<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 September 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 November 1, 1997, the number of shares of Class A and Class B common
stock of NEXTLINK Communications, Inc. issued and outstanding was 18,552,678
and 34,406,523, 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, EXCEPT PER SHARE AMOUNTS)
(AMOUNTS AS OF SEPTEMBER 30, 1997, ARE UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1997 (1)
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<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................. $ 76,807 $ 144,088 $ 760,676
Marketable securities..................... 47,713 76,525 76,525
Accounts receivable, net.................. 7,008 10,088 10,088
Other..................................... 607 878 878
Pledged securities........................ 39,770 41,853 41,853
------------- ------------- -------------
Total current assets................. 171,905 273,432 890,020
Pledged securities............................ 61,668 41,646 41,646
Property and equipment, net................... 97,784 196,041 196,041
Goodwill, net................................. 24,110 53,115 53,115
Other assets, net............................. 35,216 32,006 43,006
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Total assets......................... $ 390,683 $ 596,240 $ 1,223,828
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</TABLE>
--Continued--
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NEXTLINK COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(AMOUNTS AS OF SEPTEMBER 30, 1997, ARE UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1997 (1)
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<S> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................... $ 18,622 $ 12,868 $ 12,868
Accrued expenses............................... 4,112 12,221 12,221
Accrued interest payable....................... 9,250 19,458 19,458
Current portion of capital lease obligations... 1,194 1,310 1,310
Payable to affiliate........................... 1,500 -- --
------------- ------------- -------------
Total current liabilities................. 34,678 45,857 45,857
Long-term debt..................................... 350,000 350,000 750,000
Capital lease obligations.......................... 6,262 9,491 9,491
Deferred compensation.............................. 10,289 -- --
Other long-term liabilities........................ 2,850 3,329 3,329
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Total liabilities......................... 404,079 408,677 808,677
Commitments and contingencies
Minority interests................................. 308 77 77
Redeemable preferred stock (par value $0.01 per
share, aggregate liquidation preference $312,540;
0 and 6,108,254 shares issued and outstanding in
1996 and 1997, respectively)....................... -- 302,151 302,151
Class B common stock, subject to redemption
(par value $0.02 per share, 0 and 519,950 shares
issued and outstanding in 1996 and 1997,
respectively)...................................... -- 4,950 4,950
Equity units subject to redemption (397,202 and
0 units outstanding in 1996 and 1997,
respectively)...................................... 4,950 -- --
Shareholders' equity (deficit):
Common Stock, par value $0.02 per share,
stated at amounts paid in; Class A,
110,334,000 shares authorized, 0 and
810,429 shares issued and outstanding in
1996 and 1997, respectively (18,290,429
pro forma shares issued and outstanding);
Class B, 44,133,600 shares authorized,
0 and 37,086,573 shares issued and
outstanding in 1996 and 1997, respectively
(33,886,573 pro forma shares issued and
outstanding)................................. -- 83,953 311,541
Deferred compensation ......................... -- (6,055) (6,055)
Due from related parties ...................... -- (2,825) (2,825)
Accumulated deficit ........................... (84,181) (194,688) (194,688)
Members' capital (28,154,509 units, all
of which are outstanding in 1996)............ 65,527 -- --
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Total shareholders' equity (deficit)...... (18,654) (119,615) 107,973
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Total liabilities and shareholders'
equity (deficit)........................ $ 390,683 $ 596,240 $1,223,828
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</TABLE>
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(1) The pro forma balance sheet gives effect to the net proceeds from the
Company's initial public offering of Class A common stock and the sale
of 9 5/8% Senior Notes, both transactions which closed on October 1, 1997,
as if those transactions had closed on September 30, 1997. See NOTE 11.
See accompanying notes to unaudited interim consolidated financial statements.
