What do you all think about THE SOURCE closing up shop? (read below)
 

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October 28, 2005 -- Media Ink

THE Source, the floundering bible of the hip-hop industry that has lost more than $11 million over the past four years, has failed to file state and federal income tax for two years and has skipped mailing issues of its magazine as its financial crisis has mounted, a lawsuit filed against it by its principal lender claims.

Top executives have written nearly $3 million in bad checks over the past nine months, the suit claims.

It's all part of a lawsuit filed by one-time principal lender Textron Financial Corp., which loaned the company $18 million and now says The Source has defaulted. Textron is due to be back in New York State Supreme Court Wednesday in a bid to force the company into receivership — a first step toward a takeover and eventual disposal or sale of assets.

Separately, Media Ink has learned that the company has even stiffed Steve Forbes and his brothers on rent that The Source subleased from Forbes Inc.

A lawsuit filed by Textron Financial Corp. paints a picture of free-spending company principals using the company as a virtual piggybank. They seem to have little or no knowledge of whether the company has enough money in the bank to cover expenses, the suit says.

The lawsuit says the original loans were personally guaranteed by company founder David Mays.

Mays and his longtime business partner, company President Raymond "Benzino" Scott, have been running the firm.

The suit also says the landlord of 28 W. 23rd St. has started eviction proceedings and has given the magazine until Monday to clear the premises because of unpaid rent totaling $156,000.

Mays said that is incorrect, claiming that Forbes Inc. is the leaseholder and that they bailed The Source out of that jam.

"I have a lot of influential friends," said Mays. "It's been worked out."

Forbes officials tell a slightly different story. "They did sublease the space from Forbes.com, and we've been in and out of court for the past few months trying to resolve it," said a spokeswoman.

Even if The Source is not tossed onto the sidewalk, its legal and financial woes detailed in the suit appear to be far deeper than previously reported.

The Source's freewheeling, self-styled moguls appear to routinely write checks to themselves for parties, jewelry, exotic trips and other things — with little or no record-keeping.

"Borrower's records of checks and wire have little or no back-up and [the] borrower appears to have no internal controls," claims the suit filed by Textron's attorney Thomas Finn.

"Senior management seriously mismanages borrower's cash," claims the suit.

The suit says that in the first half of 2005, auditors unearthed nearly $1 million in unauthorized expenditures. The figure comprised $422,000 in payments to company insiders, $357,000 to travel agents, and $80,000 for "promotional jewelry."

The suit estimates 2005 sales at $20.7 million, a decrease of $5.1 million from 2004. The suit alleges that the company's net loss widened from $831,000 in 2004 to $2.26 million in 2005.

On top of that, the flagship magazine has seen its circulation plunge.

The Source was selling 500,000 copies per month in 2002 and 2003, and is now selling about 250,000 copies a month, the suit claims. Part of the reason for the decline was that the company did not put out the January 2005 issue and has failed to mail at least 140,000 subscriber copies this year.

Reached yesterday, Mays insisted that everything was under control.

"The company is going through a restructuring, which many companies are doing today due to the economy."

He said The Source has been "hurt because of what is going on in the hip-hop world."

There are "monopolies" driving hip-hop record labels to merge or go out of business, drying up an advertising base, he said. At the same time, the number of hip-hop clothing lines is shrinking.

"We're downsizing our space and finding ways to cut our operating costs," said Mays.

Meanwhile, The Source is taking the offensive in a lawsuit that it filed against Black Entertainment Television over the canceled Source Awards.

The show, which was held in Miami in 2003 and 2004, was canceled over the Columbus Day weekend, and no makeup has been scheduled.

The Source Entertainment has filed a breach-of-contract suit against Black Entertainment Television and two of its top executives — Scott Miller, the CFO, and Byron Marchant, the president — claiming they backed away from a deal to televise the award on Viacom's BET.

Mays claimed that Miller and Marchant pulled the plug because they have plans to start their own award show.

"BET denies the allegations raised by Source Entertainment. Source Entertainment failed to fulfill its obligations to BET," a BET spokesman said.