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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
FOR THE YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE NUMBER 000-21091
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ADVANCED RADIO TELECOM CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 52-1869023
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
500 108TH AVENUE, NE
SUITE 2600
BELLEVUE, WASHINGTON 98004
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
(206) 688-8700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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None None
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Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS:_____________Common Stock ($.001 Par Value)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days: Yes [X] No [_] .
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [_] .
The aggregate market value of the registrant's voting stock held by non-
affiliates was approximately $191 million on March 21, 1997, based on the
closing sales price of the registrant's Common Stock as reported on the NASDAQ
National Market System as of such date.
The number of shares outstanding of each of the registrant's classes of
common stock as of March 21, 1997 was as follows:
Common Stock, $.001 par value: 19,559,420
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated herein by reference: PART III:
Portions of the Registrant's definitive Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the Registrant's 1997
Annual Meeting of Stockholders.
Exhibit Index is on page 43.
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PART I
ITEM 1. BUSINESS
Utilizing its 38 GHz radio licenses, Advanced Radio Telecom Corp. ("ART" or
the "Company") provides point-to-point wireless broadband digital
telecommunications services. The Company offers "last mile" services,
providing business and government end users with cost-effective, high-speed,
high capacity local access to voice, video, data and Internet services. The
Company also offers other telecommunications providers wireless broadband
network services such as linking off-network sites of competitive access
providers to their fiber-optic backbone and linking cell sites of mobile
communications service providers. The Company's wireless broadband links
deliver high quality voice, video and data transmissions at a level of
performance which exceeds the performance of copper-based networks and which
is a viable alternative to fiber-optic based networks.
The Company owns, manages or has a right to use on a long-term basis 238 38
GHz licenses granted by the Federal Communications Commission (the "FCC")
covering an aggregate population of approximately 157 million people in 169
U.S. markets, allowing it to provide between 100 and 500 MHz of transmission
capacity in 82 of the top 100 U.S. markets by estimated population.
The Company began deploying its links principally on a trial basis in
November 1995 and has since been hiring its staff, building its infrastructure
and developing its marketing plans and relationships with potential customers.
Having commenced full scale commercial operation in the fourth quarter of
1996, the Company has generated only nominal revenues from its operations to
date and has recently finalized plans to roll out its services on a wide-scale
basis. See Exhibit 99, filed as an exhibit to this Report and incorporated
herein by reference, "Risk Factors--Limited Operations; History of Net
Losses." During 1996, the Company installed over 270 radio links (single path
point-to-point microwave connections) on its 38 GHz licenses, including
approximately 80 revenue-generating radio links. The Company also installed
approximately 100 radio links for other 38 GHz license holders.
The Company is a Delaware corporation organized in 1993 under the name of
Advanced Radio Technologies Corporation. In October 1996, the Company through
a wholly owned subsidiary merged with Advanced Radio Telecom Corp., a
corporation organized by the Company and others in 1995 to acquire 38 GHz
licenses and to operate its business jointly with the Company. Upon the
merger, Advanced Radio Telecom became a wholly owned subsidiary of the Company
and changed its name to ART Licensing Corp. ("ART Licensing"), and the Company
changed its name to Advanced Radio Telecom Corp.
TELECOMMUNICATIONS INDUSTRY OVERVIEW
The current telecommunications landscape is being reshaped by the
convergence of three major trends: (i) accelerating growth in demand for high-
speed, high capacity digital telecommunications services, (ii) deregulation of
telecommunications markets and (iii) rapid advances in millimetric microwave
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 Company believes that continued growth in the quality and number of
competitors in the local telecommunications market will be driven principally
by (i) growing interest among business customers for an alternative to the
incumbent LEC networks in order to obtain higher capacity, better pricing or
increased quality, (ii) increases in data applications and capacity
requirements for local and wide area network connections, high-
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speed Internet access and videoconferencing, (iii) LECs' difficulty in
upgrading their copper networks quickly, (iv) 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.
Until recently, only fiber-optic networks were available as an alternative to
copper wire networks to meet the "last mile" demand. Wireless broadband
telecommunications services have been developing to provide 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 costs per customer competitive to wire
alternatives.
38 GHZ TECHNOLOGY
The FCC has allocated the 37.0-40.0 GHz (the "38 GHz") band for wireless
broadband transmissions and authorized the use of fourteen 100 MHz channels
between 38.6 GHz and 40.0 GHz. Licensees are authorized to provide point-to-
point wireless telecommunications services within a specified geographic
footprint.
The 38 GHz band provides the following advantages for broadband services 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. An ART transparent LAN service circuit at 6 Megabits per
second ("Mbps") linking a corporate user to an Internet service provider
("ISP") point of presence ("POP") can transfer data more than 100 times
faster than a 56 Kilobits per second ("Kbps") dial-up modem, which is the
fastest dial-up modem currently in widespread commercial use, and
approximately 45 times faster than the fastest integrated services
digital network ("ISDN") lines currently in use (128 Kbps). A 38 GHz DS-3
link at 45 Mbps today can transfer data at a rate which is over 800 times
the rate of a 56 Kpbs dial-up modem and over 350 times the rate of the
128 Kpbs ISDN line. Each of the Company's 38 GHz links can support one
DS-3 circuit, which is equivalent to 28 DS-1 circuits. 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.
. Very High Transmission Quality. The Company's wireless broadband services
are engineered to provide 99.999% availability based on local weather
patterns, with better than a 10-/1/3 (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 downtime, compared to a range of
four hours to 44 hours of historical performance for copper-based
circuits of similar capacity.
. 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 channel within a licensed area,
thereby increasing the number of customers to which such services can be
provided.
. Rapid Deployment. 38 GHz technology can be deployed considerably faster
than both 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.
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. 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.
. Additional Advantages Over Other Portions of Radio Spectrum. At
frequencies above 38 GHz, point-to-point applications become less
practical because the maximum distance between transceivers decreases.
ART'S COMPETITIVE STRENGTHS
The Company believes that a number of factors provide it with certain
significant competitive advantages in offering broadband "last mile" services
and broadband network services to other telecommunications providers,
including:
. 38 GHz Technology. The characteristics of 38 GHz technology (high data
transfer rates, significant channel capacity, high transmission quality,
rapid deployment, easy installation and efficient network design) are
well suited for the provision of "last mile" services. See "--38 GHz
Technology."
. Time-to-Market Advantage. The Company believes it is one of the first two
38 GHz service providers to offer commercial services. As a result, the
Company believes it enjoys a time-to-market advantage and is therefore
well positioned to capture early adopters, which are generally among the
heaviest users.
. Broad Footprint. The broad scope of the Company's footprint enables it to
offer wireless broadband services targeting much of the United States'
addressable business market.
. Network Management System. The Company's network management operational
support system 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.
. Proprietary Technology. The Company has developed proprietary Geographic
Information Systems ("GIS") to provide ART with 3-D digital modeling of
its markets, including all building and landscape features, designed to
reduce the time and expense of engineering its proposed radio locations.
When implemented for each market, these systems are expected to provide,
virtually instantaneously, line of site availability for proposed links,
tenants in the buildings serviceable from such locations and integration
of this information with marketing databases.
BUSINESS STRATEGY
The Company's strategy is to capitalize on its broad footprint of 38 GHz
licenses and other competitive strengths 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:
. Develop Large-Scale Network. 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.
. Establish and Expand Key Strategic Alliances. The Company plans to
utilize strategic alliances to bundle its services with partners,
including major service providers, equipment manufacturers and systems
integrators, to provide for alternative distribution channels and to gain
access to technological advancements. Under the Ameritech Strategic
Distribution Agreement (as hereinafter defined), Ameritech Corp.
("Ameritech") is targeting certain sales objectives and has agreed to
spend internally a minimum of $7.0 million on sales, marketing and
operations support of ART's services. The Company also has agreements
with Harris Corporation, Farinon Division ("Harris") for marketing ART's
38 GHz services along with Harris' 38 GHz equipment to PCS providers and
with GTE Corporation ("GTE") for installation, field servicing and
network monitoring. See "--Strategic Alliances."
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. Market Initially as a Carrier's Carrier. The Company intends to market
its services initially 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, competitive
access providers ("CAPs"), competitive local exchange carriers ("CLECs"),
long distance carriers ("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 is using GIS to analyze a particular carrier's network and
identify high density off-net customer locations. After a critical mass
of sites has been qualified, the Company will be able to market
proactively 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 unified wireless network in each of its target markets.
. Pursue Opportunities to Provide Value-Added Services. The Company plans
to market its broadband capacity to provide services such as data
transmission, videoconferencing, 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. Through
its participation in equipment manufacturers' research and technology
development and primary research efforts, the Company seeks to reduce its
network costs by encouraging development of equipment with increased
capacity levels and greater spectral efficiency. For example, the Company
anticipates taking delivery of low cost 38 GHz OC-3 SONET (155 Mbps)
radios within eighteen to twenty-four months. The Company also has had
discussions with several microwave equipment and technology companies
about 38 GHz network architectures, combinations of radios with computer
networking devices, and other near-future technology applications. The
Company will continue to monitor technology advances and may fund
research from time to time.
ART WIRELESS SERVICES AND APPLICATIONS
Utilizing 38 GHz frequencies, the Company offers "last mile" services,
providing business and government end users with cost-effective, high-speed,
high capacity local access to voice, video, data and Internet services. The
Company also offers other telecommunications providers wireless broadband
network services such as linking off-network sites of competitive access
providers to their fiber or copper backbone and linking cell sites of mobile
communications service providers.
The Company's wireless circuits range in capacity from DS-1 (1.544 Mbps,
capable of carrying 24 simultaneous voice conversations) to DS-3 (45 Mbps,
capable of carrying 672 simultaneous voice conversations). ART's wireless
broadband links consist of paired millimeter wave radio transceivers. Each
link requires a direct line of sight between the two transceivers. Because the
maximum length of a single link is generally limited to three to five miles,
intermediate links (or "repeaters") are used to permit wireless broadband
transmission beyond this limit. Repeaters are also used to circumvent
obstacles, such as buildings in urban areas or hills in rural areas.
Transmission links in areas of heavy rainfall are engineered for shorter
distances and greater margin to maintain transmission quality. The Company
currently installs its transceivers and antennas on building rooftops and
other tall structures and must secure rights for each building or other
structure on which equipment is installed. The Company has contracted with GTE
for equipment staging and outfitting, site preparation, equipment installation
and maintenance for the Company's wireless services and network management
software and services relating to the Company's network management system.
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
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vendor to major IXCs. The Company currently provides services to carriers such
as Ameritech, Bell Atlantic NYNEX Mobile, MFS Communications Company,
Inc./WorldCom, 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 has entered
into master service agreements with certain of these and other companies which
contain the terms by which such customers may place future orders, including
volume discounts, approximate geographic location of links needed and
representative pricing. Although a master service agreement is not a
commitment to purchase, it facilitates the placement of future orders by a
customer.
The Company currently provides, or anticipates providing, wireless broadband
services to the following types of customers, among others:
Competitive Access Providers/Competitive Local Exchange Carriers and 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. Without
sharing proprietary information with a direct competitor, such as a LEC,
CAPs/CLECs can utilize the Company's wireless broadband services as an
alternative to LEC facilities to reach areas where extensions of CAP/CLEC
networks are not cost-efficient, feasible or quick or to provide redundant or
backup 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.
Internet Service Providers. The expanding demand for Internet access, the
growing importance of audio, video and graphic Internet applications to both
businesses and individuals and the lack of high capacity access through
existing LEC facilities has created a growing market for wireless broadband
services. The Company offers ISPs access at the required high-speed data rates
from 1.544 Mbps to 45 Mbps. The Company provides wireless broadband links
between customers and their ISPs and between ISP POPs and the Internet
backbone.
Mobile Communications Service Providers. ART's wireless broadband services
can provide cellular, wireless dispatch and PCS carriers, cost-effective
backbone network connections between cell sites, base stations and wireline
networks, with reduced construction time and installation costs.
Inter-exchange Carriers. To minimize costly LEC access charges and to gain
more direct contact with the consumer, IXCs can utilize the Company's wireless
broadband services to connect call origination or termination points either
directly to the IXCs' POPs or by way of CAP/CLEC intermediate fiber rings or
two or more of their respective POPs in a single market area and to provide
carriers with physical diversity routes (i.e., backup capacity) for traffic in
situations when primary routes become incapacitated or network reliability
concerns demand alternate telecommunications paths. 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.
Private User Networks. Heavy usage customers can utilize ART's wireless
broadband services to create private voice, data and video communications
networks within and among their local facilities and buildings.
Interactive Video Services Users. ART's wireless broadband services can
provide high-speed, high capacity access to communications networks for
customers who require reliable videoconferencing, video on demand, and
Internet video services.
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38 GHZ WIRELESS BROADBAND LICENSES
The Company owns 224 licenses and manages or has the right to use on a long-
term basis 14 licenses that allow it to provide 38 GHz wireless broadband
services in 169 U.S. markets, including 82 of the top 100 U.S. markets by
estimated population. The Company can provide between 100 and 500 MHz of
transmission capacity within each such market.
Because 38 GHz beams 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 current target customers in each of the Company's existing
markets. 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 licenses. See Exhibit 99, "Risk Factors--Acquisition of
Additional Bandwidth in Selected Areas."
Although the Company has 66 applications pending before the FCC for
additional licenses there can be no assurance that it will receive additional
licenses with respect to any pending applications. See "--Government
Regulation" and Exhibit 99, "Risk Factors--Government Regulation."
Commco, L.L.C. has an option, under certain circumstances, to acquire up to
12 of the Company's licenses. See "--Recent Agreements Relating to Licenses--
CommcoCCC Acquisition."
RECENT AGREEMENTS RELATING TO LICENSES
CommcoCCC Acquisition. On February 25, 1997 the Company acquired the assets
of CommcoCCC, Inc. ("CommcoCCC"), including 129 38 GHz licenses (the
"CommcoCCC Assets"), in exchange for 6,000,000 shares of Common Stock (the
"CommcoCCC Acquisition"). CommcoCCC was jointly owned by Columbia Capital
Corporation and its affiliates and Commco, L.L.C.
The Company has given Commco, L.L.C. an option (the "Commco Option") to
purchase one license in each of 12 specified market areas in which the Company
has more than one license, which licenses cover in the aggregate approximately
19 million people. The Commco Option will be exercisable only if Commco,
L.L.C. obtains licenses pursuant to certain pending applications previously
frozen under the NPRM (as hereinafter defined) 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 licenses 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 licenses 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 licenses 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, L.L.C. 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, L.L.C. The Company
believes that the FCC order partially lifting the freeze on processing of
pending applications could result in the grant to Commco, L.L.C. of sufficient
licenses to make the Commco Option exercisable.
ART West Joint Venture. On February 10, 1997, ART acquired the partnership
interest of Extended Communications, Inc. ("Extended"), in the ART West Joint
Venture ("ART West"), a Delaware partnership equally owned by ART and
Extended, for $6.0 million, of which $3.0 million was paid in November 1996.
ART West owned twelve 38 GHz licenses.
DCT Agreement. On June 28, 1996 the Company entered into a definitive
agreement (the "DCT Agreement") with DCT Communications, Inc. ("DCT") to
acquire sixteen 38 GHz licenses (the "DCT Systems") from DCT for $3.6 million
in cash. DCT has alleged that the Company has failed to satisfy a
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provision of the DCT Agreement, causing the DCT Agreement to terminate and DCT
to be able to retain a $100,000 deposit. Although the Company believes that it
has satisfied such provision, there can be no assurance as to the outcome of
such dispute. The Company does not currently expect to purchase the DCT
Systems pursuant to the DCT Agreement, and, accordingly, the DCT Systems are
not included herein among the licenses managed by the Company.
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 has an exclusive right, as against third
parties, to use for a five-year term ten 38 GHz wireless broadband licenses in
southern California. In addition, this services agreement grants the Company a
right of first refusal with respect to the purchase of such licenses, subject
to limited exceptions. The services agreement is renewable for successive one-
year terms totaling five additional 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
agreed to provide 38 GHz services to Ameritech, which will in turn market the
Company's services under the Ameritech name in five Midwestern states. In
connection with the agreement, Ameritech also acquired 231,131 shares of
Common Stock and warrants to purchase an additional 318,959 shares of Common
Stock. Ameritech has initiated on a limited basis the sale of a service
incorporating a local access for LAN interconnection, desktop
videoconferencing and Internet access utilizing the Company's services. The
Company expects that full scale rollout of these wireless broadband services
will begin in the second quarter of 1997. Under the Ameritech Strategic
Distribution Agreement, Ameritech is targeting certain sales objectives and
has agreed to spend internally a minimum of $7.0 million on its sales,
marketing and operations support of the Company's services. The Ameritech
Strategic Distribution Agreement is subject to termination at any time by
either party on 90 days' notice.
Technology Development Agreements. 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 would fund up to $1.0 million of
Helioss' research and development expenses (of which approximately $90,000 had
been paid at December 31, 1996) in return for a right of first refusal on
production capacity of the radios for three years from delivery of the first
radios produced, and 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. There can be no assurance that the Company
will consummate a definitive agreement with Helioss on these terms or at all
or that Helioss will develop technologies with commercial value.
MARKETING PLANS
The Company is initially marketing its services as a carrier's carrier in
order to leverage ART's carrier customers' sales forces, channels of
distribution and customer bases, while expanding its marketing efforts to
include direct sales to end users of its services. The Company plans to
augment its marketing and sales channels through resale agreements with
strategic marketing partners and through alliances with LECs, CAPs/CLECs,
ISPs, IXCs, interconnect providers (PBX suppliers), LAN, MAN and WAN systems
integrators and other telecommunications equipment manufacturers and service
providers.
