SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
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OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from______________________ to ______________________
Commission File Number 0-28262
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AERIAL COMMUNICATIONS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 39-1706857
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8410 West Bryn Mawr, Suite 1100, Chicago, Illinois 60631
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (773) 399-4200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 1997
- ------------------------------------- -------------------------------
Common Shares, $1 par value 31,597,680 Shares
Series A Common Shares, $1 par value 40,000,000 Shares
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<PAGE>
AERIAL COMMUNICATIONS, INC.
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3RD QUARTER REPORT ON FORM 10-Q
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INDEX
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Page No.
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Part I. Financial Information
Management's Discussion and Analysis of
Results of Operations and Financial Condition 3-8
Consolidated Statements of Operations -
Three Months and Nine Months Ended September 30,
1997 and 1996 9
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1997 and 1996 10
Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996 11
Notes to Consolidated Financial Statements 12-14
Part II. Other Information 15
Signatures 16
<PAGE>
PART I. FINANCIAL INFORMATION
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AERIAL COMMUNICATIONS, INC.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
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AND FINANCIAL CONDITION
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RESULTS OF OPERATIONS
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Aerial Communications, Inc. (the "Company" - NASDAQ symbol: AERL), an
82.6%-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.
Since its acquisition of PCS licenses in the FCC broadband Block A and Block B
PCS auction, which concluded in March of 1995, 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's focus in 1997 has been the preparation of each of its markets for
initial service launch and the development of its PCS business. The Columbus MTA
launched service on March 27, 1997. The Company's five remaining MTAs launched
service during the second quarter of 1997. Across all six markets, the Company
launched service with approximately 600 cell sites in service. The Company
launched service in its Orlando market in early November of 1997. Although cell
site zoning moratoria and other zoning restrictions have been and
remain a challenge, the Company currently has more than 850 cell sites in
service across all its markets and anticipates having more than 1,000 cell sites
in service by the end of 1997.
With the launch of service in its MTAs between March and June of
1997, the Company transitioned from the development stage to
being an established operating enterprise. As a result of this transition, the
Company has experienced in 1997 increasing revenues and operating expenses, and
is incurring substantial losses. The Company had no revenues and significantly
less expenses in 1996 and for the first quarter of 1997.
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. The Company capitalizes interest on such PCS network
expenditures where appropriate. When the assets are placed in service, the
Company transfers the assets to the appropriate property and equipment category.
Nine Months Ended 9/30/97 Compared to Nine Months Ended 9/30/96
Operating Revenues
- ------------------
Operating revenues totaled $25.8 million for the nine months ended September 30,
1997, reflecting the launch of service in all six markets during 1997.
Service revenue primarily consists of charges for access, airtime and
value-added services provided to the Company's retail customers who use the
network operated by the Company, and charges for
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long-distance calls made on the Company's systems. Service revenue totaled $12.9
million in the first nine months of 1997. In late March 1997 the Company began
offering PCS service in Columbus, Ohio and during the second quarter the Company
began offering service in Houston, Minneapolis, Kansas City, Pittsburgh and
Tampa/St. Petersburg. At September 30, 1997, the Company had nearly 65,000
customers.
Equipment sales revenue totaled $12.9 million in the first nine months of 1997.
Equipment revenue represents the sale of handsets and related accessories to
retailers, independent agents and end user customers.
Operating Expenses
- ------------------
Operating expenses totaled $163.6 million in the first nine months of 1997, up
$139.3 million from the first nine months of 1996, reflecting the Company's
expanded level of business activity required to launch service and transition
from start-up operations.
System operations expense totaled $13.9 million in the first nine months of
1997, reflecting the costs of operating the Company's network in all markets.
Significant costs include cell site rent and maintenance expenses, utilities,
local landline interconnection and toll charges and salaries and benefits of
engineering and maintenance employees.
Marketing and selling expense totaled $27.0 million in the first nine months of
1997, primarily reflecting the Company's aggressive advertising campaign that
accompanied the launch of service and continued throughout the third quarter.