<PAGE>
NEXTLINK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1996 1997 1996 1997
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<S> <C> <C> <C> <C>
Revenue ..................................... $ 6,919 $ 13,390 $ 18,960 $ 35,058
Costs and expenses:
Operating ............................... 6,661 13,916 17,474 35,857
Selling, general and administrative...... 8,011 19,318 20,502 48,421
Deferred compensation.................... 4,800 334 4,800 1,449
Depreciation............................. 2,555 3,898 4,942 9,952
Amortization............................. 1,023 1,631 2,788 4,508
----------- ----------- ----------- -----------
Total costs and expenses............ 23,050 39,097 50,506 100,187
----------- ----------- ----------- -----------
Loss from operations......................... (16,131) (25,707) (31,546) (65,129)
Interest income.............................. 4,113 4,808 7,212 15,329
Interest expense............................. (11,582) (10,746) (20,220) (32,787)
----------- ----------- ----------- -----------
Loss before minority interests............... (23,600) (31,645) (44,554) (82,587)
Minority interests in loss of consolidated
subsidiaries............................. 98 60 219 231
----------- ----------- ----------- -----------
Net loss..................................... $ (23,502) $ (31,585) $ (44,335) $ (82,356)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Preferred stock dividends and accretion of
preferred stock redemption obligation,
including issue costs.................... (10,798) (28,151)
----------- -----------
Net loss applicable to common shares......... $ (42,383) $ (110,507)
----------- -----------
----------- -----------
Pro Forma:
Net loss per share....................... $ (1.08) $ (2.87)
----------- -----------
----------- -----------
Shares used in computation of pro forma
net loss per share....................... 39,257,126 38,536,851
----------- -----------
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</TABLE>
See accompanying notes to unaudited interim consolidated financial statements.
<PAGE>
NEXTLINK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1996 1997
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<S> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................................. $ (44,335) $ (82,356)
Adjustments to reconcile net loss to net cash used
in operating activities:
Deferred compensation expense.................................... 4,800 1,449
Equity in loss of affiliates..................................... 657 1,688
Depreciation and amortization.................................... 7,730 14,460
Minority interests in loss of consolidated subsidiaries.......... (219) (231)
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable.............................................. (3,774) (3,062)
Other assets..................................................... (2,919) (662)
Accounts payable................................................. (620) (6,328)
Accrued expenses and other liabilities........................... 844 5,601
Accrued interest payable......................................... 18,942 10,208
----------- -----------
25,441 23,123
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Net cash used in operating activities................................ (18,894) (59,233)
INVESTING ACTIVITIES:
Purchase of property and equipment................................... (38,938) (89,146)
Net assets acquired in business and asset acquisitions
(net of cash acquired)........................................... (10,503) (41,239)
Cash withdrawn from escrow to be used in business
acquisition...................................................... -- 6,000
Investments in unconsolidated affiliates............................. (3,220) (6,342)
Purchase of pledged securities....................................... (117,688) --
Maturity of pledged securities....................................... -- 18,049
Purchase of marketable securities, net............................... (55,600) (28,812)
----------- -----------
Net cash used in investing activities................................ (225,949) (141,490)
</TABLE>
-- Continued --
<PAGE>
NEXTLINK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1996 1997
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<S> <C> <C>
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.................................... (33,703) (1,500)
Repayment of capital lease obligations............................... (607) (1,380)
Bank overdraft....................................................... (1,373) --
Proceeds from issuance of common stock............................... -- 111
Costs incurred in connection with financing.......................... (9,700) (402)
Loans to related parties............................................. -- (2,825)
Proceeds from issuance of senior notes............................... 350,000 --
----------- -----------
Net cash provided by financing activities............................ 343,304 268,004
----------- -----------
Net increase in cash and cash equivalents............................ 98,461 67,281
Cash and cash equivalents, beginning of period....................... 1,350 76,807
----------- -----------
Cash and cash equivalents, end of period............................. $ 99,811 $ 144,088
----------- -----------
----------- -----------
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
redeemable preferred shares................................. $ -- $ 20,413
----------- -----------
----------- -----------
Accrued cumulative redeemable preferred stock dividends,
payable in redeemable preferred shares...................... $ -- $ 7,127
----------- -----------
----------- -----------
Capital lease obligations assumed................................ $ 6,104 $ 4,725
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Cash paid for interest............................................... $ 1,278 $ 22,579
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</TABLE>
See accompanying notes to unaudited interim consolidated financial statements.
<PAGE>
NEXTLINK COMMUNICATIONS, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(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 operates 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 nine month periods ended
September 30, 1997 are not necessarily indicative of the results to be
expected for the full year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRO FORMA NET LOSS PER SHARE
Pro forma net loss per share has been computed using the number of shares
of common stock and common stock equivalents outstanding using the treasury
stock method. Pursuant to Securities and Exchange Commission Staff Accounting
Bulletin No. 83, shares issued and stock options granted at prices below the
initial public offering price of $17 per share during the twelve-month period
preceding the date of the initial filing of the Registration Statement have
been included in the calculation of common stock equivalent shares, using the
treasury stock method, as if such shares and options were outstanding for all
periods presented.
