<PAGE> 1
===============================================================================
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 JUNE 30, 2000
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 [X] No [ ]
----------------
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 July 31, 2000
-------------- ----------------------------
<S> <C> <C>
Common Stock, $.0001 par value 57,354,420
</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, 1999,
and June 30, 2000 (Unaudited).............................................................. 3
Consolidated Statements of Operations for the Three Months
Ended June 30, 1999 and 2000 (Unaudited)................................................... 4
Consolidated Statements of Operations for the Six Months
Ended June 30, 1999 and 2000 (Unaudited)................................................... 5
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 2000 (Unaudited)................................................... 6
Notes to Consolidated Financial Statements (Unaudited)........................................ 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................... 15
PART II. OTHER INFORMATION
Item 2. Changes in Securities......................................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders........................................... 17
Item 6. Exhibits and Reports on Form 8-K.............................................................. 18
Signatures.................................................................................... 18
</TABLE>
2
<PAGE> 3
PART I.FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
----------- ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................ $ 152,564 $ 196,874
Short-term investments .............................................. 162,013 166,334
Accounts receivable, net of reserve of $19 and $84, respectively .... 259 1,301
Prepaid expenses and other current assets ............................ 5,454 7,533
--------- ---------
Total current assets ............................................... 320,290 372,042
PROPERTY AND EQUIPMENT, net ............................................. 46,577 129,775
REAL ESTATE ACCESS RIGHTS, net of accumulated amortization of
$2,036 and $9,378, respectively ...................................... 107,099 145,901
GOODWILL, net of accumulated amortization of $0 and $383, respectively .. -- 4,675
OTHER ASSETS ............................................................ 1,088 8,309
--------- ---------
Total assets ....................................................... $ 475,054 $ 660,702
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ..................................................... $ 2,817 $ 2,179
Accrued liabilities .................................................. 12,095 45,727
Current maturities of capital lease obligations ...................... 3,049 13,169
Deferred revenue - current ........................................... -- 338
--------- ---------
Total current liabilities ....................................... 17,961 61,413
CAPITAL LEASE OBLIGATIONS, net of current maturities .................... 4,679 19,604
CONVERTIBLE DEBENTURES (7.50% interest payable in stock or cash) ........ -- 150,000
--------- ---------
Total liabilities ............................................... 22,640 231,017
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock, $.0001 par value, 1,000,000,000 shares authorized,
56,569,000 and 57,358,000 outstanding as of December 31, 1999
and June 30, 2000, respectively (net of 96,000 and 371,000 treasury
shares, respectively) .............................................. 6 6
Additional paid-in capital ........................................... 434,930 453,339
Warrants, authorizing the issuance of 6,336,000 and 6,854,000 shares
as of December 31, 1999 and June 30, 2000, respectively ............ 109,135 146,054
Deferred compensation ................................................ (17,654) (14,618)
Accumulated deficit .................................................. (74,003) (155,096)
--------- ---------
Total stockholders' equity ...................................... 452,414 429,685
--------- ---------
Total liabilities and stockholders' equity ...................... $ 475,054 $ 660,702
========= =========
</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 JUNE 30, 1999 AND 2000
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
1999 2000
------------ ------------
(UNAUDITED)
<S> <C> <C>
NETWORK SERVICES REVENUE ..................................... $ 401 $ 1,972
OPERATING EXPENSES:
Network operations ........................................ 1,651 10,198
Selling expense ........................................... 1,801 11,302
General and administrative expenses ....................... 5,599 15,892
Amortization of deferred compensation and other stock based
expenditures ........................................... 5,435 3,693
Amortization of real estate access rights ................. -- 3,873
Depreciation and amortization ............................. 504 3,947
------------ ------------
Total operating expenses ............................. 14,990 48,905
------------ ------------
OPERATING INCOME (LOSS) ...................................... (14,589) (46,933)
OTHER INCOME (EXPENSE):
Interest expense .......................................... (390) (848)
Interest income ........................................... 344 3,713
------------ ------------
Total other income (expense) ......................... (46) 2,865
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES ............................ (14,635) (44,068)
------------ ------------
PROVISION FOR INCOME TAXES ................................... -- --
------------ ------------
NET INCOME (LOSS) ............................................ (14,635) (44,068)