Marketing and selling expenses primarily consist of the cost of print,
television and radio advertising, salaries and benefits for sales and marketing
personnel and sales commissions.
Customer service expense totaled $6.8 million in the first nine months of 1997,
reflecting customer service activity at the Company's National Operations Center
in connection with the launch and support of its six markets.
Cost of equipment sold totaled $40.8 million in the first nine months of 1997,
reflecting the launch of service and filling of third-party distribution
channels for handsets.
General and administrative expense totaled $48.1 million in the first nine
months of 1997, an increase of $31.1 million compared to the first nine months
of 1996. The increase is attributable to expenses associated with the growth of
the Company's management and operating teams required to launch service and
transition from start-up operations, and the resulting increases in salaries,
employee benefits, and overhead expenses. The Company had 1,177 employees at
September 30, 1997, compared to 207 employees at September 30, 1996.
Development costs decreased $1.5 million in the first nine months of 1997
compared to the first nine months of 1996. The decrease in development costs is
primarily due to the Company being a development stage enterprise for all of
1996 while, in the second quarter of 1997, the Company ceased to be classified
as a development stage enterprise with the launch of service in its six markets.
Other
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Investment losses totaled $2.2 million in the first nine months of 1997.
Investment losses represent the Company's 49% share of the 1997 losses of the
Wireless Alliance, LLC., a joint venture
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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.
Interest income-affiliate totaled $95,000 in the first nine months of 1997 as
compared to $3.5 million in the first nine months of 1996. Interest
income-affiliate represents interest income earned on the proceeds of the
Company's April 1996 Initial Public Offering ("IPO") invested in the TDS cash
management program pending use in PCS network development and construction.
Proceeds from the IPO were fully utilized by the end of January 1997.
Interest income-other totaled $2.2 million in the first nine months of 1997, due
to interest income earned on the excess proceeds from the Company's November
1996 sale of Series A Zero Coupon Notes pending use in PCS network development
and construction. The proceeds from the sale of the Series A Zero Coupon Notes
were fully utilized by the end of August 1997.
Interest expense-affiliate increased $9.0 million in the first nine months of
1997, primarily due to the average outstanding balance of borrowings under the
Revolving Credit Agreement (See Note 8-Revolving Credit Agreement) being greater
in 1997. Interest expense-affiliate in 1997 represents interest on amounts
borrowed under the Revolving Credit Agreement with TDS and the TDS 3% guarantee
fees associated with the Series A Zero Coupon Notes, less interest capitalized
of $2.7 million. The 1996 amount primarily represents interest on amounts
borrowed under the Revolving Credit Agreement, less interest capitalized of $0.4
million.
Interest expense-other totaled $3.1 million in the first nine months of 1997 and
relates to the Series A Zero Coupon Notes issued in November 1996, less interest
capitalized. The Company capitalized interest expense of $3.1 million related to
the Series A Zero Coupon Notes in 1997.
The Company is included in a consolidated federal income tax return with other
members of the TDS consolidated group. For financial reporting purposes, the
Company computes federal income taxes as if it were filing a separate return as
its own affiliated group and was not included in the TDS group. TDS and the
Company are parties to a Tax Allocation Agreement under which the Company is
able to carry forward any losses and credits and use them to offset any future
income tax liabilities to TDS.
The weighted average Common and Series A Common Shares increased by
approximately 5.3 million due primarily to 12,250,000 Common Shares issued on
April 25, 1996, in connection with the Company's IPO.
Three Months Ended 9/30/97 Compared to Three Months Ended 9/30/96
Operating Revenues
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Operating revenues totaled $18.6 million for the three months ended September
30, 1997. Service revenue totaled $11.7 million and Equipment sales revenue
totaled $6.9 million for the third quarter of 1997, for reasons generally the
same as the first nine months of 1997.
Operating Expenses
- ------------------
Operating expenses totaled $83.2 million in the third quarter of 1997, up $72.4
million over the third quarter of 1996. With the exception of Development costs,
the increase is for reasons generally the same as the first nine months of 1997.
