-----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, JWYVAg+OgTB4YGXCrJGnnrai+8zPPGZj6yLffSN14lmBdl+U6DAePah4QL0hNAyR aP2zWivXCPGTiKEVJPI6Ug== /in/edgar/work/0000950134-00-009797/0000950134-00-009797.txt : 20001115 0000950134-00-009797.hdr.sgml : 20001115 ACCESSION NUMBER: 0000950134-00-009797 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOURCE MEDIA INC CENTRAL INDEX KEY: 0000900029 STANDARD INDUSTRIAL CLASSIFICATION: [4822 ] IRS NUMBER: 133700438 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21894 FILM NUMBER: 767630 BUSINESS ADDRESS: STREET 1: 5400 LBJ FREEWAY STE 680 CITY: DALLAS STATE: TX ZIP: 75240 BUSINESS PHONE: 9727015400 MAIL ADDRESS: STREET 1: 5400 LBJ FREEWAY STE 680 CITY: DALLAS STATE: TX ZIP: 75240 FORMER COMPANY: FORMER CONFORMED NAME: HB COMMUNICATIONS ACQUISITION CORP DATE OF NAME CHANGE: 19950703 10-Q 1 d81825e10-q.txt FORM 10-Q FOR QUARTER ENDED SEPTEMBER 30, 2000 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000 COMMISSION FILE NUMBER 0-21894 SOURCE MEDIA, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 13-3700438 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER) 5400 LBJ FREEWAY, SUITE 680 DALLAS, TEXAS 75240 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (972) 701-5400 (REGISTRANT'S TELEPHONE NUMBER) 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 NOVEMBER 7, 2000: 17,618,712 2 SOURCE MEDIA, INC. FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000 PART I. FINANCIAL INFORMATION
Page Number ----------- Item 1. Consolidated Financial Statements of Source Media, Inc. Consolidated Balance Sheets of Source Media, Inc. (Unaudited) December 31, 1999 and September 30, 2000 4-5 Consolidated Statements of Operations of Source Media, Inc. (Unaudited) Three and nine months ended September 30, 1999 and 2000 6 Consolidated Statements of Cash Flows of Source Media, Inc. (Unaudited) 7 Nine months ended September 30, 1999 and 2000 Consolidated Statements of Stockholder's Equity (Capital Deficiency) 8 of Source Media, Inc. (Unaudited) September 30, 2000 Notes to Consolidated Financial Statements of Source Media, Inc. (Unaudited) 9-19 Financial Statements of SourceSuite LLC Balance Sheet of SourceSuite LLC (Unaudited) September 30, 2000 20 Statement of Operations of SourceSuite LLC (Unaudited) Three months ended September 30, 2000 and Period from Inception (March 3, 2000) to September 30, 2000 21 Statement of Cash Flows of SourceSuite LLC (Unaudited) Period from Inception (March 3, 2000) to September 30, 2000 22 Statement of Members' Equity of SourceSuite LLC (Unaudited) 23 September 30, 2000 Notes to Financial Statements of SourceSuite LLC (Unaudited) Period from Inception (March 3, 2000) to September 30, 2000 24-26 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 27-33
2 3
Page Number ----------- Item 3. Quantitative and Qualitative Disclosures About Market Risk 34 PART II. OTHER INFORMATION Item 1. Legal Proceedings 35 Item 2. Changes in Securities and Use of Proceeds 35 Item 3. Defaults Upon Senior Securities N/A Item 4. Submission of Matters to a Vote of Security Holders N/A Item 5. Other Information N/A Item 6. Exhibits and Reports on Form 8-K 35
3 4 SOURCE MEDIA, INC. CONSOLIDATED BALANCE SHEETS ASSETS (IN THOUSANDS) (UNAUDITED)
DECEMBER 31, SEPTEMBER 30, 1999 2000 ------------- ------------- Current Assets: Cash and cash equivalents $ 10,910 $ 13,171 Short-term investments 2,500 -- Restricted investments 5,997 339 Trade accounts receivable, less allowance for doubtful accounts of $605 and $558 in 1999 and 2000, respectively 1,643 1,573 Related party receivables 1,458 473 Prepaid expenses and other current assets 1,068 1,224 Investment in securities available for sale -- 25,639 ------------- ------------- Total current assets 23,576 42,419 Property and equipment: Production equipment 4,511 4,403 Computer equipment 3,612 3,461 Other equipment 1,612 2,626 Furniture and fixtures 656 659 ------------- ------------- 10,391 11,149 Accumulated depreciation 7,957 9,953 ------------- ------------- Net property and equipment 2,434 1,196 Intangible assets: Goodwill 3,688 3,688 Contract rights 11,933 11,933 ------------- ------------- 15,621 15,621 Accumulated amortization 6,119 7,871 ------------- ------------- Net intangible assets 9,502 7,750 Investment in joint venture 18,669 2,766 Other non-current assets 3,835 2,977 ------------- ------------- Total assets $ 58,016 $ 57,108 ============= =============
See accompanying Notes to Consolidated Financial Statements. 4 5 SOURCE MEDIA, INC. CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) (IN THOUSANDS) (UNAUDITED)
DECEMBER 31, SEPTEMBER 30, 1999 2000 ------------- ------------- Current Liabilities: Trade accounts payable $ 955 $ 567 Accrued interest 1,991 4,566 Accrued payroll 591 558 Other accrued liabilities 3,706 2,791 Unearned income 1,925 1,911 ------------- ------------- Total current liabilities 9,168 10,393 Long-term debt 96,250 88,533 Minority interests in consolidated subsidiaries 3,840 3,840 Note receivable and accrued interest from minority stockholder, net of discount of $12 and $0 in 1999 and 2000, respectively (837) (860) ------------- ------------- 3,003 2,980 Senior redeemable payment-in-kind (PIK) preferred stock, $25 dollar per share liquidation preference, $.001 par value, net of discount Authorized shares - 1,712; Issued and outstanding shares 1,043 and 529 in 1999 and 2000, respectively 18,467 8,426 Non-participating preferred stock, $25 dollar per share liquidation preference, $.001 par value; Authorized and issued - 1 single share -- -- Stockholders' equity (capital deficiency): Common stock, $.001 par value: Authorized shares - 50,000; 16,278 and 17,869 issued and outstanding in 1999 and 2000, respectively 16 18 Less treasury stock, at cost - 268 and 250 shares in 1999 and 2000, respectively (2,647) (2,476) Capital in excess of par value 120,883 136,550 Accumulated other comprehensive income -- (61,799) Accumulated deficit (187,124) (125,517) ------------- ------------- Total stockholders' equity (capital deficiency) (68,872) (53,224) ------------- ------------- Total liabilities and stockholders' equity (capital deficiency) $ 58,016 $ 57,108 ============= =============
See accompanying Notes to Consolidated Financial Statements. 5 6 SOURCE MEDIA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS ENDED ENDED ENDED ENDED SEPTEMBER 30, 1999 SEPTEMBER 30, 2000 SEPTEMBER 30, 1999 SEPTEMBER 30, 2000 ------------------ ------------------ ------------------ ------------------ Monetary revenues $ 4,275 $ 4,063 $ 13,624 $ 12,626 Nonmonetary revenues 555 397 1,437 1,723 ------------------ ------------------ ------------------ ------------------ Total revenues 4,830 4,460 15,061 14,349 Monetary cost of sales 3,085 2,422 9,826 7,479 Nonmonetary cost of sales 555 397 1,437 1,723 ------------------ ------------------ ------------------ ------------------ Total cost of sales 3,640 2,819 11,263 9,202 ------------------ ------------------ ------------------ ------------------ Gross profit 1,190 1,641 3,798 5,147 Selling, general and administrative expenses 4,122 2,634 18,223 9,053 Amortization of intangible assets 1,236 584 3,709 1,752 Research and development expenses 783 -- 2,302 -- ------------------ ------------------ ------------------ ------------------ 6,141 3,218 24,234 10,805 ------------------ ------------------ ------------------ ------------------ Operating loss (4,951) (1,577) (20,436) (5,658) Interest expense 3,208 2,843 9,621 8,926 Interest income (104) (169) (640) (632) Equity interest in losses of joint venture -- 734 -- 3,443 Gain on sale of interest in joint venture -- -- -- (74,977) Other expense (income) -- 110 (2) 214 ------------------ ------------------ ------------------ ------------------ Net income (loss) before extraordinary item (8,055) (5,095) (29,415) 57,368 Extraordinary item - gain on extinguishment of debt -- 1,709 -- 4,239 ------------------ ------------------ ------------------ ------------------ Net income (loss) (8,055) (3,386) (29,415) 61,607 Preferred stock dividends (difference on conversion of preferred stock, net of dividend) 4 (1,763) 1,433 (5,643) ------------------ ------------------ ------------------ ------------------ Net income (loss) attributable to common stockholders $ (8,059) $ (1,623) $ (30,848) $ 67,250 ================== ================== ================== ================== Other comprehensive income (loss): Unrealized loss on available for sale securities -- (332) -- (61,799) ------------------ ------------------ ------------------ ------------------ Comprehensive Income $ (8,059) $ (1,955) $ (30,848) $ 5,451 ================== ================== ================== ================== Basic and diluted net loss per common share: Basic: Net income (loss) before extraordinary item per common share $ (0.60) $ (0.19) $ (2.32) $ 3.79 Extraordinary item $ -- $ 0.10 $ -- $ 0.25 ------------------ ------------------ ------------------ ------------------ Net loss attributable to common stockholders $ (0.60) $ (0.09) $ (2.32) $ 4.04 ================== ================== ================== ================== Weighted average basic common shares outstanding: 13,499 17,451 13,285 16,648 ================== ================== ================== ================== Diluted: Net income (loss) before extraordinary item per common share $ (0.60) $ (0.19) $ (2.32) $ 3.63 Extraordinary item $ -- $ 0.10 $ -- $ 0.24 ------------------ ------------------ ------------------ ------------------ Net loss attributable to common stockholders $ (0.60) $ (0.09) $ (2.32) $ 3.87 ================== ================== ================== ================== Weighted average diluted common shares outstanding: 13,499 17,451 13,285 17,353 ================== ================== ================== ==================
See accompanying notes to Consolidated Financial Statements 6 7 SOURCE MEDIA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
NINE MONTHS NINE MONTHS ENDED ENDED SEPTEMBER 30, 1999 SEPTEMBER 30, 2000 ------------------ ------------------ OPERATING ACTIVITIES Net income (loss) $ (29,415) $ 61,607 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation 2,032 1,337 Amortization of intangible assets 3,709 1,753 Deferred Compensation 894 1,077 Non-cash interest expense 619 857 Non-cash interest income (296) (118) Provision for losses on accounts receivable 250 (47) Gain on sale of joint venture -- (74,977) Equity investment in losses of joint venture -- 3,443 Extraordinary gain on issuance of common stock in exchange for notes (4,239) Changes in operating assets and liabilities: Trade accounts receivable 1,854 116 Related party receivable -- 985 Prepaid expenses and other current assets (436) (171) Deferred expenses (54) 15 Trade accounts payable and accrued liabilities 4,915 1,230 Accrued interest (43) (23) Unearned income 602 (14) ------------------ ------------------ Net cash used in operating activities (15,369) (7,169) INVESTING ACTIVITIES Capital expenditures (1,166) (99) Redemption of investments -- 5,775 Redemption of short-term investments 6,000 2,500 Proceeds from sale of joint venture -- 4,392 Investment in SourceSuite LLC -- (4,392) ------------------ ------------------ Net cash provided by investing activities 4,834 8,176 FINANCING ACTIVITIES Proceeds from issuance of common stock 3,315 1,009 Warrants exercised 1,164 244 Other 162 1 ------------------ ------------------ Net cash provided by financing activities 4,641 1,254 ------------------ ------------------ Net increase (decrease) in cash and cash equivalents (5,894) 2,261 Cash and cash equivalents at beginning of period 11,662 10,910 ------------------ ------------------ Cash and cash equivalents at end of period $ 5,768 $ 13,171 ================== ==================
See accompanying Notes to Consolidated Financial Statements 7 8 SOURCE MEDIA, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) (IN THOUSANDS) (UNAUDITED)
COMMON STOCK CAPITAL IN --------------------------- TREASURY EXCESS OF ACCUMULATED SHARES AMOUNT STOCK PAR VALUE DEFICIT ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1999 16,278 $ 16 $ (2,647) $ 120,883 $ (187,124) Issuance of common stock upon exercise of stock options 109 -- -- 837 -- Issuance of stock for employee stock plan -- -- 171 -- -- Stock compensation -- -- -- 1,077 -- Net income -- -- -- -- 61,607 Preferred stock exchange 725 1 -- 4,398 -- Warrants exercised 83 -- -- 244 -- Accumulated other comprehensive loss -- -- -- -- -- Issuance of common stock for note exchange 674 1 -- 3,468 -- Preferred stock dividends -- -- -- 5,643 -- ------------ ------------ ------------ ------------ ------------ BALANCE AT SEPTEMBER 30, 2000 17,869 $ 18 $ (2,476) $ 136,550 $ (125,517) ============ ============ ============ ============ ============ TOTAL STOCKHOLDERS' COMPREHENSIVE EQUITY (CAPITAL LOSS DEFICIENCY) ------------ ------------ BALANCE AT DECEMBER 31, 1999 $ -- $ (68,872) Issuance of common stock upon exercise of stock options -- 837 Issuance of stock for employee stock plan -- 171 Stock compensation -- 1,077 Net income -- 61,607 Preferred stock exchange -- 4,399 Warrants exercised -- 244 Accumulated other comprehensive loss (61,799) (61,799) Issuance of common stock for note exchange -- 3,469 Preferred stock dividends -- 5,643 ------------ ------------ BALANCE AT SEPTEMBER 30, 2000 $ (61,799) $ (53,224) ============ ============
See accompanying Notes to Consolidated Financial Statements 8 9 SOURCE MEDIA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Unless the context otherwise requires, all references to the "Company" or "Source Media" include Source Media, Inc. and its wholly-owned operating subsidiaries ("Subsidiaries"), including IT Network, Inc. ("IT Network"), Interactive Channel, Inc. ("Interactive Channel"), and SMI Holdings, Inc., its other operating subsidiary, Interactive Channel Technologies Inc., ("ICTI"), as well as its wholly-owned non-operating subsidiary, Source Nevada, Inc., and SourceSuite LLC ("SourceSuite"), a 50/50 joint venture with Insight Interactive LLC ("Insight"), a subsidiary of Insight Communications Company, Inc. 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, these financial statements include all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position, results of operations and cash flows of the Company and its consolidated subsidiaries for the periods indicated. Operating results for the three and nine months ended September 30, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. The balance sheet at December 31, 1999 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, 1999. On March 3, 2000 Source Media and Insight sold their respective interests in a joint venture to Liberate Technologies ("Liberate") in exchange for the issuance of 886,000 shares of common stock of Liberate and $4.4 million of cash to each of Source Media and Insight. Prior to the sale of the joint venture, cash equal to the value (as determined by an independent appraisal) of certain retained businesses, consisting of the interactive programming guide and related content business, was contributed by the joint venture to SourceSuite, of which Source Media and Insight each own 50%. SourceSuite used these funds to purchase the retained businesses from the joint venture, which were comprised of fixed assets with a net book value of approximately $200,000 and certain accrued liabilities, for $1.1 million. 9 10 The following represents the unaudited pro forma results of operations of Source Media as if the joint venture with Insight and subsequent sale to Liberate had occurred on January 1, 1999.