ACCRUED DIVIDENDS ON PREFERRED STOCK ......................... (1,650) --
------------ ------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK ................. $ (16,285) $ (44,068)
============ ============
NET INCOME (LOSS) PER COMMON SHARE ........................... $ (.71) $ (.81)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ................ 22,886,000 54,272,000
============ ============
</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 SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
1999 2000
------------ ------------
(UNAUDITED)
<S> <C> <C>
NETWORK SERVICES REVENUE ..................................... $ 547 $ 3,330
OPERATING EXPENSES:
Network operations ........................................ 2,819 15,878
Selling expense ........................................... 2,406 24,024
General and administrative expenses ....................... 9,207 30,286
Amortization of deferred compensation and other stock based
expenditures ........................................... 5,556 8,405
Amortization of real estate access rights ................. -- 7,342
Depreciation and amortization ............................. 890 5,522
------------ ------------
Total operating expenses ............................. 20,878 91,457
------------ ------------
OPERATING INCOME (LOSS) ...................................... (20,331) (88,127)
OTHER INCOME (EXPENSE):
Interest expense .......................................... (461) (1,310)
Interest income ........................................... 830 8,344
------------ ------------
Total other income (expense) ......................... 369 7,034
------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES ............................ (19,962) (81,093)
------------ ------------
PROVISION FOR INCOME TAXES ................................... -- --
------------ ------------
NET INCOME (LOSS) ............................................ (19,962) (81,093)
ACCRUED DIVIDENDS ON PREFERRED STOCK ......................... (3,300) --
------------ ------------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK ................. $ (23,262) $ (81,093)
============ ============
NET INCOME (LOSS) PER COMMON SHARE ........................... $ (1.03) $ (1.51)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ................ 22,686,000 53,795,000
============ ============
</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 SIX MONTHS ENDED JUNE 30, 1999 AND 2000
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 2000
----------- -----------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................................ $ (19,962) $ (81,093)
Adjustments to reconcile net loss to net cash used in operating
activities --
Depreciation and amortization .............................................. 6,445 21,653
Changes in assets and liabilities --
Increase in accounts receivable, net .................................... (87) (791)
Increase in prepaid expenses ............................................ (138) (1,784)
Increase (decrease) in other assets ..................................... 622 (1,061)
Increase in accounts payable, accrued liabilities and deferred
revenue ................................................................ 2,740 12,554
--------- ---------
Net cash used in operating activities ............................... (10,380) (50,522)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .......................................... (4,528) (41,729)
Purchase of short-term investments, net ...................................... -- (4,320)
Acquisition of businesses, net of cash acquired .............................. -- (1,903)
--------- ---------
Net cash used in investing activities ............................... (4,528) (47,952)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible debentures, net of offering cost ................... -- 145,000
Payments on capital lease obligations ........................................ (809) (1,740)
Proceeds from issuance of common stock
2 --
Credit facility origination fee .............................................. (1,350) --
Equity issuance costs ........................................................ -- (476)
--------- ---------
Net cash (used in) provided by financing activities ................. (2,157) 142,784
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................ (17,065) 44,310
CASH AND CASH EQUIVALENTS, beginning of period .................................. 41,372 152,564
--------- ---------
CASH AND CASH EQUIVALENTS, end of period ........................................ $ 24,307 $ 196,874
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest ....................................................... $ 237 $ 360
Noncash investing and financing activities --
Equipment acquired under capital leases .................................... $ 4,042 $ 26,784
Accrued property and equipment additions ................................... $ 80 $ 19,967
Accrued dividends and interest on preferred stock and convertible
debentures................................................................ $ 3,300 $ 31
Warrants issued ............................................................ $ -- $ 48,117
Deferred compensation and other stock based expenditures ................... $ -- $ 5,649
</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
JUNE 30, 1999 AND 2000
(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 desktops, and enhanced voice conferencing calling
services, among other things, are typically delivered to the Company's
customers over its own broadband communications 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 June 30, 2000. The results of operations
for the six months ended June 30, 1999 and 2000, and cash flows for the six
months ended June 30, 1999 and 2000, 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, 1999 and the notes thereto.
