The story of Grace Capital
Copyright 1987 UMI;
Copyright The Business Journal of Portland Inc. 1987;
Business Dateline;
The Business Journal-Portland
April 27, 1987
HEADLINE: Grace Trips as Former Principal Starts Over
BYLINE: Jan Wilkerson
DATELINE: Lake Oswego; OR; US; PARTNERSHIPS
BODY:
Eight months ago, Larry Stockett and David Johnston were confident their company, Grace Communications, was poised to establish the first coast-to-coast fiber optics network in the country.
They believed Lake Oswego-based Grace would compete directly with MCI Telecommunications Corp., GTE Sprint Communications Corp. and other long-distance giants in the industry. And they predicted their communications network would generate $ 500 million in annual revenues by 1991.
Today the partnership is dissolved. The former partners have not spoken to each other in six months. Johnston this month filed for protection from his creditors under Chapter 11 of the federal Bankruptcy Code. And Stockett has formed a new company with what he calls "exactly" the same business plan Grace Communications had.
That plan is to lease space on regional fiber optics telephone lines to create the first nationwide fiber optics network. Fiber optics is a new telephone line technology that holds more signals and produces a better quality transmission than traditional telephone lines.
Even though Sprint, MCI and other telecommunications companies own their own fiber optic lines, the former partners reasoned they could make more money by leasing the lines from other telecommunications companies at a bulk discount and reselling it to businesses. Should the telecommunications technology change, they could adjust quickly because they wouldn't have all their money tied up in antiquated equipment.
Analysts said the concept wasn't all that revolutionary; other companies were toying with the idea too. In fact, Stockett and Johnston joined forces because they developed the same fiber network vision simultaneously and decided to become partners rather than competitors.
But to succeed, they needed capital. And their plan to raise $ 100 million to finance the venture was to join a venture capital firm. But that plan failed.
Grace Communications began as a subsidiary of Grace Capital Ltd., a venture capital firm in Lake Oswego founded in 1983 by Bob Grace, an investment banker. Johnston, also an investment banker, joined the company and later brought on board Stockett, who was president of his own telecommunications firm in McLean, Va. Grace bought Stockett's National Telecommunications Corp. and made Stockett president of Grace Communications.
Ironically, the "venture capital company was unable to raise its own venture capital," said Stockett in an interview last week. Grace Capital disbanded within six months. Bob Grace left first, before the fiber optics project got under way. Then Stockett left to form a new company, Fibernet Communications Corp., and set up offices in Tigard. To expand his operations, he began acquiring other telecommunications companies by offering the owners stock in Fibernet.
"There was not enough venture capital (at Grace) to fund my plan," Stockett said. Grace Capital failed to raise the money, and other venture capitalists refused to provide Grace Communications with seed money because Grace Capital owned the company. "Venture capital companies don't want another sophisticated venture capital company taking a ride on their seed money," Stockett said.
Now Johnston alone is president and chief executive officer of Grace Capital, which owes more than $ 186,000 to 44 creditors, according to documents filed April 6 in U.S. Bankruptcy Court in Portland.
Johnston could not be reached for comment.
The 20 largest creditors, most of them office product suppliers and consultants, were scheduled to meet last Friday to discuss a plan to recover their losses. Richard Peckham, a Portland consultant helping to prepare an audit of Grace Capital, said Johnston was studying the possibility of offering creditors and shareholders stock in a new firm called Telergy. He declined to discuss any other details.
Mike Beakin, president of DeWit Financial, a Portland venture capital firm, said Telergy is a Cincinnati-based firm considering relocating its real estate, fast food and convenience store divisions in Portland.
Currently, Grace Capital's only asset is 150,000 shares in Stockett's Fibernet, and even that is in dispute, said Randall Dunn, a Portland attorney representing Grace Capital and Johnston in the bankruptcy. Stockett gave Grace Capital the 150,000 shares in exchange for $ 300,000 worth of switching equipment to be used in his new company. However, "the stock was never delivered to Grace," Dunn said. A dispute arose with another telecommunications firm over ownership of the equipment, so the equipment was never delivered to Stockett, Dunn said. He did not elaborate on the details of the transaction.
"The more I get into it," Dunn said, "I think there's nothing about Grace that isn't complicated."
Stockett said last week Fibernet's shares were trading in the $ 3 range on the pink sheets.
As Johnston struggled to keep his company afloat, Stockett was starting over. Stockett said he sold the contracts he negotiated with fiber optic line suppliers to Grace Capital when it purchased his Virginia-based company, so he has had to renegotiate contracts with suppliers -- at less favorable rates. For example, his old contract allowed him to defer payments for 10 years while his new contract gives him only a 1-year deferred payment.
Stockett's next step was to begin to acquire a string of troubled regional telecommunications companies to serve as the base of the planned national fiber optics network.
Soon after he left Grace Capital, Stockett set up a Utah blind trust called Laker Investment Corp., which allowed him to make a public stock offering for investments. In October, Stockett bought TK Communications of Metuchen, N.J., for 2.1 million shares of Fibernet stock. In November, he purchased All-State Communications of Burlingame, Calif., for 411,000 shares. In December, he bought ACSI Communications of San Francisco for 2.1 million shares.
This month he said he is acquiring Biztel Limited of San Jose, Calif., and he said he will purchase two more telecommunications companies next month. He hopes to acquire 10 to 30 companies across the country at a rate of one a month to establish terminating and originating circuits wherever he has leased the fiber line.
Every company Stockett has acquired so far has been losing money. To retire the debts, Stockett has offered creditors Fibernet stock.
Each company Fibernet acquires also brings a base of customers. To date, 10,000 customers have come to Fibernet through the acquisitions.
Donna Meindinger, a telephone security analyst with A. G. Edwards & Sons in St. Louis, Mo., said she is unfamiliar with Fibernet but well-acquainted with resellers of long-distance service. "It reminds me a little of the WATS resale, which is almost a defunct industry now," she said.
Many resellers of WATS lines -- a wide-area telecommunications service usually used for long-distance calls -- failed because they could not develop a broad enough customer base to create economies of scale.
Even though she believes fiber optics capacity exceeds demand, she said companies that own their own line will fare better than the resellers. "I'm always a little skeptical of a business that doesn't bring anything to the table," she said.
Stockett, however, is convinced Fibernet will succeed where Grace Communications failed. While he admits he's "never raised lots of cash," he thinks trading stock for young companies will provide him with the nationwide telecommunications network he wants.
"The whole Grace thing is water under the bridge," Stockett said. "I started over again." |
