The Heritage Networks was heralded as the face of black television syndication during the 1990s. With shows such as The Parkers and The Steve Harvey Show, the company was not only profitable but ranked among the largest black-owned companies in the country. But after being saddled with millions in debt and losses, the former BE 100S company was forced to seek Chapter 11 protection. Now it’s emerged from bankruptcy as a new entity that, while still black-owned, finds Frank Mercado-Valdes, the company’s charismatic founder and CEO, out of the driver’s seat.
Mercado-Valdes gained instant industry respect in 1993 as the first black man to go to movie production houses like Warner Bros., Paramount, and Universal to license black-oriented television and movie properties, distribute them to stations in major markets nationwide, and sell advertising on those stations when the shows aired. THN was a syndication company to be reckoned with, due in part to its Monthly Movie Classics, which aired a bevy of classic films starring African Americans and was hosted by legendary husband-and-wife team Ruby Dee and the late Ossie Davis.
In fact, by age 35, Mercado-Valdes had parlayed his love for black movie classics into a multimillion-dollar empire and was head of one of the largest independent, minority-owned syndication companies in the nation. Founded in 1993 as African Heritage Networks and renamed The Heritage Networks in 2002, THN debuted on the 2000 BE INDUSTRIAL/ SERVICE 100 list at No. 97 with $26.5 million in revenues. The company peaked in 2003, its final year on the list, at No. 61 with $61.5 million in revenues. Off-network TV shows, such as The Parkers and Moesha, proved lucrative for Mercado-Valdes’ firm, which touted itself as the seventh largest syndication and ad sales company in the $3.3 billion television syndication market.
But it all came crashing down in 2004. How did Mercado-Valdes go from media kingpin to industry pariah? How did his company go from one of the largest black-owned businesses to bankruptcy to finally being sold for a meager $6 million? BLACK ENTERPRISE culled court documents and spoke with industry experts as well as company insiders to answer these questions.
While Mercado-Valdes was revered as a brilliant media strategist for building a syndication empire, associates say he engaged in unsound business tactics, and defaulted on debts to major market studios, advertisers, small independents, and former employees. Mercado-Valdes reportedly developed a “my way or the highway” arrogance and refused to listen to his own advisers. Mercado-Valdes declined to be interviewed for this article.
Valerie Elliott, a former employee of THN subsidiary Heritage- Baruch Television Distribution L.L.C., asserts, “Any time Frank felt someone was challenging his authority by questioning a decision he’d made, he got angry and abusive–yelling, cursing, and ridiculing them.” Elliott began working with Baruch Entertainment Inc. in 1991 and became a consultant in 2002 when THN absorbed the Washington, D.C.-area firm after 10 years of co-syndicating movies. As the subsidiary’s former marketing director, Elliot was responsible for raising the ratings of the 2001 THN show The Source: All-Access.
Many of the company’s woes began when Mercado-Valdes decided to move away from the core syndicating business and into the much costlier development of original content and acquisition of It’s Showtime at the Apollo. This was contrary to the advice of the firm’s board of directors, which was led by investor Comer Cottrell. “His justification was that he had all the experience and we didn’t know what we were talking about. His whole business was his concept and he had proven he knew how to make money,” says Cottrell. “But [developing original shows] was doing something completely different. So we objected to the production of Livin’ Large and mandated, basically, that he discontinue it, which he did not.”
Making matters worse, Cottrell asserts that Mercado-Valdes wasted money and led a lavish lifestyle that included a condo in New York City’s swank Trump Towers, another in Miami Beach, and a home in Woodstock, New York. Painting a portrait of a rogue executive who did as he wished despite the costs, Cottrell says Mercado-Valdes burned through the company’s cash reserves to fund Livin’ Large and Weekend VIBE. “He owned 75% of the stock and I only owned 25%,” says Cottrell, who helped Mercado-Valdes launch the company in 1992 with a $350,000 loan. “So whenever it became an issue, he outvoted me and made it clear that it was his company.”
Mercado-Valdes also borrowed $13.3 million from Comerica Bank to help with the company’s financing. The idea was that THN would repay the loans with ad receipts generated by the programs. THN also signed a $610,000 bridge financing agreement with Stone Canyon Entertainment L.L.C., secured with liens against all of THN’s property. This made Comerica, Stone Canyon, and Cottrell the first, second, and third lien holders, respectively, on all of THN’s assets, with every other creditor subordinated to Cottrell.
