SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q/ A
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended March 31, 2004 | ||
OR | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to |
Commission file number 0-32421
NII HOLDINGS, INC.
Delaware | 91-1671412 | |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | |
10700 Parkridge Boulevard, Suite 600 Reston, Virginia (Address of Principal Executive Offices) | 20191 (Zip Code) |
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 þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes þ No o
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Number of Shares Outstanding | ||
Title of Class | on April 30, 2004 | |
Common Stock, $0.001 par value per share | 69,619,665 |
EXPLANATORY NOTE
Restatement of Previously Issued Condensed Consolidated Financial Statements
We have restated our previously issued condensed consolidated financial statements and related footnotes as of and for the three months ended March 31, 2004 and 2003, as set forth in Note 2 to the condensed consolidated financial statements in this quarterly report on Form 10-Q/A. We have also restated our previously issued consolidated financial statements and related footnotes as of and for the year ended December 31, 2003, as set forth in Note 2 to our consolidated financial statements included in our 2003 annual report on Form 10-K/A. We are restating our condensed consolidated financial statements to correct for the following items:
• | Bookkeeping errors at our operating company in Mexico; | |
• | Accounting for deferred tax asset valuation allowance reversals; | |
• | Certain errors in the calculation of income taxes for financial statement purposes; | |
• | Depreciation of handsets in Argentina; and | |
• | Other insignificant miscellaneous adjustments. | |
All amounts in this quarterly report on Form 10-Q/A have been updated, as appropriate, to reflect this restatement. Other than for the items discussed in this Explanatory Note, we did not update this quarterly report on Form 10-Q/A for subsequent events that occurred after we filed our original quarterly report on Form 10-Q on May 7, 2004.
Description of Errors
We identified various bookkeeping errors at our operating company in Mexico. These errors originated in the third quarter of 2002 and occurred through the third quarter of 2004. The identification of these bookkeeping errors occurred as a result of our ongoing review of Nextel Mexico’s internal accounts and records in order to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002.
The nature of the errors relate to the following main areas:
• | Foreign currency adjustments — Some foreign currency transaction gains and losses were double-recorded through a combination of manual entries and system-generated automatic entries recorded upon payment of U.S. dollar denominated payables; | |
• | Accounts receivable adjustments — Periodic reconciliations between the accounts receivable subsidiary ledger and the general ledger were not performed properly. As a result, unreconciled differences related to the non-recognition of commissions expense on credit card payments, returned checks, manual adjustments and other items were classified to a current liability account, but were not reversed from the liability account upon resolution of these differences; and | |
• | Liability accounts — Certain liability accounts contained balances that could not be supported by invoices or subsequent disbursements. | |
We determined the reversal of certain valuation allowances on deferred tax assets that were established at the time of our application of fresh-start accounting in 2002 were not correctly reported in our consolidated financial statements for subsequent periods. For the two-month period ended December 31, 2002, the year ended December 31, 2003 and the three-month period ended March 31, 2004, we reversed valuation allowances which reduced the provision for income taxes. In accordance with the American Institute of Certified Public Accountants’ Statement of Position, or SOP, 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,” the reversal of valuation allowances established in fresh-start accounting should first reduce intangible assets existing at our emergence from reorganization until fully exhausted, followed by increases to paid-in capital.
2
For the two months ended December 31, 2002 and the ten months ended October 31, 2002, we identified errors in the calculation of income tax expense in Mexico for financial statement purposes. The adjustment to correct our income tax expense for this matter increases our long-lived assets as of October 31, 2002 because of the application of fresh-start accounting under SOP 90-7. As a result, we understated amortization and depreciation related to those long-lived assets for periods subsequent to the ten months ended October 31, 2002.
During the monthly process to convert the operating results from accounting principles generally accepted in Argentina to accounting principles generally accepted in the United States, the depreciation expense related to handsets under operating leases was erroneously omitted for financial reporting purposes for the three months ended March 31, 2004.
3
NII HOLDINGS, INC. AND SUBSIDIARIES
INDEX
Page | ||||||||
Part I | Financial Information. | |||||||
Item 1. | Financial Statements — Unaudited | |||||||
Condensed Consolidated Balance Sheets — As of March 31, 2004 (restated) and December 31, 2003 | 5 | |||||||
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) — For the Three Months Ended March 31, 2004 (restated) and 2003 (restated) | 6 | |||||||
Condensed Consolidated Statements of Changes in Stockholders’ Equity — For the Three Months Ended March 31, 2004 (restated) and 2003 (restated) | 7 | |||||||
Condensed Consolidated Statements of Cash Flows — For the Three Months Ended March 31, 2004 (restated) and 2003 (restated) | 8 | |||||||
Notes to Condensed Consolidated Financial Statements | 9 | |||||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 35 | ||||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 57 | ||||||
Item 4. | Controls and Procedures | 58 | ||||||
Part II | Other Information. | |||||||
Item 1. | Legal Proceedings | 60 | ||||||
Item 2. | Changes in Securities and Use of Proceeds | 60 | ||||||
Item 4. | Submission of Matters to a Vote of Security Holders | 61 | ||||||
Item 5. | Other Information | 61 | ||||||
Item 6. | Exhibits and Reports on Form 8-K | 62 |
4
March 31, | December 31, | ||||||||||
2004 | 2003 | ||||||||||
Restated | |||||||||||
Unaudited | |||||||||||
ASSETS | |||||||||||
Current assets | |||||||||||
Cash and cash equivalents | $ | 371,693 | $ | 405,406 | |||||||
Short-term investments | 25,819 | — | |||||||||
Accounts receivable, less allowance for doubtful accounts of $9,310 and $9,020. | 119,397 | 119,985 | |||||||||
Handset and accessory inventory, net | 25,647 | 21,138 | |||||||||
Deferred income taxes, net | 47,387 | 41,097 | |||||||||
Prepaid expenses and other | 65,731 | 59,128 | |||||||||
Total current assets | 655,674 | 646,754 | |||||||||
Property, plant and equipment,net of accumulated depreciation of $75,836 and $56,913 | 405,663 | 368,434 | |||||||||
Intangible assets, net | 74,612 | 85,818 | |||||||||
Other assets | 37,545 | 27,430 | |||||||||
Total assets | $ | 1,173,494 | $ | 1,128,436 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
Current liabilities | |||||||||||
Accounts payable, accrued expenses and other | $ | 181,572 | $ | 201,173 | |||||||
Deferred revenues | 34,674 | 32,040 | |||||||||
Accrued interest | 2,244 | 5,022 | |||||||||
Due to related parties | 13,195 | 13,460 | |||||||||
Current portion of long-term debt | 1,617 | 1,466 | |||||||||
Total current liabilities | 233,302 | 253,161 | |||||||||
Long-term debt,including $52,493 and $168,067 due to related parties | 642,012 | 535,290 | |||||||||
Deferred revenues (related party) | 45,161 | 45,968 | |||||||||
Other long-term liabilities | 80,074 | 76,247 | |||||||||
Total liabilities | 1,000,549 | 910,666 | |||||||||
Commitments and contingencies (Note 6) Stockholders’ equity | |||||||||||
Common stock, 69,619 shares issued and outstanding — 2004, 68,883 shares issued and outstanding — 2003. | 70 | 69 | |||||||||
Paid-in capital | 165,301 | 164,705 | |||||||||
Retained earnings | 51,367 | 103,978 | |||||||||
Accumulated other comprehensive loss | (43,793 | ) | (50,982 | ) | |||||||
Total stockholders’ equity | 172,945 | 217,770 | |||||||||
Total liabilities and stockholders’ equity | $ | 1,173,494 | $ | 1,128,436 | |||||||
5
NII HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
2004 | 2003 | |||||||||
Restated | Restated | |||||||||
Operating revenues | ||||||||||
Service and other revenues | $ | 266,032 | $ | 194,597 | ||||||
Digital handset and accessory revenues | 11,228 | 8,796 | ||||||||
277,260 | 203,393 | |||||||||
Operating expenses | ||||||||||
Cost of service (exclusive of depreciation included below) | 67,561 | 45,885 | ||||||||
Cost of digital handset and accessory sales | 40,854 | 28,247 | ||||||||
Selling, general and administrative | 85,510 | 66,596 | ||||||||
Depreciation | 19,109 | 8,648 | ||||||||
Amortization | 3,790 | 8,659 | ||||||||
216,824 | 158,035 | |||||||||
Operating income | 60,436 | 45,358 | ||||||||
Other income (expense) | ||||||||||
Interest expense | (16,199 | ) | (13,920 | ) | ||||||
Interest income | 2,605 | 1,933 | ||||||||
Loss on early extinguishment of debt, net (Note 5) | (79,327 | ) | — | |||||||
Foreign currency transaction gains (losses), net | 2,595 | (8,304 | ) | |||||||
Other expense, net | (1,217 | ) | (1,966 | ) | ||||||
(91,543 | ) | (22,257 | ) | |||||||
(Loss) income before income tax provision | (31,107 | ) | 23,101 | |||||||
Income tax provision | (21,504 | ) | (13,097 | ) | ||||||
Net (loss) income | $ | (52,611 | ) | $ | 10,004 | |||||
Net (loss) income per common share, basic (Note 1) | $ | (0.76 | ) | $ | 0.17 | |||||
Net (loss) income per common share, diluted (Note 1) | $ | (0.76 | ) | $ | 0.16 | |||||
Weighted average number of common shares outstanding, basic | 69,149 | 60,455 | ||||||||
Weighted average number of common shares outstanding, diluted | 69,149 | 63,923 | ||||||||
Comprehensive income (loss), net of income tax | ||||||||||
Foreign currency translation adjustment | $ | 7,189 | $ | (19,150 | ) | |||||
Unrealized loss on cash flow hedge | — | (1,722 | ) | |||||||
Other comprehensive income (loss) | 7,189 | (20,872 | ) | |||||||
Net (loss) income | (52,611 | ) | 10,004 | |||||||
$ | (45,422 | ) | $ | (10,868 | ) | |||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
NII HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Accumulated | |||||||||||||||||||||||||
Common Stock | Other | ||||||||||||||||||||||||
Paid-in | Retained | Comprehensive | |||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Loss | Total | ||||||||||||||||||||
Balance, January 1, 2004 | 68,883 | $ | 69 | $ | 164,705 | $ | 103,978 | $ | (50,982 | ) | $ | 217,770 | |||||||||||||
Net loss | — | — | — | (52,611 | ) | — | (52,611 | ) | |||||||||||||||||
Other comprehensive income | — | — | — | — | 7,189 | 7,189 | |||||||||||||||||||
Exercise of stock options | 736 | 1 | 596 | — | — | 597 | |||||||||||||||||||
Balance, March 31, 2004 — Restated | 69,619 | $ | 70 | $ | 165,301 | $ | 51,367 | $ | (43,793 | ) | $ | 172,945 | |||||||||||||
Accumulated | |||||||||||||||||||||||||
Common Stock | Other | ||||||||||||||||||||||||
Paid-in | Retained | Comprehensive | |||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Loss | Total | ||||||||||||||||||||
Balance, January 1, 2003 | 60,000 | $ | 60 | $ | 49,138 | $ | 22,764 | $ | (350 | ) | $ | 71,612 | |||||||||||||
Net income | — | — | — | 10,004 | — | 10,004 | |||||||||||||||||||
Other comprehensive loss | — | — | — | — | (20,872 | ) | (20,872 | ) | |||||||||||||||||
Exercise of stock options | 759 | — | 631 | — | — | 631 | |||||||||||||||||||
Balance, March 31, 2003 — Restated | 60,759 | $ | 60 | $ | 49,769 | $ | 32,768 | $ | (21,222 | ) | $ | 61,375 | |||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
NII HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
2004 | 2003 | ||||||||||
Restated | Restated | ||||||||||
Cash flows from operating activities | |||||||||||
Net (loss) income | $ | (52,611 | ) | $ | 10,004 | ||||||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | |||||||||||
Loss on early extinguishment of debt, net | 79,327 | — | |||||||||
Amortization of debt financing costs and accretion of senior discount notes | 5,419 | 6,363 | |||||||||
Depreciation and amortization | 22,899 | 17,307 | |||||||||
Provision for losses on accounts receivable | 2,104 | 2,266 | |||||||||
Provision for losses on inventory | 477 | 2,234 | |||||||||
Foreign currency transaction (gains) losses, net | (2,595 | ) | 8,304 | ||||||||
Deferred income tax provision | 5,649 | 11,892 | |||||||||
Loss on disposal of property, plant and equipment | 37 | 37 | |||||||||
Other, net | 295 | — | |||||||||
Change in assets and liabilities: | |||||||||||
Accounts receivable, gross | (1,690 | ) | (639 | ) | |||||||
Handset and accessory inventory, gross | (5,122 | ) | 3,349 | ||||||||
Prepaid expenses and other | (5,709 | ) | 4,719 | ||||||||
Other long-term assets | (4,320 | ) | (3,223 | ) | |||||||
Accounts payable, accrued expenses and other | (13,832 | ) | (7,829 | ) | |||||||
Current deferred revenue | 1,827 | 4,244 | |||||||||
Due to related parties | (265 | ) | (627 | ) | |||||||
Proceeds from spectrum sharing agreement with Nextel Communications | — | 6,044 | |||||||||
Net cash provided by operating activities | 31,890 | 64,445 | |||||||||
Cash flows from investing activities | |||||||||||
Capital expenditures | (56,135 | ) | (50,595 | ) | |||||||
Purchases of short-term investments | (25,819 | ) | — | ||||||||
Net cash used in investing activities | (81,954 | ) | (50,595 | ) | |||||||
Cash flows from financing activities | |||||||||||
Proceeds from stock option exercises | 597 | 631 | |||||||||
Gross proceeds from issuance of convertible notes | 300,000 | — | |||||||||
Repayments of senior secured discount notes | (211,212 | ) | — | ||||||||
Repayments under long-term credit facilities and other | (73,061 | ) | — | ||||||||
Payment of debt financing costs | (8,410 | ) | — | ||||||||
Gross proceeds from towers financing transactions | 6,357 | 50,169 | |||||||||
Transfers to restricted cash | — | (7,814 | ) | ||||||||
Net cash provided by financing activities | 14,271 | 42,986 | |||||||||
Effect of exchange rate changes on cash and cash equivalents | 2,080 | (2,381 | ) | ||||||||
Net (decrease) increase in cash and cash equivalents | (33,713 | ) | 54,455 | ||||||||
Cash and cash equivalents, beginning of period | 405,406 | 231,161 | |||||||||
Cash and cash equivalents, end of period | $ | 371,693 | $ | 285,616 | |||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
8
NII HOLDINGS, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
Note 1. Basis of Presentation
General.Our unaudited condensed consolidated financial statements have been prepared under the rules and regulations of the Securities and Exchange Commission. While they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements, they reflect all adjustments that, in the opinion of management, are necessary for a fair presentation of the results for interim periods.
You should read the condensed consolidated financial statements in conjunction with the consolidated financial statements and notes contained in our 2003 annual report on Form 10-K/A, which was amended and restated for the reasons set forth in Note 2. You should not expect results of operations of interim periods to be an indication of the results for a full year.
The accounts of our consolidated non-U.S. operating companies are presented utilizing balances as of a date one month earlier than the accounts of our parent company U.S. subsidiaries and our non-operating non-U.S. subsidiaries to ensure timely reporting of consolidated results. As a result, the financial position and results of operations of each of our operating companies in Mexico, Brazil, Argentina, Peru and Chile are presented as of and for the three months ended February 29, 2004 and February 28, 2003, respectively. In contrast, financial information relating to our parent company U.S. subsidiaries and our non-operating non-U.S. subsidiaries is presented as of and for the three months ended March 31.
On February 26, 2004, we announced a 3-for-1 common stock split which was effected in the form of a stock dividend that was paid on March 22, 2004 to holders of record as of March 12, 2004. As a result of the stock split, we retroactively restated all historical share and earnings per share data, par value and paid-in capital balances included in our financial statements for the three months ended March 31, 2004 and 2003.
Restatement of Previously Issued Condensed Consolidated Financial Statements.We have restated our previously issued condensed consolidated financial statements and related footnotes as of and for the three months ended March 31, 2004 and 2003, as set forth in this report. For additional information regarding this restatement, see Note 2.
Short-Term Investments.Short-term investments primarily include commercial paper and government-backed securities with maturities greater than 90 days and less than one year at the time of purchase. We classify our short-term investments as available-for-sale and report them at market value. We report unrealized gains and losses, net of income taxes, as other comprehensive income or loss. We report realized gains or losses, as determined on a specific identification basis, and other-than-temporary declines in value, if any, on available-for-sale securities in interest income or interest expense.
Accumulated Other Comprehensive Loss.Accumulated other comprehensive loss represents a cumulative foreign currency translation adjustment of $43.8 million as of March 31, 2004 and $51.0 million as of December 31, 2003.
9
Notes to Condensed Consolidated Financial Statements — (Continued)
Supplemental Cash Flow Information. |
Three Months Ended | |||||||||
March 31, | |||||||||
2004 | 2003 | ||||||||
Restated | Restated | ||||||||
(in thousands) | |||||||||
Capital expenditures | |||||||||
Cash paid for capital expenditures, including capitalized interest | $ | 56,135 | $ | 50,595 | |||||
Changes in capital expenditures accrued and unpaid or financed | (7,912 | ) | 13,635 | ||||||
$ | 48,223 | $ | 64,230 | ||||||
Interest costs | |||||||||
Interest expense | $ | 16,199 | $ | 13,920 | |||||
Interest capitalized | 581 | 1,863 | |||||||
$ | 16,780 | $ | 15,783 | ||||||
Cash paid for interest, net of amounts capitalized | $ | 12,047 | $ | 5,274 | |||||
Cash paid for income taxes | $ | 7,700 | $ | 756 | |||||
Cash paid for reorganization items included in operating activities | $ | — | $ | 208 | |||||
Net (Loss) Income Per Common Share, Basic and Diluted.Basic net (loss) income per common share includes no dilution and is computed by dividing the net (loss) income by the weighted average number of common shares outstanding for the period. Diluted net (loss) income per common share reflects the potential dilution of securities that could participate in our earnings. As presented for the three months ended March 31, 2004, our basic and diluted net loss per share is based on the weighted average number of common shares outstanding during the period and does not include other potential common shares, including shares issuable upon exercise of stock options and conversion of our convertible notes, since their effect would have been antidilutive to our net loss.
The following table provides a reconciliation of the numerators and denominators used to calculate basic and diluted net income per common share as disclosed in our consolidated statements of operations and comprehensive loss for the three months ended March 31, 2003:
Income | Shares | Per Share | |||||||||||
(Numerator) | (Denominator) | Amount | |||||||||||
Restated | Restated | ||||||||||||
(in thousands, except per share data) | |||||||||||||
Basic net income per share: | |||||||||||||
Net income | $ | 10,004 | 60,455 | $ | 0.17 | ||||||||
Effect of dilutive securities: | |||||||||||||
Stock options | — | 3,468 | |||||||||||
Diluted net income per share: | |||||||||||||
Net income | $ | 10,004 | 63,923 | $ | 0.16 | ||||||||
Stock-Based Compensation.As of March 31, 2004, we had one stock-based employee compensation plan. We account for this plan under the recognition and measurement principles of Accounting Principles Board, or APB, Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations.
10
Notes to Condensed Consolidated Financial Statements — (Continued)
Under APB Opinion No. 25, compensation expense is based on the intrinsic value on the measurement date, calculated as the difference between the fair value of the common stock and the relevant exercise price. We account for stock-based compensation to non-employees at fair value using a Black-Scholes option pricing model in accordance with the provisions of Statement of Financial Accounting Standards, or SFAS, No. 123, “Accounting for Stock-Based Compensation,” and other applicable accounting principles. No stock-based employee compensation cost is reflected in net income, as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net (loss) income and net (loss) income per common share if we had applied the fair value recognition provisions of SFAS No. 123, as amended by SFAS No. 148, to stock-based employee compensation.
Three Months Ended | |||||||||
March 31, | |||||||||
2004 | 2003 | ||||||||
Restated | Restated | ||||||||
(in thousands, except | |||||||||
per share data) | |||||||||
Net (loss) income, as reported | $ | (52,611 | ) | $ | 10,004 | ||||
Deduct: | |||||||||
Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects | (368 | ) | (173 | ) | |||||
Pro forma net (loss) income | $ | (52,979 | ) | $ | 9,831 | ||||
Net (loss) income per common share: | |||||||||
Basic — as reported | $ | (0.76 | ) | $ | 0.17 | ||||
Basic — pro forma | $ | (0.77 | ) | $ | 0.16 | ||||
Diluted — as reported | $ | (0.76 | ) | $ | 0.16 | ||||
Diluted — pro forma | $ | (0.77 | ) | $ | 0.15 | ||||
Reclassifications.We have reclassified some prior period amounts in the unaudited condensed consolidated financial statements to conform to our current year presentation.
