<PAGE> 1
RULE 424(b)(3) AND (c)
REGISTRATION NO. 333-69543
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 31, 1999)
ALLEGIANCE TELECOM, INC.
12 7/8% SENIOR NOTES DUE 2008
ATTACHED HERETO AND INCORPORATED BY REFERENCE HEREIN IS THE ALLEGIANCE
TELECOM, INC. QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30,
1999.
This Prospectus Supplement, together with the Prospectus, is to be used by
Morgan Stanley & Co. Incorporated ("Morgan Stanley") and Dean Witter Reynolds,
Inc. ("Dean Witter" and, together with Morgan Stanley, "Morgan Stanley Dean
Witter"), in connection with offers and sales of the 12 7/8% Senior Notes due
2008 of Allegiance Telecom, Inc. in market-making transactions at negotiated
prices related to prevailing market prices at the time of sale. Morgan Stanley
Dean Witter may act as principal or as agent in such transactions. Allegiance
will receive no portion of the proceeds of such sales of 12 7/8% notes and will
bear the expenses incident to the registration thereof. If Morgan Stanley Dean
Witter conducts any market-making activities, it may be required to deliver a
"market-making prospectus" when effecting offers and sales in the 12 7/8% notes
because of the equity ownership of Allegiance by certain private investment
partnerships, which are affiliates of Morgan Stanley Dean Witter. As of November
9, 1999, these investment partnerships owned in the aggregate approximately
15.87% of Allegiance's outstanding common stock. For as long as a market-making
prospectus is required to be delivered, the ability of Morgan Stanley Dean
Witter to make a market in the 12 7/8% notes may, in part, be dependent on the
ability of Allegiance to maintain a current market-making prospectus.
November 12, 1999
<PAGE> 2
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER: 0-24509
ALLEGIANCE TELECOM, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 75-2721491
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
</TABLE>
1950 STEMMONS FREEWAY
SUITE 3026
DALLAS, TEXAS 75207
(Address of principal executive offices) (Zip Code)
(214) 261-7100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of November 8, 1999, the registrant has 64,916,716 shares of common
stock, par value $0.01 per share outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 3
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
FORM 10-Q INDEX
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.............................. 3
Condensed Consolidated Balance Sheets as of September
30, 1999 and December 31, 1998........................ 3
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1999 and
1998.................................................. 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 1998......... 5
Notes to Condensed Consolidated Financial Statements... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 12
Item 3. Quantitative and Qualitative Disclosures about
Market Risk............................................ 23
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................. 24
Item 2. Changes in Securities and Use of Proceeds......... 24
Item 3. Defaults Upon Senior Securities................... 24
Item 4. Submission of Matters to a Vote of Security
Holders................................................ 24
Item 5. Other Information................................. 24
Item 6. Exhibits and Reports on Form 8-K.................. 24
Signatures................................................ 25
</TABLE>
2
<PAGE> 4
PART I. FINANCIAL INFORMATION
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 582,446 $ 262,502
Short-term investments.................................... 27,196 143,390
Short-term investments, restricted........................ 25,727 25,543
Accounts receivable (net of allowance for doubtful
accounts of $2,900 and $577, respectively)............. 23,762 6,186
Prepaid expenses and other current assets................. 6,390 1,243
---------- ---------
Total current assets.............................. 665,521 438,864
PROPERTY AND EQUIPMENT, NET................................. 345,130 144,860
OTHER NON-CURRENT ASSETS:
Deferred debt issuance costs (net of accumulated
amortization of $2,039 and $734, respectively)......... 20,973 16,078
Goodwill (net of accumulated amortization of $2,904)...... 30,748 --
Long-term investments, restricted......................... 25,513 36,699
Other assets, net......................................... 7,359 1,373
---------- ---------
Total other non-current assets.................... 84,593 54,150
---------- ---------
Total assets...................................... $1,095,244 $ 637,874
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................................... $ 49,466 $ 20,981
Accrued liabilities and other.......................... 42,491 26,177
---------- ---------
Total current liabilities......................... 91,957 47,158
LONG-TERM DEBT............................................ 505,677 471,652
REDEEMABLE WARRANTS....................................... -- 8,634
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock -- $.01 par value, 1,000,000 shares
authorized, no shares issued or outstanding at
September 30, 1999 and December 31, 1998.............. -- --
Common stock -- 64,890,147 and 50,341,554 shares issued
and 64,864,835 and 50,341,554 outstanding at September
30, 1999 and December 31, 1998, respectively.......... 649 503
Common stock in treasury, at cost, 25,312 and no shares
at September 30, 1999 and December 31, 1998........... (5) --
Warrants............................................... 3,896 --
Additional paid-in capital............................. 940,029 416,730
Deferred compensation.................................. (15,583) (14,617)
Deferred management ownership allocation charge........ (10,640) (26,224)
Accumulated deficit.................................... (420,736) (265,962)
---------- ---------
Total stockholders' equity........................ 497,610 110,430
---------- ---------
Total liabilities and stockholders' equity........ $1,095,244 $ 637,874
========== =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 5
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUES................................. $ 32,051 $ 2,786 $ 59,773 $ 4,201
OPERATING EXPENSES:
Network................................ 18,284 2,920 38,626 4,506
Selling, general and administrative.... 40,303 13,300 98,539 26,076
Management ownership allocation
charge.............................. 4,329 160,534 15,584 160,534
Non-cash deferred compensation......... 2,010 1,390 5,841 3,759
Depreciation and amortization.......... 17,948 2,492 35,085 3,705
----------- ----------- ----------- -----------
Total operating expenses....... 82,874 180,636 193,675 198,580
----------- ----------- ----------- -----------
Loss from operations........... (50,823) (177,850) (133,902) (194,379)
OTHER (EXPENSE) INCOME:
Interest income........................ 8,876 7,463 23,159 13,059
Interest expense....................... (14,446) (13,380) (43,902) (25,278)
----------- ----------- ----------- -----------
Total other (expense) income... (5,570) (5,917) (20,743) (12,219)
NET LOSS................................. (56,393) (183,767) (154,645) (206,598)
ACCRETION OF REDEEMABLE PREFERRED STOCK
AND WARRANT VALUES..................... -- (125) (130) (11,844)
----------- ----------- ----------- -----------
NET LOSS APPLICABLE TO COMMON STOCK...... $ (56,393) $ (183,892) $ (154,775) $ (218,442)
=========== =========== =========== ===========
NET LOSS PER SHARE, basic and diluted.... $ (0.87) $ (3.69) $ (2.62) $ (13.02)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING, basic and diluted......... 64,800,773 49,794,368 58,988,867 16,780,802
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 6
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
----------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss................................................. $(154,645) $(206,598)
Adjustments to reconcile net loss to cash used in
operating activities --
Depreciation and amortization......................... 35,085 3,705
Provision for uncollectible accounts receivable....... 2,193 153
Accretion of investments.............................. (3,320) --
Accretion of senior discount notes.................... 24,523 20,114
Amortization of original issue discount............... 598 388
Amortization of deferred debt issuance costs.......... 1,305 486
Amortization of management ownership allocation charge
and deferred compensation........................... 21,425 164,293
Changes in assets and liabilities --
Increase in receivables............................... (19,339) (2,181)
Increase in prepaid expenses and other current
assets.............................................. (5,006) (1,466)
Increase in other assets.............................. (574) (1,097)
Increase (decrease) in accounts payable............... 7,157 (1,454)
Increase in accrued liabilities and other............. 26,290 13,159
--------- ---------
Net cash used in operating activities............ (64,308) (10,498)
Cash Flows from Investing Activities:
Purchases of property and equipment...................... (215,893) (63,550)
Purchases of investments................................. (61,467) (120,149)
Proceeds from redemption of investments.................. 191,983 --
Purchase of subsidiaries, net of cash acquired........... (34,878) --
--------- ---------
Net cash used in investing activities............ (120,255) (183,699)
Cash Flows from Financing Activities:
Proceeds from issuance of senior notes................... -- 443,212
Proceeds from issuance of redeemable warrants............ -- 8,184
Deferred debt issuance costs............................. (6,679) (16,812)
Proceeds from issuance of redeemable preferred stock..... -- --
Proceeds from initial public offering.................... -- 137,757
Proceeds from secondary stock offering................... 510,618 --
Proceeds from exercise of warrants....................... 3 --
Proceeds from stock options exercised.................... 263 --
Proceeds from issuance of common stock under the Employee
Stock Discount Purchase Plan.......................... 886 --
Proceeds from redeemable capital contributions........... -- 20,880
Purchase of treasury stock............................... (5) --
Other financing activities............................... (579) (5)
--------- ---------
Net cash provided by financing activities........ 504,507 593,216
--------- ---------
Net increase in cash and cash equivalents........ 319,944 399,019
Cash and cash equivalents, beginning of period... 262,502 5,726
--------- ---------
Cash and cash equivalents, end of period......... $ 582,446 $ 404,745
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 7
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
1. GENERAL
Allegiance Telecom, Inc., a competitive local exchange carrier ("CLEC"),
seeks to become a leading provider of voice, data, and Internet services to
business, government, and other institutional users in major metropolitan areas
across the United States. Allegiance Telecom, Inc. and its subsidiaries are
referred to herein as the "Company."
