<PAGE> 1
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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 MARCH 31, 2000.
[ ] 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 of incorporation or (IRS Employer Identification No.)
organization)
</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 May 10, 2000, the registrant has 108,311,924 shares of common stock,
par value $0.01 per share outstanding.
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<PAGE> 2
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 March 31,
2000 and December 31, 1999............................ 3
Condensed Consolidated Statements of Operations for the
three months ended March 31, 2000 and March 31,
1999.................................................. 4
Condensed Consolidated Statements of Cash Flows for the
three months ended March 31, 2000 and March 31,
1999.................................................. 5
Notes to Condensed Consolidated Financial Statements... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk............................................ 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................. 21
Item 2. Changes in Securities and Use of Proceeds......... 21
Item 3. Defaults Upon Senior Securities................... 21
Item 4. Submission of Matters to a Vote of Security
Holders................................................ 21
Item 5. Other Information................................. 21
Item 6. Exhibits and Reports on Form 8-K.................. 21
Signatures................................................ 22
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $1,103,496 $ 502,234
Short-term investments.................................... 13,157 23,783
Short-term investments, restricted........................ 25,864 25,518
Accounts receivable, net.................................. 44,863 29,857
Prepaid expenses and other current assets................. 6,811 2,257
---------- ----------
Total current assets.............................. 1,194,191 583,649
Property and Equipment, Net................................. 464,000 377,413
Deferred Debt Issuance Costs, net........................... 26,964 21,668
Long-Term Investments, restricted........................... 13,499 13,232
Other Assets................................................ 33,314 37,913
---------- ----------
Total assets...................................... $1,731,968 $1,033,875
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 59,435 $ 44,805
Accrued liabilities and other current liabilities......... 36,849 28,868
---------- ----------
Total current liabilities......................... 96,284 73,673
Long-Term Debt.............................................. 525,109 514,432
Long-Term Liabilities....................................... 2,293 2,154
Commitments and Contingencies
Stockholders' Equity:
Preferred stock-- $.01 par value, 1,000,000 shares
authorized, no shares issued or outstanding at March
31, 2000 and December 31, 1999......................... -- --
Common stock-- 108,457,749 and 97,459,677 shares issued
and 108,130,254 and 97,421,709 outstanding at March
31, 2000 and December 31, 1999, respectively.......... 1,084 975
Common stock in treasury, at cost, 327,495 and 37,968
shares at March 31, 2000 and December 31, 1999,
respectively.......................................... (45) (5)
Common stock warrants.................................. 3,468 3,719
Additional paid-in capital............................. 1,661,677 940,120
Deferred compensation.................................. (11,563) (13,573)
Deferred management ownership allocation charge........ (4,239) (6,790)
Accumulated deficit.................................... (542,100) (480,830)
---------- ----------
Total stockholders' equity........................ 1,108,282 443,616
---------- ----------
Total liabilities and stockholders' equity........ $1,731,968 $1,033,875
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
2000 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $ 47,161 $ 9,976
Operating Expenses:
Network................................................... 27,120 7,274
Selling, general and administrative....................... 47,991 27,935
Depreciation and amortization............................. 21,354 7,217
Management ownership allocation charge.................... 2,416 5,780
Non-cash deferred compensation............................ 2,010 1,821
------------ -----------
Total operating expenses.......................... 100,891 50,027
------------ -----------
Loss from operations.............................. (53,730) (40,051)
Other (expense) income:
Interest income........................................... 13,454 5,321
Interest expense.......................................... (20,994) (14,266)
------------ -----------
Total other (expense) income...................... (7,540) (8,945)
Net loss.................................................... (61,270) (48,996)
Accretion of warrant values................................. -- (130)
------------ -----------
Net loss applicable to common stock......................... $ (61,270) $ (49,126)
============ ===========
Net loss per share, basic and diluted....................... $ (0.59) $ (0.65)
============ ===========
Weighted average number of shares outstanding, basic and
diluted................................................... 104,095,622 75,555,941
============ ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
2000 1999
---------- --------
(UNAUDITED)
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss.................................................. $ (61,270) $(48,996)
Adjustments to reconcile net loss to cash used in
operating activities --
Depreciation and amortization.......................... 21,354 7,217
Provision for bad debts................................ 4,431 555
Accretion of investments............................... (611) (1,630)
Accretion of Series B 11.75% Notes..................... 9,257 8,493
Amortization of deferred debt issuance costs........... 6,535 262
Amortization of management ownership allocation charge
and deferred compensation............................. 4,426 7,601
Changes in assets and liabilities --
Increase in accounts receivable........................ (19,437) (3,977)
Increase in prepaid expenses and other current
assets................................................ (4,554) (58)
(Increase) decrease in other assets.................... 1,264 (414)
Increase in accounts payable........................... 14,630 26,804
Increase in accrued liabilities and other.............. 8,053 1,640
---------- --------
Net cash used in operating activities............. (15,922) (2,503)
Cash Flows from Investing Activities:
Purchases of property and equipment....................... (102,529) (78,507)
Purchases of short-term investments....................... (6,876) (34,125)
Proceeds from sale of short-term investments.............. 17,500 120,000
---------- --------
Net cash (used in) provided by investing
activities...................................... (91,905) 7,368
Cash Flows from Financing Activities:
Deferred debt issuance costs.............................. (11,831) --
Proceeds from issuance of common stock.................... 719,675 --
Proceeds from exercise of common stock options............ 874 --
Proceeds from issuance of common stock under the Employee
Stock Discount Purchase Plan........................... 1,053 303
Purchase of treasury stock................................ (40) (5)
Other..................................................... (642) --
---------- --------
Net cash provided by financing activities......... 709,089 298
---------- --------
Net increase in cash and cash equivalents......... 601,262 5,163
Cash and cash equivalents, beginning of period.... 502,234 262,502
---------- --------
Cash and cash equivalents, end of period.......... $1,103,496 $267,665
========== ========
Supplemental disclosures of cash flow information:
Cash paid for interest............................ 1,261 --
Supplemental disclosure of noncash investing and financing
activities:
Assets acquired under capital lease obligations... 2,088 --
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
1. GENERAL
Allegiance Telecom, Inc., a competitive local exchange carrier (CLEC), was
incorporated on April 22, 1997, as a Delaware corporation, for the purpose of
providing 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 business plan is focused on offering services in 36 of the
largest metropolitan areas in the United States. As of May 12, 2000, the Company
is operational in 21 markets: Atlanta, Baltimore, Boston, Chicago, Dallas,
Denver, Detroit, Fort Worth, Houston, Long Island, Los Angeles, New York City,
Northern New Jersey, Oakland, Orange County, Philadelphia, San Diego, San
Francisco, San Jose, St. Louis and Washington, D.C. The Company is in the
process of deploying networks in three additional markets: Cleveland, Miami, and
Seattle.
