1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(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, 1998
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 36-3939651
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1505 FARM CREDIT DRIVE, MCLEAN, VA 22102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 394-3000
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 issuer's classes of
common stock as of the latest practicable date:
Number of Shares Outstanding
Title of Class on November 1, 1998
-------------- -------------------
Class A Common Stock, $0.001 par value 269,650,302
Class B Non-Voting Common Stock,
$0.001 par value 17,830,000
2
NEXTEL COMMUNICATIONS, INC.
INDEX
NO. PAGE
- --- -------
PART I FINANCIAL INFORMATION.
Item 1. Financial Statements - Unaudited.
Condensed Consolidated Balance Sheets -
As of September 30, 1998 and December 31, 1997. 3
Condensed Consolidated Statements of Operations -
For the Nine Months Ended September 30, 1998 and 1997. 4
Condensed Consolidated Statements of Operations -
For the Three Months Ended September 30, 1998 and 1997. 5
Condensed Consolidated Statement of Changes in Stockholders' Equity -
For the Nine Months Ended September 30, 1998. 6
Condensed Consolidated Statements of Cash Flows -
For the Nine Months Ended September 30, 1998 and 1997. 7
Notes to Condensed Consolidated Interim Financial Statements. 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 25
PART II OTHER INFORMATION.
Item 1. Legal Proceedings. 28
Item 2. Changes in Securities. 28
Item 6. Exhibits and Reports on Form 8-K. 28
3
PART I
ITEM 1. FINANCIAL STATEMENTS - UNAUDITED.
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
UNAUDITED
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents (of which $173,818 and $159,790 is restricted) $ 291,952 $ 301,601
Marketable securities (of which $49,093 and $128,560 is restricted) 51,130 131,404
Accounts and notes receivable, less allowance for doubtful
accounts of $53,282 and $56,590 384,010 240,637
Subscriber equipment inventory 85,286 101,338
Prepaid expenses and other 104,257 64,617
------------- -------------
Total current assets 916,635 839,597
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation
of $1,040,707 and $594,473 4,585,555 3,225,603
INTANGIBLE ASSETS, net of accumulated amortization
of $871,563 and $764,554 4,945,467 4,699,746
OTHER ASSETS 665,876 462,855
------------- -------------
$ 11,113,533 $ 9,227,801
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, accrued expenses and other $ 856,821 $ 761,314
Current portion of long-term debt 5,292 7,577
------------- -------------
Total current liabilities 862,113 768,891
LONG-TERM DEBT 7,335,254 5,038,250
DEFERRED INCOME TAXES 825,259 951,192
OTHER 97,992 27,929
------------- -------------
Total liabilities 9,120,618 6,786,262
------------- -------------
SERIES D EXCHANGEABLE PREFERRED STOCK MANDATORILY REDEEMABLE 2009,
13% cumulative annual dividend; 567,044 and 515,166 shares issued;
567,031 and 515,166 shares outstanding; stated at liquidation value 582,389 529,119
SERIES E EXCHANGEABLE PREFERRED STOCK MANDATORILY REDEEMABLE 2010, 11.125%
cumulative annual dividend; 793,252 and 0 shares issued and
outstanding; stated at liquidation value 804,269 --
STOCKHOLDERS' EQUITY
Preferred stock, Class A convertible redeemable,
7,905,981 shares issued and outstanding 290,545 290,545
Preferred stock, Class B convertible, 82 shares issued and outstanding -- --
Common stock, Class A, 268,896,065 and 253,246,237 shares issued,
268,050,209 and 252,028,617 shares outstanding 269 253
Common stock, Class B, non-voting convertible, 17,830,000 shares
issued and outstanding 18 18
Paid-in capital 4,382,961 4,379,810
Accumulated deficit (4,029,850) 2,749,105)
Treasury shares, at cost, 845,856 and 1,217,620 shares (16,211) (23,435)
Other stockholders' equity (21,475) 14,334
------------- -------------
Total stockholders' equity 606,257 1,912,420
------------- -------------
$ 11,113,533 $ 9,227,801
============= =============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
4
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
UNAUDITED
1998 1997
-------------- --------------
OPERATING REVENUES $ 1,255,145 $ 463,838
-------------- --------------
OPERATING EXPENSES
Cost of revenues 365,753 195,077
Selling, general and administrative 1,106,312 568,112
Depreciation and amortization 583,108 361,757
-------------- --------------
2,055,173 1,124,946
-------------- --------------
OPERATING LOSS (800,028) (661,108)
-------------- --------------
OTHER INCOME (EXPENSE)
Interest expense (467,857) (279,901)
Interest income 29,783 21,514
Other, net (36,920) 5,486
-------------- --------------
(474,994) (252,901)
-------------- --------------
LOSS BEFORE INCOME TAX BENEFIT AND EXTRAORDINARY ITEM (1,275,022) (914,009)
INCOME TAX BENEFIT 127,502 125,402
-------------- --------------
LOSS BEFORE EXTRAORDINARY ITEM (1,147,520) (788,607)
EXTRAORDINARY ITEM - LOSS ON EARLY RETIREMENT OF DEBT,
NET OF INCOME TAX OF $0 (133,225) --
-------------- --------------
NET LOSS (1,280,745) (788,607)
EXCHANGEABLE REDEEMABLE PREFERRED STOCK DIVIDENDS (107,566) (12,822)
-------------- --------------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (1,388,311) $ (801,429)
============== ==============
BASIC AND DILUTED LOSS PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Loss before extraordinary item attributable to
common stockholders $ (4.56) $ (3.28)
Extraordinary item (0.48) --
-------------- --------------
$ (5.04) $ (3.28)
============== ==============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 275,584,000 244,221,000
============== ==============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
5
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
UNAUDITED
1998 1997
------------- --------------
OPERATING REVENUES $ 506,598 $ 207,224
------------- --------------
OPERATING EXPENSES
Cost of revenues 140,571 72,423
Selling, general and administrative 405,574 253,757
Depreciation and amortization 204,497 137,053
------------- --------------
750,642 463,233
------------- --------------
OPERATING LOSS (244,044) (256,009)
------------- --------------
OTHER INCOME (EXPENSE)
Interest expense (170,724) (107,445)
Interest income 8,039 9,228
Other, net (39,852) 8,620
------------- --------------
(202,537) (89,597)
------------- --------------
LOSS BEFORE INCOME TAX BENEFIT (446,581) (345,606)
INCOME TAX BENEFIT 44,658 39,472
------------- --------------
NET LOSS (401,923) (306,134)
EXCHANGEABLE REDEEMABLE PREFERRED STOCK DIVIDENDS (40,097) (12,822)
------------- --------------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (442,020) $ (318,956)
============= ==============
BASIC AND DILUTED LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (1.56) $ (1.26)
============= ==============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 282,691,000 253,483,000
============= ==============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
6
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
UNAUDITED
Class A Class B Class A
Preferred Stock Preferred Stock Common Stock
----------------------- -------------------- -----------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
BALANCE, January 1, 1998 7,905,981 $ 290,545 82 $ -- 253,246,237 $ 253
Issuance of common stock:
Exercise of options and warrants 2,077,826 2
Employee stock purchase plan
Acquisitions 3,618,181 4
Option Acquisition exercise (Note 2) 9,953,821 10
Deferred compensation
Unrealized loss on available-for-sale
securities, net of income taxes
Foreign currency translation adjustment
Exchangeable redeemable preferred
stock dividends
Net loss
--------- ---------- ------ ------ ----------- ------
BALANCE, September 30, 1998 7,905,981 $ 290,545 82 $ -- 268,896,065 $ 269
========= ========== ====== ====== =========== ======
Class B
Common Stock
-------------------- Paid-in Accumulated Treasury
Shares Amount Capital Deficit Shares
------ ------ ---------- ----------- --------
BALANCE, January 1, 1998 17,830,000 $ 18 $4,379,810 $(2,749,105) $(23,435)
Issuance of common stock:
Exercise of options and warrants 25,698 1,796
Employee stock purchase plan 650 5,428
Acquisitions 85,541
Option Acquisition exercise (Note 2) (10)
Deferred compensation (1,162)
Unrealized loss on available-for-sale
securities, net of income taxes
Foreign currency translation adjustment
Exchangeable redeemable preferred
stock dividends (107,566)
Net loss (1,280,745)
---------- ------ ---------- ----------- --------
BALANCE, September 30, 1998 17,830,000 $ 18 $4,382,961 $(4,029,850) $(16,211)
========== ====== ========== =========== ========
Other Stockholders' Equity
-------------------------------------------------
Accumulated Other
Comprehensive Income
---------------------------------
Unrealized Cumulative
Gain (Loss) Translation Deferred
on Investments Adjustment Compensation
-------------- ----------- ------------
BALANCE, January 1, 1998 $ 22,798 $ -- $ (8,464)
Issuance of common stock:
Exercise of options and warrants
Employee stock purchase plan
Acquisitions
Option Acquisition exercise (Note 2)
Deferred compensation 5,185
Unrealized loss on available-for-sale
securities, net of income taxes (24,585)
Foreign currency translation adjustment (16,409)
Exchangeable redeemable preferred
stock dividends
Net loss
------------ --------- ---------
BALANCE, September 30, 1998 $ (1,787) $ (16,409) $ (3,279)
============ ========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
6
7
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
UNAUDITED
1998 1997
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,280,745) $ (788,607)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of deferred financing costs and accretion of senior
redeemable discount notes, net of capitalized accreted interest 376,783 234,809
Depreciation and amortization 583,108 361,757
Provision for losses on accounts receivable 51,845 23,091
Deferred income tax benefit (127,502) (125,402)
Extraordinary loss on retirement of debt 133,225 --
Loss on interest rate protection agreement 46,873 --
Other, net 36,101 13,791
Change in current assets and liabilities, net of effects from
acquisitions:
Accounts and notes receivable (195,878) (155,795)
Subscriber equipment inventory 1,339 (29,756)
Other assets (29,761) 4,126
Accounts payable, accrued expenses and other 110,909 205,402
------------- -------------
Net cash used in operating activities (293,703) (256,584)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,772,712) (1,041,186)
Payments for acquisitions and purchase of licenses, net of cash acquired (349,365) (176,591)
Purchases of marketable securities (97,896) (145,289)
Proceeds from maturities and sales of marketable securities 176,378 64,465
Other investments in and advances to affiliates (175,007) (18,129)
------------- -------------
Net cash used in investing activities (2,218,602) (1,316,730)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt securities 1,401,013 1,000,282
Issuance of redeemable preferred stock 750,000 500,000
Retirement of debt securities (740,791) --
Borrowings under long-term credit facilities 1,052,000 250,000
Repayments under long-term credit facilities (972,021) --
Revolving line of credit borrowings (repayments), net 1,064,164 (20,000)
Other long-term repayments, net (5,724) (1,149)
Deferred financing costs (89,618) (118,267)
Issuance of common stock and options 33,514 278,384
Capital contributions from minority stockholders 10,119 --
Consent solicitation subscription proceeds -- 44,266
Option repurchase and other -- (24,513)
------------- -------------
Net cash provided by financing activities 2,502,656 1,909,003
------------- -------------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (9,649) 335,689
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 301,601 139,681
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 291,952 $ 475,370
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized of $12,837 and $35,725 $ 94,483 $ 40,252
============= =============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
7
8
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
UNAUDITED
NOTE 1 -- BASIS OF PRESENTATION.