The Company's development plan is focused on offering services in 24 of the
largest U.S. metropolitan areas. As of September 30, 1999, Allegiance is
operational in 17 markets: Atlanta, Boston, Chicago, Dallas, Fort Worth,
Houston, Long Island, Los Angeles, New York, Northern New Jersey, Oakland,
Orange County, Philadelphia, San Diego, San Francisco, San Jose, and Washington,
D.C.; and is in the process of deploying networks in two other markets: Detroit
and Baltimore.
The Company's success will be affected by the problems, expenses, and
delays encountered in connection with the formation of any new business, and the
competitive environment in which the Company intends to operate. The Company's
performance will further be affected by its ability to assess potential markets,
implement expanded interconnection and collocation with the facilities of
incumbent local exchange carriers ("ILECs"), lease adequate trunking capacity
from and otherwise develop efficient and effective working relationships with
the ILECs and other carriers, purchase and install switches in additional
markets, implement efficient operations support systems and other back office
systems, develop a sufficient customer base, and attract, retain, and motivate
qualified personnel. The Company's networks and the provisioning of
telecommunications services are subject to significant regulation at the
federal, state and local levels. Delays in receiving required regulatory
approvals or the enactment of new adverse regulation or regulatory requirements
may have a material adverse effect upon the Company. Although management
believes that the Company will be able to successfully mitigate these risks,
there is no assurance that the Company will be able to do so or that the Company
will ever operate profitably.
Expenses are expected to exceed revenues in each location in which the
Company offers service until a sufficient customer base is established. It is
anticipated that obtaining a sufficient customer base will take a number of
years, and positive cash flows from operations are not expected in the near
future.
2. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and are in the form prescribed by
the Securities and Exchange Commission in instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. The interim unaudited financial statements should be read
in conjunction with the audited financial statements of the Company as of and
for the year ended December 31, 1998. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation have been included. Operating results for the
three and nine months ended September 30, 1999 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1999.
Certain amounts in the prior period's consolidated financial statements
have been reclassified to conform with the current period presentation.
6
<PAGE> 8
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. CHANGE IN ACCOUNTING POLICY
In connection with the offering of the Series B 11 3/4% Notes due 2008,
445,000 Redeemable Warrants to purchase 1.45898399509 shares each, as adjusted
for a 426.2953905 for-one stock split (see Note 10), of the Company's common
stock at $.01 per share were issued. The Redeemable Warrants became exercisable
upon the Company's initial public offering on July 7, 1998, and will expire on
February 3, 2008.
The Redeemable Warrants are redeemable for cash, upon the occurrence of a
repurchase event. A repurchase event is defined to occur when (i) the Company
consolidates or merges into another person if the common stock thereafter
issuable upon exercise of the Redeemable Warrants is not registered under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or (ii) the
Company sells all or substantially all of its assets to another person, if the
common stock thereafter issuable upon exercise of the Redeemable Warrants is not
registered under the Exchange Act, unless the consideration for such a
transaction is cash.
Through March 31, 1999, the Company was recognizing the future potential
redemption value of the Redeemable Warrants by recording accretion to their
estimated fair market value at February 3, 2008, using the effective interest
method. Accretion of $130 was recorded during the three months ended March 31,
1999, and accretion of $125 and $323 was recorded during the three and nine
months ended September 30, 1998, respectively.
Effective April 1, 1999, the Company determined that accreting the
Redeemable Warrants to a future potential redemption value was no longer
applicable, as the redemption of the Redeemable Warrants for cash is no longer
beyond the control of the Company, and the redemption date and amount are not
reasonably determinable. Accordingly, the accreted value of the Redeemable
Warrants at April 1, 1999 was reclassified to stockholders' equity as warrants
(the "Warrants"), and no further accretion will be recorded.
If a repurchase event occurs in the future or becomes probable, the Company
will adjust the Warrants to the estimated redemption value at that time.
4. ACQUISITIONS:
During the three months ended June 30, 1999, the Company acquired certain
assets of ConnecTen, L.L.C. and the Internet service providers ConnectNet, Inc.
and Kivex, Inc. for cash. Summary information regarding the acquisitions is as
follows:
<TABLE>
<CAPTION>
BUSINESS NAME ACQUISITION DATE PERCENTAGE ACQUIRED PURCHASE PRICE
- ------------- ---------------- ------------------- --------------
<S> <C> <C> <C>
ConnecTen, L.L.C. ..................... April 1, 1999 N/A $ 750
ConnectNet, Inc. ...................... April 28, 1999 100% $ 2,500
Kivex, Inc. ........................... June 30, 1999 100% $34,545
</TABLE>
Each of the acquisitions was accounted for using the purchase method of
accounting and, accordingly, the net assets and results of operations of the
acquired companies have been included in the Company's consolidated financial
statements since the acquisition dates. The purchase price of the acquisitions
was allocated to assets acquired, including intangible assets, and liabilities
assumed, based on their respective estimated fair values at the acquisition
dates. The Company's purchase price allocation of these acquisitions is
preliminary and may be adjusted as additional information is obtained. Goodwill
and other intangibles are being amortized using the straight-line method over a
period of three years.
The following presents the unaudited pro forma results of operations of the
Company for the three and nine months ended September 30, 1999 and 1998 as if
the acquisition of Kivex, Inc. had been consummated at the beginning of each of
the periods presented. The pro forma results of operations are prepared for
comparative purposes only and do not necessarily reflect the results that would
have occurred had the
7
<PAGE> 9
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
acquisition occurred at the beginning of the periods presented or the results
which may occur in the future. The pro forma results of operations for
ConnecTen, L.L.C. and ConnectNet, Inc. are not included in this table as the
results would not have been material to the Company's results of operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ---------------------
1999 1998 1999 1998
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues........................................ $ 32,051 $ 3,837 $ 63,711 $ 6,844
Net loss before extraordinary items............. (56,393) (189,300) (165,501) (231,748)
Net loss applicable to common stock............. (56,393) (189,300) (165,501) (231,748)
Net loss per share, basic and diluted........... (0.87) (3.80) (2.81) (13.81)
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment includes network equipment, leasehold improvements,
software, office equipment and other, furniture and fixtures, and
construction-in-progress. These assets are stated at cost, which includes direct
costs and capitalized interest and are depreciated once placed in service using
the straight-line method. Interest expense for the three months ended September
30, 1999 and 1998, was $16,145 and $14,231, respectively, before the
capitalization of $1,699 and $851 of interest related to
construction-in-progress for the three months ended September 30, 1999 and 1998,
respectively. Interest expense for the nine months ended September 30, 1999 and
1998, was $48,051 and $27,073, respectively, before the capitalization of $4,149
and $1,795 of interest related to construction-in-progress for the nine months
ended September 30, 1999 and 1998, respectively. Repair and maintenance costs
are expensed as incurred.
