<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) March 22, 2000
------------------------------
VOICESTREAM WIRELESS CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Washington 000-25441 91-1983600
- --------------------------------------------------------------------------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
3650 131st Avenue S.E. Bellevue, Washington 98006
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (425) 653-4600
----------------------------
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
Aerial Communications, Inc. has filed its annual report for 1999 on Form
10-K. Because we and Aerial are parties to agreements that contemplate a number
of transactions, after which Aerial will be a wholly owned subsidiary of ours,
we are filing Aerial's audited financial statements as of and for the years
ended December 31, 1997, 1998 and 1999 for informational purposes.
<PAGE> 3
AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
OPERATING REVENUES
Service ............................................ $ 195,140 $ 123,640 $ 32,307
Equipment sales .................................... 30,361 31,514 23,645
--------- --------- ---------
Total Operating Revenues ........................... 225,501 155,154 55,952
--------- --------- ---------
OPERATING EXPENSES
System operations .................................. 78,303 69,066 30,655
Marketing and selling .............................. 89,755 79,704 45,974
Customer service ................................... 39,934 53,516 20,882
Cost of equipment sold ............................. 61,298 87,715 71,454
General and administrative ......................... 74,212 61,737 58,825
Depreciation ....................................... 84,347 75,846 36,045
Amortization of intangibles ........................ 7,660 7,555 4,509
Development costs .................................. -- -- 5,773
--------- --------- ---------
Total Operating Expenses ........................... 435,509 435,139 274,117
--------- --------- ---------
OPERATING (LOSS) ..................................... (210,008) (279,985) (218,165)
OTHER INCOME (EXPENSE)
Minority share of loss ............................. 15,782 23,620 --
Other (expense) income, net ........................ (5,205) 1,196 (21)
--------- --------- ---------
Other Income (Expense) ............................. 10,577 24,816 (21)
--------- --------- ---------
(LOSS) BEFORE INTEREST AND INCOME TAXES .............. (199,431) (255,169) (218,186)
INTEREST EXPENSE
Interest expense-affiliate ......................... 61,197 62,137 21,558
Interest expense-other ............................. 22,118 18,010 5,507
--------- --------- ---------
Total Interest Expense ............................. 83,315 80,147 27,065
--------- --------- ---------
(LOSS) BEFORE INCOME TAXES ........................... (282,746) (335,316) (245,251)
Income tax (benefit) expense ......................... (113,400) 2,579 1,806
--------- --------- ---------
NET (LOSS) ........................................... $(169,346) $(337,895) $(247,057)
========= ========= =========
WEIGHTED AVERAGE COMMON AND SERIES A COMMON
SHARES (000s) ...................................... 75,734 71,723 71,512
(LOSS) PER COMMON AND SERIES A COMMON SHARE .......... $ (2.24) $ (4.71) $ (3.45)
========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements
2
<PAGE> 4
AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (Loss) ................................................ $(169,346) $(337,895) $(247,057)
Add (Deduct) adjustments to reconcile net (loss) to net
cash (used) by operating activities:
Depreciation and amortization ............................. 92,007 83,401 40,554
Noncash interest expense .................................. 18,335 16,210 8,341
Change in deferred taxes .................................. 1,415 2,579 1,806
Investment losses ......................................... 314 128 2,518
Minority share of operating loss .......................... (15,782) (23,620) --
Loss on sale of property and equipment .................... 489 3,242 --
Change in accounts receivable-customer .................... (4,338) (174) (24,030)
Change in inventory ....................................... 3,042 14,571 (25,949)
Change in accounts payable-affiliates ..................... 184 (121) 284
Change in accounts payable-trade .......................... (17,405) 6,680 30,606
Change in accrued interest-affiliate ...................... (4,786) 1,274 3,665
Change in other assets and liabilities .................... 31 4,924 2,399
--------- --------- ---------
(95,840) (228,801) (206,863)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under the Revolving Credit Agreement-TDS ....... 242,582 301,709 448,234
Repayments of borrowings under the Revolving Credit
Agreement--TDS .......................................... (334,739) (200,000) --
Proceeds from minority investor ........................... 230,000 200,000 --
Other issuance of common stock ............................ 9,214 1,002 1,699
--------- --------- ---------
147,057 302,711 449,933
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and equipment ....................... (34,248) (74,580) (274,709)
Change in note receivable ................................. -- -- 1,925
Proceeds from sale of property and equipment .............. 75 711 --
Change in temporary and other investments ................. (2,100) (110) (558)
--------- --------- ---------
(36,273) (73,979) (273,342)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ............................................... 14,944 (69) (30,272)
CASH AND CASH EQUIVALENTS--
Beginning of year ......................................... 4,943 5,012 35,284
--------- --------- ---------
End of year ............................................... $ 19,887 $ 4,943 $ 5,012
========= ========= =========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
3
<PAGE> 5
AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
--------- ---------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents ................................................. $ 19,887 $ 4,943
Temporary investments ..................................................... -- 35
Accounts receivable:
Customers, less allowance of $3,767 and $5,875, respectively ............ 28,542 24,204
Roaming ................................................................. 3,079 2,252
Other ................................................................... 1,951 1,348
Inventory ................................................................. 8,336 11,378
Prepaid rent .............................................................. 3,920 3,666
Other ..................................................................... 1,347 898
--------- ---------
67,062 48,724
--------- ---------
PROPERTY AND EQUIPMENT
In service and under construction ......................................... 816,757 733,958
Less accumulated depreciation ............................................. (196,844) (112,677)
--------- ---------
619,913 621,281
--------- ---------
INVESTMENTS
Investment in PCS licenses, net of accumulated amortization of $19,597
and $12,044, respectively ............................................... 281,934 289,488
Other ..................................................................... 3,263 1,444
--------- ---------
285,197 290,932
--------- ---------
DEFERRED COSTS .............................................................. 204 410
--------- ---------
TOTAL ASSETS ................................................................ $ 972,376 $ 961,347
========= =========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
