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As filed with the Securities and Exchange Commission on November 14, 1997
Registration No. 333-37279
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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Source Media, Inc..
(Exact name of registrant as specified in its charter)
Delaware 13-3700438
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5400 LBJ Freeway
Suite 680
Dallas, Texas 75240
(972) 701-5400
(Address, including zip code, and telephone number,
including area code, of registrant's principal
executive offices)
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Timothy P. Peters
Chairman of the Board and
Chief Executive Officer
Source Media, Inc.
5400 LBJ Freeway
Suite 680
Dallas, Texas 75240
(972) 701-5400
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
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Approximate date of commencement of proposed sale to the public:
From time to time after this registration statement becomes
effective as determined by market conditions.
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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
The registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED NOVEMBER 14, 1997
PROSPECTUS
33,000 SHARES
SOURCE MEDIA, INC.
COMMON STOCK
All the 33,000 shares (the "Shares") of Common Stock, $.001 par value
per share ("Common Stock"), of Source Media, Inc., a Delaware corporation
(together with its subsidiaries, "Source" or the "Company"), offered hereby are
being offered for the account of a stockholder of the Company (the "Selling
Shareholder"). The Company will receive none of the proceeds from sales of the
Shares.
The Common Stock is quoted on the NASDAQ National Market System (the
"NASDAQ") under the symbol "SRCM". On November 13, 1997, the closing price of
the Common Stock on the NASDAQ was $11.50 per share.
The Shares may be sold from time to time by the Selling Shareholder.
Such sales may be made on the NASDAQ or otherwise at prices and on terms
related to the then current market price of the Common Stock or in negotiated
transactions. The Shares may be sold by any one or more of the following
methods: (a) a block trade in which the broker or dealer so engaged will
attempt to sell the Shares as agent, but may position and resell a portion of a
block as principal to facilitate the transaction; (b) purchases by a broker or
dealer as principal, and resale by such broker or dealer, for its account
pursuant to this Prospectus; (c) ordinary brokerage transactions and
transactions in which the broker solicits purchasers; and (d) privately
negotiated transactions. See "Plan of Distribution".
The Company has agreed with the Selling Shareholder to register the
Shares offered hereby. The Company has also agreed to pay all fees and expenses
incident to such registration, other than any underwriting discounts, any
selling commissions payable in respect of sales of the Shares or any expenses
incurred by the Selling Shareholder to retain any counsel, accountant or other
advisor; all of which will be paid by the Selling Shareholder. It is estimated
that the fees and expenses payable by the Company in connection with the
registration of the Shares will be approximately $15,000. The Company has
agreed with the Selling Shareholder to keep the Registration Statement (as
hereinafter defined), of which this Prospectus is a part, effective for a
period of 14 days from the effective date of this Prospectus.
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THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS", BEGINNING ON PAGE 4.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
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The date of this Prospectus is November , 1997.
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No person is authorized in connection with the offering made hereby to
give any information or to make any representation not contained or
incorporated by reference in this Prospectus, and any information or
representation not contained or incorporated by reference herein must not be
relied upon as having been authorized by the Company or the Selling
Shareholder. This Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer in such
jurisdiction. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information herein is correct as of any time subsequent to the date hereof.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Reports, proxy
statements and other information filed by the Company with the Commission can
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's regional offices at 7 World Trade Center, Suite 1300, New
York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material can also be obtained from the Commission at
prescribed rates through its Public Reference Section at 450 Fifth Street,
N.W., Washington, D.C. 20549. The Commission maintains a Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding issuers, including the Company, that file
electronically with the Commission.
The Company has filed with the Commission a Registration Statement on
Form S-3 under the Securities Act of 1933, as amended, with respect to the
Common Stock offered hereby (including all amendments or supplements thereto,
the "Registration Statement"). This Prospectus, which forms a part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement, certain parts of which have been omitted in accordance
with the rules and regulations of the Commission. Statements contained herein
concerning the provisions of certain documents are not necessarily complete
and, in each instance, reference is made to the copy of such document filed as
an exhibit to the Registration Statement or otherwise filed with the
Commission. Each such statement is qualified in its entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission (File
No. 0-21894) pursuant to the Exchange Act are incorporated herein by reference:
(1) The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996;
(2) The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1997, June 30, 1997 and September 30, 1997;
(3) The Company's Current Reports on Form 8-K dated January 19, 1997
and October 30, 1997; and
(4) All other documents filed by the Company pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the Shares.
Any statement contained herein or in a document or information
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent that
a statement contained herein or in any subsequently filed document which also
is, or is deemed to be, incorporated by reference herein, modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of any such person, a
copy of any and all of the foregoing documents or information that has been
incorporated by reference in this Prospectus, other than exhibits to such
documents (unless such exhibits are
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specifically incorporated by reference into such documents). All requests
should be directed to Maryann Walsh, General Counsel, Source Media, Inc., 5400
LBJ Freeway, Suite 680, Dallas, Texas 75240, Telephone (972) 701-5400.
