AETH Aether

Aether Holdings, Inc. (Nasdaq:AETH), the new parent holding company of Aether Systems, Inc., today reported financial results for the quarter ended June 30, 2005.(1) Net income for the second quarter of 2005 was $0.02 per share, or approximately $778,000, which was a significant increase from a net loss of ($1.14) per share, or approximately ($49.8 million) in the second quarter of 2004. The Company said that its move to profitability in the current quarter was primarily attributable to increased earnings from its mortgage-backed securities ("MBS") portfolio, including realized gains of $423,000 on sales of MBS. No gains on sales of MBS were recognized during the first quarter of 2005. In the first quarter of 2005, net loss was ($0.01) per share, or approximately ($658,000). "Although MBS market conditions remained challenging during the second quarter, we are very pleased that we were able to achieve profitability through the careful and conservative management of our MBS portfolio, coupled with a reduction in our operating expenses," said David S. Oros, Aether's Chairman and CEO. "In addition, with our stockholders having voted to approve our holding company reorganization at our July 12th annual meeting, we have now implemented transfer restrictions on our common stock to help protect the long-term value of our substantial net operating and capital loss carryforwards." The Company also indicated that during the current quarter it completed the process of transitioning its operations to the MBS business. Accordingly, the Company said, the level of operating expenses for the quarter, exclusive of certain non-recurring costs associated with its holding company reorganization, was more indicative of the anticipated future level of quarterly operating expenses. The Company reiterated that it expects future recurring quarterly operating expenses to be approximately $1 million, excluding management fees paid to its third-party MBS portfolio manager. During the second quarter, those fees totaled approximately $139,000. During the second quarter, the Company settled $326.8 million in additional MBS purchases and entered into repurchase agreements to fund a substantial portion of those purchases. At June 30, 2005, the Company's MBS portfolio had a fair value of $352.0 million, as compared to a fair value of $434.4 million at March 31, 2005. The decreased size of the MBS portfolio reflects the sale during the second quarter of approximately $73 million of MBS, as well as principal repayments of approximately $19.7 million. As of June 30, 2005, the Company had $253.1 million in borrowings under short-term repurchase agreements, which had a weighted average maturity of 26 days and a weighted average interest rate of 3.31%. The weighted average coupon of the Company's MBS was 4.44% at June 30, 2005, up from 4.01% at March 31, 2005 and 3.92% at December 31, 2004. The Company's debt-to-equity ratio as of June 30, 2005 was 2.0:1, as compared to 2.7:1 as of March 31, 2005 and .1:1 as of December 31, 2004. All of the Company's MBS are guaranteed by U.S. government-chartered agencies. In addition, all of the Company's MBS are hybrid adjustable-rate securities that have initial fixed interest rates for three to five years and thereafter generally reset on an annual basis. In Q2 2005, the weighted average annualized yield on average earning assets was 4.12%, versus 3.64% as of March 31, 2005 and 3.76% as of December 31, 2004. For the quarter, the Company's weighted average cost of funds was 3.03%, which equates to an interest rate spread of 1.09% for the quarter. The weighted average constant prepayment rate on the Company's MBS portfolio was 17.0 during the second quarter of 2005, as compared to 16.5 and 7.3 during the first quarter of 2005 and the fourth quarter of 2004, respectively. The Company said as a result of continued tightening in interest rate spreads resulting from ongoing increases in the federal funds rate along with sustained flatness in the yield curve, it has continued to follow a conservative approach to its MBS portfolio and has not acquired additional MBS since those settled in May 2005. Additionally, the Company indicated that as a result of continuing principal repayments on its existing MBS portfolio, the size of the portfolio may decline further absent a change in market conditions and a decision by the Company to purchase additional MBS. The Company also reiterated that it is continuing to evaluate other potential business opportunities that could contribute to the Company's profitability and allow it to realize value from its substantial accumulated tax loss carryforwards more quickly. Such opportunities may complement the MBS business or may involve a different business strategy. Conference Call Aether will host a conference call on Thursday, August 4, 2005 at 8:30 a.m., Eastern Time. Interested parties may access the call at www.aethersystems.com or by telephone at (800) 946-0782. Please ask for confirmation code 1649618. Replay of this call will be available until August 24, 2005, by calling (888) 203-1112 / (719) 457-0820, access code 1649618. About Aether Holdings, Inc. Aether Holdings owns and manages a leveraged portfolio of mortgage-backed securities through its wholly-owned subsidiary Aether Systems, Inc. Forward-Looking Statement Disclosure This press release contains "forward-looking statements," as such term is used in the Securities Exchange Act of 1934, as amended. Such forward-looking statements include those regarding the Company's expectations about anticipated future cash balances and expense reductions. When used herein, the words "anticipate," "believe," "estimate," "intend," "may," "will," and "expect" and similar expressions as they relate to the Company or its management are intended to identify such forward-looking statements. Forward-looking statements are based on current expectations and