<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 16, 1997
REGISTRATION NO. 333-19295
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ADVANCED RADIO TELECOM CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4812 52-1869023
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification 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 2600 500 108TH AVENUE, N.E., SUITE 2600
BELLEVUE, WASHINGTON 98004 BELLEVUE, WASHINGTON 98004
(206) 688-8700 (206) 688-8700
(Address, Including Zip Code, and Telephone (Name, Address, Including Zip Code, and
Number, Including Area Code, of Registrant's Telephone Number, Including Area Code, of
Principal Executive Offices) Agent for Service)
</TABLE>
<TABLE>
<S> <C>
COPIES TO:
JAMES KARDON, ESQ. JOHN D. WATSON, JR., ESQ.
HAHN & HESSEN LLP LATHAM & WATKINS
350 FIFTH AVENUE 1001 PENNSYLVANIA AVE., N.W.
NEW YORK, NEW YORK 10118 WASHINGTON, D.C. 20004
(212) 736-1000 (202) 637-2200
</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. / /
------------------------
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.
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<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>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JANUARY 16, 1997
PROSPECTUS
$125,000,000
[LOGO]
125,000 UNITS CONSISTING OF
% SENIOR NOTES DUE 2007
AND 125,000 WARRANTS TO PURCHASE SHARES OF COMMON STOCK
------------------
Advanced Radio Telecom Corp. ("ART" or the "Company") is hereby offering
(the "Offering") 125,000 units (the "Units"), each consisting of $1,000
principal amount of % Senior Notes due 2007 (the "Notes") and one warrant
(collectively, the "Warrants") to purchase 9.024 shares of common stock (the
"Common Stock") of the Company. The Notes and the Warrants will not be separable
until the earliest of (i) , 1997, (ii) a Change in Control (as
defined) of the Company and (iii) such date as the Underwriters may, in their
discretion, deem appropriate (the "Separation Date"). At the closing of the
Offering, the Company will use approximately $44.3 million of the net proceeds
thereof to purchase a portfolio of Pledged Securities (as defined), initially
consisting of U.S. government securities, that will provide funds sufficient for
payment in full of interest on the Notes through , 2000 and that will be
pledged as security for repayment of principal of the Notes. See "Use of
Proceeds." The Notes will mature on , 2007. Interest on the Notes
will be payable, at a rate of % per annum, semiannually in arrears on
and of each year, commencing , 1997. See
"Description of Notes." The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after , 2002 at the
redemption prices set forth herein, plus accrued and unpaid interest, if any, to
the date of redemption. In addition, in the event that the Company receives net
proceeds from the sale of its Common Stock in one or more Equity Offerings (as
defined) or investments by one or more Strategic Equity Investors (as defined)
on or prior to , 2000 (other than in connection with a Change in
Control of the Company), the Company may, at its option, use all or a portion of
any such net proceeds to redeem up to a maximum of 25% of the initially
outstanding aggregate principal amount of the Notes at a redemption price equal
to % of the principal amount thereof plus accrued and unpaid interest, if any
to the redemption date; PROVIDED that not less than 75% of the initially
outstanding aggregate principal amount of the Notes remain outstanding following
such redemption. See "Description of Notes -- Redemption -- Optional
Redemption." Upon the occurrence of a Change in Control, the Company is
obligated to make an offer to purchase all outstanding Notes at a price of 101%
of the principal amount thereof, plus accrued and unpaid interest, if any, to
the date of purchase. See "Description of Notes -- Certain Covenants -- Change
in Control." There can be no assurance that the Company will have sufficient
funds available at the time of any Change in Control to purchase all Notes
tendered. See "Risk Factors."
The Notes will represent senior obligations of the Company and will be
unsecured, except for the pledge by the Company of the Pledged Securities. The
Notes will rank PARI PASSU in right of payment with all existing and future
unsecured, senior indebtedness of the Company and will rank senior in right of
payment to any future subordinated indebtedness of the Company. At September 30,
1996, on a pro forma basis after giving effect to the Offering, the Common Stock
Offering (as defined) and the application of the net proceeds therefrom, the
aggregate amount of indebtedness of the Company (excluding the Notes) was
approximately $3.1 million, which consisted of the EMI Note (as defined) and the
Equipment Note (as defined), all of which ranked PARI PASSU with the Notes.
However, $1.6 million of such indebtedness constituted secured indebtedness
which will effectively rank senior to the Notes with respect to the assets
securing such indebtedness. Although the Indenture (as defined) will limit the
ability of the Company and its subsidiaries to incur additional indebtedness,
including senior indebtedness, the Indenture will permit the Company to incur a
substantial amount of secured indebtedness, including vendor indebtedness and
indebtedness under the Credit Facility (as defined), which, if incurred, will
effectively rank senior to the Notes with respect to the assets securing such
indebtedness. See "Risk Factors -- Possible Incurrence of Substantial Secured
Indebtedness," "Description of Notes--Ranking" and "Description of Certain
Indebtedness."
Each Warrant will entitle the holder thereof, subject to certain conditions,
to purchase 9.024 shares of Common Stock at an exercise price of $ per share,
subject to adjustment under certain circumstances. Upon exercise, the holders of
Warrants will be entitled, in the aggregate, to purchase 1,128,011 shares of
Common Stock, representing 5.0% of the outstanding Common Stock on a
fully-diluted basis on the date hereof, after giving effect to the Offering and
the CommcoCCC Acquisition (as defined). The Warrants will be exercisable at any
time on or after , 1997. Unless earlier exercised, the Warrants will
expire on , 2007. See "Description of Warrants."
There is no existing trading market for the Units, the Notes or the
Warrants, and the Company does not intend to list the Units, the Notes or the
Warrants on any securities exchange or for quotation on the Nasdaq National
Market. The Common Stock is quoted on the Nasdaq National Market under the
symbol "ARTT." As of January 14, 1997, the closing price of the Common Stock on
the Nasdaq National Market was $11.125 per share. See "Risk Factors -- Absence
of Public Market; Possible Volatility of Stock Price."
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS
WHICH SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE UNITS OFFERED
HEREBY.
---------------------
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 TO UNDERWRITERS' PROCEEDS TO
PUBLIC(1) DISCOUNT(2) COMPANY(3)
<S> <C> <C> <C>
Per Unit................................. % % %
Total.................................... $ $ $
</TABLE>
(1) Plus accrued interest, if any, on the Notes from , 1997.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $ .
------------------------------
The Units are being offered by the Underwriters, subject to prior sale,
when, as and if delivered to and accepted by the Underwriters, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the Units will be made in New York, New York on or about ,
1997.
------------------------------
MERRILL LYNCH & CO. CIBC WOOD GUNDY SECURITIES CORP.
------------------------------
The date of this Prospectus is , 1997.
<PAGE>
[INSIDE FRONT COVER GATE FOLD]
[MAP OF U.S. DISPLAYING ADVANCED RADIO
TELECOM CORP.'S 38 GHz SERVICE AREAS.]
<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 THAT 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 GIVES EFFECT TO (I) THE COMPLETION OF THE
ACQUISITION OF TELECOM (AS DEFINED) BY THE MERGER (THE "MERGER") OF A
WHOLLY-OWNED SUBSIDIARY OF ADVANCED RADIO TECHNOLOGIES CORPORATION WITH AND INTO
TELECOM EFFECTED IN OCTOBER 1996, (II) THE CONVERSION (THE "CONVERSION") OF ALL
OUTSTANDING SHARES OF PREFERRED STOCK OF ART INTO SHARES OF COMMON STOCK OF ART
EFFECTED IN NOVEMBER 1996, (III) THE AMENDMENT OF THE COMPANY'S CERTIFICATE OF
INCORPORATION TO CHANGE ITS NAME FROM ADVANCED RADIO TECHNOLOGIES CORPORATION TO
"ADVANCED RADIO TELECOM CORP." ("ART" OR THE "COMPANY"), AND (IV) COMPLETION OF
THE INITIAL PUBLIC OFFERING OF 2,300,500 SHARES OF COMMON STOCK EFFECTED IN
NOVEMBER 1996 (THE "COMMON STOCK OFFERING"). 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 ITS WHOLLY-OWNED SUBSIDIARY, ART LICENSING CORP. ("ART
LICENSING" AND, FORMERLY, 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 38 GHz band 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. Upon completion of its pending acquisition of 129 38 GHz
wireless broadband authorizations (the "CommcoCCC Assets") from CommcoCCC, Inc.
("CommcoCCC"), the Company will own, manage or have a right to use on a long-
term basis a total of 233 authorizations (which are also referred to herein as
"licenses") granted by the Federal Communications Commission (the "FCC")
covering an aggregate population of approximately 156 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, manages or has a right to use on a long-term basis 104
licenses (exclusive of the CommcoCCC Assets) that allow it to provide 38 GHz
wireless broadband services in 81 markets. See "Risk Factors -- Risk of
Non-Consummation of CommcoCCC Acquisition and Other Acquisitions; Commco
Option," "Business -- 38 GHz Wireless Broadband Licenses and Authorizations" and
"-- Agreements Relating to Licenses and Authorizations -- CommcoCCC
Acquisition." During 1996 the Company installed over 370 radio links (single
path point-to-point microwave connections), including 99 radio links installed
for other carriers and 85 radio links providing service to customers.
The ability to access and distribute information quickly has become critical
to business and government users of telecommunications services. The rapid
growth of local area networks ("LANs"), Internet services, video
teleconferencing and other data intensive applications is 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, is creating an opportunity to offer cost effective, high capacity
last mile access using both wireline and wireless solutions. See "Business --
Telecommunications Industry Overview."
ART'S WIRELESS BROADBAND SERVICES
The Company is positioned to solve the need for broadband last mile
services, linking end users to facilities of LECs, competitive access providers
("CAPs"), competitive local exchange carriers ("CLECs"), inter-exchange carriers
("IXCs") and Internet service providers ("ISPs"). The Company is also positioned
to link cell sites of mobile communications service providers and to link
metropolitan area network sites using 38 GHz technology. The Company's wireless
broadband links deliver high quality voice and data transmissions at a level of
performance which exceeds the performance of copper
3
<PAGE>
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 (1.544 megabits per second ("Mbps"), capable of carrying 24
simultaneous voice conversations) to DS-3 (45 Mbps, capable of carrying 672
simultaneous voice conversations). 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 88 markets to be acquired under the CommcoCCC Agreement (as
defined). See "Business -- ART's Wireless Broadband Services."
The Company intends initially to market its services as a carrier's carrier
in order to leverage ART's carrier customers' sales forces, channels of
distribution and customer bases. The Company believes that its services will be
attractive to carrier customers which do not currently have broadband networks
that reach the majority of their customers. For example, 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. Ameritech has initiated
the sale of ART's wireless broadband services on a limited basis, and the
Company expects that full-scale rollout will begin in the first quarter of 1997.
See "Business -- Strategic Alliances -- Ameritech Strategic Distribution
Agreement."
The Company believes that a number of factors provide it with certain
significant competitive advantages in offering broadband last mile services,
including:
- The characteristics of 38 GHz technology (high data transfer rates,
significant channel capacity, rapid deployment, easy installation, very
high transmission quality and efficient network design) are ideal for the
provision of last mile services. See "Business -- 38 GHz Technology."
- The Company deploys capital efficiently because of the
installation-to-meet-demand and redeployable nature of the Company's
wireless broadband equipment, as compared to the significant upfront cost
for installation of fiber based networks.
- As one of the first 38 GHz service providers, the Company enjoys a
time-to-market advantage and is therefore well-positioned to capture a
large percentage of early adopters, which are generally among the heaviest
users. The Company believes it is one of only two 38 GHz service providers
currently offering commercial services.
- The Company is forging strategic alliances with major telecommunications
carriers, equipment vendors and technology development companies, thus
gaining access to important channels of distribution and early deployment
of advanced technologies.
- The broad scope of the Company's footprint enables it to offer wireless
broadband services targeting much of the United States's addressable
business market.
- The Company's network management operational support system provides
24-hour, seven-days-a-week network monitoring and management.
- The Company is developing proprietary Geographic Information Systems
("GIS") that provide ART with 3-D digital modeling of all of its markets,
including all building and landscape features, to reduce the time and
expense of engineering its proposed radio locations. These systems will
allow the Company to determine line of site for proposed links, produce a
list of tenants in the buildings serviceable from such locations and
integrate this information with its marketing databases.
4
<PAGE>
BUSINESS STRATEGY
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. See "Business -- Business Strategy." The Company has begun to
implement the following strategic initiatives to achieve this objective:
- CAPITALIZE ON BROAD SPECTRUM POSITION. The Company's spectrum assets
provide it with the foundation on which to create a large scale commercial
network of 38 GHz wireless broadband operations. 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 "Business -- Agreements Relating to Licenses and
Authorizations."
- ESTABLISH AND EXPAND KEY STRATEGIC ALLIANCES. 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. The Company has established and will seek to
continue to establish key strategic alliances with major service providers,
equipment manufacturers and systems integrators. Under the Ameritech
Strategic Distribution Agreement, Ameritech is targeting certain sales
objectives and has agreed to spend internally up to $7.0 million on its
sales and marketing of ART's services. Ameritech owns a 5.0% beneficial
equity interest in the Company as of January 14, 1997. 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. See "Business--
Strategic Alliances."
- MARKET INITIALLY AS A CARRIER'S CARRIER. The Company intends to initially
market its services as a carrier's carrier in order to leverage ART's
carrier customers' sales forces, channels of distribution and customer
bases. The Company's initial target customers include LECs, CAPs/CLECs,
IXCs, ISPs and mobile communications service providers. The Company
believes that its services are particularly attractive to carrier customers
who do not currently have broadband networks capable of reaching the
majority of their customers.
- PROACTIVELY IDENTIFY OFF-NET MARKET OPPORTUNITIES FOR CARRIER CUSTOMERS.
ART utilizes its proprietary database tools, such as GIS, to analyze a
particular carrier's network and identify high density off-net customer
locations. The GIS database is then used to pre-clear off-net buildings for
line of site, distance and network design alternatives. After a critical
mass of sites has been pre-qualified, the Company is able to proactively
market to the carrier access to such customer premises and pursue a "team
selling" approach to end users. Utilizing this proactive approach with
multiple carriers is expected to allow the Company incrementally to build a
custom-designed wireless hub network in each of its target markets.
- PURSUE OPPORTUNITIES TO PROVIDE VALUE-ADDED SERVICES. The Company will
also market services such as data, video-conferencing, high resolution
imaging and video on demand directly to end users in conjunction with
system integrators, telecommunications equipment manufacturers and other
service providers. The Company also plans to offer point-to-multipoint
wireless broadband services and may also decide to offer switched-data
services to end users who desire a single source telecommunications
solution.
- MAINTAIN COMPETITIVE ADVANTAGES THROUGH TECHNOLOGY ADVANCEMENTS. As 38 GHz
microwave radios begin to be produced in large volumes with modern
manufacturing techniques, the Company believes that the cost of such
equipment will decline, thereby allowing the Company to meet anticipated
price competition in its markets. 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 continuously seeks to
reduce costs by designing equipment that allows it to more efficiently
utilize its spectrum. For example, the Company anticipates taking delivery
of 38 GHz OC-3 radios SONET compatible (155 Mbps) within 18-24 months.
5
<PAGE>
CUSTOMERS AND APPLICATIONS
The Company began deploying its links principally on a trial basis in
November 1995 and has since been hiring its staff, building its internal
infrastructure and developing its marketing plans and relationships with
potential customers. The Company has generated only nominal revenues from its
operations to date and has recently begun to finalize plans to roll out its
services on a wide-scale basis. Currently, the Company is providing or has
received orders to provide wireless broadband services to LECs, CAPs/ CLECs,
ISPs and mobile communications service providers, and is in the process of
becoming a qualified vendor to all the major IXCs. The Company currently
provides services to carriers such as Ameritech, Bell Atlantic NYNEX Mobile, MFS
Communications Company, Inc., UUNet, DIGEX, Incorporated, Electric Lightwave,
NEXTLINK Communications LLC, American PCS, L.P., Western Wireless, Commonwealth
Telephone, Public Interest Network, Chadwick Telephone, CGX Telecom, CAIS, Inc.
and Brooks Fiber Properties, Inc., among others. See "Business--Customers and
Applications."
38 GHZ TECHNOLOGY
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 Mbps today can
transfer data at a rate which is over 1,300 times the rate of the fastest
dial-up modem currently in use (33.3 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 its addressable service
market.
- 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 most 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 and that cannot commence service until
frequency coordination has been completed.
- EASE OF INSTALLATION. The equipment used for 38 GHz point-to-point
applications (I.E., antennae, transceivers and digital interface units) is
smaller, less obtrusive and less expensive than that used for microwave
equipment applications at other frequencies, making it less susceptible to
zoning restrictions. In addition, 38 GHz equipment can be easily
redeployed to meet changing customer requirements.
- VERY HIGH TRANSMISSION QUALITY. 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
6
<PAGE>
based networks. When measured as the total amount of time "out of service"
over a year, 99.999% availability equates to less than six minutes per
year of down-time, compared to a range of four hours to 44 hours of
historical performance of similar copper-based LEC circuits.
- 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.
RECENT DEVELOPMENTS
There have been a number of recent corporate developments at ART, including:
- AMERITECH ROLLOUT ANNOUNCEMENT. Ameritech has initiated the sale of ART's
wireless broadband services on a limited basis, and the Company expects
that full-scale rollout will begin in the first quarter of 1997. Ameritech
will rely on ART for the provision of high speed door-to-door connectivity
of voice, data and video to customers in the Midwest. See
"Business--Strategic Alliances."
- MASTER SERVICE AGREEMENTS WITH CAPS/CLECS AND ISPS. In September and
October 1996, ART entered into various master service agreements with a
number of CAPs/CLECs and ISPs, including NEXTLINK Communications LLC,
DIGEX, Incorporated, CAIS, Inc., Microwave Partners d/b/a Astrolink
Communications, Inc., American PCS, L.P., Message Center Management, Inc.,
GST Telecom, Inc., and Brooks Fiber Properties, Inc. The Company's master
service agreements contain the terms by which customers will place future
orders. The terms which are outlined in these agreements include volume
discounts, approximate geographic location of links needed and
representative pricing. Although a master service agreement is not a take
or pay commitment, it lays the groundwork for future orders by a preferred
customer and is utilized to facilitate the issuance of purchase orders by
a customer without any additional negotiations. See "Business--Strategic
Alliances."
- WORLDCOM AGREEMENT. In November 1996, ART entered into an agreement with
WorldCom, Inc. ("WorldCom") to supply trial broadband links to connect
WorldCom sites in the New York City metropolitan area. Assuming successful
completion of the trial and evaluation process, the Company anticipates
that it will be able to enter into broader contractual relationships with
WorldCom; however, there can be no assurance that the Company will be able
to do so. WorldCom acquired MFS Communications, Inc. on December 31, 1996.
- TELEPORT CONTRACT. In October 1996, ART entered into an installation
services agreement pursuant to which ART acted as a sub-contractor to
Teleport Communications Group ("TCG" or "Teleport") to provide
transmission facilities construction services. As of December 31, 1996,
all of such construction services had been substantially completed. See
"Business--Strategic Alliances."
- ICG AGREEMENT. In October 1996, ART entered into a services agreement
(the "ICG Agreement") with ICG Telecom Group, Inc. and Pacific & Eastern
Digital Transmission Services, Inc., pursuant to which the Company will
have an exclusive right, as against third parties, to use for a five-year
term ten 38 GHz wireless broadband authorizations covering an aggregate
population of approximately 13 million in or around the California cities
of Beverly Hills, Los Angeles, Palm Springs, Riverside, Santa Barbara, San
Bernardino, Santa Monica, San Diego, Santa Ana and Ventura. In addition,
the services agreement grants to the Company a right of first refusal with
respect to the purchase of such authorizations, subject to limited
exceptions. The services agreement may be renewed for successive one-year
terms totalling five additional years upon expiration of its initial term.
See "Business--Agreements Relating to Licenses and Authorizations--ICG
Agreement."
7
<PAGE>
THE OFFERING
THE UNITS
<TABLE>
<S> <C>
Units Offered..................... 125,000 Units, each consisting of $1,000 principal
amount of % Senior Notes due 2007 and one Warrant to
purchase 9.024 shares of Common Stock of the Company.
The Notes and the Warrants will not be separable until
the earliest of (i) , 1997, (ii) a Change in
Control of the Company and (iii) such date as the
Underwriters may, in their discretion, deem appropriate
(the "Separation Date").
Use of Proceeds................... To fund capital expenditures, including the purchase of
equipment and the acquisition of certain spectrum
rights, and for general corporate purposes, including
the funding of operating cash flow shortfalls,
technology development and acquisitions of additional
spectrum rights and, potentially, related businesses. At
the closing of the Offering, the Company will use
approximately $44.3 million of the net proceeds to
purchase the Pledged Securities. The amount of the net
proceeds used to purchase Pledged Securities may vary
depending upon the then current interest rates on U.S.
government securities. See "Use of Proceeds" and
"Description of Notes -- Security."
THE NOTES
Notes Offered..................... $125,000,000 aggregate principal amount of % Senior
Notes due 2007.
Maturity Date..................... , 2007.
Interest Payment Date............. Cash interest on the Notes will be payable semiannually
in arrears on and of each year,
commencing , 1997.
Security.......................... At the closing of the Offering, the Company will use a
portion (approximately $44.3 million) of the net
proceeds thereof to purchase a portfolio of Pledged
Securities that will provide funds sufficient for
payment in full of interest on the Notes through
, 2000 and that will be pledged as security for
repayment of principal of the Notes. Proceeds from the
Pledged Securities will be used by the Company to make
interest payments on the Notes through , 2000.
See "Description of Notes -- Security." The Pledged
Securities will be held by the Collateral Agent under
the Pledge Agreement (in each case, as defined) pending
disbursement.
Mandatory Redemption.............. None.
Optional Redemption............... The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after
, 2002 at the redemption prices set forth
herein, plus accrued and unpaid interest thereon, if
any, to the date of redemption. In addition, in the
event that the Company receives net proceeds from the
sale of its Common Stock in one or more Equity Offerings
or investments by one or more Strategic Equity In-
vestors on or prior to , 2000 (other than in
connection with a Change in Control of the Company), the
Company may, at its option, use all or a portion of any
such net proceeds to redeem up to a maximum of 25% of
the initially outstanding aggregate principal amount of
the Notes at a redemption price equal to % of the
principal amount thereof, plus accrued and unpaid
interest thereon, if any, to the date of redemption;
PROVIDED that not less than 75% of the initially
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
outstanding aggregate principal amount of the Notes
remain outstanding following such redemption. See
"Description of Notes -- Redemption -- Optional
Redemption."
Change in Control................. Upon the occurrence of a Change in Control, the Company
is obligated to make an offer to purchase all
outstanding Notes at a price of 101% of the principal
amount thereof, plus accrued and unpaid interest
thereon, if any, to the date of purchase. See
"Description of Notes -- Certain Covenants -- Change in
Control." There can be no assurance that the Company
will have sufficient funds available at the time of any
Change in Control to purchase all Notes tendered. See
"Risk Factors -- Risk of Inability to Satisfy Change in
Control Offer."
Ranking........................... The Notes will represent senior obligations of the
Company and will be unsecured, except for the pledge by
the Company of the Pledged Securities. The Notes will
rank PARI PASSU in right of payment with all future
unsecured, senior indebtedness of the Company and will
rank senior in right of payment to any future
subordinated indebtedness of the Company. At September
30, 1996, on a pro forma basis after giving effect to
the Offering, the Common Stock Offering and the
application of the net proceeds therefrom, the aggregate
principal amount of indebtedness of the Company
(excluding the Notes) was approximately $3.1 million,
which consisted of the EMI Note and the Equipment Note,
all of which ranked PARI PASSU with the Notes. However,
$1.6 million of such indebtedness constituted secured
indebtedness which will effectively rank senior to the
Notes with respect to the assets securing such indebted-
ness. Although the Indenture will limit the ability of
the Company and its subsidiaries to incur additional
indebtedness, including additional senior indebtedness,
the Indenture will permit the Company to incur a
substantial amount of secured indebtedness, including
vendor indebtedness and indebtedness under the Credit
Facility, which, if incurred, will effectively rank
senior to the Notes with respect to the assets securing
such indebtedness. See "Risk Factors -- Possible
Incurrence of Substantial Secured Indebtedness,"
"Description of Notes" and "Description of Certain
Indebtedness."
Certain Covenants................. The Indenture will contain certain covenants which,
among other things, will restrict the ability of the
Company and its Restricted Subsidiaries (as defined) to
(i) incur indebtedness, (ii) pay dividends or 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 certain
businesses 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. These covenants are subject to important
exceptions and qualifications. See "Description of Notes
-- Certain Covenants."
THE WARRANTS
Warrants.......................... 125,000 Warrants which, when exercised, would entitle
the holders thereof to purchase, in the aggregate,
1,128,011 shares of Common Stock (the "Warrant Shares"),
representing 5.0% of the outstanding Common Stock on a
fully-diluted basis on the date hereof, after giving
effect to the Offering and the CommcoCCC Acquisition.
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Registration Rights............... The Company will be required under the terms of the
agreement pursuant to which the Warrants are issued (the
"Warrant Agreement") to use its best efforts to cause to
become effective under the Securities Act no later than
, 1997 a shelf registration statement (the
"Warrant Shelf Registration Statement") covering the
issuance and resale, to the extent applicable, of the
Warrant Shares upon exercise of the Warrants. Subject to
certain "black-out" periods, the Company will also be
required to use its best efforts to maintain the
effectiveness of the Warrant Shelf Registration
Statement until the expiration or exercise of all
Warrants. See "Description of Warrants -- Registration
of Warrant Shares" and "Risk Factors -- Current
Registration Required to Exercise Warrants."
Separation Date................... The Notes and the Warrants will not be separable until
the earlier of (i) , 1997, (ii) a Change in
Control of the Company and (iii) such date as the
Underwriters may, in their discretion, deem appropriate.
Exercise.......................... Each Warrant will entitle the holder thereof, subject to
certain conditions, to purchase 9.024 shares of Common
Stock at an exercise price of $ per share, subject
to adjustment under certain circumstances. The Warrants
will be exercisable at any time on or after
, 1997 and prior to the expiration of the
Warrants, as set forth below. The exercise price and
number of shares of Common Stock issuable upon exercise
of the Warrants will be subject to adjustment from time
to time upon the occurrence of certain changes with re-
spect to the Common Stock, including certain
distributions of shares of Common Stock, issuances of
options or convertible securities, dividends and
distributions and certain changes in options and
convertible securities of the Company. A Warrant does
not entitle the holder thereof to receive any dividends
paid on shares of Common Stock.
Expiration........................ , 2007.
</TABLE>
For additional information concerning the Units, the Notes, the Warrants and
the Common Stock, and the definitions of certain capitalized terms used above,
see "Description of Units," "Description of Notes," "Description of Warrants"
and "Description of Capital Stock."
CIBC FINANCING COMMITMENT
The Company has entered into agreements with certain investors (the "CIBC
Investors") which provide for the issuance of $50.0 million of Senior Secured
Notes due 1998 (the "Senior Secured Notes") at any time, at the Company's
option, until February 10, 1997 (the "CIBC Financing Commitment"). Upon
completion of the Offering, the CIBC Financing Commitment will terminate, and,
accordingly, the Company will not issue the Senior Secured Notes in such event.
See "Description of Certain Indebtedness -- CIBC Financing Commitment."
RISK FACTORS
See "Risk Factors" beginning on page 13 for a discussion of certain factors
that should be considered by prospective purchasers of the Units offered hereby.
Certain statements contained in this Prospectus constitute "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. Given these uncertainties, prospective
investors are cautioned not to place undue reliance on such forward-looking
statements. See "Risk Factors" and "Special Note Regarding Forward-Looking
Statements."
10
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table presents unaudited summary historical and pro forma
financial data which were derived from, and should be read in conjunction with,
the audited financial statements of the Company and the notes thereto, the
unaudited condensed consolidated financial statements of the Company and the
notes thereto, and the unaudited pro forma condensed consolidated financial
statements of the Company and the notes thereto, included elsewhere in this
Prospectus. The pro forma 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 nine months ended September 30, 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.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 NINE MONTHS ENDED SEPTEMBER 30,
1996
------------------------------- -------------------------------
HISTORICAL (1) PRO FORMA (2) HISTORICAL (1) PRO FORMA (2)
------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue........................................ $ 5,793 $ 5,793 $ 125,013 $ 125,013
Non-cash compensation expense.......................... 1,089,605 1,089,605 7,504,452 7,504,452
Depreciation and amortization.......................... 15,684 2,509,059 504,462 2,374,493
Interest and financing expense......................... 131,540 24,616,543 1,396,943 20,546,088
Net loss............................................... 3,234,843 27,048,846 20,378,377 39,024,272
Pro forma net loss per share of Common Stock (3)....... $ 0.30 $ 1.36 $ 2.15 $ 2.12
Pro forma weighted average number of shares of Common
Stock outstanding (3)................................. 10,912,338 19,846,172 9,470,545 18,404,379
OTHER FINANCIAL DATA:
EBITDA (4)............................................. $(2,007,568) $ (2,007,568) $(9,978,993) $ (9,978,993)
Capital expenditures................................... 3,585,144 3,585,144 7,864,110 7,864,110
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1995 AS OF SEPTEMBER 30, 1996
------------------ -------------------------------
HISTORICAL (1) HISTORICAL (1) PRO FORMA (2)
------------------ ------------- ----------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital surplus (deficit)........................... $ (3,008,510) $(20,700,673) $ 73,255,289
Property and equipment, net................................. 3,581,561 11,019,217 11,019,217
FCC licenses, net........................................... 4,235,734 4,276,780 104,011,780
Total assets................................................ 9,876,559 20,541,997 252,540,252
Short-term debt............................................. -- 9,275,179 --
Long-term debt (including current portion).................. 6,450,000 3,107,422 121,215,275
Total stockholders' equity (deficit)........................ (312,860) (2,995,212) 97,220,369
</TABLE>
- ------------------------------
(1) The historical summary financial data of the Company reflects the Merger of
ART and Telecom, which occurred on October 28, 1996. The Merger was
accounted for as a reorganization of entities under common control which is
similar to that of a pooling of interests.
(2) 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 sale by the Company of 2,300,500 shares of Common Stock offered in
the Common Stock Offering in November 1996 at a price of $15.00 per share,
after deducting the underwriting discount and offering expenses; (ii) the
Conversion in November 1996; (iii) fees and expenses of approximately $6.4
million related to the CIBC Financing Commitment, including the issuance of
the First CIBC Warrants (as defined) to purchase 300,257 shares of Common
Stock, which financing commitment is assumed to be replaced by the issuance
of the Notes in the Offering; (iv) the receipt of $1.6 million (out of a
total of $4.0 million) in cash proceeds from the September Bridge Financing
(as defined) in October 1996; (v) the application of the net proceeds from
the Common Stock Offering to repay the March Bridge Notes, the CommcoCCC
Notes and the September Bridge Notes (in each case, as defined), which
repayment occurred in November 1996, and the November 1996 payment of $3.0
million of the total $6.0 million consideration to acquire the 50% ownership
interest of ART West held by Extended (in each case, as defined); (vi) the
exercise of the Ameritech Warrant (as defined) to purchase an aggregate of
318,374 shares of Common Stock in December 1996; (vii) the sale by the
Company of 125,000 Units offered in the Offering assuming $125.0 million of
gross proceeds, after deducting (a) the estimated underwriting discount and
offering expenses, (b) the cash used to purchase the Pledged Securities of
approximately $44.3 million and (c) the value ascribed to the Warrants of
approximately $6.9 million (the value was based on an assumed value of
$11.25 per share of Common Stock, a warrant exercise price of $12.375 per
share and an assumed issuance of Warrants to purchase an aggregate of
1,128,011 shares of Common Stock); (viii) the use of $3.0 million of net
proceeds from the Offering to fund the
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<PAGE>
balance of the ART West purchase price; and (ix) the consummation of the
acquisition by the Company of the CommcoCCC Assets in exchange for 6,000,000
shares of Common Stock at an assumed value of $11.25 per share plus related
estimated expenses.
(3) 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 issuance of 2,300,500 shares of Common Stock
issued in the Common Stock Offering, the Conversion, the issuance of
potentially dilutive instruments issued within one year prior to the Common
Stock Offering at exercise prices below the initial public offering price of
$15.00 per share (in measuring the dilutive effect, the treasury stock
method was used), the issuance of the 318,374 shares of Common Stock to
Ameritech and the issuance of 6,000,000 shares of Common Stock in connection
with the CommcoCCC Acquisition.
(4) EBITDA represents loss before interest and financing expense (net of
interest income), income tax expense, depreciation and amortization expense,
non-cash compensation expense and non-cash market development expense.
EBITDA is not intended to represent cash flows from operating activities, as
determined in accordance with generally accepted accounting
principles.EBITDA should not be considered as an alternative to, or more
meaningful than, operating income or loss, net income or loss or cash flow
as an indicator of the Company's performance. EBITDA has been included
because the Company uses it as one means of analyzing its ability to service
its debt, because a similar measure will be used in the Indenture with
respect to computations under certain covenants and because the Company
understands that it is used by certain investors as one measure of a
company's historical ability to service its debt. Not all companies
calculate EBITDA in the same fashion and therefore EBITDA as presented may
not be comparable to other similarly titled measures of other companies.
12
<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 UNITS OFFERED HEREBY. CERTAIN STATEMENTS CONTAINED IN THIS
PROSPECTUS CONSTITUTE "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. GIVEN THESE UNCERTAINTIES, PROSPECTIVE INVESTORS ARE CAUTIONED NOT
TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. SEE "SPECIAL NOTE
REGARDING FORWARD-LOOKING STATEMENTS."
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. 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 Units 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. For the year ended December 31, 1995
and the nine-month period ended September 30, 1996, the Company reported net
losses of $3.2 million and $20.4 million, respectively. From inception through
September 30, 1996, the Company reported net losses of $23.7 million. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company currently expects capital expenditures of approximately
$35.0 million in 1997 as the development and expansion of its wireless broadband
business continues. The Company expects to generate significant operating and
net losses for at least the next several years. There can be no assurance that
the Company will develop an adequate 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. The Company expects that
substantial marketing effort, time and expense will be required to stimulate
initial demand for the Company's wireless broadband services. 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.
13
<PAGE>
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 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 AND OTHER ACQUISITIONS; COMMCO
OPTION
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 6,000,000 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, 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. After consummation of the CommcoCCC
Acquisition, a stockholder of CommoCCC may have the right, subject to certain
conditions, to acquire up to 12 authorizations from the Company pursuant to the
Commco Option (as defined). Exercise of the Commco Option would reduce the
number of authorizations owned by the Company and might adversely affect
development of the Company's business. See "Business -- Agreements Relating to
Licenses and Authorizations -- CommcoCCC Acquisition." In order to satisfy the
minimum population coverage requirements, the Company will be obliged to
complete the acquisitions of certain spectrum rights from ART West and TeleCom
One (as defined), or, in the event it cannot complete one or more of such
acquisitions, to acquire, manage or obtain the right to use on a long-term basis
other spectrum rights; however there can be no assurance that the Company will
be able to do so. The Company's acquisition agreements with ART West and TeleCom
One are also subject to various conditions and consequently there can be no
assurance that all such conditions can be satisfied. See "Business-- Agreements
Relating to Licenses and Authorizations."
To obtain FCC approval of the CommcoCCC Acquisition, 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 could be considerably smaller than planned, and the
expected development of the Company's business could be materially adversely
affected.
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
14
<PAGE>
competition from other 38 GHz providers and incumbent LECs, such as the Regional
Bell Operating Companies ("RBOCs"). The Company may also compete with
CAPs/CLECs, other wireless service providers, 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," which is an affiliate of
TCG), 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, several dozen smaller
entities have been granted 38 GHz authorizations in geographic regions in which
the Company plans to operate. In January 1997, WinStar acquired the 38 GHz
licenses of one such entity, Milliwave L.P. ("Milliwave"). Due to the relative
ease and speed of deployment of 38 GHz technology, the Company could face
intense price competition and competition for customers 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." On December 31, 1996, the FCC announced that it had adopted an
order that partially lifted the freeze on the processing of new applications,
which should result in the grant of additional authorizations to other 38 GHz
applicants. 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 and diminish the value of the Company's existing
38 GHz authorizations. 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."
OTHER WIRELESS COMPETITORS. The Company may also face competition from
other terrestrial wireless services, including 2 GHz and 28 GHz "wireless cable"
systems (MMDS and LMDS), 18 GHz point-to-point microwave services (DEMS), FCC
Part 15 wireless radio devices, and other services that use existing
point-to-point microwave channels on other frequencies. Motorola Satellite
Systems, Inc. has filed an application with the FCC for a global network of
satellites in the 37.5-40.5 GHz band and the 47.2-50.2 GHz band, which is
proposed to be used for broadband voice and data services. Other companies have
filed applications for global broadband satellite systems in the 28 GHz band. If
developed, these systems could also present significant competition to the
Company.
The FCC is planning to hold an auction for 28 GHz spectrum in all markets
for the provision of high capacity wireless cable systems. These auctions are
expected to take place in 1997. The 2 GHz wireless cable spectrum may also
provide competition for metropolitan wireless broadband services. At present,
wireless cable licenses are used primarily (if not exclusively) for the
distribution of video programming, and have only a limited capability to provide
two-way communications needed for wireless broadband telecommunications
services, but there can be no assurance that this will continue to be the case.
According to press reports and FCC records, Associated Communications Group
affiliates and joint venture partners (collectively, "ACG") hold licenses in the
18 GHz band in 31 markets. Press reports indicate that ACG plans to use fixed
wireless service to provide voice, data, Internet and videoconferencing
services.
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The FCC has allocated a number of spectrum blocks for use by wireless
devices that do not require site or network licensing. A number of vendors have
developed such devices that may provide competition to the Company for certain
low data-rate transmission services.
In January 1997, the FCC allocated 300 MHz of spectrum in the 5 GHz band for
unlicensed devices to provide short-range, high-speed wireless digital
communications. These frequencies must be shared with incumbent users without
causing interference. Although the allocation is designed to facilitate the
creation of new wireless local area networks (and thus might not be competitive
to the Company's services), it is too early to predict what kind of equipment
might ultimately be manufactured and for what purposes it might be utilized.
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 inter-LATA
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.
A number of companies are developing enhancements to increase the
performance of LECs' legacy copper networks. These generally come under the
description of digital subscriber line products, such as ADSL (asymmetrical
digital subscriber line), HDSL (high-speed digital subscriber line) and VDSL
(video digital subscriber line). There can be no assurance that the Company will
be able to compete effectively with these enhancements.
OTHER COMPETITORS. The Company may compete with CAPs/CLECs for the
provision of last mile access and additional services in most of its market
areas. However, the Company believes that many CAPs/CLECs may utilize 38 GHz
transmission links primarily 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/ CLECs. However, there can be no assurance that CAPs/CLECs will
utilize the Company's 38 GHz services or that CAPs/CLECs will not seek to
acquire their own 38 GHz licenses or use the 38 GHz licenses of other licensees.
Furthermore, the ability of CAPs/CLECs to compete in the local exchange market
is limited by lack of parity with LECs in number portability, dialing parity and
interconnection. The Telecommunications Act requires the FCC and the states to
implement regulations that place CAPs/ CLECs on a more equal competitive footing
with LECs. To the extent these changes are implemented, CAPs/CLECs may be able
to compete more effectively with LECs. However, there can be no assurance that
CAPs/CLECs 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
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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.
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 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 use of the same channel
in part of the same geographic area as one or
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more applications filed by third parties and therefore could not be granted
under the FCC rules generally prohibiting the grant of mutually-exclusive
applications. 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 networks.
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 proposed 100 MHz channels (which are
similar to those used by the Company) and the lower four proposed 50 MHz
channels in the 38 GHz band that have not been previously available for
commercial use and the possible auction of the unlicensed areas in the upper
fourteen 100 MHz channels, (ii) licensing frequencies using predefined
geographic service areas ("Basic Trading Areas"), (iii) 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 (iv) 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
(the "freeze"). On December 31, 1996, the FCC announced that it had adopted an
order that partially lifted the freeze on the processing of pending
applications. Among other actions, the order provides that the FCC will process
certain amendments filed before December 15, 1995 that have the effect of
eliminating mutual exclusivity among pending applications, which is likely to
result in the grant of additional authorizations to 38 GHz applicants other than
the Company. Final rules issued in connection with the NPRM may require that 38
GHz service providers share the 38 GHz band with satellite services. Motorola
Satellite Systems, Inc. ("Motorola Satellite") has filed an application with the
FCC with respect to a global network of satellites to be used to provide
broadband voice and data services. See "-- Other Wireless Competitors." Motorola
Satellite proposes to use 38 GHz frequencies for transmissions from space to
earth. If permitted by the FCC, satellite transmissions in the 38 GHz
frequencies could adversely effect the Company's existing operations or its
future expansions by creating interference or by causing the FCC to impose power
and other limitations upon the Company's transmissions. The Motorola Satellite
application would require the FCC to change certain rules in order to be
granted, and the Company expects that a number of years would elapse before any
such system would be launched. The extent of the adverse impact upon the
Company's operations if the Motorola Satellite application were to be granted in
its current form is unknown. However, there can be no assurance that the
Company's operations would not be adversely affected.
There can also be no assurance that the final rules (if any) issued in
connection with the NPRM will resemble the rules proposed in the NPRM, and there
can also 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.
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The Company manages the systems of ART West, DCT (as defined), TeleCom One
and CommcoCCC (during the pendency of certain acquisitions) pursuant to
management agreements. In addition, the Company recently entered into the ICG
Agreement and a services agreement with Microwave Partners. See "Business --
Agreements Relating to Licenses and Authorizations." The Company believes that
the provisions of these management and lease 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.
RISK OF FORFEITURE, NON-RENEWAL AND FLUCTUATION IN VALUE OF FCC LICENSES
Upon completion of the CommcoCCC Acquisition, the Company will own, manage
or have a right to use on a long-term basis a total of 233 licenses that will
allow it to provide 38 GHz wireless broadband services in 169 U.S. markets. The
Company currently owns, manages or has a right to use on a long-term basis 104
licenses (exclusive of the CommcoCCC Assets) that allow it to provide 38 GHz
wireless broadband services in 81 markets, 73 of which are owned by the Company,
19 of which are managed by the Company through the Company's interests in or
arrangements with other companies, and 12 of which the Company has the right to
use on a long-term basis. Under the current FCC rules, the recipient of a
license for 38 GHz microwave facilities is required to construct facilities to
place the station "in operation" within 18 months of the date of grant of the
authorization. Although under current FCC regulations the term "in operation" is
not defined beyond the requirement that the station be capable of providing
service, the industry custom is to establish at least one link between two
transceivers in each market area for which an authorization is held. In the
event that the recipient fails to comply with this construction deadline, the
license is subject to forfeiture, absent an extension of the deadline. All of
the 104 licenses that the Company owns, manages or has a right to use on a
long-term basis (exclusive of the CommcoCCC Assets) have met the FCC's
construction deadline. Under the terms of the CommcoCCC authorizations and the
Company's management agreement with CommcoCCC, the Company has met the
construction deadline for 76 licenses and must meet the construction deadline
for the remaining 53 licenses 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 meet the
construction deadline for all of the CommcoCCC licenses within applicable 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 licenses could be subject to forfeiture, which could have
a material adverse effect on the Company's development and results of
operations. In addition, pursuant to rules that became effective August 1, 1996,
if a station does not transmit operational traffic (not test or maintenance
signals) for a consecutive period of twelve months at any time after
construction is complete, or if removal of equipment or facilities renders the
station incapable of providing service, the license is subject to forefeiture,
absent a waiver of the FCC's rules. Although this rule has not been interpreted
by the FCC, it is possible that it could be applied in such a way that could
cause one or more of the Company's licenses to be subject to forfeiture. See
"Business -- Government Regulation" and "-- 38 GHz Wireless Broadband Licenses
and Authorizations."
The FCC's current policy aligns the expiration dates of all 38 GHz licenses
so that all licenses expire concurrently. Licenses can be renewed for a period
not to exceed ten years. 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
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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 licenses to develop wireless broadband systems
in all of its market areas. In addition, a limited secondary market exists for
38 GHz licenses, and the Company may from time to time purchase such licenses.
The value of licenses 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 licenses 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 licenses. Assignments of licenses and changes of control
involving entities holding licenses 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 licenses may adversely affect the value of the Company's
licenses.
POTENTIAL RIGHTS TO FOREIGN LICENSES
Entities in which the Company has a substantial interest have applied or
intend to apply for licenses to provide wireless broadband services in Canada
and in various Western European countries. Although the Company currently
expects that, if licenses are obtained, these entities will be financed on a
stand-alone basis without recourse to the Company, there can be no assurance
that such entities will have access to financing on acceptable terms or at all.
See "Business -- Foreign Markets."
In October 1996, ART 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 the 66 major markets in Canada covering a population
of at least 21 million people. 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 any
licenses that may be granted to ATI and subject to control by ATI. The Company
incurred approximately $300,000 of expenses, 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 licenses are 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 or will cause to be formed subsidiaries in Sweden, the United Kingdom and
Italy 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 $10,000 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 telecommunication markets to competition over the next several years, the
timing and extent of a 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, through such subsidiaries, will be able to acquire
the licenses necessary in each European country, to finance and or implement its
business plan or to operate in any country on a profitable basis.
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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
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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 also has
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 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,
has agreed to acquire or has the long-term right to use 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 Company is unable to apply for
additional licenses as the FCC has generally suspended the acceptance of new
applications subject to resolution of the NPRM. The Company does not believe
that the FCC's suspension 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 of new licenses. 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, (ii) applications
currently being processed by the FCC and (iii) 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
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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 effect 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 Offering and the remaining net proceeds of the Common Stock Offering, after
the use of approximately $3.0 million to complete the acquisition of certain
spectrum rights and $2.4 million to pay expenses related to the CommcoCCC
Acquisition, when consummated, will be sufficient to fund the operations and
capital requirements of the Company at least through December 31, 1997. See "Use
of Proceeds." Management also believes that the Company's future capital needs
will continue to be significant, and management intends to seek additional
sources of financing, including the Credit Facility. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of Certain
Indebtedness--Proposed Credit Facility." The Company expects capital
expenditures of approximately $35.0 million in 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. From its inception through September
30, 1996, the Company reported a net loss of $23.7 million. In addition, if (i)
the Company's plan of development or projections change or prove to be
inaccurate, (ii) the proceeds from the Offering, together with other existing
financial resources, prove to be insufficient to fund the operations and capital
requirements of the Company through December 31, 1997, (iii) the Company
completes any material acquisitions, other than those now under contract, or
buys spectrum at auction or (iv) the Company accelerates implementation of its
business plan, the Company may be required to obtain additional financing
earlier than December 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, including the
Credit Facility, 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 when required, 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.
POSSIBLE INCURRENCE OF SUBSTANTIAL SECURED INDEBTEDNESS
The Notes will represent senior obligations of the Company and will be
unsecured, except for the pledge by the Company of the Pledged Securities. The
Notes will rank PARI PASSU in right of payment with all existing and future
unsecured, senior indebtedness of the Company and will rank senior in right of
payment to any future subordinated indebtedness of the Company. At September 30,
1996, on a pro forma basis after giving effect to the Offering and the Common
Stock Offering, and the application of
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the net proceeds therefrom, the aggregate principal amount of indebtedness of
the Company (excluding the Notes) was approximately $3.1 million, which
consisted of the EMI Note and the Equipment Note, all of which ranked PARI PASSU
with the Notes. However, $1.6 million of such indebtedness constituted secured
indebtedness which will effectively rank senior to the Notes with respect to the
assets securing such indebtedness. Although the Indenture will limit the ability
of the Company and its subsidiaries to incur additional indebtedness, including
senior indebtedness, the Indenture will permit the Company to incur a
substantial amount of secured indebtedness, including vendor indebtedness and
indebtedness under the Credit Facility, which, if incurred, will effectively
rank senior to the Notes with respect to the assets securing such indebtedness.
In addition, the Indenture will permit the subsidiaries of the Company
(including any subsidiary holding all or any part of the Company's FCC licenses
and authorizations) to guarantee the indebtedness of the Company under the
Credit Facility on a secured basis (consistent with applicable FCC rules), which
guarantees and security interests would effectively rank senior in right of
payment to the Notes. In such a case, if the Company or any such subsidiary were
to become insolvent or be liquidated or if any of such secured indebtedness were
to be accelerated, the holders of such secured indebtedness would be entitled to
payment in full out of the assets securing such indebtedness prior to payment to
holders of the Notes. If the lenders party to, or the holders of, any such
secured indebtedness were to foreclose on the collateral securing the Company's
obligations to them, there can be no assurance that there would be sufficient
assets remaining after payment of all such secured indebtedness to satisfy the
claims of holders of the Notes in full. See "Description of Notes -- Certain
Covenants" and "Description of Certain Indebtedness."
LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS
Following the Offering, the Company will be leveraged and will have certain
restrictions on its operations. As of September 30, 1996, on a pro forma basis
after giving effect to the Common Stock Offering and the Offering, the 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 $121.2
million of total indebtedness (which is net of $6.9 million allocated to the
Warrants) and stockholders' equity of approximately $97.2 million. See
"Capitalization."
The indebtedness expected to be incurred by the Company as a result of the
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 be required
to pay interest with respect to such indebtedness, once the Pledged Securities
are no longer available for such purpose; (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
likely 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 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, to finance the construction of networks, the purchase of equipment and
the introduction of new services. See "Description of Notes--Certain Covenants."
Any future indebtedness may contain covenants that may limit the Company's
flexibility in
24
<PAGE>
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 other indebtedness
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. In the event the Company fails to comply with these various covenants,
it could be in default under the Notes. 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 Notes--Certain Covenants."
ORIGINAL ISSUE DISCOUNT
Because a portion of the purchase price for each Unit will be allocable to
the Warrants for federal income tax purposes, the Notes will be treated as
issued with original issue discount. Purchases of the Units therefore generally
will be required to include amounts in gross income for Federal income tax
purposes in advance of receipt of the cash interest payments on the Notes to
which the income is attributable. See "Certain Federal Income Tax
Considerations" for a more detailed discussion of the federal income tax
consequences to the purchasers of the Units resulting from the purchase,
ownership or disposition thereof.
If a bankruptcy case is commenced by or against the Company under Title 11
of the United States Code, as amended (the "Bankruptcy Code") after the issuance
of the Units, the claim of a holder of the Notes with respect to the principal
amount thereof may be limited to an amount equal to the sum of (i) the initial
public offering price of the Notes and (ii) that portion of the original issue
discount that is not deemed to constitute "unmatured interest" for purposes of
the Bankruptcy Code. Any original issue discount that was not accrued as of such
bankruptcy filing may be deemed to constitute "unmatured interest." A holder of
a Note may not have any claim with respect to that portion of the issue price of
a Unit allocated to the Warrant issued as part of such Unit.
RISK OF INABILITY TO SATISFY CHANGE IN CONTROL OFFER
Upon the occurrence of a Change in Control, the Company will be required to
make an offer to purchase all of the outstanding Notes at a purchase price in
cash equal to 101% of the principal amount thereof, together with accrued and
unpaid interest, if any, to the date of purchase. There can be no assurance that
the Company will have the funds necessary to effect such a purchase if such an
event were to occur. In the event a Change in Control occurs at a time when the
Company is unable to purchase the Notes, the Company could seek to refinance the
Notes. If the Company is unsuccessful in refinancing the Notes, the Company's
failure to purchase tendered Notes would constitute an Event of Default under
the Indenture. See "Description of Notes -- Certain Covenants -- Change in
Control."
LEGAL AND TRADING RISKS
CURRENT REGISTRATION REQUIRED TO EXERCISE WARRANTS
Holders of Warrants will be able to exercise their Warrants only if a
registration statement relating to the Warrant Shares underlying the Warrants is
then in effect or the exercise of such Warrants is exempt from the registration
requirements of the Securities Act, and such securities are qualified for sale
or exempt from qualification under the applicable securities laws of the states
in which the various holders of the Warrants reside. The Company is required
under the terms of the Warrant Agreement to use its best efforts to cause to
become effective under the Securities Act no later than , 1997 the
Warrant Shelf Registration Statement covering the issuance and resale, to the
extent applicable, of the Warrant Shares upon exercise of the Warrants. Subject
to certain "black-out" periods, the Company will also be required to use its
best efforts to maintain the effectiveness of the Warrant Shelf Registration
25
<PAGE>
Statement until the expiration or exercise of all Warrants. See "Description of
Warrants -- Registration of Warrant Shares." There can be no assurance that the
Company will be able to file, cause to be declared effective or keep a
registration statement continuously effective until all of the Warrants have
been exercised or have expired.
ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
There is currently no public market for the Units, the Notes or the
Warrants. The Company does not intend to apply for listing of the Units, the
Notes or the Warrants on any securities exchange or for quotation of the Units,
the Notes or the Warrants on the Nasdaq National Market. The Company has been
advised by the Underwriters that they presently intend to make a market in the
Units, the Notes and the Warrants, as permitted by applicable laws and
regulations, after the consummation of the sale of the Units; however, the
Underwriters are not obligated to do so and any such market-making activity may
be discontinued at any time without notice at the sole discretion of each
Underwriter. Accordingly, there can be no assurance as to whether an active
public market for the Units, the Notes or the Warrants will develop or, if a
public market does develop, as to the liquidity of the trading market for the
Units, the Notes or the Warrants. If an active public market does not develop,
the market price and liquidity for the Units, the Notes or the Warrants may be
adversely affected. See "Underwriting."
While the Common Stock is quoted on the Nasdaq National Market, there can be
no assurance that an active public trading market will be sustained after the
Offering. 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 Company's Common Stock to fluctuate, perhaps substantially.
CONTROL BY MANAGEMENT AND PRINCIPAL STOCKHOLDERS
As of January 14, 1997, the Company's executive officers, directors and
their affiliates, as a group, beneficially owned approximately 20.6% (assuming
no exercise of the Warrants) of the Company's outstanding Common Stock (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 16.7% and 14.5%,
respectively, of the Company's outstanding Common Stock and the Company will
elect James B. Murray, Jr. 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 the Company's stockholders prior to the Common Stock Offering 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 Notes--Certain
Covenants."
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
26
<PAGE>
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 and 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 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."
27
<PAGE>
THE COMPANY
Advanced Radio Telecom Corp. provides wireless broadband telecommunications
services using point-to-point microwave transmissions in the 38 GHz band 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 Company's last mile services
are a complement and a viable alternative to fiber optic networks and offer
rapidly deployable coverage throughout the 81 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, manage or have a
right to use on an exclusive basis a total of 233 authorizations to provide 38
GHz wireless broadband services in 169 U.S. markets. See "Risk Factors -- Risk
of Non-Consummation of CommcoCCC Acquisition and Other Acquisitions," "Business
- -- Agreements Relating to Licenses and Authorizations -- ART West Joint
Venture," "-- EMI Acquisition" and " -- CommcoCCC Acquisition."
On October 28, 1996, a subsidiary of ART merged with and into Telecom
pursuant to the Merger Agreement (as defined). Upon the merger (the "Merger"),
Telecom became a wholly-owned subsidiary of ART and changed its name to "ART
Licensing Corp.," and ART changed its name to "Advanced Radio Telecom Corp." See
"Certain Transactions -- Merger." Prior to completion of the Merger, Telecom
managed the combined businesses of the Company (including all FCC licenses held
by ART and Telecom).
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.
28
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering (assuming gross proceeds
of $125.0 million) are estimated to be approximately $119.5 million in the
aggregate after deducting estimated underwriting discount and offering expenses.
A substantial portion of the net proceeds from the Offering is expected to
be used for capital expenditures. Because the Company installs links in response
to customer orders and can redeploy links removed from service, the Company's
actual rate of capital expenditures will depend largely on levels of customer
demand. The Company currently expects to use approximately $35.0 million of the
net proceeds (including the cost to complete construction of the remaining
CommcoCCC authorizations which have not been perfected, estimated at less than
$1.5 million) for capital expenditures in 1997. An additional $3.0 million will
be used for the completion of the acquisition of certain spectrum rights, and
approximately $2.4 million of the net proceeds will be used to fund expenses
related to the CommcoCCC Acquisition, when consummated. See "Business --
Agreements Relating to Licenses and Authorizations." At the closing of the
Offering, the Company will use approximately $44.3 million of the net proceeds
to purchase the Pledged Securities. The amount of net proceeds used to purchase
the Pledged Securities may vary depending upon the then current interest rates
on U.S. governmental securities. See "Description of Notes -- Security."
The remainder of the net proceeds 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 those disclosed in this Prospectus, has been reached
with respect to any acquisition. To the extent the Company does not consummate
any of these acquisitions, or negotiates changes in such acquisitions to provide
for payment using stock or other consideration (which is not currently
contemplated), the funds reserved for such acquisitions will be available for
general corporate purposes. See "Business -- Agreements Relating to Licenses and
Authorizations." The Company anticipates that it will fund approximately an
aggregate of $1.0 million for 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 and to
make investments in other companies, the Company expects to incur additional
research and development expenses and may make other 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 Offering and the Common Stock Offering will be
sufficient to fund the operations of the Company at least through December 31,
1997. The Company will require substantial additional financing to fund
anticipated capital requirements and operating losses in periods after December
31, 1997. See "Description of Certain Indebtedness -- Proposed Credit Facility"
and "Risk Factors -- Significant Capital Requirements; Need for Additional
Financing."
