<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 SEPTEMBER 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 1-15425
------------
ALLIED RISER COMMUNICATIONS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 75-2789492
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1700 PACIFIC AVE., SUITE 400
DALLAS, TEXAS 75201-4679
(Address of Principal Executive Offices) (Zip Code)
(214) 210-3000
(Registrant's Telephone Number, Including Area Code)
NOT APPLICABLE
(Former Name, Former Address, and Former Fiscal Year,
if Changed Since Last Report)
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 [ ] No [X]
------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
<TABLE>
<CAPTION>
Number of Shares Outstanding
Title of Class on December 12, 1999
-------------- ----------------------------
<S> <C>
Common Stock, $.0001 par value 56,665,015
</TABLE>
================================================================================
<PAGE> 2
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1998,
and September 30, 1999 (Unaudited)................................................................. 3
Consolidated Statements of Operations for the Three Months
Ended September 30, 1998 and 1999 (Unaudited)...................................................... 4
Consolidated Statements of Operations for the Nine Months
Ended September 30, 1998 and 1999 (Unaudited)...................................................... 5
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1998 and 1999 (Unaudited)...................................................... 6
Notes to Consolidated Financial Statements (Unaudited)................................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................ 17
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds............................................................. 18
Item 4. Submission of Matters to a Vote of Security Holders................................................... 19
Item 6. Exhibits and Reports on Form 8-K...................................................................... 19
Signatures............................................................................................ 20
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
-------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................................... $ 41,371 $ 60,138
Accounts receivable, net of reserve of $2 and $11, respectively ............ 20 170
Stock subscription receivable ............................................... 8 --
Prepaid expenses and other current assets ................................... 131 444
-------------- --------------
Total current assets ...................................................... 41,530 60,752
PROPERTY AND EQUIPMENT, net of accumulated depreciation and
amortization of $510 and $2,228, respectively ............................... 13,005 25,644
OTHER ASSETS ................................................................... 1,037 2,450
-------------- --------------
Total assets .............................................................. $ 55,572 $ 88,846
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable ............................................................ $ 272 $ 1,811
Accrued liabilities ......................................................... 2,843 6,457
Current maturities of capital lease obligations ............................. 722 2,233
-------------- --------------
Total current liabilities .............................................. 3,837 10,501
CAPITAL LEASE OBLIGATIONS, net of current maturities ........................... 1,420 3,539
-------------- --------------
Total liabilities ...................................................... 5,257 14,040
COMMITMENTS AND CONTINGENCIES
CONVERTIBLE REDEEMABLE PREFERRED STOCK, $.0001 par value,
100,000 shares authorized, 66 and 117 shares issued and outstanding as
of December 31, 1998 and September 30, 1999, respectively (aggregate
redemption of $66,452 and $122,991, respectively) .......................... 66,452 122,991
STOCKHOLDERS' DEFICIT:
Common Stock, $.0001 par value, 1,000,000,000 shares authorized,
25,716,396 and 33,194,465 shares issued and outstanding as of
December 31, 1998 and September 30, 1999, respectively .................... 3 3
Additional paid-in capital .................................................. 375 20,367
Deferred compensation ....................................................... -- (16,048)
Accumulated deficit ......................................................... (16,515) (52,507)
-------------- --------------
Total stockholders' deficit ............................................ (16,137) (48,185)
-------------- --------------
Total liabilities and stockholders' deficit ............................ $ 55,572 $ 88,846
============== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
balance sheets.
3
<PAGE> 4
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
NETWORK SERVICES REVENUE .............................. $ 77 $ 442
OPERATING EXPENSES:
Network operations ................................. 775 1,972
Selling expense .................................... 522 2,556
General and administrative expenses ................ 2,840 6,889
Amortization of deferred compensation .............. -- 4,357
Depreciation and amortization ...................... 159 830
-------- --------
Total operating expenses ...................... 4,296 16,604
-------- --------
OPERATING INCOME (LOSS) ............................... (4,219) (16,162)
OTHER INCOME (EXPENSE):
Interest expense ................................... (255) (399)
Interest income .................................... 2 531
Other income (expense), net ........................ -- --
-------- --------
Total other income (expense) .................. (253) 132
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES ................. (4,472) (16,030)
-------- --------
PROVISION FOR INCOME TAXES ............................ -- --
-------- --------
NET INCOME (LOSS) ..................................... (4,472) (16,030)
ACCRUED DIVIDENDS ON PREFERRED STOCK .................. -- (2,240)
-------- --------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK .......... $ (4,472) $(18,270)
======== ========
NET INCOME (LOSS) PER COMMON SHARE .................... $ (18.56) $ (.68)
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ......... 241 26,809
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE> 5
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
NETWORK SERVICES REVENUE .............................. $ 104 $ 989
OPERATING EXPENSES:
Network operations ................................. 1,493 4,791
Selling expense .................................... 1,121 4,962
General and administrative expenses ................ 5,662 16,096
Amortization of deferred compensation .............. -- 9,913
Depreciation and amortization ...................... 225 1,720
-------- --------
Total operating expenses ...................... 8,501 37,482
-------- --------
OPERATING INCOME (LOSS) ............................... (8,397) (36,493)
OTHER INCOME (EXPENSE):
Interest expense ................................... (475) (861)
Interest income .................................... 17 1,366
Other income (expense), net ........................ 1 (4)
-------- --------
Total other income (expense) .................. (457) 501
-------- --------
INCOME (LOSS) BEFORE INCOME TAXES ................. (8,854) (35,992)
-------- --------
PROVISION FOR INCOME TAXES ............................ -- --
-------- --------
NET INCOME (LOSS) ..................................... (8,854) (35,992)
ACCRUED DIVIDENDS ON PREFERRED STOCK .................. -- (5,540)
-------- --------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK .......... $ (8,854) $(41,532)
======== ========
NET INCOME (LOSS) PER COMMON SHARE .................... $ (36.67) $ (1.73)
======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ......... 241 24,076
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE> 6
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1999
-------- --------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ....................................................... $ (8,854) $(35,992)
Adjustments to reconcile net loss to net cash used in operating
activities --
Depreciation and amortization
225 1,720
Amortization of deferred compensation ................................. -- 9,913
Changes in assets and liabilities --
Increase in accounts receivable, net ............................... (39) (142)
Increase in prepaid expenses ....................................... (7) (313)
Increase in other assets ........................................... (80) (63)
Increase in accounts payable and accrued liabilities ............... 1,713 4,395
-------- --------
Net cash used in operating activities .......................... (7,042) (20,482)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ...................................... (4,453) (8,592)
-------- --------
Net cash used in investing activities .......................... (4,453) (8,592)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt ...................................................... 13,100 --
Payments on capital lease obligations ................................... (222) (1,379)
Credit facility origination fee ......................................... -- (1,350)
Net proceeds from stock issuance ........................................ -- 50,570
-------- --------
Net cash provided by financing activities ...................... 12,878 47,841
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS ...................................... 1,383 18,767
CASH AND CASH EQUIVALENTS, beginning of period ............................. 188 41,371
-------- --------
CASH AND CASH EQUIVALENTS, end of period ................................... $ 1,571 $ 60,138
======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest .................................................. $ 42 $ 404
Noncash investing and financing activities --
Equipment acquired under capital leases ............................... $ 1,250 $ 5,009
Accrued property and equipment additions .............................. $ 3,518 $ 758
Accrued dividends on preferred stock .................................. $ -- $ 5,540
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
6
<PAGE> 7
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
1. ORGANIZATION:
The Company is a facilities-based provider of broadband data, video and
voice communications services to small-and-medium-sized businesses in major
metropolitan areas in the United States. The Company's services, which today
include ultra high-speed Internet access, business-oriented television for
display on the computer desktop, and Internet-enhanced voice conferencing
calling services, among other things, are typically delivered to the Company's
customers over its own fiber-optic network built inside multi-tenant commercial
office buildings. In addition to selling services to the commercial tenants of
buildings in which the Company owns and operates these advanced communications
networks, the Company leverages its market presence and brand by offering
end-to-end connectivity on a resold basis to businesses located outside these
buildings.
