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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________
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, 1997 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 (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
500 108TH AVENUE, NE
SUITE 2600
BELLEVUE, WASHINGTON 98004
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(425) 688-8700
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
_____________
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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None None
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 $303 million on March 25, 1998, based on the
closing sales price of the registrant's common stock as reported on the Nasdaq
National Market as of such date.
The number of shares outstanding of each of the registrant's classes of common
stock as of March 25, 1998 was as follows:
Common Stock, $.001 par value: 22,113,665
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 1998
Annual Meeting of Stockholders.
Exhibit Index is on page 26.
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PART I
ITEM 1. BUSINESS
Advanced Radio Telecom Corp. ("ART" or the "Company") intends to become the
leading provider of broadband data services to businesses not served by fiber
optic networks. Utilizing its national footprint of 38 GHz spectrum licenses,
the Company plans to serve up to 100 of the top metropolitan markets over the
next five years, beginning in 1998 with Seattle, Washington and Washington,
D.C. With Lucent Technologies, Inc. ("Lucent") as the Company's technology
partner, the Company is building its own fixed wireless, packet-switched
broadband data networks utilizing Asynchronous Transfer Mode ("ATM"), Internet
Protocol ("IP"), Ethernet and Frame Relay technology. As networks are deployed
and interconnected using leased fiber optic backbone, ART plans to provide its
customers with end-to-end connectivity on a metropolitan, regional and national
basis. ART intends to offer an integrated package of data solutions including
Internet access, gateway networks such as intranets, extranets, virtual private
networks, local and wide area networks ("LANs" and "WANs"), and ultimately video
conferencing and other video services, voice and fax over IP and other value-
added data services.
The data services market has been the fastest growing segment of the
communications industry over the last five years, expanding at a rate five times
faster than voice. Bandwidth-intensive data applications require high-speed
connectivity that today is generally only available on fiber-optic networks.
However, approximately 95% of U.S. commercial buildings are not currently served
by fiber and receive their data services through the copper telephone networks
provided by the incumbent local exchange carriers ("ILECs"). These copper
networks are limited in their ability to meet the demand for data services,
creating a "bottleneck" in the local connection to end-users. The Company
believes that a significant portion of these off-fiber buildings are not
currently economically attractive to fiber-based providers. For businesses
located in these buildings, access to the fiber backbone networks and as a
result, high-speed connectivity is generally unavailable, or is available only
at significant expense and with significant lead time.
Recognizing this market opportunity, ART has refocused its business to
offer high-speed data connectivity and products directly to off-fiber
businesses. With its broadband data networks, the Company expects to deliver
services such as high-speed Internet access and gateway network services to the
customer premise rapidly and economically.
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 licenses and to operate
its business jointly with the Company. Upon the merger, Advanced Radio Telecom
Corp. became a wholly owned subsidiary of the Company and changed its name to
ART Licensing Corp., and the Company changed its name to Advanced Radio Telecom
Corp. In 1997 the Company acquired 129 38GHz licenses in exchange for 6 million
shares of common stock and acquired the remaining 50% interest in a partnership
jointly owned by the Company for $6 million. See Note 4 to the Consolidated
Financial Statements. The Company's original business strategy was to sell
connectivity to communications providers on a wholesale, carriers' carrier
basis.
ART'S COMPETITIVE ADVANTAGES
The Company believes that it is well-positioned to compete in offering
broadband data services to off-fiber commercial buildings. Advantages of ART's
wireless solution include:
FOCUS ON DATA. ART believes it is currently the only wireless
telecommunications company focusing exclusively on data services rather than
primarily on voice telephony. Focusing on data allows ART's networks to be
completely packet-switched, generally providing higher capacity, higher speed
data services than a circuit-switched
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network. ART intends to hire product development, technical, and sales personnel
with expertise in data applications and delivery, as opposed to telephony
experience. ART expects to direct its sales efforts toward information
technology managers rather than business managers in charge of telephony, which
the Company believes will be a sales advantage in selling data services.
HIGH-SPEED, HIGH-CAPACITY, HIGH-QUALITY CONNECTIVITY. ART's broadband
data services will be engineered to provide high-speed, high-capacity
connectivity with quality superior to copper and comparable to fiber.
Currently, ART's wireless service provides two-way data transfer rates of up to
45 megabits per second.
LOWER COST NETWORK. The Company expects its networks to cost less than
its competitors' fiber and wireless networks. The Company's fixed wireless
networks do not require the same magnitude of installation and maintenance costs
as required by fiber networks. The Company expects this cost differential to
increase over time because the cost of deploying fiber involves substantial
labor and right-of-way costs, which are not expected to decrease over time,
while the cost of ART's networks involves substantial electronic equipment
costs, which have and are expected to continue to decline over time. ART's
networks will also cost less than competing wireless networks that are designed
to carry voice. The Company's network will be entirely packet-switched, and
therefore the Company will not have to buy more expensive circuit switches
required by other fixed wireless networks.
SUCCESS-BASED CAPITAL REQUIREMENTS. ART is designing its networks so that
the Company's capital will be spent incrementally as ART attracts customers,
minimizing the deployment of non-revenue generating equipment. ART's network
will be designed to reach customers within its initial clusters of buildings
without having to build out an entire market. ART's sales force will initially
target customers within buildings ready to be connected to the ART network,
then new buildings within the range of established radio hub sites, and then
buildings to be connected in new clusters. As needs change, ART's equipment can
be economically and rapidly deployed or relocated.
RAPID MARKET COVERAGE. Leveraging its 38 GHz licenses which cover 90 of
the top 100 U.S. markets (assuming the consummation of pending acquisitions),
ART intends to rapidly deploy a nationwide broadband network dedicated to
delivering data services to businesses off the fiber network. ART believes that
this rapid deployment will enable ART to establish its position as the leading
provider of broadband data services by penetrating the market in advance of many
wireline competitors who cannot or will not construct their networks as quickly.
EXPERIENCED MANAGEMENT. ART has assembled a management team with
substantial telecommunications experience. Henry C. Hirsch, ART's Chairman,
President and Chief Executive Officer, was formerly Vice Chairman and CEO of
Williams Communications Group and President and Chief Operating Officer of
Williams Telecommunications Systems ("WilTel"). Company founder and Vice
Chairman Vernon L. Fotheringham was previously president and CEO of Norcom
Networks Corporation, and prior to that Senior Vice President of The Walter
Group. William J. Maxwell, Executive Vice President of Strategic Planning,
Marketing and Sales, previously served as Executive Vice President of ICG
Communications and President of ICG Telecom Group. Thomas A. Grina, Executive
Vice President and Chief Financial Officer, previously served as Executive Vice
President and Chief Financial officer of Dial Page, Inc. George R. Olexa, Senior
Vice President and Chief Technology Officer, was formerly Executive Vice
President of Engineering of Dial Call Communications Inc. and as Executive
Director of Network Engineering and Technology Applications for Pacific Bell,
was the architect of their cellular networks in major cities in the U.S. and
Europe.
BUSINESS STRATEGY
ART's goal is to become a leading end-to-end solutions provider for
businesses needing a wide range of broadband data services. The Company is
implementing the following initiatives to achieve this objective:
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TARGET OFF-FIBER BUSINESSES. ART plans to focus its primary marketing
efforts on businesses located off the fiber network. The Company will identify
building clusters in high-density off-fiber areas containing customers with high
potential for significant data services requirements, such as high-technology
companies that are typically located outside cities' main business districts.
Once ART has deployed its network to service these initial customers, it will be
able to reach new customers in the surrounding area rapidly without having to
replicate hub site infrastructure.
OFFER END-USERS AN ARRAY OF BROADBAND DATA SERVICES. ART intends to offer
business customers an integrated package of high-speed, broadband data services,
including Internet access, intranets, extranets, virtual private networks, LANs
and WANs, and ultimately IP telephony and fax, video on demand, service based
video, video conferencing, and other emerging high value-added services. By
targeting end-user customers, ART believes it will maximize revenues and
profitability.
DEVELOP STRATEGIC BUSINESS RELATIONSHIPS. ART plans to enter into
business relationships to help the Company penetrate its markets, develop its
service offerings and provide additional distribution channels. ART intends to
forge alliances with property management companies to gain access to buildings
and tenants. ART also intends to develop partnerships with data-oriented sales
agents, including local data network integrators and telecom resellers that
focus primarily on data products. ART also plans to expand its product
offerings by developing relationships with Internet service providers ("ISPs")
and private networking companies. ART will seek to develop relationships with
inter-exchange carriers ("IXCs"), utilities, ILECs and competitive local
exchange carriers ("CLECs") to connect disparate parts of the Company's network,
thereby offering end-to-end connectivity to its customers.
PROVIDE SUPERIOR CUSTOMER SERVICE. ART plans to provide superior customer
service, with service features such as a 24-hour-a-day, seven-day-a-week call
center, a network quality control system and comprehensive customer support
services. The Company hopes to differentiate itself from its competitors and
establish brand identity based on high quality service that is responsive to the
customer.
STRATEGIC AGREEMENT WITH LUCENT TECHNOLOGIES
ART has signed letters of intent for Lucent to act as the supplier and
integrator of ART's planned wireless broadband data networks. The letters
outline the purchase of systems including equipment and professional services
and vendor financing valued at up to $200 million for the first phase of the
network construction, during which Lucent will deploy and commission networks in
Seattle, Washington and Washington D.C., followed by build-outs in an additional
ten cities. The Lucent financing is contingent upon various conditions,
including ART meeting a series of performance objectives as the network build
progresses, raising additional capital, execution of definitive agreements and
certain other conditions. There can be no assurance that definitive agreements
will be executed or that the transactions contemplated by the letter of intent
will be consummated.
The letters of intent contemplate that Lucent will supply integrated
operating systems that incorporate a full suite of equipment including point-to-
multipoint radios, ATM switches, access concentrators, fiber and multiplexer
systems and communications software products. Under the letters of intent,
Lucent will also provide professional services and support.
NETWORK DEPLOYMENT
ART believes it will be the first company to deploy state-of-the-art,
packet-based broadband metropolitan area networks ("BMANs") using IP routing and
ATM switching infrastructure. ART's BMANs are expected to provide broadband
connectivity to buildings and office campuses with significant aggregation
opportunities for a
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variety of data services. The Company will connect buildings and campuses to
ISPs, IXCs, CLECs and ILECs in a metropolitan area.
Over the next five years, ART intends to build BMANs in up to 100 of the
top U.S. markets. ART will initially build its networks in Seattle, Washington
and Washington, D.C. After deploying the initial hub sites, the networks will
be expanded incrementally in response to demand. Using leased capacity on long
haul fiber networks, ART plans to connect BMANS first in neighboring markets
with communities of interest, such as Boston, New York City, Philadelphia,
Baltimore and Washington, D.C. Eventually, ART plans to interconnect its BMANs
into a national and global network using long haul fiber connections. As BMANs
are connected, ART will be able to offer customers end-to-end connectivity,
carrying data between two end-users through its local wireless network in one
metropolitan area, over the long haul fiber backbone, and back through another
wireless network in a different metropolitan area. This end-to-end connectivity
will also allow the Company to sell long haul capacity.
SALES & MARKETING
ART plans to market its products to end-users and wholesale customers
through direct sales, indirect channels, telemarketing, and by developing
strategic partnerships.
RETAIL END-USERS. ART intends to use a building-centric approach to target
retail end-users. ART will use demographic and geographic information systems
to identify clusters of buildings with unserved demand for high-speed data
services. ART's direct sales force will then pre-sell in buildings as ART
constructs the radio network that will reach those buildings. Once the network
is operating, ART's direct and indirect sales force will seek a deeper market
penetration by selling additional capacity and services to existing customers,
and by targeting new customers within the buildings that are connected to ART's
network. ART salespeople will also sell to other buildings within the cluster
that can be easily connected to the network.
ART will hire a direct sales force in each market as ART's network is
deployed, targeting sales personnel experienced in data services. ART also
plans to utilize technology consultants to present customers with complete data
access solutions. Direct mail and telemarketing account teams will target
smaller business.
WHOLESALE CUSTOMERS. ART plans to seek relationships with a variety of
telecommunications carriers who are willing to jointly deploy data networks and
share capacity and revenue opportunities. ART believes its high-speed, high-
capacity connectivity may also be attractive to ISPs to help them develop
markets quickly, differentiate their service from other ISPs, increase their
margins, and serve higher volumes of customers. The Company also believes it
may be an attractive partner for national and international high-speed data
carriers who are interested in building high-speed packet data networks using IP
technology, smaller carriers providing fiber backhaul, and IXCs looking for
local access providers other than the incumbent and competitive LECs.
PRODUCTS AND SERVICES
ART intends to sell broadband data access solutions. The Company plans to
deploy its networks on an initial basis to support a comprehensive and fully-
integrated product line that is designed to meet the broadband data
telecommunications needs of business customers located off the fiber network.
INTERNET ACCESS. ART plans to offer business customers an end-to-end
Internet access solution by bundling high-speed Internet access with transport
provided by ART's wireless data networks. ART expects to provide Internet
service in conjunction with one or more Internet access partners.
GATEWAY SERVICES. ART's Gateway Services will provide broadband
connectivity between end-users or between a wholesale customer's networks.
Gateway Services will connect end-users' private networks, including remote
office
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LAN and client server interconnectivity, remote Internet access, and integrated
voice, video and data offerings. It will also enable end-user businesses to
create virtual private networks, facilitating enterprise-wide communications
with local and national private networking capabilities. Gateway Services will
also offer end-users Intranet services connecting remote offices into a central
hub location, and Extranet services giving outside customers and clients access
to specific elements within the Intranet. Gateway Services will support ATM, IP,
Ethernet and Frame Relay technologies.
INTERNET VALUE-ADDED SERVICES. ART intends to eventually offer an array of
value-added Internet services, including web hosting, security services and
operational and support services (including consulting).
FUTURE PRODUCTS AND SERVICES. ART plans to offer an array of other
services which are currently under development. ART expects future Internet
services will include web caching and E-commerce Gateway Services, IP voice and
fax service and video conferencing services and other value added services as
they are developed.
ART'S NETWORK
The Company believes that the U.S. local data network will remain a hybrid
of fiber, copper, coaxial and wireless networks connected with a national
ATM/SONET fiber backbone network. ART plans to supply the wireless facilities
portion of this network and interface with the fiber backbone in metropolitan
areas and nationally to provide end-to-end high bandwidth data services. ART
will initially build packet switched, point-to-point fixed wireless BMANs using
ATM, Ethernet, Frame Relay and IP technologies. ART intends to incorporate
point-to-multipoint equipment as soon as it becomes commercially available.
The network equipment will use digital wireless technology designed to
deliver high quality data services that ART believes will be comparable in
quality to fiber-based systems. The Company will use radio hubs to transmit to
and receive signals from wireless equipment on customers' premise. The
customer premise equipment includes two components: (1) an integrated
antenna/radio unit installed on the roof or an exterior wall, and (2) the indoor
customer interface equipment installed within the building. The radio/antenna
unit will communicate with the hub via radio signal. The base stations hubs
will have an average line-of-sight service radius of approximately one mile,
depending on a number of factors such as power levels used, customer density,
local weather environment and network design. A point-to-multipoint hub will
have the capability to support customers within line-of-sight in every direction
within a 360 degree coverage area.
The Company's point-to-multipoint hardware and network capacity will be
shared among all the customers within the coverage area of a hub sector. A key
feature of the Company's network architecture will be its ability to provide
bandwidth-on-demand, giving customers as much or as little bandwidth as they
need.
Traffic between hub sites and the Company's ATM switching centers will be
carried over a backhaul network that will be a combination of wireless links and
fiber optic transmission facilities, as appropriate. The Company expects to work
with fiber network providers, through leasing arrangements or partnerships.
38 GHZ WIRELESS BROADBAND LICENSES
The FCC has allocated the 38.6-40.0 GHz (the "38 GHz") band for wireless
broadband transmissions consisting of fourteen 100 MHz channels for the
provision of wireless telecommunications services within a specified geographic
footprint.
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The Company owns, manages, or has agreements to acquire or to resell on 358
38 GHz licenses. Taken together, these licenses allow the Company to provide 38
GHz wireless broadband services in 210 U.S. markets, allowing it to provide
between 100 and 500 MHz of transmission capacity in 90 of the top 100 U.S.
markets.
The Company may selectively utilize other radio frequencies to provide its
services under certain circumstances. The Company may seek to acquire
additional licenses or businesses which hold licenses to expand its geographic
footprint or to enhance its ability to provide service within its current
markets.