The Company's success will be affected by the challenges, 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 and access
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 ILECs and other carriers, obtain peering agreements with
Internet service providers, collect interexchange access charges, purchase and
install switches in additional markets, implement efficient OSS 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 market in which the
Company offers service until a sufficient customer base is established. It is
anticipated that obtaining a sufficient customer base will take several 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, 1999. 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 months ended March 31, 2000 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2000.
Certain amounts in the prior period's consolidated financial statements
have been reclassified to conform to the current period presentation.
6
<PAGE> 7
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACQUISITIONS
During 1999, the Company acquired 100% of the outstanding stock of
ConnectNet, Inc. and Kivex, Inc. and certain assets of ConnecTen, L.L.C. The
following presents the unaudited pro forma results of operations of the Company
for the three months ended March 31, 1999, as if the acquisition had been
consummated at the beginning of the period. 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 acquisition occurred at the beginning
of the period 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>
<S> <C>
Revenue..................................................... $ 11,788
Net loss applicable to common stock......................... (54,623)
Net loss per share, basic and diluted....................... (0.72)
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment includes network equipment, leasehold improvements,
software, office equipment, furniture and fixtures, and
construction-in-progress. These assets are stated at cost, which includes direct
costs and capitalized interest and are depreciated over their respective useful
lives using the straight-line method. During the three months ended March 31,
2000 and 1999, $2,524 and $1,090, respectively, of interest expense was
capitalized related to network construction-in-progress. Repair and maintenance
costs are expensed as incurred.
Property and equipment at March 31, 2000 and December 31, 1999, consisted
of the following:
<TABLE>
<CAPTION>
USEFUL
MARCH 31, DECEMBER 31, LIVES
2000 1999 (IN YEARS)
--------- ------------ ----------
<S> <C> <C> <C>
Network equipment.................................. $311,656 $266,727 5-7
Leasehold improvements............................. 54,178 52,980 5-10
Software........................................... 28,766 26,169 3
Office equipment and other......................... 12,197 11,073 2
Furniture and fixtures............................. 7,458 6,061 5
-------- --------
Property and equipment, in service................. 414,255 363,010
Less: Accumulated depreciation..................... (76,132) (58,113)
-------- --------
Property and equipment, in service, net.......... 338,123 304,897
Construction-in-progress........................... 125,877 72,516
-------- --------
Property and equipment, net...................... $464,000 $377,413
======== ========
</TABLE>
5. OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Goodwill.................................................... $34,211 $34,211
Other acquired intangibles.................................. 5,705 5,705
Long-term deposits.......................................... 2,322 2,143
Other....................................................... 1,173 2,616
------- -------
Total other assets.......................................... 43,411 44,675
Less: Accumulated amortization.............................. (10,097) (6,762)
------- -------
Other assets, net................................. $33,314 $37,913
======= =======
</TABLE>
7
<PAGE> 8
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Acquired subscriber lists and acquired workforces were obtained in
connection with certain acquisitions made in 1999. These assets are being
amortized over their estimated useful lives of three years using the
straight-line method.
6. ACCRUED LIABILITIES AND OTHER CURRENT LIABILITIES:
Accrued liabilities and other current liabilities consisted of the
following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<S> <C> <C>
Accrued employee compensation and benefits.................. $ 6,911 $ 4,709
Accrued network expenses.................................... 7,630 7,896
Accrued taxes............................................... 4,383 3,823
Accrued interest expense.................................... 9,898 3,449
Other....................................................... 8,026 8,991
------- -------
Accrued liabilities and other current liabilities......... $36,848 $28,868
======= =======
</TABLE>
7. LONG-TERM DEBT:
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
--------- ------------
<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..................................................... $313,579 $304,393
12 7/8% Senior Notes, face amount $205,000 due May 15, 2008;
effective interest rate of 13.24%; at accreted value...... 201,330 201,259
Capital lease obligations................................... 10,200 8,780
-------- --------
Long-term debt.............................................. $525,109 $514,432
======== ========
</TABLE>
Credit Facilities
In February 2000, the Company closed on $500 million of new senior secured
credit facilities (Credit Facilities), which replaced the existing $225 million
revolving credit facility. The Credit Facilities consist of a $350 million
seven-year revolving credit facility and a $150 million two-year delayed draw
term loan facility. The Credit Facilities will be available, subject to
satisfaction of certain terms and conditions, to provide financing for network
build-out, including the cost to develop, acquire and integrate the necessary
operations support and back office systems, as well as for additional dark fiber
purchases and central office collocations. Interest on amounts drawn is variable
based on the Company's leverage ratio and is initially expected to be LIBOR plus
3.25%. The initial commitment fee on the unused portion of the Credit Facilities
will be 1.5% per annum, paid quarterly and will be reduced based upon usage.
