Nii 10Q 2005 Q1 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2005

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.

(Exact name of registrant as specified in its charter)


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)

(703) 390-5100

(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 29, 2005

Common Stock, $0.001 par value per share		69,860,270

NII HOLDINGS, INC. AND SUBSIDIARIES

INDEX


			Page

Part I	Financial Information.
	Item 1.	Financial Statements		3
		Condensed Consolidated Balance Sheets — As of March 31, 2005 and December 31, 2004		3
		Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) — For the Three Months Ended March 31, 2005 and 2004		4
		Condensed Consolidated Statements of Changes in Stockholders’ Equity — For the Three Months Ended March 31, 2005 and 2004		5
		Condensed Consolidated Statements of Cash Flows — For the Three Months Ended March 31, 2005 and 2004		6
		Notes to Condensed Consolidated Financial Statements		7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		39
	Item 4.	Controls and Procedures		40

Part II	Other Information.
	Item 1.	Legal Proceedings		43
	Item 6.	Exhibits		43

PART I — FINANCIAL INFORMATION.


Item 1.	Financial Statements.

NII HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands)

Unaudited


				March 31,			December 31,
				2005			2004

ASSETS
Current assets
	Cash and cash equivalents			$	317,617		$	330,984
	Short-term investments				16,895			38,401
	Accounts receivable, less allowance for doubtful accounts of $9,798 and $8,145				167,507			160,727
	Handset and accessory inventory, net				30,017			32,034
	Deferred income taxes, net				17,417			17,268
	Prepaid expenses and other				56,391			53,280

		Total current assets			605,844			632,694
Property, plant and equipment,net of accumulated depreciation of $170,411 and $145,976					606,378			558,247
Intangible assets, net					70,793			67,956
Deferred income taxes, net					154,522			154,757
Other assets					77,571			77,626

		Total assets		$	1,515,108		$	1,491,280


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
	Accounts payable			$	52,129		$	87,406
	Accrued expenses and other				246,969			227,933
	Deferred revenues				45,739			44,993
	Accrued interest				1,747			5,479
	Due to related party				824			796
	Current portion of long-term debt				3,413			2,823

		Total current liabilities			350,821			369,430
Long-term debt					603,627			600,686
Deferred revenues (related party)					41,724			42,528
Other long-term liabilities					57,984			56,689

		Total liabilities			1,054,156			1,069,333

Commitments and contingencies (Note 5)
Stockholders’ equity
	Common stock, 69,859 shares issued and outstanding — 2005, 69,831 shares issued and outstanding — 2004				70			70
	Paid-in capital				317,250			317,053
	Retained earnings				206,305			161,267
	Deferred compensation				(11,286	)		(12,644	)
	Accumulated other comprehensive loss				(51,387	)		(43,799	)

		Total stockholders’ equity			460,952			421,947

			Total liabilities and stockholders’ equity	$	1,515,108		$	1,491,280

The accompanying notes are an integral part of these condensed consolidated financial statements.

NII HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

For the Three Months Ended March 31, 2005 and 2004

(in thousands, except per share amounts)

Unaudited


			2005			2004

Operating revenues
	Service and other revenues		$	354,195		$	275,105
	Digital handset and accessory revenues			16,012			12,586

				370,207			287,691

Operating expenses
	Cost of service (exclusive of depreciation and amortization included below)			96,461			72,154
	Cost of digital handset and accessory sales			54,250			47,270
	Selling, general and administrative			119,192			87,030
	Depreciation			24,755			20,026
	Amortization			1,342			3,938

				296,000			230,418

Operating income				74,207			57,273

Other income (expense)
	Interest expense			(12,824	)		(16,009	)
	Interest income			4,524			2,231
	Loss on early extinguishment of debt, net			—			(79,327	)
	Foreign currency transaction gains, net			1,914			6,682
	Other expense, net			(2,002	)		(980	)

				(8,388	)		(87,403	)

Income (loss) before income tax provision and cumulative effect of change in accounting principle				65,819			(30,130	)
Income tax provision				(20,781	)		(22,616	)

Income (loss) before cumulative effect of change in accounting principle				45,038			(52,746	)
Cumulative effect of change in accounting principle, net of income taxes of $11,898 in 2004				—			970

Net income (loss)			$	45,038		$	(51,776	)

Income (loss) before cumulative effect of change in accounting principle, per common share, basic			$	0.64		$	(0.76	)
Cumulative effect of change in accounting principle, per common share, basic				—			0.01

Net income (loss) per common share, basic (Note 1)			$	0.64		$	(0.75	)

Income (loss) before cumulative effect of change in accounting principle, per common share, diluted			$	0.57		$	(0.76	)
Cumulative effect of change in accounting principle, per common share, diluted				—			0.01

Net income (loss) per common share, diluted (Note 1)			$	0.57		$	(0.75	)

Weighted average number of common shares outstanding, basic				69,832			69,149

Weighted average number of common shares outstanding, diluted				85,815			69,149

Comprehensive income (loss), net of income tax
	Foreign currency translation adjustment		$	(7,433	)	$	6,003
	Unrealized losses on derivatives, net of $127 of reclassification adjustment included in net income			(155	)		—

		Other comprehensive (loss) income		(7,588	)		6,003
	Net income (loss)			45,038			(51,776	)

			$	37,450		$	(45,773	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

NII HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Three Months Ended March 31, 2005 and 2004

(in thousands)

Unaudited


													Accumulated
		Common Stock											Other
						Paid-in		Retained		Deferred			Comprehensive
		Shares		Amount		Capital		Earnings		Compensation			Loss			Total

Balance, January 1, 2005			69,831	$	70	$	317,053	$	161,267	$	(12,644	)	$	(43,799	)	$	421,947
	Net income		—		—		—		45,038		—			—			45,038
	Other comprehensive loss		—		—		—		—		—			(7,588	)		(7,588	)
	Reversal of deferred tax asset valuation allowance		—		—		173		—		—			—			173
	Amortization of restricted stock expense		—		—		—		—		1,358			—			1,358
	Exercise of stock options		28		—		24		—		—			—			24

Balance, March 31, 2005			69,859	$	70	$	317,250	$	206,305	$	(11,286	)	$	(51,387	)	$	460,952


													Accumulated
		Common Stock											Other
						Paid-in		Retained			Deferred		Comprehensive
		Shares		Amount		Capital		Earnings			Compensation		Loss			Total

Balance, January 1, 2004			68,883	$	69	$	164,705	$	103,978		$	—	$	(50,982	)	$	217,770
	Net loss		—		—		—		(51,776	)		—		—			(51,776	)
	Other comprehensive income		—		—		—		—			—		6,003			6,003
	Exercise of stock options		736		1		596		—			—		—			597

Balance, March 31, 2004			69,619	$	70	$	165,301	$	52,202		$	—	$	(44,979	)	$	172,594

The accompanying notes are an integral part of these condensed consolidated financial statements.

NII HOLDINGS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2005 and 2004

(in thousands)

Unaudited


				2005			2004

Cash flows from operating activities
	Income (loss) before cumulative effect of change in accounting principle			$	45,038		$	(52,746	)
	Adjustments to reconcile income (loss) before cumulative effect of change in accounting principle 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			496			5,419
		Depreciation and amortization			26,097			23,964
		Provision for losses on accounts receivable			4,629			1,597
		Provision for losses on inventory			1,699			226
		Foreign currency transaction gains, net			(1,914	)		(6,682	)
		Deferred income tax provision			302			5,316
		Loss on disposal of property, plant and equipment			21			—
		Non-cash stock compensation			1,358			—
		Other, net			(411	)		(2,207	)
		Change in assets and liabilities:
			Accounts receivable, gross		(11,377	)		1,790
			Handset and accessory inventory, gross		356			(6,419	)
			Prepaid expenses and other		(5,115	)		(8,364	)
			Other long-term assets		(1,178	)		(3,742	)
			Accounts payable, accrued expenses and other		(14,639	)		(2,676	)
			Current deferred revenue		746			1,214
			Due to related parties		28			11,671
			Other long-term liabilities		1,028			3,059

			Net cash provided by operating activities		47,164			50,747

Cash flows from investing activities
	Capital expenditures				(76,411	)		(56,478	)
	Proceeds from maturities of short-term investments				26,393			—
	Purchase of short-term investments				(4,887	)		(25,819	)
	Payments for acquisitions, purchases of licenses and other				(3,924	)		(987	)
	Payments related to derivative instruments				(223	)		—

			Net cash used in investing activities		(59,052	)		(83,284	)

Cash flows from financing activities
	Proceeds from stock option exercises				24			597
	Transfers from restricted cash				400			—
	Repayments under capital leases				(37	)		(474	)
	Gross proceeds from tower financing transactions				304			546
	Repayments under tower financing transactions				(456	)		—
	Gross proceeds from issuance of convertible notes				—			300,000
	Repayments under senior secured discount notes				—			(211,212	)
	Payment of debt financing costs				—			(8,410	)
	Repayments under long-term credit facilities and other				—			(72,507	)

			Net cash provided by financing activities		235			8,540

Cumulative effect of change in accounting principle, net					—			7,962
Effect of exchange rate changes on cash and cash equivalents					(1,714	)		(2,190	)

Net decrease in cash and cash equivalents					(13,367	)		(18,225	)
Cash and cash equivalents, beginning of period					330,984			405,406

Cash and cash equivalents, end of period				$	317,617		$	387,181

The accompanying notes are an integral part of these condensed consolidated financial statements.

NII HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

Unaudited

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. All adjustments made were normal recurring accruals.

You should read these condensed consolidated financial statements in conjunction with the audited consolidated financial statements and notes contained in our 2004 annual report on Form 10-K. You should not expect results of operations of interim periods to be an indication of the results for a full year.

Change in Accounting Principle. Until September 30, 2004, we presented the financial information of our consolidated foreign operating companies in our consolidated financial statements utilizing accounts as of a date one month earlier than the accounts of the parent company, U.S. subsidiaries and our non-operating non-U.S. subsidiaries, which we referred to as our one-month lag reporting policy. In contrast, financial information relating to our parent company, U.S. subsidiaries and our non-operating non-U.S. subsidiaries was presented without giving effect to our one-month lag reporting policy.

Effective January 1, 2004, we eliminated our one-month lag reporting policy on October 1, 2004 and report consolidated results using a consistent calendar year reporting period for the entire company. Therefore, our consolidated results for the three months ended March 31, 2005 and 2004 are presented on a calendar basis.

We accounted for the elimination of our one-month lag reporting policy as a change in accounting principle in accordance with Accounting Principles Board, or APB, Opinion No. 20, “Accounting Changes,” effective January 1, 2004. Under APB Opinion No. 20, a change in accounting principle is determined at the beginning of the period of change. As a result, we treated the month of December 2003, which was normally the first month in the fiscal year of our foreign operating companies, as the lag month, and our 2004 fiscal year for all of our foreign operating companies now begins with January 1 and ends with December 31. Each of our successive quarterly and annual consolidated financial statements will continue to follow the same basis of consolidation for our foreign operating companies. For further discussion regarding our change in accounting principle, refer to Note 2 to our audited consolidated financial statements contained in our 2004 annual report on Form 10-K, which includes the combined statement of operations and statement of cash flows for our foreign operating companies for the month of December 2003.