FOREIGN LICENSES
Foreign subsidiaries of the Company have been granted broadband wireless
authorizations covering Norway, Sweden, Denmark and the United Kingdom which
allow the provision of broadband wireless connectivity for communications
services with certain limitations. Other foreign subsidiaries and entities in
which the Company has or expects to have an interest have applied for licenses
in other countries. There can be no assurance that any of these entities will
be able to acquire, retain or exploit licenses, comply with applicable license
restrictions, obtain any other necessary governmental approvals, obtain
financing, implement business plans or operate in any country on a profitable
basis or at all.
COMPETITION
ART does not believe any other company is currently offering broadband,
packet-switched data services to off-fiber businesses. However, ART faces
significant competition from other entities that currently, or could in the
future, deliver data services over copper wire, fiber and wireless networks,
including ILECs, CLECs, fiber service providers, wireless service providers,
cable television operators, satellite communications companies and ISPs. In
addition, the consolidation of telecommunications companies and the formation of
strategic alliances and cooperative relationships in the telecommunications and
related industries, 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 bandwidth, features, service, quality, price,
responsiveness to customer needs and reliability. There can be no assurance
that the Company will be able to compete effectively in any of its market areas
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 and sale of their services than the Company.
ILECS' COPPER NETWORKS. The Company faces significant competition from
ILECs, which typically deliver data services over copper networks. ILECs have
long-standing relationships with their customers and substantial name
recognition. In addition, the ILECs have employed or will likely employ digital
subscriber line products, such as ISDN (integrated services digital network) and
ADSL (asymmetrical digital subscriber line), which are currently available, and
HDSL (high-speed digital subscriber line), and VDSL (video digital subscriber
line), which are under development, to enhance the performance of their copper
networks.
FIBER NETWORKS. The Company also faces competition from expanding fiber
optic networks owned by incumbent and competitive LECs, IXCs, electric utilities
and other companies in any building connected or able to be connected to the
fiber network. Many of these companies have greater name recognition and
greater financial, technical and marketing resources than the Company. Fiber
optic service generally offers broadband connectivity that is comparable, if not
superior to, the Company's wireless broadband connections. In addition, fiber
technology may enjoy a greater degree of market acceptance than wireless
broadband technology.
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COAXIAL CABLE NETWORKS. The Company is likely to face competition from
cable television operators deploying cable modems, which provide high-speed data
capability over installed coaxial cable television networks, and there can be no
assurance that such competition will not be significant. Although cable modems
currently are not widely available and do not provide for data transfer rates
that are as rapid as those which can be provided by the Company's services, the
Company believes that the cable industry may support the deployment of cable
modems to residential customers through methods such as price subsidies.
Notwithstanding the cable industry's interest in rapid deployment of cable
modems, the Company believes that in order to provide broadband capacity to a
significant number of businesses and government users, cable operators will be
required to spend significant time and capital in order to upgrade their
existing networks to a more advanced hybrid fiber coaxial network architecture
and to extend these networks to reach businesses. However, there can be no
assurance that cable modems will not emerge as a source of competition.
OTHER FIXED WIRELESS NETWORKS. The Company also faces competition from
other fixed wireless service providers within its market areas including WinStar
Communications, Inc., Teleport Communications Group, Inc. ("TCG"), and Teligent,
Inc. ("Teligent"). In many cases, one or all of these service providers hold
licenses to operate in the Company's market areas. WinStar and Teligent have
positioned themselves as wireless CLECs, and therefore will compete with the
Company in offering off-fiber connectivity to businesses and buildings, with the
potential to offer broadband data services. TCG, which AT&T has agreed to
acquire, also has the ability to provide wireless broadband services. All three
companies have substantially greater financial resources than the Company.
Various other entities also have 38GHz and other wireless broadband
licenses. Due to the relative ease and speed of deployment of fixed wireless
technology, the Company could face intense price competition and competition for
customers from other service providers.
The Company also faces potential competition from new entrants acquiring
licenses from FCC auctions. The FCC has recently auctioned 28 GHz LMDS licenses
in all markets for the provision of high capacity, wide-area fixed wireless
point-to-multipoint systems. 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. The FCC has
announced an auction of geographical wide area licenses for the operation of
fixed wireless point-to-point and point-to-multipoint communications services in
the 38 GHz band.
MMDS service, provided at the 2 GHz spectrum band, also known as "wireless
cable," also competes for metropolitan wireless broadband services. At present,
wireless cable licenses are used primarily for the distribution of video
programming and have only a limited capability to provide two-way communications
needed for wireless broadband telecommunications services, but there can be no
assurance that this will continue to be the case.
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. The allocation was designed to facilitate the creation of
new wireless local area networks, and thus may compete with the Company's
strategy of providing wireless connections between LANs. It is too early to
predict, however, how and to what extent this particular frequency may be used
in competition with the Company.
MOBILE WIRELESS NETWORKS. Cellular, Personal Communications Services and
other mobile service providers may also offer data services over their licensed
frequencies. The FCC has also 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,
in particular for certain low-speed data transmission services.
SATELLITE NETWORKS. Many other companies have filed applications with the
FCC for global broadband satellite systems proposed to be used for broadband
voice and data services. If licensed and developed, these systems could also
represent future competition to the Company.
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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.
FEDERAL REGULATION
FCC Licensing. The Communications Act of 1934, as amended, (the
"Communications Act") and the FCC Rules and Regulations impose certain
requirements relating to licensing. Acquisition and sale of the wireless
broadband operating radio systems that are needed to provide the services
offered by the Company. Under current FCC rules, the recipient of a license for
38 GHz 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 cancels
automatically. In addition, 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. It is possible that
this rule could be applied in such a way that could cause one or more of the
Company's licenses to be subject to forfeiture.
All of the 38 GHz licenses owned or to be acquired by the Company are due
to expire in February 2001. The Company is entitled to a "renewal expectancy" if
it can demonstrate that it is providing substantial service within the
authorized area for each particular license when it files its renewal
application. That showing will depend on the particular type of services
offered, but might consist of four links per million population within the
service area.
Services Agreements. 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. 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. The Telecommunications Act of 1996 substantially
departs from prior legislation in the telecommunications industry by
establishing local exchange competition as a national policy through the removal
of state regulatory barriers to competition and the preemption of laws
restricting competition in the local exchange market. The provisions of the
Telecommunications Act are designed to ensure that regional Bell operating
companies ("RBOCs") take affirmative steps to level the playing field for their
competitors so that Competitive Access Providers, CLECs 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.
FCC Rulemaking. On December 15, 1995, the FCC announced the issuance of a
notice of proposed Rulemaking and Order (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)
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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"). On January 17, 1997, the FCC adopted an Memorandum
Opinion and 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. The FCC has granted
additional 38 GHz licenses to various applicants, including the Company. On
March 24, 1997, the FCC released another notice of proposed rulemaking ("FNPRM")
in which it proposed an omnibus spectrum allocation plan for the frequencies
located above 38 GHz. The FCC proposed to allocate the spectrum band that the
Company currently uses (38.6-40.0 GHz) for wireless services. In the FNPRM, the
FCC noted that it has already issued licenses for fixed operations throughout
this band and that it has proposed to continue to license these services in that
band. In addition, the FCC has proposed to designate the spectrum bands that
surround the Company's licenses (37.5-38.5 GHz and 40.5-41.5 GHz) as well as
48.2-50.2 GHz bands predominantly for fixed-satellite services.
On October 24, 1997, the FCC adopted the Report and Order and Second Notice
of Proposed Rulemaking ("Order"), which amended the rules for fixed microwave
service in the 38.6-40.0 GHz band ("38 GHz") and adopted a conforming set of
rules for the 37.0-38.6 GHz band ("39 GHz"). The rules adopted were intended to
provide terrestrial licenses, such as the Company's, with sufficient flexibility
to provide the public with innovative services. In the Order, the FCC provided
for licensing in both bands by Basic Trading Areas ("BTAs") and for the
employment of competitive bidding procedures as a means for choosing among
mutually exclusive license applicants. The new rules permit point-to-multipoint,
as well as point-to-point operations, and provide for mobile operations in the
38 GHz band.
More specifically, the FCC rules retained the existing 38 GHz channeling
plan and ensured protection for incumbent licensees, such as the Company, that
are authorized for rectangular service areas, conditioned on them satisfying the
newly-adopted build-out requirements. The order also provided for overlaying 38
GHz BTA-based licenses that will be awarded through competitive bidding, or
auctions. The newly-adopted build-out obligations require a showing of
substantial service at renewal, a standard described as intentionally flexible
to promote innovation and not to unnecessarily limit the types of service
offerings a license may offer. There is an outstanding issue as to when
incumbent renewal applications must be filed, and, therefore, when incumbents
must provide the substantial service showing. The FCC did not adopt any limit
on the amount of 38 GHz spectrum that can be held by a single entity, nor did it
limit the entities eligible to apply for such licenses. Further, the Order
included rules for the issuance of 38GHz licenses through competitive bidding.
Petitions for reconsideration of various aspects of the Report and Order,
in particular the treatment of pending applications and amendments and the
timing of the substantial service showing for incumbents, have been filed by a
number of entities, including the Company. It is not possible to determine when
the FCC will dispose of them or what outcome is likely. There also can be no
assurance that any 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.
Under current state regulatory schemes, entities can compete with ILECs 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.
-10-
<PAGE>
RESEARCH AND DEVELOPMENT
During 1997 and 1996, the Company spent $421,236 and $1,269,579,
respectively, with respect to research and development.
EMPLOYEES
As of March 1, 1998 the Company had a total of 94 employees. None of the
Company's employees is represented by a collective bargaining agreement.
ITEM 2. PROPERTIES
The Company leases approximately 55,057 square feet of office, technical
operations and engineering field services depot space in Bellevue, Washington,
under leases expiring in April and May 2002 of which 5,227 square feet has been
subleased. In addition, the Company also leases approximately 29,659 square
feet of office space in 12 cities nationwide of which 9,083 square feet has been
subleased.
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
The Company did not submit any matter to a vote of the security holders
during the fourth quarter of the 1997 fiscal year.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Henry C. Hirsch......... 55 Chairman of the Board of Directors, President and Chief
Executive Officer
Vernon L. Fotheringham.. 49 Vice Chairman of the Board of Directors
Thomas A. Grina......... 40 Executive Vice President and Chief Financial Officer
William J. Maxwell...... 55 Executive Vice President, Strategic Planning, Marketing & Sales
George R. Olexa......... 42 Senior Vice President, Chief Technology Officer
Thomas M. Walker........ 33 Vice President, General Counsel and Secretary
- -----------
</TABLE>
Henry C. Hirsch has served as Chairman of the Board of Directors, President
and Chief Executive Officer of the Company since November, 1997. From 1996 to
1997, Mr. Hirsch was the Vice Chairman and Chief Executive Officer of Williams
Communications Group, a wholly-owned subsidiary of The Williams Companies that
provides
-11-
<PAGE>
businesses with enterprise network solutions, services and advanced multimedia
applications. From 1992 to 1996, Mr. Hirsch served as President and Chief
Operating Officer of WilTel, a nationwide systems integration company. From 1989
to 1992, he was Executive Vice President of Sales and Marketing as well as Chief
Financial Officer of WilTel.
Vernon L. Fotheringham has served as Vice Chairman of the Board of
Directors since November, 1997. Prior to that, Mr. Fotheringham served as
Chairman of the Board of Directors and Chief Executive Officer of the Company
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. He presently serves as Chairman of American
Broadband Productions, an Internet content provider, and as Vice Chairman of
Angel Technology Corp. From 1988 to 1994, Mr. Fotheringham served as Senior Vice
President of The Walter Group, Inc., a wireless telecommunications consulting
and project management firm.
Thomas A. Grina has served as Executive Vice President, Finance and Chief
Financial Officer of the Company since April 1996. From 1989 to 1996, Mr. Grina
served as Executive Vice President, Finance and Chief Financial Officer of Dial
Page, Inc., a paging services provider, and from 1993 to 1996 he simultaneously
served in the same capacity at its wholly-owned subsidiary, Dial Call
Communications, Inc. ("Dial Call"), a wireless communications company.
William J. Maxwell has served as Executive Vice President of Strategic
Planning, Sales and Marketing of the Company since December, 1997. From 1992 to
1997, Mr. Maxwell was Executive Vice President of ICG Communications Inc. and
the President and Chief Executive Officer of ICG Telecom Group. From 1991 to
1992, Mr. Maxwell was a senior marketing executive with WilTel. From 1989 to
1991, Mr. Maxwell was the President and Chief Executive Officer of MidAmerican
Communications Corporation, a regional long distance company.
George R. Olexa has served as Senior Vice President and Chief Technology
Officer since February, 1998. From 1996 to 1997, Mr. Olexa was Chief Operating
Officer at Superconducting Core Technologies, a high-technology equipment
manufacturer for the telecommunications industry, supplying high-performance,
superconducting filters and cryoelectronics for wireless infrastructures. From
1993 to 1996, Mr Olexa served as Executive Vice President of Engineering of Dial
Call. From 1988 to 1993, he was Executive Director of Network Engineering and
Technology Applications for Pacific Bell.
Thomas M. Walker has served as vice president and general counsel of the
Company since 1997, and served as associate general counsel from 1996 to 1997.
From 1994 to 1996, Mr. Walker practiced in the law firm of Buchalter, Nemer,
Fields & Younger in its Los Angeles, California office, advising
telecommunications and other clients on corporate matters. From 1991 to 1994, Mr
Walker practiced with the national law firm of Pillsbury Madison & Sutro.
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.
-12-
<PAGE>
<TABLE>
<CAPTION>
PRICE RANGE
--------------------
HIGH LOW
--------- ---------
<S> <C> <C>
1996 Fourth Quarter (commencing on November 5).. $16.250 $11.125
1997 First Quarter.............................. $14.625 $10.375
Second Quarter............................. $11.250 $ 6.625
Third Quarter.............................. $ 9.500 $ 6.313
Fourth Quarter............................. $10.625 $ 7.500
</TABLE>
On March 25, 1998, the last sale price of common stock as reported on the
Nasdaq National Market was $14.936 per share. As of March 25, 1998 there were
159 record holders of ART's Common Stock and 3,395 beneficial holders.
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.
In 1997, the Company did not sell any of its securities in unregistered
sales that were not reported in previous quarterly reports on Form 10-Q.
-13-
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below as of December 31, 1993, 1994,
1995, 1996 and 1997 and for the period from August 23, 1993 (date of inception)
to December 31, 1993 and the years ended December 31, 1994, 1995, 1996 and 1997
were derived from and should be read in conjunction with the audited financial
statements of the Company.
<TABLE>
<CAPTION>
AUGUST 23, 1993
(DATE OF INCEPTION) YEAR ENDED DECEMBER 31
TO DECEMBER 31, ------------------------------------------------------
1993 1994 1995 1996 1997
-------------------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service revenue............................ $ -- $ -- $ 5,793 $ 247,116 $ 708,883
Equipment sales and construction revenue... -- -- -- 2,660,811 396,970
Consulting revenue......................... -- 137,489 -- -- --
Technical and network operations expenses.. -- -- -- 3,402,948 7,252,512
Cost of equipment sales and construction... -- -- -- 1,590,779 254,444
Sales and marketing expenses............... -- -- 191,693 5,548,584 13,469,898
General and administrative expenses........ 5,906 253,453 2,911,273 12,896,134 12,789,866
Research and development expenses.......... -- -- -- 1,269,579 421,236
Equipment impairment....................... -- -- -- -- 7,166,920
Depreciation and amortization.............. 688 8,281 15,684 1,017,959 6,018,172
Loss from operations....................... (6,594) (124,245) (3,112,857) (22,818,056) (46,266,995)
Interest and other expenses, net........... -- 4,375 121,986 6,512,251 16,817,180
Income tax benefit......................... -- -- -- -- 1,355,249
Extraordinary loss......................... -- -- -- 1,339,996 --
Net loss................................... (6,594) (128,620) (3,234,843) (30,670,303) (61,728,926)
Basic and diluted net loss per share....... -- (0.04) (0.54) (3.97) (3.23)
Weighted average number of shares of
common stock outstanding.................. 1,820,555 3,337,685 5,946,338 7,717,755 19,083,304
OTHER FINANCIAL DATA:
EBITDA (1)................................. $ (5,906) $ (115,964) $(2,007,568) $(14,348,920) $(30,811,151)
Capital expenditures....................... -- 5,175 3,585,144 16,631,451 16,685,436
AS OF DECEMBER 31,
-----------------------------------------------------------------------
1993 1994 1995 1996 1997
---------- ---------- ----------- ------------ ------------
BALANCE SHEET DATA:
Working capital surplus (deficit).......... $ 13,958 $ (76,556) $(3,008,510) $ (9,623,905) $ 25,608,821
Property and equipment, net................ -- 3,448 3,581,561 19,303,849 25,294,946
FCC licenses, net.......................... -- -- 4,235,734 4,330,906 131,210,102
Total assets............................... 74,513 42,611 9,876,559 36,648,701 232,559,749
Long-term debt............................. -- -- 6,450,000 4,977,246 108,299,359
Accumulated deficit........................ (6,594) (135,214) (3,370,057) (34,040,360) (95,769,286)
Total stockholders' equity (deficit)....... 54,542 (39,078) (312,860) 19,949,920 76,257,063
</TABLE>
- --------
-14-
<PAGE>
(1) EBITDA consists of loss before interest and financing expense (net of
interest income), income tax expense, depreciation and amortization
expense, non-cash compensation expense, non-cash equipment charges 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.