New Accounting Pronouncements.In January 2003, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation, or FIN, No. 46, “Consolidation of Variable Interest Entities — An Interpretation of ARB No. 51,” which clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN No. 46 provides guidance related to identifying variable interest entities (previously known generally as special purpose entities or SPEs) and determining whether such entities should be consolidated. FIN No. 46 must be applied immediately to variable interest entities created, or interests in variable interest entities obtained, after January 31, 2003. For those variable interest entities created, or interests in variable interest entities obtained, on or before January 31, 2003, the guidance in FIN No. 46 must be applied in the first fiscal year or interim period beginning after December 15, 2003. The adoption of FIN No. 46 on January 1, 2004 did not have a material impact on our financial position or results of operations.
In March 2004, the Emerging Issues Task Force, or EITF, reached a final consensus on Issue No. 03-6, “Participating Securities and the Two-Class Method Under FASB Statement No. 128,Earnings Per Share.” Issue No. 03-6 addresses a number of questions regarding the computation of earnings per share (“EPS”) by
11
Notes to Condensed Consolidated Financial Statements — (Continued)
companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating EPS. It clarifies what constitutes a participating security and how to apply the two-class method of computing EPS once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-6 is effective for the fiscal quarter ending June 30, 2004. We are currently evaluating the impact of adopting EITF 03-6 on our consolidated financial statements.
Note 2. Restatement of Previously Issued Condensed Consolidated Financial Statements
We have restated our previously issued condensed consolidated financial statements and related footnotes as of and for the three months ended March 31, 2004 and 2003. We have also restated our previously issued consolidated financial statements and related footnotes as of and for the year ended December 31, 2003, as set forth in Note 2 to our consolidated financial statements included in our 2003 annual report on Form 10-K/A. We are restating our condensed consolidated financial statements to correct for the following items:
• | Bookkeeping errors at our operating company in Mexico; | |
• | Accounting for deferred tax asset valuation allowance reversals; | |
• | Certain errors in the calculation of income taxes for financial statement purposes; | |
• | Depreciation of handsets in Argentina; and | |
• | Other insignificant miscellaneous adjustments. | |
All amounts in these condensed consolidated financial statements have been updated, as appropriate, to reflect this restatement. Other than for the items discussed in this Note, we did not update these condensed consolidated financial statements for subsequent events that occurred after we filed our original quarterly report on Form 10-Q on May 7, 2004.
Description of Errors
We identified various bookkeeping errors at our operating company in Mexico. These errors originated in the third quarter of 2002 and occurred through the third quarter of 2004. The identification of these bookkeeping errors occurred as a result of our ongoing review of Nextel Mexico’s internal accounts and records in order to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002.
The nature of the errors relate to the following main areas:
• | Foreign currency adjustments — Some foreign currency transaction gains and losses were double-recorded through a combination of manual entries and system-generated automatic entries recorded upon payment of U.S. dollar denominated payables; | |
• | Accounts receivable adjustments — Periodic reconciliations between the accounts receivable subsidiary ledger and the general ledger were not performed properly. As a result, unreconciled differences related to the non-recognition of commissions expense on credit card payments, returned checks, manual adjustments and other items were classified to a current liability account, but were not reversed from the liability account upon resolution of these differences; and | |
• | Liability accounts — Certain liability accounts contained balances that could not be supported by invoices or subsequent disbursements. | |
We determined the reversal of certain valuation allowances on deferred tax assets that were established at the time of our application of fresh-start accounting in 2002 were not correctly reported in our consolidated
12
Notes to Condensed Consolidated Financial Statements — (Continued)
financial statements for subsequent periods. For the two-month period ended December 31, 2002, the year ended December 31, 2003 and the three-month period ended March 31, 2004, we reversed valuation allowances which reduced the provision for income taxes. In accordance with the American Institute of Certified Public Accountants’ Statement of Position, or SOP 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,” the reversal of valuation allowances established in fresh-start accounting should first reduce intangible assets existing at our emergence from reorganization until fully exhausted, followed by increases to paid-in capital.
For the two months ended December 31, 2002 and the ten months ended October 31, 2002, we identified errors in the calculation of income tax expense in Mexico for financial statement purposes. The adjustment to correct our income tax expense for this matter increases our long-lived assets as of October 31, 2002 because of the application of fresh-start accounting under SOP 90-7. As a result, we understated amortization and depreciation related to those long-lived assets for periods subsequent to the ten months ended October 31, 2002.
During the monthly process to convert the operating results from accounting principles generally accepted in Argentina to accounting principles generally accepted in the United States, the depreciation expense related to handsets under operating leases was erroneously omitted for financial reporting purposes for the three months ended March 31, 2004.
The following tables present the effects of the restatement adjustments on our previously reported unaudited condensed consolidated statements of operations for the three months ended March 31, 2004 and 2003 and on our previously reported unaudited condensed consolidated balance sheets as of March 31, 2004 and 2003.
13
Notes to Condensed Consolidated Financial Statements — (Continued)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended | For the Three Months Ended | ||||||||||||||||||||||||
March 31, 2004 | March 31, 2003 | ||||||||||||||||||||||||
As | As | As | As | ||||||||||||||||||||||
Reported | Adjustment | Restated | Reported | Adjustment | Restated | ||||||||||||||||||||
(in thousands, except per share amounts) | |||||||||||||||||||||||||
Operating revenues | $ | 277,260 | $ | — | $ | 277,260 | $ | 203,393 | $ | — | $ | 203,393 | |||||||||||||
Operating expenses | |||||||||||||||||||||||||
Cost of service | 67,561 | — | 67,561 | 45,885 | — | 45,885 | |||||||||||||||||||
Cost of digital handset and accessory sales | 40,854 | — | 40,854 | 28,247 | — | 28,247 | |||||||||||||||||||
Selling, general and administrative | 86,040 | (530 | )(a) | 85,510 | 72,011 | (5,415 | )(a) | 66,596 | |||||||||||||||||
Depreciation | 18,430 | 679 | (b) | 19,109 | 8,646 | 2 | (b) | 8,648 | |||||||||||||||||
Amortization | 10,122 | (6,332 | )(c) | 3,790 | 9,467 | (808 | )(c) | 8,659 | |||||||||||||||||
Total operating expenses | 223,007 | (6,183 | ) | 216,824 | 164,256 | (6,221 | ) | 158,035 | |||||||||||||||||
Operating income | 54,253 | 6,183 | 60,436 | 39,137 | 6,221 | 45,358 | |||||||||||||||||||
Other income (expense) | |||||||||||||||||||||||||
Loss on early extinguishment of debt, net | (79,327 | ) | — | (79,327 | ) | — | — | — | |||||||||||||||||
Foreign currency transaction gains (losses), net | 2,896 | (301 | )(d) | 2,595 | (11,162 | ) | 2,858 | (d) | (8,304 | ) | |||||||||||||||
Interest expense and all other non-operating expenses, net | (14,811 | ) | — | (14,811 | ) | (13,953 | ) | — | (13,953 | ) | |||||||||||||||
Total other expense | (91,242 | ) | (301 | ) | (91,543 | ) | (25,115 | ) | 2,858 | (22,257 | ) | ||||||||||||||
(Loss) income before income tax provision | (36,989 | ) | 5,882 | (31,107 | ) | 14,022 | 9,079 | 23,101 | |||||||||||||||||
Income tax provision | (3,050 | ) | (18,454 | )(e) | (21,504 | ) | (4,603 | ) | (8,494 | )(e) | (13,097 | ) | |||||||||||||
Net (loss) income | $ | (40,039 | ) | $ | (12,572 | ) | $ | (52,611 | ) | $ | 9,419 | $ | 585 | $ | 10,004 | ||||||||||
Net (loss) income per common share, basic | $ | (0.58 | ) | $ | (0.18 | ) | $ | (0.76 | ) | $ | 0.16 | $ | 0.01 | $ | 0.17 | ||||||||||
Net (loss) income per common share, diluted | $ | (0.58 | ) | $ | (0.18 | ) | $ | (0.76 | ) | $ | 0.15 | $ | 0.01 | $ | 0.16 | ||||||||||
Weighted average number of common shares outstanding, basic | 69,149 | — | 69,149 | 60,455 | — | 60,455 | |||||||||||||||||||
Weighted average number of common shares outstanding, diluted | 69,149 | — | 69,149 | 63,923 | — | 63,923 | |||||||||||||||||||
14
Notes to Condensed Consolidated Financial Statements — (Continued)
The statements of operations components changed, as reflected in the “Adjustment” column above, as a result of the following restatement adjustments:
Three Months Ended | Three Months Ended | |||||||||
March 31, 2004 | March 31, 2003 | |||||||||
(in thousands) | ||||||||||
(a) | Selling, general and administrative | |||||||||
Mexico bookkeeping errors | $ | (530 | ) | $ | (5,415 | ) | ||||
Net decrease | $ | (530 | ) | $ | (5,415 | ) | ||||
(b) | Depreciation | |||||||||
Mexico bookkeeping errors | $ | (51 | ) | $ | (52 | ) | ||||
Tax provision calculation errors | 54 | 54 | ||||||||
Argentina handset depreciation | 676 | — | ||||||||
Net increase | $ | 679 | $ | 2 | ||||||
(c) | Amortization | |||||||||
Mexico bookkeeping errors | $ | (49 | ) | $ | (51 | ) | ||||
Tax provision calculation errors | 71 | 71 | ||||||||
Release of deferred tax asset valuation allowance | (6,354 | ) | (828 | ) | ||||||
Net decrease | $ | (6,332 | ) | $ | (808 | ) | ||||
(d) | Foreign currency transaction gains (losses), net | |||||||||
Mexico bookkeeping errors | $ | (301 | ) | $ | 2,858 | |||||
Net change | $ | (301 | ) | $ | 2,858 | |||||
(e) | Income tax provision | |||||||||
Tax provision calculation errors | $ | (264 | ) | $ | — | |||||
Release of deferred tax asset valuation allowance, tax impact of Mexico bookkeeping errors and other | (18,190 | ) | (8,494 | ) | ||||||
Net increase | $ | (18,454 | ) | $ | (8,494 | ) | ||||
15
As of March 31, 2004 | |||||||||||||||
As Reported | Adjustment | As Restated | |||||||||||||
(in thousands) | |||||||||||||||
ASSETS | |||||||||||||||
Current deferred income taxes, net | $ | 51,242 | $ | (3,855 | )(f) | $ | 47,387 | ||||||||
Current assets, excluding current deferred income taxes, net | 611,291 | (3,004 | )(g) | 608,287 | |||||||||||
Property, plant and equipment, net | 406,470 | (807 | )(h) | 405,663 | |||||||||||
Intangible assets, net | 188,453 | (113,841 | )(i) | 74,612 | |||||||||||
Other assets | 37,545 | — | 37,545 | ||||||||||||
Total assets | $ | 1,295,001 | $ | (121,507 | ) | $ | 1,173,494 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||
Accounts payable, accrued expenses and other | $ | 178,735 | $ | 2,837 | (j) | $ | 181,572 | ||||||||
Other current liabilities | 51,730 | — | 51,730 | ||||||||||||
Other long-term liabilities | 767,247 | — | 767,247 | ||||||||||||
Total liabilities | 997,712 | 2,837 | 1,000,549 | ||||||||||||
Stockholders’ equity | |||||||||||||||
Common stock | 70 | — | 70 | ||||||||||||
Paid-in capital | 165,301 | — | 165,301 | ||||||||||||
Retained earnings | 175,487 | (124,120 | )(k) | 51,367 | |||||||||||
Accumulated other comprehensive loss | (43,569 | ) | (224 | )(l) | (43,793 | ) | |||||||||
Total stockholders’ equity | 297,289 | (124,344 | ) | 172,945 | |||||||||||
Total liabilities and stockholders’ equity | $ | 1,295,001 | $ | (121,507 | ) | $ | 1,173,494 | ||||||||
16
As of | ||||||
March 31, | ||||||
2004 | ||||||
(in thousands) | ||||||
(f) | Current deferred income taxes, net | |||||
Release of deferred tax asset valuation allowance, Mexico bookkeeping errors and other | $ | (3,855 | ) | |||
Net decrease | $ | (3,855 | ) | |||
(g) | Current assets, excluding current deferred income taxes, net | |||||
Mexico bookkeeping errors | $ | (3,393 | ) | |||
Release of deferred tax asset valuation allowance | 389 | |||||
Net decrease | $ | (3,004 | ) | |||
(h) | Property, plant and equipment, net | |||||
Mexico bookkeeping errors | $ | (859 | ) | |||
Tax provision calculation errors | 1,237 | |||||
Argentina handset depreciation | (1,185 | ) | ||||
Net decrease | $ | (807 | ) | |||
(i) | Intangible assets, net | |||||
Mexico bookkeeping errors | $ | (868 | ) | |||
Tax provision calculation errors | 1,140 | |||||
Release of deferred tax asset valuation allowance | (114,113 | ) | ||||
Net decrease | $ | (113,841 | ) | |||
(j) | Accounts payable, accrued expenses and other | |||||
Mexico bookkeeping errors | $ | (7,623 | ) | |||
Tax provision calculation errors | 10,460 | |||||
Net increase | $ | 2,837 | ||||
(k) | Retained earnings | |||||
Mexico bookkeeping errors | $ | 2,914 | ||||
Tax provision calculation errors | (8,082 | ) | ||||
Release of deferred tax asset valuation allowance, tax impact of Mexico bookkeeping errors and other | (117,768 | ) | ||||
Argentina handset depreciation | (1,184 | ) | ||||
Net decrease | $ | (124,120 | ) | |||
(l) | Accumulated other comprehensive loss | |||||
Mexico bookkeeping errors | $ | (413 | ) | |||
Release of deferred tax asset valuation allowance | 191 | |||||
Argentina handset depreciation | (2 | ) | ||||
Net increase | $ | (224 | ) | |||
17
As of March 31, 2003 | |||||||||||||||
As | As | ||||||||||||||
Reported | Adjustment | Restated | |||||||||||||
(in thousands) | |||||||||||||||
ASSETS | |||||||||||||||
Current assets | $ | 457,103 | $ | (47 | )(m) | $ | 457,056 | ||||||||
Property, plant and equipment, net | 263,097 | 388 | (n) | 263,485 | |||||||||||
Intangible assets, net | 180,258 | (25,718 | )(o) | 154,540 | |||||||||||
Other assets | 22,003 | — | 22,003 | ||||||||||||
Total assets | $ | 922,461 | $ | (25,377 | ) | $ | 897,084 | ||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||||||
Accounts payable, accrued expenses and other | $ | 193,119 | $ | (4,659 | )(p) | $ | 188,460 | ||||||||
Other current liabilities | 81,427 | — | 81,427 | ||||||||||||
Other long-term liabilities | 567,456 | (1,634 | )(q) | 565,822 | |||||||||||
Total liabilities | 842,002 | (6,293 | ) | 835,709 | |||||||||||
Stockholders’ equity | |||||||||||||||
Common stock | 60 | — | 60 | ||||||||||||
Paid-in capital | 49,769 | — | 49,769 | ||||||||||||
Retained earnings | 51,985 | (19,217 | )(r) | 32,768 | |||||||||||
Accumulated other comprehensive loss | (21,355 | ) | 133 | (s) | (21,222 | ) | |||||||||
Total stockholders’ equity | 80,459 | (19,084 | ) | 61,375 | |||||||||||
Total liabilities and stockholders’ equity | $ | 922,461 | $ | (25,377 | ) | $ | 897,084 | ||||||||
18
Notes to Condensed Consolidated Financial Statements — (Continued)
The balance sheet components changed, as reflected in the “Adjustment” column above, as a result of the following restatement adjustments:
As of March 31, | ||||||
2003 | ||||||
(in thousands) | ||||||
(m) | Current assets | |||||
Mexico bookkeeping errors | $ | (47 | ) | |||
Net decrease | $ | (47 | ) | |||
(n) | Property, plant and equipment, net | |||||
Mexico bookkeeping errors | $ | (1,064 | ) | |||
Tax provision calculation errors | 1,452 | |||||
Net increase | $ | 388 | ||||
(o) | Intangible assets, net | |||||
Mexico bookkeeping errors | $ | (1,067 | ) | |||
Tax provision calculation errors | 1,424 | |||||
Release of deferred tax asset valuation allowance | (26,075 | ) | ||||
Net decrease | $ | (25,718 | ) | |||
(p) | Accounts payable, accrued expenses and other | |||||
Mexico bookkeeping errors | $ | (10,910 | ) | |||
Tax provision calculation errors | 6,251 | |||||
Net decrease | $ | (4,659 | ) | |||
(q) | Other long-term liabilities | |||||
Release of deferred tax asset valuation allowance and other | $ | (1,634 | ) | |||
Net decrease | $ | (1,634 | ) | |||
(r) | Retained earnings | |||||
Mexico bookkeeping errors | $ | 9,082 | ||||
Tax provision calculation errors | (3,261 | ) | ||||
Release of deferred tax asset valuation allowance, tax impact of Mexico bookkeeping errors and other | (25,038 | ) | ||||
Net decrease | $ | (19,217 | ) | |||
(s) | Accumulated other comprehensive loss | |||||
Mexico bookkeeping errors | $ | (353 | ) | |||
Release of deferred tax asset valuation allowance and other | 486 | |||||
Net decrease | $ | 133 | ||||
19
March 31, | December 31, | |||||||
2004 | 2003 | |||||||
Restated | ||||||||
(in thousands) | ||||||||
Value added tax receivables, current | $ | 21,687 | $ | 22,596 | ||||
Advances to suppliers | 13,248 | 8,053 | ||||||
Insurance claims | 972 | 4,853 | ||||||
Prepaid income taxes | — | 4,470 | ||||||
Other prepaid expenses | 29,824 | 19,156 | ||||||
$ | 65,731 | $ | 59,128 | |||||
March 31, | December 31, | |||||||
2004 | 2003 | |||||||
Restated | ||||||||
(in thousands) | ||||||||
Accrued income taxes and income taxes payable | $ | 16,681 | $ | 14,462 | ||||
Accrued non-income based taxes | 34,006 | 32,899 | ||||||
Accrued payroll, commissions and related items | 24,364 | 32,816 | ||||||
Accrued expenses and amounts payable related to network system and information technology | 37,992 | 40,907 | ||||||
Accrued capital expenditures and capital expenditure specific payables | 19,453 | 28,202 | ||||||
Customer deposits | 13,167 | 11,485 | ||||||
Accrued tax and other contingencies | 6,715 | 6,676 | ||||||
Other | 29,194 | 33,726 | ||||||
$ | 181,572 | $ | 201,173 | |||||
20
Notes to Condensed Consolidated Financial Statements — (Continued)
Other Long-Term Liabilities.The components of our other long-term liabilities are as follows:
March 31, | December 31, | |||||||
2004 | 2003 | |||||||
(in thousands) | ||||||||
Tax and other contingencies | $ | 69,251 | $ | 69,627 | ||||
Asset retirement obligations | 3,269 | 3,021 | ||||||
Capital lease obligations | 3,548 | — | ||||||
Other long-term liabilities | 4,006 | 3,599 | ||||||
$ | 80,074 | $ | 76,247 | |||||
Note 4. Intangible Assets
Our intangible assets consist of our licenses, customer base and tradename, all of which have finite useful lives, as follows:
March 31, 2004 — Restated | December 31, 2003 | |||||||||||||||||||||||||
Gross Carrying | Accumulated | Net Carrying | Gross Carrying | Accumulated | Net Carrying | |||||||||||||||||||||
Value | Amortization | Value | Value | Amortization | Value | |||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||
Amortizable intangible assets: | ||||||||||||||||||||||||||
Licenses | $ | 68,750 | $ | (6,653 | ) | $ | 62,097 | $ | 73,595 | $ | (5,380 | ) | $ | 68,215 | ||||||||||||
Customer base | 41,344 | (31,035 | ) | 10,309 | 42,133 | (27,684 | ) | 14,449 | ||||||||||||||||||
Tradename | 3,324 | (1,118 | ) | 2,206 | 4,132 | (978 | ) | 3,154 | ||||||||||||||||||
Total intangible assets | $ | 113,418 | $ | (38,806 | ) | $ | 74,612 | $ | 119,860 | $ | (34,042 | ) | $ | 85,818 | ||||||||||||
SOP 90-7 requires that reversals of valuation allowances associated with deferred tax assets that exist as of the date of application of fresh-start accounting be recorded as a reduction to intangible assets. Substantially all of our deferred tax asset valuation allowances existed as of the date of the application of fresh-start accounting. As such, under SOP 90-7, we record any valuation allowance reversals first as a reduction to our remaining intangible assets existing at our emergence from reorganization and then as an increase to paid in capital. This accounting methodology for deferred tax asset valuation allowance reversals resulted in a decrease to the bases of our intangible assets from December 31, 2003 to March 31, 2004.
