<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 29, 1996
REGISTRATION NO. 333-04388
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ADVANCED RADIO TELECOM CORP.
(Currently Advanced Radio Technologies Corporation)
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4812 52-1348016
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
Incorporation or Organization) No.)
</TABLE>
<TABLE>
<S> <C>
VERNON L. FOTHERINGHAM
CHIEF EXECUTIVE OFFICER
ADVANCED RADIO TELECOM CORP. ADVANCED RADIO TELECOM CORP.
500 108TH AVENUE, N.E., SUITE 500 108TH AVENUE, N.E.,
2600 SUITE 2600
BELLEVUE, WASHINGTON 98004 BELLEVUE, WASHINGTON 98004
(206) 688-8700 (206) 688-8700
(Address, Including Zip Code, (Name, Address, Including
and Telephone Number, Zip Code, and Telephone
Including Area Code, of Number, Including Area Code,
Registrant's Principal of Agent for Service)
Executive Offices)
</TABLE>
<TABLE>
<S> <C> <C>
COPIES TO:
JAMES KARDON, ESQ. JOHN D. WATSON, JR., ESQ. W. THEODORE
HAHN & HESSEN LLP LATHAM & WATKINS PIERSON, JR.,
350 FIFTH AVENUE 1001 PENNSYLVANIA AVE., N.W. ESQ.
NEW YORK, NEW YORK 10118 WASHINGTON, D.C. 20004 PIERSON &
(212) 736-1000 (202) 637-2200 BURNETT, LLP
1667 K. STREET,
N.W., SUITE 801
WASHINGTON, D.C.
20006
(202) 466-3044
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS OF MAXIMUM MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT TO OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED BE REGISTERED PER SHARE OFFERING PRICE FEE
<S> <C> <C> <C> <C>
Common Stock, $.001 par
value................... 6,900,000 Shares (1) $6.00 (2) $41,400,000 $14,276 (3)
</TABLE>
(1) Includes 900,000 shares that the Underwriters have the option to purchase to
cover over-allotments, if any.
(2) Proposed maximum offering price per share to be supplied by amendment.
Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act.
(3) Previously paid.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
ADVANCED RADIO TELECOM CORP.
CROSS-REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING LOCATION
IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF FORM S-1
<TABLE>
<CAPTION>
ITEM AND CAPTION IN FORM S-1 CAPTION IN PROSPECTUS
- ---------------------------------------------------------------- -----------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus...................... Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus.......................................... Inside Front Cover Page of Prospectus; Outside Back
Cover Page of Prospectus
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................... Prospectus Summary; Risk Factors
4. Use of Proceeds...................................... Use of Proceeds
5. Determination of Offering Price...................... Outside Front Cover Page of Prospectus; Risk Factors;
Underwriting
6. Dilution............................................. Dilution; Shares Eligible for Future Sale
7. Selling Security Holders............................. Not Applicable
8. Plan of Distribution................................. Outside Front Cover Page of Prospectus; Underwriting
9. Description of Securities to be Registered........... Outside Front Cover Page of Prospectus; Prospectus
Summary; Description of Capital Stock; Shares
Eligible for Future Sale
10. Interests of Named Experts and Counsel............... Legal Matters; Experts
11. Information with Respect to the Registrant........... Prospectus Summary; Risk Factors; The Company;
Dividend Policy; Capitalization; Selected Historical
Combined and Pro Forma Financial Data; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business; Management;
Principal Stockholders; Certain Transactions;
Description of Capital Stock; Description of Certain
Indebtedness; Financial Statements.
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities...................... Not Applicable.
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
6,000,000 SHARES
[LOGO]
COMMON STOCK
ALL OF THE SHARES OF COMMON STOCK OFFERED HEREBY ARE BEING SOLD BY ADVANCED
RADIO TELECOM CORP. ("ART" OR THE "COMPANY"). PRIOR TO THIS OFFERING, THERE HAS
BEEN NO PUBLIC MARKET FOR THE COMMON STOCK OF THE COMPANY. IT IS CURRENTLY
ESTIMATED THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $5.50 AND $6.50
PER SHARE. SEE "UNDERWRITING" FOR A DISCUSSION OF THE FACTORS TO BE CONSIDERED
IN DETERMINING THE INITIAL PUBLIC OFFERING PRICE. THE COMMON STOCK HAS BEEN
APPROVED FOR QUOTATION ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "ARTT." OF
THE 6,000,000 SHARES OF COMMON STOCK OFFERED HEREBY, UP TO 106,000 OF SUCH
SHARES HAVE BEEN RESERVED FOR SALE TO CERTAIN DIRECTORS AND PRINCIPAL
STOCKHOLDERS OF THE COMPANY. SEE "UNDERWRITING."
CONCURRENTLY WITH THE OFFERING OF THE SHARES OF COMMON STOCK (THE "COMMON
STOCK OFFERING"), THE COMPANY IS OFFERING, PURSUANT TO A SEPARATE PROSPECTUS,
150,000 UNITS (THE "UNITS"), EACH CONSISTING OF $1,000 PRINCIPAL AMOUNT AT
MATURITY OF % SENIOR NOTES DUE 2006 (THE "NOTES") AND ONE WARRANT (THE
"WARRANTS") TO PURCHASE 41.949153 SHARES OF COMMON STOCK, FOR GROSS PROCEEDS OF
$150,000,000 (THE "UNIT OFFERING" AND, TOGETHER WITH THE COMMON STOCK OFFERING,
THE "OFFERINGS"). THE COMMON STOCK OFFERING IS CONDITIONED UPON THE CONSUMMATION
OF THE UNIT OFFERING.
AN INVESTMENT IN THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN FACTORS
WHICH SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN EVALUATING AN INVESTMENT
IN THE COMMON STOCK.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS TO
TO PUBLIC DISCOUNT (1) COMPANY (2)
<S> <C> <C> <C>
PER SHARE............................. $ $ $
TOTAL (3)............................. $ $ $
</TABLE>
(1) SEE "UNDERWRITING" FOR INFORMATION CONCERNING INDEMNIFICATION OF THE
UNDERWRITERS AND OTHER MATTERS.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $ .
(3) THE COMPANY HAS GRANTED TO THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP
TO 900,000 ADDITIONAL SHARES OF COMMON STOCK SOLELY TO COVER
OVER-ALLOTMENTS, IF ANY. IF THE UNDERWRITERS EXERCISE THIS OPTION IN FULL,
THE PRICE TO PUBLIC WILL TOTAL $ , THE UNDERWRITING DISCOUNT WILL
TOTAL $ AND THE PROCEEDS TO COMPANY WILL TOTAL $ . SEE
"UNDERWRITING."
THE SHARES OF COMMON STOCK ARE OFFERED BY THE SEVERAL UNDERWRITERS NAMED
HEREIN SUBJECT TO RECEIPT AND ACCEPTANCE BY THEM AND SUBJECT TO THEIR RIGHT TO
REJECT ANY ORDER IN WHOLE OR IN PART. IT IS EXPECTED THAT DELIVERY OF THE
CERTIFICATES REPRESENTING SUCH SHARES WILL BE MADE AGAINST PAYMENT THEREFOR AT
THE OFFICE OF MONTGOMERY SECURITIES ON OR ABOUT , 1996.
-------------------
MONTGOMERY SECURITIES
MERRILL LYNCH & CO.
DEUTSCHE MORGAN GRENFELL
, 1996
<PAGE>
[INSIDE FRONT COVER GATE FOLD]
38 GHz TECHNOLOGY PROVIDES SUPERIOR
BANDWIDTH PER CHANNEL WHICH ALLOWS SIGNIFICANTLY
FASTER DATA TRANSFER RATES.
[GRAPHIC DISPLAYING BANDWIDTH PER CHANNEL
OF FREQUENCIES BETWEEN 530 KHz AND 38 GHz.]
<PAGE>
[GRAPHIC DISPLAYING 38 GHz LINKS
BETWEEN METROPOLITAN FIBER RING,
OFF-FIBER NET BUILDINGS AND ON-FIBER NET BUILDINGS.]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SECURITIES
OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY SHOULD BE READ IN CONJUNCTION WITH, AND IS QUALIFIED
IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION, INCLUDING "RISK FACTORS" AND
THE HISTORICAL AND PRO FORMA FINANCIAL STATEMENTS AND THE NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, ALL
INFORMATION IN THIS PROSPECTUS ASSUMES (I) THE COMPLETION OF THE PROPOSED MERGER
(THE "MERGER"), AS A CONDITION OF THE OFFERINGS, OF A WHOLLY-OWNED SUBSIDIARY OF
ADVANCED RADIO TECHNOLOGIES CORPORATION ("ART") WITH AND INTO ADVANCED RADIO
TELECOM CORP. ("TELECOM"), (II) THE CONVERSION (THE "CONVERSION") OF ALL
OUTSTANDING SHARES OF PREFERRED STOCK OF TELECOM INTO SHARES OF COMMON STOCK OF
TELECOM PRIOR TO THE MERGER, (III) THE AMENDMENT OF ART'S CERTIFICATE OF
INCORPORATION TO CHANGE ITS NAME TO "ADVANCED RADIO TELECOM CORP.," (IV) THE
29,450.16 FOR ONE SPLIT OF THE COMMON STOCK EFFECTED IN JUNE 1996 AND (V) NO
EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTION IN THE COMMON STOCK
OFFERING. FOLLOWING THE MERGER, TELECOM WILL BE A WHOLLY-OWNED SUBSIDIARY OF
ART. AS USED IN THIS PROSPECTUS, THE TERMS "ART" OR THE "COMPANY" REFER EITHER
TO ART ON A STAND-ALONE BASIS OR ON A COMBINED BASIS WITH TELECOM AS THE CONTEXT
MAY REQUIRE. SEE "THE COMPANY." SEE "GLOSSARY" FOR THE DEFINITIONS OF CERTAIN
TERMS AND ACRONYMS USED HEREIN.
THE COMPANY
Advanced Radio Telecom Corp. ("ART" or the "Company") provides wireless
broadband telecommunications services using point-to-point microwave
transmissions in the 37.0 to 40.0 gigahertz portion of the radio spectrum ("38
GHz"). The Company is seeking to address the growing demand for high speed, high
capacity digital telecommunications services on the part of business and
government end users who require cost effective, high bandwidth local access to
voice, video, data and Internet services. Upon completion of its pending
acquisition of 129 38 GHz wireless broadband authorizations (the "CommcoCCC
Assets") from CommcoCCC, Inc. ("CommcoCCC"), the Company will own or manage a
total of 237 authorizations granted by the Federal Communications Commission
("FCC") covering an aggregate population of approximately 143 million in 169
U.S. markets. ART's footprint will allow it to provide 38 GHz wireless broadband
services in 47 of the top 50 markets and 82 of the top 100 markets. Presently,
the Company owns or manages 108 authorizations (exclusive of the CommcoCCC
Assets) that allow it to provide 38 GHz wireless broadband services in 89
markets. See "Risk Factors -- Risk of Non-Consummation of CommcoCCC
Acquisition," "Business -- 38 GHz Wireless Broadband Licenses and
Authorizations" and "-- Agreements Relating to Licenses and Authorizations --
CommcoCCC Acquisition."
The ability to access and distribute information quickly has become critical
to business and government users of telecommunications services. The
proliferation of local area networks ("LANs"), rapid growth of Internet
services, rising demand for video teleconferencing and other demand factors are
significantly increasing the volume of broadband telecommunications traffic. The
inability of the existing infrastructure to meet this demand is creating a "last
mile" bottleneck in the copper wire networks of the incumbent local exchange
carriers ("LECs"). This increasing demand, together with changes in the
regulatory environment, are creating an opportunity to offer cost effective,
high capacity last mile access using both wireline and wireless solutions. See
"Business -- Telecommunications Industry Overview."
38 GHZ TECHNOLOGY
The Company is positioned to solve the need for broadband last mile access,
linking end users to competitive access providers ("CAPs"), inter-exchange
carriers ("IXCs"), cellular and mobile radio service providers and Internet
service providers ("ISPs") using 38 GHz technology. The Company's wireless
broadband services are engineered to provide 99.999% availability, with better
than a 10-13 (unfaded) bit error rate. This level of availability exceeds the
performance of copper based networks and is a viable alternative to fiber optic
based networks. See "Business -- The ART Solution." In addition, the Company
believes that ART's last mile solution is competitively priced with most
broadband wireline solutions. See "Business -- 38 GHz Technology" and "--The ART
Solution." The 38 GHz band provides for the following additional advantages as
compared to other spectrum bands and wireline alternatives:
3
<PAGE>
- HIGH DATA TRANSFER RATES. The total amount of bandwidth for each 38 GHz
channel is 100 MHz, which exceeds the bandwidth of any other present
terrestrial wireless channel allotment and supports full broadband
capability. For example, one 38 GHz DS-3 link at 45 Mbps today can transfer
data at a rate which is over 1,500 times the rate of the fastest dial-up
modem currently in use (28.8 Kbps) and over 350 times the rate of the
fastest integrated services digital network ("ISDN") line currently in use
(128 Kbps). In addition to accommodating standard voice and data
requirements, 45 Mbps data transmission rates allow end users to receive
real time, full motion video and 3-D graphics at their workstations and to
utilize highly interactive applications on the Internet and other networks.
- SIGNIFICANT CHANNEL CAPACITY. Because 38 GHz radio emissions have a narrow
beam width, a relatively short range and in many instances the capability
to intersect without creating interference, 38 GHz service providers can
efficiently reuse their bandwidth within a licensed area, thereby
increasing the number of customers to which such services can be provided.
Management believes that by using technology currently employed by the
Company it can serve virtually all of the immediately addressable market in
its market areas.
- RAPID DEPLOYMENT. 38 GHz technology can be deployed considerably more
rapidly than wireline and other wireless technologies, generally within 72
hours after obtaining access to customer premises. In contrast to the
relative ease of installing a 38 GHz transmission link, extending fiber or
copper-based networks to reach new customers requires significant time and
expense. In addition, unlike providers of point-to-point microwave service
in other spectrum bands, a 38 GHz license holder can install and operate as
many transmission links as it can engineer in the licensed area without
obtaining additional approvals from the FCC. This is a substantial
advantage over other portions of the microwave radio spectrum that must be
licensed on a link-by-link basis following frequency coordination, which in
total can take from three to five months.
- EASE OF INSTALLATION. The equipment used for point-to-point applications
in 38 GHz (I.E., antennae, transceivers and digital interface units) is
smaller, less obtrusive and less expensive than that used for microwave
equipment applications at lower frequencies, making it less susceptible to
zoning restrictions. In addition, 38 GHz equipment can be easily redeployed
to meet changing customer requirements.
- ADDITIONAL ADVANTAGES OVER OTHER PORTIONS OF RADIO SPECTRUM. At
frequencies above 38 GHz, point-to-point applications become less practical
because attenuation increases and the maximum distance between transceivers
accordingly decreases. Additionally, the FCC has specified the use of many
portions of the spectrum for applications other than point-to-point, such
as satellite and wireless cable services, and, accordingly, these portions
of the radio spectrum often are not available for point-to-point
applications. Finally, 38 GHz has characteristics which provide better
signal quality and performance in inclement weather than those offered in
other portions of the radio spectrum.
BUSINESS STRATEGY
ART began providing 38 GHz wireless broadband services in the fourth quarter
of 1995 and has generated only nominal revenues from such services to date. The
Company is seeking to capitalize on its broad footprint of 38 GHz authorizations
to become a leading provider of wireless broadband solutions to a diverse group
of traditional and emerging telecommunications service providers and end users
of telecommunications services. See "Business -- Business Strategy." The Company
plans to implement the following strategic initiatives to achieve this
objective:
- EXPLOIT SPECTRUM POSITION IN KEY MARKETS. Upon completion of its pending
acquisition of the CommcoCCC Assets, the Company will own or manage a total
of 237 authorizations that will allow it to provide 38 GHz wireless
broadband services in 169 U.S. markets. The Company currently owns or
manages 108 authorizations (exclusive of the CommcoCCC Assets) that allow
it to provide 38 GHz wireless broadband services in 89 markets, 73 of which
are owned by the Company and the remaining 35 of which are managed by the
Company through the Company's interests in or arrangements with other
companies. The Company has agreed to acquire all of the
4
<PAGE>
authorizations which it currently manages but does not own. These spectrum
assets provide the Company with the foundation on which to create a large
scale commercial system of 38 GHz wireless broadband operations. As of July
26, 1996, the Company was operating revenue-generating, wireless broadband
links in 15 cities. The Company plans to continue to build out its
infrastructure and to intensify its marketing effort in its market areas in
order to exploit the value inherent in its spectrum assets. The Company may
seek to acquire additional spectrum rights in new and existing markets in
order to expand its geographic footprint or enhance its services. See
"Business -- Agreements Relating to Licenses and Authorizations."
- MARKET INITIALLY AS A CARRIER'S CARRIER. The Company's initial target
customers include CAPs, IXCs, cellular and mobile radio service providers
and ISPs. The Company's wireless broadband services enable CAPs to extend
their broadband services to locations where it is either not cost-efficient
or too difficult to extend their fiber optic network due to physical
limitations, franchise fees or other restrictions. The Company's services
may also be attractive to certain LECs, which generally do not currently
have broadband networks capable of reaching the majority of their
customers. All telecommunications service providers can use the Company's
services as alternate or redundant routes to increase network reliability.
The Company has entered into a strategic distribution agreement (the
"Ameritech Strategic Distribution Agreement") with Ameritech Corp.
("Ameritech") for delivery of the Company's wireless broadband services
throughout Ameritech's midwest operating region and for certain large
customers located outside its region. The Company currently provides
services to Ameritech, Bell Atlantic NYNEX Mobile, UUNet, Electric
Lightwave, NEXTLINK, American Personal Communications, American Show
Management, Capital Area Internet Service, Brooks Fiber Communications and
Western Wireless, among others. See "Business -- Customers and
Applications." As regulatory and competitive conditions permit and as the
Company's customer base and market presence develop, the Company expects
that its market focus will expand from a wholesale "carrier's carrier" to
include provision of services directly to commercial end users.
- PURSUE OPPORTUNITIES TO PROVIDE VALUE-ADDED SERVICES. The Company has
identified and plans to pursue additional market niches with immediate
needs for reliable, high bandwidth last mile access services. For example,
the market for Internet services urgently requires broadband "pipes" to
facilitate high speed access for corporate users, and the Company is
pursuing agreements to package its 38 GHz solutions with the services of
leading ISPs. Other potential value-added uses include desktop
videoconferencing, high resolution imaging for healthcare and law
enforcement applications and video on demand. The Company may also decide
to offer switched-based services to end users who desire a single source
telecommunications solution.
- MAINTAIN TECHNOLOGY LEADERSHIP IN SPECTRUM MANAGEMENT. The Company is
currently developing proprietary site selection and network design software
which it believes will provide for faster site development at a lower cost.
In addition, through the Company's internal technology development efforts,
as well as on-going participation in equipment manufacturers' research and
development activities, the Company is seeking to achieve a competitive
advantage through proprietary methods designed to increase the capacity and
quality of its networks.
- ESTABLISH AND EXPAND KEY STRATEGIC ALLIANCES. The Company has established
and will seek to continue to establish key strategic alliances with major
service providers, equipment manufacturers, systems integrators and
enhanced service providers. Ameritech owns a 5.4% beneficial equity
interest in the Company as of July 26, 1996 (4.5% after giving effect to
the Common Stock Offering) and entered into the Ameritech Strategic
Distribution Agreement in April 1996. The Company also has agreements with
Harris Corporation, Farinon Division ("Harris") for marketing ART's 38 GHz
services to PCS providers and with GTE Corporation ("GTE") for
installation, field servicing and network monitoring. In addition, the
Company is seeking to develop relationships with a number of equipment
manufacturers focusing on 38 GHz technology development, wireless broadband
standards and joint sales efforts. The Company plans to utilize these
strategic alliances to bundle its services with those of its partners, to
provide for alternative distribution channels and to gain access to
technological advancements. See "Business -- Strategic Alliances."
5
<PAGE>
THE COMMON STOCK OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company.......... 6,000,000 shares
Common Stock outstanding after the
offering.................................... 36,086,498 shares (1)
Use of proceeds.............................. To fund capital expenditures, including the
purchase of equipment and the acquisition of
certain spectrum rights, to repay outstanding
indebtedness and for general corporate
purposes, including the funding of operating
cash flow shortfalls, technology development
and the acquisition of additional spectrum
rights and, potentially, related businesses.
Nasdaq National Market symbol................ ARTT
</TABLE>
- ------------------------------
(1) Assumes completion of the Merger and the Conversion. Excludes (i) 877,136
shares of Common Stock subject to the Ameritech Warrant (as defined), (ii)
1,100,000 shares of Common Stock subject to the Bridge Warrants (as
defined), (iii) 325,000 shares of Common Stock subject to the Indemnity
Warrants (as defined), (iv) 1,664,732 shares of Common Stock subject to
outstanding options under the Equity Incentive Plan (as defined), (v) 28,000
shares of Common Stock anticipated to be subject to outstanding options
under the Directors Plan (as defined) upon consummation of the Offerings,
(vi) 50,000 shares subject to the CommcoCCC Warrants (as defined) and (vii)
16,500,000 shares issuable upon the consummation of the CommcoCCC
Acquisition (as defined). As of July 26, 1996, an additional 835,268 shares
of Common Stock were available for issuance under the Equity Incentive Plan.
As of the effective date of the Offerings, an additional 172,000 shares of
Common Stock were available for issuance under the Directors Plan. See
"Certain Transactions" and "Management -- Stock Option Plans." In addition,
does not give effect to the exercise of (i) the over-allotment option
granted to the Underwriters by the Company in the Common Stock Offering and
(ii) the Warrants. See "Underwriting."
CONCURRENT OFFERING
Concurrently with the Common Stock Offering, the Company is offering,
pursuant to a separate prospectus, 150,000 Units, each consisting of $1,000
principal amount at maturity of Notes and one Warrant to purchase 41.949153
shares of Common Stock of the Company, for gross proceeds of $150,000,000 (the
"Unit Offering" and, together with the Common Stock Offering, the "Offerings").
At the closing of the Unit Offering, the Company will use approximately $57.6
million of the net proceeds thereof to purchase a portfolio of Pledged
Securities (as defined) which will provide funds sufficient for payment in full
of interest on the Notes through , 1999 and as security for
repayment of principal of the Notes. Upon exercise, the holders of Warrants
would be entitled, in the aggregate, to purchase approximately 6.3 million
shares of Common Stock, representing approximately 10.0% of the outstanding
Common Stock on a fully-diluted basis on the date hereof, after giving effect to
the Offerings and the CommcoCCC Acquisition. The Common Stock Offering is
conditioned upon the consummation of the Unit Offering. See "Description of
Certain Indebtedness."
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. See "Risk Factors" beginning on page 9 for a discussion of certain factors
which should be considered by prospective investors in evaluating an investment
in the Common Stock.
6
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA (1)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 THREE MONTHS ENDED MARCH 31, 1996
-------------------------------------------------- --------------------------------------------------
HISTORICAL PRO FORMA HISTORICAL PRO FORMA
COMBINED (2) PRO FORMA (3) AS ADJUSTED (4) COMBINED (2) PRO FORMA (3) AS ADJUSTED (4)
------------- ---------------- ----------------- ------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Operating revenue.... $ 5,793 $ 5,793 $ 5,793 $ 9,620 $ 9,620 $ 9,620
Non-cash compensation
expense............. 1,089,605 1,089,605 1,089,605 7,221,000 7,221,000 7,221,000
Depreciation and
amortization........ 15,684 15,684 3,760,202 89,279 89,279 1,025,409
Interest, net........ 121,986 1,974,275 21,411,287 131,145 528,739 5,359,370
Net loss............. 3,234,843 5,087,132 26,995,526 10,694,588 11,092,182 16,540,659
Pro forma net loss
per share of Common
Stock (5)........... -- $ 0.17 $ 0.51 -- $ 0.36 $ 0.31
Pro forma weighted
average number of
shares of Common
Stock outstanding
(5)................. -- 30,516,037 53,016,037 -- 30,516,037 53,016,037
OTHER FINANCIAL DATA:
EBITDA (6)........... $(1,936,141) $ (1,936,141) $ (1,936,141) $(2,156,893) $ (2,156,893) $ (2,156,893)
Capital
expenditures........ 3,585,144 3,585,144 3,585,144 2,861,241 2,861,241 2,861,241
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1995 AS OF MARCH 31, 1996
------------------ --------------------------------------------------
HISTORICAL HISTORICAL PRO FORMA
COMBINED (2) COMBINED (2) PRO FORMA (3) AS ADJUSTED (4)
------------------ ------------- ---------------- -----------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital surplus (deficit)........ $ (3,008,510) $(1,128,130) $ 1,116,870 $ 101,467,995
Property and equipment, net.............. 3,581,561 6,380,895 6,380,895 6,380,895
FCC licenses............................. 4,235,734 4,235,734 4,235,734 149,780,734
Total assets............................. 9,876,559 15,036,337 20,432,236 327,836,002
Short-term debt.......................... -- -- 2,975,000 --
Long-term debt, including current
portion................................. 6,450,000 5,483,082 7,394,521 135,074,560
Total stockholders' equity (deficit)..... (312,860) 5,339,738 5,849,198 154,887,925
</TABLE>
- ------------------------------
(1) The unaudited summary historical and pro forma financial data were derived
from, and should be read in conjunction with, the audited financial
statements of ART and Telecom and the notes thereto, the unaudited interim
condensed financial statements of ART and Telecom and the notes thereto, and
the unaudited pro forma condensed financial statements of the Company and
the notes thereto, included elsewhere in this Prospectus. The pro forma and
pro forma as adjusted financial data are not necessarily indicative of what
the actual financial position and results of operations of the Company would
have been as of and for the three months ended March 31, 1996 and for the
year ended December 31, 1995, nor do they purport to represent the Company's
future financial position and results of operations.
(2) The unaudited summary financial data under the caption "Historical Combined"
are presented as if the historical financial statements of ART and Telecom
had been combined and reflect (i) the elimination of transactions and
balances between ART and Telecom and (ii) the elimination of ART's
investment in Telecom and Telecom's investment in ART.
(3) The unaudited summary financial data under the caption "Pro Forma" are
presented as if the following transactions had occurred as of the beginning
of the respective periods for the Statement of Operations Data and Other
Financial Data and as of the balance sheet date for the Balance Sheet Data:
(i) the March 8, 1996 issuance of the Bridge Notes (as defined) in
connection with the Bridge Financing (as defined); (ii) the receipt of $2.2
million in cash proceeds from the issuance of the Equipment Note (as
defined) and Indemnity Warrants in connection with the Equipment Financing
(as defined), after deducting related fees and expenses of $225,000, (iii)
the receipt of $3.0 million in cash proceeds from the CommcoCCC Notes (as
defined) and CommcoCCC Warrants in connection with the CommcoCCC Financing
(as defined); (iv) the Conversion; and (v) the Merger, including the
issuance of Common Stock to Telecom stockholders and the cancellation of all
outstanding Telecom common stock. See "Certain Transactions."
(4) The unaudited summary financial data under the caption "Pro Forma As
Adjusted" are presented as if the transactions referred to in (3) above and
the following transactions had occurred as of the beginning of the
respective periods for the Statement of Operations Data and Other Financial
Data and as of the balance sheet date for the Balance Sheet Data: (i) the
7
<PAGE>
sale by the Company of 6,000,000 shares of Common Stock offered in the
Common Stock Offering based on an assumed initial public offering price of
$6.00 per share and the Units and Warrants offered in the Unit Offering
assuming, $150.0 million of gross proceeds, and, in each case, after
deducting the estimated underwriting discount and offering expenses and the
cash used for the purchase of Pledged Securities of approximately $57.6
million, and the value ascribed to the Warrants of approximately $18.3
million based on an assumed issuance of Warrants to purchase an aggregate of
10% of Common Stock of the Company on a fully-diluted basis after giving
effect to the Offerings and the CommcoCCC Acquisition, (ii) the receipt and
application of the net proceeds therefrom to repay the Bridge Notes and the
CommcoCCC Notes and to acquire the 50% ownership interest of ART West (as
defined) held by Extended (as defined) for $6.0 million in cash and the DCT
Assets (as defined) for $3.6 million in cash and (iii) the issuance of
16,500,000 shares of Common Stock based upon an assumed value of $6.00 per
share in connection with the CommcoCCC Acquisition (as defined). See "Use of
Proceeds."
(5) Pro forma net loss per share is computed based on the loss for the period
divided by the weighted average number of shares of Common Stock outstanding
during the period, including the Conversion, the Merger and the issuance of
potentially dilutive instruments issued within one year prior to the
Offerings at exercise prices below the assumed initial public offering price
of $6.00 per share. Pro forma as adjusted net loss per share include the
items above noted plus the issuance of 6,000,000 shares of Common Stock in
the Common Stock Offering and the issuance of 16,500,000 shares of Common
Stock in connection with the CommcoCCC Acquisition. In measuring the
dilutive effect, the treasury stock method was used.
(6) EBITDA means loss before interest expense, income tax expense, depreciation
and amortization expense, non-cash compensation expense and non-cash market
development expense. Information with respect to EBITDA is included herein
because a similar measure will be used in the Indenture (as defined) with
respect to the computation of certain covenants. EBITDA is not intended to
represent cash flows from operating activities, as determined in accordance
with generally accepted accounting principles, nor has it been presented as
an alternative to operating income as an indicator of operating performance
and should not be considered as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles.
8
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN
INVESTMENT IN THE COMMON STOCK OFFERED HEREBY.
BUSINESS AND REGULATORY RISKS
LIMITED OPERATIONS; HISTORY OF NET LOSSES
Although the Company's business commenced in 1993, the Company has generated
only nominal revenues from operations to date. The Company's primary activities
have focused on the acquisition of wireless authorizations, the hiring of
management and other key personnel, the raising of capital, the acquisition of
equipment and the development of operating systems. As of June 28, 1996, the
Company was operating revenue-generating, wireless broadband links in 15 cities
using 38 GHz technology. Prospective investors have limited operating and
financial data about the Company upon which to base an evaluation of the
Company's performance and an investment in the Common Stock offered hereby. The
Company's ability to provide commercial service on a widespread basis and to
generate positive operating cash flow will depend on its ability to, among other
things, (i) deploy its 38 GHz technology on a market-by-market basis, (ii)
attract and retain an adequate customer base, (iii) develop its operational and
support systems and (iv) acquire appropriate sites for its operations. See
"Business -- Business Strategy." Given the Company's limited operating history,
there can be no assurance that it will be able to achieve these goals, to
develop a sufficiently large revenue-generating customer base, to service its
indebtedness or to compete successfully in the telecommunications industry.
The development of the Company's business and the deployment of its services
and systems will require significant capital expenditures, a substantial portion
of which will need to be incurred before the realization of significant
revenues. Together with the associated start-up operating expenses, these
capital expenditures will result in negative cash flow until an adequate revenue
generating customer base is established. On a historical combined basis for the
year ended December 31, 1995 and the three-month period ended March 31, 1996,
the Company reported net losses of $3.2 million and $10.7 million, respectively.
On a combined historical basis, from inception through March 31, 1996, the
Company reported net losses of $14.1 million. The financial statements of the
Company included in this Prospectus have been prepared on a going concern basis.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations." Through July 31, 1997, the Company currently expects to incur
capital expenditures of approximately $70.0 million as the development and
expansion of its wireless broadband business continues. The Company expects to
generate significant operating losses for at least the next several years. There
can be no assurance that the Company will develop a revenue-generating customer
base or will achieve or sustain profitability in the future.
EMERGING MARKET; UNCERTAIN ACCEPTANCE OF 38 GHZ SERVICES
The Company has only recently begun to market its wireless broadband
services to potential customers and has generated only nominal revenues to date.
The provision of wireless broadband services on 38 GHz frequencies represents an
emerging sector of the telecommunications industry, and the demand for such
services is uncertain. Market acceptance may be adversely affected by historical
perceptions of the unreliability and lack of security of previous microwave
technologies using frequencies other than 38 GHz. See "Business -- 38 GHz
Technology." There can be no assurance that substantial markets will develop for
38 GHz wireless broadband services, or, if such markets were to develop, that
the Company would be able to attract and maintain a sufficient
revenue-generating customer base or operate profitably.
The Company's success in providing wireless broadband services is subject to
certain factors beyond the Company's control. These factors include, without
limitation, changes in general and local economic conditions, availability of
equipment, changes in telecommunications service rates charged by other service
providers, changes in the supply and demand for wireless broadband services,
competition from
9
<PAGE>
wireline and wireless operators in the same market area, changes in the federal
and state regulatory schemes affecting the operation of wireless broadband
systems (including the enactment of new statutes and the promulgation of changes
in the interpretation or enforcement of existing or new rules and regulations)
and changes in technology that have the potential of rendering obsolete the
Company's wireless broadband equipment. In addition, the extent of the potential
demand for wireless broadband services in the Company's market areas cannot be
estimated with certainty. There can be no assurance that one or more of these
factors will not have an adverse effect on the Company's financial condition and
results of operations.
RISK OF NON-CONSUMMATION OF COMMCOCCC ACQUISITION
On July 3, 1996, the Company entered into an agreement (as amended, the
"CommcoCCC Agreement") to acquire the CommcoCCC Assets from CommcoCCC (the
"CommcoCCC Acquisition") in exchange for 16,500,000 shares of Common Stock. See
"Business -- Agreements Relating to Licenses and Authorizations -- CommcoCCC
Acquisition." The CommcoCCC Acquisition is subject to various conditions
including receipt of FCC and other approvals (including approval under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, if required), receipt by
CommcoCCC of an opinion as to the tax-free nature of the transaction,
consummation of the Offerings on terms reasonably satisfactory to CommcoCCC,
minimum population coverage requirements for the authorizations of ART and
CommcoCCC, accuracy of representations and warranties except for breaches that
do not have in the aggregate a material adverse effect, no pending or threatened
material litigation and other customary closing conditions. There can be no
assurance that all such conditions will be satisfied. See "Business --
Agreements Relating to Licenses and Authorizations -- CommcoCCC Acquisition." In
particular, to obtain FCC approval, the Company will need to demonstrate that
the shareholders of CommcoCCC acquired the authorizations that are to be
assigned to the Company with the intent of providing service to the public and
not for the speculative purpose of reselling such authorizations and may need
certain waivers or consents from the FCC. The FCC may be unwilling to grant its
approval or may grant its approval subject to conditions that may be adverse to
the Company. There can be no assurance that the FCC will grant such waivers or
that there would not be substantial delays in its doing so. If the Company were
unable to complete the CommcoCCC Acquisition for any reason, the Company's
footprint would be considerably smaller than planned and the Company's growth
could be limited.
COMPETITION
The telecommunications services industry is highly competitive. The Company
has only recently begun to market its wireless broadband services to potential
customers and is currently providing services on a limited basis. In each market
area in which the Company is authorized to provide services, the Company
competes or will compete with several other service providers and technologies.
The Company expects to compete primarily on the basis of wireless broadband
service features, quality, price, reliability, customer service and rapid
response to customer needs. The Company faces significant competition from other
38 GHz providers and incumbent LECs, such as the Regional Bell Operating
Companies ("RBOCs"). The Company may also compete with CAPs, cable television
operators, electric utilities, LECs operating outside their current local
service areas and IXCs. There can be no assurance that the Company will be able
to compete effectively in any of its market areas. See "Business --
Competition."
COMPETITION FROM 38 GHZ SERVICE PROVIDERS. The Company faces competition
from other 38 GHz service providers, such as WinStar Communications, Inc.
("WinStar") and BizTel Communications, Inc. ("BizTel"), within its market areas.
In many cases, one or both of these service providers hold licenses to operate
in other portions of the 38 GHz band in geographic areas which encompass or
overlap the Company's market areas. In certain of the Company's market areas,
other 38 GHz service providers may have a longer history of operations, a larger
geographic footprint or substantially greater financial resources than the
Company. WinStar commenced its 38 GHz operations approximately one year prior to
the Company, has raised significant capital and has the competitive advantages
inherent in being the
10
<PAGE>
first to market 38 GHz services. In addition to WinStar and BizTel, at least one
other substantial entity, Milliwave L.P. ("Milliwave"), and several dozen
smaller ones have been granted 38 GHz authorizations in geographic regions in
which the Company plans to operate. WinStar has recently entered into a
definitive agreement with Milliwave to acquire Milliwave's 38 GHz licenses,
subject to FCC approval, and has agreed to manage such licenses pending the
consummation of such acquisition. Due to the relative ease and speed of
deployment of 38 GHz technology, the Company could face intense price
competition and competition for customers (including other telecommunications
service providers) from other 38 GHz service providers.
The Company also faces potential competition from new entrants to the 38 GHz
market, including LECs and other leading telecommunications companies. The NPRM
(as defined) contemplates an auction of certain spectrum assets, including the
lower fourteen proposed 100 MHz channels (which are similar to those used by the
Company) and four proposed 50 MHz channels in the 38 GHz spectrum band, which
have not been previously available for commercial use. See "-- Government
Regulation." The grant of additional authorizations by the FCC in the 38 GHz
band, or other portions of the spectrum with similar characteristics, could
result in increased competition. The Company believes that, assuming that
additional channels are made available as proposed by the NPRM, additional
entities having greater resources than the Company could acquire authorizations
to provide 38 GHz services. See "Business -- Government Regulation -- Federal
Regulation -- FCC Rulemaking."
COMPETITION FROM INCUMBENT LECS. The Company also faces significant
competition from incumbent LECs, irrespective of whether they provide 38 GHz
services. Incumbent LECs have long-standing relationships with their customers,
generally own significant PCS or cellular assets, have the potential to
subsidize competitive services with revenues from a variety of businesses and
benefit from favorable federal and state policies and regulations. Regulatory
decisions and recent legislation, such as the Telecommunications Act of 1996
(the "Telecommunications Act"), have partially deregulated the
telecommunications industry and reduced barriers to entry into new segments of
the industry. In particular, the Telecommunications Act, among other things, (i)
enhances local exchange competition by preempting laws prohibiting competition
in the local exchange market by requiring LECs to provide fair and equal
standards for interconnection and by requiring incumbent LECs to provide
unbundling of services and (ii) permits an RBOC to compete in the interLATA long
distance service market once certain competitive characteristics emerge in such
RBOC's service area. The Company believes that this trend towards greater
competition will continue to provide opportunities for broader entrance into the
local exchange markets. However, as LECs face increased competition, regulatory
decisions are likely to provide them with increased pricing flexibility, which
in turn may result in increased price competition. There can be no assurance
that such increased price competition will not have a material adverse effect on
the Company's results of operations.
OTHER COMPETITORS. The Company may compete with CAPs for the provision of
last mile access and additional services in most of its market areas. However,
the Company believes that many CAPs may utilize 38 GHz transmission links to
augment their own service offerings to IXCs and end users, and that the Company
is well positioned to provide such 38 GHz services to CAPs. However, there can
be no assurance that CAPs will utilize the Company's 38 GHz services or that
CAPs will not seek to acquire their own 38 GHz licenses or use the 38 GHz
licenses of other licensees. Furthermore, the ability of CAPs to compete in the
local exchange market is limited by regulations relating to number portability,
dialing parity and reasonable interconnection. The Telecommunications Act
requires the FCC and the states to implement regulations that place CAPs on a
more equal competitive footing with LECs. To the extent these changes are
implemented, CAPs may be able to compete more effectively with LECs. However,
there can be no assurance that CAPs or 38 GHz service providers, such as the
Company, will be able to compete effectively for the provision of last mile
access and other services.
The Company may also face competition from cable television operators
deploying cable modems, which provide high speed data capability over installed
coaxial cable television networks. Although cable modems are not widely
available currently, the Company believes that the cable industry may support
11
<PAGE>
the deployment of cable modems to residential cable customers through methods
such as price subsidies. Notwithstanding the cable industry's interest in rapid
deployment of cable modems, the Company believes that in order to provide
broadband capacity to a significant number of business and government users
cable operators will be required to spend significant time and capital in order
to upgrade their existing networks to the next generation of hybrid fiber
coaxial network architecture. However, there can be no assurance that cable
television operators will not emerge as a source of competition to the Company.
The Company may also face competition from electric utilities, LECs
operating outside their current local service areas, IXCs and other providers.
These entities provide transmission services using technologies which may enjoy
a greater degree of market acceptance than 38 GHz wireless broadband technology
in the provision of last mile broadband services. In addition, the Company may
face competition from new market entrants using wireless, fiber optic and
enhanced copper based networks to provide local service and from wireless cable
providers and other service providers operating in frequencies other than 38
GHz.
Many of the Company's competitors have long-standing relationships with
customers and suppliers, greater name recognition and greater financial,
technical and marketing resources than the Company. As a result, these
competitors may be able to more quickly develop and exploit new or emerging
technologies, adapt to changes in customer requirements or devote greater
resources to the marketing of their services than the Company. The consolidation
of telecommunications companies and the formation of strategic alliances and
cooperative relationships in the telecommunications and related industry, as
well as the development of new technologies, could give rise to significant new
competitors to the Company. In such case, there can be no assurance as to the
degree to which the Company will be able to compete effectively.
GOVERNMENT REGULATION
The telecommunications services offered by the Company are subject to
regulation by federal, state and local government agencies. At the federal
level, the FCC has jurisdiction over the use of the electromagnetic spectrum
(I.E., wireless services) and has exclusive jurisdiction over all interstate
telecommunications services, that is, those that originate in one state and
terminate in another state. State regulatory commissions have jurisdiction over
intrastate communications, that is, those that originate and terminate in the
same state. Municipalities may regulate limited aspects of the Company's
business by, for example, imposing zoning requirements and requiring
installation permits. See "Business -- Government Regulation."
The Company is licensed by the FCC as a common carrier provider of
facilities-based local telecommunications services. For many of its intrastate
services, the Company will need to seek authorizations from the states and, in
most cases, file tariffs. The Company is in the process of filing tariffs for
some of its services with the FCC and with certain state authorities on an
ongoing basis. Certain of its proposed services have not yet been permitted in
most states. Although the Telecommunications Act requires the states to open up
all of the Company's services to competition, there can be no assurance that
this will occur on a timely basis. Challenges to its applications for
authorizations or its tariffs by third parties could cause the Company to incur
substantial legal and administrative expenses and time delay in implementing its
business plan. Although many of the Company's applications for FCC
authorizations were subject to challenge, the Company nonetheless was granted
authorizations for a majority of its applications. The Company's remaining
applications were either dismissed, voluntarily or involuntarily, or are
currently pending before the FCC.
Twenty of the Company's applications were dismissed by the FCC because they
overlapped either with authorizations granted to third parties or with third
party applications that held superior rights by virtue of the timing of their
filing. Five of the Company's applications were dismissed voluntarily by the
Company because they could not be granted under FCC policies. In one instance,
the geographic area sought was larger than that permitted by the FCC's September
1994 Policy Statement. In the other four
12
<PAGE>
instances the dismissed applications overlapped with each other and thus could
not be granted under then-existing FCC policies. None of the dismissals will
impact the financial condition or operations of the Company because they have
not been included in the Company's business plan. Some of the pending
applications propose the same channel in part of the same geographic area as one
or more applications filed by third parties and therefore could not be granted
under the FCC rules generally prohibiting the grant of mutually-exclusive
applications. Elimination of the conflicts generally would require dismissal of
a majority of the applications as part of a settlement. All of the pending
applications are subject to the freeze on the grant of additional authorizations
pending completion of the NPRM, which proposes dismissal of all such
applications. The Company's business plans do not assume that any of these
pending applications will be granted. The Company does not believe that a
failure to grant these applications will impair its ability to operate. See
"Business -- Government Regulation."
In its provision of local wireless broadband services, the Company currently
is not subject to rate regulation by the FCC, but is subject to regulation by
most states. Additionally, the Company is required to comply with all applicable
local zoning and other laws governing the installation and operation of its
wireless broadband services.
Changes in existing laws and regulations, including those relating to the
provision of wireless local telecommunications services via 38 GHz licenses, or
any failure or significant delay in obtaining necessary regulatory approvals,
could have a material adverse effect on the Company. On November 13, 1995, the
FCC released an order barring the acceptance of new applications for 38 GHz
authorizations. On December 15, 1995, the FCC announced the issuance of a notice
of proposed rulemaking (the "NPRM"), pursuant to which it proposed to amend its
current rules to provide for, among other things, (i) the adoption of an auction
procedure for the issuance of authorizations in the 38 GHz band, including a
possible auction of the lower fourteen 100 MHz channels (which are similar to
those used by the Company) and the lower four 50 MHz channels in the 38 GHz band
that have not been previously available for commercial use, (ii) the
continuation of the 100 MHz-based channeling plan and licensing rules for
point-to-point microwave operations in the lower 14 channels, (iii) licensing
frequencies using predefined geographic service areas ("Basic Trading Areas"),
(iv) the imposition of substantially stricter construction requirements for
authorizations that are not received pursuant to auctions as a condition to the
retention of such authorizations and (v) the implementation of certain technical
rules designed to avoid radio frequency interference among licensees. In
addition, the FCC ordered that those applications subject to mutual exclusivity
with other applicants or placed on public notice by the FCC after September 13,
1995 would be held in abeyance pending the outcome of the NPRM and might then be
dismissed. Final rules issued in connection with the NPRM may require that 38
GHz service providers share other yet-to-be licensed portions of the 38 GHz band
with other telecommunications service providers. The implementation of such a
measure could materially affect the Company's ability to provide services to its
customers by imposing power and other limitations upon existing operations.
There can be no assurance that the final rules (if any) issued in connection
with the NPRM will resemble the rules proposed in the NPRM. There also can be no
assurance that any proposed or final rules will not have a material adverse
effect on the Company. Statutes and regulations which may become applicable to
the Company as it expands could require the Company to alter methods of
operations at costs which could be substantial or otherwise limit the types of
services offered by the Company.
The Company manages the systems of ART West, DCT, Telecom One and CommcoCCC
(during the pendency of certain acquisitions) pursuant to management agreements.
See "Business -- Agreements Relating to Licenses and Authorizations." The
Company believes that the provisions of these management agreements comply with
the FCC's policies concerning licensee control of FCC-licensed facilities.
Because the 38 GHz service is a new service, however, there is no FCC precedent
addressing the limits of such management arrangements for this service. No
assurance can be given that the management arrangements or proposed acquisitions
will, if challenged, be found to satisfy the FCC's policies or what
modifications, if any, may need to be made to satisfy those policies. If the FCC
were to void or require modifications of the management arrangements, the
operations of the Company could be adversely affected.
13
<PAGE>
RISK OF FORFEITURE, NON-RENEWAL AND FLUCTUATION IN VALUE OF FCC LICENSES
Upon completion of the CommcoCCC Acquisition, the Company will own or manage
a total of 237 authorizations that will allow it to provide 38 GHz wireless
broadband services in 169 U.S. markets. The Company currently owns or manages
108 authorizations (exclusive of the CommcoCCC Assets) that allow it to provide
38 GHz wireless broadband services in 89 markets, 73 of which are owned by the
Company and the remaining 35 of which are managed by the Company through the
Company's interests in or arrangements with other companies. Under the current
FCC rules, the recipient of an authorization for 38 GHz microwave facilities is
required to complete construction of such facilities within 18 months of the
date of grant of the authorization (authorizations for facilities that are not
constructed are referred to in this Prospectus as "construction permits" and
authorizations for facilities that are constructed are referred to in this
Prospectus as "licenses"). Upon completion of construction, the licensee is
required to certify that the station is operational and ready to provide service
to the public. Although under current FCC regulations the term "operational" is
not defined, the industry custom is to establish at least one link between two
transceivers in each market area for which a construction permit is held. In the
event that the recipient fails to comply with the construction deadline, the
construction permit is subject to forfeiture, absent an extension of the
deadline. Of the 108 authorizations that the Company owns or manages (exclusive
of the CommcoCCC Assets), 77 are licenses. Under the terms of its remaining 31
construction permits, the Company must complete construction of facilities for
the majority of such construction permits between mid-August and mid-September
1996. Under the terms of the CommcoCCC authorizations and the Company's
management agreement with CommcoCCC, the Company must complete construction of
facilities for eight construction permits by mid-September 1996, 39 construction
permits by December 1996 and the remaining 82 construction permits between
mid-April and mid-August 1997. The Company believes that, in light of current
FCC practice, extensions of construction periods are highly unlikely. Although
the Company believes that it can complete the construction of all of its own and
CommcoCCC's facilities using the proceeds of the Offerings within respective
time limits, there can be no assurance that it will be able to do so or that the
Company will be able to comply with whatever more stringent construction
requirements the FCC ultimately adopts as a result of the NPRM. As a result,
some of the Company's construction permits could be subject to forfeiture, which
could have a material adverse effect on the Company's development and results of
operations. See "Business -- Government Regulation" and "-- 38 GHz Wireless
Broadband Licenses and Authorizations."
The FCC's current policy is to align the expiration dates of all 38 GHz
licenses held by a particular licensee such that all such licenses mature
concurrently and then to require renewal of all such licenses for a matching
ten-year period. All of the 38 GHz licenses owned or to be acquired by the
Company will expire in February 2001. Although the Company currently anticipates
that its licenses will be renewed based upon the FCC's custom and practice in
connection with other services which have established a presumption in favor of
licensees that have complied with regulatory obligations during the initial
license period, there can be no assurance that all or any of the licenses will
be renewed upon expiration of their initial terms. In the event that the FCC
does not renew one or more of the licenses, the Company's business and results
of operations could be materially adversely affected.
The Company plans to use its authorizations to develop wireless broadband
systems in all of its market areas. In addition, a limited secondary market
exists for 38 GHz authorizations, and the Company may from time to time purchase
such authorizations. The value of authorizations held or acquired hereafter by
the Company will depend upon the success of the Company's wireless broadband
operations, fluctuations in the level of supply and demand for such
authorizations and the telecommunications industry's response to the
availability and efficacy of wireless broadband systems. In addition, federal
and state regulations limit the ability of licensees to sell their
authorizations. Assignments of authorizations and changes of control involving
entities holding authorizations require prior FCC and, in some instances, state
regulatory approval and are subject to restrictions and limitations on the
identity and status of the assignee or successor. These regulatory restrictions
on transfer of authorizations may adversely affect the value of the Company's
authorizations.
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MANAGEMENT OF GROWTH
The Company is currently experiencing a period of rapid growth and is
pursuing a business plan that, if successfully implemented, will result in
expansion of its operations and the provision of 38 GHz services on a widespread
basis over the next two to five years. The Company's success will depend on its
ability to manage growth effectively, to enhance its operational and financial
control and information systems and to attract, assimilate and retain additional
qualified personnel. Failure by the Company to meet the demands of customers and
to manage the expansion of its business and operations could have a material
adverse effect on the Company's development and results of operations.
LINE OF SIGHT; ROOF RIGHTS; OTHER LIMITATIONS
Wireless broadband services over 38 GHz frequencies require a direct line of
sight between two transceivers comprising a link and are subject to distance and
rain attenuation. The maximum length of a single link is generally limited to
three to five miles, and, as a result, intermediate links (or "repeaters") are
required to permit wireless broadband transmission to extend beyond this limit.
In the absence of a direct line of sight, repeaters may be required to
circumvent obstacles, such as buildings in urban areas or hills in rural areas.
In addition, in areas of heavy rainfall, the intensity of rainfall and the size
of raindrops can affect the transmission quality of 38 GHz services.
Transmission links in these areas are engineered for shorter distances and
greater power to maintain transmission quality. The use of intermediate links to
overcome obstructions or rain fade increases the cost of service. While these
increased costs may not be significant in all cases, such costs may render
wireless broadband services uneconomical in certain circumstances.
Due to line of sight limitations, the Company currently installs its
transceivers and antennas on the rooftops of buildings and on other tall
structures. Line of sight and distance limitations generally do not present
problems in urban areas due to the ability of the licensee to select
unobstructed structures from which to transmit and the concentration of
customers within a limited area although the Company may have to install
intermediate links. Line of sight and distance limitations in non-urban areas
can arise due to lack of structures with sufficient height to clear local
obstructions. The Company has generally been able to construct intermediary
repeater links and other solutions to reduce line of sight and distance
limitations in urban and non-urban areas; however, in a minority of instances
the Company has encountered line of sight and distance limitations that could
not be solved economically. In such instances, sales to certain potential
customers have been or in the future may be adversely affected, and, in some
cases, the Company may determine to provide certain services on terms that are
uneconomical in the near term as a result of these limitations. While the effect
on the financial condition and results of operations of the Company resulting
from such cases has been minimal to date, there can be no assurance that such
limitations will not have a material adverse effect on the Company's future
development and results of operations.
In order to obtain the necessary access to install its transceivers and
antennas, the Company generally must secure roof rights from the owners of each
building or other structure on which its equipment is installed. Failure to
obtain roof rights in a timely fashion may cause potential customers to use
alternative providers of 38 GHz services or to refrain from using 38 GHz
services altogether. There can be no assurance that the Company will succeed in
obtaining the roof rights necessary to establish wireless broadband services to
all potential customers in its market areas on favorable terms, if at all, or
that delays in obtaining such rights will not have a material adverse effect on
the Company's development and results of operations.
The relative significance of the size of a market area served depends on the
concentration within that area of potential customers. The Company's market
areas were defined by the Company in preparing its FCC applications for 38 GHz
licenses. The definitions of these areas were based on the Company's analysis of
the then existing local demographic characteristics in each market, such as
concentrations of employees and income levels. In certain of the Company's
market areas, other 38 GHz service providers have larger geographic footprints
or greater bandwidth. To the extent that the
15
<PAGE>
Company's authorizations do not track the appropriate growth and development
patterns of potential customers within its market areas or that other 38 GHz
providers have greater geographic coverage or more bandwidth, the Company may
have a competitive disadvantage.
RELIANCE ON EQUIPMENT SUPPLIERS; LACK OF INDUSTRY STANDARDS
The Company currently purchases the majority of its telecommunications
equipment pursuant to an agreement with P-Com, Inc. ("P-Com") and recently
entered into an equipment purchase agreement with Harris. Any reduction or
interruption in supply from either supplier could have a disruptive effect on
the Company. Although six manufacturers currently produce or are developing
equipment that will meet the Company's current and anticipated requirements, no
industry standard or uniform protocol currently exists for 38 GHz equipment.
Consequently, a single manufacturer's equipment must be used in establishing a
link and generally will be used across an entire market area. As a result, the
failure of the Company to procure sufficient equipment produced by a single
manufacturer for service in a particular market area could adversely affect the
Company's results of operations. See "Business -- Strategic Alliances."
DEPENDENCE ON THIRD PARTIES FOR MARKETING AND SERVICE
The Company is partly dependent upon third parties for marketing its
services and maintaining its operational systems. The Company recently entered
into the Ameritech Strategic Distribution Agreement, which allows Ameritech to
resell the Company's 38 GHz services to customers within Ameritech's midwestern
region and to major Ameritech customers nationwide. The Company also has
agreements with subsidiaries of GTE to provide field service and network
monitoring and a joint marketing agreement with Harris. The failure of any of
these third parties to perform or the loss of any of these agreements could have
a material adverse effect on the Company's results of operations or its ability
to service its customers. The Company plans to enter into sales and marketing
agreements with other companies, and the failure to successfully implement these
agreements could have an adverse effect on the Company's development and results
of operations. See "Business -- Strategic Alliances."
ACQUISITION OF ADDITIONAL BANDWIDTH IN SELECTED AREAS
Although the Company believes the 38 GHz authorizations it owns, manages or
has agreed to acquire are sufficient in each of its markets to implement its
current business strategy, the Company may seek to acquire or lease additional
authorizations to expand its geographic footprint or to enhance its ability to
provide service to its current target market or customers it may target in the
future. The FCC has suspended granting additional licenses, subject to
resolution of the NPRM. The Company does not believe that the FCC's suspension
on acceptance of new applications will have a material effect on the Company's
financial condition, results of operation and plans of expansion since the
Company's business plan does not depend on the grant thereof. See "Business --
Government Regulation." However, the Company believes that additional channels
may become available by virtue of (i) the obligations of other 38 GHz service
providers as common carriers to make their services available and (ii) FCC
auctions of and adoption of other licensing procedures for additional 38 GHz
authorizations. Nevertheless, there can be no assurance that access to
additional 38 GHz authorizations will be acquired on favorable terms, if at all.
See "Business -- Business Strategy," "-- 38 GHz Wireless Broadband Licenses and
Authorizations" and "-- Government Regulation."
NEW SERVICES; TECHNOLOGICAL CHANGE
The telecommunications industry has been characterized by rapid
technological advances, changes in end user requirements, frequent new service
introductions, evolving industry standards and decreases in the cost of
equipment. The Company expects these changes to continue, and believes that its
long-term success will increasingly depend on its ability to exploit advanced
technologies and anticipate or adapt to evolving industry standards. There can
be no assurance that (i) the Company's wireless broadband services will not be
outmoded by technology or services now existing or developed and implemented in
the future, (ii) the Company will have sufficient resources to develop or
acquire new
16
<PAGE>
technologies or to introduce new services capable of competing with future
technologies or service offerings, (iii) the Company's inventory of equipment
will not be rendered obsolete or (iv) the cost of 38 GHz equipment will decline
as rapidly as that of competitive alternatives. See "Business."
DEPENDENCE ON KEY EMPLOYEES
The success of the Company is dependent, in part, on its ability to attract
and retain qualified technical, marketing, sales and management personnel,
especially the Company's executive officers. Competition for such personnel is
intense, and the Company's inability to attract and retain additional key
employees or the loss of one or more of its current key employees could have a
material adverse affect on the Company's business and results of operations. The
Company has employment agreements with each of its officers. See "Management."
