UPDATED: Creditor Files to Liquidate Equity Media, Claims Company Cannot Meet Payroll Obligations

Equity Media Holdings Corp. of Little Rock faces the possibility of liquidation after its creditors filed to change the company's petition for voluntary Chapter 11 bankruptcy to involuntary Chapter 7 or dismiss Equity's bankruptcy case entirely. The bankruptcy filing only covers the holding corporation and does not protect the 48 properties listed in the original suit.

A hearing is scheduled for 9 a.m. Tuesday in U.S. Bankruptcy Court for the Eastern District of Arkansas.

A liquidation would take six months in the least, but would likely take between 12 and 18 months, said media broker W. Lawrence Patrick, of Patrick Communications LLC in Elkridge, Md. Patrick has worked with Equity and its creditors to broker previous deals involving Equity's properties. Employees would retain their jobs through a liquidation, Patrick said.

A complaint filed Dec. 2 against Equity alleges the company's management and members of the company's board of directors repeatedly acted in their own self-interest rather than in the interest of creditors.

Silver Point Finance LLC of Greenwich, Conn., filed the foreclosure suit and conversion motion, seeking to recoup about $41.5 million the private equity firm loaned to the broadcaster. On Dec. 8, Equity filed for Chapter 11 reorganization, which will delay and possibly pre-empt the liquidation Silver Point is seeking. Silver Point's latest filing alleges Equity's management cannot reorganize successfully under Chapter 11 and does not have cash sufficient to cover its payroll obligations. It's unknown how many employees Equity has.

"Indeed, as of the time of this motion's filing (Tuesday), the Debtor and its subsidiaries must fund payroll tomorrow (Wednesday) and the Senior Lenders are informed the that [Equity Media] and its subsidiaries do not have cash sufficient to make payroll," according to court documents. Equity CEO John Oxendine has not returned several calls seeking comment. Several other Equity officials have also failed to return calls. The company must pay its check processor Wednesday. If Equity does not, the company must overnight checks to employees or not pay them at all. In a court filing, Equity's payroll was estimated about $300,000.

In an amendment to the conversion motion filed by Silver Point, James Hearnsberger, Equity's then vice president for finance administration, said the company is "currently experiencing cash shortages.... [and is] having difficulty meeting daily expenses necessary to run the business."

Equity Media repeatedly defaulted on the credit agreement it signed with Silver Point Feb. 13, according to court documents. The two parties amended the credit facility three times before relations apparently broke down in November. Despite the defaults, Silver Point provided three additional loan extensions worth a total of $7 million, according to court documents. Equity has had had a history of losses since 2001, the court case alleges. The company lost about $133 million between 2001 and Sept. 30, according to Securities & Exchange Commission filings.

Among several claims, Silver Point alleges that Equity Media and its management presented three separate business plans during 2008 but failed to implement any of them. The company's management team has also changed drastically since the beginning of the year, with three CEOs appointed as well as a chief restructuring officer, Paul Brissette, whom the company fired only 20 days after his hiring, according to court documents. Silver Point also alleges that Equity Media's management impaired the company's value by:

● Placing the personal interest of certain board member above obligations to creditors and engaging in self-serving transactions;

● Threatening to cease operations rather than sell assets to repay existing debts;

● Refusing to sell assets at prices agreed upon in the lending agreement;

● Making false certifications to the Federal Communications Commission, causing the FCC to place on hold "license renewal, license assignment, and transfer of control applications" for most of Equity Media's full-power TV stations;

● Failing to pay a satellite service provider, resulting in the provider threatening to cut service on Dec. 3; and

● Breaching obligations to pay CBS $1.3 million.

Silver Point is requesting the appointment of a receiver to maximize the value of property owned by Equity Media and "liquidate the Lenders' secured interest therein," according to documents. (For a list of Equity Media's 49 properties that Silver Point lists as collateral, click here. For a timeline of 2008 events leading to Equity Media's bankruptcy filing, click here.)

Silver Point officials declined to comment.

Equity Media (%% NASDAQ:EMDA %%) has a current market capitalization of $2.82 million, with shares trading at 7 cents on Tuesday. The company's market capitalization dropped to $1.61 million Wednesday, while trading at 4 cents a share at about 2 p.m. The company's initial public offering in September 2005 raised $69 million at $6 per share according to the company's Web site.

The company lists its assets as worth more than $100 million and liabilities as more than $50 million in its bankruptcy filing. Media broker Lawrence Patrick appraised the company's assets at between $35 and $40 million. Patrick said it is likely the company's assets are worth less than its liabilities, although Equity believes otherwise. Equity lists assets worth $103 million and total current liabilities totaling about $112 million, according to its third quarter filing with the SEC.

"Part of the problem for equity is these are people who I would give an A-plus in technology," Lawrence Patrick said, adding the company was ahead of the curve in creating technology to centralize distribution. "While it is one thing to build the stations and hook them all together and operate them out of a centralized hub, they have never been able to monetize them."