2. PRESENTATION:
In the opinion of the Company's management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the Company's
consolidated financial position as of September 30, 1999. The results of
operations for the three and nine months ended September 30, 1998 and 1999, and
cash flows for the nine months ended September 30, 1998 and 1999, are not
necessarily indicative of the results of operations or cash flows to be expected
for the full year. The accompanying unaudited consolidated financial statements
have been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and disclosures normally
included in notes to consolidated financial statements have been condensed or
omitted pursuant to such rules and regulations, but resultant disclosures are in
accordance with generally accepted accounting principles as they apply to
interim reporting. The unaudited consolidated financial statements should be
read in conjunction with the audited consolidated financial statements as of
December 31, 1998 and the notes thereto.
3. NET INCOME (LOSS) PER COMMON SHARE:
Net income (loss) per common share is presented in accordance with the
provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per
Share." Shares issued to employees subject to repurchase by the Company are not
included in the weighted average number of common shares outstanding for the
period. Convertible redeemable preferred stock was outstanding at September 30,
1999. These securities were not considered in a computation of diluted EPS for
the three and nine-month periods ended September 30, 1999, as the conversion is
dependent upon a qualifying public offering or qualifying recapitalization, as
defined in the certificate of incorporation and due to the net loss incurred for
both the three and nine-month periods ended September 30, 1999, the impact
would be antidilutive.
Options to purchase 590,217 shares of common stock were outstanding at
September 30, 1999. In management's opinion, the exercise price was equal to the
fair value of the common stock at the date of grant. These securities were not
considered in a computation of diluted EPS due to the net loss incurred for both
the three and nine-month periods ended September 30, 1999, as the impact would
be antidilutive.
7
<PAGE> 8
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment as of September 30, 1999, consist of the following:
<TABLE>
<CAPTION>
AVERAGE
ESTIMATED
USEFUL LIVES
(YEARS)
------------
<S> <C> <C>
Office equipment and information systems............................... 4 $ 7,521,000
Furniture and fixtures................................................. 7 359,000
Leasehold improvements................................................. 5 988,000
System infrastructure.................................................. 10 6,550,000
System equipment....................................................... 5 5,701,000
Construction-in-progress............................................... 6,753,000
--------------
27,872,000
Less -- Accumulated depreciation and amortization...................... (2,228,000)
--------------
Property and equipment, net............................................ $ 25,644,000
==============
</TABLE>
5. COMMITMENTS AND CONTINGENCIES:
Operating Leases
The Company has entered into various operating lease agreements, with
expirations through 2005, for lease space and equipment. Future minimum lease
obligations as of September 30, 1999, related to the Company's operating leases
are as follows:
<TABLE>
<S> <C>
2000.................................................................................. $ 2,361,000
2001.................................................................................. 2,008,000
2002.................................................................................. 2,027,000
2003.................................................................................. 1,967,000
2004.................................................................................. 662,000
Thereafter............................................................................ --
--------------
Total minimum lease obligations.............................................. $ 9,025,000
==============
</TABLE>
Total rent expense for the three months ended September 30, 1998 and 1999,
was approximately $146,000 and $529,000, respectively. Total rent expense for
the nine months ended September 30, 1998 and 1999, was approximately $246,000
and $1,380,000, respectively.
8
<PAGE> 9
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Capital Leases
The Company has entered into various capital leases for equipment. Future
minimum lease obligations as of September 30, 1999, related to the Company's
capital leases are as follows:
<TABLE>
<S> <C>
2000................................................................................. $ 2,730,000
2001................................................................................. 2,728,000
2002................................................................................. 1,121,000
Thereafter........................................................................... --
--------------
Total minimum lease obligations............................................. 6,579,000
Less -- Amounts representing interest................................................ (807,000)
--------------
Present value of minimum lease obligations........................................... 5,772,000
Current maturities................................................................... (2,233,000)
--------------
Capital lease obligations, net of current maturities................................. $ 3,539,000
==============
</TABLE>
Connectivity Contracts
In order to provide its services, the Company must connect each
intra-building network to a local network and each metropolitan point of
presence to a national fiber optic connection. The Company has secured contracts
that range from monthly to five years for local transport and up to three years
for national inter-city transport. The Company incurs fixed monthly charges for
local connectivity. For national connectivity, the Company incurs fixed monthly
charges plus incremental charges for customer usage above a certain volume. In
addition, in the event the Company fails to meet its minimum volume commitments
for national connectivity; it may be obligated to pay underutilization charges.
Future minimum obligations as of September 30, 1999, related to the
Company's connectivity contracts are as follows:
<TABLE>
<S> <C>
2000.................................................................................. $ 1,406,000
2001.................................................................................. 247,000
2002.................................................................................. 136,000
2003.................................................................................. 75,000
2004.................................................................................. 24,000
--------------
Total minimum lease obligations............................................. $ 1,888,000
==============
</TABLE>
6. EQUITY TRANSACTIONS:
COMPENSATION CHARGE
The Company completed an initial public offering of its securities on
October 29, 1999 (see Note 7). Based on the ultimate valuation of the Company
determined by this offering and business activities and transactions which have
occurred prior to the completion of the offering, the Company was required to
record compensation expense and deferred compensation to reflect the difference
in the initial public offering price and management's determination of value
prior to the offering.
9
<PAGE> 10
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT -- (CONTINUED)
Based on the share price of the initial public offering of $18, the Company
was unable to reconcile the $13.50 per share difference between the offering
price and management's determination of fair value prior to this offering.
