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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-28262
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AERIAL COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
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<TABLE>
<S> <C>
DELAWARE 39-1706857
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(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) No.)
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8410 WEST BRYN MAWR AVENUE, SUITE 1100, CHICAGO, ILLINOIS 60631
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER: (773) 399-4200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
---------------------------
Common Shares, $1 par value
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes __X__ No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.___X___
As of February 26, 1999, the aggregate market value of registrant's Common
Shares held by nonaffiliates was approximately $88 million (based upon the
closing price of the Common Shares on February 26, 1998, of $7.00, as reported
by the NASDAQ).
The number of shares outstanding of each of the registrant's classes of
common stock, as of February 26, 1999, is 31,794,240 Shares, $1 par value, and
40,000,000 Series A Common Shares, $1 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Those sections or portions of the registrant's 1998 Annual Report to
Shareholders and of the registrant's Notice of Annual Meeting of Shareholders
and Proxy Statement for its Annual Meeting of Shareholders to be held May 7,
1999, described in the cross reference sheet and table of contents attached
hereto are incorporated by reference into Parts II and III of this report.
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CROSS REFERENCE SHEET
AND
TABLE OF CONTENTS
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PAGE NUMBER
OR REFERENCE(1)
---------------
Item Business............................................. 3
1.
Item Properties........................................... 12
2.
Item Legal Proceedings.................................... 13
3.
Item Submission of Matters to a Vote of Security
4. Holders............................................ 13
Item Market for Registrant's Common Equity and Related
5. Stockholder Matters................................ 14(2)
Item Selected Financial Data.............................. 14(3)
6.
Item Management's Discussion and Analysis of Financial
7. Condition and Results of Operations................ 14(4)
Item Qualitative and Quantitative Disclosures About Market
7A. Risk............................................... 14(4)
Item Financial Statements and Supplementary Data.......... 14(5)
8.
Item Changes in and Disagreements with Accountants on
9. Accounting and Financial Disclosure................ 14
Item Directors and Executive Officers of the Registrant... 15(6)
10.
Item Executive Compensation............................... 15(7)
11.
Item Security Ownership of Certain Beneficial Owners and
12. Management......................................... 15(8)
Item Certain Relationships and Related Transactions....... 15(9)
13.
Item Exhibits, Financial Statement Schedules and Reports
14. on Form 8-K........................................ 16
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(1) Parenthetical references are to information incorporated by reference from
the registrant's Exhibit 13, which includes portions of its Annual Report to
Shareholders for the year ended December 31, 1998 ("Annual Report") and from
the registrant's Notice of Annual Meeting of Shareholders and Proxy
Statement for its Annual Meeting of Shareholders to be held on May 7, 1999
("Proxy Statement").
(2) Annual Report section entitled "Aerial Stock and Dividend Information" and
"Market Price Per Common Share by Quarter."
(3) Annual Report section entitled "Selected Consolidated Financial Data."
(4) Annual Report section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(5) Annual Report sections entitled "Consolidated Statements of Operations,"
"Consolidated Statements of Cash Flows," "Consolidated Balance Sheets,"
"Consolidated Statements of Changes in Shareholders' Equity," "Notes to
Consolidated Financial Statements," and "Report of Independent Public
Accountants."
(6) Proxy Statement section entitled "Election of Directors" and "Executive
Officers."
(7) Proxy Statement section entitled "Executive Compensation" except for the
information specified in Item 402 (a) (8) of Regulation S-K under the
Securities Exchange Act of 1934, as amended.
(8) Proxy Statement section entitled "Security Ownership of Certain Beneficial
Owners and Management."
(9) Proxy Statement section entitled "Certain Relationships and Related
Transactions."
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AERIAL COMMUNICATIONS, INC.
8410 WEST BRYN MAWR AVENUE - SUITE 1100 - CHICAGO, IL 60631
[LOGO]
TELEPHONE (773) 399-4200
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PART I
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ITEM 1. BUSINESS
COMPANY
Aerial Communications, Inc. (the "Company" or "Aerial"), [NASDAQ: AERL]
together with its subsidiaries, is a provider of Personal Communications
Services ("PCS") in the Minneapolis, Tampa-St. Petersburg-Orlando, Houston,
Pittsburgh, Kansas City and Columbus (Ohio) Major Trading Areas ("MTAs")
(collectively, the "PCS Markets"). The PCS Markets include approximately 27.7
million population equivalents ("POPs"). The Company has constructed networks
for its PCS Markets using Global System for Mobile Communication ("GSM")
technology. The Company has commenced service in all its markets. By year end
1998, the Company had expanded its system coverage to total more than 80% of the
six MTAs' total population.
The Company was formed in 1991 under Delaware law as a wholly-owned
subsidiary of Telephone and Data Systems, Inc. [AMEX: TDS] and was formerly
named American Portable Telecom, Inc. In November 1996 the Company changed its
name to Aerial Communications, Inc. TDS owned 59,086,000 shares of Common Stock
of the Company at December 31, 1998, representing 82.3% of the combined total of
the Company's outstanding Common and Series A Common Shares and 98.0% of the
voting power.
PCS is the term used to describe the wireless telecommunications services
that are offered by those companies that acquired licenses for radio spectrum
(frequency range 1850-1990 MHz) in the Federal Communications Commission ("FCC")
auctions and are the newest entrants in the wireless telecommunications market.
PCS competes directly with existing cellular telephone, paging and specialized
mobile radio services. PCS providers were the first in most markets to offer
mass market all-digital mobile networks. In addition, the Company believes PCS
providers may be among the first to be able to offer mass market wireless local
loop applications, in competition with switched and direct access local
telecommunications services.
The Company's strategic goal is to take full advantage of the potential of
wireless telecommunications. The Company sees an opportunity for significant
growth in the wireless telecommunications market through the shift of existing
wireless usage patterns from applications focused on business use, special
occasions and emergencies to much broader applications for everyday use. The
Company is structured to meet the increasingly competitive challenges of the
wireless telecommunications marketplace, and has a marketing-oriented approach
focused on serving its customers and their needs. Since the introduction of
cellular telephone service in 1983, the demand for wireless telecommunications
services has grown dramatically as cellular, paging and other emerging wireless
personal communications services have become widely available and increasingly
affordable. As of December 31, 1998, there were an estimated 70 million domestic
wireless telephone subscribers (representing both cellular and PCS customers),
which represented U.S. market penetration of approximately 25%.
During 1996 and early 1997, the Company contracted for network equipment,
billing systems, support software and the equipment and services necessary to
launch service. Additionally during this period, the Company completed the
design for its PCS networks, acquired and built out the switching centers
serving each market, leased and built out a National Operations Center, leased
or purchased the cell sites required to launch service and commenced zoning and
building the sites. The Columbus MTA launched service on March 27, 1997. The
Company's five remaining MTAs launched service during the
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second quarter of 1997. Across all six markets, the Company launched with
approximately 600 cell sites in service. The Company had 1,180 cell sites in
service by the end of 1998. The coverage of the Company's PCS networks includes
the major metropolitan areas within the PCS Markets, as well as portions of the
major highway corridors extending out from those areas.
In November 1996, the Company entered into a Member Control Agreement
("Agreement") forming a joint venture with Rural Cellular Corporation ("RCC"),
the Wireless Alliance, LLC ("WALLC"), to build out certain rural areas covering
approximately 925,000 POPs in the Minneapolis MTA. The Company has contributed
20 MHz of its Minneapolis MTA license covering certain territories as defined in
the Agreement in return for a 49% equity interest in the joint venture. RCC
built the network and is responsible for the ongoing operations. The WALLC
launched service in 1998. The joint venture purchases services such as network
switching from the Company. The network uses GSM technology.
On September 8, 1998, pursuant to the terms of a Purchase Agreement dated
June 1, 1998, Sonera Ltd. ("Sonera"), formerly Telecom Finland Ltd., made a $200
million investment in Aerial Operating Company, Inc. ("AOC"), a then
wholly-owned subsidiary of the Company. Sonera purchased approximately 2.4
million shares of common stock of AOC at a price of approximately $83 per share
representing a 19.4% equity interest in AOC. Sonera's equity ownership amount in
AOC is subject to adjustment based on Aerial's 20-day average stock price during
the three years commencing September 8, 1998. Depending on the level of increase
in the stock price, Sonera's ownership amount in AOC could decline to
approximately 15%. Sonera has the right, subject to adjustment under certain
circumstances, to exchange each share of AOC common stock which it owns for
6.72919 Common Shares of Aerial. Upon the exchange of all of the AOC shares,
Sonera would own an 18.452% equity interest in Aerial, reflecting a purchase
price equivalent to $12.33 per Common Shares of Aerial (the "Equivalent Purchase
Price"). In addition to exchanging AOC common stock for Aerial Common Shares,
Sonera's equity in AOC could be exchanged incrementally, in certain
circumstances, for equity in TDS or cash or any combination of TDS equity,
Aerial equity and cash.
PROPOSED TDS CORPORATE RESTRUCTURING
In December 1997, Aerial received a proposal from TDS to acquire all of the
issued and outstanding Common Shares of Aerial not already owned by TDS. The
proposal was part of TDS's proposed corporate restructuring which included
issuing three new classes of common stock (commonly known as "tracking" stock)
and changing the state of incorporation of TDS from Iowa to Delaware. The three
new classes of stock were intended to separately reflect the performance of
TDS's cellular telephone, landline telephone and personal communications
services businesses.
In December 1998, TDS announced the withdrawal of its offer to exchange
tracking stock for the outstanding common shares of Aerial which it did not own.
TDS also announced that it was pursuing a tax-free spin-off of its 82.3%
interest in Aerial, as well as reviewing other alternatives. TDS intends to ask
the Internal Revenue Service ("IRS") to rule on the tax-free status of such a
distribution. There are a number of conditions that must be met for a spin-off
to occur, including a receipt of a favorable IRS ruling, final approval by the
TDS Board, certain government and third party approvals and review by the
Securities and Exchange Commission ("SEC") of appropriate SEC filings. TDS
intends to seek shareholder approval of a proposal to distribute Aerial Series A
Common Shares, on a pro-rata basis, to holders of TDS Series A Common Shares and
Aerial Common Shares, on a pro-rata basis, to holders of TDS Common Shares.
There can be no assurance that a spin-off will be consummated or that other
alternatives will not be pursued. Prior to any spin-off, it is expected that
Aerial will seek additional financing so that Aerial would have the appropriate
capitalization to operate as a stand-alone entity. In connection with such
financing, all or a portion of Aerial's debt to TDS may be converted into
equity.
Following the announcement by TDS in December 1998, that it intended to
distribute to its shareholders all of the capital stock of Aerial that it owns,
and that Aerial would seek additional financing from sources other than TDS in
connection therewith, Sonera contacted TDS to express certain concerns about the
announcement. Sonera has asserted that the TDS announcement reflects a change in
circumstances that warrant the renegotiation of certain matters related to its
investment in AOC, including an adjustment in the Equivalent Purchase Price, and
has raised the possibility of litigation in connection therewith. TDS and Aerial
intend to attempt to reach a mutually acceptable resolution of the concerns
raised by Sonera. There can be no assurance that this matter will not lead to
litigation, or that it
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will not have a material adverse effect on Aerial or on the plans relating to
the refinancing and spin-off of Aerial.
WIRELESS TELECOMMUNICATIONS INDUSTRY
OVERVIEW. Wireless service is currently available using analog or digital
technology. Traditionally wireless services transmited voice and data signals
over analog-based networks by varying the amplitude or frequency of one
continuous electronic signal transmitted over a single radio channel. Analog
technology currently has several limitations, including inconsistent service
quality, lack of privacy, limited capacity and less reliability in transferring
data without errors. The Company has chosen GSM, which utilizes a digital
technology, for use in the PCS Markets. Digital systems convert voice or data
signals into a stream of digits that is compressed before transmission, enabling
a single radio channel to carry multiple simultaneous signal transmissions. This
additional capacity, along with improvements in digital protocols, allows
digital-based wireless technologies to offer new and enhanced services, such as
greater call privacy and more robust data transmission features, such as "mobile
office" applications (including facsimile, electronic mail and wireless
connections to computer/data networks, including the Internet).
PCS spectrum differs from existing cellular and specialized mobile radio
("SMR") spectrum in three basic ways: frequency, spectrum and geographic
division. PCS networks will operate in a higher frequency range (1850-1990 MHz)
compared to the cellular and SMR frequency (800-900 MHz). PCS is comprised of 30
or 10 MHz spectrum versus 25 MHz spectrum for cellular networks. As a result of
the improved capacity of the infrastructure and large allocation of spectrum in
the A, B and C PCS frequency Blocks, PCS will have more capacity for new
wireless services such as data and video transmission. Finally, the geographic
areas for PCS licenses are divided differently than for cellular licenses. PCS
is segmented among 51 MTAs and 493 Basic Trading Areas ("BTAs") as opposed to
cellular's 306 Metropolitan Statistical Areas ("MSAs") and 428 Rural Service
Areas ("RSAs"). An MTA license generally covers a much larger geographic area
than a BTA, MSA or RSA license.
OPERATION OF WIRELESS NETWORKS. Wireless service areas are divided into
smaller geographic areas called "cells", each of which contains an antenna and a
base transceiver station ("BTS") consisting of a low-power transmitter, a
receiver and signaling equipment. The cells are typically configured on a grid
in a honeycomb-like pattern, although terrain factors (including natural and
man-made obstructions) and signal coverage patterns may result in irregularly
shaped cells and overlaps or gaps in coverage. The BTS in each cell is connected
by microwave, fiber optic cable or telephone wires to a switching office
("mobile switching center" or "MSC"). The MSC controls the operation of the
wireless telephone network for its entire service area, performing inter-BTS
hand-offs, managing call delivery to handsets, allocating calls among the cells
within the network and connecting calls to local landline telephone systems or
to long-distance telephone carriers. Wireless service providers have
interconnection agreements with various local exchange carriers and
interexchange carriers, thereby integrating the wireless telephone network with
landline telecommunications systems. Because two-way wireless networks are fully
interconnected with landline telephone networks and long-distance networks,
customers can receive and originate both local and long-distance calls from
their wireless telephones.
The signal strength of a transmission between a handset and a BTS antenna
declines as the handset moves away from the BTS antenna. The MSC and the BTSs
monitor the signal strength of calls in process. When the signal strength of a
call declines to a predetermined level, the MSC may "hand off" the call to
another BTS that can establish a stronger signal with the handset. If a handset
leaves the service area of the wireless service provider, the call is
disconnected unless an appropriate technical interface is established to hand
off the call to an adjacent service provider's system.
Operators of wireless networks frequently agree to provide service to
customers from other compatible networks who are temporarily located or
traveling through the operator's service area. Such customers are called
"roamers." Agreements among network operators allocate revenues received from
roamers. With automatic roaming, wireless customers are preregistered in certain
networks outside their home service area and receive service automatically while
they are roaming. Other roaming features permit calls to a customer to follow
the customer into different networks, so that the customer
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will continue to receive calls in a different network just as if the customer
were within his or her service area.
Wireless customers generally are charged separately for monthly access, air
time, long-distance calls and custom-calling features (although custom-calling
features may be included in monthly access charges in certain pricing plans).
Wireless network operators pay fees to local exchange and long-distance
telephone companies for access to their networks and toll charges based on
standard or negotiated rates. When wireless operators provide service to roamers
from other networks, they generally charge roamer air-time usage rates, which
usually are higher than standard air-time usage rates for their own customers,
and additionally may charge daily access fees. Special, discounted rate roaming
arrangements, often between neighboring operators who wish to stimulate usage in
their respective territories, provide for reduced roaming fees and no daily
access fees.
TECHNOLOGY
With GSM technology, the Company offers easy-to-use, interactive menu-driven
phones, and advanced features such as caller identification and a smart card, as
well as more complex features such as text messaging, which allows the GSM
handset to function as a two-way messaging device. In the future, the Company
intends to increasingly emphasize services which are expected to increase the
size and scope of the wireless market, such as wireless data and information
services as well as wireless local loop services. The Company anticipates that
PCS will ultimately offer a competitive alternative to wireline telephone
service as PCS networks are constructed and PCS operators form strategic
alliances.
GSM is not compatible with other PCS or cellular technologies. However,
compatibility can be achieved through the use of handsets that support multiple
technologies. The Company expects that compatibility between GSM and the
existing analog cellular systems will be achieved with the use of dual-mode
handsets. Aerial expects to launch its dual-mode service in 1999.
To date, seventeen North American PCS companies are providing commercial GSM
service. GSM systems are currently in commercial operation in over 2,400 North
American cities with more than 3 million customers. The Company anticipates that
its customers will be able to roam substantially throughout the United States,
either on other GSM-based PCS networks or by using dual-mode handsets that can
also be used on existing cellular networks.
The Company is a member of the North American GSM Alliance LLC ("GSM
Alliance"), an all-digital wireless PCS network of U.S. and Canadian carriers.
The GSM Alliance was established to create a national network and develop
seamless wireless communications for customers, whether at home, away or abroad.
The GSM Alliance's collaborative efforts focus on serving the wireless customer
efficiently by addressing the areas of roaming, customer care, national
distribution and data communications. The Company is also a member of the GSM
Capital Limited Partnership. The partnership was formed to make investments in
companies mainly engaged in the wireless communications industry using the GSM
platform, that are in a development or expansion stage, or whose securities
trade in an organized market. The Company is also a part of the GSM North
America consortium, which is the North American interest group for the GSM
Association. Formed in 1995, GSM North America brings together service providers
and equipment manufacturers to identify and resolve issues related to making GSM
the premier PCS digital technology.
SOURCES OF EQUIPMENT
The Company does not manufacture any of the GSM network equipment, handsets
or accessories ("equipment") used or anticipated to be used in its operations.
The equipment the Company uses or anticipates to use is available from multiple
sources, and the Company anticipates such equipment will continue to be
available to the Company in the foreseeable future, consistent with normal
manufacturing and delivery lead times. As GSM uses an open system architecture,
and due to the fact that GSM has well-developed features, software systems and
equipment that are available "off the shelf", the Company is able to design its
GSM networks and systems without being dependent upon any single manufacturing
source. Nokia Telecommunications Inc. has been the Company's sole supplier of
digital radio channel and switching infrastructure equipment during the initial
build-out of its PCS networks. The
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Company's current handset vendors are Nokia Mobile Phones, Inc., Motorola Inc.,
and Mitsubishi Wireless Communications, Inc.
PRODUCTS AND SERVICES
The Company offers coverage in those areas of the PCS Markets where most of
the population lives and works. Subsequent construction of its PCS networks will
provide coverage which, in combination with roaming services as described above,
is competitive with that of current cellular operators. The Company provides
roaming capabilities through agreements with other GSM and cellular operators.
The Company's two primary sources of revenues are similar to those available
to other cellular system providers. Service revenue primarily consists of
charges for access, airtime and value-added services provided to the Company's
retail customers who use the network operated by the Company, and charges for
long-distance calls made on the Company's systems. Service revenue also consists
of charges to customers of other wireless carriers who use the Company's PCS
network when roaming (outcollect roaming revenue). Equipment sales revenue
consists of the sale of handsets and related accessories to retailers,
independent agents and end user customers. At December 31, 1998, the Company had
311,900 customers. Service revenues and equipment sales revenues totaled $123.6
million and $31.5 million, respectively, for the year ended December 31, 1998.
The Company provides the following services and features:
THE SMART CARD. GSM technology employs a Smart Card which contains a
microchip containing detailed information about a customer's service profile.
The Smart Card allows the Company to initiate services or change a customer's
service package from a remote location. The Smart Card also allows customers to
roam onto other participating GSM-based networks by using their cards in
handsets compatible with the local network.
FEATURE-RICH HANDSETS. As part of its basic service package, the Company
provides easy-to-use, interactive menu-driven phones that enable customers to
utilize the features available in a GSM network. These handsets primarily use
words and easy-to-use menus rather than numeric codes to operate handset
functions such as call-forwarding, call-waiting and text messaging.
SHORT TEXT MESSAGING. GSM technology allows for the capability to send and
receive short text messages, similar to two-way radio paging services. This
service allows the Company to offer a quicker and less expensive form of
wireless communication when a full conversation is not necessary.
ENHANCED SECURITY. The Company's service provides greater security from
eavesdropping and cloning than analog wireless service. Greater conversation
security is provided by the encryption code of the digital GSM signal. Greater
fraud protection is provided because GSM handsets require the use of a Smart
Card with a sophisticated authentication scheme, the replication of which is
virtually impossible.
As the market for wireless telecommunications services continues to develop,
the Company expects to offer advanced wireless applications such as mobile data
services, wireless private branch exchange applications, wireless local loop
services and other individually customized wireless products and services.
MARKETING AND DISTRIBUTION
The Company's marketing objective is to create demand for its PCS service by
clearly differentiating its service offerings. The Company believes the strength
of its marketing efforts are a key contributor to its success. The Company has
developed overall marketing strategies as well as certain, specific local
marketing strategies for each PCS Market.
The Company's mass marketing efforts emphasize the value of the Company's
services and its "fairness" to customers and are supported by heavily promoting
the Aerial brand name. This is supported by a substantial advertising program.
The Company offers its services and products through traditional cellular
sales channels as well as through new, lower cost channels which increase the
quality of the typical sale. The Company utilizes traditional sales channels
which include mass merchandisers and retail outlets, company retail stores,
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sales agents and a direct sales force. National distributors include Best Buy,
Office Depot, Staples and Ritz Camera. The Company currently also distributes
its services and products through over 90 company retail locations (mall stores,
strip mall stores and kiosks). Based in part upon the remote activation feature
of the GSM Smart Card, the Company also intends to develop distribution
innovations such as simplified retail sales processes and lower-cost channels
which include inbound telesales, affinity marketing programs, and via the
Internet.
COMPETITION
The wireless telecommunications industry is experiencing significant
technological change, as evidenced by the increasing pace of digital upgrades to
existing analog cellular networks, evolving industry standards, ongoing
improvements in the capacity and quality of digital technology, shorter
development cycles for new products and enhancements, and changes in end-user
requirements and preferences. Accordingly, the Company expects competition in
the wireless telecommunications business to be dynamic and intense as a result
of the entrance of new competitors and the development of new technologies,
products and services.
The Company competes directly with up to five other PCS providers in each of
its PCS Markets. The other successful bidders in the FCC's broadband Block A and
Block B PCS auction in each of the six PCS Markets were PCS PrimeCo (Houston and
Tampa-St. Petersburg-Orlando), Sprint Spectrum (Minneapolis, Pittsburgh and
Kansas City) and AT&T Wireless Services, Inc. (Columbus). The existing cellular
providers in the PCS Markets, most of which have an infrastructure in place and
have been operational for a number of years, have, in most cases, upgraded their
networks to provide comparable services in competition with the Company.
Principal cellular providers in the PCS Markets are AT&T Wireless Services,
Inc., BellSouth Mobility, Inc., GTE Mobile Communications Corporation, AirTouch
Communications, Inc., Southwestern Bell, Bell Atlantic-NYNEX Mobile and
Ameritech Cellular. Additionally, the Company competes with SMR provider Nextel
Communications, Inc. in each of its six PCS Markets.
The Company also competes with other communications technologies that now
exist, such as paging, enhanced specialized mobile radio ("ESMR") and global
satellite networks. In the future, cellular service and PCS will also compete
more directly with traditional landline telephone service providers and with
cable operators who expand into the offering of traditional communications
services over their cable systems.
All of such competition is intense. There can be no assurance that the
Company will be able to compete successfully in this environment or that new
technologies and products that are more commercially effective than the
Company's technologies and products will not be developed. In addition, many of
the Company's competitors have substantially greater financial, technical,
marketing, sales and distribution resources than those of the Company and have
significantly greater experience than the Company in testing new or improved
telecommunications products and services and obtaining regulatory approvals.
Some competitors are expected to market other services, such as cable television
access, with their wireless telecommunications service offerings. Several of the
Company's competitors are operating, or planning to operate, through joint
ventures and affiliation arrangements, wireless telecommunications networks that
cover most of the United States.
