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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 March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0-19656
NEXTEL COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3939651
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2001 EDMUND HALLEY DRIVE, RESTON, VIRGINIA 20191
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 433-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No
--- ---
Indicate the number of shares outstanding of each of issuer's classes of
common stock as of the latest practicable date:
Number of Shares Outstanding
Title of Class on April 30, 1999
-------------- -----------------
Class A Common Stock, $0.001 par value 278,126,194
Class B Non-Voting Common Stock, 17,830,000
$0.001 par value
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NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
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PART I FINANCIAL INFORMATION.
Item 1. Financial Statements - Unaudited.
Condensed Consolidated Balance Sheets -
As of March 31, 1999 and December 31, 1998. 3
Condensed Consolidated Statements of Operations and Comprehensive
Loss - For the Three Months Ended March 31, 1999 and 1998. 4
Condensed Consolidated Statement of Changes in Stockholders' (Deficit)
Equity - For the Three Months Ended March 31, 1999. 5
Condensed Consolidated Statements of Cash Flows -
For the Three Months Ended March 31, 1999 and 1998. 6
Notes to Condensed Consolidated Financial Statements. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 26
PART II OTHER INFORMATION.
Item 1. Legal Proceedings. 29
Item 2. Changes in Securities. 29
Item 6. Exhibits and Reports on Form 8-K. 29
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PART I
ITEM 1. FINANCIAL STATEMENTS - UNAUDITED.
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 AND DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
UNAUDITED
1999 1998
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents (of which $109,029 and $121,116
is restricted) $ 245,758 $ 321,379
Accounts and notes receivable, less allowance for doubtful
accounts of $68,115 and $62,547 439,256 443,447
Subscriber unit and accessory inventory 77,505 62,639
Assets held for sale 67,354 132,370
Other 58,703 92,877
------------ ------------
Total current assets 888,576 1,052,712
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation
of $1,374,113 and $1,202,066 5,085,416 4,915,025
INTANGIBLE ASSETS, net of accumulated amortization
of $941,488 and $917,311 4,671,545 4,937,124
OTHER ASSETS 776,049 668,500
------------ ------------
$ 11,421,586 $ 11,573,361
============ ============
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES
Accounts payable, accrued expenses and other $ 1,267,580 $ 1,172,351
Current portion of long-term debt 6,679 9,875
------------ ------------
Total current liabilities 1,274,259 1,182,226
LONG-TERM DEBT (NOTE 3) 8,005,738 7,710,373
DEFERRED INCOME TAXES 762,021 771,326
OTHER 77,772 73,005
------------ ------------
Total liabilities 10,119,790 9,736,930
------------ ------------
CONTINGENCIES (NOTE 4)
MINORITY INTEREST 21,083 28,677
MANDATORILY REDEEMABLE PREFERRED STOCK (NOTE 5) 1,624,287 1,578,252
STOCKHOLDERS' (DEFICIT) EQUITY
Preferred stock, Class A convertible redeemable,
7,905,981 shares issued and outstanding 290,545 290,545
Preferred stock, Class B convertible, 82 shares issued and outstanding -- --
Common stock, Class A, 275,176,323 and 272,087,322 shares issued,
274,573,481 and 271,386,227 shares outstanding 275 272
Common stock, Class B, non-voting convertible, 17,830,000 shares
issued and outstanding 18 18
Paid-in capital 4,358,510 4,379,724
Accumulated deficit (4,840,633) (4,401,193)
Treasury stock, at cost, 602,842 and 701,095 shares (12,013) (13,398)
Deferred compensation, net (4,343) (1,989)
Accumulated other comprehensive loss (135,933) (24,477)
------------ ------------
Total stockholders' (deficit) equity (343,574) 229,502
------------ ------------
$ 11,421,586 $ 11,573,361
============ ============
The accompanying notes are an integral part
of these condensed consolidated financial statements.
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NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
UNAUDITED
1999 1998
----------- -----------
OPERATING REVENUES $ 663,805 $ 327,134
----------- -----------
OPERATING EXPENSES
Cost of revenues 162,320 102,428
Selling, general and administrative 465,665 329,739
Depreciation and amortization 228,440 184,495
----------- -----------
856,425 616,662
----------- -----------
OPERATING LOSS (192,620) (289,528)
----------- -----------
OTHER INCOME (EXPENSE)
Interest expense (198,059) (145,380)
Interest income 3,427 14,353
Other, net (62,027) 53
----------- -----------
(256,659) (130,974)
----------- -----------
LOSS BEFORE INCOME TAX BENEFIT (449,279) (420,502)
INCOME TAX BENEFIT 9,839 33,640
----------- -----------
NET LOSS (439,440) (386,862)
MANDATORILY REDEEMABLE PREFERRED STOCK DIVIDENDS (46,034) (28,088)
----------- -----------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (485,474) $ (414,950)
=========== ===========
LOSS PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS, BASIC AND DILUTED $ (1.66) $ (1.53)
=========== ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 291,625,000 270,385,000
=========== ===========
COMPREHENSIVE LOSS, NET OF INCOME TAX
Net loss $ (439,440) $ (386,862)
Unrealized gain on available-for-sale securities 27,641 9,774
Foreign currency translation adjustment (139,097) (3,470)
----------- -----------
COMPREHENSIVE LOSS $ (550,896) $ (380,558)
=========== ===========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
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s
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(DOLLARS IN THOUSANDS)
UNAUDITED
Class A Class B Class A Class B
Preferred Stock Preferred Stock Common Stock Common Stock
--------------------- ------------------ -------------------- -------------------
Shares Amount Shares Amount Shares Amount Shares Amount
---------- -------- ------ ------ ----------- ------ ---------- ------
BALANCE, JANUARY 1, 1999 7,905,981 $290,545 82 $ -- 272,087,322 $ 272 17,830,000 $ 18
Issuance of common stock:
Exercise of options and warrants 3,089,001 3
Employee stock purchase plan
Deferred compensation, net
Unrealized gain on available-for-sale
securities, net of income tax
Foreign currency translation adjustment
Mandatorily redeemable preferred
stock dividends
Other
Net loss
---------- -------- ------ ------ ----------- ------ ---------- ------
BALANCE, MARCH 31, 1999 7,905,981 $290,545 82 $ -- 275,176,323 $ 275 17,830,000 $ 18
========== ======== ====== ====== =========== ====== ========== ======
Paid-in Accumulated Treasury Stock Deferred
-----------------------
Capital Deficit Shares Amount Compensation
----------- ------------ ----------- --------- ------------
BALANCE, JANUARY 1, 1999 $ 4,379,724 $(4,401,193) 701,095 $ (13,398) $ (1,989)
Issuance of common stock:
Exercise of options and warrants 19,150
Employee stock purchase plan (320) (141,072) 2,741
Deferred compensation, net 5,990 (2,354)
Unrealized gain on available-for-sale
securities, net of income tax
Foreign currency translation adjustment
Mandatorily redeemable preferred
stock dividends (46,034)
Other 42,819 (1,356)
Net loss (439,440)
----------- ----------- --------- --------- --------
BALANCE, MARCH 31, 1999 $ 4,358,510 $(4,840,633) 602,842 $ (12,013) $ (4,343)
=========== =========== ========= ========= ========
Accumulated Other
Comprehensive (Loss) Income
---------------------------
Unrealized
Gain Cumulative
(Loss) on Translation
Investments Adjustment Total
----------- ---------- -----------
BALANCE, JANUARY 1, 1999 (427) $ (24,050) $ 229,502
Issuance of common stock:
Exercise of options and warrants 19,153
Employee stock purchase plan 2,421
Deferred compensation, net 3,636
Unrealized gain on available-for-sale
securities, net of income tax 27,641 27,641
Foreign currency translation adjustment (139,097) (139,097)
Mandatorily redeemable preferred
stock dividends (46,034)
Other (1,356)
Net loss (439,440)
------- ---------- ----------
BALANCE, MARCH 31, 1999 $27,214 $ (163,147) $ (343,574)
======= ========== ==========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
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NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
UNAUDITED
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (439,440) $ (386,862)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Amortization of deferred financing costs and accretion of senior
redeemable notes, net of capitalized accreted interest
of $3,866 and $8,845 115,103 122,081
Depreciation and amortization 228,440 184,495
Provision for losses on accounts receivable 34,792 22,163
Deferred income tax benefit (9,839) (33,640)
Foreign currency transaction loss, net 63,615 849
Other, net 4,514 4,568
Change in current assets and liabilities, net of effects from
acquisitions:
Accounts and notes receivable (30,601) (49,162)
Subscriber unit and accessory inventory (18,582) (8,945)
Other assets 22,477 (17,981)
Accounts payable, accrued expenses and other 118,796 52,573
----------- -----------
Net cash provided by (used in) operating activities 89,275 (109,861)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (Note 1) (477,838) (602,114)
Proceeds from sale of assets to affiliate (Note 2) 132,370 --
Payments for acquisitions and purchase of licenses, net of cash acquired (14,401) (86,230)
Purchases of marketable securities -- (4,917)
Proceeds from maturities and sales of marketable securities -- 128,198
Other investments in and advances to affiliates (5,496) (37,774)
----------- -----------
Net cash used in investing activities (365,365) (602,837)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt securities -- 1,401,013
Issuance of mandatorily redeemable preferred stock -- 750,000
Borrowings under long-term credit facilities 207,830 1,000,000
Repayments under long-term credit facilities -- (972,021)
Revolving line of credit repayments, net (24,000) (192,676)
Other long-term repayments, net (9,031) (1,993)
Deferred financing costs (351) (86,578)
Exercise of stock options, warrants and other 21,574 14,564
Capital contributions from minority stockholders 4,447 4,077
----------- -----------
Net cash provided by financing activities 200,469 1,916,386
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (75,621) 1,203,688
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 321,379 301,601
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 245,758 $ 1,505,289
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized of $5,303 and $3,543 $ 40,883 $ 26,409
=========== ===========
The accompanying notes are an integral part
of these condensed consolidated financial statements.
