usatoday.com
06/24/2001 - Updated 11:28 PM ET
As dot-coms crash, the fallout lands on Main Street
By Andrew Backover, USA TODAY
Tom Rissi was thrilled to move into his first home, a new $150,000
townhouse in Brighton, Colo., in March.
But when he moved in, something was missing: a phone line. The local phone
company, Tess Communications, was about to go bankrupt, leaving dozens
of homes in the new subdivision and more than 100 homes statewide without
phone service.
Qwest Communications is serving stranded customers, but it could be months
before everyone is hooked up.
Rissi, meanwhile, piles up charges on his cellphone and pays for a
$9.95-a-month Internet account he cannot use. "We've fallen through the
cracks," says Rissi, 36, a maintenance supervisor for a property firm. "I feel
like selling my home. But how do I ... without a phone?"
The crack Rissi has fallen into has claimed tens of thousands of victims. As
hundreds of telecom and Internet companies fold or go bankrupt — victims of
their own overexuberant expansion — the economic fallout is spreading from
the stock market to the corner store.
Banks, bondholders and big firms, such as telecommunications-equipment
maker Nortel Networks, are on the hook for billions. But people like Rissi
and mom-and-pop creditors are losing big, too. They'll be lucky to squeeze
pennies on the dollar out of the bankruptcy proceedings, and some are coping
by cutting jobs, spreading the pain to the USA's kitchen tables. "It runs
through the economy," says Jack Partain, bankruptcy partner at Fulbright &
Jaworski in San Antonio. "It ranges from the mom and pop with the copy
shop ... to the advertising firm owed a large debt. All the owners and
employees have homes, cars and mortgages."
The aftermath is worsened by the fact that expectations were so high. Firms
were so caught up in the Internet euphoria of the past few years that large and
small ones extended huge amounts of credit to technology players. "There
was an impression that these were mega-companies with tons of money ...
and there was no risk. They were awash in (venture capital) money and
(people thought) the boom was never going to end," says Roger Schwartz,
bankruptcy attorney with Sidley Austin Brown & Wood in New York.
The boom did end. The telecom industry is buried under more than $600
billion in debt — about 20% of which could be in trouble, analysts say. Some
economic experts say the telecom implosion could turn into the biggest
one-industry meltdown since the savings-and-loan debacle of the early 1990s.
The troubles in tech and telecom might not take down the economy, but they
could slow a recovery, economists say.
Bankruptcies prove point
One need look no further than bankruptcy courts for evidence. Nearly 50%
of the 47 public telecom companies that filed for bankruptcy since 1990 did
so in the past 18 months, BankruptcyData.com says. The past year has
produced seven of the 10 largest public telecom bankruptcies since 1990.
Hundreds of smaller firms have gone bankrupt or closed. At the same time, at
least 493 Internet companies have folded in the past 18 months, says
Webmergers.com.
Once companies get to bankruptcy court, lenders with secured loans, such as
banks, generally have first dibs. Beneath them are priority creditors, such as
taxing authorities and employees with unpaid wages. Then come creditors,
such as office suppliers and florists. Shareholders are at the bottom.
Tony Martin of Dallas knows he is low on the chain. He says he never
received a $250 rebate for a computer modem, as promised, when he signed
up last June for high-speed Internet service from NorthPoint Communications
Group. About 100,000 customers were cut off when NorthPoint folded in
March, less than 3 months after it filed for Chapter 11 bankruptcy protection.
Martin, who had switched to a different provider by then, doesn't "expect a
dime." He filed a claim against NorthPoint to make a point.
"If everybody does nothing and says, 'Oh well, I just got screwed again,' we'll
continue to be taken advantage of," Martin, 32, says. "People like me waiting
for $200 to $300 apiece, that adds up."
Telecom and Internet bankruptcies offer slim pickings compared with other
kinds of companies. Electronics makers, for example, might get close to
100% of the value of TVs and stereos, bankruptcy experts say. Firms with
real estate assets also tend to provide more to creditors, depending on the
market.
With dot-com and telecom firms, the prospects are dimmer. Internet
companies have little to liquidate beyond office equipment and "intellectual
property" that anchored money-losing business plans. Telecom firms have
phone lines, real estate and networks. But buyers can command fire-sale
prices because of a glut of equipment from a slew of bankruptcies. Modems
that cost hundreds of dollars new now fetch less than $20 on online auction
site eBay. And the slowing economy has pared the list of potential buyers.
In fact, creditors are finding that entire companies are almost worthless.
GovWorks, a start-up that helped governments accept online payments from
citizens, had assets of $8 million and debts of $40 million when it filed for
bankruptcy in January. Its attorney, Walter Benzija, says the company, now
called Publicdatasystems, was lucky to sell its transaction-processing business
for $1.5 million.
