Poised to Sell, Napster Files for Bankruptcy
Napster Inc., the Internet music exchange service, said Monday that it has filed for bankruptcy protection as part of the planned sale of its assets to German media giant Bertelsmann.
The closely held Redwood City, Calif.-based company listed $7.9million in assets and about $101million in debt as of April 30, according to papers filed with its voluntary Chapter 11 petition at the U.S. Bankruptcy Court in Delaware.
The filing is part of a comeback plan for 3-year-old Napster, which became one of the Internet’s hottest properties by allowing millions of people to swap music online.
Though wildly popular, Napster has been offline since July as it fights a music piracy lawsuit by major record labels.
A federal appeals court in San Francisco dealt Napster a fresh setback in March, ordering it to remain shut until it complies with an injunction to block all copyrighted music.
Napster failed to find enough backing to relaunch as a royalty-paying service.
“The extraordinary costs associated with developing the new Napster pay service and defending against the lawsuits have depleted [Napster’s] available cash reserves” and could have forced Napster to close by June, Chief Financial Officer Carolyn Jensen said in a court filing.
Bertelsmann stepped in May 17 with $8 million to buy Napster’s assets. Napster owes Bertelsmann $91 million, court papers show.
Under the Bertelsmann agreement, Napster was to voluntarily seek bankruptcy protection and emerge as a wholly owned unit of Europe’s second-largest media group. The agreement requires court approval. Bertelsmann declined to comment.
Napster is seeking approval for $5.125 million of debtor-in-possession financing from Bertelsmann, court papers show.
Konrad Hilbers, who joined Napster from Bertelsmann as chief executive in July 2001, resigned May14 after the company failed to find funding to relaunch its service. He returned three days later when Bertelsmann offered the buyout.
Shawn Fanning, who founded Napster as a college student in 1999, will be the company’s chief technology officer.
Napster has about 18 employees, court papers show, down from about 100 earlier this year.
Napster listed the Assn. of Independent Music of London, which it said is owed $3.79 million, as its largest unsecured creditor, followed by the law firm of Boies, Schiller & Flexner, with $2.14million, court papers show.
The big recording labels that were arrayed against Napster include AOL Time Warner Inc.’s Warner Music, Bertelsmann’s BMG, EMI Group, Sony Music and Vivendi Universal’s Universal Music.
