-----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, J27uxbZIHu3BJ5aAFqOOKeUYfqoPnbV50UpF23oqP5i87Iau8w3bmRxDx5TtjNWR apUW4UEmgj18HYwgmrWPNQ== 0001008614-99-000004.txt : 19990517 0001008614-99-000004.hdr.sgml : 19990517 ACCESSION NUMBER: 0001008614-99-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AERIAL COMMUNICATIONS INC CENTRAL INDEX KEY: 0001008614 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 391706857 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-28262 FILM NUMBER: 99623324 BUSINESS ADDRESS: STREET 1: 8410 WEST BRYN MAWR AVE STREET 2: STE 1100 CITY: CHICAGO STATE: IL ZIP: 60631 BUSINESS PHONE: 3123994200 MAIL ADDRESS: STREET 1: 8410 WEST BRYN MAWR AVE STREET 2: STE 1100 CITY: CHICAGO STATE: IL ZIP: 60631-3486 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN PORTABLE TELECOM INC DATE OF NAME CHANGE: 19960221 10-Q 1 FORM 10-Q - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 ------------------------------------------------- OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------------- ------------------------ Commission File Number 0-28262 - -------------------------------------------------------------------------------- AERIAL COMMUNICATIONS, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 39-1706857 - ------------------------------- ---------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 8410 West Bryn Mawr, Suite 1100, Chicago, Illinois 60631 -------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (773) 399-4200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at April 30, 1999 --------------------------- ----------------------------- Common Shares, $1 par value 31,908,297 Shares Series A Common Shares, $1 par value 40,000,000 Shares - -------------------------------------------------------------------------------- AERIAL COMMUNICATIONS, INC. --------------------------- 1st QUARTER REPORT ON FORM 10Q ------------------------------ INDEX ----- Page No. -------- Part I. Financial Information Management's Discussion and Analysis of Results of Operations and Financial Condition 2-11 Consolidated Statements of Operations - Three Months Ended March 31, 1999 and 1998 12 Consolidated Statements of Cash Flows - Three Months Ended March 31, 1999 and 1998 13 Consolidated Balance Sheets - March 31, 1999 and December 31, 1998 14 Notes to Consolidated Financial Statements 15-17 Part II. Other Information 18 Signatures 19 PART I. FINANCIAL INFORMATION ----------------------------- AERIAL COMMUNICATIONS, INC. ----------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS ------------------------------------------------------------- AND FINANCIAL CONDITION ----------------------- RESULTS OF OPERATIONS - --------------------- Aerial Communications, Inc. ("Aerial" or the "Company" - NASDAQ symbol: AERL), an 82.2%- owned subsidiary of Telephone and Data Systems, Inc. ("TDS"), was formed to acquire Personal Communications Services ("PCS") licenses from the Federal Communications Commission ("FCC"), construct PCS networks in its Major Trading Areas ("MTAs") and offer wireless PCS communications services in these areas. The Company provides PCS service in Minneapolis, Tampa-St. Petersburg-Orlando, Houston, Pittsburgh, Kansas City and Columbus (Ohio). Following is a table of summarized operating data for the Company's consolidated operations.
As of March 31, 1999 1998 - --------------- ---- ---- Total MTA population (in millions) 27.7 27.6 Customers 331,600 166,000 Average revenue per customer (year to date) $ 46 $ 57 MTA penetration 1.20% 0.60% Cell sites in service 1,180 1,118 Total number of employees 1,783 1,399
In December 1998, TDS announced that it was pursuing a tax free spin-off of its 82.2% interest in Aerial, as well as reviewing other alternatives. See Proposed TDS Corporate Restructuring for further discussion of the spin-off. Three Months Ended 3/31/99 Compared to Three Months Ended 3/31/98 Operating Revenues - ------------------ Operating revenues totaled $50.5 million in 1999, an increase of $19.8 million as compared to 1998. The increase in operating revenues reflects the growth of the Company's customer base in the past year as the Company has added over 165,000 customers since March 31, 1998. Service revenue totaled $44.1 million in 1999, an increase of $20.0 million as compared to 1998. Service revenue primarily consists of charges for access, airtime and value-added services provided to the Company's customers who use the network operated by the Company (local service revenue). Service revenue also consists of charges to customers of other wireless carriers who use the Company's PCS network when roaming (outcollect roaming revenue) and charges for long-distance calls made on the Company's systems (long-distance revenue). The increase in 1999 service revenue was driven by the growth in the number of customers using 2 the Company's PCS network during 1999 as compared to 1998 partially offset by a decline in average revenue per customer per month ("ARPU"). The Company's ARPU was $46 for the three months ended March 31, 1999 as compared to $57 for the same period in 1998. The decline in ARPU reflects the addition of more moderate wireless users to the Company's customer base. Equipment sales revenue totaled $6.4 million in 1999, a decrease of $0.2 million as compared to 1998. Equipment sales represents the sale of handsets and related accessories to retailers, independent agents, and end user customers. The decrease in equipment sales revenue is due primarily to a decline in handset sales prices partially offset by an increase in the number of handsets sold in 1999 as compared to 1998. Operating Expenses - ------------------ Operating expenses totaled $100.4 million in 1999, an increase of $0.3 million as compared to 1998. Operating expenses increased across most functional areas due to the Company's increased level of business activity during the first