FINANCIAL RISKS
SIGNIFICANT CAPITAL REQUIREMENTS; NEED FOR ADDITIONAL FINANCING
Management anticipates that, based on its current plan of development,
assuming that no material new acquisitions are consummated, the net proceeds of
the Offerings, after the use of approximately $8.0 million to repay existing
indebtedness, $9.6 million to complete pending acquisitions of certain spectrum
rights and approximately $57.6 million to purchase the Pledged Securities will
be sufficient to fund the operations and capital requirements of the Company
through at least July 31, 1997. See "Use of Proceeds." Management also believes
that the Company's future capital needs will continue to be significant and that
it will be necessary for the Company to seek additional sources of financing.
The Company expects to incur capital expenditures of approximately $70.0 million
through at least July 31, 1997 as the development and expansion of its wireless
broadband business continues. The Company expects to generate significant
operating losses for at least the next several years. The Company will require
substantial investment capital for the continued development and expansion of
its wireless broadband operations, the continued funding of related operating
losses, and the possible acquisition of additional licenses, other assets or
other businesses. The Company expects to be required to arrange substantial
additional financing to fund anticipated capital requirements and operating
losses in periods after July 31, 1997. On a historical combined basis, from its
inception through March 31, 1996, the Company reported a net loss of $14.1
million. In addition, if (i) the Company's plan of development or projections
change or prove to be inaccurate, (ii) the proceeds of the Offerings, together
with other existing financial resources, prove to be insufficient to fund the
Company through at least July 31, 1997 or (iii) the Company completes any
material acquisitions not now under contract, the Company may be required to
obtain additional financing earlier than July 31, 1997. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations." There
can be no assurance that the Company will be able to obtain any additional
financing, or, if such financing is available, that the Company will be able to
obtain it on acceptable terms. In the event that the Company fails to obtain
additional financing, such failure could result in the modification, delay or
abandonment of some or all of the Company's development and expansion plans. Any
such modification, delay or abandonment is likely to have a material adverse
effect on the Company's business, which could adversely affect the value of the
Common Stock, the Notes and the Warrants and may limit the Company's ability to
make principal and interest payments on its indebtedness.
HIGH LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS
Following the Offerings, the Company will be highly leveraged and will have
certain restrictions on its operations. As of March 31, 1996, on a pro forma
basis after giving effect to the Equipment Financing, the CommcoCCC Financing,
the Conversion, the Merger, the Offerings and use of the proceeds therefrom and
completion of the CommcoCCC Acquisition, all as if they had occurred on that
date, the Company would have had approximately $135.1 million of total
indebtedness (which is net of $18.6 million allocated to the Warrants) and
stockholders' equity of approximately $154.9 million. After giving effect to
such transactions as if they had occurred at the beginning of the respective
periods, the
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<PAGE>
Company's pro forma earnings for the three months ended March 31, 1996 and the
year ended December 31, 1995 would have been insufficient to cover fixed charges
by approximately $16.9 million and $28.3 million, respectively.
The indebtedness expected to be incurred as a result of the Unit Offering
will have several important consequences to the holders of the Company's
securities, including, but not limited to, the following: (i) a substantial
portion of the Company's cash flow from operations will ultimately be required
to be dedicated to the payment of interest with respect to the Notes; (ii) the
Company's flexibility may be limited in responding to changes in the industry
and economic conditions generally; (iii) the Indenture relating to the Notes
(the "Indenture") will contain numerous financial and other restrictive
covenants, the failure to comply with which may result in an event of default,
which, if not cured or waived, could have a material adverse effect on the
Company; (iv) the ability of the Company to satisfy its obligations pursuant to
such indebtedness will be dependent upon its future performance which, in turn,
will be subject to management, financial, business and other factors affecting
the business and operations of the Company; (v) the Company's ability to obtain
any necessary financing in the future may be limited; (vi) the Company will be
more highly leveraged than many of its competitors, which may put it at a
competitive disadvantage and (vii) the Company's high leverage may make it more
vulnerable in the event of an economic downturn or if the Company's cash flow
does not significantly increase. Some of these factors are beyond the control of
the Company. See "Unaudited Pro Forma Condensed Financial Statements," "Selected
Historical and Pro Forma Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations." In addition,
although the Indenture will limit the ability of the Company and its
subsidiaries to incur additional indebtedness, the Indenture will permit the
Company to incur substantial additional indebtedness, which may or may not be
secured, during the next few years to finance the construction of networks, the
purchase of equipment and the introduction of new services. Additional
indebtedness of the Company may rank PARI PASSU in right of payment with the
Notes in certain circumstances. See "Description of Certain Indebtedness -- The
Notes" and "-- Credit Facility." Any such indebtedness may contain covenants
that may limit the Company's flexibility in responding to changes in industry
and economic conditions generally. The debt service requirements of any
additional indebtedness could make it more difficult for the Company to make
principal and interest payments on the Notes and could exacerbate any of the
foregoing consequences.
There can be no assurance that the Company will be able to generate
sufficient cash flow to meet required interest and principal payments associated
with the Notes and its other indebtedness. If the Company is unable to generate
sufficient cash flow to meet its debt obligations, the Company may be required
to renegotiate the payment terms or to refinance all or a portion of its
indebtedness, to sell assets or to obtain additional financing. If the Company
is unable to refinance such indebtedness, substantially all of the Company's
long-term debt would be in default and could be declared immediately due and
payable. Furthermore, the Indenture contains numerous financial and operating
covenants, including, among others, covenants restricting the ability of the
Company and its subsidiaries to incur indebtedness or to create or suffer to
exist certain liens. In the event the Company fails to comply with these various
covenants, it could be in default under the Indenture. In the event of such
default, substantially all of the Company's long-term debt could be declared
immediately due and payable. See "Description of Certain Indebtedness -- The
Notes."
LEGAL AND TRADING RISKS
ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Common Stock Offering, there has been no public market for the
Company's Common Stock. While the Common Stock has been approved for quotation
on the Nasdaq National Market, there can be no assurance that an active public
trading market will develop or be sustained after the Offerings or that the
initial public offering price will correspond to the price at which the Common
Stock will trade in the public market thereafter. The initial public offering
price will be determined solely by negotiations between the Company and the
Representatives. See "Underwriting" for a discussion of the factors to be
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<PAGE>
considered in determining the initial public offering price. The Company
believes that factors, such as (i) announcements of developments related to the
Company's business, (ii) announcements of new services by the Company or its
competitors, (iii) developments in the Company's relationships with its
suppliers or customers, (iv) fluctuations in the Company's results of
operations, (v) a shortfall in revenues or earnings compared to analysts'
expectations and changes in analysts' recommendations or projections, (vi) sales
of substantial amounts of securities of the Company into the marketplace, (vii)
regulatory developments affecting the telecommunications industry or 38 GHz
services or (viii) general conditions in the telecommunications industry or the
worldwide economy, could cause the price of the Common Stock to fluctuate,
perhaps substantially.
CONTROL BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS
Upon consummation of the Offerings, the Company's executive officers,
directors and their affiliates, as a group, will beneficially own approximately
21.1% of the Company's outstanding Common Stock excluding shares of Common Stock
purchased by directors and certain principal stockholders of the Company in the
Common Stock Offering (20.6% if the Underwriters' over-allotment option is
exercised in full and 14.3% upon consummation of the CommcoCCC Acquisition). In
addition, upon completion of the CommcoCCC Acquisition, Columbia Capital
Corporation, as general partner of two of the stockholders of CommcoCCC, and
Commco, L.L.C., the remaining stockholder of CommoCCC, will beneficially own
approximately 16.8% and 14.7%, respectively, of the Company's outstanding Common
Stock excluding any shares of Common Stock purchased in the Common Stock
Offering (16.5% and 14.4%, respectively, if the Underwriters' over-allotment
option is exercised in full), and the Company has agreed to nominate one
individual designated by the CommcoCCC stockholders and acceptable to the
Company as a director of the Company after the CommcoCCC Acquisition. As a
result, these stockholders will have the ability to exercise significant
influence over the Company and the election of its directors, the appointment of
new management and the approval of any action requiring the approval of the
holders of the Company's voting stock, including adopting certain amendments to
the Company's Certificate of Incorporation and approving mergers or sales of
substantially all of the Company's assets. The directors elected by these
stockholders will have the authority to effect decisions affecting the capital
structure of the Company, including the issuance of additional capital stock,
the implementation of stock repurchase programs and the declaration of
dividends. See "Principal Stockholders."
ABSENCE OF DIVIDENDS ON COMMON STOCK
The Company has not paid and does not anticipate paying any cash dividends
on its Common Stock in the foreseeable future. The Company intends to retain its
earnings, if any, for use in the Company's growth and ongoing operations. In
addition, the terms of the Indenture will restrict the ability of the Company to
pay dividends on the Common Stock. See "Description of Certain Indebtedness --
The Notes."
ANTITAKEOVER PROVISIONS; POSSIBLE FUTURE ISSUANCES OF PREFERRED STOCK
The Company's Certificate of Incorporation and Bylaws and the provisions of
the Delaware General Corporation Law (the "Delaware GCL") contain certain
provisions which may have the effect of discouraging, delaying or making more
difficult a change in control of the Company or preventing the removal of
incumbent directors. The existence of these provisions may have a negative
impact on the price of the Common Stock, the Units, the Notes and the Warrants,
may discourage third party bidders from making a bid for the Company or may
reduce any premiums paid to stockholders for their Common Stock. Furthermore,
the Company is subject to Section 203 of the Delaware GCL, which could have the
effect of delaying or preventing a change in control of the Company. See
"Description of Capital Stock -- Change in Control Provisions."
The Company's Certificate of Incorporation also allows the Board of
Directors to issue up to 10,000,000 shares of Preferred Stock and to fix the
rights, privileges and preferences of such shares without any further vote or
action by the stockholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may
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<PAGE>
be issued in the future. While the Company has no present intention to issue
shares of Preferred Stock, any such issuance could be used to discourage, delay
or make more difficult a change in control of the Company. See "Description of
Capital Stock -- Preferred Stock."
DILUTION
Purchasers of shares of Common Stock in the Common Stock Offering will
experience immediate dilution of $5.07 in net tangible book value per share,
assuming an initial public offering price of $6.00 per share. To the extent
outstanding options and warrants (including the Warrants issued in the Unit
Offering) are exercised, there will be further dilution. Assuming the issuance
of 16,500,000 shares of Common Stock in connection with the CommcoCCC
Acquisition as of the date of this Prospectus, the purchasers of shares of
Common Stock in the Common Stock Offering will experience immediate dilution of
$6.06 in net tangible book value per share. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public market
following the Offerings could adversely affect the market price of the Common
Stock. Upon consummation of the Offerings, the Company will have outstanding
36,086,498 shares of Common Stock, assuming no exercise of outstanding options,
warrants, rights or other convertible securities, 30,086,498 of which will be
subject to resale restrictions (excluding shares of Common Stock purchased by
directors and certain principal stockholders of the Company in the Common Stock
Offering). Beginning 90 days after the date of this Prospectus, approximately
8,687,798 of the restricted shares of Common Stock will become available for
sale in the public market pursuant to Rule 144 under the Securities Act, subject
in certain cases to volume and other resale limitations under Rule 144. All of
the restricted shares are subject to lock-up agreements with Montgomery
Securities which expire 180 days after the date of this Prospectus or such
earlier time as Montgomery Securities may, in its sole discretion, determine.
See "Underwriting." An additional 1,325,257 shares of Common Stock will become
available for future sale in the public market pursuant to Rule 144 in August
1997. The balance of the outstanding restricted shares of Common Stock
(20,073,443 shares) will become available for sale in the public market under
Rule 144 approximately two years after the date of this Prospectus. Upon the
closing of the CommcoCCC Acquisition, 16,500,000 shares will be issued for the
CommcoCCC Assets, which shares will become available for sale in the public
market under Rule 144 two years after the date of consummation of the CommcoCCC
Acquisition. Under a proposal currently pending before the Securities and
Exchange Commission (the "Commission"), the date on which such shares of Common
Stock will become available for sale under Rule 144 may be accelerated to one
year after the date of this Prospectus (or one year after the date of the
closing of the CommcoCCC Acquisition in the case of the 16,500,000 shares issued
for the CommcoCCC Assets). Holders of 30,086,498 shares (46,586,498 shares upon
consummation of the CommcoCCC Acquisition) of Common Stock and warrants to
purchase 1,475,000 shares of Common Stock have contractual rights to have those
shares registered with the Commission for resale to the public. See "Shares
Eligible For Future Sale."
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<PAGE>
THE COMPANY
Advanced Radio Telecom Corp. provides wireless broadband telecommunications
services using point-to-point microwave transmissions in the 37.0 to 40.0
gigahertz portion of the radio spectrum ("38 GHz"). The Company is seeking to
address the growing demand for high speed, high capacity digital
telecommunications services on the part of business and government end users who
require cost effective, high bandwidth local access to voice, video, data and
Internet services. The Company's last mile services are a complement and a
viable alternative to fiber optic networks and offer rapidly deployable coverage
throughout the 89 markets in which the Company is currently authorized by the
FCC to provide services.
The business of the Company is comprised of (i) the business of Advanced
Radio Technologies Corporation ("ART" or the "Company"), a company organized by
Vernon L. Fotheringham and W. Theodore Pierson, Jr. in 1993 for the purpose of
acquiring 38 GHz licenses, and (ii) the business of Advanced Radio Telecom Corp.
("Telecom"), a corporation organized in Delaware in March 1995 under the name
Advanced Radio Technology, Ltd. for the purposes of acquiring additional 38 GHz
licenses and developing and operating the business of ART and Telecom on a joint
basis. In April 1995, ART entered into the ART West Joint Venture Agreement (as
defined) to apply for, acquire and develop 38 GHz operations in 13 states in the
western United States. In November 1995, the Company completed the EMI
Acquisition (as defined), pursuant to which it acquired thirty-two 38 GHz
licenses and certain related assets in the northeast United States. In July
1996, the Company entered into the CommcoCCC Agreement to acquire the CommcoCCC
Assets and other agreements to acquire authorizations it currently manages. Upon
completion of these pending acquisitions, the Company will own or manage a total
of 237 authorizations to provide 38 GHz wireless broadband services in 169 U.S.
markets. See "Risk Factors -- Risk of Non-Consummation of CommcoCCC
Acquisition," "Business -- Agreements Relating to Licenses and Authorizations --
ART West Joint Venture," "-- EMI Acquisition" and " -- CommcoCCC Acquisition."
To date, the business of the Company has been operated and managed
(including all FCC licenses and construction permits held by ART and Telecom)
pursuant to a services agreement. On June 26, 1996, ART and Telecom entered into
the Merger Agreement (as defined), pursuant to which a subsidiary of ART will
merge with and into Telecom. The FCC has indicated that it will approve the
Merger. Upon completion of the Merger, Telecom will become a wholly owned
subsidiary of ART and change its name to "ART Licensing Corp.," and ART will
change its name to "Advanced Radio Telecom Corp." See "Business -- Proposed
Merger" and "Certain Transactions -- Merger." Prior to completion of the Merger,
Telecom will manage the combined businesses of the Company in accordance with
the terms of the existing services agreement. See "Business -- Agreements
Relating to Licenses and Authorizations -- ART Services Agreement."
DIGIWAVE, ART, OZ BOX and ADVANCED RADIO TELECOM are service marks of the
Company. The Company's principal executive offices are located at 500 108th
Avenue, N.E., Suite 2600, Bellevue, Washington 98004 and its telephone number is
(206) 688-8700.
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<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offerings are estimated to be
approximately $175.6 million in the aggregate, giving effect to the sale by the
Company of 6,000,000 shares of Common Stock offered in the Common Stock
Offering, based on an assumed initial public offering price of $6.00 per share,
and the Units offered in the Unit Offering, assuming $150.0 million of gross
proceeds, and, in each case, after deducting the estimated underwriting discount
and offering expenses. Approximately $57.6 million of the net proceeds from the
Unit Offering will be used to purchase a portfolio of securities, initially
consisting of U.S. government securities (including any securities substituted
in respect thereof, the "Pledged Securities"), which will provide funds
sufficient for payment in full of interest on the Notes through ,
1999 and which will be pledged as security for repayment of principal of the
Notes.
Of the net proceeds, approximately $70.0 million is expected to be used for
capital expenditures through July 31, 1997 and an additional $9.6 million will
be used for the acquisition of certain spectrum rights from ART West and DCT.
See "Business -- Agreements Relating to Licenses and Authorizations -- ART West
Joint Venture" and " -- DCT System Purchase Agreements." Approximately $8.0
million will be used for the repayment of indebtedness, consisting of the Bridge
Notes, which were issued on March 8, 1996 and which bear interest at 10% per
annum, and the CommcoCCC Notes, which were issued on June 27 and July 3, 1996
and which bear interest at the prime rate. See "Certain Transactions,"
"Description of Certain Indebtedness -- Bridge Notes" and "-- CommcoCCC
Financing." The expected amount of capital expenditures includes estimated
construction costs under service agreements with CommcoCCC, ART West, DCT and
Telecom One. See "Business -- Agreements Relating to Licenses and
Authorizations." Such amount also includes the cost to complete construction of
initial transmission facilities, estimated at less than $5.0 million.
The remainder of the net proceeds (approximately $30.0 million) will be used
for general corporate purposes, including the funding of operating cash flow
shortfalls, technology development and acquisitions of additional spectrum
rights and, potentially, related businesses. Although the Company considers
potential acquisitions from time to time, no agreement, agreement in principle,
understanding or other arrangement, other than the Extended Agreement (as
defined), the DCT Agreements (as defined), the Telecom One Agreements (as
defined) and the CommcoCCC Agreement, has been reached with respect to any
acquisition. The Company anticipates that it will fund approximately an
aggregate of $3.5 million for research and development activities and other
investment upon the consummation of currently anticipated agreements with
American Wireless (as defined), QuestTV (as defined) and Helioss (as defined).
Although the Company does not have other material commitments to fund research
and development and to make investments in other companies, the Company expects
to incur additional research and development expenses and to make other such
investments from time to time. Management anticipates that, based on its current
plan of development and assuming that no material new acquisitions or
investments are consummated, the remaining net proceeds of the Offerings will be
sufficient to fund the operations of the Company through at least July 31, 1997.
The Company expects to be required to arrange substantial additional financing
to fund anticipated capital requirements and operating losses in periods after
July 31, 1997. See "Risk Factors -- Significant Capital Requirements; Need for
Additional Financing."
DIVIDEND POLICY
The Company has not paid and does not anticipate paying any cash dividends
on the Common Stock in the foreseeable future. The Company intends to retain its
earnings, if any, for use in the Company's growth and ongoing operations. In
addition, the terms of the Indenture will restrict the ability of the Company to
pay dividends on the Common Stock. See "Description of Certain Indebtedness --
The Notes."
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1996 (i) on a historical combined basis, giving effect to the elimination of
balances between ART and Telecom and the elimination of ART's investment in
Telecom and Telecom's investment in ART, (ii) on a pro forma basis, giving
effect to the Conversion, the Merger and certain other financing transactions
occurring subsequent to March 31, 1996 as specified in Note 1 hereto and (iii)
on a pro forma as adjusted basis, giving effect to (A) the sale by the Company
of 6,000,000 shares of Common Stock offered in the Common Stock Offering based
on an assumed initial public offering price of $6.00 per share and the Units
offered in the Unit Offering assuming $150.0 million of gross proceeds, and, in
each case, after deducting the estimated underwriting discount and offering
expenses and the cash used to purchase the Pledged Securities of $57.6 million,
(B) the receipt and application of the net proceeds therefrom to repay the
Bridge Notes and the CommcoCCC Notes and to acquire certain spectrum rights from
ART West and DCT (see "Use of Proceeds") and (C) the issuance of 16,500,000
shares of Common Stock based upon an assumed value of $6.00 per share in
connection with the CommcoCCC Acquisition. The capitalization information set
forth in the table below is qualified by the more detailed information contained
in, and should be read in conjunction with, the audited financial statements of
ART and Telecom and the notes thereto, the unaudited interim condensed financial
statements of ART and Telecom and the notes thereto and the unaudited pro forma
condensed financial statements of the Company and the notes thereto, all
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
-----------------------------------------------------
HISTORICAL PRO FORMA
COMBINED PRO FORMA (1) AS ADJUSTED
--------------- ------------------ ----------------
<S> <C> <C> <C>
Cash and cash equivalents................................. $ 3,024,161 $ 8,244,161 $ 105,620,286
--------------- ------------------ ----------------
--------------- ------------------ ----------------
Short-term debt:
CommcoCCC Notes......................................... $ -- $ 2,975,000 $ --
--------------- ------------------ ----------------
--------------- ------------------ ----------------
Long-term debt:
Note payable to EMI..................................... $ 1,500,000 $ 1,500,000 $ 1,500,000
Bridge Notes............................................ 3,983,082 3,983,082 --
Equipment Note.......................................... -- 1,911,439 1,911,439
Senior Notes offered concurrently (2)................... -- -- 131,663,121
--------------- ------------------ ----------------
Total long-term debt.................................. 5,483,082 7,394,521 135,074,560
--------------- ------------------ ----------------
Stockholders' equity:
Telecom convertible serial preferred stock (3).......... 921 -- --
Common Stock (4)........................................ 10,013 30,086 52,586
Telecom common stock (5)................................ 18,114 -- --
Additional paid-in capital.............................. 19,375,335 19,883,757 169,941,902
Deficit accumulated during the development stage........ (14,064,645) (14,064,645) (15,106,563)
--------------- ------------------ ----------------
Total stockholders' equity............................ 5,339,738 5,849,198 154,887,925
--------------- ------------------ ----------------
Total capitalization................................ $ 10,822,820 $ 13,243,719 $ 289,962,485
--------------- ------------------ ----------------
--------------- ------------------ ----------------
</TABLE>
- ------------------------
(1) Reflects pro forma adjustments for the following transactions as if they
had occurred as of March 31, 1996: (i) the receipt of $2.2 million in cash
proceeds from the issuance of the Equipment Note and Indemnity Warrants in
connection with the Equipment Financing, after deducting related expenses
of $225,000; (ii) the receipt of $3.0 million in cash proceeds from the
issuance of the CommcoCCC Notes and CommcoCCC Warrants in connection with
the CommcoCCC Financing; (iii) the Conversion and (iv) the Merger,
including the issuance of Common Stock to Telecom's stockholders and
cancellation of all outstanding Telecom common stock. See "Certain
Transactions."
(2) The Company anticipates gross proceeds from the Unit Offering of $150.0
million. The estimated value of the Warrants ($18.3 million based on an
assumed issuance of Warrants to purchase an aggregate of 10.0% of Common
Stock of the Company on a fully diluted basis after giving effect to the
Offerings and the CommcoCCC Acquisition) has been reflected both as a debt
discount and an element of additional paid-in capital. However, the actual
aggregate principal amount of the Notes is $150.0 million.
(3) Consists of Telecom convertible serial preferred stock, $.001 par value per
share: 10,000,000 shares authorized; historical combined -- 455,550 shares
of Series A, 114,679 shares of Series B, 7,363 shares of Series C, 61,640
shares of Series D, 232,826 shares of Series E and 48,893 shares of Series
F issued and outstanding; pro forma and pro forma as adjusted -- no shares
issued and outstanding.
(4) Consists of Common Stock, $.001 par value per share: 100,000,000 shares
authorized; historical combined -- 10,013,055 shares issued and
outstanding; pro forma -- 30,086,498 shares issued and outstanding; pro
forma as adjusted -- 52,586,498 issued and outstanding.
(5) Consists of Telecom common stock, $.001 par value per share: 60,000,000
shares authorized; historical combined -- 18,114,135 shares issued and
outstanding; pro forma and pro forma as adjusted -- no shares issued and
outstanding.
23
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1996
was $897,562, or $0.03 per share of Common Stock, after giving effect to the
Equipment Financing, the Conversion, the CommcoCCC Financing, the Merger
(including the issuance of Common Stock to Telecom's stockholders and
cancellation of all Telecom common stock) and the issuance of the Units in the
Unit Offering and the use of the net proceeds therefrom for the repayment of
certain indebtedness and completion of certain pending acquisitions of spectrum
rights. "Pro forma net tangible book value per share" represents the amount of
the Company's total tangible assets comprised of cash and cash equivalents,
restricted cash, other current assets, net property and equipment, and equipment
and other deposits, less total liabilities (net of deferred finance costs)
divided by the pro forma number of shares of Common Stock outstanding. Without
taking into account any other changes in the net tangible book value after March
31, 1996, other than to give effect to the receipt by the Company of net
proceeds of approximately $32.8 million from the sale of 6,000,000 shares of
Common Stock offered by the Common Stock Offering based on an assumed initial
public offering price of $6.00 per share, after deducting the estimated
underwriting discount and offering expenses, the pro forma net tangible book
value of the Company as of March 31, 1996 would have been approximately $33.7
million, or $0.93 per share of Common Stock. This represents an immediate
increase in pro forma net tangible book value of $0.90 per share to existing
stockholders and an immediate dilution of $5.07 per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $ 6.00
Pro forma net tangible book value per share as of March 31, 1996
before giving effect to the Common Stock Offering.............. $ 0.03
Increase in pro forma net tangible book value per share
attributable to new investors.................................. 0.90
---------
Pro forma net tangible book value per share as of March 31, 1996,
as adjusted for the Common Stock Offering........................ 0.93
---------
Dilution in pro forma net tangible book value per share to new
investors........................................................ $ 5.07
---------
---------
</TABLE>
The following table summarizes, as of March 31, 1996, after giving effect to
the Offerings, the number of shares of Common Stock purchased from the Company,
the total consideration paid to the Company and the average price per share paid
by the existing stockholders and by new investors purchasing Common Stock in the
Common Stock Offering. In the Common Stock Offering, based on an assumed initial
public offering price of $6.00 per share before deducting the estimated
underwriting discount and offering expenses, the number of shares of Common
Stock purchased from the Company is 6,000,000, the total consideration paid to
the Company is $36.0 million, the average price per share paid by the existing
stockholders is $0.32 and the price per share paid by new investors is $6.00.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------ --------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------- --------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.............. 30,086,498 83.4% $ 9,622,156 21.1% $ 0.32
New investors...................... 6,000,000 16.6 36,000,000 78.9 6.00
------------- --------- -------------- -----------
Total.......................... 36,086,498 100.0% $ 45,622,156 100.0%
------------- --------- -------------- -----------
------------- --------- -------------- -----------
</TABLE>
The foregoing computations do not give effect to the exercise of any of the
following as of March 31, 1996: (i) 877,136 shares of Common Stock subject to
the Ameritech Warrant; (ii) 1,100,000 shares of Common Stock subject to the
Bridge Warrants; (iii) 325,000 shares of Common Stock subject to the Indemnity
Warrants; (iv) 50,000 shares of Common Stock subject to the CommcoCCC Warrants;
(v) 1,664,732 shares of Common Stock subject to outstanding options under the
Equity Incentive Plan; and (vi) 28,000 shares of Common Stock anticipated to be
subject to outstanding options under the Directors Plan upon the date of the
Offerings. As of July 28, 1996, an additional 835,268 shares of Common Stock
were available for issuance under the Equity Incentive Plan and an additional
200,000 shares of Common Stock were available for issuance under the Directors
Plan. See "Certain Transactions" and "Management -- Stock Option Plans." The
computations also do not give effect to the issuance of 16,500,000 shares of
Common Stock in connection with the CommcoCCC Acquisition which, at an assumed
value of $6.00 per share, would result in a decrease in the pro forma net
tangible book value of $36.7 million or $0.99 per share. In addition, the above
does not give effect to the exercise of (i) the over-allotment option granted to
the Underwriters by the Company in the Common Stock Offering and (ii) the
Warrants. See "Underwriting." To the extent that any outstanding options or
warrants are exercised, there will be further dilution to new investors. See
"Risk Factors -- Dilution."
24
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
THE COMPANY -- HISTORICAL COMBINED AND PRO FORMA DATA
The unaudited selected historical combined and pro forma financial data
presented below as of and for the three months ended March 31, 1996 and for the
year ended December 31, 1995 and the unaudited historical combined financial
data presented below as of December 31, 1995 were derived from the unaudited pro
forma condensed financial statements of the Company included elsewhere in this
Prospectus. For definitions of certain terms and more information about the
transactions cited in the notes thereto, see "Certain Transactions."
The unaudited selected historical combined and pro forma financial data
should be read in conjunction with the audited financial statements of ART and
Telecom, and the notes thereto, the unaudited condensed interim financial
statements of ART and Telecom, and the notes thereto, and the unaudited pro
forma condensed financial statements of the Company, and the notes thereto,
included elsewhere in the Prospectus. The unaudited selected historical
combined, pro forma and pro forma as adjusted financial data are not necessarily
indicative of what the actual financial position and results of operations of
the Company would have been as of and for the three months ended March 31, 1996
and as of and for the year ended December 31, 1995, nor do they purport to
represent the Company's future financial position and results of operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 THREE MONTHS ENDED MARCH 31, 1996
--------------------------------------------- ---------------------------------------------
HISTORICAL PRO FORMA AS HISTORICAL PRO FORMA AS
COMBINED (1) PRO FORMA (2) ADJUSTED (3) COMBINED (1) PRO FORMA (2) ADJUSTED (3)
------------- ------------- --------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenue............... $ 5,793 $ 5,793 $ 5,793 $ 9,620 $ 9,620 $ 9,620
Non-cash compensation expense... 1,089,605 1,089,605 1,089,605 7,221,000 7,221,000 7,221,000
Depreciation and amortization... 15,684 15,684 3,760,202 89,279 89,279 1,025,409
Interest, net................... 121,986 1,974,275 21,411,287 131,145 528,739 5,359,370
Net loss........................ 3,234,843 5,087,132 26,995,526 10,694,588 11,092,182 16,540,659
Pro forma net loss per share of
Common Stock (4)............... -- $ 0.17 $ 0.51 -- $ 0.36 $ 0.31
Pro forma weighted average
number of shares of Common
Stock outstanding (4).......... -- 30,516,037 53,016,037 -- 30,516,037 53,016,037
OTHER FINANCIAL DATA:
EBITDA (5)...................... $ (1,936,141 ) $ (1,936,141 ) $ (1,936,141 ) $ (2,156,893 ) $ (2,156,893 ) $ (2,156,893 )
Capital expenditures............ 3,585,144 3,585,144 3,585,144 2,861,241 2,861,241 2,861,241
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1995 AS OF MARCH 31, 1996
------------- --------------------------------------------------
HISTORICAL HISTORICAL PRO FORMA AS
COMBINED (1) COMBINED (1) PRO FORMA (2) ADJUSTED (3)
------------- ------------- ---------------- -----------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital surplus (deficit)............ $(3,008,510) $(1,128,130) $ 1,116,870 $ 101,467,995
Property and equipment, net.................. 3,581,561 6,380,895 6,380,895 6,380,895
FCC licenses................................. 4,235,734 4,235,734 4,235,734 149,780,734
Total assets................................. 9,876,559 15,036,337 20,432,236 327,836,002
Short-term debt.............................. -- -- 2,975,000 --
Long-term debt, including current portion.... 6,450,000 5,483,082 7,394,521 135,074,560
Deficit accumulated during the development
stage....................................... (3,370,057) (14,064,645) (14,064,645) (15,106,563)
Total stockholders' equity (deficit)......... (312,860) 5,339,738 5,849,198 154,887,925
</TABLE>
25
<PAGE>
ART -- HISTORICAL FINANCIAL DATA
The selected historical financial data of ART below as of and for the years
ended December 31, 1995 and 1994, and for the period from August 23, 1993 (date
of inception) to December 31, 1993 were derived from and should be read in
conjunction with the audited financial statements of ART and the related notes
thereto included elsewhere in this Prospectus. The selected financial data of
ART below as of March 31, 1996 and for the three months ended March 31, 1996 and
1995 were derived from and should be read in conjunction with the unaudited
condensed interim financial statements of ART and the related notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AUGUST 23, 1993
(DATE OF INCEPTION) YEAR ENDED THREE MONTHS ENDED
TO -------------------------------------- --------------------------------
DECEMBER 31, 1993 DECEMBER 31, 1994 DECEMBER 31, 1995 MARCH 31, 1995 MARCH 31, 1996
------------------- ------------------ ------------------ --------------- ---------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Operating revenue......... $ -- $ 137,489 $ -- $ -- $ --
Depreciation and
amortization............. 688 8,281 10,378 -- 2,595
Net loss.................. $ 6,594 $ 128,620 $ 1,267,655 $ 41,753 $ 3,654,775
Pro forma net loss per
share of Common Stock
(4)...................... -- -- $ 0.04 -- $ 0.12
Pro forma weighted average
number of shares of
Common Stock outstanding
(4)...................... -- -- 31,651,605 -- 31,651,605
OTHER FINANCIAL DATA:
Capital expenditures...... $ -- $ 5,175 $ -- $ -- $ --
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
----------------------------------------------------------- ---------------
1993 1994 1995 1996
------------------- ------------------ ------------------ ---------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital surplus (deficit)......... $ 13,958 $ (76,556) $ (976,563) $ (494,630)
Property and equipment, net............... -- 3,448 1,723 1,292
FCC licenses.............................. -- -- 8,913 8,913
Total assets.............................. 74,513 42,611 5,784,624 3,281,788
Long-term debt, including current
portion.................................. -- -- 4,950,000 --
Redeemable Preferred Stock................ -- -- 44,930 44,930
Deficit accumulated during the development
stage.................................... (6,594) (135,214) (1,402,869) (5,057,644)
Total stockholders' equity (deficit)...... 54,542 (39,078) (404,481) 2,736,258
</TABLE>
26
<PAGE>
TELECOM -- HISTORICAL FINANCIAL DATA
The selected historical financial data of Telecom below as of December 31,
1995 and for the period from March 28, 1995 (date of inception) to December 31,
1995 were derived from and should be read in conjunction with the audited
financial statements of Telecom and the related notes thereto included elsewhere
in this Prospectus. The selected financial data of Telecom below as of and for
the three months ended March 31, 1996 were derived from and should be read in
conjunction with the unaudited condensed interim financial statements of Telecom
and the related notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
MARCH 28, 1995
(DATE OF
INCEPTION) THREE MONTHS
TO ENDED
DECEMBER 31, 1995 MARCH 31, 1996
------------------ ------------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenue............................................................ $ 5,793 $ 9,620
Non-cash compensation expense................................................ 1,089,605 7,221,000
Depreciation and amortization................................................ 5,306 86,684
Net loss..................................................................... $ 2,981,073 $ 10,666,383
OTHER FINANCIAL DATA:
Capital expenditures......................................................... $ 3,585,144 $ 2,861,241
<CAPTION>
AS OF AS OF
DECEMBER 31, MARCH 31,
1995 1996
------------------ ------------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital surplus (deficit)............................................ $ (2,031,947) $ (633,500)
Property and equipment, net.................................................. 3,579,838 6,379,603
FCC licenses................................................................. 4,226,821 4,226,821
Total assets................................................................. 9,830,615 15,254,980
Long-term debt............................................................... 6,500,000 5,483,082
Deficit accumulated during the development stage............................. (2,981,073) (13,647,456)
Total stockholders' equity (deficit)......................................... (119,922) 5,560,881
</TABLE>
- ------------------------------
(1) The unaudited selected financial data under the caption "Historical
Combined" are presented as if the historical financial statements of ART
and Telecom had been combined and reflect (i) the elimination of
transactions and balances between ART and Telecom and (ii) the elimination
of ART's investment in Telecom and Telecom's investment in ART.
(2) The unaudited selected financial data under the caption "Pro Forma" are
presented as if the following transactions had occurred as of the beginning
of the respective periods for the Statement of Operations Data and Other
Financial Data and as of the balance sheet date for the Balance Sheet Data:
(i) the March 8, 1996 issuance of the Bridge Notes in connection with the
Bridge Financing; (ii) the receipt of $2.2 million in cash proceeds from
the issuance of the Equipment Note and Indemnity Warrants in connection
with the Equipment Financing, after deducting related fees and expenses of
$225,000; (iii) the receipt of $3.0 million in cash proceeds from the
issuance of the CommcoCCC Notes and CommcoCCC Warrants in connection with
the CommcoCCC Financing; (iv) the Conversion and (v) the Merger, including
the issuance of ART Common Stock to Telecom stockholders and the
cancellation of all outstanding Telecom common stock. See "Certain
Transactions."
(3) The unaudited selected financial data under the caption "Pro Forma As
Adjusted" are presented as if the transactions referred to in (2) above and
the following transactions had occurred as of the beginning of the
respective periods for the Statement of Operations Data and Other Financial
Data and as of the balance sheet date for the Balance Sheet Data: (i) the
sale by the Company of 6,000,000 shares of Common Stock offered in the
Common Stock Offering based on an assumed initial public offering price of
$6.00 per share and the Units and Warrants offered in the Unit Offering
assuming $150.0 million of gross proceeds, and, in each case, after
deducting the estimated underwriting discount and offering expenses and the
cash used to purchase the Pledged Securities of approximately $57.6
million, and the value ascribed to the Warrants of approximately $18.3
million based on an assumed issuance of Warrants to purchase an aggregate
of 10% of Common Stock of the Company on a fully-diluted basis after giving
effect to the Offerings and the CommcoCCC Acquisition, (ii) the receipt and
application of the net proceeds therefrom to repay the Bridge Notes and the
CommcoCCC Notes and to acquire the 50% ownership interest of ART West held
by Extended for $6.0 million in cash and the DCT Assets for $3.6 million in
cash and (iii) the issuance of 16,500,000 shares of Common Stock based upon
an assumed value of $6.00 per share in connection with the CommcoCCC
Acquisition. See "Use of Proceeds."
(4) Pro forma net loss per share is computed based on the loss for the period
divided by the weighted average number of shares of Common Stock
outstanding during the period including the Conversion, the Merger and the
issuance of potentially dilutive instruments issued within one year prior
to the Offerings at exercise prices below the assumed initial public
offering price of $6.00 per share. In measuring the dilutive effect, the
treasury stock method was used.
(5) EBITDA means loss before interest expense, income tax expense, depreciation
and amortization expense, non-cash compensation expense and non-cash market
development expense. Information with respect to EBITDA is included herein
because a similar measure will be used in the Indenture with respect to the
computation of certain covenants. EBITDA is not intended to represent cash
flows from operating activities, as determined in accordance with generally
accepted accounting principles, nor has it been presented as an alternative
to operating income as an indicator of operating performance and should not
be considered as a substitute for measures of performance prepared in
accordance with generally accepted accounting principles.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company provides wireless broadband telecommunications services using
point-to-point microwave transmissions in the 38 GHz portion of the radio
spectrum. The Company is seeking to address the growing demand for high speed,
high capacity digital telecommunications services on the part of business and
government end users who require cost effective, high bandwidth local access to
voice, video, data and Internet services.
To facilitate a meaningful comparison, the following discussion and analysis
is based on the historical combined financial information of Advanced Radio
Technologies Corporation ("ART") and Advanced Radio Telecom Corp. ("Telecom") as
of all dates and for all periods ending after March 28, 1995, the date of
Telecom's inception, and the historical financial statements of ART as of all
dates and for all the periods ended prior to March 28, 1995. All of the above
financial statements appear elsewhere in this Prospectus. The historical
combined financial statements include the elimination of transactions and
balances between the two entities as well as ART's investment in Telecom and
Telecom's investment in ART.
The following discussion includes certain forward-looking statements. For a
discussion of important factors, including, but not limited to, continued
development of the Company's business, actions of regulatory authorities and
competitors, and other factors that could cause actual results to differ
materially from the forward-looking statements, see "Risk Factors."
OVERVIEW
The Company's business commenced in 1993, and the Company has generated only
nominal revenues from operations to date. The Company's primary activities have
focused on the acquisition of wireless construction permits (authorizations for
facilities that are not constructed) and licenses (authorizations for facilities
that are constructed), the hiring of management and other key personnel, the
raising of capital, the acquisition of equipment and the development of its
operating and support systems and infrastructure. The Company has obtained radio
spectrum rights under FCC issued licenses and construction permits throughout
the United States by applying to the FCC directly and through the purchase of
such rights held by others. The Company's ability to provide commercial services
on a widespread basis and to generate positive operating cash flow will depend
on its ability, among other things, to (i) deploy its 38 GHz technology on a
market-by-market basis, (ii) attract and retain an adequate customer base, (iii)
successfully develop and deploy its operational and support systems and (iv)
acquire appropriate sites for its operations. Proper management of the Company's
anticipated growth and quality of its service will require the Company to expand
its technical, accounting and internal management systems at a pace consistent
with the Company's planned business roll-out. This roll-out will require
substantial capital expenditures. See "Liquidity and Capital Resources" and
"Risk Factors."
The Company has experienced significant operating and net losses and
negative operating cash flow in connection with the development and deployment
of its wireless broadband services and systems and expects to continue to
experience net losses and negative operating cash flow until such time as it
develops a revenue-generating customer base sufficient to fund operating
expenses attributable to the Company's wireless broadband operations. See "Risk
Factors." The Company expects to achieve positive operating margins over time by
(i) increasing the number of revenue generating customers and responding to
growing demand for capacity among its customers without significantly increasing
related hardware and roof rights costs and (ii) inducing other
telecommunications service providers to utilize and market the Company's
wireless broadband services as part of their own services, thereby reducing the
Company's related marketing costs. The Company anticipates that operating
revenues will increase in 1996; however, the Company also expects that net
losses and negative operating cash flow will increase as the Company implements
its growth strategy and that, under its current business plan,
28
<PAGE>
net losses and negative operating cash flow will continue for at least the next
several years. Accordingly, the Company will be dependent on various financing
sources to fund its growth as well as continued losses from operations. See
"Liquidity and Capital Resources."
ACQUISITIONS, BUSINESS DEVELOPMENT AND CAPITAL EXPENDITURES
From inception through March 31, 1996, the Company has invested an aggregate
of $4.2 million to obtain interests in FCC authorizations and licenses,
including those acquired from EMI, and invested $285,000 in the ART West Joint
Venture. From inception, expenditures for property and equipment have totalled
$6.5 million. In addition, the Company has incurred significant other costs and
expenses in the development of its business and has recorded cumulative losses
from inception through March 31, 1996 of approximately $14.1 million, including
$9.4 million of non-cash compensation and marketing expenses, and used cash in
operating activities of approximately $3.1 million. The Company has agreed to
acquire, subject to FCC approval and other conditions, additional FCC
authorizations and licenses for an aggregate purchase price of $9.6 million in
cash and 16,500,000 shares of the Company's Common Stock. The Company may, when
and if the opportunity arises, acquire other spectrum rights and, potentially,
related businesses, incur expenses in the development of new technologies and
expand its wireless broadband services into new market areas.
The recoverability of property and equipment and intangible assets
representing FCC authorizations is dependent upon the successful development of
systems in each of the respective markets, or through sale of such assets.
Management estimates that it will recover the carrying amounts of those assets
from cash flow generated by the systems once they have been developed. However,
it is possible that such estimate will change as a result of any failure by the
Company to develop its FCC authorizations on a timely basis, or technological,
regulatory or other changes. The Company anticipates that it will fund
approximately an aggregate of $3.5 million for research and development
activities and other investment upon the consummation of currently anticipated
agreements with American Wireless, QuestTV and Helioss. Although the Company
does not have other material commitments to fund research and development or to
make investments in other companies, the Company expects to incur additional
research and development expenses and to make other such investments from time
to time.
The Company is exploring the possibilities of providing its wireless
broadband services in other countries including Canada and in Europe. The
Company has entered into agreements with certain consultants and potential
partners to identify foreign opportunities and expects to file application for
licenses or to acquire 38 GHz licenses in several European countries. There can
be no assurance that the Company can acquire such licenses or develop and
operate such systems.
The Company entered into a management consulting agreement in November 1995
with Landover Holdings Corporation ("LHC") to provide strategic planning,
corporate development and general management services. Under the agreement,
which terminates on the date of this Prospectus, the Company pays LHC $35,000
per month for an initial one year term. In 1995 the Company paid $140,000 to LHC
for consulting services and $391,750 for expenses in connection with the $7.0
million investment made under the LHC Purchase Agreement. See "Certain
Transactions."
RESULTS OF OPERATIONS
The Company has generated nominal revenue from operations to date. From
inception through March 31, 1996, the Company has incurred aggregate expenses of
approximately $14.2 million, including $9.4 million of non-cash compensation and
marketing expenses. The remaining expenses consist of compensation and benefits,
sales and marketing expenses, consulting and legal fees, facilities expenses,
systems development costs, management consulting expenses and net interest
expenses related to building the Company's business infrastructure and marketing
its wireless broadband services. The Company expects to generate increased
revenues beginning in 1996; however, there can be no assurance that this
objective will be achieved. The Company expects that it will not achieve
profitable operations at least through fiscal 1998. See "Risk Factors -- Limited
Operations; History of Net Losses."
29
<PAGE>
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO MARCH 31, 1995
Revenue for the three months ended March 31, 1996 was $9,620 compared to no
revenue in 1995. The increase in revenues was due to operating revenues earned
from wireless broadband telecommunications services provided by the Company.
Operating expenses other than interest were $10.6 million for the three
months ended March 31, 1996 compared to $40,878 in 1995. The increase was
primarily due to $7.2 million of non-cash compensation expense, including $6.8
million arising from the termination of the Escrow Share Arrangement (as
defined) and subsequent release of shares to certain employees in connection
with the February 1996 Reorganization (as defined), as well as higher general
and administrative, increased market development, and research and development
expenses. See "Certain Transactions." Excluding the non-cash compensation
expense, general and administrative expenses increased primarily due to higher
payroll and consulting costs relating to the ramp-up in operations of the
Company. Market development expenses increased primarily due to a non-cash
marketing expense of $1.1 million related to the Ameritech Strategic
Distribution Agreement. Research and development costs were incurred as the
Company initiated its research and development of microwave radio technology.
The Company expects cash expenses for general and administrative, marketing and
research and development to increase substantially in future periods as the
development and deployment of the Company's business continues.
Interest expense was $174,416 for the three months ended March 31, 1996
compared to $875 in 1995. The increase in interest expense was primarily due to
interest on the EMI Note and the Bridge Notes. Interest expense in the second
quarter of 1996 will increase primarily due to a full quarter of interest
expense on the Bridge Notes and also due to the Equipment Note executed in April
1996, and the issuance of the Notes will cause interest expense to increase
substantially in future periods. The write-off of unamortized offering discount
and deferred finance costs associated with the Bridge Notes is expected to
result in a non-cash extraordinary loss of approximately $1.0 million upon
repayment at the closing of the Offerings.
FISCAL 1995 COMPARED TO FISCAL 1994
ART was formed in 1993, and, accordingly, the Company's historical financial
statements for 1994 reflect ART's activities in applying for 38 GHz licenses and
building operating systems.
The Company had $137,489 in consulting services income for engineering and
management services related to filing of applications for 38 GHz licenses on
behalf of others, including Extended, in 1994 and $5,793 in operating revenue in
1995 derived from customers for wireless broadband services attributable to the
markets for which licenses were acquired from EMI in November 1995. See
"Business -- Agreements Relating to Licenses and Authorizations -- EMI
Acquisition."
Total expenses other than interest increased from $261,734 in 1994 to $3.1
million in 1995 due to the expansion of the business and the recognition of
non-cash compensation expenses associated with employee stock options of
$287,603 and certain Escrow Shares (as defined) of $802,002 associated with the
release to certain employees of the Company as a result of meeting certain
performance objectives for an aggregate of $1.1 million of non-cash compensation
expenses. See "Certain Transactions -- LHC Purchase Agreement -- February 1996
Reorganization." General and administrative expenses, including these non-cash
compensation expenses, increased to $2.9 million for fiscal 1995, from $253,453
for 1994. Market development expenses increased to $191,693 in 1995 from $0 in
1994. Net interest expenses increased to $121,986 in 1995 from $4,375 in 1994.
As a result, the net loss for 1995 was $3.2 million, as compared to a net loss
of $128,620 in 1994.
FISCAL 1994 COMPARED TO FISCAL 1993
The Company had $137,489 in consulting services income in 1994 compared to
no revenue in 1993. The increase in 1994 was primarily due to consulting
services related to 38 GHz license applications.
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Total expenses other than interest expense increased to $261,734 in 1994
from $6,594 in 1993. The increases were due primarily to consulting and legal
fees related to the initial operations of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have required substantial capital investment for
the acquisition of FCC authorizations and related assets, the purchase of
telecommunications equipment, staffing, and the development and expansion of the
Company's infrastructure to support anticipated growth. From inception through
March 31, 1996, the Company used $3.1 million of cash in its operating
activities and $7.3 million of cash in its investing activities. These cash
outflows were financed primarily through private equity and debt placements,
including the issuance of convertible notes payable to the Advent Partnerships
which were converted into equity in February 1996. At December 31, 1995 the
Company had a working capital deficit of $3.0 million and cash of $633,654, as
compared to a working capital deficit of $76,556 and cash of $5,133 at December
31, 1994. The Company had a working capital deficit of $1.1 million and cash of
$3.0 million at March 31, 1996. Subsequent to March 31, 1996, the Company raised
$2.2 million in cash (net of expenses) from the Equipment Financing and $3.0
million in cash from the CommcoCCC Financing. See "Certain Transactions."
The Company's total assets increased from $42,611 as of December 31, 1994 to
$9.9 million at December 31, 1995 and $15.0 million at March 31, 1996. Property
and equipment, net of accumulated depreciation, comprised $3.6 million of total
assets at December 31, 1995 and $6.4 million at March 31, 1996. FCC licenses and
the investment in the ART West Joint Venture increased to $4.5 million at
December 31, 1995 and March 31, 1996, as compared to $0.0 at December 31, 1994.
Cash used in operating activities increased by $1.4 million to $1.5 million
in 1995 over 1994. The increase in cash used in operating activities resulted
primarily from the increase in net loss to $3.2 million, partially offset by
non-cash compensation expenses of $1.1 million and increased payables in 1995.
Cash used in investing activities increased by $4.2 million in 1995 compared
to minimal amounts in 1994. The increase was primarily due to $3.0 million paid
for the EMI acquisition, and approximately $600,000 used for property and
equipment additions in 1995.
Cash provided by financing activities increased by $6.2 million in 1995 over
1994. The increase was primarily due to the issuances of the Advent/ART
Securities of $5.0 million and of Telecom serial preferred stock, net of
redemptions of $2.0 million issued in 1995, partially offset by the use of cash
for stock and debt issuance costs.
Capital expenditures, including deposits on equipment for fiscal 1995 and
1994, were $3.9 million and $5,175, respectively. The Company currently
purchases the majority of its wireless transmission equipment from a single
vendor, P-Com, Inc., under an equipment purchase agreement which expires at the
end of 1998. The Company is committed to purchase a total of $13.3 million of
equipment under this agreement. The Company has also entered into an equipment
purchase agreement, expiring in 1997, with Harris, providing for the purchase of
wireless transmission equipment.
Cash used in operating activities increased to $1.5 million for the three
months ended March 31, 1996 compared to $49,212 for the three months ended March
31, 1995. The increase was primarily due to higher operating costs. Cash used in
investing activities was approximately $3.1 million for the three months ended
March 31, 1996 compared to $0.0 for the three months ended March 31, 1995. The
increase was due to additions to property and equipment. Cash provided by
financing activities increased to $6.9 million in the three months ended March
31, 1996 compared to $44,334 for the three months ended March 31, 1995. The
increase was primarily due to the private equity placement with Ameritech and
the Bridge Notes.
The Company does not currently manufacture, nor does it have or plan to
develop the capability to manufacture, any of the wireless transmission
equipment necessary to provide its services. Although there are a limited number
of manufacturers who have, or are developing, equipment that would meet
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the Company's requirements, there can be no assurance that such equipment would
be available to the Company on comparable terms or on terms more favorable than
those included in its current arrangements in the event that such arrangements
are terminated. Moreover, a change in vendors could cause a delay in the
Company's ability to provide its services, which would affect future operating
results adversely.
The Company has entered into an agreement with American Wireless to fund
$700,000 to $1.0 million of research and development costs related to wireless
transmission equipment. Vernon L. Fotheringham, the Chairman of the Company, is
a director and a 6% shareholder of American Wireless. The Company will receive a
first right of refusal on production capacity and a license fee in exchange for
its funding. The Company has also entered into a letter of intent with Helioss
Communications Corporation ("Helioss") for the development of advanced 38 GHz
radios. Under the letter of intent, which is subject to definitive
documentation, the Company will fund up to $1.0 million of Helioss' research and
development expenses. The Company will have a right of first refusal on
production capacity of the radios and will receive a royalty on the sale of a
certain number of radios to customers other than the Company. The Company has
also entered into a letter of intent to invest $1.5 million in QuestTV (as
defined), a provider of video and data transmission and storage services. See
"Certain Transactions -- American Wireless Development Agreement" and "--
QuestTV Investment." Although the Company does not have any other material
commitments to fund research and development or to make investments in other
companies, it expects to incur additional expenses for research and development
and to make other such investments from time to time.
The Company currently expects that its capital expenditures (excluding the
acquisition of certain spectrum rights) will aggregate approximately $70.0
million through July 31, 1997. The Company currently expects capital
expenditures through July 31, 1997 to consist of approximately $48.0 million for
wireless transmission equipment, approximately $12.0 million for network design
and development and related equipment and approximately $10.0 million for
computer equipment and other related capital. Included in these amounts are the
costs of initial construction of all owned and managed authorizations, estimated
to be less than $5.0 million, including wireless transmission equipment.
Although the Company does not anticipate substantial difficulties in completing
such initial construction on a timely basis, the failure to do so could have a
material adverse effect on the number of licenses available to the Company to
carry out its business. The Company expects that capital expenditures for
wireless transmission equipment will be largely variable with market demand,
increasing over the remainder of 1996 and the next several years as demand for
the Company's 38 GHz services increases in the targeted geographic markets and
industry segments. In addition, the Company has agreed to acquire authorizations
and licenses for $9.6 million from DCT and ART West. The Company has entered
into an agreement to acquire 129 38 GHz authorizations from CommcoCCC in
exchange for 16,500,000 shares of Common Stock. CommcoCCC has entered into a
management agreement with the Company under which the Company will construct,
manage and operate the authorizations to be acquired pending consummation of the
CommcoCCC Acquisition. If the Company does not consummate the CommcoCCC
Acquisition, the Company expects that approximately 25% of its expected capital
expenditures through 1997 would be deferred until later years and incurred in
the Company's other markets. See "Business -- Agreements Relating to Licenses
and Authorizations -- CommcoCCC Acquisition."
The Company is obliged to pay all costs and expenses of construction,
operation and management of the authorizations managed by the Company. The
Company is also obligated under the terms of the service agreements covering
such authorizations to pay fees to the current holders of those authorizations
approximating 10% to 15% of the revenue generated from such assets. See
"Business -- Agreements Relating to Licenses and Authorizations."
The Company expects that it will continue to have substantial capital
requirements in connection with (i) the acquisition of appropriate sites for its
operations, (ii) deployment of its 38 GHz technology on a market-by-market
basis, (iii) capturing and retaining an adequate revenue generating customer
base and (iv) developing and deploying its operational and support systems. The
Company believes it has an
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opportunity to expand its wireless broadband services business significantly and
that access to capital will enable it to expand more quickly and effectively.
See "Risk Factors -- Significant Capital Requirements; Need for Additional
Financing."
The Company has incurred significant operating and net losses and negative
operating cash flow attributable to the development of its wireless broadband
services and anticipates that such losses and negative operating cash flow will
increase as the Company implements its growth strategy. Accordingly, the Company
will be dependent on additional capital to fund its growth, as well as to fund
continued losses from operations.
Management anticipates that, based on current plans of development, assuming
that no new material acquisitions (other than those currently under contract)
are consummated, the net proceeds of the Offerings after the use of $8.0 million
to repay existing indebtedness and $9.6 million to complete pending
acquisitions, will be sufficient to fund the operations of the Company through
July 31, 1997. See "Description of Certain Indebtedness." Management believes
that the Company's future capital needs will continue to be significant and that
thereafter it will be necessary for the Company to arrange substantial
additional sources of financing. In addition, if (i) the Company's plan of
development or projections change or prove to be inaccurate, (ii) the proceeds
of the Offerings, together with other existing financial resources, prove to be
insufficient to fund the Company at least through July 31, 1997 or (iii) the
Company completes any material acquisitions, other than those now under contract
or buys spectrum at auction, the Company may be required to obtain additional
financing earlier than July 31, 1997. The Company is currently pursuing the
Credit Facility as a source of additional financing, although there can be no
assurance that the Credit Facility will be obtained. See "Description of Certain
Indebtedness--Credit Facility." There can also be no assurance that the Company
will be able to obtain any additional financing, or, if such financing is
available, that the Company will be able to obtain it on acceptable terms. In
the event that the Company fails to obtain additional financing, such failure
could result in the modification, delay or abandonment of some or all of the
Company's development and expansion plans. Any such modification, delay or
abandonment is likely to have a material adverse effect on the Company's
business, which could adversely affect the value of the Common Stock, the Notes
and the Warrants and may limit the Company's ability to make principal and
interest payments on its indebtedness.
NEW ACCOUNTING PRONOUNCEMENT
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." This Statement encourages, but does not require, accounting for
stock compensation awards granted to employees based on their fair value at the
date the awards are granted. Companies may elect to continue to apply current
accounting requirements for employee stock compensation awards, which generally
will result in no compensation cost for most fixed stock option plans, such as
the Company's Equity Incentive Plan. The expense measurement provisions of the
Statement apply to all equity instruments issued for goods and services provided
by persons other than employees. All companies are required to comply with the
disclosure requirements of the Statement. The Company expects to continue
accounting for employee stock compensation awards using current accounting
requirements.
INFLATION
Management does not believe that its business is impacted by inflation to a
significantly different extent than is the general economy.
