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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
Commission file numbers: 333-4603; 333-4603-01
NEXTLINK Communications, Inc.
NEXTLINK Capital, INC.
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(Exact name of small business issuer as specified in its charter)
Washington 91-1738221
Washington 91-1716062
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
155 108TH AVENUE NE, 8TH FLOOR, BELLEVUE, WA 98004
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(Address of principal executive offices) (Zip Code)
(425) 519-8900
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(Issuer's telephone number, including area code)
Check whether the issuer (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 issuer was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes X No .
As of May 1, 1997, the number of shares of Class B common stock of NEXTLINK
Communications, Inc. issued and outstanding was 83,123,084 and there were 1,000
shares of common stock of NEXTLINK Capital, Inc., all of which 1,000 shares were
held by NEXTLINK Communications, Inc.
NEXTLINK Capital, Inc. meets the conditions set forth in General Instruction G
(1) (a) and (b) of Form 10-QSB and is therefore filing this form with the
reduced disclosure format.
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PART I. FINANCIAL INFORMATION
Item 1(a). FINANCIAL STATEMENTS
NEXTLINK COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 31,
1997 DECEMBER 31,
(UNAUDITED) 1996
------------ -------------
ASSETS
Current assets:
Cash and cash equivalents....... $221,934 $ 76,807
Marketable securities........... 107,348 47,713
Accounts receivable, net........ 8,782 7,008
Other........................... 1,240 607
Pledged securities.............. 41,417 39,770
----------- -----------
Total current assets....... 380,721 171,905
Pledged securities................... 61,486 61,668
Property and equipment, net.......... 125,000 97,784
Goodwill, net........................ 54,523 24,110
Other intangible assets, net......... 10,465 11,243
Other assets, net.................... 17,512 23,973
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Total assets............... $649,707 $390,683
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--Continued-
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NEXTLINK COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
MARCH 31,
1997 DECEMBER 31,
(UNAUDITED) 1996
----------- -------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable............................. $ 15,198 $ 18,622
Accrued expenses............................. 5,549 4,112
Accrued interest payable..................... 20,187 9,250
Current portion of capital lease obligations. 1,149 1,194
Payable to affiliate......................... 1,500 1,500
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Total current liabilities............... 43,583 34,678
Long-term debt.................................... 350,000 350,000
Capital lease obligations......................... 5,879 6,262
Deferred compensation............................. 11,109 10,289
Other............................................. 3,051 2,850
---------- ----------
Total liabilities....................... 413,622 404,079
Commitments and contingencies
Minority interests................................ 212 308
Redeemable preferred stock (par value $0.01
per share, aggregate liquidation preference
$291,650; 5,700,000 and 0 shares issued and
outstanding in 1997 and 1996, respectively)..... 280,803 --
Class B common stock, subject to redemption
(par value $0.01 per share, 1,178,128 and 0
shares issued and outstanding in 1997 and 1996,
respectively)................................... 4,950 --
Equity units subject to redemption
(0 and 900,000 units outstanding in 1997
and 1996, respectively).......................... -- 4,950
Shareholders' deficit:
Class A common stock (par value $0.01
per share, 250,000,000 shares authorized
and 0 shares issued and outstanding in 1997
and 1996, respectively)..................... -- --
Class B common stock (par value $0.01
per share, stated at amounts paid in,
100,000,000 shares authorized, 81,944,956
and 0 shares issued and outstanding in 1997
and 1996, respectively)..................... 65,527 --
Accumulated deficit........................... (115,407) (84,181)
Members' capital (63,793,820 units, all of
which are outstanding in 1996) -- 65,527
-------- ---------
Total shareholders' deficit (49,880) (18,654)
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Total liabilities and shareholders'
deficit $ 649,707 $ 390,683
-------- ---------
-------- ---------
See accompanying notes to unaudited interim consolidated financial statements.
