Nextel Communications 10-Q/A 2001 Q3 Quarterly report (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(Mark One)

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[   ]	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 0-19656

NEXTEL COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	36-3939651 (I.R.S. Employer Identification No.)
2001 Edmund Halley Drive, Reston, Virginia (Address of principal executive offices)	20191 (Zip Code)
Registrant’s telephone number, including area code: (703) 433-4000

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]     No [  ]

     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 October 31, 2001
Class A Common Stock, $0.001 par value		762,647,372
Class B Nonvoting Common Stock, $0.001 par value		35,660,000

     The registrant hereby amends Item 2 of its quarterly report on Form 10-Q for the quarter ended September 30, 2001 in its entirety as follows:

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

Overview

     The following is a discussion and analysis of:

•   our consolidated financial condition and results of operations for the nine-and three-month periods ended September 30, 2001 and 2000; and

•   significant factors that could affect our prospective financial condition and results of operations.

You should read this discussion in conjunction with our 2000 annual report on Form 10-K and our subsequent quarterly reports on Form 10-Q. Historical results may not indicate future performance. See “Forward Looking Statements.”

     Our consolidated financial statements include the accounts of Nextel International, Inc. and its consolidated subsidiaries. However, additional more detailed and focused information relating to Nextel International may be found in the periodic and other reports filed by Nextel International with the Securities and Exchange Commission pursuant to the rules under the Securities Exchange Act of 1934.

     We provide a wide array of digital wireless communications services throughout the United States. We offer a differentiated, integrated package of digital wireless communications services under the Nextel brand name, primarily to business users. Our digital mobile network constitutes one of the largest integrated wireless communications systems utilizing a single transmission technology in the United States. This digital technology, developed by Motorola, Inc., is referred to as integrated Digital Enhanced Network, or
iDEN^(R), technology.

  A customer using our digital mobile network is able to access:

•   digital mobile telephone service;

•   digital two-way radio dispatch service, which is marketed as “Nextel Direct Connect^(R)” service;

•   Internet applications, mobile messaging services, e-mail and advanced business applications, which are marketed as “Nextel Wireless Web” services;

•   advanced calling features, such as three-way calling, voicemail, call forwarding and additional line service;

•   international roaming capabilities, which are marketed as “Nextel Worldwide^SM”; and

•   text and numeric paging.

     In addition to our domestic operations, we have ownership interests in international wireless companies through our substantially wholly owned subsidiary, Nextel International. Nextel International, through its subsidiaries, provides wireless communications services in and around various major metropolitan market areas in Latin America and the Philippines, referred to as its managed markets. Additionally, Nextel International has investments in wireless communications providers in Canada and Japan and owns analog specialized mobile radio companies in Chile.

     As of September 30, 2001:

•   we provided service to about 8,165,600 digital handsets in the United States;

•   our digital mobile network and the compatible digital mobile network of Nextel Partners, Inc., our affiliate providing service in small and medium sized markets, was operational in 191 of the top 200 metropolitan statistical areas in the United States; and

•   Nextel International provided service to about 1,189,500 digital handsets in its managed markets.

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     In July 2001, we initiated operations in our sixth customer care center near Bremerton, Washington and expect it to be fully operational by the end of 2001.

     In July 2001, we launched an enhanced Nextel Direct Connect service that allows any Nextel subscriber to instantly communicate with any other Nextel subscriber in the same local dispatch calling area in some of our markets. We expect to offer this improved service in all of our markets by the end of 2001. We also have announced plans for our next enhancement to Nextel Direct Connect which will allow any two or more Nextel subscribers traveling to a market outside of their home calling area to continue to use Nextel Direct Connect with each other and with other Nextel subscribers in the visited market. This traveling Nextel Direct Connect feature is expected to be available in 2002 and is the next step in our planned introduction of a nationwide Nextel Direct Connect feature. See “Forward Looking Statements.”

     In September 2001, we announced that Paul N. Saleh had been named our Executive Vice President and Chief Financial Officer. He replaces John S. Brittain, Jr., who remains our Vice President and Treasurer. In September 2001, J. Timothy Bryan, Chief Financial Officer of Eagle River, Inc., an affiliate of Craig O. McCaw, joined our board of directors as a designee of Digital Radio, L.L.C. In October 2001, Daniel F. Akerson resigned from our board of directors and also from his position as chairman of the board of directors of Nextel International.

     In October 2001, Motorola and we announced an anticipated significant technology upgrade to our iDEN digital mobile network, which Motorola is developing for our expected deployment in 2003. We expect that this upgrade will effectively double our voice capacity and leverage our existing infrastructure more efficiently. We also announced a compression technology enhancement expected to be rolled out in 2002 to deliver packet data service more efficiently at perceived higher speeds. See “Forward Looking Statements.”

Results of Operations

Operating revenues.

