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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, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-28262
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AERIAL COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
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<TABLE>
<S> <C>
DELAWARE 39-1706857
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(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) No.)
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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
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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._______
As of February 28, 1997, the aggregate market value of registrant's Common
Shares held by nonaffiliates was approximately $69 million (based upon the
closing price of the Common Shares on February 28, 1997, of $5 5/8, as reported
by the NASDAQ).
The number of shares outstanding of each of the registrant's classes of
common stock, as of February 28, 1997, is 31,387,781 Common 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 1996 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 12,
1997, described in the cross reference sheet and table of contents attached
hereto are incorporated by reference into Parts II and III of this report.
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CROSS REFERENCE SHEET
AND
TABLE OF CONTENTS
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PAGE NUMBER
OR REFERENCE(1)
---------------
Item 1. Business............................................. 3
Item 2. Properties........................................... 12
Item 3. Legal Proceedings.................................... 12
Item 4. Submission of Matters to a Vote of Security
Holders............................................ 12
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters................................ 13(2)
Item 6. Selected Financial Data.............................. 13(3)
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 13(4)
Item 8. Financial Statements and Supplementary Data.......... 13(5)
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 13
Item 10. Directors and Executive Officers of the Registrant... 14(6)
Item 11. Executive Compensation............................... 14(7)
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................... 14(8)
Item 13. Certain Relationships and Related Transactions....... 14(9)
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K........................................ 15
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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, 1996 ("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 12, 1997
("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."
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[LOGO]
AERIAL COMMUNICATIONS, INC.
8410 WEST BRYN MAWR AVENUE - SUITE 1100 - CHICAGO, IL 60631
TELEPHONE (773) 399-4200
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PART I
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ITEM 1. BUSINESS
COMPANY
Aerial Communications, Inc. (NASDAQ symbol "AERL" or the "Company" or
"Aerial"), together with its subsidiaries, is a licensee of Personal
Communications Services ("PCS") in the United States, with licenses to provide
service in the Minneapolis, Tampa-St. Petersburg-Orlando, Houston, Pittsburgh,
Kansas City and Columbus Major Trading Areas ("MTAs") (collectively, the "PCS
Markets"). The PCS Markets include approximately 27.6 million population
equivalents ("POPs"). The Company is constructing networks for its PCS Markets
using Global System for Mobile Communication ("GSM") technology. The Company has
commenced development of a marketing program, intends to launch commercial
service in its first market in March 1997, and expects to complete construction
of its PCS networks within twelve months of launch of commercial service.
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, 1996, representing 82.8% percent of the combined
total of the Company's outstanding Common and Series A Common Shares and 98.1%
percent of the voting power.
The Company sold in 1996 its licenses covering the Guam and Alaska Major
Trading Areas for an aggregate pretax gain of $2.6 million.
PCS is the term used to describe the wireless telecommunications services
that will be offered by those companies that acquired or will acquire 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 will initially compete directly with existing
cellular telephone, paging and specialized mobile radio services. PCS will also
include features which have not traditionally been offered by cellular
providers, such as: (i) the provision of all services to one untethered, mobile
number; (ii) lower-priced service options; and (iii) data transmissions to and
from portable computers, advanced paging services and facsimile services. The
Company believes that these enhanced features will contribute to the
acceleration of growth in the wireless telecommunications market. The Company
believes that PCS providers will be the first wireless direct competitors to
cellular providers and the first to offer mass market all-digital mobile
networks. In addition, 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
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everyday use. The Company is being structured to meet the increasingly
competitive challenges of the wireless telecommunications marketplace, and will
have a marketing-oriented approach focused on serving its customers and their
needs. Since 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. Since its introduction in 1983, the number of domestic cellular
telephone subscribers, both analog and digital, has grown from approximately
91,600 in 1984 to an estimated 43.9 million at December 31, 1996, which
represents U.S. market penetration of approximately 16.3%.
During 1996 the Company contracted for network equipment, billing systems,
support software and the majority of equipment and services necessary to launch
service. All of the senior management positions and most other key management
positions have been staffed. The Company has completed the final 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
majority of the cell sites required to launch and commenced zoning and building
the sites. Key operating and marketing staff are in place in each of the PCS
Markets. The initial coverage of the Company's PCS networks will include the
major metropolitan areas within the PCS Markets, as well as portions of the
major highway corridors extending out from those areas. The Company expects to
complete construction of its PCS networks within twelve months of launch of
commercial service, at which time its PCS networks are anticipated to cover
approximately 80% of the population within the PCS Markets.
In November 1996, the Company entered into a Member Control Agreement
("Agreement") forming a joint venture with Rural Cellular Corporation ("RCC") to
build out certain rural areas covering approximately 530,000 POPs in the
Minneapolis MTA. The Company will contribute 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 will be responsible for building
out the network and for the ongoing operations. It is anticipated that the joint
venture will purchase services such as network switching and customer billing
from the Company. The network will use GSM technology. The Company expects to
benefit from the joint venture by extending the GSM footprint without the
capital investment required to build out the network. The Agreement is awaiting
FCC approval.
TECHNOLOGY
By implementing GSM technology the Company believes it will be able to
launch more services earlier than it could with other available technologies as
well as rapidly complete the initial construction of its networks. Since GSM
technology has been in use successfully in Europe since 1992, the Company does
not expect to encounter network-related problems. Generally, it takes a number
of years to successfully launch a new wireless technology into commercial
operation, with problems arising in both handsets and network infrastructure. By
using GSM technology, the Company believes that these problems have already been
mitigated. GSM also offers sophisticated operations and maintenance systems
which are expected to facilitate the integration and launch of PCS networks
containing several hundred cell sites. The Company will offer a full range of
telecommunications services, including easy-to-use, interactive menu-driven
phones, and advanced features such as Caller ID 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.
To date, in North America, nearly 20 PCS companies have chosen or are
expected to choose GSM. With the completion of the U.S. broadband PCS auctions,
license areas of GSM committed operators now total more than 260 million POPs
(representing 98.3% of the U.S. population). The Company anticipates that its
customers will be able to roam throughout the United States and Canada, either
on other GSM-based PCS networks or by using dual-mode handsets that also can be
used on existing cellular networks.
GSM is not directly 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
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compatibility between GSM and the existing analog cellular systems will be
achieved with the use of dual-mode handsets. Dual-mode handsets are expected to
be available in late 1997. Because analog cellular service is available
nationwide, the Company expects that PCS customers will be able to roam into
many service areas served by analog cellular providers.
WIRELESS TELECOMMUNICATIONS INDUSTRY
OVERVIEW. Wireless service is currently available using analog or digital
technology. Most wireless services currently transmit 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 single number (or "find me") service, 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).
While digital technology serves generally to reduce transmission
interference relative to analog technology, capacity limitations in the 8 Kb
vocoder cellular digital handsets now deployed by several digital wireless
operators using TDMA technology also cause a perceptible decline in voice
quality. This gap in voice quality has proven to be a significant barrier to
cellular operators attempting to switch their customers from analog to digital
service. Manufacturers have developed enhanced 13 Kb vocoder digital handsets
for both PCS and digital cellular networks using GSM or CDMA technology. These
new handsets are expected to offer digital voice transmission comparable to
wireline quality.
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 will also be
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"
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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 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.
PRODUCTS AND SERVICES
The Company's fundamental customer proposition will be an affordable,
reliable, high-quality mobile voice communications service. At the commencement
of commercial service, the Company intends to offer 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 is competitive with
that of current cellular operators. The Company will also provide roaming
capabilities, through agreements with other GSM and cellular operators.
The Company will provide several distinct services and features, certain of
which are currently available only on PCS networks. These include:
THE SMART CARD. GSM technology employs a credit-card sized Smart Card which
contains a microchip containing detailed information about a customer's service
profile. The Smart Card will allow 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
will provide easy-to-use, interactive menu-driven phones that will enable
customers to utilize the features available in a GSM network. These handsets
will 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 will provide greater security from
eavesdropping and cloning than existing 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.
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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 will be 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 will emphasize the value of the
Company's high-quality, innovative services and will be supported by heavily
promoting the Aerial brand name. This will be supported by a substantial
advertising program.
The Company plans to offer 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 will utilize traditional
sales channels which include mass merchandisers and retail outlets, company
retail stores, sales agents and a direct sales force. 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, neighborhood sales and on-line sales.
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. In March 1996, the Company selected Nokia Telecommunications Inc. as its
sole supplier of digital radio channel and switching infrastructure equipment
during the initial build-out of its PCS networks.
THE COMPANY'S PCS MARKETS
The PCS Markets cover large areas with attractive demographic
characteristics including growing populations, high population densities,
favorable commuting patterns, high median household incomes and favorable
business climates. The Company believes the geographic diversity of the PCS
Markets mitigates adverse consequences which may result from an economic
slowdown in one particular region.
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 will compete 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). Each of
these PCS licensees is designing and constructing their respective networks. PCS
PrimeCo's networks are commercially operational in Houston and Tampa. Sprint
Spectrum has launched commercial service in Pittsburgh. The FCC has awarded the
initial licenses for the Block C spectrum and has recently announced the winning
bidders for the D, E and F Blocks. The Company also expects that existing
cellular providers in the PCS Markets, most of which have an infrastructure in
place and have been operational for a number of years, will upgrade their
networks to provide comparable services in competition with the Company.