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NEXTLINK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
MARCH 31,
--------------------------
1997 1996
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Revenues.......................................... $ 10,067 $ 5,370
Costs and expenses:
Operating ................................... 9,904 4,696
Selling, general and administrative.......... 13,274 5,516
Deferred compensation........................ 892 --
Depreciation................................. 2,848 1,077
Amortization of intangible assets............ 1,558 752
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Total costs and expenses................ 28,476 12,041
--------- --------
Loss from operations.............................. (18,409) (6,671)
Interest income................................... 5,029 242
Interest expense.................................. (11,139) (736)
--------- --------
Loss before minority interests.................... (24,519) (7,165)
Minority interests in loss of
consolidated subsidiaries........................ 96 49
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Net loss.......................................... $(24,423) $(7,116)
--------- --------
--------- --------
See accompanying notes to unaudited interim consolidated financial statements.
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NEXTLINK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON ACCUMULATED MEMBERS'
STOCK DEFICIT CAPITAL TOTAL
<S> <C> <C> <C>
Balance at December 31, 1996................................... $ -- $(84,181) $65,527 $(18,654)
Merger of NEXTLINK Communications,
L.L.C. with and into NEXTLINK Communications, Inc........... 65,527 -- (65,527) --
Cumulative redeemable preferred stock dividends.............. -- (6,650) -- (6,650)
Accretion of preferred stock redemption obligation,
including issue costs....................................... -- (153) -- (153)
Net loss..................................................... -- (24,423) -- (24,423)
------- --------- -------- --------
Balance at March 31, 1997...................................... $65,527 $(115,407) $ -- $(49,880)
------- --------- -------- --------
------- --------- -------- --------
</TABLE>
See accompanying notes to unaudited interim consolidated financial statements.
NEXTLINK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES:
Net loss........................................................................... $ (24,423) $ (7,116)
Adjustments to reconcile net loss to net cash used in operating activities:
Deferred compensation expense................................................. 892 --
Equity in loss of affiliates.................................................. 495 --
Depreciation and amortization of intangible assets............................ 4,406 1,829
Minority interests in loss of consolidated subsidiaries....................... (96) (49)
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable........................................................... (1,756) (1,670)
Other current assets.......................................................... (1,875) (105)
Other long-term assets........................................................ (359) (1,087)
Accounts payable.............................................................. (2,073) 1,896
Accrued expenses.............................................................. (271) 561
Accrued interest payable...................................................... 10,937 --
---------- -----------
10,300 1,375
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Net cash used in operating activities.............................................. (14,123) (5,741)
INVESTING ACTIVITIES:
Purchase of property and equipment............................................ (17,648) (7,791)
Net assets acquired in business and asset acquisitions
(net of cash acquired)....................................................... (41,239) (9,598)
Cash withdrawn from escrow to be used in business acquisition................. 6,000 --
Investments in unconsolidated affiliates...................................... (1,800) --
Purchase of marketable securities, net........................................ (59,635) --
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Net cash used in investing activities.............................................. (114,322) (17,389)
</TABLE>
-- Continued --
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NEXTLINK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------
1997 1996
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<S> <C> <C>
FINANCING ACTIVITIES:
Net proceeds from issuance of redeemable preferred stock.... 274,000 --
Capital contributions....................................... -- 9,872
Proceeds from payable to affiliates......................... -- 28,531
Repayment of capital lease obligations...................... (428) --
Bank overdraft.............................................. -- (1,373)
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Net cash provided by financing activities........................ 273,572 37,030
-------- -------
Net increase in cash and cash equivalents........................ 145,127 13,900
Cash and cash equivalents, beginning of period................... 76,807 1,350
Cash and cash equivalents, end of period......................... $221,934 $15,250
-------- -------
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SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid for interest $ 244 $ 256
</TABLE>
See accompanying notes to unaudited interim consolidated financial statements.
<PAGE>
NEXTLINK COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of NEXTLINK
Communications, Inc., a Washington corporation, and its majority-owned
subsidiaries (collectively referred to as the Company). The Company, through
predecessor entities, was formed on September 16, 1994 and, through its
subsidiaries, provides competitive local telecommunications services in selected
markets in the United States. The Company is a majority-owned subsidiary of
Eagle River Investments, L.L.C. (Eagle River).
The Company's financial statements include 100% of the assets, liabilities
and results of operations of subsidiaries in which the Company has a controlling
interest of greater than 50%. The ownership interests of the other members or
partners in such subsidiaries are reflected as minority interests. The
Company's investment in Telecommunications of Nevada, L.L.C.