					% of					% of			Change from
					Consolidated					Consolidated			Previous Year
		September 30,			Operating			September 30,		Operating
		2001			Revenues			2000		Revenues			Dollars			Percent
		(dollars in millions)
Nine Months Ended
Domestic		$	5,132			91	%	$	3,856		95	%	$	1,276			33	%
International			486			9	%		212		5	%		274			129	%
Intercompany eliminations			(3	)		—			—		—			(3	)		—
	Operating revenues	$	5,615			100	%	$	4,068		100	%	$	1,547			38	%
Three Months Ended
Domestic		$	1,807			91	%	$	1,437		94	%	$	370			26	%
International			186			9	%		91		6	%		95			104	%
Intercompany eliminations			(1	)		—			—		—			(1	)		—
	Operating revenues	$	1,992			100	%	$	1,528		100	%	$	464			30	%

Digital handsets in service at end
of period for consolidated					Handsets		Percent
subsidiaries (handsets in thousands)
Domestic	8,166	—	6,157	—		2,009		33	%
International	1,189	—	639	—		550		86	%

     The increase in domestic operating revenues from the nine months ended September 30, 2000 to the nine months ended September 30, 2001 consists of a $1.24 billion or 35% increase in wireless service and other revenues to $4.8 billion and a $34 million or 11% increase in revenues from digital handset and accessory sales to $332 million. The increase in domestic operating revenues from the three months ended September 30, 2000 to the three months ended September 30, 2001 consists of a $359 million or 27% increase in wireless

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service and other revenues to $1.69 billion and an $11 million or 10% increase in revenues from digital handset and accessory sales to $118 million. We continue to sell handsets at prices below our cost to attract new customers and as handset upgrade and retention inducements for existing customers. Additionally, as competition has intensified, the prices at which we sell handsets to our new and existing customers have generally declined from the nine months ended September 30, 2000. Accordingly, revenues from domestic digital handset and accessory sales have not increased in proportion to the increase in the number of handsets sold. To mitigate this effect, during the second quarter of 2001, we began to raise prices on existing handsets and introduce more feature rich and higher priced handsets, in an effort to limit the level of subsidy offered to attract and retain customers in our targeted segments. However, in order to stimulate sales of slow-moving handset models, we continue to rely on various customer inducements, including reductions in the sales prices of affected handset models.

     Domestic service and other revenues increased principally as a result of a 33% increase in domestic handsets in service. Average monthly revenue per domestic handset decreased from about $74 during the first nine months of 2000 to about $71 during the first nine months of 2001. Additionally, as compared to the same periods in 2000, average monthly minutes of use per subscriber increased 19% in the nine months ended September 30, 2001 to about 560 minutes. We attribute both the decrease in average monthly revenue per domestic handset and the increase in minutes of use per subscriber to the introduction of pricing plans designed to provide additional value to our customers. These new pricing plans, developed in part to meet competitive demands, generally provide lower per-minute rates made available in conjunction with fixed-rate service plans. These plans typically include a fixed amount of interconnect minutes combined with an unlimited or fixed amount of digital two-way radio service, unlimited Nextel Wireless Web services or free long distance service, all for a stated package price. The growth in handsets in service is the result of a number of factors, principally:

•   the introduction of more competitive service pricing plans targeted at meeting more of our customers’ needs, including a variety of fixed-rate plans offering bundled monthly minutes and other integrated services and features;

•   our differentiated products and services, including Nextel Direct Connect and Nextel Wireless Web;

•   increased brand name recognition through increased advertising and marketing campaigns;

•   aggressive handset pricing promotions;

•   increased sales force and marketing staff; and

•   improved quality of service.

     We expect our average monthly revenue per domestic handset may continue to decrease in the future:

•   as we continue to migrate existing customers to lower priced service offering packages;

•   if competitive pressures require us to:

•   further restructure our service offering packages to offer more value;

•   reduce our service offering prices; or

•   respond to particular short-term, market specific situations, such as special introductory pricing or packages that may be offered by providers launching their service, or particular new product or service offerings, in a particular market; or

•   if we expand our marketing efforts to attract non-business users as customers.

     The increase in international operating revenues from the nine months ended September 30, 2000 to the nine months ended September 30, 2001 consists of a $266 million or 135% increase in wireless service and other revenues to $463 million and an $8 million or 53% increase in revenues from digital handset and accessory sales to $23 million. The increase in international operating revenues from the three months ended September 30, 2000 to the three months ended September 30, 2001 consists of a $92 million or 107% increase

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in wireless service and other revenues to $178 million and a $3 million or 60% increase in revenues from digital handset and accessory sales to $8 million. Operating revenues increased primarily as a result of an 86% increase in the number of digital handsets in service in Nextel International’s managed markets from September 30, 2000 to September 30, 2001, particularly in the Mexican and Brazilian markets. Additionally, the successful introduction of higher priced service plans, primarily in Mexico, contributed to the increase, but was partially offset by more competitive pricing plans in our other international markets offering lower per-minute rates.

Cost of revenues.

					% of					% of			Change from
					Consolidated					Consolidated			Previous Year
		September 30,			Operating			September 30,		Operating
		2001			Revenues			2000		Revenues			Dollars			Percent
		(dollars in millions)
Nine Months Ended
Domestic		$	1,868			33	%	$	1,432		35	%	$	436			30	%
International			249			5	%		117		3	%		132			113	%
Intercompany eliminations			(3	)		—			—		—			(3	)		—
	Cost of revenues	$	2,114			38	%	$	1,549		38	%	$	565			36	%
Three Months Ended
Domestic		$	639			32	%	$	538		35	%	$	101			19	%
International			94			5	%		49		3	%		45			92	%
Intercompany eliminations			(1	)		—			—		—			(1	)		—
	Cost of revenues	$	732			37	%	$	587		38	%	$	145			25	%

     The increase in cost of revenues from the nine months ended September 30, 2000 to the nine months ended September 30, 2001 for our domestic operations consists of a $247 million or 35% increase in cost of providing wireless services to $955 million and a $189 million or 26% increase in cost of digital handset and accessory sales to $913 million. The increase in cost of revenues from the three months ended September 30, 2000 to the three months ended September 30, 2001 for our domestic operations consists of a $77 million or 29% increase in cost of providing wireless services to $341 million and a $24 million or 9% increase in cost of digital handset and accessory sales to $298 million. Cost of digital handset and accessory sales increased primarily due to the increase in the number of handsets sold to new and existing customers, and to a lesser extent, the increase in the percentage of higher cost handsets sold.

