<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] 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 333-61293
SPLITROCK SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0529757
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
8665 NEW TRAILS DRIVE, THE WOODLANDS, TEXAS 77381
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (281) 465-1200
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 [ ]
The number of shares of Common Stock, par value $.001 per share, of the
Registrant outstanding at June 30, 1999 was 46,681,424.
<PAGE>
SPLITROCK SERVICES, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Part I -- Financial Information
Item 1 -- Financial Statements
Condensed Balance Sheets as of December 31, 1998 and June 30, 1999 (unaudited).............. 2
Condensed Statements of Operations and Comprehensive Loss for the Three Months Ended
June 30, 1998 and 1999 (unaudited).......................................................... 3
Condensed Statements of Operations and Comprehensive Loss for the Six Months Ended
June 30, 1998 and 1999 (unaudited).......................................................... 4
Condensed Statement of Stockholders' Equity (Deficit) for the
Six Months ended June 30, 1999 (unaudited).................................................. 5
Condensed Statements of Cash Flows for the Six Months Ended
June 30, 1998 and 1999 (unaudited).......................................................... 6
Notes to Condensed Financial Statements (unaudited)......................................... 7
Item 2 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations............................................... 8
Item 3 -- Quantitative and Qualitative Disclosures About Market Risk.................................. 20
Part II -- Other Information
Item 1 -- Legal Proceedings........................................................................... 22
Item 2 -- Changes in Securities and Use of Proceeds................................................... 22
Item 3 -- Defaults upon Senior Securities............................................................. 22
Item 4 -- Submission of Matters to a Vote of Security Holders......................................... 22
Item 5 -- Other Information........................................................................... 22
Item 6 -- Exhibits and Reports on Form 8-K............................................................ 22
Signatures............................................................................................ 23
</TABLE>
1
<PAGE>
SPLITROCK SERVICES, INC.
CONDENSED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 28,330 $ 8,327
Unrestricted investments -- short term......................... 120,475 56,166
Restricted investments -- short term........................... 39,476 21,597
Accounts receivable, net....................................... 3,205 3,919
Prepaid expenses and other current assets...................... 480 948
---------- ----------
Total current assets......................................... 191,966 90,957
Property and equipment, net..................................... 73,899 88,721
Restricted investments -- long term............................. 19,001 23,243
Other assets, net............................................... 11,275 29,808
---------- ----------
$ 296,141 $ 232,729
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of capital lease obligations................ $ 9,121 $ 9,088
Accounts payable............................................... 21,582 11,533
Accrued interest payable....................................... 13,375 14,141
Accrued liabilities and other current liabilities.............. 15,894 18,211
---------- ----------
Total current liabilities.................................... 59,972 52,973
Senior notes payable ($261,000 face value net of
unamortized discount).......................................... 258,217 258,298
Capital lease obligations....................................... 8,243 3,383
---------- ----------
Total liabilities............................................ 326,432 314,654
Commitments and contingencies
Stockholders' equity (deficit):
Common stock, $.001 par value, 150,000,000 shares authorized,
46,624,845 and 46,681,424 shares issued and outstanding as
of December 31, 1998, and June 30, 1999, respectively......... 47 47
Additional paid-in capital..................................... 34,717 34,831
Common stock warrants.......................................... 2,849 2,849
Accumulated other comprehensive income(loss)................... 47 (335)
Accumulated deficit............................................ (67,951) (119,317)
---------- ----------
Total stockholders' equity (deficit)......................... (30,291) (81,925)
---------- ----------
$ 296,141 $ 232,729
========== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
2
<PAGE>
SPLITROCK SERVICES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1999
------------- -------------
<S> <C> <C>
Revenues................................. $ 15,720 $ 17,889
Operating expenses:
Splitrock network costs............... 6,769 18,128
Legacy network costs.................. 14,795 8,842
Selling, general and administrative... 1,582 3,768
Depreciation and amortization......... 2,087 6,602
------------- -------------
Total operating expenses....... 25,233 37,340
------------- -------------
Loss from operations..................... (9,513) (19,451)
Other income (expense):
Interest income....................... 76 1,731
Interest expense...................... (493) (8,155)
------------- -------------
Net loss................................. (9,930) (25,875)
------------- -------------
Other comprehensive loss:
Unrealized net loss on securities..... -- (140)
------------- -------------
Comprehensive net loss................... $ (9,930) $ (26,015)
============= =============
Net loss per share - basic and diluted $ (.23) $ (.55)
============= =============
Weighted average shares - basic and diluted 43,337,389 46,678,316
============= =============
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
3
<PAGE>
SPLITROCK SERVICES, INC.
CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARES AND PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1999
-------------- --------------
<S> <C> <C>
Revenues................................. $ 32,214 $ 34,241
Operating expenses:
Splitrock network costs............... 10,724 34,150
Legacy network costs.................. 27,111 21,871
Selling, general and administrative... 2,441 6,338
Depreciation and amortization......... 4,907 11,237
---------- ----------
Total operating expenses....... 45,183 73,596
---------- ----------
Loss from operations..................... (12,969) (39,355)
Other income (expense):
Interest income....................... 183 4,335
Interest expense...................... (842) (16,346)
---------- ----------
Net loss................................. (13,628) (51,366)
---------- ----------
Other comprehensive loss:
Unrealized net loss on securities..... -- (382)
---------- ----------
Comprehensive net loss................... $ (13,628) $ (51,748)
========== ==========
Net loss per share - basic and diluted $ (.31) $ (1.10)
========== ==========
Weighted average shares - basic and diluted 43,288,168 46,668,728
========== ==========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
4
<PAGE>
SPLITROCK SERVICES, INC.
CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Accumulated
Additional Common Other
Par Paid-in Stock Comprehensive Accumulated
Shares Value Capital Warrants Income (Loss) (Deficit) Total
---------- ----- ---------- -------- -------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998....... 46,624,845 $ 47 $ 34,717 $ 2,849 $ 47 $ (67,951) $ (30,291)
Net loss........................... - - - - - (51,366) (51,366)
Unrealized net loss on securities.. - - - - (382) - (382)
Exercise of stock options.......... 56,579 - 114 - - - 114
---------- ----- --------- -------- ------- ---------- ---------
Balance at June 30, 1999........... 46,681,424 $ 47 $ 34,831 $ 2,849 $ (335) $ (119,317) $ (81,925)
========== ===== ========= ======== ======= ========== =========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
5
<PAGE>
SPLITROCK SERVICES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1999
-------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.......................................................................... $ (13,628) $ (51,366)
Adjustments to reconcile net loss to net cash provided by operating activities -
Depreciation and amortization................................................. 4,907 11,237
Amortization of debt discount and deferred financing costs.................... -- 554
Changes in operating assets and liabilities:
Accounts receivable, net...................................................... (1,986) (714)
Prepaid expenses and other current assets..................................... (199) (468)
Accounts payable and accrued liabilities...................................... 7,194 (7,732)
Accrued interest payable...................................................... -- 766
----------- -----------
Net cash used in operating activities..................................... (3,712) (47,723)
----------- -----------
INVESTING ACTIVITIES:
Purchases of equipment............................................................ (5,548) (25,311)
Use of unrestricted investments................................................... -- 64,255
Use of restricted investments, net................................................ -- 13,309
Increase in other assets.......................................................... (2,166) (19,189)
----------- -----------
Net cash (used in) or provided by investing activities.................... (7,714) 33,064
----------- -----------
FINANCING ACTIVITIES:
Proceeds from note payable to stockholder......................................... 10,000 --
Proceeds from note payable........................................................ 1,477 --
Financing costs incurred.......................................................... (424) (565)
Sale of common stock and exercise of stock options................................ 1,100 114
Proceeds from sale leaseback of equipment......................................... 440 --
Principal payments on capital lease obligations................................... (7,172) (4,893)
Release of restriction of cash under credit agreement............................. 3,472 --
----------- -----------
Net cash (used in) or provided by financing activities.................... 8,893 (5,344)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS............................................ (2,533) (20,003)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..................................... 7,710 28,330
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................... $ 5,177 $ 8,327
=========== ===========
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
financial statements.
6
<PAGE>
SPLITROCK SERVICES, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements of Splitrock Services,
Inc. have been prepared in accordance with generally accepted accounting
principles and the Securities and Exchange Commission's rules and regulations
for reporting interim financial information. Certain amounts previously reported
have been reclassified in order to ensure comparability among the periods
reported.
The accompanying unaudited interim condensed financial statements reflect all
adjustments (consisting of normal recurring adjustments) which, in the opinion
of management, are necessary for a fair presentation of the results for the
interim periods presented. Accordingly, they do not include all information and
notes required by generally accepted accounting principles for complete
financial statements. The results for the interim period ended June 30, 1999,
are not necessarily indicative of results to be expected for the entire year
ending December 31, 1999, or future operating results.
On June 28, 1999, the Company's Board of Directors approved a 0.563-for-1
reverse stock split of the Common Stock of the Company effected on July 12,
1999. All share and per share amounts included in these financial statements
have been retroactively adjusted to give effect to the reverse stock split.
The financial statements should be read in conjunction with the Company's annual
audited financials statements for the year ended December 31, 1998 as filed with
the Securities and Exchange Commission on Form 10-K.
2. NET LOSS PER SHARE
Basic and diluted net loss per share have been computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
No. 128). SFAS No. 128 requires the Company to report both basic earnings per
share, which is based on the weighted average number of common shares
outstanding, and diluted earnings per share, which is based on the weighted
average number of common shares outstanding and all dilutive potential common
shares outstanding. At June 30, 1998, options to acquire 1,351,482 shares of
Common Stock at the weighted-average exercise price of $1.11 and a warrant to
acquire 2,815,000 shares of Common Stock at an exercise price of $1.11 were not
included in the computation of diluted earnings per share because their effect
is anti-dilutive. At June 30, 1999, options to acquire 2,896,128 shares of
Common Stock at the weighted average exercise price of $5.10 and warrants to
acquire 1,487,791 shares of Common Stock at an exercise price of $0.02, were not
included in the computation of diluted earnings per share because their effect
is anti-dilutive.
7
<PAGE>
SPLITROCK SERVICES, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
FORWARD-LOOKING STATEMENTS
All references to "we", "us", "Splitrock", or "our" refer to Splitrock
Services, Inc. This section contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act, which are intended to be covered by safe harbors created thereby. Investors
are cautioned that all forward-looking statements involve risks and uncertainty,
including, without limitation, our ability to continue building the Splitrock
network, our ability to diversify our services and customers, the ability to
obtain necessary supplies, the ability to make projected capital expenditures,
and the ability to achieve projected quarterly results, as well as general
market conditions, competition, and pricing. All statements, other than
statements of historical facts, included or incorporated by reference in this
report that address activities, events or developments that we expect or
anticipate will or may occur in the future, including such things as future
capital expenditures (including the amount and nature hereof), business strategy
and measures to implement such strategy, competitive strengths, goals, expansion
and growth of Splitrock's business and operations, plans, references to future
success as well as other statements which include words such as "anticipate,"
"believe," "plan," "estimate," "expect," and "intend" and other similar
expressions, constitute forward-looking statements. Although we believe that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and the inclusion of
such information should not be regarded as a representation by us or any other
person that our objectives and plans will be achieved.