Out-of-Period Adjustments. During the first quarter of 2005, we identified errors in our financial statements for the year ended December 31, 2004 related to the accounting for the deferred tax asset valuation allowance for our operating company in Argentina and an error in the accounting for an insurance claim in our operating company in Mexico. To correct these errors, in the first quarter of 2005, we recorded a reduction to our income tax provision of $3.1 million to correct the deferred tax asset valuation allowance in Argentina and a $1.4 million increase to our operating expenses to correct the accounting for the insurance claim. Operating income was reduced by the $1.4 million adjustment while net income, basic earnings per share and diluted earnings per share increased by $2.1 million, $0.03 and $0.02, respectively. We do not believe that the adjustments are material to our first quarter 2005 results, our projected results for the current year or to any prior years’ earnings, earnings trends or financial statement line items. As a result, we have not adjusted any prior period amounts.

NII HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

Unaudited

Accumulated Other Comprehensive Loss. The components of our accumulated other comprehensive loss, net of taxes, as of March 31, 2005 and December 31, 2004 are as follows:


	March 31,			December 31,
	2005			2004

	(in thousands)
Cumulative foreign currency translation adjustment	$	(49,412	)	$	(41,978	)
Unrealized losses on derivatives		(1,975	)		(1,821	)

	$	(51,387	)	$	(43,799	)


	*Supplemental Cash Flow Information.*


		Three Months Ended
		March 31,

		2005			2004

		(in thousands)
Capital expenditures
	Cash paid for capital expenditures, including capitalized interest	$	76,411		$	56,478
	Changes in capital expenditures accrued and unpaid or financed		(3,391	)		(12,373	)

		$	73,020		$	44,105

Interest costs
	Interest expense	$	12,824		$	16,009
	Interest capitalized		2,340			599

		$	15,164		$	16,608

Cash paid for interest, net of amounts capitalized		$	13,097		$	40,463

Cash paid for income taxes		$	20,316		$	10,396

For the three months ended March 31, 2005 and 2004, we had $4.1 million and $0.8 million in non-cash investing and financing activities related to capital lease obligations for co-location on communication towers owned by other parties.

During the three months ended March 31, 2005, we paid $1.2 million for licenses acquired in Brazil using restricted cash.

Net Income (Loss) Per Common Share, Basic and Diluted. Basic net income (loss) per common share includes no dilution and is computed by dividing the net income (loss) by the weighted average number of common shares outstanding for the period. Diluted net 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, 2005, our calculation of diluted net income per share includes common shares resulting from shares issuable upon the potential exercise of stock options under stock-based employee compensation plans and our restricted stock, as well as common shares resulting from the potential conversion of our 3.5% convertible notes and our 2.875% convertible notes. 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 potential conversion of our 3.5% convertible notes and our 2.875% convertible notes, since their effect would have been antidilutive to our net loss.

NII HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

Unaudited

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 income (loss) for the three months ended March 31, 2005:


		Net Income		Shares		Per Share
		(Numerator)		(Denominator)		Amount

		(in thousands, except per share data)
Basic net income per share:
	Net income	$	45,038		69,832	$	0.64
Effect of dilutive securities:
	Stock options		—		3,598
	3.5% convertible notes		1,575		6,750
	2.875% convertible notes		2,156		5,635

Diluted net income per share:
	Net income	$	48,769		85,815	$	0.57

Stock-Based Compensation. We currently have two equity incentive plans: our 2002 Management Incentive Plan and our 2004 Incentive Compensation Plan. We account for awards granted under these plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees” and related interpretations. As part of the 2004 Incentive Compensation Plan, we issued 429,500 shares of restricted stock in April 2004. The fair value of the restricted shares on the grant date was $16.3 million, which we are amortizing on a straight-line basis over the three year vesting period. We recognized compensation expense of $1.4 million for the three months ended March 31, 2005 related to restricted shares. No other stock-based employee compensation cost related to our employee stock options is reflected in net income as the relevant exercise price of the options issued was equal to the fair value on the date of the grant.

The following table illustrates the effect on net income (loss) and net income (loss) per common share if we had applied the fair value recognition provisions of Statement of Financial Accounting Standards, or SFAS, No. 123, “Accounting for Stock-Based Compensation,” as amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of FASB Statement No. 123,” to stock-based employee compensation.

NII HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

Unaudited


		Three Months Ended
		March 31,

		2005			2004

		(in thousands, except
		per share data)
Net income (loss), as reported		$	45,038		$	(51,776	)
Add:
	Stock-based employee compensation expense included in reported net income, net of related tax effects		1,358			—
Deduct:
	Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects		(3,969	)		(368	)

Pro forma net income (loss)		$	42,427		$	(52,144	)

Net income (loss) per common share:
	Basic — as reported	$	0.64		$	(0.75	)

	Basic — pro forma	$	0.61		$	(0.75	)

	Diluted — as reported	$	0.57		$	(0.75	)

	Diluted — pro forma	$	0.54		$	(0.75	)

Reclassifications. We have reclassified some prior period amounts in our unaudited condensed consolidated financial statements to conform to our current year presentation.

New Accounting Pronouncements. In December 2004, the Financial Accounting Standards Board, or FASB, issued its final standard on accounting for share-based payments, Statement No. 123R, “Share-Based Payment — An Amendment of FASB Statements No. 123 and 95,” or SFAS 123R, that requires companies to expense the value of employee stock options and similar awards. In April 2005, the SEC approved a new rule that delays the effective date of SFAS 123R, giving companies more time to develop their implementation strategies. Under the SEC’s rule, SFAS 123R is now effective for public companies for annual periods that begin after June 15, 2005 and applies to all outstanding and unvested share-based payment awards at a company’s adoption date. The provisions of SFAS 123R are effective for our financial statements issued subsequent to January 1, 2006. The adoption of SFAS 123R will require us to treat the fair value of share-based payment awards that are within its scope as compensation expense in the statement of operations beginning on the date that we grant the awards to employees. We are currently evaluating which methodology we will utilize and have not yet determined the impact to our financial statements.

In December 2004, the FASB issued Statement No. 153, “Exchanges of Nonmonetary Assets — An Amendment APB Opinion No. 29,” or SFAS 153, to produce financial reporting that more accurately represents the economics of nonmonetary exchange transactions. APB Opinion No. 29, or APB 29, provided an exception to the basic measurement principle (fair value) for exchanges of similar productive assets. That exception required that some nonmonetary exchanges, although commercially substantive, be recorded on a carryover basis. SFAS 153 amends APB 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS 153 is effective for fiscal periods beginning after June 15, 2005. We do not expect the adoption of SFAS 153 to have a material impact on our financial statements.

NII HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

Unaudited

Note 2. Supplemental Balance Sheet Information

Prepaid Expenses and Other. The components of our prepaid expenses and other are as follows:


	March 31,		December 31,
	2005		2004

	(in thousands)
Value added tax receivables, current	$	12,722	$	13,723
Advertising		10,862		10,281
Advances to suppliers		3,803		2,472
Insurance claims		2,974		3,022
Deferred cost of handsets		2,544		2,081
Income taxes		—		134
Other		23,486		21,567

	$	56,391	$	53,280

Other Assets. The components of our other assets are as follows:


	March 31,		December 31,
	2005		2004

	(in thousands)
Value added tax receivables	$	32,115	$	31,019
Income tax receivable		16,151		15,315
Deposits and restricted cash		12,085		13,963
Deferred financing costs		11,287		11,773
Long-term prepaid expenses		4,999		4,789
Other		934		767

	$	77,571	$	77,626

Accrued Expenses and Other. The components of our accrued expenses and other are as follows:


	March 31,		December 31,
	2005		2004

	(in thousands)
Income taxes currently payable	$	43,394	$	42,412
Payroll related items and commissions		37,741		34,256
Network system and information technology		34,684		28,491
Capital expenditures		33,101		30,880
Tax and non-tax liabilities		27,496		23,684
Customer deposits		19,334		17,950
Non-income based taxes		18,447		23,514
Other		32,772		26,746

	$	246,969	$	227,933

NII HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

Unaudited

Other Long-Term Liabilities. The components of our other long-term liabilities are as follows:


	March 31,		December 31,
	2005		2004

	(in thousands)
Tax and non-tax liabilities	$	48,045	$	47,259
Severance plan liability		5,315		5,075
Asset retirement obligations		4,395		4,126
Other		229		229

	$	57,984	$	56,689


Note 3.	Intangible Assets

On January 10, 2005, the Mexican government began an auction for wireless spectrum licenses in the 806-821 MHz to 851-866 MHz frequency band. Inversiones Nextel de Mexico, a subsidiary of Nextel Mexico, participated in this auction. The spectrum auction was divided into three separate auctions: Auction 15 for Northern Mexico Zone 1, Auction 16 for Northern Mexico Zone 2 and Auction 17 for Central and Southern Mexico. The auctions were completed between February 7 and February 11. Nextel Mexico won an average of 15 MHz of nationwide spectrum, except for Mexico City, where no spectrum was auctioned off and where Nextel Mexico has licenses covering approximately 21 MHz. The corresponding licenses and immediate use of the spectrum were granted to Inversiones Nextel de Mexico on March 17, 2005. These new licenses have an initial term of 20 years, which we have estimated to be the amortization period of the licenses, and are renewable thereafter for 20 years. Nextel Mexico paid an up-front fee of $3.4 million for these licenses, excluding certain annual fees, and $0.5 million in other capitalizable costs.

Our intangible assets consist of our licenses, customer base and tradename, all of which have finite useful lives, as follows:


			March 31, 2005							December 31, 2004

			Gross Carrying		Accumulated			Net Carrying		Gross Carrying		Accumulated			Net Carrying
			Value		Amortization			Value		Value		Amortization			Value

			(in thousands)
Amortizable intangible assets:
	Licenses		$	79,932	$	(10,690	)	$	69,242	$	75,954	$	(9,804	)	$	66,150
	Customer base			40,750		(39,199	)		1,551		40,917		(39,111	)		1,806
	Tradename			1,502		(1,502	)		—		1,538		(1,538	)		—

		Total intangible assets	$	122,184	$	(51,391	)	$	70,793	$	118,409	$	(50,453	)	$	67,956

The American Institute of Certified Public Accountants’ Statement of Position, or SOP, 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,” 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 such 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. We previously wrote down all intangible assets that existed as of the date we applied fresh-start accounting to zero. As a result, we will record all future reversals of valuation allowances that existed at our emergence from reorganization as increases to paid-in capital.