Three Months Ended Nine Months Ended Nine Months Ended September 30, 1999 September 30, 1999 September 30, 2000 ------------------ ------------------ ------------------ Total revenues 4,830 15,020 14,349 Operating loss (2,353) (12,382) (5,658) Net income (loss) attributed to common stockholders (5,993) (24,787) 68,336 Net income (loss) per common share (0.44) (1.87) 3.85
2. Equity Investment in Joint Venture The Company recorded its share of results of operations of its original joint venture with Insight up to March 3, 2000 and records its share of operating results of SourceSuite using the equity method in the Consolidated Statement of Operations. The Company owns a 50% interest in SourceSuite, which provides SourceGuide, an interactive programming guide; LocalSource, an interactive television programming service; and is developing other applications for the interactive television industry. SourceSuite is managed by the Company within the terms of the operating agreement and the annual operating plan approved by the management committee. Special actions by SourceSuite require approval of a four-member management committee comprised of two representatives from each of Source Media and Insight. The Operating Agreement of SourceSuite restricts any distribution of equity to members for a period of three years. 3. Computation of Net Income (Loss) Per Common Share The Company computes net income (loss) per share in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128). Basic net income (loss) per common share is computed by dividing net income (loss) attributed to common stockholders by the weighted average number of common shares outstanding. In computing dilutive net income (loss) per share, options, warrants, and convertible securities are excluded if their effect would be antidilutive. The reconciliation between the numerator of Basic and Diluted net income (loss) per common share is as follows: 10 11
Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, ------------- ------------- ------------- ------------- 1999 2000 1999 2000 ---- ---- ---- ---- Numerator for both basic and diluted net income (loss) per share: Net income (loss) before extraordinary items (8,055) (5,095) (29,415) 57,368 Extraordinary items -- 1,709 -- 4,239 Preferred dividend (4) 1,763 (1,433) 5,643 -------- -------- --------- ------- Income (loss) available to common stockholders $(8,059) $(1,623) $(30,848) $67,250 ======== ======== ========= =======
The reconciliation between the denominator of Basic and Diluted net income (loss) per common share is as follows:
Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, ------------- ------------- ------------- ------------- 1999 2000 1999 2000 ---- ---- ---- ---- Denominator for basic net income (loss) per share - weighted average shares 13,499 17,451 13,285 16,648 Effect of dilutive securities: Employee stock options -- -- -- 141 Warrants -- -- -- 564 ------------- ------------- ------------- ------------- Dilutive potential common shares -- -- -- 705 Denominator for diluted net income (loss) per share - adjusted weighted average shares and assumed conversions 13,499 17,451 13,285 17,353 ============= ============= ============= ============= Basic: Net income (loss) per share before extraordinary item $ (0.60) $ (0.19) $ (2.32) $ 3.79 Extraordinary gain -- 0.10 -- 0.25 ------------- ------------- ------------- ------------- Net income (loss) attributable to common stockholders $ (0.60) $ (0.09) $ (2.32) $ 4.04 ============= ============= ============= ============= Diluted: Net income (loss) per share before extraordinary item $ (0.60) $ (0.19) $ (2.32) $ 3.63 Extraordinary gain -- 0.10 -- 0.24 ------------- ------------- ------------- ------------- Net income (loss) attributable to common stockholders $ (0.60) $ (0.09) $ (2.32) $ 3.87 ============= ============= ============= =============
11 12 4. Available for Sale Securities Investment in securities available for sale is recorded at market value as of the reporting date. Temporary declines in market value are charged to shareholders' equity. Other than temporary declines in market value, if any, are charged to earnings. The closing price per share of the Liberate common stock at September 29, 2000 was $28.9375 resulting in an aggregate value of $25.6 million. The decline from the previous quarter has been reflected in other comprehensive income and charged to Shareholder's equity. Management does not currently believe the decline in market value of the Liberate common stock to be other than temporary. 5. New Accounting Pronouncements Financial Accounting Statement ("FAS") 133, Accounting for Derivative Instruments and Hedging Activities was issued in June 1998, and amended by FAS 137 and FAS 138 to be effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company has not yet adopted or completed its assessment of the implications of this statement. The Company is also considering the effects of the SEC Staff Accounting Bulletin No. 101, Revenue Recognition ("SAB 101") that is to be effective no later than the fourth fiscal quarter of fiscal years beginning after December 15, 1999. If the Company were to change its current revenue recognition methodology in accordance with SAB 101, the Company would expect this change in accounting policy to have a negative impact on fourth quarter revenues, but to have a positive revenue effect for the full year 2000. Net income for the year would decrease due to the impact of the cumulative effect of the accounting change. Additionally, the Company has completed its evaluation of the effects of FASB Interpretation 44, Accounting for Certain Transactions Involving Stock Options ("FIN 44") and believes that the Company is in compliance with FIN 44. 6. Commitments and Contingencies On August 21, 1998, the first of fourteen class action complaints were filed against the Company and certain of its present and former officers and directors in the United States District Court for the Northern District of Texas asserting violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10-b5 promulgated thereunder. The fourteen complaints were consolidated into the first filed case. Plaintiffs filed an amended complaint on March 3, 1999. The plaintiffs sought damages in an unspecified amount. On May 1, 2000, the Court set a series of deadlines for the disposition of the case with the trial set for April 16, 2001. The Company believes this case is totally without merit and intends to vigorously defend itself and its officers and directors. In addition, the Company is aware of certain claims against the Company that have not developed into litigation, or if they have, are dormant, and in any case, if determined adversely to the Company, are not expected to have a material adverse affect on the Company. Further, the Company is involved in routine litigation in the ordinary course of business, none of which, either singly or in the aggregate, if determined adversely to the Company, is expected to have a material adverse effect on the Company's results of operations or its financial condition. 12 13 The Company has employment agreements with five senior executives which expire in 2001 and 2002. The agreements generally provide that the Company will pay a base salary amount and grant stock options to the employees, which vest over a fixed period, typically four years. In the event of a termination without cause, the Company remains obligated to make certain payments as defined in the agreements. 7. Long-Term Debt On October 30, 1997, the Company issued Senior Secured Notes (the "Notes"), in the principal amount of $100 million, which bear interest at the rate of 12% per annum through November 1, 2004. Interest on the Notes is payable semi-annually on May 1 and November 1 of each year commencing on May 1, 1998, to holders of record at the close of business on April 15th or October 15th immediately preceding the interest payment date. The Company placed into an escrow account approximately $22.6 million of the net proceeds from the offering of the Notes, representing funds sufficient, together with interest thereon, to pay the first four interest payments on the Notes. Additionally, $6.0 million from the proceeds received in a transaction with Insight was placed into escrow and used to pay the May 2000 interest payment. The November 2000 interest payment was made from available cash funds. The Notes are fully and unconditionally guaranteed, jointly and severally, by all of the Company's Subsidiaries (the "Subsidiary Guarantors"). The guarantees are senior obligations of the Subsidiary Guarantors and are secured by substantially all of the assets of the Subsidiary Guarantors. The guarantees rank pari passu in right of payment with all existing and future senior indebtedness of the Subsidiary Guarantors and rank senior in right of payment to all existing and future subordinated obligations of the Subsidiary Guarantors. The guarantees may be released upon the occurrence of certain events. The guarantee executed by IT Network contains a covenant that restricts payments of dividends on its capital stock to an amount sufficient to cover debt service on the Notes, redemptions or repurchases of the Notes or the Company's Senior PIK Preferred Stock (the "Preferred Stock"), dividends on the Preferred Stock and corporate overhead. The assets of Source Media consist solely of the capital stock of its subsidiaries, investments in Liberate and SourceSuite, and the remaining invested proceeds from the issuance of the Notes and the Preferred Stock and related warrants and Insight Communication Company Inc.'s equity investment. Financial statements for the Subsidiary Guarantors and Source Media, Inc., on an unconsolidated basis, are not presented because management has determined that they would not be material to investors. In conjunction with the formation of SourceSuite, the Company pledged its membership units in SourceSuite as collateral to secure payments on the Notes. On December 13, 1999, $3.8 million of Notes were tendered to the Company and additional cash received in exchange for an exercise of warrants to purchase shares of common stock. In June and August of 2000, the Company issued 394,285 and 279,720 shares of common stock with a market value of $5.25 and $5.00 per share, respectively, in exchange for Notes with a carrying value of $4.6 million and $3.1 million, respectively. These transactions resulted in extraordinary gains of $2.5 million and $1.7 million in the quarters ended June 30 and September 30, 2000, respectively. The face value of the remaining Notes was $88.5 million at September 30, 2000. 13 14 Except as described below, the Company may not redeem the Notes prior to November 1, 2001. On or after such date, the Company may redeem the Notes, in whole or in part, at any time, at various redemption prices set forth in the indenture governing the terms of the Notes, together with accrued and unpaid interest, if any, to the date of redemption. The Notes are not subject to any sinking fund requirement. Upon the occurrence of a change in control, the Company will be required to make an offer to repurchase the Notes at a price equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of the repurchase. The indenture contains certain covenants including, but not limited to, limitations on indebtedness, restricted payments, liens, restrictions on distributions from restricted subsidiaries, sales of assets and subsidiary stock, affiliate transactions, issuances of capital stock of restricted subsidiaries and sale/leaseback transactions. As of September 30, 2000, $88.5 million of Notes were outstanding and the dealer quoted value of a Note was $0.37 per dollar face value resulting in an aggregate fair market value of the outstanding Notes of approximately $32.7 million. 8. Senior PIK Preferred Stock On October 30, 1997, the Company issued 800 units (the "Units") for an aggregate purchase price of $20 million, each Unit consisting of 1,000 shares of non-voting Preferred Stock with a liquidation preference of $25.00 per share and 558.75 warrants (the "October 1997 Warrants"). Each October 1997 Warrant entitles the holder to purchase one share of the Company's common stock at a purchase price of $0.01 per share. In the aggregate, the October 1997 Warrants represent the right to purchase 447,000 shares of common stock. The Units were sold in connection with the Company's acquisitions of certain assets. Dividends on the Preferred Stock are payable quarterly on each February 1, May 1, August 1 and November 1, commencing February 1, 1998, at an annual rate of 13 1/2% of the liquidation preference per share. At the Company's option, any dividend payment occurring on or prior to November 1, 2002, may be paid either in cash or by the issuance of additional shares of Preferred Stock with a liquidation preference equal to the amount of such dividends; thereafter, dividends will be paid in cash. The certificate of designation governing the Preferred Stock limits the amount of cash dividends that may be paid on the Preferred Stock. Prior to November 1, 2002, the Preferred Stock is not redeemable. On or after November 1, 2002, the Company may redeem the Preferred Stock, in whole or in part, at any time, at various redemption prices, plus accumulated and unpaid dividends, to the date of redemption. Upon the occurrence of a change in control, the Company will be required to make an offer to purchase the outstanding shares of the Preferred Stock at a price equal to 101% of the liquidation preference thereof, plus accumulated and unpaid dividends, to the date of purchase. The Preferred Stock will be subject to mandatory redemption in whole on November 1, 2007, at a price equal to 100% of the then effective liquidation preference thereof, plus, without duplication, all accrued and unpaid dividends to the date of redemption. The certificate of designation contains certain covenants including, but not limited to, limitations on indebtedness, restricted payments, affiliate transactions, issuances of capital stock of restricted subsidiaries and sale/leaseback transactions. 14 15 The Preferred Stock ranks senior to all classes of common stock and to each other class of capital stock or series of Preferred Stock with respect to dividend rights and rights on liquidation, winding-up and dissolution of the Company. The Preferred Stock is non-voting except in certain circumstances. The Company may not authorize any new class of Preferred Stock that ranks senior or pari passu to the Preferred Stock without the approval of the holders of at least a majority of the shares of Preferred Stock then outstanding, voting or consenting, as the case may be, as one class, provided, however, that the Company can issue additional shares of Preferred Stock to satisfy dividend payments on outstanding shares of Preferred Stock; and further provided that the Company can issue shares of Preferred Stock ranking pari passu with the Preferred Stock if after giving effect thereto, the Consolidated Coverage Ratio, as defined in the certificate of designation, is greater than 1.7 to 1.0. During the second and third quarters, the Company entered into a number of agreements whereby it exchanged shares of its common stock for shares of Preferred Stock. In each instance, the exchange ratio was 1.2 common shares for each share of Preferred Stock. The Company issued 537,744 and 187,320 shares of common stock with a market value of $3.5 million and $0.9 million, respectively, in exchange for Preferred Stock with a carrying value of $8.2 million and $3.0 million, respectively. Dividends on preferred shares were deducted from the difference between the carrying value of preferred shares ($4.7 and $2.1 million for the quarters ended June 30 and September 30, respectively) and the market value of the common shares issued to determine the amount to be added back in arriving at net earnings (loss) available to common shareholders. At the time of issuance the estimated fair market value of the October 1997 Warrants, which was estimated to be approximately $5.5 million was credited to capital in excess of par value and the Preferred Stock was recorded at a corresponding discount. Additionally, $1.2 million of issuance costs were recorded on the Preferred Stock. The discount and issuance costs on the Preferred Stock are being accreted as additional Preferred Stock dividends using the effective dividend rate method over a ten-year period, resulting in an effective dividend rate of 19.9%. As of September 30, 2000 the dealer-quoted fair market value of the Preferred Stock was approximately $6.72 per share for an aggregate value of the outstanding Preferred Stock of $3.6 million. On February 1, May 1, and August 1, 2000, the quarterly dividends due on the Preferred Stock were paid through the issuance of additional Preferred Stock having a liquidation preference of $0.9 million, $0.9 million, and $0.5 million, respectively, with terms identical to those of the Preferred Stock. The estimated fair market value of the stock issued in lieu of a cash payment on February 1, May 1, and August 1, 2000 was approximately $0.4 million, $0.3 million, and $0.1 million, respectively, which were recorded as Preferred Stock dividends. 9. Stock Based Compensation On January 2, 1998, the Company issued stock option grants to its employees which fully vest on January 2, 2004. If certain target stock prices are met, the vesting accelerates. As a portion of the underlying shares for these options had not been authorized by the common 15 16 stockholders at the date of grant, the portion of unauthorized options were treated as a variable compensation plan through July 28, 1998, when the stockholders authorized the shares. Separately, in the second quarter of 2000, the Company accelerated the vesting and modified the terms of stock options associated with the severance of an employee which resulted in $0.6 million of compensation expense on the new measurement date. The Company has recognized stock compensation income of $0.3 million and expense of $0.2 million in selling, general and administrative expense for the three months ended September 30, 1999 and 2000, respectively. Total expense amounted to $0.9 million and $1.1 million, respectively, for the nine month periods ended September 30, 1999 and 2000. 10. Equity in SourceSuite Joint Venture On November 17, 1999 the Company completed the creation of a joint venture with Insight to conduct the business of its former VirtualModem(TM) and Interactive TV lines of business. The investment in the joint venture was accounted for by the equity method. The Company contributed certain assets of the "VirtualModem(TM)" and "Interactive Channel" products and businesses in exchange for a 50% ownership in the joint venture. Insight contributed $13 million in cash to the joint venture in exchange for a 50% interest. On March 3, 2000, the joint venture conveyed its Interactive TV line of business to SourceSuite and Source Media and Insight each transferred their interests in the joint venture to Liberate in exchange for the issuance to each of Source Media and Insight of 886,000 shares of Liberate common stock and $4.4 million of cash. This transaction resulted in a gain for the Company of $75.0 million in the first quarter. The gain was calculated based on the closing price of Liberate common stock on March 3, 2000 (the closing date) of $98.6875 per share, net of the Company's book basis of $17.4 million. The Company has net operating loss carry forwards in excess of the tax effect of this gain and, consequently, has reported no current or deferred income tax expense. Assets contributed to SourceSuite have been valued based on an independent appraisal of fair value and allocated to assets, liabilities and goodwill. The Company records amortization of the assets contributed to the joint venture on its historical basis. 16 17 Summary financial data of SourceSuite at September 30, 2000 is as follows (in thousands): ASSETS: Current Assets .................................... $ 5,713 Property and equipment, net ....................... 209 Intangible assets, net ............................ 752 ------- $ 6,674 ======= LIABILITIES AND MEMBERS' EQUITY: Current liabilities ............................... $ 1,058 Members' equity ................................... 5,616 ------- $ 6,674 ======= NET LOSS: Net loss from period of inception (March 3, 2000) through September 30, 2000 ....................... $(4,351) =======
