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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 June 30, 1999
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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
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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 July 30, 1999
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Common Shares, $1 par value 31,923,975 Shares
Series A Common Shares, $1 par value 40,000,000 Shares
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<PAGE>
AERIAL COMMUNICATIONS, INC.
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2nd QUARTER REPORT ON FORM 10Q
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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 2-12
Consolidated Statements of Operations -
Three Months and Six Months Ended June 30,
1999 and 1998 13
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1999 and 1998 14
Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998 15
Notes to Consolidated Financial Statements 16-18
Part II. Other Information 19-20
Signatures 21
<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. ("Aerial" or the "Company" - NASDAQ symbol: AERL),
an 82.2%- owned subsidiary of Telephone and Data Systems, Inc. ("TDS"), was
formed to acquire Personal Communications Services ("PCS") licenses from the
Federal Communications Commission ("FCC"), construct PCS networks in its Major
Trading Areas ("MTAs") and offer wireless PCS communications services in these
areas. The Company provides PCS service in Minneapolis, Tampa-St.
Petersburg-Orlando, Houston, Pittsburgh, Kansas City and Columbus (Ohio). The
Columbus MTA launched service on March 27, 1997. The Company's five remaining
MTAs launched service during the second quarter of 1997.
The following is a table of summarized operating data for the Company's
consolidated operations.
<TABLE>
<CAPTION>
June 30, March 31, June 30, March 31,
As of: 1999 1999 1998 1998
- ------ ---- ---- ---- ----
<S> <C> <C> <C> <C>
Total MTA population (in millions) 27.5 27.7 27.6 27.6
Total customers 346,600 331,600 204,000 166,000
Net customer additions (quarter) 15,000 19,700 38,000 41,000
Churn rate (year to date) 4.8% 4.7% 5.3% 4.3%
Churn rate (quarter) 4.8% 4.7% 6.0% 4.3%
Average revenue per customer per month (year to date) $46 $46 $53 $57
Average revenue per customer per month (quarter) $47 $46 $51 $57
MTA penetration 1.26% 1.20% 0.74% 0.60%
Cell sites in service 1,207 1,180 1,133 1,118
</TABLE>
Through the first half of 1999 the Company has experienced a decline in its net
customer growth rate compared to the same period of the previous year. The
Company plans to increase its net customer growth rate through the selective use
of competitive promotions and expansion of third party dealer and Aerial owned
outlets. The benefits of these activities are expected to be fully realized
during the fourth quarter.
Six Months Ended 6/30/99 Compared to Six Months Ended 6/30/98
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Operating Revenues
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Operating revenues totaled $105.3 million in 1999, an increase of $37.9 million
as compared to 1998. The increase in operating revenues reflects the growth of
the Company's customer base in the past year as the Company has added 142,600
customers since June 30, 1998.
Service revenue totaled $91.9 million in 1999, an increase of $39.0 million as
compared to 1998. Service revenue primarily consists of charges for access,
airtime and value-added services provided to the Company's customers who use the
network operated by the Company (local
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service revenue). Service revenue also consists of charges to customers of other
wireless carriers who use the Company's network when roaming (outcollect roaming
revenue) and charges for long-distance calls made on the Company's systems
(long-distance revenue). The increase in 1999 service revenue was driven by the
growth in the number of customers using the Company's network during 1999 as
compared to 1998, partially offset by a decline in average revenue per customer
per month ("ARPU"). The Company's ARPU was $46 for the six months ended June 30,
1999 as compared to $53 for the same period in 1998. The decline in ARPU
reflects the addition of more moderate wireless users to the Company's customer
base.
Equipment sales revenue represents the sale of handsets and related accessories
to retailers, independent agents, and end user customers. Equipment sales
totaled $13.4 million in 1999, a decrease of $1.1 million as compared to 1998.
The decrease in equipment sales revenue is due primarily to a decline in the
number of handsets sold in 1999 as compared to 1998.
Operating Expenses
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Operating expenses totaled $202.5 million in 1999, a decrease of $1.7 million as
compared to 1998. Operating expenses increased across most functional areas due
to the Company's increased level of business activity during the first half of
1999 as compared to 1998. However, these increases were more than offset by a
decrease in customer service expense and a significant decrease in cost of
equipment sold.
System operations expense totaled $40.5 million in 1999, an increase of $6.4
million as compared to 1998. System maintenance expenses increased $5.4 million,
primarily for maintenance service performed on the Company's network. The
Company began incurring charges for these services during the second quarter of
1998.
Marketing and selling expense totaled $37.9 million in 1999, an increase of $2.5
million as compared to 1998. Gross customer additions were a disappointing
129,000 in 1999 as compared to 132,000 in 1998, despite an increase in
advertising, promotion and store rent expenses which contributed significantly
to the overall increase in marketing and selling expense.
Customer service expense totaled $20.2 million in 1999, a decrease of $3.5
million as compared to 1998. The decrease in customer service expense is
primarily due to a decrease in bad debt expense as a result of improved
processes in accounts receivable and fraud management.
Cost of equipment sold totaled $25.6 million in 1999, a decrease of $17.8
million as compared to 1998. The decrease reflects a significant decline in
handset cost per unit combined with a decrease in handsets sold.
General and administrative expense totaled $34.2 million in 1999, an increase of
$7.5 million as compared to 1998. Consulting expense increased $3.6 million due
to costs associated with the Year 2000 Issue. Salaries and other employee
related expenses increased $3.8 million reflecting an increase in personnel
since June 30, 1998.
3
<PAGE>
Depreciation expense was $40.4 million in 1999, an increase of $3.3 million as
compared to 1998. The increase is due to an increase in the Company's fixed
asset balances. As of June 30, 1999, the Company had $742.3 million of property
and equipment in service as compared to June 30, 1998, when the Company had
$667.6 million of property and equipment in service.
Operating (Loss)
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Operating (Loss) totaled $(97.2) million in 1999, a decrease of $39.6 million as
compared to 1998, largely as a result of the increase in operating revenues in
1999. Although service revenues are expected to continue to grow during the
remainder of 1999 as the Company builds its customer base, the Company expects
to continue to have operating losses and to generate negative cash flow at least
through 2000 as it incurs costs associated with that growth.
Investment and Other Income (Expense)
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Investment and Other Income (Expense) totaled $5.3 million in 1999, an increase
of $5.0 million as compared to 1998. The increase is primarily due to the
allocation of $4.9 million of the consolidated net (loss) of Aerial Operating
Company, Inc. ("AOC") to the Company's minority investor (See Note 5 - Minority
Interest).