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BUSINESS
Advanced Radio Telecom Corp. ("ART" or the "Company") provides wireless
broadband telecommunications services using point-to-point microwave
transmissions in the 37.0 to 40.0 gigahertz portion of the radio spectrum ("38
GHz"). The Company is seeking to address the growing demand for high speed, high
capacity digital telecommunications services on the part of business and
government end users who require cost effective, high bandwidth local access to
voice, video, data and Internet services. Upon completion of its pending
acquisition of 129 38 GHz wireless broadband authorizations (the "CommcoCCC
Assets") from CommcoCCC, Inc. ("CommcoCCC"), the Company will own or manage a
total of 237 authorizations granted by the Federal Communications Commission
("FCC") covering an aggregate population of approximately 143 million in 169
U.S. markets.
TELECOMMUNICATIONS INDUSTRY OVERVIEW
The current telecommunications landscape is being reshaped by the
convergence of three major trends: (i) the accelerating growth in demand for
high speed, high capacity digital telecommunications services, (ii) the
deregulation of telecommunications markets and (iii) the rapid advances in
wireless technologies. The growth in demand for high speed digital
telecommunications services is being driven by the revolution in microprocessor
power and advances in new multimedia and on-line applications such as the
Internet. The ability to access and distribute information quickly has become
critical to business and government users of telecommunications services. The
proliferation of local area networks ("LANs"), rapid growth of Internet
services, rising demand for video teleconferencing and other demand factors are
significantly increasing the volume of broadband telecommunications traffic. The
inability of the existing infrastructure to meet this demand is creating a "last
mile" bottleneck in the copper wire networks of the incumbent local exchange
carriers ("LECs"). This increasing demand, together with changes in the
regulatory environment, are creating an opportunity to offer cost effective,
high capacity last mile access using both wireline and wireless solutions.
The present structure of the U.S. telecommunications industry was shaped
principally by the 1984 court-directed divestiture of the Bell System (the
"Divestiture"). As part of the Divestiture, seven Regional Bell Operating
Companies ("RBOCs") were created and separated from the long distance service
provider, AT&T, resulting in two distinct telecommunications industries: local
exchange and inter-exchange (commonly known as long distance). Local exchange
services typically involve the carriage of telecommunications within FCC-defined
local access and transport areas ("LATAs"), and the provision of access, or
connections, between LECs and inter-exchange carriers ("IXCs") for the
completion of long distance calls.
Since the Divestiture, the local exchange segment of the telecommunications
market has remained the domain of LECs. Recently, however, regulatory policy has
shifted away from monopoly protection of the LECs. U.S. court decisions, FCC
actions and most recently the Telecommunications Act have dramatically changed
the regulatory environment. These changes have permitted increased competition
in the local exchange market and created opportunities for new companies, such
as competitive access providers ("CAPs").
Beginning in the late 1980s, CAPs emerged to compete with LECs by providing
dedicated private line transmission and access services. CAP networks typically
consist of fiber optic facilities connecting IXC points of presence ("POPs")
with customer locations and LEC switches within a limited metropolitan area.
Initially, demand for alternative local access was driven by access charges of
approximately 40% to 45% of the cost of a long distance call levied by LECs on
the IXCs. In addition to providing lower access charges, CAP fiber optic
services, where available, have generally been considered to provide superior
quality and higher capacity services than those available from LECs' legacy
copper wire networks. A leading research company estimates that in 1994 CAPs
captured approximately $1.3 billion of the revenues generated by the local
exchange market. Such research company also projects that, as a result of
increased competition and the growth of enhanced services, CAPs' revenues will
grow in excess
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of 150% per year over the next two years. In addition to CAPs, a wide range of
alternative access providers, including cable television operators, wireless
local loop service providers and others, are expected to emerge.
Continued growth in the quality and number of competitors in the local
telecommunications market will be driven principally by (i) the growing interest
among business customers for an alternative to the LEC networks in order to
obtain higher capacity and better pricing, (ii) the increases in data
applications and capacity requirements for local and wide area network
connections, high speed Internet access and videoconferencing, (iii) the LECs'
inability to upgrade their copper networks quickly, (iv) the preference of
competing telecommunications providers to control the points of connection to
their customers and prevent LECs from obtaining confidential marketing
information and (v) new state and federal legislation mandating interconnection
and competition in the local exchange market.
Wireless broadband telecommunications services are developing rapidly to
handle these growing needs for alternative access. In particular, the successful
deployment of 38 GHz links by European cellular service providers and recent
advances in 38 GHz technology, coupled with metropolitan-wide footprint
licensing, has enabled the provision of greater capacity and reliability at a
lower cost per customer than traditional copper wire networks. Furthermore, 38
GHz facilities can be installed, deinstalled and reinstalled elsewhere with
minimal time and cost compared to both fiber optic and copper wire facilities.
38 GHZ TECHNOLOGY
The FCC has allocated fourteen 100 MHz channels between 38.6 GHz and 40.0
GHz for wireless broadband transmissions and has allocated the 37.0 - 38.5 GHz
band to wireless broadband transmissions (the 37.0 - 38.5 GHz band and the 38.6
- -40.0 GHz band are collectively referred to as "38 GHz"), which enable the
licensee to provide point-to-point services within a specified geographic
footprint usually of up to a 50-mile radius.
38 GHz technology was first widely deployed in Europe by cellular telephone
service providers for the interconnection of cell sites with switches. In the
early 1990s, technological advances resulted in a substantial reduction in the
cost and size of millimetric microwave components with a simultaneous increase
in reliability and quality, allowing for the provision of wireless broadband
telecommunication links at competitive prices. By 1993, advances in 38 GHz
technology, combined with its growing use in Europe and Central America, led to
increasing awareness of and interest in the potential uses of 38 GHz in the
United States.
The 38 GHz band provides for the following additional advantages as compared
to other spectrum bands and wireline alternatives:
- HIGH DATA TRANSFER RATES. The total amount of bandwidth for each 38 GHz
channel is 100 MHz, which exceeds the bandwidth of any other present
terrestrial wireless channel allotment and supports full broadband
capability. For example, one 38 GHz DS-3 link at 45 megabits per second
("Mbps") today can transfer data at a rate which is over 1,500 times the
rate of the fastest dial-up modem currently in use (28.8 Kbps) and over
350 times the rate of the fastest integrated services digital network
("ISDN") line currently in use (128 Kbps). In addition to accommodating
standard voice and data requirements, 45 Mbps data transmission rates
allow end users to receive real time, full motion video and 3-D graphics
at their workstations and to utilize highly interactive applications on
the Internet and other networks.
- SIGNIFICANT CHANNEL CAPACITY. Because 38 GHz radio emissions have a
narrow beam width, a relatively short range and in most instances the
capability to intersect without creating interference, 38 GHz service
providers can efficiently reuse their bandwidth within a licensed area,
thereby increasing the number of customers to which such services can be
provided. Management believes that by using technology currently employed
by the Company it can serve virtually all of the immediately addressable
market in its market areas.
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- RAPID DEPLOYMENT. 38 GHz technology can be deployed considerably more
rapidly than wireline and other wireless technologies, generally within 72
hours after obtaining access to customer premises. In contrast to the
relative ease of installing a 38 GHz transmission link, extending fiber or
copper-based networks to reach new customers requires significant time and
expense. In addition, unlike providers of point-to-point microwave service
in other spectrum bands, a 38 GHz license holder can install and operate
as many transmission links as it can engineer in the licensed area without
obtaining additional approvals from the FCC. This is a substantial
advantage over other portions of the microwave radio spectrum that must be
licensed on a link-by-link basis following frequency coordination, which
in total can take from three to five months.
- EASE OF INSTALLATION. The equipment used for point-to-point applications
in 38 GHz (I.E., antennae, transceivers and digital interface units) is
smaller, less obtrusive and less expensive than that used for microwave
equipment applications at lower frequencies, making it less susceptible to
zoning restrictions. In addition, 38 GHz equipment can be easily
redeployed to meet changing customer requirements.
- ADDITIONAL ADVANTAGES OVER OTHER PORTIONS OF RADIO SPECTRUM. At
frequencies above 38 GHz, point-to-point applications become less
practical because attenuation increases and the maximum distance between
transceivers accordingly decreases. Additionally, the FCC has specified
the use of many portions of the spectrum for applications other than
point-to-point, such as satellite and wireless cable services, and,
accordingly, these portions of the radio spectrum often are not available
for point-to-point applications. Finally, 38 GHz has characteristics which
provide better signal quality and performance in inclement weather than
those offered in other portions of the radio spectrum.
THE ART SOLUTION
The Company is positioned to solve the need for broadband last mile access,
linking end users to fiber optic based facilities of CAPs and other
telecommunications service providers without the need to deploy fiber all the
way to end users' premises. The Company provides point-to-point wireless digital
circuits ranging in capacity from DS-1 (capable of carrying 24 simultaneous
voice conversations at 1.544 Mbps) to DS-3 (capable of carrying 672 simultaneous
voice conversations at 45 Mbps). The Company's wireless broadband services are
engineered to provide 99.999% availability, with better than a 10-13 (unfaded)
bit error rate. This level of availability exceeds the performance of copper
based networks and is a viable alternative to fiber based networks. When
measured as the total amount of time "out of service" over a year, 99.999%
availability under conditions of no path fading equates to less than six minutes
of down-time compared to a range of four hours to 44 hours of historical
performance of similar copper-based LEC circuits. In addition, the Company
believes that ART's last mile solution is competitively priced with most
broadband wireline solutions.
The Company's initial target customers include CAPs, IXCs, cellular and
mobile radio service providers and ISPs. The Company's services may also be
attractive to certain LECs which do not currently have broadband networks that
reach the majority of their customers. The Company has entered into a strategic
distribution agreement with Ameritech for delivery of the Company's wireless
broadband services throughout Ameritech's midwest operating region and for
certain large customers located outside its region. See "-- Strategic Alliances
- -- Ameritech Strategic Distribution Agreement."
The Company believes that the following factors provide it with certain
significant competitive advantages in offering broadband last mile access,
including:
- The characteristics of 38 GHz technology (high data transfer rates,
significant channel capacity, rapid deployment, easy installation and
efficient network design) are ideal for the provision of last mile access.
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- The Company minimizes its initial capital expenditures because of the
installation-to-meet-demand and redeployable nature of the Company's
wireless broadband equipment, as compared to the significant cost and
expense of installation of fiber based networks.
- As one of the first 38 GHz service providers, the Company is
well-positioned to capture a large percentage of early adopters, which are
generally among the heaviest users.
- The Company's industry relationships should enable it to forge strategic
alliances with other carriers, equipment vendors and technology
development companies, thus gaining access to important channels of
distribution and early deployment of advanced technologies.
- The scope of the Company's market area enables it to offer wireless
broadband services targeting much of the United States's addressable
business market.
As regulatory and competitive conditions permit, the Company's market focus
will evolve from a wholesale "carrier's carrier" orientation to the retail
provision of services directly to government and commercial end-user customers
of telecommunications services. The Company will focus on its initial wholesale
"carrier's carrier" strategy at least through the first half of 1997. At that
time, the Company anticipates it will have developed its customer base and
market presence to a level that will enable the Company to expand its direct
sales efforts. At the same time, the Company anticipates it will commence the
development of switched services to expand the Company's service offerings both
geographically and demographically, to business and residential customers,
offering a wider array of voice, data, Internet and multimedia services,
depending on further advances in wireless technology.
BUSINESS STRATEGY
ART began providing 38 GHz wireless broadband services in the fourth quarter
of 1995 and has generated only nominal revenues from such services to date. The
Company is seeking to capitalize on its broad footprint of 38 GHz authorizations
to become a leading provider of wireless broadband solutions to a diverse group
of traditional and emerging telecommunications service providers and end users
of telecommunications services. The Company plans to implement the following
strategic initiatives to achieve this objective:
- EXPLOIT SPECTRUM POSITION IN KEY MARKETS. Upon completion of its pending
acquisition of the CommcoCCC Assets, the Company will own or manage a total
of 237 authorizations that will allow it to provide 38 GHz wireless
broadband services in 169 U.S. markets. The Company currently owns or
manages 108 authorizations (exclusive of the CommcoCCC Assets) that allow
it to provide 38 GHz wireless broadband services in 89 markets, 73 of which
are owned by the Company and the remaining 35 of which are managed by the
Company through the Company's interests in or arrangements with other
companies. The Company has agreed to acquire all of the authorizations
which it currently manages but does not own. These spectrum assets provide
the Company with the foundation on which to create a large scale commercial
system of 38 GHz wireless broadband operations. As of July 26, 1996, the
Company was operating revenue-generating, wireless broadband links in 15
cities. The Company plans to continue to build out its infrastructure and
to intensify its marketing effort in its market areas in order to exploit
the value inherent in its spectrum assets. See " -- Agreements Relating to
Licenses and Authorizations." The Company may seek to acquire additional
spectrum rights in new and existing markets in order to expand its
geographic footprint or enhance its services.
- MARKET INITIALLY AS A CARRIER'S CARRIER. The Company's initial target
customers include CAPs, IXCs, cellular and mobile radio service providers
and ISPs. The Company's wireless broadband services enable CAPs to extend
their broadband services to locations where it is either not cost-efficient
or too difficult to extend their fiber optic network due to physical
limitations, franchise fees or other restrictions. The Company's services
may also be attractive to certain LECs, which generally do not currently
have broadband networks capable of reaching the majority of their
customers. All telecommunications service providers can use the Company's
services as alternate
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or redundant routes to increase network reliability. The Company has
entered into a strategic distribution agreement (the "Ameritech Strategic
Distribution Agreement") with Ameritech Corp. ("Ameritech") for delivery of
the Company's wireless broadband services throughout Ameritech's midwest
operating region and for certain large customers located outside its
region. The Company currently provides services to Ameritech, Bell Atlantic
NYNEX Mobile, UUNet, Electric Lightwave, NEXTLINK, American Personal
Communications, American Show Management, Capital Area Internet Service,
Brooks Fiber Communications and Western Wireless, among others. See " --
Customers and Applications." As regulatory and competitive conditions
permit and as the Company's customer base and market presence develop, the
Company expects that its market focus will expand from a wholesale
"carrier's carrier" to include provision of services directly to commercial
end users.
- PURSUE OPPORTUNITIES TO PROVIDE VALUE-ADDED SERVICES. The Company has
identified and plans to pursue additional market niches with immediate
needs for reliable, high bandwidth last mile access services. For example,
the market for Internet services urgently requires broadband "pipes" to
facilitate high speed access for corporate users. The amount of time it
takes to download graphics and images from the Internet to personal
computers over dial-up copper circuits hinders demand for the Internet. For
example, a 38 GHz DS-1 circuit (1.544 Mbps), linking a corporate user to an
ISP's POP, is approximately 53 times faster than a 28.8 kbps dial-up modem
and 12 times faster than the fastest ISDN connection (128 Kbps).
Alternatively, one 38 GHz DS-3 link at 45 Mbps can currently transfer data
at a rate that is over 1,500 times the rate of the fastest dial-up modem
currently in use (28.8 Kbps) and over 350 times the rate of the fastest
ISDN line currently in use (128 Kbps). Each of the Company's DS-3 links can
support 28 DS-1 circuits per channel. The Company is pursuing agreements to
package its 38 GHz solutions with the services of leading ISPs. Other
potential value-added uses include desktop videoconferencing, high
resolution imaging for healthcare and law enforcement applications and
video on demand. The Company may also decide to offer switched-based
services to end users who desire a single source telecommunications
solution.
- MAINTAIN TECHNOLOGY LEADERSHIP IN SPECTRUM MANAGEMENT. The Company is
currently developing proprietary site selection and network design software
which it believes will provide for faster site development at a lower cost.
In addition, through the Company's internal technology development efforts,
as well as on-going participation in equipment manufacturers' research and
development activities, the Company is seeking to achieve a competitive
advantage through proprietary methods designed to increase the capacity and
quality of its networks.
- ESTABLISH AND EXPAND KEY STRATEGIC ALLIANCES. The Company has established
and will seek to continue to establish key strategic alliances with major
service providers, equipment manufacturers, systems integrators and
enhanced service providers. Ameritech owns a 5.4% beneficial equity
interest in the Company as of July 26, 1996 (4.5% after giving effect to
the Common Stock Offering) and entered into the Ameritech Strategic
Distribution Agreement in April 1996. The Company also has agreements with
Harris Corporation, Farinon Division ("Harris") for marketing ART's 38 GHz
services to PCS providers and with GTE Corporation for installation, field
servicing and network monitoring. In addition, the Company is seeking to
develop relationships with a number of equipment manufacturers focusing on
38 GHz technology development, wireless broadband standards and joint sales
efforts. The Company plans to utilize strategic alliances to bundle its
services with those of its partners to provide for alternative distribution
channels and to gain access to technological advancements. See "--
Strategic Alliances."
WIRELESS BROADBAND SERVICES
The Company's wireless broadband links deliver high quality voice and data
transmissions at a level of performance which exceeds the performance of copper
based networks and is a viable alternative to fiber optic based networks. The
Company provides point-to-point wireless digital circuits ranging in capacity
from DS-1 (capable of carrying 24 simultaneous voice conversations at 1.544
Mbps) to DS-3
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(capable of carrying 672 simultaneous voice conversations at 45 Mbps). The
Company believes that it generally owns or manages sufficient 38 GHz bandwidth
to satisfy the anticipated service requirements of its target customers in each
of the Company's existing markets and the additional 78 markets to be acquired
under the CommcoCCC Agreement.
Significant features of the Company's wireless broadband services include
(i) sufficient bandwidth and flexibility in each channel for most present day
applications, (ii) minimal channel interference from other sources, resulting
from dedicated spectrum, (iii) range of up to five miles between transmission
links (depending upon moisture conditions), (iv) performance engineered to
provide a minimum of 99.999% availability, (v) transmission accuracy engineered
to provide bit error rates of better than 10-13 (unfaded), (vi) optional forward
error correction for even higher data reliability, insuring the integrity of
transmitted data over wireless broadband paths, (vii) rapid deployment (where
roof rights have been previously obtained), (viii) 24-hour, seven-days-a-week
network monitoring by the Company's network management control center, (ix)
available nationwide four-hour emergency restoral time from GTE in most
circumstances and (x) optional "hot" standby links that remain powered up and
switch "on line" if the primary link fails.
Each of ART's wireless broadband links consists of paired millimeter wave
radio transceivers installed at a distance of up to five miles from one another
within a direct line of sight. The transceivers currently used by the Company
are supplied principally by P-Com, Inc. ("P-Com") and are installed primarily on
rooftops and on other tall structures. In order to deploy its links quickly, the
Company plans to obtain roof rights on buildings with fiber optic points of
termination for transceiver sites. To accomplish this objective, the Company is
developing proprietary site selection and network design software which will
significantly reduce the amount of time necessary to select optimal network
sites. In coordination with its marketing plans, the Company will dispatch site
acquisition specialists to such locations to obtain renewable options. The
Company intends to use a combination of its own employees and independent
contractors for site acquisition.
CUSTOMERS AND APPLICATIONS
The Company introduced its wireless broadband services in November 1995 and
began marketing its services in January 1996. The Company has generated only
nominal revenues from its operations to date. Currently, the Company is
providing or has received orders to provide carrier's carrier wireless broadband
services to CAPs, a LEC, ISPs, cellular and mobile carriers and several IXCs,
and is in the process of becoming a qualified vendor to all the major IXCs. The
Company currently provides services to Ameritech, Bell Atlantic NYNEX Mobile,
UUNet, Electric Lightwave, NEXTLINK, American Personal Communications, American
Show Management, Capital Area Internet Service, Brooks Fiber Communications and
Western Wireless, among others. As of July 26, 1996, the Company was operating
revenue-generating wireless broadband links in 15 cities.
The Company currently provides, or anticipates providing, wireless broadband
services to the following types of customers, among others:
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COMPETITIVE ACCESS PROVIDERS AND LOCAL EXCHANGE CARRIERS. Currently, CAPs
compete with LECs by installing fiber optic cable rings in the highest density
business locations to connect with long distance carriers and for intra-ring
transmissions. Due to the high cost inherent in building fiber networks, CAPs
generally target densely populated areas with high concentrations of large
end-users. In order to reach "off-net" customers, CAPs must either lease or
purchase facilities and services from LECs or alternative suppliers until such
time as it becomes economical to extend the CAP fiber networks to these
customers.
CAPs face certain implementation obstacles that the Company's wireless
broadband services can assist in solving. CAPs need to reach new customers that
are off-net quickly and inexpensively, and are expected to prefer to obtain
additional network facilities from (and share proprietary information with)
someone other than a direct competitor, such as a LEC. CAPs can utilize the
Company's wireless broadband services as an alternative to copper, fiber-based
or other such network facilities provided to the CAPs by LECs (see diagram
below), to extend their own networks to reach areas where such extension is
neither cost-efficient nor feasible, because of rights-of-way or other
restrictions, or to provide redundant and back-up capacity to their existing
networks.
The Company anticipates that LECs will encounter many of the same obstacles
CAPs are encountering in seeking to enhance their networks to deliver broadband
services. The Company also believes that LECs will seek to utilize 38 GHz
technology to expand the range of their service offerings to match those offered
by CAPs. Further, as LECs are permitted to provide inter-LATA long distance
services, they may seek to use 38 GHz technology to bypass other LECs outside of
their region. See "-- Strategic Alliances -- Ameritech Strategic Distribution
Agreement."
[GRAPHIC]
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INTERNET SERVICE PROVIDERS. The expanding demand for Internet access, the
growing importance of audio, video and graphic Internet applications to both
business and consumers and the lack of high capacity access through local
telephone company facilities has created a growing market for ART's wireless
broadband services. The Company offers Internet service providers timely,
reliable and affordable access at the required high speed data rates -- both 45
Mbps and 1.544 Mbps -- allowing ISPs to keep pace with their customer growth.
The Company provides wireless broadband links between customers and their ISP
providers and between ISP POPs and the Internet backbone. A single 38 GHz DS-1
circuit linking a corporate user to an ISP's POP is approximately 53 times
faster than a 28.8 Kbps dial-up modem and 12 times faster than the fastest ISDN
connection. Each of the Company's 38 GHz DS-3 links can support 28 DS-1 circuits
per channel or one DS-3 circuit per channel, which can transfer data at a rate
which is over 1,500 times the rate of the fastest dial-up modems currently in
use (28 Kbps) and over 350 times the rate of the fastest ISDN lines currently in
use (128 Kbps).
[GRAPHIC]
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MOBILE COMMUNICATIONS SERVICE PROVIDERS. ART's wireless broadband services
can help cellular, wireless dispatch and emerging PCS carriers compete in
expanding domestic mobile communications markets by providing cost-effective
backbone network connections between cell sites, base stations and wireline
networks, regardless of location. Similar 38 GHz mobile communications
connections have been proven effective in Europe, and ART's easily installed,
economical wireless broadband links can give domestic mobile carriers a
competitive edge in building or expanding their networks through reduced
construction time and installation costs.
[GRAPHIC]
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INTER-EXCHANGE CARRIERS. To minimize costly LEC access charges and to gain
more direct contact with the consumer, IXCs can utilize the Company's wireless
broadband services to connect call origination or termination points either
directly to the IXCs' POPs or by way of CAP intermediate fiber rings. These
providers can also use 38 GHz services to connect two or more of their
respective POPs in a single market area. By utilizing the Company's wireless
broadband services, IXCs can avoid the capacity barriers inherent in copper wire
connections, which have typically prevented them from providing their customers
with the end-to-end, high bandwidth, full digital services available from a
fiber optic or wireless-based system. Wireless broadband services also may be
utilized to provide carriers with viable, cost-efficient physical diversity
routes (I.E., back-up capacity) for traffic in situations when primary routes
become incapacitated or network reliability concerns demand alternate
telecommunications paths.
[GRAPHIC]
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PRIVATE USER NETWORKS. ART's wireless broadband services enable business,
government and other heavy usage customers to create efficient, high speed, high
capacity private voice, data and video communications networks within and among
their local facilities and buildings. These customers include universities,
hospitals, hotels, shopping centers and multi-location manufacturing, business
and governmental institutions. Working directly with ART or through ART
resellers, customers will be able to access cost-effective alternatives to LEC
copper networks.
Providing high speed data transmission and real time communications services
by linking customer computers in local, metropolitan and wide area
configurations will be an important part of ART's private networking business.
The ability to send large amounts of data quickly and efficiently and to
interconnect personal computers both within and among buildings in campus
settings is a growing customer need. ART's wireless broadband services are
designed to serve this rapidly expanding market.
[GRAPHIC]
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<PAGE>
INTERACTIVE VIDEO SERVICES USERS. ART's wireless broadband services provide
high speed, high capacity access to communications networks for customers who
require reliable videoconferencing, video on demand, and Internet video
services. The Company believes the increasing popularity and use of these
services, particularly by large business and government customers, provide a
promising market for ART's wireless links. Videoconferencing requires high speed
communications both to and from the participants. The Company's services meet
this requirement for high bandwidth, full duplex communications.
[GRAPHIC]
MARKETING PLANS
In January 1996, the Company commenced implementation of its marketing
program. The Company is addressing its initial target markets as a carrier's
carrier, while building the internal capability to expand its marketing efforts
to include direct sales to end users of its services. The Company is augmenting
its marketing and sales channels through resale agreements with strategic
marketing partners and through alliances with selected CAPs, LECs, ISPs, IXCs,
interconnect providers (PBX suppliers), LAN, MAN and WAN systems integrators and
other telecommunications equipment manufacturers and service providers.
The Company's internal salesforce is currently marketing the Company's
wireless broadband services by (i) performing field demonstrations of 38 GHz
service, (ii) making presentations at industry trade shows, (iii) providing an
interactive Internet home page, (iv) running promotional advertisements in
selected trade media and (v) conducting extensive one-on-one presentations and
demonstrations through its direct sales force with major telecommunications
service providers and end users of telecommunications services.
The Company currently expects to price its services on a monthly flat-rate
non-distance sensitive basis. As a non-dominant carrier, ART does not have to
cost-justify its rates to regulatory bodies and usually has a wide latitude in
changing customer-specific rates. As a result, ART expects to enter into
customer and service specific arrangements, which include volume, capacity and
term discounts and customized billing and payment options. The services offered
by ART are expected to be competitively
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priced with those of the incumbent LECs. The Company also intends to charge for
installation and network monitoring services where appropriate. The Company also
anticipates offering metered services to various end users at an appropriate
point in the future.
38 GHZ WIRELESS BROADBAND LICENSES AND AUTHORIZATIONS
The Company was granted the first of its authorizations to construct and
operate 38 GHz wireless broadband facilities in February 1995. Authorizations
for facilities that are not constructed are referred to in this Prospectus as
"construction permits"; authorizations for facilities that are constructed are
referred to in this Prospectus as "licenses". Upon completion of the CommcoCCC
Acquisition, the Company will own or manage a total of 237 authorizations that
will allow it to provide 38 GHz wireless broadband services in 169 U.S. markets.
The Company currently owns or manages 108 authorizations (exclusive of the
CommcoCCC Assets) that allow it to provide 38 GHz wireless broadband services in
89 markets, 73 of which are owned by the Company and the remaining 35 of which
are managed by the Company through the Company's interests in or arrangements
with other companies.
The table below lists, for the top 100 U.S. markets, the amount of bandwidth
covered by authorizations which the Company owns, manages or has a definitive
agreement to acquire in the top 100 U.S. markets, in descending order of size
based on the estimated population of the market:
<TABLE>
<CAPTION>
BANDWIDTH COVERED BY AUTHORIZATIONS (MHZ)
--------------------------------------------------------
UNDER
DEFINITIVE
AGREEMENT TO
MARKET OWNED MANAGED (1) ACQUIRE TOTAL
- ----------------------------------------- ----------- --------------- ------------- -----
<S> <C> <C> <C> <C>
300 MHZ OR MORE MARKETS
New York, NY 300 -- -- 300
Washington, D.C. 300 -- -- 300
Boston, MA 200 -- 100 300
Baltimore, MD 200 100 -- 300
Cincinnati, OH 100 -- 200 300
Portland, OR -- 100 200 300
Norfolk/Virginia Beach, VA -- 100 300 400
Columbus, OH -- 100 200 300
Providence, RI/Fall River, MA 200 -- 200 400
Memphis, TN 100 -- 200 300
Oklahoma City, OK -- 100 200 300
Birmingham, AL 100 -- 200 300
Buffalo/Niagara Falls, NY 300 -- 100 400
Dayton/Springfield, OH 100 100 100 300
Richmond/Petersburg, VA 100 -- 200 300
Rochester, NY 300 -- 200 500
Hartford, CT 200 100 200 500
Albany/Schenectady, NY 300 -- 200 500
Knoxville, TN 100 -- 200 300
New Haven/Waterbury, CT 200 -- 100 300
Syracuse, NY 200 -- 100 300
Harrisburg, PA 200 -- 100 300
Scranton/Wilkes-Barre, PA 300 -- 100 400
Springfield/Holyoke, MA 200 -- 200 400
Jackson, MS 100 -- 200 300
Shreveport, LA 100 -- 200 300
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
BANDWIDTH COVERED BY AUTHORIZATIONS (MHZ)
--------------------------------------------------------
UNDER
DEFINITIVE
AGREEMENT TO
MARKET OWNED MANAGED (1) ACQUIRE TOTAL
- ----------------------------------------- ----------- --------------- ------------- -----
<S> <C> <C> <C> <C>
200 MHZ MARKETS
Philadelphia, PA/Trenton, NJ 200 -- -- 200
Miami/Fort Lauderdale, FL 100 -- 100 200
Cleveland/Akron, OH 100 -- 100 200
Seattle/Tacoma, WA -- 100 100 200
St. Louis, MO 100 -- 100 200
Pittsburgh, PA 200 -- -- 200
Charlotte/Gastonia, NC -- -- 200 200
Nashville, TN 100 -- 100 200
Indianapolis, IN 100 -- 100 200
Louisville, KY 100 -- 100 200
Greensboro/Winston-Salem, NC -- 100 100 200
Las Vegas, NV -- 100 100 200
Austin, TX -- 100 100 200
Grand Rapids, MI -- 100 100 200
Omaha, NE -- -- 200 200
Honolulu, HI -- 100 100 200
Albuquerque, NM -- 100 100 200
Des Moines, IA 100 -- 100 200
Tucson, AZ -- 100 100 200
El Paso, TX -- -- 200 200
Worcester, MA 200 -- -- 200
Allentown/Bethlehem, PA 200 -- -- 200
Baton Rouge, LA 100 -- 100 200
Charleston, SC 100 100 -- 200
Mobile, AL 100 100 -- 200
100 MHZ MARKETS
Chicago, IL 100 -- -- 100
Detroit, MI -- -- 100 100
Dallas/Fort Worth, TX 100 -- -- 100
Houston, TX 100 -- -- 100
Atlanta, GA 100 -- -- 100
Minneapolis, MN 100 -- -- 100
Phoenix, AZ -- 100 -- 100
San Diego, CA -- 100 -- 100
Tampa-St. Petersburg, FL -- -- 100 100
Denver, CO -- 100 -- 100
Kansas City, MO 100 -- -- 100
Sacramento, CA -- 100 -- 100
Milwaukee, WI -- -- 100 100
San Antonio, TX 100 -- -- 100
Salt Lake City, UT -- 100 -- 100
Orlando, FL -- -- 100 100
New Orleans, LA 100 -- -- 100
Raleigh-Durham, NC -- -- 100 100
Little Rock, AR -- -- 100 100
Tulsa, OK -- -- 100 100
Greenville/Spartanburg, SC -- -- 100 100
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
BANDWIDTH COVERED BY AUTHORIZATIONS (MHZ)
--------------------------------------------------------
UNDER
DEFINITIVE
AGREEMENT TO
MARKET OWNED MANAGED (1) ACQUIRE TOTAL
- ----------------------------------------- ----------- --------------- ------------- -----
<S> <C> <C> <C> <C>
Toledo, OH -- -- 100 100
Spokane, WA -- 100 -- 100
Kingsport, TN/Bristol, VA -- -- 100 100
Fort Wayne, IN -- -- 100 100
Madison, WI 100 -- -- 100
Wichita, KS 100 -- -- 100
Springfield, MO -- -- 100 100
Sarasota/Bradenton, FL -- -- 100 100
Corpus Christi, TX -- -- 100 100
Chattanooga, TN -- -- 100 100
</TABLE>
- ------------------------------
(1) Includes authorizations (i) held by ART West, (ii) managed by ART under the
DCT services agreement and (iii) managed under the Telecom One services
agreement pursuant to a revenue-sharing arrangement. Does not include
authorizations included in the CommcoCCC Assets which are managed by the
Company on a short-term basis, pending the CommcoCCC Acquisition. The
Company recently has entered into definitive agreements to acquire all
outstanding interests in the authorizations held by ART West, DCT and
Telecom One. See "Business -- Agreements Relating to Licenses and
Authorizations."
In addition to the above authorizations, the Company has 71 applications
pending before the FCC for additional authorizations. However, due to the
"freeze" imposed by the NPRM and the conflicts with other applicants in same
markets, there can be no assurance that it or any other company will receive
additional authorizations with respect to any pending applications. See "Risk
Factors -- Government Regulation" and "-- Government Regulation."
Excluding the CommcoCCC Assets, the Company presently owns or manages
between 100 and 300 MHz of transmission capacity within each of its markets.
Because 38 GHz paths are very narrow and because certain microwave paths can
intersect each other without creating interference, each market area can
accommodate thousands of paths. The Company believes it generally owns or
manages sufficient 38 GHz bandwidth to satisfy the anticipated service
requirements of its target customers in each of the Company's existing markets
and the additional 80 markets to be acquired under the CommcoCCC Agreement.
Consistent with the Company's growth strategy, the Company may seek to obtain
additional spectrum by either leasing excess capacity from other 38 GHz
licensees, entering into management agreements or acquiring interests in other
38 GHz authorizations. See "Risk Factors -- Acquisition of Additional Bandwidth
in Selected Areas."
Under the terms of its 31 construction permits (exclusive of the CommcoCCC
Assets), the Company must complete construction of facilities for the majority
of such construction permits between mid-August and mid-September 1996. Under
the terms of the CommcoCCC authorizations and the Company's management agreement
with CommcoCCC, the Company must complete construction of facilities for eight
construction permits by mid-September 1996, 39 construction permits by December
1996 and the remaining 82 construction permits between mid-April and mid-August
1997. The Company has begun installing the number of links required to complete
construction and currently expects it will meet the FCC deadlines. However, the
FCC may impose more stringent construction requirements, as it has proposed to
do in the NPRM, which may jeopardize the status of the Company's authorizations.
All of the 38 GHz licenses owned or to be acquired by the Company are due to
expire in February 2001. The Company believes that, in keeping with common FCC
practices, the licenses will be renewed for successive 10-year periods upon
expiration.
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<PAGE>
AGREEMENTS RELATING TO LICENSES AND AUTHORIZATIONS
COMMCOCCC ACQUISITION. On July 3, 1996, the Company entered into an
agreement (as amended, the "CommcoCCC Agreement") to acquire 129 38 GHz wireless
broadband authorizations (the "CommcoCCC Assets") from CommcoCCC, Inc. (the
"CommcoCCC Acquisition") in exchange for 16,500,000 shares of Common Stock.
CommcoCCC was formed in a transaction arranged by Columbia Capital Corporation
to acquire, own and operate the 38 GHz authorizations owned by Columbia Capital
Corporation and its affiliates and those owned by Commco, L.L.C. The CommcoCCC
Acquisition is subject to various conditions including receipt of FCC and other
approvals (including approval under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, if required), receipt by CommcoCCC of an opinion as to the tax-free
nature of the transaction, consummation of the Offerings on terms reasonably
satisfactory to CommcoCCC, minimum population coverage requirements for the
authorizations of the Company and CommcoCCC, accuracy of representations and
warranties except for breaches that do not have in the aggregate a material
adverse effect, no pending or threatened material litigation and other customary
closing conditions. There can be no assurance that all such conditions will be
satisfied. In particular, to obtain FCC approval, the Company will need to
demonstrate that the shareholders of CommcoCCC acquired the authorizations that
are to be assigned to the Company with the intent of providing service to the
public and not for the speculative purpose of reselling such authorizations and
may need certain waivers or consents from the FCC. The FCC may be unwilling to
grant its approval or may grant its approval subject to conditions that may be
adverse to the Company. The CommcoCCC Agreement may be terminated by CommcoCCC
if the Offerings are not completed within 90 days of the date of the CommcoCCC
Agreement or by either party if the CommcoCCC Acquisition is not consummated
within one year of the date of the CommcoCCC Agreement. See "Risk Factors --
Risk of Non-Consummation of CommcoCCC Acquisition."
In the CommcoCCC Agreement, the Company and Telecom have each agreed that,
prior to the consummation of the transaction, except in certain circumstances or
with the consent of CommcoCCC, they will not issue equity, incur debt, acquire
spectrum, make investments, consolidate, merge or sell all or substantially all
of its assets. CommcoCCC has entered into a management agreement with the
Company pursuant to which the Company bears the responsibility during the
pendency of the CommcoCCC Acquisition to construct, manage and operate the
CommcoCCC Assets, consistent with FCC rules. Under the management agreement,
CommcoCCC is obligated to reimburse ART for up to $100,000 of operating
expenses, which obligation will be cancelled if the CommcoCCC Acquisition is
consummated. In the event the management agreement is terminated other than as a
result of the consummation of the CommcoCCC Acquisition, CommcoCCC is obligated
to purchase and ART is obligated to sell at the Company's original cost the
equipment purchased by ART necessary to meet the FCC construction requirements
for the CommcoCCC authorizations.
The stockholders of CommcoCCC loaned the Company $3.0 million payable
September 30, 1996 pursuant to a subordinated bridge financing facility (the
"CommcoCCC Financing") and, in connection therewith, received three-year
warrants to purchase 50,000 shares of Common Stock at a price of $9.00 per share
(the "CommcoCCC Warrants"). The CommcoCCC Financing is secured by a security
interest in all of the assets of the Company, including a pledge of the
Company's stock in Telecom. If the CommcoCCC Financing is not paid in full when
due, the unpaid principal and interest could be converted into Common Stock on a
formula basis at the option of the holders. The CommcoCCC Financing will be
repaid with the proceeds of the Offerings.
The Company has given Commco, L.L.C., a stockholder of CommcoCCC, an option
(the "Commco Option") to purchase one authorization in each of 12 specified
market areas in which the Company will have more than one authorization, which
authorizations cover in the aggregate approximately 19 million people. The
Commco Option will be exercisable only if (i) the CommcoCCC Acquisition is
consummated and (ii) Commco, L.L.C. obtains authorizations pursuant to certain
pending applications frozen under the NPRM in market areas covering an aggregate
population of at least 40 million people, and will terminate on the date nine
months after the consummation of the Common Stock Offering.
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<PAGE>
The purchase price for any authorizations acquired under the Commco Option is
determined by a formula based upon the fair market value at the time the Commco
Option is exercised of up to approximately 2,600,000 shares of Common Stock
depending upon the number of authorizations purchased. The purchase price is
payable in cash or, if the Commco Option is exercised within the later of 120
days after the closing of the CommcoCCC Acquisition or the date of grant by the
FCC of the authorizations necessary to exercise the Commco Option, with a
two-year note secured by shares of Common Stock having a value on the date of
exercise equal to two times the principal amount of the note. In addition, if
the Commco Option becomes exerciseable, Commco will have the right to sublease
channel capacity from the Company in the New York and Washington, D.C. markets
on terms substantially identical to those that the Company is able to arrange on
its own behalf in its Los Angeles market area.
In arranging the CommcoCCC Acquisition, Columbia Capital Corporation and its
affiliates agreed not to compete with the Company in the provision of wireless
broadband telecommunication services in the 38 GHz band of the radio spectrum
for a five-year period commencing upon the closing of the CommcoCCC Acquisition
and have granted the Company a right of first offer to acquire any 38 GHz
authorizations that Columbia Capital Corporation or its affiliates may acquire
in the future with respect to their pending applications.
Promptly upon closing of the CommcoCCC Acquisition, the Company has agreed
to nominate one individual designated by CommcoCCC's stockholders and acceptable
to the Company as a director of the Company.
In late 1994 and 1995, Columbia Capital Corporation and certain of its
affiliates ("Columbia") entered into several letter agreements (the "Letter
Agreements") with Video/Phone Systems, Inc. ("Video/Phone"). In consideration
for services to be rendered under the Letter Agreements, Columbia granted or
agreed to grant to Video/Phone options to purchase minority equity interests in
entities formed or to be formed to apply for 38 GHz licenses. Columbia agreed
not to assign these licenses to any person controlling, controlled by or under
common control with Columbia unless such transferee granted to Video/Phone an
equivalent option. The CommcoCCC Assets include 67 authorizations transferred by
Columbia to CommcoCCC, subject to FCC approval. Columbia and Video/Phone are in
a dispute with respect to the performance and obligations of the parties under
the Letter Agreements. Columbia has agreed to indemnify and hold harmless the
Company with respect to any loss or damage resulting from the Letter Agreements.
EMI ACQUISITION. On April 4, 1995, ART entered into an agreement with EMI
Communications Corporation ("EMI") to acquire EMI's thirty two 38 GHz wireless
broadband licenses and related assets in the northeastern United States (the
"EMI Assets") in exchange for $3.0 million in cash and a $1.5 million three-year
non-negotiable and non-transferable promissory note (the "EMI Note"). In
November 1995, ART assigned all of its rights and obligations under the purchase
agreement to Telecom. The FCC subsequently approved the transfer of the EMI
Assets to Telecom, and the EMI Assets were acquired by Telecom in November 1995.
ART has also agreed to provide wireless broadband services to EMI for a period
of five years from the date of the agreement and to certain of EMI's customers
on behalf of EMI for the terms provided in such EMI service agreements, and EMI
agreed to provide certain services to Telecom for an initial period of one year
from the date of the agreement. See "Description of Certain Indebtedness -- EMI
Note."
ART WEST JOINT VENTURE. On April 4, 1995, ART and Extended Communications,
Inc. ("Extended") entered into a joint venture agreement (the "ART West
Agreement") resulting in the formation of ART West Joint Venture ("ART West"), a
Delaware partnership equally owned by ART and Extended. Under the terms of the
ART West Agreement, ART and Extended agreed to transfer to ART West all of their
respective interests in all of their 38 GHz authorizations (currently, 12
authorizations) in Alaska, Arizona, California, Colorado, Hawaii, Idaho,
Montana, Nevada, New Mexico, Oregon, Utah, Washington and Wyoming (the "ART West
Markets"), subject to FCC approval. Under a separate management
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<PAGE>
agreement between ART and ART West, ART is obligated to bear all costs and
expenses relating to construction, operation and management of the ART West
Markets and has agreed to utilize the ART West authorizations before other
authorizations owned or managed by ART in the ART West Markets. As compensation,
ART receives 90% of the recurring revenues of ART West, with ART West receiving
the remaining 10%. To date, Extended has had no significant responsibilities
with respect to ART West, and is not expected to invest in or contribute any
services to ART West pending the proposed acquisition of Extended's interest
described below. See "Certain Transactions -- ART West Joint Venture."
In June 1996, the Company entered into an agreement (the "Extended
Agreement") to acquire Extended's interest in ART West for an aggregate of $6.0
million in cash, subject to adjustment and subject to closing conditions
including final FCC approval. Of the $6.0 million purchase price, $3.0 million
is payable upon consummation of the Offerings as a non-refundable deposit (the
"ART West Deposit") and the balance is payable upon consummation of the
transaction. Under this agreement, upon payment by ART of the ART West Deposit,
Extended has agreed to surrender its rights under the ART West Agreement (i) to
participate in the acquisition of additional licenses or authorizations in
certain of the ART West Markets through ART West and (ii) to prohibit the
acquisition by ART of additional licenses or authorizations in certain other ART
West Markets.
DCT SYSTEM PURCHASE AGREEMENTS. On July 1, 1996 the Company entered into a
definitive agreement (the "DCT Agreement") with DCT to acquire DCT's interest in
certain 38 GHz licenses (the "DCT Systems") in exchange for $3.6 million in
cash, subject to FCC approval, consummation of the DCT Agreement by September 1,
1997 and other customary closing conditions including accuracy of
representations and warranties; absence of litigation and receipt of opinion of
counsel. ART has entered into a services agreement with DCT pursuant to which
ART bears the responsibility for the construction, operation and management of
the DCT Systems. The agreement expires on December 31, 1998 and may be
terminated earlier by DCT if the DCT Agreement terminates. Under the terms of
the services agreement, ART is obligated to bear all costs and expenses relating
to construction, operation and management of the DCT Systems. As compensation,
ART is entitled to receive all of the revenues generated by the DCT Systems
until December 31, 1996. From January 1, 1997 until the later of January 1, 1998
and the termination of the DCT Agreement, a license fee equal to 15% of the
gross revenue generated by the DCT Systems will be paid to DCT, and thereafter a
license fee based on the number and types of circuits operated by ART over the
DCT Systems will be paid to DCT. After December 31, 1997, DCT has the right to
market to third parties utilizing the DCT Systems. The services agreement
terminates with respect to each DCT 38 GHz license upon the acquisition by ART
of such license. The Company is currently completing the initial construction
requirements of the DCT Systems and expects such construction to be completed in
the third quarter of 1996.
TELECOM ONE SERVICES AGREEMENT. On April 24, 1996, the Company and Telecom
One, Inc. ("Telecom One") entered into a services agreement (the "Telecom One
Services Agreement") pursuant to which the Company agreed to construct, operate
and manage all 38 GHz wireless broadband licenses and related telecommunications
systems owned by Telecom One that are granted by the FCC. At present Telecom One
has been granted two authorizations. Under the Telecom One Services Agreement,
the Company is obligated to pay all costs and expenses related to construction,
operation and management of the systems. As compensation, the Company receives
90% of the net revenues generated by the systems and Telecom One receives the
remaining 10% for ten years.
TELECOM ONE PURCHASE AGREEMENT. On June 27, 1996, the Company and Telecom
One entered into an agreement pursuant to which the Company will acquire,
subject to FCC approval, from Telecom One the two currently granted
authorizations that are the subject of the Telecom One Services Agreement for
approximately $111,000 in cash. In addition, the Company will have a right of
first refusal on all future grants of 38 GHz authorizations to Telecom One or
its current stockholders.
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STRATEGIC ALLIANCES
AMERITECH STRATEGIC DISTRIBUTION AGREEMENT. On April 29, 1996, the Company
and Ameritech entered into a three-year strategic distribution agreement (the
"Ameritech Strategic Distribution Agreement") pursuant to which the Company
provides 38 GHz services to Ameritech, who will in turn market the Company's
services under the Ameritech name. Ameritech has agreed to be the primary
provider of the Company's services in the midwest. Under the agreement,
Ameritech is targeting certain sales objectives and will spend internally up to
$7.0 million on its sales and marketing of the Company's services. The Company
believes that Ameritech's sales and marketing expertise and its access to
extensive distribution channels within its region will accelerate the rollout of
the Company's business plan. The Ameritech Strategic Distribution Agreement is
subject to termination at any time by either party on 90 days' notice. See "Risk
Factors -- Dependence on Third Parties for Marketing and Service."
GTE SERVICES AGREEMENT. On April 25, 1996, the Company entered into a
two-year agreement with GTE Government Systems Corporation, a subsidiary of GTE
Corporation ("GTE"). GTE will provide equipment staging and outfitting, site
preparation, equipment installation and maintenance for the Company's wireless
broadband services. Under the agreement, it is anticipated that GTE will perform
at least 75% of the Company's installations. The Company will pay a fee equal to
$1,550 for the installation of each link and a maintenance fee equal to $85 per
hour. The aggregate amount of the fee will depend on the Company's rate of
growth. The Company believes that GTE's nationwide presence and experience will
provide the Company with efficient, quality installation and maintenance for its
nationwide services. See "Risk Factors -- Dependence on Third Parties for
Marketing and Service."
GTE SOFTWARE LICENSE AGREEMENT. On March 29, 1996, the Company entered into
a software license agreement with GTE's Network Management Organization. Under
this agreement, the Company will purchase software and centralize its network
management functions to reduce costs and increase reliability. GTE's "Integrated
Network Management Products" enable the Company to quickly identify service
interruptions and to simultaneously alert the field service teams, who are able
to restore services in a timely manner. The Company will pay a license fee of
approximately $2.4 million and an annual maintenance support fee of
approximately $300,000. The license fee will be paid in monthly installments
commencing January 1, 1997 of $67,000 per month, including interest. After the
first year, fees are subject to renegotiation based on market prices and
conditions. See "Risk Factors -- Dependence on Third Parties for Marketing and
Service."
HARRIS AGREEMENTS. On April 26, 1996, the Company and Harris Corporation,
Farinon Division ("Harris") entered into a one-year PCS marketing agreement (the
"Harris Marketing Agreement") pursuant to which the Company granted to Harris
the right to use its 38 GHz authorizations, including associated coordination
services, installation and network monitoring and field services. Pursuant to
the Harris Marketing Agreement, Harris agreed to market the Company's services
in the emerging PCS market. The Harris Marketing Agreement is automatically
renewable for successive one-year terms unless either party delivers notice of
non-renewal at least 60 days prior to the end of the initial term or any
successive term. The agreement is also subject to termination at any time by
either party on 90 days' notice.
Concurrently with the Harris Marketing Agreement, the parties entered into a
one-year purchase agreement (the "Harris Purchase Agreement") pursuant to which
the Company agreed to purchase certain microwave transmission equipment,
software and services relating thereto (the "Harris Products"). The agreement
sets minimum purchase goals for the purchase by the Company of Harris Products.
If either the Harris Purchase Agreement or the Harris Marketing Agreement shall
terminate, the other shall also terminate.
TECHNOLOGY DEVELOPMENT AGREEMENTS. The Company has had discussions with
several microwave equipment or technology development companies for development
of technologies owned by such
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companies, for advanced 38 GHz radios highspeed converters, innovative
telecommunications platforms and other technologies. The Company will continue
to monitor new developments in technology and may elect to fund research and
development activity in such new technology. The Company has also entered into a
letter of intent with American Wireless Corporation ("American Wireless")
providing for the funding by the Company of $700,000 to $1.0 million for
research and development. In consideration of such funding, the Company will
have a first right to purchase American Wireless' production capacity of the new
radios for a period of 18 months from the date of the first order and will
receive a per-unit fee on radios sold by American Wireless to third parties,
however, the Company will have no other rights to any technology developed. See
"Certain Transactions -- American Wireless Development Agreement." This
arrangement is subject to definitive documentation. The Company has entered into
a non-binding arrangement with QuestTV providing for an investment of $1.5
million in the development of a nationwide network of franchises offering retail
access to sophisticated video data transmission and storage technology. See
"Certain Transactions -- QuestTV Investment."
The Company has also entered into a letter of intent with Helioss
Communications Corporation ("Helioss") for the development of advanced 38 GHz
radios. Under the letter of intent which is subject to definitive documentation,
the Company will fund up to $1.0 million of Helioss' research and development
expenses. The Company will have a right of first refusal on production capacity
of the radios for three years from delivery of the first radios produced, and
will receive a royalty on the sale of a certain number of radios to customers
other than the Company, however, the Company will have no other rights to any
technology developed.
Through June 15, 1996, the Company has incurred approximately $600,000 of
research and development expenses under such arrangements. There can be no
assurance that the Company can complete definitive agreements with any of such
companies or that such companies can develop technologies with commercial value
for the Company. Although the Company does not have any other material
commitments to fund research and development or to make investments in other
companies, the Company expects to incur additional research and development
expenses or to make other such investments from time to time.
FOREIGN MARKETS
The Company is exploring the possibilities of providing its wireless
broadband services in other countries including Canada and in Europe. Pursuant
to a consulting agreement, the Company has retained the services of Trond
Johannessen for a period of two years to assist the Company in the exploration
of foreign opportunities, including the acquisition of wireless broadband
licenses and identification of local operating partners. In addition to payments
of $6,500 per month to Mr. Johannessen, Mr. Johannessen will be entitled to
purchase, on the same terms as the Company, up to 20% of the equity of any
entity formed to exploit any such opportunities. The Company has also entered
into a letter of intent with Advantage Telecom, Inc. ("ATI"). ATI has received
an experimental license to provide 38 GHz services in Vancouver, British
Columbia and intends to seek authority to provide 38 GHz services in other major
markets in Canada whenever Canadian regulators adopt appropriate policies. The
letter of intent anticipates that the Company would provide initial funds and
services to ATI in amounts to be determined. There can be no assurance that the
Company can acquire such licenses or develop and operate such systems.
COMPETITION
The telecommunications services industry is highly competitive. The Company
has only recently begun to market its wireless broadband services to potential
customers and is currently providing services on a limited basis. In each market
area in which the Company is authorized to provide services, the Company
competes or will compete with several other service providers and technologies.
The Company expects to compete primarily on the basis of wireless broadband
service features, quality, price, reliability, customer service and response to
customer needs. The Company faces significant competition from other 38 GHz
providers and incumbent LECs, such as the RBOCs. The Company
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may also compete with CAPs, cable television operators, electric utilities, LECs
operating outside their current local service areas and IXCs. There can be no
assurance that the Company will be able to compete effectively in any of its
market areas.
COMPETITION FROM 38 GHZ SERVICE PROVIDERS. The Company faces competition
from other 38 GHz service providers, such as WinStar and BizTel, within its
market areas. In many cases, one or both of these service providers hold
licenses to operate in other portions of the 38 GHz band in geographic areas
which encompass or overlap the Company's market areas. In certain of the
Company's market areas, other 38 GHz service providers may have a longer history
of operations, a larger geographic footprint or substantially greater financial
resources than the Company. WinStar commenced its 38 GHz operations
approximately one year prior to the Company, has raised significant capital and
has the competitive advantages inherent in being the first to market 38 GHz
services. In addition to WinStar and BizTel, at least one other substantial
entity, Milliwave, L.P. ("Milliwave"), and several dozen smaller ones have been
granted 38 GHz authorizations in geographic regions in which the Company plans
to operate. Winstar has recently entered into a definitive agreement with
Milliwave to acquire Milliwave's 38 GHz licenses, subject to FCC approval, and
has agreed to manage such licenses pending the consummation of such acquisition.
Due to the relative ease and speed of deployment of 38 GHz technology, the
Company could face intense price competition and competition for customers
(including other telecommunications service providers) from other 38 GHz service
providers.
The Company also faces potential competition from new entrants to the 38 GHz
market, including LECs and other leading telecommunications companies. The NPRM
contemplates an auction of certain spectrum assets, including the lower fourteen
proposed 100 MHz channels (which are similar to those used by the Company) and
four proposed 50 MHz channels in the 38 GHz spectrum band, which have not been
previously available for commercial use. See "Risk Factors -- Government
Regulation." The grant of additional authorizations by the FCC in the 38 GHz
band, or other portions of the spectrum with similar characteristics, could
result in increased competition. The Company believes that, assuming that
additional channels are made available as proposed by the NPRM, additional
entities having greater resources than the Company could acquire authorizations
to provide 38 GHz services.
COMPETITION FROM INCUMBENT LECS. The Company also faces significant
competition from incumbent LECs, irrespective of whether they provide 38 GHz
services. Incumbent LECs have long-standing relationships with their customers,
generally own significant PCS or cellular assets, have the potential to
subsidize competitive services with revenues from a variety of businesses and
benefit from favorable federal and state policies and regulations. Regulatory
decisions and recent legislation, such as the Telecommunications Act, have
partially deregulated the telecommunications industry and reduced barriers to
entry into new segments of the industry. In particular, the Telecommunications
Act, among other things, (i) enhances local exchange competition by preempting
laws prohibiting competition in the local exchange market by requiring LECs to
provide fair and equal standards for interconnection and by requiring incumbent
LECs to provide unbundling of services and (ii) permits an RBOC to compete in
the interLATA long distance service market once certain competitive
characteristics emerge in such RBOC's service area. The Company believes that
this trend towards greater competition will continue to provide opportunities
for broader entrance into the local exchange markets. However, as LECs face
increased competition, regulatory decisions are likely to provide them with
increased pricing flexibility, which in turn may result in increased price
competition. There can be no assurance that such increased price competition
will not have a material adverse effect on the Company's results of operations.
OTHER COMPETITORS. The Company may compete with CAPs for the provision of
last mile access and additional services in most of its market areas. However,
the Company believes that many CAPs may utilize 38 GHz transmission links to
augment their own service offerings to IXCs and end users, and that the Company
is well positioned to provide such 38 GHz services to CAPs. However, there can
be no assurance that CAPs will utilize the Company's 38 GHz services or that
CAPs will not seek to acquire
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their own 38 GHz licenses or use the 38 GHz licenses of other licensees.
Furthermore, the ability of CAPs to compete in the local exchange market is
limited by regulations relating to number portability, dialing parity and
reasonable interconnection. The Telecommunications Act requires the FCC and the
states to implement regulations that place CAPs on a more equal competitive
footing with LECs. To the extent these changes are implemented, CAPs may be able
to compete more effectively with LECs. However, there can be no assurance that
CAPs or 38 GHz service providers, such as the Company, will be able to compete
effectively for the provision of last mile access and other services.
The Company may also face competition from cable television operators
deploying cable modems, which provide high speed data capability over installed
coaxial cable television networks. Although cable modems are not widely
available currently, the Company believes that the cable industry may support
the deployment of cable modems to residential cable customers through methods
such as price subsidies. Notwithstanding the cable industry's interest in rapid
deployment of cable modems, the Company believes that in order to provide
broadband capacity to a significant number of business and government users
cable operators will be required to spend significant time and capital in order
to upgrade their existing networks to the next generation of hybrid fiber
coaxial network architecture. However, there can be no assurance that cable
television operators will not emerge as a source of competition to the Company.
The Company may also face competition from electric utilities, LECs
operating outside their current local service areas, IXCs and other providers.