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
<PAGE>
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 Company intends to 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 September 30, 1997, the Company had 44,133,600 and
37,606,523 shares of Class B common stock authorized and outstanding,
respectively, and 110,344,000 and 810,429 shares of Class A common stock
authorized and outstanding, respectively. In addition, there were options to
purchase 3,388,364 shares of Class A common stock and options to purchase
654,858 shares of Class B common stock outstanding. The Company also had
25,000,000 and 6,108,254 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.
<PAGE>
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. The Company's initial public offering of Class A common
stock (see NOTE 11) constituted a Qualifying Event and, accordingly, the
contingent warrants expired thirty days after the closing on October 1, 1997,
of the Company's initial public offering.
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
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--------
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. 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 to the lessor 176,534 shares of Class A common stock in
June 1997 for certain exclusivity rights to the excess capacity.
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.
<PAGE>
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 interest units. 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
incentive for certain officers, employees and individuals or companies 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 4,413,360 shares of Class A common stock for issuance under the
Plan. The options generally vest ratably over four years and expire no later
than 10 years after the date of grant, with the exception of options originally
granted under the Equity Option Plan, which expire 15 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 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 nine months ended September 30, 1997, the Company recorded
$557,000 and $892,000 of deferred compensation expense related to the Stock
Option Plan and Equity Option Plan, respectively.
8. RELATED PARTY TRANSACTIONS
In August 1997, the Company agreed to lend certain officers and employees
of the Company an aggregate of $2.8 million in connection with the payment of
income taxes incurred upon the exercise of stock options. These loans (i)
bear interest at a fixed rate of 7.7%, (ii) are secured by shares of Class A
and Class B common stock with a market value equal to 2.5 times the amount of
the loan and (iii) require payment of principal and accrued interest on
February 26, 1999. Interest income from the related party notes receivable
will be recognized when received.
9. SHAREHOLDERS' EQUITY (DEFICIT)
On July 21, 1997, the Company's Board of Directors authorized management
to file a registration statement with the Securities and Exchange Commission
to permit the Company to sell shares of its Class A common stock to the
public.
<PAGE>
On August 27, 1997, the Company effected a 0.441336-for-1 reverse stock
split of the issued and outstanding shares of Class A and Class B common
stock. All common stock, membership units, and per share amounts in the
consolidated financial statements have been adjusted retroactively to give
effect to the reverse stock split.
10. RECLASSIFICATIONS
Certain reclassifications have been made to prior period amounts in order
to conform to the current presentation.
11. SUBSEQUENT EVENTS
FINANCINGS
On October 1, 1997, the Company completed an initial public offering
(IPO) of 12,000,000 shares of Class A common stock at a price of $17 per
share. In addition, the underwriters of the IPO exercised an option to
purchase 2,280,000 additional shares of Class A common stock at the same
price per share. Gross proceeds from the IPO totaled approximately $242.8
million, and proceeds net of underwriting discounts, advisory fees and
expenses aggregated approximately $226.8 million.
Concurrently with the IPO, the Company sold $400.0 million in aggregate
principal amount of 9 5/8% Senior Notes due 2007, which, after deducting
issue costs, resulted in net proceeds to the Company of $388.5 million.
Interest payments on the 9 5/8% Senior Notes are due semi-annually.
ACQUISITIONS
On October 1, 1997, the Company acquired all of the outstanding shares of
Chadwick Telecommunications Corporation (Chadwick), a switch-based long
distance reseller in central Pennsylvania, through a merger transaction
between Chadwick and a wholly owned subsidiary of NEXTLINK. The purchase
price of the transaction consisted of a $5.0 million promissory note payable,
due January 1, 1998, issuance of 257,151 shares of Class A common stock, and
the repayment of long term debt and other liabilities totaling $5.2 million.
The merger agreement also provides for additional payments of up to a maximum
of 192,863 shares of Class A common stock over a two year period, with these
payments being contingent upon the acquired operation achieving specified
performance goals.