The condensed consolidated interim financial statements of Nextel
Communications, Inc. and subsidiaries ("Nextel" or the "Company") included
herein have been prepared by the Company without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission (the "Commission") and
reflect all adjustments that are, in the opinion of management, necessary for a
fair statement of the results for the interim periods. All adjustments made were
normal recurring accruals. Additionally, certain prior period amounts have
been reclassified to conform to the 1998 presentation.
These interim financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997 (the "1997 Form 10-K"), and
the Nextel International, Inc. Annual Report on Form 10-K for the year ended
December 31, 1997 (the "Nextel International 1997 Form 10-K"), for matters
related to operations of Nextel International, Inc. and its subsidiaries
("Nextel International"), an indirect, substantially wholly-owned subsidiary of
Nextel. Operating results for the interim periods are not necessarily indicative
of results for an entire year.
SUPPLEMENTAL CASH FLOW INFORMATION -- Total capital expenditures paid in
cash and financed during the nine months ended September 30, 1998 and 1997 were
$1,768.1 million and $1,023.2 million, respectively (including $312.0 million
and $59.2 million for Nextel International for the respective periods). Total
capital expenditures include interest capitalized in connection with the
construction and development of the Company's advanced mobile communications
systems using digital technology with a multi-site configuration permitting
frequency reuse (the "Digital Mobile network") of approximately $41.8 million
and $35.7 million during the nine months ended September 30, 1998 and 1997,
respectively.
RESTRICTED CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES -- As of
September 30, 1998 and December 31, 1997, approximately $222.9 million and
$288.4 million, respectively, of cash, cash equivalents and marketable
securities held by Nextel International were not available to fund any of the
cash needs of Nextel's domestic Digital Mobile network and analog specialized
mobile radio ("SMR") businesses due to the restrictions contained in (i) the
indenture related to the 10-year discount notes issued by Nextel International
in March 1997 (the "1997 NI Notes") and (ii) the indenture related to the
10-year discount notes issued by Nextel International in March 1998 (such
indentures, collectively, the "NI Indentures").
NEXTEL INTERNATIONAL ARGENTINA INVESTMENT -- On January 30, 1998, Nextel
International acquired the remaining 50% equity interest in the holding company
for Nextel Argentina S.R.L. ("Nextel Argentina") for a purchase price of $46.0
million. As a result of this purchase, Nextel International commenced
consolidating the accounts of Nextel Argentina effective February 1, 1998.
COMPREHENSIVE INCOME -- Effective January 1, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), that establishes new rules for the reporting and display
of comprehensive income and its components. Adoption of SFAS 130 requires
unrealized gains or losses on the Company's available-for-sale securities and
foreign currency translation adjustments to be included in other comprehensive
income.
8
9
The components of comprehensive income (loss) are as follows (dollars in
thousands):
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
1998 1997 1998 1997
----------- -------------- ------------ ------------
Loss attributable to
common stockholders $(1,388,311) $ (801,429) $ (442,020) $ (318,956)
Other comprehensive income (loss):
Unrealized (loss) gain
on investments, net of tax (24,585) 49,170 (17,009) 36,479
Foreign currency translation
adjustments (16,409) -- (7,497) --
----------- -------------- ------------ ------------
Comprehensive loss $(1,429,305) $ (752,259) $ (466,526) $ (282,477)
=========== ============== ============ ============
NEW ACCOUNTING PRONOUNCEMENTS -- In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which establishes accounting and reporting standards for derivative
instruments and for hedging activities by requiring that all derivatives be
recognized in the balance sheet and measured at fair value. SFAS 133 is
effective for fiscal years beginning after June 15, 1999. The Company has not
evaluated the effects of this change on its financial position or results of
operations.
In March 1998, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This statement will
be effective in 1999 and establishes accounting standards for costs incurred in
the acquisition or development and implementation of computer software. These
new standards will require the capitalization of certain software implementation
costs relating to software acquired or developed and implemented for the
Company's use. This statement is not expected to have a significant effect on
the Company's financial position or results of operations.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities." This statement will be effective in 1999 and
will require costs of start-up activities and organization costs to be expensed
as incurred. This statement is not expected to have a significant effect on the
Company's financial position or results of operations.
NOTE 2 -- SIGNIFICANT ACQUISITIONS AND EQUITY ISSUANCES.
During the nine months ended September 30, 1998, the Company completed the
following transactions. Transactions completed in the three-month period ended
September 30, 1998 are more fully discussed in "Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Domestic
Transactions and Developments for the Three-Month Period Ending September 30,
1998."
MCCAW INVESTOR OPTION EXERCISE -- On July 28, 1998, Option Acquisition,
L.L.C., an entity controlled by Craig O. McCaw ("Mr. McCaw"), exercised options
to purchase 9,953,821 shares of Nextel's Class A Common Stock, par value $0.001
per share ("Common Stock"), in a cashless exercise transaction as permitted by
the terms of such options. The exercise of the options was effected by
surrendering a number of options determined (as provided in such options) by
dividing the full cash exercise price for all of the options by the average
closing sales price for a share of Common Stock on the Nasdaq National Market
for the 20 trading days immediately preceding the exercise date.
DOMESTIC ACQUISITIONS -- During the second quarter of 1998, the Company
acquired several analog SMR businesses for a total purchase price of $172.2
million, consisting of $88.6 million in cash and approximately 3.6 million
shares of Nextel's Common Stock having an aggregate value of $83.6 million on
the contract date. The results of operations of these businesses were not
material in relation to the Company's consolidated results of operations.
PREFERRED STOCK ISSUANCE -- On February 11, 1998, Nextel completed the
sale of 750,000 shares of 11.125% Series E Exchangeable Preferred Stock
Mandatorily Redeemable 2010 (the shares of such stock issued originally, any
shares of such stock issued in exchange therefor and any shares of such stock
issued as payment in kind dividends thereon, collectively, the "Series E
Preferred Stock"), with a liquidation preference of $1,000 per share, yielding
net cash proceeds of approximately $727.9 million (the "Series E Preferred Stock
Proceeds"). At September 30, 1998, accrued
9
10
but unpaid dividends on the outstanding shares of 13% Series D Exchangeable
Preferred Stock Mandatorily Redeemable 2009 (the "Series D Preferred Stock") and
Series E Preferred Stock were approximately $15.4 million and $11.0 million,
respectively.
NOTE 3 -- LONG-TERM DEBT.
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(dollars in thousands)
11.5% Senior Redeemable Discount Notes due 2003,
net of unamortized discount of $0 and $24,564 $ 35,811 $ 318,801
9.75% Senior Redeemable Discount Notes due 2004,
net of unamortized discount of $38,980 and $113,926 1,087,455 1,012,509
10.125% Senior Redeemable Discount Notes due 2004,
net of unamortized discount of $78,300 and $111,870 331,576 298,006
12.25% Senior Redeemable Discount Notes due 2004,
net of unamortized discount of $1,352 and $104,504 7,274 326,966
10.25% Senior Redeemable Discount Notes due 2005,
net of unamortized discount of $25,127 and $34,320 90,038 80,845
13.0% Senior Redeemable Discount Notes due 2007
(issued by Nextel International), net of unamortized
discount of $356,821 and $411,571 594,642 539,892
10.65% Senior Redeemable Discount Notes due 2007,
net of unamortized discount of $282,710 and $324,329 557,290 515,671
9.75% Senior Serial Redeemable Discount Notes due 2007,
net of unamortized discount of $363,373 and $416,021 765,727 713,079
9.95% Senior Serial Redeemable Discount Notes due 2008,
net of unamortized discount of $562,640 1,064,360 --
12.125% Senior Redeemable Discount Notes due 2008,
(issued by Nextel International), net of unamortized
discount of $302,242 427,758 --
Bank credit facility, interest payable quarterly at an
adjusted rate calculated either on the prime rate or LIBOR
(7.81% to 8.84% -- 1998 and 7.94% to 9.75% -- 1997) 2,217,000 1,021,000
Vendor credit facility, interest payable quarterly at 2.0%
over the prime rate (10.5%) -- 152,021
Nextel Argentina bank credit facility, interest payable
quarterly at an adjusted rate calculated either on the
prime rate or LIBOR (9.44% to 9.5%) 52,000 --
Nextel International vendor credit facility, interest payable
semiannually at 2.5% over the prime rate
(10.41% to 11.0% -- 1998 and 11.0% -- 1997) 98,414 50,250
Other 11,201 16,787
----------- -----------
7,340,546 5,045,827
Less current portion 5,292 7,577
----------- -----------
$ 7,335,254 $ 5,038,250
=========== ===========
During the nine months ended September 30, 1998 Transactions completed in
the three-month period ended September 30, 1998 are more fully discussed
in "Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Domestic Transactions and Developments for
the Three-Month Period Ending September 30, 1998."
10
11
During the quarter ended September 30, 1998, the Company terminated an
interest rate protection agreement and recorded a $46.9 million loss included in
other expense within the Company's statement of operations.
FEBRUARY NOTES ISSUANCE -- On February 11, 1998, the Company completed a
private placement of $1,627.0 million in principal amount at maturity of 9.95%
Senior Serial Redeemable Discount Notes due 2008 (the securities issued
originally, and any securities issued in exchange therefor collectively, the
"February Notes") yielding approximately $975.9 million in net cash proceeds
(the "February Notes Proceeds").
NEW BANK FINANCING -- On March 13, 1998, the Company entered into
definitive agreements which increased the Company's total secured financing
capacity under its bank financing agreement to $3.0 billion (consisting of a
$1.5 billion revolving loan and $1.5 billion in term loans) and concurrently
terminated its domestic vendor credit facilities. The $1.5 billion revolving
loan and a $500.0 million portion of the term loans mature over the period from
September 30, 2001 to March 31, 2006. The remaining $1.0 billion portion of the
term loans matures over the period from September 30, 2001 to September 30,
2006. (See Note 5 -- Subsequent Events.)
TENDER OFFER -- On April 3, 1998, the Company concluded a cash tender
offer and related consent solicitation with respect to all of the then
outstanding 11.5% Senior Redeemable Discount Notes due 2003 (the "2003 Notes")
and 12.25% Senior Redeemable Discount Notes due 2004 (the "12.25% 2004 Notes"
and collectively with the 2003 Notes, the "Targeted Notes"). Pursuant to the
terms of the tender offer and consent solicitation, the Company paid
approximately $740.8 million for the tendered Targeted Notes (representing both
the purchase price of the tendered Targeted Notes and related consent fees)
utilizing a portion of the February Notes Proceeds. As a result of the early
retirement of the tendered Targeted Notes, the Company recognized an
extraordinary loss of approximately $133.2 million, representing the sum of (i)
the excess of the purchase price for such tendered Targeted Notes over the sum
of carrying values of such tendered Targeted Notes and (ii) the write-off of the
associated unamortized deferred financing costs related to such tendered
Targeted Notes of approximately $19.3 million.
NEXTEL INTERNATIONAL NOTES ISSUANCE -- On March 12, 1998, Nextel
International completed a private placement of $730.0 million in principal
amount at maturity of 12.125% Senior Redeemable Discount Notes due 2008 (the
"1998 NI Notes") yielding approximately $387.0 million in net cash proceeds (the
"1998 NI Notes Proceeds").