The Company anticipates that market prices for two-way wireless services
generally will continue to decline in the future based on increased competition.
The Company will compete to attract and retain customers principally on the
basis of services and enhancements, its customer service, the size and location
of its service areas and pricing. The Company's ability to compete successfully
will also depend, in part, on its ability to anticipate and respond to various
competitive factors affecting the industry, including new services that may be
introduced, changes in consumer preferences, demographic trends, economic
conditions and discount pricing strategies by competitors, which could adversely
affect the Company's operating margins.
REGULATION
REGULATORY ENVIRONMENT. The FCC regulates the licensing, construction,
operation and acquisition of wireless telecommunications systems in the United
States pursuant to the Communications Act of
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1934, as amended, and the rules, regulations and policies promulgated by the FCC
thereunder (the "Communications Act"). Under the Communications Act, the FCC is
authorized to allocate, grant and deny licenses for PCS frequencies, establish
regulations governing the interconnection of PCS networks with wireline and
other wireless carriers, grant or deny license renewals and applications for
transfer of control or assignment of PCS licenses, and impose fines and
forfeitures for any violations of FCC regulations.
In addition, the Telecommunications Act of 1996 (the "1996 Act"), which
amended the Communications Act, mandates significant changes in existing
telecommunications rules and policies to promote competition, ensure the
availability of telecommunications services to all parts of the nation and to
streamline regulations of the telecommunications industry to remove regulatory
burdens, as competition develops and makes regulation less necessary. The FCC
promulgated and continues to promulgate regulations governing construction and
operation of wireless carriers, licensing (including renewal of licenses) and
technical standards for the provision of PCS services under the Communications
Act, and is implementing the legislative objectives of the 1996 Act, as
discussed below.
PCS LICENSING. The FCC established PCS service areas in the United States
and its possessions and territories based upon Rand McNally's market definition
of 51 MTAs comprised of 493 smaller BTAs. Each MTA consists of at least two
BTAs.
The FCC has allocated 120 MHz of radio spectrum in the 2 GHz band for
licensed broadband PCS services. The FCC divided the 120 MHz of spectrum into
six individual blocks, each of which is allocated to serve either MTAs or BTAs.
The spectrum allocation includes two 30 MHz blocks ("A" and "B" Blocks) licensed
for each of the 51 MTAs, one 30 MHz block ("C" Block) licensed for each of the
493 BTAs, and three 10 MHz blocks ("D," "E" and "F" Blocks) licensed for each of
the 493 BTAs. A PCS license has been awarded for each MTA and substantially all
of the BTAs in every block, for a total of more than 1,500 licenses. This means
that in any PCS service area as many as six licensees could be operating
separate PCS networks. Under the FCC's rules, a broadband PCS licensee may own
combinations of licenses with total aggregate spectrum coverage of up to 45 MHz
in a single geographic area. The FCC adopted comprehensive rules that outlined
the bidding process, described the bidding application and payment process,
established penalties for certain bid withdrawals, default or disqualification
and established regulatory safeguards.
Several auction winners have filed for bankruptcy. Other winners tendered
approximately 450 licenses acquired in auctions to the FCC for cancellation in
1998. These licenses are scheduled to be reauctioned starting in March of 1999.
On November 9, 1995, in Cincinnati Bell Telephone Co. v. FCC (Case No.
94-3701/4113), the United States Court of Appeals for the Sixth Circuit granted
two petitions for review of an FCC order that had barred certain common
ownership of cellular and PCS interests in the same market, and remanded the
case to the FCC for further proceedings. Neither of the two petitioners had been
barred by cross interests from applying for any of the authorizations the FCC
later granted to the Company. The Company is watching the FCC proceedings
closely.
The grants of licenses to the Company are conditioned upon timely compliance
with the FCC's build-out requirements, I.E., coverage of one-third of the
population of a PCS market within five years of initial license grant and
coverage of two-thirds of that population within ten years. The Company has
exceeded the buildout requirements for both the five year and ten year stages
for each of its MTAs.
The FCC also imposes a requirement that all licensees register and obtain
FCC registration numbers for all of their antenna towers which require prior
Federal Aviation Administration ("FAA") clearance. All broadband PCS
transmitting facilities of the Company also must comply with federal "radio
frequency (RF) radiation requirements." The Company has complied with and
continues to comply with the antenna registration and RF radiation requirements.
The FCC enhanced 911 ("E911") regulations require broadband PCS operators to
"be capable of transmitting 911 calls from individuals with speech or hearing
disabilities through the use of Text Telephone Devices ("TTY")." TTY equipment
currently, however, is not compatible with digital wireless systems such as the
Company's. Consequently, on December 4, 1998, Aerial filed a petition with the
FCC requesting a waiver of the applicability of the TTY connectivity requirement
to the Company's digital
9
<PAGE>
system. On December 30, 1998, the FCC granted the Company, along with over 100
other wireless operators, a temporary waiver of the regulation. Equipment
manufacturers are developing hardware and software that will make TTY devices
compatible with the digital wireless technologies used by the Company and other
wireless service providers. The Company is working with manufacturers and other
members of the wireless industry in developing solutions for users of TTY
devices.
The E911 regulations also require broadband PCS operators to determine the
approximate location of persons making the emergency calls. On February 5, 1999,
the Company filed a petition requesting a waiver to clarify that handset based
location technology will meet the FCC's E911 location requirements. A waiver
will enable the Company to be compliant with the location requirements by
introducing new handsets that have the capability of being located rather than
installing very expensive upgraded equipment throughout the Company's entire
network. The Company's waiver and dozens of other wireless operators' waiver
requests are pending before the FCC.
The FCC licenses granted to the Company are issued for a ten-year period
expiring June 23, 2005, and may be renewed. In the event challengers file
competing applications in response to any of the Company's renewal filings, the
FCC has rules and regulations providing that the application of the licensee
seeking renewal will be granted and the application of the challenger will not
be considered in the event that the broadband PCS licensee involved has (i)
provided "substantial" service, which is defined as "sound, favorable and
substantially above a level of mediocre service just minimally justifying
renewal" and (ii) substantially complied with FCC rules, policies and the
Communications Act. Although the Company is unaware of any circumstances which
would prevent the approval of any future renewal applications, there can be no
guarantee that the Company's licenses will be renewed by the FCC in the future.
Moreover, although revocation and involuntary modification of licenses are
extraordinary regulatory measures, the FCC does have the authority to restrict
the operation of licensed facilities or revoke or modify licenses.
The FCC has proceedings in process which could open up other frequency bands
for wireless telecommunications and PCS-like services. There can be no assurance
that such proceedings will not result in additional wireless competition.
In addition, there are citizenship requirements, assignment requirements and
other federal rules and regulations that may affect the business of the Company.
RECENT EVENTS. There are certain regulatory proceedings currently pending
before the FCC that are of particular importance to the broadband PCS industry.
The FCC is expected to give the telecommunications industry guidance as to
the implementation of the Communications Assistance for Law Enforcement Act
("CALEA"). Due to a conflict between manufacturing standards and law enforcement
requirements, the FCC extended the compliance date to June 30, 2000.
The FCC has adopted a limited expansion of the obligation of cellular
carriers to serve the subscribers of broadband PCS providers, among others, even
though neither the subscribers or the PCS providers involved have a pre-existing
service relationship with such cellular carrier. Under these new policies,
broadband PCS providers may offer their subscribers handsets which are capable
of operating over broadband PCS and cellular networks so that when their
subscribers are out of range of broadband PCS networks, they will be able to
obtain non-automatic access to cellular networks. The FCC expects that
implementation of these roaming capabilities will promote competition between
broadband PCS and cellular service providers. The FCC is considering whether all
cellular, broadband PCS and certain SMR providers should be required to provide
"automatic" roaming service to other providers (i.e., carrier-to-carrier roaming
service) during a five year period commencing after the last group of initial
broadband PCS licenses are awarded which is expected to occur in 1999.
The FCC has adopted requirements which will make it possible for subscribers
to retain, subject to certain geographic and other limitations, their existing
telephone numbers when they switch from one service provider to another. This
numbering portability will include switching between local exchange carrier
("LEC") and other wireline providers, between wireless service providers and
between LEC/ wireline and wireless providers. LECs in the 100 largest MSAs had
implementation deadlines by the end of 1998 at those switches which received
specific requests for numbering portability. The FCC recently
10
<PAGE>
extended the compliance date for cellular, broadband PCS, and certain other
wireless providers to November 24, 2002.
The FCC also has pending proceedings: (1) to ensure that the customers of
wireless providers, among others, receive complete, accurate and understandable
bills, (2) to establish effective safeguards to protect against unauthorized
access to certain customer information (i.e., CPNI), (3) to retain, relax or
repeal its 45 MHZ spectrum cap on the amount of broadband PCS and cellular
spectrum which entities under common ownership or control may hold in any single
market and its related cellular cross-interest restrictions, (4) to devise
guidelines for the operation and administration of universal service support
mechanisms as applied to wireless providers, and (5) to implement requirements
for wireless providers to set rates for interstate interexchange services in
each state at levels no higher than the rates charged to subscribers in any
other state.
The FCC also is continuing to implement the 1996 Act. The 1996 Act provides
that implementing its legislative objectives will be the task of the FCC, the
state public utilities commissions and a Federal-State Joint Board. Much of this
implementation has and continues to be proceeding in numerous, concurrent
proceedings with aggressive deadlines. The Company cannot predict the full
extent and nature of developments of the 1996 Act which will depend, in part,
upon interrelationships among state and federal regulators.
The primary purpose and effect of the 1996 Act is to open all
telecommunications markets to competition -- including local telephone service.
The 1996 Act makes most direct or indirect state and local barriers to
competition unlawful. It directs the FCC to preempt all inconsistent state and
local laws and regulations, after notice and comment proceedings. It also
enables electric and other utilities to engage in telecommunications service
through qualifying subsidiaries.
Only narrow powers over competitive entry are left to state and local
authorities. Each state retains the power to impose competitively neutral
requirements that are consistent with the 1996 Act's universal service provision
and necessary for universal services, public safety and welfare, continued
service quality and consumer rights.
The 1996 Act establishes principles and a process for implementing a
modified "universal service" policy. This policy seeks nationwide, affordable
service and access to advanced telecommunications and information services. It
calls for reasonably comparable urban and rural rates and services. The 1996 Act
also requires universal service to schools, libraries and rural health
facilities at discounted rates. In a series of orders adopted in 1997, the FCC
established universal service support mechanisms which require
telecommunications providers, including all wireless carriers, to contribute.
The Company has made the required Universal Service Worksheet filings and makes
the required periodic payments.
Since enactment, the FCC has adopted orders implementing certain local
competition provisions of the 1996 Act. The FCC found that broadband PCS and
certain other wireless providers that are entitled to reciprocal compensation,
may not be charged for LEC-originated traffic or for code opening/per-number
fees, and may obtain LEC interconnection subject to the terms of the 1996 Act.
Appeals were taken to the United States Supreme Court from these FCC orders by
numerous parties alleging that the FCC has exceeded its statutory mandate, among
other matters. On January 25,1999, the U.S. Supreme Court upheld the FCC's
general jurisdiction to implement the local competition provisions of the 1996
Act.
STATE AND LOCAL REGULATION The scope of state regulatory authorities covers
such matters as the terms and conditions of interconnection between LECs and
wireless carriers with respect to intrastate services, customer billing
information and practices, billing disputes, other consumer protection matters,
facilities construction issues and transfers of control, among other matters. In
these areas, particularly the terms and conditions of interconnection between
LECs and wireless providers, the FCC and state regulatory authorities share
regulatory responsibilities with respect to interstate and intrastate issues,
respectively.
The FCC has pending numerous petitions for pre-emption of state and local
regulations which allege such regulations prohibit or impair the provision of
interstate or intrastate telecommunications services. It has also requested
public comment on a petition requesting pre-emption of moratoria imposed by
state and local governments on siting of telecommunications facilities, the
imposition of
11
<PAGE>
state taxes on the gross receipts of commercial mobile radio service ("CMRS")
providers and other proposed state taxes based on the asset value of CMRS
licenses awarded by the FCC. The FCC has been actively involved in educating
state and local regulatory and zoning authorities as to the prohibitions in the
1996 Act against the creation of unreasonable and discriminatory zoning,
taxation or other barriers to new wireless providers.
The FCC is required to forbear from applying any statutory or regulatory
provision that is not necessary to keep telecommunications rates and terms
reasonable or to protect consumers. A state may not apply a statutory or
regulatory provision that the FCC decides to forbear from applying. In addition,
the FCC must review its telecommunications regulations every two years and
change any that are no longer necessary.
The Company and its subsidiaries have been and intend to remain active
participants in proceedings before the FCC and before state regulatory and
zoning authorities. Proceedings with respect to the foregoing policy issues
before the FCC and state regulatory authorities could have significant impacts
on the competitive market structure among wireless providers and the
relationships between wireless providers and other carriers. The Company is
unable to predict the scope, pace, or financial impact of policy changes which
could be adopted in these proceedings.
SEASONALITY
Management believes there exists within the wireless telecommunications
industry a seasonality in both revenues, which tend to be greater in the fourth
quarter due to customer growth, and operating expenses, which tend to be higher
in the fourth quarter due to increased marketing activities and customer growth,
which may cause operating income (loss) to vary from quarter to quarter.
EMPLOYEES
As of December 31, 1998, the Company had a total of 1,907 employees. None of
the Company's employees is represented by a labor union. The Company considers
its relations with its employees to be good.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
SAFE HARBOR CAUTIONARY STATEMENT
THIS FORM 10-K CONTAINS "FORWARD-LOOKING" STATEMENTS, AS DEFINED IN THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, THAT ARE BASED ON CURRENT
EXPECTATIONS, ESTIMATES AND PROJECTIONS. STATEMENTS THAT ARE NOT HISTORICAL
FACTS, INCLUDING STATEMENTS ABOUT THE COMPANY'S BELIEFS AND EXPECTATIONS ARE
FORWARD-LOOKING STATEMENTS. THESE STATEMENTS CONTAIN POTENTIAL RISKS AND
UNCERTAINTIES AND, THEREFORE, ACTUAL RESULTS MAY DIFFER MATERIALLY. THE COMPANY
UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD-LOOKING STATEMENTS
WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
IMPORTANT FACTORS THAT MAY AFFECT THESE PROJECTIONS OR EXPECTATIONS INCLUDE,
BUT ARE NOT LIMITED TO: CHANGES IN THE OVERALL ECONOMY; CHANGES IN COMPETITION
IN THE COMPANY'S MARKETS; ADVANCES IN TELECOMMUNICATIONS TECHNOLOGY; CHANGES IN
THE TELECOMMUNICATIONS REGULATORY ENVIRONMENT; PENDING AND FUTURE LITIGATION;
AVAILABILITY OF FUTURE FINANCING; UNANTICIPATED CHANGES IN GROWTH IN PCS
CUSTOMERS, PENETRATION RATES, CHURN RATES AND THE MIX OF PRODUCTS AND SERVICES
OFFERED IN THE COMPANY'S MARKETS AND UNANTICIPATED PROBLEMS WITH THE YEAR 2000
ISSUE. READERS SHOULD EVALUATE ANY STATEMENTS IN LIGHT OF THESE IMPORTANT
FACTORS.
ITEM 2. PROPERTIES
The Company currently leases office and warehouse space in each of its PCS
Markets as well as office space for its corporate headquarters in Chicago,
customer service center in Kansas City and National Operations Center in Tampa.
The Company also has leases for its retail store locations and leases certain
cell sites for its digital radio channel (or "BTS") equipment on land, buildings
and other fixed structures at various rentals for various terms. As of December
31, 1998, the Company had 1,180 cell sites in service across all its PCS
markets. The leases provide for monthly rentals at market rates and expire,
subject to renewal options, on various dates through 2021. The Company owns all
five of its
12
<PAGE>
switch site buildings serving each of the PCS Markets (the Pittsburgh switch
also serves the Columbus market).
ITEM 3. LEGAL PROCEEDINGS
The Company is involved from time to time in routine legal and regulatory
proceedings incidental to its business. The Company does not believe that such
routine legal and regulatory proceedings will have, individually or in the
aggregate, a material adverse effect on the Company. However, concerns raised by
Sonera Ltd. about the spin-off announcement made by TDS have indicated the
possibility of litigation. See Item 1. Business--Proposed TDS Corporate
Restructuring.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of securities holders during the fourth
quarter of fiscal year 1998.
13
<PAGE>
- --------------------------------------------------------------------------------
PART II
- --------------------------------------------------------------------------------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Incorporated herein by reference from Exhibit 13, Annual Report section
entitled "Aerial Stock and Dividend Information" and "Market Price Per Common
Share By Quarter."
ITEM 6. SELECTED FINANCIAL DATA
Incorporated herein by reference from Exhibit 13, Annual Report section
entitled "Selected Consolidated Financial Data."
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Incorporated herein by reference from Exhibit 13, Annual Report section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated herein by reference from Exhibit 13, Annual Report section
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations" under the caption "Market Risk."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated herein by reference from Exhibit 13, Annual Report sections
entitled "Consolidated Statements of Operations," "Consolidated Statements of
Cash Flows," "Consolidated Balance Sheets," "Consolidated Statements of Changes
in Shareholders' Equity," "Notes to Consolidated Financial Statements" and
"Report of Independent Public Accountants."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
<PAGE>
- --------------------------------------------------------------------------------
PART III
- --------------------------------------------------------------------------------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference from Proxy Statement sections entitled
"Election of Directors" and "Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from Proxy Statement section entitled
"Executive Compensation" except for the information specified in item 402 (a)
(8) of Regulation S-K under the Securities Exchange Act of 1934, as amended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from Proxy Statement section entitled
"Security Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from Proxy Statement section entitled
"Certain Relationships and Related Transactions."
15
<PAGE>
- --------------------------------------------------------------------------------
PART IV
- --------------------------------------------------------------------------------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as a part of this report:
(a) (1) Financial Statements
<TABLE>
<S> <C>
Consolidated Statements of Operations.......................... Annual Report*
Consolidated Statements of Cash Flows.......................... Annual Report*
Consolidated Balance Sheets.................................... Annual Report*
Consolidated Statements of Changes in Shareholders' Equity..... Annual Report*
Notes to Consolidated Financial Statements..................... Annual Report*
Report of Independent Public Accountants....................... Annual Report*
</TABLE>
- ------------------------
* Incorporated herein by reference from Exhibit 13.
(2) Schedules
<TABLE>
<CAPTION>
LOCATION
--------
<S> <C> <C>
Report of Independent Public Accountants on Financial Statement Schedule.......... page 18
II. Valuation and Qualifying Accounts for each of the Three Years in the Period
Ended December 31, 1998.................................................... page 19
All other schedules have been omitted because they are not applicable or not
required or because the required information is shown in the financial
statements or notes thereto.
</TABLE>
(3) Exhibits
The exhibits set forth in the accompanying Index to Exhibits are filed as a part
of this Report. The following is a list of each management contract or
compensatory plan or arrangement required to be filed as an exhibit to this form
pursuant to Item 14 (c) of this Report.
EXHIBIT
NUMBER DESCRIPTION
- -------- ----------------------------------------------------------------------
10.8 Aerial Communications, Inc. 1996 Long-Term Incentive Plan, as amended,
is hereby incorporated by reference to Exhibit 99.1 to the Company's
registration statement on Form S-8 (Registration No 333-06471).
10.9 Description of Terms of Signing Letter with Donald W. Warkentin dated
June 7, 1995, is hereby incorporated by reference to Exhibit 10.15 to
the Company's Annual Report on Form 10-K for the year ended December
31, 1996.
10.10 Aerial Communications, Inc. Compensation Plan for Non-Employee
Directors is hereby incorporated by reference to Exhibit 99.1 to the
Company's Form S-8 dated May 2, 1997 (Registration No. 333-26429).
10.11 Description of Supplemental Benefit Agreement with Donald W. Warkentin
dated August 2, 1996, is hereby incorporated by reference to Exhibit
10.17 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
10.12 Amendment to the Aerial Communications, Inc. 1996 Long-Term Incentive
Plan is hereby incorporated by reference to Exhibit 99.2 of the
Company's Form S-8 dated April 30, 1998 (Registration No. 333-51561).
(b) Reports on Form 8-K filed during the quarter ended December 31, 1998.
On November 9, 1998, the Company filed a Current Report on Form 8-K dated
June 30, 1998, for the purpose of filing a redacted copy of the June 30, 1998,
Credit Agreement between Nokia Telecommunications Inc., and the Company.
16
<PAGE>
The Company filed a Current Report on Form 8-K dated December 18, 1998, for
the purpose of filing the news release dated December 18, 1998, concerning the
Company's announcement that the offer from its parent company, Telephone and
Data Systems, Inc. [AMEX: TDS], to acquire all of the issued and outstanding
Common Shares of the Company not already owned by TDS had been withdrawn. TDS
said that it is pursuing a tax free spin-off of its 82.3% interest in Aerial, as
well as reviewing other alternatives.
17
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Shareholders and Board of Directors of AERIAL COMMUNICATIONS, INC.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in the Aerial Communications,
Inc. and Subsidiaries Annual Report to Shareholders incorporated by reference in
this Form 10-K, and have issued our report thereon dated January 27, 1999
(except with respect to the matter discussed in Note 10, as to which the date is
March 15, 1999). Our audits were made for the purpose of forming an opinion on
the basic consolidated financial statements taken as a whole. The financial
statement schedule listed in Item 14 (a) (2) is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This financial statement schedule has been
subjected to the auditing procedures applied in the audits of the basic
consolidated financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 27, 1999
(except with respect to the matter discussed in Note 10, as to which the date is
March 15, 1999)
18
<PAGE>
AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COLUMN C
COLUMN B ADDITIONS COLUMN E
BALANCE AT CHARGED TO BALANCE AT
COLUMN A BEGINNING OF COSTS AND COLUMN D END OF
DESCRIPTION PERIOD EXPENSES DEDUCTIONS PERIOD
- ------------------------------------------------------------------------ ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1998
Valuation Allowance for Deferred Tax Assets........................... $ 129,412 $ 148,370 $ -- $ 277,782
Allowance for Doubtful Accounts deducted from Accounts Receivable..... 7,252 23,239 24,616 5,875
FOR THE YEAR ENDED DECEMBER 31, 1997
Valuation Allowance for Deferred Tax Assets........................... 15,029 114,383 -- 129,412
Allowance for Doubtful Accounts deducted from Accounts Receivable..... -- 7,252 -- 7,252
FOR THE YEAR ENDED DECEMBER 31, 1996
Valuation Allowance for Deferred Tax Assets........................... $ 1,291 $ 13,738 $ -- $ 15,029
</TABLE>
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
AERIAL COMMUNICATIONS, INC.
By: /S/ DONALD W. WARKENTIN
------------------------------------------
Donald W. Warkentin
PRESIDENT (CHIEF EXECUTIVE OFFICER)
By: /S/ J. CLARKE SMITH
------------------------------------------
J. Clarke Smith
VICE PRESIDENT-FINANCE AND
ADMINISTRATION AND TREASURER
(CHIEF FINANCIAL OFFICER)
By: /S/ B. SCOTT DAILEY
------------------------------------------
B. Scott Dailey
CONTROLLER (PRINCIPAL ACCOUNTING OFFICER)
</TABLE>
Dated: March 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
- -------------------------------------------------- ------------------------------ ---------------------
<S> <C> <C>
/s/ DONALD W. WARKENTIN DIRECTOR March 30, 1999
----------------------------------
Donald W. Warkentin
/s/ J. CLARKE SMITH DIRECTOR March 30, 1999
----------------------------------
J. Clarke Smith
/s/ LEROY T. CARLSON, JR. CHAIRMAN AND DIRECTOR March 30, 1999
----------------------------------
LeRoy T. Carlson, Jr.
