CONFORMED COPY
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996.
Commission file numbers: 333-4603; 333-4603-01
NEXTLINK COMMUNICATIONS, L.L.C.
NEXTLINK CAPITAL, INC.
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(Exact name of small business issuer as specified in its charter)
Washington 91-1678465
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)
(206) 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 No X .
-- --
NEXTLINK Capital, Inc. meets the conditions set forth in General Instruction
G(1)(a) and (b) of Form 10QSB and is therefore filing this form with the
reduced disclosure format.
The number of shares of NEXTLINK Capital, Inc.'s common stock outstanding as
of August 1, 1996 was 1,000.
Page 1 of 14 pages.
Exhibit index at page 13.
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
JUNE 30, DECEMBER 31,
1996 1995
------------ ------------
Current assets:
Cash and cash equivalents.................... $ 178,357 $ 1,350
Accounts receivable, net..................... 7,009 3,563
Other........................................ 664 746
Pledged securities........................... 36,233 --
------------ ------------
Total current assets.................... 222,263 5,659
Pledged securities............................... 82,666 --
Property and equipment, net...................... 67,509 29,664
Goodwill, net.................................... 22,780 12,137
Other intangible assets, net..................... 4,976 5,751
Other assets, net ............................... 12,289 250
------------ ------------
Total assets............................ $ 412,483 $ 53,461
------------ ------------
------------ ------------
Current liabilities:
Bank overdraft............................... $ -- $ 1,373
Accounts payable............................. 9,048 4,315
Accrued expenses............................. 4,698 1,266
Accrued interest payable .................... 8,021 --
Payable to affiliates........................ 1,500 4,937
------------ ------------
Total current liabilities............... 23,267 11,891
Long-term liabilities:
Capital lease obligation..................... 5,077 --
Long-term debt............................... 350,000 --
Other........................................ 2,008 1,965
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Total liabilities....................... 380,352 13,856
Minority interest ............................... 517 2,886
Members' equity.................................. 31,614 36,719
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Total liabilities and members' equity... $ 412,483 $ 53,461
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------------ ------------
See accompanying notes to unaudited consolidated interim financial statements.
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
1996 1995 1996 1995
--------- --------- --------- ---------
Revenue. . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,671 $ 1,000 $ 12,041 $ 1,399
Costs and expenses:
Operating. . . . . . . . . . . . . . . . . . . . . . . 6,117 1,156 10,813 1,794
Selling, general and administrative. . . . . . . . . . 6,975 1,467 12,491 2,220
Depreciation . . . . . . . . . . . . . . . . . . . . . 1,310 185 2,387 315
Amortization of intangible assets. . . . . . . . . . . 1,013 482 1,765 964
--------- --------- --------- ---------
Total costs and expenses . . . . . . . . . . . . . . . 15,415 3,290 27,456 5,293
--------- --------- --------- ---------
Loss from operations . . . . . . . . . . . . . . . . . . . (8,744) (2,290) (15,415) (3,894)
Interest income. . . . . . . . . . . . . . . . . . . . . . 3,787 -- 4,029 --
Interest expense . . . . . . . . . . . . . . . . . . . . . (8,832) (10) (9,568) (10)
--------- --------- --------- ---------
Loss before minority interest. . . . . . . . . . . . . . . (13,789) (2,300) (20,954) (3,904)
Minority interest in loss of consolidated
subsidiaries . . . . . . . . . . . . . . . . . . . . . . 72 46 121 89
--------- --------- --------- ---------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . $(13,717) $ (2,254) $(20,833) $ (3,815)
--------- --------- --------- ---------
--------- --------- --------- ---------
See accompanying notes to unaudited consolidated interim financial statements.