These entities provide transmission services using technologies which may enjoy
a greater degree of market acceptance than 38 GHz wireless broadband technology
in the provision of last mile broadband services. In addition, the Company may
face competition from new market entrants using wireless, fiber optic and
enhanced copper based networks to provide local service and from wireless cable
providers and other service providers operating in frequencies other than 38
GHz.
Many of the Company's competitors have long-standing relationships with
customers and suppliers, greater name recognition and greater financial,
technical and marketing resources than the Company. As a result, these
competitors may be able to more quickly develop and exploit new or emerging
technologies, adapt to changes in customer requirements, or devote greater
resources to the marketing of their services than the Company. The consolidation
of telecommunications companies and the formation of strategic alliances and
cooperative relationships in the telecommunications and related industry, as
well as the development of new technologies, could give rise to significant new
competitors to the Company. In such case, there can be no assurance as to the
degree to which the Company will be able to compete effectively.
GOVERNMENT REGULATION
The Company's wireless broadband services are subject to regulation by
federal, state and local governmental agencies. The Company believes that it is
in substantial compliance with all material laws, rules and regulations
governing its operations and has obtained, or is in the process of obtaining,
all authorizations, tariffs and approvals necessary and appropriate to conduct
its operations. Nevertheless, changes in existing laws and regulations,
including those relating to the provision of wireless local telecommunications
services via 38 GHz and/or the future granting of 38 GHz authorizations, or any
failure or significant delay in obtaining necessary regulatory approvals, could
have a material adverse effect on the Company.
FEDERAL REGULATION
At the federal level, the FCC has jurisdiction over the use of the
electromagnetic spectrum (I.E., wireless services) and has exclusive
jurisdiction over all interstate telecommunications services, that is, those
that originate in one state and terminate in another state. State regulatory
commissions have jurisdiction over intrastate communications, that is, those
that originate and terminate in the same state.
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Municipalities may regulate limited aspects of the Company's business by, for
example, imposing zoning requirements and requiring installation permits. The
Company also is subject to taxation at the federal and state levels and may be
subject to varying taxes and fees from local jurisdictions.
FCC LICENSING. The Communications Act of 1934 (the "Communications Act")
imposes certain requirements relating to licensing, common carrier obligations,
reporting and treatment of competition. Under current FCC rules, the recipient
of an authorization for 38 GHz microwave facilities is required to complete
construction of such facilities within 18 months of the date of grant of the
authorization (authorizations for facilities that are not constructed are
referred to in this Prospectus as "construction permits" and authorizations for
facilities that are constructed are referred to in this Prospectus as
"licenses"). Upon completion of construction, the licensee is required to
certify that the station is operational and ready to provide services to the
public. Although, under current FCC regulations, the term "operational" is not
defined, the industry custom is to establish at least one link between two
transceivers in each market area for which it holds a construction permit. In
the event that the recipient fails to comply with the construction deadline, the
construction permit is subject to forfeiture, absent an extension of the
deadline. Effective August 1, 1996, the Company will not be required to file a
form with the FCC certifying that its station is operational (i.e. that
construction is completed); however, the licensee will still be required to
complete construction within 18 months of the date of grant of the
authorization. In addition, effective August 1, 1996, a station will be
operational when construction is complete and the station is capable of
providing service. Upon completion of the CommcoCCC Acquisition, the Company
will own or manage a total of 237 authorizations that will allow it to provide
38 GHz wireless broadband services in 169 U.S. markets. The Company currently
owns or manages 108 authorizations (exclusive of the CommcoCCC Assets) that
allow it to provide 38 GHz wireless broadband services in 89 markets to
construct and operate 38 GHz wireless broadband facilities, 73 of which are
owned by the Company and the remaining 35 of which are managed by the Company
through the Company's interests in or arrangements with other companies. Of the
108 authorizations (exclusive of the CommcoCCC Assets) which the Company owns or
manages, 77 are licenses. Under the terms of its remaining 31 construction
permits, the Company must complete construction of facilities for the majority
of such authorizations between mid-August and mid-September 1996, but it expects
to complete construction of all such construction permits by the beginning of
August 1996. Under the terms of the CommcoCCC authorizations and the Company's
management agreement with CommcoCCC, the Company must complete construction of
facilities for eight construction permits by mid-September 1996, 39 construction
permits by December 1996 and the remaining 82 between mid-April and August 1997.
The Company believes that, in light of current FCC practice, extensions of
construction periods are highly unlikely. See "Risk Factors -- Risk of
Forfeiture, Non-Renewal and Fluctuation in Value of FCC Licenses."
COMMON CARRIER REGULATION. Under the terms of its licenses, the Company is
classified as a common carrier, and as such is required to offer service on a
non-discriminatory basis at just and reasonable rates to anyone reasonably
requesting such service. Although the Communications Act prohibits the Company
from discriminating among its customers, the Communications Act, as currently
interpreted by the FCC, does permit the Company substantial discretion in
classifying its customers and discriminating among such classifications. The
Company generally is obligated to furnish service to its competitors and might
be obligated to allow other 38 GHz providers to install links within one of the
Company's market areas for a non-discriminatory fee. Under the FCC's streamlined
regulation of non-dominant carriers, the Company, as a non-dominant carrier,
must file tariffs with the FCC for certain interstate services on an ongoing
basis. The Company is in the process of filing tariffs with the FCC, to the
extent required, with respect to its provision of interstate service. The FCC
has recently initiated a rulemaking proceeding to eliminate the tariff filing
requirement pursuant to new forbearance authority contained in the
Telecommunications Act. The Company, as a non-dominant carrier, is not currently
subject to rate regulation, and it may install and operate non-radio facilities
for the transmission of interstate communications without prior FCC or state
authorization.
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The Company manages the systems of ART West, DCT, Telecom One and CommcoCCC
(during the pendency of certain acquisitions) pursuant to management agreements.
See "Business -- Agreements Relating to Licenses and Authorizations." The
Company believes that the provisions of these management agreements comply with
the FCC's policies concerning licensee control of FCC-licensed facilities.
Because the 38 GHz service is a new service, however, there is no FCC precedent
addressing the limits of such management arrangements for these services. No
assurance can be given that the management arrangements or proposed acquisitions
will, if challenged, be found to satisfy the FCC's policies or what
modifications, if any, may need to be made to satisfy those policies. If the FCC
were to void or require modifications of the management arrangements, the
Company's operating results would be adversely affected.
FCC REPORTING. The Company, as an operator of millimeter wave radio
facilities, is subject to the FCC's semiannual reporting requirements with
respect to the deployment of wireless local telecommunications services in its
licensed areas. The Company believes that it has fully complied with its
reporting obligation. Effective August 1, 1996, the FCC rules will not require
semiannual reporting.
COMPETITION. Over the last several years, the FCC has issued a series of
decisions and Congress has recently enacted legislation making the interstate
access services market more competitive by requiring reasonable and fair
interconnection by LECs. Concomitant with its decision to require such
interconnection, the FCC has provided LECs with a greater degree of increased
pricing flexibility between services (such as the ability to reduce local access
charges paid by long distance carriers utilizing LECs' local networks) and
between geographic markets (such as cross-subsidizing price cuts across
geographic markets). The Company anticipates that this pricing flexibility will
result in LECs lowering their prices in high density zones. To the extent that
LECs choose to take advantage of increased pricing flexibility to lower their
rates, the ability of the Company and CAP customers of the Company to compete
for certain markets and services and the Company's operating results may be
adversely affected.
THE TELECOMMUNICATIONS ACT. The Telecommunications Act substantially
departs from prior legislation in the telecommunications industry by
establishing local exchange competition as a national policy through the removal
of state regulatory barriers to competition and the preemption of laws
restricting competition in the local exchange market. The Telecommunications
Act, among other things, mandates that LECs (i) permit resale of their services
and facilities on reasonable and nondiscriminatory terms and at wholesale rates,
(ii) allow customers to retain the same telephone number ("number portability")
when they switch carriers, (iii) permit interconnection by competitors to a
LEC's network at any technically feasible point on the same terms as LEC charges
for its own services, (iv) unbundle their network services and facilities by
permitting competitors and others to use some but not all of their facilities at
cost-based and nondiscriminatory rates and (v) ensure that the end user does not
have to dial any more digits to reach local competitors than to reach the LEC to
the extent technically feasible ("dialing parity"). The Telecommunications Act
also allows RBOCs to provide interLATA services once certain competitive
characteristics emerge in their local exchange markets. The provisions of the
Telecommunications Act are designed to ensure that RBOCs take affirmative steps
to level the playing field for their competitors so that CAPs and others can
compete effectively. The FCC, with advice from the United States Department of
Justice, and the states are given jurisdiction to enforce these requirements.
There can be no assurance, however, that the states and the FCC will implement
the Telecommunications Act in a manner favorable to the Company and its
customers.
FCC RULEMAKING. On November 13, 1995, the FCC released an order barring the
acceptance of new applications for 38 GHz authorizations. On December 15, 1995,
the FCC announced the issuance of the NPRM, pursuant to which it proposed to
amend its current rules to provide for, among other things, (i) the adoption of
an auction procedure for the issuance of authorizations in the 38 GHz band,
including a possible auction of the lower fourteen 100 MHz channels (which are
similar to those used by the Company) and the lower four 50 MHz channels in the
38 GHz band that have not been previously available for commercial use, (ii) the
continuation of the 100 MHz-based channeling plan and licensing
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rules for point-to-point microwave operations in the lower 14 channels, (iii)
licensing frequencies using predefined geographic service areas ("Basic Trading
Areas"), (iv) the imposition of substantially stricter construction requirements
for authorizations that are not received pursuant to auctions as a condition to
the retention of such authorizations and (v) the implementation of certain
technical rules designed to avoid radio frequency interference among licensees.
In addition, the FCC ordered that those applications subject to mutual
exclusivity with other applicants or placed on public notice by the FCC after
September 13, 1995 would be held in abeyance pending the outcome of the NPRM and
might then be dismissed. Final rules issued in connection with the NPRM may
require that 38 GHz service providers share other yet-to-be licensed portions of
the 38 GHz band with other telecommunications service providers. The
implementation of such a measure could materially affect the Company's ability
to provide services to its customers by imposing power or other limitations upon
its existing operations. The NPRM proposes substantial strengthening of the
current rules concerning the steps that a grantee of a 38 GHz authorization must
take to satisfy the FCC's construction requirements. At present, the holder of a
construction permit is only required to certify that it is operational. Although
under current FCC regulations the term "operational" is not defined, the
industry custom is to install one link, which may be only temporary and may not
be producing revenue for the operator. The NPRM expresses concern that this
lenient standard might allow the warehousing of 38 GHz spectrum. As a
consequence, the NPRM proposes much more stringent construction requirements for
authorizations other than those received pursuant to an auction. There can be no
assurance that the final rules (if any) issued in connection with the NPRM will
resemble the rules proposed in the NPRM. There also can be no assurance that any
proposed or final rules will not have a material adverse effect on the Company.
Statutes and regulations which may become applicable to the Company as it
expands could require the Company to alter methods of operations at costs which
could be substantial or otherwise limit the types of services offered by the
Company.
The NPRM also proposes that 38 GHz authorizations be awarded by auction. The
NPRM would specify the geographic areas that could be licensed instead of
continuing to allow the applicants to design the geographic circumferences of
the licenses. The Company has not determined whether to seek additional licenses
in the event of an auction. The Company believes that the FCC is likely to award
38 GHz authorizations by auction, but there can be no assurance that this will
occur.
STATE REGULATION
Many of the Company's services, either now or in the future, may be
classified as intrastate and therefore may be subject to state regulation. The
Company is in the process of obtaining state authorizations deemed to be
sufficient to conduct most, if not all, of its proposed business in the
near-term, but there can be no assurance that some portion of the Company's
proposed transmissions might not be considered to be subject to state
jurisdiction in a state in which the Company does not have appropriate
authority. The Company expects that as its business and product lines expand and
the requirements of the Telecommunications Act favoring competition in the
provision of local communications services are implemented, it will offer an
increased number and type of intrastate services. The Company is implementing a
program to expand the scope of its intrastate certifications in various state
jurisdictions as its product line expands and as the Telecommunications Act is
implemented.
Under current state regulatory schemes, entities can compete with LECs in
the provision of (i) local access services, (ii) dedicated access services,
(iii) private network services, including WAN services, for businesses and other
entities and (iv) long distance toll services. The remaining local
telecommunications services, including switched local exchange services
encompassing calls originating and terminating within a single LATA, are not
currently subject to competition in most states. The Telecommunication Act
requires each of these states to remove these barriers to competition. No
assurance can be given as to how quickly and how effectively each state will act
to implement the new legislation.
INTELLECTUAL PROPERTY RIGHTS
The Company has filed for protection for four service marks: DigiWave (the
Company's wireless broadband trademark), OZ Box (the Company's proprietary
network management interface), ART and
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Advanced Radio Telecom. These first filings are block mark applications, which
if allowed by the Patent and Trademark Office, would protect future variations.
The Company will seek the maximum protection for its future service marks. There
can be no assurance that the service marks applied for will be granted nor that
the Company's future efforts will be successful. Although the Company is
developing various proprietary processes, software products and databases and
intends to protect its rights vigorously and to continue to develop such
proprietary systems and databases, there can be no assurance that these measures
will be successful in establishing its proprietary rights in such assets.
EMPLOYEES
As of June 15, 1996, the Company had a total of 70 employees, including 20
in engineering and field services, 25 in sales and marketing, 13 in
administration and finance, 8 in operations and 4 in corporate development and
advanced services. None of the Company's employees is represented by a
collective bargaining agreement. The Company has never experienced a work
stoppage and believes that its employee relations are good.
PROPERTIES
The Company leases approximately 22,000 square feet of office, technical
operations and engineering field services depot space in Bellevue, Washington.
The Company's corporate headquarters, network operations center and western
regional sales office occupy approximately 15,000 square feet under a sublease
expiring in January 2000. The Company's engineering department leases
approximately 5,000 square feet and 2,000 square feet for technical operations
and an engineering field services depot, respectively, pursuant to leases
expiring in May 1997. In addition the Company leases 1,100 square feet of office
space in Portland, Oregon for sales and marketing personnel pursuant to a lease
expiring in March 1998. The Company also leases temporary office space in
Washington, D.C. under a sub-lease from Pierson & Burnett, L.L.P. See "Certain
Transactions -- Pierson & Burnett Transactions."
LITIGATION
The Company is not a party to any litigation.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers, directors and certain other key officers of the
Company, their ages and their positions are as follows (after giving effect to
the Merger):
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------------- --- -------------------------------------------------------
<S> <C> <C>
Vernon L. Fotheringham (1)(2)(3)............ 48 Chairman of the Board of Directors and Chief Executive
Officer
Steven D. Comrie............................ 40 President, Chief Operating Officer and Director
Thomas A. Grina............................. 38 Executive Vice President and Chief Financial Officer
W. Theodore Pierson, Jr..................... 59 Executive Vice President, Secretary and General Counsel
James D. Miller............................. 53 Senior Vice President, Sales and Marketing
James C. Cook (6)(7)(8)..................... 36 Director Designate
J.C. Demetree, Jr. (3)(4)(5)................ 37 Director
Mark C. Demetree (1)(2)..................... 39 Director
Andrew I. Fillat (2)(3)(4).................. 48 Director
Matthew C. Gove (2)(4)(5)................... 31 Director
T. Allan McArtor (6)(8)(9).................. 53 Director Designate
Laurence S. Zimmerman (1)(3)(5)............. 36 Director
</TABLE>
- ------------------------------
(1) Member of Option Committee.
(2) Member of Compensation Committee.
(3) Member of Finance Committee.
(4) Member of Audit Committee.
(5) These directors will resign effective on the date of this Prospectus, and
James C. Cook and T. Allan McArtor will be elected to the Board of
Directors. See " -- Board Composition."
(6) These directors have been elected effective on the date of this Prospectus.
See "-- Board Composition."
(7) Member of Option Committee effective on the date of this Prospectus.
(8) Member of Audit Committee effective on the date of this Prospectus.
(9) Member of Compensation Committee effective on the date of this Prospectus.
VERNON L. FOTHERINGHAM has served as Chairman of the Board of Directors,
Chief Executive Officer of the Company and Telecom since inception. From 1993 to
1995, Mr. Fotheringham served as president and chief executive officer of Norcom
Networks Corporation, a nationwide provider of mobile satellite services. In
1992, Mr. Fotheringham co-founded Digital Satellite Broadcasting Corporation
("DSBC"), a development stage company planning to provide satellite radio
services nationwide, served as its chairman from 1992 to 1993 and currently
serves as one of its directors. From 1988 to 1994, Mr. Fotheringham served as
senior vice president of The Walter Group, Inc. ("TWG"), a wireless
telecommunications consulting and project management firm. From 1983 to 1986,
Mr. Fotheringham served as vice president of marketing of Omninet Corporation,
which was the original developer of the current Qualcomm Omni TRACS network.
Over the last ten years, Mr. Fotheringham has advised several businesses in the
telecommunications industry, including American Mobile Satellite Corporation,
ClairCom Communications ("ClairCom") and McCaw Cellular Communications, Inc.
STEVEN D. COMRIE has served as President, Chief Operating Officer and a
director of the Company since July 1995. From 1992 to 1995, Mr. Comrie served as
vice president and general manager of
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Cypress Broadcasting Inc., a California-based television subsidiary of Ackerley
Communications Inc., a diversified media company based in Seattle, Washington.
From 1990 to 1992, Mr. Comrie served as president of First Communication Media
Inc. and as an investor, advisor and manager of satellite, broadcast and
telecommunications businesses in the United States and Canada. In 1986, Mr.
Comrie co-founded Netlink, the first commercial direct broadcast satellite
service operating in the U.S. which was subsequently acquired by
Tele-Communications Inc. ("TCI"). Previously, Mr. Comrie served in a variety of
management positions with cable and media companies.
THOMAS A. GRINA has served as Executive Vice President and Chief Financial
Officer of the Company since April 1996. From June 1989 to April 1996, Mr. Grina
was Executive Vice President, Finance and Chief Financial Officer of DialPage,
Inc. and Executive Vice President of its wholly-owned subsidiary, Dial Call
Communications, Inc., a wireless communications company operating in the
southeastern U.S.
W. THEODORE PIERSON, JR. has served as Executive Vice President and General
Counsel of the Company and Telecom since inception. He has served as a director
of the Company since its inception and will resign upon completion of the
Merger. For more than five years, Mr. Pierson has been a partner of the firm of
Pierson & Burnett, L.L.P. (and its predecessor firms) in Washington, D.C., which
specializes in telecommunications law. As such, Mr. Pierson has advised a number
of start-up telecommunications companies, including Home Box Office, Satellite
Business Services, Omninet Corporation and DSBC. Mr. Pierson currently serves as
a director of DSBC. Mr. Pierson has also been counsel to the Competitive
Telecommunications Association (the largest association of long distance
carriers) and the Association for Local Telecommunications Services for several
years.
JAMES D. MILLER has served as Senior Vice President, Sales and Marketing of
the Company since December 1995. From 1993 to 1995, Mr. Miller was vice
president and general manager of U.S. Intelco Wireless. Mr. Miller served as
executive vice president of Atlas Telecom from 1987 to 1993 and as national
sales manager of Sidereal Corporation from 1977 to 1987.
JAMES C. COOK will become a director of the Company upon the date of this
Prospectus. Mr. Cook is currently senior vice president of First Union Capital
Partners, Inc. ("FUCPI"), the private equity investment affiliate of First Union
Corporation, where he has been employed since 1989. Prior to joining FUCPI, Mr.
Cook served in various capacities at The Bank of New York from 1982 to 1987 and
at Kidder, Peabody & Co. Inc. in 1988.
J.C. DEMETREE, JR. has served as a director of the Company since May 1995.
Since 1987, Mr. Demetree has served as president of Demetree Brothers, Inc., a
real estate service company. Since 1980, he has been a partner and trustee of
Pentagon Properties, a privately-held trust with investments in commercial real
estate and other operating businesses including banking and chemical. Mr.
Demetree has served since 1987 as a director of Community First Bank and since
1995 as a director and officer of CFB Bancorp.
MARK C. DEMETREE has served as a director of the Company since May 1995.
Since 1993, Mr. Demetree has been president of North American Salt Company, the
second largest salt producer in North America. From 1991 through 1993, Mr.
Demetree served as president of Trona Railway Company, a shortline railroad
division of North American Chemical Company. Mr. Demetree currently is a
director of J.C. Nichols Company, a real estate company, and serves on the Board
of Governors of the Canadian Chamber of Maritime Commerce for the Great
Lakes/St. Lawrence Seaway and is the current chairman of the CEO Council of the
Salt Institute.
ANDREW I. FILLAT has served as a director of the Company since November
1995. Mr. Fillat has been employed since 1989 by Advent International
Corporation ("Advent"), a global venture capital and private equity management
firm and currently serves as senior vice president. Prior to 1989, Mr. Fillat
was a partner at Fletcher and Company, a consulting firm specializing in
assisting venture-backed enterprises, and was an operating executive with
Fidelity Investments. Mr. Fillat is also a director of:
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Interlink Computer Sciences, a systems management and communications software
company; Lightbridge, Inc., a company providing customer acquisition and
marketing related services for cellular and PCS carriers; Voxware, Inc., a
software company providing advanced voice compression and processing; and
several private companies in the Advent portfolio.
MATTHEW C. GOVE has served as a director of the Company since May 1995.
Since 1994, Mr. Gove has been, through Hedgerow Corporation of Maine
("Hedgerow"), a consultant to LHC, specializing in domestic and international
telecommunications transactions. From 1991 through 1993, he attended the
Columbia University Graduate School of Business and worked as an independent
consultant specializing in spreadsheet modeling and financial analysis. Prior to
1991, he was custodial manager of foreign currency derivative funds at The
Boston Company.
T. ALLAN MCARTOR will become a director of the Company upon the date of this
Prospectus. Since 1995, Mr. McArtor has been chairman and chief executive
officer of Quest Computer Television Company, LLC, an interactive publicly
programmable information network. Since 1994, Mr. McArtor has also served as
chairman and chief executive officer of Contrails, LLC, an aviation consulting
firm. From 1992 to 1994, Mr. McArtor served as president of FedEx Aeronautics
Corporation, a wholly-owned subsidiary of Federal Express Corporation ("FedEx").
From 1982 to 1987, he served as senior vice president of the FedEx
Telecommunications Division and from 1989 to 1992 as senior vice president of
air operations at FedEx. From 1987 to 1989, Mr. McArtor was Administrator of the
Federal Aviation Administration. Mr. McArtor currently serves on the board of
directors of Pilkington Aerospace, Inc., a manufacturer of aviation
transparencies for fighter aircraft canopies, aircraft windshields and windows.
LAURENCE S. ZIMMERMAN has served as a director of the Company since May
1995. Since 1985, Mr. Zimmerman has been President of Landover Holdings
Corporation ("LHC"), of which he is the founder and beneficial owner. LHC is a
private investment firm with interests in wireless cable, wireless telephone,
cellular and managed healthcare and specialty retail companies as well as other
investments in the United States and abroad. From 1989 to 1990, Mr. Zimmerman
was a managing director of Renaissance Capital Group Inc., a leveraged buyout
firm which concentrated on emerging market and middle market telecommunications
and healthcare opportunities. In 1993, Mr. Zimmerman was a founder of, and
provided the seed capital for, National Wireless Holdings Inc., a wireless cable
company serving markets in Southern Florida. On February 1, 1995, Mr. Zimmerman
consented to the entry of an order of the Securities and Exchange Commission,
without admitting or denying the matters referred to therein, barring him from
association with any broker, dealer, municipal securities dealer, investment
company or investment adviser during the period February 1, 1995 to February 1,
1996 and requiring him not to violate certain provisions of the Federal
securities laws. The order relates to alleged violations arising out of alleged
conduct by Mr. Zimmerman in 1986 as a broker for Breuer Capital, in connection
with trading and selling shares of Balchem Corporation. See "Principal
Stockholders -- Voting Trust Agreement."
BOARD COMPOSITION
Under the terms of the Stockholders Agreement (as described in "Certain
Transactions -- February 1996 Reorganization"), the Landover Stockholders (as
defined in the Stockholders Agreement) have the right to designate four members
of the Board of Directors of the Company and have designated Messrs. Mark C.
Demetree, J.C. Demetree, Jr., Gove and Zimmerman as directors. In addition,
pursuant to the terms of the Stockholders Agreement, the Advent Partnerships (as
defined in the Stockholders Agreement) and Ameritech, as holders of Telecom's
Series E and F preferred stock respectively, have the right to designate one
member of the Board of Directors of the Company and have designated Mr. Fillat
as a director. Pursuant to the Stockholders Agreement, the right of the Advent
Partnerships to designate a director terminates at such time as the Advent
Partnerships cease to own at least 50% of the aggregate amount of equity
securities of the Company currently owned by them. See "Certain Transactions --
LHC Purchase Agreement -- Advent Private Placement." The Stockholders Agreement
will terminate upon consummation of the Offerings.
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All directors hold office until their successors have been elected and
qualified. Effective as of the date of this Prospectus, Messrs. J.C. Demetree,
Jr., Gove and Zimmerman will resign as directors, and James C. Cook and T. Allan
McArtor, each of whom is unaffiliated with the Company's present management,
will be elected to the Board. After consummation of the Offerings, Mr. Zimmerman
may attend meetings of the Board of Directors as an observer, at the invitation
of the Board of Directors. In addition, upon consummation of the Offerings, the
Company's Board of Directors will be divided into three classes, with each class
of directors to serve three-year staggered terms (after their initial terms).
Messrs. Comrie and McArtor will be elected as Class I directors for an initial
one-year term expiring in 1997. Messrs. Cook and Fotheringham will be elected as
Class II directors for an initial two-year term expiring in 1998. Messrs. Mark
C. Demetree and Fillat will be elected as Class III directors for an initial
three-year term expiring in 1999.
Promptly after closing of the CommcoCCC Acquisition, the Company has agreed
to nominate one individual designated by the Commco CCC stockholders and
acceptable to the Company as a director of the Company.
DIRECTOR COMPENSATION
Upon consummation of the Offerings, directors who are not employees of the
Company will receive $4,000 per year for services rendered as a director and
$500 for attending each meeting of the Board of Directors or one of its
Committees. In addition, directors may be reimbursed for certain expenses
incurred in connection with attendance at any meeting of the Board of Directors
or Committees. Other than reimbursement of expenses, directors who are employees
of the Company receive no additional compensation for service as a director.
In April 1996, the Company adopted the Directors Plan (as defined) which
provides for automatic grants of options to purchase an aggregate of 200,000
shares of Common Stock to non-employee directors of the Company. See "-- Stock
Option Plans." Upon consummation of the Offerings, options to purchase an
aggregate of 28,000 shares at an exercise price equal to the initial offering
price of the Common Stock are anticipated to be granted to non-employee
directors under the Directors Plan.
BOARD COMMITTEES
The Company's bylaws, as amended (the "Bylaws"), provide that the Board of
Directors may establish committees to exercise certain powers delegated by the
Board of Directors. Pursuant to that authority, the Board of Directors has
established an Option Committee, Compensation Committee, Finance Committee and
Audit Committee.
The Option Committee reviews, interprets and administers the Equity
Incentive Plan (as defined), prescribes rules and regulations relating thereto
and determines the stock options to be granted by the Company to its employees.
Messrs. Mark C. Demetree, Fotheringham and Zimmerman currently serve on the
Option Committee. Upon consummation of the Offerings, Messrs. Cook, Mark C.
Demetree and Fillat will serve on the Option Committee.
The Compensation Committee has responsibility for reviewing and
administering the Company's program with respect to the compensation of its
officers, employees and consultants and reviewing transactions with its
officers, directors and affiliates. As a policy, the Compensation Committee pays
officers, directors and affiliates of the Company for services rendered outside
the scope of their respective obligations to the Company, in accordance with
industry standards for such services, which may include introducing major
transactions or providing legal services to the Company. Messrs. Mark C.
Demetree, Fillat, Fotheringham and Gove currently serve on the Compensation
Committee. Upon consummation of the Offerings, Messrs. Mark C. Demetree, Fillat,
Fotheringham and McArtor will serve on the Compensation Committee.
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The Finance Committee has responsibility for reviewing and negotiating
financing proposals for the Company and submitting such proposals to the Board
of Directors for approval. Messrs. J.C. Demetree, Jr., Fillat, Fotheringham and
Zimmerman currently serve on the Finance Committee. Upon consummation of the
Offerings, the Finance Committee will be disbanded.
The Audit Committee recommends the engagement of independent accountants to
audit the Company's financial statements and perform services related to the
audit, reviews the scope and results of the audit with the accountants, reviews
with management and the independent accountants the Company's year-end operating
results, and considers the adequacy of internal accounting procedures. Messrs.
J.C. Demetree, Jr., Fillat and Gove currently serve on the Audit Committee. Upon
consummation of the Offerings, Messrs. Cook, Fillat and McArtor will serve on
the Audit Committee.
RELATED PARTY TRANSACTIONS
On February 2, 1996, the Company adopted a policy that all transactions,
including compensation, between the Company and its officers, directors and
affiliates will be on terms no less favorable to the Company than could be
obtained from unrelated third parties and shall be approved by a majority of the
disinterested members of the Compensation Committee or by a majority of the
disinterested members of the Board of Directors.
EXECUTIVE COMPENSATION
The following table sets forth all compensation received by (i) the
Company's Chief Executive Officer and (ii) each person serving as an executive
officer of the Company whose salary and bonus exceeded $100,000 (collectively,
the "Named Executive Officers"), for services rendered to the Company in all
capacities during the fiscal year ended December 31, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
--------------
ANNUAL COMPENSATION SECURITIES
--------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS(#) COMPENSATION
- --------------------------------------------------- -------------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Vernon L. Fotheringham, Chief Executive Officer $ 90,000 -- -- $ 6,400(1)
Steven D. Comrie, President and Chief Operating
Officer(2) 70,000 -- 756,691 33,200(1)(3)
W. Theodore Pierson, Jr., Executive Vice President 77,000 -- -- 216,400(1)(4)
James D. Miller, Senior Vice President, Sales and
Marketing (2) -- -- 50,000 --
</TABLE>
- ------------------------------
(1) Automobile reimbursement benefits equal to $6,400 in the case of Messrs.
Fotheringham and Pierson and $3,200 in the case of Mr. Comrie.
(2) Reflects compensation for a partial year. See "-- Employment and Consulting
Agreements."
(3) Represents the forgiveness of a loan on January 1, 1996 that has been
accounted for as compensation expense on the 1995 statement of operations
of the Company.
(4) The Company paid Pierson & Burnett, L.L.P., of which Mr. Pierson is a
partner, $210,000 for services rendered to the Company through December 31,
1995.
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OPTION GRANTS. The following table sets forth certain information
regarding stock option grants made to the Named Executive Officers in fiscal
year 1995.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS (2) POTENTIAL REALIZABLE
---------------------------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM (1)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION ------------------------
NAME GRANTED FISCAL YEAR SHARE DATE 5% 10%
- -------------------------------- ------------ --------------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Steven D. Comrie 756,691 71.9% $ 0.5907 6/17/05 $ 179,428 $ 427,102
James D. Miller 50,000 4.8% 1.652 12/29/00 -- 14,031
</TABLE>
- ------------------------------
(1) The potential realizable value is calculated based on the term of the
option at its time of grant (five years). It is calculated by assuming that
the stock price on the date of grant appreciates at the indicated annual
rate, compounded annually for the entire term of the option. The actual
realizable value of the options based on the price to public in the Common
Stock Offering will substantially exceed the potential realizable value
shown in the table. The exercise prices were determined by the Option
Committee, which considered the fair market value of the Company's
securities at the time of grant based upon analysis of recent private
placements of securities. Subsequently, the Company engaged an independent
appraisal firm who conducted a more thorough analysis of the value of the
Company's securities considering such placements as well as comparable
market transactions and other relevant factors specific to the placements
(such as underlying security interest and liquidity). In all cases, the
exercise price was equal to, or in excess of, the estimated fair value of
the Company's Common Stock at the date of grant as determined by the
independent appraisal firm.
(2) See "-- Stock Option Plans -- Equity Incentive Plan -- Grants."
AGGREGATE STOCK OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION VALUES. The following table sets forth the number and value as of
December 31, 1995 of shares underlying unexercised options held by each of the
Named Executive Officers. As of December 31, 1995, no stock options had been
exercised by any Named Executive Officers.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
FISCAL YEAR END FISCAL YEAR END (1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------- ----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Steven D. Comrie 302,676 454,015 $ 184,420 $ 276,631
James D. Miller 10,000 40,000 -- --
</TABLE>
- ------------------------------
(1) Based on the estimated fair market value of the Company's Common Stock as
of December 31, 1995 of $1.20 per share, less the exercise price payable
upon exercise of such options. Such estimated fair market value as of
December 31, 1995 is substantially lower than the price to the public in
the Common Stock Offering.
STOCK OPTION PLANS
EQUITY INCENTIVE PLAN.
The Equity Incentive Plan was adopted by the Company on May 30, 1996 and
approved by the stockholders on June 25, 1996.
The Equity Incentive Plan is designed to advance the Company's interests by
enhancing its ability to attract and retain employees and others in a position
to make significant contributions to the success of the Company through
ownership of shares of Common Stock. The Equity Incentive Plan provides for the
grant of incentive stock options ("ISOs"), non-statutory stock options
("NQSOs"), stock appreciation rights ("SARs"), restricted stock, unrestricted
stock, deferred stock grants, and performance awards, loans to participants in
connection with awards, supplemental grants and combinations of the above. A
total of 2,500,000 shares of common stock are reserved for issuance under the
Equity Incentive
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Plan. The maximum number of shares as to which options or SARs may be granted to
any participant in any one calendar year is 800,000. The shares of Common Stock
issuable under the Equity Incentive Plan are subject to adjustment for stock
dividends and similar events. Awards under the Equity Incentive Plan may also
include provision for payment of dividend equivalents with respect to the shares
subject to the award.
The Equity Incentive Plan is administered by the Option Committee of the
Board of Directors (the "Option Committee"). The Option Committee shall consist
of at least two directors. If the Common Stock is registered under the
Securities Exchange Act of 1934, all members of the Option Committee shall be
"outside directors" as defiined. All employees of the Company and any of its
subsidiaries and other persons or entities (including non-employee directors of
the Company and its subsidiaries) who, in the opinion of the Option Committee,
are in a position to make a significant contribution to the success of the
Company or its subsidiaries are eligible to participate in the Equity Incentive
Plan.
STOCK OPTIONS. The exercise price of an ISO granted under the Equity
Incentive Plan may not be less than 100% (110% in the case of 10% shareholders)
of the fair market value of the Common Stock at the time of grant. The exercise
price of a nonstatutory option granted under the Equity Incentive Plan is
determined by the Option Committee. The term of each option may be set by the
Option Committee but cannot exceed ten years from grant (five years from grant
in the case of an incentive stock option granted to a 10% shareholder), and each
option will be exercisable at such time or times as the Option Committee
specifies. The option price may be paid in cash or check acceptable to the
Company or, if permitted by the Option Committee and subject to certain
additional limitations, by tendering shares of Common Stock, by using a
promissory note, by delivering to the Company an unconditional and irrevocable
undertaking by a broker promptly to deliver sufficient funds to pay the exercise
price, or a combination of the foregoing.
STOCK APPRECIATION RIGHTS. SARs may be granted either alone or in tandem
with stock option grants. Each SAR entitles the participant, in general, to
receive upon exercise the excess of a share's fair market value in cash or
common stock at the date of exercise over the share's fair market value on the
date the SAR was granted. The Option Committee may also grant SARs which provide
that following a change in control of the Company as determined by the Option
Committee, the holder of such right will be entitled to receive an amount
measured by specified values or averages of values prior to the change in
control. If an SAR is granted in tandem with an option, the SAR will be
exercisable only to the extent the option is exercisable. To the extent the
option is exercised, the accompanying SAR will cease to be exercisable, and vice
versa. An SAR granted in tandem with an ISO may be exercised only when the
market price of common stock subject to the option exceeds the exercise price of
such option. SARs not granted in tandem shall be exercisable at such time, and
on such conditions, as the Option Committee may specify.
STOCK AWARDS. The Equity Incentive Plan provides for awards of
nontransferable shares of restricted Common Stock subject to forfeiture as well
as of unrestricted shares of Common Stock. Awards may provide for acquisition of
restricted and unrestricted Common Stock for a purchase price specified by the
Option Committee, but in no event less than par value. Restricted Common Stock
is subject to repurchase by the Company at the original purchase price or to
forfeiture if no cash was paid by the participant if the participant ceases to
be an employee before the restrictions lapse. Other awards under the Equity
Incentive Plan may also be settled with restricted Common Stock. Restricted
securities shall become freely transferable upon the completion of the
Restricted Period including the passage of any applicable period of time and
satisfaction of any conditions to vesting. The Option Committee, in its sole
discretion, may waive all or part of the restrictions and conditions at any
time.
The Equity Incentive Plan also provides for deferred grants entitling the
recipient to receive shares of Common Stock in the future at such times and on
such conditions as the Option Committee may
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<PAGE>
specify, and performance awards entitling the recipient to receive cash or
Common Stock following the attainment of performance goals determined by the
Option Committee. Performance conditions and provisions for deferred stock may
also be attached to other awards under the Equity Incentive Plan.
A loan may be made under the Equity Incentive Plan either in connection with
the purchase of Common Stock under an award or with the payment of any federal,
state and local tax with respect to income recognized as a result of an award.
The Option Committee will determine the terms of any loan, including the
interest rate (which may be zero). No loan may have a term exceeding ten years
in duration. In connection with any award, the Option Committee may also provide
for and grant a cash award to offset federal, state and local income taxes or to
make a participant whole for certain taxes.
Except as otherwise provided by the Option Committee, if a participant dies,
options and SARs held by such participant immediately prior to death, to the
extent then exercisable, may be exercised by the participant's executor,
administrator or transferee during a period of one year following such death (or
for the remainder of their original term, if less). Except as otherwise
determined by the Option Committee, options and SARs not exercisable at a
participant's death terminate. Outstanding awards of restricted Common Stock
must be transferred to the Company upon a participant's death and, similarly,
deferred Common Stock grants, performance awards and supplemental awards to
which a participant was not irrevocably entitled prior to death will be
forfeited, except as otherwise determined by the Option Committee.
In the case of termination of a participant's association with the Company
for reasons other than death, options and SARs remain exercisable, to the extent
they were exercisable immediately prior to termination, for three months (or for
the remainder of their original term, if less), shares of restricted Common
Stock must be resold to the Company, and other awards to which the participant
was not irrevocably entitled prior to termination will be forfeited, unless
otherwise determined by the Option Committee. If any such association is
terminated due to the participant's discharge for cause which, in the opinion of
the Option Committee, casts such discredit on the participant as to justify
immediate termination of any award under the Equity Incentive Plan, such
participant's options and SARs may be terminated immediately.
In the event of a consolidation or merger in which the Company is not the
surviving corporation or which results in the acquisition of substantially all
of the Company's outstanding Common Stock by a single person or entity or by a
group of persons and/or entities acting in concert or in the event of the sale
or transfer of substantially all of the Company's assets, the Option Committee
may determine that (i) each outstanding option and SAR will become immediately
exercisable unless otherwise provided at the time of grant, (ii) each
outstanding share of restricted Common Stock will immediately become free of all
restrictions and conditions, (iii) all conditions on deferred grants,
performance awards and supplemental grants which relate only to the passage of
time and continued employment will be removed and (iv) all loans under the
Equity Incentive Plan will be forgiven. The Committee may also arrange to have
the surviving or acquiring corporation or affiliate assume any award held by a
participant or grant a replacement award. If the optionee is terminated after a
change in control by the Company without cause, or in the case of certain
officers designated from time to time by the Option Committee resigns under
certain circumstances, within two years following the change in control, all
unvested options will vest and all options will be exercisable for the shorter
of four years or their original duration and all other awards will vest. If the
option committee makes no such determination, outstanding awards to the extent
not fully vested will be forfeited.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES. The following discussion, which is
based on the law as in effect on June 1, 1996, summarizes certain federal income
tax consequences of participation in the Equity Incentive Plan. The summary does
not purport to cover federal employment tax or other federal tax consequences
that may be associated with the plans, nor does it cover state, local or
non-U.S. taxes.
In general, an optionee realizes no taxable income upon the grant or
exercise of an ISO. However, the exercise of an ISO may result in an alternative
minimum tax liability to the optionee. With certain
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<PAGE>
exceptions, a disposition of shares purchased under an ISO within two years from
the date of grant or within one year after exercise produces ordinary income to
the optionee (and a corresponding deduction is available to the company) equal
to the value of the shares at the time of exercise less the exercise price. Any
additional gain recognized in the disposition is treated as a capital gain for
which the Company is not entitled to a deduction. If the optionee does not
dispose of the shares until after the expiration of these one- and two-year
holding periods, any gain or loss recognized upon a subsequent sale is treated
as a long-term capital gain or loss for which the Company is not entitled to a
deduction.
In general, in the case of a nonstatutory option the optionee has no taxable
income at the time of grant but realizes income in connection with exercise of
the option in an amount equal to the excess (at the time of exercise) of the
fair market value of the shares acquired upon exercise over the exercise price,
a corresponding deduction is available to the Company, and upon a subsequent
sale or exchange of the shares, appreciation or depreciation after the date of
exercise is treated as capital gain or loss for which the Company is not
entitled to a deduction. In general, an ISO that is exercised more than three
months after termination of employment (other than termination by reason of
death) is treated as a nonstatutory option. ISOs granted after 1986 are also
treated as nonstatutory options to the extent they first become exercisable by
an individual in any calendar year for shares having a fair market value
(determined as of the date of grant) in excess of $100,000.
Under the so-called "golden parachute" provisions of the Internal Revenue
Code, the vesting or accelerated exercisability of awards in connection with a
change in control of the Company may be required to be valued and taken into
account in determining whether participants have received compensatory payments,
contingent on the change in control, in excess of certain limits. If these
limits are exceeded, a substantial portion of amounts payable to the
participant, including income recognized by reason of the grant, vesting or
exercise of awards under the Equity Incentive Plan, may be subject to an
additional 20% federal tax and may be nondeductible to the Company.
GRANTS. Mr. Comrie has been granted NQSOs expiring on various dates through
June 17, 2005 to purchase 756,691 shares of Common Stock at a price of $0.5907
per share. Of the NQSOs, 417,693 are currently exercisable, and 111,990 will
become exercisable on July 17, 1997 and up to an additional 227,008 shares (the
"Additional Shares") will become exercisable on June 17, 2000. The vesting of
NQSOs to purchase 56,752 Additional Shares will be accelerated in each year
based upon the attainment of certain performance goals as determined by the
Board of Directors. Each of Mr. Comrie's options are exercisable for a period of
five years from the date of vesting.
Mr. Grina has been granted NQSOs expiring on various dates through April 26,
2004 to purchase 300,000 shares of Common Stock at a price of $6.25 per share.
The NQSOs are subject to vesting over a three-year period, of which 100,000 are
fully vested and currently exercisable. NQSOs to purchase 200,000 shares will
become exercisable on April 26, 1999; however, the vesting of 100,000 of such
shares will be accelerated on each of the first and second anniversary of the
date of grant based upon attainment of certain performance goals as determined
by the Board of Directors. Each of Mr. Grina's options are exercisable for a
period of five years from the date of vesting. Mr. Grina's options will be fully
vested, notwithstanding the attainment of performance goals, on April 26, 1999.
In addition, all of his options become immediately exercisable, without regard
to the vesting period, upon a Change of Control (as defined in the Equity
Incentive Plan) and upon other corporate changes described in the agreement
evidencing his options.
Mr. Miller has been granted NQSOs expiring December 29, 2000 to purchase
50,000 shares of Common Stock at a price of $1.652 per share. The NQSOs vest at
a rate of 20% on each anniversary of the date of grant.
THE DIRECTORS PLAN.
On May 30, 1996, the Company adopted the 1996 Non-Employee Directors
Automatic Stock Option Plan (the "Directors Plan"), which provides for the
automatic grant of stock options to non-employee directors to purchase up to an
aggregate of 200,000 shares. Under the Directors Plan, options
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<PAGE>
to acquire 6,000 shares of Common Stock are automatically granted to each
non-employee director who is a director on January 1 of each year. In addition,
each non-employee director serving on the Board of Directors effective on the
date of the Common Stock Offering will receive, and in the future each newly
elected non-employee director on the date of his or her first appointment or
election to the Board of Directors will receive, an automatic grant of options
to acquire 7,000 shares of Common Stock.
Although grants of the options under the Directors Plan are automatic, and
the Directors Plan is intended to be largely self-administering, the Directors
Plan will be administered by either the Board of Directors or a committee
designated by the Board of Directors, which will, to the extent necessary,
administer and interpret the Directors Plan (the "Plan Administrator"). Stock
options awarded under the Directors Plan are priced automatically at an exercise
price equal to the market price of the Common Stock on the date of grant. If at
any time no public market for the Common Stock exists, the Plan Administrator is
empowered to determine the fair market value. Under the Directors Plan, initial
option grants vest over a three-year period and are exercisable for a period of
10 years from the date of grant. On the date of this Prospectus, options to
purchase an aggregate of 28,000 shares at an exercise price equal to the initial
offering price of the Common Stock will be granted to non-employee directors
under the Directors Plan.
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company has entered into a three-year employment agreement with Mr.
Fotheringham providing for full-time employment at an annualized base salary of
$250,000 for 1996, $275,000 for 1997 and $300,000 for 1998. In addition, Mr.
Fotheringham is entitled to receive an annual bonus of up to $100,000 depending
on the achievement of specified annual link installation goals. The goal for
each year will be established based on the operating budget approved by the
Board of Directors. The agreement precludes Mr. Fotheringham from competing with
the Company for one year after the cessation of his employment, regardless of
the reason for such cessation.
The Company has entered into a three-year employment agreement with Mr.
Comrie providing for full time employment at an annualized base salary of
$160,000 through December 31, 1995, $200,000 from January 1, 1996 to July 16,
1997 and $240,000 from July 17, 1997 to July 16, 1998. Mr. Comrie is entitled to
receive an annual bonus of up to $100,000 depending on the achievement of
specified annual link installation goals. The goal for each year will be
established based on the operating budget approved by the Board of Directors. As
part of the employment agreement, the Company provided Mr. Comrie an
interest-free loan in the amount of $30,000 and forgave payment of such loan on
January 1, 1996. The forgiveness of such loan has been accounted for as
compensation expense on the 1995 statement of operations of the Company. The
agreement also precludes Mr. Comrie from competing with the Company for one year
after the cessation of employment, regardless of the reason for such cessation.
The agreement may be terminated at any time by either party and provides that,
if the Company terminates Mr. Comrie without cause or Mr. Comrie's employment is
terminated due to his disability or death, Mr. Comrie will be entitled to
continue to receive the full amount of his base salary and any other benefits to
which he would have otherwise been entitled for a period of one year from the
date of such termination. See "-- Stock Option Plans" regarding stock options
granted to Mr. Comrie pursuant to his employment agreement.
The Company has entered into an employment agreement with Mr. Grina,
providing for full time employment on an at will basis at an annualized base
salary of $190,000 through April 30, 1997. In addition, Mr. Grina is entitled to
receive an annual bonus of up to $100,000 depending upon the achievement of
specified annual link installation goals. The goal for each year will be
established based on the operating budget approved by the Board of Directors.
The agreement precludes Mr. Grina from competing with the Company for one year
after the cessation of his employment, regardless of the reason for such
cessation. The agreement may be terminated at any time by either party and
provides that, if the Company terminates Mr. Grina without cause or Mr. Grina's
employment is terminated due to his disability or death, Mr. Grina will be
entitled to continue to receive the full amount of his base
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salary and any other benefits to which he would have otherwise been entitled for
a period of six months from the date of such termination. See "-- Stock Option
Plans" regarding stock options granted to Mr. Grina pursuant to his employment
agreement.
The Company has also entered into an employment agreement with Mr. Miller,
providing for full time employment at an annual base salary equal to $150,000.
His employment agreement provides for the payment by the Company of an annual
bonus in designated amounts based upon the achievement of specified performance
goals. The agreement has a term of three years and precludes him from competing
with the Company for one year after the cessation of employment, regardless of
the reason for such cessation. See "-- Stock Option Plans" regarding stock
options granted to Mr. Miller pursuant to his employment agreement. The
employment agreement may be terminated at any time by the Company or Mr. Miller
and provides that, if the Company terminates Mr. Miller's employment without
cause or his employment is terminated due to his disability or death, Mr. Miller
may continue to receive the full amount of his base salary and any other
benefits to which he would have otherwise been entitled for a period of six
months from the date of such termination.
The Company has entered into a three-year consulting agreement with Mr.
Pierson on May 8, 1995, under which Mr. Pierson agreed to provide strategic,
business and other advisory services to the Company for base fees of $80,000 for
1995, $140,000 for 1996 and $80,000 for 1997, subject to extension at the option
of the Company. The agreement also precludes Mr. Pierson from competing with the
Company for one year after termination of the agreement, regardless of the
reason for such termination. The agreement may be terminated at any time by
either party and provides that, if the Company terminates Mr. Pierson without
cause or Mr. Pierson terminates his consulting agreement for "good reason" (as
specified in the agreement), Mr. Pierson will be entitled to continue to receive
the full amount of his base fees and any other benefits to which he would have
otherwise been entitled for a period of one year from the date of such
termination. See "Certain Transactions -- Pierson & Burnett Transactions."
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of July 26, 1996,
regarding the beneficial ownership of the Company's Common Stock by (i) the
directors and executive officers of the Company, (ii) each person known by the
Company to own beneficially more than five percent of the outstanding shares of
the Company's Common Stock and (iii) all executive officers and directors as a
group assuming, in each case, that the Merger has been completed and the
Landover Partnerships have been dissolved.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP AFTER
PRIOR TO OFFERINGS OFFERINGS+
------------------------- ----------------------------------
NAME NUMBER PERCENT NUMBER PERCENT
- --------------------------------------------------------- ------------- ---------- -------------------- ------------
<S> <C> <C> <C> <C>
Vernon L. Fotheringham (1)............................... 3,545,063 11.8% 3,545,063 9.8%
W. Theodore Pierson, Jr. (2)............................. 2,455,407 8.2 2,455,407 6.8
High Sky Inc. (3)........................................ 1,748,604 5.8 1,748,604 4.8
Landover Holdings Corporation (4)........................ 8,068,582 26.8 8,068,582 22.3
Advent International Corporation (5)..................... 3,186,238 10.5 3,186,238 8.8
Ameritech Development Corp. (6).......................... 1,677,745 5.4 1,677,745 4.5
Steven D. Comrie (7)..................................... 417,693 1.4 417,693 1.1
James C. Cook (8)........................................ 133,930 * 140,930(15) *
J.C. Demetree, Jr. (9)................................... 1,055,288 3.5 1,055,288 2.9
Mark C. Demetree (10).................................... 1,055,288 3.5 1,062,288(15) 2.9
Andrew I. Fillat (11).................................... 6,061 * 13,061(15) *
Matthew C. Gove (12)..................................... 441,753 1.5 441,753 1.2
T. Allan McArtor......................................... 0 * 7,000(15) *
Laurence S. Zimmerman (4)................................ 8,068,582 26.8 8,068,582 22.3
Thomas A. Grina (13)..................................... 100,000 * 100,000 *
James D. Miller (14)..................................... 10,000 * 10,000 *
All executive officers and directors as a group
(1)(2)(4)(7)(8)(9)(10)(11)(12)(13)(14)(15).............. 17,155,135 56.0% 7,751,442(8)(16) 21.1%
</TABLE>
- ------------------------
Unless otherwise indicated, the business address of each director and executive
officer named above is c/o Advanced Radio Telecom Corp., 500 108th Avenue N.E.,
Suite 2600, Bellevue, Washington 98004.
* Less than 1.0%.
+ Amounts (i) assume no exercise of the Underwriters' over-allotment option
and (ii) exclude, based on preliminary indications of interest, up to
100,000, 5,000 and 1,000 shares of Common Stock expected to be purchased by
Mark C. Demetree, James C. Cook and Matthew C. Gove, respectively, pursuant
to the Company's directed shares program. See "Underwriting."
(1) Includes 104,273 shares of Common Stock subject to an option owned by SERP.
See "Certain Transactions -- SERP Agreement."
(2) Includes 44,694 shares of Common Stock subject to an option owned by SERP.
See "Certain Transactions -- SERP Agreement." Mr. Pierson's address is c/o
Pierson & Burnett L.L.P., 1667 K. Street, N.W., Washington, D.C. 20006.
(3) High Sky Inc. is the general partner of High Sky and High Sky II and may be
deemed the beneficial owner of all shares held by such partnerships.
Includes 1,398,883 and 349,721 shares of Common Stock owned by High Sky and
High Sky II, respectively. Also includes 119,171 and 29,796 shares of Common
Stock held by High Sky and High Sky II, respectively, subject to an option
owned by SERP. See "Certain Transactions -- SERP Agreement." High Sky Inc.'s
address is c/o Frank S. Phillips Company, 6106 MacArthur Blvd., Bethesda,
Maryland 20816.
(4) Includes 7,754,987 shares of Common Stock issuable upon the Merger,
including 400,634 shares of Common Stock subject to an option owned by
holders of Telecom Series D preferred stock. Also includes 37,500 shares of
Common Stock issuable upon exercise of Indemnity Warrants. Does not include
100,000 shares of Common Stock issuable upon the Merger owned by the wife
and 100,000 shares of Common Stock issuable upon the Merger owned by a
family trust of Laurence S. Zimmerman, of which shares LHC and Mr. Zimmerman
disclaim beneficial ownership. Does not include 294,489 shares, 1,375,699
shares, 5,276,440 shares and 95,719 shares of Common Stock issuable upon the
Merger held by E1, E2, E2-2 and E2-3, respectively, each a limited
partnership whose general partner is controlled by LHC. Upon the
effectiveness of the Merger, these partnerships will dissolve. Including the
shares owned by such partnerships, LHC beneficially owns 15,110,929 shares
of Common Stock constituting 50.2% of the Company's outstanding securities
prior to the Offerings. LHC is controlled by Laurence S. Zimmerman. LHC's
address is 667 Madison Avenue, New York, New York 10021. See "-- Voting
Trust Agreement."
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(5) Includes 2,882,659 shares, 3,029 shares and 141,050 shares of Common Stock
issuable upon the Merger and 151,908 shares, 160 shares and 7,432 shares of
Common Stock issuable upon exercise of Bridge Warrants, respectively owned
by Global Private Equity II, L.P., Advent International II, L.P. and Advent
Partners, L.P. (collectively, the "Advent Partnerships"), each a limited
partnership whose general partner is controlled by Advent International
Corporation ("Advent"). Mr. Fillat is an officer of Advent. The address of
Advent and each of the Advent Partnerships is 101 Federal Street, Boston,
Massachusetts 02110.
(6) Includes 635,609 shares of Common Stock issuable upon the Merger and
877,136 shares and 165,000 shares of Common Stock issuable upon exercise of
the Ameritech Warrant and Bridge Warrants, respectively. The address of
Ameritech is 30 South Wacker Drive, Chicago, Illinois 60601. See "Certain
Transactions -- Ameritech Financing; Ameritech Strategic Distribution
Agreement."
(7) Includes 417,693 shares of Common Stock currently issuable upon exercise of
options. Does not include 338,998 shares of Common Stock issuable upon
exercise of the non-vested portion of options. See "Management -- Stock
Option Plans."
(8) Includes 133,930 shares beneficially owned by James C. Cook including
22,000 shares of Common Stock issuable upon exercise of Bridge Warrants and
73,642 shares and 38,288 shares of Common Stock issuable upon the Merger as
a limited partner in E-2 and E2-3, respectively. Mr. Cook will become a
director of the Company upon the date of this Prospectus.
(9) Does not include 154,000 shares of Common Stock issuable upon exercise of
Bridge Warrants, 162,500 shares of Common Stock issuable upon exercise of
Indemnity Warrants or 4,221,152 shares of Common Stock issuable upon the
Merger held in each case by members of Mr. Demetree's family (or a trust for
their benefit), of which he disclaims beneficial ownership. J.C. Demetree,
Jr.'s address is c/o Demetree Brothers, 3740 Beach Boulevard, Suite 300,
Jacksonville, Florida 32207.
(10) Does not include 154,000 shares of Common Stock issuable upon exercise of
Bridge Warrants, 162,500 shares of Common Stock issuable upon exercise of
Indemnity Warrants or 4,221,152 shares of Common Stock issuable upon the
Merger held in each case by members of Mr. Demetree's family (or a trust for
their benefit), of which he disclaims beneficial ownership. Mark C.
Demetree's address is 505 Lancaster Street, #8AB, Jacksonville, FL 32204.
(11) Mr. Fillat disclaims beneficial ownership of the shares of Common Stock
held by the Advent Partnerships, except for 6,061 shares.
(12) Includes 441,753 shares of Common Stock issuable upon the Merger owned by
Hedgerow Corporation of Maine ("Hedgerow"), which is controlled by Mr. Gove.
Does not include shares owned beneficially by LHC, of which Mr. Gove
disclaims beneficial ownership. Hedgerow from time to time acts as a
consultant to LHC. Mr. Gove's address is 215 West 84th Street, New York, New
York 10024.
(13) Includes 100,000 shares of Common Stock currently issuable upon exercise of
an option.
(14) Includes 10,000 shares of Common Stock currently issuable upon exercise of
an option.
(15) Includes 7,000 shares of Common Stock issuable upon exercise of options
anticipated to be granted under the Directors Plan upon the consummation of
the Offerings.