29
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock has been quoted on the Nasdaq Market since
November 5, 1996, under the symbol "ARTT." The following table sets forth, for
the fiscal periods indicated, the high and low last sale prices of the Common
Stock as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
COMMON STOCK PRICE
------------------------
FISCAL PERIOD HIGH LOW
- ---------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
1996 Fourth Quarter (from November 5)................................. $ 16.50 $ 10.50
1997 First Quarter (through January 14)............................... $ 12.375 $ 10.625
</TABLE>
See the cover page of this Prospectus for a recent reported last sale price
of the Common Stock on the Nasdaq National Market. As of December 31, 1996,
there were 133 holders of record of the Common Stock.
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 Notes -- Certain
Covenants."
30
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1996 (i) on a historical basis, after giving effect to the Merger
of ART and Telecom, which occurred on October 28, 1996 (the Merger was accounted
for as a reorganization of entities under common control which is similar to
that of a pooling of interests), (ii) on a pro forma basis, giving effect to the
Common Stock Offering and certain other transactions occurring subsequent to
September 30, 1996 and the application of the net proceeds thereof as described
in Note 1 below and (iii) on a pro forma as adjusted basis, giving effect to, as
described in Note 2 below, (A) the pro forma adjustments in (ii), (B) the sale
by the Company of 125,000 Units in the Offering, after deducting the estimated
underwriting discount and offering expenses, the use of cash to purchase the
Pledged Securities and the value ascribed to the Warrants, (C) the receipt and
application of the aggregate net proceeds from the Offering and (D) the
consummation of 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
the Company and the notes thereto, the unaudited condensed consolidated
financial statements of the Company and the notes thereto and the unaudited pro
forma condensed consolidated financial statements of the Company and the notes
thereto, all appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
-------------------------------------------------------
PRO FORMA
HISTORICAL PRO FORMA (1) AS ADJUSTED (2)
---------------- ----------------- ------------------
<S> <C> <C> <C>
Cash and cash equivalents (excluding restricted cash).................. $ 752,368 $ 16,208,151 $ 85,433,151(3)
---------------- ----------------- ------------------
---------------- ----------------- ------------------
Short-term debt:
March Bridge Notes................................................... $ 4,243,784 $ -- $ --
CommcoCCC Notes...................................................... 2,827,836 -- --
September Bridge Notes............................................... 2,203,559 -- --
---------------- ----------------- ------------------
$ 9,275,179 $ -- $ --
---------------- ----------------- ------------------
---------------- ----------------- ------------------
Long-term debt (including current portion):
Note payable to EMI.................................................. $ 1,500,000 $ 1,500,000 $ 1,500,000
Equipment Note....................................................... 1,607,422 1,607,422 1,607,422
% Senior Notes due 2007 (4)....................................... -- -- 118,107,853
---------------- ----------------- ------------------
Total long-term debt............................................... 3,107,422 3,107,422 121,215,275
---------------- ----------------- ------------------
Stockholders' equity (deficit):
Preferred stock (5).................................................. 921 -- --
Common Stock (6)..................................................... 6,587 13,560 19,560
Additional paid-in capital........................................... 20,745,714 54,290,502 128,676,649
Accumulated deficit ................................................. (23,748,434) (31,475,840) (31,475,840)
---------------- ----------------- ------------------
Total stockholders' equity (deficit)............................... (2,995,212) 22,828,222 97,220,369
---------------- ----------------- ------------------
Total capitalization............................................. $ 112,210 $ 25,935,644 $ 218,435,644
---------------- ----------------- ------------------
---------------- ----------------- ------------------
</TABLE>
- ------------------------
(1) Reflects adjustments for the following transactions as if they had occurred
as of September 30, 1996: (i) the sale by the Company of 2,300,500 shares of
Common Stock offered in the Common Stock Offering in November 1996 at a
price of $15.00 per share, after deducting the underwriting discount and
offering expenses; (ii) the Conversion in November 1996; (iii) fees and
expenses of approximately $6.4 million related to the CIBC Financing
Commitment, including the issuance of the First CIBC Warrants to purchase
300,257 shares of Common Stock, which financing commitment is assumed to be
replaced by the issuance of the Notes in the Offering (as described in Note
(2) below); (iv) the receipt of $1.6 million (out of a total of $4.0
million) in cash proceeds from the September Bridge Financing in October
1996; (v) the application of the net proceeds from the Common Stock Offering
to repay the March Bridge Notes, the CommcoCCC Notes and the September
Bridge Notes, which repayment occurred in November 1996, and the November
1996 payment of $3.0 million of the total $6.0 million consideration to
acquire the 50% ownership interest of ART West held by Extended; and (vi)
the exercise of the Ameritech Warrant to purchase an aggregate of 318,374
shares of Common Stock in December 1996.
(2) Reflects adjustments in (1) above and for the following transactions as if
they had occurred as of September 30, 1996: (i) the sale by the Company of
125,000 Units in the Offering assuming $125.0 million of gross proceeds,
after deducting (a) the estimated underwriting discount and offering
expenses of approximately $5.5 million, (b) the cash used to purchase the
Pledged Securities of approximately $44.3 million and (c) the value ascribed
to the Warrants of approximately $6.9 million (the value was based on an
assumed value of $11.25 per share of Common Stock, a warrant exercise price
of $12.375 per share and an assumed issuance of Warrants to purchase an
aggregate of 1,128,011 shares of Common Stock); (ii) the use of $3.0 million
of the net proceeds from the Offering to fund the remaining balance of the
ART West purchase price; and (iii) the consummation of the CommcoCCC
Acquisition in exchange for 6,000,000 shares of Common Stock at an assumed
value of $11.25 per share plus related estimated expenses.
(3) Cash and cash equivalents excludes restricted cash of $44.3 million used to
purchase the Pledged Securities.
(4) The Company anticipates gross proceeds from the Offering of $125.0 million.
The estimated value of the Warrants ($6.9 million) has been reflected as
both a debt discount and an element of additional paid-in capital. However,
the actual aggregate principal amount of the Notes is $125.0 million.
(5) Consists of convertible serial preferred stock, $.001 par value per share:
10,000,000 shares authorized; historical -- 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.
(6) Consists of Common Stock, $.001 par value per share: 100,000,000 shares
authorized; historical 6,586,958 shares issued and outstanding; pro forma --
13,559,420 shares issued and outstanding; pro forma as adjusted --
19,559,420 shares issued and outstanding.
31
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
HISTORICAL AND PRO FORMA DATA
The unaudited selected historical and pro forma financial data presented
below as of and for the nine months ended September 30, 1996 and for the year
ended December 31, 1995 were derived from the unaudited pro forma condensed
consolidated 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 and pro forma financial data should be
read in conjunction with the audited financial statements of the Company, and
the notes thereto, the unaudited condensed consolidated financial statements of
the Company, and the notes thereto, and the unaudited pro forma condensed
consolidated financial statements of the Company, and the notes thereto,
included elsewhere in the Prospectus. The unaudited selected pro forma 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 nine
months ended September 30, 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.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1995 SEPTEMBER 30,
---------------------------- 1996
HISTORICAL --------------
(1) PRO FORMA (2) HISTORICAL (1)
------------- ------------- --------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue........................................................... $ 5,793 $ 5,793 $ 125,013
Non-cash compensation expense............................................. 1,089,605 1,089,605 7,504,452
Depreciation and amortization............................................. 15,684 2,509,059 504,462
Interest and financing expense............................................ 131,540 24,616,543 1,396,943
Net loss.................................................................. 3,234,843 27,048,846 20,378,377
Pro forma net loss per share of Common Stock (3).......................... $ 0.30 $ 1.36 $ 2.15
Pro forma weighted average number of shares of Common Stock outstanding
(3)...................................................................... 10,912,338 19,846,172 9,470,545
OTHER FINANCIAL DATA:
EBITDA (4)................................................................ $ (2,007,568 ) $ (2,007,568 ) $ (9,978,993)
Capital expenditures...................................................... 3,585,144 3,585,144 7,864,110
Ratio of earnings to fixed charges (5).................................... -- -- --
<CAPTION>
PRO FORMA (2)
--------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue........................................................... $ 125,013
Non-cash compensation expense............................................. 7,504,452
Depreciation and amortization............................................. 2,374,493
Interest and financing expense............................................ 20,546,088
Net loss.................................................................. 39,024,272
Pro forma net loss per share of Common Stock (3).......................... $ 2.12
Pro forma weighted average number of shares of Common Stock outstanding
(3)...................................................................... 18,404,379
OTHER FINANCIAL DATA:
EBITDA (4)................................................................ $ (9,978,993)
Capital expenditures...................................................... 7,864,110
Ratio of earnings to fixed charges (5).................................... --
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1996
--------------
HISTORICAL (1)
--------------
<S> <C>
BALANCE SHEET DATA:
Working capital surplus (deficit)................................................................... $ (20,700,673)
Property and equipment, net......................................................................... 11,019,217
FCC licenses, net................................................................................... 4,276,780
Total assets........................................................................................ 20,541,997
Short-term debt..................................................................................... 9,275,179
Long-term debt (including current portion).......................................................... 3,107,422
Accumulated deficit................................................................................. (23,748,434)
Total stockholders' equity (deficit)................................................................ (2,995,212)
<CAPTION>
PRO FORMA (2)
----------------
<S> <C>
BALANCE SHEET DATA:
Working capital surplus (deficit)................................................................... $ 73,255,289
Property and equipment, net......................................................................... 11,019,217
FCC licenses, net................................................................................... 104,011,780
Total assets........................................................................................ 252,540,252
Short-term debt..................................................................................... --
Long-term debt (including current portion).......................................................... 121,215,275
Accumulated deficit................................................................................. (31,475,840)
Total stockholders' equity (deficit)................................................................ 97,220,369
</TABLE>
32
<PAGE>
HISTORICAL FINANCIAL DATA
The selected historical financial data of the Company below as of December
31, 1995, 1994 and 1993 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 the Company and the related notes thereto, included elsewhere in
this Prospectus. The selected financial data of the Company below as of and for
the nine months ended September 30, 1996 and 1995 were derived from and should
be read in conjunction with the unaudited condensed consolidated financial
statements of the Company and the related notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
AUGUST 23, 1993 NINE MONTHS ENDED SEPTEMBER
(DATE OF INCEPTION) YEAR ENDED DECEMBER 31, 30,
TO -------------------------- ---------------------------
DECEMBER 31, 1993 1994 1995 1995 1996
------------------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue................................... $ -- $ -- $ 5,793 $ -- $ 125,013
Consulting revenue................................ -- 137,489 -- -- --
Depreciation and amortization..................... 688 8,281 15,684 15,407 504,462
Interest expense.................................. -- 4,375 131,540 1,539 1,396,943
Net loss.......................................... 6,594 128,620 3,234,843 1,004,313 20,378,377
Pro forma net loss per share of Common Stock
(3).............................................. -- -- $ 0.30 $ 2.15
Pro forma weighted average number of shares of
Common Stock outstanding (3)..................... -- -- 10,912,338 -- 9,470,545
OTHER FINANCIAL DATA:
EBITDA (4)........................................ $ (5,906) $ (115,964) $ (2,007,568) $ (987,367) $ (9,978,993)
Capital Expenditures.............................. -- 5,175 3,585,144 57,120 7,864,110
Ratio of earnings to fixed charges (5)............ -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
------------------------------------------- -----------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital surplus (deficit)................... $ 13,958 $ (76,556) $ (3,008,510) $ (168,791) $ (20,700,673)
Property and equipment, net......................... -- 3,448 3,581,561 49,488 11,019,217
FCC licenses, net................................... -- -- 4,235,734 175,000 4,276,780
Total assets........................................ 74,513 42,611 9,876,559 548,203 20,541,997
Short-term debt..................................... -- -- -- -- 9,275,179
Long-term debt (including current portion).......... -- -- 6,450,000 -- 3,107,422
Accumulated deficit................................. (6,594) (135,214) (3,370,057) (1,139,528) (23,748,434)
Total stockholders' equity (deficit)................ 54,542 (39,078) (312,860) 297,900 (2,995,212)
</TABLE>
33
<PAGE>
(1) The historical selected financial data of the Company reflects the Merger of
ART and Telecom, which occurred on October 28, 1996. The Merger was
accounted for as a reorganization of entities under common control which is
similar to that of a pooling of interest.
(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 sale by the Company of 2,300,500 shares of Common Stock offered in
the Common Stock Offering in November 1996 at a price of $15.00 per share,
after deducting the underwriting discount and offering expenses; (ii) the
Conversion in November 1996; (iii) fees and expenses of approximately $6.4
million related to the CIBC Financing Commitment, including the issuance of
the First CIBC Warrants to purchase 300,257 shares of Common Stock, which
financing commitment is assumed to be replaced by the issuance of the Notes
in the Offering; (iv) the receipt of $1.6 million (out of a total of $4.0
million) in cash proceeds from the September Bridge Financing in October
1996; (v) the application of the net proceeds from the Common Stock Offering
to repay the March Bridge Notes, the CommcoCCC Notes and the September
Bridge Notes, which repayment occurred in November 1996 and the November
1996 payment of $3.0 million of the total $6.0 million consideration to
acquire the 50% ownership interest of ART West held by Extended; (vi) the
exercise of the Ameritech Warrant to purchase an aggregate of 318,374 shares
of Common Stock in December 1996; (vii) the sale by the Company of 125,000
Units offered in the Offering assuming $125.0 million of gross proceeds,
after deducting (a) the estimated underwriting discount and offering
expenses (b) the cash used to purchase the Pledged Securities of
approximately $44.3 million and (c) the value ascribed to the Warrants of
approximately $6.9 million (the value was based on an assumed value of
$11.25 per share of Common Stock, a Warrant exercise price of $12.375 per
share and an assumed issuance of Warrants to purchase an aggregate of
1,128,011 shares of Common Stock); (viii) the use of $3.0 million of the net
proceeds from the Offering to fund the balance of the ART West purchase
price; and (ix) the consummation of the acquisition by the Company of the
CommcoCCC Assets in exchange for 6,000,000 shares of Common Stock at an
assumed value of $11.25 per share plus related estimated expenses.
(3) 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 issuance of 2,300,500 shares of Common Stock
issued in the Common Stock Offering, the Conversion, the issuance of
potentially dilutive instruments issued within one year prior to the Common
Stock Offering at exercise prices below the initial public offering price of
$15.00 per share (in measuring the dilutive effect, the treasury stock
method was used), the issuance of the 318,374 shares of Common Stock to
Ameritech, and the issuance of 6,000,000 shares of Common Stock in
connection with the CommcoCCC Acquisition.
(4) EBITDA represents loss before interest and financing expense (net of
interest income), income tax expense, depreciation and amortization expense,
non-cash compensation expense and non-cash market development expense.
EBITDA is not intended to represent cash flows from operating activities, as
determined in accordance with generally accepted accounting principles.
EBITDA should not be considered as an alternative to, or more meaningful
than, operating income or loss, net income or loss or cash flow as an
indicator of the Company's performance. EBITDA has been included because the
Company uses it as one means of analyzing its ability to service its debt,
because a similar measure will be used in the Indenture with respect to
computations under certain covenants and because the Company understands
that it is used by certain investors as one measure of a company's
historical ability to service its debt. Not all companies calculate EBITDA
in the same fashion and therefore EBITDA as presented may not be comparable
to other similarly titled measures of other companies.
(5) For the purpose of determining earnings coverage of fixed charges, net
losses include fixed charges representing interest expense on all
indebtedness (including the amortization of deferred debt issuance cost and
original issue discount). For the purpose of the pro forma information,
fixed charges include interest expense from the Notes (including the
amortization of deferred debt issuance costs and original issue discount for
the value ascribed to the Warrants) at an assumed effective interest rate of
14.04% and the financing charges from the CIBC Financing Commitment
(including the commitment fee and the value ascribed to the First CIBC
Warrants) offset by the reversal of interest expense from the March Bridge
Notes, the CommcoCCC Notes and the September Bridge Notes (including
amortization of deferred debt issuance costs and original issue discount)
which were repaid out of the proceeds from the Common Stock Offering in
November 1996. If the interest rate on the Notes were to change by 0.5%,
interest expense would change by approximately $625,000 and $468,750 for the
year ended December 31, 1995 and nine months ended September 30, 1996,
respectively. Earnings were deficient to cover fixed charges by the
following amounts for the periods indicated:
Pro Forma
<TABLE>
<S> <C>
Nine months ended September 30, 1996.............................................. $ 39,024,272
Year ended December 31, 1995...................................................... 27,048,846
</TABLE>
Historical
<TABLE>
<S> <C>
Nine months ended September 30, 1996.............................................. 20,378,377
Nine months ended September 30, 1995.............................................. 1,004,313
Year ended December 31, 1995...................................................... 3,234,843
Year ended December 31, 1994...................................................... 128,620
August 23, 1993 (date of inception) to December 31, 1993.......................... 6,594
</TABLE>
34
<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 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 financial statements
of the Company, as restated to reflect the Merger effected in October 1996.
Certain statements set forth below constitute "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. Given these uncertainties, prospective investors are
cautioned not to place undue reliance on such forward-looking statements. See
"Risk Factors" and "Special Note Regarding Forward-Looking Statements."
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 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 or lease 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 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.
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 expects its
operating revenues will increase in 1997; 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."
35
<PAGE>
ACQUISITIONS, BUSINESS DEVELOPMENT AND CAPITAL EXPENDITURES
From inception through September 30, 1996, the Company has invested an
aggregate of $4.4 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 totalled $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 (before related expenses) of $6.0 million in cash (of which $3.0 million
was paid in November 1996) and 6,000,000 shares of 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 $1.0 million for 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, ART 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 the 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 any licenses that
may be granted to ATI and subject to control by ATI. The Company incurred
approximately $300,000 of expenses, 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 or will cause to be formed subsidiaries in Sweden, the United Kingdom and
Italy 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
currently receives monthly payments of $10,000 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 telecommunication markets to competition over the next
several years, the timing and extent of a relaxation in entry barriers and the
degree of cooperation from the incumbent service providers in such
36
<PAGE>
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 to 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 concurrently with the Common Stock 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
November 1996, the Company paid LHC approximately $300,000 as a fee in
connection with various consulting services previously rendered under the
management consulting agreement. See "Certain Transactions."
RESULTS OF OPERATIONS
From inception through September 30, 1996, the Company has generated revenue
of $130,806 from operations and 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 generate increased revenues in 1997; however, there can be no
assurance that the Company will achieve substantially increased revenues in the
future. The Company expects that it will not achieve profitable operations at
least through fiscal 1998. See "Risk Factors -- Limited Operations; History of
Net Losses."
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. Revenue in 1996 is 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.
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 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, 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 commencement of operations of the Company.
Included in general and administrative expenses is a charge of approximately
$1.2 million associated with the Company's unsuccessful public debt offering in
July 1996. 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.
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 the EMI Note, the Equipment Note, the March Bridge
Notes, the CommcoCCC Notes and the September Bridge Notes. The Company expects
the issuance of the Notes and any future financings will cause interest expense
to increase substantially in future periods. The repayment in November 1996 of
the March Bridge Notes,
37
<PAGE>
the CommcoCCC Notes and the September Bridge Notes will result in a non-cash
extraordinary loss of approximately $1.3 million in the fourth quarter of 1996
relating to the write-off of associated unamortized offering discount and
deferred financing costs.
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 service 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.
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
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 $76,556 and cash of $5,133 at December
31, 1994. The Company had 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 $1.6 million in cash
(out of a total of $4.0 million) from the September Bridge Financing. During
November and December 1996, the Company received gross proceeds of approximately
$34.5 million from the Common Stock Offering and repaid the March Bridge Notes,
the CommcoCCC Notes and the September Bridge Notes. 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 $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
38
<PAGE>
September 30, 1996. FCC licenses and the investment in the ART West Joint
Venture comprised $4.5 million of total assets at December 31, 1995, compared to
$4.6 million at September 30, 1996 and $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 $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 for the nine
months ended September 30, 1995. The increase was primarily due to the private
equity placement with Ameritech, the issuance of the Equipment Financing, the
March Bridge Financing, the CommcoCCC Financing and the September Bridge
Financing.
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.
The Company has funded approximately $400,000 of research and development
costs with American Wireless Corporation ("American Wireless") related to
wireless transmission equipment. Vernon L. Fotheringham, the Chairman of the
Company, is a former director and a 3% shareholder of American Wireless. See
"Certain Transactions -- American Wireless Development Agreement." 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.
39
<PAGE>
A substantial portion of the net proceeds from the Offering is expected to
be used for capital expenditures. Because the Company installs links in response
to customer orders and can redeploy links removed from service, the Company's
actual rate of capital expenditures will depend largely on levels of customer
demand. The Company currently expects to use approximately $35.0 million of the
net proceeds for capital expenditures in 1997, consisting 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 $1.5 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. 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. 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 $6.0 million from ART West, of which $3.0 million was paid in November 1996.
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. 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. See "Business -- Agreements Relating
to Licenses and Authorizations" and "Risk Factors -- Risk of Non-Consummation of
CommcoCCC Acquisition and Other Acquisitions."
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 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.
During November 1996, the Company completed the Common Stock Offering,
raising $34.5 million before expenses. An aggregate of $12.0 million from the
proceeds of the Common Stock 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 contract)
are consummated, the remaining net proceeds of the Common Stock Offering and
funds available from the Offering after the use of $3.0
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million to complete pending acquisitions of certain spectrum rights and $2.4
million to pay expenses related to the CommcoCCC Acquisition when consummated,
will be sufficient to fund the operations of the Company at least through
December 31, 1997. Management also believes that the Company's future capital
needs will continue to be significant, and management intends to continue to
seek additional sources of financing. The Company is currently pursuing the
Credit Facility as a source of additional financing, although there can be no
assurance that the Credit Facility can be obtained. See "Description of Certain
Indebtedness--Proposed Credit Facility." In addition, if (i) the Company's plan
of development or projections change or prove to be inaccurate, (ii) the
proceeds of the Offering, together with other existing financial resources,
prove to be insufficient to fund the Company through December 31, 1997, (iii)
the Company completes any material acquisitions, other than those now under
contract, or buys spectrum at auction or (iv) the Company accelerates
implementation of its business plan, 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 obtain any additional financing, or, if such
financing is available, that the Company will be able to obtain it on acceptable
terms. If the Offering is not consummated the Company expects that it will draw
down $50.0 million of the Senior Secured Notes due 1998 pursuant to the CIBC
Financing Commitment, and that, based on current plans of development, the
remaining net proceeds of the Common Stock Offering and the net proceeds from
the CIBC Financing Commitment, after payment to complete pending acquisitions,
will be sufficient to fund operations of the Company at least through December
1997. If the CIBC Financing Commitment is drawn down, the Company will pursue
refinancing thereof at the earliest practicable time. In the event that the
Offering is not consummated in a timely manner, the CIBC Financing Commitment is
not drawn down and the Company is unable to obtain additional financing, the
Company may be obliged to modify, delay or abandon some or all of its
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. See "Risk
Factors -- Significant Capital Requirements; Need for Additional Financing."
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 38 GHz band 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. Upon completion of its pending acquisition of 129 38 GHz
wireless broadband authorizations (the "CommcoCCC Assets") from CommcoCCC, Inc.
("CommcoCCC") but excluding any licenses leased under the ICG Agreement, the
Company will own, manage or have a right to use on a long-term basis a total of
233 authorizations (which are also referred to herein as "licenses") granted by
the Federal Communications Commission (the "FCC") covering an aggregate
population of approximately 156 million in 169 U.S. markets. During 1996 the
Company installed over 370 radio links (single path point-to-point microwave
connections), including 99 radio links installed for other carriers and 85 radio
links providing service to customers.
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
rapid growth of local area networks ("LANs"), Internet services, video
teleconferencing and other data intensive applications is 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, is 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 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, with total 1995 revenues estimated by the FCC at over $95.0 billion, 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 of 1996 (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").
In the late 1980s, CAPs emerged to compete with LECs by providing dedicated
private line transmission and access services. Beginning in 1994, a few states
permitted CAPs to also operate as "competitive local exchange carriers"
("CLECs"), by providing local exchange services to business customers in
addition to transmission and access services. These CAP/CLEC 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
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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/CLEC 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/CLECs 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/CLECs' revenues will grow in excess of 150% per year over the next two
years. In addition to CAPs/CLECs, 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.
ART'S WIRELESS BROADBAND SERVICES
The Company is positioned to solve the need for broadband last mile
services, linking end users to facilities of LECs, CAPs/CLECs, IXCs and Internet
Service Providers ("ISPs"). The Company is also positioned to link cell sites of
mobile communications service providers and to link metropolitan area network
sites using 38 GHz technology. 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 (1.544 Megabits per second ("Mbps"),
capable of carrying 24 simultaneous voice conversations) to DS-3 (45 Mbps,
capable of carrying 672 simultaneous voice conversations). 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 80 markets to be acquired under
the CommcoCCC Agreement (as defined).
The Company intends initially to market its services as a carrier's carrier
in order to leverage ART's carrier customers' sales forces, channels of
distribution and customer bases. The Company believes that its services will be
attractive to carrier customers which do not currently have broadband networks
that reach the majority of their customers. For example, the Company has entered
into a strategic distribution agreement (the "Ameritech Strategic Distribution
Agreement") with Ameritech ("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. Ameritech has initiated the
sale of ART's wireless broadband services on a limited basis, and the Company
expects that full-scale rollout will begin in the first quarter of 1997. See "--
Strategic Alliances -- Ameritech Strategic Distribution Agreement."
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 installed primarily on rooftops. In order to deploy its links quickly,
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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 locations to obtain renewable site access options at
targeted locations. The Company uses a combination of its own employees and
independent contractors for site acquisition.
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 path engineering factors), (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, (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 in most circumstances and (x) optional "hot" standby links that
remain powered up and switch "on line" if the primary link fails.
The Company believes that a number of factors provide it with certain
significant competitive advantages in offering broadband last mile services,
including:
- The characteristics of 38 GHz technology (high data transfer rates,
significant channel capacity, rapid deployment, easy installation, very
high transmission quality and efficient network design) are ideal for the
provision of last mile services. See "-- 38 GHz Technology."
- The Company deploys capital efficiently because of the
installation-to-meet-demand and redeployable nature of the Company's
wireless broadband equipment, as compared to the significant upfront cost
for installation of fiber based networks.
- As one of the first 38 GHz service providers, the Company enjoys a
time-to-market advantage and is therefore well-positioned to capture a
large percentage of early adopters, which are generally among the heaviest
users. The Company believes it is one of only two 38 GHz service providers
currently offering commercial services.
- The Company is forging strategic alliances with major telecommunications
carriers, equipment vendors and technology development companies, thus
gaining access to important channels of distribution and early deployment
of advanced technologies.
- The broad scope of the Company's footprint enables it to offer wireless
broadband services targeting much of the United States's addressable
business market.
- The Company's network management operational support system that provides
24-hour, seven-days-a-week network monitoring and management. The system
is designed to provide provisioning, link alarm monitoring, link
performance reporting, historical link performance data, remote link
diagnosis, remote link restoral and coordination and testing with
associated network operating centers.
- The Company is developing proprietary Geographic Information Systems
("GIS") that provide ART with 3-D digital modeling of all of its markets,
including all building and landscape features, to reduce the time and
expense of engineering its proposed radio locations. These systems will
allow the Company to determine line of site for proposed links, produce a
list of tenants in the buildings serviceable from such locations and
integrate this information with its marketing databases. The GIS
development will enable the Company remotely to determine line-of-sight
availability and provide immediate information regarding network design
alternatives. These systems further provide the Company with a powerful
tool to market its services to telecommunications service providers
seeking to offer broadband connectivity to their customers.
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BUSINESS STRATEGY
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. The Company has begun to implement the following strategic
initiatives to achieve this objective:
- CAPITALIZE ON BROAD SPECTRUM POSITION. The Company's spectrum assets
provide it with the foundation on which to create a large scale commercial
network of 38 GHz wireless broadband operations. 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."
- ESTABLISH AND EXPAND KEY STRATEGIC ALLIANCES. 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. The Company has established and will seek to
continue to establish key strategic alliances with major service providers,
equipment manufacturers and systems integrators. Under the Ameritech
Strategic Distribution Agreement, Ameritech is targeting certain sales
objectives and has agreed to spend internally up to $7.0 million on its
sales or marketing of ART's services. Ameritech owns a 5.0% beneficial
equity interest in the Company as of January 14, 1997. 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. See "-- Strategic
Alliances."
- MARKET INITIALLY AS A CARRIER'S CARRIER. The Company intends to initially
market its services as a carrier's carrier in order to leverage ART's
carrier customers' sales forces, channels of distribution and customer
bases. The Company's initial target customers include LECs, CAPs/CLECs,
IXCs, ISPs and mobile communications service providers. The Company
believes that its services are particularly attractive to carrier customers
who do not currently have broadband networks capable of reaching the
majority of their customers.
- PROACTIVELY IDENTIFY OFF-NET MARKET OPPORTUNITIES FOR CARRIER CUSTOMERS.
ART utilizes its proprietary database tools, such as GIS, to analyze a
particular carrier's network and identify high density off-net customer
locations. The GIS database is then used to pre-clear off-net buildings for
line-of-site, distance and network design alternatives. After a critical
mass of sites has been pre-qualified, the Company is able to proactively
market to the carrier access to such customer premises and pursue a "team
selling" approach to end users. Utilizing this proactive approach with
multiple carriers is expected to allow the Company incrementally to build a
custom-designed wireless hub network in each of its target markets.
- PURSUE OPPORTUNITIES TO PROVIDE VALUE-ADDED SERVICES. The Company will
also market services such as data, video-conferencing, high resolution
imaging and video on demand directly to end users in conjunction with
system integrators, telecommunications equipment manufacturers and other
service providers. The Company also plans to offer point-to-multipoint
wireless broadband services and may also decide to offer switched-data
services to end users who desire a single source telecommunications
solution.
- MAINTAIN COMPETITIVE ADVANTAGES THROUGH TECHNOLOGY ADVANCEMENTS. As 38 GHz
microwave radios begin to be produced in large volumes with modern
manufacturing techniques, the Company believes that the cost of such
equipment will decline, thereby allowing the Company to meet anticipated
price competition in its markets. 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 continuously seeks to reduce costs by designing equipment that
allows it to more efficiently utilize its spectrum. For example, the
Company anticipates taking delivery of 38 GHz OC-3 SONET compatible radios
(155 Mbps) within 18-24 months.
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MARKETING PLANS
ART is addressing its initial target markets as a carrier's carrier, while
expanding 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 LECs, CAPs/CLECs, ISPs, IXCs, interconnect providers (PBX suppliers),
LAN, MAN and WAN systems integrators and other telecommunications equipment
manufacturers and service providers.
To develop the market potential of its wireless broadband authorizations,
ART has organized its operations into four geographic regions: Northeastern,
Central, Southern and Western. Each region has its own General Manager in charge
of operations, field service and sales and marketing. Factors that determine the
extent of proactive sales activity in each market include (i) number of license
areas, (ii) geographic size of license areas, (iii) end user density within
license areas, (iv) radio link design variables such as precipitation patterns
and topography and (v) the strategies of the incumbent LECs and CAPs/CLECs.
Organizing its markets into regions provides ART with significant operating cost
efficiencies through the centralization of its administrative functions, and
allows ART to provide superior service to its key customers.
The Company's internal salesforce is currently marketing the Company's
wireless broadband services by (i) team selling with the carriers' sales forces
(ii) performing field demonstrations of 38 GHz service, (iii) making
presentations at industry trade shows, (iv) providing an interactive Internet
home page, (v) running promotional advertisements in selected trade media and
(vi) conducting extensive one-on-one presentations and demonstrations through
its carrier sales force. The sales organization is supported by the product
marketing group which has developed programs for each of the targeted sectors.
As a non-dominant carrier, ART does not have to cost-justify its rates to
regulatory bodies and therefore has a wide latitude to exercise individual case
based pricing, subject to certain policies against discriminatory treatment. As
a result, ART expects to enter into customer-specific 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 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.
CUSTOMERS AND APPLICATIONS
The Company began deploying its links principally on a trial basis in
November 1995 and has since been hiring its staff, building its internal
infrastructure and developing its marketing plans and relationships with
potential customers. The Company has generated only nominal revenues from its
operations to date and has recently begun to finalize plans to roll out its
services on a wide-scale basis. Currently, the Company is providing or has
received orders to provide wireless broadband services to LECs, CAPs/ CLECs,
ISPs and mobile communications service providers and is in the process of
becoming a qualified vendor to all the major IXCs. The Company currently
provides services to carriers such as Ameritech, Bell Atlantic NYNEX Mobile, MFS
Communications Company, Inc., UUNet, DIGEX, Incorporated, Electric Lightwave,
NEXTLINK Communications LLC, American PCS, L.P., Western Wireless, Commonwealth
Telephone, Public Interest Network, Chadwick Telephone, CGX Telecom, CAIS, Inc.
and Brooks Fiber Properties, Inc., among others.
The Company currently provides, or anticipates providing, wireless broadband
services to the following types of customers, among others:
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LOCAL EXCHANGE CARRIERS AND COMPETITIVE ACCESS PROVIDERS/COMPETITIVE LOCAL
EXCHANGE CARRIERS. Currently, CAPs/CLECs 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/CLECs generally target densely
populated areas with high concentrations of large end-users. In order to reach
"off-net" customers, CAPs/CLECs must either lease or purchase facilities and
services from LECs or alternative suppliers until such time as it becomes
economical to extend the CAP/CLEC fiber networks to these customers.
CAPs/CLECs face certain implementation obstacles that the Company's wireless
broadband services can assist in solving. CAPs/CLECs 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/CLECs can utilize
the Company's wireless broadband services as an alternative to copper,
fiber-based or other such network facilities provided to the CAPs/CLECs 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.
LECs are encountering many of the same obstacles CAPs/CLECs are encountering
in seeking to enhance their networks to deliver broadband services. Certain LECs
have sought to utilize 38 GHz technology to expand the range of their service
offerings to match those offered by CAPs/CLECs. 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 residents and the lack of high capacity access through local
telephone company facilities has created a growing market for wireless broadband
services similar to ART's services. The Company offers ISPs 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 customers' need for
increased capacity. The Company provides wireless broadband links between
customers and their ISPs 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 45 times faster than a 33.3 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 1,300 times the rate of the fastest
dial-up modems currently in use (33.3 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
have begun to 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 have begun to give domestic mobile carriers,
such as American PCS, L.P. and Western Wireless, 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 have begun to 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/CLEC intermediate fiber
rings. These providers have also begun to 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 are able to 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 and video transmission and real time
communications services by linking customer computers in local, metropolitan and
wide area network 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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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]
38 GHZ TECHNOLOGY
The FCC has allocated the 37.0-40.0 GHz (the "38 GHz") band for wireless
broadband transmissions. The FCC has authorized the use of fourteen 100 MHz
channels between 38.6 GHz and 40.0 GHz, which enables licensees to provide
point-to-point wireless telecommunications services within a specified
geographic footprint usually of up to a 50-mile radius inscribed within a
rectangle.
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 Mbps today can
transfer data at a rate which is over 1,300 times the rate of the fastest
dial-up modem currently in use (33.3 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.
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- 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 its addressable service
market.
- 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 most 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 and that cannot commence service until
frequency coordination has been completed.
- EASE OF INSTALLATION. The equipment used for 38 GHz point-to-point
applications (I.E., antennae, transceivers and digital interface units) is
smaller, less obtrusive and less expensive than that used for microwave
equipment applications at other frequencies, making it less susceptible to
zoning restrictions. In addition, 38 GHz equipment can be easily
redeployed to meet changing customer requirements.
- VERY HIGH TRANSMISSION QUALITY. 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 equates to less than six minutes per
year of down-time, compared to a range of four hours to 44 hours of
historical performance of similar copper-based LEC circuits.
- 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.
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. Upon completion
of the CommcoCCC Acquisition, the Company will own or manage a total of 233
authorizations that will allow it to provide 38 GHz wireless broadband services
in 169 U.S. markets. The Company currently owns or manages or has the right to
use on a long-term basis 104 licenses (exclusive of the CommcoCCC Assets) that
allow it to provide 38 GHz wireless broadband services in 81 markets, 73 of
which are owned by the Company, 19 of which are managed by the Company through
the Company's interests in or arrangements with other companies and 12 of which
the Company has the right to use on a long-term basis.
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The table below lists 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
Cincinnati, OH 100 -- 200 300
Norfolk/Virginia Beach, VA -- -- 300 300
Providence, RI/Fall River, MA 200 -- 200 400
Memphis, TN 100 -- 200 300
Birmingham, AL 100 -- 200 300
Buffalo/Niagara Falls, NY 300 -- 100 400
Richmond/Petersburg, VA 100 -- 200 300
Rochester, NY 300 -- 200 500
Hartford, CT 200 -- 200 400
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>
54
<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
St. Louis, MO 100 -- 100 200
Pittsburgh, PA 200 -- -- 200
Baltimore, MD 200 -- -- 200
Portland, OR -- -- 200 200
Charlotte/Gastonia, NC -- -- 200 200
Columbus, OH -- -- 200 200
Nashville, TN 100 -- 100 200
Indianapolis, IN 100 -- 100 200
Louisville, KY 100 -- 100 200
Oklahoma City, OK -- -- 200 200
Dayton/Springfield, OH 100 -- 100 200
Las Vegas, NV -- 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
El Paso, TX -- -- 200 200
Worcester, MA 200 -- -- 200
Allentown/Bethlehem, PA 200 -- -- 200
Baton Rouge, LA 100 -- 100 200
100 MHZ MARKETS
Chicago, IL 100 -- -- 100
Los Angeles, CA -- 100(2) -- 100
Detroit, MI -- -- 100 100
Dallas/Fort Worth, TX 100 -- -- 100
Houston, TX 100 -- -- 100
Atlanta, GA 100 -- -- 100
Minneapolis, MN 100 -- -- 100
Seattle/Tacoma, WA -- -- 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
Milwaukee, WI -- -- 100 100
San Antonio, TX 100 -- -- 100
Salt Lake City, UT -- 100 -- 100
Orlando, FL -- -- 100 100
New Orleans, LA 100 -- -- 100
Greensboro/Winston-Salem, NC -- -- 100 100
Raleigh-Durham, NC -- -- 100 100
Austin, TX -- -- 100 100
Little Rock, AR -- -- 100 100
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
BANDWIDTH COVERED BY AUTHORIZATIONS (MHZ)
-------------------------------------------
UNDER
DEFINITIVE
AGREEMENT TO
MARKET OWNED MANAGED (1) ACQUIRE TOTAL
- -------------------------------------------------- ----------- --------------- ------------- -----
<S> <C> <C> <C> <C>
Tulsa, OK -- -- 100 100
Greenville/Spartanburg, SC -- -- 100 100
Toledo, OH -- -- 100 100
Tucson, AZ -- -- 100 100
Spokane, WA -- 100 -- 100
Kingsport, TN/Bristol, VA -- -- 100 100
Fort Wayne, IN -- -- 100 100
Charleston, SC 100 -- -- 100
Mobile, AL 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
TeleCom One services agreement pursuant to a revenue-sharing arrangement and
(iii) those authorizations that are leased on a long-term exclusive basis.
Does not include (i) authorizations included in the CommcoCCC Assets which
are managed by the Company on a short-term basis, pending the CommcoCCC
Acquisition or (ii) the DCT Systems. The Company has entered into definitive
agreements to acquire all outstanding interests in the authorizations held
by ART West and TeleCom One. See "--Agreements Relating to Licenses and
Authorizations."
(2) Consists of authorizations in the Los Angeles market which the Company has
the right to use on a long-term basis pursuant to the ICG Agreement. See
"--Agreements Relating to Licenses and Authorizations--ICG Agreement."
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 FCC 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. On December
31, 1996, the FCC announced that it had adopted an order that partially lifted
the "freeze" on the processing of pending applications. Among other actions, the
order permitted applicants to modify pending applications to reduce their
coverage areas. See "Risk Factors -- Government Regulation" and "-- Government
Regulation."
Excluding the CommcoCCC Assets, the Company presently owns, manages or has a
long-term right to use 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 the CommcoCCC authorizations and the Company's management
agreement with CommcoCCC, the Company must meet the FCC's construction deadline
for 53 licenses between mid-April and mid-August 1997. The Company has met the
construction deadline for 76 authorizations on a timely basis and expects it
will meet its other FCC deadlines. All of the 38 GHz licenses owned or to
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<PAGE>
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.
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.
("CommcoCCC") in exchange for 6,000,000 shares of Common Stock (the "CommcoCCC
Acquisition"). 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 Offering 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 order to satisfy
the minimum population coverage requirements, the Company will be obliged to
complete the acquisitions of certain spectrum rights from ART West and TeleCom
One, or, in the event it cannot complete one or more of such acquisitions, to
acquire or lease other spectrum rights. The Company's acquisition agreements
with ART West and TeleCom One are also subject to various conditions. See
"--Additional Spectrum Rights Leases." 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, as
amended, may be terminated by either party if the CommcoCCC Acquisition is not
consummated before October 15, 1997. See "Risk Factors -- Risk of
Non-Consummation of CommcoCCC Acquisition and Other Acquisitions; Commco
Option."
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
December 31, 1996 pursuant to a subordinated bridge financing facility (the
"CommcoCCC Financing") and, in connection therewith, received three-year
warrants to purchase 18,182 shares of Common Stock at a price of $24.75 per
share. In connection with an October 1996 amendment to the CommcoCCC Agreement,
the Company modified the terms of such warrants, reduced the exercise price of
such warrants to $17.1875 per share ($15.00 after giving effect to anti-dilution
adjustment) and increased the number of shares issuable upon exercise thereof to
87,273 shares (the "CommcoCCC Warrants"). The CommcoCCC Financing was repaid
with the proceeds of the Common Stock Offering.
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<PAGE>
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 previously frozen under the NPRM in market areas covering
an aggregate population of at least 40 million people, and will terminate on
August 12, 1997. 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 945,455 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 exercisable, an affiliate of Commco LLC will have the
right to sublease channel capacity from the Company in the New York and
Washington, D.C. markets on terms agreed to by the Company and Commco LLC. On
December 31, 1996, the FCC announced that it had adopted an order that partially
lifted the freeze on the processing of pending applications. Among other
actions, the order provides that the Commission will process certain amendments
filed before December 15, 1995 that have the effect of eliminating mutual
exclusivity among pending applications. The Company believes that the FCC order
could result in the grant to Commco L.L.C. of sufficient authorizations to
enable it to satisfy the population coverage condition of the Commco Option. See
"Risk Factors -- Risk of Non-Consummation of CommcoCCC Acquisition and Other
Acquisitions; Commco Option."
As part of 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.
As a condition to the CommcoCCC Acquisition, the Company will elect James B.
Murray, Jr. as a director of the Company promptly after the closing of the
CommcoCCC Acquisition.
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.
In connection with the CommcoCCC Acquisition, Montgomery Securities has been
retained by the Company as its financial adviser for which it will receive fees
of up to approximately $2.7 million (of which $600,000 was paid in December
1996) and the reimbursement of reasonable out-of-pocket expenses incurred in
connection therewith.
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"). The EMI
58
<PAGE>
Assets were acquired by the Company 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 the Company 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 transferred 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"). Under a separate management 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
was paid in November 1996 as a non-refundable deposit (the "ART West Deposit")
and the balance is payable upon consummation of the acquisition. Upon payment by
ART of the ART West Deposit, Extended surrendered 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 SYSTEMS SERVICES AND PURCHASE AGREEMENTS. On June 28, 1996 the Company
entered into a definitive agreement (the "DCT Agreement") with DCT to acquire
DCT's interest in sixteen 38 GHz licenses (the "DCT Systems") covering a
population of approximately 15 million in exchange for $3.6 million in cash,
subject to FCC approval, consummation of the DCT Agreement by August 28, 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. DCT has alleged that the Company
has failed to satisfy a provision of the DCT Agreement which provides that if
the Company failed to obtain debt or equity proceeds by August 31, 1996 in an
amount at least equal to $3.6 million, the DCT Agreement would terminate and DCT
could retain a $100,000 deposit paid by the Company against the purchase price.
There can be no assurance as to the outcome of such dispute and, therefore, no
assurance that the Company will be in a position to consummate the acquisition
of the DCT Systems, even if the Company wishes to do so. Although the Company
believes that it has satisfied such provision of the DCT Agreement and is
legally entitled to proceed to consummate the transactions contemplated thereby,
the Company does not currently plan to purchase the DCT Systems as contemplated
by the DCT Agreement. Accordingly, the DCT Systems are not included among the
licenses managed by the Company as disclosed in this Prospectus, and the Company
does not currently intend to use the proceeds of the Offering to consummate the
purchase thereof and would use the unpaid purchase price for general corporate
purposes. See "Use of Proceeds."
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 was entitled to
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<PAGE>
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 has completed construction of all of the DCT
authorizations.
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 constructed, and has agreed
to 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. The Company has
completed construction of the 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. 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.
ICG AGREEMENT. In October 1996, ART entered into a services agreement with
ICG Telecom Group, Inc. and Pacific & Eastern Digital Transmission Services,
Inc., pursuant to which the Company will have an exclusive right, as against
third parties, to use for a five-year term ten 38 GHz wireless broadband
authorizations covering an aggregate population of approximately 13 million in
or around the California cities of Beverly Hills, Los Angeles, Palm Springs,
Riverside, Santa Barbara, San Bernardino, Santa Monica, San Diego, Santa Anna
and Ventura. In addition, the services agreement grants to the Company a right
of first refusal with respect to the purchase of such authorizations, subject to
limited exceptions. The services agreement may be renewed for successive
one-year terms totalling five additional years upon expiration of its initial
term.
MICROWAVE PARTNERS AGREEMENT. In November 1996, ART entered into a services
agreement with Microwave Partners, pursuant to which the Company will have an
exclusive right, as against third parties, to use for a five-year term two 38
GHz wireless broadband authorizations covering an aggregate population of
approximately 755,000 in or around Palm Springs, California and Bellingham,
Washington. In addition, the services agreement grants to the Company a right of
first refusal with respect to the purchase of such authorizations, subject to
limited exceptions. The services agreement may be renewed for an additional term
of two years upon expiration of its initial term.
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. Ameritech has initiated on a
limited basis the sale of its "Ameritech Wireless Broadband Service," which will
be a local access component of Ameritech's GlobalDesk Managed Access Service,
allowing seamless high-speed connectivity for LAN interconnection, desktop
videoconferencing and Internet access. The Company expects that full scale
rollout of these wireless broadband services will begin in the first quarter of
1997. Under the Ameritech Strategic Distribution 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
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<PAGE>
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 purchased software and developed its network
management and provisioning functions to produce a reliable network management
system and increase system performance. 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 $1.9
million and an annual maintenance support fee of approximately $145,000. 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 companies, for advanced 38 GHz radios highspeed
converters 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.
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<PAGE>
The Company has 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 September 30, 1996, the Company has incurred approximately $650,000
of research and development expenses, including amounts incurred with American
Wireless (as defined) and Helioss. See "Certain Transactions -- American
Wireless Development Agreement." There can be no assurance that the Company can
complete a definitive agreement with Helioss or that Helioss 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.
MASTER SERVICE AGREEMENTS. The Company's master service agreements contain
the terms by which customers will place future orders. The terms which are
outlined in these agreements include volume discounts, approximate geographic
location of links needed and representative pricing. Although a master service
agreement is not a take or pay commitment, it lays the groundwork for future
orders by a preferred customer and is utilized to facilitate the issuance of
purchase orders by a customer without any additional negotiations between the
companies.
ART has entered into master service agreements with a number of CAPs/CLECs
and ISPs, including NEXTLINK Communications LLC, DIGEX, Incorporated, CAIS,
Inc., Microwave Partners d/b/a Astrolink Communications, Inc., American PCS,
L.P., Message Center Management, Inc. ("MCM"), GST Telecom, Inc., Chadwick
Telephone and Brooks Fiber Properties, Inc.
SITE ACQUISITION AGREEMENTS. In order to reduce the lag time in the
provisioning of services and ensure that the Company can respond rapidly to
customer orders, the Company has initiated a program to obtain access to antenna
sites in advance of receiving a customer order in those situations where it can
be anticipated that there may be difficulty in obtaining such rights through the
customer's contracts and where the sites fit within the Company's marketing and
network development plans. The Company has signed an agreement with MCM which
will give the Company access to 4800 sites nationwide.
TCG INSTALLATION AGREEMENT. Under an Installation Services Agreement dated
October 2, 1996, the Company acted as a sub-contractor to Teleport to provide
transmission facilities construction services. Total gross billings to the
Company under this agreement were approximately $2.6 million. As of December 31,
1996, all such services had been substantially completed.
FOREIGN MARKETS
Entities in which the Company has a substantial interest have applied or
intend to apply for licenses to provide wireless broadband services in Canada
and in various European countries. See "Risk Factors--Potential Rights to
Foreign Licenses."
In October 1996, ART 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 the 66 major markets in Canada covering a population
of at least 21 million people. 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 any
licenses that may be granted to ATI and subject to control by ATI. The Company
incurred approximately $300,000 of expenses, and ATI is responsible for securing
any
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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 licenses are 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 or will cause to be formed subsidiaries in Sweden, the United Kingdom and
Italy 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 $10,000 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 telecommunication markets to competition over the next several years, the
timing and extent of a 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, through such subsidiaries, 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.
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 may also compete
with CAPs/CLECs, other wireless service providers, 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 (an affiliate of
TCG), 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 several dozen smaller
entities have been granted 38 GHz authorizations in geographic regions in which
the Company plans to operate. In January 1997, WinStar acquired the 38 GHz
licenses of one such entity, Milliwave L.P. 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." On
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December 31, 1996, the FCC announced it had adopted an order that partially
lifted the freeze on the processing of new applications which would result in
the grant of additional authorizations to other 38 GHz applicants. 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
and diminish the value of the Company's existing 38 GHz authorizations. 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.
OTHER WIRELESS COMPETITORS. The Company may also face competition from
other terrestrial wireless services, including 2 GHz and 28 GHz wireless cable
systems (MMDS and LMDS), 18 GHz point-to-point microwave services (DEMS), FCC
Part 15 wireless radio devices, and other services that use existing
point-to-point microwave channels on other frequencies. Motorola Satellite
Systems, Inc. has filed an application with the FCC for a global network of
satellites in the 37.5-40.5 GHz band and the 47.2-50.2 GHz band, which is
proposed to be used for broadband voice and data services. Other companies have
filed applications for global broadband satellite systems in the 28 GHz band. If
developed, these systems could also present significant competition to the
Company.
The FCC is planning to hold an auction for 28 GHz spectrum in all markets
for the provision of high capacity "wireless cable" systems. These auctions are
expected to take place in 1997. The 2 GHz wireless cable spectrum may also
provide competition for metropolitan wireless broadband services. At present,
wireless cable licenses are used primarily (if not exclusively) for the
distribution of video programming, and have only a limited capability to provide
two-way communications needed for wireless broadband telecommunications services
but there can be no assurance that this will continue to be the case.
According to press reports and FCC records Associated Communications Group,
affiliates and joint venture partners (collectively "ACG") hold licenses in the
18 GHz band in 31 markets. Press reports indicate that ACG plans to use fixed
wireless service to provide voice, data, Internet and videoconferencing
services.
The FCC has allocated a number of spectrum blocks for use by wireless
devices that do not require site or network licensing. A number of vendors have
developed such devices that may provide competition to the Company for certain
low data-rate transmission services.
In January 1997, the FCC allocated 300 MHz of spectrum in the 5 GHz band for
unlicensed devices to provide short-range, high-speed wireless digital
communications. These frequencies must be shared with incumbent users without
causing interference. Although the allocation is designed to facilitate the
creation of new wireless local area networks (and thus might not be competitive
to the Company's services), it is too early to predict what kind of equipment
might ultimately be manufactured and for what purposes it might be utilized.
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 inter-LATA 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
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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.
A number of companies are in the process of developing enhancements to
increase the performance of LECs' legacy copper networks. These generally come
under the description of digital subscriber line products, such as ADSL
(asymmetrical digital subscriber line), HDSL (high-speed digital subscriber
line), and VDSL (video digital subscriber line). There can be no assurance that
the Company will be able to compete effectively with these enhancements.
OTHER COMPETITORS. The Company may compete with CAPs/CLECs for the
provision of last mile access and additional services in most of its market
areas. However, the Company believes that many CAPs/CLECs have begun to utilize
38 GHz transmission links primarily to augment their own service offerings to
IXCs and end users, and that the Company is well positioned and has begun to
provide such 38 GHz services to CAPs/CLECs. However, there can be no assurance
that CAPs/CLECs will utilize the Company's 38 GHz services or that CAPs/CLECs
will not seek to acquire their own 38 GHz licenses or use the 38 GHz licenses of
other licensees. Furthermore, the ability of CAPs/CLECs to compete in the local
exchange market is limited by lack of parity with LECs in number portability,
dialing parity and reasonable interconnection. The Telecommunications Act
requires the FCC and the states to implement regulations that place CAPs/CLECs
on a more equal competitive footing with LECs. To the extent these changes are
implemented, CAPs/CLECs may be able to compete more effectively with LECs.
However, there can be no assurance that CAPs/CLECs 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 fiber optic and enhanced copper
based networks to provide local service.
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,
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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. 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 construct
facilities to place the station "in operation" within 18 months of the date of
grant of the authorization. Although, under current FCC regulations, the term
"in operation" is not defined beyond the requirement that the station be capable
of providing service, the industry custom is to establish at least one link
between two transceivers in each market area for which it holds a license. In
the event that the recipient fails to comply with the construction deadline, the
license is subject to forfeiture, absent an extension of the deadline. Upon
completion of the CommcoCCC Acquisition, the Company will own or manage a total
of 233 authorizations that will allow it to provide 38 GHz wireless broadband
services in 169 U.S. markets. The Company currently owns or manages 104 licenses
(exclusive of the CommcoCCC Assets) that allow it to provide 38 GHz wireless
broadband services in 81 markets to construct and operate 38 GHz wireless
broadband facilities, 73 of which are owned by the Company, 19 of which are
managed by the Company through the Company's interests in or arrangements with
other companies and 12 of which the Company has the right to use on a long-term
basis. All of the 104 licenses (exclusive of the CommcoCCC Assets) which the
Company owns, manages or has a right to use on a long-term basis have met the
FCC's construction deadline. Under the terms of the CommcoCCC authorizations and
the Company's management agreement with CommcoCCC, the Company has met the
construction deadline for 76 licenses and must meet the construction deadline
for the remaining 53 licenses between mid-April and August 1997. The Company
believes that, in light of current FCC practice, extensions of construction
periods are highly unlikely. In addition, pursuant to rules that became
effective August 1, 1996, if a station does not transmit operational traffic
(not test or maintenance signals) for a consecutive period of twelve months at
any time after construction is complete, or if removal of equipment or
facilities renders the station incapable of providing service, the license is
subject to forfeiture, absent a waiver of the FCC's rules. Although this rule
has not been interpreted by the FCC, it is possible that it could be applied in
such a way that could cause one or more of the Company's licenses to be subject
to forfeiture. 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,
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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.
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." In
addition, the Company recently entered into the ICG Agreement and a services
agreement with Microwave Partners. 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, was 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 fully complied with its reporting
obligation. Since August 1, 1996, the FCC rules have not required 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 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 inter-LATA 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.
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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 proposed 100 MHz channels
(which are similar to those used by the Company) and the lower four proposed 50
MHz channels in the 38 GHz band that have not been previously available for
commercial use and a possible auction of the unlicensed areas in the upper
fourteen 100 MHz channels, (ii) licensing frequencies using predefined
geographic service areas ("Basic Trading Areas"), (iii) 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 (iv) 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
(the "freeze"). On December 31, 1996, the FCC announced that it had adopted an
order that partially lifted the freeze on the processing of pending
applications. Among other actions, the order provides that the Commission will
process certain amendments filed before December 15, 1995 that have the effect
of eliminating mutual exclusivity among pending applications, which is likely to
result in the grant of additional authorizations to 38 GHz applicants other than
the Company. Final rules issued in connection with the NPRM may require that 38
GHz service providers share the 38 GHz band with satellite services. Motorola
Satellite Systems, Inc. has filed an application with the FCC for a global
network of satellites to be used for broadband voice and data services. Motorola
proposes to use 38 GHz frequencies for transmissions from space to earth.
Satellite transmissions in the 38 GHz frequencies could adversely effect the
Company's existing operations or its future expansions by creating interference
or by inducing the FCC to impose power and other limitations upon the Company's
transmissions. However, the Motorola application would require changes in the
FCC's rules to be granted, and it would likely be a number of years before any
such system could be launched. The extent of the adverse impact upon the
Company's operations if the Motorola application were to be granted in its
current form is unknown, and there can be no assurance that the Company's
operations would not be adversely effected. 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 specifically 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. The Company does not believe that awards by auction will adversely effect
the Company and that the auction of additional spectrum could enable the Company
to broaden its geographic reach as desired.
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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 one registered service mark, ART, and has filed for
protection for three other service marks: DigiWave (the Company's wireless
broadband trademark), OZ Box (the Company's proprietary network management
interface) and 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 December 31, 1996, the Company had a total of 118 employees, including
39 in engineering and field services, 44 in sales and marketing, 20 in
administration and finance and 15 in operations. 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 and February 1997, respectively. 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 director designate of the Company,
their ages and their positions are as follows:
<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............................ 41 President, Chief Operating Officer and Director
Thomas A. Grina............................. 39 Executive Vice President and Chief Financial Officer
W. Theodore Pierson, Jr..................... 59 Executive Vice President and Secretary
James D. Miller............................. 54 Senior Vice President, Sales and Marketing
Richard A. Shields, Jr...................... 40 Senior Vice President, Technical Operations
James C. Cook (1)(3)........................ 36 Director
Mark C. Demetree (1)(2)..................... 39 Director
Andrew I. Fillat (2)(3)..................... 48 Director
Alan Z. Senter.............................. 55 Director
James B. Murray, Jr. (4).................... 50 Director Designate
</TABLE>
- ------------------------------
(1) Member of Option Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
(4) Designated for election promptly after consummation of the CommcoCCC
Acquisition.
