-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, D2dgsWBFRw395detAOq/prjf4UlNW4hvHogy0O5kIqJYREkwde0cBGkRpyz7mgeP 1XZ5QFdfbSCDcRfycjhhsg== 0000912057-97-027798.txt : 19970815 0000912057-97-027798.hdr.sgml : 19970815 ACCESSION NUMBER: 0000912057-97-027798 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOURCE MEDIA INC CENTRAL INDEX KEY: 0000900029 STANDARD INDUSTRIAL CLASSIFICATION: TELEGRAPH & OTHER MESSAGE COMMUNICATIONS [4822] IRS NUMBER: 133700438 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-21894 FILM NUMBER: 97660575 BUSINESS ADDRESS: STREET 1: 8140 WALNUT HILL LANE STE 1000 CITY: DALLAS STATE: TX ZIP: 75231 BUSINESS PHONE: 9146695811 MAIL ADDRESS: STREET 1: 8140 WALNUT HILL LANE STREET 2: STE 1000 CITY: DALLAS STATE: TX ZIP: 75231 FORMER COMPANY: FORMER CONFORMED NAME: HB COMMUNICATIONS ACQUISITION CORP DATE OF NAME CHANGE: 19950703 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 1997 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______ Commission File Number 0-21894 SOURCE MEDIA, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 13-3700438 (State of Incorporation) (I.R.S. Employer Identification Number) 8140 Walnut Hill Lane, Suite 1000 Dallas, Texas 75231 (Address of Principal Executive Offices) (214) 890-9050 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Number of shares of Common Stock outstanding at August 14, 1997: 11,459,927 SOURCE MEDIA, INC. FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997 PART I. FINANCIAL INFORMATION Page Number ----------- ITEM 1. Consolidated Financial Statements Consolidated Balance Sheets (Unaudited)........................... 3 June 30, 1997 and December 31, 1996 Consolidated Statements of Operations (Unaudited)................. 5 Three and six months ended June 30, 1997 and 1996 Consolidated Statements of Cash Flows (Unaudited)................. 6 Six months ended June 30, 1997 and 1996 Notes to Consolidated Financial Statements........................ 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.....................................11 PART II. OTHER INFORMATION Item 1. Legal Proceedings.................................................18 Item 2. Changes in Securities.............................................N/A Item 3. Defaults Upon Senior Securities...................................N/A Item 4. Submission of Matters to a Vote of Security Holders...............20 Item 5. Other Information.................................................N/A Item 6. Exhibits and Reports on Form 8-K..................................22 2 PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Source Media, Inc. Consolidated Balance Sheets (Unaudited) December 31, June 30, 1996 1997 =========== =========== Assets Current assets: Cash and cash equivalents $ 4,302,943 $ 8,626,528 Restricted investments 611,182 -- Trade accounts receivable, less allowance for doubtful accounts of $62,504 and $27,313 in 1996 and 1997, respectively 956,078 1,305,542 Deferred expenses 729,819 802,745 Prepaid expenses and other current assets 1,167,201 800,634 ----------- ----------- Total current assets 7,767,223 11,535,449 Property and equipment, net: Production equipment 1,997,838 2,106,333 Computer equipment 1,240,259 928,785 Other equipment 1,672,048 2,586,429 Furniture and fixtures 51,304 364,963 ----------- ----------- Net property and equipment 4,961,449 5,986,510 Intangible assets, net: Patents 591,518 10,454,808 Goodwill 474,838 237,080 Contract rights 1,121,000 934,167 ----------- ----------- Net intangible assets 2,187,356 11,626,055 Other non-current assets 980,745 1,028,988 ----------- ----------- Total assets $15,896,773 $30,177,002 =========== =========== 3 Source Media, Inc. Consolidated Balance Sheets (continued) (Unaudited) December 31, June 30, 1996 1997 ============ ============ Liabilities and Stockholders' Equity Current liabilities: Trade accounts payable $ 917,462 $ 985,525 Accrued payroll 420,926 371,451 Other accrued liabilities 1,483,373 2,019,140 Amounts payable related to acquisitions 1,350,000 750,000 Unearned income 3,976,244 3,178,042 Current portion of capital lease obligations 85,683 21,493 ------------ ------------ Total current liabilities 8,233,688 7,325,651 Long-term debt, net of discount 4,612,021 18,279,791 Capital lease obligations, less current portion 22,706 12,214 Minority interests in consolidated subsidiaries 3,665,104 3,839,552 Note receivable and accrued interest from minority stockholder, net of discount of $137,152 and $116,294 in 1996 and 1997, respectively (666,931) (695,226) ------------ ------------ 2,998,173 3,144,326 Stockholders' equity: Common stock, $.001 par value: Authorized shares - 50,000,000 Issued shares - 10,327,041 and 11,737,331 in 1996 and 1997, respectively 10,327 11,737 Less treasury stock, at cost - 381,351 shares (3,757,641) (3,757,641) Capital in excess of par value 60,815,785 73,332,581 Accumulated deficit (56,931,832) (68,026,716) Foreign currency translation 3,737 (40,270) Notes receivable and accrued interest from stockholders (110,191) (104,671) ------------ ------------ Total stockholders' equity 30,185 1,415,020 ------------ ------------ Total liabilities and stockholders' equity $ 15,896,773 $ 30,177,002 ============ ============ See accompanying notes. 4 Source Media, Inc. Consolidated Statements of Operations (Unaudited)
Three months ended June 30, Six months ended June 30, 1996 1997 1996 1997 =========================== =========================== Monetary revenues $ 2,304,488 $ 2,707,153 $ 4,586,356 $ 5,336,008 Nonmonetary revenues 2,795,808 1,723,237 5,674,981 3,410,757 --------------------------- --------------------------- Total revenues 5,100,296 4,430,390 10,261,337 8,746,765 Monetary cost of sales 900,177 1,550,775 1,852,511 2,901,810 Nonmonetary cost of sales 2,795,808 1,723,237 5,674,981 3,410,757 --------------------------- --------------------------- Total cost of sales 3,695,985 3,274,012 7,527,492 6,312,567 --------------------------- --------------------------- Gross profit 1,404,311 1,156,378 2,733,845 2,434,198 Selling, general and administrative expenses 2,581,447 4,501,510 4,969,605 9,074,492 Amortization of intangible assets 257,834 1,018,740 515,668 1,843,612 Research and development expenses 1,429,330 1,065,554 2,650,803 1,844,467 --------------------------- --------------------------- 4,268,611 6,585,804 8,136,076 12,762,571 --------------------------- --------------------------- Operating loss (2,864,300) (5,429,426) (5,402,231) (10,328,373) Interest expense 187,751 772,848 192,710 980,375 Interest income (226,000) (103,070) (438,784) (155,249) Other (income) expense (19,524) (43,650) (25,615) (49,644) Minority interest in losses of consolidated subsidiaries (5,965) -- (109,324) (8,970) --------------------------- --------------------------- Net loss ($ 2,800,562) ($ 6,055,554) ($ 5,021,218) ($11,094,885) =========================== =========================== Net loss per common share ($0.28) ($0.53) ($0.51) ($0.99) =========================== =========================== Weighted average common shares outstanding 9,927,172 11,336,092 9,931,664 11,220,586 =========================== ===========================
See accompanying notes. 5 Source Media, Inc. Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 1996 1997 ============ ============ Operating Activities Net loss ($ 5,021,218) ($11,094,885) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 419,386 1,038,309 Amortization of intangible assets 515,668 1,843,612 Non-cash interest expense -- 966,227 Provision for losses on accounts receivable 93,575 -- Minority interest in net losses (109,323) (8,970) Write-off of debt issue costs -- 315,068 Warrants issued for services provided -- 279,571 Other, net (12,904) (22,775) Changes in operating assets and liabilities: Trade accounts receivable (79,013) (349,464) Prepaid expenses and other current assets 269,536 364,456 Deferred expenses 149,346 (70,815) Trade accounts payable (273,028) 68,063 Accrued payroll (63,352) (49,475) Other accrued liabilities (58,978) 36,831 Unearned income (119,347) (798,202) ------------ ------------ Net cash used in operating activities (4,289,652) (7,482,449) Investing Activities Capital expenditures (481,289) (1,452,188) Acquisition of equipment and contract rights -- (600,000) ------------ ------------ Net cash used in investing activities (481,289) (2,052,188) Financing Activities Net proceeds from issuance of long-term debt and warrants 4,606,163 13,922,625 Proceeds from issuance of common stock and exercise of stock options 75,088 121,523 Payments on capital lease obligations (115,744) (74,682) Other (30,042) (67,237) ------------ ------------ Net cash provided by financing activities 4,535,465 13,902,229 Effect of exchange rate changes on cash and cash equivalents 25,790 (44,007) ------------ ------------ Net increase (decrease) in cash and cash equivalents (209,686) 4,323,585 Cash and cash equivalents at beginning of period 17,479,223 4,302,943 ------------ ------------ Cash and cash equivalents at end of period $ 17,269,537 $ 8,626,528 ============ ============
See accompanying notes. 6 Source Media, Inc. Notes to Consolidated Financial Statements (Unaudited) Unless the context otherwise requires, (a) all references to the "Company" or "Source" include Source Media, Inc. and its wholly-owned subsidiaries, IT Network, Inc. ("IT") and Interactive Channel Technologies Inc. ("ICT"), which was formerly known as Cableshare Inc., and (b) all references to the Company's activities, results of operations or financial condition prior to June 23, 1995 relate to IT. 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management these financial statements include all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position, results of operations and cash flows of Source Media, Inc. and its consolidated subsidiaries for the periods indicated. The balance sheet at December 31, 1996 has been derived from the audited financial statements at that date. For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 2. Accumulated Depreciation and Amortization Accumulated depreciation of property and equipment at June 30, 1997 and December 31, 1996, was $4.6 million and $3.6 million, respectively. Accumulated amortization of intangible assets at June 30, 1997 and December 31, 1996, was $7.4 million and $5.5 million, respectively. 3. Net Loss Per Common Share The computation of net loss per common share in each period is based on the weighted average number of common shares outstanding for each period. Convertible securities and stock options are not included in the net loss per common share calculation for each period because they are anti-dilutive. In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128), which the Company will be required to adopt in the fourth quarter of 1997. The Company anticipates that the adoption of SFAS No. 128 will have no impact on its reporting of net loss per common share for 1997 or prior years. 4. Contingencies Lerch. On December 15, 1993, Marvin Lerch, the former Chief Executive Officer and a former shareholder of ICT, and certain of his relatives who are also former ICT shareholders, 7 commenced a legal proceeding in Ontario, Canada in the Ontario Court (General Division) against Source and certain executive officers of Source and a director of ICT on the grounds that the defendants took actions intended to depress the value of ICT to allow Source to acquire a portion of ICT at a favorable price. The plaintiffs seek, among other things, orders that certain actions by ICT's board were invalid; a declaration that ICT's board was incapable of managing its affairs due to conflicts of interest; an injunction against Source from voting its ICT shares for three years; purchase by the defendants of the plaintiffs' ICT shares for Cdn$20 per share or exchange of the plaintiffs' ICT shares for Source Common Shares of equal value; and damages in the amount of Cdn$8 million to compensate the plaintiffs for the reduced value of their ICT shares and damages in the amount of Cdn$6 million to compensate Mr. Lerch for the loss of certain ICT stock options. ICT disputes all of the claims and no trial date has as yet been set. The plaintiffs have amended their statement of claim for punitive damages in the amounts of Cdn$1 million against Source and an aggregate of Cdn$2 million against certain officers of Source. Although the ultimate outcome of this action cannot be determined at this time, management believes the claims are without merit and intends to vigorously defend its positions. In addition, management believes the ultimate outcome of these actions will not have a material impact on the consolidated financial condition or results of operations of Source. Little. On January 17, 1997, William T. Little, a stockholder of Source and former director of IT , and a trust of which Mr. Little is the trustee, commenced a legal proceeding in the United States District Court, Western District of Michigan, against the Company and certain of its executive officers and directors, alleging that he and various convertible noteholders converted their notes based upon misrepresentations by IT and those officers and directors. The plaintiff claims that he suffered damages in excess of $26 million because an alleged promise was made that IT would engage in a public offering of its stock for approximately $56 per share, which did not occur. The plaintiff further claims that IT offered to issue to him, during the time he was serving as a director of IT, an unspecified number of shares of IT common stock in consideration of his release of any claims related to such alleged misrepresentations and that IT agreed to pay him and other noteholders an unspecified amount in equivalent interest relating to the conversion of notes. Although the ultimate outcome of this action cannot be determined at this time, the Company disputes all of the plaintiff's claims as meritless and intends to vigorously assert its position in this litigation. In addition, management believes the ultimate outcome of this action will not have a material impact on the consolidated financial condition or results of operations of the Company. The Company and each of the defendants have filed answers denying the plaintiff's allegations. Certain of the individual defendants also have made counterclaims against Mr. Little for breach of fiduciary duty during his tenure as a director of the Company and are seeking exemplary and punitive damages. The Company is party to ordinary routine litigation and other claims incidental to its business, none of which is expected to have a material adverse effect on the Company's results of operations or financial condition. 