The gross carrying values of licenses, customer base and tradename decreased by $8.2 million, $2.6 million and $1.1 million, respectively from December 31, 2003 to March 31, 2004 due to the reversal of deferred tax asset valuation allowances.
Based on the carrying amount of amortizable intangible assets existing as of March 31, 2004 and current exchange rates, we estimate amortization expense for each of the next five years ending December 31 to be as follows (in thousands):
Estimated | ||||
Amortization | ||||
Years | Expense | |||
2004 | $ | 17,699 | ||
2005 | 13,857 | |||
2006 | 4,528 | |||
2007 | 3,867 | |||
2008 | 3,867 |
21
Notes to Condensed Consolidated Financial Statements — (Continued)
Actual amortization expense to be reported in future periods could differ from these estimates as a result of additional acquisitions of intangibles and the timing of releases of deferred tax asset valuation allowances as well as changes in exchange rates and other relevant factors. During the three months ended March 31, 2004, we did not acquire, dispose of or write down any goodwill or intangible assets with indefinite useful lives.
Note 5. Debt
March 31, | December 31, | |||||||
2004 | 2003 | |||||||
(in thousands) | ||||||||
3.5% convertible notes due 2033 | $ | 180,000 | $ | 180,000 | ||||
2.875% convertible notes due 2034 | 300,000 | — | ||||||
13.0% senior secured discount notes due 2009, net of unamortized discount of $14 and $52,196 | 40 | 128,625 | ||||||
International equipment facility | 52,493 | 125,000 | ||||||
Tower financing obligations | 111,096 | 103,131 | ||||||
Total debt | 643,629 | 536,756 | ||||||
Less: current portion | (1,617 | ) | (1,466 | ) | ||||
$ | 642,012 | $ | 535,290 | |||||
3.5% Convertible Notes due 2033.Our 3.5% convertible notes due 2033, which we refer to as our 3.5% notes, are senior unsecured obligations and rank equal in right of payment with all of our other existing and future senior unsecured debt. Some of our other long-term debt is secured, and therefore our 3.5% notes effectively rank junior in right of payment to our secured debt to the extent of the value of the assets securing each debt. In addition, since we conduct all of our operations through our subsidiaries, our 3.5% notes effectively rank junior in right of payment to all liabilities of our subsidiaries. The notes bear interest at a rate of 3.5% per year, payable semi-annually in arrears and in cash on March 15 and September 15 of each year, beginning March 15, 2004. Our 3.5% notes will mature on September 15, 2033, when the entire principal balance of $180.0 million will be due.
The noteholders have the right to require us to repurchase the 3.5% notes on September 15 of 2010, 2013, 2018, 2023 and 2028 at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest. In addition, if a fundamental change or termination of trading, as defined, occurs prior to maturity, the noteholders have the right to require us to repurchase all or part of the notes at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest.
The 3.5% notes are convertible, at the option of the holder, into shares of our common stock at an adjusted conversion rate of 37.5 shares per $1,000 principal amount of notes, or 6,750,000 aggregate common shares, at a conversion price of about $26.67 per share. The 3.5% notes are convertible, subject to adjustment, at any time prior to the close of business on the final maturity date under any of the following circumstances:
• | during any fiscal quarter commencing after December 31, 2003, if the closing sale price of our common stock exceeds 110% of the conversion price of $26.67 per share for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter; | |
• | during the five business day period after any five consecutive trading day period in which the trading price per note for each day of such period was less than 98% of the product of the closing sale price of our common stock and the number of shares issuable upon conversion of $1,000 principal amount of the notes, or 6,750,000 aggregate common shares, subject to certain limitations; |
22
Notes to Condensed Consolidated Financial Statements — (Continued)
• | if the notes have been called for redemption by us; or | |
• | upon the occurrence of certain specified corporate events. |
The conversion rate of the 3.5% notes is subject to adjustment if any of the following events occurs:
• | we issue common stock as a dividend or distribution on our common stock; | |
• | we issue to all holders of common stock certain rights or warrants to purchase our common stock; | |
• | we subdivide or combine our common stock; | |
• | we distribute to all holders of our common stock shares of our capital stock, evidences of indebtedness or assets, including cash or securities but excluding the rights, warrants, dividends or distributions specified above; | |
• | we or one of our subsidiaries makes a payment in respect of a tender offer or exchange offer for our common stock to the extent that the cash and value of any other consideration included in the payment per share of common stock exceeds the current market price per share of common stock on the trading day next succeeding the last date on which tenders or exchanges may be made pursuant to this tender or exchange offer; or | |
• | someone other than us or one of our subsidiaries makes a payment in respect of a tender offer or exchange offer in which, as of the closing date of the offer, our board of directors is not recommending the reject of the offer, subject to certain conditions. |
For the fiscal quarter ended March 31, 2004, the closing sale price of our common stock exceeded 110% of the conversion price of $26.67 per share for at least 20 trading days in the 30 consecutive trading days ending on March 31, 2004. As a result, the conversion contingency was met, and effective April 1, 2004 our 3.5% notes became convertible into 37.5 shares of our common stock per $1,000 principal amount of notes, or 6,750,000 aggregate common shares, at a conversion price of about $26.67 per share. As presented for the three months ended March 31, 2004, our calculation of diluted net loss per share does not include the common shares resulting from the potential conversion of our 3.5% notes since their effect would have been antidilutive to our net loss.
Prior to September 20, 2008, the 3.5% notes are not redeemable. Beginning September 20, 2008, we may redeem the 3.5% notes in whole or in part at the following prices expressed as a percentage of the principal amount:
Redemption Period | Price | |||
Beginning on September 20, 2008 and ending on September 14, 2009 | 101.0 | % | ||
Beginning on September 15, 2009 and ending on September 14, 2010 | 100.5 | % | ||
Beginning on September 15, 2010 and thereafter | 100.0 | % |
Neither we, nor any of our subsidiaries, are subject to any financial covenants under our 3.5% notes. In addition, the indenture governing our 3.5% notes does not restrict us or any of our subsidiaries from paying dividends, incurring debt, or issuing or repurchasing our securities.
2.875% Convertible Notes due 2034.In January 2004, we issued $250.0 million aggregate principal amount of 2.875% convertible notes due 2034, which we refer to as our 2.875% notes. In addition, we granted the initial purchaser an option to purchase up to an additional $50.0 million principal amount of 2.875% notes, which was exercised in full in February 2004. As a result, we issued an additional $50.0 million aggregate principal amount of 2.875% notes, resulting in total net proceeds of $291.6 million. The 2.875% notes bear interest at a rate of 2.875% per year, payable semi-annually in arrears and in cash on February 1 and August 1
23
Notes to Condensed Consolidated Financial Statements — (Continued)
of each year, beginning August 1, 2004. The 2.875% notes will mature on February 1, 2034, when the entire principal balance of $300.0 million will be due.
The noteholders have the right to require us to repurchase the 2.875% notes on February 1 of 2011, 2014, 2019, 2024 and 2029 at a repurchase price equal to 100% of the principal amount, plus any accrued and unpaid interest (including additional amounts, if any) up to but excluding the repurchase date. In addition, if a fundamental change or termination of trading, as defined, occurs prior to maturity, the noteholders have a right to require us to repurchase all or part of the notes at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest.
The 2.875% notes are convertible, at the option of the holder, into shares of our common stock at an adjusted conversion rate of 18.7830 shares per $1,000 principal amount of notes, or 5,634,900 aggregate common shares, at a conversion price of about $53.24 per share. The 2.875% notes are convertible, subject to adjustment, prior to the close of business on the final maturity date under any of the following circumstances:
• | during any fiscal quarter commencing after March 31, 2004, if the closing sale price of our common stock exceeds 120% of the conversion price of $53.24 per share for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter; | |
• | during the five business day period after any five consecutive trading day period in which the trading price per note for each day of this period was less than 98% of the product of the closing sale price of our common stock and the number of shares issuable upon conversion of $1,000 principal amount of the 2.875% notes, or 5,634,900 aggregate common shares, subject to certain limitations; | |
• | if the 2.875% notes have been called for redemption; or | |
• | upon the occurrence of specified corporate events. |
We have the option to satisfy the conversion of the 2.875% notes in shares of our common stock, in cash or a combination of both.
The conversion feature related to the trading price per note meets the criteria of an embedded derivative under SFAS 133. As a result, we are required to separate out the value of the conversion feature from the notes and record a liability on our consolidated balance sheet. As of March 31, 2004, the conversion feature had a nominal value, and therefore it did not have a material impact on our financial position or results of operations. We will continue to evaluate the materiality of the value of this conversion feature on a quarterly basis and record the resulting adjustment, if any, in our consolidated balance sheet and statement of operations.
The conversion rate of the 2.875% notes is subject to adjustment if any of the following events occurs:
• | we issue common stock as a dividend or distribution on our common stock; | |
• | we issue to all holders of common stock certain rights or warrants to purchase our common stock; | |
• | we subdivide or combine our common stock; | |
• | we distribute to all holders of our common stock shares of our capital stock, evidences of indebtedness or assets, including cash or securities but excluding the rights, warrants, dividends or distributions specified above; | |
• | we or one of our subsidiaries makes a payment in respect of a tender offer or exchange offer for our common stock to the extent that the cash and value of any other consideration included in the payment per share of common stock exceeds the current market price per share of common stock on the trading |
24
Notes to Condensed Consolidated Financial Statements — (Continued)
day next succeeding the last date on which tenders or exchanges may be made pursuant to this tender or exchange offer; or | ||
• | someone other than us or one of our subsidiaries makes a payment in respect of a tender offer or exchange offer in which, as of the closing date of the offer, our board of directors is not recommending the rejection of the offer, subject to certain conditions. |
Prior to February 7, 2011, the 2.875% notes are not redeemable. On or after February 7, 2011, we may redeem for cash some or all of the 2.875% notes, at any time and from time to time, upon at least 30 days’ notice for a price equal to 100% of the principal amount of the 2.875% notes to be redeemed plus any accrued and unpaid interest (including additional amounts, if any) up to but excluding the redemption date.
Neither we, nor any of our subsidiaries, are subject to any financial covenants under our 2.875% notes. In addition, the indenture governing our 2.875% notes does not restrict us or any of our subsidiaries from paying dividends, incurring debt, or issuing or repurchasing our securities.
Repurchase of 13.0% Senior Secured Discount Notes.On March 8, 2004, NII Holdings (Cayman), Ltd. (NII Cayman), one of our wholly-owned subsidiaries, retired substantially all of its $180.8 million aggregate principal amount 13.0% senior secured discount notes due 2009 through a cash tender offer, resulting in about a $79.3 million pre-tax loss, including a $47.2 million write-off of the unamortized discount and $2.3 million in charges representing the write-off of debt financing costs and the payment of transaction costs. NII Cayman financed this tender offer with intercompany loans from NII Holdings and cash on hand. We used a portion of our proceeds from the issuance of our 2.875% notes to fund these intercompany loans to NII Cayman. For the three months ended March 31, 2004, the basic and diluted loss per share amount resulting from the loss on the early extinguishment of our 13.0% senior secured discount notes was $1.15.
Partial Repayment of International Equipment Facility.In February 2004, in compliance with our international equipment facility credit agreement, we prepaid, at face value, $72.5 million of the $125.0 million in outstanding principal and related accrued interest of $0.4 million. We did not realize a gain or loss on this prepayment.
Tower Financing Obligations.During the three months ended March 31, 2004 and 2003, Nextel Mexico and Nextel Brazil sold communications towers as follows:
2004 | 2003 | |||||||||||||||
Towers | Proceeds | Towers | Proceeds | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Nextel Mexico | 23 | $ | 4,332 | 223 | $ | 41,529 | ||||||||||
Nextel Brazil | 15 | 2,025 | 64 | 8,640 | ||||||||||||
Total | 38 | $ | 6,357 | 287 | $ | 50,169 | ||||||||||
On January 1, 2004, we executed a binding term sheet with American Tower whereby both parties agreed to make certain amendments to the sale-leaseback agreement with respect to the construction and/or the acquisition by American Tower of any new towers to be constructed or purchased by our Mexican and our Brazilian operating companies. The most significant of such amendments provide for: the elimination of minimum purchase and construction commitments; the establishment of new purchase commitments for the following four years, subject to certain collocation conditions; the extension for an additional four years, subject to certain conditions and limitations, of the right of American Tower to market for collocation existing and new towers; and the reduction of the monthly rent payments, as well as the purchase price, of any existing towers not previously purchased or identified for purchase and of any new sites built.
25
Notes to Condensed Consolidated Financial Statements — (Continued)
Subsequent to the end of the first quarter of 2004, Nextel Brazil sold an additional 4 towers for $0.5 million in proceeds and Nextel Mexico sold an additional 12 towers for $2.2 million in net proceeds.
Note 6. Contingencies
Brazilian Contingencies.Nextel Brazil has received tax assessment notices from state and federal Brazilian tax authorities asserting deficiencies in tax payments related primarily to value added taxes and import duties based on the classification of equipment and services. Nextel Brazil has filed various petitions disputing these assessments. In some cases Nextel Brazil has received favorable decisions, which are currently being appealed by the respective governmental authority. In other cases Nextel Brazil’s petitions have been denied and Nextel Brazil is currently appealing those decisions. Nextel Brazil is also disputing certain non-tax related claims. Nextel Brazil believes it has appropriately reserved for probable losses related to tax and non-tax matters in accordance with SFAS No. 5, “Accounting for Contingencies.” As a result of ongoing analysis, further consultations with external legal counsel, expirations of the statute of limitations and settlements of certain matters during the first quarter of 2004, Nextel Brazil reversed $4.3 million in accrued liabilities, of which $2.5 million was recorded as a reduction to operating expenses. We currently estimate the range of possible losses related to tax and non-tax matters for which we have not accrued liabilities to be between $38.5 million and $42.5 million. From time to time, Nextel Brazil may also receive additional tax assessment or claim notices of a similar nature. We are continuing to evaluate the likelihood of possible losses, if any, related to all known tax and non-tax contingencies. As a result, future increases or decreases to our accrued contingencies may be necessary. As of March 31, 2004, Nextel Brazil had accrued liabilities of $48.5 million related to tax and non-tax contingencies.
Legal Proceedings.We are subject to claims and legal actions that may arise in the ordinary course of business. We do not believe that any of these pending claims or legal actions will have a material effect on our business, financial condition, results of operations or cash flows.
Note 7. Income Taxes
During the first quarter of 2004, we assessed the realizability of certain deferred tax assets, consistent with the methodology employed for 2003. In that assessment, we considered the reversal of existing temporary differences associated with deferred tax assets, future taxable income, tax planning strategies as considered and historical and future pre-tax book income as adjusted for permanent differences between financial and tax accounting items. Accordingly, we reversed $13.2 million of the valuation allowance associated with deferred tax assets in Mexico due to additional information regarding our expected profitability within certain Mexican operations. Since substantially all of the Mexican valuation allowance existed as of the date we applied fresh-start accounting, $11.9 million of the valuation allowance reduced our intangible assets in accordance with SOP 90-7. Additionally, we recorded an income tax benefit of $1.3 million for the remainder of the valuation allowance as that portion related to deferred tax assets that were generated subsequent to our reorganization.
Note 8. Segment Reporting
We operate in four reportable segments: (1) Mexico, (2) Brazil, (3) Argentina and (4) Peru. The operations of all other businesses that fall below the segment reporting thresholds are included in the “Corporate and other” segment below. This segment includes our Chilean operating companies, our corporate operations in the U.S. and our Cayman entity that issued our senior secured discount notes. We evaluate the performance of these segments and provide resources to them based on operating income before depreciation and amortization and impairment, restructuring and other charges, which we refer to as segment earnings. During 2003, we began allocating corporate overhead costs to some of our subsidiaries. We expect that a
26
Corporate | Intercompany | |||||||||||||||||||||||||||
Mexico | Brazil | Argentina | Peru | and other | Eliminations | Consolidated | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Three Months Ended March 31, 2004 — Restated (see Note 2) | ||||||||||||||||||||||||||||
Operating revenues | $ | 172,963 | $ | 43,194 | $ | 37,689 | $ | 23,146 | $ | 407 | $ | (139 | ) | $ | 277,260 | |||||||||||||
Segment earnings (losses) | $ | 76,203 | $ | 3,507 | $ | 10,020 | $ | 4,191 | $ | (10,586 | ) | $ | — | $ | 83,335 | |||||||||||||
Depreciation and amortization | (16,917 | ) | (2,516 | ) | (2,221 | ) | (1,134 | ) | (217 | ) | 106 | (22,899 | ) | |||||||||||||||
Operating income (loss) | 59,286 | 991 | 7,799 | 3,057 | (10,803 | ) | 106 | 60,436 | ||||||||||||||||||||
Interest expense | (5,187 | ) | (2,663 | ) | (8 | ) | (83 | ) | (8,264 | ) | 6 | (16,199 | ) | |||||||||||||||
Interest income | 686 | 923 | 105 | 41 | 856 | (6 | ) | 2,605 | ||||||||||||||||||||
Loss on early extinguishment of debt, net | — | — | — | — | (79,327 | ) | — | (79,327 | ) | |||||||||||||||||||
Foreign currency transaction gains (losses), net | 3,196 | 38 | (642 | ) | 6 | (3 | ) | — | 2,595 | |||||||||||||||||||
Other (expense) income, net | (554 | ) | (541 | ) | 14 | (4 | ) | (132 | ) | — | (1,217 | ) | ||||||||||||||||
Income (loss) before income tax | $ | 57,427 | $ | (1,252 | ) | $ | 7,268 | $ | 3,017 | $ | (97,673 | ) | $ | 106 | $ | (31,107 | ) | |||||||||||
Capital expenditures | $ | 24,793 | $ | 9,046 | $ | 8,232 | $ | 5,246 | $ | 906 | $ | — | $ | 48,223 | ||||||||||||||
Three Months Ended March 31, 2003 — Restated (see Note 2) | ||||||||||||||||||||||||||||
Operating revenues | $ | 126,434 | $ | 33,674 | $ | 20,335 | $ | 22,693 | $ | 390 | $ | (133 | ) | $ | 203,393 | |||||||||||||
Segment earnings (losses) | $ | 55,476 | $ | 3,485 | $ | 6,464 | $ | 5,653 | $ | (8,413 | ) | $ | — | $ | 62,665 | |||||||||||||
Depreciation and amortization | (15,445 | ) | (558 | ) | (515 | ) | (679 | ) | (110 | ) | — | (17,307 | ) | |||||||||||||||
Operating income (loss) | 40,031 | 2,927 | 5,949 | 4,974 | (8,523 | ) | — | 45,358 | ||||||||||||||||||||
Interest expense | (3,655 | ) | (2,231 | ) | — | (535 | ) | (7,788 | ) | 289 | (13,920 | ) | ||||||||||||||||
Interest income | 751 | 604 | 96 | 7 | 764 | (289 | ) | 1,933 | ||||||||||||||||||||
Foreign currency transaction (losses) gains, net | (11,432 | ) | 2,134 | 884 | 126 | (16 | ) | — | (8,304 | ) | ||||||||||||||||||
Other income (expense), net | 176 | (71 | ) | 7,191 | (75 | ) | (7,077 | ) | (2,110 | ) | (1,966 | ) | ||||||||||||||||
Income (loss) before income tax | $ | 25,871 | $ | 3,363 | $ | 14,120 | $ | 4,497 | $ | (22,640 | ) | $ | (2,110 | ) | $ | 23,101 | ||||||||||||
Capital expenditures | $ | 48,887 | $ | 4,684 | $ | 3,846 | $ | 5,928 | $ | 885 | $ | — | $ | 64,230 | ||||||||||||||
March 31, 2004 — Restated (see Note 2) | ||||||||||||||||||||||||||||
Property, plant and equipment, net | $ | 296,082 | $ | 45,320 | $ | 33,056 | $ | 29,425 | $ | 3,293 | $ | (1,513 | ) | $ | 405,663 | |||||||||||||
Identifiable assets | $ | 644,060 | $ | 137,320 | $ | 102,832 | $ | 75,472 | $ | 215,323 | $ | (1,513 | ) | $ | 1,173,494 | |||||||||||||
December 31, 2003 | ||||||||||||||||||||||||||||
Property, plant and equipment, net | $ | 278,118 | $ | 38,320 | $ | 25,699 | $ | 25,313 | $ | 2,602 | $ | (1,618 | ) | $ | 368,434 | |||||||||||||
Identifiable assets | $ | 675,035 | $ | 138,824 | $ | 94,158 | $ | 76,935 | $ | 145,102 | $ | (1,618 | ) | $ | 1,128,436 | |||||||||||||
March 31, 2003 — Restated (see Note 2) | ||||||||||||||||||||||||||||
Property, plant and equipment, net | $ | 228,990 | $ | 7,755 | $ | 9,404 | $ | 18,083 | $ | 1,018 | $ | (1,765 | ) | $ | 263,485 | |||||||||||||
Identifiable assets | $ | 582,937 | $ | 81,889 | $ | 49,703 | $ | 61,072 | $ | 123,248 | $ | (1,765 | ) | $ | 897,084 | |||||||||||||
27
Notes to Condensed Consolidated Financial Statements — (Continued)
Note 9. | Condensed Consolidating Financial Information |
During 2003, we began allocating corporate overhead costs to some of our subsidiaries. We expect that a portion of these allocations will be treated as tax deductions and serve to reduce our effective tax rate. The condensed consolidating financial information below reflects the impact of our allocations as increases to selling, general and administrative expenses of the guarantor and non-guarantor subsidiaries and corresponding decreases to the selling, general and administrative expenses of NII Holdings, Inc.