Investors should also be aware that while we do, from time to time,
communicate with securities analysts, it is against our policy to disclose to
them any material non-public information or other confidential commercial
information. Accordingly, investors should not assume that we agree with any
statement or report issued by any analyst irrespective of the content of the
statement or report. Furthermore, we have a policy against issuing or confirming
financial forecasts or projections issued by others. Thus, to the extent that
reports issued by securities analysts contain any projections, forecasts or
opinions, we are not responsible for those reports.
Overview
We are a facilities-based provider of advanced data communications
services. We market our services to Internet service providers,
telecommunications carriers and other businesses throughout the United States.
Our services include an array of Internet access and data communications
services delivered over our high capacity, facilities-based network.
We were founded in March 1997. In July 1997, we acquired the existing
legacy network infrastructure of Prodigy Communications Corporation, and agreed
to build and operate a nationwide communications network and to provide network
services for Prodigy's customers. We initially provided service to Prodigy's
subscribers using Prodigy's legacy network. For locations outside the coverage
area of the legacy network, we have been using the IBM Global Services network.
From September 1997 through April 1998, we deployed our broadband access network
in metropolitan areas across the country. Over time, as more coverage has become
available on our access network, we have been decommissioning the Prodigy legacy
network POPs and reducing our usage of the IBM network. In July 1998, we raised
$261 million through the issuance of our 11 3/4% senior notes and warrants to
purchase common stock, principally to finance capital expenditures related
8
<PAGE>
to the construction and installation of our broadband access network. As of June
30, 1999, our network included 324 installed POPs, 270 of which were
operational. Later this year, we expect to have approximately 370 active POPs,
giving us a physical presence in all 50 states, and targeting 90% of U.S.
businesses and households with a local call. Our expanding network is supported
by two network operations centers equipped with state-of-the-art network
management systems.
As part of our ongoing efforts to further expand and enhance our network
and service offerings, we have agreed to acquire indefeasible rights to use four
dark fiber strands in a state-of-the-art fiber optic network currently under
construction by Level 3 Communications, LLC, with an option to acquire
indefeasible rights to use an additional 12 fibers. This nationwide fiber
network will cover approximately 15,000 route miles and will be delivered in
segments that are expected to become available from the end of 1999 through the
first quarter of 2001. The combination of this fiber optic backbone with our
broadband access network positions us to:
. deliver, on our own facilities, a broad array of end-to-end data
communications services at the high level of quality and reliability
increasingly demanded by customers;
. reduce significantly our network costs as a percentage of revenues as
we substitute the acquired bandwidth for existing leased circuit
arrangements with various telecommunications carriers;
. expand our service offerings by providing bandwidth leasing services
on a stand alone basis or bundled with our other services;
. increase the reliability and redundancy of our network; and
. increase the variety of service options and speeds available to
customers.
Revenues
Historically, Prodigy has been our primary customer and has accounted for
substantially all of our revenues since our inception. For the year ended
December 31, 1998 Prodigy accounted for 99% of our revenues. For the six months
ended June 30, 1999 Prodigy accounted for 93% of our revenues. While we expect
revenues from Prodigy to decrease as a percentage of our total revenues in
future periods, we believe that Prodigy will continue to account for a
significant portion of our revenues.
We provide network services, including Internet dial services and other
network connections, to Prodigy in exchange for a monthly service charge. The
service charge is calculated based on the lower of two alternative rates,
subject to a minimum. One rate is calculated based upon the total hours of usage
and the other rate is calculated based upon the total number of subscribers. The
minimum monthly service charge is $4.0 million and will increase to $4.5 million
on July 1, 2000. Through March 31, 1998, our Prodigy revenues were a function of
the amount of usage rather than the number of subscribers. However, since April
1998, these revenues have been, and over the long term are expected to continue
to be, a function of the number of subscribers rather than the amount of usage.
In addition, if the average monthly hours per subscriber exceeds a target
amount, we will be entitled to receive additional fees.
Our original four-year agreement with Prodigy expires on June 30, 2001.
After the initial term, either party may terminate the agreement upon 12 months'
prior written notice. If no notice is received, the term of the
9
<PAGE>
agreement is automatically extended for successive 12-month terms. Under the
agreement, we are required, among other things, to provide Prodigy with
financial and other information and to meet network performance standards. We
are required to provide credits to Prodigy if we fail to meet these standards.
Prodigy may terminate the agreement following a cure period if we fail to meet
specified service level objectives or otherwise fail to comply with our
agreement. Prodigy may also terminate the agreement during the initial term
without cause by providing 12 months' prior written notice and paying a
termination charge of $3.0 million.
Prodigy has announced plans to discontinue Prodigy Classic, its original
on-line service, on or before October 31, 1999 because of a shift in business
focus to Internet-based products and services and a determination not to make
Prodigy Classic Year 2000 compliant. Prodigy has reported that, although it will
continue to encourage Prodigy Classic subscribers to migrate to Prodigy
Internet, it has had difficulty in generating this migration and a substantial
portion of the remaining Prodigy Classic subscribers lack the minimum hardware
requirements for the Prodigy Internet service. While we expect continued growth
in Prodigy Internet subscribers, we do not expect that any significant portion
of this growth will be attributable to the migration of Prodigy Classic
subscribers.
On May 27, 1999, Prodigy announced that it had entered into a definitive
agreement to acquire the Internet access customer base of Cable & Wireless USA,
which we believe will result in a significant increase in Prodigy subscribers.
In addition to providing Internet dial access and related services to
Prodigy, we began offering Internet dedicated access services on a limited basis
to select customers during the second half of 1998. Given the nature of our
network costs and the fact that current network utilization peaks in the evening
hours to support Prodigy's residential Internet subscribers, we are targeting
providers of daytime intensive traffic as well as providers of evening intensive
traffic to maximize network utilization throughout a 24-hour period. We plan to
focus on providing virtual private network services, Internet dedicated access,
web hosting and Internet dial access services. Historically, in the data
communications industry, providing virtual private network services increases
the length of the sales cycle when compared to providing Internet dedicated
access services. Because we are in the early stages of building our sales force,
we expect growth in revenues to fluctuate from quarter to quarter depending on
the volume of monthly revenue of our customers and the actual date the service
becomes billable to our customers. We cannot assure you that we will achieve the
balance of utilization of the network facilities necessary to attain or maximize
profitability or positive cash flow from operations.
