-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PnwVNmx5MEpf9Seot99/NecKjK64ov+w6BWI47/eugs5NbbW2/H7aUVAisBmPM+U /vhGjzkiIZOMgjSEG+CDyA== 0001036050-99-000808.txt : 19990416 0001036050-99-000808.hdr.sgml : 19990416 ACCESSION NUMBER: 0001036050-99-000808 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVANCED RADIO TELECOM CORP CENTRAL INDEX KEY: 0001010286 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 521869023 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21091 FILM NUMBER: 99594877 BUSINESS ADDRESS: STREET 1: 500 108TH AVE NE STREET 2: SUITE 2600 CITY: BELLEVUE STATE: WA ZIP: 98004 BUSINESS PHONE: 4256888700 MAIL ADDRESS: STREET 1: 500 108TH AVENUE NE STREET 2: SUITE 2600 CITY: BELLEVUE STATE: WA ZIP: 98004 10-K 1 ANNUAL REPORT 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, 1998 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 ------------------- --------------------- 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 $271 million on April 12, 1999, 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 April 12, 1999 was as follows: Common Stock, $.001 par value: 27,142,409 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 1999 Annual Meeting of Stockholders. Exhibit Index is on page 24. PART I ITEM 1. BUSINESS Advanced Radio Telecom Corp. ("ART" or the "Company") intends to become the leading provider of broadband Internet services to businesses not served by fiber-optic networks. Utilizing its national footprint of 38 GHz spectrum licenses, the Company currently serves Seattle, Washington, Portland, Oregon, and Phoenix, Arizona and plans to serve up to 100 of the top metropolitan markets over the next five years. With Lucent Technologies, Inc. ("Lucent") as the Company's technology partner, the Company is building its own fixed wireless, packet-based broadband data networks utilizing Internet Protocol ("IP") and Asynchronous Transfer Mode ("ATM") technology. As networks are deployed and interconnected using a leased fiber-optic backbone, ART plans to provide its customers with end-to-end connectivity on a metropolitan, regional and national basis. ART offers an integrated package of data solutions including Internet access, web hosting, web based content, virtual private networks, web design and Internet portal service and intends to also offer electronic commerce applications, multimedia 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 private network services to the customers' premises 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 38 GHz 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. 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 Internet 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 Internet applications allows ART's networks to be completely packet-based, providing higher capacity, higher speed data services than a circuit-switched network. ART has and intends to continue hiring product development, technical, and sales personnel with expertise in Internet applications and delivery, as opposed to telephony experience. ART is directing 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 Internet services. -2- High-Speed, High-Capacity, High-Quality Connectivity. ART's broadband data services are being 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. Technology is available to expand the speed of two-way data transfer rates to 155 megabits per second. Lower Cost Network. The Company expects its networks to cost less than its competitors' fiber 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 the Company does not expect to decrease, while the cost of ART's networks involves substantial electronic equipment costs, which have and are expected to continue to decline. The Company's network will be entirely packet-based, and therefore the Company will not have to buy more expensive circuit switches required by voice 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 networks are designed to reach customers within its initial clusters of buildings without having to build out an entire market. ART's sales force initially targets customers within hub site and other buildings ready to be connected to the ART network, then customers in new buildings within the range of established radio hub sites, and then customers in 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, 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 a 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 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"). William J. Maxwell, President and Chief Operating Officer, previously served as Executive Vice President of Strategic Planning, Sales and Marketing and prior to that as Executive Vice President of ICG Communications and President of ICG Telecom Group. Robert S. McCambridge, Executive Vice President and Chief Financial Officer, was formerly Executive Vice President of OneComm, formerly Cable Plus Holding Company. Thomas P. Boyhan, Executive Vice President, Sales and Marketing, previously was Senior Vice President, National Account Sales for William's Communications Solutions, a national systems integration company, and served as Vice President, Global Accounts for WilTel. George R. Olexa, Executive 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 PacTel Cellular, 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 Internet based services. The Company is implementing the following initiatives to achieve this objective: Target Off-Fiber Businesses. ART is focusing its primary marketing efforts on businesses located off the fiber network. The Company identifies building clusters in high-density off-fiber areas containing customers with high potential for significant Internet services requirements, such as high-technology companies that are typically located outside cities' main business districts. Once ART deploys its network to service these initial customers, it is able to reach new customers in the surrounding area rapidly without having to replicate hub site infrastructure. -3- Offer End-Users an Array of Broadband Internet Services. ART offers business customers an integrated package of high-speed, Internet based services, including Internet access, web hosting and virtual private networks and intends to also offer electronic commerce applications, multimedia services, voice and fax over IP and other enhanced data 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 continue 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 continue to expand its product offerings by developing relationships with web hosting providers, electronic commerce software providers, system integrators, streaming media providers, and other web content providers. ART will continue to seek to develop relationships with inter-exchange carriers ("IXCs"), Internet service providers ("ISPs"), 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 provides 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 plans to continue to differentiate itself from its competitors and establish brand identity based on high quality service that is responsive to the customer. Network Deployment ART believes it is 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 variety of Internet services. The Company will connect buildings and campuses to the public Internet, IXCs and CLECs 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 has initially built its networks in Seattle, Washington, Portland, Oregon and Phoenix, Arizona. 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 San Jose, Los Angeles and San Diego, California, Las Vegas, Nevada, Tucson, Arizona, Salt Lake City, Utah, Boise, Idaho and Spokane, Washington. 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. As ART interconnects its BMANs, ART will create a private inter-city IP and ATM backbone that will allow ART to sell national intranets to its end users. Sales & Marketing ART is marketing its services primarily through a direct sales force, which is responsible for initial sales efforts in each new market. ART supports its direct sales efforts in each market with telemarketing, direct mail and advertising as well as with research about target markets, buildings and customers. Lucent has agreed to provide technical support to assist ART's salespersons with selling the Company's services to prospective customers by assigning Lucent teams to work with ART personnel during the selling process. ART also will employ various indirect sales channels. -4- In each new market, ART uses demographic and geographic information systems to identify those clusters of commercial buildings without access to high-speed data services that contain tenants with significant demand for data services or that contain large buildings with attractive opportunities for aggregating data traffic. ART expects that its best sales opportunities will be in clusters including office buildings, warehouses, retail buildings, office parks, hospitals and universities. ART expects to rapidly deploy its network by initially locating sites in each market to serve those clusters that the Company believes present the most promising opportunities and then expanding in secondary clusters in a market. In general, before any customer premise equipment is deployed in a cluster, ART's sales personnel pre-sell its services by focusing on buildings with the highest concentrations of significant data users. The Company simultaneously seeks to obtain building access rights necessary to extend its network to these new customers. Once ART begins services to a cluster, ART continues to sell services in buildings where equipment has been deployed and will target additional buildings within the cluster. ART will then expand its network within the market by deploying additional clusters using the same process. ART believes that its data focus provides it with a significant advantage in selling its services. Sales of data services are technical in nature, and therefore, the Company has hired and continues to hire sales personnel in each market who are experienced in selling and implementing data services, rather than a sales force experienced in voice telephony. ART's data focus enables its direct sales personnel to tailor their selling efforts to a potential customer's information technology decision-marker, rather than the voice telephony decision-maker. ART expects that these information technology decision-makers will directly drive the demand for high-bandwidth broadband data services by its target customers. In order to increase the scope and speed of its market penetration, ART intends to supplement its direct sales efforts by utilizing various indirect sales channels. ART will seek to develop relationships with data-oriented sales agents, including local data network integrators and telecom resellers focusing on data. These sales agents could provide ART with access to a greater number of data-oriented business customers in each market. In addition to these traditional indirect sales channels. ART plans to continue marketing to nationally positioned property management companies to gain access to their tenants and to secure roof rights necessary to deploy ART's networks. ART also plans to seek relationships with a variety of telecommunications carriers to assist the Company in developing its networks, more rapidly penetrating its markets, reducing its operating costs, and creating additional revenue opportunities. The Company believes it would be an attractive partner for a variety of telecommunications carriers which may be willing to jointly deploy data networks and share capacity and revenue opportunities. For example, capacity-swaps between ART and domestic and international high-speed data carriers could be mutually advantageous, helping those carriers build high-speed, packet data networks using IP technology. Capacity-swaps with smaller fiber carriers and IXCs could provide the fiber carriers and IXCs with broadband local access. ART believes its high-speed, high-capacity connectivity also may be attractive to ISPs, helping them develop markets quickly, differentiate their service from other ISPs, increase their margins and serve higher volumes of customers. Products and Services ART provides broadband Internet solutions. The Company is deploying its networks on an initial basis to support a comprehensive and fully-integrated product line that is designed to meet the broadband Internet telecommunications needs of business customers located off the fiber network. Internet Access. ART offers business customers an end-to-end Internet access solution by providing high-speed Internet access over ART's wireless data networks. ART's Internet Access offering ranges in speed from 64 kilobits per second to 10 megabits per second. ART is providing Internet service in conjunction with one or more Internet transit partners. ART intends to partner with additional Internet transit providers that are utilizing a private network access point ("PNAP") strategy. It is ART's belief that a PNAP configuration provides a higher speed Internet experience. -5- Hosting Services. ART currently offers a shared web hosting service. The service is based on state-of-the-art servers and is located in an environmentally-controlled equipment room that is staffed 24 hours a day. The server farm is connected to the network via a redundant DS-3 backbone connection. ART is planning to offer dedicated web hosting service as well as collocation service for web hosting customers that require support for a stand-alone server or need support for a customer-owned server. Web Design Services. ART offers web design services for those customers that require assistance in creating and maintaining a web site. Remote Access Service. ART provides remote access services to customers who wish to access their local area network through the Internet or wish to remotely access the Internet. Internet Portal. ART offers a portal that is used by customers to access the Internet. The portal can be customized by geographic region and by the end-user's interests. Internet Value-Added Services. ART offers an array of value-added Internet services, including domain name service, IP Fax, local caching, e-mail service, web hosting, security services and news services. Gateway Services. ART's Gateway Services provide broadband connectivity between end-users or between a wholesale customer's networks. Gateway Services connect end-users' private networks, including remote office LAN and client server interconnectivity, integrated voice, multimedia and data offerings. Gateway services also enable ART to create virtual private networks ("VPNs") or intranets, facilitating enterprise-wide communications with local and national private networking capabilities. Gateway Services also offer end-users extranet services giving outside customers and clients access to specific elements within an end user's VPN or intranet. Gateway Services will support ATM, IP, Ethernet and Frame Relay technologies. 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 security service and security consulting services, distributed network caching and electronic commerce services, IP voice and IP video conferencing service, multimedia streaming applications, network consulting and other value-added services as they are developed. ART's Network ART is deploying a state-of-the-art packet-based broadband network using wireless facilities interfaced with the fiber backbone in metropolitan areas and nationally to provide end-to-end, high-bandwidth data services. ART has been building 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 uses digital wireless technology designed to deliver high-quality data services that ART believes is comparable in quality to fiber-based systems. The Company will use radio hubs to transmit to and receive signals from wireless equipment on customers' premises. The customers' premises 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 and local weather environment. 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. -6- 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. The Company owns 363 38 GHz licenses (excluding certain licenses being transferred pursuant to the option described below). 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. An option to acquire from the Company 12 38 GHz licenses in specified markets in which the Company has more than one license was exercised in June 1997, with closing subject to FCC approval. The Company has the right to be a reseller with respect to these licenses for a term of five years at market rates. 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, Denmark and the United Kingdom which allow the provision of broadband wireless connectivity for communications services with certain limitations. Other foreign subsidiaries 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 Internet 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 ISPs, web hosting and web application providers, ILECs, CLECs, fiber service providers, cable television operators, wireless service providers and satellite communications companies. 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 responsiveness to customer needs, features, service, quality, price, high-speed services 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. ISPs. The Company faces significant competition from ISPs which deliver Internet access services as well as valued-added, web-based services. ART competes against Tier 1, Tier 2, and Tier 3 ISPs. Tier 1 ISPs generally have substantial brand recognition and a robust suite of value-added, web-based services. Tier 2 and Tier 3 ISPs have regional brand recognition and are expanding rapidly with low-cost services like digital subscriber line ("DSL") services. -7- Web Hosting and Application Providers. The Company faces significant competition from web hosting and web application providers. These companies specialize in niche markets and offer value-added, web-based services that compete directly with ART's value-added services. ILECs' Copper Networks. The Company faces significant competition from incumbent LECs, which typically deliver data services over copper networks. Incumbent LECs have long-standing relationships with their customers and substantial name recognition. In addition, the incumbent LECs have employed or will likely employ digital subscriber line products such as ADSL (asymmetrical digital subscriber line), which is currently available. Commercial DSL services currently are limited to 7 megabits of throughput downstream and 1 megabit of throughput upstream. ART currently has the capability to provide much higher bandwidth. Fiber Networks. The Company also faces competition from expanding fiber-optic networks owned by incumbent and competitive LECs, IXCs, electric utilities and other companies. 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. 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. 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 significant 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 acquired, 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 38 GHz 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," and ISM service also compete 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. -8- 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, which may provide competition to the Company particularly for certain low-speed data transmission services. However, ART has positioned itself to provide high-speed Internet services, and mobile wireless networks generally offer lower transmission speeds. Satellite Networks. Many other companies have filed applications with the FCC to develop global broadband satellite systems which may be used to provide broadband voice and date services. Satellite is currently a broadcast medium in which two-way communications are not readily available. However, if the satellite providers can develop two-way communications, this could represent a significant competitive threat. 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, and the FCC Rules and Regulations ("Communications Laws") impose requirements on radio licensees and carriers, including, among other things, regulations on the ownership, operation, acquisition and sale of the broadband operating radio systems that are needed to provide the services offered by the Company. On October 24, 1997, the FCC issued a Report and Order and Second Notice of Proposed Rulemaking ("Order") that substantially modified the regulations applied to 38 GHz licensees, such as the Company. The Order allocated new spectrum at 37.0-38.6 GHz; conformed the rules for operation in the 37.0-38.6 GHz band with the rules for operation in the 38.6-40.0 GHz band; modified certain operational rules for both bands; adopted a competitive bidding licensing scheme for authorizing new spectrum in these bands over geographic areas defined by the Rand-McNally Basic Trading Areas ("BTAs") and, adopted rules for the protection of incumbent licensees, such as the Company. The new operational rules generally expand the flexibility of licensees operating in the 37.0-40.0 GHz band. For example, licensees are now permitted to offer point-to-multipoint and point to point services, and will be permitted to provide mobile services upon adoption of inter-licensee coordination policies. All of the 38 GHz licenses owned or to be acquired by the Company are due to expire in February of 2001. Under the new operational rules, the Company will be entitled to a "renewal expectancy," a dispositive preference in renewal proceedings, for a license if the Company can demonstrate that it is providing "substantial service" within the licensed area when it files its renewal application. The FCC has not provided definitive guidance on what level of service is considered "substantial." If the Company were not to receive a renewal expectancy, the Company's operations could be adversely affected. -9- Under the FCC's rules, the Company is also subject to certain build-out requirements. The Company must construct facilities to place each licensed 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 licensed market area. Failure to meet the construction deadline results in the automatic cancellation of the license. 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 cancellation or forfeiture, absent a waiver of the FCC's rules. Petitions for reconsideration of various aspects of the Order, including but not limited to the treatment of pending applications and amendments, have been filed by a number of parties, including the Company. It is not possible to determine when the FCC will act on these petitions or what changes, if any, will be made to the final rules. Thus, there can be no assurance that the final rules will not have a material adverse effect on the Company's operations. The FCC has not yet scheduled an auction for licenses in the 37.0-40.0 GHz band. The Company has not made a determination as to whether it would seek additional licenses in the event of an auction. 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. 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. Research and Development During 1998, 1997 and 1996, the Company spent $593,595, $421,236 and $1,269,579, respectively, with respect to research and development. Employees As of March 1, 1999 the Company had a total of 133 employees. None of the Company's employees is represented by a collective bargaining agreement. ITEM 2. PROPERTIES The Company leases approximately 57,443 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 31,000 square feet of office space in 8 cities nationwide of which 12,822 square feet has been subleased. -10- 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 1998 fiscal year. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company are as follows:
Name Age Position - ---- --- -------- Henry C. Hirsch..............57 Chairman of the Board of Directors and Chief Executive Officer William J. Maxwell...........56 President and Chief Operating Officer Thomas P. Boyhan.............54 Executive Vice President, Sales and Marketing Robert S. McCambridge........40 Executive Vice President, Chief Financial Officer George R. Olexa..............43 Executive Vice President, Chief Technology Officer
Henry C. Hirsch has served as Chairman of the Board of Directors 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 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. William J. Maxwell has served as President and Chief Operating Officer since October 1998 and previously 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 the 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. Thomas P. Boyhan has served as Executive Vice President, Sales and Marketing of the Company since September, 1998. From January 1997 to August 1998, Mr. Boyhan was Senior Vice President, National Account Sales of William's Communications Solutions, a national $1.3 billion systems integration company, 70 percent owned by William's Communications Group, Inc. From July 1994 to December 1997, Mr. Boyhan was Vice President, Global Accounts of WilTel. From February 1991 to June 1994, Mr. Boyhan was Director of Sales, Eastern U.S. Region of Bell South Communications. Robert S. McCambridge has served as Executive Vice President and Chief Financial Officer of the Company since October 1998. From September 1996 to October 1998, Mr. McCambridge was Executive Vice President and earlier Vice President and Chief Financial Officer of One Comm, formerly Cable Plus Holding Company. From May 1995 to September 1996, Mr. McCambridge was President of the Robert S. McCambridge Company. From March 1994 to May 1995 Mr. McCambridge was Senior Vice President and Director of Pacific Northwest Corporate Finance of Dain Bosworth Inc. From December 1991 to January 1994 Mr. McCambridge was Treasurer and Vice President of Corporate Development of Cerdian Corporation, formerly Control Data Corporation. George R. Olexa has served as Executive 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 -11- 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 PacTel Cellular. 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 bid 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. PRICE RANGE ----------- High Low ---- --- 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 1998 First Quarter........................ $17.000 $7.500 Second Quarter....................... $16.375 $9.688 Third Quarter........................ $10.000 $2.938 Fourth Quarter....................... $7.500 $2.125 On April 12, 1999, the last sale price of common stock as reported on the Nasdaq National Market was $12.9375 per share. As of April 12, 1999 there were 136 record holders of ART's common stock. ART has not paid any cash dividends on its common stock in the past and does not anticipate paying any cash dividends on its common stock in the foreseeable future. ART's Board of Directors intends to retain earnings to finance the expansion of ART's business and fund ongoing operations for the foreseeable future. In addition, the terms of the indenture relating to the Company's 14% Senior Notes due 2007 restrict the ability of the Company to pay dividends on common stock. -12- ITEM 6. SELECTED FINANCIAL DATA The selected financial data presented below as of December 31, 1994, 1995, 1996, 1997 and 1998 and for the years ended December 31, 1994, 1995, 1996, 1997 and 1998 were derived from and should be read in conjunction with the audited financial statements of the Company.
Year ended December 31 --------------------------------------------------------------------------------- 1994 1995 1996 1997 1998 ------------- ------------- ------------- ------------- ------------- Statement of Operations Data: Service revenue ............................ $ -- $ 5,793 $ 247,116 $ 708,883 $ 840,822 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 8,603,576 Cost of equipment sales and construction ... -- -- 1,590,779 254,444 Sales and marketing expenses ............... -- 191,693 5,548,584 13,469,898 5,679,222 General and administrative expenses ........ 253,453 2,911,273 12,896,134 12,789,866 11,992,874 Research and development expenses .......... -- -- 1,269,579 421,236 593,595 Equipment impairment ....................... -- -- -- 7,166,920 2,753,105 Depreciation and amortization .............. 8,281 15,684 1,017,959 6,018,172 7,354,378 Loss from operations ....................... (124,245) (3,112,857) (22,818,056) (46,266,995) (36,135,928) Interest and other expenses, net ........... 4,375 121,986 6,512,251 16,817,180 19,978,994 Income tax benefit ......................... -- -- -- 1,355,249 9,132,237 Extraordinary loss ......................... -- -- 1,339,996 -- -- Net loss ................................... (128,620) (3,234,843) (30,670,303) (61,728,926) (46,982,685) Basic and diluted net loss per share ....... (0.04) (0.54) (3.97) (3.23) (1.89) Weighted average number of shares of common stock outstanding .............. 3,337,685 5,946,338 7,717,755 19,083,304 24,890,177 Other Financial Data: EBITDA (1) ................................. $ (115,964) $ (2,007,568) $ (14,348,920) $ (30,811,151) (25,186,686) Capital expenditures ....................... 5,175 3,585,144 16,631,451 16,685,436 11,049,743 As of December 31 --------------------------------------------------------------------------------- 1994 1995 1996 1997 1998 ------------- ------------- ------------- ------------- ------------- Balance Sheet Data: Working capital surplus (deficit) .......... $ (76,556) $ (3,008,510) $ (9,623,905) $ 25,608,821 $ (2,930,428) Property and equipment, net ................ 3,448 3,581,561 19,303,849 25,294,946 33,202,310 FCC licenses, net .......................... -- 4,235,734 4,330,906 131,210,102 186,513,591 Total assets ............................... 42,611 9,876,559 36,648,701 232,559,749 265,721,291 Long-term debt ............................. -- 6,450,000 4,977,246 108,299,359 118,371,245 Accumulated deficit ........................ (135,214) (3,370,057) (34,040,360) (95,769,286) (142,751,971) Total stockholders' equity (deficit) ....... (39,078) (312,860) 19,949,920 76,257,063 82,354,920
- ------------ (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. -13- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Restatement of Quarters and Significant Provisions The Company has restated its interim financial results for the first, second and third quarters of fiscal 1998 as a result of a change in tax law that was not previously considered, which increased the net operating loss carryforward period from 15 to 20 years. As a result of this and an increase in the Company's tax liability accrual, the 1998 year end results reflected in this report differ from the unaudited results previously reported by the Company. The following table presents a summary of unaudited quarterly financial information for the three quarters of fiscal 1998, as reported and as restated.