Development costs totaled $3.2 million in the third quarter of 1996 and were
zero for the third quarter of 1997, as a result of the Company ceasing to be a
development stage company in the second quarter of 1997 with the launch of
service in its six markets.
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Other
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Investment losses totaled $1.1 million in the third quarter of 1997, for reasons
generally the same as the first nine months of 1997.
Interest income-affiliate totaled $1.8 million in the third quarter of 1996,
representing interest earned on the IPO proceeds invested in TDS's cash
management program. The proceeds were invested pending use in PCS network
development and construction. The IPO proceeds were fully utilized by the end of
January 1997.
Interest income-other totaled $0.3 million in the third quarter of 1997, for
reasons generally the same as the first nine months of 1997.
Interest expense-affiliate totaled $7.7 million in the third quarter of 1997,
for reasons generally the same as the first nine months of 1997. The Company
capitalized interest of $0.1 million related to the Revolving Credit Agreement
and TDS 3% guarantee fees in the third quarter of 1997.
Interest expense-other totaled $2.0 million in the third quarter of 1997, for
reasons generally the same as the first nine months of 1997. The Company
capitalized interest of $0.1 million related to the Series A Zero Coupon Notes
in the third quarter of 1997.
The weighted average Common and Series A Common Shares increased by 230,625
Common Shares due primarily to the issuance of Common Shares in connection with
various Company benefit plans.
LIQUIDITY AND CAPITAL RESOURCES
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The costs of development, construction, start-up and post-launch activities of
the Company will continue to require substantial capital. From inception through
September 30, 1997, the Company had expended $304.4 million for its licenses,
including capitalized interest, $568.9 million for all other capital
expenditures and incurred cumulative net losses of $200.3 million. The Company
expects to incur significant operating losses and generate negative cash flow
from operating activities during the next several years as it continues to build
its customer base.
Cash flows used by operating activities were $165.7 million during the first
nine months of 1997 compared to $14.5 million in 1996. Cash used in 1997
primarily resulted from the operating cash outflow (operating loss before
depreciation and amortization expense) of $116.4 million, plus launch related
increases in accounts receivable and inventory aggregating $48.9 million. Cash
used in 1996 resulted primarily from an operating cash outflow of $23.2 million
for the period and a $1.1 million reduction in affiliated accounts payable and
accrued interest, offset by a reduction in income tax refund
receivable-affiliate of $10.2 million.
Cash flows from financing activities totaled $331.8 million during the first
nine months of 1997 compared to $163.9 million in 1996. Cash provided in 1997
was due primarily to $330.4 million in borrowings under the Revolving Credit
Agreement (See Note 8-Revolving Credit Agreement). 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. Also
in 1996, the Company received proceeds of $195.3 million from its IPO and used a
portion of the proceeds to repay the then outstanding balance under the
Revolving Credit Agreement with TDS.
Cash flows used in investing activities totaled $201.1 million during the first
nine months of 1997 compared to $50.3 million in 1996. Cash used in 1997
resulted primarily from $203.4 million in additions to property and equipment,
primarily launch-related network and information system assets, offset by a $1.9
million reduction in note receivable-other. Cash requirements in 1996 also
consisted primarily of additions to property and equipment (primarily computer
equipment, office
6
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equipment, and leasehold improvements).
While start-up and post-launch activities may be impacted by many factors, the
Company anticipates that the continuing development of its PCS networks and
services will require substantial capital over the next several years. The
Company estimates that the aggregate funds required for 1997 will total
approximately $620 million. This amount includes an estimated $365 million for
capital expenditures and $255 million of estimated working capital requirements.
For the first nine months of 1997, the Company's capital expenditures totaled
approximately $314 million (including noncash transactions), and cash flows used
in operations totaled $166 million. Capital and operating expenditures in the
fourth quarter of approximately $140 million are expected to be funded by unused
borrowings of $95 million under the Revolving Credit Agreement with TDS and $45
million available ($200 million in financing less $155 million in expenditures)
under the June 19, 1996 Credit Agreement ("Credit Agreement") with Nokia
Telecommunications, Inc. ("Nokia"). The Company plans to have substantially
completed all phases of its network build-out by the end of 1997.