Leveraging our demonstrated network capabilities, we have recently entered
into significant new customer relationships with Juno Online Services and
InfiNet. Juno, a leading provider of Internet and e-mail services, currently has
more than 200,000 subscribers for its Internet services launched in July 1998
and has created more than 6.8 million free e-mail accounts since April 1996.
InfiNet, a consortium sponsored by Knight-Ridder, Gannett and Landmark
Communications, provides Internet access and web publishing solutions to nearly
100,000 subscribers nationwide. We began providing Internet dial access to
InfiNet's subscribers in the second quarter of 1999.
As segments of our fiber backbone are constructed, we plan to use the
additional network capacity to offer bandwidth leasing services. However,
overcapacity could result from the construction of competing networks,
technological advances, strategic alliances, or a decline in the growth rate of
demand for bandwidth capacity. If this occurs, we could encounter significant
pricing pressure, which could limit the amount we could competitively charge for
these services.
10
<PAGE>
Splitrock Network Costs
Our Splitrock network costs include all expenses incurred in connection
with operating our network. These costs primarily include leased
telecommunication line charges for connecting our POPs to local central offices
and for backbone transmission, personnel expenses, and operating expenses
related to network operations, maintenance field operations and facility
management.
Increases in Splitrock network operating costs relate to the increase in
Splitrock network facilities and line charges incurred in connection with the
growth in total subscriber usage. As of June 30, 1999, we had 324 installed
POPs, 270 of which were operational and we expect to have approximately 370
operational POPs when our network construction is completed later this year. We
anticipate continued increases in our network operating costs as additional
lines and facilities are deployed.
We are deliberately increasing our network operating expenditures to expand
our broadband access network and backbone capacity in anticipation of expected
increases in dial access and other services. We may incur expenditures to
increase our capacity to serve customers in advance of entering into new
customer relationships.
During March 1999, in order to maintain the quality and reliability of our
network performance, we entered into an agreement with Lucent Technologies to
provide us with maintenance on our broadband access network. Prior to entering
into this maintenance arrangement with Lucent, we had performed our own
maintenance of equipment and have relied on warranties from our vendors. We
expect our maintenance costs to increase as POP sites are added to the
maintenance contract through year end.
We expect our network operating costs to decrease significantly as a
percentage of revenues as we substitute our acquired fiber optic backbone
network for existing leased circuit arrangements with various telecommunications
carriers. Although we expect to incur new costs for maintenance, colocation and
software in connection with the fiber optic network, we expect these new costs
to be offset in future years by a larger reduction in charges for backbone
transmission.
Legacy Network Costs
Legacy network costs include all expenses incurred in connection with
operating and decommissioning the Prodigy legacy network and costs of operating
the InfiNet legacy network until we transition InfiNet traffic from its network
to our network. These costs include facility leases, line charges, occupancy
costs, equipment maintenance costs and access fees for the IBM network, as well
as significant transition costs which will be incurred until the traffic from
these networks is migrated to our network.
Legacy network costs are expected to continue to decline, as more coverage
becomes available on our own broadband access network. As the construction and
installation of our own network progresses, the Prodigy legacy network is being
decommissioned and usage of the IBM network is declining. As of June 30, 1999,
we had fully deactivated substantially all of the original Prodigy legacy
network POPs. Our network can service a substantial portion of the InfiNet
traffic acquired in May of 1999. We began migrating the InfiNet traffic to our
network in July 1999 and expect to be substantially completed by the end of the
year. Despite the increase in legacy network costs resulting from the InfiNet
network, our legacy network costs in total decreased 32.1% from the first
quarter of 1999 to the second quarter of 1999. We do not expect to incur any
significant legacy network costs beyond the end of 1999.
11
<PAGE>
The largest component of our legacy network costs are paid to IBM for usage
incurred on the IBM network. We have incurred quarterly costs from IBM of $6.3
million, $7.3 million, $11.0 million, $12.0 million, $12.6 million, $11.5
million and $6.5 million, respectively, for the seven quarters from October 1,
1997 through June 30, 1999. The increase in costs through the fourth quarter of
1998 related to a continued quarterly increase in total subscriber usage,
coupled with an increase in the hourly usage rate that went into effect at the
beginning of the second quarter of 1998. The IBM network costs have declined
since the fourth quarter of 1998 and we expect those costs to be substantially
eliminated by the end of 1999.
During construction of new POP sites, access and transmission lines are
installed and charges are incurred as a POP site becomes operational. Transition
costs result from a duplication of expenses on both the new POP and the
associated legacy network POP until the new POP is operational and the
associated legacy network POP is decommissioned.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of personnel and
operating costs relating to executive management, accounting and finance,
information systems, human resources, sales and marketing, customer support,
network planning, development, and administrative employees. We expect our
selling, general and administrative expenses to continue to increase in dollar
amount and as a percentage of revenue in 1999, 2000 and 2001 principally due to
the following factors:
. expansion of our sales and marketing force; and
. expansion of our back-office, customer care, billing, and
administrative functions.
