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The “Wall Street Journal” reported that the number of SBA guaranteed 7(a) loans was down 36% in fiscal 2009, totaling $9.3 billion, which was $3.4 billion less than the previous fiscal year. Reasons for the drop-off in SBA loans include scarce credit, and the riskier nature of small business loans, which hit a 12% failure rate in 2008, up from 2.4% in 2004, according to the Coleman report. Â Â SBA loans did rebound in September 2009, which the agency credited to stimulus measures, including an increase in the SBA’s maximum guarantee from 80% to 90% of the loan amount.
FairPoint Communications filed for bankruptcy under Chapter 11 on October 26, 2009, hampered by interest payments resulting from the excessive debt it took on in the $2.3 million acquisition of Verizon’s northern New England landlines and Internet network in early 2008. Remarkably, FairPoint Communications CEO David Hauser was quoted as saying this about the bankruptcy filing, “From a consumer point of view, this is a nonevent.”FairPoint Communications has been plauged by complaints from retail, business and wholesale customers since changing over from Verizon computers to its own computer systems, the “New Hampshire Union Leader” recently reported. Prior to that, in mid-2008, Vermont 911 calls were not being properly routed, with state officials assigning blame to FairPoint.
Lesson learned: A look at FairPoint’s 10-k report shows that its long term debt went from zero in 2007 (the year before the acquisition) to $2.1 billion at the end of 2008, while net income (profits after interest and tax) went from a profit of $32.8 million in 2007 to a loss of $68.5 million in 2008. I completely agree with the many bloggers who have already opined that it is hard to understand what the regulators in Maine, New Hampshire and Vermont were thinking would happen when they approved FairPoint’s acquisition of the assets being spun off by Verizon. Regulators should have considered the advice my friend Cotty, a financial adviser in Toronto gives his clients: you may be able to make the down payment on a fancy new house, just be sure you can also handle the “cost of ownership.”
The “Sixty Minutes” segment last Sunday on people who file fraudulent claims for Medicaid reimbursements has me hopping mad, and if you take the time to watch it, you will be too.
What I would like to know is why someone doesn’t put in an added step in the auditing process, whereby the supposed recipients of any electric wheelchair, urine bag, artificial limb or other medical equipment over a certain a dollar amount is called at random to verify that these were actual people, and it was not just a storefront operation submitting the names, before the funds are released.
If you are concerned, please write a letter to President Obama, and Senator Schumer too, if you are a New York resident.  And thanks to “Sixty Minutes” for illuminating this troublesome issue.
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As a postscript, in the early morning of July 16, 2010, Federal agents arrested 94 individuals suspected of Medicare fraud, spanning Miami, Baton Rouge, New York, Detroit and Houston, CBS News reported. Â Â (The above-mentioned October 2009, “Sixty Minutes” segment focused on Medicare fraud based in Southern Florida.)
R. H. Donnelley filed for bankruptcy in May of 2009 after missing a $55 million interest payment to creditors, but the seeds of its bankruptcy were planted more than five years earlier when Dex Media borrowed $1.5 billion to pay a special dividend to its private equity owners, including Carlyle Group and Welsh, Carson, Anderson & Stowe.  The two Private Equity firms acquired Dex Media from Qwest Communications International in a 2003 LBO for a total purchase price of $7 billion, and were subsequently able to recoup their entire equity investments of $775 million each through a series of special dividends, as reported by the WSJ on Sept. 21, 2005. Dex Media was taken public at $19 a share in early 2005, and R.H. Donnelley acquired Dex Media in a cash and stock deal later that year, which also involved R. H. Donnelley assuming $5.3 billion in debt, bringing Donnelley to a total of $10.7 billion in debt.
A look at the S-1 statement for Dex Media’s initial public offering shows that the lead underwriters for the January 2005 IPO were Lehman Brothers, Morgan Stanley and Merrill Lynch, and that the company had an 8-to-1 debt equity ratio on 9/30/2004. The risks section of the S-1 stated that “our substantial indebtedness could adversely impact our financial condition, and impair our ability to operate our business” and went on to say “despite our substantial indebtedness, we may still incur significantly more debt.”Â
Lesson Learned: Dex Media’s underwriters were right on both counts.  R. H. Donnelley’s total debt load, including the debt assumed in the Dex Media acquisition, deprived it of the needed financial cushion in the face of tough competition and adverse economic conditions.