quarter of 1999 as compared to 1998, substantially offset by a decrease in cost of equipment sold. System operations expense totaled $20.4 million in 1999, an increase of $5.0 million as compared to 1998. System maintenance expenses increased $4.3 million, primarily for maintenance service performed on the Company's PCS network. The Company began incurring charges for these services during the second half of 1998. Other significant system operations expenses include salaries and employee related-expenses which increased $1.4 million, primarily reflecting an increase in engineering and maintenance personnel in 1999 as compared to 1998. Other systems operations expenses such as property tax expense, consulting expense and utility expense increased $1.3 million in aggregate. System operations expense also includes cell site rent expense, customer usage expense and net roamer expense which decreased $2.0 million in aggregate. Marketing and selling expense totaled $20.1 million in 1999, an increase of $2.6 million as compared to 1998. The increase in sales and marketing expense is due primarily to increases in commissions expense, retail store repair and maintenance expenses, rent expense and sales promotion and research expenses. Increases in these expense areas were partially offset by a decrease in advertising expense. Customer service expense totaled $9.9 million in 1999, a decrease of $1.0 million as compared to 1998. With the completion of the Kansas City customer service center in 1998, the Company has replaced most of its temporary customer service employees with permanent employees. As a result, salaries and other employee related expenses increased $1.6 million while consulting and temporary service expense decreased $1.0 million. Customer service expense also includes bad debt expense which decreased $1.6 million in 1999 as compared to 1998. 3 Cost of equipment sold totaled $12.4 million in 1999, a decrease of $10.4 million as compared to 1998. The decrease reflects a significant decline in handset cost per unit, partially offset by an increase in handsets sold. General and administrative expense totaled $15.9 million in 1999, an increase of $2.0 million as compared to 1998. General and administrative expenses include the costs of operating the Company's local business offices and its corporate expenses other than the corporate engineering and marketing departments. Salaries and other employee related expenses were the primary reason for the change, reflecting an increase in personnel since March 31, 1998. Depreciation expense was $19.9 million in 1999, an increase of $2.1 million as compared to 1998. The increase is due to an increase in the Company's fixed asset balances. As of March 31, 1999, the Company had $720.1 million of property and equipment in service as compared to March 31, 1998, when the Company had $652.6 million of property and equipment in service. Operating (Loss) - ---------------- Operating (Loss) totaled $(49.8) million in 1999, a decrease of $19.5 million as compared to 1998, largely as a result of the increase in operating revenues in 1999. Although service revenues are expected to continue to grow during the remainder of 1999 as the Company builds its customer base, the Company expects to continue to have operating losses and to generate negative cash flow at least through 1999 as it incurs costs associated with that growth. Investment and Other Income (Expense) - ------------------------------------- Investment and Other Income (Expense) totaled $(8.7) million in 1999, a decrease of $9.7 million as compared to 1998. The decrease is primarily due to the allocation of $8.0 million of the consolidated net income of Aerial Operating Company, Inc. ("AOC") to the Company's minority investor (See Note 5 - Minority Interest). AOC recorded net income in the first quarter of 1999 as a result of the income tax benefit generated by the $114.5 million received from TDS related to the tax settlement agreement (see Income Taxes below). The remainder of the decrease in investment and other income (expense) is primarily due to professional fees of $1.1 million associated with the proposed spin-off of the Company (See Note 8-Proposed TDS Corporate Restructuring) which are included in other (expense) in 1999. Interest and Income Taxes - ------------------------- Interest expense-affiliate totaled $17.0 million in 1999, an increase of $3.4 million as compared to 1998. In 1999, interest expense-affiliate represents interest on amounts borrowed under the Revolving Credit Agreement with TDS and the 3% guarantee fees associated with the Series A and Series B Zero Coupon Notes and the Nokia 1998 Credit Agreement. The average balance of borrowings under the Revolving Credit Agreement was greater in 1999 as compared to 1998, resulting in greater interest expense. Interest expense-other totaled $5.0 million in 1999, an increase of $0.9 million as compared to 1998. In 1999, Interest expense-other relates to interest expense accreted on the Series A and Series B Zero Coupon Notes, as well as interest expense related to the Nokia 1998 Credit 4 Agreement. The average outstanding balance of long-term debt was greater in 1999 as compared to 1998, resulting in greater interest expense. Income taxes. The Company is included in a consolidated federal tax return with other members of the TDS consolidated group. For financial reporting purposes, the Company computes its federal income taxes as if it were filing a separate return as its own affiliated group and was not included in the TDS group. TDS and the Company are parties to a Tax Allocation Agreement under which the Company may carry forward any losses and credits and use them to offset income tax liabilities to TDS if any arise in the future. On March 12, 1999, the TDS and Aerial boards of directors approved a tax settlement agreement calling for payment of $114.5 million