4
<PAGE> 6
AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
-----------------------------
1999 1998
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable:
Affiliates ......................................................... $ -- $ 6,727
Trade .............................................................. 35,230 56,097
Current portion of long-term debt .................................... 103,765 --
Accrued interest-affiliate ........................................... 153 4,939
Accrued compensation ................................................. 9,732 5,169
Accrued taxes ........................................................ 7,419 7,015
Other ................................................................ 4,675 6,177
----------- -----------
160,974 86,124
----------- -----------
REVOLVING CREDIT AGREEMENT-TDS ......................................... 37,786 549,943
----------- -----------
LONG-TERM DEBT ......................................................... 250,846 278,010
----------- -----------
DEFERRED TAX LIABILITY-NET ............................................. 17,772 16,357
----------- -----------
MINORITY INTEREST ...................................................... 94,364 5,835
----------- -----------
COMMON SHAREHOLDERS' EQUITY
Common Shares, $1.00 par value; authorized 100,000,000 shares;
issued and outstanding 42,289,028 and 31,788,982, respectively ..... 42,289 31,789
Series A Common Shares, $1.00 par value; authorized 60,000,000
shares; issued and outstanding 52,924,151 and 40,000,000,
respectively ....................................................... 52,924 40,000
Additional paid-in capital ........................................... 1,115,592 584,114
Retained deficit ..................................................... (800,171) (630,825)
----------- -----------
410,634 25,078
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ............................. $ 972,376 $ 961,347
=========== ===========
</TABLE>
5
<PAGE> 7
AERIAL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
COMMON SHARES
Balance at beginning of year ........... $ 31,789 $ 31,611 $ 31,359
Add
TDS debt replacement ................. 6,167 -- --
Sonera-Aerial investment ............. 3,409 -- --
Employee benefit plans ............... 924 178 252
----------- ----------- -----------
Balance at end of year ................. $ 42,289 $ 31,789 $ 31,611
=========== =========== ===========
SERIES A COMMON SHARES
Balance at beginning of year ........... $ 40,000 $ 40,000 $ 40,000
TDS debt replacement ................. 12,924 -- --
----------- ----------- -----------
Balance at end of year ................. $ 52,924 $ 40,000 $ 40,000
=========== =========== ===========
ADDITIONAL PAID-IN CAPITAL
Balance at beginning of year ........... $ 584,114 $ 413,746 $ 412,299
Add
Gain on sale of subsidiary stock ..... 50,688 169,544 --
TDS debt replacement ................. 400,909 -- --
Sonera-Aerial investment ............. 71,591 -- --
Employee benefit plans ............... 8,290 824 1,447
----------- ----------- -----------
Balance at the end of year ............. $ 1,115,592 $ 584,114 $ 413,746
=========== =========== ===========
RETAINED DEFICIT
Balance at beginning of year ........... $ (630,825) $ (292,930) $ (45,873)
Net (Loss) ............................. (169,346) (337,895) (247,057)
----------- ----------- -----------
Balance at end of year ................. $ (800,171) $ (630,825) $ (292,930)
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
6
<PAGE> 8
1. VOICESTREAM MERGER
On September 17, 1999, the VoiceStream and Aerial Communications, Inc.
("Aerial" or the "Company") Boards of Directors approved a definitive Agreement
and Plan of Reorganization to merge the two companies. The merger is expected to
close in the second quarter of 2000. Pursuant to the Agreement and Plan of
Reorganization, VoiceStream will exchange 0.455 shares of VoiceStream common
stock for each of the Company's Common and Series A Common Shares, subject to
adjustment under certain circumstances.
Aerial public shareholders will have the right to elect to receive $18 in
cash in lieu of shares of VoiceStream. Sonera will convert its shares in Aerial
Operating Company, Inc. ("AOC"), an 81.0%-owned subsidiary of Aerial, into
shares of Aerial (at a conversion ratio of 6.72919) immediately prior to the
merger becoming effective. The parties anticipate that the merger will be
tax-free to Aerial shareholders that elect to receive VoiceStream stock. This
merger has received shareholder approval by both Aerial and VoiceStream.
Although all filing and time requirements under the antitrust laws have been
satisfied, the merger of Aerial and VoiceStream is subject to Federal
Communications Communication ("FCC") approval. In the event the merger with
VoiceStream does not take place, under certain circumstances, Aerial would be
required to pay VoiceStream a $40 million termination fee which would be charged
to "other income (expense)" on the consolidated statement of operations. If
Aerial does not have sufficient funds at such time to pay the termination fee,
TDS will allow Aerial to finance the termination fee through an increase in the
Revolving Credit Agreement. The following is a discussion of significant
transactions executed in anticipation of but not contingent upon the merger with
VoiceStream, except as indicated below.
TDS Debt Replacement
On September 17, 1999, TDS, the Company, AOC and VoiceStream entered into a
Debt/Equity Replacement Agreement (the "TDS Debt Replacement Agreement"). In
accordance with the TDS Debt Replacement Agreement, on November 1, 1999, TDS
assigned to Aerial as a contribution to capital $420 million of debt owed by AOC
to TDS under the TDS Revolving Credit Agreement in exchange for an aggregate
19.1 million shares of Aerial common stock, at a purchase price of $22.00 per
share. On September 17, 1999, the date of the TDS Debt Replacement Agreement,
the closing price of Aerial Common Shares was $20.00 per share. The shares of
Aerial common stock consisted of 6.2 million Aerial Common Shares and 12.9
million Aerial Series A Common Shares. Thereafter, on November 1, 1999, Aerial
assigned to AOC as a contribution to capital the $420 million of debt received
from TDS, as well as $75 million received by Aerial from Sonera (see
"Sonera-Aerial Investment" below) in exchange for an aggregate of 3.3 million
common shares of AOC. As a result of the transactions under the TDS Debt
Replacement Agreement, $420 million of debt previously owed by AOC to TDS was
extinguished and the Maximum Amount under the Revolving Credit Agreement was
reduced from $775 million to $355 million. In addition, the interest rate under
the Revolving Credit Agreement was decreased to prime rate plus 2.35% and the
guarantee by Aerial of AOC's obligations thereunder was terminated.
Under certain circumstances, TDS is required to loan funds to AOC after the
merger close up to a maximum of $315 million. In such event, effective at the
merger closing, TDS and AOC will amend the TDS Revolving Credit Agreement by
entering into an Amended and Restated Credit Agreement (the "Amended
Agreement"). Any amounts borrowed under the Amended Agreement will become due in
full one year after the effective date of the Amended Agreement. The interest
rate under the Amended Agreement will be LIBOR plus 3.5% and the obligations of
the Company under the Amended Agreement will be secured by substantially all the
Company's assets. See Note 6--Revolving Credit Agreement for further discussion
of the Revolving Credit Agreement.
