Rhythms misses beat again, lays off 400

Struggling DSL provider Rhythms NetConnections yesterday revealed plans to cut 400 jobs—25% of its work force—in an SEC filing that paints a bleak picture of the company’s efforts to overcome massive debts, operating expenses and a series of investment mishaps in a downtrodden DSL market.

Although Rhythms claims to have enough cash to operate through January, the company’s inability to access the debt markets leaves it with few alternatives, according to the SEC document.

“If [Rhythms] is unable to generate sufficient cash flow or obtain funds necessary to meet required debt payments, then the company will be in default on its debt instruments,” according to the filing. “To date, the company’s cash flows from operations have been insufficient to cover its expenses and capital needs.”

Indeed, while Rhythms generated $19.0 million in first-quarter operational revenues—triple the figure of the year-ago quarter—$169.9 million in operational expenses overshadowed this growth. Overall, Rhythms posted a net loss of $190.3 million, or $2.61 per share.

“The company’s significant operating losses are expected to continue, which will require additional financing,” the filing states. “These factors raise substantial doubt about the company’s ability to continue as a going concern.”

Nor does it appear that the company will get any relief from its investments. During the first quarter, Rhythms wrote off $14.6 million in losses on investments—an $8.9 million investment in SEH, the parent company of failed DSL provider Winfire, and a $5.7 million investment in Axxent, a Canadian competitive carrier that was placed in receivership in April.

Other Rhythms’ investments may have similar fates, the company stated.

“Many of the privately held companies that [Rhythms] has invested in can still be considered in the start-up or development stages,” according to the SEC filing. “These investments are inherently risky, as the market for the technologies or products they have under development are typically in the early stages and may never materialize. The company could lose its entire initial investment in these companies.”

The layoff marked the second time Rhythms has cut jobs this year. Combined with the 450-person cutback in January, the company has decreased its work force by more than 40%.

In March, Rhythms retained investment-banking firm Lazard Freres & Co. to examine the company’s financial options, including a possible sale. In April, co-founder and CEO Catherine Hapka resigned.

“Although Rhythms is dealing with difficult market conditions, it is important for our customers to know that, while we continue to streamline our operations, we also continue to provide a high quality of service to help them meet the growing demands of the broadband industry,” said Steve Stringer, Rhythms’ president and chief operating officer, in a prepared statement.

While Nasdaq has expressed an interest in delisting Rhythms, the company has yet to receive a formal notice from the exchange. If a notice is received, the company has not decided whether it will appeal. Rhythms stock price closed Thursday at 36 cents per share, down 7 cents on the day.

Kathie Hackler, vice president and chief analyst in telecommunications at Gartner Dataquest, says she hopes Rhythms does not deteriorate into a repeat of NorthPoint Communications’ demise, but the earnings report offers little hope.

“It’s not pretty; they’re treading water pretty hard,” she said. “I just can’t imagine who is going to come in as a white knight and save them.”

Hackler said she believes Rhythms is doing everything it can to reduce costs, which is why she believes the company can say it has enough cash to last through the year.

“They’re lasting a little longer than I thought they would,” she said. “But I don’t know what miracle’s going to save them.”