Property and equipment at September 30, 1999 and December 31, 1998,
consisted of the following:
<TABLE>
<CAPTION>
USEFUL
SEPTEMBER 30, DECEMBER 31, LIVES
1999 1998 (IN YEARS)
------------- ------------ ----------
<S> <C> <C> <C>
Network equipment................................ $221,116 $ 67,304 5-7
Leasehold improvements........................... 44,138 24,483 5-10
Software......................................... 23,215 7,840 3
Office equipment and other....................... 8,174 4,384 2
Furniture and fixtures........................... 6,635 2,420 5
-------- --------
Property and equipment, in service............... 303,278 106,431
Less: Accumulated depreciation................... (40,697) (9,015)
-------- --------
Property and equipment in service, net........... 262,581 97,416
Construction-in-progress......................... 82,549 47,444
-------- --------
Property and equipment, net.................... $345,130 $144,860
======== ========
</TABLE>
8
<PAGE> 10
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. OTHER ASSETS
Other assets at September 30, 1999 and December 31, 1998 consisted of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Acquired subscriber lists................................... $5,500 $ --
Acquired workforces......................................... 205 --
Advanced payment on capital leases.......................... 248 --
Long-term deposits.......................................... 1,418 1,373
Other....................................................... 529 --
------ ------
Total other assets.......................................... 7,900 1,373
Less: Accumulated amortization.............................. (541) --
------ ------
Other assets, net................................. $7,359 $1,373
====== ======
</TABLE>
Acquired subscriber lists and acquired workforces were obtained in
connection with the acquisitions (see Note 4) during the three months ended June
30, 1999. These assets are being amortized over their estimated useful lives of
three years using the straight-line method.
7. CAPITALIZATION:
Common Stock
During the three and nine months ended September 30, 1999, 15,828 and
83,057 shares of common stock were issued under the Company's Employee Stock
Discount Purchase Plan for proceeds of $357 and $886, respectively.
Warrants
During the three and nine months ended September 30, 1999, 72,000 and
247,139 Warrants, formerly referred to as Redeemable Warrants (see Note 3), were
exercised to purchase 105,045 and 360,538 shares of common stock, respectively.
Fractional shares are not issued, cash payments are made in lieu thereof,
according to the terms of the Warrant Agreement. At September 30, 1999 and
December 31, 1998, 197,861 and 445,000 Warrants, respectively, were outstanding.
8. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Series B 11 3/4% Notes, face amount $445,000 due February
15, 2008, effective interest rate of 12.21%, at accreted
value....................................................... $295,470 $270,526
12 7/8% Senior Notes, face amount $205,000 due May 15, 2008,
effective interest rate of 13.24%, at accreted value...... 201,196 201,019
Other....................................................... 9,011 107
-------- --------
Total long-term debt.............................. $505,677 $471,652
======== ========
</TABLE>
Included in accrued liabilities and other at September 30, 1999 is $1,795
currently payable under capital lease obligations.
9
<PAGE> 11
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revolving Credit Facility
On April 1, 1999, the Company completed a $225 million senior secured
revolving credit facility maturing December 31, 2005 (the "Credit Facility").
The Credit Facility will be available, subject to satisfaction of certain terms
and conditions, to provide purchase money financing for the acquisition,
construction and improvement of telecommunications assets. Initial borrowings
under the Credit Facility will not be available until certain financial and
operating objectives are met. Further borrowings will only be available to the
extent certain further objectives are met and certain other financial ratios and
covenants are maintained.
The Credit Facility is structurally senior to the Company's 12 7/8% Senior
Notes and Series B 11 3/4% Notes issued in 1998. The Credit Facility is secured
by substantially all of the Company's assets. Interest rates under the Credit
Facility are tied to the level of debt compared to consolidated EBITDA (earnings
before interest, income taxes, depreciation and amortization, management
ownership allocation charge and deferred compensation) and are initially
expected to be the London Interbank Offering Rate +3.75%. The quarterly
commitment fee is a maximum 1.50% of the total amount of the average daily
unused portion of the Credit Facility during the preceding quarter, with
step-downs based on utilization.
The Credit Facility carries certain restrictive covenants that, among other
things, limits the ability of the Company to incur indebtedness, create liens,
engage in sale-leaseback transactions, pay dividends or make distributions in
respect of their capital stock, redeem capital stock, make investments or
certain other restricted payments, sell assets, issue or sell stock of certain
subsidiaries, engage in transactions with stockholders and affiliates, and
requires the Company to maintain certain operating and financial performance
measures.
No advances have been made to the Company through the Credit Facility as of
September 30, 1999.
9. COMMITMENTS AND CONTINGENCIES:
The Company has entered into various operating lease agreements, with
expirations through 2009, for office space, equipment and network facilities.
Future minimum lease obligations related to the Company's operating leases as of
September 30, 1999 are as follows:
<TABLE>
<S> <C>
1999....................................................... $ 4,173
2000....................................................... 16,873
2001....................................................... 15,939
2002....................................................... 13,099
2003....................................................... 10,134
2004....................................................... 6,508
Thereafter................................................. 21,355
</TABLE>
Total rent expense for the three months ended September 30, 1999 and 1998,
and the nine months ended September 30, 1999 and 1998, was $2,694, $815, $6,190,
and $1,576, respectively.
10. EARNINGS (LOSS) PER SHARE:
The net loss per share amounts included on the condensed consolidated
statements of operations and the number of shares outstanding on the condensed
consolidated balance sheets reflect a 426.2953905 for-one stock split, which
occurred in connection with the initial public offering of common stock on July
7, 1998. The redeemable preferred stock, warrants and options are not included
in the diluted net loss per share calculation as the effect from the conversion
would be antidilutive. The net loss applicable to common stock includes the
accretion of redeemable preferred stock and warrant values of $0 and $125 for
the three months ended
10
<PAGE> 12
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
September 30, 1999 and 1998, respectively, and $130 and $11,844 for the nine
months ended September 30, 1999 and 1998, respectively.
11. COMPREHENSIVE INCOME:
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income" (SFAS 130). SFAS 130 establishes reporting and disclosure
requirements for comprehensive income and its components within the financial
statements. The Company's comprehensive income components were immaterial for
the three and nine months ending September 30, 1999 and 1998; therefore,
comprehensive income is the same as net income for all periods.
12. SEGMENT REPORTING:
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" (SFAS 131). SFAS 131 establishes how
public enterprise businesses determine operating segments and the financial and
descriptive information required to be disclosed relating to a company's
operating segments.
Management has determined that the adoption of SFAS 131 has no material
impact on the Company's current disclosures of its one operating segment,
providing telecommunication services.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Allegiance is a competitive local exchange carrier ("CLEC"), seeking to be
a premier provider of telecommunications services to business, government and
other institutional users in major metropolitan areas across the United States.
We offer an integrated set of telecommunications products and services including
local exchange, local access, domestic and international long distance, data and
a full suite of Internet services. Our principal competitors are incumbent local
exchange carriers ("ILECs"), such as the regional Bell operating companies and
GTE Corporation operating units.
We are developing networks throughout the United States using what we refer
to as a "smart build" approach. In contrast to the traditional network build-out
strategy under which carriers install their own telecommunications switch in
each market and then construct their own fiber optic networks to reach
customers, we install our own switch in each market but then lease other
elements of the network from the ILECs. The smart build strategy specifically
involves:
- leasing existing ILEC copper wire connections throughout a local market
area, also called the "local loop," which connect customers to the
central offices or "hubs" of an ILEC network, and
- installing, or physically locating, transmission equipment in these
central offices to route customer traffic through them to our own switch.
Locating equipment at ILEC facilities, also known as "collocation," is
central to the success of the smart build strategy. By collocating, we have the
ability to lease, on a monthly or long-term basis, local loop and other network
elements owned by the ILEC. This enables us to reach a wide range of customers
without having to build network connections to each one of them.
We believe that the smart build approach offers a number of competitive
advantages over the traditional build-out strategy by allowing us to:
- accelerate market entry by nine to eighteen months through eliminating or
at least deferring the need for city franchises, rights-of-way and
building access;
- reduce initial capital expenditures in each market, allowing us to focus
our initial capital resources on the critical areas of sales, marketing,
and operations support systems, instead of on constructing extensive
fiber optic networks to each customer;
- improve return on capital by generating revenue with a smaller capital
investment;
- defer capital expenditures for network assets so that most of such
expenditures will be incurred when revenue generated by customer demand
is available to finance them; and
- address attractive service areas selectively throughout target markets
and not just in those areas where we own network transmission facilities.
We believe that our smart build approach allows us to develop a market
network by making up-front capital expenditures of approximately 25% of the
total capital expenditures required to develop such a network as compared with
initial capital expenditures of approximately 50% made under traditional
build-out models. The level of up-front capital required to develop a network
will vary depending on a number of factors. These factors include:
- the size of the market;
- the cost of development of our network in each market;
- the degree of penetration of the market;
- the extent of price and service competition for telecommunications
services;
- regulatory and technological developments; and
- our ability to negotiate favorable prices for purchases of equipment and
for capital leases of fiber networks.