8 5. Acquisitions In January 1997, the Company acquired all of the outstanding shares of ICT held by minority interest shareholders in exchange for approximately 1,390,000 shares of the Company's common stock, making ICT a wholly-owned subsidiary of the Company. The Company also issued options to purchase 177,000 shares of the Company's common stock at exercise prices ranging from $1.43 to $4.96 per share to certain employees and directors of ICT in exchange for their outstanding options to purchase ICT common shares, and incurred cash expenses related to the acquisition of approximately $675,000. The aggregate purchase price for the acquisition of the ICT minority interest was approximately $11.2 million, and the acquisition was accounted for by the purchase method of accounting. The purchase price was allocated primarily to patents, which are being amortized over a five year period. The following represents the unaudited pro forma results of operations as if the above acquisition had occurred as of January 1, 1996, after giving effect to certain adjustments, including amortization of intangibles resulting from the allocation of the purchase price. Pro forma results for the six months ended June 30, 1997 would not have differed materially from the actual results. Six Months Ended June 30, 1996 ------------- (In thousands, except per share amount) Total revenues $10,261 Gross profit 2,734 Operating loss (6,524) Net loss (6,252) Net loss per common share (0.55) The pro forma results given above are not necessarily indicative of what actually would have occurred if the acquisition had been in effect during the period presented, and is not intended to be a projection of future results or trends. 6. Long-Term Debt and Notes Payable On April 3, 1996, the Company issued a senior note (the "First Tranche Note") in the principal amount of $5.0 million and a warrant (the "First Tranche Warrant") which entitled the holder thereof to purchase 500,000 shares of the Company's common stock at a purchase price of $10.21 per share. On September 30, 1996 and March 31, 1997, the Company issued additional senior notes in the amounts of $326,806 and $350,090, respectively, for the payment of interest on the First Tranche Note. The First Tranche Note and the additional senior notes (collectively, the "Aggregate First Tranche Notes") were due on March 31, 2001 and bore interest at the rate of 13% per annum through March 31, 1998 and 12% thereafter. The estimated fair market value of the First Tranche Warrant was credited to capital in excess of par value and the First Tranche 9 Note was recorded at a corresponding discount. The discount on the First Tranche Note was being amortized to interest expense using the effective interest rate method over the stated term of the First Tranche Note, resulting in an effective interest rate of 16.2%. As of December 31, 1996, the carrying value of the Aggregate First Tranche Notes, which had no public market, approximated their fair market value, which was estimated using a discounted cash flow analysis. On April 9, 1997, the Company received cash proceeds of approximately $13.9 million, net of related fees and expenses, upon the issuance of additional senior notes (the "Second Tranche Notes") in the principal amount of $15.0 million and additional warrants (the "Second Tranche Warrants") entitling the holders thereof to purchase in the aggregate 2,000,000 shares of the Company's common stock at a purchase price of $6.00 per share at any time until their expiration on March 31, 2004. Additionally, in connection with the issuance of the Second Tranche Notes and the Second Tranche Warrants, the Aggregate First Tranche Notes and the First Tranche Warrant were amended and restated to terms identical to those of the Second Tranche Notes and the Second Tranche Warrants, respectively. The amended Aggregate First Tranche Notes and the Second Tranche Notes (collectively, the "Aggregate Tranche Notes") are due on March 31, 2002 and bear interest at the rate of either: (i) 12% per annum through March 31, 1999 if paid in cash, or (ii) 13% per annum through March 31, 1999 if paid through the issuance of additional notes, and 12% thereafter. At the option of the Company, interest payments may be made through the issuance of additional senior notes; however, to the extent interest payments are made through the issuance of additional senior notes, additional warrants to purchase .125 of the Company's common stock at a purchase price of $6.00 per share must also be issued to the holders of the Aggregate First and Second Tranche Notes for each dollar of principal amount of such senior notes. On March 31, 2001, the Company must make a prepayment of the notes equal to 33.33% of the then outstanding principal (together with accrued interest to date on such principal amount). The notes are secured by a lien on all of the Company's assets. Except for the required prepayment described above, the note agreement provides for a prepayment penalty and customary covenants and events of default. The amendment of the Aggregate First Tranche Notes and First Tranche Warrant has been accounted for as the extinguishment and replacement of the existing senior notes and the cancellation of the existing warrants and issuance of new warrants due to the significance of the modification to the terms of the senior notes and warrant. The extinguishment of the Aggregate First Tranche Notes resulted in a loss of approximately $315,000, which has been included in other (income) expense. The estimated fair market value of the amended First Tranche Warrant and the Second Tranche Warrant was credited to capital in excess of par value and the Aggregate Tranche Notes were recorded at a corresponding discount. The discount on the Aggregate Tranche Notes is being amortized to interest expense using the effective interest rate method over the stated term of the Aggregate Tranche Notes resulting in an effective interest rate of 15.4%. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Unless the context otherwise requires, (a) all references to the "Company" or "Source" include Source Media, Inc. and its wholly-owned subsidiaries, IT Network, Inc. ("IT") and Interactive Channel Technologies Inc. ("ICT"), which was formerly known as Cableshare Inc., and (b) all references to the Company's activities, results of operations or financial condition prior to June 23, 1995 relate to IT. Forward Looking Information and Risk Factors The Company or its representatives may make forward looking statements, oral or written, including statements in this report's Management's Discussion and Analysis of Financial Condition and Results of Operations, press releases and filings with the Securities and Exchange Commission about confidence and strategies and plans and expectations about demand, demand and acceptance of new and existing products, potential acquisitions, potential for profits and returns on investments in products and markets that are forward looking statements involving risks and uncertainties that could significantly impact the Company. Although the Company believes that the expectations reflected in these forward looking statements are reasonable, there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected effects on its business or operations. Among the factors that could cause actual results to differ materially from the Company's expectations are its need for additional financing, general economic conditions, the projected and historical losses of the Company, evolving nature of its business, limited access to channels, uncertainty of subscriber acceptance of the Interactive Channel, possible unavailability of programming, possible obsolescence of the Company's technology, sources and degrees of competition, possible unavailability of equipment and other factors discussed from time to time in the Company's Annual Report on Form 10-K and other Securities and Exchange Commission filings. General Source Media, Inc., is a provider of information and services to consumers through the television and telephone. In September 1996, in Colorado Springs, Colorado, the Company commercially introduced the Interactive Channel, its television programming service which provides a range of on-demand information and services to consumers utilizing cable television and telephone lines. In November 1996, the Company also commercially introduced the Interactive Channel in Denton, Texas. Source utilizes the interactive television system of its wholly-owned Canadian subsidiary, Interactive Channel Technologies Inc., to deliver the Interactive Channel. Source has announced distribution agreements for the Interactive Channel with three cable operators, Marcus Cable Company, L.P., Cablevision Systems Corporation and Century Communications Corporation, and is currently offering the Interactive Channel on the systems of two of these operators. The Interactive Channel offers over 80 interactive programs including on-demand local and national news, sports and weather, home shopping with 11 companies such as J.C. Penney, Hallmark Connections and Waldenbooks, interactive Yellow Pages, television and movie guides, travel information and games. Since 1988, the Company has been delivering audiotext information to consumers through the touch-tone telephone. Through its IT Network telephone business, the Company provides consumers with information on-demand, such as news, weather and sports, together with topical information for health, legal and other matters of consumer interest. Source's principal IT Network telephone business product, called the Network Guide, consists of approximately 800 specific information topics listed in a stand-alone insert generally bound in the front of Yellow Pages directories distributed by certain Regional Bell Operating Companies or their affiliates or other Yellow Pages publishers (collectively, "Directory Publishers"). The Company has earned monetary revenues through advertising sponsorships in the Network Guide, which are recorded as unearned income when billed and recognized on a straight-line basis as earned over the terms of the respective contracts (which are typically from three to 12 months). The Company also has earned monetary revenues from sales of audiotext services, principally its Consumer Tips service, to certain Directory Publishers. The Company is beginning to earn a significant percentage of its monetary revenues by acting as a sales agent for advertising in directories published by Directory Publishers and providing audiotext services in those directories. In each of its markets, the Company has entered into nonmonetary barter agreements with local television and radio stations. These media sponsors provide the Company with advertising time on their stations and update local news, weather and sports programming on the IT Network telephone business in exchange for promotional messages on the IT Network telephone business and print advertisements in the Network Guide. Revenues and cost of sales associated with these nonmonetary barter transactions are included in the Company's consolidated statements of operations at the estimated fair value of the on-air advertisements and information content provided to the Company by media sponsors. The Company expects that nonmonetary revenues as a percentage of total revenues will continue to decline in the future as the Company earns a higher percentage of its revenues as a service provider or sales agent rather than from sales of advertising in the Network Guide. On January 14, 1997, the Company acquired all of the outstanding shares that it did not already own of ICT in exchange for approximately 1,390,000 shares of the Company's common stock, making ICT a wholly-owned subsidiary of the Company. ICT owns the patented technology utilized by the Company for the Interactive Channel and provides research and development services for the Company. The Company's historical consolidated results of operations and financial condition include ICT as the Company owned a majority interest in ICT before the acquisition of the remaining interest. Three Months Ended June 30, 1997 and 1996 Monetary revenues increased 17 percent to $2.7 million for the quarter ended June 30, 1997. The net increase of $403,000 was related to an increase of $1.1 million attributable to the 12 Company's audiotext services as a result of new services contracts recently acquired from The Reuben H. Donnelly Corporation ("Donnelly") and GTE Directories Corporation ("GTE"). This increase was partially offset by declines of (i) $335,000 attributable to the Network Guide product, (ii) $259,000 attributable to ICT and (iii) $61,000 attributable to the Company's Consumer Tips service. The decline in Network Guide monetary revenues primarily reflects the termination of distribution in 19 designated market areas ("DMAs"), 11 of which are located within the Ameritech region, five within the Southwestern Bell region and three within the DonTech region. Total Network Guide revenues in the 19 terminated DMAs were $49,000 for the quarter ended June 30, 1997 and $505,000 for the quarter ended June 30, 1996. Network Guide revenues within the Company's other 35 existing DMAs declined slightly during the second quarter of 1997 compared with the same period in 1996. These declines were partially offset by increasesd revenues totaling $324,000 related to 17 new DMAs. Until February 1, 1996, the Company published the Network Guide in Yellow Pages directories in certain DMAs within the Ameritech region and produced the related audiotext messages in exchange for a share of the Network Guide revenues generated in those DMAs. The Company's agreement with Ameritech was terminated by Ameritech, and the Company's Network Guide has not been included in any Ameritech Yellow Pages directories published after September 1996. Accordingly, revenues in those Ameritech DMAs will end in the third quarter of 1997 due to the conclusion of revenue from Network Guide contracts in effect prior to the termination of the Ameritech agreement. Total monetary revenues for both the Network Guide and Consumer Tips products in the Ameritech region accounted for approximately seven and 27 percent of the Company's monetary revenues in the second quarter of 1997 and 1996, respectively. On February 5, 1996, Source initiated litigation against Ameritech in Texas state court related to the termination. In June 1997, in connection with the settlement of the litigation, the Company and Ameritech entered into a definitive agreement pursuant to which the Company will be the exclusive audiotext sales agent and service provider in up to 38 Ameritech Yellow Pages directories for a three year period commencing in the fourth quarter of 1997. The Company expects to partially offset 1997 declining revenue associated with the Ameritech with revenues generated through (i) its sales agency agreement with Donnelly to sell advertising in the Network Guide in Yellow Pages published by Donnelly in six top-100 DMAs in the mid-Atlantic region, (ii) its purchase of certain assets from Donnelly and a related audiotext service contract with Donnelly under which the Company will provide audiotext services in Yellow Pages published by Donnelly in eight top-100 DMAs located throughout the United States, (iii) its sales agency agreement with GTE to sell advertising in the Network Guide in Yellow Pages published by GTE in four top-100 DMAs located throughout the United States, (iv) its purchase of certain assets from GTE and a related audiotext service contract with GTE under which the Company will provide audiotext services in Yellow Pages published by GTE in nine top-100 DMAs located throughout the United States, and (v) its agreement with Southern New England Telephone ("SNET") to sell advertising in the Network Guide in Yellow Pages published by SNET in one top-100 DMA located in the northeastern United States. 