3. NET INCOME (LOSS) PER SHARE:
Net income (loss) per share is presented in accordance with the provisions
of Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
(SFAS 128). SFAS 128 requires a presentation of basic EPS and diluted EPS.
Basic EPS excludes dilution for common stock equivalents and is computed by
dividing income or loss available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
and resulted in the issuance of common stock.
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. Options and warrants to purchase 3,525,000 and 6,854,000 shares of
common stock, respectively, were outstanding at June 30, 2000.
Diluted EPS are not presented as all potentially dilutive securities would
be antidilutive, due to the net losses incurred for the three and six months
ended June 30, 1999 and 2000.
7
<PAGE> 8
4. PROPERTY AND EQUIPMENT:
Property and equipment as of June 30, 2000, consist of the following:
<TABLE>
<CAPTION>
AVERAGE
ESTIMATED
USEFUL LIVES
(YEARS)
------------
<S> <C> <C>
Office equipment and information systems............................... 4 $ 34,448,000
Furniture and fixtures................................................. 7 2,714,000
Leasehold improvements................................................. 5 1,938,000
System infrastructure.................................................. 10 17,012,000
System equipment....................................................... 5 10,396,000
Construction-in-progress............................................... 71,859,000
------------
138,367,000
Less -- Accumulated depreciation and amortization...................... (8,592,000)
------------
Property and equipment, net............................................ $129,775,000
============
</TABLE>
5. DEBT:
On June 28, 2000, the Company completed the issuance and sale in a private
placement of an aggregate of $150,000,000 in principal amount of its 7.50%
convertible subordinated notes due June 15, 2007, generating approximately
$145,000,000 in net cash proceeds. The notes may be converted at the option of
the holders into shares of common stock at a conversion price of $15.37 per
share. Interest is payable semiannually on June 15 and December 15, commencing
December 15, 2000, and is payable, at the election of the Company, in either
cash or shares of common stock that have been registered under the Securities
Act of 1933. The notes are redeemable at the Company's option at any time on or
after the third business day after June 15, 2004 at specified redemption prices
plus accrued interest. The Company has agreed to specific registration rights
with respect to the notes. If a registration statement with respect to the
7.50% convertible subordinated notes has not been filed with the Securities and
Exchange Commission by September 26, 2000, or if the registration statement has
not been declared effective by the Securities and Exchange Commission by
December 25, 2000, additional interest will be payable on the notes and the
underlying common stock.
During June 2000, the Company terminated its previously unused $45,000,000
credit facility.
6. COMMITMENTS AND CONTINGENCIES:
Operating Agreements
The Company has entered into various operating agreements, with expirations
through 2010, for lease space, equipment and license agreements. Future minimum
obligations as of June 30, 2000, related to the Company's operating agreements
are as follows:
<TABLE>
<S> <C>
2001................................................... $10,412,000
2002................................................... 11,023,000
2003................................................... 11,047,000
2004................................................... 9,739,000
2005................................................... 7,036,000
Thereafter............................................. 5,400,000
-----------
Total minimum obligations..................... $54,657,000
===========
</TABLE>
Total operating agreement expense for the six months ended June 30, 1999
and 2000, was approximately $1,895,000 and $3,495,000 respectively.
8
<PAGE> 9
Capital Leases
The Company has entered into various capital leases for equipment.
