<PAGE>
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 June 30, 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 August 1, 1997, the number of shares of Class A and Class B common
stock of NEXTLINK Communications, Inc. issued and outstanding was 452,025 and
83,123,084, respectively, 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.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1(a). FINANCIAL STATEMENTS
NEXTLINK COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JUNE 30,
1997 DECEMBER 31,
(UNAUDITED) 1996
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents..................... $ 198,763 $ 76,807
Marketable securities......................... 76,525 47,713
Accounts receivable, net...................... 9,790 7,008
Other......................................... 1,127 607
Pledged securities............................ 40,970 39,770
---------- ---------
Total current assets..................... 327,175 171,905
Pledged securities................................ 41,307 61,668
Property and equipment, net....................... 161,250 97,784
Goodwill, net..................................... 53,825 24,110
Intangible assets, net............................ 11,304 11,243
Other assets, net................................. 19,349 23,973
---------- ---------
Total assets............................. $ 614,210 $ 390,683
---------- ---------
---------- ---------
--Continued-
<PAGE>
NEXTLINK COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JUNE 30,
1997 DECEMBER 31,
(UNAUDITED) 1996
----------- ------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable.............................. $ 13,863 $ 18,622
Accrued expenses.............................. 7,775 4,112
Accrued interest payable...................... 8,885 9,250
Current portion of capital lease obligations.. 1,310 1,194
Payable to affiliate.......................... 1,500 1,500
--------- ---------
Total current liabilities................ 33,333 34,678
Long-term debt.................................... 350,000 350,000
Capital lease obligations......................... 5,357 6,262
Deferred compensation............................. -- 10,289
Other long-term liabilities....................... 3,106 2,850
--------- ---------
Total liabilities........................ 391,796 404,079
Commitments and contingencies
Minority interests................................ 137 308
Redeemable preferred stock (par value $0.01 per
share, aggregate liquidation preference
$301,971; 5,901,706 and 0 shares issued and
outstanding in 1997 and 1996, respectively)..... 291,353 --
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,
400,000 and 0 shares issued and outstanding
in 1997 and 1996, respectively)............. 16,763 --
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 --
Deferred compensation......................... (4,011) --
Accumulated deficit........................... (152,305) (84,181)
Members' capital (63,793,820 units, all of
which are outstanding in 1996).............. -- 65,527
--------- ---------
Total shareholders' deficit.............. (74,026) (18,654)
--------- ---------
Total liabilities and shareholders'
deficit................................ $ 614,210 $ 390,683
--------- ---------
--------- ---------
See accompanying notes to unaudited interim consolidated financial statements.
<PAGE>
NEXTLINK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- --------------------
1997 1996 1997 1996
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Revenues..................................... $ 11,601 $ 6,671 $ 21,668 $ 12,041
Costs and expenses:
Operating................................ 12,037 6,117 21,941 10,813
Selling, general and administrative...... 15,829 6,975 29,103 12,491
Deferred compensation.................... 223 -- 1,115 --
Depreciation............................. 3,206 1,310 6,054 2,387
Amortization............................. 1,319 1,013 2,877 1,765
--------- -------- --------- ---------
Total costs and expenses............ 32,614 15,415 61,090 27,456
--------- -------- --------- ---------
Loss from operations......................... (21,013) (8,744) (39,422) (15,415)
Interest income.............................. 5,492 2,857 10,521 3,099
Interest expense............................. (10,902) (7,902) (22,041) (8,638)
--------- -------- --------- ---------
Loss before minority interests............... (26,423) (13,789) (50,942) (20,954)
Minority interests in loss of consolidated
subsidiaries............................... 75 72 171 121
--------- -------- --------- ---------
Net loss..................................... $ (26,348) $(13,717) $(50,771) $ (20,833)
--------- -------- --------- ---------
--------- -------- --------- ---------
</TABLE>
See accompanying notes to unaudited interim consolidated financial statements.