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.
ITEM 7. 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 primarily selling connectivity
to various telecommunications companies as a wholesale carriers' carrier. During
the first quarter of 1998, the Company altered its strategy to begin deploying
broadband data networks and selling a variety of data services to end user
customers.
RESULTS OF OPERATIONS
1997 Compared to 1996
Revenues for the year ended December 31, 1997 were approximately $1.1
million compared to $2.9 million in 1996. Included in revenues was
approximately $0.4 million in 1997 and $2.7 million in 1996 representing non-
recurring sales and construction revenue associated with radio links installed
for a third party. The Company does not expect routinely to sell equipment and
install radio links for third parties in the future.
Operating costs and expenses were approximately $47.4 million for the year
ended December 31, 1997 compared to approximately $25.7 million in 1996. The
increase was primarily due to an overall increase in expenses associated with
the commencement of commercial operations. Included in operating costs and
expenses for 1997 and 1996 was approximately $0.3 million and $1.6 million,
respectively, related to non-recurring sales and construction revenue. Sales and
marketing expenses in 1996 included a $1.1 million charge relating to a
distribution agreement. General and administrative expenses in 1996 included
$7.6 million of non-cash compensation charges, including $6.8 million related to
release of escrowed shares to executive officers. In connection with employment
arrangements with its new Chairman and Chief Executive Officer, the Company
incurred a non-recurring charge of approximately $1.2 million in 1997 with
respect to a stock grant and other expenses. During the fourth quarter of 1997
the Company recorded $8.1 million of non-cash equipment charges, including
approximately $7.2 million to write down certain radio equipment that is not
expected to be an integral part of the Company's broadband data network. The
Company incurred non-recurring severance and office closure costs of
approximately $950,000 in the third and fourth quarters of 1997 in connection
with management-initiated restructuring activities intended to align the
Company's organization with its marketing and business development plans and to
conserve capital resources. While such restructurings are expected to reduce
expenses in the near term, in future periods the Company expects increases in
cash expenses for network operations and sales and marketing as the Company
deploys and markets its networks. Depreciation and amortization was
approximately $6.0 million for 1997 compared to approximately $1.0 million in
1996. The increase was due to additional equipment placed in service and
amortization of FCC licenses. Excluding non-cash and non-recurring items,
operating costs and expenses for the year ended December 31, 1997 were
approximately $30.9 million compared to $14.4 million in 1996.
-15-
<PAGE>
Net interest and other expenses were approximately $16.8 million for the
year ended December 31, 1997 compared to $6.5 million in 1996. Interest expense
increased in 1997 due to increased borrowings in 1997. Included in interest and
other expenses was approximately $2.7 million in 1997 and $3.7 million in 1996
related to a financing commitment which was terminated in 1997 upon the sale of
the Company's 14% Senior Notes due 2007 (the "Senior Notes"). The issuance of
the Senior Notes in February 1997 caused interest expense to increase
substantially and will continue to cause interest expense to increase in future
periods. Interest income increased due to the purchases of short-term
investments and pledged securities. 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.
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.
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 from the termination of an arrangement involving the escrow of 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 for 1996 were non-cash marketing costs of approximately $1.1
million related to a distribution agreement.
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 was 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 of the
Senior Notes. Interest expense increased in 1996 due to increased borrowings in
1996.
LIQUIDITY AND CAPITAL RESOURCES
To date, funding for the Company's 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 $51 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 interest payments 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.
During 1997 the Company issued six million shares of common stock to
acquire certain FCC licenses. In addition, the Company has entered into
agreements to acquire certain additional FCC licenses, including agreements to
acquire licenses in exchange for 1.34 million shares of common stock, and shares
of common stock valued at approximately $28 million at the time of closing. The
Company may continue to acquire additional licenses in exchange for common
stock.
The Company will require significant additional capital to fund its
operations and business plan. ART currently estimates that it
-16-
<PAGE>
will require in excess of $1 billion over the next five years for capital
expenditures, working capital and funding of operating losses. The Company has
signed a letter of intent with Lucent to provide vendor financing of up to $200
million which is contingent upon various conditions, including achieving
performance targets and raising additional capital. The Company expects to seek
additional financing to satisfy its capital requirements and to raise
substantial capital in 1998. If the Company is unable to obtain such additional
financing, the Company's capital was sufficient at March 31, 1998 to fund its
operations at levels at that date through the end of 1998 and to meet its
capital commitments at that date through the end of the year. However, without
additional capital, the Company will not be able to implement its business plan.
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. If 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 and could
materially adversely affect the Company.
ART's actual capital requirements will be affected, possibly materially,
by various factors including the speed of the Company's build out, the cost and
amount of equipment acquired, the number of markets served and the penetration
of those markets, customer acceptance and demand and the prices charged for
services, competition and technological change. The Company expects to be able
to adjust its capital requirements in part in response to customer demand by
changing the rate at which it adds new markets and builds out existing markets.
If 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.
INFLATION
Management does not believe that its business is impacted by inflation to a
significantly different extent than is the general economy.
OTHER
The Company has implemented a program to identify and resolve the effect of
Year 2000 software issues on the integrity and reliability of its financial and
operational systems. In addition, the Company is also communicating with its
principal vendors and service providers to coordinate Year 2000 conversion.
Although the Company cannot yet assess the cost of year 2000 issues, the Company
does not expect the costs of achieving Year 2000 compliance to have a material
impact on the Company's business, operations or its financial condition.
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. The Company
does not undertake to update or revise its forward-looking statements publicly
even if experience or future changes make it clear that any projected results
expressed or implied herein will not be realized.
-17-
<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, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity (deficit)
and cash flows for the years ended December 31, 1997, 1996 and 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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, 1997 and 1996, and the
consolidated results of their operations and their cash flows for the years
ended December 31, 1997, 1996 and 1995, in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P.
Seattle, Washington
March 10, 1998
F-1
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------- -----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 7,135,427 $ 1,974,407
Short-term investments.......................... 18,210,220
Pledged securities.............................. 18,517,640
Restricted cash................................. 1,032,060
Accounts receivable............................. 199,316 1,819,593
Prepaid expenses and other current assets....... 112,825 196,791
-------------- -------------
Total current assets.......................... 45,207,488 3,990,791
Pledged securities................................ 25,842,275
Restricted cash................................... 1,032,060
Property and equipment, net....................... 25,294,946 19,303,849
FCC licenses, net................................. 131,210,102 4,330,906
Deferred financing costs, net..................... 4,502,330 3,255,688
Other assets...................................... 502,608 4,735,407
-------------- -------------
Total assets.................................. $ 232,559,749 $ 36,648,701
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable.......................... $ 3,067,984 $ 9,425,834
Accrued compensation and benefits............... 1,775,646 1,350,894
Book overdraft.................................. 3,055,759
Other accrued liabilities....................... 3,109,631 927,648
Accrued interest payable........................ 7,113,391 17,159
Current portion of long-term debt............... 1,476,256 1,893,161
-------------- -------------
Total current liabilities..................... 19,598,667 13,614,696
Long-term debt, net of current portion............ 106,823,103 3,084,085
Deferred income tax liability..................... 29,880,916
-------------- -------------
Total liabilities............................. 156,302,686 16,698,781
Commitments and contingencies
Stockholders' equity:
Serial preferred stock, $.001 par value,
10,000,000 shares authorized, none issued
and outstanding
Common stock, $.001 par value, 100,000,000
shares authorized 21,429,485 and 13,559,420
shares issued and outstanding................... 21,429 13,559
Additional paid-in capital........................ 172,892,420 53,976,721
Note receivable from stockholder.................. (887,500)
Accumulated deficit............................... (95,769,286) (34,040,360)
-------------- -------------
Total stockholders' equity....................... 76,257,063 19,949,920
-------------- -------------
Total liabilities and stockholders' equity.... $ 232,559,749 $ 36,648,701
============== =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-2
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Service revenue...................................... $ 708,883 $ 247,116 $ 5,793
Equipment sales and construction revenue............. 396,970 2,660,811
------------ ------------ -----------
Total revenue................................... 1,105,853 2,907,927 5,793
------------ ------------ -----------
Costs and expenses:
Technical and network operations................... 7,252,512 3,402,948
Cost of equipment sales and construction........... 254,444 1,590,779
Sales and marketing................................ 13,469,898 5,548,584 191,693
General and administrative......................... 12,789,866 12,896,134 2,911,273
Research and development........................... 421,236 1,269,579
Equipment impairment............................... 7,166,720
Depreciation and amortization...................... 6,018,172 1,017,959 15,684
------------ ------------ -----------
Total operating costs and expenses.............. 47,372,848 25,725,983 3,118,650
------------ ------------ -----------
Operating loss....................................... (46,266,995) (22,818,056) (3,112,857)
Interest and other:
Interest expense................................... 18,931,303 1,695,489 131,540
Financing commitment expense....................... 2,699,881 3,687,644
Other.............................................. 1,248,000
Interest income.................................... (4,814,004) (118,882) (9,554)
------------ ------------ -----------
Loss before income taxes and extraordinary
item........................................... (63,084,175) (29,330,307) (3,234,843)
Deferred income tax benefit.......................... 1,355,249
------------ ------------ -----------
Loss before extraordinary item..................... (61,728,926) (29,330,307) (3,234,843)
Extraordinary loss on early retirement of debt....... (1,339,996)
------------ ------------ -----------
Net loss............................................ $(61,728,926) $(30,670,303) $(3,234,843)
============ ============ ===========
Basic and diluted loss per common share before
extraordinary item.................................. $ (3.23) $ (3.80) $ (0.54)
Basic and diluted extraordinary loss per common
share............................................... (0.17)
------------ ------------ -----------
Basic and diluted net loss per common share.......... $ (3.23) $ (3.97) $ (0.54)
============ ============ ===========
Weighted average common shares....................... 19,083,304 7,717,755 5,946,338
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
SERIAL NOTE
COMMON STOCK PREFERRED STOCK ADDITIONAL RECEIVABLE
-------------------- ------------------ PAID-IN FROM ACCUMULATED
AMOUNTS SHARES PAR VALUE SHARES PAR VALUE CAPITAL STOCKHOLDER DEFICIT TOTAL
- ------- ------- --------- ------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 serial
preferred stock to limited
partnerships affiliated
with Landover for cash... 419,811 $ 419 1,999,581 2,000,000
Issuance of serial
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 serial
preferred stock for cash.. 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 serial
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
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..... (1,254,698) (1,254,698)
Accrued stock option
compensation.............. 449,313 449,313
Stock options exercised.... 286,100 286 496,159 496,445
Warrants exercised......... 1,583,965 1,584 (1,584)
Common stock issuable for
note receivable from
stockholder.............. 887,500 $(887,500)
Common stock issuable
under employment
agreement............... 887,500 887,500
Net loss................... (61,728,926) (61,728,926)
---------- -------- -------- ------ ------------ --------- ------------- -----------
Balance December 31, 1997.. 21,429,485 $ 21,429 $172,892,420 $(887,500) $(95,769,286) $76,257,063
========== ======== ========= ====== ============ ========= ============= ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows from operating activities:
Net loss............................................. $(61,728,926) $(30,670,303) $ (3,234,843)
Adjustments to reconcile net loss to net cash
used in operating activities:
Non-cash compensation expense....................... 1,336,813 7,646,177 1,089,605
Non-cash equipment charges.......................... 8,100,859
Non-cash marketing expense.......................... 1,053,000
Depreciation and amortization....................... 6,018,172 1,017,959 15,684
Non-cash interest expense........................... 1,466,698 772,221 110,828
Financing commitment expense........................ 2,699,881 3,687,644
Deferred income tax benefit......................... (1,355,249)
Extraordinary loss on early debt retirement......... 1,339,996
Changes in operating assets and liabilities:
Accrued interest on investments and securities.... (2,194,497)
Accounts receivable............................... 1,620,277 (1,819,593)
Prepaid expenses and other current assets......... 83,966 (144,466) (56,337)
Other assets...................................... (137,321)
Accounts payable and accrued liabilities.......... 1,098,448 3,615,884 563,351
Accrued interest payable.......................... 7,096,232 17,159
------------ ------------ ------------
Net cash used in operating activities........... (35,894,647) (13,484,322) ( 1,511,712)
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures for property and equipment..... (24,051,854) (9,439,481) (621,364)
Additions to FCC licenses and acquisitions.......... (5,747,844) (3,201,183) (3,292,883)
Purchases of pledged securities..................... (51,245,250)
Purchases of short-term investments................. (47,065,154)
Investment in restricted cash....................... (1,032,060)
Proceeds from maturities of pledged securities...... 8,863,315
Proceeds from sales of short-term investments....... 29,071,448
Other............................................... 88,718 (1,425,032) (280,000)
------------ ------------ ------------
Net cash used in investing activities........... (90,086,621) (15,097,756) (4,194,247)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of Senior Notes and warrants.. 135,000,000
Warrant issuance costs............................... (1,254,698)
Proceeds from issuance of common stock............... 496,445 34,507,500 1,020
Proceeds from issuance of preferred stock............ 2,500,000 4,050,000
Stock issuance costs................................. (6,231,098) (213,884)
Proceeds from loans and debt financings.............. 14,445,000 5,133,500
Book overdraft....................................... 3,055,759
Repayments of loans and debt financings.............. (2,018,743) (13,131,443) (8,500)
Redemption of common stock.......................... (2,000,000)
Additions to deferred financing costs................ (4,136,475) (2,167,128) (452,656)
Other................................................ (175,000)
------------ ------------ ------------
Net cash provided by financing activities......... 131,142,288 29,922,831 6,334,480
------------ ------------ ------------
Net increase in cash and cash equivalents.............. 5,161,020 1,340,753 628,521
Cash and cash equivalents, beginning of period......... 1,974,407 633,654 5,133
------------ ------------ ------------
Cash and cash equivalents, end of period............... $ 7,135,427 $ 1,974,407 $ 633,654
============ ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<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, build out of its
systems, development of its operating infrastructure, and raising of funds to
implement its business plan. The Company is building fixed wireless broadband
packet-switched data networks to provide broadband data services to businesses
not served by fiber optic networks.
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 current business plan, the Company will require significant
financing in 1998 and over the next several years to fund the development and
expansion of its national wireless broadband operations. The Company has signed
letters of intent for up to $200 million of equipment vendor financing subject
to definitive agreement, additional financing and other conditions and is
pursuing other sources of financing. In addition, the Company has significant
radio equipment on hand available for deployment. Management believes that, in
the event the Company is unable to obtain the additional funding contemplated in
its business plan for 1998, its current funds are sufficient to enable the
Company to fund its operations at current levels and meet its present capital
commitments through the end of 1998. There can be no assurance that the Company
will be able to obtain 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 needed, such failure could
result in 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.
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.
F-6
<PAGE>
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, 1997, the Company's temporary cash investments were principally
placed in two entities. Checks issued but not presented to banks are classified
as "Book overdrafts" for accounting purposes in the consolidated balance sheet.
Short-term Investments and Pledged Securities
Short-term investments are comprised of commercial paper and other similar
investments purchased with a term to maturity of more than three months. Short-
term investments are held as available for sale and are carried at market value.
Pledged securities consist of U.S. Treasury securities that are held to maturity
and are carried at amortized cost.
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 five years for wireless transmission equipment placed in service and
three to five 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 three to five 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, 1997 and December 31, 1996 totaled
$2,930,798 and $106,011, respectively. 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 deployment of networks 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 networks once they have been deployed. 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.
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.
F-7
<PAGE>
Accumulated amortization of deferred financing costs totaled $290,756 and
$3,753,605 at December 31, 1997 and 1996, respectively. Deferred costs of
approximately $1.2 million associated with an incomplete public debt offering
were charged to other expense in 1996.
Revenue Recognition
Revenue from telecommunications services is 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.
Two customers accounted for approximately forty-five percent of the
Company's service revenues in 1997, and a single customer accounted for
approximately forty-two percent of the Company's service revenues in 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.
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
During 1997 the Company adopted, and applied retroactively, Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). This
statement specifies the computation, presentation, and disclosure requirements
for earnings per share ("EPS"), simplifies the computational guidelines, and
increases comparability on an international basis. This statement replaced
"primary" EPS with "basic" EPS, the principal difference being the exclusion of
common stock equivalents in the computation of basic EPS. In connection with the
adoption of SFAS 128, the Company also adopted the provisions of SEC Staff
Accounting Bulletin No. 98 ("SAB 98"), which provides for the inclusion of
nominal issuances of potentially dilutive equity instruments in the calculation
of net loss per share. The adoption of SFAS 128 and SAB 98 by the Company had
no impact on previously reported net loss per share.
