SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
--------------------
Date of report (date of earliest event reported): February 4, 2002
----------------
Cogent Communications Group, Inc.
---------------------------------
(Exact Name of Registrant as
Specified in Charter)
1-31227
-------
(Commission File No.)
52-2337274
----------
(IRS Employer
Identification No.)
Delaware
--------
(State or Other Jurisdiction
of Incorporation)
1015 31st Street N.W.
Washington, DC 20007
(Address of Principal
Executive Offices)
(202) 295-4200
--------------
(Registrant's telephone
number, including area code)
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
As reported on its current report on Form 8-K filed February 5,
2002, on February 4, 2002, Cogent Communication Corporation, Inc. ("Cogent")
completed its merger with Allied Riser Communications Corporation ("Allied
Riser"). As described more fully in Cogent's Form 8-K and in the Form S-4
filed by Cogent on October 16, as amended, the transaction was structured as
a merger of a wholly owned subsidiary of Cogent with and into Allied Riser.
Pursuant to Item 7(a)(4) of Form 8-K, this Form 8-K/A amends the
current report on Form 8-K filed February 5, 2002 to include (1) the
financial statements of Allied Riser required by Item 7(a) of Form 8-K and
(2) the pro forma financial information required by Item 7(b) of Form 8-K.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Businesses Acquired.
The following financial statements required by Item 7(a) of Form 8-K
relating to Allied Riser are filed herewith:
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1999 and 2000
Consolidated Statements of Income (Loss) for the years ended
December 31, 1998, 1999 and 2000
Consolidated Statements of Stockholder's Equity for the
years ended December 31, 1998, 1999 and 2000
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1999 and 2000
Notes to Consolidated Financial Statements
Consolidated Balance Sheets at December 31, 2000 and
September 30, 2001 (Unaudited)
Consolidated Statements of Income (Loss) for the nine months
ended September 30, 2000 and September 30, 2001 (Unaudited)
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and September 30, 2001 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited)
(b) Pro Forma Financial Information.
The following pro forma financial information required by Item 7(b) of
Form 8-K relating to Cogent's merger with Allied Riser is filed herewith:
- Cogent Communications Group, Inc. pro forma balance sheet as of
September 30, 2001 (unaudited)
- Explanatory notes to pro forma balance sheet
- Cogent Communications Group, Inc. pro forma statement of operations
for the year ended December 31, 2000 (unaudited)
- Explanatory notes to pro forma statement of operations
- Cogent Communications Group, Inc. pro forma statement of operations
for the nine months ended September 30, 2001 (unaudited)
- Explanatory notes to pro forma statement of operations
(c) Exhibits
2.1 Agreement and Plan of Merger, dated as of August 28, 2001, by and
among Cogent, Allied Riser and the merger subsidiary (previously
filed as Appendix A to our Registration Statement on Form S-4,
Commission File No. 333-71684, filed October 16, 2001, and
incorporated herein by reference).
2.2 Amendement No. 1 to the Agreement and Plan of Merger, dated as of
October 13, 2001, by and among Cogent, Allied Riser and the merger
subsidiary (previously filed as Appendix B to our Registration
Statement on Form S-4, Commission File No. 333-71684, filed
October 16, 2001, and incorporated herein by reference).
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 hereunto duly authorized.
COGENT COMMUNICATIONS GROUP, INC.
Date: February 13, 2002 By: /s/ THADDEUS G. WEED
--------------------------------------
Name: Thaddeus G. Weed
Title: Vice President and Controller
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Allied Riser Communications Corporation:
We have audited the accompanying consolidated balance sheets of Allied Riser
Communications Corporation (a Delaware corporation) and subsidiaries as of
December 31, 1999 and 2000, and the related consolidated statements of income
(loss), stockholders' equity and cash flows for each of the three years in the
period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Allied Riser
Communications Corporation and subsidiaries as of December 31, 1999 and 2000,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Dallas, Texas,
January 24, 2001 (except with respect to the matter discussed in Note 14,
as to which the date is February 23, 2001)
1
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 2000
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1999 2000
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $152,564 $ 29,455
Short-term investments.................................... 162,013 212,107
Accounts receivable, net of reserve of $19 and $196 in
1999 and 2000, respectively............................. 259 3,912
Prepaid expenses and other current assets................. 5,454 5,606
-------- --------
Total current assets.................................. 320,290 251,080
PROPERTY AND EQUIPMENT, net................................. 46,577 182,442
REAL ESTATE ACCESS RIGHTS, net of accumulated amortization
of $2,036 and $16,003 in 1999 and 2000, respectively...... 107,099 133,003
GOODWILL AND OTHER INTANGIBLE ASSETS, net of accumulated
amortization of $0 and $2,592 in 1999 and 2000,
respectively.............................................. -- 12,118
OTHER ASSETS, net........................................... 1,088 11,060
-------- --------
Total assets.......................................... $475,054 $589,703
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 10,693 $ 17,904
Accrued liabilities....................................... 4,219 21,037
Current maturities of capital lease obligations........... 3,049 32,229
Current maturities of debt................................ -- 713
-------- --------
Total current liabilities............................. 17,961 71,883
CAPITAL LEASE OBLIGATIONS, net of current maturities........ 4,679 41,290
CONVERTIBLE NOTES (7.50% interest payable in stock or
cash)..................................................... -- 150,000
-------- --------
Total liabilities..................................... 22,640 263,173
COMMITMENTS AND CONTINGENCIES (see Note 7)
STOCKHOLDERS' EQUITY:
Common stock, $.0001 par value, 1,000,000,000 shares
authorized, 56,569,000 and 58,561,000 outstanding as of
December 31, 1999 and 2000, respectively (net of 96,000
and 675,000 treasury shares, respectively).............. 6 6
Additional paid-in capital................................ 434,930 460,137
Warrants, authorizing the issuance of 6,336,000 and
7,377,000 shares as of December 31, 1999 and 2000,
respectively............................................ 109,135 127,846
Deferred compensation..................................... (17,654) (13,501)
Accumulated other comprehensive income (loss)............. -- (547)
Accumulated deficit....................................... (74,003) (247,411)
-------- --------
Total stockholders' equity............................ 452,414 326,530
-------- --------
Total liabilities and stockholders' equity............ $475,054 $589,703
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
2
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
1998 1999 2000
---------- ----------- -----------
REVENUE:
Network services..................................... $ 212 $ 1,422 $ 10,969
Value added services................................. -- 448 3,363
---------- ----------- -----------
Total revenue...................................... 212 1,870 14,332
OPERATING EXPENSES:
Network operations................................... 2,358 7,554 43,389
Cost of value added services......................... -- 128 2,356
Selling expense...................................... 1,623 9,296 44,535
General and administrative expenses.................. 9,736 25,981 60,763
Depreciation and amortization........................ 499 5,007 36,155
Amortization of deferred compensation................ -- 14,681 9,418
Total operating expenses........................... 14,216 62,647 196,616
---------- ----------- -----------
OPERATING INCOME (LOSS)................................ (14,004) (60,777) (182,284)
---------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense..................................... (724) (1,275) (9,348)
Interest and other income............................ 118 4,564 18,224
---------- ----------- -----------
Total other income (expense)....................... (606) 3,289 8,876
---------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES...................... (14,610) (57,488) (173,408)
PROVISION FOR INCOME TAXES............................. -- -- --
---------- ----------- -----------
NET INCOME (LOSS)...................................... (14,610) (57,488) (173,408)
ACCRUED DIVIDENDS ON PREFERRED STOCK................... (452) (6,452) --
---------- ----------- -----------
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK........... $ (15,062) $ (63,940) $ (173,408)
========== =========== ===========
NET INCOME (LOSS) PER COMMON SHARE..................... $(8.09) $(2.15) $(3.18)
========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING.......... 1,862,000 29,736,000 54,472,000
========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
3
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
COMMON STOCK WARRANTS
----------------------- --------------------
NUMBER NUMBER
OF ADDITIONAL OF DEFERRED ACCUMULATED
SHARES AMOUNT PAID-IN CAPITAL SHARES AMOUNT COMPENSATION DEFICIT
---------- ---------- ---------------- --------- -------- ------------ ---------------
BALANCE, December 31, 1997..... 241,000 $ -- $ 163 -- $ -- $ -- $ (1,905)
Net income (loss).............. -- -- -- -- -- -- (14,610)
Other comprehensive income --
foreign currency translation
adjustment................... -- -- -- -- -- -- --
Comprehensive income...........
Issuance of common stock, net
of issuance costs.......... 25,475,000 3 (316) -- -- -- --
Capital contribution......... -- -- 980 -- -- -- --
Accrued cumulative dividends
on preferred stock......... -- -- (452) -- -- -- --
---------- ---------- -------- --------- -------- -------- ---------
BALANCE, December 31, 1998..... 25,716,000 3 375 -- -- -- (16,515)
Net income (loss).............. -- -- -- -- -- -- (57,488)
Other comprehensive income --
foreign currency translation
adjustment................... -- -- -- -- -- -- --
Comprehensive income...........
Issuance of common stock, net
of stock repurchases and
issuance costs............. 24,353,000 2 284,768 -- -- -- --
Conversion of preferred
stock...................... 6,500,000 1 123,904 -- -- -- --
Issuance of warrants......... -- -- -- 6,336,000 109,135 -- --
Accrued cumulative dividends
on preferred stock......... -- -- (6,452) -- -- -- --
Deferred compensation........ -- -- 32,335 -- -- (32,335) --
Amortization of deferred
compensation............... -- -- -- -- -- 14,681
---------- ---------- -------- --------- -------- -------- ---------
BALANCE, December 31, 1999..... 56,569,000 6 434,930 6,336,000 109,135 (17,654) (74,003)
Net income (loss).............. -- -- -- -- -- -- (173,408)
Other comprehensive income --
foreign currency translation
adjustment................... -- -- -- -- -- -- --
Comprehensive income...........
Issuance of common stock, net
of stock repurchases and
issuance costs............. 1,280,000 -- 5,278 -- -- -- --
Issuance of warrants......... -- -- -- 1,753,000 33,375 -- --
Exercise of warrants......... 712,000 -- 14,664 (712,000) (14,664) -- --
Deferred compensation........ -- -- 5,265 -- -- (5,265) --
Amortization of deferred
compensation............... -- -- -- -- -- 9,418 --
---------- ---------- -------- --------- -------- -------- ---------
BALANCE, December 31, 2000..... 58,561,000 $ 6 $460,137 7,377,000 $127,846 $(13,501) $(247,411)
========== ========== ======== ========= ======== ======== =========
ACCUMULATED OTHER
COMPREHENSIVE EQUITY COMPREHENSIVE
INCOME (LOSS) TOTAL INCOME
----------------- --------- -----------------
BALANCE, December 31, 1997..... $ -- $ (1,742) $
Net income (loss).............. -- (14,610) (14,610)
Other comprehensive income --
foreign currency translation
adjustment................... -- -- --
---------
Comprehensive income........... (14,610)
---------
Issuance of common stock, net
of issuance costs.......... -- (313)
Capital contribution......... -- 980
Accrued cumulative dividends
on preferred stock......... -- (452)
----- --------- ---------
BALANCE, December 31, 1998..... -- (16,137)
Net income (loss).............. -- (57,488) (57,488)
Other comprehensive income --
foreign currency translation
adjustment................... -- -- --
---------
Comprehensive income........... (57,488)
---------
Issuance of common stock, net
of stock repurchases and
issuance costs............. -- 284,770
Conversion of preferred
stock...................... -- 123,905
Issuance of warrants......... -- 109,135
Accrued cumulative dividends
on preferred stock......... -- (6,452)
Deferred compensation........ -- --
Amortization of deferred
compensation............... -- 14,681
----- --------- ---------
BALANCE, December 31, 1999..... -- 452,414
Net income (loss).............. -- (173,408) (173,408)
Other comprehensive income --
foreign currency translation
adjustment................... (547) (547) (547)
---------
Comprehensive income........... $(173,955)
=========
Issuance of common stock, net
of stock repurchases and
issuance costs............. -- 5,278
Issuance of warrants......... -- 33,375
Exercise of warrants......... -- --
Deferred compensation........ -- --
Amortization of deferred
compensation............... -- 9,418
----- ---------
BALANCE, December 31, 2000..... $(547) $ 326,530
===== =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(IN THOUSANDS)
1998 1999 2000
-------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(14,610) $ (57,488) $(173,408)
Adjustments to reconcile net income (loss) to net cash
used in operating activities --
Depreciation and amortization........................... 499 19,688 45,573
Changes in assets and liabilities, net of the effect of
acquisitions
Increase in accounts receivable, net.................. (20) (239) (2,260)
(Increase) decrease in prepaid expenses............... (128) (5,316) 515
(Increase) decrease in other assets................... (992) 1,299 (4,673)
Increase in accounts payable and accrued
liabilities......................................... 2,454 11,799 15,718
-------- --------- ---------
Net cash used in operating activities............... (12,797) (30,257) (118,535)
-------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (9,738) (28,790) (79,815)
Purchases of short-term investments, net.................. -- (162,013) (50,094)
Acquisition of businesses, net of cash acquired........... -- -- (14,745)
-------- --------- ---------
Net cash used in investing activities............... (9,738) (190,803) (144,654)
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible notes, net of offering cost..... 15,100 -- 145,003
Payments on capital lease obligations..................... (373) (2,167) (6,023)
Payments of debt.......................................... (17,668) -- (391)
Proceeds from issuance of common stock and sale of
subsidiary stock, net of issuance costs................. (321) 284,770 1,728
Proceeds from issuance of preferred stock................. 66,000 51,000 --
Credit facility origination fee........................... -- (1,350) --
Capital contribution...................................... 980 -- --
-------- --------- ---------
Net cash provided by financing activities........... 63,718 332,253 140,317
-------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... -- -- (237)
-------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 41,183 111,193 (123,109)
CASH AND CASH EQUIVALENTS, beginning of period.............. 188 41,371 152,564
-------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period.................... $ 41,371 $ 152,564 $ 29,455
======== ========= =========
SUPPLEMENTARY CASH FLOW DISCLOSURES:
Payments for interest..................................... $ 113 $ 569 $ 6,836
Noncash investing and financing activities -- Equipment
acquired under capital leases........................... $ 2,515 $ 7,754 $ 67,501
Accrued dividends and interest on preferred stock and
convertible notes....................................... $ 452 $ 6,452 $ 500
Warrants issued........................................... $ -- $ 109,135 $ 33,375
Deferred compensation..................................... $ -- $ 32,335 $ 5,265
Conversion of preferred stock............................. $ -- $ 123,904 $ --
Common stock issued for business acquisitions (129,000
shares)................................................. $ -- $ -- $ 4,011
The accompanying notes are an integral part of these consolidated financial
statements.