The Credit Facilities carry certain restrictive covenants that, among other
things, limit 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 or affiliates, effect a
consolidation or merger and require the Company to maintain certain operating
and financial performance measures. The Company was in compliance with all such
restrictive covenants at March 31, 2000. No advances have been made to the
Company through the Credit Facilities as of March 31, 2000.
Unamortized deferred debt issuance costs of $5,854 related to the $225
million revolving credit facility were expensed as additional interest expense
during first quarter 2000, upon termination of the $225 million revolving credit
facility and establishment of the Credit Facilities.
8
<PAGE> 9
ALLEGIANCE TELECOM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. CAPITALIZATION:
Common Stock
During the three months ended March 31, 2000, 31,935 shares of common stock
were issued under the Company's Employee Stock Discount Purchase Plan for
proceeds of $1,053.
On February 2, 2000, the Company raised $693,000 of gross proceeds from the
sale of the Company's Common Stock. The Company sold 9,900,000 shares at a price
of $70 per share. Net proceeds from this offering were $665,562. On February 29,
2000, the underwriters of the offering exercised an option to purchase an
additional 803,109 shares of Common Stock, providing an additional $56,218 gross
proceeds and $54,113 net proceeds to the Company.
On February 28, 2000, a three-for-two stock split of the Company's Common
Stock was effected in the form of a 50% stock dividend to shareholders of record
on February 18, 2000. Par value remained unchanged at $.01 per share. All
references to the number of common shares and per share amounts have been
restated to reflect the stock split for all periods presented.
Warrants
During the three months ended March 31, 2000, 12,975 Warrants were
exercised to purchase 28,389 shares of common stock. Fractional shares are not
issued; cash payments are made in lieu thereof, according to the terms of the
Warrant Agreement. At March 31, 2000 and December 31, 1999, 175,886 and 188,861
Warrants, respectively, were outstanding.
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
March 31, 2000 are as follows:
<TABLE>
<S> <C>
2000....................................................... $ 9,894
2001....................................................... 12,974
2002....................................................... 12,739
2003....................................................... 11,721
2004....................................................... 10,401
2005....................................................... 10,637
Thereafter................................................. 24,356
</TABLE>
Total rent expense for the three months ended March 31, 2000 and 1999, was
$3,098 and $1,735, respectively.
10. 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 and a three-for-two stock split which occurred on February 28, 2000. The
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 warrant values of $130
for the three months ended March 31, 1999.
11. RELATED PARTIES:
In connection with the Credit Facilities and the February 2, 2000 equity
offering, the Company incurred approximately $1,091 and $2,944, respectively in
fees to an affiliate of an investor in the Company.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Overview
Allegiance Telecom, Inc. (Allegiance) is a leading competitive provider of
telecommunications services to small and medium-sized business, government and
other institutional users in major metropolitan areas across the United States.
Allegiance offers an integrated set of telecommunications 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 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.
Management believes 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 18 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 to the time when revenue
generated by customer demand is available to finance such expenditures;
and
- address attractive service areas selectively throughout target markets
and not just in those areas where we have constructed fiber transmission
facilities.
We believe that the smart build approach allows us to reduce up-front
capital expenditures to approximately 25% of the total capital expenditures
required to develop such a network as compared with up-front capital
expenditures of approximately 50% under traditional build-out models. The level
of "up-front" capital required to be spent to develop a network will vary
depending on a number of factors. These factors include:
- the size and geography 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.
10
<PAGE> 11
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. 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
Baltimore, Detroit, Houston, Long Island, Northern New Jersey, Orange County,
Philadelphia, San Diego, San Jose and Washington, D.C. During 2000, we commenced
operations in Denver (February 2000) and St Louis (April 2000).
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 in order 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 also resell services in certain cases where customers require
services that we do not currently provide on a facilities basis. We earn
significantly higher margins by providing facilities-based services instead of
resale services and our sales teams have focused their efforts on selling
services that require the use of our facilities.
We may acquire unused fiber capacity to which we add our own electronic
transmission equipment once traffic volume justifies this investment or other
factors make it attractive. 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. We are moving to the next
stage of our smart build strategy in most of our existing markets by acquiring
dark fiber capacity to connect many of the central offices at which we are
located. These dark fiber rings will replace the network elements that we are
leasing on a short-term basis from the ILECs and are expected to provide us with
higher operating margins and more reliable network services. We currently have
dark fiber rings in operation in Dallas, Houston and New York City and we have
entered into contracts for dark fiber rings in an additional 16 metropolitan
markets, all of which are expected to be in operation before the end of 2000. We
have also contracted for similar long-term arrangements for long-haul fiber
routes connecting our Boston, New York City and Washington, D.C. networks.