<PAGE>
NEXTLINK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
CLASS A COMMON CLASS B COMMON
----------------- ------------------- DEFERRED ACCUMULATED MEMBERS'
SHARES AMOUNT SHARES AMOUNT COMPENSATION DEFICIT CAPITAL TOTAL
-------- -------- ---------- -------- ------------ ----------- -------- --------
<S> <C> <C> <C> <C> <C> <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.............. -- -- 81,944,956 65,527 -- -- (65,527) --
Conversion of Equity Option Plan
into Employee Stock Option Plan.. -- 15,363 -- -- (4,234) -- -- 11,129
Compensation attributable to stock
options vesting.................. -- -- -- -- 223 -- -- 223
Issuance of common stock under
leasing arrangement.............. 400,000 1,400 -- -- -- -- -- 1,400
Cumulative redeemable preferred
stock dividends.................. -- -- -- -- -- (16,971) -- (16,971)
Accretion of preferred stock
redemption obligation, including
issue costs...................... -- -- -- -- -- (382) -- (382)
Net loss........................... -- -- -- -- -- (50,771) -- (50,771)
-------- -------- ---------- -------- ------------ ----------- -------- --------
Balance at June 30, 1997............... 400,000 $ 16,763 81,944,956 $ 65,527 $ (4,011) $(152,305) $ -- $(74,026)
-------- -------- ---------- -------- ------------ ----------- -------- --------
-------- -------- ---------- -------- ------------ ----------- -------- --------
</TABLE>
See accompanying notes to unaudited interim consolidated financial statements.
<PAGE>
NEXTLINK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
---------------------
1997 1996
--------- ---------
OPERATING ACTIVITIES:
Net loss................................ $ (50,771) $ (20,833)
Adjustments to reconcile net loss to
net cash used in operating activities:
Deferred compensation expense....... 1,115 --
Equity in loss of affiliates........ 1,015 --
Depreciation and amortization....... 8,931 4,152
Minority interests in loss of
consolidated subsidiaries......... (171) (121)
Changes in assets and liabilities, net
of effects from acquisitions:
Accounts receivable................. (2,764) (3,446)
Other current assets................ 815 82
Other long-term assets.............. (351) (1,254)
Accounts payable.................... (5,333) 4,733
Accrued expenses.................... 1,959 2,522
Accrued interest payable............ (365) 8,021
Other long-term liabilities......... 123 (74)
--------- ---------
4,974 14,615
--------- ---------
Net cash used in operating activities... (45,797) (6,218)
INVESTING ACTIVITIES:
Purchase of property and equipment...... (55,181) (31,495)
Net assets acquired in business and
asset acquisitions (net of cash
acquired)............................. (41,239) (10,503)
Cash withdrawn from escrow to be used
in business acquisition............... 6,000 --
Investments in unconsolidated
affiliates............................ (4,275) (2,500)
Maturity of pledged securities.......... 18,049 --
Purchase of marketable securities, net.. (28,812) (117,688)
--------- ---------
Net cash used in investing activities... (105,458) (162,186)
-- Continued --
<PAGE>
NEXTLINK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
---------------------
1997 1996
--------- ---------
FINANCING ACTIVITIES:
Net proceeds from issuance of redeemable
preferred stock.......................... $ 274,000 $ --
Capital contributions...................... -- 9,921
Proceeds from payable to affiliates........ -- 28,766
Repayment of payable to affiliate.......... -- (32,203)
Repayment of capital lease obligations..... (789) --
Bank overdraft............................. -- (1,373)
Costs incurred in connection with
financing................................ -- (9,700)
Proceeds from issuance of senior notes..... -- 350,000
--------- ---------
Net cash provided by financing activities.. 273,211 345,411
--------- ---------
Net increase in cash and cash equivalents.. 121,956 177,007
Cash and cash equivalents, beginning of
period................................... 76,807 1,350
--------- ---------
Cash and cash equivalents, end of period... $ 198,763 $ 178,357
--------- ---------
--------- ---------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Noncash financing and investing activities:
Class A common stock issued under lease
arrangement.......................... $ 1,400 $ --
--------- ---------
--------- ---------
Redeemable preferred stock dividends,
paid in stock......................... $ 10,086 $ --
--------- ---------
--------- ---------
Accrued cumulative redeemable preferred
stock dividends, payable in stock.... $ 6,885 $ --
--------- ---------
--------- ---------
Cash paid for interest..................... $ 22,406 $ 1,277
--------- ---------
--------- ---------
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.
(Nevada), 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 operational statistics of the
Company included in this Report include 100% of the operational statistics of
Nevada. 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.
The interim 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 and six month periods ended
June 30, 1997 are not necessarily indicative of the results to be expected
for the full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INCOME TAXES
Prior to January 31, 1997, the Company was organized and operated as a
limited liability company that was classified and taxed as a partnership for
federal and state income tax purposes. Effective February 1, 1997, the
Company became subject to federal and state income taxes directly as a C
corporation.
