- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
--------------------------------------
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------------- --------------------------
Commission File Number 0-28262
- --------------------------------------------------------------------------------
AERIAL COMMUNICATIONS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 39-1706857
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8410 West Bryn Mawr, Suite 1100, Chicago, Illinois 60631
--------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (773) 399-4200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 30, 1998
- ------------------------------------ -------------------------------
Common Shares, $1 par value 31,788,900 Shares
Series A Common Shares, $1 par value 40,000,000 Shares
- --------------------------------------------------------------------------------
<PAGE>
AERIAL COMMUNICATIONS, INC.
--------------------------
3rd QUARTER REPORT ON FORM 10Q
------------------------------
INDEX
-----
Page No.
-------
Part I. Financial Information
Management's Discussion and Analysis of
Results of Operations and Financial Condition 2-13
Consolidated Statements of Operations -
Three Months and Nine Months Ended September 30,
1998 and 1997 14
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 15
Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 16
Notes to Consolidated Financial Statements 17-20
Part II. Other Information 21
Signatures 22
<PAGE>
PART I. FINANCIAL INFORMATION
-----------------------------
AERIAL COMMUNICATIONS, INC.
---------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
AND FINANCIAL CONDITION
-----------------------
RESULTS OF OPERATIONS
- ---------------------
Aerial Communications, Inc. ("Aerial" or the "Company" - NASDAQ symbol: AERL),
an 82.4%- 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 devoted 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 Columbus MTA launched service on
March 27, 1997. The Company's five remaining MTAs launched service during the
second quarter of 1997.
With the launch of service in its MTAs during the second quarter of 1997, the
Company transitioned from the development stage to being an operating
enterprise. As a result of this transition, the Company has experienced an
increase in revenues and operating expenses and incurred substantial losses. The
Company had substantially less revenues and expenses in the first nine months of
1997. In addition, significant efforts to build-out the Company's network
infrastructure continued throughout the second half of 1997.
In 1998, the Company's focus has been the completion of its PCS networks and the
development of its PCS business. Following is a table of summarized operating
data for the Company's consolidated operations.
<TABLE>
<CAPTION>
Nine Months Ended
or At September 30,
-----------------------
1998 1997
-------- --------
<S> <C> <C>
Total MTA population (in millions) 27.6 27.6
Customers 231,000 65,000
Average revenue per customer (year to date) $ 52 N/M
Average revenue per customer (quarter to date) $ 50 N/M
MTA penetration 0.84% 0.24%
MTAs in operation 6 6
Cell sites in service 1,152 850
Total number of employees 1,715 1,276
N/M - not meaningful
</TABLE>
2
<PAGE>
Nine Months Ended 9/30/98 Compared to Nine Months Ended 9/30/97
Operating Revenues
- ------------------
Operating revenues totaled $105.9 million in 1998, an increase of $80.1 million
as compared to 1997. The increase in operating revenues is reflective of the
Company's launch of service between March and June of 1997 and the subsequent
significant efforts to build its customer base.
Service revenue primarily consists of i) charges for access, airtime and
value-added services provided to the Company's customers who use the network
operated by the Company (local service revenue); ii) charges to customers of
other wireless carriers who use the Company's PCS network when roaming
(outcollect roaming revenue); and iii) charges for long-distance calls made on
the Company's systems (long-distance revenue). Service revenue totaled $85.5
million in 1998, an increase of $72.6 million as compared to 1997. The increase
was driven by the growth in the number of customers using the Company's PCS
network during 1998 as compared to 1997. As of September 30, 1998, the Company
had approximately 231,000 customers and had been providing service in all of its
markets throughout all of 1998. As of September 30, 1997, the Company had
approximately 65,000 customers, after launching service in all markets between
late March and late June of 1997. The Company's average revenue per customer per
month ("ARPU") was $52 for the nine months ended September 30, 1998.
Equipment sales revenue represents the sale of handsets and related accessories
to retailers, independent agents, and end user customers. Equipment sales
totaled $20.3 million in 1998, an increase of $7.5 million as compared to 1997.
The increase in Equipment sales revenue primarily reflects the increase in sales
volume, partially offset by a decline in handset prices.
Operating Expenses
- ------------------
Operating expenses totaled $303.3 million in 1998, an increase of $139.7 million
as compared to 1997. The increase in operating expenses is reflective of the
Company's launch of service between March and June of 1997 and the subsequent
significant efforts to build and serve its customer base.
System operations expense totaled $48.1 million in 1998, an increase of $32.5
million as compared to 1997. The increase in system operations expense is due to
the increasing size of the Company's network and its fully operational status
during all of 1998 as compared to only part of 1997. As of September 30, 1998,
the Company's PCS network had 1,152 cell sites in service and had been
operational in all of the Company's markets throughout all of 1998. As of
September 30, 1997, the network had approximately 850 cell sites and had become
operational across all markets between late March and late June of 1997.
Significant system operations expenses include cell site rent expense and system
maintenance expense which increased $7.9 million and $3.5 million, respectively,
in 1998 as compared to 1997. Salaries and other employee related expenses
increased $6.9 million, primarily reflecting an increase in engineering and
maintenance personnel since September 30, 1997, as well as a
3
<PAGE>
decrease in internal labor costs capitalized. Other systems operations expenses
increased $2.1 million and include charges such as cell site utility expense,
vehicle and other maintenance expense and roamer fraud expense.
System operations expense also includes customer usage expense which increased
$12.1 million in 1998 due primarily to increased landline interconnection and
toll charges, reflecting an increasing customer base and increased use of the
Company's network by its customers.
Marketing and selling expense totaled $52.0 million in 1998, an increase of
$23.0 million as compared to 1997. Significant Marketing and selling expenses
include the salaries, benefits and other employee related expenses for sales and
marketing personnel, which increased $8.8 million in 1998, primarily reflecting
an increase in sales and marketing personnel since September 30, 1997. Sales
commissions increased $3.4 million in 1998, reflecting the Company's growing
customer base. Retail store rental costs increased $2.9 million in 1998
primarily due to the Company's increasing number of store and kiosk locations
across its markets. Other Marketing and selling expense items increased $7.9
million in aggregate, primarily driven by increases in consulting, temporary
service, advertising and other sales expenses.
