ALLIED RISER COMMUNICATIONS CORP
10-Q, 2000-05-15
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)
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<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 MARCH 31, 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:

                                                Number of Shares Outstanding
              Title of Class                          on April 30, 2000
              --------------                          -----------------
     Common Stock, $.0001 par value                       56,864,791

================================================================================


<PAGE>   2


            ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

                                    FORM 10-Q
                                      INDEX

<TABLE>
<CAPTION>
                                                                                                           PAGE NO.
                                                                                                           --------
<S>  <C>      <C>                                                                                          <C>
PART I.  FINANCIAL INFORMATION
     Item 1.  Financial Statements
              Consolidated Balance Sheets as of December 31, 1999,
                 and March 31, 2000 (Unaudited)...............................................................    3
              Consolidated Statements of Operations for the Three Months
                 Ended March 31, 1999 and 2000 (Unaudited)....................................................    4
              Consolidated Statements of Cash Flows for the Three Months
                 Ended March 31, 1999 and 2000 (Unaudited)....................................................    5
              Notes to Consolidated Financial Statements (Unaudited)..........................................    6
     Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations...........   10
     Item 3.  Quantitative and Qualitative Disclosures About Market Risk......................................   13
PART II.  OTHER INFORMATION
     Item 6.  Exhibits and Reports on Form 8-K................................................................   14
              Signatures......................................................................................   14
</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,    MARCH 31,
                                                                                             1999          2000
                                                                                         -----------     ---------
                                  ASSETS                                                                (UNAUDITED)
<S>                                                                                      <C>             <C>
CURRENT ASSETS:
   Cash and cash equivalents ........................................................     $ 152,564      $ 120,049
   Short-term investments ...........................................................       162,013        152,007
   Accounts receivable, net of reserve of  $19 and $33, respectively ................           259            883
   Prepaid expenses and other current assets ........................................         5,454          6,075
                                                                                          ---------      ---------
     Total current assets ...........................................................       320,290        279,014
PROPERTY AND EQUIPMENT, net .........................................................        46,577         72,180
REAL ESTATE ACCESS RIGHTS, net of accumulated amortization of
   $2,036 and $5,505, respectively ..................................................       107,099        146,580
OTHER ASSETS ........................................................................         1,088          2,164
                                                                                          ---------      ---------
     Total assets ...................................................................     $ 475,054      $ 499,938
                                                                                          =========      =========

                        LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Accounts payable .................................................................     $   2,817      $   1,582
   Accrued liabilities ..............................................................        12,095         21,668
   Current maturities of capital lease obligations ..................................         3,049          5,683
                                                                                          ---------      ---------
        Total current liabilities ...................................................        17,961         28,933
CAPITAL LEASE OBLIGATIONS, net of current maturities ................................         4,679          7,443
                                                                                          ---------      ---------
        Total liabilities ...........................................................        22,640         36,376

