Source Media Inc. was facing a spate of shareholder
lawsuits last week accusing the troubled interactive-services provider of duping
investors.
By midweek, six lawsuits had been filed in U.S. District
Court for the Northern District of Texas, alleging that between September 1997 and August
1998, the Dallas-based company concealed lost business by issuing false and misleading
earnings statements and press releases, thereby artificially inflating its stock price.
The filings sought class-action status.
Source -- which did not return calls seeking comment last
week -- has publicly responded to one of the lawsuits, putting out a press release saying
that the suit was without merit, and that the company would defend itself vigorously.
At issue is the acquisition in October 1997 of the assets
of Brite Voice Systems and Voice News Network for $35.6 million and $9 million,
respectively, by the company's IT Network division.
Disgruntled shareholders claimed that company officials
failed to disclose that the earnings potential of the acquired assets was diminished when
some Brite Voice customers elected to jump to other service providers.
The company did not report the lost business until the
second quarter of 1998, when it revealed that it had been forced to take a $25.9 million
write-down.
"They knew that they were going to lose those
customers, and that the assets would not be as valuable as they claimed," said Nancy
Kaboolian, an attorney with Abbey, Gardy & Squitieri, a New York law firm that filed
its complaint Aug. 24.
The lawsuits also noted that some Source officers and
directors sold stock at a profit in May, before the disclosures were made.
The lawsuits have added to pressures on Source's stock
price, which has dropped below $10 per share after hitting $34.25 July 14, amid
speculation that the company was the object of a bidding war between Microsoft Corp.,
America Online Inc. and Yahoo! Inc.
By early last Thursday, Source's stock was selling for
$8 per share on the NASDAQ over-the-counter market.
The company provides software that allows consumers to
access the Internet via their television sets. It is developing its Interactive Channel as
a means of delivering entertainment services -- including video games, information and
shopping on-demand -- over digital-cable tiers.
Source and Century Communications Corp. recently scrubbed
an analog trial of the service in Colorado Springs, Colo., but Source is hoping that a
planned digital Interactive Channel launch later this year on the Insight
Communications-controlled system in Columbus, Ohio, is successful.