Interest and Income Taxes
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Interest expense-affiliate totaled $33.6 million in 1999, an increase of $3.7
million as compared to 1998. In 1999, interest expense-affiliate represents
interest on amounts borrowed under the Revolving Credit Agreement with TDS and
the 3% guarantee fees associated with the Series A and Series B Zero Coupon
Notes and the Nokia 1998 Credit Agreement. During the fourth quarter of 1998 the
interest rate charged on the outstanding balance under the Revolving Credit
Agreement was increased from prime rate plus 1.5% to prime rate plus 3.0%.
Interest expense-other totaled $10.4 million in 1999, an increase of $2.0
million as compared to 1998. In 1999, interest expense-other relates to interest
expense accreted on the Series A and Series B Zero Coupon Notes, as well as
interest expense related to the Nokia 1998 Credit Agreement. The average
outstanding balance of long-term debt was greater in 1999 as compared to 1998,
resulting in greater interest expense.
Income taxes. The Company is included in a consolidated federal tax return with
other members of the TDS consolidated group. For financial reporting purposes,
the Company computes its federal income taxes as if it were filing a separate
return as its own affiliated group and was not included in the TDS group. TDS
and the Company are parties to a tax allocation agreement, as well as a March
12, 1999 tax settlement agreement calling for the payment of $114.5 million from
TDS to Aerial. The $114.5 million received by Aerial covered the estimated tax
losses incurred by the Company and used by TDS for the period commencing from
January 1, 1996 through August 31, 1999. The tax settlement agreement requires
the final settlement amount to cover tax losses incurred by Aerial and used by
TDS for the period commencing January 1, 1996 and ending with the date of the
spin-off of Aerial.
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<PAGE>
The payment of the $114.5 million by TDS, partially offset by an increase in
deferred income tax expense of $1.3 million, resulted in a net income tax
benefit of $113.2 million for the first half of 1999.
Net (Loss) and (Loss) Per Common and Series A Common Share
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Net (loss) totaled $(22.6) million in 1999 and $(176.4) million in 1998. Net
(loss) per Common and Series A Common Share was $(0.31) in 1999 and $(2.46) in
1998. The decrease in the Company's Net (loss) and Net (loss) per Common and
Series A Common Share in 1999 as compared to 1998 is due to increased operating
revenues and the income tax benefit generated by the $114.5 million received by
the Company from TDS related to the tax settlement agreement.
Three Months Ended 6/30/99 Compared to Three Months Ended 6/30/98
Operating Revenues
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Operating revenues totaled $54.8 million in 1999, an increase of $18.1 million
as compared to 1998. Service revenue totaled $47.8 million in 1999, an increase
of $18.9 million as compared to 1998. The increase in 1999 service revenue was
driven by the growth in the number of customers using the Company's network
during 1999 as compared to 1998 partially offset by a decline in ARPU. The
Company's ARPU was $47 for the three months ended June 30, 1999 as compared to
$51 for the same period in 1998. The decline in ARPU reflects the addition of
more moderate wireless users to the Company's customer base. Equipment sales
totaled $7.0 million in 1999, a decrease of $1.0 million as compared to 1998.
The decrease in equipment sales revenue reflects primarily a decline in the
number of handsets sold in 1999 as compared to 1998.
Operating Expenses
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Operating expenses were $102.1 million in 1999, a decrease of $2.0 million as
compared to 1998. The decrease in operating expenses is for reasons generally
the same as the first half of 1999.
Operating (Loss)
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Operating (Loss) totaled $(47.3) million in 1999, a decrease of $20.1 million as
compared to 1998, largely as a result of the increase in operating revenues in
1999.
Net (Loss) and (Loss) Per Common and Series A Common Share
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Net (loss) totaled $(56.0) million in 1999 and $(89.5) million in 1998. Net
(loss) per Common and Series A Common Share was $(0.78) in 1999 and $(1.25) in
1998. The decrease in the Company's Net loss and Net loss per Common and Series
A Common Share in 1999 as compared to 1998 is due to increased operating
revenues and the allocation of $12.9 million of the consolidated net (loss) of
AOC to the Company's minority investor (See Note 5 - Minority Interest).
5
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
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The costs of development, construction, start-up and post-launch activities of
the Company require substantial capital. From inception through June 30, 1999,
the Company had expended $304.4 million for its six licenses, including
capitalized interest, $770.0 million for all other capital expenditures and
incurred cumulative net losses of $653.5 million. The Company expects to
continue to incur significant operating losses and generate negative cash flow
from operating activities at least through 2000 as it continues to build its
customer base.
Cash flows from operating activities provided $6.9 million in 1999 and required
$118.8 million in 1998. Operating cash outflow (operating loss before
depreciation and amortization expense) totaled $53.0 million in 1999 as compared
to $95.8 million in 1998. Cash flows from the March 12, 1999 tax settlement
agreement with TDS provided $114.5 million in 1999 and cash flows from other
operating activities (investment and other income, interest expense, changes in
working capital and changes in other assets and liabilities) required $54.6
million in 1999 and required $23.0 million in 1998.
Cash flows from financing activities provided $6.1 million in 1999 and $162.6
million in 1998. Cash provided in 1999 was primarily due to the Company
borrowing $119.0 under the Revolving Credit Agreement with TDS. The Company paid
$114.5 million to TDS to repay a portion of the outstanding balance under the
Revolving Credit Agreement with the proceeds from the tax settlement agreement.
In 1998, borrowings under the Revolving Credit Agreement provided $161.8
million.
Cash flows used in investing activities totaled $13.5 million in 1999 as
compared to $46.9 million in 1998. Cash used in 1999 and 1998 was primarily for
additions to property and equipment for PCS network and information system
assets. Fixed asset additions were financed through a combination of borrowings
under the Revolving Credit Agreement with TDS, and proceeds from Series B Zero
Coupon Notes and the Nokia 1996 and 1998 Credit Agreements.
For all of 1999, the Company estimates that the aggregate funds required for
capital expenditures for the continuing development of its PCS networks and
services will total approximately $100 million. The Company will be building
additional cell sites to augment its existing coverage area, primarily corridor
coverage on interstates to suburbs. The Company will continue to upgrade its
switching and other fixed network equipment to support future customer growth.
Also in 1999, capital expenditures related to information systems will include a
significant upgrade of the Company's billing and customer care system, including
new hardware and software to support employee and customer growth, to address
the Year 2000 Issue and for other project initiatives.
The Company estimates requiring $210 million for working capital requirements to
fund operations for all of 1999, including an estimated $75 million in interest
expense.