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 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.
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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 of the
Company and Telecom since inception. He served as a director of the Company from
its inception until July 1996 and as General Counsel of the Company from its
inception until December 31, 1996. For more than three 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. Prior
to becoming a partner at Pierson & Burnett, L.L.P., Mr. Pierson was a partner of
the law firm Reed, Smith Shaw & McClay. In his 32 years of practicing law, Mr.
Pierson has advised a number of start-up telecommunications companies, including
Home Box Office, Satellite Business Systems, Omninet Corporation and DSBC. Mr.
Pierson currently serves as a director of DSBC. Mr. Pierson was also counsel to
the Competitive Telecommunications Association (the largest association of long
distance carriers) from 1984 to 1988 and the Association for Local
Telecommunications Services from 1993 to 1995.
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.
RICHARD A. SHIELDS, JR. has served as Senior Vice President, Technical
Operations of the Company since December 1996 and served as Vice President,
Technology Development of the Company from March 1996 to December 1996. From
1992 through 1996, Mr. Shields was vice president, engineering and design for
Claircom. From 1991 to 1992, Mr. Shields served as director of product
development of TWG.
JAMES C. COOK has served as a director of the Company since November 1996.
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.
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: 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.
ALAN Z. SENTER has served as a director of the Company since December 1996.
From 1994 to May 1996, Mr. Senter served as executive vice president and chief
financial officer of NYNEX Corporation. From 1993 to 1994, Mr. Senter served as
chairman of Senter Associates, a financial advisory firm. From 1992 to 1993, Mr.
Senter was executive vice president, chief financial officer and a director of
GAF/ISP
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Corporation. From 1968 to 1992, Mr. Senter served in various capacities at Xerox
Corporation, including serving as vice president of finance from 1990 to 1992.
Mr. Senter currently serves as a director of XL Insurance Company and formerly
served as a director of NYNEX Cablecom (U.K.), Bell Atlantic NYNEX Mobile, NYNEX
Credit Co., International Specialty Products, Inc., GAF Corp., Rank Xerox Ltd.,
and Xerox Financial Services. Mr Senter has also served as a member of the
Advisory Committee of the University of Chicago Graduate School of Business.
JAMES B. MURRAY, JR. will become a director of the Company promptly after
consummation of the CommcoCCC Acquisition. Since its inception in March 1989,
Mr. Murray has been a Managing Director of Columbia Capital Corporation and
since January 1995, has been a director of The Columbia Group Incorporated. From
January 1990 to January 1993, Mr. Murray was also the President of Randolph
Cellular Corp., a cellular communications company. Mr. Murray is a member of the
Board of Directors of Saville Systems, a publicly-traded entity providing
billing solutions for service providers in the telecommunications industry as
well as several privately-held telecommunications companies, including GO
Communications Corporation, Merrick Tower Corporation, Contact New Mexico, Inc.
and Columbia Spectrum Management, Inc.
BOARD COMPOSITION
All directors hold office until their successors have been elected and
qualified. The Company's Board of Directors is divided into three classes, with
each class of directors to serve three-year staggered terms (after their initial
terms). Messrs. Comrie and Senter serve as Class I directors for an initial one-
year term expiring in 1997. Messrs. Cook and Fotheringham serve as Class II
directors for an initial two-year term expiring in 1998. Messrs. Mark C.
Demetree and Fillat serve as Class III directors for an initial three-year term
expiring in 1999.
As a condition to the CommcoCCC Acquisition, the Company will elect Mr.
Murray as a Class III director of the Company.
PROMOTERS OF TELECOM AND THE COMPANY
Landover Holdings Corporation ("LHC") and Laurence S. Zimmerman could be
deemed promoters of Telecom and the Company. See "Certain Transactions --
Organization of Telecom," "-- LHC Purchase Agreement" and "-- LHC Agreements."
Mr. Zimmerman served as a director of the Company from June to November 1996,
and as a director of Telecom from May 1995 to November 1996. Since 1985, Mr.
Zimmerman has been President, founder and beneficial owner of LHC. LHC is a
private investment firm with interests in wireless cable, wireless telephone,
cellular, 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. Mr. Zimmerman may attend
meetings of the Board of Directors as an observer, at the invitation of the
Board of Directors. See "Principal Stockholders -- Voting Trust Agreement."
DIRECTOR COMPENSATION
Directors who are not employees of the Company 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
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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 May 1996, the Company adopted the Directors Plan (as defined) which
provides for automatic grants of options to purchase an aggregate of 75,000
shares of Common Stock to non-employee directors of the Company. See "-- Stock
Option Plans." As of January 14, 1997, options to purchase an aggregate of
19,200 shares at exercise prices ranging from $11.25 to $15.00, have been
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. Cook, Demetree and Fillat currently 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
directs the Company to pay 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. Demetree, Fillat and Fotheringham currently serve on the
Compensation Committee.
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.
Cook and Fillat currently 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.
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EXECUTIVE COMPENSATION
The following table sets forth all compensation received by (i) the
Company's Chief Executive Officer and (ii) the four highest-paid executive
officers of the Company other than the Company's Chief Executive Officer
(collectively, the "Named Executive Officers"), for services rendered to the
Company in all capacities during the fiscal year ended December 31, 1996.
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 $ 250,000 -- -- $ 9,600(1)
Steven D. Comrie, President and Chief Operating
Officer 197,500 -- -- 9,600(1)
W. Theodore Pierson, Jr., Executive Vice President 186,107(2) -- -- --
Thomas A. Grina, Executive Vice President and Chief
Financial Officer 122,190(3) -- 181,818 29,800(1)(4)
James D. Miller, Senior Vice President, Sales and
Marketing 135,000 -- 36,364 6,200(1)
</TABLE>
- ------------------------------
(1) Automobile reimbursement benefits equal to $9,600 for each of Messrs.
Fotheringham and Comrie, $4,800 for Mr. Grina and $6,200 for Mr. Miller.
(2) The Company paid Pierson & Burnett, L.L.P., of which Mr. Pierson is a
partner, approximately $520,000 for services rendered to the Company in
1996.
(3) Reflects compensation for a partial year. See "-- Employment and Consulting
Agreements."
(4) The Company reimbursed approximately $25,000 of moving expenses.
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OPTION GRANTS. The following table sets forth certain information regarding
stock option grants made to the Named Executive Officers during the fiscal year
ended December 31, 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS (2)
------------------------------------------------------ POTENTIAL REALIZABLE VALUE
NUMBER OF PERCENT OF AT ASSUMED ANNUAL RATES OF
SECURITIES TOTAL OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM (1)
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION --------------------------
NAME GRANTED FISCAL YEAR SHARE DATE 5% 10%
- ----------------------------- ------------ --------------- ----------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas A. Grina 109,091 25.1% $ 17.1875 4/25/04 $ 432,927 $ 1,341,934
72,727 16.7% 17.1875 10/11/01 325,270 992,323
James D. Miller 36,364 8.4% 17.1875 10/11/01 162,635 496,161
</TABLE>
- ------------------------------
(1) The potential realizable value is calculated based on the term of the
option at its time of grant. 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 exercise prices
for the options granted expiring through April 25, 2004 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 and who considered such placements as
well as comparable market transactions and other relevant factors specific
to the placements (such as underlying security interest and liquidity). The
exercise prices for the options granted expiring October 11, 2004, were
determined by the Option Committee, which considered the expected price of
the Common Stock in the Common Stock Offering. 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, and in the case of the options
expiring through April 25, 2004, 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, 1996 of shares underlying unexercised options held by each of the
Named Executive Officers. As of December 31, 1996, 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 172,525 102,635 $ 1,660,657 $ 987,923
Thomas A. Grina 36,364 145,454 $ -- $ --
James D. Miller 7,273 47,273 $ 48,780 $ 73,167
</TABLE>
- ------------------------------
(1) Based on the last sales price of the Company's Common Stock reported on the
Nasdaq National Market on December 31, 1996 of $11.25 per share, less the
exercise price payable upon exercise of such options.
STOCK OPTION PLANS
EQUITY INCENTIVE PLAN.
The Equity Incentive Plan was adopted by the Company on May 30, 1996 and
amended on October 11, 1996 and approved by the stockholders on June 25, 1996
and October 14, 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 1,400,000 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 300,000. 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 defined. 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 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.
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<PAGE>
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 (each, a "change in
control" under the Equity Incentive Plan), 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 such 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.
GRANTS. Mr. Comrie has been granted NQSOs expiring on various dates through
June 17, 2005 to purchase 275,160 shares of Common Stock at a price of $1.6244
per share. Of the NQSOs, 172,525 are currently exercisable, and 40,724 will
become exercisable on July 17, 1997 and up to an additional 61,911 shares (the
"Additional Shares") will become exercisable on June 17, 2000. The vesting of
NQSOs to purchase 20,637 Additional Shares will be accelerated in each year
based upon the attainment of certain performance goals as determined by the
Board of Directors. In accordance with such program, the vesting of NQSOs to
purchase 20,637 Additional Shares was accelerated in December 1996. 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 109,091 shares of Common Stock at a price of $17.1875 per
share. The NQSOs are subject to vesting
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over a three-year period, of which 36,364 are fully vested and currently
exercisable. NQSOs to purchase 72,727 shares will become exercisable on April
26, 1999; however, the vesting of 36,364 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. All of the foregoing options will be fully vested,
notwithstanding the attainment of performance goals, on April 26, 1999. In
addition, Mr. Grina has been granted NQSOs expiring on various dates through
October 11, 2005 to purchase 72,727 shares of Common Stock at a price of
$17.1875 per share. These NQSOs vest at a rate of 25% on each anniversary of the
date of grant commencing October 14, 1997. In addition, all of his options
become immediately exercisable, without regard to the vesting period, upon a
change of control under 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
18,182 shares of Common Stock at a price of $4.543 per share. The NQSOs vest at
a rate of 20% on each anniversary of the date of grant. In addition, Mr. Miller
has been granted NQSOs expiring on various dates through October 11, 2005 to
purchase 36,364 shares of Common Stock at a price of $17.1875 per share. These
NQSOs vest at a rate of 25% on each anniversary of the date of grant commencing
October 14, 1997.
As of December 31, 1996, options to purchase 816,970 shares were outstanding
under the Incentive Plan.
THE DIRECTORS PLAN.
On May 30, 1996, the Company adopted the 1996 Non-Employee Directors
Automatic Stock Option Plan, as amended (the "Directors Plan"), which provides
for the automatic grant of stock options to non-employee directors to purchase
up to an aggregate of 75,000 shares. Under the Directors Plan, options to
acquire 2,200 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 immediately after
the date of the Common Stock Offering received, 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 2,600 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. Initial options to purchase an aggregate of
7,800 shares at an exercise price equal to $15.00 per share, the initial
offering price of the Common Stock in the Common Stock Offering, and initial
options to purchase 2,600 shares at an exercise price equal to $12.625 per
share, the market price of the Common Stock on December 23, 1996, have been
granted to non-employee directors under the Directors Plan. Annual options to
purchase an aggregate of 6,600 shares at an exercise price equal to $11.25 per
share, the market price of the Common Stock on December 31, 1996, have been
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
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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 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 January 14, 1997,
regarding the beneficial ownership of the Company's Common Stock by (i) each
person known by the Company to own beneficially more than five percent of the
outstanding shares of the Company's Common Stock, (ii) the directors, director
designate and executive officers of the Company and (iii) all executive officers
and directors as a group.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
----------------------------------
NAME NUMBER PERCENT
- ------------------------------------------------------------------------------ -------------------- ------------
<S> <C> <C>
Advent International Corporation (1).......................................... 1,321,511 9.7%
Ameritech Development Corp. (2)............................................... 681,323 5.0
High Sky Inc. (3)............................................................. 672,219 5.0
Landover Holdings Corporation (4)............................................. 2,941,165 21.7
Steven D. Comrie (5).......................................................... 172,525 1.3
James C. Cook (6)............................................................. 60,168 *
Mark C. Demetree (7).......................................................... 398,541 2.9
Andrew I. Fillat (8).......................................................... 7,327 *
Vernon L. Fotheringham (9).................................................... 1,289,114 9.5
James B. Murray, Jr. (10)..................................................... 135,000 1.4%
Alan Z. Senter (11)........................................................... 4,600 *
Thomas A. Grina (12).......................................................... 36,364 *
James D. Miller (13).......................................................... 7,273 *
W. Theodore Pierson, Jr. (14)................................................. 856,512 6.3
Richard A. Shields, Jr. (15).................................................. 5,090 *
All executive officers and directors as a group
(5)(6)(7)(8)(9)(11)(12)(13)(14)(15)(16)...................................... 2,837,514 20.6%
</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%.
(1) Includes 1,189,673 shares, 1,149 shares and 58,143 shares of Common Stock
and 55,239 shares, 58 shares and 2,703 shares of Common Stock issuable upon
exercise of March Bridge Warrants, respectively, owned by Global Private
Equity II, L.P., Advent International Investors 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"). Also includes 13,868 shares and 678 shares of Common
Stock issuable upon exercise of September Bridge Warrants, respectively,
owned by Global Private Equity II, L.P. and Advent Partners, L.P. Mr. Fillat
is an officer of Advent. The address of Advent and each of the Advent
Partnerships is 101 Federal Street, Boston, Massachusetts 02110.
(2) Includes 60,000 shares and 21,818 shares of Common Stock issuable upon
exercise of the March Bridge Warrants and September Bridge Warrants,
respectively. The address of Ameritech is 30 South Wacker Drive, Chicago,
Illinois 60601. See "Certain Transactions -- Ameritech Financing; Ameritech
Strategic Distribution Agreement."
(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 545,048 and 127,171 shares of Common Stock owned by High Sky and
High Sky II, respectively. Also includes 43,335 and 10,835 shares of Common
Stock held by High Sky and High Sky II, respectively, subject to options
owned by SERP and its designees. See "Certain Transactions -- SERP
Agreement." High Sky Inc.'s address is c/o Frank S. Phillips Company, 6106
MacArthur Blvd., Bethesda, Maryland 20816.
(4) All of such securities are held in the LHC Voting Trust (as defined) by
trustees who are directors of the Company and independent of LHC, Mr.
Zimmerman and members of his family. Includes 13,636 shares and 2,036 shares
of Common Stock issuable upon exercise of Indemnity Warrants and September
Bridge Warrants, respectively. Does not include 36,364 shares of Common
Stock beneficially owned by the wife and 36,364 shares of Common Stock
beneficially owned by a family trust of Laurence S. Zimmerman, of which
shares LHC and Mr. Zimmerman disclaim beneficial ownership. Does not reflect
the contingent effect of the Series D Option covering 145,685 shares. LHC is
controlled by Mr. Zimmerman. LHC's address is 667 Madison Avenue, New York,
New York 10021. See "-- Voting Trust Agreement" and "Certain Transactions --
Series D Preferred Stock Issuance."
(5) Consists of 172,525 shares of Common Stock currently issuable upon exercise
of options. Does not include 102,635 shares of Common Stock issuable upon
exercise of the non-vested portion of options. See "Management -- Stock
Option Plans."
(6) Includes 8,000 shares of Common Stock issuable upon exercise of March
Bridge Warrants and 4,800 shares of Common Stock issuable upon exercise of
options granted under the Directors Plan.
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(7) Includes 4,800 shares of Common Stock beneficially issuable upon exercise
of options granted under the Directors Plan. Does not include 56,000 shares
and 2,909 shares of Common Stock issuable upon exercise of March Bridge
Warrants and September Bridge Warrants, respectively, 59,090 shares of
Common Stock issuable upon exercise of Indemnity Warrants or [1,534,964]
shares of Common Stock beneficially owned in each case by members of Mr.
Demetree's family or a trust for their benefit, of which he disclaims
beneficial ownership. Mr. Demetree's address is 505 Lancaster Street, #8AB,
Jacksonville, FL 32204.
(8) Includes 4,800 shares of Common Stock issuable upon exercise of options
granted under the Directors Plan. Mr. Fillat disclaims beneficial ownership
of the shares of Common Stock and shares of Common Stock issuable upon
exercise of March Bridge Warrants and September Bridge Warrants held by the
Advent Partnerships, except for 2,495 shares of Common Stock, and 3 shares
and 29 shares issuable upon exercise of March Bridge Warrants and September
Bridge Warrants, respectively.
(9) Includes 37,917 shares of Common Stock subject to options owned by SERP and
its designees. See "Certain Transactions -- SERP Agreement."
(10) Mr. Murray is expected to become a director upon consummation of the
CommcoCCC Acquisition. He is a managing director of Columbia Capital
Corporation, which beneficially owns 195,000 shares and, upon consummation
of the CommcoCCC Acquisition, will beneficially own 3,462,787 shares of
Common Stock, including 46,630 shares and 15,543 shares issuable upon
exercise of the CommcoCCC Warrants and the September Bridge Warrants,
respectively. Upon becoming a director, he will receive an option to
purchase 2,600 shares of Common Stock under the Directors Plan.
(11) Includes 2,600 shares of Common Stock issuable upon exercise of options
granted under the Directors Plan.
(12) Includes 36,364 shares of Common Stock currently issuable upon exercise of
options.
(13) Includes 7,273 shares of Common Stock currently issuable upon exercise of
an option.
(14) Includes 16,252 shares of Common Stock subject to options owned by SERP and
its designees. 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.
(15) Includes 5,090 shares of Common Stock currently issuable upon exercise of
an option.
(16) Does not include 2,941,165 shares of Common Stock held in the LHC Voting
Trust by trustees, all of whom are directors of the Company of which such
trustees disclaim beneficial ownership. See "-- Voting Trust Agreement."
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 3,462,787 and
2,878,577 shares, respectively, of Common Stock, including 46,630 and 40,643
shares, respectively, issuable upon exercise of the CommcoCCC Warrants and
15,543 and 13,548 shares, respectively, issuable upon exercise of the September
Bridge Warrants, constituting 17.7% and 14.7%, respectively, of the Company's
Common Stock. Assuming the consummation of the CommcoCCC Acquisition as of the
date of this Prospectus, the Company would have 19,559,420 shares of Common
Stock outstanding.
VOTING TRUST AGREEMENT
Pursuant to a Voting Trust Agreement, dated November 5, 1996, LHC and the
wife and a trust for the benefit of the family of Laurence S. Zimmerman
deposited all of their shares of ART Common Stock in trust (the "LHC Voting
Trust") with Messrs. Demetree, Fillat and Fotheringham with irrevocable
instructions to vote such shares on all matters submitted to a vote of the
stockholders of the Company in proportion to, or in certain cases, consistent
with the majority of, the vote of other stockholders of the Company. The voting
trust will expire on November 5, 2006, but is subject to early termination in
the event of (i) a business combination in which 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 Mr. 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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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 constitutes an aggregate of 2,145,626
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 545,048 shares and 127,171 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 133,864 shares of Common Stock. Of these
133,864 shares, 5,701 shares are subject to options owned by Southeast Research
Partners and its designees. 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
3,641,111 shares and 2,650,414, 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 160,637 shares and 53,546 shares of Common Stock,
respectively. LHC is controlled by Laurence S. Zimmerman, a former director of
the Company, and Hedgerow is controlled by Matthew C. Gove, also a former
director of the Company. From May 1994 until August 1996 Hedgerow and, from May
1994 until September 1996, Toro provided management and strategic consulting
services to LHC, including services relating to analysis and negotiation of
acquisitions.
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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 733,711 and 662,495 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 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 converted into 169,581 shares of Common Stock in
November 1996). This option was exercised in November 1995. Mark C. Demetree is
a director and J.C. Demetree, Jr. was formerly a director of the Company. 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 converted into 1,918,705
shares of Common Stock in November 1996) for an aggregate of $946,600, and LHC
purchased 35,873 shares of such Series A preferred stock (which converted into
169,581 shares of Common Stock in November 1996) 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 converted into 500,254 shares of Common Stock in
November 1996) for an aggregate of $842,400. E1 purchased 13,797 shares of
Telecom Series A preferred stock (which converted into 65,222 shares of Common
Stock in November 1996) for an aggregate of $60,000 and 8,856 shares of Telecom
Series B preferred stock (which converted into 41,865 shares of Common Stock in
November 1996) for an aggregate of $38,300. E2-3 purchased an aggregate of 7,363
shares of Telecom Series C preferred stock (which converted into 34,807 shares
of Common Stock in November 1996) for an aggregate of $112,700.
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Control of E2-2 was transferred to an affiliate of J.C. Demetree, Jr. and Mark
C. Demetree in August 1996. All of the Landover Partnerships were liquidated in
November 1996. See "Principal Stockholders."
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 converted into 1,100,632
shares of Common Stock in November 1996). 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. This
management consulting agreement was terminated in November 1996. In November
1996, the Company paid LHC an aggregate of $300,000 in connection with services
previously rendered under the management consulting agreement.
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, the other
parties to such agreement agreed to grant SERP options to purchase, for an
aggregate consideration of $210,000, 114,040 shares of Common Stock 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 converted into 291,390 shares of Common Stock in November
1996) for $2.0 million in a private placement. Telecom simultaneously redeemed
293,791 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 ("Series D Option")
to purchase 145,685 shares of Telecom common stock owned by LHC at a nominal
price.
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 Common Stock Offering, (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 ART Common Stock (upon
consummation of the Common
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Stock Offering) of the Series A, B, C, D, E and F preferred stock (originally
issued by Telecom and converted to ART preferred stock in the Merger) 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") which converted into
231,131 shares of Common Stock in November 1996. 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 318,959 shares of Common
Stock of the Company exercisable at a nominal price 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." On December 5, 1996, Ameritech exercised the
Ameritech Warrant to purchase 318,374 shares of Common Stock.
MARCH BRIDGE FINANCING
On March 8, 1996, Telecom entered into a financing (the "March Bridge
Financing") pursuant to which it issued $5.0 million of 10% unsecured notes due
in 1998 (the "March Bridge Notes") and five-year warrants to purchase up to an
aggregate of 400,000 shares of Telecom common stock at a price of $17.1875 per
share (the "March Bridge Warrants") to private investors including (i)
affiliates of J.C. Demetree, Jr. and Mark C. Demetree, then directors of the
Company, (ii)the Advent Partnerships and (iii) Ameritech, who invested $700,000,
$725,000 and $750,000, respectively, in the March Bridge Notes and March Bridge
Warrants. See "Principal Stockholders." The March Bridge Notes were repaid with
the proceeds of the Common Stock Offering.
EQUIPMENT FINANCING
On April 1, 1996 CRA, Inc. ("CRA") provided the Company with $2.5 million 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, then 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 $2.5
million 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 118,181
shares of Common Stock (the "Indemnity Warrants") on terms substantially similar
to the March Bridge Warrants as compensation for such indemnity. LHC has
assigned Indemnity Warrants to purchase 45,455 shares of Common Stock to a
consultant to LHC. The letter of credit provided by the Indemnitors was returned
to the Indemnitors in December 1996.
SEPTEMBER BRIDGE FINANCING
In August 1996, the Company received commitments for $3.0 million of 14.75%
unsecured notes due March 1998 (the "September Bridge Financing"). Such notes
(the "September Bridge Notes") were funded from August 1996 to October 1996. In
October 1996, the Company also received a commitment for an additional $1.0
million. The Company also issued five-year warrants to purchase up to an
aggregate of 116,363 shares of Common Stock at a price of $17.1875 per share
($15.00 after giving
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effect to anti-dilution adjustment) (the "September Bridge Warrants") to private
investors who participated in the financing, including the Advent Partnerships,
Ameritech, affiliates of CommcoCCC, LHC and affiliates of J.C. Demetree, Jr. and
Mark C. Demetree. The September Bridge Warrants are not exercisable for a period
of one year following their date of issuance. The September Bridge Notes were
repaid with the proceeds of the Common Stock Offering.
PIERSON & BURNETT TRANSACTIONS
W. Theodore Pierson, Jr., Executive Vice President 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, 1996, the Company paid Pierson & Burnett, L.L.P. $520,000 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 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
In early 1996 ART entered into a memorandum of understanding with American
Wireless Corporation ("American Wireless") to jointly develop a quick-to-market
38 GHz receive only radio. Discoveries made as a result of this initial directed
work served to define ART's requirements for a series of low cost 38 GHz
transmit/receive link equipment, ranging from 4 x DS-1 to DS-3 payload capacity.
In response to this requirement American Wireless did extensive design,
performance, and cost modelling that has enabled ART to accelerate its planned
implementation of more cost effective shared network topologies. The Company has
funded approximately $400,000 of research and development costs with American
Wireless related to the development of the 38 GHz receive only radio. Vernon L.
Fotheringham, the Chairman of the Company, is a former director and a 3.0%
stockholder of American Wireless. Mr. Fotheringham has recused himself in all
negotiations regarding agreements between the Company and American Wireless.
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 6,000,000 shares of Common
Stock, or 28.5% of the Company on a fully diluted basis after giving effect to
the Common Stock Offering. 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 18,182 shares of Common Stock at a price of $24.75 per share. In
connection with an October 1996 amendment to the CommcoCCC Agreement, the
Company modified the terms of such warrants, reduced the exercise price of such
warrants to $17.1875 ($15.00 after giving effect to anti-dilution adjustment)
per share and increased the number of shares issuable upon exercise thereof to
87,273 shares and increased the interest rate of the CommcoCCC Notes to 14.75%
and extended the maturity date thereof to December 31, 1996. The CommcoCCC
Financing was secured by a security interest in all of the assets of the
Company, including a pledge of the Company's stock in Telecom. The CommcoCCC
Financing was repaid with the proceeds of the Common Stock Offering. As a
condition to the CommcoCCC Acquisition, the Company will elect James B. Murray,
Jr. as a Class III director of the Company. See "Management -- Executive
Officers and Directors."
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DESCRIPTION OF UNITS
Each Unit offered hereby consists of $1,000 principal amount at maturity of
Notes and one Warrant, each Warrant initially representing the right to purchase
9.024 shares of Common Stock. The Notes and the Warrants will not be separable
until the earliest to occur of (i) , 1997, (ii) a Change in Control
of the Company and (iii) such earlier date as may be determined by the
Underwriters (the "Separation Date").
DESCRIPTION OF NOTES
The Notes will be issued under an Indenture (the "Indenture") between the
Company and The Bank of New York, as trustee (the "Trustee"). The Notes will be
secured by a portion of the proceeds of the Unit Offering pursuant to the pledge
and escrow agreement, dated as of the Issue Date (the "Pledge Agreement"),
between the Company and The Bank of New York, as collateral agent (the
"Collateral Agent"). Copies of the form of the Indenture and the Pledge
Agreement have been filed as exhibits to the Registration Statement of which
this Prospectus is a part. The following summary of the material provisions of
the Indenture and the Pledge Agreement does not purport to be complete and is
subject to, and is qualified in its entirety by reference to, the Trust
Indenture Act of 1939, as amended (the "Trust Indenture Act"), and to all of the
provisions of the Indenture and the Pledge Agreement, including the definitions
of certain terms therein and those terms made a part of the Indenture by
reference to the Trust Indenture Act, as in effect on the date of the Indenture.
The definitions of certain terms used in the following summary are set forth
below under "-- Certain Definitions."
As of the date of the Indenture, all of the Company's Subsidiaries will be
Restricted Subsidiaries, other than foreign Subsidiaries that the Company may
establish prior to such date. However, under certain circumstances, the Company
will be able to designate future Subsidiaries as Unrestricted Subsidiaries.
Unrestricted Subsidiaries will not be subject to many of the restrictive
covenants set forth in the Indenture.
GENERAL
The Notes will be unsecured senior obligations of the Company, will be
limited to $125.0 million aggregate principal amount and will mature on
, 2007. Cash interest on the Notes will be payable, at a rate of
% per annum, semi-annually in arrears on and of each
year (each, an "Interest Payment Date"), commencing , 1997, to the
holders of record of Notes at the close of business on the and
immediately preceding such Interest Payment Date. Interest on the
Notes will accrue from the most recent Interest Payment Date to which interest
has been paid or, if no interest has been paid, from the Issue Date. Interest
will be computed on the basis of a 360-day year of twelve 30-day months.
Interest on overdue principal and, to the extent permitted by law, on overdue
installments of interest will accrue at the rate of interest borne by the Notes.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes will be exchangeable and transferable, at the office or agency of
the Company in the City of New York maintained for such purposes (which
initially will be the office of the Trustee); PROVIDED, HOWEVER, the payment of
interest may be made by check mailed to the address of the Person entitled
thereto as shown on the security register. The Notes will be issued only in
fully registered form without coupons and only in denominations of $1,000 and
any integral multiple thereof. No service charge will be made for any
registration of transfer, exchange or redemption of Notes, but the Company may
require payment in certain circumstances of a sum sufficient to cover any tax or
other governmental charge that may be imposed in connection therewith.
SECURITY
The Indenture will provide that upon the closing of the Offering, the
Company will be required to purchase, and pledge to the Collateral Agent for the
benefit of the holders of the Notes, the Pledged
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Securities in such amount as will be sufficient upon receipt of scheduled
interest and principal payments of such securities, in the opinion of a
nationally recognized firm of independent public accountants selected by the
Company, to provide for payment in full of the first six scheduled interest
payments due on the Notes. The Company expects to use approximately $44.3
million of the net proceeds of the Unit Offering to acquire the Pledged
Securities; however, the precise amount of securities to be acquired will depend
upon the interest rates on government securities prevailing at the time of the
closing of the Unit Offering. The Pledged Securities will be pledged by the
Company to the Collateral Agent for the benefit of the holders of Notes pursuant
to the Pledge Agreement and will be held by the Collateral Agent in the Pledge
Account. Pursuant to the Pledge Agreement, immediately prior to an Interest
Payment Date on the Notes, the Company may either deposit with the Collateral
Agent from funds otherwise available to the Company cash sufficient to pay the
interest scheduled to be paid on such date or the Company may direct the
Collateral Agent to release from the Pledge Account proceeds sufficient to pay
interest then due. In the event that the Company exercises the former option,
the Pledge Agreement provides that the Company may thereafter direct the
Collateral Agent to release to the Company proceeds or the Pledged Securities
from the Pledge Account in like amount. A failure by the Company to pay interest
on the Notes in a timely manner through , 2000 will constitute an
immediate Event of Default under the Indenture, with no grace or cure period.
Interest earned on the Pledged Securities will be added to the Pledge
Account. In the event that the funds or Pledged Securities held in the Pledge
Account exceed (giving no effect to any excess created by the substitution of
Temporary Cash Investments for the Government Securities originally pledged as
collateral) the amount sufficient, in the opinion of a nationally recognized
firm of independent public accountants selected by the Company, to provide for
payment in full of the first six scheduled interest payments due on the Notes
(or, in the event an interest payment or payments have been made, an amount
sufficient to provide for payment in full of any interest payment remaining, up
to and including the sixth scheduled interest payment), the Collateral Agent
will be permitted to release to the Company at the Company's request any such
excess amount. The Notes will be secured by a first priority security interest
in the Pledged Securities and in the Pledge Account and, accordingly, the
Pledged Securities and the Pledge Account will also secure repayment of the
principal amount of the Notes to the extent of such security. At any time while
the Pledge Agreement is in force, the Pledge Agreement allows the Company to
substitute Temporary Cash Investments of the types described in clauses (i)
through (iv) in the definition thereof for the U.S. government securities
originally pledged as collateral; PROVIDED, HOWEVER, Temporary Cash Investments
so substituted must have a fair market value (measured at the date of
substitution), in the opinion of a nationally recognized firm of independent
public accountants selected by the Company, at least equal to 125.0% of the
amount of any of the first six scheduled interest payments on the Notes that are
unpaid (or the PRO RATA portion of such interest payments equal to the
percentage of such interest payments to be secured by such Temporary Cash
Investments) as of the date such Temporary Cash Investments are proposed to be
substituted as security for the Company's obligation under the Pledge Agreement.
Under the Pledge Agreement, assuming that the Company makes the first six
scheduled interest payments on the Notes in a timely manner, all of the Pledged
Securities will have been released from the Pledge Account and thereafter the
Notes will be unsecured.
REDEMPTION
OPTIONAL REDEMPTION
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after , 2002, upon not less than 30 nor more
than 60 days' notice, at the redemption prices
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(expressed as percentages of principal amount) set forth below, plus accrued and
unpaid interest, if any, to the date of redemption, if redeemed during the
12-month period beginning on of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
-------------------------- ------------
<S> <C>
2002...................................................... %
2003...................................................... %
2004...................................................... %
2005 and thereafter....................................... 100.000%
</TABLE>
Notwithstanding the foregoing, in the event of a sale by the Company of its
Common Stock in one or more Equity Offerings or Investments by one or more
Strategic Equity Investors on or prior to , 2000 (other than in
connection with a Change in Control of the Company), the Company may, at its
option, use all or a portion of the net proceeds thereof to redeem up to a
maximum of 25% of the initially outstanding aggregate principal amount of the
Notes at a redemption price equal to % of the principal amount thereof, plus
accrued and unpaid interest thereon, if any, to the redemption date; PROVIDED
that not less than 75% of the initially outstanding aggregate principal amount
of the Notes remain outstanding following such redemption. Any such redemption
must be effected upon not less than 30 nor more than 60 days' notice given
within 30 days after any such Equity Offering or sale to a Strategic Equity
Investor.
MANDATORY REDEMPTION
The Company is not required to make any mandatory sinking fund payments in
respect of the Notes. However, (i) upon the occurrence of a Change in Control,
the Company is obligated to make an offer to purchase all outstanding Notes at a
price of 101% of the principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the date of purchase, and (ii) the Company may be obligated
to make an offer to purchase Notes with the Net Cash Proceeds of certain Asset
Sales at a price of 100% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the date of purchase. See "-- Certain Covenants --
Change in Control" and "-- Disposition of Proceeds of Asset Sales."
SELECTION; EFFECT OF REDEMPTION NOTICE
In the case of a partial redemption, selection of the Notes for redemption
will be made PRO RATA, by lot or by such other method as the Trustee in its sole
discretion deems fair and appropriate or in such manner as complies with the
requirements of the principal national securities exchange, if any, on which the
Notes being redeemed are listed. Upon giving of a redemption notice, interest on
the Notes called for redemption will cease to accrue from and after the date
fixed for redemption (unless the Company defaults in providing the funds for
such redemption) and, upon redemption on such redemption date, such Notes will
cease to be outstanding.
RANKING
The Notes will represent senior obligations of the Company and will be
unsecured, except for the pledge by the Company of the Pledged Securities. The
Notes will rank PARI PASSU in right of payment with any future unsecured, senior
Indebtedness of the Company and will rank senior in right of payment to all
existing and future subordinated indebtedness of the Company. At September 30,
1996, on a pro forma basis after giving effect to the Common Stock Offering, the
Offering and the application of the net proceeds therefrom, the aggregate
principal amount of indebtedness of the Company (excluding the Notes) was
approximately $3.1 million, which consisted of the EMI Note and the Equipment
Note, all of which ranked PARI PASSU with the Notes. However, $1.6 million of
such indebtedness constituted secured indebtedness which will effectively rank
senior to the Notes with respect to the assets securing such indebtedness.
Although the Indenture will limit the ability of the Company and its
subsidiaries to incur additional indebtedness, including senior indebtedness,
the Indenture will permit the Company to incur a substantial amount of secured
indebtedness, including vendor indebtedness and indebtedness under the Credit
Facility, which, if incurred, will effectively rank senior to the Notes
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with respect to the assets securing such indebtedness. In addition, the
Indenture will permit the subsidiaries of the Company (including any subsidiary
holding all or any part of the Company's FCC licenses and authorizations) to
guarantee the indebtedness of the Company under the Credit Facility on a secured
basis (consistent with applicable FCC rules), which guarantees and security
interests would effectively rank senior in right of payment to the Notes. See
"-- Certain Covenants," "Risk Factors -- Possible Incurrence of Substantial
Secured Indebtedness" and "Description of Certain Indebtedness."
CERTAIN COVENANTS
LIMITATION ON INDEBTEDNESS
The Indenture will provide that the Company will not, and will not permit
any of its Subsidiaries to, Incur any Indebtedness (including Acquired Debt);
PROVIDED that the Company may Incur Indebtedness (including Acquired Debt) if,
after giving effect to the Incurrence of such Indebtedness and the receipt and
application of the proceeds therefrom, the Indebtedness to EBITDA Ratio would be
greater than zero and less than 5 to 1.
The foregoing provisions will not apply to:
(i)
Indebtedness of the Company outstanding at any time in an aggregate
principal amount not to exceed $100.0 million, less any amount of
Indebtedness permanently repaid as provided under the "Disposition of Proceeds
of Asset Sales" covenant described below (other than any such permanent
reduction of the Indebtedness under clause (xiii) hereof; PROVIDED, HOWEVER,
that the aggregate principal amount of Indebtedness outstanding pursuant to
clauses (i) and (xiii) hereof shall not exceed $150.0 million at any time;
(ii)
Indebtedness of any of the Company's Restricted Subsidiaries owing to the
Company or another Restricted Subsidiary; PROVIDED, HOWEVER, that (A) any
subsequent issuance or transfer of Capital Stock that results in any such
Indebtedness being held by a Person other than the Company or a Restricted
Subsidiary and (B) any sale or other transfer of any such Indebtedness to a
Person that is not the Company or a Restricted Subsidiary shall be deemed, in
each case, to constitute an Incurrence of such Indebtedness by the Company;
(iii)
Indebtedness issued in exchange for, or the net proceeds of which are
used to refinance or refund, then outstanding Indebtedness, other than
Indebtedness Incurred under clause (i), (ii), (v), (vi) or (viii) of this
paragraph, and any refinancings thereof in an amount not to exceed the amount so
refinanced or refunded (plus premiums, accrued interest, fees and expenses);
PROVIDED that Indebtedness the proceeds of which are used to refinance or refund
the Notes or Indebtedness that is PARI PASSU with, or subordinated in right of
payment to, the Notes shall only be permitted under this clause (iii) if (A) in
case the Notes are refinanced in part or the Indebtedness to be refinanced is
PARI PASSU with the Notes, such new Indebtedness (by its terms or by the terms
of any agreement or instrument pursuant to which such new Indebtedness is
outstanding) is PARI PASSU with, or is expressly made subordinate in right of
payment to, the remaining Notes, (B) in case the Indebtedness to be refinanced
is subordinated in right of payment to the Notes, such new Indebtedness, by its
terms or by the terms of any agreement or instrument pursuant to which such new
Indebtedness is outstanding, is expressly made subordinate in right of payment
to the Notes at least to the extent that the Indebtedness to be refinanced is
subordinated to the Notes, and (C) such new Indebtedness, determined as of the
date of Incurrence of such new Indebtedness, does not have a Stated Maturity
prior to the Stated Maturity of the Indebtedness to be refinanced or refunded,
and the Average Life of such new Indebtedness is at least equal to the remaining
Average Life of the Indebtedness to be refinanced or refunded; and PROVIDED
FURTHER that in no event may Indebtedness of the Company be refinanced by means
of any Indebtedness of any Restricted Subsidiary of the Company pursuant to this
clause (iii);
(iv)
Indebtedness (A) in respect of performance, surety or appeal bonds
provided in the ordinary course of business; and (B) arising from
agreements providing for indemnification, adjustment of
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purchase price or similar obligations, or from Guarantees or letters of credit,
surety bonds or performance bonds securing any obligations of the Company or any
of the Restricted Subsidiaries pursuant to such agreements, in any case Incurred
in connection with the disposition of any business, assets or Restricted
Subsidiary of the Company (other than Guarantees of Indebtedness Incurred by any
Person acquiring all or any portion of such business, assets or Restricted
Subsidiary of the Company for the purpose of financing such acquisition), in a
principal amount not to exceed the gross proceeds actually received by the
Company or any Restricted Subsidiary in connection with such disposition;
(v)
without duplication of clause (viii) hereof, Indebtedness of the Company
not to exceed, at any one time outstanding, two TIMES an amount equal to
(A) the aggregate proceeds (less appropriate fees and expenses) (which proceeds
may consist of cash, Capital Stock of an entity that as a result of such
transaction becomes a Restricted Subsidiary of the Company, or
Telecommunications Assets which in connection with such transaction become held
by the Company or a Restricted Subsidiary of the Company, and the value of which
proceeds shall be the fair market value thereof as determined in good faith by
the Board, which in all events shall make any appropriate adjustments on account
of any Indebtedness associated with such Capital Stock or Telecommunications
Assets in making such determination) received by the Company from the issuance
and sale of its Capital Stock (other than Redeemable Stock and Preferred Stock
that provides for the payment of dividends in cash) after the Issue Date MINUS
(B) the fair market value of any Directed Investments made with the proceeds of
such issuances or sales; PROVIDED that such Indebtedness (x) does not have a
Stated Maturity prior to the Stated Maturity of the Notes and has an Average
Life longer than the Notes and (y) is unsecured and is expressly subordinated in
right of payment to the Notes;
(vi)
Indebtedness to the extent such Indebtedness is secured by Liens
permitted under clause (xxiv) of the definition of "Permitted Liens;"
(vii)
Indebtedness of the Company, to the extent the proceeds thereof are
immediately used to purchase Notes tendered in an Offer to Purchase made
as a result of a Change in Control;
(viii)
without duplication of clause (v) hereof, Indebtedness of the Company
Incurred in connection with the acquisition of (A) 38 GHz licenses or
authorizations through auctions conducted by the FCC or (B) other licenses or
authorizations through other spectrum auctions conducted by the FCC with respect
to other frequencies approved for microwave point-to-point transmissions, in an
amount not to exceed, at any one time outstanding, the greater of (1) $10.0
million and (2) an amount equal to the aggregate proceeds (less appropriate fees
and expenses) (which proceeds may consist of cash, Capital Stock of an entity
that as a result of such transaction becomes a Restricted Subsidiary of the
Company, or Telecommunications Assets which in connection with such transaction
become held by the Company or a Restricted Subsidiary of the Company, and the
value of which proceeds shall be the fair market value thereof as determined in
good faith by the Board, which in all events shall make any appropriate
adjustments on account of any Indebtedness associated with such Capital Stock or
Telecommunications Assets in making such determination) received by the Company
from the issuance and sale of its Capital Stock (other than Redeemable Stock and
Preferred Stock that provides for the payment of dividends in cash) after the
Issue Date MINUS the fair market value of any Directed Investments made with the
proceeds of such issuances or sales; PROVIDED that such Indebtedness (x) does
not have a Stated Maturity prior to the Stated Maturity of the Notes and has an
Average Life longer than the Notes and (y) is unsecured and is PARI PASSU or
subordinated in right of payment with the Notes;
(ix)
revolving credit Indebtedness of any Restricted Subsidiary Incurred
pursuant to a credit facility in an aggregate amount not to exceed, at
any one time outstanding, the greater of 62.5% and such greater percentage
permitted pursuant to such credit facility of the accounts receivable net of
reserves and allowances for doubtful accounts, determined in accordance with
GAAP, of such Restricted Subsidiary and its Restricted Subsidiaries (without
duplication); PROVIDED that such Indebtedness is not Guaranteed by the Company
or any of its other Restricted Subsidiaries;
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(x)
the Incurrence by the Company or any of its Restricted Subsidiaries of
Hedging Obligations that are Incurred for the purpose of fixing or
hedging interest rate risk with respect to any floating rate Indebtedness of the
Company or any Restricted Subsidiary, as the case may be, that is permitted by
the terms of the Indenture to be outstanding;
(xi)
the Incurrence by the Company's Unrestricted Subsidiaries of Non-Recourse
Debt, PROVIDED, HOWEVER, that if any such Indebtedness ceases to be
Non-Recourse Debt of an Unrestricted Subsidiary, such event shall be deemed to
constitute an incurrence of Indebtedness by a Restricted Subsidiary of the
Company;
(xii)
the Incurrence by Unrestricted Subsidiaries of Indebtedness to the
Company or any Restricted Subsidiary of the Company to the extent
permitted by the "Limitation on Restricted Payments" covenant;
(xiii)
Indebtedness of the Company in an aggregate principal amount not to
exceed $100.0 million Incurred pursuant to the Credit Facility less any
amount of Indebtedness under the Credit Facility permanently repaid as provided
under the "Disposition of Proceeds of Asset Sales" covenant described below;
PROVIDED, HOWEVER, that the aggregate principal amount of Indebtedness
outstanding pursuant to clauses (i) and (xiii) hereof shall not exceed $150.0
million at any time;
(xiv)
Guarantees by the Company's Restricted Subsidiaries of the Indebtedness
referred to in clause (xiii) above;
(xv)
Indebtedness of the Company existing on the Issue Date; and
(xvi)
Indebtedness of the Company represented by the Notes and the Indenture.
For purposes of determining compliance with this "Limitation on
Indebtedness" covenant, in the event that an item of Indebtedness meets the
criteria of more than one of the types of Indebtedness described in the above
clauses, the Company, in its sole discretion, shall classify such item of
Indebtedness and only be required to include the amount and type of such
Indebtedness in one of such clauses.
The Company will not, and will not permit any Restricted Subsidiary to,
Incur any Guarantee of Indebtedness of any Unrestricted Subsidiary.
The Indenture will provide that, notwithstanding the foregoing, ART
Licensing shall not Incur any Indebtedness or issue any Preferred Stock;
PROVIDED that ART Licensing may Incur Indebtedness of the type and in the amount
set forth in clause (xiv) of the second paragraph of this "Limitation on
Indebtedness" covenant.
LIMITATION ON RESTRICTED PAYMENTS
The Indenture will provide that the Company will not, and will not permit
any Restricted Subsidiary to, directly or indirectly, (i) declare or pay any
dividend or make any distribution on its or such Restricted Subsidiary's Capital
Stock (other than dividends or distributions payable solely in shares of its or
such Restricted Subsidiary's Capital Stock (other than Redeemable Stock) or in
options, warrants or other rights to acquire such shares of Capital Stock) other
than such Capital Stock held by the Company or any of its Restricted
Subsidiaries (and other than pro rata dividends or distributions on Common Stock
of Restricted Subsidiaries), (ii) repurchase, redeem, retire or otherwise
acquire for value any shares of Capital Stock (including options, warrants or
other rights to acquire such shares of Capital Stock) of the Company (other than
any such Capital Stock held by the Company or any Wholly Owned Restricted
Subsidiary of the Company), (iii) make any voluntary or optional principal
payment, or voluntary or optional redemption, repurchase, defeasance, or other
acquisition or retirement for value, of Indebtedness of the Company that is
subordinated in right of payment to the Notes or (iv) make any Investment, other
than a Permitted Investment, in any Person (such payments or any other actions
described in clauses (i) through (iv) being collectively "Restricted Payments")
if, at the time of, and after giving effect to, the proposed Restricted Payment:
(A) a Default or Event of Default shall have occurred and be continuing;
(B) except with respect to any Investment (other than an Investment
consisting of the designation of a Restricted Subsidiary as an
Unrestricted Subsidiary), the Company could not Incur at least $1.00 of
Indebtedness under the first paragraph of the "Limitation on Indebtedness"
covenant; and
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(C) the aggregate amount expended for all Restricted Payments (the amount
so expended, if other than in cash, to be determined in good faith by
the Board, whose determination shall be conclusive and evidenced by a
resolution of the Board) after the Issue Date shall exceed the sum of (1)
50% of the aggregate amount of the Adjusted Consolidated Net Income (or, if
the Adjusted Consolidated Net Income is a loss, MINUS 100% of such amount)
(determined by excluding income resulting from transfers of assets by the
Company or a Restricted Subsidiary to an Unrestricted Subsidiary) accrued on
a cumulative basis during the period (taken as one accounting period)
beginning on the first day of the fiscal quarter immediately following the
Issue Date and ending on the last day of the last fiscal quarter preceding
the date for which reports have been filed pursuant to the "Reports"
covenant, PLUS (2) the aggregate Net Cash Proceeds received by the Company
after the Issue Date from the issuance and sale permitted by the Indenture
of its Capital Stock (other than Redeemable Stock) to a Person who is not a
Subsidiary of the Company, or from the issuance to a Person who is not a
Subsidiary of the Company of any options, warrants or other rights to
acquire Capital Stock of the Company (in each case, exclusive of any
convertible Indebtedness, Redeemable Stock or any options, warrants or other
rights that are redeemable at the option of the holder, or are required to
be redeemed, prior to the Stated Maturity of the Notes), MINUS the actual
amount of Net Cash Proceeds used to make Directed Investments, PLUS (3) an
amount equal to the net reduction in Investments (other than reductions in
Permitted Investments) in any Person resulting from payments of interest on
Indebtedness, dividends, repayments of loans or advances, or other transfers
of assets, in each case to the Company or any Restricted Subsidiary (except
to the extent any such payment is included in the calculation of Adjusted
Consolidated Net Income), or from the redesignation of Unrestricted
Subsidiaries as Restricted Subsidiaries (valued in each case as provided in
the definition of "Investments"), not to exceed the amount of Investments
previously made by the Company and its Restricted Subsidiaries in such
Person.
The foregoing provision shall not be violated by reason of:
(i)
the payment of any dividend within 60 days after the date of declaration
thereof if, at said date of declaration, such payment would comply with
the foregoing paragraph;
(ii)
the redemption, repurchase, defeasance or other acquisition or retirement
for value of Indebtedness that is subordinated in right of payment to the
Notes, including premium, if any, and accrued and unpaid interest, with the
proceeds of, or in exchange for, Indebtedness Incurred under clause (iii) of the
second paragraph of the "Limitation on Indebtedness" covenant;
(iii)
the repurchase, redemption or other acquisition of Capital Stock of the
Company (or options, warrants or other rights to acquire such Capital
Stock) in exchange for, or out of the proceeds of a substantially concurrent
offering of, shares of Capital Stock or options, warrants or other rights to
acquire such Capital Stock (in each case, other than Redeemable Stock) of the
Company;
(iv)
the making of any principal payment or repurchase, redemption,
retirement, defeasance or other acquisition for value of Indebtedness of
the Company which is subordinated in right of payment to the Notes in exchange
for, or out of the proceeds of a substantially concurrent offering of, shares of
the Capital Stock of the Company (other than Redeemable Stock);
(v)
payments or distributions, in the nature of satisfaction of dissenters'
rights, pursuant to or in connection with a consolidation, merger or
transfer of assets that complies with the provisions of the Indenture applicable
to mergers, consolidations and transfers of all or substantially all of the
property and assets of the Company;
(vi)
any purchase or acquisition from, or withholding on issuances to, any
employee of the Company's Capital Stock in order to satisfy any
applicable federal, state or local tax payments in respect of the receipt of
shares of the Company's Capital Stock;
(vii)
any purchase or acquisition from, or withholding on issuances to, any
employee of the Company's Capital Stock in order to pay the purchase
price of such Capital Stock or similar instrument pursuant to a stock option,
equity incentive or other employee benefit plan or agreement of the Company or
any of its Restricted Subsidiaries;
(viii)
the repurchase of shares of, or options to purchase shares of, the
Company's Capital Stock from employees of the Company in connection with
the termination of their employment; PROVIDED that (A) the aggregate price paid
for all such repurchased shares of Capital Stock made in any twelve-month period
shall not exceed $250,000 PLUS the aggregate cash proceeds received by the
Company during
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such twelve-month period from any reissuance of such Capital Stock by the
Company to employees of the Company and its Restricted Subsidiaries and (B) no
Default shall have occurred and be continuing immediately after such
transaction;
(ix)
payments and distributions pursuant to any tax sharing agreement between
the Company and any other Person with which the Company files a
consolidated tax return or with which the Company is part of a consolidated
group, in each case, for federal income tax purposes;
(x)
cash payments in lieu of the issuance of fractional shares of Common
Stock of the Company upon conversion of any class of Preferred Stock of
the Company; and
(xi)
the issuance of shares of Common Stock upon exercise of warrants to
purchase shares of common stock of ART Licensing existing on the Issue
Date, including any contribution of such shares of Common Stock to ART
Licensing, any payment by ART Licensing to the Company in consideration thereof
and any contribution by the Company to ART Licensing in respect thereof;
PROVIDED that, except in the case of clauses (i) and (ii), no Default or Event
of Default shall have occurred and be continuing or occur as a consequence of
the actions or payments set forth herein. Any Investments made other than in
cash shall be valued, in good faith, by the Board.
Each Restricted Payment permitted pursuant to the preceding paragraph (other
than Restricted Payments referred to in clause (ii) thereof) and the Net Cash
Proceeds from any issuance of Capital Stock referred to in clause (iii) or (iv)
shall be included in calculating whether the conditions of clause (C) of the
first paragraph of this "Limitation on Restricted Payments" covenant have been
met with respect to any subsequent Restricted Payments. In the event the
proceeds of an issuance of Capital Stock of the Company are used for the
redemption, repurchase or other acquisition of the Notes or Indebtedness that is
PARI PASSU with the Notes, then the Net Cash Proceeds of such issuance shall be
included in clause (C) of the first paragraph of this "Limitation on Restricted
Payments" covenant only to the extent such proceeds are not used for such
redemption, repurchase or other acquisition of Indebtedness.
The Board may designate any Restricted Subsidiary to be an Unrestricted
Subsidiary if such designation would not cause a Default. For purposes of making
such determination, all outstanding Investments by the Company and its
Restricted Subsidiaries (except to the extent repaid in cash) in the Subsidiary
so designated will be deemed to be Restricted Payments at the time of such
designation and will reduce the amount available for Restricted Payments under
the first paragraph of this covenant. All such outstanding Investments will be
deemed to constitute Investments in an amount valued in accordance with the
definition of "Investment." Such designation will only be permitted if such
Restricted Payment would be permitted at such time and if such Restricted
Subsidiary otherwise meets the definition of an Unrestricted Subsidiary.
LIMITATION ON LIENS SECURING CERTAIN INDEBTEDNESS
The Indenture will provide that the Company will not, and will not permit
any Subsidiary to, create, Incur, assume or suffer to exist any Lien, other than
Permitted Liens, on any of its assets or properties of any character, or any
shares of Capital Stock or Indebtedness of any Subsidiary, without making
effective provision for all of the Notes and all other amounts due under the
Indenture to be directly secured equally and ratably with (or, if the obligation
or liability to be secured by such Lien is subordinated in right of payment to
the Notes, prior to) the obligation or liability secured by such Lien.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES
The Indenture will provide that the Company will not, and will not permit
any Restricted Subsidiary to, create or otherwise cause or suffer to exist or
become effective any consensual encumbrance or restriction of any kind on the
ability of any Restricted Subsidiary to (i) pay dividends or make other
distributions permitted by applicable law on any Capital Stock of such
Restricted Subsidiary owned by the Company or any other Restricted Subsidiary,
(ii) pay any Indebtedness owed to the Company or any other Restricted Subsidiary
that owns, directly or indirectly, any Capital Stock of such Restricted
Subsidiary, (iii) make loans or advances to the Company or any other Restricted
Subsidiary that owns, directly or indirectly, any Capital Stock of such
Restricted Subsidiary or (iv) transfer any of its property or assets to the
Company or any other Restricted Subsidiary that owns, directly or indirectly,
any Capital Stock of such Restricted Subsidiary.
The foregoing provisions shall not prohibit any encumbrances or
restrictions:
(i)
existing on the Issue Date in the Indenture or any other agreement in
effect on the Issue Date, and any extension, refinancing, renewal or
replacement of any such agreement; PROVIDED that the
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encumbrances and restrictions in any such extension, refinancing, renewal or
replacement are no less favorable in any material respect to the holders than
those encumbrances or restrictions that are then in effect and that are being
extended, refinanced, renewed or replaced;
(ii)
existing under or by reason of applicable law;
(iii)
existing with respect to any Person or the property or assets of such
Person acquired by the Company or any Restricted Subsidiary, at the time
of such acquisition and not Incurred in contemplation thereof, which
encumbrances or restrictions are not applicable to any Person or the property or
assets of any Person other than such Person or the property or assets of such
Person so acquired;
(iv)
in the case of clause (iv) of the first paragraph of this "Limitation on
Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries" covenant, (A) that restrict in a customary manner the subletting,
assignment or transfer of any property or asset that is a lease, license,
conveyance or contract or similar property or asset, (B) existing by virtue of
any transfer of, agreement to transfer, option or right with respect to, or Lien
on, any property or assets of the Company or any Restricted Subsidiary, not
otherwise prohibited by the Indenture or (C) arising or agreed to in the
ordinary course of business, not relating to any Indebtedness, and that do not,
individually or in the aggregate, detract from the value of property or assets
of the Company or any Restricted Subsidiary in any manner material to the
Company or any Restricted Subsidiary;
(v)
imposed pursuant to an agreement that has been entered into for the sale
or disposition of Capital Stock of, or property or assets of, the Company
or a Restricted Subsidiary; PROVIDED that such encumbrance or restriction shall
only remain in force during the pendency of such acquisition or disposition; or
(vi)
imposed pursuant to agreements governing Indebtedness permitted to be
Incurred under clauses (xiii) and (xiv) of the second paragraph of the
"Limitation of Indebtedness" covenant.
Nothing contained in this "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant shall prevent the
Company or any Restricted Subsidiary from (a) creating, Incurring, assuming or
suffering to exist any Liens otherwise permitted in the "Limitation on Liens
Securing Certain Indebtedness" covenant or (b) restricting the sale or other
disposition of property or assets of the Company or any of its Restricted
Subsidiaries that secure Indebtedness of the Company or any of its Restricted
Subsidiaries.