11. Segment Reporting In accordance with SFAS 131, the Company has identified two reportable operating segments, IT Network and Interactive TV, for disclosure purposes. These two segments are regularly reviewed by the Company's management for determination of the allocation of resources to these businesses. IT Network sells advertising and related support services to clients who sponsor a promotional message with interactive content supplied primarily by IT Network. The Interactive TV business has developed proprietary software and interactive programming services that can enable digital, two-way television systems equipped with digital (or advanced analog) set-top boxes to deliver two-way, interactive programming with the touch of a set-top remote or the use of a wireless keyboard. The Interactive TV business includes the results of the Interactive Channel and ICTI subsidiaries and the Company's 50% equity interest in the results of SourceSuite (and its predecessor joint venture with Insight) from November 17, 1999. The total revenues, expenses and assets by reportable operating segments are used in the Company's operations and do not include general corporate overhead and assets not allocated to the operating units. These assets and expenses have been separately disclosed for reconciliation purposes. 17 18
Three Months Ended Nine Months Ended September 30, September 30, 1999 2000 1999 2000 ---------- ---------- ---------- ---------- (In Thousands) (In Thousands) Monetary revenues: IT Network $ 4,275 $ 4,063 $ 13,582 $ 12,626 Interactive TV -- -- 42 -- ---------- ---------- ---------- ---------- Total monetary revenues $ 4,275 $ 4,063 $ 13,624 $ 12,626 ========== ========== ========== ========== Nonmonetary revenues: IT Network $ 555 $ 397 $ 1,437 $ 1,723 Interactive TV -- -- -- -- ---------- ---------- ---------- ---------- Total nonmonetary revenues $ 555 $ 397 $ 1,437 $ 1,723 ========== ========== ========== ========== Net revenues: IT Network $ 4,830 $ 4,460 $ 15,019 $ 14,349 Interactive TV -- -- 42 -- ---------- ---------- ---------- ---------- Total net revenues $ 4,830 $ 4,460 $ 15,061 $ 14,349 ========== ========== ========== ========== Operating loss: IT Network $ (1,617) $ (958) $ (5,372) $ (3,031) Interactive TV (2,598) -- (8,053) -- Corporate (736) (619) (7,011) (2,627) ---------- ---------- ---------- ---------- Total operating loss $ (4,951) (1,577) $ (20,436) $ (5,658) ========== ========== ========== ========== Equity interest in loss of joint venture: Interactive TV $ -- $ (734) $ -- $ (3,443) ========== ========== ========== ==========
December 31, 1999 September 30, 2000 ----------------- ------------------ Identifiable assets: IT Network $15,474 $12,626 Interactive TV 20,675 -- Corporate 21,867 44,482 ------- ------- Total identifiable assets $58,016 $57,108 ======= ======= Investment in joint venture: Interactive TV $18,669 $ 2,766 ======= =======
12. Restatement of June 30, 2000 Financial Statements The Company has restated its financial statements for the quarter and six months ended June 30, 2000 to reflect a previously reported gain on the extinguishments of debt as an extraordinary item rather than as a change in equity, and to reflect the benefit realized upon the exchange of common shares for shares of Preferred Stock as an increase (decrease) in income (loss) attributable to common shares. These changes increased net income for the quarter and six months ended June 30, 2000 by $7.2 million and increased basic income per share for the quarter and six months by $0.44 and diluted net income per share by $0.44 and $0.42 per share for the quarter and six months, respectively. The restatement had no effect on the Company's cash flows or financial position. 18 19 13. Subsequent Events On November 8, 2000, the Company approved the extension of the exercise period of Warrants to purchase the Company's Common Stock. The expiration date of the "Public Warrants," originally issued June 23, 1993 and previously scheduled to expire December 22, 2000, was extended to December 21, 2001. 19 20 SOURCESUITE LLC BALANCE SHEET SEPTEMBER 30, 2000 (DOLLARS IN THOUSANDS) (UNAUDITED) ASSETS Current Assets: Cash and cash equivalents $ 4,871 Related Party Receivable 488 Prepaid expenses and other current assets 354 ---------- Total current assets 5,713 Property and equipment: Computer and production equipment 249 Accumulated depreciation 40 ---------- Net property and equipment 209 Intangible assets: Goodwill 858 Accumulated amortization 106 ---------- Net intangible assets 752 ---------- Total assets $ 6,674 ========== LIABILITIES AND MEMBERS' EQUITY Current Liabilities: Accounts payable $ 18 Accrued liabilities 567 Payable to Source Media, Inc. 473 ---------- Total current liabilities 1,058 Members' equity, 1,000,000 units authorized and outstanding 9,967 Accumulated deficit (4,351) ---------- Total Members' Equity 5,616 ---------- Total liabilities and members' equity $ 6,674 ==========
See accompanying Notes to Consolidated Financial Statements. 20 21 SOURCESUITE LLC STATEMENT OF OPERATIONS (DOLLARS IN THOUSANDS) (UNAUDITED)
THREE MONTHS PERIOD OF INCEPTION ENDED (MARCH 3, 2000) TO SEPTEMBER 30, 2000 SEPTEMBER 30, 2000 ------------------ ------------------ Revenues $ 24 $ 24 Operating expenses: Selling, general and administrative expenses 1,553 4,514 Amortization of intangible assets 43 106 ------------------ ------------------ Total operating expenses 1,596 4,620 ------------------ ------------------ Operating loss (1,572) (4,596) Interest income 104 245 ------------------ ------------------ Net loss $ (1,468) $ (4,351) ================== ==================
See accompanying Notes to Consolidated Financial Statements. 21 22 SOURCESUITE LLC STATEMENT OF CASH FLOWS PERIOD OF INCEPTION (MARCH 3, 2000) TO SEPTEMBER 30, 2000 (DOLLARS IN THOUSANDS) (UNAUDITED) OPERATING ACTIVITIES Net Loss $(4,351) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 27 Amortization of intangible assets 106 Changes in operating assets and liabilities: Related party receivable 599 Prepaid expenses and other current assets (312) Trade accounts payable and accrued liabilities 84 Related party payable (66) ------- Net cash used in operating activities (3,913) INVESTING ACTIVITIES Capital expenditures (48) ------- Net cash used in investing activities (48) ------- Net decrease in cash and cash equivalents (3,961) Cash and cash equivalents at beginning of period 8,832 ------- Cash and cash equivalents at end of period $ 4,871 ======= See accompanying Notes to Consolidated Financial Statements. 22 23 SOURCESUITE LLC STATEMENT OF MEMBERS' EQUITY SEPTEMBER 30, 2000 (DOLLARS IN THOUSANDS) (UNAUDITED)
MEMBERSHIP MEMBERS' UNITS EQUITY ------------- ------------- Sale of membership units on March 3, 2000 1,000,000 $ 9,967 Net loss -- (4,351) ------------- ------------- September 30, 2000 1,000,000 $ 5,616 ============= =============
See accompanying Notes to Consolidated Financial Statements. 23 24 SOURCESUITE LLC NOTES TO FINANCIAL STATEMENTS PERIOD FROM INCEPTION (MARCH 3, 2000) THROUGH SEPTEMBER 30, 2000 1. DESCRIPTION OF BUSINESS SourceSuite LLC ("SourceSuite" or "Company"), a Delaware limited liability company, was formed on March 3, 2000 as a 50/50 joint venture between Source Media, Inc. ("Source Media") and Insight Interactive, LLC ("Insight"). On November 17, 1999 Source Media conveyed certain assets related to its VirtualModem(TM)" and "Interactive Channel" products and businesses and Insight contributed $13 million in cash to a joint venture in exchange for each owning a 50% interest in that joint venture. On March 3, 2000, Source Media and Insight sold their respective interests in the joint venture to Liberate Technologies ("Liberate") in exchange for the issuance of 886,000 shares of common stock of Liberate to each of Source Media and Insight and $4.4 million of cash. Prior to the sale of the joint venture, cash equal to the value (as determined by an independent appraisal) of certain retained businesses, consisting of SourceGuide, an interactive programming guide; LocalSource, an interactive television programming service; and related content, was contributed by the joint venture to SourceSuite. SourceSuite used these funds to purchase the retained business from the joint venture, which comprised of fixed assets with a net book value of approximately $200,000 and certain accrued liabilities, for $1.1 million. SourceSuite will continue the development of the proprietary software contributed by Source Media and will provide interactive programming services that are enabled on digital, two-way television systems equipped with digital (or advanced analog) set-top boxes to deliver two-way, interactive programming with the touch of a set-top remote or the use of a wireless keyboard. Liberate provides SourceSuite, without charge, specific software development services for the Interactive TV products under a programming services agreement. SourceSuite entered into a preferred content provider agreement with Liberate pursuant to which Liberate offers pricing incentives to its customers that use SourceSuite's local content services with the VirtualModem(TM) products. 2. ACCOUNTING POLICIES Basis of Presentation Assets contributed to the joint venture by Source Media have been valued at the fair value on the date of contribution based on an independent appraisal and allocated to assets, liabilities and goodwill. 24 25 Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents The Company classifies all highly liquid investments with original maturities of three months or less as cash equivalents. These investments are recorded at cost, which approximates market. Computer and Production Equipment Computer and production equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives (three to five years) of the assets. Intangible Assets Goodwill resulted from the difference between the cash received for the fair value of the assets contributed to the joint venture and their recorded values. Intangible assets are amortized using the straight-line method over an estimated useful life of five years. The carrying value of intangible assets is reviewed for impairment whenever events or changes in circumstances indicated that there may be an impairment. If the review indicates that any of the intangibles will not be recoverable, as determined by an analysis of undiscounted cash flows, the intangible asset will be reduced to its estimated fair value. Comprehensive Income There are no significant comprehensive income items, therefore, comprehensive income is equal to net income and not separately shown on the Statement of Operations. 3. INCOME TAXES SourceSuite has experienced net operating losses from inception. Accordingly, no provision for income taxes has been recorded. A valuation allowance has been established to fully offset the deferred tax asset associated with SourceSuite's net operating loss carry forwards. 4. MEMBERS' EQUITY Distribution of equity to members is restricted by the Company's Operating Agreement for a period of three years. 25 26 5. RELATED PARTY TRANSACTIONS As part of the joint venture agreement between Source Media and Insight, Source Media manages the day-to-day operations of SourceSuite within the terms of SourceSuite's operating plan. As part of this arrangement, SourceSuite reimburses Source Media for the direct costs of the Interactive TV business and certain overhead costs. These costs have been included in the payable to related parties and are reimbursed to Source Media on a regular basis. Additionally, SourceSuite purchases certain hardware on behalf of Insight. These amounts are billed to Insight and included in related party receivables. 6. COMMITMENTS AND CONTINGENCIES Upon formation, SourceSuite assumed the responsibility for the following litigation: On October 6, 1998, Advanced Interactive, Inc. filed a complaint in U.S. District Court for the Northern District of Illinois, Eastern Division, against ICTI and the following companies: Matsushita Electric Corporation, Matsushita Electric Industrial Co., Ltd., Sharp Electronics Corp., Sharp Corp., Thomson Consumer Electronics, Toshiba Consumer Products, Inc., Toshiba American, Inc., Toshiba Corporation, General Instruments Corp., Scientific Atlanta, Inc., ATI Technologies, Inc., ADS Technologies Inc., Gateway 2000, Inc., STB Systems, Inc., Hauppauge Computer Works, Inc., WebTV Networks, Inc. and WorldGate Communications, Inc. (collectively the "Defendants"). Advanced Interactive, Inc. alleges that ICTI infringed two claims of one of its patents by manufacturing, using and/or selling or offering to sell Sourceware(TM) ChannelLink(TM). The same allegation is made against each Defendant for its particular product or service. The Plaintiff seeks damages, but makes no claims against the patents of ICTI or any other Defendant. ICTI, and each of the Defendants, have filed an Answer and have collectively joined the Motion for Partial Summary Judgment submitted by Matsushita Electric Corporation of America, Sharp Electronics Corp., Sharp Corp. and the Toshiba Defendants. On June 26, 2000, the court entered a judgement that ICTI does not infringe on Advanced Interactive's patent. The Plaintiff has filed a Notice of Appeal of this judgement in the U.S. Court of Appeals of the Federal Circuit dated August 3, 2000. This case was transferred to the joint venture between Source Media and Insight in November 1999 and was assumed by SourceSuite on March 3, 2000. The Company is vigorously defending the appeal. 26 27 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Unless the context otherwise requires, all references to "we", "us" or "our" include Source Media, Inc., its wholly-owned operating subsidiaries ("Subsidiaries"), including IT Network, Inc. ("IT Network"), Interactive Channel, Inc. ("Interactive Channel"), and SMI Holdings, Inc., its other operating subsidiary, Interactive Channel Technologies Inc. ("ICTI"), as well as its wholly-owned non-operating subsidiary, Source Nevada, Inc., and SourceSuite LLC, a 50/50 joint venture with Insight Interactive LLC ("Insight"), a subsidiary of Insight Communications Company, Inc. FORWARD LOOKING INFORMATION AND RISK FACTORS We or our representatives from time to time may make, or may have made, certain forward-looking statements, whether orally or in writing, including without limitation any such statements made, or to be made, in the Management's Discussion and Analysis of Financial Condition and Results of Operations, press releases and other information contained in our various filings with the Securities and Exchange Commission. We wish to ensure that such statements are accompanied by meaningful cautionary statements, so as to ensure to the fullest extent possible the protections of the "safe harbor" established in the Private Securities Litigation Reform Act of 1995. Accordingly, such statements are qualified in their entirety by reference to, and are accompanied by, the following discussion of certain important factors that could cause actual results to differ materially from those projected in such forward-looking statements. We caution you that this list of factors does not describe all of the risks of an investment in our common stock. We operate in a rapidly changing business environment, and new risk factors continually emerge. We cannot predict every risk factor, nor can we assess the impact of all these risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ from those projected in any forward-looking statements. Accordingly, you should not rely upon forward-looking statements as a prediction of our actual results. Among the factors that could cause actual results to differ materially from our expectations are our high degree of leverage and our ability to service debt, the need for additional financing, that we may not have sufficient collateral to repay our indebtedness in full, the potential for a change of control that would require us to purchase our notes and Preferred Stock, historical and projected losses, access to channels on cable television systems and uncertainty of subscriber acceptance, the uncertainty of a market for interactive television, the availability of programming, the further technical development needed to improve the economics of deploying interactive television to multiple cable systems, a delay in the roll-out of digital set-top boxes, competition within the industry, rapid technological advances that could render our products obsolete or non-competitive, anti-takeover effects of our shareholder rights plan, stock volatility, the market price of our common stock, the market price of our investments, our ability to attract and retain key 27 28 management personnel, government regulation and other factors discussed from time to time in our Annual Report on Form 10-K and other Securities and Exchange Commission filings. GENERAL The following discussion should be read in conjunction with our Consolidated Financial Statements and related notes which are included elsewhere in this report. We provide streaming media content and sell interactive advertising that can be accessed over the telephone and the Internet. We also own a 50% interest in SourceSuite LLC, a joint venture we manage, which provides interactive cable television programming services, including a fully interactive program guide, known as SourceGuide(TM), and an information entertainment service, known as LocalSource(TM). We categorize these operations as our IT Network business and our Interactive TV business. We have experienced significant changes in our Interactive TV business since the second quarter of 1999. In November 1999 we contributed this business to a 50/50 joint venture with Insight. Insight contributed $13 million of equity financing to the joint venture and purchased 842,105 shares of our common stock for $12 million ($14.25 per share) and warrants to purchase 4,596,786 additional shares of our common stock at $20 per share. On March 3, 2000, we and Insight Interactive sold our interests in the joint venture to Liberate Technologies ("Liberate") in exchange for the issuance to each of us and Insight Interactive of 886,000 shares of Liberate common stock and $4.4 million of cash. Prior to the completion of the sale, the joint venture transferred to SourceSuite its assets and properties not related to the VirtualModem(TM) products and associated businesses. The interests in the new joint venture were distributed to us and Insight Interactive, so that each became a 50% owner of SourceSuite. Liberate thus acquired all patents and intellectual property related to the VirtualModem(TM) products and businesses and granted SourceSuite an exclusive license to use the patents necessary to its business. SourceSuite's business is interactive television programming and services, including SourceGuide(TM)and LocalSource(TM). THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 Monetary revenues decreased 5% to $4.1 million for the three months ended September 30, 2000 from $4.3 million for the same period in 1999. The decrease was primarily driven by $0.5 million of decreased advertising sales, $0.1 million of decreased advertiser services revenues and $0.3 million of decreased information services revenue from the same period in the prior year. These decreases were partially offset by $0.7 million of revenue from new products introduced in 2000, including streaming audio sales and Internet advertising. Monetary cost of sales decreased 21% to $2.4 million for the three months ended September 30, 2000 from $3.1 million for the same period in 1999, primarily due to $0.5 million of reduced product costs due to discontinued products and decreased sales, $0.2 million of payments in 1999 to customers for unfulfilled sales guarantees and $0.2 million of cost of the 28 29 Interactive TV operations transitioned to our joint venture. These decreases were partially offset by increases of $0.2 million of other operational expenses. Nonmonetary revenues and nonmonetary cost of sales decreased 28% to $0.4 million for the three months ended September 30, 2000. Nonmonetary sales accounted for 9% of revenues for the three months ended September 30, 2000 compared to 11% of revenues for the same period in 1999. Selling, general and administrative expenses decreased 37% to $2.6 million for the three months ended September 30, 2000 from $4.1 million for the same period in 1999. The decrease is primarily due to $1.3 million of cost of the Interactive TV operations transitioned to our joint venture with Insight, a decrease of $0.5 million in professional fees and legal fees, and other