GST Telecommunications http://www.gstcorp.com (Nasdaq: GSTX), which filed for chapter 11 bankruptcy last week, apparently isn't the only CLEC having financial troubles (see GST Files for Bankruptcy). e.spire Communications Inc. http://www.espire.com (Nasdaq: ESPI) is the next CLEC struggling to stem losses and pay its debts.

"e.spire has been in trouble for awhile," said one attendee at the Association for Local Telecommunications Services conference in Miami this week. "The internal management is a mess. And no one has sat down to fix the problem." e.spire's debts and operating losses are escalating. Since its inception in 1993, the company has never been profitable. The company reported $66 million in revenue for the first quarter of 2000, a 14 percent increase over the previous quarter. But losses grew faster than revenue: the company suffered a net loss of about $82 million in the same period, nearly a 50 percent increase over the $57 million net loss reported in the year-ago period.

The company has issued senior notes that mature in each of the years 2005 through 2007, some of which have interest rates as high as 13 percent. In addition, the company this year started paying debt on 2008 senior notes and senior secured credit facility. For the quarter ending March 31, interest expenses on all its debt totalled nearly $30 million.

Additionally, e.spire is apparently having trouble meeting certain requirements of the debt. "The Company was not in compliance with the financial covenants as of December 31, 1999 and March 31, 2000, resulting in a default under the Credit Facilities which allows the lenders to accelerate the maturity of the borrowings under the Credit Facilities," says in its last quarterly report for the period ending March 31.

In that same financial statement, the company reported that it had $119 million in cash on hand. With a burn rate of $80 million for the same quarter, it appears as if the company has less than six months of cash left unless it resorts to cutting expenses or raising more money through private placements, stock offerings, or further issuance of debt.

Investors in e.spire have been disappointed. Shares in the company closed Wednesday at $3.69, well off the 52-week high of $16.81.

Several class-action lawsuits have been filed against the company alleging that e.spire execuctives knowingly issued false and misleading statements concerning the company's assets, revenues, income and earnings.

For their part, e.spire executives claim the company is perfectly healthy, having received a commitment of $175 million in combined equity investment from Allied Capital Management LLC, Greenwich Street Capital Partners II, and the Huff Alternative Income Fund, L.P..

"The difference [between GST and e.spire] is that we have deep pockets behind us still funding us," says Bradley Sparks, CFO of e.spire.

Attendees at the Association for Local Telecommunications Services conference are saying that situations like these could be a sign of the times. CLECs such as e.spire, which borrowed heavily to build out their networks, are now faced with increased pressure to pay off that debt. With interest rates creeping up further, and the Nasdaq plunging, nervous investors want to see profits.

"In the past it was easy to slide by if your numbers slipped," says Tricia Breckenridge, executive VP of business development for KMC Telecom (http://www.kmctelecom.com). "Now if you can't pay your bills, you get called on it. Wall Street downgrades the stock."

But the problem is not as simple as just having too much debt. In the case of e.spire, the company says it still has $119 million in cash sitting in the bank. However, there is some evidence to suggest that e.spire may have been badly managed

For example, during the fourth quarter of 1999, the company had trouble billing customers, sources say. It wasn't a technical issue --they simply had not been sent out. Some bills were as much as six months late.

The management team has been completely re-shuffled over the past four months. In January founder and CEO, Tony Pompliano, retired and was replaced by George E. Schmitt, a former Omnipoint Communications executive. In March of this year, e.spire lost Dennis Kern, its COO, to another CLEC, Nextlink http://www.lightreading.com. The COO position was temporarily filled by Jeffrey Rubenstein, and then permanently filled by Christopher J. Resavy.

Keeping things in perspective, GST and e.spire are only two companies in a market of nearly 400 CLECs. To say that all CLECs are in trouble is not accurate. So far, VCs haven't lost faith in CLECs as a whole.

"There still seems to be an influx of private equity flowing from VCs," says Ken Hoexter, managing director of corporate strategy and research at Merril Lynch http://www.ml.com. "The pace may have slowed down, but the money is out there." --Marguerite Reardon, Senior Editor, Light Reading

http://www.lightreading.com