LIMITATION ON TRANSACTIONS WITH AFFILIATES
The Indenture will provide that the Company will not, and will not permit
any of its Restricted Subsidiaries to, sell, lease, transfer or otherwise
dispose of any of its properties or assets to, or purchase any property or
assets from, or enter into or make any contract, agreement, loan, advance or
Guarantee with, or any contract, agreement, loan, advance or Guarantee for the
specific benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms that are no
less favorable to the Company or the relevant Restricted Subsidiary than those
that would have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person and (ii) the Company delivers to
the Trustee (A) with respect to any Affiliate Transaction involving aggregate
consideration in excess of $1.0 million, a resolution of the Board of Directors
set forth in an Officers' Certificate certifying that such Affiliate Transaction
complies with clause (A) above and that such Affiliate Transaction has been
approved by a majority of the disinterested members of the Board of Directors
and (B) with respect to any Affiliate Transaction involving aggregate
consideration in excess of $5.0 million, a written opinion, appraisal or
certification from a nationally recognized professional experienced in
evaluating similar types of transactions stating that the terms of such
transaction are fair to the Company or such Restricted Subsidiary, as the case
may be, from a financial point of view; PROVIDED that the following shall not be
deemed to constitute Affiliate Transactions:
(i) the payment of reasonable fees to directors of the Company who are not
employees of the Company;
(ii) agreements and arrangements existing on the date hereof;
(iii) any employment agreement entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business of the Company or
such Restricted Subsidiary;
(iv) the adoption of employee benefit plans in the ordinary course of
business and payments and other transactions thereunder; PROVIDED that any such
adoption, payment or other transaction shall have been approved by a majority of
the disinterested members of the Board;
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(v) transactions between or among the Company and/or its Wholly Owned
Restricted Subsidiaries;
(vi) any contract, agreement, loan, advance or Guarantee for the general
benefit of the Company and its stockholders, including stockholders that are
Affiliates of the Company; and
(vii) any Affiliate Transactions permitted by the provisions of the
Indenture described above under the caption "-- Limitation on Restricted
Payments."
LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES
The Indenture will provide that the Company will not sell, and will not
permit any Restricted Subsidiary, directly or indirectly, to issue or sell any
shares of Capital Stock of a Restricted Subsidiary (including options, warrants
or other rights to purchase shares of such Capital Stock), except (i) to the
Company or a Wholly Owned Restricted Subsidiary, (ii) issuances or sales to
foreign nationals of shares of Capital Stock of foreign Restricted Subsidiaries,
to the extent required by applicable law, (iii) if, immediately after giving
effect to such issuance or sale, such Restricted Subsidiary would no longer
constitute a Restricted Subsidiary or (iv) issuances or sales of Common Stock of
Restricted Subsidiaries, if within six months of each such issuance or sale, the
Company or such Restricted Subsidiary applies an amount not less than the Net
Cash Proceeds thereof (if any) in accordance with clause (A) or (B) of the first
paragraph of the "Disposition of Proceeds of Asset Sales" covenant.
BUSINESS ACTIVITIES OF THE COMPANY AND RESTRICTED SUBSIDIARIES
The Company will not, and will not permit any Restricted Subsidiary to,
engage in (i) any business other than the Telecommunications Business and such
business activities as are incidental or related thereto and (ii) any business,
activities or services in which the Company and its Restricted Subsidiaries were
engaged on the Issue Date. In addition, the Company will (i) at such time and to
the extent permitted by the FCC, transfer, or cause to be transferred, all FCC
licenses and authorizations of the Company and its Restricted Subsidiaries to
ART Licensing and (ii) cause ART Licensing to remain a Wholly Owned Restricted
Subsidiary of the Company.
Notwithstanding the foregoing, to the extent permitted by the FCC, the
Company will not permit ART Licensing to engage in any business or activity,
other than the application for, acquisition of or ownership of FCC licenses and
authorizations; PROVIDED, HOWEVER, that ART Licensing shall be permitted to own
and operate any equipment or assets that were owned by ART Licensing on or prior
to the Issue Date.
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CHANGE IN CONTROL
In the event of a Change in Control, the Company must commence and
consummate an Offer to Purchase for all the Notes then outstanding, at a
purchase price equal to 101% of the principal amount thereof, together with
accrued and unpaid interest, if any, to the date of purchase. Not later than 20
days following any Change in Control, the Company will mail a notice to each
holder describing the transaction or transactions that constitute the Change in
Control and offering to repurchase Notes pursuant to the procedures required by
the Indenture and described in such notice.
The Indenture does not contain provisions that permit the holders of the
Notes to require that the Company repurchase or redeem the Notes in the event of
a highly leveraged transaction, including a takeover, recapitalization or
similar restructuring, that may adversely effect the holders of the Notes if
such transaction does not otherwise constitute a Change in Control. See "--
Certain Definitions." In addition, with the consent of at least 66 2/3% in
principal amount of the Notes then outstanding, the Company may amend, and the
holders of Notes may waive any Default in the performance of, the provisions
described in this "Change in Control" covenant. See "-- Amendments and Waivers."
There can be no assurance that the Company will have sufficient funds available
at the time of any Change in Control to make any debt payment (including
repurchases of Notes) required by the foregoing covenant (as well as may be
contained in other securities of the Company which might be outstanding at the
time).
DISPOSITION OF PROCEEDS OF ASSET SALES
The Indenture will provide that the Company will not, and will not permit
any Restricted Subsidiary to, consummate any Asset Sale, unless (a) the
consideration received by the Company or such Restricted Subsidiary is at least
equal to the fair market value of the assets sold or disposed of and (b) at
least 85% of the consideration received consists of cash or Temporary Cash
Investments, PROVIDED that any notes or other obligations received by the
Company or any such Restricted Subsidiary as consideration that are converted by
the Company or such Restricted Subsidiary into cash within 30 days of their
receipt (to the extent of the cash received), shall be deemed to be cash for
purposes of this provision. In the event and to the extent that the Net Cash
Proceeds received by the Company or its Restricted Subsidiaries from one or more
Asset Sales occurring on or after the Issue Date in any period of 12 consecutive
months exceed 10% of Adjusted Consolidated Net Tangible Assets (determined as of
the date closest to the commencement of such 12-month period for which a
consolidated balance sheet of the Company and its Restricted Subsidiaries has
been prepared), then the Company shall or shall cause the relevant Restricted
Subsidiary to (i) within six months after the date Net Cash Proceeds so received
exceed 10% of Adjusted Consolidated Net Tangible Assets (A) apply an amount
equal to such excess Net Cash Proceeds to permanently repay unsubordinated
Indebtedness of the Company or any of its Restricted Subsidiaries owing to a
Person other than the Company or any of its Restricted Subsidiaries or (B)
invest an equal amount, or the amount not so applied pursuant to clause (A) (or
enter into a definitive agreement committing to so invest within six months
after the date of such agreement), in property or assets of a nature or type or
that are used in a business (or in a company having property and assets of a
nature or type, or engaged in a business) similar or related to the nature or
type of the property and assets of, or the business of, the Company and its
Restricted Subsidiaries existing on the date of such Investment (as determined
in good faith by the Board, whose determination shall be conclusive and
evidenced by a resolution of the Board and (ii) apply (no later than the end of
the six-month period referred to in clause (i)) such excess Net Cash Proceeds
(to the extent not applied pursuant to clause (i)) as provided in the following
paragraph of this "Disposition of Proceeds of Asset Sales" covenant. The amount
of such excess Net Cash Proceeds required to be applied (or to be committed to
be applied) during such six-month period as set forth in clause (i) of the
preceding sentence and not applied as so required by the end of such period
shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to this
"Limitation on Asset Sales" covenant totals at least $5.0 million, the Company
must commence, not later than the fifteenth business day of such month, and
consummate an Offer to Purchase from the holders on a pro rata basis an
aggregate principal amount of Notes equal to the Excess Proceeds on such date,
at a purchase price equal to 100% of the principal amount thereof, plus accrued
and unpaid interest, if any, to the date of purchase.
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NO AMENDMENT TO VOTING TRUST AGREEMENTS
The Indenture will provide that the Company will not amend, modify or alter
any Voting Trust Agreement without having obtained the consent of the holders of
not less than a majority in principal amount at maturity of the Notes then
outstanding; PROVIDED, HOWEVER, that the Company may amend, modify or alter any
Voting Trust Agreement, if, in the opinion of Delaware counsel, such amendment,
modification or alteration is necessary to cause such Voting Trust Agreement to
comply with Delaware law or any change thereto.
REPORTS
The Indenture will provide that, whether or not required by the rules and
regulations of the Securities and Exchange Commission (the "Commission"), so
long as any Notes are outstanding, the Company will furnish to the Holders of
Notes (i) all quarterly and annual financial information that would be required
to be contained in a filing with the Commission on Forms 10-Q and 10-K if the
Company were required to file such Forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and, with respect
to the annual information only, a report thereon by the Company's certified
independent accountants and (ii) all current reports that would be required to
be filed with the Commission on Form 8-K if the Company were required to file
such reports. In addition, whether or not required by the rules and regulations
of the Commission, the Company will file a copy of all such information and
reports with the Commission for public availability (unless the Commission will
not accept such a filing) and make such information available to securities
analysts and prospective investors upon request.
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
The Indenture will provide that the Company shall not consolidate with,
merge with or into, or sell, convey, transfer, lease or otherwise dispose of all
or substantially all of its property and assets (as an entirety or substantially
an entirety in one transaction or a series of related transactions) to, any
Person (other than a consolidation or merger with or into a Wholly Owned
Restricted Subsidiary with a positive net worth; PROVIDED that, in connection
with any such merger or consolidation, no consideration (other than Capital
Stock in the surviving Person or the Company) shall be issued or distributed to
the stockholders of the Company) or permit any Person to merge with or into the
Company unless: (i) the Company shall be the continuing Person, or the Person
(if other than the Company) formed by such consolidation or into which the
Company is merged or that acquired or leased such property and assets of the
Company shall be a corporation organized and validly existing under the laws of
the United States of America or any jurisdiction thereof and shall expressly
assume, by a supplemental indenture, executed and delivered to the Trustee, all
of the obligations of the Company on all of the Notes and under the Indenture;
(ii) immediately after giving effect to such transaction, no Default or Event of
Default shall have occurred and be continuing; (iii) immediately after giving
effect to such transaction on a pro forma basis, the Indebtedness to Total
Market Capitalization Ratio (determined as of a date no earlier than 10 days
prior to such transaction) of the Company, or any person becoming the successor
obligor of the Notes, would be no greater than 130% of the Indebtedness to Total
Market Capitalization Ratio of the Company immediately prior to giving effect to
such transaction; PROVIDED that this clause (iii) shall not apply to any
transaction or series of transactions effected solely for the purpose of
creating a parent corporation of which the Company shall be a Wholly Owned
Subsidiary and whose stockholders shall be identical (without regard to the
exercise of options or warrants, or securities convertible or exchangeable into
shares of Common Stock) to those of the Company immediately prior thereto; and
(iv) the Company delivers to the Trustee an Officers' Certificate (attaching the
arithmetic computations to demonstrate compliance with clause (iii)) and an
Opinion of Counsel, in each case, stating that such consolidation, merger or
transfer and such supplemental indenture complies with this provision and that
all conditions precedent provided for herein relating to such transaction have
been complied with; PROVIDED, HOWEVER, that clause (iii) above does not apply
if, in the good faith determination of the Board, whose determination shall be
evidenced by a resolution of the Board, the principal purpose of such
transaction is to change the state of incorporation of the Company; and PROVIDED
FURTHER that any such transaction shall not have as one of its purposes the
evasion of the foregoing limitations.
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EVENTS OF DEFAULT AND REMEDIES
The following events are "Events of Default" under the Indenture:
(i)
default in the payment of interest on the Notes, when it becomes due and
payable as to any interest payment date on or prior to ,
2000, and continuance of such default for a period of 30 days or more as to any
interest payment date thereafter; or
(ii)
default in the payment of principal of, or premium, if any, on the Notes
when due; or
(iii)
default in the performance, or breach, of any covenant described under
"Certain Covenants -- Limitation on Restricted Payments," "-- Limitation
on Indebtedness," "-- Change in Control," "-- Disposition of Proceeds of Asset
Sales" and "-- Consolidation, Merger, Sale of Assets, Etc."; or
(iv)
default in the performance, or breach, of any covenant in the Indenture
(other than defaults specified in clause (i), (ii) or (iii) above), and
the continuance of such default or breach for a period of 30 days or more after
written notice to the Company by the Trustee or to the Company and the Trustee
by the holders of at least 25% in aggregate principal amount at maturity of the
outstanding Notes (in each case, when such notice is deemed received in
accordance with the Indenture); or
(v)
default under any mortgage, indenture or instrument under which there may
be issued or by which there may be secured or evidenced any Indebtedness
for money borrowed by the Company or any of its Restricted Subsidiaries (or the
payment of which is Guaranteed by the Company or any of its Restricted
Subsidiaries) whether such Indebtedness or Guarantee now exists, or is created
after the Issue Date, which default (A) is caused by a failure to pay principal
of or premium, if any, or interest on such Indebtedness prior to the expiration
of the grace period provided in such Indebtedness on the date of such default (a
"Payment Default") or (B) results in the acceleration of such Indebtedness prior
to its express maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such Indebtedness
under which there has been a Payment Default, or the maturity of which has been
so accelerated, aggregates $5.0 million or more; or
(vi)
any final judgment or order (not covered by insurance) for the payment of
money in excess of $5.0 million in the aggregate for all such final
judgments or orders against all such Persons (treating any deductibles,
self-insurance or retention as not so covered) shall be rendered against the
Company or any Significant Subsidiary and shall not be paid or discharged, and
there shall be any period of 60 consecutive days following entry of the final
judgment or order that causes the aggregate amount for all such final judgments
or orders outstanding and not paid or discharged against all such Persons to
exceed $5.0 million during which a stay of enforcement of such final judgment or
order, by reason of a pending appeal or otherwise, shall not be in effect; or
(vii)
a court having jurisdiction in the premises enters a decree or order for
(A) relief in respect of the Company or any Significant Subsidiary in an
involuntary case under any applicable bankruptcy, insolvency or other similar
law now or hereafter in effect, (B) the appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator or similar official of the Company or
any Significant Subsidiary or for all or substantially all of the property and
assets of the Company or any Significant Subsidiary or (C) the winding up or
liquidation of the affairs of the Company or any Significant Subsidiary and, in
each case, such decree or order shall remain unstayed and in effect for a period
of 60 consecutive days; or
(viii)
the Company or any Significant Subsidiary (A) commences a voluntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or consents to the entry of an order for relief in an
involuntary case under any such law, (B) consents to the appointment of or
taking possession by a receiver, liquidator, assignee, custodian, trustee,
sequestrator or similar official of the Company or any Significant Subsidiary or
for all or substantially all of the property and assets of the Company or any
Significant Subsidiary or (C) effects any general assignment for the benefit of
creditors.
If any Event of Default (other than an Event of Default specified in clause
(vii) or (viii) above with respect to the Company) occurs and is continuing,
then the Trustee or the holders of at least 25% in principal amount of
outstanding Notes may, by written notice, and the Trustee upon the request of
the holders of not less than 25% in principal amount of the outstanding Notes
shall, declare the Default
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Amount of, and any accrued and unpaid interest on, all outstanding Notes to be
immediately due and payable and upon any such declaration such amounts shall
become immediately due and payable. If an Event of Default specified in clause
(vii) or (viii) above with respect to the Company occurs and is continuing, then
all outstanding Notes shall IPSO FACTO become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any holder.
After a declaration of acceleration, the holders of a majority in aggregate
principal amount of outstanding Notes may, by notice to the Trustee, rescind
such declaration of acceleration if all existing Events of Default, other than
nonpayment of the principal of, and any accrued and unpaid interest on, the
Notes that has become due solely as a result of such acceleration, have been
cured or waived and if the rescission of acceleration would not conflict with
any judgment or decree. The holders of a majority in principal amount of the
outstanding Notes also have the right to waive past defaults under the
Indenture, except a default in the payment of the principal of, or any interest
on, any outstanding Note, or in respect of a covenant or a provision that cannot
be modified or amended without the consent of all holders of Notes.
No holder of any of the Notes has any right to institute any proceeding with
respect to the Indenture or any remedy thereunder, unless the holders of at
least 25% in principal amount of the outstanding Notes have made written
request, and offered reasonable security or indemnity, to the Trustee to
institute such proceeding as Trustee, the Trustee has failed to institute such
proceeding within 60 days after receipt of such notice and the Trustee has not
within such 60-day period received directions inconsistent with such written
request by holders of a majority in principal amount of the outstanding Notes.
Such limitations do not apply, however, to a suit instituted by a holder of a
Note for the enforcement of the payment of the principal of, or any accrued and
unpaid interest on, such Note on or after the respective due dates expressed in
such Note.
During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent Person would
exercise under the circumstances in the conduct of such Person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default shall occur and be continuing, the Trustee is
not under any obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the holders unless such holders
shall have offered to such Trustee reasonable security or indemnity. Subject to
certain provisions concerning the rights of the Trustee, the holders of a
majority in principal amount at maturity of the outstanding Notes have the right
to direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee.
The Indenture provides that the Trustee will, within 45 days after the
occurrence of any Default, give to the holders of the Notes notice of such
Default known to it, unless such Default shall have been cured or waived;
PROVIDED that the Trustee shall be protected in withholding such notice if it
determines in good faith that the withholding of such notice is in the interest
of such holders.
The Company is required to furnish to the Trustee annually a statement as to
its compliance with all conditions and covenants under the Indenture.
DEFEASANCE
The Company may at any time terminate all of its obligations with respect to
the Notes ("defeasance"), except for certain obligations, including those
regarding any trust established for a defeasance and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes as required by the Indenture and to maintain agencies in respect of
the Notes. The Company may at any time terminate its obligations under certain
covenants set forth in the Indenture, some of which are described under "Certain
Covenants" above, and any omission to comply with such obligations shall not
constitute a Default with respect to the Notes ("covenant defeasance"). To
exercise either defeasance or covenant defeasance, the Company must irrevocably
deposit in trust with the Trustee, for the benefit of the holders of the Notes,
money (in United States dollars) or U.S. government obligations (denominated in
United States dollars), or a combination thereof, in such amounts as will be
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sufficient to pay the principal of, premium, if any, and interest on the
outstanding Notes to redemption or maturity and comply with certain other
conditions, including the delivery of a legal opinion as to certain tax matters.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of Notes)
as to all outstanding Notes when either (a) all such Notes theretofore
authenticated and delivered (except lost, stolen or destroyed Notes that have
been replaced or paid and Notes for whose payment money has theretofore been
deposited in trust or segregated and held in trust by the Company and thereafter
repaid to the Company or discharged from such trust) have been delivered to the
Trustee for cancellation or (b)(i) all such Notes not theretofore delivered to
the Trustee for cancellation have become due and payable by their terms or shall
have been called for redemption and the Company has irrevocably deposited or
caused to be deposited with the Trustee as trust funds in trust for the purpose
an amount of money sufficient to pay and discharge the entire Indebtedness on
the Notes not theretofore delivered to the Trustee for cancellation or
redemption, for the principal amount, premium, if any, and accrued interest to
the date of such deposit; (ii) the Company has paid all other sums payable by it
under the Indenture; and (iii) the Company has delivered irrevocable
instructions to the Trustee to apply the deposited money toward the payment of
the Notes at maturity or on the redemption date, as the case may be. In
addition, the Company must deliver an Officers' Certificate and an Opinion of
Counsel stating that all conditions precedent to satisfaction and discharge have
been complied with.
AMENDMENTS AND WAIVERS
From time to time the Company, when authorized by resolutions of its Board,
and the Trustee, without the consent of the holders of the Notes, may amend,
waive or supplement the Indenture, the Pledge Agreement or the Notes for certain
specified purposes, including, among other things, curing ambiguities, defects
or inconsistencies, maintaining the qualification of the Indenture under the
Trust Indenture Act or making any change that does not adversely affect the
rights of any holder. Other amendments and modifications of the Indenture, the
Pledge Agreement and the Notes may be made by the Company and the Trustee with
the consent of the holders of not less than a majority of the aggregate
principal amount of the outstanding Notes (including consents obtained in
connection with a tender offer or exchange offer for Notes); PROVIDED that no
such modification or amendment may, without the consent of the holder of each
outstanding Note affected thereby, (i) reduce the principal amount of, extend
the fixed maturity of, or alter the redemption provisions of, the Notes, (ii)
change the currency in which any Notes or any premium or the accrued interest
thereon is payable, (iii) reduce the percentage in principal amount outstanding
of Notes who must consent to an amendment, supplement or waiver or consent to
take any action under the Indenture or the Notes, (iv) impair the right to
institute suit for the enforcement of any payment on or with respect to the
Notes, (v) waive a default in payment with respect to the Notes, (vi) reduce the
rate or extend the time for payment of interest on the Notes, (vii) adversely
affect the ranking of the Notes in a manner adverse to the holder of the Notes
or (viii) release any Collateral from the Lien created by the Pledge Agreement,
except in accordance with the terms thereof.
In addition, without the consent of at least 66 2/3% in principal amount of
the Notes then outstanding (including consents obtained in connection with a
tender offer or exchange offer for Notes), no amendment to the Indenture may
make any change in, and no waiver may be made with respect to any Default in the
performance of, the provisions described above under the captions "Change in
Control" and "Disposition of Proceeds of Asset Sales."
CONCERNING THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. If an Event of Default has occurred and is continuing, the
Trustee will exercise such rights and powers vested in it under the Indenture
and use the same degree of care and skill in its exercise as a prudent Person
would exercise under the circumstances in the conduct of such Person's own
affairs.
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The Indenture and the provisions of the Trust Indenture Act incorporated by
reference therein contain certain limitations on the rights of the Trustee
thereunder, should it become a creditor of the Company, to obtain payment of
claims in certain cases, or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions; PROVIDED, HOWEVER, that if it acquires any
conflicting interest, it must eliminate such conflict or resign.
GOVERNING LAW
The Indenture and the Notes will be governed by, and construed in accordance
with, the laws of the State of New York without giving effect to the principles
of conflicts of law thereof.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for any other capitalized terms used herein for which
no definition is provided.
"ACQUIRED DEBT" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"ADJUSTED CONSOLIDATED NET INCOME" means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such period
determined in conformity with GAAP; PROVIDED that the following items shall be
excluded in computing Adjusted Consolidated Net Income (without duplication):
(i) the net income of any Person (other than net income attributable to a
Restricted Subsidiary) in which any Person (other than the Company or any of its
Restricted Subsidiaries) has a joint interest and the net income of any
Unrestricted Subsidiary, except to the extent of the amount of dividends or
other distributions actually paid to the Company or any of its Restricted
Subsidiaries by such other Person (including, without limitation, an
Unrestricted Subsidiary) during such period; (ii) solely for the purposes of
calculating the amount of Restricted Payments that may be made pursuant to
clause (C) of the first paragraph of the "Limitation on Restricted Payments"
covenant described above (and in such case, except to the extent includable
pursuant to clause (i) above), the net income (or loss) of any Person accrued
prior to the date it becomes a Restricted Subsidiary or is merged into or
consolidated with the Company or any of its Restricted Subsidiaries or all or
substantially all of the property and assets of such Person are acquired by the
Company or any of its Restricted Subsidiaries; (iii) the net income of any
Restricted Subsidiary to the extent that the declaration or payment of dividends
or similar distributions by such Restricted Subsidiary of such net income is not
at the time permitted by the operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to such Restricted Subsidiary; (iv) any gains or losses
(on an after-tax basis) attributable to Asset Sales; (v) except for purposes of
calculating the amount of Restricted Payments that may be made pursuant to
clause (C) of the first paragraph of the "Limitation on Restricted Payments"
covenant described above, any amount paid as, or accrued for, cash dividends on
Preferred Stock of the Company or any Restricted Subsidiary owned by Persons
other than the Company and any of its Restricted Subsidiaries; and (vi) all
extraordinary or nonrecurring gains and losses; and (vii) the net income of the
Company in respect of the Pledged Securities or any securities deposited with
the Collateral Agent in substitution thereof.
"ADJUSTED CONSOLIDATED NET TANGIBLE ASSETS" means the total amount of assets
of the Company and its Restricted Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), except to the extent resulting from
write-ups of capital assets (excluding write-ups in connection with accounting
for acquisitions in conformity with GAAP), after deducting therefrom (i) all
current liabilities of the Company and its Restricted Subsidiaries (excluding
intercompany items) and (ii) all goodwill, trade names, trademarks, patents,
unamortized debt discount and expense and other like intangibles (other than
licenses issued by the FCC), all as set forth on the quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries,
prepared in conformity with GAAP and most recently filed with the Commission
pursuant to the "Reports" covenant; PROVIDED that the value of any licenses
issued
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by the FCC shall, in the event of an auction for similar licenses, be equal to
the fair market value ascribed thereto in good faith by the Board and evidenced
by a resolution of the Board. As used in the Indenture, references to financial
statements of the Company and its Restricted Subsidiaries shall be adjusted to
exclude Unrestricted Subsidiaries if the context requires.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; PROVIDED that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control. For purposes of the Indenture, the term "Affiliate"
shall at all times include Laurence S. Zimmerman, Landover Holdings Corporation
and their respective Affiliates.
"ART LICENSING" means ART Licensing Corp., a Delaware corporation and a
wholly owned subsidiary of the Company, or any successor thereto, or such other
Subsidiary or Subsidiaries of the Company formed for the purpose of the
application for, acquisition of or ownership of FCC licenses and authorizations.
"ART WEST" means ART West Joint Venture, a Delaware partnership owned by the
Company and Extended Communications, Inc.
"ASSET ACQUISITION" means (i) an Investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person shall
become a Restricted Subsidiary of the Company or shall be merged into or
consolidated with the Company or any of its Restricted Subsidiaries or (ii) an
acquisition by the Company or any of its Restricted Subsidiaries of the property
and assets of any Person other than the Company or any of its Restricted
Subsidiaries that constitute substantially all of a division or line of business
of such Person.
"ASSET SALE" means any sale, transfer or other disposition (including by way
of merger, consolidation or sale-leaseback transaction) in one transaction or a
series of related transactions by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted Subsidiaries
or (iii) any other property or assets of the Company or any of its Restricted
Subsidiaries outside the ordinary course of business of the Company or such
Restricted Subsidiary; PROVIDED that the following shall not be included within
the meaning of "Asset Sale": (A) sales or other dispositions of inventory,
receivables and other current assets; (B) sales or other dispositions of
equipment that has become worn out, obsolete, damaged or otherwise unsuitable or
undesirable for use in connection with the business of the Company or its
Restricted Subsidiaries; (C) Permitted Asset Swaps; (D) sales, transfers or
other dispositions otherwise constituting Asset Sales in an aggregate amount not
to exceed $500,000 during the relevant twelve-month period referred to in the
"Disposition of Proceeds of Asset Sales" covenant; (E) any Restricted Payment
permitted by the "Limitation on Restricted Payments" covenant; (F) any Lien
permitted to be Incurred by the "Limitation on Liens Securing Certain
Indebtedness" covenant; (G) any transaction that is governed by the provisions
of the "Consolidation, Merger, Sale of Assets, Etc." covenant; (H) any sale,
transfer or other disposition of the Capital Stock of an Unrestricted
Subsidiary; and (I) any disposition pursuant to the Option Agreement, dated as
of July 3, 1996, between the Company and Commco, L.L.C.
"AVERAGE LIFE" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (A)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (B) the amount
such principal payment by (ii) the sum of all such principal payments.
"BOARD" means the Board of Directors of the Company.
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however
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designated) of corporate stock, (iii) in the case of a partnership, partnership
interests (whether general or limited) and (iv) any other interest or
participation that confers on a Person the right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person.
"CAPITALIZED LEASE" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person; and "Capitalized
Lease Obligations" means the discounted present value of the rental obligations
under such lease.
"CHANGE IN CONTROL" means such time as (i) a "person" or "group" (within the
meaning of Sections 13(d) and 14(d)(2) of the Exchange Act) becomes the ultimate
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act) of Voting
Stock representing more than 50% of the total voting power of the Voting Stock
of the Company on a fully diluted basis, (ii) individuals who on the Issue Date
constitute the Board (together with any new directors whose election by the
Board or whose nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds of the members of the Board then in
office who either were members of the Board on the Issue Date or whose election
or nomination for election was previously so approved) cease for any reason to
constitute a majority of the members of the Board then in office or (iii) the
merger or consolidation of the Company with or into another corporation, or the
merger or consolidation of another corporation with and into the Company, with
the effect that, immediately after such transaction, the stockholders of the
Company immediately prior to such transaction hold less than 50% of the Voting
Stock of the Person surviving such merger or consolidation.
"COLLATERAL" means the Pledged Securities and the proceeds thereof.
"COMMON STOCK" of any Person means Capital Stock of such Person that does
not rank prior to, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
to such Person, to shares of Capital stock of any other class of such Person.
"CONSOLIDATED EBITDA" means, for any period, the sum of the amounts for such
period of (i) Adjusted Consolidated Net Income, (ii) Consolidated Interest
Expense, to the extent such amount was deducted in calculating Adjusted
Consolidated Net Income, (iii) income taxes, to the extent such amount was
deducted in calculating Adjusted Consolidated Net Income (other than income
taxes (either positive or negative) attributable to extraordinary and
non-recurring gains or losses or sales of assets), (iv) depreciation expense, to
the extent such amount was deducted in calculating Adjusted Consolidated Net
Income, (v) amortization expense, to the extent such amount was deducted in
calculating Adjusted Consolidated Net Income, (vi) all other non-cash items
reducing Adjusted Consolidated Net Income (other than items that will require
cash payments and for which an accrual or reserve is, or is required by GAAP to
be, made), less all non-cash items increasing Adjusted Consolidated Net Income
and (vii) all cash dividend payments (and non-cash dividend payments in the case
of a Person that is a Restricted Subsidiary) on any series of preferred stock of
such Person, all as determined on a consolidated basis for the Company and its
Restricted Subsidiaries in conformity with GAAP; PROVIDED that, if any
Restricted Subsidiary is not a Wholly Owned Restricted Subsidiary, Consolidated
EBITDA shall be reduced (to the extent not otherwise reduced in accordance with
GAAP) by an amount equal to (A) the amount of the Adjusted Consolidated Net
Income attributable to such Restricted Subsidiary MULTIPLIED BY (B) the quotient
of (1) the number of shares of outstanding Common Stock of such Restricted
Subsidiary not owned on the last day of such period by the Company or any of its
Restricted Subsidiaries DIVIDED BY (2) the total number of shares of outstanding
Common Stock of such Restricted Subsidiary on the last day of such period.
Notwithstanding the foregoing, the provision for taxes based on the income or
profits of, and the depreciation and amortization and other non-cash charges of,
a Restricted Subsidiary of a Person shall be added to Adjusted Consolidated Net
Income to compute Consolidated EBITDA only to the extent (and in the same
proportion) that the net income of such Restricted Subsidiary was included in
calculating the Adjusted Consolidated Net Income of such Person and only if a
corresponding amount would be permitted at the date of determination to be
dividended
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to the Company by such Restricted Subsidiary without prior approval (that has
not been obtained), pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Restricted Subsidiary or its stockholders.
"CONSOLIDATED INTEREST EXPENSE" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including amortization of original issue
discount on any Indebtedness and the interest portion of any deferred payment
obligation, calculated in accordance with the effective interest method of
accounting; all commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing and net payments
(if any) pursuant to Hedging Obligations; and Indebtedness that is Guaranteed or
secured by the Company or any of its Restricted Subsidiaries) and all but the
principal component of rentals in respect of Capitalized Lease Obligations paid,
accrued or scheduled to be paid or to be accrued by the Company and its
Restricted Subsidiaries during such period; EXCLUDING, HOWEVER, (i) any amount
of such interest of any Restricted Subsidiary if the net income of such
Restricted Subsidiary is excluded from the calculation of Adjusted Consolidated
Net Income pursuant to clause (iii) of the definition thereof (but only in the
same proportion as the net income of such Restricted Subsidiary is excluded from
the calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of
the definition thereof) and (ii) any premiums, fees and expenses (and any
amortization thereof) payable in connection with the offering of the Notes, all
as determined on a consolidated basis (without taking into account Unrestricted
Subsidiaries) in conformity with GAAP.
"CREDIT FACILITY" means a bank credit facility, to be entered into among the
Company, Canadian Imperial Bank of Commerce, Inc., as agent (the "Agent"), and
certain lenders to be party thereto, on substantially the terms set forth in the
Summary of Terms and Conditions of the Agent, dated as of December 19, 1996, and
any amendment, extension, restatement, refinancing or refunding thereof;
PROVIDED that the Company and the Agent shall have (A) executed a commitment
letter with respect to such facility not later than June 30, 1997 and (B)
entered into such facility not later than December 31, 1997; PROVIDED FURTHER
that, in the event that the Company and the Agent shall have failed to execute a
commitment letter or enter into such facility within the time periods specified
in the second provision of this definition, clauses (xiii) and (xiv) of the
second paragraph of the "Limitation on Indebtedness" covenant shall be of no
further force and effect.
"DEFAULT" means any event that is, or with the passage of time or the giving
of notice or both would be, an Event of Default.
"DIRECTED INVESTMENT" means any Investment in a Telecommunications Business
that is made by investing the net proceeds of the issuance of Capital Stock
(other than Redeemable Stock) by the Company (or options, warrants or other
rights to purchase such Capital Stock) after the Issue Date; PROVIDED that such
Investment shall be made with such net proceeds in the form received by the
Company and shall be limited to an amount equal to (A) 50% of such net proceeds
to the extent that such net proceeds consist of cash, and (B) 100% of such net
proceeds to the extent such net proceeds consist of Capital Stock or
Telecommunications Assets; PROVIDED FURTHER that such Investment is made within
180 days of such issuance of Capital Stock.
"EQUITY OFFERING" means an underwritten public offering or flotation of
Common Stock of the Company which has been registered under the Securities Act
and/or admitted to listing on a national securities exchange.
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"FAIR MARKET VALUE" means the price that would be paid in an arm's length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board (whose determination shall be conclusive) and evidenced
by a resolution of the Board; PROVIDED that, with respect to the Pledged
Securities, the fair market value thereof shall be net of the accrued and unpaid
interest, if any, on the Notes.
"FCC" means the United States Federal Communications Commission and any
state or local telecommunications authority, department, commission or agency
(and any successors thereto).
"GAAP" means generally accepted accounting principles in the United States
of America as in effect from time to time, including, without limitation, those
set forth in the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession. All ratios and computations contained in the Indenture
shall be computed in conformity with GAAP applied on a consistent basis, except
that calculations made for purposes of determining compliance with the terms of
the covenants and with other provisions of the Indenture shall be made without
giving effect to (i) the amortization of any expenses incurred in connection
with the offering of the Notes and (ii) except as otherwise provided, the
amortization of any amounts required or permitted by Accounting Principles Board
Opinion Nos. 16 and 17.
"GUARANTEE" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness or other obligation of any
other Person and, without limiting the generality of the foregoing, any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness or other obligation of such other Person (whether arising by virtue
of partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness or other obligation of the
payment thereof or to protect such obligee against loss in respect thereof (in
whole or in part); PROVIDED that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
"INCUR" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including, with respect to the Company and its Restricted Subsidiaries, an
"incurrence" of Indebtedness by reason of a Person becoming a Restricted
Subsidiary of the Company; PROVIDED that neither the accrual of interest nor the
accretion of original issue discount shall be considered an Incurrence of
Indebtedness.
"INDEBTEDNESS" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments (whether negotiable or
non-negotiable), (iii) all obligations of such Person in respect of letters of
credit or other similar instruments (including reimbursement obligations with
respect thereto), (iv) all obligations of such Person to pay the deferred and
unpaid purchase price of property or services, which purchase price is due more
than six months after the date of placing such property in service or taking
delivery and title thereto or the completion of such services, except trade
payables and escrows, holdbacks and comparable arrangements to secure
indemnification obligations under acquisition agreements, (v) all obligations of
such Person as lessee under Capitalized Leases, (vi) all indebtedness of other
Persons secured by a Lien on any asset of such Person,
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whether or not such indebtedness is assumed by such Person, PROVIDED that the
amount of such indebtedness shall be the lesser of (A) the fair market value of
such asset at such date of determination and (B) the amount of such
indebtedness, (vii) the balance deferred and unpaid of the purchase price of any
property or representing any Hedging Obligations, except any such balance that
constitutes an accrued expense or trade payable and (viii) all indebtedness of
other Persons Guaranteed by such Person to the extent such indebtedness is
Guaranteed by such Person. The amount of Indebtedness of any Person at any date
shall be the outstanding balance at such date of all unconditional obligations
as described above and, with respect to contingent obligations that are included
in any of clauses (i) through (viii) above, the maximum liability upon the
occurrence of the contingency giving rise to the obligation, PROVIDED (A) that
the amount outstanding at any time of any Indebtedness issued with original
issue discount is the face amount of such Indebtedness, less the remaining
unamortized portion of the original issue discount (other than original issue
discount attributable to the issuance of warrants or other equity securities in
connection with the issuance of such Indebtedness) of such Indebtedness on such
date, (B) that Indebtedness shall not include any liability for federal, state,
local or other taxes and (C) that Indebtedness shall not include the fair market
value of the Pledged Securities then held by the Collateral Agent as determined
in good faith by an officer of the Company.
"INDEBTEDNESS TO EBITDA RATIO" means, as at any date of determination, the
ratio of (i) the aggregate amount of Indebtedness of the Company and its
Restricted Subsidiaries on a consolidated basis ("Consolidated Indebtedness") as
at the date of determination (the "Transaction Date") to (ii) the Consolidated
EBITDA of the Company for the then most recent four full fiscal quarters for
which reports have been filed pursuant to the "Reports" covenant described above
(such four full fiscal quarter period being referred to herein as the "Four
Quarter Period"); PROVIDED that (x) pro forma effect shall be given to any
Indebtedness Incurred from the beginning of the Four Quarter Period through the
Transaction Date (including any Indebtedness Incurred on the Transaction Date),
to the extent outstanding on the Transaction Date, (y) if during the period
commencing on the first day of such Four Quarter Period through the Transaction
Date (the "Reference Period"), the Company or any of the Restricted Subsidiaries
shall have engaged in any Asset Sale, Consolidated EBITDA for such period shall
be reduced by an amount equal to the EBITDA (if positive), or increased by an
amount equal to the EBITDA (if negative), directly attributable to the assets
which are the subject of such Asset Sale and any related retirement of
Indebtedness as if such Asset Sale and related retirement of Indebtedness had
occurred on the first day of such Reference Period or (z) if during such
Reference Period the Company or any of the Restricted Subsidiaries shall have
made any Asset Acquisition, Consolidated EBITDA of the Company shall be
calculated on a pro forma basis as if such Asset Acquisition and any Incurrence
of Indebtedness to finance such Asset Acquisition had taken place on the first
day of such Reference Period.
"INDEBTEDNESS TO TOTAL MARKET CAPITALIZATION RATIO" means, at any date of
determination, the ratio of (i) the aggregate amount of Indebtedness of the
Person and Restricted Subsidiaries on a consolidated basis outstanding to (ii)
the Total Market Capitalization of the Person.
"INVESTMENT" in any Person means any direct or indirect advance, loan or
extension of credit (including, without limitation, by way of Guarantee or
similar arrangement, but excluding advances to customers in the ordinary course
of business that are, in conformity with GAAP, recorded as accounts receivable
on the balance sheet of the Company or its Restricted Subsidiaries) or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase or acquisition of Capital Stock, bonds, notes, debentures or other
similar instruments issued by, such Person and shall include (i) the designation
of a Restricted Subsidiary as an Unrestricted Subsidiary and (ii) the fair
market value of the Capital Stock held by the Company and the Restricted
Subsidiaries of any Person that has ceased to be a Restricted Subsidiary by
reason of any transaction permitted by clause (iii) of the "Limitation on the
Issuance and Sale of Capital Stock of Restricted Subsidiaries" covenant. For
purposes of the definition of "Unrestricted Subsidiary" and the "Limitation on
Restricted Payments" covenant, (i) "Investment" shall include the fair market
value of the assets (net of liabilities) of any Restricted Subsidiary of the
Company at the time that such Restricted Subsidiary is designated an
Unrestricted Subsidiary and shall exclude the fair market value of
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the assets (net of liabilities) of any Unrestricted Subsidiary at the time that
such Unrestricted Subsidiary is designated a Restricted Subsidiary of the
Company and (ii) any property transferred to or from an Unrestricted Subsidiary
shall be valued at its fair market value at the time of such transfer, in each
case as determined by the Board in good faith.
"ISSUE DATE" means the date of original issuance of the Notes.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction).
"NET CASH PROCEEDS" means (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary of the Company)
and proceeds from the conversion of other property received when converted to
cash or cash equivalents, net of (i) brokerage commissions and other fees and
expenses (including fees and expenses of counsel and investment bankers) related
to such Asset Sale, (ii) provisions for all taxes (whether or not such taxes
will actually be paid or are payable) as a result of such Asset Sale without
regard to the consolidated results of operations of the Company and its
Restricted Subsidiaries, taken as a whole, (iii) payments made to repay
Indebtedness or any other obligation outstanding at the time of such Asset Sale
that either (A) is secured by a Lien on the property or assets sold or (B) is
required to be paid as a result of such sale and (iv) appropriate amounts to be
provided by the Company or any Restricted Subsidiary of the Company as a reserve
against any liabilities associated with such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as determined in conformity
with GAAP and (b) with respect to any issuance or sale of Capital Stock, the
proceeds of such issuance or sale in the form of cash or cash equivalents,
including payments in respect of deferred payment obligations (to the extent
corresponding to the principal, but not interest, component thereof) when
received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to the Company or any Restricted
Subsidiary of the Company) and proceeds from the conversion of other property
received when converted to cash or cash equivalents, net of attorney's fees,
underwriters' or placement agents' fees, discounts or commissions and brokerage,
consultant and other fees incurred in connection with such issuance or sale and
net of taxes paid or payable as a result thereof.
"NON-RECOURSE DEBT" means Indebtedness (a) as to which neither the Company
nor any of its Restricted Subsidiaries (i) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness) or (ii) is directly or indirectly liable (as a guarantor or
otherwise); (b) no default with respect to which (including any rights that the
holders thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit (upon notice, lapse of time or both) any holder of any
other Indebtedness (other than the Notes) of the Company or any of its
Restricted Subsidiaries to declare a default on such other Indebtedness or cause
the payment thereof to be accelerated or payable prior to its stated maturity;
and (c) as to which the lender of any indebtedness for borrowed money in an
aggregate amount in excess of $5.0 million has been notified in writing that
such lender will not have any recourse to the stock or assets of the Company or
any of its Restricted Subsidiaries.
"OFFER TO PURCHASE" means an offer to purchase Notes by the Company from the
holders that is required by the "Disposition of Proceeds of Asset Sales" or
"Change in Control" covenants of the Indenture and which is commenced by mailing
a notice to the Trustee and each holder stating: (i) the covenant pursuant to
which the offer is being made and that all Notes validly tendered will be
accepted
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for payment on a pro rata basis; (ii) the purchase price and the date of
purchase (which shall be a business day no earlier than 30 days nor later than
60 days from the date such notice is mailed) (the "Payment Date"); (iii) that
any Note not tendered will continue to accrue interest pursuant to its terms;
(iv) that, unless the Company defaults in the payment of the purchase price, any
Note accepted for payment pursuant to the Offer to Purchase shall cease to
accrue interest on and after the Payment Date; (v) that holders electing to have
a Note purchased pursuant to the Offer to Purchase will be required to surrender
the Note together with the form entitled "Option of the Holder to Elect
Purchase" on the reverse side thereof completed, to the Paying Agent at the
address specified in the notice prior to the close of business on the business
day immediately preceding the Payment Date; (vi) that holders will be entitled
to withdraw their election if the Payment Agent receives, not later than the
close of business on the third business day immediately preceding the Payment
Date, a telegram, facsimile transmission or letter setting forth the name of
such holder, the principal amount of Notes delivered for purchase and a
statement that such holder is withdrawing his election to have such Notes
purchased; and (vii) that holders whose Notes are being purchased only in part
will be issued new Notes equal in principal amount to the unpurchased portion
thereof; PROVIDED that each Note purchased and each new Note issued shall be in
a principal amount of $1,000 or integral multiples thereof. On the Payment Date,
the Company shall (i) accept for payment on a pro rata basis Notes or portions
thereof tendered pursuant to an Offer to Purchase, (ii) deposit with the Paying
Agent money sufficient to pay the purchase price of all Notes or portions
thereof so accepted and (iii) deliver, or cause to be delivered, to the Trustee
all Notes or portions thereof so accepted together with an Officers' Certificate
specifying the Notes or portions thereof so accepted for payment by the Company.
The Paying Agent shall promptly mail to the holders of Notes so accepted for
payment in an amount equal to the purchase price, and the Trustee shall promptly
authenticate and mail to such holders a new Note equal in principal amount to
any unpurchased portion of the Note surrendered; PROVIDED that each Note
purchased and each new Note issued shall be in a principal amount of $1,000 or
integral multiples thereof. The Company will publicly announce the results of an
Offer to Purchase as soon as practicable after the Payment Date. The Trustee
shall act as the Paying Agent for an Offer to Purchase. The Company will comply
with Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable,
in the event that the Company is required to repurchase Notes pursuant to an
Offer to Purchase.
"PERMITTED ASSET SWAP" means any disposition by the Company or any of its
Restricted Subsidiaries of Telecommunications Assets or a majority of the Voting
Stock of a Restricted Subsidiary in exchange for comparable Telecommunications
Assets or a majority of the Voting Stock of a comparable Restricted Subsidiary;
PROVIDED that the Board shall have approved such disposition and exchange and
determined the fair market value of the assets subject to such transaction as
evidenced by a resolution of the Board or such fair market value has been
determined by a written opinion of an investment banking firm of national
standing or other recognized independent expert with experience appraising the
terms and conditions of the type of transaction contemplated thereby.
"PERMITTED INVESTMENTS" MEANS:
(i) an Investment in a Restricted Subsidiary or a Person which will,
upon the making of such Investment, become a Restricted Subsidiary or be
merged or consolidated with or into or transfer or convey all or
substantially all its assets to, the Company or a Restricted Subsidiary;
(ii) Temporary Cash Investments;
(iii) payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as expenses
in accordance with GAAP;
(iv) loans or advances to employees (other than executive officers of
the Company) in an aggregate principal amount not to exceed $1.0 million at
any one time outstanding;
(v) stock, obligations or securities received in satisfaction of
judgments;
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(vi) Investments, to the extent that the consideration provided by the
Company or any of its Restricted Subsidiaries consists solely of Capital
Stock (other than Redeemable Stock) of the Company;
(vii) notes payable to the Company that are received by the Company as
payment of the purchase price for Capital Stock (other than Redeemable
Stock) of the Company;
(viii) Investments in an aggregate amount not to exceed $20.0 million at
any one time outstanding;
(ix) Investments in an aggregate amount not to exceed $1.0 million at
any time outstanding in Unrestricted Subsidiaries engaged in the
Telecommunications Business outside of the United States;
(x) Investments in entities (other than ART West) that own licenses
granted by the FCC; PROVIDED that (A) such Investments are made pursuant to
a senior promissory note, in an amount equal to such Investment, that by its
terms is payable in full at or before any required repayment of principal on
the Notes, (B) such promissory note is secured equally and ratably with (or
prior to) any other secured Indebtedness of such entity, (C) such Investment
is made and used for the purpose of effecting, and does not exceed the
amount reasonably required to effect, the minimum build-out with respect to
such licenses that is required by the FCC as a prerequisite to the transfer
of a majority equity interest in such entity to the Company or one of its
Restricted Subsidiaries, as determined in good faith by the Board and (D)
the Company, at the time such Investment is made, had a contractual right
to, and intends (subject in all cases to compliance with applicable FCC
rules and regulations) to, acquire such majority equity interest;
(xi) Investments existing on the Issue Date;
(xii) the acquisition of all equity interests of ART West not otherwise
owned by the Company;
(xiii) Directed Investments; and
(xiv) promissory notes from Commco, L.L.C. in payment of the exercise
price of the option granted by the Company to Commco, L.L.C. in accordance
with the terms of the Option Agreement, dated as of July 3, 1996, between
the Company and Commco, L.L.C.
"PERMITTED LIENS" MEANS:
(i) Liens for taxes, assessments, governmental charges or claims that
are being contested in good faith by appropriate legal proceedings timely
instituted and diligently conducted and for which a reserve or other
appropriate provision, if any, as shall be required in conformity with GAAP
shall have been made;
(ii) statutory or common law Liens of landlords and carriers,
warehousemen, mechanics, suppliers, materialmen, repairmen or other similar
Liens arising in the ordinary course of business and with respect to amounts
not yet delinquent or being contested in good faith by appropriate legal
proceedings timely instituted and diligently conducted and for which a
reserve or other appropriate provision, if any, as shall be required in
conformity with GAAP shall have been made;
(iii) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security;
(iv) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory or regulatory obligations, bankers'
acceptances, surety and appeal bonds, government contracts, performance and
return-of-money bonds and other obligations of a similar nature incurred in
the ordinary course of business (exclusive of obligations for the payment of
borrowed money) and a bank's unexercised right of set-off with respect to
deposits made in the ordinary course;
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(v) easements, rights-of-way, municipal and zoning ordinances and
similar charges, encumbrances, title defects or other irregularities that do
not materially interfere with the ordinary course of business of the Company
or any of its Subsidiaries or other irregularities that do not materially
interfere with the ordinary course of business of the Company or any of its
Subsidiaries;
(vi) Liens (including extensions and renewals thereof) upon real or
personal property acquired after the Issue Date; PROVIDED that (A) such Lien
is created solely for the purpose of securing Indebtedness Incurred in
accordance with the "Limitation on Indebtedness" covenant, (1) to finance
the cost (including the cost of improvement or construction) of the item of
property or assets subject thereto and such Lien is created prior to, at the
time of or within six months after the later of the acquisition, the
completion of construction or the commencement of full operation of such
property or (2) to refinance any Indebtedness previously so secured, (B) the
principal amount of the Indebtedness secured by such Lien does not exceed
100% of such cost and (C) any such Lien shall not extend to or cover any
property or assets other than such item of property or assets and any
improvements on such item;
(vii) leases or subleases granted to others that do not materially
interfere with the ordinary course of business of the Company and its
Restricted Subsidiaries, taken as a whole;
(viii) Liens encumbering property or assets under construction arising
from progress or partial payments by a customer of the Company or its
Restricted Subsidiaries relating to such property or assets;
(ix) any interest or title of a lessor in the property subject to any
Capitalized Lease or operating lease;
(x) Liens arising from filing Uniform Commercial Code financing
statements regarding leases;
(xi) Liens on property of, or on shares of stock or Indebtedness of, any
corporation existing at the time such corporation becomes, or becomes a part
of, any Restricted Subsidiary; PROVIDED that such Liens do not extend to or
cover any property or assets of the Company or any Restricted Subsidiary
other than the property or assets acquired;
(xii) Liens in favor of the Company or any Restricted Subsidiary;
(xiii) Liens arising from the rendering of a final judgment or order
against the Company or any Restricted Subsidiary of the Company that does
not give rise to an Event of Default;
(xiv) Liens securing reimbursement obligations with respect to letters of
credit that encumber documents and the property relating to such letters of
credit and the products and proceeds thereof;
(xv) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;
(xvi) Liens arising out of conditional sale, title retention, consignment
or similar arrangements for the sale of goods entered into by the Company or
any of its Restricted Subsidiaries in the ordinary course of business in
accordance with the past practices of the Company and its Restricted
Subsidiaries prior to the Issue Date;
(xvii) Liens on or sales of receivables;
(xviii) Liens securing other Indebtedness in an aggregate amount not to
exceed $250,000 at any one time;
(xix) Liens on assets of Unrestricted Subsidiaries that secure
Non-Recourse Debt of Unrestricted Subsidiaries;
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(xx) Liens existing on the Issue Date and any extension, renewal or
replacement of any Liens existing on Issue Date, PROVIDED that the Liens in
any such extension, renewal or replacement are no less favorable in any
material respect to the holders of the Notes than those Liens that are then
in effect and that are being extended, renewed or replaced;
(xxi) Liens granted after the Issue Date on any assets or Capital Stock of
the Company or its Restricted Subsidiaries created in favor of the holders
of the Notes;
(xxii) Liens with respect to the assets of a Restricted Subsidiary granted
by such Restricted Subsidiary to the Company or a Wholly Owned Restricted
Subsidiary to secure Indebtedness owing to the Company or such other Wholly
Owned Restricted Subsidiary;
(xxiii) Liens securing Indebtedness which is Incurred to refinance secured
Indebtedness which is permitted to be Incurred under clause (iii) of the
second paragraph of the "Limitation on Indebtedness" covenant; PROVIDED that
such Liens do not extend to or cover any property or assets of the Company
or any Restricted Subsidiary other than the property or assets securing the
Indebtedness being refinanced;
(xxiv) purchase money Liens upon equipment, software or systems acquired or
held by the Company or any of its Restricted Subsidiaries taken or retained
by the seller (or a financing institution acting on behalf of the seller) of
such equipment, software or systems to secure all or a part of the purchase
price therefor; PROVIDED that such Liens do not extend to or cover any
property or assets of the Company or any Restricted Subsidiary other than
the equipment so acquired;
(xxv) Liens securing Indebtedness which is permitted to be Incurred under
clause (xiii) or (xiv) of the second paragraph of the "Limitation on
Indebtedness" covenant; and
(xxvi) Liens on the Pledged Securities in favor of the holders of the
Notes.
"PERSON" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"PLEDGE ACCOUNT" means an account established with the Trustee pursuant to
the terms of the Pledge Agreement for the deposit of the Pledged Securities
purchased by the Company with a portion of the net proceeds from the Unit
Offering.
"PLEDGE AGREEMENT" means the Collateral Pledge and Security Agreement, dated
as of the date of the Indenture, by and between the Trustee and the Company,
governing the disbursement of funds from the Pledge Account.
"PLEDGED SECURITIES" means the securities purchased by the Company with a
portion of the net proceeds from the Unit Offering, which shall initially
consist of Government Securities, to be deposited in the Pledge Account.
"PREFERRED STOCK" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's preferred or preference stock, whether now outstanding or issued after
the Issue Date, and including, without limitation, all classes and series of
preferred or preference stock of such Person.
"REDEEMABLE STOCK" means any class or series of Capital Stock of any Person
that by its terms or otherwise is (i) required to be redeemed prior to the
Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes (unless the redemption price is, at the Company's option, without
conditions precedent, payable solely is Common Stock (other than Redeemable
Stock) of the Company) or (iii) convertible into or exchangeable for Capital
Stock referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; PROVIDED that any Capital
Stock that would not constitute Redeemable Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or redeem
such Capital Stock upon the occurrence of an "asset sale" or "change of
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control" occurring prior to the Stated Maturity of the Notes shall not
constitute Redeemable Stock if the "asset sale" or "change of control"
provisions applicable to such Capital Stock are no more favorable to the holders
of such Capital Stock than the provisions contained in "Disposition of Proceeds
of Asset Sales" and "Change in Control" covenants described above and such
Capital Stock specifically provides that such Person will not repurchase or
redeem any such stock pursuant to such provision prior to the Company's
repurchase of such Notes as are required to be repurchased pursuant to the
"Disposition of Proceeds of Asset Sales" and "Change in Control" covenants
described above.
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"SIGNIFICANT SUBSIDIARY" means, at any date of determination, any Restricted
Subsidiary of the Company that, together with its Subsidiaries, (i) for the most
recent fiscal year of the Company, accounted for more than 10% of the
consolidated revenues of the Company and its Restricted Subsidiaries or (ii) as
of the end of such fiscal year, had assets accounting for more than 10% of the
consolidated assets of the Company and its Restricted Subsidiaries, all as set
forth on the most recently available consolidated financial statements of the
Company for such fiscal year.
"SPECIFIED DATE" means any redemption date, any date of purchase of Notes
pursuant to the "Disposition of Proceeds of Asset Sales" or "Change in Control"
covenants described above, or any date on which the Notes are due and payable
after an Event of Default.
"STATED MATURITY" means, (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
"STRATEGIC EQUITY INVESTOR" means any company which is (or a controlled
Affiliate of any company which is or a controlled Affiliate of which is) engaged
principally in a cable or telecommunications business which has a Total Market
Capitalization of at least $1.0 billion.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"TELECOMMUNICATIONS ASSETS" means all assets (including, without limitation,
assets consisting of subscribers), rights (contractual or otherwise) and
properties, whether tangible or intangible, used in connection with a
Telecommunications Business.
"TELECOMMUNICATIONS BUSINESS" means, when used in reference to any Person,
that such Person is engaged primarily in the business of (i) providing voice,
video or data communications services, (ii) creating, developing, marketing or
selling communications related equipment, software and other devices or (iii)
evaluating, participating in or pursuing any other activity or opportunity that
is related or incidental to those identified in clauses (i) or (ii) above.
"TEMPORARY CASH INVESTMENT" means any of the following: (i) direct
obligations of the United States or any agency thereof or obligations fully and
unconditionally guaranteed by the United States or any agency thereof; (ii) time
deposit accounts, certificates of deposit and money market deposits maturing
within six months of the date of acquisition thereof issued by a bank or trust
company which is organized under the laws of the United States, any state
thereof or any foreign country recognized by the United States, and which bank
or trust company has capital, surplus and undivided profits aggregating in
excess of $500.0 million (or the foreign currency equivalent thereof) and has
outstanding debt which is
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rated "A" (or such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined in Rule 436
under the Securities Act) or any money-market fund sponsored by a registered
broker dealer or mutual fund distributor; (iii) repurchase obligations with a
term of not more than 30 days for underlying securities of the types described
in clause (i) above entered into with a bank meeting the qualifications
described in clause (ii) above; (iv) commercial paper, maturing not more than
six months after the date of acquisition, issued by a corporation (other than an
Affiliate of the Company) organized and in existence under the laws of the
United States, any state thereof or any foreign country recognized by the United
States with rating at the time as of which any investment therein is made of
"P-1" (or higher) according to Moody's Investors Service, Inc. or "A-1" (or
higher) according to Standard & Poor's Ratings Group; and (v) securities with
maturities of six months or less from the date of acquisition issued or fully
and unconditionally guaranteed by any state, commonwealth or territory of the
United States, or by any political subdivision or taxing authority thereof, and
rated at least "A" by Standard & Poor's Ratings Group or Moody's Investors
Service, Inc.
