UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
Commission file number: 000-22939
NEXTLINK Communications, Inc.
NEXTLINK Capital, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 91-1738221
Washington 91-1716062
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 108th Avenue NE, Suite 2200, Bellevue, WA 98004
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(Address of principal executive offices) (Zip Code)
(425) 519-8900
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (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 registrant 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, 1998, the number of shares of Class A and Class B common
stock of NEXTLINK Communications, Inc. issued and outstanding was 21,232,980
and 31,133,502, 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
H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the reduced
disclosure format.
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, 1998 ARE UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1998 1997
----------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 392,350 $ 389,074
Marketable securities......................................... 784,493 353,283
Accounts receivable, net...................................... 29,525 22,955
Other......................................................... 12,273 4,530
Pledged securities............................................ 42,992 41,425
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Total current assets...................................... 1,261,633 811,267
Pledged securities................................................. -- 21,185
Property and equipment, net........................................ 448,550 253,653
Goodwill, net ..................................................... 55,813 52,278
Other assets, net.................................................. 260,182 78,770
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Total assets.............................................. $ 2,026,178 $ 1,217,153
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.............................................. $ 24,634 $ 26,776
Accrued expenses.............................................. 32,119 13,082
Accrued interest payable...................................... 40,615 18,880
Notes payable and current portion of capital lease obligations 4,021 10,844
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Total current liabilities................................. 101,389 69,582
Long-term debt..................................................... 1,503,263 750,000
Capital lease obligations and other long-term liabilities.......... 16,096 10,842
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Total liabilities......................................... 1,620,748 830,424
Commitments and contingencies
Redeemable preferred stock, par value $0.01 per share, 25,000,000
shares authorized; 14% Preferred, aggregate liquidation
preference $358,646, 7,009,348 and 6,322,031 shares issued and
outstanding in 1998 and 1997, respectively; 6 1/2% Convertible
Preferred, 4,000,000 and 0 shares issued and outstanding in 1998
and 1997, respectively.......................................... 543,258 313,319
Common stock subject to redemption, par value $0.02 per share,
519,950 Class B shares issued and outstanding in 1997........... -- 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, 20,830,169
and 19,167,899 shares issued and outstanding in 1998 and
1997, respectively; Class B, 44,133,600 shares authorized,
33,133,502 and 33,746,573 shares issued and outstanding in
1998 and 1997, respectively................................. 352,018 330,561
Deferred compensation......................................... (12,894) (9,596)
Accumulated deficit........................................... (476,952) (252,505)
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Total shareholders' equity (deficit)...................... (137,828) 68,460
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Total liabilities and shareholders' equity (deficit)...... $ 2,026,178 $ 1,217,153
============= =============
See accompanying notes to unaudited interim consolidated financial statements.
NEXTLINK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ------------------------------
1998 1997 1998 1997
------------ ------------ ------------- ------------
Revenue $ 37,817 $ 13,390 $ 96,392 $ 35,058
Costs and expenses:
Operating........................... 32,828 13,916 85,448 35,857
Selling, general and administrative. 41,565 19,318 109,599 48,421
Deferred compensation............... 1,720 334 3,104 1,449
Depreciation........................ 11,334 3,898 26,243 9,952
Amortization........................ 3,444 1,631 10,898 4,508
---------- ---------- ---------- ----------
Total costs and expenses........ 90,891 39,097 235,292 100,187
---------- ---------- ---------- ----------
Loss from operations..................... (53,074) (25,707) (138,900) (65,129)
Interest income.......................... 21,559 4,868 56,116 15,560
Interest expense......................... (37,434) (10,746) (99,050) (32,787)
---------- ---------- ---------- ----------
Net loss................................. $ (68,949) $ (31,585) $ (181,834) $ (82,356)
========== ========== ========== ==========
Preferred stock dividends and accretion
of preferred stock redemption
obligation, including issue costs... (15,734) (10,798) (42,613) (28,151)
---------- ---------- ---------- ----------
Net loss applicable to common shares..... $ (84,683) $ (42,383) $ (224,447) $ (110,507)
========== ========== ========== ==========
Net loss per share....................... $ (1.57) $ (1.08) $ (4.18) $ (2.87)
========== ========== ========== ==========
Shares used in computation of net loss
per share........................... 53,883,632 39,257,126 53,658,325 38,536,851
========== ========== ========== ==========
See accompanying notes to unaudited interim consolidated financial statements.
NEXTLINK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------------
1998 1997
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OPERATING ACTIVITIES:
Net loss............................................................ $ (181,834) $ (82,356)
Adjustments to reconcile net loss to net cash used in operating
activities:
Deferred compensation expense.................................. 3,104 1,449
Equity in loss of affiliates................................... 2,635 1,688
Depreciation and amortization.................................. 37,141 14,460
Accretion of interest on senior notes.......................... 18,940 --
Changes in assets and liabilities, net of effects from acquisitions:
Accounts receivable............................................ (6,570) (3,062)
Other assets................................................... (10,588) (662)
Accounts payable............................................... (8,016) (6,328)
Accrued expenses and other liabilities......................... 18,683 5,370
Accrued interest payable....................................... 21,735 10,208
------------ ------------
Net cash used in operating activities............................... (104,770) (59,233)
INVESTING ACTIVITIES:
Purchase of property and equipment.................................. (209,136) (89,146)
Net assets acquired in business and asset acquisitions (net of cash
acquired)........................................................ -- (41,239)
Cash withdrawn from escrow to be used in business acquisition....... -- 6,000
Assets acquired in network lease agreement.......................... (92,000) --
Contribution to NEXTBAND for purchase of spectrum licenses.......... (67,354) --
Investments in unconsolidated affiliates............................ (13,337) (6,342)
Maturity of pledged securities...................................... 19,636 18,049
Purchase of marketable securities................................... (3,347,468) (28,812)
Sale of marketable securities....................................... 2,916,258 --
------------ ------------
Net cash used in investing activities............................... (793,401) (141,490)
-- Continued --
NEXTLINK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------------
1998 1997
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FINANCING ACTIVITIES:
Net proceeds from issuance of redeemable preferred stock............ $ 193,824 $ 274,000
Repayment of note payable and capital lease obligations............. (7,346) (1,380)
Repayment of payable to affiliates ................................. -- (1,500)
Proceeds from issuance of common stock upon exercise of stock options 2,021 111
Dividends paid on convertible preferred stock....................... (6,500) --
Repayment (issuance) of loans to related parties.................... 2,357 (2,825)
Proceeds from issuance of senior notes (net of discount)............ 734,323 --
Costs incurred in connection with financing......................... (17,232) (402)
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Net cash provided by financing activities........................... 901,447 268,004
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Net increase in cash and cash equivalents........................... 3,276 67,281
Cash and cash equivalents, beginning of period...................... 389,074 76,807
------------ ------------
Cash and cash equivalents, end of period............................ $ 392,350 $ 144,088
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Noncash financing and investing activities:
Redeemable preferred stock dividends, paid in redeemable
preferred shares............................................. $ 34,366 $ 20,413
============ ============
Accrued redeemable preferred stock dividends, payable in
redeemable preferred shares, and accretion of preferred stock
redemption obligation and issue costs........................ $ 1,747 $ 7,127
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Issuance of Class B common stock for purchase of minority
interests.................................................... $ 5,727 $ --
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Capital lease obligations assumed.............................. $ 5,065 $ 4,725
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Class A common stock issued under lease arrangement............ $ -- $ 1,400
============ ============
Cash paid for interest........................................... $ 58,860 $ 22,579
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See accompanying notes to unaudited interim consolidated financial statements.
