Rhythms looks for a way out

The broadband provider considers putting itself up for sale given a delisting notice from the Nasdaq and a question about whether it has enough cash to continue operating.

Broadband provider Rhythms NetConnections is considering putting itself up for sale given a delisting notice from the Nasdaq and a question from its auditors about whether it has enough cash to continue operating.

The news follows the recent blowup of DSL company NorthPoint Communications, which sold the bulk of its assets to AT&T for $135 million last month after declaring bankruptcy.

Rhythms said it has hired investment banking firm Lazard Freres as an adviser in strategic and financial options, which could include a sale, a strategic transaction, a joint venture or partnership, debt or equity financing and restructuring, or a public or private sale of debt or equity securities or assets.

Rhythms also said it has received notice from the Nasdaq to delist the company's stock because of its failure to maintain $4 million in net tangible assets or maintain a sufficient stock price.

The Englewood, Colo.-based company said that it has enough cash on hand and available through lease financing to fund its operations through this year and into January 2002.

In January of this year, Rhythms said it would scale back growth plans in 2001 to concentrate on its top 40 markets, rather than the 60 markets it previously served. It expected to have about 175,000 lines in service by the end of the year. Rhythms posted a fourth-quarter loss in February, attributing the shortfall to network expansion costs and financial problems of some of its customers.

NorthPoint's ominous example
Rhythms provides DSL-based, broadband communication services to businesses and consumers. That business segment has seen at least one high-profile collapse in recent weeks.

NorthPoint's failure left many DSL subscribers stranded, because AT&T's acquisition did not include NorthPoint's customer base, which includes business and Internet service providers that resell the DSL service. After the company's efforts to raise cash failed, it shut down its network, leaving customers without Internet access.

That failure has sparked the attention of legislators; California's Public Utility Commission issued an order to cease the shutdown, saying NorthPoint had not given customers enough warning.

Regional phone company Verizon Communications backed out of a deal to buy a 55 percent stake in NorthPoint last November, which led to NorthPoint's bankruptcy filing in January.

Rhythms, like NorthPoint, has seen better times. Its stock has plunged from a 52-week high of $35.63, and in Monday morning trading it was at 38 cents. The stock dropped under $5 in October, and has been under $1 since the end of February.

The causes of its troubles resemble those that hobbled NorthPoint: A sluggish economy has caused customers to scale back capital expenditures, delay payments or go out of business entirely, "calling into question the likelihood of collection of the full amounts they owe us and the continued viability of the customer lines they have installed with us," Rhythms said in a filing with the Securities and Exchange Commission.

Fierce competition in the offing
And the competition for the remaining business, which includes major telecom companies like Verizon, is tough.

"We believe that we compare unfavorably with many of our competitors with regard to, among other things, brand recognition, existing relationships with end users, available pricing discounts, CO (central office) access, capital availability and exclusive contracts," Rhythms said in a filing with the SEC.

"We may not be able to compete effectively in our target markets. The independent local exchange carriers are larger, better capitalized, have stronger brand recognition, offer a wider range of products and services, own the copper lines, and have many more existing relationships with potential end users than we do," the filing said.

Rhythms may already be in trouble with its lenders. According to the SEC filing, one of the company's leasing companies has notified Rhythms that a default has occurred for failure to maintain certain covenants. As of Dec. 31, Rhythms had approximately $832.3 million of long-term debt and approximately $451.3 million of mandatorily redeemable preferred stock.

The company said in the SEC filing that "we likely will not generate sufficient revenue to fund our operations or to repay our debt."