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 enters 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 generally are
competitively priced with those of the incumbent LECs. The Company also
charges for installation where appropriate. The Company also anticipates
offering metered services to various end users at an appropriate point in the
future.
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FOREIGN MARKETS
Entities in which the Company has or may have a substantial interest have
applied or intend to apply for licenses to provide wireless broadband services
in Canada and in various European countries. See Exhibit 99, "Risk Factors--
Potential Rights to Foreign Licenses."
ART has 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. The letter of intent provides for ART to acquire a substantial
direct and indirect minority interest in ATI and to be a party to a services
agreement with ATI pursuant to which ART may construct and operate radio
systems based upon any licenses that may be granted to ATI and subject to
control by ATI. Under the letter of intent 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.
The Company is seeking, but has not yet received, any operating licenses in
Europe. The Company has agreed to give a consultant of the Company an equity
interest in certain subsidiaries formed or to be formed to conduct operations
in Europe. Although each member nation of the European 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 any 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 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.
The Company expects to compete primarily on the basis of wireless broadband
service features, quality, price, reliability, customer service and
responsiveness to customer needs. The Company faces significant competition
from incumbent LECs, such as the RBOCs, CAPs/CLECs and other 38 GHz providers.
The Company may also compete with 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. There can be no
assurance that the Company will be able to compete effectively with any of its
existing and potential competitors. 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, among other things, may be able to
develop and exploit new or emerging technologies or adapt to changes in
customer requirements more quickly than the Company or devote greater
resources to the marketing of their services than the Company.
Competition from Incumbent LECs. The Company faces significant competition
from incumbent LECs, utilizing copper and fiber-optic networks as well as 38
GHz and other wireless 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
reduced barriers to entry into the
9
<PAGE>
local exchange markets which is expected to increase competition in these
markets which in turn may result in increased price competition. These changes
will affect both the Company and its CAP customers. See Exhibit 99, "Risk
Factors--Competition" and "Risk Factors--Regulation."
Digital subscriber line products, such as ADSL (asymmetrical digital
subscriber line), HDSL (high-speed digital subscriber line) and VDSL (video
digital subscriber line) are under development to enhance the performance of
LECs' copper networks. There can be no assurance that the Company will be able
to compete effectively with companies offering these enhancements.
CAPs/CLECs. The Company also competes 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. Nonetheless, 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 currently is limited by lack of parity with LECs in number
portability, dialing parity and reasonable interconnection.
Competition from 38 GHz Service Providers. The Company also faces
competition from other 38 GHz service providers, such as WinStar
Communications, Inc. and BizTel Communications, Inc. (an affiliate of Teleport
Communications Group, Inc. ("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 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. TCG has agreed to acquire the remaining interest in BizTel which
it does not now own. TCG has significantly greater financial and other
resources than the Company. 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. 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, CAPs, CLECs and other telecommunications companies.
The grant of additional licenses by the FCC in the 38 GHz band in the proposed
FCC auctions or as a result of the partial lifting of the freeze on processing
new applications, or the grant of licenses in other portions of the spectrum
with characteristics similar to the 38 GHz band, could result in increased
competition and diminish the value of the Company's existing 38 GHz licenses.
The Company believes that, assuming that additional channels are made
available as proposed by the FCC, additional entities having greater resources
than the Company could acquire licenses and provide services competitive with
the Company's services. See "--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, Wireless Communications Services at 2.3 GHz
(WCS), 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. 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
10
<PAGE>
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 FCC recently established service and competitive bidding rules for LMDS.
The FCC plans to award LMDS licenses by the end of the year through an auction
process. LMDS licensees may use the spectrum to offer a variety of services
such as multichannel video programming, telephony, video communications and
data services in competition with the Company. Recently, the FCC has permitted
certain wireless cable operators licensed to provide video programming in the
2 GHz band to offer two-way digital broadband telecommunications services in
select markets. It is expected that the FCC will continue authorizing wireless
cable operators to provide similar services.
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 to small and medium sized businesses in competition with the Company.
The FCC is currently licensing, through competitive bidding, 30 MHz of
spectrum at 2.3 GHz for WCS. The FCC will award two 10 MHz licenses and two 5
MHz licenses. The FCC has permitted maximum flexible use of this spectrum to
include fixed or mobile services. Thus, licensees that utilize the spectrum
for fixed services could provide additional competition to the Company.
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 for 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.
Other Competitors. Although cable modems are not widely available currently
and may require significant system upgrades, the Company may face competition
from cable television operators deploying cable modems, which provide high-
speed data capability over installed coaxial cable television networks.
The Company may also face competition from electric utilities, LECs
operating outside their current local service areas, IXCs and other providers.
These entities may 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.
GOVERNMENT REGULATION
The Company's wireless broadband services are subject to regulation by
federal, state and local governmental 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.
11
<PAGE>
Federal Regulation
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 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 license. 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. 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 Exhibit 99, "Risk Factors--Risk of
Forfeiture, Non-Renewal and Fluctuation in Value of FCC Licenses."
All of the 38 GHz licenses owned or to be acquired by the Company are due to
expire in February 2001. Although there can be no assurance, the Company
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.
Common Carrier Regulation. Under the terms of its licenses, the Company is
classified as a common carrier, and as such is required to offer service on a
non-discriminatory basis at just and reasonable rates to anyone reasonably
requesting such service. Although the Communications Act prohibits the Company
from discriminating among its customers, the Communications Act, as currently
interpreted by the FCC, does permit the Company substantial discretion in
classifying its customers and discriminating among such classifications. The
Company generally is obligated to furnish service to its competitors and might
be obligated to allow other 38 GHz providers to install links within one of
the Company's market areas for a non-discriminatory fee. Under the FCC's
streamlined regulation of non-dominant carriers, the Company, as a non-
dominant carrier, must file tariffs with the FCC for certain interstate
services on an ongoing basis. The Company is in the process of filing tariffs
with the FCC, to the extent required, with respect to its provision of
interstate service. The FCC has recently initiated a rulemaking proceeding to
eliminate the tariff filing requirement. The Company is not currently subject
to rate regulation as a non-dominant carrier.
Services Agreements. There is no FCC precedent addressing the limits of
management and service agreements for 38 GHz services. However, the Company
believes that the provisions of its management and service agreements comply
with the FCC's policies concerning licensee control of FCC-licensed facilities
in other services. No assurance can be given that the Company's management and
service agreements, if challenged, would be found to comply with FCC policies
or what modifications, if any, may need to be made to comply with those
policies. If the FCC were to void or require modifications of the management
and service arrangements, the Company's operating results could be adversely
affected.
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).
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
12
<PAGE>
of state regulatory barriers to competition and the preemption of laws
restricting competition in the local exchange market. The provisions of the
Telecommunications Act are designed to ensure that RBOCs take affirmative
steps to level the playing field for their competitors so that CAPs and others
can compete effectively. The FCC, with advice from the United States
Department of Justice, and the states are given jurisdiction to enforce these
requirements. There can be no assurance, however, that the states and the FCC
will implement the Telecommunications Act in a manner favorable to the Company
and its customers.
FCC Rulemaking. On November 13, 1995, the FCC released an order barring the
acceptance of new applications for 38 GHz licenses. 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
licenses 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
licenses that are not received pursuant to auctions as a condition to the
retention of such licenses 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"). In December 1996, the FCC 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 licenses 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. The
NPRM proposes substantial strengthening of the current rules concerning the
steps that a grantee of a 38 GHz license must take to satisfy the FCC's
construction requirements 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. The Company has not determined whether to seek
additional licenses in the event of an auction.
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 to conduct its
proposed business in the near-term. 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 defined local
area, 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.
TELEPORT AGREEMENT
In October 1996, ART entered into an agreement to provide transmission
facilities construction services to TCG. Approximately $2.7 million of the
Company's fourth quarter revenues represented non-recurring equipment sales
and construction revenue from installing links for TCG. The Company had
completed
13
<PAGE>
such services by December 31, 1996 and does not expect routinely to provide
significant construction services to third parties in the future.
EMPLOYEES
As of December 31, 1996, the Company had a total of 121 employees. None of
the Company's employees is represented by a collective bargaining agreement.
ITEM 2. PROPERTIES
The Company leases approximately 22,000 square feet of office, technical
operations and engineering field services depot space in Bellevue, Washington,
including approximately 15,000 square feet under a sublease expiring in
January 2000 and approximately 7,000 square feet under leases expiring in May
1997. The Company also leases an additional approximately 18,000 square feet
of office space in thirteen cities nationwide.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material litigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On October 16, 1996, the Company's stockholders approved by unanimous
written consent the merger agreement pursuant to which ART Licensing was
merged and the restatement of the Company's Certificate of Incorporation in
preparation for the Company's initial public offering. The Company did not
submit any other matters to a vote of security holders during the fourth
quarter of 1996.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION*
- ---- --- ---------
<S> <C> <C>
Vernon L. Fotheringham........ 48 Chairman of the Board of Directors and Chief
Executive Officer.
Steven D. Comrie.............. 41 President and Chief Operating Officer.
Thomas A. Grina............... 39 Executive Vice President, Finance and Chief
Financial Officer
James D. Miller............... 54 Senior Vice President, Sales and Marketing
Richard A. Shields, Jr. ...... 40 Senior Vice President, Technical Operations
</TABLE>
- --------
* Includes positions with predecessor
Vernon L. Fotheringham has served as Chairman of the Board of Directors and
Chief Executive Officer of the Company and ART Licensing 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, 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., a wireless telecommunications
consulting and project management firm.
Steven D. Comrie has served as President and Chief Operating Officer of the
Company since July 1995. From 1992 to 1995, Mr. Comrie served as vice
president and general manager of Cypress Broadcasting Inc., a television
subsidiary of Ackerley Communications Inc. From 1990 to 1992, Mr. Comrie
served as president of First Communication Media Inc.
Thomas A. Grina has served as Executive Vice President, Finance and Chief
Financial Officer of the Company and ART Licensing since April 1996. Mr. Grina
was Vice President--Finance and Chief Financial Officer of Dial Page, Inc., a
paging provider, from 1989 to 1996 and of its wholly-owned subsidiary, Dial
Call Communications, Inc., a wireless communications company operating in the
southeastern U.S. from 1993 to 1996.
14
<PAGE>
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.
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 Communications. From 1991 to 1992, Mr. Shields served as director of
product development of The Walter Group, Inc.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
ART's Common Stock is traded in the over-the-counter market and is reported
on the Nasdaq National Market under the symbol "ARTT." The following table
sets forth for the periods indicated the high and low sales information of the
Common Stock as reported on the Nasdaq National Market. Such transactions
reflect inter-dealer prices, without retail markup, markdown or commission and
may not necessarily represent actual transactions.
<TABLE>
<CAPTION>
PRICE RANGE
---------------
HIGH LOW
------- -------
<S> <C> <C>
1996 Fourth Quarter (commencing on November 5)............ $16.250 $11.125
1997 First Quarter (through March 21)..................... $14.625 $10.375
</TABLE>
On March 21, 1997, the last sale price of Common Stock as reported on the
Nasdaq National Market was $12.125 per share. As of March 21, 1997 there were
202 record holders of ART's Common Stock.
ART has not paid any cash dividends on its Common Stock in the past and does
not anticipate paying any cash dividends on its Common Stock in the
foreseeable future. ART's Board of Directors intends to retain earnings to
finance the expansion of ART's business and fund ongoing operations for the
foreseeable future. In addition, the terms of the indenture relating to the
Company's 14% Senior Notes due 2007 restrict the ability of the Company to pay
dividends on Common Stock.
RECENT SALES OF UNREGISTERED SECURITIES.
Preferred Stock
In the February 1996 reorganization of ART Licensing, Global Private Equity
II, L.P., Advent Partners Limited Partnership and Advent International
Investors II L.P. (collectively, "Advent") exchanged $50,000 stated amount of
the Company's preferred stock and a $4.95 million note of the Company for
232,826 shares of Art Licensing Series E preferred stock (which converted into
1,100,632 shares of Common Stock upon completion of the Company's initial
public 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.
On February 2, 1996, Ameritech Development Corp. ("Ameritech") purchased
48,893 shares of Art Licensing Series F preferred stock (which converted into
231,131 shares of Common Stock upon completion of the Company's initial public
offering). In addition, in connection with the Ameritech Strategic
Distribution Agreement, ART Licensing granted Ameritech a ten-year warrant to
purchase 318,959 shares of Art Licensing common stock exercisable at a nominal
price per share (the "Ameritech Warrant") which warrant has been exercised.
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.
15
<PAGE>
March Bridge Notes
On March 8, 1996, Art Licensing 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 Art
Licensing common stock at a price of $17.1875 per share (the "March Bridge
Warrants") to then existing shareholders of ART Licensing and their affiliates
and other accredited investors. 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 February 25, 1997, the Company acquired the CommcoCCC Assets from
CommcoCCC in exchange for 6,000,000 shares of Common Stock. Simultaneous with
the execution of the CommcoCCC agreement pursuant to which the CommcoCCC
Acquisition was consummated (the "CommcoCCC Agreement"), the stockholders of
CommcoCCC 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 amendment to the CommcoCCC Agreement, the Company modified
the terms of such warrants, reduced the exercise price of such warrants to
$15.00 per share and increased the number of shares issuable upon exercise to
87,273 shares. 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.
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 million 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 $15.00 per share (the "September
Bridge Warrants") to then existing shareholders of ART Licensing and their
affiliates and other accredited investors. 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 entered into agreements with certain investors (the "CIBC
Investors") which provided 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"). In connection with the CIBC Financing Commitment, the Company
issued five-year warrants to purchase 300,258 shares of Common Stock at a
nominal exercise price to the CIBC Investors. The Company did not elect to
issue the Senior Secured Notes, and the CIBC Financing Commitment was
terminated. 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.
The Merger with ART Licensing
In October 1996, the Company merged with ART Licensing through a wholly
owned subsidiary, in which the holders of ART Licensing Common Stock received
2,945,848 shares of Common Stock and holders of ART Licensing preferred stock
received 920,951 shares of preferred stock of the Company, which was converted
into 4,353,587 shares of Common Stock upon the consummation of the Company's
initial public offering in November 1996. 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.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below as of December 31, 1993, 1994,
1995 and 1996 and for the period from August 23, 1993 (date of inception) to
December 31, 1993 and the years ended December 31, 1994, 1995 and 1996 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 Report.
<TABLE>
<CAPTION>
AUGUST 23, 1993
(DATE OF INCEPTION YEAR ENDED DECEMBER 31,
TO DECEMBER 31, -------------------------------------
1993 1994 1995 1996
------------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Service revenue......... $ -- $ -- $ 5,793 $ 247,116
Equipment sales and
construction revenue... -- -- -- 2,660,811
Consulting revenue...... -- 137,489 -- --
Technical and network
operations expenses.... -- -- -- 3,402,948
Cost of equipment sales
and construction....... -- -- -- 1,590,779
Sales and marketing
expenses............... -- -- 191,693 5,548,584
General and
administrative
expenses............... 5,906 253,453 2,911,273 12,896,134
Research and development
expenses............... -- -- -- 1,269,579
Depreciation and
amortization........... 688 8,281 15,684 1,017,959
Loss from operations.... (6,594) (124,245) (3,112,857) (22,818,056)
Interest and other
expenses............... -- 4,375 121,986 6,512,251
Extraordinary loss...... -- -- -- 1,339,996
Net loss................ (6,594) (128,620) (3,234,843) (30,670,303)
Net loss per share...... -- (0.04) (0.54) (3.97)
Weighted average number
of shares of
common stock
outstanding............ 1,820,555 3,337,685 5,946,338 7,717,755
OTHER FINANCIAL DATA:
EBITDA (1).............. $ (5,906) $ (115,964) $(2,007,568) $(14,348,920)
Capital expenditures.... -- 5,175 3,585,144 16,631,451
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------
1993 1994 1995 1996
------------------ ---------- ----------- ------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital surplus
(deficit).............. $ 13,958 $ (76,556) $(3,008,510) $ (9,623,905)
Property and equipment,
net.................... -- 3,448 3,581,561 19,303,849
FCC licenses, net....... -- -- 4,235,734 4,330,906
Total assets............ 74,513 42,611 9,876,559 36,648,701
Long-term debt.......... -- -- 6,450,000 4,977,246
Accumulated deficit..... (6,594) (135,214) (3,370,057) (34,040,360)
Total stockholders'
equity (deficit)....... 54,542 (39,078) (312,860) 19,949,920
</TABLE>
- --------
(1) 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
relating to the Company's 14% Senior Notes due 2007 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.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Since the Company's inception in 1993, it has primarily focused on acquiring
licenses, hiring management and other key personnel, raising capital,
acquiring equipment and developing its operating and support systems and
infrastructure. The Company commenced limited commercial operations in January
1996 and began full scale commercial operations in November 1996.
From inception through December 31, 1996, the Company has generated revenue
of approximately $3.1 million, consisting of service revenue of $252,909,
equipment sales and construction revenue of approximately $2.7 million and
consulting revenue of $137,489 and has incurred aggregate operating expenses
of approximately $29.1 million, including $9.8 million of non-cash operating
expenses. The remaining operating expenses consist primarily of compensation
and benefits, sales and marketing expenses, costs related to equipment sales
and construction, consulting and legal fees, research and development
expenses, facilities expenses, systems development costs, and other costs
related to building the Company's business infrastructure and marketing its
wireless broadband services. 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."