Customer service expense totaled $38.5 million in 1998, an increase of $30.0
million as compared to 1997. The increase was driven by rapid customer growth,
and the efforts to manage that growth with increased personnel (including the
establishment of a second call center in Kansas City) and new and evolving
information systems. The higher than anticipated level of customer service
expense reflects primarily the effects of higher than planned bad debt costs as
well as additional consulting and temporary service expenses directed at
reducing both bad debt and customer churn.
Cost of equipment sold totaled $59.6 million in 1998, an increase of $18.8
million as compared to 1997. The increase primarily reflects the growth in
handset unit sales to support the rise in customer activations.
General and administrative expense totaled $43.9 million in 1998, an increase of
$1.4 million as compared to 1997. General and administrative expenses include
the costs of operating the Company's local business offices and its corporate
expenses other than the corporate engineering and marketing departments. The
Company experienced increases in these expense areas in 1998 as compared to 1997
as the Company added more employees to support its growing PCS business. The
level of General and administrative expenses in 1997 was partially driven by the
Company being a development stage enterprise in the first quarter of 1997 and
thereby classifying all expenses as either General and administrative or
Development. In 1998, expenses are classified to reflect the Company's
operational status.
Depreciation expense was $55.4 million in 1998, an increase of $36.7 million as
compared to 1997. The increase is due to rising fixed asset balances as a result
of the Company's network build-out and the amount of time that network assets
have been in service in 1998 as compared to 1997. As of September 30, 1998, the
Company had $668.3 million of property and equipment in service which had
largely been operational throughout all of 1998. As of September 30, 1997,
4
<PAGE>
the Company had $530.0 million of property and equipment in service, the PCS
network portion of which had only been in operation since the second quarter of
1997.
Amortization expense was $5.7 million in 1998, an increase of $3.1 million as
compared to 1997. Upon the commencement of service in a particular market, the
Company began amortizing that market's related PCS license. Aerial launched
service across all its markets between late March and late June of 1997. As a
result, year to date consolidated amortization expense in 1997 reflects less
than a full nine month's expense. In 1998, all markets were operational the
entire nine months resulting in greater amortization expense.
Development costs totaled $5.8 million in 1997 and primarily represent
pre-launch marketing, consulting and legal costs. Effective in the second
quarter of 1997, the Company was no longer a development stage entity and
prospectively began classifying expenses to reflect its operational status.
Operating (Loss)
- ----------------
Operating (Loss) totaled $(197.4) million in 1998, an increase of $59.6 million
as compared to 1997. Although service revenues are expected to continue to grow
during the remainder of 1998 as the Company builds its customer base, the
Company expects to continue to have operating losses and to generate negative
cash flow in 1998 and for the next few years as it incurs costs associated with
that growth.
Investment and Other Income
- ---------------------------
Investment and Other Income totaled $4.6 million in 1998, an increase of $4.4
million as compared to 1997. The increase is primarily due to the allocation of
$3.8 million of the consolidated net loss of Aerial Operating Co., Inc. ("AOC"),
to the Company's minority investor (See Note 7 - Minority Investor). The
Company's MTAs are wholly-owned subsidiaries of AOC.
Interest and Income Taxes
- -------------------------
Interest expense-affiliate totaled $47.0 million in 1998, an increase of $36.3
million as compared to 1997. Interest expense-affiliate represents interest on
amounts borrowed under the Revolving Credit Agreement with TDS and the 3%
guarantee fees associated with the Series A and Series B Zero Coupon Notes and
the 1996 and 1998 Nokia Credit Agreements, less capitalized interest. The
average balance of borrowings under the Revolving Credit Agreement was greater
in 1998 as compared to 1997, resulting in greater interest expense.
Additionally, the Company capitalized $2.7 million less interest in 1998 as
compared to 1997.
Interest expense-other totaled $13.2 million in 1998, an increase of $10.1
million as compared to 1997. Interest expense-other relates to interest expense
accreted on the Series A Zero Coupon Notes issued in November 1996 and the
Series B Zero Coupon Notes issued in February 1998, as well as interest expense
associated with the 1996 and 1998 Nokia Credit Agreements, less capitalized
interest. The increase is primarily due to the average balance of Long-term debt
outstanding during 1998 being greater than the average balance outstanding
during 1997. Additionally, the Company capitalized $3.0 million less interest in
1998 as compared to 1997.
5
<PAGE>
Income taxes. The Company is included in a consolidated federal tax return with
other members of the TDS consolidated group. For financial reporting purposes,
the Company computes its federal income taxes as if it were filing a separate
return as its own affiliated group and was not included in the TDS group. TDS
and the Company are parties to a Tax Allocation Agreement under which the
Company may carry forward any losses and credits and use them to offset income
tax liabilities to TDS if any arise in the future.
Net (Loss) and (Loss) Per Common and Series A Common Share
- ----------------------------------------------------------
Net (Loss) totaled $(255.5) million in 1998 and $(154.4) million in 1997. Net
(Loss) per Common and Series A Common Share was $(3.56) in 1998 and $(2.16) in
1997. The increase in the Company's Net (Loss) and Net (Loss) per Common and
Series A Common Share in 1998 reflects the Company's fully operational status
during all of 1998 as compared to 1997 when the Company was not fully
operational until the end of the second quarter.
Three Months Ended 9/30/98 Compared to Three Months Ended 9/30/97
Operating Revenues
- ------------------
Operating revenues totaled $38.4 million in 1998, an increase of $19.8 million
as compared to 1997. Service revenues totaled $32.6 million representing an
increase of $20.9 million. The increase in operating revenues reflects the
growth of the Company's customer base from approximately 65,000 at September 30,
1997, to approximately 231,000 at September 30, 1998. The Company's ARPU was $50
for the three months ended September 30, 1998.
Equipment sales totaled $5.8 million in 1998, a decrease of $1.1 million as
compared to the third quarter of 1997. The decrease in equipment sales is
primarily due to decreases in handset sale prices.
Operating Expenses
- ------------------
Operating expenses were $99.0 million in 1998, an increase of $15.9 million as
compared to 1997. With the exception of Cost of equipment sold, the increase is
for reasons generally the same as the first nine months of 1998.
Cost of equipment sold was $16.2 million in 1998, a decrease of $9.6 million as
compared to the third quarter of 1997. The decrease is due primarily to handset
price declines.