5
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION:
Allied Riser Communications Corporation ("ARC Corporation") (collectively
including all predecessors, the "Company") is a facilities-based provider of
broadband data, video and voice communications services to small- and
medium-sized businesses in 54 major metropolitan statistical areas in North
America. The Company's services, which today include high-speed Internet access
and other broadband data services, are typically delivered to the Company's
customers over its broadband data 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 this broadband data network,
the Company leverages its existing customer relationships by offering end-to-end
connectivity on a resold basis to businesses located outside these buildings.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CONSOLIDATION
The accompanying financial statements include all wholly owned subsidiaries
and a 68% owned subsidiary, Shared Technologies of Canada ("STOC"). STOC is
owned by the Company's wholly owned subsidiary, ARC Canada. All inter-company
accounts and activity have been eliminated. Minority interest in STOC, is not
presented in the accompanying financial statements because the minority interest
is in a deficit position and the Company continues to record 100 percent of the
losses of STOC.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and marketable securities with
original maturities of three months or less.
The cash balance at December 31, 2000, includes $1,716,000 in escrow which
relates to acquisitions made during 2000 (see Note 10). This escrowed amount is
restricted as to use by the Company.
SHORT-TERM INVESTMENTS
Short-term investments consist primarily of U.S. government and corporate
fixed income securities with original maturities at date of purchase beyond
three months and less than 12 months. Such short-term investments are carried at
their accreted value as the Company intends to hold these securities to
maturity. Also included in short-term investments are corporate fixed income
securities with original maturities beyond 12 months for which management will
exercise its redemption provision within the next 12 months. These securities
comprise less than 2% of total short-term investments. Unrealized gains and
losses on these securities are not significant. As of December 31, 2000,
investments are carried at their original cost, which approximates fair market
value.
LONG-LIVED ASSETS
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated when placed in
service using the straight-line method. Interest is capitalized during the
construction period of system infrastructure based on the rates applicable to
borrowings outstanding during the period. Equipment held under capital lease
obligations is amortized over the shorter of the lease term or estimated useful
life of the asset. Equipment held under capital lease obligations amounted to
approximately $9,169,000 and
6
$73,769,000, net of accumulated amortization of approximately $1,100,000 and
$8,404,000, for the years ended December 31, 1999 and 2000, respectively. Repair
and maintenance costs are expensed as incurred.
REAL ESTATE ACCESS RIGHTS
The Company has entered into agreements to issue warrants to its real estate
partners in conjunction with acquiring real estate access rights. 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
final measurement date for the warrants is the date on which the
telecommunication license agreements are signed and the real estate partners
effectively complete their performance element of the agreement. At the
measurement date, the Company measures the fair market value of the warrants
based on an acceptable pricing model. This asset is amortized over the term of
the related telecommunication license agreement which is generally ten years.
GOODWILL AND OTHER INTANGIBLE ASSETS
The excess of the purchase price of the acquired businesses over the fair
market value of the identifiable net assets of acquired businesses has been
recorded as identifiable intangible assets, including customer lists and
assembled workforce, with the remainder recorded as goodwill. The Company is
amortizing goodwill and intangible assets over a three-year period.
REALIZATION OF LONG-LIVED ASSETS
The Company periodically evaluates its long-lived assets, including property
and equipment and real estate access rights, to determine whether events or
changes in circumstances have occurred that indicate the remaining asset
balances may not be recoverable and an impairment loss should be recorded.
Recoverability of assets is measured by comparing the carrying amount of an
asset to the undiscounted future cash flows estimated to be generated by the
asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair market value of the assets. No such impairments have been
recorded as of December 31, 2000.
SELF-INSURANCE RESERVES
The Company has accrued for costs related to medical claims. At the time of
an incident, the Company records a reserve for the incident's estimated outcome,
which may be adjusted, as additional information becomes available. Total
accrued claims liabilities represent all such reserves and the Company's
estimate for incidents which may have been incurred but not reported as of the
balance sheet date. Management believes that any additional cost incurred over
amounts accrued will not have a material adverse effect on the Company's
financial position or results of operations.
TREASURY STOCK
Pursuant to a stockholders' agreement, the Company periodically repurchases
shares of the Company's common stock. Shares repurchased are accounted for under
the cost method.
REVENUE RECOGNITION
Network services revenue includes broadband data, video, voice communication
and installation services. Broadband data and video are subscription-based
services generally provided to customers under month-to-month contracts. Voice
communications and installation services are usage-based services. Installation
service fees are non-recurring fees for access to the Company's network. Service
7
revenues are recognized in the month in which the services are provided, except
for installation service fees which are deferred and recognized over the
estimated customer life. Deferred service fees were approximately $0 and
$1,166,000 at December 31, 1999 and 2000, respectively, and are included in
accrued liabilities in the accompanying financial statements.
Value added service revenue includes web design and consulting, professional
services and web hosting. Such services are recognized upon completion of
services.
During 2000, the Company adopted Staff Accounting Bulletin (SAB) No. 101.
"Revenue Recognition in Financial Statements." SAB No. 101 provides additional
guidance on revenue recognition as well as criteria for when revenue is
generally realized and earned. The adoption of SAB No. 101 did not have a
material effect on the Company's results of operation for the year ended
December 31, 2000.
NETWORK OPERATIONS
Network operations include payments to providers of transmission capacity,
costs associated with customer care, customer installations, equipment
maintenance, payments to real estate owners, property taxes and content
licensing costs. All expenses related to network services are recognized as
incurred.
COST OF VALUE ADDED SERVICES
Cost of value added services includes direct costs and internal labor
associated with web design and consulting, professional services and web
hosting. All expenses related to value added services are recognized as
incurred.
SELLING EXPENSE
Selling expense includes employee salaries, commissions, taxes, benefits,
advertising, marketing and promotional expenses and costs associated with
leasing and operating sales demonstration centers.
INCOME TAXES
Deferred income tax assets and liabilities are recorded for the differences
between the tax and financial reporting basis of the assets and liabilities and
are based on the enacted income tax rates which are expected to be in effect in
the period in which the difference is expected to be settled or realized. A
change in tax laws would result in adjustments to the deferred tax assets and
liabilities. Management periodically evaluates whether it is more likely than
not that some or all of the deferred tax assets will be realized. Adjustments
are made to the related assets carrying values based on this periodic evaluation
of realizability (see Note 11).
COMPREHENSIVE INCOME (LOSS)
Comprehensive income is defined as the change in equity (net assets) of a
business enterprise during a period as a result of transactions from other
events and circumstances from non-owner sources. It consists of net income and
other gains and losses affecting stockholders' equity that, under accounting
principles generally accepted in the United States, are excluded from net
income, such as unrealized gains and losses on investments available for sale,
foreign currency translation gains and losses and minimum pension liability.
Currency translation is the only item of other comprehensive income impacting
the Company.
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
8
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 stockholders 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.
Restricted stock issued to employees is subject to repurchase by the Company
until vested, and such unvested shares are not included in the weighted average
number of common shares outstanding for the period. Shares of restricted stock
outstanding were 2,447,000, 2,315,000 and 859,000 as of December 31, 1998, 1999
and 2000, respectively.
Options to purchase approximately 0, 1,504,000 and 8,738,000 shares of
common stock, were outstanding as of December 31, 1998, 1999 and 2000,
respectively. Warrants to purchase 0, 6,336,000 and 7,377,000 shares of common
stock, were outstanding as of December 31, 1998, 1999 and 2000, respectively. In
addition, certain equity instruments are contingently issuable and would be
potentially dilutive securities upon issuance (see Note 8).
Diluted EPS are not presented as all potentially dilutive securities would
be antidilutive due to the net loss incurred for the years ended December 31,
1998, 1999 and 2000.
SEGMENTS
The Company's chief operating decision maker evaluates performance based
upon underlying information of the Company as a whole. There are no additional
reporting segments.
INTERNATIONAL OPERATIONS
The Company recognized a total of $1,992,000 of revenue from operations in
Canada through its wholly owned subsidiary, ARC Canada, for the year ended
December 31, 2000. Long-lived assets of ARC Canada were $18,676,000 as of
December 31, 2000.
USE OF ESTIMATES IN FINANCIAL STATEMENTS
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of expenses during the
reporting period. Actual results may differ from those estimates.
RECLASSIFICATIONS
Certain 1998 and 1999 balances have been reclassified to conform to the
current year presentation.
FOREIGN CURRENCY TRANSLATION
For the Company's Canadian subsidiary, the local currency is the functional
currency. All assets and liabilities are translated at exchange rates in effect
at the end of the period, and income and expense items are translated at the
average exchange rates for the period. Translation adjustments are reported as a
separate component of stockholders' equity.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 requires that
all derivatives be recognized at fair value as either assets or liabilities.
SFAS No. 133 also requires an entity that elects to apply hedge accounting to
9
establish the method to be used in accessing the effectiveness of the hedging
derivatives and the measurement approach for determining the ineffectiveness of
the hedge at the inception of the hedge. The methods chosen must be consistent
with the entity's approach to managing risk. SFAS No. 133 is effective for the
Company as of January 1, 2001. SFAS No. 133 is not expected to have an effect on
the Company, as the Company has historically not invested in derivatives or
participated in hedging activities.
3. PROPERTY AND EQUIPMENT, NET:
Property and equipment as of December 31 consist of the following:
AVERAGE
ESTIMATED
USEFUL LIVES
(YEARS) 1999 2000
------------ ------------ ------------
Office equipment and information systems.............. 4 $ 13,789,000 $ 38,526,000
Furniture and fixtures................................ 7 2,207,000 4,292,000
Leasehold improvements................................ 5 1,768,000 3,419,000
System infrastructure................................. 10 9,028,000 30,573,000
System equipment...................................... 5 7,180,000 43,468,000
Construction-in-progress.............................. 16,062,000 82,783,000
------------ ------------
50,034,000 203,061,000
Less -- Accumulated depreciation and amortization..... (3,457,000) (20,619,000)
------------ ------------
Property and equipment, net........................... $ 46,577,000 $182,442,000
============ ============
Capitalized interest for the years ended December 31, 1998, 1999 and 2000,
was approximately $221,000, $0 and $1,150,000, respectively.
4. OTHER ASSETS, NET:
Other assets primarily include deferred debt issuance costs and long term
deposits as required by lease agreements. Deferred debt issuance was recorded
upon issuance of $150,000,000 convertible notes and is being amortized over the
life of the related agreement. The balance as of December 31, 2000, was
approximately $4,639,000, net of accumulated amortization of $358,000. Deposits
required by lease agreements were approximately $5,202,000 and are refundable
upon expiration of the related agreements.
5. ACCRUED LIABILITIES:
Accrued liabilities as of December 31 consist of the following:
1999 2000
---------- -----------
Property and equipment additions............................ $2,863,000 $ 334,000
General operating expenses.................................. 1,129,000 15,707,000
Due to former stockholders of an acquired company........... 0 1,168,000
Deferred revenue............................................ 0 1,166,000
Interest.................................................... 227,000 2,662,000
---------- -----------
Accrued Liabilities......................................... $4,219,000 $21,037,000
========== ===========
10
6. DEBT:
In March 1999, the Company entered into a credit facility under which the
Company could borrow up to $45,000,000 subject to certain conditions. The
Company paid an origination fee of $1,350,000, which was fully amortized to
interest expense during 1999 and 2000. During June 2000, the Company terminated
this facility. No amounts had been drawn under this facility at the date of
termination.
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 (the "Notes"). The Company
incurred expenses of approximately $4,997,000, of which approximately $4,500,000
represented underwriting fees and approximately $497,000 represented other
expenses related to the offering. The net offering proceeds to the Company after
total expenses were approximately $145,003,000. The Notes may be converted at
the option of the holders into shares of the Company's common stock at an
initial conversion price of $15.37 per share, which may be adjusted based on
certain antidilution provisions included in the intenture related to the Notes.
Interest is payable semiannually on June 15 and December 15, and is payable, at
the election of the Company, in either cash or registered shares of the
Company's common stock. 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. During 2000, a shelf registration
statement on Form S-3 (Commission File No. 333-50026) was filed with the
Securities and Exchange Commission registering the Notes and the shares of
common stock issuable upon conversion of the Notes and as payment-in kind
interest on the Notes. Total interest expense incurred during 2000 related to
the Notes was approximately $5,719,000, of which $5,219,000 was paid in cash and
$500,000 is included in accrued liabilities in the accompanying balance sheet.
In connection with the Company's acquisition of businesses, the Company
recognized notes of approximately $713,000 which are currently payable.
7. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES
The Company has entered into various operating lease agreements, with
expirations through 2010, for leased space and equipment. Future minimum lease
obligations as of December 31, 2000, related to the Company's operating leases
are as follows:
2001........................................................ $11,107,000
2002........................................................ 12,037,000
2003........................................................ 12,409,000
2004........................................................ 10,012,000
2005........................................................ 6,143,000
Thereafter.................................................. 5,591,000
-----------
Total minimum lease obligations......................... $57,299,000
===========
Total operating lease expenses for the years ended December 31, 1998, 1999
and 2000, was approximately $586,000, $1,946,000 and $9,321,000, respectively.
11
CAPITAL LEASES
The Company has entered into various capital leases for equipment. Future
minimum lease obligations as of December 31, 2000, related to the Company's
capital leases are as follows:
2001........................................................ $39,484,000
2002........................................................ 28,832,000
2003........................................................ 15,263,000
2004........................................................ 754,000
2005........................................................ 33,000
Total minimum lease obligations......................... 84,366,000
Less -- Amounts representing interest....................... (10,847,000)
-----------
Present value of minimum lease obligations.................. 73,519,000
Current maturities.......................................... (32,229,000)
-----------
Capital lease obligations, net of current maturities........ $41,290,000
===========
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 broadband
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 intercity 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 December 31, 2000, related to the Company's
connectivity contracts are as follows:
2001........................................................ $14,956,000
2002........................................................ 2,509,000
2003........................................................ 1,062,000
2004........................................................ 215,000
2005........................................................ 181,000
-----------
Total minimum lease obligations............................. $18,923,000
===========
Total connectivity expense for the years ended December 31, 1998, 1999 and
2000, was approximately $463,000, $2,144,000 and $19,557,000, respectively.