Texas-based ConnectSouth Communications, a high-speed Internet seller,
filed for bankruptcy in March with $35 million in debts and less than $10
million in assets. It raised less than $2 million selling office equipment. It will
try to sell real estate leases. But attorney Eric Taube says even big creditors,
such as banks, will "take it in the shorts." Smaller players have less hope.
"There's nothing there," Taube says.
No question, big creditors are feeling the pain.
Nortel Networks is taking a $300 million charge for bad debts to telecom
customers and asset write-downs in the second quarter. It will have cut
30,000 jobs by year's end. Lucent Technologies reported a $671 million, or
55%, increase in fiscal second-quarter sales costs, mostly because of bad
debts from bankrupt Winstar Communications. The tech and telecom
industries are so connected, they've poisoned each other. One of GovWorks'
creditors was telecom start-up Teligent, which is also seeking Chapter 11
protection and cut 800 jobs in May. Teligent is attempting to reorganize and is
still serving customers.
Blindsided by troubles
In addition to the firms that sold tech players high-tech nuts and bolts, there
are thousands of suffering creditors who don't work with bits and bytes.
Houston ad agency The McInnerney/Millspaugh Group was blindsided by
troubles at ConnectSouth, which hired the firm to buy $945,000 in ads with
81 newspapers and radio stations in 33 markets. "ConnectSouth had a credit
report that was glowing," says Bob McInnerney, president of the ad agency.
But, he says, ConnectSouth didn't pay in December. Not only did the agency
lose $140,000 in commissions, but some of the media outlets are threatening
to sue the ad agency while others are hiring collection agencies. Meanwhile,
McInnerney's company no longer does business with telecom firms unless
they can pay cash. And he's had to cut two of the firm's six employees
because of lost revenue.
"Our life has been a nightmare for the past 6 months," McInnerney says. "Our
good name, our good credit, has been damaged. One single lawsuit will put us
under."
Rock Lake, which operates four Bear Rock Cafe stores in North Carolina,
has given up on $1,000 in bills from KOZ, a North Carolina firm that helped
create online communities. Bear Rock catered about 12 to 15 lunches for
KOZ, now bankrupt, last year. "That additional $1,000 could have paid some
bills," says Rock Lake executive Charlie Galloway. With a $50,000 monthly
payroll and banks to pay, Galloway says he might have to hold off on paying
some bills.
Firms that were doing business with a lot of online companies are especially
squeezed. Online marketer Be Free lost more than 70 Internet-related
customers during the first 3 months of this year. The lost customers account
for about 9% of Be Free's $5.4 million in first-quarter sales. A few months
ago, Boston-based Be Free cut 20% of its 300 employees.
"A lot of these dot-coms were totally irresponsible in how they spent their
money," Be Free CEO Gordon Hoffstein says. "They used money like rocket
fuel." Like a lot of burned suppliers, Hoffstein says he's sending his sales force
after more established companies.
Office refreshment seller Classic Coffee Systems of Valley Stream, N.Y.,
says it is owed about $10,000 from failed tech companies. "We have been
getting burned considerably with the dot-com craze," says CEO John Malizio.
"Everyone just got caught up in: 'This is great. Look how much business we
are getting.' "
The fallout is magnified in regions where the tech boom was the biggest, such
as California's Bay Area, which is already reeling from high energy prices. But
other areas are taking hits, too, such as New York City's "Silicon Alley" and
tech-rich Austin, Texas.
"Being a Manhattan-based company, we were really in the middle of it,"
Malizio says. "We were getting phone calls from dot-coms all the time. They
went from having 20 people to 200 people 3 months later. And all of a
sudden, it stopped."
Tech analysts expect the slowdown to continue into late 2002, perhaps 2003,
resulting in dozens, if not hundreds, of more Internet shutdowns. Dell
Computer CEO Michael Dell said Thursday that he expects more dot-coms
to collapse before the computer-technology sector stabilizes.
In telecom, bad debts are expected to continue to mount as an oversupply of
network capacity and the slowing economy take their toll.
PricewaterhouseCoopers, in a report issued Thursday, said it thinks the rate
of bankruptcy filings in some telecom sectors, including mobile wireless, will
significantly increase in coming months.
Some losses are not measured in dollars, but in frustration. Former Tess
Communications' customer Rosie Schaa, 47, who lives in Mead, Colo., went
without a phone for a month after she closed on her new three-bedroom
home in April.
She fretted about leaving her 88-year-old mother, who lives with her, without
a phone. And a cellphone was too complicated for her mom. But Schaa had
no choice. She had to go to work. "That was very difficult," says Schaa, an
accountant.
Her story is not lost on Tess Chief Operating Officer Jim Cook, who watched
his own dreams crumble when his firm filed for bankruptcy.
Almost 1,000 Tess customers in Arizona and Colorado are being switched to
Qwest, the dominant phone company. Some received service right away or
within weeks. Others could wait months. The damage could have been worse:
Tess had contracts for 38,000 homes. "We inconvenienced them, and we
apologize," Cook says.
KJC |