Accordingly, the Company recorded a compensation charge of $13.50 per share for
each restricted stock issuance or option grant to employees related to the
period subsequent to January 1, 1999. The total compensation charge as of
September 30, 1999, is approximately $25,961,000 of which approximately
$16,048,000 will be deferred and amortized over the remaining employee service
period. An additional compensation charge of approximately $6,374,000 will be
recorded for options granted to employees for the period October 1, 1999,
through October 29, 1999.
COMMON AND PREFERRED STOCK
In August 1999, the Company issued 17 shares of Series B Preferred Stock and
2,019,766 shares of common stock to a group of financial sponsors for
approximately $17,000,000 in cash.
Also in August 1999, the Company issued 34 shares of Series B Preferred
Stock and 4,039,531 shares of common stock for approximately $34,000,000 in
cash.
7. SUBSEQUENT EVENTS:
In October 1999, the Company issued warrants to acquire 6,530,242 shares of
common stock to real estate partners and their affiliates. The warrants are
exercisable upon the occurrence of certain events, as defined in the warrant
acquisition agreements and will have no exercise price.
The warrants and the rights associated with the warrants may be adjusted if
certain telecommunication license agreements are not executed in accordance with
the parameters outlined in the warrant acquisition agreements. Accordingly, the
measurement date for the warrants will be the date on which the
telecommunications license agreements are signed, as defined, and the real
estate partners effectively complete their performance element of the agreement.
At the measurement date, the Company will measure the fair value of the
warrants based on the fair value of the underlying common stock. As the terms of
the warrant allow the holder to acquire shares of common stock without any
additional consideration, the fair value of the warrant is equivalent to the
fair value of the common stock. Based upon the current structure of the
agreements, the fair value of the warrants will be capitalized as an intangible
asset and amortized over the term of the telecommunication license agreements.
The $18 per share common stock value on the date of the Company's public
offering would result in the fair value of the warrants of $118,000,000. This
results in approximately $11,800,000 of amortization on an annual basis.
Additionally, depending upon timing of the measurement dates related to the
issuance of the warrants, the total fair value may vary.
On October 25, 1999, the stockholders approved an amendment to the
1999 Stock Option Plan, providing for the issuance of up to 5,000,000 shares of
Class A common stock. Additionally on October 25, 1999, the Company amended its
certificate of incorporation to authorize the issuance of up to 1,000,100,000
shares of capital stock of which 1,000,000,000 shares were designated as common
stock, par value $.0001 per share, and 100,000 shares were designated as
preferred stock, par value $.0001 per share.
On October 29, 1999, the Company completed an initial public offering of
16,970,550 shares of common stock for which it received net proceeds of
approximately $284,891,706.
10
<PAGE> 11
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT -- (CONTINUED)
Simultaneous with the Company's initial public offering and pursuant to
contractual agreements with the preferred stockholders, all shares of preferred
stock were converted into shares of common stock. Accrued dividends on the
preferred stock were waived as of the initial public offering and recorded as a
contribution to capital. The 117 shares of preferred stock outstanding were
converted into 6,500,000 shares of common stock at the initial public offering
price of $18. Had the conversion of preferred stock occurred at the beginning of
each period presented, net income (loss) per common share would have been
$(1.31) and $(1.18), respectively, for the nine months ended September 30, 1998
and 1999.
In November 1999 the Company received commitment from a vendor to increase
the Company's lease facility to $65,000,000.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We are a facilities-based provider of broadband data, video and voice
communications services to small-and-medium-sized businesses in 16 major
metropolitan areas in the United States. We typically deliver our services over
fiber-optic networks that we design, construct, own and operate inside
large-and-medium-sized office buildings. Today, over this infrastructure, we
offer ultra high-speed Internet access, business-oriented television for display
on computer desktops, enhanced conference calling services and other broadband
data services. Broadband data services are services that are enabled by
high-speed dedicated data transmission capacity. As of September 30, 1999, we
owned and operated in-building fiber-optic networks inside 61 office buildings
with more than 33.6 million rentable square feet. We have agreements with
building owners to install and operate fiber-optic networks in more than 1,000
office buildings with more than 325 million rentable square feet.
Our Internet access services provide a direct connection to the Internet at
speeds up to 175 times faster than standard dial-up services and are always-on.
We believe that our service offers a combination of price and performance to our
target customers that is superior to competing offerings. Our business-oriented
television is the first of many additional connectivity services and
broadband-enabled applications and content that we intend to offer using our
in-building broadband infrastructure. We intend to take advantage of our growing
market presence and brand by also offering similar broadband services to our
customers' branch offices and other businesses located in buildings in which we
have not installed our fiber-optic networks.
We use our in-building fiber-optic networks to transmit data to and from
each of our customers at speeds of ten million bits of data per second. Using
commercially available equipment, we can increase this transmission speed to one
billion bits of data per second. We connect each of our in-building networks to
a central facility in each metropolitan area, usually over fiber-optic lines we
lease from other carriers. At this metropolitan hub, we aggregate and
disseminate network traffic for Internet connectivity and our other broadband
services.
Since our inception in December 1996, our principal activities have included
developing our business plan, raising capital, hiring management and other key
personnel, designing and developing our fiber-optic networks inside buildings,
acquiring equipment and facilities, entering into agreements with building
owners and real estate managers and beginning the initial deployment of our
fiber-optic networks.
To rapidly establish a strong position in the markets we target, we are
heavily investing in our fiber-optic networks. We incur costs in the design and
installation of our in-building infrastructure, which is typically installed
within a secure conduit located in the building's riser, which is the building's
vertical utility shaft. We also invest in electronic equipment that is needed to
connect our networks to the Internet. We expect to incur significant additional
costs building and refining our operational support systems; this includes the
purchase and implementation of software to facilitate customer acquisition,
billing, collections, and network management.
As a result of our development activities and the deployment of our
networks, from inception to date we have incurred significant operating losses,
net losses and negative EBITDA. We expect that the continued expansion of our
operations will result in increasing operating losses, net losses and negative
EBITDA. As a result of our limited operating history, prospective investors have
limited operating and financial data upon which to base an evaluation of our
performance and an investment in our common stock.
12
<PAGE> 13
NINE MONTHS ENDED SEPTEMBER 30, 1999,
COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998
Network Services Revenue. Network services revenue for the nine months ended
September 30, 1999, increased to $989,000 as compared to $104,000 for the
corresponding period of the prior year. Network services revenue for the nine
months ended September 30, 1999, includes the recognition in April 1999 of
$123,000 of previously fully reserved revenue which was earned upon the
successful deployment of a virtual private network. The remaining increase is
attributable to growth in the number of customers resulting from increased sales
and marketing efforts concentrated in our networked properties and the increased
penetration of our fiber-optic network into new buildings compared to the
corresponding period in 1998. As of September 30, 1999, our fiber-optic network
was installed inside 61 buildings with more than 33.6 million rentable square
feet as compared to September 30, 1998, when our networks were installed inside
3 buildings, with 1.9 million rentable square feet.
