The Wall Street Journal  

June 21, 2004

PAGE ONE

Radio Daze
Inside Air America's Troubles: Optimism and Shaky Finances

In an Election Year, Talk Radio For Liberals Made Sense;
A $24 Million Shortfall
Al Franken's Kitchen Surprise

By JULIA ANGWIN and SARAH MCBRIDE
Staff Reporters of THE WALL STREET JOURNAL
June 21, 2004; Page A1

On March 30, the night before Air America went on the air, the liberal radio network threw itself a $70,000 party at Manhattan's hip Maritime Hotel. More than 1,000 guests, including Yoko Ono and Tim Robbins, drank red, white and blue vodka cocktails as they toasted the network's bid to challenge the dominance of conservative talk radio.

But behind the scenes, Air America was running out of money. Today several employees say they still haven't been reimbursed for the costs of attending the New York launch. "It was a fun party, until I knew I was paying for it," says Bob Visotcky, Air America's former Los Angeles market manager, who hasn't been reimbursed for his hotel room and flight.

Mr. Visotcky wasn't the only insider in the dark about the company's problems. Many of Air America's investors and executives say they thought the network had raised more than $30 million, based on assurances from its owners, Guam-based entrepreneurs Evan M. Cohen and Rex Sorensen. In fact, Air America had raised only $6 million, Mr. Cohen concedes. Within six weeks of the launch, those funds had been spent and the company owed creditors more than $2 million.

[Portrait of Evan Cohen]

When the problems came to light, "we realized that we had all been duped," says David Goodfriend, the company's acting chief operating officer. Messrs. Cohen and Sorensen say they didn't mislead anyone about the company's finances. They say they planned to invest more over time but didn't because of cultural differences with other managers. Both resigned in early May.

Five months before a presidential election, Air America should be on a roll. Instead, it's grappling with a financial crisis. Creditors are lined up at the door, and it is off the air in two big markets, Los Angeles and Chicago.

Air America's left-leaning orientation gave the fledging network a public profile and helped lure donors, including RealNetworks Inc.'s Chief Executive Rob Glaser and New York's Durst family of real-estate developers. It also helped attract big-name talent, including comedian Al Franken. Amid the hype, however, investors and executives overlooked Air America's haphazard organization, opaque finances and flawed business strategy.

Trying to make a big political splash, Air America embarked on an ambitious and costly plan to get radio-station owners to carry the network's entire 24-hour lineup. Typically, networks allow stations to pick the shows they want, and both sides share the advertising revenue. Air America got its way in smaller markets. In big cities, Air America agreed to pay for airtime, which ultimately cost more than it could afford.

"When you believe you're doing work for the greater good, you don't question as much," says Javier Saade, a former Air America executive vice president. "People never questioned the curves and obstacles on the road. People just said, 'We're on the road.' "

Company executives now say the business is stabilizing. They note that the network's early ratings have been positive, and its business plan has been restructured. The company has received enough cash from investors to stay afloat, and it is negotiating with its creditors. Air America is "on track" to meet its financial goals, says Doug Kreeger, Air America's current chief executive.

Air America was conceived by a wealthy Chicago couple, Anita and Sheldon Drobny. Mr. Drobny is a venture capitalist and liberal activist who writes an occasional column for a Web site that has compared Republican control of Congress and the White House to the Nazis' rise to power in Germany.

[David Goodfriend]

After some unsuccessful fund-raising efforts, the Drobnys met Mr. Cohen in the spring of 2003 through a meeting brokered by Mr. Goodfriend, a former Clinton aide who was interested in the radio concept. Mr. Goodfriend, 36 years old, and Mr. Cohen, 37, attended Beloit College in Wisconsin together.

Mr. Cohen teamed up with Mr. Sorensen, 58, a business partner and the founder of Sorensen Pacific Broadcasting Inc., a network of five radio stations in Guam and Saipan. The two men agreed to buy the concept from the Drobnys for about $1 million, according to four people familiar with the transaction. The Drobnys haven't yet been paid. Messrs. Cohen and Sorensen say payment was based on performance milestones that haven't been met.

In Guam, where he was born, Mr. Cohen was involved in a number of ventures at least some of which were unsuccessful, including a publishing company, an ad agency and a market research firm. He says the businesses were hurt by the Asian economic crisis of the late 1990s.

Joe Calvo, the general manager of Guam's Pacific Telestations Inc., which owns TV and radio stations, says Mr. Cohen's defunct ad agency owes him $20,000. Mark Pangalinan, president of Guam conglomerate M.V. Pangalinan Enterprises, says the same ad company owes his real-estate division four years in rent; it also owes another division several years' worth of employee health-insurance premiums. Mr. Cohen denies owing both companies money. Mr. Goodfriend says he thought Mr. Cohen was a successful businessman and says he was unaware of these disputes.

In October, Mr. Goodfriend introduced Messrs. Cohen and Sorensen to a potential chief executive. Mark Walsh, a 50-year-old former America Online Inc. executive, had run an e-commerce site called Verticalnet Inc., which was briefly one of the highest-flying dot-com stocks with a peak value of $12.4 billion. More recently, Mr. Walsh headed Internet operations for John Kerry's presidential campaign.