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Once traffic volume justifies further investment, we may lease unused fiber
to which we add our own electronic transmission equipment or construct our own
fiber network. This unused fiber is known as "dark fiber" because no light is
transmitted through it while it is unused. We believe that dark fiber is readily
available in most major markets and that additional fiber rings will be
constructed in all major markets.
We have rapidly deployed our networks since commencing service. We were
operating in 17 markets across the United States as of September 30, 1999, and
we commenced operations in Baltimore in October 1999. We have had significant
success in selling services to customers, with approximately 262,100 lines sold
since beginning our sales efforts in January 1998. The table below provides
selected key operational data for the quarters ended:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
------------- -------------
<S> <C> <C>
Markets Served............................................ 17 3
Number Of Switches Deployed............................... 13 3
Central Office Collocations............................... 260 54
Addressable Market (Business Lines)....................... 8.4 million 2.0 million
Lines Sold................................................ 69,800 22,300
Lines Installed........................................... 59,100 14,900
Sales Force Employees..................................... 608 195
Total Employees........................................... 1,525 462
</TABLE>
We believe in pre-funding each of our markets. Thus, we do not begin to
develop a new market until we have raised the capital that we project to be
necessary to build our network and operate that market to the point at which
operating cash flow from the market is sufficient to fund such market's
operating costs and capital expenditures.
Results of Operations -- Three and Nine Months Ended September 30, 1999
Compared With Three and Nine Months Ended September 30, 1998
We initiated service by buying phone lines at wholesale prices and then
reselling them to customers in Dallas during December 1997. We began providing
service using our own switch and transmission equipment in April 1998 to
customers in New York City. We generated revenues of $2.8 million during the
third quarter of 1998 and $4.2 million for the nine months ended September 30,
1998. Total lines installed as of September 30, 1998 were 25,900 and we had sold
a total of 43,400 lines as of that same date.
Throughout the remainder of 1998, we initiated facilities based services in
Atlanta, Boston, Chicago, Dallas, Fort Worth, Los Angeles, Oakland and San
Francisco. During 1999, we commenced operations in Philadelphia (in January
1999), in Washington, D.C., including suburban Maryland and Virginia, and San
Jose (each in March 1999), in Houston (in April 1999), in Northern New Jersey
(in May 1999), in San Diego (in July 1999), in Long Island (in August 1999), in
Orange County (in September 1999) and in Baltimore (in October 1999). We plan to
begin operations in Detroit during the fourth quarter of 1999 for which we have
already raised the necessary capital. This will provide a year-end total of 19
markets.
Although we initiated resale of local services in Dallas in 1997, reselling
local service is not our core focus and comprises a small percentage of our
sales. We now generally resell local services only to provide a comprehensive
telecommunications solution to a customer that has a need for local services
both within and outside of our markets. In these cases, we resell services to
those locations that are not within markets where we have facilities. We earn
significantly higher margins by providing facilities based services instead of
resale services and our sales teams have focused their efforts almost
exclusively on selling services that require the use of our facilities.
Facilities based lines represented 87% of all lines installed at September 30,
1999.
During the third quarter of 1999, we generated approximately $32.1 million
of revenue. For the nine months ended September 30, 1999, we generated
approximately $59.8 million of revenue. Approximately
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$11.6 million and $25.5 million for the three and nine months ending September
30, 1999, respectively, was local service revenue consisting of:
- the monthly recurring charge for basic service;
- usage based charges for local calls in certain markets;
- charges for services such as call waiting and call forwarding; and
- to a lesser extent, non-recurring charges, such as charges for additional
lines for an existing customer.
Access charges and local interconnection charges, which we earn by
connecting our local service customers to their selected long distance carriers
for outbound calls or by delivering inbound local and long distance traffic to
our local service customers, including our Internet wholesale customer group,
accounted for $15.3 million of our third quarter 1999 revenues and $27.1 million
of our revenues for the first nine months of 1999.
Some interexchange carriers, including AT&T and Sprint, have challenged the
switched access rates of Allegiance and other CLECs and have withheld some
payments for the switched access services that they continue to receive. On July
5, 1999, the FCC issued a ruling to address this issue in the context of a
complaint case filed by MGC Communications, Inc., a CLEC that had not been
receiving payments from AT&T. In that ruling, the FCC stated that "AT&T is
liable to MGC, at MGC's tariffed rate, for the originating access service that
it received . . ." In response to that FCC decision, AT&T filed a Petition for
Review with the FCC on August 5, 1999. The FCC has not yet ruled on that
Petition.
It is our belief that the FCC's decision in the MGC/AT&T matter has
established the approach that will be applied for all similarly-situated CLECs.
We believe that Allegiance is similarly situated. Further, the FCC is reviewing
the switched access rate level issue and related matters in its Access Charge
Reform docket. The Company is an active participant in that proceeding.
In light of the FCC's decision, we believe that we will ultimately receive
payment, plus interest, from AT&T, Sprint and any other interexchange carrier
that withholds payment for switched access services that we provide. Our
switched access rates may be adjusted to comport with future decisions of the
FCC or state commissions; however, we do not expect any such adjustment to have
a material effect on our revenues.
Long distance revenues during the third quarter and first nine months of
1999 amounted to $.9 million and $1.7 million, respectively. For the three and
nine months ended September 30, 1998, we earned $.2 million and $.4 million,
respectively, in long distance revenue.
Internet access and other Internet revenues accounted for $4.0 million and
$5.0 million of third quarter and year-to-date 1999 revenues, respectively. We
are using the purchase accounting method to account for the acquisitions of the
common stock of Kivex, Inc. and ConnectNet, Inc. and the acquisition of certain
assets of ConnectTen, L.L.C. We have recognized the revenues earned since the
ConnectTen, L.L.C. and ConnectNet, Inc. transactions, both of which closed in
April 1999, and the Kivex, Inc. transaction which closed June 30, 1999, in our
condensed consolidated statement of operations for the period ending September
30, 1999. Kivex, Inc. revenues contributed approximately $2.4 million to
consolidated revenues for the third quarter of 1999. The other two companies'
revenues are immaterial to quarterly revenues.
All other sources of revenue accounted for approximately $.3 million during
the third quarter of 1999 and $.5 million for the nine months ending September
30, 1999. Other revenues for the three and nine months ended September 30, 1998
were immaterial.
As described above, we have completed three acquisitions prior to the
beginning of the third quarter of 1999. Additional acquisitions during the
remainder of 1999 may further increase revenues and revenue yield. We have had
discussions, and will continue to have discussions in the foreseeable future,
concerning other potential acquisitions of internet service providers and other
providers of telecommunications services.
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<PAGE> 16
The systems that have historically been used to switch customers from their
existing carrier to Allegiance and to begin providing them service generally
required multiple entries of customer information by hand and were exchanged by
fax with the ILEC. In January 1999, we announced that we had successfully
achieved "electronic bonding" between our operations support systems and those
of Bell Atlantic in the New York City market with respect to processing local
service orders. Electronic bonding is a method by which manual processing and
faxing of information is replaced with electronic processing where our computer
systems and those of other carriers communicate directly. The manual approach
which we must use in the absence of electronic bonding is not only labor
intensive, but also creates numerous opportunities for:
- errors in providing new service and billing;
- service interruptions;
- poor customer service; and
- increased customer turnover.
These problems create added expenses and decrease customer satisfaction.
Without electronic bonding, confirmation of receipt and installation of
orders has taken from two business days to one month. Electronic bonding is
expected to improve productivity by decreasing the period between the time of
sale and the time a customer's line is installed. We completed testing in the
third quarter of 1999 and are now electronically bonding with Bell Atlantic in
Boston and with Southwestern Bell in Dallas. Testing with Pacific Bell in
California was completed during the third quarter 1999 on the electronic data
interface which is now in use there. We are currently testing electronic bonding
with Ameritech and Bell Atlantic in their Southern region. If successful, we
expect to be electronically bonding with these companies during the fourth
quarter of 1999. We will begin testing with GTE and with BellSouth during the
fourth quarter of 1999 or early in 2000.
We are also working towards the electronic bonding of that portion of the
billing process in which we gather customer specific information, including
their current service options, and the process of identifying and resolving
customer service problems. These additional "electronic bonding" initiatives
will require additional capital expenditures and should result in additional
efficiencies.