NII HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

Unaudited

Based on the carrying amount of amortizable intangible assets existing as of March 31, 2005 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

2005	$	4,865
2006		4,255
2007		3,635
2008		3,635
2009		3,635

Actual amortization expense to be reported in future periods could differ from these estimates as a result of additional acquisitions of intangibles, as well as changes in exchange rates and other relevant factors.

During the three months ended March 31, 2005, we did not acquire, dispose of or write down any goodwill or intangible assets with indefinite useful lives.


Note 4.	Debt


	March 31,			December 31,
	2005			2004

	(in thousands)
3.5% convertible notes due 2033	$	180,000		$	180,000
2.875% convertible notes due 2034		300,000			300,000
13.0% senior secured discount notes due 2009, net of unamortized discount of $14 and $14		40			40
Tower financing obligations		117,668			118,202
Capital lease obligations		9,332			5,267

Total debt		607,040			603,509
Less: current portion		(3,413	)		(2,823	)

	$	603,627		$	600,686

3.5% Convertible Notes. For the fiscal quarter ended March 31, 2005, 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, 2005. As a result, the conversion contingency was met, and our 3.5% notes are convertible into 37.5 shares of our common stock per $1,000 principal amount of notes, or an aggregate of 6,750,000 common shares, at a conversion price of about $26.67 per share.

2.875% Convertible Notes. For the fiscal quarter ended March 31, 2005, the closing sale price of our common stock did not exceed 120% of the conversion price of $53.24 per share for at least 20 trading days in the 30 consecutive trading days ending on March 31, 2005. As a result, the conversion contingency was not met.

Capital Lease Obligations. In December 2002, we entered into an agreement with American Tower Corporation for the sale-leaseback of communication towers in Mexico and Brazil. Under the master lease agreement with American Tower, in certain circumstances, Nextel Mexico and Nextel Brazil are permitted to co-locate communications equipment on American Tower sites. Nextel Mexico and Nextel Brazil account for these co-location agreements as capital leases.

NII HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

Unaudited


Note 5.	Contingencies

Brazilian Contingencies. Nextel Brazil has received various assessment notices from state and federal Brazilian authorities asserting deficiencies in payments related primarily to value-added taxes and import duties based on the classification of equipment and services. Nextel Brazil has filed various administrative and legal 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 various other claims. As a result of ongoing analysis, further consultations with external legal counsel, settlement of certain matters, and the expiration of the statute of limitations for certain contingencies during the first quarter of 2004, Nextel Brazil reversed $4.3 million in accrued liabilities, of which $2.5 million were recorded as a reduction to operating expenses.

As of March 31, 2005, Nextel Brazil had accrued liabilities of $27.0 million related to contingencies, of which $24.0 million were classified as other long-term liabilities and $3.0 million was classified as accrued expenses. As of December 31, 2004, Nextel Brazil had accrued liabilities of $26.4 million related to contingencies, of which $23.2 million were classified as other long-term liabilities and $3.2 million were classified as accrued expenses. Of the total accrued liabilities as of March 31, 2005 and December 31, 2004, Nextel Brazil had $21.6 million and $20.8 million in unasserted claims, respectively. We currently estimate the range of possible losses related to matters for which we have not accrued liabilities to be between $53.4 million and $57.4 million as of March 31, 2005. We are continuing to evaluate the likelihood of probable and possible losses, if any, related to all known contingencies. As a result, future increases or decreases to our accrued liabilities may be necessary.

Mexican Tax Contingencies. On December 31, 2001, the Mexican Congress created a new tax on the revenues of telecommunications companies, which Nextel Mexico legally disputed. In November 2002, the Mexican tax authority confirmed that Nextel Mexico’s interconnection services were exempt from payment under the 2002 Telecommunications Tax Law. The tax authority also stated that, in its opinion, dispatch, paging and value-added services were taxable services and had no applicable exceptions. Nextel Mexico continued to accrue and pay taxes related to these services. Nextel Mexico also initiated legal proceedings with respect to the payments made under the 2002 Telecommunications Tax Law.

In March 2005, the Mexican Supreme Court confirmed that the 2002 Telecommunications Tax Law was constitutional, that dispatch, paging and value-added services were taxable services and that there were no exceptions applicable to these services. As a result, this case was definitively resolved. As Nextel Mexico accrued and paid taxes throughout the period of this case’s dispute, Nextel Mexico did not make any additional payments as a result of the resolution.

As of March 31, 2005 and December 31, 2004, Nextel Mexico had accrued liabilities of $3.0 million related to various contingencies for import taxes and employee claims, all of which was classified as accrued expenses.

See Note 7 for more information regarding Mexican taxes.

Argentine Contingencies. During the three months ended March 31, 2005 and 2004, Nextel Argentina recorded $2.0 million and $1.0 million, respectively, as an increase in liabilities for local turnover taxes. Specifically, in one of the markets in which we operate, the city government had previously increased the turnover tax rate from 3% to 6% of revenues for cellular companies. From a regulatory standpoint, we are not considered a cellular company. As a result, we continue to pay the turnover tax at the existing rate and record a liability for the differential between the old rate and the new rate. Similarly, one of the provincial governments in one of the markets where we operate also increased their turnover tax rate from 3% to 4.5% of revenues for cellular companies. Consistent with our earlier position, we continue to pay the turnover tax at the

NII HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

Unaudited

existing rate and accrue a liability for the increase in the rate. During the three months ended March 31, 2005 and 2004, Nextel Argentina also recorded $0.4 million and $0.2 million, respectively, as an increase in liabilities for various municipality charges levied on Nextel Argentina typically related to the use or construction of our sites or towers.

As of March 31, 2005 and December 31, 2004, Nextel Argentina had accrued liabilities of $21.1 million and $17.9 million, respectively, related primarily to local turnover taxes and local government claims, all of which was classified as accrued expenses.

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 6.	Derivative Instruments

In November 2004, Nextel Mexico entered into a derivative agreement to reduce its foreign currency transaction risk associated with a portion of its U.S. dollar forecasted capital expenditures and handset purchases. This risk is hedged by forecasting Nextel Mexico’s capital expenditures and handset purchases for a 12-month period that began in January 2005. Under this agreement, Nextel Mexico purchased a U.S. dollar call option for $3.6 million and sold a call option on the Mexican peso for $0.9 million for a net cost of $2.7 million, which we refer to as the net purchased option. Nextel Mexico’s objective for entering into this derivative transaction was for protection from adverse economic or financial impacts of foreign exchange rate changes. We enter into derivative transactions only for hedging or risk management purposes. We have not and will not enter into any derivative transactions for speculative or profit generating purposes. We formally document all relationships between hedging instruments and hedged items, as well as our risk management objectives for undertaking various hedge transactions before entering the transaction.

We recorded the initial net purchase price of the derivative instrument as a non-current asset of $2.7 million in November 2004. As of March 31, 2005, our net purchase option, designated as a cash-flow hedge, decreased in value by $2.7 million. During the three months ended March 31, 2005, we reclassified $0.1 million from accumulated other comprehensive loss to earnings since the underlying capital expenditures and purchased handsets had impacted earnings.

The fair values of our derivative instruments as of March 31 are as follows:


		2005

		(in thousands)
Purchased call options		$	959
Written put options			(952	)

	Net purchased option	$	7


Note 7.	Income Taxes

Deferred Tax Assets. We assessed the realizability of certain deferred tax assets during the first quarter of 2005, consistent with the methodology we employed for 2004. 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. During the first quarter of 2005, we recorded a correction to reduce our deferred tax asset valuation allowance by $3.3 million. We will continue to evaluate the deferred tax asset valuation allowance balances in all of our foreign operating companies and in our U.S. companies throughout 2005 to determine the appropriate level of valuation allowances.

NII HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

Unaudited

Mexican Taxes. During the second quarter of 2004, the Mexican tax authorities issued a technical description to clarify the tax treatment regarding specific transactions. One such transaction relates to current Mexican tax law that allows a taxpayer to deduct from the basis of property amounts not previously deducted when assets are sold. However, the tax authorities have not yet amended the law that currently permits the use of this deduction or other specifically mentioned transactions. Our Mexican operations originally included a deduction with respect to the aforementioned transaction in their prior year Mexican income tax filings.

As a result of the Mexican tax authority’s current interpretation regarding this matter, and potential sanctions against Nextel Mexico, the Mexican operating companies affected by this potential disallowance amended their prior year income tax returns during the third quarter of 2004 to reflect the reversal of these deductions. The relevant Nextel Mexico companies immediately initiated the process of recovering these amounts. We have received an independent third party Mexican legal opinion supporting the tax position taken in prior years, which conclude that it is probable that the tax positions will be sustained upon review or audit by the Mexican tax authorities. Based on this opinion of tax law interpretation, Nextel Mexico has continued to record a recoverable asset, which was approximately $16.2 million as of March 31, 2005.


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. We allocate corporate overhead costs to some of our subsidiaries. We treat a portion of these allocated amounts as tax deductions which 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.


													Corporate			Intercompany
	Mexico			Brazil			Argentina			Peru			and other			Eliminations			Consolidated

	(in thousands)
Three Months Ended March 31, 2005
Operating revenues	$	218,006		$	67,444		$	58,458		$	26,012		$	424		$	(137	)	$	370,207

Segment earnings (losses)	$	91,348		$	3,033		$	15,769		$	5,345		$	(15,191	)	$	—		$	100,304
Depreciation and amortization		(15,172	)		(5,379	)		(3,368	)		(1,909	)		(367	)		98			(26,097	)

Operating income (loss)		76,176			(2,346	)		12,401			3,436			(15,558	)		98			74,207
Interest expense		(5,066	)		(3,094	)		(589	)		(35	)		(4,056	)		16			(12,824	)
Interest income		3,158			386			95			123			778			(16	)		4,524
Foreign currency transaction gains (losses), net		1,660			137			87			37			(7	)		—			1,914
Other (expense) income, net		(127	)		(1,734	)		10			(9	)		(142	)		—			(2,002	)

Income (loss) before income tax	$	75,801		$	(6,651	)	$	12,004		$	3,552		$	(18,985	)	$	98		$	65,819

Capital expenditures	$	35,094		$	25,347		$	10,092		$	2,313		$	174		$	—		$	73,020

NII HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

Unaudited


													Corporate			Intercompany
	Mexico			Brazil			Argentina			Peru			and other			Eliminations			Consolidated

	(in thousands)
Three Months Ended March 31, 2004
Operating revenues	$	178,527		$	45,247		$	40,676		$	22,968		$	412		$	(139	)	$	287,691

Segment earnings (losses)	$	76,300		$	2,830		$	9,162		$	3,514		$	(10,569	)	$	—		$	81,237
Depreciation and amortization		(17,526	)		(2,637	)		(2,517	)		(1,173	)		(217	)		106			(23,964	)