Principal cellular providers in the PCS Markets are AT&T Wireless
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Services, Inc., BellSouth Mobility, Inc., GTE Mobile Communications Corporation,
AirTouch Communications, Inc., U S WEST NewVector Group, Inc., Bell
Atlantic-NYNEX Mobile and Ameritech Cellular.
The Company also expects to compete with other communications technologies
that now exist, such as paging, enhanced specialized mobile radio ("ESMR") and
global satellite networks, and expects to compete with cellular and PCS
resellers. 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. In addition, the Company may face competition from
technologies that may be introduced in the future.
All of such competition is expected to be 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.
Handsets used for GSM-based PCS networks will not be automatically
compatible with cellular systems, and vice versa. The Company expects dual-mode
handsets to be available in late 1997, which will permit its customers to roam
by using the existing cellular wireless network in other markets. Until then,
this lack of interoperability may impede the Company's ability to attract
current cellular customers or potential new wireless communication customers
that desire the ability to access different service providers in the same
market.
The Company anticipates that market prices for two-way wireless services
generally will 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 OF WIRELESS TELECOMMUNICATIONS INDUSTRY
REGULATORY ENVIRONMENT. The FCC regulates the licensing, construction,
operation and acquisition of wireless telecommunications systems in the U.S.
pursuant to the Communications Act of 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 forfeitures for 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 unnecessary. The FCC
promulgated and continues to promulgate regulations governing construction and
operation of wireless providers, 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.
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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 BTA in every
block, for a total of more than 2,000 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. The FCC has awarded the initial licenses for the C Block spectrum
and has recently announced the winning bidders for the D, E and F Blocks.
An appeal has been taken to the FCC from the Bureau order by a party
alleging that some of the authorizations were granted to parties which had
engaged in collusion in the competitive bidding process. That party has also
sought review of the denial of its motion for a stay of the grant of A and B
Block authorizations. No allegation of collusion was made against TDS or the
Company. The Company would defend vigorously any challenges to the
authorizations it has been granted.
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.
In compliance with FCC restrictions on common ownership of cellular and
broadband PCS interests in overlapping market areas, United States Cellular,
another subsidiary of TDS, entered into a series of arrangements for the
divestiture or restructuring of certain of its cellular interests in market
areas where the Company was awarded broadband PCS licenses. A number of these
proposed arrangements required FCC approval of assignment or transfer of control
applications before they could be consummated. These applications have been
approved by the FCC and have been consummated.
The grants of licenses to the Company are also 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. A significant factor
affecting the schedule and cost of the Company's network implementation will be
the relocation of existing private microwave facilities which operate on the
same frequencies to be used for the Company's broadband PCS operations. Under
the FCC's policies, if the Company decides that any existing microwave facility
must be relocated, it is required to provide substitute facilities at its own
expense so that the companies using these existing facilities may continue to
have access to the same or equivalent communications capabilities. The FCC
concluded proceedings in 1996 clarifying and changing its requirements for
permissible relocation costs, adopting incentives to encourage reliance on
voluntary relocation agreements and requiring the sharing of relocation costs
where the relocation of private microwave facilities benefits multiple broadband
PCS licenses.
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 policies 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" performance, 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
assurance that the Company's licenses will be renewed by the FCC in the
9
<PAGE>
future. Moreover, although revocation and involuntary modification of licenses
are extraordinary regulatory measures, the FCC has 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 regulations and requirements which may affect the business of the
Company.
RECENT EVENTS. The FCC adopted certain significant decisions during 1996.
In one decision, the FCC required that all licensees register and obtain FCC
registration numbers for all of their antenna towers which require prior Federal
Aviation Administration ("FAA") clearance. The FCC also amended its
environmental protection rules to adopt new guidelines and procedures for
evaluating the environmental effects of radio frequency ("RF") emissions.
The FCC has also imposed new "enhanced 911" regulations in broadband PCS
systems to determine the precise location of the person making the emergency
call. The new rules require broadband PCS providers to work with local public
safety officials to process 911 calls, including those made from mobile
telephones not registered with the broadband PCS provider, and to meet phased
deadlines for implementing these capabilities.
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 the subscribers involved have no pre-existing service relationship with
that 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 has adopted requirements which will make it possible for subscribers
to retain, at the same location, 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 have implementation deadlines by the end of 1998.
Broadband PCS, cellular and certain other wireless providers have phased
implementation deadlines in 1998 and 1999.
The FCC is also proceeding 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 is proceeding in numerous, concurrent proceedings with aggressive
deadlines. The Company cannot predict the full extent, nature and
interrelationships among state and federal implementation and other responses to
the 1996 Act.
The primary purpose and effect of the new law 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. While a state may not impose requirements
that effectively function as barriers to entry, it retains limited authority to
regulate certain competitive practices in rural telephone company service areas.
Since enactment, the FCC has adopted orders implementing the local
competition provisions of the 1996 Act. The FCC found that broadband PCS and
certain other wireless providers 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
have been taken
10
<PAGE>
to the United States Court of Appeals for the Eighth Circuit from these FCC
orders by numerous parties alleging that the FCC has exceeded its statutory
mandate, among other matters. The Eighth Circuit Court granted a stay of certain
rules adopted in the FCC orders pending its decision on the merits of these
appeals.
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. The FCC has proceedings pending to address
recommendations made by the Joint Board with respect to the implementation of
the universal service provisions of the 1996 Act, including, among other issues,
the size of the universal service fund and the assessment mechanism to determine
how much individual wireless carriers will be required to contribute.
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 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 and local 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
Generally, the Company's operating results are not significantly affected by
seasonal factors.
EMPLOYEES
As of December 31, 1996, the Company had a total of 424 employees. None of
the Company's employees is represented by a labor union. The Company considers
its relations with its employees to be good.
11
<PAGE>
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; and unanticipated changes in growth in PCS
customers, penetration rates, churn rates and the mix of products and services
offered in the Company's markets. 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 and
National Operations Center in Tampa. These leases provide for monthly rentals at
market rates and expire, subject to renewal options, on various dates through
2006. The Company also leases 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, 1996, the Company had entered into
370 such cell site agreements. The Company owns all five of its 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 is not involved in any
currently pending lawsuits or proceedings that it believes will have,
individually or in the aggregate, a material adverse effect on the Company.
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 1996.
12
<PAGE>
- --------------------------------------------------------------------------------
PART II
- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Except as described below, such information is incorporated herein by
reference from Exhibit 13, Annual Report section entitled "Aerial Stock and
Dividend Information" and "Market Price Per Common Share By Quarter."
On November 4, 1996, the Company issued $226.2 million in aggregate
principal amount at maturity of Series A Zero Coupon Notes ("Notes") due in
2006. The issue price of the Notes was 44.2% of the principal amount at maturity
or $100 million, and there is no periodic payment of interest. The $100 million
in proceeds from the sale of the Notes were paid to Nokia Telecommunications
Inc., in satisfaction of all outstanding obligations and future obligations up
to $100 million of the Company under a Credit Agreement dated June 19, 1996. The
Notes and the obligations under the Credit Agreement are fully and
unconditionally guaranteed by TDS at an annual fee rate of 3%. Such Notes were
issued without registration under the Securities Act of 1933, as amended,
pursuant to an exemption therefrom in Rule 144A under such act.
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 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.
13
<PAGE>
- --------------------------------------------------------------------------------
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 RELATIONSHIP AND RELATED TRANSACTIONS
Incorporated herein by reference from Proxy Statement section entitled
"Certain Relationships and Related Transactions."
14
<PAGE>
- --------------------------------------------------------------------------------
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
<TABLE>
<S> <C>
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*
</TABLE>
- ---------
* Incorporated herein by reference from Exhibit 13.
(2) Schedules
<TABLE>
<CAPTION>
LOCATION
--------
<S> <C> <C>
Report of Independent Public Accountants on Financial Statement Schedule.......... page 16
II. Valuation and Qualifying Accounts for each of the Three Years in the Period
Ended December 31, 1996.................................................... page 17
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.
</TABLE>
(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
- -------- ----------------------------------------------------------------------
10.14 Aerial Communications, Inc. 1996 Long-Term Incentive Plan, as amended,
is hereby incorporated by reference to Exhibit B to the Company's
Notice of Annual Meeting of Shareholders and Proxy Statement for the
1997 Annual Meeting of Shareholders.
10.15 Description of Terms of Signing Letter with Donald W. Warkentin dated
June 7, 1995.
(b) Reports on Form 8-K filed during the quarter ended December 31, 1996.
The Company filed on November 29, 1996, a Current Report on Form 8-K dated
November 4, 1996, for the purpose of filing the Trust Indenture Agreement dated
November 4, 1996, between the Company, as issuer, Telephone and Data Systems,
Inc., as guarantor, and The First National Bank of Chicago, as trustee related
to the Series A Zero Coupon Notes Due 2006.
The Company filed on November 27, 1996, a Current Report on Form 8-K dated
November 20, 1996, for the purpose of filing a Certificate of Ownership and
Merger with the Secretary of State of the State of Delaware to effect a change
in its name from "American Portable Telecom, Inc." to "Aerial Communications,
Inc." The NASDAQ ticker symbol was also changed from "APTI" to "AERL".