The Company's revenues will be driven primarily by the number and capacity
of the Company's 38 GHz links in service. The Company expects to charge
customers a fixed monthly rate based on capacity provided. The Company's
wireless broadband services are sold through a sales cycle that may average
more than six months because of the need to demonstrate the quality of the
Company's 38 GHz services and to formalize service agreements with customers.
Once such agreements are completed, the Company must design its network and
acquire access to sites necessary to provide services to customer locations.
The Company believes that the sales cycle will shorten as the Company's 38 GHz
technology becomes more widely accepted. Also, the Company has begun
proactively to identify and qualify sites in selected markets in support of
expected customer demand. See "Business--Business Strategy." 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.
RESULTS OF OPERATIONS
1996 Compared to 1995
Revenues for the year ended December 31, 1996 were approximately $2.9
million compared to $5,793 in 1995. Included in 1996 revenues was
approximately $2.7 million representing non-recurring sales and construction
revenue associated with approximately 100 radio links installed for a third
party. The Company does not expect routinely to sell equipment to and install
radio links for third parties in the future. As of December 31, 1996, the
Company had installed over 270 radio links on its 38 GHz licenses, including
approximately 80 revenue generating links.
Operating expenses other than interest were approximately $25.7 million for
the year ended December 31, 1996 compared to approximately $3.1 million in
1995. The increase was primarily due to an overall increase in costs and
expenses associated with preparing for the commencement of commercial
operations. Included in 1996 was approximately $1.6 million of non-recurring
expenses for sales and construction performed for a third party. Non-cash
compensation expense of approximately $7.6 million, including approximately
$6.8 million arising
18
<PAGE>
from the termination of an arrangement involving the escrow of shares of
Common Stock (the "Escrow Shares") and subsequent release of such shares to
certain employees, as well as higher general and administrative, sales and
marketing expenses, technical and network operating expenses and research and
development expenses. Included in sales and marketing expenses were non-cash
marketing costs of approximately $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
and expects depreciation and amortization to increase substantially in future
periods as a result of recent spectrum acquisitions and deployment of its
wireless transmission equipment.
Net interest and other expenses were approximately $6.5 million for the year
ended December 31, 1996 compared to $121,986 in 1995. Included in interest and
other expenses for 1996 are approximately $1.2 million relating to an
unsuccessful debt offering in July 1996 and approximately $3.7 million related
to a financing commitment which was terminated in 1997 upon the sale by the
Company of its 14% Senior Notes due 2007 (the "Senior Notes"). An additional
expense of approximately $2.7 million will be recognized in the first quarter
in connection with such terminated commitment. Interest expense increased in
1996 due to increased borrowings in 1996. The issuance of the Senior Notes in
February 1997 will cause interest expense to increase substantially in future
periods. The early repayment in November 1996 of bridge financings resulted in
a non-cash extraordinary loss of approximately $1.3 million arising from the
write-off of associated unamortized offering discount and deferred financing
costs.
1995 compared to 1994
The Company's historical financial statements for 1994 primarily 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 in 1994, related to filing of applications for 38 GHz
licenses on behalf of others, and $5,793 in service revenue in 1995 derived
from customers for wireless broadband services in markets in which licenses
were acquired in November 1995.
General and administrative expenses increased to approximately $2.9 million
for 1995, from $253,453 for 1994 due to an increased number of employees and
the recognition of non-cash compensation expenses of approximately $1.1
million associated with the release to certain employees of Escrow Shares as a
result of meeting certain performance objectives and certain employee stock
options. Sales and marketing expenses increased to $191,693 in 1995 from $0 in
1994 as the Company prepared for commercial operations. Net interest expense
increased to $121,986 in 1995 from $4,375 in 1994 due to increased levels of
borrowing. As a result, the net loss for 1995 was approximately $3.2 million,
as compared to a net loss of $128,620 in 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has generated negative cash flow and net losses each year since
its inception and expects such net losses to continue at least for the next
few years. Capital expenditures, including deposits on equipment, were
approximately $16.6 million, $3.6 million and $5,175 for 1996, 1995 and 1994,
respectively. Capital expenditures have primarily been for the purchase of
radio transmission equipment in anticipation of commencing operations and for
installation of equipment to meet FCC construction requirements. During 1996,
the Company had net cash flows from financing activities of approximately
$29.9 million primarily from its initial public offering of Common Stock.
During 1995 and 1994, the Company had net cash flows from financing activities
of approximately $6.3 million (net of redemptions) and $105,000, respectively,
primarily from private placements of preferred stock and convertible notes. In
February 1997, the Company completed its public offering of $135 million of
Senior Notes. The Company used approximately $52 million of the net proceeds
of such offering to purchase a portfolio of U.S. Treasury securities that will
provide for payment of interest on the Senior Notes through February 2000.
Also in February 1997, the Company completed its acquisition of the
19
<PAGE>
remaining 50% ownership interest in the ART West Joint Venture not already
owned by the Company for $6 million, $3 million of which was paid in November
1996, and completed its acquisition of the assets of CommcoCCC, including 129
38 GHz licenses, for 6 million shares of Common Stock. To date, funding for
acquisitions, capital expenditures and net operating losses has been provided
from private placements of equity, various bridge financings, the Company's
initial public offering in November 1996 and the Company's public offering of
its Senior Notes in February 1997. Because the Senior Notes have "significant
original issue discount" for tax purposes, the Company does not expect to be
able to deduct the interest expense related to the accretion of this original
issue discount for tax purposes.
The Company currently estimates that it will incur approximately $35.0
million of capital expenditures in 1997. 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, in large part, depend on
levels of customer demand. As of December 31, 1996, the Company had outstanding
commitments to purchase approximately $9.5 million of wireless transmission
equipment from its equipment supplier.
The Company's current business plan projects that the Company has resources
to fund its operations and capital requirements at least through December 31,
1997 and that the Company will require significant additional capital after
that date. The Company will require substantial additional capital for the
continued development and expansion of its wireless broadband operations, the
continued funding of operating losses, and the possible acquisition of
additional licenses, other assets or other businesses. In addition, if, among
other things, (i) the Company's plan of development or projections change or
prove to be inaccurate, (ii) the Company's 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 or buys spectrum at auction or (iv) the Company accelerates
implementation of its business plan, the Company may require additional
financing earlier than December 31, 1997. There can be no assurance that the
Company will be able to obtain any financing when required, 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.
NEW ACCOUNTING PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 128, "Earnings per Share." This statement specifies
the computation, presentation and disclosure requirements for earnings per
share ("EPS"), to simplify the existing computational guidelines and increase
comparability on an international basis. The statement will be effective for
the year ending December 31, 1997 and will replace "primary" EPS with "basic"
EPS, the principal difference being the exclusion of common stock equivalents
in the computation of basic EPS and the required dual presentation of basic and
diluted EPS on the face of the consolidated statement of operations. Due to the
Company's net losses, basic and diluted EPS computed pursuant to this statement
are not expected to be materially different from the historical net losses per
share previously presented.
INFLATION
Management does not believe that its business is impacted by inflation to a
significantly different extent than is the general economy.
CAUTIONARY STATEMENT
This Item and other Items in this Report include "forward-looking"
information as that term is defined in the Private Securities Litigation Reform
Act of 1995 or by the Securities and Exchange Commission in its rules,
regulations and releases. The Company cautions investors that any such
statements made by the Company are not guarantees of future performance and
that known and unknown risks, uncertainties, and other factors including those
risk factors identified in Exhibit 99 to this Report may cause actual results
to differ materially from those in the forward-looking statements.
20
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Advanced Radio Telecom Corp.
We have audited the accompanying consolidated balance sheets of Advanced
Radio Telecom Corp. and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the years ended December 31, 1996, 1995 and 1994. 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 consolidated financial position of Advanced
Radio Telecom Corp. and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1996, 1995 and 1994, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Seattle, Washington
March 18, 1997
21
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 1,974,407 $ 633,654
Accounts receivable............................... 1,819,593
Prepaid expenses and other current assets......... 196,791 52,325
------------ -----------
Total current assets............................ 3,990,791 685,979
Restricted cash..................................... 1,032,060
Property and equipment, net......................... 19,303,849 3,581,561
FCC licenses, net................................... 4,330,906 4,235,734
Equity investment................................... 3,285,000 285,000
Deferred financing costs, net....................... 3,255,688 778,897
Other assets........................................ 1,450,407 309,388
------------ -----------
Total assets.................................... $ 36,648,701 $ 9,876,559
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.................................. $ 9,425,834 $ 3,340,144
Accrued compensation and benefits................. 1,350,894 267,091
Other accrued liabilities......................... 944,807 87,254
Current portion of long-term debt................. 1,893,161
------------ -----------
Total current liabilities....................... 13,614,696 3,694,489
Long-term debt, net of current portion.............. 3,084,085 6,450,000
------------ -----------
Total liabilities............................... 16,698,781 10,144,489
------------ -----------
Commitments and contingencies
Redeemable preferred stock, $0.01 par value, 1 share
issued and outstanding at December 31, 1995........ 44,930
------------ -----------
Stockholders' equity (deficit):
Serial preferred stock, $0.001 par value, 488,492
shares issued and outstanding at December 31,
1995............................................. 488
Common stock, $0.001 par value, 13,559,420 and
6,529,975 shares issued and outstanding.......... 13,559 6,530
Additional paid-in capital........................ 53,976,721 3,050,179
Accumulated deficit............................... (34,040,360) (3,370,057)
------------ -----------
Total stockholders' equity (deficit)............ 19,949,920 (312,860)
------------ -----------
Total liabilities and stockholders' equity
(deficit).................................... $ 36,648,701 $ 9,876,559
============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
22
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- ---------
<S> <C> <C> <C>
Service revenue......................... $ 247,116 $ 5,793
Equipment sales and construction
revenue................................ 2,660,811
Consulting revenue...................... $ 137,489
------------ ----------- ---------
Total revenue....................... 2,907,927 5,793 137,489
------------ ----------- ---------
Costs and expenses:
Technical and network operations...... 3,402,948
Cost of equipment sales and
construction......................... 1,590,779
Sales and marketing................... 5,548,584 191,693
General and administrative............ 12,896,134 2,911,273 253,453
Research and development.............. 1,269,579
Depreciation and amortization......... 1,017,959 15,684 8,281
------------ ----------- ---------
Total operating expenses............ 25,725,983 3,118,650 261,734
------------ ----------- ---------
Loss from operations.................... (22,818,056) (3,112,857) (124,245)
Interest and other:
Interest expense...................... 1,695,489 131,540 4,375
Financing commitment expense.......... 3,687,644
Other................................. 1,248,000
Interest income....................... (118,882) (9,554)
------------ ----------- ---------
Loss before extraordinary item...... (29,330,307) (3,234,843) (128,620)
Extraordinary loss on early retirement
of debt................................ (1,339,996)
------------ ----------- ---------
Net loss............................ $(30,670,303) $(3,234,843) $(128,620)
============ =========== =========
Pro forma loss per share of common stock
before extraordinary item.............. $ (2.97) $ (0.30)
Extraordinary loss per share of common
stock.................................. (0.13)
------------ -----------
Pro forma net loss per share of common
stock.................................. $ (3.10) $ (0.30)
============ ===========
Pro forma weighted average number of
shares of common stock outstanding..... 9,885,193 10,912,338
============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
23
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
SERIAL
COMMON STOCK PREFERRED STOCK ADDITIONAL
--------------------- ------------------- PAID-IN ACCUMULATED
AMOUNTS SHARES PAR VALUE SHARES PAR VALUE CAPITAL DEFICIT TOTAL
- ------- ---------- --------- -------- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1993................... 1,070,915 $ 1,071 $ 60,065 $ (6,594) $ 54,542
Issuance of common stock
for cash............... 1,070,915 1,071 33,929 35,000
Net loss................ (128,620) (128,620)
---------- ------- -------- ----- ----------- ------------ ------------
Balance, December 31,
1994................... 2,141,830 2,142 93,994 (135,214) (39,078)
Issuance of common stock
to ART West............ 26,773 27 24,973 25,000
Issuance of common stock
to existing
stockholders........... 1,472,508 1,472 (1,472)
Conversion of note
payable and interest to
paid-in capital........ 75,250 75,250
Issuance of common stock
to Landover and
affiliates for cash.... 3,120,000 3,120 (2,100) 1,020
Issuance of preferred
stock to limited
partnerships affiliated
with Landover for cash:
Series A............... 332,091 $ 332 1,006,268 1,006,600
Series B............... 82,318 82 880,618 880,700
Series C............... 5,402 5 112,695 112,700
Issuance of Series D
preferred stock for
cash................... 61,640 62 1,999,938 2,000,000
Shares issued to reflect
anti-dilution
adjustments............ 62,655 63 7,041 7 (70)
Preferred stock issuance
costs.................. (229,814) (229,814)
Redemption of common
stock.................. (293,791) (294) (1,999,706) (2,000,000)
Increase in additional
paid-in capital as a
result of the release
of Escrow Shares....... 802,002 802,002
Accrued stock option
compensation........... 287,603 287,603
Net loss................ (3,234,843) (3,234,843)
---------- ------- -------- ----- ----------- ------------ ------------
Balance, December 31,
1995................... 6,529,975 6,530 488,492 488 3,050,179 (3,370,057) (312,860)
Issuance of Series E
preferred stock........ 232,826 233 4,672,953 4,673,186
Shares issued to reflect
anti-dilution
adjustments............ 56,984 57 150,740 151 (208)
Issuance of Series F
preferred stock and
warrants in exchange
for cash and the
Ameritech strategic
distribution
agreement.............. 48,893 49 3,552,951 3,553,000
Preferred stock issuance
costs.................. (150,000) (150,000)
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
equipment financing
warrants............... 484,937 484,937
Value ascribed to the
Bridge Financing
Warrants............... 1,795,533 1,795,533
Issuance of common stock
in an initial public
offering............... 2,300,500 2,301 34,505,199 34,507,500
Initial public offering
common stock issuance
costs.................. (6,081,098) (6,081,098)
Conversion of preferred
stock to common stock
in connection with the
initial public
offering............... 4,353,587 4,353 (920,951) (921) (3,432)
Value ascribed to the
CIBC Warrants.......... 4,503,848 4,503,848
Accrued stock option
compensation........... 850,663 850,663
Common stock issued in
connection with the
exercise of the
Ameritech warrants..... 318,374 318 (318)
Net loss................ (30,670,303) (30,670,303)
---------- ------- -------- ----- ----------- ------------ ------------
Balance, December 31,
1996................... 13,559,420 $13,559 $ $53,976,721 $(34,040,360) $ 19,949,920
========== ======= ======== ===== =========== ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
24
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................ $(30,670,303) $(3,234,843) $(128,620)
Adjustments to reconcile net loss to net
cash used in operating activities:
Non-cash compensation expense.......... 7,646,177 1,089,605
Depreciation and amortization.......... 1,017,959 15,684 8,281
Financing commitment expense........... 3,687,644
Extraordinary item..................... 1,339,996
Non-cash interest expense.............. 772,221 110,828
Non-cash marketing expense............. 1,053,000
Changes in operating assets and
liabilities:
Accounts payable and accrued
liabilities.......................... 3,633,043 563,351 (8,282)
Accounts receivable................... (1,819,593)
Prepaid expenses and other current
assets............................... (144,466) (56,337)
------------ ----------- ---------
Net cash used in operating
activities.......................... (13,484,322) (1,511,712) (128,621)
------------ ----------- ---------
Cash flows from investing activities:
Additions to property and equipment..... (9,439,481) (621,364) (5,175)
Investment in ART West.................. (3,000,000) (255,000)
Acquisition of EMI licenses and property
and equipment.......................... (3,023,971)
Additions to other assets............... (1,425,032) (280,000)
Investment in restricted cash........... (1,032,060)
Additions to FCC licenses............... (201,183) (13,912)
------------ ----------- ---------
Net cash used in investing
activities.......................... (15,097,756) (4,194,247) (5,175)
------------ ----------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock.. 34,507,500 1,020 35,000
Proceeds from issuance of preferred
stock.................................. 2,500,000 4,050,000
Proceeds from bridge financings......... 12,000,000
Proceeds from issuance of equipment
financing note......................... 2,445,000
Proceeds from issuance of convertible
note payable........................... 4,950,000
Proceeds from loan and advances from
Landover............................... 183,500 70,000
Redemption of common stock.............. (2,000,000)
Stock issuance costs.................... (6,231,098) (213,884)
Repayment of bridge financings.......... (12,000,000)
Principal payments of loan and long-term
debt................................... (1,131,443) (8,500)
Additions to deferred financing costs... (2,167,128) (452,656)
Repayment of cash advances from
Landover............................... (175,000)
------------ ----------- ---------
Net cash provided by financing
activities.......................... 29,922,831 6,334,480 105,000
------------ ----------- ---------
Net increase (decrease) in cash......... 1,340,753 628,521 (28,796)
Cash, beginning of period................ 633,654 5,133 33,929
------------ ----------- ---------
Cash, end of period...................... $ 1,974,407 $ 633,654 $ 5,133
============ =========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
25
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND BASIS OF PRESENTATION:
Advanced Radio Telecom Corp. ("ART", and collectively with its subsidiaries,
the "Company") provides wireless broadband telecommunications services using
point-to-point microwave transmissions in the 38 GHz band of the radio
spectrum throughout the United States. Prior to the commencement of full-scale
commercial operations during 1996, the Company's principal business activities
included the acquisition of spectrum rights, buildout of its systems,
development of its operating infrastructure, and raising of funds to implement
its business plan.