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 Delaware 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 Company's investment in Telecommunications of
Nevada, L.L.C. (Nevada L.L.C.), 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 L.L.C. 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 are unaudited and have been prepared
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 25, 1998.
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, 1998 are not necessarily indicative of the results to be expected
for the full year.
2. FINANCINGS
DEBT
On March 3, 1998, the Company completed the sale of $335.0 million in
aggregate principal amount of 9% Senior Notes due March 15, 2008 (9% Senior
Notes). Proceeds from the sale net of discounts, underwriting commissions,
advisory fees and expenses totaled approximately $326.5 million. Interest
payments on the 9% Senior Notes are due semi-annually. The 9% Senior Notes
are redeemable at the option of the Company, in whole or in part, beginning
March 15, 2003.
On April 1, 1998, the Company completed the sale of 9.45% Senior Discount
Notes (9.45% Notes), due April 15, 2008. The 9.45% Notes were issued at a
discount from their principal amount to generate aggregate gross proceeds to the
Company of approximately $400.0 million. Proceeds net of underwriting
commissions, advisory fees and expenses totaled $390.9 million. The 9.45% Notes
accrete at a rate of 9.45% compounded semi-annually, to an aggregate principal
amount of approximately $637.0 million by April 15, 2003. No cash interest will
accrue on the 9.45% Notes until April 15, 2003. Interest will become payable in
cash semi-annually beginning on October 15, 2003. The 9.45% Notes are redeemable
at the option of the Company, in whole or in part, at any time after April 15,
2003.
The indentures pursuant to which the 9% Senior Notes and the 9.45% Notes
(the Notes) are issued contain certain covenants that, among other things, limit
the ability of the Company and its subsidiaries to incur additional
indebtedness, issue stock in subsidiaries, pay dividends or make other
distributions, repurchase equity interests or
subordinated indebtedness, engage in sale and leaseback transactions, create
certain liens, enter into certain transactions with affiliates, sell assets
of the Company and its subsidiaries, and enter into certain mergers and
consolidations.
In the event of a change in control or asset disposition of the Company as
defined in the indentures, holders of the Notes will have the right to require
the Company to purchase their Notes, in whole or in part, at a price equal to
101% of the principal amount thereof, plus accrued and unpaid interest, if any,
thereon to the date of purchase. The Notes are senior unsecured obligations of
the Company, and are subordinated to all current and future indebtedness of the
Company's subsidiaries, including trade payables.
REDEEMABLE PREFERRED STOCK
On March 31, 1998, the Company completed the sale of 4,000,000 shares of
6 1/2% cumulative convertible preferred stock (6 1/2% Preferred Stock) with a
liquidation preference of $50 per share. The sale generated gross proceeds to
the Company of $200.0 million, and proceeds net of underwriting discounts,
advisory fees and expenses of $193.8 million. Each share of 6 1/2% Preferred
Stock is convertible, at the option of the holder, into 1.145 shares of the
Company's Class A common stock (subject to adjustments in certain
circumstances). The Company may cause such conversion rights to expire if the
closing price of the Class A common stock exceeds 120% of an implied conversion
price (as defined) for 20 days in a 30 consecutive day trading period after
April 15, 2001 and through April 15, 2006. Dividends on the 6 1/2% Preferred
Stock accrue from March 31, 1998 and are payable in cash quarterly, beginning on
June 30, 1998, at an annual rate of 6 1/2% of the liquidation preference
thereof. The Company is required to redeem all of the 6 1/2% Preferred Stock
outstanding on March 31, 2010 at a redemption price equal to 100% of the
liquidation preference thereof, plus accumulated and unpaid dividends to the
date of redemption.
3. NETWORK LEASE
In February 1998, the Company entered into a 20-year capital lease for
exclusive rights to multiple fibers and innerducts throughout New York, New
Jersey, Connecticut, Pennsylvania, Delaware, Maryland and Washington D.C. The
Company paid $92.0 million in the transaction, of which $80.3 million was placed
into escrow pending completion and delivery of segments of the network route to
the Company. The payment was recorded as a long-term asset, and will be
reclassified as property and equipment as portions of the network are completed.
The Company has the option to renew the lease for two additional 10-year terms.
4. JOINT VENTURES
NEXTBAND
In January 1998, the Company and Nextel Communications, Inc. (Nextel), a
nationwide provider of wireless telephone services, formed a joint venture
called NEXTBAND Communications, L.L.C. (NEXTBAND), which is owned 50% each by
the Company and Nextel. NEXTBAND was the successful bidder in 42 markets
covering approximately 105 million POPs, or persons located within the licensed
areas owned, in the FCC's local multipoint distribution service (LMDS) auctions,
which concluded in March 1998. The Company has contributed $67.4 million to
NEXTBAND, representing its pro rata share of NEXTBAND's total bid in the LMDS
auctions. The Company is evaluating means to use its access to NEXTBAND's LMDS
spectrum to enhance its ability to connect customers to its fiber rings, and to
deploy wireless local loop technologies using LMDS frequencies where it
determines it cost effective to do so.
INTERNEXT
In July 1998, the Company announced the formation of INTERNEXT L.L.C.,
which is beneficially owned 50% each by the Company and Eagle River. INTERNEXT
has entered into an agreement with Level 3 Communications, LLC (Level 3). Level
3 is constructing a national fiber optic network that is expected to cover more
than 16,000 route miles with six or more conduits and connect 50 cities in the
United States and Canada. Pursuant to this agreement, INTERNEXT will receive an
exclusive interest in 24 fibers in a shared, filled conduit, one entire empty
conduit and the right to 25% of the fibers pulled through the sixth and any
additional conduits in the network. INTERNEXT will pay $700.0 million in
exchange for these rights, the majority of which will be payable as
segments of the network are completed and accepted by INTERNEXT, which is
expected to occur substantially during 2000 and 2001. The Company has
guaranteed 50% of the financial obligations of INTERNEXT under this agreement
and, together with Eagle River, has also guaranteed the performance of
certain other obligations of INTERNEXT thereunder. The Company anticipates
that Nextel will acquire a one-third ownership interest in INTERNEXT, which
would reduce the Company's beneficial interest in and obligations with
respect to INTERNEXT to one-third.