The Company filed on December 18, 1996, a Current Report on Form 8-K dated
June 19, 1996, for the purpose of filing the Credit Agreement dated June 19,
1996 and rider thereto dated October 30, 1996, between the Company and Nokia
Telecommunications Inc.
15
<PAGE>
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 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 29, 1997. 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 financials 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 29, 1997
16
<PAGE>
AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN A COLUMN C
DESCRIPTION COLUMN B ADDITIONS COLUMN E
- ------------------------------------------------------------------------- BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND COLUMN D END OF
(DOLLARS IN THOUSANDS) PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1996
Valuation Allowance for Deferred Tax Assets $ 1,291 $ 13,738 $ -- $ 15,029
FOR THE YEAR ENDED DECEMBER 31, 1995
Valuation Allowance for Deferred Tax Assets 170 1,121 -- 1,291
FOR THE YEAR ENDED DECEMBER 31, 1994
Valuation Allowance for Deferred Tax Assets $ 101 $ 69 $ -- $ 170
</TABLE>
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
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)
</TABLE>
Dated March 20, 1997
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------------------- ------------------------------ ---------------------
<S> <C> <C>
/S/ DONALD W. WARKENTIN DIRECTOR March 20, 1997
----------------------------------
Donald W. Warkentin
/S/ J. CLARKE SMITH DIRECTOR March 20, 1997
----------------------------------
J. Clarke Smith
/S/ LEROY T. CARLSON, JR. CHAIRMAN AND DIRECTOR March 20, 1997
----------------------------------
LeRoy T. Carlson, Jr.
/S/ LEROY T. CARLSON DIRECTOR March 20, 1997
----------------------------------
LeRoy T. Carlson
/S/ MURRAY L. SWANSON DIRECTOR March 20, 1997
----------------------------------
Murray L. Swanson
/S/ RUDOLPH E. HORNACEK DIRECTOR March 20, 1997
----------------------------------
Rudolph E. Hornacek
/S/ JAMES BARR III DIRECTOR March 20, 1997
----------------------------------
James Barr III
/S/ WALTER C.D. CARLSON DIRECTOR March 20, 1997
----------------------------------
Walter C.D. Carlson
/S/ JOHN D. FOSTER DIRECTOR March 20, 1997
----------------------------------
John D. Foster
/S/ THOMAS W. WILSON, JR. DIRECTOR March 20, 1997
----------------------------------
Thomas W. Wilson, Jr.
</TABLE>
18
<PAGE>
- --------------------------------------------------------------------------------
EXHIBIT INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- ----------------------------------------------------------------------
<C> <S>
3.1 Restated Certificate of Incorporation of the Company, is hereby
incorporated by reference to Exhibit 3.1 to the Company's Form 8-K
dated November 20, 1996.
3.2 Restated Bylaws of the Company, are hereby incorporated by reference
to Exhibit 3.2 to the Company's Amendment No. 1 to Form S-1
(Registration No. 333-1514)
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.
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 the TDS 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 the TDS Annual Report on Form 10-K for
the year ended December 31, 1992.
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 Revolving Credit Agreement dated as of August 1, 1995 between the
Company and TDS, is hereby incorporated by reference to Exhibit 10.2
to the Company's Amendment No. 1 to Form S-1 (Registration No.
333-1514)
10.3 Amendment dated December 31, 1995 to Revolving Credit Agreement
between the Company and TDS, is hereby incorporated by reference to
Exhibit 10.3 to the Company's Amendment No. 1 to Form S-1
(Registration No. 333-1514)
10.4 Form of Tax Allocation Agreement between the Company and TDS, is
hereby incorporated by reference to Exhibit 10.4 to the Company's
Amendment No. 1 to Form S-1 (Registration No. 333-1514)
10.5 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)
10.6 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)
10.7 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)
10.8 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)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- ----------------------------------------------------------------------
<C> <S>
10.9 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)
10.10* Software License Agreement dated as of December 15, 1995 between the
Company and Aethos Communications, Inc., is incorporated by reference
to Exhibit 10.11 to the Company's Amendment No. 1 to Form S-1
(Registration No. 333-1514)
10.11* Project Management and Construction Agreement dated as of January 15,
1996 between the Company and Fluor Daniel, Inc., is hereby
incorporated by reference to Exhibit 10.12 to the Company's Amendment
No. 1 to Form S-1 (Registration No. 333-1514)
10.12* 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)
10.13* Credit Agreement dated as of June 19, 1996, and rider thereto dated
October 30, 1996, between the Company and Nokia Telecommunications
Inc., is hereby incorporated by reference to Exhibit 99.1 to the
Company's Form 8-K dated June 19, 1996.
10.14 Aerial Communications, Inc. 1996 Long-Term Incentive Plan, as amended,
is hereby incorporated by reference to Exhibit B to the Company's
Notice of Annual Meeting of Shareholders and Proxy Statement for the
1997 Annual Meeting of Shareholders.
10.15 Description of Terms of Signing Letter with Donald W. Warkentin dated
June 7, 1995.
11 Computation of earnings per common share
13 Incorporated portions of the 1996 Annual Report to Shareholders
21 List of Subsidiaries of the Registrant
23 Consent of Independent Public Accountants
27 Financial Data Schedule
</TABLE>
- ---------
* 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.
<PAGE>
[LOGO]
AERIAL COMMUNICATIONS, INC.
8410 West Bryn Mawr - Suite 1100
Chicago, Illinois 60631
Phone: (773) 399-4200
Fax: (773) 399-4170
<PAGE>
EXHIBIT 10.15
AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
DESCRIPTION OF TERMS OF SIGNING LETTER WITH DONALD W. WARKENTIN
DATED JUNE 7, 1995
Base salary at an annual rate of $200,000 per year, with an increase
effective 1/1/96 to $220,000.
$150,000 signing bonus payable on first anniversary date with TDS.
1995 guaranteed bonus of $40,000 and maximum bonus of $60,000.
Target bonus opportunity of 35% of base salary, starting in 1996.
Participation in the TDS Long Term Incentive Plan until such time as American
Portable Telecommunications, Inc. ("APT") is taken public. In the event APT
is taken public, participation in the APT stock option program, with the
unvested portion of the TDS Stock Option Grant offset by the APT Stock Option
Grant.
<PAGE>
EXHIBIT 11
AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
COMPUTATION OF EARNINGS PER COMMON SHARE
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1995
- ------------------------------------------------------------------------------------------------------- ------------ -----------
<S> <C> <C>
PRIMARY EARNINGS
Net (Loss)........................................................................................... $ (37,921) $ (6,468)
------------ -----------
------------ -----------
PRIMARY SHARES
Weighted average number of Common and Series A Common Shares Outstanding (1)......................... 67,492 59,086
------------ -----------
------------ -----------
PRIMARY EARNINGS PER COMMON SHARE
Net (Loss)........................................................................................... $ (0.56) $ (0.11)
------------ -----------
------------ -----------
FULLY DILUTED EARNINGS(2)
Net (Loss)........................................................................................... $ (37,921) $ (6,468)
------------ -----------
------------ -----------
FULLY DILUTED SHARES
Weighted average number of Common and Series A Common Shares Outstanding (1)......................... 67,492 59,086
Additional shares assuming issuance of:
Options............................................................................................ 310 --
------------ -----------
Fully Diluted Shares................................................................................. 67,802 59,086
------------ -----------
------------ -----------
FULLY DILUTED EARNINGS PER COMMON SHARE
Net (Loss)........................................................................................... $ (0.56) $ (0.11)
------------ -----------
------------ -----------
</TABLE>
- ---------
(1) Weighted average number of Common and Series A Common Shares Outstanding was
calculated based on the number of Common Shares outstanding during the
period adjusted to give retroactive effect to the recapitalization in
conjunction with the Company's initial public offering, as if this
transaction had occurred at January 1, 1995.
(2) This calculation is submitted in accordance with Securities Act of 1934
Release No. 9083 although not required by footnote 2 to paragraph 14 of APB
Opinion No. 15 because it results in dilution of less than 3%.
<PAGE>
<TABLE>
<CAPTION>
AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES (A Development Stage Enterprise)
SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended December 31, 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
OPERATING FINANCIAL DATA:
Operating Revenues $ - $ - $ - $ - $ -
Development Costs-affiliate 1,163 1,221 856 60 110
Development Costs-other 15,107 2,767 1,119 - 77
General and Administrative 27,680 3,574 2 5 5
Operating (Loss) (43,950) (7,562) (1,977) (65) (192)
Interest Income-affiliate 4,488 - - - -
Interest Income-other 1,158 49 2 - -
Investment Losses (304) - - - -
Gain on sale PCS licenses 2,582 - - - -
Interest Expense-affiliate 1,960 1,051 50 40 15
Interest Expense-other 802 - - - -
Net (Loss) $ (37,921) $ (6,468) $ (1,283) $ (67) $ (134)
Weighted Average Common and
Series A Common
Shares (000) (1) 67,492 59,086 59,086 59,086 59,086
(Loss) per Common and Series A
Common Share $ (0.56) $ (0.11) $ (0.02) $ - $ -
Dividends per Common and
Series A Common Share $ - $ - $ - $ - $ -
BALANCE SHEET
Cash and Cash Equivalents $ 35,284 $ 261 $ 10 $ 4 $ 17
Property and Equipment (Net) 252,423 12,087 - 414 344
Investment in PCS Licenses 304,354 305,818 20,401 - -
Total Assets 672,827 360,444 21,320 512 441
Revolving Credit Agreement-TDS - 60,238 22,659 650 450
Long-Term Debt 103,743 - - - -
Common Shareholders'
Equity (Deficit) $ 437,785 $ 281,282 $ (1,444) $ (161) $ (94)
OTHER DATA
Capital Expenditures $ 242,270 $ 297,551 $ 20,401 $ - $ -
Population Equivalents 27.6 million 27.3 million - - -
</TABLE>
(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 at
January 1, 1992.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Aerial Communications, Inc. (the "Company" - NASDAQ symbol: AERL), an
82.8%-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 acquired eight licenses in the FCC broadband Block A and Block B PCS
auction which concluded in March 1995 (the "FCC auction"). Since its acquisition
of PCS licenses, the Company has been devoting its efforts to recruiting an
experienced management team, developing and executing a business plan, raising
capital and designing and constructing a PCS network in each of its MTAs
(Minneapolis, Tampa-St. Petersburg-Orlando, Houston, Pittsburgh, Kansas City and
Columbus). The Company has sold its licenses covering the Guam and Alaska MTAs
and recorded a total gain on such sales in 1996 of $2.6 million, net of
commissions and legal fees.