THE COMPANY
Source Media provides on-demand information, services and programming
through the telephone and cable television, delivered over the Company's
proprietary digital operating systems to mass market consumers through its two
operating subsidiaries, IT Network, Inc. ("IT Network") and Interactive
Channel, Inc. ("Interactive Channel"). IT Network provides on-demand information
through advertiser-sponsored telephone hotlines advertised in Yellow Pages and
newspapers. Interactive Channel provides on-demand information and services and
can provide Internet access to the cable television industry over existing
cable infrastructure and telephone lines.
IT Network provides voice information services through telephone
directories and newspapers. The Company also provides related support services
to a majority of its Yellow Pages directory and newspaper publisher partners.
The Company sells advertising and provides related support services to
advertising clients who pay to sponsor and deliver a promotional message before
and after the delivery of the voice information services. The Company provides
voice information services to eight of the nine largest Yellow Pages directory
publishers in the country.
Interactive Channel's Cable SuperSites cable network supplies programming
and services which allow a subscriber to access on-demand local and national
news, weather, sports and school information, view programming guides and
purchase goods and can allow a subscriber to browse the Internet, send and
receive e-mail and access a variety of other offerings over existing cable
infrastructure and telephone lines. Cable SuperSites is broadcast by cable
operators utilizing the Company's proprietary two-way operating system,
SourceWare.
The Company's operations are conducted through its subsidiaries, IT
Network, Inc., Interactive Channel, Inc. and Interactive Channel Technologies
Inc. ("ICT"). On January 14, 1997, Source acquired all of the outstanding
shares of ICT that it did not already own in exchange for 1,390,000 shares of
Common Stock, making ICT a wholly-owned subsidiary of the Company. ICT owns the
patented technology utilized by Source for the Cable SuperSites and provides
research and development services for Source. In October 1997, Holdings formed
IT Network, Inc. and Interactive Channel, Inc. as wholly-owned operating
subsidiaries.
The Company is a Delaware corporation whose principal executive offices are
located at 5400 LBJ Freeway, Suite 680, Dallas, Texas 75240.
RECENT DEVELOPMENTS
On October 30, 1997, the Company, through a subsidiary, acquired certain
of the electronic publishing assets of Brite Voice, Inc. ("Brite"). These
assets consisted primarily of contract rights and equipment used in the
Company's voice information services business. The purchase price for these
assets was approximately $35.6 million in cash.
On October 30, 1997, the Company, through a subsidiary, acquired the
electronic publishing assets of Voice News Network, Inc. ("VNN"). These assets
consisted primarily of contract rights and equipment used in the Company's
voice information services business. The purchase price for these assets was
$9.0 million in cash.
Both of these acquisitions (the "Acquisitions") were funded with cash
acquired in a private placement made in reliance upon Rule 506 of Regulation D
and Rule 144A under the Securities Act of 1933 of $100,000,000 of the Company's
12% Senior Secured Notes due 2004 (the "Notes") and Units (the "Units")
representing $20,000,000 of the Company's 13 1/2% Senior PIK Preferred Stock
(the "Preferred Stock") and Warrants (the "Warrants") to purchase 447,000
shares of the Company's common stock at a purchase price of $.01 per share
(collectively, the "Offering" and, together with the Acquisitions, the
"Transactions").
Of the remaining net proceeds, approximately (i) $22.3 million was used to
retire existing debt, (ii) $22.3 million was used to fund an interest escrow
account from which the first four interest payments on the Notes will be made,
(iii) $6.4 million will be used to pay fees and expenses of the offering and
(iv) $24.4 million will be used for general corporate purposes, including
working capital. The Company intends to file registration statements with the
Securities and Exchange Commission within 45 days of the closing of the
Offering and, after those registration statements have been declared
effective, will exchange the privately placed Notes and Preferred Stock for
substantially identical Senior Secured Notes and Senior PIK Preferred Stock.
The Company also intends to file a registration statement covering the shares
of common stock underlying the Warrants within six months.
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FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus and the documents incorporated
herein, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other important
factors that could cause the actual results, performance or achievements of the
Company, or industry results, to differ materially from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such risks, uncertainties and other important factors include,
among others: ability to secure distribution for Cable SuperSites, failure of
Interactive Channel to make available advanced analog or digital set-top boxes
incorporating the Company's technology; general economic and business
conditions; industry trends; competition; equipment costs and availability; the
loss of any significant customers; changes in business strategy or development
plans; availability, terms and deployment of capital; availability of qualified
personnel; changes in, or the failure or inability to comply with, government
regulation; and other factors referenced in this Prospectus. See "Risk
Factors." Forward-looking statements speak only as of the date of this
Prospectus. The Company expressly disclaims any obligation or undertaking to
disseminate any updates or revisions to any forward-looking statement contained
herein to reflect any change in the Company's expectations with regard thereto
or any change in events, conditions or circumstances on which any such
statement is based.