NEXTEL INTERNATIONAL ARGENTINA CREDIT FACILITY -- On February 27, 1998,
Nextel Argentina entered into an $83.0 million senior secured credit facility
(the "Argentina Credit Facility"), which, as amended on May 8, 1998 and
September 30, 1998, was increased to $100.0 million. Borrowings under the
Argentina Credit Facility are scheduled to be repaid in quarterly installments
beginning September 30, 2000 and ending March 31, 2003.
NOTE 4 -- DIGITAL MOBILE NETWORK EQUIPMENT SALES AND RELATED COSTS.
The loss generated from the sale of subscriber units used in the Digital
Mobile network primarily results from the Company's subsidy of digital
subscriber units and represents marketing costs. Consolidated equipment and
accessory sales revenue and the related cost of sales of digital subscriber
units and related accessories, which includes current period order fulfillment
and installation related expenses and write downs to estimated net realizable
value of subscriber unit inventory and related accessories, are classified
within selling, general and administrative expenses as follows (dollars in
thousands):
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------- ------------------------------------
1998 1997 1998 1997
------------- --------------- -------------- ---------------
Equipment and accessory sales $ 308,526 $ 171,024 $ 126,325 $ 72,348
Cost of equipment and accessory sales 502,429 272,902 192,157 126,586
------------- --------------- -------------- ---------------
$ (193,903) $ (101,878) $ (65,832) $ (54,238)
============= =============== ============== ===============
11
12
NOTE 5 -- SUBSEQUENT EVENTS.
Subsequent to September 30, 1998, the Company completed the following
financing transactions which are more fully discussed in "Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Post-September 30, 1998 Transactions and Developments."
ADDITIONAL BANK FINANCING -- On October 28, 1998, Nextel, Nextel Finance
Company, a wholly-owned subsidiary of Nextel and certain other subsidiaries of
the Company amended the existing bank credit facility with certain banks (the
"Bank Credit Facility") to provide for $195.0 million in additional term loan
financing availability thereunder. This amendment increased Nextel's current
total secured financing capacity under such Bank Credit Facility to $3.195
billion (consisting of a $1.5 billion revolving loan and $1.695 billion in term
loans), subject to the satisfaction or waiver of applicable borrowing
conditions. The entire $195.0 million in additional term loans was fully drawn
on October 28, 1998, bears interest payable quarterly at an adjustable rate
calculated based on either the prime rate or London Interbank Offered Rate
("LIBOR") and has a final maturity of March 31, 2007. In connection with such
amendment, the Company secured the consent of the lenders to obtain incremental
financing under the Bank Credit Facility from time to time that would increase
the aggregate secured financing available thereunder to $3.5 billion. Borrowings
under the Bank Credit Facility, as amended, are ratably secured by liens on
assets of the Company's subsidiaries that are "restricted" subsidiaries under
the terms of the Company's public indentures.
NOVEMBER 1998 NOTES ISSUANCE -- On November 4, 1998, the Company completed
a private placement of $300.0 million in principal amount at maturity of 12.0%
Senior Serial Redeemable Notes due 2008 (the "November 1998 Notes") yielding
approximately $289.3 million in net cash proceeds (the "November 1998 Note
Proceeds").
MOTOROLA INTERNATIONAL FINANCING COMMITMENTS -- On November 11, 1998,
Motorola Credit Corporation ("MCC") reached an agreement in principle with
Nextel International to provide up to $275.0 million in additional financing
under a senior secured credit facility. For additional information concerning
this facility, see Nextel International's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998.
NOTE 6 -- CONTINGENCIES.
See Part II, Item 1. "Legal Proceedings" for a discussion of certain
lawsuits and other legal matters.
12
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW.
The following discussion of the condensed consolidated financial
condition and results of operations of Nextel for the nine and three-month
periods ended September 30, 1998 and the nine and three-month periods ended
September 30, 1997 and certain factors that could affect Nextel's prospective
financial condition should be read in conjunction with the Company's 1997 Form
10-K.
Nextel provides a wide array of digital and analog wireless
communications services throughout the United States. The Company offers a
differentiated, integrated package of digital wireless communications services
under the Nextel brand name primarily to business users, and as of September 30,
1998, provided service to approximately 2,417,400 digital subscriber units in
the United States. At September 30, 1998, the Company's Digital Mobile network
was operational in areas in or around 91 of the top 100 metropolitan statistical
areas ("MSAs") in the United States. In addition to its Digital Mobile network,
Nextel also operates analog wireless networks providing analog SMR services
throughout the continental United States and Hawaii to approximately 417,800
analog SMR subscriber units as of September 30, 1998. Nextel has significant SMR
spectrum holdings in and around every major business and population center in
the country, including all of the top 50 MSAs in the United States.
In early 1997, Nextel finalized and began implementing a business plan
that contemplated an accelerated build-out of its Digital Mobile network in the
United States incorporating the modified version of the digital technology
developed by Motorola, Inc. ("Motorola") referred to as the "integrated Digital
Enhanced Network" or "Reconfigured iDEN." During 1997, Nextel achieved a
significant expansion of its Digital Mobile network and experienced a large
increase in the number of digital subscriber units in service and system minutes
of use. In early 1998, Nextel updated and revised its 1998 domestic business
plan in light of its results and experience in building out and commercializing
its Digital Mobile network in 1997. This revised and updated 1998 Plan
contemplated further expansion of the Company's Digital Mobile network with the
objectives of: (i) achieving additional penetration in its targeted business
customer base in markets where the Digital Mobile network was or was planned to
be operating in early 1998; (ii) selecting and prioritizing additional markets
for expansion of Digital Mobile network coverage by Nextel during 1998; and
(iii) enhancing the quality and performance of its Digital Mobile network
wireless service offerings to maintain and strengthen Nextel's competitive
position relative to other existing and emerging providers of digital wireless
services in the United States.
The growth in Nextel's domestic Digital Mobile network coverage and
capacity, and the related significant increases in the number of digital
subscriber units in service and in system minutes of use, that began in 1997 has
continued and accelerated through the third quarter of 1998. This growth has
contributed significantly to the Company achieving positive earnings before
interest, taxes, depreciation and amortization for its domestic operations for
the third quarter of 1998. It also has resulted in a steady increase in the
Company's capital expenditures and in the amount of net cash used in Digital
Mobile network operations during this 1997 - 1998 period. See Part I, Item 1.
"Business -- 1998 Business Plan" in the Company's 1997 Form 10-K.
The Company currently estimates that its domestic funding requirements
for system and non-system capital expenditures for 1998 will be approximately
$1,930.0 million, as compared to the approximately $1,452.5 million in funding
used for such purposes during 1997. Such actual and contemplated capital
expenditures exclude capital expenditures relating to international operations
and capitalized interest relating to the Company's domestic and international
operations for the respective years. During the nine months ended September 30,
1998, domestic capital expenditures (excluding capitalized interest) were
approximately $1,431.7 million, and the Company currently anticipates that
domestic capital expenditures (excluding capitalized interest) during the fourth
quarter of 1998 will total approximately $500.0 million. However, the actual
levels of capital expenditures that will be incurred by the Company in the
remainder of 1998 are subject to certain risks and uncertainties, including
those identified or referred to in the Company's 1997 Form 10-K. The Company
previously has identified and disclosed the most significant factors that the
Company believes have accounted for the level of its domestic capital
expenditures during 1998. Such factors include: (1) the continued strong growth
in net subscriber adds experienced by the Company, resulting in over 2.4 million
subscriber units in service at September 30, 1998, or nearly twice the number
of subscriber units in service at
13
14
December 31, 1997; (2) the growth rate in system utilization by its customer
base, steadily increasing to an aggregate of approximately 2.7 billion minutes
of use in the third quarter of 1998, as compared to approximately 2.2 billion
minutes of use during the second quarter of 1998 and approximately 1.5 billion
minutes of use during the first quarter of 1998; (3) the acceleration of the
deployment of certain switching and related system infrastructure equipment from
early 1999 to the latter half of 1998; and (4) the implementation of the
Company's planned acceleration of system build out activities to attain an
approximate three month lead time in that process, to enable the Company to
conduct network upgrade activities once per quarter in its market areas, thereby
minimizing potential service disruptions and unsatisfactory customer experiences
arising from more frequent network affecting events. See "-- Forward Looking
Statements."
During 1998, the Company has continued to make capital expenditures to
construct transmission towers and to expand the Digital Mobile network to new
market areas. The Company currently is pursuing two transactions which, if
consummated, would be expected to have an impact on the level of the Company's
capital expenditures and funding requirements that are related to such
activities. Specifically, the Company is currently discussing with third parties
potential transactions involving the sale of all or a portion of its portfolio
of transmission tower assets, which includes towers and related assets
constructed during 1998. Also, the Company is seeking to finalize the terms of
agreements (and to assemble related equity and debt funding commitments)
pursuant to which Nextel Partners, Inc. ("Nextel Partners"), would build out and
operate digital mobile systems compatible with the Digital Mobile network in
domestic markets outside or adjacent to the Company's currently operating market
areas. Definitive agreements covering the potential transactions described in
this paragraph have not yet been finalized, and there can be no assurance that
such agreements will be finalized or that either or both of such potential
transactions will be consummated. See "--Forward Looking Statements."
The Company also operates or has investments in international wireless
companies through Nextel International. Nextel International's subsidiaries or
other entities in which Nextel International holds equity or equivalent
interests own and operate wireless communications systems (the "Operating
Companies") in Latin America, Asia and Canada and, together with Nextel's
domestic Digital Mobile network operations, provide service in 10 of the
world's 25 largest cities. The Company's condensed consolidated financial
statements include financial information reflecting the assets, liabilities and
results of operations relating to Nextel International and its consolidated
subsidiaries as of the relevant dates or for periods indicated therein except
for foreign subsidiaries, which are reported as of a date one month earlier.
Since March 1997, the funding needs relating to international operations have
been met largely through separate financing arrangements entered into by Nextel
International and its operating subsidiaries and affiliates. Nextel
International currently estimates its funding requirements for fiscal year 1998
to be approximately $810.0 million. As of September 30, 1998, Nextel
International's total cash expenditures for its business activities were
approximately $574.0 million.
As of September 30, 1998, Nextel International's proportionate share of
the approximately 472,400 international digital subscriber units in service,
based on its ownership interests in the Operating Companies, is estimated to be
approximately 118,200. These units in service are derived from the reported
total digital subscriber units as of September 30, 1998 on the Operating
Companies' current commercial networks in Argentina, Brazil, Canada, Japan,
Mexico, the Philippines, and Shanghai, China.
During the third quarter of 1998, Nextel International, through its
subsidiaries or affiliated companies, launched commercial digital enhanced SMR
("ESMR") service in Rio de Janeiro, Manila, the Kanto region of Japan (which
includes Tokyo) and Mexico City. More detailed information relating to Nextel
International's business operations, financial condition and results of
operations may be found in the periodic and other reports filed by Nextel
International with the Commission pursuant to rules under the Securities and
Exchange Act of 1934, as amended (the "Exchange Act").