ART, formerly named Advanced Radio Technologies Corporation, was organized
as a Delaware corporation in August 1993. Advanced Radio Technology Ltd.,
renamed Advanced Radio Telecom Corp. ("Telecom"), was organized in March 1995
by ART and Landover Holdings Corporation ("Landover") for the purpose of
acquiring certain 38 GHz licenses and to facilitate Landover's commitment to
invest or cause to invest $7 million in the Company. Pursuant to the related
purchase, shareholder, and services agreements, ART and Telecom were operated
as a single entity pending approval of their merger from the Federal
Communications Commission ("FCC"). Such approval was received and Telecom
became a wholly-owned subsidiary of ART by merger in October 1996. 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.
Under the Company's current business plan, the development of the Company's
business and the deployment of its services and systems will require
significant expenditures in the near term, a substantial portion of which is
expected to be incurred before realization of significant revenues. Management
believes that under its current business plans, the funds received from its
initial public offering of equity securities and issuance of public debt
securities are sufficient to enable the Company to fund its operations and
capital requirements at least through December 1997 and that the Company will
require significant additional capital after that date. While not expected, in
the event that the Company's business development and expansion plans change,
the Company may require additional financing earlier than December 31, 1997.
In the event that the Company fails to obtain such 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 which in turn, could have
a material adverse affect on the Company.
2. 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.
Development Stage Enterprise
During 1996, the Company commenced commercial operations, and is no longer
considered to be in the development stage as defined in Statement of Financial
Accounting Standards No. 7, "Accounting and Reporting by Development Stage
Enterprises." Such change in classification of the Company had no impact on
the net loss or stockholders' equity (deficit) for any periods presented.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with remaining
maturities of three months or less to be cash equivalents.
The Company places its temporary cash investments with major financial
institutions. At December 31, 1996 and 1995, the Company's temporary cash
investments are principally placed in one entity.
26
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives,
generally 5 years for wireless transmission equipment and 3 to 5 years for
other property and equipment.
The costs of normal maintenance and repairs are charged to expense as
incurred. Direct costs of placing assets into service and major improvements
are capitalized. Gains or losses on the disposition of assets are recorded at
the time of disposition.
Capitalized Software
Purchased software is capitalized at cost and amortized over its estimated
useful life of 3 to 5 years.
FCC Licenses
The direct costs of obtaining 38 GHz radio spectrum licenses by grant from
the FCC or by purchase from others and the cost of perfecting such licenses
are capitalized and amortized on a straight-line basis over a 40 year period.
Accumulated amortization as of December 31, 1996 totaled $106,011. All of the
Company's licenses expire in 2001 and it is management's expectation that they
will be renewed by the FCC for successive ten year periods.
Recoverability of Long-Lived Assets
The recoverability of property and equipment and capitalized FCC licenses is
dependent on, among other things, the successful development of systems in
each of the respective markets, or sale of such assets. Management estimates
that it will recover the carrying amount of those costs from undiscounted cash
flows generated by the systems once they have been developed. However, it is
reasonably possible that such estimates will change in the near term as a
result of technological, regulatory or other changes. The Company periodically
reviews the carrying value of its capitalized assets for impairment and
recoverability.
Equity Investment
The Company accounts for its fifty percent interest in the ART West joint
venture under the equity method. There were no operations in this joint
venture for the year ended December 31, 1996.
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 of obtaining commitments for financing are
deferred and charged to expense over the term of the commitments. 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 other expense.
Accumulated amortization of deferred financing costs totaled $3,753,605 and
$44,376 at December 31, 1996 and 1995, respectively. Deferred costs of
approximately $1.2 million associated with an unsuccessful public debt
offering were charged to other expense in 1996.
Revenue Recognition
Revenue from telecommunications services are recognized ratably over the
period such services are provided.
Equipment sales and construction revenue is recorded at the time the
equipment is delivered and construction is completed. Cost of equipment sales
are based on the average cost method.
27
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A single customer accounted for approximately forty-two percent of the
Company's service revenues during 1996. Additionally, the Company entered into
an equipment sales and construction services agreement with another customer
during 1996 to act as a sub-contractor to provide transmission facilities
construction services and the related wireless transmission equipment. This
agreement was substantially completed during 1996 and total equipment sales
and construction revenues are attributable to this customer. The receivables
from this customer accounted for approximately ninety-four percent of total
accounts receivable at December 31, 1996.
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 to a related party.
Research and Development
Research and development costs are charged to expense as incurred.
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.
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 for the years ended December 31
are as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Loss per share before extraordinary item.. $ (3.80) $ (0.54) $ (0.04)
Extraordinary loss per share.............. (0.17)
---------- ---------- ----------
Net loss per share........................ $ (3.97) $ (0.54) $ (0.04)
========== ========== ==========
Weighted average number of shares of
common stock outstanding................. 7,717,755 5,946,338 3,337,685
========== ========== ==========
</TABLE>
In accordance with Securities and Exchange Commission rules, potentially
dilutive instruments issued within one year prior to the Company's initial
public offering at exercise prices below the initial public offering price
must be treated as outstanding for all periods presented in the initial public
offering prospectus. Accordingly, 2,167,438 and 4,966,000 additional 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
years ended December 31, 1996 and 1995, respectively.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share." This
statement specifies the computation, presentation, and disclosure requirements
for earnings per share ("EPS"), to simplify the existing computational
guidelines and increase comparability on an international basis. The statement
will be effective for the year ending December 31, 1997. This statement will
replace "primary" EPS with "basic" EPS, the principal difference being the
exclusion of common stock equivalents in the computation of basic EPS. In
addition, this statement will require the dual presentation of basic and
diluted EPS on the face of the consolidated statement of operations. Due to
the Company's net losses, basic and diluted EPS computed pursuant to this
statement are not expected to be materially different from the historical net
losses per share previously presented.
28
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
3. SPECTRUM ACQUISITIONS:
CommcoCCC Licenses
In June 1996, the Company agreed to acquire 129 38 GHz licenses from
CommcoCCC, Inc. ("CommcoCCC") in exchange for 6 million shares of the
Company's common stock, which acquisition was consummated in February 1997.
The aggregate market value of the common shares issued to CommcoCCC was
approximately $88 million. The Company incurred approximately $3 million in
fees in connection with this acquisition, of which approximately $1 million
had been paid as of December 31, 1996 and included in other assets.
The Company has given a stockholder of CommcoCCC an option to purchase FCC
licenses in specified market areas in which the Company will have more than
one license. The Option is exercisable only in the event that the stockholder
receives licenses pursuant to pending applications covering a minimum
specified population and expires in August 1997. The price of licenses to be
purchased under the option is based upon a formula that considers the market
price of the Company's common stock on the date of exercise.
ART West Licenses
In February 1997, the Company completed its acquisition from Extended
Communications, Inc. ("Extended") of the remaining 50% interest in ART West, a
partnership jointly controlled by Extended and the Company, for $6 million in
cash, of which $3 million was paid in November 1996. The Company's initial 50%
interest was obtained in 1995 through its initial capital contribution of
$255,000 in cash and 26,773 shares of common stock. ART West held certain 38
GHz licenses that were transferred to the Company upon the completion of the
acquisition. An officer of the Company is the president and a shareholder of
Extended.
EMI Licenses
In November 1995, the Company acquired from EMI Communications Corp. ("EMI")
certain 38 GHz radio spectrum licenses and related assets (the "EMI Licenses")
in exchange for $3 million in cash and a $1.5 million non-negotiable
promissory note. Landover advanced $175,000 to the Company to fund a portion
of the initial payment to EMI, which was repaid in 1995. The total purchase
price, including expenses, was allocated to the acquired assets as follows:
<TABLE>
<S> <C>
FCC licenses................................................ $4,226,821
Property and equipment...................................... 297,150
----------
$4,523,971
==========
</TABLE>
29
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment at December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
Wireless transmission equipment placed in
service........................................ $ 5,303,386 $ 297,150
Wireless transmission equipment not yet placed
in operation................................... 10,727,923 3,199,755
Computer software............................... 2,334,683
Computer hardware............................... 1,063,928
Office furniture and equipment.................. 458,698 93,414
Other equipment and vehicles.................... 333,152
----------- ----------
20,221,770 3,590,319
Accumulated depreciation........................ (917,921) (8,758)
----------- ----------
$19,303,849 $3,581,561
=========== ==========
</TABLE>
Depreciation expense for the years ended December 31, 1996, 1995 and 1994 was
$909,163, $7,031, and $1,727, respectively.
5. INCOME TAXES:
Deferred tax assets and liabilities at December 31 were as follows:
<TABLE>
<CAPTION>
1996 1995
----------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................. $ 9,100,000 $ 870,000
Accrued compensation and benefits................ 470,000
Valuation allowance.............................. (9,258,000) (870,000)
----------- ---------
$ 312,000 $
=========== =========
Deferred tax liabilities:
Depreciation and amortization.................... $ (312,000)
===========
</TABLE>
Differences between the tax bases of assets and liabilities and their
financial statement amounts are reflected as deferred income taxes based on
enacted tax rates. The net deferred tax assets have been reduced by a valuation
allowance based on management's determination that the recognition criteria for
realization has not been met.
At December 31, 1996, the Company has accumulated net operating loss
carryforwards for Federal income tax purposes of approximately $26.7 million
which expire between 2008 and 2011. The Company's ability to use its net
operating losses to offset future income is subject to restrictions in the
Internal Revenue Code which could limit the Company's future use of its net
operating losses if certain stock ownership changes occur.
30
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT, BRIDGE, AND OTHER FINANCINGS:
Long-Term Debt
Long-term debt as of December 31 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
----------- ----------
<S> <C> <C>
EMI note, payable in quarterly installments of
principal of $187,500 plus interest at prime plus 2%
(10.25% at December 31, 1996), through January 1,
1999................................................. $ 1,312,500 $1,500,000
Equipment financing note, net of original issue
discount of $333,476, payable in monthly installments
of $92,694 including interest at 17.26%, and final
payment of $642,305 due April 29, 1998............... 1,446,699
GTE software financing, payable in monthly
installments of $67,000 including interest at 8.5%,
through December 1, 1999............................. 2,079,372
Other................................................. 138,675
Advent notes, payable on demand on or after May 13,
1997................................................. 4,950,000
----------- ----------
4,977,246 6,450,000
Less current portion................................ (1,893,161)
----------- ----------
$ 3,084,085 $6,450,000
=========== ==========
</TABLE>
The aggregate amount of the principal payments for long-term debt as of
December 31, 1996 follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31:
-----------------------
<S> <C>
1997.......................................... $2,159,941
1998.......................................... 2,346,811
1999.......................................... 803,970
----------
$5,310,722
==========
</TABLE>
The equipment financing note is collateralized by a portion of the Company's
wireless transmission equipment and a $1 million certificate of deposit. The
certificate of deposit is included in restricted cash. In connection with the
issuance of the equipment financing note, certain shareholders of the Company
guaranteed payment of the note in exchange for warrants to purchase 118,181
shares of the Company's common stock for $17.19 per share and $225,000 in
fees. In November 1996, the shareholders were released from the guarantee.
Bridge Financings
During 1996 the Company issued in the aggregate $12 million of bridge
financings in three private placements, consisting of $5 million of 10% notes
issued in March 1996, $3 million of 14.75% notes issued in July 1996, and $4
million of 14.75% notes issued in September and October 1996. Of these notes,
approximately $8.1 million principal amount was issued to certain shareholders
of the Company and CommcoCCC. Warrants to purchase in the aggregate 603,637
shares of the Company's common stock (the "Bridge Financing Warrants") at a
price per share ranging from $15.00 to $17.19, were issued in connection with
these bridge financings.
In November 1996, the Company repaid these bridge financings with the
proceeds from the initial public offering of the Company's common stock. The
early repayment of these bridge financings resulted in an extraordinary loss
arising from the write-off of the unamortized note discounts and the related
deferred financing costs.
31
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In November 1995, the Company issued $4.95 million in 10% promissory notes
and one share of the Company's Series A redeemable preferred stock to certain
limited partnerships controlled by Advent International Corp. in exchange for
$5 million in cash. In February 1996, the notes, related accrued interest and
the redeemable preferred stock were exchanged for 232,826 shares of Series E
preferred stock.
Public Debt Offering
In February 1997, the Company received $135 million of gross proceeds from a
public offering of $135 million of 14% Senior Notes (the "Senior Notes") and
warrants to purchase an aggregate of 2,731,725 shares of the Company's common
stock for $0.01 per share. The Company used approximately $51.8 million of the
net proceeds of this offering to purchase a portfolio of U.S. Treasury
securities, pledged as collateral for the payment of interest on the Senior
Notes through February 15, 2000.
The Senior Notes are unsecured senior obligations of the Company, due
February 2007, with interest payable on February 15 and August 15 of each year
and are redeemable at the Company's option beginning in February 2002 at
redemption prices declining to par. The Senior Notes were issued under an
indenture which contains covenants limiting the Company's ability to incur
additional debt, pay dividends or make other distributions, incur liens, merge
or sell assets, or enter into certain transactions with related parties, among
other restrictions.
CIBC Financing Commitment
In November 1996, in connection with Company's initial public offering of
common stock, the Company entered into agreements with certain lenders which
provided for the issuance of up to $50 million of Senior Secured Notes (the
"CIBC Financing Commitment"), at any time at the Company's option through
February 1997. In connection with the CIBC Financing Commitment, the Company
paid placement and commitment fees and other expenses of approximately $1.9
million and issued warrants to purchase 300,258 shares of common stock (the
"CIBC Warrants") at an exercise price of $0.01 per share. No amounts were
borrowed under the CIBC Financing Commitment. The CIBC Financing Commitment
was terminated in connection with the issuance of the Senior Notes.
7. COMMITMENTS AND CONTINGENCIES:
Equipment Purchase Agreement
In August 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 1995 and December 31, 1998, subject to termination upon
90 days advance notice by either party. At December 31, 1996, this obligation
amounted to approximately $9.5 million.
The Company currently purchases the majority of its wireless transmission
equipment from this and one other vendor. There are a limited number of other
manufacturers who have, or are developing, equipment that would meet the
Company's requirements; however, 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.
32
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Operating Leases
The Company has entered into operating leases for office space and antenna
sites which expire between 1997 and 2002. Lease expense amounted to
approximately $618,000, $16,000 and $6,400 for 1996, 1995 and 1994,
respectively. Future annual minimum lease payments as of December 31, 1996 are
as follows:
<TABLE>
<S> <C>
1997......................................................... $ 645,493
1998......................................................... 535,021
1999......................................................... 526,200
2000......................................................... 500,439
2001......................................................... 500,547
Thereafter................................................... 382,033
----------
$3,089,733
==========
</TABLE>
Research and Development Arrangements
During 1996, the Company funded approximately $400,000 of research and
development with an entity, of which an executive of the Company is a
shareholder and former director, related to development of wireless
transmission equipment.
Employment Agreements
The Company has entered into various employment agreements with certain
executives that provide for annual base salaries and cash bonuses based on
achievement of specific performance goals.
DCT Agreement
In June 1996, the Company entered into an agreement with DCT Communications,
Inc. ("DCT") to acquire 16 38 GHz licenses from DCT for $3.6 million in cash.
DCT has alleged that the Company has failed to satisfy a provision of the
agreement, causing it to terminate and DCT to be able to retain a $100,000
deposit. Although the Company believes that it has satisfied such provision,
there can be no assurance as to the outcome of such dispute. The Company does
not currently expect to purchase the licenses pursuant to the agreement.
Contingencies
The Company is party to certain claims and makes routine filings with the
FCC and state regulatory authorities. Management believes that the resolution
of any such claims or matters arising from such filings, if any, will not have
a material adverse impact on the consolidated financial position, results of
operations or cash flows of the Company.
33
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. CAPITAL STOCK:
Preferred Stock
The Company is authorized to issue 10 million shares of $0.001 par value
serial preferred stock. Each series of the preferred stock issued is a
separate class and, as a class, has a liquidation preference equal to the
aggregate purchase price paid for such class. As of December 31, 1996, there
were no shares of preferred stock outstanding. The historical share
information regarding the Company's preferred stock activity follows:
<TABLE>
<CAPTION>
SERIAL PREFERRED STOCK
-------------------------------------------------------------------
SERIES A SERIES B SERIES C SERIES D SERIES E SERIES F TOTAL
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31,
1995:
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.......... 2,852 4,189 7,041
-------- -------- ------ ------- -------- ------- --------
334,943 86,507 5,402 61,640 488,492
Year ended December 31,
1996:
Issuance of Series E
preferred stock........ 232,826 232,826
Shares issued to reflect
anti-dilution.......... 120,607 28,172 1,961 150,740
Issuance of Series F
preferred stock to
Ameritech.............. 48,893 48,893
-------- -------- ------ ------- -------- ------- --------
455,550 114,679 7,363 61,640 232,826 48,893 920,951
Serial preferred stock
converted to common
stock in connection
with initial public
offering of common
stock.................. (455,550) (114,679) (7,363) (61,640) (232,826) (48,893) (920,951)
</TABLE>
Common Stock
The Company is authorized to issue 100 million shares of common stock,
$0.001 par value. As of December 31, 1996, and February 25, 1997, there were
13,559,420 and 19,559,420 shares of the Company's common stock outstanding,
respectively.
The Company was initially formed in August 1993 by two of its executives and
during November 1993, the Company issued additional shares of common stock in
a private placement to a limited partnership. During March 1994, an affiliate
of the limited partnership contributed $100,000 to the Company in exchange for
214,183 shares of common stock and a $70,000 promissory note. In connection
with this financing, the Company issued an additional 856,732 shares of common
stock to all of the then existing shareholders. In March 1995, the limited
partnership agreed to assign the $70,000 promissory note, plus accrued
interest, to the executives in exchange for two new promissory notes executed
by the executives. Concurrent with the exchange of the promissory notes, the
executives contributed the $70,000 promissory notes plus accrued interest to
the Company, for which contribution there were no additional shares issued.