"TOTAL MARKET CAPITALIZATION" of any Person means, as of any day of
determination, the sum of (a) the consolidated Indebtedness of such Person and
its Restricted Subsidiaries on such day, PLUS (b) the product of (i) the
aggregate number of outstanding shares of Common Stock of such Person on such
day (which shall not include any options or warrants on, or securities
convertible or exchangeable into, shares of Common Stock of such Person) and
(ii) the average Closing Price of such Common Stock over the 10 consecutive
Trading Days ending not earlier than 10 Trading Days immediately prior to such
date of determination, PLUS (c) the liquidation value of any outstanding shares
of Preferred Stock of such Person on such day. If no such Closing Price exists
with respect to shares of any such class, the value of such shares for purposes
of clause (b) of the preceding sentence shall be determined by the Board in good
faith and evidenced by a resolution of the Board filed with the Trustee.
Notwithstanding the foregoing, unless the Company's Common Stock is listed on
any national securities exchange or on the Nasdaq National Market, the "Total
Market Capitalization" of the Company shall mean, as of any day of
determination, the enterprise value (without duplication) of the Company and its
Restricted Subsidiaries (including the fair market value of their debt and
equity, but excluding the enterprise value of the Company's Unrestricted
Subsidiaries), as determined by an independent banking firm of national standing
with experience in such valuations and evidenced by a written opinion in
customary form filed with the Trustee; PROVIDED that for purposes of any such
determination, the enterprise value of the Company shall be calculated as if the
Company were a publicly held corporation without a controlling stockholder. For
purposes of any such determination, such banking firm's written opinion may
state that such fair market value is no less than a specified amount and such
opinion may be as of a date no earlier than 90 days prior to the date of such
determination.
"TRADING DAY" with respect to a securities exchange or automated quotation
system means a day on which such exchange or system is open for a full day of
trading.
"UNRESTRICTED SUBSIDIARY" means any Subsidiary that is designated by the
Board as an Unrestricted Subsidiary pursuant to a resolution of the Board; but
only to the extent that such Subsidiary (i) has no Indebtedness other than
Non-Recourse Debt; (ii) is not party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary of the Company
unless the terms of any such agreement, contract, arrangement or understanding
are no less favorable to the Company or such Restricted Subsidiary than those
that might be obtained at the time from Persons who are not Affiliates of the
Company; (iii) is a Person with respect to which neither the Company nor any of
its Restricted Subsidiaries has any direct or indirect obligation (A) to
subscribe for additional equity interests, except to the extent that such
obligation complies with the "Limitation on Restricted Payments" covenant, or
(B) to maintain or preserve such Person's financial condition or to cause such
Person to achieve any specified levels of operating results; (iv) is not a
guarantor of or otherwise directly or indirectly provides credit support for any
Indebtedness of the Company or any of its Restricted Subsidiaries; and (v) has,
immediately prior to the commencement of material business operations, at least
one director on its board of directors that is not a director or executive
officer of the Company or any of its Restricted Subsidiaries and has at least
one executive officer that is not a director or executive
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officer of the Company or any of its Restricted Subsidiaries. Any such
designation by the Board shall be evidenced to the Trustee by filing with the
Trustee a certified copy of the resolution of the Board giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions and was permitted by the covenant
described above under the caption "Limitation on Restricted Payments." If, at
any time, any Unrestricted Subsidiary would fail to meet the foregoing
requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of
such Subsidiary shall be deemed to be Incurred by a Restricted Subsidiary of the
Company as of such date (and, if such Indebtedness is not permitted to be
Incurred as of such date under the covenant described under the caption
"Limitation on Indebtedness," the Company shall be in default of such covenant).
The Board may at any time designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; PROVIDED that such designation shall be deemed to be an
Incurrence of Indebtedness by a Restricted Subsidiary of the Company of any
outstanding Indebtedness of such Unrestricted Subsidiary and such designation
shall only be permitted if (i) such Indebtedness is permitted under the covenant
described under the caption "Limitation on Indebtedness" and (ii) no Default or
Event of Default would be in existence following such designation.
"VOTING STOCK" means, with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"VOTING TRUST AGREEMENTS" means (i) that certain Voting Trust Agreement,
(ii) that certain Cooperation Agreement and (iii) Section 7 of that certain
Confidentiality Agreement, each dated as of November 5, 1996.
"WHOLLY OWNED" means, with respect to any Subsidiary of any Person, such
Subsidiary if all of the outstanding Capital Stock in such Subsidiary (other
than any director's qualifying shares or Investments by foreign nationals
mandated by applicable law) is owned by such Person or one or more Wholly Owned
Subsidiaries of such Person.
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DESCRIPTION OF WARRANTS
The Warrants will be issued pursuant to a warrant agreement (the "Warrant
Agreement") by and between the Company and Continental Stock Transfer and Trust
Company, as warrant agent (the "Warrant Agent"). The following summary of
certain provisions of the Warrant Agreement and the Warrants does not purport to
be complete and is qualified in its entirety by reference to the Warrant
Agreement and the Warrants, including the definitions therein of certain terms.
The Warrant Agreement will be substantially in the form of the Warrant Agreement
filed as an exhibit to the Registration Statement of which this Prospectus is a
part.
GENERAL
Each Warrant, when exercised, will entitle the holder thereof to receive
9.024 shares of Common Stock (such shares, the "Warrant Shares") at an exercise
price of $ per share (the "Exercise Price"). The Exercise Price and the
number of Warrant Shares issuable on exercise of a Warrant are both subject to
adjustment in certain cases referred to below. The Warrants are exercisable at
any time on or after , 1997. Unless exercised, the Warrants will
automatically expire on , 2007 (the "Expiration Date"). Upon
exercise, the holders of Warrants would be entitled, in the aggregate, to
purchase 1,128,011 shares of Common Stock, representing 5.0% of the outstanding
Common Stock on a fully diluted basis on the date hereof, after giving effect to
the CommcoCCC Acquisition.
The Warrants may be exercised at any time on or after the Separation Date by
surrendering to the Company at the office of the Warrant Agent the Warrant
certificates evidencing such Warrants with the accompanying form of election to
purchase properly completed and executed, together with payment of the Exercise
Price. Payment of the Exercise Price may be made in the form of cash or a
certified or official bank check payable to the order of the Company. Upon
surrender of the Warrant certificate and payment of the Exercise Price, the
Warrant Agent will deliver or cause to be delivered, to or upon the written
order of such holder, a stock certificate representing the number of whole
Warrant Shares or other securities or property to which such holder is entitled
under the Warrant Agreement and the Warrants, including, without limitation, any
cash payment to adjust for fractional interests in Warrant Shares issuable upon
such exercise. If less than all of the Warrants evidenced by a Warrant
certificate are to be exercised, a new Warrant certificate will be issued for
the remaining number of Warrants. The Warrant Shares to be issued upon the
exercise of the Warrants will be registered under the Securities Act.
No fractional Warrant Share will be issued upon exercise of the Warrants. If
any fraction of a Warrant Share would, except for the foregoing provision, be
issuable on the exercise of any Warrants (or a specified portion thereof), the
Company shall pay an amount in cash equal to the current market price per
Warrant Share, as determined on the day immediately preceding the date the
Warrant is presented for exercise, multiplied by such fraction, computed to the
nearest whole U.S. cent.
Certificates for Warrants will be issued in registered form only, and no
service charge will be made for registration of transfer or exchange upon
surrender of any Warrant certificate at the office of the Warrant Agent
maintained for that purpose. The Company may require payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in connection
with any registration, transfer or exchange of Warrant certificates.
The holders of the Warrants have no right to vote on matters submitted to
the stockholders of the Company and have no right to receive dividends. The
holders of the Warrants are not be entitled to share in the assets of the
Company in the event of liquidation, dissolution or winding up of the Company's
affairs.
In the event of taxable distribution to holders of Common Stock which
results in an adjustment to the number of Warrant Shares or other consideration
for which a Warrant may be exercised, the holders of the Warrants may, in
certain circumstances, be deemed to have received a distribution subject to
United States federal income tax as a dividend. See "Certain Federal Income Tax
Considerations."
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REGISTRATION OF WARRANT SHARES
Holders of Warrants will be able to exercise their Warrants only if a
registration statement relating to the Warrant Shares is then in effect, or the
exercise of such Warrants is exempt from the registration requirements of the
Securities Act, and such securities are qualified for sale or exempt from
qualification under the applicable securities laws of the states in which the
various holders of the Warrants or other persons to whom it is proposed that the
Warrant Shares be issued on exercise of the Warrants reside. The Company is
required under the terms of the Warrant Agreement to file and use its best
efforts to cause to become effective no later than , 1997 a shelf
registration statement (the "Warrant Shelf Registration Statement") on an
appropriate form under the Securities Act covering the issuance and resale, to
the extent applicable, of the Warrant Shares upon the exercise of the Warrants.
Subject to "black-out" periods not to exceed 90 days in the aggregate in any
calendar year, the Company will also be required to use its best efforts to
maintain the effectiveness of the Warrant Shelf Registration Statement until the
expiration or exercise of all Warrants. There can be no assurance that the
Company will be able to file, cause to be declared effective or keep a
registration statement continuously effective until all of the Warrants have
been exercised or have expired.
ADJUSTMENTS
The number of shares of Common Stock purchasable upon the exercise of the
Warrants and the Exercise Price both will be subject to adjustment in certain
events (subject to certain exceptions) including (i) the payment by the Company
of dividends (and other distributions) on Common Stock payable in Common Stock
or other shares of the Company's capital stock, (ii) subdivisions, combinations
and reclassifications of Common Stock, (iii) the issuance to all holders of
Common Stock of rights, options or warrants entitling them to subscribe for
Common Stock or of securities convertible into or exchangeable for Common Stock,
for a consideration per share of Common Stock which is less than the current
market price per share of Common Stock and (iv) the distribution to all holders
of Common Stock of any of the Company's assets, debt securities or any rights or
warrants to purchase securities (excluding those rights and warrants referred to
in clause (iii) above and excluding cash dividends less than a specified
amount). In addition, the Exercise Price may be reduced in the event of
purchases of Common Stock pursuant to a tender or exchange offer made by the
Company of any subsidiary thereof at a price greater than the sale price of the
Common Stock at the time such tender or exchange offer expires.
No adjustment in the Exercise Price will be required unless such adjustment
would require an increase or decrease of at least one percent (1%) in the
Exercise Price; PROVIDED, HOWEVER, that any adjustment which is not made will be
carried forward and taken into account in any subsequent adjustment.
In the case of certain consolidations or mergers of the Company, or the sale
of all or substantially all of the assets of the Company to another corporation,
each Warrant shall thereafter be exercisable for the right to receive the kind
and amount of shares of stock or other securities or property to which such
holder would have been entitled as a result of such consolidation, merger or
sale had the Warrants been exercised immediately prior thereto.
AUTHORIZED SHARES
The Company has authorized for issuance such number of shares of Common
Stock as shall be issuable upon the due exercise of all outstanding Warrants.
Such shares of Common Stock, when paid for and issued, will be duly and validly
issued, fully paid and non-assessable, free of preemptive rights and free from
all taxes, liens, charges and security interests with respect to the issue
thereof (other than any such tax, lien, charge or security interest imposed upon
or granted by the holder of the Common Stock).
AMENDMENT
From time to time, the Company and the Warrant Agent, without the consent of
the holders of the Warrants, may amend or supplement the Warrant Agreement for
certain purposes, including curing
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defects or inconsistencies or making changes that do not materially adversely
affect the rights of any holder. Any amendment or supplement to the Warrant
Agreement that has a material adverse effect on the interests of the holders of
the Warrants shall require the written consent of the holders of a majority of
the then outstanding Warrants (excluding Warrants held by the Company or any of
its Affiliates). The consent of each holder of the Warrants affected shall be
required for any amendment pursuant to which the Exercise Price would be
increased or the number of Warrant Shares purchasable upon exercise of Warrants
would be decreased (other than pursuant to adjustments provided in the Warrant
Agreement).
GOVERNING LAW
The Warrant Agreement and the Warrants will be governed by, and construed in
accordance with, the laws of the State of New York without regard to the
principles of conflicts of law thereof.
REPORTS
Whether or not the Company is subject to the reporting requirements of the
Exchange Act, the Company shall cause copies of the reports described under
"Description of Notes -- Certain Covenants -- Reports" to be filed with the
Commission (to the extent permitted) and the Warrant Agent and mailed to the
holders at their addresses appearing in the register of Warrants maintained by
the Warrant Agent to the same extent as such reports are furnished to the
holders of Notes in accordance with the Indenture.
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, $.001 par value, and 10,000,000 shares of Serial Preferred
Stock, $.001 par value (the "Preferred Stock").
COMMON STOCK
As of December 31, 1996, there were 13,560,005 shares of Common Stock
outstanding held of record by 133 stockholders (without giving effect to 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
shares of Preferred Stock, if any, 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 the 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 issuable upon exercise
of the Warrants will be fully paid and non-assessable.
PREFERRED STOCK
As of December 31, 1996, there were no shares of Preferred Stock
outstanding. The Board of Directors has 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.
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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. Certain provisions of the Certificate of Incorporation
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 75% 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 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 is quoted on the Nasdaq Stock Market under the symbol
"ARTT."
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DESCRIPTION OF CERTAIN INDEBTEDNESS
CIBC FINANCING COMMITMENT
The Company has entered into agreements with the CIBC Investors which
provide that the Company may draw down $50.0 million of 12.5% Senior Secured
Notes, due in two years (the "CIBC Financing Commitment"). The Company has the
option of drawing down the Senior Secured Notes until February 10, 1997. Upon
completion of the Offering, the CIBC Financing Commitment will terminate, and,
accordingly, the Company will not issue the Senior Secured Notes in such event.
The interest rate on the Senior Secured Notes increases by 0.50% per annum on
February 12, 1997 and by an additional 0.50% per annum for each three-month
period thereafter.
The Senior Secured Notes, if issued, will be secured 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, if
issued, will be guaranteed by the Company's domestic subsidiaries. The Senior
Secured Notes, if issued, will 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.
The Company must apply the net proceeds received by it or any of its
subsidiaries from the net cash proceeds of any bank financing, sale of senior or
subordinated debt securities (excluding vendor financing and indebtedness
assumed in acquisitions and including the Offering) or any sale of equity
securities (other than equity issuances in permitted acquisitions) to prepay the
Senior Secured Notes. Upon a change of control (as defined in the CIBC Financing
Commitment agreements), the Company must make an offer to repurchase the Senior
Secured Notes at 101% of principal plus accrued and unpaid interest. The Company
may prepay the Senior Secured Notes at any time at par plus accrued interest.
In November 1996, the Company delivered to the CIBC Investors warrants to
purchase 300,257 shares of Common Stock (1.5% of the fully diluted Common Stock
of the Company after giving effect to the CommcoCCC Acquisition) at an exercise
price of $.01 per share (the "First CIBC Warrants"). The Company is obligated to
deliver to the CIBC Investors additional warrants to purchase 1.5% of the fully
diluted Common Stock upon first drawing down of the Senior Secured Notes (the
"Second CIBC Warrants" and, collectively with the First CIBC Warrants, the
"Initial CIBC Warrants"). If the Senior Secured Notes are outstanding on May 12,
1997, the Company shall issue to the CIBC Investors additional such warrants to
purchase 3% of the fully diluted Common Stock (the "Third CIBC Warrants"), and
if the Senior Secured Notes are outstanding after such initial six month period,
the Company will issue to the CIBC Investors additional such warrants (the
"Fourth CIBC Warrants", and collectively with the Third CIBC Warrants, the
"Additional CIBC Warrants") until the repayment date of the Senior Secured Notes
on the basis of 3% of the fully diluted Common Stock for every six month period,
pro-rated for any partial periods. The Initial CIBC Warrants and Additional CIBC
Warrants are referred to collectively as the "CIBC Warrants." The CIBC Warrants
have anti-dilution protection and demand and piggyback registration rights under
the Company's Registration Rights Agreement. See "Shares Eligible for Future
Sale--Registration Rights."
The commitment for sale of the Senior Secured Notes and the CIBC Warrants
(the "CIBC Financing Commitment") was arranged by CIBC Wood Gundy (as defined).
See "Underwriting." In connection with the CIBC Financing Commitment, the
Company is obligated to pay to CIBC Wood Gundy a structuring/placement fee and
is obligated to pay to the CIBC Investors a commitment fee, of which 50% was
paid in November 1996 and 50% is payable upon the earlier of draw down or March
31, 1997 if the Senior Secured Notes are issued. Under an exclusive placement
agent agreement, the Company has agreed to indemnify CIBC Wood Gundy and its
affiliates for liabilities resulting from the CIBC Financing Commitment and
certain future financings.
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EMI NOTE
In connection with the acquisition of the EMI Assets, the Company 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 a 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. See "Certain Transactions -- Equipment Financing."
PROPOSED CREDIT FACILITY
Canadian Imperial Bank of Commerce 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 have not
been determined as of the date hereof but would include measures of total debt
to operating cash flows, numbers of links, numbers of links per population unit
or market and amount of revenue per link. The proceeds could be used to finance
the construction of the Company' 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 including a
pledge of stock and assets of all subsidiaries, subject to certain exceptions to
be determined, and would be guaranteed by all subsidiaries. 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 will be required with respect to a
percentage of excess cash flow and proceeds of equity offerings and asset sales.
The revolving credit facility will 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, minimum 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 asset 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 and 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 Offering 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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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the material United States federal
income tax considerations relevant to the purchase, ownership and disposition of
the Units, Notes and Warrants by holders acquiring Units on original issue for
cash, but does not purport to be a complete analysis of all potential tax
effects. The discussion is based upon the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury regulations, Internal Revenue Service ("IRS")
rulings and pronouncements and judicial decisions all in effect as of the date
hereof, all of which are subject to change at any time, and any such change may
be applied retroactively in a manner that could adversely affect a holder of the
Units, Notes or Warrants. The discussion does not address all of the federal
income tax consequences that may be relevant to a holder in light of such
holder's particular circumstances or to holders subject to special rules, such
as certain financial institutions, insurance companies, dealers in securities,
foreign corporations, nonresident alien individuals and persons holding the
Units, Notes or Warrants as part of a "straddle," "hedge" or "conversion
transaction." Moreover, the effect of any applicable state, local or foreign tax
laws is not discussed. The discussion deals only with Units, Notes and Warrants
held as "capital assets" within the meaning of section 1221 of the Code.
The Company has not sought and will not seek any rulings from the IRS with
respect to the position of the Company discussed below. There can be no
assurance that the IRS will not take a different position concerning the tax
consequences of the purchase, ownership or disposition of the Units, Notes or
Warrants or that any such position would not be sustained.
PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH REGARD TO
THE APPLICATION OF THE TAX CONSIDERATIONS DISCUSSED BELOW TO THEIR PARTICULAR
SITUATIONS AS WELL AS THE APPLICATION OF ANY STATE, LOCAL, FOREIGN OR OTHER TAX
LAWS.
THE UNITS
Because the original purchasers of the Notes also will acquire Warrants,
each Note will be treated for federal income tax purposes as having been issued
as part of an "investment unit" consisting of the Note and associated Warrants.
The issue price of an investment unit consisting of the Note and associated
Warrants will be the first price at which a substantial amount of Units are sold
to the public for money (excluding sales to bond houses, brokers, or similar
persons or organizations acting in the capacity of underwriters, placement
agents or wholesalers). The "issue price" of an investment unit is allocated
between its component parts based on their relative fair market values. The
Company will allocate the issue price of a Unit between the Note and the
associated Warrants in accordance with the Company's determination of their
relative fair market values on the issue date. The Company will use that
allocation to determine the issue price of the Notes and the holder's tax basis
in the Warrants. Although the Company's allocation is not binding on the IRS, a
holder of a Unit must use the Company's allocation unless the holder discloses
on its federal income tax return for the year in which the Unit was acquired
that it plans to use an allocation that is inconsistent with the Company's
allocation.
THE NOTES
Holders of the Notes will be required to include payments of "qualified
stated interest" (as defined below) received thereon in taxable income in
accordance with their respective methods of accounting for federal income tax
purposes. In addition, the Notes will be issued with "original issue discount"
for federal income tax purposes. A holder generally is required to include
original issue discount in gross income as it accrues, regardless of the
holder's method of accounting for federal income tax purposes. Accordingly, each
holder will be required to include amounts in gross income without regard to
when the cash or other payments to which such income is attributable are
received.
The amount of original issue discount with respect to each Note is an amount
equal to the excess of the "stated redemption price at maturity" of such Note
over its issue price. The stated redemption price at maturity of each Note will
include all cash payments other than "qualified stated interest" payments,
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including principal and interest, required to be made thereunder until maturity.
Stated interest on the Notes will be treated as qualified stated interest. The
issue price of a Note will be equal to that portion of the issue price of the
Unit allocable to the Note as described above. It is expected that each Note
will be issued with a substantial amount of original issue discount.
TAXATION OF ORIGINAL ISSUE DISCOUNT. Each holder of a Note will be required
to include in gross income for federal income tax purposes an amount equal to
the sum of the "daily portions" of the original issue discount of the Note for
all days during each taxable year in which the holder holds the Note. The daily
portions of original issue discount will be determined on a constant interest
rate basis by allocating to each day in an accrual period a pro rata portion of
the original issue discount thereon that is attributable to the accrual period
in which such day is included. The amount of the original issue discount
attributable to each full accrual period will be the product of the "adjusted
issue price" of the Note at the beginning of such accrual period and the "yield
to maturity" of the Note (adjusted to reflect the length of the accrual period).
The adjusted issue price of a Note at the beginning of an accrual period is the
original issue price of the Note plus the aggregate amount of original issue
discount that has accrued in all prior accrual periods, less any cash payments
on the Note other than qualified stated interest on or before the first day of
such accrual period. The yield to maturity is the discount rate that, when used
in computing the present value of all principal and interest payments to be made
on the Note, produces an amount equal to the issue price. Under these rules,
holders will have to include increasingly greater amounts of original issue
discount in each successive accrual period. Each payment made under a Note
(except for payments of qualified stated interest) will be treated first as a
payment of original issue discount (which was previously includable in income)
to the extent of original issue discount that has accrued as of the date of
payment and has not been allocated to prior payments and second as a payment of
principal (which is not includable in income).
The accrual period generally is the six-month period ending on the day in
each calendar year corresponding to the day before the maturity date of the Note
or the date six months before such date. The initial accrual period of a note is
the short period beginning on the issue date and ending on the day before the
first day of the first full accrual period. The amount of original issue
discount attributable to an initial short accrual period may be computed under
any reasonable method.
The Company is required to furnish certain information to the IRS, and will
furnish annually to record holders of a Note, information with respect to
original issue discount accruing during the calendar year. That information will
be based upon the adjusted issue price of the Note as if the holder were the
original holder of the Note.
A holder who purchases a Note for an amount other than the adjusted issue
price and/or on a date other than the end of an accrual period will be required
to determine for himself the amount of original issue discount, if any, he is
required to include in gross income for federal income tax purposes.
OPTIONAL REDEMPTION. Under the original issue discount Regulations, the
Company will be presumed to exercise its option to redeem the Notes if, by
utilizing the date of exercise of the call option as the maturity date and the
Redemption Price as the stated redemption price at maturity, the yield on the
Notes would be lower than such yield would be if the option were not exercised.
See "Description of Notes--Optional Redemption."
If the Company's option to redeem the Notes were presumed exercised on a
given date (the "Presumed Exercise Date"), the Notes would bear original issue
discount in an amount equal to the amount for which the Notes could be redeemed
(the "Redemption Amount") over their issue price. For purposes of calculating
the current inclusion of such discount, the yield on the Notes would be computed
on their issue date by treating the Presumed Exercise Date as the maturity date
of the Notes and the Redemption Amount as their stated redemption price at
maturity. If the Company's option to redeem the Notes were presumed exercised
but were not exercised in fact on the Presumed Exercise Date, the Notes would be
treated, for certain purposes, as if the option were exercised and new debt
instruments were issued on the Presumed Exercise Date for an amount of cash
equal to the Redemption
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Amount. In such case, it appears that any payment of stated interest due under
the Notes after the Presumed Exercise Date would constitute qualified stated
interest (rather than original issue discount) and would be taxable as ordinary
interest income at the time such interest was accrued or was received, in
accordance with such holder's regular method of accounting for tax purposes.
SALE OR RETIREMENT OF A NOTE. In general, a holder of a Note will recognize
gain or loss upon the sale, retirement, redemption or other taxable disposition
of such Note in an amount equal to the difference between (a) the amount of cash
and the fair market value of other property received in exchange therefor (other
than amounts attributable to accrued but unpaid stated interest) and (b) the
holder's adjusted tax basis in such Note.
A holder's tax basis in a Note generally will be equal to the price paid for
such Note, increased by the amount of original issue discount, if any,
includable in gross income prior to the date of disposition, and decreased by
the amount of any payment on such Note other than qualified stated interest
prior to disposition.
Any gain or loss recognized on the sale, retirement, redemption or other
taxable disposition of a Note generally will be capital gain or loss. Such
capital gain or loss generally will be long-term capital gain or loss if the
Note has been held by the holder for more than one year and otherwise will be a
short term capital gain or loss.
Holders should be aware that the resale of the Note may be effected by the
"Market Discount" rules of the Code under which a subsequent Purchaser of a Note
requiring the Note at a market discount generally would be required to include
as ordinary income a portion of the gain realized upon the disposition or
retirement of such Note, to the extent of the market discount that has accrued
while the debt instrument was held by such holder.
THE WARRANTS
Upon the sale, exchange or other taxable disposition of a Warrant (including
the receipt of cash in lieu of a fractional interest in a Warrant Share upon
exercise of a Warrant), a holder will recognize gain or loss for federal income
tax purposes in an amount equal to the difference between the amount of cash
plus the fair market value of property received therefor and the holder's
adjusted tax basis in the Warrant. A holder's initial tax basis in a Warrant
acquired in the Unit Offering will be that portion of the issue price of the
Units allocable to the Warrant, as described above, subject to adjustment in the
events described below. Such gain or loss will be capital gain or loss if the
Warrant Shares to which the Warrants relate would be a capital asset in the
hands of the Warrant holder. Any such capital gain or loss will be long-term
capital gain or loss if the Warrant was held for more than one year at the time
of the sale or exchange and otherwise will be a short term capital gain or loss.
Notwithstanding the above, it is possible that a redemption of a Warrant by
the Company would not be treated as a sale or exchange of a capital asset. In
that event, the holder of a Warrant could recognize ordinary income or loss on
such redemption.
The exercise of a Warrant for cash will not result in a taxable event to the
holder of the Warrant (except to the extent of cash, if any, received in lieu of
fractional interest in a Warrant Share). Upon such exercise, the holder's
adjusted tax basis in the Warrant Shares obtained will be equal to the sum of
such holder's adjusted tax basis in the Warrant (described above) and the
exercise price of the Warrant; the holder's holding period with respect to such
Warrant Shares will commence on the day after the date of exercise. The holder
will generally realize capital gain or loss on the sale or exchange of a Warrant
Share if the Warrant Share is a capital asset in the hands of the holder, and
such capital gain or loss will be long-term if the Warrant Share was held for
more than one year. If a Warrant expires without being exercised, the holder
will recognize a loss in an amount equal to its tax basis in the Warrant. Such
loss will be a capital loss if the Warrant Shares to which the Warrants relate
would have been a capital asset in the hands of the Warrant holder, and such
capital loss will be a long-term capital loss is the Warrant was held for more
than one year at the time of the lapse.
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Adjustments to the conversion ratio of the Warrants, or the failure to make
adjustments, may in certain circumstances result in the receipt of taxable
constructive dividends by the holder resulting in ordinary income (subject to
possible dividends received deduction in the case of corporate holders) to the
extent of the Company's current and accumulated earnings and profits. In such
event the holder's tax basis in the Warrants would be increased by an amount
equal to the constructive dividend.
BACKUP WITHHOLDING
A holder of a Note may be subject to backup withholding at a rate of 31%
with respect to interest and original issue discount on, and gross proceeds upon
sale or retirement of, a Note unless such holder (i) is a corporation or other
exempt recipient and, when required, demonstrates that fact, or (ii) provides a
correct taxpayer identification number, certifies under penalty of perjury, when
required, that the taxpayer identification number provided is the holder's
correct number and that such holder is not subject to backup withholding, and
otherwise complies with applicable requirements of the backup withholding rules.
Backup withholding is not an additional tax; any amounts so withheld are
creditable against the holder's federal income tax, provided the required
information is provided to the IRS. Holders of the Notes should consult their
tax advisors as to their qualification for exemption from backup withholding and
the procedure for obtaining such an exemption.
APPLICABLE HIGH-YIELD DISCOUNT OBLIGATIONS
If the Notes are considered to have "significant original discount" (for
example, due to the number of shares of Common Stock underlying the Warrants or
the value allocated thereto) and if the yield of the Notes is at least five
percentage points above the applicable federal rate, the Company will not be
able to deduct for tax purposes any original issue discount accruing with
respect thereto until the amounts attributable to such original issue discount
are actually paid. In addition, if the yield of the Notes is more than six
percentage points above the applicable federal rate, then (i) a portion of
interest corresponding to the yield in excess of six percentage points above the
applicable federal rate will not be deductible by the Company at any time, and
(ii) a corporate holder may be entitled to treat the original issue discount
that is not deductible as a dividend to the extent of the earnings and profits
of the Company, which may then qualify for the dividends received deduction. If
the disqualified portion exceeds the Company's current accumulated earnings and
profits, the excess will continue to be taxed as ordinary original issue
discount income in accordance with the rules described above. Corporate holders
should consult their tax advisers concerning the availability of the dividends
received deduction.
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UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
"Purchase Agreement"), among the Company and Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") and CIBC Wood Gundy Securities Corp. ("CIBC
Wood Gundy" and, collectively with Merrill Lynch, the "Underwriters"), the
Company has agreed to sell to the Underwriters, and each Underwriter has agreed
to purchase from the Company, severally but not jointly, the number of Units set
forth opposite its name below. The Purchase Agreement provides that, subject to
the terms and conditions set forth therein, the Underwriters will be obligated
to purchase all of the Units if any such Units are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF UNITS
---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..........................................
CIBC Wood Gundy Securities Corp..................................
---------
Total................................................. 125,000
---------
---------
</TABLE>
The several Underwriters propose to offer the Units directly to the public
at the offering price set forth on the cover page of this Prospectus, and in
part to certain selected dealers at such price less a concession not in excess
of % per Unit. The several Underwriters may allow, and such dealers may
reallow, a discount not in excess of % per Unit to certain other dealers.
After the Offering, the public offering price, concession and discount may be
changed.
Merrill Lynch acted as an underwriter in the Common Stock Offering for which
Merrill Lynch received customary compensation. The Company has granted to
Merrill Lynch a right of first refusal with respect to the performance of
certain investment banking services for which Merrill Lynch will receive
customary compensation. The Company also has engaged CIBC Wood Gundy to provide
certain investment banking services for which CIBC Wood Gundy will receive
customary compensation. In addition, in connection with the CIBC Financing
Commitment, (i) CIBC Wood Gundy received a $1.25 million structuring/placement
fee and (ii) CIBC WG Argosy Merchant Fund 2, LLC, an affiliate of CIBC Wood
Gundy (the "Merchant Fund"), committed to purchase $20.0 million of Senior
Secured Notes, if issued, and consequently received warrants to purchase 120,103
shares of Common Stock and a commitment fee of $200,000 in connection therewith.
If the Senior Secured Notes are issued, (i) CIBC Wood Gundy will receive an
additional $1.25 million installment of its structuring/placement fee and (ii)
the Merchant Fund will receive an additional $200,000 installment of its
commitment fee. In the event that the Senior Secured Notes are issued, the
Merchant Fund would, under certain circumstances, be entitled to receive
additional warrants to purchase Common Stock. See "Description of Certain
Indebtedness -- CIBC Financing Commitment."
There is currently no public market for the Units, the Notes or the
Warrants, and the Company does not intend to apply for listing of the Units, the
Notes or the Warrants on any securities exchange or on any inter-dealer
quotation system. The Common Stock has been approved for quotation on the Nasdaq
National Market. The Company has been advised by the Underwriters that,
following the completion of the initial public offering of the Notes, the
Underwriters presently intend to make a market in the Units, the Notes and the
Warrants as permitted by applicable laws and regulations; however, they are not
obligated to do so and any such market-making may be discontinued at any time
without notice at the sole discretion of each Underwriter. Accordingly, there
can be no assurance as to whether an active public market for the Units, the
Notes or the Warrants will develop or, if a public market does develop, as to
the liquidity of the trading market for the Units, the Notes or the Warrants. If
an active public market does not develop, the market price and liquidity for the
Units, the Notes or the Warrants may be adversely affected. See "Risk Factors --
Absence of Public Market; Possible Volatility of Stock Price."
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended
(the "Securities Act"), and, under certain circumstances, to contribute to
payments the Underwriters may be required to make in respect thereof.
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The Company has agreed that it will not, for a period of 180 days from the
date of this Prospectus, without the prior written consent of the Underwriters,
directly or indirectly, offer, sell, grant any option to purchase or otherwise
dispose of, any debt security of the Company which is publicly offered or sold
pursuant to Rule 144A under the Securities Act.
LEGAL MATTERS
The validity of the Units, the Notes and the Warrants offered hereby will be
passed upon for the Company by Hahn & Hessen LLP, New York, New York. Certain
legal matters in connection with the 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 beneficially owns 8,618 shares of
Common Stock (including 2,000 shares issuable upon exercise of March Bridge
Warrants). Latham & Watkins, Washington, D.C., currently represents the Company
with respect to certain FCC matters.
EXPERTS
The balance sheets as of December 31, 1995 and 1994 and the statements of
operations, stockholders' equity (deficit) and 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 included in this Prospectus, have been included
herein in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
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. The Commission also maintains a
site on the World Wide Web at http://www.sec.gov that contains reports, proxy
and information statements and other information that registrants file with the
Commission.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith is 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. In addition, the Indenture and the
Warrant Agreement provide that the Company, to the extent that it is not
required to file such information pursuant to the Exchange Act, shall provide
the Trustee and holders of the Notes and Warrants with audited year-end
financial statements of the Company prepared in accordance with GAAP and
unaudited quarterly financial statements of the Company prepared in accordance
with GAAP.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus, including, without
limitation, statements containing the words "believes," "anticipates," "expects"
and words of similar import, constitute "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, among others, the following:
the limited nature of the Company's operations and its history of net losses;
the uncertain acceptance of 38 GHz services; competition; the risk of the
Company's failure to consummate the CommcoCCC Acquisition; existing government
regulations and changes in, or the failure to comply with, government
regulations; the risk of loss, non-renewal or fluctuation in value of the
Company's FCC licenses; the ability of the Company to sustain, manage or
forecast its growth; technological limitations with respect to 38 GHz
technology; dependence on significant suppliers and marketers and the potential
loss thereof; the availability of additional 38 GHz bandwidth; the changing
nature of wireless broadband services and the telecommunications industry; the
ability to attract and retain qualified personnel; the Company's significant
capital requirements and need for additional financing; the Company's leverage
and ability to service its indebtedness; ownership of Common Stock; the use of
proceeds of the Offering; retention of earnings (if any); and other factors
referenced in this Prospectus. Certain of these factors are discussed in more
detail elsewhere in this Prospectus, including, without limitation, under the
captions "Risk Factors," "Use of Proceeds," "Price Range of Common Stock and
Dividend Policy," "Capitalization," "Selected Historical and Pro Forma Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations," "Business" and "Principal Stockholders." GIVEN THESE
UNCERTAINTIES, PROSPECTIVE INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE
ON SUCH 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.
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GLOSSARY
38 GHZ -- The fourteen 100 MHz channels between 38.6 GHz and 40.0 GHz and
the frequency between 37.0 and 38.5 GHz allocated by the FCC for wireless
broadband transmissions.
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.
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.
BIT -- 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.
CLEC (COMPETITIVE LOCAL EXCHANGE CARRIER) -- A company that provides local
exchange services in competition with the incumbent local exchange carrier.
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 information as opposed to the
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continuously 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 is required by the Telecommunication Act.
Dialing parity when implemented will enable customers to dial only 1+ or 0+ for
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.
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.
HERTZ -- Cycles 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.
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.
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LINE OF SIGHT -- An unobstructed view between two transceivers.
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.
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 a settlement of an antitrust
suit reached 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.
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 or
long distance carriers while retaining the same telephone number. If number
portability does not exist, customers will have to change phone numbers when
they change carriers.
OC-3 RADIOS -- A transmission protocol most often deployed on fiber optic
SONET networks that operates at 155 megabits per second when provisioned using
electronic rather than optical media referred to as STS-3.
PCS (PERSONAL COMMUNICATIONS SERVICES) -- 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.
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.
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 each of
which is 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 antennas and transceivers) on the roofs of buildings, on special
towers or even on utility poles or pylons.
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SONET (SYNCHRONOUS OPTICAL NETWORK) -- A set of standards for optical
communications transmission systems that define the optical rates and formats,
signal characteristics, performance, management and maintenance information to
be embedded within the signals and the multiplexing techniques to be employed in
optical communications transmission systems. SONET facilitates the
interoperability of dissimilar vendors equipment. SONET benefits business
customers by minimizing the equipment necessary for various telecommunications
applications and supports networking diagnostic and maintenance features.
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ADVANCED RADIO TELCOM CORP.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Unaudited Pro Forma:
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of September 30, 1996..................... F-3
Unaudited Pro Forma Condensed Consolidated Statements of Operations for the nine months ended
September 30, 1996 and for the year ended December 31, 1995.......................................... F-4
Notes to Unaudited Pro Forma Condensed Consolidated Financial Statements.............................. F-5
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 and for the period from August
23, 1993 (date of inception) to December 31, 1993.................................................... F-10
Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1995 and 1994 and for
the period from August 23, 1993 (date of inception) to December 31, 1993............................. F-11
Statements of 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.................................................... F-13
Notes to the Financial Statements..................................................................... F-14
Unaudited Condensed Consolidated Balance Sheets as of September 30, 1996 and 1995..................... F-28
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.................................. F-29
Unaudited Condensed Consolidated Statements of Stockholders' Deficit for the nine months ended
September 30, 1996................................................................................... F-30
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1996
and 1995............................................................................................. F-31
Notes to Unaudited Condensed Consolidated Financial Statements........................................ F-32
</TABLE>
F-1
<PAGE>
ADVANCED RADIO TELECOM CORP. AND ITS SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements are presented for the following transactions: (i) the sale by the
Company of an aggregate of 2,300,500 shares of Common Stock offered in the
November 1996 Common Stock Offering at a price of $15.00 per share, after
deducting underwriting discount and expenses of approximately $5,600,000; (ii)
the conversion of the serial preferred stock into shares of Common Stock in
November 1996; (iii) fees and expenses of approximately $6,400,000 related to
the receipt of the CIBC Financing Commitment of $50 million, including the
issuance of CIBC Warrants to purchase 300,257 shares of Common Stock in November
1996, which financing commitment is assumed to be replaced by the issuance of
the Notes in the Offering; (iv) the October 1996 receipt of the remaining
$1,550,000 (out of a total of $4,000,000) in cash proceeds from the September
Bridge Financing; (v) the application of the net proceeds from the Common Stock
Offering to repay the March Bridge Notes, the CommcoCCC Notes and the September
Bridge Notes and to pay an initial $3,000,000 (out of a total of $6,000,000) to
acquire the 50% ownership interest of ART West held by Extended; (vi) the
exercise of the Ameritech Warrant to purchase an aggregate of 318,374 shares of
Common Stock in December 1996; (vii) the sale by the Company of 125,000 Units
(consisting of Notes and Warrants) offered in the Offering assuming $125,000,000
in gross proceeds, after deducting the estimated underwriting discount and
offering expenses and the cash used for the purchase of Pledged Securities;
(viii) the payment of the remaining $3,000,000 in the acquisition of the 50%
ownership interest of ART West held by Extended and (ix) the consummation of the
acquisition by the Company of the CommcoCCC Assets in exchange for 6,000,000
shares of Common Stock at an assumed value of $11.25 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
consolidated statements of operations and at the balance sheet date for the
unaudited pro forma condensed consolidated balance sheet.
These unaudited pro forma condensed consolidated financial statements were
derived from and should be read in conjunction with the audited financial
statements and the related notes thereto, and the unaudited condensed
consolidated financial statements of the Company 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 consolidated 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
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ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1996
---------------------------------------------------
<S> <C> <C> <C>
PRO FORMA
HISTORICAL (A) ADJUSTMENTS (B) PRO FORMA
--------------- ---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents............................... $ 752,368 $ 30,789,438(1) $
1,550,000(3) 85,433,151
(12,000,000 (4)
(6,000,000 (5)
(3,000,000 (7)
(1,883,655 (8)
75,225,000(9)
Accounts receivable..................................... 78,645
78,645
Other current assets.................................... 140,227
140,227
--------------- ---------------- ----------------
Total current assets.................................. 971,240 84,680,783 85,652,023
Restricted cash........................................... 1,000,000 44,300,000(9) 45,300,000
Property and equipment, net............................... 11,019,217
11,019,217
Equity investment......................................... 285,000 (285,000 (5) --
FCC licenses, net......................................... 4,276,780 6,285,000(5) 104,011,780
93,450,000(7)
Deferred financing costs, net............................. 2,343,087 (1,907,528 (1)
5,475,000(9) 5,910,559
Deposits.................................................. 463,036
463,036
Other assets.............................................. 183,637
183,637
--------------- ---------------- ----------------
$ 20,541,997 $ 231,998,255 $ 252,540,252
--------------- ---------------- ----------------
--------------- ---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities................ $ 11,154,608 $ $ 11,154,608
March Bridge Notes...................................... 4,243,784 (4,243,784 (4) --
CommcoCCC Notes......................................... 2,827,836 (2,827,836 (4) --
September Bridge Notes.................................. 2,203,559 1,384,918(3)
(3,588,477 (4) --
Current portion of long-term debt....................... 1,242,126
1,242,126
--------------- ---------------- ----------------
Total current liabilities............................. 21,671,913 (9,275,179) 12,396,734
Note payable to EMI, net of current portion............... 937,500
937,500
Equipment financing note payable, net of current
portion.................................................. 927,796
927,796
Senior Notes.............................................. -- 118,107,853(9) 118,107,853
Deferred tax liability.................................... -- 22,950,000(7) 22,950,000
--------------- ---------------- ----------------
Total liabilities..................................... 23,537,209 131,782,674 155,319,883
--------------- ---------------- ----------------
Stockholders' equity (deficit):
Serial preferred stock, $.001 par....................... 921 (921 (2) --
Common Stock, $.001 par................................. 6,587 2,301(1) 19,560
4,354(2)
318(6)
6,000(7)
Additional paid-in capital.............................. 20,745,714 28,879,609(1) 128,676,649
(3,433 (2)
165,082(3)
(318 (6)
67,494,000(7)
4,503,848(8)
6,892,147(9)
Accumulated deficit..................................... (23,748,434) (1,339,903 (4) (31,475,840)
(6,387,503 (8)
--------------- ---------------- ----------------
Total stockholders' equity (deficit).................. (2,995,212) 100,215,581 97,220,369
--------------- ---------------- ----------------
$ 20,541,997 $ 231,998,255 $ 252,540,252
--------------- ---------------- ----------------
--------------- ---------------- ----------------
</TABLE>
See the accompanying notes to unaudited pro forma condensed consolidated
financial statements.
F-3
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
-------------------------------------------------
PRO FORMA
HISTORICAL (A) ADJUSTMENTS (B) PRO FORMA
--------------- --------------- ---------------
<S> <C> <C> <C>
Service revenue.......................................... $ 125,013 $ $ 125,013
--------------- --------------- ---------------
Operating expenses:
Selling, general and administrative (D)................ 16,942,052 16,942,052
Market development (E)................................. 1,053,000 1,053,000
Research and development............................... 666,406 666,406
Depreciation and amortization.......................... 504,462 1,870,031 (11 2,374,493
--------------- --------------- ---------------
19,165,920 1,870,031 21,035,951
--------------- --------------- ---------------
Other:
Interest expense....................................... 1,396,943 (811,483)(4)
13,573,125 (10 14,158,585
Financing expense...................................... -- 6,387,503(8) 6,387,503
Interest income........................................ (59,473) (1,777,537) 10) (1,837,010)
--------------- --------------- ---------------
1,337,470 17,371,608 18,709,078
--------------- --------------- ---------------
Pretax loss........................................ 20,378,377 19,241,639 39,620,016
Deferred tax benefit..................................... -- (595,744) 11) (595,744)
--------------- --------------- ---------------
Net loss........................................... $ 20,378,377 $ 18,645,895 $ 39,024,272
--------------- --------------- ---------------
--------------- --------------- ---------------
Pro forma net loss per share of Common Stock (C)......... $ 2.15 $ $2.12
--------------- ---------------
--------------- ---------------
Pro forma weighted average number of shares of Common
Stock outstanding (C) 9,470,545 18,404,379
--------------- ---------------
--------------- ---------------
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------
PRO FORMA
HISTORICAL (A) ADJUSTMENTS (B) PRO FORMA
--------------- --------------- ---------------
<S> <C> <C> <C>
Service revenue.......................................... $ 5,793 $ $ 5,793
--------------- --------------- ---------------
Operating expenses:
Selling, general and administrative (D)................ 2,911,273 2,911,273
Market development..................................... 191,693 191,693
Depreciation and amortization.......................... 15,684 2,493,375 (11 2,509,059
--------------- --------------- ---------------
3,118,650 2,493,375 5,612,025
--------------- --------------- ---------------
Other:
Interest expense....................................... 131,540 18,097,500 (10 18,229,040
Financing expense...................................... -- 6,387,503(8) 6,387,503
Interest income........................................ (9,554) (2,370,050) 10) (2,379,604)
--------------- --------------- ---------------
121,986 22,114,953 22,236,939
--------------- --------------- ---------------
Pretax loss........................................ 3,234,843 24,608,328 27,843,171
Deferred tax benefit..................................... -- (794,325) 11) (794,325)
--------------- --------------- ---------------
Net loss........................................... $ 3,234,843 $ 23,814,003 $ 27,048,846
--------------- --------------- ---------------
--------------- --------------- ---------------
Pro forma net loss per share
of Common Stock (C)..................................... $ 0.30 $ 1.36
--------------- ---------------
--------------- ---------------
Pro forma weighted average number of shares of Common
Stock outstanding (C)................................... 10,912,338 19,846,172
--------------- ---------------
--------------- ---------------
</TABLE>
See the accompanying notes to unaudited pro forma condensed consolidated
financial statements.
F-4
<PAGE>
ADVANCED RADIO TELECOM CORP.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(A) Represents the historical consolidated balance sheet of the Company as of
September 30, 1996 and the consolidated statements of operations of the
Company for the year ended December 31, 1995 and the nine months ended
September 30, 1996.
(B) Pro forma adjustments:
(1)Issuance of 2,300,500 shares of Common Stock offered in the November 1996
Common Stock Offering based on the initial public offering price of
$15.00 per share, after deducting the estimated Underwriting discount and
related expenses of approximately $5,600,000.
(2)The November 1996 conversion of the serial preferred stock into shares of
Common Stock in connection with the Common Stock Offering.
(3)The receipt of the remaining $1,550,000 in October 1996 (out of a total
of $4,000,000) in cash from the September Bridge Financing in exchange
for the September Bridge Notes and September Bridge Warrants. The value
ascribed to the September Bridge Warrants issued after September 30, 1996
was $165,082 (out of a total of $426,019).
(4)Repayment in November 1996 of the March Bridge Notes, the CommcoCCC Notes
and the September Bridge Notes out of the net proceeds from the Common
Stock Offering and the reversal of the related interest expense. The
unamortized offering discount and deferred financing costs associated
with the March Bridge Financing, the CommcoCCC Financing and the
September Bridge Financing will result in an extraordinary loss of
approximately $1,340,000, which has been excluded from the pro forma
condensed consolidated statements of operations.
(5)The acquisition of the 50% ownership interest of ART West held by
Extended for $6,000,000 in cash of which $3,000,000 has been paid in
November 1996.
(6)The exercise by Ameritech of its Warrant to purchase 318,374 shares of
Common Stock.
(7)The acquisition of the CommcoCCC Assets, accounted for as a business
combination, in exchange for 6,000,000 shares of Common Stock based on an
assumed value of $11.25 per share, the recognition of the related
deferred tax liabilities and the estimated payment of related expenses of
$3,000,000 of which $600,000 was paid in December 1996.
(8)The fees and expenses related to the receipt of a commitment from certain
investors to borrow up to $50,000,000 of 12.5% Senior Secured Notes due
1998 (the "Senior Secured Notes") pursuant to financing arranged by CIBC
Wood Gundy Securities Corp. (the "CIBC Financing Commitment") which is
assumed to be replaced by the issuance of the Notes in the Offering. The
Company incurred approximately $1,900,000 in fees and issued warrants to
purchase 300,257 shares of Common Stock (representing 1.5% of the
outstanding shares of Common Stock of the Company on a fully diluted
basis after giving effect to the Common Stock Offering and the CommcoCCC
Acquisition) for a nominal amount. The value ascribed to the Initial CIBC
Warrants was $4,572,435. Assumes no draw down under the CIBC Financing
Commitment.
(9)Assumed gross proceeds of $125,000,000 from the issuance of the 125,000
Units (consisting of Notes and Warrants) in the Offering, the related
estimated underwriting discount and related expenses of approximately
$5,475,000 and the cash used for the purchase of Pledged Securities of
$44,300,000. The value ascribed to the Unit Warrants totaled
approximately $6,900,000 based on an assumed issuance of Warrants to
purchase an aggregate of 1,128,011 shares of
F-5
<PAGE>
Common Stock of the Company (representing approximately 5% of the Common
Stock outstanding on a fully diluted basis after giving effect to the
Common Stock Offering, the Offering and the CommcoCCC Acquisition).
(10)
Interest expense on the Notes, at an assumed coupon rate of 13.0%
(resulting in an effective interest rate of 14.04% on the Notes,
including the amortization of debt issuance costs and original issue
discount representing 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 $625,000 and $468,750 for the year ended December 31,
1995 and for the nine months ended September 30, 1996, respectively.
Interest income of $1,777,537 for the nine months ended September 30,
1996 and $2,370,050 for the year ended December 31, 1995 on the Pledged
Securities at an assumed rate of 5.35%.
(11)
Depreciation and amortization expense related to the acquisition of the
CommcoCCC Assets and the 50% ownership interest in ART West and the
related deferred taxes.
(C) Pro forma net loss per share and the weighted average number of shares of
Common Stock reflect (i) the conversion of the serial preferred stock to
Common Stock; (ii) the issuance of potentially dilutive instruments issued
within one year prior to the Common Stock Offering at exercise prices below
the initial public offering price of $15.00 per share; (iii) the issuance of
2,300,500 shares of Common Stock in the Common Stock Offering; (iv) the
exercise of the Ameritech Warrant to purchase 318,374 shares of Common
Stock; and (v) the issuance of shares of Common Stock in connection with the
acquisition of the CommcoCCC Assets.
<TABLE>
<CAPTION>
As of As of
December 31, September 30,
1995 1996
--------------- ---------------
<S> <C> <C>
Weighted average number of shares of
Common Stock outstanding for primary
computation............................ 5,946,338(1) 6,580,627(1)
Issuances of shares of serial preferred
stock assumed converted into shares of
Common Stock........................... 3,720,253(2) 2,480,169(2)
Options and warrants issued and
outstanding............................ 605,195(2) 403,463(2)
Issuance of Common Stock ............... 640,552(3) 6,286(3)
--------------- ---------------
Historical pro forma weighted average
number of shares of Common Stock....... 10,912,338(2) 9,470,545(2)
Common Stock issued in the Common Stock
Offering............................... 2,300,500 2,300,500
Common Stock issued in connection with
the conversion of the serial preferred
stock and the exercise of the Ameritech
Warrant................................ 633,334(4) 633,334(4)
Common Stock issued in connection with
the acquisition of the CommcoCCC
Assets................................. 6,000,000 6,000,000
--------------- ---------------
Pro Forma weighted average number of
shares of Common Stock................. 19,846,172 18,404,379
--------------- ---------------
--------------- ---------------
</TABLE>
F-6
<PAGE>
<TABLE>
<S> <C>
------------------------
(1) The weighted average number of shares of Common Stock for primary computation
exclude all common stock equivalents, which are anti-dilutive.
(2) The Securities and Exchange Commission requires that potentially dilutive
instruments issued within one year prior to the Common Stock Offering at exercise
prices below the initial public offering price be treated as outstanding for the
entire periods presented in the Common Stock Offering prospectus. The pro forma
weighted average number of shares of Common Stock on a historical basis reflects
those potentially dilutive instruments based on the initial public offering price
of $15 per share in the Common Stock Offering. In measuring the dilutive effect,
the treasury stock method was used.
(3) Represents the issuance of Common Stock at prices below the initial public
offering price of $15 per share in the Common Stock Offering, presented as if such
shares were outstanding for the entire periods presented in the Common Stock
Offering prospectus to reflect potentially dilutive instruments.
(4) Included as potentially dilutive instruments in item (2) are the shares of Common
Stock issued in connection with the conversion of the preferred stock and the exercise
of the Ameritech Warrant. The additional shares of Common Stock are an adjustment
to the weighted average number of shares to eliminate the effect of the treasury
stock method for the conversion of the serial preferred stock and the exercise of
the Ameritech Warrant.
</TABLE>
(D) General and administrative expense includes non-recurring, non-cash
compensation expense of $802,002 and $6,795,514 for the year ended December
31, 1995 and for the nine months ended September 30, 1996, respectively,
associated with the release of Escrow Shares in 1995 and the termination of
the Escrow Shares arrangement in 1996.
(E) Market development expense for the nine months ended September 30, 1996
represents the value ascribed to the Ameritech Strategic Distribution
Agreement in connection with the February 1996 investment in the Company by
Ameritech.
F-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Advanced Radio Telecom Corp.:
We have audited the accompanying balance sheets of Advanced Radio Telecom
Corp. as of December 31, 1995 and 1994, and the related statements of
operations, stockholders' equity (deficit) and 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. 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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 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.
COOPERS & LYBRAND L.L.P.
New York, New York
April 26, 1996, except for Note 5B as to which the date is
June 26, 1996, except for the second paragraph of Note 2A,
Note 2C and the second paragraph of Note 11A as to which the date is
October 11, 1996 and except for the fourth paragraph of Note 1A and Note 1C
as to which the date is November 12, 1996.
F-8
<PAGE>
ADVANCED RADIO TELECOM CORP.
BALANCE SHEETS (NOTE 1A)
DECEMBER 31, 1995 AND 1994
<TABLE>
<CAPTION>
1995 1994
-------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 633,654 $ 5,133
Other current assets.............................................................. 52,325
-------------- ------------
Total current assets.......................................................... 685,979 5,133
Property and equipment, net......................................................... 3,581,561 3,448
Equity investment................................................................... 285,000
FCC licenses........................................................................ 4,235,734
Deferred financing costs, net....................................................... 778,897
Deposits............................................................................ 284,012
Other assets........................................................................ 25,376 34,030
-------------- ------------
Total assets.................................................................. $ 9,876,559 $ 42,611
-------------- ------------
-------------- ------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued liabilities.......................................... $ 3,694,489 $ 11,689
Note payable to related party..................................................... 70,000
-------------- ------------
Total current liabilities..................................................... 3,694,489 81,689
Convertible notes payable........................................................... 4,950,000
Note payable to EMI................................................................. 1,500,000
-------------- ------------
Total liabilities............................................................. 10,144,489 81,689
-------------- ------------
Redeemable preferred stock, $.01 par value, 1 share issued and outstanding at
December 31, 1995.................................................................. 44,930
-------------- ------------
Commitments and contingencies
Stockholders' deficit:
Serial preferred stock, $.001 par value, 488,492 shares issued and outstanding at
December 31, 1995................................................................ 488
Common Stock, $.001 par value, 6,529,975 and 2,141,830 shares issued and
outstanding...................................................................... 6,530 2,142
Additional paid-in capital........................................................ 3,050,179 93,994
Accumulated deficit............................................................... (3,370,057) (135,214)
-------------- ------------
Total stockholders' deficit................................................... (312,860) (39,078)
-------------- ------------
Total liabilities and stockholders' deficit................................. $ 9,876,559 $ 42,611
-------------- ------------
-------------- ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-9
<PAGE>
ADVANCED RADIO TELECOM CORP.
