<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended June 30, 1997.
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ______ to _____
Commission File Number 000-21091
ADVANCED RADIO TELECOM CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 52-1869023
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
500 108th Avenue NE, Suite 2600
Bellevue, Washington 98004
(Address of principal executive offices)
(425) 688-8700
(Registrant's telephone number, including area code)
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 the number of shares outstanding of each of the registrant's classes of
common stock as of the latest practicable date: 19,749,452 shares of common
stock, $.001 par value, at August 7, 1997.
Part I - Financial Information
1
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1997 1996
---------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 24,463,966 $ 1,974,407
Short-term investments 19,671,556
Pledged securities 18,251,339
Accounts receivable 448,303 1,819,593
Prepaid and other current assets 305,168 196,791
------------- -----------
Total current assets 63,140,332 3,990,791
Restricted cash 1,032,060 1,032,060
Pledged securities 34,787,959
Property and equipment, net of accumulated depreciation and
amortization of $2,117,904 and $917,921 28,228,836 19,303,849
FCC licenses, net of accumulated amortization of
$1,267,303 and $106,011 131,822,061 4,330,906
Deferred financing costs, net 4,300,668 3,255,688
Other assets 636,265 4,735,407
------------- -----------
Total assets $263,948,181 $36,648,701
============= ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 1,657,015 $ 9,425,834
Accrued compensation and benefits 1,934,891 1,350,894
Accrued interest payable 7,508,219 17,159
Other accrued liabilities 446,243 927,648
Current portion of long-term debt 2,495,510 1,893,161
------------ ----------
Total current liabilities 14,041,878 13,614,696
Long-term debt, net of current portion 107,782,634 3,084,085
Deferred income tax liability 30,371,368
------------- -----------
Total liabilities 152,195,880 16,698,781
------------- -----------
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value, 100,000,000 shares authorized,
19,749,452 and 13,559,420 shares issued and outstanding 19,749 13,559
Additional paid-in capital 170,931,302 53,976,721
Accumulated deficit (59,198,750) (34,040,360)
------------- -----------
Total stockholders' equity 111,752,301 19,949,920
------------- -----------
</TABLE>
2
<PAGE>
<TABLE>
<S> <C> <C>
Total liabilities and stockholders' equity $263,948,181 $ 36,648,701
============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
3
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three months ended June 30, Six months ended June 30,
1997 1996 1997 1996
-------------------------- -------------------------
<S> <C> <C> <C> <C>
Service revenue $ 186,088 $ 51,900 $ 328,223 $ 61,520
Equipment sales and construction
revenue 356,970
------------ ----------- ------------ ------------
Total revenue 186,088 51,900 685,193 61,520
------------ ----------- ------------ ------------
Costs and expenses:
Technical and network operations 1,240,278 270,319 2,621,878 270,319
Cost of equipment sales and
construction 214,399
Sales and marketing 3,786,175 322,135 6,241,797 1,472,198
General and administrative 3,401,285 2,449,978 6,383,433 11,364,281
Research and development 69,170 101,988 128,715 521,406
Depreciation and amortization 1,407,301 189,096 2,361,275 278,375
------------ ----------- ------------ ------------
Total operating costs and expenses 9,904,209 3,333,516 17,951,497 13,906,579
------------ ----------- ------------ ------------
Loss from operations (9,718,121) (3,281,616) (17,266,304) (13,845,059)
Interest expense (5,084,734) (469,119) (8,616,576) (618,694)
Financing commitment expense (2,699,881)
Other (1,248,000) (1,248,000)
Interest income 1,496,825 21,459 2,559,574 39,889
------------ ----------- ------------ ------------
Loss before income taxes (13,306,030) (4,977,276) (26,023,187) (15,671,864)
Deferred income tax benefit 609,616 864,797
------------ ----------- ------------ ------------
Net loss $(12,696,414) $(4,977,276) $(25,158,390) $(15,671,864)
============ =========== ============ ============
Pro forma net loss per share of
common stock $ (0.46) $ (1.44)
=========== ===========
Pro forma weighted average shares 10,912,338 10,912,338
of common stock =========== ===========