NEXTLINK COMMUNICATIONS, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1996 1995 1996 1995
-------- -------- -------- -------
OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . $(13,717) $(2,254) $(20,833) $(3,815)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization . . . . . . . . . 2,323 667 4,152 1,279
Minority interest in loss of consolidated
subsidiaries. . . . . . . . . . . . . . . . . (72) (46) (121) (89)
Changes in assets and liabilities, net of
effects from acquisitions:
Accounts receivable. . . . . . . . . . . . (1,776) (739) (3,446) (1,145)
Other current assets . . . . . . . . . . . 187 (92) 82 (92)
Other noncurrent assets. . . . . . . . . . (167) (635) (1,254) (1,753)
Accounts payable . . . . . . . . . . . . . 2,837 869 4,733 1,690
Accrued interest expense . . . . . . . . . 8,021 -- 8,021 --
Accrued expenses . . . . . . . . . . . . . 2,188 325 2,522 1,348
Other noncurrent liabilities . . . . . . . (301) -- (74) --
-------- -------- -------- -------
. . . . . . . . . . . . . . . . . . . . . 13,240 349 14,615 1,238
-------- -------- -------- -------
Net cash used in operating activities. . . . . . . . . . (477) (1,905) (6,218) (2,577)
INVESTING ACTIVITIES:
Purchase of pledged securities . . . . . . . . . . . (117,688) -- (117,688) --
Net assets acquired in business and asset
acquisitions . . . . . . . . . . . . . . . . . . . (905) (1,570) (10,503) (12,960)
Investments in affiliates. . . . . . . . . . . . . . (2,500) -- (2,500) --
Purchase of property and equipment . . . . . . . . . (23,704) (1,748) (31,495) (2,541)
-------- -------- -------- -------
Net cash used in investing activities. . . . . . . . . . (144,797) (3,318) (162,186) (15,501)
FINANCING ACTIVITIES:
Capital contributions. . . . . . . . . . . . . . . . 49 5,486 9,921 18,369
Proceeds from payable to affiliates. . . . . . . . . 235 -- 28,766 --
Repayment of payables to affiliates. . . . . . . . . (32,203) -- (32,203) --
Bank overdraft . . . . . . . . . . . . . . . . . . . -- -- (1,373) --
Costs incurred in connection with financing. . . . . (9,700) -- (9,700) --
Proceeds from issuance of senior notes . . . . . . . 350,000 -- 350,000 --
-------- -------- -------- -------
Net cash provided by financing activities. . . . . . . . 308,381 5,486 345,411 18,369
-------- -------- -------- -------
Net increase in cash . . . . . . . . . . . . . . . . . . 163,107 263 177,007 291
Cash, beginning of period. . . . . . . . . . . . . . . . 15,250 53 1,350 25
-------- -------- -------- -------
Cash, end of period. . . . . . . . . . . . . . . . . . . $178,357 $ 316 $178,357 $ 316
-------- -------- -------- -------
-------- -------- -------- -------
SUPPLEMENTAL CASH FLOW
DISCLOSURES:
Cash paid for interest . . . . . . . . . . . . . . . $1,021 $-- $1,277 $--
See accompanying notes to unaudited consolidated interim financial statements.
SUPPLEMENTAL CASH FLOW DISCLOSURES (CONT'D):
(Dollars in thousands)
Non-cash investing and financing activities:
In the three months ended March 31, 1996, the Company recognized additional
members' equity and goodwill of $5,574 and $2,907, respectively, and a reduction
in minority interests of $2,667 relating to a recapitalization and merger of
companies holding minority equity interests in certain subsidiaries of the
Company, who exchanged these interests for Class A membership units of the
Company.
Effective January 1, 1996, the Company acquired certain assets of FoneNet, Inc.
and U.S. Network, Inc. through NEXTLINK Ohio, L.L.C. As part of the purchase
consideration for these assets, the Company assumed liabilities of $6,104 and
issued Class A membership units valued at $652.
See accompanying notes to unaudited consolidated interim financial statements.
NEXTLINK COMMUNICATIONS, L.L.C.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
1. BASIS OF PRESENTATION:
The condensed consolidated financial statements include the accounts of
NEXTLINK Communications, L.L.C., a Washington limited liability company,
and its majority-owned subsidiaries (collectively referred to as the
("Company"). 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 (both limited liability companies
and a partnership) in which the Company has a controlling interest of
greater than 50%. The ownership interests of the other members or partners
is reflected as minority interests. The Company's investments in ventures
in which it has voting interests of at least 20% but not more than 50% are
accounted for on the equity method and investments in ventures in which it
has voting interests of not more than 20% are accounted for on the cost
method. All significant intercompany accounts and transactions have been
eliminated.
These financial statements have been prepared without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. These consolidated financial statements should be
read in conjunction with the audited consolidated financial statements and
notes thereto included in the Company's Form S-4 as filed with the
Securities and Exchange Commission on May 28, 1996 as subsequently amended.
The financial information included herein reflects all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion
of management, necessary to a fair presentation of the results for interim
periods. The results of operations for the three and six month periods
ended June 30, 1996 are not necessarily indicative of the results to be
expected for the full year.
2. FINANCING
On April 25, 1996, the Company executed a purchase agreement pursuant to
which investors committed to purchase $350.0 million of 12.5% Senior Notes
due April 15, 2006 (the "Notes"), with interest due semi-annually. The
Company used $117.7 million of the proceeds to purchase U.S. government
securities, representing funds sufficient to provide for payment in full of
interest on the Notes through April 15, 1999 and $32.2 million to repay
advances and accrued interest from Eagle River. The Company will use the
remaining proceeds (net of transaction costs) to (i) expand existing
networks, (ii) acquire new networks or other complementary businesses,
(iii) build networks in new markets, and (iv) fund future negative
operating cash flow. The Company incurred costs of $9.7 million in
connection with the financing. Such costs are included in other long-term
assets and are amortized over the ten year term of the Notes.