The table below provides selected key operational data for the quarters
ended:
<TABLE>
<CAPTION>
MARCH 31, MARCH 31,
2000 1999
--------- ---------
<S> <C> <C>
Markets served.............................................. 20 12
Number of switches deployed................................. 16 9
Central office collocations................................. 395 152
Addressable market -- business lines (in millions).......... 11.8 5.3
Lines sold.................................................. 433,100 136,500
Lines installed............................................. 314,300 81,100
Sales force employees....................................... 905 408
Total employees............................................. 2,038 908
</TABLE>
Our business plan covers 36 of the largest metropolitan areas in the United
States. We believe we have successfully raised the projected capital required to
build our networks and operate in each of these markets 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 Months Ended March 31, 2000 Compared With Three
Months Ended March 31, 1999
During the first quarter of 2000 and 1999, we generated revenues of $47.2
million and $10.0 million, respectively. For the quarters ended March 31, 2000
and 1999, we sold 95,600 lines and 50,000 lines, and installed 72,600 lines and
33,400 lines, respectively. Facilities-based lines represented 88% of all lines
installed as of March 31, 2000 as compared to 77% as of March 31, 1999.
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Local service revenues for the quarters ended March 31, 2000 and 1999 were
approximately $21.4 million and $5.4 million, respectively. Local service and
access revenues consisted of:
- the monthly recurring charge for basic service;
- usage-based charges for local and toll calls in certain markets;
- charges for services such as call waiting and call forwarding; and
- certain non-recurring charges, such as charges for additional lines for
an existing customer.
Interconnection revenues, comprised of access charge revenue and reciprocal
compensation revenue, accounted for $17.3 million of our revenues for the
quarter ended March 31, 2000 and $3.8 million of our revenues for the quarter
ended March 31, 1999.
We earn "access charge" revenue by connecting our local service customers
to their selected long distance carriers for outbound calls or by delivering
inbound long distance traffic to our local service customers. Our interstate
access charges were filed largely mirroring those used by the National Exchange
Carrier Association (NECA), an association of independent local exchange
carriers and our state access charges were generally set the same as those of
state associations similar to NECA or of individual ILECs operating in other
areas within the same state. These charges are generally higher than those
charged by the larger ILECs operating in the same areas because these large
ILECs have many more customers and therefore have lower per unit costs. Access
charges are intended to compensate the local exchange carrier for the costs
incurred in originating and terminating long distance calls on its network and
we believe our access charges are appropriately set at levels approximately the
same as those of the smaller ILECs. Access charge levels in general, and those
charged by CLECs in particular, are subject to various disputes and are under
review by the FCC. Some interexchange carriers, including AT&T and Sprint, have
challenged the switched access rates of Allegiance and other CLECs and have
withheld some or all payments for the switched access services that they
continue to receive. Although no formal complaints have been filed against us,
AT&T and other interexchange carriers have asserted that they have not ordered
switched access service from us and/or that our charges for switched access
services are higher than those of the ILEC serving the same territory and are
therefore unjust and unreasonable. AT&T has refused to pay us any originating
access charges at our tariffed rates and other carriers are paying us less than
our tariffed rates. On July 5, 1999, the FCC issued a ruling to address this
issue in the context of a complaint 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 . . ." The FCC indicated that AT&T had no obligation to
purchase access from MGC based on the arguments that MGC had made, but the FCC
also made clear that there may be other requirements that could limit AT&T's
ability to not purchase such access from a CLEC. In response to that FCC
decision, AT&T filed a Petition for Review with the FCC, which was denied on
December 28, 1999. The FCC is also reviewing the switched access rate level
issue and related matters in its Access Charge Reform docket. In this docket,
the FCC has requested comment as to whether interexchange carriers may refuse to
purchase switched access services from particular carriers. Allegiance is an
active participant in that proceeding.
Several states, including Colorado, Missouri, New York, Texas and Virginia,
have proposed or required that CLEC access charges be limited to those charged
by ILECs operating in the same area as the CLEC with respect to calls
originating or terminating in such area, except where the CLEC in question can
establish that its costs justify a higher access rate through a formal cost
proceeding. We believe that it is possible that other states will enact similar
requirements. We also believe, however, that it is more likely that many states
will use the same approach for intrastate long distance as the FCC ultimately
decides to use for interstate long distance.
In light of the FCC's decision in the MGC/AT&T proceeding and the support
ILECs, including the large ILECs, have generally given to the principle that
interexchange carriers should not be permitted to refuse to purchase switched
access services from particular carriers, we believe that we will ultimately
receive payment owed to us from AT&T, Sprint and any other interexchange carrier
that withholds payment for
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switched access services that we provide. However, given the uncertainty as to
whether such amounts will ultimately be paid to Allegiance by AT&T and Sprint,
we recognize such access revenues only when realization of it is certain, which
in most cases is upon receipt of cash. On March 30, 2000, we filed a lawsuit
against each of AT&T and Sprint in the Federal District Court of the District of
Columbia requesting that such parties pay us for outstanding interstate and
intrastate access charges. We cannot provide any assurance, however, as to the
amount of payments that we will ultimately receive, the actual outcome of the
FCC proceedings or our lawsuits or the positions various states will take on the
similar issue of intrastate switched access rates. Our switched access rates
will have to be adjusted to comport with future decisions of the FCC or state
commissions and these adjustments could have a material adverse effect on
Allegiance.