RISK FACTORS
Any investment in the Common Stock involves a high degree of risk.
Prospective purchasers of the Common Stock should carefully consider the risk
factors set forth below, as well as the other information contained in this
Prospectus.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
The Company is highly leveraged and substantially all its assets are
subject to security interests securing the Notes. The Company had total
indebtedness at October 30, 1997 of approximately $100 million (96% of total
capitalization excluding the Preferred Stock).
The degree to which the Company is leveraged, together with the covenants
imposed by the Notes and the Preferred Stock, could have adverse consequences
to holders of the Common Stock, including the following: (i) substantial cash
flow from the Company's operations will be required for the payment of
principal and interest on its indebtedness and will not be available for other
purposes; (ii) the Company's ability to obtain additional financing in the
future, whether for acquisitions, capital expenditures, further development of
Cable SuperSites, refinancings or otherwise, may be impaired; (iii) the Company
may be more leveraged than certain of its competitors, which may place it at a
competitive disadvantage; (iv) the Indenture related to the Notes (the
"Indenture") imposes significant financial and operating restrictions; and (v)
the Company's high degree of leverage makes it more vulnerable to changes in
economic conditions and may limit its ability to withstand competitive
pressures and technological developments, consummate acquisitions and
capitalize on significant business opportunities.
The Company will require substantial cash flow to meet its interest payment
obligations with respect to the Notes and any other borrowings. For the year
ended December 31, 1996, the Company's Pro Forma earnings before income taxes,
depreciation and amortization ("EBITDA") would have been $(4.9) million. For
the same period, the Company's pro forma interest expense, as adjusted to give
effect to the Transactions, would have been $12.0 million. The Company's cash
flow is dependent on the Company's future performance and is subject to
financial, economic and other factors, some of which are beyond its control. If
the Company is unable to generate such cash flow from operations or otherwise
to satisfy its interest obligations on the Notes and other indebtedness, it may
be required to refinance all or a portion of such obligations or to sell
assets. The Company expects that any payment of the principal of any of the
Notes or any other borrowings, whether upon maturity, acceleration, redemption
or other repurchase obligation, such as a change of control, may have to be
refinanced in whole or in part or financed by the sale of assets or similar
transactions. The Indenture contains restrictions on the Company's ability to
incur additional indebtedness and to sell assets and, notwithstanding such
restrictions, the Company may not be able to effect a refinancing or sell
assets on acceptable terms when needed.
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HISTORICAL AND PROJECTED LOSSES
The Company has reported an operating loss and a net loss in each year
since its inception, including EBITDA of $(12.1) million, an operating loss of
$14.0 million and a net loss of $13.9 million in the year ended December 31,
1996. For the full year, the Company's operating losses were experienced in
Interactive Channel and IT Network, although IT Network reached a break-even
position in the third and fourth quarters. While the Company expects its EBITDA
will improve as a result of the Acquisitions, the Company expects to continue to
incur substantial operating losses through 1998 and may incur substantial
operating losses thereafter. There can be no assurance that the Company will be
able to operate profitably at any time.
SHARES ELIGIBLE FOR FUTURE SALE
Source has a total of 11,514,047 shares of Common Stock outstanding. All
of the shares outstanding are freely tradeable under the Securities Act without
restriction or registration, to the extent held by persons other than
"affiliates" of Source, as defined under the Securities Act. Source also has
outstanding warrants, options and exchange rights entitling the holders thereof
to acquire an aggregate of 8,561,482 shares of Common Stock. Source is
required to file and maintain the effectiveness of a registration statement
covering 2,773,500 shares of Common Stock issuable upon exercise of certain of
such warrants. Any of such 2,773,500 shares, other than those acquired by
affiliates of Source, would be freely tradeable following the effectiveness of
such registration statement. In addition, various persons have "piggyback" and
demand registration rights to register shares of outstanding Common Stock and
Common Stock issuable upon the exercise of certain warrants and exchange rights
for public sale under the Securities Act. The preparation and filing of any
registration statements filed in connection with the exercise of registration
rights will be at the expense of Source. Sales of substantial amounts of
Common Stock in the public market pursuant to such registration rights could
adversely affect the prevailing market price of the Common Stock.
NO PRIOR HISTORY OF COMBINED OPERATIONS; RISK OF CANCELLATION OF ACQUIRED
CONTRACTS; ACQUISITION RISKS
Prior to the Acquisitions, the operations of the Company, Brite and VNN
were conducted as separate and distinct businesses, each with its own management
team, sales force and operations. The Company intends to manage its operations
and the operations of Brite and VNN as an integrated entity. While the Company
believes, based on its history with prior acquisitions, that it can successfully
integrate the operations of Brite and VNN, there can be no assurance that this
will be the case. There also can be no assurance that the Company will be able
to realize expected operating and economic efficiencies following the
Acquisitions. Many of the customer contracts of Brite and VNN acquired by the
Company are either non-transferrable, or terminable at will or with little or
no notice. There can be no assurance that the customers under such contracts
will not terminate them or that the Company will be able to renew such
contracts. In addition, certain customer contracts of Brite acquired by the
Company have expired. The termination or non-renewal of such contracts would
adversely affect the Company's business.