The Company's focus in 1996 has been the development of its PCS business. This
focus will continue until the launch of commercial service in all its markets,
the first expected in March 1997. As of December 31, 1996, the Company had
cleared 150 microwave paths and had commitments to clear 39 paths. Management
believes that sufficient paths have been cleared to allow service launch in all
six markets. Management contemplates clearing additional paths as it expands its
network in 1997. Over 600 cell sites have been secured as zoning and
installation work continues. A number of municipalities have adopted cell site
zoning moratoria slowing the task of network build-out. The Company has taken
steps to mitigate the impact of all such moratoria affecting its build-out.
Moratoria have been particularly challenging for all wireless providers in the
Orlando/Orange County, Florida area. Construction of the National Operations
Center ("NOC") in Tampa is complete. Customer service advisors ("CSAs") have
been hired, training of the first two classes of CSAs has been completed and
calls are now being taken from trial customers. Friendly user (customer) trials
are planned to conclude in the first quarter of 1997, with roll-out of
commercial service after successful customer trials.
The Company is currently capitalizing, as work in process, 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. Costs associated with developing information systems are
also capitalized. The Company capitalized interest in 1996 solely on its PCS
network expenditures financed under the Nokia Credit Agreement, the Series A
Zero Coupon Notes and the TDS Revolving Credit Agreement (See "Liquidity and
Capital Resources"). The Company capitalized interest in 1995 on the acquisition
cost of the licenses, prior to TDS's $289.2 million equity contribution which
covered such costs.
The following discussion of the consolidated financial condition and results of
operations of the Company for the three years ended December 31, 1996, should be
read in conjunction with the Consolidated Financial Statements, the related
notes thereto, and the other financial information included herein.
RESULTS OF OPERATIONS
The Company's results of operations for 1996 compared to 1995 and 1994 primarily
reflect increased activities undertaken to prepare the Company's MTAs for
initiation of commercial PCS services. These activities accelerated in March
1995 after the Company's purchase of the eight broadband PCS licenses in the FCC
auction and significantly increased the Company's net loss to $37.9 million in
1996 from $6.5 million in 1995 and $1.3 million in 1994. The Company had no
operating revenues in 1996 as commercial service is not anticipated to commence
in its first market until March 1997, and expects its net losses to increase
during 1997 as the Company continues its business development activities.
Years Ended December 31, 1996, 1995, and 1994
DEVELOPMENT COSTS-AFFILIATE are management services performed by TDS and/or
affiliated companies and incurred in the development of the Company's business.
Development costs-affiliate stayed constant at $1.2 million from 1995 to 1996.
Development costs-affiliate were $0.9 million in 1994 which reflected management
services costs incurred primarily in preparation for the FCC auction.
DEVELOPMENT COSTS-OTHER increased to $15.1 million during 1996 from $2.8 million
in 1995 and $1.1 million in 1994. The $12.3 million increase between 1996 and
1995 is primarily due to increased consulting fees incurred in the development
of the Company's business and marketing plans and legal expenses incurred in the
continuing effort to prepare the Company's MTAs for commercial PCS services.
Development costs-other in 1995 primarily reflect legal expenses related to the
FCC auction and the establishment of the Company's subsidiaries. Development
costs-other in 1994 primarily reflect legal expenses incurred in preparation for
the FCC auction. Additionally, 1994 costs include a charge to expense for the
book value of equipment related to an unsuccessful business development
activity.
15
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES increased to $27.7 million during 1996 from
$3.6 million in 1995, primarily as a result of the growth of the Company's
management and operating teams and the resulting increases in salaries, employee
benefits and overhead expenses. General and administrative expenses in 1994 were
not significant.
INTEREST INCOME-AFFILIATE was $4.5 million in 1996 as a result of interest
income earned on the proceeds from the Company's initial public offering
("IPO"). The proceeds were invested in the TDS cash management program pending
use in PCS network development and construction.
INTEREST INCOME-OTHER increased to $1.2 million in 1996 from $49,000 in 1995
primarily due to $1.1 million in interest income earned in 1996 on the excess
proceeds from the Company's sale of Series A Zero Coupon Notes (See Note
5-Long-Term Debt) pending use in PCS network development and construction.
Interest income-other was not significant in 1994.
INVESTMENT LOSSES were $0.3 million in 1996 and represent the Company's share of
the 1996 losses of the Wireless Alliance, LLC, 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.
GAIN ON SALE OF PCS LICENSES represents the pretax gain of $0.2 million
recognized on the sale of the Guam license in May 1996 and the pretax gain of
$2.4 million recognized on the sale of the Alaska license in December 1996.
INTEREST EXPENSE-AFFILIATE increased to $2.0 million in 1996 from $1.1 million
in 1995 and $50,000 in 1994. Interest expense-affiliate represents interest on
amounts borrowed under the Revolving Credit Agreement with TDS and fees paid to
TDS for serving as guarantor on the Series A Zero Coupon Notes, less interest
capitalized.
INTEREST EXPENSE-OTHER was $0.8 million in 1996 and relates primarily to the
Series A Zero Coupon Notes issued in November 1996, less interest capitalized.
Interest capitalization in 1996, totaling $1.2 million, is based solely upon
construction expenditures incurred related to the PCS network and financed
under the Nokia Credit Agreement, the Series A Zero Coupon Notes and the TDS
Revolving Credit Agreement (See "Liquidity and Capital Resources"). Interest
capitalization in 1995, totaling $16.6 million, represents interest
capitalized on the acquisition cost of licenses, prior to TDS's $289.2
million equity contribution which covered such costs.
Income tax benefit decreased to $0.9 million in 1996 from $2.1 million in 1995
primarily due to an increase in the estimated valuation allowance associated
with deferred tax assets. The Company recognized income tax benefits of $2.1
million in 1995 and $0.7 million in 1994 due primarily to an increase in pretax
loss. See "Income Taxes" below for a discussion of the Company's tax allocation
agreement with TDS.
The weighted average Common and Series A Common Shares increased to 67,491,753
in 1996 compared to 59,086,000 ( after giving retroactive effect to the
recapitalization described in Note 8 - Common Stock ) in 1995 and 1994 due
primarily to 12,250,000 Common Shares issued on April 25, 1996 in connection
with the Company's IPO.
INCOME TAXES
For federal income tax purposes, the Company is included in the TDS consolidated
tax return. For financial reporting purposes, the Company computes its federal
income taxes as if it were not a member of the TDS consolidated group but filed
a separate return.
For 1995 and prior years, TDS reimbursed the Company for the federal income tax
benefit of any net operating loss of the Company which reduced the provision for
income taxes reflected in TDS's consolidated statements of income. The Company
and TDS entered into a tax allocation agreement which became effective as of
January 1, 1996 (the "1996 tax allocation agreement"), pursuant to which, among
other things, TDS no longer reimburses the Company on a current basis for losses
or credits used by TDS in the year they are generated. Instead, the Company will
be compensated (i.e., future tax liabilities will be reduced) for TDS's use of
tax benefits at such time as the Company would be able to utilize such benefits
on a separate return basis.
If the 1996 tax allocation agreement had been in place during 1995, the Company
would have recorded a deferred tax asset of $11.9 million (net of a valuation
allowance of $6.2 million) and a deferred tax liability of $14.0 million,
resulting in deferred tax expense of $2.1 million being recognized in the
Consolidated Statements of Operations. The deferred tax asset primarily relates
to the net operating loss ("NOL") carryforward, which requires a valuation
allowance to be provided when it is more likely than not that some portion
16
<PAGE>
of the deferred tax asset will not be realized. Due to the absence of
an established earnings history of the Company, a valuation allowance has
been provided to the extent that temporary differences related to the
deferred tax liability do not reverse in the 15 year NOL carryforward period.
The deferred tax liability is primarily created due to the accelerated
amortization of the PCS license cost and the current deduction of interest
that was capitalized for book purposes. Therefore, the deferred tax expense
represents that portion of the NOL which was created by accelerated tax
amortization of the PCS licenses and the related interest deduction which may
not be realized because those temporary differences reverse over 40 years.
