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Yipes Reborn – Amid Accusations

When Yipes Communications Inc. filed for Chapter 11 on March 21, some folk (including Light Reading) made fun of Jerry Parrick, then the CEO, for saying that bankruptcy would be good for his company and would be temporary (see Yipes Joins Chapter 11 Club).

As things have turned out, Parrick was right. Sort of. Yipes plans to announce tomorrow that it has effectively emerged from Chapter 11 with a healthy balance sheet -- although it isn't quite that simple.

In reality, Yipes Communications' assets have been sold for a song -- somewhere around $20 million, if you include payments for loans while the company was on life support, according to Promod Haque, managing partner of Norwest Venture Partners, one of Yipes' original investors.

The bulk of Yipes' assets -- infrastructure in 10 cities -- was acquired by a company called PHX Holdings Inc., owned by some of Yipes' original investors, including Norwest. This has now been renamed Yipes Enterprise Services Inc. and has received a $54 million new round of funding from its shareholders.

Not everyone is happy about the deal. That's because shareholders in the original company that didn't participate in the rescue plan lost everything. This includes a number of investment funds as well as two of Yipes' founders -- Parrick and Ron Young, both of whom have left the company.

Parrick was tight-lipped when he talked to Light Reading today. Filing for bankruptcy protection "did what we said it would do," he said.

Young, on the other hand, says he's happy that Yipes has pulled out of bankruptcy but says there was no need to file for Chapter 11 in the first place. Yipes' revenue was growing at between 8 and 10 percent a month, and the company had already raised $57.5 million in an escrow account that could have been used to keep the company afloat. Instead, some of the big investors deliberately pushed Yipes into bankruptcy to gain a bigger share of the company for themselves. "I was completely against it," he says, adding that he left Yipes to join Procket Networks Inc. on the day the decision was made.

"I think all these [Chapter 11 filings] are scandalous," Young adds.

"It's easy for people not writing big checks," counters Norwest Ventures' Haque. "We had to write off $55 million."

What's happened to Yipes is "pretty unique", says Haque, who thinks it could set a precedent. "We're just seeing the beginning. There are a lot of Internet companies out there that have been encumbered by poor balance sheet management in the past. If you can clean up those balance sheets -- and you can only do that in a bankruptcy court -- their business models look even more attractive" than they did originally.

Haque views Metromedia Fiber Network Inc.(MFN) (Nasdaq: MFNX) as another service provider that might follow Yipes out of Chapter 11.

Yipes has certainly emerged a lot leaner and meaner from the bankruptcy court. "The company was formed right at the peak of the Internet boom," notes Dennis Muse, who joined Yipes as COO last January and became CEO when it filed for Chapter 11. As a result, it ended up like a lot of other startups, with a "cost structure that was out of whack" with market conditions.

Yipes has managed to renegotiate a lot of supply contracts, often achieving more than a 50 percent reduction in costs, by holding out the prospect of it going bust and suppliers getting nothing. "We've been successful in renegotiating contracts across all our lines of business," says Muse.

Muse has also slashed staff numbers. He expects to have between 112 and 120 by the end of this year, less than a third of the 375 that Yipes once employed, in early summer 2001.

Surprisingly, Yipes has lost a mere 4 percent in revenues since it filed for Chapter 11, according to Muse. And customer satisfaction levels have improved, he adds.

Investment in the new Yipes comes from Norwest and a bunch of other existing shareholders including New Enterprise Associates (NEA), Sprout Group, J.P. Morgan Chase Bank & Co., Soros Private Equity Partners, Focus Capital, Glynn Ventures, and Quantum Capital.

— Peter Heywood, Founding Editor, Light Reading
http://www.lightreading.com
netchinta 12/4/2012 | 10:08:40 PM
re: Yipes Reborn – Amid Accusations Peter,

How much did the assets get writted down from (you mentioned they were now valued at $20 MM) and how much did the liabilities get written down by? Wondering how much change there has been in shareholder equity.

Netchinta
deepciscothroat 12/4/2012 | 10:08:39 PM
re: Yipes Reborn – Amid Accusations Good point fon, but Young is the real "fonny". Why did he leave if the company was healthy? As a board member and founder, why did he act so unethically.
Glad he is at Procket, though ;-)
fon_guy 12/4/2012 | 10:08:39 PM
re: Yipes Reborn – Amid Accusations Apparently Mr. Young had done considerable interviewing and had received at least one offer of employment before the fateful day, if we are expected to believe him. From his remarks he didn't even bother to give 2 weeks notice unless he was invited not to do so. Scandalous indeed.
BuckStopsHere 12/4/2012 | 10:08:30 PM
re: Yipes Reborn – Amid Accusations While I am by far no financial genius, it seems relatively obvious to me that business models that require continuous influxes of huge amounts of capital to merely SURVIVE, much less profit, will eventually go bust. Sooner or later, the well runs dry. Therefore, it seems likely to me that anyone with the title "C-anything-O" should have at least had this idea cross his/her mind.