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:
   Common Stock, $.0001 par value, 1,000,000,000 shares authorized, 56,569,000
     and 56,737,000 shares issued and outstanding as of December 31, 1999 and
     March 31, 2000, respectively ...................................................             6              6
   Additional paid-in capital .......................................................       434,930        435,315
   Warrants, authorizing the issuance of 6,336,000 and 7,535,000 shares
     as of December 31, 1999 and March 31, 2000, respectively .......................       109,135        154,056
   Deferred compensation ............................................................       (17,654)       (14,788)
   Accumulated deficit ..............................................................       (74,003)      (111,027)
                                                                                          ---------      ---------
        Total stockholders' equity ..................................................       452,414        463,562
                                                                                          ---------      ---------
        Total liabilities and stockholders' equity ..................................     $ 475,054      $ 499,938
                                                                                          =========      =========
</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 MARCH 31, 1999 AND 2000
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                       1999          2000
                                                                                     --------      --------
                                                                                           (UNAUDITED)
<S>                                                                                  <C>           <C>
NETWORK SERVICES REVENUE .......................................................     $    146      $  1,358
OPERATING EXPENSES:
   Network operations ..........................................................        1,168         5,680
   Selling expense .............................................................          605        12,722
   General and administrative expenses .........................................        3,608        14,394
   Amortization of deferred compensation and other stock based
      expenditures .............................................................          121         4,712
   Amortization of real estate access rights ...................................           --         3,469
   Depreciation and amortization ...............................................          386         1,575
                                                                                     --------      --------
        Total operating expenses ...............................................        5,888        42,552
                                                                                     --------      --------
OPERATING INCOME (LOSS) ........................................................       (5,742)      (41,194)
OTHER INCOME (EXPENSE):
   Interest expense ............................................................          (71)         (462)
   Interest income .............................................................          486         4,631
                                                                                     --------      --------
        Total other income (expense) ...........................................          415         4,169
                                                                                     --------      --------
INCOME (LOSS) BEFORE INCOME TAXES ..............................................       (5,327)      (37,025)
                                                                                     --------      --------
PROVISION FOR INCOME TAXES .....................................................           --            --
                                                                                     --------      --------
NET INCOME (LOSS) ..............................................................       (5,327)      (37,025)
ACCRUED DIVIDENDS ON PREFERRED STOCK ...........................................       (1,650)           --
                                                                                     --------      --------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK ...................................     $ (6,977)     $(37,025)
                                                                                     ========      ========
NET INCOME (LOSS) PER COMMON SHARE .............................................     $   (.31)     $   (.69)
                                                                                     ========      ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING ..................................       22,396        53,318
                                                                                     ========      ========
</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 CASH FLOWS
               FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 2000
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                             1999            2000
                                                                           ---------      ---------
                                                                                  (UNAUDITED)
<S>                                                                        <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss) .................................................     $  (5,327)     $ (37,025)
   Adjustments to reconcile net loss to net cash used in operating
     activities --
     Depreciation and amortization....................................           507          9,756
     Changes in assets and liabilities --
        Increase in accounts receivable, net .........................           (23)          (624)
        (Increase) decrease in prepaid expenses ......................           (26)           216
        Increase in other assets .....................................          (961)        (1,077)
        Increase in accounts payable and accrued liabilities .........           370          5,575
                                                                           ---------      ---------
            Net cash used in operating activities ....................        (5,460)       (23,179)
                                                                           ---------      ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
   Sale of short-term investments, net ...............................            --         10,006
   Purchases of property and equipment ...............................        (2,320)       (18,611)
                                                                           ---------      ---------
            Net cash used in investing activities ....................        (2,320)        (8,605)
                                                                           ---------      ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
   Payments on capital lease obligations .............................          (199)          (405)
   Equity issuance costs .............................................                         (326)
                                                                           ---------      ---------
            Net cash used by financing activities ....................          (199)          (731)
                                                                           ---------      ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .....................        (7,979)       (32,515)
CASH AND CASH EQUIVALENTS, beginning of period .......................        41,371        152,564
                                                                           ---------      ---------
CASH AND CASH EQUIVALENTS, end of period .............................     $  33,392      $ 120,049
                                                                           =========      =========

SUPPLEMENTAL CASH FLOW DISCLOSURES:
   Cash paid for interest ............................................     $      71      $     388
   Noncash investing and financing activities --
     Equipment acquired under capital leases .........................     $      47      $   5,804
     Accrued property and equipment additions ........................     $   1,020      $   2,763
     Accrued dividends on preferred stock ............................     $   1,650      $      --
     Warrants issued .................................................     $      --      $  44,921
     Deferred compensation and other stock based expenditures ........     $     380      $   1,009
</TABLE>


                 The accompanying notes are an integral part of
                    these consolidated financial statements.


                                       5
<PAGE>   6

            ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             MARCH 31, 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 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 March 31, 2000. The results of operations
for the three months ended March 31, 1999 and 2000, and cash flows for the three
months ended March 31, 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 2,035,000 and 7,535,000 shares of
common stock, respectively, were outstanding at March 31, 2000.

    Diluted EPS are not presented as all potentially dilutive securities would
be antidilutive, due to the net loss incurred for the three months ended March
31, 1999 and 2000.


                                       6
<PAGE>   7

            ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

4.  PROPERTY AND EQUIPMENT:

    Property and equipment as of March 31, 2000, consist of the following:

<TABLE>
<CAPTION>
                                                                                AVERAGE
                                                                               ESTIMATED
                                                                             USEFUL LIVES
                                                                                (YEARS)
                                                                             ------------
<S>                                                                          <C>               <C>
   Office equipment and information systems...............................         4           $   28,131,000
   Furniture and fixtures.................................................         7                2,184,000
   Leasehold improvements.................................................         5                1,768,000
   System infrastructure..................................................        10                8,756,000
   System equipment.......................................................         5                6,601,000
   Construction-in-progress...............................................                         29,773,000
                                                                                               --------------
                                                                                                   77,213,000
   Less -- Accumulated depreciation and amortization......................                         (5,033,000)
                                                                                               -------------
   Property and equipment, net............................................                     $   72,180,000
                                                                                               ==============
</TABLE>

5.  COMMITMENTS AND CONTINGENCIES:

    Operating Leases

    The Company has entered into various operating lease agreements, with
expirations through 2007, for lease space and equipment. Future minimum lease
obligations as of March 31, 2000, related to the Company's operating leases are
as follows:

<TABLE>
<S>                                                                                            <C>
    2001..................................................................................     $    7,867,000
    2002..................................................................................          9,228,000
    2003..................................................................................          9,254,000
    2004..................................................................................         10,332,000
    2005..................................................................................          6,655,000
    Thereafter............................................................................          3,486,000
                                                                                               --------------
             Total minimum lease obligations..............................................     $   46,822,000
                                                                                               ==============
</TABLE>

    Total rent expense for the three months ended March 31, 1999 and 2000, was
approximately $341,000 and $808,000, respectively.