On June 30, 1998, the Company and Nokia Telecommunications Inc. ("Nokia")
entered into an agreement ("1998 Credit Agreement") in which Nokia will provide
up to an aggregate $150 million in financing to the Company for the purchase of
network infrastructure equipment and services from Nokia. Loans under the 1998
Credit Agreement are to be made available in two
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tranches. With respect to Tranche A, the Company borrowed $68.5 million and,
upon its written notice and payment of an extension fee to Nokia, extended the
maturity date of Tranche A loans to June 30, 2000. A second tranche of $75
million ("Tranche B") became available commencing on June 30, 1999. The maturity
date of both the Tranche A and Tranche B loans is June 30, 2000. The obligations
of the Company under the 1998 Credit Agreement are fully and unconditionally
guaranteed by TDS at an annual fee rate of 3%. As of June 30, 1999, the Company
had $75.0 million available for borrowing under the 1998 Credit Agreement with
Nokia.
Under the TDS Revolving Credit Agreement, as amended, AOC may borrow up to a
maximum amount (the "Maximum Amount"), less the amount of any debt or equity
financing obtained by AOC or the Company, including the amount of any borrowings
under the Nokia 1998 Credit Agreement. However, debt financing related to the
Company's Series A and Series B Zero Coupon Notes does not change the Maximum
Amount. The Maximum Amount under the amended Revolving Credit Agreement was
increased to $650 million in February 1999. The interest rate under the amended
Revolving Credit Agreement is equal to the prime rate plus 3%. Interest on the
balance due under the amended Revolving Credit Agreement is payable quarterly
and no principal is payable until April 2, 2000. In March 1999, TDS paid the
Company $114.5 million as a settlement for tax losses incurred by the Company
and utilized by the TDS consolidated tax group. The Company used the funds to
repay a portion of the existing AOC indebtedness to TDS, thereby increasing the
amount available under the Revolving Credit Agreement. The net amount available
for borrowings under the Revolving Credit Agreement was $27.1 million at June
30, 1999.
In July 1999, an amendment to the Revolving Credit Agreement was approved by the
TDS and Aerial boards of directors which increased from $650 million to $775
million the Maximum Amount under the amended Revolving Credit Agreement.
Accordingly, available funding under the Revolving Credit Agreement is now
expected to last through December 1999. TDS has not committed to any further
financing of Aerial's operations. It is the intent of TDS and Aerial management
to obtain the necessary level of financial support from sources other than TDS
to enable the Company to pay its debts as they become due. TDS and Aerial
management believe the Company has the ability to obtain financial support in
order to pay its debts as they become due. Sources of additional capital may
include vendor financing and public and private equity and debt financings by
the Company or its subsidiaries. If sufficient future funding is not available
on terms and prices acceptable to the Company, the Company would have to reduce
its construction and operating activities or take other actions, which could
have a material adverse impact on the Company's financial condition and results
of operations.
Proposed TDS Corporate Restructuring
In December 1998, TDS announced that it was pursuing a tax-free spin-off of its
82.2% interest in Aerial, as well as reviewing other alternatives. On August 4,
1999, TDS submitted a request for a private letter ruling from the Internal
Revenue Service ("IRS") on the tax-free status of the spin-off. There are a
number of conditions that must be met for a spin-off to occur, including a
receipt of a favorable IRS ruling, final approval by the TDS Board, certain
government and third party approvals and review by the Securities and Exchange
Commission ("SEC") of appropriate SEC filings. TDS intends to seek shareholder
approval of a proposal to distribute Aerial Series A
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<PAGE>
Common Shares, on a pro-rata basis, to holders of TDS Series A Common Shares and
Aerial Common Shares, on a pro-rata basis, to holders of TDS Common Shares.
There can be no assurance that a spin-off will be consummated or that other
alternatives will not be pursued. Prior to any spin-off, it is expected that
Aerial will seek additional financing so that Aerial would have the appropriate
capitalization to operate as a stand-alone entity. In connection with such
financing, all or a portion of Aerial's debt to TDS may be converted into
equity.
On September 8, 1998, pursuant to the terms of a Purchase Agreement (the
"Purchase Agreement") between TDS, the Company, AOC and Sonera Ltd., a limited
liability company organized under the laws of Finland ("Sonera"), Sonera
purchased approximately 2.4 million shares of common stock of AOC representing a
19.4% equity interest in AOC (subject to adjustment under certain circumstances)
for the aggregate purchase price of $200 million. Sonera has the right, subject
to adjustment under certain circumstances, to exchange each share of AOC common
stock which it owns for 6.72919 Common Shares of Aerial. Upon the exchange of
all of the above AOC shares, Sonera would own an 18.4% equity interest in
Aerial, reflecting a purchase price equivalent to $12.33 per Common Share of
Aerial (the "Equivalent Purchase Price").
Following the announcement by TDS on December 18, 1998, that it intended to
distribute to its shareholders all of the capital stock of Aerial that it owns,
and that Aerial would seek additional financing from sources other than TDS in
connection therewith, Sonera contacted TDS to express certain concerns about the
announcement. Sonera has claimed that it was induced to pay an excessive price
for AOC common stock. Sonera has requested the renegotiation of certain matters
related to Sonera's investment in AOC, including an adjustment in the Equivalent
Purchase Price, and raised the possibility of litigation in connection
therewith.
Under the Purchase Agreement, the number of AOC shares purchased by Sonera is
subject to reduction if the average price of the Company's Common Shares exceeds
certain threshold prices. During the second quarter and on July 7, 1999, the
average price of the Company's Common Shares exceeded all of the threshold
prices set forth in the Purchase Agreement. Accordingly, the Company has
requested Sonera to surrender for cancellation an aggregate of 634,216 shares of
AOC common stock. Cancellation of these shares would have the effect of
increasing Sonera's Equivalent Purchase Price from $12.33 to $16.68 per Common
Share of the Company. However, Sonera has refused to surrender any AOC shares
and, in connection with its allegations, as discussed above, has objected to the
application of the share reduction provisions in the Purchase Agreement.
TDS and the Company deny Sonera's allegations and deny that Sonera has any right
to refuse to return the shares of AOC common stock for cancellation. TDS and the
Company are attempting to reach a mutually acceptable resolution of open issues
with Sonera, including Sonera's objection to the adjustment of Sonera shares in
AOC. However, there can be no assurance that any such resolution will be
possible and that this matter will not lead to litigation, or that it will not
have a material adverse effect on TDS or the Company or on the plans relating to
the spin-off and refinancing of the Company.
8
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Market Risk
The Company is subject to market rate risks due to fluctuations in interest
rates and equity markets. The majority of the Company's debt is in the form of
variable rate notes with original maturities ranging from 1 to 10 years. The
Series A and Series B Zero Coupon Notes are fixed rate debt and, therefore,
fluctuations in interest rates can lead to fluctuations in the fair value of
these instruments. The Company has not entered into any financial derivatives to
reduce its exposure to interest rate risks. There has been no material change in
the fair value relative to the Company's outstanding debt since December 31,
1998.