13 The decrease in ICT's revenues in the second quarter of 1997 compared with the same period in 1996 reflects certain hardware and software sales in connection with a trial of Interactive Channel technology in 1996. The decline in Consumer Tips revenues is the result of the February 1996 termination of the Company's agreement with Ameritech. Ameritech Consumer Tips revenues ended completely in the second quarter of 1996. Nonmonetary revenues and nonmonetary cost of sales declined 38 percent to $1.7 million for the quarter ended June 30, 1997 from $2.8 million for the quarter ended June 30, 1996. Substantially all of this $1.1 million decrease in nonmonetary revenues and nonmonetary cost of sales occurred because of the termination of distribution agreements in certain DMAs and because, in other DMAs, the Company reduced the amount of space devoted to information provided by media sponsors for lesser amounts of promotional advertising. Monetary cost of sales increased 72 percent to $1.6 million, for the quarter ended June 30, 1997 from $900,000 for the quarter ended June 30, 1996. This increase resulted from operating personnel salaries, depreciation expenses and various other operating expenses totaling $590,000 attributable to the Interactive Channel's operations in Colorado Springs and Denton as well as increased operating personnel salaries incurred by the IT Network telephone business to support new services and advertising contracts acquired from Donnelly and GTE. In the prior period, costs incurred by the Interactive Channel were classified as research and development in nature, as the Interactive Channel had not been commercially deployed. Selling, general and administrative expenses, including amortization of intangible assets, increased 94 percent to $5.5 million for the quarter ended June 30, 1997 from $2.8 million for the quarter ended June 30, 1996. This increase resulted from certain programming, personnel salaries, subscriber acquisition, travel and various other Interactive Channel expenses totaling $1.8 million as well as increased operating, customer service, sales, marketing and administrative expenses incurred by the IT Network telephone business to support new services and advertising contracts acquired from Donnelly and GTE. Amortization of intangible assets increased by $761,000 during the second quarter of 1997 as a result of the amortization of patents related to the Company's acquisition of the remaining shares of ICT during the first quarter of 1997 as well as the amortization of certain contract rights acquired from Donnelly and GTE. Research and development expenses declined 25 percent to $1.1 million for the quarter ended June 30, 1997 from $1.4 million for the quarter ended June 30, 1996. This decrease reflects lower Interactive Channel development expenses following the commercial introduction of the Interactive Channel. Other Income and Expenses. Net interest expense was $670,000 for the quarter ended June 30, 1997 compared with net interest income of $38,000 for the quarter ended June 30, 1996, reflecting interest expense on higher debt balances outstanding during the second quarter of 1997. Other (income) expense for the three months ended June 30, 1997 includes $356,000 of 14 income related to the sale by the Company of certain warrants to its issuer as well as $315,000 of expense due to the extinguishment of the Aggregate First Tranche Notes. Six Months Ended June 30, 1997 and 1996 Monetary revenues increased 16 percent to $5.3 million for the six months ended June 30, 1997. The net increase of $750,000 was related to an increase of $2.0 million attributable to the Company's audiotext services as a result of new services contracts acquired from Donnelly and GTE. This increase was partially offset by declines of (i) $560,000 attributable to the Network Guide product, (ii) $481,000 attributable to ICT and (iii) $213,000 attributable to the Company's Consumer Tips service. The decline in Network Guide monetary revenues primarily reflects the termination of distribution in 19 DMAs, 11 of which are located within the Ameritech region, five within the Southwestern Bell region and three within the DonTech region. Total Network Guide revenues in the 19 terminated DMAs were $169,000 for the six months ended June 30, 1997 and $1.1 million for the six months ended June 30, 1996. Network Guide revenues within the Company's other 35 existing DMAs declined slightly during the first half of 1997 compared with the same period in 1996. These declines were partially offset by increasesd revenues totaling $532,000 related to 17 new DMAs. The decrease in ICT's revenues in the first six months of 1997 compared with the same period in 1996 reflects a portion of the one-time license fee paid in 1996 to ICT by GTE Corporation and GTE MainStreet for the use of ICT's United States patents as part of an agreement to end litigation between ICT and GTE as well as certain hardware and software sales made in connection with a trial of Interactive Channel technology. The decline in Consumer Tips revenues is the result of the February 1996 termination of the Company's agreement with Ameritech. Ameritech Consumer Tips revenues ended completely in the second quarter of 1996. Nonmonetary revenues and nonmonetary cost of sales declined 40 percent to $3.4 million for the six months ended June 30, 1997 from $5.7 million for the six months ended June 30, 1996. Substantially all of this $2.3 million decrease in nonmonetary revenues and nonmonetary cost of sales occurred because of the termination of distribution agreements in certain DMAs and because, in other DMAs, the Company reduced the amount of space devoted to information provided by media sponsors for lesser amounts of promotional advertising. Monetary cost of sales increased 57 percent to $2.9 million, for the six months ended June 30, 1997 from $1.9 million for the quarter ended June 30, 1996. This increase resulted from operating personnel salaries, depreciation expenses and various other operating expenses totaling $1.1 million attributable to the Interactive Channel's operations in Colorado Springs and Denton. In the prior period, costs incurred by the Interactive Channel were research and development in nature, because the Interactive Channel had not been commercially deployed. 15 Selling, general and administrative expenses, including amortization of intangible assets, increased 99 percent to $10.9 million for the six months ended June 30, 1997 from $5.5 million for the six months ended June 30, 1996. This increase resulted from certain programming, personnel salaries, subscriber acquisition, travel and various other Interactive Channel expenses totaling $3.8 million as well as increased operating, customer service, sales, marketing and administrative expenses incurred by the IT Network telephone business to support new services and advertising contracts acquired from Donnelly and GTE. Amortization of intangible assets increased by $1.3 million during the second quarter of 1997 as a result of the amortization of patents related to the Company's acquisition of the remaining shares of ICT during the first quarter of 1997 as well as the amortization of certain contract rights acquired from Donnelly and GTE. Research and development expenses declined 30 percent to $1.8 million for the six months ended June 30, 1997 from $2.7 million for the six months ended June 30, 1996. This decrease reflects lower Interactive Channel development expenses following the commercial introduction of the Interactive Channel. Other Income and Expenses. Net interest expense was $825,000 for the six months ended June 30, 1997 compared with net interest income of $246,000 for the six months ended June 30, 1996, reflecting interest expense on higher debt balances outstanding during the first half of 1997 compared to interest income on the proceeds from a public offering of the Company's common stock in December 1995 during the first six months of 1996. Other (income) expense for the first six months of 1997 includes $356,000 of income related to the sale by the Company of certain warrants to its issuer as well as $315,000 of expense due to the extinguishment of the Aggregate First Tranche Notes. Liquidity and Capital Resources Since its inception, the Company has experienced substantial operating losses and net losses as a result of its efforts to develop, deploy and support its IT Network telephone business and to develop, conduct trials and commercially launch the Interactive Channel. As of June 30, 1997, the Company had an accumulated deficit of approximately $68.0 million and had used cumulative net cash in operations of $44.8 million. The difference at June 30, 1997 between the accumulated deficit and cumulative net cash used in operations since inception was attributable to (i) $21.2 million of nonmonetary charges related to financing incentives, write-down of intangible assets, depreciation and amortization and other non-cash expenses and (ii) $2.0 million of unearned income, accounts payable and accrued liabilities in excess of accounts receivable, prepaid expenses and inventory. Source expects that these losses will increase throughout 1997 as a result of, among other things, its continuing expenditures relating to its efforts to commercially introduce, deploy and enhance the Interactive Channel. Source expects to continue to incur operating losses through 1997 in excess of the amount of the operating losses experienced in past years and may incur operating losses at similar or greater levels thereafter. 16 Since its inception, the Company has financed its operations primarily through an aggregate $65.7 million raised from various financing activities, including the incurrence of debt and issuance of the Company's common and preferred stock. In December 1996, the Company acquired certain audiotext servicing assets from GTE for an aggregate purchase price of $1.8 million, of which $600,000 was paid in both December 1996 and May 1997 and $600,000 is payable in August 1997. The Company may consider additional strategic acquisitions in either of its lines of business from time to time. Although there can be no assurance that the Company will consummate any such transactions, to the extent that it does so, such acquisitions would require the Company to expend funds, issue additional equity securities or incur additional debt. The incurrence of additional indebtedness by the Company could result in a substantial portion of the Company's operating cash flow being dedicated to the payment of principal and interest on such indebtedness, could render the Company more vulnerable to competitive pressures and economic downturns and could impose restrictions on the Company's operations. In addition, the Company's ability to acquire businesses is restricted under the terms of its agreements with its senior lenders. On April 3, 1996, the Company issued a senior note (the "First Tranche Note") in the principal amount of $5.0 million and a warrant (the "First Tranche Warrant") which entitled the holder thereof to purchase 500,000 shares of the Company's common stock at a purchase price of $10.21 per share. On September 30, 1996 and March 31, 1997, the Company issued additional senior notes in the amounts of $326,806 and $350,090, respectively, for the payment of interest on the First Tranche Note. The First Tranche Note and the additional senior notes (collectively, the "Aggregate First Tranche Notes") were due on March 31, 2001 and bore interest at the rate of 13% per annum through March 31, 1998 and 12% thereafter. On April 9, 1997, the Company received cash proceeds of approximately $13.9 million net of fees and expenses associated with the transaction upon the issuance of additional senior notes (the "Second Tranche Notes") in the principal amount of $15.0 million and warrant (the "Second Tranche Warrants") entitling the holders thereof to purchase in the aggregate 2,000,000 shares of the Company's common stock at a purchase price of $6.00 per share at any time until their expiration on March 31, 2004. Additionally, in connection with the issuance of the Second Tranche Notes and the Second Tranche Warrants, the Aggregate First Tranche Notes and the First Tranche Warrant were amended and restated to terms identical to those of the Second Tranche Notes and the Second Tranche Warrants, respectively. The amended Aggregate First Tranche Notes and the Second Tranche Notes are due on March 31, 2002 and bear interest at the rate of either: (i) 12% per annum through March 31, 1999 if paid in cash, or (ii) 13% per annum through March 31, 1999 if paid through the issuance of additional notes, and 12% thereafter. At the option of the Company, interest payments may be made through the issuance of additional senior notes; however, to the extent interest payments are made through the issuance of additional senior notes, additional warrants to purchase .125 of the Company's common stock at a purchase price of $6.00 per share must also be issued to the holders of the Aggregate First and Second Tranche Notes for each dollar of principal amount of such senior notes. On March 31, 2001, the Company must make a prepayment of the notes equal to 33.33% of the then outstanding principal (together with accrued interest to date on such principal amount). The 17 notes are secured by a lien on all of the Company's assets. Except for the required prepayment described above, the note agreement provides for a prepayment penalty and customary covenants and events of