YIPES EMERGES FROM CHAPTER 11

Few companies have returned from bankruptcy and prospered, but officials at what is now being called Yipes Enterprise Services are hoping last week's emergence from Chapter 11 makes it an exception.

The service provider, which filed for protection in March, is coming out of bankruptcy with a $40.8 million round of equity financing from new investors, and it expects to close an additional $13.2 million later this year.

The deal, however, left the company's founders and initial stakeholders with nothing, and some are questioning whether Yipes even needed to file in the first place. “They didn't have much debt,” said Dave Schaeffer, CEO of Cogent Communications. “It was all about equity.” Cogent looked at purchasing Yipes' assets during the court proceedings but later declined.

But according to Yipes Chief Technical Officer Kamran Sistanizadeh, “To clean the balance sheet, we had to file Chapter 11.” He added that Chapter 7 would have been the only other option, and that wouldn't have helped the initial stakeholders, either. “Sure, former stakeholders are unhappy, but they would have been either way,” Sistanizadeh said, adding that he took a personal financial loss in the reorganization.

“The real positive is that the company, the customers and the value proposition can survive,” Sistanizadeh said. “Our issue wasn't operations or customers; it was the long-term contracts.”

Much like the morale boost Level 3 Communications got from its new cash infusion (see story on page 6), investors willing to put new capital into Ethernet services provided some much-needed validation for the sector, said Schaeffer.

Yipes Enterprise Services doesn't plan to change its service offering and has renegotiated several supplier contracts signed in 1999 and 2000. It has also pared down to just 10 markets and lowered its headcount from 400 to 100.

However, at least one analyst doesn't think the cost-slashing measures will make a difference.

“All this doesn't change the fact that the economics of the business still don't add up,” said David Gross, senior analyst at CIR. Yipes raised nearly a half-billion dollars and still wasn't able to make the metro Ethernet business profitable, he said.

About half of the new investment is earmarked to pay down remaining debts, leaving the provider with $20 million in fresh cash. That figure isn't likely to get it to any level of operational self-sufficiency, Schaeffer said.

“That's not enough for a facilities-based business,” he said.