Friday, September 15, 2000
By KATHY MULADY SEATTLE POST-INTELLIGENCER REPORTER
TellThemNow.com seems like a good idea: With a click of a button, news watchers or movie fans can give politicians and celebrities raves or rants via e-mail.
Founder Wiley Brooks is still convinced that it is a good idea.
But like some other dot-coms, the year-old Seattle company is closing its doors, looking for a buyer, and may be facing bankruptcy. About $2.5 million of start-up money has turned into $3 million of debt.
In a tale many financial experts say is likely to be repeated by other dot-com companies, Brooks has hired an attorney.
Seattle law firms, like others around the country, are bracing for a surge in bankruptcies as some of the sparkle starts to fade from the once glittering potential to sell almost anything online.
"We are gearing up in the sense of anticipating what is going to happen," said Richard Schroeder, a partner in the Seattle office of Davis Wright Tremaine.
Law firms are reorganizing their staffs and brushing up on the nuances of Internet and intellectual-property issues that will be a part of dot-com bankruptcies.
But with few assets and slim chances for reorganization, dot-com bankruptcies are expected to be a lot of clean-up work rather than lawyer-intensive efforts.
Some dot-com dissolutions have already raised tricky questions, such as whether customer lists, which often include not only names and addresses, but also past purchases, can be sold.
Geoffrey Groshong, a partner with Miller Nash in Seattle, and Marc Barreca, a partner at Preston Gates Ellis in Seattle, are co-chairmen of a seminar on Internet bankruptcies for lawyers, potential investors and Internet business owners in February.
Although the country's strong economy has helped cut the number of bankruptcies among brick-and-mortar retailers (those without an Internet presence) to its lowest level since 1996, the number of Internet bankruptcies is expected to surge.
In April, Forrester Research issued a report predicting that 71 percent of existing online retailers will fail by 2001.
Customers are already finding that favorite online stores have disappeared overnight.
In late August, Living.com, a Texas-based company with a coveted tab on Amazon.com, simply disappeared. Shoppers looking for sales on sheets, towels and comforters found only a terse apology on the Web site.
Filing for Chapter 11 in the U.S. Bankruptcy Court of Texas on Aug. 29, the company said it was unable to attract new revenue sources after spending $41.5 million in venture capital.
Shoppers visiting Web sites for Toysmart.com and Valueamerica.com, Hardware.com and scores of others have found similar messages.
TellThemNow.com in Seattle still has its site up. Once there were 37 employees, now there are a half-dozen volunteers who drop in to keep the site operating.
"If it's not bought, or we don't get enough money to negotiate with our creditors, our options are really limited. Bankruptcy might be one of them," Brooks said.
"We have to figure out a way to cover about $3 million in debts, that includes our attorney, who we owe a fair amount of money," he said. "I'm sure they are wondering if they are going to see it, but they have given us first-rate advice."
According to the August issue of the National Law Journal, dot-com jitters have made bankruptcy one of the most closely watched expansion areas of law, with some firms staffing up.
Most of Seattle's larger law firms say they expect to handle the added work with attorneys already on staff.
"If it becomes a large number, we can move people into it," said Schroeder at Davis Wright Tremain. "We have a pretty solid bankruptcy group here; we can absorb much of the work by managing and pulling in expertise from other parts of the firm."
Liquidating an Internet retailer isn't the kind of work most attorney's relish.
Many bankruptcy attorneys say they find satisfaction in helping businesses in deep financial trouble restructure and keep their employees, or helping them find another company that can put it all back together again.
By comparison, some lawyers handling Internet bankruptcies say it feels a bit like preparing a body for burial.
"With an Internet company, it is akin to undertaking, it doesn't have much charm, but like everything else, it is a necessary task," said Stuart Hirshfield, chairman of the bankruptcy group for Dewey Ballantine in New York City.
Some small dot-coms will simply disappear. Others will merge with healthier companies.
Many Internet retailers will file for Chapter 7 bankruptcy, liquidate what little inventory they have, and pay as many bills as they can.
"It's a very ephemeral service product. If you stop providing the service you don't have much," Groshong said.
The domain name and customer database are often the most valuable assets of an Internet retailer.
Brooks, for example, said TellThemNow's main assets are a database of 800,000 e-mail addresses for newsmakers, and their technology. They are not selling their customer database.
Recently, privacy advocates and the Federal Trade Commission have worked to stop the selling of customer lists, citing common e-tailer promises never to reveal customer data.
The issue was raised in August when Internet retailer Toysmart.com appeared in bankruptcy court.
The proposed sale of Toysmart's company's customer list, which contains names and other information on about 250,000 people, drew criticism.
There was no buyer for the list anyway, and the issue was dropped.
Last week, Amazon.com released a revised privacy policy, notifying customers that, "In the unlikely event that Amazon.com, or substantially all of its assets are acquired, customer information will, of course, be one of the transferred assets."
Another asset for an Internet company is its employees and managers.
"If they are young smart executives who came from other places because of the stock options, which are now worthless, then you can count on them already being gone," said Dennis Simon, the founder and principal of Crossroads, a Newport Beach, Calif., group that specializes in turning around failing businesses.
Simon said he's helping two California e-tailers, one food-focused, the other entertainment-oriented, get back on track.
Both companies, he said, were living from "capital-raising event to capital event."
The management team was geared toward growth rather than operating efficiencies. Both were operating on a negative cash flow "and not thinking much about it," said Simon.
"If they were 58 instead of 28, they would be more atuned when times turn bad," he said. "They are wealthy and they have their whole lives ahead of them. They will have both time and capital to do this again."
But for many, second chances may come after they've learned first hand the intricacies of federal bankruptcy law.
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