Bankruptcy Trustee Grills Sarnow on Finances
The Chapter 11 proceeding of American is being closely watched by cable networks and broadcast stations that collectively are owed millions in unpaid media bills.
Gregory Sarnow, president of American, was on the witness stand for two hours as the trustee and attorneys representing American's creditors grilled him with questions about several discrepancies in financial statements filed with the U.S. Trustees Office.
The trustee noticed an unexplained difference in Sarnow's ownership of the company. A 1997 tax return showed that he owned 20 percent of American, but financial schedules filed at bankruptcy indicated he owned 70 percent of the company's shares.
"The 1997 tax return ... shows that [Sarnow] has only 20 percent interest and three other shareholders have 10 percent, so I am looking for the other 50 percent," said Richard W. Simmons, the bankruptcy trustee.
Sarnow testified that on Sept. 1 he purchased 50 percent of the shares from Kathleen Williams, the founder of Williams Worldwide Inc., Santa Monica, CA, and of American (originally named Williams Television Southwest Inc.). The remaining shares were owned by Sarnow's wife, Beatrice, and Brenda Becker and Sandra Tonneson.
Sarnow testified he could not remember the price of the shares, nor could he remember the location of any documents showing proof of the transaction. Simmons also noted a difference between the company's bottom line on the tax return and the bottom line on the financial schedules. The retained earnings on the 1997 tax return were reported as $3,345,531, while the retained earnings on the statement of financial affairs were considerably less than that, the trustee said.
"Mr. Sarnow, you are either a lot richer than you say you are or somebody doesn't know how to keep books," Simmons said. "The numbers are wrong somewhere and a lot of people, starting with me, are going to start looking real close at the numbers. Somewhere along the line, this is going to have to be explained, and they do not make sense to me."
Sarnow did not respond to the trustee's statement.
In later questioning, the trustee asked Sarnow about a $226,000 loan to shareholders that appeared on the 1997 tax return, but not on the financial schedules. Sarnow again testified he could not remember the purpose of the transaction.
"I'm not 100 percent sure what that loan was for; it has something to do with bases and something to do with Kathleen Williams, but I am not sure," Sarnow testified. The meaning of "bases" was not clarified in the testimony. An attorney representing several TV stations asked Sarnow if Williams owed American money.
"I don't believe that's the case," Sarnow testified, "but that was the case at the time, however, I don't know where the paperwork is."
While the status of that loan was not clarified in the testimony, Williams Worldwide appeared on the list of top creditors that American Television was required to file with the bankruptcy court. That list indicated Williams Worldwide has a claim against American Television Time of $48,663.
Attorney Questions Temple Connections
One area of persistent speculation in the American Television bankruptcy proceeding is the role of the International Society of Divine Love, a Hindu temple that leased office space to the agency, in the company's business affairs. The temple was founded by H.D. Prakashanand Saraswati, more commonly known as Swamiji, as Sarnow testified in court.
There is concern in the media industry that the American Television bankruptcy is part of an orchestrated attempt by the temple and its members to avoid paying stations and cable networks, while continuing to make money under a new company name, Fast Media Llc.
Ken Schwartz, an attorney representing Tower Entertainment, asked Sarnow about links between the temple, Sarnow, Williams and several other infomercial industry executives in an attempt clarify American Television's financial status prior to bankruptcy.
Paul Keiffer, an attorney representing American Television Time, raised objections to the questions. The objections were noted, but the line of questioning was allowed to continue.
Sarnow testified that Linda Bartos, a former employee of American Television who co-founded a new DRTV media agency called Fast Media, was a member of the temple.
Fast Media, which operates in the same building as American Television and employs many of the same people, signed an agreement with American Television to lease its equipment and service its former clients.
Sarnow said other members of the temple included Kathleen Williams and the owners of her largest client, Marsha Kent and Peter Spiegel, co-founders of Kent & Spiegel Direct Inc., Culver City, CA. Kent & Spiegel declared bankruptcy last year after it sold defective exercise devices to thousands of dissatisfied customers, many of whom never received a product, but were billed anyway.
While Sarnow testified that Bartos, Williams, Kent and Spiegel were members of the temple, he also said that the Swamiji was not consulted on business matters. Sarnow also testifed that American Television did not give money to the temple, apart from rent.
$300,000 Loan to Kent & Spiegel
During the questioning Sarnow testified that a loan of $300,000 was made to Kent & Spiegel in December 1997. Schwartz ascertained that Kent and Spiegel were members of the temple at the time the loan was made. The loan was made five months before Kent & Spiegel Direct filed for bankruptcy.
The loan was not documented in the schedules, but Sarnow testified that American might have written it off when Kent & Spiegel went into Chapter 11 proceedings though he was not aware that Kent & Spiegel was having financial problems at the time the loan was made.
Sarnow said he did he did not know if there was a promissary note from Kent & Spiegel for the loan and nor who negotiated the terms of the loan. Sarnow said he did not ask for collateral to secure the loan.
When asked where any documents about the loan may be located, Sarnow said that many American Television documents were stored at the company's fulfillment warehouse, which is also on the temple property, although he did not know for sure where many files directly related to the company's financial status were located.
Schwartz was the last attorney to question Sarnow at the trustee's meeting before the hearing was adjourned to be reconvened at a later date. Sarnow may be deposed again.
The Chapter 11 hearings may end in dismissal, when an alternative plan of operation is approved by the committee of creditors and the trustee, or in a Chapter 7 liquidation.