from TDS to Aerial under the September 8, 1998 Tax Allocation Agreement. The settlement covers tax losses incurred by Aerial and used by TDS for the period commencing January 1, 1996 and ending with the date of the proposed spin-off of Aerial, currently planned for the end of 1999. The settlement amount was used to repay a portion of the existing AOC indebtedness to TDS under the Revolving Credit Agreement. The payment of the $114.5 million by TDS, partially offset by an increase in deferred income tax expense of $0.6 million, resulted in a net income tax benefit of $113.9 million for the first quarter of 1999. Net Income (Loss) and Net Income (Loss) Per Common and Series A Common Share - ---------------------------------------------------------------------------- Net income (loss) totaled $33.4 million in 1999 and $(86.9) million in 1998. Net income (loss) per Common and Series A Common Share was $0.46 in 1999 and $(1.21) in 1998. The change in the Company's Net income (loss) and Net income (loss) per Common and Series A Common Share in 1999 reflects primarily the income tax benefit generated by the $114.5 million received by the Company from TDS related to the tax settlement agreement. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- The costs of development, construction, start-up and post-launch activities of the Company require substantial capital. From inception through March 31, 1999, the Company had expended $304.4 million for its six licenses, including capitalized interest, $750.0 million for all other capital expenditures and incurred cumulative net losses of $597.4 million. The Company expects to continue to incur significant operating losses and generate negative cash flow from operating activities at least through 1999 as it continues to build its customer base. Cash flows from operating activities provided $52.7 million in 1999 and required $62.6 million in 1998. Operating cash outflow (operating loss before depreciation and amortization expense) totaled $28.1 million in 1999 as compared to $49.6 million in 1998. Cash flows from the March 12, 1999 tax settlement agreement with TDS and from other operating activities (investment and other income, interest expense, changes in working capital and changes in other assets and liabilities) provided $80.8 million in 1999 and required $13.0 million in 1998. 5 Cash flows from financing activities required $46.9 million in 1999 and provided $87.8 million in 1998. Cash required in 1999 was primarily due to the Company paying $114.5 million to TDS to repay a portion of the outstanding balance under the Revolving Credit Agreement. Also in 1999, the Company had borrowings under the Revolving Credit Agreement of $66.9 million. In 1998, borrowings under the Revolving Credit Agreement provided $87.3 million. Cash flows used in investing activities totaled $5.9 million in 1999 as compared to $29.1 million in 1998. Cash used in 1999 and 1998 was primarily for additions to property and equipment for PCS network and information system assets. Fixed asset additions were financed through a combination of borrowings under the Revolving Credit Agreement with TDS, and proceeds from Series B Zero Coupon Notes and the Nokia 1996 and 1998 Credit Agreements. For 1999, the Company estimates that the aggregate funds required for capital expenditures for the continuing development of its PCS networks and services will total approximately $105 million. The Company will be building additional cell sites to augment its existing coverage area, primarily corridor coverage on interstates to suburbs. The Company will continue to upgrade its switching and other fixed network equipment to support future customer growth. Also in 1999, capital expenditures related to information systems will include a significant upgrade of the Company's billing system, including new hardware and software to support employee and customer growth, to address the Year 2000 Issue and for other project initiatives. The Company estimates requiring $235 million for working capital requirements to fund operations for all of 1999, including an estimated $85 million in interest expense. On June 30, 1998, the Company and Nokia Telecommunications Inc. ("Nokia") entered into an agreement ("1998 Credit Agreement") in which Nokia will provide up to an aggregate $150 million in financing to the Company for the purchase of network infrastructure equipment and services from Nokia. Loans under the 1998 Credit Agreement are to be made available in two $75 million tranches. With respect to Tranche A, the Company may borrow up to $75 million until June 30, 1999. Tranche A loans mature on June 30, 1999; however, the maturity date of Tranche A loans may be extended to June 30, 2000, upon written notice and payment of an extension fee by the Company to Nokia. A second $75 million ("Tranche B") becomes available commencing on June 30, 1999, and ending on June 30, 2000, the maturity date of Tranche B loans. The obligations of the Company under the 1998 Credit Agreement are fully and unconditionally guaranteed by TDS at an annual fee rate of 3%. As of March 31, 1999, the Company had $19.7 million available for borrowing under the Tranche A portion of the 1998 Credit Agreement with Nokia. Under the TDS Revolving Credit Agreement, as amended, AOC may borrow up to a maximum amount (the "Maximum Amount"), less the amount of any debt or equity financing obtained by AOC or the Company, including the amount of any borrowings under the Nokia 1998 Credit Agreement. The Maximum Amount under the amended Revolving Credit Agreement was increased to $650 million in February 1999. The interest rate under the amended Revolving Credit Agreement is equal to the prime rate plus 3%. Interest on the balance due under the amended Revolving Credit Agreement is payable quarterly and no principal is payable until April 2, 2000. In March 1999, TDS paid the Company $114.5 million as a settlement for tax losses incurred by the Company and utilized by the TDS consolidated tax group. The Company used 6 the funds to repay a portion of the existing AOC indebtedness to TDS, thereby increasing the amount available under the Revolving Credit Agreement. The net amount available for borrowings under the Revolving Credit Agreement was $92.4 million at March 31, 1999. Accordingly, available funding under the Revolving Credit Agreement is now expected to last through June of 1999. TDS has not committed to any further financing of the Company's operations. It is the intent of TDS and Aerial management to obtain the necessary level of financial support from sources other than TDS to enable the Company to pay its debts as they become due. TDS and Aerial management believe the Company has the ability to obtain that financial support. Sources of additional capital may include vendor financing and public and private equity and debt financings by the Company or its subsidiaries. If sufficient future funding is not available on terms and prices acceptable to the Company, the Company would have to reduce its construction and operating activities or take other actions, which could have a material adverse impact on the Company's financial condition and results of operations. Proposed TDS Corporate Restructuring In December 1998, TDS announced that it was pursuing a tax-free spin-off of its 82.2% interest in Aerial, as well as reviewing other alternatives. TDS intends to ask the Internal Revenue Service ("IRS") to rule on the tax-free status of such a distribution. There are a number of conditions that must be met for a spin-off to occur, including a receipt of a favorable IRS ruling, final approval by the TDS Board, certain government and third party approvals and review by the Securities and Exchange Commission ("SEC") of appropriate SEC filings. TDS intends to seek shareholder approval of a proposal to distribute Aerial Series A Common Shares, on a pro-rata basis, to holders of TDS Series A Common Shares and Aerial Common Shares, on a pro-rata basis, to holders of TDS Common Shares. There can be no assurance that a spin-off will be consummated or that other alternatives will not be pursued. Prior to any spin-off, it is expected that Aerial will seek additional financing so that Aerial would have the appropriate capitalization to operate as a stand-alone entity. In connection with such financing, all or a portion of Aerial's debt to TDS may be converted into equity. On September 8, 1998, pursuant to the terms of a Purchase Agreement dated June 1, 1998 (the "Purchase Agreement"), Sonera Ltd. ("Sonera") made a $200 million investment in AOC. Sonera purchased approximately 2.4 million shares of common stock of AOC representing a 19.4% equity interest in AOC. Sonera has the right, subject to adjustment under certain circumstances, to exchange each share of AOC common stock which it owns for 6.72919 Common Shares of Aerial. Upon the exchange of all of the AOC shares, Sonera would own an 18.452% equity interest in Aerial, reflecting a purchase price equivalent to $12.33 per Common Share of Aerial (the "Equivalent Purchase Price"). Following the announcement by TDS in December 1998, that it intended to distribute to its shareholders all of the capital stock of Aerial that it owns, and that Aerial would seek additional financing from sources other than TDS in connection therewith, Sonera contacted TDS to express certain concerns about the announcement. Sonera has asserted that the TDS announcement reflects a change in circumstances that warrant the renegotiation of certain matters related to its investment in AOC, including an adjustment in the Equivalent Purchase 7 Price, and has raised the possibility of litigation in connection therewith. TDS and Aerial intend to attempt to reach a mutually acceptable resolution of the concerns raised by Sonera. There can be no assurance that this matter will not lead to litigation, or that it will not have a material adverse effect on Aerial or on the plans relating to the refinancing and spin-off of Aerial. Market Risk The Company is subject to market rate risks due to fluctuations in interest rates and equity markets. The majority of the Company's debt is in the form of variable rate notes with original maturities ranging from 1 to 10 years. The Series A and Series B Zero Coupon Notes are fixed rate debt and, therefore, fluctuations in interest rates can lead to fluctuations in the fair value of these instruments. The Company does not enter into financial derivatives to reduce its exposure to interest rate risks. There has been no material change in the fair value relative to the Company's outstanding debt since December 31, 1998. Year 2000 Issue The Year 2000 Issue exists because many computer systems and applications abbreviate dates using only two digits, rather than four digits, e.g., "98" rather than "1998". Unless corrected, this shortcut may cause problems when the century date "2000" occurs. On that date, some computer operating systems, applications and embedded technology may recognize the date as January 1, 1900, instead of January 1, 2000. If the Company fails to correct any critical Year 2000 processing problems prior to January 1, 2000, the affected systems may either cease to function or produce erroneous data, which could have material adverse operational and financial consequences. The Company's management has established a project team to address the Year 2000 issue. The Company's plan to address the Year 2000 Issue consists of five general phases: (i) Awareness, (ii) Assessment, (iii) Renovation, (iv) Validation and (v) Implementation. The Awareness phase consisted of developing an overall compliance strategy and establishing a Year 2000 project team that reports periodically to the Company's Audit Committee. Management has established a Year 2000 Program