default. The Company also granted holders of the warrants demand and "piggyback" registration rights covering the shares of the Company's common stock issuable upon exercise of the warrants. The Company's future capital requirements will depend on many factors, including, but not limited to, (i) the success and timing of the development, introduction and deployment of the Interactive Channel, (ii) the operating results of its IT Network telephone business, (iii) the levels of advertising expenditures necessary to increase awareness of the Interactive Channel, (iv) the extent of market acceptance of such products, (v) the funds required by ICT and the Company to fund their costs of litigation, (vi) potential acquisitions or asset purchases and (vii) competitive factors. Following the issuance of the Second Tranche Notes, the Company believes its current resources will be sufficient to meet the Company's anticipated cash needs for working capital and other capital expenditures related to the further development of the Interactive Channel in the Company's existing markets and the further development of its telephone business through the end of 1997. However, the Company may seek additional funds or enter into other arrangements that could allow it to pursue a more extensive business plan, including the possible deployment of the Interactive Channel in additional markets and the consideration of potential acquisitions in its IT Network telephone business. If cash generated by operations is insufficient to satisfy the Company's liquidity requirements, the Company may attempt to sell additional equity securities or incur additional indebtedness. To the extent that future financing requirements are satisfied through the issuance of equity securities, Source's shareholders may experience dilution. The incurrence of additional debt financing could result in a substantial portion of Source's operating cash flow being dedicated to the payment of principal and interest on such indebtedness, could render Source more vulnerable to competitive pressures and economic downturns and could impose restrictions on Source's operations. Net Operating Loss Carryforwards At December 31, 1996, IT had net operating loss carryforwards of approximately $42.2 million for United States income tax purposes, which begin to expire in 2003. The Internal Revenue Code of 1986 imposes limitations on the use of net operating loss carryforwards if certain stock ownership changes occur. Consequently, the Company's utilization of pre-1996 net operating losses is limited to approximately $3.5 million in a given year. Part II - Other Information Item 1 - Legal Proceedings Lerch. On December 15, 1993, Marvin Lerch, the former Chief Executive Officer and a former shareholder of ICT, and certain of his relatives who were also former ICT shareholders, commenced a legal proceeding in Ontario, Canada in the Ontario Court (General Division) against Source and certain executive officers of Source and a director of ICT on the grounds that 18 the defendants took actions intended to depress the value of ICT to allow Source to acquire a portion of ICT at a favorable price. The plaintiffs seek, among other things, orders that certain actions by ICT's board were invalid; a declaration that ICT's board was incapable of managing its affairs due to conflicts of interest; an injunction against Source from voting its ICT shares for three years; purchase by the defendants of the plaintiffs' ICT shares for Cdn$20 per share or exchange of the plaintiffs' ICT shares for Source Common Shares of equal value; and damages in the amount of Cdn$8 million to compensate the plaintiffs for the reduced value of their ICT shares and damages in the amount of Cdn$6 million to compensate Mr. Lerch for the loss of certain ICT stock options. ICT disputes all of the claims and no trial date has as yet been set. The plaintiffs have amended their statement of claim for punitive damages in the amounts of Cdn$1 million against Source and an aggregate of Cdn$2 million against certain officers of Source. Although the ultimate outcome of this action cannot be determined at this time, management believes the claims are without merit and intends to vigorously defend its position. In addition, management believes the ultimate outcome of these actions will not have a material impact on the consolidated financial condition or results of operations of Source. On January 25, 1994, Mr. Lerch also commenced a proceeding against ICT and several persons who are, or have been, officers and directors of ICT claiming wrongful termination of Mr. Lerch's employment with ICT and seeking damages in the amount of Cdn$350,000. ICT denied the claim. The trial of this action began in London, Ontario on April 23, 1996 and was completed May 3, 1996. Judgment was rendered against ICT in the amount of Cdn$200,000. ICT's appeal of this decision was initially denied but a review before a three judge panel resulted in ICT being allowed to continue its appeal. Little. On January 17, 1997, William T. Little, a stockholder of Source and former director of IT , and a trust of which Mr. Little is the trustee, commenced a legal proceeding in the United States District Court, Western District of Michigan, against the Company and certain of its executive officers and directors, alleging the he and various convertible noteholders converted their notes based upon misrepresentations by IT and those officers and directors. The plaintiff claims that he suffered damages in excess of $26 million because an alleged promise was made that IT would engage in a public offering of its stock for approximately $56 per share, which did not occur. The plaintiff further claims that IT offered to issue to him, during the time he was serving as a director of IT, an unspecified number of shares of IT common stock in consideration of his release of any claims related to such alleged misrepresentations and that IT agreed to pay him and other noteholders an unspecified amount in equivalent interest relating to the conversion of notes. Although the ultimate outcome of this action cannot be determined at this time, the Company disputes all of the plaintiff's claims as meritless and intends to vigorously assert its position in this litigation. In addition, management believes the ultimate outcome of this action will not have a material impact on the consolidated financial condition or results of operations of the Company. The Company and each of the defendants have filed answers denying the plaintiff's allegations. Certain of the individual defendants also have made counterclaims against Mr. Little for breach of fiduciary duty during his tenure as a director of the Company and are seeking exemplary and punitive damages. 19 Bauer. In November 1996, Jeanna Bauer, a former employee of IT, commenced a proceeding in the United States District Court for the Southern District of Ohio, Western District at Dayton, against IT , alleging discrimination on the basis of sex and pregnancy and seeking reinstatement and compensatory damages in the amount of $250,000 and an equivalent amount of punitive damages. The Company denies the charges of discrimination and contends that it provided the plaintiff the standard six week maternity leave, even though the plaintiff did not technically qualify for such leave. The Company has filed a counterclaim against the plaintiff seeking reimbursement of funds advanced to the plaintiff, but never repaid. The Company intends to vigorously assert its position in this litigation. No trial date has yet been set. In addition, management believes the ultimate outcome of these actions will not have a material impact on the consolidated financial condition or results of operations of Source. Others. The Company is aware of certain claims against the Company and ICT that have not developed into litigation, or if they have, are dormant. Unnamed shareholders of ICT advised the ICT directors in June 1995 that they questioned certain of the directors' actions under Ontario law. ICT's attorney responded to the shareholders' substantive points and the shareholders have not taken further action. Further, the Company and ICT are parties to ordinary routine litigation incidental to their business, none of which is expected to have a material adverse effect on the Company's results of operations or financial condition. Item 2 - Changes in Securities - not applicable Item 3 - Defaults Upon Senior Securities - not applicable Item 4 - Submission of Matters to a Vote of Security Holders - Source Media, Inc. held its Annual Meeting of Stockholders on May 21, 1997 ("Annual Meeting"). Proxies for the Annual Meeting were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934; there was no solicitation in opposition to management's nominees for directors as listed in the Proxy Statement for the Annual Meeting. Briefly described below are the matters voted upon at the Annual Meeting and the number of votes for, against and abstaining with respect to such matters. Proposal to elect Timothy P. Peters to serve as a director of the Company for the ensuing year and until his successor is elected and qualified. For 8,360,127 Abstain or Authority Withheld 214,923 20 Proposal to elect William S. Bedford to serve as a director of the Company for the ensuing year and until his successor is elected and qualified. For 8,360,377 Abstain or Authority Withheld 214,673 Proposal to elect John J. Reed to serve as a director of the Company for the ensuing year and until his successor is elected and qualified. For 8,360,377 Abstain or Authority Withheld 214,673 Proposal to elect David L. Kuykendall to serve as a director of the Company for the ensuing year and until his successor is elected and qualified. For 8,398,893 Abstain or Authority Withheld 176,157 Proposal to elect Michael J. Marocco to serve as a director of the Company for the ensuing year and until his successor is elected and qualified. For 8,398,893 Abstain or Authority Withheld 176,157 Proposal to elect James L. Greenwald to serve as a director of the Company for the ensuing year and until his successor is elected and qualified. For 8,398,663 Abstain or Authority Withheld 176,387 Proposal to elect Robert H. Alter to serve as a director of the Company for the ensuing year and until his successor is elected and qualified. For 8,398,663 Abstain or Authority Withheld 176,387 Proposal to elect Robert J. Cresci to serve as a director of the Company for the ensuing year and until his successor is elected and qualified. For 8,398,893 Abstain or Authority Withheld 176,157 Proposal to amend the 1995 Nonqualified Stock Option Plan for Non-Employee Directors: For 3,166,525 Against 201,460 Abstain 27,596 Proposal to amend the 1995 Performance Equity Plan: For 3,118,017 Against 243,430 Abstain 34,134 21 Proposal to approve the Employee Stock Purchase Plan: For 3,206,462 Against 157,079 Abstain 32,040 Proposal to ratify the appointment of Ernst & Young LLP as independent auditors for the Company for the 1997 fiscal year: For 8,552,404 Against 5,547 Abstain 17,093 Item 5 - Other information - not applicable Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits - 10.1 Audiotex Agreement by and between the Company and Ameritech Publishing, Inc., dated June 30, 1997. 10.2 Amendment to Distribution Agreement by and between the Company and Cablevision Systems Corporation, dated May 22, 1997. (b) Reports on Form 8-K during the three months ended June 30, 1997 - not applicable 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SOURCE MEDIA, INC. (Registrant) Date: August 14, 1997 By: /s/ Michael G. Pate ---------------------------- Michael G. Pate Chief Financial Officer and Treasurer (Principal Financial Officer and Duly Authorized Officer) 23 EX-10.1 2 EXHIBIT 10.1 AUDIOTEX AGREEMENT This Audiotex Agreement, effective June 30, 1997 ("Agreement"), is entered into between IT NETWORK, INC., a Texas corporation and a wholly-owned subsidiary of Source Media, Inc. ("ITN"), and AMERITECH PUBLISHING, INC., a Delaware corporation, doing business as AMERITECH ADVERTISING SERVICES ("AAS"), for the purpose of providing AAS with the services as described in this Agreement (the "Services"), and as more fully set forth in Article II of this Agreement . The parties, intending to be legally bound, agree as follows: ARTICLE 1 DEFINITIONS I.1 For the purposes of this Agreement, the following terms and all other terms defined in this Agreement shall have the meaning so defined unless the context clearly indicates otherwise. A term defined in the singular shall include the plural and vice verse when the context so indicates. "Affiliate(s)" means any organization or entity owning a majority of the outstanding common stock and voting stock of ITN and/or AAS; (ii) any other corporation of which a majority of the outstanding common stock and the voting stock is owned by the parent of ITN and/or AAS; and (iii) any other legal business entity of which at least fifty percent is owned by ITN and/or AAS. "Information" means specifications, drawings, sketches, models, manuals, samples, tools, computer programs, technical information, and other confidential business, customer or personnel information or data, whether written, oral or otherwise. 