We expect to make a substantial investment in our sales and marketing
programs to achieve and properly support the intended expansion in our customer
base. Through the combination of a direct sales force and alternative
distribution channels, we believe that we will be able to access markets and
increase revenue-producing traffic on our network. To implement our distribution
strategy, we are developing an in-house direct sales force. We intend to utilize
our direct sales force to market our services directly to Internet service
providers, carriers, value added service providers, and medium and large
businesses. We intend to utilize alternate distribution channels, such as
agents, resellers and wholesalers, to market our services to medium and small
businesses. We cannot assure you that we will be successful in our marketing
plan. In addition to the expanded sales force, we anticipate continued back-
office expansion, including the continued implementation of a new customer care
and billing system. We have also signed a lease for 69,000 square feet of
additional office space, which we expect to be available for occupancy by August
1999. This office lease will increase selling, general and administrative costs
and will also require additional capital expenditures for furniture and fixtures
and leasehold improvements.
Depreciation and Amortization
Depreciation and amortization expense consists primarily of depreciation of
network equipment. We anticipate that our depreciation and amortization
expenses will increase significantly as we record amortization
12
<PAGE>
on amounts expected to be paid to acquire dark fiber rights and depreciation
expenses for the related electronic equipment.
Net Losses
We have incurred net losses since our inception in March 1997. We
anticipate that we will continue to incur net losses while we complete the
construction and installation of our nationwide network and expand our sales and
marketing force. The extent to which we continue to incur net losses is largely
dependent upon the timely deployment of the network, the rate at which we can
expand our customer and revenue base and our ability to maximize use of our
nationwide network .
Results of Operations
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30,
1998
Revenues. Revenues for the three months ended June 30, 1999 totaled $17.9
million, an increase of $2.2 million from revenues of $15.7 million for the
three months ended June 30, 1998. This increase was primarily due to providing
dial access service to InfiNet subscribers commencing in May of 1999 and
increases in revenue from Prodigy.
Splitrock Network Costs. Splitrock network costs for the three months
ended June 30, 1999 were $18.1 million compared to $6.8 million for the three
months ended June 30, 1998. This $11.3 million increase was due to the growth in
the size of our network from 70 operational POPs as of June 30, 1998 to 270
operational POPs as of June 30, 1999. As a percentage of revenues, Splitrock
network costs increased to 101.0% of revenue for the three months ended June 30,
1999 from 43.0% of revenues for the three months ended June 30, 1998.
Legacy Network Costs. Legacy network costs for the three months ended June
30, 1999 were $8.8 million compared to $14.8 million for the three months ended
June 30, 1998. This $6.0 million decrease was attributable to a decrease in the
IBM Network access charges as a result of the expanded coverage becoming
available on our network and the migration of additional traffic from the
Prodigy legacy network to our network. This decrease was offset by approximately
$1.9 million of additional costs from servicing InfiNet customers on its legacy
network beginning in May 1999. Despite the increase in legacy network costs
resulting from the InfiNet network, our legacy network costs in total decreased
32.1% from the first quarter of 1999 to the second quarter of 1999. As a
percentage of revenues, legacy network costs decreased to 49.4% of revenue for
the three months ended June 30, 1999 from 94.1% of revenues for the three months
ended June 30, 1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended June 30, 1999 were $3.8
million compared to $1.6 million for the three months ended June 30, 1998. The
majority of this increase was due to personnel costs incurred in building our
internal sales force beginning in the second quarter of 1999 and the increase in
personnel to support the growth in the size of our network. As a percentage of
revenues, selling, general and administrative expenses increased to 21.0% of
revenue for the three months ended June 30, 1999 from 10.0% of revenues for the
three months ended June 30, 1998.
13
<PAGE>
Depreciation and Amortization. Depreciation and amortization was $6.6
million for the three months ended June 30, 1999 compared to $2.1 million for
the three months ended June 30, 1998. This increase was due to the increase in
equipment and facilities placed in service throughout 1998 and 1999.
Interest Expense. Interest expense was $8.2 million for the three months
ended June 30, 1999, compared to $0.5 million for the three months ended June
30, 1998. Historical interest expense was related to capital leases on equipment
and loans from a stockholder prior to completion of the senior notes offering in
July 1998. Beginning in the third quarter of 1998, interest expense increased
significantly due to the issuance of our senior notes.
Interest Income. Interest income relates to the interest earned on
investments of cash on hand in investment grade commercial paper and money
market accounts. Interest income was $1.7 million for the three months ended
June 30, 1999, compared to $0.1 million for the three months ended June 30,
1998. This increase is due to the interest earned on the proceeds from our
senior notes offering.
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30,
1998
Revenues. Revenues for the six months ended June 30, 1999 totaled $34.2
million, an increase of $2.0 million from revenues of $32.2 million for the six
months ended June 30, 1998. This increase was due primarily to providing dial
access service to InfiNet subscribers commencing in May of 1999.
Splitrock Network Costs. Splitrock network costs for the six months ended
June 30, 1999 were $34.2 million compared to $10.7 million for the six months
ended June 30, 1998. This increase was due to the growth in the size of our
network from 70 operational POPs as of June 30, 1998 to 270 operational POPs as
of June 30, 1999. As a percentage of revenues, Splitrock network costs increased
to 100.0% of revenue for the six months ended June 30, 1999 from 33.3% of
revenues for the six months ended June 30, 1998.
Legacy Network Costs. Legacy network costs for the six months ended June
30, 1999 were $21.9 million compared to $27.1 million for the six months ended
June 30, 1998. This decrease was primarily attributable to a decrease in the IBM
Network access charges as a result of the expanded coverage becoming available
on our network and the migration of additional traffic from the Prodigy legacy
network to our network. This decrease was offset by approximately $1.9 million
of additional costs from servicing InfiNet customers on its legacy network
beginning in May 1999. Despite the increase in legacy network costs resulting
from the InfiNet network, our legacy network costs in total decreased 32.1% from
the first quarter of 1999 to the second quarter of 1999. As a percentage of
revenues, legacy network costs decreased to 63.8% of revenue for the six months
ended June 30, 1999 from 84.2% of revenues for the six months ended June 30,
1998.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the six months ended June 30, 1999 were $6.3 million
compared to $2.4 million for the six months ended June 30, 1998. The majority of
this increase was due to personnel costs incurred in building our internal sales
force beginning in the second quarter of 1999 and the increase in personnel
throughout 1998 and 1999 to support the growth in the size of our network. As a
percentage of revenues, selling, general and administrative expenses increased
to 18.5% of revenues for the six months ended June 30, 1999 from 7.6% of
revenues for the six months ended June 30, 1998.
