Rhythms NetConnections, the digital-subscriber-line services firm whose IPO was once among the biggest first-day gainers in history, became an emblem of the telecom sector's recent struggles when it filed for Chapter 11 bankruptcy protection Thursday.
The Englewood, Colo.-based company said it voluntarily filed for reorganization in the Southern District of New York. It has established an agreement with the holders of more than 60 percent of the principal amount of the company's notes to establish a restructuring process or liquidate the company's assets.
Rhythms, which received pre-IPO financing from numerous prominent investors such as Kleiner Perkins Caulfield & Byers, the Sprout Group and Brentwood Capital, became a poster company for the telecommunications boom when its shares more than tripled on its first day of trading. The company was also successful in raising funds from major corporate investors, including Enron and Microsoft, cementing its reputation in the broadband market.
The bankruptcy filing, which provides the company protection from its creditors while it attempts to strengthen its business, said the company had amassed debts of nearly $850 million and had assets of less than $700 million. The company said it had about $133 million in cash, which it expects to use to fund operations during its restructuring efforts. Its daily cash-burn rate, according to documents filed with the Securities and Exchange Commission on Thursday, was $895,000, with $200,000 going to payroll for the company's 990 employees. The company expects to reduce its staff to 250 in the next week.
In a letter posted on its Web site, Rhythms CEO Steve Stringer said the company was exploring a variety of reorganization strategies and a possible sale. If those prove fruitless, Stringer said, the company will have to cease operations.
"The company will continue to operate the network until such time as it reasonably determines that it is unlikely to attract an acceptable bid for the company as a 'going concern,' " Stringer wrote. He pledged to give customers a 31-day notice before service is stopped.
Seven weeks ago the company filed documents declaring that it would cease its services in nine markets and concentrate on its 33 largest markets. The company also said in April that it faced delisting from the Nasdaq National Market and was for sale.
The company was delisted May 30 after failing to meet several financial minimums required by the Nasdaq.
Rhythms began providing Internet connectivity services in April 1998 in San Diego, expanding nationwide from the West Coast. It went public a year later. On its first day of trading, the company's stock share price rose 229 percent, jumping from $21 to more than $69 per share and making it the eighth-biggest first-day gainer ever at the time. The stock peaked a week later at $93.13.
Since then, Rhythms' fortunes – along with the rest of the DSL sector – have taken a turn for the worse. The company posted a net loss of $568 million ($8 per share) in 2000. Its share price tumbled, dipping below $1 on the last day of February 2001.
Rhythms was also named in a class action filed on behalf of shareholders alleging that the company's IPO underwriters misled investors. The suit states that Merrill Lynch, Salomon Smith Barney and J.P. Morgan Chase failed to disclose "excessive and undisclosed" commissions from other investors.
Difficulties have plagued other broadband communications firms lately, as well. Former competitor NorthPoint Communications shut down this year. Covad Communications, also delisted this summer, announced the departure of its CFO on Thursday morning. Another DSL company, Copper Mountain Networks, closed down 14 cents, or 4 percent, to $3.52 before posting a $74 million net loss for the second quarter.