LITIGATION
The Company is involved in certain litigation arising in the ordinary course
of business. Management believes that such litigation will be resolved without
material effect on the Company's financial position or results of operations.
ACQUISITION COMMITMENTS
During 2000, the Company completed five acquisitions as described in
Note 10. Additional amounts are potentially payable to the former owners of the
acquired companies and are contingent upon the achievement of certain
performance levels. The performance levels relate to various
12
employment and financial targets that extend into 2003 and that may or may not
be achieved. Payment of all these contingent amounts would result in additional
goodwill and/or compensation expense. If all performance targets are achieved
the Company would be obligated to pay up to $540,000 in cash, issue up to
861,000 shares of common stock of the Company, release from restriction warrants
underlying 250,000 shares of common stock of the Company, release from
restriction 759,000 shares of restricted stock and issue shares of common stock
(in addition to the 861,000 shares previously discussed) equivalent to
$1,100,000 as of the date of issuance. Additional goodwill and/or compensation
expense will be recorded as it becomes probable that such amounts will be paid
to the former owners of the acquired companies.
8. EQUITY:
COMMON STOCK
Pursuant to an investment agreement dated November 23, 1998, and in
connection with a preferred investment (see below), the Company issued to a
group of investors approximately 13,270,000 shares of common stock for $.0015
per share and approximately 7,291,000 shares of common stock for $.0015 per
share to a second group of investors in December 1998.
During 1998, accrued interest totaling $980,000 was contributed by an
investor and a real estate owner. As both are related parties of the Company,
the contribution was accounted for as a capital transaction and included in the
accompanying consolidated statements of stockholders' equity.
In April 1999, the Company issued 125,000 shares of common stock for
consulting services previously received.
In August 1999, the Company issued 6,059,000 shares of common stock to a
group of financial sponsors and to real estate partners in connections with a
preferred investment. (See Preferred Stock, August 1999 transaction below)
On October 29, 1999, the Company raised gross proceeds of approximately
$305,470,000 in its initial public offering. The Company sold 16,970,550 shares
of common stock at a price of $18 per share.
During the years ended December 31, 1999 and 2000, the Company repurchased
96,000 and 579,000 shares of unvested restricted common stock. During the year
ended December 31, 2000, warrants underlying 712,000 shares of stock were
exercised (see Warrants). During the year ended December 31, 2000, 1,791,000
shares of common stock were issued in connection with acquisitions, of which
759,000 shares are restricted and subject to forfeiture if certain performance
targets are not achieved over the next three years. Of these 1,791,000 shares of
common stock, 129,000 shares were purchase consideration while 1,662,000 shares
were compensation to employees of the acquired companies. During the year ended
December 31, 2000, 52,000 shares of common stock were issued in connection with
the Company's employee stock purchase plan. Stock options underlying 347,000 and
16,000 shares of common stock of the Company were exercised by employees during
the year ended December 31, 1999 and 2000, respectively.
PREFERRED STOCK
In November and December 1998, the Company issued to groups of investors, 41
and 25 shares of Series A convertible redeemable preferred stock, for
$41,000,000 and $25,000,000 in cash, respectively.
In August 1999, the Company issued 17 shares of Series B preferred stock to
a group of financial sponsors and 34 shares of Series B preferred stock to real
estate partners and their affiliates for approximately $51,000,000 in cash.
13
The holders of the preferred stock were entitled to certain rights
including: redemption, conversion, dividends and liquidation preference, as
defined in the investment agreement. As a result of the redemption provision,
the preferred stock was classified outside of stockholders' equity (deficit).
Simultaneous with the Company's initial public offering and pursuant to
contractual agreements with the preferred stockholders, all of the outstanding
shares of preferred stock were converted into 6,500,000 shares of common stock.
Upon the conversion, accrued dividends of $6,904,000 on the preferred stock were
waived and recorded as a contribution to capital.
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, pursuant to telecommunications license agreements, to
install its broadband data network in these real estate entities' buildings. The
warrants are exercisable upon the occurrence of certain events, as defined in
the warrant acquisition agreements.
The number of warrants the Company is obligated to issue may be adjusted if
certain telecommunication license agreements are not executed and delivered in
accordance with the parameters outlined in the warrant acquisition agreements.
Accordingly, the date for determining the final value of the warrants is the
date on which the telecommunication license agreements are signed and delivered,
as defined, and the real estate partners effectively complete their performance
element of the warrant acquisition agreement. At the measurement date, the
Company will measure the fair market value of the warrants based on an
acceptable pricing model. The warrants also are subject to forfeiture as a
result of subsequent events of default by the real estate partners as outlined
in the warrant acquisition agreement.
During the year ended December 31, 1999, the Company entered into warrant
acquisition agreements for the issuance of 7,004,000 shares of common stock. The
performance obligations underlying 6,336,000 shares of common stock had been
completed as of December 31, 1999. The value of the telecommunication license
agreements (TLA's) related to these 6,336,000 warrants at December 31, 1999, was
$109,135,000.
During the year ended December 31, 2000, the Company entered into warrant
agreements for the issuance of 1,085,000 shares of common stock, net of
adjustments for certain telecommunication license agreements that were not
executed and delivered in accordance with parameters outlined in the warrant
acquisition agreements. The performance obligations related to 1,353,000
warrants were completed during 2000. The value of the TLA's related to these
1,353,000 warrants at December 31, 2000, was $30,979,000. Warrants underlying
712,000 shares of common stock, valued at $14,664,000, were exercised during the
year ended December 31, 2000.
During the year ended December 31, 2000, the Company issued warrants
underlying 150,000 shares of common stock in exchange for services which
resulted in an expense of $2,396,000.
During the year ended December 31, 2000, the Company issued warrants
underlying up to 250,000 shares of common stock in connection with acquisitions.
The exercise of these warrants are contingent upon future events (see Note 7).
9. STOCK COMPENSATION:
RESTRICTED STOCK AWARDS
During 1998 and early 1999, the Company issued approximately 5,753,000
shares of common stock to management, current and former employees and
non-employee stockholders for $.0015 per share. With respect to the stockholders
who are employees of the Company, subscription agreements provide
14
that the shares shall be restricted, non-transferable, and subject to repurchase
by the Company until vested. Upon issuance of the shares to the employees in
1998, certain shares were vested based on employees' prior service with the
Company. Unvested shares vest over four years in equal monthly installments
commencing upon their issuance. Pursuant to contractual arrangements, vesting of
shares may accelerate upon the occurrence of a qualifying business combination
or a combination of a qualifying business combination and termination of
employment without cause. The accelerated vesting provisions differ based upon
the employee's position with the Company. There are no accelerated vesting
provisions related to performance criteria. Upon the resignation or termination
of an employee subscriber for any reason, all unvested shares will be subject to
repurchase by the Company at the price paid by the employee.
The following table presents the activity related to restricted stock for
the years presented.
GRANTED VESTED REPURCHASED OUTSTANDING
--------- --------- ----------- -----------
1998............................ 4,610,000 2,163,000 -- 2,447,000
1999............................ 1,143,000 1,122,000 153,000 2,315,000
2000............................ -- 953,000 503,000 859,000
The vesting schedule for the outstanding shares that have been issued or
subscribed through December 31, 2000, for the years ending is:
2001........................................................ 409,000
2002........................................................ 387,000
2003........................................................ 63,000
During the year ended December 31, 2000, the Company issued 759,000 shares
of restricted stock (see Compensation Charge discussion below). These shares are
subject to certain contingencies based on future events and are not included in
the schedules above (see Note 7).
EQUITY BASED COMPENSATION PLANS
Effective June 1, 1999, the Company adopted the 1999 Amended and Restated
Stock Option and Equity Incentive Plan (the "1999 Plan") under which 5,000,000
shares of common stock are authorized for issuance. Effective June 15, 2000, the
Company adopted the Allied Riser Communications Corporation 2000 Stock Option
and Equity Incentive Plan (the "2000 Plan") under which 8,500,000 shares of
common stock are authorized for issuance (the 1999 Plan and the 2000 Plan,
together the "Plans"). The shares authorized under the Plans, subject to
adjustments, are available for award to employees, officers, directors, or
consultants. Pursuant to the Plans, the Company's board of directors may grant
stock options, stock appreciation rights, restricted shares, deferred shares and
certain tax offset payments. The terms of any particular grant, including any
performance-based requirements, vesting terms and other restrictions are
determined by the Board or by the Compensation Committee of the Board. The
exercise price of nonstatutory options may be above, at or below fair market
value of the common stock on the grant date. The exercise price of incentive
stock options must not be less than the fair market value on the grant date. The
right to purchase shares under the stock options agreements typically vests over
a four-year period. The exercise period of options may be set by the Board or
the Committee but may not exceed ten years for incentive stock options. As of
December 31, 2000, there were 4,694,000 share available for future grants. No
options were granted outside of the Plans.
During June 1999, the Company granted 347,000 stock options to employees
under the 1999 Plan. Each of the options granted included a provision for
exercise through July 26, 1999. All options were exercised prior to that date.
Shares issued upon the exercise of the stock options were restricted and shall
vest on a monthly basis over a four-year period.
15
The Company accounts for stock options and other employee awards under the
provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees." Had compensation costs for the Plans been determined based
on the fair market value of the options as of the grant dates, consistent with
the method prescribed in SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net income (loss) applicable to common stock and
net income (loss) per common share would have resulted in the pro forma amounts
indicated below (dollars in thousands, exception per share data):
1999 2000
-------- ---------
Net income (loss):
As reported.......................................... $(63,940) $(173,408)
Pro forma............................................ (66,167) (195,244)
Net income (loss) per common share:
As reported.......................................... $(2.15) $(3.18)
Pro forma............................................ (2.23) (3.58)
No diluted earnings per share are presented as the Company has generated net
losses and all potentially dilutive securities would be antidilutive.
The weighted average fair market value of options granted during each of the
years ended December 31, 1999 and 2000, were $13.25 and $6.81, respectively. The
fair market value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions:
1999 2000
-------- --------
Expected dividend yield..................................... -- --
Expected stock price volatility............................. 107% 106%
Average risk-free interest rate............................. 5.30% 6.02%
Expected life of options (years)............................ 6 6
16
The following table summarizes stock option activity for the year ended
December 31, 1999 and 2000:
WEIGHTED
AVERAGE
OPTIONS RANGE OF PRICE PRICE
OUTSTANDING PER SHARE EXERCISE
----------- ----------------- --------
Balance at 1/1/99.................................... -- -- $ --
Granted --
Option Price Equal to Fair Market Value.............. 1,566,095 $0.0015 - $22.500 $ 8.8581
Total Granted.................................... 1,566,095 $0.0015 - $22.500 $ 8.8581
Exercised............................................ (22,656) $0.0015 - $0.3336 $ 0.1169
Canceled............................................. (39,022) $0.0015 - $18.000 $ 6.8522
---------- ----------------- --------
Balance at 12/31/99.................................. 1,504,417 $0.0015 - $22.500 $ 9.0532
========== ================= ========
Granted --
Option Price Equal to Fair Market Value.............. 6,146,769 $1.3750 - $41.250 $ 9.3198
Option Price Greater Than Fair Market Value.......... 1,151,414 $4.9063 - $26.875 $ 5.4631
Option Price Less Than Fair Market Value............. 1,388,000 $0.0000 - $26.625 $ 1.6520
Total Granted:................................... 8,686,183 $0.0000 - $41.250 $ 7.5745
Exercised............................................ (45,805) $0.3336 - $0.3336 $ 0.3336
Canceled............................................. (1,407,258) $0.0015 - $41.250 $13.1782
---------- ----------------- --------
Balance at 12/31/00.................................. 8,737,537 $0.0000 - $41.250 $ 6.9645
========== ================= ========
As of December 31, 2000, 735,601 of options outstanding were exercisable. No
options outstanding were exercisable at December 31, 1999. The remaining options
will become exercisable over the next three to four years based on vesting
percentages.
The following table summarizes information about the Company's outstanding
and exercisable stock options at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------- -----------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE AVERAGE
RANGE OF AS OF LIFE EXERCISE AS OF EXERCISE
EXERCISE PRICES 12/31/00 (YEARS) PRICE 12/31/00 PRICE
--------------- ----------- ----------- --------- ----------- ---------
$0.0000-- 4.1250....... 4,740,990 9.6 $ 1.9706 87,948 $ 0.7828
4.1251-- 8.2500........ 1,738,572 8.8 5.3747 230,553 5.1224
8.2501--12.3750........ 158,907 9.6 10.3827 50,000 10.2500
12.3751--16.5000....... 298,052 9.4 14.2789 0 0.0000
16.5001--20.6250....... 1,411,343 7.6 18.0243 362,244 17.9964
20.6251--24.7500....... 37,678 8.6 22.8407 4,856 22.5000
24.7501--28.8750....... 250,041 8.2 25.3271 0 0.0000
28.8751--33.0000....... 52,036 9.2 31.1039 0 0.0000
33.0001--37.1250....... 2,300 9.2 34.7500 0 0.0000
37.1251--41.2500....... 47,618 9.2 40.7246 0 0.0000
--------- --- -------- ------- --------
Total.................. 8,737,537 9.1 $ 6.9656 735,601 $11.4065
========= === ======== ======= ========
17
2000 EMPLOYEE STOCK PURCHASE PLAN
Beginning July 1, 2000, the Company has established an employee stock
purchase plan, the Allied Riser Communications Corporation 2000 Employee Stock
Purchase Plan (the "ESPP"), the terms of which allow qualified employees (as
defined) to participate in the purchase of designated shares of the Company's
common stock at a price equal to the lower of 85% of the closing price on the
first or last day of the offering period. Offering periods begin on the first
day of each fiscal quarter and end on the last day of each fiscal quarter. Under
the ESPP, the Company issued 52,700 and 183,400 shares of common stock for the
third and fourth fiscal quarters of 2000 at an average price per share of $5.64
and $1.73, respectively.
COMPENSATION CHARGE
The Company completed an initial public offering ("IPO") of its securities
on October 29, 1999. The estimated fair market value of the Company's common
stock (as implied by the IPO price) exceeded management's determination of fair
market value of each stock option grant and restricted stock grant made prior to
the IPO. Therefore, the Company has recorded compensation of $32,335,000 for the
excess of the IPO price over the pre-IPO stock option grant and restricted stock
grant price. During the year ended December 31, 1999, $14,681,000 was recorded
as compensation expense and as of December 31, 1999, $17,654,000 was being
deferred and amortized over the remaining estimated employee service period. The
total compensation charge is reduced when employees terminate prior to vesting.
