-----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, EJGcdgvyZbl6W/APs23DELfQswmCAokQwQmRjbjXifS9NN/5FPYMN+ZLdBcb9S94 n5+Db7w/SXB6q3KWP7GtGA== 0001047469-99-012602.txt : 19990402 0001047469-99-012602.hdr.sgml : 19990402 ACCESSION NUMBER: 0001047469-99-012602 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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-K405 SEC ACT: SEC FILE NUMBER: 000-28262 FILM NUMBER: 99579976 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-K405 1 FORM 10-K - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 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 (IRS Employer Identification incorporation or organization) No.)
8410 WEST BRYN MAWR AVENUE, SUITE 1100, CHICAGO, ILLINOIS 60631 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER: (773) 399-4200 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of each class --------------------------- Common Shares, $1 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 registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.___X___ As of February 26, 1999, the aggregate market value of registrant's Common Shares held by nonaffiliates was approximately $88 million (based upon the closing price of the Common Shares on February 26, 1998, of $7.00, as reported by the NASDAQ). The number of shares outstanding of each of the registrant's classes of common stock, as of February 26, 1999, is 31,794,240 Shares, $1 par value, and 40,000,000 Series A Common Shares, $1 par value. DOCUMENTS INCORPORATED BY REFERENCE Those sections or portions of the registrant's 1998 Annual Report to Shareholders and of the registrant's Notice of Annual Meeting of Shareholders and Proxy Statement for its Annual Meeting of Shareholders to be held May 7, 1999, described in the cross reference sheet and table of contents attached hereto are incorporated by reference into Parts II and III of this report. - -------------------------------------------------------------------------------- CROSS REFERENCE SHEET AND TABLE OF CONTENTS - -------------------------------------------------------------------------------- PAGE NUMBER OR REFERENCE(1) --------------- Item Business............................................. 3 1. Item Properties........................................... 12 2. Item Legal Proceedings.................................... 13 3. Item Submission of Matters to a Vote of Security 4. Holders............................................ 13 Item Market for Registrant's Common Equity and Related 5. Stockholder Matters................................ 14(2) Item Selected Financial Data.............................. 14(3) 6. Item Management's Discussion and Analysis of Financial 7. Condition and Results of Operations................ 14(4) Item Qualitative and Quantitative Disclosures About Market 7A. Risk............................................... 14(4) Item Financial Statements and Supplementary Data.......... 14(5) 8. Item Changes in and Disagreements with Accountants on 9. Accounting and Financial Disclosure................ 14 Item Directors and Executive Officers of the Registrant... 15(6) 10. Item Executive Compensation............................... 15(7) 11. Item Security Ownership of Certain Beneficial Owners and 12. Management......................................... 15(8) Item Certain Relationships and Related Transactions....... 15(9) 13. Item Exhibits, Financial Statement Schedules and Reports 14. on Form 8-K........................................ 16 - ------------------------ (1) Parenthetical references are to information incorporated by reference from the registrant's Exhibit 13, which includes portions of its Annual Report to Shareholders for the year ended December 31, 1998 ("Annual Report") and from the registrant's Notice of Annual Meeting of Shareholders and Proxy Statement for its Annual Meeting of Shareholders to be held on May 7, 1999 ("Proxy Statement"). (2) Annual Report section entitled "Aerial Stock and Dividend Information" and "Market Price Per Common Share by Quarter." (3) Annual Report section entitled "Selected Consolidated Financial Data." (4) Annual Report section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." (5) Annual Report sections entitled "Consolidated Statements of Operations," "Consolidated Statements of Cash Flows," "Consolidated Balance Sheets," "Consolidated Statements of Changes in Shareholders' Equity," "Notes to Consolidated Financial Statements," and "Report of Independent Public Accountants." (6) Proxy Statement section entitled "Election of Directors" and "Executive Officers." (7) Proxy Statement section entitled "Executive Compensation" except for the information specified in Item 402 (a) (8) of Regulation S-K under the Securities Exchange Act of 1934, as amended. (8) Proxy Statement section entitled "Security Ownership of Certain Beneficial Owners and Management." (9) Proxy Statement section entitled "Certain Relationships and Related Transactions." - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AERIAL COMMUNICATIONS, INC. 8410 WEST BRYN MAWR AVENUE - SUITE 1100 - CHICAGO, IL 60631 [LOGO] TELEPHONE (773) 399-4200 - -------------------------------------------------------------------------------- PART I - -------------------------------------------------------------------------------- ITEM 1. BUSINESS COMPANY Aerial Communications, Inc. (the "Company" or "Aerial"), [NASDAQ: AERL] together with its subsidiaries, is a provider of Personal Communications Services ("PCS") in the Minneapolis, Tampa-St. Petersburg-Orlando, Houston, Pittsburgh, Kansas City and Columbus (Ohio) Major Trading Areas ("MTAs") (collectively, the "PCS Markets"). The PCS Markets include approximately 27.7 million population equivalents ("POPs"). The Company has constructed networks for its PCS Markets using Global System for Mobile Communication ("GSM") technology. The Company has commenced service in all its markets. By year end 1998, the Company had expanded its system coverage to total more than 80% of the six MTAs' total population. The Company was formed in 1991 under Delaware law as a wholly-owned subsidiary of Telephone and Data Systems, Inc. [AMEX: TDS] and was formerly named American Portable Telecom, Inc. In November 1996 the Company changed its name to Aerial Communications, Inc. TDS owned 59,086,000 shares of Common Stock of the Company at December 31, 1998, representing 82.3% of the combined total of the Company's outstanding Common and Series A Common Shares and 98.0% of the voting power. PCS is the term used to describe the wireless telecommunications services that are offered by those companies that acquired licenses for radio spectrum (frequency range 1850-1990 MHz) in the Federal Communications Commission ("FCC") auctions and are the newest entrants in the wireless telecommunications market. PCS competes directly with existing cellular telephone, paging and specialized mobile radio services. PCS providers were the first in most markets to offer mass market all-digital mobile networks. In addition, the Company believes PCS providers may be among the first to be able to offer mass market wireless local loop applications, in competition with switched and direct access local telecommunications services. The Company's strategic goal is to take full advantage of the potential of wireless telecommunications. The Company sees an opportunity for significant growth in the wireless telecommunications market through the shift of existing wireless usage patterns from applications focused on business use, special occasions and emergencies to much broader applications for everyday use. The Company is structured to meet the increasingly competitive challenges of the wireless telecommunications marketplace, and has a marketing-oriented approach focused on serving its customers and their needs. Since the introduction of cellular telephone service in 1983, the demand for wireless telecommunications services has grown dramatically as cellular, paging and other emerging wireless personal communications services have become widely available and increasingly affordable. As of December 31, 1998, there were an estimated 70 million domestic wireless telephone subscribers (representing both cellular and PCS customers), which represented U.S. market penetration of approximately 25%. During 1996 and early 1997, the Company contracted for network equipment, billing systems, support software and the equipment and services necessary to launch service. Additionally during this period, the Company completed the design for its PCS networks, acquired and built out the switching centers serving each market, leased and built out a National Operations Center, leased or purchased the cell sites required to launch service and commenced zoning and building the sites. The Columbus MTA launched service on March 27, 1997. The Company's five remaining MTAs launched service during the 3 second quarter of 1997. Across all six markets, the Company launched with approximately 600 cell sites in service. The Company had 1,180 cell sites in service by the end of 1998. The coverage of the Company's PCS networks includes the major metropolitan areas within the PCS Markets, as well as portions of the major highway corridors extending out from those areas. In November 1996, the Company entered into a Member Control Agreement ("Agreement") forming a joint venture with Rural Cellular Corporation ("RCC"), the Wireless Alliance, LLC ("WALLC"), to build out certain rural areas covering approximately 925,000 POPs in the Minneapolis MTA. The Company has contributed 20 MHz of its Minneapolis MTA license covering certain territories as defined in the Agreement in return for a 49% equity interest in the joint venture. RCC built the network and is responsible for the ongoing operations. The WALLC launched service in 1998. The joint venture purchases services such as network switching from the Company. The network uses GSM technology. On September 8, 1998, pursuant to the terms of a Purchase Agreement dated June 1, 1998, 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's equity ownership amount in AOC is subject to adjustment based on Aerial's 20-day average stock price during the three years commencing September 8, 1998. Depending on the level of increase in the stock price, Sonera's ownership amount in AOC could decline to approximately 15%. 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 Shares of Aerial (the "Equivalent Purchase Price"). In addition to exchanging AOC common stock for Aerial Common Shares, Sonera's equity in AOC could be exchanged incrementally, in certain circumstances, for equity in TDS or cash or any combination of TDS equity, Aerial equity and cash. PROPOSED TDS CORPORATE RESTRUCTURING In December 1997, Aerial received a proposal from TDS to acquire all of the issued and outstanding Common Shares of Aerial not already owned by TDS. The proposal was part of TDS's proposed corporate restructuring which included issuing three new classes of common stock (commonly known as "tracking" stock) and changing the state of incorporation of TDS from Iowa to Delaware. The three new classes of stock were intended to separately reflect the performance of TDS's cellular telephone, landline telephone and personal communications services businesses. In December 1998, TDS announced the withdrawal of its offer to exchange tracking stock for the outstanding common shares of Aerial which it did not own. TDS also announced that it was pursuing a tax-free spin-off of its 82.3% 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 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 4 will not have a material adverse effect on Aerial or on the plans relating to the refinancing and spin-off of Aerial. WIRELESS TELECOMMUNICATIONS INDUSTRY OVERVIEW. Wireless service is currently available using analog or digital technology. Traditionally wireless services transmited voice and data signals over analog-based networks by varying the amplitude or frequency of one continuous electronic signal transmitted over a single radio channel. Analog technology currently has several limitations, including inconsistent service quality, lack of privacy, limited capacity and less reliability in transferring data without errors. The Company has chosen GSM, which utilizes a digital technology, for use in the PCS Markets. Digital systems convert voice or data signals into a stream of digits that is compressed before transmission, enabling a single radio channel to carry multiple simultaneous signal transmissions. This additional capacity, along with improvements in digital protocols, allows digital-based wireless technologies to offer new and enhanced services, such as greater call privacy and more robust data transmission features, such as "mobile office" applications (including facsimile, electronic mail and wireless connections to computer/data networks, including the Internet). PCS spectrum differs from existing cellular and specialized mobile radio ("SMR") spectrum in three basic ways: frequency, spectrum and geographic division. PCS networks will operate in a higher frequency range (1850-1990 MHz) compared to the cellular and SMR frequency (800-900 MHz). PCS is comprised of 30 or 10 MHz spectrum versus 25 MHz spectrum for cellular networks. As a result of the improved capacity of the infrastructure and large allocation of spectrum in the A, B and C PCS frequency Blocks, PCS will have more capacity for new wireless services such as data and video transmission. Finally, the geographic areas for PCS licenses are divided differently than for cellular licenses. PCS is segmented among 51 MTAs and 493 Basic Trading Areas ("BTAs") as opposed to cellular's 306 Metropolitan Statistical Areas ("MSAs") and 428 Rural Service Areas ("RSAs"). An MTA license generally covers a much larger geographic area than a BTA, MSA or RSA license. OPERATION OF WIRELESS NETWORKS. Wireless service areas are divided into smaller geographic areas called "cells", each of which contains an antenna and a base transceiver station ("BTS") consisting of a low-power transmitter, a receiver and signaling equipment. The cells are typically configured on a grid in a honeycomb-like pattern, although terrain factors (including natural and man-made obstructions) and signal coverage patterns may result in irregularly shaped cells and overlaps or gaps in coverage. The BTS in each cell is connected by microwave, fiber optic cable or telephone wires to a switching office ("mobile switching center" or "MSC"). The MSC controls the operation of the wireless telephone network for its entire service area, performing inter-BTS hand-offs, managing call delivery to handsets, allocating calls among the cells within the network and connecting calls to local landline telephone systems or to long-distance telephone carriers. Wireless service providers have interconnection agreements with various local exchange carriers and interexchange carriers, thereby integrating the wireless telephone network with landline telecommunications systems. Because two-way wireless networks are fully interconnected with landline telephone networks and long-distance networks, customers can receive and originate both local and long-distance calls from their wireless telephones. The signal strength of a transmission between a handset and a BTS antenna declines as the handset moves away from the BTS antenna. The MSC and the BTSs monitor the signal strength of calls in process. When the signal strength of a call declines to a predetermined level, the MSC may "hand off" the call to another BTS that can establish a stronger signal with the handset. If a handset leaves the service area of the wireless service provider, the call is disconnected unless an appropriate technical interface is established to hand off the call to an adjacent service provider's system. Operators of wireless networks frequently agree to provide service to customers from other compatible networks who are temporarily located or traveling through the operator's service area. Such customers are called "roamers." Agreements among network operators allocate revenues received from roamers. With automatic roaming, wireless customers are preregistered in certain networks outside their home service area and receive service automatically while they are roaming. Other roaming features permit calls to a customer to follow the customer into different networks, so that the customer 5 will continue to receive calls in a different network just as if the customer were within his or her service area. Wireless customers generally are charged separately for monthly access, air time, long-distance calls and custom-calling features (although custom-calling features may be included in monthly access charges in certain pricing plans). Wireless network operators pay fees to local exchange and long-distance telephone companies for access to their networks and toll charges based on standard or negotiated rates. When wireless operators provide service to roamers from other networks, they generally charge roamer air-time usage rates, which usually are higher than standard air-time usage rates for their own customers, and additionally may charge daily access fees. Special, discounted rate roaming arrangements, often between neighboring operators who wish to stimulate usage in their respective territories, provide for reduced roaming fees and no daily access fees. TECHNOLOGY With GSM technology, the Company offers easy-to-use, interactive menu-driven phones, and advanced features such as caller identification and a smart card, as well as more complex features such as text messaging, which allows the GSM handset to function as a two-way messaging device. In the future, the Company intends to increasingly emphasize services which are expected to increase the size and scope of the wireless market, such as wireless data and information services as well as wireless local loop services. The Company anticipates that PCS will ultimately offer a competitive alternative to wireline telephone service as PCS networks are constructed and PCS operators form strategic alliances. GSM is not compatible with other PCS or cellular technologies. However, compatibility can be achieved through the use of handsets that support multiple technologies. The Company expects that compatibility between GSM and the existing analog cellular systems will be achieved with the use of dual-mode handsets. Aerial expects to launch its dual-mode service in 1999. To date, seventeen North American PCS companies are providing commercial GSM service. GSM systems are currently in commercial operation in over 2,400 North American cities with more than 3 million customers. The Company anticipates that its customers will be able to roam substantially throughout the United States, either on other GSM-based PCS networks or by using dual-mode handsets that can also be used on existing cellular networks. The Company is a member of the North American GSM Alliance LLC ("GSM Alliance"), an all-digital wireless PCS network of U.S. and Canadian carriers. The GSM Alliance was established to create a national network and develop seamless wireless communications for customers, whether at home, away or abroad. The GSM Alliance's collaborative efforts focus on serving the wireless customer efficiently by addressing the areas of roaming, customer care, national distribution and data communications. The Company is also a member of the GSM Capital Limited Partnership. The partnership was formed to make investments in companies mainly engaged in the wireless communications industry using the GSM platform, that are in a development or expansion stage, or whose securities trade in an organized market. The Company is also a part of the GSM North America consortium, which is the North American interest group for the GSM Association. Formed in 1995, GSM North America brings together service providers and equipment manufacturers to identify and resolve issues related to making GSM the premier PCS digital technology. SOURCES OF EQUIPMENT The Company does not manufacture any of the GSM network equipment, handsets or accessories ("equipment") used or anticipated to be used in its operations. The equipment the Company uses or anticipates to use is available from multiple sources, and the Company anticipates such equipment will continue to be available to the Company in the foreseeable future, consistent with normal manufacturing and delivery lead times. As GSM uses an open system architecture, and due to the fact that GSM has well-developed features, software systems and equipment that are available "off the shelf", the Company is able to design its GSM networks and systems without being dependent upon any single manufacturing source. Nokia Telecommunications Inc. has been the Company's sole supplier of digital radio channel and switching infrastructure equipment during the initial build-out of its PCS networks. The 6 Company's current handset vendors are Nokia Mobile Phones, Inc., Motorola Inc., and Mitsubishi Wireless Communications, Inc. PRODUCTS AND SERVICES The Company offers coverage in those areas of the PCS Markets where most of the population lives and works. Subsequent construction of its PCS networks will provide coverage which, in combination with roaming services as described above, is competitive with that of current cellular operators. The Company provides roaming capabilities through agreements with other GSM and cellular operators. The Company's two primary sources of revenues are similar to those available to other cellular system providers. Service revenue primarily consists of charges for access, airtime and value-added services provided to the Company's retail customers who use the network operated by the Company, and charges for long-distance calls made on the Company's systems. Service revenue also consists of charges to customers of other wireless carriers who use the Company's PCS network when roaming (outcollect roaming revenue). Equipment sales revenue consists of the sale of handsets and related accessories to retailers, independent agents and end user customers. At December 31, 1998, the Company had 311,900 customers. Service revenues and equipment sales revenues totaled $123.6 million and $31.5 million, respectively, for the year ended December 31, 1998. The Company provides the following services and features: THE SMART CARD. GSM technology employs a Smart Card which contains a microchip containing detailed information about a customer's service profile. The Smart Card allows the Company to initiate services or change a customer's service package from a remote location. The Smart Card also allows customers to roam onto other participating GSM-based networks by using their cards in handsets compatible with the local network. FEATURE-RICH HANDSETS. As part of its basic service package, the Company provides easy-to-use, interactive menu-driven phones that enable customers to utilize the features available in a GSM network. These handsets primarily use words and easy-to-use menus rather than numeric codes to operate handset functions such as call-forwarding, call-waiting and text messaging. SHORT TEXT MESSAGING. GSM technology allows for the capability to send and receive short text messages, similar to two-way radio paging services. This service allows the Company to offer a quicker and less expensive form of wireless communication when a full conversation is not necessary. ENHANCED SECURITY. The Company's service provides greater security from eavesdropping and cloning than analog wireless service. Greater conversation security is provided by the encryption code of the digital GSM signal. Greater fraud protection is provided because GSM handsets require the use of a Smart Card with a sophisticated authentication scheme, the replication of which is virtually impossible. As the market for wireless telecommunications services continues to develop, the Company expects to offer advanced wireless applications such as mobile data services, wireless private branch exchange applications, wireless local loop services and other individually customized wireless products and services. MARKETING AND DISTRIBUTION The Company's marketing objective is to create demand for its PCS service by clearly differentiating its service offerings. The Company believes the strength of its marketing efforts are a key contributor to its success. The Company has developed overall marketing strategies as well as certain, specific local marketing strategies for each PCS Market. The Company's mass marketing efforts emphasize the value of the Company's services and its "fairness" to customers and are supported by heavily promoting the Aerial brand name. This is supported by a substantial advertising program. The Company offers its services and products through traditional cellular sales channels as well as through new, lower cost channels which increase the quality of the typical sale. The Company utilizes traditional sales channels which include mass merchandisers and retail outlets, company retail stores, 7 sales agents and a direct sales force. National distributors include Best Buy, Office Depot, Staples and Ritz Camera. The Company currently also distributes its services and products through over 90 company retail locations (mall stores, strip mall stores and kiosks). Based in part upon the remote activation feature of the GSM Smart Card, the Company also intends to develop distribution innovations such