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
COMMISSION FILE NUMBER: 333-26649
------------------------
NEXTEL INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
WASHINGTON 91-167-1412
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1191 SECOND AVENUE, SUITE 1600, SEATTLE, WA 98101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 749-8000
------------------------
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
-------------- -------------------
Common Stock, no par value 36,508,622
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
NEXTEL INTERNATIONAL, INC.
INDEX
PAGE NO.
--------
PART I FINANCIAL INFORMATION.
Item 1. Financial Statements--Unaudited................... 3
Condensed Consolidated Balance Sheets--As of September
30, 1998 and December 31, 1997........................ 3
Condensed Consolidated Statements of Operations--For
the Three Months Ended September 30, 1998 and 1997.... 4
Condensed Consolidated Statements of Operations--For
the Nine Months Ended September 30, 1998 and 1997..... 5
Condensed Consolidated Statement of 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.................... 16
PART II OTHER INFORMATION.
Item 1. Legal Proceedings................................. 28
Item 4. Submissions of Matters to a Vote of Security
Holders................................................ 28
Item 6. Exhibits and Reports on Form 8-K.................. 29
2
3
PART I
ITEM 1. FINANCIAL STATEMENTS -- UNAUDITED.
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
UNAUDITED
1998 1997
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (of which $28,260 is
restricted as of September 30, 1998).................. $ 173,818 $ 159,790
Marketable securities.................................. 49,093 128,560
Accounts receivable, less allowance for doubtful
accounts of $4,238 and $1,003......................... 15,292 3,838
Subscriber equipment inventory......................... 29,479 1,749
Prepaid and other...................................... 24,220 15,884
---------- ----------
Total current assets.............................. 291,902 309,821
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $13,294 and $1,992........................ 467,994 136,210
INVESTMENT IN UNCONSOLIDATED SUBSIDIARIES, at cost less
equity in net losses of $9,048 and $7,526................. 118,728 106,489
INTANGIBLE ASSETS, net of accumulated amortization of
$35,775 and $14,664....................................... 567,795 526,000
INVESTMENTS AND OTHER ASSETS................................ 154,942 44,518
---------- ----------
$1,601,361 $1,123,038
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, accrued expenses and other........... $ 106,055 $ 76,048
Due to parent.......................................... -- 8,254
Notes payable and current portion of long-term debt.... 2,715 2,211
---------- ----------
Total current liabilities......................... 108,770 86,513
LONG-TERM DEBT.............................................. 1,178,376 597,809
DEFERRED INCOME TAXES....................................... 93,651 120,777
---------- ----------
Total liabilities...................................... 1,380,797 805,099
---------- ----------
MINORITY INTEREST........................................... 27,345 21,910
STOCKHOLDERS' EQUITY:
Series A exchangeable redeemable preferred stock (1,250
shares authorized, $10.00 par value, 988.86 and 0
shares issued and outstanding)........................ 98,886 --
Series B redeemable preferred stock (2,500 shares
authorized, $10.00 par value, no shares issued and
outstanding).......................................... -- --
Common stock (73,000,000 shares authorized, no par
value, 36,502,624 and 36,500,000 shares issued and
outstanding).......................................... 395,455 395,428
Accumulated deficit.................................... (246,932) (102,689)
Unrealized gain (loss) on investments.................. (37,781) 3,290
Cumulative translation adjustment...................... (16,409) --
---------- ----------
Total stockholders' equity........................ 193,219 296,029
---------- ----------
$1,601,361 $1,123,038
========== ==========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
4
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
1998 1997
----------- -----------
REVENUES
Radio service revenue.................................. $ 7,016 $ 2,819
Equipment sales and maintenance........................ 1,834 266
----------- -----------
8,850 3,085
----------- -----------
OPERATING EXPENSES
Cost of radio service revenue.......................... 3,752 624
Cost of equipment sales and maintenance................ 2,211 129
Selling, general and administrative.................... 49,599 7,350
Depreciation and amortization.......................... 13,742 4,656
----------- -----------
69,304 12,759
----------- -----------
OPERATING LOSS.............................................. (60,454) (9,674)
----------- -----------
OTHER INCOME (EXPENSE)
Interest income........................................ 4,772 6,079
Interest expense....................................... (30,163) (16,761)
Loss from equity method investments.................... (4,208) (2,448)
Other, net............................................. 5,464 (13)
Minority interest...................................... 4,722 900
----------- -----------
(19,413) (12,243)
----------- -----------
LOSS BEFORE INCOME TAX BENEFIT.............................. (79,867) (21,917)
INCOME TAX BENEFIT.......................................... 10,003 1,296
----------- -----------
NET LOSS.................................................... $ (69,864) $ (20,621)
----------- -----------
NET LOSS PER COMMON SHARE, BASIC AND DILUTED................ $ (1.91) $ (0.57)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING........ 36,501,654 36,500,000
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
5
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
UNAUDITED
1998 1997
----------- -----------
REVENUES
Radio service revenue.................................. $ 20,392 $ 5,972
Equipment sales and maintenance........................ 6,205 1,077
----------- -----------
26,597 7,049
----------- -----------
OPERATING EXPENSES
Cost of radio service revenue.......................... 8,519 1,637
Cost of equipment sales and maintenance................ 4,440 594
Selling, general and administrative.................... 89,578 17,646
Depreciation and amortization.......................... 33,657 11,347
----------- -----------
136,194 31,224
----------- -----------
OPERATING LOSS.............................................. (109,597) (24,175)
----------- -----------
OTHER INCOME (EXPENSE)
Interest income........................................ 14,177 15,045
Interest expense....................................... (74,548) (39,114)
Loss from equity method investments.................... (6,404) (6,330)
Other, net............................................. 3,303 140
Minority interest...................................... 8,271 2,247
----------- -----------
(55,201) (28,012)
----------- -----------
LOSS BEFORE INCOME TAX BENEFIT.............................. (164,798) (52,187)
INCOME TAX BENEFIT.......................................... 20,555 3,417
----------- -----------
NET LOSS.................................................... $ (144,243) $ (48,770)
----------- -----------
NET LOSS PER COMMON SHARE, BASIC AND DILUTED................ $ (3.95) $ (1.34)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING........ 36,500,557 36,500,000
=========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
6
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(DOLLARS IN THOUSANDS)
UNAUDITED
SERIES A SERIES B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
----------------- --------------- --------------------- ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT
------ -------- ------ ------ ---------- -------- -----------
BALANCE, January 1, 1998..... -- -- -- -- 36,500,000 $395,428 $(102,689)
Issuance of Series A
preferred stock....... 988.86 $98,886
Issuance of common stock
upon exercise of stock
options............... 2,624 27
Unrealized loss on
investments...........
Cumulative translation
adjustment............
Net loss................ (144,243)
------ ------- -- -- ---------- -------- ---------
BALANCE, September 30,
1998....................... 988.86 $98,886 -- -- 36,502,624 $395,455 $(246,932)
====== ======= == == ========== ======== =========
ACCUMULATED OTHER
COMPREHENSIVE INCOME
----------------------------
UNREALIZED CUMULATIVE
GAIN (LOSS) ON TRANSLATION
INVESTMENTS ADJUSTMENT TOTAL
-------------- ----------- ---------
BALANCE, January 1, 1998..... $ 3,290 -- $ 296,029
Issuance of Series A
preferred stock....... 98,886
Issuance of common stock
upon exercise of stock
options............... 27
Unrealized loss on
investments........... (41,071) (41,071)
Cumulative translation
adjustment............ $(16,409) (16,409)
Net loss................ (144,243)
-------- -------- ---------
BALANCE, September 30,
1998....................... $(37,781) $(16,409) $ 193,219
======== ======== =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
7
NEXTEL INTERNATIONAL, 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............................................... $(144,243) $(48,770)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization..................... 33,657 11,347
Interest accretion on long-term debt, net of
capitalized accreted interest of $12,892 and
$399............................................ 68,737 38,199
Loss from equity method investments............... 6,404 6,330
Deferred income taxes............................. (31,385) (2,555)
Minority interest................................. (8,271) (2,247)
Change in current assets and liabilities:
Accounts receivable.......................... (9,977) 1,514
Subscriber equipment inventory............... (24,646) 747
Prepaid and other............................ (6,828) (4,996)
Accounts payable, accrued expenses and
other...................................... 35,528 846
Prepaid value added taxes and other............... (41,027) 1,765
--------- --------
Net cash (used in) provided by operating activities.... (122,051) 2,180
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures................................... (291,480) (59,236)
Purchase of marketable securities...................... (93,997) (142,539)
Proceeds from sale of marketable securities............ 172,132 58,728
Business acquisitions, net of cash acquired............ (67,251) --
Investments in unconsolidated subsidiaries............. (80,214) (76,510)
Other.................................................. -- (6,410)
--------- --------
Net cash used in investing activities.................. (360,810) (225,967)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments to parent, net.............................. (8,254) (23,556)
Capital contributions from parent...................... -- 6,366
Capital contributions from minority stockholders....... 10,132 --
Proceeds from issuance of Series A preferred stock to
parent................................................ 8,254 --
Proceeds from issuance of warrants..................... -- 14,800
Proceeds from exercise of stock options................ 27 --
Net proceeds from issuance of long-term debt........... 489,123 467,578
Repayment of long-term debt............................ (2,393) --
--------- --------
Net cash provided by financing activities.............. 496,889 465,188
--------- --------
INCREASE IN CASH AND CASH EQUIVALENTS....................... 14,028 241,401
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 159,790 53,029
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 173,818 $294,430
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized of
$5,175 and $122....................................... $ -- $ 192
========= ========
Cash paid for income taxes............................. $ 1,685 $ --
========= ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
7
8
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
UNAUDITED
NOTE 1 -- BASIS OF PRESENTATION
The condensed consolidated interim financial statements of Nextel
International, Inc. and subsidiaries ("Nextel International" or the "Company"),
an indirect, substantially wholly owned subsidiary of Nextel Communications,
Inc. ("Nextel Communications"), 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.
The interim financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997.
Operating results for the interim periods are not necessarily indicative of
results for an entire year.
The accounts of the Company's consolidated foreign subsidiaries and foreign
subsidiaries accounted for under the equity method are presented utilizing
accounts as of a date one month earlier than the accounts of the Company and its
U.S. subsidiaries to ensure timely reporting of consolidated results.
Certain prior period amounts have been reclassified to conform with the
current presentation.