Three Months Ended Three Months Ended Three Months Ended March 31, 1998 June 30, 1998 September 30, 1998 ---------------------------- ---------------------------- ---------------------------- Previously As Previously As Previously As Reported Restated Reported Restated Reported Restated ------------ ------------ ------------ ------------ ------------ ------------ Total revenue ................ $ 236,557 $ 236,557 $ 205,770 $ 205,770 $ 186,756 $ 186,756 Total operating costs and expenses ......... 7,089,860 7,089,860 7,370,331 7,370,331 10,660,279 10,660,279 ------------ ------------ ------------ ------------ ------------ ------------ Operating loss ............... (6,853,303) (6,853,303) (7,164,561) (7,164,561) (10,473,523) (10,473,523) Total interest and other ..... 4,299,281 4,299,281 4,614,100 4,614,100 5,170,632 5,170,632 ------------ ------------ ------------ ------------ ------------ ------------ Loss before income taxes ..... (11,152,584) (11,152,584) (11,778,661) (11,778,661) (15,644,155) (15,644,155) Deferred income tax benefit .. 329,170 2,051,789 1,464,053 2,207,090 808,974 1,936,645 ------------ ------------ ------------ ------------ ------------ ------------ Net loss ..................... $(10,823,414) $ (9,100,795) $(10,314,608) $ (9,571,571) $(14,835,181) $(13,707,510) ============ ============ ============ ============ ============ ============ Basic and diluted net loss per common share ........... $ (0.50) $ (0.42) $ (0.42) $ (0.39) $ (0.56) $ (0.51) ============ ============ ============ ============ ============ ============ Weighted average common shares ..................... 21,736,800 21,736,800 24,332,349 24,332,349 26,701,030 26,701,030 ============ ============ ============ ============ ============ ============
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 operating and support systems to support its initial business of selling connectivity to various telecommunications companies as a wholesale carriers' carrier, which the Company commenced in the fourth quarter of 1996. Following the establishment of a new core management team, the Company altered its strategy in the first quarter of 1998 to sell a variety of broadband Internet services to end-user customers and to deploy a broadband data network. The results from operations in 1997 reflect a business no longer being pursued by the Company. During the year ended December 31, 1998, ART began offering its Internet services in the Seattle, Washington, Portland, Oregon and Phoenix, Arizona areas and, as such, revenues to date have been limited. Results of Operations 1998 Compared to 1997 Revenue for 1998, was approximately $0.8 million compared to approximately $1.1 million for the same period in 1997. The revenue for 1997 included approximately $0.4 million of non-recurring equipment sales and construction revenue associated with radio links installed for a third party. -14- Operating costs and expenses were approximately $37.0 million for 1998, compared to approximately $47.4 million in 1997. The Company initiated certain restructuring activities in the third and fourth quarters of 1997 to align the Company's organization more closely with its marketing and business development plans and to conserve capital resources. While such restructuring activities reduced certain expenses, in future periods the Company expects increases in expenses for network operations and sales and marketing as the Company implements its business plan. During 1998, the Company recorded approximately $650,000 of non-recurring severance expenses and non-cash compensation charges of approximately $657,500 with respect to a deferred stock grant. In 1997, the Company incurred a charge of approximately $1.2 million with respect to a deferred stock grant and other compensation expenses. The Company incurred non- recurring severance and office closure costs of approximately $1.0 million in the third and fourth quarters of 1997. Cost of equipment sales and construction of approximately $0.3 million incurred in the 1997 period related to non- recurring equipment sales and construction revenue. During the fourth quarter of 1998, the Company recorded an additional accrued liability for sales and property taxes of approximately $3.3 million, of which approximately $2.4 million was charged to operations in the fourth quarter of 1998. Depreciation and amortization was approximately $7.4 million for 1998, compared to approximately $6.0 million for 1997. The increase was primarily due to amortization of additional FCC licenses and equipment placed in service. In 1998, the Company recorded approximately $2.8 million to write down equipment which is not expected to be utilized in its broadband data network. In 1997, the Company recorded an equipment charge of approximately $8.1 million, which included a charge of approximately $7.2 million to write down equipment not expected to be utilized in its broadband data network. The Company expects to record an additional charge of approximately $6.4 million in the first quarter of 1999 to write down the carrying value of additional equipment which the Company determined, in the first quarter of 1999, will not be used in its broadband data network build out. Net interest and other expenses were approximately $20.0 million for 1998 compared to approximately $16.8 million for 1997. Included in net interest and other expenses for 1998 was a charge of approximately $448,000 related to an unsuccessful high yield debt offering and a charge of approximately $1.0 million related to the amortization of deferred financing costs related to the financing commitment under the Working Capital Facility (defined below). Included in net interest and other expenses for 1997 was approximately $2.7 million 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"). Interest expense will also increase in future quarters as a result of borrowings under the Working Capital Facility and Purchase Money Facility (defined below). Deferred income tax benefit was approximately $9.1 million for 1998 compared to approximately $1.4 million in 1997 as a result of a change in tax law which increased the net operating loss carryforward period from 15 to 20 years. 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. 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 charge of approximately $1.2 million in 1997 with respect to a deferred stock grant and other expenses. During 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 $1.0 million 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 -15- development plans and to conserve capital resources. 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. 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 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. Liquidity and Capital Resources Through December 31, 1998, 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, the Company's public offering of units consisting of its Senior Notes and warrants in February 1997, and the borrowings from Lucent Technologies Inc. ("Lucent") described below in 1998. Approximately $51 million of the approximately $130 million net proceeds from the sale of the units 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 will not be able to deduct the interest expense related to the accretion of this original issue discount for tax purposes. During 1998 and 1997, the Company issued approximately 4.5 million and 6 million shares of common stock, respectively to acquire certain FCC licenses. In addition, as of December 31, 1998, the Company had agreements to acquire certain additional FCC licenses for cash of approximately $4.3 million and other FCC licenses for approximately 154,000 shares of common stock, which were consummated subsequent to December 31, 1998. The Company may continue to acquire additional licenses in exchange for common stock or cash. An option to acquire from the Company 12 38 GHz licenses in specified markets in which the Company has more than one license was exercised in June 1997, with closing subject to FCC approval. The Company would receive approximately $7.0 million on closing of such transaction. In September 1998, the Company and Lucent entered into a credit facility (the "Working Capital Facility") for Lucent to provide the Company with up to $25 million of unsecured revolving loans for working capital purposes. As of December 31, 1998, the Company had drawn $17.5 million under the Working Capital Facility and subsequent to December 31, 1998 has drawn the remaining $7.5 million. Loans made pursuant to the Working Capital Facility are due June 30, 1999, unless extended by Lucent to no later than September 17, 1999. The terms of the Working Capital Facility require ART to apply debt or equity capital raised by ART in excess of $50 million to permanently repay the Working Capital Facility. In September 1998, the Company and Lucent entered into a purchase money credit facility (the "Purchase Money Facility") setting forth the terms and conditions under which Lucent will provide purchase money financing in an aggregate amount of up to $200 million, to be used to finance the purchase of the Company's data network from Lucent. The Company has borrowed $10 million in initial purchase money loans (the "Initial Purchase Money Loans") under the Purchase Money Facility. No additional amounts are currently available to the Company under the Purchase Money Facility. Subject to certain conditions, including ART's raising at least $50 million of certain debt or equity capital and repayment and termination of the Working Capital Facility, Lucent will make available purchase money loans equal to 200% of the aggregate capital raised, not to exceed $200 million (including the $10 million Initial Purchase Money Loans). There can be no assurance that the funding contemplated by the Purchase Money Facility will become available to ART. -16- In July 1998, ART and Lucent entered into a definitive purchase agreement (the "Lucent Purchase Agreement"), which amended and restated the Company's purchase agreement with Lucent entered into in April 1998, under which Lucent will design, engineer and construct the Company's wireless broadband data network. The Company's purchase commitment under the Lucent Purchase Agreement is initially $240 million upon the availability from Lucent of $200 million of purchase money loans under the Purchase Money Facility, and increases to $1.2 billion if Lucent agrees to increase the amount of ART's purchase money loans to $600 million on terms that are acceptable to ART. The Company's commitment is subject to various other terms and conditions, including the availability of additional financing on terms that are acceptable to ART. Subsequent to December 31, 1998, the Company issued a purchase order for certain wireless network equipment in the amount of $5 million under the Lucent Purchase Agreement. The Company will require significant additional capital to fully fund its operations and its long-term broadband data network buildout and business plan. The Company currently estimates that it will require in excess of $1 billion over the next several years to fund capital expenditures, working capital and operations. The Company has limited financial resources, has incurred recurring losses from operations since inception and does not expect to generate significant operating revenues in the near term. The Company's ability to continue as a going concern at least through December 31, 1999, which includes funding of its operations and business plan, the repayment of the $25 million Working Capital Facility and funding of its contractual commitments, is dependent upon its ability to raise additional financing. The Company has engaged investment bankers to assist it in obtaining financing and is in negotiations with potential investors to provide equity financing. However, there can be no assurance that the Company will be successful in its efforts to obtain such financing, or, if available, that it will be able to obtain it on acceptable terms. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Inflation Management does not believe that its business is impacted by inflation to a significantly different extent than is the general economy. Year 2000 Disclosure Many existing computer programs use only two digits, rather than four, to represent a year. Date-sensitive software or hardware written or developed in this fashion may not be able to distinguish between 1900 and 2000, and programs written in this manner that perform arithmetic operations, comparisons or sorting of date fields may yield incorrect results when processing a Year 2000 date. This Year 2000 problem could potentially cause system failures or miscalculations that could disrupt operations. The Company's State of Readiness The Company has implemented a survey to identify Year 2000 issues in three areas: (i) financial and information technology systems (ii) non-IT network equipment and (iii) third-party vendors and suppliers. The Company believes its financial and information technology systems and its non-IT equipment will be Year 2000 compliant by the end of 1999. Because the Company's financial and information technology systems are relatively new, having been purchased in 1996 or thereafter, the Company does not expect to uncover any material noncompliant systems. The Company completed its survey of financial and information technology systems in the first quarter of 1999. As a result of the survey, the Company does not believe there are any material noncompliant systems. However, the Company is conducting detailed verification testing to confirm the results of its survey. If Year 2000 issues are discovered, the Company will evaluate and prioritize the problems. The Company expects to coordinate any Year 2000 problems with the vendors that supplied the noncompliant systems. The Company expects that any remediation efforts would continue through mid-1999. However, there can be no assurance that the Company's survey will identify all Year 2000 problems in these systems or that the necessary corrective actions will be completed in a timely manner. -17- The Company has received warranties from its network equipment suppliers and integrators, including Lucent, that the Company's non-IT network equipment is Year 2000 compliant. In addition, the tests conducted by the Company before accepting delivery of such network equipment are designed to confirm whether the equipment is Year 2000 compliant. Based on these warranties and acceptance tests, the Company does not plan to take further action to ascertain whether its network equipment is Year 2000 compliant. However, there can be no assurance that this equipment will be Year 2000 compliant as warranted or that the acceptance tests will identify all Year 2000 problems. In addition, the Year 2000 warranties that the Company has received limit the damages that the Company would be able to recover if such systems were not Year 2000 compliant. The Company is also reviewing the Year 2000 compatibility of its network management software. If the Company discovers that this software is not Year 2000 compliant, it expects to coordinate its remediation efforts with the software provider to remediate the system. The Company expects that these remediation efforts, if any, will continue through mid-1999. The Company's survey is also assessing the Company's vulnerability to the Year 2000 problems of third-party service suppliers and is communicating with suppliers regarding the problem. The Company relies on third-party suppliers to deliver fiber telecommunications links, Internet access, network equipment, banking services and payroll services. The Company also intends to develop new relationships with several providers of fiber-optic telecommunications service, Internet service providers, telecommunications resellers and other companies in the telecommunications industry. The Company intends to continuously identify and prioritize critical suppliers and communicate with them about their plans and progress in addressing the Year 2000 problem. The Company's Year 2000 Risk Based on the efforts described above, the Company currently believes that its systems will be Year 2000 compliant in a timely manner. The Company completed its survey of financial and information technology systems and non-IT systems in the first quarter of 1999 and expects to complete any remediation efforts by the end of the third quarter 1999. However, there can be no assurance that all Year 2000 problems will be successfully identified, or that the necessary corrective actions will be completed in a timely manner. Failure to successfully identify and remediate such Year 2000 problems in a timely manner could have a material adverse effect on the Company's results of operations, financial position or cash flow. In addition, the Company believes that there is a risk relating to significant service suppliers' failure to remediate their Year 2000 issues in a timely manner. Although the Company is communicating with its suppliers regarding the Year 2000 problem, the Company does not know whether these suppliers' systems will be Year 2000 compliant in a timely manner. Like most telecommunications providers, the Company's ability to provide service is dependent on key suppliers and equipment vendors. If one or more significant suppliers are not Year 2000 compliant, this could have a material adverse effect on the Company's results of operations, financial position or cash flow. The Company's Contingency Plans The Company has not created a formal contingency plan for Year 2000 problems. The Company intends to take appropriate actions to mitigate the effects of third parties' failures to remediate their Year 2000 issues and for unexpected failures in its own systems. Such actions may include having arrangements for alternate suppliers and using manual intervention where necessary. If it becomes necessary for the Company to take these corrective actions, it is uncertain whether this would result in significant interruptions in service or delays in business operations or whether it would have a material adverse effect on the Company's results of operations, financial position or cash flow. Costs of Year 2000 Remediation As of December 31, 1998, the Company has not incurred material costs related to the Year 2000 problem, and does not expect to in the future. The Company has not deferred other information technology projects due to Year 2000 expenses, and does not expect to defer such projects in the future. However, there can be no assurance that the costs associated with the Year 2000 problem will not be greater than anticipated. -18- Readers are cautioned that forward-looking statements contained in the Year 2000 Disclosure should be read in conjunction with the Company's disclosures under the heading: "Cautionary Statement" below. 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. -19- ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of Advanced Radio Telecom Corp. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and stockholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of Advanced Radio Telecom Corp. and Subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has limited financial resources, requires significant additional capital to fund its operations and business plan and has incurred recurring losses from operations since inception and does not expect to generate significant operating revenues in the near term. The Company's continued funding of its operations and business plan is dependent upon its ability to raise additional financing. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. PriceWaterhouseCoopers LLP Seattle, Washington March 29, 1999 F-1 ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997
1998 1997 ------------- ------------- ASSETS Current assets: Cash and cash equivalents .......................................... $ 11,864,218 $ 7,135,427 Short-term investments ............................................. 18,210,220 Pledged securities ................................................. 18,504,263 18,517,640 Restricted cash .................................................... 32,060 1,032,060 Accounts receivable ................................................ 125,976 199,316 Prepaid expenses and other current assets .......................... 681,468 112,825 ------------- ------------- Total current assets .................................. 31,207,985 45,207,488 Pledged securities ...................................................... 8,854,569 25,842,275 Property and equipment, net ............................................. 33,202,310 25,294,946 FCC licenses, net ....................................................... 186,513,591 131,210,102 Deferred financing costs, net ........................................... 5,503,172 4,502,330 Other assets ............................................................ 439,664 502,608 ------------- ------------- Total assets ................................................... $ 265,721,291 $ 232,559,749 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Working capital facility ........................................... $ 16,229,121 Book overdraft ..................................................... $ 3,055,759 Trade accounts payable ............................................. 2,533,612 3,067,984 Accrued compensation and benefits .................................. 2,936,454 1,775,646 Other accrued liabilities .......................................... 4,759,689 3,109,631 Accrued interest payable ........................................... 7,154,224 7,113,391 Current portion of long-term debt .................................. 525,313 1,476,256 ------------- ------------- Total current liabilities ...................................... 34,138,413 19,598,667 Long-term debt, net of current portion .................................. 117,845,932 106,823,103 Deferred income tax liabilities ......................................... 31,382,026 29,880,916 ------------- ------------- Total liabilities .............................................. 183,366,371 156,302,686 ------------- ------------- Commitments and contingencies (Note 9) Stockholders' equity: Common stock, $.001 par value, 100,000,000 shares authorized, 26,707,036 and 21,429,485 shares issued and outstanding 26,707 21,429 Additional paid-in capital ......................................... 225,967,684 172,892,420 Note receivable from stockholder ................................... (887,500) (887,500) Accumulated deficit ................................................ (142,751,971) (95,769,286) ------------- ------------- Total stockholders' equity ..................................... 82,354,920 76,257,063 ------------- ------------- Total liabilities and stockholders' equity ................ $ 265,721,291 $ 232,559,749 ============= =============
The accompanying notes are an integral part of the consolidated financial statements. F-2 ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS for the years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ------------ ------------ ------------ Service revenue ................................................. $ 840,822 $ 708,883 $ 247,116 Equipment sales and construction revenue ........................ 396,970 2,660,811 ------------ ------------ ------------ Total revenue .......................................... 840,822 1,105,853 2,907,927 ------------ ------------ ------------ Costs and expenses: Technical and network operations ........................... 8,603,576 7,252,512 3,402,948 Cost of equipment sales and construction ................... 254,444 1,590,779 Sales and marketing ........................................ 5,679,222 13,469,898 5,548,584 General and administrative ................................. 11,992,874 12,789,866 12,896,134 Research and development ................................... 593,595 421,236 1,269,579 Equipment impairment ....................................... 2,753,105 7,166,720 Depreciation and amortization .............................. 7,354,378 6,018,172 1,017,959 ------------ ------------ ------------ Total operating costs and expenses ..................... 36,976,750 47,372,848 25,725,983 ------------ ------------ ------------ Operating loss .................................................. (36,135,928) (46,266,995) (22,818,056) Interest and other: Interest expense ........................................... 21,173,374 18,931,303 1,695,489 Financing commitment expense ............................... 1,004,393 2,699,881 3,687,644 Interest income ............................................ (2,693,257) (4,814,004) (118,882) Other ...................................................... 494,484 1,248,000 ------------ ------------ ------------ Loss before income taxes and extraordinary item ........ (56,114,922) (63,084,175) (29,330,307) Deferred income tax benefit ..................................... 9,132,237 1,355,249 ------------ ------------ ------------ Loss before extraordinary item ......................... (46,982,685) (61,728,926) (29,330,307) Extraordinary loss on early retirement of debt .................. (1,339,996) ------------ ------------ ------------ Net loss ............................................... $(46,982,685) $(61,728,926) $(30,670,303) ============ ============ ============ Basic and diluted loss per common share before extraordinary item $ (1.89) $ (3.23) $ (3.80) Basic and diluted extraordinary loss per common share ........... (0.17) ------------ ------------ ------------ Basic and diluted net loss per common share ..................... $ (1.89) $ (3.23) $ (3.97) ============ ============ ============ Weighted average common shares ......................... 24,890,177 19,083,304 7,717,755 ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements. F-3 ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) for the years ended December 31, 1998, 1997 and 1996
Serial Common Stock Preferred Stock -------------------------- ------------------------ Shares Par Value Shares Par Value --------- ------------- ------- ------------- Balance, December 31, 1995 ........................... 6,529,975 $ 6,530 488,492 $ 488 Issuance of serial preferred stock for cash .......... 232,826 233 Shares issued to reflect anti-dilution adjustments ... 56,984 57 150,740 151 Issuance of serial preferred stock and warrants in exchange for cash and the strategic distribution agreement .............................. 48,893 49 Preferred stock issuance costs ....................... Increase in additional paid-in capital as a result of the release of Escrow Shares ..................... Value ascribed to the equipment financing warrants ... Value ascribed to the bridge financing warrants ...... Issuance of common stock in an initial public offering 2,300,500 2,301 Initial public offering common stock issuance costs .. Conversion of preferred stock to common stock in connection with the initial public offering ...... 4,353,587 4,353 (920,951) (921) Value ascribed to the CIBC Warrants .................. Accrued stock option compensation .................... Warrants exercised ................................... 318,374 318 Net loss ............................................. ---------- ------- -------- ---- Balance, December 31, 1996 ........................... 13,559,420 13,559 Common stock issued in connection with the acquisition of the CommcoCCC, Inc. licenses ........ 6,000,000 6,000 Value ascribed to warrants issued with Senior Notes ....................................... Warrant issuance costs ............................... Accrued stock option compensation .................... Stock options exercised .............................. 286,100 286 Warrants exercised ................................... 1,583,965 1,584 Common stock issuable for note receivable from stockholder .................................... Common stock issuable under employment agreement ..... Net loss ............................................. ---------- ------- -------- ---- Balance December 31, 1997 ............................ 21,429,485 $21,429 Common stock issued in connection with the acquisition of certain FCC licenses ................ 4,529,519 4,530 Common stock issued for note receivable from stockholder .................................... 100,000 100 Value ascribed to warrants issued in connection with the working capital facility .................. Warrants exercised ................................... 632,314 632 Stock options exercised .............................. 15,718 16 Accrued stock option compensation .................... Common stock issuable under employment agreements ......................................... Net loss ............................................. ---------- ------- -------- ---- Balance December 31, 1998 ............................ 26,707,036 $26,707 ========== ======= ======== ==== Note Additional Receivable Paid-In from Accumulated Capital Stockholder Deficit Total ------------ ----------- ------------ ----------- Balance, December 31, 1995 ........................... $ 3,050,179 $ (3,370,057) $ (312,860) Issuance of serial preferred stock for cash .......... 4,672,953 4,673,186 Shares issued to reflect anti-dilution adjustments ... (208) Issuance of serial preferred stock and warrants in exchange for cash and the strategic distribution agreement .............................. 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 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 ...... (3,432) Value ascribed to the CIBC Warrants .................. 4,503,848 4,503,848 Accrued stock option compensation .................... 850,663 850,663 Warrants exercised ................................... (318) Net loss ............................................. (30,670,303) (30,670,303) ----------- ---------- ----------- ------------ Balance, December 31, 1996 ........................... 53,976,721 (34,040,360) 19,949,920 Common stock issued in connection with the acquisition of the CommcoCCC, Inc. licenses ........ 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 .............................. 496,159 496,445 Warrants exercised ................................... (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 ............................ $172,892,420 $(887,500) $ (95,769,286) $ 76,257,063 Common stock issued in connection with the acquisition of certain FCC licenses ................ 48,343,268 48,347,798 Common stock issued for note receivable from stockholder .................................... (100) Value ascribed to warrants issued in connection with the working capital facility .................. 3,282,351 3,282,351 Warrants exercised ................................... 19,057 19,689 Stock options exercised .............................. 94,445 94,461 Accrued stock option compensation .................... 678,743 678,743 Common stock issuable under employment agreements ......................................... 657,500 657,500 Net loss ............................................. (46,982,685) (46,982,685) ----------- ---------- ----------- ------------ Balance December 31, 1998 ............................ $225,967,684 $ (887,500) $(142,751,971) $ 82,354,920 =========== ========== =========== ============
The accompanying notes are an integral part of the consolidated financial statements. F-4 ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended December 31, 1998, 1997 and 1996
1998 1997 1996 ------------- ------------- ------------- Cash Flows from operating activities: Net loss ................................................ $(46,982,685) $(61,728,926) $(30,670,303) Adjustments to reconcile net loss to net cash used in operating activities: Non-cash compensation expense ......................... 1,336,243 1,336,813 7,646,177 Non-cash equipment charges ............................ 2,753,105 8,100,859 Non-cash marketing expense ............................ 1,053,000 Depreciation and amortization ......................... 7,354,378 6,018,172 1,017,959 Non-cash interest expense ............................. 1,699,784 1,466,698 772,221 Non-cash financing commitment expense ................. 1,004,393 2,699,881 3,687,644 Deferred income tax benefit ........................... (9,132,237) (1,355,249) Extraordinary loss on early debt retirement ........... 1,339,996 Changes in operating assets and liabilities: Accrued interest payable ............................ 40,833 7,096,232 17,159 Accounts receivable ................................. 73,340 1,620,277 (1,819,593) Accrued interest on investments and securities ...... (1,928,243) (2,194,497) Accounts payable and other current liabilities ...... 4,164,189 1,098,448 3,615,884 Prepaid expenses and other current assets ........... (568,643) 83,966 (144,466) Other assets ........................................ 62,944 (137,321) ------------- ------------- ------------- Net cash used in operating activities .......... (40,122,599) (35,894,647) (13,484,322) ------------- ------------- ------------- Cash flows from investing activities: Purchases of property and equipment ..................... (5,678,062) (24,051,854) (9,439,481) Additions to and acquisitions of FCC licenses ........... (518,278) (5,747,844) (3,201,183) Purchases of pledged securities ......................... (51,245,250) Purchases of short-term investments ..................... (9,126,454) (47,065,154) Proceeds from sales of short-term investments ........... 27,636,000 29,071,448 Proceeds from maturities of pledged securities .......... 18,630,000 8,863,315 Investment in restricted cash ........................... (1,032,060) Proceeds from maturities of restricted cash ............. 1,000,000 Proceeds from the disposition of property and equipment . 621,101 88,718 Additions to other assets ............................... (1,425,032) ------------- ------------- ------------- Net cash provided by (used in) investing activities . 32,564,307 (90,086,621) (15,097,756) ------------- ------------- ------------- 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 .................. 114,150 496,445 34,507,500 Proceeds from issuance of preferred stock ............... 2,500,000 Stock issuance costs .................................... (6,231,098) Proceeds from certain loans and debt financings ......... 17,500,000 14,445,000 Book overdraft .......................................... (3,055,759) 3,055,759 Repayments of certain loans and debt financings ......... (1,727,053) (2,018,743) (13,131,443) Additions to deferred financing costs ................... (544,255) (4,136,475) (2,167,128) ------------- ------------- ------------- Net cash provided by financing activities ........... 12,287,083 131,142,288 29,922,831 ------------- ------------- ------------- Net increase in cash and cash equivalents .................... 4,728,791 5,161,020 1,340,753 Cash and cash equivalents, beginning of period ............... 7,135,427 1,974,407 633,654 ------------- ------------- ------------- Cash and cash equivalents, end of period ..................... $ 11,864,218 $ 7,135,427 $ 1,974,407 ============= ============= =============