On November 1, 1997, the Company acquired all of the outstanding shares
of Start Technologies Corporation (Start), a shared tenant services provider
offering local and long distance services, Internet access and customer
premise equipment management in markets in Texas and Arizona. The Company
paid consideration for the transaction consisting of $20.0 million in cash,
441,336 shares of Class A common stock, and the assumption of $3.4 million of
liabilities, the majority of which will be repaid.
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1(b). FINANCIAL STATEMENTS
NEXTLINK CAPITAL, INC.
BALANCE SHEET
(UNAUDITED)
SEPTEMBER 30,
1997
-------------
ASSETS:
Cash in bank.......................................... $ 100
-------------
-------------
SHAREHOLDER'S EQUITY
Common stock, no par value,
1,000 shares authorized, issued and outstanding... $ 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.
2. Basis of Presentation
The interim financial statements have been prepared without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission. These 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. <PAGE>
<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
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 October 31, 1997, the Company provided services in
24 of its 30 markets. 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
(dollars are in thousands):
AS OF AND
FOR THE THREE MONTHS
ENDED SEPTEMBER 30,
1996 1997
----------- -----------
Gross property and equipment............. $ 78,973 $ 214,320
EBITDA (1)............................... $ (7,753) $ (19,844)
OPERATING DATA (2):
Route miles (3).......................... 900 1,757
Fiber miles (4).......................... 55,701 124,399
On-net buildings connected (5)........... 299 479
Off-net buildings connected (6).......... -- 1,404
Switches installed....................... 6 13
Access lines in service (7).............. 6,907 30,944
Employees................................ 456 1,027
(1) EBITDA consists of quarterly net loss before interest expense, interest
income, minority interests, depreciation, amortization and deferred
compensation expense. EBITDA is commonly used to analyze companies on the
basis of operating performance, leverage and liquidity. While 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, it is included
herein to provide additional information with respect to the ability of the
Company to meet future debt service, capital expenditure and working
capital requirements.
(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 incumbent local exchange (ILEC)
facilities.
(6) Represents buildings connected to the Company's networks through leased or
unbundled ILEC facilities.
(7) 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 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
platform and associated distribution technology. As of October 31, 1997, the
Company had ten operational Nortel DMS 500 switches and currently plans to
install three 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 from 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 directly as a C corporation.
RESULTS OF OPERATIONS
Revenue increased 94% to $13.4 million during the third quarter of 1997,
from $6.9 million in the same period in 1996. Year to date revenue of $35.1
million represented an 85% increase from the $19.0 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
33% year to date growth in local and long distance services (both switched
and resale), dedicated services and enhanced communications services. The
third quarter 1997 revenues included $8.8 million derived from local and long
distance, competitive access and dedicated line services and $4.6 million
derived from enhanced communications services. The Company's interactive
voice response subsidiary contributed 54% and 28% of the Company's revenues
during the third quarters of 1996 and 1997, respectively. The revenues
generated by this subsidiary 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 Orange County, California, in July 1997. Most
recently, the Company began offering such services in Provo, Utah, in
September 1997. In addition, the Company has offered dedicated line services
since January 1995 and has resold
<PAGE>
Centrex access lines since April 1995. The Company increased its quarterly
customer access line installation rate from 6,153 in the second quarter of
1997 to 13,535 during the third quarter of 1997. As of September 30, 1997,
the Company had 30,944 access lines in service, compared to 8,511 as of
December 31, 1996, and 6,907 as of September 30, 1996. Revenues from the
provision of such services are expected to continue to increase as a
component of total revenues over future periods. Access lines in service
includes those lines which are provided through resale of Centrex services,
the number of which is decreasing over time as the Company converts those
customers to its own network.
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 109% in the third quarter of 1997 to
$13.9 million, an increase of $7.3 million over the third quarter of 1996.
For the nine months ended September 30, 1997, operating expenses rose $18.4
million, or 105%, over the same period in 1996. These increases were
attributed to factors that include 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 141% and
136%, respectively, in the three and nine month periods ended September 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 on a basis similar
to that for 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 those
compensatory stock options issued, as well as for compensatory stock options
issued subsequent to the Plan conversion date. 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 decreased 7% in the third quarter of 1997 over the
comparable period in the prior year due to additional interest capitalized
during the current period. 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 three quarters of 1997 totaled $0.9 million.