On September 21, 1999, a putative class action complaint was filed on behalf
of Aerial stockholders. The complaint names as defendants Aerial, TDS, certain
directors of Aerial and TDS, and VoiceStream in connection with the transactions
contemplated by the Agreement and Plan of Reorganization and the related
agreements, particularly the TDS Debt Replacement Agreement. The complaint
alleges a breach of fiduciary duties by the defendants, including in connection
with the exchange of $420 million of debt owed by Aerial to TDS for Aerial
common stock at $22.00 per share. The complaint alleges that this
7
<PAGE> 9
1. VOICESTREAM MERGER (CONTINUED)
action benefits TDS at the expense of Aerial's public stockholders and seeks to
have the transactions contemplated by the Agreement and Plan of Reorganization
enjoined or, if they are consummated, to have them rescinded and to recover
unspecified damages, fees and expenses. The defendants believe that this lawsuit
is without merit and intend to vigorously defend against this lawsuit.
Sonera-Aerial Investment
On September 17, 1999, TDS, Aerial, AOC, VoiceStream, Sonera Corporation
("Sonera", formerly known as Sonera Ltd.) and Sonera Corporation U.S. ("Sonera
U.S.") entered into a Settlement Agreement and Release providing for the
Sonera-Aerial Investment. In accordance with the Sonera-Aerial Investment, on
November 1, 1999, Sonera invested an aggregate of $230 million in Aerial and AOC
at an equivalent purchase price of $22.00 per share of Aerial common stock.
Aerial issued 3.4 million Aerial Common Shares to Sonera in consideration for
$75 million, and AOC issued 1.0 million shares of AOC common stock to Sonera in
consideration for $155 million. The funds invested by Sonera were used to repay
outstanding debt under the TDS Revolving Credit Agreement and are available to
be drawn down by AOC under the TDS Revolving Credit Agreement between November
1, 1999, and the closing of the merger. Additionally, Sonera surrendered 317,108
shares of AOC stock on November 1, 1999, without releasing its claims with
respect thereto, and will surrender an additional 317,108 shares at the closing
of the merger. At the merger closing, TDS, Aerial, AOC and VoiceStream, on the
one hand, and Sonera and Sonera U.S., on the other hand, will release each other
from all claims relating to actions occurring through September 17, 1999,
including all claims by Sonera to the 634,216 disputed shares, and, subject to
certain exceptions, will extend such release through the date of the merger
closing. See Note 4--Minority Interest for further discussion of Sonera's
concern's regarding the disputed AOC shares.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of operations
Aerial is an 82.1%-owned subsidiary of TDS. The Company was incorporated in
Delaware on July 23, 1991, as American Portable Telecommunications, Inc. and
changed its name to American Portable Telecom, Inc. ("APTI") effective January
18, 1996. On November 12, 1996, the Company changed its name to Aerial
Communications, Inc.
The Company was formed to acquire Personal Communications Services ("PCS")
licenses, construct PCS networks in its Major Trading Areas ("MTAs") and offer
wireless PCS communications services in these areas. The Company acquired its
licenses in the FCC broadband Block A and Block B PCS auction (the "PCS
auction") which concluded in March 1995. The Company acquired licenses in the
Columbus (Ohio), Houston (Texas), Kansas City (Missouri), Minneapolis
(Minnesota), Pittsburgh (Pennsylvania), and Tampa-St. Petersburg-Orlando
(Florida) MTAs covering approximately 27.9 million population equivalents
("POPs"). As of December 31, 1999, the Company had approximately 422,900
customers.
(b) Development stage enterprise
Effective with the second quarter of 1997, the Company ceased to be a
development stage enterprise and presents its results of operations, cash flows
and financial position in a manner similar to other operating enterprises within
the industry.
(c) Principles of consolidation
The accounting policies of the Company and its subsidiaries conform to
generally accepted accounting principles. The consolidated financial statements
include the accounts of Aerial Communications, Inc. and its 81.0%-owned
subsidiary, AOC. The MTAs are wholly owned subsidiaries of AOC. All material
intercompany balances and transactions have been eliminated. The preparation of
the consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities as well as the disclosure
of contingent assets and liabilities at the date of the financial
8
<PAGE> 10
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain amounts reported in prior years have been reclassified to conform to
the current year presentation.
(d) Revenue recognition and inventory
Revenues from operations consist of charges to customers for monthly access,
airtime, value-added services, outcollect roaming and long-distance charges.
Revenues are recognized as the services are rendered. Unbilled revenues,
resulting from PCS services provided from the billing cycle date to the end of
each month, are estimated and recorded.
Revenues from operations also consist of phone and accessory sales to
retailers, independent agents and end user customers. Revenues from such sales
are recognized upon the shipment of goods to retailers and independent agents or
upon sale through direct distribution channels to end user customers.
Phone inventory is stated at current replacement cost.
(e) Advertising costs
The Company expenses advertising costs as incurred. Advertising costs
totaled $26.6 million, $25.8 million and $21.1 million for the years ended
December 31, 1999, 1998 and 1997, respectively.
(f) Pension plan
Effective July 1, 1995, the Company began providing pension benefits for its
employees under a qualified, noncontributory, defined contribution pension plan.
Under this plan, pension benefits and costs are calculated separately for each
participant and are funded currently. Pension costs were $1.9 million, $0.6
million and $0.3 million in 1999, 1998 and 1997, respectively. Effective January
1, 2000, the pension plan was terminated in anticipation of the merger with
VoiceStream and all unvested account balances became fully vested.
(g) Cash and cash equivalents
Cash and cash equivalents consists of cash on hand and those short-term,
highly-liquid investments with original maturities of three months or less. The
carrying amount of cash and cash equivalents approximates fair value due to its
short-term nature.
(h) Property and equipment
Property and equipment is stated at cost. Depreciation is provided based on
the straight-line method over the estimated useful lives of the respective
assets, generally ten years for network assets and five years for information
system assets and office equipment. Leasehold improvements are amortized over
ten years or the lease term, whichever is shorter.