28
NII Holdings | ||||||||||||||||||||||||||
NII Holdings, | (Cayman), Ltd. | Guarantor | Non-Guarantor | Intercompany | ||||||||||||||||||||||
Inc. (Parent) | (Issuer)(1) | Subsidiaries(2) | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||
Current assets | ||||||||||||||||||||||||||
Cash and cash equivalents | $ | 171,738 | $ | 98,071 | $ | 68,856 | $ | 33,028 | $ | — | $ | 371,693 | ||||||||||||||
Short-term investments | — | 25,819 | — | — | — | 25,819 | ||||||||||||||||||||
Accounts receivable, net | 197 | 66 | 104,999 | 14,135 | — | 119,397 | ||||||||||||||||||||
Handset and accessory inventory, net | — | — | 21,055 | 4,592 | — | 25,647 | ||||||||||||||||||||
Deferred income taxes, net | — | — | 41,635 | 5,752 | — | 47,387 | ||||||||||||||||||||
Prepaid expenses and other | 333 | — | 52,929 | 12,469 | — | 65,731 | ||||||||||||||||||||
Total current assets | 172,268 | 123,956 | 289,474 | 69,976 | — | 655,674 | ||||||||||||||||||||
Property, plant and equipment, net | — | — | 372,412 | 33,251 | — | 405,663 | ||||||||||||||||||||
Investments in and advances to affiliates | 481,984 | 150,740 | 158,564 | 217 | (791,505 | ) | — | |||||||||||||||||||
Intangible assets, net | — | — | 14,580 | 60,032 | — | 74,612 | ||||||||||||||||||||
Other assets | 13,117 | — | 21,926 | 2,502 | — | 37,545 | ||||||||||||||||||||
$ | 667,369 | $ | 274,696 | $ | 856,956 | $ | 165,978 | $ | (791,505 | ) | $ | 1,173,494 | ||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||||||||||||||||||||
Current liabilities | ||||||||||||||||||||||||||
Accounts payable, accrued expenses and other | $ | 107 | $ | 642 | $ | 143,025 | $ | 37,798 | $ | — | $ | 181,572 | ||||||||||||||
Deferred revenues | — | — | 31,478 | 3,196 | — | 34,674 | ||||||||||||||||||||
Accrued interest | 1,700 | — | 544 | — | — | 2,244 | ||||||||||||||||||||
Due to related parties | 2,306 | 279,491 | 216,047 | 49,076 | (533,725 | ) | 13,195 | |||||||||||||||||||
Current portion of long-term debt | — | — | 1,617 | — | — | 1,617 | ||||||||||||||||||||
Total current liabilities | 4,113 | 280,133 | 392,711 | 90,070 | (533,725 | ) | 233,302 | |||||||||||||||||||
Long-term debt | 480,000 | 40 | 161,972 | — | — | 642,012 | ||||||||||||||||||||
Deferred revenues (related party) | — | — | 45,161 | — | — | 45,161 | ||||||||||||||||||||
Other long-term liabilities | 10,311 | — | 68,815 | 948 | — | 80,074 | ||||||||||||||||||||
Total liabilities | 494,424 | 280,173 | 668,659 | 91,018 | (533,725 | ) | 1,000,549 | |||||||||||||||||||
Total stockholders’ equity (deficit) | 172,945 | (5,477 | ) | 188,297 | 74,960 | (257,780 | ) | 172,945 | ||||||||||||||||||
$ | 667,369 | $ | 274,696 | $ | 856,956 | $ | 165,978 | $ | (791,505 | ) | $ | 1,173,494 | ||||||||||||||
(1) | NII Holdings (Cayman), Ltd. is the issuer of our senior secured discount notes due 2009. See Note 5. |
(2) | Represents our subsidiaries that have provided guarantees of the obligations of NII Holdings (Cayman), Ltd. under our senior secured discount notes due 2009. See Note 5. |
29
Notes to Condensed Consolidated Financial Statements — (Continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 2004
NII Holdings | |||||||||||||||||||||||||
NII Holdings, | (Cayman), Ltd. | Guarantor | Non-Guarantor | Intercompany | |||||||||||||||||||||
Inc. (Parent) | (Issuer) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||||||
Operating revenues | $ | — | $ | — | $ | 165,016 | $ | 112,342 | $ | (98 | ) | $ | 277,260 | ||||||||||||
Operating expenses | |||||||||||||||||||||||||
Cost of revenues (exclusive of depreciation included below) | — | — | 90,932 | 17,581 | (98 | ) | 108,415 | ||||||||||||||||||
Selling, general and administrative | 2,333 | — | 4,922 | 78,255 | — | 85,510 | |||||||||||||||||||
Depreciation | — | — | 16,883 | 2,226 | — | 19,109 | |||||||||||||||||||
Amortization | — | — | 2,324 | 1,466 | — | 3,790 | |||||||||||||||||||
2,333 | — | 115,061 | 99,528 | (98 | ) | 216,824 | |||||||||||||||||||
Operating (loss) income | (2,333 | ) | — | 49,955 | 12,814 | — | 60,436 | ||||||||||||||||||
Other income (expense) | |||||||||||||||||||||||||
Interest expense | (3,423 | ) | (4,841 | ) | (7,430 | ) | (505 | ) | — | (16,199 | ) | ||||||||||||||
Interest income | 548 | 301 | 1,568 | 188 | — | 2,605 | |||||||||||||||||||
Loss on early extinguishment of debt, net | — | (79,327 | ) | — | — | — | (79,327 | ) | |||||||||||||||||
Foreign currency transaction gains (losses), net | — | — | 3,240 | (645 | ) | — | 2,595 | ||||||||||||||||||
Equity in (losses) income of affiliates | (47,402 | ) | 3,391 | 5,737 | — | 38,274 | — | ||||||||||||||||||
Other expense, net | — | (126 | ) | (960 | ) | (131 | ) | — | (1,217 | ) | |||||||||||||||
(50,277 | ) | (80,602 | ) | 2,155 | (1,093 | ) | 38,274 | (91,543 | ) | ||||||||||||||||
(Loss) income before income tax provision | (52,610 | ) | (80,602 | ) | 52,110 | 11,721 | 38,274 | (31,107 | ) | ||||||||||||||||
Income tax provision | (1 | ) | — | (18,901 | ) | (2,602 | ) | — | (21,504 | ) | |||||||||||||||
Net (loss) income | $ | (52,611 | ) | $ | (80,602 | ) | $ | 33,209 | $ | 9,119 | $ | 38,274 | $ | (52,611 | ) | ||||||||||
30
Notes to Condensed Consolidated Financial Statements — (Continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 2004
NII Holdings | ||||||||||||||||||||||||
NII Holdings, | (Cayman), Ltd. | Guarantor | Non-Guarantor | Intercompany | ||||||||||||||||||||
Inc. (Parent) | (Issuer) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Cash and cash equivalents, beginning of period | $ | 108,688 | $ | 123,730 | $ | 137,931 | $ | 35,057 | $ | — | $ | 405,406 | ||||||||||||
Cash flows (used in) from operating activities | (16,589 | ) | 160 | 42,448 | 5,871 | — | 31,890 | |||||||||||||||||
Cash flows used in investing activities | (1,337 | ) | (25,819 | ) | (46,971 | ) | (8,585 | ) | 758 | (81,954 | ) | |||||||||||||
Cash flows from (used in) financing activities | 80,976 | — | (66,505 | ) | 558 | (758 | ) | 14,271 | ||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | 1,953 | 127 | — | 2,080 | ||||||||||||||||||
Cash and cash equivalents, end of period | $ | 171,738 | $ | 98,071 | $ | 68,856 | $ | 33,028 | $ | — | $ | 371,693 | ||||||||||||
31
NII Holdings | ||||||||||||||||||||||||||
NII Holdings, | (Cayman), Ltd. | Guarantor | Non-Guarantor | Intercompany | ||||||||||||||||||||||
Inc. (Parent) | (Issuer)(1) | Subsidiaries(2) | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||||
ASSETS | ||||||||||||||||||||||||||
Current assets | ||||||||||||||||||||||||||
Cash and cash equivalents | $ | 108,688 | $ | 123,730 | $ | 137,931 | $ | 35,057 | $ | — | $ | 405,406 | ||||||||||||||
Accounts receivable, net | 110 | 101 | 105,785 | 13,989 | — | 119,985 | ||||||||||||||||||||
Handset and accessory inventory, net | — | — | 17,485 | 3,653 | — | 21,138 | ||||||||||||||||||||
Deferred income taxes, net | — | — | 33,073 | 8,024 | — | 41,097 | ||||||||||||||||||||
Prepaid expenses and other | 112 | — | 50,187 | 8,829 | — | 59,128 | ||||||||||||||||||||
Total current assets | 108,910 | 123,831 | 344,461 | 69,552 | — | 646,754 | ||||||||||||||||||||
Property, plant and equipment, net | 2,401 | — | 340,133 | 25,900 | — | 368,434 | ||||||||||||||||||||
Investments in and advances to affiliates | 302,994 | 145,955 | 160,805 | 136 | (609,890 | ) | — | |||||||||||||||||||
Intangible assets, net | — | — | 15,184 | 70,634 | — | 85,818 | ||||||||||||||||||||
Other assets | 5,097 | 1,728 | 19,557 | 1,048 | — | 27,430 | ||||||||||||||||||||
$ | 419,402 | $ | 271,514 | $ | 880,140 | $ | 167,270 | $ | (609,890 | ) | $ | 1,128,436 | ||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||||||||||||||||
Current liabilities | ||||||||||||||||||||||||||
Accounts payable | $ | 257 | $ | — | $ | 24,970 | $ | 8,454 | $ | — | $ | 33,681 | ||||||||||||||
Accrued expenses and other | 185 | 519 | 140,767 | 26,021 | — | 167,492 | ||||||||||||||||||||
Deferred revenues | — | — | 29,608 | 2,432 | — | 32,040 | ||||||||||||||||||||
Accrued interest | 1,835 | — | 3,187 | — | — | 5,022 | ||||||||||||||||||||
Due to related parties | 9,135 | 68,454 | 189,040 | 57,784 | (310,953 | ) | 13,460 | |||||||||||||||||||
Current portion of long-term debt | — | — | 1,466 | — | — | 1,466 | ||||||||||||||||||||
Total current liabilities | 11,412 | 68,973 | 389,038 | 94,691 | (310,953 | ) | 253,161 | |||||||||||||||||||
Long-term debt | 180,000 | 128,625 | 226,665 | — | — | 535,290 | ||||||||||||||||||||
Deferred revenues (related party) | — | — | 45,968 | — | — | 45,968 | ||||||||||||||||||||
Other long-term liabilities | 10,220 | — | 65,160 | 867 | — | 76,247 | ||||||||||||||||||||
Total liabilities | 201,632 | 197,598 | 726,831 | 95,558 | (310,953 | ) | 910,666 | |||||||||||||||||||
Total stockholders’ equity | 217,770 | 73,916 | 153,309 | 71,712 | (298,937 | ) | 217,770 | |||||||||||||||||||
$ | 419,402 | $ | 271,514 | $ | 880,140 | $ | 167,270 | $ | (609,890 | ) | $ | 1,128,436 | ||||||||||||||
(1) | NII Holdings (Cayman), Ltd. is the issuer of our senior secured discount notes due 2009. See Note 5. |
(2) | Represents our subsidiaries that have provided guarantees of the obligations of NII Holdings (Cayman), Ltd. under our senior secured discount notes due 2009. See Note 5. |
32
Notes to Condensed Consolidated Financial Statements — (Continued)
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Three Months Ended March 31, 2003
NII Holdings | ||||||||||||||||||||||||
NII Holdings, | (Cayman), Ltd. | Guarantor | Non-Guarantor | Intercompany | ||||||||||||||||||||
Inc. (Parent) | (Issuer) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Operating revenues | $ | — | $ | — | $ | 178,457 | $ | 25,034 | $ | (98 | ) | $ | 203,393 | |||||||||||
Operating expenses | ||||||||||||||||||||||||
Cost of revenues (exclusive of depreciation included below) | — | — | 67,404 | 6,826 | (98 | ) | 74,132 | |||||||||||||||||
Selling, general and administrative | 7,655 | — | 46,985 | 11,956 | — | 66,596 | ||||||||||||||||||
Depreciation | 75 | — | 8,135 | 438 | — | 8,648 | ||||||||||||||||||
Amortization | — | — | 7,159 | 1,500 | — | 8,659 | ||||||||||||||||||
7,730 | — | 129,683 | 20,720 | (98 | ) | 158,035 | ||||||||||||||||||
Operating (loss) income | (7,730 | ) | — | 48,774 | 4,314 | — | 45,358 | |||||||||||||||||
Other income (expense) | ||||||||||||||||||||||||
Interest expense | — | (7,015 | ) | (6,747 | ) | (393 | ) | 235 | (13,920 | ) | ||||||||||||||
Interest income | 36 | 383 | 1,529 | 220 | (235 | ) | 1,933 | |||||||||||||||||
Foreign currency transaction (losses) gains, net | — | — | (9,171 | ) | 867 | — | (8,304 | ) | ||||||||||||||||
Equity in income (losses) of affiliates | 17,720 | (15,419 | ) | 5,950 | — | (8,251 | ) | — | ||||||||||||||||
Other expense, net | — | — | (1,890 | ) | (76 | ) | — | (1,966 | ) | |||||||||||||||
17,756 | (22,051 | ) | (10,329 | ) | 618 | (8,251 | ) | (22,257 | ) | |||||||||||||||
Income (loss) before income tax provision | 10,026 | (22,051 | ) | 38,445 | 4,932 | (8,251 | ) | 23,101 | ||||||||||||||||
Income tax provision | (22 | ) | — | (7,651 | ) | (5,424 | ) | — | (13,097 | ) | ||||||||||||||
Net income (loss) | $ | 10,004 | $ | (22,051 | ) | $ | 30,794 | $ | (492 | ) | $ | (8,251 | ) | $ | 10,004 | |||||||||
33
Notes to Condensed Consolidated Financial Statements — (Continued)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Three Months Ended March 31, 2003
NII Holdings | ||||||||||||||||||||||||
NII Holdings, | (Cayman), Ltd. | Guarantor | Non-Guarantor | Intercompany | ||||||||||||||||||||
Inc. (Parent) | (Issuer) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Cash and cash equivalents, beginning of period | $ | 9,811 | $ | 122,499 | $ | 81,156 | $ | 17,695 | $ | — | $ | 231,161 | ||||||||||||
Cash flows (used in) from operating activities | (8,143 | ) | 254 | 63,655 | 8,679 | — | 64,445 | |||||||||||||||||
Cash flows used in investing activities | (1,044 | ) | — | (48,645 | ) | (3,522 | ) | 2,616 | (50,595 | ) | ||||||||||||||
Cash flows from financing activities | 18,348 | — | 26,532 | 722 | (2,616 | ) | 42,986 | |||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents | — | — | (4,112 | ) | 1,731 | — | (2,381 | ) | ||||||||||||||||
Cash and cash equivalents, end of period | $ | 18,972 | $ | 122,753 | $ | 118,586 | $ | 25,305 | $ | — | $ | 285,616 | ||||||||||||
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
INDEX TO MANAGEMENT’S DISCUSSION AND ANALYSIS
Introduction | 36 | ||||
Restatement of Previously Issued Condensed Consolidated Financial Statements | 36 | ||||
Critical Accounting Policies and Estimates | 36 | ||||
Business Overview | 37 | ||||
Recent Developments | 38 | ||||
Ratio of Earnings to Fixed Charges | 39 | ||||
Results of Operations | 39 | ||||
a. Consolidated | 40 | ||||
b. Nextel Mexico | 44 | ||||
c. Nextel Brazil | 46 | ||||
d. Nextel Argentina | 48 | ||||
e. Nextel Peru | 50 | ||||
f. Corporate and other | 51 | ||||
Liquidity and Capital Resources | 52 | ||||
Future Capital Needs and Resources | 53 | ||||
Forward Looking Statements | 56 | ||||
Effect of New Accounting Standards | 56 |
35
Introduction
The following is a discussion and analysis of:
• | our consolidated financial condition and results of operations for the three-month periods ended March 31, 2004 and 2003; and | |
• | significant factors which we believe could affect our prospective financial condition and results of operations. |
You should read this discussion in conjunction with our 2003 annual report on Form 10-K/A, including, but not limited to, the discussion regarding our critical accounting judgments, as described below. Historical results may not indicate future performance. See “Forward Looking Statements” for risks and uncertainties that may impact our future performance.
We present the accounts of our consolidated foreign operating companies utilizing accounts as of a date one month earlier than the accounts of our parent company, our U.S. subsidiaries and our non-operating non-U.S. subsidiaries to ensure timely reporting of consolidated results. As a result, the financial position and results of operations of each of our operating companies in Mexico, Brazil, Argentina, Peru and Chile are presented as of and for the three months ended February 29, 2004 and February 28, 2003, respectively. In contrast, financial information relating to our parent company, our U.S. subsidiaries and our non-operating non-U.S. subsidiaries is presented as of and for the three months ended March 31. Information provided in the table below regarding digital handsets in commercial service for all markets is presented as of March 31.
Restatement of Previously Issued Condensed Consolidated Financial Statements
We have restated our previously issued condensed consolidated financial statements and related footnotes as of and for the three months ended March 31, 2004 and 2003, as set forth in this quarterly report on Form 10-Q/A. We are restating our condensed consolidated financial statements to correct for the following items:
• | Bookkeeping errors at our operating company in Mexico; | |
• | Accounting for deferred tax asset valuation allowance reversals; | |
• | Certain errors in the calculation of income taxes for financial statement purposes; | |
• | Depreciation of handsets in Argentina; and | |
• | Other insignificant miscellaneous adjustments. | |
For additional information regarding this restatement, see Note 2 to our unaudited condensed consolidated financial statements included in this quarterly report on Form 10-Q/A. All amounts in this quarterly report on Form 10-Q/A have been updated, as appropriate, to reflect this restatement. Other than for the items discussed herein, we did not update these condensed consolidated financial statements for subsequent events that occurred after we filed our original quarterly report on Form 10-Q on May 7, 2004.
Critical Accounting Policies and Estimates
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the condensed consolidated financial statements and related notes for the period presented. Due to the inherent uncertainty involved in making those estimates, actual results to be reported in future periods could differ from those estimates.