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 and start-up activities of the Company
will require substantial capital. As of December 31, 1996, the Company had
expended $305.8 million for licenses, including capitalized interest, $254.4
million for all other capital expenditures and incurred cumulative net losses of
$45.9 million. The Company expects to incur significant operating losses and to
generate negative cash flow from operating activities during the next several
years, while it develops and constructs its PCS networks and builds its customer
base.
Cash flows used by operating activities were $17.8 million in 1996, cash flows
provided by operating activities were $0.1 million in 1995 and cash flows used
by operating activities were $1.6 million in 1994. Cash used in 1996 resulted
from the $37.9 million net loss for the period, offset by a $12.5 million
decrease in income tax receivable-affiliate, an increase in other accounts
payable of $3.5 million, and $4.1 million net in other items. The cash provided
in 1995 resulted largely from a total $9.1 million increase in accounts
payable-other, accounts payable-affiliate and accrued interest-affiliate, and
from a $10.4 million increase in deferred tax liability. The cash provided by
these activities was offset by a $12.3 million increase in income tax refund
receivable-affiliate and the $6.5 million net loss for the period. The cash used
in 1994 was primarily due to the $1.3 million net loss.
Cash flows from financing activities provided $164.1 million in 1996, $297.9
million in 1995 and $22.0 million in 1994. 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
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. The 1995 equity contribution was made to cover the original
cost of the licenses acquired in the FCC auction. Cash flows from financing
activities in 1995 and 1994 were generated by borrowings under the Revolving
Credit Agreement with TDS.
Cash flows used in investing activities totaled $111.3 million in 1996, $297.8
million in 1995 and $20.4 million in 1994. Such cash requirements in 1996
consisted primarily of $16.5 million of additions to property and equipment and
$96.4 million of additions to work in process. Total 1996 additions to work in
progress and property and equipment, including noncash transactions, were $242.3
million, including $53.2 million for switching equipment, $150.4 million for
cell sites, and $38.7 million for other activity, including information systems
development and property and equipment in service (primarily computer equipment
and software, office equipment, and leasehold improvements). Cash requirements
in 1995 related largely to the Company's $285.4 million acquisition of eight
licenses in the FCC auction and $12.1 million in additions to property and
equipment and capitalized construction costs. Cash requirements in 1994
consisted primarily of a $20.4 million payment to the FCC to ensure eligibility
in the FCC auction.
The Company continues to construct networks in its MTAs. Commercial operations
are anticipated to commence in the first market in March 1997.
The Company anticipates construction, development and introduction of PCS
networks and services will require substantial capital and operating
expenditures over the next several years. While construction (including
microwave relocation) and other start-up activities may be impacted by many
factors, the Company estimates that the aggregate funds required for 1997 will
total approximately $600 million. This amount includes an estimated $345 million
of capital expenditures for construction of PCS networks and information systems
development and $255 million of estimated working capital requirements.
17
<PAGE>
The Company expects 1997 construction and working capital requirements to be
financed using a variety of sources, including but not limited to, borrowings
under the TDS Revolving Credit Agreement (See Note 4-Revolving Credit
Agreement), vendor financing and private equity investors in the Company. In
March 1996, the Company selected Nokia Telecommunications Inc. ("Nokia") as its
sole supplier of digital radio channel and switching infrastructure equipment
during the initial build-out of its PCS networks. Nokia has agreed to provide up
to $200 million in financing for equipment through a Credit Agreement with the
Company dated June 19, 1996 (the "Credit Agreement" or "Nokia Credit
Agreement").
At the Company's option it may issue, in tranches, 10-year unsecured zero coupon
promissory notes in accordance with the provisions of the Credit Agreement, the
proceeds of which are to be paid to Nokia in satisfaction of borrowings by the
Company under the Credit Agreement.
On November 4, 1996 the Company issued $226.2 million in aggregate principal
amount at maturity of Series A Zero Coupon Notes ("Notes") due in 2006. The
issue price of the Notes was 44.2% of the principal amount at maturity or $100
million, and there is no periodic payment of interest. The $100 million proceeds
of the sale of the Notes were paid to Nokia in satisfaction of all outstanding
obligations and future obligations up to $100 million of the Company under the
Credit Agreement. The per annum yield to maturity on the Notes is 8.34%
(computed on a semi-annual bond equivalent basis) calculated from November 4,
1996. The Notes will rank in the same priority with all other unsecured and
unsubordinated indebtedness of the Company. The Notes and the obligations under
the Credit Agreement are fully and unconditionally guaranteed by TDS at an
annual fee rate of 3%. The Notes are subject to optional redemption by the
Company on and after November 1, 2001, at a purchase price equal to the issue
price plus accrued interest through the date of redemption.
In April 1996, the Company sold 12,250,000 of its Common Shares, approximately
17.2% of total outstanding shares of common stock, at a price of $17 per share
in an initial public offering. The net proceeds from the offering, after
underwriters fees, were $195.3 million. A portion of the net proceeds was
applied to the repayment of $64.1 million in outstanding indebtedness (including
accrued interest) to TDS under the Revolving Credit Agreement. The Company had
available $250 million under the Revolving Credit Agreement with TDS as of
December 31, 1996.
In November 1996 the Company entered into a Member Control Agreement
("Agreement") to establish a joint venture with Rural Cellular Corporation
("RCC") to be known as the Wireless Alliance, LLC. The joint venture was formed
to build out certain rural areas covering approximately 530,000 population
equivalents ("POPs") in the Minneapolis MTA. The Company has agreed to
contribute 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 will be responsible for building out the network and for the
ongoing operations. It is anticipated that the joint venture will purchase
services such as network switching and customer billing from the Company. The
Company expects to benefit from the joint venture by extending its footprint
without the capital investment required to build the network. The Agreement is
awaiting FCC approval.
The Company believes that its capital resources will be sufficient to fund its
complete network build-out and cover operating losses into the second half of
1997. In addition to the Revolving Credit Agreement with TDS, sources of
additional capital may include additional vendor financing as well as private
equity and debt financing by the Company or its subsidiaries. If sufficient
funding is not made available to the Company on terms and prices acceptable to
the Company, the Company would have to reduce its construction and development
programs, which could have a material adverse impact on the Company's financial
condition and results of future 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; and unanticipated changes in growth in PCS
customers, penetration rates, churn rates and the mix of products and services
offered in the Company's markets. Readers should evaluate any statements in
light of these important factors.
18
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, Cumulative
------------------------------------ July 23, 1991 to
1996 1995 1994 December 31, 1996
- ------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
OPERATING EXPENSES:
Development costs-affiliate $ 1,163 $ 1,221 $ 856 $ 3,410
Development costs-other 15,107 2,767 1,119 19,070
General and administrative 27,680 3,574 2 31,266
- ------------------------------------------------------------------------------------------------------
OPERATING (LOSS) (43,950) (7,562) (1,977) (53,746)
OTHER INCOME, NET
Interest income-affiliate 4,488 - - 4,488
Interest income-other 1,158 49 2 1,215
Investment losses (304) - - (304)
Gain on sale of PCS licenses 2,582 - - 2,582
- ------------------------------------------------------------------------------------------------------
7,924 49 2 7,981
(LOSS) BEFORE INTEREST
AND INCOME TAXES (36,026) (7,513) (1,975) (45,765)
Interest expense-affiliate 1,960 1,051 50 3,116
Interest expense-other 802 - - 802
- ------------------------------------------------------------------------------------------------------
(LOSS) BEFORE INCOME TAXES (38,788) (8,564) (2,025) (49,683)
- ------------------------------------------------------------------------------------------------------
Income tax (benefit) (867) (2,096) (742) (3,810)
- ------------------------------------------------------------------------------------------------------
NET (LOSS) $(37,921) $(6,468) $(1,283) $(45,873)
- ------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON AND
SERIES A COMMON SHARES (000) 67,492 59,086 59,086 61,277
(LOSS) PER COMMON AND
SERIES A COMMON SHARE - See Note 2(j) $ (0.56) $ (0.11) $ (0.02) $ (0.75)
- ------------------------------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, Cumulative
----------------------------------- July 23, 1991 to
1996 1995 1994 December 31, 1996
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net (Loss) $ (37,921) $ (6,468) $ (1,283) $ (45,873)
Add (Deduct) adjustments to
reconcile net (loss) to net cash (used)
provided by operating activities:
Depreciation 1,934 47 - 1,981
Investment losses 304 - - 304
Gain on sale of PCS licenses (2,582) - - (2,582)
Change in accounts payable-affiliates
and accrued interest-affiliate (2,292) 2,676 47 489
Change in accounts payable-other 3,491 6,401 - 9,892
Change in other accrued interest and other
liabilities 5,721 - - 5,721
Change in income tax refund
receivable-affiliate 12,502 (12,320) (112) -
Change in deferred tax asset/
liability-net 2,231 10,407 (630) 11,973
Change in other assets and deferred costs (1,169) (617) 414 (1,786)
- -------------------------------------------------------------------------------------------------------------------
(17,781) 126 (1,564) (19,881)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Change in note receivable-affiliate 28,836 - - 28,836
Change in Revolving Credit
Agreement - TDS (60,238) 297,937 22,009 260,358
Issuance of common stock 195,485 - - 195,525