In March and April 1995, the Company entered into certain agreements with
Landover pursuant to which Landover agreed to invest or cause to be invested
$7 million in the Company (the "Landover Funding Commitment") in exchange for
approximately 3.1 million shares of the Company's common stock issued to
Landover and certain of its affiliates. The agreements also contained
provisions under which additional shares of the Company's preferred and common
stock would be issued to shareholders of the Company, excluding Landover, for
no consideration, such that the additional securities issued to satisfy the
Landover Funding Commitment would dilute only Landover's ownership interest in
the Company. The preferred stock transactions in 1995 and 1996 satisfied the
Landover Funding Commitment and, as a result, the anti-dilution provisions
terminated. As the actual cash proceeds received from these preferred stock
transactions were in excess of Landover's commitment, the Company redeemed
293,791 shares of common stock from Landover for $2 million.
34
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As part of the Landover Funding Commitment, approximately 1.9 million shares
of the Company's common stock previously held by certain individual
shareholders were placed in escrow to be released upon attainment of certain
objectives, including the acquisition of a specified number of 38 GHz licenses
("Escrow Shares"). In November 1995, 681,102 Escrow Shares, with an estimated
fair value of approximately $800,000, were released as a result of the
acquisition of the EMI Licenses. In February 1996, the remaining Escrow
Shares, with an estimated fair value of $6.8 million, were released as part of
a reorganization of the Company. The estimated fair values of the Escrow
Shares on the dates such shares were released were recorded as compensation
expense and as an increase in additional paid-in capital.
In February 1996, the Company sold 48,893 shares of 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 common stock at an exercise price of $0.01 per share. The Company recorded
the estimated value of the strategic distribution agreement of $1.1 million as
marketing expense and additional paid-in capital in 1996. The Company incurred
fees of $150,000 in connection with this transaction. In December 1996,
Ameritech exercised its warrants and was issued 318,374 shares of common stock
by the Company.
The financial statements and footnotes reflect the effects of various common
stock splits and reverse stock splits, including a 1 for 2.75 reverse split of
the Company's common stock effected in October 1996. All references to the
number of shares, per share amounts and par value amounts have been restated
for all stock splits and reverse stock splits. Such stock splits and reverse
stock splits have no impact on the total amount of stockholders' equity
(deficit).
Initial Public Common Stock Offering
During November 1996, the Company completed an initial public offering of
2,300,500 shares of common stock, raising approximately $34.5 million of gross
proceeds. The Company incurred approximately $6.1 million of expenses in
connection with this offering.
Warrants to Purchase Common Stock
The Company has issued warrants to purchase common stock in connection with
its financing activities during the year ended December 31, 1996. The
following summarizes the warrants outstanding at December 31, 1996:
<TABLE>
<CAPTION>
EXERCISE
NUMBER OF PRICE PER PERIOD OF
SHARES SHARE EXERCISE
--------- --------- ---------
<S> <C> <C> <C>
Equipment financing warrants................. 118,181 17.19 2001
Bridge Financing Warrants.................... 400,000 17.19 2001
Bridge Financing Warrants.................... 203,637 15.00 2001
CIBC Warrants................................ 300,258 0.01 2001
</TABLE>
The warrants contain certain anti-dilution provisions.
In February 1997, in connection with the issuance of the Senior Notes, the
Company issued warrants to purchase 2,731,725 shares of the Company's common
stock at an exercise price of $0.01 per share. The warrants will be
exercisable at any time after August 15, 1997 through February 2007.
Stock Option Plans
During 1996, the Company adopted the Restated Equity Incentive Plan (the
"Plan") that permits the Company to grant incentive and non-qualified options
and other equity incentives to employees and independent consultants of the
Company. The Company has reserved 1,400,000 shares of common stock for
issuance under
35
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the Plan. 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.
Options granted under the Plan are generally exercisable for a term that does
not exceed ten years from the date of grant.
In May 1996 the Company adopted the 1996 Non-Employee Directors Automatic
Stock Option Plan (the "Directors Plan"), which provides for the automatic
grant of stock options to non-employee directors to purchase up to an aggregate
of 75,000 shares.
The Company applies the accounting provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations for its stock-based plans. Accordingly, compensation costs for
employee stock options is measured as the excess, if any, of the fair value of
the Company's stock at the measurement date over the amount an employee must
pay to acquire the stock. Deferred compensation costs charged to operations was
$850,663 and $287,603 in 1996 and 1995, respectively, and as of December 31,
1996, unearned compensation costs amounted to $449,312.
A summary of the stock option transactions follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------- ----------------
<S> <C> <C>
Options granted in 1995............................ 382,630 $ 2.276
-------
Options outstanding, December 31, 1995............. 382,630 2.276
Options granted.................................. 461,112 16.074
Options canceled................................. (16,363) 12.247
-------
Options outstanding, December 31, 1996............. 827,379 $ 9.950
=======
</TABLE>
The Company has adopted the disclosure provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123"). Had the Company elected to recognize compensation costs as provided
for by SFAS No. 123, the Company's net loss and per share amounts on a pro
forma basis for the years ended December 31 would have been as follows:
<TABLE>
<CAPTION>
1996 1995
PRO FORMA PRO FORMA
------------ -----------
<S> <C> <C>
Loss before extraordinary item................. $(29,410,915) $(3,049,032)
Extraordinary item............................. (1,339,996)
------------ -----------
Net loss....................................... $(30,750,911) $(3,049,032)
============ ===========
Loss per share before extraordinary item....... $ (3.81) $ (0.51)
Extraordinary loss per share................... (0.17)
------------ -----------
Net loss per share............................. $ (3.98) $ (0.51)
============ ===========
</TABLE>
The weighted average fair values per share at the date of grant for options
granted during the years ended December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
----- -----
<S> <C> <C>
Options granted with exercise prices equal to the fair value
of the stock at the date of grant........................... $6.59 $0.82
Options granted with exercise prices greater than the fair
value of the stock at the date of grant..................... $7.04
</TABLE>
36
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The assumptions applied in these valuations for periods prior to the Company
becoming a public entity were (i) use of the minimum value method, (ii) risk
free interest rates ranging from 6.1% to 6.5%, (iii) assumed expected lives of
3 to 5 years, and (iv) no expected dividends. The assumptions applied for
periods subsequent to the Company becoming a public entity were (i) use of the
Black-Scholes option pricing model, (ii) risk free interest rates ranging from
5.8% to 6.0%, (iii) expected volatility rate of approximately 60%, (iv) assumed
expected lives of 3 to 5 years, and (v) no expected dividends.
The following table summarizes information about fixed-price options
outstanding at December 31, 1996 as follows:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.624 to 4.543........ 382,630 3 $ 2.276 194,876 $ 2.136
$10.835 to 17.188....... 444,749 4.5 $16.552 58,887 $16.163
</TABLE>
9. RELATED PARTY TRANSACTIONS:
In 1995 and 1996, the Company entered into various management consulting
agreements with Landover. Fees paid to Landover under the agreements totaled
approximately $830,000 and $70,000 in 1996 and 1995, respectively. The
agreements with Landover terminated in November 1996. Additionally, the Company
paid Landover approximately $390,000 for expenses in connection with the
Landover Funding Commitment.
The Company has paid legal fees to a law firm in which a principal of the law
firm was also an officer of the Company. Total fees paid to such law firm were
approximately $520,000, $34,800 and $74,600 in 1996, 1995 and 1994,
respectively.
10. FAIR VALUES OF FINANCIAL INSTRUMENTS:
The carrying amounts and the estimated fair values of the Company's financial
instruments at December 31, 1996 were as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
---------- ----------
<S> <C> <C>
Cash and cash equivalents........................... $1,974,407 $1,974,407
Restricted cash..................................... 1,032,060 1,032,060
EMI Note............................................ 1,312,500 1,312,500
Other long-term debt................................ 3,664,746 3,950,568
</TABLE>
Cash, cash equivalents and restricted cash: The carrying amount reported in
the balance sheet approximates fair value.
EMI Note and other long-term debt: The fair values are based upon interest
rates currently available to the Company for issuance of similar debt with
similar terms and maturities.
37
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
11. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental disclosure of cash flow information are summarized below for the
years ended December 31:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Non-cash financing and investing activities:
Additions to property and equipment.................... $9,548,102 $2,666,630
Exchange of Advent Notes for Series E preferred stock,
net of deferred financing costs....................... 4,673,186
Value ascribed to issuance of warrants................. 2,115,388
Accrued deferred financing costs....................... 300,405 370,617
Issuance of promissory note payable to EMI............. 1,500,000
Conversion of note payable and interest to common
stock................................................. 75,250
Issuance of stock and contribution of licenses to ART
West.................................................. 30,000
Interest paid............................................ $ 926,821
</TABLE>
38
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information relating to the executive officers of the Company is included in
Item 4A of Part I of this Form 10-K.
Information relating to the directors of the Company is incorporated herein
by reference to the information included under "Election of Directors" and
"Certain Transactions--Laurence S. Zimmerman" in the Company's definitive
Proxy Statement to be filed with the Commission in connection with the
Company's 1997 Annual Meeting of Stockholders (the "Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under "Compensation" in the Proxy Statement is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under "Common Stock Ownership" in the Proxy
Statement is incorporated herein by reference.
For the sole purpose of calculating the aggregate market value of voting
stock held by non-affiliates of the Company as set forth on the cover page, it
was assumed that only directors, executive officers and greater than five
percent stockholders as of the calculation date (other than Landover Holdings
Corporation) constituted affiliates; no acknowledgment by such persons of
affiliate status is implied.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth under "Certain Transactions" in the Proxy
Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
(1) Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1995.
Consolidated Statements of Operations for the years ended December
31, 1996, 1995 and 1994.
Consolidated Statements of Stockholders Equity (Deficit) for the
years ended December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the years ended December
31, 1996, 1995 and 1994.
(2) Financial Statement Schedules:
None
(3) Exhibits
The following Exhibits are, as indicated on the Exhibit Index, either
filed herewith or have heretofore been filed with the Securities and
Exchange Commission and are referred to and incorporated herein by
reference to such filings.
39
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE
----------- -----
<C> <S>
3.1 Amended and Restated Certificate of Incorporation.
3.2 Restated and Amended Bylaws of Registrant.
4.1 Specimen of Common Stock Certificate.
4.2 Indenture relating to the Company's 14% Senior Notes (the "Notes")
due 2007.
4.3 Specimen of Note (included in Exhibit 4.2)
4.4 Collateral Pledge and Security Agreement relating to the Notes.
4.5 Form of Warrant Agreement in connection with offering of Notes.
4.6 Specimen of Warrant Certificate in connection with offering of
Notes (included in Exhibit 4.5).
9.1 Voting Trust Agreement dated November 5, 1996.
9.2 Form of Trustee Indemnification Agreement.
9.3 Cooperation Agreement dated November 5, 1996.
9.4 Confidentiality Agreement dated November 5, 1996.
10.1 Employment Agreement between the Company and Vernon L.
Fotheringham, dated December 16, 1995.
10.2 Employment Agreement between the Company and Steven D. Comrie,
dated February 2, 1996.
10.3 Consulting Agreement between the Company and W. Theodore Pierson,
Jr., dated May 8, 1995 and effective January 1, 1995.
10.4 Employment Agreement between the Company and Charles Menatti,
dated March 8, 1996.
10.5 Employment Agreement between the Company and James D. Miller,
dated February 1, 1996.
10.6 Employment Agreement between the Company and Thomas A. Grina,
dated April 26, 1996.
10.7 Form of Director Indemnification Agreement.
10.8 Company's Restated Equity Incentive Plan, as amended.
10.9 Form of Stock Option Agreement.
10.10 Company's 1996 Non-Employee Directors Automatic Stock Option Plan.
10.11 Form of Non-Employee Directors Stock Option Agreement.
10.12 Comrie Non-Qualified Stock Option Agreement between the Company
and Mr. Comrie.
10.13 Comrie Incentive Stock Option Agreement.
10.14 Grina Option Agreement.
10.15 Purchase Agreement with DCT Communications, Inc. dated July 1,
1996.
10.16 $1,500,000 Non-negotiable and Nontransferable Promissory Note to
EMI Communications Corp.
10.17 38 GHz Radio Links Purchase Agreement dated August 11, 1995 with
P-Com, Inc.
10.18 Second Restated and Amended Registration Rights Agreement dated
July 3, 1996 with ART Licensing and the stockholders of each of
ART Licensing and the Company.
10.19 Amendment No. 1 to Registration Rights Agreement dated as of
October 16, 1996.
10.20 Warrant issued on February 2, 1996 to Ameritech.
10.21 Strategic Distribution Agreement dated April 29, 1996 with
Ameritech.
10.22 $2,445,000 Promissory Note in favor of CRA, Inc. ("CRA").
10.23 Security Agreement with CRA.
10.24 Form of Indemnity Warrant.
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE
----------- -----
<C> <S>
10.25 Form of Subscription Agreement dated March 8, 1996, including
Forms of Bridge Note and Bridge Warrant.
10.26 Asset Acquisition Agreement and Plan of Reorganization dated July
3, 1996 with CommcoCCC, Inc.
10.27 Option Agreement dated July 3, 1996 with Commco, L.L.C.
10.28 Form of Noncompetition Agreement with Columbia and affiliates of
Columbia.
10.29 Right of First Offer Agreement dated July 3, 1996 with Columbia
and affiliates of Columbia.
10.30 Agreement to Lease between Commco, L.L.C. and Advanced Radio
Technologies Corporation.
10.31 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 Consulting Agreement dated March 1, 1996 with Trond Johannesen.
10.34 Shareholders Agreement between the Company and Trond Johannesen.
10.35 Form of September Bridge Warrant.
10.36 Memorandum of Terms with Advantage Telecom, Inc.
10.37 Form of CIBC Warrants.
10.38 Services Agreement dated as of October 29, 1996 with ICG Telecom
Group, Inc. and Pacific & Eastern Digital Transmission Services,
Inc.
21 Subsidiaries of the Company.
23 Consent of Independent Accountants.
27 Financial Data Schedule
99 Risk Factors.
</TABLE>
(4) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth
quarter of 1996.
41
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED ON THIS 31ST DAY
OF MARCH 1997.
Advanced Radio Telecom Corp
/s/ Thomas A. Grina
By: _________________________________
EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT IN THE CAPACITIES AND ON THE DATES INDICATED:
SIGNATURE TITLE DATE
/s/ Vernon L. Fotheringham Chairman, Chief March 31, 1997
- ------------------------------------- Executive Officer
VERNON L. FOTHERINGHAM and Director
/s/ Steve D. Comrie Director March 31, 1997
- -------------------------------------
STEVE D. COMRIE
/s/ James Cook Director March 31, 1997
- -------------------------------------
JAMES COOK
/s/ Mark C. Demetree Director March 31, 1997
- -------------------------------------
MARK C. DEMETREE
/s/ Andrew I. Fillat Director March 31, 1997
- -------------------------------------
ANDREW I. FILLAT
/s/ James B. Murray, Jr. Director March 31, 1997
- -------------------------------------
JAMES B. MURRAY, JR.
/s/ Alan Z. Senter Director March 31, 1997
- -------------------------------------
ALAN Z. SENTER
/s/ Thomas A. Grina Executive Vice March 31, 1997
- ------------------------------------- President and Chief
THOMAS A. GRINA Financial Officer
42
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE PAGE
----------- ----- ----
<C> <S> <C>
3.1 Amended and Restated Certificate of Incorporation.
3.2 Restated and Amended Bylaws of Registrant.
4.1 Specimen of Common Stock Certificate.(3)
4.2 Indenture relating to the Company's 14% Senior Notes (the
"Notes") due 2007.(10)
4.3 Specimen of Note (included in Exhibit 4.2).(10)
4.4 Collateral Pledge and Security Agreement relating to the
Notes.(10)
4.5 Form of Warrant Agreement in connection with offering of
Notes.(10)
4.6 Specimen of Warrant Certificate in connection with offering
of Notes (included in Exhibit 4.5).(10)
9.1 Voting Trust Agreement dated November 5, 1996.(9)
9.2 Form of Trustee Indemnification Agreement.(3)
9.3 Cooperation Agreement dated November 5, 1996.(9)
9.4 Confidentiality Agreement dated November 5, 1996.(9)
10.1 Employment Agreement between the Company and Vernon L.
Fotheringham, dated December 16, 1995.(1)
10.2 Employment Agreement between the Company and Steven D.
Comrie, dated
February 2, 1996.(1)
10.3 Consulting Agreement between the Company and W. Theodore
Pierson, Jr., dated
May 8, 1995 and effective January 1, 1995.(1)
10.4 Employment Agreement between the Company and Charles
Menatti, dated March 8, 1996.(1)
10.5 Employment Agreement between the Company and James D.
Miller, dated
February 1, 1996.(1)
10.6 Employment Agreement between the Company and Thomas A.
Grina, dated
April 26, 1996.(8)
10.7 Form of Director Indemnification Agreement.(1)
10.8 Company's Restated Equity Incentive Plan, as amended.(2)
10.9 Form of Stock Option Agreement.(3)
10.10 Company's 1996 Non-Employee Directors Automatic Stock
Option Plan.(1)
10.11 Form of Non-Employee Directors Stock Option Agreement.(3)
10.12 Comrie Non-Qualified Stock Option Agreement between the
Company and Mr. Comrie.(1)
10.13 Comrie Incentive Stock Option Agreement.(1)
10.14 Grina Option Agreement.(9)
10.15 Purchase Agreement with DCT Communications, Inc. dated July
1, 1996.(5)
10.16 $1,500,000 Nonnegotiable and Nontransferable Promissory
Note to EMI Communications Corp.(1)
10.17 38 GHz Radio Links Purchase Agreement dated August 11, 1995
with P-Com, Inc.(1)
10.18 Second Restated and Amended Registration Rights Agreement
dated July 3, 1996 with ART Licensing and the stockholders
of each of ART Licensing and the Company.(2)
10.19 Amendment No. 1 to Registration Rights Agreement dated as
of October 16, 1996.(9)
</TABLE>
43
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. TITLE PAGE
----------- ----- ----
<C> <S> <C>
10.20 Warrant issued on February 2, 1996 to Ameritech.(1)
10.21 Strategic Distribution Agreement dated April 29, 1996 with
Ameritech.(1)
10.22 $2,445,000 Promissory Note in favor of CRA, Inc.