The Company expects 1998 construction and operating expenditures to be financed
using a variety of sources, including but not limited to, additional borrowings
under the TDS Revolving Credit Agreement, vendor financing and an investment by
a minority equity investor in the Company or its subsidiaries.
In March 1996, the Company selected 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 the equipment through
the 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.
Pursuant to 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
("Series A Notes") due in 2006. The issue price of the Series A Notes was $100
million and there is no periodic payment of interest. The proceeds of the sale
of the Series A Notes were paid to Nokia in satisfaction of all then outstanding
obligations and future obligations of the Company up to $100 million under the
Credit Agreement. The effective rate on the Series A Notes is 8.09%.
Pursuant to the Credit Agreement, in the fourth quarter of 1997 the Company
expects to issue Series B Zero Coupon Notes ("Series B Notes") due in 2007
(representing the final issuance of zero coupon notes under the Credit
Agreement). The issue price of the Series B Notes is expected to be $100 million
with no periodic payment of interest. The effective rate is not yet determined.
The proceeds from the sale of the Series B Notes would be paid to Nokia in
satisfaction of all then outstanding obligations and future obligations of the
Company (to the extent not satisfied from the proceeds of the sale of the Series
A Notes) up to $100 million under the Credit Agreement.
The Series A and Series B Notes ("Notes") 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 after five years from the applicable date of issuance
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 the then total outstanding shares of common stock, at a price of $17
per share in an initial public offering ("IPO"). 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 the $64.1 million then outstanding
indebtedness (including accrued interest) to TDS under the Revolving Credit
Agreement. Proceeds from the IPO were fully utilized by the end of January 1997.
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At September 30, 1997 the Company had approximately $95 million available for
borrowing under its $425 million Revolving Credit Agreement with TDS (See Note 8
- - Revolving Credit Agreement). Borrowings under the Revolving Credit Agreement
mature December 31, 1998. The Company believes that its capital resources will
be sufficient to fund its complete network build-out and cover operating losses
through the end of the year. In addition to the Revolving Credit Agreement with
TDS, other sources of capital may include additional vendor financing as well as
private equity and debt financing by the Company or its subsidiaries. TDS is
committed to the continued funding of the Company's capital expenditures and
operations, as required. If sufficient additional funding is not made available
to the Company on terms and prices acceptable to the Company, the Company would
have to reduce its operating activities, 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
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STATEMENT
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This Form 10-Q contains "forward-looking" statements, as defined in the Private
Securities Litigation Reform Act of 1995, that are based on current
expectations, estimates and projections. Statements that are not historical
facts, including statements about the Company's beliefs and expectations are
forward-looking statements. These statements contain potential risks and
uncertainties and, therefore, actual results may differ materially. The Company
undertakes no obligation to update publicly any forward-looking statements
whether as a result of new information, future events or otherwise.
Important factors that may affect these projections or expectations include, but
are not limited to: changes in the overall economy; changes in competition in
the Company's markets; advances in telecommunications technology; changes in the
telecommunications regulatory environment; pending and future litigation;
availability of future financing; 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.