Network Operations. Network operations expenses were $4,791,000 for the nine
months ended September 30, 1999 and $1,483,000 for the nine months ended
September 30, 1998. This increase is consistent with expansion of our
fiber-optic network and resulting increase in transport, licensing and customer
support costs.
Selling Expense. Selling expense increased from $1,121,000 for the nine
months ended September 30, 1998, to $4,962,000 for the nine months ended
September 30, 1999. This increase is attributable to the continued expansion of
sales and marketing efforts including commissions, development of corporate
identification, promotional and advertising materials, the establishment of
sales demonstration centers, market launch events and hiring sales personnel.
General and Administrative Expenses. General and administrative expenses
were $16,096,000 for the nine months ended September 30, 1999 and $5,662,000 for
the nine months ended September 30, 1998. This increase is consistent with our
development activities and is attributable to the rapid growth in number of
employees we incurred in connection with building our operating infrastructure.
Our number of general and administrative employees increased to 216 as of
September 30, 1999, as compared to 81 at September 30, 1998.
Amortization of Deferred Compensation. Amortization of deferred compensation
was $9,913,000 for the nine months ended September 30, 1999.
Depreciation and Amortization. Depreciation and amortization for the nine
months ended September 30, 1999, increased to $1,720,000 as compared to $225,000
for the corresponding period of the prior year. This increase was primarily due
to the increase in system infrastructure and system equipment placed in service.
Other Income (Expense). Other income (expense) was $501,000 for the nine
months ended September 30, 1999 and $(457,000) for the nine months ended
September 30, 1998. The change in other income (expense) is primarily due to an
increase in interest income as a result of the recapitalization and
reorganization in late 1998 and the equity offerings in August 1999.
Provision For Income Taxes. For the nine months ended September 30, 1999 and
September 30, 1998, no provision for taxes was recognized as we operated at a
loss throughout both periods.
THREE MONTHS ENDED SEPTEMBER 30, 1999,
COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998
Network Services Revenue. Network services revenue for the three months
ended September 30, 1999, increased to $442,000 as compared to $77,000 for the
corresponding period of the prior year. The increase is attributable to growth
in the number of customers resulting from increased sales and marketing efforts
concentrated in our networked properties and the increased penetration of our
fiber-optic network into new buildings compared to the corresponding period in
1998. As of September 30, 1999, our fiber-optic network was installed inside 61
buildings with more than 33.6 million rentable square
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<PAGE> 14
feet as compared to September 30, 1998, when our networks were installed inside
3 buildings, with 1.9 million rentable square feet.
Network Operations. Network operations expenses were $1,972,000 for the
three months ended September 30, 1999 and $775,000 for the three months ended
September 30, 1998. This increase is consistent with expansion of our
fiber-optic network and resulting increase in transport, licensing and customer
support costs.
Selling Expense. Selling expense increased from $522,000 for the three
months ended September 30, 1998, to $2,556,000 for the three months ended
September 30, 1999. This increase is attributable to the continued expansion of
sales and marketing efforts including commissions, development of corporate
identification, promotional and advertising materials, the establishment of
sales demonstration centers, market launch events and hiring sales personnel.
General and Administrative Expenses. General and administrative expenses
were $6,889,000 for the three months ended September 30, 1999 and $2,840,000 for
the three months ended September 30, 1998. This increase is consistent with our
development activities and is attributable to the rapid growth in number of
employees we incurred in connection with building our operating infrastructure.
Our number of general and administrative employees increased to 216 as of
September 30, 1999, as compared to 81 at September 30, 1998.
Amortization of Deferred Compensation. Amortization of deferred
compensation was $4,357,000 for the three months ended September 30, 1999.
Depreciation and Amortization. Depreciation and amortization for the three
months ended September 30, 1999, increased to $830,000 as compared to $159,000
for the corresponding period of the prior year. This increase was primarily due
to the increase in system infrastructure and system equipment placed in service.
Other Income (Expense). Other income (expense) was $132,000 for the three
months ended September 30, 1999 and $(253,000) for the three months ended
September 30, 1998. The change in other income (expense) is primarily due to an
increase in interest income as a result of the recapitalization and
reorganization in late 1998 and the equity offerings in August 1999.
Provision For Income Taxes. For the three months ended September 30, 1999
and September 30, 1998, no provision for taxes was recognized as we operated at
a loss throughout both periods.
LIQUIDITY AND CAPITAL RESOURCES
We have required significant capital to fund the construction and
installation of our fiber-optic networks within buildings and to purchase
electronic equipment for installation in building and metropolitan points of
presence. As of September 30, 1999, we had made capital expenditures of
$27,611,000 since inception. We expect that our capital expenditures will
increase substantially in future periods as we construct our networks and
purchase more equipment. We will continue to seek access to additional
buildings. If we are successful in gaining access to additional buildings, we
will have substantial needs for additional capital for an indefinite period. We
also expect to have substantial and increasing operating losses and net losses.
In August 1999, we issued shares of common and preferred stock to a group of
financial sponsors for approximately $17,000,000. Additionally, in August 1999,
we issued shares of common and preferred stock to our real estate partners for
approximately $34,000,000.
As of September 30, 1999, we have financed approximately $7,524,000 of
equipment additions through vendor sponsored lease facilities and have
outstanding capital lease obligations of approximately $5,772,000.
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<PAGE> 15
As of September 30, 1999, we had committed to pay approximately $1,888,000
to carriers under our existing connectivity contracts.
As of September 30, 1999, we had cash and cash equivalents of $60,138,000.
In October 1999, we issued warrants to acquire 6,530,242 additional shares
of our common stock to our real estate partners. These warrants are exercisable
upon our real estate partners meeting certain performance obligations as
outlined in the warrant acquisition agreements.
On October 29, 1999, we completed an initial public offering of 16,970,550
shares of our common stock for which we received net proceeds of approximately
$285,000,000. We intend to use more than $175,000,000 of the net proceeds from
this offering for construction of in-building fiber-optic networks and the
remainder for working capital and general corporate purposes, including to fund
operating losses. We may also use a portion of the net proceeds to acquire or
invest in complementary businesses, technologies, services or products. However,
we currently have no material commitments or agreements with respect to any of
these types of transactions.
Simultaneous with this offering our preferred stockholders converted all of
their preferred stock for 6,500,000 shares of common stock. Had the conversion
of preferred stock occurred at the beginning of each period, net income (loss)
per common share would have been $(1.31), and $(1.18) the nine months ended
September 30, 1998 and 1999, respectively.
We estimate that the net proceeds received from the initial public offering
in addition to our cash on hand will be sufficient to fund our operations and
the projected deployment of our network through approximately the middle of
2001. We do, however, expect to continue our growth, expansion and the further
development of our network and services beyond that point. Accordingly, we
expect that we will eventually need to arrange for additional sources of capital
through the issuance of debt or equity or additional bank borrowings. We have no
commitments other than those described above for any such additional financing,
and we cannot be sure that we will be able to obtain any such additional
financing at the times required and on terms and conditions acceptable to us. In
such event, our growth could slow and operations could be adversely affected.