5. RECLASSIFICATIONS
Certain reclassifications have been made to prior period amounts in order
to conform to the current presentation.
6. SUBSEQUENT EVENT
On November 12, 1998, the Company completed the sale of $500.0 million in
aggregate principal amount of 10 3/4% Senior Notes due November 15, 2008
(10 3/4% Senior Notes). Proceeds from the sale net of underwriting commissions,
advisory fees and expenses totaled approximately $488.5 million. Interest
payments on the notes are due semi-annually, beginning May 15, 1999. The 10 3/4%
Senior Notes are redeemable at the option of the Company, in whole or in part,
beginning November 15, 2003.
The indenture pursuant to which the 10 3/4% Senior Notes are issued
contains certain covenants that, among other things, limit the ability of the
Company and its subsidiaries to incur additional indebtedness, issue stock in
subsidiaries, pay dividends or make other distributions, repurchase equity
interests or subordinated indebtedness, engage in sale and leaseback
transactions, create certain liens, enter into certain transactions with
affiliates, sell assets of the Company and its subsidiaries, and enter into
certain mergers and consolidations. In addition, under the indenture, the
Company has agreed to use the net proceeds from the sale for expenditures
relating to the construction, improvement and acquisition of new and existing
networks and services and direct or indirect investments in certain joint
ventures to fund similar expenditures.
In the event of a change in control or asset disposition of the Company as
defined in the indentures, holders of the 10 3/4% Senior Notes will have the
right to require the Company to purchase their 10 3/4% Senior Notes, in whole or
in part, at a price equal to 101% of the principal amount thereof, plus accrued
and unpaid interest, if any, thereon to the date of purchase. The 10 3/4% Senior
Notes are senior unsecured obligations of the Company, and are subordinated to
all current and future indebtedness of the Company's subsidiaries, including
trade payables.
PART I. FINANCIAL INFORMATION
Item 1(b). FINANCIAL STATEMENTS
NEXTLINK CAPITAL, INC.
BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30,
1998 1997
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ASSETS
Cash in bank........................................... $ 100 $ 100
============ ============
SHAREHOLDER'S EQUITY
Common stock, no par value,
1,000 shares authorized, issued and outstanding...... $ 100 $ 100
============ ============
NOTES TO BALANCE SHEETS
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 25,
1998.
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 pursued this
strategy by constructing, acquiring, leasing fibers or capacity on, and entering
into agreements to acquire local telecommunications networks.
The Company develops and operates high capacity, local fiber optic networks
with broad market coverage in a growing number of markets across the United
States. In its switched local service markets, the Company offers its customers
a bundled package of local and long distance services and also offers dedicated
transmission and competitive access services to long distance carriers and end
users. 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 Company currently operates 19 facilities-based networks providing
switched local and long distance services in 33 markets in 11 states. The
Company serves larger markets including New York, Los Angeles, Chicago, Atlanta
and the San Francisco Bay Area, medium-sized markets such as Salt Lake City and
Nashville, and clusters of smaller markets in Orange County, California and
central Pennsylvania. The Company anticipates developing additional new markets
throughout a majority of the nation's top 30 markets which, together with its
existing markets, are expected to have a total of approximately 27 million
addressable business lines by the end of 2000. The Company plans to launch
service in Dallas, Denver and Miami in the fourth quarter of 1998 and in San
Diego, Washington, D.C. and Seattle in the first half of 1999. The Company is
also developing a national network strategy to enable it to offer its customers
complete, end-to-end voice and data communications services over NEXTLINK-owned
facilities.
The table below provides selected key financial and operating data (dollars
are in thousands):
AS OF AND
FOR THE THREE MONTHS ENDED
SEPTEMBER 30,
1998 1997
------------- --------------
FINANCIAL DATA:
Gross property and equipment.................. $ 511,204 $ 214,320
EBITDA (1) .................................... $ (36,576) $ (19,844)
OPERATING DATA (2):
Route miles (3)................................ 2,150 1,757
Fiber miles (4)................................ 158,987 124,399
On-net buildings connected (5)................. 736 479
Off-net buildings connected (6)................ 9,688 1,404
Switches installed............................. 18 13
Access lines in service (7).................... 134,107 30,944
Employees .................................... 2,065 1,027
(1) EBITDA represents net loss before interest expense, interest income,
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 includes 100% of 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 carrier
(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
that are provided through resale of Centrex services, for which the
Company is billing services. The Company serviced 3,312 resold access
lines as of September 30, 1998. The Company defines an access line as
a telephone connection between a customer purchasing local telephone
services and NEXTLINK. This connection does not include the concept of
access line equivalents (ALEs), and is a one-for-one relationship with
no multipliers used for trunk ratios, except for those trunks over
which primary rate interface (PRI) service is provided, which are
counted as 23 access lines.
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 September 30, 1998, the Company
had 16 operational Nortel DMS 500 switches, including one switch in its NEXTLAB
facility, and currently plans to install three additional switches by the end of
1998. NEXTLAB is 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 development of the Company's businesses and the construction,
acquisition and expansion of its networks require significant expenditures,
substantial portions 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.
RESULTS OF OPERATIONS
Revenue increased 182% to $37.8 million during the third quarter of 1998,
from $13.4 million in the same period in 1997. Year to date revenue of $96.4
million represented a 175% increase from the $35.1 million reported for the
comparable period in 1997. The increase was driven by 290% growth in revenues
from bundled local and long distance services and dedicated services, as well as
by the acquisitions of Start Technologies Corporation (Start) and Chadwick
Telecommunications Corporation (Chadwick) in the fourth quarter of 1997.
Revenues reported in the third quarter of 1998 included $31.5 million derived
from local and long distance, competitive access, dedicated line services and
shared tenant services and $6.3 million derived from enhanced communications
services, primarily interactive voice response (IVR) services. The Company's IVR
revenue comprised 16% and 28% of the Company's total revenues during the third
quarter of 1998 and 1997, respectively.
The Company increased the number of customer access lines added during the
quarter from 30,053 in the second quarter of 1998 to 31,220 during the third
quarter of 1998. As of September 30, 1998, the Company had
134,107 access lines in service, compared to 50,131 as of December 31, 1997
and 30,944 as of September 30, 1997. 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 136% in the third quarter of 1998 to $32.8 million,
an increase of $18.9 million over the third quarter of 1997. For the nine months
ended September 30, 1998, operating expenses rose $49.6 million, or 138%, over
the same period in 1997. These increases were attributed to increased network
costs related to provisioning higher volumes of local, long distance and
enhanced communications services, an increase in employees and an increase in
other related costs primarily to expand the Company's switched local and long
distance service businesses in its existing and planned markets. To a lesser
extent, the acquisitions of Start and Chadwick in the fourth quarter of 1997
also contributed to the increase in operating costs over those in the third
quarter of 1997.