DOMESTIC TRANSACTIONS AND DEVELOPMENTS FOR THE THREE-MONTH PERIOD ENDING
SEPTEMBER 30, 1998
SERIES E PREFERRED STOCK EXCHANGE OFFER: On July 16, 1998, Nextel completed an
exchange offer for its Series E Preferred Stock, of which 750,000 shares were
initially issued on February 11, 1998 in a private placement transaction.
14
15
FEBRUARY SENIOR NOTES EXCHANGE OFFER: Concurrent with the exchange offer of the
Series E Preferred Stock on July 16, 1998, Nextel completed an exchange offer
for $1,627.0 million in principal amount at maturity of its February Notes,
which were initially issued on February 11, 1998 in a private placement
transaction.
LMDS AUCTION: On February 18, 1998, the Federal Communications Commission (the
"FCC") commenced an auction of Local Multipoint Distribution Service ("LMDS")
spectrum in the 28 GHz - 31 GHz frequency range. The Company's participation
in the LMDS spectrum auction and related activities have been conducted through
NextBand Communications, L.L.C. ("NextBand"), a joint venture in which the
Company has a 50% ownership interest, with the remaining 50% interest held by
NextLink Communications, Inc. ("NextLink"), a publicly traded company that is
controlled by Mr. McCaw. As of the conclusion of the LMDS spectrum auction on
March 25, 1998, NextBand had submitted $134.7 million in bids that represented
the highest bids with respect to the auction of LMDS spectrum in 42 markets
covering approximately 96 million people throughout the United States. Through
September 30, 1998, the Company made $67.2 million in payments to the FCC,
representing its full 50% share of the bid amount in accordance with the
relevant NextBand joint venture arrangements.
MCCAW INVESTOR OPTION EXERCISE -- On July 28, 1998, Option Acquisition, L.L.C.,
an entity controlled by Mr. McCaw, exercised options to purchase 9,953,821
shares of Nextel Common Stock in a cashless exercise transaction as permitted by
the terms of such options. The exercise of the options was effected by
surrendering a number of options determined (as provided in such options) by
dividing the full cash exercise price for all of the options by the average
closing sales price for a share of Common Stock on the Nasdaq National Market
for the 20 trading days immediately preceding the exercise date.
NEXTEL INTERNATIONAL TRANSACTIONS AND DEVELOPMENTS FOR THE THREE-MONTH PERIOD
ENDED SEPTEMBER 30, 1998
PHILIPPINES RESTRUCTURING: In February 1998, Nextel International reached an
agreement in principle with the three groups of local shareholders of Infocom
Communications Network, Inc. ("Nextel Philippines"), including the Gotesco group
(the "Gotesco Group" and together with the other local shareholders, the
"Philippines Shareholders"), and consummated such agreement in April 1998 (the
"Philippines Partner Agreements"). On June 26, 1998, Nextel International and
the Gotesco Group entered into an Agreement to Accelerate Put Rights (the
"Gotesco Put Acceleration Agreement") pursuant to which the exercise date of the
Gotesco Group's right to put its 20% interest to Nextel International was
accelerated from January 1999 to August 21, 1998. Pursuant to the Gotesco Put
Acceleration Agreement, the Company agreed to pay the Gotesco Group $9.0 million
for the shares covered by the Gotesco Put in three installments. The first two
installments were paid on June 26 and July 13, 1998. On August 21, 1998, Gamboa
Holdings, Inc. ("Gamboa Holdings"), which is 60% owned by ACCRA Investments
Corporation, a corporation organized under the laws of the Philippines and owned
by Philippines nationals ("ACCRAIN"), and 40% owned by an indirect subsidiary of
Nextel International, delivered the final installment of $8.0 million to the
Gotesco Group and the Gotesco Group delivered the shares covered by the Gotesco
Put to Gamboa Holdings. Nextel International also agreed to other terms and
conditions relating to an agreement dated August 21, 1998 between a wholly-owned
subsidiary of Nextel International and ACCRAIN. Additional information regarding
Nextel Philippines is contained in Nextel International's Quarterly Report on
Form 10-Q for the period ended September 30, 1998.
SHANGHAI: Prior to September 1998, China United Telecommunications, Ltd.
("Unicom") requested that Shanghai CCT -- McCaw Telecommunications Systems Co.,
Ltd. ("Shanghai CCT McCaw") participate in financing the expansion of the
Shanghai GSM System ("Phase IV"). While Nextel International had previously
advised its partners in Shanghai CCT McCaw that it was not willing to provide
funding for Phase IV of the Shanghai GSM System, such partners advised Nextel
International that each intended to participate in the funding of Phase IV.
Accordingly, Nextel International and its partners in Shanghai CCT McCaw have
engaged in discussions among themselves and with Unicom with respect to Shanghai
CCT McCaw's possible participation in Phase IV.
In September 1998, Unicom advised the parties that pursuant to a new policy of
the Chinese government, Unicom was no longer permitted to enter into any new
contracts for its projects wherein financing was derived through investment
structures involving indirect investment by foreign investors, including the
structure utilized by Shanghai CCT McCaw with respect to the Shanghai GSM
System. Further, Unicom advised the parties that it intended to finance Phase IV
and any possible future expansions of the Shanghai GSM System on its own using
financing derived independently of Shanghai CCT McCaw. Additional information
regarding Shanghai CCT McCaw is contained in Nextel International's Quarterly
Report on Form 10-Q for the period ended September 30, 1998.
NEXTEL INTERNATIONAL NOTES ISSUANCE: On March 12, 1998, Nextel International
completed a private placement of its 1998 NI Notes yielding approximately $387.0
million in 1998 NI Notes Proceeds. On September 10, 1998, Nextel International
completed an exchange offer for the 1998 NI Notes.
15
16
POST-SEPTEMBER 30, 1998 TRANSACTIONS AND DEVELOPMENTS
ADDITIONAL BANK FINANCING: At September 30, 1998, the Company had drawn an
aggregate of approximately $2.2 billion of its then-maximum $3.0 billion in
available financing under its Bank Credit Facility. On October 28, 1998, the
Company and certain lenders amended the terms of its current Bank Credit
Facility to increase the amount available for borrowing thereunder by an
additional $195.0 million in term loans. The Bank Credit Facility as so amended
now provides for up to $3.195 billion of secured financing, subject to the
satisfaction or waiver of applicable borrowing conditions, consisting of a $1.5
billion revolving loan and $1.695 billion in term loans which matures over a
period from September 30, 2001 to March 31, 2007. The additional $195.0
million in term loans was fully drawn on October 28, 1998, and was used to
reduce outstanding borrowings under the revolving loan. The loans bear interest
payable quarterly at an adjustable rate calculated either on the prime rate or
LIBOR. The maturity date of the loans is subject to acceleration if the
aggregate principal amount of certain series of the Company's senior redeemable
discount notes is not less than $1.0 billion by specified dates. See also "Item
1. Note 5 -- Subsequent Events."
NOVEMBER 1998 NOTES OFFERING: On November 4, 1998, the Company completed the
issuance and sale in a private placement of $300.0 million in principal amount
of its November 1998 Notes. Cash interest on the November 1998 Notes will be
payable on May 1 and November 1 of each year commencing May 1, 1999, at a rate
of 12.0% per annum. The issue price of the November 1998 Notes, which mature on
November 1, 2008, was $985.78 per $1,000 principal amount (generating
approximately $289.3 million in November 1998 Notes Proceeds), representing an
effective yield to maturity of 12.25% computed on a semi-annual bond equivalent
basis from the date of issuance. The November 1998 Notes are redeemable at the
option of Nextel, in whole or in part, at any time, on or after November 1,
2003, at specified redemption prices. The November 1998 Notes are senior
unsecured indebtedness of Nextel and rank pari passu in right of payment with
all unsubordinated, unsecured indebtedness of Nextel (including all of Nextel's
previously issued Senior Redeemable Discount Notes outstanding as of September
30, 1998) (collectively the "Nextel Notes").
The November 1998 Notes were issued in a private placement transaction
and have not been registered with the Commission under the Securities Act of
1933 (the "Securities Act") and may not be sold absent registration or an
applicable exemption from the registration requirements. In connection with the
issuance of the November 1998 Notes, Nextel has agreed to use its best efforts
to file with the Commission and cause to become effective a registration
statement with respect to a registered offer to exchange the then outstanding
November 1998 Notes for substantially identical notes of equal value that have
been registered pursuant to the Securities Act (the "November 1998 Notes
Exchange Offer"). In the event that the November 1998 Notes Exchange Offer is
not consummated prior to the specified dates, additional incremental interest
on the principal amount of the November 1998 Notes will accrue until the
November 1998 Notes Exchange Offer is consummated or certain other requirements
are met. Terms of the November 1998 Notes are set forth in the Indenture filed
as Exhibit 4.1 hereto.
MOTOROLA INTERNATIONAL FINANCING COMMITMENTS: On November 11, 1998, MCC reached
an agreement in principle with Nextel International to provide up to $275.0
million in additional financing under a senior secured credit facility. For
additional information concerning this facility, see Nextel International's
Quarterly Report on Form 10-Q for the period ended September 30, 1998.
RESULTS OF OPERATIONS
The following discussion compares the consolidated results of operations
for the nine- and three-month periods ended September 30, 1998 to the nine- and
three-month periods ended September 30, 1997. The operating results of these
nine- and three-month periods are not necessarily indicative of operating
results in future periods. The following comparative information should be read
in conjunction with the Condensed Consolidated Financial Statements and
accompanying Notes, as well as the information presented elsewhere herein and in
the financial statements and related notes for the year ended December 31, 1997
included in the Company's 1997 Form 10-K.
16
17
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, 1998 VS. 1997 SEPTEMBER 30, 1998 VS. 1997
------------------------------- -------------------------------
INCREASE PERCENT INCREASE PERCENT
(DECREASE) CHANGE (DECREASE) CHANGE
------------ --------- ------------ ---------
(dollars (dollars
in millions) in millions)
Operating revenues $ 791.3 170.6% $ 299.4 144.5%
Cost of revenues 170.7 87.5% 68.1 94.1%
Selling, general and
administrative expenses 538.2 94.7% 151.8 59.8%
Depreciation and
amortization expense 221.4 61.2% 67.4 49.2%
Interest expense 188.0 67.2% 63.3 58.9%
Interest income 8.3 38.4% (1.2) (12.9%)
Other expense, net 42.4 NM 48.5 NM
NM--change not meaningful
Operating revenues include service revenues, which consist primarily of
charges for airtime usage and monthly network access fees, as well as revenue
from sales of analog equipment and accessories. Operating revenues for the nine-
and three-month periods ended September 30, 1998 increased from the comparable
1997 periods principally as a result of a 155% increase in end-of-period digital
subscriber units in service from approximately 946,600 at September 30, 1997, to
approximately 2,417,400 at September 30, 1998. The increase in operating
revenues primarily reflects the increased number of subscriber units in service
in both new and existing markets and an increase in minutes of use producing an
increase in the average revenue per digital subscriber unit. The growth in
digital subscriber units in service is the result of a number of factors,
including principally the Company's increased sales force and marketing staff,
increased distribution channels, expanded network capacity, declining equipment
prices, increased consumer awareness and acceptance of wireless communications
and pricing plans targeted at particular market segments. Average monthly
revenue per digital unit increased from approximately $65 to approximately $68
for the nine-month periods and was approximately $70 for each of the three-month
periods ended September 30, 1997 and 1998, respectively.