     Domestic cost of service revenues increased primarily as a result of increased costs incurred related to variable interconnect fees on higher minutes of use and increased costs incurred related to direct switch and transmitter and receiver site costs including rent, utility and fixed interconnection fees. Total system minutes of use grew 66% from the nine months ended September 30, 2000 to the nine months ended September 30, 2001 principally due to the larger number of handsets in service as well as the 19% increase in average monthly minutes of use per subscriber in the nine months ended September 30, 2001 compared to the same period in 2000. The transmitter and receiver site and switch costs increased due to a 31% increase in transmitter and receiver sites and related equipment and an 11% increase in the number of switches we placed in service from September 30, 2000 to September 30, 2001.

     The increase in international cost of revenues from the nine months ended September 30, 2000 to the nine months ended September 30, 2001 consists of a $79 million or 152% increase in cost of providing wireless services to $131 million, and a $53 million or 82% increase in cost of digital handset and accessory sales to $118 million. The increase in international cost of revenues from the three months ended September 30, 2000 to the three months ended September 30, 2001 consists of a $27 million or 123% increase in cost of providing wireless services to $49 million, and an $18 million or 67% increase in cost of digital handset and accessory

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sales to $45 million. The increase in the cost of providing international wireless services is primarily attributable to:

•   an increase in costs related to variable interconnect fees on significantly increased minutes of use, as well as higher fixed interconnect costs per minute, primarily in Brazil; and

•   an increase in site ground lease and utility expenses incurred due to a 65% increase in the number of transmitter and receiver sites placed in service by Nextel International’s consolidated subsidiaries from September 30, 2000 to September 30, 2001.

     The increase in international cost of digital handset and accessory sales is primarily due to the increase in the number of digital handsets sold, partially offset by a decrease in the average cost Nextel International paid for the handsets sold.

     We expect the amount of cost of revenues to increase as we place more sites and switches into service to add capacity and coverage to our networks, as customer usage of the digital mobile networks increases and as we sell more handsets and accessories to new customers and provide handset upgrade and retention inducements to existing customers, partially offset by a reduction in the average cost we expect to pay for the handsets sold. See “Forward Looking Statements.”

Selling, general and administrative expenses.

				% of					% of			Change from
				Consolidated					Consolidated			Previous Year
		September 30,		Operating			September 30,		Operating
		2001		Revenues			2000		Revenues			Dollars		Percent
		(dollars in millions)
Nine Months Ended
Selling, general and administrative		$	2,236		40	%	$	1,642		40	%	$	594		36	%
Domestic		$	924		17	%	$	745		18	%	$	179		24	%
International			163		3	%		104		3	%		59		57	%
	Selling and marketing	$	1,087		20	%	$	849		21	%	$	238		28	%
Domestic		$	978		17	%	$	702		17	%	$	276		39	%
International			170		3	%		91		2	%		79		87	%
Intercompany eliminations			1		—			—		—			1		—
	General and administrative	$	1,149		20	%	$	793		19	%	$	356		45	%
Three Months Ended
Selling, general and administrative		$	763		38	%	$	582		38	%	$	181		31	%
Domestic		$	296		15	%	$	249		16	%	$	47		19	%
International			59		3	%		41		3	%		18		44	%
	Selling and marketing	$	355		18	%	$	290		19	%	$	65		22	%
Domestic		$	346		17	%	$	258		17	%	$	88		34	%
International			62		3	%		34		2	%		28		82	%
	General and administrative	$	408		20	%	$	292		19	%	$	116		40	%

     The increase in domestic selling and marketing expenses from the nine and three months ended September 30, 2000 to the nine and three months ended September 30, 2001 primarily reflects increased costs incurred in connection with higher sales of handsets including:

•   $61 million and $11 million, or an 18% and a 10%, increase in commissions and residuals earned by indirect dealers and distributors as a result of increased handset sales through these channels;

•   $58 million and $14 million, or a 40% and a 29%, increase in advertising expenses due to aggressive marketing campaigns, including sports-related sponsorships and television commercials, directed at

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	growing our customer base and increasing brand awareness, as well as promoting our differentiated services, such as Nextel Direct Connect and Nextel Wireless Web;
•	$52 million and $23 million, or a 21% and a 27%, increase in sales and marketing payroll and related expenses including costs associated with our company-owned retail stores acquired in May 2001 and increased commissions attributable to a larger direct sales force and increased reliance on our lower cost distribution channels beginning in the third quarter of 2001; and
•	$8 million increase and $1 million decrease in other general marketing expenses.

     The increase in international selling and marketing expenses from the nine and three months ended September 30, 2000 to the nine and three months ended September 30, 2001 is primarily due to increased direct sales labor costs attributable to a larger direct sales force, increased commissions from higher levels of digital handset sales and increased advertising.