The accompanying notes are an integral part of the consolidated financial statements. F-5 ADVANCED RADIO TELECOM CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The Company and Basis of Presentation: Advanced Radio Telecom Corp. (collectively with its subsidiaries, "ART" or the "Company") provides wireless broadband telecommunications services in the 38 GHz band of the radio spectrum. From its inception in 1993 to the fourth quarter of 1996, the Company primarily focused on the acquisition of spectrum rights, hiring managements and other key personnel, raising capital, acquiring equipment and roof rights and developing operating and support systems to support its initial business of selling connectivity to various telecommunications companies as a wholesale carriers' carrier, which commenced in the fourth quarter of 1996. The Company altered its strategy in 1998 to sell a variety of broadband Internet services to end-user customers and to deploy a broadband data network. The results from operations in 1997 reflect a business no longer being pursued by the Company. During the year ended 1998, the Company began offering its Internet services in the Seattle, Washington, Portland, Oregon and Phoenix, Arizona areas and, as such, revenues to date have been limited. 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. The Company will require significant additional capital to fully fund its operations, long-term broadband data network buildout and business plan. The Company currently estimates that it will require in excess of $1 billion over the next several years to fund capital expenditures, working capital and operations. During 1998, the Company and Lucent Technologies Inc. ("Lucent") entered into a credit facility for Lucent to provide the Company with up to $25 million of unsecured revolving loans for working capital purposes, due June 30, 1999 unless extended by Lucent. During 1998, the Company and Lucent also entered into a purchase money credit facility ("the "Purchase Money Facility") setting forth the terms and conditions under which Lucent will provide purchase money financing of up to $200 million, to be used to finance the purchase of the Company's broadband data networks from Lucent. Lucent has made available $10 million in initial purchase money loans and the availability of the balance is subject to other conditions, including the Company's ability to raise at least $50 million of certain debt or equity capital. There can be no assurance that the funding will become available to the Company. The consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the ordinary course of business. The Company has limited financial resources, has incurred recurring losses from operations since inception and does not expect to generate significant operating revenues in the near term. The Company's ability to continue as a going concern at least through December 31, 1999, which includes funding of its operations and business plan, the repayment of the $25 million working capital facility and funding of its contractual commitments, is dependent upon its ability to raise additional financing. The Company has engaged investment bankers to assist it in obtaining financing and is in negotiations with potential investors to provide equity financing. However, there can be no assurance that the Company will be successful in its efforts to obtain such financing, or, if available, that it will be able to obtain it on acceptable terms. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. F-6 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 was no longer considered to be in the development stage as defined in Statement of Financial Accounting Standards No. 7, "Accounting and Reporting by Development Stage Enterprises." Such change in classification of the Company had no impact on the net loss or stockholders' equity (deficit) for any periods presented. Cash and Cash Equivalents The Company considers all highly liquid investments purchased with remaining maturities of three months or less to be cash equivalents. The Company places its temporary cash investments with major financial institutions in amounts which may exceed Federally insured limits. At December 31, 1998, 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 three to five years for wireless network equipment placed in service and other property and equipment. Subsequent to year end, the Company reduced the estimated useful lives of certain wireless network equipment not yet placed in service from five years to two years. 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 used for internal purposes is capitalized at cost and amortized over its estimated useful life, which is generally three 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, 1998 and 1997 totaled $7,174,629 and $2,930,798, 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. F-7 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 associated with obtaining equity are charged to additional paid-in capital as the related funds are raised. Deferred costs associated with unsuccessful financings are charged to expense. The Company charged approximately $448,000 and $1,248,000 to other expense during the years ended December 31, 1998 and 1996, respectively, associated with unsuccessful financings. Direct costs of obtaining commitments for financing are deferred and charged to expense over the term of the commitments. Accumulated amortization of deferred financing costs totaled $1,338,248 and $290,756 at December 31, 1998 and 1997, respectively. 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 thirty-seven and forty-five percent of the Company's service revenues in 1998 and 1997, respectively, and a single customer accounted for approximately forty-two percent of the Company's service revenue 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. Receivables from five customers accounted for approximately forty-nine percent and fifty-three percent of trade accounts receivable at December 31, 1998 and 1997, respectively. 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 F-8 Company also adopted the provisions of SEC Staff Accounting Bulletin No. 98 ("SAB 98"), which provides for the inclusion of nominal issuances of potentially dilative 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. Management of the Company will continue to evaluate the estimated useful lives of its wireless network equipment based on changes in industry conditions. 3. Property and Equipment: Property and equipment at December 31, were as follows:
1998 1997 ------------ ------------ Wireless network equipment placed in service ....... $ 14,239,886 $ 5,879,673 Wireless network equipment not yet placed in service 17,925,364 16,730,010 Computer hardware .................................. 1,723,871 1,673,288 Computer software .................................. 2,168,867 934,127 Office furniture and equipment ..................... 1,681,409 1,601,190 Other equipment and vehicles ....................... 489,220 489,220 ------------ ------------ 38,228,617 27,307,508 Accumulated depreciation ........................... (5,026,307) (2,012,562) ------------ ------------ $ 33,202,310 $ 25,294,946 ============ ============
Depreciation expense for the years ended December 31, 1998, 1997 and 1996 was $3,110,503, $3,021,380, and $909,163, respectively. During 1998 and 1997, the Company recorded non-cash equipment charges of approximately $2.8 million and $8.1 million, respectively, primarily related to the write-down of certain radio equipment that is not expected to be an integral part of the Company's expanded broadband data network. The Company expects to record an additional charge of approximately $6.4 million in the first quarter of 1999 to write down the carrying value of additional equipment which the Company determined, in the first quarter of 1999, would be disposed of and not used in its future broadband network build out. The amount of the write-downs are based on discounted projected future cash flows from such equipment under current deployment plans or estimated salvage value. In 1998, the Company sold certain non-integral radio equipment with proceeds of approximately $536,000, which approximated the carrying value. Amounts receivable from this sale are included in other current assets at December 31, 1998. 4. Other Accrued Liabilities and Fourth Quarter Adjustments: During the fourth quarter of 1998, as a result of a re-evaluation of its tax posture, the Company changed its estimate of its sales and property tax liability and recorded an additional accrual of approximately $3.3 million of which approximately $2.4 million was charged to operations in the fourth quarter of 1998 and approximately $900,000 was capitalized as part of the cost of equipment. F-9 5. FCC Licenses: CommcoCCC Licenses In June 1996, the Company agreed to acquire certain 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 of approximately $3.2 million and the related deferred tax liability of approximately $31.2 million. In connection with transaction, the Company gave a stockholder of CommcoCCC an option to acquire certain 38 GHz FCC licenses in specified markets, in which the Company has more than one license. This option was exercised in July 1997 at an exercise price of approximately $6.9 million, determined based on the sales price of the Company's common stock on the date the option was exercised and the population covered by the licenses. Final terms under this option were reached in November 1998 and the exercise price will be paid in cash upon closing of the sale, which is subject to FCC approval. The Company has the right to be a reseller with respect to these licenses for a term of five years at market rates. 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 1996. ART West held certain 38 GHz licenses that were transferred to the Company upon the completion of the acquisition. Columbia Licenses In May 1998, the Company acquired from Columbia Capital Corporation and one of its affiliates certain 38 GHz licenses for 1,335,750 shares of common stock. The total acquisition cost was approximately $14.8 million, comprised of the fair value of the 1,335,750 shares of common stock issued of approximately $12.0 million, direct costs incurred of approximately $92,000 and the related deferred tax liability of approximately $2.7 million. DCT Licenses In May 1998, the Company acquired DCT Communications Inc., which held certain 38 GHz licenses, in exchange for 3,124,875 shares of the Company's common stock. The total acquisition cost was approximately $43.3 million, comprised of the fair value of the 3,124,874 shares of common stock issued of approximately $35.2 million, direct costs incurred of approximately $241,000 and the related deferred tax liability of approximately $7.9 million. Other Licenses In March 1998, the Company acquired a certain 38 GHz license in exchange for 68,895 shares of the Company's common stock. The total acquisition cost was approximately $1.2 million, which consisted of the aggregate market value of the shares issued and direct costs. In January 1999, the Company consummated acquisitions of certain 38 GHz Licenses for $4.3 million in cash and certain other licenses for 154,114 shares of common stock valued at approximately $1.3 million. F-10 6. Income Taxes: A reconciliation of the Company's effective tax rate and the Federal statutory rate for the years ended December 31, were as follows:
1998 1997 1996 ------------- ------------- ------------- Net loss before taxes .................... $ (56,114,922) $ (63,084,175) $ (30,670,303) ============= ============= ============= Federal income tax at statutory rate .......................... 35.0% 35.0% 35.0% Non-deductible interest .................. (0.8) (0.6) Non-deductible compensation .............. (7.8) State benefit, net of Federal tax benefit 2.0 2.0 1.6 Other .................................... (0.1) (0.1) Valuation allowance ...................... (19.8) (34.2) (28.8) ------------- ------------- ------------- Effective income tax rate ................ 16.3% 2.1% 0.0% ============= ============= ============= Income tax benefit ....................... $ (9,132,237) $ (1,355,249) $ 0 ============= ============= =============
Deferred tax assets and liabilities at December 31, were as follows:
1998 1997 ------------ ------------ Deferred tax assets: Net operating loss carryforwards .... $ 49,283,000 $ 28,385,000 Equipment depreciation and impairment 1,965,000 3,071,000 Accrued compensation and benefits ... 906,000 755,000 Valuation allowance ................. (20,165,026) (18,833,916) ------------ ------------ 31,988,974 13,377,084 Deferred tax liabilities: FCC Licenses ..................... (63,371,000) (43,258,000) ------------ ------------ Net deferred tax liabilities ..... $(31,382,026) $(29,880,916) ============ ============
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 1998 and 1997, the Company reversed approximately $10.8 million and $12.8 million, respectively, of its deferred tax asset valuation allowance as a result of recording deferred taxes arising from certain FCC license acquisitions. During the fourth quarter of 1998, the Company determined that its 1998 deferred income tax benefit was understated by approximately $6 million for a change in the tax law that was not previously considered, which increased the net operating loss carryforward period from 15 to 20 years. Accordingly, the deferred income tax benefit was increased to approximately $9.1 million for the year ended December 31, 1998. The Company has restated its 1998 quarterly financial information to reflect the change in the tax law, increasing the deferred income tax benefit to approximately $2.1 million, $2.2 million and $1.9 million and reducing its net loss to approximately $9.1 million, $9.6 million and $13.7 million for the three months ended March 31, 1998, June 30, 1998 and September 30, 1998, respectively. At December 31, 1998, the Company has accumulated net operating loss carryforwards for Federal income tax purposes of approximately $133.2 million which expire between 2008 and 2018. 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. F-11 7. Working Capital Facility: In September 1998, the Company and Lucent Technologies Inc. ("Lucent") entered into a credit facility (the "Working Capital Facility") for Lucent to provide the Company with up to $25 million of unsecured revolving loans for working capital purposes. As of December 31, 1998, the Company had drawn $17.5 million under the Working Capital Facility. Interest initially accrues at an annual rate of LIBOR plus 5% (10.7% at December 31, 1998) and increases 0.5% each month beginning January 1999. The availability of the undrawn balance of the Working Capital Facility is subject to the achievement of certain milestones by the Company. Loans made pursuant to the Working Capital Facility, plus accrued interest, are due June 30, 1999, unless extended by Lucent to no later than September 17, 1999. The terms of the Working Capital Facility require the Company to apply debt or equity capital raised by the Company in excess of $50 million to permanently repay the Working Capital Facility. ART issued warrants to purchase 277,892 shares of common stock at an exercise price of $0.01 per share upon the Company obtaining a commitment from Lucent for the Working Capital Facility and the warrants were valued at approximately $1,777,000. The Company has recorded the value ascribed to these warrants as deferred financing costs and as additional paid-in-capital. Additionally, under the terms of the Working Capital Facility, the Company is required to issue additional warrants to purchase common stock, at an exercise price of $3.33 per share, each time a draw is made. In connection with $17.5 million drawn under the Working Capital Facility during 1998, the Company issued warrants to purchase 447,972 shares of the Company's common stock. The aggregate value ascribed to these warrants of approximately $1,505,000 was reflected as both a debt discount and an increase in additional paid-in capital. Subsequent to December 31, 1999, the Company has drawn the remaining $7.5 million under the Working Capital Facility and the Company issued warrants to purchase 191,988 shares of the Company's common stock. The aggregate value ascribed to the warrants was approximately $1,242,000. 8. Long-term Debt, Bridge, and Other Financings: Long-Term Debt Long-term debt as of December 31 were as follows:
1998 1997 ------------- ------------- Senior Notes, with 14% semi-annual interest, due 2007 ......... $ 135,000,000 $ 135,000,000 Discount on Senior Notes ...................................... (27,536,362) (28,672,995) Purchase Money Facility ....................................... 10,000,000 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 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 Other ......................................................... 907,607 532,000 ------------- ------------- 118,371,245 108,299,359 Less current portion .......................................... (525,313) (1,476,256) ------------- ------------- $ 117,845,932 $ 106,823,103
F-12 The aggregate amount of the principal payments for long-term debt as of December 31, 1998 follows: Year ended December 31: 1999.............................................. $ 525,313 2000.............................................. 335,193 2001.............................................. 47,101 2002.............................................. 2003.............................................. 250,000 Thereafter........................................ 144,750,000 Discount on Senior Notes ......................... (27,536,362) ------------ $118,371,245 ============ 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 such 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. Purchase Money Facility In September 1998, the Company and Lucent entered into a purchase money credit facility (the "Purchase Money Facility") setting forth the terms and conditions under which Lucent will provide purchase money financing in an aggregate amount of up to $200 million, to be used to finance the purchase of the Company's data network from Lucent. Under the Purchase Money Facility, Lucent made $10 million in initial purchase money loans (the "Initial Purchase Money Loans") immediately available to ART. As of December 31, 1998, the Company has drawn the full $10 million of the Initial Purchase Money Loans and has also incurred additional other equipment and construction related costs of approximately $1.2 million due to Lucent, which is included in accounts payable. Interest initially accrues at an annual rate of LIBOR plus 5% (10.7% at December 31, 1998) and increases 0.5% each month beginning January 1999. Payments under the Initial Purchase Money Loans, plus accrued interest, will be due in installments beginning 2003 through 2009. Subject to other conditions, upon ART's raising at least $50 million of certain debt or equity capital and repayment and termination of the Working Capital Facility, Lucent will make available purchase money loans equal to 200% of the aggregate capital raised, not to exceed $200 million, including the Initial Purchase Money Loans. Equipment Financing Note The equipment financing note was repaid in full during 1998 and was previously collateralized by a portion of the Company's wireless transmission equipment and a $1 million certificate of deposit, which was also repaid in 1998. In connection with the issuance of the equipment financing note, certain shareholders of the Company guaranteed F-13 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. 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 at a price per share ranging from $15.00 to $17.19, were issued in connection with these bridge financings. In November 1996, the Company repaid these bridge financings with the proceeds from the initial public offering of the Company's common stock. The early repayment of these bridge financings resulted in an extraordinary loss arising from the write-off of the unamortized note discounts and the related deferred financing costs. 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. 9. Commitments and Contingencies: Purchase Commitments In July 1998, the Company and Lucent entered into a definitive purchase agreement (the "Lucent Purchase Agreement") which amended and restated the Company's purchase agreement with Lucent entered into in April 1998, under which Lucent will design, engineer and construct the Company's wireless broadband data networks. The Company's purchase commitment under the Lucent Purchase Agreement is initially $240 million upon the availability of the $200 million Purchase Money Facility from Lucent. The Company's commitment is subject to various other terms and conditions, including the availability of additional financing on terms that are acceptable to the Company. Subsequent to December 31, 1998, the Company issued a purchase order for certain wireless network equipment in the amount of approximately $5 million under Lucent Purchase Agreement. The cost of the wireless network equipment was based on a volume discount price. Operating Leases The Company has entered into operating leases for office space and antenna sites which expire between 1999 and 2017. Lease expense amounted to approximately $2,523,836, $1,753,962 and $618,000 for 1998, 1997 and 1996, respectively. Future annual minimum lease payments as of December 31, 1998 are as follows: 1999 ....................................... $ 2,714,843 2000 ....................................... 2,259,412 2001 ....................................... 2,082,947 2002........................................ 1,567,541 2003........................................ 897,854 Thereafter ................................. 6,170,797 ------------- $15,693,394 ============= F-14 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. 10. 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:
Serial Preferred Stock ---------------------------------------------------------------- Series A Series B Series C Series D Series E Series F Total -------- -------- -------- -------- -------- -------- ----- Balance December 31, 1995 .................................... 334,943 86,507 5,402 61,640 488,492 Issuance of serial preferred stock for cash .................. 232,826 48,893 281,719 Shares issued under anti-dilution provisions ................. 120,607 28,172 1,961 150,740 -------- -------- -------- -------- -------- -------- ----- 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 ................................. -- -- -- -- -- -- -- ======== ======== ======== ======== ======== ======== =====
Common Stock Approximately 1.2 million shares of the Company's common stock, previously held by certain individual shareholders in escrow ("Escrow Shares") as part of the Landover funding commitment, were released upon attainment of certain objectives in February 1996 as part of a reorganization of the Company. The Escrow Shares had an estimated fair value of $6.8 million and were recorded as compensation expense and as an increase in additional paid-in capital. In February 1996, the Company sold 48,893 shares of Series F preferred stock for an aggregate purchase price of $2.5 million and the Company entered into a strategic distribution agreement and, as partial consideration, granted warrants to the preferred stockholder 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, the preferred stockholder 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). F-15 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 1998, 1997 and 1996. The following summarizes the warrants outstanding related to these financing activities at December 31, 1998:
Exercise Period of Number of Price per Exercise Shares Share Through --------- --------- --------- 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............................................ 66,217 $ 0.01 2001 Senior Note Warrants..................................... 749,451 $ 0.01 2007 Lucent Warrants.......................................... 277,892 $ 0.01 2008 Lucent Warrants.......................................... 447,972 $ 3.33 2008
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. 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 $678,743, $449,313 and $850,663 in 1998, 1997 and 1996, respectively. In July 1997, the Company canceled and reissued certain stock options previously granted to employees under the Company's equity incentive plan to have exercise prices equal to the then current fair market value of $7.88 per share of common stock. In October 1998, the Company authorized the cancellation and reissuance, at the election of the recipients, of certain other stock options previously granted to employees under the Company's equity incentive plan. Approximately 2,099,000 stock options were canceled and reissued. Of these stock options, 50% were issued with an exercise price equal to the then current market value of $2.19 per share of common stock. The exercise price of the remaining stock options were based on the current fair market value upon the occurrence of certain future events. In February 1999, the exercise prices of the remaining options were established at the then current fair market value of $8.50 per share of common stock. F-16 A summary of the stock option transactions follows:
Weighted Average Shares Exercise Price ------ ---------------- 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 Options granted.......................................... 3,381,625 6.45 Options exercised........................................ (15,718) 5.98 Options canceled......................................... (2,656,800) 9.45 ----------- Options outstanding December 31, 1998......................... 3,006,439 6.15 ===========
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:
1998 1997 1996 Pro Forma Pro Forma Pro Forma --------- --------- --------- Loss before extraordinary item .......................... $(51,650,666) $(63,848,637) $(29,410,915) Extraordinary item ...................................... (1,339,996) ------------ ------------ ------------ Net loss ................................................ $(51,650,666) $(63,848,637) $(30,750,911) Basic and diluted loss per share before extraordinary item ............................. $ (2.08) $ (3.35) $ (3.81) Basic and diluted extraordinary loss per share .......... (0.17) ------------ ------------ ------------ Basic and diluted net loss per share .................... $ (2.08) $ (3.35) $ (3.98) ============ ============ ============
The weighted average fair value and exercise price of options granted during the years ended December 31, were as follows:
1998 1997 1996 ---- ---- ---- The weighted average fair values of options granted with exercise prices equal to the market price of stock at the date of grant...... $3.84 $5.78 $ 6.59 The weighted average exercise price options granted with exercise prices equal to the market price of the stock at the date of grant.. 6.05 8.69 $14.60
F-17
1998 1997 1996 ---- ---- ---- The weighted average fair values of options granted with exercise prices greater than the market price of the stock at the date of grant 0.98 4.80 7.04 The weighted average exercise price of options granted with exercise prices greater than the market price of the stock at the date of grant 9.89 12.89 16.60 The weighted average fair values of options granted with exercise prices less than the market price of the stock at the date of grant........ 8.80 -- -- The weighted average exercise price of options granted with exercise prices less than the market price of the stock at the date of grant. 8.75 -- --
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 4.6% to 6.0%, (iii) expected volatility rates ranging from approximately 60% to approximately 85%, (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, 1998 as follows:
Weighted- Number Average Weighted- Number Weighted- Outstanding Remaining Average Exercisable Average Exercise Price at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price -------------- ----------- ---------------- -------------- ----------- -------------- $1.62 to 4.94........... 1,244,064 9.41 $ 2.29 36,523 $ 3.14 $6.00 to 8.75........... 1,409,725 8.79 $ 8.29 139,483 $ 7.98 $9.88 to 12.75.......... 342,250 8.63 $11.10 46,287 $10.70 $14.63 to 15.00......... 10,400 7.94 $14.91 6,069 $14.95 ----------- ---- ------ ----- ------ $1.62 to 15.00.......... 3,006,439 9.02 $ 6.15 228,362 $ 7.94
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 due 2001. During 1998, the Company entered into agreements with two of its officers to issue an aggregate 85,000 shares of common stock deliverable in 2001 that has been reflected as a non-cash compensation charge of approximately $657,500. 11. Related Party Transactions: In 1996, the Company entered into various management consulting agreements with Landover. Fees paid to Landover under the agreements totaled approximately $830,000 in 1996. The agreements with Landover terminated in November 1996. Additionally, the Company paid Landover approximately $390,000 for expenses in connection with its funding commitment in 1996. The Company has paid legal fees to a law firm in which a principal of the law firm was also a former officer of the Company. Total fees paid to such law firm were approximately $666,695 and $520,000 in 1997 and 1996, respectively. F-18 During 1996, the Company funded approximately $400,000 of research and development related to development of wireless transmission equipment with an entity, of which a former executive of the Company was a shareholder and director. 12. 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:
1998 1997 ---------------------------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Cash and cash equivalents ............ $11,864,218 $11,864,218 $7,135,427 $7,135,427 Restricted cash....................... 32,060 32,060 1,032,060 1,032,060 Short-term investments................ 18,210,220 18,210,220 Pledged securities.................... 27,358,832 27,585,981 44,359,915 44,230,640 Senior Notes.......................... 107,463,638 87,855,469 106,327,005 129,600,000 Note payable.......................... 562,500 562,500 Equipment financing note.............. 877,854 877,854 Working Capital Facility.............. 16,229,121 16,602,472 Purchase Money Facility............... 10,000,000 10,000,000 Other long-term debt.................. 907,607 907,607 532,000 532,000
Cash, cash equivalents, restricted cash and short-term investments: The carrying amount reported in the balance sheet approximates fair value. 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, Working Capital Facility, Purchase Money Facility 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. 13. Supplemental Cash Flow Information: Supplemental disclosure of cash flow information are summarized below for the years ended December 31:
1998 1997 1996 -------- -------- -------- Non-cash financing and investing activities: Additions to property and equipment ......................... $10,818,140 $2,181,684 $9,548,102 Value ascribed to warrants................................... 3,282,351 29,707,509 2,115,388 Issuance of shares for licenses ............................ 48,347,798 87,750,000 Accrued deferred financing costs ............................ 300,405 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..................................................... 19,312,343 10,368,374 926,821
F-19 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information relating to the executive officers of the Company is included in Item 4A of Part I of this Form 10-K. Information relating to the directors of the Company is incorporated herein by reference to the information included under "Election of Directors" and "Certain Transactions" in the Company's definitive Proxy Statement to be filed with the Commission in connection with the Company's 1999 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 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, 1998 and 1997. Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996. Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1998, 1997 and 1996. Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996. (2) Financial Statement Schedules: None. -20- (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. 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 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. 10.1 Employment Agreement dated October 17, 1997 between the Company and Henry C. Hirsch. 10.2 Amended and Restated Change of Control Agreement dated February 3, 1999 between Henry C. Hirsch and the Company. 10.3 Employment Agreement dated February 1, 1998 between William J. Maxwell and the Company. 10.4 Amended and Restated Change of Control Agreement dated February 3, 1999 between William J. Maxwell and the Company. 10.5 Employment Agreement dated February 1, 1998 between George R. Olexa and the Company. 10.6 Amended and Restated Change of Control Agreement dated February 3, 1999 between George R. Olexa and the Company. 10.7 Employment Agreement dated August 31, 1998 between Thomas P. Boyan and the Company. 10.8 Amended and Restated Change of Control Agreement dated February 3, 1999 between Thomas P. Boyan and the Company. 10.9 Employment Agreement dated October 16, 1998 between Robert S. McCambridge and the Company. 10.10 Amended and Restated Change of Control Agreement dated February 3, 1999 between Robert S. McCambridge and the Company. 10.11 Form of Director Indemnification Agreement. 10.12 Company's Restated Equity Incentive Plan, as amended. 10.13 Company's 1997 Equity Incentive Plan for Non-Employee Directors. 10.14 Company's 1996 Non-Employee Directors Incentive Stock Option Plan. 10.15 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. 10.16 Amendment No. 1 to Registration Rights Agreement dated as of October 16, 1996. 10.17 Form of Indemnity Warrant. 10.18 Form of Subscription Agreement dated March 8, 1996, including Forms of Bridge Note and Bridge Warrant. 10.19 Option Agreement dated July 3, 1996 with Commco, L.L.C. 10.20 Form of September Bridge Warrant. 10.21 Form of CIBC Warrants. 10.22 Agreement and Plan of Merger dated as of January 23, 1998, among the Company, DCT Acquisition, Inc., DCT Communications, Inc. 10.23 Registration Rights Agreement dated August 26, 1999 between the Company and Lucent. 10.24 Amended and Restated Purchase Agreement dated July 24, 1998 between the Company and Lucent. 10.25 Purchase Money Credit Agreement dated as of September 17, 1998 between the Company and Lucent. 10.26 Working Capital Credit Agreement date as of September 17, 1998 between the Company and Lucent. 10.27 Form of Warrants issued to Lucent pursuant to the Working Capital Facility. -21- 10.28 Asset Purchase Agreement dated as of August 6, 1998 between the Company and ICG Telecom Group, Inc. 10.29 Asset Purchase Agreement dated as of July 3, 1998 between the Company and Astrolink Communications, Inc. 10.30 First Amendment to Asset Purchase Agreement dated as of August 25, 1998 between the Company and Astrolink Communications, Inc. 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 1998. -22- 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 14TH DAY OF APRIL 1999. Advanced Radio Telecom Corp. /s/ Robert S. McCambridge By: ______________________________ EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER PURSUANT TO THE REQUIREMENTS OF THE SECURITIES AND EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT IN THE CAPACITIES AND ON THE DATES INDICATED: SIGNATURE TITLE DATE /s/ Henry C. Hirsch Chairman, Chief Executive April 14, 1999 - ------------------------------- Officer and Director HENRY C. HIRSCH /s/ James Cook Director April 14, 1999 - ------------------------------- JAMES COOK /s/ Mark C. Demetree Director April 14, 1999 - ------------------------------- MARK C. DEMETREE /s/ Andrew I. Fillat Director April 14, 1999 - ------------------------------- ANDREW I. FILLAT /s/ James B. Murray, Jr. Director April 14, 1999 - ------------------------------- JAMES B. MURRAY, JR. /s/ Alan Z. Senter Director April 14, 1999 - ------------------------------- ALAN Z. SENTER /s/ Thomas Wynne Director April 14, 1999 - ------------------------------- THOMAS WYNNE /s/ Robert S. McCambridge Executive Vice President, April 14, 1999 - ------------------------------- Chief Financial Officer ROBERT S. McCAMBRIDGE -23- EXHIBIT INDEX Exhibit No. Title Page 3.1 Amended and Restated Certificate of Incorporation.(7) 3.2 Restated and Amended Bylaws of Registrant.(12) 4.1 Specimen of Common Stock Certificate.(3) 4.2 Indenture relating to the Company's 14% Senior Notes due 2007.(6) 4.3 Specimen of Note (included in Exhibit 4.2).(6) 4.4 Collateral Pledge and Security Agreement relating to the Notes.(6) 4.5 Form of Warrant Agreement in connection with offering of Notes.(6) 4.6 Specimen of Warrant Certificate in connection with offering of Notes (included in Exhibit 4.5).(6) 4.7 Shareholders Rights Agreement.(8) 4.8 Form of Rights Certificate.(8) 10.1 Employment Agreement dated October 17, 1997 between the Company and Henry C. Hirsch.(9) 10.2 Amended and Restated Change of Control Agreement dated February 3, 1999 between Henry C. Hirsch and the Company. 10.3 Employment Agreement dated February 1, 1998 between William J. Maxwell and the Company.