<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
File No. 333-37279
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.
---------------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS", BEGINNING ON PAGE 4.
---------------------
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.
---------------------
The date of this Prospectus is November 17, 1997.
<PAGE> 2
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.
2
<PAGE> 3
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 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")
3
<PAGE> 4
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.
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
4
<PAGE> 5
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.
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,
5
<PAGE> 6
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.
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
6
<PAGE> 7
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
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.
7
<PAGE> 8
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.
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
8
<PAGE> 9
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.
9
<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
COMMON STOCK OWNERSHIP OF
BEFORE THE COMMON STOCK AFTER
OFFERING THE OFFERING(1)
------------------- -------------------
NUMBER OF NUMBER OF SHARES NUMBER OF
NAME SHARES PERCENT BEING OFFERED SHARES PERCENT
---- --------- ------- ----------------- --------- -------
<S> <C> <C> <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
10
<PAGE> 11
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.
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.
11