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NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED
NOTE 1 -- BASIS OF PRESENTATION.
The condensed consolidated financial statements of Nextel Communications,
Inc. and subsidiaries ("Nextel") included herein have been prepared by Nextel
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 condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
contained in Nextel's Annual Report on Form 10-K for the year ended December 31,
1998 (the "1998 Form 10-K"), and Nextel International, Inc.'s Annual Report on
Form 10-K for the year ended December 31, 1998 (the "Nextel International 1998
Form 10-K"), for matters related to operations of Nextel International, Inc., an
indirect, substantially wholly-owned subsidiary of Nextel, and its subsidiaries
("Nextel International"). Operating results for the interim periods are not
necessarily indicative of results for an entire year.
RECLASSIFICATIONS -- Certain prior period amounts have been reclassified
to conform to the current year presentation.
SUPPLEMENTAL CASH FLOW INFORMATION -- Total recorded capital expenditures
were $432.7 million and $591.1 million for the three months ended March 31, 1999
and 1998, respectively, reflecting decreases in amounts accrued and unpaid or
financed of $49.0 million and $19.8 million at March 31, 1999 and 1998,
respectively, compared to December 31, 1998 and 1997, respectively. Total
recorded capital expenditures include interest capitalized in connection with
the construction and development of Nextel's digital network ("Digital Mobile
Network") of approximately $9.2 million and $12.4 million during the three
months ended March 31, 1999 and 1998, respectively.
RESTRICTED CASH AND CASH EQUIVALENTS -- At March 31, 1999 and December
31, 1998, approximately $109.0 million and $121.1 million, respectively, in cash
and cash equivalents held by Nextel International were not available to fund any
of the cash needs of Nextel's domestic business due to restrictions contained in
the indentures related to the senior redeemable discount notes issued by Nextel
International in March 1998 and March 1997.
DIGITAL SUBSCRIBER UNIT AND ACCESSORY SALES AND RELATED COSTS -- The loss
generated from the sale of subscriber units used in Nextel's Digital Mobile
Network primarily results from Nextel's subsidy of digital subscriber units and
accessories and represents marketing costs. Consolidated digital subscriber unit
and accessory sales revenue and the related cost of sales, including current
period order fulfillment and installation related expenses and write downs of
digital subscriber unit inventory and related accessories for shrinkage and
obsolescence, are classified within selling, general and administrative expenses
as follows (dollars in thousands):
THREE MONTHS ENDED
MARCH 31
--------------------------------
1999 1998
-------------- ------------
Subscriber unit and accessory sales $ 110,506 $ 83,995
Cost of subscriber unit and accessory sales 197,643 143,075
------- -------
$ (87,137) $ (59,080)
======= =======
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NEW ACCOUNTING PRONOUNCEMENTS -- In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"),
which establishes accounting and reporting standards for derivative instruments
(including certain derivatives embedded in other contracts) and for hedging
activities by requiring that all derivatives be recognized in the balance sheet
and measured at fair value. SFAS 133 is effective for all quarters of fiscal
years beginning after June 15, 1999. The Company is in the process of evaluating
the potential impact of this standard on its financial position and results of
operations.
NOTE 2 -- SIGNIFICANT TRANSACTIONS AND DEVELOPMENTS.
DOMESTIC -- ASSETS HELD FOR SALE.
NEXTEL PARTNERS -- On January 29, 1999, Nextel, Nextel Partners, Inc.
("Nextel Partners") and certain other parties, including Motorola, Inc.
("Motorola") and Eagle River Investments, L.L.C. ("Eagle River"), an affiliate
of Mr. Craig O. McCaw ("Mr. McCaw"), entered into definitive agreements relating
to the capitalization, governance, financing and operation of Nextel Partners.
Nextel Partners plans to construct and operate a digital wireless system
utilizing digital transmission technology developed by Motorola (such technology
is referred to as the "integrated Digital Enhanced Network" or "iDEN") employed
in Nextel's national network in thirty-nine mid-size and smaller markets in the
United States. In connection with this transaction, Nextel sold assets, and is
in the process of transferring certain Federal Communications Commission ("FCC")
licenses, to Nextel Partners. In exchange, Nextel Partners issued to Nextel
equity representing about a 29% voting interest in Nextel Partners and having an
agreed value of $131.1 million and paid Nextel about $132.4 million in cash
(which remains subject to post-closing adjustments) related to the assets sold
and the reimbursement of costs and net operating expenses. The definitive
agreements also establish certain circumstances in which Nextel will have the
right or the obligation to purchase the remaining equity interests in Nextel
Partners at specified prices. The net book value of the assets sold is
classified as assets held for sale as of December 31, 1998.
SALE OF NEXTBAND INTEREST -- On March 31, 1999, Nextel entered into
definitive agreements with NEXTLINK Communications, Inc. ("NEXTLINK") providing
for the sale of Nextel's interest in NEXTBAND Communications, L.L.C.
("NEXTBAND") to NEXTLINK. Nextel and NEXTLINK formed NEXTBAND to bid in an
auction of Local Multipoint Distribution System ("LMDS") spectrum licenses by
the FCC. In the auction, NEXTBAND was awarded LMDS licenses in 42 markets for a
bid price of about $134 million. Nextel paid its full one-half share of this
bid price in 1998, which is classified as assets held for sale as of March 31,
1999. The purchase price for Nextel's interest in NEXTBAND will be $137.7
million, of which a minimum of $68.85 million will be paid in cash. NEXTLINK
may elect to pay the balance of the purchase price in either shares of NEXTLINK
common stock or in cash. The transaction is subject to receipt of necessary
regulatory approvals and to customary closing conditions. Nextel expects that
the transaction will be completed during the second quarter of 1999.
INTERNATIONAL
BRAZIL CURRENCY DEVALUATION -- During the quarter ending March 31, 1999,
there was a significant fluctuation in the value of the Brazilian real relative
to the U.S. dollar due to the real's recent devaluation. As a result of the
devaluation in the Brazilian real, Nextel International recorded a pre-tax
charge, net of minority interests, of about $45.1 million for foreign currency
transaction losses for the quarter ended March 31, 1999. This amount is based on
the outstanding amount of U.S. dollar-denominated debt of Nextel International's
Brazilian subsidiaries, the average exchange rate of the Brazilian real for the
quarter ended February 28, 1999 (in accordance with Nextel's consolidation
policy of utilizing accounts as of a date one month earlier than the date of the
relevant financial statements) and Nextel International's percentage ownership
interest in its Brazilian subsidiaries at the end of such period. Additionally,
Nextel International recorded a negative cumulative translation adjustment on
its balance sheet dated March 31, 1999 of approximately $136.1 million based on
the
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exchange rate of the Brazilian real as of the end of the first quarter, which is
reflected as an adjustment to the cumulative translation adjustment account
within stockholders' deficit.