9
<PAGE> 11
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and equipment (including work in process) consists of:
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
--------- ---------
(Dollars in thousands)
<S> <C> <C>
Cell sites and equipment ............... $ 543,315 $ 484,638
Switching equipment .................... 122,416 114,470
Information systems .................... 117,767 108,279
Office equipment ....................... 22,383 18,247
Leasehold improvements and other ....... 10,876 8,324
--------- ---------
816,757 733,958
Accumulated depreciation ............... (196,844) (112,677)
--------- ---------
Property and equipment-net ........... $ 619,913 $ 621,281
========= =========
</TABLE>
Gains and losses on the disposition of property and equipment are included
in operating expenses.
(i) Work in process
Work in process includes expenditures for the design, construction and
testing of the Company's PCS networks as well as the cost to relocate dedicated
private microwave links currently operating in the Company's spectrum in its
MTAs. Work in process also includes the costs associated with developing
information systems. The Company capitalizes interest on such expenditures where
appropriate. When the assets are placed in service, the Company transfers the
assets to the appropriate property and equipment category.
(j) Investment in PCS licenses
Investment in PCS licenses is recorded at historical cost, which includes
the purchase price of the licenses acquired by the Company in the PCS auction
plus capitalized interest of $16.6 million. The Company began amortizing the
licenses straight-line over 40 years upon commencement of service in each
respective MTA. Accumulated amortization on the licenses at December 31, 1999
and 1998, totaled $19.6 million and $12.0 million, respectively.
(k) (Loss) per Common and Series A Common Share
(Loss) per Common and Series A Common Share was computed based on the
weighted average of Common and Series A Common Shares outstanding during the
period. In 1999, 1998 and 1997, respectively, 0.8 million, 1.7 million and 1.4
million stock options were not included in computing diluted (loss) per Common
and Series A Common Share because their effects were antidilutive.
(l) Supplemental cash flow disclosures
The following summarizes interest paid and certain noncash transactions.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1999 1998 1997
------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C>
Interest paid to non-affiliates .................. 3,786 1,911 428
Interest and guarantee fees paid to TDS .......... 61,044 57,219 24,297
</TABLE>
In 1999, $420 million of borrowings under the Revolving Credit Agreement
were extinguished by TDS in exchange for Aerial common stock. Also in 1999,
$58.3 million in additions to property and equipment (amounts in service and
work in process, collectively) were financed through an increase in long-term
debt. In 1998, $71.5 million in additions to property and equipment were
financed through long-term debt and accounts payable-affiliate. In 1997, $113.0
million in additions to property and equipment were financed through a
combination of long-term debt, accounts payable-trade, microwave relocation
costs payable and prepaid network infrastructure costs.
10
<PAGE> 12
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In 1999, the Company incurred interest charges totaling $83.3 million. In
1999, the interest charges were comprised of $52.0 million paid to TDS relating
to the Revolving Credit Agreement (See Note 6--Revolving Credit Agreement),
$8.9 million paid to TDS for guarantee fees on the Series A and Series B Zero
Coupon Notes and obligations under the Nokia 1998 Credit Agreement (See Note
5--Long-Term Debt), $3.5 million paid to Nokia for interest charges relating to
the 1998 Credit Agreement, $18.3 million in accrued interest on the Series A and
Series B Zero Coupon Notes and $0.6 million in other interest charges. All
interest charges incurred were expensed in 1999.
In 1998, the Company incurred interest charges totaling $80.2 million. In
1998, the interest charges were comprised of $55.4 million paid to TDS relating
to the Revolving Credit Agreement, $6.7 million paid to TDS for guarantee fees
on the Series A and Series B Zero Coupon Notes and obligations under the Nokia
1998 and 1996 Credit Agreements, $1.0 million paid to Nokia for interest charges
relating to the 1998 Credit Agreement, $16.2 million in accrued interest on the
Series A and Series B Zero Coupon Notes and $0.9 million in other interest
charges. Of these amounts, the Company capitalized $0.1 million relating to its
work in process expenditures. The remaining $80.1 million was charged to
expense.
In 1997, the Company incurred interest charges totaling $33.1 million. In
1997, the interest charges were comprised of $21.0 million paid to TDS relating
to the Revolving Credit Agreement, $3.3 million paid to TDS for guarantee fees
on the Series A Zero Coupon Notes and obligations under the Nokia 1996 Credit
Agreement, $0.4 million paid to Nokia for interest charges relating to the 1996
Credit Agreement, $8.3 million in accrued interest on the Series A Zero Coupon
Notes and $0.1 million in other interest charges. Of these amounts, the Company
capitalized $6.0 million relating to its work in process expenditures. The
remaining $27.1 million was charged to expense.
(m) New accounting pronouncements
Securities and Exchange Commission Staff Accounting Bulletin ("SAB") No.
101, "Revenue Recognition", is effective beginning in the first quarter of
2000. SAB No. 101 provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. Management believes this bulletin
will not have a material effect on results of operations and financial position
of the Company.
3. INCOME TAXES
The Company is included in a consolidated federal income tax return with
other members of the TDS consolidated group. The Company and TDS are parties to
a Tax Allocation Agreement (the "Agreement"). The Agreement provides that the
Company and its subsidiaries be included with the TDS affiliated group in a
consolidated federal income tax return and in state income or franchise tax
returns in certain situations. For financial reporting purposes, the Company
computes its federal income taxes as if it were filing a separate return as its
own affiliated group and was not included in the TDS group.
TDS and the Company are also parties to a March 12, 1999, tax settlement
agreement which resulted in a payment of $114.5 million from TDS to Aerial. The
$114.5 million received by Aerial covered the estimated tax losses incurred by
the Company and used by TDS in consolidated income tax returns for the period
commencing from January 1, 1996 through August 31, 1999. The tax settlement
agreement requires a settlement of amounts to cover tax losses incurred by
Aerial and used by TDS through December 31, 1999. In the first quarter of 1999,
the Company determined that it was appropriate to recognize the $114.5 million
payment in current income tax expense as part of a reduction in its deferred tax
asset valuation allowance.