     Domestic general and administrative expenses increased from the nine and three months ended September 30, 2000 to the nine and three months ended September 30, 2001 primarily as a result of activities to support a larger customer base, specifically:

•   $140 million and $60 million, or a 141% and a 154%, increase in bad debt expense, which has increased as a percentage of domestic operating revenues primarily due to the impact of a slowing economy and aggressive promotions in late 2000 and early 2001, resulting in an ongoing increased focus on and strengthening of our credit policies and procedures, including modifying credit scoring models and requiring more forms of identification and deposits from more classes of customers;

•   $125 million and $35 million, or a 49% and a 35%, increase in expenses related to billing, collection, customer retention and customer care activities, including the costs associated with our fifth customer care center which commenced operations in January 2001 and our sixth customer care center which commenced operations in July  2001, as well as costs associated with the implementation of our new billing system, expected to be completed in mid-2002; and

•   $11 million increase and $7 million decrease in personnel, facilities and general corporate expenses.

     International general and administrative expenses increased from the nine and three months ended September 30, 2000 to the nine and three months ended September 30, 2001 primarily due to an increase in billing and customer care, information technology, facilities and other general corporate expenses to support a growing customer base. Additionally, international bad debt expense increased $17 million and $9 million, or 142% and 300%, from the nine and three months ended September 30, 2000 to the nine and three months ended September 30, 2001 and has been increasing as a percentage of revenues primarily as a result of a weakening Brazilian economy.

     The aggregate amount of domestic selling, general and administrative expenses is expected to increase as a result of a number of factors, including but not limited to:

•   increasing aggressive marketing and advertising campaigns designed to increase brand awareness in our traditional business and government markets, as well as to develop brand awareness in the non-business user market;

•   costs associated with operating recently acquired retail stores and opening additional retail stores in 2002;

•   increasing commission and residual payments as we sell more handsets, partially offset by efforts to generate more handset sales through our lower cost distribution channels, such as company-owned retail stores, Internet sales through our website and telemarketing sales; and

•   increasing customer care costs as a result of our sixth customer care center, which is expected to become fully operational by the end of 2001.

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Segment earnings (losses).

					% of						% of			Change from
					Consolidated						Consolidated			Previous Year
		September 30,			Operating			September 30,			Operating
		2001			Revenues			2000			Revenues			Dollars			Percent
		(dollars in millions)
Nine Months Ended
Domestic earnings		$	1,362			24	%	$	977			24	%	$	385			39	%
International losses			(96	)		(2	)%		(100	)		(2	)%		4			4	%
Intercompany eliminations			(1	)		—			—			—			(1	)		—
	Segment earnings	$	1,265			22	%	$	877			22	%	$	388			44	%
Three Months Ended
Domestic earnings		$	526			26	%	$	392			26	%	$	134			34	%
International losses			(29	)		(1	)%		(33	)		(2	)%		4			12	%
	Segment earnings	$	497			25	%	$	359			24	%	$	138			38	%

     We define segment earnings as operating income (loss) before depreciation, amortization, restructuring and impairment charges. Based on the current stage of development of each of our reportable segments, most of our operating revenues and identifiable assets as well as all of our segment earnings pertains to our domestic operations. In the first quarter of 2001, our domestic segment earnings decreased as a percentage of consolidated operating revenues as compared to the same period in 2000 primarily due to customer acquisition, retention and handset upgrade activities. As described in “Future Capital Needs and Resources,” beginning in the second quarter of 2001, we initiated various actions resulting in reduced costs and increased domestic segment earnings. As a result of these actions, domestic segment earnings as a percentage of consolidated operating revenues for each of the three months ended September 30, 2001 and June 30, 2001 has improved to 26% as compared to 20% for the three months ended March 31, 2001. However, as the growth rate of our domestic customer base has been declining throughout the year, continued improvement in segment earnings as a percentage of consolidated operating revenues may be dependent in part on our abilities to achieve increased economies of scale, control costs and drive greater sales growth through our lower cost distribution channels. If general economic conditions worsen or if our new handset offerings are not well received, we may continue to see declines in demand for our product and service offerings, which may adversely affect our domestic segment earnings. See “Forward Looking Statements.”

     International segment losses improved due to increased operating revenues from growth in Nextel International’s customer base partially offset by increased costs attributable to:

•   the build-out of our international digital mobile networks, higher customer usage as well as higher fixed interconnect costs per minute, primarily in Brazil;

•   increased aggregate amounts of digital handset costs and related commissions resulting from increased handset sales; and

•   increased general corporate expenses, including bad debt expense primarily in Brazil, to support the larger customer base.

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Depreciation and amortization.

				% of					% of			Change from
				Consolidated					Consolidated			Previous Year
		September 30,		Operating			September 30,		Operating
		2001		Revenues			2000		Revenues			Dollars		Percent
		(dollars in millions)
Nine Months Ended
Depreciation		$	1,089		20	%	$	756		19	%	$	333		44%
Amortization			181		3	%		142		3	%		39		27%
	Depreciation and amortization	$	1,270		23	%	$	898		22	%	$	372		41%
Three Months Ended
Depreciation		$	389		20	%	$	268		18	%	$	121		45%
Amortization			60		3	%		47		3	%		13		28%
	Depreciation and amortization	$	449		23	%	$	315		21	%	$	134		43%

     Depreciation increased from the nine and three months ended September 30, 2000 to the nine and three months ended September 30, 2001 primarily as a result of placing into service, as well as modifying, additional switches and transmitter and receiver sites in existing domestic and international markets primarily to enhance the coverage and capacity of our digital mobile networks. We expect the amount of depreciation to continue to increase as we place additional switches and transmitter and receiver sites into service.