36
We consider the following accounting policies to be the most important to our financial position and results of operations or policies that require us to exercise significant judgment and/or estimates:
• | revenue recognition; | |
• | allowance for doubtful accounts; | |
• | valuation of long-lived assets; | |
• | depreciation of property, plant and equipment; | |
• | amortization of intangible assets; | |
• | foreign currency; | |
• | loss contingencies; | |
• | stock-based compensation; and | |
• | income taxes. |
A description of these policies is included in our 2003 annual report on Form 10-K/ A under “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Business Overview
We provide digital wireless communication services targeted at meeting the needs of business customers through operating companies located in selected Latin American markets. Our principal operations are in major business centers and related transportation corridors of Mexico, Brazil, Peru and Argentina. We also provide analog specialized mobile radio services in Mexico, Brazil and Peru, as well as in Chile. Our markets are generally characterized by high population densities and, we believe, a concentration of the country’s business users and economic activity. In addition, vehicle traffic congestion, low landline penetration and unreliability of the land-based telecommunications infrastructure encourage the use of mobile wireless communications services in these areas.
We use a transmission technology called integrated digital enhanced network, or iDENR, developed by Motorola, Inc., to provide our digital mobile services on 800 MHz spectrum holdings in all of our digital markets. This technology allows us to use our spectrum more efficiently and offer multiple digital wireless services integrated on one digital handset device. We are designing our digital mobile networks to support multiple digital wireless services, including:
• | digital mobile telephone service, including advanced calling features such as speakerphone, conference calling, voice-mail, call forwarding and additional line service; | |
• | Nextel Direct Connect® service, which allows subscribers anywhere on our network in the same country to talk to each other instantly, on a “push-to-talk” basis, on a private one-to-one call or on a group call; | |
• | Internet services, mobile messaging services, e-mail and advanced Java™ enabled business applications, which are marketed as “Nextel OnlineSM” services; and | |
• | international roaming capabilities, which are marketed as “Nextel WorldwideSM”. | |
The table below provides an overview of our total digital handsets in commercial service in the countries indicated as of March 31, 2004 and 2003. For purposes of the table, digital handsets in commercial service
37
Total Digital Handsets | ||||||||
In Commercial Service | ||||||||
March 31, | March 31, | |||||||
Country | 2004 | 2003 | ||||||
(in thousands) | ||||||||
Mexico | 703 | 553 | ||||||
Brazil | 400 | 375 | ||||||
Argentina | 296 | 222 | ||||||
Peru | 154 | 136 | ||||||
Total | 1,553 | 1,286 | ||||||
Recent Developments
Convertible Notes Issuance. In January 2004, we privately placed $250.0 million aggregate principal amount of 2.875% convertible notes due 2034. In addition, we granted the initial purchaser an option to purchase up to an additional $50.0 million principal amount of notes, which the initial purchaser exercised in full in February 2004. As a result, we issued an additional $50.0 million aggregate principal amount of convertible notes, resulting in total net proceeds of $291.6 million.
The convertible notes bear interest at a rate of 2.875% per year, payable semi-annually in arrears and in cash on February 1 and August 1 of each year, beginning August 1, 2004, and will mature on February 1, 2034, when the entire principal balance of $300.0 million will be due. In addition, the noteholders have the right to require us to repurchase the notes on February 1 of 2011, 2014, 2019, 2024 and 2029 at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest. The notes are convertible, at the option of the holder, into shares of our common stock at an adjusted conversion rate of 18.783 shares per $1,000 principal amount of notes, subject to adjustment, prior to the close of business on the final maturity date under any of the following circumstances:
• | during any fiscal quarter commencing after March 31, 2004, if the closing sale price of our common stock exceeds 120% of the conversion price for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter; | |
• | during the five business day period after any five consecutive trading day period in which the trading price per note for each day of this period was less than 98% of the product of the closing sale price of our common stock and the number of shares issuable upon conversion of $1,000 principal amount of the notes subject to certain limitations; | |
• | if the notes have been called for redemption; or | |
• | upon the occurrence of specified corporate events. | |
We have the option to satisfy the conversion of the notes in shares of our common stock, in cash or a combination of both.
Prior to February 7, 2011, the notes are not redeemable. On or after February 7, 2011, we may redeem for cash some or all of the notes at a price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest.
Repurchase of 13.0% Senior Secured Discount Notes.On March 8, 2004, NII Holdings (Cayman), Ltd. (NII Cayman), one of our wholly-owned subsidiaries, retired substantially all of its $180.8 million aggregate principal amount 13.0% senior secured discount notes due 2009 through a cash tender offer, resulting in a $79.3 million pre-tax loss, including a $47.2 million write-off of the unamortized discount and $2.3 million in charges representing the write-off of debt financing costs and the payment of transaction costs. NII Cayman financed this tender offer with intercompany loans from NII Holdings and cash on hand. We used a portion of
38
Partial Repayment of International Equipment Facility.In February 2004, in compliance with our international equipment facility credit agreement, we prepaid, at face value, $72.5 million of the $125.0 million in outstanding principal and related accrued interest of $0.4 million. We did not realize a gain or loss on this prepayment.
Stock Split.On February 26, 2004, we announced a 3-for-1 common stock split which was effected in the form of a stock dividend that was paid on March 22, 2004 to holders of record as of March 12, 2004. As a result of the stock split, we retroactively restated all historical share and earnings per share data, par value and additional paid-in capital balances for our prior periods in this Form 10-Q/A.
Income Taxes.During the first quarter of 2004, we assessed the realizability of certain deferred tax assets, consistent with the methodology employed during 2003. In that assessment, we considered the reversal of existing temporary differences associated with deferred tax assets, future taxable income, tax planning strategies as considered and historical and future pre-tax book income as adjusted for permanent differences between financial and tax accounting items. Accordingly, we reversed $13.2 million of the valuation allowance associated with deferred tax assets in Mexico due to additional information regarding our expected profitability within certain Mexican operations. Since substantially all of the Mexican valuation allowance existed as of the date we applied fresh-start accounting, $11.9 million of the valuation allowance reduced our intangible assets in accordance with SOP 90-7. Additionally, we recorded an income tax benefit of $1.3 million for the remainder of the valuation allowance as that portion related to deferred tax assets that were generated subsequent to our reorganization.
Ratio of Earnings to Fixed Charges
Three Months Ended | ||||||
March 31, | ||||||
2004 | 2003 | |||||
Restated | Restated | |||||
— | 2.21x |
For the purpose of computing the ratio of earnings to fixed charges, earnings consist of (loss) income from continuing operations before income taxes plus fixed charges and amortization of capitalized interest less capitalized interest, equity in (losses) gains of unconsolidated affiliates and minority interest in losses of subsidiaries. Fixed charges consist of:
• | interest on all indebtedness, amortization of debt financing costs and amortization of original issue discount; | |
• | interest capitalized; and | |
• | the portion of rental expense we believe is representative of interest. |
The deficiency of earnings to cover fixed charges for the three months ended March 31, 2004 was $30.0 million.
Results of Operations
Operating revenues primarily consist of wireless service revenues and revenues generated from the sale of digital handsets and accessories. Service revenues primarily include fixed monthly access charges for digital mobile telephone service and digital two-way radio and other services, revenues from calling party pays programs and variable charges for airtime and digital two-way radio usage in excess of plan minutes and local and long distance charges derived from calls placed by our customers.
Cost of revenues primarily includes the cost of providing wireless service and the cost of digital handset and accessory sales. Cost of providing service consists largely of costs of interconnection with local exchange carrier facilities and direct switch and transmitter and receiver site costs, including property taxes, insurance
39
Our service and other revenues and the variable component of our cost of service are primarily driven by the number of digital handsets in service and not necessarily by the number of customers, as one customer may purchase one or many digital handsets. Our digital handset and accessory revenues and cost of digital handset and accessory sales are primarily driven by the number of new handsets placed into service and handset upgrades provided during the year.
Selling and marketing expenses include all of the expenses related to acquiring customers. General and administrative expenses include expenses related to billing, customer care, collections including bad debt, management information systems, and corporate overhead.
a. Consolidated
% of | % of | Change from | |||||||||||||||||||||||
Consolidated | Consolidated | Previous Year | |||||||||||||||||||||||
March 31, | Operating | March 31, | Operating | ||||||||||||||||||||||
2004 | Revenues | 2003 | Revenues | Dollars | Percent | ||||||||||||||||||||
Restated | Restated | Restated | Restated | Restated | Restated | ||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||||
Operating revenues | |||||||||||||||||||||||||
Service and other revenues | $ | 266,032 | 96 | % | $ | 194,597 | 96 | % | $ | 71,435 | 37 | % | |||||||||||||
Digital handset and accessory revenues | 11,228 | 4 | % | 8,796 | 4 | % | 2,432 | 28 | % | ||||||||||||||||
277,260 | 100 | % | 203,393 | 100 | % | 73,867 | 36 | % | |||||||||||||||||
Cost of revenues | |||||||||||||||||||||||||
Cost of service (exclusive of depreciation included below) | (67,561 | ) | (24 | )% | (45,885 | ) | (23 | )% | (21,676 | ) | 47 | % | |||||||||||||
Cost of digital handset and accessory sales | (40,854 | ) | (15 | )% | (28,247 | ) | (14 | )% | (12,607 | ) | 45 | % | |||||||||||||
(108,415 | ) | (39 | )% | (74,132 | ) | (37 | )% | (34,283 | ) | 46 | % | ||||||||||||||
Selling and marketing expenses | (33,912 | ) | (12 | )% | (27,342 | ) | (13 | )% | (6,570 | ) | 24 | % | |||||||||||||
General and administrative expenses | (51,598 | ) | (19 | )% | (39,254 | ) | (19 | )% | (12,344 | ) | 31 | % | |||||||||||||
Depreciation and amortization | (22,899 | ) | (8 | )% | (17,307 | ) | (9 | )% | (5,592 | ) | 32 | % | |||||||||||||
Operating income | 60,436 | 22 | % | 45,358 | 22 | % | 15,078 | 33 | % | ||||||||||||||||
Interest expense | (16,199 | ) | (6 | )% | (13,920 | ) | (7 | )% | (2,279 | ) | 16 | % | |||||||||||||
Interest income | 2,605 | 1 | % | 1,933 | 1 | % | 672 | 35 | % | ||||||||||||||||
Loss on early extinguishment of debt, net | (79,327 | ) | (29 | )% | — | — | (79,327 | ) | NM | ||||||||||||||||
Foreign currency transaction gains (losses), net | 2,595 | 1 | % | (8,304 | ) | (4 | )% | 10,899 | (131 | )% | |||||||||||||||
Other expense, net | (1,217 | ) | — | (1,966 | ) | (1 | )% | 749 | (38 | )% | |||||||||||||||
(Loss) income before income tax provision | (31,107 | ) | (11 | )% | 23,101 | 11 | % | (54,208 | ) | (235 | )% | ||||||||||||||
Income tax provision | (21,504 | ) | (8 | )% | (13,097 | ) | (6 | )% | (8,407 | ) | 64 | % | |||||||||||||
Net (loss) income | $ | (52,611 | ) | (19 | )% | $ | 10,004 | 5 | % | $ | (62,615 | ) | NM | ||||||||||||
NM-Not Meaningful
1. Operating revenues
The $71.4 million, or 37%, increase in consolidated service and other revenues from the three months ended March 31, 2003 to the three months ended March 31, 2004 is primarily the result of an 18% increase in the average number of consolidated digital handsets in service, as well as an increase in average consolidated revenue per handset resulting from higher access charges and higher revenues generated from service agreements between mobile carriers.
40
The $2.4 million, or 28%, increase in consolidated digital handset and accessory revenues from the three months ended March 31, 2003 to the three months ended March 31, 2004 is largely due to a 24% increase in consolidated handset sales, more handset upgrades provided to current customers and a change in the mix of handsets sold, which included a higher proportion of expensive models during the three months ended March 31, 2004 compared to the same period in 2003.
2. Cost of revenues
The $21.7 million, or 47%, increase in consolidated cost of service from the three months ended March 31, 2003 to the three months ended March 31, 2004 is principally a result of the following:
• | an increase in consolidated interconnect costs primarily resulting from a 34% increase in total system minutes of use; | |
• | an increase in consolidated direct switch and transmitter and receiver site costs resulting from a 16% increase in the number of consolidated transmitter and receiver sites in service from March 31, 2003 to March 31, 2004; and | |
• | an increase in consolidated service and repair costs mainly resulting from increased activity under handset insurance programs in Mexico, Argentina and Brazil. |
The $12.6 million, or 45%, increase in consolidated cost of digital handset and accessory sales is primarily a result of the 24% increase in handset sales, the change in the mix of handsets sold toward more expensive models and an increase in handset upgrades provided to current customers.
3. Selling and marketing expenses
The $6.6 million, or 24%, increase in consolidated selling and marketing expenses from the three months ended March 31, 2003 to the three months ended March 31, 2004 is principally a result of the following:
• | a $4.5 million, or 45%, increase in consolidated direct commissions and payroll expenses largely due to an increase in commissions incurred as a result of a 47% increase in handset sales by company sales personnel; | |
• | a $1.2 million, or 12%, increase in consolidated indirect commissions incurred as a result of a 10% increase in handset sales obtained through indirect channels; and | |
• | a $1.0 million, or 17%, increase in consolidated advertising expenses, primarily in Mexico, mainly related to promoting the launch of Nextel Mexico’s Morelia market. |
4. General and administrative expenses
The $12.3 million, or 31%, increase in consolidated general and administrative expenses from the three months ended March 31, 2003 to the three months ended March 31, 2004 is primarily a result of the following:
• | a $7.7 million, or 37%, increase in general corporate expenses largely due to an increase in certain taxes on operating revenues in Mexico and Argentina, partially offset by a $3.8 million reduction in tax and other contingencies in Brazil; | |
• | a $2.7 million, or 28%, increase in consolidated customer care expenses mainly due to more customer care personnel necessary to support a larger customer base; and | |
• | a $1.4 million, or 26%, increase in consolidated information technology costs resulting from the implementation of various new information technology projects. |
5. Depreciation and amortization
In connection with the application of fresh-start accounting principles on October 31, 2002, we recorded $148.6 million in fixed asset write-downs during the fourth quarter of 2002. These write-downs substantially reduced the cost bases of our consolidated fixed assets and resulted in relatively lower depreciation during the three months ended March 31, 2003. During 2003, we invested $214.3 million in consolidated capital expenditures, which resulted in a significant increase in our property, plant and equipment from the first
41
6. Interest expense
The $2.3 million, or 16%, increase in consolidated interest expense from the three months ended March 31, 2003 to the three months ended March 31, 2004 is primarily a result of the following:
• | an increase in interest incurred as a result of Nextel Mexico’s and Nextel Brazil’s tower sale-leaseback financing transactions executed since March 31, 2003; and | |
• | interest incurred on our 3.5% convertible notes and our 2.875% convertible notes that we issued in September 2003 and January 2004, respectively. |
These increases were partially offset by the following:
• | a reduction in interest resulting from the $100.0 million and $72.5 million principal pay-downs of our international equipment facility in September 2003 and February 2004, respectively; | |
• | the elimination of interest related to our Brazil equipment financing facility in connection with the extinguishment of this facility in September 2003; and | |
• | a reduction in interest incurred on our 13.0% senior secured discount notes in connection with the retirement of substantially all of these notes in March 2004. |
7. Interest income
The $0.7 million, or 35%, increase in consolidated interest income from the three months ended March 31, 2003 to the three months ended March 31, 2004 is principally the result of an increase in average consolidated cash balances.
8. Loss on early extinguishment of debt, net
The $79.3 million net loss on early extinguishment of debt for the three months ended March 31, 2004 represents a loss we incurred in connection with the retirement of substantially all of our 13.0% senior secured discount notes through a cash tender offer in March 2004.
9. Foreign currency transaction gains (losses), net
Net foreign currency transaction gains of $2.6 million for the three months ended March 31, 2004 are primarily the result of foreign currency transaction gains recognized in Mexico resulting from the strengthening of the Mexican peso compared to the U.S. dollar on Nextel Mexico’s U.S. dollar-denominated liabilities, primarily our international equipment facility. Net foreign currency transaction losses of $8.3 million for the three months ended March 31, 2003 are principally the result of the weakening of the Mexican peso compared to the U.S. dollar on our international equipment facility during that period.
10. Income tax provision
The $8.4 million, or 64%, increase in income tax provision from the three months ended March 31, 2003 to the three months ended March 31, 2004 is primarily the result of an increase in the income tax provision in Mexico resulting from higher taxable income, partially offset by a decrease in the income tax provision in Argentina resulting from lower profitability and the reversal of a $1.3 million of valuation allowances related to deferred tax assets that were generated subsequent to our reorganization during the three months ended March 31, 2004.
42
Segment Results
We refer to our operating companies by the countries in which they operate, such as Nextel Mexico, Nextel Brazil, Nextel Argentina, Nextel Peru and Nextel Chile. We evaluate performance of these segments and provide resources to them based on operating income before depreciation and amortization and impairment, restructuring and other charges, which we refer to as segment earnings. The tables below provide a summary of the components of our consolidated segments for the three months ended March 31, 2004 and 2003. The results of Nextel Chile are included in “Corporate and other.” During 2003, we began allocating corporate overhead costs to some of our subsidiaries. We expect that a portion of these allocated amounts will be treated as tax deductions and serve to reduce our effective tax rate. The segment information below does not reflect any allocations of corporate overhead costs because the amounts of these expenses are not provided to or used by our chief operating decision maker in making operating decisions related to these segments.
% of | ||||||||||||||||||||||||||||
Consolidated | ||||||||||||||||||||||||||||
% of | % of | Selling, | Selling, | |||||||||||||||||||||||||
Consolidated | Consolidated | General and | General and | Segment | ||||||||||||||||||||||||
Three Months Ended | Operating | Operating | Cost of | Cost of | Administrative | Administrative | Earnings | |||||||||||||||||||||
March 31, 2004 | Revenues | Revenues | Revenues | Revenues | Expenses | Expenses | (Losses) | |||||||||||||||||||||
Restated | Restated | Restated | ||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||
Nextel Mexico | $ | 172,963 | 62 | % | $ | (51,729 | ) | 48 | % | $ | (45,031 | ) | 53 | % | $ | 76,203 | ||||||||||||
Nextel Brazil | 43,194 | 16 | % | (27,019 | ) | 25 | % | (12,668 | ) | 15 | % | 3,507 | ||||||||||||||||
Nextel Argentina | 37,689 | 14 | % | (17,162 | ) | 16 | % | (10,507 | ) | 12 | % | 10,020 | ||||||||||||||||
Nextel Peru | 23,146 | 8 | % | (12,224 | ) | 11 | % | (6,731 | ) | 8 | % | 4,191 | ||||||||||||||||
Corporate and other | 407 | — | (420 | ) | — | (10,573 | ) | 12 | % | (10,586 | ) | |||||||||||||||||
Intercompany eliminations | (139 | ) | — | 139 | — | — | — | — | ||||||||||||||||||||
Total consolidated | $ | 277,260 | 100 | % | $ | (108,415 | ) | 100 | % | $ | (85,510 | ) | 100 | % | ||||||||||||||
% of | ||||||||||||||||||||||||||||
Consolidated | ||||||||||||||||||||||||||||
% of | % of | Selling, | Selling, | |||||||||||||||||||||||||
Consolidated | Consolidated | General and | General and | Segment | ||||||||||||||||||||||||
Three Months Ended | Operating | Operating | Cost of | Cost of | Administrative | Administrative | Earnings | |||||||||||||||||||||
March 31, 2003 | Revenues | Revenues | Revenues | Revenues | Expenses | Expenses | (Losses) | |||||||||||||||||||||
Restated | Restated | Restated | ||||||||||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||||||
Nextel Mexico | $ | 126,434 | 62 | % | $ | (39,709 | ) | 54 | % | $ | (31,249 | ) | 47 | % | $ | 55,476 | ||||||||||||
Nextel Brazil | 33,674 | 17 | % | (16,967 | ) | 23 | % | (13,222 | ) | 20 | % | 3,485 | ||||||||||||||||
Nextel Argentina | 20,335 | 10 | % | (6,461 | ) | 9 | % | (7,410 | ) | 11 | % | 6,464 | ||||||||||||||||
Nextel Peru | 22,693 | 11 | % | (10,547 | ) | 14 | % | (6,493 | ) | 10 | % | 5,653 | ||||||||||||||||
Corporate and other | 390 | — | (581 | ) | — | (8,222 | ) | 12 | % | (8,413 | ) | |||||||||||||||||
Intercompany eliminations | (133 | ) | — | 133 | — | — | — | — | ||||||||||||||||||||
Total consolidated | $ | 203,393 | 100 | % | $ | (74,132 | ) | 100 | % | $ | (66,596 | ) | 100 | % | ||||||||||||||
43
A discussion of the results of operations in each of our reportable segments is provided below.
