<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[MARK ONE]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM TO
--------------------- ---------------------
COMMISSION FILE NUMBER: 0 -21091
-------------------
ADVANCED RADIO TELECOM CORP.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-1348016
- ------------------------ ---------------------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
500 - 108TH AVENUE N.E., SUITE 2600
BELLEVUE, WASHINGTON 98004
(206) 688-8700
(REGISTRANT'S TELEPHONE NUMBER)
------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR END
IF CHANGED SINCE LAST REPORT)
INDICATE BY CHECKMARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
----- -----
STATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF DECEMBER 16 , 1996: 13,559,420
----------
<PAGE>
ADVANCED RADIO TELECOM CORP.
FORM 10-Q
TABLE OF CONTENTS
PAGE
PART I. Financial Information
ITEM 1. Financial Statements
Unaudited Condensed Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 3
Unaudited Condensed Consolidated Statements
of Operations - for the nine months ended
September 30, 1996 and 1995 and for the
three months ended September 30, 1996 and 1995 4
Unaudited Condensed Consolidated Statements of
of Stockholders' Deficit for the nine months ended
September 30, 1996 5
Unaudited Condensed Consolidated Statements of
Cash Flows - for the nine months ended September 30,
1996 and 1995 6
Notes to Unaudited Condensed Consolidated
Financial Statements 7 - 15
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16 - 24
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 25
ITEM 2. Changes in Securities 25
ITEM 3. Defaults Upon Senior Securities 25
ITEM 4. Submission of Matters to a Vote of Security Holders 25
ITEM 5. Other Information 25
ITEM 6. Exhibits and Reports on Form 8-K 25
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (NOTE 1)
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1996 1995
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 752,368 $ 633,654
Accounts receivable 78,645 -
Other current assets 140,227 52,325
------------- -------------
Total current assets 971,240 685,979
Restricted cash 1,000,000 -
Property and equipment, net 11,019,217 3,581,561
Equity investment 285,000 285,000
FCC licenses, net 4,276,780 4,235,734
Deferred financing costs 2,343,087 778,897
Deposits 463,036 284,012
Other assets 183,637 25,376
------------- -------------
Total assets $ 20,541,997 $ 9,876,559
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities $ 11,154,608 $ 3,694,489
March Bridge Notes 4,243,784 -
CommcoCCC Notes 2,827,836 -
September Bridge Notes 2,203,559 -
Current portion of long-term debt 1,242,126 -
------------- -------------
Total current liabilities 21,671,913 3,694,489
Convertible notes payable - 4,950,000
Equipment financing note payable 927,796 -
Note payable to EMI 937,500 1,500,000
------------- -------------
Total liabilities 23,537,209 10,144,489
------------- -------------
Commitments and contingencies
Redeemable preferred stock, $.01 par value, 1 share issued and
outstanding, December 31, 1995 - 44,930
------------- -------------
Stockholders' deficit:
Serial preferred stock, $.001 par value, 920,951 and 488,492 shares
issued and outstanding, respectively 921 488
Common stock, $.001 par value, 6,586,958 and 6,467,320 shares
issued and outstanding, respectively 6,587 6,467
Additional paid-in capital 20,745,714 3,050,242
Accumulated deficit (23,748,434) (3,370,057)
------------- -------------
Total stockholders' deficit (2,995,212) (312,860)
------------ -------------
Total liabilities and stockholders' deficit $ 20,541,997 $ 9,876,559
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (NOTE 1)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 AND
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------------- -----------------------------
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Service revenue $ 125,013 $ - $ 63,493 $ -
------------- ------------ ------------ -----------
Expenses:
Selling, general and
administrative 16,942,052 987,367 3,640,254 622,611
Market development 1,053,000 - - -
Research and development 666,406 - 145,000 -
Depreciation and amortization 504,462 15,407 226,087 9,353
Interest expense, net 1,337,470 1,539 758,665 664
------------- ------------ ------------ -----------
Total expenses 20,503,390 1,004,313 4,770,006 632,628
------------- ------------ ------------ -----------
Net loss $ (20,378,377) $ (1,004,313) $ (4,706,513) $ (632,628)
------------- ------------ ------------ -----------
------------- ------------ ------------ -----------
Pro forma net loss per share $ (2.15)
-------------
-------------
Pro forma weighted average
number of shares of common
stock outstanding 9,470,545
-------------
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF
STOCKHOLDERS' DEFICIT (NOTE 1)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
SERIAL
COMMON PREFERRED
STOCK STOCK
------ ---------
<S> <C> <C>
SHARES
------
Balance at December 31, 1995 6,529,975 488,492
Issuance of Series E preferred stock 232,826