The Company accounts for income taxes in accordance with the provisions
of Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" (SFAS 109), which requires that deferred income taxes be
determined based on the estimated future tax effects of differences between
the financial statement and tax bases of assets and liabilities given the
provisions of the enacted tax laws.
The conversion of the Company to a taxable corporation resulted in the
Company recording fully reserved net deferred tax assets. Major items giving
rise to deferred tax assets included deferred compensation and certain
operating expenses capitalized for tax purposes. Management believes that,
based on a number of factors, the available objective evidence created
sufficient uncertainty regarding the realization of net deferred tax assets.
Accordingly, a valuation allowance was provided for the net deferred tax
assets of the Company. The gross amount of deferred tax assets is not
material in relation to the Company's financial statements taken as a whole.
The
<PAGE>
Company will make the required annual disclosures of SFAS 109 in its
consolidated financial statements as of and for the year ended December 31,
1997.
STOCK-BASED COMPENSATION
In October 1995, the Financial Accounting Standards Board issued
Statement No 123, "Accounting for Stock-Based Compensation." Under Statement
No. 123, stock-based compensation expense is measured using either the
intrinsic-value method as prescribed by Accounting Principles Board (APB)
Opinion No. 25 or the fair value method described in Statement No. 123. The
Company has chosen to account for compensation cost associated with its stock
option plans in accordance with APB Opinion No. 25.
3. 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 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 June 30, 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 400,000 shares of Class A common stock
authorized and outstanding, respectively. In addition, there were options to
purchase 7,743,767 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 5,901,706 shares of Preferred Stock authorized and
outstanding, respectively.
4. PREFERRED STOCK
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 accrue from January 31, 1997 and
are 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.
<PAGE>
5. ACQUISITION
On February 4, 1997, the Company acquired 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 from the downtown Los Angeles area to the city of Irvine in Orange
County. As part of the assets acquired, the Company obtained access to
approximately 250 route miles of right-of-way, of which 183 miles have been
completed, creating one network in Los Angeles and one network in the Orange
County area. The Company has been providing competitive access services over
these networks since the acquisition date, and launched switched local and
long distance services in July 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
--------
--------
6. NETWORK LEASES
In June 1997, the Company entered into an eight year operating lease
agreement, with an option to renew for five additional years, with a company
that has excess fiber capacity in each of Atlanta, Chicago, New York City,
Newark, New Jersey, and Philadelphia which it agreed to make available to the
Company in each of those markets at a substantial discount to the wholesale
rates charged by other vendors of capacity. Payment in exchange for use of
the leased network will be based on monthly charges for actual services
provided. In connection with this lease agreement, the Company also issued
400,000 shares of Class A common stock in June 1997 for certain exclusivity
rights to the networks.
In addition to the capacity arrangement described above, the Company
entered into a 20-year capital lease over an existing 47-mile fiber network
in New York City. In connection with this arrangement, the Company paid $11
million in full satisfaction of its obligation under the lease, $6 million of
which has been placed in escrow pending completion of certain building
connections by the lessor.
Both leasing arrangements will allow the Company to accelerate its entry
into each of these markets by enabling the Company to avoid a significant
portion of the infrastructure development and construction time that would
otherwise be required to launch switched local and long distance services in
these markets.
7. STOCK OPTION PLAN
Prior to February 1997, the Company maintained an Equity Option Plan
which provided for the granting of equity option interests in the Company.
These option grants were considered compensatory and were accounted for
similar to stock appreciation rights. The Company recognized compensation
expense over the vesting periods based on the excess of the fair value of the
equity option interests, as determined by the Administrative Committee, over
the exercise price of the option interests. Such expense was periodically
adjusted for changes in the fair value of the equity option interests. These
option interests vested ratably over a four-year period, although some
retained vesting schedules of previous option plans which, in most cases,
vested 20% at employment and 20% at the end of each subsequent year.
In connection with the incorporation of the Company (see NOTE 3), the
Company established the NEXTLINK Communications, Inc. Stock Option Plan (the
Plan) to replace the Equity Option Plan and to provide a performance
<PAGE>
incentive for certain officers, employees and individuals who provide
services to the Company. The Plan provides for the granting of qualified and
non-qualified stock options. All options outstanding under the Equity Option
Plan were regranted under the new Plan with terms and conditions
substantially the same as under the Equity Option Plan, except that option
holders will no longer have the option to require the Company to repurchase
units for cash upon exercise of such units, nor will the Company have the
option to repurchase exercised units for cash. The Company has reserved
10,000,000 shares of Class A common stock for issuance under the Plan. The
options vest ratably over four years and expire no later than 10 years after
the date of grant.