(11) 10.4 Amended and Restated Change of Control Agreement dated February 3, 1999 between William J. Maxwell and the Company. 10.5 Employment Agreement dated February 1, 1998 between George R. Olexa and the Company.(11) 10.6 Amended and Restated Change of Control Agreement dated February 3, 1999 between George R. Olexa and the Company. 10.7 Employment Agreement dated August 31, 1998 between Thomas P. Boyan and the Company.(17) 10.8 Amended and Restated Change of Control Agreement dated February 3, 1999 between Thomas P. Boyan and the Company. 10.9 Employment Agreement dated October 16, 1998 between Robert S. McCambridge and the Company. 10.10 Amended and Restated Change of Control Agreement dated February 3, 1999 between Robert S. McCambridge and the Company. 10.11 Form of Director Indemnification Agreement.(1) 10.12 Company's Restated Equity Incentive Plan, as amended.(10) 10.13 Company's 1997 Equity Incentive Plan for Non-Employee Directors. (10) 10.14 Company's 1996 Non-Employee Directors Incentive Stock Option Plan.(1) 10.15 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) 10.16 Amendment No. 1 to Registration Rights Agreement dated as of October 16, 1996.(5) 10.17 Form of Indemnity Warrant.(1) 10.18 Form of Subscription Agreement dated March 8, 1996, including Forms of Bridge Note and Bridge Warrant.(2) 10.19 Option Agreement dated July 3, 1996 with Commco, L.L.C.(2) 10.20 Form of September Bridge Warrant.(5) 10.21 Form of CIBC Warrants.(4) 10.22 Agreement and Plan of Merger dated as of January 23, 1998, among the Company, DCT Acquisition, Inc., DCT Communications, Inc.(11) 10.23 Registration Rights Agreement dated August 26, 1999 between the Company and Lucent.(13) 10.24 Amended and Restated Purchase Agreement dated July 24, 1998 between the Company and Lucent.(13) 10.25 Purchase Money Credit Agreement dated as of September 17, 1998 between the Company and Lucent.(13) 10.26 Working Capital Credit Agreement date as of September 17, 1998 between the Company and Lucent.(13) 10.27 Form of Warrants issued to Lucent pursuant to the Working Capital Facility.(13) 10.28 Asset Purchase Agreement dated as of August 6, 1998 between the Company and ICG Telecom Group, Inc.(13) 10.29 Asset Purchase Agreement dated as of July 3, 1998 between the Company and Astrolink Communications, Inc.(13) 10.30 First Amendment to Asset Purchase Agreement dated as of August 25, 1998 between the Company and Astrolink Communications, Inc. (13) 21 Subsidiaries of the Company. 23 Consent of Independent Accountants. 27 Financial Data Schedule. 99 Risk Factors. - -------- (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 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. (5) 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. (6) 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. (7) 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. (8) 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. (9) 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. (10) Previously filed with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (SEC Reg. No. 000-21091) and Incorporated by reference herein. (11) Previously filed with the Company's Quarterly Report on Form 10-Q, dated May 14, 1998 (SEC Reg. No. 000-21091) and incorporated by reference herein. (12) Previously filed with the Company's Quarterly Report on Form 10-Q dated August 14, 1998 (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 16, 1998 (SEC Reg. No. 21091) and incorporated by reference herein. EX-10.2 2 CONTROL AGREEMENT HENRY HIRSCH EXHIBIT 10.2 ADVANCED RADIO TELECOM CORP. Amended and Restated Change of Control Agreement ------------------------------------------------ AGREEMENT, made this 3/rd/ day of February, 1999 by and between Henry C. Hirsch ("Executive") and ADVANCED RADIO TELECOM CORP. (the "Company"); RECITALS: A. The Board of Directors of the Company (the "Board") recognizes that the possibility of a change in control may exist and that such possibility, and the uncertainty and questions which it may raise among management personnel, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; B. The Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including Executive, to their duties, to assisting the Board in assessing proposals with respect to a change in control and to advising the Board as to the best interests of the Company and its shareholders with respect to such potential change in control, without distraction and conflict arising from the possibility of a change in control; C. The Board wishes to induce Executive to remain in the employ of the Company and to assure him of fair severance should his employment terminate in specified circumstances following a change of control of the Company. NOW, THEREFORE, in consideration of the promises and the mutual covenants contained herein, the parties hereto agree as follows: 1. If within 24 months following a Change of Control (as defined in Exhibit A) (the "Post Change of Control Period") Executive's employment with the Company is terminated (i) by the Company for any reason (other than for "Cause" or "Disability" (as defined paragraph 4 below) or as a result of Executive's death), or (ii) Executive terminates such employment for Good Reason (as defined in paragraph 4 below): (a) The Company will pay to Executive within five business days of such termination of employment a lump-sum cash payment in an amount equal to the sum of (i) Executive's annual base salary ("Base Salary") at the time of termination through the date of such termination of employment to the extent not theretofore paid, (ii) a prorated portion of Executive's maximum incentive compensation for the fiscal year in which such termination shall occur, calculated by multiplying (A) such incentive compensation times (B) a fraction, the numerator of which is the number of days in the fiscal year through the date of termination of employment, and the denominator of which is 365, (iii) if Executive has not been paid incentive compensation with respect to the fiscal year prior to the year in which such termination occurs and during which Executive was employed by the Company (except where prior to the Change of Control the Board had determined that no such incentive compensation was to be paid to Executive with respect to such prior year), Executive's maximum incentive bonus for such prior fiscal year prorated for the period of his employment by the Company if less than a full year (provided that if any target incentive compensation under (ii) or (iii) was expressed in shares of common stock rather than cash, the Company will pay the cash equivalent of such compensation based on the closing price per share as reported in the Wall Street Journal (Eastern Edition), in the case of the Company's common stock as of the date prior to the date of the Change of Control), and (iv) any accrued and unpaid vacation pay through the date of termination; (b) Any stock, stock option or other awards granted to Executive by the Company shall immediately vest and, if applicable, become exercisable in full, notwithstanding any provision to the contrary, and shall remain exercisable, if applicable, until the earlier of the fourth anniversary of such termination of employment or the latest date on which such grant could have been exercised, any restrictions on any restricted stock, deferred stock or other awards shall immediately terminate and all such awards shall immediately be vested in full, and any certificates for any deferred stock shall be delivered to Executive no later than five business days following such termination; (c) The Company will pay to Executive within five business days of such termination of employment a lump-sum cash payment in an amount equal to the greater of (i) an amount equal to Executive's aggregate Base Salary and maximum incentive compensation for the period from the date of termination through December 31, 2000 determined as if he had been employed through December 31, 2000 (but without duplication of amounts paid pursuant to Section 1(a) above) or (ii) an amount equal to two times: (A) the amount of Executive's Base Salary at the rate in effect immediately prior to the date of termination or at the rate in effect immediately prior to the Change of Control, whichever is higher, and (B) the amount of Executive's maximum incentive compensation for the fiscal year during which the termination of employment occurs or the amount of Executive's maximum incentive compensation in effect immediately prior to the Change of Control, whichever is higher (provided that if any such incentive compensation is expressed or was paid in shares of common stock rather than cash, the calculation will be based on, and the Company will pay the cash equivalent of, such compensation based on the closing price per share as reported in the Wall Street Journal (Eastern Edition) in the case of a share of the Company's common stock determined on the date prior to the date of the Change of Control; -2- (d) Executive, together with his dependents, will continue following such termination of employment to participate fully in the life and medical insurance plans maintained or sponsored by the Company immediately prior to the Change of Control on the same basis they participated prior to the Change in Control until the earlier of (i) the second anniversary of such termination or any longer period as may be provided by the terms of such plan or (ii) the date Executive becomes re-employed with another employer and is eligible to receive substantially equivalent life and medical benefits under another employer provided plan, provided that if the continued participation of Executive and his dependents is not possible under the terms of any of such Company plans, the Company shall instead either arrange to provide Executive and his dependents with substantially equivalent benefits or pay to Executive (within five days of the date of termination) an amount equal to the full value thereof in cash; (e) the Company will promptly reimburse Executive for any and all legal fees and expenses (including, without limitation, stenographer fees and printing costs) incurred by him as a result of such termination of employment, including without limitation all fees and expenses incurred to enforce the provisions of this Agreement or contest or dispute that the termination of his employment is for Cause or other than for Good Reason (regardless of the outcome thereof); and (f) if the fair market value of the shares of the Company's common stock pledged to secure the promissory note dated October 17, 1997 given by Executive to the Company (the "Note") (calculated on the basis of the closing price of a share of the Company's common stock on the Nasdaq Stock Market on the day preceding the date of termination) is less than the outstanding principal plus accrued interest on such Note at the date of termination, Executive may no later than 30 days after such termination notify the Company that he elects to return such stock to the Company in full satisfaction of outstanding indebtedness under the Note and all indebtedness outstanding thereunder shall as of the date of such notice be forgiven. Notwithstanding anything herein to the contrary, (i) to the extent that any payment or benefit provided for herein is required to be paid or vested on any earlier date under the terms of any plan, agreement or arrangement, such plan, agreement or arrangement shall control; and (ii) if the Company terminates Executive's employment for a reason other than Cause prior to the date upon which the Change of Control occurs, and Executive reasonably demonstrates that such termination of employment (x) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (y) otherwise arose in connection with or in anticipation of a Change of Control, then for all purposes of this Agreement, Executive shall be entitled to the benefits provides in Section 1 above. To avert duplication of benefits, if Executive receives any payment of Base Salary, incentive compensation or severance other than under this Agreement ("Other Termination -3- Payments") upon the termination of his employment with the Company, the amount of such payments shall be deducted from the amount paid under this Agreement and the benefits to be provided hereunder shall be provided only to the extent additional to the benefits to be provided other than under this Agreement; provided, however, that neither this paragraph nor the provisions of any other agreement shall be interpreted to reduce the amount payable to Executive below the amount that would otherwise have been payable under this Agreement if such Other Termination Payments had not been made. 2. Death, Disability, Cause, Other Than For Good Reason (a) If Executive's employment shall terminate during the Post Change of Control Period by reason of Executive's death, this Agreement shall terminate without further obligations to Executive's legal representatives under this Agreement. (b) If Executive's employment is terminated during the Post Change of Control Period by reason of Executive's Disability, this Agreement shall terminate without further obligations to Executive. For purposes of this Agreement, "Disability" shall have the meaning given in the Company's long-term disability plan defining the date and conditions for which Executive is entitled to receive long-term disability compensation pursuant to such long-term disability plan. If the Company determines in good faith that the Disability of Executive has occurred during the Post Change of Control Period, it may give Executive written notice of its intention to terminate Executive's employment. In such event, Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by Executive, provided that, within the 30 days of such receipt, Executive shall not have returned to full-time performance of Executive's duties. (c) If Executive's employment shall be terminated for Cause (as defined in Section 4 below) during the Post Change of Control Period, this Agreement shall terminate without further obligations to Executive other than the obligation to pay Executive (A) his Base Salary through the date of termination and (B) Other Benefits, in each case to the extent theretofore unpaid. (d) If Executive voluntarily terminates employment during the Post Change of Control Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to Executive. -4- 3. "Cause" means only: (a) commission of a felony or gross neglect of duty by Executive rising to the level of deliberate dereliction, (b) conviction of a crime involving moral turpitude, or (c) willful failure by Executive in the performance of his duties to the Company which failure is deliberate on Executive's part, results in material injury to the Company, and continues for more than 30 days after written notice given to Executive pursuant to a two- thirds vote of all of the members of the Board at a meeting called and held for such purpose (after reasonable notice to Executive) and at which meeting Executive and his counsel were given an opportunity to be heard, such vote to set forth in reasonable detail the nature of the failure. For purposes of this definition of Cause, no act or omission shall be considered to have been "willful" unless it was not in good faith and Executive had knowledge at the time that the act or omission was not in the best interest of the Company. Any act or failure to act based on authority given pursuant to a resolution duly adopted by the Board or based on the advice of counsel of the Company shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interest of the Company. Cause shall not include willful failure due to incapacity resulting from physical or mental illness or any actual or anticipated failure after Notice of Termination for Good Reason. 4. Executive shall be deemed to have voluntarily terminated his employment for Good Reason if Executive leaves the employ of the Company for any reason following: (a) The assignment to Executive of any duties inconsistent in any respect with Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities immediately prior to the Change of Control; or the diminution or adverse alteration in any material adverse respect of such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Executive; (b) Any reduction in Executive's rate of Base Salary for any fiscal year to less than 100% of the rate of Base Salary payable for the fiscal year immediately preceding the Change of Control or of the Base Salary provided for such fiscal year in any agreement between Executive and the Company, or reduction in Executive's total cash and stock compensation opportunities, including Base Salary and incentives, for any fiscal year to less than 100% of the total cash and stock compensation opportunities made available to him immediately preceding the Change of Control for the then current fiscal year or of the total cash and stock compensation opportunities which were to be made available to him for the fiscal year pursuant to any agreement between Executive and the Company (for this purpose, such opportunities shall be deemed reduced if the objective standards by which Executive's incentive compensation measured becomes more stringent, the target or maximum amounts of such incentive compensation are reduced, or the -5- amount of such incentive compensation is reduced on a discretionary basis from the amount that would be payable solely by reference to the objectives); or (c) Failure of the Company to continue in effect any retirement, life, medical, dental, disability accidental death or travel insurance plan or other benefit plan or practice, in which Executive was participating immediately prior to the Change of Control unless the Company provides Executive with a plan or plans or practices that provide substantially similar benefits, or the taking of any action by the Company that would adversely affect Executive's participation in or materially reduce Executive's benefits under any of such plans or practices or deprive Executive of any material fringe benefit enjoyed by Executive immediately prior to the Change of Control other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Executive; or (d) The Company requires Executive to be based at any office or location further than 40 miles from the City of Bellevue, or the Company requires Executive to travel on Company business to a substantially greater extent than required immediately prior to the date of the Change of Control; or (e) Any failure by the Company to comply with and satisfy Section 6 of this Agreement. Executive's right to terminate his employment pursuant to this section shall not be affected by his incapacity due to physical or mental illness. Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder. 5. In the case of any dispute under this Agreement, Executive may initiate binding arbitration in Seattle, Washington before the American Arbitration Association by serving a notice to arbitrate upon the Company or, at Executive's election, institute judicial proceedings. The Company shall not have the right to initiate binding arbitration, and agrees that upon the initiation of binding arbitration by Executive pursuant to this paragraph 5 the Company shall cause to be dismissed any judicial proceedings it has brought against Executive relating to this Agreement. The Company authorizes Executive from time to time to retain counsel of his choice to represent Executive in connection with any and all actions, proceedings, and/or arbitration, whether by or against the Company or any director, officer, shareholder, or other person affiliated with the Company, which may affect Executive's rights under this Agreement. Company agrees to (i) pay the fees and expenses of such counsel, (ii) to pay the cost of such arbitration and/or judicial proceeding, and (iii) pay interest to Executive on all amounts owed to Executive under this Agreement during any period of time that such amounts are withheld pending arbitration and/or judicial proceedings. Such interest will be at the base rate as announced from time to time by Canadian Imperial Bank of Commerce. -6- In addition, notwithstanding any existing or prior attorney-client relationship between the Company and counsel retained by Executive, the Company irrevocably consents to Executive entering into an attorney-client relationship with such counsel and agrees that a confidential relationship shall exist between Executive and such counsel. 6. If the Company is at any time before or after a Change of Control merged or consolidated into or with any other corporation or other entity (whether or not the Company is the surviving entity), or if substantially all of the assets thereof are transferred to another corporation or other entity, the provisions of this Agreement will be binding upon and inure to the benefit of the corporation or other entity resulting from such merger or consolidation or the acquirer of such assets (the "Successor Entity"), and this paragraph 6 will apply in the event of any subsequent merger or consolidation or transfer of assets. The Company will require any such Successor Entity to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such transaction had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any Successor Entity which assumes and agrees to perform this Agreement by operation of law or otherwise. In the event of any merger, consolidation, or sale of assets described above, nothing contained in this Agreement will detract from or otherwise limit Executive's right to or privilege of participation in any stock option or purchase plan or any bonus, profit sharing, pension, group insurance, hospitalization, or other incentive or benefit plan or arrangement which may be or become applicable to executives of the corporation resulting from such merger or consolidation or the corporation acquiring such assets of the Company. In the event of any merger, consolidation, or sale of assets described above, references to the Company in this Agreement shall unless the context suggests otherwise be deemed to include the entity resulting from such merger or consolidation or the acquiror of such assets of the Company. 7. Any termination by the Company for Cause, or by Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with the last paragraph of Section 12 of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice that (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by Executive or the Company to set forth in the Notice of Termination any fact or circumstance -7- which contributes to a showing of Good Reason or Cause shall not waive any right of Executive or the Company, respectively, hereunder or preclude Executive or the Company, respectively, from asserting such fact or circumstance in enforcing Executive's or the Company's rights hereunder. "Date of Termination" means (i) if Executive's employment is terminated by the Company for Cause, or by Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies Executive of such termination and (iii) if Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of Executive or the effective date of the Disability, as the case may be. 8. All payments required to be made by the Company hereunder to Executive or his dependents, beneficiaries, or estate will be subject to the withholding of such amounts relating to tax and/or other payroll deductions as may be required by law. In the event that it is determined that any payment or benefit provided by the Company to or for the benefit of Executive, either under this Agreement or otherwise, will be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code or any successor provision(s) ("Section 4999"), the Company will, prior to the date on which any amount of the excise tax must be paid or withheld, make an additional lump-sum payment (the "Gross-up Payment") to Executive in an amount sufficient, after giving effect to all federal, state and other taxes and charges (including interest and penalties, if any) with respect to the gross-up payment, to make Executive whole for all taxes (including withholding taxes) and any associated interest and penalties, imposed under or as a result of Section 4999. Determinations under this Section 8 will be made by Coopers & Lybrand unless Executive has reasonable objections to the use of that firm, in which case the determinations will be made by a comparable firm chosen by Executive after consultation with the Company (the firm making the determinations to be referred to as the "Firm"). The determinations of the Firm will be binding upon the Company and Executive except as the determinations are established in resolution (including by settlement) of a controversy with the Internal Revenue Service to have been incorrect. All fees and expenses of the Firm will be paid by the Company. If the Internal Revenue Service asserts a claim that, if successful, would require the Company to make a Gross-up Payment or an additional Gross-up Payment, the Company and Executive will cooperate fully in resolving the controversy with the Internal Revenue Service. The Company will make or advance such Gross-up Payments as are necessary to prevent Executive from having to bear the cost of payments made to the Internal Revenue Service in the course of, or as a result of, the controversy. The Firm will determine the amount of such Gross-up Payments or advances and will determine after final resolution of the controversy whether any advances must be returned by Executive to the Company. The Company will bear all expenses of the controversy and will gross Executive up for any additional taxes that may be imposed upon Executive as a result of its payment of such expenses. -8- 9. There shall be no requirement on the part of Executive to seek other employment or otherwise mitigate damages in order to be entitled to the full amount of any payments and benefits to which Executive is entitled under this Agreement, and the amount of such payments and benefits shall not be reduced by any compensation or benefits received by Executive from other employment other than with respect to certain welfare benefits as provided in the first proviso to Section 1(d). 10. Nothing contained in this Agreement shall be construed as a contract of employment between Company and Executive, or as a right of Executive to continue in the employ of Company, or as a limitation of the right of Company to discharge Executive with or without Cause; provided that Executive shall have the right to receive upon termination of his employment the payments and benefits provided in this Agreement and shall not be deemed to have waived any rights he may have either at law or in equity in respect of such discharge. 11. No amendment, change, or modification of this Agreement may be made except in writing, signed by both parties. This agreement amends and restates in its entirety the Change of Control Agreement between the parties, dated October 17, 1997. 12. This Agreement shall terminate on December 31, 2000, provided, however, that commencing on December 31, 1999 and on each annual anniversary of such date (each such date hereinafter referred to as a "Renewal Date"), unless previously terminated, the term of this Agreement shall be automatically extended so as to terminate three years from such Renewal Date, unless at least sixty days prior to the Renewal Date the Company shall give notice to Executive that the term of this Agreement shall not be so extended. This Agreement shall not apply to a Change of Control which takes place after the termination of this Agreement. The provisions of this Agreement shall be binding upon and shall inure to the benefit of Executive, his executors, administrators, legal representatives and assigns, and the Company and its successors. The validity, interpretation, and effect of this Agreement shall be governed by the laws of the State of Washington. Any ambiguities in this Agreement shall be construed in favor of Executive. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. The Company shall have no right of set-off or counterclaims, in respect of any claim, debt, or obligation, against any payments to Executive, his dependents, beneficiaries, or estate provided for in this Agreement. -9- No right or interest to or in any payments shall be assignable by Executive; provided, however, that this provision shall not preclude him from -------- designating one or more beneficiaries to receive any amount that may be payable after his death and shall not preclude the legal representative of his estate from assigning any right hereunder to the person or persons entitled thereto under his will or, in the case of intestacy, to the person or persons entitled thereto under the laws of intestacy applicable to his estate. The term "beneficiaries" as used in this Agreement shall mean a beneficiary or beneficiaries so designated to receive any such amount, or if no beneficiary has been so designated, the legal representative of Executive's estate. No right, benefit, or interest hereunder, shall be subject to anticipation, alienation, sale, assignment, encumbrance, charge, pledge, hypothecation or set- off in respect of any claim, debt or obligation, or to execution, attachment, levy or similar process, or assignment by operation of law. Any attempt, voluntary or involuntary, to effect any action specified in the immediately preceding sentence shall, to the full extent permitted by law, be null, void, and of no effect. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to Executive: Henry C. Hirsch --------------- 1220 Second Ave. N. Seattle, WA 98109 If to the Company: Advanced Radio Telecom Corp. ----------------- 500 108th Avenue, N.E. Suite 2600 Bellevue, WA 98004 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. -10- IN WITNESS WHEREOF, the Company and Executive have each caused this Agreement to be duly executed and delivered as of the date set forth above. ADVANCED RADIO TELECOM CORP. By: ------------------------------ --------------------------------- Henry C. Hirsch -11- EXHIBIT A Change of Control. For the purposes of this Agreement, a "Change of ----------------- Control" shall mean: (a) The acquisition by any person, corporation, partnership, limited liability company or other entity (a "Person", which term shall include a group within the meaning of section 13(d) of the Securities Exchange Act of 1934 (the "Exchange Act")) of ultimate beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act), directly or indirectly of 30% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any such acquisition directly from the Company, except for acquisition of securities upon conversion of other securities of the Company (ii) any such acquisition by the Company, (iii) any such acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any such acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Exhibit A; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election, by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company in one or a series of transactions (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the -12- Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, immediately following such Business Combination more than 50% of, respectively, the outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) ultimately beneficially owns, directly or indirectly, 30% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. -13- EX-10.4 3 CONTROL AGREEMENT WILLIAM MAXWELL EXHIBIT 10.4 ADVANCED RADIO TELECOM CORP. Amended and Restated Change of Control Agreement ------------------------------------------------ AGREEMENT, made this 3/rd/ day of February, 1999 by and between William J. Maxwell ("Executive") and ADVANCED RADIO TELECOM CORP. (the "Company"); RECITALS: A. The Board of Directors of the Company (the "Board") recognizes that the possibility of a change in control may exist and that such possibility, and the uncertainty and questions which it may raise among management personnel, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; B. The Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including Executive, to their duties, to assisting the Board in assessing proposals with respect to a change in control and to advising the Board as to the best interests of the Company and its shareholders with respect to such potential change in control, without distraction and conflict arising from the possibility of a change in control; C. The Board wishes to induce Executive to remain in the employ of the Company and to assure him of fair severance should his employment terminate in specified circumstances following a change of control of the Company. NOW, THEREFORE, in consideration of the promises and the mutual covenants contained herein, the parties hereto agree as follows: 1. If within 24 months following a Change of Control (as defined in Exhibit A) (the "Post Change of Control Period") Executive's employment with the Company is terminated (i) by the Company for any reason (other than for "Cause" or "Disability" (as defined paragraph 4 below) or as a result of Executive's death), or (ii) Executive terminates such employment for Good Reason (as defined in paragraph 4 below): (a) The Company will pay to Executive within five business days of such termination of employment a lump-sum cash payment in an amount equal to the sum of (i) Executive's annual base salary ("Base Salary") at the time of termination through the date of such termination of employment to the extent not theretofore paid, (ii) a prorated portion of Executive's maximum incentive compensation for the fiscal year in which such termination shall occur, calculated by multiplying (A) such incentive compensation times (B) a fraction, the numerator of which is the number of days in the fiscal year through the date of termination of employment, and the denominator of which is 365, (iii) if Executive has not been paid incentive compensation with respect to the fiscal year prior to the year in which such termination occurs and during which Executive was employed by the Company (except where prior to the Change of Control the Board had determined that no such incentive compensation was to be paid to Executive with respect to such prior year), Executive's maximum incentive bonus for such prior fiscal year prorated for the period of his employment by the Company if less than a full year (provided that if any target incentive compensation under (ii) or (iii) was expressed in shares of common stock rather than cash, the Company will pay the cash equivalent of such compensation based on the closing price per share as reported in the Wall Street Journal (Eastern Edition), in the case of the Company's common stock as of the date prior to the date of the Change of Control), and (iv) any accrued and unpaid vacation pay through the date of termination; and (b) Any stock, stock option or other awards granted to Executive by the Company shall immediately vest and, if applicable, become exercisable in full, notwithstanding any provision to the contrary, and shall remain exercisable, if applicable, until the earlier of the fourth anniversary of such termination of employment or the latest date on which such grant could have been exercised, any restrictions on any restricted stock, deferred stock or other awards shall immediately terminate and all such awards shall immediately be vested in full, and any certificates for any deferred stock shall be delivered to Executive no later than five business days following such termination; (c) The Company will pay to Executive within five business days of such termination of employment a lump-sum cash payment in an amount equal to the greater of (i) an amount equal to Executive's aggregate Base Salary and maximum incentive compensation for the period from the date of termination through December 31, 2000 determined as if he had been employed through December 31, 2000 (but without duplication of amounts paid pursuant to Section 1(a) above) or (ii) an amount equal to: (A) the amount of Executive's Base Salary at the rate in effect immediately prior to the date of termination or at the rate in effect immediately prior to the Change of Control, whichever is higher, and (B) the amount of Executive's maximum incentive compensation for the fiscal year during which the termination of employment occurs or the amount of Executive's maximum incentive compensation in effect immediately prior to the Change of Control, whichever is higher (provided that if any such incentive compensation is expressed or was paid in shares of common stock rather than cash, the calculation will be based on, and the Company will pay the cash equivalent of, such compensation based on the closing price per share as reported in the Wall Street Journal (Eastern Edition) in the case of a share of the Company's common stock determined on the date prior to the date of the Change of Control. -2- (d) Executive, together with his dependents, will continue following such termination of employment to participate fully in the life and medical insurance plans maintained or sponsored by the Company immediately prior to the Change of Control on the same basis they participated prior to the Change in Control until the earlier of (i) the second anniversary of such termination or any longer period as may be provided by the terms of such plan or (ii) the date Executive becomes re-employed with another employer and is eligible to receive substantially equivalent life and medical benefits under another employer provided plan, provided that if the continued participation of Executive and his dependents is not possible under the terms of any of such Company plans, the Company shall instead either arrange to provide Executive and his dependents with substantially equivalent benefits or pay to Executive (within five days of the date of termination) an amount equal to the full value thereof in cash; and (e) the Company will promptly reimburse Executive for any and all legal fees and expenses (including, without limitation, stenographer fees and printing costs) incurred by him as a result of such termination of employment, including without limitation all fees and expenses incurred to enforce the provisions of this Agreement or contest or dispute that the termination of his employment is for Cause or other than for Good Reason (regardless of the outcome thereof). Notwithstanding anything herein to the contrary, (i) to the extent that any payment or benefit provided for herein is required to be paid or vested on any earlier date under the terms of any plan, agreement or arrangement, such plan, agreement or arrangement shall control; and (ii) if the Company terminates Executive's employment for a reason other than Cause prior to the date upon which the Change of Control occurs, and Executive reasonably demonstrates that such termination of employment (x) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (y) otherwise arose in connection with or in anticipation of a Change of Control, then for all purposes of this Agreement, Executive shall be entitled to the benefits provides in Section 1 above. To avert duplication of benefits, if Executive receives any payment of Base Salary, incentive compensation or severance other than under this Agreement ("Other Termination Payments") upon the termination of his employment with the Company, the amount of such payments shall be deducted from the amount paid under this Agreement and the benefits to be provided hereunder shall be provided only to the extent additional to the benefits to be provided other than under this Agreement; provided, however, that neither this paragraph nor the provisions of any other agreement shall be interpreted to reduce the amount payable to Executive below the amount that would otherwise have been payable under this Agreement if such Other Termination Payments had not been made. -3- 2. Death, Disability, Cause, Other Than For Good Reason (a) If Executive's employment shall terminate during the Post Change of Control Period by reason of Executive's death, this Agreement shall terminate without further obligations to Executive's legal representatives under this Agreement. (b) If Executive's employment is terminated during the Post Change of Control Period by reason of Executive's Disability, this Agreement shall terminate without further obligations to Executive. For purposes of this Agreement, "Disability" shall have the meaning given in the Company's long-term disability plan defining the date and conditions for which Executive is entitled to receive long-term disability compensation pursuant to such long-term disability plan. If the Company determines in good faith that the Disability of Executive has occurred during the Post Change of Control Period, it may give Executive written notice of its intention to terminate Executive's employment. In such event, Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by Executive, provided that, within the 30 days of such receipt, Executive shall not have returned to full-time performance of Executive's duties. (c) If Executive's employment shall be terminated for Cause (as defined in Section 4 below) during the Post Change of Control Period, this Agreement shall terminate without further obligations to Executive other than the obligation to pay Executive (A) his Base Salary through the date of termination and (B) Other Benefits, in each case to the extent theretofore unpaid. (d) If Executive voluntarily terminates employment during the Post Change of Control Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to Executive. 