NEXTLINK Capital, Inc.
BALANCE SHEET
(Unaudited)
JUNE 30,
1996
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ASSETS:
Cash in bank................................... $ 100
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--------
SHAREHOLDER'S EQUITY
Common stock, no par value,
1,000 shares authorized, issued and
outstanding............................... $ --
Additional paid-in capital.................. 100
--------
$ 100
--------
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NOTE TO BALANCE SHEET
1. Description of the Company
NEXTLINK Capital, Inc. (NEXTLINK Capital) is a Washington corporation and
a wholly-owned subsidiary of NEXTLINK Communications, L.L.C. (NEXTLINK).
NEXTLINK Capital was formed for the sole purpose of obtaining financing from
external sources and is a joint obligor on the Senior Notes of NEXTLINK.
NEXTLINK Capital was initially funded with a $100 contribution from NEXTLINK
and has had no operations to date.
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. These activities have provided the Company
with the foundation to become a full service provider of local
facilities-based telecommunications services. Over this period, the Company
has begun construction of, or acquired and expanded, telecommunications
networks in 10 metropolitan areas in five states. Currently, revenues are
being generated from the Company's networks in Tennessee (Memphis and
Nashville); Pennsylvania (Allentown, Harrisburg and Reading/Lancaster); Ohio
(Columbus) and Washington (Spokane). In addition, the Company became a 40%
member in a joint venture that currently provides competitive access services
in Las Vegas, Nevada. This venture also plans to become a full service
provider of local telecommunications services in 1997. The Company is also
generating revenues from the provision of enhanced communications services.
The Company anticipates that its networks in Ohio (Akron and Cleveland) and
Utah (Salt Lake City), will begin generating revenues during the first
quarter of 1997.
In July 1996, the Company commenced the offering of local switched
telecommunications services in six of its markets, and expects to provide
these services in its four remaining markets and the joint venture by early
1997. The Company also plans to acquire and build networks in new areas,
expand its current networks, and also explore the acquisition of additional
enhanced communications services 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.
Operating Data (1):
As of June 30, As of March 31,
1996 1996
-------------- --------------
Metropolitan areas in operation. . . . . . . . 8 7
Metropolitan areas under development . . . . . 3 3
Route miles (2). . . . . . . . . . . . . . . . 801 496
Buildings connected. . . . . . . . . . . . . . 277 206
Switches . . . . . . . . . . . . . . . . . . . 6 6
Employees. . . . . . . . . . . . . . . . . . . 387 255
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(1) Operating data as of June 30, 1996 includes information for the
Company's 40% joint venture interest in the Las Vegas, Nevada service
area.
(2) Route miles refers to the number of miles of telecommunications path in
which the Company-owned or leased fiber optic cables are installed.
RESULTS OF OPERATIONS
Revenues increased to $6.7 million in the three months ended June 30, 1996
from $5.4 million in the first quarter of 1996 and $1.0 million in the three
months ended June 30, 1995. For the six months ended June 30, 1996, revenues
increased to $12.0 million, compared to $1.4 million in the same period in 1995.
The increase was due to additional revenue generated from companies acquired in
the latter part of 1995 and expansion of the competitive access and dedicated
line service business in Tennessee. Of the
second quarter 1996 revenues, $4.3 million were derived from enhanced services,
$1.4 million from competitive access and dedicated line services and $1.0
million from local exchange resale services.
Operating expenses increased to $6.1 million in the three months ended June
30, 1996 from $4.7 million in the first quarter of 1996 and $1.2 million in the
three months ended June 30, 1995. For the six months ended June 30, 1996,
operating expenses increased to $10.8 million, compared to $1.8 million in the
same period in 1995. The increases are primarily due to increases in payroll-
related costs for operations personnel, consultant fees and local and long
distance service costs.
Selling, general and administrative expenses (S,G&A") increased to $7.0
million in the second quarter of 1996 from $5.5 million in the first quarter of
1995 and $1.5 million in the second quarter of 1995. For the six months ended
June 30, 1996, S,G&A expenses were $12.5 million, compared to $2.2 million in
the same period in 1995. S,G&A increased substantially as a result of
acquisitions and development of the Company's business to commence local
exchange service in six service areas in July 1996. Salaries and benefits,
marketing, consulting and legal fees, property taxes and facilities expenses
increased in 1996 compared to 1995.