b. Nextel Mexico
% of | % of | ||||||||||||||||||||||||
Nextel | Nextel | Change from | |||||||||||||||||||||||
Mexico’s | Mexico’s | Previous Year | |||||||||||||||||||||||
March 31, | Operating | March 31, | Operating | ||||||||||||||||||||||
2004 | Revenues | 2003 | Revenues | Dollars | Percent | ||||||||||||||||||||
Restated | Restated | Restated | Restated | Restated | Restated | ||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||||
Operating revenues | |||||||||||||||||||||||||
Service and other revenues | $ | 167,938 | 97 | % | $ | 122,675 | 97 | % | $ | 45,263 | 37 | % | |||||||||||||
Digital handset and accessory revenues | 5,025 | 3 | % | 3,759 | 3 | % | 1,266 | 34 | % | ||||||||||||||||
172,963 | 100 | % | 126,434 | 100 | % | 46,529 | 37 | % | |||||||||||||||||
Cost of revenues | |||||||||||||||||||||||||
Cost of service (exclusive of depreciation included below) | (29,497 | ) | (17 | )% | (23,050 | ) | (18 | )% | (6,447 | ) | 28 | % | |||||||||||||
Cost of digital handset and accessory sales | (22,232 | ) | (13 | )% | (16,659 | ) | (13 | )% | (5,573 | ) | 33 | % | |||||||||||||
(51,729 | ) | (30 | )% | (39,709 | ) | (31 | )% | (12,020 | ) | 30 | % | ||||||||||||||
Selling and marketing expenses | (21,453 | ) | (12 | )% | (16,806 | ) | (13 | )% | (4,647 | ) | 28 | % | |||||||||||||
General and administrative expenses | (23,578 | ) | (14 | )% | (14,443 | ) | (12 | )% | (9,135 | ) | 63 | % | |||||||||||||
Segment earnings | 76,203 | 44 | % | 55,476 | 44 | % | 20,727 | 37 | % | ||||||||||||||||
Depreciation and amortization | (16,917 | ) | (10 | )% | (15,445 | ) | (12 | )% | (1,472 | ) | 10 | % | |||||||||||||
Operating income | 59,286 | 34 | % | 40,031 | 32 | % | 19,255 | 48 | % | ||||||||||||||||
Interest expense | (5,187 | ) | (3 | )% | (3,655 | ) | (3 | )% | (1,532 | ) | 42 | % | |||||||||||||
Interest income | 686 | — | 751 | — | (65 | ) | (9 | )% | |||||||||||||||||
Foreign currency transaction gains (losses), net | 3,196 | 2 | % | (11,432 | ) | (9 | )% | 14,628 | (128 | )% | |||||||||||||||
Other (expense) income, net | (554 | ) | — | 176 | — | (730 | ) | (415 | )% | ||||||||||||||||
Income before income tax | $ | 57,427 | 33 | % | $ | 25,871 | 20 | % | $ | 31,556 | 122 | % | |||||||||||||
In accordance with accounting principles generally accepted in the United States, we translated Nextel Mexico’s results of operations using the average exchange rates for the three months ended March 31, 2004. The average exchange rate of the Mexican peso for the three months ended March 31, 2004 depreciated against the U.S. dollar by 5% from the three months ended March 31, 2003. As a result, compared to 2003, the components of Nextel Mexico’s results of operations for 2004 after translation into U.S. dollars reflect lower increases than would have occurred if it were not for the impact of the depreciation of the peso, taking into consideration our one-month lag financial reporting policy for our non-U.S. operating subsidiaries.
1. Operating revenues
The $45.3 million, or 37%, increase in service and other revenues from the three months ended March 31, 2003 to the three months ended March 31, 2004 is primarily a result of the following:
• | a 27% increase in the average number of digital handsets in service from the three months ended March 31, 2003 to the same period in 2004 resulting from growth in Nextel Mexico’s existing markets, as well as the expansion of service coverage in Mexico that has occurred since March 31, 2003; | |
• | an increase in average revenue per handset on a local currency basis primarily due to the successful implementation of previously introduced monthly service plans with higher access charges and price increases applied to the existing customer base; and | |
• | $6.0 million in revenues generated from Nextel Mexico’s amended handset insurance program during the three months ended March 31, 2004. |
44
The $1.3 million, or 34%, increase in digital handset and accessory revenues from the three months ended March 31, 2003 to the three months ended March 31, 2004 is primarily the result of a 21% increase in handset sales, as well as a change in the mix of handsets sold, which included a higher proportion of expensive models during the three months ended March 31, 2004 compared to the same period in 2003.
2. Cost of revenues
The $6.4 million, or 28%, increase in cost of service from the three months ended March 31, 2003 to the three months ended March 31, 2004 is largely a result of the following:
• | an increase in interconnect costs generally resulting from a 37% increase in total system minutes of use, partially offset by a decrease in variable interconnect cost per minute of use as a result of the renegotiation of interconnect rates with some of Nextel Mexico’s traffic carriers during the three months ended March 31, 2004; | |
• | an increase in fixed costs related to direct switch and transmitter and receiver site costs resulting from a 27% increase in the number of transmitter and receiver sites in service from March 31, 2003 to March 31, 2004; and | |
• | an increase in service and repair costs largely due to increased activity under Nextel Mexico’s handset insurance program. |
The $5.6 million, or 33%, increase in cost of digital handset and accessory sales from the three months ended March 31, 2003 to the three months ended March 31, 2004 is a result of the 21% increase in handset sales, as well as an increase in handset upgrades provided to current customers.
3. Selling and marketing expenses
The $4.6 million, or 28%, increase in selling and marketing expenses from the three months ended March 31, 2003 to the three months ended March 31, 2004 is principally a result of the following:
• | a $3.1 million, or 65%, increase in direct commissions and payroll expenses, largely due to an increase in commissions incurred as a result of a 73% increase in handset sales by Nextel Mexico’s salesforce and an increase in payroll and related expenses resulting from more sales and marketing personnel; and | |
• | a $0.9 million, or 22%, increase in advertising expenses primarily related to new advertising campaigns promoting the launch of the Morelia market. |
4. General and administrative expenses
The $9.1 million, or 63%, increase in general and administrative expenses from the three months ended March 31, 2003 to the three months ended March 31, 2004 is primarily a result of the following:
• | a $7.1 million, or 109%, increase in general corporate expenses primarily resulting from an increase in taxes on operating revenues and costs recognized as a result of government-mandated employee profit sharing, as well as an increase in payroll and related expenses caused by more general and administrative personnel; | |
• | a $1.3 million, or 26%, increase in customer care expenses principally resulting from an increase in payroll and related expenses caused by more customer care personnel necessary to support a growing customer base; and | |
• | a $0.8 million, or 49%, increase in information technology costs largely as a result of the implementation of various new information technology projects. |
5. Depreciation and amortization
The $1.5 million, or 10%, increase in depreciation and amortization from the three months ended March 31, 2003 to the three months ended March 31, 2004 is primarily a result of an increase in Nextel Mexico’s property, plant and equipment, mostly due to the build-out of new service areas partially offset by a decrease in amortization. This decrease is the result of the reversal of certain valuation allowances for deferred
45
6. Interest expense
The $1.5 million, or 42%, increase in interest expense from the three months ended March 31, 2003 to the three months ended March 31, 2004 is largely a result of an increase in interest incurred on Nextel Mexico’s tower financing obligations. This increase was partially offset by a decrease in interest incurred on our international equipment facility in connection with the $100.0 million and $72.5 million principal pay-downs of this facility in September 2003 and February 2004, respectively.
7. Foreign currency transaction gains (losses), net
Foreign currency transaction gains of $3.2 million for the three months ended March 31, 2004 are largely the result of the strengthening of the Mexican peso compared to the U.S. dollar on Nextel Mexico’s U.S. dollar-based liabilities, primarily the international equipment facility, during that period. Foreign currency transaction losses of $11.4 million for the three months ended March 31, 2003 are primarily the result of the weakening of the Mexican peso compared to the U.S. dollar on the international equipment facility during that period.
c. Nextel Brazil
% of | % of | ||||||||||||||||||||||||
Nextel | Nextel | Change from | |||||||||||||||||||||||
Brazil’s | Brazil’s | Previous Year | |||||||||||||||||||||||
March 31, | Operating | March 31, | Operating | ||||||||||||||||||||||
2004 | Revenues | 2003 | Revenues | Dollars | Percent | ||||||||||||||||||||
Restated | Restated | Restated | Restated | Restated | Restated | ||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||||
Operating revenues | |||||||||||||||||||||||||
Service and other revenues | $ | 40,554 | 94 | % | $ | 30,916 | 92 | % | $ | 9,638 | 31 | % | |||||||||||||
Digital handset and accessory revenues | 2,640 | 6 | % | 2,758 | 8 | % | (118 | ) | (4 | )% | |||||||||||||||
43,194 | 100 | % | 33,674 | 100 | % | 9,520 | 28 | % | |||||||||||||||||
Cost of revenues | |||||||||||||||||||||||||
Cost of service (exclusive of depreciation included below) | (17,578 | ) | (41 | )% | (11,242 | ) | (33 | )% | (6,336 | ) | 56 | % | |||||||||||||
Cost of digital handset and accessory sales | (9,441 | ) | (22 | )% | (5,725 | ) | (17 | )% | (3,716 | ) | 65 | % | |||||||||||||
(27,019 | ) | (63 | )% | (16,967 | ) | (50 | )% | (10,052 | ) | 59 | % | ||||||||||||||
Selling and marketing expenses | (5,912 | ) | (14 | )% | (4,744 | ) | (14 | )% | (1,168 | ) | 25 | % | |||||||||||||
General and administrative expenses | (6,756 | ) | (15 | )% | (8,478 | ) | (25 | )% | 1,722 | (20 | )% | ||||||||||||||
Segment earnings | 3,507 | 8 | % | 3,485 | 11 | % | 22 | 1 | % | ||||||||||||||||
Depreciation and amortization | (2,516 | ) | (6 | )% | (558 | ) | (2 | )% | (1,958 | ) | 351 | % | |||||||||||||
Operating income | 991 | 2 | % | 2,927 | 9 | % | (1,936 | ) | (66 | )% | |||||||||||||||
Interest expense | (2,663 | ) | (6 | )% | (2,231 | ) | (7 | )% | (432 | ) | 19 | % | |||||||||||||
Interest income | 923 | 2 | % | 604 | 2 | % | 319 | 53 | % | ||||||||||||||||
Foreign currency transaction gains, net | 38 | — | 2,134 | 6 | % | (2,096 | ) | (98 | )% | ||||||||||||||||
Other expense, net | (541 | ) | (1 | )% | (71 | ) | — | (470 | ) | NM | |||||||||||||||
(Loss) income before income tax | $ | (1,252 | ) | (3 | )% | $ | 3,363 | 10 | % | $ | (4,615 | ) | (137 | )% | |||||||||||
NM-Not Meaningful
In accordance with accounting principles generally accepted in the United States, we translated Nextel Brazil’s results of operations using the average exchange rates for the three months ended March 31, 2004 and 2003. The average exchange rate for the three months ended March 31, 2004 appreciated against the U.S. dollar by 22% from the three months ended March 31, 2003. As a result, the components of Nextel Brazil’s results of operations for the three months ended March 31, 2004 after translation into U.S. dollars reflect
46
1. Operating revenues
The $9.6 million, or 31%, increase in service and other revenues from the three months ended March 31, 2003 to the three months ended March 31, 2004 is primarily a result of the increase in the average value of the Brazilian real compared to the U.S. dollar, as well as an increase in average revenue per handset on a local currency basis, largely due to higher revenues generated from calling party pays service agreements.
2. Cost of revenues
The $6.3 million, or 56%, increase in cost of service from the three months ended March 31, 2003 to the three months ended March 31, 2004 is primarily a result of the following:
• | an increase in interconnect costs mainly resulting from higher interconnect minutes of use, as well as an increase in local currency interconnect cost per minute of use; | |
• | an increase in direct switch and transmitter and receiver site costs that Nextel Brazil incurred as a result of an 11% increase in the number of transmitter and receiver sites in service from March 31, 2003 to March 31, 2004; and | |
• | an increase in the average value of the Brazilian real compared to the U.S. dollar. | |
The $3.7 million, or 65%, increase in cost of digital handset and accessory sales from the three months ended March 31, 2003 to the three months ended March 31, 2004 is largely a result of a 41% increase in handset sales and rentals, which were on average more expensive during the first quarter of 2004 compared to the same period in 2003, a significant reduction in the proportion of used handsets sold and leased during the first quarter of 2004 and an increase in handset upgrades provided to current customers.
3. Selling and marketing expenses
The $1.2 million, or 25%, increase in selling and marketing expenses from the three months ended March 31, 2003 to the three months ended March 31, 2004 is principally due to an increase in direct commissions resulting from a 53% increase in handset sales by Nextel Brazil’s salesforce, an increase in payroll and related expenses due to more selling and marketing personnel and the increase in the average value of the Brazilian real.
4. General and administrative expenses
The $1.7 million, or 20%, decrease in general and administrative expenses from the three months ended March 31, 2003 to the three months ended March 31, 2004 is primarily a result of a $2.8 million, or 65%, decrease in general corporate expenses largely caused by a $3.8 million reduction in tax and other contingency expenses. This decrease was partially offset by a $0.5 million, or 22%, increase in customer care expenses due to an increase in payroll and related expenses caused by more general and administrative personnel and the increase in the average value of the Brazilian real.
5. Depreciation and amortization
In connection with the application of fresh-start accounting principles on October 31, 2002, Nextel Brazil recorded $27.8 million in fixed asset write-downs in the fourth quarter of 2002. These write-downs substantially reduced the cost bases of Nextel Brazil’s fixed assets and resulted in less depreciation during the three months ended March 31, 2003. During 2003, Nextel Brazil invested $33.0 million in capital expenditures, which resulted in a significant increase in Nextel Brazil’s property, plant and equipment from the first quarter of 2003 to the first quarter of 2004. The $2.0 million increase in depreciation and amortization from the three months ended March 31, 2003 to the three months ended March 31, 2004 is primarily due to increased depreciation on Nextel Brazil’s higher property, plant and equipment base.
47
6. Foreign currency transaction gains, net
The $2.1 million, or 98%, decrease in foreign currency transaction gains from the three months ended March 31, 2003 to the three months ended March 31, 2004 is principally due to a significant reduction of Nextel Brazil’s U.S. dollar-denominated liabilities in connection with the extinguishment of its equipment financing facility during the third quarter of 2003.
d. Nextel Argentina
% of | % of | ||||||||||||||||||||||||
Nextel | Nextel | Change from | |||||||||||||||||||||||
Argentina’s | Argentina’s | Previous Year | |||||||||||||||||||||||
March | Operating | March 31, | Operating | ||||||||||||||||||||||
31, 2004 | Revenues | 2003 | Revenues | Dollars | Percent | ||||||||||||||||||||
Restated | Restated | Restated | Restated | Restated | Restated | ||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||||
Operating revenues | |||||||||||||||||||||||||
Service and other revenues | $ | 34,675 | 92 | % | $ | 18,583 | 91 | % | $ | 16,092 | 87 | % | |||||||||||||
Digital handset and accessory revenues | 3,014 | 8 | % | 1,752 | 9 | % | 1,262 | 72 | % | ||||||||||||||||
37,689 | 100 | % | 20,335 | 100 | % | 17,354 | 85 | % | |||||||||||||||||
Cost of revenues | |||||||||||||||||||||||||
Cost of service (exclusive of depreciation included below) | (11,379 | ) | (30 | )% | (3,727 | ) | (18 | )% | (7,652 | ) | 205 | % | |||||||||||||
Cost of digital handset and accessory sales | (5,783 | ) | (15 | )% | (2,734 | ) | (14 | )% | (3,049 | ) | 112 | % | |||||||||||||
(17,162 | ) | (45 | )% | (6,461 | ) | (32 | )% | (10,701 | ) | 166 | % | ||||||||||||||
Selling and marketing expenses | (2,882 | ) | (8 | )% | (1,989 | ) | (9 | )% | (893 | ) | 45 | % | |||||||||||||
General and administrative expenses | (7,625 | ) | (20 | )% | (5,421 | ) | (27 | )% | (2,204 | ) | 41 | % | |||||||||||||
Segment earnings | 10,020 | 27 | % | 6,464 | 32 | % | 3,556 | 55 | % | ||||||||||||||||
Depreciation and amortization | (2,221 | ) | (6 | )% | (515 | ) | (3 | )% | (1,706 | ) | 331 | % | |||||||||||||
Operating income | 7,799 | 21 | % | 5,949 | 29 | % | 1,850 | 31 | % | ||||||||||||||||
Interest expense | (8 | ) | — | — | — | (8 | ) | NM | |||||||||||||||||
Interest income | 105 | — | 96 | 1 | % | 9 | 9 | % | |||||||||||||||||
Foreign currency transaction (losses) gains, net | (642 | ) | (2 | )% | 884 | 4 | % | (1,526 | ) | (173 | )% | ||||||||||||||
Other income, net | 14 | — | 7,191 | 35 | % | (7,177 | ) | (100 | )% | ||||||||||||||||
Income before income tax | $ | 7,268 | 19 | % | $ | 14,120 | 69 | % | $ | (6,852 | ) | (49 | )% | ||||||||||||
NM-Not Meaningful
In accordance with accounting principles generally accepted in the United States, we translated Nextel Argentina’s results of operations using the average exchange rates for the three months ended March 31, 2004 and 2003. The average exchange rate of the Argentine peso for the three months ended March 31, 2004 appreciated against the U.S. dollar by 13% from the same period in 2003. As a result, the components of Nextel Argentina’s results of operations for the three months ended March 31, 2004 after translation into U.S. dollars reflect increases compared to its results of operations for the same period in 2003, taking into consideration our one-month lag financial reporting policy for our non-U.S. operating subsidiaries.
1. Operating revenues
The $16.1 million, or 87%, increase in service and other revenues from the three months ended March 31, 2003 to the three months ended March 31, 2004 is primarily a result of the following:
• | a 32% increase in the average number of digital handsets in service due to growth in Nextel Argentina’s existing markets; | |
• | an increase in average revenue per handset on a local currency basis, largely resulting from the implementation of a termination fee between mobile carriers during the second quarter of 2003; and |
48
• | the increase in the average value of the Argentine peso. |
The $1.3 million, or 72%, increase in digital handset and accessory sales from the three months ended March 31, 2003 to the three months ended March 31, 2004 is largely a result of a 20% increase in handset sales and leases, as well as a significant change in the mix of handsets sold and leased, which included a substantially higher proportion of expensive models during the three months ended March 31, 2004 compared to the same period in 2003 when handset sales and leases primarily included lower cost refurbished models.
2. Cost of revenues
The $7.7 million, or 205%, increase in cost of service from the three months ended March 31, 2003 to the three months ended March 31, 2004 is primarily a result of the following:
• | an increase in interconnect costs largely as a result of a 48% increase in total system minutes of use and a significant increase in variable interconnect cost per minute of use resulting from an agreement between Nextel Argentina and other mobile carriers reached in the second quarter of 2003 that allows each of the carriers to charge a fee for mobile calls that terminate on their networks; | |
• | an increase in service and repair costs resulting from increased activity under Nextel Argentina’s handset replacement program during the three months ended March 31, 2004; | |
• | an increase in direct switch and transmitter and receiver site costs due to a 7% increase in the number of transmitter and receiver sites in service from March 31, 2003 to March 31, 2004; and | |
• | the increase in the average value of the Argentine peso. |
The $3.0 million, or 112%, increase in cost of digital handset and accessory sales is largely a result of a 20% increase in handset sales, as well as the change in the mix of handsets sold toward more expensive models and away from refurbished models that were predominantly sold in the first quarter of 2003.
3. Selling and marketing expenses
The $0.9 million, or 45%, increase in selling and marketing expenses from the three months ended March 31, 2003 to the three months ended March 31, 2004 is largely a result of a $0.4 million, or 57%, increase in indirect commissions mainly caused by a 28% increase in handset sales obtained through indirect channels. This increase is also a result of a $0.4 million increase in advertising and other marketing expenses resulting from more expensive advertising promotions. Both increases also resulted from the appreciation of the average value of the Argentine peso.
4. General and administrative expenses
The $2.2 million, or 41%, increase in general and administrative expenses from the three months ended March 31, 2003 to the three months ended March 31, 2004 is primarily due to a $2.0 million, or 67%, increase in general corporate expenses caused by an increase in certain revenue-based taxes, as well as an increase in payroll and related expenses due to more general and administrative personnel and the increase in the average value of the Argentine peso.