                                       7
<PAGE>   8

            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 March 31, 2000, related to the Company's capital
leases are as follows:

<TABLE>
<S>                                                                                            <C>
     2001.................................................................................     $    6,413,000
     2002.................................................................................          5,362,000
     2003.................................................................................          2,508,000
                                                                                               --------------
              Total minimum lease obligations.............................................         14,283,000
     Less - Amounts representing interest.................................................         (1,157,000)
                                                                                               --------------
     Present value of minimum lease obligations...........................................         13,126,000
     Current maturities...................................................................         (5,683,000)
                                                                                               --------------
     Capital lease obligations, net of current maturities.................................     $    7,443,000
                                                                                               ==============
</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 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 March 31, 2000, related to the Company's
connectivity contracts are as follows:

<TABLE>
<S>                                                                                            <C>
    2001..................................................................................     $    4,026,000
    2002..................................................................................            399,000
    2003..................................................................................            290,000
    2004..................................................................................            161,000
                                                                                               --------------
              Total minimum lease obligations.............................................     $    4,876,000
                                                                                               ==============
</TABLE>

6.  EQUITY:

WARRANTS

    The Company has issued and plans to continue to issue warrants to acquire
shares of common stock to real estate partners and their affiliates 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
measurement date for 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 the
measurement date, the Company will measure the fair value of the warrants based
on an acceptable pricing model.

    As of March 31, 2000, the Company has entered into agreements for the
issuance of 8,224,000


                                       8
<PAGE>   9

shares of common stock. Performance obligations underlying 7,535,000 shares of
common stock had been completed as of March 31, 2000.


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
$32,335,000 as of March 31, 2000, of which $14,788,000 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 $1,135,000 through March 31, 2000. An additional $837,000 is being
deferred and amortized over the remaining service period.


7.  SUBSEQUENT EVENT

    Effective April 4, 2000, the Company acquired the stock of a service
provider for $350,000 and 161,000 shares of common stock, a portion of which is
contingent upon the achievement of certain performance targets over the next
three years.


                                       9
<PAGE>   10

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 30 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 March 31, 2000, we owned
and operated in-building fiber-optic networks inside more than 230 office
buildings with more than 140 million rentable square feet. We have agreements
with building owners to install and operate fiber-optic networks in more than
1,250 office buildings with more than 420 million rentable square feet.

    Internet access services, which we provide using our in-building fiber-optic
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 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 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 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 deployment of our fiber-optic
networks. In June 1997, we began installing our networks, 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.


                                       10
<PAGE>   11


                       THREE MONTHS ENDED MARCH 31, 2000,
                  COMPARED TO THREE MONTHS ENDED MARCH 31, 1999

    Network Services Revenue. Network services revenue for the three months
ended March 31, 2000, increased to $1,358,000 as compared to $146,000 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 March 31, 2000, our network was installed
inside more than 230 buildings with more than 140 million rentable square feet
as compared to March 31, 1999, when our networks were installed inside 14
buildings, with more than 7 million rentable square feet.

    Network Operations. Network operations expenses were $5,680,000 for the
three months ended March 31, 2000 and $1,168,000 for the three months ended
March 31, 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 expense increased from $605,000 for the three
months ended March 31, 1999, to $12,722,000 for the three months ended March 31,
2000. 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 $14,394,000 for the three months ended March 31, 2000 and $3,608,000 for
the three months ended March 31, 1999. 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 317 as of March
31, 2000 as compared to 99 at March 31, 1999.

    Amortization of Deferred Compensation and Other Stock Based Expenditures.
Amortization of deferred compensation and other stock based expenditures was
$4,712,000 for the three months ended March 31, 2000 and $121,000 for the three
months ended March 31, 1999.

    Amortization of Real Estate Access Rights. Amortization of real estate
access rights was $3,469,000 for the three months ended March 31, 2000.

    Depreciation and Amortization. Depreciation and amortization for the three
months ended March 31, 2000 increased to $1,575,000 as compared to $386,000 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 $4,169,000 for the three
months ended March 31, 2000 and $415,000 for the three months ended March 31,
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 months ended March 31, 2000 and
March 31, 1999, 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 networks within buildings and to purchase electronic
equipment for installation in building and metropolitan points of presence. As
of March 31, 2000, we had made capital expenditures of $76,973,000 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.