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.
F-8
<PAGE>
Reclassifications
Certain reclassifications have been made to prior year amounts to conform
to current year presentation. Such reclassifications had no effect on
previously reported net loss, stockholders' equity or cash flows.
3. PROPERTY AND EQUIPMENT:
Property and equipment at December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Wireless transmission equipment placed in service............ $ 5,879,673 $ 5,303,386
Wireless transmission equipment not yet placed in operation.. 16,730,010 10,727,923
Computer hardware............................................ 1,673,288 1,063,928
Computer software............................................ 934,127 2,334,683
Office furniture and equipment............................... 1,601,190 458,698
Other equipment and vehicles................................. 489,220 333,152
----------- -----------
27,307,508 20,221,770
Accumulated depreciation (2,012,562) (917,921)
----------- -----------
$25,294,946 $19,303,849
=========== ===========
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1996 and 1995
was $3,021,380, $909,163, and $7,031, respectively.
During the fourth quarter of 1997, the Company recorded non-cash equipment
charges of $8.1 million, including a charge of approximately $7.2 million to
write down certain radio equipment that is not expected to be an integral part
of the Company's expanded broadband network. The amount of the write-down was
based on discounted projected future cash flows from such equipment under
current deployment plans.
4. FCC LICENSES:
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 total
acquisition cost was approximately $122.2 million, comprised of the aggregate
market value of the common shares issued to CommcoCCC of approximately $88
million, direct costs and the related deferred tax liability of approximately
$31.2 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.
In connection with this transaction, the Company gave a stockholder of
CommcoCCC an option to acquire twelve 38 GHz FCC licenses in specified markets,
in which the Company has more than one license. Such option was exercised in
June 1997, with closing subject to FCC approval. The purchase price will be
paid by a non-recourse note and will be determined 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.
F-9
<PAGE>
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. Acquisition costs incurred
through December 31, 1996 were included in other assets in the consolidated
balance sheet. ART West held certain 38 GHz licenses that were transferred to
the Company upon the completion of the acquisition. An employee of the Company
is the president and a shareholder of Extended.
EMI Licenses
In November 1995, the Company acquired certain FCC licenses from EMI
Communications Corp. in exchange for $3 million in cash and a $1.5 million
promissory note.
Pending License Acquisitions
During 1997, the Company entered into agreements to acquire certain 38 GHz
licenses, including twenty three licenses from Columbia Capital Corporation and
Columbia Millimeter Communications, L.P., for approximately 1.34 million shares
of common stock to be issued at closing. In January 1998, the Company also
entered into a definitive agreement with DCT Communications, Inc. to acquire
forty-nine 38 GHz licenses in exchange for shares of the Company's common stock
with a value of approximately $28 million, subject to adjustment based upon the
trading price of the Company's shares at the time of closing. These
transactions are subject to various closing conditions, including approval by
the FCC.
5. INCOME TAXES:
A reconciliation of the Company's effective tax rate and the Federal statutory
rate follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- ------------
<S> <C> <C> <C>
Net loss before taxes $(63,084,175) $(30,670,303) $(3,234,843)
============ ============ ===========
Federal income tax at
statutory rate 35.0% 35.0% 35.0%
Non-deductible interest (0.6)
Non-deductible compensation (7.8) (8.7)
State benefit, net of Federal tax benefit 2.0 1.6 1.4
Other (0.1) (2.3)
Valuation allowance (34.2) (28.8) (25.4)
------------ ------------ -----------
Effective income tax rate 2.1% 0.0% 0.0%
============ ============ ===========
Income tax benefit $ (1,355,249) $ 0 $ 0
============ ============ ===========
</TABLE>
F-10
<PAGE>
Deferred tax assets and liabilities at December 31, were as follows:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 28,385,000 $ 9,100,000
Equipment impairment 2,652,000
Accrued compensation and benefits 755,000 470,000
Depreciation 419,000
Valuation allowance (18,833,916) (9,258,000)
------------ -----------
13,377,084 312,000
------------ -----------
Deferred tax liabilities:
FCC Licenses (43,258,000)
Depreciation and amortization (312,000)
------------ -----------
(43,258,000) (312,000)
------------ -----------
Net deferred tax liability $(29,880,916) $ 0
============ ===========
</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. 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.
At December 31, 1997, the Company has accumulated net operating loss
carryforwards for Federal income tax purposes of approximately $76.7 million
which expire between 2008 and 2012. 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.
6. LONG-TERM DEBT, BRIDGE, AND OTHER FINANCINGS:
Long-Term Debt
Long-term debt as of December 31 consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Senior Notes, with 14% semi-annual interest, due 2007............................................. $135,000,000 $ --
Discount on Senior Notes.......................................................................... (28,672,995) --
Equipment financing note, payable in monthly installments
of $92,694 including interest at 17.26%, and
final payment of $642,305 due April 29, 1998..................................................... 877,854 1,446,699
Note payable in quarterly installments of principal of $187,500
plus interest at prime plus 2% (10.5% at December 31, 1997)
through September 1998........................................................................... 562,500 1,312,500
GTE software financing............................................................................ 2,079,372
Other............................................................................................. 532,000 138,675
------------ -----------
108,299,359 4,977,246
Less current portion................................................................................ (1,476,256) (1,893,161)
------------ -----------
$106,823,103 $ 3,084,085
============ ===========
</TABLE>
F-11
<PAGE>
The aggregate amount of the principal payments for long-term debt as of December
31, 1997 follows:
YEAR ENDED DECEMBER 31:
<TABLE>
<S> <C>
1998................................. $ 1,476,256
1999................................. 496,098
2000................................. --
2001................................. --
2002................................. --
Thereafter........................... 135,000,000
Discount on Senior Notes............. (28,672,995)
-------------
$ 108,299,359
=============
</TABLE>
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, approximately $51 million of which proceeds were used
to purchase a portfolio of U.S. Treasury securities that will provide for
interest payments on the Senior Notes through February 2000. 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.
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.
Equipment Financing Note
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.
F-12
<PAGE>
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.
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.
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 collateralized 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:
Operating Leases
The Company has entered into operating leases for office space and antenna
sites which expire between 1998 and 2006. Lease expense amounted to
approximately $1,753,962, $618,000 and $16,000 for 1997, 1996 and 1995,
respectively. Future annual minimum lease payments as of December 31, 1996 are
as follows:
<TABLE>
<S> <C>
1998........ $ 2,690,905
1999........ 2,736,249
2000........ 2,235,533
2001........ 2,107,011
2002........ 1,498,481
Thereafter.. 261,946
-----------
$11,530,125
===========
</TABLE>
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.
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.
F-13
<PAGE>
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.
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.................. 332,091 82,318 5,402 419,811
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 serial preferred stock................... 232,826 232,826
Shares issued to reflect anti-dilution............... 120,607 28,172 1,961 150,740
Issuance of serial 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)
Balance at December 31, 1996......................... ---- ---- ---- ---- ---- ---- ----
======== ======== ====== ======= ======== ======= ========
</TABLE>
Common Stock
The Company was initially formed in August 1993 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, 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.
F-14
<PAGE>
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 certain FCC 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 years ended December 31, 1997 and 1996. The
following summarizes the warrants outstanding related to these financing
activities at December 31, 1997:
<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
Senior Note Warrants.......... 1,147,760 $ 0.01 2007
</TABLE>
The warrants contain certain anti-dilution provisions.
Stock Compensation
Pursuant to the Restated Equity Incentive Plan (the "Plan"), the Company
may grant incentive and non-qualified options and other equity incentives with
respect to up to 4 million shares to employees and certain other persons or
entities.
F-15
<PAGE>
Pursuant to the 1997 Equity Incentive Plan for Non-Employee Directors, non-
employee directors are given annual automatic grants of stock options and may
annually elect to take fees in common stock to be issued covering up to an
aggregate of 500,000 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
$449,313, $850,663 and $287,603 in 1997, 1996 and 1995, respectively.
A summary of the stock option transactions follows:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
---------- ----------------
<S> <C> <C>
Options granted in 1995................. 382,630 $ 2.28
---------
Options outstanding, December 31, 1995.. 382,630 2.28
Options granted....................... 461,112 16.07
Options canceled...................... (16,363) 12.25
---------
Options outstanding, December 31, 1996.. 827,379 9.95
Options granted....................... 2,320,263 10.23
Options exercised..................... (286,100) 1.74
Options canceled...................... (564,210) 15.87
--------- ------
Options outstanding, December 31, 1997.. 2,297,332 $ 9.82
========= ======
</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:
F-16
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
Pro Forma Pro Forma Pro Forma
------------- ------------- ------------
<S> <C> <C> <C>
Loss before extraordinary item........ $(63,848,637) $(29,410,915) $(3,049,032)
Extraordinary item.................... (1,339,996)
------------ ------------ -----------
Net loss.............................. $(63,848,637) $(30,750,911) $(3,049,032)
============ ============ ===========
Basic and diluted loss per share
before extraordinary item............ $ (3.35) $ (3.81) $ (0.51)
Basic and diluted extraordinary loss
per share............................ (0.17)
------------ ------------ -----------
Basic and diluted net loss per share.. $ (3.35) $ (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, 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Options granted with exercise prices equal to the fair value
of the stock at the date of grant........................ $8.71 $6.59 $0.82
Options granted with exercise prices greater than the fair
value of the stock at the date of grant.................... $8.50 $7.04
</TABLE>
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 5.0% to
6.0%, (iii) expected volatility rates ranging from 60% to approximately 65%,
(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, 1997 as follows:
<TABLE>
<CAPTION>
Weighted-
Number Average Weighted- Number Weighted-
Outstanding Remaining Average Exercisable Average
Exercise Price at 12/31/97 Contractual Life Exercise Price at 12/31/97 Exercise Price
- -------------- ----------- ----------------- ---------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
$ 1.62 to 4.54........... 68,926 2.8 $ 3.61 41,356 $ 3.61
$7.13 to 10.38........... 1,614,527 4.5 $ 8.64 133,812 $ 7.88
$11.25 to 15.00.......... 602,970 4.4 $13.54 13,949 $13.04
$17.19................... 10,909 3.6 $17.19 3,818 $17.19
</TABLE>
During 1997, the Company entered into an employment agreement with its
Chief Executive Officer that provides for, among other things, the issuance of
100,000 shares of common stock deliverable in 2001 that has been reflected as a
non-cash compensation charge of $887,500 in 1997 and the issuance of 100,000
shares of common stock in exchange for a recourse note of $887,500 with interest
at the minimum applicable federal rate.
F-17
<PAGE>
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. In 1995, Landover advanced $175,000 to the Company
to fund a portion of the cost of certain FCC licenses acquired. The advance was
repaid in the same year.
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 $666,695, $520,000 and $34,800 in 1997, 1996 and 1995,
respectively.
During 1996, the Company funded approximately $400,000 of research and
development related to development of wireless transmission equipment with an
entity, of which an executive of the Company was a shareholder and director.
10. FAIR VALUES OF FINANCIAL INSTRUMENTS:
The carrying amounts and the estimated fair values of the Company's
financial instruments at December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Cash and cash equivalents.. $ 7,135,427 $ 7,135,427 $1,974,407 $1,974,407
Restricted cash............ 1,032,060 1,032,060 1,032,060 1,032,060
Short-term investments..... 18,210,220 18,210,220 ---- ----
Pledged securities......... 44,359,915 44,230,640 ---- ----
Senior Notes............... 106,327,005 129,600,000 ---- ----
Note payable............... 562,500 562,500 1,312,500 1,312,500
Equipment financing note... 877,854 877,854 1,446,699 1,446,699
Other long-term debt....... 532,000 532,000 2,218,047 2,218,047
</TABLE>
Cash, cash equivalents and restricted cash: The carrying amount reported in
the balance sheet approximates fair value. Short-term investments and pledged
securities: The fair values are based on published market values for the
respective investment instruments. Senior Notes: the fair value is based upon
published market value. Note payable, equipment financing note and other debt:
The fair values are based upon interest rates currently available to the Company
for issuance of similar debt with similar terms and maturities.
F-18
<PAGE>
11. SUPPLEMENTAL CASH FLOW INFORMATION:
Supplemental disclosure of cash flow information are summarized below for
the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ---------
<S> <C> <C> <C>
Non-cash financing and investing activities:
Additions to property and equipment............ $ 2,181,684 $ 9,548,102 2,666,360
Value ascribed to warrants..................... 29,707,509 2,115,388
Issuance of shares for licenses................ 87,750,000
Accrued deferred financing costs............... 300,405 370,617
Issuance of note payable for certain FCC
licenses..................................... 1,500,000
Exchange of notes for serial preferred stock,
net of deferred financing costs.............. 4,673,186
Termination of software license agreement...... 1,774,087
Common stock issuable in exchange for note
receivable................................... 887,500
Interest paid.................................... 10,368,374 926,821
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
F-19
<PAGE>
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" in the Company's definitive Proxy Statement to be filed
with the Commission in connection with the Company's 1998 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 the 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, 1997 and 1996.
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995.
Consolidated Statements of Stockholders Equity (Deficit) for the
years ended December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.
-22-
<PAGE>
(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.
-23-
<PAGE>
Exhibit
No. Title
------ ------
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).
4.7 Shareholders Rights Agreement.
4.8 Form of Rights Certificate.
9.1 Voting Trust Agreement dated November 5, 1996.
9.2 Form of Trustee Indemnification Agreement.
10.1 Employment Agreement between the Company and Vernon L. Fotheringham
dated December 16, 1995.
10.2 Amendment No. 1 to Employment Agreement between the Company and
Vernon L. Fotheringham dated October 17, 1997.
10.3 Employment Agreement between the Company and Thomas A. Grina, dated
August 21, 1997.
10.4 Employment Agreement between the Company and Henry C. Hirsch dated
October 17, 1997.
10.5 Change of Control Agreement between the Company and Henry C. Hirsch
dated October 17, 1997.
10.6 Form of Director Indemnification Agreement.
10.7 Company's Restated Equity Incentive Plan, as amended.
10.8 Company's 1997 Equity Incentive Plan for Non-Employee Directors.
10.9 Company's 1996 Non-Employee Directors Incentive Stock Option Plan.
10.10 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.
10.11 Amendment No. 1 to Registration Rights Agreement dated as of October
16, 1996.
10.12 Form of Indemnity Warrant.
10.13 Form of Subscription Agreement dated March 8, 1996, including Forms
of Bridge Note and Bridge Warrant.
10.14 Option Agreement dated July 3, 1996 with Commco, L.L.C.
10.15 Form of September Bridge Warrant.
10.16 Form of CIBC Warrants.
21 Subsidiaries of the Company.
23 Consent of Independent Accountants.
27 Financial Data Schedule.
99 Risk Factors.
(4) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the fourth quarter of
1997.
-24-
<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 30TH DAY OF
MARCH 1998.
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:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Henry C. Hirsch Chairman, President, Chief March 30, 1998
- ------------------------------ Executive Officer and Director
HENRY C. HIRSCH
/s/ Vernon L. Fotheringham Vice Chairman and Director March 30, 1998
- ------------------------------
VERNON L. FOTHERINGHAM
/s/ James Cook Director March 30, 1998
- ------------------------------
JAMES COOK
/s/ Mark C. Demetree Director March 30, 1998
- ------------------------------
MARK C. DEMETREE
/s/ Andrew I. Fillat Director March 30, 1998
- ------------------------------
ANDREW I. FILLAT
/s/ James B. Murray, Jr. Director March 30, 1998
- ------------------------------
JAMES B. MURRAY, JR.
