Winstar files for bankruptcy, sues Lucent

The communications service provider seeks Chapter 11 protection and files a $10 billion lawsuit against Lucent Technologies alleging the breach of a partnership agreement.

Winstar on Wednesday said it has filed for Chapter 11 federal bankruptcy protection and filed a lawsuit claiming Lucent Technologies breached a partnership agreement.

Under the lawsuit--filed in the U.S. Bankruptcy Court for the District of Delaware--New York-based Winstar said it has arranged initial financing of $75 million from a consortium of banks to continue serving its customers and restructure its balance sheet. The company stressed that the Chapter 11 filing will not impinge on its day-to-day operations.

The financially troubled service provider is seeking $10 billion in damages in its lawsuit against Lucent and is asking that Lucent perform its contractual obligations, including the payment of more than $90 million, which it failed to pay Winstar on March 30, the company said in a statement. Winstar is also claiming that Lucent's breach of its contract has forced the company to seek protection under the U.S. Bankruptcy Code and injured its ability to complete the development of its high-speed broadband network.

"This lawsuit is absolutely frivolous and without an ounce of merit," said Mary Lou Ambrus, a spokeswoman for Murray Hill, N.J.-based Lucent. "We did not breach any of our obligations with Winstar."

According to Lucent, Winstar is the one in default.

"We'll obviously continue to monitor this," Ambrus said. "We're appropriately reserved and we'll work to recover as much as possible in the bankruptcy proceedings."

Earlier this month, Winstar announced that it would halt domestic and international network expansion for the rest of the year in an effort to trim costs. Winstar also recently laid off some 2,000 employees as it strives to save money and focus on acquiring more customers within the 5,400 buildings that it already serves.

Winstar is only the latest company to be hit by a harsh downturn in the telecommunications industry. Smaller carriers such as Winstar have been especially battered, since their business was somewhat built on the presumption that the capital markets--rather than sales to customers--could fuel their expansion plans.

Winstar, which has been widely expected to file for bankruptcy protection, alleges in the suit against Lucent that the company did not fulfill obligations under a supply agreement. "Little more than two years into the five-year agreement, Lucent has shown its promises were hollow," Winstar said in a statement.

Winstar's complaint also points to the recent scrutiny that Lucent has endured by analysts regarding its vendor financing.

Analysts have said that Lucent, along with rivals Nortel Networks and Cisco Systems, will be weighed down in this earnings season by the billions they collectively lent to now struggling telecommunications service providers. Lucent is slated to report earnings April 24.

Winstar is aiming to emerge from Chapter 11 with a new balance sheet and significantly less debt, William Rouhana, the company's chief executive, said in a statement. So-called debtor-in-possession (DIP) financing, obtained from CIBC, Citicorp, Credit Suisse First Boston, The Bank of New York and The Chase Manhattan Bank, has the potential to increase to as much as $300 million depending on the satisfaction of certain conditions, the company said.

As part of its restructuring efforts, Winstar said it intends also to focus on tapping new corporate customers housed in buildings already connected to its existing U.S. network. Winstar said it serves some 30,000 business customers.