The average churn rate for the Digital Mobile network operation has
increased from approximately 1.2% and 1.3% per month for the nine- and
three-month periods ended September 30, 1997, respectively, to approximately
1.7% per month for both the nine- and three-month periods ended September 30,
1998.
Cost of revenues consists primarily of network operating costs and
interconnection fees assessed by local exchange carriers. Cost of revenues for
the nine- and three-month periods ended September 30, 1998 increased from the
comparable 1997 periods primarily as a result of an increase in cell sites and
related equipment activated by the Company during 1998 as well as increases in
airtime usage and digital subscriber units in service. Cost of revenues as a
percentage of revenues decreased from 42% for the nine months ended September
30, 1997 to 29% for the nine months ended September 30, 1998 and from 35% for
the three months ended September 30, 1997 to 28% for the three months ended
September 30, 1998. This improvement primarily resulted from increases in system
usage and digital subscriber units placed in service during 1998 and the fourth
quarter of 1997.
The increase in selling, general and administrative expenses for the nine
and three months ended September 30, 1998 consisted of an increase in selling
and marketing expenses of $342.5 million and $87.0 million, respectively, and an
increase in general and administrative expenses of $195.7 million and $64.8
million, respectively, from the comparable 1997 periods.
Selling and marketing expenses for the nine months ended September 30,
1998 increased by 99% to $688.8 million, as compared to $346.3 million for the
nine months ended September 30, 1997. Selling and marketing expenses for the
three months ended September 30, 1998 increased by 54% to $249.5 million, as
compared to $162.5 million for the three months ended September 30, 1997. These
increases in selling and marketing expenses for the nine months ended September
30, 1998 and the three months ended September 30, 1998 over the comparable 1997
periods consisted
17
18
primarily of (i) increased costs incurred in connection with higher levels of
consolidated sales of digital subscriber units, including an increase in the
loss generated from consolidated sales of digital subscriber units and related
accessories of $92.0 million and $11.6 million, respectively (including a loss
of $5.9 million for the nine and three months ended September 30, 1998 relating
to international digital subscriber unit sales); (ii) an increase in
commissions and residuals to domestic indirect distributors of $95.0 million
and $26.1 million, respectively; and (iii) increased international sales and
marketing costs of $22.8 million and $14.9 million, respectively. Also
contributing to the increase in selling and marketing expenses were higher
domestic advertising and promotion expenses related to the aggressive national
and regional marketing campaigns which began in March 1997 and have continued
into 1998. The remaining increase in selling and marketing expenses is
attributable to increased salaries, commissions and related personnel costs
associated with increased sales and marketing staffing. Selling and marketing
expenses are expected to increase both domestically and internationally as the
Company continues to expand its presence in existing markets and expands the
geographic coverage of its Digital Mobile network.
The Company offers digital subscriber units and related accessories at
competitive prices, which are below cost, as an incentive for new customers to
subscribe to its services and for certain existing customers to remain
subscribers. The Company includes the loss generated from the sale of digital
subscriber units and related accessories in selling and marketing expenses, as
the loss primarily represents marketing costs. The loss on digital subscriber
unit and related accessory sales for the nine months ended September 30, 1998
increased 90% to $193.9 million, as compared to $101.9 million for the nine
months ended September 30, 1997. The loss on digital subscriber unit and related
accessory sales for the three months ended September 30, 1998 increased 21% to
$65.8 million, as compared to $54.2 million for the three months ended September
30, 1997. These increases primarily reflect the continued effect of customer
subsidies and discounts on increased sales of digital subscriber units and
related accessories and also include write downs to estimated net realizable
value of subscriber unit inventory and related accessories. Competitive market
pressures are expected to result in a continued trend of negative gross margins
on digital subscriber unit and related accessory sales as the Company
anticipates that it will continue to offer customers subsidies and/or discounts
in connection with the sale and installation of digital subscriber units and
related accessories.
General and administrative expenses for the nine months ended September
30, 1998 increased 88% to $417.5 million, as compared to $221.8 million for the
nine months ended September 30, 1997, and decreased as a percentage of
operating revenues from 48% for 1997 to 33% for 1998. General and
administrative expenses for the three months ended September 30, 1998 increased
71% to $156.1 million, as compared to $91.3 million for the three months ended
September 30, 1997, and decreased as a percentage of operating revenues from
44% for 1997 to 31% for 1998. The increase in general and administrative
expenses for the nine and three months ended September 30, 1998 over the
comparable 1997 periods is primarily related to (i) increased domestic
personnel costs principally reflecting increased staffing for back-office,
customer care and collection activities of $45.2 million and $16.0 million,
respectively; (ii) increased general and administrative expenses to support the
growth of international operations of $43.2 million and $19.4 million,
respectively; and (iii) increased domestic bad debt expense of $25.8 million
and $0.1 million, respectively.
The Company recognized an aggregate of $51.8 million and $18.8 million in
bad debt expense for the nine and three months ended September 30, 1998,
respectively. The Company initiated a comprehensive and aggressive program for
more stringent credit reviews and the collection of past due receivables in the
second half of 1997, including involuntarily disconnecting certain non-paying
customer accounts. As a result of such initiatives, bad debt expense as a
percentage of total revenues, including digital equipment revenues classified
within selling and marketing expense, decreased to 3.3% for the nine months
ended September 30, 1998 from 3.6% for the nine months ended September 30, 1997
and decreased to 3.0% for the three months ended September 30, 1998 from 6.1%
for the three months ended September 30, 1997.
The increase in depreciation and amortization expense for the nine months
ended September 30, 1998 from the comparable 1997 period consisted of an
increase in depreciation expense of $266.0 million offset by a decrease in
amortization expense of $44.6 million. The increase in depreciation and
amortization expense for the three months ended September 30, 1998 from the
comparable 1997 period consisted of an increase in depreciation expense of $83.4
million offset by a decrease in amortization expense of $16.0 million.
18
19
Depreciation expense for the nine months ended September 30, 1998
increased 162% to $430.5 million, as compared to $164.5 million for the nine
months ended September 30, 1997. Depreciation expense for the three months ended
September 30, 1998 increased 121% to $152.6 million, as compared to $69.2
million for the three months ended September 30, 1997. These increases reflect
the effect of activating additional operational cell sites and switches, the
expansion of the existing Digital Mobile network and the effect of certain
business acquisitions during the last quarter of 1997 and the first three
quarters of 1998. System assets relating to the development and expansion of the
Digital Mobile network represent the largest portion of capital expenditures
during the period. Depreciation of such assets begins upon commencement of
commercial service.
Effective October 1, 1997, the Company changed the estimated useful lives
of certain intangible assets, including FCC licenses and the excess of purchase
price over fair value of net assets acquired related to domestic acquisitions,
from 20 to 40 years to better reflect the period over which the economic
benefits of such assets will be realized. Accordingly, amortization expense for
the nine months ended September 30, 1998 decreased 23% to $152.6 million, as
compared to $197.2 million for the nine months ended September 30, 1997.
Amortization expense for the three months ended September 30, 1998 decreased 23%
to $51.9 million, as compared to $67.9 million for the three months ended
September 30, 1997.
The increase in interest expense for the nine and three months
ended September 30, 1998 from the comparable 1997 periods resulted from the
Company's issuance of discount notes during 1997, the February Notes and the
1998 NI Notes, as well as a higher average level of borrowings under the Bank
Credit Facility and Nextel International's bank and vendor credit facilities.
The increase was partially offset by a decrease in the weighted average
interest rate on the total outstanding debt which was a result of the
refinancing of the domestic vendor credit facility during the first quarter of
1998 and the retirement of a portion of the Targeted Notes during the fourth
quarter of 1997 and the second quarter of 1998. In April 1998, a portion of the
net proceeds from the February Notes were applied to retire approximately 94%
of the principal amount of the Targeted Notes then outstanding. Specifically,
during April 1998, the Company purchased $294.2 million in book value of its
2003 Notes and $332.7 million in book value of its 12.25% 2004 Notes at a cost
in excess of related carrying amounts. Accordingly, the Company recorded an
extraordinary loss of $133.2 million related to the early retirement of debt.
The extraordinary loss represented the difference between the purchase price of
$740.8 million and the book value of such purchased Targeted Notes on the date
of purchase plus the write-off of the associated unamortized deferred financing
costs related to such purchased Targeted Notes of approximately $19.3 million.
See "Item 1. Note 3 -- Tender Offer."
The increase in interest income for the nine months ended September 30,
1998 from the comparable 1997 period is primarily attributable to income
recognized on the investment of the net proceeds received from the Company's
sale of the Series E Preferred Stock and the February Notes.
In the fourth quarter of 1997, the Company entered into an interest rate
protection agreement to lock in interest rates on 10-year U.S. Treasury notes in
anticipation of a future debt issuance. During the quarter ended September 30,
1998, management determined that this anticipated transaction was not likely to
occur before the interest rate protection agreement expiration date. The
interest rate protection agreement was terminated on September 29, 1998 and
approximately $46.9 million was recognized as other expense within the Company's
statement of operations for the quarter ended September 30, 1998.
The effective tax benefit rate for the nine months ended September 30,
1998 of 10.0% decreased from 13.7% for the nine months ended September 30, 1997.
The effective tax benefit rate for the three months ended September 30, 1998 of
10.0% decreased from 11.4% for the three months ended September 30, 1997. These
income tax benefits were derived from the recognition of net operating losses
that can be utilized against existing deferred tax liabilities. In certain
circumstances, Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes," limits the recognition of income tax benefits for net
operating losses to the amount of deferred tax liabilities that are expected to
reverse within the statutory carry forward period. This limitation resulted in a
reduction in the Company's effective tax rate for 1998 as compared to 1997. The
decrease is not expected to have an impact on the Company's ability to utilize
its net operating losses for income tax purposes.
19
20
LIQUIDITY AND CAPITAL RESOURCES
Nextel had net losses attributable to common stockholders of $1,388.3
million and $801.4 million for the nine months ended September 30, 1998 and
1997, respectively. The operating expenses associated with developing,
enhancing and operating the Digital Mobile network have more than offset
operating revenues, and such operating expenses, debt service obligations and
anticipated capital expenditures are expected to continue to offset such
operating revenues for the next several years. Nextel has consistently used
external sources of funds, primarily from equity issuances and debt
incurrences, to fund operations, capital expenditures, acquisitions and other
non-operating needs. For the next several years, Nextel intends to use its
existing cash and investments, anticipated positive earnings before interest,
taxes, depreciation and amortization and externally generated funds from debt
and equity sources (as discussed below) to cover the majority of its future
liquidity needs, including funding required for the design, implementation and
operation of its Digital Mobile network. See "-- Future Capital Needs and
Resources."
CASH FLOWS -- Capital expenditures to fund the continued expansion of the
Digital Mobile network continue to represent the largest use of Company funds
for investing activities. Net cash used in investing activities for the nine
months ended September 30, 1998 increased $901.9 million as compared to the nine
months ended September 30, 1997, primarily attributable to the $731.5 million
increase in capital expenditures. Cash payments for capital expenditures totaled
$1,772.7 million and $1,041.2 million for the nine months ended September 30,
1998 and 1997, respectively. Of these amounts, $291.5 million and $59.2 million
represent capital expenditures for international operations for the nine months
ended September 30, 1998 and 1997, respectively. Capital spending has increased
as a result of the continued build-out of the Digital Mobile network to enhance
or expand coverage and increase network capacity. See "-- Future Capital Needs
and Resources." Also contributing to the increase in cash used in investing
activities was a $172.8 million increase in payments for acquisitions and
purchases of licenses, consisting primarily of $76.1 million and $67.2 million
in payments required in connection with the recently concluded FCC auctions for
800 MHz and LMDS licenses, respectively, and $44.5 million of additional cash
investments in international subsidiaries. The increases in cash used in
investing activities were offset in part by $78.5 million in net proceeds from
marketable securities transactions.