Net (Loss) and (Loss) Per Common and Series A Common Share
- ----------------------------------------------------------
Net (Loss) totaled $(79.1) million in 1998 and $(76.6) million in 1997. Net
(Loss) per Common and Series A Common Share was $(1.10) in 1998 and $(1.07) in
1997. The increase in the Company's Net (Loss) and Net (Loss) per share in the
third quarter of 1998 as compared to 1997 reflects the costs of growing the
Company's PCS business.
6
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The costs of development, construction, start-up and post-launch activities of
the Company require substantial capital. From inception through September 30,
1998, the Company had expended $304.4 million for its licenses, including
capitalized interest, $720.4 million for all other capital expenditures and
incurred cumulative net losses of $548.5 million. The Company expects to
continue to incur operating losses and generate negative cash flow from
operating activities during the next few years as it continues to build its
customer base.
Cash flows used by operating activities were $173.3 million during 1998 as
compared to $165.7 million in 1997. Operating cash outflow (operating loss
before depreciation and amortization expense) totaled $136.3 million in 1998 as
compared to $116.4 million in 1997. Cash flows used by other operating
activities (investment and other income, interest expense, changes in working
capital and changes in other assets and liabilities) required cash investments
of $37.0 million in 1998 as compared to $49.3 million in 1997.
Cash flows from financing activities totaled $236.6 million in 1998 as compared
to $331.8 million in 1997. Cash provided in 1998 was primarily due to $235.8
million in borrowings under the Revolving Credit Agreement. The Company also
received $200 million from the sale of a 19.4% equity interest in AOC. The
proceeds from the sale were remitted to TDS to pay down part of the outstanding
balance under the Revolving Credit Agreement. In 1997, borrowings under the
Revolving Credit Agreement provided $330.4 million.
Cash flows used in investing activities totaled $63.9 million in 1998 as
compared to $201.1 million in 1997. Cash used in 1998 and 1997 was due primarily
to additions to property and equipment for PCS network and information system
assets. Fixed asset additions have been financed through a combination of
borrowings under the Revolving Credit Agreement with TDS, the Series A and
Series B Zero Coupon Notes and the 1998 Nokia Credit Agreement.
The Company anticipates that the continuing development of its PCS services will
require substantial capital over the next few years. For all of 1998 the Company
estimates that the funds required for construction expenditures will total
approximately $80 to $100 million. The Company estimates requiring $275 million
for working capital requirements to fund operations for all of 1998, including
an estimated $62 million in interest expense related to the Revolving Credit
Agreement and 3% guarantee fees payable to TDS.
Nokia Telecommunications Inc. ("Nokia") agreed to provide the Company with up to
$200 million in financing for digital radio channel and switching infrastructure
equipment through a Credit Agreement with the Company dated June 19, 1996 ("1996
Credit Agreement"). In accordance with the provisions of the 1996 Credit
Agreement, the Company issued, in tranches, 10-year unsecured zero coupon
promissory notes, the proceeds of which were paid to Nokia in satisfaction of
borrowings by the Company under the 1996 Credit Agreement. On November 4, 1996,
the Company issued $226.2 million in aggregate principal amount at maturity of
Series A Zero Coupon Notes ("Series A Notes") due in 2006. On February 5, 1998,
the Company issued $222.0 million in aggregate principal amount at maturity of
Series B Zero Coupon Notes ("Series B Notes") due in 2008 (representing the
final issuance of zero coupon notes under the 1996 Credit Agreement). The
aggregate issue price of the Series A and Series B Zero Coupon Notes
7
<PAGE>
was $200 million. The proceeds were paid to Nokia in satisfaction of all
obligations of the Company under the 1996 Credit Agreement.
On June 30, 1998, the Company and Nokia entered into an agreement ("1998 Credit
Agreement") in which Nokia will provide up to an aggregate $150 million in
financing to the Company for the purchase of network infrastructure equipment
and services from Nokia. Loans under the 1998 Credit Agreement are to be made
available in two $75 million tranches. With respect to Tranche A, the Company
may borrow up to $75 million until June 30, 1999. Tranche A loans mature on June
30, 1999, however, the maturity date of Tranche A loans may be extended to June
30, 2000, upon written notice and payment of an extension fee by the Company to
Nokia. A second $75 million ("Tranche B") becomes available commencing on June
30, 1999, and ending on June 30, 2000, the maturity date of Tranche B loans. The
obligations of the Company under the 1998 Credit Agreement are fully and
unconditionally guaranteed by TDS at an annual fee rate of 3% (See Note 6 -
Vendor Financing for further discussion). As of September 30, 1998, the Company
had $40.0 million available for borrowing under the Tranche A portion of the
1998 Credit Agreement with Nokia.
On September 8, 1998, pursuant to the terms of a Purchase Agreement dated June
1, 1998, Sonera Corporation ("Sonera"), formerly Telecom Finland Ltd., made a
$200 million investment in Aerial Operating Co., Inc. ("AOC"). Sonera purchased
approximately 2.4 million shares of common stock of AOC representing a 19.4%
equity interest in AOC. (See Note 7- Minority Investor for further discussion).
Under the terms of the Purchase Agreement, the Revolving Credit Agreement
between the Company and TDS dated August 1, 1995, as amended, pursuant to which
the Company owed TDS $665.0 million as of August 31, 1998, was terminated. A new
Revolving Credit Agreement between AOC and TDS was substituted, under which AOC
was indebted to TDS for $665.0 million as of August 31, 1998.
The new Revolving Credit Agreement has the same terms and conditions as the
previous Revolving Credit Agreement, as amended, and provides that the amount of
any proceeds raised by the Company or AOC in connection with the sale of equity
(See Note 7 - Minority Investor) or debt will be used to reduce the borrowings
under the Revolving Credit Agreement as well as reduce the total amount AOC may
borrow under the Revolving Credit Agreement. Additionally, any borrowings under
the Nokia 1998 Credit Agreement (See Note 6 - Vendor Financing) concurrently
reduces by the same amount the authorized total line of credit available to AOC
under the Revolving Credit Agreement. Pursuant to these terms, AOC paid to TDS
the $200 million it had received from Sonera to reduce the outstanding balance
under the Revolving Credit Agreement.
