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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
FEBRUARY 11, 1999
SOURCE MEDIA, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 0-21894 13-3700438
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
5400 LBJ FREEWAY, SUITE 680, DALLAS, TEXAS 75240
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(972) 701-5400
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Item 5. Other Events
On February 11, 1999 Source Media, Inc. (the "Company") and Prevue
Ventures, Inc. ("Prevue"), a subsidiary of United Video Satellite Group, Inc.
("United Video"), announced in a press release in the form attached as Exhibit
99 that the parties have executed a Letter of Intent to enter into a joint
venture to establish a new business entity ("Newco") to conduct the Company's
lines of business that are unrelated to the "IT Network" business of providing
recorded voice information services through the telephone on a free,
pay-per-call or pay-per-minute basis. The Letter of Intent is subject to the
execution of definitive documentation, including representations and
warranties, covenants and conditions to closing. There can be no assurance that
the Company and Prevue will be able to agree on the form of such definitive
documents or that, if agreed upon, the transaction will be consummated.
Pursuant to the terms of the Letter of Intent, upon formation of Newco
Prevue would acquire 842,105 shares of Common Stock of the Company for a
purchase price of $12 million in cash. The Company would also issue to Prevue
five-year warrants to acquire up to 14,155,356 shares of the Company's Common
Stock at an exercise price of $14.25 per share. The Company and Prevue would
enter into a stockholders agreement with provisions to protect Prevue's
interest in the Company, including preemptive rights and proportionate Board
representation. Initially, upon the closing of the transaction, the Company's
Board of Directors would consist of seven members, two of which would be
designated by Prevue.
Newco would be capitalized initially with a $5 million capital
contribution by Prevue in consideration for a 45% equity ownership in Newco.
The Company would grant to Newco an exclusive, perpetual, royalty free,
irrevocable, worldwide license, with the right to sublicense, to all of the
Company's intellectual property that has application in its VirtualModem(TM)
and Interactive Channel business, as well as any future lines of business of
Newco, except that Newco's license would specifically exclude application in
the field of on-screen television program guides. The Company would grant to
Prevue an exclusive, perpetual, royalty free, irrevocable, worldwide license,
with the right to sublicense, to all of the Company's intellectual property
solely for use and application in such field of on-screen television program
guides.
Prevue would also commit to provide Newco advances, on an as-needed
basis, of up to $5 million to fund the operations of Newco. Such advances would
be in the form of secured convertible subordinated debentures ("Newco
Debentures") accruing interest at a compounding annual rate of 6%. Interest
would not be payable during the first five years, and the Newco Debentures
would mature after seven years, at which time all principal and the interest
accrued during the first five years would be payable. The Newco Debentures
would be convertible into super-voting equity interests of Newco. Assuming the
full funding in respect of the Newco Debentures and a full conversion thereof,
including conversion of accrued interest amounts for the first five years,
Prevue would have an approximately 60% equity ownership in Newco and
approximately 90% of the total voting power of Newco.
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Each of the Company and Prevue have further committed to provide
funding of up to an additional $10 million proportionally in accordance with
their respective interests in Newco pursuant to capital calls made by Newco
management in accordance with the expenditures contained in an agreed upon
budget. The funding of such $10 million amount, and any additional funding that
may be required by Newco, requires a 90% vote if needed during the first three
years, are thereafter a majority of the Newco votes, in accordance with
specified capital call procedures.
Prevue would also contribute certain services to Newco, including
affiliate sales and marketing, network operations, accounting and national
advertising sales and support. The Company would contribute to Newco system
specific, locally focused content, including local advertising, yellow pages,
classified advertising, local news and sports information. Prevue, through its
ultimate parent company United Video, would be required to use commercially
reasonable efforts to facilitate distribution of Newco's products through
United Video's affiliates and other contractual relations. It is anticipated
that both Prevue and the Company will provide other additional services to
Newco, in all cases on commercially reasonable terms and on an arm's-length
basis. Both Prevue and the Company have agreed that they will not compete with
the services of Newco while a significant shareholder of Newco.