as simplified retail sales processes and lower-cost channels which include inbound telesales, affinity marketing programs, and via the Internet. COMPETITION The wireless telecommunications industry is experiencing significant technological change, as evidenced by the increasing pace of digital upgrades to existing analog cellular networks, evolving industry standards, ongoing improvements in the capacity and quality of digital technology, shorter development cycles for new products and enhancements, and changes in end-user requirements and preferences. Accordingly, the Company expects competition in the wireless telecommunications business to be dynamic and intense as a result of the entrance of new competitors and the development of new technologies, products and services. The Company competes directly with up to five other PCS providers in each of its PCS Markets. The other successful bidders in the FCC's broadband Block A and Block B PCS auction in each of the six PCS Markets were PCS PrimeCo (Houston and Tampa-St. Petersburg-Orlando), Sprint Spectrum (Minneapolis, Pittsburgh and Kansas City) and AT&T Wireless Services, Inc. (Columbus). The existing cellular providers in the PCS Markets, most of which have an infrastructure in place and have been operational for a number of years, have, in most cases, upgraded their networks to provide comparable services in competition with the Company. Principal cellular providers in the PCS Markets are AT&T Wireless Services, Inc., BellSouth Mobility, Inc., GTE Mobile Communications Corporation, AirTouch Communications, Inc., Southwestern Bell, Bell Atlantic-NYNEX Mobile and Ameritech Cellular. Additionally, the Company competes with SMR provider Nextel Communications, Inc. in each of its six PCS Markets. The Company also competes with other communications technologies that now exist, such as paging, enhanced specialized mobile radio ("ESMR") and global satellite networks. In the future, cellular service and PCS will also compete more directly with traditional landline telephone service providers and with cable operators who expand into the offering of traditional communications services over their cable systems. All of such competition is intense. There can be no assurance that the Company will be able to compete successfully in this environment or that new technologies and products that are more commercially effective than the Company's technologies and products will not be developed. In addition, many of the Company's competitors have substantially greater financial, technical, marketing, sales and distribution resources than those of the Company and have significantly greater experience than the Company in testing new or improved telecommunications products and services and obtaining regulatory approvals. Some competitors are expected to market other services, such as cable television access, with their wireless telecommunications service offerings. Several of the Company's competitors are operating, or planning to operate, through joint ventures and affiliation arrangements, wireless telecommunications networks that cover most of the United States. The Company anticipates that market prices for two-way wireless services generally will continue to decline in the future based on increased competition. The Company will compete to attract and retain customers principally on the basis of services and enhancements, its customer service, the size and location of its service areas and pricing. The Company's ability to compete successfully will also depend, in part, on its ability to anticipate and respond to various competitive factors affecting the industry, including new services that may be introduced, changes in consumer preferences, demographic trends, economic conditions and discount pricing strategies by competitors, which could adversely affect the Company's operating margins. REGULATION REGULATORY ENVIRONMENT. The FCC regulates the licensing, construction, operation and acquisition of wireless telecommunications systems in the United States pursuant to the Communications Act of 8 1934, as amended, and the rules, regulations and policies promulgated by the FCC thereunder (the "Communications Act"). Under the Communications Act, the FCC is authorized to allocate, grant and deny licenses for PCS frequencies, establish regulations governing the interconnection of PCS networks with wireline and other wireless carriers, grant or deny license renewals and applications for transfer of control or assignment of PCS licenses, and impose fines and forfeitures for any violations of FCC regulations. In addition, the Telecommunications Act of 1996 (the "1996 Act"), which amended the Communications Act, mandates significant changes in existing telecommunications rules and policies to promote competition, ensure the availability of telecommunications services to all parts of the nation and to streamline regulations of the telecommunications industry to remove regulatory burdens, as competition develops and makes regulation less necessary. The FCC promulgated and continues to promulgate regulations governing construction and operation of wireless carriers, licensing (including renewal of licenses) and technical standards for the provision of PCS services under the Communications Act, and is implementing the legislative objectives of the 1996 Act, as discussed below. PCS LICENSING. The FCC established PCS service areas in the United States and its possessions and territories based upon Rand McNally's market definition of 51 MTAs comprised of 493 smaller BTAs. Each MTA consists of at least two BTAs. The FCC has allocated 120 MHz of radio spectrum in the 2 GHz band for licensed broadband PCS services. The FCC divided the 120 MHz of spectrum into six individual blocks, each of which is allocated to serve either MTAs or BTAs. The spectrum allocation includes two 30 MHz blocks ("A" and "B" Blocks) licensed for each of the 51 MTAs, one 30 MHz block ("C" Block) licensed for each of the 493 BTAs, and three 10 MHz blocks ("D," "E" and "F" Blocks) licensed for each of the 493 BTAs. A PCS license has been awarded for each MTA and substantially all of the BTAs in every block, for a total of more than 1,500 licenses. This means that in any PCS service area as many as six licensees could be operating separate PCS networks. Under the FCC's rules, a broadband PCS licensee may own combinations of licenses with total aggregate spectrum coverage of up to 45 MHz in a single geographic area. The FCC adopted comprehensive rules that outlined the bidding process, described the bidding application and payment process, established penalties for certain bid withdrawals, default or disqualification and established regulatory safeguards. Several auction winners have filed for bankruptcy. Other winners tendered approximately 450 licenses acquired in auctions to the FCC for cancellation in 1998. These licenses are scheduled to be reauctioned starting in March of 1999. On November 9, 1995, in Cincinnati Bell Telephone Co. v. FCC (Case No. 94-3701/4113), the United States Court of Appeals for the Sixth Circuit granted two petitions for review of an FCC order that had barred certain common ownership of cellular and PCS interests in the same market, and remanded the case to the FCC for further proceedings. Neither of the two petitioners had been barred by cross interests from applying for any of the authorizations the FCC later granted to the Company. The Company is watching the FCC proceedings closely. The grants of licenses to the Company are conditioned upon timely compliance with the FCC's build-out requirements, I.E., coverage of one-third of the population of a PCS market within five years of initial license grant and coverage of two-thirds of that population within ten years. The Company has exceeded the buildout requirements for both the five year and ten year stages for each of its MTAs. The FCC also imposes a requirement that all licensees register and obtain FCC registration numbers for all of their antenna towers which require prior Federal Aviation Administration ("FAA") clearance. All broadband PCS transmitting facilities of the Company also must comply with federal "radio frequency (RF) radiation requirements." The Company has complied with and continues to comply with the antenna registration and RF radiation requirements. The FCC enhanced 911 ("E911") regulations require broadband PCS operators to "be capable of transmitting 911 calls from individuals with speech or hearing disabilities through the use of Text Telephone Devices ("TTY")." TTY equipment currently, however, is not compatible with digital wireless systems such as the Company's. Consequently, on December 4, 1998, Aerial filed a petition with the FCC requesting a waiver of the applicability of the TTY connectivity requirement to the Company's digital 9 system. On December 30, 1998, the FCC granted the Company, along with over 100 other wireless operators, a temporary waiver of the regulation. Equipment manufacturers are developing hardware and software that will make TTY devices compatible with the digital wireless technologies used by the Company and other wireless service providers. The Company is working with manufacturers and other members of the wireless industry in developing solutions for users of TTY devices. The E911 regulations also require broadband PCS operators to determine the approximate location of persons making the emergency calls. On February 5, 1999, the Company filed a petition requesting a waiver to clarify that handset based location technology will meet the FCC's E911 location requirements. A waiver will enable the Company to be compliant with the location requirements by introducing new handsets that have the capability of being located rather than installing very expensive upgraded equipment throughout the Company's entire network. The Company's waiver and dozens of other wireless operators' waiver requests are pending before the FCC. The FCC licenses granted to the Company are issued for a ten-year period expiring June 23, 2005, and may be renewed. In the event challengers file competing applications in response to any of the Company's renewal filings, the FCC has rules and regulations providing that the application of the licensee seeking renewal will be granted and the application of the challenger will not be considered in the event that the broadband PCS licensee involved has (i) provided "substantial" service, which is defined as "sound, favorable and substantially above a level of mediocre service just minimally justifying renewal" and (ii) substantially complied with FCC rules, policies and the Communications Act. Although the Company is unaware of any circumstances which would prevent the approval of any future renewal applications, there can be no guarantee that the Company's licenses will be renewed by the FCC in the future. Moreover, although revocation and involuntary modification of licenses are extraordinary regulatory measures, the FCC does have the authority to restrict the operation of licensed facilities or revoke or modify licenses. The FCC has proceedings in process which could open up other frequency bands for wireless telecommunications and PCS-like services. There can be no assurance that such proceedings will not result in additional wireless competition. In addition, there are citizenship requirements, assignment requirements and other federal rules and regulations that may affect the business of the Company. RECENT EVENTS. There are certain regulatory proceedings currently pending before the FCC that are of particular importance to the broadband PCS industry. The FCC is expected to give the telecommunications industry guidance as to the implementation of the Communications Assistance for Law Enforcement Act ("CALEA"). Due to a conflict between manufacturing standards and law enforcement requirements, the FCC extended the compliance date to June 30, 2000. The FCC has adopted a limited expansion of the obligation of cellular carriers to serve the subscribers of broadband PCS providers, among others, even though neither the subscribers or the PCS providers involved have a pre-existing service relationship with such cellular carrier. Under these new policies, broadband PCS providers may offer their subscribers handsets which are capable of operating over broadband PCS and cellular networks so that when their subscribers are out of range of broadband PCS networks, they will be able to obtain non-automatic access to cellular networks. The FCC expects that implementation of these roaming capabilities will promote competition between broadband PCS and cellular service providers. The FCC is considering whether all cellular, broadband PCS and certain SMR providers should be required to provide "automatic" roaming service to other providers (i.e., carrier-to-carrier roaming service) during a five year period commencing after the last group of initial broadband PCS licenses are awarded which is expected to occur in 1999. The FCC has adopted requirements which will make it possible for subscribers to retain, subject to certain geographic and other limitations, their existing telephone numbers when they switch from one service provider to another. This numbering portability will include switching between local exchange carrier ("LEC") and other wireline providers, between wireless service providers and between LEC/ wireline and wireless providers. LECs in the 100 largest MSAs had implementation deadlines by the end of 1998 at those switches which received specific requests for numbering portability. The FCC recently 10 extended the compliance date for cellular, broadband PCS, and certain other wireless providers to November 24, 2002. The FCC also has pending proceedings: (1) to ensure that the customers of wireless providers, among others, receive complete, accurate and understandable bills, (2) to establish effective safeguards to protect against unauthorized access to certain customer information (i.e., CPNI), (3) to retain, relax or repeal its 45 MHZ spectrum cap on the amount of broadband PCS and cellular spectrum which entities under common ownership or control may hold in any single market and its related cellular cross-interest restrictions, (4) to devise guidelines for the operation and administration of universal service support mechanisms as applied to wireless providers, and (5) to implement requirements for wireless providers to set rates for interstate interexchange services in each state at levels no higher than the rates charged to subscribers in any other state. The FCC also is continuing to implement the 1996 Act. The 1996 Act provides that implementing its legislative objectives will be the task of the FCC, the state public utilities commissions and a Federal-State Joint Board. Much of this implementation has and continues to be proceeding in numerous, concurrent proceedings with aggressive deadlines. The Company cannot predict the full extent and nature of developments of the 1996 Act which will depend, in part, upon interrelationships among state and federal regulators. The primary purpose and effect of the 1996 Act is to open all telecommunications markets to competition -- including local telephone service. The 1996 Act makes most direct or indirect state and local barriers to competition unlawful. It directs the FCC to preempt all inconsistent state and local laws and regulations, after notice and comment proceedings. It also enables electric and other utilities to engage in telecommunications service through qualifying subsidiaries. Only narrow powers over competitive entry are left to state and local authorities. Each state retains the power to impose competitively neutral requirements that are consistent with the 1996 Act's universal service provision and necessary for universal services, public safety and welfare, continued service quality and consumer rights. The 1996 Act establishes principles and a process for implementing a modified "universal service" policy. This policy seeks nationwide, affordable service and access to advanced telecommunications and information services. It calls for reasonably comparable urban and rural rates and services. The 1996 Act also requires universal service to schools, libraries and rural health facilities at discounted rates. In a series of orders adopted in 1997, the FCC established universal service support mechanisms which require telecommunications providers, including all wireless carriers, to contribute. The Company has made the required Universal Service Worksheet filings and makes the required periodic payments. Since enactment, the FCC has adopted orders implementing certain local competition provisions of the 1996 Act. The FCC found that broadband PCS and certain other wireless providers that are entitled to reciprocal compensation, may not be charged for LEC-originated traffic or for code opening/per-number fees, and may obtain LEC interconnection subject to the terms of the 1996 Act. Appeals were taken to the United States Supreme Court from these FCC orders by numerous parties alleging that the FCC has exceeded its statutory mandate, among other matters. On January 25,1999, the U.S. Supreme Court upheld the FCC's general jurisdiction to implement the local competition provisions of the 1996 Act. STATE AND LOCAL REGULATION The scope of state regulatory authorities covers such matters as the terms and conditions of interconnection between LECs and wireless carriers with respect to intrastate services, customer billing information and practices, billing disputes, other consumer protection matters, facilities construction issues and transfers of control, among other matters. In these areas, particularly the terms and conditions of interconnection between LECs and wireless providers, the FCC and state regulatory authorities share regulatory responsibilities with respect to interstate and intrastate issues, respectively. The FCC has pending numerous petitions for pre-emption of state and local regulations which allege such regulations prohibit or impair the provision of interstate or intrastate telecommunications services. It has also requested public comment on a petition requesting pre-emption of moratoria imposed by state and local governments on siting of telecommunications facilities, the imposition of 11 state taxes on the gross receipts of commercial mobile radio service ("CMRS") providers and other proposed state taxes based on the asset value of CMRS licenses awarded by the FCC. The FCC has been actively involved in educating state and local regulatory and zoning authorities as to the prohibitions in the 1996 Act against the creation of unreasonable and discriminatory zoning, taxation or other barriers to new wireless providers. The FCC is required to forbear from applying any statutory or regulatory provision that is not necessary to keep telecommunications rates and terms reasonable or to protect consumers. A state may not apply a statutory or regulatory provision that the FCC decides to forbear from applying. In addition, the FCC must review its telecommunications regulations every two years and change any that are no longer necessary. The Company and its subsidiaries have been and intend to remain active participants in proceedings before the FCC and before state regulatory and zoning authorities. Proceedings with respect to the foregoing policy issues before the FCC and state regulatory authorities could have significant impacts on the competitive market structure among wireless providers and the relationships between wireless providers and other carriers. The Company is unable to predict the scope, pace, or financial impact of policy changes which could be adopted in these proceedings. SEASONALITY Management believes there exists within the wireless telecommunications industry a seasonality in both revenues, which tend to be greater in the fourth quarter due to customer growth, and operating expenses, which tend to be higher in the fourth quarter due to increased marketing activities and customer growth, which may cause operating income (loss) to vary from quarter to quarter. EMPLOYEES As of December 31, 1998, the Company had a total of 1,907 employees. None of the Company's employees is represented by a labor union. The Company considers its relations with its employees to be good. PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY STATEMENT THIS FORM 10-K 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. ITEM 2. PROPERTIES The Company currently leases office and warehouse space in each of its PCS Markets as well as office space for its corporate headquarters in Chicago, customer service center in Kansas City and National Operations Center in Tampa. The Company also has leases for its retail store locations and leases certain cell sites for its digital radio channel (or "BTS") equipment on land, buildings and other fixed structures at various rentals for various terms. As of December 31, 1998, the Company had 1,180 cell sites in service across all its PCS markets. The leases provide for monthly rentals at market rates and expire, subject to renewal options, on various dates through 2021. The Company owns all five of its 12 switch site buildings serving each of the PCS Markets (the Pittsburgh switch also serves the Columbus market). ITEM 3. LEGAL PROCEEDINGS The Company is involved from time to time in routine legal and regulatory proceedings incidental to its business. The Company does not believe that such routine legal and regulatory proceedings will have, individually or in the aggregate, a material adverse effect on the Company. However, concerns raised by Sonera Ltd. about the spin-off announcement made by TDS have indicated the possibility of litigation. See Item 1. Business--Proposed TDS Corporate Restructuring. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of securities holders during the fourth quarter of fiscal year 1998. 13 - -------------------------------------------------------------------------------- PART II - -------------------------------------------------------------------------------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Incorporated herein by reference from Exhibit 13, Annual Report section entitled "Aerial Stock and Dividend Information" and "Market Price Per Common Share By Quarter." ITEM 6. SELECTED FINANCIAL DATA Incorporated herein by reference from Exhibit 13, Annual Report section entitled "Selected Consolidated Financial Data." ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated herein by reference from Exhibit 13, Annual Report section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Incorporated herein by reference from Exhibit 13, Annual Report section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the caption "Market Risk." ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated herein by reference from Exhibit 13, Annual Report sections entitled "Consolidated Statements of Operations," "Consolidated Statements of Cash Flows," "Consolidated Balance Sheets," "Consolidated Statements of Changes in Shareholders' Equity," "Notes to Consolidated Financial Statements" and "Report of Independent Public Accountants." ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 14 - -------------------------------------------------------------------------------- PART III - -------------------------------------------------------------------------------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated herein by reference from Proxy Statement sections entitled "Election of Directors" and "Executive Officers." ITEM 11. EXECUTIVE COMPENSATION Incorporated herein by reference from Proxy Statement section entitled "Executive Compensation" except for the information specified in item 402 (a) (8) of Regulation S-K under the Securities Exchange Act of 1934, as amended. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference from Proxy Statement section entitled "Security Ownership of Certain Beneficial Owners and Management." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference from Proxy Statement section entitled "Certain Relationships and Related Transactions." 15 - -------------------------------------------------------------------------------- PART IV - -------------------------------------------------------------------------------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K The following documents are filed as a part of this report: (a) (1) Financial Statements Consolidated Statements of Operations.......................... Annual Report* Consolidated Statements of Cash Flows.......................... Annual Report* Consolidated Balance Sheets.................................... Annual Report* Consolidated Statements of Changes in Shareholders' Equity..... Annual Report* Notes to Consolidated Financial Statements..................... Annual Report* Report of Independent Public Accountants....................... Annual Report*
- ------------------------ * Incorporated herein by reference from Exhibit 13. (2) Schedules
LOCATION -------- Report of Independent Public Accountants on Financial Statement Schedule.......... page 18 II. Valuation and Qualifying Accounts for each of the Three Years in the Period Ended December 31, 1998.................................................... page 19 All other schedules have been omitted because they are not applicable or not required or because the required information is shown in the financial statements or notes thereto.