Year 2000 Issue
The Year 2000 Issue exists because many computer systems and applications
abbreviate dates using only two digits, rather than four digits, e.g., "98"
rather than "1998". Unless corrected, this shortcut may cause problems when the
century date "2000" occurs. On that date, some computer operating systems,
applications and embedded technology may recognize the date as January 1, 1900,
instead of January 1, 2000. If the Company fails to correct any critical Year
2000 processing problems prior to January 1, 2000, the affected systems may
either cease to function or produce erroneous data, which could have material
adverse operational and financial consequences.
The Company's management has established a project team to address 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 developing an overall compliance strategy and
establishing a Year 2000 project team that reports periodically to the Company's
Audit Committee. TDS Management has established a Year 2000 Program Office at
the TDS corporate level to coordinate activities of the Year 2000 project teams,
to monitor the current status of individual projects, to report periodically to
the TDS Audit Committee, and to promote the exchange of information between all
business units to share knowledge and solution techniques. On an ongoing basis,
the project teams continue to provide Year 2000 information and updates to
customers, employees and business partners. Aerial management has made the Year
2000 Issue a top priority. The Year 2000 effort covers the network and
supporting infrastructure for the provision of PCS services; the operational and
financial information technology ("IT") systems and applications, such as
computer systems that support key business functions such as billing, finance,
customer service, procurement and supply; and a review of the Year 2000
compliance efforts of the Company's critical vendors.
The Assessment phase included 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. Except for
the contingency plans as discussed below, the Assessment phase was completed in
the first quarter of 1999.
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The Year 2000 project team identified those mission critical hardware, systems
and applications that were not Year 2000 compliant. These noncompliant critical
hardware, systems and applications have undergone renovation. The Renovation
phase consisted of the remediation or replacement of mission critical systems,
applications and hardware. The renovation of mission critical systems,
applications and hardware has been completed.
The mission critical hardware, systems and applications that have been renovated
are undergoing Year 2000 validation testing. The Validation phase includes
testing, verifying and validating the renovated or replaced platforms,
applications, databases and utilities. The Validation phase consists of
independent verification testing of mission critical systems, applications and
hardware, as well as network and system component upgrades received from
suppliers. In addition, selected Year 2000 upgrades are slated to undergo
testing in a controlled environment that replicates the current environment and
is equipped to simulate the turn of the century and leap year dates. The Company
will rely on the Cellular Telephone Industry Association ("CTIA"), Alliance for
Telecommunications Industry Solutions ("ATIS") and TELCO Forum, which formed
working groups to coordinate efforts of various carriers and manufacturers to
facilitate inter-network Year 2000 testing. These programs have concluded and,
generally, the findings indicate that there are no known network
inter-operability defects related to Year 2000 associated with the available
compliant upgrades for the networks. The Company has analyzed the findings and
plans to install upgrades appropriate to its network. Validation of mission
critical hardware, systems and applications is scheduled to be completed in the
third quarter of 1999.
The Implementation phase involves migrating the converted, renovated and
validated mission critical systems, applications and hardware into production.
This phase is expected to be completed during the fourth quarter of 1999.
As with other telecommunications services providers, there exists a worst case
scenario possibility that a failure to correct a Year 2000 problem in one or
more of the mission critical network elements or IT applications could cause a
significant disruption of, or interruption in, certain normal business
functions. Management believes it has assembled the proper staffing and tools,
and put in place procedures to identify and prepare all mission critical systems
for the Year 2000 and believes the necessary programs are in place for a smooth
Year 2000 transition. Based on the assessments and work performed to date by the
project team, management believes that any such material disruption to the
operations due to failure on an internal system is unlikely. However, management
cannot provide assurance that its plan to address Year 2000 compliance will be
successful as the Company is subject to various risks and uncertainties. Like
most other telecommunications operators, the Company is highly dependent on the
telecommunications network vendors to develop and 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 and timely upgrades. The Company has
contacted critical vendors requesting information about their Year 2000
readiness. The responses have been used by the Company to make its renovations
and are being used in developing the Company's overall contingency plans.
The Company cannot assess with certainty the magnitude of any such potential
adverse impact. However, based upon risk assessment work conducted thus far,
management believes that the most reasonably likely worst case scenario of the
failure by the Company, its suppliers or other
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telecommunications carriers with which the Company interconnects to resolve Year
2000 issues would be an inability by the Company to (i) provide
telecommunications services to the Company's customers, (ii) route and deliver
telephone calls originating from or terminating with other other
telecommunications carriers, (iii) timely and accurately process service
requests and (iv) timely and accurately bill its customers. In addition to lost
earnings, these failures could also result in loss of customers due to service
interruptions and billing errors, substantial claims by customers and increased
expenses associated with stabilizing operations and executing contingency plans.
The Company's contingency plan initiatives will include the following:
reviewing, assessing and updating existing business recovery plans; identifying
teams who will be on call during the millennium change to monitor the network,
critical systems, operations centers and business processes to react immediately
to facilitate repairs; re-prioritizing of mission critical work processes and
associated resources; developing alternate processes to support critical
customer functions in the event information systems or mechanized processes
experience Year 2000 disruptions; establishing replacement/repair parallel paths
to provide for repair and readiness of existing systems and components that are
scheduled for replacement by the year 2000, in the event the replacement
schedules are not met; developing alternate plans for critical suppliers of
products/services that fail to meet Year 2000 compliance commitment schedules;
and developing data retention and recovery procedures to be in place for
customer and critical business data to provide pre-millennium backups with
on-site as well as off-site data copies. The Company anticipates substantially
completing the balance of its contingency planning early in the fourth
quarter of 1999.
The Company estimates that the total costs related to the Year 2000 project will
be approximately $17 million. Through June 30, 1999, the total costs directly
associated with the Year 2000 Issue were approximately $9.2 million. The timing
of expenditures may vary and is not necessarily indicative of readiness efforts
or progress to date. Though Year 2000 project costs will directly impact the
reported level of future net (loss), 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.
11
<PAGE>
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
STATEMENT
This Form 10-Q contains "forward-looking" statements, as defined in the Private
Securities Litigation Reform Act of 1995, that are based on current
expectations, estimates and projections. Statements that are not historical
facts, including statements about the Company's beliefs and expectations are
forward-looking statements. These statements contain potential risks and
uncertainties and, therefore, actual results may differ materially. The Company
undertakes no obligation to update publicly any forward-looking statements
whether as a result of new information, future events or otherwise.