Shares issued to reflect anti-dilution adjustments 56,983 150,740
Issuance of Series F preferred stock 48,893
--------- -------
Balance at September 30, 1996 6,586,958 920,951
--------- -------
--------- -------
</TABLE>
<TABLE>
<CAPTION>
SERIAL ADDITIONAL
COMMON PREFERRED PAID-IN ACCUMULATED
STOCK STOCK CAPITAL DEFICIT TOTAL
--------- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
AMOUNTS
Balance at December 31, 1995 $ 6,530 $ 488 $ 3,050,179 $ (3,370,057) $ (312,860)
Issuance of Series E preferred
stock 233 4,672,953 4,673,186
Shares issued to reflect anti-
dilution adjustments 57 151 (208)
Issuance of Series F preferred
stock and warrants in exchange
for cash and the Strategic
Distribution Agreement, net
of expenses of $150,000 49 3,402,951 3,403,000
Increase in additional paid-in
capital as a result of the 6,795,514 6,795,514
release of escrow shares
Value ascribed to the March
Bridge Warrants 1,050,000 1,050,000
Value ascribed to the equipment
financing warrants 484,937 484,937
Value ascribed to the
CommcoCCC Warrants 319,514 319,514
Value ascribed to the
September Bridge Warrants 260,937 260,937
Accrued stock option
compensation 708,937 708,937
Net loss (20,378,377) (20,378,377)
-------- ------- ------------ ------------ -----------
Balance at September 30, 1996 $ 6,587 $ 921 $ 20,745,714 $(23,748,434) $(2,995,212)
-------- ------- ------------ ------------ -----------
-------- ------- ------------ ------------ -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 1)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (20,378,377) $ (1,004,313)
-------------- -------------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 504,462 15,407
Noncash interest expense 632,994
Noncash compensation expense 7,504,452
Noncash market development expense 1,053,000
Writeoff of deferred financing costs 1,248,000
Changes in operating assets and liabilities:
Other current assets (87,902)
Accounts receivable (78,645)
Accounts payable and accrued liabilities 805,179 238,615
Deposits (179,024)
-------------- -------------
Net cash used in operating activities (8,975,861) (750,291)
-------------- -------------
Cash flows from investing activities:
Additions to property and equipment (4,241,470) (57,120)
Restricted cash (1,000,000)
Additions to FCC licenses (112,131) (175,000)
Additions to other assets (165,185)
Investment in ART West (187,500)
-------------- -------------
Net cash used in investing activities (5,518,786) (419,620)
-------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,040
Proceeds from issuance of serial preferred stock 2,500,000 1,311,616
Proceeds from issuance of March Bridge Notes 5,000,000
Proceeds from issuance of the equipment financing note payable 2,445,000
Proceeds from issuance of CommcoCCC Notes 3,000,000
Proceeds from issuance of September Bridge Notes 2,450,000
Principal payments made on the equipment financing note payable (437,407)
Stock issuance costs (150,000) (66,366)
Additions to deferred financing costs (194,232)
-------------- -------------
Net cash provided by financing activities 14,613,361 1,246,290
-------------- -------------
Net increase in cash and cash equivalents 118,714 76,379
Cash and cash equivalents at beginning of period 633,654 5,133
-------------- -------------
Cash and cash equivalents at end of period $ 752,368 $ 81,512
-------------- -------------
-------------- -------------
Supplemental cash flow information:
Interest paid $ 281,062
Noncash financing and investing activities:
Additions to property and equipment 6,260,000
Exchange of Advent Notes for series E preferred
stock, net of deferred financing costs 4,673,186
Value ascribed to warrants reflected as paid-in capital 2,115,388
Accrued deferred financing costs 1,784,300
Conversion of note payable and interest to common stock $ 75,250
Investment in ART West 25,000
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND BASIS OF PRESENTATION:
THE COMPANY
Advanced Radio Telecom Corp. ("ART" and, collectively with its
subsidiaries, the "Company"), formerly named Advanced Radio Technologies
Corporation, was organized as a Delaware corporation on August 23, 1993 to
develop, market and provide broadband wireless digital 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.
ART Licensing Corp. ("Telecom"), formerly named Advanced Radio Telecom
Corp. and Advanced Radio Technology Ltd., was incorporated in Delaware on
March 28, 1995, with one of its initial objectives to acquire certain 38
GHz licenses.
On October 11, 1996, ART, Telecom and a wholly owned subsidiary of ART
("Merger Sub") entered into a revised merger agreement, which provided for
the merger of Merger Sub into Telecom (the "Merger"). The Merger was
completed on October 28, 1996 and Telecom, through the Merger, became a
wholly owned subsidiary of ART (see Note 2). The Merger was accounted for
as a transfer of entities under common control which is similar to the
accounting for a pooling of interests, and the financial statements of
prior periods have been restated. All transactions and balances between
ART and Telecom have been eliminated.