(3) Exhibits The exhibits set forth in the accompanying Index to Exhibits are filed as a part of this Report. The following is a list of each management contract or compensatory plan or arrangement required to be filed as an exhibit to this form pursuant to Item 14 (c) of this Report. EXHIBIT NUMBER DESCRIPTION - -------- ---------------------------------------------------------------------- 10.8 Aerial Communications, Inc. 1996 Long-Term Incentive Plan, as amended, is hereby incorporated by reference to Exhibit 99.1 to the Company's registration statement on Form S-8 (Registration No 333-06471). 10.9 Description of Terms of Signing Letter with Donald W. Warkentin dated June 7, 1995, is hereby incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 10.10 Aerial Communications, Inc. Compensation Plan for Non-Employee Directors is hereby incorporated by reference to Exhibit 99.1 to the Company's Form S-8 dated May 2, 1997 (Registration No. 333-26429). 10.11 Description of Supplemental Benefit Agreement with Donald W. Warkentin dated August 2, 1996, is hereby incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 10.12 Amendment to the Aerial Communications, Inc. 1996 Long-Term Incentive Plan is hereby incorporated by reference to Exhibit 99.2 of the Company's Form S-8 dated April 30, 1998 (Registration No. 333-51561). (b) Reports on Form 8-K filed during the quarter ended December 31, 1998. On November 9, 1998, the Company filed a Current Report on Form 8-K dated June 30, 1998, for the purpose of filing a redacted copy of the June 30, 1998, Credit Agreement between Nokia Telecommunications Inc., and the Company. 16 The Company filed a Current Report on Form 8-K dated December 18, 1998, for the purpose of filing the news release dated December 18, 1998, concerning the Company's announcement that the offer from its parent company, Telephone and Data Systems, Inc. [AMEX: TDS], to acquire all of the issued and outstanding Common Shares of the Company not already owned by TDS had been withdrawn. TDS said that it is pursuing a tax free spin-off of its 82.3% interest in Aerial, as well as reviewing other alternatives. 17 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE To the Shareholders and Board of Directors of AERIAL COMMUNICATIONS, INC.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in the Aerial Communications, Inc. and Subsidiaries Annual Report to Shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 27, 1999 (except with respect to the matter discussed in Note 10, as to which the date is March 15, 1999). Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The financial statement schedule listed in Item 14 (a) (2) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This financial statement schedule has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic consolidated financial statements taken as a whole. ARTHUR ANDERSEN LLP Chicago, Illinois January 27, 1999 (except with respect to the matter discussed in Note 10, as to which the date is March 15, 1999) 18 AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED DECEMBER 31, 1998 (DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------
COLUMN C COLUMN B ADDITIONS COLUMN E BALANCE AT CHARGED TO BALANCE AT COLUMN A BEGINNING OF COSTS AND COLUMN D END OF DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD - ------------------------------------------------------------------------ ------------ ------------ ----------- ------------ FOR THE YEAR ENDED DECEMBER 31, 1998 Valuation Allowance for Deferred Tax Assets........................... $ 129,412 $ 148,370 $ -- $ 277,782 Allowance for Doubtful Accounts deducted from Accounts Receivable..... 7,252 23,239 24,616 5,875 FOR THE YEAR ENDED DECEMBER 31, 1997 Valuation Allowance for Deferred Tax Assets........................... 15,029 114,383 -- 129,412 Allowance for Doubtful Accounts deducted from Accounts Receivable..... -- 7,252 -- 7,252 FOR THE YEAR ENDED DECEMBER 31, 1996 Valuation Allowance for Deferred Tax Assets........................... $ 1,291 $ 13,738 $ -- $ 15,029
19 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. AERIAL COMMUNICATIONS, INC. By: /S/ DONALD W. WARKENTIN ------------------------------------------ Donald W. Warkentin PRESIDENT (CHIEF EXECUTIVE OFFICER) By: /S/ J. CLARKE SMITH ------------------------------------------ J. Clarke Smith VICE PRESIDENT-FINANCE AND ADMINISTRATION AND TREASURER (CHIEF FINANCIAL OFFICER) By: /S/ B. SCOTT DAILEY ------------------------------------------ B. Scott Dailey CONTROLLER (PRINCIPAL ACCOUNTING OFFICER)
Dated: March 30, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE(S) DATE - -------------------------------------------------- ------------------------------ --------------------- /s/ DONALD W. WARKENTIN DIRECTOR March 30, 1999 ---------------------------------- Donald W. Warkentin /s/ J. CLARKE SMITH DIRECTOR March 30, 1999 ---------------------------------- J. Clarke Smith /s/ LEROY T. CARLSON, JR. CHAIRMAN AND DIRECTOR March 30, 1999 ---------------------------------- LeRoy T. Carlson, Jr. /s/ LEROY T. CARLSON DIRECTOR March 30, 1999 ---------------------------------- LeRoy T. Carlson /s/ SANDRA L. HELTON DIRECTOR March 30, 1999 ---------------------------------- Sandra L. Helton /s/ RUDOLPH E. HORNACEK DIRECTOR March 30, 1999 ---------------------------------- Rudolph E. Hornacek /s/ JAMES BARR III DIRECTOR March 30, 1999 ---------------------------------- James Barr III /s/ WALTER C.D. CARLSON DIRECTOR March 30, 1999 ---------------------------------- Walter C.D. Carlson /s/ JOHN D. FOSTER DIRECTOR March 30, 1999 ---------------------------------- John D. Foster /s/ THOMAS W. WILSON, JR. DIRECTOR March 30, 1999 ---------------------------------- Thomas W. Wilson, Jr.
20
SIGNATURE TITLE(S) DATE - -------------------------------------------------- ------------------------------ --------------------- /s/ MATTI MAKKONEN DIRECTOR March 30, 1999 ---------------------------------- Matti Makkonen /s/ PERTTI MIETTUNEN DIRECTOR March 30, 1999 ---------------------------------- Pertti Miettunen
21 - -------------------------------------------------------------------------------- EXHIBIT INDEX - --------------------------------------------------------------------------------
EXHIBIT NO. DESCRIPTION - -------- ---------------------------------------------------------------------- 3.1 Restated Certificate of Incorporation of the Company, is hereby incorporated by reference to Exhibit 3.1 to the Company's Form 10-Q for the quarter ended June 30, 1997. 3.2 Restated Bylaws of the Company. 4.1 Trust Indenture Agreement dated as of November 4, 1996, between the Company as issuer, TDS as guarantor, and The First National Bank of Chicago, as trustee for the Company's Series A Zero Coupon Notes, due 2006, is hereby incorporated by reference to Exhibit 4.1 to the Company's Form 8-K dated November 4, 1996. 4.2 Trust Indenture Agreement dated as of February 5, 1998, between the Company as issuer, TDS as guarantor, and The First National Bank of Chicago, as trustee for the Company's Series B Zero Coupon Notes, due 2008, is hereby incorporated by reference to Exhibit 4.1 to the Company's Form 8-K dated February 5, 1998. 9.1(a) Voting Trust Agreement, dated as of June 30, 1989, is hereby incorporated by reference to an exhibit to Post-Effective Amendment No. 3 to the TDS Registration Statement on Form S-1, No. 33-12943. 9.1(b) Amendment dated as of May 9, 1991, to the Voting Trust Agreement dated as of June 30, 1989, is hereby incorporated by reference to Exhibit 9.2 to TDS's Annual Report on Form 10-K for the year ended December 31, 1991. 9.1(c) Amendment dated as of November 20, 1992, to the Voting Trust Agreement dated as of June 30, 1989, as amended, is hereby incorporated by reference to Exhibit 9.1(c) to TDS's Annual Report on Form 10-K for the year ended December 31, 1992. 9.1(d) Amendment dated as of May 22, 1998, to the Voting Trust Agreement dated as of June 30, 1989, as amended, is hereby incorporated by reference to Exhibit 99.3 to TDS's Current Report on Form 8-K filed on June 5, 1998. 10.1 Form of Exchange Agreement between the Company and TDS, is hereby incorporated by reference to Exhibit 10.1 to the Company's Amendment No. 1 to Form S-1 (Registration No. 333-1514). 10.2 Form of Cash Management Agreement between the Company and TDS, is hereby incorporated by reference to Exhibit 10.5 to the Company's Amendment No. 1 to Form S-1 (Registration No. 333-1514). 10.3 Form of Intercompany Agreement between the Company and TDS, is hereby incorporated by reference to Exhibit 10.6 to the Company's Amendment No. 1 to Form S-1 (Registration No. 333-1514). 10.4 Form of Registration Rights Agreement between the Company and TDS, is hereby incorporated by reference to Exhibit 10.7 to the Company's Amendment No. 1 to Form S-1 (Registration No. 333-1514). 10.5 Form of Insurance Cost Sharing Agreement between the Company and TDS, is hereby incorporated by reference to Exhibit 10.8 to the Company's Amendment No. 1 to Form S-1 (Registration No. 333-1514). 10.6 Form of Employee Benefit Plans Agreement between the Company and TDS, is hereby incorporated by reference to Exhibit 10.9 to the Company's Amendment No. 1 to Form S-1 (Registration No. 333-1514).
22
EXHIBIT NO. DESCRIPTION - -------- ---------------------------------------------------------------------- 10.7* PCS Infrastructure Supply Contract dated as of March 1, 1996, between the Company and Nokia Telecommunications Inc., is hereby incorporated by reference to Exhibit 10.13 to the Company's Amendment No. 1 to Form S-1 (Registration No. 333-1514). 10.8 Aerial Communications, Inc. 1996 Long-Term Incentive Plan, as amended, is hereby incorporated by reference to Exhibit 99.1 to the Company's registration statement on Form S-8 (Registration No 333-06471). 10.9 Description of Terms of Signing Letter with Donald W. Warkentin dated June 7, 1995, is hereby incorporated by reference to Exhibit 10.15 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996. 10.10 Aerial Communications, Inc. Compensation Plan for Non-Employee Directors is hereby incorporated by reference to Exhibit 99.1 to the Company's Form S-8 dated May 2, 1997 (Registration No. 333-26429). 10.11 Description of Supplemental Benefit Agreement with Donald W. Warkentin dated August 2, 1996, is hereby incorporated by reference to Exhibit 10.17 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997. 10.12 Amendment to the Aerial Communications, Inc. 1996 Long-Term Incentive Plan is hereby incorporated by reference to Exhibit 99.2 of the Company's Form S-8 filed on April 30, 1998 (Registration No. 333-51561). 10.13 Investment Agreement by and between the Company, Telephone & Data Systems, Inc., Aerial Operating Company, Inc. and Sonera Ltd. is hereby incorporated by reference to Exhibit 99.2 of the Company's Form 8-K dated September 8, 1998 and filed on September 17, 1998. 10.14 Registration Rights Agreement by and between the Company and Sonera Ltd. is hereby incorporated by reference to Exhibit 99.3 of the Company's Form 8-K dated September 8, 1998 and filed on September 17, 1998. 10.15 Joint Venture Agreement by and between the Company, Aerial Operating Company, Inc. and Sonera Corporation U.S., is hereby incorporated by reference to Exhibit 99.4 of the Company's Form 8-K dated September 8, 1998 and filed on September 17, 1998. 10.16 Supplemental Agreement by and between the Company, Aerial Operating Company, Inc. and Sonera Ltd. is hereby incorporated by reference to Exhibit 99.5 of the Company's Form 8-K dated September 8, 1998 and filed September 17, 1998. 10.17 Restated and amended Tax Allocation Agreement by and between the Company, Aerial Operating Company, Inc. and Telephone and Data Systems, Inc., is hereby incorporated by reference to Exhibit 99.6 of the Company's Form 8-K dated September 8, 1998 and filed September 17, 1998. 10.18 Guaranty Agreement by and between the Company and Telephone and Data Systems, Inc., dated August 31, 1998, is hereby incorporated by reference to Exhibit 99.7 of the Company's Form 8-K dated September 8, 1998 and filed on September 17, 1998. 10.19 Purchase Agreement between the Company, Aerial Operating Company, Inc., Telephone and Data Systems, Inc. and Sonera Ltd., dated June 1, 1998, is hereby incorporated by reference to Exhibit 99.9 of the Company's Form 8-K dated September 8, 1998 and filed on September 17, 1998. 10.20(a) Revolving Credit Agreement dated August 31, 1998, by and between Telephone and Data Systems, Inc. and Aerial Operating Company, Inc. is hereby incorporated by reference to Exhibit 99.8 of the Company's Form 8-K dated September 8, 1998 and filed on September 17, 1998.
23
EXHIBIT NO. DESCRIPTION - -------- ---------------------------------------------------------------------- 10.20(b) First Amendment dated November 3, 1998, to the Revolving Credit Agreement between Telephone and Data Systems, Inc. and Aerial Operating Company, Inc. 10.20(c) Second Amendment dated February 15, 1998 to the Revolving Credit Agreement between Telephone and Data Systems, Inc and Aerial Operating Company, Inc. 10.21* Credit Agreement dated June 30, 1998, by and between Nokia Telecommunications Inc. and the Company, is hereby incorporated by reference to Exhibit 99.1 of the Company's Form 8-K dated June 30, 1998 and filed on November 9, 1998. 10.22 Tax Settlement Agreement dated March 12, 1999, by and between the Company, Aerial Operating Company, Inc. and Telephone and Data Systems, Inc. 11 Computation of earnings per common share (included in Footnote 2(l) to consolidated financial statements in Exhibit 13) 13 Incorporated portions of the 1998 Annual Report to Shareholders 21 List of Subsidiaries of the Registrant 23 Consent of Independent Public Accountants 27 Financial Data Schedule
- ------------------------ * Confidential material appearing in this exhibit was omitted and filed separately with the Securities and Exchange Commission in accordance with Rule 406 promulgated under the Securities Act of 1933. 24 EX-3.2 2 EXHIBIT 3.2 EXHIBIT 3.2 AERIAL COMMUNICATIONS, INC. RESTATED BYLAWS (AS AMENDED AS OF SEPTEMBER 8, 1998) ARTICLE I OFFICES SECTION 1. REGISTERED OFFICE. The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware. SECTION 2. OTHER OFFICES. The corporation may also have offices at such other places both within and without the State of Delaware as the board of directors may from time to time determine or the business of the corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS SECTION 1. PLACE OF MEETING. All meetings of the stockholders for the election of directors shall be held at such place either within or without the State of Delaware as shall be designated from time to time by the board of directors and stated in the notice of the meeting. Meetings of stockholders for any other purpose may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. SECTION 2. TIME OF ANNUAL MEETING AND VOTE REQUIRED TO ELECT DIRECTORS. Annual meetings of stockholders shall be held on the first Monday in May, commencing in 1997, if not a legal holiday, and if a legal holiday, then on the next secular day following, at 10:00 A.M., or at such other date and time as shall be designated from time to time by the board of directors and stated in the notice of the meeting, at which the stockholders shall elect by a plurality vote directors to succeed those whose terms expire, and transact such other business as may properly be brought before the meeting. SECTION 3. NOTICE OF ANNUAL MEETING. Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not less than ten nor more than sixty days before the date of the meeting. SECTION 4. VOTING LIST. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, at the corporation's principal business address during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. SECTION 5. SPECIAL MEETINGS. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the certificate of incorporation, may be called by the president and shall be called by the president or secretary at the request in writing of a majority of the board of directors, or at the request in writing of holders of a majority of the votes of the stock issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. SECTION 6. NOTICE OF SPECIAL MEETINGS. Written notice of a special meeting, stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given not less than ten nor more than sixty days before the date of the meeting to each stockholder entitled to vote at such meeting. SECTION 7. BUSINESS TO BE TRANSACTED AT SPECIAL MEETINGS. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. SECTION 8. QUORUM AND ADJOURNMENTS. The holders of a majority of the votes of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation, and except where a separate vote by a class or classes is required, in which case the holders of a majority of the votes of the stock of such class or classes, present in person or represented by a proxy, shall constitute a quorum entitled to take action with respect to that vote on that matter. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. SECTION 9. VOTE REQUIRED. When a quorum is present at any meeting, the vote of the holders of a majority of the votes of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of statute, the certificate of incorporation, or the bylaws, a different vote is required, in which case such express provision shall govern and control the decision or such question. SECTION 10. VOTING. Each stockholder shall at every meeting of stockholders be entitled to vote in person or by proxy the shares of capital stock having voting power held by such stockholder, but no proxy shall be voted after three years from its date, unless the proxy provides for a longer period. SECTION 11. INFORMAL ACTION. Any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. SECTION 12. INTRODUCTION OF BUSINESS AT A MEETING OF STOCKHOLDERS. At an annual or special meeting of stockholders, only such business shall be conducted, and only such proposals shall be acted upon, as shall have been properly brought before an annual or special meeting of stockholders. To be properly brought before an annual or special meeting of stockholders, business must be (1) in the case of a special meeting, specified in the notice of the special meeting (or any supplement thereto) given by or at the direction of the board of directors, or (2) in the case of an annual meeting, properly brought before an annual meeting by a stockholder. For business to be properly brought before an annual meeting of stockholders by a stockholder, the stockholder must have given timely notice thereof in writing to the President or Secretary of the corporation. To be timely, a stockholder's notice must be received at the principal executive offices of the corporation not less than twenty days nor more than fifty days prior to the date of the annual meeting, provided, however, that if less than thirty days' notice or prior public disclosure of the date of the annual meeting is made or given to stockholders, notice by the stockholder to be timely must be received not later than the close of business on the tenth day following the earlier of (1) the day on which such notice of the date of the meeting was mailed or (2) the day on which such public disclosure was made. A stockholder's notice shall set forth as to each matter the stockholder proposes to bring before an annual meeting of stockholders (1) a brief description of the business desired to be brought before the annual meeting, (2) the name and address, as they appear on the corporation's books, of the stockholder proposing such business and any other stockholders known by such stockholder to be supporting such proposal, (3) the class and number of shares of the corporation which are beneficially owned by such stockholder on the date of such stockholder's notice and by any other stockholders known by such stockholder to be supporting such proposal on the date of such stockholder's notice and (4) any material interest of the stockholder in such proposal. Notwithstanding anything in the bylaws to the contrary, no business shall be conducted at a meeting of stockholders except in accordance with the procedure set forth in this Section 12. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that the business was not properly brought before the meeting in accordance with the procedures described by the bylaws, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be considered. SECTION 13. NOMINATION OF DIRECTORS. Only persons nominated in accordance with the procedures set forth in this section shall be eligible for election as directors. Nominations of persons for election to the board may be made at a meeting of stockholders (1) by or at the direction of the board of directors, or (2) by any stockholder of the corporation entitled to vote for the election of directors at such meeting who complies with the notice procedures set forth in this Section 13. Such nominations, other than those made by or at the direction of the board of directors, shall be made pursuant to timely notice in writing to the President or Secretary of the corporation. To be timely, a stockholder's notice must be received at the principal executive offices of the corporation not less than twenty days nor more than fifty days prior to the date of a meeting, provided, however, that if fewer than thirty days notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so delivered or received not later than the close of business on the tenth day following the earlier of (1) the day on which such notice of the date of such meeting was mailed or (2) the day on which such public disclosure was made. A stockholder's notice shall set forth (1) as to each person whom the stockholder proposes to nominate for election or reelection as a director (a) the name, age, business address and residence address of such person, (b) the principal occupation or employment of such person, (c) the class and number of shares of the corporation which are beneficially owned by such person on the date of such stockholder's notice and (d) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including without limitation such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (2) as to the stockholder giving the notice (a) the name and address, as they appear on the corporation's books, of such stockholder and any other stockholders known by such stockholder to be supporting such nominees and (b) the class and number of shares of the corporation which are beneficially owned by such stockholder on the date of such stockholder's notice and by any other stockholders known by such stockholder to be supporting such nominees on the date of such stockholder's notice. No person shall be eligible for election as a director of the corporation unless nominated in accordance with procedures set forth in this section. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the bylaws, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. This Section 13 shall not apply to the election of a director to a directorship which may be filled by the board of directors under the Delaware General Corporation Law. ARTICLE III DIRECTORS SECTION 1. NUMBER, CLASSIFICATION AND TERM OF OFFICE. The number of directors which shall constitute the whole board shall not be less than three nor more than twelve. Within the limits above specified, the number of directors shall be determined by resolution of the board of directors or by the stockholders at the annual meeting. Commencing with the 1997 annual meeting of stockholders, the directors shall be divided into three classes: Class I, Class II and Class III. Such classes shall be as nearly equal in number as possible. The term of office of the initial Class I directors shall expire at the annual meeting of stockholders in 1998; the term of office of the initial Class II directors shall expire at the annual meeting of stockholders in 1999; and the term of office of the initial Class III directors shall expire at the annual meeting of stockholders in 2000, or thereafter when their respective successors in each case are elected and qualified. At each annual election held after the 1997 annual meeting of stockholders the directors chosen to succeed those whose terms then expire shall be identified as being of the same class as the directors they succeed and shall be elected for a term expiring at the third succeeding annual meeting or thereafter when their respective successors in each case are elected and qualified. Any director elected to a particular class by the stockholders or directors shall be eligible, upon resignation, to be elected to a different class. SECTION 2. GENERAL POWERS. The business of the corporation shall be managed by its board of directors, which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute, by the certificate of incorporation or by the bylaws directed or required to be exercised or done by the stockholders. MEETINGS OF THE BOARD OF DIRECTORS SECTION 3. PLACE OF MEETINGS. The board of directors of the corporation may hold meetings, both regular and special, either within or without the State of Delaware. SECTION 4. REGULAR MEETINGS. A regular meeting of the board of directors shall be held without other notice than this bylaw, immediately after, and at the same place as, the annual meeting of stockholders. The board of directors may provide, by resolution, the time and place, either within or without the State of Delaware, for the holding of additional regular meetings without other notice than such resolution. SECTION 5. SPECIAL MEETINGS. Special meetings of the board of directors may be called by the president on two days notice to each director, either personally or by mail or by telegram; special meetings shall be called by the president or secretary in like manner and on like notice on the written request of two directors. SECTION 6. QUORUM. At all meetings of the board of directors, a majority of directors then in office shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum shall not be present at any meeting of the board of directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. SECTION 7. INFORMAL ACTION. Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting, if all members of the board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the board or committee. SECTION 8. RESIGNATIONS. Any director of the corporation may resign at any time by giving written notice to the board of directors, the president, or the secretary of the corporation. Such resignation shall take effect at the time specified therein; and, unless tendered to take effect upon acceptance thereof, the acceptance of such resignation shall not be necessary to make it effective. SECTION 9. PRESUMPTION OF ASSENT. A director of the corporation who is present at a meeting of the board of directors at which action on any corporate matter is taken shall be conclusively presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. COMMITTEES OF DIRECTORS SECTION 10. APPOINTMENT AND POWERS. The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, each committee to consist of one or more directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether the member or members constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the certificate of incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the bylaws of the corporation; and, unless the resolution so provides, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors. SECTION 11. MINUTES. Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. COMPENSATION OF DIRECTORS SECTION 12. COMPENSATION. The board of directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the board of directors and may be paid a fixed sum for attendance at each meeting of the board of directors or a stated salary as director. No such payments shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. ARTICLE IV NOTICES SECTION 1. NOTICE. Whenever, under the provisions of statute or of the certificate of incorporation or of these bylaws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at the stockholder's address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by telegram, telex or similar device. SECTION 2. WAIVER. Whenever any notice is required to be given under the provisions of statute or of the certificate of incorporation or of these bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE V OFFICERS SECTION 1. NUMBER AND QUALIFICATIONS. The officers of the corporation shall be chosen by the board of directors and shall be a chairman, president, one or more vice-presidents, a secretary and a treasurer. The board of directors may also choose one or more assistant secretaries and assistant treasurers. Any number of offices may be held by the same person, unless the certificate of incorporation or these bylaws otherwise provide. SECTION 2. ELECTION. The board of directors at its first meeting after each annual meeting of stockholders shall choose a chairman, president, one or more vice-presidents, a secretary and a treasurer. SECTION 3. OTHER OFFICERS AND AGENTS. The board of directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board. SECTION 4. SALARIES. The salaries of all officers and agents of the corporation shall be fixed by the board of directors or by the chairman, PROVIDED that the chairman shall not fix any salary for himself or herself as an officer or agent of the corporation. SECTION 5. TERM OF OFFICE. The officers of the corporation shall hold office until their successors are chosen and qualify. Any officer elected or appointed by the board of directors may be removed at any time by the affirmative vote of a majority of the board of directors. Any vacancy occurring in any office of the corporation shall be filled by the board of directors. THE CHAIRMAN SECTION 6. CHAIRMAN. The chairman shall preside at all meetings of the shareholders and of the board of directors and shall see that orders and resolutions of the board of directors are carried into effect. He may sign bonds, mortgages, certificates for shares and all other contracts and documents whether or not under the seal of the corporation except in cases where the signing and execution thereof shall be expressly delegated by law, by the board of directors or by these bylaws to some other officer or agent of the corporation. In the absence of the president (including a vacancy in such office) or in the event of his inability or refusal to act, which inability shall be determined by the chairman, the chairman shall perform the duties of the principal executive officer and, when so acting, shall have all the powers of the President. THE PRESIDENT SECTION 7. THE PRESIDENT. The president shall be the principal executive officer of the corporation and shall in general supervise and control all of the business and affairs of the corporation, subject to the general powers of the board of directors. In the absence of the chairman, he shall preside at all meetings of the shareholders and of the board of directors. He may sign bonds, mortgages, certificates for shares and all other contracts and documents whether or not under seal of the corporation except in cases where the signing and execution thereof shall be expressly delegated by the board of directors or by these bylaws to some other officer or agent of the corporation. In general, he shall perform all duties incident to the office of president and such other duties as may be prescribed by the board of directors from time to time. He shall have general powers of supervision and shall be the final arbiter of all differences between officers of the corporation and his decision as to any matter affecting the corporation shall be final and binding as between the officers of the corporation subject only to the chairman and the board of directors. THE VICE-PRESIDENT SECTION 8. THE VICE-PRESIDENT. In the absence of the chairman or the president or in the event of the chairman's or the president's inability or refusal to act, the vice-president (or in the event there be more than one vice-president, the vice-presidents in the order designated, or in the absence of any designation then in the order of their election) shall perform the duties of the president, and when so acting shall have all the powers of and be subject to all the restrictions upon the president. The vice-president shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. THE SECRETARY AND ASSISTANT SECRETARY SECTION 9. THE SECRETARY. The secretary shall attend all meetings of the board of directors and all meetings of the stockholders and record all the proceedings of the meetings of the corporation and of the board of directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the board of directors, and shall perform such other duties as may be prescribed by the board of directors or president, under whose supervision the secretary shall be. The secretary shall have custody of the corporate seal of the corporation and the secretary, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and, when so affixed, it may be attested by the secretary's signature or by the signature of such assistant secretary. The board of directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by the secretary's signature. SECTION 10. THE ASSISTANT SECRETARY. The assistant secretary or, if there be more than one, the assistant secretaries in the order determined by the board of directors (or if there be no such determination, then in the order of their election), shall, in the absence of the secretary or in the event of the secretary's inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. THE TREASURER AND ASSISTANT TREASURER SECTION 11. THE TREASURER. The treasurer shall have custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the board of directors. The treasurer shall disburse the funds of the corporation as may be ordered by the board of directors, taking proper vouchers for such disbursements, and shall render to the president and the board of directors, at its regular meetings, or when the board of directors so requires, an account of all transactions as treasurer and of the financial condition of the corporation. If required by the board of directors, the treasurer shall give the corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the board of directors for the faithful performance of the duties of the office and for the restoration to the corporation, in case of the treasurer's death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in the treasurer's possession or under the treasurer's control belonging to the corporation. SECTION 12. THE ASSISTANT TREASURER. The assistant treasurer or, if there shall be more than one, the assistant treasurers in the order determined by the board of directors (or if there be no such determination, then in the order of their election), shall, in the absence of the treasurer or in the event of the treasurer's inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. ARTICLE VI CERTIFICATES OF STOCK SECTION 1. FORM OF CERTIFICATES. Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by, the chairman, president or a vice-president and the treasurer or an assistant treasurer or the secretary or an assistant secretary of the corporation, certifying the number of shares owned by the stockholder in the corporation. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in Section 202 of Title 8 of the Delaware Code, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. SECTION 2. FACSIMILE SIGNATURES. Where a certificate is countersigned (1) by a transfer agent other than the corporation or its employee, or (2) by a registrar other than the corporation or its employee, any other signature on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. SECTION 3. LOST CERTIFICATES. The board of directors may direct that a new certificate or certificates be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. SECTION 4. TRANSFER OF STOCK. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the corporation, within a reasonable period of time, to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. SECTION 5. REGISTERED STOCKHOLDERS. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VII GENERAL PROVISIONS SECTION 1. DIVIDENDS. Dividends upon the capital stock of the corporation, subject to the provisions of the certificate of incorporation, if any, may be declared by the board of directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the certificate of incorporation. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. SECTION 2. CHECKS. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the board of directors may from time to time designate. SECTION 3. FISCAL YEAR. The fiscal year of the corporation shall be fixed by resolution of the board of directors. SECTION 4. SEAL. The corporate seal shall have inscribed thereon the name of the corporation and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE VIII AMENDMENTS These bylaws may be altered, amended or repealed or new bylaws may be adopted by the board of directors or by the stockholders at any regular meeting of the board of directors or of the stockholders or at any special meeting of the board of directors or of the stockholders, if in the case of such special meeting of the stockholders notice of such alteration, amendment, repeal or adoption of new bylaws is contained in the notice of such special meeting. EX-10.20 3 EXHIBIT 10.20(B) EXHIBIT 10.20(b) FIRST AMENDMENT TO THE REVOLVING CREDIT AGREEMENT BY AND BETWEEN TELEPHONE AND DATA SYSTEMS, INC. AND AERIAL OPERATING COMPANY, INC. This First Amendment (the "FIRST AMENDMENT") to the Revolving Credit Agreement dated as of August 31, 1998, (the "Revolving Credit Agreement") by and between Telephone and Data Systems, Inc. ("TDS"), a Delaware corporation, and Aerial Operating Company, Inc. (the "COMPANY"), a Delaware corporation, is effective as of this 3rd day of November, 1998. WHEREAS TDS and the Company entered into the Revolving Credit Agreement; WHEREAS TDS continues to own certain of the issued and outstanding shares of the capital stock of Aerial Communications, Inc. (the "GUARANTOR"), which, in turn, is the parent of the Company and guarantor of the Company's obligations under the Notes and the Revolving Credit Agreement; and WHEREAS, the Company has identified a need for additional funds and TDS has agreed to provide the Company certain additional funds for specified purposes under terms more particularly set forth in the Revolving Credit Agreement and as proposed to be amended hereby; NOW, THEREFORE, in consideration of the premises set forth above, and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, TDS and the Company agree to amend the Revolving Credit Agreement as follows: 1. The definition of "Applicable Maximum Amount" set forth in Section 10(b) of the Revolving Credit Agreement is hereby amended and restated to read in its entirety as follows: "Applicable Maximum Amount" shall mean, as of any date of determination, the dollar amount set forth in Schedule I hereto and pertaining to the period during which such date occurs, MINUS (i) the aggregate principal amount of all prepayments required to be paid pursuant to the last sentence of Section 2 after November 3, 1998 and (ii) the aggregate amount of all loans to the Guarantor outstanding as of November 3, 1998 under that certain Credit Agreement dated as of June 30, 1998, by and among the Guarantor, the "Lenders" party thereto from time to time and Nokia Telecommunications Inc., as "Agent" for said Lenders. 2. Schedule I to this First Amendment shall be added to the Revolving Credit Agreement as Schedule I thereto. 3. Section 3 of the Credit Agreement is hereby amended by striking the rate "1-1/2%" set forth in the first sentence thereof and replacing it with the rate "3.0%". 4. Section 5 of the Credit Agreement is hereby amended by striking the date "December 31, 1999" set forth therein and replacing it with the date April 2, 2000. All other terms and conditions of the Revolving Credit Agreement shall remain unchanged and in full force and effect. All defined terms contained in the Revolving Credit Agreement hereby are incorporated into this First Amendment and shall have the same meaning herein as in the Revolving Credit Agreement, unless otherwise defined herein. IN WITNESS WHEREOF, the parties hereto, by their duly authorized representatives, have executed this First Amendment to the Revolving Credit Agreement, effective as of the date first written above. TELEPHONE AND DATA SYSTEMS, INC. AERIAL OPERATING COMPANY, INC. By: /s/ Sandra L. Helton By: /s/ J. Clarke Smith - ------------------------------ -------------------------- Name: Sandra L. Helton Name: J. Clarke Smith Title: Executive Vice President-Finance Title: Vice President Finance & Adminstration Date: 11/24/98 Date: 11/24/98 - ------------------------------ -------------------------- The Guarantor, without in any way establishing a course of dealing, as evidenced by its signature below, hereby (i) consents to the execution and delivery of this Amendment by the parties hereto, (ii) agrees that this Amendment shall not limit or diminish the obligations of the Guarantor under the Guarantor's unconditional and irrevocable guarantee of the Company's obligations of the Notes and the Revolving Credit Agreement, (iii) reaffirms its obligations under such guarantee, and (iv) agrees that its guarantee of such obligations remains in full force and effect and is hereby ratified and confirmed. AERIAL COMMUNICATIONS, INC. By: /s/ Donald W. Warkentin - ------------------------------ Name: Donald W. Warkentin Title: President & Chief Executive Officer Date: 11/24/98 - ------------------------------ SCHEDULE I TO REVOLVING CREDIT AGREEMENT
PERIOD APPLICABLE MAXIMUM AMOUNT - ------ ------------------------- November 30, 1998 through December 30, 1998 $585,000,000 December 31, 1998 through January 30, 1999 $615,000,000 January 31, 1999 through February 27, 1999 $625,000,000 February 28, 1999 and thereafter $650,000,000
EX-10.20 4 EXHIBIT 10.20(C) EXHIBIT 10.20(c) SECOND AMENDMENT TO THE REVOLVING CREDIT AGREEMENT BY AND BETWEEN TELEPHONE AND DATA SYSTEMS, INC. AND AERIAL OPERATING COMPANY, INC. This Second Amendment (the "SECOND AMENDMENT") to the Revolving Credit Agreement dated as of August 31, 1998, as amended November 3, 1998 (the "REVOLVING CREDIT AGREEMENT") by and between Telephone and Data systems, Inc. ("TDS"), a Delaware corporation, and Aerial Operating Company, Inc. (the "COMPANY"), a Delaware corporation, is effective as of this 15th day of February, 1999. WHEREAS TDS and the Company entered into the Revolving Credit Agreement; WHEREAS TDS continues to own certain of the issued and outstanding shares of the capital stock of Aerial Communications, Inc. (the "GUARANTOR"), which, in turn, is the parent of the Company and guarantor of the Company's obligations under the Notes and the Revolving Credit Agreement; and WHEREAS, the Company has identified a need for funds on an earlier basis than previously anticipated and TDS has agreed to accelerate funds for specified purposes under terms more particularly set forth in the Revolving Credit Agreement and as proposed to be amended hereby; NOW, THEREFORE, in consideration of the premises set forth above, and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, TDS and the Company agree to amend the Revolving Credit Agreement as follows: 1. Schedule I is hereby amended and restated in its entirety in the form attached hereto. All other terms and conditions of the Revolving Credit Agreement shall remain unchanged and in full force and effect. All defined terms contained in the Revolving Credit Agreement hereby are incorporated into this Second Amendment and shall have the same meaning herein as in the Revolving Credit Agreement, unless otherwise defined herein. * * * * * IN WITNESS WHEREOF, the parties hereto, by their duly authorized representatives, have executed this Second Amendment to the Revolving Credit Agreement, effective as of the date first written above. TELEPHONE AND DATA SYSTEMS, INC. AERIAL OPERATING COMPANY, INC. By: /S/ SANDRA L. HELTON By: /S/ J. CLARKE SMITH ---------------------------------- ------------------------------ Name: Sandra L. Helton Name: J. Clarke Smith Title: Executive Vice President-Finance Title: Vice President Finance & Administration Date: February 15, 1999 Date: February 17, 1999 ------------------------------- ---------------------------- The Guarantor, without in any way establishing a course of dealing, as evidenced by its signature below, hereby (i) consents to the execution and delivery of this Amendment by the parties hereto, (ii) agrees that this Amendment shall not limit or diminish the obligations of the Guarantor under the Guarantor's unconditional and irrevocable guarantee of the Company's obligations of the Notes and the Revolving Credit Agreement, (iii) reaffirms its obligations under such guarantee, and (iv) agrees that its guarantee of such obligations remains in full force and effect and is hereby ratified and confirmed. AERIAL COMMUNICATIONS, INC. By: /S/ J. CLARKE SMITH ----------------------- Name: J. Clarke Smith Title: Vice President Finance & Administration Date: February 17, 1999 --------------------- SCHEDULE I TO REVOLVING CREDIT AGREEMENT
PERIOD APPLICABLE MAXIMUM AMOUNT - ------ ------------------------- November 30, 1998 through December 30, 1998 $585,000,000 December 31, 1998 through January 30, 1999 $615,000,000 January 31, 1999 through February 14, 1999 $625,000,000 February 15, 1999 and thereafter, thru April 2, 2000 $650,000,000
EX-10.22 5 EXHIBIT 10.22 EXHIBIT 10.22 TAX SETTLEMENT AGREEMENT This Tax Settlement Agreement (this "Agreement"), dated as of March 12, 1999, is entered into among Telephone and Data Systems, Inc., a Delaware corporation ("TDS"), Aerial Communications, Inc., a Delaware corporation ("Aerial"), and Aerial Operating Co., Inc., a Delaware corporation ("AOC"), and has reference to the following circumstances. 1. TDS, Aerial and AOC are parties to a Tax Allocation Agreement dated as of September 8, 1998 (the "Tax Allocation Agreement"). 2. TDS and Aerial have agreed that it is desirable for TDS to make a payment to Aerial with respect to certain losses incurred by the Aerial Group and used in computing the consolidated tax liabilities of the TDS Group, in lieu of the treatment of such losses provided under the Tax Allocation Agreement. 3. TDS is the common parent of an affiliated group of corporations which files a consolidated tax return (the "TDS Group"). 4. For purposes of this Agreement, the term "Aerial Group" means Aerial and its subsidiaries as if they constituted a separate affiliated group of corporations which files a consolidated tax return. NOW, THEREFORE, in consideration of the mutual agreements contained herein, the parties hereto agree as follows. Section 1. Tax Settlement Payment. On or before March 15, 1999, TDS shall pay Aerial $114,500,000 (the "Tax Settlement Payment"). In consideration of the Tax Settlement Payment, the amount of the net operating and capital losses and tax credits of the Aerial Group taken into account under the Tax Allocation Agreement shall be adjusted to exclude the net operating and capital losses and tax credits attributable to the Aerial Group that are absorbed by the TDS Group in periods ending on or before December 31, 1999. Section 2. Tax Settlement Model. The tax settlement model attached to this Agreement as Schedule 1 has been prepared solely for purposes of making the adjustments contemplated by Sections 3, 4, 5 and 6 hereof, and the parties agree that it does not represent a projection of the anticipated results of the TDS Group, the Aerial Group or any member thereof and that, except for the adjustments noted, it was not relied upon by the parties hereto in arriving at the amount of the Tax Settlement Payment. For a period of 90 days after the date of this Agreement, TDS and Aerial shall be entitled to object to such model on the grounds that it contains computational errors or errors in the application of the federal income tax law. The procedures set forth in Section 8 of this Agreement shall apply to resolve any such objections. Within 10 days after the resolution of any such objections, the parties shall modify such model accordingly (as so modified, the "Tax Settlement Model") and shall adjust the Tax Settlement Payment by payment from TDS to Aerial or from Aerial to TDS, as the case may be, of the difference between the Tax Settlement Payment shown on the model attached as Schedule 1 and the Tax Settlement Payment shown on the Tax Settlement Model, plus interest on such difference as provided in Section 9. Section 3. 1998 Results. The Tax Settlement Model is based on estimates of the taxable income or loss of the members of the TDS Group for the consolidated return year ended December 31, 1998 (the "1998 Results"). Within 30 days after filing the consolidated federal income tax return of the TDS Group for such year, TDS shall recalculate the Tax Settlement Model, reflecting in such recalculation the 1998 Results as reported on such return. The change to reflect the 1998 Results shall be the only change made in this recalculation. TDS shall provide a copy of the Tax Settlement Model as recalculated to Aerial, together with such supporting information as Aerial may reasonably request to determine the correctness of the recalculation. For a period of 30 days after receipt, Aerial shall have the opportunity to object solely on the grounds that the Tax Settlement Model as recalculated does not accurately reflect the 1998 Results. The procedures set forth in Section 8 of this Agreement shall apply to resolve any such objections. Within 10 days after the resolution of any such objections, the parties shall modify the Tax Settlement Model accordingly (as so modified, the "Adjusted Tax Settlement Model") and shall adjust the Tax Settlement Payment by payment from TDS to Aerial or from Aerial to TDS, as the case may be, of the difference between the Tax Settlement Payment shown on the Tax Settlement Model and the Tax Settlement Payment shown on the Adjusted Tax Settlement Model, plus interest on such difference as provided in Section 9. Section 4. Spin-Off Date. The Tax Settlement Model is based on the assumption that TDS will distribute to its shareholders the stock of Aerial that it now owns on August 31, 1999. If Aerial ceases to be a member of the TDS Group (on account of such distribution or the consummation of another transaction) on a later date (the "Departure Date"), the adjustments set forth on Exhibit A shall be made. If the Departure Date occurs on a date that is between two of the dates in the table set forth on Exhibit A, the adjustment to the Tax Settlement Payment and the amount of Aerial Losses shall be determined by interpolation based on the number of days. If Aerial is a member of the TDS Group on January 1, 2000, the Departure Date shall be treated as December 31, 1999 for purposes of this Section. The figures in the table set forth on Exhibit A shall be adjusted to reflect any changes made to the Tax Settlement Model pursuant to Sections 2 and 3. TDS shall pay Aerial the adjustment to the Tax Settlement Payment provided by this Section within 10 days after the Departure Date (or December 31, 1999 in the event that Aerial is a member of the TDS Group of January 1, 2000), plus interest on such adjustment as provided in Section 9. Section 5. 