Network expenses increased to $18.3 million in the third quarter of 1999
from $2.9 million in the third quarter of 1998. For the nine months ending
September 30, 1999 and 1998, network expenses were $38.6 million and $4.5
million, respectively. This sharp increase is consistent with the deployment of
our networks and initiation and growth of our services during 1999 and 1998.
Network expenses represent:
- the cost of leasing high capacity digital lines that interconnect our
network with ILEC networks;
- the cost of leasing high capacity digital lines that connect our
switching equipment to Allegiance transmission equipment located in ILEC
central offices;
- the cost of leasing local loop lines which connect our customers to our
network;
- the cost of completing local and long distance calls originated by our
customers;
- the cost of leasing space in ILEC central offices for collocating
Allegiance transmission equipment; and
- the cost of leasing our nationwide Internet network.
The costs to lease local loop lines and high capacity digital lines from
the ILECs vary by ILEC and are regulated by state authorities under the
Telecommunications Act of 1996. We believe that in many instances there are
multiple carriers in addition to the ILEC from which we can lease high capacity
lines, and that we can generally lease those lines at lower prices than are
charged by the ILEC. We expect that the costs associated with these leases will
increase with customer volume and will be a significant part of our ongoing cost
of services. The cost of leasing switch sites is also a significant part of our
ongoing cost of services.
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<PAGE> 17
In constructing switching and transmission equipment for a new market, we
capitalize as a component of property and equipment only the non-recurring
charges associated with our initial network facilities and the monthly recurring
costs of those network facilities until the switching equipment begins to carry
revenue producing traffic. Typically, the charges for just one to two months are
capitalized. We expense the monthly recurring and non-recurring costs resulting
from the growth of existing collocation sites, and the costs related to
expansion of the network to additional collocation sites in operational markets
as we incur these charges.
We incur "reciprocal compensation" costs in providing both voice and data
services and expect reciprocal compensation costs to be a major portion of our
cost of services. We must enter into an interconnection agreement with the ILEC
in each market to make widespread calling available to our customers. These
agreements typically set the cost per minute to be charged by each party for the
calls that are exchanged between the two carriers' networks. Generally, a
carrier must compensate another carrier when a local call by the first carrier's
customer terminates on the other carrier's network. These reciprocal
compensation costs will grow as our customers' outbound calling volume grows. We
expect, however, to generate increased revenue from the ILECs as inbound calling
volume to our customers increases. If our customers' outbound call volume is
equivalent to their inbound call volume, our reciprocal compensation costs paid
to the ILECs will be substantially offset by the reciprocal compensation
revenues we receive from them.
The cost of securing long distance service capacity is a variable cost that
increases in direct relationship to increases in our customer base and their
long distance calling volumes. We believe that these costs, measured as a
percentage of long distance revenues, will be relatively consistent from period
to period. However, we do expect period over period growth in the absolute cost
of such capacity, and that the cost of long distance capacity will be a
significant portion of our cost of long distance services. We have entered into
one resale agreement with a long distance carrier to provide Allegiance with the
ability to provide our customers with long distance service. We expect to enter
into resale agreements for long distance service with other carriers in the
future. Such agreements typically provide for the resale of long distance
services on a per-minute basis and may contain minimum volume commitments. Our
existing resale agreement, however, does not contain a minimum volume
commitment. If we agree to minimum volume commitments and fail to meet them, we
may be obligated to pay underutilization charges. Under most of these
agreements, if a company underestimates its need for transmission capacity and
exceeds the maximum amount agreed to under such agreements, it may be required
to obtain capacity through more expensive means.
We lease high capacity digital lines that comprise our Internet network,
and currently have servers in New York, Dallas and San Francisco. The absolute
costs of these lines will increase as we add customers, open new markets and
connect additional markets to our Internet network. However, these costs
generally increase in line with increases in Internet revenues and we expect
that they will be relatively consistent from period to period when measured as a
percentage of revenues.
Selling, general and administrative expenses increased to $40.3 million in
the third quarter of 1999 from $13.3 million in the third quarter of 1998,
primarily due to the growth of our business. On a year-to-date basis, selling,
general and administrative expenses increased to $98.5 million for the first
nine months of 1999 from $26.1 million during the first nine months of 1998.
Selling, general and administrative expenses include salaries and related
personnel costs, facilities costs, and legal and consulting fees. The number of
employees increased to 1,525 as of September 30, 1999, from 462 as of September
30, 1998. As of September 30, 1999, the sales force, including sales managers
and sales administrators had grown to 608. We had a sales force of 195 as of
September 30, 1998. During the remainder of 1999, we expect the number of sales
personnel to grow by approximately 50. We currently do not use agents to sell
services nor do we currently use any print or other media advertising campaigns.
As we continue to grow in terms of number of customers and call volume, we
expect that ongoing expenses for customer care and billing will increase.
We amortized $4.3 million of the deferred management ownership allocation
charge, a non-cash charge to income, during the third quarter of 1999 and $15.6
million over the first nine months of 1999. Our original private equity fund
investors and original management team investors owned 95.0% and 5.0%,
respectively, of the ownership interests of Allegiance Telecom, LLC, an entity
that owned substantially all of our outstanding capital stock prior to our
initial public offering of common stock. As a result of that offering, the
assets of
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<PAGE> 18
Allegiance Telecom, LLC, which consisted almost entirely of such capital stock,
were distributed to the original fund investors and management investors in
accordance with the Allegiance Telecom, LLC limited liability company agreement.
This agreement provided that the equity allocation between the fund investors
and management investors would be 66.7% and 33.3%, respectively, based upon the
valuation implied by the initial public offering. We recorded the increase in
the assets of Allegiance Telecom, LLC allocated to the management investors as a
$193.5 million increase in additional paid-in capital. This transaction was
recorded during the third quarter of 1998. Of this charge, we recorded $122.4
million as a non-cash, non-recurring charge to operating expense and $71.1
million as a deferred management ownership allocation charge. We amortized $38.1
million of the deferred charge in the third quarter of 1998. We will further
amortize this deferred charge at $3.2 million, $7.2 million and $.2 million
during the remainder of 1999, 2000 and 2001, respectively. This period is the
time-frame over which we have the right to repurchase a portion of the
securities, at the lower of fair market value or the price paid by the employee,
in the event the management employee's employment with Allegiance is terminated.
In addition to the above expenses, we recognized $2.0 million and $1.4
million of amortization of deferred stock compensation expense for the three
months ended September 30, 1999 and 1998, respectively, also non-cash charges.
During the first nine months of 1999 and 1998, we recorded $5.8 million and $3.8
million of amortization of deferred compensation expense, respectively. Such
deferred compensation was recorded in connection with membership units of
Allegiance Telecom, LLC sold to certain management employees and grants to
employees under our 1997 Stock Option Plan and 1998 Stock Incentive Plan.
Depreciation and amortization of property and equipment increased to $14.7
million in the third quarter of 1999 from approximately $2.5 million in the
third quarter of 1998, consistent with the deployment of our networks and
initiation of services in seventeen markets by September 30, 1999. For the first
nine months of 1999, we recorded $31.7 million of depreciation and amortization
of property and equipment, compared with $3.7 million for the first nine months
of 1998.
In connection with the acquisitions completed during the second quarter of
1999, we assigned $5.5 million of the purchase price to customer lists and $.2
million to workforces. We also recorded $33.7 million of goodwill. Each of these
intangible assets is being amortized over their estimated useful lives of three
years, beginning at the dates of the acquisitions, respectively. We recorded
$2.7 million of amortization of goodwill and $.5 million of amortization for
customer list and workforces during the third quarter of 1999. For the nine
months ending September 30, 1999, we recorded $2.9 million of amortization for
goodwill and $.5 million of amortization of customer list and workforces.
Interest expense was $14.4 million and $43.9 million for the three and nine
months ending September 30, 1999, respectively. For the three and nine months
ending September 30, 1998, interest expense was $13.4 million and $25.3 million,
respectively. Interest expense recorded during 1999 reflects the accretion of
the Series B 11 3/4% Notes due 2008 and related amortization of the original
issue discount, and the amortization of the original issue discount on the
12 7/8% Senior Notes due 2008. The 12 7/8% Senior Notes were issued on July 1,
1998. We capitalize a portion of our interest costs as part of the construction
cost of our networks, in accordance with Statement of Financial Accounting
Standards No. 34. The amount of interest capitalized during the three and nine
months ended September 30, 1999 was $1.7 million and $4.1 million, respectively.