SUPPLEMENTAL CASH FLOW INFORMATION: In March 1998, a wholly owned
subsidiary of Nextel Communications transferred to the Company 6,777,778 Class D
Shares of Clearnet Communications Inc. ("Clearnet") with a fair value of $90.6
million at the date of transfer in exchange for 906.32 shares of the Company's
Series A Exchangeable Redeemable Preferred Stock, $10 par value per share (the
"Series A Preferred Stock"). See Note 3.
RESTRICTED CASH AND CASH EQUIVALENTS: As of September 30, 1998,
approximately $28.3 million of cash and cash equivalents was restricted for
investment in the equity of subsidiaries under certain of the Company's
financing agreements and equipment purchases under certain infrastructure
purchase contracts.
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. The components of comprehensive income, net of related tax, are as
follows (dollars in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1997 1998 1997
--------- -------- --------- --------
Net loss.................................. $ (69,864) $(20,621) $(144,243) $(48,770)
Other comprehensive income:
Unrealized gain (loss) on investments,
net of tax........................... (26,168) 5,317 (41,071) 6,484
Foreign currency translation
adjustment........................... (7,497) -- (16,409) --
--------- -------- --------- --------
Comprehensive income (loss)............... $(103,529) $(15,304) $(201,723) $(42,286)
========= ======== ========= ========
ESMR NETWORK EQUIPMENT SALES AND RELATED COSTS: The loss generated from the
sale of subscriber units used in the Company's digital enhanced specialized
mobile radio ("ESMR") network primarily results from the Company's subsidy of
digital subscriber units and represents a marketing cost. Equipment sales
revenue and related cost of sales of digital subscriber units and related
accessories, including current period
8
9
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 1 -- BASIS OF PRESENTATION -- (CONTINUED)
order fulfillment and installation related expenses, are classified within
selling, general and administrative expenses as follows (dollars in thousands):
THREE
MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1998
------------- -------------
Equipment sales.......................................... $11,291 $12,787
Cost of equipment sales.................................. 16,813 18,678
------- -------
$(5,522) $(5,891)
======= =======
A substantial portion of the Company's digital subscriber units issued to
customers are sold or leased with terms requiring up to 24 monthly payments. The
Company has recorded such transactions as equipment sales at the time of
delivery and recorded an allowance for estimated sales returns. As of September
30, 1998, accounts receivable and investments and other assets includes $5.3
million and $6.0 million, respectively, related to such sales, which are
expected to be billed and collected over the next 24 months.
NEW ACCOUNTING PRONOUNCEMENTS: In March 1998, the American Institute of
Certified Public Accountants ("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 development or implementation of
computer software. These new standards will require the capitalization of
certain software implementation costs relating to software 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 TRANSACTIONS; PRO FORMA INFORMATION
NEXTEL BRAZIL: On January 30, 1997, Nextel Communications purchased 81% of
the issued and outstanding capital stock of Wireless Ventures of Brazil, Inc.
("WVB") from Telcom Ventures, Inc. and affiliates (collectively "Telcom
Ventures") in exchange for $186.3 million in Nextel Communications Class A
Common Stock. Nextel Communications' investment in WVB was simultaneously
contributed to the Company, and WVB changed its name to McCaw International
(Brazil), Ltd. ("Nextel Brazil").
MCS: On September 26, 1997, Nextel S.A., a subsidiary of Nextel Brazil
that is the indirect holder of substantially all of Nextel Brazil's specialized
mobile radio channels and related operating assets in Brazil, acquired 49% of
the capital stock of MCS Radio Telefonia, Ltda. ("MCS"), an indirect wholly
owned subsidiary of Motorola, Inc. ("Motorola"), an option to purchase the
remaining 51% of the capital stock of MCS upon receipt of the approval of the
applicable Brazilian regulatory authorities and certain assets of MCS. Upon the
approval of the Brazilian regulatory authorities, the option for the remaining
51% will be exercisable for approximately $3.2 million. In exchange, Motorola,
through a wholly owned subsidiary, acquired 5% of the outstanding capital stock
of Nextel S.A. Immediately subsequent to the acquisition, the Company, through
its 81% equity interest in Nextel Brazil and Nextel Brazil's 95% equity interest
in Nextel S.A., held a 77% equity interest in Nextel S.A.
9
10
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SIGNIFICANT TRANSACTIONS; PRO FORMA INFORMATION -- (CONTINUED)
NEXTEL MEXICO: During the year ended December 31, 1997, through a series
of transactions, the Company increased its equity interest in Comunicaciones
Nextel de Mexico S.A., de C.V. ("Nextel Mexico") from 30.1% to 100% for
consideration equal to approximately $132.2 million.
NEXTEL ARGENTINA: On May 6, 1997, the Company contributed its 100%
ownership interest in Nextel Argentina S.R.L. ("Nextel Argentina") into Nextel
International (Argentina), Ltd. (the "Argentina Joint Venture"), a joint venture
between the Company and Wireless Ventures of Argentina, L.L.C. ("WVA"). WVA's
contribution included all of the outstanding common stock of a paging company
and two companies that own SMR licenses in Argentina (collectively the "WVA
Entities"). During 1997, Nextel Argentina and the WVA Entities were merged, with
Nextel Argentina being the surviving entity (the merged entities are herein
collectively referred to as "Nextel Argentina" subsequent to the formation of
the Argentina Joint Venture). The Company had a 50% voting interest, shared
equally in the profits and losses of the Argentina Joint Venture, and accounted
for its investment in the Argentina Joint Venture under the equity method of
accounting.
On January 30, 1998, the Company acquired the remaining 50% interest in the
Argentina Joint Venture from WVA for a purchase price of $46 million in cash. As
a result of the purchase, the Company increased its effective ownership interest
in Nextel Argentina from 50% to 100%. The acquisition is accounted for as a
purchase and, accordingly, the Company consolidated the accounts of Nextel
Argentina commencing February 1, 1998. The carrying value of the Company's
investment in Nextel Argentina as of January 30, 1998 was approximately $63.0
million and was allocated to the net assets acquired based on their preliminary
estimated fair values, including licenses and goodwill, which are being
amortized over their estimated useful lives of 20 years.
NEXTEL PERU: On January 29, 1998, the Company acquired a 70.1% interest in
Comunicaciones Nextel del Peru S.A. ("Nextel Peru," formerly known as Valorcom
S.A.), a Peruvian wireless telecommunications company, for $27.9 million, which
was paid in the form of capital contributions from January 29, 1998 to July 30,
1998. Nextel Peru, through its subsidiaries, holds licenses to operate 138 SMR
channels in the greater Lima area. As of the closing date of the Company's
investment in Nextel Peru, Motorola, through Motorola International (as defined
below) held a 19.9% interest in Nextel Peru. The acquisition is accounted for as
a purchase and, accordingly, the Company consolidated the accounts of Nextel
Peru commencing February 1, 1998. The purchase price was allocated to the net
assets acquired based on their preliminary estimated fair values, including
licenses and goodwill, which are being amortized over their estimated useful
lives of 20 years. Nextel Peru's historical operations are insignificant
relative to the results of the Company.
In August 1998, the Company gave notice to Motorola International
Development Corporation ("Motorola International"), an indirect wholly owned
subsidiary of Motorola and the holder of a minority equity interest in Nextel
Peru, of the Company's exercise of its option to sell a portion of the Company's
shares of Nextel Peru to Motorola International (the "Nextel Peru Put
Transaction"). Pursuant to the agreement between the Company and Motorola
International, the Company had the right to sell to Motorola International
shares representing approximately 10% of the outstanding shares of Nextel Peru
for a purchase price of approximately $6.0 million. The Nextel Peru Put
Transaction was consummated on October 30, 1998. Additionally, as a result of
the decision of the other minority shareholder of Nextel Peru not to contribute
his pro rata share of capital contributions to Nextel Peru during the third
quarter of 1998, such shareholder's equity interest in Nextel Peru has been
diluted and the Company's and Motorola International's equity interest in Nextel
Peru have increased. Immediately following the closing of the Nextel Peru Put
Transaction, and giving effect to the dilution of the equity interest of the
other minority shareholder during the third quarter of 1998, the Company and
Motorola International held approximately 62.1% and 30.9%, respectively, of the
outstanding shares of Nextel Peru.
10
11
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SIGNIFICANT TRANSACTIONS; PRO FORMA INFORMATION -- (CONTINUED)
NEXTEL PHILIPPINES: In February 1998, the Company 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 finalized such agreements in April 1998 (the "Philippines
Partner Agreements"). Pursuant to the Philippines Partner Agreements (i) the
Philippines Shareholders agreed to vote for the election of new, professional
senior management of Nextel Philippines; (ii) the Company purchased existing
shareholder loans of the Philippines Shareholders totaling approximately $19.6
million, which loans bear interest at 18% per annum and are convertible into
equity of Nextel Philippines; (iii) the Company may, at its option, fund Nextel
Philippines' future capital needs, estimated to be $50 million for fiscal year
1998, pursuant to loans that, at the option of the Company, may be converted
into equity of Nextel Philippines; (iv) the Gotesco Group obtained the right to
put its 20% interest to the Company for approximately $9.4 million, beginning in
January 1999 (the "Gotesco Put"); and (v) the Company had the right to call the
Gotesco Group's 20% interest for approximately $11.6 million, if the Gotesco
Group did not exercise the Gotesco Put. The ability of the Company to convert
shareholders loans into equity, satisfy the Gotesco Put or call the Gotesco
Group's 20% interest is subject to applicable Philippines foreign ownership
rules.
On June 26, 1998, the Company 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 Put was accelerated from
January 1999 to August 21, 1998. Pursuant to the Gotesco Put Acceleration
Agreement, the Company agreed to pay the Gotesco Group $9,000,000 for the shares
covered by the Gotesco Put in three installments: (i) $500,000 upon the delivery
of irrevocable proxies covering the voting rights on the shares of Nextel
Philippines owned by the Gotesco Group; (ii) $500,000 to the Gotesco Group upon
the conclusion of the Nextel Philippines annual shareholder meeting, provided
that the Gotesco Group's shares of Nextel Philippines were voted in favor of the
corporate governance provisions of the Philippines Partner Agreements at such
annual meeting; and (iii) $8,000,000 upon the transfer of the shares covered by
the Gotesco Put to a qualified third-party purchaser in accordance with
Philippines law. The first two installments were paid on June 26, 1998 and July
13, 1998, respectively. 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 Philippine nationals
("ACCRAIN"), and 40% owned by an indirect subsidiary of the Company, delivered
the final installment of $8,000,000 to the Gotesco Group and the Gotesco Group
delivered the shares covered by the Gotesco Put to Gamboa Holdings.
