-----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, JFH6BBWDLnxsOuqz2+EpizL+P6YZheRRuq9tVwSlfZKiiS+3InyeiLG7aJInlE6n t6bQIiAV59jexWYk252vTQ== 0000950134-99-004395.txt : 19990518 0000950134-99-004395.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950134-99-004395 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOURCE MEDIA INC CENTRAL INDEX KEY: 0000900029 STANDARD INDUSTRIAL CLASSIFICATION: TELEGRAPH & OTHER MESSAGE COMMUNICATIONS [4822] IRS NUMBER: 133700438 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-21894 FILM NUMBER: 99627152 BUSINESS ADDRESS: STREET 1: 5400 LBJ FREEWAY STE 680 CITY: DALLAS STATE: TX ZIP: 75231 BUSINESS PHONE: 9727015400 MAIL ADDRESS: STREET 1: 5400 LBJ FREEWAY STE 680 CITY: DALLAS STATE: TX ZIP: 75231 FORMER COMPANY: FORMER CONFORMED NAME: HB COMMUNICATIONS ACQUISITION CORP DATE OF NAME CHANGE: 19950703 10-Q 1 FORM 10-Q FOR QUARTER ENDED MARCH 31, 1999 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ....... to ....... Commission File Number 0-21894 SOURCE MEDIA, INC. (Exact Name of Registrant as Specified in its Charter) Delaware 13-3700438 (State of Incorporation) (I.R.S. Employer Identification Number) 5400 LBJ Freeway, Suite 680 Dallas, Texas 75240 (Address of Principal Executive Offices) (972) 701-5400 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Number of shares of Common Stock outstanding at May 7, 1999: 13,354,018 2 SOURCE MEDIA, INC. FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 1999
PART I. FINANCIAL INFORMATION Page Number Item 1. Consolidated Financial Statements Consolidated Balance Sheets (Unaudited) December 31, 1998 and March 31, 1999 3-4 Consolidated Statements of Operations (Unaudited) Three months ended March 31, 1998 and 1999 5 Consolidated Statements of Cash Flows (Unaudited) Three months ended March 31, 1998 and 1999 6 Notes to Consolidated Financial Statements (Unaudited) 7-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14-20 Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 PART II. OTHER INFORMATION Item 1. Legal Proceedings 20-22 Item 2. Changes in Securities and Use of Proceeds N/A Item 3. Defaults Upon Senior Securities N/A Item 4. Submission of Matters to a Vote of Security Holders N/A Item 5. Other Information N/A Item 6. Exhibits and Reports on Form 8-K 22
2 3 PART I - FINANCIAL INFORMATION SOURCE MEDIA, INC. CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED)
DECEMBER 31, MARCH 31, 1998 1999 ----------- --------- ASSETS Current assets: Cash and cash equivalents $11,662 $ 9,336 Restricted investments 11,716 11,870 Trade accounts receivable, less allowance for doubtful accounts of $387 and $173 in 1998 and 1999, respectively 3,596 3,062 Deferred expenses 447 304 Prepaid expenses and other current assets 937 1,154 ------- ------- Total current assets 28,358 25,726 Property and equipment: Production equipment 6,050 6,123 Computer equipment 3,273 3,298 Other equipment 1,150 1,256 Furniture and fixtures 660 660 ------- ------- 11,133 11,337 Accumulated depreciation 6,733 7,402 ------- ------- Net property and equipment 4,400 3,935 Intangible assets: Patents 14,945 14,945 Goodwill 6,698 6,698 Contract rights 11,933 11,933 ------- ------- 33,576 33,576 Accumulated amortization 14,557 15,793 ------- ------- Net intangible assets 19,019 17,783 Other non-current assets 4,812 4,606 ------- ------- Total assets $56,589 $52,050 ======= =======
3 4 SOURCE MEDIA, INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) (IN THOUSANDS) (UNAUDITED)
DECEMBER 31, MARCH 31, 1998 1999 ----------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) Current liabilities: Trade accounts payable $ 2,501 $ 1,326 Accrued interest 2,000 5,000 Accrued payroll 540 757 Other accrued liabilities 1,619 1,621 Unearned income 1,750 1,796 --------- --------- Total current liabilities 8,410 10,500 Long-term debt 100,000 100,000 Minority interests in consolidated subsidiaries 3,840 3,840 Note receivable and accrued interest from minority stockholder, net of discount of $53 and $43 in 1998 and 1999, respectively (780) (794) --------- --------- 3,060 3,046 Senior redeemable payment-in-kind (PIK) preferred stock, $25 liquidation preference, $.001 par value, net of discount Authorized shares - 1,712; Issued and outstanding shares 914 and 944 in 1998 and 1999, respectively 16,628 17,344 Stockholders' equity (capital deficiency): Common stock, $.001 par value: Authorized shares - 50,000 Issued shares - 13,021 and 13,422 in 1998 and 1999, respectively 13 13 Less treasury stock, at cost - 280 and 280 in 1998 and 1999, respectively (2,770) (2,770) Capital in excess of par value 80,269 81,234 Accumulated deficit (148,943) (157,238) Notes receivable and accrued interest from stockholders (78) (79) --------- --------- Total stockholders' equity (capital deficiency) (71,509) (78,840) --------- --------- Total liabilities and stockholders' equity (capital deficiency) $ 56,589 $ 52,050 ========= =========
See accompanying notes. 4 5 SOURCE MEDIA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS THREE MONTHS ENDED ENDED MARCH 31, MARCH 31, 1998 1999 ------------------------------ Monetary revenues $ 5,191 $ 4,943 Nonmonetary revenues 675 409 -------- -------- Total revenues 5,866 5,352 Monetary cost of sales 2,305 2,697 Nonmonetary cost of sales 675 409 -------- -------- Total cost of sales 2,980 3,106 -------- -------- Gross profit 2,886 2,246 Selling, general and administrative expenses 5,618 5,550 Amortization of intangible assets 2,621 1,236 Research and development expenses 754 830 -------- -------- 8,993 7,616 -------- -------- Operating loss (6,107) (5,370) Interest expense 3,241 3,209 Interest income (628) (282) Other (income) expense (21) (2) -------- -------- Net loss ($ 8,699) ($ 8,295) Preferred stock dividends 766 716 -------- -------- Net loss attributable to common stockholders (9,465) (9,011) ======== ======== Basic and diluted net loss per common share ($ 0.79) ($ 0.70) ======== ======== Weighted average common shares outstanding 11,983 12,830 ======== ========
See accompanying notes. 5 6 SOURCE MEDIA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 1998 1999 -------- -------- OPERATING ACTIVITIES Net loss ($ 8,699) ($ 8,295) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 610 669 Amortization of intangible assets 2,621 1,236 Stock based compensation 233 408 Non-cash interest expense 238 206 Non-cash interest income (317) (154) Provision for losses on accounts receivable 211 150 Other, net (15) (15) Changes in operating assets and liabilities: Trade accounts receivable (1,796) 384 Prepaid expenses and other assets (72) (217) Deferred expenses (19) 143 Trade accounts payable and accrued liabilities 2,811 2,044 Unearned income 292 46 -------- -------- Net cash used in operating activities (3,902) (3,395) INVESTING ACTIVITIES Capital expenditures (569) (204) Redemption of short-term investments 2,302 -- Capitalized acquisition costs (2) -- -------- -------- Net cash provided by (used in) investing activities 1,731 (204) FINANCING ACTIVITIES Payments of financing fees and expenses (168) -- Proceeds from issuance of common stock upon exercise of stock options and warrants 194 1,273 Other 27 -- -------- -------- Net cash provided by financing activities 53 1,273 Net decrease in cash and cash equivalents (2,118) (2,326) Cash and cash equivalents at beginning of period 8,431 11,662 -------- -------- Cash and cash equivalents at end of period $ 6,313 $ 9,336 ======== ========
See accompanying notes. 6 7 SOURCE MEDIA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Unless the context otherwise requires, all references to the "Company" or "Source" include Source Media, Inc. and its wholly-owned subsidiaries, IT Network, Inc. ("IT Network"), Interactive Channel, Inc. ("Interactive Channel"), SMI Holdings, Inc. ("Holdings"), and Interactive Channel Technologies, Inc., marketed under the name of VirtualModem(TM) ("ICT" formerly known as Cableshare, Inc.). 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, these financial statements include all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position, results of operations and cash flows of the Company and its consolidated subsidiaries for the periods indicated. Operating results for the three months ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. The balance sheet at December 31, 1998, has been derived from the audited financial statements at that date. For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. 2. Computation of Net Loss Per Common Share Net loss per common share is calculated in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share". Dilutive earnings per share has not been presented because the options and warrants are anti-dilutive. 3. Translation of Foreign Currencies The financial positions and results of operations of ICT and the numbered company, 997758 Ontario, Inc. are measured using local currency (Canadian dollar) as the functional currency. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each balance sheet date. Statement of operations accounts are translated at the average rate of exchange prevailing during the period. Translation adjustments and foreign currency gains and losses have not been significant and accordingly, have not been separately presented. 4. Commitments and Contingencies On May 11, 1998, ICT and Holdings filed an action in U.S. District Court for the District of Delaware against WorldGate Communications, Inc. ("WorldGate") alleging that WorldGate has infringed four of the Company's patents. Each party has filed a Motion to Dismiss certain claims and no date has been set for a hearing by the district court. The Company intends to aggressively defend its patents. 7 8 On January 11, 1999, Brite Voice Systems, Inc. ("Brite") filed a lawsuit against IT Network, Inc. and Source Media, Inc. (together with IT Network, the "Defendants") in the United States District Court for the District of Kansas. Brite alleged three claims against Defendants: (1) breach of a September 23, 1997 Asset Purchase Agreement for which Brite seeks recovery of alleged damages in an amount in excess of $111,950.18; (2) breach of an October 30, 1997 Lease and Service Agreement in connection with the September 23, 1997 Asset Purchase Agreement, for which Brite seeks recovery of alleged damages in the amount of $30,472.53; and (3) declaratory judgment pursuant to which Brite seeks a declaration of rights in connection with all indemnity claims of which IT Network has provided Brite written notice pursuant to the September 23, 1997 Asset Purchase Agreement. On April 23, 1999, the Company and Brite executed a Settlement Agreement resulting in Brite voluntarily dismissing the case with prejudice. The terms of the settlement are confidential, but do not adversely affect the Company's results of operations or its financial condition. A total of fourteen class action complaints were filed against Source Media, Inc. and certain of its officers and directors in the United States District Court for the Northern District of Texas asserting violations of sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 of the accompanying regulations. The fourteen complaints were consolidated by Judge Buchmeyer into the first filed case, Hartsell, et al. v. Source Media, Inc., et al., Civil Action No. 398-CV-1980-R (filed August 21, 1998), on October 9, 1998. Plaintiffs filed a motion for the appointment of lead plaintiff and lead plaintiffs' lead counsel on October 20, 1998. Plaintiff proposed the appointment of three law firms to serve as "Co-Lead Counsel," Weiss & Yourman, Abbey, Gardy & Squitieri, and Milberg Weiss Bershad Hynes & Lerach, LLC. On November 12, 1998, defendants filed a statement of non-opposition to plaintiffs' motion. The Court granted plaintiffs' motion on January 5, 1999. Plaintiffs filed a consolidated amended complaint on March 3, 1999. Defendants filed a motion to dismiss the consolidated amended complaint on April 19, 1999. Plaintiffs' opposition to the motion is due on May 24, 1999, and defendants' reply brief is due on June 14, 1999. The Court has not yet set a hearing date for the motion. A trial date is expected to be set sometime during the first half of 2000. On July 17, 1998, IT Network, Inc. filed a lawsuit against a former employee of Brite Voice Systems, Inc., Michael Shell ("Shell"), the two companies he founded, Interactive Media Services, Inc. ("IMS") and Interactive Information Services, LLC ("IIS"), and a third company called Talking Directories, Inc. ("TDI"). The lawsuit was filed in the Western District of Michigan and alleged two causes of action, one for copyright infringement against all of the defendants arising out of the defendants' alleged use of IT Network's 1997 BDR Audio Guide (the "Catalogue") and the thousands of narrative scripts that correspond to the subject matter categories contained in the Catalogue (the "Scripts"), and a second for breach of contract against TDI arising out of TDI's alleged wrongful termination of its information services contract with IT Network. IT Network moved for a preliminary injunction on July 17, 1998. The Court granted IT Network's motion on August 14, 1998, preliminarily enjoining the defendants from further infringing IT Network's Catalogue and Scripts. On December 4, 1998, the defendants moved to set aside the preliminary injunction as to the Catalogue on the ground that they had new evidence that IT Network did not own the Catalogue and therefore could not enforce a copyright in it. IT Network filed an opposition to defendants' motion on January 8, 1999. To date, there has been no ruling on the motion. 