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Covad Communications Group Inc., the wholesale high-speed Internet service provider, is close to pulling off the unprecedented among telecommunications startups: emerge from bankruptcy. A Delaware bankruptcy court Thursday approved Covad’s reorganization plan setting up a debt-for-equity swap that would retire nearly all of the company’s $1.4 billion in long-term debts. The Santa Clara, Calif.-based company said it expects to officially exit Chapter 11 protection around Dec. 20. “The exciting thing was the way we were able to do this without diluting our shareholders or disrupting our customers,” said Covad chief executive and president Charles Hoffman. Covad, which trades as an over-the-counter stock, expects to be reinstated onto the Nasdaq early next year. Covad filed for bankruptcy Aug. 15, joining Rhythms NetConnections Inc. of Englewood, Colo., and the former NorthPoint Communications Group Inc. of Emeryville, Calif., as other independent sellers of digital subscriber line-service, or DSL, forced to seek court protection from its debtors. DSL technology operates over ordinary copper phone lines and is marketed mainly to residential and small business customers seeking high-speed Internet access. While AT&T Corp. bought NorthPoint’s assets in March and Rhythms remains in bankruptcy, Covad was in a position to emerge as a functioning company largely because of the nearly $460 million in cash the company was able to retain after a year of severely reducing costs. The deal approved by the U.S. Bankruptcy Court for the District of Delaware calls for Covad to pay its bondholders 19 cents on the dollar, or $257 million, and a total of 15 percent of the reorganized company’s equity. Existing common shareholders are expected to own about 80 percent of the restructured company. “The fact that this company had adequate liquidity to implement a major financial and operational restructuring is the difference in this one,” said Irwin Gold, a banker with Houlihan Lokey Howard & Zukin Capital, the Los Angeles firm that began working with Covad in April. Covad was represented in its restructuring by Los Angeles-based law firm Pachulski, Stang, Ziehl, Young & Jones. A $150 million deal signed in November with SBC Communications Inc., owner of Southwest Bell, Pac Bell and Ameritech Corp., helped Covad satisfy the bankruptcy court. Under the agreement, SBC was relieved of an earlier commitment to pay Covad $600 million but obliged to pay Covad $85 million for services over the next 10 years. SBC also agreed to loan Covad $50 million and forgive the company $15 million it owed the San Antonio-based operator. After the court-approved reorganization is completed, Covad’s only long-term debt would be the $50 million from SBC. The court also was persuaded, Hoffman said, by Covad’s ability to reduce its cash consumption from $223 million in the first quarter to $67 in the third quarter. The company laid off more than half its work force, reducing its employee base to 1,450 from a peak of roughly 4,000. In the past six months, Covad vacated its original office complex, bounced around to a few headquarters in Silicon Valley before moving into a smaller Santa Clara complex in November. Covad’s impending exit from bankruptcy makes for a bit of good news in an otherwise wrenching year for the country’s telecom startups. Three Intel Corp. veterans founded the company in 1996 just as Congress approved legislation mandating that regional Bell operating companies such as SBC open their local networks to startups. Almost from the outset, Covad charged that the Bells were obstructing the company’s access to the copper lines that run into the country’s millions of homes and businesses. The company filed antitrust suits against three of the four Bells, agreeing a year ago to settle out-of-court with SBC. Their deal required SBC to buy a $150 million equity stake in Covad and purchase $600 million in services over 10 years. Copyright (c)2001 TDD, LLC. All rights reserved.

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