The exercise price of qualified stock options granted under the Plan may
not be less than the fair market value of the common shares on the date of
grant. The exercise price of non-qualified stock options granted under the
Plan may be greater or less than the fair market value of the common stock on
the date of grant, as determined by the Board of Directors in its discretion.
Stock options granted at prices below fair market value at the date of grant
are considered compensatory, and compensation expense is deferred and
recognized ratably over the option vesting period based on the excess of the
fair market value of the stock at the date of grant over the exercise price
of the option. In connection with the regranting of options under the new
Plan, the Company reclassified the deferred compensation liability relating
to compensatory options issued under the Equity Option Plan to additional
paid-in capital (included in Class A Common Stock, stated at amounts paid
in). The remaining, unrecognized compensation expense attributable to these
compensatory options was also recorded as deferred compensation, a
contra-equity balance, and will be recognized over the remaining vesting
periods of the options.
During the six months ended June 30, 1997, the Company recorded $223,000
and $892,000 of deferred compensation expense related to the Stock Option
Plan and Equity Option Plan, respectively.
8. 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)
JUNE 30,
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, acquiring and leasing fiber optic networks and acquiring
related telecommunications businesses. Over this period, the Company has
begun development or construction of, acquired, leased fibers or capacity on,
or entered into agreements to acquire local telecommunications networks in 30
markets in 11 states.
The Company's primary focus is providing switched local and long distance
and enhanced communications services to small and medium sized commercial
end-user customers. As of July 31, 1997, the Company provided such services
in 23 of its 30 markets. The Company expects to commence the offering of
switched local and long distance services in an additional three markets by
December 1997 and four additional markets in 1998. In addition, the Company
plans to acquire, build or develop 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 table below provides selected key financial and operating data:
AS OF AND
FOR THE THREE MONTHS
ENDED JUNE 30,
1997 1996
---------- ----------
Gross property and equipment........ $ 175,630 $ 70,906
EBITDA (1).......................... $ (16,265) $ (6,421)
OPERATING DATA (2):
Route miles (3)..................... 1,595 801
Fiber miles (4)..................... 117,464 42,217
On-net buildings connected (5)...... 459 277
Switches installed.................. 12 6
Access lines in service (6)......... 17,409 5,079
Employees........................... 845 387
(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
principles.
(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.
(5) Represents buildings physically connected to the Company's networks,
excluding those connected by unbundled facilities. As of June 30,
1997, the Company had 1,284 buildings physically connected to its
networks, including those buildings connected through unbundled
facilities.
(6) Represents the number of access lines in service, including those
lines which are provided through resale of Centrex services, for
which the Company is billing services.
<PAGE>
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 July 31, 1997, the Company had nine operational Nortel DMS
500 switches and currently plans to install four additional switches by the
end of the first quarter of 1998. 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 serves as a testing facility for switch
software and the Company's products and services and will serve as the
Company's network operations control center. The Company also employs two
long distance switches.
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; and (ii)
Magic Number, 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. Historically, the Company has derived a substantial portion of its
revenues from these services. As local and long distance revenues are
expected to grow more rapidly than revenues for the Company's enhanced
communications services, the Company anticipates that, over the next five
years, local and long distance revenues will account for a significantly
higher percentage of total revenues.
The development of the Company's businesses and the construction,
acquisition and expansion of its networks require significant expenditures, a
substantial portion of which are 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. The Company has recently entered into leased
dark fiber and fiber capacity arrangements which allow the Company, by
installing one or more switches and related electronics, to enter a market
prior to completing construction of its own fiber optic network.
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 became subject to federal
and state income tax.
