Executives of Intermix Media Inc. have been on the defensive since New York Attorney General Eliot Spitzer launched an inquiry into the Internet marketing firm's business activities accusing it of unloading so-called spyware on unsuspecting customers.

Stock in the Los Angeles-based company plummeted more than 35 percent, to $5.18 a share as of April 20, from $8.25 on April 12, when the matter was first disclosed in a conference call.

Intermix executives mentioned the inquiry in passing toward the end of the call, which otherwise focused on company guidance for fourth-quarter earnings.

But the matter didn't go away. Two days later, after some unflattering news stories and a precipitous drop in its stock price, Intermix issued a press release "correcting inaccurate coverage" of its downloadable software, which the company denies is spyware.

Last week, Intermix officials declined comment, providing a statement saying that the company is in discussions with the New York Attorney General's Internet bureau and is cooperating with Spitzer.

"Intermix does not promote or condone spyware, and remains committed to instituting and promoting best practices on the Internet," the statement said.

Spyware is controversial software that covertly gathers information through an Internet connection without the users' knowledge. Spyware applications are usually a hidden component bundled with a free application downloaded from the Internet onto a computer.

Their main purpose is to monitor activity by reading a computer's "cookies" information about what users look at on the Internet and what they buy. It can then transmit the information to a third party, usually for advertising or marketing purposes.

Some spyware also can aggravate users by changing settings like their home page so much so that the House and Senate passed anti-spyware bills last year that if enacted would bring penalties of up to $3 million for violators.

"This is essentially infiltrating people's personal computers and adjusting them in a way so they operate to the benefit of these third parties," said Scott Kessler, an analyst with Standard & Poors. "And it's all unbeknownst to the user himself."

Dealing with downloads
Spitzer's office hasn't commented on the probe.

A Securities and Exchange Commission filing by Intermix discloses that Spitzer has launched an inquiry into the company's practices, though it did not use the word "spyware" to describe what is being questioned.

The filing further notes that Spitzer's office is considering an action against the company for what it calls "unlawful and deceptive acts and practices" associated with Intermix's toolbar, redirect and ad serving applications.

According to the filing, the Attorney General's Office asserts that the downloads were distributed "without sufficient notice or consent" and are difficult to remove.

Intermix owns several social websites, including the popular MySpace.com, where users find dates and share information with other members about music and band performances. The company also distributes animated jokes, greetings, games and trivia.

It reported net income of $38,000 for the third quarter ended Dec. 31, compared with a restated loss of $2.1 million in the year-ago period when the company was called eUniverse Inc. Revenues were $20.3 million in the most recent third quarter; year-ago quarterly revenues were not available.

About half of Intermix's revenues come from paid advertising on its social sites and the other half from its online marketing division Alena, which sells beauty and skincare products through profit-sharing partnerships with vendors.

As eUniverse, the company offered a hodgepodge of downloadable games, quizzes, cartoons, and a search toolbar that promised faster navigation through the Web most of which are still distributed on Intermix Media's website.

It is these applications that apparently attracted Spitzer's attention. The toolbar allegedly gathers information from the user's Internet searches, and the "redirect" applications automatically dump the user to certain Web sites.

Because the actions are done without proper consent from the user, they have been labeled spyware by Computer Associates International Inc., which maintains a list of online "pests."

Intermix insists that its products have been inaccurately described, claiming in a press release that the toolbar and redirect applications do not collect information about a person's Web surfing habits or transmit any personal information. Nevertheless, it stopped offering the applications for download last week.

The company announced that it would not resume the downloads "until every precaution is taken to ensure that users are fully informed about and consent to the installation of the applications during the download process."

The toolbar and navigation software contributes "just a couple of hundred thousand in revenue, that's it," said John Tinker, an analyst with ThinkEquity Partners LLC, who owns Intermix stock. "They're in it in a very minute way, and they've been phasing it out," he added. Still, he admitted, "The stock will be hurt until this gets cleared up."

As eUniverse, the company had to restate earnings in 2003 due to faulty accounting, which triggered a downward spiral of proxy battles and executive ousters. An SEC investigation followed and the company's stock was de-listed from the Nasdaq. The current chief executive, Richard Rosenblatt, took over in 2004, pruning divisions and attracting funding. The company changed its name to Intermix and was listed on the American Stock Exchange last October.

"I've been a fan of what Rosenblatt's doing," said Frank Husic, chief investment officer of Husic Capital Management, which owns more than 85,000 shares. "The company had a surprisingly strong quarter, exceeding most estimates but the Eliot Spitzer thing, that was a big surprise."

Husic said he is comforted because the applications in question were part of an earlier business model, introduced by previous management, and represent areas the company has been phasing out.

"All I can do is nervously wait and watch," Husic said. "These things have a way of hanging around, and I'm just not sure of how they'll resolve this."

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