NOTE 3 -- LONG-TERM DEBT.
MARCH 31, DECEMBER 31,
1999 1998
----------- ------------
(dollars in thousands)
11.5% SENIOR REDEEMABLE DISCOUNT NOTES DUE 2003,
net of unamortized discount of $0 $ 35,811 $ 35,811
9.75% SENIOR REDEEMABLE DISCOUNT NOTES DUE 2004,
net of unamortized discount of $0 and $12,800 1,126,435 1,113,635
10.125% SENIOR REDEEMABLE DISCOUNT NOTES DUE 2004,
net of unamortized discount of $62,710 and $66,491 347,166 343,385
12.25% SENIOR REDEEMABLE DISCOUNT NOTES DUE 2004,
net of unamortized discount of $812 and $1,083 7,814 7,543
10.25% SENIOR REDEEMABLE DISCOUNT NOTES DUE 2005,
net of unamortized discount of $21,927 and $22,411 93,238 92,754
13.0% SENIOR REDEEMABLE DISCOUNT NOTES DUE 2007
(issued by Nextel International), net of unamortized
discount of $317,116 and $337,065 634,347 614,398
10.65% SENIOR REDEEMABLE DISCOUNT NOTES DUE 2007,
net of unamortized discount of $253,034 and $267,942 586,966 572,058
9.75% SENIOR SERIAL REDEEMABLE DISCOUNT NOTES DUE 2007,
net of unamortized discount of $326,042 and $344,849 803,058 784,251
9.95% SENIOR SERIAL REDEEMABLE DISCOUNT NOTES DUE 2008,
net of unamortized discount of $509,686 and $536,495 1,117,314 1,090,505
12.125% SENIOR REDEEMABLE DISCOUNT NOTES DUE 2008,
(issued by Nextel International), net of unamortized
discount of $276,321 and $289,349 453,679 440,651
12.0% SENIOR SERIAL REDEEMABLE NOTES DUE 2008,
net of unamortized discount of $4,171 and $4,228 295,829 295,772
BANK CREDIT FACILITY, interest payable quarterly at an
adjusted rate calculated either on the prime rate or
LIBOR (6.94% to 8.63% - 1999; 7.06% to 10.50% - 1998) 2,194,000 2,118,000
NEXTEL INTERNATIONAL VENDOR CREDIT FACILITIES, interest payable
semiannually at 2.50% over the prime rate (10.25% to
11.00% - 1999 and 1998) 208,576 110,771
NEXTEL ARGENTINA BANK CREDIT FACILITY, interest payable quarterly at
an adjusted rate calculated either on the prime rate or LIBOR
(8.75% to 9.50% - 1999 and 1998) 100,000 83,500
OTHER 8,184 17,214
---------- ----------
8,012,417 7,720,248
Less current portion (6,679) (9,875)
---------- ----------
$8,005,738 $7,710,373
========== ==========
INTERNATIONAL FINANCING -- In March 1999, Nextel Argentina S.R.L.
("Nextel Argentina") notified the administrative agent under the $100 million
credit facility (the "Argentina Credit Facility") of its anticipated
noncompliance with certain financial covenants under such facility applicable in
the first quarter of 1999. Nextel Argentina received a waiver from the lenders
under such facility with regard to such covenants for the first quarter of 1999.
On May 12, 1999, Nextel Argentina and the lenders under the Argentina Credit
Facility agreed
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to certain amendments to the Argentina Credit Facility modifying the covenants
in question for future quarters (the "Argentina Amendments"). The effectiveness
of the Argentina Amendments is subject to customary conditions, which are
expected to be satisfied prior to May 28, 1999. The lenders have extended their
waiver of Nextel Argentina's compliance with such covenants until the earlier of
May 28, 1999 or the date the Argentina Amendments become effective.
As a result of the Argentina Amendments, Nextel International has entered
into a new capital subscription agreement that will require additional equity to
be contributed to Nextel Argentina. Concurrently with the execution of the
Argentina Amendments, MCC agreed to provide up to $50.0 million in loans to
Nextel Argentina as incremental loans under the Argentina Credit Facility for
purchases of qualifying iDEN equipment and related services (the "Argentina
Incremental Facility Loans").
MOTOROLA INTERNATIONAL FINANCING -- On February 4, 1999, Nextel
International and Motorola Credit Corporation ("MCC") entered into definitive
agreements providing for $225.0 million in secured financings. Additional
information concerning this and the related financing arrangements between
Nextel International and Motorola is included in the Nextel International 1998
Form 10-K and in Nextel International's Form 10-Q for the quarter ended March
31, 1999 (the "Nextel International Form 10-Q").
NOTE 4 -- CONTINGENCIES.
See Part II, Item 1. "Legal Proceedings" for a discussion of certain
lawsuits and other legal matters.
NOTE 5 -- MANDATORILY REDEEMABLE PREFERRED STOCK.
MARCH 31, DECEMBER 31,
1999 1998
---------- ----------
(dollars in thousands)
SERIES D EXCHANGEABLE PREFERRED STOCK MANDATORILY REDEEMABLE 2009, 13%
cumulative annual dividend; 604,501 and 585,473 shares issued; 604,488
and 585,460 shares outstanding, stated at liquidation value $ 620,860 601,317
SERIES E EXCHANGEABLE PREFERRED STOCK MANDATORILY REDEEMABLE 2010, 11.125%
cumulative annual dividend; 837,990 and 815,314 shares issued; 837,975
and 815,299 shares outstanding, stated at liquidation value 849,643 826,637
ZERO COUPON CONVERTIBLE PREFERRED STOCK MANDATORILY REDEEMABLE 2013, no
dividend; convertible into 5,761,764 shares of Class A Common Stock;
591,308 shares issued and outstanding; stated at fair value when issued
plus accretion of liquidation preference at 9.25% compounded quarterly 153,784 150,298
---------- ----------
$1,624,287 $1,578,252
========== ==========
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NOTE 6 -- SEGMENT REPORTING.
The Company operates in two business segments: domestic and
international. These reportable segments are strategic business units that are
in different phases of development and are managed and financed separately based
on the fundamental differences in their operations. Nextel evaluates performance
of these segments based on segment earnings (loss), which is calculated as
earnings (loss) before interest, taxes, depreciation and amortization and other
non-recurring charges.
DOMESTIC INTERNATIONAL CONSOLIDATED
-------- ------------- ------------
(dollars in thousands)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
- -----------------------------------------
Digital service revenues $ 624,625 $ 15,517 $ 640,142
Other revenues 19,319 4,344 23,663
----------- ----------- -----------
Total operating revenues 643,944 19,861 663,805
Segment earnings (loss) 81,810 (45,990) 35,820
Depreciation and amortization expenses 205,026 23,414 228,440
Interest expense (159,365) (38,694) (198,059)
Interest income 1,889 1,538 3,427
Other, net (3,584) (58,443) (62,027)
Loss before income tax benefit (284,276) (165,003) (449,279)
AS OF MARCH 31, 1999
- --------------------
Long-lived assets, net $ 8,849,666 $ 907,295 $ 9,756,961
Identifiable assets 9,978,459 1,443,127 11,421,586
Capital expenditures 382,042 50,702 432,744
FOR THE THREE MONTHS ENDED MARCH 31, 1998
- -----------------------------------------
Digital service revenues $ 287,593 $ -- $ 287,593
Other revenues 30,983 8,558 39,541
----------- ----------- -----------
Total operating revenues 318,576 8,558 327,134
Segment loss (94,843) (10,190) (105,033)
Depreciation and amortization expenses 175,303 9,192 184,495
Interest expense (125,912) (19,468) (145,380)
Interest income 10,029 4,324 14,353
Other, net (1,029) 1,082 53
Loss before income tax benefit (387,058) (33,444) (420,502)
AS OF MARCH 31, 1998
- --------------------
Long-lived assets, net $ 7,591,141 $ 859,151 $ 8,450,292
Identifiable assets 9,381,302 1,626,258 11,007,560
Capital expenditures 500,193 90,931 591,124
NOTE 7 -- SUBSEQUENT EVENTS.