For the same periods in 1998, the amounts were $.9 million and $1.8 million,
respectively. Interest income for the three and nine months ending September 30,
1999 was $8.9 million and $23.2 million, respectively. Interest income for the
three and nine months ending September 30, 1998 was $7.5 million and $13.1
million, respectively. Interest income results from the investment of cash and
from U.S. Government securities which we purchased and placed in a pledge
account to secure the semi-annual payments of interest through May 2001 on the
12 7/8% Senior Notes due 2008. Interest income during 1999 is greater than for
the comparable periods in 1998 because we had additional cash generated from the
initial public offering of stock and 12 7/8% Senior Notes sale in July 1998, as
well as the additional sale of common stock during April 1999.
From February 1998 through March 1999, we recorded accretion of our
redeemable warrants to reflect the possibility that they would be redeemed at
fair market value in February 2008. Amounts were accreted using the effective
interest method and management's estimates of the future fair market value of
such
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warrants at the time redemption is permitted. Amounts accreted increased the
recorded value of such warrants on the balance sheet and resulted in non-cash
charges to increase the net loss applicable to common stock. As the terms and
conditions of the Warrant Agreement do not specify a date certain for redemption
of the warrants and the exchange of warrants for cash is no longer beyond the
control of management, we have ceased accretion of the warrants and reclassified
the accreted value of the redeemable warrants at April 1, 1999 to the
stockholders' equity section. If a repurchase event occurs in the future or
becomes probable, we will adjust the warrants to the estimated redemption value
at that time.
Until the consummation of our initial public offering of common stock in
July 1998, we also recorded the potential redemption values of redeemable
convertible preferred stock, in the event that those shares would be redeemed at
fair market value in August 2004. At the time of the initial public offering,
such preferred stock was converted into common stock. Accordingly, the amounts
accreted for the redeemable convertible preferred stock were reclassified as an
increase to additional paid-in capital in the stockholders' equity section of
the balance sheet, and there has been, and will be, no additional accretion of
redeemable convertible preferred stock values. Accretion related to the
redeemable convertible preferred stock was zero and $11.5 million for the three
and nine months ending September 30, 1998, respectively.
Our net loss for the third quarter of 1999, after amortization of the
non-cash management allocation charge and amortization of deferred compensation,
but before accretion of redeemable warrants, was $56.4 million and it was $154.6
million for the nine months ending September 30, 1999. Our net loss for the
third quarter of 1998, after amortization of the non-cash management allocation
charge and amortization of deferred compensation, but before the accretion of
the redeemable convertible preferred stock and redeemable warrants, was $183.8
million and it was $206.6 million for the nine months ending September 30, 1998.
After deducting accretion of redeemable warrant values, the net loss applicable
to common stock was $56.4 million and $154.8 million for the three and nine
months ended September 30, 1999, respectively. After deducting accretion of
redeemable preferred stock and warrant values, the net loss applicable to common
stock was $183.9 million and $218.4 million for the three and nine months ended
September 30, 1998, respectively.
Many securities analysts use the measure of earnings before deducting
interest, taxes, depreciation and amortization, also commonly referred to as
"EBITDA," as a way of evaluating a company. We had EBITDA losses of $26.5
million and $77.4 million for the three months and nine months ended September
30, 1999, respectively. For the three and nine months ended September 30, 1998,
we had EBITDA losses of $13.4 million and $26.4 million, respectively. In
calculating EBITDA, we also exclude the non-cash charges to operations for
management ownership allocation charge and deferred stock compensation expense
totaling $6.3 million and $21.4 million for the three and nine months ended
September 30, 1999, respectively. Amortization of management ownership
allocation charge and deferred stock compensation expense for the three and nine
months ended September 30, 1998 was $161.9 million and $164.3 million,
respectively.
We expect to continue to experience operating losses and negative EBITDA as
a result of our development and market expansion activities. We typically do not
expect to achieve positive EBITDA in any market until at least its third year of
operation, however, our Dallas and Fort Worth markets have become EBITDA
positive within their first 18 months of operations before taking into account
allocation of corporate overhead costs.
Liquidity and Capital Resources
Our financing plan is predicated on the pre-funding of each market's
expansion to positive free cash flow. By using this approach, we avoid being in
the position of seeking additional capital to fund a market after we have
already made significant capital investment in that market. We believe that by
raising all required capital prior to making any commitments in a market, we can
raise capital on more favorable terms and conditions.
We planned to establish networks in the 24 largest U.S. metropolitan
markets. We have raised more capital than was estimated to be needed to fund the
operating and capital requirements to build the networks
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and operate the 24 targeted markets. Therefore, on September 29, 1999, we
announced an enhancement and acceleration of our original business plan. The
enhanced and accelerated plan includes:
- Accelerating the rollouts of our networks in Cleveland, Denver, Miami,
Seattle and St. Louis to all become operational by June 30, 2000;
- Accelerating the deployment of HDSL2 capability to 100 collocations
throughout our operational markets by the end of 1999;
- Accelerating our buildout of collocations during 1999 to 325 compared
with 300 in the original business plan;
- Accelerating the deployment of fiber optic networks to include Houston
and other markets;
- Expanding our network in Northern New Jersey to include circuit and
packet switches plus an additional 31 collocations, and;
- Expanding our product and service offerings to include new data/Internet
based products and services uniquely focused on small and medium sized
businesses.
We continue to believe that we have raised capital that is more than
sufficient to completely develop all 24 markets under our enhanced and
accelerated business plan. However, the actual amount and timing of future
capital requirements may differ materially from our estimates as a result of,
among other things:
- the cost of the development of our networks in each of our markets;
- a change in or inaccuracy of our development plans or projections that
leads to an alteration in the schedule or targets of our roll-out plan;
- the extent of price and service competition for telecommunications
services in our markets;
- the demand for our services;
- regulatory and technological developments, including additional market
developments and new opportunities in our industry;
- an inability to borrow under our senior credit facility; and
- the consummation of acquisitions.
Our cost of rolling out our networks and operating our business, as well as
our revenues, will depend on a variety of factors, including:
- our ability to meet our roll-out schedules;
- our ability to negotiate favorable prices for purchases of equipment;
- our ability to develop, acquire and integrate the necessary operations
support systems and other back office systems;
- the number of customers and the services for which they subscribe;
- the nature and penetration of new services that we may offer; and
- the impact of changes in technology and telecommunication regulations.
As such, actual costs and revenues may vary from expected amounts, possibly
to a material degree, and such variations are likely to affect our future
capital requirements.
We made capital expenditures of $81.8 million and $42.1 million during the
third quarters of 1999 and 1998, respectively, for property, plant, equipment,
software and hardware necessary in deploying our networks in our markets and
providing operations and other support systems necessary in conducting our
business. For the nine months ending September 30, 1999 and 1998, we made
capital expenditures of $215.9 million and
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$63.6 million, respectively. Allegiance also used capital during these periods
to fund our operations; excess cash was used to purchase short-term investments
and money market investments.
As of September 30, 1999, we had transmission equipment collocated in 260
ILEC central offices. Under our enhanced 24 market business plan, we plan to
make approximately $259 million in total capital expenditures in 1999, including
purchases of switching equipment, switch and sales facilities, transmission
equipment and collocation facilities.
As of September 30, 1999, we had approximately $609.6 million of cash and
short-term investments. This amount excludes $51.2 million of restricted U.S.
Government securities that have been placed in a pledge account to fund interest
payments on our 12 7/8% notes through May 2001.
We completed a senior secured revolving credit facility under which we may
borrow up to $225 million, subject to the satisfaction of certain terms and
conditions, during the second quarter of 1999. This revolving facility will be
available, subject to satisfaction of certain terms and conditions, to provide
purchase money financing for the acquisition, construction and improvement of
telecommunications assets by our operating subsidiaries. Borrowings under the
facility will not be available until we reach certain financial and operating
objectives, and then will only be available to the extent we have achieved
certain further objectives and have maintained certain financial ratios and
covenants. Based on our current business plan, we do not expect to draw on this
facility until 2000, if at all.
The credit facility is structurally senior to our 12 7/8% notes and Series
B 11 3/4% notes issued in 1998. The facility is secured by substantially all of
the assets of our subsidiaries and the stock of the Allegiance borrowing
subsidiary and is guaranteed by Allegiance Telecom, Inc. Interest rates under
the facility are tied to the level of debt compared to consolidated EBITDA and
is initially expected to be the London Interbank Offering Rate + 3.75%. The
current commitment fee on the undrawn portion of the facility is 1.50% of the
total amount of the facility, with step-downs based on utilization. The facility
also contains certain representations, warranties, covenants and events of
default customary for credit of this nature and otherwise agreed upon by the
parties.