Currently, the Company has received $105,000,000 in vendor commitments for
lease financing, subject to certain conditions. Future minimum lease
obligations as of June 30, 2000, related to the Company's capital leases are as
follows:
<TABLE>
<S> <C>
2001.......................................................... $ 14,558,000
2002.......................................................... 12,396,000
2003.......................................................... 8,160,000
2004.......................................................... 20,000
-------------
Total minimum lease obligations...................... $35,134,000
Less - Amounts representing interest.......................... (2,361,000)
--------------
Present value of minimum lease obligations.................... 32,773,000
Current maturities............................................ (13,169,000)
-------------
Capital lease obligations, net of current maturities.......... $ 19,604,000
=============
</TABLE>
Connectivity Contracts
In order to provide its services, the Company must connect each in-building
network to a central facility in each metropolitan area, usually over
fiber-optic lines that are leased from other carriers. At this metropolitan
hub, the Company aggregates and disseminates network traffic for Internet
connectivity. The Company has secured contracts that range from monthly to four
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 June 30, 2000, related to the Company's
connectivity contracts are as follows:
<TABLE>
<S> <C>
2001............................................... $6,918,000
2002............................................... 791,000
2003............................................... 602,000
2004............................................... 105,000
----------
Total minimum obligations................ $8,416,000
==========
</TABLE>
7. EQUITY:
COMMON STOCK
Effective April 4, 2000 and May 22, 2000, the Company acquired all of the
outstanding stock of two high-speed data communication companies. The Company
acquired both companies for an aggregate purchase price of $1,984,000 and
398,000 shares of common stock, a portion of which is subject to forfeiture if
certain performance targets are not achieved over the next three years. Each of
these acquisitions was accounted for using the purchase method of accounting
and, accordingly, the net assets and results of operations of the acquired
companies have been included in the Company's consolidated financial statements
since the acquisition dates. Goodwill of $5,058,000 has been recorded to
reflect the total excess of the purchase price over the fair value of the net
assets for both acquisitions. The Company is amortizing such goodwill over a
three-year period. The Company's purchase price allocation of the acquisitions
is preliminary and may be adjusted as additional information is obtained. The
acquired companies, individually or in aggregate, are not significant
transactions under the rules of the Securities and Exchange Commission.
9
<PAGE> 10
WARRANTS
The Company has issued and plans to continue to issue to real estate
partners and their affiliates warrants to acquire shares of common stock in
exchange for the right to install its fiber-optic networks in these real estate
entities' buildings. The warrants are exercisable upon the occurrence of
certain events, as defined in the warrant acquisition agreements.
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 date for determining the value of the warrants is 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 this date, the Company will measure the fair value of the
warrants based on an acceptable pricing model.
As of June 30, 2000, the Company has entered into agreements for the
issuance of 8,449,000 shares of common stock. Performance obligations
underlying 7,562,000 shares of common stock had been completed as of June 30,
2000. The value of these 7,562,000 shares at June 30, 2000 was $157,251,000. At
June 30, 2000 warrants underlying 708,000 shares of common stock had been
exercised. The value of these exercised shares upon issuance was $11,197,000.
COMPENSATION CHARGE AND OTHER STOCK BASED EXPENDITURES
The Company completed an initial public offering of its securities on
October 29, 1999. As the estimated fair market value of the Company's common
stock (as implied by the IPO price) exceeded management's determination of fair
value on the date of each stock issuance on the stock option and restricted
stock grant date, the Company has recognized a total compensation charge of
$35,301,000 for the IPO and acquisitions as of June 30, 2000, of which
$14,618,000 is being deferred and amortized over the remaining employee service
period.
In February 2000, the Company issued warrants to a marketing firm to
purchase 50,000 shares of common stock at an exercise price of $6.00, and
50,000 shares of common stock at an exercise price of $14.40 per share as
settlement of services performed and to be performed in the future. The Company
has recognized an expense of $1,693,000 through June 30, 2000. An additional
$279,000 is being deferred and amortized over the remaining service period.
8. SUBSEQUENT EVENT
Effective July 26, 2000, the Company acquired 68% of the stock of Shared
Technologies of Canada through its wholly owned subsidiary, ARC Canada, for
$15,341,000, a portion of which is contingent upon the achievement of certain
performance obligations.
9. RECENT ACCOUNTING PRONOUNCEMENTS:
In December 1999, the SEC issued a Staff Accounting Bulletin (SAB) No. 101.
"Revenue Recognition in Financial Statements," which currently must be adopted
by December 31, 2000. SAB No. 101 provides additional guidance on revenue
recognition as well as criteria for when revenue is generally realized and
earned and also requires the deferral of incremental costs. The Company is
currently assessing the impact of SAB No. 101.
10
<PAGE> 11
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 49 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. We also provide services
using wireless, air optical and copper-based technologies. As of June 30, 2000,
we owned and operated network inside more than 570 office buildings with more
than 245 million rentable square feet. We have agreements with building owners
to install and operate our network in more than 1,250 office buildings with
more than 420 million rentable square feet in the United States.