LIMITATIONS ON ABILITY TO PAY DIVIDENDS
For all dividend dates through and including November 1, 2002, the Company
may, at its option, pay dividends in additional shares of Preferred Stock in
lieu of paying cash dividends. However, the Company currently does not have a
sufficient number of authorized shares of preferred stock to pay dividends on
the Preferred Stock in additional shares of Preferred Stock on any quarterly
dividend date after May 1, 1999, and the Indenture limits the amount of cash
dividends that may be paid on shares of preferred stock of the Company. The
Company intends to seek approval from its stockholders at its next annual
meeting of an amendment to its certificate of incorporation to increase the
number of shares of authorized preferred stock to an amount sufficient to allow
it to pay such dividends in additional shares of Preferred Stock. If the Company
does not obtain such approval and is unable to pay cash dividends, the holders
of Preferred Stock would be entitled to certain rights, including the right to
elect two directors and an additional 2% dividend, for so long as dividends
remain unpaid.
In addition to the limitations imposed on the payment of dividends by the
Indenture, under Delaware law the Company is permitted to pay dividends on its
capital stock, including the Preferred Stock, only out of its surplus or, in the
event that it has no surplus, out of its net profits for the year in which a
dividend is declared or for the immediately preceding fiscal year. Surplus is
defined as the excess of a company's total assets over the sum of its total
liabilities plus the par value of its outstanding capital stock. In order to pay
dividends in cash, the Company must have surplus or net profits equal to the
full amount of the cash dividend at the time such dividend is declared.
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In determining the Company's ability to pay dividends, Delaware law permits
the Board of Directors of the Company to revalue the Company's assets and
liabilities from time to time to their fair market values in order to create
surplus. The Company cannot predict what the value of its assets or the amount
of its liabilities will be in the future and, accordingly, there can be no
assurance that the Company will be able to pay cash dividends on the Preferred
Stock. In addition, the Certificate of Designation relating to the Preferred
Stock limits the Company's ability to pay dividends on its other shares of
capital stock.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company will be required to
offer to repurchase all or a portion of the outstanding Notes or Preferred Stock
at 101% of, in the case of the Notes, the principal amount thereof, plus accrued
and unpaid interest to the date of repurchase, and, in the case of the Preferred
Stock, the liquidation preference plus accumulated and unpaid dividends. The
source of funds for any such payment at maturity or earlier repurchase will be
the Company's available cash or cash generated from operating or other sources,
including, without limitation, borrowings or sales of assets or equity
securities of the Company. There can be no assurance that sufficient funds will
be available to pay such principal, liquidation preference or to make any
required repurchase. If an offer to repurchase the Notes is required to be made
and the Company does not have available funds sufficient to pay for Notes
tendered for repurchase, an event of default would occur under the Indenture.
The occurrence of an event of default could result in acceleration of maturity
of the Notes. Similarly, if the Company is required to offer to repurchase the
outstanding Preferred Stock and the Company does not have available funds
sufficient to repurchase shares of the Preferred Stock tendered for repurchase,
a voting rights triggering event would occur under the Certificate of
Designation, which would, among other things, give the holders of Preferred
Stock the right to elect two members of the Board of Directors.
ACCESS TO CHANNELS ON CABLE SYSTEMS AND UNCERTAINTY OF SUBSCRIBER ACCEPTANCE
The Company's ability to offer Cable SuperSites on any cable television
system depends on obtaining an agreement from cable operators on terms
satisfactory to the Company. There is intense competition among suppliers of
programming for access to channels. The Company currently has three agreements
in place with cable operators and is providing programming in Colorado Springs,
Colorado and Denton, Texas. Two of these agreements may be terminated with
little or no notice. The Company expects that any future distribution agreements
may be terminated with little or no notice. The Company is in active discussions
to obtain channel access for Cable SuperSites with other cable systems. There
can be no assurances that such additional agreements will be entered into.
Even if the Company does have channel access, there can be no assurance
that a significant market for on-demand interactive television will develop or
that cable subscribers will use the television as a source of on-demand
information and services. In addition, the Interactive Channel will be competing
with other on-demand information and entertainment sources. This competition
includes services offering access to the Internet through the television. There
can be no assurance that Cable SuperSites will prove more desirable than such
services. If Cable SuperSites does not achieve market acceptance, Source will be
unable to implement its business strategy and Source's business will be
materially adversely affected.
EVOLVING NATURE OF BUSINESS
The on-line information and services industry is experiencing rapid change.
Products or technologies developed by others could render obsolete or otherwise
significantly diminish the value of the Company's products or technologies,
Interactive Channel or IT Network. The Company's future performance will depend
substantially on its ability to respond to competitive developments, to upgrade
its technologies and programming, to commercialize products and services
incorporating upgraded technologies and programming and to adapt its operational
and financial control systems as necessary to respond to continuing changes in
its businesses. There can be no assurance that the Company will be successful in
these efforts.