(16) Reflects the resignations of Messrs. J.C. Demetree, Jr., Gove and Zimmerman
and the elections as directors of Messrs. Cook and McArtor upon the date of
this Prospectus. Does not include 8,068,582 shares of Common Stock
beneficially owned by LHC and held in trust by trustees, all of whom are
directors of the Company, pursuant to a Voting Trust Agreement, of which
such trustees disclaim beneficial ownership. See "-- Voting Trust
Agreement." Includes 7,000 shares of Common Stock beneficially owned by each
of Messrs. Mark C. Demetree, Fillat, Cook and McArtor issuable upon exercise
of options to be granted under the Directors Plan upon the consummation of
the Offerings.
Upon completion of the CommcoCCC Acquisition, Columbia Capital Corporation,
as general partner of two of the stockholders of CommcoCCC, and Commco, L.L.C.,
the remaining stockholder of CommcoCCC, will beneficially own 8,842,154 and
7,707,846 shares, respectively, of Common Stock, including 26,715 and 23,285
shares, respectively, issuable upon exercise of the CommcoCCC Warrants,
constituting 16.8% and 14.7%, respectively, of the Company's Common Stock after
the Offerings (assuming the Underwriters' over-allotment option is not exercised
and excluding any shares of Common Stock purchased in the Common Stock
Offering). Assuming the consummation of the Offerings and the CommcoCCC
Acquisition as of the date of this Prospectus, the Company would have 52,586,498
shares of Common Stock outstanding.
VOTING TRUST AGREEMENT
Pursuant to a proposed Voting Trust and Irrevocable Proxy Agreement,
effective on the date of this Prospectus, LHC and the wife and a trust for the
benefit of the family of Laurence S. Zimmerman will deposit all of their shares
of ART Common Stock in trust with Messrs. Mark C. Demetree, Andrew I. Fillat and
Vernon L. Fotheringham with irrevocable instructions to vote such shares on all
matters submitted to a vote of the stockholders of the Company in proportion to
the vote of other stockholders of the Company. The voting trust will expire on
the tenth anniversary of the date of this Prospectus, but is subject to early
termination in the event of (i) a business combination in which the Notes are
repaid in full in cash and ART stockholders own less than 50%, and ART directors
constitute less than 50% if the board of directors, of the combined entity and
LHC owns less than 5% of the voting power of such entity, (ii) the death of
Laurence S. Zimmerman or (iii) the sale by LHC of such shares to unaffiliated
parties. The trustees of the trust will be indemnified by the Company.
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<PAGE>
CERTAIN TRANSACTIONS
FORMATION OF ART
The Company was organized in August 1993 by Vernon L. Fotheringham and W.
Theodore Pierson, Jr., for the purpose of obtaining 38 GHz licenses from the
FCC. The initial stockholders, including Messrs. Fotheringham and Pierson,
purchased for $.01 per share ART Common Stock in a private placement which, net
of certain subsequent transfers, currently constitute an aggregate of 6,000,470
shares of Common Stock.
HIGH SKY PRIVATE PLACEMENTS
In November 1993 and March 1994, ART raised $60,000 and $30,000 through the
sale of its common stock (which, net of sales and acquisitions of additional
shares, now constitute an aggregate of 1,398,883 shares and 349,721 shares of
Common Stock, respectively) to High Sky Limited Partnership and High Sky II
Limited Partnership ("High Sky II" and, collectively, the "High Sky
Partnerships"). In March 1994, ART borrowed $70,000 from High Sky II. The loan
was evidenced by a promissory note executed by ART and payable to High Sky II
(the "High Sky Note"). Pursuant to an Agreement dated March 1, 1995, High Sky II
sold the High Sky Note to Vernon L. Fotheringham and W. Theodore Pierson, Jr. in
exchange for two new promissory notes, bearing interest at 7.5% per annum,
executed by Messrs. Fotheringham and Pierson in the principal amounts of $52,675
and $22,575, respectively (the "Fotheringham/Pierson Notes"), with payment
secured by pledges of shares of Common Stock owned by them. The terms of the
notes were as favorable as could be negotiated with unrelated third parties.
After the assignment and exchange, Messrs. Fotheringham and Pierson transferred
the High Sky Note to the Company as a capital contribution. The
Fotheringham/Pierson Notes, which are due in August 1997 and which are now
unsecured, are currently held by LHC (as defined below).
ART WEST JOINT VENTURE
The Company is party to the ART West Management Agreement, pursuant to which
it manages the business and assets of ART West, a joint venture between ART and
Extended. Mark T. Marinkovich, Vice President and General Manager, Western
Region of the Company is also the President and a stockholder of Extended. See
"Business -- Agreements Relating to Licenses and Authorizations -- ART West
Joint Venture" and "Principal Stockholders." In connection with the ART West
Joint Venture, ART issued to Extended 368,127 shares of Common Stock. Of these
368,127 shares, 15,678 shares are subject to an option owned by Southeast
Research Partners. See "-- SERP Agreement." In June 1996, the Company agreed to
acquire Extended's interest in ART West for $6,000,000 in cash, subject to FCC
approval.
ORGANIZATION OF TELECOM
ART and Landover Holdings Corporation ("LHC") organized Advanced Radio
Telecom Corp. ("Telecom") on March 28, 1995, and purchased for $.001 per share
340,000 shares of Class A common stock and 640,000 shares of Class B common
stock of Telecom, respectively, which, after giving effect to anti-dilution
adjustments resulting from issuances of preferred stock as described in "-- LHC
Purchase Agreement," certain transfers and the transactions described in "--
February 1996 Reorganization" and "-- Merger," currently are equivalent to
10,013,055 shares and 7,512,076, shares respectively, after giving effect to the
November 1995 redemption of shares of Common Stock. In addition, Hedgerow
Corporation of Maine ("Hedgerow") and Toro Financial Corp. ("Toro") purchased
for $.001 per share 15,000 shares and 5,000 shares, respectively, of Telecom
Class A common stock which, after such anti-dilution adjustments and the Merger,
currently are equivalent to 441,753 shares and 147,251 shares of Common Stock,
respectively. LHC is controlled by Laurence S. Zimmerman. Hedgerow is controlled
by Matthew C. Gove, a director of the Company. Hedgerow and Toro provide
management and strategic consulting services to LHC, including services relating
to analysis and negotiation of acquisitions.
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<PAGE>
LHC PURCHASE AGREEMENT
GENERAL. Pursuant to a Purchase Agreement, dated April 21, 1995 (the "LHC
Purchase Agreement") among ART, LHC and Telecom, LHC, on behalf of itself and
its designees, agreed to purchase additional securities of Telecom (the "LHC
Stock") for an aggregate purchase price of $7,000,000 (the "Purchase Price"),
which additional securities would dilute only LHC's interest in the Company. In
addition, ART and Telecom entered into the ART Services Agreement. Moreover, ART
and its stockholders agreed with Telecom and its stockholders to enter into a
revised stockholders agreement (the "May 1995 Stockholders Agreement"), a
registration rights agreement and a merger agreement. Messrs. Fotheringham and
Pierson deposited 2,017,704 and 1,816,559 shares of Common Stock, respectively
(the "Escrow Shares"), under such agreement to be released upon achievement by
the Company of certain performance goals (the "Escrow Arrangement"). The Escrow
Shares were released to Messrs. Fotheringham and Pierson in part on November 13,
1995 as a result of the EMI Asset Acquisition, and the balance was released on
February 2, 1996 in connection with the February 1996 Reorganization (as
defined).
Upon the first closing under the LHC Purchase Agreement, on May 8, 1995,
Telecom received $700,000 from E2-2 Holdings, L.P. ("E2-2") and E2 Holdings,
L.P. ("E2"). In addition, E2-2 committed to subscribe for up to 50.0% of the
Purchase Price, matching other investors under the LHC Purchase Agreement with
protection from dilution to the extent such matching funds were not required.
The general partner of E2-2 and E2 is controlled by LHC. E2-2's limited partners
include J.C. Demetree, Jr. and Mark C. Demetree, directors of the Company, and
their affiliates. In addition, E2-2 granted to LHC an option to purchase from
E2-2 35,873 shares of Series A preferred stock (which convert into 466,349
shares of Common Stock prior to the Offerings). This option was exercised in
November 1995. See "Principal Stockholders."
The additional payments on the Purchase Price were made by the Landover
Partnerships (as defined below) as follows: $700,000 on August 22, 1995 and
$600,000 on October 19, 1995. On November 13, 1995, the Advent Partnerships (as
described below) paid the $5.0 million balance of the Purchase Price and the
Company paid LHC an aggregate of $391,750 for expenses. Also, on November 13,
1995, Telecom, ART and LHC agreed that the LHC Purchase Agreement was
substantially completed.
ART SERVICES AGREEMENT. Pursuant to the LHC Purchase Agreement, ART and
Telecom entered into a Services Agreement, dated May 8, 1995 (the "ART Services
Agreement") pursuant to which, for a 20-year term, Telecom provides management
services for, and receives 75.0% of the cash flow from operations after
deducting certain related direct expenses under wireless licenses held by ART.
LANDOVER PARTNERSHIPS. Between May 8, 1995 and November 13, 1995, the LHC
Stock was diluted by purchases of series of Telecom preferred stock by E2-2, E2,
E1 Holdings L.P. ("E1") and E2-3 Holdings, L.P. ("E2-3" and collectively with
E1, E2 and E2-2, the "Landover Partnerships"), each a limited partnership whose
general partner is controlled by LHC, in separate private placements. E2-2,
which committed to purchase up to $3.5 million of Telecom preferred stock
matching other investors under the LHC Purchase Agreement, purchased 405,880
shares of Telecom Series A preferred stock (which will convert into 5,276,440
shares of Common Stock prior to the Offerings) for an aggregate of $946,600, and
LHC purchased 35,873 shares of such Series A preferred stock from E2-2 for $1.1
million pursuant to an option. E2 purchased an aggregate of 105,823 shares of
Telecom Series B preferred stock (which converts into 1,375,699 shares of Common
Stock prior to the Offerings) for an aggregate of $842,400. E1 purchased 13,797
shares of Telecom Series A preferred stock (which converts into 179,361 shares
of Common Stock prior to the Offerings) for an aggregate of $60,000 and 8,856
shares of Telecom Series B preferred stock (which converts into 115,128 shares
of Common Stock prior to the Offerings) for an aggregate of $38,300. E2-3
purchased an aggregate of 7,363 shares of Telecom Series C preferred stock
(which converts into 95,719 shares of Common Stock prior to the Offerings) for
an aggregate of $112,700. All of the Landover Partnerships will liquidate upon
effectiveness of the Merger. See "Principal Stockholders."
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ADVENT PRIVATE PLACEMENT. On November 13, 1995, ART sold, for an aggregate
of $5.0 million, $4.95 million principal amount of 10% notes due May 13, 1997
(the "Advent Notes") and $50,000 stated amount of ART Series A Preferred Stock
(collectively, with the Advent Notes, the "Advent/ART Securities") to Global
Private Equity II, L.P., Advent International Investors II, L.P. and Advent
Limited Partnership (collectively the "Advent Partnerships"), each a limited
partnership whose general partner is controlled by Advent International Corp.
("Advent") pursuant to a Securities Purchase Agreement, dated November 13, 1995,
among the Advent Partnerships, ART, Telecom, Vernon L. Fotheringham and W.
Theodore Pierson, Jr. (the "Advent Agreement"). The Advent Agreement provided
among other things that the Advent/ART Securities were convertible into, and in
the February 1996 Reorganization described below, were converted into, 232,826
shares of Telecom Series E preferred stock (which convert into 3,026,738 shares
of Common Stock prior to the Offerings). The Telecom Series E preferred stock
provides, among other things, that the holders thereof have a right to designate
a director of Telecom (and, after the Merger, the Company), which director's
term was extended to an initial term of three years pursuant to the Stockholders
Agreement, as described below.
LHC AGREEMENTS
Pursuant to the LHC Purchase Agreement, LHC and Telecom entered into a
strategic and financial consulting agreement, dated May 8, 1995, under which LHC
agreed to provide financial and strategic planning and other advisory and
management services to the Company for a fee of $10,000 per month. The strategic
and financial consulting agreement was terminated on November 13, 1995, and
Telecom entered into a management consulting agreement with LHC, dated November
13, 1995, for an initial term of one year under which the Company will pay LHC
$420,000 per year and may pay a fee in the event LHC provides other services,
such as merger and acquisition advisory services to the Company. Upon the date
of this Prospectus, this agreement will be terminated and LHC will receive
amounts otherwise due under this agreement through November 13, 1996.
SERP AGREEMENT
Pursuant to a letter agreement, dated July 12, 1995, among Southeast
Research Partners ("SERP") ART, Vernon L. Fotheringham, W. Theodore Pierson,
Jr., High Sky Limited Partnership, High Sky II Limited Partnership and Extended
(the "SERP Agreement"), SERP agreed to procure additional capitalization or
financial assistance on behalf of ART. Under the SERP Agreement, SERP received
options from the other parties to such agreement to purchase, for an aggregate
consideration of $210,000, 313,612 shares of Common Stock after giving effect to
the Merger and $245,000 in cash as a fee for introducing LHC to ART.
SERIES D PREFERRED STOCK ISSUANCE
On November 9, 1995, Telecom sold 61,640 shares of Telecom Series D
preferred stock (which convert into 801,320 shares of Common Stock prior to the
Offerings) for $2.0 million in a private placement. Telecom simultaneously
redeemed 807,924 shares of Telecom common stock from LHC for $2.0 million. In
connection with the February 1996 Reorganization described below, LHC granted to
the holders of such Series D preferred stock a contingent option to purchase
400,634 shares of Telecom common stock owned by LHC at a nominal price. This
option will expire unexercised upon consummation of the Offerings.
FEBRUARY 1996 REORGANIZATION
On February 2, 1996, Telecom, ART and their respective stockholders agreed
(the "February 1996 Reorganization") to an amendment and restatement of the May
1995 Stockholders Agreement (as amended, the "Stockholders Agreement") providing
for (i) termination effective on consummation of the Offerings, (ii)
reorganization of the capital structure of Telecom, including providing for the
conversion of Telecom Class A and Class B common stock into Telecom common
stock, the revision of the terms and conversion into Telecom common stock (upon
consummation of the Offerings) of the
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Telecom Series A, B, C, D, E and F preferred stock and a 13 for 1 stock split,
(iii) the exchange of the Advent/ART Securities for Telecom Series E preferred
stock, (iv) revision of provisions for election of directors, (v) amendment and
restatement of the Company's registration rights agreement, including waiver of
registration rights relating to this offering, (vi) release of the remaining
Escrow Shares to the original owners thereof, (vii) the change of name of
Telecom to Advanced Radio Telecom Corp. and (viii) approval of a revised merger
agreement (the "Old Merger Agreement") providing for the merger of ART into
Telecom (the "Old Merger").
AMERITECH FINANCING; AMERITECH STRATEGIC DISTRIBUTION AGREEMENT
On February 2, 1996, Ameritech Development Corp. ("Ameritech") purchased for
an aggregate of $2.5 million 48,893 shares of Telecom Series F preferred stock,
par value $0.001 per share, (the "Ameritech Financing") convertible into 635,609
shares of Common Stock prior to the Offerings. In addition, Telecom entered into
a letter of intent with Ameritech Corp., the parent of Ameritech, to enter into
the Ameritech Strategic Distribution Agreement and in connection therewith
granted to Ameritech a ten-year warrant to purchase 877,136 shares of Common
Stock of the Company exercisable at a price of $.01 per share (the "Ameritech
Warrant"). On April 29, 1996, Telecom entered into the Ameritech Strategic
Distribution Agreement. See "Business -- Strategic Alliances -- Ameritech
Strategic Distribution Agreement."
BRIDGE FINANCING
On March 8, 1996, Telecom entered into a financing (the "Bridge Financing")
pursuant to which it issued $5.0 million of 10% unsecured notes due in 1998 (the
"Bridge Notes") and five-year warrants to purchase up to an aggregate of
1,100,000 shares of Telecom common stock at a price of $6.25 per share (the
"Bridge Warrants") to private investors including (i) affiliates of J.C.
Demetree, Jr. and Mark C. Demetree, directors of the Company, (ii) the Advent
Partnerships and (iii) Ameritech, who invested $700,000, $725,000 and $750,000,
respectively, in the Bridge Notes and Bridge Warrants. See "Principal
Stockholders."
EQUIPMENT FINANCING
On April 1, 1996 CRA, Inc. ("CRA") provided the Company with $2,445,000 in
equipment financing (the "Equipment Financing") for the purchase from P-Com of
38 GHz radio equipment secured by the equipment, the Company's $1.0 million
letter of credit and a $500,000 letter of credit provided by J.C. Demetree, Jr.
and Mark C. Demetree, directors of the Company, and LHC, a principal stockholder
of the Company (the "Indemnitors"). To evidence its obligations under the
Equipment Financing the Company executed in favor of CRA its $2,445,000
Promissory Note (the "Equipment Note") which note is payable in 24 monthly
installments of $92,694 with a final payment of $642,305 due April 1, 1998. The
Indemnitors also agreed to provide the Company with funds and support for up to
$2.0 million of its obligations in the event of default on the Equipment Note or
draw against the Company's letter of credit. Pursuant to an arrangement approved
by the Company's disinterested directors on February 16, 1996, the Company paid
to the Indemnitors, or their designees an aggregate of $225,000 in cash and
five-year warrants to purchase an aggregate of 325,000 shares of Common Stock
(the "Indemnity Warrants") on terms substantially similar to the Bridge Warrants
as compensation for such indemnity. LHC has assigned Indemnity Warrants to
purchase 125,000 shares of Common Stock to a consultant to LHC.
PIERSON & BURNETT TRANSACTIONS
W. Theodore Pierson, Jr., Executive Vice President, General Counsel and
Secretary of the Company is a principal in the law firm of Pierson & Burnett,
L.L.P., which regularly provides legal services to the Company. During the year
ended December 31, 1995, the Company paid Pierson & Burnett, L.L.P. $210,000 for
such services. The Company believes that the terms of its relationship with
Pierson & Burnett, L.L.P. are at least as favorable to the Company as could be
obtained from an unaffiliated party. See "Management -- Executive Compensation"
and "Principal Stockholders" for a description of
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Mr. Pierson's consulting agreement with the Company and for information
regarding his share ownership. The Company subleases office space for its
regional office in Washington, D.C. from Pierson & Burnett, L.L.P. The Company
believes that the terms of its sublease are at least as favorable to the Company
as could be obtained from an unaffiliated party. See "Business -- Properties."
AMERICAN WIRELESS DEVELOPMENT AGREEMENT
The Company is party to a letter of intent with American Wireless pursuant
to which the Company will fund, subject to definitive documentation, $700,000 to
$1.0 million for research and development in exchange for a first right to
purchase American Wireless' production capacity of the new radios and will
receive a per-unit fee on radios sold by American Wireless to third parties.
Vernon L. Fotheringham, the Chairman of the Company, is a director and a 6.0%
stockholder of American Wireless. Mr. Fotheringham has recused himself in all
negotiations regarding agreements between the Company and American Wireless.
QUESTTV INVESTMENT
The Company has a non-binding arrangement with Quest Computer Television
Company, L.L.C. ("QuestTV") pursuant to which the Company would purchase,
subject to, among other things, definitive documentation and consummation of the
Offerings, equity interests of QuestTV for $1.5 million. QuestTV is seeking to
develop a nationwide network of franchises offering retail access to
sophisticated video and data transmission and storage technology. T. Allan
McArtor, who will become a director of the Company upon the date of this
Prospectus, is the president and chief executive officer of QuestTV.
COMMCOCCC ACQUISITION
On July 3, 1996, the Company entered into the CommcoCCC Agreement with
CommcoCCC which provides for the acquisition, subject to FCC approval, of 129 38
GHz wireless broadband authorizations in exchange for 16,500,000 shares of
Common Stock, or 30.5% of the Company on a fully diluted basis after giving
effect to the Offerings. The stockholders of CommcoCCC simultaneously loaned
$3.0 million to the Company, bearing interest at the prime rate and payable on
September 30, 1996, and received three-year warrants to purchase up to an
aggregate of 50,000 shares of Common Stock at a price of $9.00 per share. The
CommcoCCC Financing is secured by a security interest in all of the assets of
the Company, including a pledge of the Company's stock in Telecom. After closing
of the CommcoCCC Acquisition, the Company has agreed to nominate one individual
designated by CommcoCCC's stockholders and acceptable to the Company as a
director of the Company.
MERGER
On June 26, 1996, Telecom, ART and a wholly-owned subsidiary of ART ("Merger
Sub") entered into a revised merger agreement, superseding the Old Merger
Agreement (the "Merger Agreement"), which provides for the Merger of Merger Sub
into Telecom. Upon completion of the Merger, the stockholders of Telecom will
receive 20,073,443 shares of Common Stock, and Telecom will become a
wholly-owned subsidiary of ART and change its name to "ART Licensing Corp." The
consummation of the Merger is contingent on receipt of FCC approval therefor,
approval of the holders of Telecom capital stock and all ART stockholders and
receipt of a tax opinion. The FCC has indicated that it will approve the Merger,
and the Company expects to complete it shortly prior to the effectiveness of the
Offerings. The Merger Agreement further provides that if the Merger is not
effective for any reason by May 13, 1997, the shares of Telecom common stock
owned by ART will be surrendered to Telecom for nominal consideration, and the
ART Services Agreement will be amended to provide that (i) the term thereof will
be extended to 40 years, (ii) ART will receive, in the event of any dividends
paid by Telecom to its stockholders, an amount equal to the percentage share
that the ART stockholders would have owned of the combined corporation after
giving effect to the Merger of such aggregate dividends, (iii) ART would have a
right of co-sale, subject to FCC approval, in accordance with such percentage
share of the aggregate consideration payable to Telecom and ART in such
transaction in the event of any merger or sale of substantial assets by Telecom
and (iv) in the event ART agrees to merge into another entity or to sell
substantially all its assets to another entity, Telecom shall, upon the request
of the Company, use its best efforts, subject to FCC approval, to merge into
such entity or sell substantially all its assets to such entity for aggregate
consideration equal to the percentage share of the aggregate consideration to be
paid for ART and Telecom in such transaction.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company currently consists of
100,000,000 shares of Common Stock, $0.001 par value, and 10,000,000 shares of
Serial Preferred Stock, $0.001 par value (the "Preferred Stock").
COMMON STOCK
As of July 26, 1996, there were 10,013,055 shares of Common Stock
outstanding held of record by 11 stockholders (without giving effect to the
Merger or any exercise of outstanding warrants or options). The holders of
Common Stock are entitled to one vote per share on all matters to be voted on by
the stockholders. Subject to preferences that may be applicable to the
outstanding share of Preferred Stock, the holders of Common Stock are entitled
to receive ratably such dividends as may be declared from time to time by the
Board of Directors out of funds legally available therefor. In the event of the
liquidation, dissolution or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to prior liquidation rights of Preferred Stock then
outstanding. The Common Stock has no preemptive conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the Common Stock. All outstanding shares of Common Stock are fully
paid and non-assessable, and the shares of Common Stock to be outstanding upon
consummation of the Common Stock Offering will be fully paid and non-assessable.
PREFERRED STOCK
As of July 26, 1996, there was one share of ART Series A Preferred Stock
outstanding held of record by Telecom. Upon the completion of the Merger, such
Preferred Stock will automatically be surrendered. See "Certain Transactions --
Merger." The Board of Directors will have the authority to issue Preferred Stock
in one or more series and to fix the rights, preferences, privileges and
restrictions granted to or imposed upon any wholly unissued shares of Preferred
Stock and to fix the number of shares constituting any series in the
designations of such series, without any further vote or action by the
stockholders. The Board of Directors, without stockholder approval, can issue
Preferred Stock with voting and conversion rights which could adversely affect
the voting power of the holders of Common Stock. The issuance of Preferred Stock
may have the effect of delaying, deferring or preventing a change in control of
the Company. The Company does not presently intend to issue Preferred Stock. In
addition, the terms of the Indenture will restrict the ability of the Company to
issue Preferred Stock. See "Description of Certain Indebtedness -- The Notes."
CHANGE IN CONTROL PROVISIONS
Certain provisions of the Company's Certificate of Incorporation and Bylaws
may have the effect of preventing, discouraging or delaying any change in the
control of the Company any may maintain the incumbency of the Board of Directors
and management. The authorization of Preferred Stock makes it possible for the
Board of Directors to issue Preferred Stock with voting or other rights or
preferences that could impede the success of any attempt to effect a change in
control of the Company. In addition, on the effectiveness of the Offerings,
certain provisions of the Certificate of Incorporation will create three classes
of directors serving for staggered three-year terms and prevent any amendment to
such provisions without the consent of holders of at least two-thirds of the
then outstanding shares of Common Stock. These provisions could also impede the
success of any attempt to effect a change in control of the Company.
The Company is subject to Section 203 ("Section 203") of the Delaware
General Corporation Law (the "Delaware GCL"). Section 203 prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless (i)
prior to such date, the board of directors of the corporation approves either
the business combination or the transaction which
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resulted in the stockholder becoming an interested stockholder, (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owns at least 85% of the
outstanding voting stock (excluding certain shares held by persons who are both
directors and officers of the corporation and certain employee stock plans), or
(iii) on or after the consummation date, the business combination is approved by
the board of directors and by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder. For
purposes of Section 203, a "business combination" includes, among other things,
a merger, asset sale or other transaction resulting in a financial benefit to
the interested stockholder, and an "interested stockholder" is generally a
person who, together with affiliates and associates, owns (or within three
years, owned) 15% or more of the corporation's voting stock.
INDEMNIFICATION OF DIRECTORS AND OFFICERS AND LIMITATION OF DIRECTOR LIABILITY
The Company's Certificate of Incorporation contains provisions that
eliminate the personal liability of its directors to the fullest extent
permitted by the Delaware GCL for monetary damages resulting from breaches of
their fiduciary duty. The Certificate of Incorporation also contains provisions
requiring the indemnification of the Company's directors and officers to the
fullest extent permitted by the Delaware GCL against all losses or liabilities
which he or she may sustain or incur on or about the execution of the duties of
his or her office or otherwise in relation thereto. The Company believes that
these provisions are necessary to attract and retain qualified persons as
directors and officers.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Continental Stock
Transfer & Trust Company.
LISTING
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "ARTT."
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SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
Upon consummation of the Common Stock Offering, the Company will have
outstanding 36,086,498 shares of Common Stock (assuming no exercise of the
Underwriters' over-allotment option and options or warrants after July 26,
1996). Of these shares, the 6,000,000 shares being sold in the Common Stock
Offering will be freely tradable without restriction under the Securities Act,
unless purchased by "affiliates" of the Company.
The remaining 30,086,498 shares of Common Stock held by existing
stockholders are "restricted" shares under the Securities Act (the "Restricted
Shares"), all of which are also subject to certain lock-up agreements between
certain stockholders and the Representatives (as defined). Beginning 90 days
after the date of this Prospectus, 8,687,798 shares (excluding shares of Common
Stock purchased by directors and certain principal stockholders of the Company
in the Common Stock Offering) will become available for immediate sale to the
public market subject to certain volume and other resale restrictions pursuant
to Rule 144 promulgated under the Securities Act, as described below, unless
such shares are registered. See "Registration Rights." An additional 1,325,257
shares of Common Stock will become available for sale in the public market
pursuant to Rule 144 in August 1997. Upon the closing of the CommcoCCC
Acquisition, 16,500,000 shares will be issued for the CommcoCCC Assets, which
shares will become available for sale in the public market under Rule 144 two
years after the date of consummation of the CommcoCCC Acquisition. In addition,
under a proposal currently pending before the Securities and Exchange
Commission, the date on which shares of Common Stock become available for sale
under Rule 144 may be significantly accelerated.
As of July 26, 1996, an aggregate of 4,016,868 shares of Common Stock will
be subject to outstanding options and warrants and an aggregate of 1,035,268
shares are reserved for future issuance pursuant to the Company's Equity
Incentive Plan and Directors Plan (collectively, the "Plans"). As of July 26,
1996, 639,302 of such shares were vested, and, 180 days following the date of
this Prospectus, an additional 59,109 of such shares will be vested. The Company
intends to file a Registration Statement on Form S-8 to register the shares of
Common Stock to be issued and issuable pursuant to the Plans. Thereafter, shares
of Common Stock issued under the Plans will be available for sale in the public
market upon vesting of such shares, subject, with respect to affiliates of the
Company, to certain volume limitations under Rule 144.
In general, under Rule 144 as currently in effect, beginning 90 days after
the Effective Date, a person (or persons whose shares are aggregated) who has
beneficially owned Restricted Shares for at least two years, will be entitled to
sell in any three-month period a number of shares that does not exceed the
greater of (i) 1% of the number of shares of Common Stock then outstanding
(approximately 360,865 shares immediately after the Common Stock Offering
assuming no exercise of the Underwriters' over-allotment option) and (ii) the
average weekly trading volume of the Company's Common Stock in the Nasdaq
National Market during the four calendar weeks immediately preceding the date on
which notice of the sale is filed with the Securities and Exchange Commission.
Sales pursuant to Rule 144 are subject to certain requirements relating to
manner of sale, notice and availability of current public information about the
Company. A person (or persons whose shares are aggregated) who is not deemed to
have been an affiliate of the Company at any time during the 90 days immediately
preceding the sale and who has beneficially owned Restricted Shares for at least
three years is entitled to sell such shares pursuant to Rule 144(k) without
regard to the limitations and requirements described above.
All holders of the Company's Common Stock, as well as all holders of
warrants or options to purchase Common Stock, have agreed not to sell, offer to
sell, contract to sell or otherwise sell, dispose of, loan, pledge or grant any
rights with respect to any shares of Common Stock, any options or warrants to
purchase Common Stock, or any securities convertible or exchangeable for Common
Stock, owned directly by such holders or with respect to which they have power
of disposition for a period of 180 days after the date of this Prospectus
without the prior written consent of Montgomery Securities. Montgomery
Securities may, in its sole discretion and at any time without notice, release
all or any portion of the
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securities subject to these lock-up agreements. In addition, the Company has
agreed not to sell, offer to sell, contract to sell or otherwise sell or dispose
of any shares of Common Stock or any rights to acquire Common Stock, other than
pursuant to the Restated Equity Incentive Plan, upon exercise of outstanding
warrants and options or pursuant to the CommcoCCC Agreement for a period of 180
days after the date of this Prospectus without the prior consent of Montgomery
Securities. See "Underwriting."
Prior to the Common Stock Offering, there has been no public market for the
Common Stock and there can be no assurance that a significant public market for
the Common Stock will develop or be sustained after the Common Stock Offering.
Sales of substantial amounts of Common Stock in the public market could
adversely affect the market price of the Common Stock and could impair the
Company's future ability to raise capital through the sale of its equity
securities.
REGISTRATION RIGHTS
Under the terms of an amended and restated registration rights agreement,
dated as of July 3, 1996, among the Company, Telecom, their respective
stockholders and the holders of the Bridge Warrants, Indemnity Warrants and
CommcoCCC Warrants (as amended, the "Registration Rights Agreement"), following
the consummation of the Offerings, such stockholders and the holders of the
Bridge Warrants, Indemnity Warrants and CommcoCCC Warrants, who are the holders
of an aggregate 31,561,498 shares of Common Stock on a fully-diluted basis (the
"Registrable Securities"), will be entitled to certain demand rights with
respect to the registration of such shares under the Securities Act. In
addition, under the Registration Rights Agreement, if the Company proposes to
register any of its securities under the Securities Act, either for its own
account or the account of other security holders, the holders of Registrable
Securities are entitled to notice of such registration and are entitled to
include their Registrable Securities in any such registration; PROVIDED, that,
among other things, that the underwriters have the right, subject to certain
limitations, to limit the number of such shares included therein.
Upon the consummation of the CommcoCCC Acquisition, the 16,500,000 shares to
be issued in connection therewith will also be subject to the Registration
Rights Agreement.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
THE NOTES
Concurrently with the Common Stock Offering, the Company is offering,
pursuant to a separate prospectus, 150,000 Units, each consisting of $1,000
principal amount at maturity of the Notes and one Warrant to purchase 41.949153
shares of Common Stock of the Company, for gross proceeds of $150,000,000 in the
Unit Offering. Approximately $57.6 million of the net proceeds from the Unit
Offering will be used to purchase the Pledged Securities, which represent funds
sufficient to provide for payment in full of interest on the Notes through
, 1999 and which will be pledged as security for repayment of
principal of the Notes.
Upon exercise, the holders of Warrants would be entitled, in the aggregate,
to purchase approximately 6.3 million shares of Common Stock, representing
approximately 10.0% of the outstanding Common Stock on a fully-diluted basis on
the date hereof, after giving effect to the Offerings and the CommcoCCC
Acquisition. The Common Stock Offering is conditioned upon the successful
consummation of the Unit Offering. Cash interest will accrue at a rate of %
per annum, payable semiannually in arrears on and of
each year, commencing , 1997. The Notes will mature on ,
2006. The Notes will be redeemable at the option of the Company on or after
, 2001, and the holders of the Notes will have the right to
require the Company to repurchase all or part of such holders' Notes in the
event of certain events involving a change of control with respect to, or
certain sales of assets by, the Company and its subsidiaries.
Subject to certain exceptions and qualifications, the Indenture will, among
other things, restrict the ability of the Company and its subsidiaries to (i)
incur indebtedness, (ii) pay dividends and make distributions in respect of the
Company's capital stock or make certain other restricted payments, (iii) create
certain liens, (iv) enter into certain transactions with affiliates or related
persons, (v) conduct businesses other than those permitted by the Indenture or
(vi) sell certain assets. In addition, the Indenture will limit the ability of
the Company to consolidate, merge or sell all or substantially all of its
assets.
EMI NOTE
In connection with the acquisition by Telecom of the EMI Assets, Telecom
issued to EMI a $1.5 million principal amount non-negotiable and
non-transferable, unsecured promissory note (the "EMI Note"). Interest on the
EMI Note accrues at a rate equal to the prime rate plus 2%. The Company is
obligated to make quarterly principal repayments of $187,500, commencing January
1, 1997. The EMI Note matures on November 14, 1998. See "Business -- Agreements
Relating to Licenses and Acquisitions -- EMI Acquisition."
EQUIPMENT FINANCING
On April 1, 1996, CRA, Inc. ("CRA") entered into secured Equipment Financing
with the Company for the purchase from P-Com of 38 GHz radio equipment. To
evidence its obligations under the Equipment Financing, the Company issued in
favor of CRA a $2,445,000 Equipment Note, payable in twenty four monthly
installments of $92,694 with a final payment equal to $642,305 due April 1,
1998.
BRIDGE FINANCING
On March 8, 1996, the Company issued $5.0 million principal amount of Bridge
Notes in connection with the Bridge Financing. See "Certain Transactions --
Bridge Financing." The Bridge Notes are subordinated in right of payment to the
EMI Note and will be repaid with proceeds from the Offerings. See "Use of
Proceeds."
COMMCOCCC FINANCING
On June 27 and July 3, 1996, the Company issued to stockholders of
CommcoCCC, in connection with the CommcoCCC Agreement $3.0 million principal
amount of subordinated bridge notes (the
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"CommcoCCC Notes"), bearing interest at the prime rate and payable 90 days after
the date of the CommcoCCC Agreement. The CommcoCCC Notes are secured by a
security interest in all of the assets of the Company, including a pledge of the
Company's stock in Telecom. See "Certain Transactions -- CommcoCCC Acquisition."
The CommcoCCC Notes are subordinated in right of payment to the EMI and the
Bridge Notes and will be repaid with proceeds from the Offerings. See "Use of
Proceeds."
CREDIT FACILITY
Canadian Imperial Bank of Commerce ("CIBC") has provided the Company a
Summary of Terms and Conditions on which it and other banks might extend credit
pursuant to a Senior Secured Revolving Credit Facility converting to an
Amortizing Term Loan (the "Credit Facility"). Under the Credit Facility, up to
$100,000,000 in revolving loans would be available based on incurrence
provisions which will be determined but would include measures of total debt to
operating cash flow, numbers of links, numbers of links per pop or market and
amount of revenue per link. The proceeds could be used to finance the
construction of the Company's systems, capital expenditures, permitted
acquisitions, operating losses and working capital. The Credit Facility would be
secured by all of the assets of the Company and its subsidiaries (consistent
with applicable FCC rules) including a pledge of stock of subsidiaries, and
would be guaranteed by all subsidiaries, excluding unrestricted subsidiaries to
be determined. The interest rate would initially be at 2.50% over the bank's
base rate or 3.50% over LIBOR subject to reduction. Mandatory prepayment would
be required with respect to a percentage of excess cash flow and proceeds of
equity offerings. The revolving credit facility would convert to a term loan
after a period, for a term and with an amortization to be determined.
In addition, the Credit Facility would include financial covenants to be
determined relating to ratios of total debt to annualized operating cash flow,
operating cash flow to cash interest expense, cash flow available for debt
service to pro forma fixed charges and total debt per total links as well as to
minimum revenues, operating cash flow (or maximum loss), minimum revenue per
link and minimum number of links. The Credit Facility would prohibit the Company
from making restricted payments and acquisitions other than permitted
acquisitions, from incurring indebtedness except with certain limitations or
liens, or merging and would limit investments and assets sales. The Credit
Facility would contain a provision relating to change of control of the Company.
The Credit Facility would also contain customary events of default, including
but not limited to nonpayment of principal or interest when due, violations of
covenants, falsity of representations and warranties in any material respect,
actual or asserted invalidity of security documents and security interests and
the occurrence of certain events with respect to the Company or any subsidiary
including cross-default and cross-acceleration, bankruptcy, material judgments,
ERISA violations, change in control and loss or material impairment of FCC
licenses.
The Company would be required to pay a structuring fee which has not yet
been determined, a facility fee of 3.5% payable at closing and a commitment fee
of 0.5% per annum on the unused portion of the facility. Execution of the Credit
Facility will be dependent upon, among other things, satisfactory due diligence
review by the banks, consummation of the Offerings on terms satisfactory to the
banks and negotiation and execution of mutually satisfactory documentation.
There is no assurance that the Credit Facility will be executed, what the terms
of the Credit Facility will be, or if executed, that the Company will be able to
borrow under the Credit Facility.
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UNDERWRITING
The underwriters named below (the "Underwriters"), represented by Montgomery
Securities, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch")
and Deutsche Morgan Grenfell/C. J. Lawrence Inc. (together, the
"Representatives"), have severally agreed, subject to the terms and conditions
set forth in the Underwriting Agreement, to purchase from the Company the number
of shares of Common Stock indicated below opposite their respective names at the
initial public offering price less the underwriting discount set forth on the
cover page of this Prospectus. The Underwriting Agreement provides that the
obligations of the Underwriters are subject to certain terms and conditions
precedent and that the Underwriters are committed to purchase all of such
shares, if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
---------
<S> <C>
Montgomery Securities............................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..........................................
Deutsche Morgan Grenfell/C. J. Lawrence Inc......................
---------
Total.............................................. 6,000,000
---------
---------
</TABLE>
The Representatives have advised the Company that the Underwriters initially
propose to offer the Common Stock to the public on the terms set forth on the
cover page of this Prospectus. The Underwriters may allow to selected dealers a
concession of not more than $ per share, and the Underwriters may allow,
and any such dealers may reallow, a concession of not more than $ per
share to certain other dealers. After the initial public offering, the price and
concessions and reallowances to dealers may be changed by the Representatives.
The Common Stock is offered subject to receipt and acceptance by the
Underwriters and to certain other conditions, including the right to reject
orders in whole or in part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 900,000 additional shares of Common Stock to cover over-allotments, if any,
at the same price per share as the initial 6,000,000 shares to be purchased by
the Underwriters. To the extent the Underwriters exercise this option, each of
the Underwriters will be committed, subject to certain conditions, to purchase
such additional shares in approximately the same proportion as set forth in the
above table.
Of the 6,000,000 shares of Common Stock offered hereby, up to 100,000, 5,000
and 1,000 of such shares are expected to be purchased by Mark C. Demetree, James
C. Cook and Matthew C. Gore, respectively, at the initial public offering price,
pursuant to the Company's directed shares program.
The Underwriting Agreement contains certain covenants of indemnity among the
Underwriters and the Company against certain civil liabilities, including
liability under the Securities Act of 1933, as amended (the "Securities Act").
Concurrently with the Common Stock Offering, the Company is offering,
pursuant to a separate prospectus, 150,000 Units in the Unit Offering.
Montgomery Securities and Merrill Lynch are acting as underwriters in the Unit
Offering and will receive customary compensation in connection therewith. In
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connection with the CommcoCCC Acquisition, Montgomery Securities has been
retained by the Company as its financial advisor for which it will receive fees
of up to approximately $2.7 million and the reimbursement of reasonable
out-of-pocket expenses incurred in connection therewith.
All holders of the Company's Common Stock prior to the Common Stock
Offering, as well as all holders of options, warrants or other rights to
purchase Common Stock, have agreed not to sell, offer to sell, contract to sell
or otherwise sell, dispose of, loan, pledge or grant any rights with respect to
any shares of Common Stock, any options or warrants to purchase Common Stock, or
any securities convertible or exchangeable for Common Stock, owned directly by
such holders or with respect to which they have power of disposition for a
period of 180 days after the date of this Prospectus without the prior written
consent of Montgomery Securities. Montgomery Securities may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to these lock-up agreements. In addition, the Company has
agreed not to sell, offer to sell, contract to sell or otherwise sell or dispose
of any shares of Common Stock or any rights to acquire Common Stock, other than
pursuant to the Equity Incentive Plan, upon exercise of outstanding options and
warrants or pursuant to the CommcoCCC Agreement, for a period of 180 days after
the Effective Date without the prior consent of Montgomery Securities.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority in excess of 5% of the number of shares of Common Stock offered
hereby.
Prior to the Common Stock Offering, there has been no public market for the
Common Stock of the Company. Consequently, the initial public offering price
will be determined through negotiations among the Company and the
Representatives. Among the factors to be considered in such negotiations will be
the history of, and prospects for, the Company and the industry in which it
competes, an assessment of the Company's management, the present state of the
Company's development, the prospects for future earnings of the Company, the
prevailing market conditions at the time of the Common Stock Offering, market
valuations of publicly traded companies that the Company and the Representatives
believe to be comparable to the Company, and other factors deemed relevant. See
"Risk Factors -- Absence of Public Market; Possible Volatility of Stock Price."
LEGAL MATTERS
The validity of the issuance of shares of Common Stock offered hereby will
be passed upon for the Company by Hahn & Hessen LLP, New York, New York. Certain
legal matters in connection with the Common Stock Offering will be passed upon
for the Underwriters by Latham & Watkins, Washington, D.C. As of the date of
this Prospectus, a member of Hahn & Hessen LLP owns $25,000 of the Bridge Notes
and 5,500 Bridge Warrants and beneficially owns 13,627 shares of Common Stock.
Latham & Watkins, Washington, D.C., currently represents the Company with
respect to certain FCC matters.
EXPERTS
The historical financial statements of Advanced Radio Technologies
Corporation as of December 31, 1995 and 1994, for the years then ended, and for
the period from August 23, 1993 (date of inception) to December 31, 1993 and of
Advanced Radio Telecom Corp. as of December 31, 1995 and for the period from
March 28, 1995 (date of inception) to December 31, 1995 included in this
Prospectus, have been included herein in reliance on the reports, each of which
includes an explanatory paragraph regarding the substantial doubt which exists
about the respective entity's ability to continue as a going concern, of Coopers
& Lybrand L.L.P., independent accountants, given on the authority of that firm
as experts in accounting and auditing.
85
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement on Form
S-1 (together with all amendments, exhibits, schedules and supplements thereto,
the "Registration Statement") under the Securities Act with respect to the
securities offered hereby. This Prospectus, which forms a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement, certain parts of which have been omitted in accordance
with the rules and regulations of the Commission. For further information with
respect to the Company and the securities offered hereby, reference is made to
the Registration Statement and to the schedules and exhibits filed therewith.
Statements contained in this Prospectus as to the contents of certain documents
are not necessarily complete, and, in each instance, reference is made to the
copy of the document filed as an exhibit to the Registration Statement. The
Registration Statement, including the exhibits and schedules thereto, can be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the following regional offices of the Commission: New York
Regional Office, 7 World Trade Center, New York, New York 10007; and Chicago
Regional Office, Suite 1400, Northwestern Atrium Center, 500 West Madison
Street, Chicago, Illinois 60661. Copies of such material can also be obtained
from the Commission at prescribed rates through its Public Reference Section at
450 Fifth Street, N.W., Washington, D.C. 20549.
Immediately following the Offerings, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith will be required to file
reports and other information with the Commission. Such reports may be inspected
and copied at the public reference facilities at the addresses set forth above
and at the Public Reference Section of the Commission at the address set forth
above.
86
<PAGE>
GLOSSARY
ACCESS CHARGES -- The fees paid by long distance carriers to LECs for
originating and terminating long distance calls on their local networks.
BANDWIDTH -- At any given level of compression, the amount of information
transportable over a link per unit of time. A DS-1, or Digital Service 1,
circuit will carry up to 1,544,000 bits (or 1.544 megabits) per second.
BPS -- Bits per second. A bit is the basic unit of information, yes-or-no,
on-or-off, 1-or-0 in the binary (base 2) system which is the basis of digital
computing. In contrast, a voice telephone signal over a copper wire is analog,
reflecting a continuous range of vocal tone (frequency) and volume (amplitude).
BROADBAND -- Data streams of at least 1.544 megabits per second. Broadband
communications systems can transmit large quantities of voice, data and video by
way of digital or analog signals. Examples of broadband communication systems
include DS-3 systems, which can transmit 672 simultaneous voice conversations,
or a broadcast television station signal that transmits high resolution audio
and video signals into the home. Broadband connectivity is an essential element
for interactive multimedia applications.
BTA (BASIC TRADING AREA) -- An area erected by Rand McNally based upon
various business demographics to establish a contiguous urban area, without
reference to political or similar boundaries. The FCC has proposed to use BTAs
to auction 38 GHz authorizations.
CAP (COMPETITIVE ACCESS PROVIDER) -- A company that provides its customers
with an alternative to the local telephone company for local and interstate
transport of private line, special access and switched access telecommunications
services. CAPs are also referred to in the industry as competitive local
exchange carriers (CLECs), alternative local telecommunications service
providers (ALTs) and metropolitan area network providers (MANs) and were
formerly referred to as alternative access vendors (AAVs).
CELLULAR -- Characterized by "cells," the area accessible by transceiver(s)
typically located at one site. A cellular phone connects to the transceiver in
its current cell, then the connection is handed-off as and when the user moves
to any other cell.
COMPRESSION -- Any process that transforms a signal to a more compact form
(fewer bits) for easier transfer, and then restores the signal after transfer.
CMRS -- Commercial mobile radio services.
COPPER WIRE -- A shorthand reference to traditional telephone lines using
electric current to carry signals over copper wire.
DIGITAL -- A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary code digits 0 and 1. Digital transmission and switching technologies
employ a sequence of these pulses to represent infomation as opposed to the
continously variable analog signal. Digital transmission and switching
technologies offer a threefold improvement in speed and capacity over analog
techniques, allowing much more efficient and cost-effective transmission of
voice, video, and data.
DIALING PARITY -- Dialing parity is one of the changes, intended to level
the competitive playing field, that are required by the Telecommunication Act.
Dialing parity when implemented will enable customers to have dial only 1+ or 0+
service no matter which local or long distance carrier they choose.
DS-0, DS-1, DS-3 -- Standard telecommunications industry digital signal
formats, which are distinguishable by bit rate (the number of binary digits (0
and 1) transmitted per second). DS-0 service has a bit rate of 64 kilobits per
second. DS-1 service has a bit rate of 1.544 megabits per second and DS-3
service has a bit rate of 45 megabits per second.
87
<PAGE>
ESMR (ENHANCED SPECIALIZED MOBILE RADIO) -- A recent mobile radio services
category involving technical and service enhancements to traditional "push to
talk" dispatch services.
FCC -- Federal Communications Commission.
FIBER OPTICS -- Fiber optic cable largely immune to electrical interference
and environmental factors that affect copper wiring and satellite transmission.
Fiber optic technology involves sending laser light pulses across glass strands
in order to transmit digital information.
GHZ (GIGAHERTZ) -- Billions of cycles or hertz per second. A hertz is one
full cycle (an s-shaped sine curve with one peak and one valley).
INTER-LATA LONG DISTANCE -- Inter-LATA long distance calls are calls that
pass from one LATA to another. Typically, these calls are simply referred to as
"long distance" calls although intra-LATA calls can also be long distance calls.
INTERNET -- An array of interconnected networks using a common set of
protocols defining the information coding and processing requirements that can
communicate across hardware platforms and over many links now operated by a
consortium of telecommunications service providers and others.
ISP -- Internet service provider.
ITC (INDEPENDENT TELEPHONE COMPANY) -- A telephone company not associated or
formerly associated with the Bell Telephone system.
IXC (INTER-EXCHANGE CARRIERS) -- Usually referred to as long distance
providers. There are many facilities-based IXCs, including AT&T, MCI, WorldCom,
Sprint and Frontier.
KILOBIT -- One thousand bits of information. The information-carrying
capacity (i.e., bandwidth of a circuit may be measured in "kilobits per
second").
KBPS -- Kilobits per second.
LANS (LOCAL AREA NETWORKS) -- The interconnection of computers for the
purpose of sharing files, programs and various devices such as work stations,
printers and high-speed modems. LANs may include dedicated computers or file
servers that provide a centralized source of shared files and programs. Most
office computer networks use a LAN to share files, printers, modems and other
items. Where computers are separated by greater distances, a Metropolitan Area
Net (MAN) or other Wide Area Net (WAN) may be used.
LAST MILE -- A shorthand reference to the last section of a
telecommunications path to the ultimate end user which may be less than or
greater than a mile.
LATAS (LOCAL ACCESS AND TRANSPORT AREAS) -- The geographically defined areas
in which RBOCs were authorized by the MFJ to provide local exchange services.
These LATAs roughly reflect the population density of their respective states
(California has 11 LATAs while Wyoming has only one). There are 164 LATAs in the
United States. LATAs have one or more area codes and may cross state lines.
LEC (LOCAL EXCHANGE CARRIER) -- A company providing local exchange services.
The traditional local telephone companies (also known as incumbent local
exchange carriers), such as the RBOCs, which until recently were monopolies.
LINE OF SIGHT -- An unobstructed view between two transceivers comprising a
link.
LINK -- A transmission link between two transceivers.
MAN -- Metropolitan Area Network.
MARKET -- The potential and actual customers within the boundaries of a
wireless license. For simplicity, the definition of the market in this
Prospectus has been based on Basic Trading Areas, though each application as
granted defines its own actual boundaries.
88
<PAGE>
MEGABIT -- One million bits of information. The information-carrying
capacity (i.e., bandwidth) of a circuit may be measured in "megabits per
second."
MFJ (MODIFIED FINAL JUDGMENT) -- The MFJ was an agreement made in 1982
between AT&T and the Department of Justice which forced the breakup of the old
Bell System. This judgment, also known as the Divestiture of AT&T, established
seven separate RBOCs and enhanced the establishment of two distinct segments of
telecommunications service: local and long distance. This laid the groundwork
for intense competition in the long distance industry. The MFJ has been
superseded by the Telecommunications Act of 1996.
MICROWAVE -- A portion of the radio spectrum having radio waves that are
physically very short, ranging in length between about 30 cm and 0.3 cm and
generally used to refer to frequencies above 2 GHz.
MILLIMETRIC MICROWAVE OR MILLIMETER WAVE -- Those portions of the microwave
radio spectrum having wave lengths measured in millimeter lengths and generally
used to refer to frequencies above 20 GHz. A shorter wave length means a higher
frequency and vice versa.
MHZ (MEGAHERTZ) -- Millions of cycles or hertz per second.
MBPS -- Megabits per second.
NARROWBAND -- Data streams less than 64 kilobits per second.
NPRM (NOTICE OF PROPOSED RULEMAKING) -- A term used in governmental,
principally FCC, rulemaking proceedings to refer to initiation of the process.
NUMBER PORTABILITY -- The ability of an end user to change local exchange
carriers while retaining the same telephone number. If number portability does
not exist, customers will have to change phone numbers when they change local
exchange carriers.
OFF-NET CUSTOMERS -- A customer that is not physically connected to a CAP's
network but who is accessed through interconnection with a LEC network or an
alternative provider such as a 30 GHz licensee.
ON-NET CUSTOMERS -- A customer that is physically connected to a CAP's
network.
PCS (PERSONAL COMMUNICATIONS SERVICE) -- Cellular-like services provided at
the 2 GHz band of the radio spectrum rather than 800 MHz. A type of wireless
telephone system that uses light, inexpensive handheld sets and communicates via
low power antennas.
PIPE -- A generic term for telecommunications transmission media, whether
wired or wireless, used to carry signals between the signal generating unit and
the user.
POPS (POINTS OF PRESENCE) -- Locations where a carrier has installed
transmission equipment in a service area that serves as, or relays calls to, a
network switching center of that carrier.
PSTN (PUBLIC SWITCHED TELECOMMUNICATIONS NETWORK) -- The traditional LEC
networks that switch calls between different customers.
RBOCS (REGIONAL BELL OPERATING COMPANIES) -- The holding companies owning
LEC affiliates of the
old AT&T or Bell system.
REPEATER -- An intermediate transceiver between two transceivers connected
to end users and established to circumvent obstacles in the line of sight
between communication ports, such as buildings in urban areas and hills in rural
areas.
RESELLERS -- Companies which purchase telecommunications services wholesale
from underlying carriers and resell them to end users at retail rates.
ROOF RIGHTS -- The legal right to locate, maintain and operate equipment
(most commonly transceivers) on the roofs of buildings, on special towers or
even on utility poles or pylons.
89
<PAGE>
WIDEBAND -- Data streams between 64 kilobits and 1.544 megabits per second.
10-13 BIT ERROR RATE -- The measurement of a transmission path's ability to
pass data in an uncorrupted format. Bit error rate ("BER") is defined as the
number of erroneous bits ("errors"), divided by the number of bits over a
stipulated period of time. In the example of a BER of 10-13, a BER tester (a
test and measurement instrument), placed in line to measure the transmission
path (in real time) would have to measure, and analyze, ten trillion bits of
data before it detected one bit of erroneous data.
90
<PAGE>
ADVANCED RADIO TECHNOLOGIES CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Advanced Radio Technologies Corporation
Unaudited Pro Forma:
Unaudited Pro Forma Condensed Balance Sheets as of December 31, 1995 and March 31, 1996............... F-3
Unaudited Pro Forma Condensed Balance Sheets -- Supplementary Combining Balance Sheet Data as of
December 31, 1995 and March 31, 1996................................................................. F-4
Unaudited Pro Forma Condensed Statement of Operations for the three months ended March 31, 1996 and
for the year ended December 31, 1995................................................................. F-5
Notes to Unaudited Pro Forma Condensed Financial Statements........................................... F-6
Historical:
Report of Independent Accountants..................................................................... F-8
Balance Sheets as of December 31, 1995 and 1994....................................................... F-9
Statements of Operations for the years ended December 31, 1995 and 1994, for the period from August
23, 1993 (date of inception) to December 31, 1993 and cumulative for the period from August 23, 1993
(date of inception) to December 31, 1995............................................................. F-10
Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1995 and 1994, for the
period from August 23, 1993 (date of inception) to December 31, 1993 and cumulative for the period
from August 23, 1993 (date of inception) to December 31, 1995........................................ F-11
Statements of Cash Flows for the years ended December 31, 1995 and 1994, for the period from August
23, 1993 (date of inception) to December 31, 1993 and cumulative for the period from August 23, 1993
(date of inception) to December 31, 1995............................................................. F-12
Notes to Financial Statements......................................................................... F-13
Unaudited Interim Condensed Balance Sheets as of March 31, 1996 and 1995.............................. F-24
Unaudited Interim Condensed Statements of Operations for the three months ended March 31, 1996 and
1995................................................................................................. F-25
Unaudited Interim Condensed Statements of Cash Flows for the three months ended March 31, 1996 and
1995................................................................................................. F-26
Notes to Unaudited Interim Condensed Financial Statements............................................. F-27
Advanced Radio Telecom Corp.
Historical:
Report of Independent Accountants..................................................................... F-30
Balance Sheet as of December 31, 1995................................................................. F-31
Statement of Operations for the period from March 28, 1995 (date of inception) to December 31, 1995... F-32
Statement of Stockholders' Deficit for the period from March 28, 1995 (date of inception) to December
31, 1995............................................................................................. F-33
Statement of Cash Flows for the period from March 28, 1995 (date of inception) to December 31, 1995... F-34
Notes to Financial Statements......................................................................... F-35
Unaudited Interim Condensed Balance Sheet as of March 31, 1996........................................ F-47
Unaudited Interim Condensed Statement of Operations for the three months ended March 31, 1996......... F-48
Unaudited Interim Condensed Statement of Stockholders' Equity (Deficit) for the three months ended
March 31, 1996....................................................................................... F-49
Unaudited Interim Condensed Statement of Cash Flows for the three months ended March 31, 1996......... F-50
Notes to Unaudited Interim Condensed Financial Statements............................................. F-51
</TABLE>
F-1
<PAGE>
ADVANCED RADIO TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma condensed financial statements are
presented as if all of the following transactions had occurred: (i) the March 8,
1996 issuance of the Bridge Notes in connection with the Bridge Financing; (ii)
the receipt of $2,220,000 in cash proceeds from the issuance of the Equipment
Note and Indemnity Warrants in connection with the Equipment Financing, after
deducting related expenses of $225,000; (iii) the receipt of $3,000,000 in cash
proceeds from the issuance of the CommcoCCC Notes and the CommcoCCC Warrants in
connection with the CommcoCCC Financing; (iv) the Conversion; and (v) the
Merger, including the issuance of ART Common Stock to Telecom stockholders and
the cancellation of all outstanding Telecom common stock.
