Allied Riser buys back convertibles, noteholders claim default

New York, Dec. 13 - Allied Riser Communications Corp. said it has bought back some of its 7.5% convertible subordinated notes due 2007. Meanwhile, a group of noteholders have alleged - and sent a notice to the trustee - that the company has defaulted under the terms of the indenture.

The Dallas, Texas communications company said the repurchases are at a discount to face value in "limited open market or negotiated transactions."

Allied Riser's directors authorized the transactions and they were approved by Cogent Communications Group, Inc. which Allied Riser agreed to merge with August 2001.

Allied Riser said there is no assurance it will make further repurchases.

The company also described as "without merit" allegations from a group of noteholders claiming Allied Riser and its board has breached their fiduciary duty and that the company is in default.

The noteholders made their complaint about the company in filings with the Securities and Exchange Commission and said they are acting as a group in this matter, although they have no other connection. Together they hold $86.8 million face value of the notes.

Allied Riser issued $150 million of the notes in June 2000. In June 2001, $26.4 million were repurchased in a tender offer leaving $123.6 million.

Included in the group are: Providence Asset Management, LLC with $10 million face value of the notes; Peninsula Partners, LP with $19.7 million face value of the notes; Sagamore Hill Hub Fund, Ltd. with $16.05 million face value of the notes; CRT Capital Group, LLC with $11.473 million face value of the notes; JMG Capital Partners, LP with $900,000 face value of the notes; JMG Triton Offshore Fund, Ltd. with $3.05 million face value of the notes; LC Capital Partners, LP with $4.5 million face value of the notes; HBV Capital Management, LLC with $1.618 million face value of the notes; Magten Asset Management, Corp. with $15.5 million face value of the notes; and Angelo, Gordon & Co., LP with $4 million face value of the notes. The filing notes that the various companies will have paid different amounts to buy their holdings.

The noteholders said that on Dec. 7 some of them - Angelo Gordon, JMG Capital, Sagamore Hill, JMG Triton, Peninsula and Providence - filed an action in the Court of Chancery of the State of Delaware seeking an injunction to prevent "further dissipation" of the company's assets and preventing the merger with Cogent from going ahead. They also asserted claims against the company and its directors for breach of fiduciary duties. The company and its board members were named as defendants.

In the court case, the noteholders claim Allied Riser "has consistently experienced negative cash flow and losses since the notes were issued, expects to generate significant losses into the foreseeable future and, on information and belief, is insolvent or in the vicinity of insolvency."

They described the company and its directors as having pursued a "de facto liquidation and abandonment" of its business. After successive layouts, they said the company now has only 26 employees, excluding a Canadian subsidiary. They also noted the company suspended retail sales of broadband data and applications in most U.S. markets on Sept. 21, moved these customers to other providers and closed its sales offices. It also has sold off acquired companies and subsidiaries.

They also claimed Cogent "projects years of projected negative cash flow and dramatically increasing losses into the foreseeable future." They quoted an SEC filing in which Cogent describes itself as "an early-stage company" with a short operating history in an "unproven industry." It also said it would need rapid growth and additional capital to survive. It had revenues of $70,000 for the first nine months of 2001.

Because of "their substantial interests" in Allied Riser's common stock, the noteholders allege that the company directors have not acted in the best interests of noteholders. The merger with Cogent, they say, diverts the value left in Allied Riser's remaining assets to shareholders rather than satisfying obligations to noteholders.

Also on Dec. 7 some of the noteholders group - CRT, Peninsula, Providence, JMG Capital, Sagamore, JMG Triton, Magten, HBV and Angelo Gordon - issued a notice of default.

The default notice claims that based on the evidence also mentioned in the court case "it is clear that the issuer has undertaken a systematic liquidation of its assets and has essentially ceased to do business in any meaningful way. The issuer is now insolvent and has no reasonable expectation of being able to pay the notes, or its other obligations, as they come due."

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