In addition, Source may consider strategic acquisitions in either of its
lines of business from time to time. Any assessment of potential acquisitions,
including the Acquisitions, is necessarily inexact and its accuracy is
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inherently uncertain. There can be no assurances that management of Source
would recognize the risks and uncertainties associated with such an
acquisition, including the Acquisitions.
AVAILABILITY OF PROGRAMMING
The success of Interactive Channel is highly dependent on the
availability of high-quality programming applications. The Company depends on
independent programming sources, such as third-party suppliers, local media,
retailers and information service providers, to create, produce and update the
programming disseminated on Cable SuperSites at no, or minimal, cost to the
Company. There can be no assurance that Source will succeed in attracting and
retaining such independent programming sources. If independent programming
sources do not develop high quality, up-to-date information, shopping,
entertainment and other programming applications that are capable of being
delivered on Cable SuperSites and that appeal to subscribers, or if such
suppliers are unwilling to provide such applications to Source on terms
favorable to Source, Source would have to increase the extent to which it
supplements these independent programming services with its internal
programming, which would increase the cost of operating Cable SuperSites.
RELIANCE UPON PROPRIETARY TECHNOLOGY
Source often enters into confidentiality or license agreements with certain
of its employees, consultants and other outside parties, and generally seeks to
control access to and distribution of its proprietary information. Despite
these precautions, it may be possible for third parties to copy or otherwise
obtain and use Source's products or technology without authorization, or to
independently develop similar products and technology. In addition, effective
copyright and trade secret protection may be unavailable or limited in certain
foreign countries. There can be no assurance that the steps taken by Source
will prevent misappropriation of its technology or that litigation will not be
necessary in the future to enforce Source's intellectual property rights, to
protect Source's trade secrets, to determine the validity and scope of the
proprietary rights of others, or to defend against claims of infringement or
invalidity. Such litigation could result in the invalidation of Source's
proprietary rights and, in any event, could result in substantial costs and
diversion of management time, either of which could have a material adverse
effect on Source's business.
UNAVAILABILITY OF EQUIPMENT; RELIANCE ON SOLE SUPPLIER
The Company and NextLevel Systems, Inc. ("NextLevel") have entered into
an agreement to incorporate the Company's SourceWare operating system in Next
Level's advanced-analog and digital set-top boxes. Although NextLevel has
agreed to manufacture set-top boxes compatible with the Company's technology,
NextLevel has not agreed to manufacture such units in any certain quantities.
If NextLevel fails to incorporate the Company's SourceWare operating system
into its set-top boxes or fails to manufacture them in sufficient quantities,
the Company would be required to seek to enter into such arrangement with a
different set-top box manufacturer or continue to purchase its own set-top
boxes. Because NextLevel produces over 62% of the United States' set-top boxes,
an agreement with any other manufacturer would not be as beneficial to the
Company. In addition, if the Company were required to purchase its own set-top
boxes, the Company estimates that its capital costs related to such purchases
would increase significantly, compared to the estimated cost of incorporating
the Company's SourceWare operating system into NextLevel's set-top boxes. If
the Company is forced to pursue either of these alternatives, its business
prospects and financial condition would be materially adversely affected.
To incorporate SourceWare technology in advanced analog set-top boxes
requires the addition of the Company's chip for such set-top boxes to access
Cable SuperSites. Consequently, such chip is likely to be a key factor in the
success of the Interactive Channel. LSI Logic is currently the only manufacturer
of these chips and is therefore the Company's sole supplier of this important
component. The Company has no guaranteed supply arrangements with LSI Logic, and
there can be no assurance that LSI Logic will be able to meet its requirements.
Unless alternative supply sources are identified for this chip, the Company
could be subject to pricing risks, delivery delays and quality control problems
or even unavailability of this component, any of which would have a material
adverse effect on the Company.
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HOLDING COMPANY STRUCTURE
Source is a holding company with no business operations of its own. The
Company's only material assets are the direct and indirect equity interests in
its subsidiaries, through which the Company conducts its business operations.
Accordingly, Source will be dependent upon the earnings and cash flows of, and
dividends and distributions from, its direct and indirect equity interest in its
subsidiaries to pay its expenses, meet its obligations and pay interest and
principal on the Notes and dividends on the Preferred Stock. There can be no
assurance that these direct and indirect equity interests in Source's
subsidiaries will generate sufficient earnings and cash flows to pay dividends
to distribute funds to Source to enable Source to pay its expenses and meet its
obligations to pay interest and principal on the Notes and dividends on the
Preferred Stock.
RELIANCE ON KEY PERSONNEL
The Company's future performance depends in large part on the services of
certain executive officers and other key personnel, the loss of any one of which
could be detrimental to the Company's success. In addition, for the Company to
implement its strategy and continued development and growth, it will be
necessary for the Company to attract and retain qualified personnel in all
areas.