("CRA").(1)
10.23 Security Agreement with CRA.(1)
10.24 Form of Indemnity Warrant.(1)
10.25 Form of Subscription Agreement dated March 8, 1996,
including Forms of Bridge Note and Bridge Warrant.(2)
10.26 Asset Acquisition Agreement and Plan of Reorganization
dated July 3, 1996 with CommcoCCC, Inc.(2)
10.27 Option Agreement dated July 3, 1996 with Commco, L.L.C.(2)
10.28 Form of Noncompetition Agreement with CommcoCCC.(2)
10.29 Right of First Offer Agreement dated July 3, 1996.(2)
10.30 Agreement to Lease between Commco, L.L.C. and Advanced
Radio Technologies Corporation.(4)
10.31 Amendment No. 1 to Asset Acquisition Agreement and Plan of
Reorganization.(5)
10.32 Letter of Intent dated April 29, 1996 with Helioss
Communications Inc.(2)
10.33 Consulting Agreement dated March 1, 1996 with Trond
Johannesen.(3)
10.34 Shareholders Agreement between the Company and Trond
Johannesen.(5)
10.35 Form of September Bridge Warrant.(9)
10.36 Memorandum of Terms with Advantage Telecom, Inc.(5)
10.37 Form of CIBC Warrants.(7)
10.38 Services Agreement dated as of October 29, 1996 with ICG
Telecom Group, Inc. and Pacific & Eastern Digital
Transmission Services, Inc.(6)
21 Subsidiaries of the Company.(2)
23 Consent of Independent Accountants.
27 Financial Data Schedule.
99 Risk Factors.
</TABLE>
- --------
(1) Previously filed with the Company's Registration Statement on Form S-1,
effective November 5, 1996 (SEC Reg. No. 333-04388) and incorporated by
reference herein.
(2) Previously filed with Amendment 1 to the Company's Registration Statement
on Form S-1, effective November 5, 1996 (SEC Reg. No. 333-04388) and
incorporated by reference herein.
(3) Previously filed with Amendment 2 to the Company's Registration Statement
on Form S-1, effective November 5, 1996 (SEC Reg. No. 333-04388) and
incorporated by reference herein.
(4) Previously filed with Amendment 4 to the Company's Registration Statement
on Form S-1, effective November 5, 1996 (SEC Reg. No. 333-04388) and
incorporated by reference herein.
(5) Previously filed with Amendment 6 to the Company's Registration Statement
on Form S-1, effective November 5, 1996 (SEC Reg. No. 333-04388) and
incorporated by reference herein.
(6) Previously filed with Amendment 7 to the Company's Registration Statement
on Form S-1, effective November 5, 1996 (SEC Reg. No. 333-04388) and
incorporated by reference herein.
(7) Previously filed with Amendment 8 to the Company's Registration Statement
on Form S-1, effective November 5, 1996 (SEC Reg. No. 333-04388) and
incorporated by reference herein.
(8) Previously filed with the Company's Registration statement on Form S-1,
filed May 15, 1996 (SEC Reg. No. 333-03735) and incorporated by reference
herein.
(9) Previously filed with the Company's Registration Statement Form S-1,
effective February 3, 1997 (SEC Reg. No. 333-19295) and incorporated by
reference herein.
(10) Previously filed with Amendment 2 to the company's Registration Statement
on Form S-1, effective February 3, 1997 (SEC Reg. No. 333-19295) and
incorporated by reference herein.
44
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ADVANCED RADIO TELECOM CORP.
Advanced Radio Telecom Corp., a corporation organized and existing under
the laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation (the "Corporation") is Advanced Radio
Telecom Corp. (formerly Advanced Radio Technologies Corporation) and its
original Certificate of Incorporation was filed with the Secretary of State of
the State of Delaware on August 23, 1993.
2. This Amended and Restated Certificate of Incorporation of the
Corporation restates and integrates and further amends the Certificate of
Incorporation of the Corporation, as the same heretofore has been amended,
supplemented or restated (the "Certificate of Incorporation").
3. The text of the Certificate of Incorporation is hereby further amended
and restated to read in full as herein set forth:
FIRST: The name of the Corporation is Advanced Radio Telecom Corp.
-----
SECOND: The address of its registered office in the State of Delaware
------
is 1013 Centre Road, City of Wilmington, Delaware, 19805, County of New Castle.
The name of the registered agent at such address is The Prentice-Hall
Corporation System, Inc.
THIRD: The purpose of the Corporation is to engage in any lawful act
-----
or activity for which corporations may be organized under the General
Corporation Law of the State of Delaware.
FOURTH:
------
(a) The total number of shares of all classes of stock which the
Corporation shall have authority to issue is one hundred ten million
(110,000,000), which are divided into one hundred million (100,000,000) shares
of Common Stock of a par value of $0.001 per share
<PAGE>
("Common Stock") and ten million (10,000,000) shares of Preferred Stock of a
par value of $0.001 per share ("Preferred Stock").
(b) The Board of Directors of the Corporation is expressly authorized
at any time, and from time to time, to provide for the issuance of shares of
Preferred Stock in one or more series, with such designations, preferences and
relative, participating, optional or other special rights, and qualifications,
limitations, or restrictions thereof, as shall be stated and expressed in the
resolution or resolutions providing for the issue thereof adopted by the Board
of Directors.
FIFTH: The Corporation is to have perpetual existence.
-----
SIXTH: Whenever a compromise or arrangement is proposed between the
-----
Corporation and its creditors or any class of them and/or between the
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the Corporation under the
provisions of Section 291 of Title 8 of the Delaware Code or on the application
of trustees in dissolution or of any receiver or receivers appointed for the
Corporation under the provisions of Section 279 of Title 8 of the Delaware Code,
order a meeting of the creditors or class of creditors and/or of the
stockholders or class of stockholders of the Corporation, as the case may be, to
be summoned in such manner as the said court directs. If a majority in number
representing three fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of the Corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization of
the Corporation as consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the Corporation, as the case may be, and also on the
Corporation.
SEVENTH: For the management of the business and for the conduct of
-------
the affairs of the Corporation, and in further definition, limitation, and the
regulation of the powers of the Corporation and of its directors and of its
stockholders or any class thereof, as the case may be, it is further provided:
1. Number of Directors. The management of the business and the conduct
-------------------
of the affairs of the Corporation shall be vested in its Board of Directors.
The number of directors
-2-
<PAGE>
which shall constitute the whole Board of Directors shall be fixed by, or in the
manner provided in, the Bylaws. The phrase "whole Board" and the phrase "total
number of directors" shall be deemed to have the same meaning, to wit, the total
number of directors which the Corporation would have if there were no vacancies.
No election of directors need be by written ballot.
2. Terms of Directors. Except as otherwise provided in or fixed by or
------------------
pursuant to the provisions of Article FOURTH hereof relating to the rights of
the holders of any class or series of stock having a preference over the Common
Stock as to dividends or upon liquidation or to elect directors under specified
circumstances, the directors shall be classified, with respect to the time for
which they severally hold office, into three classes, as nearly equal in number
as possible, as shall be provided in the manner specified in the By-Laws of the
Corporation. One class shall be originally elected for a term expiring at the
annual meeting of stockholders to be held in 1997, another class shall be
originally elected for a term expiring at the annual meeting of stockholders to
be held in 1998, and another class shall be originally elected for a term
expiring at the annual meeting of stockholders to be held in 1999, with each
member of each class to hold office until a successor is elected and qualified.
At each annual meeting of stockholders of the Corporation and except as
otherwise provided in or fixed by or pursuant to the provisions of Article
FOURTH hereof relating to the rights of the holders of any class or series of
stock having a preference over the Common Stock as to dividends or upon
liquidation to elect directors under specified circumstances, the successors of
the class of directors whose term expires at that meeting shall be elected to
hold office for a term of three years.
3. Newly Created Directorships and Vacancies. Except as otherwise
-----------------------------------------
required by law and except as otherwise provided in or fixed by or pursuant to
the provisions of Article FOURTH hereof relating to the rights of the holders of
any class or series of stock having a preference over the Common Stock as to
dividends or upon liquidation to elect directors under specified circumstances:
(i) newly created directorships resulting from any increase in the number of
directors and any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other cause shall be filled by the
affirmative vote of a majority of the remaining directors then in office, even
though less than a quorum of the Board of Directors; (ii) any director elected
in accordance with the preceding clause (i) shall hold office for the remainder
of the full term of the class of directors in which the new directorship was
created or the vacancy occurred and until such director's successor shall have
been elected and qualified; and (iii) no decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
-3-
<PAGE>
4. Removal. Except as otherwise provided in or fixed by or pursuant to
-------
the provisions of Article FOURTH hereof relating to the rights of the holders of
any class or series of stock having a preference over the Common Stock as to
dividends or upon liquidation to elect directors under specified circumstances,
any director may be removed from office only for cause by the affirmative vote
of the holders of at least a majority of the combined voting power of the then
outstanding shares of the Corporation's stock entitled to vote generally, voting
together as a single class. Whenever in this Article SEVENTH hereof, the
phrase, "the then outstanding shares of the Corporation's stock entitled to vote
generally" is used, such phrase shall mean each then outstanding share of any
class or series of the Corporation's stock that is entitled to vote generally in
the election of the Corporation's directors.
5. Amendment or Repeal of this Article. Notwithstanding any other
-----------------------------------
provisions of this Article SEVENTH or any other Article hereof or of the By-Laws
of the Corporation (and notwithstanding the fact that a lesser percentage may be
specified from time to time by law, this Article SEVENTH, any other Article
hereof, or the By-Laws of the Corporation), the provisions of this Article
SEVENTH may not be altered, amended or repealed in any respect, nor may any
provision inconsistent therewith be adopted, unless such alteration, amendment,
repeal or adoption is approved by the affirmative vote of at least 75% of the
combined voting power of the then outstanding shares of the Corporation's
capital stock entitled to vote generally, voting together as a single class.
6. Amendment of Bylaws. After the original or other Bylaws of the
-------------------
Corporation have been adopted, amended, or repealed, as the case may be, in
accordance with the provisions of Section 109 of the General Corporation Law of
the State of Delaware, and, after the corporation has received any payment for
any of its stock, the power to adopt, amend, or repeal the Bylaws of the
Corporation may be exercised by the Board of Directors of the Corporation,
unless otherwise provided in the Bylaws.
7. Voting Power. Whenever the corporation shall be authorized to issue
------------
only one class of stock, each outstanding share shall entitle the holder thereof
to notice of, and the right to vote at, any meeting of stockholders. Whenever
the Corporation shall be authorized to issue more than one class of stock, no
outstanding share of any class of stock which is denied voting power under the
provisions of the Certificate of Incorporation shall entitle the holder thereof
to the right to vote at any meeting of stockholders except as the provisions of
paragraph (2) of subsection (b) of Section 242 of the General Corporation Law of
the State of Delaware shall otherwise require; provided, that no share of any
such class which is otherwise denied voting power shall entitle the
-4-
<PAGE>
holder thereof to vote upon the increase or decrease in the number of authorized
shares of said class.
EIGHTH: The personal liability of the directors of the Corporation
------
is hereby eliminated to the fullest extent permitted by the provisions of
paragraph (7) of subsection (b) of Section 102 of the General Corporation Law of
the State of Delaware, as the same may be amended and supplemented. No
amendment or repeal of this Article EIGHTH shall apply to or have any effect on
the liability or alleged liability of any director of this Corporation for or
with respect to any acts or omissions of such director occurring prior to such
amendment or repeal.
NINTH: The Corporation shall, to the fullest extend permitted by the
-----
provisions of Section 145 of the General Corporation Law of the State of
Delaware, as the same may be amended and supplemented, indemnify, and upon
request advance expenses to, any and all persons who is or was a party or is
threatened to be made a party to any threatened, pending or completed action,
suit, proceeding or claim, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was or has agreed to
be a director or officer of this Corporation or while a director or officer is
or was serving at the request of this Corporation as a director, officer,
partner, trustee, employee or agent of any corporation, partnership, joint
venture, trust or other enterprise, including service with respect to employee
benefit plans, from and against any and all of the expenses, liabilities, or
other matters referred to in or covered by said section (including without
limitation attorneys fees and expenses); provided, however, that the foregoing
-------- -------
shall not require this Corporation to indemnify or advance expenses to any
person in connection with any action, suit, proceeding, claim or counterclaim
initiated by or on behalf of such person other than solely to enforce rights
under this ARTICLE NINTH. The indemnification provided for herein shall not be
deemed exclusive of any other rights to which those indemnified may be entitled
under any Bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office, and shall continue as to a person
who has ceased to be a director, officer, employee, or agent and shall inure to
the benefit of the heirs, executors, and administrators of such a person. Any
person seeking indemnification under this Article NINTH shall be deemed to have
met the standard of conduct required for such indemnification unless the
contrary shall be established by a court of competent jurisdiction. Any repeal
or modification of the foregoing provisions of this Article NINTH shall not
adversely affect any right or protection of a director or officer of the
Corporation with respect to any acts or omissions of such director or officer
occurring prior to such repeal or modification.
-5-
<PAGE>
TENTH: From time to time any of the provisions of this Certificate of
-----
Incorporation may be amended, altered, or repealed, and the provisions
authorized by the laws of the State of Delaware at the time in force may be
added or inserted in the manner and at the time prescribed by said laws, and all
rights at any time conferred upon the stockholders of the Corporation by this
Certificate of Incorporation are granted subject to the provisions of this
Article TENTH.
ELEVENTH: The Corporation hereby elects to be governed by Section 203
--------
of the Delaware General Corporation Law.
TWELFTH: If at any time the corporation shall have a class of stock
-------
registered pursuant to the provisions of the Securities Exchange Act of l934,
for so long as such class is so registered, any action by the stockholders of
such class must be taken at an annual or special meeting of stockholders and may
not be taken by written consent.
THIRTEENTH: The Board of Directors of the Corporation, when
----------
evaluating any offer of another party (a) to make a tender or exchange offer for
any equity security of the Corporation or (b) to effect a business combination,
shall, in connection with the exercise of its judgment in determining what is in
the best interests of the Corporation as a whole, be authorized to give due
consideration to any such factors as the Board of Directors determines to be
relevant, including, without limitation:
a. the interests of the Corporation's stockholders;
b. whether the proposed transaction might violate federal or
state laws;
c. not only the consideration being offered in the proposed
transaction, in relation to the then current market price
for the outstanding capital stock of this Corporation, but
also to the market price for the capital stock of the
Corporation over a period of years, the estimated price that
might be achieved in a negotiated sale of the Corporation as
a whole or in part or through orderly liquidation, the
premiums over market price for the securities of other
corporations in similar transactions, current political,
economic and other factors bearing on securities prices and
the Corporation's financial condition and future prospects;
and
-6-
<PAGE>
d. the social legal and economic effects upon employees,
suppliers, customers and others having similar relationships
with the Corporation, and the communities in which the
Corporation conducts its business.
In connection with any such evaluation, the Board of Directors is authorized to
conduct such investigations and engage in such legal proceedings as the Board of
Directors may determine.
FOURTEENTH: Notwithstanding any other provisions of this Certificate
----------
of Incorporation or the Bylaws (and notwithstanding the fact that a lesser
percentage may be specified by law, this Certificate of Incorporation or the
Bylaws of this Corporation), the affirmative vote of 75% of the total number of
votes of the then outstanding shares of capital stock of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class, shall be required to amend or repeal, or to adopt any provision
inconsistent with the purpose or intent of ARTICLES SEVENTH, EIGHTH, NINTH,
TENTH, ELEVENTH, TWELFTH, THIRTEENTH and this ARTICLE FOURTEENTH. Notice of any
such proposed amendment, repeal or adoption shall be contained in the notice of
the meeting at which it is to be considered. Subject to the provisions set forth
herein, this Corporation reserves the right to amend, alter, repeal or rescind
any provision contained in this Certificate of Incorporation in the manner or
hereafter prescribed by law.
4. This Amended and Restated Certificate of Incorporation was duly
adopted in accordance with Sections 228, 242 and 245 of the General Corporation
Law of the State of Delaware and written notice of the adoption of this Amended
and Restated Certificate of Incorporation has been given pursuant to Section 228
of the General Corporation Law of the State of Delaware to each and every
stockholder entitled to such notice.
-7-
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Amended and
Restated Certificate of Incorporation to be signed and attested to by its duly
authorized officers on this 6th day of November, 1996.
--- --------
ADVANCED RADIO TELECOM CORP.
By:________________________________
Vernon L. Fotheringham
Chairman and C.E.O.
