Exodus Files Chapter 11, to Close 10 Data Centers
Exodus Communications Inc., which never made a profit since it went public in March 1998, filed for bankruptcy protection after losing customers in the collapsing Internet economy.
Exodus, which runs 44 Internet data centers on four continents, listed $5.98 billion in assets and $4.44 billion in debts in Chapter 11 papers filed Wednesday in U.S. Bankruptcy Court in Delaware. The company operates so-called server farms that provide Web site services for businesses.
The Santa Clara, Calif.-based company’s losses increased more than tenfold in the second quarter, and it fired workers as it failed to win new contracts fast enough to replace those it lost. Exodus counted Yahoo Inc. and AMR Corp.’s American Airlines among its customers.
“They had no choice,” said Ken Turek, senior money manager at Northern Trust Corp., of the bankruptcy decision.
Turek, whose company sold Exodus shares this year, said the “writing was on the wall” when Director L. William Krause replaced Chief Executive Ellen Hancock, a former IBM Corp. executive who quit Sept. 4.
In an interview, Krause said that although Exodus would consider a buyout offer, the company’s plan is to reorganize independently and pay creditors with new shares. Exodus will close 10 data centers that were under construction, fire more employees and focus on existing customers in its bid to turn a profit, he said.
“We’re getting close to the size we need to be, but we’re not there yet,” Krause said.
Exodus has arranged a $200-million bankruptcy credit line from General Electric Co.’s GE Capital unit to fund operations, the company said in a statement. “We are confident our suppliers will continue to support us,” Krause said.
A Bankruptcy Court hearing will be held Wednesday to consider approval of the credit line, said J. Gregory Milmoe, a New York attorney representing Exodus.
More Debt Than Firm Could Handle
Trading in Exodus shares was halted before the markets opened Wednesday. The shares fell 33 cents to 17 cents Tuesday and have plunged 99% from a record $89.81 in March 2000. The Nasdaq Stock Market said shares will resume trading when Exodus satisfies a request for more information.
Analysts say Exodus, with eight different junk bond offerings totaling about $3.4 billion, ran up more debt than it could handle.
“Management over-leveraged the company and it’s their fault,” said Cary Robinson, an analyst at U.S. Bancorp Piper Jaffray, who rates Exodus shares “neutral” and doesn’t own them. “That’s why they all got fired.”
The bankruptcy filing lets Exodus escape $75 million to $80 million in quarterly interest payments on the bonds, Krause said. HSBC Bank USA, representing six different groups of bondholders, is listed in court papers as Exodus’ largest unsecured creditor.
With a weaker economy that may have tipped into a recession after the Sept. 11 terrorist attacks on the U.S., corporations have reduced spending on technology, Internet start-ups have failed and many customers have decided to save money by managing their own Web sites.
“We sacrificed profitability in exchange for growth and market share, over-expanding in some areas in advance of demand, not anticipating the decline as the dot-com bubble burst and the economy weakened,” Krause said.
Exodus’ second-quarter loss grew on acquisition and restructuring costs to $583.4 million, or $1.05 a share, from $51.8 million, or 13 cents, a year earlier.
Sales rose 79% to $318.7 million but missed analyst estimates. The company lost $256 million on sales of $818.4 million in 2000.
Corporate Credit Ratings Lowered
In June, Exodus slashed its cash flow forecast for the second half of the year to $80 million from $270 million. The move led Standard & Poor’s and Moody’s Investors Service to cut Exodus’ corporate credit ratings. Standard & Poor’s on Wednesday lowered Exodus’ credit ratings to “D.”
Businesses that don’t want to maintain their own equipment or manage their own Web sites hire Exodus. The company’s data centers occupy 5.1 million square feet to house server computers with software and network links.
Exodus acquired Global Crossing Ltd.’s GlobalCenter unit in January for $1.91 billion in stock, giving the company new centers in New York and Amsterdam.
Global Crossing, which operates a worldwide phone and data-transmission network, was the biggest Exodus shareholder as of June 30, with a 19% stake, according to a Securities and Exchange Commission filing. The Bermuda-based company remains Exodus’ top shareholder, according to Wednesday’s court filing.
Global Crossing shares, which have plunged more than 81% this year, fell 54 cents to $2.41 on the New York Stock Exchange.