Net loss per share of common stock $ (0.65) $ (0.76) $ (1.42) $ (2.38)
============ =========== ============ ============
Weighted average shares of
common stock 19,624,874 6,586,958 17,735,974 6,577,461
============ =========== ============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
4
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders' Equity (Unaudited)
for the six months ended June 30, 1997
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Paid-In Accumulated
Shares Par Value Capital Deficit Total
--------- ---------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 13,559,420 $13,559 $ 53,976,721 $(34,040,360) $ 19,949,920
Common stock issued in connection
with the acquisition of the
CommcoCCC, Inc. licenses 6,000,000 6,000 87,744,000 87,750,000
Value ascribed to warrants issued
with Senior Notes 29,707,509 29,707,509
Warrant issuance costs (1,254,697) (1,254,697)
Accrued stock option compensation 449,313 449,313
Stock options exercised 190,032 190 308,456 308,646
Net loss (25,158,390) (25,158,390)
---------- -------- ------------ ------------ -------------
Balance, June 30, 1997 19,749,452 $19,749 $170,931,302 $(59,198,750) $111,752,301
========== ======== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
5
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six months ended June 30,
-----------------------------
1997 1996
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(25,158,390) $(15,671,864)
Adjustments to reconcile net loss to net cash used
in operating activities:
Non-cash compensation expense 449,313 7,362,726
Non-cash marketing expense 1,053,000
Depreciation and amortization 2,361,275 278,375
Non-cash financing commitment expense 2,699,881
Write-off of deferred financing costs 1,248,000
Non-cash interest expense 824,263 587,992
Changes in assets and liabilities:
Accrued interest payable 7,491,060 167,567
Accounts receivable 1,371,290
Accrued interest on pledged securities (1,261,232)
Accounts payable and accrued liabilities (1,674,200) (890,333)
Deferred income taxes (864,797)
Deposits and other assets (198,774) (50,381)
Prepaid expenses and other current assets (78,474) (79,615)
------------ -----------
Net cash used in operating activities (14,038,785) (5,994,533)
------------ -----------
Cash flows from investing activities:
Additions to property and equipment (15,571,289) (3,050,607)
Additions to FCC licenses (5,398,269)
Additions to short-term investments (19,671,556)
Investment in restricted cash (1,000,000)
Investment in pledged securities (51,778,066)
------------ -----------
Net cash used in investing activities (92,419,180) (4,050,607)
------------ -----------
Cash flows from financing activities:
Proceeds from issuance of Senior Notes and warrants 135,000,000
Proceeds from exercise of stock options 308,646
Proceeds from issuance of preferred stock 2,500,000
Proceeds from bridge financings 6,000,000
Proceeds from issuance of equipment financing note 2,445,000
Stock issuance costs (150,000)
Warrant issuance costs (1,254,697)
Principal payments on loan and long-term debt (1,121,997) (272,814)
Additions to deferred financing costs (3,984,428) (281,103)
------------ -----------
Net cash provided by financing activities 128,947,524 10,241,083
------------ -----------
</TABLE>
6
<PAGE>
<TABLE>
<S> <C> <C>
Net increase in cash 22,489,559 195,943
Cash, beginning of period 1,974,407 633,654
------------ -----------
Cash, end of period $ 24,463,966 $ 829,597
============ ===========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. The Company and Basis of Presentation:
Advanced Radio Telecom Corp. (Collectively with its subsidiaries "ART" or
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.
The unaudited condensed consolidated financial statements included herein
have been prepared by the Company. The financial statements contain all
adjustments, consisting only of normal recurring adjustments which are, in
the opinion of the Company's management, necessary to present fairly the
consolidated financial position of the Company as of June 30, 1997, the
consolidated results of its operations for the three and six months ended
June 30, 1997 and 1996, and its cash flows for the six months ended June
30, 1997 and 1996. The consolidated statements of operations for the six
months ended June 30, 1996, and cash flows for the six months ended June
30, 1996, have been restated to reflect a merger in October 1996.