BASIS OF PRESENTATION
The unaudited condensed consolidated 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
consolidated financial position of the Company as of September 30, 1996 and
the consolidated results of its operations and its consolidated cash flows
for the nine and three months ended September 30, 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 unaudited
condensed consolidated financial statements should be read in conjunction
with the December 31, 1995 audited financial statements of ART and Telecom
and notes thereto.
7
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
1. THE COMPANY AND BASIS OF PRESENTATION, CONTINUED:
BASIS OF PRESENTATION, CONTINUED
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 further
deployment of its commercial services, which commenced in fiscal 1996. The
Company estimates that revenues in 1996 and 1997 will not be sufficient to
fund its operating expenses, capital expenditures and other working capital
needs. The Company's continued funding of its operating expenses, working
capital needs and contractual commitments is dependent upon its ability to
raise financing. During November 1996, the Company completed an initial
public offering of equity securities, raising $34,500,000 before expenses.
In connection with the initial public offering, the Company obtained a
commitment to borrow up to $50 million through the issuance of Senior
Secured Notes (see Note 8). The proceeds from the initial public offering
were used to repay the March Bridge Notes, the CommcoCCC Notes and the
September Bridge Notes and partially fund the acquisition of the remaining
50% interest in ART West. Management believes that, based upon its current
business plans, the funds received from the initial public offering and
available under the Senior Secured Notes commitment are sufficient to
enable the Company to continue as a going concern at least through December
31, 1997.
2. MERGER AND PUBLIC OFFERING:
In connection with the formation of Telecom, the stockholders of ART and
Telecom entered into a stockholders' agreement dated May 8, 1995 (the
"Stockholders' Agreement"), which provided for the merger of ART and
Telecom once approval from the Federal Communications Commission ("FCC")
was granted. On February 2, 1996, ART, Telecom and their respective
stockholders 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 convertible notes payable and one share of redeemable
preferred stock for shares of serial 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.
8
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2. MERGER AND PUBLIC OFFERING, CONTINUED:
The definitive merger agreement, as entered into February 2, 1996, and
subsequently restated and amended on June 26, 1996 and October 11, 1996
(the "Merger Agreement") provided for the merger of Merger Sub into Telecom
subject to certain conditions, including the receipt of FCC approval. FCC
approval was received and, on October 28, 1996, the Merger was completed.
As a result, Telecom became a wholly owned subsidiary of the Company. In
connection with the Merger, each outstanding share of each series of
Telecom's serial preferred stock was converted into a share of a similar
series of the Company's preferred stock. Upon completion of the initial
public offering in November 1996, all shares of all series of the Company's
preferred stock (920,951) automatically converted into 4,353,587 shares of
the Company's common stock. The Merger Agreement also provided 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, the
holders of warrants to purchase an aggregate of 924,413 shares of Telecom
common stock are entitled to purchase an equal number of shares of the
Company's common stock. Employee stock options to purchase 816,970 shares
of Telecom's common stock were replaced by stock options to purchase an
equal number of shares of common stock of the Company. The terms of the
warrants and stock options are similar except that the exercise price of
the warrants and stock options and the number of shares subject thereto,
have been adjusted on a proportional basis to reflect the 1 for 2.75
reverse stock split (see Note 9).
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CONSOLIDATION
The consolidated financial statements include all majority owned
subsidiaries in which the Company has the ability to exercise control. All
intercompany transactions have been eliminated in consolidation. During
1996, the Company incorporated two wholly owned subsidiaries, Advanced
Radio Telecom AB and Advanced Radio Telecom Ltd. for its planned European
operations in the future. There have been no operations by these two
subsidiaries to date.
FINANCING COSTS
Direct costs associated with obtaining financing are deferred and charged
to interest expense using the effective interest rate method over the term
of the debt or, in the case of equity, charged to additional paid-in
capital. Deferred costs associated with unsuccessful financings are
charged to expense. The Company charged approximately $1,248,000 to
expense during the nine months ended September 30, 1996 associated with its
unsuccessful public debt offering.
9
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
FCC LICENSES
The Company 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. The costs associated with the
acquisition of such licenses, including the cost of perfecting such
licenses pursuant to FCC requirements, are capitalized and amortized on a
straight-line basis over a 40 year period upon commencement of operations
in the related market.
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. As of September 30, 1996, approximately $1.4 million out of a total
of $9.7 million of wireless transmission equipment has been placed into
service.