Office at the TDS corporate level to coordinate activities of the Year 2000 project team, to monitor the current status of individual projects, to report periodically to the TDS Audit Committee, and to promote the exchange of information between all business units to share knowledge and solution techniques. Aerial management has made the Year 2000 Issue a top priority. The Year 2000 effort covers the network and supporting infrastructure for the provision of PCS services; the operational and financial information technology ("IT") systems and applications, such as computer systems that support key business functions such as billing, finance, customer service, procurement and supply; and a review of the Year 2000 compliance efforts of the Company's critical suppliers. The Assessment phase included the identification of core business areas and processes, analysis of systems, applications and hardware supporting the core business areas and the prioritization of renovation or replacement of systems, applications and hardware that are not Year 2000 compliant. Included in the Assessment phase is an analysis of risk management 8 factors such as contingency plans and liability exposure. Except for the contingency plans as discussed below, the Assessment phase was completed in the first quarter of 1999. The Year 2000 project team has identified those mission critical systems, applications and hardware that are not Year 2000 compliant. These noncompliant critical systems, applications and hardware have undergone renovation or are currently in the renovation phase. The Renovation phase consists of the conversion or replacement of mission critical systems, applications and hardware. The renovation of mission critical systems, applications and hardware is scheduled to be completed by the end of the second quarter of 1999. The mission critical systems, applications and hardware that have been renovated are undergoing Year 2000 validation testing. The Validation phase includes testing, verifying and validating the renovated or replaced systems, applications and hardware. A goal of the Validation phase is to conduct independent verification testing of mission critical systems, applications and hardware, as well as network and system component upgrades received from suppliers. In addition, selected Year 2000 upgrades are slated to undergo testing in a controlled environment that replicates the current environment and is equipped to simulate the turn of the century and leap year dates. The Cellular Telecommunications Industry Association ("CTIA") has formed a working group to coordinate efforts of various carriers and manufacturers to facilitate in inter-network Year 2000 testing. The Company is monitoring CTIA's testing program. Validation of the Company's mission critical systems, applications and hardware is scheduled to be completed in the third quarter of 1999. The Implementation phase involves migrating the converted, renovated and validated mission critical systems, applications and hardware into production. This phase has been started and is expected to be completed early in the fourth quarter of 1999. Management cannot provide assurance that its plan to achieve Year 2000 compliance will be successful, as it is subject to various risks and uncertainties. The Company's current schedule is subject to change depending on developments that may arise through unforeseen circumstances in the Renovation, Validation and Implementation phases of the Company's compliance efforts. The Company, like most other telecommunications operators, is highly dependent on network and system suppliers to provide compliant systems, applications, and hardware and on other third parties, including interconnected telecommunications service providers, government agencies and financial institutions, to deliver reliable services. The Company is dependent on the development of compliant systems, applications, and hardware, and upgrades by experts, both internal and external, and the availability of critical resources with the requisite skill sets. The Company's ability to meet its target dates is dependent upon the timely provision of necessary upgrades and modifications by its suppliers and internal resources. In addition, the Company cannot guarantee that third parties on whom it depends for essential services (such as electric utilities, financial institutions and interconnected telecommunications operators) will convert their critical systems and processes in a timely manner. Failure or delay by any of these parties could significantly disrupt the Company's business, including the provision of PCS services, billing and collection processes and other areas of the business, and cause a material adverse effect on the Company's results of operations, financial position and cash flow. The Company has contacted critical vendors 9 requesting information about their Year 2000 readiness. The responses are being reviewed and used in developing the Company's overall contingency plans. The Company's Year 2000 worst case scenario may involve interruption of telecommunications services and data processing services and/or interruption of customer billing, operating and other information systems. As part of its Year 2000 initiative, the Company is evaluating a variety of adverse scenarios and is in the process of developing contingency and business continuity plans tailored for adverse Year 2000-related occurrences. The contingency and business continuity plans will assess the potential for business disruption in various scenarios, and will provide key operational back-up, recovery and restorative options. The Company's contingency plan initiatives will include the following: reviewing, assessing and updating existing business recovery plans; assigning personnel to teams of subject matter experts who will be on call during the millennium change to monitor the network, critical