Internet access services, which we provide using our network, enable 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 network. 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 network.
We use our in-building network to transmit data to and from each of our
customers at speeds up to 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 building network to a
central facility in each metropolitan area, usually over 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 and debt, hiring
management and other key personnel, designing and developing our network inside
buildings, acquiring equipment and facilities, entering into agreements with
building owners and real estate managers and beginning the deployment of our
network. In June 1997, we began installing our network, and we began operating
our first in-building network in January 1998.
To rapidly establish a strong position in the markets we target, we are
heavily investing in our 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 have incurred and expect
to incur significant additional costs building and refining our operational
support systems, which to date has included 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.
11
<PAGE> 12
RESULTS OF OPERATIONS
Network Services Revenue. Network services revenue for the three months
ended June 30, 2000, increased to $1,972,000 as compared to $401,000 for the
corresponding period of the prior year. Revenue was $3,330,000 for the six
months ended June 30, 2000 compared to $547,000 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 network into new
buildings. As of June 30, 2000, our network was installed inside more than 570
buildings with more than 245 million rentable square feet as compared to June
30, 1999, when our networks were installed inside 30 buildings, with more than
22 million rentable square feet.
Network Operations. Network operations expenses were $10,198,000 for the
three months ended June 30, 2000 and $1,651,000 for the three months ended June
30, 1999. Network operations expenses were $15,878,000 for the six months ended
June 30, 2000 and $2,819,000 for the six months ended June 30, 1999. This
increase is consistent with the expansion of our network and the resulting
increase in transport, licensing and customer support costs.
Selling Expense. Selling expenses were $11,302,000 for the three months
ended June 30, 2000 and $1,801,000 for the three months ended June 30, 1999.
Selling expenses were $24,024,000 for the six months ended June 30, 2000 and
$2,406,000 for the six months ended June 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 $15,892,000 for the three months ended June 30, 2000 and $5,599,000 for
the three months ended June 30, 1999. General and administrative expenses were
$30,286,000 for the six months ended June 30, 2000 and $9,207,000 for the six
months ended June 30, 1999. This increase is consistent with our development
activities and is attributable to the rapid growth in number of our employees
in connection with building our operating infrastructure. Our number of general
and administrative employees increased to 359 as of June 30, 2000 as compared
to 122 at June 30, 1999.
Amortization of Deferred Compensation and Other Stock Based Expenditures.
Amortization of deferred compensation and other stock based expenditures was
$3,693,000 for the three months ended June 30, 2000 and $5,435,000 for the
three months ended June 30, 1999. Through June 30, 2000, we recorded a total of
$8,405,000 of amortization of deferred compensation, as compared to a balance
of $5,556,000 for the six months ended June 30, 1999.
Amortization of Real Estate Access Rights. Amortization of real estate
access rights was $3,873,000 for the three months ended June 30, 2000 and
$7,342,000 for the six months ended June 30, 2000.
Depreciation and Amortization. Depreciation and amortization for the three
months ended June 30, 2000 increased to $3,947,000 as compared to $504,000 for
the corresponding period of the prior year. Depreciation and amortization for
the six months ended June 30, 2000 increased to $5,522,000 as compared to
$890,000 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 $2,865,000 for the three
months ended June 30, 2000 and ($46,000) for the three months ended June 30,
1999. Other income was $7,034,000 for the six months ended June 30, 2000 and
$369,000 for the six months ended June 30, 1999. The change in other income
(expense) is primarily due to an increase in interest income as a result of the
October 1999 initial public offering proceeds.
Provision For Income Taxes. For the three and six months periods ended June
30, 2000 and June 30, 1999, no provision for taxes was recognized as we
operated at a loss throughout both periods. We expect to generate significant
net losses for the foreseeable future which should generate net operating loss
carryforwards, thus we do not have a benefit for income taxes.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
We have required significant capital to fund the construction and
installation of our network within buildings and to purchase electronic
equipment for installation in building and metropolitan points of presence. As
of June 30, 2000, we had made capital expenditures of $138,118,000 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, net losses and negative EBITDA.
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.
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 our network and the remainder for working
capital and general corporate purposes, including to fund operating losses. We
may use a portion of the net proceeds to acquire or invest in complementary
businesses, technologies, services or products.