The following unaudited pro forma as adjusted condensed financial statements
reflect further adjustments assuming (i) the sale by the Company of 6,000,000
shares of Common Stock offered in the Common Stock Offering based on an assumed
initial public offering price of $6.00 per share and the 150,000 Units offered
in the Unit Offering assuming $150,000,000 in gross proceeds, in each case,
after deducting the estimated underwriting discount and offering expenses and
the cash used for the purchase of Pledged Securities; (ii) the receipt and
application of the net proceeds therefrom to repay the Bridge Notes and the
CommcoCCC Notes and to acquire the 50% ownership interest of ART West held by
Extended for $6.0 million in cash and the DCT Assets for $3.6 million in cash;
and (iii) the consummation of the acquisition by the Company of the CommcoCCC
Assets in exchange for 16,500,000 shares of Common Stock at an assumed value of
$6.00 per share.
All such transactions are reflected as if they had occurred as of the
beginning of the respective periods for the unaudited pro forma condensed
statements of operations and at the respective balance sheet date for the
unaudited pro forma condensed balance sheet.
These unaudited pro forma condensed financial statements were derived from
and should be read in conjunction with the audited and unaudited interim
condensed financial statements of ART and Telecom and the related notes thereto,
included elsewhere herein. In management's opinion, all adjustments necessary to
reflect the foregoing and related transactions have been made.
The unaudited pro forma condensed financial statements are not necessarily
indicative of what the actual financial position or results of operations would
have been assuming that the transactions described in the preceding paragraphs
had occurred on the dates indicated, nor does it purport to represent the future
financial position or results of operations of the Company.
F-2
<PAGE>
ADVANCED RADIO TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PRO FORMA CONDENSED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF MARCH
1995 31, 1996
------------ ------------
HISTORICAL HISTORICAL
COMBINED (A) COMBINED (A)
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash
equivalents...... $ 633,654 $ 3,024,161
Other current
assets........... 52,325 61,226
------------ ------------
Total current
assets......... 685,979 3,085,387
Restricted cash.....
Property and
equipment, net..... 3,581,561 6,380,895
Equity
investments........ 285,000 285,000
FCC licenses........ 4,235,734 4,235,734
Deferred financing
costs, net......... 778,897 681,692
Equipment and other
deposits........... 284,012 344,417
Other assets........ 25,376 23,212
------------ ------------
$9,876,559 $15,036,337
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
and accrued
liabilities...... $3,694,489 $ 4,213,517
CommcoCCC Notes... --
------------ ------------
Total current
liabilities.... 3,694,489 4,213,517
Convertible notes
payable............ 4,950,000
Note payable to
EMI................ 1,500,000 1,500,000
Bridge notes
payable............ -- 3,983,082
Equipment financing
note payable....... -- --
Senior notes........ -- --
Deferred tax
liability.......... -- --
------------ ------------
Total
liabilities.... 10,144,489 9,696,599
------------ ------------
Redeemable Preferred
Stock.............. 44,930 --
------------ ------------
Stockholders'
equity:
Preferred stock,
par.............. 488 921
Common stock,
par.............. 25,304 28,127
Additional paid-in
capital.......... 3,031,405 19,375,335
Accumulated
deficit.......... (3,370,057 ) (14,064,645)
------------ ------------
Total
stockholders'
equity......... (312,860 ) 5,339,738
------------ ------------
$9,876,559 $15,036,337
------------ ------------
------------ ------------
<CAPTION>
PRO FORMA OFFERING PRO FORMA
ADJUSTMENTS (B) PRO FORMA ADJUSTMENTS (C) AS ADJUSTED
--------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents...... $3,000,000(2)
$2,220,000(3) $ 8,244,161 32,82$1,185(1)
85,154,940(2)
(8,000,000)(3)
(6,000,000)(5)
(3,600,000)(6)
(3,000,000)(4) 105$,620,286
Other current
assets........... 61,226 61,226
--------------- ------------ ------------- -----------
Total current
assets......... 5,220,000 8,305,387 97,376,125 105,681,512
Restricted cash..... 57,600,000(2) 57,600,000
Property and
equipment, net..... 6,380,895 6,380,895
Equity
investments........ 285,000 (285,000)(5) --
FCC licenses........ 4,235,734 135,660,000(4)
6,285,000(5)
3,600,000(6) 149,780,734
Deferred financing
costs, net......... 175,899(3) 857,591 (77,419)(1)
7,245,060(2) 8,025,232
Equipment and other
deposits........... 344,417 344,417
Other assets........ 23,212 23,212
--------------- ------------ ------------- -----------
$5,395,899 $ 20,432,236 307,4$03,766 327$,836,002
--------------- ------------ ------------- -----------
--------------- ------------ ------------- -----------
LIABILITIES AN
Current liabilities:
Accounts payable
and accrued
liabilities...... $ $ 4,213,517 $ 4$,213,517
CommcoCCC Notes... 2,975,000(2) 2,975,000 (2,975,000)(3) --
--------------- ------------ ------------- -----------
Total current
liabilities.... 2,975,000 7,188,517 (2,975,000) 4,213,517
Convertible notes
payable............ -- -- --
Note payable to
EMI................ 1,500,000 1,500,000
Bridge notes
payable............ 3,983,082 (3,983,082)(3)
Equipment financing
note payable....... 1,911,439(3) 1,911,439 1,911,439
Senior notes........ -- 131,663,121(2) 131,663,121
Deferred tax
liability.......... 33,660,000(4) 33,660,000
--------------- ------------ ------------- -----------
Total
liabilities.... 4,886,439 14,583,038 158,365,039 172,948,077
--------------- ------------ ------------- -----------
Redeemable Preferred
Stock.............. -- -- --
--------------- ------------ ------------- -----------
Stockholders'
equity:
Preferred stock,
par.............. (921)(1) --
Common stock,
par.............. 1,959(1) 30,086 6,000(1) --
16,500(4) 52,586
Additional paid-in
capital.......... (1,038)(1)
25,000(2)
484,460(3) 19,883,757 32,737,766(1)
18,336,879(2)
98,983,500(4) 169,941,902
Accumulated
deficit.......... (14,064,645) (1,041,918)(3) (15,106,563)
--------------- ------------ ------------- -----------
Total
stockholders'
equity......... 509,460 5,849,198 149,038,727 154,887,925
--------------- ------------ ------------- -----------
$5,395,899 $ 20,432,236 307,4$03,766 327$,836,002
--------------- ------------ ------------- -----------
--------------- ------------ ------------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-3
<PAGE>
ADVANCED RADIO TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PRO FORMA CONDENSED BALANCE SHEETS
SUPPLEMENTARY COMBINING BALANCE SHEET DATA:
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1995
-----------------------------------------------------------------
HISTORICAL
-----------------------------------------------------------------
ADVANCED RADIO ADVANCED RADIO
TECHNOLOGIES TELECOM HISTORICAL
CORPORATION (D) CORP. (E) ELIMINATIONS (F) COMBINED
-------------- -------------- ---------------- ------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents...... $ 6,069 $ 627,585 $ 633,654
Due from ART...... -- 738,680 $ (738,680) --
Other current
assets........... -- 52,325 52,325
-------------- -------------- ---------------- ------------
Total current
assets......... 6,069 1,418,590 (738,680) 685,979
Note receivable from
Telecom............ 5,000,000 -- (5,000,000) --
Property and
equipment, net..... 1,723 3,579,838 3,581,561
Equity investments.. 285,000 -- 285,000
FCC licenses........ 8,913 4,226,821 4,235,734
Deferred financing
costs, net......... 457,543 321,354 778,897
Equipment and other
deposits........... -- 284,012 284,012
Investment in ART... -- -- --
Other assets........ 25,376 -- 25,376
-------------- -------------- ---------------- ------------
$ 5,784,624 $ 9,830,615 $(5,738,680) $ 9,876,559
-------------- -------------- ---------------- ------------
-------------- -------------- ---------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable
and accrued
liabilities...... $ 243,952 $ 3,450,537 $ 3,694,489
Due to Telecom.... 738,680 -- $ (738,680) --
Commco Notes...... -- -- --
-------------- -------------- ---------------- ------------
Total current
liabilities.... 982,632 3,450,537 (738,680) 3,694,489
Convertible notes
payable............ 4,950,000 -- 4,950,000
Losses in excess of
equity investment.. 211,543 -- (211,543) --
Note payable to
ART................ -- 5,000,000 (5,000,000) --
Note payable to
EMI................ -- 1,500,000 1,500,000
Bridge notes
payable............ -- -- --
Equipment financing
note payable....... -- -- --
Senior discount
notes.............. -- -- --
-------------- -------------- ---------------- ------------
Total
liabilities.... 6,144,175 9,950,537 (5,950,223) 10,144,489
-------------- -------------- ---------------- ------------
Redeemable Preferred
Stock.............. 44,930 -- 44,930
-------------- -------------- ---------------- ------------
Stockholders'
equity:
Preferred stock,
par.............. -- 488 488
Common stock,
par.............. 10,013 15,291 25,304
Additional paid-in
capital.......... 988,375 2,845,372 (802,002)
(340) 3,031,405
Accumulated
deficit.......... (1,402,869) (2,981,073) 1,013,885 (3,370,057)
-------------- -------------- ---------------- ------------
Total
stockholders'
equity
(deficit)...... (404,481) (119,922) 211,543 (312,860)
-------------- -------------- ---------------- ------------
$ 5,784,624 $ 9,830,615 $(5,738,680) $ 9,876,559
-------------- -------------- ---------------- ------------
-------------- -------------- ---------------- ------------
<CAPTION>
AS OF MARCH 31, 1996
-------------------------------------------------------------
HISTORICAL
-------------------------------------------------------------
ADVANCED
ADVANCED RADIO RADIO
TECHNOLOGIES TELECOM HISTORICAL
CORPORATION (D) CORP. (E) ELIMINATIONS (F) COMBINED
--------------- ------------ --------------- -----------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash
equivalents...... $ 5,970 $3,018,191 3$,024,161
Due from ART...... -- 498,100 (49$8,100) --
Other current
assets........... -- 61,226 61,226
--------------- ------------ --------------- -----------
Total current
assets......... 5,970 3,577,517 (498,100) 3,085,387
Note receivable from
Telecom............ -- -- --
Property and
equipment, net..... 1,292 6,379,603 6,380,895
Equity investments.. 3,242,401 -- (2,957,401) 285,000
FCC licenses........ 8,913 4,226,821 4,235,734
Deferred financing
costs, net......... -- 681,692 681,692
Equipment and other
deposits........... -- 344,417 344,417
Investment in ART... -- 44,930 (44,930) --
Other assets........ 23,212 -- 23,212
--------------- ------------ --------------- -----------
$3,281,788 $15,254,980 (3,50$0,431) 15$,036,337
--------------- ------------ --------------- -----------
--------------- ------------ --------------- -----------
Current liabilities:
Accounts payable
and accrued
liabilities...... 2,500 $4,211,017 4$,213,517
Due to Telecom.... 498,100 -- (49$8,100) --
Commco Notes...... -- -- --
--------------- ------------ --------------- -----------
Total current
liabilities.... 500,600 4,211,017 (498,100) 4,213,517
Convertible notes
payable............ -- -- --
Losses in excess of
equity investment.. -- --
Note payable to
ART................ -- --
Note payable to
EMI................ -- 1,500,000 1,500,000
Bridge notes
payable............ -- 3,983,082 3,983,082
Equipment financing
note payable....... -- -- --
Senior discount
notes.............. -- -- --
--------------- ------------ --------------- -----------
Total
liabilities.... 500,600 9,694,099 (498,100) 9,696,599
--------------- ------------ --------------- -----------
Redeemable Preferred
Stock.............. 44,930 -- (44,930) --
--------------- ------------ --------------- -----------
Stockholders'
equity:
Preferred stock,
par.............. -- 921 921
Common stock,
par.............. 10,013 18,114 28,127
Additional paid-in
capital.......... 7,783,889 19,189,302 (7,597,856) 19,375,335
Accumulated
deficit.......... (5,057,644) (13,647,456 ) 4,640,455 (14,064,645)
--------------- ------------ --------------- -----------
Total
stockholders'
equity
(deficit)...... 2,736,258 5,560,881 (2,957,401) 5,339,738
--------------- ------------ --------------- -----------
$3,281,788 $15,254,980 (3,50$0,431) 15$,036,337
--------------- ------------ --------------- -----------
--------------- ------------ --------------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-4
<PAGE>
ADVANCED RADIO TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1996
--------------------------------------------------------------------------------------------
HISTORICAL
--------------------------------------------------------------
ADVANCED RADIO ADVANCED RADIO
TECHNOLOGIES TELECOM PRO FORMA
CORPORATION (D) CORP. (E) ELIMINATIONS (F) COMBINED ADJUSTMENTS (B) PRO FORMA
---------------- -------------- --------------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Operating revenue...... $ $ 9,620 $ 9,620 $ 9,620
---------------- -------------- ----------- -----------
Expenses:
General and
administrative
(H)................. 24,939 8,889,364 8,914,303 8,914,303
Market development
(I)................. -- 1,150,063 1,150,063 1,150,063
Research &
development......... -- 419,418 419,418 419,418
Depreciation and
amortization.......... 2,595 86,684 89,279 89,279
Interest, net........ 671 130,474 131,145 $ 198,425(4)
157,316(5)
86,360(6)
(44,507)(7) 528,739
---------------- -------------- ----------- --------------- -----------
Total expenses..... 28,205 10,676,003 10,704,208 397,594 11,101,802
Equity loss in
Telecom............... 3,626,570 -- $(3,626,570) -- --
---------------- -------------- --------------- ----------- --------------- -----------
Pretax loss............ 3,654,775 10,666,383 (3,626,570) 10,694,588 397,594 11,092,182
Deferred tax benefit... -- -- -- --
---------------- -------------- --------------- ----------- --------------- -----------
Net loss......... $ 3,654,775 $ 10,666,383 ($3,626,570) $10,694,588 $ 397,594 $11,092,182
---------------- -------------- --------------- ----------- --------------- -----------
---------------- -------------- --------------- ----------- --------------- -----------
Pro forma net loss per
share of common stock
(G)................... $ 0.12 $ 0.36
---------------- -----------
---------------- -----------
Pro forma weighted
average number of
shares of Common Stock
outstanding (G)....... 31,651,605 30,516,037
---------------- -----------
---------------- -----------
<CAPTION>
OFFERING PRO FORMA
ADJUSTMENTS (C) AS ADJUSTED
---------------- ------------
<S> <C> <C>
Operating revenue...... $ 9,620
------------
Expenses:
General and
administrative
(H)................. 8,914,303
Market development
(I)................. 1,150,063
Research &
development......... 419,418
Depreciation and
amortization.......... $ 936,130(8) 1,025,409
Interest, net........
(264,658)(3)
(86,360)(3)
5,937,649(7)
(756,000)(7) 5,359,370
---------------- ------------
Total expenses..... 5,766,761 16,868,563
Equity loss in
Telecom............... --
---------------- ------------
Pretax loss............ 5,766,761 16,858,943
Deferred tax benefit... (318,284)(8) (318,284)
---------------- ------------
Net loss......... $ 5,448,477 $16,540,659
---------------- ------------
---------------- ------------
Pro forma net loss per
share of common stock
(G)................... $ 0.31
------------
------------
Pro forma weighted
average number of
shares of Common Stock
outstanding (G)....... 53,016,037
------------
------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------------
HISTORICAL
--------------------------------------------------------------
ADVANCED RADIO ADVANCED
TECHNOLOGIES RADIO TELECOM
CORPORATION (D) CORP. (E) ELIMINATIONS (F) COMBINED
-------------- ------------- ---------------- ----------
<S> <C> <C> <C> <C>
Operating revenue... $ -- $ 5,793 $ 5,793
-------------- ------------- ----------
Expenses:
General and
administrative
(G).............. 204,937 2,706,336 2,911,273
Market
development...... -- 191,693 191,693
Depreciation and
amortization..... 10,378 5,306 15,684
Interest, net..... 38,455 83,531 121,986
-------------- ------------- ----------
Total
expenses....... 253,770 2,986,866 3,240,636
Equity loss in
Telecom............ 1,013,885 $(1,013,885) --
-------------- ------------- ---------------- ----------
Pretax Loss......... 1,267,655 2,981,073 (1,013,885) 3,234,843
Deferred tax
benefit............ -- -- --
-------------- ------------- ---------------- ----------
Net loss...... $1,267,655 $ 2,981,073 $(1,013,885) $3,234,843
-------------- ------------- ---------------- ----------
-------------- ------------- ---------------- ----------
Pro forma net loss
per share of Common
Stock (G).......... $ 0.04
--------------
--------------
Pro forma weighted
average number of
shares of Common
Stock outstanding
(G)................ 31,651,605
--------------
--------------
<CAPTION>
PRO FORMA OFFERING PRO FORMA
ADJUSTMENTS (B) PRO FORMA ADJUSTMENTS (C) AS ADJUSTED
--------------- ---------- --------------- -----------
<S> <C> <C> <C> <C>
Operating revenue... $ 5,793 $ $5,793
---------- --------------- -----------
Expenses:
General and
administrative
(G).............. 2,911,273 2,911,273
Market
development...... 191,693 191,693
Depreciation and
amortization..... 15,684 3,744,518(8) 3,760,202
Interest, net..... $1,019,145(4)
673,534(5)
270,438(6)
(110,828)(7) 1,974,275 (1,019,145)(3)
(270,438)(3)
23,750,595(7)
(3,024,000)(7) 21,411,287
--------------- ---------- --------------- -----------
Total
expenses....... 1,852,289 5,092,925 23,181,530 28,274,455
Equity loss in
Telecom............ -- --
--------------- ---------- --------------- -----------
Pretax Loss......... 1,852,289 5,087,132 23,181,530 28,268,662
Deferred tax
benefit............ -- (1,273,136)(8) (1,273,136)
--------------- ---------- --------------- -----------
Net loss...... $1,852,289 $5,087,132 21,9$08,394 26$,995,526
--------------- ---------- --------------- -----------
--------------- ---------- --------------- -----------
Pro forma net loss
per share of Common
Stock (G).......... $ 0.17 $ 0.51
---------- -----------
---------- -----------
Pro forma weighted
average number of
shares of Common
Stock outstanding
(G)................ 30,516,037 53,016,037
---------- -----------
---------- -----------
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
F-5
<PAGE>
ADVANCED RADIO TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
(A) Represents the historical combined balance sheets of ART and Telecom. See
supplementary combining balance sheet data on page F-4.
(B) Pro forma adjustments:
(1) Conversion of Telecom serial preferred stock into Telecom common stock,
issuance of ART Common Stock to Telecom stockholders, and cancellation of
the outstanding Telecom common stock and the ART Redeemable Preferred
Stock in connection with the Merger.
(2) Proceeds of $3,000,000 in cash from the CommcoCCC Financing in exchange
for the CommcoCCC Notes and CommcoCCC Warrants. The value ascribed to the
CommcoCCC Warrants totaled $25,000.
(3) Proceeds of $2,220,000 in cash from the Equipment Financing and issuance
of the Indemnity Warrants, net of the related financing costs of
$225,000. The value ascribed to the Indemnity Warrants totaled $484,460.
(4) Interest expense from the Bridge Financing provided by stockholders of
Telecom at the effective interest rate after giving effect to the value
ascribed to the Bridge Warrants, as if the Bridge Notes were issued as of
the beginning of the respective periods.
(5) Interest expense from the Equipment Financing at the effective interest
rate after giving effect to the value ascribed to the Indemnity Warrants,
as if the Equipment Notes were issued as of the beginning of the
respective periods.
(6) Interest expense from the CommcoCCC Financing, at the effective interest
rate after giving effect to the value ascribed to the CommcoCCC Warrants,
as if the CommcoCCC Notes were issued as of the beginning of the
respective periods.
(7) Elimination of interest expense from the Advent Notes that were
converted into shares of Telecom stock on February 2, 1996.
(C) Offering adjustments:
(1) Issuance of 6,000,000 shares of Common Stock offered in the Common Stock
Offering based on an assumed initial public offering price of $6.00 per
share, after deducting the estimated offering discount and related
expenses of $3,256,234.
(2) Assumed gross proceeds of $150,000,000 from the issuance of the Notes
and Warrants in the Unit Offering, the related estimated offering
discount and related expenses of $7,567,641, and the cash used for the
purchase of Pledged Securities of $57,600,000. The value ascribed to the
Unit Warrants totaled $18,336,879 based on an assumed issuance of
Warrants to purchase an aggregate of 10% of Common Stock of the Company
on a fully diluted basis offer giving effect to the Offerings and the
CommcoCCC Acquisition.
(3) Repayment of the Bridge Financing and CommcoCCC Financing out of the net
proceeds from the Offerings and the reversal of the related interest
expense. The unamortized offering discount and deferred finance costs
associated with the Bridge Financing and CommcoCCC Financing will result
in an extraordinary loss of approximately $1,000,000 which has been
excluded from the pro forma as adjusted presentation.
(4) The acquisition of the CommcoCCC Assets in exchange for 16,500,000
shares of Common Stock of the Company based on an assumed value of $6.00
per share, the related deferred tax liabilities and the estimated related
expenses of $3,000,000.
(5) The acquisition of the 50% ownership interest of ART West held by
Extended for $6 million in cash, to be paid out of the net proceeds from
the Offerings.
(6) The acquisition of the DCT assets for $3.6 million in cash, to be paid
out of the net proceeds from the Offerings.
(7) Interest expense on the Notes, at an assumed coupon rate of 14.25%
(resulting in an effective interest rate of 18.04% on the Notes,
including the amortization of debt issuance costs and original issue
discount for the value ascribed to the Warrants) as if the Notes were
issued as of the beginning of the respective periods. If the interest
rate on the Notes changed by 0.5%, interest expense would change by
approximately $658,000 and $165,000 for the year ended
F-6
<PAGE>
December 31, 1995 and three months ended March 31, 1996, respectively.
Interest income of $756,000 for the three months ended March 31, 1996 and
$3,024,000 for the year ended December 31, 1995 on the Pledged Securities
at an assumed rate of 5.25%.
(8) Depreciation and amortization expense related to the acquisition of the
CommcoCCC Assets, the 50% ownership interest in ART West, the DCT Assets
and the related deferred taxes.
(D) Represents the historical amounts of ART as of and for the three months
ended March 31, 1996 and as of and for the year ended December 31, 1995.
(E) Represents the historical amounts of Telecom as of and for the three months
ended March 31, 1996, as of December 31, 1995 and for the period from March
28, 1995 (date of inception) to December 31, 1995.
(F) Represents the elimination of inter-entity transactions and balances
consisting of (i) receivables and payables, (ii) ART's investment in
Telecom, Telecom's corresponding stockholder equity amounts and the
recognition by ART of its equity in losses of Telecom and (iii) Telecom's
investment in ART Redeemable Preferred Stock.
(G) Pro forma net loss per share and the weighted average number of shares of
Common Stock reflect (i) the conversion of all shares of Telecom serial
preferred stock to Telecom common stock; (ii) issuance of ART Common Stock
to Telecom stockholders, (iii) the cancellation of the outstanding Telecom
common stock and the ART Series A Redeemable Preferred Stock; and (iv) the
issuance of potentially dilutive instruments issued within one year prior to
a proposed initial public offering at exercise prices below the assumed
initial public offering price of $6.00 per share as if they were outstanding
as of the beginning of the respective periods.
<TABLE>
<S> <C>
Pro Forma:
Weighted average number of shares of Common Stock outstanding for
primary computation.............................................. 10,013,055(1)
Issuances of shares of Telecom serial preferred stock as converted
into shares of ART Common Stock.................................. 10,389,030
Issuances of shares of Telecom common stock as converted into
shares of ART Common Stock....................................... 8,100,910(2)
Options and warrants issued and outstanding....................... 2,013,042
--------------
Pro forma weighted average number of shares of Common Stock....... 30,516,037(3)
--------------
--------------
Pro Forma As Adjusted:
Pro forma weighted average number of shares of Common Stock....... 30,516,037
Common Stock issued in connection with the Common Stock Offering
and the acquisition of the CommcoCCC Assets...................... 22,500,000
--------------
Pro forma as adjusted weighted average number of shares of Common
Stock............................................................ 53,016,037(3)
--------------
--------------
</TABLE>
(1) The weighted average number of shares of Common Stock for primary
computation exclude all common stock equivalents, which are
anti-dilutive.
(2) Excludes shares of Telecom common stock owned by ART.
(3) The Securities and Exchange Commission requires that potentially
dilutive instruments issued within one year prior to a proposed initial
public offering at exercise prices below the expected initial public
offering price be treated as outstanding for the entire period presented.
The weighted average number of shares of Common Stock on a pro forma and
a pro forma as adjusted basis reflects those potentially dilutive
instruments assuming the sale of shares of Common Stock offered in the
Common Stock Offering based on an assumed initial public offering price
of $6.00 per share. In measuring the dilutive effect, the treasury stock
method was used.
(H) General and administrative expense includes a non-recurring, non-cash
compensation expense of $802,002 and $6,795,514 for the year ended December
31, 1995 and for the three months ended March 31, 1996, respectively,
associated with the release of Escrow Shares in 1995 and the termination of
the Escrow Shares arrangement in 1996.
(I) Market development expense for the three months ended March 31, 1996
includes $1,053,000, representing the value ascribed to the Strategic
Distribution Agreement in connection with the February 1996 investment in
Telecom by Ameritech.
F-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
Advanced Radio Technologies Corporation:
We have audited the accompanying balance sheets of Advanced Radio
Technologies Corporation (a development stage company) as of December 31, 1995
and 1994, and the related statements of operations, stockholders' deficit and
cash flows for the years ended December 31, 1995 and 1994, for the period from
August 23, 1993 (date of inception) to December 31, 1993 and for the cumulative
period from August 23, 1993 (date of inception) to December 31, 1995. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of Advanced Radio Technologies
Corporation as of December 31, 1995 and 1994, and the results of its operations
and its cash flows for the years ended December 31, 1995 and 1994, and for the
period from August 23, 1993 (date of inception) to December 31, 1993, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared on the going
concern basis of accounting, which contemplates realization of assets and
liquidation of liabilities in the ordinary course of business. As described in
Note 1, the Company has a substantial working capital deficit at December 31,
1995, has incurred operating losses since inception and does not expect to
generate significant operating revenues until fiscal 1996. The Company estimates
that revenues in 1996 will not be sufficient to fund its initial capital
requirements, operating expenses and other working capital needs. In addition,
as set forth in Notes 5, 7, 8, and 11, the Company has significant financial
commitments. The Company's continued funding of its initial capital
requirements, operating expenses, working capital needs and contractual
commitments is dependent upon its ability to raise additional financing.
Management's plans in this regard are discussed in Note 1. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
COOPERS & LYBRAND L.L.P.
New York, New York
April 26, 1996, except for Note 2C, Note 5B and
the second paragraph of Note 9
as to which the date is June 26, 1996
F-8
<PAGE>
ADVANCED RADIO TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
-------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash.............................................................................. $ 6,069 $ 5,133
-------------- ------------
Total current assets.......................................................... 6,069 5,133
Note receivable from Telecom (Note 4)............................................... 5,000,000
Equity investments (Note 5)......................................................... 285,000
Deferred financing costs, net....................................................... 457,543
FCC licenses........................................................................ 8,913
Property and equipment, net......................................................... 1,723 3,448
Other assets........................................................................ 25,376 34,030
-------------- ------------
Total assets.................................................................. $ 5,784,624 $ 42,611
-------------- ------------
-------------- ------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities.......................................... $ 243,952 $ 11,689
Due to Telecom (Note 11).......................................................... 738,680
Note payable to related party (Note 11)........................................... 70,000
-------------- ------------
Total current liabilities..................................................... 982,632 81,689
Equity loss in excess of investment (Note 5)........................................ 211,543
Convertible note payable (Note 4)................................................... 4,950,000
-------------- ------------
Total liabilities............................................................. 6,144,175 81,689
-------------- ------------
Redeemable Preferred Stock, $.01 par value; 1,000 shares authorized; 1 share issued
and outstanding at December 31,
1995 (Note 4)...................................................................... 44,930
-------------- ------------
Commitments and contingencies (Notes 1, 5, 7, 8, 11 and 12).........................
Stockholders' deficit (Note 9):
Common Stock, $.001 par value; 58,900,320 shares authorized; 10,013,055 and
5,890,032 shares issued and outstanding.......................................... 10,013 5,890
Additional paid-in capital........................................................ 988,375 90,246
Deficit accumulated during the development stage.................................. (1,402,869) (135,214)
-------------- ------------
Total stockholders' deficit................................................... (404,481) (39,078)
-------------- ------------
Total liabilities and stockholders' deficit................................. $ 5,784,624 $ 42,611
-------------- ------------
-------------- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-9
<PAGE>
ADVANCED RADIO TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994,
FOR THE PERIOD FROM AUGUST 23, 1993 (DATE OF INCEPTION)
TO DECEMBER 31, 1993 AND CUMULATIVE FOR THE PERIOD
FROM AUGUST 23, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
CUMULATIVE
PERIOD FROM FROM AUGUST
AUGUST 23, 23, 1993
YEARS ENDED 1993 (DATE OF (DATE OF
DECEMBER 31, INCEPTION) TO INCEPTION) TO
-------------------------- DECEMBER 31, DECEMBER 31,
1995 1994 1993 1995
------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
Consulting income......................................... $ -- $ 137,489 $ -- $ 137,489
------------- ----------- ------------- -------------
Expenses:
General and administrative expenses..................... 204,937 253,453 5,906 464,296
Depreciation and amortization........................... 10,378 8,281 688 19,347
Interest expense, net (Note 11)......................... 38,455 4,375 42,830
------------- ----------- ------------- -------------
Total expenses...................................... 253,770 266,109 6,594 526,473
Equity loss on investment in Telecom (Note 5)............. 1,013,885 1,013,885
------------- ----------- ------------- -------------
Net loss............................................ $ 1,267,655 $ 128,620 $ 6,594 $ 1,402,869
------------- ----------- ------------- -------------
------------- ----------- ------------- -------------
Pro forma net loss per share (unaudited).................. $ 0.04
-------------
-------------
Pro forma weighted average number of shares of Common
Stock outstanding (unaudited)............................ 30,516,037
-------------
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-10
<PAGE>
ADVANCED RADIO TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994,
FOR THE PERIOD FROM AUGUST 23, 1993 (DATE OF INCEPTION)
TO DECEMBER 31, 1993 AND CUMULATIVE FOR THE PERIOD
FROM AUGUST 23, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING
COMMON PAID-IN DEVELOPMENT
STOCK CAPITAL STAGE TOTAL
--------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Net issuance of 2,945,016 shares of Common Stock for cash... $ 2,945 $ 58,191 $ 61,136
Net loss.................................................... $ (6,594) (6,594)
--------- ----------- -------------- --------------
Balance, December 31, 1993.................................. 2,945 58,191 (6,594) 54,542
Issuance of 2,945,016 shares of Common Stock for cash....... 2,945 32,055 35,000
Net loss.................................................... (128,620) (128,620)
--------- ----------- -------------- --------------
Balance, December 31, 1994.................................. 5,890 90,246 (135,214) (39,078)
Issuance of 73,625 shares of Common Stock to ART West....... 74 24,926 25,000
Issuance of 4,049,398 shares of Common Stock to existing
shareholders............................................... 4,049 (4,049)
Conversion of note payable and interest to paid-in
capital.................................................... 75,250 75,250
Investment in Telecom as a result of the release of escrow
shares..................................................... 802,002 802,002
Net loss.................................................... (1,267,655) (1,267,655)
--------- ----------- -------------- --------------
Balance, December 31, 1995.................................. $ 10,013 $ 988,375 $ (1,402,869) $ (404,481)
--------- ----------- -------------- --------------
--------- ----------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-11
<PAGE>
ADVANCED RADIO TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994,
FOR THE PERIOD FROM AUGUST 23, 1993 (DATE OF INCEPTION)
TO DECEMBER 31, 1993 AND CUMULATIVE FOR THE PERIOD
FROM AUGUST 23, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
PERIOD FROM CUMULATIVE
AUGUST 23, FROM AUGUST
YEARS ENDED 1993 (DATE OF 23, 1993 (DATE
DECEMBER 31, INCEPTION) TO OF INCEPTION)
----------------------------- DECEMBER 31, TO DECEMBER
1995 1994 1993 31, 1995
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................................ $ (1,267,655) $ (128,620) $ (6,594) $ (1,402,869)
Adjustments to reconcile net loss to net cash used in
operating activities:
Non-cash interest expense............................. 110,828 110,828
Depreciation and amortization......................... 10,378 8,281 688 19,347
Equity loss on investment in Telecom.................. 1,013,885 1,013,885
Changes in operating assets and liabilities:
Accounts payable and accrued liabilities.............. (3,939) (8,282) 19,971 7,750
-------------- ------------- ------------- --------------
Net cash (used in) provided by operating
activities......................................... (136,503) (128,621) 14,065 (251,059)
-------------- ------------- ------------- --------------
Cash flows from investing activities:
Additions to property and equipment..................... (5,175) (5,175)
Investment in ART West and Telecom...................... (255,340) (255,340)
Note receivable from Telecom............................ (5,000,000) (5,000,000)
Acquisition of FCC Licenses............................. (13,912) (13,912)
Increase in other assets................................ (41,272) (41,272)
-------------- ------------- ------------- --------------
Net cash used in investing activities............... (5,269,252) (5,175) (41,272) (5,315,699)
-------------- ------------- ------------- --------------
Cash flows from financing activities:
Proceeds from issuance of Common Stock.................. 35,000 61,136 96,136
Proceeds from loan and note payable..................... 8,500 70,000 78,500
Proceeds from issuance of Preferred Stock............... 50,000 50,000
Preferred Stock issuance costs.......................... (5,070) (5,070)
Repayment of loan....................................... (8,500) (8,500)
Proceeds from convertible note payable.................. 4,950,000 4,950,000
Deferred financing costs................................ (326,919) (326,919)
Due to Telecom.......................................... 738,680 738,680
-------------- ------------- ------------- --------------
Net cash provided by financing activities........... 5,406,691 105,000 61,136 5,572,827
-------------- ------------- ------------- --------------
Net increase (decrease) in cash..................... 936 (28,796) 33,929 6,069
Cash, beginning of period................................. 5,133 33,929
-------------- ------------- ------------- --------------
Cash, end of period....................................... $ 6,069 $ 5,133 $ 33,929 $ 6,069
-------------- ------------- ------------- --------------
-------------- ------------- ------------- --------------
Supplemental cash flow information:
Non-cash investing and financing activities:
Release of escrow shares and increase in the investment
in Telecom............................................. $ 802,002 $ 802,002
Issuance of stock and contribution of licenses to ART
West................................................... $ 30,000 $ 30,000
Conversion of note payable and interest to Common
Stock.................................................. $ 75,250 $ 75,250
Accrued deferred financing costs........................ $ 175,000 $ 175,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-12
<PAGE>
ADVANCED RADIO TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. FORMATION OF THE COMPANY AND BASIS OF PRESENTATION:
THE COMPANY
Advanced Radio Technologies Corporation ("ART" or the "Company") was
organized as a Delaware corporation on August 23, 1993, to provide broadband
wireless digital telecommunications services to the domestic telecommunications
market. The Company's operations to date include the application for and
acquisition of certain 38 GHz licenses granted by the Federal Communications
Commission ("FCC") and costs incurred for the deployment of such services.
During 1995, The Company established a strategic alliance with Extended
Communications, Inc. ("Extended") to form the ART West joint venture. ART West
was formed on April 4, 1995 to develop and expand the Company's wireless digital
telecommunications services in various markets throughout the western United
States (see Note 5).
During 1995, Advanced Radio Telecom Corp. ("Telecom") was organized by the
Company and Landover Holdings Corporation ("Landover") with one of its initial
objectives to acquire certain 38 GHz licenses in the northeastern United States
from EMI Communications, Corp. ("EMI"). Under the terms of a purchase agreement
between the Company, Landover, and Telecom dated April 21, 1995, (the "Purchase
Agreement") Landover was obligated to purchase $7,000,000 of securities of
Telecom. Pursuant to the Purchase Agreement and a stockholders' agreement
between the Company, Telecom and their respective shareholders dated May 8, 1995
(the "Stockholders' Agreement"), the Company and Telecom were to merge once
approval from the FCC had been granted. (See Note 2).
INITIAL CAPITALIZATION
The Company was formed on August 23, 1993 by two of its executives (the
"Founding Stockholders") by issuing 2,945,016 shares of Common Stock in exchange
for $1,136. During November 1993, ART redeemed 1,178,006 shares of Common Stock
from the Founding Stockholders and through a private placement issued 1,178,006
shares of Common Stock to High Sky Limited Partnership ("High Sky") in exchange
for $60,000. During March 1994, High Sky II Limited Partnership ("High Sky II"),
an affiliate of High Sky (collectively referred to as the "High Sky
Partnerships") contributed $100,000 to the Company in exchange for 589,003
shares of Common Stock and a $70,000 Promissory Note. In connection with the
High Sky II financing, ART issued an additional aggregate of 2,356,013 shares to
the Founding Stockholders and High Sky whereby the Founding Stockholders and the
High Sky Partnerships would each own a 50% interest in ART. Additionally, during
1994, one of the Founding Stockholders contributed an additional $5,000 for
which contribution there were no shares issued.
Pursuant to an agreement dated March 1, 1995, High Sky II agreed to assign
the $70,000 Promissory Note, plus accrued interest, to the Founding Stockholders
in exchange for two new promissory notes executed by the Founding Stockholders.
Concurrent with the exchange of the promissory notes, the Founding Stockholders
contributed the $70,000 Promissory Note plus accrued interest of $5,250 to the
Company, for which contribution there were no additional shares issued.
BASIS OF PRESENTATION
The financial statements have been prepared on the going concern basis of
accounting, which contemplates realization of assets and liquidation of
liabilities in the ordinary course of business. The Company has a substantial
working capital deficit, has incurred operating losses since inception and does
not expect to recognize significant operating revenues until the commencement of
its commercial services, which is anticipated to occur in fiscal 1996. The
Company estimates that revenues in 1996 will not be sufficient to fund its
initial operating expenses and other working capital needs, including
F-13
<PAGE>
ADVANCED RADIO TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1. FORMATION OF THE COMPANY AND BASIS OF PRESENTATION, CONTINUED:
consulting, service and purchase commitments set forth in Notes 5, 7, 8 and 11.
The Company's continued funding of its initial operating expenses, working
capital needs and contractual commitments is dependent upon its ability to raise
additional financing. The Company and Telecom have engaged various investment
bankers to assist them in raising financing through a public equity and debt
offering. There can be no assurance that the Company and Telecom will be
successful in their effort to raise additional financing through these offerings
or, if available, that the Company and Telecom will be able to obtain it on
acceptable terms. These conditions raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of these uncertainties.
2. PURCHASE AGREEMENT:
A -- INITIAL CAPITALIZATION OF TELECOM
Pursuant to the Purchase Agreement, as its initial capitalization, an
aggregate of 8,580,000 shares of Class B and Class A common stock were issued by
Telecom to Landover and consultants to Landover, respectively, for an aggregate
cash consideration of $1,020. Such shares of Class B and Class A common stock
represented 64% and 2%, respectively, of the total number shares of capital
stock of Telecom then outstanding. Concurrently, the Company received 4,420,000
shares of Class A common stock, representing 34% of the total number of shares
of capital stock of Telecom then outstanding in exchange for $340. All of the
above references to shares of common stock of Telecom have been adjusted to
reflect a 13 for 1 stock split which occurred in February 1996, but are prior to
the issuance of anti-dilutive shares described below.
Under the Purchase Agreement, Landover agreed to invest or cause to be
invested $7,000,000 in ART, Telecom and their affiliates (the "Landover Funding
Commitment"). In consideration for this $7,000,000 investment, Telecom agreed to
issue preferred stock, the number of shares of which would be designated by
Landover. Under the anti-dilution provisions of the Class A common stock, in
respect of each such preferred stock issuance, Telecom agreed to issue, for no
consideration, additional shares of Class A common stock in number necessary to
maintain the 36% ownership interest in Telecom of the holders of Class A common
stock.
Under the Purchase Agreement, the individual shareholders of the Company
were required to place 5,153,778 shares of Common Stock in the Company in escrow
(the "Escrow Shares") to be released upon the completion of the then pending EMI
Asset acquisition (see Note 8), Telecom's attainment of specific operating
income levels for the years 1997 through 1999 and the acquisition of interests
in a specified number of FCC license authorizations by April 30, 2000. As a
result of the consummation of the EMI Asset acquisition, in November 1995,
1,873,030 of the Escrow Shares of ART were released. The fair value of the
Escrow Shares released in 1995, amounting to $802,002, has been accounted for as
an equity investment in Telecom, the effect of which has been recognized as
additional paid-in capital in the Company. Pursuant to the February 2, 1996
Reorganization, the Escrow Shares arrangement was terminated and all of the
remaining Escrow Shares were released to the stockholders of the Company. The
fair value of the remaining Escrow Shares released, in the amount of
approximately $6.8 million, will be accounted for in the same manner during
1996.
B -- MERGER
Under the terms of the Purchase Agreement, the Company and Telecom intend to
operate both companies as a single enterprise and are committed to merge if and
when permitted by the FCC.
F-14
<PAGE>
ADVANCED RADIO TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. PURCHASE AGREEMENT, CONTINUED:
Concurrent with the Purchase Agreement, the Company and Telecom entered into an
exclusive 20-year services agreement (the "Services Agreement") for the
construction, development and operation of systems in the Company's markets (see
Note 6).
On February 2, 1996, the Company, Telecom and their respective shareholders
agreed to an amendment and restatement of the Stockholders' Agreement providing
for (i) termination effective on the closing of a public share offering, (ii)
amendment and restatement of the Certificate of Incorporation and reorganization
of the capital structure of Telecom; (iii) the exchange of the Advent Notes and
one share of ART Series A Redeemable Preferred Stock for shares of Series E
preferred stock of Telecom (see Note 4); (iv) revision of provisions for
election of directors; (v) amendment and restatement of ART's registration
rights agreements; (vi) release of shares escrowed in connection with the
original Stockholders' Agreement; and (vii) approval of a definitive agreement
to merge the Company and Telecom (the "Reorganization").
C -- AMENDED MERGER
The definitive merger agreement, as entered into on February 2, 1996 and
subsequently restated and amended on June 26, 1996, (the "Merger Agreement")
provides for the merger of a newly-formed wholly owned subsidiary of the Company
("Merger Sub") into Telecom (the "Merger") subject to certain conditions,
including the receipt of FCC approval. Prior to the Merger, each outstanding
share of Telecom's serial preferred stock will be converted into 13 shares of
Telecom's common stock. In the Merger, each outstanding share of common stock of
Telecom will be exchanged for the right to receive an equal number of shares of
Common Stock of the Company. As a result, Telecom will become a wholly owned
subsidiary of the Company. The Merger Agreement provides that if the Merger is
not consummated by May 13, 1997, the shares of Telecom's common stock owned by
the Company will be surrendered to Telecom, and the Services Agreements is to be
revised to, among other revisions, extend the term to 40 years and provide for a
proportionate participation by the Company's stockholders in any dividends paid
by Telecom or the proceeds from any sale of Telecom. The Merger Agreement also
provides for the assignment of Telecom's interests in all of its agreements,
including the various services agreements, employment agreements, equipment
purchase agreements and purchase option agreements, to the Company. Further,
upon the Merger, the holders of warrants to purchase an aggregate of 2,302,136
shares of Telecom common stock will be entitled to purchase an equivalent number
of shares of Common Stock on the same terms. Employee stock options to purchase
1,664,732 shares of Telecom's common stock will be converted into similar stock
options of the Company.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DEVELOPMENT STAGE ENTERPRISE
The Company is a development stage enterprise as defined in Statement of
Financial Accounting Standards No. 7, "Accounting and Reporting by Development
Stage Enterprises." The financial statements have been prepared on the going
concern basis of accounting.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and amortization is
computed using the straight-line method over the estimated useful lives of three
years.
F-15
<PAGE>
ADVANCED RADIO TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
INVESTMENTS
The Company accounts for its 50% interest in the ART West joint venture and
its 34% interest in Telecom under the equity method.
FCC LICENSES
The Company has obtained radio spectrum rights under FCC issued
authorizations and licenses throughout the United States by petitioning the FCC
directly and through the purchase of such rights held by others. Such licenses
are issued for an initial term of six years and are renewable subject to review
by the FCC. The costs associated with the acquisition of such licenses are
capitalized and amortized on a straight-line basis over a 40-year period
beginning upon commencement of operations in the related market. The 40-year
period is based upon management's license renewal expectations.
RECOVERABILITY OF LONG-LIVED ASSETS
The recoverability of property and equipment and capitalized FCC
authorizations and licenses is dependent upon the successful development of
systems in each of the respective markets, or through sale of such assets.
Management estimates that it will recover the carrying amount of those costs
from cash flow generated by the systems once they have been developed. However,
it is reasonably possible that such estimate will change as a result of the
failure to develop the FCC authorizations on a timely basis, or technological,
regulatory or other changes.
The Company's policy is to assess annually any impairment in value based
upon a comparison of projected operating cash flows from each market over its
expected period of operation, on an undiscounted basis, to the carrying amount
of the property and equipment, licenses and other capitalized costs related to
the market.
FINANCING COSTS
Direct costs associated with obtaining debt financing are deferred and
charged to interest expense using the effective interest rate method over the
term of the debt. Direct costs associated with obtaining equity financing are
deferred and charged to additional paid-in capital as the related funds are
raised. Deferred costs associated with unsuccessful financings are charged to
expense.
Accumulated amortization of deferred financing costs totaled $44,376 at
December 31, 1995.
REVENUE RECOGNITION
Revenue from telecommunications services are recognized ratably over the
period such services are provided.
During 1994, the Company recognized income from consulting fees associated
with the application of FCC licenses on behalf of third parties, including
consulting fees of approximately $80,000 from Extended.
INCOME TAXES
The Company accounts for income taxes under the liability method of
accounting. Under the liability method, deferred taxes are determined based on
the differences between the financial statement and tax bases of assets and
liabilities at enacted tax rates in effect in the year in which the differences
are expected to reverse. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amounts expected to be realized.
F-16
<PAGE>
ADVANCED RADIO TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
NET LOSS PER SHARE
Historical net loss per share is computed based on the loss for the period
divided by the weighted average number of shares of Common Stock outstanding
during the period. Historical net loss per share and the weighted average number
of shares of Common Stock outstanding are as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEARS ENDED FROM AUGUST 23,
DECEMBER 31, 1993 (DATE OF
----------------------------- INCEPTION) TO
1995 1994 DECEMBER 31, 1993
-------------- ------------- ------------------
<S> <C> <C> <C>
Net loss per share.................................. $ 0.13 $ 0.01 $ --
-------------- ------------- ------------------
-------------- ------------- ------------------
Weighted average number shares of Common Stock
outstanding........................................ 10,013,055 9,178,633 5,006,527
-------------- ------------- ------------------
-------------- ------------- ------------------
</TABLE>
The Securities and Exchange Commission requires that potentially dilutive
instruments issued within one year prior to a proposed initial public offering
at exercise prices below the expected initial public offering price be treated
as outstanding for all periods presented. Accordingly, an additional 20,502,982
shares are reflected in the weighted average number of shares of Common Stock
outstanding in computing the unaudited pro forma net loss per share for the year
ended December 31, 1995.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
4. NOTE RECEIVABLE FROM TELECOM AND CONVERTIBLE NOTES PAYABLE TO ADVENT:
The Company, Telecom and several entities affiliated with Advent
International Corp. (collectively, "Advent"), entered into a securities purchase
agreement (the "Advent Purchase Agreement") dated November 13, 1995 under which
Advent agreed to acquire a 10% interest in the combined entities of the Company,
Telecom and certain specified affiliates. Pending the merger of these entities
(see Note 2), the Company issued promissory notes (the "Advent Notes") with an
aggregate principal amount of $4,950,000 and one share of the Company's Series A
Redeemable Preferred Stock in exchange for $5,000,000 in cash.
The Advent Notes carried interest at a rate of 10% per annum and were
payable on demand at any time on or after May 13, 1997. The Advent Notes were
collateralized by certain assets of the Company and Telecom. The Advent Notes
were convertible into that number of shares of preferred stock which represented
in the aggregate at least 10% of the fully diluted capital stock of the combined
entities described above, as defined in the Advent Purchase Agreement. The
Advent Notes were convertible either (i) immediately prior to an initial public
offering with aggregate gross proceeds of at least $10,000,000 or (ii) at
Advent's election.
At December 31, 1995, the Company accrued interest expense of $66,542 on the
Advent Notes, which has been included in accounts payable and accrued
liabilities.
On November 13, 1995, the gross proceeds of $5,000,000 received by the
Company from Advent were transferred to Telecom in exchange for a note with
terms equivalent to the terms of the Advent Notes. On February 2, 1996, the
Company, Telecom and Advent entered into an exchange agreement
F-17
<PAGE>
ADVANCED RADIO TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. NOTE RECEIVABLE FROM TELECOM AND CONVERTIBLE NOTES PAYABLE TO
ADVENT, CONTINUED:
under which the Advent Notes, including accrued interest, and the one share of
ART Series A Redeemable Preferred Stock held by Advent were exchanged for
232,826 shares of Series E preferred stock of Telecom, and the note was
canceled. As a result, the Advent Notes were canceled and Telecom became the
owner of the one share of the ART Series A Redeemable Preferred Stock.
5. EQUITY INVESTMENTS:
A -- INVESTMENT IN ART WEST JOINT VENTURE
On April 4, 1995, the Company entered into an agreement with Extended to
form ART West, a jointly controlled general partnership established to acquire,
develop, and operate radio systems using 38 GHz licenses in certain western
states of the U.S. The ART West joint venture will continue until December 31,
2055, unless terminated earlier. The Company's initial capital contribution
consisted of $255,000 in cash, FCC licenses and related assets with a carrying
value of approximately $5,000, and 73,625 shares of Common Stock of ART.
Extended's initial capital contribution consisted of $5,000 in cash and FCC
licenses. The combined systems are collectively referred to as the ART West
Systems. Additionally, Extended received distributions of $250,000 in cash and
the 73,625 shares of Common Stock contributed by the Company to ART West. As a
result of these contributions and distributions, the Company and Extended share
equally in the partnership interests of ART West. The Company recorded its
investment in ART West in the amount of $285,000. The excess of the Company's
share of the underlying net assets of ART West over the Company's recorded
investment will be amortized over the life of the ART West Systems.
On October 1, 1994, ART entered into an exclusive services agreement with
Extended, whereby ART is responsible for the construction, operation and
management of Extended's telecommunications systems. The term of the Agreement
is for five years. In connection with the formation of ART West, Extended
assigned its interest in the services agreement to ART West. Under the terms of
the services agreement, ART will incur all costs and expenses related to
construction, operation and management of the systems. As compensation, ART will
receive all revenues generated by the systems after deducting certain related
direct expenses, less 45% which is to be paid to ART West. ART's interest in
this service agreement was subsequently assigned to Telecom (Note 6). An officer
of ART is also the President and a shareholder of Extended.
B -- ART WEST JOINT VENTURE ACQUISITION AND MANAGEMENT AGREEMENTS
In June 1996, the Company agreed to acquire Extended's 50% ownership
interest in ART West for $6,000,000 in cash upon consummation of public equity
and debt offerings with aggregate net proceeds of $125.0 million to the Company
and receipt of FCC approval. In addition, the Company entered into a ten-year
management agreement which, effective June 1, 1996, replaces the services
agreement referred to above with an arrangement whereby the Company agrees to
construct, operate and manage the ART West Systems in exchange for a license fee
equal to 10% of recurring operating revenues.
C -- INVESTMENT IN TELECOM
The Company acquired 4,420,000 shares of Class A common stock of Telecom, or
34% of the outstanding and issued shares, for cash of $340 (see Note 2). The
Company also recorded $802,002 as an investment in Telecom based upon the fair
value of Escrow Shares released in 1995 (see Note 2). The excess of the
Company's share of the underlying net assets of Telecom over the Company's
recorded investment will be amortized over the estimated useful life of
Telecom's FCC licenses.
F-18
<PAGE>
ADVANCED RADIO TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
5. EQUITY INVESTMENTS, CONTINUED:
The Company recognizes its proportionate share of the losses of Telecom in
excess of its investment to the extent of its funding and financial commitments.
During 1995, the Company recognized its proportionate share of Telecom's loss in
the amount of $1,013,885. Summarized financial information for Telecom as of
December 31, 1995 and for the period from March 28, 1995 (date of inception) to
December 31, 1995 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
---------------
<S> <C>
Total current assets................................................................... $ 1,418,590
Property and equipment, net............................................................ 3,579,838
FCC licenses........................................................................... 4,226,821
Other assets........................................................................... 605,366
---------------
Total assets......................................................................... $ 9,830,615
---------------
---------------
Total current liabilities.............................................................. $ 3,450,537
Note payable to EMI.................................................................... 1,500,000
Note payable to ART.................................................................... 5,000,000
Total stockholders' deficit............................................................ (119,922)
---------------
Total liabilities and stockholders' deficit.......................................... $ 9,830,615
---------------
---------------
<CAPTION>
MARCH 28, 1995
(DATE OF
INCEPTION) TO
DECEMBER 31,
1995
---------------
<S> <C>
Operating revenue...................................................................... $ 5,793
Expenses............................................................................... 2,986,866
---------------
Net loss............................................................................... $ 2,981,073
---------------
---------------
</TABLE>
6. TELECOM SERVICES AGREEMENT:
The Company entered into an exclusive Services Agreement with Telecom, for
the construction, operation and management of the FCC licenses and related
telecommunications systems that are owned by ART or for which ART has existing
services agreements. Under the Services Agreement, Telecom will incur all costs
and expenses related to construction, operation and management of the systems.
As compensation, Telecom will receive all revenues generated by the systems
after deducting certain related direct expenses, less 25% which is to be paid to
the Company. The Services Agreement is for a period of 20 years.
Through this Services Agreement, the Company has assigned its interests in
other similar services agreements with ART West (see Note 5) and DCT (see Note
7). There have been no services provided through December 31, 1995 on any of the
services agreements.
7. DCT AGREEMENTS:
SYSTEM PURCHASE AGREEMENT
On September 1, 1994, the Company entered into an agreement with DCT
Communications, Inc. ("DCT"), in which the Company obtained the option to
purchase certain FCC licenses (the "Systems") from DCT for $500,000 and shares
of ART Common Stock that represent 5% of its fully diluted equity as of the date
of transfer. The option is exercisable at any time after December 31, 1995 and
up to the date
F-19
<PAGE>
ADVANCED RADIO TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. DCT AGREEMENTS, CONTINUED:
that is three years after the FCC issues DCT's first license. At any time after
December 31, 1995, DCT may require that the Company purchase the Systems for
$50,000, plus reimbursement of certain costs defined in the agreement.
SERVICES AGREEMENT
On September 1, 1994, the Company entered into an exclusive services
agreement with DCT whereby the Company is responsible for the construction,
operation and management of DCT's Systems. The term of the Agreement is for five
years. Under the terms of the services agreement, the Company will incur all
costs and expenses related to construction, operation and management of the
systems. As compensation, the Company will receive all revenues generated by the
systems after deducting certain related direct expenses, less 45% which is to be
paid to DCT.
CONSULTING AND LOAN AGREEMENT
On March 13, 1995, the Company entered into a consulting and loan agreement
(the "Consulting and Loan Agreement"). Under the terms of the Consulting and
Loan Agreement, DCT agreed to loan the Company $8,500, bearing interest at 9%
per annum. The loan, including interest of $431, was due and paid on August 31,
1995.
DCT PRELIMINARY AGREEMENT
On April 25, 1996, the Company and Telecom entered into a preliminary
agreement with DCT to acquire DCT's interest in certain FCC authorizations and
licenses in exchange for $3.6 million in cash, subject to the completion of a
definitive purchase agreement and services agreement. The definitive purchase
agreement will supersede and replace all other existing agreements between DCT
and the Company. The definitive purchase agreement must be signed by June 28,
1996 and the closing of the transaction is subject to FCC approval.
8. COMMITMENTS:
ACQUISITION OF ASSETS OF EMI
On April 4, 1995, the Company entered into a purchase option agreement with
EMI to acquire EMI's interest in certain 38 GHz radio spectrum licenses and
related assets in the northeastern United States (the "EMI Assets") in exchange
for $3,000,000 in cash and a three year non-negotiable promissory note in the
amount of $1,500,000. Pursuant to the Purchase Agreement (see Note 1), in
November, 1995, the Company assigned its rights and obligations under the
purchase option agreement to Telecom. The FCC subsequently approved the transfer
of the EMI licenses and Telecom directly acquired the EMI Assets in November
1995. The Company has also issued a guarantee to EMI of the obligations of
Telecom under the promissory note.
TELECOM ONE OPTION
On May 25, 1995, the Company entered into an agreement with TeleCom One
Incorporated ("TeleCom One") whereby the Company agreed to assist TeleCom One in
its applications for certain FCC licenses (the "TeleCom One Agreement"). Under
the terms of the TeleCom One Agreement, in exchange for its services, the
Company acquired options to purchase a 49% interest in each of the FCC licenses
obtained by TeleCom One at a purchase price of $.0133 per person covered by the
geographic license area. The term of the TeleCom One Agreement is five years.
The Company has not exercised any of its options.
F-20
<PAGE>
ADVANCED RADIO TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
8. COMMITMENTS, CONTINUED:
EMPLOYMENT AND CONSULTING AGREEMENTS
On May 8, 1995, the Company and Telecom jointly entered into consulting
agreements with two executive officers of the Company and Telecom, effective as
of January 1, 1995 and continuing for a term of three years, with minimum
payments aggregating approximately $170,000 annually. The costs associated with
these contracts have been recorded by Telecom and no amounts have been charged
to the Company.