8 9 On December 3, 1998, IT Network filed a First Amended Complaint which added a new claim against Shell, IMS and IIS for copyright infringement of certain proprietary satellite broadcast software IT Network acquired from Brite. IT Network moved for a preliminary injunction on the software on December 28, 1998. Defendants filed an opposition to the motion on January 27, 1999, and IT Network filed a reply brief on March 1, 1999. Oral argument has not yet been scheduled. On April 21, 1999, TDI filed a motion to compel arbitration of the breach of contract claim. By stipulation of the parties, IT Network's opposition to that motion is due on June 7, 1999. Discovery in the case is underway, and a trial date has been set for November, 8, 1999. On October 6, 1998, Advanced Interactive, Inc. filed a complaint in U.S. District Court for the Northern District of Illinois, Eastern Division, against ICT and the following companies: Matsushita Electric Corporation, Matsushita Electric Industrial Co., Ltd., Sharp Electronics Corp., Sharp Corp., Thomson Consumer Electronics, Toshiba Consumer Products, Inc., Toshiba America, Inc., Toshiba Corporation, General Instruments Corp., Scientific Atlanta, Inc., ATI Technologies, Inc., ADS Technologies Inc., Gateway 2000, Inc., STB Systems, Inc., Hauppauge Computer Works, Inc., WebTV Networks, Inc. and WorldGate Communications, Inc. (collectively the "Defendants"). Advanced Interactive alleges that ICT infringed two claims of one of its patents by manufacturing, using and/or selling or offering to sell "Sourceware(TM) ChannelLink(TM)". The same allegation is made against each Defendant for its particular product or service. The Plaintiff seeks damages, but makes no claims against the patents of ICT or any other Defendant. ICT, and each of the Defendants, have filed an Answer and have collectively joined the Motion for Partial Summary Judgment submitted by Matsushita Electric Corporation of America, Sharp Electronics Corp., Sharp Corp. and the Toshiba Defendants. The court has not yet considered the Defendant's collective Motion for Partial Summary Judgment. The Company believes this case is totally without merit and intends to vigorously defend itself. In addition, the Company is aware of certain claims against the Company that have not developed into litigation, or if they have, are dormant, and in any case are not expected to have a material adverse affect on the Company. Further, the Company is party to ordinary routine litigation, none of which is expected to have a material adverse effect on the Company's results of operations or its financial condition. The Company has employment agreements with three executives. The agreements provide that the Company will pay a base salary amount and grant stock options over a set term to the employees. In the event of a termination without cause, the Company remains obligated to make certain payments as defined in the agreements. Two contracts terminate in 1999 and the third in 2002. On February 11, 1999, the Company signed a Letter of Intent with Prevue Ventures, Inc. to enter into a joint venture. The Letter of Intent requires that the parties negotiate the definitive documents in good faith, with commercially reasonable efforts, and exclusively with each other for 90 days. If either the Company or Prevue fails to use its good faith commercially reasonable efforts as such, the other has agreed to pay as liquidated damages $3.0 million plus out-of-pocket costs and expenses associated with due diligence and negotiation. In addition, the Company has agreed to pay such liquidated damages and costs and expenses if it breaches the exclusivity agreement prior to execution of definitive documents and, within 240 days after the execution of the Letter of Intent, enters into a significant transaction with a third party. 9 10 Upon the execution of definitive documents, the Company intends to seek the approval of its common stockholders, as well as the approval of the holders of its long-term debt and preferred stock. The consummation of the definitive documents will also be subject to any required clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("Hart-Scott"). If for any reason the transaction is not consummated after the execution of definitive documents, other than a failure to satisfy the condition relating to Hart-Scott, the Company would be required to grant to Prevue a perpetual and non-exclusive license to the Company's intellectual property. Such license would require payments of royalties to the Company in an amount equal to .001% of revenues attributable to the intellectual property, but in no event less than $50,000 annually. If the transaction is not consummated after the execution of definitive documents as a result of the Company's breach of the exclusivity agreement and the Company enters into a significant transaction with a third party within one year after the execution of the Letter of Intent, in addition to such non-exclusive license grant, the Company would be required to pay Prevue as liquidated damages $10.0 million plus out-of-pocket costs and expenses, provide for two Prevue representatives on a seven-member Board of Directors of the Company and issue to Prevue five-year warrants to acquire 3,208,700 shares of the Company's common stock at an exercise price of $7.125 per share. 5. Long-Term Debt On October 30, 1997, the Company issued Senior Secured Notes (the "Senior Secured Notes", or the "Notes"), in the principal amount of $100 million, which bear interest at the rate of 12% per annum through November 1, 2004. Interest on the Notes is payable semi-annually on May 1 and November 1 of each year commencing on May 1, 1998, to holders of record at the close of business on April 15th or October 15th immediately preceding the interest payment date. The Company placed approximately $22.6 million of the net proceeds from the offering, representing funds sufficient, together with interest thereon, to pay the first four interest payments on the Notes, into an escrow account. At March 31, 1999, $11.9 million remains in escrow to pay the interest due in 1999. The Notes are fully and unconditionally guaranteed, jointly and severally, by each of the Company's subsidiaries (the "Subsidiary Guarantors"). The guarantees are senior obligations of the Subsidiary Guarantors and are secured by substantially all of the assets of the Subsidiary Guarantors. The guarantees rank pari passu in right of payment with all existing and future senior indebtedness of the Subsidiary Guarantors and rank senior in right of payment to all existing and future subordinated obligations of the Subsidiary Guarantors. The guarantees may be released upon the occurrence of certain events. The guarantee executed by IT Network contains a covenant that restricts payments of dividends on its capital stock to an amount sufficient to cover debt service on the Notes, redemptions or repurchases of the Notes or the Senior Preferred Stock (the "Preferred Stock"), dividends on the Preferred Stock and corporate overhead. The assets of Source consist solely of investments in its subsidiaries and invested proceeds from the Notes and the Senior PIK Preferred Stock and related warrants. Financial statements for the Subsidiary Guarantors and the parent, Source Media, Inc., are not presented because management has determined that they would not be material to investors. Except as described below, the Company may not redeem the Notes prior to November 1, 2001. On or after such date, the Company may redeem the Notes, in whole or in part, at any time, at various redemption prices set forth in the indenture governing the sale of the Notes, 10 11 together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time and from time to time on or prior to November 1, 2000, the Company may, subject to certain requirements, redeem up to 35% of the aggregate principal amount of the Notes with the cash proceeds of one or more equity offerings at a redemption price equal to 112% of the principal amount to be redeemed, together with accrued and unpaid interest, if any, to the date of redemption, provided, that, at least $65.0 million of the aggregate principal amount of the Notes remain outstanding immediately after each such redemption. The Notes are not subject to any sinking fund requirement. Upon the occurrence of a change in control, the Company will be required to make an offer to repurchase the Notes at a price equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of the repurchase. The indenture contains certain covenants including, but not limited to, limitations on indebtedness, restricted payments, liens, restrictions on distributions from restricted subsidiaries, sales of assets and subsidiary stock, affiliate transactions, issuances of capital stock of restricted subsidiaries and sale/leaseback transactions. As of March 31, 1999, the dealer quoted value of a Note was $0.75 per dollar resulting in an aggregate fair market value of approximately $75.0 million. 6. Senior PIK Preferred Stock On October 30, 1997, the Company issued 800 units (the Units) for an aggregate purchase price of $20 million, each Unit consisting of 1,000 shares of non-voting Preferred Stock with a liquidation preference of $25.00 per share and 558.75 warrants (the "October 1997 Warrants") to purchase one share of the Company's common stock at a purchase price of $0.01 per share. In the aggregate, the October 1997 Warrants represent the right to purchase 447,000 shares of common stock. The Units were sold in connection with the Company's acquisitions of certain assets. Dividends on the Preferred Stock are payable quarterly on each February 1, May 1, August 1 and November 1, commencing February 1, 1998, at an annual rate of 13 1/2% of the liquidation preference per share. At the Company's option, on any dividend payment date occurring on or prior to November 1, 2002 dividends may be paid either in cash or by the issuance of additional shares of Preferred Stock with a liquidation preference equal to the amount of such dividends; thereafter, dividends will be paid in cash. The certificate of designation governing the sale of the Units limits the amount of cash dividends that may be paid on the Preferred Stock. At any time and from time to time on or prior to November 1, 2000, the Company may, subject to certain requirements, redeem up to 35% of the aggregate liquidation value of the Preferred Stock with the cash proceeds of one or more equity offerings at a redemption price equal to 113 1/2% of the liquidation preference thereof, plus accumulated dividends, on the date of redemption. After November 1, 2000 and prior to November 1, 2002, the Preferred Stock is not redeemable. On or after November 1, 2002, the Company may redeem the Preferred Stock, in whole or in part, at any time, at various redemption prices, plus accumulated and unpaid dividends, to the date of redemption. Upon the occurrence of a change in control, the Company will be required to make an offer to purchase the outstanding shares of the Preferred Stock at a price equal to 101% of the liquidation preference thereof, plus accumulated and unpaid dividends, to the date of purchase. The Preferred Stock will be subject to mandatory redemption in whole on November 1, 2007, at a price equal to 100% of the then effective liquidation preference thereof, plus, without duplication, all accrued and unpaid dividends to the date of redemption. The certificate of designation contains certain covenants including, but not limited to, limitations on indebtedness, restricted payments, affiliate transactions, issuances of capital stock of restricted subsidiaries and sale/leaseback transactions. 11 12 The Preferred Stock ranks senior to all classes of common stock and to each other class of capital stock or series of preferred stock with respect to dividend rights and rights on liquidation, winding-up and dissolution of the Company. The Preferred Stock is non-voting except in certain circumstances. The Company may not authorize any new class of preferred stock that ranks senior or pari passu to the Preferred Stock without the approval of the holders of at least a majority of the shares of Preferred Stock then outstanding, voting or consenting, as the case may be, as one class, provided, however, that the Company can issue additional shares of Preferred Stock to satisfy dividend payments on outstanding shares of Preferred Stock; and further provided that the Company can issue shares of preferred stock ranking pari passu with the Preferred Stock if after giving effect thereto, the Consolidated Coverage Ratio, as defined in the certificate of designation, is greater than 1.7 to 1.0. The estimated fair market value of the October 1997 Warrants, which was estimated to be approximately $5.5 million, was credited to capital in excess of par value and the Preferred Stock was recorded at a corresponding discount. Additionally, $1.2 million of issuance costs were recorded on the Preferred Stock. The discount and issuance costs on the Preferred Stock are being accreted as additional preferred stock dividends using the effective dividend rate method over a ten year period, resulting in an effective dividend rate of 19.9%. As of March 31, 1999 the dealer quoted fair market value of the preferred stock was $17.50 per share for an aggregate value of $16.5 million. On February 1, 1998 and 1999, the quarterly dividends due on the Preferred Stock were paid through the issuance of additional Preferred Stock having a liquidation preference of $0.7 million and $0.8 million, respectively, with terms identical to those of the Preferred Stock. The estimated fair market value of the stock issued in lieu of a cash payment on February 1, 1998 and 1999 was approximately $0.5 million and $0.6 million, respectively, which was recorded as preferred stock dividends. 8. Stock Based Compensation The Company has granted stock options to employees in excess of shares authorized by the shareholders at the date of grant. The portion of unauthorized options are treated as a variable compensation plan through the date the shares are authorized by shareholders. The Company recognizes stock compensation expense over the vesting period of the related options. Total non-cash stock based compensation for the three months ended March 31, 1998 and 1999 amounted to $0.2 million and $0.4 million, respectively. 9. Segment Reporting The Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131") in the year ended December 31, 1998. In accordance with SFAS 131, the Company has identified two reportable operating segments, IT Network and Interactive TV, for disclosure purposes. These two segments are regularly reviewed by the Company's management for determination of the allocation of resources to these businesses. 12 13 IT Network sells advertising and related support services to clients who sponsor a promotional message with interactive content supplied primarily by IT Network. Interactive TV has designed and is developing proprietary software and interactive programming services that can enable digital, two-way television systems equipped with digital (or advanced analog) set-top boxes to deliver two-way, interactive programming with the touch of a set-top remote or the use of a wireless keyboard. The total revenues, expenses and assets by reportable operating segments are used in the Company's operations and do not include general corporate overhead and assets not allocated to the operating units. These assets and expenses have been separately disclosed for reconciliation purposes.