operational savings of $0.3 million offset by an increase in non-cash variable compensation expense of $0.6 million. Amortization of intangible assets decreased 53% to $0.6 million from $1.2 million for the three months ended September 30, 2000 primarily due to the transfer of patents to our joint venture with Insight in 1999. Research and development activities were transferred to our joint venture with Insight in November 1999, resulting in a decrease of $0.8 million in research and development expense compared to the three months ended September 30, 1999. Equity interest includes our share of the results of operations of SourceSuite for the three months ended September 30, 2000, recorded using the equity method. Interest expense decreased 11% to $2.8 million for the three months ended September 30, 2000 from $3.2 million for the same period in 1999 due to the exchange of approximately $11.5 million of Notes for common stock since December of 1999. This expense is associated with a $100 million debt financing completed by the Company in October 1997 and described in detail in the Notes to Consolidated Financial Statements. Interest income increased 63% to $0.2 million for the three months ended September 30, 2000 from $0.1 million for the same period 1999 due to the investment of larger cash balances. Extraordinary gain resulted from the gain recorded on the exchange of $3.1 million of Notes for common stock during the third quarter. Preferred Stock dividends reflect a benefit of $2.1 million realized on the issuance of common stock in exchange for Preferred Stock, due to the excess of the carrying amount of the Preferred Stock over the fair value of the Company's common stock. This benefit is partially offset by $0.4 million of preferred dividend expense for the three months ended September 30, 2000, as compared to dividend expense of $4 thousand in the same period of 1999. Excluding the benefit, the increase in dividend expense is primarily caused by a lower Preferred Stock price in 1999. The dividends relate to the $20 million Preferred Stock financing completed by the Company in October 1997 29 30 and described in detail in the Notes to Consolidated Financial Statements. Dividends are recorded at the fair market value of the shares. NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 Monetary revenues decreased 7% to $12.6 million for the nine months ended September 30, 2000 from $13.6 million for the same period of 1999. This decrease is primarily due to decreases of $1.4 million in advertising sales, $0.4 million in advertising services, and $0.9 million in information services offset by an increase of $1.7 million in new product revenues including streaming audio sales and Internet advertising. Monetary cost of sales decreased 24% to $7.5 million for the nine months ended September 30, 2000 from $9.8 million for the same period in 1999 as a result of 1999 costs of $1.6 million for payment of unfulfilled sales guarantees, $0.7 million of Interactive TV costs transferred to SourceSuite, and a $0.8 million reduction in page costs related to the decreased advertising sales partially offset by increased operational costs of $0.8 million. Nonmonetary revenues and nonmonetary cost of sales increased 20% to $1.7 million for the nine months ended September 30, 2000 from $1.4 million for the same period in 1999. Nonmonetary sales accounted for 12% of revenues for the nine months ended September 30, 2000 compared to 10% of revenues for the same period in 1999. Selling general and administrative expenses decreased 50% to $9.1 million for the nine months ended September 30, 2000 from $18.2 million for the same period in 1999. The decrease is primarily due to the following: (a) $4.0 million of cost of the Interactive TV operations transitioned to our joint venture with Insight; (b) decreased legal and professional fees of $3.1 million which were incurred in 1999 in connection with a proposed joint venture that were expensed after the termination of the proposed transaction; (c) a savings of $0.4 million in severance expense in 2000; and (d) $1.6 million in cost reductions and other administrative expenses. Amortization of intangible assets decreased 53% to $1.7 million from $3.7 million for the nine months ended September 30, 2000 due to the transfer of patents to our joint venture with Insight in 1999. Research and development activities were transferred to our joint venture with Insight in November 1999 resulting in a decrease of $2.3 million in research and development expense compared to the nine months ended September 30, 1999. Other income includes $75.0 million of gain recorded upon the sale of our interest in the original joint venture with Insight to Liberate in exchange for 886,000 shares of common stock in Liberate and $4.4 million cash. 30 31 Equity interest in losses of joint venture includes our share of the results of operations of SourceSuite and its predecessor joint venture for the nine months ended September 30, 2000, recorded using the equity method. The original joint venture was formed November 17, 1999. Interest expense decreased 7% to $8.9 million for the nine months ended September 30, 2000 from $9.6 million in 1999. This decrease is due to the retirement of $11.5 million of Notes for common stock since December of 1999. The interest is associated with a $100 million debt financing completed by the company in October 1997 and described in detail in the Notes to Consolidated Financial Statements. Interest income remained consistent at $0.6 million for the nine months ended September 30, 2000. Extraordinary gain resulted from the gain recorded on the exchange of $7.7 million of Notes for common stock. Preferred Stock dividends reflects a benefit of $6.8 million realized recorded on the issuance of common stock in exchange for Preferred Stock, due to the excess of the carrying amount of the Preferred Stock over the fair value of the Company's common stock. This benefit is partially offset by $1.2 million of dividend expense for the nine months ended September 30, 2000 as compared to dividend expense of $1.4 million for the nine months ended September 30, 1999. The dividend expense relates to the $20 million Preferred Stock financing completed by the Company in October 1997 and described in detail in the Notes to Consolidated Financial Statements. Dividends are recorded at the fair market value of the preferred shares issued as payment-in-kind. Excluding the benefit the decrease is related to exchanges of Preferred Stock for common stock, which took place in the second and third quarters of this year, as well as a decrease in the fair value of the Preferred Stock issued as dividends during the nine months ended September 30, 2000. LIQUIDITY AND CAPITAL RESOURCES Since inception, we have experienced substantial operating losses and net losses as a result of our efforts to develop, deploy and support our IT Network business and to develop, conduct trials and commercially launch our Interactive TV business. As of September 30, 2000, we had an accumulated deficit of $125.5 million and had used cumulative net cash in operations of $109.9 million. The difference at September 30, 2000, between the accumulated deficit and cumulative net cash used in operations since inception was attributable primarily to charges related to financing incentives and extinguishment of debt, variable compensation expense, write-downs of analog set-top boxes and intangible assets, depreciation and amortization and other non-cash expenses. We are likely to continue to incur operating losses at least into 2001. Any launch of our television products and services through SourceSuite may require an additional capital contribution which may require us to raise additional capital. On March 3, 2000, we sold our interest in the VirtualModem(TM) business owned by our joint venture with Insight to Liberate for 886,000 shares of Liberate common stock which became freely tradable by us after July 31, 2000. In addition 31 32 to the Liberate common shares, we received from Liberate $4.4 million as a working capital adjustment which we contributed to SourceSuite. It is expected that this liquidity will provide the necessary funding for expected future capital requirements at least through 2000. The Liberate shares had an aggregate value of approximately $87.4 million, based on the closing price of Liberate common stock of $98.6875 per share on March 3, 2000. Liberate common stock is traded on the Nasdaq Stock Market under the symbol "LBRT". As of November 7, 2000, the closing price per share of the Liberate common stock was $21.0625 resulting in an aggregate value of $18.7 million. Management does not believe the decline in the Liberate stock price is other than temporary as there have been no material adverse changes in Liberate's market position or balance sheet of which management is aware. The decline in the Liberate share price appears to closely follow the general decline of equities and, particularly, the equities of technology companies. Additionally, Source Media believes it has adequate cash on-hand to meet operational requirements throughout the remainder of the year and does not expect to reduce its holding of Liberate stock in 2000. Since inception, we have financed our operations primarily with $156.6 million raised from various financing activities, including the incurrence of debt and issuance of our common stock and Preferred Stock. In October 1997, we issued $100.0 million of Notes and $20.0 million of Preferred Stock. On December 19, 1999, $3.75 million of Notes were tendered to the Company and additional cash was received in exchange for an exercise of warrants to purchase shares of common stock. On June 20, 2000 an additional $4.6 million of Notes were exchanged for common stock, and on August 16 and 17, an additional $1.6 million and $1.5 million of Notes were exchanged for common stock, respectively. As of September 30, 2000, the face value of the outstanding balance was $88.5 million. The interest escrow account created pursuant to the indenture governing the Notes has been used to fund the first four interest payments on the Notes. Interest payments from the interest escrow account were made on May 1, 1998, November 1, 1998, May 1, 1999 and November 1, 1999. Additionally, $6.0 million from proceeds received in a transaction with Insight was placed into escrow and used to pay the May 2000 interest payment. On November 1, 2000, we made our interest payment of approximately $5.4 million, which was paid out of current operating balances. Our primary source of liquidity is our cash, which totaled $13.2 million at September 30, 2000 prior to the November interest payment. Additionally, we have an investment of 886,000 shares of Liberate common stock that are now freely tradeable. We currently believe our resources will be sufficient to meet our anticipated cash needs for working capital, required interest payments and other capital expenditures related to the further development of our IT Network business and capital requirements for SourceSuite through and beyond the fourth quarter of 2000. Additionally, while we do not currently anticipate any capital calls by the joint venture, we believe our resources are sufficient to meet any capital calls through 2000. Our future capital requirements will depend on many factors, including, but not limited to the following factors, some of which are outside our control: (i) the operating results of our IT Network business, including local advertisers' willingness to purchase Internet based advertising; (ii) the success and timing of the development, introduction and deployment of the Interactive TV products; (iii) the extent of market acceptance of our products; (iv) potential 32 33 acquisitions or asset purchases; (v) the deployment of digital set-top boxes incorporating technology that we are able to access; (vi) competitive factors; and (vii) changes in the regulatory environment and (viii) general economic conditions. EFFECT OF INFLATION We believe that the effect of inflation has not been material during the three month periods ended September 30, 1999 and 2000, respectively. NET OPERATING LOSS CARRYFORWARDS At December 31, 1999, we had net operating loss carryforwards of approximately $124.5 million for U.S. Federal income tax purposes, which begin to expire in 2003. The Internal Revenue Code of 1986, as amended, imposes limitations on the use of net operating loss carryforwards if certain stock ownership changes occur. An ownership change occurred in 1995 that caused utilization of $23.1 million of our net operating losses incurred prior to the ownership change to be limited to approximately $9.0 million in a given year. 33 34 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We are exposed to changes in interest rates related primarily to our Notes and Preferred Stock. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. At September 30, 2000, we had Notes outstanding having an aggregate principal amount of $88.5 million, due November 1, 2004, which bear interest at a fixed rate of 12% and Preferred Stock outstanding having a liquidation preference of $13.2 million, due November 1, 2007, which has a fixed dividend rate of 13 1/2%. The fair value of the Notes at September 30, 2000 was approximately $32.7 million based upon dealer quoted market price. As of September 30, 2000, the dealer-quoted fair market value of the Preferred Stock was approximately $6.72 per share for an aggregate value of the outstanding Preferred Stock of $3.6 million. We invest our cash balance in money market funds and commercial paper rated A1, and P1, respectively. These securities are in U.S. dollars, with maturities of six months or less, are held to maturity and are not owned for trading purposes. Using this strategy, we have not experienced any losses due to interest rate risk, market risk or foreign exchange risk on our commercial paper investments, and we do not anticipate any such losses. On March 3, 2000, we received 886,000 shares of Liberate common stock in exchange for our interest in our joint venture with Insight. The closing price per share of the Liberate common stock on March 3, 2000 was $98.6875, giving us a total original investment in Liberate common stock of approximately $87.4 million. We face the market risk associated with price fluctuations of the Liberate common stock until such time as we sell or hedge the stock. As of September 30, 2000, the closing price per share of the Liberate common stock was $28.9375 resulting in a total investment balance of $25.6 million. As of November 7, 2000, the closing price was $21.0625, resulting in a total investment of $18.7 million. 34 35 PART II - OTHER INFORMATION Item 1 - Legal Proceedings Reference is made to our Annual Report on Form 10-K for the year ended December 31, 1999 and to the Notes to SourceSuite's and our financial statements included in this report for a discussion of certain litigation. Item 2 - Changes in Securities and Use of Proceeds We extended the exercise period of our redeemable common stock purchase warrants, issued in June 1993, to December 22, 2001 from the previously scheduled June 23, 2000 expiration. In addition, our right to call the warrants for redemption may now be exercised if the closing price of our common stock is $13.00 or more for 10 consecutive trading days. On August 9, 2000, we issued the following stock options to various employees pursuant to our 1999 Stock Option Plan:
Number of Shares Exercise Price Underlying Options Per Share ------------------ -------------- 125,000 $ 6.890 50,000 5.235 5,000 8.425 1,500 5.328 1,500 5.078
Exemption from registration under the Securities Act of 1933 is claimed for each such issuance of securities in reliance upon the exemption afforded by Section 4(2) of the Securities Act. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Employment Agreement dated as of September 1, 2000, between the Company and Paul Tigh 10.2 Employment Agreement dated as of September 20, 2000, between the Company and Philip Howort 10.3 Employment Agreement dated as of October 17, 2000, between the Company and Derrick Horner Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K during the three months ended September 30, 2000. None. 35 36 SIGNATURE 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: November 14, 2000 By: /s/ PAUL TIGH ------------------------------------- Paul Tigh Chief Financial Officer and Treasurer (Principal Financial Officer and Duly Authorized Officer) 37 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 10.1 Employment Agreement dated as of September 1, 2000, between the Company and Paul Tigh 10.2 Employment Agreement dated as of September 20, 2000, between the Company and Philip Howort 10.3 Employment Agreement dated as of October 17, 2000, between the Company and Derrick Horner 27 Financial Data Schedule
EX-10.1 2 d81825ex10-1.txt EMPLOYMENT AGREEMENT - PAUL TIGH 1 EXHIBIT 10.1 EMPLOYMENT AGREEMENT, dated as of September 1, 2000, by and between SOURCE MEDIA, INC., a Delaware corporation (the "Company"), and F. PAUL TIGH (the "Employee"). The Company desires to engage Employee to perform services for the Company, and Employee desires to perform such services, on the terms and conditions set forth below: NOW, THEREFORE, the parties agree as follows: 1. EMPLOYMENT. The Company hereby employs Employee as its Chief Financial Officer and Treasurer, and Employee hereby accepts such employment, upon the terms and conditions hereinafter set forth. 2. TERM. The term of employment of Employee pursuant to this Agreement shall commence as of the date hereof and shall continue indefinitely until this Agreement is terminated in accordance with Section 7. 3. DUTIES AND SERVICES. Employee shall devote substantially his full time and best efforts to the business and affairs of the Company, and perform, in a competent manner, such executive and managerial functions and duties commensurate with his position as Chief Financial Officer of the Company, as the President of the Company may reasonably prescribe from time to time. Employee shall report directly to the President of the Company. 4. COMPENSATION. For all services to be rendered by Employee hereunder, the Company shall pay Employee an annual base salary of $185,000. The Company shall pay Employee's salary in accordance with the Company's standard payroll practices as in effect from time to time, with appropriate deductions required by applicable laws, rules and regulations. 5. EXPENSES. The Company shall reimburse Employee for all reasonable, ordinary and necessary expenses incurred on behalf of the Company by Employee. Employee shall submit to the Company an expense report and receipts or other verification of expenses to be reimbursed in accordance with the Company's standard policies. 