DEATH OF AN ISP

In the fall of 1999, one of the first and largest commercial ISPs was working on a plan to go public. But when executives took a closer look at its company contracts, they knew there was trouble.

What they uncovered led to a series of events that ultimately would be the undoing of a company that should have been as influential as a Uunet or PSINet. The collapse of Apex Global Information Services (AGIS) holds valuable lessons for anyone running a business in the Internet economy.

Executives found unsigned contracts, with loopholes and no guarantees, says one former business operations manager who declined to be identified. "We had to go through each contract and see who was a customer and when they needed to be renewed," he says.

AGIS owed about $319M to Qwest for fiber capacity it never used.

Executives found other deals that were changed and countersigned in the field, and AGIS was on the hook to deliver. Needless to say, there was no IPO. Months later, AGIS quietly slid into bankruptcy and was auctioned off for a song.

When AGIS' assets were sold to Sweden's Telia AB in April for the fire-sale price of $30.5 million, it was a disappointing end to one of the largest Internet backbone service providers and industry pioneers. Telia had reportedly offered more than $200 million to buy AGIS about one year earlier, say sources familiar with the talks.

How could a company at the forefront of the growing Internet market, with such potential, lose it all? Former executives say the carrier was killed by bad business deals, infighting on the board of directors and management changes that drained company resources. Analysts add the carrier lacked a solid growth strategy.

"AGIS was an aggressive backbone provider, but they never declared themselves as to what they wanted to be," says George Peabody, vice president at the Aberdeen Group, a consulting firm.

AGIS was founded in 1994 by Phillip Lawlor in Dearborn, Mich., and became one of the first carriers, along with Uunet, BBN and PSINet, to be picked by the National Science Foundation to transit commercial Internet traffic.

AGIS was the type of service provider known as a "carrier's carrier," in that its backbone traffic mostly came from other ISPs and RBOCs, although it had some enterprise customers, too. At its peak, AGIS had more than 450 customers, mostly mom-and-pop ISPs, company executives say. The traffic ran on a fully meshed OC-3 ATM network with more than 200 points of presence.

The carrier earned notoriety in 1998 as a spammer's haven. AGIS supported Sanford Wallace, the so-called spam king who ran the junk e-mail powerhouse Cyber Promotions. Wallace had angered Internet purists for sending bulk e-mail to customers. Initially, with Lawlor's support, the traffic ran on the AGIS network. Lawlor eventually bowed to industry pressure and booted Cyber Promotions off the network.

The spam war bruised AGIS' image, but it was minor trouble compared with what was to come. AGIS was originally funded by a private investment. Like some other major backbone providers, it also traded equity to other infrastructure players in exchange for use of their bandwidth.

One early investor was Qwest Communications International, a Denver ISP. Qwest bought a 20 percent equity stake in AGIS and a seat on its board of directors in exchange for AGIS receiving bandwidth on Qwest's network. AGIS expected to use Qwest's fiber network to deliver some new services. Another investor was Alltel, a Little Rock, Ark., carrier. Alltel cut a similar deal in 1997 and landed a position on AGIS' board.

Former employees say that during the early years the company had the fast pace and kinetic energy of a typical start-up. But in the spring of 1997, Lawlor stepped down as CEO, reportedly due to ill health. AGIS' board installed an interim management team led by Rob Orr, a managing partner of a venture group that was an original investor.

The company was moving forward with new investments that included roughly $15 million in cash plus equipment from Nortel Networks and Ascend. Nortel also provided some co-marketing funds. AGIS had signed new accounts, which included Telia, plus satellite providers Comsat and Loral Orion.

In February 1999, the board approved a new permanent CEO, Alan Adams, a former Cellular One executive. Adams was brought in to spruce up the company and offer it up for an IPO sometime in mid- to late 1999.

The unraveling of AGIS really started when management went looking for investors in late summer and early fall 1999. Adams' supporters say he had come to AGIS thinking the carrier was filled with potential but, as the company started its bid to go public, his management team also started digging into company contracts. What they found were a lot of bad deals.

Aside from a multitude of unsigned and poorly worded contracts, AGIS executives found themselves grappling with the worst deal of all. The carrier owed Qwest about $310 million for fiber capacity that AGIS never really used, and the tab was due Jan. 1, 2001.

Although this was certainly a big monkey on its back, there is no consensus on what caused the carrier's quick demise, but most agree it was a combination of snowballing events. Lawlor was contacted for comment but did not respond. Adams could not be reached. Some fault Lawlor for his unwillingness or inability to form significant partnerships or grow the company in the late 1990s, when other ISP merger activity was rampant.

Others fault Adams for bringing in executives from the cellular world and running AGIS like a local exchange carrier, as well as for advertising e-business and application hosting products it did not have. One former sales manager says new executives had expected to sell next-generation services they were led to believe existed, in hopes of paying the Qwest bill.

The manager says they believed the product set existed because it was so widely discussed. But they quickly discovered it was not commercially developed or viable. "We were focused on selling a bundled solution to the enterprise, but you need to have a bundled solution to sell first," the manager says.

To get some cash, the company had to quickly refocus AGIS on products it could sell, such as co-location and wholesale dial services. AGIS executives hit the road to cut deals or get some bridge financing, but they were shot down at every turn.

"When potential investors saw [the Qwest] deal, they died," says another former employee.

The IPO plans were canceled in October, and Adams started looking for a buyer. Until that time, the carrier still had about 450 ISPs as customers, as well as numerous enterprise accounts. By early March, however, that number had dwindled to fewer than 150 customers, largely because the carrier was having trouble provisioning its dial services in a timely manner, says one former product manager.

AGIS was out of cash by February, but former employees say the corporate atmosphere remained "amazingly positive" right until Feb. 25, when Adams was fired and the company filed for Chapter 11. "When [Adams] left, we all knew it was over," one former employee said.

Lawlor returned briefly as CEO and laid off half of the staff. Of the original 100 employees, fewer than 29 people remained, mostly members of the carrier's core engineering staff.

In late April, Telia bought the AGIS name, the contracts and the assets.

One former executive summed up the carrier's spectacular fall: "Like many other technical companies, it went way too long without professional management. When it reached a stage where it had the ability to capture a market, it needed funds to move forward. But the money just ran out.

"No one maliciously set out to tank the company," the executive says. "It was just a building set of circumstances that caused things to go very, very wrong."