On December 16, 1995, one of the executive officers of the Company and
Telecom, previously a party to one of the consulting agreements described above,
entered into a full-time employment agreement. The employment agreement is for a
three-year term with an annual salary of $250,000 in the first year, $275,000 in
the second year and $300,000 in the third year. In addition, the agreement
provides for a cash bonus of up to $100,000 for each year based upon achievement
of specific performance objectives. The costs associated with this contract have
been recorded by Telecom and no amounts have been charged to the Company.
On July 11, 1995, the Company and Telecom entered into an employment
agreement, as amended January 8, 1996, with an officer of the Company and
Telecom. The term of the agreement is three years at an annual salary of
$160,000 in the first year, $200,000 in the second year and $240,000 in the
third year. Options to purchase shares of Telecom common stock were awarded to
this officer equivalent to 2.5% of the outstanding capital stock of Telecom. The
agreement also provides for an engagement bonus of $17,000 upon execution of the
agreement and a cash bonus of up to $100,000 for each year based upon
achievement of specific performance objectives. The costs associated with this
contract have been recorded by Telecom and no amounts have been charged to the
Company.
The Company and Telecom have also entered into employment agreements with
other executives that provide for annual base salaries and cash bonuses based on
achievement of specific performance goals. These contracts may be terminated at
any time by management.
FINANCING AGREEMENT
During 1994, the Company entered into an agreement with Southeast Research
Partners ("SERP"), a subsidiary of Josephthal, Lyons & Ross, a Florida broker
dealer, to procure additional financing for the Company in exchange for cash and
options to purchase capital stock of the Company. Pursuant to a letter agreement
dated July 12, 1995, the Company and Telecom paid SERP $245,000 and the
shareholders of the Company granted SERP options to purchase 313,612 shares of
the Company's Common Stock directly from the Founding Stockholders for an
aggregate consideration of $210,000.
As of December 31, 1995, the Company and Telecom have accounted for the fee
of $245,000 as part of the financing provided by Landover and, accordingly,
$175,000 has been recorded as deferred financing costs related to the issuance
of the Advent Notes (See Note 4) and the balance of $70,000 has been recognized
as an offset against the proceeds from the issuance of the serial preferred
stock of Telecom.
9. COMMON STOCK:
On April 5, 1994, the Board of Directors authorized a 5 for 1 stock split.
Subsequently, on April 5, 1995, the Board of Directors authorized a 1 for 5
reverse stock split and simultaneously issued an additional 4,049,398 shares of
Common Stock.
On May 30, 1996, the Board of Directors authorized a 29,450.16 for 1 stock
split, increased the number of authorized shares of Preferred Stock and Common
Stock to 10,000,000 and 100,000,000,
F-21
<PAGE>
ADVANCED RADIO TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
9. COMMON STOCK, CONTINUED:
respectively, and changed the par value per share from $.01 to $.001. All
references to the number of shares and per share amounts of the Company's Common
Stock in the accompanying financial statements have been restated to reflect the
five for one stock split, the one for five reverse stock split and the 29,450.16
for 1 stock split, unless otherwise indicated. All par value amounts have been
restated to reflect the change in par value to $.001 per share.
10. INCOME TAXES:
As of December 31, 1995 and 1994, the Company has net operating loss
carry-forwards for income tax purposes of approximately $390,000 and $134,000,
respectively, which will expire between 2008 and 2010. Deferred tax assets of
approximately $130,000 and $46,000 at December 31, 1995 and 1994, respectively,
principally comprised of such net operating tax loss carry-forwards, have been
offset in full by a valuation allowance.
11. RELATED PARTY TRANSACTIONS:
On May 8, 1995, the Company and Telecom entered into a consulting agreement
with Landover as a strategic and financial consultant. Telecom paid Landover
$70,000 for services under this agreement during 1995. The consulting agreement
was terminated on November 13, 1995.
On November 13, 1995, the Company and Telecom entered into a management
consulting agreement with Landover to provide strategic planning, corporate
development and general management. Under the agreement, the Company and Telecom
will pay Landover $35,000 per month for an initial one year term, renewable by
the Company and Telecom for two additional one year terms. The aggregate expense
recognized by Telecom under this agreement during 1995 amounted to $70,000.
These expenses have been recorded by Telecom and no portion of such costs have
been charged to the Company. The agreement also provides that in the event
Landover arranges financing, acquisitions or certain other transactions for the
Company and Telecom, Landover will be paid a fee in accordance with industry
standards.
Pursuant to the Purchase Agreement, the Company and Telecom paid Landover
$391,750 for expenses in connection with the Landover Funding Commitment, of
which $250,000 has been capitalized as deferred financing costs by the Company
and the balance of $141,750 has been charged to paid-in capital of Telecom.
Telecom has funded certain expenses and investments of the Company,
including the Company's investment in ART West and payments of financing and
other operating costs. The amounts funded by Telecom to date totaling $805,803,
offset by accrued interest income of $67,123 related to the note receivable from
Telecom (see Note 4) have been included in the amount due to Telecom.
In 1994, the Company shared office space with a law firm in which a
principal of the law firm was also one of the Founding Stockholders. The Company
paid rent in the amount of $6,353 to the law firm for the use of their office
space. The law firm also regularly provides legal services to the Company.
During 1995 and 1994, the Company incurred fees of $34,770 and $74,550,
respectively, for such services.
F-22
<PAGE>
ADVANCED RADIO TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
12. FAIR VALUES OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company's financial instruments
at December 31 were as follows:
<TABLE>
<CAPTION>
1995 1994
---------------------------- --------------------
CARRYING CARRYING FAIR
AMOUNT FAIR VALUE AMOUNT VALUE
------------- ------------- --------- ---------
<S> <C> <C> <C> <C>
Note receivable from Telecom................................ $ 5,000,000 $ 5,000,000 -- --
Notes payable............................................... 4,950,000 4,950,000 $ 70,000 $ 70,000
</TABLE>
Note receivable from Telecom: The carrying amounts reported in the balance
sheet are a reasonable estimate of fair values.
Notes payable: The carrying amounts reported in the balance sheet
approximate fair values based upon interest rates that are currently available
to the Company for issuance of similar debt with similar terms and maturities.
F-23
<PAGE>
ADVANCED RADIO TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED INTERIM CONDENSED BALANCE SHEETS
AS OF MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash.............................................................................. $ 5,970 $ 255
-------------- ------------
Total current assets.......................................................... 5,970 255
Equity investments.................................................................. 3,242,401
FCC licenses........................................................................ 8,913
Property and equipment, net......................................................... 1,292 3,448
Other assets........................................................................ 23,212 34,030
-------------- ------------
Total assets.................................................................. $ 3,281,788 $ 37,733
-------------- ------------
-------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities.......................................... $ 2,500 $ 4,230
Due to Telecom.................................................................... 498,100
Notes payable..................................................................... 114,334
-------------- ------------
Total current liabilities..................................................... 500,600 118,564
Redeemable Preferred Stock, $.01 par value; 1,000 shares authorized; 1 share issued
and outstanding at March 31, 1996.................................................. 44,930
-------------- ------------
Commitments and contingencies
Stockholders' equity (deficit):
Common Stock, $.001 par value; 58,900,320 shares authorized; 10,013,055 and
5,890,032 shares issued and outstanding.......................................... 10,013 5,890
Additional paid-in capital........................................................ 7,783,889 90,246
Deficit accumulated during the development stage.................................. (5,057,644) (176,967)
-------------- ------------
Total stockholders' equity (deficit).......................................... 2,736,258 (80,831)
-------------- ------------
Total liabilities and stockholders' equity (deficit)........................ $ 3,281,788 $ 37,733
-------------- ------------
-------------- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-24
<PAGE>
ADVANCED RADIO TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED INTERIM CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- ---------
<S> <C> <C>
Expenses:
General and administrative............................................................. $ 24,939 $ 40,878
Depreciation and amortization.......................................................... 2,595
Interest expense, net.................................................................. 671 875
------------- ---------
Total expenses..................................................................... 28,205 41,753
Equity loss on investment in Telecom..................................................... 3,626,570
------------- ---------
Net loss........................................................................... $ 3,654,775 $ 41,753
------------- ---------
------------- ---------
Pro forma net loss per share............................................................. $ 0.12
-------------
-------------
Pro forma weighted average number of shares of Common Stock outstanding (unaudited)...... 30,516,037
-------------
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-25
<PAGE>
ADVANCED RADIO TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED INTERIM CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................................................... $ (3,654,775) $ (41,753)
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash interest expense............................................................ 69,347
Depreciation and amortization........................................................ 2,595
Equity loss on investment in Telecom................................................. 3,626,570
Changes in operating assets and liabilities:
Accounts payable and accrued liabilities............................................. (43,836) (7,459)
-------------- ----------
Net cash used in operating activities.............................................. (99) (49,212)
-------------- ----------
Cash flows from financing activities:
Proceeds from loan and note payable.................................................... 44,334
-------------- ----------
Net cash provided by financing activities.......................................... -- 44,334
-------------- ----------
Net decrease in cash............................................................... (99) (4,878)
Cash, beginning of period................................................................ 6,069 5,133
-------------- ----------
Cash, end of period...................................................................... $ 5,970 $ 255
-------------- ----------
-------------- ----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-26
<PAGE>
ADVANCED RADIO TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS
1. FORMATION OF THE COMPANY AND BASIS OF PRESENTATION:
THE COMPANY
Advanced Radio Technologies Corporation ("ART" or the "Company") was
organized as a Delaware corporation on August 23, 1993, to provide broadband
wireless digital telecommunications services to the domestic telecommunications
market.
BASIS OF PRESENTATION
The unaudited interim condensed financial statements included herein have
been prepared by the Company. The foregoing statements contain all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
the Company's management, necessary to present fairly the financial position of
the Company as of March 31, 1996 and 1995, and the results of its operations and
its cash flows for the three months ended March 31, 1996 and 1995.
Certain information and footnote disclosures normally included in financial
statements have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. These condensed financial statements
should be read in conjunction with the Company's December 31, 1995 audited
financial statements and notes thereto.
The financial statements have been prepared on the going concern basis of
accounting, which contemplates realization of assets and liquidation of
liabilities in the ordinary course of business. The Company has limited
financial resources, incurred operating losses since inception and does not
expect to recognize material operating revenues until the commencement of its
commercial services, which is anticipated to occur in fiscal 1996. The Company
estimates that revenues in 1996 will not be sufficient to fund its initial
operating expenses and other working capital needs, including consulting,
service and purchase commitments. The Company's continued funding of its initial
operating expenses, working capital needs and contractual commitments is
dependent upon its ability to raise additional financing. The Company and
Advanced Radio Telecom Corp. ("Telecom") (see Note 2) have engaged various
investment bankers to assist them in raising financing through a public equity
and debt offering. There can be no assurance that the Company and Telecom will
be successful in their effort to raise additional financing through this public
offering or, if available, that the Company and Telecom will be able to obtain
it on acceptable terms. These conditions raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of these
uncertainties.
2. STOCKHOLDERS' AGREEMENT:
On February 2, 1996, the Company, Telecom and their respective shareholders
agreed to an amendment and restatement of the Stockholders' Agreement providing
for (i) termination effective on the closing of a public share offering, (ii)
amendment and restatement of the Certificate of Incorporation and reorganization
of the capital structure of Telecom; (iii) the exchange of the Advent Notes and
one share of ART Series A Redeemable Preferred Stock for shares of Series E
preferred stock of Telecom; (iv) revision of provisions for election of
directors; (v) amendment and restatement of ART's registration rights
agreements; (vi) release of shares escrowed in connection with the original
Stockholders' Agreement; and (vii) approval of the definitive merger agreement.
The definitive merger agreement, as entered into on February 2, 1996 and
subsequently restated and amended on June 26, 1996 (the "Merger Agreement"),
provides for the merger of a newly-formed wholly owned subsidiary of the Company
("Merger Sub") into Telecom (the "Merger") subject to certain conditions,
including the receipt of FCC approval. Prior to the Merger, each outstanding
share of
F-27
<PAGE>
ADVANCED RADIO TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS, CONTINUED
2. STOCKHOLDERS' AGREEMENT: CONTINUED:
Telecom's serial preferred stock will be converted into 13 shares of Telecom's
common stock. In the Merger each outstanding share of common stock of Telecom
will be exchanged for the right to receive an equal number of shares of Common
Stock of the Company. As a result, Telecom will become a wholly owned subsidiary
of the Company. The Merger Agreement provides that if the Merger is not
consummated by May 13, 1997, the shares of Telecom's common stock owned by the
Company will be surrendered to Telecom and the Services Agreement is to be
revised to, among other revisions, extend the term to 40 years and provide for a
proportionate participation by the Company's stockholders in any dividends paid
by Telecom or the proceeds from any sale of Telecom. The Merger Agreement also
provides for the assignment of Telecom's interests in all of its agreements,
including the various services agreements, employment agreements, equipment
purchase agreements and purchase option agreements, to the Company. Further,
upon the Merger, the holders of warrants to purchase an aggregate of 2,302,136
shares of Telecom common stock will be entitled to purchase an equivalent number
of shares of Common Stock on the same terms. Employee stock options to purchase
1,664,732 shares of Telecom's common stock will be converted into similar stock
options of the Company.
3. NET LOSS PER SHARE
Historical net loss per share is computed based on the loss for the period
divided by the weighted average number of shares of Common Stock outstanding
during the period. Historical net loss per share and the weighted average number
of shares of Common Stock outstanding are as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Net loss per share.............................................. $ .37 $ --
------------- -------------
------------- -------------
Weighted average number shares of Common Stock outstanding...... 10,013,055 10,013,055
------------- -------------
------------- -------------
</TABLE>
The Securities and Exchange Commission requires that potentially dilutive
instruments issued within one year prior to a proposed initial public offering
at exercise prices below the expected initial public offering price be treated
as outstanding for all periods presented. Accordingly, an additional 20,502,982
shares are reflected in the weighted average number of shares of Common Stock
outstanding in computing the unaudited pro forma net loss per share for the
three months ended March 31, 1996.
4. NOTES RECEIVABLE FROM TELECOM AND CONVERTIBLE NOTE PAYABLE TO ADVENT:
On February 2, 1996, the Company, Telecom and Advent entered into an
exchange agreement under which the Advent Notes, including accrued interest, and
the one share of ART's Series A Redeemable Preferred Stock held by Advent were
exchanged for 232,826 shares of Series E preferred stock of Telecom, and the
notes payable by the Company to Advent and by Telecom to the Company were
canceled, the related interest forgiven, and Telecom became the owner of the one
share of ART Series A Redeemable Preferred Stock.
5. INVESTMENTS:
The Company accounts for its 50% interest in the ART West joint venture and
its 34% interest in Telecom under the equity method.
In June 1996, the Company agreed to acquire Extended's 50% ownership
interest in ART West for $6 million in cash upon consummation of public equity
and debt offerings with aggregate net proceeds of $125 million to the Company
and receipt of FCC approval. In addition, the Company entered into a
F-28
<PAGE>
ADVANCED RADIO TECHNOLOGIES CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS, CONTINUED
5. INVESTMENTS: CONTINUED:
ten-year management agreement which, effective June 1, 1996, replaced the
services agreement with ART West with an arrangement whereby the Company agrees
to construct, operate, and manage the ART West systems in exchange for a license
fee equal to 10% of recurring operating revenues.
During 1995, the Company recorded $802,002 as an investment in Telecom based
upon the fair value of Escrow Shares released in 1995, the effect of which was
recognized as additional paid-in capital in the Company. On February 2, 1996,
the Company recorded an additional $6,795,514 based on the fair value of the
remaining Escrow Shares released, which was accounted for in the same manner.
The Company recognizes its proportionate share of the losses of Telecom to
the extent of its investment, funding and financial commitments. During 1996,
the Company has recognized its proportionate share of the losses of Telecom in
the amount of $3,626,570.
6. COMMCOCCC ASSET ACQUISITION
During July 1996, the Company entered into an agreement with CommcoCCC, Inc.
("CommcoCCC") to acquire CommcoCCC's interests in certain 38 GHz FCC
authorizations (the "CommcoCCC Assets") in exchange for 16.5 million shares of
Common Stock. The acquisition of the CommcoCCC Assets is subject to various
conditions including (i) minimum population coverage of the authorizations of
the Company and CommcoCCC, (ii) receipt of final FCC and other approvals, (iii)
receipt by CommcoCCC of an opinion as to the tax-free nature of the transaction
(iv) the accuracy of representations and warranties except for breaches that do
not have in the aggregate a material adverse effect, (v) no pending or
threatened material litigation, (vi) consummation of public equity and debt
offerings on terms reasonably satisfactory to CommcoCCC and (vii) other
customary closing conditions. Pending the completion of the acquisition, the
Company has agreed to construct, manage and operate the CommcoCCC Assets.
The Company has given a stockholder ("Commco LLC") of CommcoCCC an option
(the "Option") to purchase FCC authorizations in specified market areas in which
the Company will have more than one authorization. The Option is exercisable
only in the event that the CommcoCCC Acquisition is consummated and Commco LLC
receives authorizations pursuant to pending applications covering a minimum
specified population and expires nine months after the consummation of the
Common Stock Offering. The price of authorizations to be purchased under the
Option is based upon a formula that considers the market price of Common Stock
on the date of exercise.
In connection with the agreement to acquire the CommcoCCC Assets, certain
stockholders of CommcoCCC loaned the Company $3 million in cash in exchange for
notes due September 30, 1996 (the "CommcoCCC Notes") with interest at the prime
rate and received three year warrants to purchase 50,000 shares of Common Stock
at a price of $9 per share, as adjusted from $15 per share. The CommcoCCC Notes
are collateralized by all of the assets of the Company and, if not paid in full
when due, the unpaid balance is convertible into Common Stock, at the option of
each holder, at stipulated per share prices based upon the timing of exercise.
7. RELATED PARTY TRANSACTIONS
Telecom has funded the payment of certain expenses of the Company, including
financing costs. The amounts funded by Telecom during the quarter ended March
31, 1996 totaled $175,000. The balance resulting from the funding activities,
offset by the net effect of the conversion of the Advent Notes and the
cancellation of the note receivable from Telecom (Note 3), is shown as due to
Telecom in the accompanying balance sheet.
F-29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Advanced Radio Telecom Corp.:
We have audited the accompanying balance sheet of Advanced Radio Telecom
Corp. (a development stage company) as of December 31, 1995, and the related
statements of operations, stockholders' deficit and cash flows for the period
from March 28, 1995 (date of inception) to December 31, 1995. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Advanced Radio Telecom Corp.
as of December 31, 1995, and the results of its operations and its cash flows
for the period from March 28, 1995 (date of inception) to December 31, 1995, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared on the going
concern basis of accounting, which contemplates realization of assets and
liquidation of liabilities in the ordinary course of business. As described in
Note 1, the Company has a substantial working capital deficit at December 31,
1995, has incurred operating losses since inception and does not expect to
generate significant operating revenues until fiscal 1996. The Company estimates
that revenues in 1996 will not be sufficient to fund its initial capital
requirements, operating expenses and other working capital needs. In addition,
as set forth in Notes 8 and 2, the Company has significant financial
commitments. The Company's continued funding of its initial capital
requirements, operating expenses, working capital needs and contractual
commitments is dependent upon its ability to raise additional financing.
Management's plans in this regard are discussed in Note 1. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
COOPERS & LYBRAND L.L.P.
New York, New York
April 26, 1996, except for Note 2B
as to which the date is June 26, 1996
F-30
<PAGE>
ADVANCED RADIO TELECOM CORP.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, 1995
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents.................................................... $ 627,585
Due from ART (Note 12)....................................................... 738,680
Other current assets......................................................... 52,325
-----------
Total current assets....................................................... 1,418,590
Property and equipment, net (Note 5)........................................... 3,579,838
FCC licenses (Note 4).......................................................... 4,226,821
Equipment and other deposits (Note 8).......................................... 284,012
Deferred financing costs....................................................... 321,354
-----------
Total assets............................................................. $ 9,830,615
-----------
-----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities (Note 6)............................ $ 3,450,537
-----------
Total current liabilities................................................ 3,450,537
Note payable to ART (Note 7)................................................... 5,000,000
Note payable to EMI (Note 4)................................................... 1,500,000
-----------
Total liabilities........................................................ 9,950,537
-----------
Commitments and contingencies (Notes 1, 8, 12 and 14)
Stockholders' deficit (Note 9):
Serial preferred stock, $.001 par value, 488,492 shares issued and
outstanding................................................................. 488
Class A common stock, $.001 par value, 7,779,135 shares issued and
outstanding................................................................. 7,779
Class B common stock, $.001 par value, 7,512,076 shares issued and
outstanding................................................................. 7,512
Additional paid-in capital................................................... 2,845,372
Deficit accumulated during the development stage............................. (2,981,073)
-----------
Total stockholders' deficit.............................................. (119,922)
-----------
Total liabilities and stockholders' deficit............................ $ 9,830,615
-----------
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-31
<PAGE>
ADVANCED RADIO TELECOM CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM MARCH 28, 1995 (DATE OF INCEPTION)
TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
Operating revenue.............................................................. $ 5,793
<S> <C>
----------
Expenses:
General and administrative expenses (Notes 8, 9 and 10)...................... 2,706,336
Market development expenses.................................................. 191,693
Depreciation and amortization................................................ 5,306
Interest expense, net (Notes 4 and 7)........................................ 83,531
----------
Total expenses............................................................. 2,986,866
----------
Net loss................................................................. $2,981,073
----------
----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-32
<PAGE>
ADVANCED RADIO TELECOM CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE PERIOD FROM MARCH 28, 1995 (DATE OF INCEPTION)
TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK
-------------------- -------------------------------------------------------------
SHARES CLASS A CLASS B SERIES A SERIES B SERIES C SERIES D TOTAL
- ---------------------------------- --------- --------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock to ART
for cash......................... 4,420,000
Issuance of common stock to
Landover and affiliates for
cash............................. 260,000 8,320,000
Issuance of preferred stock to
limited partnerships affiliated
with Landover for cash:
Series A........................ 332,091 332,091
Series B........................ 82,318 82,318
Series C........................ 5,402 5,402
Issuance of Series D preferred
stock for cash................... 61,640 61,640
Shares issued to reflect
anti-dilution adjustments........ 3,099,135 2,852 4,189 7,041
Redemption of common stock from
Landover......................... (807,924)
--------- --------- ----------- ----------- ----- ----------- ---------
Balance at December 31, 1995...... 7,779,135 7,512,076 334,943 86,507 5,402 61,640 488,492
--------- --------- ----------- ----------- ----- ----------- ---------
--------- --------- ----------- ----------- ----- ----------- ---------
<CAPTION>
SHARES
- ----------------------------------
<S> <C> <C> <C>
Issuance of common stock to ART
for cash.........................
Issuance of common stock to
Landover and affiliates for
cash.............................
Issuance of preferred stock to
limited partnerships affiliated
with Landover for cash:
Series A........................
Series B........................
Series C........................
Issuance of Series D preferred
stock for cash...................
Shares issued to reflect
anti-dilution adjustments........
Redemption of common stock from
Landover.........................
Balance at December 31, 1995......
</TABLE>
<TABLE>
<CAPTION>
PAR VALUE
-----------------------------------------------------------------------------------------------
COMMON STOCK PREFERRED STOCK
------------------------ ---------------------------------------------------------------------
AMOUNTS CLASS A CLASS B SERIES A SERIES B SERIES C SERIES D TOTAL
- ---------------------------------- ----------- ----------- ----------- ------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock to ART
for cash......................... $ 4,420
Issuance of common stock to
Landover and affiliates for
cash............................. 260 $ 8,320
Issuance of preferred stock to
limited partnerships affiliated
with Landover for cash:
Series A........................ $ 332 $ 332
Series B........................ $ 82 82
Series C........................ $ 5 5
Issuance of Series D preferred
stock for cash................... $ 62 62
Shares issued to reflect
anti-dilution adjustments........ 3,099 3 4 7
Serial preferred stock issuance
costs............................
Redemption of common stock from
Landover......................... (808)
Investment by ART as a result of
the release of escrow shares.....
Accrued stock option
compensation.....................
Net loss..........................
--
----------- ----------- ----- --- --- -----
Balance at December 31, 1995...... $ 7,779 $ 7,512 $ 335 $ 86 $ 5 $ 62 $ 488
--
--
----------- ----------- ----- --- --- -----
----------- ----------- ----- --- --- -----
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
AMOUNTS CAPITAL DEFICIT TOTAL
- ---------------------------------- ----------- ------------- -----------
<S> <C> <C> <C>
Issuance of common stock to ART
for cash......................... $ (4,080) $ 340
Issuance of common stock to
Landover and affiliates for
cash............................. (7,560) 1,020
Issuance of preferred stock to
limited partnerships affiliated
with Landover for cash:
Series A........................ 1,006,268 1,006,600
Series B........................ 880,618 880,700
Series C........................ 112,695 112,700
Issuance of Series D preferred
stock for cash................... 1,999,938 2,000,000
Shares issued to reflect
anti-dilution adjustments........ (3,106)
Serial preferred stock issuance
costs............................ (229,814) (229,814)
Redemption of common stock from
Landover......................... (1,999,192) (2,000,000)
Investment by ART as a result of
the release of escrow shares..... 802,002 802,002
Accrued stock option
compensation..................... 287,603 287,603
Net loss.......................... $(2,981,073) (2,981,073)
----------- ------------- -----------
Balance at December 31, 1995...... $ 2,845,372 $(2,981,073) $ (119,922)
----------- ------------- -----------
----------- ------------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-33
<PAGE>
ADVANCED RADIO TELECOM CORP.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM MARCH 28, 1995 (DATE OF INCEPTION)
TO DECEMBER 31, 1995
<TABLE>
<CAPTION>
Cash flows from operating activities:
<S> <C>
Net loss..................................................................... $(2,981,073)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization.............................................. 5,306
Non-cash compensation expense.............................................. 1,089,605
Changes in operating assets and liabilities:
Deposits................................................................. (4,012)
Accounts payable and accrued liabilities................................. 567,290
Other current assets..................................................... (52,325)
-----------
Net cash used in operating activities.................................. (1,375,209)
-----------
Cash flows from investing activities:
Acquisition of EMI licenses and property and equipment....................... (3,023,971)
Additions to property and equipment.......................................... (621,364)
Advances to ART.............................................................. (738,680)
Deposits on equipment........................................................ (280,000)
-----------
Net cash used in investing activities.................................. (4,664,015)
-----------
Cash flows from financing activities:
Proceeds from issuance of common stock....................................... 1,360
Proceeds from issuance of serial preferred stock............................. 4,000,000
Stock issuance costs......................................................... (208,814)
Proceeds from issuance of note payable to ART................................ 5,000,000
Advances from Landover and affiliates........................................ 175,000
Payments on advances from Landover and affiliates............................ (175,000)
Redemption of common stock................................................... (2,000,000)
Additions to deferred financing costs........................................ (125,737)
-----------
Net cash provided by financing activities.............................. 6,666,809
-----------
Net increase in cash and cash equivalents and balance at end of
period.............................................................. $ 627,585
-----------
-----------
Supplemental cash flow information:
Non-cash financing and investing activities:
Additions to property and equipment........................................ $ 2,666,630
Issuance of promissory note payable to EMI................................. 1,500,000
Accrued stock issuance costs............................................... 21,000
Accrued deferred financing costs........................................... 195,617
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-34
<PAGE>
ADVANCED RADIO TELECOM CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. FORMATION OF THE COMPANY AND BASIS OF PRESENTATION:
THE COMPANY
Advanced Radio Telecom Corp. ("Telecom"), formerly named Advanced Radio
Technology Ltd., was incorporated in Delaware as a subsidiary of Advanced Radio
Technologies Corporation ("ART") on March 28, 1995, to develop, market and
deliver broadband telecommunication and information services throughout the
United States. The Company's business objective is to organize and finance local
operating facilities, establish strategic alliances with other businesses,
acquire new wireless telecommunications technologies, and market broadband
wireless services to telecommunications service providers and end users.
Telecom was organized by ART and Landover Holdings Corporation ("Landover")
with one of its initial objectives to acquire certain 38 GHz licenses in the
Northeastern United States from EMI Communications Corp. ("EMI") (see Note 4).
Under the terms of a purchase agreement between Telecom, Landover and ART dated
April 21, 1995 (the "Purchase Agreement"), Landover was obligated to purchase
$7.0 million of securities of Telecom. Pursuant to the Purchase Agreement and a
stockholders' agreement between Telecom, ART and their respective shareholders
dated May 8, 1995 (the "Stockholders' Agreement"), Telecom and ART will merge
once approval from the Federal Communications Commission (the "FCC") has been
granted. On February 2, 1996, Telecom and ART entered into a definitive merger
agreement (the "Merger Agreement") providing for a merger of Telecom and ART
(the "Merger"). (See Note 2).
INITIAL CAPITALIZATION
As its initial capitalization, Telecom issued 8,320,000 shares of Class B
common stock to Landover and 260,000 shares of Class A common stock to
consultants to Landover, for aggregate cash consideration of $1,020. Such shares
of Class B common stock and Class A common stock represented 64% and 2%,
respectively, of the total number of shares of capital stock of Telecom then
outstanding. Concurrently, Telecom issued 4,420,000 shares of Class A common
stock, representing 34% of the total number of shares of capital stock, to ART
for $340. The number of shares of Class A and Class B common stock issued at the
initial capitalization of Telecom shown above give effect to the 13 for 1 stock
split but are prior to the issuance of anti-dilutive shares (see Note 9). All
references to number of shares of common stock and per share amounts in the
accompanying financial statements and footnotes have been restated to reflect
the 13 for 1 stock split unless otherwise indicated.
Under the Purchase Agreement, Landover agreed to invest or cause to be
invested $7.0 million in Telecom and its affiliates (the "Landover Funding
Commitment"). In consideration for this $7.0 million investment, Telecom agreed
to issue serial preferred stock, the number of shares of which would be
designated by Landover.
BASIS OF PRESENTATION
The financial statements have been prepared on the going concern basis of
accounting, which contemplates realization of assets and liquidation of
liabilities in the ordinary course of business. Telecom has limited financial
resources, has incurred operating losses since inception and does not expect to
generate significant operating revenues until the commencement of its commercial
services, which is anticipated to occur in fiscal 1996. Telecom estimates that
revenues in 1996 will not be sufficient to fund its initial operating expenses
and other working capital needs, including consulting, service and purchase
commitments set forth in Notes 8 and 2. Telecom's funding of its initial
operating expenses, working capital needs and contractual commitments is
dependent upon its ability to raise additional
F-35
<PAGE>
ADVANCED RADIO TELECOM CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1. FORMATION OF THE COMPANY AND BASIS OF PRESENTATION, CONTINUED:
financing. Telecom and ART have engaged various investment bankers to assist
them in raising financing through a public equity and debt offering of ART.
There can be no assurance that Telecom and ART will be successful in its effort
to raise additional financing through these offerings or, if available, that
Telecom and ART will be able to obtain it on acceptable terms. These conditions
raise substantial doubt about Telecom's ability to continue as a going concern.
The financial statements do not include any adjustments that might result from
the outcome of these uncertainties.
2. REORGANIZATION AND PENDING MERGER WITH ART:
A -- MERGER
Under the terms of the Purchase Agreement, Telecom and ART intend to operate
both companies as a single enterprise and were committed to merge if and when
permitted by the FCC. Concurrent with the Purchase Agreement, Telecom and ART
entered into an exclusive 20-year services agreement (the "Services Agreement")
for the construction, development and operation of systems in ART markets (see
Note 8).
On February 2, 1996, Telecom, ART and their respective shareholders agreed
to an amendment and restatement of the Stockholders' Agreement providing for (i)
termination effective on the closing of a public share offering; (ii) amendment
and restatement of the Certificate of Incorporation and reorganization of the
capital structure of Telecom (see Note 9); (iii) the exchange of the Advent
Notes and one share of ART Series A Redeemable Preferred Stock for Series E
preferred stock of Telecom (see Note 7); (iv) revision of provisions for
election of directors; (v) amendment and restatement of Telecom's registration
rights agreements; (vi) release of shares escrowed in connection with the
original Stockholders' Agreement (see Note 9); and (vii) approval of a
definitive agreement to merge ART and Telecom (the "Reorganization").
B -- AMENDED MERGER
The definitive merger agreement, as entered into on February 2, 1996 and
subsequently restated and amended on June 26, 1996, (the "Merger Agreement")
provides for the merger of a newly-formed wholly owned subsidiary of ART
("Merger Sub") into Telecom (the "Merger") subject to certain conditions,
including the receipt of FCC approval. Prior to the Merger, each outstanding
share of Telecom's serial preferred stock will be converted into 13 shares of
Telecom's common stock. In the Merger, each outstanding share of common stock of
Telecom will be exchanged for the right to receive an equal number of shares of
Common Stock of ART. As a result, Telecom will become a wholly owned subsidiary
of ART. The Merger Agreement provides that if the Merger is not consummated by
May 13, 1997, the shares of Telecom's common stock owned by ART will be
surrendered to Telecom and the Services Agreement is to be revised to, among
other revisions, extend the term to 40 years and provide for a proportionate
participation by ART's stockholders in any dividends paid by Telecom or the
proceeds from any sale of Telecom. The Merger Agreement also provides for the
assignment of Telecom's interests in all of its agreements, including the
various services agreements, employment agreements, equipment purchase
agreements and purchase option agreements, to ART. Further, upon the Merger, the
holders of warrants to purchase an aggregate of 2,302,136 shares of Telecom
common stock will be entitled to purchase an equivalent number of shares of ART
Common Stock on the same terms. Employee stock options to purchase 1,664,732
shares of Telecom's common stock will be converted into similar stock options of
ART.
F-36
<PAGE>
ADVANCED RADIO TELECOM CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. SIGNIFICANT ACCOUNTING POLICIES:
DEVELOPMENT STAGE ENTERPRISE
Telecom is a development stage enterprise as defined in Statement of
Financial Accounting Standards No. 7, "Accounting and Reporting by Development
Stage Enterprises." The financial statements have been prepared on the going
concern basis of accounting.
CASH AND CASH EQUIVALENTS
Telecom considers all highly liquid investments purchased with remaining
maturities of three months or less to be cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
related assets as follows: wireless transmission equipment - 5 years; office
furniture and equipment - 3 years.
FCC LICENSES
Telecom has obtained radio spectrum rights under FCC issued licenses
throughout the United States through the purchase of such rights held by others
and by petitioning the FCC directly. Such licenses are issued for an initial
term of six years and are renewable subject to review by the FCC. The costs
associated with the acquisition of such licenses are capitalized and amortized
on a straight-line basis over a 40-year period beginning upon commencement of
operations in the related market. The 40-year period is based upon management's
license renewal expectations.
RECOVERABILITY OF LONG-LIVED ASSETS
The recoverability of property and equipment and capitalized FCC
authorizations and licenses is dependent upon the successful development of
systems in each of the respective markets, or through sale of such assets.
Management estimates that it will recover the carrying amounts of those assets
from cash flow generated by the systems once they have been developed. However,
it is reasonably possible that such estimate will change as a result of the
failure to develop the FCC authorizations on a timely basis, technological,
regulatory or other changes.
Telecom's policy is to assess annually any impairment in value based upon a
comparison of projected operating cash flows from each market over its expected
period of operation, on an undiscounted basis, to the carrying amount of the
property and equipment, FCC licenses and other capitalized costs related to the
market.
FINANCING COSTS
Direct costs associated with obtaining equity financing are deferred and
charged to additional paid-in capital as the related funds are raised. Direct
costs associated with obtaining debt financing are deferred and amortized using
the effective interest rate method commencing when the related funds are raised.
Deferred costs associated with unsuccessful financings are charged to expense.
REVENUE RECOGNITION
Revenue from telecommunications services are recognized ratably over the
period such services are provided.
F-37
<PAGE>
ADVANCED RADIO TELECOM CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
INCOME TAXES
Telecom accounts for income taxes under the liability method of accounting.
Under the liability method, deferred taxes are determined based on the
differences between the financial statement and tax bases of assets and
liabilities at enacted tax rates in effect in the year in which the differences
are expected to reverse. Valuation allowances are established, when necessary,
to reduce deferred tax assets to the amounts expected to be realized.
NET LOSS PER SHARE
Net loss per share of $0.19 is computed based on the loss for the period
from March 28, 1995 (date of inception) to December 31, 1995 divided by the
weighted average number of shares of common stock outstanding of 15,919,596.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISKS
Telecom places its temporary cash investments with major financial
institutions. At December 31, 1995, the Company's temporary cash investments are
principally placed in one entity. Other financial instruments which expose
Telecom to potential credit risk include the amount due from ART (Note 12) and
deposits on equipment (Note 8).
4. ACQUISITION OF ASSETS OF EMI:
On April 4, 1995, ART entered into a purchase option agreement with EMI to
acquire EMI's interest in certain 38 GHz radio spectrum licenses and related
assets in the Northeastern United States (the "EMI Assets") in exchange for $3.0
million in cash and a three year non-negotiable promissory note in the amount of
$1.5 million. Pursuant to the terms of the Purchase Agreement, in November 1995,
ART assigned its rights and obligations under the EMI purchase option agreement
to Telecom. The FCC subsequently approved the transfer of the EMI licenses and
Telecom directly purchased the EMI Assets in November 1995. The total purchase
price, including expenses, was allocated to the acquired assets as follows:
<TABLE>
<S> <C>
Property and equipment......................................... $ 297,150
FCC licenses................................................... 4,226,821
----------
$4,523,971
----------
----------
</TABLE>
The promissory note issued by Telecom, with a guarantee by ART, is payable
in quarterly installments of principal of $187,500 beginning January 1, 1997.
Interest is payable quarterly at a major commercial bank's prime rate plus 2.0%,
or 10.5% as of December 31, 1995.
On November 8, 1995 Landover advanced $175,000 to Telecom to fund a portion
of the initial payment to EMI. Telecom repaid such advance later in the same
month.
F-38
<PAGE>
ADVANCED RADIO TELECOM CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
5. PROPERTY AND EQUIPMENT:
PROPERTY AND EQUIPMENT COMPRISE:
<TABLE>
<S> <C>
Wireless transmission equipment................................ $3,496,905
Office furniture and equipment................................. 88,239
----------
3,585,144
Accumulated depreciation....................................... (5,306)
----------
$3,579,838
----------
----------
</TABLE>
As of December 31, 1995, excluding the property and equipment acquired from
EMI (Note 4), the wireless transmission equipment acquired to date has not been
placed into service.
6. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES COMPRISE:
<TABLE>
<S> <C>
Accrued interest payable....................................... $ 20,712
Salaries and other employee related costs...................... 267,091
Trade accounts payable......................................... 496,104
Wireless transmission equipment payable........................ 2,666,630
----------
$3,450,537
----------
----------
</TABLE>
7. NOTE PAYABLE TO ART:
ART, Telecom and several entities referred to as the Advent Group
("Advent"), entered into a securities purchase agreement (the "Advent Purchase
Agreement") dated November 13, 1995 under which Advent agreed to acquire a 10%
interest in the combined entities of ART, Telecom and certain specified
affiliates. Pending the merger of these entities (see Note 2), ART issued
promissory notes (the "Advent Notes") with an aggregate principal amount of
$4,950,000 and one share of ART's Series A Redeemable Preferred Stock in
exchange for $5.0 million in cash.
The Advent Notes carried interest at a rate of 10% per annum and were
payable on demand at any time on or after May 13, 1997. The Advent Notes were
collateralized by certain assets of ART and Telecom. The Advent Notes were
convertible into that number of shares of preferred stock which represented in
the aggregate at least 10% of the fully diluted capital stock of the combined
entities described above, as defined in the Advent Purchase Agreement. The
Advent Notes were convertible either (i) immediately prior to an initial public
offering with aggregate gross proceeds of at least $10.0 million or (ii) at
Advent's election.
On November 13, 1995, the gross proceeds of $5.0 million received by ART
from Advent were transferred to Telecom in exchange for a note with terms
equivalent to the terms of the Advent Notes. In connection with the
Reorganization on February 2, 1996, ART, Telecom and Advent entered into an
exchange agreement under which the Advent Notes, including accrued interest, and
the one share of ART's Series A Redeemable Preferred Stock held by Advent were
exchanged for 232,826 shares of Series E preferred stock of Telecom, the note
was canceled, and Telecom became the owner of the one share of ART Series A
Redeemable Preferred Stock.
F-39
<PAGE>
ADVANCED RADIO TELECOM CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
8. COMMITMENTS:
EQUIPMENT PURCHASE AGREEMENT
On August 11, 1995, Telecom entered into an agreement to purchase wireless
transmission equipment from a vendor. Under the terms of the agreement, Telecom
is obligated to purchase a specified number of wireless transmission units
between August 11, 1995 and December 31, 1998, subject to termination upon 90
days advance notice by either party. Telecom's initial non-cancelable purchase
order amounts to $13,260,000. Through December 31, 1995, Telecom has purchased
and paid for $522,812 of equipment under this contract. In addition, Telecom has
made a $280,000 deposit under this agreement which is to be applied against
future purchases after Telecom has purchased a specified amount of equipment,
which is expected to occur in 1996.
Telecom currently purchases the majority of its wireless transmission
equipment from this vendor. Any reduction or interruption in supply from this
vendor could have a material adverse effect on Telecom until alternative supply
sources are established. Telecom does not manufacture, nor does it have the
capability to manufacture, any of the wireless transmission equipment necessary
to provide its services. Although there are a limited number of other
manufacturers who have, or are developing, equipment that would meet Telecom's
requirements, there can be no assurance that such equipment would be available
to Telecom on comparable terms or on terms more favorable to those included in
its current arrangements. Moreover, a change in vendors could cause a delay in
Telecom's ability to provide its services, which would affect future operating
results adversely.
SERVICES AGREEMENTS
Under the Services Agreement, Telecom has agreed to construct, operate and
manage the FCC licenses and related telecommunications systems that are owned by
ART or for which ART has existing services agreements. Under the Services
Agreement, Telecom will incur all costs and expenses related to construction,
operation and management of the systems. As compensation, Telecom will receive
all revenues generated by the systems after deducting certain related direct
expenses, less 25% which is to be paid to ART.
Telecom, through its Services Agreement with ART, has two other exclusive
services agreements, one with ART West, a joint venture in which ART has a 50%
ownership interest, and one with DCT Communications, Inc. ("DCT"). The terms of
these two services agreements are substantially identical to the terms in the
Services Agreement between ART and Telecom, except that the services agreements
are for five years and compensation to the Company is based on all revenues
generated by the systems after deducting certain related direct expenses, less
45% which is paid to ART West and DCT. There have been no services provided
under these agreements through December 31, 1995. One of the officers of Telecom
is the President and a shareholder of ART's joint venture partner in ART West.
On April 24, 1996, Telecom entered into a services agreement with TeleCom
One on terms substantially identical to the terms of the Services Agreement
between ART and Telecom, except that compensation to Telecom is equal to all
revenues generated by the systems, after deducting certain expenses, less 10%
which is paid to TeleCom One.
Under the services agreements described above, title to the system assets
purchased by Telecom and used to provide services in the respective markets
remains with Telecom upon termination of the services agreements.
F-40
<PAGE>
ADVANCED RADIO TELECOM CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
8. COMMITMENTS, CONTINUED:
EMPLOYMENT AND CONSULTING AGREEMENTS
On May 8, 1995, Telecom and ART jointly entered into consulting agreements
with two executive officers of Telecom, effective as of January 1, 1995 and
continuing for a term of three years, with minimum payments aggregating
approximately $170,000 annually. The aggregate expense incurred by Telecom under
these consulting agreements through December 31, 1995 amounted to $166,750.
On December 16, 1995, one of the executive officers of Telecom, previously a
party to one of the consulting agreements described above, entered into a
full-time employment agreement. The employment agreement is for a three-year
term with an annual salary of $250,000 in the first year, $275,000 in the second
year and $300,000 in the third year. In addition, the agreement provides for a
cash bonus of up to $100,000 for each year based upon achievement of specific
performance objectives.
On July 11, 1995, Telecom entered into an employment agreement, as amended
February 2, 1996, with an officer of Telecom. The term of the agreement is for
three years at an annual salary of $160,000 in the first year, $200,000 in the
second year and $240,000 in the third year. Options to purchase shares of common
stock were awarded to this officer equivalent to 2.5% of the outstanding capital
stock of Telecom (see Note 10). The agreement also provides for an engagement
bonus of $17,000 upon execution of the agreement and a cash bonus of up to
$100,000 for each year based upon achievement of specific performance
objectives.
Telecom has entered into employment agreements with other executives that
provide for annual base salaries and cash bonuses based on achievement of
specific performance goals. These contracts may be terminated at any time by
management.
FINANCING AGREEMENT
During 1994, ART entered into an agreement with Southeast Research Partners
("SERP"), a subsidiary of Joesephthal, Lyons & Ross, a Florida broker dealer, to
procure additional financing for ART in exchange for cash and options to
purchase capital stock of ART. Pursuant to a letter agreement dated July 12,
1995, ART and Telecom paid SERP $245,000 and the shareholders of ART granted
SERP options to purchase 313,612 shares of ART Common Stock directly from the
shareholders of ART for an aggregate consideration of approximately $210,000.
As of December 31, 1995, ART and Telecom have accounted for the fee of
$245,000 as part of the financing provided by Landover and, accordingly, $70,000
has been recognized as an offset against the proceeds from the issuance of the
Serial preferred stock of Telecom (see Note 9) and the balance as part of the
deferred financing costs recorded by ART in connection with the issuance of the
Advent Notes (See Note 7).
F-41
<PAGE>
ADVANCED RADIO TELECOM CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
8. COMMITMENTS, CONTINUED:
LEASES
Telecom and ART have entered into operating leases for office space and
antenna sites which expire between 1997 and 2001. Lease expense amounted to
$16,044 for 1995. The costs associated with these leases have been recorded by
Telecom and no amounts have been charged to ART. Future annual minimum lease
payments as of December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996........................................................... $ 363,079
1997........................................................... 352,480
1998........................................................... 302,727
1999........................................................... 297,417
2000 and thereafter............................................ 25,825
----------
$1,341,528
----------
----------
</TABLE>
9. STOCKHOLDERS' DEFICIT:
At December 31, 1995, the Certificate of Incorporation authorized the
issuance of 20,000,000 shares of stock of all classes, divided into (i)
10,000,000 shares of common stock, $0.001 par value per share, of which
7,000,000 shares are designated as Class A common stock and 3,000,000 shares are
designated as Class B common stock and (ii) 10,000,000 shares of preferred
stock, $0.001 par value per share of which 451,513 shares are designated as
Series A preferred stock, 113,663 shares are designated as Series B preferred
stock, 7,297 shares are designated as Series C preferred stock and 61,640 shares
are designated as Series D preferred stock, before giving effect to the 13 for 1
stock split discussed below. Pursuant to the Reorganization (see Note 2), the
Certificate of Incorporation was amended and restated on February 2, 1996 to (i)
convert each share of Class A common stock and Class B common stock into one
share of common stock, par value $0.001 per share, (ii) change the authorized
capital stock of the Corporation to 70,000,000 shares of stock of all classes,
(iii) change the authorized common stock to 60,000,000 shares, (iv) amend the
terms of the preferred stock and each series thereof, (v) provide for two new
series of preferred stock designated as "Series E preferred stock" and "Series F
preferred stock", and (vi) effect a 13 for 1 stock split of each share of common
stock issued and outstanding.
The holders of Class A common stock had anti-dilution protection, but in all
other respects such shares were identical to the Class B common stock. Under the
anti-dilution provisions, additional shares of Class A common stock were issued,
for no consideration, to the holders of the Class A common stock upon the
issuance of serial preferred stock, so that the holders of Class A common stock
maintained their 36% ownership interest through the $7.0 million Landover
Funding Commitment as set forth in the Purchase Agreement.
Under the Purchase Agreement, the individual shareholders of ART were
required to place 5,153,778 shares of Common Stock in ART in escrow (the "Escrow
Shares") to be released upon the completion of the pending EMI Asset acquisition
(see Note 4), Telecom's attainment of specific operating income levels for the
years 1997 through 1999 and the acquisition of interests in a specified number
of FCC license authorizations by April 30, 2000. As a result of the consummation
of the EMI Asset acquisition, in November 1995, 1,873,030 shares of the Escrow
Shares of ART were released. The related compensation of $802,002, based on the
then current fair value of the Escrow Shares, has been recognized as
compensation expense in 1995, the offset of which has been accounted for as an
investment by ART. Pursuant to the February 2, 1996 Reorganization, the Escrow
Shares arrangement was
F-42
<PAGE>
ADVANCED RADIO TELECOM CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
9. STOCKHOLDERS' DEFICIT, CONTINUED:
terminated and all of the remaining Escrow Shares were released to the
stockholders of ART. The related compensation expense of approximately $6.8
million, based upon the fair value of the remaining Escrow Shares will be
recognized in 1996.
Each issuance of serial preferred stock pursuant to the Landover Funding
Commitment is a separate class and, as a class, has a liquidation preference
equal to the aggregate price paid for such class and an ownership interest
designated by Landover at issuance. The ownership interest of each outstanding
class of serial preferred stock was not to be diluted by subsequent issuances of
shares of other classes of serial preferred stock through the satisfaction of
the Landover Funding Commitment. As a result, additional shares of serial
preferred stock were issued to the existing holders upon the issuance of such
other shares so that each outstanding class maintained its designated aggregate
liquidation preference and aggregate ownership interest.
Each share of serial preferred stock outstanding at December 31, 1995 is
convertible into 13 shares of common stock, subject to certain anti-dilution
adjustments. The holders of serial preferred stock have a vote, and receive
dividends or distributions, equivalent to the votes and amounts which would be
obtainable by them upon conversion of their shares into common stock.
In partial satisfaction of the Landover Funding Commitment, during 1995,
Telecom issued 332,091 shares of Series A preferred stock, 82,318 shares of
Series B preferred stock and 5,402 shares of Series C preferred stock to three
separate limited partnerships of which an affiliate of Landover is the general
partner, for aggregate cash consideration of $2.0 million.
On November 9, 1995, Telecom issued 61,640 shares of Series D preferred
stock for cash of $2.0 million. The Series D preferred stock purchase agreement
provided that in the event that Telecom and ART on a combined basis, did not
achieve an equity valuation of $225.0 million, as defined, on or before November
1, 1997, the holders of the Series D preferred stock had the option to purchase
additional shares of serial preferred stock for $0.001 per share up to a maximum
of 1.33% of the then outstanding capital stock of Telecom. The Series D
preferred stock purchase agreement was amended February 2, 1996 whereby the
option to purchase additional serial preferred stock was replaced with an option
to purchase 400,634 shares of Telecom common stock directly from Landover for
$0.001 per share in the event Telecom does not attain certain equity valuation
objectives.
On November 13, 1995, the Advent Group executed a securities purchase
agreement with ART and Telecom. As a result of the exchange agreement dated
February 2, 1996, Advent received 232,826 shares of Series E preferred stock of
Telecom (see Note 7).
The serial preferred stock transactions described above satisfied the
Landover Funding Commitment. As a result, the anti-dilution protection for the
Class A common stock and serial preferred stock terminated. As the actual cash
proceeds received were in excess of Landover's $7.0 million commitment, on
November 13, 1995, Telecom used the proceeds from the sale of Series D preferred
stock to redeem 807,924 shares of Class B common stock held by Landover.
The Series E and F preferred stock (see Note 14) are senior in liquidation
preference to the Series A, B, C and D preferred stock. The Series D preferred
stock is senior in liquidation preference to the Series A, B and C preferred
stock. At any time on or after November 13, 2000, the Series E and F preferred
stock may be redeemed at the option of the holders of such stock at a price
equal to the liquidation amount plus all accrued and unpaid dividends.
F-43
<PAGE>
ADVANCED RADIO TELECOM CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
10. STOCK OPTION PLANS:
On July 22, 1995, Telecom adopted the 1995 Stock Option Plan (the "Plan")
that provides for option grants to employees, directors and independent
consultants of Telecom. Telecom has reserved 2,500,000 shares of common stock
for issuance under the Plan. Options granted to employees may be designated as
incentive stock options ("ISO's") or non-qualified stock options ("NQSO's"), as
defined by the Internal Revenue Service. Options granted to independent
consultants and other non-employees may only be designated NQSO's.
The exercise price of options granted under the Plan may not be less than
100% of the fair market value of the common stock on the grant date. Generally,
options will be exercisable for a term that will not exceed ten years from the
date of grant.
Under the Plan, options to purchase an aggregate of 817,232 and 235,000
shares of common stock were granted to employees of Telecom on July 22, 1995 and
December 29, 1995, respectively, at an option price of $.5907 and $1.652 per
share, respectively. The difference between the exercise price of the options
issued at $.5907 and the deemed fair value of common stock of $1.20 per share as
determined on the measurement date, is recognized as compensation expense over
the respective vesting period. The options vest at various dates during a 5-year
period. At December 31, 1995, 361,785 options were vested and Telecom has
recognized compensation expense of $287,603 during 1995. At December 31, 1995,
unearned stock option compensation expense amounted to $210,339. There were no
options exercised or canceled during 1995.
On February 15, 1996, options to purchase an aggregate of 145,000 shares of
common stock were granted to employees of Telecom under the Plan at an option
price of $3.94 per share.
On April 24, 1996, Telecom adopted the 1996 Non-Employee Directors Automatic
Stock Option Plan (the "Directors Plan"), subject to shareholder approval, which
provides for the automatic grant of stock options to non-employee directors to
purchase up to an aggregate of 200,000 shares. Under the Directors Plan, options
to acquire 6,000 shares of common stock are automatically granted to each non-
employee director who is a director on January 1 of each year. In addition, each
non-employee director serving on the Board of Directors effective on the date of
an initial public offering, and in the future each newly elected non-employee
director on the date of his or her first appointment or election to the Board of
Directors will receive an automatic grant of options to acquire 7,000 shares of
common stock.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". This Statement encourages, but does not require, accounting for
stock compensation awards granted to employees based on their fair value at the
date the awards are granted. Companies may elect to continue to apply current
accounting requirements for employee stock compensation awards, which generally
will result in no compensation cost for most fixed stock option plans, such as
Telecom's Plan. The expense measurement provisions of the Statement apply to all
equity instruments issued for goods and services provided by persons other than
employees. All companies are required to comply with the disclosure requirements
of the Statement. Telecom expects to continue accounting for employee stock
compensation awards using current accounting requirements.
11. INCOME TAXES:
As of December 31, 1995, Telecom has net operating loss carryforwards of
approximately $1.9 million to offset future taxable income for Federal income
tax purposes which will expire in 2010. Deferred tax assets of approximately
$741,000, principally comprised of such net operating tax loss carry-forwards
and temporary differences arising from compensation expense related to the stock
option plans have been offset in full by a valuation allowance.
F-44
<PAGE>
ADVANCED RADIO TELECOM CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
12. RELATED PARTY TRANSACTIONS:
On May 8, 1995, Telecom and ART entered into a consulting agreement with
Landover as a strategic and financial consultant. Telecom paid Landover $70,000
for services under this agreement during 1995. The consulting agreement was
terminated on November 13, 1995.
On November 13, 1995, Telecom and ART entered into a management consulting
agreement with Landover to provide strategic planning, corporate development and
general management. Under the agreement, Telecom will pay Landover $35,000 per
month for an initial one year term, renewable by Telecom and ART for two
additional one year terms. The aggregate expense under this agreement during
1995 amounted to $70,000, which amount is payable as of December 31, 1995. The
agreement also provides that in the event Landover arranges financing,
acquisitions or certain other transactions for Telecom, it will be paid a fee by
Telecom in accordance with industry standards.
Pursuant to the Purchase Agreement, Telecom and ART paid Landover $391,750
for expenses in connection with the Landover Funding Commitment, of which
$141,750 has been charged to paid-in capital by Telecom and $250,000 has been
capitalized as deferred financing costs by ART.
An executive and shareholder of ART is a principal in a law firm that
regularly provides legal services to Telecom. During the period from March 28,
1995 through December 31, 1995, Telecom incurred $237,538 for such services.
Telecom has funded certain expenses and investments of ART, including ART's
investment in ART West and payments of financing and other operating costs. The
amounts funded by Telecom to date totalling $805,803, offset by accrued interest
of $67,123 related to the note payable to ART (see Note 7) have been included in
the amount due from ART.
13. FAIR VALUES OF FINANCIAL INSTRUMENTS:
The carrying amount and fair values of Telecom's financial instruments at
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
------------- -------------
<S> <C> <C>
Cash and cash equivalents................................................. $ 627,585 $ 627,585
Long-term notes payable................................................... 6,500,000 6,500,000
</TABLE>
Cash and cash equivalents: The carrying amount reported in the balance sheet
approximates fair value.
Long-term notes payable: The carrying amount approximates fair value based
upon interest rates that are currently available to Telecom for issuance of debt
with similar terms and maturity.
14. SUBSEQUENT EVENTS:
- -- AMERITECH FINANCING
On February 2, 1996, Telecom sold 48,893 shares of Series F preferred stock
for an aggregate purchase price of $2.5 million to Ameritech Development
Corporation ("Ameritech"). In addition, Telecom entered into a strategic
distribution agreement with Ameritech Corp., the parent of Ameritech, and, as
partial consideration, granted warrants to Ameritech to purchase up to 877,136
shares of common stock from Telecom at a price of $0.01 per share, exercisable
on February 2, 1996 through February 2, 2006. The Series F preferred stock and
warrants are collectively referred to as the Ameritech Securities. The strategic
distribution agreement provides for Ameritech to be the principal distributor of
Telecom's services within five midwestern states. Telecom incurred fees of
$150,000 in connection with this transaction.