DEVELOPMENT STAGE ENTERPRISE
During the three months ended September 30, 1996, the Company perfected
substantially all of its licenses and commenced commercial operations.
Accordingly, the Company is no longer considered to be in the development
stage. Prior to July 1, 1996, the Company was considered to be in the
development stage. Such change in classification of the Company had no
impact on net loss or stockholders' deficit for any periods presented.
4. 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:
For the Nine Months For the Three Months
Ended September 30, Ended September 30,
------------------- --------------------
1996 1995 1996 1995
Net loss per share $ 3.10 $ 0.18 $ 0.71 $ 0.09
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average number of shares
of common stock outstanding 6,580,627 5,721,111 6,586,958 6,761,111
--------- --------- --------- ---------
--------- --------- --------- ---------
The Securities and Exchange Commission requires that potentially dilutive
instruments issued within one year prior to an initial public offering at
exercise prices below the initial public offering price be treated as
outstanding for all periods presented in the public offering prospectus.
Accordingly, an additional 2,889,918 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 nine months ended September
30, 1996.
10
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
5. CONVERTIBLE NOTES PAYABLE:
On February 2, 1996, the Company and several entities affiliated with
Advent International Corp. (collectively, "Advent") entered into an
exchange agreement under which the convertible notes payable to Advent,
including accrued interest, and the one share of ART's redeemable preferred
stock held by Advent were exchanged for 232,826 shares of serial preferred
stock of Telecom (converted into 1,100,632 shares of common stock of the
Company concurrent with the initial public offering). As a result, the
notes payable by the Company to Advent were canceled and the related
interest forgiven.
6. EQUITY INVESTMENT:
The Company accounts for its 50% interest in the ART West joint venture
under the equity method. In June 1996, the Company agreed to acquire the
remaining 50% ownership interest in ART West held by Extended
Communications Inc. ("Extended") for $6 million in cash upon consummation
of public equity and debt offerings with aggregate net proceeds of $125
million and receipt of FCC approval. In addition, the Company entered into
a ten-year management agreement which, effective June 1, 1996, replaced the
services agreement with ART West with an arrangement whereby the Company
agreed to construct, operate, and manage the ART West systems in exchange
for a license fee equal to 10% of recurring operating revenues. During
November 1996, upon completion of its initial public offering, the Company
made a $3 million nonrefundable payment to Extended pursuant to the
acquisition agreement.
7. 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 6,000,000 shares of
common stock of the Company. 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 a public equity offering and a debt offering 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. Under the
management agreement, CommcoCCC is obligated to reimburse the Company up to
$100,000 of operating expenses, which obligation is canceled upon
consummation of the acquisition.
11
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
7. COMMCOCCC ASSET ACQUISITION, CONTINUED:
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 in August 1997. The
price of authorizations to be purchased under the Option is based upon a
formula that considers the market price of the Company's 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 18,182 shares
of Common Stock at a price of $15.00 per share, as adjusted and after
giving effect to anti-dilution adjustments. As a result of a delay in the
September 30, 1996 repayment, the Company obtained waivers from the lenders
to extend the payment terms. In exchange, the Company issued additional
warrants to purchase 69,091 shares of the Company's common stock at a price
of $15.00 per share (as adjusted after giving effect to anti-dilution
adjustments) and increased the interest rate to 14.75%. During
November 1996, the Company repaid the principal balance and accrued
interest with proceeds from the initial public offering.
8. FINANCINGS:
AMERITECH FINANCING
On February 2, 1996, Telecom sold 48,893 shares of serial preferred stock
(converted into 231,131 shares of common stock of the Company concurrent
with the initial public offering) 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 318,959 shares of common stock at a
nominal price per share, exercisable on February 2, 1996 through February
2, 2006. The Company recorded the value of $1,053,000 ascribed to the
strategic distribution agreement as market development expense in the first
quarter of 1996. The Company incurred fees of $150,000 in connection with
this transaction. On December 5, 1996, Ameritech surrendered its warrants
to purchase 318,959 shares of common stock in full exercise of the warrants
and was issued 318,374 shares of common stock by the Company.
12
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. FINANCINGS, CONTINUED:
MARCH BRIDGE FINANCING
On March 8, 1996, the Company issued in a private placement a portion of
which was issued to certain holders of serial preferred stock, $5,000,000
of two year, 10% notes, interest payable on a semi-annual basis, and
warrants to purchase up to an aggregate of 400,000 shares of common stock
at a price of $17.1875 per share. During November 1996, the Company repaid
the principal balance and accrued interest with proceeds from the initial
public offering.