/s/ LEROY T. CARLSON DIRECTOR March 30, 1999
----------------------------------
LeRoy T. Carlson
/s/ SANDRA L. HELTON DIRECTOR March 30, 1999
----------------------------------
Sandra L. Helton
/s/ RUDOLPH E. HORNACEK DIRECTOR March 30, 1999
----------------------------------
Rudolph E. Hornacek
/s/ JAMES BARR III DIRECTOR March 30, 1999
----------------------------------
James Barr III
/s/ WALTER C.D. CARLSON DIRECTOR March 30, 1999
----------------------------------
Walter C.D. Carlson
/s/ JOHN D. FOSTER DIRECTOR March 30, 1999
----------------------------------
John D. Foster
/s/ THOMAS W. WILSON, JR. DIRECTOR March 30, 1999
----------------------------------
Thomas W. Wilson, Jr.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
- -------------------------------------------------- ------------------------------ ---------------------
/s/ MATTI MAKKONEN DIRECTOR March 30, 1999
----------------------------------
Matti Makkonen
<S> <C> <C>
/s/ PERTTI MIETTUNEN DIRECTOR March 30, 1999
----------------------------------
Pertti Miettunen
</TABLE>
21
<PAGE>
- --------------------------------------------------------------------------------
EXHIBIT INDEX
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- ----------------------------------------------------------------------
<C> <S>
3.1 Restated Certificate of Incorporation of the Company, is hereby
incorporated by reference to Exhibit 3.1 to the Company's Form 10-Q
for the quarter ended June 30, 1997.
3.2 Restated Bylaws of the Company.
4.1 Trust Indenture Agreement dated as of November 4, 1996, between the
Company as issuer, TDS as guarantor, and The First National Bank of
Chicago, as trustee for the Company's Series A Zero Coupon Notes, due
2006, is hereby incorporated by reference to Exhibit 4.1 to the
Company's Form 8-K dated November 4, 1996.
4.2 Trust Indenture Agreement dated as of February 5, 1998, between the
Company as issuer, TDS as guarantor, and The First National Bank of
Chicago, as trustee for the Company's Series B Zero Coupon Notes, due
2008, is hereby incorporated by reference to Exhibit 4.1 to the
Company's Form 8-K dated February 5, 1998.
9.1(a) Voting Trust Agreement, dated as of June 30, 1989, is hereby
incorporated by reference to an exhibit to Post-Effective Amendment
No. 3 to the TDS Registration Statement on Form S-1, No. 33-12943.
9.1(b) Amendment dated as of May 9, 1991, to the Voting Trust Agreement dated
as of June 30, 1989, is hereby incorporated by reference to Exhibit
9.2 to TDS's Annual Report on Form 10-K for the year ended December
31, 1991.
9.1(c) Amendment dated as of November 20, 1992, to the Voting Trust Agreement
dated as of June 30, 1989, as amended, is hereby incorporated by
reference to Exhibit 9.1(c) to TDS's Annual Report on Form 10-K for
the year ended December 31, 1992.
9.1(d) Amendment dated as of May 22, 1998, to the Voting Trust Agreement
dated as of June 30, 1989, as amended, is hereby incorporated by
reference to Exhibit 99.3 to TDS's Current Report on Form 8-K filed on
June 5, 1998.
10.1 Form of Exchange Agreement between the Company and TDS, is hereby
incorporated by reference to Exhibit 10.1 to the Company's Amendment
No. 1 to Form S-1 (Registration No. 333-1514).
10.2 Form of Cash Management Agreement between the Company and TDS, is
hereby incorporated by reference to Exhibit 10.5 to the Company's
Amendment No. 1 to Form S-1 (Registration No. 333-1514).
10.3 Form of Intercompany Agreement between the Company and TDS, is hereby
incorporated by reference to Exhibit 10.6 to the Company's Amendment
No. 1 to Form S-1 (Registration No. 333-1514).
10.4 Form of Registration Rights Agreement between the Company and TDS, is
hereby incorporated by reference to Exhibit 10.7 to the Company's
Amendment No. 1 to Form S-1 (Registration No. 333-1514).
10.5 Form of Insurance Cost Sharing Agreement between the Company and TDS,
is hereby incorporated by reference to Exhibit 10.8 to the Company's
Amendment No. 1 to Form S-1 (Registration No. 333-1514).
10.6 Form of Employee Benefit Plans Agreement between the Company and TDS,
is hereby incorporated by reference to Exhibit 10.9 to the Company's
Amendment No. 1 to Form S-1 (Registration No. 333-1514).
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- ----------------------------------------------------------------------
<C> <S>
10.7* PCS Infrastructure Supply Contract dated as of March 1, 1996, between
the Company and Nokia Telecommunications Inc., is hereby incorporated
by reference to Exhibit 10.13 to the Company's Amendment No. 1 to Form
S-1 (Registration No. 333-1514).
10.8 Aerial Communications, Inc. 1996 Long-Term Incentive Plan, as amended,
is hereby incorporated by reference to Exhibit 99.1 to the Company's
registration statement on Form S-8 (Registration No 333-06471).
10.9 Description of Terms of Signing Letter with Donald W. Warkentin dated
June 7, 1995, is hereby incorporated by reference to Exhibit 10.15 to
the Company's Annual Report on Form 10-K for the year ended December
31, 1996.
10.10 Aerial Communications, Inc. Compensation Plan for Non-Employee
Directors is hereby incorporated by reference to Exhibit 99.1 to the
Company's Form S-8 dated May 2, 1997 (Registration No. 333-26429).
10.11 Description of Supplemental Benefit Agreement with Donald W. Warkentin
dated August 2, 1996, is hereby incorporated by reference to Exhibit
10.17 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1997.
10.12 Amendment to the Aerial Communications, Inc. 1996 Long-Term Incentive
Plan is hereby incorporated by reference to Exhibit 99.2 of the
Company's Form S-8 filed on April 30, 1998 (Registration No.
333-51561).
10.13 Investment Agreement by and between the Company, Telephone & Data
Systems, Inc., Aerial Operating Company, Inc. and Sonera Ltd. is
hereby incorporated by reference to Exhibit 99.2 of the Company's Form
8-K dated September 8, 1998 and filed on September 17, 1998.
10.14 Registration Rights Agreement by and between the Company and Sonera
Ltd. is hereby incorporated by reference to Exhibit 99.3 of the
Company's Form 8-K dated September 8, 1998 and filed on September 17,
1998.
10.15 Joint Venture Agreement by and between the Company, Aerial Operating
Company, Inc. and Sonera Corporation U.S., is hereby incorporated by
reference to Exhibit 99.4 of the Company's Form 8-K dated September 8,
1998 and filed on September 17, 1998.
10.16 Supplemental Agreement by and between the Company, Aerial Operating
Company, Inc. and Sonera Ltd. is hereby incorporated by reference to
Exhibit 99.5 of the Company's Form 8-K dated September 8, 1998 and
filed September 17, 1998.
10.17 Restated and amended Tax Allocation Agreement by and between the
Company, Aerial Operating Company, Inc. and Telephone and Data
Systems, Inc., is hereby incorporated by reference to Exhibit 99.6 of
the Company's Form 8-K dated September 8, 1998 and filed September 17,
1998.
10.18 Guaranty Agreement by and between the Company and Telephone and Data
Systems, Inc., dated August 31, 1998, is hereby incorporated by
reference to Exhibit 99.7 of the Company's Form 8-K dated September 8,
1998 and filed on September 17, 1998.
10.19 Purchase Agreement between the Company, Aerial Operating Company,
Inc., Telephone and Data Systems, Inc. and Sonera Ltd., dated June 1,
1998, is hereby incorporated by reference to Exhibit 99.9 of the
Company's Form 8-K dated September 8, 1998 and filed on September 17,
1998.
10.20(a) Revolving Credit Agreement dated August 31, 1998, by and between
Telephone and Data Systems, Inc. and Aerial Operating Company, Inc. is
hereby incorporated by reference to Exhibit 99.8 of the Company's Form
8-K dated September 8, 1998 and filed on September 17, 1998.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- ----------------------------------------------------------------------
<C> <S>
10.20(b) First Amendment dated November 3, 1998, to the Revolving Credit
Agreement between Telephone and Data Systems, Inc. and Aerial
Operating Company, Inc.
10.20(c) Second Amendment dated February 15, 1998 to the Revolving Credit
Agreement between Telephone and Data Systems, Inc and Aerial Operating
Company, Inc.
10.21* Credit Agreement dated June 30, 1998, by and between Nokia
Telecommunications Inc. and the Company, is hereby incorporated by
reference to Exhibit 99.1 of the Company's Form 8-K dated June 30,
1998 and filed on November 9, 1998.
10.22 Tax Settlement Agreement dated March 12, 1999, by and between the
Company, Aerial Operating Company, Inc. and Telephone and Data
Systems, Inc.
11 Computation of earnings per common share (included in Footnote 2(l) to
consolidated financial statements in Exhibit 13)
13 Incorporated portions of the 1998 Annual Report to Shareholders
21 List of Subsidiaries of the Registrant
23 Consent of Independent Public Accountants
27 Financial Data Schedule
</TABLE>
- ------------------------
* Confidential material appearing in this exhibit was omitted and filed
separately with the Securities and Exchange Commission in accordance with Rule
406 promulgated under the Securities Act of 1933.
24
<PAGE>
EXHIBIT 3.2
AERIAL COMMUNICATIONS, INC.
RESTATED BYLAWS
(AS AMENDED AS OF SEPTEMBER 8, 1998)
ARTICLE I
OFFICES
SECTION 1. REGISTERED OFFICE. The registered office shall be in the
City of Wilmington, County of New Castle, State of Delaware.
SECTION 2. OTHER OFFICES. The corporation may also have offices at
such other places both within and without the State of Delaware as the board
of directors may from time to time determine or the business of the
corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. PLACE OF MEETING. All meetings of the stockholders for the
election of directors shall be held at such place either within or without
the State of Delaware as shall be designated from time to time by the board
of directors and stated in the notice of the meeting. Meetings of
stockholders for any other purpose may be held at such time and place, within
or without the State of Delaware, as shall be stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
SECTION 2. TIME OF ANNUAL MEETING AND VOTE REQUIRED TO ELECT DIRECTORS.
Annual meetings of stockholders shall be held on the first Monday in May,
commencing in 1997, if not a legal holiday, and if a legal holiday, then on
the next secular day following, at 10:00 A.M., or at such other date and time
as shall be designated from time to time by the board of directors and stated
in the notice of the meeting, at which the stockholders shall elect by a
plurality vote directors to succeed those whose terms expire, and transact
such other business as may properly be brought before the meeting.
SECTION 3. NOTICE OF ANNUAL MEETING. Written notice of the annual
meeting stating the place, date and hour of the meeting shall be given to each
stockholder entitled to vote at such meeting not less than ten nor more than
sixty days before the date of the meeting.
SECTION 4. VOTING LIST. The officer who has charge of the stock ledger of
the corporation shall prepare and make, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote
at the meeting, arranged in alphabetical order, and showing the address of
each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, at the corporation's principal
business address during ordinary business hours, for a period of at least ten
days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be
held. The list shall also be produced
<PAGE>
and kept at the time and place of the meeting during the whole time thereof,
and may be inspected by any stockholder who is present.
SECTION 5. SPECIAL MEETINGS. Special meetings of the stockholders, for
any purpose or purposes, unless otherwise prescribed by statute or by the
certificate of incorporation, may be called by the president and shall be
called by the president or secretary at the request in writing of a majority
of the board of directors, or at the request in writing of holders of a
majority of the votes of the stock issued and outstanding and entitled to
vote. Such request shall state the purpose or purposes of the proposed
meeting.
SECTION 6. NOTICE OF SPECIAL MEETINGS. Written notice of a special
meeting, stating the place, date and hour of the meeting and the purpose or
purposes for which the meeting is called, shall be given not less than ten
nor more than sixty days before the date of the meeting to each stockholder
entitled to vote at such meeting.
SECTION 7. BUSINESS TO BE TRANSACTED AT SPECIAL MEETINGS. Business
transacted at any special meeting of stockholders shall be limited to the
purposes stated in the notice.
SECTION 8. QUORUM AND ADJOURNMENTS. The holders of a majority of the
votes of the stock issued and outstanding and entitled to vote thereat,
present in person or represented by proxy, shall constitute a quorum at all
meetings of the stockholders for the transaction of business except as
otherwise provided by statute or by the certificate of incorporation, and
except where a separate vote by a class or classes is required, in which case
the holders of a majority of the votes of the stock of such class or classes,
present in person or represented by a proxy, shall constitute a quorum
entitled to take action with respect to that vote on that matter. If,
however, such quorum shall not be present or represented at any meeting of
the stockholders, the stockholders entitled to vote thereat, present in
person or represented by proxy, shall have power to adjourn the meeting from
time to time, without notice other than announcement at the meeting, until a
quorum shall be present or represented. At such adjourned meeting at which a
quorum shall be present or represented, any business may be transacted which
might have been transacted at the meeting as originally notified. If the
adjournment is for more than thirty days, or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
SECTION 9. VOTE REQUIRED. When a quorum is present at any meeting, the
vote of the holders of a majority of the votes of the stock having voting
power present in person or represented by proxy shall decide any question
brought before such meeting, unless the question is one upon which by express
provision of statute, the certificate of incorporation, or the bylaws, a
different vote is required, in which case such express provision shall govern
and control the decision or such question.
SECTION 10. VOTING. Each stockholder shall at every meeting of
stockholders be entitled to vote in person or by proxy the shares of capital
stock having voting power held by such stockholder, but no proxy shall be
voted after three years from its date, unless the proxy provides for a longer
period.
SECTION 11. INFORMAL ACTION. Any action required to be taken at any
annual or special meeting of stockholders of the corporation, or any action
which may be taken at any annual or special meeting of such stockholders, may
be taken without a meeting, without prior notice and without a vote, if a
consent in writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted. Prompt
notice of the taking of the corporate action without a meeting by less than
unanimous written consent shall be given to those stockholders who have not
consented in writing.
<PAGE>
SECTION 12. INTRODUCTION OF BUSINESS AT A MEETING OF STOCKHOLDERS. At
an annual or special meeting of stockholders, only such business shall be
conducted, and only such proposals shall be acted upon, as shall have been
properly brought before an annual or special meeting of stockholders. To be
properly brought before an annual or special meeting of stockholders,
business must be (1) in the case of a special meeting, specified in the
notice of the special meeting (or any supplement thereto) given by or at the
direction of the board of directors, or (2) in the case of an annual meeting,
properly brought before an annual meeting by a stockholder. For business to
be properly brought before an annual meeting of stockholders by a
stockholder, the stockholder must have given timely notice thereof in writing
to the President or Secretary of the corporation. To be timely, a
stockholder's notice must be received at the principal executive offices of
the corporation not less than twenty days nor more than fifty days prior to
the date of the annual meeting, provided, however, that if less than thirty
days' notice or prior public disclosure of the date of the annual meeting is
made or given to stockholders, notice by the stockholder to be timely must be
received not later than the close of business on the tenth day following the
earlier of (1) the day on which such notice of the date of the meeting was
mailed or (2) the day on which such public disclosure was made.
A stockholder's notice shall set forth as to each matter the stockholder
proposes to bring before an annual meeting of stockholders (1) a brief
description of the business desired to be brought before the annual meeting,
(2) the name and address, as they appear on the corporation's books, of the
stockholder proposing such business and any other stockholders known by such
stockholder to be supporting such proposal, (3) the class and number of
shares of the corporation which are beneficially owned by such stockholder on
the date of such stockholder's notice and by any other stockholders known by
such stockholder to be supporting such proposal on the date of such
stockholder's notice and (4) any material interest of the stockholder in such
proposal.
Notwithstanding anything in the bylaws to the contrary, no business
shall be conducted at a meeting of stockholders except in accordance with the
procedure set forth in this Section 12. The chairman of the meeting shall,
if the facts warrant, determine and declare to the meeting that the business
was not properly brought before the meeting in accordance with the procedures
described by the bylaws, and if he should so determine, he shall so declare
to the meeting and any such business not properly brought before the meeting
shall not be considered.
SECTION 13. NOMINATION OF DIRECTORS. Only persons nominated in
accordance with the procedures set forth in this section shall be eligible
for election as directors. Nominations of persons for election to the board
may be made at a meeting of stockholders (1) by or at the direction of the
board of directors, or (2) by any stockholder of the corporation entitled to
vote for the election of directors at such meeting who complies with the
notice procedures set forth in this Section 13. Such nominations, other than
those made by or at the direction of the board of directors, shall be made
pursuant to timely notice in writing to the President or Secretary of the
corporation. To be timely, a stockholder's notice must be received at the
principal executive offices of the corporation not less than twenty days nor
more than fifty days prior to the date of a meeting, provided, however, that
if fewer than thirty days notice or prior public disclosure of the date of
the meeting is given or made to stockholders, notice by the stockholder to be
timely must be so delivered or received not later than the close of business
on the tenth day following the earlier of (1) the day on which such notice of
the date of such meeting was mailed or (2) the day on which such public
disclosure was made.
A stockholder's notice shall set forth (1) as to each person whom the
stockholder proposes to nominate for election or reelection as a director (a)
the name, age, business address and residence address of such person, (b) the
principal occupation or employment of such person, (c) the class and number
of shares of the corporation which are beneficially owned by such person on
the date of such stockholder's notice and (d) any other information relating
to such person that is required to be disclosed in solicitations of proxies
for election of directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities
<PAGE>
Exchange Act of 1934, as amended (including without limitation such person's
written consent to being named in the proxy statement as a nominee and to
serving as a director if elected); and (2) as to the stockholder giving the
notice (a) the name and address, as they appear on the corporation's books,
of such stockholder and any other stockholders known by such stockholder to
be supporting such nominees and (b) the class and number of shares of the
corporation which are beneficially owned by such stockholder on the date of
such stockholder's notice and by any other stockholders known by such
stockholder to be supporting such nominees on the date of such stockholder's
notice.
No person shall be eligible for election as a director of the
corporation unless nominated in accordance with procedures set forth in this
section. The chairman of the meeting shall, if the facts warrant, determine
and declare to the meeting that a nomination was not made in accordance with
the procedures prescribed by the bylaws, and if he should so determine, he
shall so declare to the meeting and the defective nomination shall be
disregarded.
This Section 13 shall not apply to the election of a director to a
directorship which may be filled by the board of directors under the Delaware
General Corporation Law.
ARTICLE III
DIRECTORS
SECTION 1. NUMBER, CLASSIFICATION AND TERM OF OFFICE. The number of
directors which shall constitute the whole board shall not be less than three
nor more than twelve. Within the limits above specified, the number of
directors shall be determined by resolution of the board of directors or by
the stockholders at the annual meeting. Commencing with the 1997 annual
meeting of stockholders, the directors shall be divided into three classes:
Class I, Class II and Class III. Such classes shall be as nearly equal in
number as possible. The term of office of the initial Class I directors
shall expire at the annual meeting of stockholders in 1998; the term of
office of the initial Class II directors shall expire at the annual meeting
of stockholders in 1999; and the term of office of the initial Class III
directors shall expire at the annual meeting of stockholders in 2000, or
thereafter when their respective successors in each case are elected and
qualified. At each annual election held after the 1997 annual meeting of
stockholders the directors chosen to succeed those whose terms then expire
shall be identified as being of the same class as the directors they succeed
and shall be elected for a term expiring at the third succeeding annual
meeting or thereafter when their respective successors in each case are
elected and qualified. Any director elected to a particular class by the
stockholders or directors shall be eligible, upon resignation, to be elected
to a different class.
SECTION 2. GENERAL POWERS. The business of the corporation shall be
managed by its board of directors, which may exercise all such powers of the
corporation and do all such lawful acts and things as are not by statute, by
the certificate of incorporation or by the bylaws directed or required to be
exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
SECTION 3. PLACE OF MEETINGS. The board of directors of the
corporation may hold meetings, both regular and special, either within or
without the State of Delaware.
SECTION 4. REGULAR MEETINGS. A regular meeting of the board of
directors shall be held without other notice than this bylaw, immediately
after, and at the same place as, the annual meeting of
<PAGE>
stockholders. The board of directors may provide, by resolution, the time
and place, either within or without the State of Delaware, for the holding of
additional regular meetings without other notice than such resolution.
SECTION 5. SPECIAL MEETINGS. Special meetings of the board of
directors may be called by the president on two days notice to each director,
either personally or by mail or by telegram; special meetings shall be called
by the president or secretary in like manner and on like notice on the
written request of two directors.
SECTION 6. QUORUM. At all meetings of the board of directors, a
majority of directors then in office shall constitute a quorum for the
transaction of business and the act of a majority of the directors present at
any meeting at which there is a quorum shall be the act of the board of
directors, except as may be otherwise specifically provided by statute or by
the certificate of incorporation. If a quorum shall not be present at any
meeting of the board of directors, the directors present thereat may adjourn
the meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
SECTION 7. INFORMAL ACTION. Unless otherwise restricted by the
certificate of incorporation or these bylaws, any action required to be taken
at any meeting of the board of directors or of any committee thereof may be
taken without a meeting, if all members of the board or committee, as the
case may be, consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the board or committee.
SECTION 8. RESIGNATIONS. Any director of the corporation may resign at
any time by giving written notice to the board of directors, the president,
or the secretary of the corporation. Such resignation shall take effect at
the time specified therein; and, unless tendered to take effect upon
acceptance thereof, the acceptance of such resignation shall not be necessary
to make it effective.
SECTION 9. PRESUMPTION OF ASSENT. A director of the corporation who is
present at a meeting of the board of directors at which action on any
corporate matter is taken shall be conclusively presumed to have assented to
the action taken unless his dissent shall be entered in the minutes of the
meeting or unless he shall file his written dissent to such action with the
person acting as the secretary of the meeting before the adjournment thereof
or shall forward such dissent by registered mail to the secretary of the
corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to a director who voted in favor of such action.
COMMITTEES OF DIRECTORS
SECTION 10. APPOINTMENT AND POWERS. The board of directors may, by
resolution passed by a majority of the whole board, designate one or more
committees, each committee to consist of one or more directors of the
corporation. The board may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member
at any meeting of the committee. In the absence or disqualification of a
member of a committee, the member or members thereof present at any meeting
and not disqualified from voting, whether the member or members constitute a
quorum, may unanimously appoint another member of the board of directors to
act at the meeting in the place of any such absent or disqualified member.
Any such committee, to the extent provided in the resolution of the board of
directors, shall have and may exercise all the powers and authority of the
board of directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to
all papers which may require it; but no such committee shall have the power
or authority in reference to amending the certificate of incorporation,
adopting an agreement of merger or consolidation, recommending to the
stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, recommending to the stockholders a
dissolution of the corporation or a revocation of a
<PAGE>
dissolution, or amending the bylaws of the corporation; and, unless the
resolution so provides, no such committee shall have the power or authority
to declare a dividend or to authorize the issuance of stock. Such committee
or committees shall have such name or names as may be determined from time to
time by resolution adopted by the board of directors.
SECTION 11. MINUTES. Each committee shall keep regular minutes of
its meetings and report the same to the board of directors when required.
COMPENSATION OF DIRECTORS
SECTION 12. COMPENSATION. The board of directors shall have the
authority to fix the compensation of directors. The directors may be paid
their expenses, if any, of attendance at each meeting of the board of
directors and may be paid a fixed sum for attendance at each meeting of the
board of directors or a stated salary as director. No such payments shall
preclude any director from serving the corporation in any other capacity and
receiving compensation therefor. Members of special or standing committees
may be allowed like compensation for attending committee meetings.
ARTICLE IV
NOTICES
SECTION 1. NOTICE. Whenever, under the provisions of statute or of the
certificate of incorporation or of these bylaws, notice is required to be
given to any director or stockholder, it shall not be construed to mean
personal notice, but such notice may be given in writing, by mail, addressed
to such director or stockholder, at the stockholder's address as it appears
on the records of the corporation, with postage thereon prepaid, and such
notice shall be deemed to be given at the time when the same shall be
deposited in the United States mail. Notice to directors may also be given
by telegram, telex or similar device.