(Telecommunications), a limited liability company in which the Company has a
40% interest and which owns a network that is managed by the Company in Las
Vegas, Nevada, is accounted for on the equity method. All operations statistics
of the Company included in this Report include 100% of the operational
statistics of Telecommunications. Investments in entities in which the Company
has voting interests of not more than 20% are accounted for on the
cost method. All significant intercompany accounts and transactions have been
eliminated.
These financial statements have been prepared without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. These condensed
consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
Form 10-KSB as filed with the Securities and Exchange Commission on March 14,
1997.
The financial information included herein reflects all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion of
management, necessary to a fair presentation of the results for interim periods.
The results of operations for the three month period ended March 31, 1997 are
not necessarily indicative of the results to be expected for the full year.
2. INCORPORATION
On January 31, 1997, NEXTLINK Communications, L.L.C. was merged with and
into the Company in a tax-free transaction. In that merger, the Class A
membership interests of NEXTLINK Communications, L.L.C. were converted into
Class B common stock, options to acquire Class A membership interests were
converted into options to purchase Class B common stock, and options to
purchase Class B membership interests were converted into the right to
receive options to purchase Class A common stock. The Company's Class A
common stock and Class B common stock are identical in dividend and
liquidation rights, and vote together as a single class on all matters,
except as otherwise required by applicable law, with the Class A shareholders
entitled to cast one vote per share, and the Class B shareholders entitled to
cast 10 votes per share. In calculating the number of shares of the Company's
Class B common stock that each of the Class A members received in the merger,
the Company applied a formula that reflected each member's revalued capital
account balance as of January 31, 1997. Options to purchase Class B
membership interests were converted into the right to receive options to
purchase shares of Class A common stock on a one to one basis. As of March
31, 1997, the Company had 100,000,000 and 83,123,084 shares of Class B common
stock authorized and outstanding, respectively, and 250,000,000 and 0 shares
of Class A common stock authorized and outstanding, respectively. In
addition, there were options to purchase 4,741,774 shares of Class A common
stock and options to purchase 3,571,364 shares of Class B common stock
outstanding. The Company also had 25,000,000 and 5,700,000 shares of
Preferred Stock authorized and outstanding, respectively.
<PAGE>
3. FINANCING
On January 31, 1997, the Company completed the sale of 5.7 million units
consisting of (i) 14% senior exchangeable redeemable preferred shares (Preferred
Shares), liquidation preference $50 per share, and (ii) contingent warrants to
acquire in the aggregate 5% of each class of outstanding junior shares (as
defined) of the Company on a fully diluted basis as of February 1, 1998, which
resulted in gross proceeds to the Company of $285 million, and proceeds net of
underwriting discounts, advisory fees and expenses of $274 million. Dividends on
the Preferred Shares will accrue from January 31, 1997 and will be payable
quarterly commencing on May 1, 1997 at an annual rate of 14% of the liquidation
preference thereof. Dividends may be paid, at the Company's option, on any
dividend payment date occurring on or prior to February 1, 2002, either in cash
or by issuing additional Preferred Shares with an aggregate liquidation
preference equal to the amount of such dividends. The Company is required to
redeem all of the Preferred Shares outstanding on February 1, 2009 at a
redemption price equal to 100% of the liquidation preference thereof, plus
accumulated and unpaid dividends to the date of redemption.
Subject to certain conditions, the Preferred Shares are exchangeable in
whole, but not in part, at the option of the Company, on any dividend payment
date, for the 14% senior subordinated notes (Senior Subordinated Notes) due
February 1, 2009 of the Company. All terms and conditions (other than interest,
ranking and maturity) of the Senior Subordinated Notes would be substantially
the same as those of the Company's outstanding 12 1/2% Senior Notes due April
15, 2006.
The contingent warrants are exercisable on any business day after February
1, 1998, if a Qualifying Event has not occurred on or prior to February 1, 1998.
A Qualifying Event means a public equity offering (as defined) or one or more
strategic equity investments (as defined) which, in either case, results in
aggregate net proceeds to the Company of not less than $75 million.
