One of the largest U.S. private cable operators has filed for Chapter 11 bankruptcy protection under a cloud of controversy, with one of its shareholders claiming that the bankruptcy is merely a ruse to avoid a lawsuit.
WSNet Inc., an Austin, Texas-based private cable operator and provider of satellite video programming to small cable operators, filed for Chapter 11 protection in U.S. Bankruptcy Court for the Western District of Texas on Oct. 24, after its primary lender literally cleaned out its bank account.
According to bankruptcy documents, WSNet has about 750,000 subscribers, the vast majority of which are private cable operations in multiple dwelling units. The company listed assets of between $10 million and $50 million and liabilities of between $50 million and $100 million.
Court documents state that WSNet's primary lender — Digital Satellite Lenders LLC — exercised its right to empty its bank accounts of $8 million on Oct. 17, after the company had defaulted on certain covenants on its loans. That, in turn, triggered additional defaults on other company debt and prompted the bankruptcy filing.
In court testimony on Oct. 31, WSNet chief financial officer Randy Jonkers testified that WSNet had defaulted on revenue, cash-flow and subscriber-growth covenants under its loans from Digital Satellite. WSNet had been in default of those covenants since January, he added.
Since the bankruptcy filing, Digital Satellite Lenders has agreed to provide $2 million in debtor-in-possession financing for WSNet, which matures on Jan. 31, or less than 90 days after its issuance.
WSNet chief operating officer Stuart Lefkowitz said he could not comment on the reasons for the bankruptcy, but said the company is continuing to provide service.
"All I can tell people is that we have received our [debtor-in-possession] financing and we are just trying to come up with a new business plan that works," Lefkowitz said. "There is very little else to tell. We are just brainstorming, trying to get a business model that is effective."
But it is the short term of that DIP loan — and the fact that it requires the waiver of all claims against company assets — that Beck said in his suit indicates that WSNet filed for bankruptcy to avoid his claim.
"The thing that is questionable here is DSL and particularly the principal of WSNet — Jerry Abbruzzese — they're very closely affiliated," said Eric Taube, the attorney for Beck, in an interview. "What happens when you file a shareholders derivative action, you're suing on behalf of the company against people that really.
"When a company files for bankruptcy, those derivative actions become property of the bankruptcy estate. One of the ways to try to avoid claims in relation to that is to file bankruptcy and take control of the litigation. Our supposition was that's exactly what they did here."
In the suit, Beck called the bankruptcy a "transparent attempt by the parties who are defendants in the state court action, including officers and directors of these Chapter 11 debtors, to undermine and eliminate the assertion of these claims."
Lefkowitz declined to comment on Beck's allegations. "He can say whatever he wants," Lefkowitz said.
Regarding the short term of the DIP financing, Lefkowitz acknowledged that DIP loans are usually extended for longer terms, "but that's the terms we're operating under."
According to Beck, WSNet was mired in a complicated web of self-dealing by some of its top officers, who also happened to be principals in the company's biggest lenders. In addition, Beck claims that Digital Satellite principals steered WSNet away from a plan to acquire two rural cable systems — Classic Communications Inc. and Galaxy Telecom Inc. — while secretly cutting deals to acquire the public debt of those MSOs.
Singer Got Galaxy
And one of Digital Satellite's partners — Gary Singer — ended up with control of Galaxy after it emerged from bankruptcy. Singer, according to Taube, also is a large bondholder in Classic. Classic is expected to emerge from Chapter 11 as early as next month.
Beck also claims that Singer, although not an officer of WSNet, was installed as a key decision-maker at both the officer and director level. In the suit, Beck said Digital Satellite had neglected to inform other shareholders of Singer's criminal record.
Singer is the former Cooper Cos. Inc. chairman, and in 1995 he was sentenced to 28 months in prison as a result of insider-trading violations while with that company. Singer also was fined $50,000 and ordered to forfeit $2.5 million in property to the government. Singer currently invests in distressed companies through his New Rochelle, N.Y.-based fund, Romulus Holdings Inc.
According to Beck, WSNet had made tender offers to buy Galaxy and Classic in 2001. The company 's board of directors had also approved efforts to raise about $200 million in equity financing, in part to finance those transactions.
But on Feb. 21 of that year, another DSL partner — Steven Feinberg, president of Cerberus Partners, a New York-based distressed debt fund — told WSNet management not to go ahead with the deal, Beck claimed.
"Feinberg told WSNet management that his businesses were attempting to make similar acquisitions and did not want competition from WSNet," Beck claimed in the suit.
And when WSNet management went forward with their plans anyway, Beck claims that Singer and Feinberg fired the company's CEO, Cary Ferchill, and replaced him with Abbruzzese, another Digital Satellite partner.
Abbruzzese had been acting chairman and CEO of WSNet ever since. He did not return phone calls seeking comment.
Beck's suit also claims that Abbruzzese, Singer and Feinberg are principals in CRT, another WSNet investor. CRT is an acronym for Cerberus, Romulus and Tech One, an Abbruzzese investment vehicle.
Abbruzzese has a history in cable. As head of CAI Wireless Inc. in the mid-1990s, Abbruzzese ran what became the largest wireless cable operator in the country, fueled with a $300-million commitment from regional Bell operating company Bell Atlantic Corp. (now Verizon Communications).
But citing problems with line-of-sight restrictions on the microwave multipoint distribution system technology — it reached less than 60 percent of homes passed — Bell Atlantic pulled its commitment from CAI in 1997.
CAI floundered for years, trying to raise money to build out systems in a tough capital market, and its stock preformed accordingly. Once trading as high as $20 per share, CAI stock had plummeted to less than $1 each by 1999.
CAI started to rebound in 1999, after two long-distance calling providers — MCI Worldcom Inc. and Sprint Corp. — tried to capture MMDS spectrum by buying up debt from several wireless-cable companies. MCI eventually offered to buy out CAI later that year for $28 per share, or about $408 million.
While WSNet winds its way through the courts, its customers are in a state of limbo.
"We were hoping that WSNet would be the solution to competing against DBS," said Alpine Cable general manager Pat McGowan. Des Moines, Iowa-based Alpin has about 700 cable subscribers in several small towns in that state.
McGowan said that Alpine could launch HITS2Home, the digital platform from Comcast Corp.'s Headend in the Sky, but that it will be costly — between $130,000 and $140,000. He added that if WSNet is forced to discontinue the service "we will have to take a look to see if it makes sense going on."
Buford Television president Ben Hooks, who has deployed WSNet in one small system in Arkansas, said his options are limited as well.
"What are my alternatives? Nothing good financially," Hooks said.
Buford, which has about 7,000 customers in small communities in Arkansas, could upgrade its systems to digital — which would cost at least $250,000 — or switch to HITS2Home, which requires a $100,000 investment just for the headend, he said.
He added that HITS2Home also is more expensive to maintain than WSNet's service.
Despite WSNet's financial problems, Hooks added, he has been extremely pleased with the service.
"I have never run into anybody who said he didn't like it," Hooks said. "The technology really worked."
Hooks has served as a technology consultant to WSNet in the past, but said that relationship expired last year.