     The increase in amortization is primarily attributable to international acquisition activities completed during the second half of 2000. Domestic licenses acquired in auctions in late 2000 as well as acquisitions occurring in 2001 also contributed to the increase.

Restructuring and impairment charges, interest and other.

				% of						% of			Change from
				Consolidated						Consolidated			Previous Year
	September 30,			Operating			September 30,			Operating
	2001			Revenues			2000			Revenues			Dollars			Percent
	(dollars in millions)
Nine Months Ended
Restructuring and impairment charges	$	(169	)		(3	)%	$	—			—		$	(169	)		—
Interest expense		(1,071	)		(19	)%		(912	)		(22	)%		(159	)		(17	)%
Interest income		178			3	%		298			7	%		(120	)		(40	)%
Equity in losses of unconsolidated affiliates		(69	)		(1	)%		(106	)		(3	)%		37			35	%
Foreign currency transaction (losses) gains, net		(71	)		(1	)%		9			—			(80	)		NM
Reduction in fair value of available-for-sale securities		(188	)		(3	)%		—			—			(188	)		—
Other, net		(12	)		—			4			—			(16	)		NM
Income tax benefit		47			1	%		24			1	%		23			96	%
Extraordinary gain (loss)		469			8	%		(104	)		(3	)%		573			NM
Loss attributable to common stockholders		(1,063	)		(19	)%		(963	)		(24	)%		(100	)		(10	)%

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				% of						% of			Change from
				Consolidated						Consolidated			Previous Year
	September 30,			Operating			September 30,			Operating
	2001			Revenues			2000			Revenues			Dollars			Percent
	(dollars in millions)
Three Months Ended
Impairment charge	$	(147	)		(7	)%	$	—			—		$	(147	)		—
Interest expense		(354	)		(18	)%		(333	)		(22	)%		(21	)		(6	)%
Interest income		43			2	%		111			7	%		(68	)		(61	)%
Equity in losses of unconsolidated affiliates		(24	)		(1	)%		(35	)		(2	)%		11			31	%
Foreign currency transaction (losses) gain, net		(16	)		(1	)%		3			—			(19	)		NM
Reduction in fair value of available-for-sale securities		(188	)		(9	)%		—			—			(188	)		—
Other, net		(1	)		—			18			1	%		(19	)		(106	)%
Income tax benefit		20			1	%		8			1	%		12			150	%
Extraordinary gain		469			24	%		—			—			469			—
Loss attributable to common stockholders		(209	)		(10	)%		(236	)		(15	)%		27			11	%

NM—Not Meaningful

    In May 2001, we announced a restructuring to reduce domestic payroll and other operating costs by implementing a 5% workforce reduction and streamlining our operations. The workforce reduction, completed during the second quarter, affected about 800 employees across the entire domestic organization. As a result of the restructuring, we recorded a $22 million charge in the second quarter of 2001 consisting of $15 million related to severance and fringe benefits and $7 million related to the write-off of information technology development projects that we abandoned as a result of the reduced headcount. We expect any savings in operating expenses as a result of the workforce reduction will be offset by operating expenses attributable to headcount increases in our direct sales force and existing and new customer care centers, as well as costs associated with our recently acquired retail stores.

     In connection with Nextel International’s continuing efforts to tailor its operations to more closely align with anticipated sources of financing, and following its most recent review of economic conditions, operating performance and other relevant factors relating to its Philippine operating company, Nextel International decided to discontinue incremental funding to its Philippine operating company during the third quarter of 2001. As a result, Nextel International recognized a pretax impairment charge of $147 million in the third quarter of 2001.

     The increase in interest expense from the nine and three months ended September 30, 2000 to the nine and three months ended September 30, 2001 resulted primarily from the issuance of our senior notes in January 2001 and our convertible notes in May 2001 and Nextel International’s issuance of its senior notes in August 2000, as well as a higher average level of outstanding borrowings under our credit facilities, offset by a reduction in the weighted average interest rate for our domestic bank credit facility.

     The decrease in interest income from the nine and three months ended September 30, 2000 to the nine and three months ended September 30, 2001 is primarily due to a decrease in interest rates during 2001 as well as a lower average cash balance in 2001.

     The decrease in equity in losses of unconsolidated affiliates from the nine months ended September 30, 2000 to the nine months ended September 30, 2001 is due to $6 million of decreased losses attributable to our equity method investment in Nextel Partners, Inc. The remaining decrease is attributable to our Philippine affiliate, which we began consolidating in the third quarter of 2000, and to our Japanese investment, which was written off in the fourth quarter of 2000. The decrease in equity in losses of unconsolidated affiliates from the three months ended September 30, 2000 to the three months ended September 30, 2001 is due to decreased

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losses in our Japanese investment of $14 million offset by $3 million of increased losses attributable to our equity method investment in Nextel Partners.