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AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES
--------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Unaudited
---------
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- -----------------
1997 1996 1997 1996
-------- -------- -------- ---------
(Dollars in thousands,
except per share amounts)
OPERATING REVENUES
Service $ 11,740 $ -- $ 12,922 $ --
Equipment sales 6,908 -- 12,869 --
-------- -------- -------- ---------
Total Operating Revenues 18,648 -- 25,791 --
OPERATING EXPENSES
System operations 9,815 -- 13,857 --
Marketing and selling 12,113 -- 27,003 --
Customer service 5,007 -- 6,757 --
Cost of equipment sold 25,798 -- 40,770 --
General and administrative 16,478 7,644 48,075 17,001
Depreciation 12,121 -- 18,759 --
Amortization of intangibles 1,853 -- 2,581 --
Development costs -- 3,161 5,773 7,311
-------- -------- -------- ---------
Total Operating Expenses 83,185 10,805 163,575 24,312
-------- -------- -------- ---------
OPERATING (LOSS) (64,537) (10,805) (137,784) (24,312)
INVESTMENT AND OTHER INCOME
Investment (losses) (1,113) -- (2,165) --
Interest income-affiliate -- 1,755 95 3,547
Interest income-other 272 -- 2,204 --
Gain on sale of PCS license -- -- -- 189
-------- -------- -------- ---------
Total Investment and Other Income (841) 1,755 134 3,736
(LOSS) BEFORE INTEREST
AND INCOME TAXES (65,378) (9,050) (137,650) (20,576)
INTEREST EXPENSE
Interest expense-affiliate 7,711 -- 10,631 1,669
Interest expense-other 2,006 8 3,104 8
-------- -------- -------- ---------
Total Interest Expense 9,717 8 13,735 1,677
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(LOSS) BEFORE INCOME TAXES (75,095) (9,058) (151,385) (22,253)
Income tax expense 1,503 771 3,028 1,453
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NET (LOSS) $(76,598) $ (9,829) $(154,413)$(23,706)
========= ======== ========= =========
WEIGHTED AVERAGE COMMON AND
SERIES A COMMON SHARES (000s) 71,559 71,336 71,481 66,176
(LOSS) PER COMMON AND SERIES A
COMMON SHARE $ (1.07) $ (0.14) $ (2.16) $ (0.36)
========= ======== ======== =========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
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AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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Unaudited
---------
Nine Months Ended
September 30,
------------------------
1997 1996
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(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss) $ (154,413) $ (23,706)
Add (Deduct) adjustments to reconcile net (loss)
to net cash (used) by operating activities:
Depreciation and amortization 21,340 1,091
Noncash interest expense 6,171 --
Investment losses 2,165 --
Gain on sale of PCS license -- (189)
Change in accounts receivable (16,222) --
Change in inventory (32,719) --
Change in income tax refund receivable-affiliate -- 10,206
Change in accounts payable-affiliates 45 (1,075)
Change in accounts payable-trade and other (192) (2,584)
Change in deferred tax liability-net 3,027 3,926
Change in other assets and liabilities 5,146 (2,138)
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(165,652) (14,469)
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CASH FLOWS FROM FINANCING ACTIVITIES
Change in note receivable-affiliate -- 28,836
Change in Revolving Credit Agreement-TDS 330,426 (60,238)
Issuance of common stock 1,333 195,265
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331,759 163,863
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CASH FLOWS FROM INVESTING ACTIVITIES
Change in note receivable-other 1,925 --
Additions to property and equipment (203,374) (51,337)
Proceeds from sale of PCS license -- 350
Change in temporary cash and other investments 319 689
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(201,130) (50,298)
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NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (35,023) 99,096
CASH AND CASH EQUIVALENTS-
Beginning of period 35,284 261
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End of period $ 261 $ 99,357
========== ===========
The accompanying notes to consolidated
financial statements are an integral part
of these statements.