We earn "reciprocal compensation" revenue by terminating on our network,
local calls that originate on another carrier's network. We believe that other
local exchange carriers should have to compensate us when their customers place
calls to Internet service providers who are our customers. Most incumbent local
exchange carriers disagree. A majority of our reciprocal compensation revenues
are from calls to Internet service providers. Regulatory decisions providing
that other carriers do not have to compensate us for these calls could limit our
ability to service this group of customers profitably. For all other local
calls, it is clear that the telecommunications company whose customer calls a
customer of a second telecommunications company must compensate the second
company. The reciprocal compensation rules do not apply to long distance
interstate calls and the FCC in its Declaratory Ruling of February 26, 1999,
determined that Internet service provider traffic is interstate for
jurisdictional purposes, but that its current rules neither require nor prohibit
the payment of reciprocal compensation for such calls. In the absence of a
federal rule, the FCC determined that state commissions have authority to
interpret and enforce the reciprocal compensation provisions of existing
interconnection agreements and to determine the appropriate treatment of
Internet service provider traffic in arbitrating new agreements. The Court of
Appeals for the District of Columbia Circuit issued a decision on March 24,
2000, vacating the Declaratory Ruling. The court held that the FCC had not
adequately explained its conclusion that calls to Internet service providers
should not be treated as "local" traffic. Allegiance views this decision as
favorable, but the court's direction to the FCC to re-examine the issue will
likely result in further delay in the resolution of pending compensation
disputes, and there can be no assurance as to the ultimate outcome of these
proceedings or as to the timing of such outcome. Currently, over 30 state
commissions and several federal and state courts have ruled that reciprocal
compensation arrangements do apply to calls to Internet service providers, while
four jurisdictions have ruled to the contrary. A number of these rulings are
subject to appeal. Additional disputes over the appropriate treatment of
Internet service provider traffic are pending in other states and federal
legislation seeking to resolve this issue has been and continues to be proposed
and considered. Given the uncertainty as to whether reciprocal compensation
should be payable in connection with calls to Internet service providers, we
recognize such revenue only when realization of it is certain, which in most
cases is upon receipt of cash. In addition, we anticipate that the per minute
reciprocal compensation rate we receive from ILECs under our new interconnection
agreements will be lower than it was under our previous agreements. These
reductions in reciprocal compensation will have a material adverse effect on us
if we are unable to offset them with other revenues.
Internet access and other data revenues for the quarter ended March 31,
2000 were approximately $6.5 million and for the quarter ended March 31, 1999
were $0.3 million.
Long distance revenues for the first quarter of 2000 and 1999 were
approximately $1.7 million and $0.5 million, respectively.
All other sources of revenue accounted for approximately $0.3 million for
the quarter ended March 31, 2000.
We are using the purchase method of accounting for the acquisitions of the
common stock of Kivex, Inc. and ConnectNet, Inc. and the acquisition of certain
assets of ConnecTen, L.L.C. We have recognized the revenues earned since the
ConnecTen, L.L.C. and ConnectNet, Inc. transactions, both of which closed in
April 1999, and the Kivex, Inc. transaction which closed on June 30, 1999, in
our condensed consolidated statement of operations for the quarter ended March
31, 2000. We have had discussions, and will continue to
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have discussions in the foreseeable future, concerning other potential
acquisitions of Internet service providers and other providers of
telecommunications services.
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 between 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.
In addition to Bell Atlantic in New York City, we are now electronically
bonding with Bell Atlantic in Boston and Long Island and with Southwestern Bell
in Dallas, Fort Worth and Houston. Testing with SBC Communications (SBC) and
Pacific Bell in California was completed during the third quarter 1999 on the
electronic data interface which is now in use there. Local service requests for
all Texas and California markets are now processed electronically with SBC. We
have recently completed electronic bonding testing with Ameritech, and currently
we are processing data for local service requests electronically with Ameritech.
We are currently testing electronic bonding with Bell Atlantic in their southern
region and expect to begin sending production orders during second quarter 2000.
We plan on testing electronic bonding with BellSouth in the second quarter and
US West in the third quarter 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.
For the quarters ended March 31, 2000 and 1999, network expenses were $27.1
million and $7.3 million, respectively. The increase in network expenses is
consistent with the deployment of our networks and initiation and growth of our
services during 2000 and 1999. Network expenses included:
- 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 our 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 our
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
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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.
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 generally expense the monthly 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.
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 types of
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 have developed a national Internet data network by connecting our
markets with leased high-capacity digital lines. The costs of these lines will
increase as we increase capacity to address customer demand, open new markets
and connect additional markets to our Internet network.
For the quarter ended March 31, 2000, selling, general and administrative
expenses increased to $48.0 million from $27.9 million for the quarter ended
March 31, 1999. Selling, general and administrative expenses include salaries
and related personnel costs, facilities costs and legal and professional fees.
The number of employees increased to 2,038 as of March 31, 2000, from 908 as of
March 31, 1999. As of March 31, 2000, the sales force, including sales managers
and sales administrators, had grown to 905 from 408 as of March 31, 1999. We
currently do not have 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 $2.4 million and $5.8 million of the deferred management
ownership allocation charge, a non-cash charge to income, for the first quarter
2000 and 1999, respectively. 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 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
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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 $122.5 million as a non-cash, non-recurring charge to operating
expense and $71.0 million as a deferred management ownership allocation charge.
We will further amortize this deferred charge at $4.1 million and $0.1 million
during the remainder of 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. During the
first quarter of 2000, we repurchased 289,527 shares from terminated management
employees, and reversed the remaining deferred charge of $0.1 million related to
these shares to additional paid-in capital. During 1999, we repurchased 37,968
shares from terminated management employees, and reversed the remaining deferred
charge of $0.6 million related to these shares to additional paid-in capital.
For the quarters ended March 31, 2000 and 1999, we recognized $2.0 million and
$1.8 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 options granted
to employees under our 1997 Stock Option Plan and 1998 Stock Incentive Plan.