[Mark Walsh]

Mr. Walsh says he asked Mr. Cohen for proof of his assets. The entrepreneur showed Mr. Walsh documents that Mr. Cohen represented as real-estate and cash holdings valued at millions of dollars, Mr. Walsh says. Mr. Cohen denies saying the assets were his alone. He says the documents combined his assets with those of Mr. Sorensen and another business partner, Brooklyn real-estate developer Charles Cara.

Mr. Walsh says he was impressed by Mr. Cohen's "seductive" account of his battle with cancer. Mr. Cohen told Mr. Walsh and others that he was diagnosed with brain cancer in 2001 only to make a miraculous recovery that spurred him to devote his life to liberal causes. This new radio network, "represented the confluence of business pragmatism and social progressiveness that I wanted for my second chance in life," Mr. Cohen wrote in a fund-raising letter to television journalist Bill Moyers, who didn't invest.

Mr. Walsh became chief executive of a holding company called Progress Media that owned two other entities. One company was set up to create programming and another was designed to buy radio stations.

Air America's purchasing arm struggled to buy radio stations in major markets -- where few big stations were interested in turning over their entire airtime to Air America. But most major market stations were too expensive and the network's $36 million credit line hadn't come through. So the network eventually had to sign costly leasing deals to buy airtime. The expense of the leases, which have largely fallen out of favor in the radio industry, helped deplete Air America's operating cash.

Rick Cummings, president of the radio division at Emmis Communications Corp., one of the nation's biggest station owners, had brief talks with Air America. But he didn't want to dedicate an entire station to its shows, as the network requested. "They quickly realized there were a lot of things they didn't know, and one was how to do radio," says Mr. Cummings.

Messrs. Cohen and Sorensen were meanwhile raising money for their programming arm. They told potential backers they would put $12 million of their own money in the venture, according to two investors and Messrs. Walsh and Saade, who attended many pitches. Messrs. Cohen and Sorensen also told investors and employees they had raised $18 million from individual donors, these people say.

Norman Wain, a Cleveland radio entrepreneur, says Mr. Cohen told him that Air America already had $30 million in the bank. Mr. Wain says he was told that his contribution would not be used until a separate round of financing was completed.

Messrs. Walsh and Saade say Mr. Cohen told them that TV producer Norman Lear had given Air America $2 million and pledged another $2 million. They also say Mr. Cohen told them that Laurie David, wife of comedian Larry David, had invested $2 million and pledged another $4 million.

Buoyed by the good news, Mr. Walsh told reporters on a March 11 conference call that the network was "well on our way" to raising "upward of $30 million" by its planned March 31 launch.

In fact, Mr. Lear and Ms. David were approached by Mr. Cohen but didn't invest, their spokespeople say. The amount raised totaled only $6 million, Mr. Cohen and Air America executives agree. Mr. Cohen denies telling Messrs. Walsh and Saade about investments from the two Hollywood bigwigs and denies misleading Mr. Wain and other investors about the fund-raising efforts. He says anyone who thought the deals had gone through were not in the loop.

Mr. Cohen says he told investors and others at the company he would invest "up to $12 million" through a partnership that included himself, his brother, Mr. Sorensen and Mr. Cara, the real-estate developer. Mr. Cohen says they invested more than $1 million in the company and intended to put in more. Mr. Cohen says he told investors and executives that the bulk of the $12 million would come from Mr. Cara.

Mr. Cara says in an interview he was willing to invest up to $12 million but held off when Mr. Cohen ran into problems at the radio network. Mr. Walsh says he doesn't recall Mr. Cohen mentioning Mr. Cara.

Mr. Sorensen, in an e-mail response to questions from a reporter, said: "In all our discussions in private placement documents we listed our LLC with Charlie [Cara] as the funding source being used to further fund the company. This was not hidden in any way."

Meanwhile, the network was starting to create a buzz. Advertising salespeople lined up $700,000 in commitments before the network even started, a former advertising executive at the network says.

The war in Iraq and the pending election had fiercely polarized national politics. Personal animosity toward President Bush seemed as intense as the antipathy once aimed at Bill Clinton, an anger that did much to feed the explosion in conservative radio.

The network's lineup included Mr. Franken, a former "Saturday Night Live" writer and performer turned best-selling author of liberal tomes. Also on board were actress Janeane Garofalo and rapper Chuck D. Air America leased stations in the top three radio markets: New York, Chicago and Los Angeles. Its high-profile launch party gave the network a big publicity boost.

But bills weren't getting paid. Mr. Visotcky, the former Los Angeles market manager, says he discovered in March the company hadn't paid the rent on its office space there. He lost his job later when Air America was kicked off the air in that city. Mr. Cohen says the rent wasn't paid because of a contractual dispute. In April, vendors stopped delivering office supplies because they weren't getting paid and contractors, such as electricians, complained their checks weren't arriving.