TOWERS TRANSACTION -- On April 20, 1999, Nextel and some of its
subsidiaries and SpectraSite Holdings, Inc. ("SpectraSite") and some of its
subsidiaries consummated agreements pursuant to which Nextel transferred
specified telecommunications towers and related assets to SpectraSite, which
were then leased back to Nextel. Under the terms of the agreement, Nextel
received $560.0 million in cash and about an 18% ownership interest in
SpectraSite. In connection with the transaction, the parties entered into an
exclusive agreement for SpectraSite to construct additional towers in the United
States to support expansion of the digital networks of Nextel and Nextel
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Partners. Due to Nextel's continuing involvement related to the ownership
interest in SpectraSite, the sale-leaseback transaction will be accounted for by
the financing method.
MOTOROLA WARRANT EXERCISES -- On April 30, 1999, Motorola exercised
warrants to purchase 2,895,384 shares of Nextel Class A Common Stock ("Nextel
Common Stock"). Nextel received about $43.3 million in cash proceeds from
Motorola as a result of such warrant exercises.
MICROSOFT TRANSACTION -- On May 7, 1999, Nextel and Microsoft Corporation
("Microsoft") entered into an investment agreement in which Microsoft has
committed to purchase, and Nextel has committed to sell, about 16.7 million
shares of Nextel Common Stock for an aggregate cash investment of about $600
million, representing a per share price of $36.00. The investment agreement and
related agreements also establish certain transfer restrictions that apply to
the Nextel shares purchased by Microsoft, include an investor standstill
provision and provide certain registration rights relating to the Nextel shares.
The transactions contemplated by the investment agreement are subject to
customary closing conditions. In connection with this transaction, Nextel and
Microsoft also entered into agreements under which Microsoft is to provide
certain portal services and related assistance in connection with Nextel's
previously announced Nextel Online(SM) service offering.
Nextel plans to use the proceeds from this investment to advance the
deployment of its wireless Internet services, to expand its domestic and
international digital mobile network service offerings and for other corporate
purposes.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
A. OVERVIEW.
The following discussion of the condensed consolidated financial
condition and results of operations of Nextel for the three months ended March
31, 1999 and 1998, and significant factors that could affect Nextel's
prospective financial condition, should be read in conjunction with the 1998
Form 10-K and the Nextel International 1998 Form 10-K.
Nextel provides a wide array of digital and analog wireless
communications services throughout the United States. Nextel offers a
differentiated, integrated package of digital wireless communications services
under the Nextel brand name, primarily to business users. Nextel's Digital
Mobile Network constitutes one of the largest integrated wireless communications
systems utilizing a single transmission technology in the United States. Nextel
and Nextel Partners have significant specialized mobile radio spectrum holdings
in and around every major business and population center in the country,
including all of the top 50 metropolitan statistical areas in the United States.
As of March 31, 1999:
- - Nextel provided service to about 3,152,900 digital subscriber units in
the United States, adding about 415,000 net subscriber units during the
quarter; and
- - Nextel and Nextel Partners digital networks were operational in areas in
and around 92 of the top 100 metropolitan statistical areas in the United
States.
B. FIRST QUARTER TRANSACTIONS AND DEVELOPMENTS
1. NEXTEL PARTNERS TRANSACTION. On January 29, 1999, Nextel, Nextel
Partners and certain other parties, including Motorola and Eagle River, an
affiliate of Mr. McCaw, entered into definitive agreements relating to the
capitalization, governance, financing and operation of Nextel Partners. Nextel
Partners plans to construct and operate a digital wireless system utilizing iDEN
technology in thirty-nine mid-size and smaller markets in the United States,
with a combined population of about 33 million people. Under these agreements,
Nextel Partners will offer its customers the same basic package of digital
wireless communications services as Nextel, under the Nextel brand name, and
customers of Nextel and Nextel Partners will be allowed to roam between the
Nextel and Nextel Partners systems without incurring any roaming charges. In
connection with this transaction, Nextel sold assets and is in the process of
transferring certain FCC licenses to Nextel Partners. In exchange, Nextel
Partners issued to Nextel equity representing about a 29% voting interest in
Nextel Partners and having an agreed value of $131.1 million and paid Nextel
about $132.4 million in cash (which remains subject to post-closing adjustments)
related to the assets sold and the reimbursement of costs and net operating
expenses. The definitive agreements also establish certain circumstances in
which Nextel will have the right or the obligation to purchase the remaining
equity interests in Nextel Partners at specified prices.
2. MOTOROLA INTERNATIONAL FINANCING. On February 4, 1999, Nextel
International and MCC entered into definitive agreements providing for $225.0
million in secured financing. Additional information concerning this and the
related financing arrangements between Nextel International and Motorola is
included in the Nextel International 1998 Form 10-K.
3. BRAZIL CURRENCY DEVALUATION. During the first quarter of 1999, there
was significant fluctuation in the value of the Brazilian real relative to the
United States dollar due to the Brazilian real's recent devaluation. As a result
of such devaluation, Nextel International recorded a pre-tax charge (net of
minority interests) of about $45.1
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million related to foreign currency transaction losses. This amount has been
calculated based on the outstanding amount of United States dollar-denominated
debt of Nextel International's Brazilian subsidiaries, the average exchange rate
of the Brazilian real during the first quarter and Nextel International's
percentage ownership interest in its Brazilian subsidiaries at the end of the
first quarter. Additionally, Nextel recorded a negative cumulative translation
adjustment on its balance sheet of approximately $136.1 million based on the
exchange rate as of February 28, 1999 which is reflected as an adjustment to the
cumulative translation adjustment account within stockholder's deficit.
4. SALE OF NEXTBAND INTEREST. On March 31, 1999, Nextel entered into
definitive agreements with NEXTLINK providing for the sale of Nextel's interest
in NEXTBAND to NEXTLINK. Nextel and NEXTLINK formed NEXTBAND to bid in an
auction of LMDS spectrum licenses by the FCC. In the auction, NEXTBAND was
awarded LMDS licenses in 42 markets for a bid price of about $134 million.
Nextel paid its full one-half share of this bid price in 1998. The purchase
price for Nextel's interest in NEXTBAND will be $137.7 million, of which a
minimum of $68.85 million will be paid in cash. NEXTLINK may elect to pay the
balance of the purchase price in either shares of NEXTLINK common stock or in
cash. The transaction is subject to receipt of necessary regulatory approvals
and to customary closing conditions. Nextel expects that the transaction will be
completed during the second quarter of 1999.
C. POST FIRST QUARTER TRANSACTIONS AND DEVELOPMENTS
1. TOWERS TRANSACTION. On April 20, 1999, Nextel and some of its
subsidiaries and SpectraSite and some of its subsidiaries consummated agreements
pursuant to which Nextel transferred specified telecommunications towers and
related assets to SpectraSite which were then leased back to Nextel. Under the
terms of the agreement, Nextel received $560.0 million in cash and about an 18%
ownership interest in SpectraSite. In connection with the transaction, the
parties entered into an exclusive agreement for SpectraSite to construct
additional towers in the United States to support expansion of the digital
networks of Nextel and Nextel Partners. Due to Nextel's continuing involvement
related to the ownership interest in SpectraSite, the sale-leaseback transaction
will be accounted for by the financing method.
2. MOTOROLA WARRANT EXERCISES. On April 30, 1999, Motorola exercised
warrants to purchase 2,895,384 shares of Nextel Common Stock. Nextel received
about $43.3 million in cash proceeds from Motorola as a result of such warrant
exercises.
3. MICROSOFT TRANSACTION. On May 7, 1999, Nextel and Microsoft entered
into an investment agreement in which Microsoft has committed to purchase, and
Nextel has committed to sell, about 16.7 million shares of Nextel Common Stock
for an aggregate cash investment of about $600 million, representing a per share
price of $36.00. The investment agreement and related agreements also establish
certain transfer restrictions that apply to the Nextel shares purchased by
Microsoft, include an investor standstill provision and provide certain
registration rights relating to the Nextel shares. The transactions contemplated
by the investment agreement are subject to customary closing conditions. In
connection with this transaction, Nextel and Microsoft also entered into
agreements under which Microsoft is to provide certain portal services and
related assistance in connection with Nextel's previously announced Nextel
Online(SM) service offering.
4. INTERNATIONAL FINANCING -- In March 1999 Nextel Argentina notified the
administrative agent under the Argentina Credit Facility of its anticipated
noncompliance with certain financial covenants under such facility applicable in
the first quarter of 1999. Nextel Argentina received a waiver from the lenders
under such facility with regard to such covenants for the first quarter of 1999.