The Company will require significant additional capital in 1998 to fund its
operations and business plan. Based on its current business plan, the
Company will require significant capital over the next few years for the
continued development and expansion of its wireless broadband operations.
Because the Company generally deploys radio equipment in response to
customer orders, a substantial portion of its capital requirements is
dependent on customer demand. Accordingly, the Company's capital
requirements may increase or decrease depending largely upon the cost and
amount of equipment acquired, the number of networks installed, the number
of markets served and the prices charged for its services as well as other
factors. In addition, if, among other things, the assumptions underlying
the Company's business plan change or prove to be inaccurate or the Company
changes its business plan, the Company's capital requirements may change.
In the event 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 effect on the Company.
7
<PAGE>
Certain information and footnote disclosures normally included in financial
statements have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The year-end
condensed consolidated balance sheet was derived from audited financial
statements but does not include all disclosures required by generally
accepted accounting principles. The unaudited condensed consolidated
financial statements should be read in conjunction with the Company's
December 31, 1996, audited consolidated financial statements and notes
thereto contained in the 1996 Form 10-K on file with the Securities and
Exchange Commission.
2. Summary of Significant Accounting Policies:
Short-Term Investments
Short-term investments are comprised of commercial paper and other similar
investments purchased with a term to maturity of more than three months.
The amount reported in the balance sheet at June 30, 1997, approximates
fair value.
Property and Equipment
As of June 30, 1997, approximately $7.0 million out of a total of $23.0
million of wireless transmission equipment had been placed in service.
3. FCC Licenses
In February 1997, the Company completed the acquisition (the "CommcoCCC
Acquisition") of 129 38 GHz licenses from CommcoCCC, Inc. ("CommcoCCC") in
exchange for six million shares of the Company's common stock. The total
acquisition cost was approximately $122.2 million, comprised of the fair
value of the six million shares of common stock issued of approximately
$87.8 million, direct costs incurred of approximately $3.2 million and the
related deferred tax liability of approximately $31.2 million.
In connection with the CommcoCCC Acquisition, the Company granted Commco,
L.L.C.,("Commco"), a stockholder of CommcoCCC, an option to acquire twelve
38 GHz licenses. Each of the licenses covers a market in which ART holds
one or more other 38 GHz licenses. Commco exercised its option in June
1997, with closing subject to FCC approval. The purchase price will be paid
by a non-recourse secured note and will be determined by a formula based on
the sales price of the Company's common stock on the day the option was
exercised and the population covered by the twelve licenses. The Company
has the right to be a reseller with respect to these licenses for a term of
five years at market rates.
8
<PAGE>
In February 1997, the Company completed its acquisition from Extended
Communications, Inc. of the remaining 50% interest in ART West, for $6
million in cash, of which $3 million was paid in November 1996, of which
the total cost has been included in FCC licenses.
4. Senior Notes:
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 aggregate value ascribed to the
warrants of approximately $29.7 million, was reflected as both a debt
discount and an increase in additional paid-in capital. The debt discount
is accounted for as a component of interest expense using the effective
interest rate method. The Senior Notes are considered to have "significant
original issue discount" under Federal tax rules and the Company is not
able to deduct the accretion of the debt discount for Federal income tax
purposes.
5. Income Taxes:
Deferred income tax liabilities at June 30, 1997, consisted of
approximately $44.4 million of deferred tax liabilities, principally
arising from the CommcoCCC Acquisition, partially offset by approximately
$13.8 million of deferred tax assets . Deferred tax assets consisted
primarily of $19.3 million of net operating loss carryforwards, partially
offset by a valuation allowance of approximately $5.6 million. In February
1997, the Company reversed approximately $12.8 million of its deferred tax
asset valuation allowance as a result of recording deferred taxes arising
from the CommcoCCC Acquisition. The valuation allowance is based on
management's determination that the recognition criteria for a portion of
the deferred tax assets has not been met.