Cash flows provided by financing activities for the nine months ended
September 30, 1998 increased by $593.7 million as compared to the nine months
ended September 30, 1997, primarily reflecting higher net proceeds in the first
quarter of 1998 from the issuance of long-term debt and mandatorily redeemable
preferred stock and additional borrowings under domestic and international
credit facilities. Net cash provided by financing activities for the nine months
ended September 30, 1998 consisted primarily of gross proceeds from the Series E
Preferred Stock of $750.0 million, the February Notes of $1,000.1 million, and
the 1998 NI Notes of $400.9 million, along with $2,116.2 million in borrowings
under the Company's Bank Credit Facility and Nextel International's bank and
vendor credit facilities, offset in part by repurchases of the Targeted Notes of
$740.8 million, deferred financing cost payments of $89.6 million and $972.0
million used to repay the outstanding term borrowings under the domestic bank
and vendor credit facilities in effect prior to March 1998.
Since December 31, 1997, working capital has decreased by $16.2 million
to $54.5 million at September 30, 1998. This decrease primarily resulted from
the utilization of working capital derived from the proceeds of the 1997 NI
Notes to fund international investing and operating activities. Proceeds of the
1998 NI Notes are primarily used to finance international operations, capital
expenditures and acquisitions and are not available to fund any of the cash
needs of the Company's domestic Digital Mobile and analog SMR businesses due to
restrictions contained in the NI Indentures.
FUTURE CAPITAL NEEDS AND RESOURCES
Nextel anticipates that, for the foreseeable future, it will be utilizing
significant amounts of its available cash for capital expenditures for the
construction and enhancement of the Digital Mobile network, operating expenses
relating both to the Digital Mobile network and to its analog SMR business,
potential acquisitions (including any future auctions of spectrum by the FCC),
debt service requirements and other general corporate expenditures. Nextel
anticipates that its cash utilization for capital expenditures and other
investing activities will continue to exceed its positive cash flows from
operating activities over the remainder of 1998 and throughout 1999 as it builds
out, expands and enhances its Digital Mobile network.
20
21
Nextel estimates that the external funding required to meet the cash
needs of its domestic business activities throughout 1998, including principally
the purchase in April 1998 of the Targeted Notes and the funding of actual and
anticipated capital expenditures, acquisitions (including approximately $76.1
million for acquisitions of licenses in the FCC's 800 MHz spectrum auction
concluded in December 1997 and paid to the FCC in July 1998, and $67.2 million
paid to the FCC in 1998 to acquire LMDS licenses) and operating losses, will be
approximately $3.5 billion, which includes approximately $1.9 billion of capital
expenditures. Such estimates are based in part on the Company's experience
through September 30, 1998, and on a number of significant assumptions,
including assumptions regarding continued subscriber growth, increased demand
for the Company's wireless services and enhancements to its existing Digital
Mobile system infrastructure to expand and improve systems coverage and
performance to address competitive pressures in its domestic markets. The
telecommunications industry is rapidly evolving and there can be no assurance
that the Company will not experience levels of demand for its services or
competitive pressures that differ from those experienced through September 30,
1998 and from those assumed in developing the foregoing estimates, which could
cause a material change in the Company's need for additional financing. See "--
Forward Looking Statements."
The Bank Credit Facility, as amended on October 28, 1998, currently
provides for up to approximately $3.2 billion in secured financing available to
the Company, subject to the satisfaction or waiver of applicable borrowing
conditions. At September 30, 1998, the Company had drawn an aggregate of
approximately $2.2 billion of its available financing under its Bank Credit
Facility. Amounts outstanding under the Bank Credit Facility are secured by
liens on assets of Nextel's subsidiaries that are "restricted" subsidiaries
under the terms of Nextel's public indentures relating to the Nextel Notes (the
"Nextel Indentures") and bear interest payable quarterly at an adjustable rate
calculated based either on the prime rate or LIBOR. The availability of such
financing is subject to Nextel's satisfying certain requirements under the
Nextel Indentures relating to Nextel Notes that were issued prior to 1997 (the
"Old Indentures"), which require Nextel to issue new equity for cash as a
condition to obtaining access to all amounts not constituting "permitted debt"
(as such term is defined in the Old Indentures). Based on (i) the amount of
equity issuances, including issuances of Series D and Series E Preferred Stock,
and (ii) the Company's outstanding debt at September 30, 1998 (and taking into
account the additional debt incurred upon issuance of the November 1998 Notes),
the Company may access all amounts available under the Bank Credit Facility in
compliance with the debt incurrence covenants contained in the Old Indentures.
The Company has not completed its business plan for 1999, and accordingly
is not currently able to estimate its 1999 funding needs including its estimated
capital expenditures for 1999. However, based on its estimate of approximately
$500.0 million in domestic capital expenditures for the fourth quarter of 1998
and its preliminary assessments of business activity and related net cash needs
through the end of 1999, the Company anticipates that its cash on hand
(including proceeds of the November 1998 Notes), the amounts remaining available
for borrowing under the Bank Credit Facility (as currently in effect), the
assumed exercise in 1999 of certain options held by an affiliate of Mr. McCaw
and net cash expected to be generated by domestic operations through the end of
1999 collectively will provide sufficient funds to finance the Company's
domestic operations, meet its domestic debt service obligations and fund its
domestic capital expenditures, all at levels the Company currently anticipates
would be consistent with maintaining growth within an assumed minimum range of
an annual rate of 1.4 to 1.6 million net domestic digital subscriber unit
additions through the end of 1999. The Company currently is exploring a number
of additional sources of debt and equity financing for its domestic operations,
and is pursuing other avenues for increasing the amount of cash available to
meet potential additional domestic operating expenses and capital expenditures
likely to be associated with more aggressive business plans. Access to
additional funding would likely enhance the Company's growth prospects. See
"Item 1. Note 5 -- Subsequent Events," "--Liquidity and Capital Resources" and
"-- Forward Looking Statements."
Nextel may require substantial additional financing to fund further
deployment, expansion and enhancement of its Digital Mobile network after 1999
or in market areas where the Company has assumed that Nextel Partners would
raise the necessary equity and debt capital for Digital Mobile system build and
operation. Nextel also may require additional financing to pursue activities
related to new business opportunities (including commercial activities involving
its LMDS spectrum holdings), additional spectrum acquisitions (including any
spectrum auctions by the FCC) and other potential transactions or investments
not a part of its current domestic mobile wireless communications businesses.
Finally, the above funding requirements and estimates relate only to the
Company's domestic business operations and opportunities, and do not reflect any
of the separate funding needs of Nextel International.
21
22
As described in the Nextel International 1997 Form 10-K, Nextel
International currently estimates its funding requirements for fiscal year 1998
to be approximately $810.0 million. These amounts consist primarily of the costs
of building Nextel International's ESMR networks, including the purchase of
switches and other equipment, the acquisition of cell sites, the costs of
constructing the networks and loading subscribers and the acquisition of
licenses and investments and funding of operating losses. As of September 30,
1998, Nextel International's total cash expenditures for its business activities
for fiscal year 1998 were $574.0 million. Nextel International's cash
expenditures, funding requirements and access to funding sources, as well as its
business, financial condition and future prospects, are subject to a number of
risks and contingencies. For a detailed description of the risks and
contingencies that Nextel International regards as significant, see the Nextel
International 1997 Form 10-K and Nextel International's Quarterly Reports on
Form 10-Q for the periods ended March 31, 1998, June 30, 1998 and September 30,
1998. Nextel International is currently exploring a number of alternative
sources of equity and debt financing, including the additional vendor financing
arrangements on which Nextel International and MCC have reached agreement
in principle, to fund its contemplated business operations, including related
capital expenditures, working capital and other cash needs through 1999. There
is no assurance that such financing will become available. If such financing
does not become available in sufficient amounts on a timely basis, Nextel may
(but is not obligated to) fund some or all of Nextel International's cash needs
through 1999 (subject to compliance with certain covenants set forth in the
Nextel Indentures, including those relating to investment limitations). To the
extent Nextel were to provide such funding to Nextel International, Nextel would
have reduced availability for its own needs. If the Company were to elect to
provide funding to Nextel International, and if the Company's existing and
assumed financing sources are insufficient to meet both such needs and the needs
of its domestic businesses, the Company may seek to raise additional capital
from public or private equity or debt sources. There can be no assurance that
any such efforts would be successful. See "Liquidity and Capital Resources" and
"-- Forward Looking Statements."
The availability of borrowings pursuant to the Bank Credit Facility is
subject to certain conditions, and there can be no assurance that such
conditions will be met. Moreover, there can be no assurance that Nextel will
receive funding from its other existing or assumed sources, such as the exercise
of outstanding options to purchase the Company's Common Stock, including the
options currently held by an affiliate of Mr. McCaw. The Bank Credit Facility,
the Nextel Indentures, and the terms of the Series D and Series E Preferred
Stock contain provisions that operate to limit the amount of borrowings that may
be incurred by Nextel. The terms of the Bank Credit Facility also require Nextel
and its restricted subsidiaries at specified times to maintain compliance with
certain operating and financial covenants or ratios including certain covenants
and ratios specifically related to leverage which become more stringent over
time. In addition, Nextel's capital needs, and its ability to adequately address
those needs through debt or equity funding sources, are subject to a variety of
factors that cannot presently be predicted with certainty, such as the
commercial success of Nextel's Digital Mobile network, the amount and timing of
Nextel's capital expenditures and operating losses, the availability and
volatility of the equity and debt markets, the market price of its Common Stock
and consummation of certain potential transactions currently being explored by
the Company. See "-- Forward Looking Statements."