3. "Cause" means only: (a) commission of a felony or gross neglect of duty by Executive rising to the level of deliberate dereliction, (b) conviction of a crime involving moral turpitude, or (c) willful failure by Executive in the performance of his duties to the Company which failure is deliberate on Executive's part, results in material injury to the Company, and continues for more than 30 days after written notice given to Executive pursuant to a two- thirds vote of all of the members of the Board at a meeting called and held for such purpose (after reasonable notice to Executive) and at which meeting Executive and his counsel were given an opportunity to be heard, such vote to set forth in reasonable detail the nature of the failure. For purposes of this definition of Cause, no act or omission shall be considered to have been "willful" unless it was not in good faith and Executive had knowledge at the time that the act or omission was not in the best interest of the Company. Any act or failure to act based on authority given -4- pursuant to a resolution duly adopted by the Board or based on the advice of counsel of the Company shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interest of the Company. Cause shall not include willful failure due to incapacity resulting from physical or mental illness or any actual or anticipated failure after Notice of Termination for Good Reason. 4. Executive shall be deemed to have voluntarily terminated his employment for Good Reason if Executive leaves the employ of the Company for any reason following: (a) The assignment to Executive of any duties inconsistent in any respect with Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities immediately prior to the Change of Control; or the diminution or adverse alteration in any material adverse respect of such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Executive; (b) Any reduction in Executive's rate of Base Salary for any fiscal year to less than 100% of the rate of Base Salary payable for the fiscal year immediately preceding the Change of Control or of the Base Salary provided for such fiscal year in any agreement between Executive and the Company, or reduction in Executive's total cash and stock compensation opportunities, including Base Salary and incentives, for any fiscal year to less than 100% of the total cash and stock compensation opportunities made available to him immediately preceding the Change of Control for the then current fiscal year or of the total cash and stock compensation opportunities which were to be made available to him for the fiscal year pursuant to any agreement between Executive and the Company (for this purpose, such opportunities shall be deemed reduced if the objective standards by which Executive's incentive compensation measured becomes more stringent, the target or maximum amounts of such incentive compensation are reduced, or the amount of such incentive compensation is reduced on a discretionary basis from the amount that would be payable solely by reference to the objectives); or (c) Failure of the Company to continue in effect any retirement, life, medical, dental, disability accidental death or travel insurance plan or other benefit plan or practice, in which Executive was participating immediately prior to the Change of Control unless the Company provides Executive with a plan or plans or practices that provide substantially similar benefits, or the taking of any action by the Company that would adversely affect Executive's participation in or materially reduce Executive's benefits under any of such -5- plans or practices or deprive Executive of any material fringe benefit enjoyed by Executive immediately prior to the Change of Control other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Executive; or (d) The Company requires Executive to be based at any office or location further than 40 miles from the City of Bellevue, or the Company requires Executive to travel on Company business to a substantially greater extent than required immediately prior to the date of the Change of Control; or (e) Any failure by the Company to comply with and satisfy Section 6 of this Agreement. Executive's right to terminate his employment pursuant to this section shall not be affected by his incapacity due to physical or mental illness. Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder. 5. In the case of any dispute under this Agreement, Executive may initiate binding arbitration in Seattle, Washington before the American Arbitration Association by serving a notice to arbitrate upon the Company or, at Executive's election, institute judicial proceedings. The Company shall not have the right to initiate binding arbitration, and agrees that upon the initiation of binding arbitration by Executive pursuant to this paragraph 5 the Company shall cause to be dismissed any judicial proceedings it has brought against Executive relating to this Agreement. The Company authorizes Executive from time to time to retain counsel of his choice to represent Executive in connection with any and all actions, proceedings, and/or arbitration, whether by or against the Company or any director, officer, shareholder, or other person affiliated with the Company, which may affect Executive's rights under this Agreement. Company agrees to (i) pay the fees and expenses of such counsel, (ii) to pay the cost of such arbitration and/or judicial proceeding, and (iii) pay interest to Executive on all amounts owed to Executive under this Agreement during any period of time that such amounts are withheld pending arbitration and/or judicial proceedings. Such interest will be at the base rate as announced from time to time by Canadian Imperial Bank of Commerce. In addition, notwithstanding any existing or prior attorney-client relationship between the Company and counsel retained by Executive, the Company irrevocably consents to Executive entering into an attorney-client relationship with such counsel and agrees that a confidential relationship shall exist between Executive and such counsel. 6. If the Company is at any time before or after a Change of Control merged or consolidated into or with any other corporation or other entity (whether or not the Company is the surviving entity), or if substantially all of the assets thereof are transferred to another corporation -6- or other entity, the provisions of this Agreement will be binding upon and inure to the benefit of the corporation or other entity resulting from such merger or consolidation or the acquirer of such assets (the "Successor Entity"), and this paragraph 6 will apply in the event of any subsequent merger or consolidation or transfer of assets. The Company will require any such Successor Entity to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such transaction had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any Successor Entity which assumes and agrees to perform this Agreement by operation of law or otherwise. In the event of any merger, consolidation, or sale of assets described above, nothing contained in this Agreement will detract from or otherwise limit Executive's right to or privilege of participation in any stock option or purchase plan or any bonus, profit sharing, pension, group insurance, hospitalization, or other incentive or benefit plan or arrangement which may be or become applicable to executives of the corporation resulting from such merger or consolidation or the corporation acquiring such assets of the Company. In the event of any merger, consolidation, or sale of assets described above, references to the Company in this Agreement shall unless the context suggests otherwise be deemed to include the entity resulting from such merger or consolidation or the acquiror of such assets of the Company. 7. Any termination by the Company for Cause, or by Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with the last paragraph of Section 12 of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice that (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of Executive or the Company, respectively, hereunder or preclude Executive or the Company, respectively, from asserting such fact or circumstance in enforcing Executive's or the Company's rights hereunder. "Date of Termination" means (i) if Executive's employment is terminated by the Company for Cause, or by Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies Executive of such termination and (iii) if Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of Executive or the effective date of the Disability, as the case may be. -7- 8. All payments required to be made by the Company hereunder to Executive or his dependents, beneficiaries, or estate will be subject to the withholding of such amounts relating to tax and/or other payroll deductions as may be required by law. In the event that it is determined that any payment or benefit provided by the Company to or for the benefit of Executive, either under this Agreement or otherwise, will be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code or any successor provision(s) ("Section 4999"), the Company will, prior to the date on which any amount of the excise tax must be paid or withheld, make an additional lump-sum payment (the "Gross-up Payment") to Executive in an amount sufficient, after giving effect to all federal, state and other taxes and charges (including interest and penalties, if any) with respect to the gross-up payment, to make Executive whole for all taxes (including withholding taxes) and any associated interest and penalties, imposed under or as a result of Section 4999. Determinations under this Section 8 will be made by Coopers & Lybrand unless Executive has reasonable objections to the use of that firm, in which case the determinations will be made by a comparable firm chosen by Executive after consultation with the Company (the firm making the determinations to be referred to as the "Firm"). The determinations of the Firm will be binding upon the Company and Executive except as the determinations are established in resolution (including by settlement) of a controversy with the Internal Revenue Service to have been incorrect. All fees and expenses of the Firm will be paid by the Company. If the Internal Revenue Service asserts a claim that, if successful, would require the Company to make a Gross-up Payment or an additional Gross-up Payment, the Company and Executive will cooperate fully in resolving the controversy with the Internal Revenue Service. The Company will make or advance such Gross-up Payments as are necessary to prevent Executive from having to bear the cost of payments made to the Internal Revenue Service in the course of, or as a result of, the controversy. The Firm will determine the amount of such Gross-up Payments or advances and will determine after final resolution of the controversy whether any advances must be returned by Executive to the Company. The Company will bear all expenses of the controversy and will gross Executive up for any additional taxes that may be imposed upon Executive as a result of its payment of such expenses. 9. There shall be no requirement on the part of Executive to seek other employment or otherwise mitigate damages in order to be entitled to the full amount of any payments and benefits to which Executive is entitled under this Agreement, and the amount of such payments and benefits shall not be reduced by any compensation or benefits received by Executive from other employment other than with respect to certain welfare benefits as provided in the first proviso to Section 1(d). -8- 10. Nothing contained in this Agreement shall be construed as a contract of employment between Company and Executive, or as a right of Executive to continue in the employ of Company, or as a limitation of the right of Company to discharge Executive with or without Cause; provided that Executive shall have the right to receive upon termination of his employment the payments and benefits provided in this Agreement and shall not be deemed to have waived any rights he may have either at law or in equity in respect of such discharge. 11. No amendment, change, or modification of this Agreement may be made except in writing, signed by both parties. This agreement amends and restates in its entirety the Change of Control Agreement between the parties, dated December 8, 1997. 12. This Agreement shall terminate on December 31, 2000, provided, however, that commencing on December 31, 1999 and on each annual anniversary of such date (each such date hereinafter referred to as a "Renewal Date"), unless previously terminated, the term of this Agreement shall be automatically extended so as to terminate three years from such Renewal Date, unless at least sixty days prior to the Renewal Date the Company shall give notice to Executive that the term of this Agreement shall not be so extended. This Agreement shall not apply to a Change of Control which takes place after the termination of this Agreement. The provisions of this Agreement shall be binding upon and shall inure to the benefit of Executive, his executors, administrators, legal representatives and assigns, and the Company and its successors. The validity, interpretation, and effect of this Agreement shall be governed by the laws of the State of Washington. Any ambiguities in this Agreement shall be construed in favor of Executive. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. The Company shall have no right of set-off or counterclaims, in respect of any claim, debt, or obligation, against any payments to Executive, his dependents, beneficiaries, or estate provided for in this Agreement. No right or interest to or in any payments shall be assignable by Executive; provided, however, that this provision shall not preclude him from -------- designating one or more beneficiaries to receive any amount that may be payable after his death and shall not preclude the legal representative of his estate from assigning any right hereunder to the person or persons entitled thereto under his will or, in the case of intestacy, to the person or persons entitled thereto under the laws of intestacy applicable to his estate. The term "beneficiaries" as used in this Agreement shall mean a beneficiary or beneficiaries so designated to receive any such amount, or if no beneficiary has been so designated, the legal representative of Executive's estate. -9- No right, benefit, or interest hereunder, shall be subject to anticipation, alienation, sale, assignment, encumbrance, charge, pledge, hypothecation or set- off in respect of any claim, debt or obligation, or to execution, attachment, levy or similar process, or assignment by operation of law. Any attempt, voluntary or involuntary, to effect any action specified in the immediately preceding sentence shall, to the full extent permitted by law, be null, void, and of no effect. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to Executive: William J. Maxwell --------------- 528 Lake Street S. A-302 Kirkland, WA 98033 If to the Company: Advanced Radio Telecom Corp. ----------------- 500 108th Avenue, N.E. Suite 2600 Bellevue, WA 98004 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. IN WITNESS WHEREOF, the Company and Executive have each caused this Agreement to be duly executed and delivered as of the date set forth above. ADVANCED RADIO TELECOM CORP. By: ------------------------------ ---------------------------------- William J. Maxwell -10- EXHIBIT A Change of Control. For the purposes of this Agreement, a "Change of ----------------- Control" shall mean: (a) The acquisition by any person, corporation, partnership, limited liability company or other entity (a "Person", which term shall include a group within the meaning of section 13(d) of the Securities Exchange Act of 1934 (the "Exchange Act")) of ultimate beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act), directly or indirectly of 30% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any such acquisition directly from the Company, except for acquisition of securities upon conversion of other securities of the Company (ii) any such acquisition by the Company, (iii) any such acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any such acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Exhibit A; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election, by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company in one or a series of transactions (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the -11- Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, immediately following such Business Combination more than 50% of, respectively, the outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) ultimately beneficially owns, directly or indirectly, 30% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. -12- EX-10.6 4 CONTROL AGREEMENT GEORGE OLEXA EXHIBIT 10.6 ADVANCED RADIO TELECOM CORP. Amended and Restated Change of Control Agreement ------------------------------------------------ AGREEMENT, made this 3rd day of February, 1999 by and between George R. Olexa ("Executive") and ADVANCED RADIO TELECOM CORP. (the "Company"); RECITALS: A. The Board of Directors of the Company (the "Board") recognizes that the possibility of a change in control may exist and that such possibility, and the uncertainty and questions which it may raise among management personnel, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; B. The Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including Executive, to their duties, to assisting the Board in assessing proposals with respect to a change in control and to advising the Board as to the best interests of the Company and its shareholders with respect to such potential change in control, without distraction and conflict arising from the possibility of a change in control; C. The Board wishes to induce Executive to remain in the employ of the Company and to assure him of fair severance should his employment terminate in specified circumstances following a change of control of the Company. NOW, THEREFORE, in consideration of the promises and the mutual covenants contained herein, the parties hereto agree as follows: 1. If within 24 months following a Change of Control (as defined in Exhibit A) (the "Post Change of Control Period") Executive's employment with the Company is terminated (i) by the Company for any reason (other than for "Cause" or "Disability" (as defined paragraph 4 below) or as a result of Executive's death), or (ii) Executive terminates such employment for Good Reason (as defined in paragraph 4 below): (a) The Company will pay to Executive within five business days of such termination of employment a lump-sum cash payment in an amount equal to the sum of (i) Executive's annual base salary ("Base Salary") at the time of termination through the date of such termination of employment to the extent not theretofore paid, (ii) a prorated portion of Executive's maximum incentive compensation for the fiscal year in which such termination shall occur, calculated by multiplying (A) such incentive compensation times (B) a fraction, the numerator of which is the number of days in the fiscal year through the date of termination of employment, and the denominator of which is 365, (iii) if Executive has not been paid incentive compensation with respect to the fiscal year prior to the year in which such termination occurs and during which Executive was employed by the Company (except where prior to the Change of Control the Board had determined that no such incentive compensation was to be paid to Executive with respect to such prior year), Executive's maximum incentive bonus for such prior fiscal year prorated for the period of his employment by the Company if less than a full year (provided that if any target incentive compensation under (ii) or (iii) was expressed in shares of common stock rather than cash, the Company will pay the cash equivalent of such compensation based on the closing price per share as reported in the Wall Street Journal (Eastern Edition), in the case of the Company's common stock as of the date prior to the date of the Change of Control), and (iv) any accrued and unpaid vacation pay through the date of termination; and (b) Any stock, stock option or other awards granted to Executive by the Company shall immediately vest and, if applicable, become exercisable in full, notwithstanding any provision to the contrary, and shall remain exercisable, if applicable, until the earlier of the fourth anniversary of such termination of employment or the latest date on which such grant could have been exercised, any restrictions on any restricted stock, deferred stock or other awards shall immediately terminate and all such awards shall immediately be vested in full, and any certificates for any deferred stock shall be delivered to Executive no later than five business days following such termination; (c) The Company will pay to Executive within five business days of such termination of employment a lump-sum cash payment in an amount equal to the greater of (i) an amount equal to Executive's aggregate Base Salary and maximum incentive compensation for the period from the date of termination through December 31, 2000 determined as if he had been employed through December 31, 2000 (but without duplication of amounts paid pursuant to Section 1(a) above) or (ii) an amount equal to: (A) the amount of Executive's Base Salary at the rate in effect immediately prior to the date of termination or at the rate in effect immediately prior to the Change of Control, whichever is higher, and (B) the amount of Executive's maximum incentive compensation for the fiscal year during which the termination of employment occurs or the amount of Executive's maximum incentive compensation in effect immediately prior to the Change of Control, whichever is higher (provided that if any such incentive compensation is expressed or was paid in shares of common stock rather than cash, the calculation will be based on, and the Company will pay the cash equivalent of, such compensation based on the closing price per share as reported in the Wall Street Journal (Eastern Edition) in the case of a share of the Company's common stock determined on the date prior to the date of the Change of Control. -2- (d) Executive, together with his dependents, will continue following such termination of employment to participate fully in the life and medical insurance plans maintained or sponsored by the Company immediately prior to the Change of Control on the same basis they participated prior to the Change in Control until the earlier of (i) the second anniversary of such termination or any longer period as may be provided by the terms of such plan or (ii) the date Executive becomes re-employed with another employer and is eligible to receive substantially equivalent life and medical benefits under another employer provided plan, provided that if the continued participation of Executive and his dependents is not possible under the terms of any of such Company plans, the Company shall instead either arrange to provide Executive and his dependents with substantially equivalent benefits or pay to Executive (within five days of the date of termination) an amount equal to the full value thereof in cash; and (e) the Company will promptly reimburse Executive for any and all legal fees and expenses (including, without limitation, stenographer fees and printing costs) incurred by him as a result of such termination of employment, including without limitation all fees and expenses incurred to enforce the provisions of this Agreement or contest or dispute that the termination of his employment is for Cause or other than for Good Reason (regardless of the outcome thereof). Notwithstanding anything herein to the contrary, (i) to the extent that any payment or benefit provided for herein is required to be paid or vested on any earlier date under the terms of any plan, agreement or arrangement, such plan, agreement or arrangement shall control; and (ii) if the Company terminates Executive's employment for a reason other than Cause prior to the date upon which the Change of Control occurs, and Executive reasonably demonstrates that such termination of employment (x) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (y) otherwise arose in connection with or in anticipation of a Change of Control, then for all purposes of this Agreement, Executive shall be entitled to the benefits provides in Section 1 above. To avert duplication of benefits, if Executive receives any payment of Base Salary, incentive compensation or severance other than under this Agreement ("Other Termination Payments") upon the termination of his employment with the Company, the amount of such payments shall be deducted from the amount paid under this Agreement and the benefits to be provided hereunder shall be provided only to the extent additional to the benefits to be provided other than under this Agreement; provided, however, that neither this paragraph nor the provisions of any other agreement shall be interpreted to reduce the amount payable to Executive below the amount that would otherwise have been payable under this Agreement if such Other Termination Payments had not been made. -3- 2. Death, Disability, Cause, Other Than For Good Reason (a) If Executive's employment shall terminate during the Post Change of Control Period by reason of Executive's death, this Agreement shall terminate without further obligations to Executive's legal representatives under this Agreement. (b) If Executive's employment is terminated during the Post Change of Control Period by reason of Executive's Disability, this Agreement shall terminate without further obligations to Executive. For purposes of this Agreement, "Disability" shall have the meaning given in the Company's long-term disability plan defining the date and conditions for which Executive is entitled to receive long-term disability compensation pursuant to such long-term disability plan. If the Company determines in good faith that the Disability of Executive has occurred during the Post Change of Control Period, it may give Executive written notice of its intention to terminate Executive's employment. In such event, Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by Executive, provided that, within the 30 days of such receipt, Executive shall not have returned to full-time performance of Executive's duties. (c) If Executive's employment shall be terminated for Cause (as defined in Section 4 below) during the Post Change of Control Period, this Agreement shall terminate without further obligations to Executive other than the obligation to pay Executive (A) his Base Salary through the date of termination and (B) Other Benefits, in each case to the extent theretofore unpaid. (d) If Executive voluntarily terminates employment during the Post Change of Control Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to Executive. 3. "Cause" means only: (a) commission of a felony or gross neglect of duty by Executive rising to the level of deliberate dereliction, (b) conviction of a crime involving moral turpitude, or (c) willful failure by Executive in the performance of his duties to the Company which failure is deliberate on Executive's part, results in material injury to the Company, and continues for more than 30 days after written notice given to Executive pursuant to a two- thirds vote of all of the members of the Board at a meeting called and held for such purpose (after reasonable notice to Executive) and at which meeting Executive and his counsel were given an opportunity to be heard, such vote to set forth in reasonable detail the nature of the failure. For purposes of this definition of Cause, no act or omission shall be considered to have been "willful" unless it was not in good faith and Executive had knowledge at the time that the act or omission was not in the best interest of the Company. Any act or failure to act based on authority given -4- pursuant to a resolution duly adopted by the Board or based on the advice of counsel of the Company shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interest of the Company. Cause shall not include willful failure due to incapacity resulting from physical or mental illness or any actual or anticipated failure after Notice of Termination for Good Reason. 4. Executive shall be deemed to have voluntarily terminated his employment for Good Reason if Executive leaves the employ of the Company for any reason following: (a) The assignment to Executive of any duties inconsistent in any respect with Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities immediately prior to the Change of Control; or the diminution or adverse alteration in any material adverse respect of such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Executive; (b) Any reduction in Executive's rate of Base Salary for any fiscal year to less than 100% of the rate of Base Salary payable for the fiscal year immediately preceding the Change of Control or of the Base Salary provided for such fiscal year in any agreement between Executive and the Company, or reduction in Executive's total cash and stock compensation opportunities, including Base Salary and incentives, for any fiscal year to less than 100% of the total cash and stock compensation opportunities made available to him immediately preceding the Change of Control for the then current fiscal year or of the total cash and stock compensation opportunities which were to be made available to him for the fiscal year pursuant to any agreement between Executive and the Company (for this purpose, such opportunities shall be deemed reduced if the objective standards by which Executive's incentive compensation measured becomes more stringent, the target or maximum amounts of such incentive compensation are reduced, or the amount of such incentive compensation is reduced on a discretionary basis from the amount that would be payable solely by reference to the objectives); or (c) Failure of the Company to continue in effect any retirement, life, medical, dental, disability accidental death or travel insurance plan or other benefit plan or practice, in which Executive was participating immediately prior to the Change of Control unless the Company provides Executive with a plan or plans or practices that provide substantially similar benefits, or the taking of any action by the Company that would adversely affect Executive's participation in or materially reduce Executive's benefits under any of such -5- plans or practices or deprive Executive of any material fringe benefit enjoyed by Executive immediately prior to the Change of Control other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Executive; or (d) The Company requires Executive to be based at any office or location further than 40 miles from the City of Bellevue, or the Company requires Executive to travel on Company business to a substantially greater extent than required immediately prior to the date of the Change of Control; or (e) Any failure by the Company to comply with and satisfy Section 6 of this Agreement. Executive's right to terminate his employment pursuant to this section shall not be affected by his incapacity due to physical or mental illness. Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder. 5. In the case of any dispute under this Agreement, Executive may initiate binding arbitration in Seattle, Washington before the American Arbitration Association by serving a notice to arbitrate upon the Company or, at Executive's election, institute judicial proceedings. The Company shall not have the right to initiate binding arbitration, and agrees that upon the initiation of binding arbitration by Executive pursuant to this paragraph 5 the Company shall cause to be dismissed any judicial proceedings it has brought against Executive relating to this Agreement. The Company authorizes Executive from time to time to retain counsel of his choice to represent Executive in connection with any and all actions, proceedings, and/or arbitration, whether by or against the Company or any director, officer, shareholder, or other person affiliated with the Company, which may affect Executive's rights under this Agreement. Company agrees to (i) pay the fees and expenses of such counsel, (ii) to pay the cost of such arbitration and/or judicial proceeding, and (iii) pay interest to Executive on all amounts owed to Executive under this Agreement during any period of time that such amounts are withheld pending arbitration and/or judicial proceedings. Such interest will be at the base rate as announced from time to time by Canadian Imperial Bank of Commerce. In addition, notwithstanding any existing or prior attorney-client relationship between the Company and counsel retained by Executive, the Company irrevocably consents to Executive entering into an attorney-client relationship with such counsel and agrees that a confidential relationship shall exist between Executive and such counsel. 6. If the Company is at any time before or after a Change of Control merged or consolidated into or with any other corporation or other entity (whether or not the Company is the surviving entity), or if substantially all of the assets thereof are transferred to another corporation -6- or other entity, the provisions of this Agreement will be binding upon and inure to the benefit of the corporation or other entity resulting from such merger or consolidation or the acquirer of such assets (the "Successor Entity"), and this paragraph 6 will apply in the event of any subsequent merger or consolidation or transfer of assets. The Company will require any such Successor Entity to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such transaction had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any Successor Entity which assumes and agrees to perform this Agreement by operation of law or otherwise. In the event of any merger, consolidation, or sale of assets described above, nothing contained in this Agreement will detract from or otherwise limit Executive's right to or privilege of participation in any stock option or purchase plan or any bonus, profit sharing, pension, group insurance, hospitalization, or other incentive or benefit plan or arrangement which may be or become applicable to executives of the corporation resulting from such merger or consolidation or the corporation acquiring such assets of the Company. In the event of any merger, consolidation, or sale of assets described above, references to the Company in this Agreement shall unless the context suggests otherwise be deemed to include the entity resulting from such merger or consolidation or the acquiror of such assets of the Company. 7. Any termination by the Company for Cause, or by Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with the last paragraph of Section 12 of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice that (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of Executive or the Company, respectively, hereunder or preclude Executive or the Company, respectively, from asserting such fact or circumstance in enforcing Executive's or the Company's rights hereunder. "Date of Termination" means (i) if Executive's employment is terminated by the Company for Cause, or by Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies Executive of such termination and (iii) if Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of Executive or the effective date of the Disability, as the case may be. -7- 8. All payments required to be made by the Company hereunder to Executive or his dependents, beneficiaries, or estate will be subject to the withholding of such amounts relating to tax and/or other payroll deductions as may be required by law. In the event that it is determined that any payment or benefit provided by the Company to or for the benefit of Executive, either under this Agreement or otherwise, will be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code or any successor provision(s) ("Section 4999"), the Company will, prior to the date on which any amount of the excise tax must be paid or withheld, make an additional lump-sum payment (the "Gross-up Payment") to Executive in an amount sufficient, after giving effect to all federal, state and other taxes and charges (including interest and penalties, if any) with respect to the gross-up payment, to make Executive whole for all taxes (including withholding taxes) and any associated interest and penalties, imposed under or as a result of Section 4999. Determinations under this Section 8 will be made by Coopers & Lybrand unless Executive has reasonable objections to the use of that firm, in which case the determinations will be made by a comparable firm chosen by Executive after consultation with the Company (the firm making the determinations to be referred to as the "Firm"). The determinations of the Firm will be binding upon the Company and Executive except as the determinations are established in resolution (including by settlement) of a controversy with the Internal Revenue Service to have been incorrect. All fees and expenses of the Firm will be paid by the Company. If the Internal Revenue Service asserts a claim that, if successful, would require the Company to make a Gross-up Payment or an additional Gross-up Payment, the Company and Executive will cooperate fully in resolving the controversy with the Internal Revenue Service. The Company will make or advance such Gross-up Payments as are necessary to prevent Executive from having to bear the cost of payments made to the Internal Revenue Service in the course of, or as a result of, the controversy. The Firm will determine the amount of such Gross-up Payments or advances and will determine after final resolution of the controversy whether any advances must be returned by Executive to the Company. The Company will bear all expenses of the controversy and will gross Executive up for any additional taxes that may be imposed upon Executive as a result of its payment of such expenses. 9. There shall be no requirement on the part of Executive to seek other employment or otherwise mitigate damages in order to be entitled to the full amount of any payments and benefits to which Executive is entitled under this Agreement, and the amount of such payments and benefits shall not be reduced by any compensation or benefits received by Executive from other employment other than with respect to certain welfare benefits as provided in the first proviso to Section 1(d). -8- 10. Nothing contained in this Agreement shall be construed as a contract of employment between Company and Executive, or as a right of Executive to continue in the employ of Company, or as a limitation of the right of Company to discharge Executive with or without Cause; provided that Executive shall have the right to receive upon termination of his employment the payments and benefits provided in this Agreement and shall not be deemed to have waived any rights he may have either at law or in equity in respect of such discharge. 11. No amendment, change, or modification of this Agreement may be made except in writing, signed by both parties. This agreement amends and restates in its entirety the Change of Control Agreement between the parties, dated February 1, 1998. 12. This Agreement shall terminate on December 31, 2000, provided, however, that commencing on December 31, 1999 and on each annual anniversary of such date (each such date hereinafter referred to as a "Renewal Date"), unless previously terminated, the term of this Agreement shall be automatically extended so as to terminate three years from such Renewal Date, unless at least sixty days prior to the Renewal Date the Company shall give notice to Executive that the term of this Agreement shall not be so extended. This Agreement shall not apply to a Change of Control which takes place after the termination of this Agreement. The provisions of this Agreement shall be binding upon and shall inure to the benefit of Executive, his executors, administrators, legal representatives and assigns, and the Company and its successors. The validity, interpretation, and effect of this Agreement shall be governed by the laws of the State of Washington. Any ambiguities in this Agreement shall be construed in favor of Executive. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. The Company shall have no right of set-off or counterclaims, in respect of any claim, debt, or obligation, against any payments to Executive, his dependents, beneficiaries, or estate provided for in this Agreement. No right or interest to or in any payments shall be assignable by Executive; provided, however, that this provision shall not preclude him from -------- designating one or more beneficiaries to receive any amount that may be payable after his death and shall not preclude the legal representative of his estate from assigning any right hereunder to the person or persons entitled thereto under his will or, in the case of intestacy, to the person or persons entitled thereto under the laws of intestacy applicable to his estate. The term "beneficiaries" as used in this Agreement shall mean a beneficiary or beneficiaries so designated to receive any such amount, or if no beneficiary has been so designated, the legal representative of Executive's estate. -9- No right, benefit, or interest hereunder, shall be subject to anticipation, alienation, sale, assignment, encumbrance, charge, pledge, hypothecation or set- off in respect of any claim, debt or obligation, or to execution, attachment, levy or similar process, or assignment by operation of law. Any attempt, voluntary or involuntary, to effect any action specified in the immediately preceding sentence shall, to the full extent permitted by law, be null, void, and of no effect. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to Executive: George R. Olexa --------------- 17756 NE 90th Street Apt. N372 Redmond, WA 98052 If to the Company: Advanced Radio Telecom Corp. ----------------- 500 108th Avenue, N.E. Suite 2600 Bellevue, WA 98004 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. IN WITNESS WHEREOF, the Company and Executive have each caused this Agreement to be duly executed and delivered as of the date set forth above. ADVANCED RADIO TELECOM CORP. By: ------------------------------ --------------------------------- George R. Olexa -10- EXHIBIT A Change of Control. For the purposes of this Agreement, a "Change of ----------------- Control" shall mean: (a) The acquisition by any person, corporation, partnership, limited liability company or other entity (a "Person", which term shall include a group within the meaning of section 13(d) of the Securities Exchange Act of 1934 (the "Exchange Act")) of ultimate beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act), directly or indirectly of 30% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any such acquisition directly from the Company, except for acquisition of securities upon conversion of other securities of the Company (ii) any such acquisition by the Company, (iii) any such acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any such acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Exhibit A; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election, by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company in one or a series of transactions (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the -11- Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, immediately following such Business Combination more than 50% of, respectively, the outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) ultimately beneficially owns, directly or indirectly, 30% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. -12- EX-10.8 5 CONTROL AGREEMENT THOMAS BOYAN EXHIBIT 10.8 ADVANCED RADIO TELECOM CORP. Amended and Restated Change of Control Agreement ------------------------------------------------ AGREEMENT, made this 3rd day of February, 1999 by and between Thomas Boyhan ("Executive") and ADVANCED RADIO TELECOM CORP. (the "Company"); RECITALS: A. The Board of Directors of the Company (the "Board") recognizes that the possibility of a change in control may exist and that such possibility, and the uncertainty and questions which it may raise among management personnel, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; B. The Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including Executive, to their duties, to assisting the Board in assessing proposals with respect to a change in control and to advising the Board as to the best interests of the Company and its shareholders with respect to such potential change in control, without distraction and conflict arising from the possibility of a change in control; C. The Board wishes to induce Executive to remain in the employ of the Company and to assure him of fair severance should his employment terminate in specified circumstances following a change of control of the Company. NOW, THEREFORE, in consideration of the promises and the mutual covenants contained herein, the parties hereto agree as follows: 1. If within 24 months following a Change of Control (as defined in Exhibit A) (the "Post Change of Control Period") Executive's employment with the Company is terminated (i) by the Company for any reason (other than for "Cause" or "Disability" (as defined paragraph 4 below) or as a result of Executive's death), or (ii) Executive terminates such employment for Good Reason (as defined in paragraph 4 below): (a) The Company will pay to Executive within five business days of such termination of employment a lump-sum cash payment in an amount equal to the sum of (i) Executive's annual base salary ("Base Salary") at the time of termination through the date of such termination of employment to the extent not theretofore paid, (ii) a prorated portion of Executive's maximum incentive compensation for the fiscal year in which such termination shall occur, calculated by multiplying (A) such incentive compensation times (B) a fraction, the numerator of which is the number of days in the fiscal year through the date of termination of employment, and the denominator of which is 365, (iii) if Executive has not been paid incentive compensation with respect to the fiscal year prior to the year in which such termination occurs and during which Executive was employed by the Company (except where prior to the Change of Control the Board had determined that no such incentive compensation was to be paid to Executive with respect to such prior year), Executive's maximum incentive bonus for such prior fiscal year prorated for the period of his employment by the Company if less than a full year (provided that if any target incentive compensation under (ii) or (iii) was expressed in shares of common stock rather than cash, the Company will pay the cash equivalent of such compensation based on the closing price per share as reported in the Wall Street Journal (Eastern Edition), in the case of the Company's common stock as of the date prior to the date of the Change of Control), and (iv) any accrued and unpaid vacation pay through the date of termination; and (b) Any stock, stock option or other awards granted to Executive by the Company shall immediately vest and, if applicable, become exercisable in full, notwithstanding any provision to the contrary, and shall remain exercisable, if applicable, until the earlier of the fourth anniversary of such termination of employment or the latest date on which such grant could have been exercised, any restrictions on any restricted stock, deferred stock or other awards shall immediately terminate and all such awards shall immediately be vested in full, and any certificates for any deferred stock shall be delivered to Executive no later than five business days following such termination; (c) The Company will pay to Executive within five business days of such termination of employment a lump-sum cash payment in an amount equal to the greater of (i) an amount equal to Executive's aggregate Base Salary and maximum incentive compensation for the period from the date of termination through December 31, 2000 determined as if he had been employed through December 31, 2000 (but without duplication of amounts paid pursuant to Section 1(a) above) or (ii) an amount equal to: (A) the amount of Executive's Base Salary at the rate in effect immediately prior to the date of termination or at the rate in effect immediately prior to the Change of Control, whichever is higher, and (B) the amount of Executive's maximum incentive compensation for the fiscal year during which the termination of employment occurs or the amount of Executive's maximum incentive compensation in effect immediately prior to the Change of Control, whichever is higher (provided that if any such incentive compensation is expressed or was paid in shares of common stock rather than cash, the calculation will be based on, and the Company will pay the cash equivalent of, such compensation based on the closing price per share as reported in the Wall Street Journal (Eastern Edition) in the case of a share of the Company's common stock determined on the date prior to the date of the Change of Control. -2- (d) Executive, together with his dependents, will continue following such termination of employment to participate fully in the life and medical insurance plans maintained or sponsored by the Company immediately prior to the Change of Control on the same basis they participated prior to the Change in Control until the earlier of (i) the second anniversary of such termination or any longer period as may be provided by the terms of such plan or (ii) the date Executive becomes re-employed with another employer and is eligible to receive substantially equivalent life and medical benefits under another employer provided plan, provided that if the continued participation of Executive and his dependents is not possible under the terms of any of such Company plans, the Company shall instead either arrange to provide Executive and his dependents with substantially equivalent benefits or pay to Executive (within five days of the date of termination) an amount equal to the full value thereof in cash; and (e) the Company will promptly reimburse Executive for any and all legal fees and expenses (including, without limitation, stenographer fees and printing costs) incurred by him as a result of such termination of employment, including without limitation all fees and expenses incurred to enforce the provisions of this Agreement or contest or dispute that the termination of his employment is for Cause or other than for Good Reason (regardless of the outcome thereof). Notwithstanding anything herein to the contrary, (i) to the extent that any payment or benefit provided for herein is required to be paid or vested on any earlier date under the terms of any plan, agreement or arrangement, such plan, agreement or arrangement shall control; and (ii) if the Company terminates Executive's employment for a reason other than Cause prior to the date upon which the Change of Control occurs, and Executive reasonably demonstrates that such termination of employment (x) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (y) otherwise arose in connection with or in anticipation of a Change of Control, then for all purposes of this Agreement, Executive shall be entitled to the benefits provides in Section 1 above. To avert duplication of benefits, if Executive receives any payment of Base Salary, incentive compensation or severance other than under this Agreement ("Other Termination Payments") upon the termination of his employment with the Company, the amount of such payments shall be deducted from the amount paid under this Agreement and the benefits to be provided hereunder shall be provided only to the extent additional to the benefits to be provided other than under this Agreement; provided, however, that neither this paragraph nor the provisions of any other agreement shall be interpreted to reduce the amount payable to Executive below the amount that would otherwise have been payable under this Agreement if such Other Termination Payments had not been made. -3- 2. Death, Disability, Cause, Other Than For Good Reason (a) If Executive's employment shall terminate during the Post Change of Control Period by reason of Executive's death, this Agreement shall terminate without further obligations to Executive's legal representatives under this Agreement. (b) If Executive's employment is terminated during the Post Change of Control Period by reason of Executive's Disability, this Agreement shall terminate without further obligations to Executive. For purposes of this Agreement, "Disability" shall have the meaning given in the Company's long-term disability plan defining the date and conditions for which Executive is entitled to receive long-term disability compensation pursuant to such long-term disability plan. If the Company determines in good faith that the Disability of Executive has occurred during the Post Change of Control Period, it may give Executive written notice of its intention to terminate Executive's employment. In such event, Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by Executive, provided that, within the 30 days of such receipt, Executive shall not have returned to full-time performance of Executive's duties. (c) If Executive's employment shall be terminated for Cause (as defined in Section 4 below) during the Post Change of Control Period, this Agreement shall terminate without further obligations to Executive other than the obligation to pay Executive (A) his Base Salary through the date of termination and (B) Other Benefits, in each case to the extent theretofore unpaid. (d) If Executive voluntarily terminates employment during the Post Change of Control Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to Executive. 3. "Cause" means only: (a) commission of a felony or gross neglect of duty by Executive rising to the level of deliberate dereliction, (b) conviction of a crime involving moral turpitude, or (c) willful failure by Executive in the performance of his duties to the Company which failure is deliberate on Executive's part, results in material injury to the Company, and continues for more than 30 days after written notice given to Executive pursuant to a two- thirds vote of all of the members of the Board at a meeting called and held for such purpose (after reasonable notice to Executive) and at which meeting Executive and his counsel were given an opportunity to be heard, such vote to set forth in reasonable detail the nature of the failure. For purposes of this definition of Cause, no act or omission shall be considered to have been "willful" unless it was not in good faith and Executive had knowledge at the time that the act or omission was not in the best interest of the Company. Any act or failure to act based on authority given -4- pursuant to a resolution duly adopted by the Board or based on the advice of counsel of the Company shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interest of the Company. Cause shall not include willful failure due to incapacity resulting from physical or mental illness or any actual or anticipated failure after Notice of Termination for Good Reason. 4. Executive shall be deemed to have voluntarily terminated his employment for Good Reason if Executive leaves the employ of the Company for any reason following: (a) The assignment to Executive of any duties inconsistent in any respect with Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities immediately prior to the Change of Control; or the diminution or adverse alteration in any material adverse respect of such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Executive; (b) Any reduction in Executive's rate of Base Salary for any fiscal year to less than 100% of the rate of Base Salary payable for the fiscal year immediately preceding the Change of Control or of the Base Salary provided for such fiscal year in any agreement between Executive and the Company, or reduction in Executive's total cash and stock compensation opportunities, including Base Salary and incentives, for any fiscal year to less than 100% of the total cash and stock compensation opportunities made available to him immediately preceding the Change of Control for the then current fiscal year or of the total cash and stock compensation opportunities which were to be made available to him for the fiscal year pursuant to any agreement between Executive and the Company (for this purpose, such opportunities shall be deemed reduced if the objective standards by which Executive's incentive compensation measured becomes more stringent, the target or maximum amounts of such incentive compensation are reduced, or the amount of such incentive compensation is reduced on a discretionary basis from the amount that would be payable solely by reference to the objectives); or (c) Failure of the Company to continue in effect any retirement, life, medical, dental, disability accidental death or travel insurance plan or other benefit plan or practice, in which Executive was participating immediately prior to the Change of Control unless the Company provides Executive with a plan or plans or practices that provide substantially similar benefits, or the taking of any action by the Company that would adversely affect Executive's participation in or materially reduce Executive's benefits under any of such -5- plans or practices or deprive Executive of any material fringe benefit enjoyed by Executive immediately prior to the Change of Control other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Executive; or (d) The Company requires Executive to be based at any office or location further than 40 miles from the City of Bellevue, or the Company requires Executive to travel on Company business to a substantially greater extent than required immediately prior to the date of the Change of Control; or (e) Any failure by the Company to comply with and satisfy Section 6 of this Agreement. Executive's right to terminate his employment pursuant to this section shall not be affected by his incapacity due to physical or mental illness. Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder. 5. In the case of any dispute under this Agreement, Executive may initiate binding arbitration in Seattle, Washington before the American Arbitration Association by serving a notice to arbitrate upon the Company or, at Executive's election, institute judicial proceedings. The Company shall not have the right to initiate binding arbitration, and agrees that upon the initiation of binding arbitration by Executive pursuant to this paragraph 5 the Company shall cause to be dismissed any judicial proceedings it has brought against Executive relating to this Agreement. The Company authorizes Executive from time to time to retain counsel of his choice to represent Executive in connection with any and all actions, proceedings, and/or arbitration, whether by or against the Company or any director, officer, shareholder, or other person affiliated with the Company, which may affect Executive's rights under this Agreement. Company agrees to (i) pay the fees and expenses of such counsel, (ii) to pay the cost of such arbitration and/or judicial proceeding, and (iii) pay interest to Executive on all amounts owed to Executive under this Agreement during any period of time that such amounts are withheld pending arbitration and/or judicial proceedings. Such interest will be at the base rate as announced from time to time by Canadian Imperial Bank of Commerce. In addition, notwithstanding any existing or prior attorney-client relationship between the Company and counsel retained by Executive, the Company irrevocably consents to Executive entering into an attorney-client relationship with such counsel and agrees that a confidential relationship shall exist between Executive and such counsel. 6. If the Company is at any time before or after a Change of Control merged or consolidated into or with any other corporation or other entity (whether or not the Company is the surviving entity), or if substantially all of the assets thereof are transferred to another corporation -6- or other entity, the provisions of this Agreement will be binding upon and inure to the benefit of the corporation or other entity resulting from such merger or consolidation or the acquirer of such assets (the "Successor Entity"), and this paragraph 6 will apply in the event of any subsequent merger or consolidation or transfer of assets. The Company will require any such Successor Entity to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such transaction had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any Successor Entity which assumes and agrees to perform this Agreement by operation of law or otherwise. In the event of any merger, consolidation, or sale of assets described above, nothing contained in this Agreement will detract from or otherwise limit Executive's right to or privilege of participation in any stock option or purchase plan or any bonus, profit sharing, pension, group insurance, hospitalization, or other incentive or benefit plan or arrangement which may be or become applicable to executives of the corporation resulting from such merger or consolidation or the corporation acquiring such assets of the Company. In the event of any merger, consolidation, or sale of assets described above, references to the Company in this Agreement shall unless the context suggests otherwise be deemed to include the entity resulting from such merger or consolidation or the acquiror of such assets of the Company. 7. Any termination by the Company for Cause, or by Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with the last paragraph of Section 12 of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice that (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of Executive or the Company, respectively, hereunder or preclude Executive or the Company, respectively, from asserting such fact or circumstance in enforcing Executive's or the Company's rights hereunder. "Date of Termination" means (i) if Executive's employment is terminated by the Company for Cause, or by Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies Executive of such termination and (iii) if Executive's employment is -7- terminated by reason of death or Disability, the Date of Termination shall be the date of death of Executive or the effective date of the Disability, as the case may be. 8. All payments required to be made by the Company hereunder to Executive or his dependents, beneficiaries, or estate will be subject to the withholding of such amounts relating to tax and/or other payroll deductions as may be required by law. In the event that it is determined that any payment or benefit provided by the Company to or for the benefit of Executive, either under this Agreement or otherwise, will be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code or any successor provision(s) ("Section 4999"), the Company will, prior to the date on which any amount of the excise tax must be paid or withheld, make an additional lump-sum payment (the "Gross-up Payment") to Executive in an amount sufficient, after giving effect to all federal, state and other taxes and charges (including interest and penalties, if any) with respect to the gross-up payment, to make Executive whole for all taxes (including withholding taxes) and any associated interest and penalties, imposed under or as a result of Section 4999. Determinations under this Section 8 will be made by Coopers & Lybrand unless Executive has reasonable objections to the use of that firm, in which case the determinations will be made by a comparable firm chosen by Executive after consultation with the Company (the firm making the determinations to be referred to as the "Firm"). The determinations of the Firm will be binding upon the Company and Executive except as the determinations are established in resolution (including by settlement) of a controversy with the Internal Revenue Service to have been incorrect. All fees and expenses of the Firm will be paid by the Company. If the Internal Revenue Service asserts a claim that, if successful, would require the Company to make a Gross-up Payment or an additional Gross-up Payment, the Company and Executive will cooperate fully in resolving the controversy with the Internal Revenue Service. The Company will make or advance such Gross-up Payments as are necessary to prevent Executive from having to bear the cost of payments made to the Internal Revenue Service in the course of, or as a result of, the controversy. The Firm will determine the amount of such Gross-up Payments or advances and will determine after final resolution of the controversy whether any advances must be returned by Executive to the Company. The Company will bear all expenses of the controversy and will gross Executive up for any additional taxes that may be imposed upon Executive as a result of its payment of such expenses. 9. There shall be no requirement on the part of Executive to seek other employment or otherwise mitigate damages in order to be entitled to the full amount of any payments and benefits to which Executive is entitled under this Agreement, and the amount of such payments and benefits shall not be reduced by any compensation or benefits received by Executive from other employment other than with respect to certain welfare benefits as provided in the first proviso to Section 1(d). -8- 10. Nothing contained in this Agreement shall be construed as a contract of employment between Company and Executive, or as a right of Executive to continue in the employ of Company, or as a limitation of the right of Company to discharge Executive with or without Cause; provided that Executive shall have the right to receive upon termination of his employment the payments and benefits provided in this Agreement and shall not be deemed to have waived any rights he may have either at law or in equity in respect of such discharge. 11. No amendment, change, or modification of this Agreement may be made except in writing, signed by both parties. This agreement amends and restates in its entirety the Change of Control Agreement between the parties, dated August 31, 1998. 12. This Agreement shall terminate on December 31, 2000, provided, however, that commencing on December 31, 1999 and on each annual anniversary of such date (each such date hereinafter referred to as a "Renewal Date"), unless previously terminated, the term of this Agreement shall be automatically extended so as to terminate three years from such Renewal Date, unless at least sixty days prior to the Renewal Date the Company shall give notice to Executive that the term of this Agreement shall not be so extended. This Agreement shall not apply to a Change of Control which takes place after the termination of this Agreement. The provisions of this Agreement shall be binding upon and shall inure to the benefit of Executive, his executors, administrators, legal representatives and assigns, and the Company and its successors. The validity, interpretation, and effect of this Agreement shall be governed by the laws of the State of Washington. Any ambiguities in this Agreement shall be construed in favor of Executive. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. The Company shall have no right of set-off or counterclaims, in respect of any claim, debt, or obligation, against any payments to Executive, his dependents, beneficiaries, or estate provided for in this Agreement. No right or interest to or in any payments shall be assignable by Executive; provided, however, that this provision shall not preclude him from -------- designating one or more beneficiaries to receive any amount that may be payable after his death and shall not preclude the legal representative of his estate from assigning any right hereunder to the person or persons entitled thereto under his will or, in the case of intestacy, to the person or persons entitled thereto under the laws of intestacy applicable to his estate. The term "beneficiaries" as used in this Agreement shall mean a beneficiary or beneficiaries so designated to receive any such amount, or if no beneficiary has been so designated, the legal representative of Executive's estate. -9- No right, benefit, or interest hereunder, shall be subject to anticipation, alienation, sale, assignment, encumbrance, charge, pledge, hypothecation or set- off in respect of any claim, debt or obligation, or to execution, attachment, levy or similar process, or assignment by operation of law. Any attempt, voluntary or involuntary, to effect any action specified in the immediately preceding sentence shall, to the full extent permitted by law, be null, void, and of no effect. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to Executive: Thomas Boyhan --------------- 4003 South Oak Circle Sugar Land, TX 77479 If to the Company: Advanced Radio Telecom Corp. ----------------- 500 108th Avenue, N.E. Suite 2600 Bellevue, WA 98004 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. IN WITNESS WHEREOF, the Company and Executive have each caused this Agreement to be duly executed and delivered as of the date set forth above. ADVANCED RADIO TELECOM CORP. By: ------------------------------- ---------------------------------- Thomas Boyhan -10- EXHIBIT A Change of Control. For the purposes of this Agreement, a "Change of ----------------- Control" shall mean: (a) The acquisition by any person, corporation, partnership, limited liability company or other entity (a "Person", which term shall include a group within the meaning of section 13(d) of the Securities Exchange Act of 1934 (the "Exchange Act")) of ultimate beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act), directly or indirectly of 30% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any such acquisition directly from the Company, except for acquisition of securities upon conversion of other securities of the Company (ii) any such acquisition by the Company, (iii) any such acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any such acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Exhibit A; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election, by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company in one or a series of transactions (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the -11- Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, immediately following such Business Combination more than 50% of, respectively, the outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) ultimately beneficially owns, directly or indirectly, 30% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. -12- EX-10.9 6 EMPLOYMENT AGREEMENT ROBERT MCCAMBRIDGE EXHIBIT 10.9 EMPLOYMENT AGREEMENT AGREEMENT dated as of October 16, 1998 between Robert S. McCambridge ("Executive") and Advanced Radio Telecom Corp. (the "Company"), a Delaware corporation located at 500 108th Ave NE, Suite 2600, Bellevue, WA 98004. RECITALS -------- Executive seeks to be employed by the Company, and the Company seeks to employ Executive as its Executive Vice President, Chief Financial Officer. The Company and Executive intend that Executive shall serve the Company on the terms set forth below and, to that end, deem it desirable and appropriate to enter into this Agreement. AGREEMENT --------- The parties hereto, in consideration of the mutual agreements hereinafter contained, agree as follows: 1. EFFECTIVE DATE; TERM OF AGREEMENT. This Agreement shall become effective --------------------------------- as of October 27, 1998 (the "Effective Date"). Executive's employment shall continue on the terms provided herein until December 31, 2000, subject to earlier termination as provided herein (such period of employment hereinafter called the "Employment Period"). 2. SCOPE OF EMPLOYMENT. ------------------- a. Nature of Services. During the Employment Period, Executive shall be ------------------ elected and serve as Executive Vice President, Chief Financial Officer or as such other executive vice president designated by the Chief Executive Officer or the Board of Directors ("Board") of the Company and shall have and diligently perform the duties and the responsibilities of such office and such additional executive duties and responsibilities consistent with such office as shall from time to time be assigned to him. b. Extent of Services. Except for illnesses and vacation periods, ------------------ Executive shall devote substantially all his working time and attention and his best efforts to the performance of his duties and responsibilities under this Agreement. However, Executive may (i) make any passive investments where he is not obligated or required to, and shall not in fact, devote any managerial efforts, (ii) participate in charitable or community activities or in trade or professional organizations, or (iii) subject to Board approval (which approval shall not be unreasonably withheld or withdrawn), hold directorships in public companies, provided that the Board shall have the right to limit such investments, participation and services whenever the Board shall reasonably believe that the time spent on such activities infringes in any material respect upon the time required by Executive for the performance of his duties under this Agreement or is otherwise incompatible in any material regard with those duties. 3. COMPENSATION AND BENEFITS. ------------------------- a. Base Salary. Executive shall be paid a base salary at the annualized ----------- rate of One Hundred Seventy Five Thousand and No/100 ($175,000) or such higher annualized rate as the Board may determine ("Base Salary"), such Base Salary to be paid in the same manner and at the same times as the Company shall pay base salary to other executive employees. b. Bonus Compensation. Executive will be eligible for an incentive ------------------ bonus with respect to each fiscal year or portion thereof during the Employment Period pursuant to such bonus or incentive compensation plan as is then available to executives of the Company generally, or if there is no such plan, as the Board may determine based on performance criteria set annually. The maximum incentive bonus for each fiscal year shall be 100% of his Base Salary in effect with respect to such fiscal year. For each fiscal year or portion thereof, the determination of the target incentive bonus and whether Executive has earned any incentive bonus and the amount thereof shall be made by the Board in its judgment. c. Policies and Fringe Benefits. Executive shall be subject to Company ---------------------------- policies applicable to its executives generally and shall be entitled to receive all such fringe benefits as the Company shall from time to time make available to other executives generally (subject to the terms of any applicable fringe benefit plan), including vacation of three weeks per year, in accordance with and subject to prevailing Company policies. 4. TERMINATION OF EMPLOYMENT. ------------------------- a. The Company shall have the right to terminate Executive's employment at any time and for any reason, with or without Cause. Executive may resign for any reason on thirty (30) days notice and upon Constructive Termination (as defined below). -2- b. The Employment Period shall terminate when Executive dies or becomes Disabled. In addition, if by reason of Incapacity Executive is unable to perform his duties for at least six continuous months, the Employment Period may be terminated by the Company for Incapacity upon written notice by the Company to Executive. "Disability" and "Disabled" shall have the meaning given in the Company's long-term disability plan. Executive's employment shall be deemed to be terminated for Disability on the date on which Executive is entitled to receive long-term disability compensation pursuant to such long-term disability plan. "Incapacity" shall mean a disability (other than Disability) or other impairment of health that renders Executive unable to perform his duties to the reasonable satisfaction of the Board. c. Whenever the Employment Period shall terminate, Executive shall resign all offices or other positions he holds with the Company and any affiliated entities. 5. BENEFITS UPON TERMINATION OF EMPLOYMENT OR UPON EXPIRATION OF THE ----------------------------------------------------------------- AGREEMENT. --------- a. Certain Terminations Prior to December 31, 2000. If the Employment ----------------------------------------------- Period shall terminate prior to December 31, 2000 by reason of (i) death, Disability or Incapacity of Executive, (ii) termination by the Company for any reason other than Cause or (iii) termination by Executive in the event that either (A) Executive shall be removed from or fail to be reelected as an executive vice president (B) Executive is relocated more than 40 miles from the current corporate headquarters of the Company, in the case without his prior written consent (each a "Constructive Termination") and subject to Section 6 hereof, Executive shall be entitled to the following severance benefits: (i) The Company shall continue to pay to Executive or his legal representative his Base Salary for twelve (12) months following such termination and, at the termination of such twelve-month period, shall pay Executive an incentive bonus at the target amount at the time of his termination; provided that if Executive is eligible for long-term disability compensation benefits under any Company long-term disability plan, the amount payable under this clause shall be reduced by the long- term disability compensation benefits under such plan for which Executive is eligible with respect to the period following termination. (ii) For twelve (12) months following termination, and subject to such minimum coverage-continuation requirements as may be required by law, the Company will provide (except to the extent that Executive shall obtain or be eligible to obtain such insurance from another employer) such medical and -3- hospital insurance and term life insurance for Executive and his family, comparable to the insurance provided for executives generally, as the Company shall determine, and upon the same terms and conditions as the same shall be provided for other Company executives generally; provided, however, that in no event shall such insurance benefits supplied by the Company or the terms and conditions thereof be less favorable to Executive than those afforded to him as of the date of termination. To the extent it is impossible or impracticable to provide any such benefits to Executive under the Company's then existing employee benefit plans or arrangements, the Company shall arrange for alternative comparable coverage or, if such alternative coverage is not available, shall pay to Executive the cost of such coverage, as reasonably determined by the Company. (iii) All of Executive's previously granted stock options ("Options") then outstanding, to the extent not already vested, shall be immediately vested and shall remain exercisable for a period of one year or, if less, the remainder of the original option term, and shall then terminate. (iv) It is agreed and understood that all payments and benefits provided to Executive hereunder shall be expressly conditioned on the execution by Executive or his legal representative of a general release and waiver of claims in favor of the Company and its directors, officers, affiliates, and representatives. b. Voluntary Termination of Employment. If Executive terminates his ----------------------------------- employment voluntarily (other than a Constructive Termination), Executive or his legal representative shall not be entitled to any severance or other benefits under this Agreement. c. Termination for Cause. If the Company should terminate Executive's --------------------- employment for Cause, Executive or his legal representative shall not be entitled to any severance or other benefits under this Agreement, all Options shall immediately terminate and the Company shall not waive any rights it may have for damages or for injunctive relief. "Cause" shall mean dishonesty by Executive in the performance of his duties, conviction of a felony (other than a conviction arising solely under a statutory provision imposing criminal liability upon Executive on a per se basis due to the Company offices held by Executive, so long as any act or omission of Executive with respect to such matter was not taken or omitted in contravention of any applicable policy or directive of the Board), gross neglect of duties (other than as a result of Disability, Incapacity or death) rising to the level of deliberate dereliction, conflict of interest, which conflict shall continue for 30 days after the Company gives written notice to Executive requesting the cessation of such conflict, or material breach by Executive of any of the restrictive covenants contained in Sections 6(a) and 6(b) hereof. -4- 6. AGREEMENT NOT TO SOLICIT OR COMPETE; CONFIDENTIALITY. ---------------------------------------------------- a. Nonsolicitation. For a period of one year after the termination of --------------- his employment, Executive shall not under any circumstances employ, solicit the employment of, accept unsolicited the services of or assist any other entity in employing or soliciting the employment of, any Protected Person (as defined below), recommend the employment of any Protected Person to any other business or encourage any Protected Person to terminate his or her employment relationship with the Company. A "Protected Person" shall mean any person who was employed by the Company or its subsidiaries prior to the termination of Executive's employment and is, or during the three months prior to the commencement of conversations with Executive with respect to employment was, employed by the Company or its subsidiaries. b. Noncompetition. During the course of his employment, Executive will -------------- learn trade secrets of the Company and will have access to Confidential Information (as hereinafter defined) and business plans of the Company. Therefore, (i) during the Employment Period, (ii) upon automatic termination of the Employment Period on December 31, 2000, if Executive should terminate his employment voluntarily at any time, or if Executive's employment is terminated for Disability or Incapacity, then for a period of one year after the termination of his employment, or Executive will not, directly or indirectly, engage in, become associated in any manner with, lend his name to or have any financial interest in any Competitive Business (as defined below) anywhere in the world, whether as a contractor, consultant, agent, partner, principal, investor, employee, owner, manager or otherwise. Without limiting the generality of the foregoing, Executive agrees during such period that he shall not, directly or indirectly, solicit or encourage any customer or vendor of the Company to terminate or diminish its relationship with the Company or to conduct with himself or with any other person, organization or other entity any business or activity which such customer or vendor conducts or could conduct with the Company. "Competitive Business" shall mean any line of business in which the Company is at the time engaged or for which the management or the Board of Directors of the Company is at the time actively planning to become engaged. Nothing herein shall prevent Executive from owning not in excess of one percent of any security issued and outstanding listed on a national securities exchange or traded on the Nasdaq National Market. It is agreed and understood that the post-employment Noncompetition period prescribed herein shall be tolled, and shall not run, during any period of time in which Executive is in breach of the provisions of this Section 6(b). -5- c. Confidentiality. Executive acknowledges that during his employment, --------------- he may develop Confidential Information for the Company and may learn Confidential Information developed or owned by the Company or entrusted to it by others. Executive agrees that he will not, during the term of this Agreement or at any time thereafter, other than as required in furthering the best interests of the Company, use or disclose any Confidential Information. "Confidential Information" means any and all information of the Company that is not generally available to the public. Confidential Information includes but is not limited to (i) the Company's development, research and marketing activities, (ii) the Company's products and services, (iii) the Company's costs, sources of supply and strategic plans, (iv) the identity and requirements of the Company's customers, prices charged and services provided and (v) the people and organizations with whom the Company has business relationships and those relationships. Confidential Information also includes such information as the Company may receive or has received belonging to customers or others who do business with it, but shall not include information which is either generally known to the public and/or is required to be disclosed publicly by operation of law or regulation. d. Return of Confidential Information. All Confidential Information ---------------------------------- created by Executive or to which Executive has access and all documents, records and files, in any media of whatever kind and description, relating to the business, present or otherwise, of the Company or containing, based on or reflecting Confidential Information (the "Documents"), whether or not prepared by Executive, shall be the sole and exclusive property of the Company. Executive shall return to the Company immediately after the termination of this Agreement, and at such other times as may be specified by the Company, all Documents and all other property of the Company then in his possession or control. -6- 7. ENFORCEMENT. The parties desire that the provisions of this Agreement ----------- shall be enforced to the fullest extent permissible under the laws and public policies applied to the jurisdiction whose laws govern this Agreement. Accordingly, to the extent that a restriction contained in this Agreement is more restrictive than permitted by the laws of any jurisdiction where this Agreement may be subject to review and interpretation, and in the event that any restriction shall be determined by any court of competent jurisdiction to be unenforceable by reason of its being extended over too great a time, too large a geographic area or too great a range of activities, the terms of such restriction, for the purpose only of the operation of such restriction in such jurisdiction, shall be the maximum restriction allowed by the laws of such jurisdiction and such restriction shall be deemed to have been revised accordingly. 8. REMEDIES. Executive acknowledges that he has carefully read and -------- considered all the terms and conditions of this Agreement, including the restraints imposed upon him pursuant to Section 6 hereof. Executive agrees that said restraints are necessary for the reasonable and proper protection of the Company and that each and every one of the restraints is reasonable in respect to its core subject matter, length of time and geographic area. Executive acknowledges that the provisions of this Agreement are of a special and unique nature, the loss of which cannot be accurately compensated for in damages by an action at law, and that, were he to breach any of the covenants contained in Section 6 hereof, the damage to the Company would be irreparable. The Executive therefore agrees that the Company, in addition to any other remedies available to it, shall be entitled to preliminary and permanent injunctive relief against any breach or threatened breach by the Executive of any of said covenants, without having to post bond, and shall be further entitled to recover from Executive its reasonable attorney's fees and expenses incurred in connection with the enforcement of its rights hereunder should the Company prevail. -7- 9. ASSIGNMENT. The rights and obligations of the Company shall inure to the ---------- benefit of and shall be binding upon the successors and assigns of the Company. The rights and obligations of Executive are not assignable except only that payments payable to him after his death shall be made by devise or descent. 10. NOTICES. All notices and other communications required hereunder shall be ------- in writing and shall be given by mailing the same by certified or registered mail, return receipt requested, postage prepaid. If sent to the Company, the same shall be mailed to the Company at 500 108th Avenue, N.E., Suite 2600, Bellevue, WA 98004, Attention: General Counsel, or other such address as the Company may hereafter designate by notice to Executive; and if sent to Executive, the same shall be mailed to Executive c/o the Company at 500 108th Avenue, N.E., Suite 2600, Bellevue, WA 98004 with a copy to 5700 64/th/ Avenue NE, Seattle, WA 98105, or such other address as Executive may hereafter designate by notice to the Company. 11. WITHHOLDING. Anything to the contrary notwithstanding, all payments ----------- required to be made by the Company hereunder to Executive shall be subject to the withholding of such amounts, if any, relating to tax and other payroll deductions as the Company may reasonably determine it should withhold pursuant to any applicable law or regulation. 12. GOVERNING LAW. This Agreement and the rights and obligations of the ------------- parties hereunder shall be governed by the laws of the State of Washington. 13. CONFLICTING AGREEMENTS. Executive hereby represents and warrants that the ---------------------- execution of this Agreement and the performance of his obligations hereunder will not breach or be in conflict with any other agreement to which Executive is a party or is bound and that the Executive is not now subject to any covenants against competition or similar covenants that would affect the performance of his obligations hereunder. Executive will not disclose to or use on behalf of the Company any proprietary information of a third party without such party's consent. 14. SEVERABILITY. If any portion or provision of this Agreement shall to any ------------ extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. The parties agree to substitute a provision that effects the intent of the invalidated provision as nearly as possible. -8- 15. WAIVER; AMENDMENT. No waiver of any provision hereof shall be effective ----------------- unless made in writing and signed by the waiving party. The failure of either party to require the performance of any term or obligation of this Agreement, or the waiver by either party of any breach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach. This Agreement may be amended or modified only by a written instrument signed by the Executive and by a duly or authorized representative of the Company. 16. HEADINGS; COUNTERPARTS. The headings and captions in this Agreement are ---------------------- for convenience only and in no way define or describe the scope or content of any provision of this Agreement. -9- 17. ENTIRE AGREEMENT. This Agreement represents the entire agreement between ---------------- the parties relating to the terms of Executive's employment by the Company and supersedes all prior written or oral agreements between them. ------------------------------------- Robert S. McCambridge ADVANCED RADIO TELECOM CORP. By: ---------------------------------- Henry C. Hirsch Chairman, CEO & President -10- EX-10.10 7 CONTROL AGREEMENT ROBERT MCCAMBRIDGE EXHIBIT 10.10 ADVANCED RADIO TELECOM CORP. Amended and Restated Change of Control Agreement ------------------------------------------------ AGREEMENT, made this 3rd day of February, 1999 by and between Robert S. McCambridge ("Executive") and ADVANCED RADIO TELECOM CORP. (the "Company"); RECITALS: A. The Board of Directors of the Company (the "Board") recognizes that the possibility of a change in control may exist and that such possibility, and the uncertainty and questions which it may raise among management personnel, may result in the departure or distraction of management personnel to the detriment of the Company and its stockholders; B. The Board has determined that appropriate steps should be taken to reinforce and encourage the continued attention and dedication of members of the Company's management, including Executive, to their duties, to assisting the Board in assessing proposals with respect to a change in control and to advising the Board as to the best interests of the Company and its shareholders with respect to such potential change in control, without distraction and conflict arising from the possibility of a change in control; C. The Board wishes to induce Executive to remain in the employ of the Company and to assure him of fair severance should his employment terminate in specified circumstances following a change of control of the Company. NOW, THEREFORE, in consideration of the promises and the mutual covenants contained herein, the parties hereto agree as follows: 1. If within 24 months following a Change of Control (as defined in Exhibit A) (the "Post Change of Control Period") Executive's employment with the Company is terminated (i) by the Company for any reason (other than for "Cause" or "Disability" (as defined paragraph 4 below) or as a result of Executive's death), or (ii) Executive terminates such employment for Good Reason (as defined in paragraph 4 below): (a) The Company will pay to Executive within five business days of such termination of employment a lump-sum cash payment in an amount equal to the sum of (i) Executive's annual base salary ("Base Salary") at the time of termination through the date of such termination of employment to the extent not theretofore paid, (ii) a prorated portion of Executive's maximum incentive compensation for the fiscal year in which such termination shall occur, calculated by multiplying (A) such incentive compensation times (B) a fraction, the numerator of which is the number of days in the fiscal year through the date of termination of employment, and the denominator of which is 365, (iii) if Executive has not been paid incentive compensation with respect to the fiscal year prior to the year in which such termination occurs and during which Executive was employed by the Company (except where prior to the Change of Control the Board had determined that no such incentive compensation was to be paid to Executive with respect to such prior year), Executive's maximum incentive bonus for such prior fiscal year prorated for the period of his employment by the Company if less than a full year (provided that if any target incentive compensation under (ii) or (iii) was expressed in shares of common stock rather than cash, the Company will pay the cash equivalent of such compensation based on the closing price per share as reported in the Wall Street Journal (Eastern Edition), in the case of the Company's common stock as of the date prior to the date of the Change of Control), and (iv) any accrued and unpaid vacation pay through the date of termination; and (b) Any stock, stock option or other awards granted to Executive by the Company shall immediately vest and, if applicable, become exercisable in full, notwithstanding any provision to the contrary, and shall remain exercisable, if applicable, until the earlier of the fourth anniversary of such termination of employment or the latest date on which such grant could have been exercised, any restrictions on any restricted stock, deferred stock or other awards shall immediately terminate and all such awards shall immediately be vested in full, and any certificates for any deferred stock shall be delivered to Executive no later than five business days following such termination; (c) The Company will pay to Executive within five business days of such termination of employment a lump-sum cash payment in an amount equal to the greater of (i) an amount equal to Executive's aggregate Base Salary and maximum incentive compensation for the period from the date of termination through December 31, 2000 determined as if he had been employed through December 31, 2000 (but without duplication of amounts paid pursuant to Section 1(a) above) or (ii) an amount equal to: (A) the amount of Executive's Base Salary at the rate in effect immediately prior to the date of termination or at the rate in effect immediately prior to the Change of Control, whichever is higher, and (B) the amount of Executive's maximum incentive compensation for the fiscal year during which the termination of employment occurs or the amount of Executive's maximum incentive compensation in effect immediately prior to the Change of Control, whichever is higher (provided that if any such incentive compensation is expressed or was paid in shares of common stock rather than cash, the calculation will be based on, and the Company will pay the cash equivalent of, such compensation based on the closing price per share as reported in the Wall Street Journal (Eastern Edition) in the case of a share of the Company's common stock determined on the date prior to the date of the Change of Control. -2- (d) Executive, together with his dependents, will continue following such termination of employment to participate fully in the life and medical insurance plans maintained or sponsored by the Company immediately prior to the Change of Control on the same basis they participated prior to the Change in Control until the earlier of (i) the second anniversary of such termination or any longer period as may be provided by the terms of such plan or (ii) the date Executive becomes re-employed with another employer and is eligible to receive substantially equivalent life and medical benefits under another employer provided plan, provided that if the continued participation of Executive and his dependents is not possible under the terms of any of such Company plans, the Company shall instead either arrange to provide Executive and his dependents with substantially equivalent benefits or pay to Executive (within five days of the date of termination) an amount equal to the full value thereof in cash; and (e) the Company will promptly reimburse Executive for any and all legal fees and expenses (including, without limitation, stenographer fees and printing costs) incurred by him as a result of such termination of employment, including without limitation all fees and expenses incurred to enforce the provisions of this Agreement or contest or dispute that the termination of his employment is for Cause or other than for Good Reason (regardless of the outcome thereof). Notwithstanding anything herein to the contrary, (i) to the extent that any payment or benefit provided for herein is required to be paid or vested on any earlier date under the terms of any plan, agreement or arrangement, such plan, agreement or arrangement shall control; and (ii) if the Company terminates Executive's employment for a reason other than Cause prior to the date upon which the Change of Control occurs, and Executive reasonably demonstrates that such termination of employment (x) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (y) otherwise arose in connection with or in anticipation of a Change of Control, then for all purposes of this Agreement, Executive shall be entitled to the benefits provides in Section 1 above. To avert duplication of benefits, if Executive receives any payment of Base Salary, incentive compensation or severance other than under this Agreement ("Other Termination Payments") upon the termination of his employment with the Company, the amount of such payments shall be deducted from the amount paid under this Agreement and the benefits to be provided hereunder shall be provided only to the extent additional to the benefits to be provided other than under this Agreement; provided, however, that neither this paragraph nor the provisions of any other agreement shall be interpreted to reduce the amount payable to Executive below the amount that would otherwise have been payable under this Agreement if such Other Termination Payments had not been made. -3- 2. Death, Disability, Cause, Other Than For Good Reason (a) If Executive's employment shall terminate during the Post Change of Control Period by reason of Executive's death, this Agreement shall terminate without further obligations to Executive's legal representatives under this Agreement. (b) If Executive's employment is terminated during the Post Change of Control Period by reason of Executive's Disability, this Agreement shall terminate without further obligations to Executive. For purposes of this Agreement, "Disability" shall have the meaning given in the Company's long-term disability plan defining the date and conditions for which Executive is entitled to receive long-term disability compensation pursuant to such long-term disability plan. If the Company determines in good faith that the Disability of Executive has occurred during the Post Change of Control Period, it may give Executive written notice of its intention to terminate Executive's employment. In such event, Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by Executive, provided that, within the 30 days of such receipt, Executive shall not have returned to full-time performance of Executive's duties. (c) If Executive's employment shall be terminated for Cause (as defined in Section 4 below) during the Post Change of Control Period, this Agreement shall terminate without further obligations to Executive other than the obligation to pay Executive (A) his Base Salary through the date of termination and (B) Other Benefits, in each case to the extent theretofore unpaid. (d) If Executive voluntarily terminates employment during the Post Change of Control Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to Executive. 3. "Cause" means only: (a) commission of a felony or gross neglect of duty by Executive rising to the level of deliberate dereliction, (b) conviction of a crime involving moral turpitude, or (c) willful failure by Executive in the performance of his duties to the Company which failure is deliberate on Executive's part, results in material injury to the Company, and continues for more than 30 days after written notice given to Executive pursuant to a two- thirds vote of all of the members of the Board at a meeting called and held for such purpose (after reasonable notice to Executive) and at which meeting Executive and his counsel were given an opportunity to be heard, such vote to set forth in reasonable detail the nature of the failure. For purposes of this definition of Cause, no act or omission shall be considered to have been "willful" unless it was not in good faith and Executive had knowledge at the time that the act or omission was not in the best interest of the Company. Any act or failure to act based on authority given -4- pursuant to a resolution duly adopted by the Board or based on the advice of counsel of the Company shall be conclusively presumed to be done, or omitted to be done, by Executive in good faith and in the best interest of the Company. Cause shall not include willful failure due to incapacity resulting from physical or mental illness or any actual or anticipated failure after Notice of Termination for Good Reason. 