COMPETITION
In an industry characterized by extensive capital requirements and rapid
technological change, Source faces potential competition for the acceptance of
its on-line programming and services from a number of companies, most of which
have significantly greater financial, technical, manufacturing and marketing
resources than Source and may be in a better position to compete in the
industry. In addition, Source faces competition for advertiser revenues from
other media, including radio, television, newspapers, and magazines. Source
believes that for the foreseeable future, public access to on-line television
will generally be through cable operators. Accordingly, Source must compete with
other providers of television programming to establish relationships with cable
operators to gain channel access.
In addition, certain regional bell operating companies ("RBOCs") have
provided voice information services in the past. There can be no assurance that
the RBOCs will not provide such services again in the future. If one or more
RBOCs were to begin providing such services, the resulting competition could
have a material adverse effect on the Company's financial condition and results
of operations.
GOVERNMENT REGULATION
The telecommunications and cable television industries are subject to
extensive regulation by federal, state and local governmental agencies. Existing
regulations were substantially affected by the passage of the Telecommunications
Act of 1996 ("1996 Telecom Act") in February 1996, which allowed cable
television companies and telephone companies both to enter and participate in
new lines of business. This introduced the possibility of new, non-traditional
competition for both cable television and telephone companies and resulted in
greater potential competition for Source. The outcome of federal and state
administrative proceedings may also affect the nature and extent of competition
that will be encountered by Source. In addition, future regulations may prevent
Source from generating revenues from sales of database information about
consumers obtained by Source from its television and telephone business.
BellSouth is also allowed to terminate its agreement with the Company if it
determines that regulatory changes would impact the Company's ability to perform
under such agreement. These competitive developments, as well as other
regulatory requirements relating to privacy issues, may have a material adverse
effect on Source's business.
VOLATILITY OF MARKET PRICES FOR THE COMMON STOCK
The market price of the Common Stock has been and may continue to be
volatile and could be subject to wide fluctuations in response to quarterly
variations in operating results, announcements of technological innovations or
new products by Source or its competitors, changes in financial estimates by
securities analysts, or other events or factors. In the event that Source's
operating results are below the expectations of public market analysts and
investors in one or more future quarters, it is likely that the price of the
Common Stock will be materially adversely affected. In addition, the stock
market has experienced significant price and volume fluctuations that have
particularly affected the market prices of equity securities of many
communications, media and technology companies and that often have been
unrelated to the operating performance of such companies. General market
fluctuations may adversely affect the market price of the Common Stock.
POTENTIAL ADVERSE IMPACT OF ANTI-TAKEOVER PROVISIONS
Source's certificate of incorporation and by-laws and the provisions of the
Delaware General Corporation Law may have the effect of delaying, deterring or
preventing a change in control or an acquisition of Source. Source's
certificate of incorporation authorizes the issuance of "blank check" preferred
stock, which, in the event of issuance, could be utilized by the board of
directors of Source as a method of discouraging, delaying or preventing a change
in control or an acquisition of Source, even though such an attempt might be
economically beneficial to the holders of Common Stock. Such provisions may
have an adverse impact from time to time on the price of the Common Stock.
8
<PAGE> 10
SELLING SHAREHOLDER
The following table sets forth certain information with respect to the
ownership of the Common Stock, as of November 13, 1997, and as adjusted to
reflect the sale of the Shares offered hereby by the Selling Shareholder.
Except as otherwise indicated, the Selling Shareholder has sole voting and
investment power with respect to all shares indicated as being beneficially
owned by such person.
<TABLE>
<CAPTION>
Ownership of Ownership of
Common Stock Before Number of Shares Common Stock After
the Offering Being Offered the Offering(1)
------------------- ---------------- ------------------
Number of Number of
Name Shares Percent Shares Percent
---- -------- ------- -------- -------
<S> <C> <C> <C>
Dykema Gossett PLLC(2) 33,000 * 33,000 0 --
</TABLE>
- ---------------------------
* Represents less than 1% of outstanding Common Stock.
(1) Assumes that all Shares being offered are sold.
(2) The shares being offered by Dykema Gossett PLLC as trustee for the
benefit of William T. Little individually and as trustee of the William
T. Little Revocable Trust ("Little") were received by Little from the
Company as part of a legal settlement. In connection with the settlement,
the Company also entered into the Settlement Agreement and Release dated
September 9, 1997 (the "Little Agreement") with Little pursuant to which
Little was accorded certain registration rights with respect to such
shares. The Company has registered such shares for sale pursuant to this
Prospectus as required by the Little Agreement.