11
<PAGE> 13
3. INCOME TAXES (CONTINUED)
The Company records all deferred tax liabilities or assets for the deferred
tax consequences of all temporary differences. Income tax provisions are
summarized below:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1999 1998 1997
--------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Federal income tax (benefit) provision:
Current .................................... $(104,956) $ -- $ --
Deferred ................................... 1,104 2,078 1,561
State income tax (benefit) provision:
Current .................................... (9,859) -- --
Deferred ................................... 311 501 245
--------- --------- ---------
Income tax (benefit) expense ................. $(113,400) $ 2,579 $ 1,806
========= ========= =========
</TABLE>
The temporary differences which gave rise to significant portions of the net
deferred tax liability were as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
--------- ---------
(Dollars in thousands)
<S> <C> <C>
Deferred tax asset:
Net operating loss carryforwards ........... $ 175,009 $ 357,460
Less: valuation allowance .................. (66,012) (277,782)
--------- ---------
Total deferred tax asset ..................... $ 108,997 $ 79,678
========= =========
Deferred tax liability:
Property and equipment ..................... $ 54,732 $ 39,364
Licenses ................................... 28,795 24,060
Partnership investment ..................... 19,859 13,967
Minority share of loss ..................... 16,903 9,934
Deferred charges-interest .................. 3,430 5,273
Other ...................................... 3,050 3,437
--------- ---------
Total deferred tax liability ................. $ 126,769 $ 96,035
========= =========
Net deferred tax liability ................... $ 17,772 $ 16,357
========= =========
</TABLE>
The Company records a deferred tax asset associated with net operating loss
carryforwards and then assesses the need for any valuation allowance associated
with those carryforwards. At December 31, 1999, the federal net operating loss
carryforward available to offset future taxable income is $350.0 million
(generating a $122.5 million deferred tax asset) and expires between 2012 and
2019. The amount of state net operating loss carryforward available to offset
future taxable income, primarily of the individual MTAs which generated the
loss, is $761.2 million (generating a $52.5 million deferred tax asset) and
expires between 2000 and 2019.
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax asset will not be realized. During 1999, the
valuation allowance decreased $211.8 million primarily due to the tax settlement
described above.
12
<PAGE> 14
3. INCOME TAXES (CONTINUED)
The statutory federal income tax rate is reconciled to the Company's
effective income tax rate below:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Statutory federal income tax rate ............................ 35.0% 35.0% 35.0%
State income taxes, net of federal benefit ................... 3.2 (0.1) (0.1)
Effects of valuation allowance on deferred tax asset ......... (0.2) (35.7) (35.6)
------ ------ ------
Effective income tax rate .................................... 38.0% (0.8)% (0.7)%
====== ====== ======
</TABLE>
4. MINORITY INTEREST
On September 8, 1998, pursuant to the terms of a Purchase Agreement dated
June 1, 1998 ("Purchase Agreement"), Sonera made a $200 million investment in
AOC, a then wholly-owned subsidiary of the Company. Sonera purchased
approximately 2.4 million shares of common stock of AOC at a price of
approximately $83 per share representing a 19.4% equity interest in AOC. Sonera
has the right, subject to adjustment under certain circumstances, to exchange
each share of AOC common stock that it owns for 6.72919 Common Shares of Aerial.
Upon the exchange of all of the above AOC shares, Sonera would have owned (prior
to its additional investment in the Company, as described below) an 18.4% equity
interest in Aerial, reflecting a purchase price equivalent of $12.33 per Common
Share of Aerial (the "Equivalent Purchase Price"). The sale of the AOC common
stock was recorded at a fair market value, which was more than the Company's
book value investment in AOC. The Company adjusted its book value investment in
AOC as a result of this sale and increased additional paid-in capital $169.5
million in 1998.
Following the announcement by TDS in December 1998 that it intended to
distribute to its shareholders all of the capital stock of Aerial that it owns,
and that Aerial would seek additional financing from sources other than TDS in
connection therewith, Sonera contacted TDS to express certain concerns. Sonera
asserted, among other things, that Aerial and TDS misrepresented and failed to
disclose certain material facts to Sonera, thereby inducing Sonera to pay an
excessive price for the AOC common stock. Sonera requested the renegotiation of
certain matters related to Sonera's investment in AOC, including an adjustment
in the Equivalent Purchase Price, and raised the possibility of litigation in
connection therewith.
Under the Purchase Agreement, the number of AOC shares purchased by Sonera
is subject to reduction if the average price of Aerial's Common Shares exceeds
certain threshold prices during the first three years after Sonera's investment.
During the second quarter and on July 7, 1999, the average price of Aerial's
Common Shares exceeded all of the threshold prices set forth in the Purchase
Agreement. Accordingly, Aerial requested Sonera to surrender for cancellation an
aggregate of 634,216 shares of AOC common stock. Sonera refused to surrender any
AOC shares and, in connection with its allegations, as discussed above, objected
to the application of the share reduction provisions in the Purchase Agreement.
In connection with an Agreement and Plan of Reorganization, Sonera, TDS,
Aerial and AOC executed a Settlement Agreement and Release as of September 17,
1999. Under the Settlement Agreement and Release, Sonera surrendered for
cancellation 317,108 AOC shares, representing one-half of the 634,216 disputed
shares, on November 1, 1999, without releasing its claims with respect to such
surrendered shares, in connection with the closing of transactions under the TDS
Debt Replacement Agreement. Upon satisfaction of all of the conditions to the
closing of the transactions contemplated by the Agreement and Plan of
Reorganization, the remaining 317,108 AOC shares will be surrendered for
cancellation immediately prior to the closing of such transactions. At this
closing, each of Sonera and Sonera U.S., on the one hand, and TDS, Aerial, AOC,
VoiceStream, on the other hand, will release each other from all claims relating
to actions occurring through the date of the Settlement Agreement and Release,
including all claims by Sonera to all of the disputed shares and, subject to
certain exceptions, will extend such release to actions occurring through the
date of such closing. Also at
13
<PAGE> 15
4. MINORITY INTEREST (CONTINUED)
that closing, the Purchase Agreement and the other agreements entered into in
connection with Sonera's original investment in AOC will be terminated.
On November 1, 1999, pursuant to the terms of the Sonera-Aerial Investment
dated September 17, 1999, Sonera made a $155 million investment in AOC. Sonera
purchased approximately 1.0 million shares of AOC. After completing all of the
foregoing transactions, including the November 1, 1999 cancellation of 317,108
AOC shares, Sonera's equity ownership in AOC was approximately 19.0%. The sale
of the AOC common stock was recorded at a fair market value, which was more than
the Company's book value investment in AOC. The Company adjusted its book value
investment in AOC as a result of this sale and increased additional paid-in
capital $50.7 million in 1999.