During 2000, certain employees were terminated which resulted in a reduction
of $7,982,000 to the deferred compensation recorded upon the IPO. Amortization
related to this deferred compensation was $6,022,000, net of adjustments for
terminated employees, for the year ended December 31, 2000. As of December 31,
2000, the balance of unamortized deferred compensation recorded upon the IPO was
$3,650,000 and is being amortized over the remaining estimated employee service
period.
In connection with acquisitions of businesses during 2000, the Company has
entered into various employment agreements with former owners and employees of
the acquired companies. The Company recorded deferred compensation of $9,266,000
related to restricted stock granted to employees of the acquired companies.
Amortization related to this deferred compensation was $3,184,000 for the year
ended December 31, 2000. As of December 31, 2000, $6,082,000 is being deferred
and amortized over the remaining estimated employee service period.
During 2000, the Company issued approximately 1,388,000 nonstatutory stock
options with an exercise price less than fair market value on the date of grant
in connection with the employment of senior management. As of December 31, 2000,
the Company has recognized approximately $3,981,000 of deferred compensation and
has recorded approximately $212,000 of amortization of deferred compensation
related to these issuances. As of December 31, 2000, $3,769,000 is being
deferred and amortized over the remaining vesting period.
10. ACQUISITIONS:
During the second and third quarters of 2000, the Company acquired all of
the outstanding stock of four high-speed data communication and professional
services companies and 68% of the outstanding stock of Shared Technologies of
Canada (the "acquired companies"). The purchase of each acquired company was
accounted for under the purchase method of accounting for business combinations.
Accordingly, the accompanying consolidated statements of operations do not
include the results of operations related to the acquired companies prior to
each of their respective acquisition dates.
18
The Company purchased the acquired companies for an initial aggregate
purchase price of $16,021,000 in cash of which $1,168,000 was payable at
December 31, 2000, and 129,000 shares of common stock of the Company valued at
approximately $4,011,000. The purchase price may be adjusted if certain
performance targets are achieved (see Note 6). The aggregate fair market value
of tangible assets acquired was $8,337,000 and liabilities assumed were
$12,651,000. The total excess of the purchase price over the fair market value
of the net tangible assets for the acquired companies has been allocated to real
estate access rights (approximately $8,892,000) with the remainder allocated to
goodwill and other intangible assets. The Company is amortizing goodwill and
other intangible assets over a three-year period. Real estate access rights are
being amortized over the life of the related telecommunication license
agreements. The Company's purchase price allocation of the acquisitions is
preliminary and may be adjusted as additional information is obtained and as
contingencies discussed above are resolved. The five acquisitions accounted for
$6,733,000 of the total revenues generated by the Company in 2000.
The following table presents the unaudited pro forma results of operations
of the Company for the years ending December 31, 1999 and 2000, as if these
acquisitions had been consummated at the beginning of each period presented. The
unaudited pro forma results are prepared for comparative purposes only and do
not necessarily reflect the results that would have occurred had the
acquisitions occurred at the beginning of the periods presented or the results
which may occur in the future:
YEAR ENDED
-------------------------------------
DECEMBER 31, 1999 DECEMBER 31, 2000
----------------- -----------------
(UNAUDITED)
Revenues.................................................... $13,018,000 $ 23,034,000
Net income (loss) before extraordinary items................ (64,840,000) (178,207,000)
Net income (loss) applicable to common stock................ (71,292,000) (178,207,000)
Net income (loss) per share, basic and diluted.............. (2.40) (3.27)
11. INCOME TAXES:
The differences between the statutory federal income tax rates and the
Company's effective income tax rate for the years ended December 31, are as
follows:
1998 1999 2000
-------- -------- --------
Computed statutory tax expense.............................. (34.0)% (34.0)% (34.0)%
Deferred compensation....................................... -- 8.7% 1.9%
Other nondeductible expenses................................ 0.1% 0.1% 0.4%
Non-book income............................................. 2.3% -- --
----- ----- -----
Valuation allowance......................................... 31.6% 25.2% 31.7%
Deferred taxes reflect the impact of temporary differences between the
amount of assets and liabilities for financial reporting purposes and such
amounts as incurred by tax laws and regulations.
19
The following table discloses the components of the deferred tax amounts at
December 31:
1998 1999 2000
----------- ------------ ------------
Deferred tax assets --
Temporary difference for basis in and depreciation
of property and equipment........................ $ 158,000 $ 674,000 $ 1,682,000
Start-up costs..................................... 3,896,000 3,104,000 2,329,000
Real estate access rights.......................... -- 692,000 5,832,000
Net operating loss................................. 812,000 14,846,000 63,240,000
Other.............................................. 76,000 98,000 1,270,000
----------- ------------ ------------
Total deferred tax assets........................ 4,942,000 19,414,000 74,353,000
Deferred tax liability............................... -- -- --
----------- ------------ ------------
Net deferred tax asset............................... 4,942,000 19,414,000 74,353,000
Less -- Valuation allowance.......................... (4,942,000) (19,414,000) (74,353,000)
----------- ------------ ------------
Net deferred tax amount.......................... $ -- $ -- $ --
=========== ============ ============
The Company had approximately $186,000,000 of net operating loss carry
forward for federal income tax purposes at December 31, 2000. The net operating
loss carry forward will begin to expire in 2018, if not previously utilized.
Under existing income tax law, all operating expenses incurred prior to a
company commencing its principal operations are capitalized and amortized over a
five-year period for tax purposes. On November 23, 1998, the Company commenced
its principal operations for tax purposes and no longer capitalizes operating
expenses as start-up costs.
A valuation allowance must be provided when it is more likely than not that
some portion of the deferred tax asset will not be realized. Management has
decided to record this allowance due to the uncertainty of future operating
results. In subsequent periods, the Company may reduce the valuation allowance,
provided that utilization of the deferred tax asset is more likely than not, as
defined by SFAS No. 109, "Accounting for Income Taxes."
12. RELATED PARTIES:
The Company has entered into telecommunication license agreements with
numerous real estate owners and managers to acquire access to and the right to
install and operate its broadband data network in their buildings. Most of these
real estate owners and managers received warrants in connection with this access
and nine of these entities purchased equity in the Company (see Note 8). In
accordance with the telecommunication license agreements, the Company pays fees
which vary proportionally (above a fixed minimum) with gross revenues generated
in the respective buildings to these owners. In addition, the Company leases
office space from numerous real estate owners. Pursuant to these obligations,
the Company paid $156,000, $1,047,000, and $4,216,000 for rent and fees during
the years ended December 31, 1998, 1999 and 2000, respectively.
One of the Company's initial investors has interests in entities from which
the Company periodically purchases fiber-optic cable and other materials and has
historically, prior to 2000, purchased insurance and legal services. For the
years ended December 31, 1998, 1999 and 2000, the Company had purchases of
approximately $2,319,000, $2,451,000 and $8,809,000, respectively, for fiber-
optic cable and $387,000, $192,000 and $0 for insurance and legal services,
respectively.
One of the underwriters for the initial public offering described in Note 9
provides financial advisory and consulting services to the Company. Affiliates
of this entity own common stock and warrants of the Company.
20
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
THREE MONTHS ENDED
--------------------------------------------------------------
MAR. 31, 2000 JUNE 30, 2000 SEPT. 30, 2000 DEC. 31, 2000
------------- ------------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total revenue............................... $ 1,358 $ 1,972 $ 4,403 $ 6,599
Operating income (loss)..................... (41,194) (46,933) (49,347) (44,809)
Net income (loss)........................... (37,025) (44,068) (47,217) (45,098)
Net income (loss) applicable to common
stock..................................... $(37,025) $(44,068) $(47,217) $(45,098)
======== ======== ======== ========
Net income (loss) per common share.......... $(.69) $(.81) $(.87) $(.81)
======== ======== ======== ========
Weighted average number of shares
outstanding............................... 53,318 54,272 54,565 55,644
======== ======== ======== ========
THREE MONTHS ENDED
--------------------------------------------------------------
MAR. 31, 1999 JUNE 30, 1999 SEPT. 30, 1999 DEC. 31, 1999
------------- ------------- -------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Total revenue............................... $ 146 $ 401 $ 442 $ 881
Operating income (loss)..................... (5,742) (14,589) (16,162) (24,284)
Net income (loss)........................... (5,327) (14,635) (16,030) (21,496)
Net income (loss) applicable to common
stock..................................... $ (6,977) $(16,285) $(18,270) $(22,408)
======== ======== ======== ========
Net income (loss) per common share.......... $(.31) $(.71) $(.68) $(.48)
======== ======== ======== ========
Weighted average number of shares
outstanding............................... 22,396 22,886 26,809 46,534
======== ======== ======== ========
14. SUBSEQUENT EVENT:
In connection with employee changes initiated during the first quarter of
2001, the Company has made preliminary estimates that the related severance
benefits will cost approximately $970,000. As a result of these changes, the
Company anticipates a net reduction in deferred compensation charges previously
recognized of approximately $3,062,000, of which approximately $2,236,000 has
already been expensed and approximately $826,000 remained to be expensed.
21
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
DECEMBER 31, SEPTEMBER 30,
2000 2001
------------ -------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 29,455 $ 28,482
Short-term investments.................................... 212,107 86,241
Accounts receivable, net of reserve of $196 and $2,599,
respectively............................................ 3,912 1,093
Prepaid expenses and other current assets................. 5,606 2,301
--------- ---------
Total current assets.................................... 251,080 118,117
PROPERTY AND EQUIPMENT, net................................. 182,442 33,191
REAL ESTATE ACCESS RIGHTS, net of accumulated amortization
of $16,003 and $246, respectively......................... 133,003 8,557
GOODWILL AND OTHER INTANGIBLE ASSETS, net of accumulated
amortization of $2,592 and $0, respectively............... 12,118 --
OTHER ASSETS, net........................................... 11,060 8,623
--------- ---------
Total assets............................................ $ 589,703 $ 168,488
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 17,904 $ 7,047
Accrued liabilities....................................... 21,037 22,712
Current maturities of capital lease obligations........... 32,229 35,883
Current maturities of debt................................ 713 604
--------- ---------
Total current liabilities............................... 71,883 66,246
CAPITAL LEASE OBLIGATIONS, net of current maturities........ 41,290 23,189
LONG TERM LIABILITIES:
Long term debt, net of current maturities................. -- 749
Convertible notes (7.50% interest payable in stock or
cash)................................................... 150,000 123,600
--------- ---------
Total liabilities....................................... 263,173 213,784
COMMITMENTS AND CONTINGENCIES (see note 10)
STOCKHOLDERS' EQUITY:
Common stock, $.0001 par value, 1,000,000,000 shares
authorized, 58,561,000 and 60,819,000 outstanding as of
December 31, 2000 and September 30, 2001, respectively
(net of 675,000 and 1,874,000 treasury shares,
respectively)............................................. 6 6
Additional paid-in capital.................................. 460,137 509,294
Warrants, authorizing the issuance of 7,377,000 and
4,496,000 shares as of December 31, 2000 and September 30,
2001, respectively........................................ 127,846 71,127
Deferred compensation....................................... (13,501) (3,340)
Accumulated other comprehensive income (loss)............... (547) (859)
Accumulated deficit......................................... (247,411) (621,524)
--------- ---------
Total stockholders' equity (deficit).................... 326,530 (45,296)
--------- ---------
Total liabilities and stockholders' equity.............. $ 589,703 $ 168,488
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
22
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2000 2001
---------- ----------
(UNAUDITED)
REVENUE:
Network services.......................................... $ 6,161 $ 18,547
Value added services...................................... 1,572 5,680
---------- ----------
Total revenue........................................... 7,733 24,227
OPERATING EXPENSES:
Network operations (including $707 and $477 amortization
of deferred compensation, respectively)................. 30,365 57,050
Cost of value added services.............................. 1,101 4,013
Selling expense (including $1,580 and $1,484 amortization
of deferred compensation, respectively)................. 36,005 19,062
General and administrative expenses (including $7,968 and
$(616) amortization of deferred compensation,
respectively)........................................... 52,696 36,397
Depreciation and amortization............................. 25,041 32,484
Asset write-down.......................................... -- 262,336
---------- ----------
Total operating expenses................................ 145,208 411,342
---------- ----------
OPERATING LOSS.............................................. (137,475) (387,115)
OTHER INCOME (EXPENSE):
Interest expense.......................................... (4,632) (11,533)
Interest and other income................................. 13,797 6,780
---------- ----------
Total other income (expense)............................ 9,165 (4,753)
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES........................... (128,310) (391,868)
---------- ----------
INCOME TAX BENEFIT.......................................... -- 6,037
---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM..................... (128,310) (385,831)
---------- ----------
EXTRAORDINARY GAIN FROM EXTINGUISHMENT OF DEBT, net......... -- 11,718
---------- ----------
NET INCOME (LOSS)........................................... $ (128,310) $ (374,113)
========== ==========
NET INCOME (LOSS) PER COMMON SHARE:
Loss before extraordinary item............................ (2.38) (6.49)
Extraordinary gain, net................................... -- .20
---------- ----------
NET INCOME (LOSS) PER COMMON SHARE.......................... $ (2.38) $ (6.29)
---------- ----------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING............... 53,911,000 59,493,000
========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
23
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 2001
(IN THOUSANDS)
2000 2001
----------- -----------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (128,310) $ (374,113)
Adjustments to reconcile net income (loss) to net cash
used in operating activities
Depreciation and amortization............................. 35,296 33,829
Extraordinary gain from extinguishment of debt, net....... -- (11,718)
Deferred income taxes..................................... -- (6,037)
Write-down of assets...................................... -- 262,336
Loss on sale of assets, net............................... -- 1,914
Other non-cash expenses................................... -- 1,799
Changes in assets and liabilities, net of the effect of
acquisitions
Increase in accounts receivable, net.................... (1,989) (158)
Decrease in prepaid expenses............................ 247 2,639
(Increase) decrease in other assets..................... (4,946) 1,590
Increase (decrease) in accounts payable, accrued
liabilities and deferred revenue...................... 38,023 (7,338)
----------- -----------
Net cash used in operating activities................. (61,679) (95,257)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (79,748) (7,159)
Purchase of short-term investments, net................... (4,099) --
Proceeds from sale of short-term investments, net......... -- 125,865
Proceeds from sale of assets, net......................... -- 121
Acquisition of businesses, net of cash acquired........... (14,698) (164)
----------- -----------
Net cash (used in) provided by investing activities... (98,545) 118,663
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible notes, net of offering cost..... 145,000 --
Payments on capital lease obligations..................... (4,477) (16,336)
Payments on debt.......................................... (351) (1,159)
Payments on principal for convertible notes............... -- (7,392)
Proceeds from issuance of common stock and sale of
subsidiary stock, net of issuance costs................. 1,554 545
----------- -----------
Net cash provided by (used in) financing activities... 141,726 (24,342)
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (3) (37)
DECREASE IN CASH AND CASH EQUIVALENTS....................... (18,501) (973)
CASH AND CASH EQUIVALENTS, beginning of period.............. 152,564 29,455
----------- -----------
CASH AND CASH EQUIVALENTS, end of period.................... $ 134,063 $ 28,482
=========== ===========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest.................................... $ 783 $ 9,393
Noncash investing and financing activities
Equipment acquired under capital leases................. $ 45,264 $ 2,198
Accrued interest on convertible notes................... $ 2,843 $ 2,730
Warrants issued......................................... $ 33,292 $ 95
Deferred compensation................................... $ 15,857 $ (3,405)
Treasury shares issued for bonus payments (425,000
shares)............................................... $ -- $ 1,138
The accompanying notes are an integral part of these consolidated financial
statements.
