NorthPoint files for Chapter 11 protection

Seven weeks after being sent into a financial tailspin by Verizon Communications Inc.'s termination of a proposed merger deal, struggling digital subscriber line (DSL) service provider NorthPoint Communications Group Inc. yesterday announced that it has filed for Chapter 11 bankruptcy protection and will try to sell off virtually all of its assets.

NorthPoint, which had embarked on a series of cutback moves in the wake of Verizon's decision to pull out of an agreement that would have combined the DSL businesses of the two companies, said the Chapter 11 filing was made in U.S. Bankruptcy Court in San Francisco.

The San Francisco-based company said it has secured a commitment for up to $38 million in "debtor in possession financing" from its existing lenders that will be used to fund continued day-to-day operations. But NorthPoint also announced that it plans to undertake a sell-off of "substantially all" of its business and assets, pending approval of an open-bid process by the bankruptcy court.

Liz Fetter, NorthPoint's president and CEO, said in a statement that the company doesn't intend to abandon users of its DSL services. But, she added, it's seeking a "financially sound strategic partner" that's interested in taking over NorthPoint's network, employees and customer base.

"When Verizon unexpectedly pulled out of the merger and its interim funding obligations, which we believe was a breach of Verizon's agreements with NorthPoint, it created a funding shortfall," Fetter said. "Chapter 11 protection will provide NorthPoint with protection from creditors while enhancing our ability to meet our obligations to customers and vendors by reducing or restructuring our immediate financial obligations."

Verizon had agreed to invest $800 million in NorthPoint as part of the merger deal signed last summer. But the New York-based company said in late November that it was killing the deal because of a "deterioration in NorthPoint's business, operations and financial condition" in the months after the agreement was reached (see story).

Last month, NorthPoint cut its workforce by 19% in the immediate aftermath of the Verizon pullout (see story). In recent weeks, NorthPoint also said it was withdrawing from joint ventures in both Europe and Canada.

NorthPoint filed a lawsuit last month in an attempt to force Verizon to either revive the merger deal or pay it nearly $1 billion in damages (see story). But Dave Burstein, editor of a weekly online newsletter called DSL Prime, said NorthPoint's move to seek Chapter 11 protection was inevitable because it had run short of cash.

"We all knew it was coming," Burstein said today. Last week, he added, the company's problems were heightened when a $160 million bank loan that it was trying to arrange fell through.

Burstein predicted that NorthPoint will likely emerge from bankruptcy protection in some form because of its massive assets, which include DSL-based networks in 109 metropolitan areas across the U.S. But the company "certainly won't be owned by the same people," he said.

Numerous other DSL vendors have also been struggling financially of late. In a separate announcement yesterday, for example, Rhythms NetConnections Inc. in Englewood, Colo., said it plans to lay off 450 workers and focus on its 40 largest markets in order to achieve operational "productivity improvements."

In other recent cutback moves, Santa Clara, Calif.-based Covad Communications Co. late last month detailed plans for its second round of layoffs since November and companies such as Digital Broadband Communications Inc. in Waltham, Mass., and HarvardNet in Medford, Mass., said they planned to get out of the DSL business altogether (see story).

Michael Lauricella, an analyst at The Yankee Group in Boston, said NorthPoint's Chapter 11 filing and the problems at other vendors show that the DSL market "is not the rosy picture that we all thought it was." Competition from big companies such as Verizon and SBC Communications Inc. is putting "tremendous pressure" on the smaller firms, he added.

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