EQUIPMENT FINANCING
On April 29, 1996, the Company completed a $2,445,000 equipment financing
for the purchase of wireless transmission equipment. The Company issued a
$2,445,000 promissory 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, the Company issued five year warrants to purchase
up to an aggregate of 118,181 shares of common stock and paid $225,000 in
fees to certain stockholders to partially guarantee the equipment
financing. In addition, the Company was required to invest $1,000,000 in a
certificate of deposit assigned to the lender as collateral. The
$1,000,000 is reflected as restricted cash in the balance sheet.
SEPTEMBER BRIDGE FINANCING
During September and October, 1996, the Company issued in a private
placement, a portion of which was issued to certain stockholders,
$4,000,000 in notes due March 1998 with interest at 14.75%, payable
quarterly, and warrants to purchase 116,363 shares of common stock at a
purchase price of $15.00 per share, as adjusted after giving effect to
anti-dilution adjustments. During November 1996, the Company repaid the
principal balance and accrued interest with proceeds from the initial
public offering.
CIBC FINANCING
During November 1996, the Company entered into agreements with certain
lenders which provide for the issuance of up to $50.0 million of Senior
Secured Notes, at any time at the Company's option through February 10,
1997. The initial interest rate on the Senior Secured Notes is 12.5%,
which rate increases by 0.50% three months after the closing of the initial
public offering and by an additional 0.50% for each three-month period
thereafter. The Senior Secured Notes are due in full in November 1998.
13
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. FINANCINGS, CONTINUED:
CIBC FINANCING, CONTINUED
The Senior Secured Notes are to be collateralized by a first priority
security interest in substantially all the assets of the Company, including
a pledge of the Company's stock in its subsidiaries. The Senior Secured
Notes contain covenants that restrict the ability of the Company to pay
dividends and make other restricted payments, to incur additional debt,
guarantees and liens, to sell its assets, to enter into mergers and
consolidations, to conduct sale and leaseback transactions and to enter
into affiliate transactions, among other restrictions.
Upon completion of the initial public offering, the Company delivered
warrants to purchase 299,488 shares of common stock of the Company at a
nominal exercise price. The Company also is committed to deliver
additional warrants to purchase 1.5% of the fully diluted common stock upon
the first draw down of the Senior Secured Notes. If the Senior Secured
Notes are outstanding six months after the initial public offering, the
Company shall issue to the lenders additional warrants to purchase 3% of
the fully diluted common stock, and an additional 3% for each additional
six month period such notes are outstanding.
In connection with the CIBC Financing, the Company paid placement and
commitment fees and other expenses of approximately $1.9 million and is
obligated to pay approximately $1.8 million upon the drawdown of the Senior
Secured Notes.
9. STOCKHOLDERS' DEFICIT:
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, respectively, and changed the
par value of common stock from $.01 to $.001. On October 11, 1996, the
Board of Directors authorized a 1 for 2.75 reverse stock split of shares of
common stock issued and outstanding. All references to the number of
shares and per share amounts in the accompanying financial statements have
been restated to reflect the stock split and the reverse stock split,
unless otherwise indicated.
Pursuant to a February 2, 1996 reorganization, the terms of the escrow
shares arrangement were terminated and all of the remaining escrow shares
thereunder were released to the stockholders of the Company. The related
compensation expense of $6,795,514, based on the then estimated fair value
of the escrow shares was recognized, the effect of which was recorded as
additional paid-in capital.
14
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
10. RELATED PARTY TRANSACTION:
In November 1996, Landover Holdings Corporation ("LHC"), one of the
principal stockholders of the Company was paid an aggregate of
approximately $300,000 in conjunction with various services provided in
connection with certain acquisitions under the consulting agreement with
LHC.
11. COMMITMENTS AND CONTINGENCIES:
DCT AGREEMENT
During April 1996, the Company entered into an agreement with DCT
Communications, Inc. ("DCT") (the "DCT Agreement") to acquire DCT's
interest in certain FCC authorizations and licenses in exchange for $3.6
million in cash, of which the Company paid a deposit of $100,000. The DCT
Agreement provided, among other things, that if the Company failed to
obtain debt or equity proceeds in an amount at least equal to $3.6 million
by August 31, 1996, the DCT Agreement would terminate and DCT could retain
the $100,000 deposit. DCT has alleged that the Company has failed to
satisfy this provision. The Company believes that it has satisfied such
provision through its financings, however, there can be no assurance as
to the outcome of such dispute and therefore no assurance that the
Company will consumate this acquisition.
15
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
ITEM 2. 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 primarily 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.
The following discussion and analysis is based upon the combined financial
statements of ART and Telecom, as restated to reflect the merger in October
1996.