24
ALLIED RISER COMMUNICATIONS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000 AND 2001
(UNAUDITED)
1. ORGANIZATION:
Allied Riser Communications Corporation ("ARC Corporation") (collectively
including all predecessors, the "Company") is a facilities-based provider of
broadband data, video and voice communications services to small- and
medium-sized businesses. The Company suspended its retail services in most of
its markets in the United States on September 21, 2001. The Company is pursuing
the provision of in-building wholesale services of its broadband data network.
2. PRESENTATION:
In the opinion of the Company's management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the Company's
consolidated financial position as of September 30, 2001. The results of
operations for the three and nine months ended September 30, 2000 and 2001, and
cash flows for the nine months ended September 30, 2000 and 2001, 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, 2000, and the notes thereto included in the Company's Annual Report
on Form 10-K. The accompanying unaudited consolidated financial statements
include all wholly owned subsidiaries and a 68% owned subsidiary, Shared
Technologies of Canada ("STOC"). STOC is owned by the Company's wholly owned
subsidiary, ARC Canada. All inter-company accounts and activity have been
eliminated. The minority interest in STOC is not presented in the accompanying
financial statements because the minority interest is in a deficit position and
the Company continues to record 100 percent of the losses of STOC. All results
are reported in United States dollars. Pursuant to a shareholders agreement
dated July 26, 2000 between Allied Riser and the minority shareholders in STOC,
effective October 31, 2001, such minority shareholders have the right to cause
Allied Riser to purchase their shares of STOC at a per share price determined by
a formula described in the shareholders agreement. During January 2002, the
minority shareholders of STOC exercised this right (see note 14).
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of expenses during the
reporting period. Management may be required to make significant estimates of,
among other things, the fair value of long-lived assets, allowance for doubtful
accounts, and amounts recorded for acquisition contingencies. Actual results may
differ from those estimates.
3. PROPOSED MERGER:
On August 28, 2001, the Company entered into a merger agreement with Cogent
Communications Group, Inc., which was subsequently amended on October 13, 2001,
under which agreement each share of its common stock would be exchanged for
Cogent common stock. The merger is conditioned upon, among other things,
approval by the Company's stockholders, the approval for listing or quotation of
25
the shares of Cogent common stock to be issued in the merger on a national
securities exchange or the Nasdaq National Market, and the receipt of material
consents.
4. COMPREHENSIVE INCOME (LOSS):
Comprehensive income is defined as the change in equity (net assets) of a
business enterprise during a period as a result of transactions from other
events and circumstances from non-owner sources. It consists of net loss and
other gains and losses affecting stockholders' equity that, under accounting
principles generally accepted in the United States, are excluded from net loss,
such as unrealized gains and losses on investments available for sale, foreign
currency translation gains and losses and minimum pension liability. Currency
translation is the only item of comprehensive income impacting the Company. Set
forth below is the effect on the Company of currency translation for the
indicated periods:
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- -------------------------------
SEPT. 30, 2000 SEPT. 30, 2001 SEPT. 30, 2000 SEPT. 30, 2001
-------------- -------------- -------------- --------------
Net income (loss).................... $(47,217,000) $(39,649,000) $(128,310,000) $(374,113,000)
Comprehensive income adjustments:
Foreign currency translation
adjustment..................... (595,000) (106,000) (595,000) (312,000)
------------ ------------ ------------- -------------
Comprehensive income (loss).......... $(47,812,000) $(39,755,000) $(128,905,000) $(374,425,000)
5. INTERNATIONAL OPERATIONS:
The Company recognizes revenue from operations in Canada through its wholly
owned subsidiary, ARC Canada. All revenue is reported in United States dollars.
Revenue for ARC Canada was $815,000 and $1,282,000 for the three months ended
September 30, 2000 and 2001, respectively. Revenue for ARC Canada was $815,000
and $4,036,000 for the nine months ended September 30, 2000 and 2001,
respectively. Long-lived assets of ARC Canada were $18,676,000 and $5,219,000 as
of December 31, 2000 and September 30, 2001, respectively.
6. NET LOSS PER SHARE:
Net loss per share is presented in accordance with the provisions of
Statement of Financial Accounting Standards No. 128 ("SFAS No. 128"), "Earnings
Per Share" ("EPS"). SFAS No. 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 stockholders 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 4,897,000 and 4,496,000 shares of
common stock, respectively, were outstanding at September 30, 2001.
Diluted EPS are not presented as all potentially dilutive securities would
be antidilutive due to the net loss incurred for the three and nine months ended
September 30, 2000 and 2001.
7. ASSET WRITE-DOWN:
During the second quarter of 2001, numerous adverse changes in the Company's
industry and the economic environment as a whole, including significant declines
in valuation of competitive
26
telecommunications providers, continued weakness in the demand for information
technology and telecommunications services, and business failures of several
prominent companies in markets similar to the Company's caused the Company to
conclude that its prospects for future cash flows had weakened and operating
risks had increased. Additionally, during the second quarter of 2001, the
Company made certain changes in its operations. Both these external and internal
changes triggered a review of long-lived assets, including building and
network-related assets, real estate access rights, property and equipment, and
goodwill. This review indicated that undiscounted cash flows expected to be
generated by such assets were not sufficient to recover the historical book
value of long-lived assets and that such assets should be reduced to fair value.
The Company calculated the present value of estimated cash flows to determine
management's estimate of fair market value for the building and system
infrastructure and real estate access rights. To determine the value of other
assets, including system equipment, furniture, fixtures, software and equipment,
the Company used the lower of the historical cost or management's estimate of
fair market value. Based on the Company's current evaluation of the present
value of expected cash flows of its subsidiaries acquired in 2000, the Company
concluded that related long-lived assets and goodwill should be written down.
The total amount of write down by category is as follows:
AMOUNT OF ASSET
WRITE-DOWN
---------------
Property and equipment:
System infrastructure..................................... $ 58,108,000
Other assets.............................................. 78,051,000
------------
Total property and equipment................................ 136,159,000
Real estate access rights................................... 116,449,000
Goodwill.................................................... 9,728,000
------------
Total....................................................... $262,336,000
============
In addition, on July 24, 2001, the Company announced a number of initiatives
to further reduce its operating costs and refocus its business plan. These
initiatives included the suspension of retail sales of broadband data
applications and services, the transition of its current retail customers to
other service providers, the closure of the Company's sales offices, and a
further reduction in the number of employees by approximately 75% of the
Company's workforce. The Company also announced its intention to pursue a
business plan that contemplates the provision of in-building wholesale services
of its broadband data network.
In connection with the implementation of announced cost-cutting measures,
the Company may in the future recognize accelerated depreciation for
discontinued use of software. During the three and nine months ended September
30, 2001, the Company discontinued the use of certain software, thus reducing
its useful life, which resulted in the recognition of $3,679,000 and $4,715,000,
respectively, in accelerated depreciation. The Company will continue to evaluate
its long-lived assets, including property and equipment and real estate access
rights, to determine whether changes in circumstances have occurred that
indicate the remaining asset balances may not be recoverable and an impairment
loss should be recognized.
27
8. PROPERTY AND EQUIPMENT:
Property and equipment as of September 30, 2001, consist of the following:
AVERAGE
ESTIMATED
USEFUL LIVES
(YEARS)
------------
Office equipment and information systems............ 4 $ 29,580,000
Furniture and fixtures.............................. 7 2,294,000
Leasehold improvements.............................. 5 4,005,000
System infrastructure............................... 10 7,682,000
System equipment.................................... 5 7,003,000
------------
Property and equipment, gross....................... 50,564,000
------------
Less - accumulated depreciation and amortization.... (17,373,000)
------------
Property and equipment, net......................... $ 33,191,000
============
Capitalized interest for the nine months ended September 30, 2000 and 2001,
was approximately $300,000 and $1,143,000, respectively.
9. 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 (the "Notes"). The Company
incurred expenses of approximately $4,997,000, of which approximately $4,500,000
represented underwriting fees and approximately $497,000 represented other
expenses related to the offering. The net offering proceeds to the Company after
total expenses were approximately $145,003,000. The Notes may be converted at
the option of the holders into shares of the Company's common stock at an
initial conversion price of $15.37 per share, which may be adjusted based on
certain antidilution provisions in the intenture related to the Notes (the
"Indenture"). Interest is payable semiannually on June 15 and December 15, and
is payable, at the election of the Company, in either cash or registered shares
of the Company's common stock. 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. During 2000, a shelf registration
statement on Form S-3 (Commission File No. 333-50026) was filed with the
Securities and Exchange Commission registering some of the Notes for resale, the
shares of common stock issuable upon conversion of the Notes and as payment-in
kind interest on the Notes.
On May 11, 2001, the Company commenced a tender offer to purchase any and
all of the Notes for a purchase price of $280 in cash per $1,000 of principal
amount of Notes, plus accrued but unpaid interest on the Notes up to but
excluding the date on which the Company deposited the funds with the depositary
to purchase the accepted Notes. On June 12, 2001, the Company announced the
completion of the tender offer, accepting for purchase $26,400,000 of the
aggregate principal amount of the Notes, representing approximately 17.6% of the
$150,000,000 aggregate principal amount of the Notes outstanding prior to the
tender offer. The Company paid $8,360,000 in cash, including $968,000 for
accrued but unpaid interest, to complete the tender offer. An extraordinary gain
of $11,718,000, net of $6,037,000 in income taxes, was recognized as a result of
the early extinguishment of a portion of the aggregate principal amount of the
Notes. The extraordinary gain also includes $486,000 of expenses incurred with
the offer and a $767,000 write-off of associated debt issuance costs.
The Indenture includes a provision requiring the repurchase of the Notes at
the option of the holders upon a change in control as defined in the Indenture.
Management does not believe that the proposed merger, as set forth in the
Agreement and Plan of Merger dated August 28, 2001, as
28
amended, by and among the Company, Cogent Communications Group, Inc. and
Augustus Caesar Merger Sub, Inc., will be deemed a change in control as defined
in the Indenture.
10. COMMITMENTS AND CONTINGENCIES:
Outlined below are commitments and contingencies for the Company's operating
leases, capital leases, connectivity contracts, legal proceedings, acquisition
commitments, and retention plan. From time to time, the Company may decide to
use cash for early retirement of such commitments and contingencies. As a result
of the Company's suspension of retail operations, the Company is continuing its
efforts to terminate contractual obligations that are not needed in connection
with the Company's ongoing business. As a result, certain contractual
obligations without future benefit may be terminated which may result in
contractual commitments being paid in periods prior to those outlined below,
which may accelerate the recognition of these expenses.
OPERATING LEASES
The Company has entered into various operating lease agreements, with
expirations through 2010, for leased space and equipment. Future minimum lease
obligations related to the Company's operating leases, net of settled leases as
discussed below, are as follows for the twelve months ended September 30:
2002........................................................ $11,200,000
2003........................................................ 12,140,000
2004........................................................ 10,460,000
2005........................................................ 7,282,000
2006........................................................ 3,548,000
Thereafter.................................................. 3,937,000
-----------
Total minimum lease obligations......................... $48,567,000
===========
During the third quarter, the Company paid $705,000 to settle certain
operating leases prior to their expiration, which terminated $2,962,000 in
future obligations. Subsequent to September 30, the Company paid $118,000 to
settle additional operating leases prior to their expiration, which terminated
$524,000 in future obligations. Total operating lease expenses for the nine
months ended September 30, 2000 and 2001, were approximately $6,020,000 and
$6,641,000 (including $705,000 of termination fees), respectively.
29
CAPITAL LEASES
The Company has entered into various capital leases for equipment. Future
minimum lease obligations related to the Company's capital leases are as follows
for the twelve months ended September 30:
2002........................................................ $ 42,066,000
2003........................................................ 22,365,000
2004........................................................ 1,921,000
2005........................................................ 89,000
------------
Total minimum lease obligations......................... 66,441,000
Less - amounts representing interest........................ (7,369,000)
------------
Present value of minimum lease obligations.................. 59,072,000
Current maturities.......................................... (35,883,000)
------------
Capital lease obligations, net of current maturities........ $ 23,189,000
============
On October 9, 2001, the Company and its wholly owned subsidiary, Allied
Riser Operations Corporation, entered into a settlement and mutual release
agreement in connection with certain of its capital lease agreements. See note
14 below for a further discussion of such settlement.
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 broadband
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 related to the Company's connectivity contracts,
net of settled contracts as discussed below, are as follows for the twelve
months ended September 30:
2002........................................................ $5,685,000
2003........................................................ 2,656,000
2004........................................................ 671,000
2005........................................................ 590,000
Thereafter.................................................. 110,000
----------
Total minimum obligations............................... $9,712,000
==========
During the third quarter, the Company paid $565,000 to settle certain
connectivity contracts prior to their expiration, which terminated $2,392,000 in
future obligations. Subsequent to September 30, 2001, the Company paid $921,000
to settle additional connectivity contracts prior to their expiration, which
terminated $2,114,000 in future obligations.