Three Months Ended March 31, 1998 1999 ---- ---- (IN THOUSANDS) Monetary revenues: IT Network $ 5,110 $ 4,901 Interactive TV 81 42 -------- -------- Total monetary revenues $ 5,191 $ 4,943 ======== ======== Nonmonetary revenues: IT Network $ 675 $ 409 Interactive TV -- -- -------- -------- Total nonmonetary revenues $ 675 $ 409 ======== ======== Net revenues: IT Network $ 5,785 $ 5,310 Interactive TV 81 42 -------- -------- Total net revenues $ 5,866 $ 5,352 ======== ======== Operating Loss: IT Network $ (2,168) $ (976) Interactive TV (2,835) (2,685) Corporate (1,104) (1,709) -------- -------- Total operating loss $ (6,107) $ (5,370) ======== ======== December 31, 1998 March 31, 1999 ----------------- -------------- Identifiable assets: IT Network $ 19,408 $ 19,203 Interactive TV 8,401 7,276 Corporate 28,780 25,571 -------- -------- Total identifiable assets $ 56,589 $ 52,050 ======== ========
13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Unless the context otherwise requires, all references to the "Company" or "Source" include Source Media, Inc. and its wholly-owned subsidiaries, IT Network, Inc. ("IT Network"), Interactive Channel, Inc. ("Interactive Channel"), SMI Holdings, Inc. ("Holdings"), and Interactive Channel Technologies, Inc., marketed under the name of VirtualModem(TM) ("ICT" formerly known as Cableshare, Inc.). FORWARD LOOKING INFORMATION AND RISK FACTORS The Company or its representatives from time to time may make, or may have made, certain forward-looking statements, whether orally or in writing, including without limitation any such statements made, or to be made, in the Management's Discussion and Analysis of Financial Condition and Results of Operations, press releases and other information contained in its various filings with the Securities and Exchange Commission. The Company wishes to ensure that such statements are accompanied by meaningful cautionary statements, so as to ensure to the fullest extent possible the protections of the "safe harbor" established in the Private Securities Litigation Reform Act of 1995. Accordingly, such statements are qualified in their entirety by reference to, and are accompanied by, the following discussion of certain important factors that could cause actual results to differ materially from those projected in such forward-looking statements. The Company cautions you that this list of factors does not describe all of the risks of an investment in our common stock. We operate in a rapidly changing business environment, and new risk factors continually emerge. We cannot predict every risk factor, nor can we assess the impact of all these risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ from those projected in any forward-looking statements. Accordingly, you should not rely upon forward-looking statements as a prediction of our actual results. Among the factors that could cause actual results to differ materially from the Company's expectations are the Company's high degree of leverage and its ability to service debt, the need for additional financing, the Company may not have sufficient collateral to repay its indebtedness in full, the potential for a change of control that would require the Company to purchase their notes and preferred stock, historical and projected losses, risks related to the proposed transaction with Prevue, access to channels on cable systems and uncertainty of subscriber acceptance, the uncertainty of a market for interactive television, the availability of programming, our reliance on proprietary technology, the further technical development needed to improve the economics of deploying interactive television to multiple cable systems, a delay in digital roll-out, the integration of technology with digital set-top boxes, competition within the industry, the evolving nature of business, anti-takeover effects of a shareholder rights plan, stock volatility, the market price of the Company's common stock, the Company's ability to resolve Year 2000 issues in a timely manner, reliance on key personnel, government regulation and other factors discussed from time to time in the Company's Annual Report on Form 10-K and other Securities and Exchange Commission filings. 14 15 GENERAL Source Media, Inc. operates through its subsidiaries SMI Holdings, Inc., IT Network, Inc. Interactive Channel, Inc., and Interactive Channel Technologies Inc. in two business segments: IT Network and Interactive TV. IT Network sells advertising and related support services to clients who sponsor a promotional message with interactive content supplied or otherwise managed by IT Network. IT Network's products and services are distributed primarily through the Company's Publisher Partners which include Yellow Page directories and daily newspapers. IT Network's products and services are available in North America, Hawaii and the Caribbean. Products and services are also promoted and distributed over radio, television and the Internet. The Company's Interactive TV business consists of the combined efforts of the Interactive Channel and ICT subsidiaries. The Company has designed and is developing proprietary software and interactive programming services that can enable digital, two-way television systems equipped with digital (or advanced analog) set-top boxes to deliver two-way, interactive programming with the touch of a set-top remote or the use of a wireless keyboard. On January 14, 1997, the Company acquired all of the outstanding shares that it did not already own of ICT in exchange for 1,390,000 shares of the Company's common stock, making ICT a wholly-owned subsidiary of the Company. Holdings owns all the patents and the proprietary technology utilized by the Company for the Interactive Channel. ICT developed the Company's patented technology and provides research and development services for the Company. The Company's historical consolidated results of operations and financial condition include ICT as the Company owned a majority interest in ICT before the acquisition of the remaining interest. On October 30, 1997, the Company purchased certain of the electronic publishing assets of Brite for $35.6 million and certain of the assets of VNN, a unit of Tribune Company, for $9.0 million. Throughout the second quarter of 1998, a significant portion of the customer contracts purchased in the Brite acquisition were cancelled or not renewed. As a result, the Company reviewed the value assigned to the contract rights and certain related intangible assets acquired in the Brite purchase and found them, along with the goodwill associated with the Brite acquisition, to be impaired, resulting in a write-off of $25.9 million in the second quarter of 1998. On February 11, 1999 the Company and Prevue Ventures, Inc. and its parent, UV Ventures, Inc. (collectively, "Prevue") executed a Letter of Intent to form a joint venture ("Newco") to exploit the Company's Interactive TV line of business. The Letter of Intent is subject to the execution of definitive documentation, including representations and warranties, covenants and conditions to closing. There can be no assurance that the Company and Prevue will be able to agree on the form of such definitive documents or that, if agreed upon, the transaction will be consummated. See further discussion in the Company's Form 10-K, Item 1 - Business. THREE MONTHS ENDED MARCH 31, 1999 AND 1998 Monetary revenues decreased 5% to $4.9 million for the three months ended March 31, 1999 from $5.2 million for the same period in 1998. This decrease is primarily due to decreases 15 16 of $0.9 million in system management and information services offset by an increase of $0.6 million in advertising sales. The decrease in system management and information services is attributable to increased industry competition, customers migrating to their own systems and year 2000 hardware issues at customers. Advertising sales increased primarily from sales under certain new advertising agreements in 1999 under which revenue is earned at the time of the directory distribution. Monetary cost of sales increased 17% to $2.7 million for the three months ended March 31, 1999 from $2.3 million for the same period in 1998 as a result of $0.6 million of communications, content and page costs related to the increased advertising sales partially offset by $0.2 million of cost savings in Interactive TV in 1999 due to the completion of the Colorado Springs analog pilot in the first quarter of 1998. Nonmonetary revenues and nonmonetary cost of sales declined 39% to $0.4 million for the three months ended March 31, 1999 from $0.7 million for three months ended March 31, 1998 as the Company continues to reevaluate its focus on barter business. Nonmonetary sales account for 8% of revenues for the three months ended March 31, 1999 compared to 12% of revenues for the same period in 1998. SG&A expenses remained unchanged at $5.6 million for the three months ended March 31, 1999 and 1998. Increased expenses of $0.2 million of non-cash variable compensation expense for certain stock options granted to employees in excess of shares authorized and increased legal fees of $0.2 million, were offset by the elimination of transition costs reported in the year earlier period for the integration of acquired businesses. Amortization of intangible assets declined by 53% to $1.2 million for the three months ended March 31, 1999 from $2.6 million for the same period in 1998 due to a lower intangible asset balance resulting from the write-off in second quarter 1998 of certain intangible assets related to the Brite acquisition described in the Company's Form 10-K. Research and development expenses increased 10% from $0.7 million for the three months ended 1998 to $0.8 million for the same period in 1998 as a result of license fees and the development of the Company's Internet products. Interest expense remained essentially unchanged at $3.2 million for the three months ended March 31, 1999 and 1998. This expense is associated with a $100 million debt financing completed by the Company in October 1997 and described in detail in the Notes to Consolidated Financial Statements. Interest income decreased 55% to $0.3 million for the three months ended March 31, 1999 from $0.6 million for the same period in 1998 due to lower cash balances as a result of debt interest payments and normal operating expenditures. PIK preferred stock dividends of $0.7 million and $0.8 million for the three months ended March 31, 1999 and 1998, respectively, relate to a $20 million PIK preferred stock financing completed by the Company in October 1997 and described in detail in the Notes to Consolidated Financial Statements. 16 17 LIQUIDITY AND CAPITAL RESOURCES Since its inception, the Company has experienced substantial operating losses and net losses as a result of its efforts to develop, deploy and support IT Network and develop, conduct trials and commercially launch Interactive TV. As of March 31, 1999, the Company had an accumulated deficit of $157.2 million and had used cumulative net cash in operations of $79.4 million. The difference at March 31, 1999, between the accumulated deficit and cumulative net cash used in operations since inception was attributable primarily to nonmonetary charges related to financing incentives and extinguishment of debt, variable compensation expense, write-downs of analog set-top boxes and intangible assets, depreciation and amortization and other non-cash expenses. The effect of the lost customers associated with the Brite acquisition will continue to have a negative impact on the Company's revenues and profitability. The Company will continue to incur operating losses at least through 1999, although it expects that cash generated in IT Network operations excluding related interest expense will be sufficient to meet IT Network's operating requirements. Any launch of the Company's television products and services may require additional expenditures, which may require the Company to raise additional capital. Closing the joint venture with Prevue under the terms contained in the letter of intent, would provide both immediate and long-term liquidity benefits and potential liquidity risks to the Company: (i) at closing, the Interactive TV research and development costs and certain other costs would become costs of Newco; (ii) at closing, Prevue would pay the Company $12.0 million cash for 842,105 shares of common stock; (iii) at closing, Prevue would receive warrants which they could exercise at any time within five years to buy approximately 14.2 million shares of the Company common stock at $14.25 per share, which if fully exercised, would result in proceeds of approximately $200 million and give Prevue an approximate 40% ownership of the Company; and (iv) the Company could face capital calls for Newco and would have committed to a proportionate share of the second $10.0 million of funding and could face dilution for capital calls it did not meet. Also, in connection with the proposed transaction with Prevue, the Company could face liquidated damages upon the occurrence of certain events. There can be no assurance that the joint venture with Prevue can be consummated. Since its inception, the Company has financed its operations primarily through an aggregate $156.6 million raised from various financing activities, including the incurrence of debt and issuance of the Company's common stock and preferred stock. In October 1997, the Company issued $100.0 million of Senior Secured Notes (the "Notes") and $20.0 million of preferred stock. The interest escrow account created pursuant to the indenture has been and will be used to fund the first four interest payments on the Notes. Interest payments from the interest escrow account were made on May 1, 1998, November 1, 1998 and May 1, 1999. The Company's primary source of liquidity is its cash, cash equivalents and short-term investments, which totaled $21.2 million at March 31, 1999. This cash position consisted of $11.9 million held in escrow for interest payments, (a portion of which was used for the May 1, 1999 interest payment) and $9.3 million of operating cash. The Company's first interest payment not currently held in escrow is due May 1, 2000. The Company has received approximately $1.1 million in cash in the three months ended March 31, 1999 from the exercise of certain warrants. In addition, in April 1999, an additional $1.0 million has been received from the exercise of warrants and stock options. 