The actual amount and timing of our future capital requirements may differ
materially from our estimates as a result of many factors. These factors
include:
o our ability to meet our construction schedules;
o obtaining favorable prices for purchases of equipment;
o our ability to develop, acquire and integrate the necessary operational
support systems;
o the cost of network development in each of our markets;
o demand for our services;
o the nature and penetration of new services that may be offered by us;
o regulatory changes; and
o changes in technology and competitive developments beyond our control.
We also expect that we will require additional financing or require
financing sooner than anticipated if our current business plans change, the
assumptions underlying those plans are inaccurate, if we engage in any material
acquisitions.
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<PAGE> 16
Should we require additional capital, we may raise such capital with proceeds
from public or private sales of equity and debt securities, credit facilities
and other borrowings. There can be no assurance that such financing will be
available on a timely basis, on terms acceptable to us or at all.
YEAR 2000 READINESS DISCLOSURE
We view Year 2000 readiness as the ability to:
o correctly handle date information before, on and after December 31, 1999;
o function properly without material changes in operation resulting from
the advent of a new century; and
o recognize the Year 2000 as a leap year.
Process. Our Year 2000 project is composed of four phases:
(1) Inventory. In the inventory phase, we identified all of the systems
and equipment that could be impacted by the Year 2000 problem. The inventory
phase is complete for all systems and equipment.
(2) Assessment. In the assessment phase, we assessed whether the systems
and equipment identified in the inventory are Year 2000 ready. The
assessment phase is complete for all systems and equipment.
(3) Remediation. In the remediation phase, we seek to remedy any Year
2000 problems in systems or equipment we identified in the assessment phase.
Where the source of a Year 2000 problem is software or equipment provided by
a third party, we either obtain a Year 2000 ready upgrade from the third
party or obtain equivalent software or equipment from another source. The
remediation phase has been finished.
(4) Testing. In the testing phase, we test the systems and equipment
that were the subject of remediation efforts to verify that they are Year
2000 ready. The testing phase has been completed.
Third Party Products. We acquired our material systems and equipment
from third party vendors, and we have received assurances from our major
third party vendors either that the products we use are Year 2000 ready, or
that their recommended upgrades, which we have installed, are Year 2000
ready. In addition to these assurances, with the exception of our telephone
and security systems, we test all third party products to determine whether
they are Year 2000 ready. With the exception of one product from one vendor,
which we have not assessed and for which we have not received any assurances
from the vendor, we are not currently aware of any material operational
issues associated with preparing our systems for the Year 2000. With respect
to the one product for which we have not received assurances, we have
replaced the product with one that is Year 2000 ready. Since May 1999, we
have required, as part of our quality testing process, that all new products
and services are tested for Year 2000 readiness before they are introduced.
Despite the assurances we receive and the testing we perform, we may
experience material unanticipated problems, both operational and other, as a
result of the Year 2000. In addition, there can be no guarantee that we
identified and remediated all of our material systems that could potentially
be impacted by the Year 2000. We may also experience material unexpected
costs or business interruption caused by undetected errors or defects in the
technology used in our systems. This could have a material adverse effect on
our business, financial condition, results of operations and the price of
our common stock.
Services. We rely on telecommunications providers, building managers and
other service providers to deliver services to our customers. Our ability to
provide our Internet access and other services is dependent on the Year 2000
readiness of these third parties.
We have sought and received assurances from the major telecommunications
carriers we use that they are Year 2000 ready, and we have received such
assurances from the majority of such building
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<PAGE> 17
managers. Nevertheless, we cannot test the Year 2000 readiness of such
carriers, managers and providers, and failure of any of these third parties
to be Year 2000 ready by January 1, 2000 could result in a deterioration in
the performance of our network or other systems, or a complete system
failure, which could have a material adverse effect on our business,
financial condition, results of operations and the price of our common
stock. Additionally, the Internet could face serious disruptions arising
from the Year 2000 problem.
We are also subject to external forces that might generally affect
industry and commerce, such as utility Year 2000 compliance failures and
related service interruptions. All of these factors could have a material
adverse effect on our business, financial condition, results of operations
and the price of our common stock.
Customers. The ability of our customers to receive our services depends
on the readiness of their personal computer equipment and the equipment and
services of telecommunications and other third party vendors. We do not
currently have any information concerning the Year 2000 readiness status of
our customers. As is the case with other similarly situated companies, if
our current or future customers fail to achieve Year 2000 readiness, it
could have a material adverse effect on our business, financial condition,
results of operations and the price of our common stock.
Costs/Contingency Plans. The total budget for our Year 2000 project is
approximately $500,000 and is being expensed as incurred. We do not expect
to exceed the estimated budget.
We have not developed a contingency plan to address situations that may
result if either we or third parties upon which we rely are unable to
achieve Year 2000 readiness. We intend to perform a risk analysis for our
key services and develop a contingency plan where appropriate. In addition,
in order to mitigate the effects of Year 2000 readiness problems from
telecommunications carriers, which are beyond our control, we utilize
multiple carriers in key locations. The cost of developing and implementing
a comprehensive contingency plan, if necessary, could be material.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-Q
"Safe Harbor" Statements under the Private Securities Litigation Reform Act
of 1995. A number of the statements made in the foregoing "Management's
Discussion and Analysis of Financial Condition and Results of Operation" are
"forward-looking statements." These forward-looking statements include, but are
not limited to, statements about our plans, objectives, expectations, intentions
and assumptions and other statements that are not historical facts. We have
attempted to identify, in context, some of the factors that we currently believe
may cause actual future experience and results to differ from current
expectations regarding the relevant matter or subject area. The operation and
results of our business also may be subject to the effect of other risks and
uncertainties described from time to time in our reports filed with the
Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to financial market risk, including changes in interest rates
and marketable equity security prices, relates primarily to our investment
portfolio and to a lesser extent to our outstanding debt obligations. We
typically do not attempt to reduce or hedge our market exposure on our
investment securities because a substantial majority of our investments are in
fixed-rate, short-term securities. We do not have any derivative instruments.
The fair value of our investment portfolio or related income would not be
significantly impacted by either a 100 basis point increase or decrease in
interest rates due mainly to the fixed-rate, short-term nature of the
substantial majority of our investment portfolio. In addition, substantially all
of our outstanding indebtedness at September 30, 1999, is fixed-rate debt.
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<PAGE> 18
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
(a) Inapplicable.
(b) Inapplicable.
(c) On August 19, 1999, Allied Riser issued 17 shares of Series B
Preferred Stock and 2,019,766 shares of common stock to a group of
financial sponsors, including GS Capital Partners III, L.P., an
affiliate of Goldman, Sachs & Co., for approximately $17,000,000 in
cash. On August 19, 1999, Allied Riser issued 34 shares of Series B
Preferred Stock and 4,039,531 shares of common stock to a group of
real estate investors for approximately $34,000,000 in cash. The terms
of the Series B Preferred Stock provided that upon the occurrence of a
qualifying public offering, each share of Series B Preferred Stock
would be converted into a number of shares of common stock. In
connection with the recent initial public offering of the Company, the
shares of Series B Preferred Stock issued in August, 1999 were
converted into 944,445 shares and 1,888,889 shares, respectively, of
common stock.