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AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEETS
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(Unaudited)
September 30, December 31,
1997 1996
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(Dollars in thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents:
General funds $ 261 $ 869
Affiliated cash equivalents -- 34,415
------------- -----------
261 35,284
Temporary cash investments 108 315
Accounts receivable 16,222 --
Interest receivable-affiliate -- 243
Interest receivable-other 4 508
Note receivable -- 1,925
Inventory 32,719 --
Other 2,071 556
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51,385 38,831
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PROPERTY and EQUIPMENT
Property and equipment-net of accumulated
depreciation of $20,740 and $1,981, respectively 509,293 18,592
Work in process 38,898 233,831
Prepaid network infrastructure costs -- 70,300
------------ -----------
548,191 322,723
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INVESTMENTS
Investment in PCS licenses-net of accumulated
amortization of $2,567 in 1997 295,333 304,354
Other 4,495 6,771
------------ -----------
299,828 311,125
------------ -----------
DEFERRED COSTS 176 148
------------ -----------
TOTAL ASSETS $ 899,580 $ 672,827
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable
Affiliates $ 534 $ 489
Trade 87,252 57,114
Other -- 36,246
Accrued interest-affiliate 3,475 --
Microwave relocation costs payable 8,450 17,046
Contribution payable -- 6,453
Other 4,460 1,978
------------ -----------
104,171 119,326
------------ -----------
REVOLVING CREDIT AGREEMENT-TDS 330,426 --
------------ -----------
LONG-TERM DEBT 165,278 103,743
------------ -----------
DEFERRED TAX LIABILITY-NET 15,000 11,973
------------ -----------
COMMON SHAREHOLDERS' EQUITY
Common Shares, par value $1 per share 31,567 31,359
Series A Common Shares, par value $1 per share 40,000 40,000
Additional paid-in capital 413,424 412,299
Retained deficit (200,286) (45,873)
------------ -----------
284,705 437,785
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 899,580 $ 672,827
============ ===========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
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AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are
adequate to make the information presented not misleading. It is
suggested that these consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes
thereto included in the Company's annual report on Form 10-K.
The accompanying unaudited consolidated financial statements contain
all adjustments (consisting of only normal recurring items) necessary
to present fairly the financial position as of September 30, 1997, and
December 31, 1996, the results of operations for the nine and three
months ended September 30, 1997 and 1996, and the cash flows for the
nine months ended September 30, 1996 and 1997. The results of
operations for the nine and three months ended September 30, 1997 and
1996, are not necessarily indicative of the results to be expected for
the full year.
2. Revenue Recognition. Revenues from operations consist of charges to
customers for monthly access, airtime, value-added services and
long-distance charges. Revenues are recognized as the services are
rendered. Unbilled revenues, resulting from PCS services provided from
the billing cycle date to the end of each month, are estimated and
recorded.
Revenues from operations also consist of equipment sales to national
retailers, independent agents, and end user customers. Revenues from
equipment sales are recognized upon the shipment of goods to retailers
and independent agents or upon sale through direct distribution
channels to end user customers.
Handset inventory is stated at current replacement cost.
3. Depreciation and Amortization. Depreciation is provided based upon the
straight-line method over the estimated useful lives of the respective
assets, generally ten years for network assets and five years for
information system assets and office equipment. Leasehold improvements
are amortized over ten years or the lease term, whichever is shorter.
PCS licenses are amortized straight-line over forty years. Depreciation
of network assets and amortization of the related PCS license commences
in the month a market launches service provided the launch occurs
on or before the fifteenth day of that month. Depreciation and
amortization commences in the following month for those markets that
launch service after the fifteenth day of the month.
4. Net (Loss) per Common and Series A Common Share for the nine months and
the third quarter ended September 30, 1997 and 1996, was computed based
on the weighted average number of Common and Series A Common Shares
outstanding during the period adjusted, as applicable, to give
retroactive effect to the recapitalization in conjunction with the
Company's 1996 initial public offering, as if this transaction had
occurred at January 1, 1996.
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards
12
<PAGE>
AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
("SFAS") No. 128, "Earnings Per Share" in March 1997 which will become
effective in December 1997. SFAS No. 128 had no pro forma effect on
earnings per share for the nine and three months ended September 30,
1997 and 1996.
5. Supplemental Cash Flow Information. In the first nine months of 1997, a
net $40.8 million in additions to work in process were financed through
the June 19, 1996 Credit Agreement ("Credit Agreement") with Nokia
Telecommunications, Inc. ("Nokia"), accounts payable-other and
microwave relocation costs payable. An additional $70.3 million in
additions to work in process were financed through a decrease in
prepaid network infrastructure costs.