17 18 The Company currently believes its resources will be sufficient to meet the Company's anticipated cash needs for working capital and other capital expenditures related to the further development of the Interactive Channel, ICT, and IT Network through the fourth quarter of 1999. The Company's future capital requirements will depend on many factors, including, but not limited to the following factors, some of which are outside the Company's control: (i) the operating results of IT Network, including the Company's ability to successfully integrate its acquired businesses into its existing business, and to retain and grow its customer base, (ii) the success and timing of the development, introduction and deployment of the Interactive Channel, (iii) the extent to which the Company is able to generate revenues from licensing its proprietary technology, (iv) the number of file servers and other equipment which the Company purchases in support of the Interactive Channel, (v) the levels of advertising expenditures necessary to increase awareness of the Interactive Channel, (vi) the extent of market acceptance of the Company's products, (vii) potential acquisitions or asset purchases, (viii) the deployment of digital set-top boxes incorporating the Company's technology, (ix) the capital required to address the Company's Year 2000 issue; (x) the proposed transaction with Prevue and (xi) competitive factors. YEAR 2000 DISCLOSURE The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. Based on recent assessments, the Company determined that it will be required to modify or replace portions of its software and certain hardware so that those systems will properly utilize dates beyond December 31, 1999. The Company presently believes that with modifications or replacements of existing software and certain hardware, the Year 2000 issue can be mitigated. However, if such modifications and replacements are not made, or are not completed in a timely manner, the Year 2000 issue could have a material impact on the operations of the Company. The Company's plan to resolve the Year 2000 issue involves the following four phases: assessment, remediation, testing and implementation. To date, the Company has completed its initial assessment of all systems that could be significantly affected by the Year 2000. The Company's three operating subsidiaries: ICT, Interactive Channel and IT Network as well as the Corporate unit were included in the assessment. The assessment indicated that most of the Company's significant information technology systems could be affected. That assessment also indicated that software and hardware (embedded chips) used in the IT Network's interactive voice response systems also are at risk (hereinafter referred to as operating systems). In addition, the Company is gathering information about the Year 2000 compliance status of its significant suppliers and subcontractors and is continuing to monitor their compliance. Regarding its information technology, the Company is approximately 85% complete on the remediation phase and expects to complete software reprogramming and replacement for all 18 19 systems no later than October 31, 1999. Once software is reprogrammed or replaced for a system, the Company will begin testing and implementation. These phases run concurrently for different systems. To date, the Company has completed approximately 90% of its testing and has implemented approximately 45% of its remediated systems. Completion of the testing phase for all significant systems is expected by July 31, 1999, with all remediated systems fully tested and implemented by October 31, 1999. The Company has initiated the remediation phase of its operating equipment. The remediation of operating equipment is significantly more difficult than the remediation of the information technology systems because some of the software operating systems are no longer supported by the manufacturers of that equipment. Testing of this equipment is also more difficult than the testing of the information technology systems; the Company is approximately 50% complete with the testing of its remediated operating equipment. Once testing is complete, the operating equipment will be ready for immediate use. The Company expects to complete its remediation of operating equipment by July 31, 1999. Testing and implementation of affected equipment is expected to be completed by October 31, 1999. The Company is in the process of working with third party vendors to ensure that the Company's systems that interface directly with third parties are Year 2000 compliant by December 31, 1999. The Company has completed approximately 90% of its remediation efforts on these systems and is approximately 70% complete with the testing phase. Testing of all significant systems is expected no later than July 31, 1999. Implementation is approximately 60% complete and is expected to be completed by June 30, 1999. The Company is querying its significant suppliers and subcontractors that do not share information systems with the Company (external agents). To date, the Company is not aware of any external agent with a Year 2000 issue that would materially impact the Company's results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that external agents will be Year 2000 ready. The inability of external agents to complete their Year 2000 resolution process in a timely manner could materially impact the Company. The effect of non-compliance by external agents is not determinable. Additionally, the Company is exposed to the risk that customers may elect to discontinue receiving telephone information services due to the customer's equipment not being upgraded to address Year 2000 problems, although various hardware and software solutions exist. This could result in a loss of revenues to the Company. The Company will utilize both internal and external resources to reprogram, or replace, test, and implement the software and operating equipment for Year 2000 modifications. The total cost of the Year 2000 project is estimated at $1.2 million and is being funded through operating cash flows. To date, the Company has incurred approximately $0.3 million, related to all phases of the Year 2000 project. Of the total remaining project costs, approximately $0.8 million is attributable to the purchase of new software and operating equipment, which will be capitalized. The remaining $0.1 million relates to repair of hardware and software that will be expensed as incurred. Management of the Company believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. The Company has not yet completed all necessary phases of the Year 2000 program. There can be no assurance that the Company's efforts to solve its potential Year 2000 problems will be successful, or even partially successful. In the event that the Company does not complete any additional phases, the Company may be unable to take customer orders, provide services and products, invoice customers or collect payments. In addition, disruptions in the economy generally resulting from Year 2000 issues could also materially adversely affect the Company. The Company could be subject to litigation for 19 20 computer systems product failure, equipment shutdown or failure to properly date business records. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. The Company has contingency plans for certain critical applications and is working on such plans for others. These contingency plans involve manual workarounds, telecommunication alternatives, staff adjustments and other appropriate actions. NET OPERATING LOSS CARRYFORWARDS At December 31, 1998, Holdings had net operating loss carryforwards of approximately $87.4 million for U.S. Federal income tax purposes, which begin to expire in 2003. The Internal Revenue Code of 1986, as amended, imposes limitations on the use of net operating loss carryforwards if certain stock ownership changes occur. Consequently, the Company's utilization of a portion of the net operating losses is limited to approximately $9.0 million in a given year. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is exposed to changes in interest rates related primarily to its Notes and Preferred Stock arrangements. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. At March 31, 1999, the Company had Notes outstanding of $100.0 million, due November 1, 2004, which bear interest at a fixed rate of 12% and Preferred Stock outstanding of $23.6 million due November 1, 2007, which bears interest at a fixed rate of 13 1/2%. The fair value of the Notes and Preferred Stock at December 31, 1998 was approximately $75.0 million and $16.5 million, respectively, based upon dealer quoted market prices. PART II - OTHER INFORMATION Item 1 - Legal Proceedings On May 11, 1998, ICT and Holdings filed an action in U.S. District Court for the District of Delaware against WorldGate Communications, Inc. ("WorldGate") alleging that WorldGate has infringed four of the Company's patents. Each party has filed a Motion to Dismiss certain claims and no date has been set for a hearing by the district court. The Company intends to aggressively defend its patents. On January 11, 1999, Brite Voice Systems, Inc. ("Brite") filed a lawsuit against IT Network, Inc. and Source Media, Inc. (together with IT Network, the "Defendants") in the United States District Court for the District of Kansas. Brite alleged three claims against Defendants: (1) breach of a September 23, 1997 Asset Purchase Agreement for which Brite seeks recovery of alleged damages in an amount in excess of $111,950.18; (2) breach of an October 30, 1997 Lease and Service Agreement in connection with the September 23, 1997 Asset Purchase Agreement, for which Brite seeks recovery of alleged damages in the amount of $30,472.53; and (3) declaratory judgment pursuant to which Brite seeks a declaration of rights in 20 21 connection with all indemnity claims of which IT Network has provided Brite written notice pursuant to the September 23, 1997 Asset Purchase Agreement. On April 23, 1999, the Company and Brite executed a Settlement Agreement resulting in Brite voluntarily dismissing the case with prejudice. The terms of the settlement are confidential, but do not adversely affect the Company's results of operations or its financial condition. A total of fourteen class action complaints were filed against Source Media, Inc. and certain of its officers and directors in the United States District Court for the Northern District of Texas asserting violations of sections 10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 of the accompanying regulations. The fourteen complaints were consolidated by Judge Buchmeyer into the first filed case, Hartsell, et al. v. Source Media, Inc., et al., Civil Action No. 398-CV-1980-R (filed August 21, 1998), on October 9, 1998. Plaintiffs filed a motion for the appointment of lead plaintiff and lead plaintiffs' lead counsel on October 20, 1998. Plaintiff proposed the appointment of three law firms to serve as "Co-Lead Counsel," Weiss & Yourman, Abbey, Gardy & Squitieri, and Milberg Weiss Bershad Hynes & Lerach, LLC. On November 12, 1998, defendants filed a statement of non-opposition to plaintiffs' motion. The Court granted plaintiffs' motion on January 5, 1999. Plaintiffs filed a consolidated amended complaint on March 3, 1999. Defendants filed a motion to dismiss the consolidated amended complaint on April 19, 1999. Plaintiffs' opposition to the motion is due on May 24, 1999, and defendants' reply brief is due on June 14, 1999. The Court has not yet set a hearing date for the motion. A trial date is expected to be set sometime during the first half of 2000. On July 17, 1998, IT Network, Inc. filed a lawsuit against a former employee of Brite Voice Systems, Inc., Michael Shell ("Shell"), the two companies he founded, Interactive Media Services, Inc. ("IMS") and Interactive Information Services, LLC ("IIS"), and a third company called Talking Directories, Inc. ("TDI"). The lawsuit was filed in the Western District of Michigan and alleged two causes of action, one for copyright infringement against all of the defendants arising out of the defendants' alleged use of IT Network's 1997 BDR Audio Guide (the "Catalogue") and the thousands of narrative scripts that correspond to the subject matter categories contained in the Catalogue (the "Scripts"), and a second for breach of contract against TDI arising out of TDI's alleged wrongful termination of its information services contract with IT Network. IT Network moved for a preliminary injunction on July 17, 1998. The Court granted IT Network's motion on August 14, 1998, preliminarily enjoining the defendants from further infringing IT Network's Catalogue and Scripts. On December 4, 1998, the defendants moved to set aside the preliminary injunction as to the Catalogue on the ground that they had new evidence that IT Network did not own the Catalogue and therefore could not enforce a copyright in it. IT Network filed an opposition to defendants' motion on January 8, 1999. To date, there has been no ruling on the motion. On December 3, 1998, IT Network filed a First Amended Complaint which added a new claim against Shell, IMS and IIS for copyright infringement of certain proprietary satellite broadcast software IT Network acquired from Brite. IT Network moved for a preliminary injunction on the software on December 28,1998. Defendants filed an opposition to the motion on January 27, 1999, and IT Network filed a reply brief on March 1, 1999. Oral argument has not yet been scheduled. On April 21, 1999, TDI filed a motion to compel arbitration of the breach of contract claim. By stipulation of the parties, IT Network's opposition to that motion is due on June 7, 1999. Discovery in the case is underway, and a trial date has been set for November, 8, 1999. 21 22 On October 6, 1998, Advanced Interactive, Inc. filed a complaint in U.S. District Court for the Northern District of Illinois, Eastern Division, against ICT and the following other companies: Matsushita Electric Corporation, Matsushita Electric Industrial Co., Ltd., Sharp Electronics Corp., Sharp Corp., Thomson Consumer Electronics, Toshiba Consumer Products, Inc., Toshiba America, Inc., Toshiba Corporation, General Instruments Corp., Scientific Atlanta, Inc., ATI Technologies, Inc., ADS Technologies Inc., Gateway 2000, Inc., STB Systems, Inc., Hauppauge Computer Works, Inc., WebTV Networks, Inc. and WorldGate Communications, Inc. (collectively the "Defendants"). Advanced Interactive alleges that ICT infringed two claims of one of its patents by manufacturing, using and/or selling or offering to sell "Sourceware(TM) ChannelLink(TM)". The same allegation is made against each Defendant for its particular product or service. The Plaintiff seeks damages, but makes no claims against the patents of ICT or any other Defendant. ICT, and each of the Defendants, have filed an Answer and have collectively joined the Motion for Partial Summary Judgment submitted by Matsushita Electric Corporation of America, Sharp Electronics Corp., Sharp Corp. and the Toshiba Defendants. The court has not yet considered the Defendant's collective Motion for Partial Summary Judgment. The Company believes this case is totally without merit and intends to vigorously defend itself. In addition, the Company is aware of certain claims against the Company that have not developed into litigation, or if they have, are dormant, and in any case are not expected to have a material adverse affect on the Company. Further, the Company is party to ordinary routine litigation, none of which is expected to have a material adverse effect on the Company's results of operations or its financial condition. Item 2 - Changes in Securities and Use of Proceeds - not applicable Item 3 - Defaults Upon Senior Securities - not applicable Item 4 - Submission of Matters to a Vote of Security Holders - not applicable Item 5 - Other Information - not applicable Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits Exhibit 10.1 - Employment agreement with Victoria Hamilton. Exhibit 10.2 - Employment agreement with Stephen Pulley. Exhibit 10.3 - Employment agreement with W. Thomas Oliver. Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K during the three months ended March 31, 1999. Form 8-K (Date of Event February 11, 1999) filed on February 16, 1999, announcing the Company executing a Letter of Intent to enter into a joint venture to establish a new business entity with Prevue Ventures, Inc., a subsidiary of United Video Satellite Group, Inc. Form 8-K amendment filed on March 16, 1999 updated Form 8-K filed on February 16, 1999. 22 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SOURCE MEDIA, INC. (Registrant) Date: May 14, 1999 By: /s/ PAUL TIGH -------------------------------------- Paul Tigh Chief Financial Officer and Treasurer (Principal Financial Officer and Duly Authorized Officer) 24 24 EXHIBIT INDEX
Exhibit Number Description - ------- ----------- 10.1 Employment agreement with Victoria Hamilton. 10.2 Employment agreement with Stephen Pulley. 10.3 Employment agreement with W. Thomas Oliver. 27 Financial Data Schedule
