Dot-Bombs Crash Into Chapter 11 In 2000
By Tamu Wright
Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--In 2000, the federal bankruptcy code was wrenched
into the technology age as it faced a steady stream of petitions filed by
Internet startups.
The companies' outcomes illustrated the poor fit between the 22-year-old
statute and companies created from a doomed mixture of one idea, a few
computers, lots of venture capital and little profit.
Internet companies "have great difficulties reorganizing under Chapter 11
because they are in too early of a stage" to fit into the U.S. Bankruptcy
Code's reorganization model, which was designed for the traditional
bricks-and-mortar company, according to bankruptcy attorney Warren Agin of
Swiggart & Agin, LLC, Boston, and author of 'Bankruptcy and Secured Lending
in Cyberspace.'
Unlike traditional companies entering Chapter 11 with a variety of
recoverable assets for their creditors, Internet startups often come to the
end of their business road with few assets for creditors to recover other
than subscriber lists or other less-than-tangible intellectual property.
As for Internet companies facing insolvency in 2001, Agin forecasts that, in
addition to an increase in Internet company bankruptcy filings overall, some
of the larger, more established Internet companies may begin to seek Chapter
11 protection.
Because they have "a real business" with "more of a history," these
companies' reorganizations will begin to look more like bricks-and-mortar
reorganizations and will produce better results for creditors in Chapter 11
proceedings, Agin notes.
Internet Companies' Unique Bankruptcies
Most Internet companies are characterized by many fewer assets than the
typical company seeking Chapter 11 protection. For the Internet companies,
their most valuable assets are often intangible, such as Web sites, Internet
domain names, proprietary databases and customer information. Intangibles
are difficult to value and, therefore, to sell.
In addition, the value of many of these intangibles will dwindle with each
day the company sits in Chapter 11 proceedings. The Bankruptcy Code's
requirement that all transactions relevant to the bankrupt company receive
approval from the bankruptcy court creates a lengthy process that risks
using up valuable Internet company assets such as Web sites, which must be
consistently maintained.
In addition to the valuation and time constraint problems that face
reorganizing Internet companies, these cases bring complex, often new issues
before the bankruptcy courts such as whether the sale of assets like
customer lists and information violates consumer protection statutes or how
secured creditors can exercise their rights over Web site collateral.
(DOW JONES) DJN: DJ Dot-Bombs Crash Into Chapter 11 In 2000
DJN: DJ Dot-Bombs Crash Into Chapter 11 In 2000
By Tamu Wright
Of DOW JONES NEWSWIRES
WASHINGTON (Dow Jones)--In 2000, the federal bankruptcy code was wrenched
into the technology age as it faced a steady stream of petitions filed by
Internet startups.
The companies' outcomes illustrated the poor fit between the 22-year-old
statute and companies created from a doomed mixture of one idea, a few
computers, lots of venture capital and little profit.
Internet companies "have great difficulties reorganizing under Chapter 11
because they are in too early of a stage" to fit into the U.S. Bankruptcy
Code's reorganization model, which was designed for the traditional
bricks-and-mortar company, according to bankruptcy attorney Warren Agin of
Swiggart & Agin, LLC, Boston, and author of 'Bankruptcy and Secured Lending
in Cyberspace.'
Unlike traditional companies entering Chapter 11 with a variety of
recoverable assets for their creditors, Internet startups often come to the
end of their business road with few assets for creditors to recover other
than subscriber lists or other less-than-tangible intellectual property.
As for Internet companies facing insolvency in 2001, Agin forecasts that, in
addition to an increase in Internet company bankruptcy filings overall, some
of the larger, more established Internet companies may begin to seek Chapter
11 protection.
Because they have "a real business" with "more of a history," these
companies' reorganizations will begin to look more like bricks-and-mortar
reorganizations and will produce better results for creditors in Chapter 11
proceedings, Agin notes.
Internet Companies' Unique Bankruptcies
Most Internet companies are characterized by many fewer assets than the
typical company seeking Chapter 11 protection. For the Internet companies,
their most valuable assets are often intangible, such as Web sites, Internet
domain names, proprietary databases and customer information. Intangibles
are difficult to value and, therefore, to sell.
In addition, the value of many of these intangibles will dwindle with each
day the company sits in Chapter 11 proceedings. The Bankruptcy Code's
requirement that all transactions relevant to the bankrupt company receive
approval from the bankruptcy court creates a lengthy process that risks
using up valuable Internet company assets such as Web sites, which must be
consistently maintained.
In addition to the valuation and time constraint problems that face
reorganizing Internet companies, these cases bring complex, often new issues
before the bankruptcy courts such as whether the sale of assets like
customer lists and information violates consumer protection statutes or how
secured creditors can exercise their rights over Web site collateral.
As a result of these differences between Internet companies and their
bricks-and-mortar counterparts, a Chapter 11 proceeding wasn't necessarily
the preferred avenue for failed dot-coms to take in 2000. In fact, only a
fraction of the year's failed Web companies filed bankruptcy petitions this
year.
An illustration of this phenomenon occurred in the children's toy retail
sector. While Toysmart.com LLC decided to file a Chapter 11 petition,
Toytime.com Inc. opted for a non-bankruptcy liquidation (the company,
originally the victim of an involuntary Chapter 11 petition, had its case
dismissed and continued the liquidation plan it had commenced pre-petition).
Yet another Internet toy seller, Viacom Inc. (VIA)-backed Red Rocket, simply
closed shop.
Among the other options taken by ailing dot-coms, the Toys R Us Web site was
forced to create an alliance with Amazon.com Inc. (AMZN) to stay afloat
while Etoys Inc. (ETYS), suffering a disappointing 2000 Christmas season,
has put itself up for sale.