SECTION 2. WAIVER. Whenever any notice is required to be given under
the provisions of statute or of the certificate of incorporation or of these
bylaws, a waiver thereof in writing, signed by the person or persons entitled
to said notice, whether before or after the time stated therein, shall be
deemed equivalent thereto.
ARTICLE V
OFFICERS
SECTION 1. NUMBER AND QUALIFICATIONS. The officers of the corporation
shall be chosen by the board of directors and shall be a chairman, president,
one or more vice-presidents, a secretary and a treasurer. The board of
directors may also choose one or more assistant secretaries and assistant
treasurers. Any number of offices may be held by the same person, unless the
certificate of incorporation or these bylaws otherwise provide.
SECTION 2. ELECTION. The board of directors at its first meeting after
each annual meeting of stockholders shall choose a chairman, president, one
or more vice-presidents, a secretary and a treasurer.
<PAGE>
SECTION 3. OTHER OFFICERS AND AGENTS. The board of directors may
appoint such other officers and agents as it shall deem necessary who shall
hold their offices for such terms and shall exercise such powers and perform
such duties as shall be determined from time to time by the board.
SECTION 4. SALARIES. The salaries of all officers and agents of the
corporation shall be fixed by the board of directors or by the chairman,
PROVIDED that the chairman shall not fix any salary for himself or herself as
an officer or agent of the corporation.
SECTION 5. TERM OF OFFICE. The officers of the corporation shall hold
office until their successors are chosen and qualify. Any officer elected or
appointed by the board of directors may be removed at any time by the
affirmative vote of a majority of the board of directors. Any vacancy
occurring in any office of the corporation shall be filled by the board of
directors.
THE CHAIRMAN
SECTION 6. CHAIRMAN. The chairman shall preside at all meetings of the
shareholders and of the board of directors and shall see that orders and
resolutions of the board of directors are carried into effect. He may sign
bonds, mortgages, certificates for shares and all other contracts and
documents whether or not under the seal of the corporation except in cases
where the signing and execution thereof shall be expressly delegated by law,
by the board of directors or by these bylaws to some other officer or agent
of the corporation. In the absence of the president (including a vacancy in
such office) or in the event of his inability or refusal to act, which
inability shall be determined by the chairman, the chairman shall perform the
duties of the principal executive officer and, when so acting, shall have all
the powers of the President.
THE PRESIDENT
SECTION 7. THE PRESIDENT. The president shall be the principal
executive officer of the corporation and shall in general supervise and
control all of the business and affairs of the corporation, subject to the
general powers of the board of directors. In the absence of the chairman, he
shall preside at all meetings of the shareholders and of the board of
directors. He may sign bonds, mortgages, certificates for shares and all
other contracts and documents whether or not under seal of the corporation
except in cases where the signing and execution thereof shall be expressly
delegated by the board of directors or by these bylaws to some other officer
or agent of the corporation. In general, he shall perform all duties
incident to the office of president and such other duties as may be
prescribed by the board of directors from time to time. He shall have
general powers of supervision and shall be the final arbiter of all
differences between officers of the corporation and his decision as to any
matter affecting the corporation shall be final and binding as between the
officers of the corporation subject only to the chairman and the board of
directors.
THE VICE-PRESIDENT
SECTION 8. THE VICE-PRESIDENT. In the absence of the chairman or the
president or in the event of the chairman's or the president's inability or
refusal to act, the vice-president (or in the event there be more than one
vice-president, the vice-presidents in the order designated, or in the
absence of any designation then in the order of their election) shall perform
the duties of the president, and when so acting shall have all the powers of
and be subject to all the restrictions upon the president. The
vice-president shall perform such other duties and have such other powers as
the board of directors may from time to time prescribe.
<PAGE>
THE SECRETARY AND ASSISTANT SECRETARY
SECTION 9. THE SECRETARY. The secretary shall attend all meetings of
the board of directors and all meetings of the stockholders and record all
the proceedings of the meetings of the corporation and of the board of
directors in a book to be kept for that purpose and shall perform like duties
for the standing committees when required. He shall give, or cause to be
given, notice of all meetings of the stockholders and special meetings of the
board of directors, and shall perform such other duties as may be prescribed
by the board of directors or president, under whose supervision the secretary
shall be. The secretary shall have custody of the corporate seal of the
corporation and the secretary, or an assistant secretary, shall have
authority to affix the same to any instrument requiring it and, when so
affixed, it may be attested by the secretary's signature or by the signature
of such assistant secretary. The board of directors may give general
authority to any other officer to affix the seal of the corporation and to
attest the affixing by the secretary's signature.
SECTION 10. THE ASSISTANT SECRETARY. The assistant secretary or, if
there be more than one, the assistant secretaries in the order determined by
the board of directors (or if there be no such determination, then in the
order of their election), shall, in the absence of the secretary or in the
event of the secretary's inability or refusal to act, perform the duties and
exercise the powers of the secretary and shall perform such other duties and
have such other powers as the board of directors may from time to time
prescribe.
THE TREASURER AND ASSISTANT TREASURER
SECTION 11. THE TREASURER. The treasurer shall have custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the corporation and shall
deposit all moneys and other valuable effects in the name and to the credit
of the corporation in such depositories as may be designated by the board of
directors.
The treasurer shall disburse the funds of the corporation as may be
ordered by the board of directors, taking proper vouchers for such
disbursements, and shall render to the president and the board of directors,
at its regular meetings, or when the board of directors so requires, an
account of all transactions as treasurer and of the financial condition of
the corporation.
If required by the board of directors, the treasurer shall give the
corporation a bond (which shall be renewed every six years) in such sum and
with such surety or sureties as shall be satisfactory to the board of
directors for the faithful performance of the duties of the office and for
the restoration to the corporation, in case of the treasurer's death,
resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in the treasurer's
possession or under the treasurer's control belonging to the corporation.
SECTION 12. THE ASSISTANT TREASURER. The assistant treasurer or, if
there shall be more than one, the assistant treasurers in the order
determined by the board of directors (or if there be no such determination,
then in the order of their election), shall, in the absence of the treasurer
or in the event of the treasurer's inability or refusal to act, perform the
duties and exercise the powers of the treasurer and shall perform such other
duties and have such other powers as the board of directors may from time to
time prescribe.
<PAGE>
ARTICLE VI
CERTIFICATES OF STOCK
SECTION 1. FORM OF CERTIFICATES. Every holder of stock in the
corporation shall be entitled to have a certificate, signed by, or in the
name of the corporation by, the chairman, president or a vice-president and
the treasurer or an assistant treasurer or the secretary or an assistant
secretary of the corporation, certifying the number of shares owned by the
stockholder in the corporation. If the corporation shall be authorized to
issue more than one class of stock or more than one series of any class, the
powers, designations, preferences and relative, participating, optional or
other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights
shall be set forth in full or summarized on the face or back of the
certificate which the corporation shall issue to represent such class or
series of stock, provided that, except as otherwise provided in Section 202 of
Title 8 of the Delaware Code, in lieu of the foregoing requirements, there
may be set forth on the face or back of the certificate which the corporation
shall issue to represent such class or series of stock, a statement that the
corporation will furnish without charge to each stockholder who so requests
the powers, designations, preferences and relative, participating, optional
or other special rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or rights.
SECTION 2. FACSIMILE SIGNATURES. Where a certificate is countersigned
(1) by a transfer agent other than the corporation or its employee, or (2) by
a registrar other than the corporation or its employee, any other signature
on the certificate may be facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the corporation with
the same effect as if such person were an officer, transfer agent or
registrar at the date of issue.
SECTION 3. LOST CERTIFICATES. The board of directors may direct that a
new certificate or certificates be issued in place of any certificate or
certificates theretofore issued by the corporation alleged to have been lost,
stolen or destroyed upon the making of an affidavit of that fact by the
person claiming the certificate of stock to be lost, stolen or destroyed.
When authorizing such issue of a new certificate or certificates, the board
of directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate or certificates, or his legal representative, to advertise the
same in such manner as it shall require and/or to give the corporation a bond
in such sum as it may direct as indemnity against any claim that may be made
against the corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.
SECTION 4. TRANSFER OF STOCK. Upon surrender to the corporation or the
transfer agent of the corporation of a certificate for shares duly endorsed
or accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the corporation, within a reasonable period
of time, to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
SECTION 5. REGISTERED STOCKHOLDERS. The corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the
owner of shares, and shall not be bound to recognize any equitable or other
claim to or interest in such share or shares on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of Delaware.
<PAGE>
ARTICLE VII
GENERAL PROVISIONS
SECTION 1. DIVIDENDS. Dividends upon the capital stock of the
corporation, subject to the provisions of the certificate of incorporation,
if any, may be declared by the board of directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the certificate of
incorporation.
Before payment of any dividend, there may be set aside out of any funds
of the corporation available for dividends such sum or sums as the directors
from time to time, in their absolute discretion, think proper as a reserve or
reserves to meet contingencies, or for equalizing dividends, or for repairing
or maintaining any property of the corporation, or for such other purpose as
the directors shall think conducive to the interest of the corporation, and
the directors may modify or abolish any such reserve in the manner in which
it was created.
SECTION 2. CHECKS. All checks or demands for money and notes of the
corporation shall be signed by such officer or officers or such other person
or persons as the board of directors may from time to time designate.
SECTION 3. FISCAL YEAR. The fiscal year of the corporation shall be
fixed by resolution of the board of directors.
SECTION 4. SEAL. The corporate seal shall have inscribed thereon the
name of the corporation and the words "Corporate Seal, Delaware." The seal
may be used by causing it or a facsimile thereof to be impressed or affixed
or reproduced or otherwise.
ARTICLE VIII
AMENDMENTS
These bylaws may be altered, amended or repealed or new bylaws may be
adopted by the board of directors or by the stockholders at any regular meeting
of the board of directors or of the stockholders or at any special meeting of
the board of directors or of the stockholders, if in the case of such special
meeting of the stockholders notice of such alteration, amendment, repeal or
adoption of new bylaws is contained in the notice of such special meeting.
<PAGE>
EXHIBIT 10.20(b)
FIRST AMENDMENT
TO THE
REVOLVING CREDIT AGREEMENT
BY AND BETWEEN
TELEPHONE AND DATA SYSTEMS, INC. AND AERIAL OPERATING COMPANY, INC.
This First Amendment (the "FIRST AMENDMENT") to the Revolving Credit
Agreement dated as of August 31, 1998, (the "Revolving Credit Agreement") by
and between Telephone and Data Systems, Inc. ("TDS"), a Delaware corporation,
and Aerial Operating Company, Inc. (the "COMPANY"), a Delaware corporation,
is effective as of this 3rd day of November, 1998.
WHEREAS TDS and the Company entered into the Revolving Credit Agreement;
WHEREAS TDS continues to own certain of the issued and outstanding shares of
the capital stock of Aerial Communications, Inc. (the "GUARANTOR"), which, in
turn, is the parent of the Company and guarantor of the Company's obligations
under the Notes and the Revolving Credit Agreement; and
WHEREAS, the Company has identified a need for additional funds and TDS has
agreed to provide the Company certain additional funds for specified purposes
under terms more particularly set forth in the Revolving Credit Agreement and
as proposed to be amended hereby;
NOW, THEREFORE, in consideration of the premises set forth above, and for
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and intending to be legally bound, TDS and the Company
agree to amend the Revolving Credit Agreement as follows:
1. The definition of "Applicable Maximum Amount" set forth in Section
10(b) of the Revolving Credit Agreement is hereby amended and
restated to read in its entirety as follows:
"Applicable Maximum Amount" shall mean, as of any date of
determination, the dollar amount set forth in Schedule I hereto
and pertaining to the period during which such date occurs,
MINUS (i) the aggregate principal amount of all prepayments
required to be paid pursuant to the last sentence of Section 2
after November 3, 1998 and (ii) the aggregate amount of all
loans to the Guarantor outstanding as of November 3, 1998 under
that certain Credit Agreement dated as of June 30, 1998, by and
among the Guarantor, the "Lenders" party thereto from time to
time and Nokia Telecommunications Inc., as "Agent" for said
Lenders.
2. Schedule I to this First Amendment shall be added to the Revolving
Credit Agreement as Schedule I thereto.
3. Section 3 of the Credit Agreement is hereby amended by striking the
rate "1-1/2%" set forth in the first sentence thereof and replacing
it with the rate "3.0%".
4. Section 5 of the Credit Agreement is hereby amended by striking the
date "December 31, 1999" set forth therein and replacing it with the
date April 2, 2000.
All other terms and conditions of the Revolving Credit Agreement shall remain
unchanged and in full force and effect. All defined terms contained in the
Revolving Credit Agreement hereby are incorporated into this First Amendment
and shall have the same meaning herein as in the Revolving Credit Agreement,
unless otherwise defined herein.
<PAGE>
IN WITNESS WHEREOF, the parties hereto, by their duly authorized
representatives, have executed this First Amendment to the Revolving Credit
Agreement, effective as of the date first written above.
TELEPHONE AND DATA SYSTEMS, INC. AERIAL OPERATING COMPANY, INC.
By: /s/ Sandra L. Helton By: /s/ J. Clarke Smith
- ------------------------------ --------------------------
Name: Sandra L. Helton Name: J. Clarke Smith
Title: Executive Vice President-Finance Title: Vice President Finance &
Adminstration
Date: 11/24/98 Date: 11/24/98
- ------------------------------ --------------------------
The Guarantor, without in any way establishing a course of dealing, as
evidenced by its signature below, hereby (i) consents to the execution and
delivery of this Amendment by the parties hereto, (ii) agrees that this
Amendment shall not limit or diminish the obligations of the Guarantor under
the Guarantor's unconditional and irrevocable guarantee of the Company's
obligations of the Notes and the Revolving Credit Agreement, (iii) reaffirms
its obligations under such guarantee, and (iv) agrees that its guarantee of
such obligations remains in full force and effect and is hereby ratified and
confirmed.
AERIAL COMMUNICATIONS, INC.
By: /s/ Donald W. Warkentin
- ------------------------------
Name: Donald W. Warkentin
Title: President & Chief Executive Officer
Date: 11/24/98
- ------------------------------
<PAGE>
SCHEDULE I
TO
REVOLVING CREDIT AGREEMENT
<TABLE>
<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 27, 1999 $625,000,000
February 28, 1999 and thereafter $650,000,000
</TABLE>
<PAGE>
EXHIBIT 10.20(c)
SECOND AMENDMENT
TO THE
REVOLVING CREDIT AGREEMENT
BY AND BETWEEN
TELEPHONE AND DATA SYSTEMS, INC. AND AERIAL OPERATING COMPANY, INC.
This Second Amendment (the "SECOND AMENDMENT") to the Revolving Credit Agreement
dated as of August 31, 1998, as amended November 3, 1998 (the "REVOLVING CREDIT
AGREEMENT") by and between Telephone and Data systems, Inc. ("TDS"), a Delaware
corporation, and Aerial Operating Company, Inc. (the "COMPANY"), a Delaware
corporation, is effective as of this 15th day of February, 1999.
WHEREAS TDS and the Company entered into the Revolving Credit Agreement;
WHEREAS TDS continues to own certain of the issued and outstanding shares of the
capital stock of Aerial Communications, Inc. (the "GUARANTOR"), which, in turn,
is the parent of the Company and guarantor of the Company's obligations under
the Notes and the Revolving Credit Agreement; and
WHEREAS, the Company has identified a need for funds on an earlier basis than
previously anticipated and TDS has agreed to accelerate funds for specified
purposes under terms more particularly set forth in the Revolving Credit
Agreement and as proposed to be amended hereby;
NOW, THEREFORE, in consideration of the premises set forth above, and for good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and intending to be legally bound, TDS and the Company agree to
amend the Revolving Credit Agreement as follows:
1. Schedule I is hereby amended and restated in its entirety in the
form attached hereto.
All other terms and conditions of the Revolving Credit Agreement shall remain
unchanged and in full force and effect. All defined terms contained in the
Revolving Credit Agreement hereby are incorporated into this Second Amendment
and shall have the same meaning herein as in the Revolving Credit Agreement,
unless otherwise defined herein.
* * * * *
IN WITNESS WHEREOF, the parties hereto, by their duly authorized
representatives, have executed this Second Amendment to the Revolving Credit
Agreement, effective as of the date first written above.
<PAGE>
TELEPHONE AND DATA SYSTEMS, INC. AERIAL OPERATING COMPANY, INC.
By: /S/ SANDRA L. HELTON By: /S/ J. CLARKE SMITH
---------------------------------- ------------------------------
Name: Sandra L. Helton Name: J. Clarke Smith
Title: Executive Vice President-Finance Title: Vice President
Finance & Administration
Date: February 15, 1999 Date: February 17, 1999
------------------------------- ----------------------------
The Guarantor, without in any way establishing a course of dealing, as evidenced
by its signature below, hereby (i) consents to the execution and delivery of
this Amendment by the parties hereto, (ii) agrees that this Amendment shall not
limit or diminish the obligations of the Guarantor under the Guarantor's
unconditional and irrevocable guarantee of the Company's obligations of the
Notes and the Revolving Credit Agreement, (iii) reaffirms its obligations under
such guarantee, and (iv) agrees that its guarantee of such obligations remains
in full force and effect and is hereby ratified and confirmed.
AERIAL COMMUNICATIONS, INC.
By: /S/ J. CLARKE SMITH
-----------------------
Name: J. Clarke Smith
Title: Vice President
Finance & Administration
Date: February 17, 1999
---------------------
<PAGE>
SCHEDULE I
TO
REVOLVING CREDIT AGREEMENT
<TABLE>
<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 and thereafter, thru April 2, 2000 $650,000,000
</TABLE>
<PAGE>
EXHIBIT 10.22
TAX SETTLEMENT AGREEMENT
This Tax Settlement Agreement (this "Agreement"), dated as of March 12,
1999, is entered into among Telephone and Data Systems, Inc., a Delaware
corporation ("TDS"), Aerial Communications, Inc., a Delaware corporation
("Aerial"), and Aerial Operating Co., Inc., a Delaware corporation ("AOC"),
and has reference to the following circumstances.
1. TDS, Aerial and AOC are parties to a Tax Allocation Agreement dated
as of September 8, 1998 (the "Tax Allocation Agreement").
2. TDS and Aerial have agreed that it is desirable for TDS to make a
payment to Aerial with respect to certain losses incurred by the Aerial Group
and used in computing the consolidated tax liabilities of the TDS Group, in
lieu of the treatment of such losses provided under the Tax Allocation
Agreement.
3. TDS is the common parent of an affiliated group of corporations which
files a consolidated tax return (the "TDS Group").
4. For purposes of this Agreement, the term "Aerial Group" means Aerial
and its subsidiaries as if they constituted a separate affiliated group of
corporations which files a consolidated tax return.
NOW, THEREFORE, in consideration of the mutual agreements contained
herein, the parties hereto agree as follows.
Section 1. Tax Settlement Payment. On or before March 15, 1999, TDS
shall pay Aerial $114,500,000 (the "Tax Settlement Payment"). In
consideration of the Tax Settlement Payment, the amount of the net operating
and capital losses and tax credits of the Aerial Group taken into account
under the Tax Allocation Agreement shall be adjusted to exclude the net
operating and capital losses and tax credits attributable to the Aerial Group
that are absorbed by the TDS Group in periods ending on or before December
31, 1999.
Section 2. Tax Settlement Model. The tax settlement model attached to
this Agreement as Schedule 1 has been prepared solely for purposes of making
the adjustments contemplated by Sections 3, 4, 5 and 6 hereof, and the
parties agree that it does not represent a projection of the anticipated
results of the TDS Group, the Aerial Group or any member thereof and that,
except for the adjustments noted, it was not relied upon by the parties
hereto in arriving at the amount of the Tax Settlement Payment. For a period
of 90 days after the date of this Agreement, TDS and Aerial shall be entitled
to object to such model on the grounds that it contains computational errors
or errors in the application of the federal income tax law. The procedures
set forth in Section 8 of this Agreement shall apply to resolve any such
objections. Within 10 days after the resolution of any such objections, the
parties shall modify such model accordingly (as so modified, the "Tax
Settlement Model") and shall adjust the Tax Settlement Payment by payment
from TDS to Aerial or from Aerial to TDS, as the case may be, of the
difference between the Tax Settlement Payment shown on the model attached as
Schedule 1 and the Tax Settlement Payment shown on the Tax Settlement Model,
plus interest on such difference as provided in Section 9.
Section 3. 1998 Results. The Tax Settlement Model is based on estimates
of the taxable income or loss of the members of the TDS Group for the
consolidated return year ended December 31, 1998 (the "1998 Results"). Within
30 days after filing the consolidated federal income tax return of the TDS
Group
<PAGE>
for such year, TDS shall recalculate the Tax Settlement Model, reflecting in
such recalculation the 1998 Results as reported on such return. The change to
reflect the 1998 Results shall be the only change made in this recalculation.
TDS shall provide a copy of the Tax Settlement Model as recalculated to
Aerial, together with such supporting information as Aerial may reasonably
request to determine the correctness of the recalculation. For a period of 30
days after receipt, Aerial shall have the opportunity to object solely on the
grounds that the Tax Settlement Model as recalculated does not accurately
reflect the 1998 Results. The procedures set forth in Section 8 of this
Agreement shall apply to resolve any such objections. Within 10 days after
the resolution of any such objections, the parties shall modify the Tax
Settlement Model accordingly (as so modified, the "Adjusted Tax Settlement
Model") and shall adjust the Tax Settlement Payment by payment from TDS to
Aerial or from Aerial to TDS, as the case may be, of the difference between
the Tax Settlement Payment shown on the Tax Settlement Model and the Tax
Settlement Payment shown on the Adjusted Tax Settlement Model, plus interest
on such difference as provided in Section 9.
Section 4. Spin-Off Date. The Tax Settlement Model is based on the
assumption that TDS will distribute to its shareholders the stock of Aerial
that it now owns on August 31, 1999. If Aerial ceases to be a member of the
TDS Group (on account of such distribution or the consummation of another
transaction) on a later date (the "Departure Date"), the adjustments set
forth on Exhibit A shall be made. If the Departure Date occurs on a date that
is between two of the dates in the table set forth on Exhibit A, the
adjustment to the Tax Settlement Payment and the amount of Aerial Losses
shall be determined by interpolation based on the number of days. If Aerial
is a member of the TDS Group on January 1, 2000, the Departure Date shall be
treated as December 31, 1999 for purposes of this Section. The figures in the
table set forth on Exhibit A shall be adjusted to reflect any changes made to
the Tax Settlement Model pursuant to Sections 2 and 3. TDS shall pay Aerial
the adjustment to the Tax Settlement Payment provided by this Section within
10 days after the Departure Date (or December 31, 1999 in the event that
Aerial is a member of the TDS Group of January 1, 2000), plus interest on
such adjustment as provided in Section 9.
Section 5. 1999 Results. Within 30 days after filing the consolidated
federal income tax return of the TDS Group for the consolidated return year
ending December 31, 1999 (the "1999 Return"), TDS shall provide to Aerial a
statement setting forth the amount of the consolidated net operating and
capital losses of the TDS Group that are attributable to the Aerial Group as
of the close of such consolidated return year (the "Adjusted Aerial Losses").
TDS shall provide such supporting information as Aerial may reasonably
request to determine whether such statement is consistent with the 1999
Return. For a period of 30 days after receipt, Aerial shall have the
opportunity to object solely on the grounds that such statement is
inconsistent with the 1999 Return. The procedures set forth in Section 8 of
this Agreement shall apply to resolve any such objections. Within 10 days
after the resolution of any such objections, TDS shall adjust the Tax
Settlement Payment by paying to Aerial an amount equal to 13% of the excess,
if any, of (i) the Aerial Losses (as determined under Section 4) over (ii)
the Adjusted Aerial Losses, plus interest on such amount, if any, as provided
in Section 9. However, TDS shall not be obligated to make any payment to
Aerial pursuant to the preceding sentence or pursuant to Section 6 until the
aggregate amount of the excess determined pursuant to the preceding sentence
and Section 6 exceeds 10% of the Aerial Losses.