4. ACQUISITION
On February 4, 1997, the Company completed the acquisition of substantially
all of the assets of Linkatel Pacific, L.P. (Linkatel), a Los Angeles-based
competitive access telecommunications provider. At the time of the acquisition,
Linkatel operated an 80 mile fiber optic telecommunications network covering
several markets in the Orange and Los Angeles county areas. The acquired assets
consist primarily of fiber optic network equipment and rights-of-way. The
Company plans to expand the network and add switching facilities in order to
provide local dial tone services during 1997. The total purchase price of $42.5
million consisted of a cash payment of $36.1 million, the repayment of debt of
$5.6 million and the assumption of net liabilities of $0.8 million.
The assets acquired and consideration given were as follows (in thousands):
Fair value of tangible assets and liabilities acquired $12,003
Fair value of intangible assets acquired 29,682
--------
$41,685
--------
--------
Cash paid for assets, including repayment of debt $41,685
--------
--------
5. RECLASSIFICATIONS
Certain reclassifications have been made to prior period amounts in order
to conform to the current presentation.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1(b). FINANCIAL STATEMENTS
NEXTLINK CAPITAL, INC.
BALANCE SHEET
(UNAUDITED)
MARCH 31,
1997
ASSETS:
Cash in bank.............................................. $ 100
---------
---------
SHAREHOLDER'S EQUITY
Common stock, no par value,
1,000 shares authorized, issued and outstanding...... $ --
Additional paid-in capital........................... 100
---------
$ 100
---------
---------
NOTE TO BALANCE SHEET
1. Description
NEXTLINK Capital, Inc. (NEXTLINK Capital) is a Washington corporation and a
wholly owned subsidiary of NEXTLINK Communications, Inc. (NEXTLINK). NEXTLINK
Capital was formed for the sole purpose of obtaining financing from external
sources and is a joint obligor on the 12 1/2% Senior Notes due April 15, 2006 of
NEXTLINK. NEXTLINK Capital was initially funded with a $100 contribution from
NEXTLINK and has had no operations to date.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Since its inception in 1994, the Company has executed a strategy of constructing
and acquiring fiber optic networks and acquiring related telecommunications
businesses. Over this period, the Company has begun
construction of, acquired, or entered into agreements to acquire local
telecommunications networks in 22 markets in seven states.
The Company's primary focus is providing switched local dial tone, long
distance and related telecommunications services to small and medium sized
commercial end-user customers. As of April 30, 1997, the Company provided
such services in 11 of its 22 markets (which includes the launch of three new
markets in April 1997). The Company expects to commence the offering of
switched local dial tone and long distance services in its remaining 11
markets later in 1997. The Company currently offers dedicated transmission,
or competitive access, services to long distance carriers and end users in 19
of its 22 markets, with the other three markets expected to be able to offer
such services later in 1997.
The table below provides selected key financial and operating data:
AS OF MARCH 31,
1997 1996
-------------------------
Gross property and equipment . . . . . . . . . . $ 136,217 $ 55,286
EBITDA (1) . . . . . . . . . . . . . . . . . . . $ (13,111) $ (4,842)
OPERATING DATA (2):
Route miles (3). . . . . . . . . . . . . . . . . 1,355 496
Fiber miles (4). . . . . . . . . . . . . . . . . 90,378 39,681
On-net buildings connected . . . . . . . . . . . 449 206
Switches installed . . . . . . . . . . . . . . . 10 6
Employees. . . . . . . . . . . . . . . . . . . . 679 255
(1) EBITDA consists of quarterly loss before interest expense, interest income,
minority interests, depreciation, amortization and deferred compensation
expense. EBITDA is commonly used in the telecommunications industry to
analyze companies on the basis of operating performance, leverage and
liquidity. EBITDA should not be construed as a substitute for operating
income or a better measure of liquidity than cash flow from operating
activities, which are determined in accordance with generally accepted
accounting priniciples.
(2) The operating data for all periods subsequent to March 1996 include the
statistics of the Las Vegas network, which the Company manages and in
which the Company has a 40% membership interest.
(3) Route miles refers to the number of miles of the telecommunications path in
which the Company-owned or leased fiber optic cables are installed.