14
<PAGE>
Depreciation and Amortization. Depreciation and amortization was $11.2
million for the six months ended June 30, 1999 compared to $4.9 million for the
six months ended June 30, 1998. This increase was due to the increase in
equipment and facilities placed in service throughout 1998 and 1999.
Interest Expense. Interest expense was $16.3 million for the six months
ended June 30, 1999, compared to $0.8 million for the six months ended June 30,
1998. Historical interest expense was related to capital leases on equipment and
loans from a stockholder prior to completion of the senior notes offering in
July 1998. Beginning in the third quarter of 1998, interest expense increased
significantly due to the issuance of our senior notes.
Interest Income. Interest income relates to the interest earned on
investments of cash on hand in investment grade commercial paper and money
market accounts. Interest income was $4.3 million for the six months ended June
30, 1999, compared to $0.2 million for the six months ended June 30, 1998. This
increase was due to the interest earned on the proceeds from our senior notes
offering.
Income Taxes. No provision for income taxes has been recognized because we
had operating losses for both tax and financial reporting purposes in all
periods.
On June 30, 1999, we had approximately $45.0 million of gross deferred tax
assets comprised primarily of net operating loss carryforwards. Given our
history of operating losses, it is uncertain that we would realize these assets,
and so we have provided a reserve to reduce the carrying value of the assets to
zero. We will continue to assess the ability to realize the deferred tax assets
based on actual and forecasted results.
Liquidity and Capital Resources
Our operations have required substantial capital investment for the
purchase of communications equipment and the design and development of our
network. Capital expenditures were $45.3 million and $25.3 million for the year
ended December 31, 1998 and the six months ended June 30, 1999, respectively. We
expect that our capital expenditures will be substantially higher in future
periods in connection with the purchase of dark fiber and the related facilities
and telecommunications equipment.
Since our inception, we have satisfied our cash requirements primarily
through the issuance of equity or debt securities. As of June 30, 1999, we had
raised approximately $298.2 million, including:
. $34.9 million through private sales of our equity securities,
including $18.0 million invested by our senior management and
directors and $15.6 million invested by another major stockholder; and
. $263.3 million through the issuance of debt.
In addition we have arranged $30.6 million in equipment financing,
primarily from equipment vendors and leasing companies.
As of June 30, 1999, we had an accumulated deficit of $119.3 million, cash
and cash equivalents of $8.3 million, and restricted and unrestricted
investments of $101.0 million.
15
<PAGE>
Net cash used in operating activities was $47.7 million during the six
months ended June 30, 1999. The net cash used in operating activities in this
period was primarily attributable to the Company's net losses. Net cash used in
operating activities was $0.7 million for the year ended December 31, 1998.
During the year-ended December 31, 1998, the cash flow effect of net losses were
largely offset by increases of $42.0 million in current liabilities due to the
timing of payments for purchases to equipment vendors and accrued interest to
bond holders.
Net cash provided by investing activities during the six months ended June
30, 1999 was $33.1 million. This consisted primarily of net proceeds of $64.3
million from the liquidation of unrestricted investments, $13.3 net liquidation
of restricted investments which were used to pay the interest on the senior
notes, offset by $25.3 million used for purchases of property and equipment, the
payment of a deposit of $11.2 million related to dark fiber and approximately
$8.0 million primarily for costs incurred in connection with the construction of
our broadband access platform. Net cash used by investing activities for the
year ended December 31, 1998 was $169.5 million and consisted primarily of the
purchase of unrestricted investments of $119.5 million and $45.3 million in
equipment purchases.
Net cash used in financing activities for the six months ended June 30,
1999 was $5.3 million and consisted primarily of principal payments on capital
leases. Net cash provided by financing activities for the year ended December
31, 1998 was $190.9 million, which was derived primarily from the issuance of
our senior notes, net of issuance costs and proceeds restricted to finance
future interest payments.
As of June 30, 1999, we had aggregate operating and capital lease payments
of $5.4 million remaining in 1999, and $9.9 million, $3.4 million, $2.6 million
and $2.1 million due in each of the next four years.
We also have agreed to acquire indefeasible rights to use four dark fibers,
with an option to use up to 12 additional fibers, in the fiber optic network
under construction by Level 3. We are required to pay for the dark fiber in
segments as they become available, which is expected to occur from the end of
1999 through the first quarter of 2001.
We expect our future liquidity and capital requirements to relate primarily
to:
. capital expenditures;
. operating losses;
. debt service payments; and
. working capital and other corporate purposes.
We currently estimate that our capital expenditures for 1999, 2000 and 2001
will be approximately $73 million, $139 million and $76 million, respectively,
including capital expenditures for:
. the acquisition of rights to use four dark fiber strands and the
related electronics necessary to transmit data over the fiber;
. the completion of our broadband access network;
16
<PAGE>
. the enhancement of our network to provide additional value added
services; and
. the improvement of our network management, billing and other back
office systems.
Actual capital expenditures will depend on numerous factors beyond our control
or ability to predict, including the availability of financing, the timing of
our acquisition of dark fiber, customer demand, competition, regulatory
developments, and general economic conditions. Moreover, our capital
requirements would increase significantly if we were to exercise our options to
acquire rights to use up to 12 additional dark fiber strands over and above the
four strands for which we have committed.