The effective tax rate is based on an estimate of the annualized tax rate
and differs from the Federal statutory rate principally due to the
provision for the net deferred tax asset valuation allowance.
6. Supplemental Cash Flow Information:
Supplemental disclosure of cash flow information is summarized below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1996
------ ------
<S> <C> <C>
Non-cash financing and investing activities:
Additions to property and equipment $ 829,217 $ 4,040,806
Value ascribed to warrants 29,707,509 509,937
Issuance of shares for licenses 87,750,000
Value ascribed to strategic distribution
agreement reflected as paid-in capital 1,053,000
Accrued deferred financing costs 967,491
Exchange of notes for Series E preferred stock,
</TABLE>
9
<PAGE>
<TABLE>
<S> <C> <C>
net of deferred financing costs 4,673,186
Release of escrow shares 6,795,514
Conversion of note payable and interest into common stock 75,250
Interest paid 287,716 74,538
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
From its inception in 1993 to the fourth quarter of 1996, the Company
primarily focused on acquiring licenses, hiring management and other key
personnel, raising capital, acquiring equipment and roof rights and developing
its operating and support systems and infrastructure. In the fourth quarter of
1996, the Company started commercial operations.
Results of Operations
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
Revenue for the six months ended June 30, 1997, was approximately $685,000
compared to approximately $62,000 for the same period in 1996. The revenue for
the first six months of 1997 included approximately $357,000 of non-recurring
installation and equipment sales revenue.
Operating costs and expenses were approximately $18.0 million for the six
months ended June 30, 1997, compared to approximately $13.9 million for the same
period in 1996. General and administrative expenses in the 1996 period included
a $6.8 million charge related to release of escrowed shares to executive
officers. Equipment sales and construction costs of approximately $214,000
incurred in the 1997 period related to non-recurring revenue and sales and
marketing expenses in the 1996 period included a $1.1 million charge relating to
a distribution agreement. Excluding non-cash and non-recurring items, operating
costs and expenses for the six months ended June 30, 1997, were approximately
$14.9 million compared to approximately $5.2 million for the same period in
1996.
During July 1997, management initiated certain restructuring activities
intended to more closely align its organization with its current marketing and
business development plans. The Company's preliminary estimate of the resulting
non-recurring employee severance and office closure costs is approximately
$500,000. These activities are expected to result in a slight reduction in
recurring operating expenses for the remainder of 1997. In future periods the
Company expects increases in cash expenses for sales and marketing and network
operations as the development and deployment of the Company's business
continues. The Company also expects depreciation and amortization to increase
substantially in future periods as a result of deployment of its wireless
transmission equipment. Operating losses for the six months ended June 30, 1997,
were approximately $17.3 million compared to approximately $13.8 million for the
same period in the previous year.
Net interest and other expenses were approximately $8.8 million for the six
months ended June 30, 1997, compared to approximately $1.8 million for the same
period in 1996. Included in net interest and other expenses for 1997 was
approximately $2.7 million related to a terminated financing commitment.
Interest expense will increase in future periods due to the amortization of the
original discount on the Senior Notes which were issued in February 1997. The
net loss for the six months ended June 30, 1997, was approximately $25.2 million
compared to a net loss for the same period of 1996 of approximately $15.7
million.
10
<PAGE>
Liquidity and Capital Resources
The Company has generated negative cash flow and net losses each year since
its inception and expects such negative cash flow and net losses to continue at
least for the next few years. Accordingly, the Company will be dependent on
various financing sources to fund its growth as well as its continued losses
from operations. To date, funding for acquisitions, capital expenditures and net
operating losses has been provided from private placements of equity and bridge
financings in 1994 through 1996, the Company's initial public offering in
November 1996 and the Company's public offering of its Senior Notes in February
1997. Approximately $52 million of the approximately $130 million net proceeds
from the sale of the Senior Notes was used to purchase a portfolio of U.S.