On May 12, 1999, Nextel Argentina and the lenders under the Argentina Credit
Facility agreed to the Argentina Amendments which modify the covenants in
question for future quarters. The effectiveness of the Argentina Amendments is
subject to customary conditions, which are expected to be satisfied prior to
May 28, 1999. The lenders have extended their waiver of Nextel Argentina's
compliance with such covenants until the earlier of May 28, 1999 or the date the
Argentina Amendments become effective. As a result of the Argentina Amendments,
Nextel International has entered into a new capital subscription agreement that
will require additional equity to be contributed to Nextel Argentina.
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Concurrently with the execution of the Argentina Amendments, MCC agreed to
provide the Argentina Incremental Facility Loans.
5. INVESTMENT IN NEXTEL INTERNATIONAL. On May 13, 1999, Nextel
International issued 1,000 shares of its Series A Preferred Stock to a wholly
owned subsidiary of Nextel. Nextel International received $100.0 million in
proceeds from the issuance of such shares of Series A Preferred Stock.
D. RESULTS OF OPERATIONS
The following discussion compares the consolidated financial condition
and results of operations for Nextel for the three months ended March 31, 1999
and 1998, and significant factors that could affect Nextel's prospective
financial condition and results of operations.
1. OPERATING REVENUES
CHANGE FROM
% OF % OF PREVIOUS YEAR
MARCH 31, OPERATING MARCH 31, OPERATING -----------------
1999 REVENUES 1998 REVENUES DOLLARS PERCENT
--------- -------- --------- -------- ------- -------
(dollars in millions)
Operating revenues $663.8 100.0% $327.1 100.0% $336.7 102.9%
Domestic 643.9 97.0% 318.6 97.4% 325.3 102.1%
International 19.9 3.0% 8.5 2.6% 11.4 134.1%
Operating revenues include service revenues, which consist primarily of
charges for airtime usage and monthly network access fees from providing mobile
wireless services. In 1999, domestic operating revenues increased principally as
a result of a 92.1% increase in end-of-period domestic digital subscriber units
in service from about 1,641,500 at March 31, 1998 to about 3,152,900 at March
31, 1999. The increase in operating revenues reflects the increased number of
subscriber units in service in both new and existing markets and an increase in
minutes of use, producing an increase in the average monthly revenue per digital
subscriber unit from about $66 during the first quarter of 1998 to about $71
during the first quarter of 1999. The growth in digital subscriber units in
service is the result of a number of factors, principally Nextel's increased
sales force and marketing staff, increased distribution channels, expanded
network capacity, increased consumer awareness and acceptance of wireless
communications and pricing plans targeted at particular market segments.
International operating revenues increased primarily as a result of increased
digital subscriber units in service in Brazil, Argentina and Mexico, due to the
launch of digital services in major markets in those countries subsequent to the
first quarter of 1998.
The average churn rate for the domestic Digital Mobile Network operations
has increased from about 1.7% per month during the first quarter of 1998 to
about 2.0% per month during the first quarter of 1999.
2. COST OF REVENUES
CHANGE FROM
% OF % OF PREVIOUS YEAR
MARCH 31, OPERATING MARCH 31, OPERATING -----------------
1999 REVENUES 1998 REVENUES DOLLARS PERCENT
--------- -------- --------- -------- ------- -------
(dollars in millions)
Cost of revenues $162.3 24.5% $102.4 31.3% $59.9 58.5%
Domestic 153.3 23.1% 98.8 30.2% 54.5 55.2%
International 9.0 1.4% 3.6 1.1% 5.4 150.0%
Cost of revenues consists primarily of network operating costs and
interconnection fees assessed by local exchange carriers. In the first quarter
of 1999, domestic cost of revenues increased from the first quarter of 1998
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primarily as a result of a 66.7% increase in the number of switches placed in
service and a 44.2% increase in cell sites and related equipment activated by
Nextel, as well as increases in airtime usage and digital subscriber units in
service. Additionally, the increase in cost of international revenues is
attributable primarily to the increase in cell site operations and maintenance
related expenses incurred due to the commercial launch of international digital
services subsequent to the first quarter of 1998. Cost of revenues as a
percentage of revenues decreased as a result of the economies of scale achieved
as a result of increases in system usage and digital subscriber units placed in
service during the first quarter of 1999 and the latter part of 1998.
3. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
CHANGE FROM
% OF % OF PREVIOUS YEAR
MARCH 31, OPERATING MARCH 31, OPERATING -----------------
1999 REVENUES 1998 REVENUES DOLLARS PERCENT
--------- -------- --------- -------- ------- -------
(dollars in millions)
Selling, general and
administrative expenses $465.6 70.1% $329.7 100.8% $135.9 41.2%
Selling and marketing 283.7 42.7% 203.4 62.2% 80.3 39.5%
General and administrative 181.9 27.4% 126.3 38.6% 55.6 44.0%
The increase in selling, general and administrative expenses for the
first quarter of 1999 from the comparable 1998 period consisted of an increase
in domestic expenses of $94.2 million and an increase in international expenses
of $41.7 million.
The increase in selling and marketing expenses in the first quarter of
1999 from the comparable 1998 period consists primarily of increased costs
incurred in connection with higher consolidated sales of digital subscriber
units including:
- - $28.0 million of increased losses generated from consolidated sales of
digital subscriber units and related accessories (including a loss of
$6.1 million relating to international digital subscriber unit sales);
- - $23.5 million of increased domestic dealer commissions and residuals
earned by indirect distributors as a result of increased unit sales
through, and increased reliance on, indirect distribution channels;
- - $18.0 million of increased advertising and marketing expenses from
international operations as a result of the launch of digital service in
Sao Paulo and Buenos Aires in the second quarter of 1998 and Rio de
Janeiro and Mexico City in the third quarter 1998; and
- - $10.8 million of increased advertising, telemarketing and other selling
and marketing expenses attributable to the expanded marketing campaigns
in effect during 1998 and the first quarter of 1999.
Nextel offers digital subscriber units and related accessories at
competitive prices, which are below cost as an incentive for new customers to
subscribe to its services and for certain existing customers to remain
subscribers. Nextel includes the loss generated from the sale of digital
subscriber units and related accessories in selling and marketing expenses, as
the loss primarily represents marketing costs. The loss on digital subscriber
unit and related accessory sales for the first quarter of 1999 increased 47.4%
to $87.1 million, compared to $59.1 million during the first quarter of 1998 and
decreased as a percentage of operating revenue to 13.1% for the first quarter of
1999 from 18.1% for the first quarter of 1998. The increase in the loss on
digital subscriber unit and related accessory sales compares favorably to the
92.1% increase in end-of-period domestic digital subscriber units in service due
to decreases in subsidies and discounts on a per unit basis offered to customers
purchasing digital subscriber units and related accessories. Competitive market
pressures are expected to result in a continued trend of negative gross margins
on digital subscriber unit and related accessory sales as Nextel anticipates
that it will
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continue to offer customers subsidies and/or discounts in connection with the
sale and installation of digital subscriber units and related accessories.
In the first quarter of 1999, the increase in general and administrative
expenses from the comparable 1998 period is primarily attributable to the
following:
- - $20.0 million of increased domestic expenses related to billing and
collection activities as a result of a larger customer base;
- - $18.0 million of increased domestic personnel, facilities and general
corporate expenses primarily reflecting increased staffing for
back-office activities; and
- - $17.6 million of increased international general and administrative
expenses, incurred to support the growth in its international markets,
and bad debt expenses.
During the first quarter of 1999, Nextel continued to maintain its comprehensive
and aggressive credit review and collection program with respect to its domestic
operations. As a result of these initiatives, consolidated bad debt expense as a
percentage of total revenues, including both operating revenues and digital
equipment revenues classified within selling and marketing expense, decreased
from 5.4% for the first quarter of 1998 to 4.5% for the first quarter of 1999.
Selling and general administrative expenses are expected to increase both
domestically and internationally as a result of a number of factors, including
but not limited to the items listed below, but are expected to decline as a
percentage of revenues as the revenue base increases.
- - continuing aggressive marketing campaigns;
- - increasing sales and marketing, customer care and back-office support
staffing; and
- - increasing subsidies associated with the sale of additional digital
subscriber units and related accessories.