Our current sources of capital are not sufficient to fund all of our
planned capital expenditures. We intend to finance these capital expenditures by
raising additional funds through the issuance of equity or debt securities,
vendor financing, bank financing, strategic relationships or some combination of
the foregoing. The terms of our debt securities restrict our ability to incur
indebtedness, create liens, and make dividend payments and investments, and may
make it more difficult for us to raise the capital we will need to fully
implement our business plan.
On August 6, 1999, we completed our initial public offering of 9,692,628
shares of our common stock at a price of $10.00 per share resulting in net
proceeds of approximately $89.3 million after deducting the underwriting
discount and other estimated fees and expenses payable by us. The underwriters
purchased 692,628 of the shares from us pursuant to an over-allottment option.
Additionly, 157,372 shares were sold by certain of our stockholders under the
same over-allottment option and we did not receive any proceeds from the sale of
those shares. We intend to use our net proceeds for capital expenditures,
including:
. the acquisition of rights to use dark fiber and of the related
electronics equipment necessary to transmit data over the fiber;
. the completion of our broadband access network;
. the enhancement of our network to provide additional value-added
services; and
. the improvement of our network management, billing and other back-
office services.
We will also use a portion of the net proceeds from this offering to fund
operating losses, working capital requirements and other general corporate
purposes.
We currently anticipate that our available cash resources, combined with
the net proceeds from our initial public offering if completed, would be
sufficient to meet our anticipated cash needs through the second quarter of
2000. However, we cannot assure you that our financial resources will be
adequate to fund all of our anticipated or unanticipated working capital
requirements and capital expenditures during this period. Moreover, even if our
public offering is completed, we expect that full implementation of our current
business plan will require that we raise substantial additional capital for the
needs that we anticipate funding during the second half of 2000, 2001 and 2002.
We may be required to raise additional funds through public or private
financing, strategic relationships or other arrangements.
We cannot assure you that the additional financing we will need, will be
available on terms acceptable to us, or at all. If we are unable to obtain the
funds necessary to finance our expected capital requirements, we may have to
revise our business plans and this may materially and adversely affect our
financial condition, results of
17
<PAGE>
operations and prospectus. Furthermore, any additional equity financing may be
dilutive to stockholders, and debt financing, if available, may involve
restrictive covenants and significant interest expense.
Year 2000
The year-2000 issue is the result of computer programs being written using
two digits, rather than four digits, to define the applicable year. Programs
that have time-sensitive software may recognize a date using ``00'' as the year
1900 rather than the year 2000. This could result in a major system failure or
miscalculations, including an inability to process transactions, send invoices
or engage in similar normal business activities. Due to its reliance on computer
hardware and software, the Internet and related service industries are highly
susceptible to the year-2000 issue. If the year-2000 issue should cause
widespread problems across the Internet, usage can be expected to decline
dramatically. Such an event would have a material adverse effect on our
financial condition and results of operations, the nature and extent of which
cannot reasonably be determined by us on the basis of information currently
available to us.
Our Year 2000 Program
We have established a program to ensure that, to the extent reasonably
possible, all systems are or will be year-2000 compliant prior to the end of
1999. Our Y2K program, designed with the assistance of an outside consultant,
consists of five phases:
. inventory of our potential exposures, including significant third-
party supplier and customer relationships;
. analysis of the assets to determine compliance or non-compliance;
. remediation and contingency plan development;
. remediation; and
. testing of affected systems.
A team consisting of our managers from Information Technology, Finance and
Operations has been established as the Y2K Readiness Team. With the assistance
of our outside consultant, the Y2K Readiness Team has designed an aggressive
schedule to identify information technology (IT) and non-IT assets requiring
compliance upgrades and a timetable for performance and testing of the affected
systems. In addition, the Y2K Program calls for validation of compliance by
significant suppliers and customers.
Current Status
Our Year 2000 assessment is completed. An inventory of computing,
communications and facility systems has been prepared and validated.
Significant suppliers, including competitive local exchange carriers, have also
been identified and validated.
18
<PAGE>
We have performed a technical review of significant third party suppliers
and customers and, if available, have surveyed the public year-2000 statements
issued by them. In addition, we have sent inquiry letters to certain third party
suppliers and customers requesting information regarding their vulnerability to
year-2000 issues. We have responded to these inquiries and have evaluated the
responses we received to determine if alternate business actions are necessary.
We continue to monitor new software and vendors to insure their compliance.
To date, we have not incurred and do not anticipate incurring a significant
amount of costs to implement remedial actions required for year-2000 compliance.
Contingency Plans
Where any significant systems, customers or suppliers are determined to
have questionable remediation potential, the Y2K Readiness Team has established,
and will continue to establish, contingency plans to address the at-risk area.
As we continue to monitor all systems and suppliers and identify specific risk
areas, we will take appropriate steps to implement remedial actions and
contingency plans as required under the circumstances.
Risks
The failure to correct a year-2000 issue could result in the interruption
or failure of certain normal business activities or operations. We believe that
the most reasonably likely worst-case scenario would result from interruption or
failure of third party services. Because we are dependent on a number of third
party vendors to provide network services, a significant year-2000-related
disruption of these network services could cause customers to consider seeking
alternate service providers, decrease Internet traffic generally or cause a
significant burden on customer service and technical support.
We are not presently aware of any vendor-related year-2000 issue that is
likely to result in any disruption of this type. Although there is inherent
uncertainty in the year-2000 issue, we expect that as we progress in our Y2K
Program, the level of uncertainty about the impact of the year-2000 issue will
be reduced significantly.
19
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates. Market risk
generally represents the risk of loss that may result from the potential change
in the value of a financial instrument as a result of fluctuations in interest
rates and market prices. We have not traded or otherwise bought and sold
derivatives nor do we expect to in the future. We also do not invest in market
risk sensitive instruments for trading purposes.