Effective April 4, 2000 and May 22, 2000, we acquired all of the
outstanding stock of two high-speed data communication companies. We acquired
both companies for an aggregate purchase price of $1,984,000 and 398,000 shares
of common stock, a portion of which is subject to forfeiture if certain
performance targets are not achieved over the next three years.
On June 28, 2000, we completed the issuance and sale in a private placement
of an aggregate of $150,000,000 in principal amount of our 7.50% convertible
subordinated notes due June 15, 2007, generating approximately $145,000,000 in
net cash proceeds. The notes may be converted at the option of the holders into
shares of common stock at a conversion price of $15.37 per share. Interest is
payable semiannually on June 15 and December 15, commencing December 15, 2000,
and is payable, at our election, in either cash or shares of common stock that
have been registered under the Securities Act of 1933. The notes are redeemable
at our option at any time on or after the third business day after June 15,
2004 at specified redemption prices plus accrued interest. We have agreed to
specific registration rights with respect to the notes. If a registration
statement with respect to the 7.50% convertible subordinated notes has not been
filed with the Securities and Exchange Commission by September 26, 2000, or if
the registration statement has not been declared effective by the Securities
and Exchange Commission by December 25, 2000, additional interest will be
payable on the notes and the underlying common stock.
As of June 30, 2000, we had entered into warrant agreements for the issuance
of 8,449,000 shares of common stock. Performance obligations underlying
7,562,000 shares of common stock had been completed as of June 30, 2000. The
value of these 7,562,000 shares at June 30, 2000 was $157,251,000. At June 30,
2000 warrants underlying 708,000 shares of common stock had been exercised. The
value of these exercised shares upon issuance was $11,197,000.
As of June 30, 2000, we have $105,000,000 in vendor commitments for lease
financing, subject to certain conditions. As of June 30, 2000 we have financed
approximately $37,201,000 of equipment additions through these lease facilities
and have outstanding capital lease obligations of approximately $32,773,000.
As of June 30, 2000, we had committed to pay approximately $8,416,000 to
carriers under our existing connectivity contracts.
As of June 30, 2000, we had cash and cash equivalents of $196,874,000 and
short-term investments of $166,334,000.
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<PAGE> 14
During June 2000, we terminated our previously unused $45,000,000 credit
facility.
Effective July 26, 2000, we acquired 68% of the stock of Shared
Technologies of Canada through our wholly owned subsidiary, ARC Canada, for
$15,341,000, a portion of which is contingent upon the achievement of certain
performance obligations.
We estimate that the net proceeds received from the debt offering, together
with our cash on hand and our capital lease facility, will be sufficient to
fund our operations and the projected accelerated deployment of our network
into the fourth quarter of 2001, although there can be no assurances in this
regard, particularly if we make acquisitions for cash. 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 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 or if we engage in any
material acquisitions. 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.
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.
14
<PAGE> 15
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 June 30, 2000, is fixed-rate debt.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(a) Inapplicable.
(b) Inapplicable.
(c) Effective April 4, 2000 and May 22, 2000, we acquired all of
the outstanding stock of two high-speed data communication
companies. We acquired both companies for an aggregate
purchase price of $1,984,000 and 398,000 shares of common
stock, a portion of which is subject to forfeiture if certain
performance targets are not achieved over the next three
years.
The shares issued in each of the above transactions were
issued pursuant to the exemption of Section 4(2) of the
Securities Act of 1933 in reliance upon representations of
the shareholders of each Company.
On June 28, 2000, we completed the issuance and sale of
$150,000,000 in aggregate principal amount of our 7.50%
convertible subordinated notes due June 15, 2007. The notes
are convertible at the option of the holders into common
stock at any time prior to redemption, repurchase or maturity
at a conversion price of $15.37 per share. Goldman, Sachs &
Co. acted as the initial purchaser and received approximately
$4,500,000 in fees in connection with the sale of the notes.
Because the notes were issued in a private placement
transaction, they may not be offered or sold in the United
States absent an effective registration statement or an
applicable exemption from the registration requirements of
the Securities Act of 1933. This transaction was effected
pursuant to the exemption of Section 4(2) of the Securities
Act of 1933 and Rule 144A under that act, in reliance upon
the representations of the initial purchaser.