During the first quarter 2000 and 1999, we recorded depreciation and
amortization of property and equipment of $18.0 million and $7.2 million,
respectively. Such increase was consistent with the deployment of our networks
and initiation of services in 20 markets by March 31, 2000.
In connection with the ConnecTen, ConnectNet and Kivex acquisitions
completed during the second quarter of 1999, we assigned an aggregate of $5.7
million of the purchase price to customer lists and workforces. We also recorded
an aggregate of $34.2 million of goodwill. Each of these intangible assets is
being amortized over their estimated useful lives of three years, beginning at
their respective date of the acquisition. For the first quarter 2000, we
recorded $2.8 million of amortization for goodwill and $0.5 million of
amortization of customer list and workforces.
For the three months ended March 31, 2000 and 1999, interest expense was
$21.0 million and $14.3 million, respectively. Interest expense reflects the
accretion of the 11 3/4% notes and related amortization of the original issue
discount, and the amortization of the original issue discount on the 12 7/8%
notes. Interest expense in first quarter 2000 also includes amortization of
deferred debt issuance costs related to the new $500 million Senior Secured
Credit Facilities (Credit Facilities). Unamortized deferred debt issuance costs
of $5.9 million related to the $225 million revolving credit facility were
charged to interest expense during first quarter 2000, upon termination of the
$225 million revolving credit facility and completion of the $500 million Credit
Facilities. The amount of interest capitalized for the quarters ended March 31,
2000 and 1999 was $2.5 million and $1.1 million, respectively. Interest income
for the quarters ended March 31, 2000 and 1999 was $13.5 million and $5.3
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 semiannual payments of interest through May 2001 on the
12 7/8% notes. Interest income during first quarter 2000 is greater than first
quarter 1999 because we had additional cash to invest. The additional cash was
generated primarily from the sale of common stock in April 1999 and February
2000.
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 estimate of the future fair market value of
such 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. For the three months ending March 31, 1999, we recorded accretion
of $0.1 million related to the redeemable warrants.
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Our net loss for the three months ended March 31, 2000, after amortization
of the non-cash management ownership allocation charge and amortization of
deferred compensation, was $61.3 million. Our net loss for the three months
ended March 31, 1999, after amortization of the non-cash management ownership
allocation charge and amortization of deferred compensation but before the
accretion of warrant values, was $49.0 million. After deducting accretion of
redeemable warrant values, the net loss applicable to common stock was $49.1
million for the three months ended March 31, 1999.
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 measuring the performance of a company. We had EBITDA
losses of $28.0 million for the quarter ended March 31, 2000, and EBITDA losses
of $25.2 million for the quarter ended March 31, 1999. In calculating EBITDA, we
also exclude the non-cash charges to operations for the management ownership
allocation charge and deferred compensation expense totaling $4.4 million for
the quarter ended March 31, 2000 and $7.6 million for the quarter ended March
31, 1999.
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.
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 a 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.
On January 3, 2000, we announced a significant expansion of our business
plan to include a total of 36 target markets and which:
- includes an increase in our collocation footprint by approximately 100
central offices in our initial 24 target markets; and
- provides for the acquisition of dark fiber capacity in an additional 16
of our target markets as well as in the Boston -- New York -- Washington,
D.C. corridor.
We do not begin to develop a new market until we have raised the capital
that we project to be necessary to build and operate our network in the market
to the point at which operating cash flow from the market is sufficient to fund
such market's ongoing operating costs and capital expenditures. All of our 36
target markets are now fully funded in this manner.
We may decide to seek additional capital in the future to expand our
business. Sources of additional financing may include vendor financing and/or
the private or public sale of our equity or debt securities. We cannot assure
you, however, that such financing will be available at all or on terms
acceptable to us, or that our estimate of additional funds required is accurate.
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 new credit facilities; and
- the consummation of acquisitions.
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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.
For the three months ended March 31, 2000 and 1999, we made capital
expenditures of $102.5 million and $78.5 million, respectively. We 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 March 31,
2000, we had transmission equipment collocated in 395 ILEC central offices.
Pursuant to our expanded business plan, we expect to incur approximately $400.0
million of capital expenditures in 2000.
As of March 31, 2000, we had approximately $1,116.7 million of cash and
short-term investments. In addition, $38.4 million of restricted U.S. government
securities have been placed in a pledge account to fund interest payments on our
12 7/8% notes through May 2001.
On February 28, 2000, a three-for-two stock split of our common stock was
effected in the form of a 50% dividend to shareholders of record on February 18,
2000. All references to the number of common shares and per share amounts have
been restated to reflect the stock split for the periods presented.
On February 3, 1998, we raised gross proceeds of approximately $250.5
million in an offering of 445,000 units, each unit consisting of one 11 3/4%
note and one redeemable warrant. Net proceeds of approximately $240.7 million
were received from that offering. The 11 3/4% notes have a principal amount at
maturity of $445.0 million and an effective interest rate of 12.21%. The 11 3/4%
notes mature on February 15, 2008. From and after February 15, 2003, interest on
such notes will be payable semi-annually in cash at the rate of 11 3/4% per
annum. The accretion of original issue discount will cause an increase in
indebtedness from March 31, 2000 to February 15, 2003 of $131.4 million.
We completed the initial public offering of our common stock and the
offering of the 12 7/8% notes early in the third quarter of 1998. We raised net
proceeds of approximately $137.8 million from our initial public offering of
common stock and approximately $124.8 million from the offering of these notes.