Important factors that may affect these projections or expectations include, but
are not limited to: changes in the overall economy; changes in competition in
the Company's markets; advances in telecommunications technology; changes in the
telecommunications regulatory environment; pending and future litigation;
availability of future financing; unanticipated changes in growth in PCS
customers, penetration rates, churn rates and the mix of products and services
offered in the Company's markets and unanticipated problems with the Year 2000
Issue. Readers should evaluate any statements in light of these important
factors.
12
<PAGE>
AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
---------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -----------------
1999 1998 1999 1998
---- ---- ---- ----
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Service $ 47,795 $ 28,852 $ 91,893 $ 52,935
Equipment sales 6,990 7,836 13,433 14,499
--------- --------- --------- ---------
Total Operating Revenues 54,785 36,688 105,326 67,434
OPERATING EXPENSES
System operations 20,169 18,802 40,522 34,139
Marketing and selling 17,799 17,974 37,876 35,406
Customer service 10,311 12,752 20,162 23,651
Cost of equipment sold 13,155 20,573 25,557 43,393
General and administrative 18,260 12,805 34,181 26,680
Depreciation 20,550 19,356 40,432 37,163
Amortization of intangibles 1,888 1,888 3,777 3,777
--------- --------- --------- ---------
Total Operating Expenses 102,132 104,150 202,507 204,209
--------- --------- --------- ---------
OPERATING (LOSS) (47,347) (67,462) (97,181) (136,775)
INVESTMENT AND OTHER INCOME (EXPENSE)
Minority share of loss 12,945 -- 4,902 --
Investment (losses) -- -- (100) --
Interest income-other 134 303 258 663
Other income (expense) 891 (1,009) 231 (337)
--------- -------- --------- ---------
Total Investment and Other Income (Expense) 13,970 (706) 5,291 326
--------- -------- --------- ---------
(LOSS) BEFORE INTEREST AND INCOME TAXES (33,377) (68,168) (91,890) (136,449)
INTEREST EXPENSE
Interest expense-affiliate 16,532 16,169 33,568 29,842
Interest expense-other 5,389 4,251 10,397 8,358
--------- -------- --------- ---------
Total Interest Expense 21,921 20,420 43,965 38,200
--------- -------- --------- ---------
(LOSS) BEFORE INCOME TAXES (55,298) (88,588) (135,855) (174,649)
Income tax expense (benefit) 704 886 (113,230) 1,746
--------- -------- --------- ---------
NET (LOSS) $ (56,002) $ (89,474) $ (22,625) $(176,395)
========= ========= ========= =========
WEIGHTED AVERAGE COMMON AND
SERIES A COMMON SHARES (000s) 71,916 71,730 71,861 71,683
(LOSS) PER COMMON AND
SERIES A COMMON SHARE $ (0.78) $ (1.25) $ (0.31) $ (2.46)
========= ========= ========= =========
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</FN>
</TABLE>
13
<PAGE>
AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
---------
<TABLE>
<CAPTION>
Six Months ended
June 30,
-----------------
1999 1998
---- ----
(Dollars in Thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss) $ (22,625) $(176,395)
Add (Deduct) adjustments to reconcile net (loss)
to net cash provided (used) by operating activities
Depreciation and amortization 44,209 40,940
Noncash interest expense 8,978 7,565
Deferred taxes 1,099 1,746
Investment losses 100 --
Minority share of operating (loss) (4,902) --
Loss on sale of property and equipment 128 420
Change in accounts receivable-customer (1,709) (2,498)
Change in inventory 1,380 13,188
Change in accounts payable-affiliates 325 18
Change in accounts payable-trade (19,212) (7,754)
Change in accrued interest-affiliate (33) 1,320
Change in other assets and liabilities (853) 2,665
--------- ---------
6,885 (118,785)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in Revolving Credit Agreement-TDS 118,969 161,831
Repayments of borrowings under the Revolving Credit
Agreement-TDS (114,500) --
Issuance of common stock 1,605 816
--------- ---------
6,074 162,647
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (12,966) (48,061)
Proceeds from sale of property and equipment 33 298
Change in temporary and other investments (524) 868
--------- ---------
(13,457) (46,895)
--------- ---------
NET (DECREASE) IN CASH AND CASH
EQUIVALENTS (498) (3,033)
CASH AND CASH EQUIVALENTS-
Beginning of period 4,943 5,012
--------- ---------
End of period $ 4,445 $ 1,979
========= =========
<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 BALANCE SHEETS
<CAPTION>
(Unaudited)
June 30, 1999 December 31, 1998
------------- -----------------
(Dollars in Thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4,445 $ 4,943
Temporary investments -- 35
Accounts receivable
Customer, less allowance of $2,935 and $5,875, respectively 25,913 24,204
Roaming 1,340 2,252
Other 1,806 1,348
Inventory 9,998 11,378
Prepaid rent 3,024 3,666
Other 3,585 898
--------- ---------
50,111 48,724
--------- ---------
PROPERTY and EQUIPMENT
In service and under construction 764,593 733,958
Less accumulated depreciation (153,049) (112,677)
--------- ---------
611,544 621,281
--------- ---------
INVESTMENTS
Investment in PCS licenses-net of
accumulated amortization of $15,820 and $12,044, respectively 285,711 289,488
Other 1,902 1,444
--------- ---------
287,613 290,932
--------- ---------
DEFERRED COSTS 810 410
--------- ---------
TOTAL ASSETS $ 950,078 $ 961,347
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable
Affiliates $ 7,052 $ 6,727
Trade 33,217 56,097
Revolving credit agreement-TDS 554,412 --
Current portion of long-term debt 68,458 --
Accrued interest-affiliate 4,906 4,939
Accrued compensation 6,519 5,169
Accrued taxes 6,931 7,015
Microwave relocation costs payable 399 1,828
Other 4,236 4,349
--------- ---------
686,130 86,124
--------- ---------
REVOLVING CREDIT AGREEMENT-TDS -- 549,943
--------- ---------
LONG-TERM DEBT 241,501 278,010
--------- ---------
DEFERRED TAX LIABILITY-NET 17,456 16,357
--------- ---------
MINORITY INTEREST 479 5,835
--------- ---------
COMMON SHAREHOLDERS' EQUITY
Common Shares, par value $1.00 per share 31,921 31,789
Series A Common Shares, par value $1.00 per share 40,000 40,000
Additional paid-in capital 586,041 584,114
Retained deficit (653,450) (630,825)
--------- ---------
4,512 25,078
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 950,078 $ 961,347
========= =========
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</FN>
</TABLE>
15
<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 June 30, 1999, and December 31,
1998, the results of operations for the six and three months ended June 30,
1999 and 1998, and the cash flows for the six months ended June 30, 1999
and 1998. The results of operations for the six and three months ended June
30, 1999 and 1998, are not necessarily indicative of the results to be
expected for the full year.