6. BENEFITS. Employee shall be entitled to such insurance and retirement plan benefits as are generally available to other senior management employees of the Company, pursuant to Company policy in effect from time to time, such as health insurance, disability and life insurance, and the right to participate in any retirement plans maintained by the Company. -1- 2 7. TERMINATION PROVISIONS. A. TERMINATION FOR CAUSE. The Company, on two days' prior written notice, may terminate the employment of Employee for any of the following reasons (for "cause"), without the payment of any compensation to Employee, except accrued salary due for the period prior to the date of termination of employment: (i) Employee shall be convicted of a felony or any crime involving an act of dishonesty, such as embezzlement, theft or larceny; (ii) Commission of theft from or fraud against the Company or any willful misconduct by the Employee that is materially injurious to the financial condition or business reputation of the Company, including by reason of material breach by the Employee of the provisions of this Agreement; and (iii) Willful and continued failure by the Employee to substantially perform his duties hereunder after a written demand for such performance is delivered to the Employee by the Chief Executive Officer of the Company. B. TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE OR DEATH. The Company, on two days' prior written notice, may terminate the employment of the Employee without cause, and Employee, on two days' prior written notice, may resign his employment, and in either case the Company shall pay Employee his accrued salary for the period prior to the date of termination of employment. (i) If the employment of Employee is terminated by the Company other than for cause or death, or if Employee resigns from his employment, subject to Employee's execution and delivery to the Company of a release substantially in the form of Exhibit A hereto (the "Release"), the Company shall pay to Employee, as severance, Employee's base salary for six months after the date of termination, in accordance with the Company's standard payroll practices. (ii) If the employment of Employee is terminated by the Company other than for cause or death, or if Employee resigns from his employment, subject to Employee's execution and delivery to the Company of the Release, the Company will continue life, medical, dental and disability coverage substantially identical to the coverage maintained by the Company for Employee and his dependents prior to termination of his employment, except to the extent such coverage may be changed in its application to all Company employees on a nondiscriminatory basis. Such coverage shall continue for six (6) months after the termination of Employee's employment and shall cease if Employee becomes eligible for such insurance through other employment prior to the end of such six (6) month period. (iii) If the employment of Employee is terminated by the Company other than for cause or death, or if Employee resigns from his employment, subject to Employee's execution and delivery to the Company of the Release, the options for stock of the Company held by -2- 3 the Employee which are not currently exercisable ("Unvested Options") shall become exercisable on the date the Release becomes effective as provided therein. The Unvested Options, upon becoming exercisable, and any and all options for stock of the Company which Employee holds and which are currently exercisable at the time Employee's employment is terminated, may be exercised at any time prior to the earlier to occur of (a) the third anniversary of the termination of Employee's employment hereunder or (b) the date such option would have expired had Employee's employment not been terminated. C. TERMINATION ON ACCOUNT OF DEATH. In the event of the death of Employee, the Company shall pay the estate of the Employee or his legal representative the accrued salary due for the period prior to the date of Employee's death. This paragraph 7C shall not be deemed to affect any stock option agreements in effect between the Company and Employee. 8. NONDISPARAGEMENT; COOPERATION IN LITIGATION. If Employee's employment is terminated, Employee will not make any statements, public or otherwise, relating to the Company or its affiliates, including, without limitation, to the financial press and financial analysts or by means of electronic communication (i.e., over the Internet or similar media for communication), other than to state that Employee has resigned from the Company; and Employee will not engage in any conduct or make any statements which are critical of the Company or its affiliates. Employee will cooperate fully and assist the Company to the best of Employee's abilities in connection with any pending or subsequent legal matter or proceedings involving, directly or indirectly, Employee's role or actions as an officer or employee of the Company. 9. NON-COMPETITION AND SECRECY. A. NO INTERFERENCE. For the period ending twelve (12) months after the termination of the Employee's employment, Employee shall not, whether for his own account or for the account of any other individual, partnership, firm, corporation or other business organization (other than the Company and its affiliates), intentionally solicit, endeavor to entice away from the Company or its affiliates, or otherwise interfere with the relationship of Company or any of its affiliates with, any person who is employed by the Company or its affiliates at the time of the termination of Employee's employment and Employee will not interfere with the relationship of the Company or any of its affiliates with any individual, partnership, firm, corporation or other business organization with which the Company or its affiliates had any relationship while Employee was employed by the Company. B. SECRECY. Employee recognizes that the services to be performed by him hereunder are special, unique and extraordinary in that, by reason of his employment hereunder, he may acquire confidential information and trade secrets concerning the operation of the Company or any affiliate thereof, the use or disclosure of which could cause the Company substantial loss and damages which could not be readily calculated and for which no remedy at law would be adequate. Accordingly, Employee covenants and agrees with the Company that he will not at any time, except in performance of Employee's obligations to the Company hereunder or with the prior written consent of the Company, directly or indirectly, disclose any secret or confidential information that he -3- 4 may learn or has learned by reason of his association with the Company. The term "confidential information" includes, without limitation, information not previously disclosed to the public or to the trade with respect to the products, facilities, applications and methods, trade secrets and other intellectual property, systems, procedures, manuals, confidential reports, product price lists, customer lists, technical information, financial information (including the revenues, costs or profits associated with any of its products), business plans, prospects or opportunities but shall exclude any information already in the public domain. Notwithstanding anything to the contrary herein contained, Employee's obligation to maintain the secrecy and confidentiality of the confidential information under this Section 9 shall not apply to any such confidential information which is disclosed through any means other than as a result of any act by Employee constituting a breach of this Agreement or which is required to be disclosed under applicable law. C. EXCLUSIVE PROPERTY. Employee hereby agrees to keep all such records in connection with Employee's employment as the Company may from time to time direct, and all such records shall be the sole and exclusive property of the Company. Upon termination of Employee's employment, Employee shall return to the Company all confidential and/or proprietary information that exists in written or other physical form (and all copies thereof) under Employee's control. D. INJUNCTIVE RELIEF. Without intending to limit the remedies available to the Company, Employee acknowledges that a breach of any of the covenants contained in this Section 9 may result in material irreparable injury to the Company for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach or threat thereof, the Company shall be entitled to seek to obtain a temporary restraining order and/or a preliminary injunction restraining Employee from engaging in activities prohibited by this Section 9 or such other relief as may be required to specifically enforce any of the covenants in this Section 9. 10. COMPANY'S REPRESENTATION. The Company represents that the person signing this Agreement on its behalf is fully authorized to execute this Agreement on behalf of the Company. 11. SECTION HEADINGS. The titles to the Sections of this Agreement are solely for the convenience of the parties and shall not be used to explain, modify, simplify, or aid in the interpretations of the provisions of this Agreement. -4- 5 12. NOTICES. All notices, demands and requests provided or permitted to be given pursuant to this Agreement, shall be given in writing, sent by certified mail, return receipt requested, and addressed as follows or to such other address so designated in the appropriate manner by the parties. All notices shall be deemed effective when mailed. Company: Source Media, Inc. 5400 LBJ Parkway Suite 680 Dallas, Texas 75240 Attention: Stephen W. Palley With a copy to: Robert L. Winikoff, Esq. Sonnenschein Nath & Rosenthal 1221 Avenue of the Americas New York, New York 10020 Employee: F. Paul Tigh 1608 Old Course Drive Plano, Texas 75093 13. ASSIGNMENT AND ASSUMPTION. The rights of each party under this Agreement are personal to that party and may not be assigned, delegated or transferred to any other person, firm, corporation, or other entity without the prior written consent of the other party, except that the Company may transfer its rights under this Agreement to any Affiliate or other entity which succeeds, by contract or operation of law, to all or substantially all of the business of the Company and agrees in writing to assume the Company's obligations under this Agreement. 14. GOVERNING LAW. This Agreement shall be governed by, construed and enforced in accordance with the laws of the State of New York without giving effect to the conflicts of law principles of the laws of said state. The parties agree that any cause of action for breach of this Agreement shall be brought in any state or federal court located in New York, New York and each party waives the defense of an inconvenient forum. 15. ENTIRE AGREEMENT. This Agreement shall constitute the entire agreement between the parties and any prior written or oral understanding or representation of any kind, or any oral communications shall not be binding upon either party except to the extent incorporated in this Agreement. This Agreement supersedes any and all prior agreements between the parties. 16. MODIFICATION OF AGREEMENT. This Agreement can be modified only in writing and shall be binding only if executed with and under the same formality by the parties hereto or their duly authorized representatives. -5- 6 17. NO WAIVER. The failure of either party to this Agreement to insist upon the performance of any of the terms and conditions of this Agreement, or the waiver of any breach of any of the terms and conditions of this Agreement, shall not be construed as thereafter waiving any such terms and conditions, but each same shall continue and remain in full force and effect as if no such forbearance or waiver had occurred. 18. EFFECT OF PARTIAL INVALIDITY. The invalidity or unenforceability of any provision or covenant of this Agreement shall not be deemed to affect the validity or enforceability of any other provision or covenant. In the event that any provision or covenant of this Agreement is held invalid or unenforceable, the same shall be deemed automatically modified to the minimum extent necessary to make such provision or covenant enforceable and the parties agree that the remaining provisions shall be deemed to be and to remain in full force and effect. 19. COUNTERPARTS. This Agreement may be executed in counterparts and all counterparts so executed shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. SOURCE MEDIA, INC. By: /s/ Stephen W. Palley ------------------------------------- Stephen W. Palley, President and Chief Executive Officer /s/ F. Paul Tigh ----------------------------------------- F. PAUL TIGH -6- 7 EXHIBIT A RELEASE 1. In consideration of the payments and benefits to be granted to you pursuant to the Employment Agreement dated as of September 1, 2000 (the "Employment Agreement") between you and Source Media, Inc. (the "Company"), you agree, on your own behalf and on behalf of your heirs, executors, administrators, attorneys, representatives, successors and assigns to hereby waive, release and forever discharge all claims, demands, causes of action, obligations, promises, covenants, agreements, suits, actions, damages or expenses in law or in equity (including attorney's fees) of any kind whatsoever, whether known or unknown, which you ever had or now have against the Company, its former, current and/or future directors, officers, employees, agents, subsidiaries, affiliates, members, trustees, parents, fiduciaries of any employee benefit plan or policy of the Company and other representatives by reason of any actual or alleged act, omission, transaction, practice, conduct, occurrence, or other matter up to and including the date you execute this Release relating in any way to your employment at or termination of employment from the Company. You understand that in executing this Release you are or may be giving up rights to all possible legal claims and theories of recovery, including, but not limited to, any claim for equitable relief or recovery of punitive, compensatory, or other damages or monies, any intentional or unintentional tort; the violation of any express or implied contract or any public policy; the violation of any common law or any federal, state, or local fair employment laws, or other employee relation statutes and executive orders; and all claims for alleged discrimination based upon age, race, color, sex, marital status, religion, national origin, pregnancy, handicap, disability or retaliation, including any claim, asserted or unasserted, which could arise under Title VII of the Civil Rights Act of 1964, as amended; the Civil Rights Act of 1966; the Age Discrimination in Employment Act of 1967; the Older Workers' Benefit Protection Act of 1990; the Americans with Disabilities Act of 1990; the Texas Human Rights Commission Act; the Family and Medical Leave Act of 1993; the Fair Labor Standards Act; the Equal Pay Act; the Employee Retirement Income Security Act of 1974; the Civil Rights Act of 1991; 42 U.S.C. Sec. 1981; defamation; intentional infliction of emotional distress; injury to reputation; pain and suffering; or any other federal, state, or local law or regulation; or any right under any Company welfare or stock plans, with the exception of any breach of the terms of this Release. By executing this Release, you agree that it shall discharge the Company to the maximum extent permitted by law. However, nothing herein shall be deemed to waive any rights to benefits under the Employment Agreement or any Company plan in which you are vested as of the effective date of this Release. 2. In consideration of the benefits provided to you as described in the Employment Agreement, you also agree and acknowledge that this Release constitutes a knowing and voluntary waiver of all rights or claims you have or may have had against the Company arising under the Age Discrimination in Employment Act of 1967, as amended ("ADEA"), including, but not limited to, all claims of age discrimination in employment and all claims of retaliation in violation of the ADEA. -1- 8 3. By executing this Release, you further agree that as part of your complete, total and irrevocable release and discharge of the Company to the fullest extent permitted by law, that you have not and will not institute any complaint, claim, charge, lawsuit, administrative agency proceeding, grievance or demand for arbitration in any forum, for damages, or assist or otherwise participate willingly or voluntarily in any such claim, arbitration, suit, action, investigation or other proceeding of any kind that relates to any matter involving the Company and that occurred on or before the date you execute this Release. 4. You understand that any payments or benefits provided you under the terms of this Release do not constitute any admission by the Company that it has violated any law or legal obligation with respect to any aspect of your employment or separation from the Company. 5. You understand that by signing this Release, you do not waive any rights or claims that may arise after the date you execute this Release. (1) 6. You agree and acknowledge that the consideration provided to you in return for your entering into this Release is in addition to anything of value to which you were and are already entitled. 7. You hereby acknowledge that the Company has advised and urged you to consult with an attorney prior to executing the Employment Agreement and this Release. 8. You represent that your actions and conduct while employed by the Company were in good faith and within the scope of your duties and responsibilities. Based on and subject to your representations, the Company hereby releases you, your heirs, executors, administrators, successors and assigns, from all claims, causes of action, lawsuits, demands, debtor liability of any kind, asserted or unasserted, known or unknown, suspected or unsuspected, which the Company may now or hereafter have against you from the beginning of time to the date of this Release, arising out of or relating to your employment with the Company with the exception of any claims arising from any acts of intentional misconduct, recklessness, willful malfeasance or gross negligence by you. The foregoing waivers shall not be deemed a waiver of any rights by the Company to enforce the Employment Agreement or this Release. 9. If a dispute concerning this letter agreement shall arise, such dispute will be resolved by applying the laws of the State of New York without regard to its conflict of law provisions, and any cause of action for breach of this letter agreement shall be brought in any state or federal court located in the State of New York, you having hereby waived any claim that this is not a convenient forum. This Release and the Employment Agreement constitutes the entire understanding between the parties with respect to the subject matter thereof and no waiver or modification of the terms hereof shall be valid unless in writing signed by the party to be charged and only to the extent therein set forth. All prior agreements and understandings, whether written or oral, shall be null and void and this Release may only be amended by a written document executed by the parties hereto. Your rights and obligations hereunder are personal in nature and this Release may not be assigned by you to any other party. -2- 9 10. You have forty-five (45) days from your receipt of this Release in which to consider executing it and in which to consult with your attorney regarding the terms and effect of this Release. You may accept this Release and execute it at any time within those forty-five (45) days. Once you have signed this Release, you have seven (7) days to revoke it, and it will not become effective or enforceable until the seven days revocation period has expired. If you do not revoke this Release, it will become effective on the eighth (8th) day after you sign it. In the event you wish to revoke this Release, you must do so in writing by delivering the Notice of Revocation within seven (7) days to the following address: Stephen W. Palley Chief Executive Officer Source Media, Inc. 5400 LBJ Freeway, Suite 680 Dallas, Texas 75240 If the foregoing confirms your understanding and agreement, please countersign the enclosed copy of this Release in the presence of a Notary Public and return it to: Stephen W. Palley Chief Executive Officer Source Media, Inc. 5400 LBJ Freeway, Suite 680 Dallas, Texas 75240 Dated: ___________________ SOURCE MEDIA, INC. By: Stephen W. Palley Chief Executive Officer -3- 10 ACCEPTANCE OF RELEASE I acknowledge that I have carefully read this Release and understand all its terms, including the full and final release of claims set forth above. I further acknowledge that I have voluntarily entered into this Release, that I have not relied upon any representation or statement, whether written or oral, not set forth in this Release and that I have been encouraged and given the opportunity to consult with an attorney regarding this Release. I also acknowledge that I have been afforded forty-five (45) days to consider this Release and that I have seven (7) days after signing this Release to revoke it by delivering to the Company written Notice of Revocation at the following address: Stephen W. Palley Chief Executive Officer Source Media, Inc. 5400 LBJ Freeway, Suite 680 Dallas, Texas 75240 By executing this Release, I agree to be bound by and comply with each and every term of it appearing on the four (4) pages which comprise this Release. Pursuant to the terms of this Release, therefore, and in consideration of the benefits described in this Release, I hereby release and forever discharge the Company from all potential claims as more fully described herein. F. Paul Tigh Date SUBSCRIBED AND SWORN TO before me on this _____ day of ____________, ____. Notary Public My Commission Expires: -4- EX-10.2 3 d81825ex10-2.txt EMPLOYMENT AGREEMENT - PHILIP HOWORT 1 EXHIBIT 10.2 EMPLOYMENT AGREEMENT, dated as of September 20, 2000, by and between SOURCE MEDIA, INC., a Delaware corporation (the "Company"), and PHILIP HOWORT (the "Employee"). The Company desires to engage Employee to perform services for the Company, and Employee desires to perform such services, on the terms and conditions set forth below: NOW, THEREFORE, the parties agree as follows: 1. EMPLOYMENT. The Company hereby employs Employee as its Senior Vice President, and Employee hereby accepts such employment, upon the terms and conditions hereinafter set forth. 