     The foreign currency transaction loss in 2001 is due primarily to the weakening of the Brazilian real relative to the U.S. dollar as a result of the current economic environment in both Brazil and Argentina. During the third quarter of 2001, Nextel International recorded a translation adjustment of $11 million as part of the cumulative translation adjustment related to intercompany loans between a subsidiary of Nextel International and its foreign operating company in Brazil as a result of Nextel International’s determination that these intercompany loans are of a long-term investment nature. Prior to August 2001, the effect of exchange rate changes on these intercompany loans was reported as foreign currency transaction (losses) gains, net in our consolidated statements of operations. The foreign currency transaction gain in 2000 is primarily attributable to the strengthening of the Brazilian real.

     On September 30, 2001, Nextel International recognized a $188 million reduction in fair value of its investment in TELUS Corporation, as Nextel International determined the decline in fair value of this investment to be other-than-temporary.

     The extraordinary gain in 2001 relates to the purchase by Nextel Communications, Inc. of some of Nextel International’s senior notes during the third quarter of 2001. The extraordinary loss in 2000 relates to the early retirement of some of our senior notes during the first quarter of 2000.

Liquidity and Capital Resources

     We had losses attributable to common stockholders of $1.06 billion for the nine months ended September 30, 2001 and $963 million for the nine months ended September 30, 2000. The operating expenses and capital expenditures associated with developing, enhancing and operating our digital mobile networks have more than offset operating revenues. Our anticipated capital expenditures, debt service obligations and operating expenses are expected to continue to more than offset operating revenues for the next several years. We have consistently used external sources of funds, primarily from debt incurrences and equity issuances, to fund capital expenditures, acquisitions and other nonoperating needs.

     Cash Flows. Net cash provided by operating activities of $772 million during the nine months ended September 30, 2001 improved by $167 million compared to net cash provided by operating activities of $605 million during the nine months ended September 30, 2000. This improvement in net cash provided by operating activities is primarily attributable to domestic operations, reflecting improved domestic performance resulting from the economies of scale achieved from the growth in our customer base.

     Capital expenditures to fund the continued expansion and enhancement of our digital mobile networks continue to represent the largest use of our funds for investing activities. Net cash used in investing activities of $2.64 billion during the nine months ended September 30, 2001 decreased as compared to $4.2 billion during the nine months ended September 30, 2000 primarily due to:

•   a $2.51 billion increase in net proceeds from short-term investing activities as compared to $1.58 billion in net cash used to purchase short-term investments in 2000; offset by

•   a $374 million increase in cash paid for capital expenditures;

•   a $288 million increase in cash paid for licenses, acquisitions and other investments; and

•   a $287 million decrease in proceeds from sales of assets primarily attributable to the sale-leaseback transaction in 2000 involving some of our owned switch equipment.

Cash payments for capital expenditures totaled $2.67 billion during the nine months ended September 30, 2001 and $2.3 billion during the nine months ended September 30, 2000, including $489 million during 2001 and $277 million during 2000 for international capital expenditures. Cash paid for capital expenditures during the nine months ended September 30, 2001 increased primarily due to an increase in network construction activity resulting in an increase in the number of switches and transmitter and receiver sites and related equipment placed in service in our international operations in 2001 compared to 2000. The increase in cash

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paid for licenses, acquisitions and other investments is primarily due to $405 million paid in 2001 to Arch Wireless, Mobex and Motorola for the acquisition of 800 MHz and 900 MHz licenses and related assets, as well as $32 million to Let’s Talk Cellular & Wireless, Inc. for the purchase of retail stores. The increase was offset by a decrease in international acquisition activities as a result of $252 million used in 2000 for acquisitions in Brazil, Peru and Chile.

     Net cash provided by financing activities of $2.3 billion during 2001 consisted primarily of $2.22 billion in net proceeds from the private placement of our 9.5% senior serial redeemable notes due 2011 and our 6% convertible senior notes due 2011. Net cash provided by financing activities of $2.55 billion during 2000 was primarily attributable to $1.75 billion in net proceeds from the sale of debt securities and $1.85 billion in proceeds from borrowings under our domestic bank credit facility, offset by $1.21 billion for the retirement of debt securities.

Future Capital Needs and Resources

     We anticipate that, for the foreseeable future, significant amounts of available cash flows will be utilized for:

•   the expansion and enhancement of our domestic digital mobile network, including potential payments in connection with any implementation of enhancements to our existing iDEN technology to increase voice capacity and deliver packet data service at higher speeds;

•   operating expenses relating to our domestic digital mobile network;

•   potential acquisitions, including any negotiated acquisitions, of spectrum from third parties and any future governmental auctions of spectrum;

•   debt service requirements; and

•   other general corporate expenditures.

We anticipate that our cash utilization for capital expenditures and other investing activities will continue to exceed our positive cash flows from domestic operating activities through the remainder of 2001 and 2002, as we build out, expand and enhance our digital mobile network. See “Forward Looking Statements.”