Operating income (loss)		58,774			193			6,645			2,341			(10,786	)		106			57,273
Interest expense		(4,907	)		(2,764	)		(1	)		(85	)		(8,258	)		6			(16,009	)
Interest income		498			740			101			40			858			(6	)		2,231
Loss on early extinguishment of debt, net		—			—			—			—			(79,327	)		—			(79,327	)
Foreign currency transaction gains (losses), net		7,283			(36	)		(566	)		6			(5	)		—			6,682
Other expense, net		(235	)		(514	)		—			(99	)		(132	)		—			(980	)

Income (loss) before income tax	$	61,413		$	(2,381	)	$	6,179		$	2,203		$	(97,650	)	$	106		$	(30,130	)

Capital expenditures	$	26,879		$	6,545		$	5,056		$	4,719		$	906		$	—		$	44,105

March 31, 2005
Property, plant and equipment, net	$	348,182		$	130,228		$	82,140		$	43,510		$	3,566		$	(1,248	)	$	606,378

Identifiable assets	$	834,515		$	235,886		$	240,495		$	112,249		$	93,211		$	(1,248	)	$	1,515,108

December 31, 2004
Property, plant and equipment, net	$	328,021		$	111,031		$	73,674		$	43,107		$	3,761		$	(1,347	)	$	558,247

Identifiable assets	$	774,058		$	234,091		$	223,180		$	114,354		$	146,944		$	(1,347	)	$	1,491,280

March 31, 2004
Property, plant and equipment, net	$	301,046		$	48,251		$	34,321		$	32,202		$	3,291		$	(1,513	)	$	417,598

Identifiable assets	$	652,299		$	138,152		$	109,636		$	73,124		$	215,023		$	(1,513	)	$	1,186,721


Note 9.	Subsequent Events

Mexico Syndicated Loan. In October 2004, we closed on a $250.0 million, five-year syndicated loan facility in Mexico. The facility can be drawn down, under certain conditions, within 180 days from the date of closing. Of the total amount of the facility, $129.0 million is denominated in U.S. dollars, with a floating interest rate based on LIBOR, $31.0 million is denominated in Mexican pesos, with a floating interest rate based on the Mexican reference rate TIIE, and $90.0 million is denominated in Mexican pesos, at an interest rate fixed at the time of funding. In April 2005, we amended the credit agreement for the syndicated loan facility to extend the availability period until May 31, 2005. As of March 31, 2005, we had not drawn on this loan.

Purchase of AOL Mexico. In April 2005, Nextel Mexico purchased the entire equity interest of AOL Mexico, S. de R.L. de C.V. for approximately $14.1 million in cash. As a result of this transaction, we obtained AOL Mexico’s call center assets and access to AOL Mexico’s customer list, as well as certain tax benefits. We treated this acquisition as a related party transaction as one of our board members is also the president and chief executive officer of AOL Latin America. Due to this board member’s involvement with

NII HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements — (Continued)

Unaudited

our company, he recused himself from our decision to make this investment. We are currently evaluating the accounting treatment for this transaction.


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.

INDEX TO MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Introduction		19
Critical Accounting Policies and Estimates		19
Business Overview		19
Recent Developments		20
Ratio of Earnings to Fixed Charges		21
Results of Operations		21
	a. Consolidated	22
	b. Nextel Mexico	26
	c. Nextel Brazil	28
	d. Nextel Argentina	30
	e. Nextel Peru	32
	f. Corporate and other	34
Liquidity and Capital Resources		35
Future Capital Needs and Resources		36
Forward Looking Statements		38
Effect of New Accounting Standards		39

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, 2005 and 2004; 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 2004 annual report on Form 10-K, 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.

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.

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 2004 annual report on Form 10-K 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, Argentina and Peru. 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 iDEN®, 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;

	•	International Direct Connect® service, in partnership with Nextel Communications and Nextel Partners, which allows subscribers to communicate instantly across national borders with our subscribers in Mexico, Brazil, Argentina and Peru and with Nextel Communications and Nextel Partners subscribers in the United States;

	•	Internet services, mobile messaging services, e-mail and advanced Java^tm enabled business applications, which are marketed as “Nextel Online^sm” services; and

	•	international roaming capabilities, which are marketed as “Nextel Worldwide^sm”.

The table below provides an overview of our total digital handsets in commercial service in the countries indicated as of March 31, 2005 and 2004. For purposes of the table, digital handsets in commercial service represent all digital handsets in use by our customers on the digital mobile networks in each of the listed countries.


	Total Digital Handsets in
	Commercial Service

	March 31,		March 31,
Country	2005		2004

	(in thousands)
Mexico		883		703
Brazil		504		400
Argentina		400		296
Peru		198		154

Total		1,985		1,553

Recent Developments

Mexico Syndicated Loan. In October 2004, we closed on a $250.0 million, five year syndicated loan facility in Mexico. The facility can be drawn down, under certain conditions, within 180 days from the date of closing. Of the total amount of the facility, $129.0 million is denominated in U.S. dollars, with a floating interest rate based on LIBOR, $31.0 million is denominated in Mexican pesos, with a floating interest rate based on the Mexican reference rate TIIE, and $90.0 million is denominated in Mexican pesos, at an interest rate fixed at the time of funding. We intend to hedge the currency and interest rate risks so that the facility is an effective fixed rate Mexican peso credit facility. In April 2005, we amended the credit agreement for the syndicated loan facility to extend the availability period until May 31, 2005. As of March 31, 2005, we had not drawn on this loan.

Spectrum Auction. On January 10, 2005, the Mexican government began an auction for wireless spectrum licenses in the 806-821 MHz to 851-866 MHz frequency band. Inversiones Nextel de Mexico, a subsidiary of Nextel Mexico, participated in this auction. The spectrum auction was divided into three separate auctions: Auction 15 for Northern Mexico Zone 1, Auction 16 for Northern Mexico Zone 2 and Auction 17 for Central and Southern Mexico. The auctions were completed between February 7 and February 11. Nextel Mexico won an average of 15 MHz of nationwide spectrum, except for Mexico City, where no spectrum was auctioned off and where Nextel Mexico has licenses covering approximately 21 MHz. The corresponding licenses and immediate use of the spectrum were granted to Inversiones Nextel de Mexico on March 17, 2005. These new licenses have an initial term of 20 years, which we have estimated to be the

amortization period of the licenses, and are renewable thereafter for 20 years. Nextel Mexico paid an up-front fee of $3.4 million for these licenses, excluding certain annual fees, and $0.5 million in other capitalizable costs.

Ratio of Earnings to Fixed Charges


Three Months Ended
March 31,

2005		2004

	4.23x		—

For the purpose of computing the ratio of earnings to fixed charges, earnings consist of income (loss) from continuing operations before income taxes plus fixed charges and amortization of capitalized interest less capitalized interest. 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 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, including revenues from calling party pays programs and variable charges for airtime and digital two-way radio usage in excess of plan minutes, long-distance charges and international roaming revenues derived from calls placed by our customers.

We also have other less significant sources of revenues. Other revenues primarily include revenues generated from our handset maintenance programs, roaming revenues generated from other companies’ customers that roam on our networks and co-location rental revenues from third party tenants that rent space on our towers.

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, expenses related to our handset maintenance programs, insurance costs, utility costs, maintenance costs and rent for the network switches and sites used to operate our digital mobile networks. Interconnection costs have fixed and variable components. The fixed component of interconnection costs consists of monthly flat-rate fees for facilities leased from local exchange carriers. The variable component of interconnection costs, which fluctuates in relation to the volume and duration of wireless calls, generally consists of per-minute use fees charged by wireline and wireless providers for wireless calls from our digital handsets terminating on their networks. Cost of digital handset and accessory sales consists largely of the cost of the handset and accessories, order fulfillment and installation-related expenses, as well as write-downs of digital handset and related accessory inventory for shrinkage or obsolescence.

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
		2005			Revenues			2004			Revenues			Dollars			Percent

		(dollars in thousands)
Operating revenues
	Service and other revenues	$	354,195			96	%	$	275,105			96	%	$	79,090			29	%
	Digital handset and accessory revenues		16,012			4	%		12,586			4	%		3,426			27	%

			370,207			100	%		287,691			100	%		82,516			29	%

Cost of revenues
	Cost of service (exclusive of depreciation and amortization included below)		(96,461	)		(26	)%		(72,154	)		(25	)%		(24,307	)		34	%
	Cost of digital handset and accessory sales		(54,250	)		(15	)%		(47,270	)		(17	)%		(6,980	)		15	%

			(150,711	)		(41	)%		(119,424	)		(42	)%		(31,287	)		26	%
Selling and marketing expenses			(44,952	)		(12	)%		(37,099	)		(13	)%		(7,853	)		21	%
General and administrative expenses			(74,240	)		(20	)%		(49,931	)		(17	)%		(24,309	)		49	%
Depreciation and amortization			(26,097	)		(7	)%		(23,964	)		(8	)%		(2,133	)		9	%

Operating income			74,207			20	%		57,273			20	%		16,934			30	%
Interest expense			(12,824	)		(3	)%		(16,009	)		(6	)%		3,185			(20	)%
Interest income			4,524			1	%		2,231			1	%		2,293			103	%
Loss on early extinguishment of debt, net			—			—			(79,327	)		(27	)%		79,327			(100	)%
Foreign currency transaction gains, net			1,914			1	%		6,682			2	%		(4,768	)		(71	)%
Other expense, net			(2,002	)		(1	)%		(980	)		—			(1,022	)		104	%

Income (loss) before income tax provision and cumulative effect of change in accounting principle, net			65,819			18	%		(30,130	)		(10	)%		95,949			NM
Income tax provision			(20,781	)		(6	)%		(22,616	)		(8	)%		1,835			(8	)%

Income (loss) before cumulative effect of change in accounting principle, net			45,038			12	%		(52,746	)		(18	)%		97,784			(185	)%
Cumulative effect of change in accounting principle, net of income taxes of $11,898 in 2004			—			—			970			—			(970	)		(100	)%

Net income (loss)		$	45,038			12	%	$	(51,776	)		(18	)%	$	96,814			(187	)%

NM-Not Meaningful

1. Operating revenues

The $79.1 million, or 29%, increase in consolidated service and other revenues from the three months ended March 31, 2004 to the three months ended March 31, 2005 is primarily a result of a 28% increase in the average number of consolidated digital handsets in service and a $6.5 million increase in revenues related to handset maintenance programs.

The $3.4 million, or 27%, increase in consolidated digital handset and accessory revenues from the three months ended March 31, 2004 to the three months ended March 31, 2005 is largely due to a 21% increase in revenues generated from sales of new handsets, as well as an increase in revenues from handset upgrades provided to existing customers.