Section 6. IRS Adjustments. If it is finally determined, as a result of
audit by the Internal Revenue Service of any consolidated return year of the
TDS Group through December 31, 1999, that there is an adjustment that
decreases (or increases) the amount of the Adjusted Aerial Losses, TDS shall
provide to Aerial a statement of the Adjusted Aerial Losses as finally
determined (the "Final Aerial Losses") within 30 days after such final
determination. TDS shall provide such supporting information as Aerial may
reasonably request to ascertain the amount of the Final Aerial Losses. For a
period of 30 days after receipt, Aerial shall have the opportunity to object
to such statement solely on the grounds it does not properly reflect the
amount of the Final Aerial Losses. The procedures set forth in Section 8 of
this Agreement shall apply to resolve any such objections. Within 10 days
after the resolution of any such objections, TDS shall adjust the Tax
Settlement Payment by paying to Aerial an amount equal to 13% of the excess,
if any, of (i) the Adjusted Aerial Losses over (ii) the Final Aerial Losses,
plus interest on such amount, if any, as provided in Section 9.
<PAGE>
However, TDS shall not be obligated to make any payment to Aerial pursuant to
the preceding sentence or pursuant to Section 5 until the aggregate amount of
the excess determined pursuant to the preceding sentence and Section 5
exceeds 10% of the Aerial Losses. TDS shall have the right to make, at any
time and from time to time, a nonrefundable prepayment of an estimate of its
liability under this Section. Any amount which is so prepaid shall cease to
bear interest as of the date of prepayment.
Section 7. Section 338(h)(10) Sale and Similar Transactions. TDS shall
not, without the consent of a majority of the independent directors of
Aerial, (i) sell or agree to sell the stock of Aerial and join or agree to
join in making an election under section 338(h)(10) of the Internal Revenue
Code of 1986, as amended (the "Code"), with respect to such sale or (ii)
cause or permit the Aerial Group, while its members are members of the TDS
Group, to dispose of or agree to dispose of assets constituting 50% or more
of the assets of the Aerial Group in a transaction, or in a series of
transactions pursuant to a plan (which shall be conclusively presumed to
exist in the case of all transactions occurring within a two-year period), in
which the Aerial Group recognizes all or substantially all of the gain with
respect to such assets. In addition, this Agreement is subject to the
approval by the Board of Directors of Aerial (the "Aerial Board"),
concurrently with the approval of this Agreement, of a resolution which
authorizes the Special Committee of the Aerial Board to consider any proposal
relating to the sale, merger, consolidation or other business combination
involving substantially all of the common stock or assets of Aerial and to
report to the Board of Directors of Aerial as a whole the Special Committee's
recommendation with respect thereto.
Section 8. Resolution of Objections. Any objection raised under Sections
2, 3, 5 or 6 of this Agreement shall be in writing and shall set forth in
reasonable detail the nature of the objection and the corrections that the
objecting party believes should be made. The parties shall attempt to resolve
all such objections within 30 days, but to the extent they cannot do so, they
shall present unresolved objections to the Chicago office of Arthur Andersen
LLP. The fees and expenses of Arthur Andersen LLP shall be borne equally by
TDS and Aerial. If TDS or Aerial disputes Arthur Andersen's resolution of any
objection, the objection shall be submitted to, and finally determined by,
binding arbitration conducted in Chicago by the American Arbitration
Association in accordance with its Commercial Rules. TDS and Aerial shall
share equally the cost of such arbitration, including the administrative fee,
the compensation of the arbitrator and the costs of any neutral witnesses;
the parties shall each bear all their own costs and expenses of arbitration,
including legal and accounting fees and expenses.
Section 9. Interest. If a payment is to be made pursuant to Sections 2,
3, 4, 5 or 6 of this Agreement, interest shall be added to such payment,
computed at 13%, compounded annually, from (and including) the date of the
Tax Settlement Payment through (and including) the day before such payment is
made.
Section 10. Method of Payment. All payments to be made under this
Agreement shall be made by wire transfer of immediately available funds to an
account specified by the recipient thereof.
Section 11. Effect on Other Agreements. This Agreement is intended to
settle only the respective rights and obligations of the parties under the
Tax Allocation Agreement with respect to the net operating and capital losses
and tax credits specifically referred to in this Agreement. Subject to the
foregoing sentence, the execution of this Agreement is not intended to
prejudice or waive any party's rights to contest, or assert its
interpretation of, any or all of the provisions of the Tax Allocation
Agreement under applicable law, including, without limitation, the right to
contest the allocation between TDS and Aerial of responsibility for any taxes
resulting from an election under section 338(h)(10) of the Code with respect
to Aerial. In the event that TDS's reimbursement obligation under the Tax
Allocation Agreement is limited or extinguished by application of any
provision of the Tax Allocation Agreement or for any other reason, Aerial
shall nevertheless be entitled to receive and retain the Tax Settlement
Payment and any other payment made to Aerial hereunder.
<PAGE>
Section 12. Use of Tax Settlement Payment. TDS acknowledges and agrees
that the Tax Settlement Payment may be used by the Aerial Group for general
corporate purposes and that no prepayment is due to TDS under the Revolving
Credit Agreement, dated as of August 31, 1998, between TDS and AOC, as
amended, or otherwise as a result of the Tax Settlement Payment or any other
payment to be made by TDS to Aerial in accordance with this Agreement.
Section 13. Disclosure of Alternative Transactions. As of the date of
this Agreement, TDS has fully disclosed to the Special Committee of the Board
of Directors of Aerial the existence and status of all inquiries, offers or
proposals received or made by TDS or Aerial regarding the possible sale or
transfer of Aerial or a significant portion of its equity securities, assets
or businesses, including any merger or other business combination transaction
involving Aerial or its subsidiaries.
Section 14. Notices. All notices, consents, requests, instructions,
approvals and other communications provided for herein shall be validly
given, made or served, if in writing and delivered personally, by telegram or
sent by registered mail, postage prepaid to:
TDS at: 30 North LaSalle Street
Suite 4000
Chicago, IL 60602-2507
Attention: President
with separate copies at such address to the attention of the Chief Financial
Officer and the Corporate Secretary
Aerial at: 8410 W. Bryn Mawr Ave.
Suite 1100
Chicago, IL 60631
Attention: President
with separate copies at such address to the attention of the Chief Financial
Officer and the Corporate Secretary
AOC at: 8410 W. Bryn Mawr Ave.
Suite 1100
Chicago, IL 60631
Attention: President
with separate copies at such address to the attention of the Chief Financial
Officer and the Corporate Secretary, or to such other address as any party may,
from time to time, designate in a written notice given in a like manner. Any
notice given under this Agreement shall be deemed delivered when received at the
appropriate address.
Section 15. Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Illinois
applicable to contracts made and to be performed therein.
IN WITNESS WHEREOF, TDS, Aerial and AOC have caused this Agreement to be
duly executed by their respective officers, each of whom is duly authorized,
all as of the day and year first above written.
Telephone and Data Systems, Inc.
By: /s/ LeRoy T. Carlson, Jr.
-------------------------
LeRoy T. Carlson, Jr.
President and CEO
Aerial Communications, Inc.
By: /s/ Donald W. Warkentin
-------------------------
Donald W. Warkentin
President and CEO
Aerial Operating Co., Inc.
By: /s/ Donald W. Warkentin
-------------------------
Donald W. Warkentin
President
<PAGE>
Exhibit 13
Aerial Communications, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
RESULTS OF OPERATIONS
Aerial Communications, Inc. ("Aerial" or the "Company" - NASDAQ symbol: AERL),
an 82.3%-owned subsidiary of Telephone and Data Systems, Inc. ("TDS"), was
formed to acquire Personal Communications Services ("PCS") licenses from the
Federal Communications Commission ("FCC"), construct PCS networks in its Major
Trading Areas ("MTAs") and offer wireless PCS communications services in these
areas.
The Company provides PCS service in Minneapolis, Tampa-St. Petersburg-Orlando,
Houston, Pittsburgh, Kansas City and Columbus (Ohio). The Columbus MTA launched
service on March 27, 1997. The Company's five remaining MTAs launched service
during the second quarter of 1997. With the launch of service in its MTAs during
the second quarter of 1997, the Company transitioned from the development stage
to being an operating enterprise. As a result of this transition, the Company
has experienced an increase in revenues and operating expenses, and incurred
substantial losses.
The following is a table of summarized operating data for the Company's
consolidated operations.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
As of December 31, 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
Total MTA population (in millions) 27.7 27.6
Customers 311,900 125,000
Average monthly revenue per customer (year to date) $ 51 *
Average monthly revenue per customer (fourth quarter) $ 49 *
MTA penetration 1.13% 0.45%
MTAs in operation 6 6
Cell sites in service 1,180 1,044
Total number of employees 1,907 1,414
- ----------------------------------------------------------------------------------
</TABLE>
* The average monthly service revenue per customer in 1997 does not provide a
meaningful comparison as the initial users and usage patterns are not comparable
to the current users and usage patterns.
The Company's results of operations for 1998 compared to 1997 and 1996 reflect
increased activities undertaken to grow PCS services in its MTAs after the
launch of service in 1997. Such activities significantly increased the Company's
net loss to $337.9 million in 1998 from $247.1 million in 1997 and $37.9 million
in 1996. During 1998 the Company's focus was on the growth of its customer base.
In December 1998, TDS announced the withdrawal of its offer to exchange tracking
stock for the outstanding common shares of Aerial which it did not own. TDS also
announced that it was pursuing a tax-free spin-off of its 82.3% interest in
Aerial, as well as reviewing other alternatives. See Proposed TDS Corporate
Restructuring for further discussion of the spin-off.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Years Ended December 31, 1998, 1997 and 1996
Operating Revenues
OPERATING REVENUES totaled $155.2 million for the year ended December 31, 1998,
an increase of $99.2 million as compared to 1997. The increase reflects the
growth of the Company's customer base during 1998 as the Company added
approximately 186,900 customers. The increase is also due to the Company
providing service in all its markets for all of 1998 as compared to only part of
1997. The Company had no revenues in 1996.
SERVICE REVENUE totaled $123.6 million in 1998, an increase of $91.3 million as
compared to 1997. Service revenue primarily consists of charges for access,
airtime and value-added services provided to the Company's retail customers who
use the network operated by the Company (local service revenue). Service revenue
also consists of charges to customers of other wireless carriers who use the
Company's PCS network when roaming (outcollect roaming revenue) and charges for
long-distance calls made on the Company's systems (long-distance revenue). The
increase in 1998 service revenue was driven by the growth in the number of
customers using the Company's PCS network. The Company's average revenue per
customer per month ("ARPU") was $51 for 1998.
EQUIPMENT SALES REVENUE totaled $31.5 million in 1998, an increase of $7.9
million as compared to 1997. Equipment sales revenue represents the sale of
handsets and related accessories to retailers, independent agents and end user
customers. The increase in equipment sales revenue reflects the increase in
sales volume, partially offset by a decline in handset prices.
Operating Expenses
OPERATING EXPENSES totaled $435.1 million for the year ended December 31, 1998,
compared to $274.1 million in 1997 and $44.0 million in 1996, reflecting the
Company's expanded level of business activity required to launch service,
transition to post-launch operations and its significant efforts to build and
serve its customer base. In 1996, the Company was still a development stage
enterprise and classified all expenses as either general and administrative or
development costs.
SYSTEM OPERATIONS EXPENSE totaled $69.1 million in 1998, an increase of $38.4
million as compared to 1997. The increase in system operations expense is due to
the increased size of the Company's network and its fully operational status
during all of 1998 as compared to only part of 1997. As of December 31, 1998,
the Company's PCS network had 1,180 cell sites in service and had been
operational in all of the Company's markets throughout all of 1998. The Company
launched service in its MTAs between March and June of 1997, with approximately
600 cell sites in service. As of December 31, 1997, the network had 1,044 cell
sites.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
Significant system operations expenses include cell site rent expense and system
maintenance expense which increased $7.7 million and $6.2 million, respectively,
in 1998 as compared to 1997. Salaries and employee related-expenses increased
$8.2 million, primarily reflecting an increase in engineering and maintenance
personnel since December 31, 1997, as well as a decrease in internal capitalized
labor costs. Other system operations expenses increased $7.7 million in
aggregate, primarily driven by cell site utility expense, property tax expense,
consulting and temporary service expense and roamer fraud expense.
System operations expenses also include customer usage expense which increased
$8.6 million in 1998 primarily due to increased landline interconnection and
toll charges, reflecting an increasing customer base and increased use of the
Company's network by its customers.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
MARKETING AND SELLING EXPENSE totaled $79.7 million in 1998, an increase of
$33.7 million as compared to 1997. Gross customer activations were approximately
333,100 in 1998 as compared to approximately 141,900 in 1997. Significant
marketing and selling expenses include the salaries and benefits of sales and
marketing personnel, which increased $11.4 million in 1998, primarily reflecting
an increase in sales and marketing personnel since December 31, 1997.
Advertising expenses increased $7.0 million, reflecting the costs of
establishing and promoting Aerial's service through print, radio and television
advertising. Sales commission expense increased $4.9 million in 1998, due to the
growth in the Company's customer base. Retail store and office rent increased
$3.7 million, primarily due to the Company's increasing number of store and
kiosk locations across its markets. Other marketing and selling expenses
increased $6.7 million in aggregate, primarily driven by increases in
consulting, temporary services, phone expenses and other sales expenses.
CUSTOMER SERVICE EXPENSE totaled $53.5 million in 1998, an increase of $32.6
million as compared to 1997. The increase was driven by rapid customer growth,
as well as the efforts to manage that growth with increased personnel (including
the establishment of a second customer service center in Kansas City) and new
and evolving information systems. The higher than anticipated level of customer
service expense is primarily due to increased salary and benefit expenses
reflecting the increased number of customer service employees, the effects of
higher than planned bad debt costs, and additional consulting and temporary
service expenses directed at reducing both bad debt and customer churn.
COST OF EQUIPMENT SOLD totaled $87.7 million in 1998, an increase of $16.2
million as compared to 1997. The increase primarily reflects the growth in
handset unit sales to support the rise in customer activations.
GENERAL AND ADMINISTRATIVE EXPENSE totaled $61.7 million in 1998, an increase of
$2.9 million as compared to 1997. General and administrative expense includes
the costs of operating the Company's local business offices and its corporate
expenses other than the corporate engineering and marketing departments. The
1998 increase in general and administrative expense is primarily due to losses
on write-offs of certain information systems replaced or to be replaced. In
1996, general and administrative expenses were $28.8 million, consisting
primarily of salaries, employee benefits and other overhead expenses. General
and administrative expenses were less in 1996 due primarily to a smaller
employee base.
DEPRECIATION EXPENSE was $75.8 million in 1998, an increase of $39.8 million as
compared to 1997. The increase is due to rising fixed asset balances as a result
of the Company's network build-out and the amount of time that the network
assets have been in service in 1998 as compared to 1997. As of December 31,
1998, the Company had $696.5 million of property and equipment in service which
had largely been operational throughout all of 1998. As of December 31, 1997,
the Company had $622.7 million of property and equipment in service, the PCS
network portion of which had only been in operation since the second quarter of
1997.
AMORTIZATION EXPENSE was $7.6 million in 1998, an increase of $3.1 million as
compared to 1997. Upon the commencement of service in a particular market, the
Company began amortizing that market's related PCS license. Aerial launched
service across all of its markets between March and June of 1997. As a result,
consolidated amortization expense in 1997 reflects less than a full year's
expense while 1998's expense reflects a full year of amortization.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
DEVELOPMENT COSTS totaled $5.8 million in 1997 and $15.1 million in 1996.
Development costs primarily represent pre-launch marketing, consulting and legal
costs. In 1996, the Company was a development stage enterprise for the entire
year. Effective in the second quarter of 1997, the Company was no longer a
development stage enterprise and prospectively began classifying expenses to
reflect its operational status.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Operating (Loss)
OPERATING (LOSS) totaled $(280.0) million in 1998, $(218.2) million in 1997 and
$(44.0) million in 1996. Although service revenues are expected to continue to
grow during 1999 as the Company builds its customer base, the Company expects to
continue to have operating losses and to generate negative operating cash flow
at least through 1999 as it incurs costs associated with that growth.
Investment and Other Income
MINORITY SHARE OF LOSS totaled $23.6 million in 1998 and represents Sonera
Ltd.'s ("Sonera") share of the consolidated net loss of Aerial Operating
Company, Inc. ("AOC").
INVESTMENT LOSSES totaled $0.1 million in 1998, $2.5 million in 1997 and $0.3
million in 1996. In 1997 and 1996, investment losses represented the Company's
49% share of the net loss of the Wireless Alliance, LLC, ("WALLC"), a joint
venture associated with the Company's Minneapolis MTA and designed to extend the
PCS footprint to areas that were not in the Company's initial build-out. Because
the Company's share of the cumulative losses have exceeded its investment in the
WALLC, the Company did not recognize any losses related to the WALLC in 1998.
Investment losses in 1998 relate to the Company's investments in the North
American GSM Alliance LLC and the GSM Capital Limited Partnership (both formed
to promote the interests of the wireless telecommunications industry using GSM
technology).
INTEREST INCOME-AFFILIATE totaled $0.1 million in 1997 as compared to $4.5
million in 1996. Interest income-affiliate represents interest income earned on
the proceeds of the Company's April 1996 initial public offering ("IPO")
invested in the TDS cash management program pending use in PCS network
development and construction. Proceeds from the IPO were fully utilized by the
end of January 1997.
INTEREST INCOME-OTHER totaled $0.9 million in 1998, $2.1 million in 1997 and
$1.1 million in 1996. Interest income-other primarily represents interest income
earned on the excess proceeds from the Company's November 1996 sale of Series A
Zero Coupon Notes and the February 1998 sale of Series B Zero Coupon Notes
pending use in PCS network development and construction. The proceeds from the
sale of the Series A and Series B Zero Coupon Notes have been fully utilized.
GAIN ON SALE OF PCS LICENSES represents the pretax gain recognized on the sale
of the Guam and Alaska licenses.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
Interest and Income Taxes
INTEREST EXPENSE-AFFILIATE totaled $62.1 million in 1998, $21.6 million in 1997
and $2.0 million in 1996. Interest expense-affiliate in 1998 represents interest
on amounts borrowed under the Revolving Credit Agreement, the TDS 3% guarantee
fees associated with both the Series A and Series B Zero Coupon Notes and
amounts financed under the Nokia 1996 and 1998 Credit Agreements. Interest
expense-affiliate in 1997 represents interest on amounts borrowed under the
Revolving Credit Agreement and the TDS 3% guarantee fees associated with the
Series A Zero Coupon Notes and Nokia 1996 Credit Agreement, less interest
capitalized of $2.7 million. The 1996 interest expense-affiliate amount
primarily represents interest on amounts borrowed under the Revolving Credit
Agreement, less interest capitalized of $0.6 million. Interest expense-affiliate
increased $40.5 million in 1998 and $19.6 million in 1997, primarily due to the
increasing average outstanding balance of borrowings under the Revolving Credit
Agreement with TDS.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
INTEREST EXPENSE-OTHER totaled $18.0 million in 1998, $5.5 million in 1997 and
$0.8 million in 1996. In 1998, interest expense-other relates to interest
expense accreted on the Series A and Series B Zero Coupon Notes as well as
interest expense associated with the Nokia 1996 and 1998 Credit Agreements, less
interest capitalized of $0.1 million. In 1997 and 1996, interest expense-other
relates primarily to the Series A Zero Coupon Notes issued in November 1996,
less interest capitalized. The Company capitalized interest expense of $3.3
million and $0.6 million related to the Series A Zero Coupon Notes and interim
financing under the Nokia 1996 Credit Agreement in 1997 and 1996, respectively.
Interest expense-other increased $12.5 million in 1998 and $4.7 million in 1997,
primarily due to the increasing average outstanding balance in long-term debt.
INCOME TAXES: The Company is included in a consolidated federal income tax
return with other members of the TDS consolidated group. For financial reporting
purposes, the Company computes its federal income taxes as if it were filing a
separate return as its own affiliated group and was not included in the TDS
group. TDS and the Company are parties to a Tax Allocation Agreement under which
the Company may carry forward any losses and credits and use them to offset
income tax liabilities to TDS if any arise in the future.
Net (Loss) and (Loss) Per Common and Series A Common Share
Net (Loss) totaled $(337.9) million in 1998, $(247.1) million in 1997 and
$(37.9) million in 1996. Net (Loss) per Common and Series A Common Share was
$(4.71) in 1998, $(3.45) in 1997 and $(0.56) in 1996. The increase in the
Company's Net (Loss) and Net (Loss) per Common and Series A Common Share in 1998
reflects the Company's fully operational status during all of 1998 as compared
to 1997 when the Company was not fully operational until the end of the second
quarter. The 1996 Net (Loss) and Net (Loss) per Common and Series A Common Share
reflects the Company's status as a development stage enterprise for the entire
year.
INFLATION
Management believes that inflation affects the Company's business to no greater
extent than the general economy.
LIQUIDITY AND CAPITAL RESOURCES
The costs of development, construction, start-up and post-launch activities of
the Company require substantial capital. From inception through December 31,
1998, the Company had expended $304.4 million for its six licenses, including
capitalized interest, $739.1 million for all other capital expenditures and
incurred cumulative net losses of $630.8 million. The Company expects to incur
significant operating losses and to generate negative cash flow from operating
activities at least through 1999 as it continues to build its customer base.
Cash flows used by operating activities were $228.8 million in 1998, $206.9
million in 1997 and $17.8 million in 1996. Operating cash outflow (operating
loss before depreciation and amortization expense) totaled $196.6 million in
1998, $177.6 million in 1997 and $42.0 million in 1996.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
Cash flows used by other operating activities (investment and other income,
interest expense, changes in working capital and changes in other assets and
liabilities) required cash investments of $32.2 million in 1998, $29.3 million
in 1997 and provided cash totaling $24.2 million in 1996.
Cash flows from financing activities provided $302.7 million in 1998, $449.9
million in 1997 and $164.1 million in 1996. Cash provided in 1998 was
primarily due to $301.7 million in borrowings under the Revolving Credit
Agreement. The Company also received $200 million from the sale to Sonera of
a 19.4% equity interest in AOC (see Note 4 - Minority Interest for further
discussion).
<PAGE>
Aerial Communications, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The proceeds from the sale were remitted to TDS to pay down part of the
outstanding balance under the Revolving Credit Agreement. Cash provided in 1997
was due primarily to $448.2 million in borrowings under the Revolving Credit
Agreement. In April 1996, the Company received proceeds from its IPO of $195.3
million, net of underwriting discounts and commissions. The Company used a
portion of the net proceeds to repay the then outstanding balance under the
Revolving Credit Agreement with TDS. In 1996 the Company received from TDS $28.8
million representing the balance due in connection with TDS's $289.2 million
contribution to the equity capital of the Company in 1995.
Cash flows used in investing activities totaled $74.0 million in 1998, $273.3
million in 1997 and $111.3 million in 1996. Cash used in 1998 was primarily due
to $74.6 million in additions to property and equipment for PCS network and
information system assets. Total 1998 additions to property and equipment,
including noncash transactions, were $97.0 million, including $43.8 million for
cell sites, $23.0 million for switching equipment, $27.6 million for information
system assets and $2.6 million for other activities.
Additions to cell sites in 1998 were due to the need for additional sites to
fill in and improve the coverage of the Company's PCS network within its MTAs.
Additions to switching equipment in 1998 were primarily due to the need for
increased network capacity to handle greater call volume. Additions to
information system assets primarily reflected the costs associated with the
completion of the new Kansas City customer service center, new inventory and
payroll systems and improvements to the Company's billing system. Other capital
expenditures were primarily for leasehold improvements and office furniture and
equipment.