PLAN OF DISTRIBUTION
The Shares may be sold from time to time by the Selling Shareholder
(including the Selling Shareholder's pledgees, donees or other successors in
interest). All sales may be made by the Selling Shareholder on the NASDAQ or
otherwise at prices and on terms related to the then current market price of
the Common Stock or in negotiated transactions. The Shares may be sold by any
one or more of the following methods:
(a) a block trade in which the broker or dealer so engaged will
attempt to sell the Shares as agent, but may position and resell a portion of a
block as principal to facilitate the transaction;
(b) purchases by a broker or dealer as principal, and resale by such
broker or dealer, for its account pursuant to this Prospectus;
(c) ordinary brokerage transactions and transactions in which the
broker solicits purchasers; and
(d) privately negotiated transactions.
The Selling Shareholder may effect such transactions by selling the
Shares to or through brokers or dealers. Such brokers or dealers will receive
compensation in the form of discounts or commissions from the Selling
Shareholder, and they may also receive commissions from the purchasers of the
Shares for whom they may act as agents. Such discounts or commissions from the
Selling Shareholder or such purchasers are not expected to exceed those
customary in the types of transactions involved.
The Company will pay all fees and expenses incident to the
registration of the Shares, other than any underwriting discounts, any selling
commissions payable in respect of sales of the Shares or any expenses incurred
by the Selling Shareholder to retain any counsel, accountant or other advisor;
all of which will be paid by the Selling Shareholder. It is estimated that the
fees and expenses payable by the Company in connection with the registration of
the Shares will be approximately $15,000. The Company will receive none of the
proceeds from sales of the Shares.
In the event the Shares are offered to the public by the Selling
Shareholder, they may be deemed "underwriters" within the meaning of the
Securities Act of 1933. Any broker-dealer selling the Shares as agent for a
Selling Shareholder and any broker-dealer purchasing and reselling the Shares
for its own account may also be deemed an "underwriter".
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.
9
<PAGE> 11
LEGAL MATTERS
The legality of the Shares offered hereby will be passed upon for the
Company by Thompson & Knight, P.C., Dallas, Texas.
EXPERTS
The consolidated financial statements of the Company appearing in its
Annual Report on Form 10-K for the year ended December 31, 1996, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon included therein and incorporated herein by reference. Such
consolidated financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
Any audited financial statements incorporated by reference in the
Registration Statement of which this Prospectus is a part will be so
incorporated by reference herein in reliance upon the reports of independent
auditors pertaining to such financial statements (to the extent covered by
consents filed with the Securities and Exchange Commission) given upon the
authority of such firm as experts in auditing and accounting.
10
<PAGE> 12
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following table sets forth the expenses, other than brokerage
discounts and commissions, expected to be incurred in connection with the
offering of the Shares registered hereby. All amounts, except the Securities
and Exchange Commission registration fee, are estimated.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 120
Accounting Fees and Expenses................................ $ 5,000
Legal Fees and Expenses..................................... $ 5,000
Miscellaneous Expenses...................................... $ 4,880
-------
Total............................................ $15,000
=======
</TABLE>
- --------------
Item 15. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law ("Section 145")
permits indemnification of directors, officers, agents and controlling persons
of a corporation under certain conditions and subject to certain limitations.
Article Eighth of the Company's Certificate of Incorporation (Exhibit 3.1
hereto) and Section 5.1 of the Company's Bylaws (Exhibit 3.2 hereto) provide
for the indemnification of directors, officers and other authorized
representatives of the Company to the maximum extent permitted by the Delaware
General Corporation Law. Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by reason of the fact that he is or
was a director, officer or agent of the corporation or another enterprise if
serving at the request of the corporation. Depending on the character of the
proceeding, a corporation may indemnify against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with such action, suit or proceeding if the person
indemnified acted in good faith and in a manner he reasonably believed to be
in, or not opposed to, the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. In the case of an action by or in the right of the
corporation, no indemnification may be made with respect to any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation, unless and only to the extent, that the court of chancery or the
court in which such action or suit was brought shall determine that despite the
adjudication of liability such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper. Section 145
further provides that to the extent a director or officer of a corporation has
been successful in the defense of any action, suit or proceeding referred to
above or in the defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
The Company's Bylaws permit it to purchase insurance on behalf of any
such person against any liability asserted against him and incurred by him in
any such capacity, or arising out of his status as such, whether or not the
Company would have the power to indemnify him against such liability under the
foregoing provision of the Bylaws.
II-1
<PAGE> 13
Item 16. Exhibits.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<S> <C>
4.1 -- Form of Common Stock Certificate (filed as Exhibit 4.1 to
the Company's Registration Statement on Form S-1 (No. 33-
97564), and incorporated herein by reference).
5.1* -- Opinion of Thompson & Knight, P.C., with respect to the
validity of the Source Common Shares.
23.1+ -- Consent of Ernst & Young LLP.
23.2* -- Consent of Thompson & Knight, P.C. (included in Exhibit
5.1).
24.1* -- Powers of Attorney (included in the signature page of this
Amendment No. 1)
</TABLE>
- -------------
* Filed herewith.
+ Previously filed.
Item 17. Undertakings.