Selling, general and administrative (SG&A) expenses include salaries and
related personnel costs, facilities expenses, sales and marketing,
information systems costs, consulting and legal fees and equity in loss of
affiliates. SG&A expenses increased 115% and 126% in the three and nine-month
periods ended September 30, 1998 as compared to the corresponding periods in
1997. The increases were due to 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 Stock Option 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 Start and Chadwick acquisitions in
the fourth quarter of 1997.
Interest expense increased 248% in the third quarter of 1998 over the
comparable period in the prior year due to an increase in the Company's
average outstanding indebtedness over the respective periods. Interest
expense will increase in future periods in conjunction with the sale of
$500.0 million in aggregate principal amount of 10 3/4% Senior Notes on
November 12, 1998. See "--Liquidity and Capital Resources." Pursuant to
Statement of Financial Accounting Standards No. 34, the Company capitalizes a
portion of its interest costs as part of the construction cost of its
communications networks. Capitalized interest during the first nine months of
1998 totaled $3.0 million. Interest income results from investment of excess
cash as well as certain securities that have been pledged as collateral for
interest payments on the 12 1/2% Senior Notes. The increase in interest
income for the three and nine-month periods in 1998 over the same periods in
1997 corresponded to the increase in the Company's average outstanding cash
balances.
LIQUIDITY AND CAPITAL RESOURCES
The competitive local telecommunications service business is a
capital-intensive business. The Company's existing operations have required and
will continue to require substantial capital investment for the acquisition and
installation of fiber, electronics and related equipment in order to provide
switched services in the Company's
networks and the funding of operating losses during the start-up phase of
each market. In addition, the Company's strategic plan calls for expansion
into additional market areas. Such expansion will require significant
additional capital for: potential acquisitions of businesses or assets;
design, development and construction of new networks; and the funding of
operating losses during the start-up phase of each market. During the first
nine months of 1998, the Company used $104.8 million in cash for operating
activities, compared to $59.2 million for the same period in the prior year.
The increase was primarily due to a substantial increase in the Company's
activities associated with the continued development and expansion of
switched local and long distance service operations. During the first nine
months of 1998, the Company invested an additional $301.1 million in property
and equipment and acquisitions of telecommunications assets. During the same
period in 1997, the Company invested $130.7 million in property and
equipment, acquisitions of telecommunications assets and businesses and
equity investments in telecommunications businesses.
In July 1998, the Company announced the formation of INTERNEXT L.L.C.,
which is beneficially owned 50% each by the Company and Eagle River Investments,
L.L.C (Eagle River). INTERNEXT entered into an agreement with Level 3
Communications LLC (Level 3). Level 3 is constructing a national fiber optic
network that is expected to cover more than 16,000 route miles with six or more
conduits and connect 50 cities in the United States and Canada. Pursuant to this
agreement, INTERNEXT will receive an exclusive interest in 24 fibers in a
shared, filled conduit, one entire empty conduit and the right to 25% of the
fibers pulled through the sixth and any additional conduits in the network.
INTERNEXT will pay $700.0 million in exchange for these rights, the majority of
which will be payable as segments of the network are completed and accepted by
INTERNEXT, which is expected to occur substantially during 2000 and 2001. The
Company has guaranteed 50% of the financial obligations of INTERNEXT under this
agreement and, together with Eagle River, has also guaranteed the performance of
certain other obligations of INTERNEXT thereunder. The Company anticipates that
Nextel Communications, Inc. (Nextel) will acquire a one-third ownership interest
in INTERNEXT, which would reduce the Company's beneficial ownership interest in
and obligations with respect to INTERNEXT to one-third. The Company is in the
process of defining its plans for implementation of a national network
strategy, which will require additional capital expenditures.
In February 1998, the Company signed a definitive agreement with Metromedia
Fiber Network for exclusive rights to multiple fibers and innerducts for 20
years, with two 10-year renewals. The route covered by the agreement extends
from Manhattan to White Plains (NY), to Stamford (CT), to Newark (NJ) and south
from Manhattan through Philadelphia, Wilmington (DE), Baltimore, and to
Washington (DC). The route will offer frequent splice points within metropolitan
areas and on routes between metropolitan areas, as well as provide access to
ILEC central and tandem switching offices. The Company paid $92.0 million in
cash for this transaction, $80.3 million of which was placed into escrow, to be
released as segments of the route are constructed and delivered to the Company.
In January 1998, the Company and Nextel formed NEXTBAND, a joint venture
that is owned 50% each by the Company and Nextel. NEXTBAND was the successful
bidder in 42 markets in the FCC's local multipoint distribution service (LMDS)
auctions. The Company's pro rata share of NEXTBAND's total bid in the LMDS
auctions was $67.4 million, which was paid in full in June 1998. The Company is
in process of defining its operational and financial plans for implementation of
an LMDS strategy, which will likely involve additional capital expenditures.
On March 3, 1998, the Company completed the sale of $335.0 million in
aggregate principal amount of 9% Senior Notes due March 15, 2008. Proceeds from
the sale net of discounts, underwriting commissions, advisory fees and expenses
totaled approximately $326.5 million. Interest payments on the 9% Senior Notes
are due semi-annually, beginning September 1998.
On March 31, 1998, the Company completed the sale of 4,000,000 shares of
6 1/2% cumulative convertible preferred stock (6 1/2% Preferred Stock) with a
liquidation preference of $50 per share. The sale generated gross proceeds to
the Company of $200.0 million, and proceeds net of underwriting discounts,
advisory fees and expenses of $193.8 million. Each share of 6 1/2% Preferred
Stock is convertible, at the option of the holder, into 1.145 shares of the
Company's Class A common stock (subject to adjustments in certain
circumstances). Dividends on the 6 1/2% Preferred Stock accrue from March 31,
1998 and are payable quarterly in cash, beginning on June 30, 1998.
On April 1, 1998, the Company completed the sale of 9.45% Senior Discount
Notes (9.45% Notes), due April 15, 2008. The 9.45% Notes were issued at a
discount from their principal amount to generate aggregate gross proceeds to the
Company of approximately $400.0 million. Proceeds net of underwriting
commissions, advisory fees and expenses totaled $390.9 million. The 9.45% Notes
accrete at a rate of 9.45% compounded semi-annually, to an aggregate principal
amount of approximately $637.0 million by April 15, 2003. No cash interest will
accrue on the Notes until April 15, 2003. Interest will become payable in cash
semi-annually beginning on October 15, 2003.