LEGAL PROCEEDINGS
On July 26, 2001, in a case titled HEWLETT-PACKARD COMPANY V. ALLIED RISER
OPERATIONS CORPORATION A/K/A ALLIED RISER COMMUNICATIONS, INC., Hewlett-Packard
Company filed a complaint against the
30
Company's subsidiary, Allied Riser Operations Corporation, in the 95th Judicial
District Court, Dallas County, Texas seeking damages of $18,775,000, attorneys'
fees, interest and punitive damages relating to various types of equipment
allegedly ordered from Hewlett-Packard Company by Allied Riser Operations
Corporation. The Company believes this claim is without merit and has filed its
answer generally denying Hewlett-Packard's claims. The Company intends to
vigorously contest this lawsuit, and no financial provision has been included in
the September 30, 2001 financial statements in connection with this litigation.
ACQUISITION COMMITMENTS
During 2000, the Company completed five acquisitions as described in note
12. In connection with these acquisitions, additional amounts were potentially
payable to the former owners and employees of the acquired companies and were
contingent upon the achievement of certain performance levels. In connection
with the disposition of four of the acquired companies (see note 12 and 14), the
Company terminated certain of the employment agreements that provided for such
additional contingent payments.
During the three months ended September 30, 2001, the Company paid $524,000
in cash in settlement of a previously recorded liability, the Company released
from restriction 245,000 shares of common stock valued at $51,000, and 1,179,000
shares of restricted stock were forfeited in connection with the termination of
these employment agreements. Additionally, as of September 30, 2001, the Company
has accrued $256,000 to be paid in cash, of which $212,000 was previously
accrued and was expected to be paid in shares of common stock.
During the nine months ended September 30, 2001, warrants underlying 250,000
shares of common stock, recorded with a fair value of zero, and 346,000 shares
of restricted stock, were released from restriction. Subsequent to September 30,
2001, warrants underlying 250,000 shares of common stock, recorded with a fair
value of zero, were forfeited.
RETENTION PLAN
During the third quarter of 2001, the board of directors established a
retention plan and as part of such plan directed that a pool of up to
approximately $5,200,000 be set aside for bonus, severance, and retention
payments for remaining employees. As of September 30, 2001, the Company has
accrued $3,258,000 for such payments and substantially all of the remainder will
be accrued during the fourth quarter of 2001.
11. EQUITY:
COMMON STOCK
During the three and nine months ended September 30, 2001, the Company
repurchased 1,268,000 and 1,624,000 shares of unvested restricted common stock,
respectively. During the three and nine months ended September 30, 2001, the
Company has issued 0 and 425,000 shares of common stock from treasury,
respectively, in lieu of cash bonus payments for services rendered in 2000.
Warrants underlying 0 and 3,009,000 shares of common stock were exercised
during the three and nine months ended September 30, 2001, respectively (see
Warrants). During the three and nine months ended September 30, 2001, the
Company has issued 0 and 32,000 shares of common stock, respectively, in
connection with obligations related to prior acquisitions. During the three and
nine months ended September 30, 2001, 98,000 and 409,000 shares of common stock
were issued, respectively, in connection with the Company's employee stock
purchase plan. Also, during the three and nine months ended September 30, 2001,
stock options underlying 0 and 7,000 shares of common stock, respectively, were
exercised by employees.
31
WARRANTS
The Company has issued to real estate partners and their affiliates warrants
to acquire shares of common stock in exchange for the right, pursuant to
telecommunications license agreements, to install its broadband data network in
these real estate entities' buildings. The warrants are exercisable upon the
occurrence of certain events set forth in the warrant acquisition agreements.
The number of warrants the Company is obligated to issue may be adjusted if
certain telecommunications license agreements are not executed and delivered in
accordance with the parameters outlined in the warrant acquisition agreements.
Accordingly, the date for determining the final value of the warrants is the
date on which the telecommunications license agreements are signed and delivered
(the "measurement date"), and the real estate partners effectively complete
their performance element of the warrant acquisition agreement. At the
measurement date, the Company measured the fair market value of the warrants
based on an acceptable pricing model. The warrants also are subject to
forfeiture as a result of subsequent events of default by the real estate
partners as set forth in the warrant acquisition agreement.
As of September 30, 2001, the Company has entered into warrant acquisition
agreements for the issuance of 8,217,000 shares of common stock. Performance
obligations relating to all of these warrant acquisition agreements had been
completed as of September 30, 2001. At September 30, 2001, warrants underlying
3,721,000 shares of common stock had been exercised.
COMPENSATION CHARGE
The Company completed an initial public offering ("IPO") of its common stock
on October 29, 1999. The estimated fair market value of the Company's common
stock (as implied by the IPO price) exceeded management's determination of fair
market value of each stock option grant and restricted stock grant made prior to
the IPO. As of December 31, 2000, $7,418,000 of stock compensation recorded upon
completion of the IPO was being deferred and amortized over the remaining
estimated employee service period. The total compensation charge is reduced if
and when employees terminate prior to vesting.
During the three and nine months ended September 30, 2001, certain employees
were terminated, resulting in a reduction of $537,000 and $1,791,000,
respectively, of the deferred compensation recorded upon completion of the IPO.
During the three and nine months ended September 30, 2001, deferred compensation
expense was reduced by $1,945,000 and $5,199,000, respectively, for previously
recognized expense related to forfeited options and shares. Deferred
compensation expense related to continuing employee service was $370,000 and
$2,296,000 for the three and nine months ended September 30, 2001, respectively.
As of September 30, 2001, the balance of unamortized deferred compensation
recorded upon completion of the IPO was $3,331,000 and is being deferred and
amortized over the remaining estimated employee service period.
In connection with acquisitions of businesses during 2000, the Company
entered into various employment agreements with former owners and employees of
the acquired companies pursuant to which the Company issued restricted shares of
common stock to such persons. As of December 31, 2000, $6,082,000 was being
deferred and amortized over the remaining estimated employee service period.
During the three and nine months ended September 30, 2001, the deferred
compensation recorded upon consummation of the acquisitions was reduced by
$5,000 and $1,825,000, respectively, to reflect the termination of certain of
the employment agreements and the stock price as of September 30, 2001. During
the three and nine months ended September 30, 2001, amortization related to this
deferred compensation was $0 and $4,248,000, respectively. As of September 30,
2001, $9,000 is being deferred and amortized over the remaining estimated
employee service period.
32
12. ACQUISITIONS:
During the second and third quarters of 2000, the Company acquired all of
the outstanding stock of four high-speed data communication and professional
services companies and 68% of the outstanding stock of Shared Technologies of
Canada. The following table presents the unaudited pro forma results of
operations of the Company for the three and nine months ended September 30, 2000
as if the acquisitions made during 2000 had been consummated as of January 1,
2000, as compared to actual results of operations for the three and nine months
ended September 30, 2001, respectively. The unaudited pro forma results are
prepared for comparative purposes only and do not necessarily reflect the
results that would have occurred had the acquisitions occurred at the beginning
of the period presented or the results which may occur in the future.
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- -------------------------------
SEPT. 30, 2000 SEPT. 30, 2001 SEPT. 30, 2000 SEPT. 30, 2001
-------------- -------------- -------------- --------------
(PROFORMA) (ACTUAL) (PROFORMA) (ACTUAL)
Revenues............................. $ 5,624,000 $ 7,725,000 $ 16,434,000 $ 24,227,000
Income (loss) before extraordinary
items.............................. (48,842,000) (39,649,000) (132,994,000) (385,831,000)
Net income (loss) applicable to
common stock....................... (48,842,000) (39,649,000) (132,994,000) (374,113,000)
Net income (loss) per share, basic
and diluted........................ (.89) (.66) (2.46) (6.29)
On August 7, 2001, the Company sold its subsidiary, Winterlink, Inc. and on
September 14, 2001, the Company sold substantially all of the assets and
liabilities of its subsidiary, DirectCorporateLink.net, Inc., two of the data
and communication service providers acquired in 2000. The Company recorded a
$1,500,000 loss (included in general and administrative expenses) in connection
with the disposition of these subsidiaries. In addition, the Company recognized
an expense of $479,000 to reflect the net settlement amount of net liabilities
related to the disposition of Rockynet.com, Inc. and Netrox, L.L.C. (see note
14). The Company does not expect these transactions to have a material impact on
the results of its ongoing operations.
13. RECENT ACCOUNTING PRONOUNCEMENTS:
On July 20, 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations"
("SFAS No. 141"), and SFAS No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"). SFAS No. 141 requires that the purchase method of accounting
be used for all business combinations initiated after June 30, 2001. SFAS No.
142 changes the accounting for goodwill from an amortization method to an
impairment approach. The Company believes the adoption of SFAS Nos. 141 and 142
will not have a material effect on the Company's financial position or results
of operations.
On August 16, 2001, the Financial Accounting Standards Board issued SFAS No.
143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"). SFAS No.
143 requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. This standard is
effective for fiscal years beginning after June 15, 2002. On October 3, 2001,
the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). This
statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of" and related literature and
establishes a single accounting model, based on the framework established in
SFAS No. 121, for the impairment and disposal of long-lived assets. This
standard is effective for financial statements issued for fiscal years beginning
after December 15, 2001. The Company is currently assessing the impact of SFAS
No. 143 and 144 on its financial position and results of operations.
33
14. SUBSEQUENT EVENTS:
On October 3, 2001, the Company sold its subsidiary, Rockynet.com, Inc. and
on October 4, 2001, the Company sold all of the membership interests of its
subsidiary, Netrox, L.L.C., two of the data and communication service providers
acquired in 2000. The Company does not expect these transactions to have a
material impact on the results of its ongoing operations.
On October 9, 2001, the Company and its wholly owned subsidiary, Allied
Riser Operations Corporation, entered into a settlement and mutual release
agreement in connection with certain of its capital lease agreements. Pursuant
to the terms of the settlement and mutual release agreement, in exchange for the
payment of $12,500,000 by the Company to the lessor, the lessor released the
Company and its subsidiaries from any and all obligations to the lessor and its
affiliates under the capital lease agreement and under various maintenance
agreements with respect to equipment leased by the Company or its subsidiaries
from the lessor. As of September 30, 2001, such obligations including all future
interest were approximately $64,800,000. The title to the equipment subject to
the capital lease agreements was transferred to the Company pursuant to the
settlement, and the lessor has agreed to release all liens on and security
interests in such equipment.
On October 24, 2001, the Company announced that it had notified 19 employees
that their employment would be terminated within the next 60 days in
contemplation of the Company's pending merger with Cogent Communications Group,
Inc. The employees, who comprised approximately 26% of the Company's workforce,
remained with the Company through December 21, 2001.
The Company's common stock is traded on the Nasdaq National Market. In order
for its common stock to continue to be listed on the Nasdaq National Market, it
must satisfy various listing requirements established by Nasdaq. During the
third quarter the Company was notified by Nasdaq that the Company failed to meet
continued listing requirements regarding minimum bid price, minimum net tangible
assets, and minimum stockholders' equity. The Company received a letter from
Nasdaq on January 15, 2002, stating that Nasdaq would not initiate delisting
proceedings so long as the Company completes its proposed merger with Cogent on
or before February 15, 2002 and, in connection therewith, requests a delisting
from Nasdaq. If the merger is not completed by February 15, 2002, the Company
expects that Nasdaq will commence proceedings to delist the Company's common
stock. The Company may appeal such decision, which, if properly and timely
filed, would temporarily stay any delisting action, however there is no
assurance that its stock will remain listed.
The Company announced on December 12, 2001, that it had initiated the
repurchase of certain of its 7.50% convertible subordinated notes due 2007 (the
"notes") at a discount rate from the face value of the notes in limited open
market or negotiated transactions. The Company also announced that certain
holders of the notes filed notices with the SEC on Schedule 13D including copies
of documents indicating that such group had filed suit on December 6, 2001
against the Company and its board of directors alleging, among other things,
breaches of fiduciary duties and requesting injunctive relief to prohibit the
Company's merger with Cogent as a group, and alleging default by the Company
under the indenture related to the notes. A hearing has been set for
January 28, 2002. Allied Riser believes that these claims are without merit.
During January 2002, the minority shareholders of STOC exercised their right
to require the Company to acquire the minority interest of STOC. Allied Riser
believes that the total consideration due to such selling shareholders will not
exceed approximately $4 million (USA).
34
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This document contains certain forward-looking statements with respect to
the financial condition, results of operations, plans, objectives, future
performance, and business of Cogent, as well as certain information relating to
our merger with Allied Riser, including, without limitation:
- statements relating to the benefits of the merger;
- statements with respect to various actions to be taken in connection with
the merger or integrating Cogent and Allied Riser after the merger;
- statements relating to revenue, income, and operations of the combined
company after the merger; and
- statements preceded by, followed by, or that include the words "believes,"
"expects," "anticipates," "estimates," or similar expressions.
These statements are subject to a number of factors and uncertainties that
could cause actual results to differ materially from those described in the
forward-looking statements. The following factors, among others, could cause
actual results to differ materially from those described in the forward-looking
statements:
- expected benefits from the merger may not be fully realized or realized
within the expected time frame;
- revenues following the merger may be lower than expected;
- the combined company may require additional capital, but be unable to
acquire the necessary financing;
- the trading price of Cogent's common stock may be lower than anticipated;
- costs or difficulties related to completing the merger and, following the
merger, to the integration of the businesses of Allied Riser and Cogent,
may be greater than expected;
- Allied Riser may be unable to manage its operations in a cost effective
manner prior to the merger;
- the use of cash for early retirement of commitments and contingencies,
interest payments on any of Allied Riser's outstanding convertible
subordinated notes, or the repurchase of any debt securities may
materially reduce the amount of cash otherwise available to the combined
entity for its operations;
- general economic conditions in the jurisdictions in which and Cogent is
doing business may be less favorable than expected;
- legislative or regulatory changes, including changes in communications
regulation, may adversely affect the businesses in which Cogent is
engaged;
- changes may occur in the securities or capital markets;
- changes may occur in technology and competitive developments; and
- other economic, business, competitive, and/or regulatory factors may
affect Cogent's business generally.
1
UNAUDITED CONDENSED COMBINED PRO FORMA FINANCIAL STATEMENTS
MERGER WITH ALLIED RISER COMMUNICATIONS CORPORATION
On February 4, 2002, we consummated our merger with Allied Riser
Communications Corporation ("Allied Riser").