systems, operations centers and business processes to react immediately to facilitate repairs and implement contingency plans; re-prioritizing of mission critical work processes and associated resources; developing alternate processes to support critical customer functions in the event systems, applications or hardware experience Year 2000 disruptions; working with public safety agencies to provide alternative methods of emergency communication for the Company's customers and the agencies; establishing replacement/repair parallel paths to provide for repair and readiness of existing systems, applications or hardware that are scheduled for replacement by the year 2000, in the event the replacement schedules are not met; developing alternate plans for critical suppliers of systems, applications or hardware that fail to meet Year 2000 compliance commitment schedules; developing data retention and recovery procedures to be in place for customer and critical business data to provide pre-millennium backups with on-site as well as off-site data copies. The Company anticipates having these contingency plans in place early in the fourth quarter of 1999. The Company estimates that the total costs of its Year 2000 efforts will be approximately $15 million, depending on the outcome of the various phases of the Company's efforts. Through March 31, 1998, the total costs directly associated with Year 2000 compliance efforts were approximately $4.3 million. The timing of expenditures may vary and is not necessarily indicative of readiness efforts or progress to date. Though Year 2000 project costs will directly impact the reported level of future net income, the Company intends to manage its total cost structure, including deferral of non-critical projects, in an effort to mitigate the impact of Year 2000 project costs. 10 PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY STATEMENT This Form 10-Q contains "forward-looking" statements, as defined in the Private Securities Litigation Reform Act of 1995, that are based on current expectations, estimates and projections. Statements that are not historical facts, including statements about the Company's beliefs and expectations are forward-looking statements. These statements contain potential risks and uncertainties and, therefore, actual results may differ materially. The Company undertakes no obligation to update publicly any forward-looking statements whether as a result of new information, future events or otherwise. Important factors that may affect these projections or expectations include, but are not limited to: changes in the overall economy; changes in competition in the Company's markets; advances in telecommunications technology; changes in the telecommunications regulatory environment; pending and future litigation; availability of future financing; unanticipated changes in growth in PCS customers, penetration rates, churn rates and the mix of products and services offered in the Company's markets and unanticipated problems with the Year 2000 Issue. Readers should evaluate any statements in light of these important factors. 11 AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Unaudited ---------
Three Months Ended March 31, ------------------ 1999 1998 ---- ---- (Dollars in thousands, except per share amounts) OPERATING REVENUES Service $ 44,098 $ 24,083 Equipment sales 6,443 6,663 --------- --------- Total Operating Revenues 50,541 30,746 OPERATING EXPENSES System operations 20,353 15,337 Marketing and selling 20,077 17,432 Customer service 9,851 10,899 Cost of equipment sold 12,402 22,820 General and administrative 15,921 13,875 Depreciation 19,882 17,807 Amortization of intangibles 1,889 1,889 --------- --------- Total Operating Expenses 100,375 100,059 --------- --------- OPERATING (LOSS) (49,834) (69,313) INVESTMENT AND OTHER INCOME (EXPENSE) Minority share of (income) (8,043) -- Investment (losses) (100) -- Interest income-other 124 360 Other income (expense) (660) 672 --------- --------- Total Investment and Other Income (Expense) (8,679) 1,032 --------- --------- (LOSS) BEFORE INTEREST AND INCOME TAXES (58,513) (68,281) INTEREST EXPENSE Interest expense-affiliate 17,036 13,673 Interest expense-other 5,008 4,107 --------- --------- Total Interest Expense 22,044 17,780 (LOSS) BEFORE INCOME TAXES (80,577) (86,061) Income tax (benefit) expense (113,934) 860 --------- --------- NET INCOME (LOSS) $ 33,377 $ (86,921) ========= ========= WEIGHTED AVERAGE COMMON AND SERIES A COMMON SHARES (000s) 71,804 71,636 INCOME (LOSS) PER COMMON AND SERIES A COMMON SHARE (Basic and Diluted) $ 0.46 $ (1.21) ========= =========
The accompanying notes to consolidated financial statements are an integral part of these statements. 12 AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited ---------
Three Months ended March 31, ------------------ 1999 1998 ---- ---- (Dollars in Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net Income (Loss) $ 33,377 $ (86,921) Add (Deduct) adjustments to reconcile net income (loss) to net cash provided (used) by operating activities Depreciation and amortization 21,771 19,696 Noncash interest expense - Series A & B Notes 4,440 3,445 Deferred taxes 566 860 Investment losses 100 -- Minority share of income 8,043 -- Loss on sale of property and equipment 6 90 Change in accounts receivable-customer (1,494) (3,504) Change in inventory (1,530) 13,035 Change in accounts payable-affiliates 43 (130) Change in accrued interest-affiliate 2,067 2,355 Change in accounts payable-trade (16,227) (9,591) Change in other assets and liabilities 1,557 (1,948) --------- --------- 52,719 (62,613) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings under the Revolving Credit Agreement-TDS 66,853 87,266 Repayments of borrowings under the Revolving Credit Agreement-TDS (114,500) -- Issuance of common stock 739 529 --------- --------- (46,908) 87,795 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment (5,253) (29,685) Proceeds from sale of property and equipment -- 145 Change in temporary cash and other investments (671) 476 --------- --------- (5,924) (29,064) --------- --------- NET (DECREASE) IN CASH AND CASH EQUIVALENTS (113) (3,882) CASH AND CASH EQUIVALENTS- Beginning of period 4,943 5,012 --------- --------- End of period $ 4,830 $ 1,130 ========= =========