Depreciation expense increased to $1.3 million and $2.4 million in the
three and six months ended June 30, 1995 and 1996, respectively from $0.2
million and $0.3 million in the same periods in 1995. The increases were
primarily the result of added telecommunications and office equipment as the
result of acquisitions and expansion of the Company's networks. Amortization of
intangible assets increased to $1.0 million and $1.8 million in the three and
six month periods ended June 30, 1996, respectively, from $0.5 million and $1.0
million in the same periods in 1995 due to the increase in intangible assets as
a result of acquisitions.
Interest expense (net of $501,000 capitalized) increased to $8.8 million in
the quarter ended June 30, 1996, primarily due to the interest expense
associated with the Notes. Pursuant to SFAS No. 34, the Company capitalizes a
portion of its interest costs as part of the construction cost of its
communications networks. Interest income increased to $3.8 million in the
quarter ended June 30, 1996 primarily due to the interest income earned on both
the pledged securities and the cash investments.
The Company is a Washington limited liability company, which is treated as
a partnership for federal and state income tax purposes. Accordingly, the
Company does not maintain a provision for income taxes in its Consolidated
Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations have required substantial capital investment for
the acquisition of companies and assets, the purchase of additional
telecommunications equipment, and the design and development of the Company's
networks. Since inception, the Company has funded approximately $55.0 million of
its expenditures through cash equity investments from two entities that are
controlled by Mr. Craig O. McCaw. In addition, the Company has issued $10.5
million of member units for the acquisition of certain assets as well as the
issuance of member units in a recapitalization of the Company and four of the
Company's operating subsidiaries, as a result of which each of these
subsidiaries is owned 99% by the Company and 1% by a corporation that is wholly
owned by Mr. McCaw, and assumed or incurred approximately $12.7 million of debt
obligations. Mr. McCaw, through Eagle River, made advances totaling $32.2
million to the Company primarily to fund the Company's capital expenditures
(excluding
acquisitions) and operating losses between January 1996 and April 1996. Such
advances were repaid with a portion of the proceeds from the Notes.
On April 25, 1996, the Company executed a purchase agreement pursuant to
which investors committed to purchase $350.0 million in senior notes with
interest due semi-annually. The Company used $117.7 million of the proceeds to
purchase U.S. government securities, representing funds sufficient to provide
for payment in full of interest on the senior notes through April 15, 1999 and
$32.2 million to repay the advances and accrued interest from Eagle River.
The Company expects to use the remaining proceeds (approximately $190
million net of transaction costs) in connection with (i) further construction
and expansion of the Company's existing networks, including the installation of
additional switches and switch peripherals, (ii) design, construction and
development of networks in adjacent or new geographic areas, (iii) connection of
additional buildings and customers to the Company's networks, (iv) further
development of the Company's enhanced communications services and (v)
acquisitions and the development of acquired businesses.
Beyond 1997, the Company's planned growth will require substantial
additional capital to fund capital expenditures, working capital and any future
operating losses. The Company will continue to evaluate additional revenue
opportunities in each of its metropolitan areas and, as and when attractive
additional opportunities develop, the Company plans to make additional capital
investments in its networks that might be required to pursue such opportunities.
The Company expects to meet its additional capital needs with the proceeds from
credit facilities and other borrowings, sales of additional debt securities,
sales or issuance of equity securities and through joint ventures. There can be
no assurance, however, that the Company will be successful in raising sufficient
additional capital on terms that it will consider acceptable or that the
Company's operations will produce positive consolidated cash flow in sufficient
amounts to service the notes. Failure to raise and generate sufficient funds may
require the Company to delay or abandon some of its planned future expansion or
expenditures, which could have a material adverse effect on the Company's growth
and its ability to compete in the telecommunications services industry.
In addition, the Company's operating flexibility with respect to certain
business matters is, and will continue to be, limited by covenants associated
with the Senior Notes. Among other things, these covenants limit the ability of
the Company and its subsidiaries to incur additional indebtedness, create liens
upon assets, apply the proceeds from the disposal of assets, make dividend
payments and other distributions on capital stock and redeem capital stock.
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.
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
NEXTLINK Communications, L.L.C.
Date: August 14, 1996 /s/ Kathleen H. Iskra
---------------------------------------
Kathleen H. Iskra
Vice President, Chief Financial Officer and
Treasurer
(Principal financial and accounting officer)
NEXTLINK Capital, Inc.
Date: August 14, 1996 /s/ Kathleen H. Iskra
---------------------------------------
Kathleen H. Iskra
Vice President, Chief Financial Officer and
Treasurer
(Principal financial and accounting officer)
NEXTLINK COMMUNICATIONS, L.L.C.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
27 Financial Data Schedule