Cash used in 1997 resulted primarily from $274.7 million in additions to
property and equipment, primarily network and information system assets. Total
1997 additions to property and equipment, including noncash transactions, were
$387.7 million, including $291.9 million for cell sites, $38.4 million for
switching equipment, $55.6 million for information system assets and $1.8
million for other activities.
Cash used in 1996 resulted primarily from $112.9 million in additions to
property and equipment, primarily network and information system assets, offset
by $2.3 million in proceeds received from the sale of PCS licenses. Total 1996
additions to property and equipment, including noncash transactions, were $242.3
million, including $150.4 million for cell sites, $53.2 million for switching
equipment and $38.7 million for other activities, including information systems
development and property and equipment in service (primarily computer equipment
and software, office equipment and leasehold improvements).
The Company's fixed asset additions have been financed through a combination of
borrowings under the Revolving Credit Agreement with TDS, the proceeds from the
IPO, the Series A and Series B Zero Coupon Notes, and the Nokia 1996 and 1998
Credit Agreements.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
For 1999, the Company estimates that the aggregate funds required for capital
expenditures for the continuing development of its PCS networks and services
will total approximately $130 million. The Company will be building additional
cell sites to augment its existing coverage area, primarily corridor coverage on
interstates to suburbs. The Company will continue to upgrade its switching and
other fixed network equipment to support future customer growth. Also in 1999,
capital expenditures related to information systems will include a significant
upgrade of the Company's billing system, the Year 2000 Issue, new hardware and
software to support employee growth, and other project initiatives.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The Company estimates requiring $205 million for working capital requirements to
fund operations for all of 1999, including an estimated $80 million in interest
expense related to the Revolving Credit Agreement and TDS 3% guarantee fees
related to both the Series A and Series B Zero Coupon Notes and the Nokia 1998
Credit Agreement.
Nokia Telecommunications Inc. ("Nokia") agreed to provide the Company with up to
$200 million in financing for digital radio channel and switching infrastructure
equipment through a Credit Agreement with the Company dated June 19, 1996 ("1996
Credit Agreement"). In accordance with the provisions of the 1996 Credit
Agreement, the Company issued, in tranches, 10-year unsecured zero coupon
promissory notes, the proceeds of which were paid to Nokia in satisfaction of
borrowings by the Company under the 1996 Credit Agreement. On November 4, 1996,
the Company issued $226.2 million in aggregate principal amount at maturity of
Series A Zero Coupon Notes ("Series A Notes") due in 2006. On February 5, 1998,
the Company issued $220.0 million in aggregate principal amount at maturity of
Series B Zero Coupon Notes ("Series B Notes") due in 2008 (representing the
final issuance of zero coupon notes under the 1996 Credit Agreement). The
aggregate issue price of the Series A and Series B Zero Coupon Notes was $200
million. The proceeds were paid to Nokia in satisfaction of all obligations of
the Company under the 1996 Credit Agreement.
On June 30, 1998, the Company and Nokia entered into an agreement ("1998 Credit
Agreement") in which Nokia will provide up to an aggregate $150 million in
financing to the Company for the purchase of network infrastructure equipment
and services from Nokia. Loans under the 1998 Credit Agreement are to be made
available in two $75 million tranches. With respect to Tranche A, the Company
may borrow up to $75 million until June 30, 1999. Tranche A loans mature on June
30, 1999; however, the maturity date of Tranche A loans may be extended to June
30, 2000, upon written notice and payment of an extension fee by the Company to
Nokia. A second $75 million ("Tranche B") becomes available commencing on June
30, 1999, and ending on June 30, 2000, the maturity date of Tranche B loans. The
obligations of the Company under the 1998 Credit Agreement are fully and
unconditionally guaranteed by TDS at an annual fee rate of 3% (see Note 5 -
Long-Term Debt for further discussion). As of December 31, 1998, the Company had
$29.5 million available for borrowing under the Tranche A portion of the 1998
Credit Agreement with Nokia.
On September 8, 1998, pursuant to the terms of a Purchase Agreement dated
June 1, 1998 (the "Purchase Agreement"), Sonera made a $200 million
investment in AOC. Sonera purchased approximately 2.4 million shares of
common stock of AOC representing a 19.4% equity interest in AOC. Sonera has
the right, subject to adjustment under certain circumstances, to exchange
each share of AOC common stock which it owns for 6.72919 Common Shares of
Aerial. Upon the exchange of all of the AOC shares, Sonera would own an
18.452% equity interest in Aerial, reflecting a purchase price equivalent to
$12.33 per Common Share of Aerial (the "Equivalent Purchase Price"). See Note
4 - Minority Interest for further discussion.
Under the terms of the Purchase Agreement, the Revolving Credit Agreement
between the Company and TDS dated August 1, 1995, as amended, pursuant to which
the Company owed TDS $665.0 million as of August 31, 1998, was terminated. A new
Revolving Credit Agreement between AOC and TDS was substituted, under which AOC
was indebted to TDS for $665.0 million as of August 31, 1998.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
The new Revolving Credit Agreement provides that the amount of any proceeds
raised by the Company or AOC in connection with the sale of equity (see Note
4 - Minority Interest) or debt will be used to reduce the borrowings under
the Revolving Credit Agreement as well as reduce the total amount AOC may
borrow under the Revolving Credit Agreement. Additionally, any borrowings
under the Nokia 1998 Credit Agreement (see Note 5 - Long-Term Debt)
concurrently reduces by the same amount the authorized total line of credit
available to AOC under the Revolving Credit Agreement. Pursuant to these
terms, AOC paid to TDS the $200 million it had received from Sonera to reduce
the outstanding balance under the Revolving Credit Agreement.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
On November 3, 1998, TDS approved an amendment to the Revolving Credit Agreement
dated August 31, 1998, between TDS and AOC. Under the Revolving Credit
Agreement, as amended, AOC may borrow up to a maximum amount (the "Maximum
Amount"), less the amount of any debt or equity financing obtained by AOC or the
Company, including the amount of any borrowings under the Nokia 1998 Credit
Agreement. The Maximum Amount under the amended Revolving Credit Agreement was
increased to $650 million in February 1999. The interest rate under the amended
Revolving Credit Agreement is equal to the prime rate plus 3%. Interest on the
balance due under the amended Revolving Credit Agreement is payable quarterly
and no principal is payable until April 2, 2000.
The following table summarizes AOC's borrowing capacity under the Revolving
Credit Agreement as of December 31, 1998:
<TABLE>
<S> <C>
(Dollars in thousands)
- ----------------------------------------------------------------------
Maximum amount available $ 615,000
Reduced by:
Vendor financing under the Nokia 1998 Credit Agreement (45,472)
Amount outstanding under the Revolving Credit Agreement (549,943)
- ----------------------------------------------------------------------
Net amount available for borrowing $ 19,585
- ----------------------------------------------------------------------
</TABLE>
In March 1999, TDS agreed to pay the Company $114.5 million as a settlement
for tax losses incurred by the Company and utilized by the TDS consolidated
tax group. The Company used the funds to repay a portion of the existing AOC
Indebtedness to TDS, thereby increasing the amount available under the
Revolving Credit Agreement. Accordingly, available funding under the
Revolving Credit Agreement is now expected to last through June of 1999. TDS
has not committed to any further financing of the Company's operations. It is
the intent of TDS and Aerial management to obtain the necessary level of
financial support from sources other than TDS to enable the Company to pay
its debts as they become due. TDS and Aerial management believe the Company
has the ability to obtain that financial support. Sources of additional
capital may include vendor financing and public and private equity and debt
financings by the Company or its subsidiaries. If sufficient future funding
is not available on terms and prices acceptable to the Company, the Company
would have to reduce its construction and operating activities or take other
actions, which could have a material adverse impact on Company's financial
condition and results of operations.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
PROPOSED TDS CORPORATE RESTRUCTURING
In December 1997, Aerial received a proposal from TDS to acquire all of the
issued and outstanding Common Shares of Aerial not already owned by TDS. The
proposal was part of TDS's proposed corporate restructuring which included
issuing three new classes of common stock (commonly known as "tracking" stock)
and changing the state of incorporation of TDS from Iowa to Delaware. The three
new classes of stock were intended to separately reflect the performance of
TDS's cellular telephone, landline telephone and personal communications
services businesses.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
In December 1998, TDS announced the withdrawal of its offer to exchange tracking
stock for the outstanding common shares of Aerial which it did not own. TDS also
announced that it was pursuing a tax-free spin-off of its 82.3% interest in
Aerial, as well as reviewing other alternatives. TDS intends to ask the Internal
Revenue Service ("IRS") to rule on the tax-free status of such a distribution.
There are a number of conditions that must be met for a spin-off to occur,
including receipt of a favorable IRS ruling, final approval by the TDS Board,
certain government and third party approvals, and review by the Securities and
Exchange Commission ("SEC") of appropriate SEC filings. TDS intends to seek
shareholder approval of a proposal to distribute Aerial Series A Common Shares,
on a pro-rata basis, to holders of TDS Series A Common Shares; and Aerial Common
Shares, on a pro-rata basis, to holders of TDS Common Shares. There can be no
assurance that a spin-off will be consummated or that other alternatives will
not be pursued. Prior to any spin-off, it is expected that Aerial will seek
additional financing so that Aerial would have the appropriate capitalization to
operate as a stand-alone entity. In connection with such financing, all or a
portion of Aerial's debt to TDS may be converted into equity. See the Liquidity
and Capital Resources section for further discussion of the Company's financing.
Following the announcement by TDS in December 1998, that it intended to
distribute to its shareholders all of the capital stock of Aerial that it
owns, and that Aerial would seek additional financing from sources other than
TDS in connection therewith, Sonera contacted TDS to express certain concerns
about the announcement. Sonera has asserted that the TDS announcement
reflects a change in circumstances that warrant the renegotiation of certain
matters related to its investment in AOC, including an adjustment in the
Equivalent Purchase Price, and has raised the possibility of litigation in
connection therewith. TDS and Aerial intend to attempt to reach a mutually
acceptable resolution of the concerns raised by Sonera. There can be no
assurance that this matter will not lead to litigation, or that it will not
have a material adverse effect on Aerial or on the plans relating to the
refinancing and spin-off of Aerial.
MARKET RISK
The Company is subject to market rate risks due to fluctuations in interest
rates and equity markets. The majority of the Company's debt is in the form of
variable rate notes with original maturities ranging from one to ten years. The
Series A and Series B Zero Coupon Notes are fixed rate debt and therefore,
fluctuations in interest rates can lead to significant fluctuations in the fair
value of these instruments. The Company does not enter into financial
derivatives to reduce its exposure to interest rate risks.
The table below provides the fair value (fair values were estimated using
discounted cash flow analyses) and weighted average interest rates of the
Company's outstanding debt at December 31, 1998.
<TABLE>
<CAPTION>
Amount Maturing Wtd. Avg.
Expected Maturity Date (Dollars in thousands) Interest Rate
- -------------------------------------------------------------------
<S> <C> <C>
1999 -- --
2000 595,415 10.33%
2001 -- --
2002 -- --
2003 -- --
Thereafter 446,220 8.20%
Total $ 1,041,635 9.42%
- -------------------------------------------------------------------
Fair Value at 12/31/98 $ 828,005
- -------------------------------------------------------------------
</TABLE>
<PAGE>
Aerial Communications, Inc. and Subsidiaries
YEAR 2000 ISSUE
The Year 2000 Issue exists because many computer systems and applications
abbreviate dates using only two digits, rather than four digits, e.g., "98"
rather than "1998". Unless corrected, this shortcut may cause problems when the
century date "2000" occurs. On that date, some computer operating systems,
applications and embedded technology may recognize the date as January 1, 1900,
instead of January 1, 2000. If the Company fails to correct any critical Year
2000 processing problems prior to January 1, 2000, the affected systems may
either cease to function or produce erroneous data, which could have material
adverse operational and financial consequences.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The Company's management has established a project team to address Year 2000
issues. The Company's plan to address the Year 2000 Issue consists of five
general phases: (i) Awareness, (ii) Assessment, (iii) Renovation, (iv)
Validation and (v) Implementation.
The awareness phase consists of establishing a Year 2000 Project Team that
reports periodically to Aerial's Audit Committee, and developing an overall
strategy. A Year 2000 Program Office has been established at the TDS corporate
level to coordinate activities of the Year 2000 Project Team, to monitor the
current status of individual projects, to report periodically to the TDS Audit
Committee, and to promote the exchange of information between all business units
to share knowledge and solution techniques. Aerial management has made the Year
2000 Issue a top priority. The Year 2000 effort covers the network and
supporting infrastructure for the provision of PCS services; the operational and
financial information technology ("IT") systems and applications, such as
computer systems that support key business functions such as billing, finance,
customer service, procurement and supply; and a review of the Year 2000
compliance efforts of the Company's critical suppliers.
The assessment phase includes the identification of core business areas and
processes, analysis of systems and hardware supporting the core business areas
and the prioritization of renovation or replacement of systems and hardware that
are not Year 2000 compliant. Included in the assessment phase is an analysis of
risk management factors such as contingency plans and legal matters. The
assessment phase was substantially completed in the last quarter of 1998.
The renovation phase consists of the conversion or replacement of selected
platforms, applications, databases and utilities. The renovation of mission
critical systems, applications and hardware is scheduled to be substantially
completed by the second quarter of 1999.
The validation phase includes testing, verifying and validating the renovated or
replaced platforms, applications, databases and utilities. A goal of the
validation phase is to conduct independent verification testing of mission
critical systems, applications and hardware as well as network and system
component upgrades received from suppliers. In addition, selected Year 2000
upgrades are slated to undergo testing in a controlled environment that
replicates the current environment and is equipped to simulate the turn of the
century and leap year dates. The Cellular Telecommunications Industry
Association ("CTIA") has formed a working group to coordinate efforts of various
carriers and manufacturers to facilitate in inter-network Year 2000 testing. The
Company is monitoring CTIA's testing program. Validation of the Company's
mission critical systems, applications and hardware is scheduled to be completed
in the third quarter of 1999.
The implementation phase involves migrating the converted and renovated mission
critical systems, applications and hardware into production. This phase has been
started and is expected to be completed early in the fourth quarter of 1999.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
Management cannot provide assurance that its plan to achieve Year 2000
compliance will be successful as it is subject to various risks and
uncertainties. The Company's current schedule is subject to change depending on
developments that may arise through unforeseen circumstances in the renovation,
validation and implementation phases of the Company's compliance efforts. The
Company, like most other telecommunications operators, is highly dependent on
the telecommunications network vendors to provide compliant hardware, systems
and applications, as well as other third parties, including vendors, other
telecommunications service providers, government agencies and financial
institutions, to deliver reliable services. The Company is dependent on the
development of compliant hardware, systems and applications and upgrades by
experts, both internal and external, and the availability of critical resources
with the requisite skill sets.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The Company's ability to meet its target dates is dependent upon the timely
provision of necessary upgrades and modifications by its suppliers and internal
resources. In addition, the Company cannot guarantee that third parties on whom
it depends for essential services (such as electric utilities, financial
institutions and interconnected telecommunications operators, etc.) will convert
their critical systems and processes in a timely manner. Failure or delay by any
of these parties could significantly disrupt the Company's business, including
the provision of PCS services, billing and collection processes, and other areas
of the business, and cause a material adverse affect on the Company's results of
operations, financial position and cash flow.
The Company's Year 2000 worst-case scenario may involve interruption of
telecommunications services and data processing services and/or interruption of
customer billing, operating and other information systems. As part of its Year
2000 initiative, the Company is evaluating a variety of adverse scenarios and is
in the process of developing contingency and business continuity plans tailored
for adverse Year 2000-related occurrences. The contingency and business
continuity plans are expected to assess the potential for business disruption in
various scenarios, and to provide key operational back-up, recovery and
restorational alternatives.
The Company's contingency plan initiatives will include the following:
reviewing, assessing and updating existing business recovery plans; identifying
teams who will be on call during the millennium change to monitor the network,
critical systems, operations centers and business processes to react immediately
to facilitate repairs; re-prioritization of mission critical work processes and
associated resources; developing alternate processes to support critical
customer functions in the event information systems or mechanized processes
experience Year 2000 disruptions; working with public saftey agencies to provide
alternate methods of emergency communication for the Company's customers and the
agencies; establishing replacement/repair parallel paths to provide for repair
and readiness of existing systems and components that are scheduled for
replacement by the year 2000, in the event the replacement schedules are not
met; developing alternate plans for critical suppliers of products/services that
fail to meet Year 2000 compliance commitment schedules; developing data
retention and recovery procedures to be in place for customer and critical
business data to provide pre-millennium backups with on-site as well as off-site
data copies. The Company anticipates having these contingency plans in place
before December 31, 1999.
The Company estimates that the total costs of its Year 2000 efforts will be
approximately $15 million. Through December 31, 1998, the total costs associated
with the Year 2000 Issue were approximately $2 million. The timing of
expenditures may vary and is not necessarily indicative of readiness efforts or
progress to date. Though Year 2000 Project costs will directly impact the
reported level of future net income, the Company intends to manage its total
cost structure, including deferral of non-critical projects, in an effort to
mitigate the impact of Year 2000 Project costs.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
The above information, which contains statements that are "forward-looking"
within the meaning of the Private Securities Litigation Reform Act of 1995, is
based on the Company's current best estimates, which were derived using numerous
assumptions of future events, including the availability and future costs of
certain technological and other resources, third party modification actions and
other factors. Given the complexity of these issues and the possibility of
unidentified risks, actual results may vary materially from those anticipated
and discussed above. Specific factors that might cause such differences include,
among others, the availability and cost of personnel trained in this area, the
ability to locate and correct all affected computer code, the timing and success
of remedial efforts of third party suppliers, and similar uncertainties.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of
Operations
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 SAFE HARBOR CAUTIONARY
STATEMENT
THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS AND OTHER SECTIONS OF THIS ANNUAL REPORT CONTAIN "FORWARD-LOOKING"
STATEMENTS, AS DEFINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995,
THAT ARE BASED ON CURRENT EXPECTATIONS, ESTIMATES AND PROJECTIONS. STATEMENTS
THAT ARE NOT HISTORICAL FACTS, INCLUDING STATEMENTS ABOUT THE COMPANY'S BELIEFS
AND EXPECTATIONS ARE FORWARD-LOOKING STATEMENTS. THESE STATEMENTS CONTAIN
POTENTIAL RISKS AND UNCERTAINTIES AND, THEREFORE, ACTUAL RESULTS MAY DIFFER
MATERIALLY. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY
FORWARD-LOOKING STATEMENTS WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS
OR OTHERWISE.
IMPORTANT FACTORS THAT MAY AFFECT THESE PROJECTIONS OR EXPECTATIONS INCLUDE, BUT
ARE NOT LIMITED TO: CHANGES IN THE OVERALL ECONOMY; CHANGES IN COMPETITION IN
THE COMPANY'S MARKETS; ADVANCES IN TELECOMMUNICATIONS TECHNOLOGY; CHANGES IN THE
TELECOMMUNICATIONS REGULATORY ENVIRONMENT; PENDING AND FUTURE LITIGATION;
AVAILABILITY OF FUTURE FINANCING; UNANTICIPATED CHANGES IN GROWTH IN PCS
CUSTOMERS, PENETRATION RATES, CHURN RATES AND THE MIX OF PRODUCTS AND SERVICES
OFFERED IN THE COMPANY'S MARKETS; AND UNANTICIPATED PROBLEMS WITH THE YEAR 2000
ISSUE. READERS SHOULD EVALUATE ANY STATEMENTS IN LIGHT OF THESE IMPORTANT
FACTORS.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C>
OPERATING REVENUES
Service $ 123,640 $ 32,307 $ --
Equipment sales 31,514 23,645 --
- ---------------------------------------------------------------------------------------------------
Total Operating Revenues 155,154 55,952 --
- ---------------------------------------------------------------------------------------------------
OPERATING EXPENSES
System operations 69,066 30,655 --
Marketing and selling 79,704 45,974 --
Customer service 53,516 20,882 --
Cost of equipment sold 87,715 71,454 --
General and administrative 61,737 58,825 28,843
Depreciation 75,846 36,045 --
Amortization of intangibles 7,555 4,509 --
Development costs -- 5,773 15,107
- ---------------------------------------------------------------------------------------------------
Total Operating Expenses 435,139 274,117 43,950
- ---------------------------------------------------------------------------------------------------
OPERATING (LOSS) (279,985) (218,165) (43,950)
- ---------------------------------------------------------------------------------------------------
INVESTMENT AND OTHER INCOME
Minority share of loss 23,620 -- --
Investment (losses) (128) (2,518) (304)
Interest income-affiliate -- 95 4,488
Interest income-other 882 2,133 1,158
Other income 442 269 --
Gain on sale of PCS licenses -- -- 2,582
- ---------------------------------------------------------------------------------------------------
Total Investment and Other Income 24,816 (21) 7,924
- ---------------------------------------------------------------------------------------------------
(LOSS) BEFORE INTEREST AND INCOME TAXES (255,169) (218,186) (36,026)
- ---------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest expense-affiliate 62,137 21,558 1,960
Interest expense-other 18,010 5,507 802
- ---------------------------------------------------------------------------------------------------
Total Interest Expense 80,147 27,065 2,762
- ---------------------------------------------------------------------------------------------------
(LOSS) BEFORE INCOME TAXES (335,316) (245,251) (38,788)
Income tax expense (benefit) 2,579 1,806 (867)
- ---------------------------------------------------------------------------------------------------
NET (LOSS) $(337,895) $(247,057) $ (37,921)
- ---------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE COMMON AND
SERIES A COMMON SHARES (000s) 71,723 71,512 67,492
(LOSS) PER COMMON AND SERIES A COMMON SHARE $ (4.71) $ (3.45) $ (0.56)
- ---------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss) $(337,895) $(247,057) $ (37,921)
Add (Deduct) adjustments to reconcile net (loss)
to net cash (used) by operating activities:
Depreciation and amortization 83,401 40,554 1,934
Noncash interest expense-Series A and B Notes 16,210 8,341 1,327
Change in deferred taxes 2,579 1,806 2,231
Investment losses 128 2,518 304
Gain on sale of PCS licenses -- -- (2,582)
Minority share of loss (23,620) -- --
Loss on sale of property and equipment 3,242 -- --
Change in accounts receivable-customer (174) (24,030) --
Change in income tax refund receivable-affiliate -- -- 12,502
Change in inventory 14,571 (25,949) --
Change in accounts payable-affiliates (121) 284 (795)
Change in accounts payable-trade and other 6,680 30,606 3,491
Change in accrued interest-affiliate 1,274 3,665 (1,497)
Change in other assets and liabilities 4,924 2,399 3,225
- ---------------------------------------------------------------------------------------------------
(228,801) (206,863) (17,781)
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under the Revolving Credit Agreement-TDS 301,709 448,234 --
Repayments of borrowings under the
Revolving Credit Agreement-TDS (200,000) -- (60,238)
Proceeds from minority investor 200,000 -- --
Change in note receivable-affiliate -- -- 28,836
Issuance of common stock 1,002 1,699 195,485
- ---------------------------------------------------------------------------------------------------
302,711 449,933 164,083
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment (74,580) (274,709) (112,940)
Change in note receivable -- 1,925 --
Proceeds from sale of PCS licenses -- -- 2,275
Proceeds from sale of property and equipment 711 -- --
Change in temporary and other investments (110) (558) (614)
- ---------------------------------------------------------------------------------------------------
(73,979) (273,342) (111,279)
- ---------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (69) (30,272) 35,023
CASH AND CASH EQUIVALENTS -
Beginning of year 5,012 35,284 261
- ---------------------------------------------------------------------------------------------------
End of year $ 4,943 $ 5,012 $ 35,284
- ---------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
- -------------------------------------------------------------------------------
December 31, 1998 1997
- -------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 4,943 $ 5,012
Temporary investments 35 197
Accounts receivable:
Customers, less allowance of
$5,875 and $7,252, respectively 24,204 24,030
Roaming 2,252 --
Other 1,348 207
Inventory 11,378 25,949
Prepaid rent 3,666 1,630
Other 898 984
- -------------------------------------------------------------------------------
48,724 58,009
- -------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT
In service and under construction 733,958 642,122
Less accumulated depreciation (112,677) (38,018)
- -------------------------------------------------------------------------------
621,281 604,104
- -------------------------------------------------------------------------------
INVESTMENTS
Investment in PCS licenses, net of accumulated
amortization of $12,044 and $4,489, respectively 289,488 297,043
Other 1,444 1,298
- -------------------------------------------------------------------------------
290,932 298,341
- -------------------------------------------------------------------------------
Deferred costs 410 194
- -------------------------------------------------------------------------------
TOTAL ASSETS $ 961,347 $ 960,648
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
December 31, 1998 1997
- ---------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable:
Affiliates $ 6,727 $ 773
Trade 56,097 92,020
Accrued interest-affiliate 4,939 3,665
Accrued compensation 5,169 3,414
Accrued taxes 7,015 1,957
Microwave relocation costs payable 1,828 7,354
Other 4,349 586
- ---------------------------------------------------------------------------
86,124 109,769
- ---------------------------------------------------------------------------
REVOLVING CREDIT AGREEMENT-TDS 549,943 448,234
- ---------------------------------------------------------------------------
LONG-TERM DEBT 278,010 196,439
- ---------------------------------------------------------------------------
DEFERRED TAX LIABILITY-NET 16,357 13,779
- ---------------------------------------------------------------------------
MINORITY INTEREST 5,835 --
- ---------------------------------------------------------------------------
COMMON SHAREHOLDERS' EQUITY
Common Shares, $1.00 par value; authorized
100,000,000 shares; issued and outstanding
31,788,982 and 31,610,605, respectively 31,789 31,611
Series A Common Shares, $1.00 par value;
authorized 60,000,000 shares; issued
and outstanding 40,000,000 shares 40,000 40,000
Additional paid-in capital 584,114 413,746
Retained deficit (630,825) (292,930)
- ---------------------------------------------------------------------------
25,078 192,427
- ---------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 961,347 $ 960,648
- ---------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- -------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
COMMON STOCK
Balance at beginning of year $ -- $ -- $ 1
Deduct recapitalization -- -- (1)
- -------------------------------------------------------------------------------
Balance at the end of year $ -- $ -- $ --
- -------------------------------------------------------------------------------
COMMON SHARES
Balance at beginning of year $ 31,611 $ 31,359 $ --
Add:
Recapitalization -- -- 19,086
Initial public offering -- -- 12,250
Employee benefit plans 178 252 23
- -------------------------------------------------------------------------------
Balance at end of year $ 31,789 $ 31,611 $ 31,359
- -------------------------------------------------------------------------------
SERIES A COMMON SHARES
Balance at beginning of year $ 40,000 $ 40,000 $ --
Add recapitalization -- -- 40,000
- -------------------------------------------------------------------------------
Balance at end of year $ 40,000 $ 40,000 $ 40,000
- -------------------------------------------------------------------------------
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year $ 413,746 $ 412,299 $ 289,233
Add (Deduct):
Recapitalization -- -- (59,085)
Gain on sale of subsidiary stock 169,544 -- --
Initial public offering -- -- 183,015
Capital stock expense -- -- (1,061)
Employee benefit plans 824 1,447 197
- -------------------------------------------------------------------------------
Balance at the end of year $ 584,114 $ 413,746 $ 412,299
- -------------------------------------------------------------------------------
RETAINED DEFICIT
Balance at beginning of year $(292,930) $ (45,873) $ (7,952)
Net (Loss) (337,895) (247,057) (37,921)
- -------------------------------------------------------------------------------
Balance at end of year $(630,825) $(292,930) $ (45,873)
- -------------------------------------------------------------------------------
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. PROPOSED TDS CORPORATE RESTRUCTURING
In December 1997, Aerial Communications, Inc. ("Aerial" or the "Company")
received a proposal from Telephone and Data Systems, Inc. ("TDS") to acquire all
of the issued and outstanding Common Shares of Aerial not already owned by TDS.