2. TERM. The term (the "Term") of employment of Employee pursuant to this Agreement shall commence on October 6, 2000 and shall terminate on October 6, 2002. The Term shall automatically be renewed for successive one year periods unless either party gives the other written notice to the contrary at least 120 days prior to the end of the Term or any such renewal thereof. 3. DUTIES AND SERVICES. Employee shall devote his full time and best efforts to the business and affairs of the Company, and perform, in a competent manner, such executive and managerial functions and duties commensurate with his position as Senior Vice President of the Company, as the President of the Company may reasonably prescribe from time to time. Employee shall report directly to the President of the Company. The parties acknowledge that Employee will spend such time at the Company's offices in Dallas, Texas as is reasonably required to perform his functions and duties. The Company will not require Employee to relocate his home from the New York metropolitan area. 4. COMPENSATION. A. SALARY. For all services to be rendered by Employee hereunder, the Company shall pay Employee an annual base salary of $200,000. The Company shall pay Employee's salary in accordance with the Company's standard payroll practices as in effect from time to time, with appropriate deductions required by applicable laws, rules and regulations. B. DISCRETIONARY BONUS. On an annual basis, the Board of Directors of the Company shall consider a bonus payment to Employee based on his performance, and the Company's results of operations. The timing and amount of any such bonus payment shall be in the sole and absolute discretion of the Board of Directors. 2 C. STOCK OPTION PARTICIPATION. Employee shall receive a ten-year option to purchase 150,000 shares of the common stock, par value $.001 per share, of the Company, pursuant to the Stock Option Agreement in the form attached hereto as Exhibit A. 5. EXPENSES. The Company shall reimburse Employee for all reasonable, ordinary and necessary expenses incurred on behalf of the Company by Employee. Employee shall submit to the Company an expense report and receipts or other verification of expenses to be reimbursed in accordance with the Company's standard policies. 6. BENEFITS. Employee shall be entitled to such insurance and retirement plan benefits as are generally available to other senior management employees of the Company, pursuant to Company policy in effect from time to time, such as health insurance, disability and life insurance, and the right to participate in any retirement plans maintained by the Company. 7. VACATION AND SICK DAYS. Employee shall be entitled to fifteen (15) business days of paid vacation during each calendar year (pro-rated for periods shorter than a calendar year). Vacation and sick days shall be taken in accordance with the Company's published guidelines. 8. TERMINATION PROVISIONS. A. TERMINATION FOR CAUSE. Notwithstanding the provisions of Section 2 above, the Company, on two days' prior written notice, may terminate the employment of Employee for any of the following reasons (for "cause"), without the payment of any compensation to Employee, except accrued salary and vacation pay due for the period prior to the date of termination of employment: (i) Employee shall be convicted of a felony or any crime involving an act of dishonesty, such as embezzlement, theft or larceny; (ii) Commission of theft from or fraud against the Company or any willful misconduct by Employee that is materially injurious to the financial condition or business reputation of the Company, including by reason of material breach by Employee of the provisions of this Agreement; and (iii) Willful and continued failure by the Employee to substantially perform his duties hereunder. B. TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE, DEATH OR DISABILITY. (i) If the employment of Employee is terminated by the Company other than for cause, death or disability, the Company shall pay to Employee as severance, in equal monthly installments, the remaining base salary payments that Employee would have earned if he had continued his employment throughout the Term, and an amount equal to any accrued vacation -2- 3 pay on the date of termination of employment. Such payments shall cease in the event Employee obtains other employment following termination of employment by the Company; provided, however, that in the event the base salary payable to Employee by the Company on the date of termination exceeds the base salary payable to Employee by such new employer, the Company shall pay such excess, in equal monthly installments, through the expiration of the Term. (ii) The Company will continue life, medical, dental and disability coverage substantially identical to the coverage maintained by the Company for Employee and his dependents prior to termination of his employment, except to the extent such coverage may be changed in its application to all Company employees on a nondiscriminatory basis. Such coverage shall cease when Employee obtains other employment. C. TERMINATION ON ACCOUNT OF DISABILITY OR DEATH. (i) In the event Employee shall, during the term of this Agreement, become physically or mentally disabled so that he is unable, or can reasonably be expected to be unable, to perform his duties hereunder for a period of seventy five (75) consecutive days, or ninety (90) non-consecutive days within any twelve (12) month period, the Company shall have the right to terminate Employee's employment, provided that (a) the Company provides Employee with not less than five (5) days' prior written notice of the termination of his employment and (b) the Company makes the payments to Employee referred to in clause (ii) below. Any determination of disability shall be made by a physician selected by the Company and reasonably acceptable to Employee. (ii) In the event the Company terminates Employee's employment for disability as set forth in clause (i) above ("Disability Termination"), Employee shall be entitled to receive, in monthly installments, the base salary Employee would have received in the following three months. All payments made pursuant to this paragraph shall be made in accordance with the Company's standard payroll practices as in effect from time to time, with appropriate deductions required by applicable laws, rules and regulations. In addition, the Company, at its expense, for a period of three months following the date of Disability Termination, will continue medical and dental insurance coverage substantially identical to the coverage maintained by the Company for Employee and his dependents prior to termination of employment, except to the extent such coverage may be changed in its application to all Company employees on a non-discriminatory basis. (iii) In the event of the death of Employee, the Company shall pay the estate of the Employee or his legal representative the accrued salary and vacation pay due for the period prior to the date of Employee's death. D. TERMINATION BY EMPLOYEE. (i) Notwithstanding the provisions of Section 2 above, Employee will be considered to have resigned his employment for "good reason" if the Company, without the express written consent of Employee, materially breaches this Agreement. -3- 4 (ii) In the event that Employee resigns from his employment for good reason, the Company shall be obligated to provide Employee with the severance payments, insurance coverage as required if the Company had terminated Employee other than for cause pursuant to Section 8B above. (iii) In the event that Employee resigns from his employment without good reason, the Company shall be obligated to provide Employee with the payments as required if the Company had terminated Employee for cause pursuant to Section 8A above. 9. REPRESENTATIONS AND WARRANTIES. Employee represents and warrants that Employee is not subject to or a party to any agreement, contract, covenant, order or other restriction which in any way prohibits, restricts or impairs Employee's ability to enter into this Agreement and carry out his duties and obligations hereunder. Each party hereto represents and warrants to the other that (i) it has the full legal right and power and all authority and approvals required to enter into, execute and deliver this Agreement and to perform fully all of its obligations hereunder; and (ii) this Agreement has been duly executed and delivered by it and constitutes a valid and binding obligation of such party, enforceable in accordance with its terms. 10. NON-COMPETITION AND SECRECY. 10.1 NO INTERFERENCE. For the period ending twelve (12) months after the later of (i) the termination of Employee's employment and (ii) the expiration of the Term, Employee shall not, whether for his own account or for the account of any other individual, partnership, firm, corporation or other business organization (other than the Company and its affiliates), intentionally solicit, endeavor to entice away from the Company or its affiliates, or otherwise interfere with the relationship of the Company or any of its affiliates with, any person who is employed by the Company or its affiliates at the time of the termination of Employee's employment and Employee will not interfere with relationship of the Company or any of its affiliates with any individual, partnership, firm, corporation or other business organization with which the Company or its affiliates had any relationship while the Employee was employed by the Company. 10.2 SECRECY. Employee recognizes that the services to be performed by him hereunder are special, unique and extraordinary in that, by reason of his employment hereunder, he may acquire confidential information and trade secrets concerning the operation of the Company or any affiliate thereof, the use or disclosure of which could cause the Company substantial loss and damages which could not be readily calculated and for which no remedy at law would be adequate. Accordingly, Employee covenants and agrees with the Company that he will not at any time, except in performance of Employee's obligations to the Company hereunder or with the prior written consent of the Company, directly or indirectly, disclose any secret or confidential information that he may learn or has learned by reason of his association with the Company. The term "confidential information" includes, without limitation, information not previously disclosed to the public or to the trade with respect to the products, facilities, applications and methods, trade secrets and other intellectual property, systems, procedures, manuals, confidential reports, product price lists, customer lists, technical information, financial information (including the revenues, costs or profits associated with any of its products), business plans, prospects or opportunities but shall exclude any -4- 5 information already in the public domain. Notwithstanding anything to the contrary herein contained, Employee's obligation to maintain the secrecy and confidentiality of the confidential information under this Section 10 shall not apply to any such confidential information which is disclosed through any means other than as a result of any act by Employee constituting a breach of this Agreement or which is required to be disclosed under applicable law. 10.3 EXCLUSIVE PROPERTY. Employee hereby agrees to keep all such records in connection with Employee's employment as the Company may from time to time reasonably direct, and all such records shall be the sole and exclusive property of the Company. Upon termination of Employee's employment, Employee shall return to the Company all confidential and/or proprietary information that exists in written or other physical form (and all copies thereof) under Employee's control. 10.4 INJUNCTIVE RELIEF. Without intending to limit the remedies available to the Company, Employee acknowledges that a breach of any of the covenants contained in this Section 10 may result in material irreparable injury to the Company for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach or threat thereof, the Company shall be entitled to seek to obtain a temporary restraining order and/or a preliminary injunction restraining Employee from engaging in activities prohibited by this Section 10 or such other relief as may be required to specifically enforce any of the covenants in this Section 10. 11. SECTION HEADINGS. The titles to the Sections of this Agreement are solely for the convenience of the parties and shall not be used to explain, modify, simplify, or aid in the interpretations of the provisions of this Agreement. 12. NOTICES. All notices, demands and requests provided or permitted to be given pursuant to this Agreement, shall be given in writing, sent by certified mail, return receipt requested, and addressed as follows or to such other address so designated in the appropriate manner by the parties. All notices shall be deemed effective when mailed. Company: Source Media, Inc. 5400 LBJ Parkway Suite 680 Dallas, Texas 75240 Attention: Stephen W. Palley With a copy to: Robert L. Winikoff, Esq. Sonnenschein Nath & Rosenthal 1221 Avenue of the Americas New York, New York 10020 -5- 6 Employee: Philip Howort 131 Castle Heights Avenue Nyack, New York 10960 With a copy to: Jonathan Pillot, Esq. 62 Greene Street, 2nd Floor New York, New York 10012 13. ASSIGNMENT AND ASSUMPTION. The rights of each party under this Agreement are personal to that party and may not be assigned, delegated or transferred to any other person, firm, corporation, or other entity without the prior written consent of the other party, except that the Company may transfer its rights under this Agreement to any affiliate or other entity which succeeds, by contract or operation of law, to all or substantially all of the business of the Company and agrees in writing to assume the Company's obligations under this Agreement. 14. GOVERNING LAW. This Agreement shall be governed by, construed and enforced in accordance with the laws of the State of New York without giving effect to the conflicts of law principles of the laws of said state. 15. ENTIRE AGREEMENT. This Agreement, and the stock option agreement evidencing the stock option referred to in paragraph 4C, shall constitute the entire agreement between the parties and any prior written or oral understanding or representation of any kind, or any oral communications shall not be binding upon either party except to the extent incorporated in this Agreement. This Agreement supercedes any and all prior agreements between the parties. 16. MODIFICATION OF AGREEMENT. This Agreement can be modified only in writing and shall be binding only if executed with and under the same formality by the parties hereto or their duly authorized representatives. 17. NO WAIVER. The failure of either party to this Agreement to insist upon the performance of any of the terms and conditions of this Agreement, or the waiver of any breach of any of the terms and conditions of this Agreement, shall not be construed as thereafter waiving any such terms and conditions, but each same shall continue and remain in full force and effect as if no such forbearance or waiver had occurred. 18. EFFECT OF PARTIAL INVALIDITY. The invalidity or unenforceability of any provision or covenant of this Agreement shall not be deemed to affect the validity or enforceability of any other provision or covenant. In the event that any provision or covenant of this Agreement is held invalid or unenforceable, the same shall be deemed automatically modified to the minimum extent necessary to make such provision or covenant enforceable and the parties agree that the remaining provisions shall be deemed to be and to remain in full force and effect. -6- 7 19. COUNTERPARTS. This Agreement may be executed in counterparts and all counterparts so executed shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. SOURCE MEDIA, INC. By: /s/ Stephen W. Palley ------------------------------------- Stephen W. Palley, President and Chief Executive Officer /s/ Philip Howort ------------------------------------------ PHILIP HOWORT -7- 8 EXHIBIT A GRANT NO. _________ SOURCE MEDIA, INC. 1999 STOCK OPTION PLAN STOCK OPTION AGREEMENT AGREEMENT, dated as of _____________, 2000, between Source Media, Inc., a Delaware corporation (the "Company"), and Philip Howort (the "Optionee"). W I T N E S S E T H: WHEREAS, on August 25, 1999, the Board of Directors of the Company (the "Board") adopted the Source Media, Inc. 1999 Stock Option Plan (the "Plan"), which Plan authorizes the grant of options to purchase shares of the common stock, $0.001 par value ("Common Stock"), of the Company to directors, officers, employees and consultants of the Company and its subsidiaries and to other individuals; and WHEREAS, the Plan was adopted by the stockholders of the Company at the annual meeting of the Company on November 17, 1999; and WHEREAS, the Board has determined that it would be in the best interests of the Company to grant the option documented herein. NOW, THEREFORE, the parties hereto hereby agree as follows: 1. Definitions. The following terms, as used herein, shall have the meanings set forth below: (1) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto and the regulations promulgated thereunder. (2) "Committee" shall mean the Stock Option Committee established by the Board or any other committee of the Board, which the Board may designate to administer the Plan or any portion thereof. If no committee is so designated, then all references in this Agreement to "Committee" shall mean the Board. 2. Grant of Option. Subject to the terms and conditions of the Plan and as set forth herein, the Company hereby grants to the Optionee, as of the date hereof, an option (the "option") to purchase from the Company all or any part of an aggregate number of 150,000 shares of Common Stock (the "Option Shares") with vesting dates as set forth in paragraph 3(a) below. A-1 9 3. Installment Exercise. (1) Subject to such further limitations as are provided in the Plan and as set forth herein and any required approval of the Company's stockholders, the Option shall become exercisable on the dates and at the per share prices ("Option Price") set forth below, the Optionee having the right hereunder to purchase from the Company the indicated number of Option Shares upon exercise of the Option, on and after such dates, in cumulative fashion:
Incentive Non-Qualified Exercise Date Option Shares Option Shares Option Price ------------- ------------- ------------- ------------ September ___, 2001 [ ] [ ] $ September ___, 2002 [ ] [ ] $ September ___, 2003 [ ] [ ] $ September ___, 2004 [ ] [ ] $