Funds used by Gamboa Holdings to consummate the acquisition of the Gotesco
Group's shares of Nextel Philippines were derived from (a) equity contributions
by shareholders of Gamboa Holdings and (b) proceeds of loans made by a lending
institution to Gamboa Holdings and to ACCRAIN. The loans to Gamboa Holdings and
to ACCRAIN are secured by cash collateral deposits of the Company in the amount
of the loans and a pledge of Gamboa Holdings's shares of Nextel Philippines. As
a result of Gamboa Holdings's acquisition of the Gotesco Group's shares of
Nextel Philippines, the Company's aggregate equity interest in Nextel
Philippines, which includes its direct and indirect holdings, increased from 30%
to 38%.
ACCRAIN is a Philippine holding company with investments in a number of
Philippines companies. Pursuant to an agreement, dated as of August 21, 1998
between an indirect wholly owned subsidiary of the Company and ACCRAIN (the
"ACCRAIN Agreement"), ACCRAIN granted the Company a call right on ACCRAIN's
shares in Gamboa Holdings, exercisable at any time provided that the actual
purchaser of the shares is the Company or a qualified purchaser in accordance
with applicable Philippines foreign corporate ownership rules. Upon expiration
of the ACCRAIN Agreement, ACCRAIN may put to the Company or its qualified
designee ACCRAIN's shares in Gamboa Holdings (the "ACCRAIN Put"). The Company
believes, and has been advised by Philippine counsel, that the above-described
transactions with Gamboa Holdings
11
12
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SIGNIFICANT TRANSACTIONS; PRO FORMA INFORMATION -- (CONTINUED)
comply with Philippines law, including applicable Philippines foreign corporate
ownership rules. However, there can be no assurance that the above-described
transactions will not be subject to legal challenge. In addition, the ability of
the Company to call ACCRAIN's interest in Gamboa Holdings or to satisfy the
ACCRAIN Put is subject to applicable Philippines foreign ownership rules. See
also Part II, Item 1, "Legal Proceedings."
J-COM: On March 17, 1998, the Company purchased a 21% equity interest in
J-Com Co., Ltd., an ESMR provider in Japan ("J-Com"), for a purchase price of
Y77.2 million (approximately $593,000 based on the exchange rate on the date of
purchase) (the "Japan Acquisition"). The Company also provided a shareholder
loan of Y4.1 billion (approximately $31.5 million based on the exchange rate on
the date of purchase) to J-Com. J-Com has a contractual right to provide ESMR
service in Japan under a sublicense covering more than 125 million people. DJSMR
Business Partnership, a Japanese partnership in which an affiliate of Motorola
is the majority partner, holds a 49% equity interest in J-Com. J-Com's
historical operations are insignificant relative to the results of the Company.
The Company's investment in J-Com is accounted for under the equity method.
SHANGHAI: Prior to September 1998, China United Telecommunications, Ltd.
("Unicom") had 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 the Company 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 the Company that each
intended to participate in the funding of Phase IV. Accordingly, the Company 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.
To date, the Company is not aware of any new rules or regulations that have
been published or announced by the Chinese government with respect to the new
policy cited by Unicom or with respect to the treatment of existing contracts
such as those in existence between Shanghai CCT McCaw and Unicom under such new
policy. Pursuant to various discussions between and among representatives of
Shanghai CCT McCaw, the Company and Unicom, the Company believes that under the
new, unpublished restrictions imposed by the Chinese government (a) no agreement
with respect to Phase IV or subsequent phases will be entered into with Shanghai
CCT McCaw or any other investor that derives funds directly or indirectly from
foreign parties and (b) Shanghai CCT McCaw's existing contract with Unicom will
remain in effect and enforceable. However, it is unclear what effect the new
policy will have on the respective rights of Unicom and Shanghai CCT McCaw with
respect to the Shanghai GSM System. The restrictions to be imposed on the
Company pursuant to the new, unpublished regulations may have a material adverse
effect on Shanghai CCT McCaw's interest in the Shanghai GSM System and the value
of the Company's investment in Shanghai CCT McCaw. The Company's investment in
Shanghai CCT McCaw is carried on the Company's books at cost, which was
approximately $16.0 million as of September 30, 1998.
12
13
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- SIGNIFICANT TRANSACTIONS; PRO FORMA INFORMATION -- (CONTINUED)
PRO FORMA INFORMATION: The following summarized pro forma (unaudited)
information assumes the Nextel Brazil, MCS, Nextel Mexico and Nextel Argentina
transactions had occurred on January 1, 1997 (dollars in thousands, except for
share data).
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1997
------------- -------------
Revenues.................................................... $ 5,770 $ 18,087
========== ==========
Net loss.................................................... $ (24,561) $ (60,443)
========== ==========
Net loss per share.......................................... $ (0.67) $ (1.66)
========== ==========
Weighted average shares outstanding......................... 36,500,000 36,500,000
========== ==========
The above amounts consolidate the historical results of Nextel Brazil, MCS,
Nextel Mexico and Nextel Argentina prior to the acquisitions and reflect
adjustments for the recognition of the minority ownership interests and the
amortization of licenses and goodwill. Pro forma information for the three and
nine months ended September 30, 1998 does not differ materially from historical
results. The pro forma information is not necessarily indicative of the results
that would actually have occurred had the transactions been consummated on the
date indicated, nor is it necessarily indicative of future operating results of
the Company.
NOTE 3 -- FINANCING ARRANGEMENTS
MARCH 1998 OFFERING: On March 12, 1998, the Company completed a private
placement offering (the "March 1998 Offering") of its 12 1/8% Senior Discount
Notes due 2008 (the "March 1998 Notes"). The March 1998 Offering generated
aggregate net proceeds to the Company of approximately $387 million. The March
1998 Notes are noncallable for five years and require no cash interest payments
for the first five years. On September 10, 1998, the Company completed an
exchange offer for the March 1998 Notes pursuant to a registration statement
declared effective by the Commission on August 4, 1998.
ISSUANCE OF PREFERRED STOCK: On March 12, 1998, in connection with the
March 1998 Offering, a wholly owned subsidiary of Nextel Communications
transferred to the Company 6,777,778 Class D Shares of Clearnet in exchange for
906.32 shares of the Company's Series A Preferred Stock. As a result of such
transaction (the "Clearnet Transaction"), the Company currently owns 583,104
Class A Shares and 7,790,741 Class D Shares of Clearnet (each Class D Share is
convertible at the option of the holder into one Class A Share). Additionally,
the Company issued 82.54 shares of Series A Preferred Stock to a wholly owned
subsidiary of Nextel Communications for consideration of $8,254,000.
The Series A Preferred Stock was issued at an original liquidation
preference of $100,000 per share and thereafter the liquidation preference on
the Series A Preferred Stock accretes at an annual rate equal to 13.625%. At
September 30, 1998, the accreted liquidation preference on the Series A
Preferred Stock totaled approximately $106,697,000. Except as required by law,
the holders of the Series A Preferred Stock are not entitled to receive
dividends or other distributions. The Company has the right at any time to
redeem the Series A Preferred Stock in full (or with the consent of the holder
of the affected shares of Series A Preferred Stock, in part) at a redemption
price equal to 100% of the accreted liquidation preference thereof on the
redemption date and under certain circumstances, the holders of the Series A
Preferred Stock have the right to exchange the Series A Preferred Stock for
shares of the Company's Series B Redeemable Preferred Stock, par value $10.00
per share (the "Series B Preferred Stock"), having a liquidation preference
equal to the accreted liquidation preference of the Series A Preferred Stock so
exchanged.
The Series B Preferred Stock to be issued in exchange for shares of Series
A Preferred Stock will have an initial annual dividend rate equal to 13.625%,
increasing to 18.00% as of March 13, 2010. The Series B
13
14
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- FINANCING ARRANGEMENTS -- (CONTINUED)
Preferred Stock will have terms substantially similar to those of the Series A
Preferred Stock, except for the right to elect one director to the Company's
Board of Directors and the accrual of cumulative dividends payable quarterly in
cash. In addition, the Company may not issue shares of Series B Preferred Stock,
except in exchange for shares of Series A Preferred Stock, without the consent
of the holders of a majority of the outstanding shares of Series A Preferred
Stock and Series B Preferred Stock, voting together as a class.
ARGENTINA CREDIT FACILITY: As of February 27, 1998, Nextel Argentina
entered into an $83 million senior secured credit facility (the "Argentina
Credit Facility") with The Chase Manhattan Bank, which facility, as amended on
May 8, 1998 and September 30, 1998, was increased to $100.0 million. Borrowings
under the Argentina Credit Facility are subject to the satisfaction or waiver of
certain conditions. Loans under the Argentina Credit Facility will bear interest
at a rate equal to either (i) the ABR plus 2.75% (ABR is the highest of the
prime rate, the base CD rate plus 1% or the federal funds rate plus 0.5%) or
(ii) the Eurodollar rate plus 3.75% (the Eurodollar rate is the LIBO rate
multiplied by the statutory reserve rate). The loans under the Argentina Credit
Facility will be repaid in quarterly installments beginning September 30, 2000
and ending March 31, 2003. The first nine installments will be equal to 1/18 of
the then-outstanding balance and the final installment will be in an amount
equal to the then-outstanding balance. As of September 30, 1998, borrowings
under the Argentina Credit Facility totaled $52.0 million and bore interest at
approximately 9.5%.
PHILIPPINES MOTOROLA BRIDGE FINANCING: On August 27, 1998, Nextel
International and Motorola Credit Corporation ("Motorola Credit") entered into a
financing agreement (the "Motorola Bridge Financing Agreement"), pursuant to
which Motorola Credit agreed to provide up to $12 million in term loans to the
Company to (i) finance the cost of iDEN (integrated Digital Enhanced Network)
equipment and related services (including ancillary products and services)
purchased from Motorola by Nextel Philippines and (ii) to reimburse the Company
for payments made by the Company to Motorola for the purchase of iDEN equipment
and related services for the benefit of Nextel Philippines (the "Philippines
Motorola Bridge Financing"). Loans under the Philippines Motorola Bridge
Financing are unsecured, bear interest at rates based upon the U.S. prime rate
plus 2.5% and are repayable, together with accrued and unpaid interest, in one
installment on December 31, 1998. As of September 30, 1998, borrowings under the
Philippines Motorola Bridge Financing totaled $0.3 million.