The proposal was part of TDS's proposed corporate restructuring which included
issuing three new classes of common stock and changing the state of
incorporation of TDS from Iowa to Delaware. The three new classes of stock were
intended to separately reflect the performance of TDS's cellular telephone,
landline telephone and personal communications services businesses.
In December 1998, TDS announced the withdrawal of its offer to exchange
tracking stock for the outstanding common shares of Aerial which it did not
own. TDS also announced that it was pursuing a tax-free spin-off of its 82.3%
interest in Aerial, as well as reviewing other alternatives. TDS intends to
ask the Internal Revenue Service ("IRS") to rule on the tax-free status of
such a distribution. There are a number of conditions that must be met for a
spin-off to occur, including a receipt of a favorable IRS ruling, final
approval by the TDS Board, certain government and third party approvals, and
review by the Securities and Exchange Commission ("SEC") of appropriate SEC
filings. TDS intends to seek shareholder approval of a proposal to distribute
Aerial Series A Common Shares, on a pro-rata basis, to holders of TDS Series
A Common Shares; and Aerial Common Shares, on a pro-rata basis, to holders of
TDS Common Shares. There can be no assurance that a spin-off will be
consummated or that other alternatives will not be pursued. Prior to any
spin-off, it is expected that Aerial will seek additional financing so that
Aerial would have the appropriate capitalization to operate as a stand-alone
entity. In connection with such financing, all or a portion of Aerial's debt
to TDS may be converted into equity. See also Note 11--Contingency for
discussion of the concerns raised by Sonera Ltd. about the spin-off
announcement made by TDS, which has raised the possibility of litigation.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) NATURE OF OPERATIONS
Aerial is an 82.3%-owned subsidiary of TDS. The Company was incorporated in
Delaware on July 23, 1991, as American Portable Telecommunications, Inc. and
changed its name to American Portable Telecom, Inc. ("APTI") effective January
18, 1996. On November 12, 1996, the Company changed its name to Aerial
Communications, Inc.
The Company was formed to acquire Personal Communications Services ("PCS")
licenses, construct PCS networks in its Major Trading Areas ("MTAs") and offer
wireless PCS communications services in these areas. The Company acquired its
licenses in the Federal Communications Commission ("FCC") broadband Block A and
Block B PCS auction (the "PCS auction") which concluded in March 1995. The
Company acquired licenses in the Columbus (Ohio), Houston (Texas), Kansas City
(Missouri), Minneapolis (Minnesota), Pittsburgh (Pennsylvania), and Tampa-St.
Petersburg-Orlando (Florida) MTAs covering approximately 27.7 million population
equivalents ("POPs"). As of December 31, 1998, the Company had approximately
311,900 customers.
(B) DEVELOPMENT STAGE ENTERPRISE
Effective with the second quarter of 1997, the Company ceased to be a
development stage enterprise and presents its 1998 and 1997 results of
operations, cash flows and financial position in a manner similar to other
operating enterprises within the industry.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
(C) PRINCIPLES OF CONSOLIDATION
The accounting policies of the Company and its subsidiaries conform to generally
accepted accounting principles. The consolidated financial statements include
the accounts of Aerial Communications, Inc. and its 80.6% interest in Aerial
Operating Company, Inc. ("AOC"). The MTAs are wholly-owned subsidiaries of AOC.
All material intercompany balances and transactions have been eliminated. The
preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities as
well as disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Certain amounts reported in prior years have been reclassified to conform to the
current year presentation.
(D) REVENUE RECOGNITION AND INVENTORY
Revenues from operations consist of charges to customers for monthly access,
airtime, value-added services, outcollect roaming and long-distance charges.
Revenues are recognized as the services are rendered. Unbilled revenues,
resulting from PCS services provided from the billing cycle date to the end of
each month, are estimated and recorded
Revenues from operations also consist of equipment sales to retailers,
independent agents and end user customers. Revenues from equipment sales are
recognized upon the shipment of goods to retailers and independent agents or
upon sale through direct distribution channels to end user customers.
Handset inventory is stated at current replacement cost.
(E) ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising costs totaled
$25.8 million, $21.1 million and $1.4 million for the years ended December 31,
1998, 1997 and 1996, respectively. Prior to launching service, the Company was a
development stage enterprise and advertising costs were included in development
costs.
(F) PENSION PLAN
Effective July 1, 1995, the Company began providing pension benefits for its
employees under a qualified, noncontributory, defined contribution pension plan.
Under this plan, pension benefits and costs are calculated separately for each
participant and are funded currently. Pension costs were $611,000, $326,000 and
$72,000 in 1998, 1997 and 1996, respectively.
(G) CASH AND CASH EQUIVALENTS, TEMPORARY INVESTMENTS AND MARKETABLE SECURITIES
Cash and cash equivalents consists of cash on hand and those short-term,
highly-liquid investments with original maturities of three months or less.
Those investments with original maturities of greater than three but less than
twelve months are classified as temporary investments. Temporary investments are
stated at cost. The Company's investments in marketable non-equity securities,
included in other investments, are stated at amortized cost, have maturities of
one to five years and are classified as held-to-maturity.
The carrying amounts of cash and cash equivalents and temporary investments
approximate fair value due to the short-term nature of these investments. The
amortized cost of the marketable non-equity securities approximate their
aggregate fair value.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
(H) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided based on the
straight-line method over the estimated useful lives of the respective assets,
generally ten years for network assets and five years for information system
assets and office equipment. Leasehold improvements are amortized over ten years
or the lease term, whichever is shorter.
Property and equipment (including work in process) consists of:
<TABLE>
<CAPTION>
- ---------------------------------------------------------
December 31, 1998 1997
- ---------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Cell sites and equipment $ 484,638 $ 442,308
Switching equipment 114,470 91,598
Information systems 108,279 83,950
Office equipment 18,247 15,800
Leasehold improvements 8,324 8,466
- ---------------------------------------------------------
733,958 642,122
- ---------------------------------------------------------
Accumulated depreciation (112,677) (38,018)
- ---------------------------------------------------------
Property and equipment-net $ 621,281 $ 604,104
- ---------------------------------------------------------
</TABLE>
Gains and losses on the disposition of property and equipment are included in
operating expenses.
(I) WORK IN PROCESS
Work in process includes expenditures for the design, construction and testing
of the Company's PCS networks as well as the cost to relocate dedicated private
microwave links currently operating in the Company's spectrum in its MTAs. Work
in process also includes the costs associated with developing information
systems. The Company capitalizes interest on such expenditures where
appropriate. When the assets are placed in service, the Company transfers the
assets to the appropriate property and equipment category.
(J) INVESTMENT IN PCS LICENSES
Investment in PCS licenses is recorded at historical cost, which includes the
purchase price of the licenses acquired by the Company in the PCS auction plus
capitalized interest of $16.6 million incurred while readying the licenses in
the Company's MTAs for use. The Company recorded capitalized interest through
December 31, 1995, when TDS contributed approximately $289.2 million in equity
capital to the Company for the original cost of its licenses. The Company began
amortizing the licenses straight-line over 40 years upon commencement of service
in each respective MTA. Accumulated amortization on the licenses at December 31,
1998 and 1997, totaled $12.0 million and $4.5 million, respectively.
(K) MICROWAVE RELOCATION COSTS PAYABLE
Microwave relocation costs payable represent obligations of the Company to pay
its share of the costs to relocate dedicated private microwave links currently
operating in the Company's spectrum in its MTAs. The carrying amount reported in
the balance sheet for microwave relocation costs payable approximates fair value
because of the short maturity of those instruments.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
(L) (LOSS) PER COMMON AND SERIES A COMMON SHARE
(Loss) per Common and Series A Common Share was computed based on the weighted
average of Common and Series A Common Shares outstanding during the period,
adjusted to give retroactive effect to the recapitalization in conjunction with
the Company's 1996 initial public offering ("IPO"), as if this transaction had
occurred at January 1, 1996 (see Note 9 - Common Stock).
<PAGE>
Aerial Communications, Inc. and Subsidiaries
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share," effective December 31, 1997. The implementation of
SFAS No. 128 had no effect on reported (Loss) per Common and Series A Common
Share due to the current Net (Loss). In 1998, 1997 and 1996, respectively, 1.7
million, 1.4 million and 0.3 million stock options were not included in
computing diluted (Loss) per Common and Series A Common Share because their
effects were antidilutive.
(M) SUPPLEMENTAL CASH FLOW DISCLOSURES
The following summarizes interest and income taxes paid and certain noncash
transactions.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Year Ended December 31, 1998 1997 1996
- --------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Income tax benefits - cash payments
from TDS resulting from taxable losses
generated by the Company in prior years $ -- $ -- $15,598
Interest paid to non-affiliates 1,911 428 1,107
Interest and guarantee fees paid to TDS
or converted to debt under the
Revolving Credit Agreement $57,219 $24,297 $ 3,496
- --------------------------------------------------------------------------------
</TABLE>
In 1998, $71.5 million in additions to property and equipment (amounts in
service and work in process, collectively) were financed through long-term debt
and accounts payable-affiliate. In 1997, $113.0 million in additions to property
and equipment were financed through a combination of long-term debt, accounts
payable-trade, microwave relocation costs payable and prepaid network
infrastructure costs. In 1996, $199.6 million in additions to property and
equipment and prepaid network infrastructure costs were financed through a
combination of long-term debt, accounts payable-trade and other, and microwave
relocation costs payable.
In 1998, the Company incurred interest charges totaling $80.2 million. In 1998,
the interest charges were comprised of $55.4 million paid to TDS relating to the
Revolving Credit Agreement (see Note 6 - Revolving Credit Agreement), $6.7
million paid to TDS for guarantee fees on the Series A and Series B Zero Coupon
Notes and obligations under the Nokia 1998 and 1996 Credit Agreements (see Note
5 - Long-Term Debt), $1.0 million paid to Nokia for interest charges relating to
the 1998 Credit Agreement, $16.2 million in accrued interest on the Series A and
Series B Zero Coupon Notes, and $0.9 million in other interest charges. Of these
amounts, the Company capitalized $0.1 million relating to its work in process
expenditures. The remaining $80.1 million was charged to expense.
In 1997, the Company incurred interest charges totaling $33.1 million. In 1997,
the interest charges were comprised of $21.0 million paid to TDS relating to the
Revolving Credit Agreement (see Note 6 - Revolving Credit Agreement), $3.3
million paid to TDS for guarantee fees on the Series A Zero Coupon Notes and
obligations under the Nokia 1996 Credit Agreement (see Note 5 - Long-Term Debt),
$0.4 million paid to Nokia for interest charges relating to the 1996 Credit
Agreement, $8.3 million in accrued interest on the Series A Zero Coupon Notes,
and $0.1 million in other interest charges. Of these amounts, the Company
capitalized $6.0 million relating to its work in process expenditures. The
remaining $27.1 million was charged to expense.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
In 1996, the Company incurred interest charges of $4.0 million. The interest
charges were comprised of $2.0 million paid to TDS relating to the Revolving
Credit Agreement, $0.6 million paid to TDS for guarantee fees on the Series A
Zero Coupon Notes and obligations under the Nokia 1996 Credit Agreement, $70,000
paid to Nokia for interest charges relating to the 1996 Credit Agreement and
$1.3 million in accrued interest on the Series A Zero Coupon Notes. Of these
amounts, the Company capitalized $1.2 million relating to its work in process
expenditures. The remaining $2.8 million was charged to expense.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
(N) NEW ACCOUNTING PRONOUNCEMENTS
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income."
Comprehensive Income (Loss) equals Net (Loss) for the year ended December 31,
1998.
The American Institute of Certified Public Accountants ("AICPA") issued
Statement of Position ("SOP") 98-1 "Accounting for Computer Software Developed
for or Obtained for Internal Use," which became effective January 1999. To
eliminate the diversity in practice in accounting and improve financial
reporting, SOP 98-1 provides guidance for accounting for software developed for
internal use. Management does not anticipate that the effect on results of
operations and financial position will be material.
The AICPA issued SOP 98-5 "Reporting on the Costs of Start-up Activities," which
became effective January 1999. SOP 98-5 requires that costs of start-up
activities, including organizational costs, should be charged to operations as
incurred. Management believes SOP 98-5 will have no effect on results of
operations and financial position.
3. INCOME TAXES
The Company is included in a consolidated federal income tax return with other
members of the TDS consolidated group. The Company and TDS are parties to a Tax
Allocation Agreement (the "Agreement"). The Agreement provides that the Company
and its subsidiaries be included with the TDS affiliated group in a consolidated
federal income tax return and in state income or franchise tax returns in
certain situations. For financial reporting purposes, the Company computes its
federal income taxes as if it were filing a separate return as its own
affiliated group and is not included in the TDS group. Under the Agreement the
Company may carry forward any losses and credits, and use them to offset income
tax liabilities to TDS if any arise in the future. See Note 10--Subsequent
Event for further discussion of the Agreement.
The Company records all deferred tax liabilities or assets for the deferred tax
consequences of all temporary differences. Income tax provisions are summarized
below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Year ended December 31, 1998 1997 1996
- ------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Federal income tax provision (benefit):
Current $ -- $ -- $(3,098)
Deferred 2,078 1,561 1,671
State income tax provision:
Current -- -- --
Deferred 501 245 560
- ------------------------------------------------------------------------------
Income tax expense (benefit) $ 2,579 $ 1,806 $ (867)
- ------------------------------------------------------------------------------
</TABLE>
<PAGE>
Aerial Communications, Inc. and Subsidiaries
The temporary differences which gave rise to significant portions of the net
deferred tax liability were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
Year ended December 31, 1998 1997
- ------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C>
Deferred tax asset:
Net operating loss carryforwards $ 357,460 $ 171,896
Less: valuation allowance (277,782) (129,412)
- ------------------------------------------------------------------
Total deferred tax asset $ 79,678 $ 42,484
- ------------------------------------------------------------------
Deferred tax liability:
Licenses $ 24,060 $ 19,025
Property and equipment 39,364 19,004
Partnership investment 13,967 9,235
Minority share of loss 9,934 --
Deferred charges-interest 5,273 6,088
Other 3,437 2,911
- ------------------------------------------------------------------
Total deferred tax liability $ 96,035 $ 56,263
- ------------------------------------------------------------------
Net deferred tax liability $ 16,357 $ 13,779
- ------------------------------------------------------------------
</TABLE>
The Company records a deferred tax asset associated with net operating loss
carryforwards and then assesses the need for any valuation allowance associated
with those carryforwards. At December 31, 1998, the federal net operating loss
carryforward available to offset future taxable income is $802.4 million
(generating a $280.8 million deferred tax asset) and expires between 2012 and
2018. The amount of state net operating loss carryforward available to offset
future taxable income, primarily of the individual MTAs which generated the
loss, is $1,086.2 million (generating a $76.7 million deferred tax asset) and
expires between 2000 and 2018.
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. During 1998, the
valuation allowance increased $148.4 million primarily due to the Company's
increased net operating losses.
The statutory federal income tax rate is reconciled to the Company's effective
income tax rate below:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Year ended December 31, 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes, net of federal benefit (0.1) (0.1) (0.9)
Effects of valuation allowance on deferred tax asset (35.7) (35.6) (29.7)
Other -- -- (2.2)
- ----------------------------------------------------------------------------------------------
Effective income tax rate (0.8)% (0.7)% 2.2%
- ----------------------------------------------------------------------------------------------
</TABLE>
4. MINORITY INTEREST
On September 8, 1998, pursuant to the terms of a Purchase Agreement dated June
1, 1998, Sonera Ltd. ("Sonera"), formerly Telecom Finland Ltd., made a $200
million investment in AOC, a then wholly -owned subsidiary of the Company.
Sonera purchased approximately 2.4 million shares of common stock of AOC at a
price of approximately $83 per share representing a 19.4% equity interest in
AOC. The sale of the AOC Common Shares was recorded at a fair market value which
was more than the Company's book value investment in AOC. The Company adjusted
its book value investment in AOC as a result of this sale and increased
additional paid-in capital $169.5 million in 1998.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
Sonera's equity ownership amount in AOC is subject to adjustment based on
Aerial's 20-day average stock price during the three years commencing
September 8, 1998. Depending on the level of increase in the stock price,
Sonera's ownership amount in AOC could decline to approximately 15%. In
addition, after five years Sonera's equity in AOC becomes incrementally
exchangeable for equity in Aerial or, in certain circumstances, incrementally
exchangeable for equity in TDS or cash or any combination of the foregoing.
See also Note 11--Contingency for discussion of the concerns raised by Sonera
about the spin-off announcement made by TDS, which has raised the possibility
of litigation.
Minority share of loss of $23.6 million represents Sonera's share of AOC's
consolidated net loss from September 8, 1998 (the closing date) to December 31,
1998.
5. LONG-TERM DEBT
Nokia Telecommunications Inc. ("Nokia") agreed to provide the Company with up to
$200 million in financing for digital radio channel and switching infrastructure
equipment through a Credit Agreement with the Company dated June 19, 1996 ("1996
Credit Agreement"). In accordance with the provisions of the 1996 Credit
Agreement, the Company issued, in tranches, 10-year unsecured zero coupon
promissory notes, the proceeds of which were paid to Nokia in satisfaction of
borrowings by the Company under the 1996 Credit Agreement. On November 4, 1996,
the Company issued $226.2 million in aggregate principal amount at maturity of
Series A Zero Coupon Notes ("Series A Notes") due in 2006. On February 5, 1998,
the Company issued $220.0 million in aggregate principal amount at maturity of
Series B Zero Coupon Notes ("Series B Notes") due in 2008 (representing the
final issuance of zero coupon notes under the 1996 Credit Agreement). The
aggregate issue price of the Series A and Series B Zero Coupon Notes was $200
million. The proceeds were paid to Nokia in satisfaction of all then outstanding
and future obligations of the Company up to $200 million under the 1996 Credit
Agreement.
On June 30, 1998, the Company and Nokia entered into an agreement ("1998 Credit
Agreement") in which Nokia will provide up to an aggregate $150 million in
financing to the Company for the purchase of network infrastructure equipment
and services from Nokia. Loans under the 1998 Credit Agreement are to be made
available in two $75 million tranches. With respect to Tranche A, the Company
may borrow up to $75 million until June 30, 1999. Tranche A loans mature on June
30, 1999; however, the maturity date of Tranche A loans may be extended to June
30, 2000, upon written notice and payment of an extension fee by the Company to
Nokia. A second $75 million ("Tranche B") becomes available commencing on June
30, 1999, and ending on June 30, 2000, the maturity date of Tranche B loans.
Interest under the 1998 Credit Agreement is payable monthly at a per annum rate
equal to the 30-day London Interbank Offered Rate ("LIBOR") plus 0.25% (the
"Eurodollar margin"). The Eurodollar margin on any Tranche A loans with an
extended maturity date is subject to adjustment based on ratings for TDS
long-term senior unsecured debt.
The Series A and Series B Notes are unsecured obligations of the Company and
rank in the same priority with all other unsecured and unsubordinated
indebtedness of the Company. The Series A and Series B Notes and obligations of
the Company under the 1998 Credit Agreement are fully and unconditionally
guaranteed by TDS at an annual fee rate of 3%. Guarantee fees owed TDS are
payable semiannually. The Series A and Series B Notes are subject to optional
redemption by the Company after five years from the date of issuance at
redemption prices which reflect the original issue discount accreted since
issuance.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
Of the $278.0 million in long-term debt at December 31, 1998, $45.5 million
represents borrowings under the 1998 Credit Agreement, with the balance
representing the Series A and Series B Zero Coupon Notes, including accreted
interest.
At December 31, 1997, the Company had a balance of $196.4 million in long-term
debt which consisted of $112.1 million related to the Series A Notes and $84.3
million in obligations under the Nokia 1996 Credit Agreement.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
The $121.2 million carrying value of the Company's Series A Notes is less than
its fair value, estimated to be $124.9 million. The $111.3 million carrying
value of the Company's Series B Notes is greater than its fair value, estimated
to be $107.7 million. The fair values were estimated using discounted cash flow
analyses. The $45.5 million carrying value of the Company's obligations under
the 1998 Credit Agreement approximates the fair value of the obligations, as the
1998 Credit Agreement is variable rate debt with the interest rate based on the
30-day LIBOR plus 0.25%.