Each of the above issuances of Series B Preferred Stock and common
stock was effected pursuant to the exemption of Section 4(2) of the
Securities Act of 1933 in reliance upon the representation of the
purchasers and their agreement to resell such securities only pursuant
to a registration statement or in a transaction exempt from the
registration requirements of such act.
(d) On October 29, 1999, Allied Riser completed its initial public
offering of common stock. The effective date of its Registration
Statement on Form S-1 (Commission File No. 333-85597) was October 28,
1999, pursuant to which Allied Riser registered the offer and sale of
15,750,000 shares of common stock par value $.0001 per share, for an
aggregate offering price of $283,500,000. Allied Riser completed the
offering, selling 16,970,550 shares of common stock for the aggregate
offering price of $305,469,900, including the exercise by the
underwriters of their over-allotment option to purchase an additional
1,220,550 shares of common stock at the offering price. The managing
underwriters were Goldman, Sachs & Co., Merrill Lynch & Co., Donaldson
Lufkin & Jenrette and Thomas Weisel Partners LLC.
The Company incurred expenses of approximately $20,578,194, of which
approximately $18,328,194 represented underwriting discounts and
commissions and approximately $2,250,000 represented other expenses
related to the offering. In addition, the shares issued to GS Capital
Partners III, L.P. described in (c) above were deemed to be
underwriting compensation by the National Association of Securities
Dealers, Inc. None of the expenses incurred was paid directly or
indirectly to any director or officer of the Company or their
associates, persons owning 10% or more of any class of equity
securities of the Company, or an affiliate of the Company. The net
offering proceeds to the Company after total expenses was
approximately $284,891,706.
We have not used any of the net proceeds from the initial public
offering. The net proceeds have been invested in cash, cash
equivalents and short-term investments. We plan to use the proceeds
for construction of in-building networks, for working capital and
general corporate purposes. We may also use a portion of the net
proceeds to acquire or invest in complementary businesses,
technologies, services or products. The use of the proceeds from the
offering does not represent a material change in the use of proceeds
described in the prospectus contained in the Company's Registration
Statement on Form S-1.
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<PAGE> 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 25, 1999, pursuant to a written Waiver and Consent, 117 shares
representing 100% of the holders of the Company's outstanding preferred stock,
and 26,620,138 shares representing 80% of the Company's common stock approved
(i) the issuance of registered securities in an initial public offering of the
Company's common stock, (ii) an increase to 5,000,000 shares in the number of
shares of common stock issuable pursuant to the Company's Amended and Restated
1999 Stock Option and Equity Incentive Plan, (iii) an amendment and restatement
of the Company's Certificate of Incorporation effecting certain changes as a
result of a 1 to 15 reverse stock split of the Company's common stock approved
by the Board of Directors on September 18, 1999, and (iv) certain waivers and
consents required of the preferred stockholders prior to the Company's initial
public offering as contemplated in certain Agreements between the Company and
its financial sponsors.
On November 3, 1999, the rights, powers, and designations of the Company's
preferred stock, which was outstanding prior to the initial public offering of
the Company's common stock, were removed from the Certificate of Incorporation,
pursuant to a written Consent of Stockholders by a vote of 27,769,178 shares
representing 50.08% of the Company's common stock. As provided in the
Certificate of Incorporation, upon receipt of approval of a majority of the
holders of the common stock in such written consent, notice of such amendment
with respect to the preferred stock was delivered to stockholders whose consent
had not been previously sought.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
3.1 Amended and Restated Certificate of Incorporation
effective November 3, 1999
27.1 Financial Data Schedules
27.2 Financial Data Schedules
27.3 Financial Data Schedules
27.4 Financial Data Schedules
(b) Reports on Form 8-K.
None.
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<PAGE> 20
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.
December 12, 1999 ALLIED RISER COMMUNICATIONS CORPORATION
By: /s/ Todd C. Doshier
-----------------------------------
Todd C. Doshier
Senior Vice President and Chief
Financial Officer
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation
effective November 3, 1999
27.1 Financial Data Schedules
27.2 Financial Data Schedules
27.3 Financial Data Schedules
27.4 Financial Data Schedules
</TABLE>
<PAGE> 1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ALLIED RISER COMMUNICATIONS CORPORATION
----------------------------------------------------
Pursuant to Sections 242 and 245 of the
Delaware General Corporation Law
----------------------------------------------------
Allied Riser Communications Corporation (the "Corporation"), a
corporation organized and existing under the General Corporation Law of the
State of Delaware (the "GCL"), does hereby certify as follows:
(1) The name of the Corporation is Allied Riser Communications
Corporation. The original certificate of incorporation of the Corporation was
filed with the office of the Secretary of State of the State of Delaware on the
second day of November 1998 under the name Allied Riser Communications Holdings,
Inc.
(2) This Amended and Restated Certificate of Incorporation was
duly adopted by the Board of Directors of the Corporation (the "Board of
Directors") and by the stockholders of the Corporation in accordance with
Sections 242 and 245 of the GCL.
(3) This Amended and Restated Certificate of Incorporation
restates and integrates and further amends the certificate of incorporation of
the Corporation, as heretofore amended or supplemented.
(4) The text of the Certificate of Incorporation is amended
and restated in its entirety as follows:
FIRST: The name of the Corporation is Allied Riser Communications
Corporation (the "Corporation").
SECOND: The address of the registered office of the Corporation in the
State of Delaware is 1013 Center Road, County of New Castle, Wilmington,
Delaware 19805. The name of its registered agent at that address is Corporation
Service Company.
<PAGE> 2
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware (the "GCL").
FOURTH: (a) Authorized Capital Stock. The total number of shares of
stock which the Corporation shall have authority to issue is one billion one
hundred thousand (1,000,100,000) shares of capital stock, consisting of (i) one
billion (1,000,000,000) shares of common stock, par value $.0001 per share (the
"Common Stock"), and (ii) one hundred thousand (100,000) shares of preferred
stock, par value $.0001 per share (the "Preferred Stock").
(b) Common Stock. The powers, preferences and rights, and the
qualifications, limitations and restrictions, are as follows:
(1) Ranking. Except as otherwise expressly provided in this
Amended and Restated Certificate of Incorporation, the powers, preferences and
rights of the holders of Common Stock and the qualifications, limitations and
restrictions thereof, shall be in all respects identical to any other stock
issued by the Corporation.