NOTE 4 -- SUBSEQUENT EVENTS
INTERNATIONAL MOTOROLA FINANCING: On November 11, 1998, Nextel
International and Motorola Credit entered into a commitment letter and term
sheet (the "Motorola Financing Commitment") regarding the terms and conditions
under which Motorola Credit will provide equipment financing to the Company and
certain Operating Companies (the "International Motorola Financing"). The
Motorola Financing Commitment was entered into pursuant to, and to implement,
the memorandum of understanding entered into in November 1996 by and among the
Company, Nextel Communications and Motorola.
Under the Motorola Financing Commitment, Motorola Credit agreed to provide
up to $275 million in term loans to the Company consisting of (i) up to $100
million in loans to reimburse the Company for payments made to Motorola by the
Company and certain operating subsidiaries of the Company after January 1, 1997
for the purchase of iDEN equipment and related services by or for the benefit of
such operating subsidiaries, other than payments made to Motorola using funds
obtained under the equipment financing facility between Nextel Philippines and
Motorola Credit (the "Philippines Motorola Financing"), the Philippines Motorola
Bridge Financing or the equipment financing facility between Nextel Brazil and
Motorola Credit (the "Brazil Motorola Financing") (the "Reimbursement Loans"),
(ii) up to $225 million in loans (less the amount of Reimbursement Loans
advanced) to (A) finance the cost of iDEN equipment and related services
(including ancillary products and services) purchased by or for the benefit of
the Borrowing Affiliates (as defined below) and (B) repay the principal amounts
outstanding under the
14
15
NEXTEL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- SUBSEQUENT EVENTS -- (CONTINUED)
Philippines Motorola Financing and the Philippines Motorola Bridge Financing;
and (iii) up to $50 million in loans by Motorola Credit to Nextel Argentina as
incremental loans under the Argentina Credit Facility. The "Borrowing
Affiliates," for purposes of the Motorola Financing Commitment, include Nextel
Mexico, Nextel Peru, Nextel Philippines and J-Com and such other entities in
which the Company holds an equity interest and which have been so designated by
agreement between the Company and Motorola Credit. The maximum aggregate amount
the Company may borrow for the benefit of any one Borrowing Affiliate is $125
million.
Loans under the International Motorola Financing will be repaid in eight
equal semi-annual installments beginning June 30, 2001 and will mature December
31, 2004. Loans under the International Motorola Financing will bear interest at
variable rates based upon either the U.S. prime rate or LIBOR and will be
secured by, among other things, a pledge of the shares of stock of the Borrowing
Affiliates held by the Company, a pledge of the shares of stock of certain other
direct and indirect subsidiaries of the Company and a pledge of the shares of
stock of the Borrowing Affiliates held by certain third party shareholders.
The availability of the loans under the International Motorola Financing is
subject to a number of conditions, including the negotiation, execution and
delivery of definitive agreements and the completion by Motorola Credit of its
due diligence review of the Company and the Borrowing Affiliates. The parties
contemplate negotiating and entering into definitive agreements implementing the
terms of the Motorola Financing Commitment during the fourth quarter of 1998.
See "-- Forward-Looking Statements."
15
16
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 International, Inc. ("Nextel International"
or the "Company"), an indirect, substantially wholly owned subsidiary of Nextel
Communications, Inc. ("Nextel Communications"), for the three-month and
nine-month periods ended September 30, 1998 and 1997 should be read in
conjunction with the Company's condensed consolidated financial statements and
notes thereto appearing elsewhere in Part I of this report and the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1997 ("1997
Form 10-K").
Nextel International, through its operating subsidiaries and affiliates,
provides wireless communications services in five of the largest cities in Latin
America and three of the largest cities in Asia. The Company's markets cover
approximately 373 million people, approximately 131 million of which are in
Latin America. Nextel International is the largest specialized mobile radio
("SMR") service provider in Brazil and Mexico, and holds the largest SMR channel
position in Argentina.
The Company's strategy is focused on using its leading analog dispatch or
SMR channel positions in its principal markets, together with Nextel
Communications' experience and supplier relationships, to upgrade its services
from analog dispatch to digital enhanced specialized mobile radio ("ESMR")
services. The Company intends to use "iDEN(TM)" (integrated Digital Enhanced
Network) technology developed by Motorola, Inc. ("Motorola") to provide its ESMR
services. The Company, through its operating subsidiaries or affiliates,
launched commercial ESMR service under the brand name "Nextel(TM)" in Sao Paulo
and Buenos Aires during the second quarter of 1998 and Rio de Janeiro, Manila
and Mexico City during the third quarter of 1998. Additionally, the Company's
Japanese affiliate, J-Com Co., Ltd. ("J-Com"), introduced a multi-functional
commercial ESMR service under the brand name "NEXNET(TM)" in the Kanto region of
Japan (which includes Tokyo) in the second quarter of 1998. The Company
currently plans to launch commercial ESMR service in the greater Lima area in
the first quarter of 1999. The timing of the Company's currently planned launch
schedule depends on a number of factors, some of which are beyond the Company's
control. See 1997 Form 10-K, Part I, Item 1, "The Company's Operations and
Investments."
The Company owns majority controlling interests in wireless communications
services companies in Brazil, Mexico, Argentina and Peru and owns equity
interests and actively participates in the management of wireless communications
services companies in the Philippines and Japan. In addition, the Company owns
an approximately 15% equity interest in Clearnet Communications Inc., a Canadian
wireless communications services company ("Clearnet"), and has a contractual
right through its Chinese joint venture to receive 12.1% of the profits
generated by a Global System for Mobile communications ("GSM") network in
Shanghai, China (the "Shanghai GSM System"). The wireless communications
services companies that the Company owns or has interests in and the right to
receive profits in the Shanghai GSM System are referred to herein as the
"Operating Companies." The Company does not actively participate in the
management or in the formulation of the business plans or policies of Clearnet
or the Shanghai GSM System and considers them passive investments.
As of September 30, 1998, Nextel's proportionate share of international
digital subscriber units in service, based on its ownership interests in the
Operating Companies, is estimated to be approximately 118,000, which includes
total digital subscriber units (comprised of ESMR, personal communications
services and GSM units) on networks currently in operation in Argentina, Brazil,
Canada, Japan, Mexico and Shanghai, China. As of September 30, 1998, total
international digital subscriber units in service for the Operating Companies is
estimated to be approximately 472,000.
FISCAL QUARTER TRANSACTIONS AND DEVELOPMENTS
PHILIPPINES. As reported in the Company's prior Quarterly Reports on Form
10-Q for the quarterly periods ended March 31, 1998 and June 30, 1998, in
February 1998, the Company reached an agreement in principle with the three
groups of local shareholders of Infocom Communications Network, Inc. ("Nextel
16
17
Philippines"), including the Gotesco group (the "Gotesco Group"), which until
recently owned a 20% interest in Nextel Philippines, and finalized such
agreements in April 1998 (the "Philippines Partner Agreements"). Pursuant to the
Philippines Partner Agreements, among other things, the Gotesco Group obtained
the right to put its 20% interest to the Company for approximately $9.4 million,
beginning in January 1999 (the "Gotesco Put") and the Company had the right to
call the Gotesco Group's 20% interest for approximately $11.6 million, if the
Gotesco Group did not exercise the Gotesco Put. On June 26, 1998, the Company
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 Put was accelerated from January 1999 to August 21, 1998. Pursuant to
the Gotesco Put Acceleration Agreement, the Company agreed to pay the Gotesco
Group $9,000,000 for the shares covered by the Gotesco Put in three
installments: (i) $500,000 upon the delivery of irrevocable proxies covering the
voting rights on the shares of Nextel Philippines owned by the Gotesco Group;
(ii) $500,000 to the Gotesco Group upon the conclusion of the Nextel Philippines
annual shareholder meeting, provided that the Gotesco Group's shares of Nextel
Philippines were voted in favor of the corporate governance provisions of the
Philippines Partner Agreements at such annual meeting; and (iii) $8,000,000 upon
the transfer of the shares covered by the Gotesco Put to a qualified third-party
purchaser in accordance with Philippines law. The first two installments were
paid on June 26, 1998 and July 13, 1998, respectively. 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 Philippine nationals ("ACCRAIN"), and 40% owned by an
indirect subsidiary of the Company, delivered the final installment of
$8,000,000 to the Gotesco Group and the Gotesco Group delivered the shares
covered by the Gotesco Put to Gamboa Holdings.
Funds used by Gamboa Holdings to consummate the acquisition of the Gotesco
Group's shares of Nextel Philippines were derived from (a) equity contributions
by shareholders of Gamboa Holdings and (b) proceeds of loans made by a lending
institution to Gamboa Holdings and to ACCRAIN. The loans to Gamboa Holdings and
to ACCRAIN are secured by cash collateral deposits of the Company in the amount
of the loans and a pledge of Gamboa Holdings's shares of Nextel Philippines. As
a result of Gamboa Holdings's acquisition of the Gotesco Group's shares of
Nextel Philippines, the Company's aggregate equity interest in Nextel
Philippines, which includes its direct and indirect holdings, increased from 30%
to 38%.
ACCRAIN is a Philippine holding company with investments in a number of
Philippines companies. Pursuant to an agreement, dated as of August 21, 1998
between an indirect wholly owned subsidiary of the Company and ACCRAIN (the
"ACCRAIN Agreement"), ACCRAIN granted the Company a call right on ACCRAIN's
shares in Gamboa Holdings, exercisable at anytime provided that the actual
purchaser of the shares is the Company or a qualified purchaser in accordance
with applicable Philippines foreign corporate ownership rules. Upon expiration
of the ACCRAIN Agreement, ACCRAIN may put to the Company or its qualified
designee ACCRAIN's shares in Gamboa Holdings (the "ACCRAIN Put"). The Company
believes, and has been advised by Philippine counsel, that the above-described
transactions with Gamboa Holdings comply with Philippines law, including
applicable Philippines foreign corporate ownership rules. However, there can be
no assurance that the above-described transactions will not be subject to legal
challenge. In addition, the ability of the Company to call ACCRAIN's interest in
Gamboa Holdings or to satisfy the ACCRAIN Put is subject to applicable
Philippines foreign ownership rules. See also Part V, Item 1, "Legal
Proceedings."
PHILIPPINES MOTOROLA BRIDGE FINANCING. On August 27, 1998, Nextel
International and Motorola Credit Corporation ("Motorola Credit") entered into a
financing agreement (the "Motorola Bridge Financing Agreement"), pursuant to
which Motorola Credit agreed to provide up to $12 million in term loans to the
Company to (i) finance the cost of iDEN equipment and related services
(including ancillary products and services) purchased from Motorola by Nextel
Philippines and (ii) to reimburse the Company for payments made by the Company
to Motorola for the purchase of iDEN equipment and related services for the
benefit of Nextel Philippines (the "Philippines Motorola Bridge Financing").