STATEMENTS OF OPERATIONS (NOTE 1A)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
AND FOR THE PERIOD FROM AUGUST 23, 1993 (DATE OF INCEPTION)
TO DECEMBER 31, 1993
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 23,
YEARS ENDED (DATE OF
DECEMBER 31, INCEPTION) TO
-------------------------- DECEMBER 31,
1995 1994 1993
------------- ----------- -------------
<S> <C> <C> <C>
Service revenue....................................................... $ 5,793 $ $
Consulting revenue.................................................... 137,489
------------- ----------- -------------
Total revenue................................................... 5,793 137,489
------------- ----------- -------------
General and administrative expenses................................... 2,911,273 253,453 5,906
Market development expenses........................................... 191,693
Depreciation and amortization......................................... 15,684 8,281 688
------------- ----------- -------------
Total operating expenses........................................ 3,118,650 261,734 6,594
------------- ----------- -------------
Interest income....................................................... 9,554
Interest expense...................................................... 131,540 4,375
------------- ----------- -------------
Interest expense, net........................................... 121,986 4,375
------------- ----------- -------------
Net loss........................................................ $ 3,234,843 $ 128,620 $ 6,594
------------- ----------- -------------
------------- ----------- -------------
Pro forma net loss per share of Common Stock.......................... $ 0.30
-------------
-------------
Pro forma weighted average number of shares of Common Stock
outstanding.......................................................... 10,912,338
-------------
-------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-10
<PAGE>
ADVANCED RADIO TELECOM CORP.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (NOTE 1A)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
AND FOR THE PERIOD FROM AUGUST 23, 1993 (DATE OF INCEPTION)
TO DECEMBER 31, 1993
<TABLE>
<CAPTION>
PREFERRED STOCK
COMMON -----------------------------------------------------------
STOCK SERIES A SERIES B SERIES C SERIES D TOTAL
----------- --------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
SHARES
Net issuance of Common Stock for cash................. 1,070,915
-----------
Balance, December 31, 1993............................ 1,070,915
Issuance of Common Stock for cash..................... 1,070,915
-----------
Balance, December 31, 1994............................ 2,141,830
Issuance of Common Stock to ART West.................. 26,773
Issuance of Common Stock to existing shareholders..... 1,472,508
Issuance of Common Stock to Landover and affiliates
for cash............................................. 3,120,000
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................ 62,655 2,852 4,189 7,041
Redemption of Common Stock from Landover.............. (293,791)
----------- --------- ----------- ----- ----------- ---------
Balance, December 31, 1995............................ 6,529,975 334,943 86,507 5,402 61,640 488,492
----------- --------- ----------- ----- ----------- ---------
----------- --------- ----------- ----- ----------- ---------
</TABLE>
Continued
F-11
<PAGE>
ADVANCED RADIO TELECOM CORP.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (NOTE 1A), CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
AND FOR THE PERIOD FROM AUGUST 23, 1993 (DATE OF INCEPTION)
TO DECEMBER 31, 1993
<TABLE>
<CAPTION>
PAR VALUE
----------------------------------------------------------------------------------
PREFERRED STOCK ADDITIONAL
COMMON --------------------------------------------------------------------- PAID-IN
STOCK SERIES A SERIES B SERIES C SERIES D TOTAL CAPITAL
----------- ----------- ------------- ------------- ------------- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
AMOUNTS
Net issuance of Common Stock
for cash...................... $ 1,071 $ 60,065
Net loss.......................
----------- -----------
Balance, December 31, 1993..... 1,071 60,065
Issuance of Common Stock for
cash.......................... 1,071 33,929
Net loss.......................
----------- -----------
Balance, December 31, 1994..... 2,142 93,994
Issuance of Common Stock to ART
West.......................... 27 24,973
Issuance of Common Stock to
existing shareholders......... 1,472 (1,472)
Conversion of note payable and
interest to paid-in capital... 75,250
Issuance of Common Stock to
Landover and affiliates for
cash.......................... 3,120 (2,100)
Issuance of preferred stock to
limited partnerships
affiliated with Landover for
cash:
Series A..................... $ 332 $ 332 1,006,268
Series B..................... $ 82 82 880,618
Series C..................... $ 5 5 112,695
Issuance of Series D preferred
stock for cash................ $ 62 62 1,999,938
Shares issued to reflect anti-
dilution...................... 63 3 4 7 (70)
Serial preferred stock issuance
costs......................... (229,814)
Redemption of Common Stock from
Landover...................... (294) (1,999,706)
Increase in additional paid-in
capital as a result of the
release of escrow shares...... 802,002
Accrued stock option
compensation.................. 287,603
Net loss.......................
--
----------- ----- --- --- ----- -----------
Balance, December 31, 1995..... $ 6,530 $ 335 $ 86 $ 5 $ 62 $ 488 $ 3,050,179
--
--
----------- ----- --- --- ----- -----------
----------- ----- --- --- ----- -----------
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
------------- -----------
<S> <C> <C>
AMOUNTS
Net issuance of Common Stock
for cash...................... $ $ 61,136
Net loss....................... (6,594) (6,594)
------------- -----------
Balance, December 31, 1993..... (6,594) 54,542
Issuance of Common Stock for
cash.......................... 35,000
Net loss....................... (128,620) (128,620)
------------- -----------
Balance, December 31, 1994..... (135,214) (39,078)
Issuance of Common Stock to ART
West.......................... 25,000
Issuance of Common Stock to
existing shareholders.........
Conversion of note payable and
interest to paid-in capital... 75,250
Issuance of Common Stock to
Landover and affiliates for
cash.......................... 1,020
Issuance of preferred stock to
limited partnerships
affiliated with Landover for
cash:
Series A..................... 1,006,600
Series B..................... 880,700
Series C..................... 112,700
Issuance of Series D preferred
stock for cash................ 2,000,000
Shares issued to reflect anti-
dilution......................
Serial preferred stock issuance
costs......................... (229,814)
Redemption of Common Stock from
Landover...................... (2,000,000)
Increase in additional paid-in
capital as a result of the
release of escrow shares...... 802,002
Accrued stock option
compensation.................. 287,603
Net loss....................... (3,234,843) (3,234,843)
------------- -----------
Balance, December 31, 1995..... $(3,370,057) $ (312,860)
------------- -----------
------------- -----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-12
<PAGE>
ADVANCED RADIO TELECOM CORP.
STATEMENTS OF CASH FLOWS (NOTE 1A)
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
AND FOR THE PERIOD FROM AUGUST 23, 1993 (DATE OF INCEPTION)
TO DECEMBER 31, 1993
<TABLE>
<CAPTION>
PERIOD FROM
AUGUST 23, 1993
YEARS ENDED (DATE OF
DECEMBER 31, INCEPTION)
---------------------------- TO DECEMBER 31,
1995 1994 1993
-------------- ------------ ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................................... $ (3,234,843) $ (128,620) $ (6,594)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Noncash interest expense...................................... 110,828
Depreciation and amortization................................. 15,684 8,281 688
Non-cash compensation expense................................. 1,089,605
Changes in operating assets and liabilities:
Accounts payable and accrued liabilities.................... 563,351 (8,282) 19,971
Other current assets........................................ (52,325)
Deposits.................................................... (4,012)
-------------- ------------ --------
Net cash provided by (used in) operating activities..... (1,511,712) (128,621) 14,065
-------------- ------------ --------
Cash flows from investing activities:
Additions to property and equipment........................... (621,364) (5,175)
Investment in ART West........................................ (255,000)
Acquisition of EMI licenses and property and equipment........ (3,023,971)
Acquisition of FCC licenses................................... (13,912)
Deposits on equipment......................................... (280,000)
Increase in other assets...................................... (41,272)
-------------- ------------ --------
Net cash used in investing activities................... (4,194,247) (5,175) (41,272)
-------------- ------------ --------
Cash flows from financing activities:
Proceeds from issuance of Common Stock........................ 1,020 35,000 61,136
Proceeds from loan and note payable........................... 8,500 70,000
Proceeds from issuance of preferred stock..................... 4,050,000
Advances from Landover and affiliates......................... 175,000
Proceeds from convertible notes payable....................... 4,950,000
Redemption of Common Stock.................................... (2,000,000)
Stock issuance costs.......................................... (213,884)
Repayment on loan............................................. (8,500)
Additions to deferred financing costs......................... (452,656)
Payments on advances from Landover and affiliates............. (175,000)
-------------- ------------ --------
Net cash provided by financing activities............... 6,334,480 105,000 61,136
-------------- ------------ --------
Net increase (decrease) in cash......................... 628,521 (28,796) 33,929
Cash, beginning of period....................................... 5,133 33,929
-------------- ------------ --------
Cash, end of period............................................. $ 633,654 $ 5,133 $ 33,929
-------------- ------------ --------
-------------- ------------ --------
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
Additional paid-in capital as a result of the release of
escrow shares............................................. $ 802,002
Accrued stock issuance costs................................ $ 21,000
Accrued deferred financing costs............................ $ 370,617
Issuance of stock and contribution of licenses to ART
West...................................................... $ 30,000
Conversion of note payable and interest to Common Stock..... $ 75,250
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-13
<PAGE>
ADVANCED RADIO TELECOM CORP.
NOTES TO FINANCIAL STATEMENTS
1. FORMATION OF THE COMPANY AND BASIS OF PRESENTATION:
A -- THE COMPANY
Advanced Radio Telecom Corp. ("ART" and, collectively with ART Licensing
Corp., 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.
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).
ART Licensing Corp. ("Telecom"), formerly named Advanced Radio Telecom Corp.
and Advanced Radio Technology Ltd., was organized by ART and Landover Holdings
Corporation ("Landover") on March 28, 1995, with one of its initial objectives
to acquire certain 38 GHz licenses in the northeastern United States from EMI
Communications, Corp. ("EMI") (see Note 6). Under the terms of a purchase
agreement between ART, 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 ART, Telecom and their respective shareholders dated May 8,
1995 (the "Stockholders' Agreement"), ART and Telecom were to merge once
approval from the Federal Communications Commission ("FCC") had been granted
(see Note 2).
On October 11, 1996, ART, Telecom and a wholly owned subsidiary of ART
("Merger Sub") entered into a revised merger agreement (see Note 2), 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. The Merger was accounted for in a manner
consistent with a reorganization of entities under common control which is
similar to that of 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.
B -- INITIAL CAPITALIZATION
ART was formed on August 23, 1993 by two of its executives (the "Founding
Stockholders") by issuing 1,070,915 shares of Common Stock in exchange for
$1,136. During November 1993, ART redeemed 428,366 shares of Common Stock from
the Founding Stockholders and through a private placement issued 428,366 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 ART in exchange for 214,183 shares of Common Stock and a
$70,000 Promissory Note. In connection with the High Sky II financing, ART
issued an additional aggregate of 856,732 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 ART,
for which contribution there were no additional shares issued.
F-14
<PAGE>
ADVANCED RADIO TELECOM CORP.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1. FORMATION OF THE COMPANY AND BASIS OF PRESENTATION, CONTINUED:
C -- 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 material operating revenues until the further
development 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,
including consulting, service and purchase commitments set forth in Notes 5, 9,
10, 14 and 16. The Company's continued funding of its operating expenses,
capital expenditures, 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 from certain investors to borrow up to $50,000,000 (the
"CIBC Financing Commitment"). The proceeds from the initial public offering were
used to repay certain indebtedness 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 CIBC Financing Commitment are sufficient to enable the
Company to fund its operations at least through December 31, 1997. As a result,
the previous reference to the existence of substantial doubt regarding the
Company's ability to continue as a going concern is no longer required.
2. PURCHASE AGREEMENT:
A -- INITIAL CAPITALIZATION OF TELECOM
Pursuant to the Purchase Agreement, as its initial capitalization, an
aggregate of 3,120,000 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 of shares of capital
stock of Telecom then outstanding. Concurrently, ART received 1,607,273 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.
On February 2, 1996 and October 11, 1996, the Board of Directors of Telecom
authorized a 13 for 1 stock split and a 1 for 2.75 reverse stock split,
respectively. All of the references to shares of common stock of Telecom have
been adjusted to reflect the 13 for 1 stock split and the 1 for 2.75 reverse
stock split 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 ART were
required to place 1,874,101 shares of Common Stock in escrow (the "Escrow
Shares") to be released upon the completion of the then pending EMI Asset
acquisition (see Note 6), 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, 681,102 of the
Escrow Shares were released. The fair value of the Escrow Shares released in
1995, amounting to $802,002, has been recognized as additional paid-in
F-15
<PAGE>
ADVANCED RADIO TELECOM CORP.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. PURCHASE AGREEMENT, CONTINUED:
capital. 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 ART. 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, ART and Telecom agreed 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, ART 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.
On February 2, 1996, ART, 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 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 a definitive merger agreement.
C -- AMENDED MERGER
The definitive merger agreement, as entered into on 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. Prior to 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, all shares of all series
of the Company's preferred stock (920,951) automatically convert into 4,353,587
shares of the Company's common stock. In the Merger, each outstanding share of
common stock of Telecom was exchanged for an equal number of shares of Common
Stock of ART. As a result, Telecom became a wholly owned subsidiary of ART. 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
ART. Further, the holders of warrants to purchase an aggregate of 924,413 shares
of Telecom common stock are entitled to purchase an equivalent number of shares
of ART'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 ART. The terms of the warrants and stock
options are similar except that the exercise price of the warrants and 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.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
A -- DEVELOPMENT STAGE ENTERPRISE
Prior to July 1, 1996, the Company was considered a development stage
enterprise as defined in Statement of Financial Accounting Standards No. 7,
"Accounting and Reporting by Development Stage Enterprises." 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. Such change in classification
of the Company had no impact on the net loss or stockholders' equity (deficit)
for any periods presented.
F-16
<PAGE>
ADVANCED RADIO TELECOM CORP.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
B -- CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with remaining
maturities of three months or less to be cash equivalents.
C -- 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 equipment -- 3 years.
D -- EQUITY INVESTMENT
The Company accounts for its 50% interest in the ART West joint venture
under the equity method.
E -- 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.
F -- 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 in the near term 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.
G -- 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.
H -- 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.
F-17
<PAGE>
ADVANCED RADIO TELECOM CORP.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
I -- 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.
K -- 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 each period. Historical net loss per share and the weighted average
number of shares of Common Stock outstanding are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
<S> <C> <C> <C>
1995 1994 1993
------------- ------------- -------------
Net loss per share.............................. $ 0.54 $ 0.04 $ --
------------- ------------- -------------
------------- ------------- -------------
Weighted average number of shares of Common
Stock outstanding.............................. 5,946,338 3,337,685 1,820,555
------------- ------------- -------------
------------- ------------- -------------
</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 4,966,000
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.
L -- 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 expenses during the reporting period.
Actual results could differ from those estimates.
M -- CONCENTRATIONS OF CREDIT RISK
The Company 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. Deposits on equipment are financial
instruments which expose the Company to potential credit risk.
4. CONVERTIBLE NOTES PAYABLE:
The Company and several entities affiliated with Advent International Corp.
(collectively, the "Advent Group"), entered into a securities purchase agreement
(the "Advent Purchase Agreement") dated November 13, 1995 under which the Advent
Group agreed to acquire a 10% interest in the Company and certain specified
affiliates. The Company issued promissory notes (the "Advent Notes") with an
aggregate principal amount of $4,950,000 and one share of 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. 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
F-18
<PAGE>
ADVANCED RADIO TELECOM CORP.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. CONVERTIBLE NOTES PAYABLE, CONTINUED:
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 the Advent Group'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 February 2, 1996, the Company and several entities affiliated with the
Advent Group entered into an exchange agreement under which the convertible
notes payable to the Advent Group, including accrued interest, and the one share
of redeemable preferred stock held by the Advent Group were exchanged for
232,826 shares of Series E preferred stock of Telecom and the notes payable to
the Advent Group were canceled.
5. EQUITY INVESTMENT:
A -- INVESTMENT IN ART WEST JOINT VENTURE
On April 4, 1995, ART 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 26,773 shares of Common Stock. 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 26,773 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, the Company entered into an exclusive services agreement
with Extended, whereby the Company is responsible for the construction,
operation and management of Extended's telecommunications systems. The term of
the services 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, 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
ART West. Under the services agreement, title to the system assets purchased by
the Company and used to provide services in ART West's markets remains with the
Company upon termination of the services agreement. There have been no services
provided through December 31, 1995 under the services agreement. An officer of
the Company 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.
F-19
<PAGE>
ADVANCED RADIO TELECOM CORP.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. 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. The FCC approved the transfer of the EMI licenses and the
Company acquired 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 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%, or 10.5% as of December 31, 1995.
On November 8, 1995, Landover advanced $175,000 to the Company to fund a
portion of the initial payment to EMI. The Company repaid such amount later in
the same month.
7. PROPERTY AND EQUIPMENT:
At December 31, 1995, property and equipment comprises:
<TABLE>
<S> <C>
Wireless transmission equipment................................ $3,496,905
Office furniture and equipment................................. 93,414
----------
3,590,319
Accumulated depreciation....................................... (8,758)
----------
$3,581,561
----------
----------
</TABLE>
As of December 31, 1995, excluding the property and equipment acquired from
EMI (Note 6), the wireless transmission equipment acquired to date has not been
placed into service.
8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
At December 31, 1995, accounts payable and accrued liabilities comprise:
<TABLE>
<S> <C>
Accrued interest payable....................................... $ 87,254
Salaries and other employee related costs...................... 267,091
Trade accounts payable......................................... 673,514
Wireless transmission equipment payable........................ 2,666,630
----------
$3,694,489
----------
----------
</TABLE>
9. 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 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-20
<PAGE>
ADVANCED RADIO TELECOM CORP.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
9. 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. Under the services agreement, title to the system assets purchased
by the Company and used to provide services in DCT's markets remains with the
Company upon termination of the services agreement. There have been no services
provided through December 31, 1995 under the services agreement.
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 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.
10. COMMITMENTS:
EQUIPMENT PURCHASE AGREEMENT
On August 11, 1995, the Company entered into an agreement to purchase
wireless transmission equipment from a vendor. Under the terms of the agreement,
the Company 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. The initial non-cancelable equipment
purchase order amounts to $13,260,000. The Company has purchased and paid for
$522,812 of equipment under this contract through December 31, 1995. In
addition, a $280,000 deposit has been made under this agreement which is to be
applied against future purchases after the Company has purchased a specified
amount of equipment, which is expected to occur in 1996.
The Company 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 the Company until alternative
supply sources are established. The Company 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 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 to those
included in its current arrangements. 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.
F-21
<PAGE>
ADVANCED RADIO TELECOM CORP.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
10. COMMITMENTS, CONTINUED:
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 price of $.0133 per person covered by the
geographical license area. The term of the TeleCom One Agreement is for five
years. The Company has not exercised any of its options.
On April 24, 1996, the Company entered into a services agreement to
construct, operate and manage the FCC licenses and related telecommunications
systems of TeleCom One in exchange for all revenues generated by the systems,
after deducting certain expenses, less 10% which is paid to TeleCom One. Under
the services agreement, title to the system assets purchased by the Company and
used to provide services in TeleCom One's markets remains with the Company upon
termination of the services agreements.
EMPLOYMENT AND CONSULTING AGREEMENTS
On May 8, 1995, the Company entered into consulting agreements with two
executive officers of the Company, 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 the Company
under these consulting agreements through December 31, 1995 amounted to
$166,750.
On December 16, 1995, one of the executive officers of the Company,
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, the Company entered into an employment agreement, as
amended January 8, 1996, with an officer of the Company. 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 the Common Stock were awarded to this officer equivalent to 2.5% of
the outstanding capital stock of the Company (see Note 12). 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 Company has 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 paid SERP $245,000 and the shareholders of ART
granted SERP options to purchase 114,041 shares of Common Stock directly from
the Founding Stockholders for an aggregate consideration of $210,000.
As of December 31, 1995, the Company 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
F-22
<PAGE>
ADVANCED RADIO TELECOM CORP.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
10. COMMITMENTS, CONTINUED:
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 (see Note 11).
LEASES
The Company has entered into operating leases for office space and antenna
sites which expire between 1997 and 2001. Lease expense amounted to $16,044 for
1995. 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>
11. STOCKHOLDERS' DEFICIT:
A--ART
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 1,472,508 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, respectively, and changed the par value per
share 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 of
Common Stock in the accompanying financial statements have been restated to
reflect the 5 for 1 stock split, the 1 for 5 reverse stock split, the 29,450.16
for 1 stock split and the 1 for 2.75 reverse stock split, unless otherwise
indicated. All par value amounts have been restated to reflect the change in par
value to $.001 per share.
B--TELECOM
At December 31, 1995, Telecom's 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 of Telecom 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 Telecom 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 Telecom common stock issued and outstanding.
F-23
<PAGE>
ADVANCED RADIO TELECOM CORP.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
11. STOCKHOLDERS' DEFICIT, CONTINUED:
The holders of Telecom Class A common stock had anti-dilution protection,
but in all other respects such shares were identical to the Telecom 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.
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 4.7273 shares of Telecom 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 Telecom
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 145,685 shares of Telecom common stock directly from Landover for
$0.001 per share in the event ART and Telecom on a combined basis 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, the Advent Group received 232,826 shares of Series E preferred
stock of Telecom (see Note 4).
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 293,791 shares of Class B common stock held by Landover.
The Series E and F preferred stock (see Note 16) 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-24
<PAGE>
ADVANCED RADIO TELECOM CORP.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
12. STOCK OPTION PLANS:
On July 22, 1995, the Company adopted the 1995 Stock Option Plan (the
"Plan") that provides for option grants to employees, directors and independent
consultants of the Company. The Company has reserved 909,091 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 297,175 and 85,455
shares of Common Stock were granted to employees of the Company on July 22, 1995
and December 29, 1995, respectively, at an option price of $1.6244 and $4.5430
per share, respectively. The difference between the exercise price of the
options issued at $1.6244 and the deemed fair value of Common Stock of $3.30 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, 131,558 options were vested and
compensation expense recognized amounted to $210,339. There were no options
exercised or canceled during 1995.
On February 15, 1996, options to purchase an aggregate of 52,727 shares of
Common Stock were granted to employees of the Company under the Plan at an
option price of $10.8350 per share.
On April 24, 1996, the Company 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 72,727 shares. Under
the Directors Plan, options to acquire approximately 2,200 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 approximately 2,600 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
the 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.
13. INCOME TAXES:
As of December 31, 1995 and 1994, the Company has net operating loss
carry-forwards for income tax purposes of approximately $2.4 million and
$134,000, respectively, which will expire between 2008 and 2010. Deferred tax
assets of approximately $870,000 and $46,000 at December 31, 1995 and 1994,
F-25
<PAGE>
ADVANCED RADIO TELECOM CORP.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
13. INCOME TAXES, CONTINUED:
respectively, principally comprised of such net operating tax loss
carry-forwards and temporary differences arising from compensation expense
related to stock option plans, have been offset in full by a valuation
allowance.
14. RELATED PARTY TRANSACTIONS:
On May 8, 1995, the Company entered into a consulting agreement with
Landover as a strategic and financial consultant. The Company 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 entered into a management consulting
agreement with Landover to provide strategic planning, corporate development and
general management. Under the agreement, the Company will pay Landover $35,000
per month for an initial one year term, renewable by the Company for two
additional one year terms. The aggregate expense recognized by the Company under
this agreement during 1995 amounted to $70,000. The agreement also provides that
in the event Landover arranges financing, acquisitions or certain other
transactions for the Company and Landover will be paid a fee in accordance with
industry standards.
Pursuant to the Purchase Agreement, the Company paid Landover $391,750 for
expenses in connection with the Landover Funding Commitment, of which $250,000
has been capitalized as deferred financing costs and the balance of $141,750 has
been charged to paid-in capital.
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.
15. 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
---------------------------- --------------------
<S> <C> <C> <C> <C>
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------- ------------- --------- ---------
Cash and cash equivalents............... $ 633,654 $ 633,654 $ 5,133 $ 5,133
Notes payable........................... $ 4,950,000 $ 4,950,000 $ 70,000 $ 70,000
</TABLE>
Cash and cash equivalents: The carrying amount reported in the balance sheet
approximates fair value.
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.
16. 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, the Company 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
F-26
<PAGE>
ADVANCED RADIO TELECOM CORP.
NOTES TO FINANCIAL STATEMENTS, CONTINUED
16. SUBSEQUENT EVENTS, CONTINUED:
common stock at a nominal price 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 the
Company's services within five midwestern states. The Company incurred fees of
$150,000 in connection with this transaction.
Under the terms of the securities purchase agreement with Ameritech,
Ameritech is entitled to a put option to require the Company to repurchase the
Ameritech Securities if the Department of Justice finds that this investment is
in violation of restrictions under the Modification of Final Judgment 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, the Company issued a private placement of $5.0 million,
two year, 10% notes (the "Bridge Notes") and five year warrants to purchase up
to an aggregate of 400,000 shares of common stock at a price of $17.1875 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. In the
event of nonpayment of interest or default, the Company is required to issue
additional warrants to purchase shares of Common Stock.
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, the Company entered into a preliminary agreement to
invest from $700,000 to $1.0 million in an entity in which an executive of the
Company is a director and a shareholder. The preliminary agreement provides for
the entity to perform research and development of wireless transmission
equipment in which the Company will receive a right of first refusal on
production capacity and a license fee in exchange for its investment.
On March 13, 1996, the Company issued a letter of intent to a third party to
provide the Company 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, the Company entered into a software license agreement
(the "Software License Agreement"). The terms of the Software License Agreement
provide for licensed software and hardware for the Company'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.
F-27
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS (NOTE 1)
SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------------------
1996 1995
--------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 752,368 $ 81,512
Accounts receivable............................................................ 78,645
Other current assets........................................................... 140,227
--------------- --------------
Total current assets....................................................... 971,240 81,512
Restricted cash.................................................................. 1,000,000
Property and equipment, net...................................................... 11,019,217 49,488
Equity investment................................................................ 285,000 212,500
FCC licenses, net................................................................ 4,276,780 175,000
Deferred financing costs, net.................................................... 2,343,087
Deposits......................................................................... 463,036
Other assets..................................................................... 183,637 29,703
--------------- --------------
Total assets............................................................... $ 20,541,997 $ 548,203
--------------- --------------
--------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities....................................... $ 11,154,608 $ 250,303
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.................................................. 21,671,913 250,303
Equipment financing note payable (net of current portion)........................ 927,796
Note payable to EMI (net of current portion)..................................... 937,500
--------------- --------------
Total liabilities.......................................................... 23,537,209 250,303
--------------- --------------
Stockholders' equity (deficit):
Serial preferred stock, $.001 par value, 920,951 and 123,545 shares issued and
outstanding, respectively.................................................... 921 124
Common Stock, $.001 par value, 6,586,958 and 6,761,111 shares issued and
outstanding, respectively.................................................... 6,587 6,761
Additional paid-in capital..................................................... 20,745,714 1,430,543
Accumulated deficit............................................................ (23,748,434) (1,139,528)
--------------- --------------
Total stockholders' equity (deficit)....................................... (2,995,212) 297,900
--------------- --------------
Total liabilities and stockholders' equity (deficit)..................... $ 20,541,997 $ 548,203
--------------- --------------
--------------- --------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-28
<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,
------------------------------- ----------------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
--------------- -------------- -------------- ------------
Service revenue................................... $ 125,013 $ -- $ 63,493 $ --
--------------- -------------- -------------- ------------
Selling, general and administrative expenses...... 16,942,052 987,367 3,640,254 622,611
Market development expense........................ 1,053,000 -- -- --
Research and development expense.................. 666,406 -- 145,000 --
Depreciation and amortization..................... 504,462 15,407 226,087 9,353
--------------- -------------- -------------- ------------
Total operating expenses.................... 19,165,920 1,002,774 4,011,341 631,964
--------------- -------------- -------------- ------------
Interest income................................... (59,473) -- (19,584) --
Interest expense.................................. 1,396,943 1,539 778,249 664
--------------- -------------- -------------- ------------
Interest expense, net....................... 1,337,470 1,539 758,665 664
--------------- -------------- -------------- ------------
Net loss.................................... $ (20,378,377) $ (1,004,313) $ (4,706,513) $ (632,628)
--------------- -------------- -------------- ------------
--------------- -------------- -------------- ------------
Pro forma net loss per share of Common Stock...... $ (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 consolidated financial
statements.
F-29
<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
SHARES STOCK STOCK
- ----------------------------------------------------------------------------------------- ----------- ---------
<S> <C> <C>
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
AMOUNTS STOCK STOCK CAPITAL DEFICIT TOTAL
- ----------------------------------------- ----------- ----------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
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
Ameritech 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 release of escrow
shares.................................. 6,795,514 6,795,514
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 consolidated financial
statements.
F-30
<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 consolidated financial
statements.
F-31
<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 reorganization
of entities under common control which is similar to that of 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 the Company 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 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 $50,000,000
through the issuance of Senior Secured Notes (the "CIBC Financing Commitment")
(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 equity offering and available under the CIBC
Financing Commitment are sufficient to enable the Company to continue as a going
concern at least through December 31, 1997.
F-32
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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.
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.
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.
F-33
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS FOR THE THREE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------ ------------------------
<S> <C> <C> <C> <C>
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
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
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.
5. CONVERTIBLE NOTES PAYABLE:
On February 2, 1996, the Company and several entities affiliated with Advent
International Corp. (collectively, the "Advent Group") entered into an exchange
agreement under which the convertible notes payable to the Advent Group,
including accrued interest, and the one share of ART's redeemable preferred
stock held by the Advent Group were exchanged for 232,826 shares of serial
preferred stock of Telecom (converted into 1,100,632 shares of Common Stock
concurrent with the initial public equity offering). As a result, the notes
payable by the Company to the Advent Group 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
F-34
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
6. EQUITY INVESTMENT, CONTINUED:
by Extended Communications Inc. ("Extended") for $6,000,000 in cash upon
consummation of public equity and debt offerings with aggregate net proceeds of
$125,000,000 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 $3,000,000
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.
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 Common Stock on the date of exercise.
In connection with the agreement to acquire the CommcoCCC Assets, certain
stockholders of CommcoCCC loaned the Company $3,000,000 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 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 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
F-35
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. FINANCINGS, CONTINUED:
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.
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 COMMITMENT
During November 1996, the Company entered into agreements with certain
lenders which provide for the issuance of up to $50,000,000 of Senior Secured
Notes, at any time at the Company's option through February 10, 1997 (the "CIBC
Financing Commitment"). 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.
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 300,257 shares of Common Stock at a nominal exercise price.
The Company also is committed to deliver
F-36
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
8. FINANCINGS, CONTINUED:
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 Commitment, the Company paid placement
and commitment fees and other expenses of approximately $1,900,000 and is
obligated to pay approximately $1,800,000 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.
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 $3,600,000 in cash, of
which the Company paid a deposit of $100,000. DCT has alleged that the Company
has failed to satisfy a provision of the DCT Agreement which provides that if
the Company failed to obtain debt or equity proceeds by August 31, 1996 in an
amount at least equal to $3,600,000, the DCT Agreement would terminate and DCT
could retain the $100,000 deposit paid by the Company. The Company and DCT are
currently discussing a settlement under the DCT Agreement. There can be no
assurance as to the outcome of such dispute or settlement discussions and,
therefore, no assurance that the Company will be in a position to consummate the
acquisition of the DCT Systems, even if the Company wishes to do so. Although
the Company believes that it has satisfied such provision of the DCT Agreement
and is legally entitled to proceed to consummate the transactions contemplated
thereby, the Company does not currently plan to purchase the DCT Systems as
contemplated by the DCT Agreement.
F-37
<PAGE>
[INSIDE BACK COVER]
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>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
SECURITIES OFFERED HEREBY IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM,
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................................... 3
Risk Factors..................................................... 13
The Company...................................................... 28
Use of Proceeds.................................................. 29
Price Range of Common Stock and Dividend Policy.................. 30
Capitalization................................................... 31
Selected Historical Combined and Pro Forma Financial Data........ 32
Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 35
Business......................................................... 42
Management....................................................... 70
Principal Stockholders........................................... 80
Certain Transactions............................................. 82
Description of Units............................................. 87
Description of Notes............................................. 87
Description of Warrants.......................................... 116
Description of Capital Stock..................................... 118
Description of Certain Indebtedness.............................. 120
Certain Federal Income Tax Considerations........................ 122
Underwriting..................................................... 126
Legal Matters.................................................... 127
Experts.......................................................... 127
Available Information............................................ 127
Special Note Regarding Forward-Looking Statements................ 128
Glossary......................................................... 129
Index to Financial Statements.................................... F-1
</TABLE>
$125,000,000
[LOGO]
125,000 UNITS CONSISTING OF
% SENIOR NOTES DUE 2007
AND
125,000 WARRANTS TO PURCHASE
SHARES OF COMMON STOCK
-------------------
P R O S P E C T U S
-------------------
MERRILL LYNCH & CO.
CIBC WOOD GUNDY SECURITIES CORP.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 and the NASD filing fee, all of the amounts in the table below
are estimated.
<TABLE>
<CAPTION>
Securities and Exchange Commission registration fee............... $ 54,517
<S> <C> <C>
NASD filing fee................................................... 14,227
Accounting fees and expenses...................................... 450,000
Printing.......................................................... 250,000
Blue Sky fees and expenses (including counsel fees)............... 20,000
Legal fees and expenses........................................... 400,000
Warrant Agent fees and expenses................................... *
Trustee fees and expenses (including counsel fees)................ *
Collateral Agent Fees and expenses................................ *
Miscellaneous expenses............................................ *
----------
TOTAL (estimated)................................................. $1,188,744
----------
----------
</TABLE>
- ------------------------
* To be filed by amendment.
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 Offering to 3,641,111
shares and 2,650,414 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 Offering to 160,637 shares and 53,546
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 1,918,705 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 500,254 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 65,222
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 41,865 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 34,807 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 291,390 shares of Common Stock upon
completion of this offering) for $2,000,000 in a private placement. Telecom
simultaneously redeemed 293,791 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 145,685 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 1,100,632 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 231,131
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 318,959 shares of
Telecom common stock exercisable at a nominal price 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.
MARCH BRIDGE NOTES
On March 8, 1996, Telecom issued in a private placement $5,000,000 principal
amount of two year, 10% unsecured notes (the "March Bridge Notes") and five-year
warrants to purchase up to an aggregate of 400,000 shares of Telecom common
stock at a price of $17.1875 per share (the "March 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 March Bridge Notes and March
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 6,000,000 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 18,182 shares of Common Stock at $24.75 per share. In
connection with an October 1996 amendment to the CommcoCCC Agreement, the
Company modified the terms of such warrants, reduced the exercise price of such
warrants to $17.1875 per share and increased the number of shares issuable upon
exercise to 87,272 shares. The securities to be issued in the foregoing
transaction will be offered and sold in reliance on an exemption from
registration under Regulation D promulgated under the Act.
SEPTEMBER BRIDGE FINANCING
In August 1996, the Company received commitments for $3.0 million of 14.75%
unsecured notes due March 1998 (the "September Bridge Notes"). The September
Bridge Notes were funded from August 30, 1996 to October 1996. In October 1996,
the Company received an additional $1.0 millon of proceeds therefrom. The
Company also issued five-year warrants to purchase up to an aggregate of 116,364
shares of Common Stock at a price of $17.1875 per share (the "September Bridge
Warrants") to private investors including the Advent Partnerships, Ameritech,
LHC and affiliates of J.C. Demetree, Jr. and Mark C. Demetree. 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.
CIBC FINANCING COMMITMENT
The Company has entered into agreements with certain investors (the "CIBC
Investors") which provide for the issuance of $50.0 million of the Company's
$12.5% Senior Secured Notes due 1998 (the "Senior Secured Notes") at any time,
at the Company's option, until February 10, 1997 (the "CIBC Financing
Commitment"). The interest rate on the Senior Secured Notes will increase by
0.5% on February 12, 1997 and by an additional 0.5% for each three-month period
thereafter until such time as the Senior Secured Notes have been repaid. The
Company issued or will issue ten-year warrants at a nominal exercise price to
the CIBC Investors upon each of the following events: (i) the consummation of
the Common Stock Offering, (ii) the issuance of the Senior Secured Notes and
(iii) if the Senior Secured Notes continue to be outstanding six months on May
12, 1997, and, at various times thereafter. The Senior Secured Notes, if issued,
must be repaid with the proceeds of any future debt and equity financings,
including the Offering. 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.
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 Purchase Agreement.
2-1 (a)Amended and Restated Certificate of Incorporation and Bylaws of Registrant
(superseded).**
(b) Amendment to Amended and Restated Certificate of Incorporation
(superseded).**
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S> <C>
(c) Second Amended and Restated Certificate of Incorporation and Restated and
Amended Bylaws of Registrant.**
4-1 Specimen of Common Stock Certificate.**
4-2 (a) Indenture.*
(b) Specimen of Note (included in Exhibit 4-2(a))*
(c) Collateral Pledge and Security Agreement.*
4-3 (a) Form of Warrant Agreement.
(b) Specimen of Warrant Certificate (included in Exhibit 4-3(a)).
4-4 Omitted
5-1 Opinion and Consent of Hahn & Hessen LLP, counsel for the Registrant, with
respect to the Registrant's Units, Notes and Warrants.
9-1 (a) Voting Trust Agreement dated November 5, 1996.(1)
(b) Form of Trustee Indemnification Agreement.**
(c) Cooperation Agreement dated November 5, 1996.(1)
(d) Confidentiality Agreement dated November 5, 1996.(1)
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.**
10-2 Omitted
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.**
(c) Grina Option Agreement.(1)
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) Omitted
(b) Services Agreement dated September 1, 1994 with DCT Communications, Inc.**
(c) Omitted
(d) Purchase Agreement with DCT dated July 1, 1996.**
(e) Amendment to Services Agreement dated June 1996 with DCT.**
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <S> <C>
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) Omitted
(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 (a)Second Restated and Amended Registration Rights Agreement dated July 3, 1996
with Telecom and the stockholders of each of Telecom and the Company.**
(b)Amendment No. 1 to Registration Rights Agreement dated as of
October 16, 1996. (1)
10-21 Services Agreement dated May 8, 1995 with Telecom.**
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").**
(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 Second Restated and Amended Merger Agreement and Plan of Reorganization dated
October 11, 1996 between the Company, Merger Sub and Telecom.**
10-27 (a) $2,445,000 Promissory Note in favor of CRA, Inc. ("CRA").**
(b) Security Agreement with CRA.**
(c) Indemnity Agreement.**
(d) Form of Indemnity Warrant.**
10-28 Omitted.
</TABLE>
II-6
<PAGE>
<TABLE>
<C> <S> <C>
10-29 (a) Purchase Agreement dated April 26, 1996 with Harris Corporation Farinon
Division ("Harris").**+
(b) PCS Marketing Agreement dated April 26, 1996 with Harris.**+
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. (superseded)**
(e) Form of Warrant issued to Columbia Capital Corporation. (superseded)**
(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.**
(m) Extension Agreement.**
(n) Amendment No. 1 to Asset Acquisition Agreement and Plan of Reorganization.**
10-32 Letter of Intent dated April 29, 1996 with Helioss Communications Inc.**
10-33 Omitted
10-34 (a) Consulting Agreement dated March 1, 1996 with Trond Johannesen.**
(b) Shareholders Agreement.**
(c) License and Support Agreement, dated September 30, 1996 (United Kingdom).**
(d) License and Support Agreement, dated September 30, 1996 (Sweden).**
10-35 (a) Form of September Bridge Note.(1)
(b) Form of September Bridge Warrant.(1)
10-36 Memorandum of Terms with Advantage Telecom, Inc.**
10-37 Installation Services Agreement dated October 2, 1996 with Teleport
Communications Group, Inc.**
10-38 (a) Omitted
(b) Form of Senior Secured Credit Agreement with CIBC.**
(c) Form of Senior Secured Notes.**
(d) Form of CIBC Warrants.**
(e) Form of Security Agreement.**
10-39 Master Service Agreements.
(a) Microwave Partners, d/b/a Astrolink Communications Inc., dated October 3,
1996.**
(b) American PCS, L.P., dated July 29, 1996.**
(c) Message Center Management, Inc., dated September 19, 1996.**
(d) NEXTLINK Communications, LLC, dated October 13, 1996.**
(e) GST Telecom, Inc., dated October 11, 1996.**
(f) CAIS, Inc., dated October 1996.**
(g) DIGEX, Incorporated, dated October 1996.**
(h) Brooks Fiber Properties, Inc. dated October 1996.**
(i) Public Interest Network, dated as of October 1, 1996.(1)
(j) Comlink, Inc., dated as of October 28, 1996.(1)
10-40 MFS Communications Company, Inc. Agreements.**
</TABLE>
II-7
<PAGE>
<TABLE>
<C> <S> <C>
10-41 Services Agreement dated as of October 29, 1996 with ICG Telecom Group, Inc. and
Pacific & Eastern Digital Transmission Services, Inc.**
10-42 Services Agreement dated as of November 1, 1996 with Microwave Partners.(1)
10-43 Carrier Resale Agreement dated October 22, 1996 with Chadwick Telephone.(1)
10-44 (a) Engagement Letter with CIBC Wood Gundy dated November 5, 1996.(1)
(b) Engagement Letter with Merrill Lynch & Co. dated October 16, 1996.(1)
10-45 Summary of Terms and Conditions with CIBC.(1)
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 Omitted
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed with the Registration Statement on Form S-1 of the Company,
effective November 5, 1996 (SEC Reg. No. 333-04388) under the corresponding
Exhibit number.
(1) Previously Filed.
+ Confidential treatment requested for the deleted portions of this document.
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.
II-8
<PAGE>
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-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused 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 January 15, 1997.
Advanced Radio Telecom Corp.
By: /s/ THOMAS A. GRINA
-----------------------------------
Thomas A. Grina
EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
<TABLE>
<C> <S> <C>
SIGNATURES TITLE DATE
- ------------------------------------------------------ ----------------------------------- --------------------
/s/ THOMAS A. GRINA
------------------------------------------- Executive Vice President and Chief January 15, 1997
Thomas A. Grina Financial Officer
</TABLE>
II-10
<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 Officer January 6, 1997
Vernon L. Fotheringham and Director
/s/ STEVEN D. COMRIE
------------------------------------------- President, Chief Operating Officer January 6, 1997
Steven D. Comrie and Director
/s/ JAMES C. COOK
------------------------------------------- Director January 6, 1997
James C. Cook
/s/ MARK C. DEMETREE
------------------------------------------- Director January 6, 1997
Mark C. Demetree
/s/ Andrew I. Fillat
------------------------------------------- Director January 6, 1997
Andrew I. Fillat
/s/ ALAN Z. SENTER
------------------------------------------- Director January 6, 1997
Alan Z. Senter
</TABLE>
II-11
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION PAGE
- ---------- ---------------------------------------------------------------------------------------- ---------
<C> <S> <C>
1-1 Purchase Agreement.
2-1 (a)Amended and Restated Certificate of Incorporation and Bylaws of Registrant
(superseded).**
(b) Amendment to Amended and Restated Certificate of Incorporation (superseded).**
(c) Second Amended and Restated Certificate of Incorporation and Restated and Amended
Bylaws of Registrant.**
4-1 Specimen of Common Stock Certificate.**
4-2 (a) Indenture.*
(b) Specimen of Note (included in Exhibit 4-2(a)).*
(c) Collateral Pledge and Security Agreement.*
4-3 (a) Form of Warrant Agreement
(b) Specimen of Warrant Certificate (included in Exhibit 4-3(a)).
4-4 Omitted
5-1 Opinion and Consent of Hahn & Hessen LLP, counsel for the Registrant, with respect to
the Registrant's Units, Notes and Warrants.
9-1 (a) Voting Trust Agreement dated November 5, 1996.(1)
(b) Form of Trustee Indemnification Agreement.**
(c) Cooperation Agreement dated November 5, 1996.(1)
(d) Confidentiality Agreement dated November 5, 1996.(1)
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.**
10-2 Omitted
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.**
(c) Grina Option Agreement.(1)
10-7 Management Consulting Agreement with Landover Holdings Corporation, dated November 13,
1995.**
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION PAGE
- ---------- ---------------------------------------------------------------------------------------- ---------
10-8 (a) ART West Joint Venture Agreement dated April 4, 1995, with Extended Communications,
Inc.**
<C> <S> <C>
(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) Omitted
(b) Services Agreement dated September 1, 1994 with DCT Communications, Inc.**
(c) Omitted
(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) Omitted
(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.**
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION PAGE
- ---------- ---------------------------------------------------------------------------------------- ---------
10-20 (a) Second Restated and Amended Registration Rights Agreement dated July 3, 1996 with
Telecom and the stockholders of each of Telecom and the Company.**
<C> <S> <C>
(b) Amendment No. 1 to Registration Rights Agreement dated as of October 16, 1996. (1)
10-21 Services Agreement dated May 8, 1995 with Telecom.**
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").**
(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 Second Restated and Amended Merger Agreement and Plan of Reorganization dated October
11, 1996 between the Company, Merger Sub and Telecom.**
10-27 (a) $2,445,000 Promissory Note in favor of CRA, Inc. ("CRA").**
(b) Security Agreement with CRA.**
(c) Indemnity Agreement.**
(d) Form of Indemnity Warrant.**
10-28 Omitted.
10-29 (a) Purchase Agreement dated April 26, 1996 with Harris Corporation Farinon Division
("Harris").**+
(b) PCS Marketing Agreement dated April 26, 1996 with Harris.**+
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. (superseded)**
(e) Form of Warrant issued to Columbia Capital Corporation. (superseded)**
(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.**
(m) Extension Agreement.**
(n) Amendment No. 1 to Asset Acquisition Agreement and Plan of Reorganization.**
10-32 Letter of Intent dated April 29, 1996 with Helioss Communications Inc.**
10-33 Omitted
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS DESCRIPTION PAGE
- ---------- ---------------------------------------------------------------------------------------- ---------
10-34 (a) Consulting Agreement dated March 1, 1996 with Trond Johannesen.**
<C> <S> <C>
(b) Shareholders Agreement.**
(c) License and Support Agreement, dated September 30, 1996 (United Kingdom).**
(d) License and Support Agreement, dated September 30, 1996 (Sweden).**
10-35 (a) Form of September Bridge Note.(1)
(b) Form of September Bridge Warrant.(1)
10-36 Memorandum of Terms with Advantage Telecom, Inc.**
10-37 Installation Services Agreement dated October 2, 1996 with Teleport Communications
Group, Inc.**
10-38 (a) Omitted
(b) Form of Senior Secured Credit Agreement with CIBC.**
(c) Form of Senior Secured Notes.**
(d) Form of CIBC Warrants.**
(e) Form of Security Agreement.**
10-39 Master Service Agreements.
(a) Microwave Partners, d/b/a Astrolink Communications Inc., dated October 3, 1996.**
(b) American PCS, L.P., dated July 29, 1996.**
(c) Message Center Management, Inc., dated September 19, 1996.**
(d) NEXTLINK Communications, LLC, dated October 13, 1996.**
(e) GST Telecom, Inc., dated October 11, 1996.**
(f) CAIS, Inc., dated October 1996.**
(g) DIGEX, Incorporated, dated October 1996.**
(h) Brooks Fiber Properties, Inc. dated October 1996.**
(i) Public Interest Network, dated as of October 1, 1996.(1)
(j) Comlink, Inc., dated as of October 28, 1996.(1)
10-40 MFS Communications Company, Inc. Agreements.**
10-41 Services Agreement dated as of October 29, 1996 with ICG Telecom Group, Inc. and Pacific
& Eastern Digital Transmission Services, Inc.**
10-42 Services Agreement dated as of November 1, 1996 with Microwave Partners.(1)
10-43 Carrier Resale Agreement dated October 22, 1996 with Chadwick Telephone.(1)
10-44 (a) Engagement Letter with CIBC Wood Gundy dated November 5, 1996.(1)
(b) Engagement Letter with Merrill Lynch & Co. dated October 16, 1996.(1)
10-45 Summary of Terms and Conditions with CIBC.(1)
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 Omitted
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed with the Registration Statement on Form S-1 of the Company,
effective November 5, 1996 (SEC Reg. No. 333-04388) under the corresponding
Exhibit number.
(1) Previously Filed.
+ Confidential treatment requested for the deleted portions of this document.
<PAGE>
===============================================================================
ADVANCED RADIO TELECOM CORP.
(a Delaware corporation)
125,000 Units Consisting of
$125,000,000 Aggregate Principal Amount of
___% Senior Notes due 2007 and Warrants
to Purchase 1,128,011 Shares of Common Stock
PURCHASE AGREEMENT
Dated: ____________, 1997
===============================================================================
<PAGE>
Table of Contents
PURCHASE AGREEMENT............................................................1
SECTION 1. Representations and Warranties.....................................3
(a) Representations and Warranties by the Company.............................3
(b) Officer's Certificates...................................................12
SECTION 2. Sale and Delivery to Underwriters; Closing........................12
(a) Securities...............................................................12
(b) Payment..................................................................13
(c) Denominations; Registration..............................................13
SECTION 3. Covenants of the Company..........................................13
(a) Compliance with Securities Regulations and Commission Requests...........13
(b) Filing of Amendments.....................................................13
(c) Delivery of Registration Statements......................................14
(d) Delivery of Prospectuses.................................................14
(e) Continued Compliance with Securities Laws................................14
(f) Blue Sky Qualifications..................................................14
(g) Rule 158.................................................................15
(h) Use of Proceeds..........................................................15
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[(i) Listing.................................................................15
(j) Restriction on Sale of Securities........................................15
(k) Reporting Requirements...................................................15
(l) Pledge...................................................................15
SECTION 4. Payment of Expenses...............................................16
(a) Expenses.................................................................16
(b) Termination of Agreement.................................................16
SECTION 5. Conditions of Underwriters' Obligations...........................16
(a) Effectiveness of Registration Statement..................................16
(b) Opinion of Counsel for Company...........................................17
(d) Opinion of Counsel for Underwriters......................................17
(e) Officers' Certificate....................................................17
(f) Accountant's Comfort Letter..............................................18
(g) Bring-down Comfort Letter................................................18
(h) Maintenance of Rating....................................................18
(i) Approval of Listing......................................................18
[(j) No Objection............................................................18
(k) Additional Documents.....................................................18
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(l) Termination of Agreement.................................................18
SECTION 6. Indemnification...................................................19
(a) Indemnification of Underwriters..........................................19
(b) Indemnification of Company, Directors and Officers.......................19
(c) Actions against Parties; Notification....................................20
(d) Settlement without Consent if Failure to Reimburse.......................20
SECTION 7. Contribution......................................................20
SECTION 8. Representations, Warranties and Agreements to Survive Delivery....22
(a) Termination; General.....................................................22
(b) Liabilities..............................................................22
SECTION 10. Default by One or More of the Underwriters.......................22
SECTION 11. Notices..........................................................23
SECTION 12. Parties..........................................................23
SECTION 13. GOVERNING LAW AND TIME...........................................23
SECTION 14. Effect of Headings...............................................23
SCHEDULES
Schedule A - List of Underwriters............................Sch A-1
Schedule B - Pricing Information.............................Sch B-1
EXHIBITS
Exhibit A - Form of Opinion of Company's Counsel.................A-1
Exhibit B - Form of Opinion of Special Regulatory Counsel........B-1
Exhibit C - Capitalization of the Company........................C-1
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ADVANCED RADIO TELECOM CORP.
(a Delaware corporation)
125,000 Units Consisting of
$125,000,000 Aggregate Principal Amount of
___% Senior Notes due 2007 and Warrants
to Purchase Shares of Common Stock
PURCHASE AGREEMENT
____________ , 1997
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
CIBC WOOD GUNDY SECURITIES CORP.
as Representatives of the several Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Advanced Radio Telecom Corp. (f/k/a Advanced Radio Technologies
Corporation), a Delaware corporation (the "Company"), confirms its agreement
with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") and each of the other Underwriters named in Schedule A hereto
(collectively, the "Underwriters," which term shall also include any underwriter
substituted as hereinafter provided in Section 10 hereof), for whom Merrill
Lynch and CIBC Wood Gundy Securities Corp. ("CIBC Wood Gundy") are acting as
representatives (in such capacity, the "Representatives") with respect to the
issue and sale by the Company and the purchase by the Underwriters (the
"Offering"), acting severally and not jointly, of the respective amounts set
forth in said Schedule A of 125,000 units (the "Units"), each consisting of
$1,000 principal amount of the Company's ___% Senior Notes due 2007
(collectively, the "Notes") and one warrant (collectively, the "Warrants") to
purchase 9.024 shares (collectively, the "Warrant Shares") of common stock, par
value $.001 per share (the "Common Stock"). The Notes are to be issued pursuant
to an indenture, dated as of _________, 1997 (the "Indenture"), between the
Company and The Bank of New York, as trustee (the "Trustee"). The Warrants are
to be issued pursuant to a warrant agreement, dated as of ___________, 1997 (the
"Warrant Agreement"), between the Company and Continental Stock Transfer and
Trust Company, as warrant agent (the "Warrant Agent"). The Notes and the
Warrants will not be separable until the earlier of (i) __________, 1997, (ii) a
Change in Control with respect to the Company and (iii) such date as the
Underwriters may, in their
<PAGE>
discretion, deem appropriate (such date, the "Separation Date"). The Units, the
Notes, the Warrants and the Warrant Shares are herein collectively referred to
as the "Securities." This Agreement, the Indenture, the Warrant Agreement the
Collateral Pledge and Security Agreement, dated as of __________, 1997 (the
"Pledge Agreement"), between the Company and The Bank of New York, as collateral
agent (the "Collateral Agent"), and the CIBC Agreements (as defined) are herein
collectively referred to as the "Operative Documents." Capitalized terms used
herein but not otherwise defined herein shall have the meanings given to such
terms in the Indenture.
The Company understands that the Underwriters propose to make a public
offering of the Units as soon as the Underwriters deem advisable after this
Agreement has been executed and delivered and the Indenture has been qualified
under the Trust Indenture Act of 1939, as amended (the "1939 Act"). On October
28, 1996, (i) ART Merger Corporation, a subsidiary of the Company, merged with
and into Advanced Radio Telecom Corp. ("Telecom"), with the result that Telecom
became a wholly-owned subsidiary of the Company, (ii) the Company amended its
certificate of incorporation to change its name to "Advanced Radio Telecom
Corp." and (iii) Telecom amended its certificate of incorporation to change its
name to ART Licensing Corp. ("ART Licensing") (collectively, the "Merger").
Prior to the date hereof, the Company entered into a certain Senior Secured
Credit Agreement and certain ancillary documents attached thereto as exhibits
(collectively, the "CIBC Agreements"), pursuant to which certain investors
identified by CIBC Wood Gundy agreed, under certain circumstances, to purchase
up to $50.0 million of the Company's senior secured notes. Unless the context
otherwise requires, the "Company" shall refer to the Company after giving effect
to the Merger. References to "subsidiaries" of the Company shall be deemed to
include ART Licensing.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-______) covering the
registration of the Securities under the Securities Act of 1933, as amended (the
"1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will either
(i) prepare and file a prospectus in accordance with the provisions of Rule 430A
("Rule 430A") of the rules and regulations of the Commission under the 1933 Act
(the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of
the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule
434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a
"Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). The
information included in such prospectus or in such Term Sheet, as the case may
be, that was omitted from such registration statement at the time it became
effective but that is deemed to be part of such registration statement at the
time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred
to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is
referred to as "Rule 434 Information." Each prospectus used before such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A Information or the Rule 434 Information, that was used
after such effectiveness and prior to the execution and delivery of this
Agreement, is herein called a "preliminary prospectus." Such registration
statement, including the exhibits thereto and schedules thereto at the time it
became effective and including the Rule 430A Information and the Rule 434
Information, as applicable, is herein called the "Registration Statement." Any
registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations
is herein referred to as the "Rule 462(b) Registration Statement," and after
such filing the term "Registration Statement" shall include the Rule 462(b)
Registration Statement. The final prospectus in the form first furnished to the
Underwriters for use in connection with the offering of the Securities is herein
called the "Prospectus." If Rule 434 is relied on, the term "Prospectus" shall
refer to the preliminary prospectus dated __________, 1997 together with the
Term Sheet and all references in this Agreement to the date of the Prospectus
shall mean the date of the
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<PAGE>
Term Sheet. For purposes of this Agreement, all references to the Registration
Statement, any preliminary prospectus, the Prospectus or any Term Sheet or any
amendment or supplement to any of the foregoing shall be deemed to include the
copy filed with the Commission pursuant to its Electronic Data Gathering,
Analysis and Retrieval system ("EDGAR").
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(a) REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company
represents and warrants to each Underwriter as of the date hereof, as of the
Closing Time referred to in Section 2(b) hereof, and agrees with each
Underwriter, as follows:
(i) Each of the Registration Statement and any Rule 462(b)
Registration Statement has become effective under the 1933 Act and no
stop order suspending the effectiveness of the Registration Statement
or any Rule 462(b) Registration Statement has been issued under the
1933 Act and no proceedings for that purpose have been instituted or
are pending or, to the knowledge of the Company, are contemplated by
the Commission, and any request on the part of the Commission for
additional information has been complied with. At the respective times
the Registration Statement, any Rule 462(b) Registration Statement and
any post-effective amendments thereto became effective and at the
Closing Time, the Registration Statement, the Rule 462(b) Registration
Statement and any amendments and supplements thereto complied and will
comply in all material respects with the requirements of the 1933 Act
and the 1933 Act Regulations and did not and will not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading, and the Prospectus, any preliminary prospectus and any
supplement thereto or prospectus wrapper prepared in connection
therewith, at their respective times of issuance and at the Closing
Time, complied and will comply in all material respects with any
applicable laws or regulations of foreign jurisdictions in which the
Prospectus and such preliminary prospectus, as amended or supplemented,
if applicable, are distributed in connection with the offer and sale of
Reserved Securities. Neither the Prospectus nor any amendments or
supplements thereto (including any prospectus wrapper), at the time the
Prospectus or any such amendment or supplement was issued and at the
Closing Time, included or will include an untrue statement of a
material fact or omitted or will omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. If Rule 434
is used, the Company will comply with the requirements of Rule 434 and
the Prospectus shall not be "materially different," as such term is
used in Rule 434, from the prospectus included in the Registration
Statement at the time it became effective. The representations and
warranties in this subsection shall not apply to statements in or
omissions from the Registration Statement or Prospectus made in
reliance upon and in conformity with information furnished to the
Company in writing by any Underwriter through Merrill Lynch expressly
for use in the Registration Statement or Prospectus.