/s/ Alan Z. Senter Director March 30, 1998
- ------------------------------
ALAN Z. SENTER
/s/ Thomas A. Grina Executive Vice President, March 30, 1998
- ------------------------------ Chief Financial Officer
THOMAS A. GRINA
</TABLE>
-25-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE PAGE
- --------- ----- ----
<S> <C> <C>
3.1 Amended and Restated Certificate of Incorporation.(11)
3.2 Restated and Amended Bylaws of Registrant.(11)
4.1 Specimen of Common Stock Certificate.(3)
4.2 Indenture relating to the Company's 14% Senior 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
of Notes (included in Exhibit 4.5).(10)
4.7 Shareholders Rights Agreement.(12)
4.8 Form of Rights Certificate.(12)
9.1 Voting Trust Agreement dated November 5, 1996.(9)
9.2 Form of Trustee Indemnification Agreement.(3)
10.1 Employment Agreement between the Company and Vernon L. Fotheringham,
dated December 16, 1995.(1)
10.2 Amendment No. 1 dated October 17, 1997 to Employment Agreement
between the Company and Vernon L. Fotheringham.(13)
10.3 Employment Agreement between the Company and Thomas A. Grina dated
April 26, 1996.(8)
10.4 Employment Agreement between the Company and Henry C. Hirsch dated
October 17, 1997.(13)
10.5 Change of Control Agreement between the Company and Henry C. Hirsch
dated October 17, 1997.(13)
10.6 Form of Director Indemnification Agreement.(1)
10.7 Company's Restated Equity Incentive Plan, as amended.
10.8 Company's 1997 Equity Incentive Plan for Non-Employee Directors.
10.9 Company's 1996 Non-Employee Directors Incentive Stock Option
Plan.(1)
10.10 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)
10.11 Amendment No. 1 to Registration Rights Agreement dated as of October
16, 1996.(9)
10.12 Form of Indemnity Warrant.(1)
10.13 Form of Subscription Agreement dated March 8, 1996, including Forms
of Bridge Note and Bridge Warrant.(2)
10.14 Option Agreement dated July 3, 1996 with Commco, L.L.C.(2)
10.15 Form of September Bridge Warrant.(9)
10.16 Form of CIBC Warrants.(7)
21 Subsidiaries of the Company.(2)
23 Consent of Independent Accountants.
27 Financial Data Schedule.
99 Risk Factors.
</TABLE>
- --------
-26-
<PAGE>
(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.
(11) Previously filed with the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 and incorporated by reference herein.
(12) Previously filed with the Company's Registration Statement on Form 8-A,
filed on July 10, 1997 (SEC Reg. No. 000-21091) and incorporated by
reference herein.
(13) Previously filed with the Company's Quarterly Report on Form 10-Q, dated
November 14, 1997. (SEC Reg. No. 000-21091) and incorporated by reference
herein.
-27-
<PAGE>
EXHIBIT 10.7
ADVANCED RADIO TELECOM CORP.
RESTATED EQUITY INCENTIVE PLAN
1. PURPOSE
The purpose of this Restated Equity Incentive Plan (the "Plan") is to
advance the interests of Advanced Radio Telecom Corp. (the "Company") by
enhancing its ability to attract and retain employees and other persons or
entities who are in a position to make significant contributions to the success
of the Company and its subsidiaries through ownership of shares of the Company's
common stock ("Stock").
The Plan is intended to accomplish these goals by enabling the Company to
grant Awards in the form of Options, Stock Appreciation Rights, Restricted Stock
or Unrestricted Stock Awards, Deferred Stock Awards, Performance Awards, Loans
or Supplement Grants, or combinations thereof, all as more fully described
below.
2. ADMINISTRATION
Unless otherwise determined by the Board of Directors of the Company (the
"Board"), the Plan will be administered by one or more Committees of the Board
designated for such purpose consisting of one or more members (each, a
"Committee"). If a Committee shall have more than two members, a majority of
the members of any such Committee shall constitute a quorum, and all
determinations of any such Committee shall be made by a majority of its members.
Any determination of a Committee under the Plan may be made without notice or
meeting of such Committee by a writing signed by all members if the Committee
shall have one or two members or by a majority of such Committee members if the
Committee shall have more than two members.
The Committee will have authority, not inconsistent with the express
provisions of the Plan and in addition to other authority granted under the
Plan, to (a) grant Awards at such time or times as it may choose; (b) determine
the size of each Award, including the number of shares of Stock subject to the
Award; (c) determine the type or types of each Award; (d) determine the terms
and conditions of each Award; (e) waive compliance by a holder of an Award with
any obligations to be performed by such holder under an Award and waive any
terms or conditions of an Award; (f) amend or cancel an existing Award in whole
or in part (and if an award is canceled, grant another Award in its place on
such terms and conditions as the Committee shall specify), except that the
Committee may not, without the consent of the holder of an Award, take any
action under this clause with respect to such Award if such action would
adversely affect the rights of such holder; (g) prescribe the form or forms of
<PAGE>
instruments that are required or deemed appropriate under the Plan, including
any written notices and elections required of Participants (as defined below),
and change such forms from time to time; (h) adopt, amend and rescind rules and
regulations for the administration of the Plan; and (i) interpret the Plan and
decide any questions and settle all controversies and disputes that may arise in
connection with the Plan. Such determinations and actions of the Committee, and
all other determinations and actions of the Committee made or taken under
authority granted by any provision of the Plan, will be conclusive and will bind
all parties. Nothing in this paragraph shall be construed as limiting the power
of the Committee to make adjustments under Section 7.3 or Section 8.6.
3. EFFECTIVE DATE AND TERM OF PLAN
The Plan will become effective on the date on which it is approved by the
stockholders of the Company. No Award may be granted under the Plan ten years
following the date of stockholder approval, but Awards previously granted may
extend beyond that date.
4. SHARES SUBJECT TO THE PLAN
Subject to the adjustment as provided in Section 8.6 below, the aggregate
number of shares of Stock that may be delivered under the Plan will be
4,000,000. If any Award requiring exercise by the Participant for delivery of
Stock terminates without having been exercised in full, or if any Award payable
in Stock or cash is satisfied in cash rather than Stock, the number of shares of
Stock as to which such Award was not exercised or for which cash was substituted
will be available for future grants.
Subject to Section 8.6(a), the maximum number of shares of Stock as to
which Options and Stock Appreciation Rights may be granted to any Participant in
any one calendar year is 800,000, which limitation shall be construed and
applied consistently with the rules under Section 162(m) of the Internal Revenue
Code.
Stock delivered under the Plan may be either authorized but unissued Stock
or previously issued Stock acquired by the Company and held in treasury. No
fractional shares of Stock will be delivered under the Plan.
5. ELIGIBILITY AND PARTICIPATION
Each person in the employ of the Company or any of its subsidiaries (an
"Employee") and each other person or entity (including without limitation non-
Employee directors of the Company or a subsidiary of the Company) who, in the
opinion of the Committee, is in a position to make a significant contribution to
the success of the Company or its subsidiaries will be eligible to receive
Awards under the Plan (each such Employee, person or entity receiving an Award,
"a Participant"). A "subsidiary" for purposes of the Plan will be a
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corporation in which the Company owns, directly or indirectly, stock possessing
50% or more of the total combined voting power of all classes of stock.
6. TYPES OF AWARDS
6.1 OPTIONS
(a) Nature of Options. An Option is an Award giving the recipient the
-----------------
right on exercise thereof to purchase Stock.
Both "incentive stock options," as defined in Section 422 of the Internal
Revenue of 1986, as amended (the "Code") (any Option intended to qualify as an
incentive stock option being hereinafter referred to as an "ISO"), and Options
that are not incentive stock options, may be granted under the Plan. ISOs shall
be awarded only to Employees. Any Option not identified at the time of grant as
being either an ISO or a non-incentive stock option shall be a non-incentive
stock option.
(b) Exercise Price. The exercise price of an Option will be determined by
--------------
the Committee subject to the following:
(1) The exercise price of an ISO shall not be less than 100% (110%
in the case of an ISO granted to a ten-percent stockholder) of the fair
market value of the Stock subject to the Option, determined as of the time
the Option is granted. A "ten-percent stockholder" is any person who at the
time of grant owns, directly or indirectly, or is deemed to own by reason
of the attribution rules of section 424(d) of the Code, stock possessing
more than 10% of the total combined voting power of all classes of stock of
the Company or of any of its subsidiaries.
(2) In no case may the exercise price paid for Stock which is part
of an original issue of authorized Stock be less than the par value per
share of the Stock.
(3) The Committee may reduce the exercise price of an Option at any
time after the time of grant, but in the case of an Option originally
awarded as an ISO, only with the consent of the Participant.
(c) Duration of Options. The latest date on which an Option may be
-------------------
exercised will be the tenth anniversary (fifth anniversary, in the case of an
ISO granted to a ten-percent shareholder) of the day immediately preceding the
date the Option was granted, or such earlier date as may have been specified by
the Committee at the time the Option was granted.
(d) Exercise of Options. An Option will become exercisable at such time
-------------------
or times, and on such conditions, as the Committee may specify. The Committee
may at any time and from time to time accelerate the time at which all or any
part of the Option may be exercised.
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Any exercise of an Option must be in writing, signed by the proper person
and delivered or mailed to the Company, accompanied by (1) any documents
required by the Committee and (2) payment in full in accordance with paragraph
(e) below for the number of shares for which the Option is exercised.
(e) Payment for Stock. Stock purchased on exercise of an Option must be
-----------------
paid for as follows: (1) in cash or by check (acceptable to the Company in
accordance with guidelines established for this purpose), bank draft or money
order payable to the order of the Company or (2) if so permitted by the
Committee at or after the grant of the Option (with the consent of the optionee
of an ISO if permitted after the grant) or by the instrument evidencing the
Option, (i) through the delivery of shares of Stock which have been outstanding
for at least six months (unless the Committee approves a shorter period) and
which have a fair market value equal to the exercise price, (ii) by delivery of
a promissory note of the person exercising the Option to the Company, payable on
such terms as are specified by the Committee, (iii) by delivery of an
unconditional and irrevocable undertaking by a broker to deliver promptly to the
Company sufficient funds to pay the exercise price, or (iv) by any combination
of the foregoing permissible forms of payment.
(f) Discretionary Payments. If (i) the market price of shares of Stock
----------------------
subject to an Option (other than an Option which is in tandem with a Stock
Appreciation Right as described in Section 6.2 below) exceeds the exercise price
of the Option at the time of its exercise, and (ii) the person exercising the
Option so requests the Committee in writing, the Committee may in its sole
discretion cancel the Option and cause the Company to pay in cash or in shares
of Common Stock (at a price per share equal to the fair market value per share)
to the person exercising the Option an amount equal to the difference between
the fair market value of the Stock which would have been purchased pursuant to
the exercise (determined on the date the Option is canceled) and the aggregate
exercise price which would have been paid.
6.2 STOCK APPRECIATION RIGHTS.
(a) Nature of Stock Appreciation Rights. A Stock Appreciation Right is an
-----------------------------------
Award entitling the holder on exercise to receive an amount in cash or Stock or
a combination thereof (such form to be determined by the Committee) determined
in whole or in part by reference to appreciation in the fair market value of a
share of Stock on the date of grant as compared to its fair market value on the
date of exercise or any performance standard selected or established by the
Committee.
(b) Grant of Stock Appreciation Rights. Stock Appreciation Rights may be
----------------------------------
granted in tandem with, or independently of, Options granted under the Plan. A
Stock Appreciation Right granted in tandem with an Option which is not an ISO
may be granted either at or after the time the Option is granted. A Stock
Appreciation Right granted in tandem with an ISO may be granted only at the time
the Option is granted. The Committee may also grant Stock
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Appreciation Rights which provide that following a change in control of the
Company, as determined by the Committee, the holder of such Right will be
entitled to receive, with respect to each share of Stock subject to the Right,
an amount equal to the excess of a specified value (which may include an average
of values) for a share of Stock during a period preceding such change in control
over the fair market value of a share of Stock on the date the Right was
granted.
(c) Rules Applicable to Tandem Awards. When Stock Appreciation Rights are
---------------------------------
granted in tandem with Options, the following will apply:
(1) The Stock Appreciation Right will be exercisable only at such
time or times, and to the extent, that the related Option is exercisable
and will be exercisable in accordance with the procedure required for
exercise of the related Option.
(2) The Stock Appreciation Right will terminate and no longer be
exercisable upon the termination or exercise of the related Option, except
that a Stock Appreciation Right granted with respect to less than the full
number of shares covered by an Option will not be reduced until the number
of shares as to which the related Option has been exercised or has
terminated exceeds the number of shares not covered by the Stock
Appreciation Right.
(3) The Option will terminate and no longer be exercisable upon the
exercise of the related Stock Appreciation Right.
(4) The Stock Appreciation Right will be transferable only with the
related Option.
(5) A Stock Appreciation Right granted in tandem with an ISO may be
exercised only when the market price of the Stock subject to the Option
exceeds the exercise price of such option.
(d) Exercise of Independent Stock Appreciation Rights. A Stock
-------------------------------------------------
Appreciation Right not granted in tandem with an Option will become exercisable
at such time or times, and on such conditions, as the Committee may specify.
The Committee may at any time accelerate the time at which all or any part of
the Right may be exercised.
Any exercise of an independent Stock Appreciation Right must be in writing,
signed by the proper person and delivered or mailed to the Company, accompanied
by any other documents required by the Committee.
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6.3 RESTRICTED AND UNRESTRICTED STOCK.
(a) Grant of Restricted Stock. Subject to the terms and provisions of the
-------------------------
Plan, the Committee, at any time and from time to time, may grant shares of
Restricted Stock in such amounts and upon such terms and conditions as the
Committee shall determine subject to the restrictions described below.
(b) Restricted Stock Agreement. The Committee may require, as a condition
--------------------------
to an Award, that a recipient of a Restricted Stock Award enter into a
Restricted Stock Award Agreement, setting forth the terms and conditions of the
Award. In lieu of a Restricted Stock Award Agreement, the Committee may provide
the terms and conditions of an Award in a notice to the Participant of the
Award, on the Stock certificate representing the Restricted Stock, in the
resolution approving the Award, or in such other manner as it deems appropriate.
(c) Transferability and Other Restrictions. Except as otherwise provided
--------------------------------------
in this Section 6.3, the shares of Restricted Stock granted herein may not be
sold, transferred, pledged, assigned, or otherwise alienated or hypothecated
until the end of the applicable period or periods established by the Committee
and the satisfaction of any other conditions or restrictions established by the
Committee (such period during which a share of Restricted Stock is subject to
such restrictions and conditions is referred to as the "Restricted Period").
Except as the Committee may otherwise determine, if a Participant ceases to be
an Employee or otherwise suffers a Status Change (as defined at Section 7.2(a)
below) for any reason during the Restricted Period, the Company may purchase the
shares of Restricted Stock subject to such restrictions and conditions for the
amount of cash paid by the Participant for such shares, or such shares of
Restricted Stock shall be forfeited to the Company if no cash was paid by the
Participant.
The Company shall also have the right to retain the certificates
representing shares of Restricted Stock in the Company's possession during the
Restricted Period.
(d) Removal of Restrictions. Except as otherwise provided in this Section
-----------------------
6.3, a share of Restricted Stock covered by a Restricted Stock grant shall
become freely transferable by the Participant upon completion of the Restricted
Period including the passage of any applicable period of time and satisfaction
of any conditions to vesting. However, unless otherwise provided by the
Committee, the Committee, in its sole discretion, shall have the right to
immediately waive all or part of the restrictions and conditions with regard to
all or part of the shares held by any Participant at any time.
(e) Voting Rights, Dividends and Other Distributions. During the
------------------------------------------------
Restricted Period, Participants holding shares of Restricted Stock granted
hereunder may exercise full voting rights and shall receive all regular cash
dividends paid with respect to such shares. Except as the Committee shall
otherwise determine, any other cash dividends and other distributions paid to
Participants with respect to shares of Restricted Stock including any
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dividends and distributions paid in shares shall be subject to the same
restrictions and conditions as the shares of Restricted Stock with respect to
which they were paid.
(f) Other Awards Settled with Restricted Stock. The Committee may, at the
------------------------------------------
time any Award described in this Section 6 is granted, provide that any or all
the Stock delivered pursuant to the Award will be Restricted Stock.
(g) Unrestricted Stock. The Committee may, in its sole discretion, sell
------------------
to any Participant shares of Stock free of restrictions under the Plan for a
price which is not less than the par value of the Stock.
(h) Notice of Section 83(b) Election. Any Participant making an election
--------------------------------
under Section 83(b) of the Code with respect to Restricted Stock must provide a
copy thereof to the Company within 10 days of filing such election with the
Internal Revenue Service.
6.4 DEFERRED STOCK.
A Deferred Stock Award entitles the recipient to receive shares of Stock to
be delivered in the future. Delivery of the Stock will take place at such time
or times, and on such conditions, as the Committee may specify. The Committee
may at any time accelerate the time at which delivery of all or any part of the
Stock will take place. At the time any Award described in this Section 6 is
granted, the Committee may provide that, at the time Stock would otherwise be
delivered pursuant to the Award, the Participant will instead receive an
instrument evidencing the Participant's right to future delivery of Deferred
Stock.
6.5 PERFORMANCE AWARDS; PERFORMANCE GOALS.
(a) Nature of Performance Awards. A Performance Award entitles the
----------------------------
recipient to receive, without payment, an amount in cash or Stock or a
combination thereof (such form to be determined by the Committee) following the
attainment of performance goals. Performance goals may be related to personal
performance, corporate performance, departmental performance or any other
category of performance established by the Committee. The Committee will
determine the performance goals, the period or periods during which performance
is to be measured and all other terms and conditions applicable to the Award.