Interest expense will increase in future periods in conjunction with the sale
of $400.0 million in aggregate principal amount of 9 5/8% Senior Notes on
October 1, 1997. 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
<PAGE>
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
nine months of 1997, the Company used $59.2 million in cash for operating
activities, compared to $18.9 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. During the first nine months of 1997, the Company
invested an additional $136.7 million in property and equipment, acquisitions
of telecommunications businesses and equity investments in telecommunications
businesses. During the same period in 1996, the Company invested $52.7
million in property and equipment, acquisitions of telecommunications assets
and businesses and equity investments in telecommunications businesses.
In August 1997, the Company entered into a definitive agreement to acquire
all outstanding shares of Start Technologies Corporation (Start), a shared
tenant services provider serving commercial buildings in Dallas, Austin and
Corpus Christi, Texas and Phoenix, Arizona. The transaction closed on November
1, 1997. Services offered by Start include local and long distance services,
Internet access and customer premise equipment management. Start currently
provides services under long term contracts to 600 corporate customers, or
approximately 13,000 end users. The Company paid consideration for the
transaction consisting of $20.0 million in cash, 441,336 shares of Class A
common stock and the assumption of approximately $3.4 million of liabilities,
the majority of which will be repaid.
In July 1997, the Company executed a definitive agreement to acquire all
of the outstanding shares of Chadwick Telecommunications Corporation
(Chadwick), a switch-based long distance reseller in central Pennsylvania,
through a merger transaction between Chadwick and a wholly owned subsidiary
of NEXTLINK. The transaction closed on October 1, 1997. Chadwick serves
approximately 11,500 customers throughout the central and eastern
Pennsylvania regions. The Company issued consideration for the transaction
consisting of a promissory note payable in the aggregate principal amount of
$5.0 million, 257,151 shares of Class A common stock and the repayment of
long term debt and other liabilities totaling $5.2 million. The merger
agreement also provides for additional payments of up to a maximum of 192,863
shares of Class A common stock over a two year period, with these payments
being contingent upon the acquired operation achieving specified performance
goals.
In September 1997, the Company entered into a definitive agreement to
acquire certain telecommunications assets of Unicom Thermal Technologies,
Inc. (UTT), including two existing route miles of network plus 13 miles of
conduit in downtown Chicago. The Company also has the right to participate in
the ongoing expansion of UTT's network in Chicago. The existing network
currently provides connectivity to 28 buildings. The Company agreed to pay
$2.5 million in cash, plus up to an additional $560,000 for the acquisition
of certain telecommunications facilities. The Company will also be required
to issue certain additional consideration to UTT for a portion of the network
expansion costs, up to $3.4 million in cash plus the issuance of up to 60,022
shares of Class A common stock.
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 network 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.
<PAGE>
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 has completed
the expansion of this network to Provo and Orem and began providing network
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 September 30, 1997, the Company had
issued an additional 408,251 shares of Preferred Shares in satisfaction of
the first two quarterly dividends.
Since inception, the Company has also issued Class A Units valued at $15.5
million 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.
On October 1, 1997, the Company completed an initial public offering
(IPO) of 12,000,000 shares of Class A common stock at a price of $17 per
share. In addition, the underwriters of the IPO exercised an option to
purchase 2,280,000 additional shares of Class A common stock at the same
price per share. Gross proceeds from the IPO totaled $242.8 million, and
proceeds net of underwriting discounts, advisory fees and estimated expenses
aggregated approximately $226.8 million. Concurrently with the IPO, the
Company sold $400.0 million in aggregate principal amount of 9 5/8% Senior
Notes due 2007, which, after deducting estimated issue costs, resulted in net
proceeds to the Company of approximately $388.5 million. Interest payments on
the 9 5/8% Senior Notes are due semi-annually.
The Company will use the net proceeds from the sale of Class A common
stock and 9 5/8% Senior Notes (the Offerings) and existing unrestricted cash
balances 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)
<PAGE>
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 September 30, 1997, the Company had unrestricted cash and
investments of $220.6 million and $837.2 million on a pro forma basis after
giving effect to the Offerings. The Company's long term plan requires
substantial additional capital beyond that already available 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
additional 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 meet its interest and dividend obligations on its
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 and the 9 5/8% 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 September 30, 1997.