     During the first quarter of 2001, our domestic operations began to feel the impact of a slowing economy, and the growth rate of our customer base has been declining throughout the year. In the first quarter, we also incurred higher operating costs in our business primarily attributable to customer acquisition and retention and handset upgrade activities. As a result, we experienced lower segment earnings from our domestic business in the first quarter of 2001 as compared to the fourth quarter of 2000. To respond to and counter these developments, we initiated various actions beginning in the second quarter of 2001, including:

•   reducing the average subsidy on our handsets by increasing the selling prices of some of our existing handsets and introducing new feature rich and higher priced handsets;

•   implementing strategies designed to lower commission costs on domestic handset sales;

•   focusing more of our customer acquisition activities on lower cost distribution channels such as company-owned retail stores that were acquired in May 2001, Internet sales through our website and telemarketing sales; and

•   reducing payroll and other operating costs by restructuring and streamlining our domestic organization to improve operating efficiencies by implementing a 5% workforce reduction, while continuing to invest in our customer care centers and direct sales force.

As a result of these factors, domestic operating costs decreased as a percentage of operating revenues and segment earnings improved in the second and third quarters of 2001 as compared to the first quarter. However, we cannot be sure that our actions will continue to be successful in further improving domestic segment earnings during the fourth quarter of 2001. See “Forward Looking Statements.”

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     As of September 30, 2001, our domestic bank credit facility provided for total secured financing capacity of up to $6.0 billion, subject to the satisfaction or waiver of applicable borrowing conditions. This facility consists of a $1.5 billion revolving loan and $4.5 billion in term loans that mature over a period from December 31, 2007 to March 31, 2009. At September 30, 2001, the entire $4.5 billion of term loans available under our bank credit facility was outstanding. Amounts outstanding under this bank credit facility are secured by liens on assets of substantially all our domestic subsidiaries and bear interest payable quarterly at an adjustable rate calculated based either on the U.S. prime rate or the U.S. London Interbank Offered Rate, or LIBOR. The maturity dates of the loans can accelerate if the aggregate amount of specified debt obligations that mature before June 30, 2009, including the redemption price of redeemable stock that is mandatorily redeemable before June 30, 2009, exceed specified amounts. However, no such acceleration would occur if the long-term debt rating for specified outstanding and unsecured indebtedness of Nextel is at least BBB- by Standard & Poors Ratings Services or Baa3 by Moody’s Investors Service, Inc. The availability of financing under this bank credit facility is subject to requirements under the indentures governing our public notes and the terms applicable to some of our preferred stock. As of September 30, 2001, we were able to access the entire $6.0 billion available under our bank credit agreement in compliance with our financial ratio tests, the debt incurrence covenants contained in our indentures and the relevant terms of applicable issues of preferred stock.

     We are currently in the early stages of developing our detailed business plans and related budgets for calendar year 2002. We are not likely to finalize these processes and the resulting detailed business plans and related budgets until late 2001 or early 2002. Moreover, we may later revise any such plans and budgets in light of competitive factors in the relevant markets, new business opportunities, including additional spectrum acquisitions and other strategic or opportunistic transactions or investments, prevailing conditions in domestic and international debt and equity capital markets and the actual operating results and apparent prospects of our business.

     We anticipate that 2001 domestic capital expenditures will be approximately $2.5 billion and therefore expect to increase the level of domestic capital expenditures during the fourth quarter of 2001 as compared to the third quarter. In the future, our domestic capital spending is expected to be driven by several factors including:

•   the contemplated construction of additional transmitter and receiver sites to increase system capacity and maintain system quality and the installation of related switching equipment in the existing domestic core market coverage areas;

•   the contemplated enhancement of our digital mobile network coverage around most major domestic market areas;

•   the contemplated enhancements to our existing iDEN technology to increase voice capacity and deliver packet data service at higher speeds; and

•   any future enhancement of our digital mobile network by employing contemplated “3G” technology.

     We have historically provided Nextel International with significant financial support. In April and July 2001, through a wholly owned subsidiary, we contributed an aggregate of $500 million to Nextel International in exchange for 5,000 shares of its series A exchangeable redeemable preferred stock. Nextel International will require a significant amount of capital to fund its operations and any planned network build-out for at least the next several years. However, Nextel International has advised us that, based upon its current capital commitments and anticipated cash needs, Nextel International presently has available cash resources to fund its operations only through the remainder of 2001.

     In view of Nextel International’s currently available cash resources and its lack of funding sources, Nextel International has determined to pursue a less aggressive growth strategy that targets conservation of cash resources by slowing enhancement and expansion of its networks and reducing subscriber growth and operating expenses. Nextel International is exploring various potential sources of financing, including public or private debt or equity financing and sales of non-strategic assets, including potential sale-leaseback transactions, to meet its current and future funding requirements. We cannot be sure Nextel International will be

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successful in achieving its cash conservation targets. Further, we cannot be sure that Nextel International will be successful in raising sufficient additional funds to finance its operations at the time additional funds will be needed or at all. See “Forward Looking Statements.”

     If Nextel International cannot obtain sufficient funds when needed or successfully restructure its indebtedness and other financial obligations, it may be required to sell strategic assets, reorganize under applicable law or take other measures. In addition, in these events, it may be required to write-down the carrying values of its long-lived assets, including property, plant and equipment, licenses, goodwill and other intangible assets, to their estimated fair values, which may have a material adverse impact on our consolidated financial position and results of operations. Although we have no legal obligation to make any investments in, or otherwise advance funds to, Nextel International, to the extent Nextel International is unable to obtain necessary funding from other sources, we may provide Nextel International with funds of up to $250 million, but any such investment will be conditioned on, among other matters, Nextel International’s ability to complete a satisfactory restructuring of its indebtedness and other financial obligations and Nextel International’s obtaining additional funding from other sources, including sales of non-strategic assets. Any funding that we elect to provide to Nextel International may reduce the amount of funding available for our domestic operations.