During the nine months ended September 30, 1997, the Company incurred
interest charges totaling $19.6 million. The interest charges were
comprised of $11.0 million relating to the Revolving Credit Agreement
(See Note 8-Revolving Credit Agreement), $2.4 million for TDS guarantee
fees on its Long-term debt (Series A Zero Coupon Notes) and $6.2
million in accrued interest on the Series A Zero Coupon Notes. Of these
amounts, the Company capitalized $5.9 million relating to its work in
process expenditures. The remaining $13.7 million was charged to
expense. The Company converted $11.0 million of accrued interest and
$1.5 million in accrued TDS guarantee fees to debt under the Revolving
Credit Agreement in 1997.
During the nine months ended September 30, 1996, the Company incurred
interest charges of $2.1 million related to the Revolving Credit
Agreement. Of this amount, the Company capitalized $0.4 million
relating to the development of its PCS network. The remaining $1.7
million was charged to expense. The Company also converted $3.0 million
of accrued interest to debt under the Revolving Credit Agreement in
1996.
6. Reclassification. Certain amounts reported in the first nine months and
the third quarter of 1996 have been reclassified to conform to the 1997
presentation.
7. Development Stage Company. Effective with the second quarter of 1997,
the Company ceased to be a development stage company and presents its
1997 results of operations, cash flows and financial position in a
manner similar to established operating enterprises within the
industry.
8. Revolving Credit Agreement. The Company entered into a Revolving Credit
Agreement with TDS on August 1, 1995, which incorporates all of the
outstanding obligations of the Company to TDS. The Company may borrow
up to $425 million under the Revolving Credit Agreement.Pursuant to the
Revolving Credit Agreement the Company may borrow at an interest rate
equal to 1.5% above prime rate until the principal 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 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. The total amount advanced to the Company
under the Revolving Credit Agreement as of September 30, 1997, was
$330.4 million.
9. Accounts Payable-other represents the uninvoiced value of network
infrastructure equipment received by the Company, which is subsequently
financed under terms of the Credit Agreement with Nokia.
13
<PAGE>
AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Commitments. At September 30, 1997, the Company had orders totaling
approximately $39.2 million with Nokia Telecommunications, Inc. and
certain tower vendors for infrastructure equipment as part of the
Company's build-out of its PCS networks. Also at September 30, 1997,
the Company had orders totaling approximately $40.5 million with
various handset vendors for handsets and accessories.
14
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 10.16 -Third Amendment to the Revolving Credit Agreement by and
between Telephone and Data Systems, Inc. and Aerial
Communications, Inc.
Exhibit 11 - Computation of earnings per common share.
Exhibit 27 - Financial Data Schedule.
(b) Reports on Form 8-K filed during the quarter ended September 30, 1997.
No Reports on Form 8-K were filed during the quarter ended September
30, 1997.
15
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AERIAL COMMUNICATIONS, INC.
---------------------------
(Registrant)
Date November 13, 1997 /s/ DONALD W. WARKENTIN
----------------------- -----------------------------------------
Donald W. Warkentin
President
(Chief Executive Officer)
Date November 13, 1997 /s/ J. CLARKE SMITH
----------------------- -----------------------------------------
J. Clarke Smith
Vice President-Finance and Administration
(Chief Financial Officer)
Date November 13, 1997 /s/ B. SCOTT DAILEY
----------------------- -----------------------------------------
B. Scott Dailey
Controller
(Principal Accounting Officer)
16
<PAGE>
Exhibit 10.16
Aerial Communications, Inc. and Subsidiaries
Third Amendment
to the
Revolving Credit Agreement
by and between
Telephone and Data Systems, Inc. and Aerial Communications, Inc.
This Third Amendment (the "Third Amendment") to the Revolving Credit Agreement
dated as of August 1, 1995, as previously amended (the "Revolving Credit
Agreement") by and between Telephone and Data Systems, Inc. ("TDS") an Iowa
corporation, and Aerial Communications, Inc. ("Company"), a Delaware corporation
is effective this 29th day of August, 1997.