(2) Only those Option Shares indicated above as "Incentive Option Shares" are intended by the parties hereto to be, and be treated as, "incentive stock options" (as such term is defined under Section 422 of the Code). (3) The Option may not be exercised with respect to less than 100 Option Shares (or the Option Shares then subject to purchase under the Option, if less than 100 shares) or for any fractional shares. 4. Termination of Option. (1) The Option, to the extent not previously exercised, shall terminate and become null and void upon the expiration of ten years after the date hereof (the "Option Term"). (2) Subject to the provisions of Section 5 hereof, and except as otherwise provided in this Section 4, upon the Optionee's ceasing for any reason to be employed by the Company (such occurrence being a "termination of the Optionee's employment"), the Option, to the extent not previously exercised, shall terminate and become null and void three months after such termination of the Optionee's employment, or upon the expiration of the Option Term, whichever occurs first. (3) If the Optionee's employment is terminated for cause or because the Optionee is in breach of any employment agreement, the Option, to the extent not previously exercised, shall terminate and become null and void immediately upon such termination of the Optionee's employment. (4) Upon a termination of the Optionee's employment by reason of permanent disability (within the meaning of Section 22(e)(3) of the Code) or by reason of the death of the Optionee, the Option, to the extent not previously exercised, shall terminate and become null and void twelve months after such termination of the Optionee's employment, or upon the expiration of the Option Term, whichever occurs first. A-2 10 5. Exerciseability. (1) Except as otherwise provided in this Section 5, upon a termination of the Optionee's employment, the Option shall be exercisable only to the extent that the Option has accrued and is in effect on the date of such termination of the Optionee's employment. (2) Upon a termination of the Optionee's employment by reason of permanent disability (as defined above) or by reason of the death of the Optionee, the Option shall be exercisable with respect to the full number of the Option Shares, whether or not the Optionee was entitled to do so at the date he or she became permanently disabled or at the date of his or her death. To the extent exercisable, the Option may be exercised by a legal representative on behalf of the Optionee in the event of such permanent disability, or, in the case of the death of the Optionee, by the estate of the Optionee or by any person or persons who acquired the right to exercise the Option by bequest or inheritance or by reason of the death of the Optionee. 6. Manner of Exercise. (1) The Option may be exercised in full at one time or in part from time to time for the number of Option Shares then exercisable by giving written notice, signed by the person exercising the Option, to the Company, stating the number of Option Shares with respect to which the Option is being exercised and the date of exercise thereof. (2) Full payment by the Optionee of the Option Price for the Option Shares purchased shall be made on or before the exercise date specified in the notice of exercise by delivery of (i) cash or a check payable to the order of the Company in an amount equal to such Option Price, (ii) shares of Common Stock owned by the Optionee having a fair market value equal in amount to such Option Price, or (iii) any combination of the preceding clauses (i) and (ii). (3) The Company shall be under no obligation to issue any Option Shares unless the person exercising the Option, in whole or in part, shall give a written representation and undertaking to the Company which is satisfactory in form and substance to counsel for the Company and upon which, in the opinion of such counsel, the Company may reasonably rely, that he or she is acquiring such Option Shares for his or her own account as an investment and not with a view to, or for sale in connection with, the distribution of any such Option Shares, and that he or she will make no transfer of the same except in compliance with any rules and regulations in force at the time of such transfer under the Securities Act of 1933, or any other applicable law. (4) Upon exercise of the Option in the manner prescribed by this Section 6, delivery of a certificate for the Option Shares then being purchased shall be made at the principal office of the Company to the person exercising the Option within a reasonable time after the date of exercise specified in the notice of exercise. 7. Non-Transferability of Option. The Option shall not be assignable or transferable by the Optionee other than by will or the laws of descent, and shall be exercisable during the lifetime of the Optionee only by the Optionee. The Option shall terminate and become null and void A-3 11 immediately upon the bankruptcy of the Optionee, or upon any attempted assignment or transfer except as herein provided, including without limitation, any purported assignment, whether voluntary or by operation of law, pledge, hypothecation or other disposition, attachment, trustee process or similar process, whether legal or equitable, upon the Option. 8. No Special Employment Rights. Neither the granting of the Option nor its exercise shall be construed to confer upon the Optionee any right with respect to the continuation of his or her employment by the Company (or any subsidiary of the Company) or interfere in any way with the right of the Company (or any subsidiary of the Company), subject to the terms of any separate employment agreement to the contrary, at any time to terminate such employment or to increase or decrease the compensation of the Optionee from the rate in existence as of the date hereof. 9. No Rights of Stockholder. The Optionee shall not be deemed for any purpose to be a stockholder of the Company with respect to the Option except to the extent that the Option shall have been exercised with respect thereto and, in addition, a stock certificate shall have been issued theretofore and delivered to the Optionee. 10. Amendment. Subject to the terms and conditions of the Plan, the Board or the Committee, whichever shall then have authority to administer the Plan, may amend this Agreement with the consent of the Optionee when and subject to such conditions as are deemed to be in the best interests of the Company and in accordance with the purposes of the Plan. 11. Notices. Any communication or notice required or permitted to be given hereunder shall be in writing, and, if to the Company, to its principal place of business, attention: Secretary, and, if to the Optionee, to the address as appearing on the records of the Company. Such communication or notice shall be deemed given if and when (a) properly addressed and posted by registered or certified mail, postage prepaid, or (b) delivered by hand. 12. Incorporation of Plan by Reference. The Option is granted pursuant to the terms of the Plan, the terms of which are incorporated herein by reference, and the Option shall in all respects be interpreted in accordance with the Plan. The Board or the Committee, whichever shall then have authority to administer the Plan, shall interpret and construe the Plan and this Agreement, and their interpretations and determinations shall be conclusive and binding upon the parties hereto and any other person claiming an interest hereunder, with respect to any issue arising hereunder or thereunder. A-4 12 13. Governing Law. The validity, construction and interpretation of this Agreement shall be governed by and determined in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the undersigned have executed this Stock Option Agreement as of the date above written. SOURCE MEDIA, INC. By: --------------------------------- Name: Stephen W. Palley Title: Chief Executive Officer OPTIONEE: ------------------------------------ PHILIP HOWORT A-5 EX-10.3 4 d81825ex10-3.txt EMPLOYMENT AGREEMENT - DERRICK HORNER 1 EXHIBIT 10.3 EMPLOYMENT AGREEMENT, dated as of October 17, 2000, by and between SOURCE MEDIA, INC., a Delaware corporation (the "Company"), and DERRICK L. HORNER ("Employee"). The Company desires to engage Employee to perform services for the Company, and Employee desires to perform such services, on the terms and conditions set forth below: NOW, THEREFORE, the parties agree as follows: 1. EMPLOYMENT. The Company hereby employs Employee as its Vice President and General Counsel, and Employee hereby accepts such employment, upon the terms and conditions hereinafter set forth. 2. TERM. The term (the "Term") of employment of Employee pursuant to this Agreement shall commence on November 6, 2000 (the "Commencement Date") and shall terminate on the second anniversary of the Commencement Date. The Term shall automatically be renewed for successive one year periods unless either party gives the other written notice to the contrary at least 90 days prior to the end of the Term or any such renewal thereof. 3. DUTIES AND SERVICES. Employee shall devote his full business time and best efforts to the business and affairs of the Company, and perform, in a competent manner, such executive and legal functions and duties commensurate with his position as Vice President and General Counsel of the Company as the President of the Company may reasonably prescribe from time to time; provided, however, that nothing shall preclude Employee from engaging in appropriate civic, charitable, educational (including adjunct teaching positions), pro bono or religious activities or from devoting a reasonable amount of time to private investments or, subject to the approval of the President of the Company, from serving on the boards of directors of other entities, as long as none of such activities, investments and service interferes or conflicts with Employee's responsibilities to the Company or competes, directly or indirectly, with the Company. Employee shall report directly to the President of the Company. The parties acknowledge that Employee will spend such time at the Company's offices in Dallas, Texas as is reasonably required to perform his functions and duties. The Company will not require Employee to relocate his home from the New York metropolitan area. 4. COMPENSATION. A. SALARY. For all services to be rendered by Employee hereunder, the Company shall pay Employee an initial annual base salary of $200,000, subject to any increase approved by the Board of Directors or the President of the Company. Employee's annual base salary shall at no time be less than $200,000. The Company shall pay Employee's salary in accordance with the Company's standard payroll practices as in effect from time to time, with appropriate deductions required by applicable laws, rules and regulations. 2 B. DISCRETIONARY BONUS. On an annual basis, the Board of Directors of the Company shall consider a bonus payment to Employee based on his performance, and the Company's results of operations. Employee's target annual bonus shall equal 40% of Employee's annual base salary then in effect; provided, however, that the timing and amount of any such bonus payment shall be in the sole and absolute discretion of the Board of Directors. C. STOCK OPTION PARTICIPATION. As of the Commencement Date, Employee shall receive a ten-year option to purchase 150,000 shares of the common stock, par value $.001 per share, of the Company, pursuant to the Stock Option Agreement in the form attached hereto as Exhibit A. Upon (i) an assignment of this Agreement or (ii) a change of control of the Company (as defined in the Stock Option Agreement), all of the stock options then owned by Employee shall vest and be immediately exercisable by Employee. 5. EXPENSES. The Company shall reimburse Employee for all reasonable, ordinary and necessary expenses incurred on behalf of the Company by Employee, including costs associated with (i) travel, lodging and meals (up to $75 per day in the case of meals) incurred on behalf of the Company, (ii) legal textbooks, publications and other materials, (iii) access to on-line legal research services, (iv) legal seminars and continuing legal education programs and courses, (v) bar membership and association fees, (vi) office relocation expenses (not to exceed $500) and (vii) the purchase of a laptop computer. Employee shall submit to the Company an expense report and receipts or other verification of expenses to be reimbursed in accordance with the Company's standard policies. 5A. INDEMNIFICATION. The Company shall indemnify Employee and hold Employee harmless from and against any claim, loss, damages, expense, liability or cause of action (whether now pending or subsequently commenced), including, without limitation, liability in connection with suits by shareholders, debtholders, prospective joint venturers or strategic partners, or current or former employees, arising from or out of Employee's performance as an officer or employee of, or consultant to, the Company or in any other capacity, including serving as a fiduciary, in which Employee serves or has served at the request of the Company, to the maximum extent permitted by applicable law and the Company's charter or By-laws. If for any reason the foregoing indemnification is unavailable or insufficient to hold Employee harmless, then the Company shall contribute to the amount paid or payable by Employee as a result of such claim, loss, damages, expense, liability or cause of action in such proportion as is equitable. 6. BENEFITS. Employee shall be entitled to such insurance and retirement plan benefits as are generally available to other senior management employees of the Company, pursuant to Company policy in effect from time to time, such as health insurance, disability and life insurance, the right to participate in any retirement plans maintained by the Company and the right to participate in any stock purchase program (to the extent eligible). 7. VACATION AND SICK DAYS. Employee shall be entitled to twenty (20) business days of paid vacation during and five (5) sick days each calendar year (pro-rated for periods shorter than a calendar year). Vacation and sick days shall be taken in accordance with the Company's published guidelines. 2 3 8. TERMINATION PROVISIONS. A. TERMINATION FOR CAUSE. Notwithstanding the provisions of Section 2 above, the Company, on two days' prior written notice, may terminate the employment of Employee for any of the following reasons (for "cause"), without the payment of any compensation to Employee, except accrued salary and vacation pay due for the period prior to the date of termination of employment: (i) Employee shall be convicted of a felony; (ii) Commission of theft from or fraud against the Company or any willful misconduct by Employee that is materially injurious to the financial condition or business reputation of the Company, including by reason of material breach by Employee of the provisions of this Agreement; and (iii) Willful and continued refusal by Employee to substantially perform his duties hereunder after a written demand for such performance is delivered to Employee by the President of the Company. B. TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE, DEATH OR DISABILITY. (i) If the employment of Employee is terminated by the Company other than for cause, death or disability, the Company shall pay to Employee as severance, in equal bi-monthly installments without set-off, the remaining base salary payments that Employee would have earned if he had continued his employment throughout the Term, and an amount equal to any accrued vacation pay on the date of termination of employment. Such payments shall cease in the event Employee obtains other employment following termination of employment by the Company; provided, however, that in the event the base salary payable to Employee by the Company on the date of termination exceeds the base salary payable to Employee by such new employer, the Company shall pay such excess, in equal bi-monthly installments, through the expiration of the Term. (ii) The Company will continue life, medical, dental and disability coverage substantially identical to the coverage maintained by the Company for Employee and his dependents prior to termination of his employment, except to the extent such coverage may be changed in its application to all Company employees on a nondiscriminatory basis. Such coverage shall cease at the end of the Term or, if earlier, when Employee becomes eligible for substantially similar insurance through other employment prior to the end of the Term. C. TERMINATION ON ACCOUNT OF DISABILITY OR DEATH. (i) In the event Employee shall, during the term of this Agreement, become physically or mentally disabled so that he is unable, or can reasonably be expected to be unable, to perform his duties hereunder for a period of seventy five (75) consecutive days, or ninety (90) non-consecutive days within any twelve (12) month period, the Company shall have the right to terminate Employee's employment, provided that (a) the Company provides Employee with not less than five (5) days' prior written notice of the termination of his 3 4 employment and (b) the Company makes the payments to Employee referred to in clause (ii) below. Any determination of disability shall be made by a physician selected by the Company and reasonably acceptable to Employee. (ii) In the event the Company terminates Employee's employment for disability as set forth in clause (i) above ("Disability Termination"), Employee shall be entitled to receive, in equal bi-monthly installments without set-off, the base salary Employee would have received in the following three months. Such payments shall cease in the event Employee obtains other employment following termination of employment by the Company; provided, however, that in the event the base salary payable to Employee by the Company on the date of termination exceeds the base salary payable to Employee by such new employer, the Company shall pay such excess, in equal bi-monthly installments, through the expiration of such three-month period. All payments made pursuant to this paragraph shall be made in accordance with the Company's standard payroll practices as in effect from time to time, with appropriate deductions required by applicable laws, rules and regulations. In addition, the Company, at its expense, for a period of three months following the date of Disability Termination, will continue medical and dental insurance coverage substantially identical to the coverage maintained by the Company for Employee and his dependents prior to termination of employment, except to the extent such coverage may be changed in its application to all Company employees on a non-discriminatory basis. Such coverage shall cease at the end of such three-month period, or, if earlier, when Employee becomes eligible for substantially similar insurance through other employment prior to the end of such three-month period. (iii) In the event of the death of Employee, the Company shall pay the estate of the Employee or his legal representative the accrued salary and vacation pay due for the period prior to the date of Employee's death. D. TERMINATION BY EMPLOYEE. (i) Notwithstanding the provisions of Section 2 above, Employee will be considered to have resigned his employment for "good reason" in the event of any of the following during the Term: (a) Employee is not elected or retained as Vice President and General Counsel of the Company, or chief legal officer of any successor employer; (b) There is a material diminution in the nature or scope of Employee's authority, powers, functions, duties or responsibilities; (c) There is a substantial and continued reduction in support service, staff, secretarial assistance or office space to a level at which Employee is unable to perform his duties; (d) The Company shall fail to grant the stock options contemplated by Section 4C of this Agreement or the Company shall fail to make any payments (including expense reimbursements) due under this Agreement; or 4 5 (e) any assignee of the Company fails expressly to assume all of the Company's obligations hereunder. (ii) In the event that Employee resigns from his employment for good reason, the Company shall be obligated to provide Employee with the same severance payments, and insurance coverage as required if the Company had terminated Employee other than for cause pursuant to Section 8B above. (iii) In the event that Employee resigns from his employment without good reason, the Company shall be obligated to provide Employee with the payments as required if the Company had terminated Employee for cause pursuant to Section 8A above. 9. REPRESENTATIONS AND WARRANTIES. Each party represents and warrants that such party is not subject to or a party to any agreement, contract, covenant, order or other restriction which in any way prohibits, restricts or impairs such party's ability to enter into this Agreement and carry out such party's duties and obligations hereunder. Each party hereto represents and warrants to the other that (i) such party has the full legal right and power and all authority and approvals required to enter into, execute and deliver this Agreement and to perform fully all of its obligations hereunder (other than approval of the Company's Board of Directors with respect to the grant of stock options); and (ii) this Agreement has been duly executed and delivered by such party and constitutes a valid and binding obligation of such party, enforceable in accordance with its terms. 10. NON-COMPETITION AND SECRECY. 