RESULTS OF OPERATIONS
Revenue increased 74% to $11.6 million during the second quarter of 1997,
from $6.7 million in the same period in 1996. Year to date revenue of $21.7
million represented an 80% increase from the $12.0 million reported for the
comparable period in 1996. The increase was, in part, due to the acquisition
of ITC, a switch-based long distance reseller, in December 1996, as well as
27% year to date growth in local and long distance services (both switched
and resale) and enhanced communications services. The second quarter 1997
revenues included $5.4 million derived from local and long distance services
(both switched and resale), $4.4 million derived from enhanced communications
services and $1.8 million from competitive access and dedicated line
services. This compares to $1.0 million derived from local and long distance
services (both switched and resale), $4.3 million from enhanced
communications services and $1.4 million from competitive access and
dedicated line services during the second quarter of 1996. The Company's
interactive voice response subsidiary contributed 30% and 58% of the
Company's revenues during the second quarters of 1997 and 1996, respectively.
The revenues generated by this subsidiary, while generally increasing over
time, have tended to fluctuate on a quarter to quarter basis as the revenues
are generally event driven and seasonal in nature.
The Company began offering switched local and long distance services in
seven of its markets in July 1996, an eighth market in January 1997, three
additional markets including Cleveland and Columbus Ohio, as well as Las
Vegas, in April 1997 and in 12 additional markets including Philadelphia, Los
Angeles, and cluster markets in
<PAGE>
Orange County, California, in July 1997. In addition, the Company has resold
Centrex access lines since April 1995. The Company increased its quarterly
customer access line installation rate from 2,745 in the first quarter of
1997 to 6,153 during the second quarter of 1997. As of June 30, 1997, the
Company had 17,409 access lines in service compared to 8,511 as of December
31, 1996, and 5,079 as of June 30, 1996. 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 97% in the second quarter of 1997 to
$12.0 million, up $5.9 million over the second quarter of 1996. For the six
months ended June 30, 1997, operating expenses rose $11.1 million, or 103%,
over the same period in 1996. These increases were attributed to factors
including the effect of the ITC acquisition, an increase in network costs
related to the provision of increased volumes 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 127% and
133%, respectively, in the three and six month periods ended June 30, 1997,
as compared to the corresponding periods in 1996. The increase was due to the
ITC acquisition and the Company's increase in employees, as well as other
costs associated with the expansion of the Company's switched local and long
distance service businesses in its existing and planned markets.
Deferred compensation expense was recorded in connection with the
Company's Equity Option Plan until April 1997, and in connection with the
Company's Stock Option Plan, which replaced the Equity Option Plan,
subsequent to April 1997. The stock options granted under the Equity Option
Plan were considered compensatory and were accounted for similar to stock
appreciation rights. All options outstanding under the Equity Option Plan
were regranted under the new Plan with terms and conditions substantially the
same as under the Equity Option Plan. As such, the Company continues to
record deferred compensation expense for compensatory stock options issued.
Compensation expense is recognized over the vesting periods based on the
excess of the fair value of the stock options at the date of grant over the
exercise price.
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 increased 38% in the second quarter of 1997 over the
comparable period in the prior year due to an increase in the Company's
average outstanding indebtedness over the respective quarters. 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. Capitalized interest during the first half of 1997
totaled $0.4 million. Interest income results from investment of excess cash
and certain securities that have been pledged as collateral for interest
payments on the 12 1/2% 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 six months of 1997, the Company used $45.8
million in cash for operating activities, compared to $6.2 million for the
same period in the prior year. The increase was 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 marketing of
the Company's enhanced services operations. During the first six months of
1997, the Company invested an additional $100.7 million in property and
equipment, acquisitions of telecommunications
<PAGE>
businesses and equity investments in telecommunications businesses. During
the same period in 1996, the Company invested $44.5 million in property and
equipment and acquisitions of telecommunications assets and businesses.
In June 1997, the Company entered into an eight year exclusive agreement,
with an option to renew for five additional years, with a company that has
excess fiber capacity in each of Atlanta, Chicago, New York City, Newark, New
Jersey, and Philadelphia which it agreed to make available to the Company in
each of those markets at a substantial discount to the wholesale rates
charged by other vendors of capacity. In addition to the capacity described
above, the Company also entered into a 20-year lease of capacity over an
existing 47-mile fiber network in New York City, which extends from the Wall
Street area north to midtown Manhattan. In June 1997, the Company paid $11
million in full satisfaction of its obligation under this lease, $6 million
of which has been placed in escrow pending completion of certain building
connections by the lessor. These arrangements will allow the Company to
accelerate its entry into each of these markets by enabling the Company to
avoid a significant portion of the infrastructure development and
construction time that would otherwise be required to launch switched local
and long distance services in these markets. Although these agreements have
reduced the initial capital expenditures necessary to enter these markets,
the Company has not, as a result, reduced its overall planned capital
expenditures through 1998.
