Cisco could lose $200 m if customer collapses

CHICAGO: Networking giant Cisco Systems Inc. could lose at least $200 million

if fiber-optic network builder Velocita Corp., in which Cisco invested, files

for bankruptcy, analysts said Thursday.

Velocita, based in Falls Church, Virginia, last month cut 75 percent of its

work force, and several analysts said its chances for success were slim in an

industry that has seen bankruptcy filings by competitors Global Crossing Ltd.

and 360networks Inc. Another rival, Williams Communications Group Inc., is

weighing bankruptcy.

Velocita said it was weighing "strategic alternatives," which it

did not explain, but analysts wondered whether it would survive the shakeout.

"If Global Crossing can't make a go of it, what makes you think these guys

are going to?" one analyst, who asked not to be identified, said about

Velocita.

Last April, Cisco, the largest maker of equipment that directs Internet

traffic, invested $200 million in Velocita and loaned it another $285 million to

buy Cisco gear, a practice called vendor financing. In return, Velocita agreed

to buy $225 million of Cisco gear and services over two years.

Vendor-financing loans were used heavily the past few years by larger

suppliers like Cisco, Lucent Technologies Inc. and Nortel Networks Corp. in

order to win business, but the practice backfired when many of those customers

collapsed as their funding dried up along with demand.

A Velocita spokesman did not comment on whether bankruptcy protection was an

option for the company, but some industry observers wondered if it would be able

to avoid such a fate. "If you lay off 75 percent of your work force, it

sure seems like that's kind of where things are heading," said Steve

Mygrant, portfolio co-manager of the Fifth Third Technology Fund, which owns

shares in Cisco.

Velocita, formerly known as PF.Net Communications Inc., was started in 1998

and is led by Chairman Robert Annunziata, the former chief executive of Global

Crossing, which filed for bankruptcy protection in January. Velocita is building

a chunk of AT&T Corp.'s next-generation optical network and has plans to

build a nationwide 20,000-mile fiber-optic network.

The telecommunications and fiber-optic markets collapsed because of the

drastic slowdown in spending by telephone companies and Internet service

providers.

Cisco spokeswoman Robyn Jenkins said the San Jose, California-based company

invested in and made the loan to Velocita because of its seasoned management

team and relationship with AT&T. She said Cisco has reserved for any

potential losses already.

Cisco also has about $21 billion in cash and equivalents. Velocita was

Cisco's only investment in a telecom customer and two of its executives joined

Velocita's board last June, Jenkins said.

Velocita posted a loss of $71.8 million in the first nine months of last year

on sales of about $7 million. It will be in violation of its loan agreement if

it does not post consolidated operating revenues in the four quarters ending

Dec. 31, 2001, of at least $15 million, according to an SEC filing. It has not

released results for the December quarter.