On November 12, 1998, the Company completed the sale of $500.0 million in
aggregate principal amount of 10 3/4% Senior Notes due November 15, 2008.
Proceeds from the sale net of underwriting commissions, advisory fees and
expenses totaled approximately $488.5 million. Interest payments on the notes
are due semi-annually, beginning May 1999. Pursuant to a covenant in the
indenture under which the 10 3/4% Senior Notes were issued, the Company has
agreed to use the net proceeds from the sale for expenditures relating to the
construction, improvement and acquisition of new and existing networks and
services and direct or indirect investments in certain joint ventures
(including NEXTBAND and INTERNEXT) to fund similar expenditures.
The Company will use the net proceeds from the sale of the 9% Senior
Notes, the 6 1/2% Preferred Stock, the 9.45% Notes, the 10 3/4% Senior Notes
(subject to the limitations described above) and existing unrestricted cash
balances for expenditures relating to the development, 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, (iv) the acquisition of LMDS spectrum purchased in the FCC's
auction and the construction and deployment of associated facilities and (v)
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, 1998, the Company had unrestricted cash and investments
of $1,176.8 million and $1,665.3 million on a pro forma basis after giving
effect to the sale of the 10 3/4% Senior Notes. The Company's current plan
contemplates an aggressive expansion into a number of new markets throughout
the United States. The Company may pursue various alternatives for achieving
its growth strategy, including: additional network construction; additional
leases of network capacity from third party providers; acquisitions of
existing networks; and spectrum that was purchased during the LMDS auction
and associated facilities construction and deployment. The Company also
anticipates that a substantial amount of additional capital expenditures will
be made in 1999 and beyond. The funding of these capital expenditures is
expected to be provided by existing cash balances, future vendor and/or
credit facilities, future public or private sales of debt securities, future
sales of public or private capital stock and 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, the 9 5/8% Senior Notes, the 9% Senior Notes, the
9.45% Notes and the 10 3/4% Senior Notes (collectively referred to as the
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 14% Senior Exchangeable Redeemable Preferred Shares (14% 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 Notes and the 14% Preferred Shares as of September 30,
1998.
IMPACT OF YEAR 2000
Certain of the Company's older computer systems and applications were
written to define a given year with abbreviated dates using the last two
digits in a year rather than the entire four digits. As a result, when
computer systems attempt to process dates both before and after January 1,
2000, two digit year fields may create processing ambiguities that can cause
errors and system failures. For example, systems and applications may have
time-sensitive software that recognize an abbreviated year "00" as the year
1900 rather than the year 2000. These errors or failures may have limited
effects, or the effects may be widespread, depending on the computer chip,
system, or software, and its location and function.
STATE OF READINESS
The Company is currently assessing the impact of the Year 2000, and a
formal Year 2000 plan (the "Plan") is expected to be completed and adopted
by the Company by year-end 1998. The purpose of the Plan will be to develop
and perform reasonable steps intended to prevent the Company's critical
operational functions from being impaired due to the Year 2000 problem. The
first phase of the Company's Year 2000 assessment, to be completed by December
1998, includes: 1) taking an inventory of Company-wide systems and equipment to
determine the extent of testing required for Year 2000 compliance (generally
defined as the ability of information systems to accurately process data
from, into and between the twentieth and twenty-first centuries, including
leap year calculations), 2) developing a strategy to manage vendors' and
other outside entities' progress toward Year 2000 compliance, 3) designing a
Company-wide Year 2000 communications plan, and 4) creating a risk assessment
and impact analysis from which the Plan can be developed. The Company has
engaged outside consultants to aid in formulating and implementing the Plan.
The Company's assessments to date have indicated that its major
operational support systems, including its billing, order management, network
management, and financial systems are Year 2000 compliant. In addition, the
Company has received positive confirmation from its vendor that the Company's
Nortel DMS 500 switches are also Year 2000 compliant.
As part of the Plan and ongoing Year 2000 assessment, the Company will
continue its testing of existing telecommunications equipment and back office
systems to access the effects of the Year 2000 problem on those areas that
would result in significant impairment to the Company's critical operations.
Through its NEXTLAB facility, which operates separate and apart from the
Company's operational switches, the Company has the means to test switch
configurations without impacting its networks or customers, and the Company
is using NEXTLAB to independently verify Year 2000 compliance of its network
systems and equipment.
The Plan will also address the potential adverse effects to the Company
in the event that the computer, telecommunications, and other systems of
outside entities' (including vendors, customers, and local and interexchange
carriers and Internet service providers with which the Company interchanges
traffic) are not Year 2000 compatible. The Company does not have control of
these outside entities or their systems. However, the Company's Plan will
include ongoing identification of and contact with such outside entities
whose systems may have a substantial effect on the Company's ability to
continue to conduct the critical aspects of its operations without disruption
from Year 2000 problems. In the event such outside systems are identified,
the Company will work with the outside entities in a reasonable attempt to
inventory, assess, analyze, test, and develop contingency plans for the
Company's connections to these outside entities and their systems and to
determine the extent to which they are, or can be made to be, Year 2000
compliant.
COSTS TO ADDRESS YEAR 2000 ISSUES
The Company has not incurred material historical costs for Year 2000
awareness, inventory, assessment, analysis, conversion, testing, or
contingency planning. Further, the Company anticipates that its future costs
for these purposes will not be material.
Year 2000 costs are difficult to estimate accurately because of
unanticipated vendor delays, technical difficulties, the impact of tests of
outside entities' systems, and similar events. Although management believes
that its estimates are reasonable, there can be no assurance that the actual
costs of implementing
the Plan will not differ materially from the estimated costs or that the
Company will not be materially adversely affected by Year 2000 issues.
Furthermore, the estimated costs of implementing the Plan do not consider the
costs, if any, that might be incurred as a result of Year 2000-related
failures that occur despite the Company's implementation of the Plan.
YEAR 2000 RISK FACTORS
Between now and the year 2000 there will be increased competition for
people with the technical and managerial skills necessary to deal with the
Year 2000 problem. The Company believes it employs an adequate number of
personnel skilled in dealing with the Year 2000 problem and has retained
outside consultants who bring additional skilled people to deal with the Year
2000 problem as it affects the Company. Nevertheless, the Company could face
shortages of skilled personnel or other resources, such as Year 2000
compliant computer chips. These shortages might delay or otherwise impair the
Company's ability to assure that its critical systems are Year 2000
compliant. Outside entities could face similar problems that could materially
affect the Company. The Company believes that the possible impact of the
shortage of skilled people and resources is not, and will not be, unique to
the Company.
The Company believes that its critical systems will be Year 2000
compliant before January 1, 2000. However, there is no assurance that the
Plan will succeed in accomplishing its purposes and unforeseen circumstances
may arise during implementation of the Plan that would materially and
adversely affect the Company.