1999 Results. Within 30 days after filing the consolidated federal income tax return of the TDS Group for the consolidated return year ending December 31, 1999 (the "1999 Return"), TDS shall provide to Aerial a statement setting forth the amount of the consolidated net operating and capital losses of the TDS Group that are attributable to the Aerial Group as of the close of such consolidated return year (the "Adjusted Aerial Losses"). TDS shall provide such supporting information as Aerial may reasonably request to determine whether such statement is consistent with the 1999 Return. For a period of 30 days after receipt, Aerial shall have the opportunity to object solely on the grounds that such statement is inconsistent with the 1999 Return. The procedures set forth in Section 8 of this Agreement shall apply to resolve any such objections. Within 10 days after the resolution of any such objections, TDS shall adjust the Tax Settlement Payment by paying to Aerial an amount equal to 13% of the excess, if any, of (i) the Aerial Losses (as determined under Section 4) over (ii) the Adjusted Aerial Losses, plus interest on such amount, if any, as provided in Section 9. However, TDS shall not be obligated to make any payment to Aerial pursuant to the preceding sentence or pursuant to Section 6 until the aggregate amount of the excess determined pursuant to the preceding sentence and Section 6 exceeds 10% of the Aerial Losses. Section 6. IRS Adjustments. If it is finally determined, as a result of audit by the Internal Revenue Service of any consolidated return year of the TDS Group through December 31, 1999, that there is an adjustment that decreases (or increases) the amount of the Adjusted Aerial Losses, TDS shall provide to Aerial a statement of the Adjusted Aerial Losses as finally determined (the "Final Aerial Losses") within 30 days after such final determination. TDS shall provide such supporting information as Aerial may reasonably request to ascertain the amount of the Final Aerial Losses. For a period of 30 days after receipt, Aerial shall have the opportunity to object to such statement solely on the grounds it does not properly reflect the amount of the Final Aerial Losses. The procedures set forth in Section 8 of this Agreement shall apply to resolve any such objections. Within 10 days after the resolution of any such objections, TDS shall adjust the Tax Settlement Payment by paying to Aerial an amount equal to 13% of the excess, if any, of (i) the Adjusted Aerial Losses over (ii) the Final Aerial Losses, plus interest on such amount, if any, as provided in Section 9. However, TDS shall not be obligated to make any payment to Aerial pursuant to the preceding sentence or pursuant to Section 5 until the aggregate amount of the excess determined pursuant to the preceding sentence and Section 5 exceeds 10% of the Aerial Losses. TDS shall have the right to make, at any time and from time to time, a nonrefundable prepayment of an estimate of its liability under this Section. Any amount which is so prepaid shall cease to bear interest as of the date of prepayment. Section 7. Section 338(h)(10) Sale and Similar Transactions. TDS shall not, without the consent of a majority of the independent directors of Aerial, (i) sell or agree to sell the stock of Aerial and join or agree to join in making an election under section 338(h)(10) of the Internal Revenue Code of 1986, as amended (the "Code"), with respect to such sale or (ii) cause or permit the Aerial Group, while its members are members of the TDS Group, to dispose of or agree to dispose of assets constituting 50% or more of the assets of the Aerial Group in a transaction, or in a series of transactions pursuant to a plan (which shall be conclusively presumed to exist in the case of all transactions occurring within a two-year period), in which the Aerial Group recognizes all or substantially all of the gain with respect to such assets. In addition, this Agreement is subject to the approval by the Board of Directors of Aerial (the "Aerial Board"), concurrently with the approval of this Agreement, of a resolution which authorizes the Special Committee of the Aerial Board to consider any proposal relating to the sale, merger, consolidation or other business combination involving substantially all of the common stock or assets of Aerial and to report to the Board of Directors of Aerial as a whole the Special Committee's recommendation with respect thereto. Section 8. Resolution of Objections. Any objection raised under Sections 2, 3, 5 or 6 of this Agreement shall be in writing and shall set forth in reasonable detail the nature of the objection and the corrections that the objecting party believes should be made. The parties shall attempt to resolve all such objections within 30 days, but to the extent they cannot do so, they shall present unresolved objections to the Chicago office of Arthur Andersen LLP. The fees and expenses of Arthur Andersen LLP shall be borne equally by TDS and Aerial. If TDS or Aerial disputes Arthur Andersen's resolution of any objection, the objection shall be submitted to, and finally determined by, binding arbitration conducted in Chicago by the American Arbitration Association in accordance with its Commercial Rules. TDS and Aerial shall share equally the cost of such arbitration, including the administrative fee, the compensation of the arbitrator and the costs of any neutral witnesses; the parties shall each bear all their own costs and expenses of arbitration, including legal and accounting fees and expenses. Section 9. Interest. If a payment is to be made pursuant to Sections 2, 3, 4, 5 or 6 of this Agreement, interest shall be added to such payment, computed at 13%, compounded annually, from (and including) the date of the Tax Settlement Payment through (and including) the day before such payment is made. Section 10. Method of Payment. All payments to be made under this Agreement shall be made by wire transfer of immediately available funds to an account specified by the recipient thereof. Section 11. Effect on Other Agreements. This Agreement is intended to settle only the respective rights and obligations of the parties under the Tax Allocation Agreement with respect to the net operating and capital losses and tax credits specifically referred to in this Agreement. Subject to the foregoing sentence, the execution of this Agreement is not intended to prejudice or waive any party's rights to contest, or assert its interpretation of, any or all of the provisions of the Tax Allocation Agreement under applicable law, including, without limitation, the right to contest the allocation between TDS and Aerial of responsibility for any taxes resulting from an election under section 338(h)(10) of the Code with respect to Aerial. In the event that TDS's reimbursement obligation under the Tax Allocation Agreement is limited or extinguished by application of any provision of the Tax Allocation Agreement or for any other reason, Aerial shall nevertheless be entitled to receive and retain the Tax Settlement Payment and any other payment made to Aerial hereunder. Section 12. Use of Tax Settlement Payment. TDS acknowledges and agrees that the Tax Settlement Payment may be used by the Aerial Group for general corporate purposes and that no prepayment is due to TDS under the Revolving Credit Agreement, dated as of August 31, 1998, between TDS and AOC, as amended, or otherwise as a result of the Tax Settlement Payment or any other payment to be made by TDS to Aerial in accordance with this Agreement. Section 13. Disclosure of Alternative Transactions. As of the date of this Agreement, TDS has fully disclosed to the Special Committee of the Board of Directors of Aerial the existence and status of all inquiries, offers or proposals received or made by TDS or Aerial regarding the possible sale or transfer of Aerial or a significant portion of its equity securities, assets or businesses, including any merger or other business combination transaction involving Aerial or its subsidiaries. Section 14. Notices. All notices, consents, requests, instructions, approvals and other communications provided for herein shall be validly given, made or served, if in writing and delivered personally, by telegram or sent by registered mail, postage prepaid to: TDS at: 30 North LaSalle Street Suite 4000 Chicago, IL 60602-2507 Attention: President with separate copies at such address to the attention of the Chief Financial Officer and the Corporate Secretary Aerial at: 8410 W. Bryn Mawr Ave. Suite 1100 Chicago, IL 60631 Attention: President with separate copies at such address to the attention of the Chief Financial Officer and the Corporate Secretary AOC at: 8410 W. Bryn Mawr Ave. Suite 1100 Chicago, IL 60631 Attention: President with separate copies at such address to the attention of the Chief Financial Officer and the Corporate Secretary, or to such other address as any party may, from time to time, designate in a written notice given in a like manner. Any notice given under this Agreement shall be deemed delivered when received at the appropriate address. Section 15. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Illinois applicable to contracts made and to be performed therein. IN WITNESS WHEREOF, TDS, Aerial and AOC have caused this Agreement to be duly executed by their respective officers, each of whom is duly authorized, all as of the day and year first above written. Telephone and Data Systems, Inc. By: /s/ LeRoy T. Carlson, Jr. ------------------------- LeRoy T. Carlson, Jr. President and CEO Aerial Communications, Inc. By: /s/ Donald W. Warkentin ------------------------- Donald W. Warkentin President and CEO Aerial Operating Co., Inc. By: /s/ Donald W. Warkentin ------------------------- Donald W. Warkentin President EX-13 6 EXHIBIT 13 Exhibit 13 Aerial Communications, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations RESULTS OF OPERATIONS Aerial Communications, Inc. ("Aerial" or the "Company" - NASDAQ symbol: AERL), an 82.3%-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). The Columbus MTA launched service on March 27, 1997. The Company's five remaining MTAs launched service during the second quarter of 1997. With the launch of service in its MTAs during the second quarter of 1997, the Company transitioned from the development stage to being an operating enterprise. As a result of this transition, the Company has experienced an increase in revenues and operating expenses, and incurred substantial losses. The following is a table of summarized operating data for the Company's consolidated operations.
- ---------------------------------------------------------------------------------- As of December 31, 1998 1997 - ---------------------------------------------------------------------------------- Total MTA population (in millions) 27.7 27.6 Customers 311,900 125,000 Average monthly revenue per customer (year to date) $ 51 * Average monthly revenue per customer (fourth quarter) $ 49 * MTA penetration 1.13% 0.45% MTAs in operation 6 6 Cell sites in service 1,180 1,044 Total number of employees 1,907 1,414 - ----------------------------------------------------------------------------------
* The average monthly service revenue per customer in 1997 does not provide a meaningful comparison as the initial users and usage patterns are not comparable to the current users and usage patterns. The Company's results of operations for 1998 compared to 1997 and 1996 reflect increased activities undertaken to grow PCS services in its MTAs after the launch of service in 1997. Such activities significantly increased the Company's net loss to $337.9 million in 1998 from $247.1 million in 1997 and $37.9 million in 1996. During 1998 the Company's focus was on the growth of its customer base. In December 1998, TDS announced the withdrawal of its offer to exchange tracking stock for the outstanding common shares of Aerial which it did not own. TDS also announced that it was pursuing a tax-free spin-off of its 82.3% interest in Aerial, as well as reviewing other alternatives. See Proposed TDS Corporate Restructuring for further discussion of the spin-off. Aerial Communications, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Years Ended December 31, 1998, 1997 and 1996 Operating Revenues OPERATING REVENUES totaled $155.2 million for the year ended December 31, 1998, an increase of $99.2 million as compared to 1997. The increase reflects the growth of the Company's customer base during 1998 as the Company added approximately 186,900 customers. The increase is also due to the Company providing service in all its markets for all of 1998 as compared to only part of 1997. The Company had no revenues in 1996. SERVICE REVENUE totaled $123.6 million in 1998, an increase of $91.3 million as compared to 1997. Service revenue primarily consists of charges for access, airtime and value-added services provided to the Company's retail 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 1998 service revenue was driven by the growth in the number of customers using the Company's PCS network. The Company's average revenue per customer per month ("ARPU") was $51 for 1998. EQUIPMENT SALES REVENUE totaled $31.5 million in 1998, an increase of $7.9 million as compared to 1997. Equipment sales revenue represents the sale of handsets and related accessories to retailers, independent agents and end user customers. The increase in equipment sales revenue reflects the increase in sales volume, partially offset by a decline in handset prices. Operating Expenses OPERATING EXPENSES totaled $435.1 million for the year ended December 31, 1998, compared to $274.1 million in 1997 and $44.0 million in 1996, reflecting the Company's expanded level of business activity required to launch service, transition to post-launch operations and its significant efforts to build and serve its customer base. In 1996, the Company was still a development stage enterprise and classified all expenses as either general and administrative or development costs. SYSTEM OPERATIONS EXPENSE totaled $69.1 million in 1998, an increase of $38.4 million as compared to 1997. The increase in system operations expense is due to the increased size of the Company's network and its fully operational status during all of 1998 as compared to only part of 1997. As of December 31, 1998, the Company's PCS network had 1,180 cell sites in service and had been operational in all of the Company's markets throughout all of 1998. The Company launched service in its MTAs between March and June of 1997, with approximately 600 cell sites in service. As of December 31, 1997, the network had 1,044 cell sites. Aerial Communications, Inc. and Subsidiaries Significant system operations expenses include cell site rent expense and system maintenance expense which increased $7.7 million and $6.2 million, respectively, in 1998 as compared to 1997. Salaries and employee related-expenses increased $8.2 million, primarily reflecting an increase in engineering and maintenance personnel since December 31, 1997, as well as a decrease in internal capitalized labor costs. Other system operations expenses increased $7.7 million in aggregate, primarily driven by cell site utility expense, property tax expense, consulting and temporary service expense and roamer fraud expense. System operations expenses also include customer usage expense which increased $8.6 million in 1998 primarily due to increased landline interconnection and toll charges, reflecting an increasing customer base and increased use of the Company's network by its customers. Aerial Communications, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations MARKETING AND SELLING EXPENSE totaled $79.7 million in 1998, an increase of $33.7 million as compared to 1997. Gross customer activations were approximately 333,100 in 1998 as compared to approximately 141,900 in 1997. Significant marketing and selling expenses include the salaries and benefits of sales and marketing personnel, which increased $11.4 million in 1998, primarily reflecting an increase in sales and marketing personnel since December 31, 1997. Advertising expenses increased $7.0 million, reflecting the costs of establishing and promoting Aerial's service through print, radio and television advertising. Sales commission expense increased $4.9 million in 1998, due to the growth in the Company's customer base. Retail store and office rent increased $3.7 million, primarily due to the Company's increasing number of store and kiosk locations across its markets. Other marketing and selling expenses increased $6.7 million in aggregate, primarily driven by increases in consulting, temporary services, phone expenses and other sales expenses. CUSTOMER SERVICE EXPENSE totaled $53.5 million in 1998, an increase of $32.6 million as compared to 1997. The increase was driven by rapid customer growth, as well as the efforts to manage that growth with increased personnel (including the establishment of a second customer service center in Kansas City) and new and evolving information systems. The higher than anticipated level of customer service expense is primarily due to increased salary and benefit expenses reflecting the increased number of customer service employees, the effects of higher than planned bad debt costs, and additional consulting and temporary service expenses directed at reducing both bad debt and customer churn. COST OF EQUIPMENT SOLD totaled $87.7 million in 1998, an increase of $16.2 million as compared to 1997. The increase primarily reflects the growth in handset unit sales to support the rise in customer activations. GENERAL AND ADMINISTRATIVE EXPENSE totaled $61.7 million in 1998, an increase of $2.9 million as compared to 1997. General and administrative expense includes the costs of operating the Company's local business offices and its corporate expenses other than the corporate engineering and marketing departments. The 1998 increase in general and administrative expense is primarily due to losses on write-offs of certain information systems replaced or to be replaced. In 1996, general and administrative expenses were $28.8 million, consisting primarily of salaries, employee benefits and other overhead expenses. General and administrative expenses were less in 1996 due primarily to a smaller employee base. DEPRECIATION EXPENSE was $75.8 million in 1998, an increase of $39.8 million as compared to 1997. The increase is due to rising fixed asset balances as a result of the Company's network build-out and the amount of time that the network assets have been in service in 1998 as compared to 1997. As of December 31, 1998, the Company had $696.5 million of property and equipment in service which had largely been operational throughout all of 1998. As of December 31, 1997, the Company had $622.7 million of property and equipment in service, the PCS network portion of which had only been in operation since the second quarter of 1997. AMORTIZATION EXPENSE was $7.6 million in 1998, an increase of $3.1 million as compared to 1997. Upon the commencement of service in a particular market, the Company began amortizing that market's related PCS license. Aerial launched service across all of its markets between March and June of 1997. As a result, consolidated amortization expense in 1997 reflects less than a full year's expense while 1998's expense reflects a full year of amortization. Aerial Communications, Inc. and Subsidiaries DEVELOPMENT COSTS totaled $5.8 million in 1997 and $15.1 million in 1996. Development costs primarily represent pre-launch marketing, consulting and legal costs. In 1996, the Company was a development stage enterprise for the entire year. Effective in the second quarter of 1997, the Company was no longer a development stage enterprise and prospectively began classifying expenses to reflect its operational status. Aerial Communications, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations Operating (Loss) OPERATING (LOSS) totaled $(280.0) million in 1998, $(218.2) million in 1997 and $(44.0) million in 1996. Although service revenues are expected to continue to grow during 1999 as the Company builds its customer base, the Company expects to continue to have operating losses and to generate negative operating cash flow at least through 1999 as it incurs costs associated with that growth. Investment and Other Income MINORITY SHARE OF LOSS totaled $23.6 million in 1998 and represents Sonera Ltd.'s ("Sonera") share of the consolidated net loss of Aerial Operating Company, Inc. ("AOC"). INVESTMENT LOSSES totaled $0.1 million in 1998, $2.5 million in 1997 and $0.3 million in 1996. In 1997 and 1996, investment losses represented the Company's 49% share of the net loss of the Wireless Alliance, LLC, ("WALLC"), a joint venture associated with the Company's Minneapolis MTA and designed to extend the PCS footprint to areas that were not in the Company's initial build-out. Because the Company's share of the cumulative losses have exceeded its investment in the WALLC, the Company did not recognize any losses related to the WALLC in 1998. Investment losses in 1998 relate to the Company's investments in the North American GSM Alliance LLC and the GSM Capital Limited Partnership (both formed to promote the interests of the wireless telecommunications industry using GSM technology). INTEREST INCOME-AFFILIATE totaled $0.1 million in 1997 as compared to $4.5 million in 1996. Interest income-affiliate represents interest income earned on the proceeds of the Company's April 1996 initial public offering ("IPO") invested in the TDS cash management program pending use in PCS network development and construction. Proceeds from the IPO were fully utilized by the end of January 1997. INTEREST INCOME-OTHER totaled $0.9 million in 1998, $2.1 million in 1997 and $1.1 million in 1996. Interest income-other primarily represents interest income earned on the excess proceeds from the Company's November 1996 sale of Series A Zero Coupon Notes and the February 1998 sale of Series B Zero Coupon Notes pending use in PCS network development and construction. The proceeds from the sale of the Series A and Series B Zero Coupon Notes have been fully utilized. GAIN ON SALE OF PCS LICENSES represents the pretax gain recognized on the sale of the Guam and Alaska licenses. Aerial Communications, Inc. and Subsidiaries Interest and Income Taxes INTEREST EXPENSE-AFFILIATE totaled $62.1 million in 1998, $21.6 million in 1997 and $2.0 million in 1996. Interest expense-affiliate in 1998 represents interest on amounts borrowed under the Revolving Credit Agreement, the TDS 3% guarantee fees associated with both the Series A and Series B Zero Coupon Notes and amounts financed under the Nokia 1996 and 1998 Credit Agreements. Interest expense-affiliate in 1997 represents interest on amounts borrowed under the Revolving Credit Agreement and the TDS 3% guarantee fees associated with the Series A Zero Coupon Notes and Nokia 1996 Credit Agreement, less interest capitalized of $2.7 million. The 1996 interest expense-affiliate amount primarily represents interest on amounts borrowed under the Revolving Credit Agreement, less interest capitalized of $0.6 million. Interest expense-affiliate increased $40.5 million in 1998 and $19.6 million in 1997, primarily due to the increasing average outstanding balance of borrowings under the Revolving Credit Agreement with TDS. Aerial Communications, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations INTEREST EXPENSE-OTHER totaled $18.0 million in 1998, $5.5 million in 1997 and $0.8 million in 1996. In 1998, interest expense-other relates to interest expense accreted on the Series A and Series B Zero Coupon Notes as well as interest expense associated with the Nokia 1996 and 1998 Credit Agreements, less interest capitalized of $0.1 million. In 1997 and 1996, interest expense-other relates primarily to the Series A Zero Coupon Notes issued in November 1996, less interest