10.1 NO INTERFERENCE. For the period ending twelve (12) months after the later of (i) the termination of Employee's employment and (ii) the expiration of the Term, Employee shall not, whether for his own account or for the account of any other individual, partnership, firm, corporation or other business organization (other than the Company and its affiliates), intentionally solicit, endeavor to entice away from the Company or its affiliates, or otherwise interfere with the relationship of the Company or any of its affiliates with, any person who (to Employee's actual knowledge) is employed by the Company or its affiliates at the time of the termination of Employee's employment and Employee will not intentionally interfere with relationship of the Company or any of its affiliates with any individual, partnership, firm, corporation or other business organization with which the Company or its affiliates had any relationship (of which Employee has actual knowledge) while the Employee was employed by the Company. For purposes of this Section 10.1, an "affiliate" of the Company shall mean any entity directly or indirectly owned at least 50% by the Company. 10.2 SECRECY. Employee recognizes that the services to be performed by him hereunder are special, unique and extraordinary in that, by reason of his employment hereunder, he may acquire confidential information and trade secrets concerning the operation of the Company or any affiliate thereof, the use or disclosure of which could cause the Company substantial loss and damages which could not be readily calculated and for which no remedy at law would be adequate. Accordingly, Employee covenants and agrees with the Company that he will not at any time, except in performance of Employee's obligations to the Company hereunder or with the prior written consent of the Company, directly or indirectly, disclose any secret or confidential information that he may learn or has learned by reason of his association with the 5 6 Company. The term "confidential information" includes, without limitation, information not previously disclosed to the public or to the trade with respect to the products, facilities, applications and methods, trade secrets and other intellectual property, systems, procedures, manuals, confidential reports, product price lists, customer lists, technical information, financial information (including the revenues, costs or profits associated with any of its products), business plans, prospects or opportunities but shall exclude any information already in the public domain. Notwithstanding anything to the contrary herein contained, Employee's obligation to maintain the secrecy and confidentiality of the confidential information under this Section 10.2 shall not apply to any such confidential information disclosed with the prior written consent of the Company duly authorized by its Board of Directors, (ii) disclosed in the course of the proper performance of Employee's duties hereunder, (iii) (x) that becomes generally available to the public other than as a result of unauthorized disclosure by the Employee or his affiliates or (y) that becomes available to Employee subsequent to the termination of his employment hereunder and on a non-confidential basis from a source other than the Company or its subsidiaries who is not bound by a duty of confidentiality, or other contractual, legal or fiduciary obligations to the Company or customers, clients or others having a business relationship with the Company, or (iv) disclosed as required by applicable law or legal process. 10.3 EXCLUSIVE PROPERTY. Employee hereby agrees to keep all such records in connection with Employee's employment as the Company may from time to time direct, and all such records shall be the sole and exclusive property of the Company. Upon termination of Employee's employment, Employee shall return to the Company all confidential and/or proprietary information that exists in written or other physical form (and all copies thereof) under Employee's control, other than Employee's rolodex and personal phone books. 10.4 INJUNCTIVE RELIEF. Without intending to limit the remedies available to the Company, Employee acknowledges that a breach of any of the covenants contained in this Section 10 may result in material irreparable injury to the Company for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach or threat thereof, the Company shall be entitled to seek to obtain a temporary restraining order and/or a preliminary injunction restraining Employee from engaging in activities prohibited by this Section 10 or such other relief as may be required to specifically enforce any of the covenants in this Section 10. 11. SECTION HEADINGS. The titles to the Sections of this Agreement are solely for the convenience of the parties and shall not be used to explain, modify, simplify, or aid in the interpretations of the provisions of this Agreement. 12. NOTICES. All notices, demands and requests provided or permitted to be given pursuant to this Agreement, shall be given in writing, sent by certified mail, return receipt requested, and addressed as follows or to such other address so designated in the appropriate manner by the parties. All notices shall be deemed effective when mailed. 6 7 Company: Source Media, Inc. 5400 LBJ Parkway Suite 680 Dallas, Texas 75240 Attention: Stephen W. Palley With a copy to: Robert L. Winikoff, Esq. Sonnenschein Nath & Rosenthal 1221 Avenue of the Americas New York, New York 10020 Employee: Derrick L. Horner 7002 Boulevard East, Apt. 225C Guttenberg, New Jersey 07093 13. ASSIGNMENT AND ASSUMPTION. The rights of each party under this Agreement are personal to that party and may not be assigned, delegated or transferred to any other person, firm, corporation, or other entity without the prior written consent of the other party, except that the Company may transfer its rights under this Agreement to any affiliate or other entity which succeeds, by contract or operation of law, to all or substantially all of the business of the Company and agrees in writing to assume the Company's obligations under this Agreement. 14. GOVERNING LAW. This Agreement shall be governed by, construed and enforced in accordance with the laws of the State of New York without giving effect to the conflicts of law principles of the laws of said state. 15. ENTIRE AGREEMENT. This Agreement, and the stock option agreement evidencing the stock option referred to in paragraph 4C, shall constitute the entire agreement between the parties and any prior written or oral understanding or representation of any kind, or any oral communications shall not be binding upon either party except to the extent incorporated in this Agreement. This Agreement supercedes any and all prior agreements between the parties. 16. MODIFICATION OF AGREEMENT. This Agreement can be modified only in writing and shall be binding only if executed with and under the same formality by the parties hereto or their duly authorized representatives. 17. NO WAIVER. The failure of either party to this Agreement to insist upon the performance of any of the terms and conditions of this Agreement, or the waiver of any breach of any of the terms and conditions of this Agreement, shall not be construed as thereafter waiving any such terms and conditions, but each same shall continue and remain in full force and effect as if no such forbearance or waiver had occurred. 18. EFFECT OF PARTIAL INVALIDITY. The invalidity or unenforceability of any provision or covenant of this Agreement shall not be deemed to affect the validity or enforceability of any other provision or covenant. In the event that any provision or covenant of 7 8 this Agreement is held invalid or unenforceable, the same shall be deemed automatically modified to the minimum extent necessary to make such provision or covenant enforceable and the parties agree that the remaining provisions shall be deemed to be and to remain in full force and effect. 19. COUNTERPARTS. This Agreement may be executed in counterparts and all counterparts so executed shall constitute one and the same agreement. 20. EXCISE TAX. In the event that any amounts Employee receives or is deemed to receive under this Agreement (whether in respect of stock options, severance or otherwise) would give rise to any excise tax under Section 4999 of the Internal Revenue Code or any similar state or local law, the Company shall make payment to Employee of such amounts as are necessary for Employee to be wholly protected from the costs of any such excise tax (and any attendant income taxes, penalties and/or interest charges). IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. SOURCE MEDIA, INC. By: /s/ Stephen W. Palley ------------------------------------- Stephen W. Palley, President and Chief Executive Officer /s/ Derrick L. Horner ----------------------------------------- DERRICK L. HORNER 8 9 EXHIBIT A GRANT NO. _________ SOURCE MEDIA, INC. 1999 STOCK OPTION PLAN STOCK OPTION AGREEMENT AGREEMENT, dated as of November 6, 2000, between Source Media, Inc., a Delaware corporation (the "Company"), and Derrick L. Horner (the "Optionee"). WITNESSETH: WHEREAS, on August 25, 1999, the Board of Directors of the Company (the "Board") adopted the Source Media, Inc. 1999 Stock Option Plan (the "Plan"), which Plan authorizes the grant of options to purchase shares of the common stock, $0.001 par value ("Common Stock"), of the Company to directors, officers, employees and consultants of the Company and its subsidiaries and to other individuals; and WHEREAS, the Plan was adopted by the stockholders of the Company at the annual meeting of the Company on November 17, 1999; and WHEREAS, the Board has determined that it would be in the best interests of the Company to grant the option documented herein. NOW, THEREFORE, the parties hereto hereby agree as follows: 1. Definitions. The following terms, as used herein, shall have the meanings set forth below: (1) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and any successor thereto and the regulations promulgated thereunder. (2) "Committee" shall mean the Stock Option Committee established by the Board or any other committee of the Board, which the Board may designate to administer the Plan or any portion thereof. If no committee is so designated, then all references in this Agreement to "Committee" shall mean the Board. 2. Grant of Option. Subject to the terms and conditions of the Plan and as set forth herein, the Company hereby grants to the Optionee, as of the date hereof, an option (the "option") to purchase from the Company all or any part of an aggregate number of 150,000 shares of Common Stock (the "Option Shares") with vesting dates as set forth in paragraph 3(a) below. A-1 10 3. Installment Exercise. (1) Subject to such further limitations as are provided in the Plan and as set forth herein and any required approval of the Company's stockholders, the Option shall become exercisable on the dates and at the per share prices ("Option Price") set forth below, the Optionee having the right hereunder to purchase from the Company the indicated number of Option Shares upon exercise of the Option, on and after such dates, in cumulative fashion:
Incentive Non-Qualified Exercise Date Option Shares Option Shares Option Price ------------- ------------- ------------- ------------ November 6, 2001 [ ] [ ] $ November 6, 2002 [ ] [ ] $ November 6, 2003 [ ] [ ] $ November 6, 2004 [ ] [ ] $
(2) Only those Option Shares indicated above as "Incentive Option Shares" are intended by the parties hereto to be, and be treated as, "incentive stock options" (as such term is defined under Section 422 of the Code). (3) The Option may not be exercised with respect to less than 100 Option Shares (or the Option Shares then subject to purchase under the Option, if less than 100 shares) or for any fractional shares. 4. Termination of Option. (1) The Option, to the extent not previously exercised, shall terminate and become null and void upon the expiration of ten years after the date hereof (the "Option Term"). (2) Subject to the provisions of Section 5 hereof, and except as otherwise provided in this Section 4, upon the Optionee's ceasing for any reason to be employed by the Company (such occurrence being a "termination of the Optionee's employment"), the Option, to the extent not previously exercised, shall terminate and become null and void three months after such termination of the Optionee's employment, or upon the expiration of the Option Term, whichever occurs first. (3) If the Optionee's employment is terminated for cause or because the Optionee is in breach of any employment agreement, the Option, to the extent not previously exercised, shall terminate and become null and void immediately upon such termination of the Optionee's employment. (4) Upon a termination of the Optionee's employment by reason of permanent disability (within the meaning of Section 22(e)(3) of the Code) or by reason of the death of the Optionee, the Option, to the extent not previously exercised, shall terminate and become null and void twelve months after such termination of the Optionee's employment, or upon the expiration of the Option Term, whichever occurs first. A-2 11 5. Exerciseability. (1) Except as otherwise provided in this Section 5, upon a termination of the Optionee's employment, the Option shall be exercisable only to the extent that the Option has accrued and is in effect on the date of such termination of the Optionee's employment. (2) Upon a termination of the Optionee's employment by reason of permanent disability (as defined above) or by reason of the death of the Optionee, the Option shall be exercisable with respect to the full number of the Option Shares, whether or not the Optionee was entitled to do so at the date he or she became permanently disabled or at the date of his or her death. To the extent exercisable, the Option may be exercised by a legal representative on behalf of the Optionee in the event of such permanent disability, or, in the case of the death of the Optionee, by the estate of the Optionee or by any person or persons who acquired the right to exercise the Option by bequest or inheritance or by reason of the death of the Optionee. (3) In the event of a change of control, the Option shall become exercisable with respect to the full number of the Option Shares, whether or not the Optionee was entitled to do so at the date of such change of control. (4) For purposes of this Section 5, "change of control" means the happening of any of the following: (A) When any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (other than the Company, a subsidiary of the Company, or a Company employee benefit plan, including any trustee of such plan acting as trustee) that is not a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act, without regard to clause (d)(1) of such Rule) of 5% or more of the Company's capital stock on the date hereof becomes the beneficial owner, directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities entitled to vote generally in the election of directors; or (B) The stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve an agreement for the sale or disposition by the Company of all or substantially all the Company's assets; or A-3 12 (C) A proxy contest for the election of directors of the Company results in the persons constituting the Board immediately prior to the initiation of such proxy contest ceasing to constitute a majority of the Board upon the conclusion of such proxy contest. 6. Manner of Exercise. (1) The Option may be exercised in full at one time or in part from time to time for the number of Option Shares then exercisable by giving written notice, signed by the person exercising the Option, to the Company, stating the number of Option Shares with respect to which the Option is being exercised and the date of exercise thereof. (2) Full payment by the Optionee of the Option Price for the Option Shares purchased shall be made on or before the exercise date specified in the notice of exercise by delivery of (i) cash or a check payable to the order of the Company in an amount equal to such Option Price, (ii) shares of Common Stock owned by the Optionee having a fair market value equal in amount to such Option Price, or (iii) any combination of the preceding clauses (i) and (ii). (3) The Company shall be under no obligation to issue any Option Shares unless the person exercising the Option, in whole or in part, shall give a written representation and undertaking to the Company which is satisfactory in form and substance to counsel for the Company and upon which, in the opinion of such counsel, the Company may reasonably rely, that he or she is acquiring such Option Shares for his or her own account as an investment and not with a view to, or for sale in connection with, the distribution of any such Option Shares, and that he or she will make no transfer of the same except in compliance with any rules and regulations in force at the time of such transfer under the Securities Act of 1933, or any other applicable law. (4) Upon exercise of the Option in the manner prescribed by this Section 6, delivery of a certificate for the Option Shares then being purchased shall be made at the principal office of the Company to the person exercising the Option within a reasonable time after the date of exercise specified in the notice of exercise. 7. Non-Transferability of Option. The Option shall not be assignable or transferable by the Optionee other than by will or the laws of descent, and shall be exercisable during the lifetime of the Optionee only by the Optionee. The Option shall terminate and become null and void immediately upon the bankruptcy of the Optionee, or upon any attempted assignment or transfer except as herein provided, including without limitation, any purported assignment, whether voluntary or by operation of law, pledge, hypothecation or other disposition, attachment, trustee process or similar process, whether legal or equitable, upon the Option. 8. No Special Employment Rights. Neither the granting of the Option nor its exercise shall be construed to confer upon the Optionee any right with respect to the continuation of his or her employment by the Company (or any subsidiary of the Company) or interfere in any way with the right of the Company (or any subsidiary of the Company), subject to the terms of any separate employment agreement to the contrary, at any time to terminate such employment or to increase or decrease the compensation of the Optionee from the rate in existence as of the date hereof. A-4 13 9. No Rights of Stockholder. The Optionee shall not be deemed for any purpose to be a stockholder of the Company with respect to the Option except to the extent that the Option shall have been exercised with respect thereto and, in addition, a stock certificate shall have been issued theretofore and delivered to the Optionee. 10. Amendment. Subject to the terms and conditions of the Plan, the Board or the Committee, whichever shall then have authority to administer the Plan, may amend this Agreement with the consent of the Optionee when and subject to such conditions as are deemed to be in the best interests of the Company and in accordance with the purposes of the Plan. 11. Notices. Any communication or notice required or permitted to be given hereunder shall be in writing, and, if to the Company, to its principal place of business, attention: Secretary, and, if to the Optionee, to the address as appearing on the records of the Company. Such communication or notice shall be deemed given if and when (a) properly addressed and posted by registered or certified mail, postage prepaid, or (b) delivered by hand. 12. Incorporation of Plan by Reference. The Option is granted pursuant to the terms of the Plan, the terms of which are incorporated herein by reference, and the Option shall in all respects be interpreted in accordance with the Plan. The Board or the Committee, whichever shall then have authority to administer the Plan, shall interpret and construe the Plan and this Agreement, and their interpretations and determinations shall be conclusive and binding upon the parties hereto and any other person claiming an interest hereunder, with respect to any issue arising hereunder or thereunder. 13. Governing Law. The validity, construction and interpretation of this Agreement shall be governed by and determined in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the undersigned have executed this Stock Option Agreement as of the date above written. SOURCE MEDIA, INC. By: ----------------------------- Name: Stephen W. Palley Title: Chief Executive Officer OPTIONEE: -------------------------------- DERRICK L. HORNER A-5 EX-27 5 d81825ex27.txt FINANCIAL DATA SCHEDULE
5 1,000 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 13,171 339 2,046 558 0 42,419 11,149 9,953 57,108 10,393 88,533 8,426 0 18 (53,242) 57,108 14,349 14,349 9,202 9,202 10,805 0 8,926 57,368 0 57,368 0 4,239 0 67,250 4.04 3.87
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