(b) Other Awards Subject to Performance Condition. The Committee may, at
---------------------------------------------
the time any Award described in this Section 6 is granted, impose the condition
(in addition to any conditions specified or authorized in this Section 6 or any
other provision of the Plan) that Performance Goals be met prior to the
Participant's realization of any payment or benefit under the Award.
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6.6 LOANS AND SUPPLEMENTAL GRANTS.
(a) Loans. The Company may make a loan to a Participant ("Loan"), either
-----
on the date of or after the grant of any Award to the Participant. A Loan may
be made either in connection with the purchase of Stock under the Award or with
the payment of any Federal, state and local income tax with respect to income
recognized as a result of the Award. The Committee will have full authority to
decide whether to make a Loan and to determine the amount, terms and conditions
of the Loan, including the interest rate (which may be zero), whether the Loan
is to be secured or unsecured or with or without recourse against the borrower,
the terms on which the Loan is to be repaid and the conditions, if any, under
which it may be forgiven. However, no Loan may have a term (including
extensions) exceeding ten years in duration.
(b) Supplemental Grants. In connection with any Award, the Committee may
-------------------
at the time such Award is made or at a later date, provide for and grant a cash
award to the Participant ("Supplemental Grant") not to exceed an amount equal to
(1) the amount of any Federal, state and local income tax on ordinary income for
which the Participant may be liable with respect to the Award, determined by
assuming taxation at the highest marginal rate, plus (2) an additional amount on
a grossed-up basis intended to make the Participant whole on an after-tax basis
after discharging all the Participant's income tax liabilities arising from all
payments under this Section 6. Any payments under this subsection (b) will be
made at the time the Participant incurs Federal income tax liability with
respect to the Award.
7. EVENTS AFFECTING OUTSTANDING AWARDS
7.1 DEATH.
If a Participant dies, the following will apply:
(a) All Options and Stock Appreciation Rights held by the Participant
immediately prior to death, to the extent then exercisable, may be exercised by
the Participant's executor or administrator or the person or persons to whom the
Option or Right is transferred by will or the applicable laws of descent and
distribution, at any time within the one year period ending with the first
anniversary of the Participant's death (or such shorter or longer period as the
Committee may determine), and shall thereupon terminate. In no event, however,
shall an Option or Stock Appreciation Right remain exercisable beyond the latest
date on which it could have been exercised without regard to this Section 7.
Except as otherwise determined by the Committee, all Options and Stock
Appreciation Rights held by a Participant immediately prior to death that are
not then exercisable shall terminate at death.
(b) Except as otherwise determined by the Committee, all Restricted Stock
held by the Participant must be transferred to the Company (and, in the event
the certificates representing such Restricted Stock are held by the Company,
such Restricted Stock will be so transferred without any further action by the
Participant) in accordance with Section 6.3(c) above.
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(c) Any payment or benefit under a Deferred Stock Award, Performance
Award, or Supplemental Grant to which the Participant was not irrevocably
entitled prior to death will be forfeited and the Award canceled as of the time
of death, unless otherwise determined the Committee.
7.2 TERMINATION OF SERVICE (OTHER THAN BY DEATH).
If a Participant who is an Employee ceases to be an Employee for any reason
other than death, or if there is a termination (other than by reason of death)
of the consulting, service or similar relationship in respect of which a non-
Employee Participant was granted an Award hereunder (such termination of the
employment or other relationship being hereinafter referred to as a "Status
Change"), the following will apply:
(a) Except as otherwise determined by the Committee, all Options and Stock
Appreciation Rights held by the Participant that were not exercisable
immediately prior to the Status Change shall terminate at the time of the Status
Change. Any Options or Rights that were exercisable immediately prior to the
Status Change will continue to be exercisable for a period of three months (or
such longer period as the Committee may determine), and shall thereupon
terminate, unless the Award provides by its terms for immediate termination in
the event of a Status Change (unless otherwise determined by the Committee) or
unless the Status Change results from a discharge for cause which in the opinion
of the Committee casts such discredit on the Participant as to justify immediate
termination of the Award (unless otherwise determined by the Committee). In no
event, however, shall an Option or Stock Appreciation Right remain exercisable
beyond the latest date on which it could have been exercised without regard to
this Section 7. For purposes of this paragraph, in the case of a Participant
who is an Employee, a Status Change shall not be deemed to have resulted by
reason of (i) a sick leave or other bona fide leave of absence approved for
purposes of the Plan by the Committee, so long as the Employee's right to
reemployment is guaranteed either by statute or by contract, or (ii) a transfer
of employment between the Company and a subsidiary or between subsidiaries, or
to the employment of a corporation (or a parent or subsidiary corporation of
such corporation) issuing or assuming an option in a transaction to which
section 424(a) of the Code applies.
(b) Except as otherwise determined by the Committee, all Restricted Stock
held by the Participant at the time of the Status Change must be transferred to
the Company (and, in the event the certificates representing such Restricted
Stock are held by the Company, such Restricted Stock will be so transferred
without any further action by the Participant) in accordance with Section 6.3
(c) above.
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(c) Any payment or benefit under a Deferred Stock Award, Performance
Award, or Supplemental Grant to which the Participant was not irrevocably
entitled prior to the Status Change will be forfeited and the Award canceled as
of the date of such Status Change unless otherwise determined by the Committee.
7.3 CERTAIN CORPORATE TRANSACTIONS.
Except as otherwise provided by the Committee at the time of grant, in the
event of a consolidation or merger in which the Company is not the surviving
corporation or which results in the acquisition of substantially all the
Company's outstanding Stock by a single person or entity or by a group of
persons and/or entities acting in concert, or in the event of the sale or
transfer of substantially all the Company's assets or a dissolution or
liquidation of the Company (a 'covered transaction'), the following rules shall
apply:
(a) Subject to paragraph (b) below, immediately prior to the effective
date of the covered transaction or such earlier time as the Committee may in its
sole discretion determine, (1) any outstanding Option and Stock Appreciation
Right shall be exercisable in full, (2) all restrictions on any Restricted Stock
shall be deemed to be satisfied and no longer applicable, (3) the Company shall
make any payments of and provide any benefits under any Deferred Stock Award,
Performance Award or Supplemental Grant, (4) any performance or other conditions
or restrictions on any Award shall be deemed to be satisfied and no longer
applicable, and (5) unless otherwise provided by the Committee at the terms of
the Loan, all principal of and interest on a Loan shall be forgiven; and upon
the effectiveness of such covered transaction, all outstanding Option and Stock
Appreciation Rights shall cease to be exercisable and all Deferred Stock and
Performance Awards and Supplemental Grants shall terminate.
(b) Notwithstanding the foregoing, with respect to an outstanding Award
held by a participant who, following the covered transaction, will be employed
by, or otherwise providing services of a similar nature to those provided to the
Company, to a corporation which is a surviving or acquiring corporation in the
covered transaction or an affiliate of such corporation, the Committee may at or
prior to the effective time of the covered transaction, in its sole discretion
and in lieu of the action described in paragraph (a) above, arrange to have such
surviving or acquiring corporation or affiliate assume any Award held by such
participant outstanding hereunder or grant a replacement award which, in the
judgment of the Committee, is substantially equivalent to any Award being
replaced which awards must in the case of incentive stock options satisfy the
requirements of the Code.
7.4 TERMINATION FOLLOWING CHANGE OF CONTROL.
Notwithstanding any other provision of this Plan, if the Participant's
employment terminates because of a "Qualified Termination" as defined in Exhibit
A, all unvested Options and Stock Appreciation Rights then held by such person
shall immediately become fully vested,
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all Options and Stock Appreciation Rights then held by such person shall remain
exercisable until the earlier of (i) the fourth anniversary of such Qualified
Termination and (ii) the latest date on which such Option or Right could have
been exercised without regard to Section 7.1 and Section 7.2, and all other
Awards shall immediately become fully vested and all restrictions, conditions
and performance goals with respect to such Awards shall be deemed satisfied and
shall no longer be applicable.
8. GENERAL PROVISIONS
8.1 DOCUMENTATION OF AWARDS.
Awards will be evidenced by such written instruments, if any, as may be
prescribed by the Committee from time to time. Such instruments may be in the
form of agreements to be executed by both the Participant and the Company, or
certificates, letters or similar instruments, which need not be executed by the
Participant but acceptance of which will evidence agreement to the terms
thereof.
8.2 RIGHTS AS A STOCKHOLDER, DIVIDEND EQUIVALENTS.
Except as specifically provided by the Plan, the receipt of an Award will
not give a Participant rights as a stockholder; the Participant will obtain such
rights, subject to any limitations imposed by the Plan or the instrument
evidencing the Award, upon actual receipt of Stock. However, the Committee may,
on such conditions as it deems appropriate, provide that a Participant will
receive a benefit in lieu of cash dividends that would have been payable on any
or all Stock subject to the Participant's Award had such Stock been outstanding.
Without limitation, the Committee may provide for payment to the Participant of
amounts representing such dividends, either currently or in the future, or for
the investment of such amounts on behalf of the Participant.
8.3 CONDITIONS ON DELIVERY OF STOCK.
The Company will not be obligated to deliver any shares of Stock pursuant
to the Plan or to remove restriction from shares previously delivered under the
Plan (a) until all conditions of the Award have been satisfied or removed, (b)
until, in the opinion of the Company's counsel, all applicable Federal and state
laws and regulation have been complied with, (c) if the outstanding Stock is at
the time listed on any stock exchange or The Nasdaq National Market, until the
shares to be delivered have been listed or authorized to be listed on such
exchange or market upon official notice of notice of issuance, and (d) until all
other legal matters in connection with the issuance and delivery of such shares
have been approved by the Company's counsel. If the sale of Stock has not been
registered under the Securities Act of 1933, as amended, the Company may
require, as a condition to exercise of the Award, such representations or
agreements as counsel for the Company may consider appropriate to avoid
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violation of such Act and may require that the certificates evidencing such
Stock bear an appropriate legend restricting transfer.
If an Award is exercised by the Participant's legal representative, the
Company will be under no obligation to deliver Stock pursuant to such exercise
until the Company is satisfied as to the authority of such representative.
8.4 TAX WITHHOLDING.
The Company will withhold from any cash payment made pursuant to an Award
an amount sufficient to satisfy all federal, state and local withholding tax
requirements (the "withholding requirements").
In the case of an Award pursuant to which Stock may be delivered, the
Committee will have the right to require that the Participant or other
appropriate person remit to the Company an amount sufficient to satisfy the
withholding requirements, or make other arrangements satisfactory to the
Committee with regard to such requirements, prior to the delivery of any Stock.
If and to the extent that such withholding is required, the Committee may permit
the Participant or such other person to elect at such time and in such manner as
the Committee provides to have the Company hold back from the shares to be
delivered, or to deliver to the Company, Stock having a value calculated to
satisfy the withholding requirement. The Committee may make such share
withholding mandatory with respect to any Award at the time such Award is made
to a Participant.
If at the time an ISO is exercised the Committee determines that the
Company could be liable for withholding requirements with respect to a
disposition of the Stock received upon exercise, the Committee may require as a
condition of exercise that the person exercising the ISO agree (a) to inform the
Company promptly of any disposition (within the meaning of section 424(c) of the
Code) of Stock received upon exercise, and (b) to give such security as the
Committee deems adequate to meet the potential liability of the Company for the
withholding requirements and to augment such security from time to time in any
amount reasonably deemed necessary by the Committee to preserve the adequacy of
such security.
8.5 NONTRANSFERABILITY OF AWARDS.
Unless otherwise permitted by the Committee, no Award (other than an Award
in the form of an outright transfer of cash or Unrestricted Stock) may be
transferred other than by will or by the laws of descent and distribution, and
during a Participant's lifetime an Award requiring exercise may be exercised
only by the Participant (or in the event of the Participant's incapacity, the
person or persons legally appointed to act on the Participant's behalf).
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8.6 ADJUSTMENTS IN THE EVENT OF CERTAIN TRANSACTIONS.
(a) In the event of a stock dividend, stock split or combination of
shares, recapitalization or other change in the Company's capitalization, or
other distribution to common stockholders other than normal cash dividends,
after the effective date of the Plan, the Committee will make any appropriate
adjustments to the maximum number of shares that may be delivered under the Plan
under Section 4 above.
(b) In any event referred to in paragraph (a), the Committee will also
make any appropriate adjustments to the number and kind of shares of stock or
securities subject to Awards then outstanding or subsequently granted, any
exercise prices relating to Awards and any other provision of Awards affected by
such change. The Committee may also make such adjustments to take into account
material changes in law or in accounting practices or principles, mergers,
consolidations, acquisitions, dispositions or similar corporate transactions, or
any other event, if it is determined by the Committee that adjustments are
appropriate to avoid distortion in the operation of the Plan.
(c) In the case of ISOs or for purposes of the limits set forth in the
second paragraph of Section 4, the adjustments described in (a) and (b) will be
made only to the extent consistent with continued qualification of the option
under Section 422 of the Code (in the case of an ISO) or Section 162(m) of the
Code (in the case of the limits in Section 4).
8.7 EMPLOYMENT RIGHTS, ETC.
Neither the adoption of the Plan nor the grant of Awards will confer upon
any person any right to continued retention by the Company or any subsidiary as
an Employee or otherwise, or affect in any way the right of the Company or
subsidiary to terminate an employment, service or similar relationship at any
time. Except as specifically provided by the Committee in any particular case,
the loss of existing or potential profit in Awards granted under the Plan will
not constitute an element of damages in the event of termination of an
employment, service or similar relationship even if the termination is in
violation of an obligation of the Company to the Participant.
8.8 DEFERRAL OF PAYMENTS.
The Committee may agree at any time, upon request of the Participant, to
defer the date on which any payment under an Award will be made.
8.9 PAST SERVICES AS CONSIDERATION.
Where a Participant purchases Stock under an Award for a price equal to the
par value of the Stock the Committee may determine that such price has been
satisfied by past services rendered by the Participant.
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9. EFFECT, AMENDMENT AND TERMINATION
Neither adoption of the Plan nor the grant of Awards to a Participant will
affect the Company's right to grant to such Participant awards that are not
subject to the Plan, to issue to such Participant Stock as a bonus or otherwise,
or to adopt other plans or arrangements under which Stock may be issued to
Employees.
The Committee may at any time or times amend the Plan or any outstanding
Award for any purpose which may at the time be permitted by law, or may at any
time terminate the Plan as to any further grants of Awards, provided that
(except to the extent expressly required or permitted by the Plan) no such
amendment will, without the approval of the stockholders of the Company,
effectuate a change for which stockholder approval is required in order for the
Plan to continue to qualify for the award of ISOs under section 422 of the Code
or for the award of performance-based compensation under Section 162(m) of the
Code.
-14-
<PAGE>
EXHIBIT A
---------
For purposes of Section 7.4 of the Plan, the following terms have the
following meanings:
"Base Salary" means Participant's annual base salary, exclusive of any
bonus or other benefits the Participant may receive.
"Cause" means the following, determined by the Committee in its reasonable
judgment:
(i) willful failure to perform, or gross negligence in the
performance of, Participant's duties and responsibilities to
the Company and its subsidiaries; or
(ii) fraud, embezzlement or other material dishonesty with respect
to the Company or any of its subsidiaries; or
(iii) conviction of, or plea of nolo contendere to, a felony or other
crime involving moral turpitude; or
(iv) other conduct by Participant that is materially harmful to the
business, interests or reputation of the Company or any of its
subsidiaries.
"Change of Control" means such time as:
(i) a "person" or "group" (within the meaning of Sections 13(d) and
14(d)(2) of the Exchange Act) becomes the ultimate "beneficial
owner" (as defined in Rule 13d-3 under the Exchange Act) of
Voting Stock representing more than 50% of the total voting
power of the Voting Stock of the Company on a fully diluted
basis,
(ii) individuals who on May 30, 1996 constitute the Board (together
with any new directors whose election by the Board or whose
nomination for election by the Company's stockholders was
approved by a vote of at least two-thirds of the members of the
Board then in office who either were members of the Board on
the May 30, 1996 or whose election or nomination for election
was previously so approved) cease for any reason to constitute
a majority of the members of the Board then in office and
(iii) the merger or consolidation of the Company with or into another
corporation, or the merger or consolidation of another
corporation with
-15-
<PAGE>
and into the Company, with the effect that, immediately after
such transaction, the Voting Stock of the entity surviving such
merger or consolidation received in such transaction by the
stockholders of the Company immediately prior to such
transaction represents the ultimate beneficial ownership of
less than 50% of Voting Stock of the entity surviving such
merger or consolidation.
"Disability" has the meaning given it in any long-term disability plan of
the Company in which Participant participates. Participant's employment shall
be deemed terminated for Disability when Participant is entitled to receive
long-term disability compensation pursuant to such long-term disability plan.