Certain amounts reported in prior periods have been reclassified to conform
to the current period presentation.
2. Net (Loss) per Common and Series A Common Share for the six and three
months ended June 30, 1999 and 1998, was computed based on the weighted
average number of Common and Series A Common Shares outstanding during the
period.
3. Comprehensive income (loss) equals Net (loss) for the six and three months
ended June 30, 1999 and 1998.
4. Supplemental Cash Flow Information. Additions to property and equipment of
$23.0 million were financed through an increase in long-term debt.
In the first half of 1999, the Company incurred interest charges totaling
$44.0 million. The interest charges were comprised of $29.5 million related
to the Revolving Credit Agreement with TDS, $4.1 million for TDS guarantee
fees on the Series A and Series B Zero Coupon Notes and obligations under
the Nokia 1998 Credit Agreement, $1.2 million paid to Nokia for interest
charges relating to the 1998 Credit Agreement, $9.0 million in accreted
interest on the Series A and Series B Zero Coupon Notes and $0.2 million in
other interest charges.
During the first half of 1998, the Company incurred interest charges
totaling $38.3 million. The interest charges were comprised of $26.8
million related to the Revolving Credit Agreement with TDS, $3.1 million
for TDS guarantee fees on the Series A and Series B Zero Coupon Notes and
obligations under the Nokia 1996 Credit Agreement, $0.4 million paid to
Nokia for interest charges relating to the 1996 Credit Agreement, $7.5
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 $38.2 million was charged to expense.
16
<PAGE>
5. Minority Interest. On September 8, 1998, pursuant to the terms of a
Purchase Agreement (the "Purchase Agreement") between TDS, the Company, AOC
and Sonera Ltd., a limited liability company organized under the laws of
Finland ("Sonera"), Sonera purchased approximately 2.4 million shares of
common stock of AOC representing a 19.4% equity interest in AOC (subject to
adjustment under certain circumstances) for the aggregate purchase price of
$200 million. Sonera has the right, subject to adjustment under certain
circumstances, to exchange each share of AOC common stock which it owns for
6.72919 Common Shares of Aerial. Upon the exchange of all of the above AOC
shares, Sonera would own an 18.4% equity interest in Aerial, reflecting a
purchase price equivalent to $12.33 per Common Share of Aerial (the
"Equivalent Purchase Price").
See Note 8 - Proposed TDS Corporate Restructuring for discussion of the
concerns raised by Sonera regarding the spin-off announcement made by TDS
and certain issues related to the Purchase Agreement, which has raised the
possibility of litigation.
Minority share of loss of $4.9 million represents Sonera's share of AOC's
consolidated net loss for the first half of 1999.
6. Revolving Credit Agreement. On March 12, 1999, the TDS and Aerial boards of
directors approved a tax settlement agreement calling for payment of $114.5
million from TDS to Aerial under the tax allocation agreement. The $114.5
million received by Aerial covered the estimated tax losses incurred by the
Company and used by TDS for the period commencing from January 1, 1996
through August 31, 1999. The tax settlement agreement requires the final
settlement amount to cover tax losses incurred by Aerial and used by TDS
for the period commencing January 1, 1996 and ending with the date of the
spin-off of Aerial. The settlement amount was used to repay a portion of
the existing AOC indebtedness to TDS under the Revolving Credit Agreement.
The net amount available for borrowing under the Revolving Credit Agreement
was $27.1 million at June 30, 1999.
In July 1999, an amendment to the Revolving Credit Agreement was approved
by the TDS and Aerial boards of directors which increased from $650 million
to $775 million the Maximum Amount under the amended Revolving Credit
Agreement.
7. Commitments. At June 30, 1999, the Company had orders totaling
approximately $3.7 million with Nokia Telecommunications Inc. for network
infrastructure equipment. Also, at June 30, 1999, the Company had orders
totaling approximately $12.1 million with various handset vendors for
handsets and accessories.
8. Proposed TDS Corporate Restructuring. In December 1998, TDS announced that
it was pursuing a tax-free spin-off of its 82.2% interest in Aerial, as
well as reviewing other alternatives. On August 4, 1999, TDS submitted a
request for a private letter ruling from the Internal Revenue Service
("IRS") on the tax-free status of the spin-off. There are a number of
conditions that must be met for a spin-off to occur, including a receipt of
a favorable IRS ruling, final approval by the TDS Board, certain government
and third party approvals and review by the Securities and Exchange
Commission ("SEC") of appropriate SEC filings. TDS intends to seek
shareholder approval of a proposal to distribute Aerial Series A Common
Shares, on a pro-rata basis, to holders of TDS Series A Common Shares and
Aerial Common Shares, on a pro-rata basis, to holders of TDS Common Shares.
There can be no assurance that a spin-off will be consummated or that other
alternatives will not be pursued. Prior to any spin-off, it is expected
that Aerial will seek additional financing so that Aerial would have the
17
<PAGE>
appropriate capitalization to operate as a stand-alone entity. In
connection with such financing, all or a portion of Aerial's debt to TDS
may be converted into equity.
Following the announcement by TDS on December 18, 1998, that it intended to
distribute to its shareholders all of the capital stock of Aerial that it
owns, and that Aerial would seek additional financing from sources other
than TDS in connection therewith, Sonera contacted TDS to express certain
concerns about the announcement. Sonera has claimed that it was induced to
pay an excessive price for AOC common stock. Sonera has requested the
renegotiation of certain matters related to Sonera's investment in AOC,
including an adjustment in the Equivalent Purchase Price, and raised the
possibility of litigation in connection therewith.
Under the Purchase Agreement, the number of AOC shares purchased by Sonera
is subject to reduction if the average price of the Company's Common Shares
exceeds certain threshold prices. During the second quarter and on July 7,
1999, the average price of the Company's Common Shares exceeded all of the
threshold prices set forth in the Purchase Agreement. Accordingly, the
Company has requested Sonera to surrender for cancellation an aggregate of
634,216 shares of AOC common stock. Cancellation of these shares would have
the effect of increasing Sonera's Equivalent Purchase Price from $12.33 to
$16.68 per Common Share of the Company. However, Sonera has refused to
surrender any AOC shares and, in connection with its allegations, as
discussed above, has objected to the application of the share reduction
provisions in the Purchase Agreement.
TDS and the Company deny Sonera's allegations and deny that Sonera has any
right to refuse to return the shares of AOC common stock for cancellation.
TDS and the Company are attempting to reach a mutually acceptable
resolution of open issues with Sonera, including Sonera's objection to the
adjustment of Sonera shares in AOC. However, there can be no assurance that
any such resolution will be possible and that this matter will not lead to
litigation, or that it will not have a material adverse effect on TDS or
the Company or on the plans relating to the spin-off and refinancing of the
Company.