1 "Services" means all services described in this Agreement furnished by ITN to AAS under this Agreement. "Directory or Directories" means issues of AAS Yellow or co-bound White and Yellow Page Directories in Michigan, Indiana, Ohio, Wisconsin and as specifically set forth on Attachment B attached hereto and made a part of this Agreement. "Audiotex" means storage and retrieval of recorded information. ARTICLE II SERVICES II.1 Services and Responsibilities ITN shall provide the Services described below concerning Front of Book ("FOB") Local and National Yellow Pages Advertising and related responsibilities at no charge to AAS. All Services shall be performed by ITN in accordance with the terms and conditions of this Agreement. As used herein, the term "Services" shall include, but not be limited to, all labor or materials, or both, furnished by ITN. ITN will purchase from AAS: FOB Local and National Yellow Pages Advertising information pages per directory at the number of pages, rates, terms and directory locations listed on Attachment B for the purpose of listing ITN's Audiotex service. ITN will sell and produce the Audiotex Services listed in the AAS Directories. ITN will promote its Audiotex Services by soliciting advertisers for the Audiotex FOB pages purchased from AAS and sponsors for the audio portion of the Audiotex service itself. ITN Responsibilities ITN will have the option to purchase 12 or 16 FOB pages from AAS, provided however that ITN has the option to purchase a minimum of 8 pages in markets with a distribution of 2 500,000 or less, as indicated on Attachment B. ITN will place its orders for FOB pages by the due date for each Directory as specified on Attachment B for the first directory cycle and thereafter as specified by AAS. Failure to place an order by a due date will result in no FOB audiotex pages being printed in the Directory. ITN will supply AAS with final art for advertisers' print advertisements as specified in Attachment C, Advertisement Preparation and Production Printing Specifications attached hereto and made a part thereof. In addition, ITN will submit the FOB page template design to AAS for its approval, which shall not be unreasonably withheld. ITN is responsible for producing Audiotex messages for FOB Local and National Yellow Advertising information pages in Directories included on Attachment B and for all Audiotex production and costs including but not limited to phone lines and Audiotex content as well as associated equipment, programming and maintenance. ITN will not provide Audiotex service to information providers publishing unlawful, discriminatory, or sexually explicit messages. disconnecting these unlawful, discriminatory or sexually explicit messages at its own cost, provided that unlawful, discriminatory or sexually explicit messages existing on the date of this Agreement shall be deleted at the cost of AAS. ITN shall provide AAS with monthly reports relating to caller statistics or other matters relevant to AAS's reasonable concerns under this Agreement. ITN shall be responsible for all costs and expenses with respect to all Services performed under this Agreement, unless otherwise provided herein, pay the fees specified on Attachment B (50% of fees due upon order placement based on the number of Directories delivered in the prior year and the remainder when initial delivery of each Directory commences) and pay real estate lease expenses for any equipment not located on AAS premises identified on Attachment D-2. ITN shall be responsible to purchase or lease audiotex equipment currently used by AAS from Ameritech Credit Corporation. ITN will provide hosting and service bureau services for AAS' 1997 Cleveland "Cleveline" FOB audiotex service. 3 AAS shall send ITN a monthly invoice for page costs, offsetting any amount due against any credit remaining to ITN, as provided below. ITN will remit payment to AAS for all amounts due under each invoice within thirty (30) days of the invoice. Payments received more than 30 days after the invoice date will be subject to interest at the rate of one and one-half percent (11/2%) per month on the entire unpaid balance. AAS Responsibilities AAS is responsible for final editorial and design approval to determine that all print advertising submitted by ITN is consistent with AAS Ethics, Publishing and Premium Space Policies. AAS standards as published of the Directories, provided however that AAS shall maintain the general design and impression of print advertisements submitted by ITN and shall not modify the general design or impression without the prior approval of ITN which shall not be unreasonably withheld. AAS is responsible for printing and distributing Directories. AAS may change publication or delivery dates or content for the Directories, and AAS may change the ITN order due dates specified on Attachment B. ITN will forward its Audiotex content information on RC color separated camera ready pages with two (2) sets of color laser proofs. AAS will produce, bind and distribute designated directories during the first year at the per Directory fees designated on Attachment B. For each year thereafter, AAS will increase the per page fee for each Directory by the lesser of AAS' actual per page cost increase for expenses of publishing the Directory or 5%. As a credit against the per page fees, ITN will receive an initial one-time credit of $450,000. For each purchase of FOB pages by ITN, the total per page charges shall accrue against the credit amount until it is exhausted. After exhaustion, ITN will initiate paying the per page charges as designated on Attachment B for the initial Directory cycle and as subsequently adjusted. AAS shall provide ITN with lease space at no charge for the audiotex equipment ITN leases or purchases from Ameritech Credit Corporation at existing AAS locations where space is available identified on Attachment D-1 and D-2 . For space where the audiotex equipment resides on third party premises identified on Attachment D-1 and/or D-2, AAS will assign to ITN the 4 responsibility for leases for space on such third party premises. In addition, AAS will ensure that upon payment of the purchase price, ITN will acquire all hardware and operational software and/or license for use of software for the audiotex equipment currently used by AAS and identified on Attachment E and that the purchase price will be no more than $70,000 and no less than $50,000. Regardless of whether ITN purchases or leases the audiotex equipment identified on Attachment E, ITN will take such equipment "as is", "with all faults" and without warranty. AAS MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, OF ANY KIND WITH RESPECT TO THE EQUIPMENT. AAS MAKES NO REPRESENTATION OR WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE AND EXPRESSLY EXCLUDES SUCH WARRANTIES. AAS and ITN shall mutually agree as to the location of all Audiotex Services equipment, provided however that if ITN decides to relocate the equipment from its location on the execution date of this Agreement, ITN shall be responsible for renting, leasing, otherwise acquiring space for the equipment at a new location, maintaining such new location and paying all associated costs and expenses. AAS is also responsible for assigning to ITN telephone numbers and telecommunication services identified on Attachment F currently in use for audiotex services in the AAS Directories, and commencing on the publication of each Directory under this Agreement, ITN shall be responsible for paying the telephone costs for the numbers and telecommunication services identified on Attachment F associated with that Directory which are assigned to ITN. II.2 Warranties for Services a. ITN hereby warrants and represents that all Services provided under this Agreement shall be performed in a professional manner, promptly and with diligence, in accordance with the description of such Services in this Agreement, including the Attachments. ITN further warrants that neither ITN nor its representatives and employees shall represent themselves as employees of AAS, but shall represent themselves only as employees of ITN. ITN represents that in providing Services, it will not disparage AAS or attempt to reduce AAS' revenues. 5 b. AAS shall notify ITN of any instance where such Services are considered to be unsatisfactory. Upon receipt of any such notice, ITN shall, at no additional charge to AAS, take prompt action to correct such unsatisfactory Services. c. ITN will use its best efforts to assure that advertising copy is accurate and in accordance with current AAS Ethics, Publishing and Premium Space Policies. Without in any way limiting the obligations set forth in the section entitled "Indemnification," each party agrees to absorb the cost of all adjustments that are required to be made because of advertising and copy errors which are exclusively the fault of such party. II.3 Termination and Cancellation a. Agreement Unless terminated as specified below, this Agreement shall be effective for three directory cycles (three years) beginning with the 1997 Toledo and Indianapolis Directories. The Agreement may continue thereafter if both parties mutually agree to extend the Agreement. Upon termination, ITN shall continue to provide Services for the life of each Directory. b. Default AAS may terminate this Agreement for a Directory prior to the publication of three (3) editions of the Directory only for the gross negligence or willful default by ITN of the performance of its duties under this Agreement and such gross negligence or willful default has not been cured within thirty (30) days of written notice by AAS to ITN. . c. General (1) Upon termination, cancellation or expiration of this Agreement, ITN shall promptly deliver to AAS all of AAS's data and property of whatever kind furnished to ITN by AAS in connection with or as a result of the performance of Services under this Agreement, re-assign audiotex telephone numbers and telecommunication services to AAS to extent requested by AAS. (2) The terms, conditions and warranties contained in this Agreement that by their sense and context are intended to survive the performance thereof by either or both parties under this Agreement shall so survive the completion of performance, cancellation or termination of this Agreement. 6 II.4 Exclusive Market Rights It is expressly understood that this Agreement grants to ITN the exclusive right to provide to AAS the types of FOB services which are the subject of this Agreement. ARTICLE III GENERAL TERMS AND CONDITIONS III.1 Term of Agreement This Agreement shall become effective as of the date first above written and, unless sooner terminated or canceled as provided in Article III.3 above, shall remain in full force and effect for an initial term of three (3) directory cycles (three years) for each directory listed on Exhibit B beginning with the 1997 Toledo and Indianapolis Directories, unless extended by a writing signed by both parties. III.2 Taxes a. ITN shall bear the cost of all taxes, import and export duties, and other governmental fees of whatever nature applicable to the Services hereunder. b. ITN Agrees to pay, and to hold AAS harmless from and against, any penalty, interest, additional tax or other charge that may be levied or assessed as a result of the delay or failure of ITN for any reason to pay any tax or file any return or information required by law, rule or regulation or by this Agreement to be paid or filed by ITN. III.3 Independent Contractor ITN declares and represents that ITN is engaged in an independent business and will perform its obligations under this Agreement as an independent contractor and not as the agent or employee of AAS; that the persons performing Services on behalf of ITN are not agents or employees of AAS; that ITN has and retains the right to exercise full control of and supervision over its performance of its obligations under this Agreement and full control over the employment, direction, compensation and discharge of all employees assisting in the performance of such 7 obligations; that ITN will be solely responsible for all matters relating to payment of such employees, including compliance with Workers' Compensation, unemployment, disability insurance, Social Security, withholding and all other federal, state and local laws, rules and regulations governing such matters; and that ITN will be responsible for its acts and those of its agents, employees and contractors during the performance of its obligations under this Agreement. III.4 Indemnification Each party ("Indemnifying Party") shall indemnify the other party and its Affiliates, and its and their respective officers, directors, agents and employees, and each of them from and against any loss, cost, damage, claim, expense (including independent attorney's fees) or liability, including, but not limited to, liability as a result of injury to or death of any person or damage to or loss or destruction of any property arising out of or resulting from or in connection with the performance of this Agreement and caused by the acts or omissions of the Indemnifying Party or a contractor or an agent of the Indemnifying Party or an employee of any one of them, in any way arising out of the performance by any one of them of this Agreement, except to the extent that such loss, cost, damage, claim, expense or liability arises from the negligence or willful misconduct of the non-Indemnifying Party or its employees. As used in the preceding sentence, the words "any person" shall include, but shall not be limited to, a contractor or an agent of either party, and an employee of either party, or any such contractor or agent and the word "any property" shall include, but shall not be limited to, property of either party or any such contractor or agent or an employee of any of them. Upon request of the non-Indemnifying Party, the Indemnifying Party , at no cost or expense to the non-Indemnifying Party , defend any suit or other legal proceeding asserting a claim for any loss, damage or liability specified above, and the Indemnifying Party shall pay any costs and independent attorney's fees that may be incurred by the non-Indemnifying Party in connection with any such claim or suit or in enforcing the indemnity granted above, provided, however, that the Indemnifying Party shall also keep the non-Indemnifying Party fully informed as to the progress of opportunity to participate on an equal basis with the Indemnifying Party in any such defense. 