<PAGE>
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 and offer services 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 those identified in the Company's registration
statement on Form S-1 (File No. 333-32001) and also 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
The Company is not currently a party to any legal proceedings, other
than regulatory and other proceedings that are in the normal course
of its business.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In August 1997, the Company issued 921,314 shares of Class B common
stock upon exercise of an option to purchase such shares of common
stock. Essentially no consideration was received in exchange for the
shares of Class B common stock issued. Such shares of Class B
common stock were issued in reliance upon an exemption from
registration contained in Section 4(2) of the Securities Act of
1933, as amended.
The Company filed a registration statement on Form S-1 (File No.
333-32001) which became effective on September 26, 1997, whereby
15,200,000 shares of Class A common stock, $.02 par value per share,
were sold in an initial public offering at a price of $17 per share.
Of the 15,200,000 shares of Class A common stock sold, 12,000,000 were
sold by the Company and 3,200,000 were sold by a selling shareholder.
The Company did not receive any of the proceeds from the sale of
shares by the selling shareholder. In addition, the underwriters of
the IPO, led by Salomon Brothers Inc, exercised an option to purchase
2,280,000 additional shares of Class A common stock at the same price
per share. Net proceeds to the Company from the initial public
offering totaled approximately $226.8 million, after deducting
underwriting discounts, advisory fees and expenses aggregating
approximately $16.0 million. The Company intends to use substantially
all of the net proceeds from the initial public offering for
expenditures relating to the expansion of existing networks and
services, the development and acquisition of new networks and services
and the funding of operating losses and working capital. The net
proceeds from the initial public offering were received on October 1,
1997; as such, none of the net proceeds had been used by the Company
as of September 30, 1997.
The Company filed a registration statement on Form S-1 (File No.
333-32003) which became effective on September 26, 1997, whereby the
Company sold $400.0 million aggregate principal amount of 9 5/8%
Senior Notes. The offering was led by Salomon Brothers Inc. Net
proceeds from the sale of the Senior Notes totaled approximately
$388.5 million, after deducting issuance costs aggregating
approximately $11.5 million, relating to underwriting discounts,
advisory fees and expenses. The use of proceeds from the debt offering
are substantially the same as the Company's initial public offering.
The net proceeds from the debt offering were received on October 1,
1997; as such, none of the net proceeds had been used by the Company
as of September 30, 1997.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of the shareholders was held on August 25, 1997, to
authorize a 0.441336-for-1 reverse stock split of the issued and
outstanding shares of Class A and Class B common stock. The vote
passed with 730,231,873 affirmative votes and 101,733,775 votes
withheld.
<PAGE>
PART II. OTHER INFORMATION
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Statement Regarding Computation of Net Loss Per Share
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: November 14, 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: November 14, 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
----------- -----------
11 Statement Regarding Computation of Net Loss Per Share
27 Financial Data Schedule
<PAGE>
EXHIBIT 11
NEXTLINK COMMUNICATIONS, INC.
STATEMENT REGARDING COMPUTATION OF NET LOSS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30, 1997
-----------------------------
(Dollars in thousands, except
per share data)
<S> <C>
Weighted average common shares outstanding........................ 37,873,532
Net effect of stock options granted and common stock issued
during the 12 month period prior to the Company's filing of
its initial public offering at less than the offering price,
calculated using the treasury stock method at the offering
price of $17.00 per share, and treated as outstanding for
all periods presented............................................ 1,383,594
------------
Shares used in computation of net loss per share.................. 39,257,126
------------
------------
Net loss.......................................................... $ (31,585)
Preferred stock dividends and accretion of preferred stock
redemption obligation, including issue costs..................... (10,798)
------------
Net loss applicable to common shares.............................. $ (42,383)
------------
------------
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 144,088
<SECURITIES> 76,525
<RECEIVABLES> 10,088
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 273,432
<PP&E> 214,320
<DEPRECIATION> 18,279
<TOTAL-ASSETS> 596,240
<CURRENT-LIABILITIES> 45,857
<BONDS> 350,000
302,151
0
<COMMON> 83,953
<OTHER-SE> (203,568)
<TOTAL-LIABILITY-AND-EQUITY> 596,240
<SALES> 0
<TOTAL-REVENUES> 13,390
<CGS> 0
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</TABLE>