2. Cost of revenues

The $24.3 million, or 34%, increase in consolidated cost of service from the three months ended March 31, 2004 to the three months ended March 31, 2005 is principally a result of the following:


	•	a $14.2 million, or 37%, increase in consolidated interconnect costs primarily resulting from a 35% increase in consolidated system minutes of use;

	•	a $5.6 million, or 62%, increase in consolidated service and repair costs mainly resulting from increased activity under our handset maintenance programs, primarily in Mexico and Brazil; and

	•	a $4.5 million, or 20%, increase in consolidated direct switch and transmitter and receiver site costs resulting from a 12% increase in the number of consolidated transmitter and receiver sites in service from March 31, 2004 to March 31, 2005.

The $7.0 million, or 15%, increase in consolidated cost of digital handset and accessory sales is primarily a result of a 21% increase in costs incurred related to sales of new handsets, as well as an increase in expenses for handset upgrades provided to existing customers.


3.	Selling and marketing expenses

The $7.9 million, or 21%, increase in consolidated selling and marketing expenses from the three months ended March 31, 2004 to the three months ended March 31, 2005 is principally a result of the following:


	•	a $3.4 million, or 29%, increase in indirect commissions resulting from a 24% increase in handset sales by indirect dealers;

	•	a $2.2 million, or 31%, increase in consolidated advertising expenses, primarily in Mexico, mainly related to international Direct Connect campaigns, as well as market objectives to reinforce awareness of the Nextel brandname; and

	•	a $1.5 million, or 10%, increase in consolidated direct commissions and payroll expenses largely due to an increase in commissions incurred as a result of a 17% increase in handset sales across all markets by market sales personnel.


4.	General and administrative expenses

The $24.3 million, or 49%, increase in consolidated general and administrative expenses from the three months ended March 31, 2004 to the three months ended March 31, 2005 is primarily a result of the following:


	•	a $15.5 million, or 97%, increase related to higher audit, tax, Sarbanes-Oxley, restatement and consulting activities and business insurance expenses;

	•	a $3.0 million increase in consolidated bad debt expense primarily related to certain municipal accounts in Brazil that have suspended payments of all services;

	•	a $2.7 million, or 21%, increase in consolidated customer care expenses resulting from increases in payroll and related expenses necessary to support a larger consolidated customer base;


	•	$2.5 million in contingency reversals in Brazil that we recorded during the first quarter of 2004 related to the expiration of the statute of limitations;

	•	a $2.3 million, or 21%, increase in certain taxes on operating revenues in Mexico and Argentina; and

	•	a $0.7 million, or 10%, increase in information technology costs mostly in Mexico and Argentina.


5.	Depreciation and amortization

The $2.1 million, or 9%, increase in consolidated depreciation and amortization from the three months ended March 31, 2004 to the three months ended March 31, 2005 is primarily due to increased depreciation on a higher consolidated property, plant and equipment base, partially offset by a decrease in amortization. This net decrease in amortization resulted from a reversal that we recorded primarily in the fourth quarter of 2004 of certain valuation allowances for deferred tax assets that we originally created in connection with our application of fresh-start accounting. We recorded the reversal of valuation allowances as a reduction to the intangible assets that existed as of the date of our application of fresh-start accounting.


6.	Interest expense

The $3.2 million, or 20%, decrease in consolidated interest expense from the three months ended March 31, 2004 to the three months ended March 31, 2005 is primarily a result of the following:


	•	the elimination of interest incurred on our 13.0% senior secured discount notes in connection with the retirement of substantially all of these notes in the first quarter of 2004; and

	•	the elimination of interest related to our international equipment facility which was extinguished in 2004.

These decreases were partially offset by an increase in interest incurred on Nextel Mexico’s and Nextel Brazil’s tower financing obligations.


7.	Interest income

The $2.3 million increase in consolidated interest income from the three months ended March 31, 2004 to the three months ended March 31, 2005 is principally the result of an increase in Nextel Mexico’s 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, net

Net foreign currency transaction gains of $1.9 million for the three months ended March 31, 2005 are principally due to foreign currency transaction gains in Mexico as a result of the weakening of the Mexican peso compared to the U.S. dollar on Nextel Mexico’s cash held in U.S. dollars.

Net foreign currency transaction gains of $6.7 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 net U.S. dollar-denominated liability position.

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, 2005 and

2004. The results of Nextel Chile are included in “Corporate and other.” We allocate corporate overhead costs to some of our subsidiaries. We treat a portion of these allocated amounts 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, 2005	Revenues			Revenues			Revenues			Revenues			Expenses			Expenses			(Losses)

	(dollars in thousands)
Nextel Mexico	$	218,006			59	%	$	(65,986	)		44	%	$	(60,672	)		51	%	$	91,348
Nextel Brazil		67,444			18	%		(43,491	)		29	%		(20,920	)		18	%		3,033
Nextel Argentina		58,458			16	%		(27,962	)		19	%		(14,727	)		12	%		15,769
Nextel Peru		26,012			7	%		(12,839	)		8	%		(7,828	)		7	%		5,345
Corporate and other		424			—			(570	)		—			(15,045	)		12	%		(15,191	)
Intercompany eliminations		(137	)		—			137			—			—			—			—

Total consolidated	$	370,207			100	%	$	(150,711	)		100	%	$	(119,192	)		100	%


																% of
																Consolidated
				% of						% of			Selling,			Selling,
				Consolidated						Consolidated			General and			General and			Segment
Three Months Ended March 31,	Operating			Operating			Cost of			Cost of			Administrative			Administrative			Earnings
2004	Revenues			Revenues			Revenues			Revenues			Expenses			Expenses			(Losses)

	(dollars in thousands)
Nextel Mexico	$	178,527			62	%	$	(55,605	)		46	%	$	(46,622	)		54	%	$	76,300
Nextel Brazil		45,247			16	%		(29,727	)		25	%		(12,690	)		14	%		2,830
Nextel Argentina		40,676			14	%		(21,055	)		18	%		(10,459	)		12	%		9,162
Nextel Peru		22,968			8	%		(12,770	)		11	%		(6,684	)		8	%		3,514
Corporate and other		412			—			(406	)		—			(10,575	)		12	%		(10,569	)
Intercompany eliminations		(139	)		—			139			—			—			—			—

Total consolidated	$	287,691			100	%	$	(119,424	)		100	%	$	(87,030	)		100	%

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
		2005			Revenues			2004			Revenues			Dollars			Percent

		(dollars in thousands)
Operating revenues
	Service and other revenues	$	212,879			98	%	$	173,393			97	%	$	39,486			23	%
	Digital handset and accessory revenues		5,127			2	%		5,134			3	%		(7	)		—

			218,006			100	%		178,527			100	%		39,479			22	%

Cost of revenues
	Cost of service (exclusive of depreciation and amortization included below)		(37,300	)		(17	)%		(30,541	)		(17	)%		(6,759	)		22	%
	Cost of digital handset and accessory sales		(28,686	)		(13	)%		(25,064	)		(14	)%		(3,622	)		14	%

			(65,986	)		(30	)%		(55,605	)		(31	)%		(10,381	)		19	%
Selling and marketing expenses			(29,220	)		(13	)%		(23,912	)		(13	)%		(5,308	)		22	%
General and administrative expenses			(31,452	)		(15	)%		(22,710	)		(13	)%		(8,742	)		38	%

Segment earnings			91,348			42	%		76,300			43	%		15,048			20	%
Depreciation and amortization			(15,172	)		(7	)%		(17,526	)		(10	)%		2,354			(13	)%

Operating income			76,176			35	%		58,774			33	%		17,402			30	%
Interest expense			(5,066	)		(2	)%		(4,907	)		(3	)%		(159	)		3	%
Interest income			3,158			1	%		498			—			2,660			NM
Foreign currency transaction gains, net			1,660			1	%		7,283			4	%		(5,623	)		(77	)%
Other expense, net			(127	)		—			(235	)		—			108			(46	)%

Income before income tax and cumulative effect of change in accounting principle, net		$	75,801			35	%	$	61,413			34	%	$	14,388			23	%

NM-Not Meaningful

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, 2005 and 2004. The average exchange rate of the Mexican peso for the three months ended March 31, 2005 depreciated against the U.S. dollar by 2% from the three months ended March 31, 2004. As a result, compared to 2004, the components of Nextel Mexico’s results of operations for 2005 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.

1. Operating revenues

The $39.5 million, or 23%, increase in service and other revenues from the three months ended March 31, 2004 to the three months ended March 31, 2005 is primarily a result of the following:


	•	a 26% increase in the average number of digital handsets in service from the three months ended March 31, 2004 to the same period in 2005 resulting from growth in Nextel Mexico’s existing markets, as well as the expansion of service coverage in Mexico that has occurred since the first quarter of 2004; and

	•	a $1.6 million increase in revenues generated from Nextel Mexico’s handset maintenance program.

2. Cost of revenues

The $6.8 million, or 22%, increase in cost of service from the three months ended March 31, 2004 to the three months ended March 31, 2005 is largely a result of the following:


	•	a $4.5 million, or 27%, increase in interconnect costs generally resulting from a 30% increase in total system minutes of use; and

	•	a $2.0 million, or 61%, increase in service and repair costs largely due to increased activity under Nextel Mexico’s handset maintenance program.

The $3.6 million, or 14%, increase in cost of digital handset and accessory sales from the three months ended March 31, 2004 to the three months ended March 31, 2005 is a result of a 14% increase in handset sales, as well as an increase in handset upgrades provided to current customers.


3.	Selling and marketing expenses

The $5.3 million, or 22%, increase in selling and marketing expenses from the three months ended March 31, 2004 to the three months ended March 31, 2005 is principally a result of the following:


	•	a $2.6 million, or 29%, increase in indirect commissions primarily resulting from a 19% increase in handset sales by Nextel Mexico’s indirect dealers, as well as an increase in indirect commissions per handset sale;

	•	a $1.4 million, or 27%, increase in advertising expenses primarily related to the launch of new rate plans in 2005, international Direct Connect campaigns, which were launched in the middle of 2004, and objectives to reinforce market awareness of the Nextel brandname; and

	•	a $1.0 million, or 11%, increase in direct commissions and payroll expenses, largely due to an increase in commissions incurred as a result of a 5% increase in handset sales by Nextel Mexico’s salesforce and an increase in payroll and related expenses resulting from more sales and marketing personnel.


4.	General and administrative expenses

The $8.7 million, or 38%, increase in general and administrative expenses from the three months ended March 31, 2004 to the three months ended March 31, 2005 is primarily a result of the following:


	•	a $5.9 million increase in general corporate expenses primarily resulting from an increase in payroll and related expenses caused by more general and administrative personnel and an increase in facilities and administrative expenses due to higher business insurance expenses;

	•	a $1.3 million, or 17%, increase in taxes on operating revenues; and

	•	a $0.9 million, or 14%, increase in customer care expenses principally resulting from an increase in payroll and related expenses related to more customer care personnel necessary to support a growing customer base.