WHEREAS TDS and the Company entered into the Revolving Credit Agreement dated
and made effective as of August 1, 1995, which Revolving Credit Agreement was
subsequently amended effective as of December 31, 1995 (the "First Amendment");
and August 7, 1997 (the "Second Amendment"); and
WHEREAS TDS continues to own certain of the issued and outstanding shares of the
capital stock of the Company; and
WHEREAS, the Company has identified a need for additional funds and TDS agrees
to provide the Company certain additional funds for specified purposes under
terms more particularly set forth in the Revolving Credit Agreement; and
NOW, THEREFORE, in consideration of the promises set forth above, and for good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and intending to be legally bound, TDS and the Company agree to
amend the Revolving Credit Agreement as follows:
1. All references to "$300,000,000.00" shall be changed to
"$425,000,000.00".
TDS's obligation to furnish additional funds under the Revolving Credit
Agreement shall terminate on December 31, 1998. However, in the event that
TDS's ownership of the Company shall fall below 70%, the Revolving Credit
Agreement shall expire 6 months after such date.
All other terms and conditions of the Revolving Credit Agreement shall remain
unchanged and in full force and effect. All defined terms contained in the
Revolving Credit Agreement are hereby incorporated into this Third Amendment and
shall have the same meaning herein as in the Revolving Credit Agreement, unless
otherwise defined herein.
IN WITNESS WHEREOF, the Parties hereto, by their duly authorized
representatives, have executed this Third Amendment to the Revolving Credit
Agreement, effective as of the date first written above.
Telephone and Data Systems, Inc. Aerial Communications, Inc.
By:____________________________ By:_______________________
Name: Murray L. Swanson Name: J. Clarke Smith
Title: Executive Vice President - Finance Title: Vice President
Finance & Administration
Date:__________________________ Date:_____________________
1
<PAGE>
Exhibit 11
Aerial Communications, Inc. and Subsidiaries
Computation of Earnings Per Common Share
(in thousands, except per share amounts)
Three Months Ended September 30, 1997 1996
- --------------------------------------------------------------------------------
Primary Earnings
Net (Loss) $ (76,598) $ (9,829)
========== ===========
Primary Shares
Weighted average number of Common and Series A
Common Shares Outstanding* 71,559 71,336
========== ===========
Primary Earnings per Common Share
Net (Loss) $ (1.07) $ (0.14)
========== ===========
Nine Months Ended September 30, 1997 1996
- --------------------------------------------------------------------------------
Primary Earnings
Net (Loss) $ (154,413) $ (23,706)
========== ===========
Primary Shares
Weighted average number of Common and Series A
Common Shares Outstanding* 71,481 66,176
========== ===========
Primary Earnings per Common Share
Net (Loss) $ (2.16) $ (0.36)
========== ===========
* Weighted average number of Common and Series A Common Shares Outstanding was
calculated based on the number of 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, 1996.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF AERIAL COMMUNICATIONS, INC. AS OF SEPTEMBER
30, 1997, AND FOR THE NINE MONTHS THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> $ 261
<SECURITIES> 0
<RECEIVABLES> 16,222
<ALLOWANCES> 0
<INVENTORY> 32,719
<CURRENT-ASSETS> 51,385
<PP&E> 568,931
<DEPRECIATION> 20,740
<TOTAL-ASSETS> 899,580
<CURRENT-LIABILITIES> 104,171
<BONDS> 165,278
0
0
<COMMON> 71,567
<OTHER-SE> 213,138
<TOTAL-LIABILITY-AND-EQUITY> 899,580
<SALES> 12,869
<TOTAL-REVENUES> 25,791
<CGS> 40,770
<TOTAL-COSTS> 163,575
<OTHER-EXPENSES> (134)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,735
<INCOME-PRETAX> (151,385)
<INCOME-TAX> 3,028
<INCOME-CONTINUING> (154,413)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (154,413)
<EPS-PRIMARY> (2.16)
<EPS-DILUTED> (2.16)
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