The Company and Prevue would initially have equal management
representation in Newco. Prevue would have the right to nominate the President
and Chief Operating Officer of Newco, subject to Company approval. Upon the
acquisition by Prevue of a majority of the votes of Newco, Prevue would obtain
management control. However, certain special actions by Newco would continue to
require a 90% super-majority vote. Such special actions would include material
deviations from Newco's business strategies during the first three years,
(including a significant deviation in the amount of capital contributions by
the parties from an agreed upon business plan) issuance of additional equity,
distributions to equity holders, asset sales and other significant matters.
The Letter of Intent contemplates a "buy-sell" arrangement whereby
either party, following the third anniversary of the joint venture, may send to
the other party a notice specifying a price at which the other party can
purchase the notifying party's entire interest in Newco. If the notified party
does not elect to effect such purchase, it must sell its interest in Newco to
the notifying party at the specified price. All super-majority voting rights
would terminate upon the initiation of a buy-sell procedure or an initial
public offering of Newco. The Company would be required to redeem the warrants
issued to Prevue upon the initiation of a buy-sell procedure. The redemption
price would be payable, at the election of Prevue, either in Company Common
Stock or, if permitted, in cash. The Letter of Intent also provides for certain
transfer restrictions relating to Newco interests, drag-along and tag-along
rights with respect to such interests and rights upon a change in control of
the Company.
The Letter of Intent requires that the parties negotiate the
definitive documents in good faith, with commercially reasonable efforts, and
exclusively with each other for 90 days. If either the Company or Prevue fails
to use its good faith commercially reasonable efforts as such, the other has
agreed to pay as liquidated damages $3 million plus out-of-pocket costs and
expenses associated
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with due diligence and negotiation. In addition, the Company has agreed to pay
such liquidated damages and costs and expenses if it breaches the exclusivity
agreement prior to execution of definitive documents and, within 240 days after
the execution of the Letter of Intent, enters into a significant transaction
with a third party.
Upon the execution of definitive documents, the Company intends to
seek the approval of its common stockholders, as well as the approval of the
holders of its long-term debt and preferred stock. The consummation of the
definitive documents will also be subject to any required clearance under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("Hart-Scott"). If for any
reason the transaction is not consummated after the execution of definitive
documents, other than a failure to satisfy the condition relating to
Hart-Scott, the Company would be required to grant to Prevue a perpetual and
non-exclusive license to the Company's intellectual property. Such license
would require payments of royalties to the Company in an amount equal to .001%
of revenues attributable to the intellectual property, but in no event less
than $50,000 annually. If the transaction is not consummated after the
execution of definitive documents as a result of the Company's breach of the
exclusivity agreement and the Company enters into a significant transaction
with a third party within one year after the execution of the Letter of Intent,
in addition to such non-exclusive license grant, the Company would be required
to pay Prevue as liquidated damages $10 million plus out-of-pocket costs and
expenses, provide for two Prevue representatives on a seven-member Board of
Directors of the Company and issue to Prevue five-year warrants to acquire
3,208,700 shares of the Company's Common Stock at an exercise price of $7.125
per share.
The obligations of Prevue under the Letter of Intent and the
definitive documents, if any are entered into, are guaranteed by United Video.
RISK FACTORS
If we consummate a transaction with Prevue substantially on the terms
set forth in this Form 8-K, our business will be subject to additional risks
including:
o Reliance upon Prevue's management for the operation of the joint
venture;
o Dilutive effect of shares and warrants to be issued to Prevue; and
o Liquidated damages provisions.
We can give no assurances that we will consummate a transaction with
Prevue on the terms contained in this Form 8-K, or at all.
Item 7. Financial Statements and Exhibits
(c) Exhibits
99* Source Media, Inc., February 12, 1999 press release
announcing a joint venture between Source and Prevue to
establish a new business entity.
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* Previously filed.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: March 16, 1999 SOURCE MEDIA, INC.
By: /s/ TIMOTHY P. PETERS
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Timothy P. Peters,
Chairman of the Board and
Chief Executive Officer