This discussion contains forward-looking statements that are subject to
risks and uncertainties. Actual results could vary materially as a result of a
number of factors including those set forth under "Item 2. Management's
Discussion and Analysis of Financial Condition - Forward Looking Statements."
Interest Rate Risk
We may be exposed to market risk related to changes in interest rates. At
this time, we have not entered into any interest rate risk arrangements, and
while we may enter into interest rate risk hedging arrangements in the future,
we cannot assure you that we will be able to find commercially satisfactory
terms at that time. Our investment policy is to manage our investment portfolio
to preserve principal and liquidity while maximizing the return on the
investment portfolio through the full investment of available funds. We
diversify our marketable securities portfolio by investing in multiple types of
investment-grade securities. Our investment portfolio is primarily invested in
short-term securities with at least an investment grade rating to minimize
interest rate and credit risk as well as to provide for an immediate source of
funds. Although changes in interest rates may affect the fair value of the
investment portfolio and cause unrealized gains or losses, such gains or losses
would not be realized unless the investments are sold.
Our Short-Term Investments. As of June 30, 1999, we had unrestricted short-
term investments of $56.2 million and restricted short-term investments of $21.6
million. These short-term investments are highly liquid investments with
original maturities at the date of purchase of between three and twelve months
and consist primarily of money market funds and high-grade securities such as
corporate notes, municipal securities and U.S. Treasury notes. We value these
investments at fair market value. These investments are subject to interest rate
risk and will fall in value if market interest rates increase. A hypothetical
increase in market interest rates by 10% from levels at June 30, 1999 would
cause the fair value of these short-term investments to decline by an immaterial
amount. We have the ability to hold these investments until maturity, and
therefore would not expect the value of these investments to be affected to any
significant degree by the effect of a sudden change in market interest rates.
Declines in interest rates over time will, however, reduce our interest income,
especially from money market funds whose rates change on a daily basis.
Our Long-Term Investments. As of June 30, 1999, we maintained restricted
long-term investments totaling $23.2 million in connection with our 11 3/4%
senior notes due 2008. These long-term investments consist of high-grade
securities such as corporate notes, municipal securities and U.S. Treasury
notes, all of which are considered liquid and available for sale. Certain of
these securities will not be held to maturity. A hypothetical increase in market
interest rates by 10% from levels at June 30, 1999 would cause the fair value of
these securities to decline by an immaterial amount.
Outstanding Debt. As of June 30, 1999, the carrying value of our
outstanding senior notes was approximately $258.3 million at a fixed interest
rate of 11 3/4%. In certain circumstances, we may redeem this long-term debt.
Because the interest rates on these instruments are fixed, a hypothetical 10%
decrease in
20
<PAGE>
interest rates would not have a material impact on our financial condition,
revenues or operations. Increases in interest rates could, however, increase the
interest expense associated with future borrowings, if any. We do not hedge
against interest rate increases.
Equity Price Risk
We do not own an equity stake or investment in another company or business
entity and therefore we do not believe that we have any direct equity price
risk. We do not hedge against equity price changes.
Foreign Currency Exchange Rate Risk
All of our revenues are realized in dollars and all of our revenues are
from customers in the United States. Therefore, we do not believe that we have
any significant direct foreign currency exchange rate risk. We do not hedge
against foreign currency exchange rate changes.
21
<PAGE>
SPLITROCK SERVICES, INC.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not currently involved in any legal proceedings, nor are any
material legal proceedings threatened by or against the Company
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 1, 1999, our stockholders approved (1) the election of Kwok L. Li, James
M. Nakfoor and Marshall C. Turner to our board of directors, (2) the adoption of
our 1990 Stock Incentive Plan, (3) the amendment and restatement of our charter
effecting a .563 for 1 reverse stock split of our common stock. These matters
were approved by written consent of the holders of a majority of our outstanding
shares of common stock in accordance with Section 228 of the Delaware General
Corporation Law.
ITEM 5. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit Number Description
-------------- -----------
27 Financial data schedule
(b) Reports on Form 8-K:
None.
22
<PAGE>
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.
SPLITROCK SERVICES, INC.
Dated: August 6, 1999 By: /s/ William R. Wilson
-------------- -----------------------------------------
William R. Wilson, President and
Chief Executive Officer
By: /s/ J. Robert Fugate
-----------------------------------------
J. Robert Fugate, Executive Vice
President and Chief Financial Officer
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
COMPANY'S UNAUDITED CONDENSED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B)
FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S FORM 10-Q FOR THE PERIOD ENDED
JUNE 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 8,327
<SECURITIES> 56,166
<RECEIVABLES> 4,378
<ALLOWANCES> (459)
<INVENTORY> 0
<CURRENT-ASSETS> 90,957
<PP&E> 116,289
<DEPRECIATION> (27,568)
<TOTAL-ASSETS> 232,729
<CURRENT-LIABILITIES> 59,972
<BONDS> 258,217
0
0
<COMMON> 47
<OTHER-SE> (81,972)
<TOTAL-LIABILITY-AND-EQUITY> 232,729
<SALES> 34,241
<TOTAL-REVENUES> 34,241
<CGS> 34,159
<TOTAL-COSTS> 73,596
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,346
<INCOME-PRETAX> (51,366)
<INCOME-TAX> 0
<INCOME-CONTINUING> (51,366)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (51,366)
<EPS-BASIC> (1.10)<F1>
<EPS-DILUTED> (1.10)
<FN>
<F1>EPS-PRIMARY REFERS TO BASIC EARNINGS PER SHARE, AS DEFINED IN STATEMENT OF
FINANCIAL ACCOUNTING STANDARDS NO. 128, "EARNINGS PER SHARE."
</FN>
</TABLE>