8 III.5 Insurance Each party shall maintain in full force and effect general liability insurance, endorsed to specifically cover its indemnity obligations hereunder, in amounts acceptable to the other party, plus, if applicable, Workers' Compensation Insurance covering Vendor's full liability under the Workers' Compensation laws applicable to work being performed under this Agreement. Such insurance shall remain in full force and effect as long as AAS may have any potential liability with respect to this Agreement. At a party's request, the other party shall provide the requesting party with proof of compliance with the insurance provisions of this section (including copies of all polices and endorsements, if required by AAS). III.6 Access a. AAS shall permit ITN reasonable access to the equipment sites used in connection with providing Audiotex under this Agreement where the equipment resides on AAS premises. b. The employees and agents of ITN while on the premises of the equipment shall comply with all site rules and regulations, including, where required by government regulations, submission of satisfactory clearance from the US Department of Defense and other governmental authorities concerned. c. Release Void AAS shall not require wavers or releases of any personal rights from representatives of ITN in connection with visits to its premises. III.7 Information No Information obtained by a party ("Requesting Party") from the other party ("Non-Requesting Party") under this Agreement or in contemplation of this Agreement shall become the Requesting Party's property. All copies of such Information in written, graphic or other tangible form shall be returned to the Non-Requesting Party upon request. Unless such 9 Information was previously known to the Requesting Party free of any obligation to keep it confidential or until such Information is subsequently made public by the Non-Requesting Party or a third party, the Requesting Party shall keep it confidential, shall use it only in performing under this Agreement, shall not reproduce, copy or disclose it to others and may use it for other purposes only upon such terms as may be agreed upon in writing. The Non-Requesting Party shall have the right to review and approve the procedures for handling such Information and may make such inspections as the Non-Requesting Party deems necessary to assure that such Information s being property protected. III.8 Assignment a. Except as otherwise expressly provided in this Agreement and except as to corporate Affiliates, neither party shall assign its rights or delegate its duties under this Agreement without prior written consent of the other party, which consent shall not be unreasonably withheld; provided, however, that either party may, at any time and without the other's prior written consent, assign its rights and delegate its duties either in whole or in part under this Agreement to (a) any present or future Affiliate of the assigning party, or (b) to any other company if such assignment to such other company will, in the assigning party's opinion, assist in the implementation of any law or ruling issued in any form whatsoever by a judicial or other government authority. The assigning party shall give the other party written notice of any such assignment. In the event of such assignment, the assigning party shall be released and discharged, to the extent of such assignment, from all further obligations under this Agreement. Any attempted assignment or delegation in contravention of this sub-article (a) shall be void and of no effect. b. Subject to the provisions of sub-article (a) above, this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns, if any, of the parties to this Agreement. III.9 Notices Except as otherwise specified in this Agreement, all notices or other communications 10 hereunder shall be deemed to have been duly given when made in writing and delivered in person, sent by telefax with confirmation of receipt indicated or deposited in any form of United States mail having a return receipt, postage prepaid, return receipt requested or delivered prepaid to an express messenger service where delivery can be traced and verified (such as, but not limited to, Airborne Express, DHL Worldwide Express, Federal Express, etc.) and addressed as follows: TO ITN: TO AAS: ------- ------- IT NETWORK, INC AMERITECH ADVERTISING SERVICES 5601 EXECUTIVE DRIVE 100 EAST B IG BEAVER ROAD IRVING, TEXAS 75038 TROY, MICHIGAN 48083 ATTN: W. SCOTT BEDFORD ATTN: DIRECTOR OF BRAND MARKETING The address to which notices or communications may be given to ether party may be changed by written notice given by such party to the other pursuant to this article. III.10 Publicity Each party shall submit to the other party all advertising, sales promotion and other publicity relating to the subject matter of this Agreement in which the other party's name or names are mentioned or language, signs, markings or symbols are used. Neither party shall use or publish or such advertising, sales promotion or publicity matter without the other party's prior written approval III.11 Compliance With Laws Each party shall comply with all applicable federal, state and local laws, regulations and codes, including but not limited to, the procurement of permits, certificates and licenses when needed, in the performance of this Agreement. Each party shall indemnify and hold the other party harmless against any loss, damage or liability that may be sustained by reason of the indemnifying party's failure to comply with such federal, state and local laws, regulations and codes. 11 III.12 No Third Party Beneficiaries Except as otherwise provided in this Agreement, the provisions of this Agreement are for the benefit of the parties to this Agreement and not for any other person. III.13 Waivers of Default Waiver by either party of any default by the other party shall not be deemed a waiver by the non-defaulting party of any other default. III.14 Amendments No provisions of this Agreement shall be deemed waived, amended or modified by either party, unless such waiver, amendment or modification is in writing and signed by both parties. III.15 Non-Discrimination Attachment A is attached hereto, made a part of this Agreement and incorporated by reference in this Agreement. As used in Attachment A, "Contractor" shall mean ITN. III.16 Headings The article, section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. III.17 Governing Law This Agreement shall be governed by the substantive laws of the State of Michigan. Any dispute under this Agreement shall be submitted to arbitration under the rules of the American Arbitration Association in Troy, Michigan. III.18 Remedies Cumulative Any right of termination or other remedies prescribed in this Agreement are cumulative and are not intended to be exclusive of any other remedies to which the injured party may be entitled at law or in equity (including, but not limited to, the remedies of specific performance and cover) in case of any breach or threatened breach by the other party of any provision of this 12 Agreement, unless such other remedies which are prescribed in this Agreement are specifically limited or excluded by this Agreement. The use of one or more available remedies shall not bar the use of any other remedy for the purpose of enforcing the provisions of this Agreement; provided, however, that a party shall not be entitled to retain the benefit of inconsistent remedies. III.19 Severability If any of the provisions of this Agreement shall be invalid or unenforceable, such invalidity or unenforceability shall not invalidate or render unenforceable the entire Agreement, but rather the entire Agreement shall be construed as if not containing the particular invalid or unenforceable provision or provisions, and the rights and obligations of the parties shall be construed and enforced accordingly. III.20 Patents No licenses, express or implied, under any patents or copyrights owned by either party are granted to the other party under this Agreement. ARTICLE IV ENTIRE AGREEMENT This Agreement, including all Attachments attached to or referenced in this Agreement, and all proposals, descriptions, drawings, specifications, marketing materials, and other literature published by either party in connection with or in contemplation of this Agreement shall constitute the entire agreement between ITN and AAS with respect to the subject matter. (SIGNATURE PAGE FOLLOWS) 13 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their respective duly authorized representatives. IT NETWORK, INC. AMERITECH PUBLISHING, INC. doing business as AMERITECH ADVERTISING SERVICES By: By: -------------------------------- -------------------------------- Print Name: Print Name: ------------------------ ------------------------ Title: Title: ----------------------------- ----------------------------- Date Signed: Date Signed: ----------------------- ----------------------- 14 Attachment A NON-DISCRIMINATION PROVISIONS During the performance of this Agreement, Supplier agrees to comply with the following provisions, to the full extent that this Agreement is subject thereto: Executive Order No. 11246, Executive Order No. 11625, Executive Order No. 12138, Section 503 of the Rehabilitation Act of 1973, the Vietnam-Era Veteran's Readjustment Assistance Act of 1974, the Illinois Human Rights Act, the Indiana Civil Rights Law, the Michigan Civil Rights Act, the Ohio Fair Employment Practice Law, the Wisconsin Fair Employment Act, the rules, regulations and relevant orders of the agencies enforcing said Orders and Statutes or charged with administering affirmative action/non-discrimination requirements applicable to government contractors or subcontractors, and any other applicable Federal, State, or local law imposing obligations on government contractors or subcontractors. Monetary amounts, contractual or purchasing relationships, and/or the number of Supplier's employees, determine which provisions are applicable. CLAUSES REQUIRED BY FEDERAL LAW The following clauses are deemed part of this Agreement in accordance with the table set forth below. - -------------------------------------------------------------------------------- ANNUAL CONTRACT VALUE CLAUSES - -------------------------------------------------------------------------------- 1 2 3 4 5 6 - -------------------------------------------------------------------------------- Less than $2,500 x(a) x(a) x(b) - -------------------------------------------------------------------------------- $2,500 or More x(a) x(a) x(b) x - -------------------------------------------------------------------------------- $10,000 or More x x x(b) x x - -------------------------------------------------------------------------------- $50,000 or More x x x(c) x(b) x x - -------------------------------------------------------------------------------- (a) Applies only to depositories of government funds or financial institutions issuing U.S. savings bonds and notes. (b) Applies only to depositories of government funds or financial institutions issuing U.S. savings bonds and notes and which have 50 or more employees and are prime contractors or first-tier subcontractors. (c) Applies only to businesses having 50 or more employees. (d) Applies only to businesses having 50 or more employees and which are prime contractors or first-tier subcontractors. Clause 1: Equal Employment Opportunity The Equal Employment Opportunity Clause set forth in Part 202 of Executive Order 11246 and reiterated at 41 C.F.R. Part 60-1.4(a), is hereby incorporated by reference pursuant to 41 C.F.R. Part 60-1.4(d). Clause 2: Certification of Non-segregated Facilities The Supplier certifies that it does not and will not maintain any facilities it provides for its employees in a segregated manner, or permit its employees to perform their services at any location under its control, where segregated facilities are maintained; and that it will obtain a similar certification, prior to the award of any nonexempt subcontract. Clause 3: Certification of Affirmative Action Programs The Supplier affirms that it has developed and is maintaining Affirmative Action Plans as required by Parts 60-2, 60-250, and 60-741 of Title 41 of the Code of Federal Regulations. Clause 4: Certification of filing of Employers Information Reports 1 The Supplier agrees to file annually on or before the 31st day of March complete and accurate reports of Standard Form 100 (EEO-a) or such forms as may be promulgated in its place. Clause 5: Employment of Veterans The Affirmative Action For Disabled Veterans and Veterans of the Vietnam Era Clause, set forth in 41 C.F.R Part 60-250.4 is hereby incorporated by reference pursuant to 41 C.F.R. Part 60-250.22. Clause 6: Employment of the Handicapped The Affirmative Action Clause For Handicapped Workers set forth at 41 C.F.R. Part 60-741.4 is hereby incorporated by reference pursuant to 41 C.F.R. Part 60-741.22. ADDITIONAL FEDERAL CLAUSES If this Agreement offers further subcontracting opportunities, the following clause is hereby made a material term of this Agreement: Utilization of Small Business Concerns and Small Disadvantaged Business Concerns (Feb. 1990) (a) It is the policy of the United States that small business concerns and small business concerns owned and controlled by socially and economically disadvantaged individuals shall have the maximum practicable opportunity to participate in performing contracts let by and Federal agency, including contracts and subcontracts for subsystems, assemblies, components, and related services for major systems. It is further the policy of the United States that its prime contractors establish procedures to ensure the timely payment of amounts due pursuant to the terms of their subcontracts with small business concerns and small business concerns owned and controlled by socially and economically disadvantaged individuals. (b) Supplier hereby agrees to carry out this policy in the awarding of subcontracts to the fullest extent consistent with efficient contract performance. Supplier further agrees to cooperate in any studies or surveys as may be conducted by the United States Small Business Administration or the awarding agency of the United States as may be necessary to determine the extent of Supplier's compliance with this clause. (c) As used in this contract, the term "small business concern" shall mean a small business as defined pursuant to section 3 of the Small Business Act and relevant regulations promulgated pursuant thereto. The term "small business concern owned and controlled by socially and economically disadvantaged individuals" shall mean a small business concern - (1) Which is at least 51 percent unconditionally owned by one or more socially and economically disadvantaged individuals; or, in the case of any publicly owned business, at least 51 per centum of the stock of which is unconditionally owned by one of more socially and economically disadvantaged individuals; and (2) Whose management and daily business operations are controlled by one or more of such individuals. This term also means a small business concern that is at least 51 per cent unconditionally owned by an economically disadvantaged Indian tribe or Native Hawaiian Organization, or a publicly owned business having at least 51 percent of its stock unconditionally owned by one of these entities which has its management and daily business controlled by members or an economically disadvantaged Indian tribe or a Native Hawaiian Organization, and which meets the requirements of 13 C.F.R. part 124. The Supplier shall presume that socially and economically disadvantaged individuals include Black Americans, Hispanic Americans, Native Americans, Asian-Pacific Americans, Subcontinent Asian Americans, and other minorities, or any other individual found to be disadvantaged by the Administration pursuant to section 8(a) of the Small Business Act. The Supplier shall presume that socially and economically disadvantaged entities also include Indian Tribes and Native Hawaiian Organizations. (d) Suppliers acting in good faith may rely on written representations by their subcontractors regarding their status as either a small business concern or a small business concern owned and controlled by socially and economically disadvantaged individuals. [end of clause] 2 If the value of the goods or services to be provided by Supplier under this Agreement is $500,000 or more, Supplier further agrees that it shall adopt a Small Business and Small Disadvantaged Business Subcontracting Plan as described in the clause set forth at Part 1, Section 52.219-9 of Title 48 of the Code of Federal Regulations. STATE CLAUSES If this Agreement relates to services to be performed for the state of Illinois, its political subdivisions, or any municipal corporation within Illinois, the Equal Employment Opportunity clause set forth at 44 Ill. Adm. Code Part 750, Appendix A shall be deemed incorporated herein by reference pursuant to the language thereof. If this Agreement relates to services to be performed for the state of Michigan or its political subdivisions, the value of the contract is at least $5000, and Supplier has at least three (3) employees, the Non-discrimination Clause for All State Contractors adopted by the State Administrative Board on January 17, 1967, as amended, shall be deemed incorporated herein by reference pursuant to the language thereof. 3 Attachment B 1997 DIRECTORY MANUFACTURING COSTS