The 12 7/8% notes mature on May 15, 2008. Interest on these notes is payable in
cash semi-annually, commencing November 15, 1998. The 12 7/8% notes were sold at
less than par, resulting in an effective rate of 13.24%, and the value of the
12 7/8% notes is being accreted, using the effective interest method, from the
$200.9 million gross proceeds realized at the time of the sale to the aggregate
value at maturity, $205.0 million, over the period ending May 15, 2008. The
accretion of original issue discount will cause an increase in indebtedness from
March 31, 2000 to May 15, 2008 of $3.7 million. In connection with the sale of
the 12 7/8% notes, we purchased U.S. government securities for approximately
$69.0 million and placed them in a pledge account to fund interest payments for
the first three years the 12 7/8% notes are outstanding. The first interest
payment was made in November 1998. Such U.S. government securities are reflected
in the balance sheet as of March 31, 2000, at an accreted value of approximately
$38.4 million, $25.9 million of which we classified as current assets and $12.5
million of which we classified as non-current assets.
On February 2, 2000, we completed the public offering of 9,900,000 new
shares of our common stock at a price of $70.00 per share, raising gross
proceeds of $693.0 million. After underwriters' fees and other expenses, we
realized net proceeds of approximately $665.6 million. On February 29, 2000, the
underwriters of this
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offering exercised an option to purchase an additional 803,109 shares of common
stock at the same price per share. As a result, we raised an additional $56.2
million of gross proceeds and $54.1 million of net proceeds.
In February 2000, we closed on $500.0 million of new Credit Facilities,
which replaced the $225 million revolving credit facility. The Credit Facilities
consist of a $350.0 million revolving credit facility and a $150.0 million
delayed draw term loan facility. The Credit Facilities are available, subject to
satisfaction of certain terms and conditions, to provide purchase money
financing for network build-out, including the cost to develop, acquire and
integrate the necessary operations support and back office systems, as well as
for additional dark fiber purchases and central office collocations. Interest on
amounts drawn is variable, based on leverage ratios, and is expected to be the
London Interbank Offered Rate + 3.25%. The initial commitment fee on the unused
portion of the Credit Facilities will be 1.5% per annum, paid quarterly and will
be reduced based upon usage. The Credit Facilities contain 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. In 1999, we completed a
company-wide inventory of all computer systems on which we relied, both within
and outside of Allegiance. We have attempted to assess, and we plan to continue
to monitor year 2000 issues. If any year 2000 issues are not adequately resolved
by Allegiance, there could be a material adverse effect on our business,
financial condition or results of operations. To date, however, we have not
experienced any year 2000 issues.
Even though we have not identified or experienced 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. We have developed contingency plans for all of our
operating support systems. If we should, in the future, 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 Section 21E of the Securities Exchange Act of 1934, as amended, and
Allegiance intends that such forward-looking statements be subject to the safe
harbors created thereby. You generally can identify these statements by our use
of forward-looking words such as "plans," "estimates," "believes," "expects,"
"may," "will," "shall," "should," or "anticipates" or the negative or other
variations of such terms or comparable terminology, or by discussion of strategy
that involve risks and uncertainties. We often use these types of statements
when discussing our plans and strategies, our anticipation of revenues from
designated markets, and statements regarding the development of our businesses,
the markets for our services and products, our anticipated capital expenditures,
operations support systems or changes in regulatory requirements and other
statements contained in this report regarding matters that are not historical
facts. We caution you that these forward-looking statements are only predictions
and estimates regarding future events and circumstances. We cannot assure you
that we will achieve the future results reflected in these statements.
19
<PAGE> 20
The risks we face that could cause us not to achieve these results include, but
are not limited to, our ability to do the following in a timely manner, at
reasonable costs and on satisfactory terms and conditions: (1) successfully
market our services to current and new customers; (2) interconnect with and
develop cooperative working relationships with ILECs; (3) develop efficient
operations support systems and other back office systems; (4) successfully and
efficiently transfer new customers to our networks and access new geographic
markets; (5) identify, finance and complete suitable acquisitions; (6) borrow
under our credit facilities or borrow under alternative financing sources; (7)
install new switching facilities and other network equipment; (8) electronically
bond with ILECs; and (9) obtain leased fiber optic line capacity, rights-of-way,
building access rights and any required governmental authorizations, franchises
and permits. Regulatory, legislative and judicial developments could also cause
actual results to differ materially from the future results reflected in such
forward-looking statements. You should consider all of our subsequent written
and oral forward-looking statements only in light of such cautionary statements.
You should not place undue reliance on these forward-looking statements and you
should understand that they represent management's view only as of the dates we
make them.
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 2000, based on the estimated average 1999
earned rate on investments is $48.3 million. Assuming a 100 basis point drop in
the estimated average rate, we would be exposed to a $9.6 million reduction in
interest income for the year. The following table illustrates this impact on a
quarterly basis:
<TABLE>
<CAPTION>
QUARTER ENDING
---------------------------------------------------------------
MARCH 2000 JUNE 2000 SEPTEMBER 2000 DECEMBER 2000 TOTAL
---------- --------- -------------- ------------- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Estimated average investments....... $821.3 $1,083.3 $988.2 $905.5 N/A
Estimated average interest earned at
the estimated average rate of 5.1%
for the year ended December 31,
1999.............................. $ 10.5 $ 13.8 $ 12.5 $ 11.5 $48.3
Estimated impact of interest rate
drop.............................. $ 2.1 $ 2.7 $ 2.5 $ 2.3 $ 9.6
</TABLE>
Our outstanding long-term debt consists principally of long-term, fixed
rate notes, not subject to interest rate fluctuations.