8
<PAGE>
The following table summarizes AOC's borrowing capacity under the Revolving
Credit Agreement as of September 30, 1998:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Maximum amount available as of September 30, 1998 $ 725,000
Reduced by: Proceeds from Sonera (200,000)
Vendor financing under the 1998 Nokia Credit Agreement (35,000)
Amount outstanding under the Revolving Credit Agreement
as of September 30, 1998 (484,000)
---------
Net amount available for borrowing as of
September 30, 1998 $ 6,000
=========
</TABLE>
At September 30, 1998, the Company had orders totaling approximately $5.0
million with Nokia Telecommunications Inc. for network infrastructure equipment.
At October 31, 1998, the maximum amount available under the Revolving Credit
Agreement was $750 million (prior to reductions for the proceeds from Sonera and
vendor financing under the Nokia 1998 Credit Agreement).
On November 3, 1998, TDS approved an amendment to the Revolving Credit Agreement
dated August 31, 1998, between TDS and AOC. This amendment will be executed and
delivered after approvals by the boards of directors of the Company and AOC,
which are expected to be received in due course. Under the Revolving Credit
Agreement, as so amended, AOC will be permitted to borrow up to a maximum amount
(the "Maximum Amount"), less the amount of any debt or equity financing obtained
by AOC or the Company, including the amount of any borrowings under the Nokia
1998 Credit Agreement. The Maximum Amount under the amended Revolving Credit
Agreement will increase from $550 million ($750 million less the $200 million
in proceeds from Sonera) to $650 million in February 1999. The interest rate
under the amended Revolving Credit Agreement will be equal to the Prime Rate
announced from time to time by the LaSalle National Bank of Chicago plus 3%.
Interest on the balance due under the amended Revolving Credit Agreement will
be payable quarterly and no principal will be payable until April 2, 2000.
As of November 3, 1998, the Company had $500 million in borrowings outstanding
under the Revolving Credit Agreement and $39 million in borrowing under the
Nokia 1998 Credit Agreement. The Company believes that the Maximum Amount that
will be available under the amended Revolving Credit Agreement will be
sufficient to fund its capital expenditures and cover operating losses through
February 1999. TDS has no commitment to provide financing to the Company or AOC
except pursuant to the Revolving Credit Agreement.
In the absence of additional financing or refinancing by TDS, the Company will
be required to seek additional outside financing to fund its operating
activities and to repay the amounts due to TDS under the Revolving Credit
Agreement when it becomes due and payable. Sources of additional capital may
include additional vendor financing and public and private equity and debt
financings by the Company or its subsidiaries. If sufficient future funding is
not available on terms and prices acceptable to the Company, the Company would
have to reduce its operating activities, which could have a material adverse
impact on the Company's financial condition and results of operations.
9
<PAGE>
YEAR 2000 ISSUE
- ---------------
The Year 2000 Issue exists because many computer systems and applications
abbreviate dates using only two digits, rather than four digits, e.g., "98"
rather than "1998". Unless corrected, this shortcut may cause problems when the
century date "2000" occurs. On that date, some computer operating systems,
applications and embedded technology may recognize the date as January 1, 1900,
instead of January 1, 2000. If the Company fails to correct any critical Year
2000 processing problems prior to January 1, 2000, the affected systems may
either cease to function or produce erroneous data, which could have material
adverse operational and financial consequences. Currently, the Company believes
that a disruption in the operation of its networks, and financial and accounting
systems and/or an inability to access interconnections with other
telecommunications carriers, are the major risks associated with the inability
of systems and software to process Year 2000 data correctly. The Company's
results of operations, financial position and cash flows could be materially and
adversely affected by such failures.
The Company's management has established a project team to address Year 2000
issues. The Company's plan to address the Year 2000 Issue consists of five
general phases: (i) Awareness, (ii) Assessment, (iii) Renovation, (iv)
Validation and (v) Implementation.
The awareness phase consisted of establishing a Year 2000 Project team and
developing an overall strategy. A Year 2000 Program Office has been established
at the TDS corporate level to coordinate activities of the Year 2000 Project
team, to monitor the current status of individual projects, to report
periodically to the Audit Committee, and to promote the exchange of information
between all business units to share knowledge and solution techniques. The Year
2000 effort covers the network and supporting infrastructure for the provision
of PCS services; the operational and financial information technology ("IT")
systems and applications, such as computer systems that support key business
functions such as billing, finance, customer service, procurement and supply;
and a review of the Year 2000 compliance efforts of the Company's key suppliers.
The assessment phase includes the identification of core business areas and
processes, analysis of systems and hardware supporting the core business areas
and the prioritization of renovation or replacement of systems and hardware that
are not Year 2000 compliant. Included in the assessment phase is an analysis of
risk management factors such as contingency plans and legal matters. The
assessment phase is scheduled to be completed by the first quarter of 1999.
The renovation phase consists of the conversion or replacement of selected
platforms, applications, databases and utilities. The renovation of critical
hardware, systems and applications is scheduled to be substantially completed by
the third quarter of 1999.
The validation phase includes testing, verifying and validating the renovated or
replaced platforms, applications, databases and utilities. A goal of the
validation phase is to conduct independent verification testing of key hardware,
systems and applications as well as network and system component upgrades
received from suppliers. In addition, selected Year 2000 upgrades are slated to
undergo testing in a controlled environment that replicates the current
10
<PAGE>
environment and is equipped to simulate the turn of the century and leap year
dates. Validation is scheduled to be completed in the third quarter of 1999.
The implementation phase involves switching over to the converted and renovated
systems and applications. This phase is expected to be completed by the end of
1999.
The Company's current schedule is subject to change depending on developments
that may arise through unforeseen circumstances, and through finalization of the
assessment phase and the renovation and validation phases of the Company's
compliance efforts. The Company, like most other telecommunications operators,
is highly dependent on the telecommunications network vendors to provide
compliant hardware, systems and applications and on other third parties,
including vendors, other telecommunications service providers, government
agencies and financial institutions, to deliver reliable services. The Company
is dependent on the development of compliant hardware, systems and applications
and upgrades by experts, both internal and external, and the availability of
critical resources with the requisite skill sets. The Company's ability to meet
its target dates is dependent upon the timely provision of necessary upgrades
and modifications by its suppliers and internal resources. In addition, the
Company cannot guarantee that third parties on whom it depends for essential
services (such as electric utilities, other interconnected telecommunications
operators, etc.) will convert their critical systems and processes in a timely
manner. Failure or delay by any of these parties could significantly disrupt the
Company's business, including the provision of PCS services, billing and
collection processes and other areas of the business.