Loans under the Philippines Motorola Bridge Financing are unsecured, bear
interest at rates based upon the U.S. prime rate plus 2.5% and are repayable,
together with accrued and unpaid interest, in one installment on December 31,
1998. As of September 30, 1998, borrowings under the Philippines Motorola Bridge
Financing totaled $0.3 million.
17
18
SHANGHAI. Prior to September 1998, China United Telecommunications, Ltd.
("Unicom") had 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 the Company 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 the Company that each
intended to participate in the funding of Phase IV. Accordingly, the Company 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.
To date, the Company is not aware of any new rules or regulations that have
been published or announced by the Chinese government with respect to the new
policy cited by Unicom or with respect to the treatment of existing contracts
such as those in existence between Shanghai CCT McCaw and Unicom under such new
policy. Pursuant to various discussions between and among representatives of
Shanghai CCT McCaw, the Company and Unicom, the Company believes that under the
new, unpublished restrictions imposed by the Chinese government (a) no agreement
with respect to Phase IV or subsequent phases will be entered into with Shanghai
CCT McCaw or any other investor that derives funds directly or indirectly from
foreign parties and (b) Shanghai CCT McCaw's existing contract with Unicom will
remain in effect and enforceable. However, it is unclear what effect the new
policy will have on the respective rights of Unicom and Shanghai CCT McCaw with
respect to the Shanghai GSM System. The restrictions to be imposed on the
Company pursuant to the new, unpublished regulations may have a material adverse
effect on Shanghai CCT McCaw's interest in the Shanghai GSM System and the value
of the Company's investment in Shanghai CCT McCaw. The Company's investment in
Shanghai CCT McCaw is carried on the Company's book at cost, which was
approximately $16.0 million as of September 30, 1998.
POST FISCAL QUARTER-END TRANSACTIONS AND DEVELOPMENTS
PERU. In August 1998, the Company gave notice to Motorola International
Development Corporation ("Motorola International"), an indirect wholly owned
subsidiary of Motorola and the holder of a minority equity interest in
Comunicaciones Nextel del Peru S.A. de C.V. ("Nextel Peru"), of the Company's
exercise of its option to sell a portion of the Company's shares of Nextel Peru
to Motorola International (the "Nextel Peru Put Transaction"). Pursuant to the
agreement between the Company and Motorola International, the Company had the
right to sell to Motorola International shares representing approximately 10% of
the outstanding shares of Nextel Peru for a purchase price of approximately $6.0
million. The Nextel Peru Put Transaction was consummated on October 30, 1998.
Additionally, as a result of the decision of the other minority shareholder of
Nextel Peru not to contribute his pro rata share of capital contributions to
Nextel Peru during the third quarter of 1998, such shareholder's equity interest
in Nextel Peru has been diluted and the Company's and Motorola International's
equity interest in Nextel Peru have increased. Immediately following the closing
of the Nextel Peru Put Transaction, and giving effect to the dilution of the
other minority shareholder during the third quarter of 1998, the Company and
Motorola International held approximately 62.1% and 30.9%, respectively, of the
outstanding shares of Nextel Peru.
INTERNATIONAL MOTOROLA FINANCING. On November 11, 1998, Nextel
International and Motorola Credit entered into a commitment letter and term
sheet (the "Motorola Financing Commitment") regarding the terms and conditions
under which Motorola Credit will provide equipment financing to the Company and
certain Operating Companies (the "International Motorola Financing"). The
Motorola Financing Commitment was entered into pursuant to, and to implement,
the memorandum of understanding entered into in November 1996 by and among the
Company, Nextel Communications and Motorola.
18
19
Under the Motorola Financing Commitment, Motorola Credit agreed to provide
up to $275 million in term loans to the Company consisting of (i) up to $100
million in loans to reimburse the Company for payments made to Motorola by the
Company and certain Operating Companies after January 1, 1997 for the purchase
of iDEN equipment and related services by or for the benefit of such Operating
Companies, other than payments made to Motorola using funds obtained under the
Philippines Motorola Financing (as defined below), the Philippines Motorola
Bridge Financing or the Brazil Motorola Financing (as defined below) (the
"Reimbursement Loans"), (ii) up to $225 million in loans (less the amount of
Reimbursement Loans advanced) to (A) finance the cost of iDEN equipment and
related services (including ancillary products and services) purchased by or for
the benefit of the Borrowing Affiliates (as defined below) and (B) repay the
principal amounts outstanding under the Philippines Motorola Financing and the
Philippines Motorola Bridge Financing; and (iii) up to $50 million in loans by
Motorola Credit to Nextel Argentina S.R.L. ("Nextel Argentina") as incremental
loans under the Argentina Credit Facility (as defined below). The "Borrowing
Affiliates," for purposes of the Motorola Financing Commitment, include
Comunicaciones Nextel de Mexico, S.A. de C.V. ("Nextel Mexico"), Nextel Peru,
Nextel Philippines and J-Com and such other entities in which the Company holds
an equity interest and which have been so designated by agreement between the
Company and Motorola Credit. The maximum aggregate amount the Company may borrow
for the benefit of any one Borrowing Affiliate is $125 million.
Loans under the International Motorola Financing will be repaid in eight
equal semi-annual installments beginning June 30, 2001 and will mature December
31, 2004. Loans under the International Motorola Financing will bear interest at
variable rates based upon either the U.S. prime rate or LIBOR and will be
secured by, among other things, a pledge of the shares of stock of the Borrowing
Affiliates held by the Company, a pledge of the shares of stock of certain other
direct and indirect subsidiaries of the Company and a pledge of the shares of
stock of the Borrowing Affiliates held by certain third party shareholders.
The availability of the loans under the International Motorola Financing is
subject to a number of conditions, including the negotiation, execution and
delivery of definitive agreements and the completion by Motorola Credit of its
due diligence review of the Company and the Borrowing Affiliates. The parties
contemplate negotiating and entering into definitive agreements implementing the
terms of the Motorola Financing Commitment during the fourth quarter of 1998.
See "-- Forward-Looking Statements."
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1998 vs. Nine Months Ended September 30, 1997
Revenues increased $19.6 million to $26.6 million for the nine months ended
September 30, 1998 from $7.0 million for the nine months ended September 30,
1997. Costs and expenses related to revenues increased $10.8 million to $13.0
million for the nine months ended September 30, 1998, compared to $2.2 million
for the nine months ended September 30, 1997. The increases were attributable
primarily to the acquisition of controlling interests in Nextel Mexico, MCS
Radio Telefonia Ltd. ("MCS") and Nextel Argentina in August 1997, September 1997
and January 1998, respectively (collectively, the "Purchase Transactions"). For
the periods presented subsequent to the Purchase Transactions, the results of
Nextel Mexico, MCS and Nextel Argentina are included in the Company's
consolidated financial statements. See Part I, Item 1, "Notes to Condensed
Consolidated Interim Financial Statements --Note 2." For the nine months ended
September 30, 1997, substantially all of the revenues and costs and expenses
related to revenues result from the eight months of Nextel Brazil's SMR
operations and one month of Nextel Mexico's SMR operations included in the
Company's consolidated financial statements.
Revenues and costs and expenses related to revenues are expected to
continue to increase because the Company launched commercial ESMR services in
Sao Paulo and Buenos Aires in the second quarter of 1998 and Rio de Janeiro and
Mexico City in the third quarter of 1998. The commercial ESMR launches in Manila
and the Kanto region of Japan in the third quarter of 1998 will not affect
revenues or costs and expenses related to revenues because Nextel Philippines
and J-Com are accounted for under the equity method.
Selling, general and administrative expenses increased $72.0 million to
$89.6 million for the nine months ended September 30, 1998, compared to $17.6
million for the nine months ended September 30, 1997. The
19
20
increase is attributable primarily to the effect of the Purchase Transactions as
well as increased costs in the consolidated Operating Companies necessary to
support their respective launches of commercial ESMR service, including sales,
marketing and administrative support costs.
Selling, general and administrative expenses are expected to continue to
increase above the amounts recorded in the third quarter of 1998, primarily due
to increased selling and marketing expenses associated with the launch of
commercial ESMR service in Mexico City in September 1998 and expected increases
in sales volumes in those markets where the Company has previously launched
commercial ESMR service. The Company includes the loss resulting from the sale
of digital subscriber units in selling, general and administrative expenses, as
the loss represents a marketing cost. The Company expects to continue to offer
partial subsidies and discounts on its sale and installation of digital
subscriber units in programs designed to stimulate both new subscriber growth
and the migration of subscribers from the Company's existing analog SMR systems
to its ESMR networks. On a per subscriber basis and as a percentage of revenue,
the Company expects selling and marketing costs associated with its ESMR
networks business to decrease over time as it realizes the benefit of its
initial marketing campaigns and improves the efficiency of its sales force.
Additionally, the Company has instituted a number of cost-cutting initiatives
that are expected to offset the increased cost of activities, including customer
care and collections, necessary to support the expected higher sales volumes.
See "-- Forward-Looking Statements."
Depreciation and amortization expense increased $22.4 million to $33.7
million for the nine months ended September 30, 1998, compared to $11.3 million
for the nine months ended September 30, 1997. The increase is attributable
primarily to the effect of the Purchase Transactions and the commencement of
commercial ESMR service in the Company's markets launched in 1998. The Company
expects depreciation and amortization expense to increase significantly in
future periods due to depreciation on fixed assets placed in service upon
commencement of commercial ESMR service in each of its markets.
Interest income decreased $0.8 million to $14.2 million for the nine months
ended September 30, 1998, compared to $15.0 million for the nine months ended
September 30, 1997. The decrease was attributable primarily to lower average
outstanding cash, cash equivalent and marketable securities balances pending
their application into the Company's capital expenditure program.
Interest expense increased $35.4 million to $74.5 million for the nine
months ended September 30, 1998, compared to $39.1 million for the nine months
ended September 30, 1997. The increase is attributable primarily to interest
expense associated with the Company's senior discount notes due 2007 (the "March
1997 Notes"), issued pursuant to the Company's offering and sale in March 1997
of units consisting of such notes and detachable warrants to purchase up to 1%
of the Company's outstanding common stock (the "March 1997 Offering"), and the
Company's senior discount notes due 2008 (the "March 1998 Notes"), issued
pursuant to the Company's offering and sale in March 1998 of such notes (the
"March 1998 Offering").