Nextel is currently aware of numerous factors and considerations, any one
or more of which could have a material effect on the timing and/or amount of the
future funding to be required by Nextel, but Nextel cannot currently quantify
with precision either the magnitude or the certainty of the effects associated
with any such factors. These factors include: (i) the uncertainty of legal
challenges lodged against the 800 MHz SMR auction that was completed on December
8, 1997; (ii) the amounts that will be required to accomplish retuning or
acquisition of 800 MHz incumbent channels in spectrum blocks for which Nextel
was the high bidder at the 800 MHz auction; (iii) the possibility that Nextel
will be able to obtain geographic area licenses on the lower 800 MHz channels
through an FCC auction; (iv) the potential commercial opportunities and risks
associated with the Company's domestic and international business plans; (v) the
uncertain availability of additional debt and equity financing in view of the
recent and continuing volatility in the domestic and international capital
markets; and (vi) the net impact on Nextel's capital plan of certain
developments currently expected to increase capital needs (e.g., possible
acquisition of additional spectrum in certain markets to increase the capacity
and/or efficiency of its Digital Mobile network in such markets, construction of
the Digital Mobile network in additional market areas acquired or that may be
acquired in the future, enhancing the coverage in existing and new Nextel
Digital Mobile network markets, pursuit of new telecommunications service
offerings or business opportunities and analog SMR station construction
requirements under the currently effective FCC 800 MHz channel
22
23
licensing approach) that may be wholly or partially offset by other developments
anticipated to, or having the potential to, reduce capital needs (e.g.,
co-location of antenna and/or transmitter sites with other providers of wireless
services in certain markets, greater reliance on "build-to-suit" and related
leasing arrangements for tower sites, reductions in infrastructure and
subscriber unit prices obtained from Motorola, and utilization of more
economical means for increasing system capacity as alternatives to constructing
additional cell sites and/or installing additional base radios). Many of the
foregoing involve elements wholly or partially beyond Nextel's control or
influence. Other considerations in addition to the factors identified above may
significantly affect Nextel's decisions to seek additional financing, including
general economic conditions, conditions in the telecommunications and/or
wireless communications industry, and the feasibility and attractiveness of
structuring particular financings for specific purposes (e.g., separate
capital-raising activities with respect to international activities and
opportunities). See "-- Forward Looking Statements."
Nextel has 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 and/or
are disclosed herein, Nextel has no legally binding commitments or
understandings with any third parties to obtain any material amount of equity or
debt financing. Under the terms of the agreements between the Company and
Motorola pursuant to which the Company acquired substantially all of Motorola's
domestic 800 MHz SMR licenses in 1995, Nextel has agreed, under certain
circumstances, not to grant superior governance rights to any third-party
investor without Motorola's consent, which may make securing equity investments
more difficult. The ability of Nextel to incur additional indebtedness
(including, in certain circumstances, indebtedness incurred under the Bank
Credit Facility) is and will be limited by the terms of the Nextel Indentures,
Series D and Series E Preferred Stock and the Bank Credit Facility.
YEAR 2000 COMPLIANCE
STATE OF READINESS: The Company has taken and is scheduled to take actions that
are designed to assure that the Company will be fully Year 2000 compliant by the
end of the third quarter of 1999. However, the Company's ability to reach its
Year 2000 full compliance goal is and will continue to be dependent on the
parallel efforts of certain third-party vendors, suppliers, subcontractors and
business partners. Certain of such third parties are not yet Year 2000 compliant
and some of them also have not yet provided the Company with detailed action
plans and timetables for achieving full Year 2000 compliance. Nextel is in the
process of contacting and obtaining from such third parties relevant details and
schedules concerning their contemplated development of Year 2000 compliant
applications for the Company's utilization in its domestic and international
operations and systems. In particular, the Company relies on services and
products offered by the following third parties: Motorola, for the Company's
system infrastructure and subscriber handset units; International
Telecommunications Data Systems, Inc., as the software vendor for the Company's
domestic order entry and provisioning systems, as well as the Company's domestic
billing information systems; LHS Group, Inc. as the software vendor for Nextel
International's billing information systems; Vantive Corporation, which provides
information systems used in the Company's customer care function and order entry
systems for Nextel International; Oracle Corporation, which provides the Company
with information systems, development tools and database management used to
support the Company's human resources function and financial systems; and
Hewlett-Packard, Inc., which supplies computer hardware (i.e., monitors,
peripherals, etc.) and UNIX operating systems.
The Company has identified five phases that assist in defining the status
of the Company's progress toward Year 2000 compliance. The five phases are (i)
awareness--locating, listing and prioritizing specific technology used in the
Company's operations that is potentially subject to Year 2000 related
challenges; (ii) assessment--determining the level of risk of Year 2000
challenges that exist on the Company's systems through inquiry, research and
testing; (iii) renovation--determining and resolving Year 2000 related
challenges that were identified in previous phases through replacement, upgrade
or repair and planning for the scheduled implementation of the selected Year
2000 compliant resolution; (iv) validation--testing, monitoring, certification
and verification of the correct manipulation of dates and date related data on
non-Information Technology ("IT") and IT systems, including those of material
third parties; and (v) implementation--installing and integrating the
application of Year 2000 compliant resolutions by replacement, upgrade or repair
of non-IT and IT systems, including those of material third parties.
23
24
As of September 30, 1998, with respect to its non-IT devices and/or
systems containing embedded circuitry, the Company is for the most part in the
assessment phase. Additionally, with respect to its IT systems and issues
relating to third parties with which the Company maintains a material
relationship, the Company is in various phases as of September 30, 1998, ranging
from assessment through implementation.
The Company has established a Year 2000 committee. This committee
consists of employees across functional and divisional departments who are
responsible for assisting in the identification, assessment and remediation of
Year 2000 challenges. In addition, the committee includes representatives from
certain of the material third parties identified above and outside consultants
that the Company has retained to advise and support the committee in its Year
2000 related tasks. Members of the Year 2000 committee provide weekly status
reports regarding the progress of ongoing activities and performance against
plan by the relevant functions and divisions.
THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 CHALLENGES: Based on information
developed to date as a result of the Company's assessment efforts, the Company
believes that the costs of modifying, upgrading or replacing its systems and
equipment will not have a material effect on the Company's liquidity, its
financial condition or results of operations. To date, the Company has not
deferred any specific projects, goals or objectives relating to its domestic and
international operations as a result of implementing the Company's Year 2000
compliance efforts.
THE RISKS OF THE COMPANY'S YEAR 2000 CHALLENGES: In light of the progress made
to date, the Company does not anticipate delays and postponements in finalizing
and implementing Year 2000 resolutions by the end of the third quarter of 1999.
Until the Company's renovation and validation phases are substantially complete,
however, the Company cannot fully and accurately estimate any uncertainty in
timely resolving its Year 2000 challenges or in finalizing and implementing
related Year 2000 resolutions. Additionally, any failure by third parties which
have a material relationship with the Company to achieve full Year 2000
compliance may be a potential risk if such failure were to adversely impact the
ability of such third parties to provide any products or services that are
critical to the Company's operations. Finally, where the Company is not in a
position to validate or certify that technology provided by third parties is
fully Year 2000 compliant, the Company is seeking to obtain assurances from such
third parties that their systems are or will be Year 2000 compliant no later
than the end of the third quarter of 1999. If these third parties fail to
appropriately address Year 2000 challenges, there could be a materially adverse
effect on the Company's financial condition and results of operations. Such
risks include, but are not limited to: (i) inability of subscribers to make or
receive phone calls; (ii) inability of sites, switches and other interfaces to
accurately record call details of subscriber phone calls; and (iii) inability of
billing systems to accurately report and bill subscribers for phone usage. Other
risks associated with the inability of the Company or material third parties to
develop and deploy Year 2000 solutions in a timely and successful manner may
involve or result in conditions that could preclude the Company from: (a)
obtaining equity or debt financing; (b) deploying an alternative technology that
is Year 2000 compliant; (c) implementing commercial launches in new markets
or introducing new services in existing markets; and (d) pursuing additional
business opportunities.
Significantly, the Company cannot independently assess the impact of Year
2000 challenges and compliance activities and programs involving operators of
public switch telecommunications networks ("PSTNs") or other service providers
(such as electric utilities). The Company therefore must rely on PSTN and
utility providers' estimates of their own Year 2000 challenges and the status of
their related compliance activities and programs in the Company's own Year 2000
assessment process. Because the Company's systems will be interconnected with
PSTNs and will be dependent upon the systems of other service providers, any
disruption of operations in the computer programs of such PSTNs or service
providers would likely have an impact on the Company's systems. Moreover, there
can be no assurance that such impact will not have a materially adverse effect
on the Company's operations.
Finally, in assessing its Year 2000 exposure associated with its
international operations, the Company has considered that certain operators of
PSTNs or other service providers and operations located in foreign countries may
not be at the same level of awareness or assessment of the Year 2000 challenges
and remedial measures as their United States counterparts. Such factors, to the
extent present with respect to the Company's international operations, may
result in delays in identifying Year 2000 challenges and a lag in implementing
remediation efforts as compared with the Company's domestic operations. In the
event the Company's international affiliates and third parties fail to timely
address their Year 2000 challenges, the Company's international operations
could experience disruption after December 31, 1999.
24
25
THE COMPANY'S CONTINGENCY PLANS: The Company has not completed all systems and
software testing in its critical systems, nor has it been advised of the
completion of such activities by all third-party providers of critical products
and services. As a result, the Company has not fully assessed its exposure from
potential Year 2000 noncompliance. The Company has not yet determined whether or
not it will require, and thus has not developed, Year 2000 contingency plans.
Following testing of the Company's critical systems, the Company will evaluate
alternative plans designed to address various potential business interruptions
that may occur as a result of noncompliance. Additionally, since contingency
plans may also be provided by third parties resulting from any anticipated
failure on their part to be Year 2000 compliant, the Company will have to assess
development of appropriate alternative solutions advanced by any such third
party to determine its effectiveness and likely impact on the Company's Year
2000 risk profile.
FORWARD LOOKING STATEMENTS
"SAFE HARBOR" STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. A number of the matters and subject areas discussed in the foregoing
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" (including the related discussions referred to above that are
included in Nextel's 1997 Form 10-K) that are not historical or current facts
deal with potential future circumstances and developments. The discussion of
such matters and subject areas is qualified by the inherent risks and
uncertainties surrounding future expectations generally, and also may materially
differ from Nextel's actual future experience involving any one or more of such
matters and subject areas. Nextel has attempted to identify, in context, certain
factors that it currently believes may cause actual future experiences and
results to differ from Nextel's current expectations regarding the relevant
matter or subject area. Certain risks are also discussed in the "Risk Factors"
section of Nextel's 1997 Form 10-K. The operation and results of Nextel's
wireless communications business also may be subject to the effect of other
risks and uncertainties in addition to the relevant qualifying factors
identified or referred to elsewhere in the foregoing "Management's Discussion
and Analysis of Financial Condition and Results of Operations" section,
including, but not limited to, general economic conditions in the geographic
areas and occupational market segments that Nextel is targeting for its Digital
Mobile system service; the uncertain availability of additional debt and equity
financing in view of the recent and continuing volatility in the domestic and
international capital markets; the availability of adequate quantities of system
infrastructure and subscriber equipment and components to meet Nextel's service
deployment and marketing plans and customer demand; the success of efforts to
improve and satisfactorily address issues relating to Digital Mobile network
performance; the continued successful performance of the iDEN technology being
deployed in Nextel's various market areas; the ability to achieve market
penetration and average subscriber revenue levels sufficient to provide
financial viability to the Digital Mobile network business; the consummation of
currently contemplated transactions involving dispositions of capital assets and
corresponding reductions in ongoing capital expenditures; Nextel's ability to
timely and successfully accomplish required scale-up of its billing, collection,
customer care and similar back-room operations to keep pace with customer growth
and increased system usage rates; access to sufficient debt and/or equity
capital to meet Nextel's operating and financial needs; the impact of the
introduction of new products and services on utilization rates, revenues, and
expenditures relating to the Digital Mobile network; the quality and price of
similar or comparable wireless communications services offered or to be offered
by Nextel's competitors, including providers of cellular and PCS service; the
ability to fulfill the Company's Year 2000 compliance efforts in a timely and
successful manner; future legislative or regulatory actions relating to SMR
services, other wireless communications services or telecommunications generally
and other risks and uncertainties described from time to time in Nextel's
reports filed with the Commission, including the Company's 1997 Form 10-K and
Form 10-Q reports for the quarters ended March 31, 1998 and June 30, 1998 and,
with specific reference to risk factors relating to international operations, in
Nextel International's reports filed with the Commission, including the Nextel
International 1997 Form 10-K and Form 10-Q reports for the quarters ended March
31, 1998, June 30, 1998, and September 30, 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Nextel uses mandatorily redeemable preferred stock, senior discount
notes, and bank and vendor credit facilities to finance its operations. These
on-balance sheet financial instruments, to the extent that they provide for
variable rates of interest, expose the Company to interest rate risk, with the
primary interest rate risk exposure resulting from changes in LIBOR or the prime
rate which are used to determine the interest rates that are applicable to
borrowings under the Company's bank and vendor credit facilities. Nextel uses
off-balance sheet derivative financial instruments, including
25
26
interest rate swap and collar agreements, to partially hedge interest rate
exposure associated with on-balance sheet financial instruments. All of the
Company's financial instrument transactions are entered into for non-trading
purposes. As of September 30, 1998, the terms and characteristics of the
derivative financial instruments are matched with existing on-balance sheet
financial instruments and do not constitute speculative or leveraged positions
independent of these exposures.