(4) Fiber miles refers to the number of route miles installed along a
telecommunications path, multiplied by the Company's estimate of the number
of fibers along that path.
The Company builds its networks to encompass the significant business
concentrations in each area it serves, focusing on direct connections to
end-user locations and incumbent local exchange carrier (ILEC) central
offices. The Company employs a uniform technology platform for each of its
local exchange networks that is based on the Nortel DMS 500 digital local and
long distance combination switching system and associated distribution
technology. As of April 30, 1997, the Company had eight operational Nortel
DMS 500 switches and anticipates installing three additional switches during
the
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remainder of 1997, allowing the Company to service additional markets. The
Company also has installed a Nortel DMS 500 switch in its NEXTLAB facility,
a fully functional model of one of the Company's networks, which will serve as
the Company's network operations control center and a testing facility for
switch software and the Company's products and services. The Company also
employs two long distance switches in certain markets.
The Company also provides enhanced communications services including: (i)
interactive voice response services, which provide an interface between the
Company's clients and their customers for a variety of applications; (ii)
Xpress, the Company's virtual communications center that allows mobile
professionals and workgroups to access a suite of commonly used communications
services from any telephone in the public switched telephone network; and (iii)
the Intermind Communicator, an interactive communications tool for the World
Wide Web and intranet applications.
The Company plans to acquire and build networks in new areas, expand its current
networks, and also explore the acquisition or licensing of additional enhanced
communications services and other telecommunications service providers. These
efforts should allow the Company to increase its presence in the marketplace,
and facilitate providing a single source solution for the telecommunications
needs of its customers.
The development of the Company's businesses and the construction, acquisition
and expansion of its networks require significant expenditures, a substantial
portion of which is incurred before the realization of revenues. These
expenditures, together with the associated early operating expenses, result in
negative cash flow until an adequate customer base is established. However, as
the customer base grows, the Company expects that incremental revenues can be
generated with decreasing incremental operating expenses, which may provide
positive contributions to cash flow. The Company has made the strategic decision
to build high capacity networks with broad market coverage, which initially
increases its level of capital expenditures and operating losses. The Company
believes that over the long term this will enhance the Company's financial
performance by increasing the traffic flow over the Company's networks.
Prior to January 31, 1997, the Company was a limited liability company that was
classified and taxed as a partnership for federal and state income tax purposes.
As of January 31, 1997, the Company was subject to federal and state income tax.
RESULTS OF OPERATIONS
Revenue increased 87% to $10.1 million for the first quarter of 1997, compared
to $5.4 million in the same period in 1996. The increase was, in part, due to
the acquisition of ITC, a switch-based long distance reseller based in Salt Lake
City, Utah in December 1996, as well as 30% growth in local and long distance
services (both switched and resale) and enhanced communications services. First
quarter 1997 revenues increased 14% over pro forma fourth quarter 1996 revenues,
considering inclusion of ITC revenues for both periods. The first quarter 1997
revenues included $4.5 million derived from local and long distance services
(both switched and resale), $3.7 million derived from enhanced communications
services and $1.9 million from competitive access and dedicated line services.
This compares to $0.5 million derived from local and long distance services
(both switched and resale), $3.2 million from enhanced communications services
and $1.7 million from competitive access and dedicated line services during the
first quarter of 1996. The Company's interactive voice response subsidiary
contributed 30% and 56% of the Company's revenues during the first quarter of
1997 and 1996, respectively. The revenues generated by this subsidiary, while
generally increasing over time, have tended to fluctuate on a
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<PAGE>
quarter to quarter basis as the revenues are generally event driven and
seasonal in nature. The Company began offering switched local dial tone and
long distance services in seven of its markets in July 1996, an eighth market
in January 1997 and, most recently, three additional markets including
Cleveland and Columbus Ohio, as well as Las Vegas, in April 1997. As of March
31, 1997, the Company had 11,300 access lines in service. Revenues from the
provision of such services are expected to continue to increase as a
component of total revenues over future periods.
Operating expenses consist of costs directly related to providing
facilities-based network and enhanced communications services and also include
salaries and benefits and related costs of operations and engineering personnel.