20
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
We filed a registration statement on Form S-3 (File No. 333-94021) which
became effective on January 27, 2000, whereby 15,000,000 shares of our common
stock were sold at a price of $70.00 per share. Of the 15,000,000 shares of
common stock sold, 9,900,000 were sold by us and 5,100,000 were sold by selling
shareholders (Madison Dearborn Capital Partners II, L.P. sold 1,500,000 shares;
Frontenac VII Limited Partnership sold 1,428,572 shares; Frontenac Masters VII
Limited Partnership sold 71,428 shares; and Battery Ventures IV, L.P. sold
2,100,000 shares). We did not receive any of the proceeds from the sale of
shares by the selling shareholders. In addition, the underwriters of this public
offering, led by Goldman, Sachs & Co., Salomon Smith Barney Inc., Bear, Stearns
& Co. Inc., Morgan Stanley & Co. Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation, Warburg Dillon Read LLC, Credit Lyonnais Securities
(USA) Inc., First Union Securities, Inc., FleetBoston Robertson Stephens Inc.,
J.J.B. Hilliard, W.L. Lyons, Inc., ING Barings LLC and TD Securities (USA) Inc.,
exercised an option to purchase 803,109 additional shares of our common stock at
the same price per share. Net proceeds to us from this public offering totaled
approximately $719.7 million, after deducting underwriting discounts and other
expenses aggregating approximately $29.5 million. We intend to use substantially
all of the net proceeds from this offering to fund our expanded business plan as
well as general corporate purposes, including acquisitions. None of the proceeds
from this offering have been used as of March 31, 2000. The share numbers and
the stock price numbers reflected above have been adjusted for our 3-for-2 stock
split effected in the form of a 50% stock dividend, on February 28, 2000.
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 March 31, 2000
11.2 -- Statement regarding computation of per share loss for the
three months ended March 31, 1999
27.1 -- Financial Data Schedule
</TABLE>
21
<PAGE> 22
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.
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
Dated: May 12, 2000
22
<PAGE> 23
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
11.1 -- Statement regarding computation of per share loss for the
three months ended March 31, 2000
11.2 -- Statement regarding computation of per share loss for the
three months ended March 31, 1999
27.1 -- Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11.1
ALLEGIANCE TELECOM, INC.
COMPUTATION OF PER SHARE EARNINGS (LOSS)
THREE MONTHS ENDED MARCH 31, 2000
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Number of Shares Percent Outstanding Equivalent Shares
---------------- ------------------- -----------------
<S> <C> <C> <C>
Prior to Initial Public Offering 639 100.00% 639
1997 Common Stock Offering
After Initial Public Offering
1998 Common Stock Offering 15,000,000 100.00% 15,000,000
Preferred Stock Converted to Common Stock 60,511,692 100.00% 60,511,692
1999 Common Stock Offering 21,041,100 100.00% 21,041,100
2000 Common Stock Offering 10,703,109 62.61% 6,701,093
Treasury Shares (327,495) 53.37% (174,777)
Warrants Exercised 588,891 96.83% 570,230
Stock Options Exercised 435,386 62.12% 270,445
Cash in Lieu of Stock Split (577) 35.18% (203)
Employee Stock Discount Purchase Plan Shares Issued 177,509 98.81% 175,403
-----------------
WEIGHTED AVERAGE SHARES OUTSTANDING 104,095,622
NET LOSS APPLICABLE TO COMMON STOCK $ (61,270,000)
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.59)
=================
</TABLE>
<PAGE> 1
EXHIBIT 11.2
ALLEGIANCE TELECOM, INC.
COMPUTATION OF PER SHARE EARNINGS (LOSS)
Three Months Ended March 31, 1999
(In thousands, except share per share amount)
<TABLE>
<CAPTION>
Number of Shares Percent Outstanding Equivalent Shares
---------------- ------------------- -----------------
<S> <C> <C> <C>
1997 Common Stock Offering 639 100.00% 639
1998 Common Stock Offering 15,000,000 100.00% 15,000,000
Preferred Stock Converted to Common Stock 60,511,692 100.00% 60,511,692
Treasury Shares (37,968) 55.56% (21,096)
1999 Employee Stock Discount Purchase Plan Shares Issued 66,936 96.67% 64,706
------------
$ 75,555,941
WEIGHTED AVERAGE SHARES OUTSTANDING $ 75,555,941
NET LOSS APPLICABLE TO COMMON STOCK $ (49,126)
NET LOSS PER SHARE, BASIC AND DILUTED $ (0.65)
============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AT MARCH 31, 2000 AND FROM THE CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2000
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL
STATEMENT.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 1,103,496
<SECURITIES> 13,157
<RECEIVABLES> 54,235
<ALLOWANCES> 9,372
<INVENTORY> 0
<CURRENT-ASSETS> 1,194,191
<PP&E> 540,132
<DEPRECIATION> 76,132
<TOTAL-ASSETS> 1,731,968
<CURRENT-LIABILITIES> 96,284
<BONDS> 514,909
0
0
<COMMON> 1,084
<OTHER-SE> 1,107,198
<TOTAL-LIABILITY-AND-EQUITY> 1,731,968
<SALES> 0
<TOTAL-REVENUES> 47,161
<CGS> 0
<TOTAL-COSTS> 27,120
<OTHER-EXPENSES> 25,780
<LOSS-PROVISION> 4,431
<INTEREST-EXPENSE> 20,994
<INCOME-PRETAX> (61,270)
<INCOME-TAX> 0
<INCOME-CONTINUING> (61,270)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (61,270)
<EPS-BASIC> (0.59)
<EPS-DILUTED> (0.59)
</TABLE>
