Telecommunications service provider Winstar Communications Inc. has filed for bankruptcy and has sued Lucent Technologies Inc. for US$10 billion in damages, accusing the company of breaking a vendor financing agreement.
Both legal actions were filed in the U.S. Bankruptcy Court for the District of Delaware.
New York-based Winstar said it plans to use the Chapter 11 process to restructure its finances while continuing to provide service to its business customers. In a statement, Winstar said it would focus on maximizing its broadband network, rather than expanding it.
"During this restructuring process, we will focus on maximizing the untapped potential of the 140,000 addressable businesses in the 4,800 buildings that are directly connected to our already existing, domestic built-out broadband network," Winstar Chairman and CEO William Rouhana Jr. said in the statement.
Winstar officials couldn't be reached for additional comment at deadline.
Earlier this month, Winstar laid off 43 percent of its 4,700 employees and said that it would stop network expansion.
Rouhana said Winstar expected to emerge from bankruptcy with less debt and lower interest payments, providing the company with more operating flexibility.
The company said it had arranged for debtor-in-possession financing with an initial commitment of $75 million, which could increase to as much as $300 million, from a consortium of banks including Citicorp, Canadian Imperial Bank of Commerce, Credit Suisse First Boston, The Bank of New York Inc. and The Chase Manhattan Bank.
In a separate statement, Winstar said it was forced to file for bankruptcy protection because Lucent breached the terms of a 1998 agreement between the two companies, which were to jointly provide businesses with a wide range of telecommunications services including voice, data and Internet access using Lucent's equipment and software over Winstar's digital broadband network.
Under the five-year agreement, Murray Hill, N.J.-based Lucent also agreed to give Winstar up to $2 billion in financing.
According to Winstar, Lucent failed to meet its contractual obligation, which included making a payment of more than $90 million to Winstar on March 30.
In turn, Winstar defaulted on a $75 million debt earlier this week and missed a payment to Lucent, which cut off Winstar's access to a line of credit, said Lucent spokeswoman Mary Lou Ambrus.
The lawsuit asks the court to order Lucent to pay Winstar the more than $90 million it said it's owed.
"This lawsuit is absolutely frivolous and without an ounce of merit," Ambrus said. "We did not breach any of our obligations to Winstar. The truth is, it is in breach of its financial covenants and in payment default with us. We have been, and are continuing, to monitor the situation."
Nick Maynard, an analyst at The Yankee Group in Boston, said he questioned whether Winstar would have been sustainable even if Lucent hadn't missed its $90 million payment, as Winstar claimed.
"If it was cutting it that close, Winstar [must have already had] a cash flow problem," Maynard said. "I wonder what the burn rate was."
While other telecom companies, such as Advance Radio Telecom Corp. and Teligent Inc., have had problems, the troubles at Winstar aren't industry problems, said Peter DeCaprio, an analyst at investment banker Thomas Weisel Partners LLC in Boston. Advance Radio has also filed for bankruptcy protection, and Teligent laid off 780 people in November.
"People seem to be missing this," DeCaprio said. "Other companies in this space are not affected by the same problems. Winstar chose to do business with a lot of questionable customers and, in my opinion, they chose to record revenue in a questionable fashion. Winstar has a lot of nonrecurring, [one-time] revenue in its revenue stream. The principal problem is the quality of its revenue and where that revenue is coming from.
"In Winstar's 10Q filing [with the SEC], they talk about certain revenue segments and a lot of their revenue segments are nonrecurring in nature," he continued. "Winstar charges customers for installation of equipment, network integration and things like that. But other companies in the space typically have customers who buy their service every month and sign service contracts on a yearly basis."
Trading of Winstar stock on the Nasdaq Stock Market Inc. was halted at 8:03 a.m. EDT Wednesday. Nasdaq issued a statement saying that it's seeking additional information from Winstar, whose stock price fell 60 percent, or 21 cents, and closed at 14 cents per share Tuesday.
Also Tuesday, a lawsuit was filed against Winstar by investors who had bought the company's securities between Aug. 2, 2000, and April 2, 2001. The complaint was filed in the U.S. District Court for the Southern District of New York by the New York law firm Bernstein Liebhard & Lifshitz LLP. The complaint alleged that Winstar misrepresented that it would achieve significant earnings and revenue growth and had enough funding to carry out its planned expansion.
However, the plaintiffs alleged that Winstar's strong financial results were achieved through improper accounting practices and that the company overstated its revenue by improperly reporting uncollectible receivables.
James Evans of the IDG News Service contributed to this article.