The following discussion includes certain "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company, or industry results, to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, but are not limited to the
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. The Company disclaims
any obligation to update any such factors or to publicly announce the result of
any revisions to any of the forward-looking statements contained or incorporated
by reference herein to reflect future events or developments.
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 yet 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
construction of systems to perfect its licenses and commencement of commercial
operations. 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".
16
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
OVERVIEW, CONTINUED
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
operating and 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. 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 operating and net losses and
negative operating cash flow will increase as the Company implements its growth
strategy and that, under its current business plan, operating and net losses and
negative operating cash flow will continue at least through fiscal 1998.
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."
ACQUISITION, BUSINESS DEVELOPMENT AND CAPITAL EXPENDITURES
From inception through September 30, 1996, the Company has invested an aggregate
of $4.3 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 through September 30, 1996, expenditures for property
and equipment have totaled $11.4 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 September 30, 1996 of
approximately $23.7 million, including $9.6 million of non-cash compensation and
marketing expenses, and used cash in operating activities of approximately $10.6
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 6,000,000 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.
17
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
ACQUISITION, BUSINESS DEVELOPMENT AND CAPITAL EXPENDITURES, CONTINUED
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 estimates will change as a result of any failure by the
Company to develop its FCC authorizations on a timely basis, or due to
technological, regulatory or other changes. The Company anticipates that it
will fund approximately $1.0 million of research and development activities
pursuant to a letter of intent with Helioss Communications Corporation.
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.
In October 1996, the Company entered into a binding letter of intent with
Advantage Telecom, Inc. ("ATI"), a Canadian company which has applied for
licenses to provide 38 GHz service in 66 major markets in Canada covering a
population of at least 21 million. Upon consummation of the transactions
described in the letter of intent, ART will hold a substantial direct and
indirect minority interest in ATI and will be a party to a services agreement
with ATI pursuant to which ART will construct and operate radio systems based
upon licenses granted to ATI and subject to control by ATI. The Company
incurred up to approximately $300,000 of expenses under the letter of intent
through September 30, 1996, and ATI is responsible for securing any additional
funding necessary to construct the radio systems. Due to current uncertainty
in Canada's licensing policy, there can be no assurance that ATI will be granted
these licenses or that, if granted, ATI will obtain the funding necessary to
construct the radio systems.
On September 29, 1996 the Company entered into a shareholders agreement with
Trond Johannessen, pursuant to which the Company anticipates eventually
obtaining licenses and offering its wireless broadband services through separate
subsidiaries in the 17 countries comprising the European Union. The Company has
caused to be formed subsidiaries in Sweden and the United Kingdom for this
purpose. Under the shareholders' agreement, in consideration for services to be
rendered and his proportionate share of the formation costs, Mr. Johannessen is
entitled to receive a 20% interest in the initial shareholdings in certain of
the subsidiaries in each country, prior to significant funding of each
subsidiary. The Company has no further commitment to fund any such subsidiary.
Mr. Johannessen is also a consultant to the Company, for which he receives
monthly payments of $6,500 plus expenses. The Company is seeking but has not
yet received any operating licenses, strategic alliances or customer commitments
in Europe. Although each member nation of the European Economic Community is
required pursuant to a directive of the European Commission to open its
telecommunications markets to competition over the next several years, the
timing and extent of a
18
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
ACQUISITION, BUSINESS DEVELOPMENT AND CAPITAL EXPENDITURES, CONTINUED
relaxation in entry barriers and the degree of cooperation from the incumbent
service providers in such areas as interconnection to customers and the public
networks is unknown. There can be no assurance that the Company will be able to
acquire the licenses necessary in each European country, to finance and
implement its business plan or to operate in any country on a profitable basis.
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
terminated concurrent with the initial public offering, the Company paid 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. In
December 1996, LHC also received approximately $300,000 as a fee in connection
with various consulting services performed under the management consulting
agreement.
RESULTS OF OPERATIONS
The Company has generated revenue of $130,806 from operations since inception.
From inception through September 30, 1996, the Company has incurred aggregate
expenses of approximately $24.0 million, including $9.6 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 depreciation and amortization related to building the Company's
business infrastructure and marketing its wireless broadband services and net
interest expense. The Company expects to continue to generate increased
revenues; however, the Company expects that it will not achieve profitable
operations at least through fiscal 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO SEPTEMBER 30, 1995
Revenue for the nine months ended September 30, 1996 was $125,013 compared to no
revenue in 1995. The increase in revenues was due to service revenues earned
from wireless broadband telecommunications services provided by the Company.
As of September 30, 1996, the Company had 62 revenue generating radio links
(single path point to point microwave) in service.