assumptions, which are subject to risks and uncertainties. They are not guarantees of future performance or results. The Company's actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences include: (1) in light of market conditions, the size of our MBS portfolio and the amount of leverage we incur may remain below targeted levels, which may result in lower earnings than if we had a larger, more highly leveraged portfolio; (2) our future financial results may be negatively affected by contingent or retained liabilities relating to businesses that we have sold; (3) our MBS business involves significant risks related to changes in interest rates and the complexities of managing the overall yield of a leveraged portfolio; (4) leverage that we incur to expand the size of the MBS portfolio may limit our financial flexibility and could have a substantial negative effect on our financial results if we do not successfully manage the risks of borrowing; (5) we may not be able to realize value from our accumulated tax loss carryforwards, because of a failure to generate sufficient taxable earnings, regulatory limits or both; (6) in managing the MBS portfolio, we will depend heavily on third party investment managers and financial advisors and consultants, and there is no assurance that such third parties will continue to work with us, in which event our performance could be negatively affected; (7) our cash balance could be negatively affected by post-closing price adjustments relating to the sale of our Transportation segment, as the buyer of that business has disagreed with our calculation of certain of these post-closing adjustments and has requested a price reduction, which we are vigorously disputing; and (8) other factors discussed in our filings with the Securities and Exchange Commission. Aether undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. -0- *T (1) In accordance with generally accepted accounting principles ("GAAP"), the results of Aether's Transportation and Mobile Government businesses, which were sold in September 2004, and its Enterprise Mobility Systems business, which was sold in January 2004, have been reclassified as discontinued operations for all periods, so that period-to-period comparisons are presented on a comparable basis. Aether's continuing operations reflect the results of its mortgage-backed securities business. AETHER SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Six Months Ended Ended June 30, June 30, ------------------ ------------------ 2005 2004 2005 2004 -------- --------- -------- --------- in thousands except per share data Interest income from MBS portfolio $ 3,334 $ - $ 4,141 $ - Interest expense on short-term borrowings (1,707) - (1,719) - -------- --------- -------- --------- Net interest income from MBS portfolio 1,627 - 2,422 - -------- --------- -------- --------- -------- --------- -------- --------- Gain on sale of MBS 423 - 423 - -------- --------- -------- --------- Other operating expenses (income) -------------------------------- Selling, general and administrative expenses 1,433 3,686 3,215 6,972 Depreciation 29 475 78 1,103 Stock compensation expense - 137 76 559 Other income (19) (22) (207) (52) Restructuring charge - 275 (7) 690 -------- --------- -------- --------- Total other operating expenses 1,443 4,551 3,155 9,272 -------- --------- -------- --------- Net operating income (loss) 607 (4,551) (310) (9,272) Non operating income (expense) -------------------------------- Other interest income 301 1,254 570 2,608 Interest expense from subordinated notes payable - (2,604) - (5,208) Unrealized gain on future purchase contracts - 866 - 866 Investment gain (loss), including impairments, net (9) (5,528) (19) (4,971) -------- --------- -------- --------- Total non operating income (expense) 292 (6,012) 551 (6,705) Income (loss) from continuing operations 899 (10,563) 241 (15,977) Discontinued operations -------------------------------- Loss from discontinued operations (121) (39,029) (121) (42,865) Gain (loss) on sale of discontinued operations - (245) - 18,151 -------- --------- -------- --------- Loss from discontinued operations (121) (39,274) (121) (24,714) -------- --------- -------- --------- Net income (loss) $ 778 $(49,837) $ 120 $(40,691) ======== ========= ======== ========= Income (loss) per share - basic and diluted - from continuing operations $ 0.02 $ (0.24) $ - $ (0.37) Income (loss) per share - basic and diluted - from discontinued operations (0.00) (0.89) (0.00) (0.98) Income (loss) per share - basic and diluted - gain on sale of discontinued operations - (0.01) - 0.42 -------- --------- -------- --------- Net income (loss) per share - basic and diluted $ 0.02 $ (1.14) $ (0.00) $ (0.93) ======== ========= ======== ========= Weighted average shares outstanding Basic 44,009 43,802 44,000 43,538 ======== ========= ======== ========= Diluted 44,591 43,802 44,595 43,538 ======== ========= ======== ========= AETHER SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS June 30, December 31, 2005 2004 -------------- -------------- in thousands (Unaudited) Cash and cash equivalents $ 25,434 $ 60,723 Mortgage-backed securities, at fair value 352,040 62,184 Interest receivable 1,539 356 Prepaid expenses and other assets 1,102 4,124 Restricted cash 8,633 8,832 Furniture, computers, and equipment, net 235 367 -------------- -------------- Total assets $ 388,983 $ 136,586 ============== ============== LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued expenses $ 3,469 $ 3,494 Repurchase agreements 253,083 - Accrued employee compensation and benefits 96 186 Accrued restructuring - 259 Accrued interest payable 70 - Other long-term liabilities 2,057 2,057 -------------- -------------- Total liabilities 258,775 5,996 Stockholders' equity 130,208 130,590 Commitments and contingencies -------------- -------------- Total assets $ 388,983 $ 136,586 ============== ============== *T