EX-10.1 2 EMPLOYMENT AGREEMENT WITH VICTORIA HAMILTON 1 EXHIBIT 10.1 EMPLOYMENT AGREEMENT EMPLOYMENT AGREEMENT (the "Agreement"), dated as of March 11, 1999 (the "Effective Date"), by and between SOURCE MEDIA, INC., a Delaware corporation (the "Company"), with offices at 5400 LBJ Freeway, Suite 680, Dallas, Texas 75231 and VICTORIA HAMILTON ("Executive"), residing at 136 East 64th Street, Apt. 5A, New York, New York 10021. W I T N E S S E T H: WHEREAS, the Company desires to secure the services of Executive and to enter into an agreement embodying the terms of such employment; and WHEREAS, Executive desires to accept such employment and enter into such agreement; NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Company and Executive hereby agree as follows: 1. Employment. (a) Agreement to Employ. Upon the terms and subject to the conditions of this Agreement, the Company hereby employs Executive, and Executive hereby accepts employment by the Company. (b) Term of Employment. Except as provided in Paragraph 6(a), the Company shall employ Executive for the period commencing on the Effective Date and ending on the earlier of (i) August 10, 1999 or (ii) the closing of a Contemplated Transaction. For purposes of the foregoing sentence, "Contemplated Transaction" means the transactions contemplated by the Letter of Intent dated February 11, 1999 between the Company, Prevue Ventures, Inc. and United Video Satellite Group, Inc., or any other transaction involving the Company and/or its subsidiaries similar in scope and significance to the Company. The period during which Executive is to be employed hereunder, including any extension thereof to which the parties may agree, shall be referred to as the "Employment Period." 2. Position, Other Employment. (a) Position. Executive shall be duly appointed by the Board of Directors of the Company (the "Board") as an officer of the Company with the title 2 of Interim Chief Operating Officer and shall serve in that position during the Employment Period. Executive shall be located in New York, New York, and Executive's services hereunder shall be performed at offices to be selected by Executive in New York, New York, subject to such reasonable travel as the performance of Executive's duties and the business of the Company may require, in Executive's sole judgment. (b) Other Employment. The Company acknowledges that Executive has clients for whom she provides consulting services, that Executive also serves as an elected Director of BioReliance, Inc. and a principal of the Washington Advisory Group, that Executive will devote a portion of her time, but in no event more than, on average, one business day per week to work for her other clients and in connection with her other responsibilities as noted above, and that such work shall not constitute a breach of Executive's obligations hereunder. 3. Compensation. (a) Base Salary. During the Employment Period, the Company shall pay Executive a base salary ("Base Salary") at a rate of $50,000 per month, payable in semi-monthly installments. (b) Stock Options. As of March 29, 1999, Executive shall be awarded a grant of Stock Options (the "Options") to purchase 100,000 shares of the Common Stock of the Company, par value $.001 per share (the "Stock"), under the Company's 1995 Performance Equity Plan, as amended and restated (the "Plan"), pursuant to the Stock Option Agreement in the form annexed hereto as Exhibit A. The Company represents and warrants that all necessary Committee approvals (as defined in the Plan) have been obtained with respect to the grants of the Options and the form of the Stock Option Agreement. (c) Consulting Services. The Company acknowledges that, at the request of the Board, Executive has been providing consulting services for the Company since January 11, 1999. The Company agrees to pay Executive, prior to March 19, 1999, $50,000 for such consulting services. The Company further agrees to reimburse Executive for all out-of-pocket expenses incurred in connection with such consulting services. Such reimbursement shall be made within 14 days after presentation of statements with respect thereto. 4. Benefits, Expenses, Indemnification and Insurance. (a) Benefits. Executive shall be entitled to up to four weeks (i.e., 20 business days) paid vacation annually, to be accrued at the rate of 1.7 days per 2 3 month, and customary holidays, in accordance with the Company's policies and practices. (b) Business Expenses. The Company shall pay or reimburse Executive, within 14 days of presentation of statements with respect thereto, for all reasonable expenses incurred or paid by Executive in the performance of Executive's duties hereunder and all legal fees and costs incurred in connection with the negotiating and drafting of this Agreement. The Company acknowledges that such expenses may include, without limitation, costs associated with travel to the Company's offices in Texas. (c) Indemnification. The Company shall indemnify Executive and hold Executive harmless from and against any claim, loss, damages, expense, liability or cause of action (whether now pending or subsequently commenced), including, without limitation, liability in connection with suits by shareholders, debtholders, prospective joint venturers or strategic partners, or current or former employees, arising from or out of Executive's performance as an officer or employee of, or consultant to, the Company or in any other capacity, including serving as a fiduciary, in which Executive serves or has served at the request of the Company, to the maximum extent permitted by applicable law and the Company's charter and bylaws. If for any reason the foregoing indemnification is unavailable or insufficient to hold Executive harmless, then the Company shall contribute to the amount paid or payable by Executive as a result of such claim, loss, damages, expense, liability or cause of action in such proportion as is equitable. If any claim is asserted hereunder for which Executive reasonably believes in good faith she is entitled to be indemnified, the Company shall pay Executive's legal expenses (or cause such expenses to be paid) on a monthly basis, for Executive's chosen counsel, within 14 days of the presentation of statements with respect to such expenses. (d) Insurance. The Company shall provide Executive with Directors and Officers ("D&O") liability insurance coverage, and shall reimburse Executive for any deductible or other expenses not covered by the Company's D&O insurance policy. The Company shall ensure that such coverage for claims against Executive shall be maintained throughout the Employment Period, and continuing through the period ending six years after the termination of the Employment Period. The Company represents and warrants that: (i) The Company's current D&O policy has a $5 million "per incident" and "per policy period" limitation of liability (including defense costs); 3 4 (ii) The Company has confirmed with its D&O carrier that Executive will be covered under the D&O policy from the Effective Date; (iii) The Company has confirmed with its D&O carrier that, as of the Effective Date, no more than $500,000 of the policy limits have been exhausted. The Company shall increase the amount of its D&O policy coverage if, in consultation with the Company's General Counsel, Executive determines that the current policy limits are insufficient. However, the obligation for maintaining sufficient coverage remains solely with the Company. 5. Confidentiality. Executive shall not use or disclose any confidential or proprietary information of the Company or any affiliate thereof except (i) as required in the course of Executive's employment or (ii) as required by law (including, without limitation, when required by any governmental agency having supervisory authority over the business of the Company or by any administrative or legislative body with apparent jurisdiction to order disclosure of such information), it being understood that Executive will promptly notify the Company of such requirement so that the Company may seek to obtain a protective order. Upon termination of Executive's employment, Executive shall return to the Company all confidential and/or proprietary information that exists in written or other physical form (and all copies thereof) under Executive's control. 6. Termination of Employment. (a) Early Termination of the Employment Period. Notwithstanding Paragraph l(b), the Employment Period shall end upon a termination of Executive's employment on account of (i) Executive's death, (ii) a Termination Due to Disability, (iii) a Termination for Cause, or (iv) a Termination for Good Reason, all as defined in Subparagraph (c) hereof. (b) Benefits Payable Upon Termination. As soon as practicable, but in no event more than 30 days after the end of the Employment Period, Executive (or in the event of her death, her estate) shall be paid any Base Salary earned, but unpaid, for services rendered to the Company on or prior to the date on which the Employment Period ended. If Executive's employment ends because of a Termination for Good Reason or for any reason other than a Termination for Cause, death, or a 4 5 Termination Due to Disability, Executive shall also be paid one additional month's Base Salary. (c) Definitions. For purposes of this Paragraph 6: "Termination Due to Disability" means a termination of Executive's employment by the Company because Executive has been incapable of substantially fulfilling the position set forth in this Agreement because of physical, mental or emotional incapacity resulting from injury, sickness or disease for a period of at least 45 consecutive days. "Termination for Cause" means a termination of Executive's employment by the Company due to (i) Executive's conviction of a felony, (ii) Executive's willful malfeasance or gross misconduct in connection with her employment hereunder which has had a material adverse effect on the business of the Company or (iii) a substantial and continual refusal by Executive in breach of this Agreement to perform her position, which refusal is not cured within 10 days' of the date a written notice referring to this provision and describing such refusal is given by the Board to Executive. This definition, and not the definition of Cause included in the Stock Option Agreement, shall govern for purposes of Paragraph 6(a). "Termination for Good Reason" means (i) a termination of Executive's employment by either Executive or the Company following the appointment of a new Chief Executive Officer whose employment commences during the Employment Period or (ii) a termination of Executive's employment by Executive following: (A) a material reduction in Executive's authority or responsibilities from those Executive has performed to date or from those that are usual and customary for a senior executive of the Company of similar title, (B) a material breach of this Agreement by the Company or (C) a Change of Control (as hereinafter defined) other than a Contemplated Transaction approved by the Board. A termination under Subparagraph (i) herein shall be made upon two weeks' written notice. "Change of Control" means any transaction or event, or series of transactions or events, whether voluntary or involuntary, that results in, or as a consequence of which, any of the following events shall occur: (i) any person that is not an owner of 50% of the shares of capital stock of the Company on the Effective Date shall acquire, directly or indirectly, beneficial ownership (as defined in Rule 13d-3 of the Securities Exchange Act of 1934, as amended) of more than 50% of the voting stock of the Company, (ii) any sale of all or substantially all of the assets of the Company or (iii) a proxy contest for the election of directors of the Company results in the persons constituting the Board immediately prior to the initiation of such 5 6 proxy contest ceasing to constitute a majority of the Board upon the conclusion of such proxy contest. (d) Survival. The provisions of Subparagraphs 4(c) and 4(d) and of Paragraphs 5, 6, 7 and 8(f) shall survive the termination of this Agreement. 7. Governing Law; Arbitration; Costs; Jurisdiction. This Agreement shall be governed by the laws of the State of New York without regard to conflict of law rules. Any dispute or controversy between the Company and Executive, arising out of or relating to this Agreement, the breach of this Agreement, or otherwise, shall be settled by arbitration in New York, New York administered by the American Arbitration Association in accordance with its Commercial Rules then in effect. The Company shall reimburse Executive, upon demand, for all costs and expenses (including without limitation attorneys' fees) reasonably incurred by Executive in connection with any arbitration initiated pursuant to this paragraph for compensation or amounts owing to Executive hereunder, as well as for all such costs and expenses reasonably incurred by Executive in connection with entering, confirming, or enforcing the award rendered by the arbitrator. In the event that the Company commences an arbitration or other proceeding against Executive in which Executive prevails, the Company shall reimburse Executive, upon demand, for all costs and expenses (including without limitation attorneys' fees) reasonably incurred in connection therewith. The Company and Executive acknowledge that this Agreement evidences a transaction involving interstate commerce. Notwithstanding any choice of law provision included in this Agreement, the Federal Arbitration Act shall govern the interpretation and enforcement of this arbitration provision. The parties agree to submit to the exclusive jurisdiction of the federal and state courts within the State of New York in connection with any suit arising out of the confirmation or enforcement of any award rendered by the arbitrator, and waive any defense based on forum non conveniens or improper venue. 8. Miscellaneous. (a) Binding Effect. This Agreement shall be binding on the Company and any person or entity which succeeds to the interest of the Company (regardless of whether such succession occurs by operation of law) by reason of the sale of all or a portion the Company's securities or assets, or by a merger, consolidation, or reorganization involving the Company. This Agreement shall inure to the benefit of Executive's heirs, executors, administrators and legal representatives. (b) Assignment. Except as provided under the preceding subparagraph (relating to binding effect), neither this Agreement nor any of the rights 6 7 or obligations hereunder shall be assigned or delegated by any party hereto without the prior written consent of the other party. (c) Entire Agreement. This Agreement, together with the Stock Option Agreement annexed as Exhibit A, constitutes the entire agreement between the parties hereto with respect to the matters referred to herein and supersedes all agreements between the parties (written or oral), and no amendment or modification of this Agreement, oral or otherwise, shall be binding between the parties unless it is in writing and signed by the party against whom enforcement is sought. (d) Severability. In the event that one or more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. (e) Waiver. Waiver by any party hereto of any breach or default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or her rights hereunder on any occasion or series of occasions. (f) Notices. Any notice required or desired to be delivered under this Agreement shall be in writing and shall be delivered personally, by courier service or by certified mail, return receipt requested, and shall be effective upon actual receipt by the party to which such notice shall be directed, and shall be addressed as follows (or to such other address as the party entitled to notice shall hereafter designate in accordance with the terms hereof): 7 8 If to the Company: Board of Directors Source Media, Inc. 5400 LBJ Freeway Suite 680 Dallas, Texas 75231 with a copy to: Robert L. Winikoff, Esq. Cooperman Levitt Winikoff Lester & Newman, P.C. 800 Third Avenue New York, New York 10022 If to Executive: Victoria Hamilton 136 East 64th Street, Apt. 5A New York, New York 10021 with a copy to: Ellen A. Harnick, Esq. Friedman Kaplan & Seiler LLP 875 Third Avenue New York, New York 10022-6225 (g) Headings. Headings to paragraphs and subparagraphs in this Agreement are for the convenience of the parties only and are not intended to be part of or to affect the meaning or interpretation of the Agreement. (h) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 8 9 IN WITNESS WHEREOF, the Company has caused this Agreement to be executed by its duly authorized officer, and Executive has hereunto set her hand, as of the day and year first above written. SOURCE MEDIA, INC. By: /s/ TIMOTHY P. PETERS ------------------------------------- Timothy P. Peters Chairman of the Board VICTORIA HAMILTON /s/ VICTORIA HAMILTON ----------------------------------------- 9 EX-10.2 3 EMPLOYMENT AGREEMENT WITH STEPHEN PULLEY 1 EXHIBIT 10.2 EMPLOYMENT AGREEMENT, dated as of March 29, 1999, by and between SOURCE MEDIA, INC., a Delaware corporation ("Company"), and STEPHEN W. PALLEY (the "Employee"). ------------- Company desires to engage Employee to perform services for Company, and Employee desires to perform such services, on the terms and conditions set forth below: NOW, THEREFORE, the parties agree as follows: 1. EMPLOYMENT. The Company hereby employs Employee as its Chief Executive Officer, and Employee hereby accepts such employment, upon the terms and conditions hereinafter set forth. 