The Company is taking reasonable steps to identify, assess, and, where
appropriate, replace devices that contain embedded chips. Despite these
reasonable efforts, the Company may not be able to find and remediate all
embedded chips in all of the Company's systems. Further, outside entities on
which the Company depends also may not be able to find and remediate all
embedded chips in their systems. Some chips that are not Year 2000 compliant
may create system disruptions or failures, which may, in turn, cause
disruptions or failures in other systems. These cascading problems could
impair the Company's ability to serve its customers and otherwise fulfill
contractual and legal obligations. The Company believes that the possible
adverse impact of the embedded chip problem is not, and will not be, unique
to the Company.
The Company cannot ensure that suppliers upon which it depends for
essential supplies and services will convert and test their critical systems
and processes in a timely manner. Failure or delay by all or some of these
entities, including federal, state, or local governments, to make their
systems and processes Year 2000 compliant could create substantial
disruptions having a material adverse effect on the Company's operations.
In a recent Securities and Exchange Commission release regarding Year
2000 disclosure, the Securities and Exchange Commission stated that public
companies must disclose the most reasonably likely worst case Year 2000
scenario. Although it is not possible to assess the likelihood of any of the
following events, each must be included in a consideration of worst case
scenarios: widespread failure of electrical, gas, and similar supplies
serving the Company; widespread disruption of the services provided by common
communications carriers; similar disruption to the means and modes of
transportation for the Company and its employees, contractors, suppliers, and
customers; significant disruption to the Company's ability to gain access to,
and remain working in, office buildings and other facilities; the failure of
substantial numbers of the Company's critical computer hardware and software
systems, including both internal business systems and systems controlling
operational facilities such as electrical generation, transmission, and
distribution systems; and the failure of outside entities' systems, including
systems related to banking and finance. Among other things, the Company could
face substantial claims by customers or loss of revenue due to service
interruptions, inability to fulfill contractual obligations or to bill
customers accurately and on a timely basis, and increased expenses associated
with litigation, stabilization of operations following critical system
failures, and the execution of contingency plans. The Company could also
experience an inability by customers and others to pay, on a timely basis or
at all, obligations owed to the Company. Under these circumstances, the
adverse effects on the Company would be material, although not quantifiable
at this time. Further, the cumulative effect of these failures could have a
substantial adverse effect on the
economy, domestically and internationally. The adverse effect on the Company
from a domestic or global recession or depression also could be material,
although not quantifiable at this time.
The Company will continue to monitor business conditions to assess and
quantify material adverse effects, if any, that may result from the Year 2000
problem.
CONTINGENCY PLANS
As part of the Plan, the Company is developing contingency plans that
deal with two aspects of the Year 2000 problem: 1) that the Company, despite
its good faith and reasonable efforts, may not have satisfactorily addressed
the Year 2000 problem with respect to its critical internal systems and 2)
that outside entities' systems may not be Year 2000 ready. The Company's
contingency plans will be designed to minimize the disruptions or other
adverse effects resulting from Year 2000 incompatibilities with respect to
critical functions or systems.
The Company's contingency plans will contemplate an assessment of all
its critical internal information technology systems and its internal
operational systems that use computer-based controls. In addition, the
Company will assess any critical disruptions due to Year 2000-related
failures that are external to the Company. These processes will begin January
1, 2000, and will continue as long as circumstances require.
The Company's contingency plans will include the creation of teams that
will be prepared to respond immediately and as necessary to critical Year
2000 problems as soon as they become known. The composition of teams that are
assigned to deal with such problems will vary according to the nature,
significance, and location of the problem.
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. Such forward-looking statements include, but are not limited to:
the Company's plans to build, acquire or develop networks and offer services in
new areas, expand its current networks and explore the acquisition or licensing
of additional enhanced communications services and other telecommunications
service providers (and the effects of such efforts); the Company's development
of a national strategy for end-to-end communications services; the Company's
presence in the marketplace and its ability to provide a single source solution
for the telecommunications needs of its customers; the Company's anticipated
development of and entry into new markets and market expansion (and timing
thereof); its expected number of addressable business lines in markets where the
Company operates and by the end of 2000; its plans to launch service in various
cities; its plans to install additional switches by the end of 1998; its
expectation regarding incremental revenues, incremental operating expenses and
contributions to cash flow; the Company's belief regarding its financial
performance and traffic flow over its networks; its expectations regarding
revenue from access lines as a percentage of total revenues; increases in
interest expense in future periods; its requirements for capital investment; its
use of proceeds from various financings; its anticipated capital expenditures;
its intentions regarding LMDS technology; matters related to the national
network being constructed by Level 3, including network specifications,
INTERNEXT's interest therein, the delivery of segments thereunder, and the cost
thereof and the timing of payments for the network; the participation by other
entities (including Nextel) in certain joint ventures and financial matters
related thereto; and other statements contained herein regarding matters that
are not historical facts. Management wishes to caution the reader that these
forward-looking statements are only predictions. These statements are based on
a number of assumptions that ultimately could prove inaccurate and, therefore,
no assurance can be given that the future results will be achieved. Actual
events or results may differ materially as a result of a number of factors,
including those identified in the Company's annual report on Form 10-KSB (File
No. 333-04603). Factors that could affect performance include: the level of
the Company's future negative cash flows and operating losses incurred by the
Company until it establishes an adequate revenue base and generates
substantial revenues from the provision of switched local and long distance
services; successfully generating or raising on terms that the Company will
consider acceptable sufficient capital to accommodate planned future expansion
and expenditures; continued attraction and retention of qualified managerial,
professional and technical personnel; timely installation of the required
switches, fiber optic cable and associated electronics necessary to provide
switched local service in a manner that will permit the resolution of
technical problems; successfully negotiating new and, to the extent necessary,
renegotiating existing interconnection agreements; successfully developing
effective systems relating to ordering, provisioning and billing for
telecommunications services; successfully offering, marketing and selling
switched local services and other enhanced products and services in all of the
Company's networks as quickly as practicable; sufficient access to the ILEC's
networks and adequate cooperation therefrom to connect new customers to the
Company's network on a timely basis; identifying, financing and completing
suitable acquisitions; maintaining existing, and obtaining and maintaining
new, franchises, permits and rights-of-way and any required governmental
authorizations, franchises and permits on a timely basis; competition from
incumbent providers and new entrants; the nature of regulatory, legislative
and judicial developments; rapid and significant changes in technology; and
risks related to the Company's national network and LMDS strategies. These are
representative of factors that could affect the outcome of the forward-looking
statements. In addition, such statements could be affected by general industry
and market conditions and economic conditions including interest rate
fluctuations.