Loss from equity method investments increased $0.1 million to $6.4 million
for the nine months ended September 30, 1998, compared to $6.3 million for the
nine months ended September 30, 1997. The increase was attributable primarily to
the effect of the Company's proportionate share of losses at J-Com and the
increasing losses at Nextel Philippines more than offsetting the effect of the
Purchase Transactions. As of September 30, 1998, the only Operating Companies
being accounted for under the equity method were Nextel Philippines and J-Com.
Other income totaling $3.3 million for the nine months ended September 30,
1998 consists primarily of $12.4 million of foreign currency transaction gains
recognized in Nextel Mexico resulting from the decrease in value of the Mexico
peso relative to the U.S. dollar. Such gains were partially offset by foreign
currency transaction losses in Nextel Brazil and from the Company's Japanese
yen-denominated loan to J-Com.
Minority interest increased $6.1 million to $8.3 million for the nine
months ended September 30, 1998, compared to $2.2 million for the nine months
ended September 30, 1997. The increase is attributable primarily to increase in
both the net loss and minority ownership interest of Nextel Brazil.
Income tax benefit increased $17.2 million to $20.6 million for the nine
months ended September 30, 1998, compared to $3.4 million for the nine months
ended September 30, 1997. The increase is attributable
20
21
primarily to the effect of the Purchase Transactions and, to a lesser extent,
increased tax net operating losses in Brazil.
Three Months Ended September 30, 1998 vs. Three Months Ended September 30, 1997
Revenues increased $5.8 million to $8.9 million for the three months ended
September 30, 1998 from $3.1 million for the three months ended September 30,
1997. Costs and expenses related to revenues increased $5.2 million to $6.0
million for the three months ended September 30, 1998, compared to $0.8 million
for the three months ended September 30, 1997. The increases were attributable
primarily to the Purchase Transactions. For the three months ended September 30,
1997, substantially all of the revenues and costs and expenses related to
revenues result from the three months of Nextel Brazil's SMR operations and one
month of Nextel Mexico's SMR operations included in the Company's consolidated
financial statements.
Selling, general and administrative expenses increased $42.2 million to
$49.6 million for the three months ended September 30, 1998, compared to $7.4
million for the three months ended September 30, 1997. The increase is
attributable primarily to the effect of the Purchase Transactions as well as
increased costs in the consolidated Operating Companies necessary to support
their respective launches of commercial ESMR service, including sales, marketing
and administrative support costs.
Selling, general and administrative expenses are expected to continue to
increase above the amounts recorded in the third quarter of 1998, primarily due
to increased selling and marketing expenses associated with the launch of
commercial ESMR service in Mexico City in September 1998 and expected increases
in sales volumes in those markets where the Company has previously launched
commercial ESMR service. The Company includes the loss resulting from the sale
of digital subscriber units in selling, general and administrative expenses, as
the loss represents a marketing cost. The Company expects to continue to offer
partial subsidies and discounts on its sale and installation of digital
subscriber units in programs designed to stimulate both new subscriber growth
and the migration of subscribers from the Company's existing analog SMR systems
to its ESMR networks. On a per subscriber basis and as a percentage of revenue,
the Company expects selling and marketing costs associated with its ESMR
networks business to decrease over time as it realizes the benefit of its
initial marketing campaigns and improves the efficiency of its sales force.
Additionally, the Company has instituted a number of cost-cutting initiatives
that are expected to offset the increased cost of activities, including customer
care and collections, necessary to support the expected higher sales volumes.
See "-- Forward-Looking Statements."
Depreciation and amortization expense increased $9.0 million to $13.7
million for the three months ended September 30, 1998, compared to $4.7 million
for the three months ended September 30, 1997. The increase is attributable
primarily to the effect of the Purchase Transactions and the commencement of
commercial ESMR service in the Company's markets launched in 1998. The Company
expects depreciation and amortization expense to increase significantly in
future periods due to depreciation on fixed assets placed in service upon
commencement of commercial ESMR service in its markets.
Interest income decreased $1.3 million to $4.8 million for the three months
ended September 30, 1998, compared to $6.1 million for the three months ended
September 30, 1997. The decrease was attributable primarily to lower average
outstanding cash, cash equivalent and marketable securities balances pending
their application into the Company's capital expenditure program.
Interest expense increased $13.4 million to $30.2 million for the three
months ended September 30, 1998, compared to $16.8 million for the three months
ended September 30, 1997. The increase is attributable primarily to interest
expense associated with the March 1998 Notes.
Loss from equity method investments increased $1.8 million to $4.2 million
for the three months ended September 30, 1998, compared to $2.4 million for the
three months ended September 30, 1997. The increase was attributable primarily
to the effect of the Company's proportionate share of losses at J-Com and the
increasing losses at Nextel Philippines more than offsetting the effect of the
Purchase Transactions. As of September 30, 1998, the only Operating Companies
being accounted for under the equity method were Nextel Philippines and J-Com.
21
22
Other income totaling $5.5 million for the three months ended September 30,
1998 consists primarily of $7.9 million of foreign currency transaction gains
recognized in Nextel Mexico resulting from the decrease in value of the Mexico
peso relative to the U.S. dollar. Such gains were partially offset by foreign
currency transaction losses in Nextel Brazil.
Minority interest increased $3.8 million to $4.7 million for the three
months ended September 30, 1998, compared to $0.9 million for the three months
ended September 30, 1997. The increase is attributable primarily to the increase
in both the net loss and minority ownership interest of Nextel Brazil.
Income tax benefit increased $8.7 million to $10.0 million for the three
months ended September 30, 1998, compared to $1.3 million for the three months
ended September 30, 1997. The increase is attributable primarily to the effect
of the Purchase Transactions and, to a lesser extent, increased tax net
operating losses in Brazil.
LIQUIDITY AND CAPITAL RESOURCES
The Company has incurred net losses of approximately $246.9 million from
inception through September 30, 1998. These losses resulted from operating
expenses required to support the development of the Company's wireless
communications networks, other start-up costs and the fact that through
September 30, 1998 only $39.6 million of consolidated revenues had been
recognized. The Company expects to continue to incur increasing losses and
negative operating cash flows as it continues to build out and upgrade its
existing wireless communications networks.
Prior to March 1997, funds necessary to finance the Company's activities
were provided to the Company by its parent, which is an unrestricted subsidiary
of Nextel Communications, in the form of equity contributions. Since March 1997
and through September 30, 1998, the Company's activities have been financed
primarily with the net proceeds of the March 1997 Offering and the March 1998
Offering and, to a lesser extent, from vendor financing, including the existing
equipment financing facilities obtained from Motorola, and the Argentina Credit
Facility (as defined below). Nextel Communications is not obligated to provide
any additional funding to the Company.
Net cash used in operating activities for the nine months ended September
30, 1998 was approximately $122.1 million. Net cash used in investing activities
for the nine months ended September 30, 1998 was approximately $360.9 million.
Net cash provided by financing activities for the nine months ended September
30, 1998 was approximately $496.9 million. Working capital as of September 30,
1998 decreased to $183.1 million compared to $223.3 million at December 31,
1997. The cash used in operating activities during the nine months ended
September 30, 1998 primarily represents cash used to fund operating losses and
pay value-added taxes on the purchase of switches and other infrastructure
equipment. The cash used in investing activities during the nine months ended
September 30, 1998 primarily represented investments in the Operating Companies
to fund the build-out of the Company's ESMR networks, to fund the Company's
initial investment in Nextel Peru and J-Com and to acquire the remaining 50%
interest in Nextel Argentina. The cash provided by financing activities during
the nine months ended September 30, 1998 is primarily a result of the Company
receiving approximately $387 million of net proceeds from the March 1998
Offering and borrowings by the Company under the Brazil Motorola Financing and
the Argentina Credit Facility (each as defined below) of approximately $48.2
million and $52.0 million, respectively. As a result of the above activities,
cash and cash equivalents increased approximately $14.0 million to approximately
$173.8 million during the nine months ended September 30, 1998, compared to
$159.8 million at December 31, 1997.
As described in the 1997 Form 10-K, the Company has estimated that its
funding requirements for fiscal year 1998 will be approximately $810 million
(the "1998 Plan"). These amounts consist primarily of the costs of building the
Company'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, the acquisition of licenses and investments and funding of
operating losses. The Company has estimated that approximately $227 million of
such requirements in fiscal year 1998 will be related to expenditures in Brazil,
$161 million in Argentina, $152 million in Mexico, $29 million in Peru and $74
million in the Philippines. See 1997 Form 10-K, Part I, Item 1,
"Business -- 1998 Plan."
22
23
Through September 30, 1998, the Company's total cash expenditures for its
business activities described in the 1998 Plan were approximately $574 million.
Such expenditures were consistent with the levels estimated by the Company in
the 1998 Plan. The Company's total cash expenditures for the remainder of fiscal
year 1998, however, may be subject to the effect of certain risks and
uncertainties, as identified or referred to in the 1997 Form 10-K. See also
"-- Foward-Looking Statements."
In June 1997 and October 1997, Motorola Credit entered into definitive
agreements with each of Nextel Philippines and Nextel Brazil for financing the
purchase of up to $14.7 million and $125 million of equipment and related
services by Nextel Philippines (the "Philippines Motorola Financing") and Nextel
Brazil (the "Brazil Motorola Financing"), respectively. In February 1998, Nextel
Argentina entered into an $83 million senior secured credit facility, which
facility, as amended on May 8, 1998 and September 30, 1998, was increased to
$100 million (the "Argentina Credit Facility"). The terms and conditions of the
Philippines Motorola Financing, the Brazil Motorola Financing and the Argentina
Credit Facility are described in the 1997 Form 10-K. On August 27, 1998, Nextel
International and Motorola Credit entered into the Motorola Bridge Financing
Agreement, pursuant to which Motorola Credit agreed to provide up to $12 million
in vendor financing to the Company for the purchase of equipment and related
services by Nextel Philippines. See "--Fiscal Quarter Transactions and
Developments."
On November 11, 1998, Nextel International and Motorola Credit entered into
the Motorola Financing Commitment, pursuant to which Motorola Credit agreed to
provide up to $275 million in vendor financing to the Company and certain
Operating Companies. The Motorola Financing Commitment was entered into pursuant
to and to implement the memorandum of understanding entered into in November
1996 between the Company, Nextel Communications and Motorola. The availability
of the loans under the International Motorola Financing is subject to a number
of conditions including, the negotiation, execution and delivery of definitive
agreements and the completion by Motorola Credit of its due diligence review of
the Company and the Borrowing Affiliates. The parties contemplate negotiating
and entering into definitive agreements implementing the terms of the Motorola
Financing Commitment during the fourth quarter of 1998. See "--Post Fiscal
Quarter-End Transactions and Developments." See also "-- Forward-Looking
Statements."