2. TERM. The term (the "Term") of employment of Employee pursuant to this Agreement shall commence on the date hereof and shall terminate on the third anniversary of the date hereof. The Term shall automatically be renewed for successive one year periods unless either party gives the other written notice to the contrary at least 90 days prior to the end of the Term or any such renewal thereof. 3. DUTIES AND SERVICES. Employee shall devote his full time and best efforts to the business and affairs of the Company, and perform, in a competent manner, such executive and managerial functions and duties commensurate with his position as Chief Executive Officer of the Company, as the Board of Directors of the Company may reasonably prescribe from time to time. The Employee shall report directly to the Board of Directors. Employee shall also serve as a member of the Board of Directors without additional compensation. The Company shall not relocate the Employee's principal place of business outside of New York City without the written consent of the Employee. 4. COMPENSATION. A. SALARY. For all services to be rendered by Employee hereunder, the Company shall pay Employee an annual base salary of $200,000. The Company shall pay Employee's salary in accordance with the Company's standard payroll practices as in effect from time to time, with appropriate deductions required by applicable laws, rules and regulations. 2 B. DISCRETIONARY BONUS. On an annual basis, the Board of Directors shall consider a bonus payment to Employee based on his performance, and the Company's results of operations. The timing and amount of any such bonus payment shall be in the sole and absolute discretion of the Board of Directors. C. STOCK OPTION PARTICIPATION. Employee shall receive a ten-year option to purchase 500,000 shares of the common stock, par value $.001 per share, pursuant to the Stock Option Agreement in the form attached hereto as Exhibit A. D. GROSS-UP FOR EXCISE TAXES. In the event that Employee receives any payment or benefit (including but not limited to payments or benefits pursuant to Section 4(c) above) (a "Payment") that is subject to the excise tax under Section 4999 of the Internal Revenue Code of 1986, as amended, the Company shall pay to Employee, as soon as practicable, an additional amount (the "Gross-Up Payment") such that the net amount retained by Employee after deduction of any excise tax on the Payment and any federal, state and local income taxes and any excise tax upon the Gross-Up Payment, shall be equal to the Payment. The determination of whether an excise tax is due and the amount of any Gross-Up Payment shall be made by an independent auditor jointly selected by the Company and Employee. 5. EXPENSES. The Company shall reimburse Employee for all reasonable, ordinary and necessary expenses incurred on behalf of the Company by Employee. Employee shall submit to the Company an expense report and receipts or other verification of expenses to be reimbursed in accordance with the Company's standard policies. 6. BENEFITS. Employee shall be entitled to such insurance and retirement plan benefits as are generally available to other senior management employees of the Company, pursuant to Company policy in effect from time to time, such as health insurance, disability and life insurance, and the right to participate in any retirement plans maintained by the Company. 7. VACATION AND PERSONAL DAYS. Employee shall be entitled to twenty (20) business days of paid vacation during each calendar year (pro-rated for 1999). Employee will also be entitled to ten (10) sick and/or personal days which may be taken as paid vacation days if not used, and two (2) floating holidays. Vacation, sick and/or personal days and floating holidays shall accrue at the beginning of each calendar year (or, upon the commencement of employment of Employee by the Company, in the case of 1999), and shall be taken in accordance with the Company's published guidelines. 2 3 8. TERMINATION PROVISIONS. A. TERMINATION FOR CAUSE. Notwithstanding the provisions of Section 2 above, the Company, on two days prior written notice, may terminate the employment of Employee for any of the following reasons (for "cause"), without the payment of any compensation to Employee, except accrued salary and vacation pay due for the period prior to the date of termination of employment. (i) Employee shall be convicted of a felony; (ii) Commission of any willful misconduct by the Employee that is materially injurious to the financial condition or business reputation of the Company, including by reason of material breach by the Employee of the provisions of this Agreement, provided that Employee has been provided written notice of such willful misconduct, which notice shall describe the willful misconduct in reasonable detail, and such willful misconduct is not cured in the reasonable and good faith judgment of the Board, within thirty (30) days of the date of the notice. B. TERMINATION BY COMPANY OTHER THAN FOR CAUSE, DEATH OR DISABILITY. (i) If the employment of Employee is terminated by the Company other than for cause, death or disability, the Company shall pay to Employee as severance, in equal monthly installments, the remaining base salary payments that Employee would have earned if he had continued his employment throughout the Term, and an amount equal to any accrued and unpaid vacation days on the date of termination of employment. Such payments shall cease in the event Employee obtains other employment following termination of employment. (ii) The Company will continue life, medical, dental and disability coverage substantially identical to the coverage maintained by the Company for Employee and his dependents prior to termination of his employment, except to the extent such coverage may be changed in its application to all Company employees on a nondiscriminatory basis. Such coverage shall cease when Employee obtains other employment. C. TERMINATION ON ACCOUNT OF DISABILITY, OR DEATH. (i) In the event Employee shall, during the term of this Agreement, become physically or mentally disabled so that he is unable, or can reasonably be expected to be unable, to perform his duties hereunder for a period of seventy five (75) consecutive days, or ninety (90) non-consecutive days within any twelve (12) month period, the Company shall have the right to terminate Employee's employment, provided that (a) the Company provides the Employee with not less than five (5) days prior written notice of the termination of his employment and (b) the Company makes the payments to Employee referred to in clause (ii) below. Any determination of disability shall be made by a physician selected by the Company and reasonably acceptable to the Employee. 3 4 (ii) In the event the Company terminates the Employee's employment for disability as set forth in clause (i) above ("Disability Termination"), Employee shall be entitled to receive, in monthly installments, the base salary Employee would have received in the following twelve months had his employment continued for one year past the date of Disability Termination. All payments made pursuant to this paragraph shall be made in accordance with the Company's standard payroll practices as in effect from time to time, with appropriate deductions required by applicable laws, rules and regulations. In addition, the Company, at its expense, for a period of one year following the date of Disability Termination, will continue medical and dental insurance coverage substantially identical to the coverage maintained by the Company for Employee and his dependents prior to termination of employment, except to the extent such coverage may be changed in its application to all Company employees on a non-discriminatory basis. (iii) In the event of the death of Employee, the Company shall make the payments referred to in clause (ii) above to the estate of the Employee or his legal representative. D. TERMINATION BY THE EMPLOYEE. (i) Notwithstanding the provisions of Section 2 above, the Employee will be considered to have resigned his employment for "good reason" if (x) the Company, without the express written consent of the Employee, materially breaches this Agreement, provided that the Company has been provided written notice of such breach, which notice shall describe the breach in reasonable detail, and such breach is not cured in the reasonable and good faith judgment of the Employee within thirty (30) days of the date of the notice, or (y) the Employee resigns his employment with the Corporation within a 60-day period beginning six months after a "change of control." (ii) Without limitation, it shall be considered a material breach of this Agreement by the Company if the Company (i) fails to secure the Employee's election to the Board of Directors by its next regularly scheduled Annual Meeting of Stockholders, provided the Employee has delivered to the Company his written consent to serve as such prior to the mailing of the Proxy Statement relating to such meeting, or (ii) materially reduces the Employee's duties or authority (whether or not accompanied by a change of title) or diminishes his title in any way, or transfers his principal place of business outside New York City. (iii) In the event that the Employee resigns from his employment for good reason, the Company shall be obligated to provide the Employee with the severance payments and insurance coverage as required if the Company had terminated the Employee other than for cause pursuant to Section 8B above. (iv) In the event that the Employee resigns from his employment without good reason, the Company shall be obligated to provide the Employee with the payments as required if the Company had terminated the Employee for cause pursuant to Section 8A above. 4 5 (v) For purposes of this Agreement, "change of control" means the happening of any of the following: (i) When any "person," as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act") (other than the Company, a subsidiary of the Company, a Company employee benefit plan, including any trustee of such plan acting as trustee, or United Video Satellite Group, Inc. or any of its affiliates) that is not an owner of 5% or more of the Company capital stock on the date hereof becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities entitled to vote generally in the election of directors; or (ii) The stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least fifty percent (50%) of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve an agreement for the sale or disposition by the Company of all or substantially all the Company's assets; or (iii) A proxy contest for the election of directors of the Company results in the persons constituting the Board immediately prior to the initiation of such proxy contest ceasing to constitute a majority of the Board upon the conclusion of such proxy contest. 9. REPRESENTATIONS AND WARRANTIES. Employee represents and warrants that Employee is not subject to or a party to any agreement, contract, covenant, order or other restriction which in any way prohibits, restricts or impairs Employee's ability to enter into this Agreement and carry out his duties and obligations hereunder. Each party hereto represents and warrants to the other that (i) it has the full legal right and power and all authority and approvals required to enter into, execute and deliver this Agreement and to perform fully all of his or its obligations hereunder; and (ii) this Agreement has been duly executed and delivered by it and constitutes a valid and binding obligation of such party, enforceable in accordance with its terms. 5 6 10. NON-COMPETITION AND SECRECY. 10.1 NO COMPETING EMPLOYMENT. For so long as Employee is employed by Company and for a period of the lesser of (i) twelve (12) months after termination of employment and (ii) the expiration of the Term (such period being referred to hereinafter as the "Restricted Period"), Employee shall not, directly or indirectly, own an interest in, manage, operate, join, control, lend money, or render financial or other assistance to or participate in or be connected with, as an officer, employee, partner, stockholder, consultant or in a similar capacity, any sole proprietorship, partnership, firm, corporation or other business organization or entity that competes with the Company in any business in which it is engaged during the Term or at the time of the Employee's termination; provided, however, that nothing in this Section 10.1 shall prohibit Employee from (i) making a non-controlling and passive investment in a corporation or other entity whose shares are publicly traded; or (ii) engaging in any activity referred to above in any geographic area in which the Company is not engaged in business during the Term or at the time of the Employee's termination. The foregoing restriction shall not apply (i) in the event that the Employee is terminated without cause or resigns his employment for good reason or (ii) to the holding of a passive investment interest in a venture to develop and license the television show "Absolute Cobbler" in various media and territories throughout the world. 10.2 NO INTERFERENCE. During the Restricted Period, Employee shall not, whether for his own account or for the account of any other individual, partnership, firm, corporation or other business organization (other than Company), intentionally solicit, endeavor to entice away from Company, or otherwise interfere with the relationship of Company with, any person who is employed by the Company at the time of the termination of the Employee's employment. 