If the Company does not maintain such a plan, Participant shall be deemed
terminated for Disability if the Company terminates his employment due to
illness, injury, accident or condition of either a physical or psychological
nature as a result of which Participant is unable to perform substantially the
duties and responsibilities of his position for 180 days during a period of 365
consecutive calendar days.
"Good Reason" means the voluntary termination by Participant of his or her
employment after the occurrence, without Participant's express written consent,
of any of the following events:
(i) assignment to Participant of duties materially inconsistent
with his or her positions, duties, responsibilities, or
reporting requirements with the Company (or a subsidiary)
immediately prior to a Change of Control or a material adverse
alteration in Participant's status or the nature of his or her
responsibilities with the Company immediately prior to a Change
in Control; or
(ii) reduction in Participant's rate of Base Salary to less than 100
percent of the rate of Base Salary paid to the Participant
immediately preceding the Change of Control, or reduction in
Participant's total cash compensation opportunities, including
salary, incentives and other benefits, for any fiscal year to
less than 100 percent of the total cash compensation
opportunities made available to the Participant immediately
preceding the Change of Control (for this purpose, such
opportunities shall be deemed reduced if the objective
standards by which Participant's incentive compensation is
measured become materially more stringent or if the amount of
such compensation is materially reduced on a discretionary
basis from the amount that would be payable solely by reference
to the objective standards).
"Qualified Termination" means the termination of Participant's employment
during a Standstill Period (1) by the Company other than for Cause, death or
Disability, and (2) in the case of a Participant who at the time of the Change
of Control holds an office specifically
-16-
<PAGE>
designated by the Committee in its sole discretion to have such right, by
Participant for Good Reason.
"Standstill Period" is the period commencing on the date of a Change of
Control and continuing until the close of business on the last business day of
the 24th calendar month following such Change of Control.
"Voting Stock" means the capital stock of any class or kind ordinarily
having the power to vote for the election of directors, managers or other voting
members of the governing body of such Person.
-17-
<PAGE>
EXHIBIT 10.8
ADVANCED RADIO TELECOM CORP.
1997 EQUITY INCENTIVE PLAN FOR NON-EMPLOYEE DIRECTORS
1. PURPOSE
The purpose of this 1997 Equity Incentive Plan for Non-Employee Directors
(the "Plan") is to advance the interests of Advanced Radio Telecom Corp. (the
"Company") by enhancing the ability of the Company to attract and retain non-
employee directors who are in a position to make significant contributions to
the success of the Company and to align the interests of those directors more
closely with those of the stockholders.
2. ADMINISTRATION
Unless otherwise determined by the Board of Directors of the Company (the
"Board"), the Plan shall be administered by the Compensation Committee of the
Board or such other committee of the Board designated by the Board for that
purpose (the "Committee"). If the Board shall determine that the Plan shall be
administered by the entire Board, the references in the Plan to the "Committee"
shall be deemed references to the Board. The Committee shall have authority,
not inconsistent with the express provisions of the Plan, (a) to grant options
in accordance with the Plan, (b) to prescribe the form or forms of instruments
evidencing options and any other instruments required under the Plan and to
change such forms from time to time; (c) to adopt, amend and rescind rules and
regulations for the administration of the Plan; and (d) to interpret the Plan
and to decide any questions and settle all controversies and disputes that may
arise in connection with the Plan. Such determinations of the Committee shall
be conclusive and shall bind all parties.
3. EFFECTIVE DATE AND TERM OF THE PLAN
The Plan shall become effective on October 16, 1997, the date on which the
Plan was approved by the Board of Directors of the Company, subject to approval
by the stockholders of the Company. After October 16, 2007, no option shall be
granted under the Plan, but options previously granted may extend beyond that
date. No elections may be made, and no Deferred Stock Awards shall be granted,
pursuant to Section 7 with respect to Fees for services rendered after December
31, 2007.
4. SHARES SUBJECT TO THE PLAN
a. Number of Shares. Subject to adjustment as provided in Section 4(c),
the aggregate number of shares of Common Stock of the Company ("Stock") that may
be delivered upon the exercise of options or pursuant to Deferred Stock Awards
granted under the Plan shall be 500,000. If any option granted under the Plan
terminates without having been exercised in full, the number of shares of Stock
as to which such option was not exercised shall be available for future grants
within the limits set forth in this Section 4(a).
<PAGE>
b. Shares to be Delivered. Shares delivered under the Plan shall be
authorized but unissued Stock or, if the Board so decides in its sole
discretion, previously issued Stock acquired by the Company and held in
treasury. No fractional shares of Stock shall be delivered under the Plan.
c. Changes in Stock. In the event of a stock dividend, stock split or
combination of shares, recapitalization or other change in the Company's capital
stock occurring after the effective date of the Plan, the number and kind of
shares of stock or securities of the Company subject to options then outstanding
or subsequently granted under the Plan, the maximum number of shares or
securities that may be delivered under the Plan, the exercise price, and other
relevant provisions shall be appropriately adjusted by the Committee, whose
determination shall be binding on all persons.
The Committee may also adjust the number of shares subject to outstanding
awards and the exercise price and the terms of outstanding awards to take into
consideration material changes in accounting practices or principles,
extraordinary dividends, consolidations or mergers (except those described in
Section 6(j)), acquisitions or dispositions of stock or property or any other
event if it is determined by the Board that such adjustment is appropriate to
avoid distortion in the operation of the Plan.
5. ELIGIBILITY FOR THE PLAN
Directors who are not employees of the Company or any subsidiary of the
Company ("Eligible Directors") shall be eligible to receive options and Deferred
Stock Awards under the Plan.
6. TERMS AND CONDITIONS OF OPTIONS
a. Formula Options. On October 16, 1997, each Eligible Director shall be
granted an initial option to purchase 20,000 shares of Stock, subject to
approval of this Plan by the stockholders, and each Eligible Director elected to
the Board thereafter shall be granted an initial option to purchase 20,000
shares of Stock on the day on which he or she is first elected a Director. At
each annual meeting subsequent to the date on which the initial grant was made
to an Eligible Director and at which such Eligible Director is reelected or is
continuing as a director, he or she shall be granted an additional option to
purchase 7,000 shares of Stock. The options awarded under this paragraph (a) are
referred to as "Formula Options." The grant of Formula Options shall not
require any action by the Committee.
b. Discretionary Options. The Committee shall also have the authority
under this Plan to award options to purchase Stock to Eligible Directors in such
amounts and on such terms not inconsistent with this Plan as it shall determine
at the time of the award. The Options awarded under this paragraph (b) are
referred to herein as "Discretionary Options."
c. Exercise Price. The exercise price of each Formula Option shall be
100% of the Fair Market Value (as defined below) per share of the Stock on the
date the option is granted. The exercise price of each Discretionary Options
shall be set by the Committee. In no event, however, shall the option price of
any option be less, in the case of an original issue of authorized stock, than
par value per share. For purposes of this paragraph, (A) the "Fair Market Value"
of a share of Stock on any date shall be the Closing Price or, if there was no
Closing Price on such day, the latest day prior thereto on which there was a
Closing Price; and (B) the "Closing Price" of the Stock on any business day will
be the last sale price as reported on the principal market on which the Stock is
traded or, if no last sale is reported, then the mean between the highest bid
and lowest asked prices on that day.
-2-
<PAGE>
d. Duration of Options. The latest date on which an option may be
exercised (the "Final Exercise Date") shall be (i) in the case of Formula
Options, the date which is five years from the date the Option was granted and
(ii) in the case of Discretionary Options, such date as the Committee may
determine, but in no event later than ten years from the date the Option was
granted.
e. Exercise of Options.
i. Each Formula Option shall become exercisable to the extent of
one-third of the shares covered thereby on the day before each of the
first, second and third annual meeting of stockholders following the date
of grant Each Discretionary Option shall become exercisable at such time or
times as the Committee shall determine.
ii. Any exercise of an option shall be in writing, signed by the
proper person and delivered or mailed to the Company, accompanied by (i)
any documentation required by the Committee and (ii) payment in full for
the number of shares for which the option is exercised.
iii If an option is exercised by the executor or administrator of a
deceased director, or by the person or persons to whom the option has been
transferred by the director's will, the applicable laws of descent and
distribution or pursuant to Section 6(g) below, the Company shall be under
no obligation to deliver Stock pursuant to such exercise until the Company
is satisfied as to the authority of the person or persons exercising the
option.
f. Payment for and Delivery of Stock. Stock purchased upon exercise of
options under the Plan shall be paid for as follows: (i) in cash or by check
(acceptable to the Company in accordance with guidelines established for this
purpose), bank draft or money order payable to the order of the Company; (ii)
through the delivery of shares of Stock (which, in the case of shares of Stock
acquired from the Company, have been outstanding for at least six months) having
a fair market value on the last business day preceding the date of exercise
equal to the exercise price; (iii) by delivery of an unconditional and
irrevocable undertaking by a broker to deliver promptly to the Company
sufficient funds to pay the purchase price; or (iv) by any combination of the
foregoing permissible forms of payment; provided, that if the Stock delivered
upon exercise of the option is an original issue of authorized Stock, at least
so much of the exercise price as represents the par value of such Stock shall be
paid other than with a personal check of the option holder.
g. Discretionary Payments. If (i) the market price of shares of Stock
subject to an option exceeds the exercise price of the option at the time of its
exercise, and (ii) the person exercising the option so requests the Committee in
writing, the Committee may in its sole discretion cancel the option and cause
the Company to pay in cash or in shares of Stock (at a price per share equal to
the fair market value per share) to the person exercising the option an amount
equal to the difference between the fair market value of the Stock which would
have been purchased pursuant to the exercise (determined on the date the option
is canceled) and the aggregate exercise price which would have been paid.
-3-
<PAGE>
h. Death. Except as otherwise determined by the Board, upon the death of
any Eligible Director, all options not then exercisable shall terminate. All
options held by the director that are exercisable immediately prior to death may
be exercised by his or her executor or administrator, or by the person or
persons to whom the option is transferred by will or the applicable laws of
descent and distribution or pursuant to Section 6(g), at any time within one
year after the director's death (subject, however, to the limitations of Section
6(c) regarding the maximum exercise period for such option). After completion
of that one-year period, such options shall terminate to the extent not
previously exercised.
i. Other Termination of Status of Director. If a director's service with
the Company terminates for any reason other than death, all options held by the
director that are not then exercisable shall terminate. Options that are
exercisable on the date of termination shall continue to be exercisable for a
period of three months (subject to Section 6(c)). After completion of that
three-month period, such options shall terminate to the extent not previously
exercised, expired or terminated.
j. Mergers, etc. In the event of a merger or consolidation of the
Company, or series of transactions of which such a merger or consolidation is a
part, which results in the stockholders of the Company immediately prior to such
transaction or series of transactions beneficially owning less than a majority
of the outstanding voting securities of the surviving entity immediately
following such transaction or series of transactions or which results in a
single person or entity or group of persons or entities acting in concert owning
at least a majority of the outstanding voting securities of the surviving entity
immediately following such transaction or series of transactions, a sale,
transfer, lease or other conveyance of all or substantially all of the Company's
assets in a transaction or series of transactions, or a dissolution or
liquidation of the Company, all options hereunder will terminate; provided, that
immediately prior to the consummation of any such transaction described above,
all options outstanding hereunder that are not otherwise exercisable shall
become immediately exercisable, and provided, further, that in lieu of
termination, the Board may cause the acquiring or surviving corporation to
assume all Options outstanding under this Plan, or provide replacement options
for such options on substantially the same terms as are provided by this Plan,
with such adjustments to the number of shares covered by such Options and the
exercise price thereof as may be necessary to reflect the exchange ratio
provided for in the merger or consolidation and with such other changes as are
necessary to permit the options to remain exercisable and outstanding after the
effective date of such merger or consolidation despite the termination of the
Eligible Director's service as a director of the Company.
7. DEFERRED STOCK GRANT IN LIEU OF FEES
a. Deferred Stock Grants. Each Eligible Director who shall have so
elected (pursuant to the procedures below) shall be granted irrevocable rights
to receive shares of Stock to be delivered in the future ("Deferred Stock
Awards") in lieu of the cash fees that would otherwise
-4-
<PAGE>
be payable to such Eligible Director. Each Eligible Director shall receive a
Deferred Stock Award in lieu of any annual retainer fee to which such Eligible
Director is entitled ("Annual Fee") and a Deferred Stock Award in lieu of any
fees to which such Eligible Director is entitled with respect to any meeting of
the Board or any committee thereof ("Meeting Fees"). The number of shares of
Stock subject to a Deferred Stock Award shall be that number of shares of Stock
the Fair Market Value of which is equal, in the case of the Annual Fee, to the
amount of such Annual Fee on the first business day of the calendar year for
which such Annual Fee is payable, and in the case of a Meeting Fee, to the
amount of such Meeting Fee on the date of meeting for which such Meeting Fee is
payable. The grant of Deferred Stock Awards shall not require any action by the
Committee.
b. Issuance of Deferred Stock. Stock issuable pursuant to a Deferred
Stock Award granted under this Plan shall be issued by the Company to the
Eligible Director on the earliest of (i) the first business day of the third
January following such Deferred Stock Award, (ii) the date of an event described
in Section 6(j) of this Plan or (iii) the date on which such Eligible Director
shall cease to be a Director of the Company, and certificates therefore shall be
delivered by the Company promptly after such date.
c. Notice Procedures. Prior to the beginning of any calendar year, an
Eligible Director may notify the Company in writing of his or her election to be
granted Deferred Stock Awards in lieu of fees for the calendar year succeeding
the year in which the election is made and unless and until any subsequent
notice is given, as provided below, each calendar year thereafter (a "Deferred
Stock Election"). By making a Deferred Stock Election, such Eligible Director
agrees to forego any cash payment of the Annual Fees and Meeting Fees paid in
the form of Deferred Stock Awards. Any Deferred Stock Election shall be
irrevocable as to each calendar year once that year begins, except that in the
event the stockholders should fail to approve this Plan, all Deferred Stock
Elections shall be immediately revoked and the director promptly paid any
previous fees withheld pursuant to such agreement. Any Deferred Stock Election
shall continue in effect from year to year, until revoked, which revocation
shall be effective as to all years subsequent to the year in which the notice of
revocation is given, unless and until such Eligible Director makes a subsequent
Deferred Stock Election.
8. GENERAL PROVISIONS
a. Effect of Lack of Shares. In the event that on any date on which
options or Deferred Stock Awards are to be granted hereunder, there is not a
sufficient number of shares of Stock available to implement fully the shares
issuable thereunder, then each such director entitled to an option grant or a
Deferred Stock Award at such time shall receive a pro rata portion of the option
and/or Deferred Stock Award contemplated by this Plan to the maximum extent. In
addition, if an Deferred Stock Award cannot be implemented due to a lack of
shares, then the director's agreement to forgo Fees shall be deemed
automatically revoked to the same extent unless with the Director's consent the
Board is seeking authorization for additional shares.
-5-
<PAGE>
b. Non-Plan Issuances. Neither adoption of the Plan nor the grant of
options or Deferred Stock Grants to an Eligible Director shall affect the
Company's right to grant to such director options that are not subject to the
Plan, to issue to such director Stock as a bonus or otherwise, or to adopt other
plans or arrangements under which Stock may be issued to directors.
c. No Rights as Stockholder. A holder of an option or Deferred Stock
Award shall not have the rights of a stockholder with respect to shares issuable
with respect to such option or award.
d. Fulfillment of Legal Obligations. The Company shall not be obligated
to deliver any shares of Stock (a) until, in the opinion of the Company's
counsel, all applicable federal and state laws and regulations have been
complied with, and (b) if the outstanding Stock is at the time listed on any
stock exchange or market, until the shares to be delivered have been listed or
authorized to be listed on such exchange or market upon official notice of
issuance, and (c) until all other legal matters in connection with the issuance
and delivery of such shares have been approved by the Company's counsel. If the
sale of Stock has not been registered under the Securities Act of 1933, as
amended, the Company may require, as a condition to exercise of the option, such
representations or agreements as counsel for the Company may consider
appropriate to avoid violation of such Act and may require that the certificates
evidencing such Stock bear an appropriate legend restricting transfer.
e. Nontransferability of Options and Awards. No option or Deferred Stock
Award may be transferred other than by will, by the laws of descent and
distribution or by assignment to a member of his or her immediate family, during
a director's lifetime, an option may be exercised only by him or her or by such
member of his or her immediate family to whom the option was assigned and during
a director's lifetime, a Deferred Stock Award may be paid only by him or her or
to such member of his or her immediate family to whom the award was assigned.
f. Termination & Amendment. The Board may at any time terminate the Plan
as to any further grants of options or Deferred Stock Awards. The Committee may
at any time or times, amend the Plan for any purpose which may at the time be
permitted by law, but (without the person's consent) no such amendment shall
adversely affect the rights of any person with respect to a previously granted
option or Deferred Stock Award.