                                       11
<PAGE>   12

    In March 1999, we entered into a credit facility with Chase Manhattan Bank
under which we can borrow up to $45,000,000, subject to certain conditions
including having less than $12,500,000 cash available at the time of initial
borrowing. We have not borrowed against the facility as of March 31, 2000 and
currently do not intend to. The facility will accrue interest at one of the
following or a combination of the following, at our option: (i) the bank's prime
rate plus 3.5%, (ii) a base certificate of deposit rate plus 4.5%, (iii) Federal
funds rate plus 4%, or (iv) an Eurodollar rate plus 4.5%. The credit facility is
secured by all of our assets, except for the assets pledged in connection with
our capital lease obligations. We will pay a commitment fee of 1.5% on the
unused portion of the credit facility if we borrow against the facility. The
facility, which extends through October 2000, contains various restrictive
covenants, including the maintenance of certain financial ratios, the
achievement of certain operational targets and restrictions on certain
activities.

    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 in-building fiber-optic networks and the
remainder for working capital and general corporate purposes, including to fund
operating losses. We will use a portion of the net proceeds to acquire or invest
in complementary businesses, technologies, services or products. However, as of
March 31, 2000 we had no commitments or agreements with respect to any of these
types of transactions that are material to us.

    As of March 31, 2000, the Company has entered into agreements for the
issuance of 8,224,000 shares of common stock. Performance obligations underlying
7,535,000 shares of common stock had been completed as of March 31, 2000. The
value of these shares was $154,056,000.

    Since December 1999, we have received $65,000,000 in vendor commitments for
lease financing, subject to certain conditions. As of March 31, 2000 we have
financed approximately $16,073,000 of equipment additions through these lease
facilities and have outstanding capital lease obligations of approximately
$13,126,000.

    As of March 31, 2000, we had committed to pay approximately $4,876,000 to
carriers under our existing connectivity contracts.

    As of March 31, 2000, we had cash and cash equivalents of $120,049,000 and
short-term investments of $152,007,000.

    Effective April 4, 2000, the Company acquired the stock of a service
provider for $350,000 and 161,000 shares of common stock, a portion of which is
contingent upon the achievement of certain performance targets over the next
three years.

    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 first quarter
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:


                                       12
<PAGE>   13

    - our ability to meet our construction schedules;

    - obtaining favorable prices for purchases of equipment;

    - our ability to develop, acquire and integrate the necessary operational
      support systems;

    - the cost of network development in each of our markets;

    - demand for our services;

    - the nature and penetration of new services that may be offered by us;

    - regulatory changes; and

    - 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.

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 March 31, 2000, is fixed-rate debt.


                                       13
<PAGE>   14

                           PART II. OTHER INFORMATION


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K


(a)  List of Exhibits
       27.1                 Financial Data Schedules




                                   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.



    May 11, 2000                   ALLIED RISER COMMUNICATIONS CORPORATION





                                   By: /s/ Todd C. Doshier
                                       -----------------------------------------
                                       Todd C. Doshier
                                       Senior Vice President and Chief
                                        Financial Officer


                                       14
<PAGE>   15

                                INDEX TO EXHIBITS

<TABLE>
<CAPTION>
         EXHIBIT
         NUMBER                     DESCRIPTION
         -------                    -----------
<S>                           <C>
          27.1                Financial Data Schedules
</TABLE>



<TABLE> <S> <C>

<ARTICLE> 5

<S>                             <C>
<PERIOD-TYPE>                   3-MOS
<FISCAL-YEAR-END>                          DEC-31-2000
<PERIOD-START>                             JAN-01-2000
<PERIOD-END>                               MAR-31-2000
<CASH>                                         120,049
<SECURITIES>                                         0
<RECEIVABLES>                                      916
<ALLOWANCES>                                        33
<INVENTORY>                                          0
<CURRENT-ASSETS>                               279,014
<PP&E>                                          77,213
<DEPRECIATION>                                   5,033
<TOTAL-ASSETS>                                 499,938
<CURRENT-LIABILITIES>                           28,933
<BONDS>                                              0
                                0
                                          0
<COMMON>                                             6
<OTHER-SE>                                           0
<TOTAL-LIABILITY-AND-EQUITY>                   499,938
<SALES>                                              0
<TOTAL-REVENUES>                                 1,358
<CGS>                                                0
<TOTAL-COSTS>                                   42,552
<OTHER-EXPENSES>                                     0
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                                 462
<INCOME-PRETAX>                               (37,025)
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                           (37,025)
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                  (37,025)
<EPS-BASIC>                                      (.69)
<EPS-DILUTED>                                    (.69)


</TABLE>


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