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Rhythms Pursues Exit Strategy

Only days after NorthPoint Communications shut down some of its digital subscriber line operations nationwide, Rhythms NetConnections Inc., is looking for its own exit strategy.

Under fire from auditors to find operational cash, the data competitive local exchange carrier's (DLEC) flagging stock value has put them in danger from anther source, its officials announced Monday afternoon.

Rhythms officials said stock index Nasdaq is getting ready to issue a formal delisting notification, since the nationwide DSL provider has been trading for more than a month under $1. That's down 99 percent loss from its peak value in the $90 per share range only two years ago.

At press time, officials haven't said whether they will appeal a decision by Nasdaq to delist them. According to its 10K filing to the Securities and Exchange Commission Monday, if the company doesn't appeal the stock index's decision, officials will try to get listed on the Small Cap Market board.

Listing on the Over The Counter Bulletin Board, the lowest rung on the stock ladder, is considered the death knell for a public company and is the least-favorite option for Rhythms stock, though likely. NorthPoint was put on the OTC board when Nasdaq delisted them.

It's a bad sign for broadband Internet Service Providers (ISPs) still scrambling to find another DSL provider after AT&T's recent purchase of NorthPoint equipment. The deal stranded more than 100,000 DSL users nationwide and brought the debate of high-speed access to the fore.

A Rhythms spokesperson would not comment on the status of Rhythms operations, and would not speculate on the fate of its customers should the company go out of business.

In its statement, the national broadband provider said it had hired investment banking firm Lazard Freres & Co., LLC, to evaluate its strategic and financial operations.

Lawyers will determine the best course for Rhythms shareholders, not necessarily its DSL customers. Exit options include debt financing or restructuring, asset or equity securities sales, consolidation, or public or private sale.

Rhythms has been busy shoring up its operations the past few months to save money, a result of the economic downturn that's affected the entire high-tech industry.

In January, the company was forced to lay off 450 employees and take a $15-$17 million restructuring charge.

Losses are also mounting for the DLEC. In December of 2000, it reported accumulated losses of $825 million and expects the number to significantly increase in 2001. But officials state the company has enough cash on hand to continue operations to the end of the year.

A look at their 10K filing shows the DLECs situation isn't quite as dire as what happened with NorthPoint.

NorthPoint claimed it didn't have the money to support DSL operations until ISPs could find another provider. Rhythms, in addition to any funds it has in the coffers, sports a stock portolio that could be cashed in, in the event of an emergency.

The broadband provider has nearly $15 million invested in @Home Network Solutions, Inc. (an investment Rhythms is currently trying to get back), and $2.5 million in broadband ISP MegaPath Networks, Inc.

NorthPoint, on the other hand, was cash-strapped and out of options when it was delisted by Nasdaq in February.