     Based on available cash resources and the anticipated cash needs of our operations for capital expenditures and acquisitions and the anticipated operating cash flow of our wireless businesses, we believe that we will be able to fully fund our domestic operations through calendar year 2002. See “Forward Looking Statements.” In making this assessment, we have considered:

•   consolidated cash, cash equivalents and short-term investments on hand as of September 30, 2001 of $4.23 billion;

•   the availability of $1.5 billion of incremental funding over the amounts outstanding under our domestic bank credit facility;

•   the anticipated level of domestic capital expenditures during the remainder of 2001 and 2002;

•   our domestic debt service requirements during the remainder of 2001 and 2002; and

•   the potential investment of up to $250 million into Nextel International.

     If our business plans change, 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 are encountered that have a material effect on the cash flow or profitability of the mobile wireless businesses conducted by us, the anticipated cash needs of our businesses, and the conclusions as to the adequacy of the available sources, each also could change significantly. Finally, our conclusion that we will be able to fully fund our domestic operations through 2002 does not take into account the impact of our participation in any auctions for the purchase of licenses other than those already concluded or any significant acquisition transactions or the pursuit of any significant new business opportunities other than those currently being pursued by us. Any acquisition or new business opportunity could involve significant additional funding needs in excess of the identified currently available sources, and could require us to raise additional equity and debt funding to meet those needs.

     The availability of borrowings under our domestic bank credit facility is subject to certain conditions and limitations, and we cannot be sure that those conditions will be met. The instruments relating to our financing arrangements and preferred stock contain provisions that operate to limit the amount of borrowings that we may incur. The terms of the domestic bank credit facility and Nextel International’s financing agreements also require us and our relevant subsidiaries, and Nextel International and its relevant subsidiaries, at specified times to maintain compliance with specified operating and financial covenants or ratios, including specified covenants and ratios related to leverage, which become more stringent over time.

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     In addition, our capital needs, and our ability to adequately address those needs through debt or equity funding sources, are subject to a variety of factors that we cannot presently predict with certainty, for example:

•   the commercial success of our domestic and international digital mobile networks;

•   the amount and timing of our capital expenditures and operating income or losses;

•   the volatility and demand of the equity and debt markets; and

•   the market price of our common stock.

     We have had and may in the future have discussions with third parties regarding potential equity investments and debt financing arrangements to satisfy actual or anticipated financing needs. At present, other than the existing equity or debt financing arrangements that have been consummated or are described in this quarterly report, we have no legally binding commitments or understandings with any third parties to obtain any material amount of equity or debt financing. Our ability to incur additional indebtedness, including, in certain circumstances, indebtedness incurred under our domestic bank credit agreement, is and will be limited by the terms of our financing agreements and the terms of some series of our outstanding preferred stock.

Forward Looking Statements

     “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995. A number of statements made in the foregoing “Management’s Discussion and Analysis of Financial Condition and Results of Operations” 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,” “plans,” “may,” “will,” “would,” “could,” “should” or “anticipates” or other comparable words, or by discussions of strategy that may involve risks and uncertainties. We caution you that these forward looking statements are only predictions, which are subject to risks and uncertainties including 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 effect of other risks and uncertainties in addition to the relevant qualifying factors identified in the foregoing “Management’s Discussion and Analysis of Financial Condition and Results of Operations” including, but not limited to:

•   general economic conditions in the geographic areas and occupational market segments that we are targeting for our digital mobile network service;

•   the availability of adequate quantities of system infrastructure and subscriber equipment and components to meet service deployment and marketing plans and customer demand;

•   the availability and cost of acquiring additional spectrum;

•   the timely development and availability of new handsets with expanded applications and features;

•   the success of efforts to improve and satisfactorily address any issues relating to our digital mobile network performance;

•   the successful implementation and performance of the technology being deployed or to be deployed in our various market areas, including technologies relating to our Nextel Wireless Web services;

•   market acceptance of our new handset and service offerings, including our Nextel Wireless Web services and Nextel Worldwide;

•   the timely delivery and successful implementation of new technologies deployed in connection with any future enhanced iDEN or “third generation” (3G) services we may offer;

•   the ability to achieve market penetration and average subscriber revenue levels sufficient to provide financial viability to our digital mobile network business;

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•   our ability to timely and successfully accomplish required scale-up of our billing, collection, customer care and similar back-office operations to keep pace with customer growth, increased system usage rates and growth in levels of accounts receivables being generated by the digital mobile network customer base;

•   access to sufficient debt or equity capital to meet operating and financing needs;

•   the quality and price of similar or comparable wireless communications services offered or to be offered by our competitors, including providers of cellular and personal communication services;

•   legislation or regulatory actions relating to specialized mobile radio services, other wireless communications services or telecommunications generally; and

•   other risks and uncertainties described from time to time in our reports and, with specific reference to risk factors relating to international operations, in Nextel International’s reports, filed with the Securities and Exchange Commission, including our annual reports on Form 10-K for the year ended December 31, 2000 and our subsequent quarterly reports on Form 10-Q.

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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.

NEXTEL COMMUNICATIONS, INC.

By:  /s/ WILLIAM G. ARENDT

William G. Arendt

Vice President and Controller

(Principal Accounting Officer)

Date:  November 15, 2001

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