In 1999, minority share of loss of $15.8 million represents Sonera's share
of AOC's consolidated net loss for the year. In 1998, minority share of loss of
$23.6 million represents Sonera's share of AOC's consolidated net loss from
September 8, 1998 (the closing date) to December 31, 1998.
5. LONG-TERM DEBT
Nokia Telecommunications Inc. ("Nokia") agreed to provide the Company with
up to $200 million in financing for digital radio channel and switching
infrastructure equipment through a Credit Agreement with the Company dated June
19, 1996 ("1996 Credit Agreement"). In accordance with the provisions of the
1996 Credit Agreement, the Company issued, in tranches, 10-year unsecured zero
coupon promissory notes, the proceeds of which were paid to Nokia in
satisfaction of borrowings by the Company under the 1996 Credit Agreement. On
November 4, 1996, the Company issued $226.2 million in aggregate principal
amount at maturity of Series A Zero Coupon Notes ("Series A Notes") due in 2006.
The per annum yield to maturity on the Series A Notes is 8.34% (computed on a
semi-annual bond equivalent basis) and the effective rate is 8.09%. On February
5, 1998, the Company issued $220.0 million in aggregate principal amount at
maturity of Series B Zero Coupon Notes ("Series B Notes") due in 2008
(representing the final issuance of zero coupon notes under the 1996 Credit
Agreement). The per annum yield to maturity on the Series B Notes is 8.05%
(computed on a semi-annual bond equivalent basis) and the effective rate is
7.61%. The aggregate issue price of the Series A and Series B Zero Coupon Notes
was $200 million. The proceeds were paid to Nokia in satisfaction of all then
outstanding and future obligations of the Company up to $200 million under the
1996 Credit Agreement.
On June 30, 1998, the Company and Nokia entered into an agreement ("1998
Credit Agreement") in which Nokia will provide financing to the Company for the
purchase of network infrastructure equipment and services from Nokia. Loans
under the 1998 Credit Agreement are to be made available in two tranches. With
respect to Tranche A, the Company borrowed $68.5 million. The per annum interest
rate on the Tranche A loans is equal to the 30-day LIBOR plus 0.35%. A second
tranche of $75 million ("Tranche B") became available commencing on June 30,
1999. The per annum interest rate on the Tranche B loans is equal to the 30-day
LIBOR plus 0.25%. The maturity date of both the Tranche A and Tranche B loans is
June 30, 2000. Interest under the 1998 Credit Agreement is payable monthly. As
of December 31, 1999, the Company had $39.7 million available for borrowing
under the 1998 Credit Agreement.
The Series A and Series B Notes are unsecured obligations of the Company and
rank in the same priority with all other unsecured and unsubordinated
indebtedness of the Company. The Series A and Series B Notes and obligations of
the Company under the 1998 Credit Agreement are fully and unconditionally
guaranteed by TDS at an annual fee rate of 3%. Guarantee fees owed TDS are
payable semiannually. The Series A and Series B Notes are subject to optional
redemption by the Company after five years from the date of issuance at
redemption prices which reflect the original issue discount accreted since
issuance. As part of the VoiceStream merger, VoiceStream is required to
repurchase, repay and/or amend the Series A Notes and Series B Notes. In any
event, VoiceStream is required to cause TDS to be released from its guarantees
and all liabilities thereunder. At the merger closing, VoiceStream is required
to repay all obligations under or amend the Nokia 1998 Credit Agreement to
permit the merger to occur. In either case, VoiceStream is required to cause TDS
to be released from its guaranties and all liabilities thereunder.
14
<PAGE> 16
5. LONG-TERM DEBT (CONTINUED)
At December 31, 1999, the $103.8 million of current portion of long-term
debt represented borrowings under the 1998 Credit Agreement. The $250.8 million
of long-term debt represented the Series A and Series B Zero Coupon Notes,
including accreted interest. Of the $278.0 million in long-term debt at December
31, 1998, $45.5 million represented borrowings under the 1998 Credit Agreement,
with the balance representing the Series A and Series B Zero Coupon Notes,
including accreted interest.
The $131.1 million carrying value of the Company's Series A Notes is greater
than its fair value, estimated to be $130.3 million. The $119.7 million carrying
value of the Company's Series B Notes is greater than its fair value, estimated
to be $112.7 million. The fair values were estimated using discounted cash flow
analyses. The $103.8 million carrying value of the Company's obligations under
the 1998 Credit Agreement approximates the fair value of the obligations, as the
1998 Credit Agreement is variable rate debt based on the 30-day LIBOR.
6. REVOLVING CREDIT AGREEMENT
Under the TDS Revolving Credit Agreement, as amended, AOC may borrow up to a
maximum amount (the "Maximum Amount"), less the amount of certain financing
obtained by AOC or Aerial, including the amount of any borrowings under the
Nokia 1998 Credit Agreement. As of December 31, 1999, the Maximum Amount
available under the TDS Revolving Credit Agreement was $355 million and the
amount available for borrowing by AOC was approximately $213.4 million. The
interest rate under the Revolving Credit Agreement is equal to the prime rate
plus 2.35%. Interest on the balance due under the Revolving Credit Agreement is
payable quarterly and no principal is payable until maturity. See also Note
1--VoiceStream Merger for a further discussion of the TDS Revolving Credit
Agreement.
In March, 2000, the TDS and Aerial Boards of Directors approved an amendment
to the Revolving Credit Agreement which increased the Maximum Amount on a
scheduled basis from $355 million to $460 million as of December 1, 2000
(provided that the net amount available for borrowing from TDS shall not exceed
$315 million), and changed the maturity date from April 2, 2000, to the earlier
of December 17, 2000, or the date of the merger closing with VoiceStream.
The $37.8 million carrying value of the Company's borrowings under the
Revolving Credit Agreement approximates the fair value of the borrowings, as
the Revolving Credit Agreement is variable rate debt with the interest rate
based on the prime lending rate.
7. RELATED PARTY TRANSACTIONS
The Company is billed for all services it receives from TDS and its
subsidiaries, consisting primarily of information processing and general
management services. Such billings are based on expenses specifically identified
to the Company and on allocations of common expenses. Such allocations are based
on the relationship of the Company's assets, employees, investment in property
and equipment and expenses to the total assets, employees, investment in
property and equipment and expenses of TDS. Management believes the method used
to allocate common expenses is reasonable and that all expenses and costs
applicable to the Company are reflected in the accompanying financial statements
on a basis which is representative of what they would have been if the Company
operated on a stand-alone basis. Billings to the Company from TDS totaled $10.2
million, $8.6 million and $3.9 million during 1999, 1998 and 1997, respectively.