Operating expenses increased 111% due to the effect of the ITC acquisition, an
increase in network costs related to the provision of local, long distance and
enhanced communications services and the Company's increase in employees as well
as other related costs primarily to expand the Company's switched local and
long distance service businesses in its existing and planned markets.
Selling, general and administrative expenses (SG&A) include salaries and related
personnel costs, facilities expenses, sales and marketing, consulting and legal
fees and equity in loss of affiliates. SG&A increased 141% due to the ITC
acquisition, the Company's increase in employees as well as other related costs
in order to expand the Company's switched local and long distance service
businesses in its existing and planned markets.
Deferred compensation expenses are recorded in connection with the Company's
Equity Option Plan. The option grants under this plan are considered
compensatory and are accounted for similar to stock appreciation rights.
Compensation expense is recognized over the vesting periods based on the excess
of the fair value of the options over their exercise prices.
Depreciation expense increased primarily due to placement in service of
additional telecommunications network assets, including switches, fiber optic
cable, network electronics and related equipment. Amortization of intangible
assets increased primarily as a result of the ITC acquisition in December 1996,
as well as the acquisition of Linkatel, in February 1997.
Interest expense during 1997 (net of $0.3 million capitalized) primarily
reflects the interest expense associated with the Company's and NEXTLINK
Capital's 12 1/2% Senior Notes due April 15, 2006 (the "Senior Notes"). See
"Liquidity and Capital Resources." Pursuant to Statement of Financial Accounting
Standards No. 34, the Company capitalizes a portion of its interest costs as
part of the construction cost of its communications networks. Interest income
results from investment of excess cash and certain securities that have been
pledged as collateral for interest payments on the Senior Notes.
LIQUIDITY AND CAPITAL RESOURCES
The competitive local telecommunications service business is a capital intensive
business. The Company's existing operations have required and will continue to
require substantial capital investment for the acquisition and installation of
fiber, electronics and related equipment in order to provide switched services
in the Company's networks and the funding of operating losses during the
start-up phase of each market. In addition, the Company's strategic plan calls
for expansion into additional market areas. Such expansion will require
significant additional capital for: potential acquisitions of businesses or
assets; design, development and construction of new networks; and the funding of
operating losses during the start-up phase of each market. During the first
quarter of 1997, the Company used $14.1 million in cash for operating
activities, compared to $5.7 million in 1996. The increase was
Next1q10q - 13
<PAGE>
primarily due to a substantial increase in the Company's activities
associated with the development and initiation of switched local and long
distance services and, to a lesser degree, due to the activities associated
with the Company's enhanced services operations. During the first quarter of
1997, the Company invested an additional $60.7 million in property and
equipment, acquisitions of telecommunications businesses and equity
investments in telecommunications businesses. During the same period in 1996,
the Company invested $17.4 million in property and equipment and acquisitions
of telecommunications assets and businesses.
On February 4, 1997, the Company completed the acquisition of substantially all
of the assets of Linkatel, a Los Angeles-based competitive access
telecommunications provider. At the time of acquisition, Linkatel operated an 80
mile fiber optic telecommunications network covering several markets in the
Orange and Los Angeles county areas. The total purchase price of $42.5 million
consisted of a cash payment of $36.1 million (including the release of $6.0
million which was deposited into escrow during 1996) plus the repayment of debt
of $5.6 million and the assumption of net liabilities totaling $0.8 million.
In January 1997, the Company obtained rights-of-way to expand its existing Salt
Lake City network into Provo and Orem, Utah. In December 1996, the Company
reached an agreement in principle to acquire an existing fiber optic network in
downtown Philadelphia in order to extend its existing network in Pennsylvania,
which acquisition is anticipated to be consummated during the second quarter of
1997.