NEW ACCOUNTING STANDARD
In April 1998, the AICPA released Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" (SOP 98-5). The new standard requires that all
entities expense costs of start-up activities as those costs are
incurred. SOP 98-5 defines "start-up costs" as those costs directly related
to pre-operating, pre-opening, and organization activities. This standard
must be adopted in fiscal years beginning after December 15, 1998. The adoption
of SOP 98-5 will not have a material impact the Company's financial position.
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
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 (IPO) 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. None of the
proceeds from this offering had been used as of September 30, 1998.
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 9 5/8% 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 is expected to be substantially the same as the
Company's initial public offering. Approximately $349.8 million of the
proceeds from this offering had been used as of September 30, 1998,
$209.1 million of which was used for the purchase of property and
equipment, $20.5 million for the network lease agreement entered into
in February 1998, and the remainder was used to fund the Company's
operations and working capital requirements.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of NEXTLINK Communications,
Inc. (1)
3.2 By-laws of NEXTLINK Communications, Inc. (1)
3.3 Articles of Incorporation of NEXTLINK Capital, Inc. (2)
3.4 By-laws of NEXTLINK Capital, Inc. (2)
4.1 Form of Exchange Note Indenture, by and among NEXTLINK
Communications, Inc. and United States Trust Company of New
York, as Trustee, relating to the Exchange Notes, including
form of Exchange Notes. (3)
4.2 Certificate of Designations of the Powers, Preferences and
Relative, Participating, Optional and Other Special Rights
of 14% Senior Exchangeable Redeemable Preferred Shares and
Qualifications, Limitations and Restrictions Thereof. (1)
4.3 Form of stock certificate of 14% Senior Exchangeable
Redeemable Preferred Shares. (3)
4.4 Indenture, dated as of April 25, 1996, by and among NEXTLINK
Communications, Inc., NEXTLINK Capital, Inc. and United
States Trust Company of New York, as Trustee, relating to
12 1/2% Senior Notes due April 15, 2006, including form of
global note. (2)
4.5 First Supplemental Indenture, dated as of January 31, 1997,
by and among NEXTLINK Communications, Inc., NEXTLINK
Communications, L.L.C., NEXTLINK Capital and United States
Trust Company of New York, as Trustee. (3)
4.6 Form of Indenture between United States Trust Company, as
Trustee and NEXTLINK Communications, Inc., relating to the
9 5/8% Senior Notes due 2007. (4)
4.7 Indenture, dated March 3, 1998, between United States Trust
Company, as Trustee and NEXTLINK Communications, Inc.,
relating to the 9% Senior Notes due 2008. (5)
4.8 Certificate of Designations of the Powers, Preferences and
Relative, Participating, Optional and Other Special Rights
of 6 1/2% Cumulative Convertible Preferred Stock and
Qualifications, Limitations and Restrictions Thereof. (1)
4.9 Indenture, dated April 1, 1998, between United States Trust
Company, as Trustee and NEXTLINK Communications, Inc.
relating to the 9.45% Senior Discount Notes due 2008. (6)
4.10 Second Supplemental Indenture, dated June 3, 1998, amending
Indenture dated April 25, 1996, by and among NEXTLINK
Communications, Inc., NEXTLINK Capital, Inc. and United
States Trust Company of New York, as Trustee. (1)
4.11 First Supplemental Indenture, dated June 3, 1998, amending
Indenture dated September 25, 1997, by and between NEXTLINK
Communications, Inc. and United States Trust Company of New
York, as Trustee. (1)
4.12 First Supplemental Indenture, dated June 3, 1998, amending
Indenture dated March 3, 1998, by and between NEXTLINK
Communications, Inc. and United States Trust Company of New
York, as Trustee. (1)
4.13 Cost Sharing and IRU Agreement dated July 18,1998, between
Level 3 Communications, LLC and INTERNEXT LLC. (7)
10.1 Stock Option Plan of NEXTLINK Communications, Inc., as
amended. (1)
10.2 Employee Stock Purchase Plan of NEXTLINK Communications,
Inc. (1)
10.3 Registration Rights Agreement dated as of January 15, 1997,
between the predecessor of NEXTLINK Communications, Inc. and
the signatories listed therein. (3)
10.4 Preferred Exchange and Registration Rights Agreement, dated
as of January 31, 1997, by and among the predecessor of
NEXTLINK Communications, Inc. and the Initial Purchasers.
(3)
10.5 Fiber Lease and Innerduct Use Agreement, dated as of
February 23, 1998, by and between NEXTLINK Communications,
Inc. and Metromedia Fiber Network, Inc. (5)
10.6 Amendment No. 1 to Fiber Lease and Innerduct Use Agreement,
dated as of March 4, 1998, by and between NEXTLINK
Communications, Inc. and Metromedia Fiber Network, Inc. (5)
10.7 Guaranty Agreement, dated July 18, 1998, between NEXTLINK
Communications, Inc. and Level 3 Communications, LLC.
10.8 Cost Sharing and IRU Agreement, dated July 18, 1998, between
Level 3 Communications, LLC and INTERNEXT LLC. (7)
27 Financial Data Schedule
-------------
(1) Incorporated herein by reference to the exhibit filed
with the Registration Statement on Form S-4 of NEXTLINK
Communications, Inc. and NEXTLINK Capital, Inc.
(Commission File No. 333-53975).
(2) Incorporated herein by reference to the exhibit filed
with the Registration Statement on Form S-4 of NEXTLINK
Communications, L.L.C. (the predecessor of NEXTLINK
Communications, Inc.) and NEXTLINK Capital, Inc.
(Commission File No. 333-4603).
(3) Incorporated herein by reference to the exhibit filed
with the Annual Report on Form 10-KSB for the year
ended December 31, 1996 of NEXTLINK Communications,
Inc. and NEXTLINK Capital, Inc. (Commission File Nos.
333-04603 and 333-04603-01).
(4) Incorporated herein by reference to the exhibit filed
with the Registration Statement on Form S-1 of NEXTLINK
Communications, Inc. (Commission File No. 333-32003).
(5) Incorporated herein by reference to the exhibit filed
with the Annual Report on Form 10-KSB for the year
ended December 31, 1997 of NEXTLINK Communications,
Inc. and NEXTLINK Capital, Inc. (Commission File Nos.
333-04603 and 333-04603-01).
(6) Incorporated herein by reference to the exhibit filed
with the quarterly report on Form 10-Q for the
quarterly period ended March 31, 1998 of NEXTLINK
Communications, Inc. and NEXTLINK Capital, Inc.
(Commission File No. 000-22939).
(7) Portions of this exhibit were omitted and filed
separately with the Secretary of the Commission
pursuant to NEXTLINK Communications, Inc.'s Application
Requesting Confidential Treatment under Rule 24(b)-2 of
the Securities Exchange Act of 1934.