-------------------------------------------------------------------------------------------------------------- CIRCULATION Page ORDER DUE STATE DIRECTORY IN ISSUE COST PER Count DATE/FINAL THOUSANDS* MONTH THOUSAND COLOR Due Date ART** =================================================================================================================== 1 I ANDERSON 77,152 3 3.04 2 10/12/97 11/12/97 - ------------------------------------------------------------------------------------------------------------------- 2 I EVANSVILLE 237,433 3 2.4 2 10/21/97 11/21/97 - ------------------------------------------------------------------------------------------------------------------- 3 I EVANSVILLE MIDI 25,948 3 5.28 2 10/21/97 11/21/97 - ------------------------------------------------------------------------------------------------------------------- 4 I INDIANAPOLIS 1,030,700 10 2.38 4 6/17/97 7/17/97*** - ------------------------------------------------------------------------------------------------------------------- 5 I MUNCIE 103,915 3 3.04 2 10/21/97 11/12/97 - ------------------------------------------------------------------------------------------------------------------- 6 I SOUTH BEND 238,400 3 2.57 4 11/10/97 12/10/97 - ------------------------------------------------------------------------------------------------------------------- 7 I SOUTH BEND MIDI 103,000 3 4.02 4 11/10/97 12/10/97 - ------------------------------------------------------------------------------------------------------------------- 8 M ANN ARBOR 265,000 11 2.99 2 7/25/97 8/25/97*** - ------------------------------------------------------------------------------------------------------------------- 9 M BATTLE CREEK AREA 100,000 11 3.76 2 8/1/97 8/29/97*** - ------------------------------------------------------------------------------------------------------------------- 10 M DETROIT 768,000 9 2.43 2 4/28/98 5/28/98 - ------------------------------------------------------------------------------------------------------------------- 11 M DOWNRIVER AREA 210,000 4 2.6 2 11/22/97 12/22/97 - ------------------------------------------------------------------------------------------------------------------- 12 M EAST AREA 457,000 11 2.7 2 7/14/97 8/14/97*** - ------------------------------------------------------------------------------------------------------------------- 13 M FLINT AREA 325,000 8 2.71 2 4/19/98 5/18/98 - ------------------------------------------------------------------------------------------------------------------- 14 M GRAND RAPIDS AREA 456,571 1 2.29 2 8/24/97 9/24/97 - ------------------------------------------------------------------------------------------------------------------- 15 M GRAND RAPIDS MIDI 55,082 1 2.89 2 8/24/97 9/24/97 - ------------------------------------------------------------------------------------------------------------------- 16 M GRAND TRAVERSE AREA 140,000 5 2.87 4 1/18/98 2/18/98 - ------------------------------------------------------------------------------------------------------------------- 17 M GRAND TRAVERSE MIDI 41,200 5 4.03 4 1/18/98 2/18/98 - ------------------------------------------------------------------------------------------------------------------- 18 M JACKSON 125,000 8 3.14 2 4/7/98 5/7/98 - ------------------------------------------------------------------------------------------------------------------- 19 M KALAMAZOO 217,000 8 2.96 2 3/24/98 4/24/98 - ------------------------------------------------------------------------------------------------------------------- 20 M KALAMAZOO MIDI 49,775 9 3.67 2 3/24/98 4/24/98 - ------------------------------------------------------------------------------------------------------------------- 21 M LANSING AREA 350,000 6 2.43 2 2/19/98 3/19/98 - ------------------------------------------------------------------------------------------------------------------- 22 M MIDLAND 68,000 8 4.05 2 5/18/98 6/18/98 - ------------------------------------------------------------------------------------------------------------------- 23 M MONROE CARLETON 61,000 1 3.77 2 9/23/97 10/23/97 - ------------------------------------------------------------------------------------------------------------------- 24 M NORTH OAKLAND/PONTIAC 300,000 4 2.44 2 12/6/97 1/6/98 - ------------------------------------------------------------------------------------------------------------------- 25 M NORTH WOODWARD 389,000 4 2.46 2 11/22/97 12/22/97 - ------------------------------------------------------------------------------------------------------------------- 26 M SAGINAW 245,000 6 2.7 2 2/20/98 3/20/98 - ------------------------------------------------------------------------------------------------------------------- 27 M WEST NORTHWEST 342,000 4 2.7 2 11/17/97 12/17/97 - ------------------------------------------------------------------------------------------------------------------- 28 O AKRON 450,000 12 2.65 2 7/26/98 8/25/98 - ------------------------------------------------------------------------------------------------------------------- 29 O CANTON 218,000 6 2.71 2 2/25/98 3/25/98 - ------------------------------------------------------------------------------------------------------------------- 30 O CLEVELAND 1,190,000 5 2.28 2 12/23/97 1/23/98 - ------------------------------------------------------------------------------------------------------------------- 31 O COLUMBUS 946,200 7 2.34 2 4/1/98 5/1/98 - ------------------------------------------------------------------------------------------------------------------- 32 O DAYTON 607,500 2 2.44 2 10/7/97 11/7/97 - ------------------------------------------------------------------------------------------------------------------- 33 O TOLEDO 460,000 10 2.62 2 7/18/97 8/15/97*** - ------------------------------------------------------------------------------------------------------------------- 34 O YOUNGSTOWN 343,000 3 2.87 2 11/12/97 12/12/97 - ------------------------------------------------------------------------------------------------------------------- 35 W FOX CITIES 210,000 9 3.11 4 5/2/98 6/2/98 - ------------------------------------------------------------------------------------------------------------------- 36 W GREEN BAY 208,000 12 2.98 4 06/31/98 7/31/98 - ------------------------------------------------------------------------------------------------------------------- 37 W MADISON 400,957 1 2.31 4 9/14/97 10/14/97 - ------------------------------------------------------------------------------------------------------------------- 38 W MILWAUKEE YP 955,000 8 2.48 4 4/6/98 5/6/98 - -------------------------------------------------------------------------------------------------------------------
* CIRCULATION - Estimated 1997 Total Circulation-Initial and Secondary Delivery ** ESTIMATED DUE DATES - 1998 Directory Schedule not yet released from Manufacturing *** DIRECTORIES TO BEGIN WITH 1997 ISSUES - all others to begin with the 1998 issues ATTACHMENT C ADVERTISEMENT PREPARATION AND PRODUCTION PRINTING SPECIFICATIONS ITN agrees to follow the Advertisement Preparation and Production Printing Specifications as herein defined for publication in Directories of Ameritech in accordance with Aas's standards and guidelines. 1. Art & Text Specifications a. 1000 (or higher) dpl on Resin Coated photographic paper. b. No paste-ups. Nothing should be affixed to the surface of the page. c. There is a 1/16" separation required between different colors. In defined color ads, the 1/16" color separation requirement can be replaced with a 2 pt. black line surrounding and separating colors. d. All palette colors and green illustration elements and text require a minimum 3 pt. thickness, text size must be 12 pt. or larger. e. Provide color separated resin coated paper, with two sets of camera ready proofs. f. CYMK only. No pantone. g. No process color photographs. 2. RC Paper Preparation Dot Pattern: a. Veloxes must contain a 85 line screen using a hard round dot with black at a 45 degree screen angle, cyan at a 75 degree screen angle, magenta at a 105 degree screen angle, and yellow at a 90 degree screen angle. Tonal range is 15%-85%. Print Density: a. A maximum overall print density of 220% is required with only one color as a solid. Two or more secondary colors should not exceed 150% together (i.e.: directory red is 100% magenta and 50% yellow). Any single color not intended to print solid should not exceed 70%. Actual dot percentages will increase for black and decrease for cyan, magenta, and yellow. GCR is used for process color. Front of Book Local and National Yellow Pages Advertising cannot be run with color bars. Therefore quality of color reproduction of 4-color halftones, 4-color ads, or 4-color logos cannot be guaranteed. Note: Resin coated paper must be supplied by ITN. Aas will not be responsible for poor printing quality due to poor resin coated paper. Complaints on printing quality due to poor resin coated paper will be directed to ITN. Printing problems due to poor quality of the resin coated paper will be documented by ITN and presented to Aas at a pre-arranged meeting. 3. Typography a. Fine type should be submitted as 1-color copy only and should not be reversed out of the background. b. Reverse type should not be smaller than 10 points and should be reversed out of areas having a minimum of a 50% tone value of any one color of magenta, cyan, or black 50%. c. Maximum tint background for surprint type is 30%. 4. Production Printing Paper, Ink: a. Paper is 22#. Ink is cold set. The process is offset. Dot Gain: a. Expect midtone dot gains of 25-30% in each color; quartertone dot gains of 0% in each color; and three quartertone dot gains of 30-40% in each color. Printing Tone: a. First printing tone will be 15%. Quality of reproduction for any materials that do not comply with these specifications will not be guaranteed. 5. Audiotex Page Specifications 1. Section will be placed at the end of "Front of Book" and before subject indices. 2. Design and Text Requirements for each Audiotex Page: The disclaimer statement: "The information services on this page are created and provided by IT Network and are not associated in any way with Ameritech PagesPlus(R) Yellow Pages. For questions, comments, or advertising information, call 1-800-950-4483" will be in 8pt or larger text. 3. ITN will provide appropriate disclaimer statements for health and legal guides and others, as required. 4. "IT NETWORK" logo must appear prominently on each page. 5. Aas will not provide color proof of final pages for ITN's approval. 6. ITN pages design must be consistent with Aas template or the ITN pages will not be forwarded to the printer. General ITN FOB pages design and general content will be reviewed and approved by Aas by the Audiotex product manger. 7. Aas retains the right to change the type of medium for printing with 60 days notice to ITN. 8. Audiotex Title and Cover Pages: Title page will be prepared by ITN and is included in the page count limitation. It will separate Audiotex from access pages and will include name of section, instructions on section use and table of contents (in alphabetical order). 9. IT Network FOB pages will not include any Internet or Auto Guide content per agreed to term sheet. ATTACHMENT D-1 Ameritech advertising services Audiotex Only Real Estate Leases
Location Address Mo. Rent Lease Exp. Comments Mgmt. Co./Payee ==================================================================================================================================== Sterling Hts. 39093 Van Dyke Ave. [ILLEGIBLE] 7/31/98 Sterling Manor Traverse City 745 Garfield Ave. (Audiotex Tower) $185 6/30/97 Mth-to-Mth Northern Radio of Michigan (WHLT) ==================================================================================================================================== Evansville 2813 E. Lincoln Ave. $200 1/31/96 [ILLEGIBLE] Corp. ==================================================================================================================================== Akron 610 S. Main St $275 11/1/97 Canal Place, Ltd Cleveland 2000 E. Ninth St. $656 3/31/96 Ostendorf-Morris Co. Columbus 2900 Corporate Exchange Dr., $365 5/31/99 Eastrich No. 167, C/O John Buck Co. Youngstown 680 Boardman $36[ILLEGIBLE] 10/31/[ILLEGIBLE] Wolfe, Evans & Co. ==================================================================================================================================== Green Bay 211 N. Broadway [ILLEGIBLE] 6/30/97 Commercial Horizons, Inc. Madison [ILLEGIBLE] S. Yellowstone Dr. $292 11/30/97 Vantage Place II C/O the Shaw Company Location Mgmt. Address Contact/Phone No. =============================================================================================================== Sterling Hts. P.O. Box 32153, Fraser, MI 48232 Kim Corrado (610) 415-0035 Traverse City 746 Garfield Ave., Traverse City, MI 49084 [ILLEGIBLE] (610) 911-7630 =============================================================================================================== Evansville P.O. Box 92471, Chicago, IL 60676-2471 Bob Leonard (812) 464-6038 =============================================================================================================== Akron 540 S. Main St., Akron, OH [ILLEGIBLE] Ken Roberts (218) 434-6656 Cleveland P.O. Box 5919-C, Cleveland, OH [ILLEGIBLE] Claudia [ILLEGIBLE] (216) 661-5671 Columbus P.O. Box 182039, Dept. 90, Columbus, OH 43218-[ILLEGIBLE] Winnie [ILLEGIBLE] (614) 882-4142 Youngstown 660 Boardman - Canfield Rd., Youngstown, OH 44512 David Wolfe (216) 758-2937 =============================================================================================================== Green Bay 1600 River Pines Dr, Green Bay, WI 54310 Barbara Patton (414) 391-1191 Madison [ILLEGIBLE] W. Broadway, Ste. 104, Madison, WI 53719 Pat Schwartz (608) 221-8022