The Company has begun implementing additional initiatives to assess the degree
to which third parties with whom it has business relationships are addressing
Year 2000 Issues. These initiatives include analysis of the Year 2000 compliance
programs of the Company's critical vendors. In the near future, the initiative
will be extended to other telecommunications service providers with which the
Company interconnects. The Company's contingency plans will address mechanisms
for preventing or mitigating interruption caused by such third parties.
The Company is currently in the assessment phase, analyzing all systems and
hardware to determine which systems and hardware are not Year 2000 compliant.
The Company has not yet completed the cost estimate of this project. The Company
expects to complete this phase, and develop total cost estimates in early 1999.
Through the third quarter of 1998, the total incremental costs associated with
the Year 2000 Issue were less than $1 million. The timing of expenditures may
vary and is not necessarily indicative of readiness efforts or progress to date.
Though Year 2000 Project costs will directly impact the reported level of future
net income, the Company intends to manage its total cost structure, including
deferral of non-critical projects, in an effort to mitigate the impact of Year
2000 Project costs.
Based on the Company's current schedule for completion of Year 2000 tasks, the
Company believes that its planning is adequate to secure Year 2000 readiness of
its critical systems. Nevertheless, management cannot provide assurance that its
plan to achieve Year 2000 compliance will be successful as it is subject to
various risks and uncertainties, many of which are described above. Accordingly,
the Company's goal is to develop business continuity and contingency plans in
1999 to address high risk areas as they are identified. These plans are expected
to assess the potential for business disruption in various scenarios, and to
provide for
11
<PAGE>
key operational back-up, recovery and restoration alternatives. However, if the
Company, or third parties with whom it has significant business relationships,
fails to achieve Year 2000 readiness with respect to critical systems, there
could be a material adverse affect on the Company's results of operations,
financial position and cash flows.
The above information, which contains statements that are "forward-looking"
within the meaning of the Private Securities Litigation Reform Act of 1995, is
based on the Company's current best estimates, which were derived using numerous
assumptions of future events, including the availability and future costs of
certain technological and other resources, third party modification actions and
other factors. Given the complexity of these issues and the possibility of
unidentified risks, actual results may vary materially from those anticipated
and discussed above. Specific factors that might cause such differences include,
among others, the availability and cost of personnel trained in this area, the
ability to locate and correct all affected computer code, the timing and success
of remedial efforts of third party suppliers and similar uncertainties.
TRACKING STOCK PROPOSAL
- -----------------------
As disclosed in the Company's 1997 Annual Report on Form 10-K, on December 17,
1997, the Company received a proposal from TDS to acquire all of the issued and
outstanding Common Shares of Aerial not already owned by TDS, pursuant to a
merger (the "Aerial Merger"), in exchange for shares of TDS tracking stock which
are intended to reflect the performance of the Company.
In January 1998, the Company's Board of Directors created a special committee of
the Board (the "Special Committee") to review the proposal from TDS. The Special
Committee, consisting of two independent directors of Aerial, engaged a
financial advisor and legal advisor to assist in reviewing the proposal. On
April 15, 1998, the Company announced that the Special Committee had decided to
recommend that Aerial's Board of Directors reject the initial proposal from TDS.
The Special Committee advised TDS that it would be prepared to consider a
revised proposal. TDS has attempted to seek an agreement to acquire the Aerial
Common Shares that it does not own on mutually acceptable terms. TDS has stated
that it is actively engaged in ascertaining whether the Tracking Stock Proposal
or another alternative is the best vehicle to unlock and build shareholder value
and that it is working toward a resolution. There can be no assurance that an
agreement will be reached with respect to the Aerial Merger.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
- -----------------------------------------------------------------------
STATEMENT
- ---------
This Form 10-Q contains "forward-looking" statements, as defined in the Private
Securities Litigation Reform Act of 1995, that are based on current
expectations, estimates and projections. Statements that are not historical
facts, including statements about the Company's beliefs and expectations are
forward-looking statements. These statements contain potential risks and
uncertainties and, therefore, actual results may differ materially. The Company
undertakes no obligation to update publicly any forward-looking statements
whether as a result of new information, future events or otherwise.
12
<PAGE>
Important factors that may affect these projections or expectations include, but
are not limited to: changes in the overall economy; changes in competition in
the Company's markets; advances in telecommunications technology; changes in the
telecommunications regulatory environment; pending and future litigation;
availability of future financing; unanticipated changes in growth in PCS
customers, penetration rates, churn rates and the mix of products and services
offered in the Company's markets; and unanticipated problems related to the Year
2000 Issue. Readers should evaluate any statements in light of these important
factors.