4. DEPRECIATION AND AMORTIZATION
CHANGE FROM
% OF % OF PREVIOUS YEAR
MARCH 31, OPERATING MARCH 31, OPERATING -----------------
1999 REVENUES 1998 REVENUES DOLLARS PERCENT
--------- -------- --------- -------- ------- -------
(dollars in millions)
Depreciation and
amortization expense $228.4 34.4% $184.5 56.4% $43.9 23.8%
Depreciation 175.6 26.5% 134.4 41.1% 41.2 30.7%
Amortization 52.8 7.9% 50.1 15.3% 2.7 5.4%
In the first quarter of 1999, depreciation expense increased from the
comparable 1998 period primarily due to the effect of activating additional
operational cell sites and switches in new and existing domestic and
international markets launched subsequent to the first quarter of 1998,
partially offset by decreases associated with the sale of certain switch assets
and the Nextel Partners transaction. System assets relating to the development
and expansion of the Digital Mobile Networks both domestically and
internationally, represent the largest portion of capital expenditures during
the period. Depreciation of such assets begins upon commencement of commercial
service in the relevant markets.
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5. INTEREST EXPENSE, INTEREST INCOME AND OTHER
CHANGE FROM
% OF % OF PREVIOUS YEAR
MARCH 31, OPERATING MARCH 31, OPERATING -----------------
1999 REVENUES 1998 REVENUES DOLLARS PERCENT
--------- -------- --------- -------- ------- -------
(dollars in millions)
Interest expense $198.1 29.8% $145.4 44.5% $ 52.7 36.2%
Interest income 3.4 0.5% 14.4 4.4% (11.0) (76.4%)
Other (expense) income, net (62.0) (9.3%) 0.1 0.0% (62.1) NM
Income tax benefit 9.8 1.5% 33.6 10.3% (23.8) (70.8%)
Loss attributable to
common stockholders 485.5 73.1% 415.0 126.9% 70.5 17.0%
NM-Not Meaningful
The increase in interest expense for the first quarter of 1999 from the
comparable 1998 period resulted from Nextel's and Nextel International's
issuance of senior redeemable notes during 1998, as well as a higher average
level of borrowings under Nextel's bank credit agreement and Nextel
International's bank and vendor credit facilities. The increase was partially
offset by a decrease in the weighted average interest rate on the total
outstanding debt which was a result of the refinancing of the domestic vendor
credit facility during the first quarter of 1998 and the retirement of a portion
of a series of senior redeemable discount notes during the second quarter of
1998.
The decrease in interest income for 1999 from 1998 is primarily
attributable to income recognized in 1998 on the investment of the net proceeds
received from Nextel's sale of the Series E exchangeable preferred stock and the
issuance of the senior redeemable discount notes in the first quarter of 1998.
Nextel recorded an income tax benefit of $9.8 million (an effective tax
rate of 2.2%) in 1999, compared to $33.6 million (an effective tax rate of 8.0%)
in 1998. The change in effective tax rate primarily resulted from a change in
the tax law which extended the net operating loss carryforward period from 15 to
20 years for losses generated in or after 1998. In certain circumstances,
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," limits the recognition of income tax benefits for net operating losses
to the amount of deferred tax liabilities that are expected to reverse within
the statutory carryforward period. The financial statement limitation on the
recognition of income tax benefits for net operating losses will not have an
impact on Nextel's ability to utilize its net operating losses for income tax
purposes.
E. LIQUIDITY AND CAPITAL RESOURCES
Nextel had net losses attributable to common stockholders of $485.5
million and $415.0 million for the three months ended March 31, 1999 and 1998,
respectively. The operating expenses associated with developing, enhancing and
operating the Digital Mobile Network have more than offset operating revenues,
and operating expenses, debt service obligations and anticipated capital
expenditures are expected to continue to offset operating revenues for the next
several years. Nextel has consistently used external sources of funds, primarily
from equity issuances and debt incurrences, to fund operations, capital
expenditures, acquisitions and other non-operating needs. For the next several
years, Nextel intends to use its existing cash and investments, continued
positive earnings before interest, taxes, depreciation and amortization from its
domestic operations and externally generated funds from debt and equity sources
(as discussed below) to cover future needs, including the design, implementation
and operation of its Digital Mobile Network both domestically and
internationally.
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CASH FLOWS
Net cash provided by operating activities of $89.3 million for the three
months ended March 31, 1999 increased by $199.1 million compared to net cash
used in operating activities of $109.8 million for the three months ended March
31, 1998. The increase in net cash provided by operating activities consisted of
a domestic increase of $232.8 million partially offset by cash used in
international operations of $33.7 million. The improvement in the cash provided
by operating activities reflects increasing operating revenues and improved
domestic operating results coupled with strengthened cost controls.
Capital expenditures to fund the continued expansion of the Digital
Mobile Network continue to represent the largest use of Company funds for
investing activities. Net cash used in investing activities for the three months
ended March 31, 1999 decreased $237.5 million as compared to the three months
ended March 31, 1998, primarily attributable to the $124.3 million decrease in
capital expenditures and the receipt of $132.4 million related to the sale of
assets to Nextel Partners and reimbursement of certain costs and operating
expenses by Nextel Partners. Cash payments for capital expenditures totaled
$477.8 million for the three months ended March 31, 1999 and $602.1 million for
the three months ended March 31, 1998, including $45.4 million and $87.3 million
in capital expenditures for international operations for the three months ended
March 31, 1999 and 1998, respectively. While domestic capital spending decreased
due to a number of factors, including improved management of infrastructure
inventory, this level of capital expenditures is not expected to be indicative
of future quarters in 1999, during which the rate of capital spending is
expected to increase. Also contributing to the decrease in cash used in
investing activities was a $71.8 million decrease in payments for acquisitions
and purchases of licenses and a decrease of $32.3 million in cash investments in
international subsidiaries, offset by a decrease of $123.3 million in net
proceeds from marketable securities transactions.
Cash flows provided by financing activities decreased by $1,715.9 million
as compared to the three months ended March 31, 1998, primarily reflecting the
net proceeds received in the first quarter of 1998 from the issuance of debt
securities and mandatorily redeemable preferred stock. Net cash provided by
financing activities for the three months ended March 31, 1999 consisted
primarily of $183.8 million in net borrowings under Nextel's bank credit
agreement and Nextel International's bank and vendor credit facilities and $21.6
million in proceeds from common stock issuances and option exercises.
Nextel had a working capital deficit of $385.7 million at March 31, 1999
compared to $129.5 million at December 31, 1998. During the first quarter of
1999, Nextel utilized available cash balances and financed its capital
expenditures with current liabilities (e.g. accounts payable) resulting in an
increase in the working capital deficit. Nextel International primarily
continues to finance international operations, capital expenditures and
acquisitions by incurring long-term debt.
F. FUTURE CAPITAL NEEDS AND RESOURCES
Nextel anticipates that, for the foreseeable future, it will be utilizing
significant amounts of its available cash for:
- capital expenditures for the construction and enhancement of the
Digital Mobile Network, both domestically and internationally;
- operating expenses relating both to the Digital Mobile Network and
to its analog specialized mobile radio business;
- potential acquisitions including any negotiated acquisitions of
spectrum from third parties and any future FCC auctions of
spectrum;
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- debt service requirements; and
- other general corporate expenditures.
Nextel anticipates that its cash utilization for capital expenditures and other
investing activities will continue to exceed its positive cash flows from
domestic operating activities throughout 1999 as it builds out, expands and
enhances its Digital Mobile Network in the United States.
Nextel's bank credit agreement, as amended (the "Bank Credit Agreement"),
provides total potential secured financing capacity of $3.5 billion, of which
$3.295 billion in secured financing is currently available to Nextel, subject to
the satisfaction or waiver of applicable borrowing conditions. This facility
consists of a $1.5 billion revolving loan and $1.795 billion in term loans which
mature over a period from September 30, 2001 to March 31, 2007. At March 31,
1999, Nextel had drawn $2.194 billion of its available financing under the Bank
Credit Agreement.
Amounts outstanding under the Bank Credit Agreement are secured by liens
on assets of certain of Nextel's domestic subsidiaries and bear interest payable
quarterly at an adjustable rate calculated based either on the prime rate or the
London Interbank Offered Rate ("LIBOR"). The maturity dates of the loans are
subject to acceleration if the aggregate principal amount of certain series of
Nextel's senior redeemable discount notes is not less than $1.0 billion by
specified dates. The availability of such financing is subject to Nextel's
satisfying certain requirements under the indentures governing its public notes
issued before 1997, which require Nextel to issue new equity for cash as a
condition to obtaining access to all amounts not constituting "permitted debt"
(as that term is defined in the applicable indentures). Based on the amount of
equity issuances, including issuances of preferred stock in 1997 and 1998, and
Nextel's outstanding debt at March 31, 1999, Nextel may access the full $3.295
billion currently available under the Bank Credit Agreement in compliance with
the debt incurrence covenants contained in those indentures.
