Rhythms Files for Chapter 11

Despite speculation in June of an asset buyout or acquisition of failing national
DSL provider Rhythms NetConnections, the company appears to have had little
success in that area. On Thursday it announced that it and all of its
wholly-owned U.S. subsidiaries voluntarily filed for reorganization in the
Southern District of New York under Chapter 11 of the U.S. Bankruptcy Code.

Like other data competitive local exchange carriers (DLEC), Rhythms was hit
hard by the economic slowdown. It has struggled with layoffs, was delisted
by the NASDAQ in May, and in June said it would pull out of 150 central
offices and disconnect the affected customers by Aug. 13.

Now the company is faced with finding a serious buyer, making a
reorganization work, or liquidating the company.

Rhythms said that as of Aug. 1, it had about $133 million in unrestricted
cash and cash equivalents. It said it is not seeking debtor-in-possession
financing, but instead plans to use its unrestricted cash on hand and future
cash from operations to fund its business following the Chapter 11 filing.

“Rhythms has entered into a Voting Agreement with holders of more than 60
percent of the principal amount of the company’s notes, establishing an
agreed-up process for reorganizing the company or, if that cannot be
accomplished, liquidating the company,” Rhythms said Thursday.

The company said that when the bankruptcy case begins, it will file a motion
to establish an auction procedure for seeking bids for an investment that
would allow the company to reorganize or sell its assets.

If holders of at least two-thirds of the company’s principal amount of notes
agree to become part of the voting agreement, and the company has not
received an acceptable “going concern” bid, Rhythms said it has agreed to
give its customers 31-days advance notice of termination of service on or
before Aug. 10.

Rhythms said that its preferred stockholders will be entitled to share with
noteholders in a small portion of any cash recovered, if certain conditions
are satisfied. Barring an agreement with preferred stockholders, Rhythms
said common stockholders will not participate in the cash recovery.

“Throughout 2001, Rhythms has been restructuring its business model to
respond to the ongoing decline in the sector,” Rhythms said. “With the
assistance of its advisors, the company has explored, and is continuing to
explore, several reorganization alternatives. Rhythms believes that its
filing today, in conjunction with the agreement reached with the consenting
noteholders, will permit the company to implement one of these alternatives
in a timely and efficient manner. There can be no assurance that a
reorganization can be accomplished.”

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