5. Depreciation and amortization
In connection with the application of fresh-start accounting principles on October 31, 2002, Nextel Argentina recorded $4.3 million in fixed asset write-downs during the fourth quarter of 2002. These write-downs substantially reduced the cost bases of Nextel Argentina’s fixed assets and resulted in less depreciation during the three months ended March 31, 2003. During 2003, Nextel Argentina invested $22.9 million in capital expenditures, which resulted in a significant increase in Nextel Argentina’s property, plant and equipment from the first quarter of 2003 to the first quarter of 2004. The $1.7 million increase in depreciation and amortization from the three months ended March 31, 2003 to the three months ended March 31, 2004 is primarily due to increased depreciation on Nextel Argentina’s higher property, plant and equipment base.
49
6. Foreign currency transaction (losses) gains, net
Foreign currency transaction losses of $0.6 million for the three months ended March 31, 2004 are primarily due to the strengthening of the Argentine peso compared to the U.S. dollar on Nextel Argentina’s U.S. dollar-denominated assets. Foreign currency transaction gains of $0.9 million for the three months ended March 31, 2003 are largely due to the weakening of the Argentine peso relative to the U.S. dollar on Nextel Argentina’s U.S. dollar-denominated assets.
7. Other income, net
In connection with our emergence from Chapter 11 reorganization in 2002, one of our corporate entities repurchased Nextel Argentina’s credit facilities from its creditors. While this corporate entity contributed the principal balance to Nextel Argentina as a capital investment, it forgave the accrued interest related to these credit facilities during the first quarter of 2003. Other income of $7.2 million for the three months ended March 31, 2003 primarily represents the gain related to the forgiveness of this accrued interest.
e. Nextel Peru
% of | % of | ||||||||||||||||||||||||
Nextel | Nextel | Change from | |||||||||||||||||||||||
Peru’s | Peru’s | Previous Year | |||||||||||||||||||||||
March 31, | Operating | March 31, | Operating | ||||||||||||||||||||||
2004 | Revenues | 2003 | Revenues | Dollars | Percent | ||||||||||||||||||||
Restated | Restated | Restated | Restated | Restated | Restated | ||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||||
Operating revenues | |||||||||||||||||||||||||
Service and other revenues | $ | 22,597 | 98 | % | $ | 22,167 | 98 | % | $ | 430 | 2 | % | |||||||||||||
Digital handset and accessory revenues | 549 | 2 | % | 526 | 2 | % | 23 | 4 | % | ||||||||||||||||
23,146 | 100 | % | 22,693 | 100 | % | 453 | 2 | % | |||||||||||||||||
Cost of revenues | |||||||||||||||||||||||||
Cost of service (exclusive of depreciation included below) | (8,826 | ) | (38 | )% | (7,665 | ) | (34 | )% | (1,161 | ) | 15 | % | |||||||||||||
Cost of digital handset and accessory sales | (3,398 | ) | (15 | )% | (2,882 | ) | (12 | )% | (516 | ) | 18 | % | |||||||||||||
(12,224 | ) | (53 | )% | (10,547 | ) | (46 | )% | (1,677 | ) | 16 | % | ||||||||||||||
Selling and marketing expenses | (2,548 | ) | (11 | )% | (2,859 | ) | (13 | )% | 311 | (11 | )% | ||||||||||||||
General and administrative expenses | (4,183 | ) | (18 | )% | (3,634 | ) | (16 | )% | (549 | ) | 15 | % | |||||||||||||
Segment earnings | 4,191 | 18 | % | 5,653 | 25 | % | (1,462 | ) | (26 | )% | |||||||||||||||
Depreciation and amortization | (1,134 | ) | (5 | )% | (679 | ) | (3 | )% | (455 | ) | 67 | % | |||||||||||||
Operating income | 3,057 | 13 | % | 4,974 | 22 | % | (1,917 | ) | (39 | )% | |||||||||||||||
Interest expense | (83 | ) | — | (535 | ) | (2 | )% | 452 | (84 | )% | |||||||||||||||
Interest income | 41 | — | 7 | — | 34 | 486 | % | ||||||||||||||||||
Foreign currency transaction gains, net | 6 | — | 126 | — | (120 | ) | (95 | )% | |||||||||||||||||
Other expense, net | (4 | ) | — | (75 | ) | — | 71 | (95 | )% | ||||||||||||||||
Income before income tax | $ | 3,017 | 13 | % | $ | 4,497 | 20 | % | $ | (1,480 | ) | (33 | )% | ||||||||||||
Because the U.S. dollar is the functional currency in Peru, Nextel Peru’s results of operations are not significantly impacted by the changes in the U.S. dollar to Peruvian sol exchange rate.
1. Operating revenues
The $0.4 million, or 2%, increase in service and other revenues from the three months ended March 31, 2003 to the three months ended March 31, 2004 is primarily due to a 13% increase in the average number of digital handsets in service, partially offset by a decrease in average revenue per handset resulting from the implementation of a new rate plan with lower access charges during the second quarter of 2003.
50
2. Cost of revenues
The $1.2 million, or 15%, increase in cost of service from the three months ended March 31, 2003 to the three months ended March 31, 2004 is primarily a result of the following:
• | an increase in interconnect expenses resulting from a 9% increase in total system minutes of use and an increase in variable interconnect cost per minute of use resulting from a change in intercarrier billing methodology during the third quarter of 2003; and | |
• | an increase in direct switch and transmitter and receiver site costs primarily caused by a 6% increase in the number of transmitter and receiver sites in service from March 31, 2003 to March 31, 2004. |
The $0.5 million, or 18%, increase in cost of digital handset and accessory sales from the three months ended March 31, 2003 to the three months ended March 31, 2004 is principally due to a 7% increase in handset sales, as well as a change in the mix of handsets sold, which included a higher proportion of expensive models during the three months ended March 31, 2004 compared to the same period in 2003.
3. General and administrative expenses
The $0.5 million, or 15%, increase in general and administrative expenses from the three months ended March 31, 2003 to the three months ended March 31, 2004 is primarily due to higher customer care payroll and related expenses due to more customer care personnel necessary to support a larger customer base.
4. Depreciation and amortization
The $0.5 million, or 67%, increase in depreciation and amortization from the three months ended March 31, 2003 to the three months ended March 31, 2004 is primarily due to increased depreciation resulting from a significant increase in Nextel Peru’s property, plant and equipment.
f. Corporate and other
% of | % of | ||||||||||||||||||||||||
Corporate | Corporate | Change from | |||||||||||||||||||||||
and other | and other | Previous Year | |||||||||||||||||||||||
March 31, | Operating | March 31, | Operating | ||||||||||||||||||||||
2004 | Revenues | 2003 | Revenue | Dollars | Percent | ||||||||||||||||||||
Restated | Restated | Restated | Restated | Restated | Restated | ||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||||
Operating revenues | |||||||||||||||||||||||||
Service and other revenues | $ | 407 | 100 | % | $ | 389 | 100 | % | $ | 18 | 5 | % | |||||||||||||
Digital handset and accessory revenues | — | — | 1 | NM | (1 | ) | NM | ||||||||||||||||||
407 | 100 | % | 390 | 100 | % | 17 | 4 | % | |||||||||||||||||
Cost of revenues | |||||||||||||||||||||||||
Cost of service (exclusive of depreciation included below) | (420 | ) | (103 | )% | (334 | ) | (86 | )% | (86 | ) | 26 | % | |||||||||||||
Cost of digital handset and accessory sales | — | — | (247 | ) | (63 | )% | 247 | (100 | )% | ||||||||||||||||
(420 | ) | (103 | )% | (581 | ) | (149 | )% | 161 | (28 | )% | |||||||||||||||
Selling and marketing expenses | (1,117 | ) | (274 | )% | (944 | ) | (242 | )% | (173 | ) | (18 | )% | |||||||||||||
General and administrative expenses | (9,456 | ) | NM | (7,278 | ) | NM | (2,178 | ) | 30 | % | |||||||||||||||
Segment losses | (10,586 | ) | NM | (8,413 | ) | NM | (2,173 | ) | 26 | % | |||||||||||||||
Depreciation and amortization | (217 | ) | (53 | )% | (110 | ) | (28 | )% | (107 | ) | 97 | % | |||||||||||||
Operating loss | (10,803 | ) | NM | (8,523 | ) | NM | (2,280 | ) | 27 | % | |||||||||||||||
Interest expense | (8,264 | ) | NM | (7,788 | ) | NM | (476 | ) | 6 | % | |||||||||||||||
Interest income | 856 | 210 | % | 764 | 196 | % | 92 | 12 | % | ||||||||||||||||
Loss on early extinguishment of debt, net | (79,327 | ) | NM | — | — | (79,327 | ) | NM | |||||||||||||||||
Foreign currency transaction losses, net | (3 | ) | (1 | )% | (16 | ) | (4 | )% | 13 | (81 | )% | ||||||||||||||
Other expense, net | (132 | ) | (32 | )% | (7,077 | ) | NM | 6,945 | (98 | )% | |||||||||||||||
Loss before income tax | $ | (97,673 | ) | NM | $ | (22,640 | ) | NM | $ | (75,033 | ) | 331 | % | ||||||||||||
NM-Not Meaningful
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Corporate and other operating revenues and cost of revenues primarily represent the results of analog operations reported by Nextel Chile.
1. General and administrative expenses
The $2.2 million, or 30%, increase in general and administrative expenses from the three months ended March 31, 2003 to the three months ended March 31, 2004 is primarily due to an increase in corporate payroll and related expenses and an increase in corporate audit and tax fees.
2. Interest expense
The $0.5 million, or 6%, increase in interest expense from the three months ended March 31, 2003 to the three months ended March 31, 2004 is primarily due to interest recognized on our 3.5% convertible notes and our 2.875% convertible notes issued in September 2003 and January 2004, respectively. This additional interest was partially offset by a decrease in interest related to our international equipment facility in connection with the principal pay-down of this facility in September 2003 and the elimination of interest related to our 13.0% senior secured discount notes in connection with the retirement of substantially all of these notes in March 2004.
3. Loss on early extinguishment of debt, net
The $79.3 million net loss on early extinguishment of debt for the three months ended March 31, 2004 represents a loss we incurred in connection with the retirement of substantially all of our 13.0% senior secured discount notes through a cash tender offer in March 2004.
4. Other expense, net
Other expense, net, of $7.1 million for the three months ended March 31, 2003 primarily represents the loss related to the accrued interest that we forgave on Nextel Argentina’s credit facilities in connection with the repurchase of these facilities by one of our corporate entities.
Liquidity and Capital Resources
We had a working capital surplus of $422.4 million as of March 31, 2004 and $393.6 million as of December 31, 2003. The increase in our working capital is largely the result of cash flows generated by our financing activities described below.
We recognized a net loss of $52.6 million for the three months ended March 31, 2004, primarily due to the recognition of a $79.3 million loss on the early extinguishment of our senior secured discount notes. We recognized net income of $10.0 million for the three months ended March 31, 2003. Prior to 2003, our operating expenses and capital expenditures associated with developing, enhancing and operating our digital mobile networks more than offset our operating revenues. During 2003 and the first quarter of 2004, our operating revenues more than offset our operating expenses, excluding depreciation and amortization, and cash capital expenditures. While we expect this trend to continue, if business conditions, timing of capital expenditures or expansion plans change, we may not be able to maintain this trend. See “Future Capital Needs and Resources” for a discussion of our future outlook and anticipated sources and uses of funds for the remainder of 2004.
Cash Flows.Our operating activities provided us with $31.9 million of net cash during the three months ended March 31, 2004 and $64.4 million of net cash during the three months ended March 31, 2003. The $32.5 million decrease in generation of cash is primarily due to the pay down of current liabilities during the first quarter.
We used $82.0 million of net cash in our investing activities during the three months ended March 31, 2004 compared to $50.6 million during the three months ended March 31, 2003. The $31.4 million increase in cash used in our investing activities is due to $25.8 million in cash used to purchase short-term investments and a $5.5 million increase in cash capital expenditures.
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Our financing activities provided us with $14.3 million of net cash during the three months ended March 31, 2004, primarily due to the following:
• | $300.0 million in gross proceeds that we raised in connection with the issuance of our 2.875% convertible notes; and | |
• | $6.4 million in proceeds received in connection with tower sale-leaseback financing transactions; |
partially offset by:
• | $211.2 million in cash used to retire our 13.0% senior secured discount notes in connection with our tender offer; | |
• | $72.5 million in cash used to repay a portion of our international credit facility with Motorola; and | |
• | $8.4 million in cash used to pay debt financing costs in connection with the issuance of our 2.875% convertible notes. |
Our financing activities provided us with $43.0 million of net cash during the three months ended March 31, 2003, primarily due to $50.2 million in proceeds received in connection with tower sale-leaseback financing transactions, partially offset by $7.8 million in cash transferred to restricted cash as collateral for our former interest rate swap.
Future Capital Needs and Resources
Capital Resources.Our ongoing capital resources depend on a variety of factors, including our existing cash and short-term investments, cash flows generated by our operating companies and external financial sources that may be available. As of March 31, 2004, our capital resources included $397.5 million of cash, cash equivalents and short-term investments. Our ability to generate sufficient operating cash flows by our operating companies is dependent upon, among other things:
• | the amount of revenue we are able to generate and collect from our customers; | |
• | the amount of operating expenses required to provide our services; | |
• | the cost of acquiring and retaining customers, including the subsidies we incur to provide handsets to both our new and existing customers; | |
• | our ability to continue to grow our customer base; and | |
• | fluctuations in foreign exchange rates. |
While we plan to fund our operations using existing cash and short-term investments balances and internally generated cash flows for the foreseeable future, we may access the capital markets if we are able to meet our objectives of lowering our cost of capital, improving our financial flexibility and/or reducing our foreign currency exposure, or if we should decide to expand our operations. Consistent with these objectives, during the first quarter of 2004, we issued $300.0 million aggregate principal amount of 2.875% convertible notes due 2034 for net proceeds of $291.6 million. The notes bear interest at a rate of 2.875% per year, payable semi-annually in arrears and in cash on February 1 and August 1 of each year, beginning August 1, 2004. The notes will mature on February 1, 2034, unless earlier converted or redeemed by the holders or repurchased by us.
In February 2004, we prepaid, at face value, $72.5 million of the $125.0 million in outstanding principal under our international equipment facility. In addition, in March 2004, NII Holdings (Cayman), Ltd., one of our wholly-owned subsidiaries, used $211.2 million to complete a cash tender offer to purchase substantially all of its 13.0% senior secured discount notes due 2009. NII Holdings (Cayman), Ltd. financed the tender offer with intercompany loans from NII Holdings and cash on hand. We used a portion of our proceeds from the issuance of our 2.875% convertible notes to fund these intercompany loans to NII Holdings (Cayman), Ltd.
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As of March 31, 2004, there were no amounts available for future borrowing under our vendor credit facilities. Under an existing agreement with American Tower, during the first quarter of 2004 we received $6.4 million from tower sale-leaseback transactions. In addition, Nextel Brazil has a facility in place under which it can finance handset purchases. Borrowings under this facility have 180 day maturities and interest is prepaid in U.S. dollars at variable market rates. As of March 31, 2004, there were no amounts outstanding under the Nextel Brazil handset credit facility.
Our international equipment facility contains numerous restrictive covenants relating to the maintenance of certain financial ratios relative to leverage, segment earnings, revenues, subscribers and fixed charges. The covenants also include, among other restrictions, limitations on indebtedness, transfers, mergers, acquisitions, distributions and investments. As of March 31, 2004, we were in full compliance with these covenants.
Capital Needs.We currently anticipate that our future capital needs will principally consist of funds required for:
• | operating expenses relating to our digital mobile networks; | |
• | capital expenditures to expand and enhance our digital mobile networks, as discussed below under “Capital Expenditures;” | |
• | future spectrum purchases; | |
• | debt service requirements, including tower financing obligations; | |
• | cash taxes; and | |
• | other general corporate expenditures. |
The following table sets forth the amounts and timing of contractual payments for our most significant contractual obligations determined as of March 31, 2004. The information in the table reflects future unconditional payments and is based upon, among other things, the current terms of the relevant agreements, appropriate classification of items under accounting principles generally accepted in the United States that are currently in effect and certain assumptions, such as future interest rates. Future events could cause actual payments to differ significantly from these amounts. See “Forward Looking Statements.” Except as required by law, we disclaim any obligation to modify or update the information contained in the table.
Payments Due By Period | ||||||||||||||||||||
Less than | More than | |||||||||||||||||||
Contractual Obligations | 1 Year | 1-3 Years | 3-5 Years | 5 Years | Total | |||||||||||||||
(in thousands) | ||||||||||||||||||||
Convertible notes, credit facility and senior discount notes(1) | $ | 14,925 | $ | 47,236 | $ | 73,477 | $ | 849,975 | $ | 985,613 | ||||||||||
Towers financing obligations(1) | 26,161 | 52,315 | 52,305 | 236,415 | 367,196 | |||||||||||||||
Spectrum acquisition obligations | 21,369 | — | — | — | 21,369 | |||||||||||||||
Operating leases(2) | 31,918 | 49,683 | 40,501 | 41,674 | 163,776 | |||||||||||||||
Purchase obligations(3) | 47,670 | 173 | — | — | 47,843 | |||||||||||||||
Other long-term obligations(4) | — | — | — | 49,025 | 49,025 | |||||||||||||||
Total contractual commitments | $ | 142,043 | $ | 149,407 | $ | 166,283 | $ | 1,177,089 | $ | 1,634,822 | ||||||||||
(1) | These amounts include estimated principal and interest payments based on our expectations as to future interest rates, assuming the current payment schedule. |
(2) | These amounts principally include future lease costs, transmitter and receiver sites and switches and office facilities as of March 31, 2004. |
(3) | These amounts represent maximum contractual purchase obligations under various agreements with our vendors. |
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(4) | The amounts due in more than five years include our current estimates of asset retirement obligations based on our expectations as to future retirement costs, inflation rates and timing of retirements. |
Capital Expenditures.Our capital expenditures, including capitalized interest, were $48.2 million for the three months ended March 31, 2004 compared to $64.2 million for the three months ended March 31, 2003. The decrease in capital expenditures is primarily due to the build-out of our network in the Baja California region of Mexico during 2003. In the future, we expect to finance our capital spending using cash from operations, cash on hand, cash from tower-sale leaseback transactions and any other external financing that becomes available. Our capital spending is driven by several factors, including:
• | the construction of additional transmitter and receiver sites to increase system capacity and maintain system quality and the installation of related switching equipment in some of our existing market coverage areas; | |
• | the enhancement of our digital mobile network coverage around some major market areas; | |
• | the expansion of our digital mobile networks to new market areas; | |
• | enhancements to our existing iDEN technology to increase voice capacity; and | |
• | non-network related information technology projects. |
Our future capital expenditures will be significantly affected by future technology improvements and technology choices. In October 2001, Motorola and Nextel Communications announced an anticipated significant technology upgrade to the iDEN digital mobile network, the 6:1 voice coder software upgrade. We have implemented the network software upgrade for this technology in Mexico. We expect that this software upgrade, which requires that compatible handsets be distributed throughout the network for it to become fully operational, will significantly increase our voice capacity for interconnect calls and leverage our existing investment in infrastructure in Mexico. The 6:1 voice coder is still undergoing refinement in the United States, and we do not expect to sell handsets that will operate on the new voice coder in our markets until mid 2004. In the meantime, the handsets that are designed to be compatible with the new voice coder will continue to operate on the current 3:1 voice coder. We do not expect to realize significant benefits from the operation of the 6:1 voice coder until after 2004. If there are substantial delays in realizing the benefits of the 6:1 voice coder, we could be required to invest additional capital in our infrastructure to satisfy our network capacity needs. See “Forward Looking Statements.”
Future Outlook.Our current business plan, under which we have been operating since emerging from Chapter 11 reorganization in November 2002, does not contemplate a significant expansion and does not require any additional external funding. However, we are currently evaluating expansion plans, primarily in Mexico, but also in Brazil and other Latin American markets. If we decide to pursue these expansion plans, we would seek external financing to fund them.