19
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
RESULTS OF OPERATIONS, CONTINUED
Operating expenses other than interest were $19.2 million for the nine months
ended September 30, 1996 compared to $1.0 million in 1995. The increase was
primarily due to $7.5 million of non-cash compensation expense, including $6.8
million arising from the termination of an arrangement with certain employees
with respect to shares held in escrow pending achievement by the Company of
certain performance goals under the escrow share arrangement and subsequent
release of shares to such employees in connection with the reorganization of the
capital of ART and Telecom effected on February 2, 1996, as well as higher
general and administrative, market development, and research and development
expenses. 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 due to a non-cash marketing expense of $1.1 million related
to the strategic distribution agreement with Ameritech dated April 29, 1996.
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 activities to increase substantially in future periods, as the
development and deployment of the Company's business continues.
Net interest expense was $1.3 million for the nine months ended September 30,
1996 compared to $1,539 in 1995. The increase in interest expense was primarily
due to interest on (i) the $2.5 million Promissory Note (the "Equipment Note")
issued by the Company on April 1, 1996 in favor of CRA, Inc. to evidence the
Company's obligations under a $2.5 million equipment financing for the purchase
from P-Com, Inc. of 38 GHz radio equipment, which note is payable in 24 monthly
installments of $92,694 with a final payment of $642,305 due April 1, 1998, (ii)
a $1.5 million three-year non-negotiable and non-transferable promissory note
(the "EMI Note") issued by the Company in favor of EMI Communications, Inc. as
partial consideration for the acquisition by the Company of EMI's thirty-two 38
GHz wireless broadband licenses and related assets in the northeastern United
States, (iii) the $5.0 million principal amount of 10% unsecured notes issued by
Telecom on March 8, 1996 (the "March Bridge Notes"), and (iv) the $3.0 million
principal amount of subordinated secured bridge notes (the "CommcoCCC Notes")
issued by the Company to stockholders of CommcoCCC, Inc. ("CommcoCCC"). The
Company expects that the issuance of these notes and future financings will
cause interest expense to increase substantially in future periods. The
write-off of unamortized offering discount and deferred finance costs associated
with the March Bridge Notes, the CommcoCCC Notes and the $4.0 million principal
amount of 14.75% unsecured notes issued by the Company from August, 1996 to
October, 1996 (the "September Bridge Notes") will result in a fourth quarter
1996 non-cash extraordinary loss of approximately $1.3 million due to repayment
of such debt from the proceeds of the initial public offering.
20
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
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
September 30, 1996, the Company used $10.6 million of cash in its operating
activities and $9.8 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 $20.7 million and cash of $752,368 at
September 30, 1996.
In October 1996, the Company received the remaining $1,550,000 in cash (out of a
total of $4.0 million) from the September Bridge Financing. During November and
December 1996, the Company received approximately $34,500,000, before expenses,
from its initial public offering and repaid the March Bridge Notes, the
CommcoCCC Notes and the September Bridge Notes.
The Company's total assets increased from $9.9 million at December 31, 1995 to
$20.5 million at September 30, 1996. Property and equipment, net of accumulated
depreciation, comprised $3.6 million of total assets at December 31, 1995 and
$11.0 million at September 30, 1996. FCC licenses and the investment in the ART
West Joint Venture were $4.5 million at December 31, 1995 and $4.6 million at
September 30, 1996.
Cash used in operating activities increased to $9.0 million for the nine months
ended September 30, 1996 compared to $750,291 for the nine months ended
September 30, 1995. The increase was primarily due to higher operating costs.
Cash used in investing activities was approximately $5.5 million for the nine
months ended September 30, 1996 compared to $419,620 for the nine months ended
September 30, 1995. The increase was primarily due to additions to property and
equipment. Cash provided by financing activities increased to $14.6 million in
the nine months ended September 30, 1996 compared to $1.2 million in the nine
months ended September 30, 1995. The increase was primarily due to the private
equity placement with Ameritech and the issuance of the Equipment Note, the
March Bridge Notes, the CommcoCCC Notes and the September 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 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.