- -------------------------------------------------------------------------------------------------------------------
164,083 297,937 22,009 484,719
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Investment in PCS licenses - (285,417) (20,401) (305,818)
Additions to work in process (96,443) (8,058) - (104,501)
Additions to property and equipment (16,497) (4,076) - (20,573)
Proceeds from sale of PCS licenses 2,275 - - 2,275
Change in temporary cash and
other investments (614) (261) (38) (937)
- -------------------------------------------------------------------------------------------------------------------
(111,279) (297,812) (20,439) (429,554)
- -------------------------------------------------------------------------------------------------------------------
Net Increase in Cash and
Cash Equivalents 35,023 251 6 35,284
Cash and Cash Equivalents -
Beginning of period 261 10 4 -
- -------------------------------------------------------------------------------------------------------------------
End of period $ 35,284 $ 261 $ 10 $ 35,284
- -------------------------------------------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
20
<PAGE>
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, 1996 1995
- --------------------------------------------------------------------------------
(Dollars in thousands)
CURRENT ASSETS
Cash and cash equivalents:
General funds $ 869 $ 261
Affiliated cash equivalents 34,415 -
- --------------------------------------------------------------------------------
35,284 261
Temporary cash investments 315 107
Note receivable-affiliate - 28,836
Note receivable-other 1,925 -
Income tax refund receivable-affiliate - 12,502
Interest receivable-affiliate 243 -
Interest receivable-other 508 -
Other 556 617
- --------------------------------------------------------------------------------
38,831 42,323
- --------------------------------------------------------------------------------
FIXED ASSETS AND LICENSES
Property and equipment-net of accumulated
depreciation of $1,981 in 1996 and
$47 in 1995 18,592 4,029
Work in process 233,831 8,058
Prepaid network infrastructure costs 70,300 -
Investment in PCS licenses 304,354 305,818
- --------------------------------------------------------------------------------
627,077 317,905
- --------------------------------------------------------------------------------
OTHER INVESTMENTS 6,771 216
DEFERRED COSTS 148 -
- --------------------------------------------------------------------------------
TOTAL ASSETS $672,827 $360,444
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
21
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, 1996 1995
- --------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable-affiliates $ 489 $ 1,284
Accounts payable-other 93,360 6,401
Accrued interest-affiliate - 1,497
Microwave relocation costs payable 17,046 -
Contribution payable 6,453 -
Other 1,978 -
- --------------------------------------------------------------------------------------------------------
119,326 9,182
- --------------------------------------------------------------------------------------------------------
REVOLVING CREDIT AGREEMENT-TDS - 60,238
- --------------------------------------------------------------------------------------------------------
LONG-TERM DEBT 103,743 -
- --------------------------------------------------------------------------------------------------------
DEFERRED TAX LIABILITY-NET 11,973 9,742
- --------------------------------------------------------------------------------------------------------
COMMON SHAREHOLDERS' EQUITY
Common Stock, $1.00 par value; authorized 10,000
shares; issued and outstanding 1,000 shares in 1995 - 1
Common Shares, $1.00 par value; authorized 60,000,000
shares; issued and outstanding 31,359,460 shares in 1996 31,359 -
Series A Common Shares, $1.00 par value; authorized 60,000,000
shares; issued and outstanding 40,000,000 shares in 1996 40,000 -
Additional paid-in capital 412,299 289,233
Deficit accumulated during the development stage (45,873) (7,952)
- --------------------------------------------------------------------------------------------------------
437,785 281,282
- --------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $672,827 $360,444
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Cumulative
July 23, 1991 to
Year Ended December 31, 1996 1995 1994 December 31, 1993
- ----------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
COMMON STOCK
Balance at beginning of period $ 1 $ 1 $ 1 $ -
Common Stock Issuance - - - 1
Deduct Recapitalization (1) - - -
- ----------------------------------------------------------------------------------------------------
Balance at the end of period $ - $ 1 $ 1 $ 1
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
COMMON SHARES
Balance at beginning of period $ - $ - $ - $ -
Add
Recapitalization 19,086 - - -
Initial Public Offering 12,250 - - -
Employee Benefit Plans 23 - - -
- ----------------------------------------------------------------------------------------------------
Balance at end of period $ 31,359 $ - $ - $ -
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
SERIES A COMMON SHARES
Balance at beginning of period $ - $ - $ - $ -
Add Recapitalization 40,000 - - -
- ----------------------------------------------------------------------------------------------------
Balance at end of period $ 40,000 $ - $ - $ -
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of period $289,233 $ 39 $ 39 $ -
Add/(Deduct)
Equity Contribution from TDS - 289,194 - -
Recapitalization (59,085) - - -
Initial Public Offering 183,015 - - -
Capital Stock Expense (1,061) - - -
Common Stock Issuance - - - 39
Employee Benefit Plans 197 - - -
- ----------------------------------------------------------------------------------------------------
Balance at the end of period $412,299 $289,233 $ 39 $ 39
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
RETAINED DEFICIT
Balance at beginning of period $ (7,952) $ (1,484) $ (201) $ -
Net (Loss) (37,921) (6,468) (1,283) (201)
- ----------------------------------------------------------------------------------------------------
Balance at end of period $(45,873) $ (7,952) $ (1,484) $ (201)
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral part of these statements.
</TABLE>
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. ORGANIZATION OF BUSINESS
Aerial Communications, Inc. (the "Company" or "Aerial") is an 82.8%-owned
subsidiary of Telephone and Data Systems, Inc. ("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 December 14, 1995. 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 27.6 million population equivalents ("POPs").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) DEVELOPMENT STAGE COMPANY
The Company was originally incorporated to conduct development activities to
obtain a "pioneer's preference" broadband PCS license from the FCC. In 1994, the
Company learned it would not be obtaining a pioneer's preference and charged to
expense the book value of all assets related to that activity. Subsequent to
that event, the Company devoted substantially all of its efforts to planning for
and participating in the PCS auction. Since its acquisition of PCS licenses, the
Company has been devoting substantially all of its efforts to recruiting an
experienced management team, developing and executing a business plan, raising
capital and designing and constructing a PCS network in each of its MTAs. Its
planned principal operations have not yet commenced. The Company expects to
commence service in its first market in March 1997. Accordingly, the Company is
a development stage company as defined in Statement of Financial Accounting
Standards No. 7, "Accounting and Reporting by Development Stage Enterprises."
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Aerial
Communications, Inc. and its subsidiaries. During 1995, the Company established
the following subsidiaries which are wholly-owned and are therefore included in
the consolidated financial statements: APT Operating Company, Inc., which owns
100% of APT Columbus, Inc., APT Kansas City, Inc., APT Tampa/Orlando, Inc., APT
Minneapolis, Inc., APT Houston, Inc., APT Pittsburgh General Partner, Inc., APT
Alaska, Inc. (license was sold in December 1996), and APT Guam, Inc. (license
was sold in May 1996), and 46% of APT Pittsburgh Limited Partnership. APT
Pittsburgh General Partner, Inc. owns the remaining 54% of APT Pittsburgh
Limited Partnership. All significant 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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of expenses during the reporting period. Actual results
could differ from those estimates.
(c) PENSION PLAN
Effective July 1, 1995, the Company began providing pension benefits for its
employees under a qualified, noncontributory, defined contribution plan. Under
this plan, pension benefits and costs are calculated separately for each
participant and are funded currently. Pension costs were $72,000 and $11,000 in
1996 and 1995, respectively.
(d) CASH AND CASH EQUIVALENTS AND TEMPORARY CASH INVESTMENTS
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 months and up to
twelve months are classified as temporary cash investments. The carrying amounts
reported in the balance sheet for cash and cash equivalents and temporary cash
investments approximate their fair values.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(e) OTHER INVESTMENTS
Other investments consists of a $6.1 million investment in Wireless Alliance,
LLC (the "Investment") and $622,000 of marketable non-equity securities. The
marketable non-equity securities are classified as held to maturity. At December
31, 1996, the amortized cost of the marketable non-equity securities (having
maturities between one and five years) approximated their aggregate fair value.
The Investment represents the Company's interest in a joint venture with Rural
Cellular Corporation ("RCC"). The Company follows the equity method of
accounting for the Investment, which recognizes the Company's proportionate
share of income and losses to it under the terms of the November 14, 1996,
Member Control Agreement (the "Member Control Agreement"). Income and losses
from the Investment are reflected in the consolidated statement of operations.
At December 31, 1996, the Company's cumulative share of losses from the
Investment was $304,000.
In connection with the Investment, the Company recorded a contribution payable
which represents the value assigned under the Member Control Agreement to the
portion of the Company's Minneapolis PCS license that will be partitioned and
contributed to Wireless Alliance, LLC, pending FCC approval.
(f) PROPERTY AND EQUIPMENT
Property and equipment is stated at original cost and includes primarily
computer equipment and software, office equipment, leasehold improvements and
vehicles. Depreciation is provided based on the straight-line method over the
estimated useful lives of the respective assets, generally three years for
vehicles and five years for computer equipment and software and office
equipment. Leasehold improvements are amortized over ten years or the lease
term, whichever is shorter.