Self Interest

Chief among Silver Point's arguments is that Equity managers were looking out for themselves is the threat by Equity Chairman Richard Rochon to allow the company's assets to "go dark" rather than allow liquidation. Silver Point also alleges Equity Media's management engaged in "self-serving" transactions involving Retro Television Network Inc. The company's board owns about 25 percent of the company's total equity, according to court records.

The complaint claims Rochon and members of Equity's board threatened to shut down operations "because of purported fears that it would not be able to make the next payroll."

Rochon told Silver Point "he would never work with Silver Point to facilitate an orderly bankruptcy of [Equity] to sell assets, rather he and certain other Board members would simply resign, allow [the companies'] stations to cease operations and 'go dark' and walk away from the company," according to the filing.

Silver Point believes Rochon's threat was merely a ploy, according to court documents. The company's payroll for the two weeks starting Nov. 17 stood at $308,000, according to Silver Point's projections outlined in the complaint, while cash projections for Equity Media totaled $580,000 for the two-week period.

"Accordingly, it appeared that [Equity] would be able to meet payroll and that the threat to 'go dark' was nothing but an attempt to force the Lenders to provide further concessions," according to the complaint.

Silver Point also alleges former Equity CEO Larry Morton secured the intellectual property rights for Retro Television Network at the expense of Equity Media, allowing him to receive a slice of future RTN revenue through royalty payments and a 20-percent stake in any future sale of the property.

RTN is a business developed by Equity Media that provides content to local stations to broadcast on excess digital bandwidth. The network allows stations to pair local content with content provided by RTN, including reruns of several TV shows. To date, at least 75 stations in 39 states have signed up, according to RTN's Web site.

Patrick, the media broker, said RTN is likely the most valuable entity created by Equity's management and said that the network's success signing partners shows that it will likely remain a viable business plan.

Equity sold RTN to Luken Communications of Chattanooga, Tenn., which is owned by Henry Luken, who was also a former CEO of Equity Media. The sale totaled $18.5 million.

"This mismanagement and abuse of fiduciary duties by [Equity's] senior management and/or Board members has served only to impair the value of the Lenders' collateral," according to court documents.

Luken had resigned his posts with Equity Media before the deal took place.

Failure to Sell

As part of the lending agreement, Equity also agreed to sell assets before Sept. 17 as required by an agreement with Silver Point.

Equity "either had no intention of effectuating the station sales pursuant to the Letter Agreement or were ineffective and disorganized in doing so," according to court documents.

The company's marketing agent, Patrick Communications, allegedly found possible buyers for stations "on reasonable market terms" agreed upon with Silver Point but failed to make the sale by increasing the price, according to court documents.

Several companies are in the due diligence stage of purchasing between six to eight of the companies high-power stations, Patrick said. Discussions are on going for between eight to 12 stations total, he added. The company's high-power stations are the only stations drawing real interest, though. Of the 48 properties, about 15 are high-power stations, he said.

High-power stations have greater worth because they can demand that local cable carriers carry their signal, Patrick said. Low-power stations do not cover an entire market area and cannot demand that cable carries broadcast their signal, he said. Several of the high-power stations that could sell for between $5 million and $6 million, Patrick said.

Court documents only point to one sale that Equity pursued and received less than required: the sale of KWBF-TV in Little Rock to Nexstar Broadcasting Group Inc. of Irving, Texas, for $4 million - half what Silver Point believed the station was worth. Patrick said a buyer did evaluate the Little Rock station at $8 million, but the buyer decided to back off.

The company also sold six stations - both high and low power - to Luken Communications for $17.5 million.

FCC Investigation

The lawsuit also claims Equity hindered the value of its properties by making false statements to the FCC about the amount of educational programming broadcast by KLMN-TV in Great Falls, Mont.

The FCC placed a hold on license renewal, assignment and transfer of control applications for all of Equity Media's full-power TV stations, and that in turn killed a deal to sell KUTF-TV in Utah to Univision for $15 million.

The FCC placed a "hold" on license renewal, assignment and transfer of control applications for all of Equity Media's full-power TV stations, according to court documents.

The FCC's actions resulted in a deal worth $15 million falling through. Univision had agreed to accept KUTF-TV in Utah as payment for $15 million in outstanding preferred stock Equity Broadcasting Corp. held in the Spanish-language broadcaster.

Dealings With Creditors

Meanwhile, Equity has run into trouble with two of its vendors.

IntelSat, which provides satellite services to the company, has demanded that Equity Media pay all amounts due by Dec. 3. IntelSat wrote in an e-mail that it would cut services to or partially cut services to Equity Media's stations unless payment was received. Equity Media owes $583,931.25 to IntelSat, according to court documents. IntelSat has agreed to transmit Equity's transmissions until Jan. 3, according to court documents.

And Equity failed to pay $1.3 million to CBS for programming provided to RTN before its sale to Luken Communications. CBS has filed suit in federal court in California.

Silver Point believes Equity is also four months past due on payment for content provided by NBC, according to court documents.