In 1998, TDS developed a new payroll system for all of its subsidiaries,
including the Company. Also in 1998, the Company and TDS developed a new phone
and accessory inventory system for Aerial and its subsidiaries. The Company
recorded approximately $6.1 million related to these systems in property and
equipment.
Upon to the completion of the merger with VoiceStream, the intercompany
agreements between TDS and Aerial will be terminated.
8. COMMITMENTS
The costs of development, construction and post-launch activities of the
Company require substantial capital. From inception through December 31, 1999,
the Company had expended approximately
15
<PAGE> 17
8. COMMITMENTS (CONTINUED)
$304.4 million for its six licenses, including capitalized interest,
approximately $822.7 million for all other capital expenditures and incurred
cumulative net losses of $800.2 million. The Company expects to incur
significant operating losses and to generate negative cash flow from operating
activities during 2000 as it continues to build its PCS customer base. Through
the expected second quarter 2000 merger close with VoiceStream, the Company
estimates that its aggregate capital requirements will total approximately
$60-$90 million, with $30-$50 million needed for capital additions and $30-$40
million needed to fund operations.
At December 31, 1999, the Company had orders totaling approximately $2.7
million with Nokia for infrastructure equipment. Also at December 31, 1999, the
Company had orders totaling approximately $13.0 million with various vendors for
phones and accessories.
The Company and its subsidiaries have leases for certain office facilities,
warehouses, retail store locations and cell sites which are classified as
operating leases. For the years ended December 31, 1999, 1998 and 1997, rent
expense for non-cancelable operating leases was $23.2 million, $21.5 million and
$10.3 million, respectively, and for cancelable leases $0.2 million, $0.3
million and $1.1 million, respectively. At December 31, 1999, the aggregate
minimum rental commitments under non-cancelable operating leases for the years
2000 through 2004 and 2005 and thereafter, are approximately $21.5 million,
$19.7 million, $12.8 million, $7.0 million, $5.3 million and $10.0 million,
respectively.
9. COMMON STOCK
See Note 1--VoiceStream Merger for a discussion of additional Common Shares
issued to TDS and Sonera.
Tax-Deferred Savings Plan
Effective July 1, 1995, the Company adopted the TDS Tax-Deferred Savings
Plan (the "TDS Savings Plan"), a qualified profit-sharing plan pursuant to
Sections 401(a) and 401(k) of the Internal Revenue Code. As amended on August
15, 1996, participating employees had, prior to January 1, 2000, the option of
investing their contributions in Aerial Common Shares, TDS Common Shares, United
States Cellular Corporation (a subsidiary of TDS) Common Shares or five
non-affiliated funds. The Company has reserved 600,000 Common Shares for
issuance under the TDS Savings Plan. Employer matching contributions are made in
Aerial Common Shares. Aerial issued 105,498, 73,815 and 184,533 Common Shares in
1999, 1998 and 1997, respectively, in connection with the TDS Savings Plan.
In connection with the Company's anticipated merger with VoiceStream, TDS
and the Company entered into an agreement providing that, among other things,
the Company would establish is own Tax-Deferred Savings Plan and would cease to
participate in the TDS Savings Plan. Effective January 1, 2000, the Company
ended its participation in the TDS Savings Plan. The Company's operating
subsidiary, AOC, adopted the Aerial Operating Company, Inc., Tax Deferred
Savings Plan (the "Aerial Plan"). All interests in the TDS Savings Plan held by
eligible employees of the Company as of January 1, 2000 were transferred from
the TDS Savings Plan to the Aerial Plan. Under the Aerial Plan participating
employees have the option of investing their contributions in Aerial Common
Shares or five non-affiliated funds.
Stock-Based Compensation Plans
The Company accounts for stock options and its employee stock purchase plan
under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB 25"). No compensation costs have been recognized for the
employee stock purchase plan. Some options granted had exercise prices that were
less than the quoted market price of the Company's stock on the date they were
granted. In accordance with APB 25, compensation expense of $127,000, $20,000
and $26,000 was recorded related to these options in 1999, 1998 and 1997,
respectively.
16
<PAGE> 18
9. COMMON STOCK (CONTINUED)
Had compensation expense for all plans been determined consistent with SFAS
No. 123, "Accounting for Stock-Based Compensation," the Company's net (loss) and
(loss) per share would have been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
(Dollars in thousands except
per share amounts)
<S> <C> <C> <C>
Net (loss)
As reported ............................... $ (169,346) $ (337,895) $ (247,057)
Pro forma ................................. $ (171,120) $ (340,382) $ (250,957)
Basic and diluted (loss) per share
As reported ............................... $ (2.24) $ (4.71) $ (3.45)
Pro forma ................................. $ (2.26) $ (4.75) $ (3.51)
</TABLE>
A summary of the status of the Company's stock option plan at December 31,
1999, 1998 and 1997, and changes during the years then ended is presented in the
table and narrative below:
<TABLE>
<CAPTION>
Weighted
Number of Option Average Remaining
Shares Prices Fair Values Contractual Life
--------- ---------- ----------- ----------------
<S> <C> <C> <C> <C>
Outstanding January 1, 1997 ........................... 310,305 $ 17.00 9.33 Years
Granted ............................................... 1,137,435 $ 9.46 $4.42
Exercised ............................................. (2,553) $ 4.94
Forfeited ............................................. (56,450) $ 14.44
---------
Outstanding December 31, 1997 (633,030
exercisable from $4.94 to $17.00) ................... 1,388,737 $ 10.95 8.51 Years
Granted ............................................... 678,861 $ 5.85 $3.46
Exercised ............................................. (30,873) $ 4.94
Forfeited ............................................. (316,764) $ 10.45
---------
Outstanding December 31, 1998 (1,019,192
exercisable from $3.71 to $17.00) ................... 1,719,961 $ 9.13 7.69 Years
Granted ............................................... 337,519 $ 7.60 $3.62
Exercised ............................................. (915,858) $ 8.18
Forfeited ............................................. (362,684) $ 9.99
---------
Outstanding December 31, 1999
(447,914 exercisable from $3.69 to $17.00) ......... 778,938 $ 9.05 0.25 Years
</TABLE>
Employee Stock Options
Effective April 25, 1996, the Company began providing long-term incentive
benefits for its senior managers by adopting the Aerial Communications, Inc.