5.	Depreciation and amortization

The $2.4 million, or 13%, decrease in depreciation and amortization from the three months ended March 31, 2004 to the three months ended March 31, 2005 is primarily a result of a decrease in amortization due to a reversal recorded primarily in the fourth quarter of 2004 of certain valuation allowances for deferred tax assets that were created in connection with our application of fresh-start accounting and which we recorded as a reduction to the intangible assets that existed as of the date of our application of fresh-start accounting. This decrease is partially offset by an increase in depreciation resulting from an increase in Nextel Mexico’s property, plant and equipment as a result of the continued build-out of Nextel Mexico’s digital mobile network.


6.	Interest income

The $2.7 million increase in interest income from the three months ended March 31, 2004 to the three months ended March 31, 2005 is largely a result of an increase in Mexico’s average cash balances.


7.	Foreign currency transaction gains, net

Foreign currency transaction gains of $1.7 million for the three months ended March 31, 2005 are principally the result of the weakening of the Mexican peso compared to the U.S. dollar on Nextel Mexico’s cash held in U.S. dollars.

Foreign currency transaction gains of $7.3 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 its 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
		2005			Revenues			2004			Revenues			Dollars			Percent

		(dollars in thousands)
Operating revenues
	Service and other revenues	$	62,245			92	%	$	41,815			92	%	$	20,430			49	%
	Digital handset and accessory revenues		5,199			8	%		3,432			8	%		1,767			51	%

			67,444			100	%		45,247			100	%		22,197			49	%

Cost of revenues
	Cost of service (exclusive of depreciation and amortization included below)		(30,693	)		(46	)%		(18,683	)		(41	)%		(12,010	)		64	%
	Cost of digital handset and accessory sales		(12,798	)		(19	)%		(11,044	)		(25	)%		(1,754	)		16	%

			(43,491	)		(65	)%		(29,727	)		(66	)%		(13,764	)		46	%
Selling and marketing expenses			(7,484	)		(11	)%		(6,240	)		(14	)%		(1,244	)		20	%
General and administrative expenses			(13,436	)		(20	)%		(6,450	)		(14	)%		(6,986	)		108	%

Segment earnings			3,033			4	%		2,830			6	%		203			7	%
Depreciation and amortization			(5,379	)		(8	)%		(2,637	)		(6	)%		(2,742	)		104	%

Operating (loss) income			(2,346	)		(4	)%		193			—			(2,539	)		NM
Interest expense			(3,094	)		(5	)%		(2,764	)		(6	)%		(330	)		12	%
Interest income			386			1	%		740			2	%		(354	)		(48	)%
Foreign currency transaction gains (losses), net			137			—			(36	)		—			173			NM
Other expense, net			(1,734	)		(2	)%		(514	)		(1	)%		(1,220	)		237	%

Loss before income tax and cumulative effect of change in accounting principle, net		$	(6,651	)		(10	)%	$	(2,381	)		(5	)%	$	(4,270	)		179	%

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 rate for the three months ended March 31, 2005. The average exchange rate for the three months ended March 31, 2005 appreciated against the U.S. dollar by 9% from the three months ended March 31, 2004. As a result, the components of Nextel Brazil’s results of operations for the three months ended March 31, 2005 after translation into U.S. dollars reflect increases compared to its results of operations for the three months ended March 31, 2004.


1.	Operating revenues

The $20.4 million, or 49%, increase in service and other revenues from the three months ended March 31, 2004 to the three months ended March 31, 2005 is primarily a result of the following:


	•	a 25% increase in the average number of digital handsets in service resulting from growth in Nextel Brazil’s existing markets;

	•	an increase in average revenue per handset, mostly caused by higher access revenues and an increase in revenues generated from calling-party-pays service agreements; and


	•	a $2.7 million increase in revenue related to Nextel Brazil’s handset maintenance program.

The $1.8 million, or 51%, increase in digital handset and accessory sales from the three months ended March 31, 2004 to the three months ended March 31, 2005 is largely the result of a $1.6 million, or 86%, increase in revenues generated from new handset sales, as well as a change in the mix of handsets sold and leased, which included a higher proportion of expensive models during 2005 compared to 2004 when more refurbished handsets were sold.


2.	Cost of revenues

The $12.0 million, or 64%, increase in cost of service from the three months ended March 31, 2004 to the three months ended March 31, 2005 is primarily due to the following:


	•	a $6.0 million, or 56%, increase in interconnect costs mainly resulting from a 44% increase in total minutes of use, as well as an increase in interconnect costs per minute of use as a result of an increase in the volume of minutes terminating on mobile phones, which carry a higher rate;

	•	a $3.1 million increase in service and repair costs primarily as a result of increased activity under Nextel Brazil’s handset maintenance program; and

	•	a $2.6 million, or 41%, increase in direct switch and transmitter and receiver site costs as a result of a 15% increase in the number of transmitter and receiver sites in service from March 31, 2004 to March 31, 2005, as well as an increase in costs per site in service.

The $1.8 million, or 16%, increase in cost of digital handset and accessory sales from the three months ended March 31, 2004 to the three months ended March 31, 2005 is largely a result of a $2.5 million, or 40%, increase in costs incurred from new handset sales, as well as a change in the mix of handsets sold and leased, which included a higher proportion of expensive models during 2005 compared to 2004 when more refurbished handsets were sold. These increases were partially offset by a slight decrease in costs incurred from handset upgrades.

3. Selling and marketing expenses

The $1.2 million, or 20%, increase in selling and marketing expenses from the three months ended March 31, 2004 to the three months ended March 31, 2005 is principally due to the following:


	•	a $0.4 million, or 14%, increase in payroll and direct commissions largely as a result of a 37% increase in handset sales by Nextel Brazil’s internal salesforce;

	•	a $0.3 million, or 27%, increase in advertising expenses due to more advertising campaigns in the first quarter of 2005 primarily as a result of increased initiatives related to brand awareness and overall subscriber growth; and

	•	a $0.3 million, or 19%, increase in indirect commissions resulting from a 21% increase in handset sales by Nextel Brazil’s indirect dealers.


4.	General and administrative expenses

The $7.0 million, or 108%, increase in general and administrative expenses from the three months ended March 31, 2004 to the three months ended March 31, 2005 is primarily a result of the following:


	•	a $3.7 million increase in general corporate expenses primarily as a result of $2.5 million in tax and other contingency reversals during the first quarter of 2004 related to the expiration of the statute of limitations and the favorable resolution of other contingencies;

	•	a $2.3 million increase in bad debt expense primarily related to certain municipal accounts that have suspended payments of all services; and

	•	a $1.0 million, or 34%, increase in customer care expenses resulting from an increase in payroll and related expenses due to more customer care personnel necessary to support a larger customer base.


5.	Depreciation and amortization

The $2.7 million, or 104%, increase in depreciation and amortization from the three months ended March 31, 2004 to the three months ended March 31, 2005 is primarily due to increased depreciation on Nextel Brazil’s significantly higher property, plant and equipment base as a result of the continued build-out of Nextel Brazil’s digital mobile network.


6.	Other expense, net

The $1.2 million increase other expense, net, from the three months ended March 31, 2004 to the three months ended March 31, 2005 is primarily the result of an increase in monetary corrections on certain tax and non-tax related contingencies.


d.	Nextel Argentina


					% of						% of
					Nextel						Nextel			Change from
					Argentina’s						Argentina’s			Previous Year
		March 31,			Operating			March 31,			Operating
		2005			Revenues			2004			Revenues			Dollars			Percent

		(dollars in thousands)
Operating revenues
	Service and other revenues	$	53,850			92	%	$	37,181			91	%	$	16,669			45	%
	Digital handset and accessory revenues		4,608			8	%		3,495			9	%		1,113			32	%

			58,458			100	%		40,676			100	%		17,782			44	%

Cost of revenues
	Cost of service (exclusive of depreciation and amortization included below)		(19,362	)		(33	)%		(13,915	)		(34	)%		(5,447	)		39	%
	Cost of digital handset and accessory sales		(8,600	)		(15	)%		(7,140	)		(18	)%		(1,460	)		20	%

			(27,962	)		(48	)%		(21,055	)		(52	)%		(6,907	)		33	%
Selling and marketing expenses			(4,386	)		(7	)%		(3,180	)		(8	)%		(1,206	)		38	%
General and administrative expenses			(10,341	)		(18	)%		(7,279	)		(18	)%		(3,062	)		42	%

Segment earnings			15,769			27	%		9,162			22	%		6,607			72	%
Depreciation and amortization			(3,368	)		(6	)%		(2,517	)		(6	)%		(851	)		34	%

Operating income			12,401			21	%		6,645			16	%		5,756			87	%
Interest expense			(589	)		(1	)%		(1	)		—			(588	)		NM
Interest income			95			—			101			—			(6	)		(6	)%
Foreign currency transaction gains (losses), net			87			—			(566	)		(1	)%		653			(115	)%
Other income, net			10			—			—			—			10			NM

Income before income tax and cumulative effect of change in accounting principle, net		$	12,004			20	%	$	6,179			15	%	$	5,825			94	%

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, 2005 and 2004. The average exchange rate of the Argentine peso for the three months ended March 31, 2005 depreciated against the U.S. dollar by 1% from the same period in 2004. As a result, compared to 2004, the components of Nextel Argentina’s results of operations for 2005 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.

1. Operating revenues

The $16.7 million, or 45%, increase in service and other revenues from the three months ended March 31, 2004 to the three months ended March 31, 2005 is primarily a result of the following:


	•	a 36% 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, mostly caused by higher access revenues and an increase in revenues generated from calling-party-pays agreements; and

	•	a $2.1 million increase in handset maintenance program revenues.

The $1.1 million, or 32%, increase in digital handset and accessory sales from the three months ended March 31, 2004 to the three months ended March 31, 2005 is largely a result of a $0.8 million increase in handset upgrade revenues due to a change in the mix of handsets upgraded, which included a significantly larger proportion of expensive models during the first quarter of 2005 compared to the first quarter of 2004 when more lower cost refurbished models were sold and leased in Argentina, as well as a $0.3 million, or 10%, increase in handset sales revenue due to an 18% increase in new handset sales.

2. Cost of revenues

The $5.4 million, or 39%, increase in cost of service from the three months ended March 31, 2004 to the three months ended March 31, 2005 is primarily a result of the following:


	•	a $3.2 million, or 47%, increase in interconnect costs, largely as a result of a 44% increase in total system minutes of use;

	•	a $1.4 million, or 44%, increase in site and switch costs resulting from a 13% increase in the number of cell sites on-air from March 31, 2004 to March 31, 2005 and an increase in contingencies related to site taxes levied by municipalities; and

	•	a $0.8 million, or 24%, increase in service and repair costs primarily resulting from increased activity associated with Nextel Argentina’s handset maintenance program.

The $1.5 million, or 20%, increase in cost of digital handset and accessory sales is largely a result of a $1.5 million increase in costs related to handset upgrades due to a change in the mix of handsets upgraded, which included a significantly larger proportion of expensive models during the first quarter of 2005 compared to the first quarter of 2004 when more lower cost refurbished models were sold and leased in Argentina.