Based on its assessment of business activity and related net cash needs
through the end of 1999, Nextel anticipates that its cash on hand, the remaining
amounts available for borrowing under the Bank Credit Agreement, the cash
proceeds assumed to be received upon the exercise in 1999 of options held by
Digital Radio, L.L.C., the cash proceeds recently received upon Motorola's
exercises of warrants, the cash payment recently received upon completing the
sale of assets to Nextel Partners, the cash proceeds recently received upon
closing the towers sale transaction with SpectraSite, the cash proceeds expected
to be received upon completion of the investment transaction with Microsoft and
the net cash expected to be generated by domestic operations through the end of
1999, collectively, will provide more than sufficient funds to finance Nextel's
domestic operations, meet its domestic debt service obligations and fund its
domestic capital expenditures, all at levels Nextel currently anticipates would
be consistent with maintaining growth within an assumed range of an annual rate
of 1.4 to 1.6 million net domestic digital subscriber unit additions during
1999. See, "I. Nextel's Forward Looking Statements Are Subject to a Variety of
Factors that Could Cause Actual Results to Differ Materially From Current
Beliefs."
Nextel may require additional financing to fund further deployment,
expansion and enhancement of its Digital Mobile Network in the United States
after 1999. Nextel also may require additional financing to pursue activities
related to new business opportunities (including commercial activities involving
its deployment of data transmission services), additional spectrum acquisitions
(including any negotiated acquisitions of spectrum from third parties and
spectrum auctions by the FCC) and other potential transactions or investments
not a part of its current domestic mobile wireless communications businesses.
Finally, the above funding requirements and estimates relate only to Nextel's
domestic business operations and opportunities, and do not reflect any of the
separate funding needs of Nextel International. See also the discussion under
the caption "Liquidity and Capital Resources" in the Nextel International Form
10-Q.
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The availability of borrowings pursuant to the Bank Credit Agreement is
subject to certain conditions, and Nextel cannot provide assurance that such
conditions will be met. Moreover, Nextel cannot provide assurances that it will
receive funding from its other existing or assumed sources, such as the exercise
of outstanding options to purchase Nextel's common stock. The instruments
relating to Nextel's financing arrangements and preferred stock contain
provisions that operate to limit the amount of borrowings that may be incurred
by Nextel. The terms of the Bank Credit Agreement also require Nextel and its
restricted subsidiaries at specified times to maintain compliance with certain
operating and financial covenants or ratios, including certain covenants and
ratios specifically related to leverage, which become more stringent over time.
In addition, Nextel's capital needs, and its ability to adequately address those
needs through debt or equity funding sources, are subject to a variety of
factors that cannot presently be predicted with certainty, for example, the
commercial success of Nextel's Digital Mobile Network, the amount and timing of
Nextel's capital expenditures and operating losses, the availability and
volatility of the equity and debt markets, the market price of its common stock
and consummation of specific pending transactions. See, "I. Nextel's Forward
Looking Statements Are Subject to a Variety of Factors that Could Cause Actual
Results to Differ Materially From Current Beliefs."
Nextel has had and may in the future have discussions with third parties
regarding potential equity investments and debt financing arrangements to
satisfy actual or anticipated financing needs. At present, other than the
existing equity or debt financing arrangements that have been consummated and/or
are disclosed herein, Nextel has no legally binding commitments or
understandings with any third parties to obtain any material amount of equity or
debt financing. Under the terms of the agreements between Nextel and Motorola
pursuant to which Nextel acquired substantially all of Motorola's domestic 800
MHz specialized mobile radio licenses in 1995, Nextel has agreed, under certain
circumstances, not to grant superior governance rights to any third-party
investor without Motorola's consent which may make securing equity investments
more difficult. In this connection, the recent investment commitment by
Microsoft did not involve granting any superior governance rights. The ability
of Nextel to incur additional indebtedness including, in certain circumstances,
indebtedness incurred under the Bank Credit Agreement, is and will be limited by
the terms of Nextel's financing agreements and the terms of some of Nextel's
preferred stock.
G. NEXTEL INTERNATIONAL CAPITAL NEEDS
As of March 31, 1999, approximately $104.8 million had been borrowed
under an equipment financing facility provided through MCC (the "International
Motorola Financing Facility") (including all $100.0 million in loans to
reimburse Nextel International for payments made to Motorola by Nextel
International and certain of its operating subsidiaries and affiliates after
January 1, 1997 for the purchase of iDEN equipment and related services or for
the benefit of such subsidiaries and affiliates (the "Reimbursement Loans") and
approximately $120.2 million remained available for future borrowings under such
facility. Additionally, as of March 31, 1999, all of the $14.7 million available
under the existing financing facility between MCC and Infocom Communications
Network, Inc. ("Nextel Philippines") (the "Philippine Motorola Financing") had
been borrowed, approximately $103.8 million had been borrowed under the vendor
financing agreement between McCaw International (Brazil), Ltd. ("Nextel Brazil")
and MCC (the "Brazil Motorola Financing"), with the remaining $21.2 million
available for future borrowings, and all of the $100.0 million available under
the Argentina Credit Facility had been borrowed. Nextel International plans to
refinance the amounts owed by Nextel Philippines under the Philippines Motorola
Financing with proceeds of loans under the International Motorola Financing
Facility in the second quarter of 1999. The availability of borrowings under
each of the International Motorola Financing Facility and the Brazil Motorola
Financing is subject to the satisfaction or waiver of certain applicable
borrowing conditions under each facility. See, "I. Nextel's Forward Looking
Statements Are Subject to a Variety of Factors that Could Cause Actual Results
to Differ Materially From Current Beliefs."
In March 1999 Nextel Argentina notified the administrative agent under
the Argentina Credit Facility of its anticipated noncompliance with certain
financial covenants under such facility applicable in the first quarter of 1999.
Nextel Argentina received a waiver from the lenders under such facility with
regard to such covenants for
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the first quarter of 1999. On May 12, 1999, Nextel Argentina and the lenders
under the Argentina Credit Facility agreed to the Argentina Amendments. The
effectiveness of the Argentina Amendments is subject to customary conditions,
which are expected to be satisfied prior to May 28, 1999. The lenders have
extended their waiver of Nextel Argentina's compliance with such covenants until
the earlier of May 28, 1999 or date the Argentina Amendments become
effective. As a result of the Argentina Amendments, Nextel International has
entered into a new capital subscription agreement that will require additional
equity to be contributed to Nextel Argentina. Concurrently with the execution
of the Argentina Amendments, MCC agreed to provide the Argentina Incremental
Facility Loans.
On May 13, 1999, Nextel International issued 1,000 shares of its Series A
Preferred Stock to a wholly owned subsidiary of Nextel. Nextel International
received $100.0 million in proceeds from the issuance of such shares of Series A
Preferred Stock. Additionally, in May 1999, Nextel International entered into a
commitment with MCC pursuant to which MCC agreed to provide up to $56.6 million
in incremental term loans to Nextel International (the "International Motorola
Incremental Facility").
Based on Nextel International's current estimate of its funding
requirements for 1999, Nextel International believes that it will have adequate
funding to continue its operations through the end of 1999. Such assessment is
based on Nextel International's assumed utilization of its available cash and
cash equivalents and borrowings expected to be available under the International
Motorola Financing Facility, the International Motorola Incremental Facility,
the Brazil Motorola Financing and the Argentina Incremental Facility Loans to
meet its assumed cash needs (including reasonably foreseeable capital
expenditures, funding of operating losses and any debt service obligations)
during such period. There can be no assurance that such resources will be
sufficient to fund Nextel International's obligations through the end of 1999.
Subsequent to 1999 Nextel International will require significant additional
capital to fund the construction and expansion of its Digital Mobile Networks
and will need to rely on external sources of financing to fund its operating
losses and for other general corporate purposes until its operations generate
positive cash flows. See, "-- Nextel's Forward-Looking Statements Are Subject to
a Variety of Factors that Could Cause Actual Results to Differ Materially From
Current Beliefs" and the Nextel International 1998 Form 10-K and the Nextel
International Form 10-Q.