Since inception, the Company has funded its expenditures with approximately
$55.0 million of cash equity investments from two entities that are controlled
by Mr. Craig O. McCaw and with the proceeds from the issuance of long-term debt
and redeemable preferred stock. On April 25, 1996, the Company raised net
proceeds of approximately $190 million through the issuance of $350 million in
Senior Notes. The Company used $117.7 million of the gross proceeds to purchase
U.S. government securities, representing funds sufficient to provide for payment
in full of interest on the Senior Notes through April 15, 1999 and used an
additional $32.2 million to repay certain advances and accrued interest from
Eagle River, a company formed and owned by Mr. McCaw. In addition, the Company
incurred costs of $9.8 million in connection with the financing. Interest
payments on the Senior Notes are due semi-annually. On January 31, 1997, the
Company completed the sale of $285 million of 14% senior exchangeable redeemable
preferred shares (Preferred Shares) which, after deducting issuance costs,
resulted in net proceeds to the Company of approximately $274 million. The
Preferred Shares will accrue dividends at the rate of 14% per annum. On or
before February 1, 2002, dividends may, at the option of the Company, be paid in
cash or by issuing additional Preferred Shares with an aggregate liquidation
preference equal to the amount of such dividends. After February 1, 2002,
dividends must be paid in cash. Since inception, the Company also has issued
$15.5 million of Class A Units primarily for the acquisition of certain
telecommunications assets and businesses, which Units were converted to shares
of Class B Common Stock of the Company on January 31, 1997.
The Company will continue to use the remaining proceeds from the sale of the
Senior Notes and the Preferred Shares for expenditures relating to the
construction, acquisition and operation of telecommunications networks and
service providers and the offering of telecommunications services in those areas
where the Company currently operates or intends to operate. Expenditures for the
construction and operation of networks include (i) the purchase and installation
of switches and related electronics in existing networks and in networks to be
constructed or acquired in new or adjacent markets, (ii) the purchase and
installation of fiber optic cable and electronics to expand existing networks
and develop new networks, including the connection of new buildings, (iii) the
development of its comprehensive information technology platform and (iv) the
funding of operating losses and working capital. The Company may also acquire or
invest in businesses that consist of existing networks or
Next1q10q - 14
<PAGE>
companies engaged in businesses similar to those engaged in by the Company and
its subsidiaries or other complementary businesses.
As of March 31, 1997, the Company had unrestricted cash and investments of
$329.3 million. The Company estimates that the cash required to fund its
anticipated capital expenditures and operating losses (excluding acquisitions)
for 1997 will approximate $200 million.
The Company's planned growth subsequent to 1997 will require substantial
additional capital to fund capital expenditures, acquisition opportunities,
working capital and any future operating losses. The Company will continue to
evaluate additional revenue opportunities in each of its markets and, as
attractive additional opportunities develop, the Company plans to make
additional capital investments in its networks to pursue such opportunities. The
Company expects to meet its additional capital needs with the proceeds from
sales or issuance of equity securities, credit facilities and other borrowings,
sales of additional debt securities, and through joint ventures. There can be no
assurance, however, that the Company will be successful in raising sufficient
additional capital on terms that it will consider acceptable or that the
Company's operations will produce positive consolidated cash flow in sufficient
amounts to service the Senior Notes and to pay cash dividends on the Preferred
Shares. Failure to raise and generate sufficient funds may require the Company
to delay or abandon some of its planned future expansion or expenditures, which
could have a material adverse effect on the Company's growth and its ability to
compete in the telecommunications services industry.
In addition, the Company's operating flexibility with respect to certain
business matters is, and will continue to be, limited by covenants associated
with the Senior Notes. Among other things, these covenants limit the ability of
the Company and its subsidiaries to incur additional indebtedness, create liens
upon assets, apply the proceeds from the disposal of assets, make dividend
payments and other distributions on capital stock and redeem capital stock. In
addition, the terms of the Preferred Shares contain certain covenants that may
limit the Company's operating flexibility with respect to the incurrence of
indebtedness and issuance of additional preferred shares. There can be no
assurance that such covenants will not adversely affect the Company's ability to
finance its future operations or capital needs or to engage in other business
activities that may be in the interest of the Company. The Company was in
compliance with all covenants associated with the Senior Notes and Preferred
Shares as of March 31, 1997.