(ii) Each preliminary prospectus and the prospectus filed as
part of the Registration Statement as originally filed or as part of
any amendment thereto, or filed pursuant to Rule 424 under the 1933
Act, complied when so filed in all material respects with the 1933 Act
Regulations, and each preliminary prospectus and the Prospectus
delivered to the Underwriters for use in connection with the Offering
were identical to the electronically transmitted copies
3
<PAGE>
thereof filed with the Commission pursuant to EDGAR, except to the
extent permitted by Regulation S-T.
(iii) No action has been taken and no local, state or Federal
law, statute, ordinance, rules, regulation, requirement, judgment or
court decree has been enacted, adopted or issued by any governmental
agency that prevents the issuance of the Securities or prevents or
suspends the use of the Prospectus; no judgment, restraining order or
order of any nature by a Federal or state court of competent
jurisdiction has been issued that prevents the issuance of the
Securities or prevents or suspends the sale of the Units in any
jurisdiction referred to in Section 3(f) hereof; and every request of
any securities authority or agency of any jurisdiction for additional
information has been complied with in all material respects.
(iv) There are no contracts or other documents required to be
described in the Registration Statement or to be filed as exhibits to
the Registration Statement by the 1933 Act or by the 1933 Act
Regulations which have not been described or filed as required. The
contracts so described in the Prospectus are accurate and complete in
all material respects, and all such contracts described as being in
full force and effect on the date hereof are in full force and effect
on the date hereof. Neither the Company nor any of its subsidiaries or,
to the best of the Company's knowledge, any other party is in breach of
or default under any such contract.
(v) Each of the Company and ART Licensing has been duly formed
as a corporation and is validly existing in good standing under the
laws of its jurisdiction of incorporation and has all requisite
corporate power and authority to own, lease and operate its properties
and to conduct its business as described in the Prospectus. Each of the
Company and ART Licensing is duly qualified to do business and is in
good standing as a foreign corporation in each jurisdiction in which
the nature of its business or its ownership or leasing of property
requires such qualification, except where the failure to be so
qualified would not have, either individually or in the aggregate, a
material adverse effect on the assets, properties, business,
management, earnings, net worth, results of operations, condition
(financial or otherwise) or business prospects of the Company and its
subsidiaries, taken as a whole. No proceeding has been instituted in
any such jurisdiction, revoking, limiting or curtailing, or seeking to
revoke, limit or curtail, such power and authority or qualification.
(vi) ART Licensing, Advanced Radio Telecom Sweden AB, a
corporation organized under the laws of Sweden ("ART Sweden"), and
Advanced Radio Telecom Limited, a corporation organized under the laws
of the United Kingdom ("ART UK"), are the only subsidiaries of the
Company. The Company owns all of the outstanding capital stock of each
such subsidiary, subject, in the case of ART Sweden and ART UK, to the
provisions of that certain ART Europe Shareholders Agreement, dated as
of September 30, 1996, between the Company and Trond Johannessen; all
such capital stock has been duly authorized and validly issued and is
fully paid and nonassessable, free and clear of any security interest,
claim, lien, encumbrance or adverse interest of any nature, other than
the pledge of all outstanding shares of capital stock of ART Licensing
in connection with the CommcoCCC Financing (as such term is defined in
the Prospectus); and none of such capital stock was issued in violation
of any preemptive or similar rights. Except as disclosed in the
Prospectus, there are no outstanding subscriptions, rights, warrants,
calls, commitments of sale or options to acquire, or instruments
convertible into or exchangeable for, any such shares of capital stock
or other equity interest of any such subsidiary.
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<PAGE>
(vii) Neither ART Sweden nor ART UK has any material assets or
conducts any material business or operations.
(viii) The Company and its subsidiaries do not have any
ownership interest in any joint venture, other than (A) the Company's
50% ownership interest in the ART West Joint Venture, a Delaware
partnership owned by the Company and Extended Communications, Inc.
("ART West"), and (B) the Company's investment in Advantage Telecom,
Inc.
(ix) The Company has authorized and outstanding capital stock
as set forth in Exhibit C hereto and an authorized and outstanding
capitalization as set forth in the Prospectus under the caption
"Capitalization." All such issued and outstanding shares of capital
stock of the Company have been duly authorized and validly issued, are
fully paid and non-assessable and were not issued in violation of any
preemptive or similar rights. Except as disclosed in the Prospectus,
there are no outstanding subscriptions, rights, warrants, calls,
commitments of sale or options to acquire, or instruments convertible
into or exchangeable for, any capital stock of the Company. The
description of the Company's stock option, stock bonus and other stock
plans or arrangements, and the options or other rights granted and
exercised thereunder, set forth in the Prospectus accurately and fairly
presents in all material respects the information required to be shown
with respect to such plans, arrangements, options and rights.
(x) The Company has all requisite corporate power and
authority to execute, deliver and perform its obligations under the
Operative Documents and to consummate the transactions contemplated
hereby and thereby, including, without limitation, the corporate power
and authority to issue, sell and deliver the Securities as provided
herein and therein.
(xi) The Company has duly authorized, executed and delivered
this Agreement and this Agreement is the legally valid and binding
obligation of the Company, enforceable against the Company in
accordance with its terms, except as the enforceability thereof may be
limited (A) by the effect of bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium or other similar laws now or
hereafter in effect relating to or affecting the rights and remedies of
creditors, (B) by the effect of general principles of equity, whether
enforcement is considered in a proceeding in equity or at law, and the
discretion of the court before which any proceeding therefor may be
brought and (C) to the extent that rights to indemnification and
contribution thereunder may be limited by federal or state securities
laws or public policy relating thereto.
(xii) The Company has duly authorized the Units and, when
issued and delivered to and paid for by the Underwriters in accordance
with the terms hereof, the Units will conform in all material respects
to the description thereof in the Prospectus.
(xiii) The Company has duly authorized the Indenture and, when
the Company has duly executed and delivered the Indenture (assuming the
due authorization, execution and delivery thereof by the Trustee), the
Indenture will be the legally valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms,
except as the enforceability thereof may be limited (A) by the effect
of bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium or other similar laws now or hereafter in effect relating to
or affecting the rights and remedies of creditors and (B) by the effect
of general principles of equity, whether enforcement is considered in a
proceeding in equity or at law, and the discretion
5
<PAGE>
of the court before which any proceeding therefor may be brought. The
Indenture has been duly qualified under the 1939 Act.
(xiv) The Company has duly authorized the Notes and, when
issued and authenticated in accordance with the terms of the Indenture
and delivered to and paid for by the Underwriters in accordance with
the terms hereof, the Notes will conform in all material respects to
the description thereof in the Prospectus, will be entitled to the
benefits of the Indenture and will be the legally valid and binding
obligations of the Company, enforceable against the Company in
accordance with their terms, except as the enforceability thereof may
be limited (A) by the effect of bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium or other similar laws now or
hereafter in effect relating to or affecting the rights and remedies of
creditors and (B) by the effect of general principles of equity,
whether enforcement is considered in a proceeding in equity or at law,
and the discretion of the court before which any proceeding therefor
may be brought.
(xv) The Company has duly authorized the Warrant Agreement
and, when the Company has duly executed and delivered the Warrant
Agreement (assuming the due authorization, execution and delivery
thereof by the Warrant Agent), the Warrant Agreement will be the
legally valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, except as the
enforceability thereof may be limited (A) by the effect of bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium or other
similar laws now or hereafter in effect relating to or affecting the
rights and remedies of creditors, (B) by the effect of general
principles of equity, whether enforcement is considered in a proceeding
in equity or at law, and the discretion of the court before which any
proceeding therefor may be brought and (C) to the extent that rights to
indemnification and contribution thereunder may be limited by federal
or state securities laws or public policy relating thereto.
(xvi) The Company has duly authorized the Warrants and, when
countersigned by the Warrant Agent and issued and delivered by the
Company in accordance with the terms of the Warrant Agreement and
delivered to and paid for by the Underwriters in accordance with the
terms hereof, the Warrants will conform in all material respects to the
description thereof in the Prospectus and will have been validly
issued, and the issuance of such Warrants will not be subject to any
preemptive or similar rights.
(xvii) The Company has duly authorized and reserved for
issuance the Warrant Shares to be issued upon the exercise of the
Warrants and, when issued and delivered upon the exercise of the
Warrants against payment of the Exercise Price as provided in the
Warrant Agreement, the Warrant Shares will conform in all material
respects to the description thereof in the Prospectus, will have been
duly issued and will be fully paid and non-assessable, and the issuance
of such Warrant Shares will not be subject to any preemptive or similar
rights.
(xviii) The Company has duly authorized the Pledge Agreement
and, when the Company has duly executed and delivered the Pledge
Agreement (assuming the due authorization, execution and delivery
thereof by the Collateral Agent), the Pledge Agreement will be the
legally valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, except as the
enforceability thereof may be limited (A) by the effect of bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium or other
similar laws now or hereafter in effect relating to or affecting the
rights and remedies of
6
<PAGE>
creditors, (B) by the effect of general principles of equity, whether
enforcement is considered in a proceeding in equity or at law, and the
discretion of the court before which any proceeding therefor may be
brought and (C) to the extent that rights to indemnification and
contribution thereunder may be limited by federal or state securities
laws or public policy relating thereto.
(xix) The Company is the sole beneficial owner of the Pledged
Securities (as defined in the Registration Statement) and no Lien (as
defined in the Registration Statement) exists upon such Pledged
Securities (and no right or option to acquire the same exists in favor
of any other person or entity), except for the pledge and security
interest in favor of the Collateral Agent to be created or provided for
in the Pledge Agreement, which pledge and security interest constitute
a first priority perfected pledge and security interest in and to all
of the Pledged Securities.
(xx) No approval, authorization, order, consent, registration,
filing, qualification, license or permit of or with any court,
regulatory, administrative or other governmental body is required for
the execution and delivery of this Agreement by the Company or the
consummation of the transactions contemplated by this Agreement, except
such as have been obtained and are in full force and effect under the
1933 Act and such as may be required under applicable Blue Sky laws in
connection with the purchase and distribution of the Securities by the
Underwriters and the clearance of the Offering with the National
Association of Securities Dealers, Inc. ("NASD").
(xxi) No preemptive rights or other rights to subscribe for or
purchase exist with respect to the issuance and sale of the Securities
by the Company pursuant to this Agreement. No stockholder of the
Company has any right which has not been waived to require the Company
to register the sale of any shares owned by such stockholder under the
1933 Act in the Offering contemplated by this Agreement. No further
approval or authority of the stockholders or the board of directors of
the Company (the "Board of Directors") will be required for the
issuance and sale of the Securities to be sold by the Company as
contemplated herein.
(xxii) Each of the CIBC Agreements has been duly authorized,
executed and delivered by each of the parties thereto and is the
legally valid and binding agreement of each such party, enforceable
against each such party in accordance with its terms.
(xxiii) None of the execution, delivery and performance of the
Operative Documents by the Company, the compliance by the Company with
all of the provisions thereof, the issuance and sale of the Securities,
the consummation by the Company and its subsidiaries of the
transactions contemplated thereby (A) require any consent, approval,
authorization or other order of or filing, registration, qualification,
license or permit of or with, any court, regulatory body,
administrative agency or other governmental body (including, without
limitation, the Federal Communications Commission (the "FCC")), other
than those that have been obtained and are in full force and effect, or
(B) violate, conflict with, or constitute a breach of any of the terms
or provisions of, or a default under (or an event that with notice or
the lapse of time, or both, would constitute a default), or require
consent under, or result in the imposition of a lien or encumbrance on
any properties of the Company or any of its subsidiaries pursuant to
(1) the charter or bylaws of the Company or any of its subsidiaries,
(2) any bond, debenture, note, mortgage, deed of trust or other
agreement, indenture or other instrument to which or by which any of
them is a party or by which any of them or any of their respective
property is bound, (3) any local, state or Federal law, statute,
ordinance, rule, regulation or requirement (including,
7
<PAGE>
without limitation, the Communications Act of 1934, as amended by the
Telecommunications Act of 1996 (as so amended, the "Communications
Act"), the rules and regulations of the FCC and the environmental laws,
statutes, ordinances, rules or regulations) applicable to the Company,
any of its subsidiaries or any of their respective assets or properties
or (4) any judgment, order or decree of any court or governmental
agency or authority having jurisdiction over the Company, any of its
subsidiaries or any of their assets or properties, that, in the case of
clauses (2), (3) or (4), (x) would reasonably be expected, either
individually or in the aggregate, to result in a material adverse
effect on the assets, properties, business, management, earnings, net
worth, results of operations, condition (financial or otherwise) or
business prospects of the Company and its subsidiaries, taken as a
whole, (y) would materially interfere with or materially adversely
affect the issuance of the Securities or the consummation of the
Offering or (z) would in any manner draw into question the validity of
any of the Operative Documents (any of the events set forth in clauses
(x), (y) or (z), a "Material Adverse Effect").
(xxiv) Neither the Company nor any of its subsidiaries is or,
immediately after giving effect to the Offering, will be (A) in
violation of its charter or bylaws, (B) in default in the performance
of any material obligation, agreement or condition contained in any
bond, debenture, note or any other evidence of indebtedness or in any
other agreement, indenture or instrument material to the conduct of the
business of the Company and its subsidiaries, taken as a whole, to
which any of them is a party, or by which any of their respective
properties is bound or (C) in violation of any local, state or Federal
law, statute, ordinance, rule, regulation, requirement, judgment or
court decree (including, without limitation, the Communications Act and
the rules and regulations of the FCC and environmental laws, statutes,
ordinances, rules, regulations, judgments or court decrees) applicable
to any of them or any of their respective assets or properties (whether
owned or leased), other than, in the case of clauses (B) and (C), any
default or violation that would not reasonably be expected to have a
Material Adverse Effect. There exists no condition that, with notice,
the passage of time or otherwise, would constitute a default under any
such document or instrument that would reasonably be expected to have a
Material Adverse Effect.
(xxv) Other than routine FCC proceedings relating to
applications for and assignments of 38 GHz wireless broadband
authorizations and other than rulemaking procedures of general
applicability to the 38 GHz wireless broadband telecommunications
industry, there is (A) no action, suit or proceeding before or by any
court, arbitrator or governmental agency, body or official, domestic or
foreign, now pending or threatened or, to the Company's knowledge,
contemplated to which the Company or any of its subsidiaries is or may
be a party or to which the business or property of any of them is
subject, or (B) no injunction, restraining order or order of any nature
by a Federal or state court or foreign court of competent jurisdiction
to which the Company, any of its subsidiaries or their business,
assets, or property are, or would reasonably be expected to be,
subject.
(xxvi) Each of the Company and ART Licensing has good and
marketable title, free and clear of all liens, claims, encumbrances and
restrictions, except for liens described in the Prospectus, liens for
taxes not yet due and payable and other liens not material to the
business, prospects, financial condition or results of operations of
the Company and its subsidiaries, taken as a whole, to all property and
assets described in the Prospectus as currently being owned by each of
the Company and its subsidiaries. The Company or its subsidiaries hold
73 authorizations (the "Company FCC Licenses") to provide 38 GHz
wireless broadband services
8
<PAGE>
("Service"). In particular, the Company or its subsidiaries hold the
authorizations set forth in the table in the Prospectus under the
heading "Business--38 GHz Wireless Broadband Licenses and
Authorizations" (the "License Table") to provide Service in the markets
identified therein as "Owned" and for the amount of bandwidth set forth
in the column entitled "Owned" opposite each such market. The Company
has entered into contracts with third parties that hold, on a combined
basis, 35 authorizations (the "Managed FCC Licenses") to provide
Service. In particular, these third parties hold the authorizations set
forth in the License Table to provide Service in the markets identified
therein as "Managed" and for the amount of bandwidth set forth in the
column entitled "Managed" opposite each such market, subject to such
qualifications as are set forth in the Prospectus. The shareholders of
CommcoCCC, Inc. ("CommcoCCC") hold 129 authorizations (the "CommcoCCC
FCC Licenses") to provide Service. In particular, the shareholders of
CommcoCCC hold the authorizations set forth in the License Table to
provide Service in the markets identified therein as "Under Definitive
Agreement to Acquire" and for the bandwidth set forth in the column
entitled "Under Definitive Agreement to Acquire" opposite each such
market. All of the Company FCC Licenses, the Managed FCC Licenses and
the CommcoCCC FCC Licenses (collectively, the "Licenses") are in full
force and effect. Each of the Company and its subsidiaries is in
compliance with the terms and conditions of all such Licenses and with
the rules and regulations of the regulatory authorities having
jurisdictions with respect thereto. All leases to which the Company or
any of its subsidiaries is a party are valid and binding, and no
default has occurred or is continuing thereunder which would reasonably
be expected to result in a Material Adverse Effect. Each of the Company
and its subsidiaries enjoys peaceful and undisturbed possession under
all such Leases to which it is a party as lessee or as assignee of
lessee with such exceptions as do not materially interfere with the use
made by the Company or its subsidiaries.
(xxvii) Each of the Company, ART Licensing and ART West has
such permits, licenses, franchises, trademarks and authorizations of
governmental or regulatory authorities other than the FCC ("Permits")
as are necessary to own, lease and operate their respective properties
and to conduct their respective business in the manner described in the
Prospectus. Each of the Company, ART Licensing and ART West has
fulfilled and performed all of its material obligations with respect to
such Permits, and no event has occurred which allows, or after notice
or lapse of time would allow, revocation or termination thereof or
result in any other material impairment of the rights of the holder of
any such Permit, except for any such impairments which would not,
individually or in the aggregate, have a Material Adverse Effect.
Except as described in the Prospectus, such Permits contain no
restrictions that are materially burdensome to the Company and its
subsidiaries, taken as a whole.
(xxviii) The development, implementation and operation of the
38 GHz wireless broadband telecommunications services network as
described, and in the markets described, in the Prospectus will not (A)
result in any violation of the provisions of the charter or bylaws of
the Company or any of its subsidiaries, (B) result in any violation of
any applicable law, administrative regulation or administrative or
court decree (including, without limitation, the Communications Act,
the rules and regulations of the FCC and environmental laws) or (C)
conflict with or constitute a breach or violation of, or constitute a
default under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or its
subsidiaries pursuant to, any contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which the Company or any
of its subsidiaries is a party or by which
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any of them may be bound, or to which any of their property is subject,
except, in the case of clauses (B) and (C) above, any such violations,
conflicts or breaches that would not individually or in the aggregate,
reasonably be expected to have a Material Adverse Effect.
(xxix) Except as described in the Prospectus, the business and
operations conducted and proposed to be conducted by the Company and
its subsidiaries as described in the Prospectus are not regulated by
any public service or public utility commissions in the States in which
the Company and its subsidiaries conduct or propose to conduct such
business and operations as described in the Prospectus; and neither the
Company nor any of its subsidiaries is or will be required to obtain
any Permit from any public service or public utility commission in any
such State to conduct its business as described in the Prospectus.
(xxx) Each of the Company, ART Licensing and ART West has
filed all reports required to be filed with the FCC.
(xxxi) Neither the Company nor ART Licensing has violated any
foreign, Federal, state or local law or regulation relating to the
protection of human health and safety, the environment or hazardous or
toxic substances or wastes, pollutants or contaminants, except where
any such violations would not, individually or in the aggregate, have a
Material Adverse Effect.
(xxxii) All tax returns required to be filed by the Company or
any of its subsidiaries in any jurisdiction have been so filed. All
material taxes, including withholding taxes, penalties and interest,
assessments, fees and other charges due or claimed to be due from such
entities or that are due and payable have been paid, other than those
being contested in good faith and for which adequate reserves have been
provided for those currently payable without penalty or interest. There
are no proposed additional taxes assessments against the Company or any
of its subsidiaries, and neither the Company nor any of its
subsidiaries has any knowledge of any tax deficiency which has been or
might be asserted or threatened against the Company or any of its
subsidiaries which would reasonably be expected to have a Material
Adverse Effect.
(xxxiii) Each of the Company and its subsidiaries maintains
reasonably adequate insurance.
(xxxiv) Coopers & Lybrand, L.L.P., who have expressed their
opinion with respect to the financial statements and schedules filed
with the Commission as part of the Registration Statement and included
in the Prospectus and in the Registration Statement, are independent
public accountants as required by the 1933 Act and the 1933 Act
Regulations.
(xxxv) The financial statements, together with related
schedules and notes forming part of the Registration Statement and the
Prospectus (and any amendment or supplement thereto), present fairly
the individual and consolidated financial positions, results of
operations and changes in financial position of the Company, its
subsidiaries and Telecom on the basis stated in the Registration
Statement and the Prospectus (and any amendment or supplement thereto)
at the respective dates or for the respective periods to which they
apply. Such statements and related schedules and notes have been
prepared in accordance with generally accepted accounting principles
consistently applied through the periods involved, except as disclosed
therein. The other financial and statistical information and data set
forth in the Registration Statement and the Prospectus (and any
amendment or supplement thereto) is, in all material respects,
accurately
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presented and prepared on a basis consistent with such financial
statements and the books and records of the Company, its subsidiaries
and Telecom, as applicable. The pro forma financial information and
other financial information included in the Prospectus present fairly
the information shown therein, have been prepared in accordance with
the Commission's rules and regulations with respect to pro forma
financial information, have been properly compiled on the pro forma
basis described therein, and, in the opinion of the Company, the
assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the
transactions or circumstances referred to therein. No other financial
statements or schedules are required to be included in the Registration
Statement. The selected financial data set forth in the Prospectus
under the captions "Summary Historical and Pro Forma Financial Data,"
"Capitalization" and "Selected Historical and Pro Forma Financial Data"
fairly present the information set forth therein on the basis stated in
the Registration Statement.
(xxxvi) Each of the Company and its subsidiaries maintains a
system of internal accounting controls sufficient to provide reasonable
assurance that (A) transactions are executed in accordance with
management's general or specific authorizations, (B) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain accountability for assets, (C) access to assets is permitted
only in accordance with management's general or specific authorizations
and (D) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect thereto.
(xxxvii) Subsequent to the respective dates as of which
information is given in the Prospectus and except as set forth in the
Prospectus, (A) neither the Company nor any of its subsidiaries has
incurred any liabilities or obligations, direct or contingent, which
are material, individually or in the aggregate, to the Company and its
subsidiaries, taken as a whole, nor entered into any transaction not in
the ordinary course of business, (B) neither the Company nor any of its
subsidiaries has sustained any material loss or interference with its
businesses or properties from fire, flood, windstorm, accident or other
calamity, whether or not covered by insurance, (C) there has not been,
individually or in the aggregate, any change or development which would
reasonably be expected to result in a Material Adverse Effect and (D)
there has been no dividend or distribution of any kind declared, paid
or made by the Company or any of its subsidiaries on any class of
capital stock.
(xxxviii) The Company does not intend to, nor does it believe
that it will, incur debts beyond its ability to pay such debts as they
mature. After giving effect to the Offering, the fair saleable value of
the assets of the Company on a consolidated basis will exceed the
amount that will be required to be paid on or in respect of the
existing debts and other liabilities (including contingent liabilities)
of the Company on a consolidated basis as they become absolute and
matured. The assets of the Company on a consolidated basis do not
constitute unreasonably small capital to carry out the business of the
Company and its subsidiaries, taken as a whole, as conducted or as
proposed to be conducted.
(xxxix) Neither the Company nor any of its subsidiaries is (A)
an "investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended, or (B) a "holding company" or a "subsidiary company" or an
"affiliate" of a holding company within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
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(xl) None of the execution, delivery and performance of this
Agreement, the issuance and sale of the Securities, the application of
the proceeds from the issuance and sale of the Securities and the
consummation of the transactions contemplated thereby as set forth in
the Prospectus, will violate Regulation G, T, U or X promulgated by the
Board of Governors of the Federal Reserve System or analogous foreign
laws and regulations.
(xli) The Company has not distributed, and will not distribute
prior to the First Closing Date, any offering material in connection
with the offering and sale of the Securities other than any preliminary
prospectus, the Prospectus, the Registration Statement and the other
materials permitted by the 1933 Act.
(xlii) Neither the Company nor any of its subsidiaries has (A)
taken, directly or indirectly, any action designed to, or that might
reasonably be expected to, cause or result in stabilization or
manipulation of the price of any security of the Company to facilitate
the sale or resale of the Units or (B) since the date of the Prospectus
(1) sold, bid for, purchased or paid any person any compensation for
soliciting purchases of, the Units or (2) paid or agreed to pay to any
person any compensation for soliciting another to purchase any other
securities of the Company.
(xliii) Except pursuant to this Agreement, there are no
contracts, agreements or understandings between the Company or any of
its subsidiaries and any other person that would give rise to a valid
claim against the Company, any of its subsidiaries or any of the
Underwriters for a brokerage commission, finder's fee or like payment
in connection with the issuance, purchase and sale of the Securities.
(xliv) Each of the Company and its subsidiaries has complied
with all provisions of Section 517.075, Florida Statutes.
(xlv) Except as disclosed in the Prospectus, there are no
business relationships or related party transactions required to be
disclosed therein pursuant to Item 404 of Regulation S-K of the
Commission.
The Company acknowledges that each of the Underwriters and, for
purposes of the opinions to be delivered to the Underwriters pursuant to Section
5 hereof, counsel to the Company and counsel to the Underwriters, will rely upon
the accuracy and truth of the foregoing representations and hereby consents to
such reliance.
(b) OFFICER'S CERTIFICATES. Any certificate signed by any officer of
the Company or any of its subsidiaries delivered to the Representatives or to
counsel for the Underwriters shall be deemed a representation and warranty by
the Company to each Underwriter as to the matters covered thereby.
SECTION 2. SALE AND DELIVERY TO UNDERWRITERS; CLOSING.
(a) SECURITIES. On the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company agrees to sell to each Underwriter, severally and not jointly, and each
Underwriter, severally and not jointly, agrees to purchase from the Company, at
the price set forth in Schedule B, the number of Units set forth in Schedule A
opposite the name of such Underwriter, plus any additional number of Units which
such Underwriter may become obligated to purchase pursuant to the provisions of
Section 10 hereof.
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(b) PAYMENT. Payment of the purchase price for, and delivery of
certificates for, the Units shall be made at the offices of Latham & Watkins, or
at such other place as shall be agreed upon by the Representatives and the
Company, at 9:00 A.M. (Eastern time) on the third (fourth, if the pricing occurs
after 4:30 P.M. (Eastern time) on any given day) business day after the date
hereof (unless postponed in accordance with the provisions of Section 10), or
such other time not later than ten business days after such date as shall be
agreed upon by the Representatives and the Company (such time and date of
payment and delivery being herein called "Closing Time").
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
the Representatives for the respective accounts of the Underwriters of
certificates for the Units to be purchased by them. It is understood that each
Underwriter has authorized the Representatives, for its account, to accept
delivery of, receipt for, and make payment of the purchase price for, the Units
which it has agreed to purchase. Merrill Lynch, individually and not as
representative of the Underwriters, may (but shall not be obligated to) make
payment of the purchase price for the Units to be purchased by any Underwriter
whose funds have not been received by the Closing Time, but such payment shall
not relieve such Underwriter from its obligations hereunder.
(c) DENOMINATIONS; REGISTRATION. Certificates for the Units shall be in
such denominations and registered in such names as the Representatives may
request in writing at least one full business day before the Closing Time. The
Units will be made available for examination and packaging by the
Representatives in The City of New York not later than 10:00 A.M. (Eastern time)
on the business day prior to the Closing Time.
SECTION 3. COVENANTS OF THE COMPANY. The Company covenants with each
Underwriter as follows:
(a) COMPLIANCE WITH SECURITIES REGULATIONS AND COMMISSION
REQUESTS. The Company, subject to Section 3(b), will comply with the
requirements of Rule 430A or Rule 434, as applicable, and will notify
the Representatives immediately, and confirm the notice in writing, (i)
when any post-effective amendment to the Registration Statement shall
become effective, or any supplement to the Prospectus or any amended
Prospectus shall have been filed, (ii) of the receipt of any comments
from the Commission, (iii) of any request by the Commission for any
amendment to the Registration Statement or any amendment or supplement
to the Prospectus or for additional information, and (iv) of the
issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing
or suspending the use of any preliminary prospectus, or of the
suspension of the qualification of the Securities for offering or sale
in any jurisdiction, or of the initiation or threatening of any
proceedings for any of such purposes. The Company will promptly effect
the filings necessary pursuant to Rule 424(b) and will take such steps
as it deems necessary to ascertain promptly whether the form of
prospectus transmitted for filing under Rule 424(b) was received for
filing by the Commission and, in the event that it was not, it will
promptly file such prospectus. The Company will make every reasonable
effort to prevent the issuance of any stop order and, if any stop order
is issued, to obtain the lifting thereof at the earliest possible
moment.
(b) FILING OF AMENDMENTS. The Company will give the
Representatives notice of its intention to file or prepare any
amendment to the Registration Statement (including any filing under
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Rule 462(b)), any Term Sheet or any amendment, supplement or revision
to either the prospectus included in the Registration Statement at the
time it became effective or to the Prospectus, will furnish the
Representatives with copies of any such documents a reasonable amount
of time prior to such proposed filing or use, as the case may be, and
will not file or use any such document to which the Representatives or
counsel for the Underwriters shall object.
(c) DELIVERY OF REGISTRATION STATEMENTS. The Company has
furnished or will deliver to the Representatives and counsel for the
Underwriters, without charge, signed copies of the Registration
Statement as originally filed and of each amendment thereto (including
exhibits filed therewith or incorporated by reference therein) and
signed copies of all consents and certificates of experts, and will
also deliver to the Representatives, without charge, a conformed copy
of the Registration Statement as originally filed and of each amendment
thereto (without exhibits) for each of the Underwriters. The copies of
the Registration Statement and each amendment thereto furnished to the
Underwriters will be identical to the electronically transmitted copies
thereof filed with the Commission pursuant to EDGAR, except to the
extent permitted by Regulation S-T.
(d) DELIVERY OF PROSPECTUSES. The Company has delivered to
each Underwriter, without charge, as many copies of each preliminary
prospectus as such Underwriter reasonably requested, and the Company
hereby consents to the use of such copies for purposes permitted by the
1933 Act. The Company will furnish to each Underwriter, without charge,
during the period when the Prospectus is required to be delivered under
the 1933 Act or the Securities Exchange Act of 1934 (the "1934 Act"),
such number of copies of the Prospectus (as amended or supplemented) as
such Underwriter may reasonably request. The Prospectus and any
amendments or supplements thereto furnished to the Underwriters will be
identical to the electronically transmitted copies thereof filed with
the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(e) CONTINUED COMPLIANCE WITH SECURITIES LAWS. The Company
will comply with the 1933 Act and the 1933 Act Regulations and the 1939
Act and the regulations thereunder so as to permit the completion of
the distribution of the Units as contemplated in this Agreement and in
the Prospectus. If at any time when a prospectus is required by the
1933 Act to be delivered in connection with sales of the Securities,
any event shall occur or condition shall exist as a result of which it
is necessary, in the opinion of counsel for the Underwriters or for the
Company, to amend the Registration Statement or amend or supplement the
Prospectus in order that the Prospectus will not include any untrue
statements of a material fact or omit to state a material fact
necessary in order to make the statements therein not misleading in the
light of the circumstances existing at the time it is delivered to a
purchaser, or if it shall be necessary, in the opinion of such counsel,
at any such time to amend the Registration Statement or amend or
supplement the Prospectus in order to comply with the requirements of
the 1933 Act or the 1933 Act Regulations, the Company will promptly
prepare and file with the Commission, subject to Section 3(b), such
amendment or supplement as may be necessary to correct such statement
or omission or to make the Registration Statement or the Prospectus
comply with such requirements, and the Company will furnish to the
Underwriters such number of copies of such amendment or supplement as
the Underwriters may reasonably request.
(f) BLUE SKY QUALIFICATIONS. The Company will use its best
efforts, in cooperation with the Underwriters, to qualify the
Securities for offering and sale under the applicable securities
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laws of such states and other jurisdictions as the Representatives may
designate and to maintain such qualifications in effect for a period of
not less than one year from the later of the effective date of the
Registration Statement and any Rule 462(b) Registration Statement;
provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign
corporation or as a dealer in securities in any jurisdiction in which
it is not so qualified or to subject itself to taxation in respect of
doing business in any jurisdiction in which it is not otherwise so
subject. In each jurisdiction in which the Securities have been so
qualified, the Company will file such statements and reports as may be
required by the laws of such jurisdiction to continue such
qualification in effect for a period of not less than one year from the
effective date of the Registration Statement and any Rule 462(b)
Registration Statement. The Company will also supply the Underwriters
with such information as is necessary for the determination of the
legality of the Securities for investment under the laws of such
jurisdictions as the Underwriters may request.
(g) RULE 158. The Company will timely file such reports
pursuant to the 1934 Act as are necessary in order to make generally
available to its securityholders as soon as practicable an earnings
statement for the purposes of, and to provide the benefits contemplated
by, the last paragraph of Section 11(a) of the 1933 Act.
(h) USE OF PROCEEDS. The Company will use the net proceeds
received by it from the sale of the Units in the manner specified in
the Prospectus under "Use of Proceeds."
(i) LISTING. The Company will use its best efforts to effect
the listing of the Warrant Shares on the Nasdaq National Market.
(j) RESTRICTION ON SALE OF SECURITIES. During a period of 180
days from the date of the Prospectus, the Company will not, without the
prior written consent of Merrill Lynch, directly or indirectly, issue,
sell, offer or contract to sell, grant any option for the sale of, or
otherwise transfer or dispose of, any securities of the Company. The
foregoing sentence shall not apply to (i) the Securities to be sold
hereunder, (ii) any shares of Common Stock issued by the Company upon
the exercise of an option or warrant or conversion of a security
outstanding on the date hereof and referred to in the Prospectus, (iii)
any shares of Common Stock issued or options of Common Stock granted
pursuant to existing employee benefit plans of the Company referred to
in the Prospectus, (iv) 6,000,000 shares of Common Stock issued
pursuant to the CommcoCCC Agreement, (v) the issuance by the Company of
warrants to purchase Common Stock in accordance with the CIBC
Agreements or (vi) the issuance by the Company of senior secured notes
issued, or debt securities issued in order to refinance senior secured
notes, if any, outstanding, pursuant to the CIBC Agreements
(k) REPORTING REQUIREMENTS. The Company, during the period
when the Prospectus is required to be delivered under the 1933 Act or
the 1934 Act, will file all documents required to be filed with the
Commission pursuant to the 1934 Act within the time periods required by
the 1934 Act and the rules and regulations of the Commission
thereunder.
(l) PLEDGED SECURITIES. Pursuant to the Indenture and upon
closing of the Offering, the Company will use a portion of the net
proceeds of the Offering to purchase and pledge to the Collateral Agent
for the benefit of holders of the Notes and Pledged Securities in such
amount as
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will be sufficient upon receipt of scheduled interest and principal
payments of such securities, in the opinion of a nationally recognized
firm of public accountants selected by the Company, to provide for
payment in full for the first six scheduled interest payments due on
the Notes. The Company will take all actions necessary to pledge,
assign and set over to the Collateral Agent, for the benefit of holders
of the Notes, and irrevocably grant to the Collateral Agent for the
benefit of the holders of the Notes a first priority security interest
in, all of its respective right, title and interest in such Pledged
Securities held by the Collateral Agent or on its behalf, in order to
secure the obligations of the Company to pay interest on the Notes and
in certain circumstances the obligations of the Company to pay
principal on the Notes.
SECTION 4. PAYMENT OF EXPENSES. (a) Expenses. The Company will pay all
expenses incident to the performance of its obligations under this Agreement,
including (i) the preparation, printing and filing of the Registration Statement
(including financial statements and exhibits) as originally filed and of each
amendment thereto, (ii) the preparation, printing and delivery to the
Underwriters of this Agreement, any Agreement among Underwriters, the other
Operative Documents and such other documents as may be required in connection
with the offering, purchase, sale, issuance or delivery of the Securities, (iii)
the preparation, issuance and delivery of the certificates for the Securities to
the Underwriters, (iv) the fees and disbursements of the Company's counsel,
accountants and other advisors, (v) the qualification of the Securities under
securities laws in accordance with the provisions of Section 3(f) hereof,
including filing fees and the reasonable fees and disbursements of counsel for
the Underwriters in connection therewith and in connection with the preparation
of the Blue Sky Survey and any supplement thereto, (vi) the printing and
delivery to the Underwriters of copies of each preliminary prospectus, any Term
Sheets and of the Prospectus and any amendments or supplements thereto, (vii)
the preparation, printing and delivery to the Underwriters of copies of the Blue
Sky Survey and any supplement thereto, (viii) the fees and expenses of the
Trustee, including the fees and disbursements of counsel for the Trustee in
connection with the Indenture and the Notes, (ix) the fees and expenses of the
Collateral Agent, including the fees and disbursements of counsel for the
Collateral Agent in connection with the Pledge Agreement, (x) the fees and
expenses of the Warrant Agent, including the fees and disbursements of counsel
for the Warrant Agent in connection with the Warrant Agreement and the Warrants,
(xi) any fees payable in connection with the rating of the Securities, (xii) the
filing fees incident to, and the reasonable fees and disbursements of counsel to
the Underwriters in connection with, the review by the NASD of the terms of the
sale of the Securities and (xiii) the fees and expenses incurred in connection
with the listing of the Warrant Shares on the Nasdaq National Market.
(b) TERMINATION OF AGREEMENT. If this Agreement is terminated by the
Representatives in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the Underwriters for all of their
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the Underwriters.
SECTION 5. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of
the several Underwriters hereunder are subject to the accuracy of the
representations and warranties of the Company contained in Section 1 hereof or
in certificates of any officer of the Company or any subsidiary of the Company
delivered pursuant to the provisions hereof, to the performance by the Company
of its covenants and other obligations hereunder, and to the following further
conditions:
(a) EFFECTIVENESS OF REGISTRATION STATEMENT. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order
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suspending the effectiveness of the Registration Statement shall have
been issued under the 1933 Act or proceedings therefor initiated or
threatened by the Commission, and any request on the part of the
Commission for additional information shall have been complied with to
the reasonable satisfaction of counsel to the Underwriters. A
prospectus containing the Rule 430A Information shall have been filed
with the Commission in accordance with Rule 424(b) (or a post-effective
amendment providing such information shall have been filed and declared
effective in accordance with the requirements of Rule 430A) or, if the
Company has elected to rely upon Rule 434, a Term Sheet shall have been
filed with the Commission in accordance with Rule 424(b).
(b) OPINION OF COUNSEL FOR COMPANY. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of
Closing Time, of Hahn & Hessen LLP, counsel for the Company, in form
and substance satisfactory to counsel for the Underwriters, together
with signed or reproduced copies of such letter for each of the other
Underwriters to the effect set forth in Exhibit A hereto and to such
further effect as counsel to the Underwriters may reasonably request.
(c) OPINION OF SPECIAL REGULATORY COUNSEL FOR COMPANY. At
Closing Time, the Representatives shall have received the favorable
opinion, dated as of Closing Time, of Latham & Watkins, special
regulatory counsel for the Company, in form and substance satisfactory
to counsel for the Underwriters, together with signed or reproduced
copies of such letter for each of the other Underwriters to the effect
set forth in Exhibit B hereto and to such further effect as counsel to
the underwriters may reasonable request.
(d) OPINION OF COUNSEL FOR UNDERWRITERS. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of
Closing Time, of Latham & Watkins, counsel for the Underwriters,
together with signed or reproduced copies of such letter for each of
the other Underwriters with respect to certain matters requested by the
Underwriters. In giving such opinion such counsel may rely, as to all
matters governed by the laws of jurisdictions other than the law of the
State of New York, the federal law of the United States and the General
Corporation Law of the State of Delaware, upon the opinions of counsel
satisfactory to the Representatives. Such counsel may also state that,
insofar as such opinion involves factual matters, they have relied, to
the extent they deem proper, upon certificates of officers of the
Company and its subsidiaries and certificates of public officials.
(e) OFFICERS' CERTIFICATE. At Closing Time, there shall not
have been, since the date hereof or since the respective dates as of
which information is given in the Prospectus, any material adverse
change in the condition, financial or otherwise, or in the earnings,
business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in
the ordinary course of business, and the Representatives shall have
received a certificate of the President or a Vice President of the
Company and of the chief financial or chief accounting officer of the
Company, dated as of Closing Time, to the effect that (i) there has
been no such material adverse change, (ii) the representations and
warranties in Section 1(a) hereof are true and correct with the same
force and effect as though expressly made at and as of Closing Time,
(iii) the Company has complied with all agreements and satisfied all
conditions on its part to be performed or satisfied at or prior to
Closing Time, and (iv) no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or are contemplated by the
Commission.
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(f) ACCOUNTANTS' COMFORT LETTER. At the time of the execution
of this Agreement, the Representatives shall have received from Coopers
& Lybrand L.L.P. a letter dated such date, in form and substance
satisfactory to the Representatives, together with signed or reproduced
copies of such letter for each of the other Underwriters containing
statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
Registration Statement and the Prospectus.
(g) BRING-DOWN COMFORT LETTER. At Closing Time, the
Representatives shall have received from Coopers & Lybrand L.L.P. a
letter, dated as of Closing Time, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection (f) of
this Section, except that the specified date referred to shall be a
date not more than three business days prior to Closing Time.
(h) MAINTENANCE OF RATING. At Closing Time, the Securities
shall be rated at least ___ by Moody's Investor's Service Inc. and ___
by Standard & Poor's Ratings Group, a division of McGraw-Hill, Inc.,
and the Company shall have delivered to the Representatives a letter
dated the Closing Time, from each such rating agency, or other evidence
satisfactory to the Representatives, confirming that the Securities
have such ratings; and since the date of this Agreement, there shall
not have occurred a downgrading in the rating assigned to the
Securities or any of the Company's other securities by any "nationally
recognized statistical rating agency," as that term is defined by the
Commission for purposes of Rule 436(g)(2) under the 1933 Act, and no
such organization shall have publicly announced that it has under
surveillance or review its rating of the Securities or any of the
Company's other securities.
(i) APPROVAL OF LISTING. At Closing Time, the Warrant Shares
shall have been approved for listing on the Nasdaq National Market,
subject only to official notice of issuance.
(j) NO OBJECTION. The NASD has confirmed that it has not
raised any objection with respect to the fairness and reasonableness of
the underwriting terms and arrangements.
(k) ADDITIONAL DOCUMENTS. At Closing Time, counsel for the
Underwriters shall have been furnished with such documents and opinions
as they may require for the purpose of enabling them to pass upon the
issuance and sale of the Securities as herein contemplated, or in order
to evidence the accuracy of any of the representations or warranties,
or the fulfillment of any of the conditions, herein contained; and all
proceedings taken by the Company in connection with the issuance and
sale of the Securities as herein contemplated shall be satisfactory in
form and substance to the Representatives and counsel for the
Underwriters.
(l) TERMINATION OF AGREEMENT. If any condition specified in
this Section shall not have been fulfilled when and as required to be
fulfilled, this Agreement may be terminated by the Representatives by
notice to the Company at any time at or prior to Closing Time, and such
termination shall be without liability of any party to any other party
except as provided in Section 4 and except that Sections 1, 6, 7 and 8
shall survive any such termination and remain in full force and effect.
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<PAGE>
SECTION 6. INDEMNIFICATION.
(a) INDEMNIFICATION OF UNDERWRITERS. The Company agrees to indemnify
and hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of any untrue statement or
alleged untrue statement of a material fact contained in the
Registration Statement (or any amendment thereto), including the Rule
430A Information and the Rule 434 Information, if applicable, or the
omission or alleged omission therefrom of a material fact required to
be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact included in any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened,
or of any claim whatsoever based upon any such untrue statement or
omission, or any such alleged untrue statement or omission; provided
that (subject to Section 6(d) below) any such settlement is effected
with the written consent of the Company; and
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Merrill
Lynch), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission, to the extent that any such
expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through Merrill Lynch expressly for use in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto).
(b) INDEMNIFICATION OF COMPANY, DIRECTORS AND OFFICERS. Each
Underwriter severally agrees to indemnify and hold harmless the Company, its
directors, each of its officers who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act against any and all loss, liability,
claim, damage and expense described in the indemnity contained in subsection (a)
of this Section, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with written information furnished to the Company by such Underwriter
through Merrill
19
<PAGE>
Lynch expressly for use in the Registration Statement (or any amendment thereto)
or such preliminary prospectus or the Prospectus (or any amendment or supplement
thereto).
(c) ACTIONS AGAINST PARTIES; NOTIFICATION. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 6 or Section
7 hereof (whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.
(d) SETTLEMENT WITHOUT CONSENT IF FAILURE TO REIMBURSE. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(ii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
SECTION 7. CONTRIBUTION. If the indemnification provided for in Section
6 hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on the one
hand and the Underwriters on the other hand from the offering of the Securities
pursuant to this Agreement or (ii) if the allocation provided by clause (i) is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) above but also the
relative fault of the Company on the one hand and of the Underwriters on the
other hand in connection with the statements or omissions which resulted in such
losses, liabilities, claims, damages or expenses, as well as any other relevant
equitable considerations.
20
<PAGE>
The relative benefits received by the Company on the one hand and the
Underwriters on the other hand in connection with the offering of the Units
pursuant to this Agreement shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Units pursuant to
this Agreement (before deducting expenses) received by the Company and the total
underwriting discount received by the Underwriters, in each case as set forth on
the cover of the Prospectus, or, if Rule 434 is used, the corresponding location
on the Term Sheet, bear to the aggregate initial public offering price of the
Units as set forth on such cover.
The relative fault of the Company on the one hand and the Underwriters
on the other hand shall be determined by reference to, among other things,
whether any such untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever based upon any such untrue or alleged untrue
statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of any such untrue or
alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall
have the same rights to contribution as the Company. The Underwriters'
respective obligations to contribute pursuant to this Section 7 are several in
proportion to the principal amount of Securities set forth opposite their
respective names in Schedule A hereto and not joint.
21
<PAGE>
SECTION 8. REPRESENTATIONS, WARRANTIES AND AGREEMENTS TO SURVIVE
DELIVERY. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any of its
subsidiaries submitted pursuant hereto, shall remain operative and in full force
and effect, regardless of any investigation made by or on behalf of any
Underwriter or controlling person, or by or on behalf of the Company, and shall
survive delivery of the Securities to the Underwriters.
SECTION 9. TERMINATION OF AGREEMENT.
(a) TERMINATION; GENERAL. The Representatives may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time (i)
if there has been, since the time of execution of this Agreement or since the
respective dates as of which information is given in the Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, or (ii) if there has occurred any material adverse
change in the financial markets in the United States, any outbreak of
hostilities or escalation thereof or other calamity or crisis or any change or
development involving a prospective change in national or international
political, financial or economic conditions, in each case the effect of which is
such as to make it, in the judgment of the Representatives, impracticable to
market the Units or to enforce contracts for the sale of the Units, or (iii) if
trading in any securities of the Company has been suspended or materially
limited by the Commission or the Nasdaq National Market, or if trading generally
on the American Stock Exchange or the New York Stock Exchange or in the Nasdaq
National Market has been suspended or materially limited, or minimum or maximum
prices for trading have been fixed, or maximum ranges for prices have been
required, by any of said exchanges or by such system or by order of the
Commission, the NASD or any other governmental authority, or (iv) if a banking
moratorium has been declared by either Federal or New York authorities.
(b) LIABILITIES. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 shall survive such termination and remain in full force and
effect.
SECTION 10. DEFAULT BY ONE OR MORE OF THE UNDERWRITERS. If one or more
of the Underwriters shall fail at Closing Time to purchase the Units which it or
they are obligated to purchase under this Agreement (the "Defaulted
Securities"), the Representatives shall have the right, but not the obligation,
within 24 hours thereafter, to make arrangements for one or more of the
non-defaulting Underwriters, or any other underwriters, to purchase all, but not
less than all, of the Defaulted Securities in such amounts as may be agreed upon
and upon the terms herein set forth; if, however, the Representatives shall not
have completed such arrangements within such 24-hour period, then this Agreement
shall terminate without liability on the part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination
of this Agreement, either the Representatives or the Company shall have the
right to postpone Closing Time for a period not exceeding seven days in order to
effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements.
22
<PAGE>
SECTION 11. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representatives at North Tower, World
Financial Center, New York, New York 10281-1201, attention of Steven C. Jones;
and notices to the Company shall be directed to it at 500 108th Avenue, N.E.,
Suite 2600, Bellevue, Washington 98004, attention of Chief Financial Officer.
SECTION 12. PARTIES. This Agreement shall each inure to the benefit of
and be binding upon the Underwriters and the Company and their respective
successors. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, firm or corporation, other than the
Underwriters and the Company and their respective successors and the controlling
persons and officers and directors referred to in Sections 6 and 7 and their
heirs and legal representatives, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision herein contained. This
Agreement and all conditions and provisions hereof are intended to be for the
sole and exclusive benefit of the Underwriters and the Company and their
respective successors, and said controlling persons and officers and directors
and their heirs and legal representatives, and for the benefit of no other
person, firm or corporation. No purchaser of Securities from any Underwriter
shall be deemed to be a successor by reason merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED
TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 14. EFFECT OF HEADINGS. The Article and Section headings herein
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
23
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the Underwriters and the Company in accordance with its terms.
Very truly yours,
ADVANCED RADIO TELECOM CORP.
By
-------------------------------
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
CIBC WOOD GUNDY SECURITIES CORP.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By
--------------------------------
Authorized Signatory
24
<PAGE>
SCHEDULE A
Name of Underwriter Number of Units
------------------- ---------------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..................
CIBC Wood Gundy Securities Corp...............
---------
Total......................................... 125,000
=========
Sch A-1
<PAGE>
SCHEDULE B
ADVANCED RADIO TELECOM CORP.
125,000 Units Consisting of
$125,000,000 Aggregate Principal Amount of
___% Senior Notes due 2007 and Warrants
to Purchase Shares of Common Stock
1. The initial public offering price of the Units shall $125,000,000.
2. The purchase price to be paid by the Underwriters for the Units
shall be $____________.
3. The interest rate on the Notes shall be ___% per annum.
4. The prices at which the Company may repurchase Notes pursuant to the
optional redemption provisions of the Indenture shall be as follows:
2002..............................____%
2003..............................____%
2004..............................____%
2005 and thereafter...............____%.
5. The price at which the Company may repurchase Notes pursuant to
claw-back feature of the optional redemption provisions of the Indenture shall
be ___%.
5. The exercise price of the Warrants shall be $____ per share.
Sch B-1
<PAGE>
L&W DRAFT 1/13/97
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
ADVANCED RADIO TELECOM CORP.
125,000 Units Consisting of
$125,000,000 Aggregate Principal Amount of
___% Senior Notes due 2007
and
Warrants to Purchase 1,128,011 Shares of Common Stock
WARRANT AGREEMENT
Dated as of __________, 1997
CONTINENTAL STOCK TRANSFER AND TRUST COMPANY
Warrant Agent
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
WARRANT AGREEMENT dated as of _________, ___, 1997 between Advanced Radio
Telecom Corp., a Delaware corporation (the "COMPANY"), and Continental Stock
Transfer and Trust Company, a New York limited purpose trust company, as Warrant
Agent (the "WARRANT AGENT").
WHEREAS, the Company proposes to issue warrants (the "WARRANTS") to
initially purchase up to an aggregate of 1,128,011 shares of Common Stock, par
value $.001 per share (the "COMMON STOCK"), of the Company (the Common Stock
issuable on exercise of the Warrants being referred to herein as the "WARRANT
SHARES"), in connection with the offering (the "OFFERING") by the Company of
125,000 Units, each consisting of $1,000 principal amount of the Company's ___%
Senior Notes due 2007 (the "NOTES") and one Warrant to purchase 9.024 Warrant
Shares.
WHEREAS, the Company desires the Warrant Agent to act on behalf of the
Company, and the Warrant Agent is willing so to act, in connection with the
issuance of Warrant Certificates (as defined) and other matters as provided
herein;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereto agree as follows:
SECTION 1. APPOINTMENT OF WARRANT AGENT. The Company hereby appoints
the Warrant Agent to act as agent for the Company in accordance with the
instructions set forth hereinafter in this Agreement, and the Warrant Agent
hereby accepts such appointment.
SECTION 2. WARRANT CERTIFICATES. The certificates evidencing the
Warrants (the "WARRANT CERTIFICATES") to be delivered pursuant to this Agreement
shall be in registered form only and shall be substantially in the form set
forth in Exhibit A attached hereto and shall, prior to the Separation Date (as
defined), bear the legend set forth in Exhibit B attached hereto.
SECTION 3. EXECUTION OF WARRANT CERTIFICATES. (a) Warrant Certificates
shall be signed on behalf of the Company by its Chairman of the Board, Chief
Executive Officer, its President or a Vice President and by its Secretary or an
Assistant Secretary under its corporate seal. Each such signature upon the
Warrant Certificates may be in the form of a facsimile signature of the present
or any future Chairman of the Board, Chief Executive Officer, President, Vice
President, Secretary or Assistant Secretary and may be imprinted or otherwise
reproduced on the Warrant Certificates and for that purpose the Company may
adopt and use the facsimile signature of any person who shall have been Chairman
of the Board, Chief Executive Officer, President, Vice President, Secretary or
Assistant Secretary, notwithstanding the fact that at the time the Warrant
Certificates shall be countersigned and delivered or disposed of he shall have
ceased to hold such office. The seal of the Company may be in the form of a
facsimile thereof and may be impressed, affixed, imprinted or otherwise
reproduced on the Warrant Certificates.
(b) In case any officer of the Company who shall have signed any of the
Warrant Certificates shall cease to be such officer before the Warrant
Certificates so signed shall have been countersigned by the Warrant Agent, or
disposed of by the Company, such Warrant Certificates nevertheless may be
countersigned and delivered or disposed of as though such person had not ceased
to be such officer of the Company; and any Warrant Certificate may be signed on
behalf of the Company by any person who, at the actual date of the execution of
such Warrant Certificate, shall be a proper officer of the Company to sign such
Warrant Certificate, although at the date of the execution of this Warrant
Agreement any such person was not such officer.
<PAGE>
(c) Warrant Certificates shall be dated the date of countersignature by
the Warrant Agent.
SECTION 4. REGISTRATION AND COUNTERSIGNATURE. (a) The Warrant Agent,
on behalf of the Company, shall number and register the Warrant Certificates in
a register as they are issued by the Company.
(b) Warrant Certificates shall be manually countersigned by the Warrant
Agent and shall not be valid for any purpose unless so countersigned. The
Warrant Agent shall, upon written instructions of the Chairman of the Board, the
Chief Executive Officer, the President, a Vice President, the Treasurer or the
Controller of the Company, initially countersign, issue and deliver Warrants
entitling the holders thereof to purchase not more than the number of Warrant
Shares referred to above in the first recital hereof and shall countersign and
deliver Warrants as otherwise provided in this Agreement.
(c) The Company and the Warrant Agent may deem and treat the registered
holder(s) of the Warrant Certificates as the absolute owner(s) thereof
(notwithstanding any notation of ownership or other writing thereon made by
anyone) for all purposes, and neither the Company nor the Warrant Agent shall be
affected by any notice to the contrary.
SECTION 5. REGISTRATION OF TRANSFERS AND EXCHANGES. (a) The Warrant
Agent shall from time to time, subject to the limitations of Section 6 hereof,
register the transfer of any outstanding Warrant Certificates upon the records
to be maintained by it for that purpose, upon surrender thereof accompanied (if
so required by it) by a written instrument or instruments of transfer in form
satisfactory to the Warrant Agent, duly executed by the registered holder or
holders thereof or by the duly appointed legal representative thereof or by a
duly authorized attorney. Upon any such registration of transfer, a new Warrant
Certificate shall be issued to the transferee(s) and the surrendered Warrant
Certificate shall be cancelled by the Warrant Agent. Cancelled Warrant
Certificates shall thereafter be disposed of in a manner satisfactory to the
Company.
(b) The Warrant holders agree that prior to any proposed transfer of the
Warrant Shares, if such transfer is not made pursuant to an effective
Registration Statement under the Securities Act of 1933, as amended (the
"SECURITIES ACT"), or an opinion of counsel, reasonably satisfactory in form and
substance to the Company, that the Warrant Shares may be sold publicly without
registration under the Securities Act, the Warrant holder will, if requested by
the Company, deliver to the Company:
(i) an investment covenant reasonably satisfactory to the Company
signed by the proposed transferee;
(ii) an agreement by such transferee to the impression of the
restrictive investment legend set forth below on the Warrant Shares;
2
<PAGE>
(iii) an agreement by such transferee that the Company may place a
notation in the stock books of the Company or a "stop transfer order" with
any transfer agent or registrar with respect to the Warrant Shares; and
(iv) an agreement by such transferee to be bound by the provisions
of this Section 5 relating to the transfer of such Warrant Shares.
(c) Warrant Certificates may be exchanged at the option of the holder(s)
thereof, when surrendered to the Warrant Agent at its office for another Warrant
Certificate or other Warrant Certificates of like tenor and representing in the
aggregate a like number of Warrants. Warrant Certificates surrendered for
exchange shall be cancelled by the Warrant Agent. Such cancelled Warrant
Certificates shall then be disposed of by such Warrant Agent in a manner
satisfactory to the Company.