(2) Voting. Except as otherwise expressly required by law
or provided in this Amended and Restated Certificate of Incorporation, and
subject to any voting rights provided to holders of Preferred Stock at any time
outstanding, the holders of any outstanding shares of Common Stock shall vote
together as a single class on all matters with respect to which stockholders are
entitled to vote under applicable law, this Amended and Restated Certificate of
Incorporation or the ByLaws of the Corporation, or upon which a vote of
stockholders is otherwise duly called for by the Corporation. At each annual or
special meeting of stockholders, each holder of record of shares of Common Stock
on the relevant record date shall be entitled to cast 1 vote in person or by
proxy for each share of the Common Stock standing in such holder's name on the
stock transfer records of the Corporation.
(3) No Cumulative Voting. The holders of shares of Common
Stock shall not have cumulative voting rights.
(4) Amendments Affecting Stock. So long as any shares of
Common Stock are outstanding, the Corporation shall not, without the affirmative
vote of at least a majority (or such higher percentage, if any, as may then be
required by applicable law) of the outstanding shares of Common Stock voting as
a single
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<PAGE> 3
class, (A) amend, alter or repeal any provision of Subsections 2 through 8 of
this paragraph (b) of this Article FOURTH so as to affect the relative rights,
preferences, qualifications, limitations or restrictions of the Common Stock or
(B) take any other action upon which class voting is required by law.
(5) Dividends; Stock Splits. Subject to the rights of the
holders of Preferred Stock, and subject to any other provisions of this Amended
and Restated Certificate of Incorporation, as it may be amended from time to
time, holders of shares of Common Stock shall be entitled to receive such
dividends and other distributions in cash, stock or property of the Corporation
when, as and if declared thereon by the Board of Directors from time to time
out of assets or funds of the Corporation legally available therefor.
(6) Liquidation, Dissolution, etc. In the event of any
liquidation, dissolution or winding up (either voluntary or involuntary) of the
Corporation, the holders of shares of Common Stock shall be entitled to receive
the assets and funds of the Corporation available for distribution after
payments to creditors and to the holders of any Preferred Stock of the
Corporation that may at the time be outstanding, in proportion to the number of
shares held by them, respectively, without regard to class.
(7) No Preemptive or Subscription Rights. No holder of
shares of Common Stock shall be entitled to preemptive or subscription rights.
(8) Power to Sell and Purchase Shares. Subject to the
requirements of applicable law, the Corporation shall have the power to issue
and sell all or any part of any shares of any class of stock herein or hereafter
authorized to such persons, and for such consideration, as the Board of
Directors shall from time to time, in its discretion, determine, whether or not
greater consideration could be received upon the issue or sale of the same
number of shares of another class, and as otherwise permitted by law. Subject to
the requirements of applicable law, the Corporation shall have the power to
purchase any shares of any class of stock herein or hereafter authorized from
such persons, and for such consideration, as the Board of Directors shall from
time to time, in its discretion, determine, whether or not less consideration
could be paid upon the purchase of the same number of shares of another class,
and as otherwise permitted by law.
(c) Preferred Stock. The Board of Directors is hereby expressly
authorized to provide for the issuance of all or any shares of the Preferred
Stock in
3
<PAGE> 4
one or more classes or series, and to fix for each such class or series such
voting powers, full or limited, or no voting powers, and such designations,
preferences and relative, participating, optional or other special rights and
such qualifications, limitations or restrictions thereof, as shall be stated and
expressed in the resolution or resolutions adopted by the Board of Directors
providing for the issuance of such class or series, including, without
limitation, the authority to provide that any such class or series may be (i)
subject to redemption at such time or times and at such price or prices; (ii)
entitled to receive dividends (which may be cumulative or non-cumulative) at
such rates, on such conditions, and at such times, and payable in preference to,
or in such relation to, the dividends payable on any other class or classes or
any other series; (iii) entitled to such rights upon the dissolution of, or upon
any distribution of the assets of, the Corporation; or (iv) convertible into, or
ex changeable for, shares of any other class or classes of stock, or of any
other series of the same or any other class or classes of stock, of the
Corporation at such price or prices or at such rates of exchange and with such
adjustments; all as may be stated in such resolution or resolutions.
FIFTH: The following provisions are inserted for the management of the
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
(a) The business and affairs of the Corporation shall be
managed by or under the direction of the Board of Directors.
(b) The number of directors of the Corporation shall be as
from time to time fixed by, or in the manner provided in, the By-Laws of the
Corporation. Election of directors need not be by written ballot unless the
By-Laws so provide.
(c) The directors shall be divided into three classes,
designated Class I, Class II and Class III. Each class shall consist, as nearly
as may be possible, of one-third of the total number of directors constituting
the entire Board of Directors. The initial division of the Board of Directors
into classes shall be made by the decision of the affirmative vote of a majority
of the entire Board of Directors. The term of the initial Class I directors
shall terminate on the date of the 2000 annual meeting; the term of the initial
Class II directors shall terminate on the date of the 2001 annual meeting; and
the term of the initial Class III directors shall terminate on the date of the
2002 annual meeting. At each succeeding annual meeting of stock holders
beginning in 2002, successors to the class of directors whose term expires at
4
<PAGE> 5
that annual meeting shall be elected for a three-year term. If the number of
directors is changed, any increase or decrease shall be apportioned among the
classes so as to maintain the number of directors in each class as nearly equal
as possible, and any additional director of any class elected to fill a vacancy
resulting from an increase in such class shall hold office for a term that shall
coincide with the remaining term of that class, but in no case will a decrease
in the number of directors shorten the term of any incumbent director.
(d) A director shall hold office until the annual meeting for
the year in which his or her term expires and until his or her successor shall
be elected and shall qualify, subject, however, to prior death, resignation,
retirement, disqualification or removal from office.
(e) Subject to the terms of any one or more classes or series
of Preferred Stock, any vacancy on the Board of Directors that results from an
increase in the number of directors may be filled by a majority of the Board of
Directors then in office, provided that a quorum is present, and any other
vacancy occurring on the Board of Directors may be filled by a majority of the
Board of Directors then in office, even if less than a quorum, or by a sole
remaining director. Any director of any class elected to fill a vacancy
resulting from an increase in the number of directors of such class shall hold
office for a term that shall coincide with the remaining term of that class.
Any director elected to fill a vacancy not resulting from an increase in the
number of directors shall have the same remaining term as that of his
predecessor. Subject to the rights, if any, of the holders of shares of
Preferred Stock then outstanding, any or all of the directors of the Corporation
may be removed from office at any time, but only for cause and only by the
affirmative vote of the holders of at least a majority of the voting power of
the Corporation's then outstanding capital stock entitled to vote generally in
the election of directors. Notwithstanding the foregoing, whenever the holders
of any one or more classes or series of Preferred Stock issued by the
Corporation shall have the right, voting separately by class or series, to elect
directors at an annual or special meeting of stockholders, the election, term of
office, filling of vacancies and other features of such directorships shall be
governed by the terms of this Amended and Restated Certificate of Incorporation
applicable thereto, and such directors so elected shall not be divided into
classes pursuant to this Article FIFTH unless expressly provided by such terms.