10.3 SECRECY. Employee recognizes that the services to be performed by him hereunder are special, unique and extraordinary in that, by reason of his employment hereunder, he may acquire confidential information and trade secrets concerning the operation of the Company, the use or disclosure of which could cause the Company substantial loss and damages which could not be readily calculated and for which no remedy at law would be adequate. Accordingly, Employee covenants and agrees with the Company that he will not at any time, except in performance of Employee's obligations to the Company hereunder or with the prior written consent of the Company, directly or indirectly, disclose any secret or confidential information that he may learn or has learned by reason of his association with the Company. The term "confidential information" includes, without limitation, information not previously disclosed to the public or to the trade with respect to the products, facilities, applications and methods, trade secrets and other intellectual property, systems, procedures, manuals, confidential reports, product price lists, customer lists, technical information, financial information (including the revenues, costs or profits associated with any of its products), business plans, prospects or opportunities but shall exclude any information already in the public domain. Notwithstanding anything to the contrary herein contained, Employee's obligation to maintain the secrecy and confidentiality of the confidential information under this Section 10 shall not apply to any such confidential information which is disclosed through any means other than as a result of any act by Employee constituting a breach of this Agreement or which is required to be disclosed under applicable law. 6 7 10.4 EXCLUSIVE PROPERTY. Employee hereby agrees to keep all such records in connection with Employee's employment as the Company may from time to time direct, and all such records shall be the sole and exclusive property of the Company. 10.5 INJUNCTIVE RELIEF. Without intending to limit the remedies available to the Company, Employee acknowledges that a breach of any of the covenants contained in this Section 10 may result in material irreparable injury to the Company for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of such a breach or threat thereof, the Company shall be entitled to seek to obtain a temporary restraining order and/or a preliminary injunction restraining Employee from engaging in activities prohibited by this Section 10 or such other relief as may be required to specifically enforce any of the covenants in this Section 10. 11. PARAGRAPH HEADINGS. The titles to the Sections of this Agreement are solely for the convenience of the parties and shall not be used to explain, modify, simplify, or aid in the interpretations of the provisions of this Agreement. 12. NOTICES. All notices, demands and requests provided or permitted to be given pursuant to this Agreement, shall be given in writing, sent by certified mail, return receipt requested, and addressed as follows or to such other address so designated in the appropriate manner by the parties. All notices shall be deemed effective when mailed. Company: Source Media, Inc. 5400 LBJ Parkway Suite 680 Dallas, Texas 75240 Attention: Board of Directors With a copy to: Robert L. Winikoff, Esq. Cooperman Levitt Winikoff Lester & Newman, P.C. 800 Third Avenue New York, New York 10022 Employee: Stephen Palley 45 East End Avenue New York, New York 10004 7 8 13. ASSIGNMENT AND ASSUMPTION. The rights of each party under this Agreement are personal to that party and may not be assigned, delegated or transferred to any other person, firm, corporation, or other entity without the prior written consent of the other party, except that the Company may transfer its rights under this Agreement to any Affiliate or other entity which succeeds, by contract or operation of law, to all or substantially all of the business of the Company and agrees in writing to assume the Company's obligations under this Agreement. 14. GOVERNING LAW. This Agreement shall be governed by, construed and enforced in accordance with the laws of the State of New York without giving effect to the conflicts of law principles of the laws of said state. The Company shall reimburse the Employee for all reasonable fees and disbursements incurred by the Employee in connection with any dispute over the enforcement of the Employee's rights under this Agreement, but only if the Employee substantially prevails in such dispute. 15. ENTIRE AGREEMENT. This Agreement, and the stock option agreement evidencing the stock option referred to in paragraph 4C, shall constitute the entire agreement between the parties and any prior written or oral understanding or representation of any kind, or any oral communications shall not be binding upon either party except to the extent incorporated in this Agreement. This Agreement supercedes any and all prior agreements between the parties. 16. MODIFICATION OF AGREEMENT. This Agreement can be modified only in writing and shall be binding only if executed with and under the same formality by the parties hereto or their duly authorized representatives. 17. NO WAIVER. The failure of either party to this Agreement to insist upon the performance of any of the terms and conditions of this Agreement, or the waiver of any breach of any of the terms and conditions of this Agreement, shall not be construed as thereafter waiving any such terms and conditions, but each same shall continue and remain in full force and effect as if no such forbearance or waiver had occurred. 18. EFFECT OF PARTIAL INVALIDITY. The invalidity or unenforceability of any provision or covenant of this Agreement shall not be deemed to affect the validity or enforceability of any other provision or covenant. In the event that any provision or covenant of this Agreement is held invalid or unenforceable, the same shall be deemed automatically modified to the minimum extent necessary to make such provision or covenant enforceable and the parties agree that the remaining provisions shall be deemed to be and to remain in full force and effect. 8 9 19. COUNTERPARTS. This Agreement may be executed in counterparts and all counterparts so executed shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. SOURCE MEDIA, INC. By: /s/ TIMOTHY P. PETERS ------------------------------------- Timothy P. Peters Chairman of the Board /s/ STEPHEN W. PALLEY ----------------------------------------- Stephen W. Palley 9 EX-10.3 4 EMPLOYMENT AGREEMENT WITH W. THOMAS OLIVER 1 EXHIBIT 10.3 EMPLOYMENT AGREEMENT This AGREEMENT is dated as of the 10th day of June, 1996, by and between Source Media, Inc., (the "Company") and W. Thomas Oliver (the "Employee"). In consideration of the mutual covenants and agreement contained herein, the parties, intending to be bound legally, agree as follows: 1. Employment. (a) Term. The Company hereby agrees to employ the Employee as President and Chief Operating Officer of a division known as "The Interactive Channel" for the period commencing on June 10, 1996 through June 9, 1999, unless the Employee's employment under this Agreement is earlier terminated or extended pursuant to Paragraphs 7, 8 and 9 below (the "Term" of this Agreement). (b) Duties. The Employee shall be President and Chief Operating Officer of a division of the Company to be called "The Interactive Channel" and shall have the obligations, duties and responsibilities customary for such a position. The Employee shall report only to the CEO and Chairman of the Board of Directors of Source Media, ("Chairman of the Board"). (c) Relocation. (i) The Employee shall be reimbursed by the Company for the reasonable incremental cost of the Employee commuting between Los Angeles and the Company's corporate offices in Dallas and for the 1 2 Employee's apartment and automobile rental in Dallas through June 10, 1997. Such expenses shall be determined at the sole discretion of the Employee except that the Company shall not reimburse the Employee in an amount greater than $40,000 for such expenses described in this paragraph 1(c). (ii) In addition, should the Employee decide to move in his sole discretion to the Dallas area or to such other area which might be designated as the operating headquarters of The Interactive Channel and provide such notice in writing addressed to the Chairman of the Board of Directors prior to June 10, 1997, then, in addition to the payment described in 1(c)(i) above, the Company shall promptly and fully reimburse the Employee for all reasonable moving expenses incurred by Employee, such expenses to include packing, loading and transport of personal property of Employee and travel expenses for Employee's family. 2. Compensation. (a) Base Salary. The Employee shall be paid a base salary during the Employee's employment under this Agreement, on the same payroll cycle as other management employees of the Company, at an annual rate of Two Hundred Fifty Thousand Dollars ($250,000). Employee shall be entitled to normal merit increases as per Company policy granted during the term of this Agreement. 2 3 (b) Bonus. The Employee shall be paid an annual bonus based on his performance during each calendar year, or portion thereof, during his employment with the Company. The total bonus shall be up to forty-five (45) percent of the Employee's then base salary. Sixty (60%) percent of that bonus shall be paid annually within sixty (60) days after the end of the calendar year for which the Employee's performance is being evaluated. Such annual bonus shall be based on goals mutually agreed to by the Employee and the Chairman of the Board in writing in advance of each year. Forty (40%) percent of that bonus shall be paid quarterly during the calendar year in four installments, with each such installment of up to a maximum of 10 (ten) percent of the total maximum bonus in that calendar year. The quarterly bonus shall be based on goals mutually agreed to by the Employee and the Chairman of the Board in writing in advance of each quarter and paid within sixty (60) days of the end of that quarter. (1) The 1996 Bonus. For the Employee's performance during the period from June 10, 1996 to December 31, 1996, Sixty (60%) percent of the Bonus will be paid by no later than March 1, 1997, and shall be based on the following goals: i) the successful launch of The Interactive Channel, Colorado Springs, ii) the staffing of The Interactive Channel operations both senior and middle level, iii) the successful launch of The Interactive Channel, Yonkers, and 3 4 iv) the implementation of the TAP Program. For purposes of this Paragraph 2, "successful launch" is defined as the acquiring of customers for The Interactive Channel and their retention of the service. The Company shall pay the remaining forty (40%) percent of the 1996 maximum bonus quarterly in installments of ten (10%) percent each, based on goals mutually agreed to by the Employee and the Chairman of the Board in writing in advance of each quarter. For the period of June 10, 1996 through September 30, 1996, the goals are as follows: i) setting up operations and staff of Interactive Channel offices in Dallas and Colorado Springs, ii) establishing a Colorado Springs programming template, and iii) developing the launch advertising campaign. 3. Benefits. The Employee shall be eligible to participate in any benefit plan made generally available to senior executives of the Company, including any such pension plan, hospitalization plan, medical and dental service plan, disability plan, life insurance plan, death benefit plan, stock purchase program (notwithstanding the provisions of such stock purchase program, the Employee shall be entitled to purchase stock at no less than a fifteen (15) percent discount to the then market price of the stock of the Company), 401K plan, retirement plan or any other employee benefit plan, which may be in effect at any time or from time-to-time during the Employee's employment under this Agreement, subject to the amendment or termination of any such plan or benefit. The Company's hospitalization plan, medical and dental service plan shall also provide hospitalization, dental and medical 4 5 coverage for the Employee's dependents, including his spouse and minor children. Prior to such time as the Employee becomes eligible for coverage under the Company's group health insurance plan, the Company shall make the premium payments necessary to permit the Employee to continue group health insurance coverage for the Employee and his eligible dependents under COBRA and to continue his current disability policy until coverage under the Company's disability policy begins. 4. Stock Option Plan. The Employee shall be eligible to participate in the Company Stock Option Plan. Upon execution of this Agreement, the Company, pursuant to the Source Media, Inc.'s 1995 Performance Equity Plan ("the Stock Option Plan") as amended, hereby irrevocably grants to the Employee the right and option to purchase 200,000 shares of the common stock, par value $0.001 of the Company at a purchase price of $10.50 per share. The option is intended to be a "qualified stock option plan" to the maximum extent allowable by law, the remainder of the option to be a "non-qualified stock option" subject to the provisions of Section 83 of the Internal Revenue Code of 1986, as amended from time to time. The option shall be exercisable: (a) On or after June 10, 1996 to the extent of 25,000 shares; (b) On or after June 10, 1997, an incremental increase of 50,000 shares to a total of up to 75,000 shares; (c) On or after June 10, 1998, an incremental increase of 50,000 shares to a total of up to 125,000 shares; 5 6 (d) On or after June 10, 1999, an increase of 75,000 shares to a total of up to 200,000 shares. The unexercised portion of the option shall automatically and without notice irrevocably terminate and become null and void on June 9, 2006. 5. Business Expenses. Upon presentation of receipts within sixty (60) days after date incurred by the Employee, the Company shall reimburse the Employee for all reasonable travel, entertainment and other similar business expenses incurred by him in the performance of his duties hereunder. The Company will reimburse the Employee for all reasonable expenses incurred by the Employee in equipping, maintaining and operating a phone, fax and computer for the equivalent of an at home office in Los Angeles. 6. Vacation. The Employee shall be entitled to reasonable vacations as may be consistent with the generally applicable vacation policies of the Company, but in no event less than four (4) weeks of paid vacation per year. 7. Termination of Employment. (a) By the Company. Notwithstanding Section 1(a) of this Agreement, the Employee's employment hereunder may be terminated by the Company, prior to the expiration of the Term of this Agreement, as follows: (1) Automatically, upon the death of the Employee. 6 7 (2) On the date on which the Company notifies the Employee of the termination of his employment due to his Disability. For purposes of this Agreement, "Disability" shall mean the Employee's inability to perform his duties under this Agreement, due to his physical or mental condition, for a continuous period of five months or for any non-continuous periods totalling six months in any twelve month period. (3) On the date on which the Company notifies the Employee of the termination of his employment for Cause. For purposes of this Agreement, "Cause" shall mean the conviction of a felony or Employee's entering of a plea of guilty or nolo contendere to a felony, or Employee's conviction of a felony or any lesser crime or offense involving the property or affairs of the Company or any of its affiliates, or the Employee's misappropriation or conversion of the assets or opportunities of the Company or any of its Members or any of their affiliates. (4) On the date on which the Company notifies the Employee in writing of the termination of his employment Without Cause. For purposes of this Agreement, "Without Cause" shall mean any reason for termination other than the Employee's death, Disability, Cause or the expiration of the Term of this Agreement. (b) By the Employee. Notwithstanding Section 1(a) of this Agreement, the Employee's employment hereunder may be terminated by the Employee, prior to the expiration of the Term of the Agreement, as follows: 7 8 (1) On the date on which the Employee notifies the Company that he is resigning from the Company. The Employee has the right to resign from the Company. (2) On the date on which the Employee notifies the Company that he is terminating his employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean without the Employee's written consent, the Company breaches the terms of this Agreement. The above notwithstanding, the Employee may not terminate his Employment hereunder for Good Reason, unless the Employee has first given the Company thirty (30) days advance notice of his intention to terminate his employment for Good Reason and specified in such notice his detailed reasons therefor and the Company has failed during such thirty (30) day period to cure such Good Reason. 