13
<PAGE>
<TABLE>
AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
---------
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- ---------------------
1998 1997 1998 1997
---- ---- ---- ----
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Service $ 32,600 $ 11,740 $ 85,535 $ 12,922
Equipment sales 5,838 6,908 20,337 12,869
--------- --------- --------- ---------
Total Operating Revenues 38,438 18,648 105,872 25,791
OPERATING EXPENSES
System operations 15,498 10,776 48,107 15,652
Marketing and selling 16,603 13,013 52,009 28,971
Customer service 14,890 6,180 38,541 8,544
Cost of equipment sold 16,223 25,798 59,616 40,770
General and administrative 15,689 13,444 43,899 42,525
Depreciation 18,253 12,121 55,416 18,759
Amortization of intangibles 1,889 1,853 5,666 2,581
Development costs -- -- -- 5,773
--------- --------- --------- ---------
Total Operating Expenses 99,045 83,185 303,254 163,575
--------- --------- --------- ---------
OPERATING (LOSS) (60,607) (64,537) (197,382) (137,784)
INVESTMENT AND OTHER INCOME (EXPENSE)
Minority share of loss 3,766 -- 3,766 --
Investment (losses) (128) (1,113) (128) (2,165)
Interest income-affiliate -- -- -- 95
Interest income-other 115 151 778 2,034
Other income 481 121 144 170
--------- --------- --------- ---------
Total Investment and Other Income (Expense) 4,234 (841) 4,560 134
--------- --------- --------- ---------
(LOSS) BEFORE INTEREST AND INCOME TAXES (56,373) (65,378) (192,822) (137,650)
INTEREST EXPENSE
Interest expense-affiliate 17,115 7,711 46,957 10,631
Interest expense-other 4,828 2,006 13,186 3,104
--------- --------- --------- ---------
Total Interest Expense 21,943 9,717 60,143 13,735
--------- --------- --------- ---------
(LOSS) BEFORE INCOME TAXES (78,316) (75,095) (252,965) (151,385)
Income tax expense 821 1,503 2,567 3,028
--------- --------- --------- ---------
NET (LOSS) ($ 79,137) ($ 76,598) ($255,532) ($154,413)
========= ========= ========= =========
WEIGHTED AVERAGE COMMON AND
SERIES A COMMON SHARES (000s) 71,735 71,559 71,701 71,481
(LOSS) PER COMMON AND
SERIES A COMMON SHARE ($ 1.10) ($ 1.07) ($ 3.56) ($ 2.16)
========= ========= ========= =========
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</FN>
</TABLE>
14
<PAGE>
<TABLE>
AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
---------
<CAPTION>
Nine Months ended
September 30,
----------------------
1998 1997
---- ----
(Dollars in Thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss) ($255,532) ($154,413)
Add (Deduct) adjustments to reconcile net (loss)
to net cash (used) by operating activities
Depreciation and amortization 61,082 21,340
Noncash interest expense - Series A & B Notes 11,818 6,171
Deferred taxes 2,567 3,027
Investment losses 128 2,165
Minority share of loss (3,766) --
Loss on sale of property and equipment 559 --
Change in accounts receivable-customer (2,477) (12,956)
Change in inventory 9,875 (32,719)
Change in accounts payable-affiliates (126) 45
Change in accounts payable-trade (3,105) (192)
Change in accrued interest-affiliate 2,431 3,475
Change in other assets and liabilities 3,233 (1,595)
--------- --------
(173,313) (165,652)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under the Revolving Credit Agreement-TDS 235,766 330,426
Repayments of borrowings under the Revolving Credit Agreement-TDS (200,000) --
Proceeds from minority investment 200,000 --
Issuance of common stock 812 1,333
--------- --------
236,578 331,759
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (64,541) (203,374)
Proceeds from sale of property and equipment 505 --
Change in note receivable-other -- 1,925
Change in temporary cash and other investments 178 319
--------- --------
(63,858) (201,130)
--------- --------
NET (DECREASE) IN CASH AND CASH
EQUIVALENTS (593) (35,023)
CASH AND CASH EQUIVALENTS-
Beginning of period 5,012 35,284
--------- --------
End of period $ 4,419 $ 261
========= =========
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</FN>
</TABLE>
15
<PAGE>
<TABLE>
AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
(Unaudited)
September 30, December 31,
1998 1997
------------- ------------
(Dollars in Thousands)
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash and cash equivalents $ 4,419 $ 5,012
Temporary cash investments 247 197
Accounts receivable
Customer, less allowance of $7,782 and $7,252, respectively 26,507 24,030
Roaming 1,486 --
Other 347 207
Inventory 16,074 25,949
Prepaid rent 2,682 1,630
Other 1,142 984
---------- ---------
52,904 58,009
---------- ---------
PROPERTY and EQUIPMENT
In service and under construction 718,983 642,122
Less accumulated depreciation (93,217) (38,018)
---------- ---------
625,766 604,104
---------- ---------
INVESTMENTS
Investment in PCS licenses-net of
accumulated amortization of $10,155 and $4,489, respectively 291,377 297,043
Other 944 1,298
---------- ---------
292,321 298,341
---------- ---------
DEFERRED COSTS 504 194
---------- ---------
TOTAL ASSETS $ 971,495 $ 960,648
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
Accounts payable
Affiliates $ 647 $ 773
Trade 45,871 92,020
Accrued interest-affiliate 6,096 3,665
Accrued compensation 3,355 3,414
Accrued taxes 5,107 1,957
Microwave relocation costs payable 10,191 7,354
Other 3,752 586
---------- ---------
75,019 109,769
---------- ---------
REVOLVING CREDIT AGREEMENT-TDS 484,000 448,234
---------- ---------
LONG TERM DEBT 263,189 196,439
---------- ---------
DEFERRED TAX LIABILITY-NET 16,346 13,779
---------- ---------
MINORITY INTEREST 25,821 --
---------- ---------
COMMON SHAREHOLDERS' EQUITY
Common Shares, par value $1.00 per share 31,735 31,611
Series A Common Shares, par value $1.00 per share 40,000 40,000
Additional paid-in capital 583,847 413,746
Retained deficit (548,462) (292,930)
---------- ---------
107,120 192,427
---------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 971,495 $ 960,648
========== =========
<FN>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
</FN>
</TABLE>
16
<PAGE>
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, 1998, and
December 31, 1997, the results of operations for the nine and three months
ended September 30, 1998 and 1997, and the cash flows for the nine months
ended September 30, 1998 and 1997. The results of operations for the nine
and three months ended September 30, 1998 and 1997, are not necessarily
indicative of the results to be expected for the full year.
Certain amounts reported in prior periods have been reclassified to conform
to the current period presentation.
2. Net (Loss) per Common and Series A Common Share for the nine and three
months ended September 30, 1998 and 1997, was computed based on the
weighted average number of Common and Series A Common Shares outstanding
during the period.
3. In 1998 the Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income." Comprehensive Income (Loss) equals
Net (Loss) for the nine and three months ended September 30, 1998 and 1997.
4. Supplemental Cash Flow Information. In 1998 additions to Property and
equipment of $57.8 million were financed through a $2.9 million increase in
Microwave relocation costs payable and a $54.9 million increase in
Long-term debt.
During the nine months ended September 30, 1998, the Company incurred
interest charges totaling $60.2 million. The interest charges were
comprised of $42.2 million related to the Revolving Credit Agreement with
TDS, $4.8 million for TDS guarantee fees on the Series A and Series B Zero
Coupon Notes and obligations under the Nokia 1996 and 1998 Credit
Agreements, $0.4 million paid to Nokia for interest charges relating to the
1996 Credit Agreement, $12.3 million in accreted interest on the Series A
and Series B Zero Coupon Notes and $0.5 million in other interest charges.