F-45
<PAGE>
ADVANCED RADIO TELECOM CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS, CONTINUED
14. SUBSEQUENT EVENTS, CONTINUED:
Under the terms of the securities purchase agreement with Ameritech,
Ameritech is entitled to a put option to require Telecom to repurchase the
Ameritech Securities if the Department of Justice finds that this investment is
in violation of restrictions under the Modification of Final Judgement in the
United States vs. AT&T Civil Action 82-0192 ("MFJ"). Telecom would be required
to repurchase the Ameritech Securities at a purchase price equal to the fair
market value on the date it is determined that the investment is in violation of
the MFJ.
- -- BRIDGE FINANCING
On March 8, 1996, Telecom issued in a private placement of $5.0 million of
two year, 10% notes (the "Bridge Notes") and five year warrants to purchase up
to an aggregate of 1,100,000 shares of common stock at a price of $6.25 per
share (the "Bridge Warrants") to certain holders of serial preferred stock. The
Bridge Warrants are exercisable on March 8, 1996 through March 8, 2001.
- -- EQUIPMENT FINANCING
On April 24, 1996, the Board of Directors approved the adoption of
resolutions necessary to complete a $2,445,000 equipment financing for the
purchase of wireless transmission equipment.
- -- RESEARCH AND DEVELOPMENT ARRANGEMENTS
On January 26, 1996, Telecom entered into a preliminary agreement to invest
from $700,000 to $1.0 million in an entity in which an executive of Telecom is a
director and a shareholder. The preliminary agreement provides for the entity to
perform research and development of wireless transmission equipment in which
Telecom will receive a right of first refusal on production capacity and a
license fee in exchange for its investment.
On March 13, 1996, Telecom issued a letter of intent to a third party to
provide Telecom with specific technology consulting in connection with the
development of wireless transmission equipment. The aggregate amount to be paid
pursuant to the letter of intent totals $90,000. The letter of intent was
executed in connection with an agreement currently under negotiations for the
development and manufacture of wireless transmission equipment.
- -- SOFTWARE LICENSE AGREEMENT
On March 29, 1996, Telecom entered into a software license agreement (the
"Software License Agreement"). The terms of the Software License Agreement
provide for licensed software and hardware for Telecom's network management and
maintenance support services. The Software License Agreement provides for an
initial software license fee of approximately $2,000,000 and an annual
maintenance support fee of approximately $300,000 per year. An initial payment
of $250,000 for the software license fee was payable upon execution of the
agreement with the balance payable in monthly installments of principal and
interest commencing January 1, 1997.
- -- DCT PRELIMINARY AGREEMENT
On April 25, 1996, Telecom and ART entered into a preliminary agreement with
DCT (the "DCT Preliminary Agreement") to acquire DCT's interest in certain FCC
authorizations and licenses in exchange for $3.6 million in cash. The DCT
Preliminary Agreement is subject to the completion of a definitive purchase
agreement and services agreement (see Note 8). The definitive purchase agreement
will supersede and replace all other existing agreements between Telecom, ART,
ART's shareholders and DCT. The definitive purchase agreement must be signed by
June 28, 1996 and the closing of the transaction is subject to FCC approval.
F-46
<PAGE>
ADVANCED RADIO TELECOM CORP.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED INTERIM CONDENSED BALANCE SHEET
MARCH 31, 1996
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents................................................... $ 3,018,191
Due from ART................................................................ 498,100
Other current assets........................................................ 61,226
------------
Total current assets...................................................... 3,577,517
Property and equipment, net................................................... 6,379,603
FCC licenses.................................................................. 4,226,821
Equipment and other deposits.................................................. 344,417
Investment in ART............................................................. 44,930
Deferred financing costs...................................................... 681,692
------------
Total assets............................................................ $ 15,254,980
------------
------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................................... $ 4,211,017
------------
Total current liabilities............................................... 4,211,017
Bridge Notes.................................................................. 3,983,082
Note payable to EMI........................................................... 1,500,000
------------
Total liabilities....................................................... 9,694,099
------------
Commitments and contingencies
Stockholders' equity:
Serial preferred stock, $.001 par value, 920,951 shares issued and
outstanding................................................................ 921
Class A common stock, $.001 par value, 18,114,135 shares issued and
outstanding................................................................ 18,114
Additional paid-in capital.................................................. 19,189,302
Deficit accumulated during the development stage............................ (13,647,456)
------------
Total stockholders' equity.............................................. 5,560,881
------------
Total liabilities and stockholders' equity............................ $ 15,254,980
------------
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-47
<PAGE>
ADVANCED RADIO TELECOM CORP.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED INTERIM CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
Operating revenue............................................................. $ 9,620
<S> <C>
-----------
Expenses:
General and administrative.................................................. 8,889,364
Market development.......................................................... 1,150,063
Research and development.................................................... 419,418
Depreciation and amortization............................................... 86,684
Interest expense, net....................................................... 130,474
-----------
Total expenses............................................................ 10,676,003
-----------
Net loss................................................................ $10,666,383
-----------
-----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-48
<PAGE>
ADVANCED RADIO TELECOM CORP.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED INTERIM CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
PREFERRED STOCK
COMMON ---------------------------------------------------------------------------------------
SHARES STOCK SERIES A SERIES B SERIES C SERIES D SERIES E SERIES F TOTAL
- ------------------------- ---------- ----------- ----------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995.................... 15,291,211 334,943 86,507 5,402 61,640 488,492
Issuance of Series E
preferred stock......... 232,826 232,826
Shares issued to reflect
anti-dilution
adjustments............. 2,822,924 120,607 28,172 1,961 150,740
Issuance of Series F
preferred stock......... 48,893 48,893
---------- ----------- ----------- ----- ----------- ----------- ----------- ---------
Balance of March 31,
1996.................... 18,114,135 455,550 114,679 7,363 61,640 232,826 48,893 920,951
---------- ----------- ----------- ----- ----------- ----------- ----------- ---------
---------- ----------- ----------- ----- ----------- ----------- ----------- ---------
<CAPTION>
PAR VALUE
---------------------------------------------------------------------------------------------------
PREFERRED STOCK
COMMON ---------------------------------------------------------------------------------------
AMOUNTS STOCK SERIES A SERIES B SERIES C SERIES D SERIES E SERIES F TOTAL
- ------------------------- ---------- ----------- ----------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995.................... $ 15,291 $ 335 $ 86 $ 5 $ 62 $ 488
Issuance of Series E
preferred stock......... $ 233 233
Shares issued to reflect
anti-dilution
adjustments............. 2,823 121 28 2 151
Issuance of Series F
preferred stock and
warrants in exchange for
cash and the Strategic
Distribution Agreement
net of expenses of
$150,000................ $ 49 49
Value ascribed to the
Bridge Warrants.........
Investment by ART as a
result of the release of
escrow shares...........
Accrued stock option
compensation............
Net loss.................
---------- ----------- ----------- ----- ----------- ----------- ----------- ---------
Balance at March 31,
1996.................... $ 18,114 $ 456 $ 114 $ 7 $ 62 $ 233 $ 49 $ 921
---------- ----------- ----------- ----- ----------- ----------- ----------- ---------
---------- ----------- ----------- ----- ----------- ----------- ----------- ---------
<CAPTION>
SHARES
- -------------------------
<S> <C> <C> <C>
Balance at December 31,
1995....................
Issuance of Series E
preferred stock.........
Shares issued to reflect
anti-dilution
adjustments.............
Issuance of Series F
preferred stock.........
Balance of March 31,
1996....................
ADDITIONAL
PAID-IN ACCUMULATED
AMOUNTS CAPITAL DEFICIT TOTAL
- ------------------------- ----------- ------------- -----------
<S> <C> <C> <C>
Balance at December 31,
1995.................... $ 2,845,372 $(2,981,073) $ (119,922)
Issuance of Series E
preferred stock......... 4,672,953 4,673,186
Shares issued to reflect
anti-dilution
adjustments............. (2,974)
Issuance of Series F
preferred stock and
warrants in exchange for
cash and the Strategic
Distribution Agreement
net of expenses of
$150,000................ 3,402,951 3,403,000
Value ascribed to the
Bridge Warrants......... 1,050,000 1,050,000
Investment by ART as a
result of the release of
escrow shares........... 6,795,514 6,795,514
Accrued stock option
compensation............ 425,486 425,486
Net loss................. (10,666,383) (10,666,383)
----------- ------------- -----------
Balance at March 31,
1996.................... $19,189,302 $(13,647,456) $ 5,560,881
----------- ------------- -----------
----------- ------------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements
F-49
<PAGE>
ADVANCED RADIO TELECOM CORP.
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED INTERIM CONDENSED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
Cash flows from operating activities:
<S> <C>
Net loss.................................................................... $(10,666,383)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization............................................. 86,684
Non-cash interest expense................................................. 34,726
Non-cash compensation expenses............................................ 7,221,000
Non-cash market development expense....................................... 1,053,000
Changes in operating assets and liabilities:
Deposits................................................................ (8,901)
Accounts payable and accrued liabilities................................ 881,492
Other current assets.................................................... (60,405)
------------
Net cash used in operating activities................................. (1,458,787)
------------
Cash flows from investing activities:
Additions to property and equipment......................................... (3,050,607)
------------
Net cash used in investing activities................................. (3,050,607)
------------
Cash flows from financing activities:
Proceeds from issuance of serial preferred stock............................ 2,500,000
Preferred stock issuance costs.............................................. (150,000)
Proceeds from issuance of Bridge Notes and Bridge Warrants.................. 5,000,000
Payments of ART deferred finance costs...................................... (175,000)
Additions to deferred financing costs....................................... (275,000)
------------
Net cash provided by financing activities............................. 6,900,000
------------
Net increase in cash and cash equivalents........................... $ 2,390,606
Cash and cash equivalents, beginning of period...................... 627,585
------------
Cash and cash equivalents, end of period............................ $ 3,018,191
------------
------------
Supplemental cash flow information:
Non-cash financing and investing activities:
Additions to property and equipment....................................... $ 2,477,264
Value ascribed to the Ameritech Strategic Distribution Agreement reflected
as paid-in capital....................................................... 1,053,000
Accrued deferred financing costs.......................................... 85,338
Exchange of Advent Notes and ART Notes for Series E preferred stock, net
of deferred financing costs.............................................. 4,673,186
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-50
<PAGE>
ADVANCED RADIO TELECOM CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS
1. THE COMPANY AND BASIS OF PRESENTATION:
THE COMPANY
Advanced Radio Telecom Corp. ("Telecom"), formerly named Advanced Radio
Technology Ltd., was incorporated in Delaware as a subsidiary of Advanced Radio
Technologies Corporation ("ART") on March 28, 1995, to develop, market and
deliver broadband telecommunication and information services throughout the
United States.
BASIS OF PRESENTATION
The condensed financial statements included herein have been prepared by
Telecom. The foregoing statements contain all adjustments (consisting only of
normal recurring adjustments) which are, in the opinion of management, necessary
to present fairly the financial position of Telecom as of March 31, 1996 and the
results of its operations and its cash flows for the three months ended March
31, 1996.
Certain information and footnote disclosures normally included in financial
statements have been condensed or omitted pursuant to the rules and regulations
of the Securities and Exchange Commission. These condensed financial statements
should be read in conjunction with Telecom's audited financial statements and
notes thereto included elsewhere herein.
The financial statements have been prepared on the going concern basis of
accounting, which contemplates realization of assets and liquidation of
liabilities in the ordinary course of business. Telecom has limited financial
resources, has incurred operating losses since inception and does not expect to
generate material operating revenues until the commencement of its commercial
services, which is anticipated to occur in fiscal 1996. Telecom estimates that
revenues in 1996 will not be sufficient to fund its initial operating expenses
and other working capital needs, including consulting, service and purchase
commitments. Telecom's funding of its initial operating expenses, working
capital needs and contractual commitments is dependent upon its ability to raise
additional financing. Telecom and ART have engaged various investment bankers to
assist it in raising financing through a public equity and debt offering. There
can be no assurance that Telecom will be successful in its effort to raise
additional financing through this public offering or, if available, that Telecom
will be able to obtain it on acceptable terms. These conditions raise
substantial doubt about Telecom's ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
2. REORGANIZATION AND PENDING MERGER WITH ART:
On February 2, 1996, Telecom, ART and their respective shareholders agreed
to an amendment and restatement of the Stockholders' Agreement providing for (i)
termination effective on the closing of a public share offering; (ii) amendment
and restatement of the Certificate of Incorporation and reorganization of the
capital structure of Telecom; (iii) the exchange of the Advent Notes and one
share of ART Series A Redeemable Preferred Stock for Series E preferred stock of
Telecom; (iv) revision of provisions for election of directors; (v) amendment
and restatement of Telecom's registration rights agreements; (vi) release of
shares escrowed in connection with the original Stockholders' Agreement; and
(vii) approval of a definitive agreement to merge ART and Telecom (the
"Reorganization").
The definitive merger agreement, as entered into on February 2, 1996 and
subsequently restated and amended on June 26, 1996, (the "Merger Agreement")
provides for the merger of a newly-formed wholly owned subsidiary of ART
("Merger Sub") into Telecom (the "Merger") subject to certain conditions,
including the receipt of FCC approval. Upon the Merger, each outstanding share
of Telecom's serial preferred stock will be converted into 13 shares of
Telecom's common stock and each outstanding
F-51
<PAGE>
ADVANCED RADIO TELECOM CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS, CONTINUTED
2. REORGANIZATION AND PENDING MERGER WITH ART: CONTINUED:
share of common stock of Telecom will be exchanged for the right to receive an
equal number of shares of Common Stock of ART. As a result, Telecom will become
a wholly owned subsidiary of ART. The Merger Agreement provides that if the
Merger is not consummated by May 13, 1997, the shares of Telecom's common stock
owned by ART will be surrendered to Telecom for nominal consideration, and the
Services Agreement is to be revised to, among other revisions, extend the term
to 40 years and provide for a proportionate participation by ART's stockholders
in any dividends paid by Telecom or the proceeds from any sale of Telecom. The
Merger Agreement also provides for the assignment of Telecom's interests in all
of its agreements, including the various services agreements, employment
agreements, equipment purchase agreements and purchase option agreements, to
ART. Further, upon the Merger, the holders of warrants to purchase an aggregate
of 2,302,136 shares of Telecom common stock will be entitled to purchase an
equivalent number of shares of ART Common Stock on the same terms. Employee
stock options to purchase 1,664,732 shares of Telecom's common stock will be
converted into similar stock options of ART.
3. NET LOSS PER SHARE:
Net loss per share of $0.59 is computed based on the loss for the three
months ended March 31, 1996 divided by the weighted average number of shares of
common stock outstanding of 18,114,135.
4. AMERITECH FINANCING:
On February 2, 1996, Telecom sold 48,893 shares of Series F preferred stock
for an aggregate purchase price of $2.5 million to Ameritech Development
Corporation ("Ameritech"). In addition, Telecom entered into a strategic
distribution agreement with Ameritech Corp., the parent of Ameritech, and, as
partial consideration, granted warrants to Ameritech to purchase up to 877,136
shares of common stock from Telecom at a price of $0.01 per share, exercisable
on February 2, 1996 through February 2, 2006. Telecom has recorded the value of
$1,053,000 ascribed to the strategic distribution agreement as market
development expense in the first quarter of 1996. Telecom incurred fees of
$150,000 in connection with this transaction.
5. NOTE PAYABLE TO ART:
In connection with the Reorganization on February 2, 1996, ART, Telecom and
Advent entered into an exchange agreement under which the Advent Notes,
including accrued interest, and the one share of ART's Series A Redeemable
Preferred Stock held by Advent were exchanged for 232,826 shares of Series E
preferred stock of Telecom, the notes payable by ART to Advent and by Telecom to
ART were canceled, the related interest forgiven, and Telecom became the owner
of the one share of ART Series A Redeemable Preferred Stock.
6. COMMITMENTS:
DCT PRELIMINARY AGREEMENT
On April 26, 1996, Telecom and ART entered into a preliminary agreement with
DCT (the "DCT Preliminary Agreement") to acquire DCT's interest in certain FCC
authorizations and licenses in exchange for $3.6 million in cash. The DCT
Preliminary Agreement is subject to the completion of a definitive purchase
agreement and services agreement. The definitive purchase agreement will
supersede and replace all other existing agreements between Telecom, ART, ART's
shareholders and DCT. The definitive purchase agreement must be signed by June
28, 1996 and the closing of the transaction is subject to FCC approval.
F-52
<PAGE>
ADVANCED RADIO TELECOM CORP.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED INTERIM CONDENSED FINANCIAL STATEMENTS, CONTINUTED
7. FINANCINGS:
BRIDGE FINANCING
On March 8, 1996, Telecom issued in a private placement $5,000,000 of two
year, 10% notes (the "Bridge Notes") and five year warrants to purchase up to an
aggregate of 1,100,000 shares of common stock at a price of $6.25 per share (the
"Bridge Warrants") to certain holders of serial preferred stock. The Bridge
Warrants are exercisable on March 8, 1996 through March 8, 2001.
EQUIPMENT FINANCING
On April 29, 1996, Telecom completed a $2,445,000 equipment financing for
the purchase of wireless transmission equipment. Telecom issued a $2,445,000
promissary note, payable in 24 monthly installments of $92,694 with a final
payment of $642,305 due April 29, 1998. In connection with the equipment
financing, Telecom issued five year warrants to purchase up to an aggregate of
325,000 shares of common stock of Telecom. Telecom paid $225,000 in fees to
stockholders of Telecom to guarantee the equipment financing.
8. ESCROW SHARES:
Pursuant to the February 2, 1996 Reorganization, the terms of the Escrow
Shares arrangement were terminated and all of the remaining Escrow Shares were
released to the stockholders of ART. The related compensation expense of
$6,795,514, based upon the then estimated fair value of the Escrow Shares was
recognized, the offset of which was accounted for as an investment in Telecom by
ART.
9. COMMCOCCC ASSET ACQUISITION
During July 1996, ART entered into an agreement with CommcoCCC, Inc.
("CommcoCCC") to acquire CommcoCCC's interests in certain 38 GHz FCC
authorizations (the "CommcoCCC Assets") in exchange for 16.5 million shares of
ART Common Stock. The acquisition of the CommcoCCC Assets is subject to various
conditions including (i) minimum population coverage of the authorizations of
ART and CommcoCCC, (ii) receipt of final FCC and other approvals, (iii) receipt
by CommcoCCC of an opinion as to the tax-free nature of the transaction (iv) the
accuracy of representations and warranties except for breaches that do not have
in the aggregate a material adverse effect, (v) pending or threatened material
litigation, (vi) consummation of public equity and debt offerings on terms
reasonably satisfactory to CommcoCCC and (vii) other customary closing
conditions. Pending the completion of the acquisition, ART has agreed to
construct, manage and operate the CommcoCCC Assets.
At the closing of the acquisition, ART will give a stockholder ("Commco
LLC") of CommcoCCC an option (the "Option") to purchase FCC authorizations in
specified market areas in which ART will have more than one authorization. The
Option is exercisable only in the event that the CommcoCCC Acquisition is
consummated and Commco LLC receives authorizations pursuant to pending
applications covering a minimum specified population and expires nine months
after the consummation of the Common Stock Offering. The price of authorizations
to be purchased under the Option is based upon a formula that considers the
market price of ART Common Stock on the date of exercise.
In connection with the agreement to acquire the CommcoCCC Assets, certain
stockholders of CommcoCCC loaned ART $3 million in cash in exchange for notes
due September 30, 1996 (the "CommcoCCC Notes") with interest at the prime rate
and received three year warrants to purchase 50,000 shares of ART Common Stock
at a price of $9 per share, as adjusted from $15 per share. The CommcoCCC Notes
are collateralized by all of the assets of ART and, if not paid in full when
due, the unpaid balance is convertible into ART Common Stock, at the option of
each holder, stipulated per share prices based upon the timing of exercise.
F-53
<PAGE>
[INSIDE BACK COVER]
[MAP OF U.S. DISPLAYING ADVANCED RADIO
TELECOM CORP.'S 38 GHz SERVICE AREAS.]
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE SHARES OF COMMON STOCK TO WHICH IT RELATES OR AN OFFER
TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
------------------------
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
PROSPECTUS SUMMARY............................. 3
RISK FACTORS................................... 9
THE COMPANY.................................... 21
USE OF PROCEEDS................................ 22
DIVIDEND POLICY................................ 22
CAPITALIZATION................................. 23
DILUTION....................................... 24
SELECTED HISTORICAL AND PRO FORMA FINANCIAL
DATA.......................................... 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................... 28
BUSINESS....................................... 34
MANAGEMENT..................................... 60
PRINCIPAL STOCKHOLDERS......................... 71
CERTAIN TRANSACTIONS........................... 73
DESCRIPTION OF CAPITAL STOCK................... 78
SHARES ELIGIBLE FOR FUTURE SALE................ 80
DESCRIPTION OF CERTAIN INDEBTEDNESS............ 82
UNDERWRITING................................... 84
LEGAL MATTERS.................................. 85
EXPERTS........................................ 85
AVAILABLE INFORMATION.......................... 86
GLOSSARY....................................... 87
INDEX TO FINANCIAL STATEMENTS.................. F-1
</TABLE>
------------------------
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
6,000,000 SHARES
[LOGO]
COMMON STOCK
----------------
PROSPECTUS
----------------
MONTGOMERY SECURITIES
MERRILL LYNCH & CO.
DEUTSCHE MORGAN GRENFELL
, 1996
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, not including the
Representative's non-accountable expense allowance. Except for the SEC
registration fee, the NASD filing fee and the Nasdaq listing fee, all of the
amounts in the table below are estimated.
<TABLE>
<CAPTION>
Securities and Exchange Commission registration fee................ $ 26,767
<S> <C> <C>
NASD filing fee.................................................... 8,263
Nasdaq listing fee................................................. 50,000
Accounting fees and expenses....................................... 161,500
Printing........................................................... 175,750
Blue Sky fees and expenses (including counsel fees)................ 20,000
Legal fees and expenses............................................ 304,000
Transfer Agent and Registrar fees and expenses..................... 2,500
Miscellaneous expenses............................................. 20,000
----------
TOTAL (estimated).................................................. $ 768,780
----------
----------
</TABLE>
II-1
<PAGE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of Delaware provides that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party be reason of such position. If such person shall have acted in good
faith and in a manner he reasonable believed to be in or not opposed to the best
interests of the corporation, and, in any criminal proceeding, if such person
had no reasonable cause to believe his conduct was unlawful; provided that, in
the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the adjudicating court determines that such indemnification is
proper under the circumstances.
Reference is made to Article Ninth of the Certificate of Incorporation of
the Registrant, Section 6.4 of the By-laws and each of the Indemnification
Agreements filed as Exhibits 10-5, 10-6, 10-7 and 10-8, respectively, to this
Registration Statement for information regarding indemnification of directors
and officers under certain circumstances.
The Registrant has agreed to indemnify the Underwriters and their
controlling persons, and the Underwriters have agreed to indemnify the
Registrant and its controlling persons, against certain liabilities, including
liabilities under the Securities Act of 1933, as amended (the "Act"). Reference
is made to the Underwriting Agreement filed as part of Exhibit 1-1 hereto.
For information regarding the Registrant's undertaking to submit to
adjudication the issue of indemnification for violation of the Act, see Item 17
hereof.
The Registrant's Certificate of Incorporation provides that every director,
officer or agent of the Company shall be entitled to be indemnified out of the
assets of the Company against all losses or liabilities which he or she may
sustain or incur in or about the execution of the duties of his or her office or
otherwise in relation thereto, including any liability incurred by him or her in
defending any proceedings, whether civil or criminal, in which judgment is given
in his or her favor or in which he or she is acquitted, and no director or other
officer shall be liable for any loss, damage or misfortune which may happen to
or be incurred by the Company in the execution of the duties of his or her
office or in relation thereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
TELECOM CLASS A AND B COMMON STOCK PRIVATE PLACEMENT
In April 1995, the Company and Landover Holdings Corporation ("LHC")
subscribed 340,000 shares of Telecom Class A common stock and 640,000 shares of
Telecom Class B common stock, respectively, for $0.001 per share, which, after
giving effect to anti-dilution adjustments and the February 1996 Reorganization,
currently are equivalent upon conversion prior to the Offerings to 10,013,055
shares and 7,512,076 shares, respectively, of Common Stock. In addition,
Hedgerow Corporation of Maine ("Hedgerow") and Toro Financial Corp. ("Toro")
subscribed 15,000 shares and 5,000 shares, respectively, of Telecom Class A
common stock at the price of $0.001 per share, which, after giving effect to
anti-dilution adjustments and the February 1996 Reorganization currently are
equivalent upon conversion prior to the Offerings to 441,753 shares and 147,251
shares of the Common Stock, respectively. The securities issued in the above
transactions were offered and sold in reliance upon the exemption from
registration under Section 4(2) of the Act. The recipients made certain
representations as to the nature of their investments and had adequacy of access
to information about the Registrant.
PREFERRED STOCK PRIVATE PLACEMENTS
Between May 8, 1995 and November 13, 1995, the LHC Stock was diluted by
purchases of series of Telecom preferred stock by E2-2, E2, E1 Holdings L.P.
("E1") and E2-3 Holdings, L.P. ("E2-3" and collectively with E1, E2 and E2-2,
the "Landover Partnerships"), each a limited partnership whose general partner
is controlled by LHC, in separate private placements. E2-2, which committed to
II-2
<PAGE>
purchase up to $3,500,000 of Telecom preferred stock matching other investors
under the LHC Purchase Agreement, purchased 405,880 shares of Telecom Series A
preferred stock (which converts into 5,276,440 shares of Common Stock upon
completion of this offering) for an aggregate of $946,600, and LHC purchased
35,873 shares of such Telecom Series A preferred stock from E2-2 for $1,050,000
pursuant to an option. E2 purchased an aggregate of 105,823 shares of Telecom
Series B preferred stock (which converts into 1,375,699 shares of Common Stock
upon completion of this offering) for an aggregate of $842,400. E1 purchased
13,797 shares of Telecom Series A preferred stock (which converts into 179,361
shares of Common Stock upon completion of this offering) for an aggregate of
$60,000 and 8,856 shares of Telecom Series B preferred stock (which converts
into 115,128 shares of Common Stock upon completion of this offering) for an
aggregate of $38,300. E2-3 purchased an aggregate of 7,363 shares of Telecom
Series C preferred stock (which converts into 95,719 shares of Common Stock upon
completion of this offering) for an aggregate of $112,700. All of the Landover
Partnerships will liquidate upon completion of this offering. The securities
issued in each of the foregoing transactions were offered and sold in reliance
on an exemption from registration under Regulation D promulgated under the Act.
On November 9, 1995, Telecom sold 61,640 shares of Telecom Series D
preferred stock (which convert into 801,320 shares of Common Stock upon
completion of this offering) for $2,000,000 in a private placement. Telecom
simultaneously redeemed 807,924 shares of Telecom common stock from LHC for
$2,000,000. In connection with the February 1996 Reorganization described below,
LHC granted to the holders of Telecom Series D preferred stock a contingent
option to purchase 400,634 shares of Telecom common stock at a nominal price
(the "Series D/LHC Option"), which option expires upon completion of this
offering.
On November 13, 1995, Global Private Equity II, L.P., Advent Partners
Limited Partnership and Advent International Investors II L.P. each a limited
partnership controlled by Advent International Corporation, (collectively,
"Advent") purchased for an aggregate of $5,000,000, (i) one share of ART's
Series A Redeemable Preferred Stock for a purchase price of $50,000 and (ii) the
Company's 10% Secured Convertible Demand Promissory Notes in the aggregate
principal amount of $4,950,000. In connection with the February 1996
Reorganization, Advent exchanged such Preferred Stock and Note for 232,826
shares of Telecom Series E preferred stock (which converts into 3,026,738 shares
of Common Stock upon completion of this offering), $0.001 par value per share.
The securities issued in each of the foregoing transactions were offered and
sold in reliance on an exemption from registration under Regulation D
promulgated under the Act. Advent made certain representations as to the nature
of its investment and had adequate access to information about the Registrant.
On February 2, 1996, Ameritech Development Corp. ("Ameritech") purchased for
an aggregate of $2,500,000 48,893 shares of Telecom Series F preferred stock,
par value $0.001 per share, (the "Ameritech Financing") convertible into 635,609
shares of Common Stock upon completion of this offering. In addition, Telecom
entered into the Ameritech Strategic Distribution Agreement and in connection
therewith granted to Ameritech a ten-year warrant to purchase 877,136 shares of
Telecom common stock exercisable at a price of $.01 per share (the "Ameritech
Warrant"). The securities issued in each of the foregoing transactions were
offered and sold in reliance on an exemption from registration under Regulation
D promulgated under the Act. Ameritech made certain representations as to the
nature of its investment and had adequate access to information about the
Registrant.
BRIDGE NOTES
On March 8, 1996, Telecom issued in a private placement $5,000,000 principal
amount of two year, 10% unsecured notes (the "Bridge Notes") and five-year
warrants to purchase up to an aggregate of 1,100,000 shares of Telecom common
stock at a price of $6.25 per share (the "Bridge Warrants") to investors
including: (i) affiliates of J.C. Demetree, Jr. and Mark Demetree, directors of
the Company; (ii) the Advent Partnerships; and (iii) Ameritech, who invested
$700,000, $725,000 and $750,000 in the Bridge Notes and Bridge Warrants,
respectively.
II-3
<PAGE>
EQUIPMENT FINANCING
On April 1, 1996, CRA, Inc. ("CRA") entered into a secured equipment
financing with Telecom (the "Equipment Financing") for the purchase from P-Com
of 38 GHz radio equipment. To evidence its obligations and the Equipment
Financing, Telecom issued in favor of CRA a $2,445,000 promissory note, payable
in 24 monthly installments of $92,694 with a final payment equal to $642,305 due
April 1, 1998. The securities issued in the foregoing transaction were offered
and sold in reliance on an exemption from registration under Regulation D
promulgated under the Act.
COMMCOCCC ACQUISITION
On July 3, 1996, the Company entered into the CommcoCCC Agreement to acquire
129 38 GHz wireless broadband authorizations from CommcoCCC, Inc. in exchange
for 16,500,000 shares of Common Stock. The stockholders of CommcoCCC
simultaneously loaned $3.0 million on a secured, subordinated basis bearing
interest at the prime rate and payable on September 30, 1996 and issued
three-year warrants to acquire 50,000 shares of Common Stock at $15 per share.
The securities to be issued in the foregoing transaction will be offered and
sold in reliance on a exemption from registration under Regulation D promulgated
under the Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
The following exhibits were delivered with this Registration Statement, or
will be delivered by amendment, for filing:
<TABLE>
<C> <S> <C>
1-1 Underwriting Agreement.**
2-1 (a) Amended and Restated Certificate of Incorporation and Bylaws of
Registrant.**
(b) Amendment to Amended and Restated Certificate of Incorporation.**
(c) Amended and Restated Certificate of Incorporation (to be effective prior to
the consummation of the Offerings) and Restated and Amended Bylaws (effective
on the date of the Prospectus) of Registrant.**
4-1 Specimen of Common Stock Certificate.(3)
4-2 (a) Indenture.(3)
(b) Specimen of Senior Discount Note. (See Exhibit 4-2(a)).(3)
(c) Collateral Pledge and Security Agreement(4)
4-3 Form of Lock-Up Agreement.**
4-4 (a) Form of Warrant Agreement.(2)
(b) Specimen of Warrant Certificate. (See Exhibit 4-3(a)).(2)
5-1 Opinion and Consent of Hahn & Hessen LLP, counsel for the Registrant, with
respect to the Registrant's Common Stock.**
9-1 (a) Voting Trust Agreement.**
(b) Form of Trustee Indemnification Agreement.**
(c) Voting Agreement.**
(d) Confidentiality Agreement.**
10-1 Employment and Consulting Agreements.
(a) Vernon L. Fotheringham, dated December 16, 1995.**
(b) Steven D. Comrie, dated February 2, 1996.**
(c) W. Theodore Pierson, Jr., dated May 8, 1995 and effective January 1, 1995.**
(d) I. Don Brown, dated February 16, 1996.**
(e) Charles Menatti, dated March 8, 1996.**
(f) James D. Miller, dated February 1, 1996.**
(g) Thomas A. Grina, dated April 26, 1996.(1)
10-2 (a) Second Amended and Restated Certificate of Incorporation and By-laws of
Telecom (filed as Exhibit 2-1 to the Registration Statement on Form S-1 of the
Company dated May 2, 1996).**
(b) Certificate of Incorporation of ART Merger Corporation (to become the
Certificate of Incorporation of Telecom upon the completion of the Merger).**
10-3 Form of Director Indemnification Agreement.**
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S> <C>
10-4 (a) Registrant's Equity Incentive Plan, as amended.**
(b) Form of Stock Option Agreement.**
10-5 (a) Registrant's 1996 Non-Employee Directors Automatic Stock Option Plan.**
(b) Form of Non-Employee Directors Stock Option Agreement.**
10-6 Stock Option Agreements.
(a) Comrie Non-Qualified Stock Option Agreement.**
(b) Comrie Incentive Stock Option Agreement.**
10-7 Management Consulting Agreement with Landover Holdings Corporation, dated
November 13, 1995.**
10-8 (a)ART West Joint Venture Agreement dated April 4, 1995, with Extended
Communications, Inc.**
(b)Put/Call Agreement dated October 1, 1994, with Extended Communications,
Inc.**
(c)Services Agreement dated October 1, 1994, with Extended Communications,
Inc.**
(d)Amendment dated April 4, 1995 to the Put/Call Agreement dated October 1,
1994, with Extended Communications, Inc.**
(e)Asset Purchase Agreement dated June 24, 1996 with Extended Communications,
Inc.**
(f) Management Agreement dated June 1, 1996 with ART West Partnership.**
10-9 (a)Put/Call Agreement dated September 1, 1994 with DCT Communications, Inc.**
(b)Services Agreement dated September 1, 1994 with DCT Communications, Inc.**
(c)Term Sheet dated April 26, 1996 with DCT.**
(d) Purchase Agreement with DCT dated July 1, 1996.**
(e) Amendment to Services Agreement dated June 1996 with DCT.**
10-10 (a)Asset Purchase Agreement dated April 4, 1995 with EMI Communications
Corporation.**
(b)$1,500,000 Nonnegotiable and Nontransferable Promissory Note.**
(c)Maintenance Agreement dated November 14, 1995 with EMI Communications
Corporation.**
(d)Agreement dated November 14, 1995 with EMI Communications Corporations.**
10-11 38 GHz Radio Links Purchase Agreement dated August 11, 1995 with P-Com, Inc.+**
10-12 (a)Agreement dated May 25, 1995 with Telecom One.+**
(b) Services Agreement dated April 24, 1996 with Telecom One.**
(c) Asset Purchase Agreement and Management Agreement with Telecom One dated
June 27, 1996.**
10-13 Agreement dated April 25, 1996 with GTE.**
10-14 Software License Agreement dated March 29, 1996 with GTE.**
10-15 Agreement dated July 12, 1995 with Southeast Research Partners, Inc.**
10-16 Agreement dated March 1, 1995 with High Sky Limited Partnership, High Sky II
Limited Partnership, Vernon L. Fotheringham, W. Theodore Pierson, Jr., and F.
Thomas Tuttle.**
10-17 Stock Purchase Agreement dated May 8, 1995 with Vernon L. Fotheringham, W.
Theodore Pierson, Jr., High Sky Limited Partnership, High Sky II Limited
Partnership, and Extended Communications, Inc.**
10-18 (a)Purchase Agreement dated April 21, 1995 with Landover Holdings Corporation.**
(b)Letter Agreement dated May 8, 1995 with the Demetrees, Telecom and Landover
Holdings Corporation.**
(c)Letter Agreement dated November 13, 1995 with Telecom, E2-2 Holdings, L.P.
and the Demetrees.**
10-19 Restated and Amended Stockholders' Agreement dated February 2, 1996 with Telecom
and the stockholders of each of Telecom and the Company.**
10-20 Second Restated and Amended Registration Rights Agreement dated July 3, 1996
with Telecom and the stockholders of each of Telecom and the Company.**
10-21 Services Agreement dated May 8, 1995 with Telecom.**
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <S> <C>
10-22 Option Agreement dated February 2, 1996 with Telecom.**
10-23 (a)Securities Purchase Agreement dated November 13, 1995 with Telecom, Vernon
Fotheringham, W. Theodore Pierson, Jr., the stockholders of Telecom named
therein and the Advent Partnerships.**
(b)Exchange Agreement dated February 2, 1996 with Telecom and the Advent
Partnerships.**
10-24 (a)Securities Purchase Agreement dated February 2, 1996 with Telecom and
Ameritech Development Corporation ("Ameritech"), including letter of
intent.**
(b)Warrant issued on February 2, 1996 to Ameritech.**
(c)Put/Call Agreement dated February 2, 1996 with Ameritech.**
10-25 Strategic Distribution Agreement dated April 29, 1996 with Ameritech.**
10-26 Restated and Amended Merger Agreement and Plan of Reorganization dated June 26,
1996 between the Company and Telecom.**
10-27 (a)$2,445,000 Promissory Note in favor of CRA, Inc. ("CRA").**
(b)Security Agreement with CRA (including UCC-1 Financing Statement).**
(c)Indemnity Agreement.**
(d) Form of Indemnity Warrant.**
10-28 Memorandum of Terms of Development and Procurement Agreement with American
Wireless with Extension Agreement dated April 25, 1996.**
10-29 (a)Purchase Agreement dated April 26, 1996 with Harris Corporation Farinon
Division ("Harris") (confidential treatment requested for certain terms).(1)
(b)PCS Marketing Agreement dated April 26, 1996 with Harris (confidential
treatment requested for certain terms).(1)
10-30 Form of Subscription Agreement dated March 8, 1996, including Forms of Bridge
Note and Bridge Warrant.**
10-31 (a) Asset Acquisition Agreement and Plan of Reorganization dated July 3, 1996
with CommcoCCC, Inc.**
(b) Form of Note issued to Commco, L.L.C.**
(c) Form of Note issued to Columbia Capital Corporation.**
(d) Form of Warrant issued to Commco, L.L.C.**
(e) Form of Warrant issued to Columbia Capital Corporation.**
(f) Option Agreement dated July 3, 1996 with Commco, L.L.C.**
(g) Security Agreement dated June 27, 1996 with Columbia Capital Corporation.**
(h) Form of Noncompetition Agreement with CommcoCCC.**
(i) CommcoCCC Management Agreement dated July 3, 1996.**
(j) Right of First Offer Agreement dated July 3, 1996.**
(k) Engagement Letter with Montgomery Securities dated May 23, 1996.**
(l) Agreement to Lease between COMMCO, L.L.C. and Advanced Radio Technologies
Corporation.
10-32 Letter of Intent dated April 29, 1996 with Helioss Communications Inc.**
10-33 Letter of Intent dated March 26, 1996 with Advantage Telecom, Inc.**
10-34 Consulting Agreement dated March 1, 1996 with Trond Johannesen.**
11 Computation of Pro Forma Net Loss Per Share of Common Stock.**
12 Computation of Ratio of Earnings to Fixed Charges.(1)
21 Subsidiaries of the Registrant.**
23(a) Consent of the Registrant's Independent Accountants.
23(b) Consent of the Registrant's Counsel (Included in Exhibit 5-1).**
25 Form T-1 Statement of Eligibility of The Bank of New York under the Trust
Indenture Act of 1939.**
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment requested for the deleted portions of this document.
(1) Filed with the Registration Statement on Form S-1 of the Company dated May
15, 1996 (SEC Reg. No. 333-03735) ("Unit Registration Statement").
(2) Filed with Amendment No. 1 to Unit Registration Statement dated July 3,
1996.
(3) Filed with Amendment No. 2 to Unit Registration Statement.
(4) Filed with Amendment No. 4 to Unit Registration Statement.
II-6
<PAGE>
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities under the Act may be permitted to
directors, officers and controlling person of the Registrant pursuant to the
foregoing provisions, or otherwise, the Registrant has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to provide the Underwriters at
the closing specified in the Underwriting Agreement certificates in such
denomination and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purposes of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new Registration Statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the Registration Statement;
(2) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of New
York, State of New York, on July 26, 1996.
Advanced Radio Technologies
Corporation
By: /s/ VERNON L. FOTHERINGHAM
-----------------------------------
Vernon L. Fotheringham
CHAIRMAN AND CHIEF EXECUTIVE
OFFICER
<TABLE>
<C> <S> <C>
SIGNATURES TITLE DATE
- ------------------------------------------------------ --------------------------------------- ----------------
/s/ VERNON L. FOTHERINGHAM
------------------------------------------- Chairman, Chief Executive Officer and July 26, 1996
Vernon L. Fotheringham Director
/s/ STEVEN D. COMRIE
------------------------------------------- President, Chief Operating Officer and July 26, 1996
Steven D. Comrie Director
/s/ THOMAS A. GRINA
------------------------------------------- Executive Vice President and Chief July 26, 1996
Thomas A. Grina Financial Officer
/s/ J.C. DEMETREE
------------------------------------------- Director July 26, 1996
J.C. Demetree
/s/ MARK C. DEMETREE
------------------------------------------- Director July 26, 1996
Mark C. Demetree
/s/ MATTHEW C. GOVE
------------------------------------------- Director July 26, 1996
Matthew C. Gove
/s/ ANDREW I. FILLAT
------------------------------------------- Director July 26, 1996
Andrew I. Fillat
/s/ LAURENCE S. ZIMMERMAN
------------------------------------------- Director July 26, 1996
Laurence S. Zimmerman
</TABLE>
II-8
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby severally constitutes and appoints Vernon L. Fotheringham and
Thomas A. Grina, and each of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement and all
documents relating thereto, including one or more registration statements that
may be filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, and to file the same, with all exhibits hereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, full power and
authority to do and perform each and every act and thing necessary or advisable
to be done in and about the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do
or cause to be done in virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<C> <S> <C>
SIGNATURES TITLE DATE
- ------------------------------------------------------ -------------------------------- -----------------------
/s/ VERNON L. FOTHERINGHAM
------------------------------------------- Chairman, Chief Executive July 26, 1996
Vernon L. Fotheringham Officer and Director
/s/ STEVEN D. COMRIE
------------------------------------------- President, Chief Operating July 26, 1996
Steven D. Comrie Officer and Director
/s/ LAURENCE S. ZIMMERMAN
------------------------------------------- Director July 26, 1996
Laurence S. Zimmerman
/s/ J. C. DEMETREE, JR.
------------------------------------------- Director July 26, 1996
J. C. Demetree, Jr.
/s/ MARK C. DEMETREE
------------------------------------------- Director July 26, 1996
Mark C. Demetree
/s/ MATTHEW C. GOVE
------------------------------------------- Director July 26, 1996
Matthew C. Gove
/s/ ANDREW I. FILLAT
------------------------------------------- Director July 26, 1996
Andrew I. Fillat
</TABLE>
II-9
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION PAGE
- ---------- ---------------------------------------------------------------------------------------- ---------
<C> <S> <C>
1-1 Underwriting Agreement.**
2-1 (a) Amended and Restated Certificate of Incorporation and Bylaws of Registrant.**
(b) Amendment to Amended and Restated Certificate of Incorporation.**
(c) Amended and Restated Certificate of Incorporation (to be effective prior to the
consummation of the Offerings) and Restated and Amended Bylaws (effective on the date
of the Prospectus) of Registrant.**
4-1 Specimen of Common Stock Certificate.(3)
4-2 (a) Indenture.(3)
(b) Specimen of Senior Discount Note. (See Exhibit 4-2(a)).(3)
4-3 Form of Lock-Up Agreement.**
4-4 (a) Form of Warrant Agreement.(2)
(b) Specimen of Warrant Certificate. (See Exhibit 4-3(a)).(2)
(c) Collateral Pledge and Security Agreement(4)
5-1 Opinion and Consent of Hahn & Hessen LLP, counsel for the Registrant, with respect to
the Registrant's Common Stock.**
9-1 (a) Voting Trust Agreement.**
(b) Form of Trustee Indemnification Agreement.**
(c) Voting Agreement.*
(d) Confidentiality Agreement.*
10-1 Employment and Consulting Agreements.
(a) Vernon L. Fotheringham, dated December 16, 1995.**
(b) Steven D. Comrie, dated February 2, 1996.**
(c) W. Theodore Pierson, Jr., dated May 8, 1995 and effective January 1, 1995.**
(d) I. Don Brown, dated February 16, 1996.**
(e) Charles Menatti, dated March 8, 1996.**
(f) James D. Miller, dated February 1, 1996.**
(g) Thomas A. Grina, dated April 26, 1996.(1)
10-2 (a) Second Amended and Restated Certificate of Incorporation and By-laws of Telecom
(filed as Exhibit 2-1 to the Registration Statement on Form S-1 of the Company dated
May 2, 1996).**
(b) Certificate of Incorporation of ART Merger Corporation (to become the Certificate of
Incorporation of Telecom upon the completion of the Merger).**
10-3 Form of Director Indemnification Agreement.**
10-4 (a) Registrant's Equity Incentive Plan, as amended.**
(b) Form of Stock Option Agreement.**
10-5 (a) Registrant's 1996 Non-Employee Directors Automatic Stock Option Plan.**
(b) Form of Non-Employee Directors Stock Option Agreement.**
10-6 Stock Option Agreements.
(a) Comrie Non-Qualified Stock Option Agreement.**
(b) Comrie Incentive Stock Option Agreement.**
10-7 Management Consulting Agreement with Landover Holdings Corporation, dated November 13,
1995.**
10-8 (a)ART West Joint Venture Agreement dated April 4, 1995, with Extended Communications,
Inc.**
(b)Put/Call Agreement dated October 1, 1994, with Extended Communications, Inc.**
(c)Services Agreement dated October 1, 1994, with Extended Communications, Inc.**
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION PAGE
- ---------- ---------------------------------------------------------------------------------------- ---------
(d)Amendment dated April 4, 1995 to the Put/Call Agreement dated October 1, 1994, with
Extended Communications, Inc.**
<C> <S> <C>
(e)Asset Purchase Agreement dated June 24, 1996 with Extended Communications, Inc.**
(f) Management Agreement dated June 1, 1996 with ART West Partnership.**
10-9 (a)Put/Call Agreement dated September 1, 1994 with DCT Communications, Inc.**
(b)Services Agreement dated September 1, 1994 with DCT Communications, Inc.**
(c)Term Sheet dated April 26, 1996 with DCT.**
(d) Purchase Agreement with DCT dated July 1, 1996.**
(e) Amendment to Services Agreement dated June 1996 with DCT.**
10-10 (a)Asset Purchase Agreement dated April 4, 1995 with EMI Communications Corporation.**
(b)$1,500,000 Nonnegotiable and Nontransferable Promissory Note.**
(c)Maintenance Agreement dated November 14, 1995 with EMI Communications Corporation.**
(d)Agreement dated November 14, 1995 with EMI Communications Corporations.**
10-11 38 GHz Radio Links Purchase Agreement dated August 11, 1995 with P-Com, Inc.+
10-12 (a)Agreement dated May 25, 1995 with Telecom One.+**
(b) Services Agreement dated April 24, 1996 with Telecom One.**
(c) Asset Purchase Agreement and Management Agreement with Telecom One dated June 27,
1996.**
10-13 Agreement dated April 25, 1996 with GTE.**
10-14 Software License Agreement dated March 29, 1996 with GTE.**
10-15 Agreement dated July 12, 1995 with Southeast Research Partners, Inc.**
10-16 Agreement dated March 1, 1995 with High Sky Limited Partnership, High Sky II Limited
Partnership, Vernon L. Fotheringham, W. Theodore Pierson, Jr., and F. Thomas Tuttle.**
10-17 Stock Purchase Agreement dated May 8, 1995 with Vernon L. Fotheringham, W. Theodore
Pierson, Jr., High Sky Limited Partnership, High Sky II Limited Partnership, and
Extended Communications, Inc.**
10-18 (a)Purchase Agreement dated April 21, 1995 with Landover Holdings Corporation.**
(b)Letter Agreement dated May 8, 1995 with the Demetrees, Telecom and Landover Holdings
Corporation.**
(c)Letter Agreement dated November 13, 1995 with Telecom, E2-2 Holdings, L.P. and the
Demetrees.**
10-19 Restated and Amended Stockholders' Agreement dated February 2, 1996 with Telecom and the
stockholders of each of Telecom and the Company.**
10-20 Second Restated and Amended Registration Rights Agreement dated July 3, 1996 with
Telecom and the stockholders of each of Telecom and the Company.**
10-21 Services Agreement dated May 8, 1995 with Telecom.**
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION PAGE
- ---------- ---------------------------------------------------------------------------------------- ---------
10-22 Option Agreement dated February 2, 1996 with Telecom.**
<C> <S> <C>
10-23 (a)Securities Purchase Agreement dated November 13, 1995 with Telecom, Vernon
Fotheringham, W. Theodore Pierson, Jr., the stockholders of Telecom named therein and
the Advent Partnerships.**
(b)Exchange Agreement dated February 2, 1996 with Telecom and the Advent Partnerships.**
10-24 (a)Securities Purchase Agreement dated February 2, 1996 with Telecom and Ameritech
Development Corporation ("Ameritech"), including letter of intent.**
(b)Warrant issued on February 2, 1996 to Ameritech.**
(c)Put/Call Agreement dated February 2, 1996 with Ameritech.**
10-25 Strategic Distribution Agreement dated April 29, 1996 with Ameritech.**
10-26 Restated and Amended Merger Agreement and Plan of Reorganization dated June 26, 1996
between the Company and Telecom.**
10-27 (a)$2,445,000 Promissory Note in favor of CRA, Inc. ("CRA").**
(b)Security Agreement with CRA (including UCC-1 Financing Statement).**
(c)Indemnity Agreement.**
(d) Form of Indemnity Warrant.**
10-28 Memorandum of Terms of Development and Procurement Agreement with American Wireless with
Extension Agreement dated April 25, 1996.**
10-29 (a)Purchase Agreement dated April 26, 1996 with Harris Corporation Farinon Division
("Harris") (confidential treatment requested for certain terms).(1)
(b)PCS Marketing Agreement dated April 26, 1996 with Harris (confidential treatment
requested for certain terms).(1)
10-30 Form of Subscription Agreement dated March 8, 1996, including Forms of Bridge Note and
Bridge Warrant.**
10-31 (a) Asset Acquisition Agreement and Plan of Reorganization dated July 3, 1996 with
CommcoCCC, Inc.**
(b) Form of Note issued to Commco, L.L.C.**
(c) Form of Note issued to Columbia Capital Corporation.**
(d) Form of Warrant issued to Commco, L.L.C.**
(e) Form of Warrant issued to Columbia Capital Corporation.**
(f) Option Agreement dated July 3, 1996 with Commco, L.L.C.**
(g) Security Agreement dated June 27, 1996 with Columbia Capital Corporation.**
(h) Form of Noncompetition Agreement with CommcoCCC.**
(i) CommcoCCC Management Agreement dated July 3, 1996.**
(j) Right of First Offer Agreement dated July 3, 1996.**
(k) Engagement Letter with Montgomery Securities dated May 23, 1996.**
(l) Agreement to Lease between COMMCO, L.L.C. and Advanced Radio Technologies
Corporation.
10-32 Letter of Intent dated April 29, 1996 with Helioss Communications Inc.**
10-33 Letter of Intent dated March 26, 1996 with Advantage Telecom, Inc.**
10-34 Consulting Agreement dated March 1, 1996 with Trond Johannesen.**
11 Computation of Pro Forma Net Loss Per Share of Common Stock.**
12 Computation of Ratio of Earnings to Fixed Charges.(1)
21 Subsidiaries of the Registrant.**
23(a) Consent of the Registrant's Independent Accountants.
23(b) Consent of the Registrant's Counsel (Included in Exhibit 5-1).**
25 Form T-1 Statement of Eligibility of The Bank of New York under the Trust Indenture Act
of 1939.(3)**
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed.
<PAGE>
+ Confidential treatment requested for the deleted portions of this document.
(1) Filed with the Registration Statement on Form S-1 of the Company dated May
15, 1996 (SEC Reg. No. 333-03735) ("Unit Registration Statement").
(2) Filed with Amendment No. 1 to Unit Registration Statement.
(3) Filed with Amendment No. 2 to Unit Registration Statement.
(4) Filed with Amendment No. 4 to Unit Registration Statement.
<PAGE>
AGREEMENT TO LEASE
This Hagreement to make available 39 GHz channel lease rights (the
"Agreement") is made this ___ day of July 1996 by and between COMMCO, L.C.C.,
a Delaware limited liability company ("CLC") and ADVANCED RADIO TECHNOLOGIES
CORPORATION, a Delaware corporation ("Tech").
In consideration of the mutual promises herein contained and for other
good and valuable consideration, the receipt and adequacy of which is hereby
acknowledged by each of the parties hereto, the parties hereto do hereby
agree as follows:
1. DEFINITIONS: Reference is hereby made to (i) the Asset Acquisition
Agreement and Plan of Reorganization (the "Asset Agreement") dated July 3,
1996 by and among Tech, Advanced Radio Telecom Corp., CLC, CommcoCCC, Inc.,
Columbia Millimeter Communications, L.P. and CCC Millimeter, L.P. and to (ii)
the Option Agreement (the "Option Agreement") by and between CLC and Tech
dated July 3, 1996. Capitalized terms used in this Agreement and not
otherwise defined herein shall have the meanings set forth in the Option
Agreement and, if not
defined in the Option Agreement, in the Acquisition Agreement.
2. RIGHT TO LEASE. In the event that CLC is granted by the FCC New
Authorizations covering at least 40 million Pops prior to the end of the
Option Period, CLC may during the Option Period by notice to Tech elect to
enter into the sublease arrangements described below with respect to one 39
GHz Authorization held by Tech covering Washington D.C. and one 39 GHz
Authorization held by Tech covering the city of New York. The sublease
arrangements will permit CLC to lease 39 GHz channel capacity from Tech in
Washington, D.C. and New York for the periods specified and under the
economic terms, and such other terms and conditions as the parties may
mutually agree upon, as are contained in the services agreement attached
hereto as Exhibit A and incorporated herein by reference (the "Lease").
Within 30 days hereof, the parties will cooperate in good faith (i) to
negotiate the Lease, giving CLC the right, but not the obligation, to lease
39 GHz capacity thereunder, and (ii) to obtain an oral ruling from the FCC
satisfactory to CLC's counsel that an exclusive 39 GHz lease complies with
FCC requirements. If CLC's counsel in good faith believes that such a lease
would not comply with FCC requirements, then the parties will cooperate in
good faith to restructure the Lease in a manner which complies with such
requirements and restores the relative benefits to the parties of the Lease
to the greatest extent possible.
3. MISCELLANEOUS:
3.1 ASSIGNMENT. Either party may assign its rights or obligations
hereunder without the prior written consent of the other party
to any person or entity in
<PAGE>
which it holds a 20% or greater equity ownership, except CLC may
assign its rights hereunder to Horizons Technologies, L.L.C., which
may in turn assign such rights to any person or entity in which it
holds a 20% or greater equity ownership. Any other assignment may only
be made with the prior written consent of the other party, not to be
unreasonably withheld.
3.2 AMENDMENTS: WAIVERS. The terms of this Agreement may not be waived,
amended, modified, terminated or discharged unless in a writing signed
by the parties hereto.
3.3 NOTICES. All notices or other communications provided for under
this Agreement shall be in writing (including facsimile) and mailed,
hand delivered, sent by overnight courier or by telecopier to the
parties effective when received at the addresses specified:
If to Tech: Advanced Radio Technologies Corporation
500 108th Street, N.E., Suite 2600
Bellevue, Washington 98004
Attn: Chief Executive Officer
with a copy to: Pierson & Burnett, LLP
1667 K Street, N.W.
Suite 801
Washington, D.C. 20036
Attn: W. Theodore Pierson, Jr., Esq.
If to CLC: Commco, L.L.C.
4513 Pin Oak Court
Sioux Falls, SD 57103
Attn: Scott Reardon
with a copy to: David Knudson, Esq.
Davenport, Evans, Hurwitz & Smith, L.L.P.
513 South Main Avenue
Sioux Falls, South Dakota 57104-6813
Fax: (605) 335-3639
3.4 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
3.5 COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original but all of which taken together shall
constitute one and the same instrument.
-2-
<PAGE>
3.6 ENTIRE AGREEMENT. This Agreement contains the entire understanding
of the parties hereto with respect to the subject matter contained
herein and therein. This Agreement supersedes all prior agreement
and understandings between the parties with respect to the subject
matter.
3.7 SECTION HEADINGS. Section headings in this Agreement are for
convenience only and shall not form a part of this Agreement.
3.8 SEVERABILITY. If any provision of this Agreement shall be found by
any court of competent jurisdiction to be invalid or unenforceable,
the parties waive such provision to the extent that it is found to
be invalid or unenforceable. Such provision shall, to the maximum
extent allowable by law, be modified by such court so that it becomes
enforceable and, as modified, shall be enforced as any other provision
hereof, all the other provisions hereof continuing in full force and
effect.
IN WITNESS WHEREOF, this Agreement has been duly exercised by the parties
hereto as of the day and year first above written.
ADVANCED RADIO TECHNOLOGIES CORPORATION
By: [SIGNATURE]
--------------------------------
COMMCO, L.L.C.
By: [SIGNATURE]
--------------------------------
-3-
<PAGE>
EXHIBIT 23(A)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
our report dated April 26, 1996, except for Note 2C, Note 5B and the second
paragraph of Note 9, as to which the date is June 26, 1996, on our audit of the
financial statements of Advanced Radio Technologies Corporation as of December
31, 1995 and 1994, for the years then ended, and for the period from August 23,
1993 (date of inception) to December 31, 1993 and of our report dated April 26,
1996, except for Note 2B as to which the date is June 26, 1996, on our audit of
the financial statements of Advanced Radio Telecom Corp. as of December 31, 1995
and for the period from March 28, 1995 (date of inception) to December 31, 1995.
We also consent to the reference to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
New York, New York
July 27, 1996