6. REVOLVING CREDIT AGREEMENT
The Company entered into a Revolving Credit Agreement with TDS on August 1,
1995, under which all of the outstanding obligations of the Company to TDS are
incorporated. Under the terms of the Sonera Purchase Agreement, the Revolving
Credit Agreement between the Company and TDS, pursuant to which the Company owed
TDS $665.0 million as of August 31, 1998, was terminated. A new Revolving Credit
Agreement, between AOC and TDS was substituted, under which AOC was indebted to
TDS for $665.0 million as of August 31, 1998.
The new Revolving Credit Agreement between AOC and TDS provides that the
amount of any proceeds raised by the Company or AOC in connection with the
sale of equity (see Note 4 - Minority Interest), or debt will be used to
reduce the borrowings under the Revolving Credit Agreement as well as reduce
the total amount AOC may borrow under the Revolving Credit Agreement.
Additionally, any borrowings under the Nokia 1998 Credit Agreement (See Note
5 - Long-Term Debt) concurrently reduces by the same amount the authorized
total line of credit available to AOC under the Revolving Credit Agreement.
Pursuant to these terms, AOC paid to TDS the $200 million it had received
from Sonera to reduce its borrowings under the Revolving Credit Agreement.
On November 3, 1998, TDS approved an amendment to the Revolving Credit
Agreement dated August 31, 1998, between TDS and AOC. Under the Revolving
Credit Agreement, as amended, AOC will be permitted to borrow up to a maximum
amount (the "Maximum Amount"), less the amount of any debt or equity
financing obtained by AOC or the Company, including the amount of any
borrowings under the Nokia 1998 Credit Agreement. The Maximum Amount under
the amended Revolving Credit Agreement was increased to $650 million in
February 1999. The interest rate under the amended Revolving Credit Agreement
is equal to the prime rate plus 3%. Interest on the balance due under the
amended Revolving Credit Agreement is payable quarterly and no principal is
payable until April 2, 2000. The following table summarizes AOC's borrowing
capacity under the Revolving Credit Agreement as of December 31, 1998:
<TABLE>
<CAPTION>
(Dollars in thousands)
- ----------------------------------------------------------------------------
<S> <C>
Maximum amount available $ 615,000
Reduced by :
Vendor financing under the Nokia 1998 Credit Agreement (45,472)
Amount outstanding under the Revolving Credit Agreement (549,943)
- ----------------------------------------------------------------------------
Net amount available for borrowing $ 19,585
- ----------------------------------------------------------------------------
</TABLE>
See Note 10--Subsequent Event for further discussion of the Revolving Credit
Agreement.
The $549.9 million carrying value of the Company's borrowings under the
Revolving Credit Agreement approximates the fair value of the borrowings, as the
Revolving Credit Agreement is variable rate debt with the interest rate based on
the prime lending rate.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
7. RELATED PARTY TRANSACTIONS
The Company is billed for all services it receives from TDS and its
subsidiaries, consisting primarily of information processing and general
management services. Such billings are based on expenses specifically identified
to the Company and on allocations of common expenses. Such allocations are
<PAGE>
Aerial Communications, Inc. and Subsidiaries
based on the relationship of the Company's assets, employees, investment in
plant and expenses to the total assets, employees, investment in plant and
expenses of TDS. Management believes the method used to allocate common expenses
is reasonable and that all expenses and costs applicable to the Company are
reflected in the accompanying financial statements on a basis which is
representative of what they would have been if the Company operated on a stand
alone basis. Billings to the Company from TDS totaled $8.6 million, $3.9 million
and $2.0 million during 1998, 1997 and 1996, respectively.
In 1998, TDS developed a new payroll system for all of its subsidiaries,
including the Company. Also in 1998, the Company and TDS developed a new
inventory system for Aerial and its subsidiaries. The Company recorded
approximately $6.1 million related to these systems in property and equipment.
In 1996, TDS completed development of a new financial reporting system for all
of its subsidiaries, including the Company. The Company recorded approximately
$2.4 million related to this system in property and equipment.
In 1997 and 1996, the Company deposited its excess cash in a cash management
program administered by TDS. Deposits made into the program were generally
available to the Company with interest each month equal to 30-day commercial
paper rates plus 0.25%.
Subject to the completion of TDS's proposed spin-off of the Company, certain
intercompany agreements between TDS and Aerial could be terminated. See
Note 1-- Proposed TDS Corporate Restructuring for further discussion.
8. COMMITMENTS
The costs of development, construction, start-up and post-launch activities of
the Company require substantial capital. From inception through December 31,
1998, the Company had expended approximately $304.4 million for its six
licenses, including capitalized interest, approximately $739.1 million for all
other capital expenditures and incurred cumulative net losses of $630.8 million.
The Company expects to incur significant operating losses and to generate
negative cash flow from operating activities during 1999 as it continues to
build its PCS customer base. The Company estimates that its aggregate capital
requirements for 1999 will total approximately $335 million, with $130 million
needed for capital additions and $205 million needed to fund operations
(including an aggregate $80 million in interest expense and guarantee fees
payable to TDS).
On December 31, 1998, the Company had orders totaling approximately $3.9 million
with Nokia for infrastructure equipment. Also on December 31, 1998, the Company
had orders totaling approximately $9.1 million with various handset vendors for
handsets and accessories.
The Company and its subsidiaries have leases for certain office facilities,
warehouses, retail store locations and cell sites which are classified as
operating leases. For the years ended December 31, 1998, 1997 and 1996, rent
expense for non-cancelable operating leases was $21.5 million, $10.3 million and
$2.1 million, respectively; and for cancelable leases, $0.3 million, $1.1
million and $0.5 million, respectively. On December 31, 1998, the aggregate
minimum rental commitments under non-cancelable operating leases for the years
1999 through 2003 and 2004, and thereafter, are approximately $20.5 million,
$20.1 million, $18.6 million, $11.5 million, $6.0 million and $14.3 million,
respectively.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
9. COMMON STOCK
Tax-Deferred Savings Plan
Effective July 1, 1995, the Company adopted the TDS Tax-Deferred Savings Plan
(the "Savings Plan"), a qualified profit-sharing plan pursuant to Sections
401(a) and 401(k) of the Internal Revenue Code. As amended on August 15, 1996,
participating employees have the option of
<PAGE>
Aerial Communications, Inc. and Subsidiaries
investing their contributions in Aerial Common Shares, TDS Common Shares, United
States Cellular Corporation (a subsidiary of TDS) Common Shares or five
non-affiliated funds. The Company has reserved 600,000 Common Shares for
issuance under the Savings Plan. Employer matching contributions are made in
Aerial Common Shares. Aerial issued 73,815, 184,533 and 23,460 Common Shares in
1998, 1997 and 1996, respectively, in connection with the Savings Plan.
STOCK-BASED COMPENSATION PLANS
The Company accounts for stock options and its employee stock purchase plan
under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25"). No compensation costs have been recognized for the
employee stock purchase plan. Some options granted in 1998 and 1997 had exercise
prices that were less than the quoted market price of the Company's stock on the
date they were granted. In accordance with APB 25, compensation expense of
$20,000 and $26,000 was recorded related to these options in 1998 and 1997,
respectively.
Had compensation expense for all plans been determined consistent with SFAS No.
123, "Accounting for Stock-Based Compensation," the Company's Net (Loss) and
(loss) per share would have been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------
(Dollars in thousands except per share amounts)
<S> <C> <C> <C>
Net (Loss)
As Reported $ (337,895) $ (247,057) $ (37,921)
Pro Forma $ (340,382) $ (250,957) $ (38,323)
Basic and diluted (loss) per share
As Reported $ (4.71) $ (3.45) $ (0.56)
Pro Forma $ (4.75) $ (3.51) $ (0.57)
- --------------------------------------------------------------------------------------
</TABLE>
A summary of the status of the Company's stock option plan at December 31, 1998,
1997 and 1996, and changes during the years then ended is presented in the table
and narrative below:
<TABLE>
<CAPTION>
Weighted Average
------------------------------------------------
Number of Shares Option Prices Fair Values Contractual Life
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
Outstanding January 1, 1996
Granted 310,305 $ 17.00 $ 7.41
- ----------------------------------------------------------------------------------------------------------------------
Outstanding December 31, 1996
(61,397 exercisable at $17.00) 310,305 $ 17.00 9.33 Years
Granted 1,137,435 $ 9.46 $ 4.42
Exercised (2,553) $ 4.94
Forfeited (56,450) $ 14.44
- ----------------------------------------------------------------------------------------------------------------------
Outstanding December 31, 1997
(633,030 exercisable from $4.94 to $17.00) 1,388,737 $ 10.95 8.51 Years
Granted 678,861 $ 5.85 $ 3.46
Exercised (30,873) $ 4.94
Forfeited (316,764) $ 10.45
- ----------------------------------------------------------------------------------------------------------------------
Outstanding December 31, 1998
(1,019,192 exercisable from $3.71 to $17.00) 1,719,961 $ 9.13 7.69 Years
</TABLE>
<PAGE>
Aerial Communications, Inc. and Subsidiaries
EMPLOYEE STOCK OPTIONS
Effective April 25, 1996, the Company began providing long-term incentive
benefits for its senior managers by adopting the Aerial Communications, Inc.
Long-Term Incentive Plan (the "Stock Option Plan"). The Company has reserved 3
million Common Shares for option grants. Aerial employees were issued 6,450
Common Shares in 1998 and 767 Common Shares in 1997 in connection with the Stock
Option Plan. The options are exercisable over a specified period not in excess
of ten years from the date they are granted. Most options expire 10 years after
the grant date, or 30 days after the date of the employee's termination of
employment, if earlier. Most options vest annually over three to five years from
December 15, 1996, through December 15, 2000. The fair value of each option
grant was estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions for 1998, 1997 and 1996,
respectively: risk free interest rates of 5.20%, 6.59% and 5.53%; dividend yield
of 0%; expected lives of 8.8 years, 9.4 years and 7.4 years; and volatility of
58.17%, 51.32% and 26.36%.
EMPLOYEE STOCK PURCHASE PLAN
The Company adopted the 1996 APTI Employee Stock Purchase Plan (the "Stock
Purchase Plan") effective October 1, 1996. The Company has reserved 200,000
Common Shares for sale to the employees of the Company and its subsidiaries in
connection with the Stock Purchase Plan. Shares can be purchased twice a year
and the price per share is 85% of the stock's closing price on designated
purchase dates. The last purchase date under the Stock Purchase Plan was
September 30, 1998. Aerial employees were issued 93,996 Common Shares in 1998
and 59,822 Common Shares in 1997 in connection with the Stock Purchase Plan. The
fair value of the employees' purchase rights was estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions for 1998 and 1997, respectively: risk free interest rate of 4.99%
and 6.21%; dividend yield 0%; expected life of 1.8 and 0.8 years; and volatility
of 51.59% and 51.18%. The weighted average fair value of the employees purchase
rights were $1.94 in 1998 and $2.08 in 1997.
NON-EMPLOYEE DIRECTOR COMPENSATION
In April 1997, the Company established the Compensation Plan For Non-Employee
Directors (the "Compensation Plan"). Under the Compensation Plan, the Company's
independent directors are to be paid an annual fee of $20,000 that is payable
half in cash and half in Company stock. The number of Common Shares to be
delivered to each independent director is based upon the average market value of
the Company's stock for a certain period prior to the date of the Annual
Shareholder's Meeting. The Company has reserved 20,000 Common Shares for
issuance to the Company's independent directors under the Compensation Plan. The
Company issued 4,116 and 6,003 shares to non-employee directors under this plan
in 1998 and 1997, respectively.
INITIAL PUBLIC OFFERING
The Company sold 12.3 million Common Shares at a price of $17 per share in an
initial public offering on April 25, 1996. Proceeds of the offering, net of
underwriting discounts and commissions, totaled $195.3 million. The Company used
a portion of the net proceeds to repay TDS approximately $64.1 million,
representing the then outstanding balance (including accrued interest) under the
Revolving Credit Agreement, and used the balance of the funds to partially
finance construction, development and operating costs incurred to establish its
PCS networks. Proceeds of the offering were fully utilized by the end of January
1997.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
RECAPITALIZATION
On March 28, 1996, TDS, as the sole shareholder of the Company at such time,
executed a consent to action in lieu of a meeting, voting all 1,000 shares of
common stock of the Company then outstanding for the approval of a Restated
Certificate of Incorporation of the Company. Such Restated Certificate of
Incorporation authorized (a) 100 million Common Shares, $1.00 par value per
share; (b) 60 million Series A Common Shares, $1.00 par value per share; (c) 60
million Series B Common Shares, $1.00 par value per share; and (d) 10 million
Preferred Shares, $1.00 par value per share. Upon the filing of the Restated
Certificate of Incorporation with the Secretary of State of the
<PAGE>
Aerial Communications, Inc. and Subsidiaries
State of Delaware on April 19, 1996, the 1,000 shares of common stock of the
Company theretofore held by TDS were converted into 19.1 million Common Shares
and 40 million Series A Common Shares of the Company.
SERIES A COMMON SHARES
Series A Common Shares are convertible on a share-for-share basis into Common
Shares and are entitled to 15 votes per share. No Series A Common Shares were
converted during 1998, 1997 or 1996. As of December 31, 1998, all of the
Company's outstanding Series A Common Shares were held by TDS.
10. SUBSEQUENT EVENT
On March 12, 1999, the TDS and Aerial boards of directors approved a tax
settlement agreement calling for payment of $114.5 million from TDS to Aerial
under the September 8, 1998 Tax Allocation Agreement. The settlement covers tax
losses incurred by Aerial and used by TDS for the period commencing January 1,
1996 and ending with the date of the proposed spin-off of Aerial, currently
planned for the third quarter of 1999. The above payment, made on March 15,
1999, was used to pay down the outstanding balance under the Revolving Credit
Agreement.
11. CONTINGENCY
Following the announcement by TDS in December 1998, that it intended to
distribute to its shareholders all of the capital stock of Aerial that it
owns, and that Aerial would seek additional financing from sources other than
TDS in connection therewith, Sonera contacted TDS to express certain concerns
about the announcement. Sonera has asserted that the TDS announcement
reflects a change in circumstances that warrant the renegotiation of certain
matters related to its investment in AOC, including an adjustment in the
Equivalent Purchase Price, and has raised the possibility of litigation in
connection therewith. TDS and Aerial intend to attempt to reach a mutually
acceptable resolution of the concerns raised by Sonera. There can be no
assurance that this matter will not lead to litigation, or that it will not
have a material adverse effect on Aerial or on the plans relating to the
refinancing and spin-off of Aerial.
12. CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
Quarter Ended March 31 June 30 Sept. 30 Dec. 31
- --------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
1998
<S> <C> <C> <C> <C>
Operating revenues $ 30,746 $ 36,688 $ 38,438 $ 49,382
Operating (Loss) (69,313) (67,462) (60,607) (82,603)
Net (Loss) (86,921) (89,474) (79,137) (82,363)
Weighted average Common and
Series A Common Shares (000) 71,636 71,730 71,735 71,789
(Loss) per Common and
Series A Common Share $ (1.21) $ (1.25) $ (1.10) $ (1.15)
1997
Operating revenues $ -- $ 7,143 $ 18,648 $ 30,161
Operating (Loss) (21,614) (51,633) (64,537) (80,381)
Net (Loss) (22,340) (55,475) (76,598) (92,644)
Weighted average Common and
Series A Common Shares (000) 71,384 71,499 71,559 71,604
(Loss) per Common and
Series A Common Share $ (0.31) $ (0.78) $ (1.07) $ (1.29)
- --------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
Aerial Communications, Inc. and Subsidiaries
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended or at December 31, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
OPERATING FINANCIAL DATA
Operating Revenues $ 155,154 $ 55,952 $ -- $ -- $ --
Operating (Loss) (279,985) (218,165) (43,950) (7,562) (1,977)
Minority share of loss 23,620 -- -- -- --
Investment (losses) (128) (2,518) (304) -- --
Interest income-affiliate -- 95 4,488 -- --
Interest income-other 882 2,133 1,158 49 2
Other income 442 269 -- -- --
Gain on sale of PCS licenses -- -- 2,582 -- --
Interest expense-affiliate 62,137 21,558 1,960 1,051 50
Interest expense-other 18,010 5,507 802 -- --
(Loss) Before Income Taxes (335,316) (245,251) (38,788) (8,564) (2,025)
Net (Loss) $(337,895) $(247,057) $ (37,921) $ (6,468) $ (1,283)
Weighted Average Common
and Series A Common Shares (000)(1) 71,723 71,512 67,492 59,086 59,086
(Loss) per Common
and Series A Common Share $ (4.71) $ (3.45) $ (0.56) $ (0.11) $ (0.02)
Dividends per Common
and Series A Common Share $ -- $ -- $ -- $ -- $ --
BALANCE SHEET
Working capital $ (37,400) $ (51,566) $ (80,347) $ 33,141 $ 149
Property & Equipment (Net) 621,281 604,104 252,423 12,087 --
Investment in PCS licenses (Net) 289,488 297,043 304,354 305,818 20,401
Total Assets 961,347 960,648 672,827 360,444 21,320
Revolving Credit Agreement-TDS 549,943 448,234 -- 60,238 22,659
Long-Term Debt 278,010 196,439 103,743 -- --
Minority Interest 5,835 -- -- -- --
Common Shareholders' Equity (Deficit) 25,078 192,427 437,785 281,282 (1,444
Capital expenditures (2) $ 96,950 $ 387,718 $ 242,270 $ 297,551 $ 20,401
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Weighted Average Common and Series A Common Shares outstanding give
retroactive effect to the recapitalization in conjunction with the Company's
April 1996 initial public offering, as if the transaction had occurred January
1, 1994.
(2) Includes non-cash transactions.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
REPORT OF MANAGEMENT
Management of Aerial Communications, Inc. ("Aerial") has the responsibility for
preparing the accompanying consolidated financial statements and for their
integrity and objectivity. The statements were prepared in accordance with
generally accepted accounting principles applied on a consistent basis and, in
management's opinion, are fairly presented. The financial statements include
amounts that are based on management's best estimates and judgments. Management
also prepared the other information in the annual report and is responsible for
its accuracy and consistency with the financial statements.
Management has established and maintains a system of internal control that
provides reasonable assurance as to the integrity and reliability of the
financial statements, the protection of assets from unauthorized use or
disposition, and the prevention and detection of fraudulent financial reporting.
The system of internal control provides for appropriate division of
responsibility and is documented by written policies and procedures that are
communicated to employees with significant roles in the financial reporting
process and updated as necessary. Management monitors the system of internal
control for compliance, considers recommendations for improvements, and updates
such policies and procedures as necessary. Monitoring includes an internal
auditing program to independently assess the effectiveness of the internal
controls and recommend possible improvements thereto. Management believes that
Aerial's system of internal control is adequate to accomplish the objectives
discussed herein. The concept of reasonable assurance recognizes that the costs
of a system of internal accounting controls should not exceed, in management's
judgment, the benefits to be derived.
The consolidated financial statements of Aerial have been audited by Arthur
Andersen LLP, Independent Public Accountants.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Aerial Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Aerial
Communications, Inc. (a Delaware Corporation and an 82.3%-owned subsidiary of
Telephone and Data Systems, Inc.) and Subsidiaries (the "Company") as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
<PAGE>
Aerial Communications, Inc. and Subsidiaries
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aerial
Communications, Inc. and Subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Chicago, Illinois
January 27, 1999
(except with respect to the matter discussed in Note 10, as to which the
date is March 15, 1999)
<PAGE>
Aerial Communications, Inc. and Subsidiaries
AERIAL STOCK AND DIVIDEND INFORMATION
The Company's Common Shares are listed on the NASDAQ under the symbol "AERL" and
in the newspaper as "Aerial." As of February 26, 1998, the Company's Common
Shares were held by 656 registered holders and 5,500 beneficial holders. All of
the Series A Common Shares were held by TDS. No public trading market exists for
the Series A Common Shares, but the Series A Common Shares are convertible on a
share-for-share basis into Common Shares.
The trading price of the Common Shares on April 25, 1996, the date on which the
Common Shares were first offered for sale to the public, was $17.00 per share.
The Company has never paid any cash dividends and currently intends to retain
any future earnings for use in the Company's business. In addition, the
Revolving Credit Agreement with TDS prohibits the payment of dividends on the
Company's Common Shares and Series A Common Shares, except to the extent of
one-half of the cumulative consolidated net income, if any, of the Company.
MARKET PRICE PER COMMON SHARE BY QUARTER
No public trading market exists for Aerial's Series A Common Shares and
therefore, quotations are not available. The high and low sales prices of the
Common Shares on the NASDAQ as reported by the Dow Jones News Service are as
follows:
<PAGE>
Aerial Communications, Inc. and Subsidiaries
<TABLE>
<S> <C> <C> <C> <C>
1998 1st 2nd 3rd 4th
- ---------------------------------------------------------
High $ 9.25 $ 8.00 $ 6.94 $ 5.88
Low $ 6.50 $ 5.75 $ 3.06 $ 1.63
1997 1st 2nd 3rd 4th
- ---------------------------------------------------------
High $ 8.88 $ 9.63 $ 9.94 $ 10.63
Low $ 5.25 $ 3.88 $ 7.38 $ 7.00
</TABLE>
<PAGE>
EXHIBIT 21
AERIAL COMMUNICATIONS, INC.
SUBSIDIARIES OF AERIAL COMMUNICATIONS, INC.
<TABLE>
<CAPTION>
STATE OF
INCORPORATION
OR
LEGAL NAME ORGANIZATION
------------- --------------
<S> <C>
APT Operating Company, Inc. Delaware
APT Columbus, Inc. Delaware
APT Kansas City, Inc. Delaware
APT Tampa/Orlando, Inc. Delaware
APT Minneapolis, Inc. Delaware
APT Houston, Inc. Delaware
APT Pittsburgh Limited Partnership Delaware
APT Pittsburgh General Partner, Inc. Delaware
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in this Form 10-K of Aerial Communications, Inc., of our report
dated January 27, 1999 (except with respect to the matter discussed in Note 10,
as to which the date is March 15, 1999), on the consolidated financial
statements of Aerial Communications, Inc. and Subsidiaries (the "Company")
included in the Company's 1998 Annual Report to Shareholders, to the
inclusion in this Form 10-K of our report dated January 27, 1999 (except with
respect to the matter discussed in Note 10, as to which the date is March 15,
1999), on the financial statement schedule of the Company, and to the
incorporation by reference of such reports into the Company's previously
filed S-8 Registration Statements, File No. 333-06471, File No. 333-10201,
File No. 333-26429, File No.333-67461 and File No. 333-51561.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF AERIAL COMMUNICATIONS, INC. AS OF DECEMBER
31, 1998 AND FOR THE YEAR THEN ENDED, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,943
<SECURITIES> 0
<RECEIVABLES> 30,079
<ALLOWANCES> 5,875
<INVENTORY> 11,378
<CURRENT-ASSETS> 48,724
<PP&E> 733,958
<DEPRECIATION> (112,677)
<TOTAL-ASSETS> 961,347
<CURRENT-LIABILITIES> 86,124
<BONDS> 278,010
0
0
<COMMON> 71,789
<OTHER-SE> (46,711)
<TOTAL-LIABILITY-AND-EQUITY> 961,347
<SALES> 31,514
<TOTAL-REVENUES> 155,154
<CGS> 87,715
<TOTAL-COSTS> 435,139
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 80,147
<INCOME-PRETAX> (335,316)
<INCOME-TAX> 2,579
<INCOME-CONTINUING> (337,895)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (337,895)
<EPS-PRIMARY> (4.71)
<EPS-DILUTED> (4.71)
</TABLE>
