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Excite Eyes Funding, End to MSO Exclusivity

6/24/2001 8:00 PM Eastern

Excite@Home Corp. was busy last week: The company announced an anticipated deal that would pump another $85 million into its coffers, and revealed that exclusivity agreements with its MSO partners would expire sooner than expected.

It also told investors that it might have to reduce the number of outstanding shares in the company by as much as 75 percent.

Excite@Home has been in turmoil since April, when the company announced it would need between $75 million and $80 million to continue operations through the rest of the year. In the aftermath, chairman and CEO George Bell resigned and former Telocity Inc. chairman Patti Hart was hired to take the company's helm.

Hart's work has been cut out for her over the past two months. She supervised a revamping of the management team and a work-force reduction of about 20 percent while also landing two financing deals to fund operations.

But investors weren't ecstatic about Hart's source of funding: Promethean Capital Group, which in the past has been accused of financing sick companies and leading them to ruin by shorting their stock.

After Excite announced the Promethean deal on June 8 — for $100 million in convertible secured notes — Excite's stock dropped 37 cents each, to $3.55 per share. When the company announced a June 19 conference call to "clarify recent developments," investors expected the worst and sent the stock to $1.90 per share, off 32 cents.

The stock has traded at levels as high as $23 each over the past 12 months. Its all-time high was $91 per share, back in April 1999.

Hart spent the better part of that conference call — held to announce a sale-leaseback agreement with AT&T Corp. for its backbone network — explaining to analysts that the Promethean deal was the best one for its shareholders.

"I am confident we are headed in the right direction," Hart said.

But the Promethian deal also prompted Excite@Home management to ask investors to approve a possible reverse stock split in a June 18 Securities and Exchange Commission filing.

According to the SEC document, Excite's board of directors has approved a reverse split at an exchange ratio of one-to-two, one-to-three or one-to-four. If the one-to-four option is chosen, Excite@Home's outstanding shares would be reduced from its current 408.4 million to 102.1 million.

Shareholders will vote on the proposal at Excite's annual meeting July 28.

The reason for the reverse split is the Promethean deal, which could force Excite to pony up $100 million in cash should its stock slide below $1 per share and it become delisted from the NASDAQ National Market system. Reducing the number of shares outstanding would artificially boost the stock's price.

In the meantime, Excite@Home negotiated a sale and leaseback of its backbone network with AT&T Corp. The deal would give Excite $85 million in cash. In return, it would pay AT&T $8.8 million annually for the next 18-and-a-half years. Separately,

Excite@Home will pay AT&T another $7 million in normal upgrade fees under its original contract.

Excite@Home stressed that the deal would leave its backbone operations and its upgrade and expansion capabilities intact.

Meanwhile, Hart said Excite continues to negotiate with Comcast Corp. and Cox Communications Inc. regarding exclusivity agreements with the two MSOs, both of which are slated to expire in December.

"We are confident about the value we provide, and we fully embrace the move to nonexclusive relationships," Hart said.

In a research note, Janco Partners Corp. analyst Matthew Harrigan said the acceleration of the termination of the exclusivity agreements shouldn't have an effect on Excite@Home.

"Regulatory concerns would have ended exclusivity in June 2002 anyway, under the old arrangement, and [we] do not feel that the six-month acceleration fundamentally alters [@Home's] long-term prospects," Harrigan wrote.

"Cox and Comcast still need [@Home's] network to service their customers [as will likely other ISPs] and the network has a significant scale, quality of service, and cost advantage given that it is the largest network dedicated to carrying broadband [Internet-protocol] traffic."

On the conference call, Hart welcomed the end of exclusivity, noting that it opens the company up to new revenue streams. For example, it can now serve as an enabling company for ISPs and others that want to take advantage of the last-mile cable infrastructure.

The move would also expand the company's geographic reach beyond AT&T, Cox and Comcast territories.

"There is some broadening geographically and, from a depth-of-product perspective, we should be focusing on to diversify our portfolio of products and customers to reduce vulnerability as the market gets more competitive over time," Hart said.

Hart also hinted that asset sales — something many analysts expected as the company's media business continued to fall off — may not be on the near-term agenda.

"We have been looking at many of the assets of the company," Hart said. "We are moving rapidly from being in sales mode on our assets to operating those assets, perhaps in many cases on a scaled-down basis."

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