18
<PAGE>
PART II. OTHER INFORMATION
--------------------------
Item 4. Submission of Matters to a Vote of Security-Holders.
At the Annual Meeting of Shareholders of Aerial Communications, Inc., held
on May 7, 1999, the following number of votes were cast for the matters
indicated:
1.a. Election of one Class II Director of the Company by the holders of Common
Shares:
<TABLE>
<CAPTION>
Broker
Nominee For Withhold Non-vote
------- --- -------- --------
<S> <C> <C> <C>
Matti Makkonen 29,349,488 516,890 -0-
</TABLE>
1.b. Election of one Class III Director of the Company by the holders of Common
Shares:
<TABLE>
<CAPTION>
Broker
Nominee For Withhold Non-vote
------- --- -------- --------
<S> <C> <C> <C>
Pertti Miettunen 29,349,488 516,890 -0-
</TABLE>
1.c. Election of three Class II Directors of the Company by the holder of Series
A Common Shares:
<TABLE>
<CAPTION>
Broker
Nominee For Withhold Non-vote
------- --- -------- --------
<S> <C> <C> <C>
James Barr III 600,000,000 -0- -0-
Walter C.D. Carlson 600,000,000 -0- -0-
J. Clarke Smith 600,000,000 -0- -0-
</TABLE>
2. The proposal to ratify the selection of Arthur Andersen LLP as the Company's
Independent Public Accountants for the year ended December 31, 1999:
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-vote
--- ------- ------- --------
<S> <C> <C> <C> <C>
Series A
Common 600,000,000 -0- -0- -0-
Shares
Common 29,835,667 19,815 10,896 -0-
Shares
Total 629,835,667 19,815 10,896 -0-
</TABLE>
3. The proposal to approve the Company's Retention Restricted Stock Unit Plan:
19
<PAGE>
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-vote
--- ------- ------- --------
<S> <C> <C> <C> <C>
Series A
Common 600,000,000 -0- -0- -0-
Shares
Common 29,569,148 262,211 35,019 -0-
Shares
Total 629,569,148 262,211 35,019 -0-
</TABLE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 10.23 - Third Amendment to the Revolving Credit Agreement by
and between Telephone and Data Systems, Inc. and Aerial Operating
Company, Inc.
Exhibit 11 - Computation of earnings per common share.
Exhibit 27 - Financial Data Schedule.
(b) There were no reports on Form 8-K filed during the quarter ended June
30, 1999.
20
<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 August 13, 1999 /s/ Donald W. Warkentin
--------------- -------------------------------------------------
Donald W. Warkentin
President
(Chief Executive Officer)
Date August 13, 1999 /s/ J. Clarke Smith
-------------- -------------------------------------------------
J. Clarke Smith
Vice President-Finance and Administration
(Chief Financial Officer)
Date August 13, 1999 /s/ B. Scott DaiIey
-------------- -------------------------------------------------
B. Scott Dailey
Vice President-Controller
(Principal Accounting Officer)
21
<PAGE>
Exhibit 10.23
Third Amendment
to the
Revolving Credit Agreement
by and between
Telephone and Data Systems, Inc. and Aerial Operating Company, Inc.
This Third Amendment (the "Third Amendment") to the Revolving Credit Agreement
dated as of August 31, 1998, as amended by the First Amendment thereto dated as
of November 3, 1998 and by the Second Amendment thereto dated as of February 15,
1999 (the "Revolving Credit Agreement") by and between Telephone and Data
Systems, Inc. ("TDS"), a Delaware corporation, and Aerial Operating Company,
Inc. (the "Company"), a Delaware corporation, is effective as of this 22nd day
of July, 1999. Undefined, capitalized terms shall have the meanings assigned to
such terms in the Revolving Credit Agreement.
WHEREAS, TDS and the Company are parties to the Revolving Credit Agreement
and have agreed to enter into this Third Amendment on the terms and conditions
set forth herein.
NOW, THEREFORE, in consideration of the premises set forth above, and for
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and intending to be legally bound, TDS and the Company agree to
amend the Revolving Credit Agreement as follows:
1. Amendments to the Revolving Credit Agreement. Effective as of the
date first above written and subject to the execution of this Third
Amendment by the parties hereto, the Revolving Credit Agreement
shall be and hereby is amended as follows:
1.1 Schedule I to the Revolving Credit Agreement shall be
replaced by the new Schedule I to the Revolving Credit
Agreement attached to this Third Amendment.
1.2 The second sentence of Section 2 shall be amended in its
entirety to read as follows:
"Notwithstanding the foregoing, the aggregate outstanding
principal balance of the loans shall be prepaid by the
Company concurrently with:
(a) the Company's or Aerial's receipt of any proceeds
of debt or equity securities issued by any such entity to,
or loans or advances made to or for the benefit of any
such entity by, any person or entity other than TDS or any
affiliate of TDS, which prepayments shall be made by the
Company in amounts equal to the gross proceeds of such
securities, loans or advances net of all reasonable
expenses and fees paid by the Company or Aerial in
connection with the closing of such transaction, or
<PAGE>
(b) any of the following events:
(i) any merger, sale or spin-off as a result of which the
Company is no longer part of the TDS consolidated group
for financial accounting purposes,
(ii) any sale, transfer or other disposition of all or
substantially all of the assets of the Company, or
(iii) any other event as a result of which TDS shall cease
to own, directly or indirectly, issued and outstanding
securities of the Company or Aerial (A) having voting
power to elect a majority of the directors of either such
company, or (B) having majority voting power in all
matters other than the election of directors."
1.3 Section 6(e) is amended in its entirety to read as follows:
Except for proceedings threatened by Sonera, Ltd. and
disclosed to TDS prior to July 22, 1999, there are no
proceedings or investigations pending or threatened before
any court or arbitrator or before or by any governmental
authority in which there is a reasonable possibility of an
adverse decision which would materially adversely affect
the business or financial conditions of the Company and
its Subsidiaries taken as a whole or materially impair the
ability of the Company to perform its obligations under
this Revolving Credit Agreement or the Notes.
1.4 The paragraph immediately following Section 9(h) shall be
amended to delete the reference to "with presentment" in
the second sentence thereof and to substitute therefor the
words "without presentment".
1.5 Section 10(b) shall be amended to delete the word
"cellular" in the definition of the term "System" and to
substitute the word "wireless" therefor.
1.6 Section 11(b) shall be amended to add the following
sentence immediately after the last sentence thereof:
"A copy of each notice delivered hereunder shall also be delivered to:
Sidley & Austin at: One First National Plaza
Chicago, Illinois 60603
Attention of Michael G. Hron, Esq."