(d) The Warrant Agent is hereby authorized to countersign, in accordance
with the provisions of this Section 5 and of Section 4 hereof, the new Warrant
Certificates required pursuant to the provisions of this Section 5.
SECTION 6. SEPARATION OF WARRANTS; TERMS OF WARRANTS; EXERCISE OF
WARRANTS.(a) The Notes and Warrants will not be separately transferable prior to
the close of business of the earlier of (i) ____________, 1997, (ii) a Change
in Control (as defined in the indenture relating to the Notes) with respect to
the Company and (iii) such date as the underwriters in the Unit Offering may, in
their discretion, deem appropriate (the "SEPARATION DATE"), at which time such
Warrants shall become separately transferable. Subject to the terms of this
Agreement, each Warrant holder shall have the right, which may be exercised,
subject to the effectiveness of the Registration Statement (as defined),
commencing at the opening of business on ________, 1997 and until 5:00 p.m., New
York City time on _______, 2007 to receive from the Company the number of fully
paid and nonassessable Warrant Shares which the holder may at the time be
entitled to receive on exercise of such Warrants and payment of the Exercise
Price then in effect for such Warrant Shares. In the alternative, each holder
may exercise its right, during the Exercise Period, to receive Warrant Shares on
a net basis, such that, without the exchange of any funds, the holder receives
that number of Warrant Shares otherwise issuable (or payable) upon exercise of
its Warrants less that number of Warrant Shares having an aggregate fair market
value (as defined) at the time of exercise equal to the aggregate Exercise Price
that would otherwise have been paid by the holder of the Warrant Shares. For
purposes of the foregoing sentence, "FAIR MARKET VALUE" of the Warrant Shares
will be determined in good faith by the Board of Directors of the Company as of
the date of any such exercise. Each Warrant not exercised prior to 5:00 p.m.,
New York City time, on _______, 2007 shall become void and all rights thereunder
and all rights in respect thereof under this agreement shall cease as of such
time. No adjustments as to dividends will be made upon exercise of the
Warrants.
(b) A Warrant may be exercised upon surrender to the Company at the
principal office of the Warrant Agent of the certificate or certificates
evidencing the Warrants to be exercised with the form of election to purchase on
the reverse thereof duly filled in and signed, which signature shall be
medallion guaranteed by an institution which is a member of a Securities
Transfer
3
<PAGE>
Association recognized signature guarantee program, and upon payment to the
Warrant Agent for the account of the Company of the exercise price (the
"EXERCISE PRICE"), which is set forth in the form of Warrant Certificate
attached hereto as Exhibit A, as adjusted as herein provided, for the number of
Warrant Shares in respect of which such Warrants are then exercised. Payment of
the aggregate Exercise Price shall be made (i) in cash or by certified or
official bank check payable to the order of the Company, (ii) through the
surrender of debt or preferred equity securities of the Company having a
principal amount or liquidation preference, as the case may be, equal to the
aggregate Exercise Price to be paid (the Company will pay the accrued interest
or dividends on such surrendered debt or preferred equity securities in cash at
the time of surrender notwithstanding the stated terms thereof) or (iii) in the
manner provided in Section 6(a) hereof.
(c) Subject to the provisions of Section 7 hereof, upon such surrender of
Warrants and payment of the Exercise Price, the Company shall issue and cause to
be delivered with all reasonable dispatch to or upon the written order of the
holder and in such name or names as the Warrant holder may designate, a
certificate or certificates for the number of full Warrant Shares issuable upon
the exercise of such Warrants together with cash as provided in Section 12
hereof; PROVIDED, HOWEVER, that if any consolidation, merger or lease or sale of
assets is proposed to be effected by the Company as described in Section 11(m)
hereof, or a tender offer or an exchange offer for shares of Common Stock of the
Company shall be made, upon such surrender of Warrants and payment of the
Exercise Price as aforesaid, the Company shall, as soon as possible, but in any
event not later than two business days thereafter, issue and cause to be
delivered the full number of Warrant Shares issuable upon the exercise of such
Warrants in the manner described in this sentence together with cash as provided
in Section 12 hereof. Such certificate or certificates shall be deemed to have
been issued and any person so designated to be named therein shall be deemed to
have become a holder of record of such Warrant Shares as of the date of the
surrender of such Warrants and payment of the Exercise Price.
(d) The Warrants shall be exercisable, at the election of the holders
thereof, either in full or from time to time in part and, in the event that a
certificate evidencing Warrants is exercised in respect of fewer than all of the
Warrant Shares issuable on such exercise at any time prior to the date of
expiration of the Warrants, a new certificate evidencing the remaining Warrant
or Warrants will be issued, and the Warrant Agent is hereby irrevocably
authorized to countersign and to deliver the required new Warrant Certificate or
Certificates pursuant to the provisions of this Section and of Section 3 hereof,
and the Company, whenever required by the Warrant Agent, will supply the Warrant
Agent with Warrant Certificates duly executed on behalf of the Company for such
purpose.
(e) All Warrant Certificates surrendered upon exercise of Warrants shall
be cancelled by the Warrant Agent. Such cancelled Warrant Certificates shall
then be disposed of by the Warrant Agent in a manner satisfactory to the
Company. The Warrant Agent shall account promptly to the Company with respect to
Warrants exercised and concurrently pay to the Company all monies received by
the Warrant Agent for the purchase of the Warrant Shares through the exercise of
such Warrants.
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<PAGE>
(f) The Warrant Agent shall keep copies of this Agreement and any notices
given or received hereunder available for inspection by the holders during
normal business hours at its office. The Company shall supply the Warrant Agent
from time to time with such numbers of copies of this Agreement as the Warrant
Agent may request.
SECTION 7. PAYMENT OF TAXES. The Company will pay all documentary stamp
taxes attributable to the initial issuance of Warrant Shares upon the exercise
of Warrants; PROVIDED, HOWEVER, that the Company shall not be required to pay
any tax or taxes which may be payable in respect of any transfer involved in the
issue of any Warrant Certificates or any certificates for Warrant Shares in a
name other than that of the registered holder of a Warrant Certificate
surrendered upon the exercise of a Warrant, and the Company shall not be
required to issue or deliver such Warrant Certificates unless or until the
person or persons requesting the issuance thereof shall have paid to the Company
the amount of such tax or shall have established to the satisfaction of the
Company that such tax has been paid.
SECTION 8. MUTILATED OR MISSING WARRANT CERTIFICATES. In case any of
the Warrant Certificates shall be mutilated, lost, stolen or destroyed, the
Company may in its discretion issue and the Warrant Agent may countersign, in
exchange and substitution for and upon cancellation of the mutilated Warrant
Certificate, or in lieu of and substitution for the Warrant Certificate lost,
stolen or destroyed, a new Warrant Certificate of like tenor and representing an
equivalent number of Warrants, but only upon receipt of evidence satisfactory to
the Company and the Warrant Agent of such loss, theft or destruction of such
Warrant Certificate and indemnity, if requested, also satisfactory to them.
Applicants for such substitute Warrant Certificates shall also comply with such
other reasonable regulations and pay such other reasonable charges as the
Company or the Warrant Agent may prescribe.
SECTION 9. RESERVATION OF WARRANT SHARES. (a) The Company will at all
times reserve and keep available, free from preemptive rights, out of the
aggregate of its authorized but unissued Common Stock or its authorized and
issued Common Stock held in its treasury, for the purpose of enabling it to
satisfy any obligation to issue Warrant Shares upon exercise of Warrants, the
maximum number of shares of Common Stock which may then be deliverable upon the
exercise of all outstanding Warrants.
(b) The Company or, if appointed, the transfer agent for the Common Stock
(the "TRANSFER AGENT") and every subsequent transfer agent for any shares of the
Company's capital stock issuable upon the exercise of any of the rights of
purchase aforesaid will be irrevocably authorized and directed at all times to
reserve such number of authorized shares as shall be required for such purpose.
The Company will keep a copy of this Agreement on file with the Transfer Agent
and with every subsequent transfer agent for any shares of the Company's capital
stock issuable upon the exercise of the rights of purchase represented by the
Warrants. The Warrant Agent is hereby irrevocably authorized to requisition
from time to time from such Transfer Agent the stock certificates required to
honor outstanding Warrants upon exercise thereof in accordance with the terms of
this Agreement. The Company will supply such Transfer Agent with duly executed
certificates for such purposes and will provide or otherwise make available any
cash which may be payable as provided in Section 12 hereof. The Company will
furnish such Transfer
5
<PAGE>
Agent a copy of all notices of adjustments, and certificates related thereto,
transmitted to each holder pursuant to Section 14 hereof.
(c) Before taking any action which would cause an adjustment pursuant to
Section 11 hereof to reduce the Exercise Price below the then par value (if any)
of the Warrant Shares, the Company will take any corporate action which may, in
the opinion of its counsel (which may be counsel employed by the Company), be
necessary in order that the Company may validly and legally issue fully paid and
nonassessable Warrant Shares at the Exercise Price as so adjusted.
(d) The Company covenants that all Warrant Shares which may be issued upon
exercise of Warrants will, upon issue, be fully paid, nonassessable, free of
preemptive rights and free from all taxes, liens, charges and security interests
with respect to the issuance thereof.
SECTION 10. OBTAINING STOCK EXCHANGE LISTINGS. The Company will from
time to time take all action which may be necessary so that the Warrant Shares,
immediately upon their issuance upon the exercise of Warrants, will be listed on
the principal securities exchanges and markets within the United States of
America, if any, on which other shares of Common Stock are then listed.
SECTION 11. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES
ISSUABLE. The Exercise Price and the number of Warrant Shares issuable upon the
exercise of each Warrant are subject to adjustment from time to time upon the
occurrence of the events enumerated in this Section 11. For purposes of this
Section 11, "COMMON STOCK" means shares now or hereafter authorized of any class
of common stock of the Company and any other stock of the Company, however
designated, that has the right (subject to any prior rights of any class or
series of preferred stock) to participate in any distribution of the assets or
earnings of the Company without limit as to per share amount.
(a) ADJUSTMENT FOR CHANGE IN CAPITAL STOCK. If the Company (i) pays a
dividend or makes a distribution on its Common Stock in shares of its Common
Stock,(ii) subdivides its outstanding shares of Common Stock into a greater
number of shares,(iii) combines its outstanding shares of Common Stock into a
smaller number of shares,(iv) makes a distribution on its Common Stock in shares
of its capital stock other than Common Stock or (v) issues by reclassification
of its Common Stock any shares of its capital stock; then the Exercise Price in
effect immediately prior to such action shall be proportionately adjusted so
that the holder of any Warrant thereafter exercised may receive the aggregate
number and kind of shares of capital stock of the Company which he would have
owned immediately following such action if such Warrant had been exercised
immediately prior to such action.
The adjustment shall become effective immediately after the record date in
the case of a dividend or distribution and immediately after the effective date
in the case of a subdivision, combination or reclassification. If, after an
adjustment, a holder of a Warrant upon exercise of it may receive shares of two
or more classes of capital stock of the Company, the Company shall determine the
allocation of the adjusted Exercise Price between the classes of capital stock.
After such allocation, the exercise privilege and the Exercise Price of each
class of capital stock shall
6
<PAGE>
thereafter be subject to adjustment on terms comparable to those applicable to
Common Stock in this Section 11. Such adjustment shall be made successively
whenever any event listed above shall occur.
(b) ADJUSTMENT FOR RIGHTS ISSUE. If the Company distributes any
rights, options or warrants to all holders of its Common Stock entitling them
for a period expiring within 60 days after the record date mentioned below to
purchase shares of Common Stock at a price per share less than the current
market price per share on that record date, the Exercise Price shall be adjusted
in accordance with the formula:
O + N X P
-----
E' = E x M
--------------------
O + N
where:
E' = the adjusted Exercise Price.
E = the current Exercise Price.
O = the number of shares of Common Stock outstanding on the
record date.
N = the number of additional shares of Common Stock offered.
P = the offering price per share of the additional shares.
M = the current market price per share of Common Stock on the
record date.
The adjustment shall be made successively whenever any such rights, options
or warrants are issued and shall become effective immediately after the record
date for the determination of stockholders entitled to receive the rights,
options or warrants. If at the end of the period during which such rights,
options or warrants are exercisable, not all rights, options or warrants shall
have been exercised, the Exercise Price shall be immediately readjusted to what
it would have been if "N" in the above formula had been the number of shares
actually issued.
(c) ADJUSTMENT FOR OTHER DISTRIBUTIONS. If the Company distributes to all
holders of its Common Stock any of its assets or debt securities or any rights
or warrants to purchase debt securities, assets or other securities of the
Company, the Exercise Price shall be adjusted in accordance with the formula:
7
<PAGE>
E' = E x M - F
-----------
M
where:
E' = the adjusted Exercise Price.
E = the current Exercise Price.
M = the current market price per share of Common Stock on the
record date mentioned below.
F = the fair market value on the record date of the assets,
securities, rights or warrants to be distributed in respect
of to one share of Common Stock. The Board of Directors
shall determine the fair market value.
The adjustment shall be made successively whenever any such distribution is
made and shall become effective immediately after the record date for the
determination of stockholders entitled to receive the distribution.
This Section 11(c) does not apply to cash dividends or cash distributions
paid out of consolidated current or retained earnings as shown on the books of
the Company prepared in accordance with generally accepted accounting
principles. Also, this Section 11(c) does not apply to rights, options or
warrants referred to in Section 11(b) hereof.
(d) ADJUSTMENT FOR COMMON STOCK ISSUE. If the Company issues shares of
Common Stock for a consideration per share less than the current market price
per share on the date the Company fixes the offering price of such additional
shares, the Exercise Price shall be adjusted in accordance with the formula:
P
---
E' = E x O + M
-----------
A
where:
E' = the adjusted Exercise Price.
E = the then current Exercise Price.
O = the number of shares outstanding immediately prior to the
issuance of such additional shares.
P = the aggregate consideration received for the issuance of such
additional shares.
8
<PAGE>
M = the current market price per share on the date of issuance of
such additional shares.
A = the number of shares outstanding immediately after the
issuance of such additional shares.
The adjustment shall be made successively whenever any such issuance is
made, and shall become effective immediately after such issuance.
This Section 11(d) does not apply to:
(i) any of the transactions described in Sections 11(b) and (c);
(ii) the exercise of Warrants, or the conversion or exchange of
other securities convertible or exchangeable for Common Stock;
(iii) Common Stock issued to the Company's employees under bona
fide employee benefit plans adopted by the Board of Directors and approved
by the holders of Common Stock when required by law, if such Common Stock
would otherwise be covered by this Section 11(d) (but only to the extent
that the aggregate number of shares excluded hereby and issued after the
date of this Warrant Agreement shall not exceed 5% of the Common Stock
outstanding at the time of the adoption of each such plan, exclusive of
antidilution adjustments thereunder);
(iv) Common Stock upon the exercise of rights or warrants issued
to the holders of Common Stock;
(v) Common Stock issued to stockholders of any person which
merges into the Company in proportion to their stock holdings of such
person immediately prior to such merger, upon such merger;
(vi) Common Stock issued in a bona fide public offering pursuant
to a firm commitment underwriting; or
(vii) Common Stock issued in a bona fide private placement through
a placement agent which is a member firm of the National Association of
Securities Dealers, Inc. ("NASD") (except to the extent that any discount
from the current market price attributable to restrictions on
transferability of the Common Stock, as determined in good faith by the
Board of Directors of the Company (the "BOARD") and described in a Board
resolution which shall be filed with the Trustee, shall exceed 20%).
9
<PAGE>
(e) ADJUSTMENT FOR CONVERTIBLE SECURITIES ISSUE. If the Company issues
any securities convertible into or exchangeable for Common Stock (other than
securities issued in transactions described in Sections 11(b) and (c) hereof)
for a consideration per share of Common Stock initially deliverable upon
conversion or exchange of such securities less than the current market price per
share on the date of issuance of such securities, the Exercise Price shall be
adjusted in accordance with this formula:
P
---
E' = E x O + M
----------
O + D
where:
E' = the adjusted Exercise Price.
E = the then current Exercise Price.
O = the number of shares outstanding immediately prior to the
issuance of such securities.
P = the aggregate consideration received for the issuance of such
securities.
M = the current market price per share on the date of issuance of
such securities.
D = the maximum number of shares deliverable upon conversion or
in exchange for such securities at the initial conversion or
exchange rate.
The adjustment shall be made successively whenever any such issuance is
made, and shall become effective immediately after such issuance.
If all of the Common Stock deliverable upon conversion or exchange of such
securities have not been issued when such securities are no longer outstanding,
then the Exercise Price shall promptly be readjusted to the Exercise Price which
would then be in effect had the adjustment upon the issuance of such securities
been made on the basis of the actual number of shares of Common Stock issued
upon conversion or exchange of such securities.
This Section 11(e) does not apply to:
(i) convertible securities issued to stockholders of any person
which merges into the Company, or with a subsidiary of the Company, in
proportion to their stock holdings of such person immediately prior to such
merger, upon such merger,
10
<PAGE>
(ii) convertible securities issued in a bona fide public offering
pursuant to a firm commitment underwriting or
(iii) convertible securities issued in a bona fide private
placement through a placement agent which is a member firm of the NASD
(except to the extent that any discount from the current market price
attributable to restrictions on transferability of Common Stock issuable
upon conversion, as determined in good faith by the Board of Directors and
described in a Board resolution which shall be filed with the Trustee,
shall exceed 20% of the then current market price).
(f) CURRENT MARKET PRICE. In Sections 11(b), (c), (d) and (e) hereof, the
current market price per share of Common Stock on any date is the average of the
Quoted Prices of the Common Stock for 30 consecutive trading days commencing 45
trading days prior to the date in question. The "QUOTED PRICE" of the Common
Stock is the last reported sales price of the Common Stock as reported by the
Nasdaq National Market or, if the Common Stock is listed on a securities
exchange, the last reported sales price of the Common Stock on such exchange
which shall be for consolidated trading if applicable to such exchange, or, if
neither so reported or listed, the last reported bid price of the Common Stock.
In the absence of one or more such quotations, the Board of Directors of the
Company shall determine the current market price on the basis of such quotations
as it in good faith considers appropriate.
(g) CONSIDERATION RECEIVED. For purposes of any computation respecting
consideration received pursuant to Sections 11(d) and (e), the following shall
apply:
(i) in the case of the issuance of shares of Common Stock for
cash, the consideration shall be the amount of such cash, PROVIDED that in
no case shall any deduction be made for any commissions, discounts or other
expenses incurred by the Company for any underwriting of the issue or
otherwise in connection therewith;
(ii) in the case of the issuance of shares of Common Stock for a
consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair market value thereof as determined
in good faith by the Board of Directors (irrespective of the accounting
treatment thereof), whose determination shall be conclusive, and described
in a Board resolution which shall be filed with the Warrant Agent; and
(iii) in the case of the issuance of securities convertible into or
exchangeable for shares, the aggregate consideration received therefor
shall be deemed to be the consideration received by the Company for the
issuance of such securities plus the additional minimum consideration, if
any, to be received by the Company upon the conversion or exchange thereof
(the consideration in each case to be determined in the same manner as
provided in clauses (i) and (ii) of this subsection).
11
<PAGE>
(h) WHEN DE MINIMIS ADJUSTMENT MAY BE DEFERRED. No adjustment in the
Exercise Price need be made unless the adjustment would require an increase or
decrease of at least 1% in the Exercise Price. Any adjustments that are not
made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this Section 11 shall be made to the nearest
cent or to the nearest 1/100th of a share, as the case may be.
(i) WHEN NO ADJUSTMENT REQUIRED. No adjustment need be made for a
transaction referred to Section 11(a), (b), (c), (d) or (e) hereof, if Warrant
holders are to participate in the transaction on a basis and with notice that
the Board of Directors determines to be fair and appropriate in light of the
basis and notice on which holders of Common Stock participate in the
transaction. No adjustment need be made for (i) rights to purchase Common Stock
pursuant to a Company plan for reinvestment of dividends or interest, (ii) a
change in the par value or no par value of the Common Stock, (iii) the issuance
by the Company of 6,000,000 shares of Common Stock to CommcoCCC, Inc. in
connection with the acquisition of certain assets therefrom, or (iv) the
issuance by the Company of warrants to CIBC to purchase Common Stock in
accordance with CIBC Agreements (as defined in a certain Purchase Agreement
relating to the Unit Offering). To the extent the Warrants become convertible
into cash, no adjustment need be made thereafter as to the cash. Interest will
not accrue on the cash.
(j) NOTICE OF ADJUSTMENT. Whenever the Exercise Price is adjusted, the
Company shall provide the notices required by Section 13 hereof.
(k) VOLUNTARY REDUCTION. The Company from time to time may reduce the
Exercise Price by any amount for any period of time, if the period is at least
20 days and if the reduction is irrevocable during the period; PROVIDED,
HOWEVER, that in no event may the Exercise Price be less than the par value of a
share of Common Stock. Whenever the Exercise Price is reduced, the Company
shall mail to Warrant holders a notice of the reduction. The Company shall mail
the notice at least 15 days before the date the reduced Exercise Price takes
effect. The notice shall state the reduced Exercise Price and the period in
which it will be in effect. A reduction of the Exercise Price does not change
or adjust the Exercise Price otherwise in effect for purposes of Sections 11(a),
(b), (c), (d) and (e) hereof.
(l) NOTICE OF CERTAIN TRANSACTIONS. If (i) the Company takes any action
that would require an adjustment in the Exercise Price pursuant to Section
11(a), (b), (c), (d) or (e) hereof and if the Company does not arrange for
Warrant holders to participate pursuant to Section 11(i) hereof,(ii) the Company
takes any action that would require a supplemental Warrant Agreement pursuant to
Section 11(m) hereof or (iii) there is a liquidation or dissolution of the
Company, then the Company shall mail to Warrant holders a notice stating the
proposed record date for a dividend or distribution or the proposed effective
date of a subdivision, combination, reclassification, consolidation, merger,
transfer, lease, liquidation or dissolution. The Company shall mail the notice
at least 15 days before such date. Failure to mail the notice or any defect in
it shall not affect the validity of the transaction.
12
<PAGE>
(m) REORGANIZATION OF COMPANY. If the Company consolidates or merges with
or into, or transfers or leases all or substantially all its assets to, any
person, upon consummation of such transaction the Warrants shall automatically
become exercisable for the kind and amount of securities, cash or other assets
which the holder of a Warrant would have owned immediately after the
consolidation, merger, transfer or lease if the holder had exercised the Warrant
immediately before the effective date of the transaction. Concurrently with the
consummation of such transaction, the corporation formed by or surviving any
such consolidation or merger if other than the Company, or the person to which
such sale or conveyance shall have been made, shall enter into a supplemental
Warrant Agreement so providing and further providing for adjustments which shall
be as nearly equivalent as may be practical to the adjustments provided for in
this Section. The successor Company shall mail to Warrant holders a notice
describing the supplemental Warrant Agreement. If the issuer of securities
deliverable upon exercise of Warrants under the supplemental Warrant Agreement
is an affiliate of the formed, surviving, transferee or lessee corporation, that
issuer shall join in the supplemental Warrant Agreement. If this Section 11(m)
applies, Sections 11(a), (b), (c), (d) and (e) hereof do not apply.
(n) COMPANY DETERMINATION FINAL. Any determination that the Company or
the Board of Directors must make pursuant to Section 11(a), (c), (d), (e), (f),
(g) or (i) hereof is conclusive.
(o) WARRANT AGENT'S DISCLAIMER. The Warrant Agent has no duty to
determine when an adjustment under this Section 11 should be made, how it should
be made or what it should be. The Warrant Agent has no duty to determine
whether any provisions of a supplemental Warrant Agreement under Section 11(m)
hereof are correct. The Warrant Agent makes no representation as to the
validity or value of any securities or assets issued upon exercise of Warrants.
The Warrant Agent shall not be responsible for the Company's failure to comply
with this Section 11.
(p) WHEN ISSUANCE OR PAYMENT MAY BE DEFERRED. In any case in which this
Section 11 shall require that an adjustment in the Exercise Price be made
effective as of a record date for a specified event, the Company may elect to
defer until the occurrence of such event (i) issuing to the holder of any
Warrant exercised after such record date the Warrant Shares and other capital
stock of the Company, if any, issuable upon such exercise over and above the
Warrant Shares and other capital stock of the Company, if any, issuable upon
such exercise on the basis of the Exercise Price and (ii) paying to such holder
any amount in cash in lieu of a fractional share pursuant to Section 12 hereof;
PROVIDED, HOWEVER, that the Company shall deliver to such holder a due bill or
other appropriate instrument evidencing such holder's right to receive such
additional Warrant Shares, other capital stock and cash upon the occurrence of
the event requiring such adjustment.
(q) ADJUSTMENT IN NUMBER OF SHARES. Upon each adjustment of the Exercise
Price pursuant to this Section 11, each Warrant outstanding prior to the making
of the adjustment in the Exercise Price shall thereafter evidence the right to
receive upon payment of the adjusted Exercise Price that number of shares of
Common Stock (calculated to the nearest hundredth) obtained from the following
formula:
13
<PAGE>
N' = N x E
-----
E'
where:
N' = the adjusted number of Warrant Shares issuable upon exercise
of a Warrant by payment of the adjusted Exercise Price.
N = the number or Warrant Shares previously issuable upon
exercise of a Warrant by payment of the Exercise Price prior
to adjustment.
E' = the adjusted Exercise Price.
E = the Exercise Price prior to adjustment.
(r) FORM OF WARRANTS. Irrespective of any adjustments in the Exercise
Price or the number or kind of shares purchasable upon the exercise of the
Warrants, Warrants theretofore or thereafter issued may continue to express the
same price and number and kind of shares as are stated in the Warrants initially
issuable pursuant to this Agreement.
SECTION 12. FRACTIONAL INTERESTS. The Company shall not be required to
issue fractional Warrant Shares on the exercise of Warrants. If more than one
Warrant shall be presented for exercise in full at the same time by the same
holder, the number of full Warrant Shares which shall be issuable upon the
exercise thereof shall be computed on the basis of the aggregate number of
Warrant Shares purchasable on exercise of the Warrants so presented. If any
fraction of a Warrant Share would, except for the provisions of this Section 12,
be issuable on the exercise of any Warrants (or specified portion thereof), the
Company shall pay an amount in cash equal to the Exercise Price on the day
immediately preceding the date the Warrant is presented for exercise, multiplied
by such fraction.
SECTION 13. NOTICES TO WARRANT HOLDERS. (a) Upon any adjustment of the
Exercise Price pursuant to Section 11 hereof, the Company shall promptly
thereafter (i) cause to be filed with the Warrant Agent a certificate of a firm
of independent public accountants of recognized standing selected by the Board
of Directors of the Company (who may be the regular auditors of the Company)
setting forth the Exercise Price after such adjustment and setting forth in
reasonable detail the method of calculation and the facts upon which such
calculations are based and setting forth the number of Warrant Shares (or
portion thereof) issuable after such adjustment in the Exercise Price, upon
exercise of a Warrant and payment of the adjusted Exercise Price, which
certificate shall be conclusive evidence of the correctness of the matters set
forth therein, and (ii) cause to be given to each of the registered holders of
the Warrant Certificates at his address appearing on the Warrant register
written notice of such adjustments by first-class mail, postage prepaid. Where
appropriate, such notice may be given in advance and included as a part of the
notice required to be mailed under the other provisions of this Section 13.
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<PAGE>
(b) In case:
(i) the Company shall authorize the issuance to all holders of
shares of Common Stock of rights, options or warrants to subscribe for or
purchase shares of Common Stock or of any other subscription rights or
warrants;
(ii) the Company shall authorize the distribution to all holders
of shares of Common Stock of evidences of its indebtedness or assets (other
than cash dividends or cash distributions payable out of consolidated
earnings or earned surplus or dividends payable in shares of Common Stock
or distributions referred to in subsection (a) of Section 11 hereof);
(iii) of any consolidation or merger to which the Company is a
party and for which approval of any stockholders of the Company is
required, or of the conveyance or transfer of the properties and assets of
the Company substantially as an entirety, or of any reclassification or
change of Common Stock issuable upon exercise of the Warrants (other than a
change in par value, or from par value to no par value, or from no par
value to par value, or as a result of a subdivision or combination), or a
tender offer or exchange offer for shares of Common Stock;
(iv) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company; or
(v) the Company proposes to take any action (other than actions
of the character described in Section 11(a) hereof) which would require an
adjustment of the Exercise Price pursuant to Section 11 hereof;
then the Company shall cause to be filed with the Warrant Agent and shall cause
to be given to each of the registered holders of the Warrant Certificates at his
address appearing on the Warrant register, at least 20 days (or 10 days in any
case specified in clauses (i) or (ii) above) prior to the applicable record date
hereinafter specified, or promptly in the case of events for which there is no
record date, by first-class mail, postage prepaid, a written notice stating (x)
the date as of which the holders of record of shares of Common Stock to be
entitled to receive any such rights, options, warrants or distribution are to be
determined, (y) the initial expiration date set forth in any tender offer or
exchange offer for shares of Common Stock, or (z) the date on which any such
consolidation, merger, conveyance, transfer, dissolution, liquidation or winding
up is expected to become effective or consummated, and the date as of which it
is expected that holders of record of shares of Common Stock shall be entitled
to exchange such shares for securities or other property, if any, deliverable
upon such reclassification, consolidation, merger, conveyance, transfer,
dissolution, liquidation or winding up. The failure to give the notice required
by this Section 13 or any defect therein shall not affect the legality or
validity of any distribution, right, option, warrant, consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding up, or the vote upon
any action.
15
<PAGE>
(c) Nothing contained in this Agreement or in any of the Warrant
Certificates shall be construed as conferring upon the holders thereof the right
to vote or to consent or to receive notice as stockholders in respect of the
meetings of stockholders or the election of directors of the Company or any
other matter, or any rights whatsoever as stockholders of the Company.
SECTION 14. MERGER, CONSOLIDATION OR CHANGE OF NAME OF WARRANT AGENT. (a)
Any corporation into which the Warrant Agent may be merged or with which it may
be consolidated, or any corporation resulting from any merger or consolidation
to which the Warrant Agent shall be a party, or any corporation succeeding to
the business of the Warrant Agent, shall be the successor to the Warrant Agent
hereunder without the execution or filing of any paper or any further act on the
part of any of the parties hereto, PROVIDED that such corporation would be
eligible for appointment as a successor warrant agent under the provisions of
Section 16 hereof. In case at the time such successor to the Warrant Agent
shall succeed to the agency created by this Agreement, and in case at that time
any of the Warrant Certificates shall have been countersigned but not delivered,
any such successor to the Warrant Agent may adopt the countersignature of the
original Warrant Agent; and in case at that time any of the Warrant Certificates
shall not have been countersigned, any successor to the Warrant Agent may
countersign such Warrant Certificates either in the name of the predecessor
Warrant Agent or in the name of the successor to the Warrant Agent; and in all
such cases such Warrant Certificates shall have the full force and effect
provided in the Warrant Certificates and in this Agreement.
(b) In case at any time the name of the Warrant Agent shall be changed and
at such time any of the Warrant Certificates shall have been countersigned but
not delivered, the Warrant Agent whose name has been changed may adopt the
countersignature under its prior name, and in case at that time any of the
Warrant Certificates shall not have been countersigned, the Warrant Agent may
countersign such Warrant Certificates either in its prior name or in its changed
name, and in all such cases such Warrant Certificates shall have the full force
and effect provided in the Warrant Certificates and in this Agreement.
SECTION 15. WARRANT AGENT. The Warrant Agent undertakes the duties and
obligations imposed by this Agreement upon the following terms and conditions,
by all of which the Company and the holders of Warrants, by their acceptance
thereof, shall be bound:
(a) The statements contained herein and in the Warrant Certificates shall
be taken as statements of the Company and the Warrant Agent assumes no
responsibility for the correctness of any of the same except such as describe
the Warrant Agent or action taken or to be taken by it. The Warrant Agent
assumes no responsibility with respect to the distribution of the Warrant
Certificates except as herein otherwise provided.
(b) The Warrant Agent shall not be responsible for any failure of the
Company to comply with any of the covenants contained in this Agreement or in
the Warrant Certificates to be complied with by the Company.
(c) The Warrant Agent may consult at any time with counsel satisfactory to
it (who may be counsel for the Company) and the Warrant Agent shall incur no
liability or responsibility
16
<PAGE>
to the Company or to any holder of any Warrant Certificate in respect of any
action taken, suffered or omitted by it hereunder in good faith and in
accordance with the opinion or the advice of such counsel.
(d) The Warrant Agent shall incur no liability or responsibility to the
Company or to any holder of any Warrant Certificate for any action taken in
reliance on any Warrant Certificate, certificate of shares, notice, resolution,
waiver, consent, order, certificate, or other paper, document or instrument
believed by it to be genuine and to have been signed, sent or presented by the
proper party or parties.
(e) The Company agrees to pay to the Warrant Agent reasonable compensation
for all services rendered by the Warrant Agent in the execution of this
Agreement, to reimburse the Warrant Agent for all expenses, taxes and
governmental charges and other charges of any kind and nature incurred by the
Warrant Agent in the execution of this Agreement and to indemnify the Warrant
Agent and save it harmless against any and all liabilities, including judgments,
costs and counsel fees, for anything done or omitted by the Warrant Agent in the
execution of this Agreement except as a result of its negligence or bad faith.
(f) The Warrant Agent shall be under no obligation to institute any
action, suit or legal proceeding or to take any other action likely to involve
expense unless the Company or one or more registered holders of Warrant
Certificates shall furnish the Warrant Agent with reasonable security and
indemnity for any costs and expenses which may be incurred, but this provision
shall not affect the power of the Warrant Agent to take such action as it may
consider proper, whether with or without any such security or indemnity. All
rights of action under this Agreement or under any of the Warrants may be
enforced by the Warrant Agent without the possession of any of the Warrant
Certificates or the production thereof at any trial or other proceeding relative
thereto, and any such action, suit or proceeding instituted by the Warrant Agent
shall be brought in its name as Warrant Agent and any recovery of judgment shall
be for the ratable benefit of the registered holders of the Warrants, as their
respective rights or interests may appear.
(g) The Warrant Agent, and any stockholder, director, officer or employee
of it, may buy, sell or deal in any of the Warrants or other securities of the
Company or become pecuniarily interested in any transaction in which the Company
may be interested, or contract with or lend money to the Company or otherwise
act as fully and freely as though it were not Warrant Agent under this
Agreement. Nothing herein shall preclude the Warrant Agent from acting in any
other capacity for the Company or for any other legal entity.
(h) The Warrant Agent shall act hereunder solely as agent for the Company,
and its duties shall be determined solely by the provisions hereof. The Warrant
Agent shall not be liable for anything which it may do or refrain from doing in
connection with this Agreement except for its own negligence or bad faith.
(i) The Warrant Agent shall not at any time be under any duty or
responsibility to any holder of any Warrant Certificate to make or cause to be
made any adjustment of the Exercise Price or number of the Warrant Shares or
other securities or property deliverable as provided in
17
<PAGE>
this Agreement, or to determine whether any facts exist which may require any of
such adjustments, or with respect to the nature or extent of any such
adjustments, when made, or with respect to the method employed in making the
same. The Warrant Agent shall not be accountable with respect to the validity
or value or the kind or amount of any Warrant Shares or of any securities or
property which may at any time be issued or delivered upon the exercise of any
Warrant or with respect to whether any such Warrant Shares or other securities
will when issued be validly issued and fully paid and nonassessable, and makes
no representation with respect thereto.
SECTION 16. CHANGE OF WARRANT AGENT. If the Warrant Agent shall become
incapable of acting as Warrant Agent, the Company shall appoint a successor to
such Warrant Agent. If the Company shall fail to make such appointment within a
period of 30 days after it has been notified in writing of such incapacity by
the Warrant Agent or by the registered holder of a Warrant Certificate, then the
registered holder of any Warrant Certificate may apply to any court of competent
jurisdiction for the appointment of a successor to the Warrant Agent. Pending
appointment of a successor to such Warrant Agent, either by the Company or by
such a court, the duties of the Warrant Agent shall be carried out by the
Company. The holders of a majority of the unexercised Warrants shall be
entitled at any time to remove the Warrant Agent and appoint a successor to such
Warrant Agent. Such successor to the Warrant Agent need not be approved by the
Company or the former Warrant Agent. After appointment the successor to the
Warrant Agent shall be vested with the same powers, rights, duties and
responsibilities as if it had been originally named as Warrant Agent without
further act or deed; PROVIDED that the former Warrant Agent shall deliver and
transfer to the successor to the Warrant Agent any property at the time held by
it hereunder and execute and deliver any further assurance, conveyance, act or
deed necessary for the purpose. Failure to give any notice provided for in this
Section 16, however, or any defect therein, shall not affect the legality or
validity of the appointment of a successor to the Warrant Agent.
SECTION 17. REGISTRATION. (a) The Company shall prepare and cause to be
filed with the Securities and Exchange Commission (the "COMMISSION") pursuant to
Rule 415 under the Securities Act a shelf registration statement on the
appropriate form relating to the offer and sale by the Company of the Warrant
Shares to the holders of Warrants upon exercise of the Warrants and resales of
the Warrant Shares by the holders thereof (the "REGISTRATION STATEMENT").
(b) The Company shall use its best efforts to cause such Registration
Statement to be declared effective by the Commission on or prior to the earlier
to occur of (i) the Separation Date and (ii) 45 days after the date upon which
(A) a Change in Control (as such term is defined in the indenture relating to
the Notes) occurs or (B) the Warrants otherwise become exercisable.
(c) The Company shall use its best efforts to keep the Registration
Statement continuously effective under the Securities Act in order to permit the
prospectus included therein to be lawfully delivered by the Company to the
holders exercising the Warrants until the Expiration Date or such shorter period
that will terminate when all the Warrants have been exercised; PROVIDED that,
except as provided below with respect to any Black Out Period (as defined), the
Company shall be deemed not to have used its best efforts to keep the
Registration Statement
18
<PAGE>
effective during the requisite period if it voluntarily takes any action that
would result in it not being able to offer and sell the Warrant Shares upon
exercise of the Warrants during that period, unless such action is required by
applicable law. Notwithstanding the foregoing, the Company shall not be
required to amend or supplement the Registration Statement, any related
prospectus or any document incorporated therein by reference, for a period (a
"BLACK OUT PERIOD") not to exceed, for so long as this Agreement is in effect,
an aggregate of 45 days in any calendar year, in the event that (i) an event
occurs and is continuing as a result of which the Registration Statement, any
related prospectus or any document incorporated therein by reference as then
amended or supplemented would, in the Company's good faith judgment, contain an
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in the light of the circumstances under
which they were made, not misleading, and (ii)(A) the Company determines in its
good faith judgment that the disclosure of such event at such time would have a
material adverse effect on the business, operations or prospects of the Company
or (B) the disclosure otherwise relates to a material business transaction which
has not yet been publicly disclosed; PROVIDED that no Black Out Period may be in
effect during the six months prior to the Expiration Date.
(d) The Company shall cause the Registration Statement and the related
prospectus and any amendment or supplement thereto, as of the effective date of
the Registration Statement, amendment or supplement, (i) to comply in all
material respects with the applicable requirements of the Securities Act and the
rules and regulations of the Commission and (ii) not to contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading.
(e) The Company shall give prompt written notice to the holders of the
Warrants and the Warrant Agent of (i) the effectiveness of the Registration
Statement or any post-effective amendment thereto,(ii) the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or the initiation or threatening of any proceedings for that
purpose,(iii) the receipt by the Company or its legal counsel of any
notification with respect to the suspension of the qualification of the Warrant
Shares for sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose,(iv) the happening of any event that requires the
Company to make changes in the Registration Statement or the prospectus in order
to make the statements therein not misleading and (v) the commencement and
termination of any Black Out Period.
(f) The Company shall use its best efforts to prevent the issuance or
obtain the withdrawal of any order suspending the effectiveness of the
Registration Statement at the earliest possible time.
(g) Upon the occurrence of any event contemplated by Section 17(e)(iv) or
(v) hereof (subject to the last sentence of Section 17(c) hereof) the Company
shall promptly prepare a post-effective amendment to the Registration Statement
or a supplement to the related prospectus or file any other required document
so that, as thereafter delivered to holders of the Warrants, the prospectus
will not contain an untrue statement of a material fact or omit to state any
material fact
19
<PAGE>
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading and will contain the current information
required by the Securities Act.
(h) Not later than the effective date of the Registration Statement, the
Company will provide a CUSIP number for the Warrant Shares and provide the
Warrant Agent with printed certificates for the Warrant Shares in a form
eligible for deposit with the Depository Trust Company.
(i) The Company will comply with all rules and regulations of the
Commission to the extent and so long as they are applicable to the Shelf
Registration and will make generally available to its securities holders (or
otherwise provide in accordance with Section 11(a) of the Securities Act) an
earnings statement satisfying the provisions of Section 11(a) of the Securities
Act, no later than 45 days (plus any extension permitted by Rule 12b-25 under
the Exchange Act) after the end of a 12-month period (or 90 days, if such period
is a fiscal year (plus any extension permitted by Rule 12b-25 under the Exchange
Act)) beginning with the first month of the Company's first fiscal quarter
commencing after the effective date of the Registration Statement, which
statement shall cover shall 12-month period.
(j) The Company shall register or qualify or cooperate with the holders in
connection with the registration or qualification of the Warrant Shares for
offer and sale by the Company upon exercise of the Warrants under the securities
or blue sky laws of such states of the United States as any holder reasonably
requests and do any and all other acts or things necessary or advisable to
enable such offer and sale in such jurisdictions; PROVIDED that the Company
shall not be required to (i) qualify to do business as a broker-dealer in any
jurisdiction in which it is not then so qualified or (ii) take any action which
would subject it to general service of process or to taxation in any
jurisdiction in which it is not then so subject.
(k) The Company shall bear all expenses incurred by it in connection with
the performance of its obligations under this Section 17.
(l) The Company acknowledges and agrees that any remedy at law for breach
of any provision of this Section 17 will be inadequate and that, in addition to
any other remedies that the holder may have, the holders shall be entitled to
the remedy of specific performance to ensure the Company performs its
obligations under this Section 17. The election of any one or more remedies by
the holders hereunder shall not constitute a waiver of the right to pursue other
available remedies.
(m) No person is entitled to include any securities of the Company held by
such person in, or to have such securities registered under, the Registration
Statement.
SECTION 18. NOTICES TO COMPANY AND WARRANT AGENT. Any notice or demand
authorized by this Agreement to be given or made by the Warrant Agent or by the
registered holder of any Warrant Certificate to or on the Company shall be
sufficiently given or made when and if deposited in the mail, first class or
registered, postage prepaid, addressed (until another address is filed in
writing by the Company with the Warrant Agent) as follows:
20
<PAGE>
Advanced Radio Telecom Corp.
500 108th Avenue, N.E., Suite 2600
Bellevue, WA 98004
Telephone: (206) 688-8700
Telecopy: (206) 688-0703
Attention: Chief Financial Officer
In case the Company shall fail to maintain such office or agency or shall
fail to give such notice of the location or of any change in the location
thereof, presentations may be made and notices and demands may be served at the
principal office of the Warrant Agent.
Any notice pursuant to this Agreement to be given by the Company or by the
registered holder(s) of any Warrant Certificate to the Warrant Agent shall be
sufficiently given when and if deposited in the mail, first-class or registered,
postage prepaid, addressed (until another address is filed in writing by the
Warrant Agent with the Company) to the Warrant Agent as follows:
Continental Stock Transfer and Trust Company
2 Broadway
New York, NY 10004
Attention: Steven Nelson
SECTION 19. SUPPLEMENTS AND AMENDMENTS. The Company and the Warrant
Agent may from time to time supplement or amend this Agreement without the
approval of any holders of Warrant Certificates in order to cure any ambiguity
or to correct or supplement any provision contained herein which may be
defective or inconsistent with any other provision herein, or to make any other
provisions in regard to matters or questions arising hereunder which the Company
and the Warrant Agent may deem necessary or desirable and which shall not in any
way adversely affect the interests of the holders of Warrant Certificates.
SECTION 20. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Warrant Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
SECTION 21. TERMINATION. This Agreement shall terminate at 5:00 p.m.,
New York City time on _________, 2007. Notwithstanding the foregoing, this
Agreement will terminate on any earlier date if all Warrants have been
exercised. The provisions of Section 15 shall survive such termination.
SECTION 22. GOVERNING LAW. This Agreement and each Warrant Certificate
issued hereunder shall be deemed to be a contract made under the laws of the
State of New York and for all purposes shall be construed in accordance with the
internal laws of said State.
SECTION 23. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall
be construed to give to any person or corporation other than the Company, the
Warrant Agent and the registered holders of the Warrant Certificates any legal
or equitable right, remedy or claim under this
21
<PAGE>
Agreement; but this Agreement shall be for the sole and exclusive benefit of the
Company, the Warrant Agent and the registered holders of the Warrant
Certificates.
SECTION 24. COUNTERPARTS. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
[Signature Page Follows]
22
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the day and year first above written.
ADVANCED RADIO TELECOM CORP.
By _________________________________
Name:
Title:
[Seal]
Attest: ______________________
Secretary
CONTINENTAL STOCK TRANSFER AND TRUST COMPANY,
as Warrant Agent
By _________________________________
Name:
Title:
[Seal]
Attest: _______________________
Secretary
23
<PAGE>
EXHIBIT A
[Face of Warrant Certificate]
THE WARRANTS EVIDENCED BY THIS CERTIFICATE ARE NOT TRANSFERABLE SEPARATELY FROM
THE SENIOR NOTES ORIGINALLY SOLD AS A UNIT WITH SUCH WARRANTS UNTIL THE EARLIER
OF (I) ____________, 1997 (II) A CHANGE IN CONTROL (AS DEFINED IN THE INDENTURE
RELATING TO SUCH NOTES) AND (III) SUCH DATE AS THE UNDERWRITERS IN THE UNIT
OFFERING HEREOF MAY, IN THEIR DISCRETION, DEEM APPROPRIATE). PRIOR TO SUCH
DATE, THE WARRANTS EVIDENCED BY THIS CERTIFICATE MAY BE TRANSFERRED ONLY IN
INTEGRAL MULTIPLES OF ONE WARRANT AND ONLY WITH THE SIMULTANEOUS TRANSFER TO THE
TRANSFEREE OF $1,000 PRINCIPAL AMOUNT OF NOTES FOR EACH WARRANT SO TRANSFERRED.
EXERCISABLE ON OR AFTER _____________, 1997.
No. _____ __________Warrants
Warrant Certificate
ADVANCED RADIO TELECOM CORP.
This Warrant Certificate certifies that ______________, or registered
assigns, is the registered holder of Warrants expiring __________, 2007 (the
"WARRANTS") to purchase common stock, par value $.001 per share (the "COMMON
STOCK"), of Advanced Radio Telecom Corp, a Delaware corporation (the "COMPANY").
Each Warrant entitles the holder upon exercise to receive from the Company
commencing _____________, 1997 until 5:00 p.m. New York City Time on
_____________, 2007, 9.024 fully paid and nonassessable shares of Common Stock
(the "WARRANT SHARES") at the initial exercise price (the "EXERCISE PRICE") of
$______ payable in lawful money of the United States of America upon surrender
of this Warrant Certificate and payment of the Exercise Price at the office or
agency of the Warrant Agent, but only subject to the conditions set forth herein
and in the Warrant Agreement referred to on the reverse hereof. Notwithstanding
the foregoing, Warrants may be exercised without the exchange of funds pursuant
to the net exercise provisions of Section 6 of the Warrant Agreement. The
Exercise Price and number of Warrant Shares issuable upon exercise of the
Warrants are subject to adjustment upon the occurrence of certain events set
forth in the Warrant Agreement. No Warrant may be exercised after 5:00 p.m.,
New York City Time on _____________, 2007, and to the extent not exercised by
such time such Warrants shall become void. Reference is hereby made to the
further provisions of this Warrant Certificate set forth on the reverse hereof
and such further provisions shall for all purposes have the same effect as
though fully set forth at this place. This Warrant Certificate shall not be
valid unless countersigned by the Warrant Agent, as such term is used in the
Warrant Agreement. This Warrant Certificate shall be governed and construed in
accordance with the internal laws of the State of New York.
A-1
<PAGE>
IN WITNESS WHEREOF, Advanced Radio Telecom Corp. has caused this Warrant
Certificate to be signed by its Chief Executive Officer and by its Secretary and
has caused its corporate seal to be affixed hereunto or imprinted hereon.
Dated: ___________ ,1997
ADVANCED RADIO TELECOM CORP.
By ________________________________
Name: Vernon L. Fotheringham
Title: Chief Executive Officer
By ________________________________
Name: W. Theodore Pierson, Jr.
Title: Secretary
Countersigned:
CONTINENTAL STOCK TRANSFER AND TRUST COMPANY
as Warrant Agent
By ________________________________
Name:
Title:
A-2
<PAGE>
[Reverse of Warrant Certificate]
The Warrants evidenced by this Warrant Certificate are part of a duly
authorized issue of Warrants expiring ____________, 2007 entitling the holder on
exercise to receive shares of Common Stock, par value $.001 per share, of the
Company (the "COMMON STOCK"), and are issued or to be issued pursuant to a
Warrant Agreement dated as of __________, 1997 (the "WARRANT AGREEMENT"), duly
executed and delivered by the Company to Continental Stock Transfer and Trust
Company, a New York limited purpose trust company, as warrant agent (the
"WARRANT AGENT"), which Warrant Agreement is hereby incorporated by reference in
and made a part of this instrument and is hereby referred to for a description
of the rights, limitation of rights, obligations, duties and immunities
thereunder of the Warrant Agent, the Company and the holders (the words
"holders" or "holder" meaning the registered holders or registered holder) of
the Warrants. A copy of the Warrant Agreement may be obtained by the holder
hereof upon written request to the Company.
Warrants may be exercised, subject to the effectiveness of the Registration
Statement (as defined) at any time on or after __________, 1997 and on or before
_____________, 2007. The holder of Warrants evidenced by this Warrant
Certificate may exercise them by surrendering this Warrant Certificate, with the
form of election to purchase set forth hereon properly completed and executed,
together with payment of the Exercise Price in cash at the office of the Warrant
Agent. In the event that upon any exercise of Warrants evidenced hereby the
number of Warrants exercised shall be less than the total number of Warrants
evidenced hereby, there shall be issued to the holder hereof or his assignee a
new Warrant Certificate evidencing the number of Warrants not exercised. No
adjustment shall be made for any dividends on any Common Stock issuable upon
exercise of this Warrant.
The Warrant Agreement provides that upon the occurrence of certain events
the Exercise Price set forth on the face hereof may, subject to certain
conditions, be adjusted. If the Exercise Price is adjusted, the Warrant
Agreement provides that the number of shares of Common Stock issuable upon the
exercise of each Warrant shall be adjusted. No fractions of a share of Common
Stock will be issued upon the exercise of any Warrant, but the Company will pay
the cash value thereof determined as provided in the Warrant Agreement.
The Company has agreed under the terms of the Warrant Agreement to file and
use its best efforts to make effective and (subject to Black Out Periods)
maintain effective until expiration or exercise of all Warrants a shelf
registration statement (the "REGISTRATION STATEMENT") on an appropriate form
under the Securities Act covering the issuance and sale of Warrant Shares upon
exercise of the Warrants.
Warrant Certificates, when surrendered at the office of the Warrant Agent
by the registered holder thereof in person or by legal representative or
attorney duly authorized in writing, may be exchanged, in the manner and subject
to the limitations provided in the Warrant Agreement, but without payment of any
service charge, for another Warrant Certificate or Warrant Certificates of like
tenor evidencing in the aggregate a like number of Warrants.
A-3
<PAGE>
Upon due presentation for registration of transfer of this Warrant
Certificate at the office of the Warrant Agent a new Warrant Certificate or
Warrant Certificates of like tenor and evidencing in the aggregate a like number
of Warrants shall be issued to the transferee(s) in exchange for this Warrant
Certificate, subject to the limitations provided in the Warrant Agreement,
without charge except for any tax or other governmental charge imposed in
connection therewith.
The Company and the Warrant Agent may deem and treat the registered
holder(s) thereof as the absolute owner(s) of this Warrant Certificate
(notwithstanding any notation of ownership or other writing hereon made by
anyone), for the purpose of any exercise hereof, of any distribution to the
holder(s) hereof, and for all other purposes, and neither the Company nor the
Warrant Agent shall be affected by any notice to the contrary. Neither the
Warrants nor this Warrant Certificate entitles any holder hereof to any rights
of a stockholder of the Company.
A-4
<PAGE>
Form of Election to Purchase
(To Be Executed Upon Exercise Of Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to receive __________ shares of Common
Stock and herewith tenders payment for such shares to the order of Advanced
Radio Telecom Corp. in the amount of $______ in accordance with the terms hereof
unless the holder is exercising Warrants pursuant to the net exercise provisions
of Section 6 of the Warrant Agreement. The undersigned requests that a
certificate for such shares be registered in the name of ________________, whose
address is _______________________________ and that such shares be delivered to
________________ whose address is ___________ ______________________. If said
number of shares is less than all of the shares of Common Stock purchasable
hereunder, the undersigned requests that a new Warrant Certificate representing
the remaining balance of such shares be registered in the name of
______________, whose address is _________________________, and that such
Warrant Certificate be delivered to _________________, whose address is
__________________.
Date: ______________, ____
__________________________
(Signature)
__________________________
(Signature Guaranteed)
A-5
<PAGE>
EXHIBIT B
[FORM OF TRANSFER LEGEND]
Each Certificate evidencing Warrants originally issued as part of a Unit of
Notes and Warrants issued by the Company (and each certificate evidencing
Warrants issued on registration of transfer thereof or in exchange or
substitution therefor prior to the close of business on the Separation Date (as
defined) shall bear a legend, which may be affixed by stamp or sticker, in
substantially the following form:
The warrants evidenced by this certificate are not transferable
separately from the senior notes originally sold as a unit with such
warrants until the earlier of (i) ____________, 1997 (ii) a Change in
Control (as defined in the indenture relating to such notes) and (iii)
such date as the underwriters in the offering hereof may, in their
discretion, deem appropriate. Prior to such date, the warrants
evidenced by this certificate may be transferred only in integral
multiples of one warrant and only with the simultaneous transfer to
the Transferee of $1,000 of principal amount of Notes for each warrant
so transferred.
B-1
<PAGE>
Exhibit 5.1
Hahn & Hessen LLP
Attorneys
Empire State Building
350 Fifth Avenue
New York, N.Y. 10118-0075
(212) 736-1000
January 16, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Advanced Radio Telecom Corp.
Registration No. 333-19295
Ladies/Gentlemen:
We are acting as counsel to Advanced Radio Telecom Corp., a Delaware
corporation (the "Company") with respect to the registration by the Company
under the Securities Act of 1933, as amended, (the "Act"), of 125,000 units (the
"Units"), each Unit consisting of $1,000 principal amount at maturity of the
Company's Senior Notes due 2007 (the "Notes") and one warrant (collectively, the
"Warrants") to purchase 9.024 shares of Common Stock, par value $.001 per share
(the "Warrant Shares"), to be sold by the Company under Registration Statement
No. 333-19295 on Form S-1, as amended, relating to the Units, Notes and
Warrants, as filed with the Securities and Exchange Commission (the
"Registration Statement"). The Notes are to be issued under an Indenture (the
"Indenture") between the Company and The Bank of New York, as trustee (the
"Trustee") to be dated as of the closing date of the offering of the Units.
We are familiar with (i) the proceedings of the Company relating to the
authorization of the Units, Notes and Warrants and (ii) the forms of the
Purchase Agreement (the "Purchase Agreement") to be entered into by the Company,
Merrill Lynch, Pierce Fenner & Smith Incorporated and CIBC Wood Gundy Securities
Corp., and the Warrant Agreement ("Warrant Agreement") to be entered into
between the Company and Continental Stock Transfer and Trust Company, as Warrant
Agent, filed as exhibits to the Registration Statement. In addition, we have
made such further examination of law and fact as we have deemed appropriate in
connection with the opinion hereinafter set forth.
On the basis of the foregoing, we are of the opinion that, (i) the Units
have been duly authorized by the Company and when issued and delivered in
accordance with the Purchase Agreement will be legally issued, (ii) the Notes
have been duly authorized by
<PAGE>
the Company and when issued and authenticated in accordance with the terms of
the Indenture will constitute valid and binding obligations of the Company in
accordance with and subject to their terms and the terms of the Indenture,
subject to laws relating to bankruptcy, insolvency, moratorium, fraudulent
transfer and other laws relating to the enforcement of creditors' rights
generally and subject to general equitable principles (regardless of whether
such enforcement is considered in a proceeding in equity or law), (iii) the
Warrants have been duly authorized and when issued and delivered pursuant to
the Warrant Agreement and the Purchase Agreement, will be legally issued and
(iv) the Warrant Shares, when issued and delivered upon exercise of the
Warrants against payment of the Exercise Price as provided in the Warrant
Agreement, will have been duly issued and will be fully paid and
non-assessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to our firm under the caption "Legal Matters" in
the Prospectus constituting a part of the Registration Statement. In giving
such consent, we do not thereby admit that we are within the category of persons
whose consent is required under Section 7 of the Act, or under the rules and
regulations of the Securities and Exchange Commission.
Very truly yours,
/s/ Hahn & Hessen LLP
HAHN & HESSEN LLP
<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 5B as to which the date is June
26, 1996, except for the second paragraph of Note 2A, Note 2C and the second
paragraph of Note 11A as to which the date is October 11, 1996, and except for
the fourth paragraph of Note 1A and Note 1C as to which the date is November 12,
1996, on our audits of the financial statements of Advanced Radio Telecom Corp.
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. We also consent
to the reference to our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
New York, New York
January 15, 1997