If our business plans change, including as a result of changes in technology, or if we decide to expand into new markets, or if economic conditions in any of our markets generally, or competitive practices in the mobile wireless telecommunications industry change materially from those currently prevailing or from those now anticipated, or if other presently unexpected circumstances arise that have a material effect on the cash flow or profitability of our mobile wireless business, then the anticipated cash needs of our business as well as the conclusions presented herein as to the adequacy of the available sources of cash and timing on our ability to generate net income could change significantly. Any of these events or circumstances could involve significant additional funding needs in excess of the identified currently available sources, and could require us to raise additional capital to meet those needs. However, our ability to seek additional capital, if necessary, is subject to a variety of additional factors that we cannot presently predict with certainty, including:
• | the commercial success of our operations; | |
• | the volatility and demand of the capital markets; and | |
• | the future market prices of our securities. |
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Forward Looking Statements
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995. A number of the statements made in this quarterly report on Form 10-Q/A are not historical or current facts, but deal with potential future circumstances and developments and our expectations based on them. They can be identified by the use of forward-looking words such as “believes,” “expects,” “intends, “plans,” “may,” “will,” “would,” “could,” “should” or “anticipates” or other comparable words, or by discussions of strategy that involve risks and uncertainties. We caution you that these forward-looking statements are only predictions, which are subject to risks and uncertainties, including technical uncertainties, financial variations, changes in the regulatory environment, industry growth and trend predictions. We have attempted to identify, in context, some of the factors that we currently believe may cause actual future experience and results to differ from our current expectations regarding the relevant matter or subject area. The operation and results of our wireless communications business also may be subject to the effects of other risks and uncertainties in addition to the other qualifying factors identified in the foregoing “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section, including, but not limited to:
• | our ability to meet the operating goals established by our business plan; | |
• | general economic conditions in Latin America and in the market segments that we are targeting for our digital mobile services; | |
• | the political and social conditions in the countries in which we operate, including political instability, which may affect the economies of our markets and the regulatory schemes in these countries; | |
• | substantive terms of any international financial aid package that may be made available to any country in which our operating companies conduct business; | |
• | the impact of foreign exchange volatility in our markets as compared to the U.S. dollar and related currency devaluations in countries in which our operating companies conduct business; | |
• | reasonable access to and the successful performance of the technology being deployed in our service areas, and improvements thereon, including technology deployed in connection with the introduction of digital two-way mobile data or Internet connectivity services in our markets; | |
• | the availability of adequate quantities of system infrastructure and subscriber equipment and components to meet our service deployment and marketing plans and customer demand; | |
• | the success of efforts to improve and satisfactorily address any issues relating to our digital mobile network performance; | |
• | future legislation or regulatory actions relating to our specialized mobile radio services, other wireless communication services or telecommunications generally; | |
• | the ability to achieve and maintain market penetration and average subscriber revenue levels sufficient to provide financial viability to our digital mobile network business; | |
• | the quality and price of similar or comparable wireless communications services offered or to be offered by our competitors, including providers of cellular services and personal communications services; | |
• | market acceptance of our new service offerings, including Nextel WorldwideSM and Nextel OnlineSM; | |
• | our ability to access sufficient debt or equity capital to meet any future operating and financial needs; and | |
• | other risks and uncertainties described from time to time in our reports filed with the Securities and Exchange Commission, including our 2003 annual report on Form 10-K/A. | |
Effect of New Accounting Standards
In January 2003, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation, or FIN, No. 46, “Consolidation of Variable Interest Entities — An Interpretation of ARB No. 51,” which
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In March 2004, the Emerging Issues Task Force, or EITF, reached a final consensus on Issue No. 03-6, “Participating Securities and the Two-Class Method Under FASB Statement No. 128,Earnings Per Share.” Issue No. 03-6 addresses a number of questions regarding the computation of earnings per share (“EPS”) by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating EPS. It clarifies what constitutes a participating security and how to apply the two-class method of computing EPS once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-6 is effective for the fiscal quarter ending June 30, 2004. We are currently evaluating the impact of adopting EITF 03-6 on our consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Our revenues are primarily denominated in foreign currencies, while a significant portion of our operations are financed in U.S. dollars through our convertible notes and our international equipment facility held by Nextel Mexico, which is also denominated in U.S. dollars. As a result, fluctuations in exchange rates relative to the U.S. dollar expose us to foreign currency exchange risks. These risks include potential transaction losses on certain of our U.S. dollar-denominated long-term debt and the impact of translating our local currency reported earnings into U.S. dollars when the U.S. dollar strengthens against the local currencies of our foreign operations. In addition, we have local currency-based communication tower sale-leaseback transactions in Mexico and Brazil, which we are accounting for as financing transactions (see Note 5 to our condensed consolidated financial statements). Due to the limited availability of long-term instruments, we currently do not hedge assets or liabilities denominated in foreign currencies or foreign currency transactions.
We are also exposed to interest rate risk due to fluctuations in the U.S. prime rate and the six-month London Interbank Offered Rate, or LIBOR. These rates are used to determine the variable rates of interest that are applicable to borrowings under our international equipment facility. Interest rate changes expose our fixed rate long-term borrowings to changes in fair value and expose our variable rate long-term borrowings to changes in future cash flows. In some cases, we have used derivative instruments to manage this interest rate exposure by achieving a desired proportion of fixed rate versus variable rate borrowings. We only used derivative instruments for non-trading purposes. We do not have any derivative instruments in place as of March 31, 2004 other than one of the conversion features embedded in each of our convertible notes, which are not material in value.
The table below presents principal amounts, related interest rates by year of maturity and aggregate amounts as of March 31, 2004 for our fixed and variable rate debt obligations, including our 3.5% convertible notes, our 2.875% convertible notes, our international equipment facility and our tower financing obligations. We determined the fair values included in this section based on:
• | quoted market prices for our convertible notes; | |
• | carrying values for our international equipment facility as of March 31, 2004 as interest rates are reset periodically; and |
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• | carrying values for our tower financing obligations as interest rates were set recently when we entered into these transactions. |
The changes in the fair values of our debt compared to their fair values as of December 31, 2003 reflect changes in applicable market conditions. In addition, the table reflects the prepayment of $72.5 million of the $125.0 million in outstanding principal under our international equipment facility in February 2004 and the extinguishment of substantially all of our senior secured discount notes in March 2004. All of the information in the table is presented in U.S. dollar equivalents, which is our reporting currency. The actual cash flows associated with our long-term debt are denominated in U.S. dollars (US$), Mexican pesos (MP) and Brazilian reais (BR).
Year of Maturity | March 31, 2004 | December 31, 2003 | |||||||||||||||||||||||||||||||||||||||
2004 | 2005 | 2006 | 2007 | 2008 | Thereafter | Total | Fair Value | Total | Fair Value | ||||||||||||||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||
Long-Term Debt: | |||||||||||||||||||||||||||||||||||||||||
Fixed Rate (US$) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 480,000 | $ | 480,000 | $ | 596,796 | $ | 360,821 | $ | 383,580 | |||||||||||||||||||||
Average Interest Rate | — | — | — | — | — | 3.1 | % | 3.1 | % | 8.3 | % | ||||||||||||||||||||||||||||||
Fixed Rate (MP) | $ | 1,444 | $ | 1,705 | $ | 2,015 | $ | 2,359 | $ | 2,845 | $ | 66,608 | $ | 76,976 | $ | 76,976 | $ | 71,204 | $ | 71,204 | |||||||||||||||||||||
Average Interest Rate | 17.7 | % | 17.7 | % | 17.7 | % | 17.7 | % | 17.7 | % | 17.7 | % | 17.7 | % | 17.8 | % | |||||||||||||||||||||||||
Fixed Rate (BR) | $ | 173 | $ | 232 | $ | 310 | $ | 415 | $ | 557 | $ | 32,433 | $ | 34,120 | $ | 34,120 | $ | 31,880 | $ | 31,880 | |||||||||||||||||||||
Average Interest Rate | 28.4 | % | 28.4 | % | 28.4 | % | 28.4 | % | 28.4 | % | 28.4 | % | 28.4 | % | 28.4 | % | |||||||||||||||||||||||||
Variable Rate (US$) | $ | — | $ | — | $ | 10,826 | $ | 41,667 | $ | — | $ | — | $ | 52,493 | $ | 52,493 | $ | 125,000 | $ | 125,000 | |||||||||||||||||||||
Average Interest Rate | — | — | 6.2 | % | 6.2 | % | — | — | 6.2 | % | 6.2 | % |
Item 4. Controls and Procedures.
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission. We continuously monitor all of our controls and procedures to ensure that they are operating effectively and consistently across the company as a whole.
As of the end of the period covered in this report, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was carried out under the supervision and with the participation of our management teams in the United States and in our operating companies, including our chief executive officer and chief financial officer. This evaluation was subsequently modified due to the identification of the items described below. Based on and as of the date of such evaluation, as modified, these officers concluded that our disclosure controls and procedures were not effective for the reasons described in the following paragraphs.
Our chief executive officer and chief financial officer are also responsible for establishing and maintaining adequate internal controls over our financial reporting. Subsequent to the filing of our quarterly report on Form 10-Q for the period ended June 30, 2004, we identified bookkeeping errors in various balance sheet accounts at our operating company in Mexico. Separately, on November 4, 2004, we were notified by our independent registered public accountants of errors related to our accounting policy and treatment of the subsequent reversal of deferred tax asset valuation reserves established at the time of fresh-start accounting as of October 31, 2002. These items are described in further detail below.
During our evaluation of these items, we concluded the errors (i) reflected a material weakness in our internal control over financial reporting with respect to account reconciliations at Nextel Mexico and (ii) reflected a material weakness in our internal control over financial reporting with respect to the accounting and reporting of income taxes. In addition, the occurrence of a number of significant deficiencies may indicate a material weakness. A material weakness, as defined by the Public Company Accounting Oversight Board (PCAOB), is a reportable condition in which the design or operation of one or more elements of the internal control structure does not sufficiently reduce the risk of material errors and irregularities occurring and not being timely detected. Our management has communicated the material weaknesses and their background to our board of directors and its audit committee and our independent registered public accounting firm.
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As a result of these errors and other adjustments identified through our review, we have restated our condensed consolidated financial statements as of and for the three months ended March 31, 2004 and 2003, as set forth in this report
Except as described herein, there were no changes in our internal control over financial reporting identified in connection with our evaluation that occurred during the three-month period ended March 31, 2004 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Nextel Mexico Bookkeeping Errors
The identification of the bookkeeping errors occurred as a result of our ongoing review of Nextel Mexico’s internal accounts and records in order to comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002.
Subsequent to the identification of these errors, we completed an account reconciliation project at Nextel Mexico to review and analyze these liability accounts and all other material accounts. The errors impacted accounts receivable, accounts payable, accrued expenses, operating expenses and gains and losses regarding foreign currency transactions. The errors occurred due to our failure to perform account reconciliations and resolve differences in a timely manner, and the errors did not result from any fraudulent activities.
The nature of the errors relate to three main areas:
• | Foreign Currency Adjustments — Some of our foreign currency transaction gains and losses were double-recorded through a combination of manual entries and system generated automatic entries recorded upon payment of U.S. dollar denominated payables; | |
• | Accounts receivable adjustments — Periodic reconciliations between the accounts receivable subsidiary ledger and the general ledger were not performed properly or timely. As a result, unreconciled differences related to the non-recognition of commissions expense on credit card payments, returned checks, manual adjustments and other items were classified to a current liability account, but were not reversed from the liability account upon resolution of these differences; and | |
• | Liability accounts — Certain liability accounts contained balances that could not be supported by invoices or subsequent disbursements. | |
We have taken or are taking the following corrective actions, which we believe will strengthen our internal controls and prevent the possibility of this type of error from occurring in the future:
• | personnel changes, including the termination of the controller responsible for the unreconciled accounts; | |
• | the implementation of additional procedures surrounding the account reconciliation process as well as manual journal entries in our operating companies and related to the monitoring by NII Holdings of key control procedures in our operating companies; | |
• | revisions to system controls regarding general ledger posting restrictions; and | |
• | the provision of more specific guidance regarding steps that must be completed by our operating companies’ executives before signing the certifications related to the Section 302 of the Sarbanes-Oxley Act of 2002. | |
Accounting for Income Taxes
Beginning with our emergence from Chapter 11 reorganization on October 31, 2002, we recognized the release of valuation allowances on deferred tax assets established at the time we applied fresh-start accounting as a non-cash reduction to our income tax provision. Upon further review, our current independent registered public accounting firm notified us that our accounting was in error and that in accordance with SOP 90-7, the reversal of valuation allowances established at fresh-start accounting should not be recorded as a reduction to
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We have reviewed and corrected our accounting policy for income taxes to accurately track and record the reversal of deferred tax asset valuation allowances established at the time we applied fresh-start accounting. We recorded the reversal of these valuation allowances first as a reduction to our remaining intangible assets existing at our emergence from reorganization. Once these intangible assets are fully exhausted, we will record any additional reversals as an increase to paid-in capital. In addition, we have identified various other errors in the calculation of income taxes. These errors occurred as a result of the misapplication of the appropriate financial accounting standard and from the lack of proper review procedures and did not result from any fraudulent activities. We acknowledge that this accounting resulted in a material error and reflects a material weakness as defined by the PCAOB. Lastly, we have restated our historical condensed consolidated financial statements as of and for the three months ended March 31, 2004 and 2003, as set forth in this report.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
We and/or our operating companies are parties to certain legal proceedings that are described in our 2003 annual report on Form 10-K/A. During the three months ended March 31, 2004, there were no material changes in the status of or developments regarding those legal proceedings that have not been previously disclosed in our 2003 annual report on Form 10-K/A.
Item 2. Changes in Securities and Use of Proceeds.
(a) | At our 2004 Annual Meeting of Stockholders, held on April 28, 2004, our stockholders approved an Amendment to our Restated Certificate of Incorporation. The Amendment increases the number of authorized shares of common stock from 100 million to 300 million shares. The Amendment did not otherwise affect or modify the rights of holders of our common stock. | |
(b) | Not applicable. | |
(c) | On January 31, 2004, we sold $250.0 million of our 2.875% convertible notes due 2034 in a private placement. On February 13, 2004, we sold an additional $50.0 million of our convertible notes in a private placement. We sold all convertible notes to Banc of America Securities LLC at a 2.75% discount to their principal face amount, which equaled a total discount to purchasers of $8.3 million. The convertible notes were subsequently sold by the purchasers to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933 at 100% of their principal face amount. | |
We relied upon Section 4(2) of the Securities Act for the exemption from registration for this issuance. The notes are convertible, at the option of the holder, into shares of our common stock at a conversion rate of 18.783 shares per $1,000 principal amount of notes, subject to adjustment, at any time prior to the close of business on the final maturity date of the convertible notes under certain circumstances. For additional information on the conversion and other terms of the convertible notes, see Note 5 to our condensed consolidated financial statements. | ||
The net offering proceeds to us after deducting total discounts and estimated expenses were $291.6 million. We used the net proceeds from the convertible notes issuance to fund a $211.2 million tender offer to retire substantially all of our 13.0% senior secured discount notes. The retirement of our 13.0% senior secured discount notes resulted in a $79.3 million pre-tax loss. For additional information, see Note 5 to our condensed consolidated financial statements. | ||
(d) | Not applicable. | |
(e) | Not applicable. |
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Item 4. Submission of Matters to a Vote of Security Holders.
(a) | Our Annual Meeting of Stockholders was held on Tuesday, April 28, 2004. | |
(b) | Not applicable. | |
(c) | The common stockholders voted for the election of two (2) directors to serve for terms of three (3) years each, expiring on the date of the annual meeting in 2007 or until their successors are elected. In addition, Charles F. Wright was nominated and elected to the Board of Directors pursuant to Motorola Credit Corporation’s rights under the Special Director Preferred Stock. Mr. Wright was not subject to the vote of holders of our common stock. The results of the voting in these elections are set forth below. |
Nominee | Votes For | Votes Withheld | Broker Non-votes | |||||||||
Steven P. Dussek | 52,602,631 | 10,162,909 | N/A | |||||||||
Steven M. Shindler | 61,448,298 | 1,317,242 | N/A | |||||||||
Charles F. Wright | 1 | — | N/A |
The terms of office of the following directors continued after the meeting: Neal P. Goldman, Charles M. Herington, Carolyn Katz, Donald E. Morgan and John W. Risner.
In addition, the stockholders voted (1) to approve an Amendment to our Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 100 million to 300 million shares, (2) to approve our 2004 Incentive Compensation Plan, and (3) to approve an adjournment of the Annual Meeting to a later date or dates, if necessary, in order to permit the further solicitation of proxies. The results of the voting are set forth below.
Proposal | Votes For | Votes Against | Votes Withheld | Broker Non-votes | ||||||||||||
Amendment to our Restated Certificate of Incorporation | 55,623,157 | 7,134,302 | 8,081 | N/A | ||||||||||||
2004 Incentive Compensation Plan | 37,623,952 | 12,474,182 | 27,528 | 12,639,878 | ||||||||||||
Adjournment of the Annual Meeting | 32,756,777 | 20,984,279 | 9,024,484 | N/A |
No other matters were voted upon at the Annual Meeting or during the quarter covered by this report.
Item 5. Other Information.
(a) | Not applicable. | |
(b) | On April 28, 2004, our Board of Directors created a standing Nominating Committee. The members of the Nominating Committee are Ms. Carolyn Katz and Messrs. Neal P. Goldman and Charles M. Herington, each of whom qualifies as an independent director under the listing standards of the National Association of Securities Dealers. We will continue to accept stockholder nominations to our Board of Directors under the procedures previously disclosed in our Proxy Statement for our 2004 Annual Meeting of Stockholders, except all such nominations should be directed to the attention of the Nominating Committee instead of the full Board of Directors. |
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Item 6. Exhibits and Reports on Form 8-K.
(a) | List of Exhibits. |
Exhibit | ||||
Number | Exhibit Description | |||
3 | .1 | Amended and Restated Certificate of Incorporation (previously filed in the NII Holdings’ Form 10-Q, filed on May 7, 2004). | ||
12 | .1 | Ratio of Earnings to Fixed Charges (filed herewith). | ||
31 | .1 | Statement of Chief Executive Officer Pursuant to Rule 13a-14(a) (filed herewith). | ||
31 | .2 | Statement of Chief Financial Officer Pursuant to Rule 13a-14(a) (filed herewith). | ||
32 | .1 | Statement of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 (filed herewith). | ||
32 | .2 | Statement of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 (filed herewith). |
(b) | Reports on Form 8-K. |
We filed the following reports on Form 8-K with the Securities and Exchange Commission during the three months ended March 31, 2004:
• | On January 5, 2004, we filed a Current Report on Form 8-K, dated January 5, 2004, which furnished under Item 12 a press release announcing our reaffirmation of previously released financial guidance and our increase of guidance for net subscriber growth for the year ended December 31, 2003; | |
• | On January 26, 2004, we filed a Current Report on Form 8-K, dated January 26, 2004, which reported under Item 7 a press release announcing a proposed private offering of convertible notes; | |
• | On January 27, 2004, we filed a Current Report on Form 8-K, dated January 27, 2004, which reported under Item 7 a press release announcing the pricing of our proposed private offering of convertible notes; | |
• | On February 5, 2004, we filed a Current Report on Form 8-K, dated February 4, 2004, which reported under Item 7 a press release announcing our commencement of a cash tender offer and consent solicitation relating to NII Holdings (Cayman), Ltd.’s 13.0% senior secured discount notes due 2009; | |
• | On February 20, 2004, we filed a Current Report on Form 8-K, dated February 19, 2004, which reported under Item 7 a press release announcing our receipt of the tenders and consents required to amend the indenture under which NII Holdings (Cayman), Ltd.’s 13.0% senior secured discount notes due 2009 were issued, as well as the trustee’s execution of the supplemental indenture related to these notes; | |
• | On February 26, 2004, we filed a Current Report on Form 8-K, dated February 26, 2004, which furnished under Item 12 a press release announcing certain financial and operating results for the year and three months ended December 31, 2003; and | |
• | On March 11, 2004, we filed a Current Report on Form 8-K, dated March 10, 2004, which reported under Item 5 our receipt of a letter from Timothy M. Donahue stating that he had resigned as one of our directors. |
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By: | /s/Ricardo L. Israele |
Ricardo L. Israele | |
Vice President and Controller |
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EXHIBIT INDEX
Exhibit | ||||
Number | Exhibit Description | |||
3 | .1 | Amended and Restated Certificate of Incorporation (previously filed in the NII Holdings’ Form 10-Q, filed on May 7, 2004). | ||
12 | .1 | Ratio of Earnings to Fixed Charges (filed herewith). | ||
31 | .1 | Statement of Chief Executive Officer Pursuant to Rule 13a-14(a) (filed herewith). | ||
31 | .2 | Statement of Chief Financial Officer Pursuant to Rule 13a-14(a) (filed herewith). | ||
32 | .1 | Statement of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 (filed herewith). | ||
32 | .2 | Statement of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 (filed herewith). |
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