According to Cottrell, members of THN’s board weren’t aware of many of Mercado-Valdes’ deals–particularly the It’s Showtime at the Apollo acquisition. In that deal, THN teamed up with Warner Bros. Domestic Television Distribution to bid $1.6 million a year for five years–a guaranteed $8 million–to win syndication rights for It’s Showtime at the Apollo, beginning with the 2003 — 2004 season. Completing the deal wrested the show from Percy Sutton’s Inner City Broadcasting Corp. (No. 58 on the BE INDUSTRIAL/SERVICE 100 list with $61.5 million in revenues).
Cottrell says the board found out about the deal after he read newspaper and magazine articles about the struggle between Mercado-Valdes and Sutton (see “Showdown at the Apollo,” January 2003). “I told him that, to my knowledge, Percy was one of the more astute businessmen in the country,” Cottrell says. “And, if Percy didn’t think it was a good deal, why would we be going into it?”
Sources say Mercado-Valdes overestimated ad revenues and underestimated the financial outlays of launching Weekend VIBE and Livin’ Large while trying to simultaneously produce It’s Showtime at the Apollo. When Weekend VIBE and Livin’ Large did poorly in the ratings and the expected ad 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 office furniture that former staffers on the Livin’ Large production set saw repossessed, shutting down the show’s posh Wilshire Boulevard offices last November. Also according to court documents, THN owes more than $2 million to former employees and employees of its subsidiaries, which include the production companies formed specifically to produce its shows. Staffers of Heritage 215, which produced Livin’ Large in Los Angeles, and Heritage 215 II, which produced Weekend VIBE in New York, have filed state wage claims against THN. The company also owes the IRS nearly $12,000 in back taxes for unpaid payroll taxes for Livin’ Large employees.
Independent production companies, ad agencies, and show talent weren’t spared either. Stevie “Black” Lockett, former Mike Tyson camp coordinator, movie producer, and co-creator of Livin’ Large, warns anyone against working with Mercado-Valdes, who he says “doesn’t play fair.” Bankruptcy records show that THN owes Lockett more than $100,000. The show’s other creator, famed concert promoter and straight-to-DVD movie producer Jeff Clanagan, former host Carmen Electra, and producer Suzanne de Passe, are also owed more than $1 million collectively.
Court records reveal that THN cut off health insurance benefits and 401(k) matching funds to longtime employees, one of whom has filed an $187,500 proof of claim against the company for failing to make good on 401(k) payments. At the same time, Mercado-Valdes was publicly generous, giving a $1 million donation to Florida A & M University.
Can Mercado-Valdes’ replacement turn the troubled company around? It’s still anyone’s guess. At the outset of THN’s bankruptcy troubles, officials outlined a 100-day turnaround plan to “right-side” and stabilize the company, which may have already been instituted by Walker. Walker remains involved in bankruptcy proceedings for Hookt.com, which had its case converted to Chapter 7 liquidation in 2003. Yet, Walker, who is getting paid $19,000 a month for his turnaround expertise, is convinced that he can achieve a different result for THN.
The turnaround plan called for a reorganization under a new Delaware C limited liability company, Heritage Media Group, and contains plans to restore the ailing company to profitability within 18 months after the court confirms its formal reorganization plan. In Delaware, a corporation can be established with no minimum capital contribution and can qualify to do business in any state in the U.S. and in most countries around the world. Heritage Media Group, which is co-owned by Walker, will acquire THN for some $6 million. The acquisition, which has been approved by the court, ensures that THN remains black-controlled.
Under the original plan, Mercado-Valdes would have stayed on with the new corporation as a media consultant. He’d have no equity interest but would earn a salary of $8,000 a month. Since the onset of its bankruptcy problems, THN has submitted more than three versions of its restructuring plan and three or more amended plans of reorganization. After its last reorganization plan was denied, THN announced that Mercado-Valdes would no longer be affiliated in any way with the new corporation and no longer has any equity interest. It also announced that it could raise $10 million in financing from First Bank of Tennessee. THN stated that it needed to have at least $3.6 million in financing, and an additional $2.7 million to repay creditors, in order to exit bankruptcy.
“The new Heritage has emerged without the substantial albatross of that trade debt and can refocus its energy on its core business, which is advertising sales and distribution, with original productions being reduced substantially,” says Wiley, adding that the company emerged from bankruptcy on Jan. 3.
With the worst of THN’s problems possibly behind them, the former board chairman says Mercado-Valdes didn’t have bad intentions but made questionable business decisions: “He was operating like a loose cannon, really. I think the boy had good intentions,” Cottrell says. “I think he was way over his head and did not seek the proper legal advice.”
–Additional reporting by Derek T. Dingle and Alan Hughes