ATTACHMENT D-2 Ameritech advertising services Combined Functions (Sales and Audiotex) Real Estate Leases
Location Address Lease Exp. Comments Mgmt. Co./Payee =============================================================================================================== Grand Rapids 2401 Camelot Ct. 6/30/00 2401 Camelot Partners Kalamazoo 1341 [ILLEGIBLE], Ste. 7108 11/30/98 [ILLEGIBLE] Management Lansing 1046 [ILLEGIBLE], Ste. 6 6/30/99 First Capital Lansing Prop. Livonia 14155 Farmington Rd. 6/31/99 Livonia Metro Plex Saginaw 1901 Towne Ctr., Ste. 300 7/31/99 Towne Centre Investments Traverse City 745 Garfield 6/30/98 MLD, Inc/McCarthy-Tomga Co., Inc. Troy 100 E. Big Beaver 6/30/00 APEX Mgmt., Inc. =============================================================================================================== Indianapolis 1099 Meridian, Ste. 400 4/30/97 Mth-to-Mth REI Real Estate Svcs. =============================================================================================================== Dayton 3055 Katlering Blvd., Ste. 100 11/30/97 Point West III Ltd. Partnership Toledo 3103 Executive Pkwy. 10/31/99 Blue Cross/Blue Shield of Ohio =============================================================================================================== Brookfield 200 S. Executive Dr. 4/30/98 The [ILLEGIBLE] Funds Location Mgmt. Address Contact/Phone No. ====================================================================================================================== Grand Rapids 6274 28th St., SE, Grand Rapids, MI 49508 Deborah [ILLEGIBLE] (616) 682-0890 Kalamazoo 4341 S. [ILLEGIBLE], Ste. 2200, Kalamazoo, MI 49008 Brian Evans (616) 343-0308 Lansing 6810 S. Cedar, Ste. 3C, Lansing, MI 46911 Don [ILLEGIBLE] (517) [ILLEGIBLE] -4340 Livonia 13980 Farmington Rd., Livonia, MI 46154 Dick Barker [ILLEGIBLE] 425-6854 Saginaw 4901 Towne Ctr., Ste. 110, Saginaw, MI 40604 Janet Goodchild (617) 791-1099 Traverse City 416 E. Front St., Traverse City, MI 49684 Stan [ILLEGIBLE] (616) 941-7630 Troy 100 E. Big Beaver, Ste. 100, Troy, MI [ILLEGIBLE] Debbie Bachman (610) 524-1633 ====================================================================================================================== Indianapolis P.O. Box 66340, Indianapolis, IN 46266 Carolyn Godby (317) 630-3125 ====================================================================================================================== Dayton Eleven W. Monument Bldg, 8th Flr., Dayton, OH 45439 Janet [ILLEGIBLE] (513) 222-1285 Toledo P.O. Box 943, Toledo, OH [ILLEGIBLE] Carol [ILLEGIBLE] (419) 473-7100 ====================================================================================================================== Brookfield 200 Executive Dr. P.O. Box 75687, Chicago, IL 60675-5867 Marcie [ILLEGIBLE] (414) 289-0302
ATTACHMENT E AUDIOTEX EQUIPMENT INFORMATION AND CONFIGURATIONS
==================================================================================================================================== QUANTITY DESCRIPTION LOCATIONS ==================================================================================================================================== 26 Custom Voiceprint Systems Akron Livonia -24-48 ports per node Ann Arbor/Troy Madison -486 mhz cpu NW/Birmingham/Troy Milwaukee -16mb RAM Claw/BTB/Troy Pontiac/Troy -Floppy disk drive Cleveland Saginaw -Color monitor Columbus South Bend -19.2 trailblazer modem Dayton Sterling Heights -4 port serial card Downriver/Troy Toledo -Keyboard Evansville Traverse City -High performance BUS design Flint/Troy WnW/Troy -Ind. mounting cabinets Grand Rapids Youngstown -2.2Gb DAT tape drive Green Bay -2.4Gb SCSI drive Indianapolis -Uninterruptible power supply Kalamazoo -Voiceprint software Lansing ==================================================================================================================================== 2 Risc 6000's Both in Wichita ==================================================================================================================================== 21 Digital Satellites Akron Grand Rapids Lansing Sterling Heights Troy/Nwd2 -1.2 meter satellite dish Brookfield Green Bay Livonia Traverse City Youngstown -digital receiver license Cleveland Indianapolis Moraine/Dayton Toledo 3 not installed -LNB and 2400 baud modem Columbus Kalamazoo Saginaw Troy/Claw1 ====================================================================================================================================
AUDIOTEX SYSTEM AND SATELLITE EQUIPMENT INFORMATION - -------------------------------------------------------------------------------- NUM LOCATION STATE SYSTEM ASSET SATELLITE ABR# - -------------------------------------------------------------------------------- 1 South Bend IN Yes 2035 No N/A 2 Troy/Claw1/SH MI Yes 3196 Yes 4477 3 Troy/Down1 MI Yes 3287 No N/A 4 Indianapolis IN Yes 1222 Yes 12689 5 Green Bay WI Yes 1995 Yes 5011 6 Traverse City MI Yes 3284 Yes 10120 7 Akron OH Yes 3283 Yes 12650 8 Moraine/Dayton OH Yes 1997 Yes 7352 9 Evansville IN Yes 3280 No N/A 10 Cleveland OH Yes 2032 Yes 12658 11 Brookfield WI Yes 2033 Yes 12683 12 Serling Heights MI Yes 2017 Yes 12633 13 Youngstown OH Yes 3285 Yes 12653 14 Kalamazoo MI Yes 1994 Yes 12641 15 Columbus OH Yes 2031 Yes 12638 16 Livonia MI Yes 1993 Yes 12665 17 Lansing MI Yes 1212 Yes 12669 18 Saginaw MI Yes 3282 Yes 12659 19 Toledo OH Yes 3279 Yes 12706 20 Troy/Ann1 MI Yes 3228 No N/A 21 Troy/Flint1 MI Yes 3286 No N/A 22 Troy/Nwd2/Troy MI Yes 3281 Yes 12656 23 Troy/Pont1 MI Yes 3229 No N/A 24 Troy/West1 MI Yes 3227 No N/A 25 Grand Rapids MI Yes 2018 Yes 12644 26 Madison WI Yes 2034 No N/A 27 Wichita KS Risc 6000 2007 No N/A 28 Wichita KS Risc 6000 4257 No N/A ATTACHMENT F Ameritech advertising services Audiotex Telephone Line Information
LOCATION ADDRESS MONTHLY COST* SERVICE ACCOUNT SUMMARY ==================================================================================================================================== Ann Arbor 2360 Green $ 384 (2) T-1 [ILLEGIBLE], (32) DID Trunks Birmingham 30150 Telegraph $ 1,298 (2) T-1 [ILLEGIBLE], (40) DID Trunks, (2) [ILLEGIBLE] lines - (local presence required for billing) Flint G-5097 [ILLEGIBLE] $ 636 (1) T-1 [ILLEGIBLE], (24) DID Trunks, (1) [ILLEGIBLE] - (local presence required for billing) Grand Rapids 2401 Camelot Ct., S.E. $ 2,998 (47) Centrex, (4) MB lines, (8) FX lines from Holland to Grand Rapids, (8) FK from Grand Haven to Grand Rapids Kalamazoo 4041 S. [ILLEGIBLE] Ste. 1108 $ 2,870 (43) Centrex, (5) MB lines, (16) FX lines from Battle Creek to Kalamazoo Lansing 1048 [ILLEGIBLE] $ 3,030 (49) Centrex, (4) MB lines, (16) FX lines from Jackson to Lansing Livonia 14155 Farmington $12,768 (1) T-1, (16) DID Trunks, (42) Centrex, (4) MB lines, (32) FX lines from Detroit to Livonia - (local presence required for billing) Pontiac 35 W. Huron $ 961 (2) T-1 [ILLEGIBLE], (32) DIO Trunks, (1) Centrex - (local presence required for billing) Saginaw [ILLEGIBLE] Towne Centre, Ste 300 $ 796 (27) Centrex, (4) RCF lines from Midland to Saginaw Sterling Hts. [ILLEGIBLE] Van Dyke Ave., Ste 104A $ 129 (1) Centrex, (4) MB lines Traverse City 746 Oarfield Ave. $ 570 (28) Centrex Troy 100 E. Big Beaver, Ste. 126 $ 7,696 (9) T-1 [ILLEGIBLE], (6) MB lines, (1) RCF line from Monroe to Troy Wyandotle 140 Elm $ 684 (1) T-1 [ILLEGIBLE], (57) DID Trunks, (1) Centrex - (local presence required for billing) ==================================================================================================================================== Evansville 2613 E. Lincoln Ave. $ 7,007 (26) Centrex - RCF to Central Office Indianapolis 1899 N. Meridian $ 7,700 (102) Centrex, (18) RCF lines from Anderson to Indianapolis, (12) RCF lines from [ILLEGIBLE] to Indianapolis South Bend 1401 Prarie $ 1,646 (1) Local Loop [ILLEGIBLE], (40) Centrex ==================================================================================================================================== Akron 640 S. Main St., Ste 1742 $ 1,634 (27) Centrex, ([ILLEGIBLE]) FX lines from [ILLEGIBLE] to Akron Cleveland 2000 E. Ninth St., 827 $ 2,382 (108) Centrex Columbus 2500 Corporate Exchange Dr., Ste 310 $ 1,926 ([ILLEGIBLE]) Centrex Dayton 3055 Kettering Blvd., Ste 100, Moraine $ 1,201 (44) Centrex Toledo [ILLEGIBLE] Executive Parkway, Ste 304 $ 700 (27) Centrex Youngstown 860 Boardman - Canfield Rd., Ste 103 $ 727 (28) Centrex ==================================================================================================================================== Green Bay 211 N. Broadway, Ste 216 $ 4,370 ([ILLEGIBLE]) Centrex, (24) FX lines from Appleton to Green Bay Milwaukee- Brookfield 200 S. Executive Dr., Ste 209A $ 1,361 ([ILLEGIBLE]) Centrex, (7) [ILLEGIBLE] lines Madison 437 S. Yellowstone Dr., Ste 209A $ 1,608 (1) Local Loop Circuit, (27) Centrex
* Includes recurring monthly charges plus useage. EX-10.2 3 EXHIBIT 10.2 INTERACTIVE CHANNEL AMENDMENT TO DISTRIBUTION AGREEMENT The Agreement between Cablevision Systems Corporation, et. al. ("CSC") and IT Network ("IT") dated November 16, 1995, (the "Agreement"), is hereby amended as follows: 1. All Terms used in this Amendment which are defined in the Agreement shall have the same meaning herein as in the Agreement. 2. Effective upon execution, the parties agree as follows: a) Section 2 shall be replaced in its entirety with the following: 2. PHASE I - OPERATIONAL BURN-IN 2.1 IT and CSC agree that the goal of the operational burn-in phase is to prove to both parties' satisfaction that the IC technology performs adequately in a multi-user, simultaneous usage environment over CSC's two-way cable plant using set top boxes as defined below, without interfering with CSC's other services and operations. 2.2 IT agrees to provide CSC, at no cost to CSC, with up to 100 IT owned or licensed sidecar set top boxes (the "Set Tops") for use until such time as this Agreement is terminated and/or CSC elects to purchase other customer interface equipment as may be available in the future. 2.3 IT will deliver the Set Tops to CSC within three weeks after the signing of this Agreement. 2.4 There will be a 90 day operational burn-in period during which no License Fee shall be due from CSC, nor shall CSC charge any fee for the IC service. The 90 day operational burn-in period will begin after all Set Tops have been deployed in customers' homes, and may be extended or reduced by mutual written agreement, but such extension or reduction shall not alter the Term of this Agreement. CSC will be responsible for the installation of up to 100 Set Tops in homes or offices. CSC and IT will each provide appropriate technical support during this period. 2.5 Before the 90 day operational burn-in period, IT shall pay for, provide, install and maintain, at a co-location with the CSC system headend, an IC headend to provide IC Programming and CSC shall allow such co-location. b) Section 3 shall be replaced in its entirety with the following: 3. PHASE II - LAUNCH 3.1 Subject to IT and CSC's mutual satisfaction with the operational burn-in phase, CSC agrees to launch the IC service in its cable systems listed on Exhibit B and/or such other CSC Systems with at least 40,000 subscribers as determined by CSC in its sole discretion. IT shall provide IC headends to CSC for all such launches at IT's sole cost. 3.2 Upon CSC's request and in accordance with CSC's delivery schedule, IT agrees to provide up to 5,000 Set Tops and remote controls at no charge to CSC for use until such time as this Agreement is terminated and/or CSC elects to purchase other customer interface equipment as may be available in the future. 3.3 If CSC terminates this Agreement, then it shall return the Set Tops to IT within 90 days. 3.4 Phase II will continue for a period of sixty months from the beginning of the Operational Burn-In phase. Subsequent to the initial twelve months of phase II, CSC shall have the right to discontinue carriage of IC with 30 days' notice to IC. At the conclusion of the initial sixty-month period of the Agreement, CSC shall have the right to renew the Agreement on the same terms and conditions outlined herein for an additional sixty month period. 3.5 IT agrees to sell remote controls to CSC which will be used in the CSC Set Tops. CSC agrees to pay, and IT agrees to provide at this price, additional remote controls as needed, at $15.00 each. In the event that IT's cost from its technology sourcing company for the remote control falls below $15.00, IT shall provide such remote controls at cost to CSC. c.) Effective upon execution, Section 12 shall be replaced in its entirety with the following: 12. This agreement shall encompass CSC's standard exclusivity, non-recourse and several liability provisions (Exhibit A). The parties agree to negotiate a full Affiliation Agreement including the terms contained herein. d.) Effective upon execution, a new Section 13 shall be added, to read as follows: 12. IT grants CSC the exclusive rights to distribute IC in all markets served by CSC. In the event that CSC has not launched IC in a market in which another potential IC provider wishes to launch the service, CSC shall have the right of first refusal to either launch IC or to waive its exclusive right to IC in that market. In each market in which IC is deployed, this right shall expire two years from the date on which IC is launched. e.) Effective upon execution, a new Exhibit B shall be added, a sample of which is attached hereto as Exhibit 1. Except as amended by the foregoing, the Agreement dated November 16, 1995, shall remain in full force and effect. Agreed and Accepted for IT Network: Agreed and Accepted for Cablevision Systems Corporation, et. al.: /s/ John Reed /s/ CSC - ----------------------------------- ----------------------------------- Name Name President Vice President - ----------------------------------- ----------------------------------- Title Title 5/22/97 5/21/97 - ----------------------------------- ----------------------------------- Date Date Exhibit 1 Name & Address of Cable System Number of Subscribers Dated Added - ------------------------------ --------------------- ----------- EX-27 4 EXHIBIT 27 FDS
5 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 8,626,528 0 1,305,542 0 0 11,535,449 10,601,818 4,615,308 30,177,002 7,325,651 18,279,791 0 0 11,737 1,403,283 30,177,002 8,746,765 8,746,765 6,312,567 12,762,571 (213,863) 0 980,375 (11,094,885) 0 (11,094,885) 0 0 0 (11,094,885) (0.99) (0.99)
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