2. Conditions Precedent. This Third Amendment shall become effective
as of the date above written, if, and only if, TDS has received
duly executed originals of this Third Amendment from the Company,
Aerial and TDS.
2
<PAGE>
3. Representations and Warranties of the Company. The Company hereby
represents and warrants as follows:
3.1 This Third Amendment and the Revolving Credit Agreement,
as amended hereby, constitute legal, valid and binding
obligations of the Company and are enforceable against the
Company in accordance with their terms.
3.2 Upon the effectiveness of this Third Amendment, the
Company hereby reaffirms all representations and
warranties made in the Revolving Credit Agreement, and to
the extent the same are not amended hereby, agrees that
all such representations and warranties shall be deemed to
have been remade as of the date of delivery of this Third
Amendment, unless and to the extent that any such
representation and warranty is stated to relate solely to
an earlier date, in which case such representation and
warranty shall be true and correct as of such earlier
date.
4. Reference to and Effect on the Revolving Credit Agreement.
4.1 Upon the effectiveness of Section 1 hereof, on and after
the date hereof, each reference in the Revolving Credit
Agreement to "this Agreement," "hereunder," "hereof,"
"herein" or words of like import shall mean and be a
reference to the Revolving Credit Agreement as amended
hereby, and each reference to the Revolving Credit
Agreement in any other document, instrument or agreement
shall mean and be a reference to the Revolving Credit
Agreement as modified hereby.
4.2 The Revolving Credit Agreement, as amended hereby, and all
other documents, instruments and agreements executed
and/or delivered in connection therewith, shall remain in
full force and effect, and are hereby ratified and
confirmed.
4.3 Except as expressly provided herein, the execution,
delivery and effectiveness of this Third Amendment shall
not operate as a waiver of any right, power or remedy of
TDS, nor constitute a waiver of any provision of the
Revolving Credit Agreement or any other documents,
instruments and agreements executed and/or delivered in
connection therewith.
5. Governing Law. This Third Amendment shall be governed by and
construed in accordance with the other remaining terms of the
Revolving Credit Agreement and the internal laws (as opposed to
conflict of law provisions) of the State of Illinois.
6. Paragraph Headings. The paragraph headings contained in this Third
Amendment are and shall be without substance, meaning or content of
any kind whatsoever and are not a part of the agreement among the
parties hereto.
7. Counterparts. This Third Amendment may be executed in one or more
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
3
<PAGE>
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 Operating Company, Inc.
By: /s/ Sandra L. Helton By: /s/ Donald W. Warkentin
-------------------------- ----------------------------
Name: Sandra L. Helton Name:Donald W. Warkentin
Title: Executive Vice President - Finance Title: President
Date: July 22, 1999 Date: July 22, 1999
----------------------------- --------------------------
The Guarantor, without in any way establishing a course of dealing, as evidenced
by its signature below, hereby (i) consents to the execution and delivery of
this Third Amendment by the parties hereto, (ii) agrees that this Third
Amendment shall not limit or diminish the obligations of the Guarantor under the
Guarantor's unconditional and irrevocable guarantee of the Company's obligations
of the Notes and the Revolving Credit Agreement, (iii) reaffirms its obligations
under such guarantee, and (iv) agrees that its guarantee of such obligations
remains in full force and effect and is hereby ratified and confirmed.
Aerial Communications, Inc.
By: /s/ Donald W. Warkentin
-----------------------
Name: Donald W. Warkentin
Title: President
Date: July 22, 1999
-----------------------
4
<PAGE>
<TABLE>
SCHEDULE I
TO
REVOLVING CREDIT AGREEMENT
(revised July 22, 1999)
<CAPTION>
Period Applicable Maximum Amount
- ------ -------------------------
<S> <C>
November 30, 1998 through December 30, 1998 $585,000,000
December 31, 1998 through January 30, 1999 $615,000,000
January 31, 1999 through February 14, 1999 $625,000,000
February 15, 1999 through July 22, 1999 $650,000,000
July 22, 1999 through April 2, 2000 $775,000,000
</TABLE>
<PAGE>
Exhibit 11
<TABLE>
Aerial Communications, Inc. and Subsidiaries
Computation of Earnings Per Common Share
(in thousands, except per share amounts)
<CAPTION>
Three Months Ended June 30, 1999 1998
- --------------------------- ---- ----
<S> <C> <C>
Basic Earnings Per Common Share:
Net (Loss) $ (56,002) $ (89,474)
========= =========
Weighted average number of Common and Series A
Common Shares Outstanding (1) 71,916 71,730
========= =========
Basic Earnings Per Common Share
Net (Loss) $ (0.78) $ (1.25)
========= =========
Diluted Earnings Per Common Share (2):
Net (Loss) $ (56,002) $ (89,474)
========= =========
Weighted average number of Common and Series A
Common Shares Outstanding (1) 71,916 71,730
========= =========
Diluted Earnings Per Common Share
Net (Loss) $ (0.78) $ (1.25)
========= =========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1999 1998
- ------------------------- --------- ---------
<S> <C> <C>
Basic Earnings Per Common Share:
Net (Loss) $ (22,625) $(176,395)
========= =========
Weighted average number of Common and Series A
Common Shares Outstanding (1) 71,861 71,683
========= =========
Basic Earnings Per Common Share
Net (Loss) $ (0.31) $ (2.46)
========= =========
Diluted Earnings Per Common Share (2):
Net (Loss) $ (22,625) $(176,395)
========= =========
Weighted average number of Common and Series A
Common Shares Outstanding (1) 71,861 71,683
========= =========
Diluted Earnings Per Common Share
Net (Loss) $ (0.31) $ (2.46)
========= =========
(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).
</TABLE>
<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
June 30, 1999, and for the six months then ended, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 4,445
<SECURITIES> 0
<RECEIVABLES> 28,848
<ALLOWANCES> 2,935
<INVENTORY> 9,998
<CURRENT-ASSETS> 50,111
<PP&E> 764,593
<DEPRECIATION> (153,049)
<TOTAL-ASSETS> 950,078
<CURRENT-LIABILITIES> 686,130
<BONDS> 241,501
0
0
<COMMON> 71,921
<OTHER-SE> (67,409)
<TOTAL-LIABILITY-AND-EQUITY> 950,078
<SALES> 13,433
<TOTAL-REVENUES> 105,326
<CGS> 25,557
<TOTAL-COSTS> 202,507
<OTHER-EXPENSES> (5,291)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,956
<INCOME-PRETAX> (135,855)
<INCOME-TAX> (113,230)
<INCOME-CONTINUING> (22,625)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,625)
<EPS-BASIC> (0.31)
<EPS-DILUTED> (0.31)
</TABLE>