21
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
The Company has funded approximately $400,000 of research and development costs
with American Wireless Corporation ("American Wireless") related to wireless
transmission equipment through September 30, 1996. Vernon L. Fotheringham, the
Chairman of the Company, is a director and a 6% shareholder of American
Wireless. 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. 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 $35.0
million through December 30, 1997. The Company currently expects capital
expenditures through December 31, 1997 to consist of approximately $29.0 million
for wireless transmission equipment, approximately $3.0 million for network
design and development and related equipment and approximately $3.0 million for
computer equipment and other capital requirements. Included in these amounts
are the costs of initial construction of the remaining CommcoCCC authorizations
which have not yet satisfied the FCC's construction deadline, estimated to be
less than $3.0 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 the
installation of 38 GHz wireless transmission equipment will increase as demand
for the Company's 38 GHz services increases in the targeted geographic markets
and industry segments over the next several years. In addition, the Company has
agreed to acquire authorizations and licenses for $9.6 million, of which $3.0
million was paid in November 1996 out of the proceeds from the initial public
offering. The Company has entered into an agreement to acquire 129 38 GHz
authorizations from CommcoCCC in exchange for 6,000,000 shares of common stock
(the "CommcoCCC Acquisition"). 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 agreement
dated July 3, 1996 (as amended) to acquire 129 38 GHz wireless broadband
authorizations from CommcoCCC. If the Company does not consummate the CommcoCCC
Acquisition, the impact upon capital expenditures in 1997 is not expected to be
significant, other than capital expenditures for the initial construction of the
remaining CommcoCCC authorizations.
22
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
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 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.
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 opportunity to expand its wireless broadband services
business significantly and that access to capital will enable it to expand more
quickly and effectively.
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.
During November 1996, the Company completed an initial public offering of
equity securities, raising $34,500,000 before expenses. For a period of 90
days after the consummation of the Company's initial public offering, the
Company may draw down $50.0 million of 12.5% Senior Secured Notes due 1998
(the "Senior Secured Notes") pursuant to a financing arranged by CIBC Wood
Gundy Securities Corp. (the "CIBC Financing"). An aggregate of $12.0 million
from the proceeds of the initial public offering was used to repay the March
Bridge Notes, the CommcoCCC Notes and the September Bridge Notes, and $3.0
million was used to fund a portion of the acquisition of the remaining 50%
interest in ART West. Management anticipates that, based on current plans of
development, assuming that no new material acquisitions (other than those
currently under contact) are consummated, the remaining net proceeds of the
initial public offering and funds available from the CIBC Financing after the
use of $6.6 million to complete pending acquisitions, and $3.0 million to pay
expenses related to the CommcoCCC Acquisition when consummated, will be
sufficient to fund the operations of the Company through December 31, 1997.
Management also believes that the Company's future capital needs will
continue to be significant and intends to replace the CIBC Financing, at the
earliest practicable time and management intends to continue seeking
additional financing. Without limiting the foregoing, under the terms of the
CIBC Financing, the Company will experience substantial additional costs,
including the effect of the increases in the interest rate of the Senior
Secured Notes and of the issuance of additional warrants, if the Company
fails to replace funds available from the CIBC Financing, if drawn down,
within three months or six months after the date of the initial public
offering as the case may be. In addition, if (i) the Company's plan of
development or projections change or prove to be inaccurate, (ii) the
proceeds of the initial public offering and the CIBC Financing, together with
other existing financial resources,
23
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED
prove to be insufficient to fund the Company through December 31, 1997 or (iii)
the Company completes any material acquisitions, other than those now under
contract or buys spectrum rights at auction, the Company may be required to
obtain additional financing earlier than December 31, 1997. There can be no
assurance that the Company will be able to replace the CIBC Financing timely, or
at all, or 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 refinance the CIBC Financing timely, or at
all, or 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 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 Standard 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 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 standards.
INFLATION
Management does not believe that its business is impacted by inflation to a
significantly different extent than is the general economy.
24
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits: Not Applicable.
(b) Reports on Form 8-K: Not Applicable.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVANCED RADIO TELECOM CORP.
(Registrant)
By: /s/ Thomas A. Grina
---------------------------------------------
THOMAS A. GRINA
Executive Vice President
AND Chief Financial Officer
(Duly Authorized Officer and
Principal Financial and Accounting Officer)
Date:
26
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS - SEPTEMBER 30, 1996 AND THE UNAUDITED
CONDENSED STATEMENT OF OPERATIONS - FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 752,368
<SECURITIES> 0
<RECEIVABLES> 78,645
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 971,240
<PP&E> 11,433,514
<DEPRECIATION> 414,297
<TOTAL-ASSETS> 20,541,997
<CURRENT-LIABILITIES> 21,671,913
<BONDS> 12,382,601
0
921
<COMMON> 6,587
<OTHER-SE> (3,002,720)
<TOTAL-LIABILITY-AND-EQUITY> 20,541,997
<SALES> 0
<TOTAL-REVENUES> 125,013
<CGS> 0
<TOTAL-COSTS> 18,499,514
<OTHER-EXPENSES> 666,406
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,396,943
<INCOME-PRETAX> (20,378,377)
<INCOME-TAX> 0
<INCOME-CONTINUING> (20,378,377)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,378,377)
<EPS-PRIMARY> (3.10)
<EPS-DILUTED> (3.10)
</TABLE>