The accompanying notes to consolidated financial statements are an integral part of these statements. 13 AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(Unaudited) March 31 December 31 1999 1998 ------- -------- ASSETS (Dollars in Thousands) CURRENT ASSETS Cash and cash equivalents $ 4,830 $ 4,943 Temporary cash investments 648 35 Accounts receivable Customer, less allowance of $5,221 and $5,875, respectively 25,698 24,204 Roaming 2,847 2,252 Other 1,032 1,348 Inventory 12,908 11,378 Prepaid rent 3,287 3,666 Other 1,504 898 --------- --------- 52,754 48,724 --------- --------- PROPERTY and EQUIPMENT In service and under construction 744,922 733,958 Less accumulated depreciation (132,554) (112,677) --------- --------- 612,368 621,281 --------- --------- INVESTMENTS Investment in PCS licenses-net of accumulated amortization of $13,933 and $12,044, respectively 287,599 289,488 Other 1,402 1,444 --------- --------- 289,001 290,932 --------- --------- DEFERRED COSTS 320 410 --------- --------- TOTAL ASSETS $ 954,443 $ 961,347 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable Affiliates $ 6,770 $ 6,727 Trade 36,985 56,097 Accrued interest-affiliate 7,006 4,939 Accrued compensation 6,091 5,169 Accrued taxes 5,993 7,015 Microwave relocation costs payable 615 1,828 Other 6,428 4,349 --------- --------- 69,888 86,124 --------- --------- REVOLVING CREDIT AGREEMENT-TDS 502,296 549,943 --------- --------- LONG-TERM DEBT 292,264 278,010 --------- --------- DEFERRED TAX LIABILITY-NET 16,923 16,357 --------- --------- MINORITY INTEREST 13,963 5,835 --------- --------- COMMON SHAREHOLDERS' EQUITY Common Shares, par value $1.00 per share 31,908 31,789 Series A Common Shares, par value $1.00 per share 40,000 40,000 Additional paid-in capital 584,649 584,114 Retained deficit (597,448) (630,825) --------- --------- 59,109 25,078 --------- --------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 954,443 $ 961,347 ========= ========= The accompanying notes to consolidated financial statements are an integral part of these statements.
14 AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. The consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K. The accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring items) necessary to present fairly the financial position as of March 31, 1999, and December 31, 1998, the results of operations for the three months ended March 31, 1999 and 1998, and the cash flows for the three months ended March 31, 1999 and 1998. The results of operations for the three months ended March 31, 1999 and 1998, are not necessarily indicative of the results to be expected for the full year. Certain amounts reported in prior periods have been reclassified to conform to the current period presentation. 2. Net (Loss) per Common and Series A Common Share for the three months ended March 31, 1999 and 1998, was computed based on the weighted average number of Common and Series A Common Shares outstanding during the period. The amounts used in computing Earnings per Share and the effect on the weighted average number of Common and Series A Common Shares of dilutive potential common stock are as follows:
Three Months Ended March 31, ---------------------------- 1999 1998 ---- ---- (Dollars and share amounts in thousands) Net Income (Loss) used in Earnings Per Share - Basic and Diluted $ 33,377 $(86,921) ======== ======== Weighted Average Number of Common and Series A Common shares used in Earnings per Share-Basic 71,804 71,636 Effect of Dilutive Securities: Stock options 83 -- -------- -------- Weighted Average Number of Common and Series A Common Shares used in Earnings per Share-Diluted 71,887 71,636 ======== ========
In 1998, 1.4 million stock options were not included in computing diluted (Loss) per Common and Series A Common Share because their effects were antidilutive. 3. In 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." Comprehensive Income (Loss) equals Net Income (Loss) for the three months ended March 31, 1999 and 1998. 4. Supplemental Cash Flow Information. In 1999, additions to property and equipment of $9.8 million were financed through an increase in long-term debt. During the three months ended March 31, 1999, the Company incurred interest charges totaling $22.0 million. The interest charges were comprised of $15.1 million related to the Revolving Credit Agreement with Telephone and Data Systems, Inc. ("TDS"), $2.0 million for TDS guarantee fees on the Series A and Series B Zero Coupon Notes and obligations under the Nokia 1998 Credit Agreement, $0.5 million paid to Nokia for interest charges relating to the 1998 15 Credit Agreement and $4.4 million in accreted interest on the Series A and Series B Zero Coupon Notes. The Company did not capitalize any interest relating to its work in process expenditures during the first quarter. During the three months ended March 31, 1998, Company incurred interest charges of $17.9 million. The interest charges were comprised of $12.3 million relating to the Revolving Credit Agreement with TDS, $1.4 million for TDS guarantee fees on the Series A and Series B Zero Coupon Notes and obligations under the Nokia 1996 Credit Agreement, $0.4 paid to Nokia for interest charges relating to the 1996 Credit Agreement, $3.4 million in accreted interest on the Series A and Series B Zero Coupon Notes and $0.4 million in other interest charges. Of these amounts, the Company capitalized $0.1 million relating to its work in process expenditures. The remaining $17.8 million was charged to expense. 