October 1, 2001 7:50 AM PDT

Excite@Home files for bankruptcy

Excite@Home, the leading provider of broadband Internet access, said Friday that it will file for Chapter 11 bankruptcy protection and sell its high-speed network to AT&T for $307 million in cash.

On Monday, shares of Excite@Home were halted by the Nasdaq pending additional information from the company.

With the filing, Excite@Home becomes the latest Net highflier to seek bankruptcy court protection while it reorganizes its business. Just last week, Exodus Communications, a provider of Web-hosting services to thousands of companies, also filed for bankruptcy.

"This filing is a tool to protect the value of the broadband business for the benefit of the company's financial stakeholders and will help reassure our customers that service will continue uninterrupted through the restructuring process," Patti Hart, Excite@Home chairman and chief executive, said in a statement. "AT&T's offer reflects the value in our network, services, customer base and skilled employees."

As expected, the company filed papers with the U.S. Bankruptcy Court for the Northern District of California on Friday, according to a clerk who declined to provide additional details until the voluminous filing was processed.

The bankruptcy filing is part of a deal with AT&T that calls for Excite@Home to become wholly owned by the long-distance giant by early next year, pending approval by the bankruptcy court.

AT&T has no interest in retaining the Excite portal, so it could be sold to another company, according to a source.

AT&T said that it will use the assets as the core of a larger broadband network. Customers should not experience an interruption in service, the company added.

"AT&T remains committed to working with Excite@Home's management and the bankruptcy court to provide uninterrupted high-speed cable Internet service to existing Excite@Home customers, as well as continuing relationships with other cable companies to ensure seamless service to their customers on the @Home network," the company said in a statement on its Web site.

Excite@Home's board met Friday and agreed to the deal.

see Special report: Excite@Home marriage doomed at the altar? Excite@Home's shares closed at 13 cents Friday. In April 1999, the stock sold for nearly $100. The company has 1,350 employees.

The filing caps days of infighting among board members and senior executives, including animosity between executives of AT&T and Excite@Home, regarding the company's fate. But both parties agreed at the end that the pre-packaged filing and asset sale was the best solution.

AT&T depends on Excite@Home to provide Net access to AT&T Broadband subscribers.

Meanwhile, AT&T and Comcast signed a confidentiality agreement Friday that could result in Comcast paying $37.8 billion for AT&T Broadband, a deal that would likely include the Excite@Home assets.

The bankruptcy filing is the latest in a litany of woes for Excite@Home, a one-time darling of the dot-com era.

The company's auditors said last month that its future was in doubt. Later in August, one of the investment groups that funded the company as a stopgap measure demanded payment on the $50 million loan.

Although tempers flared among top executives in recent days as financial troubles mounted, Excite@Home has a legacy of tempestuous boardroom struggles.

Since its inception, it has operated under an awkward ownership and governance structure that included significant input from three major cable operators: AT&T, Cox and Comcast. AT&T inherited its @Home stake and board representation when it completed its acquisition of cable TV leader Tele-Communications Inc. in 1999.

As a result, it has appeared unfocused and divided. Nasty bickering between AT&T Chief Executive C. Michael Armstrong and Leo Hindery, formerly its top cable strategist, over the direction Excite@Home should take--and the role content should play--left the access provider adrift among the big cable operators' vast assets.

Boardroom divisiveness escalated in March 2000, when Ma Bell assumed majority control of Excite@Home's board of directors and offered to buy the stakes of co-partners Comcast and Cox. At that point, AT&T had a 23 percent ownership stake in Excite@Home and a 74 percent voting stake.

In January, AT&T traded $2.9 billion in its stock for the ownership stakes that competing cable operators Cox and Comcast held. That deal boosted AT&T's stake to 38 percent. AT&T also took a 79 percent voting interest in the broadband Net access company.

Some insiders say AT&T's heavy stake in the company compromised the board's decision-making abilities and took the focus away from Excite@Home shareholders.

"There's a history at the board level of directors not necessarily operating in the best interest of Excite@Home," a former @Home executive said Friday. "There's a torturous history of folks on the board doing what was expedient, not what was right for shareholders."

With Friday's filing, Excite@Home joins a growing list of tech companies that have sought refuge in bankruptcy court.

Another broadband provider, Covad Communications, filed for bankruptcy last month as part of a pre-emptive bid to remain in business.

Exodus, which hosts Web sites for some of the Net's biggest companies, filed for bankruptcy this week, with explicit provisions that are intended to keep the company functioning as it restructures.

The @Home Network, as it was initially called, was founded in spring 1995 and went public in summer 1997. Its backers included legendary venture capital firm Kleiner Perkins Caufield & Byers.

Hopes were high for the venture at the outset. For example, the company continues to claim on its Web site that "the market for residential broadband services is projected to grow to 47 million users by 2005 from less than 6 million in 2000." But despite having 3.7 million customers of its own, it has been weighed down by heavy debts and unable to reach sustained profitability.

In an attempt to provide content that would complement its high-speed connections, @Home bought the Excite Web portal for $6.7 billion in January 1999. Also as part of this strategy, the company in 1999 spent $780 million for Blue Mountain Arts, a provider of online greeting cards.

But the pipes-and-content strategy failed as online advertising revenue shriveled and investors fled high-flying Net stocks. As a result, Excite@Home went through several management shake-ups and strategy shifts, all of which failed to pull it out of a downward spiral.

Still, Excite@Home is by far the largest high-speed Internet service provider in the United States, and it is among the top 10 ISPs overall when measured by subscribers alone.

News.com's John Borland and Jeff Pelline contributed to this report.

 

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