(f) To be timely, a stockholder's notice to the Secretary must
be delivered to or mailed and received at the principal executive offices of the
Corporation (a) in the case of an annual meeting, not less than 90 days prior
to the anniversary
5
<PAGE> 6
date of the immediately preceding annual meeting of stockholders; provided,
however, that in the event that the annual meeting is called for a date that is
not within thirty (30) days before or after such anniversary date, notice by the
stock holder in order to be timely must be so received not later than the close
of business on the fifteenth (15th) day following the day on which such notice
of the date of the annual meeting was mailed or such public disclosure of the
date of the annual meeting was made, whichever first occurs; and (b) in the case
of a special meeting of stockholders called for the purpose of electing
directors, not later than the close of business on the fifteenth (15th) day
following the day on which notice of the date of the special meeting was mailed
or public disclosure of the date of the special meeting was made, whichever
first occurs.
(g) In addition to the powers and authority hereinbefore or by
statute expressly conferred upon them, the directors are hereby empowered to
exercise all such powers and do all such acts and things as may be exercised or
done by the Corporation, subject, nevertheless, to the provisions of the GCL,
this Amended and Restated Certificate of Incorporation, and any By-Laws adopted
by the stock holders; provided, however, that no By-Laws hereafter adopted by
the stockholders shall invalidate any prior act of the directors which would
have been valid if such By-Laws had not been adopted.
SIXTH: No director shall be personally liable to the Corporation or any
of its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the directors duty of
loyalty to the Corporation or its stockholders; (ii) for acts or omissions not
in good faith or that involve misconduct or a knowing violation of the law;
(iii) under the GCL regarding unlawful dividends and stock purchases; or (iv)
for any transaction from which the director derived an improper personal
benefit. If the GCL is amended hereafter to authorize the further elimination or
limitation of the liability of directors, then the liability of a director of
the Corporation shall be eliminated or limited to the fullest extent authorized
by the GCL, as so amended. Any repeal or modification of this Article SIXTH by
the stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification with respect to acts or omissions occurring prior to such repeal
or modification.
SEVENTH: The Corporation shall indemnify its directors and officers to
the fullest extent authorized or permitted by law, as now or hereafter in
effect, and such right to indemnification shall continue as to a person who has
ceased to be a director or officer of the Corporation and shall inure to the
benefit of his or her heirs, executors
6
<PAGE> 7
and personal and legal representatives; provided, however, that, except for
proceedings to enforce rights to indemnification, the Corporation shall not be
obligated to indemnify any director or officer (or his or her heirs, executors
or personal or legal representatives) in connection with a proceeding (or part
thereof) initiated by such person unless such proceeding (or part thereof) was
authorized or consented to by the Board of Directors. The right to
indemnification conferred by this Article SEVENTH shall include the right to be
paid by the Corporation the expenses incurred in defending or otherwise
participating in any proceeding in advance of its final disposition.
The Corporation may, to the extent authorized from time to
time by the Board of Directors, provide rights to indemnification and to the
advancement of expenses to employees and agents of the Corporation similar to
those conferred in this Article SEVENTH to directors and officers of the
Corporation.
The rights to indemnification and to the advance of expenses
conferred in this Article SEVENTH shall not be exclusive of any other right
which any person may have or hereafter acquire under this Amended and Restated
Certificate of Incorporation, the By-Laws of the Corporation, any statute,
agreement, vote of stock holders or disinterested directors or otherwise.
Any repeal or modification of this Article SEVENTH by the
stock holders of the Corporation shall not adversely affect any rights to
indemnification and to the advancement of expenses of a director or officer of
the Corporation existing at the time of such repeal or modification with respect
to any acts or omissions occurring prior to such repeal or modification.
Notwithstanding anything contained in this Article SEVENTH to
the contrary, in no event shall the Corporation indemnify or advance any
expenses pursuant to this Article SEVENTH to any person who is an "Original
Shareholder" (as defined in that certain Indemnification Agreement dated as of
November 23, 1998 (as amended from time to time, the "Indemnification
Agreement")) among the Corporation, EGI-ARC Investors, L.L.C., Telecom Partners
II, L.P., Crescendo World Fund, LLC Eagle Ventures WF, LLC, Crescendo III, L.P.,
Lawrence Equity Group, LLC and the other parties thereto with respect to or in
connection with any matter of the nature described by Section 2.1(1) of the
Indemnification Agreement.
EIGHTH: Any action required or permitted to be taken by the
stockholders of the Corporation must be effected at a duly called annual or
special meeting of
7
<PAGE> 8
stockholders of the Corporation, and the ability of the stockholders to consent
in writing to the taking of any action is hereby specifically denied.
NINTH: Meetings of stockholders may be held within or without the State
of Delaware, as the By-Laws may provide. The books of the Corporation may be
kept (subject to any provision contained in the GCL) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the By-Laws of the Corporation.
TENTH: Unless otherwise required by law, special meetings of
stockholders, for any purpose or purposes, may be called by either (i) the
Chairman of the Board of Directors, if there be one, (ii) the President or (iii)
the Board of Directors. The ability of the stockholders to call a special
meeting of stockholders is hereby specifically denied.
ELEVENTH: In furtherance and not in limitation of the powers conferred
upon it by the laws of the State of Delaware, the Board of Directors shall have
the power to adopt, amend, alter or repeal the Corporation's By-Laws. The
affirmative vote of at least a majority of the entire Board of Directors shall
be required to adopt, amend, alter or repeal the Corporation's By-Laws. The
Corporation's By-Laws also may be adopted, amended, altered or repealed by the
affirmative vote of the holders of at least eighty percent (80%) of the voting
power of the shares entitled to vote at an election of directors.
TWELFTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Amended and Restated Certificate of
Incorporation in the manner now or hereafter prescribed in this Amended and
Restated Certificate of Incorporation, the Corporation's By-Laws or the GCL, and
all rights herein conferred upon stockholders are granted subject to such
reservation; provided, however, that, notwithstanding any other provision of
this Amended and Restated Certificate of Incorporation (and in addition to any
other vote that may be required by law), the affirmative vote of the holders of
at least eighty percent (80%) of the voting power of the shares entitled to vote
at an election of directors shall be required to amend, alter, change or repeal,
or to adopt any provision as part of this Amended and Restated Certificate of
Incorporation inconsistent with the purpose and intent of Article FIFTH and
ELEVENTH and this Amended and Restated Certificate of Incorporation or this
Article TWELFTH.
8
<PAGE> 9
IN WITNESS WHEREOF, the Corporation has caused this Amended
and Restated Certificate of Incorporation to be executed on its behalf this 3rd
day of November, 1999.
Allied Riser Communications Corporation
By: /s/ David H. Crawford
---------------------------------------------
Name: David H. Crawford
Title: Chief Executive Officer
9
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