The board of directors for Soul of the South — the 2-year-old television network backed by nearly $2 million in state money — considered winding down operations at a board meeting last week, CEO Doug McHenry said.
McHenry called the meeting of the Little Rock company’s board to discuss how to handle a nearly $2 million lawsuit out of Chicago and whether to begin shutting down. McHenry said no decision was made on whether to wrap up operations and that the company would continue to “aggressively” pursue legal action against it.
McHenry said he was also still actively fundraising, but was struggling to raise money after a March 16 story in Arkansas Business described the network’s money woes. He said the story has had a “chilling effect” on his efforts.
In a memo to the board, McHenry wrote that the network was also in the middle of a contract dispute with a station in the Washington metropolitan market, WMDE. That station was one of two that McHenry had said the network would focus on in an attempt to turn a profit as part of a reorganization.
“It’s time for the Board to consider winding down the Company’s operations,” McHenry wrote in the memo. “Currently it doesn’t have sufficient resources to continue to operate and given the legal environment it is unlikely to attract sufficient funding to work out a plan for success. Therefore the Board must make a decision to wind down operations and do so in the best manner to preserve shareholder value and Company Assets.”
McHenry responded to questions about the memo in an interview, but said it was a confidential communication that should not have been leaked to Arkansas Business.
McHenry said last month that the network was racing to raise money from other sources, despite an additional $250,000 grant from the state in December and a $125,000 private loan from a Memphis businessman in January. He said there was an immediate need to raise $250,000-$500,000 for the station to make it through the next three or four months.
The network’s legal troubles continued late last month when a lawsuit over programming airtime filed by a Chicago television station tacked in a new direction.
New filings place at least some of the blame for the network’s financial troubles on consultant Larry Morton.
In a response to a motion to dismiss the Chicago station’s lawsuit — which sought to collect money the station argued SOS hadn’t paid on a programming contract — one of the network’s founders accused Morton of setting up the contract, but then diverting advertising money to related entities that he owned.
Morton has worked in television in Arkansas for decades, including serving as CEO of Equity Media, which filed for bankruptcy in December 2008.
The affidavit, signed by founder Frank Mercado-Valdes, states that Morton served as COO, CEO, president or treasurer of several entities that provided services to Soul of the South, including Southern Soul Broadcasting Inc., SSN Networks Inc., SSN Funding LP and SSN Media Gateway LLC. Morton’s other company, Ellis Wilson LLC, also had an ownership interest in SSBI, SSNNI and SSNMG.
Morton has previously said he works as a consultant for Soul of the South.
Mercado wrote that the network secured a “six-figure advertising contract” and a “significant political advertisement,” but S.O.S. Media Holdings Inc., the general partner of SSN Funding, did not receive any of the advertising revenue. That money instead went to Morton’s properties, he wrote.
“Larry Morton, because of the breadth of power and control afforded to him by the February 23, 2013 consulting agreement and the fact that he was an officer and/or had ownership interest (through his company EWLLC) of all entities that made up the Soul of the South network, often used SSNF, SSNNI, SOSMH and SSBI as instruments for his own personal advantage to the detriment of KM LPTV,” Mercado wrote.
Morton had not returned a message seeking comment by press time.
McHenry said that he hadn’t read the affidavit, but that Mercado was fired from the company and “many people feel this is sort of a vindictive, disgruntled employee response.” He added that Morton was a “person of unimpeachable character.”
Peter Kumpe, the network’s attorney in the lawsuit, declined to comment last week.
Soul of the South and its affiliates have until April 6 to answer the Chicago station’s response.
Back To the Beginning
Mercado’s affidavit, along with the response filed by Chicago attorney Phillip R. Nava, who represents the station, trace the network’s history back to its origins, when Mercado and a group of fellow investors decided to start the venture in Arkansas. The filings also explain how the web of subsidiaries worked together and how it obtained some of its initial funding.
Mercado wrote that in the initial planning phases, “the network desired to take advantage of the significant financial incentives offered by the State of Arkansas and various [Arkansas]-based banking institutions to have a successful launch.”
The network has received $1 million in federal economic stimulus money from the Arkansas Development Finance Authority and $750,000 from the Arkansas Economic Development Commission.
According to real estate records, the network or its subsidiaries have also secured a $1.5 million loan from Arkansas Capital Corp., a $6.5 million loan from Heartland Renaissance Fund Sub XIX LLC and a $3.9 million loan from Pacesetter CDE XII LLC of Southlake, Texas.
Mercado wrote that to secure the incentive funding with the state, the network had to “re-organize its corporate structure, including conducting all of its operations through Arkansas based entities.”
That meant replacing several entities created in Delaware with Arkansas corporations and LLCs, including subsidiaries that provided essentially every service for the network from advertising, contracting with local broadcast stations and sending the programming signal nationwide.
Donald Bae, the general manager of the Chicago station, was one of the first people approached by the network’s founders during its “pre-launch” phase. A contract with his station “allowed Soul of the South to market itself as a national network and provide a basis to raise much needed capital, including the eventual incentive funding it received from the State of Arkansas,” Mercado wrote.