ATTEST:
By:_____________________________
James Kardon
Assistant Secretary
-8-
<PAGE>
EXHIBIT 3.2
RESTATED AND AMENDED
BYLAWS
OF
ADVANCED RADIO TELECOM CORP.
(f/k/a Advanced Radio Technologies Corporation)
(a Delaware corporation)
Effective November 5, 1996
--------------------------
ARTICLE I
---------
STOCKHOLDERS
------------
1. CERTIFICATES REPRESENTING STOCK. Certificates representing stock in
-------------------------------
the Corporation shall be signed by, or in the name of, the Corporation by the
Chairman or Vice-Chairman of the Board of Directors, if any, or by the President
or a Vice President and by the Treasurer or an Assistant Treasurer or the
Secretary or an Assistant Secretary of the Corporation. Any or all the
signatures on any such certificate may be a facsimile. In case any officer,
transfer agent, or registrar who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer, transfer
agent, or registrar before such certificate is issued, it may be issued by the
Corporation with the same effect as if he were such officer, transfer agent or
registrar at the date of issue.
Whenever the Corporation shall be authorized to issue more than one class
of stock or more than one series of any class of stock, and whenever the
Corporation shall issue any shares of its stock as partly paid stock, the
certificates representing shares of any such class or series or of any such
partly paid stock shall set forth thereon the statements prescribed by the
General Corporation Law. Any restrictions on the transfer or registration of
transfer of any shares of stock of any class or series shall be noted
conspicuously on the certificate representing such shares.
The Corporation may issue a new certificate of stock or uncertificated
shares in place of any certificate thereto for issued by it, alleged to have
been lost, stolen, or destroyed, and the Board of Directors may require the
owner of the lost, stolen, or destroyed certificate, or his legal
<PAGE>
representative, to give the Corporation a bond sufficient to indemnify the
Corporation against any claim that may be made against it on account of the
alleged loss, theft, or destruction of any such certificate or the issuance of
any such new certificate or uncertificated shares.
2. UNCERTIFICATED SHARES. Subject to any conditions imposed by the
---------------------
General Corporation Law, the Board of Directors of the Corporation may provide
by resolution or resolutions that some or all of any or all classes or series of
the stock of the Corporation shall be uncertificated shares. Within a
reasonable time after the issuance or transfer of any uncertificated shares, the
Corporation shall send to the registered owner thereof any written notice
prescribed by the General Corporation Law.
3. FRACTIONAL SHARE INTERESTS. The Corporation may, but shall not be
--------------------------
required to, issue fractions of a share. If the Corporation does not issue
fractions of a share, it shall (1) arrange for the disposition of fractional
interests by those entitled thereto, (2) pay in cash fair value of fractions of
a share as of the time when those entitled to receive such fractions are
determined, or (3) issue scrip or warrants in registered form (either
represented by a certificate or uncertificated) or bearer form (represented by a
certificate) which shall entitle the holder to receive a full share upon the
surrender of such scrip or warrants aggregating a full share. A certificate for
a fractional share or an uncertificated fractional share shall, but scrip or
warrants shall not unless otherwise provided therein, entitle the holder to
exercise voting rights, to receive dividends thereon, and to participate in any
of the assets of the Corporation in the event of liquidation. The Board of
Directors may cause scrip or warrants to be issued subject to the conditions
that they shall become void if not exchanged for certificates representing the
full shares or uncertificated full shares before a specified date, or subject to
the conditions that the shares for which scrip or warrants are exchangeable may
be sold by the Corporation and the proceeds thereof distributed to the holders
of scrip or warrants, or subject to any other conditions which the Board of
Directors may impose.
4. STOCK TRANSFERS.
---------------
(a) Upon compliance with provisions restricting the transfer or
registration of transfer of shares of stock, if any, transfers or registration
of transfers of shares of stock of the Corporation shall be made only on the
stock ledger of the Corporation by the registered holder thereof, or by his
attorney thereunto authorized by power of attorney duly executed and filed with
the Secretary of the Corporation or with a transfer agent or a registrar, if
any, and, in the case of shares represented by certificates, on surrender of the
certificate or certificates for such shares of stock properly endorsed and the
payment of all taxes due thereon.
-2-
<PAGE>
(b) No shares of stock of any class or series outstanding at any time
shall be owned of record or beneficially by a person whose ownership thereof
would constitute a violation of Section 310 of the Communications Act of 1934,
as amended, or any similar or successor federal statutes.
(c) The Corporation may, in its sole discretion, redeem any
outstanding shares of stock of any class or series which are owned in violation
of Section 4.1(b) above. Shares redeemed by the Corporation under this
subparagraph (c) may be redeemed for cash, property or rights, including
securities of the Corporation or another corporation, at their fair market value
at the time of redemption. The Board of Directors of the Corporation shall have
sole discretion to determine whether shares are owned in violation of Section
4.1(b) hereof, the fair market value of any shares to be redeemed, and the value
of any non-cash consideration to be provided for such shares in any such
redemption.
(d) The Corporation will furnish to any stockholder, upon request and
without charge, copies of the certificate of incorporation, by-laws, and any
applicable resolutions of the Board of Directors of the Corporation adopted for
the purpose of ensuring the control of the Corporation remains with loyal
citizens of the United States as required by the Communications Act of 1934, as
amended.
5. RECORD DATE FOR STOCKHOLDERS. In order that the Corporation may
----------------------------
determine the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournment thereof, the Board of Directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the Board of Directors, and which record
date shall not be more than sixty nor less than ten days before the date of such
meeting. If no record date is fixed by the Board of Directors, the record date
of determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
In order that the Corporation may determine the stockholders entitled to consent
to corporate action in writing without a meeting, the Board of Directors may fix
a record date, which record date shall not precede the date upon which the
resolution fixing the
-3-
<PAGE>
record date is adopted by the Board of Directors, and which date shall not be
more than ten days after the date upon which the resolution fixing the record
date is adopted by the Board of Directors. If no record date has been fixed by
the Board of Directors, the record date for determining the stockholders
entitled to consent to corporate action in writing without a meeting, when no
prior action by the Board of Directors is required by the General Corporation
Law, shall be the first date on which a signed written consent setting forth the
action taken or proposed to be taken is delivered to the Corporation by delivery
to its registered office in the State of Delaware, its principal place of
business, or an officer or agent of the Corporation having custody of the book
in which proceedings of meetings of stockholders are recorded. Delivery made to
the Corporation's registered office shall be by hand or by certified or
registered mail, return receipt requested. If no record date has been fixed by
the Board of Directors and prior action by the Board of Directors is required by
the General Corporation Law, the record date for determining stockholders
entitled to consent to corporate action in writing without a meeting shall be at
the close of business on the day on which the Board of Directors adopts the
resolution taking such prior action. In order that the Corporation may determine
the stockholders entitled to receive payment of any dividend or other
distribution or allotment of any rights or the stockholders entitled to exercise
any rights in respect of any change, conversion, or exchange of stock, or for
the purpose of any other lawful action, the Board of Directors may fix a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted, and which record date shall be not more than
sixty days prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto.
6. MEANING OF CERTAIN TERMS. As used herein in respect of the right to
------------------------
notice of a meeting of stockholders or a waiver thereof or to participate or
vote thereat or to consent or dissent in writing in lieu of a meeting, as the
case may be, the term "share" or "shares" or "share of stock" or "shares of
stock" or "stockholder" or "stockholders" refers to an outstanding share or
shares of stock and to a holder or holders of record of outstanding shares of
stock when the Corporation is authorized to issue only one class of shares of
stock, and said reference is also intended to include any outstanding share or
shares of stock and any holder or holders of record of outstanding shares of
stock of any class upon which or upon whom the certificate of incorporation
confers such rights where there are two or more classes or series of shares of
stock or upon which or upon whom the General Corporation Law confers such rights
notwithstanding that the certificate of incorporation may provide for more than
one class or series of shares of stock, one or more of which are limited or
denied such rights thereunder, provided, however, that no such right shall vest
in the event of an increase or a decrease in the authorized number of shares of
stock of any class or series which is otherwise denied voting rights under the
-4-
<PAGE>
provisions of the certificate of incorporation, except as any provision of law
may otherwise require.
7. STOCKHOLDER MEETINGS.
--------------------
- TIME. The annual meeting shall be held on the date and at the time
----
fixed, from time to time, by the directors. A special meeting shall be held on
the date and at the time fixed by the directors.
- PLACE. Annual meetings and special meetings shall be held at such place,
-----
within or without the State of Delaware, as the directors may, from time to
time, fix. Whenever the directors shall fail to fix such place, the meeting
shall be held at the registered office of the Corporation in the State of
Delaware.
- CALL. Annual meetings and special meetings may be called by a majority
----
of the directors or by any officer instructed by a majority of the directors to
call the meeting.
- NOTICE OR WAIVER OF NOTICE. Written notice of all meetings shall be
--------------------------
given, stating the place, date, and hour of the meeting and stating the place
within the city or other municipality or community at which the list of
stockholders of the Corporation may be examined. The notice of an annual meeting
shall state that the meeting is called for the election of directors and for the
transaction of other business which may properly come before the meeting, and
shall (if any other action which could be taken at a special meeting is to be
taken at such annual meeting) state the purpose or purposes. The notice of a
special meeting shall in all instances state the purpose or purposes for which
the meeting is called. The notice of any meeting shall also include, or be
accompanied by, any additional statements, information, or documents prescribed
by the General Corporation Law. Except as otherwise provided by the General
Corporation Law, a copy of the notice of any meeting shall be given, personally
or by mail, not less than ten days nor more than sixty days before the date of
the meeting, unless the lapse of the prescribed period of time shall have been
waived, and directed to each stockholder at his record address or at such other
address which he may have furnished by request in writing to the Secretary of
the Corporation. Notice by mail shall be deemed to be given when deposited,
with postage thereon prepaid, in the United States Mail. No business shall be
conducted at an annual meeting except in accordance with this procedure. The
Chairman of an annual meeting shall, if the facts warrant, determine and declare
to the meeting that business was not properly brought before the meeting and in
accordance with the provisions of this section, and if so determined, shall
declare to the meeting that any such business not properly brought before the
meeting shall not be transacted.
-5-
<PAGE>
If a meeting is adjourned to another time, not more than thirty days hence,
and/or to another place, and if an announcement of the adjourned time and/or
place is made at the meeting, it shall not be necessary to give notice of the
adjourned meeting unless the directors, after adjournment, fix a new record date
for the adjourned meeting. Notice need not be given to any stockholder who
submits a written waiver of notice signed by him before or after the time stated
therein. Attendance of a stockholder at a meeting of stockholders shall
constitute a waiver of notice of such meeting, except when the stockholder
attends the meeting for the express purpose of objecting, at the beginning of
the meeting, to the transaction of any business because the meeting is not
lawfully called or convened. Neither the business to be transacted at, nor the
purpose of, any regular or special meeting of the stockholders need be specified
in any written waiver of notice.
- STOCKHOLDER LIST. The officer who has charge of the stock ledger of the
----------------
Corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders, arranged in alphabetical
order, and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten days prior to the meeting,
either at a place within the city or other municipality or community where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present. The stock ledger shall be the only evidence as to who are the
stockholders entitled to examine the stock ledger, the list required by this
section or the books of the Corporation, or to vote at any meeting of the
stockholders.
- CONDUCT OF MEETING. Meetings of the stockholders shall be presided over
------------------
by one of the following officers in the order of seniority and if present and
acting - the Chairman of the Board, if any, the Vice-Chairman of the Board, if
any, the President, a Vice-President, or, if none of the foregoing is in office
and present and acting, by a chairman to be chosen by the stockholders. The
Secretary of the Corporation, or in his absence, an Assistant Secretary, shall
act as secretary of every meeting, but if neither the Secretary nor an Assistant
Secretary is present the Chairman of the meeting shall appoint a secretary of
the meeting.
- PROXY REPRESENTATION. Every stockholder may authorize another person or
--------------------
persons to act for him by proxy in all matters in which a stockholder is
entitled to participate, whether by waiving notice of any meeting, voting or
participating at a meeting, or expressing consent or dissent without a meeting.
Every proxy must be signed by the stockholder or by his
-6-
<PAGE>
attorney-in-fact. No proxy shall be voted or acted upon after three years from
its date unless such proxy provides for a longer period. A duly executed proxy
shall be irrevocable if it states that it is irrevocable and, if, and only as
long as, it is coupled with an interest sufficient in law to support an
irrevocable power. A proxy may be made irrevocable regardless of whether the
interest with which it is coupled is an interest in the stock itself or an
interest in the Corporation generally.
- INSPECTORS. The directors, in advance of any meeting, may, but need not,
----------
appoint one or more inspectors of election to act at the meeting or any
adjournment thereof. If an inspector or inspectors are not appointed, the
person presiding at the meeting may, but need not, appoint one or more
inspectors. In case any person who may be appointed as an inspector fails to
appear or act, the vacancy may be filled by appointment made by the directors in
advance of the meeting or at the meeting by the person presiding thereat. Each
inspector, if any, before entering upon the discharge of his duties, shall take
and sign an oath faithfully to execute the duties of inspectors at such meeting
with strict impartiality and according to the best of his ability. The
inspectors, if any, shall determine the number of shares of stock outstanding
and the voting power of each, the shares of stock represented at the meeting,
the existence of a quorum, the validity and effect of proxies, and shall receive
votes, ballots, or consents, hear and determine all challenges and questions
arising in connection with the right to vote, count and tabulate all votes,
ballots, or consents, determine the result, and do such acts as are proper to
conduct the election or vote with fairness to all stockholders. On request of
the person presiding at the meeting, the inspector or inspectors, if any, shall
make a report in writing of any challenge, question, or matter determined by him
or them and execute a certificate of any fact found by him or them. Except as
otherwise required by subsection (e) of Section 231 of the General Corporation
Law, the provisions of that Section shall not apply to the Corporation.
- QUORUM. The holders of a majority of the outstanding shares of stock
------
shall constitute a quorum at a meeting of stockholders for the transaction of
any business. The stockholders present may adjourn the meeting despite the
absence of a quorum.
- VOTING. Each share of stock shall entitle the holder thereof to one
------
vote. Directors shall be elected by a plurality of the votes of the shares
present in person or represented by proxy at the meeting and entitled to vote on
the election of directors. Any other action shall be authorized by a majority
of the votes cast except where the General Corporation Law prescribes a
different percentage of votes and/or a different exercise of voting power, and
except as may be otherwise prescribed by the provisions of the certificate of
incorporation and these Bylaws. In the election of directors, and for any other
action, voting need not be by ballot.
-7-
<PAGE>
8. STOCKHOLDER ACTION WITHOUT MEETINGS. Any action required by the
-----------------------------------
General Corporation Law to be taken at any annual or special meeting of
stockholders, or any action which may be taken at any annual or special meeting
of stockholders, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted; provided that if at any time the Corporation shall have a class of stock
registered pursuant to the provisions of the Securities Exchange Act of 1934,
for so long as such class is so registered, any action by the stockholders of
such class must be taken at an annual or special meeting of stockholders and may
not be taken by written consent. Prompt notice of the taking of the corporate
action without a meeting by less than unanimous written consent shall be given
to those stockholders who have not consented in writing. Action taken pursuant
to this paragraph shall be subject to the provisions of Section 228 of the
General Corporation Law.
ARTICLE II
----------
DIRECTORS
---------
1. FUNCTIONS AND DEFINITION. The business and affairs of the Corporation
------------------------
shall be managed by or under the direction of the Board of Directors of the
Corporation. The Board of Directors shall have the authority to fix the
compensation of the members thereof. The use of the phrase "whole board" herein
refers to the total number of directors which the Corporation would have if
there were no vacancies.
2. QUALIFICATIONS AND NUMBER. A director need not be a stockholder, a
-------------------------
citizen of the United States, or a resident of the State of Delaware. The
initial Board of Directors shall consist of seven persons. Thereafter the
number of directors constituting the whole board shall be at least five.
Subject to the foregoing limitation and except for the first Board of Directors,
the number of directors shall be fixed by resolution of the Board of Directors
and may be increased at any time or from time to time by the directors by vote
of a majority of the directors them in office but not a greater number than nine
without action by the stockholders. The number of directors may be decreased to
any number permitted by the foregoing at any time by the directors by vote of a
majority of the directors then in office, but only to eliminate vacancies
existing by reason of the death, resignation or removal of one or more
directors.
-8-
<PAGE>
3. ELECTION AND TERM. All members of the Board of Directors shall be
-----------------
classified, with respect to the time for which they each hold office, into three
classes. One class shall originally be elected for an initial one year term
expiring at the annual meeting of stockholders to be held in 1997, another class
shall be originally elected for an initial two year term expiring at the annual
meeting of stockholders to be held in 1998, and another class shall be
originally elected for an initial three year term expiring at the annual meeting
of stockholders to be held in 1999, with each member of each class to hold
office until a successor is elected and qualified or until his earlier
resignation or removal. Thereafter, at each annual meeting of stockholders, the
successors of the class of directors whose term expires at that meeting shall be
elected to hold office for a three year term until their successors are elected
and qualified or until their earlier resignation or removal.