Treasury securities that will provide for payment of interest on the Senior
Notes through February 2000. Because the Senior Notes have "significant original
issue discount" for tax purposes, the Company is not 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 $5 million
of capital expenditures for the last two quarters of 1997, including outstanding
commitments to purchase approximately $2.0 million of wireless transmission
equipment. The Company will require significant additional capital in 1998 to
fund its operations and business plan. Based on its current business plan, ART
estimates that it will require several hundred million dollars over the next few
years for the continued development and expansion of its wireless broadband
operations. Because the Company generally deploys radio equipment in response to
customer orders, a substantial portion of its capital requirements is dependent
on customer demand. Accordingly, the Company's capital requirements may increase
or decrease depending largely upon the cost and amount of equipment acquired,
the number of networks installed, the number of markets served and the prices
charged for its services as well as other factors.
In addition, if, among other things, the assumptions underlying the
Company's business plan change or prove to be inaccurate or the Company changes
its business plan, the Company's capital requirements may change. There can be
no assurance that the Company will be able to obtain any financing when
required, or, if 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 could have a material adverse effect on
the Company.
New Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board ("FASB) issued
Financial Accounting Standards No. 128, "Earnings per Share." This statement,
effective for the year ending December 31, 1997, specifies the computation,
presentation and disclosure requirements for earnings per share ("EPS").The
statement will replace"primary" EPS with "basic" EPS, the principal difference
being
11
<PAGE>
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.
In June 1997, the FASB issued Financial Accounting Standards No. 130,
"Reporting Comprehensive Income." This statement establishes requirements for
disclosure of comprehensive income and becomes effective for the Company for the
year ending December 31, 1998. Comprehensive income includes such items as
foreign currency translation adjustments and unrealized holding gains and losses
on certain investments that are reported by the Company as a component of
stockholders' equity. The Company does not expect this pronouncement to
materially affect the Company's results of operations.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on May 22, 1997. Alan
Z. Senter and Andrew I. Fillat were elected to serve as Class I directors until
the annual meeting of shareholders in 2000. The votes cast were as follows:
FOR WITHHELD
--- --------
Alan Z. Senter 14,059,609 0
Andrew I. Fillat 14,059,609 0
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - 27 Financial Data Schedule
(b) Reports on Form 8-K - The Company filed a report on Form 8-K with the
Securities and Exchange Commission on July 10, 1997, reporting the
adoption of a Shareholder Rights Plan. No financial statements were
filed.
SIGNATURE
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 __ th day of
August 1997.
ADVANCED RADIO TELECOM CORP
By: /s/ Thomas A. Grina
-------------------------
Thomas A. Grina
Executive Vice President,
Chief Operating Officer
12
<PAGE>
and Chief Financial Officer
(Duly Authorized Officer and
Principal Financial and Accounting Officer)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1997 AND THE RELATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTH PERIOD ENDED
JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 24,463,966
<SECURITIES> 37,922,895
<RECEIVABLES> 448,303
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 63,140,332
<PP&E> 30,346,740
<DEPRECIATION> (2,117,904)
<TOTAL-ASSETS> 263,948,181
<CURRENT-LIABILITIES> 14,041,878
<BONDS> 110,278,144
0
0
<COMMON> 19,749
<OTHER-SE> 111,732,552
<TOTAL-LIABILITY-AND-EQUITY> 263,948,181
<SALES> 356,970
<TOTAL-REVENUES> 685,193
<CGS> 0
<TOTAL-COSTS> 17,951,497
<OTHER-EXPENSES> 2,699,881
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,616,576
<INCOME-PRETAX> (26,023,187)
<INCOME-TAX> 864,797
<INCOME-CONTINUING> (25,158,390)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,158,390)
<EPS-PRIMARY> (1.42)
<EPS-DILUTED> (1.42)
</TABLE>