Impact of the Year 2000
The "year 2000" issue generally describes the various problems that may
result from the improper processing of dates and date-sensitive transactions by
computers and other equipment as a result of computer hardware and software
using two digits to identify the year in a date. If a computer program or other
piece of equipment fails to properly process dates including and after the year
2000, date-sensitive calculations may be inaccurate. The failure to process
dates could result in network and system failures or miscalculations causing
disruptions in operations including, among other things, a temporary inability
to process transactions, send invoices or engage in other routine business
activities.
State of Readiness. Generally, we have identified two areas for year 2000
review: internal systems and operations, and external systems and services. As a
new enterprise, we do not have older systems that are not year 2000 ready. As we
develop network and support systems, we intend to ensure that all systems will
be year 2000 ready. We are purchasing our operations support systems with
express specifications, warranties and remedies that all systems be year 2000
ready. In addition, we require all vendors supplying third party software and
hardware to warrant year 2000 readiness. However, there can be no assurance
until the year 2000 that all systems will then function adequately. Also, we
intend to sell our telecommunications services to companies that may rely upon
computerized systems to make payments for such services, and to interconnect
certain portions of our network and systems with other companies' networks and
systems. These transactions and interactions could expose our operations to year
2000 problems.
We have completed a company-wide inventory of all computer systems on which
the company relies, both within and outside of Allegiance. We have concluded
that our internal systems are year 2000 compliant. We are using the inventory to
contact our external suppliers, vendors and providers to obtain information
about their year 2000 readiness. Based on that information, we have assessed and
will continue to assess the extent to which these external information
technology and non-information technology systems, including
20
<PAGE> 22
embedded technology, could cause a material adverse effect on our operations in
the event that the systems fail to properly process date-sensitive transactions
after December 31, 1999.
Our assessment of our year 2000 readiness will be ongoing as we continue to
develop our own operations support systems and become reliant on the systems of
additional third parties as a result of the geographic expansion of our business
into additional markets. As a result, we may in the future identify a
significant internal or external year 2000 issue which, if not remedied in a
timely manner, could have a material adverse effect on our business, financial
condition and results of operations.
Costs to Address Year 2000 Issues. We have used our internal information
technology and other personnel in identifying year 2000 issues. We do not
anticipate any significant costs to make our internal systems year 2000
compliant because we do not expect any remediation to be required.
We engaged a consultant during the third quarter of 1999 to review:
- the process that we have undertaken to determine the extent of our year
2000 readiness;
- the results of our internal inventory of systems;
- our conclusions concerning the year 2000 readiness of our internal
systems;
- responses we expect to receive from vendors and other third parties
regarding potential year 2000 exposure through our business relationships
with them, and;
- our company-wide contingency plans.
This work is continuing, and we expect it to be complete during November
1999. We are estimating that such consultant's fees and expenses will not exceed
$200,000.
Because no material year 2000 issues have yet been identified in connection
with external sources, we cannot reasonably estimate costs that may be required
for remediation or for implementation of contingency plans. As we gather
information relating to external sources of year 2000 issues, we will reevaluate
our ability to estimate costs associated with year 2000 issues. There can be no
assurance that as additional year 2000 issues are addressed, our costs to
remediate such issues will be consistent with our historical costs.
Risks of Year 2000 Issues. We cannot reasonably ascertain the extent of the
risks involved in the event that any one system fails to process date-sensitive
calculations accurately because we have not identified any material year 2000
issues. Potential risks include:
- the inability to process customer billing accurately or in a timely
manner;
- the inability to provide accurate financial reporting to management,
auditors, investors and others;
- litigation costs associated with potential suits from customers and
investors;
- delays in implementing other information technology projects as a result
of work by internal personnel on year 2000 issues;
- delays in receiving payment or equipment from customers or suppliers as a
result of their systems' failure; and
- the inability to occupy and operate in a facility.
Any one of these risks, if they materialize, could individually have a
material adverse effect on our business, financial condition or results of
operations.
All of our information technology and non-information technology systems
and products relating to our external issues are manufactured or supplied by
other companies outside of our control. As a result, we cannot assure you that
the systems of any of those companies will be year 2000 ready. In particular, we
will be dependent upon other ILECs, long distance carriers and other companies
for interconnection and completion of off-network calls. These interconnection
arrangements are material to our ability to conduct our business
21
<PAGE> 23
and failure by any of these providers to be year 2000 ready may have a material
adverse effect on our business in the affected market. Moreover, although we
have taken every precaution to purchase our internal systems to be fully year
2000 ready, there can be no assurance that every vendor will fully comply with
the contract requirements. If some or all of our internal and external systems
fail or are not year 2000 ready in a timely manner, there could be a material
adverse effect on our business, financial condition or results of operations.
Contingency Plans. Even though we have not identified any specific year
2000 issues, we believe that the design of our networks and support systems
could provide Allegiance with certain operating contingencies in the event
material external systems fail. In all of our markets, however, we have or
intend to establish interconnection agreements with the ILECs and other regional
and international carriers. If one of these carriers fails for any reason,
including year 2000 problems, there may be little we can do to mitigate the
impact of such a failure on our operations.
We have developed contingency plans for all of our operating support
systems. If we should experience year 2000 issues with any of these operating
support systems, we will have our personnel resort to the manual systems which
we used prior to implementing the operating support systems, during the period
that remediation efforts would be undertaken.
We have attempted to ensure that our own operating facilities and systems
are fully backed up with auxiliary power generators capable of operating all
equipment and systems for indeterminate periods should power supplies fail,
subject to the availability of fuel to run these generators. We also have the
ability to relocate headquarters and administrative personnel to other
Allegiance facilities should power and other services at our Dallas headquarters
fail. Because of the inability of our contingency plans to eliminate the
negative impact that disruptions in ILEC service or the service of other
carriers would create, there can be no assurance that we will not experience
numerous disruptions that could have a material effect on our operations.
Forward-Looking Statements
Certain statements in this Management's Discussion and Analysis of
Financial Condition and Results of Operations constitute "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Allegiance intends that such forward-looking statements be subject
to the safe harbors created thereby. The words "believes," "expects,"
"estimates," "anticipates," "will be," "should" and similar words or expressions
identify forward-looking statements made by or on behalf of Allegiance. These
forward-looking statements are subject to many uncertainties and factors that
may cause Allegiance's actual results to be materially different from any future
results expressed or implied by such forward-looking statements. Examples of
such uncertainties and factors include, but are not limited to, Allegiance's
ability to (1) timely and effectively provision new customers, (2) interconnect
with and develop cooperative working relationships with ILECs, (3) develop
efficient operations support systems and other back office systems, (4) install
new switching facilities and other network equipment, (5) obtain leased fiber
optic line capacity, rights-of-way, building access rights and any required
governmental authorizations, franchises and permits, (6) electronically bond
with the ILECs, and (7) access necessary capital. Allegiance does not undertake
any obligation to update or revise any forward-looking statement made by it or
on its behalf, whether as a result of new information, future events or
otherwise. See our Annual Report on Form 10-K for the fiscal year ended December
31, 1998 for a discussion of the various risks relating to our business.
22
<PAGE> 24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and Qualitative Disclosures about Market Risk
Our investment policy is limited by our existing bond indentures. We are
restricted to investing in financial instruments with a maturity of one year or
less. The indentures require investments in high quality instruments, such as
obligations of the U.S. Government or any agency thereof guaranteed by the
United States of America, money market deposits, and commercial paper with a
rating of A1/P1.
We are thus exposed to market risk related to changes in short-term U.S.
interest rates. We manage these risks by closely monitoring market rates and the
duration of our investments. We do not enter into financial or commodity
investments for speculation or trading purposes and are not a party to any
financial or commodity derivatives.
