dollars did not materialize, THN defaulted on the Comerica and Stone Canyon loans, leading Cottrell to foreclose on Mercado-Valdes’ interest in the company.
“The old company’s problem was that it overextended itself in original production, which it was determined to embark upon in ’99 and early 2000,” says Kevin Wiley, who was THN’s chief operating officer prior to the restructuring. “The strategy was sound, however the company underestimated the capital requirements of original production, it overestimated the revenues that would be produced by the original productions, and it severely underestimated the expense.”
By that time, the company was in a fiscal crisis. THN reported a $10 million operating loss for fiscal year 2003. Mercado-Valdes resigned as CEO in January 2004 and was replaced by Charles “Chas” Walker, an ex-Lehman Brothers investment banker and co-founder of Hookt.com, an R&B and hip-hop music site that filed for Chapter 7 bankruptcy liquidation in 2001. The Heritage Networks L.L.C. and its four subsidiaries filed for Chapter 11 bankruptcy protection in the U.S. Bankruptcy Court for the Northern District of Texas on March 31, 2004. Walker declined to be interviewed for this article.
“The losses began in 2000 and continued without any relief through 2004, where they had built up to a number somewhere between $17.5 and $22.5 million,” says Wiley, who oversaw the restructuring process and now serves as a consultant to the company.
Bankruptcy documents show that THN, launched as a subsidiar
y of Mercado-Valdes’ 90%-owned holding company, Alto-Marc Communications of Florida Inc. L.L.C., owes approximately $19 million to its 20 largest unsecured creditors for contract claims and unpaid licensing fees. That amount includes nearly $1 million each to Time Warner subsidiaries Warner Bros. Studios and New Line Cinema, nearly $2 million to NBC Universal Television Distribution and its subsidiary USA Network, more than $430,000 to NBC Television, around $350,000 to Dick Clark Productions Inc., and $442,000 to Viacom.
As of the bankruptcy petition date, Alto-Marc owned 54% of the renamed THN; Cottrell, 35%; Wiley and Alfred Baker, former executives of Pro-Line International, which Cottrell founded, owned 5% each.
Records also show that THN owes Cottrell $4.1 million. To recoup his funds, Cottrell placed liens on Mercado-Valdes’ properties, forcing the sale of his condo in Florida and netting $380,000. The Trump Tower and Woodstock homes are up for sale at approximately $1.2 million and $1 million, respectively. Stone Canyon has since filed a lawsuit against THN, seeking damages for alleged fraud, deceit, conspiracy, and misrepresentation in their loan transaction.
Stone Canyon, meanwhile, is not happy with the fact that Cottrell was named senior creditor and would get paid first. The firm asserts specifically that THN’s amended plan of reorganization made Cottrell’s creditor claim first priority, while unsecured creditors received 20% of the portion of their $13.1 million in claims, which was to be paid in the form of a term note payable in three years at 7% interest, provided the company survives that long.
Bankruptcy court documents show that THN’s other creditors include vendors of the television production equipment, computers, and