Posted on: Tuesday, June 4, 2002

For-sale Napster files for bankruptcy

Bloomberg News Service

WILMINGTON, Del. — Napster Inc., the Internet music-swapping service that was forced to shut down and has agreed to sell its assets to Bertelsmann AG, filed for bankruptcy protection.

The closely held company had assets of $7.9 million and debts of $101 million as of April 30, according to court documents filed with its Chapter 11 petition in U.S. Bankruptcy Court in Delaware. Napster owes Bertelsmann $91 million, the court papers said.

Once used by millions to exchange music online, Napster has been entangled in copyright litigation with five record companies since 1999. In March, an appeals court ruled that the Redwood City, Calif.-based company must remain closed until it can block trades of songs owned by record labels. Napster was hurt by its failure to find financial backing for a paid service.

"Napster intends to use the Chapter 11 process to consummate the sale to Bertelsmann and to provide an opportunity for other parties to top Bertelsmann's bid," said Rick Cieri, Napster's bankruptcy lawyer.

Napster eliminated 30 jobs in April and fired 10 percent of its staff in March and now has 18 employees, court papers said. The reduction has failed to avert a financial crisis, the company said.

"The extraordinary costs associated with developing the new Napster pay service and defending against pre-petition lawsuits have depleted" the company's available cash reserves, chief financial officer Carolyn Jensen said in court papers.

Chief executive officer Konrad Hilbers resigned May 14, then returned three days later after Napster accepted the $8 million offer from Bertelsmann, Germany's biggest media company. The proposed acquisition, requiring a bankruptcy judge's approval, doesn't rule out a better offer at auction before the deal is completed,