Except as otherwise provided in or fixed by or pursuant to the
Corporation's Certificate of Incorporation, nominations for the election of
directors may be made by the Board of Directors or by any stockholders of record
entitled to vote in the election of directors generally. However, any such
stockholders may nominate one or more persons for election as director or
directors at a stockholders' meeting only if written notice of intent to make
such nomination or nominations has been given either by personal delivery or by
mail to the Secretary of the Corporation not less than 30 days before the
meeting of stockholders at which such election is held. Each such notice shall
state (a) the name and address of the stockholder who intends to make the
nomination and of the person or persons to be nominated; (b) a representation
that the stockholder is a holder of record of stock of the Corporation entitled
to vote at such meeting and intends to appear in person or by proxy at the
meeting to nominate the person or persons specified in the notice; (c)
description of all arrangements or understandings between the stockholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the nominee
proposed by such stockholder as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the Securities and Exchange
Commission, had the nominee been nominated, or intended to be nominated, by the
Board of Directors; and (d) the consent of each nominee to serve as a director
of the Corporation if so elected, and shall be accompanied by a petition in
support of such nomination signed by at least 50 holders of record of stock
entitled to vote in the election of directors holding in the aggregate not less
than 5% of such stock. The chairman of the meeting may refuse to acknowledge
the nomination of any person not made in compliance with the foregoing
procedure.
-9-
<PAGE>
4. MEETINGS.
--------
- TIME. Meetings shall be held at such time as the Board shall fix, except
----
that the first meeting of a newly elected Board shall be held as soon after its
election as the directors may conveniently assemble.
- PLACE. Meetings shall be held at such place within or without the State
-----
of Delaware as shall be fixed by the Board.
- CALL. No call shall be required for regular meetings for which the time
----
and place have been fixed. Special meetings may be called: by or at the
direction of the Chairman of the Board, if any, the Vice-Chairman of the Board,
if any, or the President, or of a majority of the directors in office.
- NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall be required for
---------------------------------------
regular meetings for which the time and place have been fixed. Written, oral,
or any other mode of notice of the time and place shall be given for special
meetings in sufficient time for the convenient assembly of the directors
thereat. Notice need not be given to any director or to any member of a
committee of directors who submits a written waiver of notice signed by him
before or after the time stated therein. Attendance of any such person at a
meeting shall constitute a waiver of notice of such meeting, except when he
attends a meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened. Neither the business to be transacted at, not the purpose
of, any regular or special meeting of the directors need be specified in any
written waiver of notice.
- QUORUM AND ACTION. A majority of the whole Board shall constitute a
-----------------
quorum except when a vacancy or vacancies prevents such majority, whereupon a
majority of the directors in office shall constitute a quorum, provided, that
such majority shall constitute at least one-third of the whole Board. A
majority of the directors present, whether or not a quorum is present, may
adjourn a meeting to another time and place. Except as herein otherwise
provided, and except as otherwise provided by the General Corporation Law, the
vote of the majority of the directors present at a meeting at which a quorum is
present shall be the act of the Board. The quorum and voting provisions herein
stated shall not be construed as conflicting with any provisions of the General
Corporation Law and these Bylaws which govern a meeting of directors held to
fill vacancies and newly created directorships in the Board or action of
disinterested directors.
-10-
<PAGE>
Any member or members of the Board of Directors or of any committee
designated by the Board, may participate in a meeting of the Board, or any such
committee, as the case may be, by
means of conference telephone or similar communications equipment by means of
which all persons participating in the meeting can hear each other.
- CHAIRMAN OF THE MEETING. The Chairman of the Board, if any and if
-----------------------
present and acting, shall preside at all meetings. Otherwise, the Vice-Chairman
of the Board, if any and if present and acting, or the President, if present and
acting, or any other director chosen by the Board, shall preside.
5. RESIGNATION AND REMOVAL OF DIRECTORS. Any director may resign at any
------------------------------------
time by delivering his resignation in writing to the Chairman of the Board, if
any, the president, or the secretary or to a meeting of the Board of Directors.
Such resignation shall be effective upon receipt unless specified to be
effective at some other time, and without in either case the necessity of it
being accepted unless the resignation shall so state. Except as otherwise
provided in the certificate of incorporation or these by-laws relating to the
rights of the holders of any class or series of preferred stock, voting
separately by class or series, to elect directors under specified
circumstances, any director or directors may be removed from office at any time,
but only for cause and only by the affirmative vote, at any regular meeting or
special meeting of the stockholders, of not less than 50 % of the total number
of votes of the then outstanding shares of capital stock of the corporation
entitled to vote generally in the election of directors, voting together as a
single class, but only if notice of such proposal was contained in the notice of
such meeting. Any vacancy in the board of directors resulting from any such
removal shall be filled only by vote of a majority of the directors then in
office, although less than a quorum, and any director or directors so chosen
shall hold office until the next election of the class for which such directors
shall have been chosen and until their successors shall be elected and qualified
or until their earlier death, resignation or removal. No director resigning and
(except where a right to receive compensation shall be expressly provided in a
duly authorized written agreement with the corporation) no director removed
shall have any right to any compensation as such director for any period
following his resignation or removal, or any right to damages on account of such
removal, whether his compensation be by month or by the year or otherwise;
unless, in the case of a resignation, the directors, or, in the case of removal,
the body acting on the removal, shall in their or its discretion provide for
compensation.
6. VACANCIES. Vacancies and newly created directorships resulting from
---------
any increase in the number of directors shall be filled only by vote of a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director. Stockholders shall have
-11-
<PAGE>
no power to fill any vacancies or newly created directorships. When one or more
directors shall resign from the board, effective at a future date, a majority of
the directors then in office, including those who have resigned, shall have
power to fill such vacancy or vacancies, the vote or action by writing thereon
to take effect when such resignation shall become effective. The directors shall
have and may exercise all their powers notwithstanding the existence of one or
more vacancies in their number, subject to any requirement of law or of the
certificate of incorporation or of these by-laws as to the number of directors
required for a quorum or for any vote or other actions.
7. COMMITTEES. The Board of Directors may, by resolution passed by a
----------
majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the directors of the Corporation. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. Any
such committee, to the extent provided in the resolution of the Board, shall
have and may exercise the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation with the exception of
any authority the delegation of which is prohibited by Section 141 of the
General Corporation Law, and may authorize the seal of the Corporation to be
affixed to all papers which may require it.
8. WRITTEN ACTION. Any action required or permitted to be taken at any
--------------
meeting of the Board of Directors or any committee thereof may be taken without
a meeting if all members of the Board or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the Board or committee.
9. INTERESTED DIRECTORS AND OFFICERS.
---------------------------------
(a) No contract or transaction between the Corporation and one or more
of its directors or officers, or between the Corporation and any other
corporation, partnership, association, or other organization in which one or
more of the Corporation's directors or officers are directors or officers, or
have financial interest, shall be void or voidable solely for this reason, or
solely because the director or officer is present at or participates in the
meeting of the board or committee thereof which authorizes the contract or
transaction, or solely because his or their votes are counted for such purpose,
if:
(1) The material facts as to his relationship or interest and as
to the contract or transaction are disclosed or are known to the Board of
Directors or the committee, and the Board or committee in good faith
authorizes the contract or transaction
-12-
<PAGE>
by the affirmative votes of a majority of the disinterested directors, even
though the disinterested directors be less than a quorum; or
(2) The material facts as to his relationship or interest and as
to the contract or transaction are disclosed or are known to the
stockholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the stockholders; or
(3) The contract or transaction is fair as to the corporation as
of the time it is authorized, approved or ratified, by the Board of
Directors, a committee thereof, or the stockholders.
(b) Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract or transaction.
ARTICLE III
-----------
OFFICERS
--------
The officers of the Corporation shall consist of a President, a
Secretary, a Treasurer, and, if deemed necessary, expedient, or desirable by the
Board of Directors, a Chairman of the Board, a Vice-Chairman of the Board, one
or more Executive Vice Presidents, one or more other Vice-Presidents, one or
more Assistant Secretaries, one or more Assistant Treasurers, and such other
officers with such titles as the resolution of the Board of Directors choosing
them shall designate. Except as may otherwise be provided in the resolution of
the Board of Directors choosing him, no officer other than the Chairman or Vice-
Chairman of the Board, if any, need be a director. Any number of offices may be
held by the same person, as the directors may determine.
Unless otherwise provided in the resolution choosing him, each officer
shall be chosen for a term which shall continue until the meeting of the Board
of Directors following the next annual meeting of stockholders and until his
successor shall have been chosen and qualified.
All officers of the Corporation shall have such authority and perform
such duties in the management and operation of the Corporation as shall be
prescribed in the resolutions of the Board of Directors designating and choosing
such officers and prescribing
-13-
<PAGE>
their authority and duties, and shall have such additional authority and duties
as are incident to their office except to the extent that such resolutions may
be inconsistent therewith. The Secretary or an Assistant Secretary of the
Corporation shall record all of the proceedings of all meetings and actions in
writing of stockholders, directors, and committees of directors, and shall
exercise such additional authority and perform such additional duties as the
Board shall assign to him. Any officer may be removed, with or without cause, by
the Board of Directors. Any vacancy in any office may be filled by the Board of
Directors.
ARTICLE IV
----------
CORPORATE SEAL
--------------
The corporate seal shall be in such form as the Board of Directors
shall prescribe.
ARTICLE V
---------
FISCAL YEAR
-----------
The fiscal year of the Corporation shall be fixed, and shall be
subject to change, by the Board of Directors.
ARTICLE VI
----------
CONTROL OVER BYLAWS
-------------------
Subject to the provisions of the certificate of incorporation and the
provisions of the General Corporation Law, the power to amend, alter, or repeal
these Bylaws and to adopt new Bylaws may be exercised by the Board of Directors
or by the stockholders except that the power to amend, alter or repeal Article
II Sections 2 and 3 may be exercised only by the stockholders acting by at least
75% vote of the outstanding voting shares.
-14-
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Advanced Radio Telecom Corp. on Form S-8 (File No. 333-21875) of our report
dated March 18, 1997 on our audits of the consolidated financial statements of
Advanced Radio Telecom Corp. and Subsidiaries as of December 31, 1996 and 1995,
and for the years ended December 31, 1996, 1995 and 1994, which report is
included in this Annual Report on Form 10-K.
Coopers & Lybrand, L.L.P.
Seattle, Washington
March 27, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET--DECEMBER 31, 1996 AND CONSOLIDATED STATEMENT OF OPERATIONS FOR
THE YEAR ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,974,407
<SECURITIES> 0
<RECEIVABLES> 1,819,593
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,990,791
<PP&E> 20,221,770
<DEPRECIATION> (917,921)
<TOTAL-ASSETS> 36,648,701
<CURRENT-LIABILITIES> 13,614,696
<BONDS> 4,977,246
0
0
<COMMON> 13,559
<OTHER-SE> 19,936,361
<TOTAL-LIABILITY-AND-EQUITY> 36,648,701
<SALES> 2,660,811
<TOTAL-REVENUES> 2,907,927
<CGS> 0
<TOTAL-COSTS> 25,725,983
<OTHER-EXPENSES> 4,935,644
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,695,489
<INCOME-PRETAX> (29,330,307)
<INCOME-TAX> 0
<INCOME-CONTINUING> (29,330,307)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,339,996)
<CHANGES> 0
<NET-INCOME> (30,670,303)
<EPS-PRIMARY> (3.97)
<EPS-DILUTED> (3.97)
</TABLE>
<PAGE>
EXHIBIT 99
RISK FACTORS
From time to time management of the Company has made, and may in the future
make, forward-looking statements, based on management's then-current
expectations, including statements made in Securities and Exchange Commission
filings, in press releases and oral statements. These forward-looking
statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. All forward-looking statements
involve risks and uncertainties, and actual results could differ materially
from those set forth in the forward-looking statements for a variety of
reasons. These reasons include, but are not limited to, factors outlined
below.
. LIMITED OPERATIONS; HISTORY OF NET LOSSES. Having commenced full scale
commercial operations in the fourth quarter of 1996, the Company has
generated only nominal revenues from operations to date. The Company's
primary activities since the inception of its business have focused on
obtaining licenses, personnel, capital, and systems to offer its services.
The Company has generated operating and net losses since its inception and
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
a successful business or achieve or sustain profitability in the future.
. UNCERTAIN ACCEPTANCE OF 38 GHZ SERVICES. The Company and other providers
have only recently begun to market wireless broadband services on 38 GHz
frequencies. The provision of such services represents an emerging sector of
the telecommunications industry, and the demand for such services is
uncertain. There can be no assurance that a substantial market will develop
for 38 GHz wireless broadband services.
. COMPETITION. The industry and markets in which the Company plans to provide
services are highly competitive. The Company competes with other 38 GHz
service providers as well as with other technologies which have established
market acceptance and will compete with technologies not yet introduced.
Each of these other technologies may offer advantages over the Company's
services. Many of the other wireline and wireless services providers have
longer operating histories, longer standing relationships with customers and
suppliers, greater name recognition, better geographic footprints and
greater financial, technical and marketing resources than the Company. The
Company's competitors include the incumbent LECs as well as CAPs, cable
television operators, long distance carriers and other wireless services
providers. There can be no assurance that the Company will be able to
compete effectively with these other technologies and service providers in
any of its markets.
. GOVERNMENT REGULATION. The telecommunications services offered by the
Company are subject to regulation by federal, state and local government
agencies. Changes in existing laws and regulations applicable to the
provisions of wireless local telecommunications services via 38 GHz
licenses, or any failure or significant delay in obtaining or maintaining
any regulatory approvals which may be required, could have a material
adverse effect on the Company.
. RISK OF FORFEITURE, NON-RENEWAL AND FLUCTUATION IN VALUE OF FCC
LICENSES. The Company must comply with FCC rules relating, among other
things, to its licenses. For example, the Company must meet construction
deadlines for 53 licenses between mid-April and mid-August 1997. The Company
must also comply with rules relating to transmission of operational traffic
and non-removal of equipment and facilities. Failure to comply with FCC
rules could subject licenses to forfeiture.
All of the Company's 38 GHz licenses expire in February 2001. Although the
Company currently anticipates that its licenses will be renewed, there can be
no assurance that all or any of the licenses will be renewed upon expiration
of their initial terms. In the event that the FCC does not renew one or more
of the licenses, the Company's business and results of operations could be
materially adversely affected.
1
<PAGE>
The value of licenses held or acquired hereafter by the Company will depend,
among other things, 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. Assignment
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.
. 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. There can be
no assurance that such entities will be able to acquire such licenses,
obtain necessary financing, implement their business plans or operate in any
country on a profitable basis or at all.
. MANAGEMENT OF GROWTH. The Company expects to experience 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. If this growth is
achieved, the Company's success will depend on its ability to manage this
growth effectively, enhance its operational and financial controls and
information systems, and attract, assimilate and retain qualified and key
personnel. Failure to meet customer demands and manage expansion could have
a material adverse effect on the Company's results.
. ATTENUATION; ROOF RIGHTS. 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. There
can be no assurance that line of sight and distance and rain limitations of
38 GHz transmissions will not have a material adverse effect on the
Company's future development and results of operations. Due to line of sight
limitations, the Company primarily installs its transceivers and antennas on
rooftops and other tall structures. There can be no assurance that the
Company will succeed in obtaining the roof and other rights necessary to
provide wireless broadband services to 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.
. RELIANCE ON EQUIPMENT SUPPLIERS; LACK OF INDUSTRY STANDARDS. The Company
presently purchases the majority of its telecommunications equipment from
two suppliers. Any reduction or interruption in supply from either supplier
could have a disruptive effect on the Company. There is no industry standard
or uniform protocol for 38 GHz equipment, and a single manufacturer's
equipment must be used in establishing a link and generally will be used
across an entire market area. The failure of the Company to procure
sufficient equipment from one manufacturer for a particular market area
could adversely effect the Company's results of operations.
. DEPENDENCE ON THIRD PARTIES FOR MARKETING AND SERVICE. The Company is, and
expects to continue to be, partly dependent upon third parties for marketing
its services to end users and maintaining its operational systems. The
Company also plans to enter into sales and marketing agreements with other
companies. The failure of third parties to perform, the loss of third party
agreements, or the failure to successfully implement new agreements could
have a material adverse effect on the Company's development and results of
operations.
. ACQUISITION OF ADDITIONAL BANDWIDTH IN SELECTED AREAS. Although the Company
believes the 38 GHz licenses it owns, manages, 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 licenses 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. There
can be no assurance that the Company will be able to acquire additional
radio spectrum on favorable terms or at all.
2
<PAGE>
. 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. 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 technologies or to introduce new services capable of competing
with future technologies or services 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.
. 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. 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.
. SIGNIFICANT CAPITAL REQUIREMENTS; NEED FOR ADDITIONAL FINANCING. The
Company's current business plan projects that the Company has resources to
fund its operations and capital requirements at least through December 31,
1997 and that the Company will require significant additional capital after
that date. The Company will require substantial additional capital for the
continued development and expansion of its wireless broadband operations,
the continued funding of operating losses, and the possible acquisition of
additional licenses, other assets or other businesses. In addition, if,
among other things, (i) the assumptions underlying the Company's business
plan and projections change or prove to be inaccurate, (ii) the Company's
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 or buys spectrum at auction or
(iv) the Company changes or accelerates implementation of its business plan,
the Company may require additional financing earlier than December 31, 1997.
There can be no assurance that the Company will be able to obtain any
financing when required, 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.
. LEVERAGE; ABILITY TO SERVICE INDEBTEDNESS. The Company is highly leveraged
and, accordingly, (i) a substantial portion of the Company's cash flow from
operations will be required to pay interest with respect to its 14% Senior
Notes due 2007, commencing in 2000, and will be required to pay interest
with respect to any additional indebtedness incurred by the Company; (ii)
the Company's flexibility may be limited in responding to changes in the
industry and economic conditions generally; (iii) the failure to comply with
the numerous financial and other restrictive covenants of such debt 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 is dependent upon its
future performance which, in turn, is 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 may 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. 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 its 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. There is no assurance that the Company would be able to do so.
3