INFORMATION REGARDING FORWARD LOOKING STATEMENTS
The statements contained in this report and in associated prior filings by the
Company with the Securities and Exchange Commission which are not historical
facts are "forward-looking statements" (as such term is defined in the Private
Securities Litigation Reform Act of 1995), which can be identified by the use of
forward-looking terminology such as "believes", "expects", "may", "will",
"should", or "anticipates" or the negative thereof or other variations thereon
or comparable terminology, or by discussions of strategy that involve risks and
uncertainties. Management wishes to caution the reader that these
forward-looking statements, such as the Company's plans to build and acquire
networks in new areas, its anticipation of revenues from designated markets
during 1997, and statements regarding the development of the Company's
businesses, the markets for the Company's services and products, the Company's
anticipated capital expenditures, regulatory reform and other statements
contained herein regarding matters that are not historical facts, are only
predictions. No assurance can be given that the future results will be achieved;
actual events or results may differ materially as a result of risks facing the
Company. Such risks include, but are not limited to, the Company's ability to
successfully market its services to current
Next1q10q - 15
<PAGE>
and new customers, access markets, identify, finance and complete suitable
acquisitions, design and construct fiber optic networks, install cable and
facilities, including switching electronics, and obtain rights-of-way, building
access rights and any required governmental authorizations, franchises and
permits, all in a timely manner, at reasonable costs and on satisfactory terms
and conditions, as well as regulatory, legislative and judicial developments
that could cause actual results to differ materially from the future results
indicated, expressed or implied, in such forward-looking statements.
NEW ACCOUNTING STANDARD
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" (SFAS 128), which revises the calculation and
presentation provisions of Accounting Principles Board Opinion 15 (APB 15)
and related interpretations. SFAS 128 is effective for the Company's fiscal
year ending December 31, 1997, and retroactive application is required.
Because its common shares are not publicly traded, the Company was exempt
from the reporting requirements of APB 15, and will also be excluded from the
reporting provisions of SFAS 128. As such, the adoption of SFAS 128 will
have no effect on historically reported amounts.
Next1q10q - 16
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES
On January 31, 1997, NEXTLINK Communications, L.L.C. was merged
with and into the Company in a tax-free transaction. In that
merger, the Class A membership interests of NEXTLINK
Communications, L.L.C. were converted into the right to receive
83,123,084 shares of the Company's Class B common stock. Such
securities were issued in reliance upon an exemption from
registration contained in Section 4(2) of the Securities Act of
1933, as amended.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
On January 13, 1997, the Company filed a report on Form 8-K
indicating its intention to merge NEXTLINK Communications,
L.L.C. with and into NEXTLINK Communications, Inc. and to
issue units consisting of Senior Exchangeable Redeemable
Preferred Shares and Contingent Warrants to acquire Junior
Shares.
On February 18, 1997, the Company filed a report on Form 8-K
regarding the closing of its acquisition of Linkatel
Pacific, L.P. (Linkatel).
On March 18, 1997, the Company filed Amendment Number 1 to
its Report on Form 8-K dated February 18, 1997 providing the
required audited financial statements of Linkatel and pro
forma combined financial statements.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
NEXTLINK Communications, L.L.C.
Date: May XX, 1997 By: /S/ KATHLEEN H. ISKRA
---------------------------------------
Kathleen H. Iskra
Vice President, Chief Financial Officer and
Treasurer
(Principal financial and accounting officer)
NEXTLINK Capital, Inc.
Date: May XX, 1997 By: /S/ KATHLEEN H. ISKRA
---------------------------------------
Kathleen H. Iskra
Vice President, Chief Financial Officer and
Treasurer
(Principal financial and accounting officer)
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<PAGE>
NEXLINK COMMUNICATIONS, INC.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
27 Financial Data Schedule
Next1q10q - 19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 221,934
<SECURITIES> 107,348
<RECEIVABLES> 8,782
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 380,721
<PP&E> 136,217
<DEPRECIATION> 11,217
<TOTAL-ASSETS> 649,707
<CURRENT-LIABILITIES> 43,583
<BONDS> 355,879
280,803
0
<COMMON> 65,527
<OTHER-SE> (115,407)
<TOTAL-LIABILITY-AND-EQUITY> 649,707
<SALES> 0
<TOTAL-REVENUES> 10,067
<CGS> 0
<TOTAL-COSTS> 28,476
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,139
<INCOME-PRETAX> (24,423)
<INCOME-TAX> 0
<INCOME-CONTINUING> (24,423)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,423)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