So here's my theory: Companies were faced with two options--A) Stop the capital influx and try to survive on revenues like a normal company--or B) Keep the capital coming in as long as possible and deal with the consequences later. As we now see, most companies chose "B". I find it hard to believe that those making the choices didn't realize that "B" was a direct flight to Chapter 11. Instead, I believe they knew it, and used someone else's money to build up their networks with the full realization that most of these equity investments would eventually be written off. I believe they did so with the specific, yet publicly unspoken, intention of filing for Chapter 11 protection, knowing that any other growth model would result in them being buried buy competitors with Chapter 11 business models. Better to be around in the end with some good bankruptcy lawyers than out of business now. Better to fudge revenue numbers (Global Crossing) or "mistakenly" account for expenses as capital investments (WorldCom) and deal with the consequences later than publish the truth now and close up shop.

The people that developed these strategies were not stupid. They knew exactly what they were doing. They knew the inevitable results. And they didn't care. They were fat cats sitting at the country club with their analyst buddies, drinking whiskies, thinking about how they could milk some more money out of the average investor that would never know the truth about the off-balance sheet black hole of debt that their money was going into (Enron). I don't know how they could sleep at night in their 40,000 square foot homes. Most of the poeple reading this are like me in that we are honest businessmen trying to figure out how to make this thing work. For those of you who fall into the group described above, you should be ashamed of yourselves. You give life to the anti-American, capitalist-pig sentiment that anyone that has ever lived outside the US has been exposed to. I hold you responsible for lowering the reputation of my industry, my passion, down to the likes of junk-bond and used-car sales. Any self-respecting person in this industry should feel the same way.

In case you haven't figured it out yet, I'm not too happy about this.
Peter Heywood 12/4/2012 | 10:08:29 PM
re: Yipes Reborn – Amid Accusations BuckStopsHere - Good One!

I've just been reading about Jack Grubman, the Salomon Smith Barney analyst who earned $20 million a year while he pumped up Worldcom's stock.

And I've been reflecting on Worldcom's big layoffs, and how many ordinary people are having to go back home and tell their families they face a grim financial future.

Something is seriously wrong with the system, as you say.
litehearted 12/4/2012 | 10:08:22 PM
re: Yipes Reborn – Amid Accusations I believe a chord has been struck here. We EXPECTED C-something_Os and BoDs to basically maintain and create wealth in corporations and shareholders. We EXPECTED independent auditors to be independent. We EXPECTED industry analyst to be analyst. We EXPECTED the SEC to be the government watchdog. I know I sound alturistic, maybe even unrealistic, and this is "pie-in-the-sky", but we do have these expectations to some degree. Ultimately, we should spend some effort to monitor our own futures, but most of us were too busy helping to create the products and services to maintain and create the wealth to provide oversight for these other important facets of our industry. If the shareholders and/or the employees are to provide all of the oversight for the above mentioned responsibilities, why do we have the C-something_Os and BoDs with the high overhead of their compensation? What about Independent Auditors??? Industry Analyst??? The SEC???

I believe that there is a lot of review of current policies and practices and a terrific scrambling of some individuals in this industry dragging the tree bushes behind them in an attempt to hide the graves of the dead bodies. In the meantime, the average mutual fund investor is being beaten about the head and shoulders with the stock market and the rich shift and move money faster than a Vegas casino in summer.

My hearts go out to those affected by the greed of others. As many of you, I have had very close friends who have lost their jobs associated with the bubble burst.
BobbyMax 12/4/2012 | 10:08:17 PM
re: Yipes Reborn – Amid Accusations Yipes is still not out of danger. Its nationwide network can be used for data services, but it is unlikely that VoIP will be used in the US in the forseeable future. In view of this YIPES has to sustained revenue stream for a period of three years. It is not clear as to how much revenue can be generated by Video over IP. Perhaps YIPES can generate some revenue by providing Storage over IP services.

Needless to say that YIPES has thrown away money like water. YIPES has also patronized just one vendor for buying IP switches. In service providers business this is almost no.
ravencaw 12/4/2012 | 10:07:50 PM
re: Yipes Reborn – Amid Accusations With a layer-2 network (Ethernet)you don't necessarily need VOIP. TDMoIP is a better way to go. Check out:

http://www.rad.com/products/fa...
lowbandwit 12/4/2012 | 10:06:14 PM
re: Yipes Reborn – Amid Accusations "With a layer-2 network (Ethernet)you don't necessarily need VOIP. TDMoIP is a better way to go. Check out:

http://www.rad.com/products/fa..."

I just don't know how to feel about this. On the one hand I realize that TDM is being rendered obsolete and this might be useful in some very limited instances. On the other hand... why the heck would you run layer 1 on layer 3?!? Do they really have a market for this device? I can't think of anything out there that would be served efficiently with this. What's next, SONET over PPTP? ;-)
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