Shane Company, a family-owned $200 million jewelry retailer filed for Chapter 11 bankruptcy early in 2009, partly attributing “cost overruns and functionality problems on an SAP software implementation,” “ComputerWorld” reported. The company also acknowledged that the recession, and slow holiday sales were the biggest cause of its problems, as sales slumped from $275 million in 2007 to between $207 and $210 million in 2008. The SAP implementation had cost Shane $36 million by the time they pulled the plug vs. an original cost bid of $8 to $10 million, and had also caused Shane to become “substantially overstocked with inventory, and with the wrong mix of inventory.” But here’s a question for Shane management: What systems and business practices were they using to manage inventory on their way to becoming a $275 million company, and why didn’t they keep things in place as they were until thoroughly testing the new SAP system, and then cutting over, to protect against the ensuing problems.
Lesson Learned: Company managers have to take responsibility for the business systems they recommend for purchase and their subsequent implementation.  While competitor Blue Nile was riding out the recession with less than a 6% revenue decline in 2008, Shane’s 25% revenue decline meant there was little or no leeway for a botched SAP implementation.
Woodstock Film Festival panelists discussing the Future of Independent Filmmaking seemed to agree that the specialty divisions of the major studios are selecting many fewer films for broad theatrical release, perhaps as few as twenty per year.  For independent filmmakers, the current environment is almost like going back to 1975, before the establishment of specialty divisions, such as Fox Searchlight and Sony Classics. But there is one notable difference between then and now: the affordability of equipment and editing software has greatly reduced the economic barriers to aspiring filmmakers.  The recession has considerably tightened up funding sources, but for an independent filmmaker who is still able to raise $250 thousand to make a film, it would be responsible to try to raise an additional $150 thousand Prints and Advertising (P&A) funds at the onset, to increase their chances of getting the completed film into distribution, advised panelist Richard Linklater. One encouraging development is the rise of “service distributors”, some of whom have previously worked with the studio’s specialty divisions, and now are on their own, and able to provide expertise in independent film distirbution. In addition to Richard Linklater, the other panelists were John Sloss, Ira Sachs and Peter Saraf, all moderated by Scott Macaulay, the editor of “Filmmaker Magazine.”
SBA and Kauffman Foundation studies both indicate that entrepeneurship trended down in 2008.   Business starts were down 14% in the third quarter of 2008 versus the same period a year earlier, Brian Headd, an SBA economist told the WSJ online.  According to Robert Fairlie, a University of California, Santa Cruz, economist, working with the Kauffman Foundation, the number of low income potential new businesses, such as baby sitting and house-cleaning services, grew in 2008, while those with higher income potential did not, suggesting that new business starts were driven more by necessity than opportunity. The recession is taking its toll: according to a Federal Reserve July survey of 53 lending officers, “more than one third reported tightening terms for small-business loans in the prior three months, while only one reported easing terms.”
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Why Businesses Go Bankrupt: FairPoint Communications
FairPoint Communications filed for bankruptcy under Chapter 11 on October 26, 2009, hampered by interest payments resulting from the excessive debt it took on in the $2.3 million acquisition of Verizon’s northern New England landlines and Internet network in early 2008. Remarkably, FairPoint Communications CEO David Hauser was quoted as saying this about the bankruptcy filing, “From a consumer point of view, this is a nonevent.”FairPoint Communications has been plauged by complaints from retail, business and wholesale customers since changing over from Verizon computers to its own computer systems, the “New Hampshire Union Leader” recently reported. Prior to that, in mid-2008, Vermont 911 calls were not being properly routed, with state officials assigning blame to FairPoint.
Lesson learned: A look at FairPoint’s 10-k report shows that its long term debt went from zero in 2007 (the year before the acquisition) to $2.1 billion at the end of 2008, while net income (profits after interest and tax) went from a profit of $32.8 million in 2007 to a loss of $68.5 million in 2008. I completely agree with the many bloggers who have already opined that it is hard to understand what the regulators in Maine, New Hampshire and Vermont were thinking would happen when they approved FairPoint’s acquisition of the assets being spun off by Verizon. Regulators should have considered the advice my friend Cotty, a financial adviser in Toronto gives his clients: you may be able to make the down payment on a fancy new house, just be sure you can also handle the “cost of ownership.”
Tags: bankruptcy, David Hauser, FairPoint Communications