Nextel International's revenues are denominated in foreign currencies,
while a significant portion of its operations are financed through senior
discount notes and bank and vendor credit facilities, which are denominated in
U.S. dollars. Accordingly, fluctuations in exchange rates relative to the U.S.
dollar, primarily those related to the Brazilian Real and the Argentinean Peso,
expose the Company to foreign currency exchange rate risk. In the near term, the
Company's foreign currency exchange rate exposure associated with the repayment
of Nextel International's debt obligations is limited, as the terms of the
senior discount notes and bank and vendor credit facilities do not require
principal payments until after 1999. Accordingly, as of September 30, 1998, the
Company has not established any hedge or risk reduction strategies related to
its foreign currency exchange rate exposure.
The information below summarizes Nextel's sensitivity to market risks
associated with fluctuations in interest rates and foreign currency exchange
rates as of September 30, 1998 in U.S. dollars. To the extent that the Company's
financial instruments expose the Company to interest rate and foreign currency
exchange risk, they are presented within each market risk category in the table
below. The table presents principal cash flows and related interest rates by
year of maturity for the Company's mandatorily redeemable preferred stock,
senior discount notes, and bank and vendor credit facilities in effect as of
September 30, 1998 and, in the case of the mandatorily redeemable preferred
stock and senior discount notes, exclude the potential exercise of the relevant
redemption features. The cash flows related to the variable portion of interest
rate swaps are determined by dealers using valuation models that estimate the
future level of interest rates, with consideration of the applicable yield curve
as of September 30, 1998. For interest rate swap and collar agreements, the
table presents notional amounts and the related reference interest rates by year
of maturity. Fair values included herein have been determined based on: (i)
quoted market prices for mandatorily redeemable preferred stock and senior
discount notes; (ii) the carrying value for the bank and vendor credit
facilities at September 30, 1998, as interest rates are reset periodically; and
(iii) estimates obtained from dealers to settle interest rate swap and collar
agreements.
Descriptions of the Company's mandatorily redeemable preferred stock,
senior discount notes, bank and vendor credit facilities, and interest rate risk
management agreements are contained in Notes 6, 7 and 10 to the consolidated
financial statements contained in the Company's 1997 Form 10-K and should be
read in conjunction with the table below.
In June 1998, the FASB issued SFAS 133, which establishes accounting and
reporting standards for derivative instruments and for hedging activities by
requiring that all derivatives be recognized in the balance sheet and measured
at fair value. SFAS 133 is effective for fiscal years beginning after June 15,
1999. The Company has not evaluated the effects of this change on its financial
position or results of operations.
26
27
Year of Maturity
(US dollars in millions)
1998 1999 2000 2001
--------------- -------------- -------------- ---------------
I. Interest Rate Sensitivity
Redeemable Preferred Stock and Long-Term Debt:
- ----------------------------------------------
Fixed Rate -- -- -- --
Average Interest Rate -- -- -- --
Variable Rate -- -- $ 24.9 $ 35.1
Average Interest Rate -- -- 10.2% 9.9%
Interest Rate Swaps:
- --------------------
Variable to Fixed -- -- -- $ 200.0
Average Pay Rate -- -- -- 5.4%
Average Receive Rate -- -- -- 5.6%
Variable to Variable -- -- $ 50.0 $ 100.0
Average Pay Rate -- -- 5.7% 5.8%
Average Receive Rate -- -- 5.8% 5.6%
Interest Rate Collars:
- ----------------------
Collars -- -- -- --
Average Cap Rate -- -- -- --
Average Floor Rate -- -- -- --
II. Foreign Exchange Rate Sensitivity
Note Receivable:
- ----------------
Fixed Rate - Yen -- -- -- --
Average Interest Rate -- -- -- --
Long-Term Debt:
- ---------------
Fixed Rate -- -- -- --
Average Interest Rate -- -- -- --
Variable Rate -- -- $ 24.9 $ 30.1
Average Interest Rate -- -- 10.2% 10.1%
Total
There- Due at Fair
2002 After Maturity Value
-------------- ------------------ ------------------ ------------
I. Interest Rate Sensitivity
Redeemable Preferred Stock and Long-Term Debt:
- ----------------------------------------------
Fixed Rate -- $ 8,333.8 $ 8,333.8 $ 5,830.0
Average Interest Rate -- 10.8% 10.8%
Variable Rate $ 49.9 $ 2,257.5 $ 2,367.4 $ 2,367.4
Average Interest Rate 9.8% 8.1% 8.2%
Interest Rate Swaps:
- --------------------
Variable to Fixed -- 670.0 $ 870.0 $ (81.6)*
Average Pay Rate -- 7.7% 7.2%
Average Receive Rate -- 5.4% 5.4%
Variable to Variable -- $ 400.0 $ 550.0 $ (12.7)
Average Pay Rate -- 5.3% 5.4%
Average Receive Rate -- 5.7% 5.7%
Interest Rate Collars:
- ----------------------
Collars -- $ 200.0 $ 200.0 $ (6.0)
Average Cap Rate -- 6.7% 6.7%
Average Floor Rate -- 4.5% 4.5%
II. Foreign Exchange Rate Sensitivity
Note Receivable:
- ----------------
Fixed Rate - Yen -- $ 31.5 $ 31.5 $ 30.0
Average Interest Rate -- 3.8% 3.8%
Long-Term Debt:
- ---------------
Fixed Rate -- $ 1,681.5 $ 1,681.5 $ 775.7
Average Interest Rate -- 12.6% 12.6%
Variable Rate $ 39.9 $ 55.5 $ 150.4 $ 150.4
Average Interest Rate 10.2% 10.0% 10.1%
- ---------------
*Of this amount, approximately $46.9 million was recognized as a loss in the
Company's statement of operations for the period ended September 30, 1998
and approximately $14.9 million was previously capitalized as deferred
financing costs in connection with the issuance of the February Notes.
27
28
PART II
ITEM 1. LEGAL PROCEEDINGS.
The Company is involved in certain legal proceedings that are described
in the Company's 1997 Form 10-K. During the three months ended September 30,
1998, there were no material changes in the status of or developments regarding
those legal proceedings.
ITEM 2. CHANGES IN SECURITIES.
(a) Inapplicable
(b) Inapplicable
(c) Recent Issues of Unregistered Securities. Nextel sold securities that
were not registered under the Securities Act in the following transaction
during the third quarter of 1998.
On July 28, 1998, Option Acquisition, L.L.C., an entity controlled by Mr.
McCaw, exercised options to purchase 9,953,821 shares of Nextel Common
Stock in a cashless exercise transaction as permitted by the terms of
such options. The exercise of the options was effected by surrendering a
number of options determined (as provided in such options) by dividing
the full cash exercise price for all of the options by the average
closing sales price for a share of Common Stock on the Nasdaq National
Market for the 20 trading days immediately preceding the exercise date.
The foregoing transaction was effected pursuant to the exemption of
Section 4(2) of the Securities Act in reliance upon representations of
the relevant purchaser and its agreement to resell such securities only
pursuant to a registration statement or in a transaction exempt from the
registration requirements of such act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits.
EXHIBIT NUMBER EXHIBIT DESCRIPTION
- -------------- -------------------
4.1 Indenture dated as of November 4, 1998 between Nextel Communications,
Inc. and Harris Trust and Savings Bank, as Trustee (the "November 1998
Indenture"), relating to Nextel's 12.0% Senior Serial Redeemable Notes
due 2008.
4.2 Form of Note issued pursuant to November 1998 Indenture (included in
Exhibit 4.1 hereto).
4.3 Amendment No. 1 dated as of October 28, 1998, amending the Credit Agreement
dated as of March 12, 1998, between Nextel Communications, Inc., Nextel
Finance Company, the other restricted companies party thereto, the lenders
party thereto and the Administrative Agent and Collateral Agent (the "Bank
Credit Agreement")(filed on October 29, 1998, as Exhibit 4.1 to Nextel's
Current Report on Form 8-K dated October 28, 1998, and incorporated herein
by reference).
27** Financial Data Schedule.
99.1 Press Release dated August 13, 1998, announcing an agreement with Nextel
Partners, Inc., filed as Exhibit 99.1 to Nextel's Current Report on Form 8-K
filed and dated on August 18, 1998.
28
29
---------------------
** Submitted only with the electronic filing of this
document with the Commission pursuant to
Regulation S-T under the Securities Act.
(b) Reports on Form 8-K.
(i) Current Report on Form 8-K dated and filed
August 18, 1998, with the Commission reporting
under Item 5 the announcement of the agreement
with Nextel Partners, Inc., to build and operate
a related integrated digital wireless network
and filed for the purpose of filing a press
release related thereto.
29
30
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
Date: November 16, 1998 -------------------------------
William G. Arendt
Vice President and Controller
(Principal Accounting Officer)
30
31
EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT DESCRIPTION
- -------------- -------------------
4.1 Indenture dated as of November 4, 1998 between Nextel Communications,
Inc. and Harris Trust and Savings Bank, as Trustee (the "November 1998
Indenture"), relating to Nextel's 12.0% Senior Serial Redeemable Notes
due 2008.
4.2 Form of Note issued pursuant to November 1998 Indenture (included in
Exhibit 4.1 hereto).
4.3 Amendment No. 1 dated as of October 28, 1998, amending the Credit Agreement
dated as of March 12, 1998, between Nextel Communications, Inc., Nextel
Finance Company, the other restricted companies party thereto, the lenders
party thereto and the Administrative Agent and Collateral Agent (the "Bank
Credit Agreement")(filed on October 29, 1998, as Exhibit 4.1 to Nextel's
Current Report on Form 8-K dated October 28, 1998, and incorporated herein
by reference).
27** Financial Data Schedule.
99.1 Press Release dated August 13, 1998, announcing an agreement with Nextel
Partners, Inc., filed as Exhibit 99.1 to Nextel's Current Report on Form
8-K filed and dated on August 18, 1998.
----------------
** Submitted only with the electronic filing of this document
with the Commission pursuant to Regulation S-T under the
Securities Act.
31