Property and equipment consists of:
December 31, 1996 1995
- ----------------------------------------------------------------------
(Dollars in thousands)
Computer equipment/software $15,951 $2,120
Office equipment 3,180 1,462
Leasehold improvements 1,305 494
Vehicles 137 -
- -----------------------------------------------------------------------
20,573 4,076
Accumulated depreciation (1,981) (47)
- -----------------------------------------------------------------------
Property and equipment-net $18,592 $4,029
- -----------------------------------------------------------------------
- -----------------------------------------------------------------------
(g) 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 certain of its work in process
expenditures. When the assets are placed in service, the Company will transfer
the assets to the appropriate property and equipment category and depreciate
these assets over their respective estimated useful lives, generally ten years
for network infrastructure equipment and five years for information systems. The
Company expects to commence PCS service in March 1997.
(h) INVESTMENT IN PCS LICENSES
Investment in PCS licenses is recorded at historical cost, which includes the
$289.2 million 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 will begin amortizing its licenses over 40 years upon commencement
of service, which is expected in its first market in March 1997.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(i) 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.
(j) (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, 1994 (See Note 8 - Common Stock).
(k) SUPPLEMENTAL CASH FLOW DISCLOSURES
The following summarizes interest and income taxes paid and certain noncash
transactions.
1996 1995
- -------------------------------------------------------------------------
(Dollars in thousands)
Interest paid $ 1,107 $ -
Income tax benefits - cash payments
from TDS resulting from taxable losses
generated by the Company in prior years 15,598 185
Accrued interest converted to debt
under the Revolving Credit Agreement
with TDS 2,973 17,699
TDS equity contribution-conversion of
debt under the Revolving Credit
Agreement to equity and receipt of
note receivable-affiliate - 289,194
In 1996, $199.6 million in additions to work in process and prepaid network
infrastructure costs were financed through a combination of long-term debt,
accounts payable-other and microwave relocation costs payable.
During 1996, the Company incurred interest charges totaling $4.0 million. The
interest charges were comprised of $2.0 million paid to TDS relating to the
Revolving Credit Agreement (See Note 4 - Revolving Credit Agreement), $0.6
million paid to TDS for guarantee fees on the Series A Zero Coupon Notes and
obligations under the Nokia Credit Agreement (See Note 5-Long - Term Debt),
$70,000 paid to Nokia for interest charges relating to the 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.
During 1995, the Company incurred interest charges of $17.7 million related to
its Revolving Credit Agreement with TDS. Of this amount, the Company capitalized
$16.6 million relating to the development of its PCS licenses. The remaining
$1.1 million was charged to expense.
(l) RECLASSIFICATION
Certain amounts in prior years have been reclassified to conform to the current
year presentation.
3. INCOME TAXES
The Company entered into a tax allocation agreement with TDS under which the
Company will continue to join in filing consolidated federal income tax returns
with the TDS affiliated group unless TDS's ownership of the Company falls
beneath 80%. For 1995, TDS reimbursed the Company for the reduction in the
provision for federal income taxes reflected in TDS's consolidated statements of
income resulting from the inclusion of the Company and its subsidiaries in the
TDS affiliated group. The Company had recorded these amounts in "Income tax
refund receivable - affiliate" (See Note 2 (k) - Summary of Significant
Accounting Policies - Supplemental cash flow disclosures).
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For tax years beginning after December 31, 1995, TDS no longer reimburses the
Company on a current basis for losses or credits used by the TDS affiliated
group. Instead, the Company is compensated (by an offset to amounts the Company
would otherwise be required to pay to TDS for federal income taxes) for TDS's
use of tax benefits at such time as the Company could utilize such benefits on a
separate return basis. The Company will be required to pay TDS an amount equal
to the greater of the federal income tax liability of the Company, calculated as
if it were a separate affiliated group (including any minimum tax liability,
notwithstanding the absence of consolidated group liability for minimum tax), or
the tax calculated using the highest marginal tax rate (before taking into
account tax credits) of the TDS affiliated group. 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, 1996 1995 1994
- -------------------------------------------------------------------------
(Dollars in thousands)
Federal income tax provision (benefit):
Current $(3,098) $(12,502) $(112)
Deferred 1,671 9,574 (630)
State income tax provision:
Current - - -
Deferred 560 832 -
- -------------------------------------------------------------------------
Income tax (benefit) $ (867) $ (2,096) $(742)
- -------------------------------------------------------------------------
- -------------------------------------------------------------------------
The temporary differences which gave rise to significant portions of the net
deferred tax liability were as follows:
December 31, 1996 1995
- ----------------------------------------------------------------------------
(Dollars in thousands)
Deferred tax asset:
Deferred charges $ - $3,494
Net operating loss carryforwards 26,419 1,539
Less: valuation allowance (15,029) (1,291)
- ----------------------------------------------------------------------------
Total deferred tax asset $ 11,390 $3,742
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Deferred tax liability:
Licenses $ 13,650 $6,612
Deferred charges-interest 6,088 6,092
Partnership investment 2,573 780
Property and equipment 435 -
Other 617 -
- ----------------------------------------------------------------------------
Total deferred tax liability $ 23,363 $13,484
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Net deferred tax liability $ 11,973 $9,742
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
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, 1996, the federal net operating loss
carryforward available to offset future taxable income is $60.2 million and
expires in 2012. The amount of state net operating loss carryforward available
to offset future taxable income is $78.0 million and expires between 1997 and
2012.
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 1996, the
valuation allowance increased $13.7 million primarily due to the Company's
increased net operating losses which will not be reimbursed currently by TDS
under the tax allocation agreement effective January 1, 1996.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The statutory federal income tax rate is reconciled to the Company's effective
income tax rate below:
Year Ended December 31, 1996 1995 1994
- -------------------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit (0.9) (6.3) -
Effects of valuation allowance on deferred tax asset (29.7) - -
Other (2.2) (4.2) -
- -------------------------------------------------------------------------------
Effective income tax rate 2.2% 24.5% 35.0%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4. REVOLVING CREDIT AGREEMENT
The Company entered into a Revolving Credit Agreement with TDS on August 1,
1995, which was last amended on December 31, 1995, under which all of the
outstanding obligations of the Company to TDS are incorporated. Pursuant to the
Revolving Credit Agreement, the Company may borrow up to an aggregate of $250
million at an interest rate equal to 1.5% above prime rate until the principal
amount becomes due, and pay on demand an interest rate equal to 3.5% above such
prime rate on any overdue principal or overdue installment of interest. The
advances made under the Revolving Credit Agreement are unsecured. Interest on
the balance due under the Revolving Credit Agreement is payable quarterly and no
principal is payable until its maturity, which is December 31, 1998. The terms
of the Revolving Credit Agreement also include, among others, restrictions on
incurring certain additional indebtedness and on paying dividends.
In April, 1996, the Company used a portion of the net proceeds from its IPO (See
Note 8 - Common Stock) to repay TDS $64.1 million, representing the outstanding
balance (including accrued interest) under the Revolving Credit Agreement.
The total amount advanced to the Company under the Revolving Credit Agreement
through December 31, 1995, aggregated $320.6 million. On December 31, 1995, TDS,
the Company's sole shareholder at such time, contributed $289.2 million to the
equity capital of the Company. No cash was paid to the Company for the equity
contribution by TDS. Rather, the Company reduced the amount outstanding under
the Revolving Credit Agreement by $260.4 million and recorded a note receivable-
affiliate from TDS for the remaining $28.8 million. The Company received payment
of the entire note receivable from TDS by February 14, 1996. Additionally, in
connection with the equity contribution a condition was added which provided
that if TDS's ownership of the Company falls below 70%, the outstanding
principal will become payable in full six months after such date. The carrying
value of the Company's borrowings under the Revolving Credit Agreement
approximates the fair value of the borrowings, since the Revolving Credit
Agreement is variable debt with the interest rate based on the prime lending
rate.
5. LONG-TERM DEBT
On November 4, 1996, the Company issued $226.2 million in aggregate principal
amount at maturity of Series A Zero Coupon Notes ("Notes") due in 2006. The
issue price of the notes was 44.2% of the principal amount at maturity or $100
million, and there is no periodic payment of interest. The $100 million issue
price of the Notes reflects a yield to maturity of 8.34% per annum (computed on
a semi-annual bond equivalent basis) calculated from November 4, 1996. The
proceeds from the sale of the Notes were paid to Nokia Telecommunications Inc.
("Nokia") in satisfaction of all outstanding obligations and future obligations
up to $100 million of the Company under the June 19, 1996, Credit Agreement with
Nokia ( the "Credit Agreement" or "Nokia Credit Agreement"). The obligations of
the Company under the Notes are fully and unconditionally guaranteed by TDS, at
an annual fee rate of 3%. Guarantee fees owed TDS are payable semiannually.
The Notes are subject to optional redemption by the Company on and after
November 1, 2001, at a purchase price equal to the issue price plus accrued
interest through the date of redemption. The Notes are unsecured obligations of
the Company. The Notes rank in the same priority with all other unsecured and
unsubordinated indebtedness of the Company.
The excess of the proceeds from the sale of the Notes over the Company's current
obligations (i.e., financed purchases under the Credit Agreement) to Nokia is
recorded as "Prepaid network infrastructure costs." The Company will pay Nokia
for future equipment purchases by reducing the amount of the prepaid balance by
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the cost of the equipment purchased. Nokia is paying the Company monthly
interest on the unused portion of the Note proceeds.
The carrying value of the Company's Notes is greater than its fair value,
estimated to be $101.7 million. The fair value was estimated using discounted
cash flow analysis.