Long-Term Incentive Plan (the "Stock Option Plan"). The Company has reserved 3
million Common Shares for option grants. Aerial employees were issued 814,894
Common Shares in 1999, 6,450 Common Shares in 1998 and 767 Common Shares in 1997
in connection with the Stock Option Plan. The options are exercisable over a
specified period not in excess of ten years from the date they are granted. Most
options expire ten years after the grant date, or 30 days after the date of the
employee's termination of employment, if earlier. All options became vested with
the February 24, 2000, Aerial shareholder approval of the merger with
VoiceStream. Unexercised options to purchase shares of Aerial common stock will
be converted into options to acquire shares of VoiceStream common stock at an
exchange ratio of 0.455 upon the Company's merger with VoiceStream. The fair
value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1999, 1998 and 1997, respectively: risk free interest rates of
5.06%, 5.20% and 6.59%; dividend yield of 0%; expected lives of 2.5 years, 8.8
years and 9.4 years; and volatility of 66.63%, 58.17% and 51.32%.
17
<PAGE> 19
9. COMMON STOCK (CONTINUED)
Restricted Stock Units
Effective February 1, 1999 the Company adopted the Aerial Communications,
Inc. Retention Restricted Stock Unit Plan (the "Plan"). The Plan provides for
the grant of stock unit awards. Each stock unit is a right to receive one Aerial
Common Share or the fair market value in cash as of the date the stock unit
vests. A total of 456,000 Common Shares were initially made available under the
Plan. As of December 31, 1999, there were 431,000 stock units outstanding. On
February 1, 2000, 40 percent of the outstanding stock units vested and the
Company issued 172,400 Common Shares. All remaining stock units became vested
with the February 24, 2000, Aerial shareholder approval of the merger with
VoiceStream. In 1999 the Company recognized $1.9 million in compensation expense
related to the Plan.
Employee Stock Purchase Plan
The Company adopted the 1996 APTI Employee Stock Purchase Plan (the "Stock
Purchase Plan") effective October 1, 1996. The Company has reserved 200,000
Common Shares for sale to the employees of the Company and its subsidiaries in
connection with the Stock Purchase Plan. Shares can be purchased twice a year
and the price per share is 85% of the stock's closing price on designated
purchase dates. The last purchase date under the Stock Purchase Plan was
September 30, 1998. Aerial employees were issued 93,996 Common Shares in 1998
and 59,822 Common Shares in 1997 in connection with the Stock Purchase Plan. The
fair value of the employees' purchase rights was estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions for 1998 and 1997, respectively: risk free interest rate of 4.99%
and 6.21%; dividend yield 0%; expected life of 1.8 and 0.8 years; and volatility
of 51.59% and 51.18%. The weighted average fair value of the employees purchase
rights were $1.94 in 1998 and $2.08 in 1997.
Non-Employee Director Compensation
In April 1997, the Company established the Compensation Plan For
Non-Employee Directors (the "Compensation Plan"). Under the Compensation Plan,
the Company's independent directors are to be paid an annual fee of $20,000 that
is payable half in cash and half in Company stock. The number of Common Shares
to be delivered to each independent director is based upon the average market
value of the Company's stock for a certain period prior to the date of the
Annual Shareholder's Meeting. The Company has reserved 20,000 Common Shares for
issuance to the Company's independent directors under the Compensation Plan. The
Company issued 3,825, 4,116 and 6,003 shares to non-employee directors under
this plan in 1999, 1998 and 1997, respectively.
Series A Common Shares
Series A Common Shares are convertible on a share-for-share basis into
Common Shares and are entitled to 15 votes per share. No Series A Common Shares
were converted during 1999, 1998 or 1997. As of December 31, 1999, all of the
Company's outstanding Series A Common Shares were held by TDS. See Note
1--VoiceStream Merger for a discussion of additional Series A Common Shares
issued to TDS under the TDS Debt Replacement Agreement.
18
<PAGE> 20
10. CONSOLIDATED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- -------- -------- --------
(Dollars in thousands, except per share amounts)
1999
<S> <C> <C> <C> <C>
Operating Revenues .................................... $ 50,541 $ 54,785 $ 56,777 $ 63,398
Operating (Loss) ...................................... (49,834) (47,347) (48,634) (64,193)
Net Income (Loss) ..................................... 33,377 (56,002) (76,181) (70,540)
Weighted Average Common and Series A
Common Shares (000) ................................. 71,804 71,916 71,928 87,161
Income (Loss) per Common and Series A Common Share .... $ 0.46 $ (0.78) $ (1.06) $ (0.81)
1998
Operating Revenues .................................... $ 30,746 $ 36,688 $ 38,438 $ 49,382
Operating (Loss) ...................................... (69,313) (67,462) (60,607) (82,603)
Net (Loss) ............................................ (86,921) (89,474) (79,137) (82,363)
Weighted Average Common and Series A Common
Shares (000) ........................................ 71,636 71,730 71,735 71,789
(Loss) per Common and Series A Common Share ........... $ (1.21) $ (1.25) $ (1.10) $ (1.15)
</TABLE>
19
<PAGE> 21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and Board of Directors of Aerial Communications, Inc.:
We have audited the accompanying consolidated balance sheets of Aerial
Communications, Inc. (a Delaware Corporation and an 82.1%-owned subsidiary of
Telephone and Data Systems, Inc.) and Subsidiaries (the "Company") as of
December 31, 1999 and 1998, and the related consolidated statements of
operations, changes in shareholders' equity and cash flows for each of the three
years in the period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Aerial
Communications, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 27, 2000
20
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
VOICESTREAM WIRELESS CORPORATION
(Registrant)
Date March 22, 2000 By /s/ Alan R. Bender
------------------- --------------------------------------
(Signature)
Alan R. Bender, Executive Vice President
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and all references to our Firm), as it relates to Aerial Communications, Inc.
and Subsidiaries, included in or made a part of this current report on Form 8-K.
ARTHUR ANDERSEN LLP
Chicago, Illinois
March 22, 2000