3. Selling and marketing expenses

The $1.2 million, or 38%, increase in selling and marketing expenses from the three months ended March 31, 2004 to the three months ended March 31, 2005 is largely a result of the following:


	•	a $0.6 million, or 162%, increase in advertising expenses due to an increase in promotions primarily relating to radio and newspaper advertisements;

	•	a $0.4 million, or 35%, increase in indirect commissions primarily due to a 29% increase in handset sales obtained through indirect channels; and

	•	a $0.2 million, or 15%, increase in other sales costs largely due to an increase in direct commissions resulting from a 9% increase in handset sales obtained through direct channels.

4. General and administrative expenses

The $3.1 million, or 42%, increase in general and administrative expenses from the three months ended March 31, 2004 to the three months ended March 31, 2005 is primarily due to the following:


	•	a $1.8 million, or 37% increase in general corporate expenses due to an increase in certain revenue-based taxes in Argentina;


	•	a $0.5 million increase in bad debt expense mainly due to an increase in calling-party-pays receivables; and

	•	a $0.5 million, or 35%, increase in customer care and billings operations expenses primarily as the result of an increase in average customer care and billing operations headcount caused by the need to support a growing customer base.

5. Depreciation and amortization

Depreciation increased by $0.6 million, or 23%, from the first quarter of 2004 to the first quarter of 2005 due to an increase in gross property, plant and equipment as a result of the continued build-out of Nextel Argentina’s digital mobile network. Amortization increased $0.3 million due to the acquisition of licenses from Radio Movil Digital Argentina S.A. in the fourth quarter of 2004.

6. Foreign currency transaction gains (losses), net

Foreign currency transaction losses of $0.6 million for the first quarter of 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. The peso was relatively stable during the first quarter of 2005; thus foreign currency gains and losses during this quarter were minimal.

e. Nextel Peru


					% of						% of
					Nextel						Nextel			Change from
					Peru’s						Peru’s			Previous Year
		March 31,			Operating			March 31,			Operating
		2005			Revenues			2004			Revenues			Dollars			Percent

		(dollars in thousands)
Operating revenues
	Service and other revenues	$	24,934			96	%	$	22,443			98	%	$	2,491			11	%
	Digital handset and accessory revenues		1,078			4	%		525			2	%		553			105	%

			26,012			100	%		22,968			100	%		3,044			13	%

Cost of revenues
	Cost of service (exclusive of depreciation and amortization included below)		(8,673	)		(33	)%		(8,748	)		(38	)%		75			(1	)%
	Cost of digital handset and accessory sales		(4,166	)		(16	)%		(4,022	)		(18	)%		(144	)		4	%

			(12,839	)		(49	)%		(12,770	)		(56	)%		(69	)		1	%
Selling and marketing expenses			(2,833	)		(11	)%		(2,650	)		(11	)%		(183	)		7	%
General and administrative expenses			(4,995	)		(19	)%		(4,034	)		(18	)%		(961	)		24	%

Segment earnings			5,345			21	%		3,514			15	%		1,831			52	%
Depreciation and amortization			(1,909	)		(8	)%		(1,173	)		(5	)%		(736	)		63	%

Operating income			3,436			13	%		2,341			10	%		1,095			47	%
Interest expense			(35	)		—			(85	)		—			50			(59	)%
Interest income			123			1	%		40			—			83			208	%
Foreign currency transaction gains, net			37			—			6			—			31			NM
Other expense, net			(9	)		—			(99	)		—			90			(91	)%

Income before income tax and cumulative effect of change in accounting principle, net		$	3,552			14	%	$	2,203			10	%	$	1,349			61	%

NM-Not Meaningful

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 $2.5 million, or 11%, increase in service and other revenues from the three months ended March 31, 2004 to the three months ended March 31, 2005 is primarily due to a 27% increase in the average number of digital handsets in service, partially offset by a decrease in average revenue per handset mainly resulting from increased competition.

The $0.6 million, or 105%, increase in digital handset and accessory sales is primarily the result of a $0.6 million increase in handset sales revenue due to a 39% increase in new handset sales and additional revenues generated from the implementation of a rental program that recycles used handsets.

2. General and administrative expenses

The $1.0 million, or 24%, increase in general and administrative expenses from the three months ended March 31, 2004 to the three months ended March 31, 2005 is primarily due to a $0.7 million, or 49%, increase in general corporate costs largely due to an increase in general and administrative personnel and various taxes paid to regulatory agencies. The remaining increase is due to an increase in customer care personnel necessary to support a larger customer base.

3. Depreciation and amortization

The $0.7 million, or 63%, increase in depreciation and amortization from the three months ended March 31, 2004 to the three months ended March 31, 2005 is primarily due to increased depreciation resulting from a significant increase in Nextel Peru’s property, plant and equipment as a result of the continued build-out of Nextel Peru’s digital mobile network.

f. Corporate and other


					% of						% of
					Corporate						Corporate			Change from
					and other						and other			Previous Year
		March 31,			Operating			March 31,			Operating
		2005			Revenues			2004			Revenue			Dollars			Percent

		(dollars in thousands)
Operating revenues
	Service and other revenues	$	424			100	%	$	412			100	%	$	12			3	%
	Digital handset and accessory revenues		—			—			—			—			—			—

			424			100	%		412			100	%		12			3	%

Cost of revenues
	Cost of service (exclusive of depreciation and amortization included below)		(570	)		(134	)%		(406	)		(99	)%		(164	)		40	%
	Cost of digital handset and accessory sales		—			—			—			—			—			—

			(570	)		(134	)%		(406	)		(99	)%		(164	)		40	%
Selling and marketing expenses			(1,029	)		(243	)%		(1,117	)		(271	)%		88			(8	)%
General and administrative expenses			(14,016	)		NM			(9,458	)		NM			(4,558	)		48	%

Segment losses			(15,191	)		NM			(10,569	)		NM			(4,622	)		44	%
Depreciation and amortization			(367	)		(87	)%		(217	)		(53	)%		(150	)		69	%

Operating loss			(15,558	)		NM			(10,786	)		NM			(4,772	)		44	%
Interest expense			(4,056	)		NM			(8,258	)		NM			4,202			(51	)%
Interest income			778			183	%		858			208	%		(80	)		(9	)%
Loss on early extinguishment of debt, net			—			—			(79,327	)		NM			79,327			(100	)%
Foreign currency transaction losses, net			(7	)		(2	)%		(5	)		(1	)%		(2	)		40	%
Other expense, net			(142	)		(33	)%		(132	)		(32	)%		(10	)		8	%

Loss before income tax and cumulative effect of change in accounting principle, net		$	(18,985	)		NM		$	(97,650	)		NM		$	78,665			(81	)%

NM-Not Meaningful

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 $4.6 million, or 48%, increase in general and administrative expenses from the three months ended March 31, 2004 to the three months ended March 31, 2005 is primarily due to an increase in corporate payroll and related expenses, an increase in outside service costs specifically for audit, tax, Sarbanes-Oxley, restatement and consulting activities and stock compensation expense of $1.2 million for restricted stock that we recognized during the three months ended March 31, 2005.

2. Interest expense

The $4.2 million, or 51%, decrease in interest expense from the three months ended March 31, 2004 to the three months ended March 31, 2005 is primarily due to the following:


	•	the elimination of interest incurred on our 13.0% senior secured discount notes in connection with the retirement of substantially all of these notes in the first quarter of 2004; and

	•	the elimination of interest related to our international equipment facility which was extinguished in 2004.

3. Loss on early extinguishment of debt, net

Liquidity and Capital Resources

We had a working capital surplus of $255.0 million as of March 31, 2005 and $263.3 million as of December 31, 2004. The decrease in our working capital is largely the result of using cash balances to invest in our network and purchase spectrum licenses.

We recognized net income of $45.0 million for the three months ended March 31, 2005. We recognized a net loss of $51.8 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. During 2004 and the first quarter of 2005, our operating revenues have generally 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 2005.

Cash Flows. Our operating activities provided us with $47.2 million of net cash during the three months ended March 31, 2005 and $50.7 million of net cash during the three months ended March 31, 2004. The $3.5 million decrease in generation of cash is primarily due to the pay-down of current liabilities during the first quarter of 2005.

We used $59.1 million of net cash in our investing activities during the three months ended March 31, 2005 compared to $83.3 million during the three months ended March 31, 2004. The $24.2 million decrease in cash used in our investing activities is primarily due to $26.4 million in proceeds from the maturity of short-term investments we received during the first quarter of 2005 compared to $25.8 million in cash we used to purchase short-term investments during the first quarter of 2004, partially offset by a $19.9 million increase in cash capital expenditures.

Our financing activities provided us with $0.2 million of net cash during the three months ended March 31, 2005 compared to $8.5 million during the three months ended March 31, 2004. The $8.3 million decrease is primarily due to the following activities which occurred during the first quarter of 2004:


	•	$300.0 million in gross proceeds that we raised in connection with the issuance of our 2.875% convertible notes;

partially offset by:


	•	$211.2 million in cash that we used to retire our 13.0% senior secured discount notes in connection with our tender offer;

	•	$72.5 million in cash that we used to repay a portion of our international credit facility with Motorola; and


	•	$8.4 million in cash that we used to pay debt financing costs in connection with the issuance of our 2.875% convertible notes.

Future Capital Needs and Resources

Capital Resources. Our ongoing capital resources depend on a variety of factors, including our existing cash balance, cash flows generated by our operating companies and external financial sources that may be available. As of March 31, 2005, our capital resources included $334.5 million of cash and available short-term investments. Our ability to generate sufficient net cash from our operating activities 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.

In October 2004, we closed on a $250.0 million, five year syndicated loan facility in Mexico. The facility can be drawn down, under certain conditions, within 180 days from the date of closing. Of the total amount of the facility, $129.0 million is denominated in U.S. dollars, with a floating interest rate based on LIBOR, $31.0 million is denominated in Mexican pesos, with a floating interest rate based on the Mexican reference rate TIIE, and $90.0 million is denominated in Mexican pesos, at an interest rate fixed at the time of funding. We intend to hedge the currency and interest rate risks so that the facility is an effective fixed rate Mexican peso credit facility. In April 2005, we amended the credit agreement for the syndicated loan facility to extend the availability period until May 31, 2005. As of March 31, 2005, we had not drawn on this loan.

Under an existing agreement with American Tower Corporation, during the first quarter of 2005 we received $0.3 million from tower sale-leaseback transactions in Mexico and Brazil. 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, 2005, there were no amounts outstanding under the Nextel Brazil handset credit facility.

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.