4. Executive shall be deemed to have voluntarily terminated his employment for Good Reason if Executive leaves the employ of the Company for any reason following: (a) The assignment to Executive of any duties inconsistent in any respect with Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities immediately prior to the Change of Control; or the diminution or adverse alteration in any material adverse respect of such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Executive; (b) Any reduction in Executive's rate of Base Salary for any fiscal year to less than 100% of the rate of Base Salary payable for the fiscal year immediately preceding the Change of Control or of the Base Salary provided for such fiscal year in any agreement between Executive and the Company, or reduction in Executive's total cash and stock compensation opportunities, including Base Salary and incentives, for any fiscal year to less than 100% of the total cash and stock compensation opportunities made available to him immediately preceding the Change of Control for the then current fiscal year or of the total cash and stock compensation opportunities which were to be made available to him for the fiscal year pursuant to any agreement between Executive and the Company (for this purpose, such opportunities shall be deemed reduced if the objective standards by which Executive's incentive compensation measured becomes more stringent, the target or maximum amounts of such incentive compensation are reduced, or the amount of such incentive compensation is reduced on a discretionary basis from the amount that would be payable solely by reference to the objectives); or (c) Failure of the Company to continue in effect any retirement, life, medical, dental, disability accidental death or travel insurance plan or other benefit plan or practice, in which Executive was participating immediately prior to the Change of Control unless the Company provides Executive with a plan or plans or practices that provide substantially similar benefits, or the taking of any action by the Company that would adversely affect Executive's participation in or materially reduce Executive's benefits under any of such -5- plans or practices or deprive Executive of any material fringe benefit enjoyed by Executive immediately prior to the Change of Control other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Executive; or (d) The Company requires Executive to be based at any office or location further than 40 miles from the City of Bellevue, or the Company requires Executive to travel on Company business to a substantially greater extent than required immediately prior to the date of the Change of Control; or (e) Any failure by the Company to comply with and satisfy Section 6 of this Agreement. Executive's right to terminate his employment pursuant to this section shall not be affected by his incapacity due to physical or mental illness. Executive's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstances constituting Good Reason hereunder. 5. In the case of any dispute under this Agreement, Executive may initiate binding arbitration in Seattle, Washington before the American Arbitration Association by serving a notice to arbitrate upon the Company or, at Executive's election, institute judicial proceedings. The Company shall not have the right to initiate binding arbitration, and agrees that upon the initiation of binding arbitration by Executive pursuant to this paragraph 5 the Company shall cause to be dismissed any judicial proceedings it has brought against Executive relating to this Agreement. The Company authorizes Executive from time to time to retain counsel of his choice to represent Executive in connection with any and all actions, proceedings, and/or arbitration, whether by or against the Company or any director, officer, shareholder, or other person affiliated with the Company, which may affect Executive's rights under this Agreement. Company agrees to (i) pay the fees and expenses of such counsel, (ii) to pay the cost of such arbitration and/or judicial proceeding, and (iii) pay interest to Executive on all amounts owed to Executive under this Agreement during any period of time that such amounts are withheld pending arbitration and/or judicial proceedings. Such interest will be at the base rate as announced from time to time by Canadian Imperial Bank of Commerce. In addition, notwithstanding any existing or prior attorney-client relationship between the Company and counsel retained by Executive, the Company irrevocably consents to Executive entering into an attorney-client relationship with such counsel and agrees that a confidential relationship shall exist between Executive and such counsel. 6. If the Company is at any time before or after a Change of Control merged or consolidated into or with any other corporation or other entity (whether or not the Company is the surviving entity), or if substantially all of the assets thereof are transferred to another corporation -6- or other entity, the provisions of this Agreement will be binding upon and inure to the benefit of the corporation or other entity resulting from such merger or consolidation or the acquirer of such assets (the "Successor Entity"), and this paragraph 6 will apply in the event of any subsequent merger or consolidation or transfer of assets. The Company will require any such Successor Entity to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such transaction had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any Successor Entity which assumes and agrees to perform this Agreement by operation of law or otherwise. In the event of any merger, consolidation, or sale of assets described above, nothing contained in this Agreement will detract from or otherwise limit Executive's right to or privilege of participation in any stock option or purchase plan or any bonus, profit sharing, pension, group insurance, hospitalization, or other incentive or benefit plan or arrangement which may be or become applicable to executives of the corporation resulting from such merger or consolidation or the corporation acquiring such assets of the Company. In the event of any merger, consolidation, or sale of assets described above, references to the Company in this Agreement shall unless the context suggests otherwise be deemed to include the entity resulting from such merger or consolidation or the acquiror of such assets of the Company. 7. Any termination by the Company for Cause, or by Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with the last paragraph of Section 12 of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice that (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of Executive or the Company, respectively, hereunder or preclude Executive or the Company, respectively, from asserting such fact or circumstance in enforcing Executive's or the Company's rights hereunder. "Date of Termination" means (i) if Executive's employment is terminated by the Company for Cause, or by Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies Executive of such termination and (iii) if Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of Executive or the effective date of the Disability, as the case may be. -7- 8. All payments required to be made by the Company hereunder to Executive or his dependents, beneficiaries, or estate will be subject to the withholding of such amounts relating to tax and/or other payroll deductions as may be required by law. In the event that it is determined that any payment or benefit provided by the Company to or for the benefit of Executive, either under this Agreement or otherwise, will be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code or any successor provision(s) ("Section 4999"), the Company will, prior to the date on which any amount of the excise tax must be paid or withheld, make an additional lump-sum payment (the "Gross-up Payment") to Executive in an amount sufficient, after giving effect to all federal, state and other taxes and charges (including interest and penalties, if any) with respect to the gross-up payment, to make Executive whole for all taxes (including withholding taxes) and any associated interest and penalties, imposed under or as a result of Section 4999. Determinations under this Section 8 will be made by Coopers & Lybrand unless Executive has reasonable objections to the use of that firm, in which case the determinations will be made by a comparable firm chosen by Executive after consultation with the Company (the firm making the determinations to be referred to as the "Firm"). The determinations of the Firm will be binding upon the Company and Executive except as the determinations are established in resolution (including by settlement) of a controversy with the Internal Revenue Service to have been incorrect. All fees and expenses of the Firm will be paid by the Company. If the Internal Revenue Service asserts a claim that, if successful, would require the Company to make a Gross-up Payment or an additional Gross-up Payment, the Company and Executive will cooperate fully in resolving the controversy with the Internal Revenue Service. The Company will make or advance such Gross-up Payments as are necessary to prevent Executive from having to bear the cost of payments made to the Internal Revenue Service in the course of, or as a result of, the controversy. The Firm will determine the amount of such Gross-up Payments or advances and will determine after final resolution of the controversy whether any advances must be returned by Executive to the Company. The Company will bear all expenses of the controversy and will gross Executive up for any additional taxes that may be imposed upon Executive as a result of its payment of such expenses. 9. There shall be no requirement on the part of Executive to seek other employment or otherwise mitigate damages in order to be entitled to the full amount of any payments and benefits to which Executive is entitled under this Agreement, and the amount of such payments and benefits shall not be reduced by any compensation or benefits received by Executive from other employment other than with respect to certain welfare benefits as provided in the first proviso to Section 1(d). -8- 10. Nothing contained in this Agreement shall be construed as a contract of employment between Company and Executive, or as a right of Executive to continue in the employ of Company, or as a limitation of the right of Company to discharge Executive with or without Cause; provided that Executive shall have the right to receive upon termination of his employment the payments and benefits provided in this Agreement and shall not be deemed to have waived any rights he may have either at law or in equity in respect of such discharge. 11. No amendment, change, or modification of this Agreement may be made except in writing, signed by both parties. This agreement amends and restates in its entirety the Change of Control Agreement between the parties, dated October 16, 1998. 12. This Agreement shall terminate on December 31, 2000, provided, however, that commencing on December 31, 1999 and on each annual anniversary of such date (each such date hereinafter referred to as a "Renewal Date"), unless previously terminated, the term of this Agreement shall be automatically extended so as to terminate three years from such Renewal Date, unless at least sixty days prior to the Renewal Date the Company shall give notice to Executive that the term of this Agreement shall not be so extended. This Agreement shall not apply to a Change of Control which takes place after the termination of this Agreement. The provisions of this Agreement shall be binding upon and shall inure to the benefit of Executive, his executors, administrators, legal representatives and assigns, and the Company and its successors. The validity, interpretation, and effect of this Agreement shall be governed by the laws of the State of Washington. Any ambiguities in this Agreement shall be construed in favor of Executive. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. The Company shall have no right of set-off or counterclaims, in respect of any claim, debt, or obligation, against any payments to Executive, his dependents, beneficiaries, or estate provided for in this Agreement. No right or interest to or in any payments shall be assignable by Executive; provided, however, that this provision shall not preclude him from -------- designating one or more beneficiaries to receive any amount that may be payable after his death and shall not preclude the legal representative of his estate from assigning any right hereunder to the person or persons entitled thereto under his will or, in the case of intestacy, to the person or persons entitled thereto under the laws of intestacy applicable to his estate. The term "beneficiaries" as used in this Agreement shall mean a beneficiary or beneficiaries so designated to receive any such amount, or if no beneficiary has been so designated, the legal representative of Executive's estate. -9- No right, benefit, or interest hereunder, shall be subject to anticipation, alienation, sale, assignment, encumbrance, charge, pledge, hypothecation or set- off in respect of any claim, debt or obligation, or to execution, attachment, levy or similar process, or assignment by operation of law. Any attempt, voluntary or involuntary, to effect any action specified in the immediately preceding sentence shall, to the full extent permitted by law, be null, void, and of no effect. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to Executive: Robert S. McCambridge --------------- 5700 64/th/ Avenue N.E. Seattle, WA 98105 If to the Company: Advanced Radio Telecom Corp. ----------------- 500 108th Avenue, N.E. Suite 2600 Bellevue, WA 98004 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. IN WITNESS WHEREOF, the Company and Executive have each caused this Agreement to be duly executed and delivered as of the date set forth above. ADVANCED RADIO TELECOM CORP. By: ------------------------------ ------------------------------ Robert S. McCambridge -10- EXHIBIT A Change of Control. For the purposes of this Agreement, a "Change of ----------------- Control" shall mean: (a) The acquisition by any person, corporation, partnership, limited liability company or other entity (a "Person", which term shall include a group within the meaning of section 13(d) of the Securities Exchange Act of 1934 (the "Exchange Act")) of ultimate beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act), directly or indirectly of 30% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any such acquisition directly from the Company, except for acquisition of securities upon conversion of other securities of the Company (ii) any such acquisition by the Company, (iii) any such acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any such acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Exhibit A; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election, by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company in one or a series of transactions (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the -11- Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, immediately following such Business Combination more than 50% of, respectively, the outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) ultimately beneficially owns, directly or indirectly, 30% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. -12- EX-21 8 SUBSIDIARIES OF THE COMPANY EXHIBIT 21 Subsidiaries of Advanced Radio Telecom Corp. --------------------------------------------
Name Jurisdiction Percent Ownership - ---- ------------ ------------------ ART Leasing, Inc. Delaware 100% ART Licensing Corp. Delaware 100% DCT Communications, Inc. California 100% Advanced Radio Telecom International, B.V. Netherlands 100% Advanced Radio Telecom Ltd. U.K. 100%* Advanced Radio Telcom Nordic A.B. Sweden 100%* ART Italia s.r.l. Italy 95% Advanced Radio Telecom (Ireland) Limited Ireland 100%**
- ------------ * Advanced Radio Telecom Ltd. and Advanced Radio Telecom Nordic A.B. are both wholly-owned subsidiaries of Advanced Radio Telecom International, B.V. ** Advanced Radio Telecom (Ireland) Limited is a wholly-owned subsidiary of Advanced Radio Telecom Limited. EX-23 9 CONSENT OF PRICEWATERHOUSECOOPERS EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Advanced Radio Telecom Corp. on Form S-8 (File No. 333-21875), Form S-4 (File No. 333-33689), Form S-4 (File No. 333-50083), and Form S-3 (File No. 333-31453) of our report dated March 29, 1999, on our audits of the consolidated financial statements of Advanced Radio Telecom Corp. and Subsidiaries as of December 31, 1998 and 1997, and for the three years ended December 31, 1998, which report is included in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP Seattle, Washington April 14, 1999 EX-27 10 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 11,864,218 18,504,263 125,976 0 0 31,207,985 31,852,621 5,026,307 259,345,295 34,138,413 107,463,638 0 0 26,707 75,952,217 259,345,295 840,822 840,822 0 43,352,746 1,498,877 0 18,480,117 (62,490,918) 9,132,237 (53,358,681) 0 0 0 (53,358,681) (2.14) (2.14) NET OF INTEREST INCOME OF $2,693,257
EX-99 11 RISK FACTORS 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 implied 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 a limited operating history. It commenced commercial operations in November 1996 as a provider of wireless broadband capacity to communications providers on a wholesale "carriers'-carrier" basis. In March 1998, ART adopted a new business strategy of providing wireless broadband Internet services to business customers without fiber connectivity. 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 net losses of $47.0 million in 1998 and an accumulated deficit of $142.8 million at the end of 1998. In light of the Company's brief operating history and change of strategy, there is limited data about the Company upon which to evaluate its 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, raise adequate additional capital when required, attract and retain an adequate customer base, acquire adequate access rights for its network, deploy and commercialize its network, attract and retain experienced and talented personnel and establish strategic business relationships. Significant Capital Requirements; Need to Refinance Indebtedness; Need for Additional Financings. The Company will be required to seek significant additional capital in the second quarter of 1999 to fund its operations and business plan. The Company has limited financial resources, has incurred recurring losses from operations since inception and does not expect to generate significant operating revenues in the near term. The Company's ability to continue as a going concern at least through December 31, 1999, which includes funding of its operations and business plan, the repayment of the $25 million working capital facility and funding of its contractual commitments, is dependent upon its ability to raise additional financing. The Company has engaged investment bankers to assist it in obtaining financing and is in negotiations with potential investors to provide equity financing. However, there can be no assurance that the Company will be successful in its efforts to obtain such financing, or, if it obtains such financing, that such financing will be on acceptable terms. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The Company and Lucent have entered into a credit facility (the "Working Capital Facility") for Lucent Technologies, Inc. ("Lucent") to provide the Company with up to $25 million of unsecured revolving loans for working capital purposes. As of December 31, 1998, the Company had drawn $17.5 million under the Working Capital Facility and subsequent to December 31, 1998 has drawn the remaining $7.5. Loans made pursuant to the Working Capital Facility are due June 30, 1999, unless extended by Lucent to no later than September 17, 1999. There can be no assurance that Lucent will extend such loans beyond June 30, 1999, or that the Company will be able to obtain debt or equity financing to refinance such indebtedness, or, if it obtains such financing, that such financing will be on acceptable terms. In addition, the Company currently estimates that it will require in excess of $1 billion over the next several years for capital expenditures, working capital and funding operating losses. Failure to access capital on acceptable terms or delays in obtaining such financing could result in the modification, delay or abandonment of some or all of the Company's business plan. Any such modification, delay or abandonment could have a material adverse effect on the Company. The Company has entered into a purchase money credit facility (the "Purchase Money Facility") with Lucent setting forth terms and conditions under which Lucent will provide purchase money financing in an aggregate amount of up to $200 million, to be used to finance the purchase of the Company's data network from Lucent. Availability of all but $10 million on these loans is subject to the Company's raising at least $50 million of certain debt or equity capital and repayment of the $25 million Working Capital Facility. Under the Purchase Money Facility, Lucent will make available purchase money loans equal to up to 200% of the aggregate capital raised, not to exceed $200 million. There can be no assurance that the Company will be able to obtain the financing contemplated by the Purchase Money Facility. Risks Related to Strategy. The Company is pursuing a strategy to become the leading provider of broadband Internet services to business customers without fiber connectivity. The Company has limited experience in providing these services, and there can be no assurance that it will successfully implement its strategy. The Company has limited experience in deploying, operating and maintaining a broadband data network. There can be no assurance that the Company will effectively deploy, operate or maintain such facilities. Further, there can be no assurance that the broadband data network deployed by the Company will provide the expected functionality. Furthermore, the Company's strategy is subject to risks relating to the negotiation and implementation of necessary strategic business relationships with third parties, the development of value-added products and services, the ability of Lucent and the Company to design, provision and deploy the Company's network on schedule, the recruitment of experienced and talented personnel in a timely manner, the Company's ability to attract and retain customers, and the Company's ability to manage the rapid implementation of its plan in multiple markets. In addition, the Company is subject to the risk or unforseen problems inherent in being a new entrant in a rapidly evolving industry. There is significant risk relating to the market's acceptance of the Company's wireless broadband Internet services. The Company and other providers have only recently begun to market fixed wireless services, and the Company believes it is currently the only fixed wireless broadband provider focusing on providing Internet services rather than voice telephony. The provision of such services represents an emerging sector of the telecommunications industry, and the demand for such services is uncertain. 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, the lack of market history of operational fixed wireless services and the possible desire of customers to acquire telecommunications services from a single provider. The Company anticipates that a substantial investment in sales and marketing will be required to reach its target customers and to create demand for the Company's wireless broadband date services. There can be no assurance that a substantial market will develop for fixed wireless broadband Internet services, that sufficient customers will be willing to purchase such services, 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. Furthermore, 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 and narrowband Internet services, general and local economic conditions, changes in products and technology, and the potential impact of government regulation on the Company's services. The extent of the potential demand for the Company's broadband wireless Internet services cannot be estimated with certainty. Insufficient acceptance of the Company's services due to one or more of these factors or from other factors, would have a negative impact on the Company's results of operations and its financial condition. Substantial Leverage; Ability to Service Indebtedness. The Company is highly leveraged. The Company expects to incur substantial additional debt to finance its business plan. Accordingly, (i) a substantial portion of the -2- Company's cash flow from operations will be required to pay interest with respect to its outstanding 14% Senior Notes due 2007 (the "Senior Notes") commencing in August 2000, with respect to the anticipated Lucent Financing commencing in June 2003 and with respect to any additional indebtedness incurred by the Company, (ii) the Company's flexibility may be limited in responding to changes in the industry and economic conditions generally; (iii) the failure to comply with the numerous financial and other restrictive covenants of such debt may result in an event of default, which, if not cured or waived, could have a material adverse effect on the Company; (iv) the ability of the Company to satisfy its obligations pursuant to such indebtedness is dependent upon its future performance which, in turn, is subject to management, financial, business and other factors affecting the business and operations of the Company; (v) the Company's ability to obtain any necessary financing in the future may be limited; (vi) the Company may be more highly leveraged than many of its competitors, which may put it at a competitive disadvantage; and (vii) the Company's leverage may make it more vulnerable in the event of an economic downturn. 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. Any failure to meet required interest and principal payments would materially and adversely affect the Company's business and results of operations. Reliance on Lucent; Lucent Agreements. The Company and Lucent have entered into an Amended and Restated Purchase Agreement (the "Lucent Purchase Agreement") under which Lucent will provide a nationwide integrated network and will deploy its personnel to deploy and maintain ART's network. Pursuant to the Lucent Agreements, the Company has engaged Lucent to design, engineer, equip, install, construct, test and service the Company's nationwide network. Any failure or inability by Lucent to perform these functions could cause delays or additional costs in providing services to customers and building out the Company's network in specific markets. Any such failure could materially and adversely affect the Company's business and results of operations. 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 the Company 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 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 focusing exclusively on offering broadband Internet services to business customers without fiber connectivity, 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 local exchange carriers ("LECs"), fiber and wireless service providers and cable television operators. The Company's competitors also include providers of services which are in competition with the Company's product offerings, such as Internet service providers ("ISPs"). Moreover, the recent and pending auctions of spectrum capable of supporting comparable services may facilitate the introduction or expansion of competition from other -3- competitors. In addition, many other companies have filed applications with the FCC to develop global broadband satellite systems which may be used to provide broadband voice and data services. 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 broadband Internet services and has only recently begun to pursue customers with the goal of becoming the leading provider of broadband Internet services to businesses without fiber connectivity. To date, the Company does not have significant market share in any of the markets in which it is operating. Given the intense competition in the market for broadband data services, there can be no assurance that the Company will achieve significant market share in any market. Need for Technological Development. Although the Company is initially deploying its network utilizing fixed wireless point-to-point technology which has been commercially deployed for a period of time, the Company plans to utilize point-to-multipoint technology in its networks as soon as it becomes commercially available. The expected 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 should make 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 Asynchronous Transfer Mode ("ATM") switching gear and other components of the Company's network, or provide the advantages expected by the Company. Unanticipated difficulties or delays in deploying point-to-multipoint technology or failure of point-to-multipoint technology to yield the expected benefits could adversely affect the Company's network costs, profitability and results of operations. 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 broadband Internet 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 Internet 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 with which it may compete, (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 Internet 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. Fixed Wireless 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 engineering changes may increase the cost of providing service. The Company primarily installs its transceivers and antennas on rooftops of building 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 -4- 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 buildings, 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. Importance of Third-Party Relationships. In addition to its relationship with Lucent, 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. Management of Growth. The Company is pursuing a business plan that, if successfully implemented, will result in rapid growth, expansion of operations and 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. Failure to successfully manage expansion could materially adversely affect the Company's business, financial condition and results of operations. The billing, provisioning, customer service, network management and other "back office" systems with the functionality that the Company plans to offer 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 developing and implementing such systems may have a negative impact on the Company's ability to offer the efficiency and functionality expected to be provided by these systems and accordingly on the implementation of the Company's business plan. 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 personnel 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 a 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 at a reasonable cost, if at all. The failure to attract and retain such personnel at reasonable costs could have a material adverse effect on the business. Equipment Failure and Interruption of Service. The Company's operations will require that its network, including leased fiber-optic connections, operates on a continuous basis. It is not unusual for networks including -5- switching facilities to experience periodic service interruption and equipment failures. It is therefore possible that the network and facilities utilized by the Company may from time to time experience service interruptions or equipment failures, which would adversely affect consumer confidence as well as the Company's business operations and reputation. 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. 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 the Company's licenses to automatic forfeiture or, depending on the violation, to other FCC sanctions. The Company's FCC licenses are due to expire in February of 2001. To renew its FCC licenses, the Company is required to demonstrate that it is providing substantial service within the authorized area covered by that license. 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. Under the FCC's rules, the Company is also subject to certain build-out requirements. The Company must construct facilities to place each licensed 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 licensed market area. Failure to meet the construction deadline results in the automatic cancellation of the license. In addition, if a station does not transmit operational traffic (as opposed to 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 cancellation or forfeiture, absent a waiver of the FCC's rules. The Company's wireless licenses are integral assets of the Company, the value of which will depend significantly upon the success of the Company's wireless data services operations and the future direction of the wireless segment of the telecommunications industry. The value of licenses to provide wireless services also may be affected by fluctuations in supply and demand for such licenses and by valuations placed on such licenses in any current or future auctions of spectrum, such as the FCC's recently-completed auction of spectrum in the 28 GHz band. 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 and municipal regulatory approval, and are subject to restrictions and limitations on the identity, background, legal and financial qualification, 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. Acquisition of Additional Bandwidth in Selected Areas. The Company believes the licenses it owns, manages, or has the right to acquire or use are sufficient to fully implement its business plan. However, the Company may seek to acquire or manage 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 substantial -6- interest have applied or may apply for such licenses in various other countries. There can be no assurance that such licenses will be granted or exploited in any way. Year 2000 Risk. Many existing computer programs use only two digits, rather than four, to represent a year. Date-sensitive software or hardware written or developed in this fashion may not be able to distinguish between 1900 and 2000, and programs written in this manner that perform arithmetic operations, comparisons or sorting of date fields may yield incorrect results when processing a Year 2000 date. This Year 2000 problem could potentially cause system failures or miscalculations that could disrupt operations. Although the Company has completed a survey of financial and information technology systems and non-IT systems in the first quarter of 1999 and expects to complete all remediation efforts by the end of the third quarter 1999, there can be no assurance that all Year 2000 problems have been successfully identified, or that the necessary corrective actions will be completed in a timely manner. Failure to successfully identify and remediate such Year 2000 problems in a timely manner could have a material adverse effect on the Company's results of operations, financial position or cash flow. In addition, the Company believes that there is a risk relating to significant service suppliers' failure to remediate their Year 2000 issues in a timely manner. The Company relies on third-party suppliers to deliver fiber telecommunications links, Internet access, network equipment, banking services and payroll services. Although the Company is communicating with its suppliers regarding the Year 2000 problem, the Company does not know whether these suppliers' systems will be Year 2000 compliant in a timely manner. Like most telecommunications providers, the Company's ability to provide service is dependent on key suppliers and equipment vendors. If one or more significant supplier is not Year 2000 compliant, this could have a material adverse effect on the Company's results of operations, financial position or cash flow. -7- -----END PRIVACY-ENHANCED MESSAGE-----