6. RELATED PARTY TRANSACTIONS
The Company is billed for all services it receives from TDS and its
subsidiaries, consisting primarily of general management services and
information services. Unless otherwise specified by written agreement, services
provided by TDS or any of its subsidiaries to another member of the consolidated
group are charged on the basis of time reports. The costs of such services and
any other expenses incurred jointly on behalf of a number of subsidiaries are
charged to those subsidiaries on the basis of the subsidiaries' relative
operating revenues and total assets. The Company believes that this method of
allocation is reasonable.
TDS and certain of its affiliates provided the Company with centralized
management, accounting, commercial, engineering, and data processing services
aggregating $2.0 million, $1.2 million and $0.9 million during 1996, 1995 and
1994, respectively.
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."
On December 31, 1995, the Company received equity funding of $289.2 million from
TDS. The Company recorded the $289.2 million in "Additional paid-in capital."
The Company deposits its excess cash through a cash management program
administered by TDS. Deposits made into the program are generally available to
the Company and bear interest each month equal to 30 day commercial paper rates,
plus 0.25%.
7. COMMITMENTS
The costs of the Company's development, construction and initial start-up
activities will require substantial capital. As of December 31, 1996, the
Company had expended approximately $305.8 million for licenses, including
capitalized interest, approximately $254.4 million for other capital
expenditures and approximately $45.9 million for operations. Also, as of
December 31, 1996, the Company had orders totaling approximately $40.1 million
with Nokia and certain tower vendors for infrastructure equipment as part of the
Company's initial build-out of its PCS networks. The Company expects to incur
significant operating losses and to generate negative cash flow from operating
activities during the next several years, while it develops and constructs its
PCS network and builds a PCS customer base. The Company estimates that the
aggregate funds required for 1997 will total approximately $600 million, with
$345 million needed for capital additions and $255 million needed to fund
operations. The Company believes that its capital resources will be sufficient
to fund its complete network build-out and cover operating losses into the
second half of 1997.
The Company and its subsidiaries have leases for certain office facilities and
warehouses which are classified as operating leases. For the year ended December
31, 1996, rent expense was $2.1 million for term leases and $0.5 million for
cancelable leases. For the year ended December 31, 1995, rent expense was
$247,000 for term leases and $75,000 for cancelable leases. The Company incurred
no rent expense in 1994. At December 31, 1996, the aggregate minimum rental
commitments under noncancelable operating leases (including those for cell
sites) for the years 1997 through 2001, and 2002 and thereafter, are
approximately $5.6 million, $5.4 million, $5.5 million, $5.6 million, $5.0
million and $10.4 million, respectively.
8. COMMON STOCK
EMPLOYEE STOCK PURCHASE PLAN
The Company adopted the 1996 APTI Employee Stock Purchase Plan (the "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 Plan. Shares can be purchased twice a year on Plan purchase dates. The price
per share is 85% of the stock's closing price on the designated purchase dates.
The first purchase date under the Plan is in March 1997.
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TAX-DEFERRED SAVINGS PLAN
Effective July 1, 1995, the Company adopted the TDS Tax-Deferred Savings Plan
(the "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 investing their contributions in
Aerial Common Shares, TDS Common Shares, United States Cellular Corporation (a
subsidiary of TDS) Common Shares, American Paging, Inc. (a subsidiary of TDS)
Common Shares, or five other non-affiliated funds. The Company has reserved
200,000 Common Shares for issuance under the Plan. Employer matching
contributions, equal to 33 1/3% of employee contributions up to a certain limit,
are made in Aerial Common Shares. Aerial employees were issued 23,460 shares in
connection with the Plan in 1996.
EMPLOYEE STOCK OPTIONS
To account for its employee stock option plan, the Company continues to apply
the intrinsic value based method prescribed by Accounting Principles Board
Opinion 25, "Accounting for Stock Issued to Employees" ("APB 25"). The intrinsic
value of an option at any point during its term is the difference between its
exercise price and the current price of the underlying stock. As defined in
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), under the fair value based method, compensation cost
is measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. Had the fair value
based method described in SFAS 123 been used to determine compensation cost
associated with its employee stock option plan, the Company's net loss and loss
per share would have been increased by insignificant amounts.
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 Company has reserved 1,500,000 Common Shares for
option grants. The options are exercisable over a specified period not in excess
of ten years from the date they are granted. Options granted in 1996 expire in
2006, or the date of the employee's termination of employment, if earlier. These
options vest annually over five years in 20% increments, from December 15, 1996,
through December 15, 2000. The Company's employee stock options were granted at
fair market value. In accordance with APB 25, no compensation expense was
recorded related to these options. A summary of the status of the Aerial Long
Term Incentive Plan as of December 31, 1996, and changes during the year ending
on that date is presented below:
Weighted Average
-------------------------
Remaining
Contractual
Shares Exercise Price Life
- --------------------------------------------------------------------------------
Outstanding at beginning of year - -
Granted 310,305 $17.00
- --------------------------------------------------------------------------------
Outstanding at end of year 310,305 $17.00 9.33 years
Options exercisable at year-end 61,397 $17.00
Weighted-average fair value of options
granted during the year $ 7.41
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions for 1996: risk
free interest rate of 5.53%; dividend yield of 0%; expected life of 7.4 years;
and volatility of 26.36%.
INITIAL PUBLIC OFFERING
The Company sold 12,250,000 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 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.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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) 60,000,000 Common Shares, $1.00 par value per
share; (b) 60,000,000 Series A Common Shares, $1.00 par value per share; (c)
60,000,000 Series B Common Shares, $1.00 par value; and (d) 10,000,000 Preferred
Shares, $1.00 par value per share. Upon the filing of the Restated Certificate
of Incorporation with the Secretary of State of the State of Delaware on April
19, 1996, the 1,000 shares of Common Stock of the Company theretofore held by
TDS were converted into 19,086,000 Common Shares and 40,000,000 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 1996.
9. CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended March 31 June 30 Sept. 30 Dec. 31
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
1996
Operating (Loss) $ (5,746) $ (7,761) $ (10,805) $ (19,638)
Net (Loss) $ (6,671) $ (7,206) $ (9,829) $ (14,215)
Weighted Average Common and Series
A Common Shares (000) 59,086 68,105 71,336 71,355
(Loss) per Common and Series
A Common Share $ (0.11) $ (0.11) $ (0.14) $ (0.20)
1995
Operating (Loss) $ (611) $ (458) $ (1,276) $ (5,217)
Net (Loss) $ (507) $ (412) $ (1,250) $ (4,299)
Weighted Average Common and
Series A Common Shares (000) 59,086 59,086 59,086 59,086
(Loss) per Common and Series
A Common Share $ (0.01) $ (0.01) $ (0.02) $ (0.07)
</TABLE>
31
<PAGE>
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 in the development stage and an
82.8%-owned subsidiary of Telephone and Data Systems, Inc.) and Subsidiaries as
of December 31, 1996 and 1995, 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, 1996, and for the period from inception
(July 23, 1991) to December 31, 1996. 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.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Aerial Communications, Inc. and
Subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, and for the period from inception to December 31, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 29, 1997
32
<PAGE>
SHAREOWNERS' INFORMATION
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 Com. As of February 28, 1997, the Company's Common
Shares were held by 336 registered holders and 2,500 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 for
periods after December 31, 1996.
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:
1996 1st 2nd 3rd 4th
- --------------------------------------------------------------
High - $17.75 $12.00 $10.13
Low - $ 9.75 $ 8.25 $ 6.63
33
<PAGE>
EXHIBIT 21
AERIAL COMMUNICATIONS, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
SUBSIDIARIES OF AERIAL COMMUNICATIONS, INC.
<TABLE>
<CAPTION>
STATE OF
INCORPORATION
OR
LEGAL NAME ORGANIZATION
- ----------------------------------------------------------------------------------- -----------
<S> <C>
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 Alaska, Inc.................................................................... Delaware
APT Guam, Inc...................................................................... Delaware
APT Operating Company, Inc......................................................... Delaware
APT Pittsburgh General Partner, Inc................................................ Delaware
</TABLE>
<PAGE>
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 29, 1997, on the consolidated financial statements of Aerial
Communications, Inc. and Subsidiaries (the "Company") included in the Company's
1996 Annual Report to Shareholders, to the inclusion in this Form 10-K of our
report dated January 29, 1997, on the financial statement schedule of the
Company, and to the incorporation of such reports into the Company's previously
filed S-8 Registration Statements, File No. 333-06471, File No. 333-10199 and
File No. 333-10201.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 20, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF AERIAL COMMUNICATIONS INC. AS OF DECEMBER
31, 1996 AND FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 35,284
<SECURITIES> 622
<RECEIVABLES> 1,925
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 38,831
<PP&E> 20,573
<DEPRECIATION> 1,981
<TOTAL-ASSETS> 672,827
<CURRENT-LIABILITIES> 119,326
<BONDS> 103,743
0
0
<COMMON> 71,359
<OTHER-SE> 366,426
<TOTAL-LIABILITY-AND-EQUITY> 672,827
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 36,026
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,762
<INCOME-PRETAX> (38,788)
<INCOME-TAX> (867)
<INCOME-CONTINUING> (37,921)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (37,921)
<EPS-PRIMARY> (.56)
<EPS-DILUTED> (.56)
</TABLE>
