Top Stories: Rumors Swirl as Source
Media Execs' Big Payday Nears
By Eric Moskowitz
Staff Reporter
7/27/98 3:49 PM ET
It could be a very lucrative week for Source Media's
(SRCM:Nasdaq) top brass. That is, if the executives can will
the company's stock to stay above 20 for just six more
trading days.
Last Monday, TSC looked into the finances of the
Dallas-based interactive advertising company and found an
outfit ready to announce a watershed buyout. However, the
company has stayed mum ever since it reportedly hired
Lazard Freres as its adviser.
Expect the company to break that silence, as Source
Media's annual shareholder meeting gets under way
Tuesday in Dallas. The timing is interesting, to say the
least. While rumors are swirling that Microsoft
(MSFT:Nasdaq), Yahoo (YHOO:Nasdaq) and America
Online (AOL:NYSE), among others, are negotiating to buy
Source Media, some investors who are short the shares are
concerned that existing warrants and executive stock
options provide an irresistible temptation for both the
company and its management to bolster the share price.
These concerns have been heightened by the recent
volatility in the stock price. On July 8, the shares broke
above 20 for the first time, as rumors of a buyout began to
circulate. Source Media's stock surged to 39 on July 14, as
the rumors intensified. While the shares have stayed above
20, an important level for provisions in the company's
warrants and executive stock options, the company's stock
has fallen as low as 21 in late Monday trading.
Is there a connection here? According to documents filed
with the Securities and Exchange Commission and
obtained from Edgar Online, top executives such as Chief
Executive Tim Peters and President John Reed have been
granted options to buy several hundred thousand shares at
an exercise price of 8 23/32. The first tranche becomes
exercisable once the stock trades above 11 a share for any
20 trading days within a 25-day trading period; the next
tranches are exercisable at 14, 17 and 20 a share (each of
them also subject to the 20 out of 25 rule). Conditions for the
first two tranches -- for both 11 and 14 -- have been
achieved, though the contracts are written so that the
executives have to wait six months to exercise these
options. So they've come up with a plan.
At tomorrow's annual meeting, management is requesting
that shareholders approve an amendment that will annul this
six-month holding period so that the executives can exercise
these options right away. Under that proposal, CEO Tim
Peters could soon buy a total of 200,000 shares if the stock
price stays above 20 for six more trading days (in late
trading Monday, SRCM stock was at 21 1/2). With the
spread between the exercise price and Source Media's
share price of around 13, that could hand Peters a bonus of
as much as $2.6 million as soon as next week. Others who
will benefit from the deletion of the holding period include:
Reed, who would receive $780,000; Chief Financial Officer
W. Scott Bedford, $1.3 million; and executive vice
presidents Donald Maitland, $1.3 million, and Thomas Oliver,
$780,000, respectively. Source Media officials did not return
repeated phone calls for comment.
Normally, executives have to wait six months or more to
ensure some stability in a company's stock price. "By
getting rid of the six-month requirement, the company's top
men can exercise its options at a large profit right away,"
says one money manager who currently has a short position
in the stock.
The money manager said he can think of no reason for the
amendment -- unless executives are concerned that the
current price of the shares cannot be maintained. After all,
he says, "If Source Media does get bought up, top
management will be able to exercise all these options
immediately. So why would they have to waive this
six-month requirement if a buyout were imminent?"
It seems as if Source Media's lieutenants are making sure
that buyout or not, they will benefit from the stock's rise. "It's
nothing different than what other successful companies such
as Yahoo! are doing," says Anthony Stoss, an analyst with
Southeast Research Partners. "Top management have
been successful at increasing shareholder value, and they
have been doing a lot of good things on the business side."
Stoss has a buy rating on the stock and his firm's
subsidiary, GKN Securities, took the company public back
in 1993.
The other wrinkle that kicks in after the stock trades above
20 for 20 days revolves around the company's publicly traded
warrants. Once its stock attains this 20-20 level, the
company will have the option to force warrant holders to
exercise some 4.7 million public warrants outstanding,
according to SEC documents. Warrant holders would then
have 30 days to exercise these warrants (worth half a
common share) at 11 each, or relinquish the rights to the
warrants. At this point, the company could buy the warrants
back for a penny each.
If all of the 4.7 million public warrants are exercised, the
company could raise $25.6 million (a little more than 2.3
million times 11, the exercise price). Of course, this could
make warrant holders money as well if the stock stays
above 22. Two warrants equal one share, so holders will only
make a profit if the stock stays above 22.
The company has managed to retain its fans, one of whom
is Michael Rapp, a senior managing director with Oscar
Gruss & Son's private client group. Rapp thinks a buyout
deal remains feasible, saying, "It makes sense for some of
these strategic deals to start happening." Rapp says that
his clients own in the neighborhood of 2 million shares of
Source Media.
At Source Media stock's current pace, however -- the stock
is down from 28 last week -- it looks as if these warrant
holders won't be making nearly as much right now as the top
brass. |