In June 1997, the Company also executed a definitive agreement to acquire
an existing fiber optic network in downtown Philadelphia to extend its
existing network in Pennsylvania. The acquisition is subject to regulatory
and other consents and is anticipated to be consummated by the end of 1997.
During the interim period prior to closing, the Company is operating under a
36 fiber capacity agreement with the seller.
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. The Company is in the
process of completing the expansion of this network to Provo and Orem and
expects to begin providing switched local and long distance services in Provo
and Orem in September 1997.
Prior to April 1996, the Company funded its expenditures with
approximately $55.0 million of cash equity investments from two entities that
are controlled by Craig O. McCaw. On April 25, 1996, the Company raised gross
proceeds of approximately $350 million through the issuance of 12 1/2% Senior
Notes. The Company used $117.7 million of the gross proceeds to purchase and
hold in escrow U.S. government securities, representing funds sufficient to
provide for payment in full of interest on the 12 1/2% 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 12 1/2% Senior Notes
are due semi-annually. On January 31, 1997, the Company completed the sale of
$285 million aggregate liquidation preference 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 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. As of June 30, the Company has
issued an additional 201,706 shares of Preferred Shares in satisfaction of
the first quarterly dividend. 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 12 1/2% 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
<PAGE>
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 companies engaged in businesses similar to
those engaged in by the Company and its subsidiaries or other complementary
businesses.
As of June 30, 1997, the Company had unrestricted cash and investments of
$275.3 million. The Company estimates that the cash required to fund its
anticipated capital expenditures and operating losses (excluding acquisitions
and interest funded by pledged securities) for the second half of 1997 and
for 1998 will approximate $370 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 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. On July 24, 1997,
the Company filed two Registration Statements with the Securities and
Exchange Commission, one relating to the proposed issuance of approximately
$150 million of Class A Common Stock and the other relating to the proposed
issuance of approximately $200 million of new senior notes. The exact timing
and size of the proposed offerings and the terms of the senior notes will be
subject to prevailing market conditions. In addition, the proposed issuance
of senior notes is contingent upon the closing of the issuance of the Class A
Common Stock. 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 meet its interest and
dividend obligations on outstanding securities. 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 12 1/2% 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
12 1/2% Senior Notes and Preferred Shares as of June 30, 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
<PAGE>
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 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 and related interpretations. SFAS 128 is effective for the
Company's fiscal year ending December 31, 1997, and retroactive application
is required. The Company does not expect the implementation of SFAS 128 to
have a material effect on earnings per share amounts reported prior to that
date.
<PAGE>
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES
In June 1997, the Company issued 400,000 shares of Class A
common stock to Comdisco, Inc. (Comdisco) in connection with
the execution of a Master Service Agreement dated as of June
6, 1997 between the Company and Comdisco whereby Comdisco
agreed to provide certain telecommunications services to the
Company in Chicago, Illinois, New York, New York, Atlanta,
Georgia, Dallas, Texas and Philadelphia, Pennsylvania and
any other areas the parties may agree upon in the future.
Such shares of Class A common stock were paid in
consideration of the exclusivity agreement by Comdisco to
refrain from offering its services to any other carrier or
reseller in any of the geographical areas covered by the
Master Service Agreement. Such shares of Class A common
stock 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
None.
<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, Inc.
Date: August 12, 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: August 12, 1997 By: /s/ Kathleen H. Iskra
--------------------------------
Kathleen H. Iskra
Vice President, Chief Financial
Officer and Treasurer
(Principal financial and accounting
officer)
<PAGE>
NEXTLINK COMMUNICATIONS, INC.
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 198,763
<SECURITIES> 76,525
<RECEIVABLES> 9,790
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 327,175
<PP&E> 175,630
<DEPRECIATION> 14,380
<TOTAL-ASSETS> 614,210
<CURRENT-LIABILITIES> 33,333
<BONDS> 350,000
291,353
0
<COMMON> 82,290
<OTHER-SE> (156,316)
<TOTAL-LIABILITY-AND-EQUITY> 614,210
<SALES> 0
<TOTAL-REVENUES> 11,601
<CGS> 0
<TOTAL-COSTS> 32,614
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,902
<INCOME-PRETAX> (26,348)
<INCOME-TAX> 0
<INCOME-CONTINUING> (26,348)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,348)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