capitalized. The Company capitalized interest expense of $3.3 million and $0.6 million related to the Series A Zero Coupon Notes and interim financing under the Nokia 1996 Credit Agreement in 1997 and 1996, respectively. Interest expense-other increased $12.5 million in 1998 and $4.7 million in 1997, primarily due to the increasing average outstanding balance in long-term debt. INCOME TAXES: The Company is included in a consolidated federal income 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. Net (Loss) and (Loss) Per Common and Series A Common Share Net (Loss) totaled $(337.9) million in 1998, $(247.1) million in 1997 and $(37.9) million in 1996. Net (Loss) per Common and Series A Common Share was $(4.71) in 1998, $(3.45) in 1997 and $(0.56) in 1996. The increase in the Company's Net (Loss) and Net (Loss) per Common and Series A Common Share in 1998 reflects the Company's fully operational status during all of 1998 as compared to 1997 when the Company was not fully operational until the end of the second quarter. The 1996 Net (Loss) and Net (Loss) per Common and Series A Common Share reflects the Company's status as a development stage enterprise for the entire year. INFLATION Management believes that inflation affects the Company's business to no greater extent than the general economy. LIQUIDITY AND CAPITAL RESOURCES The costs of development, construction, start-up and post-launch activities of the Company require substantial capital. From inception through December 31, 1998, the Company had expended $304.4 million for its six licenses, including capitalized interest, $739.1 million for all other capital expenditures and incurred cumulative net losses of $630.8 million. The Company expects to incur significant operating losses and to generate negative cash flow from operating activities at least through 1999 as it continues to build its customer base. Cash flows used by operating activities were $228.8 million in 1998, $206.9 million in 1997 and $17.8 million in 1996. Operating cash outflow (operating loss before depreciation and amortization expense) totaled $196.6 million in 1998, $177.6 million in 1997 and $42.0 million in 1996. Aerial Communications, Inc. and Subsidiaries Cash flows used by other operating activities (investment and other income, interest expense, changes in working capital and changes in other assets and liabilities) required cash investments of $32.2 million in 1998, $29.3 million in 1997 and provided cash totaling $24.2 million in 1996. Cash flows from financing activities provided $302.7 million in 1998, $449.9 million in 1997 and $164.1 million in 1996. Cash provided in 1998 was primarily due to $301.7 million in borrowings under the Revolving Credit Agreement. The Company also received $200 million from the sale to Sonera of a 19.4% equity interest in AOC (see Note 4 - Minority Interest for further discussion). Aerial Communications, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations The proceeds from the sale were remitted to TDS to pay down part of the outstanding balance under the Revolving Credit Agreement. Cash provided in 1997 was due primarily to $448.2 million in borrowings under the Revolving Credit Agreement. In April 1996, the Company received proceeds from its IPO of $195.3 million, net of underwriting discounts and commissions. The Company used a portion of the net proceeds to repay the then outstanding balance under the Revolving Credit Agreement with TDS. In 1996 the Company received from TDS $28.8 million representing the balance due in connection with TDS's $289.2 million contribution to the equity capital of the Company in 1995. Cash flows used in investing activities totaled $74.0 million in 1998, $273.3 million in 1997 and $111.3 million in 1996. Cash used in 1998 was primarily due to $74.6 million in additions to property and equipment for PCS network and information system assets. Total 1998 additions to property and equipment, including noncash transactions, were $97.0 million, including $43.8 million for cell sites, $23.0 million for switching equipment, $27.6 million for information system assets and $2.6 million for other activities. Additions to cell sites in 1998 were due to the need for additional sites to fill in and improve the coverage of the Company's PCS network within its MTAs. Additions to switching equipment in 1998 were primarily due to the need for increased network capacity to handle greater call volume. Additions to information system assets primarily reflected the costs associated with the completion of the new Kansas City customer service center, new inventory and payroll systems and improvements to the Company's billing system. Other capital expenditures were primarily for leasehold improvements and office furniture and equipment. Cash used in 1997 resulted primarily from $274.7 million in additions to property and equipment, primarily network and information system assets. Total 1997 additions to property and equipment, including noncash transactions, were $387.7 million, including $291.9 million for cell sites, $38.4 million for switching equipment, $55.6 million for information system assets and $1.8 million for other activities. Cash used in 1996 resulted primarily from $112.9 million in additions to property and equipment, primarily network and information system assets, offset by $2.3 million in proceeds received from the sale of PCS licenses. Total 1996 additions to property and equipment, including noncash transactions, were $242.3 million, including $150.4 million for cell sites, $53.2 million for switching equipment and $38.7 million for other activities, including information systems development and property and equipment in service (primarily computer equipment and software, office equipment and leasehold improvements). The Company's fixed asset additions have been financed through a combination of borrowings under the Revolving Credit Agreement with TDS, the proceeds from the IPO, the Series A and Series B Zero Coupon Notes, and the Nokia 1996 and 1998 Credit Agreements. Aerial Communications, Inc. and Subsidiaries 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 $130 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, the Year 2000 Issue, new hardware and software to support employee growth, and other project initiatives. Aerial Communications, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations The Company estimates requiring $205 million for working capital requirements to fund operations for all of 1999, including an estimated $80 million in interest expense related to the Revolving Credit Agreement and TDS 3% guarantee fees related to both the Series A and Series B Zero Coupon Notes and the Nokia 1998 Credit Agreement. Nokia Telecommunications Inc. ("Nokia") agreed to provide the Company with up to $200 million in financing for digital radio channel and switching infrastructure equipment through a Credit Agreement with the Company dated June 19, 1996 ("1996 Credit Agreement"). In accordance with the provisions of the 1996 Credit Agreement, the Company issued, in tranches, 10-year unsecured zero coupon promissory notes, the proceeds of which were paid to Nokia in satisfaction of borrowings by the Company under the 1996 Credit Agreement. On November 4, 1996, the Company issued $226.2 million in aggregate principal amount at maturity of Series A Zero Coupon Notes ("Series A Notes") due in 2006. On February 5, 1998, the Company issued $220.0 million in aggregate principal amount at maturity of Series B Zero Coupon Notes ("Series B Notes") due in 2008 (representing the final issuance of zero coupon notes under the 1996 Credit Agreement). The aggregate issue price of the Series A and Series B Zero Coupon Notes was $200 million. The proceeds were paid to Nokia in satisfaction of all obligations of the Company under the 1996 Credit Agreement. On June 30, 1998, the Company and 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% (see Note 5 - Long-Term Debt for further discussion). As of December 31, 1998, the Company had $29.5 million available for borrowing under the Tranche A portion of the 1998 Credit Agreement with Nokia. On September 8, 1998, pursuant to the terms of a Purchase Agreement dated June 1, 1998 (the "Purchase Agreement"), 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"). See Note 4 - Minority Interest for further discussion. Under the terms of the Purchase Agreement, the Revolving Credit Agreement between the Company and TDS dated August 1, 1995, as amended, pursuant to which the Company owed TDS $665.0 million as of August 31, 1998, was terminated. A new Revolving Credit Agreement between AOC and TDS was substituted, under which AOC was indebted to TDS for $665.0 million as of August 31, 1998. Aerial Communications, Inc. and Subsidiaries The new Revolving Credit Agreement provides that the amount of any proceeds raised by the Company or AOC in connection with the sale of equity (see Note 4 - Minority Interest) or debt will be used to reduce the borrowings under the Revolving Credit Agreement as well as reduce the total amount AOC may borrow under the Revolving Credit Agreement. Additionally, any borrowings under the Nokia 1998 Credit Agreement (see Note 5 - Long-Term Debt) concurrently reduces by the same amount the authorized total line of credit available to AOC under the Revolving Credit Agreement. Pursuant to these terms, AOC paid to TDS the $200 million it had received from Sonera to reduce the outstanding balance under the Revolving Credit Agreement. Aerial Communications, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations On November 3, 1998, TDS approved an amendment to the Revolving Credit Agreement dated August 31, 1998, between TDS and AOC. Under the 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. The following table summarizes AOC's borrowing capacity under the Revolving Credit Agreement as of December 31, 1998: (Dollars in thousands) - ---------------------------------------------------------------------- Maximum amount available $ 615,000 Reduced by: Vendor financing under the Nokia 1998 Credit Agreement (45,472) Amount outstanding under the Revolving Credit Agreement (549,943) - ---------------------------------------------------------------------- Net amount available for borrowing $ 19,585 - ----------------------------------------------------------------------
In March 1999, TDS agreed to pay 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 the funds to repay a portion of the existing AOC Indebtedness to TDS, thereby increasing the amount available under the Revolving Credit Agreement. 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 Company's financial condition and results of operations. Aerial Communications, Inc. and Subsidiaries PROPOSED TDS CORPORATE RESTRUCTURING In December 1997, Aerial received a proposal from TDS to acquire all of the issued and outstanding Common Shares of Aerial not already owned by TDS. The proposal was part of TDS's proposed corporate restructuring which included issuing three new classes of common stock (commonly known as "tracking" stock) and changing the state of incorporation of TDS from Iowa to Delaware. The three new classes of stock were intended to separately reflect the performance of TDS's cellular telephone, landline telephone and personal communications services businesses. Aerial Communications, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations In December 1998, TDS announced the withdrawal of its offer to exchange tracking stock for the outstanding common shares of Aerial which it did not own. TDS also announced that it was pursuing a tax-free spin-off of its 82.3% 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 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. See the Liquidity and Capital Resources section for further discussion of the Company's financing. 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 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 one to ten years. The Series A and Series B Zero Coupon Notes are fixed rate debt and therefore, fluctuations in interest rates can lead to significant fluctuations in the fair value of these instruments. The Company does not enter into financial derivatives to reduce its exposure to interest rate risks. The table below provides the fair value (fair values were estimated using discounted cash flow analyses) and weighted average interest rates of the Company's outstanding debt at December 31, 1998.
Amount Maturing Wtd. Avg. Expected Maturity Date (Dollars in thousands) Interest Rate - ------------------------------------------------------------------- 1999 -- -- 2000 595,415 10.33% 2001 -- -- 2002 -- -- 2003 -- -- Thereafter 446,220 8.20% Total $ 1,041,635 9.42% - ------------------------------------------------------------------- Fair Value at 12/31/98 $ 828,005 - -------------------------------------------------------------------
Aerial Communications, Inc. and Subsidiaries 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. Aerial Communications, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations The Company's management has established a project team to address Year 2000 issues. 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 consists of establishing a Year 2000 Project Team that reports periodically to Aerial's Audit Committee, and developing an overall strategy. A Year 2000 Program Office has been established 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 includes the identification of core business areas and processes, analysis of systems and hardware supporting the core business areas and the prioritization of renovation or replacement of systems and hardware that are not Year 2000 compliant. Included in the assessment phase is an analysis of risk management factors such as contingency plans and legal matters. The assessment phase was substantially completed in the last quarter of 1998. The renovation phase consists of the conversion or replacement of selected platforms, applications, databases and utilities. The renovation of mission critical systems, applications and hardware is scheduled to be substantially completed by the second quarter of 1999. The validation phase includes testing, verifying and validating the renovated or replaced platforms, applications, databases and utilities. 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 and renovated 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. Aerial Communications, Inc. and Subsidiaries 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 the telecommunications network vendors to provide compliant hardware, systems and applications, as well as other third parties, including vendors, other telecommunications service providers, government agencies and financial institutions, to deliver reliable services. The Company is dependent on the development of compliant hardware, systems and applications and upgrades by experts, both internal and external, and the availability of critical resources with the requisite skill sets. Aerial Communications, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations 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, etc.) 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 affect on the Company's results of operations, financial position and cash flow. 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 are expected to assess the potential for business disruption in various scenarios, and to provide key operational back-up, recovery and restorational alternatives. The Company's contingency plan initiatives will include the following: reviewing, assessing and updating existing business recovery plans; identifying teams 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; re-prioritization of mission critical work processes and associated resources; developing alternate processes to support critical customer functions in the event information systems or mechanized processes experience Year 2000 disruptions; working with public saftey agencies to provide alternate 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 and components 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 products/services 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 before December 31, 1999. The Company estimates that the total costs of its Year 2000 efforts will be approximately $15 million. Through December 31, 1998, the total costs associated with the Year 2000 Issue were approximately $2 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. Aerial Communications, Inc. and Subsidiaries The above information, which contains statements that are "forward-looking" within the meaning of the Private Securities Litigation Reform Act of 1995, is based on the Company's current best estimates, which were derived using numerous assumptions of future events, including the availability and future costs of certain technological and other resources, third party modification actions and other factors. Given the complexity of these issues and the possibility of unidentified risks, actual results may vary materially from those anticipated and discussed above. Specific factors that might cause such differences include, among others, the availability and cost of personnel trained in this area, the ability to locate and correct all affected computer code, the timing and success of remedial efforts of third party suppliers, and similar uncertainties. Aerial Communications, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY STATEMENT THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND OTHER SECTIONS OF THIS ANNUAL REPORT CONTAIN "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. Aerial Communications, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------- Year Ended December 31, 1998 1997 1996 - --------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) OPERATING REVENUES Service $ 123,640 $ 32,307 $ -- Equipment sales 31,514 23,645 -- - --------------------------------------------------------------------------------------------------- Total Operating Revenues 155,154 55,952 -- - --------------------------------------------------------------------------------------------------- OPERATING EXPENSES System operations 69,066 30,655 -- Marketing and selling 79,704 45,974 -- Customer service 53,516 20,882 -- Cost of equipment sold 87,715 71,454 -- General and administrative 61,737 58,825 28,843 Depreciation 75,846 36,045 -- Amortization of intangibles 7,555 4,509 -- Development costs -- 5,773 15,107 - --------------------------------------------------------------------------------------------------- Total Operating Expenses 435,139 274,117 43,950 - --------------------------------------------------------------------------------------------------- OPERATING (LOSS) (279,985) (218,165) (43,950) - --------------------------------------------------------------------------------------------------- INVESTMENT AND OTHER INCOME Minority share of loss 23,620 -- -- Investment (losses) (128) (2,518) (304) Interest income-affiliate -- 95 4,488 Interest income-other 882 2,133 1,158 Other income 442 269 -- Gain on sale of PCS licenses -- -- 2,582 - --------------------------------------------------------------------------------------------------- Total Investment and Other Income 24,816 (21) 7,924 - --------------------------------------------------------------------------------------------------- (LOSS) BEFORE INTEREST AND INCOME TAXES (255,169) (218,186) (36,026) - --------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest expense-affiliate 62,137 21,558 1,960 Interest expense-other 18,010 5,507 802 - --------------------------------------------------------------------------------------------------- Total Interest Expense 80,147 27,065 2,762 - --------------------------------------------------------------------------------------------------- (LOSS) BEFORE INCOME TAXES (335,316) (245,251) (38,788) Income tax expense (benefit) 2,579 1,806 (867) - --------------------------------------------------------------------------------------------------- NET (LOSS) $(337,895) $(247,057) $ (37,921) - --------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE COMMON AND SERIES A COMMON SHARES (000s) 71,723 71,512 67,492 (LOSS) PER COMMON AND SERIES A COMMON SHARE $ (4.71) $ (3.45) $ (0.56) - ---------------------------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part of these statements. Aerial Communications, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------------------------- Year Ended December 31, 1998 1997 1996 - --------------------------------------------------------------------------------------------------- (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net (Loss) $(337,895) $(247,057) $ (37,921) Add (Deduct) adjustments to reconcile net (loss) to net cash (used) by operating activities: Depreciation and amortization 83,401 40,554 1,934 Noncash interest expense-Series A and B Notes 16,210 8,341 1,327 Change in deferred taxes 2,579 1,806 2,231 Investment losses 128 2,518 304 Gain on sale of PCS licenses -- -- (2,582) Minority share of loss (23,620) -- -- Loss on sale of property and equipment 3,242 -- -- Change in accounts receivable-customer (174) (24,030) -- Change in income tax refund receivable-affiliate -- -- 12,502 Change in inventory 14,571 (25,949) -- Change in accounts payable-affiliates (121) 284 (795) Change in accounts payable-trade and other 6,680 30,606 3,491 Change in accrued interest-affiliate 1,274 3,665 (1,497) Change in other assets and liabilities 4,924 2,399 3,225 - --------------------------------------------------------------------------------------------------- (228,801) (206,863) (17,781) - --------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Borrowings under the Revolving Credit Agreement-TDS 301,709 448,234 -- Repayments of borrowings under the Revolving Credit Agreement-TDS (200,000) -- (60,238) Proceeds from minority investor 200,000 -- -- Change in note receivable-affiliate -- -- 28,836 Issuance of common stock 1,002 1,699 195,485 - --------------------------------------------------------------------------------------------------- 302,711 449,933 164,083 - --------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property and equipment (74,580) (274,709) (112,940) Change in note receivable -- 1,925 -- Proceeds from sale of PCS licenses -- -- 2,275 Proceeds from sale of property and equipment 711 -- -- Change in temporary and other investments (110) (558) (614) - --------------------------------------------------------------------------------------------------- (73,979) (273,342) (111,279) - --------------------------------------------------------------------------------------------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (69) (30,272) 35,023 CASH AND CASH EQUIVALENTS - Beginning of year 5,012 35,284 261 - --------------------------------------------------------------------------------------------------- End of year $ 4,943 $ 5,012 $ 35,284 - ---------------------------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part of these statements. Aerial Communications, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS
ASSETS - ------------------------------------------------------------------------------- December 31, 1998 1997 - ------------------------------------------------------------------------------- (Dollars in thousands) CURRENT ASSETS Cash and cash equivalents $ 4,943 $ 5,012 Temporary investments 35 197 Accounts receivable: Customers, less allowance of $5,875 and $7,252, respectively 24,204 24,030 Roaming 2,252 -- Other 1,348 207 Inventory 11,378 25,949 Prepaid rent 3,666 1,630 Other 898 984 - ------------------------------------------------------------------------------- 48,724 58,009 - ------------------------------------------------------------------------------- PROPERTY AND EQUIPMENT In service and under construction 733,958 642,122 Less accumulated depreciation (112,677) (38,018) - ------------------------------------------------------------------------------- 621,281 604,104 - ------------------------------------------------------------------------------- INVESTMENTS Investment in PCS licenses, net of accumulated amortization of $12,044 and $4,489, respectively 289,488 297,043 Other 1,444 1,298 - ------------------------------------------------------------------------------- 290,932 298,341 - ------------------------------------------------------------------------------- Deferred costs 410 194 - ------------------------------------------------------------------------------- TOTAL ASSETS $ 961,347 $ 960,648 - -------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part of these statements. Aerial Communications, Inc. and Subsidiaries CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------- December 31, 1998 1997 - --------------------------------------------------------------------------- (Dollars in thousands) CURRENT LIABILITIES Accounts payable: Affiliates $ 6,727 $ 773 Trade 56,097 92,020 Accrued interest-affiliate 4,939 3,665 Accrued compensation 5,169 3,414 Accrued taxes 7,015 1,957 Microwave relocation costs payable 1,828 7,354 Other 4,349 586 - --------------------------------------------------------------------------- 86,124 109,769 - --------------------------------------------------------------------------- REVOLVING CREDIT AGREEMENT-TDS 549,943 448,234 - --------------------------------------------------------------------------- LONG-TERM DEBT 278,010 196,439 - --------------------------------------------------------------------------- DEFERRED TAX LIABILITY-NET 16,357 13,779 - --------------------------------------------------------------------------- MINORITY INTEREST 5,835 -- - --------------------------------------------------------------------------- COMMON SHAREHOLDERS' EQUITY Common Shares, $1.00 par value; authorized 100,000,000 shares; issued and outstanding 31,788,982 and 31,610,605, respectively 31,789 31,611 Series A Common Shares, $1.00 par value; authorized 60,000,000 shares; issued and outstanding 40,000,000 shares 40,000 40,000 Additional paid-in capital 584,114 413,746 Retained deficit (630,825) (292,930) - --------------------------------------------------------------------------- 25,078 192,427 - --------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 961,347 $ 960,648 - ---------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part of these statements. Aerial Communications, Inc. and Subsidiaries CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------- Year Ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------- (Dollars in thousands) COMMON STOCK Balance at beginning of year $ -- $ -- $ 1 Deduct recapitalization -- -- (1) - ------------------------------------------------------------------------------- Balance at the end of year $ -- $ -- $ -- - ------------------------------------------------------------------------------- COMMON SHARES Balance at beginning of year $ 31,611 $ 31,359 $ -- Add: Recapitalization -- -- 19,086 Initial public offering -- -- 12,250 Employee benefit plans 178 252 23 - ------------------------------------------------------------------------------- Balance at end of year $ 31,789 $ 31,611 $ 31,359 - ------------------------------------------------------------------------------- SERIES A COMMON SHARES Balance at beginning of year $ 40,000 $ 40,000 $ -- Add recapitalization -- -- 40,000 - ------------------------------------------------------------------------------- Balance at end of year $ 40,000 $ 40,000 $ 40,000 - ------------------------------------------------------------------------------- ADDITIONAL PAID-IN CAPITAL Balance at beginning of year $ 413,746 $ 412,299 $ 289,233 Add (Deduct): Recapitalization -- -- (59,085) Gain on sale of subsidiary stock 169,544 -- -- Initial public offering -- -- 183,015 Capital stock expense -- -- (1,061) Employee benefit plans 824 1,447 197 - ------------------------------------------------------------------------------- Balance at the end of year $ 584,114 $ 413,746 $ 412,299 - ------------------------------------------------------------------------------- RETAINED DEFICIT Balance at beginning of year $(292,930) $ (45,873) $ (7,952) Net (Loss) (337,895) (247,057) (37,921) - ------------------------------------------------------------------------------- Balance at end of year $(630,825) $(292,930) $ (45,873) - -------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part of these statements. Aerial Communications, Inc. and Subsidiaries Notes to Consolidated Financial Statements 1. PROPOSED TDS CORPORATE RESTRUCTURING In December 1997, Aerial Communications, Inc. ("Aerial" or the "Company") received a proposal from Telephone and Data Systems, Inc. ("TDS") to acquire all of the issued and outstanding Common Shares of Aerial not already owned by TDS. The proposal was part of TDS's proposed corporate restructuring which included issuing three new classes of common stock and changing the state of incorporation of TDS from Iowa to Delaware. The three new classes of stock were intended to separately reflect the performance of TDS's cellular telephone, landline telephone and personal communications services businesses. In December 1998, TDS announced the withdrawal of its offer to exchange tracking stock for the outstanding common shares of Aerial which it did not own. TDS also announced that it was pursuing a tax-free spin-off of its 82.3% 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. See also Note 11--Contingency for discussion of the concerns raised by Sonera Ltd. about the spin-off announcement made by TDS, which has raised the possibility of litigation. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) NATURE OF OPERATIONS Aerial is an 82.3%-owned subsidiary of TDS. The Company was incorporated in Delaware on July 23, 1991, as American Portable Telecommunications, Inc. and changed its name to American Portable Telecom, Inc. ("APTI") effective January 18, 1996. On November 12, 1996, the Company changed its name to Aerial Communications, Inc. The Company was formed to acquire Personal Communications Services ("PCS") licenses, construct PCS networks in its Major Trading Areas ("MTAs") and offer wireless PCS communications services in these areas. The Company acquired its licenses in the Federal Communications Commission ("FCC") broadband Block A and Block B PCS auction (the "PCS auction") which concluded in March 1995. The Company acquired licenses in the Columbus (Ohio), Houston (Texas), Kansas City (Missouri), Minneapolis (Minnesota), Pittsburgh (Pennsylvania), and Tampa-St. Petersburg-Orlando (Florida) MTAs covering approximately 27.7 million population equivalents ("POPs"). As of December 31, 1998, the Company had approximately 311,900 customers. (B) DEVELOPMENT STAGE ENTERPRISE Effective with the second quarter of 1997, the Company ceased to be a development stage enterprise and presents its 1998 and 1997 results of operations, cash flows and financial position in a manner similar to other operating enterprises within the industry. Aerial Communications, Inc. and Subsidiaries (C) PRINCIPLES OF CONSOLIDATION The accounting policies of the Company and its subsidiaries conform to generally accepted accounting principles. The consolidated financial statements include the accounts of Aerial Communications, Inc. and its 80.6% interest in Aerial Operating Company, Inc. ("AOC"). The MTAs are wholly-owned subsidiaries of AOC. All material intercompany balances and transactions have been eliminated. The preparation of the consolidated 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 as well as disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts reported in prior years have been reclassified to conform to the current year presentation. (D) REVENUE RECOGNITION AND INVENTORY Revenues from operations consist of charges to customers for monthly access, airtime, value-added services, outcollect roaming and long-distance charges. Revenues are recognized as the services are rendered. Unbilled revenues, resulting from PCS services provided from the billing cycle date to the end of each month, are estimated and recorded Revenues from operations also consist of equipment sales to retailers, independent agents and end user customers. Revenues from equipment sales are recognized upon the shipment of goods to retailers and independent agents or upon sale through direct distribution channels to end user customers. Handset inventory is stated at current replacement cost. (E) ADVERTISING COSTS The Company expenses advertising costs as incurred. Advertising costs totaled $25.8 million, $21.1 million and $1.4 million for the years ended December 31, 1998, 1997 and 1996, respectively. Prior to launching service, the Company was a development stage enterprise and advertising costs were included in development costs. (F) PENSION PLAN Effective July 1, 1995, the Company began providing pension benefits for its employees under a qualified, noncontributory, defined contribution pension plan. Under this plan, pension benefits and costs are calculated separately for each participant and are funded currently. Pension costs were $611,000, $326,000 and $72,000 in 1998, 1997 and 1996, respectively. (G) CASH AND CASH EQUIVALENTS, TEMPORARY INVESTMENTS AND MARKETABLE SECURITIES Cash and cash equivalents consists of cash on hand and those short-term, highly-liquid investments with original maturities of three months or less. Those investments with original maturities of greater than three but less than twelve months are classified as temporary investments. Temporary investments are stated at cost. The Company's investments in marketable non-equity securities, included in other investments, are stated at amortized cost, have maturities of one to five years and are classified as held-to-maturity. The carrying amounts of cash and cash equivalents and temporary investments approximate fair value due to the short-term nature of these investments. The amortized cost of the marketable non-equity securities approximate their aggregate fair value. Aerial Communications, Inc. and Subsidiaries (H) PROPERTY AND EQUIPMENT Property and equipment is stated at cost. Depreciation is provided based on the straight-line method over the estimated useful lives of the respective assets, generally ten years for network assets and five years for information system assets and office equipment. Leasehold improvements are amortized over ten years or the lease term, whichever is shorter. Property and equipment (including work in process) consists of:
- --------------------------------------------------------- December 31, 1998 1997 - --------------------------------------------------------- (Dollars in thousands) Cell sites and equipment $ 484,638 $ 442,308 Switching equipment 114,470 91,598 Information systems 108,279 83,950 Office equipment 18,247 15,800 Leasehold improvements 8,324 8,466 - --------------------------------------------------------- 733,958 642,122 - --------------------------------------------------------- Accumulated depreciation (112,677) (38,018) - --------------------------------------------------------- Property and equipment-net $ 621,281 $ 604,104 - ---------------------------------------------------------
Gains and losses on the disposition of property and equipment are included in operating expenses. (I) WORK IN PROCESS Work in process includes expenditures for the design, construction and testing of the Company's PCS networks as well as the cost to relocate dedicated private microwave links currently operating in the Company's spectrum in its MTAs. Work in process also includes the costs associated with developing information systems. The Company capitalizes interest on such expenditures where appropriate. When the assets are placed in service, the Company transfers the assets to the appropriate property and equipment category. (J) INVESTMENT IN PCS LICENSES Investment in PCS licenses is recorded at historical cost, which includes the purchase price of the licenses acquired by the Company in the PCS auction plus capitalized interest of $16.6 million incurred while readying the licenses in the Company's MTAs for use. The Company recorded capitalized interest through December 31, 1995, when TDS contributed approximately $289.2 million in equity capital to the Company for the original cost of its licenses. The Company began amortizing the licenses straight-line over 40 years upon commencement of service in each respective MTA. Accumulated amortization on the licenses at December 31, 1998 and 1997, totaled $12.0 million and $4.5 million, respectively. (K) MICROWAVE RELOCATION COSTS PAYABLE Microwave relocation costs payable represent obligations of the Company to pay its share of the costs to relocate dedicated private microwave links currently operating in the Company's spectrum in its MTAs. The carrying amount reported in the balance sheet for microwave relocation costs payable approximates fair value because of the short maturity of those instruments. Aerial Communications, Inc. and Subsidiaries (L) (LOSS) PER COMMON AND SERIES A COMMON SHARE (Loss) per Common and Series A Common Share was computed based on the weighted average of Common and Series A Common Shares outstanding during the period, adjusted to give retroactive effect to the recapitalization in conjunction with the Company's 1996 initial public offering ("IPO"), as if this transaction had occurred at January 1, 1996 (see Note 9 - Common Stock). Aerial Communications, Inc. and Subsidiaries The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," effective December 31, 1997. The implementation of SFAS No. 128 had no effect on reported (Loss) per Common and Series A Common Share due to the current Net (Loss). In 1998, 1997 and 1996, respectively, 1.7 million, 1.4 million and 0.3 million stock options were not included in computing diluted (Loss) per Common and Series A Common Share because their effects were antidilutive. (M) SUPPLEMENTAL CASH FLOW DISCLOSURES The following summarizes interest and income taxes paid and certain noncash transactions.
- -------------------------------------------------------------------------------- Year Ended December 31, 1998 1997 1996 - -------------------------------------------------------------------------------- (Dollars in thousands) Income tax benefits - cash payments from TDS resulting from taxable losses generated by the Company in prior years $ -- $ -- $15,598 Interest paid to non-affiliates 1,911 428 1,107 Interest and guarantee fees paid to TDS or converted to debt under the Revolving Credit Agreement $57,219 $24,297 $ 3,496 - --------------------------------------------------------------------------------
In 1998, $71.5 million in additions to property and equipment (amounts in service and work in process, collectively) were financed through long-term debt and accounts payable-affiliate. In 1997, $113.0 million in additions to property and equipment were financed through a combination of long-term debt, accounts payable-trade, microwave relocation costs payable and prepaid network infrastructure costs. In 1996, $199.6 million in additions to property and equipment and prepaid network infrastructure costs were financed through a combination of long-term debt, accounts payable-trade and other, and microwave relocation costs payable. In 1998, the Company incurred interest charges totaling $80.2 million. In 1998, the interest charges were comprised of $55.4 million paid to TDS relating to the Revolving Credit Agreement (see Note 6 - Revolving Credit Agreement), $6.7 million paid to TDS for guarantee fees on the Series A and Series B Zero Coupon Notes and obligations under the Nokia 1998 and 1996 Credit Agreements (see Note 5 - Long-Term Debt), $1.0 million paid to Nokia for interest charges relating to the 1998 Credit Agreement, $16.2 million in accrued interest on the Series A and Series B Zero Coupon Notes, and $0.9 million in other interest charges. Of these amounts, the Company capitalized $0.1 million relating to its work in process expenditures. The remaining $80.1 million was charged to expense. In 1997, the Company incurred interest charges totaling $33.1 million. In 1997, the interest charges were comprised of $21.0 million paid to TDS relating to the Revolving Credit Agreement (see Note 6 - Revolving Credit Agreement), $3.3 million paid to TDS for guarantee fees on the Series A Zero Coupon Notes and obligations under the Nokia 1996 Credit Agreement (see Note 5 - Long-Term Debt), $0.4 million paid to Nokia for interest charges relating to the 1996 Credit Agreement, $8.3 million in accrued interest on the Series A Zero Coupon Notes, and $0.1 million in other interest charges. Of these amounts, the Company capitalized $6.0 million relating to its work in process expenditures. The remaining $27.1 million was charged to expense. Aerial Communications, Inc. and Subsidiaries In 1996, the Company incurred interest charges of $4.0 million. The interest charges were comprised of $2.0 million paid to TDS relating to the Revolving Credit Agreement, $0.6 million paid to TDS for guarantee fees on the Series A Zero Coupon Notes and obligations under the Nokia 1996 Credit Agreement, $70,000 paid to Nokia for interest charges relating to the 1996 Credit Agreement and $1.3 million in accrued interest on the Series A Zero Coupon Notes. Of these amounts, the Company capitalized $1.2 million relating to its work in process expenditures. The remaining $2.8 million was charged to expense. Aerial Communications, Inc. and Subsidiaries (N) NEW ACCOUNTING PRONOUNCEMENTS In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income." Comprehensive Income (Loss) equals Net (Loss) for the year ended December 31, 1998. The American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1 "Accounting for Computer Software Developed for or Obtained for Internal Use," which became effective January 1999. To eliminate the diversity in practice in accounting and improve financial reporting, SOP 98-1 provides guidance for accounting for software developed for internal use. Management does not anticipate that the effect on results of operations and financial position will be material. The AICPA issued SOP 98-5 "Reporting on the Costs of Start-up Activities," which became effective January 1999. SOP 98-5 requires that costs of start-up activities, including organizational costs, should be charged to operations as incurred. Management believes SOP 98-5 will have no effect on results of operations and financial position. 3. INCOME TAXES The Company is included in a consolidated federal income tax return with other members of the TDS consolidated group. The Company and TDS are parties to a Tax Allocation Agreement (the "Agreement"). The Agreement provides that the Company and its subsidiaries be included with the TDS affiliated group in a consolidated federal income tax return and in state income or franchise tax returns in certain situations. 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 is not included in the TDS group. Under the Agreement 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. See Note 10--Subsequent Event for further discussion of the Agreement. The Company records all deferred tax liabilities or assets for the deferred tax consequences of all temporary differences. Income tax provisions are summarized below:
- ------------------------------------------------------------------------------ Year ended December 31, 1998 1997 1996 - ------------------------------------------------------------------------------ (Dollars in thousands) Federal income tax provision (benefit): Current $ -- $ -- $(3,098) Deferred 2,078 1,561 1,671 State income tax provision: Current -- -- -- Deferred 501 245 560 - ------------------------------------------------------------------------------ Income tax expense (benefit) $ 2,579 $ 1,806 $ (867) - ------------------------------------------------------------------------------
Aerial Communications, Inc. and Subsidiaries The temporary differences which gave rise to significant portions of the net deferred tax liability were as follows:
- ------------------------------------------------------------------ Year ended December 31, 1998 1997 - ------------------------------------------------------------------ (Dollars in thousands) Deferred tax asset: Net operating loss carryforwards $ 357,460 $ 171,896 Less: valuation allowance (277,782) (129,412) - ------------------------------------------------------------------ Total deferred tax asset $ 79,678 $ 42,484 - ------------------------------------------------------------------ Deferred tax liability: Licenses $ 24,060 $ 19,025 Property and equipment 39,364 19,004 Partnership investment 13,967 9,235 Minority share of loss 9,934 -- Deferred charges-interest 5,273 6,088 Other 3,437 2,911 - ------------------------------------------------------------------ Total deferred tax liability $ 96,035 $ 56,263 - ------------------------------------------------------------------ Net deferred tax liability $ 16,357 $ 13,779 - ------------------------------------------------------------------
The Company records a deferred tax asset associated with net operating loss carryforwards and then assesses the need for any valuation allowance associated with those carryforwards. At December 31, 1998, the federal net operating loss carryforward available to offset future taxable income is $802.4 million (generating a $280.8 million deferred tax asset) and expires between 2012 and 2018. The amount of state net operating loss carryforward available to offset future taxable income, primarily of the individual MTAs which generated the loss, is $1,086.2 million (generating a $76.7 million deferred tax asset) and expires between 2000 and 2018. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset will not be realized. During 1998, the valuation allowance increased $148.4 million primarily due to the Company's increased net operating losses. The statutory federal income tax rate is reconciled to the Company's effective income tax rate below:
- ---------------------------------------------------------------------------------------------- Year ended December 31, 1998 1997 1996 - ---------------------------------------------------------------------------------------------- Statutory federal income tax rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit (0.1) (0.1) (0.9) Effects of valuation allowance on deferred tax asset (35.7) (35.6) (29.7) Other -- -- (2.2) - ---------------------------------------------------------------------------------------------- Effective income tax rate (0.8)% (0.7)% 2.2% - ----------------------------------------------------------------------------------------------
4. MINORITY INTEREST On September 8, 1998, pursuant to the terms of a Purchase Agreement dated June 1, 1998, Sonera Ltd. ("Sonera"), formerly Telecom Finland Ltd., made a $200 million investment in 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. The sale of the AOC Common Shares was recorded at a fair market value which was more than the Company's book value investment in AOC. The Company adjusted its book value investment in AOC as a result of this sale and increased additional paid-in capital $169.5 million in 1998. Aerial Communications, Inc. and Subsidiaries Sonera's equity ownership amount in AOC is subject to adjustment based on Aerial's 20-day average stock price during the three years commencing September 8, 1998. Depending on the level of increase in the stock price, Sonera's ownership amount in AOC could decline to approximately 15%. In addition, after five years Sonera's equity in AOC becomes incrementally exchangeable for equity in Aerial or, in certain circumstances, incrementally exchangeable for equity in TDS or cash or any combination of the foregoing. See also Note 11--Contingency 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 loss of $23.6 million represents Sonera's share of AOC's consolidated net loss from September 8, 1998 (the closing date) to December 31, 1998. 5. LONG-TERM DEBT Nokia Telecommunications Inc. ("Nokia") agreed to provide the Company with up to $200 million in financing for digital radio channel and switching infrastructure equipment through a Credit Agreement with the Company dated June 19, 1996 ("1996 Credit Agreement"). In accordance with the provisions of the 1996 Credit Agreement, the Company issued, in tranches, 10-year unsecured zero coupon promissory notes, the proceeds of which were paid to Nokia in satisfaction of borrowings by the Company under the 1996 Credit Agreement. On November 4, 1996, the Company issued $226.2 million in aggregate principal amount at maturity of Series A Zero Coupon Notes ("Series A Notes") due in 2006. On February 5, 1998, the Company issued $220.0 million in aggregate principal amount at maturity of Series B Zero Coupon Notes ("Series B Notes") due in 2008 (representing the final issuance of zero coupon notes under the 1996 Credit Agreement). The aggregate issue price of the Series A and Series B Zero Coupon Notes was $200 million. The proceeds were paid to Nokia in satisfaction of all then outstanding and future obligations of the Company up to $200 million under the 1996 Credit Agreement. On June 30, 1998, the Company and 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. Interest under the 1998 Credit Agreement is payable monthly at a per annum rate equal to the 30-day London Interbank Offered Rate ("LIBOR") plus 0.25% (the "Eurodollar margin"). The Eurodollar margin on any Tranche A loans with an extended maturity date is subject to adjustment based on ratings for TDS long-term senior unsecured debt. The Series A and Series B Notes are unsecured obligations of the Company and rank in the same priority with all other unsecured and unsubordinated indebtedness of the Company. The Series A and Series B Notes and obligations of the Company under the 1998 Credit Agreement are fully and unconditionally guaranteed by TDS at an annual fee rate of 3%. Guarantee fees owed TDS are payable semiannually. The Series A and Series B Notes are subject to optional redemption by the Company after five years from the date of issuance at redemption prices which reflect the original issue discount accreted since issuance. Aerial Communications, Inc. and Subsidiaries Of the $278.0 million in long-term debt at December 31, 1998, $45.5 million represents borrowings under the 1998 Credit Agreement, with the balance representing the Series A and Series B Zero Coupon Notes, including accreted interest. At December 31, 1997, the Company had a balance of $196.4 million in long-term debt which consisted of $112.1 million related to the Series A Notes and $84.3 million in obligations under the Nokia 1996 Credit Agreement. Aerial Communications, Inc. and Subsidiaries The $121.2 million carrying value of the Company's Series A Notes is less than its fair value, estimated to be $124.9 million. The $111.3 million carrying value of the Company's Series B Notes is greater than its fair value, estimated to be $107.7 million. The fair values were estimated using discounted cash flow analyses. The $45.5 million carrying value of the Company's obligations under the 1998 Credit Agreement approximates the fair value of the obligations, as the 1998 Credit Agreement is variable rate debt with the interest rate based on the 30-day LIBOR plus 0.25%. 6. REVOLVING CREDIT AGREEMENT The Company entered into a Revolving Credit Agreement with TDS on August 1, 1995, under which all of the outstanding obligations of the Company to TDS are incorporated. Under the terms of the Sonera Purchase Agreement, the Revolving Credit Agreement between the Company and TDS, pursuant to which the Company owed TDS $665.0 million as of August 31, 1998, was terminated. A new Revolving Credit Agreement, between AOC and TDS was substituted, under which AOC was indebted to TDS for $665.0 million as of August 31, 1998. The new Revolving Credit Agreement between AOC and TDS provides that the amount of any proceeds raised by the Company or AOC in connection with the sale of equity (see Note 4 - Minority Interest), or debt will be used to reduce the borrowings under the Revolving Credit Agreement as well as reduce the total amount AOC may borrow under the Revolving Credit Agreement. Additionally, any borrowings under the Nokia 1998 Credit Agreement (See Note 5 - Long-Term Debt) concurrently reduces by the same amount the authorized total line of credit available to AOC under the Revolving Credit Agreement. Pursuant to these terms, AOC paid to TDS the $200 million it had received from Sonera to reduce its borrowings under the Revolving Credit Agreement. On November 3, 1998, TDS approved an amendment to the Revolving Credit Agreement dated August 31, 1998, between TDS and AOC. Under the Revolving Credit Agreement, as amended, AOC will be permitted to 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. The following table summarizes AOC's borrowing capacity under the Revolving Credit Agreement as of December 31, 1998:
(Dollars in thousands) - ---------------------------------------------------------------------------- Maximum amount available $ 615,000 Reduced by : Vendor financing under the Nokia 1998 Credit Agreement (45,472) Amount outstanding under the Revolving Credit Agreement (549,943) - ---------------------------------------------------------------------------- Net amount available for borrowing $ 19,585 - ----------------------------------------------------------------------------
See Note 10--Subsequent Event for further discussion of the Revolving Credit Agreement. The $549.9 million carrying value of the Company's borrowings under the Revolving Credit Agreement approximates the fair value of the borrowings, as the Revolving Credit Agreement is variable rate debt with the interest rate based on the prime lending rate. Aerial Communications, Inc. and Subsidiaries 7. RELATED PARTY TRANSACTIONS The Company is billed for all services it receives from TDS and its subsidiaries, consisting primarily of information processing and general management services. Such billings are based on expenses specifically identified to the Company and on allocations of common expenses. Such allocations are Aerial Communications, Inc. and Subsidiaries based on the relationship of the Company's assets, employees, investment in plant and expenses to the total assets, employees, investment in plant and expenses of TDS. Management believes the method used to allocate common expenses is reasonable and that all expenses and costs applicable to the Company are reflected in the accompanying financial statements on a basis which is representative of what they would have been if the Company operated on a stand alone basis. Billings to the Company from TDS totaled $8.6 million, $3.9 million and $2.0 million during 1998, 1997 and 1996, respectively. In 1998, TDS developed a new payroll system for all of its subsidiaries, including the Company. Also in 1998, the Company and TDS developed a new inventory system for Aerial and its subsidiaries. The Company recorded approximately $6.1 million related to these systems in property and equipment. In 1996, TDS completed development of a new financial reporting system for all of its subsidiaries, including the Company. The Company recorded approximately $2.4 million related to this system in property and equipment. In 1997 and 1996, the Company deposited its excess cash in a cash management program administered by TDS. Deposits made into the program were generally available to the Company with interest each month equal to 30-day commercial paper rates plus 0.25%. Subject to the completion of TDS's proposed spin-off of the Company, certain intercompany agreements between TDS and Aerial could be terminated. See Note 1-- Proposed TDS Corporate Restructuring for further discussion. 8. COMMITMENTS The costs of development, construction, start-up and post-launch activities of the Company require substantial capital. From inception through December 31, 1998, the Company had expended approximately $304.4 million for its six licenses, including capitalized interest, approximately $739.1 million for all other capital expenditures and incurred cumulative net losses of $630.8 million. The Company expects to incur significant operating losses and to generate negative cash flow from operating activities during 1999 as it continues to build its PCS customer base. The Company estimates that its aggregate capital requirements for 1999 will total approximately $335 million, with $130 million needed for capital additions and $205 million needed to fund operations (including an aggregate $80 million in interest expense and guarantee fees payable to TDS). On December 31, 1998, the Company had orders totaling approximately $3.9 million with Nokia for infrastructure equipment. Also on December 31, 1998, the Company had orders totaling approximately $9.1 million with various handset vendors for handsets and accessories. The Company and its subsidiaries have leases for certain office facilities, warehouses, retail store locations and cell sites which are classified as operating leases. For the years ended December 31, 1998, 1997 and 1996, rent expense for non-cancelable operating leases was $21.5 million, $10.3 million and $2.1 million, respectively; and for cancelable leases, $0.3 million, $1.1 million and $0.5 million, respectively. On December 31, 1998, the aggregate minimum rental commitments under non-cancelable operating leases for the years 1999 through 2003 and 2004, and thereafter, are approximately $20.5 million, $20.1 million, $18.6 million, $11.5 million, $6.0 million and $14.3 million, respectively. Aerial Communications, Inc. and Subsidiaries 9. COMMON STOCK Tax-Deferred Savings Plan Effective July 1, 1995, the Company adopted the TDS Tax-Deferred Savings Plan (the "Savings Plan"), a qualified profit-sharing plan pursuant to Sections 401(a) and 401(k) of the Internal Revenue Code. As amended on August 15, 1996, participating employees have the option of Aerial Communications, Inc. and Subsidiaries investing their contributions in Aerial Common Shares, TDS Common Shares, United States Cellular Corporation (a subsidiary of TDS) Common Shares or five non-affiliated funds. The Company has reserved 600,000 Common Shares for issuance under the Savings Plan. Employer matching contributions are made in Aerial Common Shares. Aerial issued 73,815, 184,533 and 23,460 Common Shares in 1998, 1997 and 1996, respectively, in connection with the Savings Plan. STOCK-BASED COMPENSATION PLANS The Company accounts for stock options and its employee stock purchase plan under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). No compensation costs have been recognized for the employee stock purchase plan. Some options granted in 1998 and 1997 had exercise prices that were less than the quoted market price of the Company's stock on the date they were granted. In accordance with APB 25, compensation expense of $20,000 and $26,000 was recorded related to these options in 1998 and 1997, respectively. Had compensation expense for all plans been determined consistent with SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's Net (Loss) and (loss) per share would have been increased to the following pro forma amounts:
- -------------------------------------------------------------------------------------- 1998 1997 1996 - -------------------------------------------------------------------------------------- (Dollars in thousands except per share amounts) Net (Loss) As Reported $ (337,895) $ (247,057) $ (37,921) Pro Forma $ (340,382) $ (250,957) $ (38,323) Basic and diluted (loss) per share As Reported $ (4.71) $ (3.45) $ (0.56) Pro Forma $ (4.75) $ (3.51) $ (0.57) - --------------------------------------------------------------------------------------
A summary of the status of the Company's stock option plan at December 31, 1998, 1997 and 1996, and changes during the years then ended is presented in the table and narrative below:
Weighted Average ------------------------------------------------ Number of Shares Option Prices Fair Values Contractual Life - ---------------------------------------------------------------------------------------------------------------------- Outstanding January 1, 1996 Granted 310,305 $ 17.00 $ 7.41 - ---------------------------------------------------------------------------------------------------------------------- Outstanding December 31, 1996 (61,397 exercisable at $17.00) 310,305 $ 17.00 9.33 Years Granted 1,137,435 $ 9.46 $ 4.42 Exercised (2,553) $ 4.94 Forfeited (56,450) $ 14.44 - ---------------------------------------------------------------------------------------------------------------------- Outstanding December 31, 1997 (633,030 exercisable from $4.94 to $17.00) 1,388,737 $ 10.95 8.51 Years Granted 678,861 $ 5.85 $ 3.46 Exercised (30,873) $ 4.94 Forfeited (316,764) $ 10.45 - ---------------------------------------------------------------------------------------------------------------------- Outstanding December 31, 1998 (1,019,192 exercisable from $3.71 to $17.00) 1,719,961 $ 9.13 7.69 Years
Aerial Communications, Inc. and Subsidiaries EMPLOYEE STOCK OPTIONS Effective April 25, 1996, the Company began providing long-term incentive benefits for its senior managers by adopting the Aerial Communications, Inc. Long-Term Incentive Plan (the "Stock Option Plan"). The Company has reserved 3 million Common Shares for option grants. Aerial employees were issued 6,450 Common Shares in 1998 and 767 Common Shares in 1997 in connection with the Stock Option Plan. The options are exercisable over a specified period not in excess of ten years from the date they are granted. Most options expire 10 years after the grant date, or 30 days after the date of the employee's termination of employment, if earlier. Most options vest annually over three to five years from December 15, 1996, through December 15, 2000. The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for 1998, 1997 and 1996, respectively: risk free interest rates of 5.20%, 6.59% and 5.53%; dividend yield of 0%; expected lives of 8.8 years, 9.4 years and 7.4 years; and volatility of 58.17%, 51.32% and 26.36%. EMPLOYEE STOCK PURCHASE PLAN The Company adopted the 1996 APTI Employee Stock Purchase Plan (the "Stock Purchase Plan") effective October 1, 1996. The Company has reserved 200,000 Common Shares for sale to the employees of the Company and its subsidiaries in connection with the Stock Purchase Plan. Shares can be purchased twice a year and the price per share is 85% of the stock's closing price on designated purchase dates. The last purchase date under the Stock Purchase Plan was September 30, 1998. Aerial employees were issued 93,996 Common Shares in 1998 and 59,822 Common Shares in 1997 in connection with the Stock Purchase Plan. The fair value of the employees' purchase rights was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for 1998 and 1997, respectively: risk free interest rate of 4.99% and 6.21%; dividend yield 0%; expected life of 1.8 and 0.8 years; and volatility of 51.59% and 51.18%. The weighted average fair value of the employees purchase rights were $1.94 in 1998 and $2.08 in 1997. NON-EMPLOYEE DIRECTOR COMPENSATION In April 1997, the Company established the Compensation Plan For Non-Employee Directors (the "Compensation Plan"). Under the Compensation Plan, the Company's independent directors are to be paid an annual fee of $20,000 that is payable half in cash and half in Company stock. The number of Common Shares to be delivered to each independent director is based upon the average market value of the Company's stock for a certain period prior to the date of the Annual Shareholder's Meeting. The Company has reserved 20,000 Common Shares for issuance to the Company's independent directors under the Compensation Plan. The Company issued 4,116 and 6,003 shares to non-employee directors under this plan in 1998 and 1997, respectively. INITIAL PUBLIC OFFERING The Company sold 12.3 million Common Shares at a price of $17 per share in an initial public offering on April 25, 1996. Proceeds of the offering, net of underwriting discounts and commissions, totaled $195.3 million. The Company used a portion of the net proceeds to repay TDS approximately $64.1 million, representing the then outstanding balance (including accrued interest) under the Revolving Credit Agreement, and used the balance of the funds to partially finance construction, development and operating costs incurred to establish its PCS networks. Proceeds of the offering were fully utilized by the end of January 1997. Aerial Communications, Inc. and Subsidiaries RECAPITALIZATION On March 28, 1996, TDS, as the sole shareholder of the Company at such time, executed a consent to action in lieu of a meeting, voting all 1,000 shares of common stock of the Company then outstanding for the approval of a Restated Certificate of Incorporation of the Company. Such Restated Certificate of Incorporation authorized (a) 100 million Common Shares, $1.00 par value per share; (b) 60 million Series A Common Shares, $1.00 par value per share; (c) 60 million Series B Common Shares, $1.00 par value per share; and (d) 10 million Preferred Shares, $1.00 par value per share. Upon the filing of the Restated Certificate of Incorporation with the Secretary of State of the Aerial Communications, Inc. and Subsidiaries State of Delaware on April 19, 1996, the 1,000 shares of common stock of the Company theretofore held by TDS were converted into 19.1 million Common Shares and 40 million Series A Common Shares of the Company. SERIES A COMMON SHARES Series A Common Shares are convertible on a share-for-share basis into Common Shares and are entitled to 15 votes per share. No Series A Common Shares were converted during 1998, 1997 or 1996. As of December 31, 1998, all of the Company's outstanding Series A Common Shares were held by TDS. 10. SUBSEQUENT EVENT 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 third quarter of 1999. The above payment, made on March 15, 1999, was used to pay down the outstanding balance under the Revolving Credit Agreement. 11. CONTINGENCY 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 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. 12. CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarter Ended Quarter Ended March 31 June 30 Sept. 30 Dec. 31 - -------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) 1998 Operating revenues $ 30,746 $ 36,688 $ 38,438 $ 49,382 Operating (Loss) (69,313) (67,462) (60,607) (82,603) Net (Loss) (86,921) (89,474) (79,137) (82,363) Weighted average Common and Series A Common Shares (000) 71,636 71,730 71,735 71,789 (Loss) per Common and Series A Common Share $ (1.21) $ (1.25) $ (1.10) $ (1.15) 1997 Operating revenues $ -- $ 7,143 $ 18,648 $ 30,161 Operating (Loss) (21,614) (51,633) (64,537) (80,381) Net (Loss) (22,340) (55,475) (76,598) (92,644) Weighted average Common and Series A Common Shares (000) 71,384 71,499 71,559 71,604 (Loss) per Common and Series A Common Share $ (0.31) $ (0.78) $ (1.07) $ (1.29) - --------------------------------------------------------------------------------------------------------
Aerial Communications, Inc. and Subsidiaries SELECTED CONSOLIDATED FINANCIAL DATA
- ---------------------------------------------------------------------------------------------------------------------------- Year Ended or at December 31, 1998 1997 1996 1995 1994 - ---------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share amounts) OPERATING FINANCIAL DATA Operating Revenues $ 155,154 $ 55,952 $ -- $ -- $ -- Operating (Loss) (279,985) (218,165) (43,950) (7,562) (1,977) Minority share of loss 23,620 -- -- -- -- Investment (losses) (128) (2,518) (304) -- -- Interest income-affiliate -- 95 4,488 -- -- Interest income-other 882 2,133 1,158 49 2 Other income 442 269 -- -- -- Gain on sale of PCS licenses -- -- 2,582 -- -- Interest expense-affiliate 62,137 21,558 1,960 1,051 50 Interest expense-other 18,010 5,507 802 -- -- (Loss) Before Income Taxes (335,316) (245,251) (38,788) (8,564) (2,025) Net (Loss) $(337,895) $(247,057) $ (37,921) $ (6,468) $ (1,283) Weighted Average Common and Series A Common Shares (000)(1) 71,723 71,512 67,492 59,086 59,086 (Loss) per Common and Series A Common Share $ (4.71) $ (3.45) $ (0.56) $ (0.11) $ (0.02) Dividends per Common and Series A Common Share $ -- $ -- $ -- $ -- $ -- BALANCE SHEET Working capital $ (37,400) $ (51,566) $ (80,347) $ 33,141 $ 149 Property & Equipment (Net) 621,281 604,104 252,423 12,087 -- Investment in PCS licenses (Net) 289,488 297,043 304,354 305,818 20,401 Total Assets 961,347 960,648 672,827 360,444 21,320 Revolving Credit Agreement-TDS 549,943 448,234 -- 60,238 22,659 Long-Term Debt 278,010 196,439 103,743 -- -- Minority Interest 5,835 -- -- -- -- Common Shareholders' Equity (Deficit) 25,078 192,427 437,785 281,282 (1,444 Capital expenditures (2) $ 96,950 $ 387,718 $ 242,270 $ 297,551 $ 20,401 - ----------------------------------------------------------------------------------------------------------------------------
(1) Weighted Average Common and Series A Common Shares outstanding give retroactive effect to the recapitalization in conjunction with the Company's April 1996 initial public offering, as if the transaction had occurred January 1, 1994. (2) Includes non-cash transactions. Aerial Communications, Inc. and Subsidiaries REPORT OF MANAGEMENT Management of Aerial Communications, Inc. ("Aerial") has the responsibility for preparing the accompanying consolidated financial statements and for their integrity and objectivity. The statements were prepared in accordance with generally accepted accounting principles applied on a consistent basis and, in management's opinion, are fairly presented. The financial statements include amounts that are based on management's best estimates and judgments. Management also prepared the other information in the annual report and is responsible for its accuracy and consistency with the financial statements. Management has established and maintains a system of internal control that provides reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition, and the prevention and detection of fraudulent financial reporting. The system of internal control provides for appropriate division of responsibility and is documented by written policies and procedures that are communicated to employees with significant roles in the financial reporting process and updated as necessary. Management monitors the system of internal control for compliance, considers recommendations for improvements, and updates such policies and procedures as necessary. Monitoring includes an internal auditing program to independently assess the effectiveness of the internal controls and recommend possible improvements thereto. Management believes that Aerial's system of internal control is adequate to accomplish the objectives discussed herein. The concept of reasonable assurance recognizes that the costs of a system of internal accounting controls should not exceed, in management's judgment, the benefits to be derived. The consolidated financial statements of Aerial have been audited by Arthur Andersen LLP, Independent Public Accountants. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholders and Board of Directors of Aerial Communications, Inc.: We have audited the accompanying consolidated balance sheets of Aerial Communications, Inc. (a Delaware Corporation and an 82.3%-owned subsidiary of Telephone and Data Systems, Inc.) and Subsidiaries (the "Company") as of December 31, 1998 and 1997, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. Aerial Communications, Inc. and Subsidiaries In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Aerial Communications, Inc. and Subsidiaries as of 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. Arthur Andersen LLP Chicago, Illinois January 27, 1999 (except with respect to the matter discussed in Note 10, as to which the date is March 15, 1999) Aerial Communications, Inc. and Subsidiaries AERIAL STOCK AND DIVIDEND INFORMATION The Company's Common Shares are listed on the NASDAQ under the symbol "AERL" and in the newspaper as "Aerial." As of February 26, 1998, the Company's Common Shares were held by 656 registered holders and 5,500 beneficial holders. All of the Series A Common Shares were held by TDS. No public trading market exists for the Series A Common Shares, but the Series A Common Shares are convertible on a share-for-share basis into Common Shares. The trading price of the Common Shares on April 25, 1996, the date on which the Common Shares were first offered for sale to the public, was $17.00 per share. The Company has never paid any cash dividends and currently intends to retain any future earnings for use in the Company's business. In addition, the Revolving Credit Agreement with TDS prohibits the payment of dividends on the Company's Common Shares and Series A Common Shares, except to the extent of one-half of the cumulative consolidated net income, if any, of the Company. MARKET PRICE PER COMMON SHARE BY QUARTER No public trading market exists for Aerial's Series A Common Shares and therefore, quotations are not available. The high and low sales prices of the Common Shares on the NASDAQ as reported by the Dow Jones News Service are as follows: Aerial Communications, Inc. and Subsidiaries 1998 1st 2nd 3rd 4th - --------------------------------------------------------- High $ 9.25 $ 8.00 $ 6.94 $ 5.88 Low $ 6.50 $ 5.75 $ 3.06 $ 1.63 1997 1st 2nd 3rd 4th - --------------------------------------------------------- High $ 8.88 $ 9.63 $ 9.94 $ 10.63 Low $ 5.25 $ 3.88 $ 7.38 $ 7.00
EX-21 7 EXHIBIT 21 EXHIBIT 21 AERIAL COMMUNICATIONS, INC. SUBSIDIARIES OF AERIAL COMMUNICATIONS, INC.
STATE OF INCORPORATION OR LEGAL NAME ORGANIZATION ------------- -------------- APT Operating Company, Inc. Delaware APT Columbus, Inc. Delaware APT Kansas City, Inc. Delaware APT Tampa/Orlando, Inc. Delaware APT Minneapolis, Inc. Delaware APT Houston, Inc. Delaware APT Pittsburgh Limited Partnership Delaware APT Pittsburgh General Partner, Inc. Delaware
EX-23 8 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference in this Form 10-K of Aerial Communications, Inc., of our report dated January 27, 1999 (except with respect to the matter discussed in Note 10, as to which the date is March 15, 1999), on the consolidated financial statements of Aerial Communications, Inc. and Subsidiaries (the "Company") included in the Company's 1998 Annual Report to Shareholders, to the inclusion in this Form 10-K of our report dated January 27, 1999 (except with respect to the matter discussed in Note 10, as to which the date is March 15, 1999), on the financial statement schedule of the Company, and to the incorporation by reference of such reports into the Company's previously filed S-8 Registration Statements, File No. 333-06471, File No. 333-10201, File No. 333-26429, File No.333-67461 and File No. 333-51561. ARTHUR ANDERSEN LLP Chicago, Illinois March 30, 1999 EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS OF AERIAL COMMUNICATIONS, INC. AS OF DECEMBER 31, 1998 AND FOR THE YEAR THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 4,943 0 30,079 5,875 11,378 48,724 733,958 (112,677) 961,347 86,124 278,010 0 0 71,789 (46,711) 961,347 31,514 155,154 87,715 435,139 0 0 80,147 (335,316) 2,579 (337,895) 0 0 0 (337,895) (4.71) (4.71)
-----END PRIVACY-ENHANCED MESSAGE-----