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<PAGE> 17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On June 15, 2000, we held our 2000 Annual Meeting of Stockholders in
Dallas, Texas. Only holders of record of common stock on the record date of
May 1, 1999, were entitled to vote at the Annual Meeting. Each holder of
record of common stock at the close of business on the record date was
entitled to one vote per share on each matter voted upon by the
stockholders at the annual meeting. As of the record date, there were
56,864,791 shares of common stock outstanding.
The following matters were submitted for a vote by security holders:
Proposal 1: To elect a total of three directors, each to hold office
for a three-year term ending on the date of our third
succeeding annual meeting of stockholders and until their
respective successors shall have been duly elected and
qualified.
Set forth below is information regarding the 49,559,903 shares of
common stock voted in the election of these three directors (87.15% of the
total number of shares of common stock entitled to vote on such matter at
the annual meeting).
<TABLE>
<CAPTION>
NAME FOR WITHHELD
----- --- --------
<S> <C> <C>
David H. Crawford 49,527,842 32,061
John M. Todd 49,523,337 36,566
Blair P. Whitaker 49,524,682 35,221
</TABLE>
The following are the names of each of our other directors whose term of
office continued after the meeting:
Directors Holding Office Until 2001: John H. Davis, R. David Spreng and Rod
F. Dammeyer (Mr. Dammeyer subsequently resigned from the Board of Directors
on July 16, 2000).
Directors Holding Office Until 2002: Stephen W. Schovee, William T. White,
Mary A. Wilderotter and Jeffrey Weitzen.
Proposal 2:
To adopt our 2000 Employee Stock Purchase Plan.
Set forth below is information regarding the 49,559,903 shares of
common stock voted in the adoption of the 2000 Employee Stock Plan.
<TABLE>
<S> <C>
Votes FOR 44,113,969
Votes AGAINST 114,454
Votes ABSTAINED 12,622
Broker NON-VOTE 5,318,858
</TABLE>
Proposal 3:
To adopt our 2000 Stock Option and Equity Incentive Plan.
Set forth below is information regarding the 49,559,903 shares of
common stock voted in the adoption of the 2000 Stock Option and Equity
Incentive Plan.
<TABLE>
<S> <C>
Votes FOR 38,196,281
Votes AGAINST 6,030,501
Votes ABSTAINED 14,263
Broker NON-VOTE 5,318,858
</TABLE>
17
<PAGE> 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
*4.1 Indenture, dated as of June 28, 2000, by and between
the Company and Wilmington Trust Company, as trustee,
relating to the Company's 7.50% Convertible
Subordinated Notes due 2007.
*4.2 Registration Rights Agreement, dated as of June 22,
2000, by and between the Company and Goldman, Sachs &
Co. relating to the Company's 7.50% Convertible
Subordinated Notes due 2007.
**27.1 Financial Data Schedule
* Filed herewith.
** Submitted only with the electronic filing of this document
with the Securities and Exchange Commission pursuant to
Regulation S-T under the Securities Act.
(b) Reports on Form 8-K
We filed a Current Report on Form 8-K, dated June 29, 2000, with
the Securities and Exchange Commission reporting under Item 5 the
announcement of a private placement of $150,000,000 of our 7.50%
Convertible Subordinated Notes due 2007.
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.
August 11, 2000 ALLIED RISER COMMUNICATIONS CORPORATION
By: /s/ Todd C. Doshier
-------------------------------------
Todd C. Doshier
Senior Vice President and Chief
Financial Officer
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<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------ -------------------
<S> <C>
*4.1 Indenture, dated as of June 28, 2000, by and between
the Company and Wilmington Trust Company, as trustee,
relating to the Company's 7.50% Convertible
Subordinated Notes due 2007.
*4.2 Registration Rights Agreement, dated as of June 22,
2000, by and between the Company and Goldman, Sachs &
Co. relating to the Company's 7.50% Convertible
Subordinated Notes due 2007.
**27.1 Financial Data Schedule
</TABLE>
* Filed herewith.
** Submitted only with the electronic filing of this document with the
Securities and Exchange Commission pursuant to Regulation S-T under the
Securities Act.
19