One of the network's on-air personalities, Randi Rhodes, formerly of WJNO in West Palm Beach, Fla., opened her own checkbook when her staff wasn't paid. Ms. Rhodes says she found "a group that was running the place that was absolutely not up to it." The New York studio had no air conditioning and some technical equipment didn't work. In its first few days, the network sometimes sputtered off the air.

Mr. Cohen concedes the company should have had tighter financial controls and blames the cash crunch on perks such as car services. Mr. Sorensen says he's "not aware of any bill over 60 days [past due] or any employee whose payroll was not immediately dealt with, if there was an issue."

Mr. Walsh says Mr. Sorensen, who was acting chief financial officer, and Mr. Cohen, who was chairman, wouldn't give him control of the checkbook or allow him a look at the financial books. Messrs. Cohen and Sorensen say Mr. Walsh had access to the company's financial documents.

When he returned home to Washington after the launch, Mr. Walsh left a voicemail for Mr. Cohen criticizing the company's lax financial controls and poor organization. Mr. Cohen responded in a three-page letter, dated April 7: "I had expected you to be in constant, close contact with Rex & me, discern what our priorities were, take on the 'family business' culture that we have used successfully in the past, and execute accordingly," Mr. Cohen wrote. "For whatever reason, and it really doesn't matter why, that just did not happen."

Unable to resolve their differences, Mr. Walsh quit on April 12, but his departure wasn't announced for a few weeks. Mr. Goodfriend, who had been the company's legal counsel, was named acting chief operating officer. Mr. Cohen took on the responsibilities of CEO.

At that time, Air America's leasing deals in Los Angeles and Chicago began to fall apart. Air America had bought time on KBLA and WNTD from MultiCultural Radio Broadcasting Inc. but the two companies battled over interpretation of the contract.

The dispute boiled over when MultiCultural locked Air America out of its studios and kicked it off the airwaves in Chicago and Los Angeles. An Air America employee wrote on the network's Web site that MultiCultural's Chief Executive Arthur Liu was a "Liu-ser" and "Liu-cifer" and that Air America was "chasing him down with a pipe wrench."

Air America sued in New York Supreme Court and a judge ordered MultiCultural to put it back on the air in Chicago, where Air America had made more payments, through April, but not in Los Angeles. After that ruling expired, the two companies couldn't come to terms and Air America was off the air in both cities.

As the network tried to repair the damage, it was also fighting with Mr. Franken over how his salary was paid. As the network's star, Mr. Franken had negotiated a pay package valued at more than $1 million a year, according to a copy of the contract viewed by The Wall Street Journal. On the evening of April 26, Mr. Goodfriend says he was asked by Mr. Cohen to show Mr. Franken a deposit slip that would prove he'd been paid a portion of his salary. Mr. Cohen says he only asked Mr. Goodfriend to negotiate with Mr. Franken.

The next day, Mr. Goodfriend went to Mr. Franken's Manhattan apartment to meet Mr. Franken's wife, who manages her husband's finances. Over the Frankens' kitchen table, the two tore open an envelope sent over by Mr. Cohen that they thought was going to contain proof of the payment. All they found was a stack of irrelevant documents.

Mr. Goodfriend, who had no access to the company's finances, says he had previously chalked up the network's snafus to growing pains. Now, he worried that Air America had less money than he thought. Mr. Goodfriend started investigating and called an emergency telephone board meeting to quiz Messrs. Cohen and Sorensen about Mr. Franken's salary and other financial issues. Mr. Goodfriend had an outside attorney listen in.

Over the next few days, the pair from Guam talked to company lawyers, executives and investors. After hearing what they considered unsatisfactory answers, the investors called a meeting on May 5 at Air America's Park Avenue headquarters. They asked Messrs. Cohen and Sorensen to resign and hand over voting control of their shares to Mr. Goodfriend, according to three people familiar with the negotiations.

After the meeting, Air America executives examined the company's finances. "When we finally gained access to the bank accounts, we realized they were empty," Mr. Saade says. Mr. Cohen denies the bank accounts were empty although he concedes there wasn't much money left.

Messrs. Cohen and Sorensen say they were asked to resign because of cultural differences with other managers. Neither would be more specific. "There was no longer any support for Rex and I, so as investors, why would we continue to go forward?" Mr. Cohen says. He adds they deserve credit for their efforts. "We built something from nothing," he says.

Mr. Goodfriend, who says he was exhausted by the turmoil, also resigned but agreed to stay until the end of May.

Air America's investors created a new company, Piquant LLC, which bought the assets of the old company, named a new CEO and simplified its business plan. Rather than buying stations or leasing time, Air America is following a more conventional route, allowing local stations to pick up portions of the lineup. It's on the air in New York and 14 other markets including Portland, Ore., and Chapel Hill, N.C.

In a startup, says Mr. Franken, people often exaggerate what they have. Mr. Cohen, he says, "did just that, and somehow got us on the air. For that, I guess I owe him some gratitude."

Write to Julia Angwin at julia.angwin@wsj.com1 and Sarah McBride at sarah.mcbride@wsj.com2