5. Minority Interest. On September 8, 1998, pursuant to the terms of a Purchase Agreement dated June 1, 1998 (the "Purchase Agreement"), Sonera Ltd. ("Sonera"), formerly Telecom Finland Ltd., made a $200 million investment in Aerial Operating Company, Inc. ("AOC"), a then wholly-owned subsidiary of the Company. Sonera purchased approximately 2.4 million shares of common stock of AOC at a price of approximately $83 per share representing a 19.4% equity interest in AOC. Sonera has the right, subject to adjustment under certain circumstances, to exchange each share of AOC common stock which it owns for 6.72919 Common Shares of Aerial. Upon the exchange of all of the AOC shares, Sonera would own an 18.452% equity interest in Aerial, reflecting a purchase price equivalent to $12.33 per Common Share of Aerial (the "Equivalent Purchase Price"). See Note 8 - Proposed TDS Corporate Restructuring for discussion of the concerns raised by Sonera about the spin-off announcement made by TDS, which has raised the possibility of litigation. Minority share of income of $8.0 million represents Sonera's share of AOC's consolidated net income for the first quarter. 6. Revolving Credit Agreement. On March 12, 1999, the TDS and Aerial boards of directors approved a tax settlement agreement calling for payment of $114.5 million from TDS to Aerial under the September 8, 1998 Tax Allocation Agreement. The settlement covers tax losses incurred by Aerial and used by TDS for the period commencing January 1, 1996 and ending with the date of the proposed spin-off of Aerial, currently planned for the end of 1999. The settlement amount was used to repay a portion of the existing AOC indebtedness to TDS under the Revolving Credit Agreement. The net available for borrowing under the Revolving Credit Agreement was $92.4 million at March 31, 1999. 7. Commitments. At March 31, 1999, the Company had orders totaling approximately $3.7 million with Nokia Telecommunications Inc. for network infrastructure equipment. Also, at March 31, 1999, the Company had orders totaling approximately $6.1 million with various handset vendors for handsets and accessories. 8. Proposed TDS Corporate Restructuring. In December 1998, TDS announced that it was pursuing a tax-free spin-off of its 82.2% interest in Aerial, as well as reviewing other alternatives. TDS intends to ask the Internal Revenue Service ("IRS") to rule on the tax-free status of such a distribution. There are a number of conditions that must be met for a spin-off to occur, including a receipt of a favorable IRS ruling, final approval by the TDS Board, certain government and third party approvals and review by the Securities and Exchange Commission ("SEC") of appropriate SEC filings. TDS intends to seek shareholder approval of a proposal to distribute Aerial Series A Common Shares, on a pro-rata basis, to holders of TDS Series A Common Shares and Aerial Common Shares, on a pro-rata basis, to holders of TDS Common Shares. There can be no assurance that a spin-off will be consummated or that other alternatives will not be pursued. Prior to any spin-off, it is expected that Aerial will seek additional financing so that Aerial would have the appropriate capitalization to operate as a stand-alone entity. In connection with such financing, all or a portion of Aerial's debt to TDS may be converted into equity. Following the announcement by TDS in December 1998, that it intended to distribute to its shareholders all of the capital stock of Aerial that it owns, and that Aerial would seek additional financing from sources other than TDS in connection therewith, Sonera contacted TDS to express certain concerns about the announcement. Sonera has asserted that the TDS announcement reflects a change in circumstances that warrant the renegotiation of certain matters related to its investment in AOC, including an adjustment in the Equivalent Purchase Price, and has raised the 16 possibility of litigation in connection therewith. TDS and Aerial intend to attempt to reach a mutually acceptable resolution of the concerns raised by Sonera. There can be no assurance that this matter will not lead to litigation, or that it will not have a material adverse effect on Aerial or on the plans relating to the refinancing and spin-off of Aerial. 17 PART II. OTHER INFORMATION -------------------------- Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit 11 - Statement regarding the computation of earnings per common share is included herein as footnote 2 to the financial statements. Exhibit 27 - Financial Data Schedule. (b) There were no reports on Form 8-K filed during the quarter ended March 31, 1999. 18 SIGNATURES Pursuant to the requirements 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. AERIAL COMMUNICATIONS, INC. (Registrant) Date May 14, 1999 /s/ Donald W. Warkentin --------------------------- ----------------------------------------- Donald W. Warkentin President (Chief Executive Officer) Date May 14, 1999 /s/ J. Clarke Smith ------------------------- ----------------------------------------- J. Clarke Smith Vice President-Finance and Administration (Chief Financial Officer) Date May 14, 1999 /s/ B. Scott DaiIey ------------------------- ----------------------------------------- B. Scott Dailey Vice President-Controller (Principal Accounting Officer) 19 EX-27 2 FDS
5 This schedule contains summary financial information extracted from the consolidated financial statements of Aerial Communications, Ins. as of March 31, 1999, and is qualified in its entirety by reference to such financial statements. 1,000 3-mos DEC-31-1999 JAN-01-1999 MAR-31-1999 4,830 0 30,919 5,221 12,908 52,754 744,922 (132,554) 954,443 69,888 292,264 0 0 71,908 (12,799) 954,443 6,443 50,541 12,402 100,375 8,679 0 22,044 (80,577) (113,934) 33,377 0 0 0 33,377 0.46 0.46
-----END PRIVACY-ENHANCED MESSAGE-----