As of September 30, 1998, all of the $14.7 million available under the
Philippine Motorola Financing had been borrowed, approximately $98.4 million had
been borrowed under the Brazil Motorola Financing, with the remaining $26.6
million available for future borrowings and $0.3 million had been borrowed under
the Philippines Motorola Bridge Financing, with the remaining $11.7 available
for future borrowings. As of September 30, 1998, $52.0 million had been borrowed
under Argentina Credit Facility, with the remaining $48.0 million available for
future borrowings.
The Company has not yet completed its business plan for 1999, and is still
considering and assessing the potential alternative approaches to conducting
business during 1999 that could be implemented by certain of the Operating
Companies. Specifically, the Company currently anticipates that those Operating
Companies that are controlled by the Company (or that rely substantially on the
Company for further funding) will tailor their ESMR network related operations
to be more responsive to the economic conditions prevailing in their respective
market areas, and to the general availability of capital. However, based on its
estimate of the funding required for the fourth quarter of 1998 and its
preliminary assessment of the business activity and related cash needs of the
Operating Companies that would arise if such Operating Companies implement a
more conservative business plan for 1999 than that pursued during the first
three quarters of 1998, the Company believes that it will have adequate funding
to continue its operations into the latter half of 1999. Such assessment is
based on the Company's assumed utilization of the remaining net proceeds from
the March 1998 Offering, together with available cash, cash equivalents and
marketable securities, and borrowings of amounts expected to be available under
the Brazil Motorola Financing, the Argentina Credit Facility and the
International Motorola Financing, to meet its assumed cash needs (including
reasonably foreseeable capital expenditures, funding of operating losses and
debt service obligations) during such period; however, there can be no assurance
that such funds will be sufficient. Access to additional funding would allow the
Company to pursue more aggressive growth strategies. See "-- Forward Looking
Statements."
The Company has taken and may continue to take various measures designed to
conserve its available cash for use in funding its existing core ESMR network
business activities, such as slowing expansion of its
23
24
ESMR networks into new market areas and minimizing or eliminating certain
discretionary expenditures. However, if (among other things) the Company's plans
change, its assumptions regarding its funding needs associated with any further
build-out, expansion and enhancement of its ESMR network at the Operating
Company level prove to be inaccurate, the other shareholders in certain of the
Operating Companies do not fund their expected capital requirements, it
increases its existing equity ownership interests in certain of the Operating
Companies beyond those currently contemplated, it experiences growth in its
business or subscriber base greater than or less than that which is currently
anticipated, it experiences unanticipated costs or competitive pressures, the
Operating Companies are unable to access funds under the Brazil Motorola
Financing, the Argentina Credit Facility and/or the International Motorola
Financing, or the remaining net proceeds from the March 1998 Offering, together
with any other funds available to the Company and the Operating Companies or any
other borrowings, otherwise prove to be insufficient to meet cash needs, the
Company may be required to seek additional capital sooner than currently
anticipated. The availability of borrowings under the Brazil Motorola Financing,
the Argentina Credit Facility and the International Motorola Financing are
subject to the satisfaction or waiver of certain conditions.
The Company will also require significant additional capital to fund the
build-out of new ESMR networks in the Company's licensed markets, any
significant further expansion and enhancement of its existing ESMR networks, the
acquisitions of additional licenses and investments in new markets and will need
to rely on external sources of financing to fund its operating losses and for
other general corporate purposes until its operations begin to generate positive
cash flows. The Company is currently assessing its capital needs and exploring
potential financing sources to meet such needs. The Company anticipates that it
will be required to seek to raise additional capital from public or private
equity or debt markets to fund such future capital needs. The Company may seek
to obtain financing from various sources, including vendor financing provided by
equipment suppliers (including the International Motorola Financing), project
financing from commercial banks and international agencies such as International
Finance Corporation and Overseas Private Investment Corporation and bank lines
of credit. To the extent the Company issues debt, its leverage and debt service
obligations will increase. Additionally, the Company and certain of the
Operating Companies may incur indebtedness only in compliance with the terms of
covenants contained in the indentures governing the March 1997 Notes and the
March 1998 Notes. There can be no assurance that the Company will be able to
raise any such capital on satisfactory terms, if at all. If the Company is
unable to obtain such additional capital, or to obtain it on acceptable terms
and in a timely manner, the Company would be required to curtail its operations
significantly and to reduce the scope of its presently anticipated build-out,
expansion and enhancement of its ESMR networks. Any such actions would have a
material adverse effect on the Company's financial condition and results of
operation, including its ability to meet its debt service and working capital
requirements. See "-- Forward-Looking Statements."
As of September 30, 1998, the Company owned 100% of Nextel Mexico and
Nextel Argentina, 81% of Nextel Brazil (or approximately 77% of Nextel S.A.) and
70.1% of Nextel Peru (which decreased to 62.1% as of October 30, 1998). The
Company's other non-cash assets consist primarily of minority ownership
interests in Nextel Philippines and J-Com, passive minority investment stakes in
the Shanghai GSM System and Clearnet. Even though the Company participates in
the management of the Operating Companies (except for Clearnet and the Shanghai
GSM System) and has certain contractual rights designed to protect its interests
as a minority shareholder, it cannot control the outcome of matters submitted to
the shareholders of the Operating Companies in which it has less than a majority
interest. In addition, the Company may be unable to access the cash flow of its
affiliated companies because (i) it does not have the requisite control to cause
such entities to pay dividends and (ii) substantially all of such entities are
parties to or expected to become parties to vendor financing or other borrowing
agreements that severely restrict the payment of dividends, and such entities
are likely to continue to be subject to such restrictions and prohibitions for
the foreseeable future. The existing Brazil Motorola Financing, the Philippines
Motorola Financing and the Argentina Credit Facility restrict the payment of
dividends to the Company by the Operating Companies that have debt outstanding
thereunder. Any future vendor or bank financings are likely to include similar
covenants restricting the payment of dividends. See 1997 Form 10-K, Part I, Item
1, "Business -- Risk Factors -- Substantial Indebtedness; Ability to Service
Debt; Refinancing Risks."
24
25
YEAR 2000 COMPLIANCE
GENERAL. The "Year 2000 issue" arises as a result of the potential
inability of some computer software to interpret correctly any date after
December 31, 1999 in entries in which the year is represented by two digits
rather than four. Any such failure could result in data processing errors or
miscalculations, and consequently, interruption in services, operations,
customer billing and other date-sensitive processes.
Many of the Company's administrative and accounting services are performed
for the Company by Nextel Communications. Additionally, many of the Company's
third party vendors are also vendors to Nextel Communications. Accordingly, in
these instances the Company has coordinated its assessment of its status toward
compliance with the Year 2000 issue with Nextel Communications, and any
reference in this section to the Company's initiatives and plans in such
instances should be read and understood to include those of Nextel
Communications.
STATE OF READINESS. The Company has taken or is scheduled to take actions
that are designed to assure that it addresses any Year 2000 issues by the end of
the third quarter of 1999. The Company's ability to reach its Year 2000 issue
compliance goal, however, is and will continue to be dependent on the parallel
efforts of Nextel Communications and certain third party vendors, suppliers,
subcontractors to and business partners of Nextel Communications and the
Company. Certain of these third party vendors, suppliers, subcontractors and
business partners are not yet Year 2000 issue compliant and some of them also
have not yet provided Nextel Communications and the Company with detailed action
plans and timetables for achieving compliance with all Year 2000 issues by the
Company's timetable. The Company is in the process of contacting and obtaining
from such third parties relevant details and schedules concerning their
contemplated development of applications that comply with the Year 2000 issue
for use in its operations and systems. In particular, the Company relies on
services and products offered by the following third parties: Motorola for
system infrastructure and subscriber handsets; MiBAS, an affiliate of Motorola,
for software for front-end order entry and provisioning systems; LHS Group Inc.
for certain Operating Companies' billing systems; The Vantive Corp. for order
entry systems; Oracle Corp., which provides information systems, development
tools and database management used to support Nextel Communications' human
resources functions performed for the Company and the Company's financial
systems; and Hewlett-Packard, Inc., for computer hardware and UNIX operating
systems.
Nextel Communication has identified five phases to assist it and the
Company in defining the status of their progress toward Year 2000 issue
compliance. The five phases are (i) awareness -- locating, listing and
prioritizing specific Information Technology ("IT") that is potentially subject
to Year 2000 issues; (ii) assessment -- determining the level of risk of Year
2000 issues that exist on the Company's systems through inquiry, research and
testing; (iii) renovation -- determining and resolving Year 2000 issues 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-IT and IT systems, including those of material third parties; and (v)
implementation -- installing and integrating the application of Year 2000 issue
compliant resolutions by replacement, upgrade or repair of non-IT and IT
systems, including those of material third parties.
As of September 30, 1998, the Company was for the most part in the
assessment phase with respect to its non-IT devices and/or systems containing
embedded circuitry and in various phases ranging from awareness through
implementation for its IT systems and issues relating to third parties with
which the Company maintains a material relationship.
Representatives of the Company participate as members, with respect to Year
2000 issues of the Operating Companies, on the Year 2000 issues committee
established by Nextel Communications. Nextel Communications's Year 2000
committee consists of employees across the functional and divisional departments
within Nextel Communications and its subsidiaries, including the Company, and
who are responsible for assisting in identification, assessment and remediation
of Year 2000 issues. In addition, the committee includes representatives from
certain of the material third parties identified above and outside consultants
Nextel Communications has retained to advise and support the committee in tasks
related to its and the
25
26
Company's Year 2000 issues. Members of the Year 2000 committee provide weekly
status reports regarding the progress of ongoing activities and performances
against plan by the relevant functions and divisions.
THE COSTS TO ADDRESS THE COMPANY'S YEAR 2000 ISSUES. Based on information
developed to date as a result of the Company's assessment efforts, the Company
believes that the costs of upgrading or replacing its systems and equipment or
modification of certain software applications will not have a material effect on
the Company's liquidity, financial condition or results of operation. To date,
the Company has not deferred any specific projects, goals or objectives relating
to its operations as a result of implementing the Company's Year 2000 issue
compliance efforts.