(a) Rule 415 Offering
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to the Registration Statement:
(i) to include any prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) to reflect in the Prospectus any facts or events
arising after the effective date of the Registration Statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental change
in the information set forth in the Registration Statement;
(iii) to include any material information with respect to
the plan of distribution not previously disclosed in the
Registration Statement or any material change to such
information in the Registration Statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed
with or furnished to the Commission by the Registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934
that are incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 14
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold
at the termination of the offering.
(b) Filings Incorporating Subsequent Exchange Act Documents by
Reference.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's Annual Report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
Registration Statement shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(h) Acceleration of Effectiveness.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-3
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused this
Amendment No. 1 to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on the 13th day of November, 1997.
SOURCE MEDIA, INC.
By: /s/ TIMOTHY P. PETERS
-----------------------------------
Timothy P. Peters
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned directors and
officers of Source Media, Inc., a Delaware corporation, which has filed a
Registration Statement on Form S-3 with the Securities and Exchange Commission,
Washington, D.C. 20549 under the provisions of the Securities Act of 1933, as
amended (the "Securities Act") hereby constitute and appoint Timothy P. Peters,
Michael G. Pate and Maryann Walsh, and each of them, the individual's true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for the person and in his or her name, place and stead, in any
and all capacities, to sign such Registration Statement and any or all
amendments, including post-effective amendments, to the Registration Statement,
including a Prospectus or an amended Prospectus therein and any registration
statement for the same offering that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act, and all other documents in connection
therewith to be filed with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact as agents or any of them, or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
By: /s/ TIMOTHY P. PETERS Chief Executive Officer and November 13, 1997
------------------------------------------ Chairman of the Board
Timothy P. Peters (principal executive officer)
By: /s/ MICHAEL G. PATE Chief Financial Officer and November 13, 1997
------------------------------------------ Treasurer (principal financial
Michael G. Pate and accounting officer)
</TABLE>
II-4
<PAGE> 16
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
By: /s/ JOHN J. REED President and Director November 13, 1997
------------------------------------------
John J. Reed
By: /s/ ROBERT H. ALTER Director November 13, 1997
------------------------------------------
Robert H. Alter
By: /s/ ROBERT J. CRESCI Director November 13, 1997
------------------------------------------
Robert J. Cresci
By: /s/ JAMES L. GREENWALD Director November 13, 1997
------------------------------------------
James L. Greenwald
By: /s/ BARRY RUBENSTEIN Director November 13, 1997
------------------------------------------
Barry Rubenstein
By: /s/ DAVID L. KUYKENDALL Director November 13, 1997
------------------------------------------
David L. Kuykendall
By: /s/ MICHAEL J. MAROCCO Director November 13, 1997
------------------------------------------
Michael J. Marocco
</TABLE>
II-5
<PAGE> 17
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------ ----------------------
<S> <C>
4.1 -- Form of Common Stock Certificate (filed as Exhibit 4.1 to
the Company's Registration Statement on Form S-1 (No. 33-
97564), and incorporated herein by reference).
5.1* -- Opinion of Thompson & Knight, P.C., with respect to the
validity of the Source Common Shares.
23.1+ -- Consent of Ernst & Young LLP.
23.2* -- Consent of Thompson & Knight, P.C. (included in Exhibit
5.1).
24.1* -- Powers of Attorney (included on the signature page of this
Amendment No. 1)
</TABLE>
- -------------
* Filed herewith.
+ Previously filed.
<PAGE> 1
EXHIBIT 5.1
(214) 969-1700
November 14, 1997
Source Media, Inc.
5400 LBJ Freeway, Suite 680
Dallas, Texas 75240
Re: Registration Statement on Form S-3
Gentlemen:
We have acted as counsel for Source Media, Inc., a Delaware corporation
(the "Company"), in connection with the preparation of the Company's
Registration Statement on Form S-3 (the "Registration Statement"), to be filed
with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Securities Act"), in connection with
the proposed sale of up to 33,000 shares (the "Shares") of Common Stock of the
Company by a certain shareholder of the Company (the "Selling Shareholder"). The
Shares are proposed to be sold by the Selling Shareholder in the manner set
forth under the caption "Plan of Distribution" in the Prospectus constituting
Part I of the Registration Statement.
In connection with the foregoing, we have examined the originals or
copies, certified or otherwise authenticated to our satisfaction, of such
corporate records of the Company, certificates of public officials and other
instruments and documents as we have deemed necessary to require as a basis for
the opinions hereinafter expressed. As to questions of fact material to such
opinions, we have, where relevant facts were not independently established,
relied upon statements of officers of the Company.
On the basis of the foregoing and in reliance thereon, we advise you
that in our opinion the Shares are legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion with the Commission as
Exhibit 5.1 of the Registration Statement and to the reference to us in the
Prospectus under the caption "Legal Matters". In giving this consent, we do not
thereby admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act or the rules or regulations of
the Commission thereunder.
Respectfully submitted,
THOMPSON & KNIGHT
A Professional Corporation
By: /s/ Michael L. Bengtson
----------------------------------
Michael L. Bengtson, Shareholder
