By Stephanie Gleason
Of DOW JONES DAILY BANKRUPTCY REVIEW
Real estate and telecommunications company Connexion
Technologies filed for Chapter 11 bankruptcy Thursday with the
intention to sell itself after DirecTV Group Inc. (DTV) terminated
its contracts with the company, pushing the already cash-depleted
Connexion over the edge.
The Cary, N.C. company, which claimed between $100 million and
$500 million in debts and fewer than $500,000 worth of assets,
asked the court Friday to approve $4 million in bankruptcy
financing from the UniCredit Bank's (BUNC.UR) New York branch so
that it can continue to operate during its Chapter 11 case.
It said it doesn't expect unsecured creditors--which include
DirecTV and Level 3 Communications (LVLT), both are owed over $1
million--to receive any payout.
Connexion blamed a number of issues that came to a head in
February for its financial situation.
Founded in 2002, the company expanded very quickly. Connexion's
main business, purchasing telecommunications rights on properties
like apartment complexes, improving the service and then leasing
the rights to companies like DirecTV, is extremely capital
intensive.
"The debtors typically operated with low cash balances and
relied upon [lender Reedy Creek Investments LLC] to provide
additional capital as needed," according to court documents filed
with the U.S. Bankruptcy Court in Wilmington, Del.
Despite being hurt by the recession when properties that it
invested in weren't completed or had low occupancy, Connexion
continued its expansion in 2009 and 2010 and maintained high fixed
costs.
"Management thought that if the debtors could grow the property
count high enough, the debtors would have enough profitable
projects to generate sufficient cash to self-finance," it said,
adding that the growth made it difficult to manage the
business.
With many of its service-provider subsidiaries suffering
negative cash flow, Connexion said it had expected most of its
growth in 2012 and 2013 to come from its DirecTV contracts.
"This expectation was shattered, however, when, in February
2012, DirecTV, without prior notice or opportunity to cure,
unilaterally terminated multiple contracts with [its subsidiaries]
(which terminations the debtors believe were wrongful) resulting in
a dramatic negative impact on significant parts of the debtors'
cash flow starting in March 2012," it said in court documents.
Around the same time, Connexion's lenders cut off the company's
access to financing. The company defaulted on its loan, was unable
to pay vendors and laid off employees.
Connexion also is facing a wrongful-termination lawsuit as a
result of the layoffs, filed earlier this month. The lawsuit, which
alleges that Connexion violated the law that requires employers to
give notice before laying off broad swaths of employees, says
Connexion eliminated between 246 and 260 people in March. It also
alleges that DirecTV ended its relationship with Connexion because
it "learned of alleged fraud committed by the defendant."
Connexion's bankruptcy attorney wasn't immediately available for
comment Friday.
Connexion filed for bankruptcy along with 11 subsidiaries,
including its main service providers, Broadstar LLC and Amenity
Broadband LLC. Through its subsidiaries, Connexion said it operates
in 48 states and had more than 100,000 video customers. Prior to
the layoffs, it employed 570 people full-time and had $69 million
in revenues.
(Dow Jones Daily Bankruptcy Review covers news about distressed
companies and those under bankruptcy protection.)
-By Stephanie Gleason, Dow Jones Daily Bankruptcy Review;
202-862-1347; stephanie.gleason@dowjones.com