Of these amounts, the Company capitalized $0.1 million relating to its work
in process expenditures. The remaining $60.1 million was charged to
expense.
During the nine months ended September 30, 1997, Company incurred interest
charges of $19.6 million. The interest charges were comprised of $11.0
million relating to the Revolving Credit Agreement with TDS, $2.4 million
for TDS guarantee fees on the Series A Zero Coupon Notes and $6.2 million
in accreted 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.
5. Development Stage Company. Effective in the second quarter of 1997, the
Company ceased to be a development stage company and presents subsequent
results of operations, cash flows and financial position in a manner
similar to other operating enterprises within the industry.
17
<PAGE>
6. Vendor Financing. On June 30, 1998, the Company and Nokia
Telecommunications Inc. ("Nokia") entered into an agreement ("1998 Credit
Agreement") in which Nokia will provide up to an aggregate $150 million in
financing to the Company for the purchase of network infrastructure
equipment and services from Nokia. Loans under the 1998 Credit Agreement
are to be made available in two $75 million tranches. With respect to
Tranche A, the Company may borrow up to $75 million until June 30, 1999.
Tranche A loans mature on June 30, 1999, however, the maturity date of
Tranche A loans may be extended to June 30, 2000, upon written notice and
payment of an extension fee by the Company to Nokia. A second $75 million
("Tranche B") becomes available commencing on June 30, 1999, and ending on
June 30, 2000, the maturity date of Tranche B loans. Interest under the
1998 Credit Agreement is payable monthly at a per annum rate equal to the
30 day London Interbank Offered Rate ("LIBOR") plus 0.25% (the "Eurodollar
margin"). The Eurodollar margin on any Tranche A loans with an extended
maturity date is subject to adjustment based on ratings for TDS long-term
senior unsecured debt.
The obligations of the Company under the 1998 Credit Agreement are fully
and unconditionally guaranteed by TDS at an annual fee rate of 3%.
Guarantee fees owed TDS are payable semiannually. Of the $263.2 million in
Long-term debt at September 30, 1998, $35.0 million represents borrowings
under the 1998 Credit Agreement, with the balance representing the Series A
and Series B Zero Coupon Notes, including accreted interest.
7. Minority Investor. On September 8, 1998, pursuant to the terms of a
Purchase Agreement dated June 1, 1998, Sonera Corporation ("Sonera"),
formerly Telecom Finland Ltd., made a $200 million investment in Aerial
Operating Co., Inc. ("AOC"), a then wholly-owned subsidiary of the Company.
Sonera purchased approximately 2.4 million shares of common stock of AOC at
a price of approximately $83 per share representing a 19.4% equity interest
in AOC. The sale of the AOC Common Shares was recorded at a fair market
value which was more than the Company's book value investment in AOC. The
Company adjusted its book value investment in AOC as a result of this sale
and increased Additional paid-in capital $169.4 million in 1998.
Sonera's equity ownership amount in AOC is subject to adjustment based on
Aerial's 20-day average stock price during the three years commencing
September 8, 1998. Depending on the level of increase in the stock price,
Sonera's ownership amount in AOC could decline to approximately 15%. In
addition, after five years Sonera's equity in AOC becomes incrementally
exchangeable for equity in Aerial Communications, Inc. or, in certain
circumstances, incrementally exchangeable for equity in Telephone and Data
Systems, Inc. or cash.
Minority share of loss of $3.8 million represents Sonera's share of AOC's
consolidated net loss from September 8, 1998 (the closing date) to
September 30, 1998.
8. Revolving Credit Agreement. The Company entered into a Revolving Credit
Agreement with TDS on August 1, 1995, under which all of the outstanding
obligations of the Company to TDS are incorporated. Under the terms of the
Purchase Agreement, the Revolving Credit Agreement between the Company and
TDS, pursuant to which the Company owed TDS $665.0 million as of August 31,
1998, was terminated. A new Revolving Agreement, between AOC and TDS was
substituted, under which AOC was indebted to TDS for $665.0 million as of
August 31, 1998.
The new Revolving Credit Agreement between AOC and TDS has the same terms
and conditions as the previous Revolving Credit Agreement, as amended, and
provides that the amount of any proceeds raised by the Company or AOC in
connection with the sale of equity (See Note 7- Minority Investor), or debt
will be used to reduce the borrowings under the Revolving Credit Agreement
as well as reduce the total amount AOC may borrow under the Revolving
Credit Agreement. Additionally, any borrowings under the Nokia 1998 Credit
Agreement (See Note 6 - Vendor Financing) concurrently reduces by the same
amount the authorized total line of credit available to AOC under the
Revolving Credit
18
<PAGE>
Agreement. Pursuant to these terms, AOC paid to TDS the $200 million it had
received from Sonera to reduce its borrowings under the Revolving Credit
Agreement.
The following table summarizes AOC's borrowing capacity under the Revolving
Credit Agreement as of September 30, 1998:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
Maximum amount available as of September 30, 1998 $ 725,000
Reduced by : Proceeds from Sonera (200,000)
Vendor financing under the 1998 Nokia Credit Agreement (35,000)
Amount outstanding under the Revolving Credit Agreement
as of September 30, 1998 (484,000)
----------
Net amount available for borrowing as of
September 30, 1998 $ 6,000
==========
</TABLE>
At October 31, 1998, the maximum amount available under the Revolving
Credit Agreement was $750 million (prior to reductions for the proceeds
from Sonera and vendor financing under the Nokia 1998 Credit Agreement).
On November 3, 1998, TDS approved an amendment to the Revolving Credit
Agreement dated August 31, 1998, between TDS and AOC. This amendment will
be executed and delivered after approvals by the boards of directors of the
Company and AOC, which are expected to be received in due course. Under the
Revolving Credit Agreement, as so amended, AOC will be permitted to borrow
up to a maximum amount (the "Maximum Amount"), less the amount of any debt
or equity financing obtained by AOC or the Company, including the amount of
any borrowings under the Nokia 1998 Credit Agreement. The Maximum Amount
under the amended Revolving Credit Agreement will increase from $550
million ($750 million less $200 million in proceeds from Sonera) to $650
million in February 1999. The interest rate under the amended Revolving
Credit Agreement will be equal to the Prime Rate announced from time to
time by the LaSalle National Bank of Chicago plus 3%. Interest on the
balance due under the amended Revolving Credit Agreement will be payable
quarterly and no principal will be payable until April 2, 2000. As of
November 3, 1998, the Company had $500 million in borrowings outstanding
under the Revolving Credit Agreement and $39 million in borrowings under
the Nokia 1998 Credit Agreement.