Those Internet companies that did file Chapter 11 petitions, however, were
spread over a variety of sectors.
Dotcom Darwinism
Even Internet companies with seemingly bright futures weren't immune to
seeking Chapter 11 protection.
One filer, Scour Inc., built upon the success of Napster Inc. (X.NPS) by
adding photos and video to Napster's digital music file-swapping program.
The services, which provided users with free copies of music and film
recordings, were wildly popular with the teen and college set, with Scour's
exchange program attracting about 5 million users.
While Napster and Scour revolutionized the entertainment business, they
appear to have done so at the expense of federal copyright laws.
Scour filed a Chapter 11 petition and shut down the exchange after being
named in several lawsuits - totaling $250 billion - by the nation's major
record labels and film studios. CenterSpan Communications Corp. (CSCC)
acquired Scour's assets for $9 million in cash and stock and plans to reopen
the exchange as a fee-based service.
A perfect example of dot-com Darwinism occurred in the Internet retail
furniture sector this year, when Amazon.com Inc.(AMZN)-backed Living.com
filed for Chapter 11 protection in August and Furniture.com filed a Chapter
7 petition in November.
UrbanDesign Online Inc. and HomePortfolio.com closed their Web sites and
completely changed focus. It seems that few consumers took to the idea of
shelling out $1,500 on couch they hadn't sat on from a company with no name
recognition. If they did take a chance and order, customers were often met
with little customer support when they discovered that the company
apparently failed to include a functioning distribution system in its
business plan.
Well-hyped British clothing retailer boo.com's New York-based affiliate
(boo.com north america inc.) created an even bigger splash after it filed
its Chapter 11 petition on Oct. 30.
The trendy fashion site, which was backed by such high-profile investors as
Italy's Benetton family and LVMH Moet Hennessy Louis Vuitton SA (LVMHY)
Chief Executive Bernard Arnault, revealed that it had burned through $120
million in funding in little over a year.
Web portal Fashionmall.com Inc. (FASH) purchased the site and related
intellectual property and relaunched it as a magazine-style fashion content
site. Ironically, boo.com founders Ernst Malmsten and Kajsa Leander have
signed an estimated six-figure deal to chronicle the company's collapse in a
new book.
Free Internet service providers also bit the dot-com dust this year as FreeI
Networks Inc., Freewwweb LLC and WorldSpy left the scene. FreeI was gobbled
up by NetZero Inc. (NZRO) in its Chapter 11 proceedings and WorldSpy ceased
operations and sold its assets to Juno Online Services Inc. (JWEB) in a
non-bankruptcy liquidation.
Freewwweb, still in the midst of its Chapter 11 proceedings, is currently
embroiled lawsuit with Juno about the terms of its agreement to transfer the
subscribers of its now-defunct ISP service.
The Year Ahead
As for Internet companies facing insolvency in 2001, bankruptcy attorney
Agin predicts more-established Internet companies may begin to file for
Chapter 11 protection along with newer or smaller operations.
Agin says he also sees the emergence of more sophisticated potential
purchasers of assets in Internet bankruptcy proceedings, which will help to
erode the current difficulty in finding buyers for dot-com assets.
For example, few buyers were interested in the assets of APB Online Inc.,
the former operator of award-winning crime and justice Web site APBNews.com.
Even before it filed a Chapter 11 petition, the struggling company had
approached dozens of media organizations for potential buyers. APB's Chapter
11 proceedings culminated in a bargain for purchaser SafetyTip.com, who
bought APB's assets for $575,000.
SafetyTip.com originally had signed a stalking horse bid for the company of
$950,000, but backed out of the deal and dropped its price as the sole
bidder at auction. The assets it bought included multimillion-dollar
syndication deals with America Online Inc. (AOL) and Yahoo! Inc. (YHOO), a
list of 65,000 subscriber e-mail addresses, 121 domain names, and a database
of 4,000 Freedom of Information Act requests for government documents and
videos.
This year, however, potential buyers are less likely to shy away from
bankruptcy assets because 'mechanisms will be created to put a value on
intellectual property' and other intangible assets, according to Agin. 'More
companies and investment bankers will become comfortable with putting
numbers on those assets.'
In fact, Agin said, bankruptcy proceedings will begin to attract the
"vulture" or "counter" investor who realizes Internet assets can be
purchased cheaply in bankruptcy proceedings and be effectively
transmongrified into new companies or incorporated into existing ones.
Web Site Service Companies Not Immune
The dot-com shakeout will also generate a "very large ripple effect" for the
companies that are servicing Internet companies, such as accounting firms,
law firms, and public relations and advertising firms, Agin says.
He notes that those companies "reaped a windfall" from the generous
venture-capital dollars that Internet companies were throwing around during
the boom of the last couple years.
"I wouldn't be surprised to see one or two of the major second-tier law
firms break up" and other service-based firms file Chapter 11 petitions
themselves as a result of overexpanding their service to Internet companies,
he says.
Foreshadowing this ripple effect has been a recent wave of bad financial
news for Web consulting firms as they deal with debt owed them by failed
clients and surviving Internet companies that have tightened their belts.
Net consultants including Xpedior Inc. (XPDR), Scient Corp. (SCNT), Lante
Corp. (LNTE), Viant Corp. (VIAN), Agency.com Ltd. (ACOM) and AnswerThink
Inc. (ANSR) all announced layoffs or issued profit warnings during the month
of December.
As Internet companies' Chapter 11 filings increase, the coming year may not
answer whether the 22-year-old bankruptcy code can adapt to the unique
issues presented by these companies' failure. But it may show whether the
remaining players on the Internet scene, failed or not, can learn a lesson
and actually build a profit-making business.
(MORE) DOW JONES NEWS 01-02-01 |