-6-
<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 10, 1998 on our audits of the consolidated financial statements of
Advanced Radio Telecom Corp. and Subsidiaries as of December 31, 1997 and 1996
and for the years ended December 31, 1997, 1996 and 1995, which report is
included in this Annual Report on Form 10-K.
Coopers & Lybrand L.L.P.
Seattle, Washington
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF DEC-31-1997 AND THE RELATED STATEMENTS OF
INCOME AND CASH FLOWS FOR THE 12-MONTH PERIOD THEN ENDED AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 7,135,427
<SECURITIES> 63,602,195
<RECEIVABLES> 199,316
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 45,207,488
<PP&E> 27,307,508
<DEPRECIATION> 2,012,562
<TOTAL-ASSETS> 232,559,749
<CURRENT-LIABILITIES> 19,598,667
<BONDS> 106,823,103
0
0
<COMMON> 21,429
<OTHER-SE> 76,235,634
<TOTAL-LIABILITY-AND-EQUITY> 232,559,749
<SALES> 296,970
<TOTAL-REVENUES> 1,105,853
<CGS> 254,444
<TOTAL-COSTS> 47,372,848
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,817,180<F1>
<INCOME-PRETAX> (63,084,175)
<INCOME-TAX> (1,355,249)
<INCOME-CONTINUING> (61,728,926)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (61,728,926)
<EPS-PRIMARY> (3.23)
<EPS-DILUTED> (3.23)
<FN>
<F1>THE AMOUNT OF INTEREST EXPENSE HAS BEEN OFFSET BY INTEREST INCOME IN THE AMOUNT
OF $4,814,004
</FN>
</TABLE>
<PAGE>
EXHIBIT 99
RISK FACTORS
From time to time the Company has made, and may in the future make,
forward-looking statements, based on its 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 expressed or impled in the forward-
looking statements for a variety of reasons. These reasons include, but are not
limited to, factors outlined below. The Company does not undertake to update or
revise its forward-looking statements publicly even if experience or future
changes make it clear that any projected results expressed or implied therein
will not be realized.
Limited Operations; History of Net Losses. The Company has limited
operating history. It commenced full scale commercial operations in the fourth
quarter of 1996 as a provider of wireless broadband access to carriers and in
the first quarter of 1998 adopted a new business strategy of providing wireless
broadband data services to retail customers. The Company has generated only
nominal revenues from operations to date, 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. The Company had 1997 net losses of $61.7
million and an accumulated deficit of $95.8 million at the end of 1997. The
Company anticipates its operating losses will continue for at least the next
several years.
Based on the Company's brief operating history and change of strategy,
there is limited data about the Company upon which to evaluate the Company's
future performance. There can be no assurance that the Company will develop a
successful business or achieve or sustain profitability in the future. The
Company's ability to provide commercial service on a widespread basis and to
generate positive operating cash flow will depend on its ability to, among other
things, develop its operational and support systems, attract experienced and
talented personnel, acquire further roof rights and building access for its
networks, construct, implement and commercialize its networks, raise additional
capital, and attract and retain an adequate customer base.
Significant Capital Requirements; Need for Additional Financing. The
Company will require substantial additional capital prior to the end of 1998 and
in the future to implement its business plan, including, among other things,
development and expansion of its networks, funding of operating losses,
repayment of debt, and possible acquisition of additional licenses, other assets
or other businesses. In addition, the Company's expected financing from Lucent
is contingent, among other things, on raising additional substantial capital.
Failure to access capital when needed could have a material adverse effect
on the Company, its ability to implement its business plan, and its financial
condition and results.
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 business
plan. 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. It will be further leveraged upon consummation of the financing
pursuant to the letter of intent with Lucent (which will be secured by certain
assets of the Company). The Company expects to incur substantial additional
debt to finance its business plan. Accordingly, (i) a substantial portion of the
Company's cash flow from operations will be required to pay interest with
respect to its outstanding 14% Senior Notes due 2007, commencing in 2000, and
may be required to pay interest with respect to any additional indebtedness
incurred by the Company, including the Lucent indebtedness, (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
<PAGE>
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. The Company's ability to make principal and
interest payments on its indebtedness, will be dependent upon, among other
things, the Company's future operating performance and anticipated cash flow and
its ability to obtain additional debt or equity financing on acceptable terms,
which are themselves dependent on a number of factors, many of which are out of
the Company's control. These factors include prevailing economic, financial,
competitive and regulatory conditions and other factors affecting the Company's
business and operations, including the ability of the Company to implement its
network on a timely and cost effective basis. There can be no assurance that
these factors will not have a material adverse effect on the Company or 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.
Uncertain Acceptance of Services. The Company and other providers have
only recently begun to market fixed wireless services, and the Company believes
it is currently the only entity marketing exclusively a fixed wireless broadband
data service. The provision of such services represents an emerging sector of
the telecommunications industry, and the demand for such services is uncertain.
The demand may be adversely affected by various factors including historical
perceptions of the unreliability of previous wireless technologies, concerns
about the security of transmissions over wireless networks and the lack of
market history of operational fixed wireless services. The Company anticipates
that a substantial investment in sales and marketing will be required to reach
the target group of businesses, and to create demand for the Company's wireless
data services. There can be no assurance that a substantial market will develop
for fixed wireless broadband data services, that sufficient customers will be
willing to acquire such services separate from voice telephony, or, if such
market were to develop, that the Company will be able to attract and maintain a
sufficient revenue-generating customer base, generate sufficient cash flow to
service its indebtedness, or operate profitably.
Acceptance of the Company's services may be affected by various factors
beyond the Company's control, including the availability and pricing of
alternative broadband data services and the availability and performance of
other networks and narrowband data services, general and local economic
conditions, changes in products and technology, and the potential impact of
government regulation on the Company's services. In addition, the extent of the
potential demand for the Company's broadband wireless data services cannot be
estimated with certainty. Poor acceptance of the Company's services due to one
or more of these factors, or from other factors, could have a negative impact on
the Company's results and its financial condition.
Moreover, the Company has incurred and will continue to incur significant
operating expenses, has made and will continue to make significant capital
investments, has entered into and plans to enter into financing agreements,
leases, equipment supply contracts and service arrangements, in each case based
upon certain expectations as to the anticipated market acceptance of, and
customer demand for, the Company's services. Lack of acceptance of these
services in the market would have a material adverse effect on the Company's
business and financial condition.
Competition. The industry and markets in which the Company plans to
provide services are highly competitive. The Company competes with other
providers of telecommunications services using a variety of telecommunications
technologies, now existing and under development, including copper, fiber,
cable, mobile and fixed wireless and satellite networks and expects to compete
with technologies not yet introduced. These other technologies may offer
advantages over the Company's services. In addition, 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. As a result, these competitors, among other things, may be
able to develop and exploit new technologies, adapt to changes in customer
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requirements more quickly, devote greater resources to the marketing and sale of
their services or more rapidly deploy and build out a network than the Company.
While the Company does not believe that any other competitor is exclusively
offering wireless broadband, packet-switched data services to off-fiber
business, ART faces significant competition from other entities and technologies
that currently, or could in the future, deliver data services to ART's potential
customers over copper wire, fiber, wireless or other technologies. These
current or potential competitors include LECs, fiber and wireless service
providers and cable television operators. The Company's competitors also
include providers of services to end users which are in competition with the
Company's product offerings, such as Internet services. Moreover, the recent
and pending auctions of spectrum capable of supporting comparable services may
facilitate the introduction or expansion of competition from other competitors.
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.
The Company has only recently begun to introduce its data services
and has only recently begun to pursue customers with the goal of becoming
the leading provider of broadband data services to businesses without fiber
connectivity. The Company is currently working to roll out its services in its
two initial markets. To date, the Company does not have significant market share
in any of the markets in which it holds licenses or offers services. Given the
intense competition in the market for broadband data services, there can be no
assurance that the Company will achieve significant market share.
Management of Growth. The Company is pursuing a business plan that, if
successfully implemented, will result in rapid growth, expansion of its
operations and the provision of broadband data services on a widespread basis
over the next two to five years. Rapid expansion of the Company's operations may
place a significant strain on the Company's management, financial and other
resources. 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. In addition, if the Company expands its business, it will
require additional facilities for its growing operation. There can be no
assurance that the Company will successfully implement and maintain such
operational and financial systems or successfully obtain, integrate and utilize
the employees and management, operational and financial resources necessary to
manage a developing and expanding business in the evolving, increasingly
competitive broadband data communications market. If the Company fails to
successfully manage expansion, customers could experience delays and inferior
service, which could have a material adverse effect on the Company's
business, financial condition and results.
Need for Technological Development. Although the Company intends to
commence the build-out of its BMANs utilizing fixed wireless point-to-point
technology, which has been commercially deployed for a period of time, the
Company plans to adopt point-to-multipoint technology for the expansion of its
build-out. The principal advantages of point-to-multipoint architecture over
traditional point-to-point installation include lower costs per customer
installation and higher flexibility in how bandwidth is allocated. Point-to-
multipoint also makes it possible to support many more subscribers than
otherwise would be possible in a point-to-point environment. This technology
has not been deployed on a commercial basis, and it is unclear whether the
technology will perform as expected, integrate as expected with the ATM
switching gear and other components of the BMANs or provide the advantages
expected by the Company. Failure to employ point-to-multipoint technology could
adversely effect the Company's network costs, profitability and results of
operations.
The billing, provisioning, customer service, network management and other
"back office" systems which will be required to operate the Company's business
do not currently exist in a form which can be readily adopted by the Company.
Significant development work by the Company or a third-party provider will be
required to develop such systems for the Company. Delays in procuring such
systems may have a negative impact on the Company's ability to bill and manage
its networks and accordingly on the implementation of its business plan.
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Radio Frequency Limitations. The Company's wireless broadband services
require a direct line of sight between two transceivers and are subject to
distance and rain attenuation. In certain markets which experience heavy
rainfall, transmission links must be engineered for shorter distances and
greater power to maintain transmission quality. Such reduction may increase the
cost of providing service.
The Company primarily installs its transceivers and antennas on rooftops of
buildings and on other tall structures. The Company generally must secure
building access rights, access to conduits and wiring from building owners, and
may require construction, zoning, franchises or other governmental permits.
There can be no assurance that the Company will succeed in obtaining roof access
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. Moreover, there may be a limited number
of available buildings which provide a clear line of sight to targeted off-fiber
businesses, and therefore there may be some circumstances where installation is
impracticable or uneconomical. In such cases, the Company may decide to provide
services that are uneconomical in the short term and seek alternative methods of
transmission to provide services on a more economical basis, or decide not to
provide services to potential customers in locations with such limitations.
There can be no assurance that line of sight limitations will not have a
material adverse effect on the Company's future development and results of
operations.
Reliance on One Principal Supplier. The Company has entered into letters of
intent with Lucent to provide infrastructure equipment for the build out of its
wireless broadband data network. As a result, the Company expects to rely on
Lucent exclusively to co-develop, procure, manufacture and supply the equipment
necessary to construct its networks and perform systems integration for these
networks. Any failure or inability by Lucent to perform these functions could
cause delays or additional costs in providing services to target customers and
building out the Company's network in specific markets. Such a failure could
adversely effect the Company's business and results of operations.
Dependence on Key Employees; Need to Attract and Retain Qualified
Personnel. The success of the Company will be dependent, in large part, on its
ability to attract and retain qualified technical, marketing, sales and
management personnel. The loss of the services of key people could have a
material adverse effect upon the business, financial condition and results of
operations of the Company. The Company's ability to implement its business plan
will require the addition of significant number of qualified personnel.
Competition for such personnel is intense, particularly those experienced in
information technology, and there can be no assurance of the Company's ability
to attract and retain additional key employees and retain its current key
employees. The failure to attract and retain such personnel could have a
material adverse effect on the business.
Importance of Third-Party Relationships. The Company intends to enter into
relationships with third parties to assist it in providing services, extending
its network and penetrating markets. There can be no assurance that the Company
will be able to enter into such relationships on a time line that is consistent
with the Company's strategy, if at all. Failure to enter into such
relationships, the failure of third parties to perform once such relationships
are entered into, or the loss of third party relationships once entered into
could cause delays in providing services, limit the Company's reach in marketing
its product, increase costs for the Company to extend its reach and penetrate
markets, and/or impede the Company's ability to offer certain service packages
to certain customers. Such failures could have a material adverse effect on the
Company's development and results of operations.
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 data services via the Company's licenses or to the regulations
governing competitive or potentially competitive providers, 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.
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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. Failure to comply with FCC rules could subject licenses to automatic
forfeiture or, depending on the violation, to other FCC sanctions, including
automatic forfeitures.
The Company will be entitled to a renewal expectancy if it can demonstrate
at renewal that it is providing substantial service within its authorized area
covered by that authorization. There can be no assurance that the Company will
be able to make this showing for any or all of its licenses. In the event that
the FCC does not renew one or more of the licenses, the Company's business and
results of operations could be materially adversely affected.
The 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
comparable spectrum and the commercial response to the availability and efficacy
of wireless broadband systems. In addition, federal and state regulations may
limit the ability of licensees to sell their licenses. Assignment of licenses
and changes of control involving entities holding licenses require prior consent
of the FCC and, in some instances, state regulatory approval and are subject to
restrictions and limitations on the identity, background, legal and financial
qualifications, among other things, of the assignee or successor. These
regulatory restrictions on transfer of licenses may adversely affect the ability
of the Company to acquire or dispose of further licenses or the value of the
Company's licenses.
Licenses Pending Approval for Transfer. The Company has entered into
agreements to acquire licenses from other parties to enter new markets or
strengthen the Company's position in existing markets. Failure to consummate
the transfer of these licenses could affect the Company's ability to offer
broadband data services in certain markets where the Company intends to
commercialize its services. The acquisition of these licenses is subject, among
other conditions, to the approval of the FCC to the assignment or change of
control of the entity holding the licenses, as the case may be. There can be no
certainty that the Company will receive the requisite approval to acquire these
licenses and thereby be able to implement its strategy with respect to the
markets covered by such licenses.
Acquisition of Additional Bandwidth in Selected Areas. Although the Company
believes the licenses it owns, manages, or has the right to acquire 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.
Foreign Licenses. Entities owned by the Company have obtained licenses to
provide broadband services in certain Western European countries and entities
owned by the Company or in which the Company has a substantial interest have
applied or may apply for such licenses in various other foreign countries. There
can be no assurance that such licenses will be granted or exploited in any way.
Changes in Technology, Services and Industry Standards. The
telecommunications industry and market for data services has been characterized
by rapid technological advances, changes in end user requirements, frequent new
service introductions, evolving industry standards and decreases in the cost of
equipment. The Company expects these changes to continue, and believes that its
long-term success will increasingly depend on its ability to offer value-added
data services that exploit advanced technologies and anticipate or adapt to
evolving industry standards. The Company believes that to remain competitive,
retain the customer base it establishes and maintain the margins of the retail
market it is pursuing, its integrated package of high-speed, broadband data
services must continue to evolve to keep pace with developments in the market.
There can be no assurance that (i) the Company will be able to arrange to offer
the new services required by its customers, (ii) the Company's services will not
be economically or technically outmoded by current or future technologies which
may compete in the data market, (iii) the Company will have sufficient resources
to develop or acquire new technologies or introduce new services capable of
competing with future technologies or service offerings, (iv) the Company's
inventory of equipment will not be rendered obsolete, or (v) the cost of the
Company's equipment and network will decline as rapidly as that of competitive
alternatives. Moreover, there can be no assurance that the Company's ability to
offer the broadband wireless data access with which it will deliver its value-
added services will not become technically or economically outmoded as new
equipment, technologies and advances in competing alternatives become available.
Radio Frequency Emission Concerns. The use of wireless equipment may pose
health risks to humans due to radio frequency emissions ("Emissions") from the
radio/antenna unit. Any allegation of health risks, if proven, could
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result in liability on the part of the Company. If the Company were held liable
in any product liability suit, such liability could have a material adverse
effect on the financial condition of the Company. Moreover, allegations of
health risks, if not proven, could still have a material adverse effect on the
Company. Concerns over Emissions may have the effect of discouraging the use of
wireless communications devices, such as the radio/antenna units to be used in
building out the Company's BMANs. These concerns could have a material adverse
effect on the Company's business, financial condition and results of operations.
The FCC recently adopted new guidelines and methods for evaluating the
environmental effects of Emissions from FCC-regulated transmitters, including
wireless antennas. The updated guidelines and methods generally are more
stringent than those previously in effect. The Company expects that the wireless
equipment to be provided by its vendors will comply with applicable FCC
guidelines. The FCC also incorporated into its rules provisions of the
Telecommunications Act which preempt state or local government regulation of
personal wireless services facilities based on radio frequency environmental
effects, to the extent such facilities comply with the FCC's rules concerning
such Emissions.
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