9. Commitments. At September 30, 1998, the Company had orders totaling
approximately $5.0 million with Nokia Telecommunications Inc. for network
infrastructure equipment. Also, at September 30, 1998, the Company had
orders totaling approximately $13.1 million with various handset vendors
for handsets and accessories.
10. Tracking Stock Proposal. As disclosed in the Company's 1997 Annual Report
on Form 10-K, on December 17, 1997, the Company received a proposal from
TDS to acquire all of the issued and outstanding Common Shares of Aerial
not already owned by TDS, pursuant to a merger (the "Aerial Merger"), in
exchange for shares of TDS tracking stock which are intended to reflect the
performance of the Company.
In January 1998, the Company's Board of Directors created a special
committee of the Board (the "Special Committee") to review the proposal
from TDS. The Special Committee, consisting of two independent directors of
Aerial, engaged a financial advisor and legal advisor to assist in
reviewing the proposal. On April 15, 1998, the Company announced that the
Special Committee had decided to recommend that Aerial's Board of Directors
reject the initial proposal from TDS. The Special Committee advised TDS
that it would be prepared to consider a revised proposal. TDS has attempted
to seek an agreement to acquire the Aerial Common Shares that it does not
own on mutually acceptable terms. TDS has stated that it is actively
engaged in ascertaining whether the Tracking Stock Proposal or another
alternative is the best vehicle to unlock and build shareholder value and
that
19
<PAGE>
it is working toward a resolution. There can be no assurance that an
agreement will be reached with respect to the Aerial Merger.
20
<PAGE>
PART II. OTHER INFORMATION
--------------------------
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
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, 1998.
The Company filed a Current Report on Form 8-K dated September 8, 1998, for
the purpose of filing the following agreements: (i) an Investment Agreement
by and between the Company, TDS, AOC and Sonera, (ii) a Registration Rights
Agreement by and between the Company and Sonera, (iii) a Joint Venture
Agreement by and between the Company, AOC and Sonera Corporation US., and
(iv) a Supplemental Agreement by and between Aerial, AOC and Sonera. These
agreements relate to the closing of the Purchase Agreement entered into on
June 1, 1998, between Aerial Communications, Inc., APT Operating Company
(renamed Aerial Operating Co., Inc.), a wholly owned subsidiary of the
Company, Telephone and Data Systems, Inc., the parent corporation of the
Company, and Sonera Corporation, a limited liability company organized
under the laws of Finland and formerly known as Telecom Finland.
21
<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, 1998 /s/ Donald W. Warkentin
------------------- -----------------------
Donald W. Warkentin
President
(Chief Executive Officer)
Date November 13, 1998 /s/ J. Clarke Smith
------------------- -------------------
J. Clarke Smith
Vice President-Finance and Administration
(Chief Financial Officer)
Date November 13, 1998 /s/ B. Scott DaiIey
------------------- -------------------
B. Scott Dailey
Vice President-Controller
(Principal Accounting Officer)
22
Exhibit 11
<TABLE>
Aerial Communications, Inc. and Subsidiaries
Computation of Earnings Per Common Share
(in thousands, except per share amounts)
<CAPTION>
Three Months Ended September 30, 1998 1997
- ------------------------------------------------------ --------- ---------
<S> <C> <C>
Basic Earnings Per Common Share:
Net (Loss) $ (79,137) $ (76,598)
========= =========
Weighted average number of Common and Series A
Common Shares Outstanding (1) 71,735 71,559
========= =========
Basic Earnings Per Common Share
Net (Loss) $ (1.10) $ (1.07)
========= =========
Diluted Earnings Per Common Share (2):
Net (Loss) $ (79,137) $ (76,598)
========= =========
Weighted average number of Common and Series A
Common Shares Outstanding (1) 71,735 71,559
========= =========
Diluted Earnings Per Common Share
Net (Loss) $ (1.10) $ (1.07)
========= =========
Nine Months Ended September 30, 1998 1997
- ------------------------------------------------------ --------- ---------
Basic Earnings Per Common Share:
Net (Loss) $(255,532) $(154,413)
========= =========
Weighted average number of Common and Series A
Common Shares Outstanding (1) 71,701 71,481
========= =========
Basic Earnings Per Common Share
Net (Loss) $ (3.56) $ (2.16)
========= =========
Diluted Earnings Per Common Share (2):
Net (Loss) $(255,532) $(154,413)
========= =========
Weighted average number of Common and Series A
Common Shares Outstanding (1) 71,701 71,481
========= =========
Diluted Earnings Per Common Share
Net (Loss) $ (3.56) $ (2.16)
========= =========
<FN>
(1) Weighted average number of Common and Series A Common Shares outstanding
was calculated based on the number of shares outstanding during the
period.
(2) The Company adopted in 1997 Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings Per Common Share". The implementation of
SFAS No. 128 had no effect on reported (Loss) per Common and Series A
Common Share due to the current Net (Loss).
</FN>
</TABLE>
23
<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, 1998, 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-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,419
<SECURITIES> 0
<RECEIVABLES> 34,289
<ALLOWANCES> 7,782
<INVENTORY> 16,074
<CURRENT-ASSETS> 52,904
<PP&E> 718,983
<DEPRECIATION> 93,217
<TOTAL-ASSETS> 971,495
<CURRENT-LIABILITIES> 75,019
<BONDS> 263,189
0
0
<COMMON> 71,735
<OTHER-SE> 35,385
<TOTAL-LIABILITY-AND-EQUITY> 971,495
<SALES> 20,337
<TOTAL-REVENUES> 105,872
<CGS> 59,616
<TOTAL-COSTS> 303,254
<OTHER-EXPENSES> (4,560)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,143
<INCOME-PRETAX> (252,965)
<INCOME-TAX> 2,567
<INCOME-CONTINUING> (255,532)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (255,532)
<EPS-PRIMARY> (3.56)
<EPS-DILUTED> (3.56)
</TABLE>
