Source Media Inc. fired the latest salvo in its battle with
TV Guide Inc., suing the Tulsa, Okla.-based interactive programming guide and magazine
publisher for $60 million for breach of contract.
The lawsuit, filed in District Court in Dallas last week,
is the latest in a series of battles touched off late last month, when TV Guide CEO Peter
Boylan told analysts Source had improperly transferred Canadian patents for its
technology. TV Guide had earlier agreed to invest about $12 million in a joint
interactive-programming venture with Source.
Source denied that it had any problems with its patents and
quickly hammered out a similar deal with New York-based MSO Insight Communications Co. to
take the place of the TV Guide investment.
But Source's stock, which is traded over the counter, took
a huge hit the day after Boylan's July 29 comments, dropping 13 percent to $10.88 per
share from $12.25. The stock continued to fall in subsequent trading, closing at $9.38
The suit claims Boylan breached a nondisclosure agreement
when he "repeatedly made public statements which, while inaccurate as a whole,
disclosed to third parties confidential information in relation to Source Media's
Source CEO Stephen Palley said in a prepared statement,
"Source Media acted in good faith at all times during our negotiations with TV Guide.
Unfortunately, TV Guide repeatedly disclosed and mischaracterized information obtained
during these negotiations. These mischaracterizations severely damaged Source Media and
our shareholders, and we intend to pursue all lawful courses for remedy."
TV Guide said in February that it would purchase 6.2
percent of Source stock, or 842,000 shares, for $12 million. The company would also
receive warrants to purchase an additional 14 million shares of Source stock for $14.95
The suit may be a pre-emptive strike, as Boylan and TV
Guide issued statements alluding to possible legal action against Source and Insight,
claiming that Insight CEO Michael Willner - who sits on Source's board of directors and
has been a private investor in the company for years - was privy to inside information.
"My response to the personal charges is that they are
not worthy of a response," Willner said.
Boylan was traveling last week and could not be reached for
comment. However, according to a press release issued by the company July 29 - prior to
the filing of the Source lawsuit - it appears that TV Guide may be planning its own legal
"TV Guide strongly believes that Source Media has
breached several of its obligations under the binding provisions of such agreement
including, but not limited to, their obligations to negotiate in good faith and
exclusively with TV Guide to consummate the transaction," the company said in the
statement. "TV Guide intends to vigorously pursue all of its remedies against Source
Media and all other responsible parties."
But according to sources, it was TV Guide's reluctance to
finalize the deal that led Source to seek other partners. Although the deal was originally
announced six months ago, TV Guide had requested several extensions to its letter of
intent, the last of which expired in late May. Source, which is in dire need of cash, just
couldn't wait any longer.
A few weeks after the LOI expired, Source began talking
with Insight and hammered out a deal.
The TV Guide deal also calls for Source to pay a $10
million breakup fee in the event that it finds another partner. However, sources said that
because the LOI has already expired, Source does not have to pay that fee.
The Insight deal is nearly identical to the failed TV Guide
pact. Insight will invest $13 million in the joint venture and purchase 842,000 shares of
Source stock for another $13 million. In addition, the MSO will receive five-year warrants
to purchase more shares of Source -- up to 20 percent of its outstanding stock -- for $20
The deal is expected to close in October.