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Brier Dudley offers a critical look at technology and business issues affecting the Northwest.

April 22, 2009 at 11:59 PM

Zango goes bango, CEO bankrupt

After a tumultuous decade in business that included a federal judgment against obnoxious Web ad practices, Bellevue Web company Zango was sold last week after a bank foreclosure.

But that’s just part of the story.

While fending off banks to which it owed $44 million, Zango was also fighting a lawsuit by a former employee who sued to recover compensation he contended he was owed.

Michael Lockhart won a $4.6 million judgment in January against the company and co-founders Keith Smith and Daniel Todd. Smith and Todd then declared bankruptcy, complicating payment while they appealed the Lockhart case.

Bankruptcy filings by Smith, Zango’s chief executive, reveal how much trouble the Web advertising company was in even before Lockhart sued.

Zango, Smith and Todd arranged with Lockhart to post a $1 million bond during the appeal. But then their banks barred them from posting the bond, and they didn’t have enough collateral for a bond company, Smith said in a March 20 declaration to the bankrupty court.

“The bank’s action is not all that hard to understand as Zango is in default on debt to … the banks (a consortium comprised of KeyBank, Silicon Valley Bank, and Comerica Bank) in excess of $44 millon,” he said in the filing. “They have a first-position secured interest in all of Zango’s assets, have formally declared Zango’s debt in default and in a demand letter dated March 10th informed Zango that they will not provide any further financing or extend their voluntary forbearance unless they are paid in full or there is a firm purchase and sale commitment in place for Zango’s assets on terms acceptable to the them within the next couple of days.”

Smith said a sale “would generate substantially less than the principal loan amount due to the banks, leaving nothing to satisfy the Lockhart judgment.”

The sale did happen last week, sort of. The banks foreclosed on Zango and sold about 10 percent of the assets — such as servers — to Blinkx, a San Francisco-based video search engine, according to Blinkx spokesman Tim Turpin.

Asked about employees, Turpin forwarded a statement from Blinkx:

“As Zango was insolvent, we believe all the employees were laid off.”

A person claiming to be a former employee told The Seattle Times that 50 were let go last week and 40 remained.

Spokespersons for Zango didn’t return calls for comment. One of Smith’s bankruptcy lawyers referred me to another, who couldn’t be reached.

On Wednesday, Zango’s Web site continued to say it employs more than 200 in Bellevue, New York, Las Vegas, Montreal, London and Tel Aviv. It also said the company “has maintained a positive operating profit every quarter since the fourth-quarter of 2001.”

Smith disclosed in bankruptcy filings that he made $11 million selling “a significant portion” of his Zango stake to a private investor in 2004. He spent about $6.3 million of that buying and remodeling a house in Bellevue and a vacation home at Lake Kachess.

When Zango needed a cash infusion in 2006 and 2007, Smith took out loans secured by his homes and put $3.1 million back into the company, “in the form of

subordinated loans and preferred stock,” according to a March declaration he made to the court.

It wasn’t mentioned in the filing, but in 2006 Zango — which was formerly known as 180solutions — paid $3.1 million to settle “Federal Trade Commission charges that they used unfair and deceptive methods to download adware and obstruct consumers from removing it, in violation of federal law,” according to an FTC release.

Smith told the bankruptcy court that when he took out the loans, he thought his remaining equity in Zango was worth more than $20 million. He planned for Zango’s loan payments to pay off most of his home loans.

“Due to deteriorating economic conditions and subsequent poor financial performance from Zango, today, my equity in Zango has no value and my notes are also without value. It wasn’t until the last two to four months that I reached this conclusion, which in large part is due to the horrific economic downturn that was outside the control of Zango or me,” he said in the declaration.

It sounds like Lockhart, the former employee, may have received something. His lawsuit was closed earlier this week. His lawyer, Dan Brown, said “we’re settled.”

“We resolved our disputes with the parties and assigned our judgment,” Brown said.

As of Wednesday, Zango’s Web site was still functioning, offering free videos, games and music to people willing to let Zango install ad software on their computer.

Comments | More in | Topics: Tech work, Web, zango

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