8. Consequences of Termination. Following the termination of the Employee's employment pursuant to Section 7, above, the Company shall have no further obligation to the Employee and no further payments shall be made to the Employee, except to the extent provided in this Section 8 and except to the extent that the Employee is eligible for any benefits under the terms of any benefit plan or Stock Option Plan for which the Employee is eligible pursuant to Paragraph 3 or 4, above. (a) In the event the Employee's employment is terminated due to his death, the Company shall pay to the Employee's legal representatives or named beneficiaries 8 9 (as the Employee may designate from time to time in a notice to the Company) the Employee's base salary for the remainder of the month in which the Employee's death shall have occurred and an amount equal to the pro-rata portion of the bonus which the Employee would have been paid for his performance for the calendar year in which his death occurs but in no event less than six months of the then current base salary. (b) In the event the Employee's employment is terminated due to his Disability, the Company shall pay the Employee severance pay in a lump sum payment in an amount equal to one year of the Employee's then current base salary, and the accrued but not yet paid portion of the Employee's bonus. (c) In the event the Employee's employment is terminated for Cause, the Company shall pay the Employee any base salary earned by the Employee through the date of the termination of the Employee's employment, but not yet paid to the Employee and the pro-rata portion of the Employee's bonus. (d) In the event the Employee's employment is terminated Without Cause, the Company shall pay the Employee severance pay in lump sum payment in an amount equal to the sum of (1) the greater of (i) the Employee's then current annual base salary; or (ii) the Employee's base salary to be paid through June 9, 1999, and (2) all accrued but yet unpaid bonuses. (e) In the event the Employee's employment is terminated by the Employee for Good Reason, the Company shall pay the Employee a lump sum payment in an amount equal to the sum of (1) the greater of (i) the Employee's then current annual 9 10 base salary; or (ii) the Employee's base salary to be paid through June 9, 1999, and (2) all accrued but yet unpaid bonuses. (f) Notwithstanding anything to the contrary contained herein or contained in the Stock Option Plan, the following shall be the consequences upon termination to the Employee's vesting under such Stock Option Plan. The unexercised portion of the option shall automatically and irrevocably terminate and become null and void on June 9, 2006 or, if earlier, upon the occurrence of any of the following: (i) the expiration of one year following the date of termination of the Employee's employment by reason of death or Disability and, in which case, the unexercisable portion of the option shall become fully exercisable; (ii) the expiration of ninety (90) days following the date of termination of the Employee's employment in the event the Employee's employment is terminated for Cause; (iii) the expiration of five (5) years following the date of termination of the Employee's employment in the event the Employee's employment is terminated Without Cause or by the Employee for Good Reason and, in which case, the unexercisable portion of the option shall become fully exercisable; (iv) the expiration of ninety (90) days following the date of Employee's resignation from the Company in the event the Employee exercises his right to depart from the Company. (g) No duty of Mitigation. The Employee's rights to the payments described herein are not subject to any duty to mitigate. 10 11 (h) Reimbursement of Expenses. In all incidents of termination of employment, voluntary or involuntary, the Company shall reimburse the Employee for all reasonable expenses Employee incurred in connection with his employment and supported by receipts submitted to the Company within 60 days of the date of termination. 9. Expiration and Renewal. This Agreement shall automatically renew for additional terms of one year each unless at least six months prior to the expiration of each Term of this Agreement, the Company shall notify the Employee in writing that it elects not to renew the Agreement for such an additional term. The Company so notifies the Employee that the Company elects not to so renew this Agreement, then the Company shall pay the Employee a lump sum payment at the conclusion of the Term of the Agreement equal to six months of the Employee's then current annual base salary. 10. Assignment of Rights. The Company may assign all of its rights and obligations under this Agreement to any person or entity acquiring the principal assets used and useful in the operation of the Company, provided such assignee is financially able to honor the obligations to the Employee under the terms of this Agreement. Upon an assignment of this Agreement or a transfer of control of the Company (a "transfer of control" is defined as a transfer or sale of twenty-five percent (25%) or more of the outstanding and issued shares of stock in the 11 12 Company, all of the stock options set forth in Paragraph 4 of this Agreement shall be exercisable by the Employee. 11. Confidentiality and Related Matters. (a) The Employee shall not, for a period commencing upon the Termination Date and ending upon the one year anniversary thereof, either directly or intentionally (i) make known to any person or entity the names and addresses of any of the customers of the Company or contacts of the Company within the industry or any other information pertaining to such customers or contacts except to the extent such information is otherwise available or generally known in the industry or was known to the Employee prior to his employment with the Company, or (ii) recruit or attempt to recruit, directly or by assisting others, any other management employee of the Company or any of its affiliates. (b) The Employee agrees that a breach or violation of this covenant not to compete by the Employee shall entitle the Company, to its rights of injunction issued by any court of competent jurisdiction, restraining any further or continued breach or violation of this covenant. Such right to an injunction shall be cumulative and in addition to, and not in lieu of, any other remedies to which the Company may show itself justly entitled. (c) The representations and covenants contained in this Paragraph on the part of the Employee will be construed as ancillary to and independent of any other provision of this Agreement, and the existence of any claim or cause of action of the Employee against the Company or any officer, director, or shareholder of the Company, whether predicated on this Agreement or otherwise, shall not constitute a defense to the enforcement 12 13 by the Company of the covenants of the Employee contained in this Paragraph so long as Company is not in breach of its obligations under this Agreement. In addition, the provisions of this Paragraph shall continue to be binding upon the Employee in accordance with their terms for a period of one year past the termination date, notwithstanding the termination of the Employee's employment hereunder for any reason. (d) If any court shall determine that the time, geographical area, or scope of activity of any restriction contained in this Paragraph is unenforceable, it is the intention of the parties that such restrictive covenant set forth herein shall not thereby be terminated but shall be deemed amended to the extent required to render it valid and enforceable. (e) Confidentiality. The Employee recognizes and acknowledges that the Company's trade secrets and other confidential or proprietary information, as they may exist from time to time, are valuable, special, and unique assets of the Company's business, access to and knowledge of which are essential to the performance of the Employee's duties hereunder. The Employee confirms that all such trade secrets and other information constitute the exclusive property of the Company. Such information shall be marked or otherwise designated by the Company as "trade secret" or "confidential" during the term of this Agreement. During the Employment Term and thereafter for a period of one year past the Termination Date, the Employee shall hold in strict confidence and shall not disclose or reveal to any person, or use for his own personal benefit or for the benefit of anyone else, any trade secrets, confidential dealings, or other confidential or proprietary information so designated by the Company during the term of the Agreement (whether or not acquired, learned, obtained, or developed by the Employee alone or in conjunction with others during the term of this Agreement) belonging to or concerning the Company or any 13 14 of its subsidiaries, or any of their customers or clients or others with whom they now or hereafter have a business relationship, except (i) with the prior written consent of the Company duly authorized by its Board of Directors, (ii) in the course of the proper performance of the Employee's duties hereunder, (iii) for information (x) that becomes generally available to the public other than as a result of unauthorized disclosure by the Employee or his affiliates or (y) that becomes available to the Employee subsequent to the termination of his employment hereunder and on a nonconfidential basis from a source other than the Company or its subsidiaries who is not bound by a duty of confidentiality, or other contractual, legal, or fiduciary obligation, to the Company or such customers, clients, or others having a business relationship, or (iv) as required by applicable law or legal process. The provisions of this Paragraph shall continue in effect notwithstanding termination of the Employee's employment hereunder for any reason for a period of one year past the Employee's Termination Date. However, the Company acknowledges that the Employee brings with him various knowledge, skills and contacts related to the Company's business which the Employee acquired prior to his employment with the Company. Nothing in this Agreement is intended to nor shall preclude the Employee from continuing to work in the same business and industry as the Company upon termination of employment and continuing to use such information acquired prior to employment with the Company in any such employment. (f) Business Records. Given the secretive and competitive environment in which the Company does business and the fiduciary relationship that the Employee will have with the Company hereunder, the Employee agrees to promptly deliver to the Company, upon termination of his employment hereunder, or at any other time when the Company so 14 15 requests, all memoranda, notes, records, drawings, manuals, and other documents (and all copies thereof and therefrom) in any way relating to the business or affairs of the Company or any of its subsidiaries or any of their clients, whether made or compiled by the Employee or furnished to him by the Company or any of its employees, customers, clients, consultants, or agents, which the Employee may then possess or have under his control. The obligation of confidentiality set forth in Paragraph (e) shall continue notwithstanding the Employee's delivery of any such documents to the Company. The provisions of this Paragraph shall continue in effect up to and until termination of the Employee's employment hereunder for any reason. 12. Representations and Warranties. The Employee represents and warrants to the Company that he is under no contractual or other restriction or obligation which would prevent the performance of his duties hereunder, or interfere with the rights of the Company hereunder. The Company represents and warrants to the Employee that this Agreement has been duly authorized, executed and delivered by the Company, is the legal obligation of the Company and is enforceable as to the Company in accordance with its terms. 13. Governing Law. This Agreement has been executed by the Employee in the State of Texas and shall be construed in accordance with, and shall be governed by, the laws of the State of Texas without giving effect to rules governing conflicts of law. 15 16 14. Entire Agreement. This instrument contains the entire understanding and agreement between the parties relating to the subject matter hereof, except as otherwise referred to herein, and supersedes any prior employment agreement between the parties, whether written or oral. Neither this Agreement nor any provision hereof may be waived, modified, amended, changed, discharged or terminated, except by an agreement in writing signed by the party against whom enforcement of any waiver, modification, change, amendment, discharge or termination is sought. To the extent any employee handbook or similar policies of the Company are inconsistent with the Agreement, this Agreement shall control and govern. 15. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, and such counterparts together shall constitute a single instrument. 16. Provisions Severable. To the extent any one or more of the provisions of this Agreement shall be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby but shall remain in full force and effect. 16 17 17. Headings. The section headings herein are for convenience only and shall not be used in interpreting or construing this Agreement. 18. Notices. Any notice required or permitted to be given under the provisions of this Agreement shall be in writing and shall be deemed to have been duly delivered and received (i) on the date of personal delivery, or (ii) on the date of receipt (as shown on the return receipt) if mailed by certified or registered mail, return receipt requested, postage prepaid, or sent by Federal Express or similar courier service, with all charges prepaid, in each case addressed to the following persons at the following addresses, or to such other person or other addresses as either party may designate by notice in writing to the other party to this Agreement: (a) To the Employee: William Thomas Oliver 542 Warner Avenue Los Angeles, California 90024 With Additional Copy to: David E. Alexander, Esquire Peyser & Alexander Management, Inc. 500 Fifth Avenue, Suite 2800 New York, New York 10110 (b) To the Company: Tim Peters 8140 Walnut Hill Lane, #1000 Dallas, Texas 75231 17 18 With Additional Copy to: Maryann Walsh, Esq. 8140 Walnut Hill Lane, #1000 Dallas, Texas 75231 19. Survival. The termination of the Employee's employment and the termination of this Agreement shall not affect the rights and obligations which customarily survive the termination of an employment arrangement, including, without limitation, the terms of Paragraphs 8, 10, 16 and 19 of this Agreement. 20. No Third Party Beneficiaries. This Agreement does not create, and shall not be construed as creating, any rights enforceable by any person not a party to this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first hereinabove written. SOURCE MEDIA, INC. By: /s/ TIM PETERS --------------------------- TIM PETERS EMPLOYEE: /s/ W. THOMAS OLIVER ------------------------------ W. THOMAS OLIVER 18 EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 9,336 0 3,062 0 0 25,726 11,337 7,402 52,050 10,500 100,000 17,344 0 13 (78,853) 52,050 5,352 5,352 3,106 7,616 (284) 0 3,209 (8,295) 0 0 0 0 0 (9,011) (.70) (.70)
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