|
quokka sports, egghead and more
|
Chris Macrae
|
Oct 15, 2001 07:59 PDT
|
More Dot-Coms File Chapter 11
http://schwab-news.excite.com/news/ap/011014/14/dotcom-bankruptcies
Updated: Sun, Oct 14 2:17 PM EDT
By MICHAEL LIEDTKE, AP Business Writer
SAN FRANCISCO (AP) - As the economy crumbles, some Internet companies are
going out of business the same way they ran their businesses -
unconventionally.
They're filing bankruptcy in a way that has angered investors and creditors
who worry that company insiders are positioning themselves for one last
windfall.
In the past year, a wave of hopelessly insolvent dot-coms have filed for
bankruptcy under Chapter 11 - an option usually reserved for companies
trying to resurrect their business - instead of auctioning off their assets
under Chapter 7, the traditional route for dead-end companies.
Most failed dot-coms still file Chapter 7 bankruptcies, according to
statistics compiled by BankruptcyData.com, a Web site that tracks filings
across the country.
Through late September, Chapter 7 petitions accounted for 79 of the 139
bankruptcy filings made by businesses with a "dot-com" in their corporate
names, according to BankruptcyData. The statistics don't include the
bankruptcies of many other Internet businesses that don't contain a dot-com
in their names.
Including companies of all types, 26 percent of the 35,323 business
bankruptcies last year came under Chapter 11, according to the American
Bankruptcy Institute, an Alexandria, Va. research group.
Chapter 11 liquidations are becoming more common in the Silicon Valley, the
heartland of doomed dot-coms. Recent prominent cases include: New Economy
magazine publisher Standard Media; Olympics Web site provider Quokka Sports;
online grocer Webvan; wireless Internet provider Metricom; and pioneering
online merchant Egghead.com.
Liquidating a company under Chapter 11 of the bankruptcy code is legal and,
according to attorneys, often a prudent strategy for large businesses trying
to preserve the value of intellectual property or other unique assets. In
return, the retained employees in Chapter 11 typically receive bonuses and
other incentives to make sure the auction goes smoothly.
In Chapter 7, the liquidation is handled by an impartial trustee whose fees
are set by the federal bankruptcy code.
"The idea behind a Chapter 11 liquidation is to have an orderly disposition
of the company's assets with the help of management instead of a fire sale
on the courthouse steps," said William Zewadski, a Tampa, Fla. attorney who
specializes in bankruptcy issues for the American Bar Association. "But
sometimes the (management) just wants to try to milk the company's assets
one last time."
That's what some major investors in Quokka Sports believe happened when
managers at the San Francisco-based company decided to file for Chapter 11
in April.
Under management's initial bankruptcy plan, 15 employees would have received
a total of $239,243 in bonuses for staying on the job to help shepherd the
liquidation process. Four other employees, including former CEO Alvaro
Saralegui, also wanted to split a 15 percent commission on the proceeds from
the company's liquidation.
U.S. Bankruptcy Judge Thomas Carlson nixed the proposed bonuses and
commissions amid investor protests that Quokka never should have been
allowed to file for Chapter 11. Quokka's Chapter 11 "represents little more
than an attempt by ... management to dip one last time into a trough that
already has been depleted over the last year," the investors said in a brief
seeking to convert the case to Chapter 7.
Bankruptcy Trustee Linda Ekstrom Stanley also argued that Quokka's case
should be converted to a Chapter 7, but Carlson denied the request in
August.
Quokka's decision to file Chapter 11 reflected management's belief that its
remaining assets would fetch substantially more money if key employees
supervised the auction process, said Tobias Keller, Quokka's bankruptcy
attorney. But the liquidation didn't live up to expectations.
Chapter 11 "did not work well with Quokka," Keller said. "In retrospect, it
could have been a Chapter 7. The problem is that you have to make a decision
(on which chapter to file) before you know how things will turn out."
Intira, a Pleasanton-based Web hosting service, fared better under a Chapter
11 liquidation, said Keller, whose firm handled the case. Heading into
bankruptcy, Intira hoped to raise $2 to $3 million for its assets, which
cost more than $100 million, Keller said. The auction fetched roughly $8
million, Keller said.
Many dot-com executives liquidating their companies under Chapter 11 are
just trying to line their pockets, said David Fidler, an attorney who
represented Quokka's investors.
"It's not like there are a lot of other employment opportunities out there
for these guys," Fidler said.
San Francisco-based Standard Media, publisher of the now-defunct Industry
Standard, irked creditors by agreeing to pay 5 percent of its liquidation
proceeds to three executives: founder John Batelle; Anne-Marie McGowan,
chief operating officer; and Jonathan Weber, the magazine's editor-in-chief.
The company's attorneys argued that the trio provided critical knowledge and
services in the Chapter 11 liquidation, but Standard Media's committee of
unsecured creditors questioned the need for the so-called "success fee."
The 5 percent fee "may be a disguised 'golden parachute' payment to these
individuals, completely unrelated to service in connection with the sale,"
the committee wrote in a legal brief.
The September auction, held a month after Standard Media's Chapter 11
bankruptcy filing, raised $1.4 million. Business 2.0 publisher AOL Time
Warner paid $500,000 for a list of the Industry Standard's subscribers and
International Data Group, Standard Media's biggest shareholder, bought the
Standard's Web site and other assets for $900,000.
Chapter 11 advocates say the process doesn't cost the estate much and might
even save money because a trustee inevitably would have to hire contractors
to help oversee the process. The best candidates for these contracting jobs
frequently are the former employees of the bankrupt company.
"In bankruptcy, you want to keep around the people who are most capable of
selling the assets," Keller said. "If you do Chapter 7, a lot of the
engineers that understand the assets might be gone for good."
|
|
 |
|