Allied Riser is a facilities-based provider of broadband data, video and
voice communications services to small- and medium-sized businesses in North
America, including Canada. Effective September 21, 2001, Allied Riser suspended
its retail services in most of its markets in the United States. Allied Riser is
pursuing the provision of in-building wholesale services of its broadband data
network. Cogent and Allied Riser merged because it presented an opportunity for
the two companies to combine their networks. We expect to become a stronger
competitor in our markets as a result of the merger.
We acquired Allied Riser by merging a wholly owned subsidiary of Cogent with
and into Allied Riser. As a consequence of the merger Allied Riser became a
wholly owned subsidiary of Cogent. In the merger, stockholders of Allied Riser
received approximately 0.0321679 shares of our common stock for each share of
Allied Riser common stock that they owned. Allied Riser stockholders own
approximately 13.36% of our outstanding common stock on a fully diluted basis,
subject to certain adjustments.
The following unaudited condensed combined pro forma financial statements
("the pro forma financial statements") and explanatory notes have been prepared
to give effect to the merger and Cogent's September 2001 acquisition of certain
assets of NetRail, Inc., using the purchase method of accounting for business
combinations. The unaudited condensed combined pro forma financial statements
also reflect the issuance by Cogent of $62.0 million of its Series C preferred
stock and the impact of Cogent's October 2001 credit facility. The merger and
acquisition of certain NetRail, Inc. assets are being accounted for as purchase
business combinations as defined by SFAS No. 141. Cogent is the acquiring
enterprise for purposes of accounting for the merger and NetRail asset
acquisition. The pro forma financial statements also reflect the modification of
certain of Allied Riser's capital leases and maintenance obligations.
In accordance with Article 11 of Regulation S-X under the Securities Act, an
unaudited condensed combined pro forma balance sheet ("the pro forma balance
sheet") as of September 30, 2001, and unaudited condensed combined pro forma
statements of operations ("the pro forma statements of operations") for the nine
months ended September 30, 2001, and the year ended December 31, 2000, have been
prepared to reflect, for accounting purposes, the merger of Allied Riser and
Cogent, the issuance by Cogent of $62.0 million of its Series C preferred stock,
the impact of Cogent's October 2001 credit facility, the modification of Allied
Riser's capital leases and maintenance obligations, and, for purposes of the
September 30, 2001 and December 31, 2000 statements of operations, the
acquisition by Cogent of certain assets of NetRail, Inc. For both the pro forma
balance sheet and all periods included in the pro forma statements of
operations, the average number of common and common equivalent shares gives
effect to the exchange ratio of one share of Allied Riser for 0.0321679 shares
of Cogent.
The pro forma balance sheet assumes that the merger was completed on
September 30, 2001. The pro forma balance sheet includes historical unaudited
consolidated balance sheet data of Cogent (adjusted for a 10 to 1 reverse
split effected as of January 31, 2002) and Allied Riser as of September 30,
2001, with Cogent's balance sheet adjusted to reflect the issuance of
$62.0 million of Series C preferred stock ("the Series C financing") and the
impact of Cogent's October 2001 credit facility and Allied Risers' settlement of
its capital lease and maintenance obligations to a vendor. The Series C
financing closed in October 2001. Cogent's credit facility with Cisco Capital
was obtained on October 9, 2001.
The pro forma statements of operations assume the merger and Cogent's
acquisition of certain assets of NetRail, Inc. occurred on January 1, 2000. The
pro forma statements of operations for the year ended December 31, 2000, include
the historical consolidated statement of income data of Cogent, NetRail, and
Allied Riser for the year ended December 31, 2000. The pro forma statements of
operations for the nine-month period ended September 30, 2001, include the
historical consolidated unaudited statement of operations data of Cogent,
NetRail, and Allied Riser for the nine-month period ended September 30, 2001.
These pro forma statements assume that the merger, Cogent's acquisition of
certain assets of NetRail, the Series C financing, and the closing of both
Cogent's credit facility with
2
Cisco Capital and the settlement and termination of Allied Riser's capital lease
and maintenance commitments to a vendor occurred on January 1, 2000.
The pro forma financial statements are provided for illustrative purposes
only, and are not necessarily indicative of the operating results or financial
position that would have occurred if these transactions had been consummated at
the beginning of the periods or on the dates indicated, nor are they necessarily
indicative of any future operating results or financial position. The pro forma
financial statements do not include any adjustments related to any restructuring
charges, profit improvements, potential costs savings, or one-time charges which
may result from these transactions or the final result of valuations of
inventories, property, plant and equipment, intangible assets, debt, and other
obligations. Cogent and Allied Riser are currently developing plans to integrate
the operations of the companies, which will involve costs including, among
others, severance and settlement of operating and capital commitments, which are
material.
3
COGENT COMMUNICATIONS GROUP, INC.
UNAUDITED CONDENSED COMBINED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 2001
(DOLLARS IN THOUSANDS)
COGENT ALLIED RISER COGENT &
PRO FORMA PRO FORMA ALLIED RISER
HISTORICAL FINANCING ADJUSTED HISTORICAL ACQUISITION PRO FORMA
COGENT ADJUSTMENTS COGENT ALLIED RISER ADJUSTMENTS COMBINED
---------- ----------- -------- ------------ -------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............. $ 10,528 $61,802 (a) $72,330 $ 28,482 $ (1,450)(f) $ 99,362
Short-term investments................. -- -- -- 86,241 60 (d) 86,301
Accounts receivable, net............... 823 -- 823 1,093 -- 1,916
Prepaid expenses and other current
assets............................... 2,320 -- 2,320 2,301 -- 4,621
-------- ------- -------- -------- --------- --------
Total current assets............... 13,671 75,473 118,117 192,200
PROPERTY AND EQUIPMENT, net............ 214,105 -- 214,105 33,191 (33,191)(g) 214,105
REAL ESTATE ACCESS RIGHTS, net......... -- -- -- 8,557 (8,557)(h) --
GOODWILL AND OTHER INTANGIBLE ASSETS,
net.................................. 11,740 -- 11,740 -- -- 11,740
OTHER ASSETS, net...................... 8,252 6,901 (b) 15,153 8,623 (3,940)(i) 19,836
-------- ------- -------- -------- --------- --------
Total assets....................... $247,768 $316,472 $168,488 $437,882
======== ======= ======== ======== ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable....................... $ 5,524 $ -- $ 5,524 $ 7,047 $ (5,775)(k) $ 6,796
Accrued liabilities.................... 5,806 -- 5,806 22,712 22,353 (j) 50,871
Current maturities of capital lease
obligations.......................... 1,734 -- 1,734 35,883 (23,517)(k) 14,100
Current maturities of credit
facility............................. -- -- -- -- -- --
Current maturities of debt............. -- -- -- 604 -- 604
-------- ------- -------- -------- --------- --------
Total current liabilities.......... 13,064 -- 13,064 66,246 72,371
CAPITAL LEASE OBLIGATIONS, net of
current maturities................... 17,756 -- 17,756 23,189 (23,091)(k) 17,854
LONG-TERM LIABILITIES:
Credit facility........................ 107,625 1,980 (c) 109,605 -- -- 109,605
Credit facility -- working capital..... 28,990 -- 28,990 -- -- 28,990
Deferred equipment discount............ 20,915 -- 20,915 -- -- 20,915
Long-term debt, net of current
maturities........................... -- -- -- 749 -- 749
Convertible notes...................... -- -- -- 123,600 (84,666)(l) 38,934
-------- ------- -------- -------- --------- --------
Total liabilities.................. 188,350 190,330 213,784 289,418
-------- ------- -------- -------- --------- --------
STOCKHOLDERS' EQUITY:
Convertible preferred stock,
Series A............................. 25,892 -- 25,892 -- -- 25,892
Convertible preferred stock,
Series B............................. 90,009 -- 90,009 -- -- 90,009
Convertible preferred stock,
Series C............................. -- 61,802 (a) 61,802 -- -- 61,802
Common stock........................... 1 -- 1 6 (6)(m) 1
Additional paid-in capital............. 207 -- 207 509,294 (497,978)(n) 11,523
Warrants............................... 583 4,921 (e) 5,504 71,127 (71,127)(o) 5,504
Deferred compensation.................. -- -- -- (3,340) 3,340 (o) --
Accumulated other comprehensive loss... -- -- -- (859) 859 (o) --
Accumulated deficit.................... (57,274) -- (57,274) (621,524) 632,530 (p) (46,268)
-------- ------- -------- -------- --------- --------
Total stockholders' equity......... $ 59,418 126,142 (45,296) 148,464
======== ======= ======== ======== ========= ========
Total liabilities and stockholders'
equity........................... $247,768 $316,472 $168,488 $437,882
======== ======= ======== ======== ========= ========
See Notes to Unaudited Condensed Combined Pro Forma Balance Sheet
4
NOTES TO THE UNAUDITED CONDENSED COMBINED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 2001
(a) Represents the issuance of 49.7 million shares of Series C preferred stock
for net proceeds of $61.8 million.
(b) Represents (1) the $4.9 million valuation of warrants for 0.6 million shares
of Cogent's common stock issued to Cisco Capital in connection with Cogent's
October 2001 credit facility and (2) the debt issuance cost of $2.0 million
accrued related to Cogent's October 2001 credit facility.
(c) Represents the commitment fee of $2.0 million accrued in connection with
Cogent's October 2001 credit facility.
(d) Represents the adjustment necessary to record Allied Riser's short term
investments at their fair market value.
(e) Represents the valuation of warrants for 0.6 million shares of Cogent's
common stock issued to Cisco Capital in connection with Cogent's
October 2001 credit facility.
(f) Represents Cogent's estimated transaction costs associated with the merger.
(g) Represents (1) the decrease of $12.1 million in the historical cost basis of
Allied Riser's property and equipment not expected to be used by Cogent to
its estimated fair value of $21.0 million and (2) the allocation of
$21.0 million of negative goodwill.
(h) Represents (1) the increase of $2.4 million in the historical cost basis of
Allied Riser's real estate access rights to their estimated fair value of
$11.0 million less (2) the allocation of $11.0 million of negative goodwill.
(i) Represents the allocation of negative goodwill to non-monetary long term
assets.
(j) Represents (1) the estimated liability for Allied Riser's operating lease
commitments not expected to be used by Cogent of $6.0 million and (2) the
estimated liability for Allied Riser's real estate access agreements not
expected to be used by Cogent of $8.9 million and (3) the estimated
liability for Allied Riser's commitments under leased circuits with carriers
not expected to be used by Cogent of $4.8 million and (4) additional
severance and health care obligations of $2.6 million that will be payable
to Allied Riser's employees as a result of the merger. Cogent has determined
that $6.0 million, $8.9 million, $4.8 million and $2.6 million of Allied
Riser's commitments for operating leases, real estate access agreements,
circuit commitments, and severance and health care obligations,
respectively, qualify as "costs of a plan to exit an activity of an acquired
company" under EITF Issue 95-3, "Recognition of Liabilities in Connection
with a Purchase Business Combination."
(k) Represents (1) the impact of the settlement of certain of Allied Riser's
capital lease and maintenance obligations totaling $62.9 million for
$12.5 million and (2) the adjustment required to record Allied Riser's
remaining capital leases at their estimated fair value using Cogent's
effective borrowing rate. On October 9, 2001, Allied Riser entered into a
settlement and mutual release agreement for certain of its capital lease
agreements with a vendor. The book value of these obligations was
$62.9 million and they were settled for $12.5 million. Of the $50.4 million
adjustment, $22.3 million was recorded against current maturities of capital
lease obligations, $22.3 million was recorded against capital lease
obligations, and $5.8 million was recorded against accounts payable.
(l) Represents the adjustment required to record Allied Risers' convertible
notes at their fair value using their trading price of the convertible notes
on October 19, 2001.
5
(m) Represents (1) the elimination of Allied Riser's historical equity balance
and (2) the par value for the 2.2 million shares of Cogent common stock to
be issued in the merger.
(n) Represents (1) the elimination of Allied Riser's historical equity balance
and (2) the additional paid in capital resulting from the issuance of
2.2 million shares of Cogent common stock to be issued in the merger. The
fair value of the common stock included in the pro forma determination of
the purchase price was determined by using the average closing price of
Allied's common stock during the period from October 8, 2001 to October 19,
2001, in accordance with SFAS 141 "Business Combinations."
(o) Represents the elimination of Allied Riser's historical equity balance.
(p) Represents the elimination of Allied Riser's historical accumulated deficit
balance of $621.5 million and (2) the extraordinary gain of $11.0 million
resulting from the excess of the net assets acquired over the purchase price
pursuant to SFAS No. 141.
MERGER CONSIDERATION
The determination of the purchase price for Allied Riser Corporation by
Cogent in accordance with SFAS 141 is not necessarily indicative of and could
differ significantly from the value of the merger consideration to be issued to
the Allied Riser stockholders. The purchase price allocation is preliminary and
may change upon final determination of the fair value of the assets and
liabilities acquired.
AMOUNTS
ALLIED RISER IN THOUSANDS
------------ ------------
Fair value of equity securities issued as merger
consideration:
Common stock.............................................. $ 10,170
Stock options, warrants and deferred stock units.......... 1,146
Transaction expenses...................................... 1,450
--------
Total purchase price...................................... $ 12,766
Estimated fair value of net assets acquired............... $ 59,803
--------
Estimated fair value in excess of purchase price --
negative goodwill....................................... $(47,037)
========
Negative goodwill allocated to:
Property and equipment.................................... $ 21,091
Real estate access rights................................. 11,000
Other assets.............................................. 3,940
Extraordinary gain........................................ 11,006
--------
$ 47,037
========
6
COGENT COMMUNICATIONS GROUP, INC.
UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(IN THOUSANDS, EXCEPT PER SHARE DATA)
COGENT &
NETRAIL NETRAIL COGENT
PRO FORMA PRO PRO FORMA
HISTORICAL HISTORICAL ACQUISITION FORMA FINANCING ADJUSTED
COGENT NETRAIL ADJUSTMENTS COMBINED ADJUSTMENTS COGENT
---------- ---------- ----------- ---------- ----------- --------
REVENUE:
Network services................... $ -- $ 9,524 $(8,294)(a) $ 1,230 $ 1,230
Value added services............... -- -- -- --
---------- -------- ---------- --------
Total revenue.................. -- 9,524 1,230 1,230
OPERATING EXPENSES:
Network operations................. 3,040 30,960 (29,737)(b) 4,263 4,263
Cost of value added services....... -- -- -- --
Selling, general and administrative
expenses......................... 10,844 18,711 (18,711)(c) 10,844 10,844
Depreciation and amortization...... 338 1,023 2,915 (d) 4,276 283 (f) 4,558
Amortization of deferred
compensation..................... -- -- -- -- --
Asset write-down................... 11,946 (11,946)(c) -- --
---------- -------- ---------- --------
Total operating expenses....... 14,222 62,640 19,383 19,665
---------- -------- ---------- --------
OPERATING LOSS....................... (14,222) (53,116) (18,153) (18,435)
OTHER INCOME (EXPENSE):
Interest expense................... (1,105) (3,082) 3,082 (c) (1,105) (703)(g) (1,808)
Interest and other income.......... 3,566 2,187 (2,900)(e) 2,853 2,853
---------- -------- ---------- --------
Total other income (expense)... 2,461 (895) 1,748 1,045
---------- -------- ---------- --------
LOSS BEFORE INCOME TAXES............. (11,761) (54,011) (16,405) (17,391)
---------- -------- ---------- --------
PROVISION FOR INCOME TAXES........... -- -- -- -- --
---------- -------- ---------- --------
NET LOSS........................... $ (11,761) $(54,011) $ (16,405) $(17,391)
========== ======== ========== ========
BASIC & DILUTED NET LOSS PER COMMON
SHARE (l).......................... $ (8.51) $ (11.87)
========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING........................ 1,382,360 1,382,360
========== ==========
ALLIED COGENT
PRO FORMA & ALLIED
HISTORICAL ACQUISITION PRO FORMA
ALLIED ADJUSTMENTS COMBINED
----------- ----------- ----------
REVENUE:
Network services................... $ 10,969 $ (964)(h) $ 11,235
Value added services............... -- 3,363
----------- ----------
Total revenue.................. 14,332 14,598
OPERATING EXPENSES:
Network operations................. 43,389 (964)(h) 46,688
Cost of value added services....... 2,356 2,356
Selling, general and administrative
expenses......................... 105,298 116,142
Depreciation and amortization...... 36,155 (36,155)(i) 4,558
Amortization of deferred
compensation..................... 9,418 9,418
Asset write-down................... --
----------- ----------
Total operating expenses....... 196,616 179,162
----------- ----------
OPERATING LOSS....................... (182,284) (164,564)
OTHER INCOME (EXPENSE):
Interest expense................... (9,348) (9,630)(j) (20,786)
Interest and other income.......... 18,224 21,077
----------- ----------
Total other income (expense)... 8,876 290
----------- ----------
LOSS BEFORE INCOME TAXES............. (173,408) (164,274)
----------- ----------
PROVISION FOR INCOME TAXES........... -- --
----------- ----------
NET LOSS........................... $ (173,408) $ (164,274)
=========== ==========
BASIC & DILUTED NET LOSS PER COMMON
SHARE (l).......................... $ (3.18) $ (45.97)
=========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING........................ 54,472,000 2,191,531 (k) 3,573,891
=========== ==========
See Notes to Unaudited Condensed Combined Pro Forma Statement of Operations for
the year ended December 31, 2000.
7
NOTES TO THE UNAUDITED CONDENSED COMBINED PRO FORMA
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000
(a) Represents the elimination of revenue generated by customers whose contracts
were not acquired by Cogent.
(b) Represents the elimination of expenses generated by assets not acquired by
Cogent. Retained expenses include network costs under contracts assumed by
Cogent. Under the asset purchase agreement, Cogent assumed contracts for
network services which totaled approximately $1.2 million in network costs
for the year ended December 31, 2000. This $29.7 million adjustment
eliminates expenses related to contracts which were not acquired and are in
excess of the $1.2 million.
(c) Represents the elimination of expenses generated by assets not acquired by
Cogent. Under the asset purchase agreement, Cogent did not acquire or assume
obligations recorded as selling general and administrative expenses by
NetRail. This adjustment eliminates $18.7 million of selling, general and
administrative expenses related to obligations and commitments which were
not acquired.
(d) Represents (1) the elimination of the historical depreciation and
amortization of $1.0 million plus (2) the increase in amortization and
depreciation of $2.9 million from the amortization of assets acquired.
AMOUNTS IN
THOUSANDS
----------
NETRAIL
Purchase consideration
Cash paid............................................... $11,886
Transaction expenses.................................... 204
-------
Total purchase price...................................... $12,090
=======
Estimated fair value of assets acquired:
Tangible assets........................................... 350
Peering agreements...................................... $11,036
Customer contracts...................................... 704
-------
$12,090
=======
The purchase price allocation is preliminary and may change upon final
determination of the fair value of assets and liabilities acquired.
The assets acquired are being depreciated using the straight-line method
over the following useful lives.
Peering agreements.......................................... 3 years
Customer contracts.......................................... 3 years
Tangible assets............................................. 3-7 years
(e) Represents (1) the elimination of historical interest income of
$2.2 million plus (2) the estimated reduction to interest income from the
reduction in cash of $12.0 million.
(f) Represents amortization of the commitment fee of $2.0 million paid to Cisco
Capital in connection with Cogent's October 2001 credit facility over the
remaining seven year term of the credit facility.
8
(g) Represents the amortization of debt issuance costs associated with warrants
for 0.6 million shares of Cogent's common stock valued at $4.9 million
amortized over the remaining seven year term of the credit facility. These
warrants were issued to Cisco Capital in connection with Cogent's
October 2001 credit facility.
(h) Represents the elimination of transactions between NetRail and Allied Riser.
Allied Riser was a customer of NetRail.
(i) Represents the reduction to depreciation and amortization expense resulting
from the allocation of negative goodwill.
(j) Represents (1) increased interest expense resulting from the write down of
Allied Riser's convertible notes and capital leases to their fair value and
the resulting additional amortization of discount less (2) the reduction to
interest expense from the settlement of certain capital lease obligations
below their recorded value. The adjustment required to record Allied Riser's
convertible notes at their fair value results in an amortization of the
discount resulting in an additional $14.5 million of interest expense. The
settlement of $44.6 million of capital lease obligations results in reduced
interest expense of $5.1 million. The adjustment to Allied Riser's remaining
capital lease obligations at appropriate current interest rates results in
an increase to interest expense of $0.2 million.
(k) Represents the effect of issuing 2.2 million shares of Cogent common stock
for all of the outstanding shares of Allied Riser common stock in the
merger. Based upon a conversion ratio of 0.0321679 shares of Cogent common
stock issued for each share of Allied Riser common stock. The conversion
ratio was determined based upon Cogent's common stock on a fully diluted
basis, including the issuance of 49.7 million shares of Series C preferred
stock.
(l) Historical basic and diluted loss per common share and pro forma basic and
diluted net loss per common share are the same, because Cogent, Allied Riser
and the pro forma combined company would have a loss and the effect of
common stock equivalents would be anti-dilutive.
9
COGENT COMMUNICATIONS GROUP, INC.
UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NETRAIL COGENT & COGENT
PRO FORMA NETRAIL PRO FORMA
HISTORICAL HISTORICAL ACQUISITION PRO FINANCING ADJUSTED HISTORICAL
COGENT NETRAIL ADJUSTMENTS FORMA ADJUSTMENTS COGENT ALLIED
---------- ---------- ----------- ---------- ----------- -------- -----------
REVENUE:
Network services............... $ 747 $ 8,594 $(6,936)(a) $ 2,405 $ 2,405 $ 18,547
Value added services........... -- -- -- -- -- 5,680
---------- -------- ---------- -------- -----------
Total revenue.............. 747 8,594 2,405 2,405 24,227
OPERATING EXPENSES:
Network operations............. 15,473 19,128 (17,818)(b) 16,783 16,783 57,050
Cost of value added services... -- -- -- -- -- 4,013
Selling, general and
administrative expenses...... 21,756 9,113 (9,113)(c) 21,756 21,756 55,459
Depreciation and
amortization................. 5,955 1,360 1,593 (d) 8,908 212 (f) 9,120 32,484
Amortization of deferred
compensation................. -- -- -- -- -- --
Asset write-down............... -- -- -- -- -- 262,336
---------- -------- ---------- -------- -----------
Total operating expenses... 43,184 29,601 47,447 47,659 411,342
---------- -------- ---------- -------- -----------
OPERATING LOSS................. (42,437) (21,007) (45,042) (45,254) (387,115)
---------- -------- ---------- -------- -----------
OTHER INCOME (EXPENSE):
Interest expense............... (4,756) (1,040) 1,040 (c) (4,756) (527)(g) (5,283) (11,533)
Interest and other income...... 1,763 139 (496)(e) 1,406 1,406 6,780
---------- -------- ---------- -------- -----------
Total other income
(expense)................ (2,993) (901) (3,350) (3,877) (4,753)
---------- -------- ---------- -------- -----------
LOSS BEFORE INCOME TAXES....... (45,430) (21,908) (48,392) (49,131) (391,868)
PROVISION FOR INCOME TAXES..... -- -- -- -- -- --
---------- -------- ---------- -------- -----------
NET LOSS....................... $ (45,430) $(21,908) $ (48,392) $(49,131) $ (391,868)
========== ======== ========== ======== ===========
BASIC & DILUTED NET LOSS PER
COMMON SHARE (l)............. $ (32.34) $ (34.45) $ (6.59)
========== ========== ===========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING........... 1,404,781 1,404,781 59,493,000
========== ========== ===========
ALLIED
PRO FORMA PRO FORMA
ADJUSTMENTS COMBINED
----------- ----------
REVENUE:
Network services............... $ (1,222)(h) $ 19,730
Value added services........... 5,680
----------
Total revenue.............. 25,410
OPERATING EXPENSES:
Network operations............. (1,222)(h) 72,611
Cost of value added services... 4,013
Selling, general and
administrative expenses...... 77,215
Depreciation and
amortization................. (32,484)(i) 9,120
Amortization of deferred
compensation................. --
Asset write-down............... 262,336
----------
Total operating expenses... 425,295
----------
OPERATING LOSS................. (399,885)
----------
OTHER INCOME (EXPENSE):
Interest expense............... (3,372)(j) (20,188)
Interest and other income...... 8,186
----------
Total other income
(expense)................ (12,002)
----------
LOSS BEFORE INCOME TAXES....... (411,887)
PROVISION FOR INCOME TAXES..... --
----------
NET LOSS....................... $ (411,887)
==========
BASIC & DILUTED NET LOSS PER
COMMON SHARE (l)............. $ (114.53)
==========
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING........... 2,191,531 (k) 3,596,312
==========
See Notes to Unaudited Condensed Combined Pro Forma Statement of Operations for
the nine months ended September 30, 2001.
10
NOTES TO THE UNAUDITED CONDENSED COMBINED PRO FORMA
STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
(a) Represents the elimination of revenues generated by customers whose
contracts were not acquired by Cogent.
(b) Represents the elimination of expenses generated by assets not acquired by
Cogent. Retained expenses include network costs under contracts assumed by
Cogent. Under the asset purchase agreement, Cogent assumed contracts for
network services which totaled approximately $1.3 million in network costs
for the nine months ended September 30, 2001. This $17.8 million adjustment
eliminates expenses related to contracts which were not acquired and are in
excess of the $1.3 million.
(c) Represents the elimination of expenses generated by assets not acquired by
Cogent. Under the asset purchase agreement, Cogent did not acquire or assume
obligations recorded as selling, general and administrative expenses by
NetRail. This adjustment eliminates $9.1 million of selling, general and
administrative expenses related to obligations and commitments which were
not acquired.
(d) Represents (1) the elimination of the historical depreciation and
amortization of $1.4 million plus (2) the increase in amortization and
depreciation of $4.0 million from the amortization of assets acquired.
AMOUNTS IN
THOUSANDS
----------
NETRAIL
Purchase consideration
Cash paid............................................... $11,886
Transaction expenses.................................... 204
-------
Total purchase price...................................... $12,090
=======
Estimated fair value of assets acquired:
Tangible assets......................................... 350
Peering agreements...................................... $11,036
Customer contracts...................................... 704
-------
$12,090
=======
The purchase price allocation is preliminary and may change upon final
determination of the fair value of assets and liabilities acquired.
The assets acquired are being depreciated using the straight-line method
over the following useful lives.
Peering agreements.......................................... 3 years
Customer contracts.......................................... 3 years
Tangible assets............................................. 3-7 years
(e) Represents (1) the elimination of historical interest increase of
$0.1 million plus (2) the estimated reduction to interest income of
$0.4 million from the reduction in cash of $12.0 million.
(f) Represents amortization of the commitment fee of $2.0 million paid to Cisco
Capital in connection with Cogent's October 2001 credit facility over the
remaining seven year term of the credit facility.
11
(g) Represents the amortization of warrants for 0.6 million shares of Cogent's
common stock valued at $4.9 million amortized over the remaining seven year
term of the credit facility. These warrants were issued to Cisco Capital in
connection with Cogent's October 2001 credit facility.
(h) Represents the elimination of transactions between NetRail and Allied Riser.
Allied Riser was a customer of NetRail.
(i) Represents the reduction to depreciation and amortization expense resulting
from the allocation of negative goodwill.
(j) Represents (1) increased interest expense resulting from the write down of
Allied Riser's convertible notes and capital leases to their fair value and
the resulting additional amortization of discount less (2) the reduction to
interest expense from the settlement of certain capital lease obligations
below their recorded value.
(k) Represents the effect of issuing 2.2 million shares of Cogent common stock
for all of the outstanding shares of Allied Riser common stock in the
merger. Based upon a conversion ratio of 0.0321679 shares of Cogent common
stock issued for each share of Allied Riser common stock. The conversion
ratio was determined based upon Cogent's common stock on a fully diluted
basis.
(l) Historical basic and diluted loss per common share and pro forma basic and
diluted net loss per common share are the same, because Cogent, Allied Riser
and the pro forma combined company would have a loss and the effect of
common stock equivalents would be anti-dilutive.
12
Exhibit Index
EXHIBIT NO. DESCRIPTION
2.1 Agreement and Plan of Merger, dated as of August 28, 2001, by and
among Cogent, Allied Riser and the merger subsidiary (previously
filed as Appendix A to our Registration Statement on Form S-4,
Commission File No. 333-71684, filed October 16, 2001, and
incorporated herein by reference).
2.2 Amendement No. 1 to the Agreement and Plan of Merger, dated as of
October 13, 2001, by and among Cogent, Allied Riser and the merger
subsidiary (previously filed as Appendix B to our Registration
Statement on Form S-4, Commission File No. 333-71684, filed
October 16, 2001, and incorporated herein by reference).