Capital Expenditures. Our capital expenditures, including capitalized interest, were $73.0 million for the three months ended March 31, 2005 compared to $44.1 million for the three months ended March 31, 2004 mostly as a result of the continued build-out of our digital mobile network during the first quarter of 2005. In the future, we expect to finance our capital spending using the most effective combination of cash from operations, cash on hand, cash from tower-sale leaseback transactions, cash available to us under our

syndicated loan facility in Mexico 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. Beginning in 2004, we started selling handsets that can operate on the new 6:1 voice coder. We expect that this software upgrade will significantly increase our voice capacity for interconnect calls and leverage our existing investment in infrastructure. We do not expect to realize the benefits from the operation of the 6:1 voice coder until after 2005. 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. We believe that our current business plan, which contemplates significant expansions in Mexico and some expansions in Brazil, will not require any additional external funding, other than the cash available to us under our syndicated loan facility in Mexico, and that we will be able to operate and grow our business while servicing our debt obligations. Our revenues are primarily denominated in foreign currencies. We expect that if current foreign currency exchange rates do not significantly adversely change, we will continue to generate net income for the foreseeable future. See “Forward Looking Statements.”

In making our assessments of a fully funded business plan and net income, we have considered:


	•	cash, cash equivalents and short-term investments on hand and available to fund our operations as of March 31, 2005 of $334.5 million;

	•	expected cash flows from operations;

	•	the availability of funding under the syndicated loan facility in Mexico;

	•	the anticipated level of capital expenditures;

	•	the anticipated level of spectrum acquisitions;

	•	our scheduled debt service; and

	•	cash taxes.

If our business plans change, including as a result of changes in technology, or if we decide to expand into new markets or further in our existing markets, as a result of the construction of additional portions of our network or the acquisition of competitors, 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. In addition, we continue to assess the opportunities to raise additional funding on attractive terms and conditions. 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.

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 are not historical or current facts, but deal with potential future circumstances and developments. 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 International Direct Connect;

	•	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.

Effect of New Accounting Standards

In December 2004, the FASB issued its final standard on accounting for share-based payments (SBP), Statement No. 123R, “Share-Based Payment — An Amendment of FASB Statements No. 123 and 95,” or SFAS 123R, that requires companies to expense the value of employee stock options and similar awards. In April 2005, the SEC approved a new rule that delays the effective date of SFAS 123R, giving companies more time to develop their implementation strategies. Under the SEC’s rule, SFAS 123R is now effective for public companies for annual periods that begin after June 15, 2005 and applies to all outstanding and unvested SBP awards at a company’s adoption date. The provisions of SFAS 123R are effective for our financial statements issued subsequent to January 1, 2006. The adoption of SFAS 123R will require us to treat the fair value of SBP awards that are within its scope as compensation expense in the income statement beginning on the date that we grant the awards to employees. We are currently evaluating which methodology we will utilize and have not yet determined the impact to our financial statements.

In December 2004, the FASB issued Statement No. 153, “Exchanges of Nonmonetary Assets — An Amendment of APB Opinion No. 29,” or SFAS 153, to produce financial reporting that more accurately represents the economics of nonmonetary exchange transactions. APB 29 provided an exception to the basic measurement principle (fair value) for exchanges of similar productive assets. That exception required that some nonmonetary exchanges, although commercially substantive, be recorded on a carryover basis. This statement amends APB Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. SFAS 153 is effective for fiscal periods beginning after June 15, 2005. We do not expect the adoption of SFAS 153 to have a material impact on our 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. As a result, fluctuations in exchange rates relative to the U.S. dollar expose us to foreign currency exchange risks. These risks include 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, Nextel Mexico, Nextel Brazil and Nextel Argentina purchase some capital assets and all handsets in U.S. dollars but record the related revenue generated from these purchases in local currency. As a result, fluctuations in exchange rates relative to the U.S. dollar expose us to foreign currency exchange risks.

We only use derivative instruments for non-trading purposes. In November 2004, Nextel Mexico also entered into a hedge agreement to reduce its foreign currency transaction risk associated with a portion of its U.S. dollar forecasted capital expenditures and handset purchases. This risk is hedged by forecasting Nextel Mexico’s capital expenditures and handset purchases for a 12-month period that began in January 2005. Under this agreement, Nextel Mexico purchased a U.S. dollar call option and sold a call option on the Mexican peso.

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. As of March 31, 2005, substantially all of our borrowings were fixed-rate long-term debt obligations.

The table below presents principal amounts, related interest rates by year of maturity and aggregate amounts as of March 31, 2005 for our fixed rate debt obligations, including our 3.5% convertible notes, our 2.875% convertible notes and our tower financing obligations, as well as the notional amounts of our purchased call option and written put option. We determined the fair values included in this section based on:


	•	quoted market prices for our convertible notes;


	•	carrying values for our tower financing obligations as interest rates were set recently when we entered into these transactions; and

	•	market values as determined by an independent third party investment banking firm for our purchased call option and written put option.

The changes in the fair values of our debt compared to their fair values as of December 31, 2004 reflect changes in applicable market conditions. 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, 2005					December 31, 2004

		2005			2006			2007			2008			2009			Thereafter			Total			Fair Value		Total			Fair Value

		(dollars in thousands)
*Long-Term Debt:*
	Fixed Rate (US$)	$	—		$	—		$	—		$	—		$	40		$	480,000		$	480,040		$	776,764	$	480,040		$	713,164
	Average Interest Rate		—			—			—			—			13.0	%		3.1	%		3.1	%				3.1	%
	Fixed Rate (MP)	$	1,746		$	2,065		$	2,444		$	2,895		$	3,431		$	64,802		$	77,383		$	77,383	$	77,978		$	77,978
	Average Interest Rate		17.7	%		17.7	%		17.7	%		17.7	%		17.7	%		17.7	%		17.7	%				17.7	%
	Fixed Rate (BR)	$	279		$	371		$	495		$	661		$	884		$	37,595		$	40,285		$	40,285	$	40,224		$	40,224
	Average Interest Rate		28.2	%		28.2	%		28.2	%		28.2	%		28.2	%		28.2	%		28.2	%				28.2	%
*Forecasted Hedge Agreement:*
	Purchased call option	$	10,000		$	—		$	—		$	—		$	—		$	—		$	10,000		$	959	$	10,000		$	2,135
	Written put option	$	10,000		$	—		$	—		$	—		$	—		$	—		$	10,000		$	952	$	10,000		$	1,967


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 included the identification of items described in management’s report on internal control over financial reporting included in Item 9A of our 2004 annual report on Form 10-K. Based on and as of the date of such evaluation, these officers concluded that our disclosure controls and procedures were not effective for the reasons described in the following paragraphs.

In light of the material weaknesses described below, we performed additional analysis and other post-closing procedures to ensure our consolidated financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in our quarterly report on this Form 10-Q for the three months ended March 31, 2005 fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

Changes in our internal control over financial reporting for the period ended March 31, 2005 as described below are related to those action plans that management has initiated to remediate the material weaknesses as reported in Item 9A of our 2004 annual report on Form 10-K. However, these action plans are still being deployed and/or have not been in place for sufficient time to consider the deficiencies corrected as per Public Company Accounting Oversight Board rules; thus, management considers that the material weaknesses continue to exist as described below. No other changes have been identified that would have affected, or are reasonably likely to materially affect, our internal control over financial reporting.

During our 2004 year-end testing and evaluation of internal controls in compliance with the Sarbanes-Oxley Act of 2002, as reported in Item 9A of our 2004 annual report on Form 10-K, we identified the

following material weaknesses in our internal control over our financial reporting that continue to exist as of March 31, 2005:


	Account Reconciliations

We did not maintain effective controls over reconciliations for accounts receivable, accounts payable and accrued expense balances at our Mexican subsidiary. Specifically, our internal accounting personnel in Mexico did not have adequate policies and procedures in place with respect to the reconciliation process nor did they have sufficient skills and experience to properly prepare the reconciliations. Additionally, there was a lack of review to ensure that monthly reconciliation procedures were performed accurately and on a timely basis. This control deficiency could result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management determined that this condition constitutes a material weakness.


	Income Tax Accounting

We did not maintain effective controls over the calculation of the income tax provision and related balance sheet accounts. Specifically, our controls over the processes and procedures related to the determination and review of the quarterly and annual tax provisions were not adequate to ensure that the income tax provision was prepared in accordance with generally accepted accounting principles in the United States. This control deficiency could result in a misstatement of the income tax provision and related balance sheet accounts that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected. Accordingly, management determined that this condition constitutes a material weakness.

Remediation of Material Weaknesses

We implemented the following remediation steps to address the material weaknesses discussed above:


	Account Reconciliations

With respect to the bookkeeping errors at our Mexican subsidiary, we have taken or are taking the following corrective actions:


	•	personnel changes, including the termination of the controller responsible for the unreconciled accounts and the hiring a new controller and chief financial officer at our Mexican subsidiary;

	•	the implementation of additional procedures surrounding the account reconciliation policies and procedures, including specific procedures for the approval of manual journal entries in our operating companies and procedures related to the monitoring by us of key control procedures in our operating companies;

	•	revisions to system controls surrounding general ledger posting restrictions and enhancement of related monitoring activities; and

	•	the provision of specific guidance regarding procedures that must be completed by our operating companies’ executives before signing the certifications related to Section 302 of Sarbanes-Oxley.

While we have made improvements to strengthen internal controls in this area, we will periodically evaluate and test the effectiveness of our remediation efforts to determine if the material weakness has been eliminated.


	Income Tax Accounting

With respect to the calculation of the tax provision and related balance sheet accounts, we have taken steps or are taking the following corrective actions;


	•	ensure a detailed review is performed;


	•	enhance our skill set by retaining a third party tax advisor and recruiting additional staff;

	•	initiate a training program to increase the current knowledge of tax provision calculation procedures in our local operations; and

	•	streamline processes with automation and enhanced checklists.

PART II — OTHER INFORMATION


Item 1.	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.

For information on our various loss contingencies, see Note 5 to our condensed consolidated financial statements above.


Item 6.	Exhibits.


Exhibit
Number			Exhibit Description

	10	.1	Amendment No. 1 to the Credit Agreement, dated as of April 22, 2005, among Communicaciones Nextel de Mexico, S.A. de C.V., the banks, financial institutions and other institutional lenders that are parties to the Credit Agreement dated as of October 27, 2004 entered into by such parties and Citibank, N.A. (filed herewith).
	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).

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	By:	/s/Daniel E. Freiman



	Daniel E. Freiman
	Vice President and Controller

Date: May 9, 2005

EXHIBIT INDEX


Exhibit
Number			Exhibit Description

	10	.1	Amendment No. 1 to the Credit Agreement, dated as of April 22, 2005, among Communicaciones Nextel de Mexico, S.A. de C.V., the banks, financial institutions and other institutional lenders that are parties to the Credit Agreement dated as of October 27, 2004 entered into by such parties and Citibank, N.A. (filed herewith).
	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).

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Good

Nii (NIHD) 10-Q2005 Q1 Quarterly report

Content analysis