The analog SMR networks and related systems of the Operating Companies,
however, have not yet been thoroughly assessed for potential Year 2000 issues,
nor has the Company formulated any estimate of the types or magnitude of the
remediation measures that might be required with respect to such analog SMR
operations. Moreover, the historical business records of the Operating Companies
(and their predecessors in interest), in particular those relating to such
analog SMR operations and related network infrastructure and subscriber
equipment and systems, are not believed to be complete, and it also may be
difficult or impossible to verify their accuracy, with respect to periods prior
to their acquisition by the Company. Accordingly, the measures that might be
required to assess potential Year 2000 issues affecting the analog SMR
businesses conducted by the Operating Companies (such as actual visits to
antenna sites to physically inventory and inspect individual items of
transmission and reception equipment) and to effect any required remediation of
Year 2000 issues discovered may make it uneconomic for the Company to pursue
such activities. The Company may instead elect alternative courses of action,
such as (i) terminating the provision of analog SMR services in certain market
areas, (ii) addressing and resolving particular Year 2000 issues affecting the
provision of analog SMR service subsequent to their identification, or (iii)
limiting or curtailing analog SMR services to the extent required to accommodate
unresolved Year 2000 issues. These "legacy system" matters relate exclusively to
operations other than the Company's ESMR network operations, all of which have
been launched within the past several years and, therefore, do not present
comparable problems associated with any incompleteness or inaccuracy of
historical records and information compiled or maintained by prior owners. Given
the steadily decreasing importance of the Operating Companies' analog SMR
businesses to the Company's overall operations, the Company does not believe
that the effect of any Year 2000 issues on the Operating Companies' analog SMR
businesses would be likely to result in a material adverse effect on the
Company's liquidity, financial condition or results of operations.
THE RISKS OF THE COMPANY'S YEAR 2000 ISSUES. Subject to the foregoing, the
Company does not anticipate delays and postponements in finalizing and
implementing Year 2000 issue 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 the
uncertainty of its Year 2000 issues. Moreover, any failure by Nextel
Communications or by third parties that have a material relationship with the
Company to achieve full compliance with their respective Year 2000 issues may be
a potential risk if such failure adversely impacts the ability of such 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 Year 2000 compliant, the
Company is seeking to obtain assurances from such third parties that their
systems are or will be Year 2000 issues compliant no later than the end of the
third quarter of 1999. If these third parties fail to address Year 2000 issues
appropriately, 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
report and bill subscribers accurately for phone usage. Other risks associated
with the failure of the Company or material third parties to develop and deploy
Year 2000 issues solutions in a timely and successful manner 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) commencing commercial service in new markets, expanding service in existing
markets or introducing new services in existing markets; (d) pursuing additional
business opportunities.
The Company cannot independently assess the impact of Year 2000 risks,
issues and compliance activities and programs involving operators of public
switched telecommunications networks ("PSTNs") or
26
27
other service providers (such as electric utilities). The Company, therefore,
must rely on the respective PSTN's and utility providers' estimates of its own
Year 2000 issues and the status of such PSTN's related compliance activities and
programs in the Company's own Year 2000 issue assessment process. The Company
has considered that certain of its customers, suppliers and operations located
in foreign countries may not be at the same advanced level of awareness or
assessment of the Year 2000 issues as their U.S. counterparts, consequently
resulting in delays and lag in remediation efforts. Because the Operating
Companies' systems will be interconnected with PSTNs in their respective
countries 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 will have an impact on the Company's network. Moreover, to the extent
that such PSTNs or other service providers fail to address their respective Year
2000 issues in a timely manner, any resulting disruption in the Company's
service could have a materially adverse effect on the Company's operations.
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 Nextel Communications or all third party
vendors of critical products and services. As a result, the Company has not
fully assessed its exposure from potential Year 2000 issues noncompliance. The
Company has not yet determined whether it will require, and thus has not
developed Year 2000 issues 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, because contingency plans may also be provided by
third parties, resulting from any anticipated failure on their part to be Year
2000 issues 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.
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" 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 differ materially from the Company's actual
future experience involving any one or more of such matters and subject areas.
The Company has attempted to identify, in context, certain of the factors that
it currently believes may cause actual future experience and results to differ
from the Company's current expectations regarding the relevant matter or subject
area. The operations and results of the Company's business also may be subject
to the effect of other risks and uncertainties in addition to the relevant
qualifying factors identified in the 1997 Form 10-K, Part I, Item 1,
"Business -- Risk Factors," including, but not limited to, general economic
conditions in Latin America and Asia as a result of the recent Asian economic
crisis and in the market segments that the Company is targeting for SMR and ESMR
commercial services, the substantive terms of or associated with any
international financial aid package that may be made available to any country in
which the Operating Companies operate (including Brazil), future legislation or
regulation by governmental entities in the markets in which the Operating
Companies conduct their business, the availability of adequate quantities of
system infrastructure and subscriber equipment and components to meet the
Company's service deployment and marketing plans and customer demand, the
volatility and uncertain availability of equity and debt financing in domestic
and international capital markets and the Company's access to sufficient debt
and equity financing to meet the Company's operating and financial needs, the
successful deployment and performance of the iDEN technology, the ability to
achieve market penetration and average subscriber revenue levels sufficient to
provide financial viability to the Company's wireless communications business,
the Company's ability to accomplish required scale-up of its billing, customer
care and similar administrative support timely and successfully to keep pace
with anticipated customer growth and increased system usage, the quality and
price of similar or comparable wireless communications services offered or to be
offered by the Company's competitors in each market, including providers of
cellular and personal communications services, other wireless communications
services or telecommunications generally and other risks and uncertainties
described from time to time in the Company's reports filed with the Securities
and Exchange Commission (the "Commission").
27
28
PART II
ITEM 1. LEGAL PROCEEDINGS.
On October 30, 1998, pursuant to the dispute resolution provisions of the
Philippines Partner Agreements, the Company commenced arbitration proceedings in
Hong Kong against Jetcom, Inc. ("Jetcom") and Foodcamp Industries and Marketing,
Inc. ("Foodcamp"), two of the local shareholders of Nextel Philippines, in which
the Company asserts that such shareholders have failed to perform their
respective obligations under the Philippines Partner Agreements. The Company
served Jetcom with a Notice of Demand for Arbitration and is currently in the
process of serving Foodcamp with a notice. The Company seeks equitable and legal
relief, including, but not limited to, compensatory damages and injunctive
relief.
Pursuant to the Nextel Philippines' application for an extension of its
provisional authority to operate its wireless communications network using its
licensed frequencies in the Philippines ("PA"), the National Telecommunications
Commission of the Philippines Department of Transportation and Communications
(the "NTC") issued on March 18, 1998 an order extending the Nextel Philippines'
PA an additional year to January 20, 1999 (the "Extension Order"). The language
of the Extension Order contained a reference to Nextel Philippines' "Integrated
Dispatch Enhanced Network (IDEN) [sic]. . . . which can function as a trunk
radio system and can work also as a cellular system (full-duplex transmission)"
(emphasis added). In June and July of 1998, a number of the Philippine cellular
mobile telephone companies filed proceedings (which have since been consolidated
into one proceeding) with the NTC asserting that (a) the Extension Order
improperly expanded Nextel Philippines' authority to provide cellular mobile
telephone services ("CMTS") and (b) if Nextel Philippines was indeed authorized
to operate CMTS, then Nextel Philippines should be required to meet the other
obligations applicable to CMTS operators, including certain obligations to build
out local exchange lines. Nextel Philippines has responded by asserting that (a)
its PA does not authorize Nextel Philippines to provide CMTS services, (b) by
operating trunk radio services using the iDEN technology it is not providing
CMTS services and (c) the Extension Order does not expand its PA by authorizing
it to provide CMTS services. Although the Company cannot predict the outcome of
this proceeding, the Company believes that the claims against Nextel Philippines
are without merit and Nextel Philippines intends to vigorously defend against
them.
The Company is also involved in certain legal proceedings, as described in
the Company's Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1998. During the three months ended September 30, 1998, there were no
material changes in the status or developments regarding such legal proceedings.
Other than the proceedings described above, neither the Company nor the
Company's subsidiaries are party to any material litigation.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The following matters were submitted to a vote and approved by the
Company's then-sole shareholder during the quarter ended September 30, 1998:
(a) On July 10, 1998, by written consent in lieu of a special meeting
of shareholders, the Company's then-sole shareholder approved (i) the
amendment of the Company's 1997 Stock Option Plan to (A) change the name of
the plan to "Nextel International, Inc. 1997 Stock Option Plan," (B)
increase the number of shares of common stock authorized for issuance under
the plan from 1,825,000 to 1,975,000, and (C) add provisions relating to
stock option grants to residents of California; and (ii) the amendment of
the Company's articles of incorporation to (A) amend certain terms of the
Company's Series A Redeemable Exchangeable Preferred Stock and the
Company's Series B Redeemable Preferred Stock and (B) provide that as long
as the Company is not a public company, any action required or permitted to
be taken at a shareholders meeting may be taken by a written consent of the
shareholders of the Company holding in the aggregate the minimum number of
shares required to take such action at a meeting in which all shares
entitled to vote on the action were present and voted, each such amendment
to the Company's articles of incorporation as previously disclosed and
described in the Company's
28
29
Registration Statement of Form S-4 (No. 333-55877), as amended, originally
filed with the Commission on June 3, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits.
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
10.1 Amendment No. 2, dated September 30, 1998, among Nextel
Argentina S.R.L., the Lenders named therein and the Chase
Manhattan Bank as Administrative Agent.
10.2 Agreement, dated as of August 21, 1998, by and between ACCRA
Investments Corporation and Top Mega Enterprises, Ltd.
10.3 Master Equipment Financing Commitment Letter and Term Sheet
dated November 11, 1998 between Motorola Credit Corporation
and Nextel International, Inc.
*27 Financial Data Schedule.
- ---------------
* 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.
None
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 INTERNATIONAL, INC.
BY: /s/ BYRON R. SILIEZAR
------------------------------------
Byron R. Siliezar
Vice President and Controller
(Principal Accounting Officer)
November 16, 1998
30
31
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT DESCRIPTION
- ----------- -------------------
10.1 Amendment No. 2, dated September 30, 1998, among Nextel
Argentina S.R.L., the Lenders named therein and the Chase
Manhattan Bank as Administrative Agent.
10.2 Agreement, dated as of August 21, 1998, by and between ACCRA
Investments Corporation and Top Mega Enterprises Ltd.
10.3 Master Equipment Financing Commitment Letter and Term Sheet
dated November 11, 1998 between Motorola Credit Corporation
and Nextel International, Inc.
*27 Financial Data Schedule.
- ---------------
* Submitted only with the electronic filing of this document with the Commission
pursuant to Regulation S-T under the Securities Act of 1933, as amended.
31