Interest income earned on our investment portfolio is affected by changes
in short-term interest rates. We believe that we are not exposed to significant
changes in fair value because of our conservative investment strategy. However,
the estimated interest income for the calendar year 1999, based on the average
1998 earned rate on investments and including in estimated average investments
the net proceeds realized from the common stock offering in April 1999, is $30.3
million. Assuming a 100 basis point drop in the average rate, we would be
exposed to a $5.5 million reduction in interest income for the year. The
following table illustrates this impact on a quarterly basis:
<TABLE>
<CAPTION>
QUARTER ENDING
----------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER
1999 1999 1999 1999 TOTAL
------ ------ --------- -------- -----
($ IN MILLIONS)
<S> <C> <C> <C> <C> <C>
ESTIMATED AVERAGE INVESTMENTS.............. $367.4 $651.7 $649.8 $572.4
ESTIMATED INTEREST EARNED AT ESTIMATED RATE
OF 5.4% AT DECEMBER 31, 1998............. $ 5.0 $ 8.8 $ 8.8 $ 7.7 $30.3
ESTIMATED IMPACT OF INTEREST RATE DROP..... $ 0.9 $ 1.6 $ 1.6 $ 1.4 $ 5.5
</TABLE>
We have outstanding long term, fixed rate notes, not subject to interest
rate fluctuations.
23
<PAGE> 25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed with this report and made a part
hereof.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
11.1 -- Statement regarding computation of per share loss for the
three months ended September 30, 1999
11.2 -- Statement regarding computation of per share loss for the
nine months ended September 30, 1999
11.3 -- Statement regarding computation of per share loss for the
three months ended September 30, 1998
11.4 -- Statement regarding computation of per share loss for the
nine months ended September 30, 1998
27.1 -- Financial Data Schedule
</TABLE>
(b) We filed a Current Report on Form 8-K, dated April 8, 1999, to report
the closing of our senior secured revolving credit facility. At that time, we
also requested confidential treatment for certain portions of our credit and
guaranty agreement. We filed an amended Current Report on Form 8-K/A, dated July
20, 1999, to amend our request for confidential treatment regarding our credit
and guaranty agreement.
24
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLEGIANCE TELECOM, INC.
<TABLE>
<S> <C>
By: /s/ ROYCE J. HOLLAND Name: Royce J. Holland
------------------------------------------------- Title: Chairman and Chief Executive Officer
By: /s/ THOMAS M. LORD Name: Thomas M. Lord
------------------------------------------------- Title: Executive Vice President and Chief Financial
Officer
</TABLE>
Dated: November 9, 1999
25
<PAGE> 27
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
11.1 -- Statement regarding computation of per share loss for the
three months ended September 30, 1999
11.2 -- Statement regarding computation of per share loss for the
nine months ended September 30, 1999
11.3 -- Statement regarding computation of per share loss for the
three months ended September 30, 1998
11.4 -- Statement regarding computation of per share loss for the
nine months ended September 30, 1998
27.1 -- Financial Data Schedule
</TABLE>
<PAGE> 28
EXHIBIT 11.1
ALLEGIANCE TELECOM, INC.
COMPUTATION OF PER SHARE LOSS
Three Months Ended September 30, 1999
(In thousands, except share amounts)
<TABLE>
<CAPTION>
NUMBER OF PERCENT EQUIVALENT
SHARES OUTSTANDING SHARES
---------- ----------- ------------
<S> <C> <C> <C>
1997 Common Stock Offering 426 100.00% 426
1998 Common Stock Offering 10,000,000 100.00% 10,000,000
Preferred Stock Converted to Common Stock 40,341,128 100.00% 40,341,128
Treasury Shares (25,312) 100.00% (25,312)
1999 Employee Stock Discount Purchase Plan Shares Issued 83,057 98.76% 82,025
1999 Common Stock Offering 14,027,400 100.00% 14,027,400
Warrants Exercised 360,538 90.60% 326,638
Stock Options Exercised - 1997 Plan 72,905 63.23% 46,101
Stock Options Exercised - 1998 Plan 4,693 50.44% 2,367
WEIGHTED AVERAGE SHARES OUTSTANDING 64,800,773
NET LOSS APPLICABLE TO COMMON STOCK $(56,392,981)
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.87)
============
</TABLE>
<PAGE> 29
EXHIBIT 11.2
ALLEGIANCE TELECOM, INC.
COMPUTATION OF PER SHARE LOSS
Nine Months Ended September 30, 1999
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OUTSTANDING EQUIVALENT SHARES
---------------- ------------------- -----------------
<S> <C> <C> <C>
1997 Common Stock Offering 426 100.00% 426
1998 Common Stock Offering 10,000,000 100.00% 10,000,000
Preferred Stock Converted to Common Stock 40,341,128 100.00% 40,341,128
Treasury Shares (25,312) 79.86% (20,213)
1999 Employee Stock Discount Purchase Plan Shares Issued 83,057 76.98% 63,941
1999 Common Stock Offering 14,027,400 59.98% 8,413,589
Warrants Exercised 360,538 46.78% 168,650
Stock Options Exercised - 1997 Plan 72,905 28.18% 20,548
Stock Options Exercised - 1998 Plan 4,693 17.00% 798
WEIGHTED AVERAGE SHARES OUTSTANDING 58,988,867
NET LOSS APPLICABLE TO COMMON STOCK $ (154,774,738)
NET LOSS PER SHARE, BASIC AND DILUTED $ (2.62)
=================
</TABLE>
<PAGE> 30
EXHIBIT 11.3
ALLEGIANCE TELECOM, INC.
COMPUTATION OF PER SHARE LOSS
Three Months Ended September 30, 1998
(In thousands, except share amounts)
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OUTSTANDING EQUIVALENT SHARES
---------------- ------------------- -----------------
<S> <C> <C> <C>
Prior to Initial Public Offering
1997 Common Stock Offering 426 1.10% 5
After Initial Public Offering
1997 Common Stock Offering 426 98.91% 421
1998 Common Stock Offering 10,000,000 98.91% 9,891,304
Preferred Stock Converted to Common Stock 40,341,128 98.91% 39,902,637
-----------------
49,794,368
WEIGHTED AVERAGE SHARES OUTSTANDING 49,794,368
NET LOSS APPLICABLE TO COMMON STOCK $ (183,892,618)
NET LOSS PER SHARE, BASIC AND DILUTED $ (3.69)
=================
</TABLE>
<PAGE> 31
EXHIBIT 11.4
ALLEGIANCE TELECOM, INC.
COMPUTATION OF PER SHARE LOSS
Nine Months Ended September 30, 1998
(In thousands, except share amounts)
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENT OUTSTANDING EQUIVALENT SHARES
---------------- ------------------- -----------------
<S> <C> <C> <C>
Prior to Initial Public Offering 426 66.67% 284
1997 Common Stock Offering
After Initial Public Offering
1997 Common Stock Offering 426 33.33% 142
1998 Common Stock Offering 10,000,000 33.33% 3,333,333
Preferred Stock Converted to Common Stock 40,341,128 33.33% 13,447,043
---------------
16,780,802
WEIGHTED AVERAGE SHARES OUTSTANDING 16,780,802
NET LOSS APPLICABLE TO COMMON STOCK $(218,442,275)
NET LOSS PER SHARE, BASIC AND DILUTED $ (13.02)
==============
</TABLE>
<PAGE> 32
[ARTICLE] 5
[LEGEND]
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1999 AND FROM THE
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENT.
[/LEGEND]
[MULTIPLIER] 1,000
<TABLE>
<S> <C>
[PERIOD-TYPE] 9-MOS
[FISCAL-YEAR-END] DEC-31-1999
[PERIOD-START] JAN-01-1999
[PERIOD-END] SEP-30-1999
[CASH] 582,446
[SECURITIES] 27,196
[RECEIVABLES] 26,662
[ALLOWANCES] 2,900
[INVENTORY] 0
[CURRENT-ASSETS] 665,521
[PP&E] 385,827
[DEPRECIATION] 40,697
[TOTAL-ASSETS] 1,095,244
[CURRENT-LIABILITIES] 91,957
[BONDS] 496,666
[PREFERRED-MANDATORY] 0
[PREFERRED] 0
[COMMON] 649
[OTHER-SE] 496,961
[TOTAL-LIABILITY-AND-EQUITY] 1,095,244
[SALES] 59,773
[TOTAL-REVENUES] 59,773
[CGS] 0
[TOTAL-COSTS] 38,626
[OTHER-EXPENSES] 56,510
[LOSS-PROVISION] 1,305
[INTEREST-EXPENSE] 43,902
[INCOME-PRETAX] (154,775)
[INCOME-TAX] 0
[INCOME-CONTINUING] (154,775)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (154,775)
[EPS-BASIC] (2.62)
[EPS-DILUTED] (2.62)
</TABLE>