(b) Reports on Form 8-K
Current report on Form 8-K, filed July 20, 1998, regarding the
announcement by James Voelker of his resignation as President and
a director of the Company and the appointment of George Tronsrue
as President of the Company.
Current report on Form 8-K, filed July 22, 1998, regarding
INTERNEXT L.L.C., of which each of the Company and Eagle River
Investments L.L.C. beneficially owns a one-half interest,
entering into a Cost Sharing and IRU Agreement with Level 3
Communications, LLC.
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 16, 1998 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 16, 1998 By: /s/ Kathleen H. Iskra
-----------------------------------
Kathleen H. Iskra
Vice President, Chief Financial Officer
and Treasurer (Principal financial and
accounting officer)
NEXTLINK COMMUNICATIONS, INC.
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
3.1 Certificate of Incorporation of NEXTLINK Communications, Inc. (1)
3.2 By-laws of NEXTLINK Communications, Inc. (1)
3.3 Articles of Incorporation of NEXTLINK Capital, Inc. (2)
3.4 By-laws of NEXTLINK Capital, Inc. (2)
4.1 Form of Exchange Note Indenture, by and among NEXTLINK
Communications, Inc. and United States Trust Company of New York,
as Trustee, relating to the Exchange Notes, including form of
Exchange Notes. (3)
4.2 Certificate of Designations of the Powers, Preferences and
Relative, Participating, Optional and Other Special Rights of 14%
Senior Exchangeable Redeemable Preferred Shares and
Qualifications, Limitations and Restrictions Thereof. (1)
4.3 Form of stock certificate of 14% Senior Exchangeable Redeemable
Preferred Shares. (3)
4.4 Indenture, dated as of April 25, 1996, by and among NEXTLINK
Communications, Inc., NEXTLINK Capital, Inc. and United States
Trust Company of New York, as Trustee, relating to 12 1/2% Senior
Notes due April 15, 2006, including form of global note. (2)
4.5 First Supplemental Indenture, dated as of January 31, 1997, by
and among NEXTLINK Communications, Inc., NEXTLINK Communications,
L.L.C., NEXTLINK Capital and United States Trust Company of New
York, as Trustee. (3)
4.6 Form of Indenture between United States Trust Company, as Trustee
and NEXTLINK Communications, Inc., relating to the 9 5/8% Senior
Notes due 2007. (4)
4.7 Indenture, dated March 3, 1998, between United States Trust
Company, as Trustee and NEXTLINK Communications, Inc., relating
to the 9% Senior Notes due 2008. (5)
4.8 Certificate of Designations of the Powers, Preferences and
Relative, Participating, Optional and Other Special Rights of
6 1/2% Cumulative Convertible Preferred Stock and Qualifications,
Limitations and Restrictions Thereof. (1)
4.9 Indenture, dated April 1, 1998 between United States Trust
Company, as Trustee and NEXTLINK Communications, Inc. relating to
the 9.45% Senior Discount Notes due 2008. (6)
4.10 Second Supplemental Indenture, dated June 3, 1998, amending
Indenture dated April 25, 1996, by and among NEXTLINK
Communications, Inc., NEXTLINK Capital, Inc. and United States
Trust Company of New York, as Trustee. (1)
4.11 First Supplemental Indenture, dated June 3, 1998, amending
Indenture dated September 25, 1997, by and between NEXTLINK
Communications, Inc. and United States Trust Company of New York,
as Trustee. (1)
4.12 First Supplemental Indenture, dated June 3, 1998, amending
Indenture dated March 3, 1998, by and between NEXTLINK
Communications, Inc. and United States Trust Company of New York,
as Trustee. (1)
4.13 First Supplemental Indenture, dated June 3, 1998, amending
Indenture dated April 1, 1998, by and between NEXTLINK
Communications, Inc. and United States Trust Company of New York,
as Trustee. (1)
10.1 Stock Option Plan of NEXTLINK Communications, Inc., as
amended. (1)
10.2 Employee Stock Purchase Plan of NEXTLINK Communications, Inc. (1)
10.3 Registration Rights Agreement dated as of January 15, 1997,
between the predecessor of NEXTLINK Communications, Inc. and the
signatories listed therein. (3)
10.4 Preferred Exchange and Registration Rights Agreement, dated as of
January 31, 1997, by and among the predecessor of NEXTLINK
Communications, Inc. and the Initial Purchasers. (3)
10.5 Fiber Lease and Innerduct Use Agreement, dated as of February 23,
1998, by and between NEXTLINK Communications, Inc. and Metromedia
Fiber Network, Inc. (5)
10.6 Amendment No. 1 to Fiber Lease and Innerduct Use Agreement, dated
as of March 4, 1998, by and between NEXTLINK Communications, Inc.
and Metromedia Fiber Network, Inc. (5)
10.7 Guaranty Agreement, dated July 18, 1998, between NEXTLINK
Communications, Inc. and Level 3 Communications, LLC.
10.8 Cost Sharing and IRU Agreement dated July 18, 1998, between
Level 3 Communications, LLC and INTERNEXT LLC. (7)
27 Financial Data Schedule
---------------
(1) Incorporated herein by reference to the exhibit filed with
the Registration Statement on Form S-4 of NEXTLINK
Communications, Inc. and NEXTLINK Capital, Inc. (Commission
File No. 333-53975).
(2) Incorporated herein by reference to the exhibit filed with
the Registration Statement on Form S-4 of NEXTLINK
Communications, L.L.C. (the predecessor of NEXTLINK
Communications, Inc.) and NEXTLINK Capital, Inc. (Commission
File No. 333-4603).
(3) Incorporated herein by reference to the exhibit filed with
the Annual Report on Form 10-KSB for the year ended
December 31, 1996 of NEXTLINK Communications, Inc. and
NEXTLINK Capital, Inc. (Commission File Nos. 333-04603 and
333-04603-01).
(4) Incorporated herein by reference to the exhibit filed with
the Registration Statement on Form S-1 of NEXTLINK
Communications, Inc. (Commission File No. 333-32003).
(5) Incorporated herein by reference to the exhibit filed with
the Annual Report on Form 10-KSB for the year ended
December 31, 1997 of NEXTLINK Communications, Inc. and
NEXTLINK Capital, Inc. (Commission File Nos. 333-04603 and
333-04603-01).
(6) Incorporated herein by reference to the exhibit filed with
the quarterly report on Form 10-Q for the quarterly period
ended March 31, 1998 of NEXTLINK Communications, Inc. and
NEXTLINK Capital, Inc. (Commission File No. 000-22939).
(7) Portions of this exhibit were omitted and filed separately
with the Secretary of the Commission pursuant to NEXTLINK
Communications, Inc.'s Application Requesting Confidential
Treatment under Rule 24(b)-2 of the Securities and Exchange
Act of 1934.