H. YEAR 2000 READINESS
As is the case with most other businesses using computers in their
operations, Nextel is in the process of evaluating and addressing the Year 2000
readiness of its computer systems. Such Year 2000 readiness efforts are designed
to identify, address and resolve issues that may be created by computer programs
being written using two digits rather than four to define the applicable year.
Any of Nextel's computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations that result in disruptions
of operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
1. STATE OF READINESS
Nextel has had a program in place since February 1998 to address Year
2000 readiness issues in its critical business areas related to products,
networks, information management systems, non-information systems with embedded
technology, suppliers and customers. Nextel has taken and will continue to take
actions designed to advance its progress toward becoming Year 2000 ready by the
end of the third quarter of 1999. Nextel's Year 2000 readiness goal focuses on
the ability of Nextel to perform its business functions and to process
information in an unambiguous manner under various date conditions.
Nextel's ability to reach its Year 2000 readiness goal depends and will
continue to depend on the efforts of significant third-party vendors, suppliers,
subcontractors and business partners. Some of these significant third parties
are not yet Year 2000 ready, although many of them have provided Nextel with
detailed action plans and timetables for achieving Year 2000 readiness. Nextel
monitors the progress of these third parties towards Year
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2000 readiness on a regular basis. Nextel regularly contacts and attempts to
obtain from these third parties relevant details and schedules concerning their
contemplated development of Year 2000 ready applications for Nextel's
utilization in its domestic and international operations and systems.
Specifically, Nextel relies on services and products offered by the following
significant third parties:
- Motorola, for Nextel's system infrastructure and subscriber
handset units;
- International Telecommunications Data Systems, Inc., as the
software vendor for Nextel's domestic order entry and provisioning
systems, as well as Nextel's domestic billing information systems;
- LHS Group, Inc. as the software vendor for Nextel International's
billing information systems;
- Vantive Corporation, which provides information systems used in
Nextel's customer care function and provides order entry systems
for Nextel International;
- Oracle Corporation, which provides Nextel with information
systems, development tools and database management used to support
its human resources function and financial systems; and
- Hewlett-Packard, Inc., which supplies computer hardware, for
example, monitors and peripherals, and UNIX operating systems.
Nextel has identified five phases that assist in defining the status of progress
toward Year 2000 readiness. The five phases are:
- Awareness -- locating, listing and prioritizing specific
technology used in Nextel's operations that is potentially subject
to Year 2000 readiness related challenges;
- Assessment -- determining the level of risk of Year 2000 readiness
challenges that exist on Nextel's systems through inquiry,
research and testing;
- Renovation -- determining and resolving Year 2000 readiness
related challenges identified in previous phases through
replacement, upgrade or repair and planning for the scheduled
implementation of the selected Year 2000 ready resolution;
- Validation -- testing, monitoring, certification and verification
of the correct manipulation of dates and date related data on
Information Technology ("IT") and non-IT systems, including those
of material third parties; and
- Implementation -- installing and integrating the application of
Year 2000 ready resolutions by replacement, upgrade or repair of
non-IT and IT systems, including those of material third parties.
As of April 15, 1999, with respect to its non-IT devices and/or systems
containing embedded circuitry, Nextel is, primarily, in the assessment phase.
Additionally, with respect to its IT systems that are critical to Nextel's
business operations and issues relating to material third parties, Nextel is in
various phases noted as follows:
- International Telecommunications Data Systems, Inc. informed
Nextel that software that operates Nextel's domestic order entry
and provisioning system has successfully completed the renovation
phase and is scheduled for delivery to Nextel for user acceptance
testing and implementation. This vendor has also informed Nextel
that the software used for domestic billing capabilities has
successfully completed the assessment and renovation phases and is
currently in unit and system integration testing phases;
- Motorola informed Nextel that the subscriber unit models i390 and
i1000 are Year 2000 ready, and all other subscriber units are Year
2000 ready with the exception of the short message service feature
on all other phones, which is not expected to cause a material
disruption in Nextel's service offerings. With regard to the
Digital Mobile Network, Motorola has indicated that the following
system infrastructure components are Year 2000 ready:
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- critical call and data processing systems applicable
to a significant portion of the Digital Mobile
Network have passed Year 2000 readiness testing;
- Nortel switches and CISCO routers have passed Year
2000 readiness testing appropriate for Nextel's use;
and
- Voice mail system components have passed Year 2000
readiness testing.
- Oracle has advised Nextel that the software that supports Nextel's
human resources function and financial systems is Year 2000 ready
in conjunction with recommended upgrades. Nextel is in the process
of establishing the environment to test and apply these upgrades;
- Vantive provided information to Nextel that it has tested and
certified the Year 2000 readiness of the software that will be
used to develop Year 2000 ready customer care systems for Nextel
International's operations;
- LHS informed Nextel that the software currently in use in Nextel
International's systems that supports the billing processes is
Year 2000 ready in conjunction with recommended upgrades. Nextel
International is currently conducting in-house Year 2000 readiness
testing and its implementation plans include making the
appropriate upgrades recommended by LHS; and
- Motorola Communications Israel Ltd., which provides the
provisioning systems for Nextel International, certified that its
software is Year 2000 ready.
To ensure the continued progress and success in managing all of Nextel's
systems Year 2000 readiness requirements, a special steering committee that
includes members of senior management responsible for Nextel's information
technology and network systems was formed to oversee this effort. Internal
employees, as well as outside contractors, staff Nextel's Year 2000 readiness
program. Members include employees across functional and divisional departments
who are responsible for assisting in the identification, assessment and
remediation of Year 2000 readiness challenges. In addition, the representatives
from some of the material third parties identified above participate in this
project.
2. THE COSTS TO ADDRESS NEXTEL'S YEAR 2000 READINESS CHALLENGES
Based on information developed to date as a result of Nextel's assessment
efforts, Nextel believes that the costs of modifying, upgrading or replacing its
systems and equipment will not have a material effect on Nextel's liquidity, its
financial condition or results of operations. Nextel currently estimates that
its domestic and international expenditures in connection with these efforts
during 1999 will not exceed $45 million. To date, Nextel has not deferred any
specific projects, goals or objectives relating to its domestic and
international operations as a result of implementing its Year 2000 readiness
efforts.
3. THE RISKS OF NEXTEL'S YEAR 2000 READINESS CHALLENGES
In light of the progress made to date, Nextel does not anticipate delays
or postponements in finalizing and implementing Year 2000 readiness solutions by
the end of the third quarter of 1999. Until Nextel's renovation and validation
phases are substantially complete, however, Nextel cannot fully and accurately
estimate any uncertainty in timely resolving its Year 2000 readiness challenges
or in finalizing and implementing related Year 2000 readiness resolutions.
Additionally, any failure by third parties which have a material relationship
with Nextel to achieve full Year 2000 readiness may be a potential risk if such
failure were to adversely impact the ability of such third parties to provide
any products or services that are critical to Nextel's operations. Finally,
where Nextel cannot validate or certify that technology provided by material
third parties is fully Year 2000 ready, Nextel is seeking to obtain assurances
from these material third parties that their systems are or will be Year 2000
ready no later than the end of the third quarter of 1999. If these material
third parties fail to
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appropriately address their own Year 2000 readiness challenges, there could be a
materially adverse effect on Nextel's financial condition and results of
operations. These risks include, but are not limited to:
- inability of subscribers to make or receive phone calls;
- inability of sites, switches and other interfaces to accurately
record call details of subscriber phone calls; and
- inability of billing systems to accurately report and bill
subscribers for phone usage.
Other risks associated with the inability of Nextel or material third
parties to develop and deploy Year 2000 ready solutions in a timely and
successful manner may involve or result in conditions that could preclude Nextel
from:
- deploying an alternative technology that is Year 2000 ready;
- implementing commercial launches in new markets or introducing new
services in existing markets;
- pursuing additional business opportunities; and
- obtaining equity or debt financing.
Significantly, Nextel cannot independently assess the impact of Year 2000
readiness challenges, activities and programs involving operators of public
switched telecommunications networks or other service providers, for example,
electric utilities. Nextel therefore must rely on public switched
telecommunications networks and utility providers' estimates of their own Year
2000 readiness challenges and the status of their related compliance activities
and programs in Nextel's own Year 2000 readiness assessment process. Because
Nextel's systems are interconnected with public switched telecommunications
networks and are dependent upon the systems of other service providers, any
disruption of operations in the computer programs of such public switched
telecommunications networks or service providers would likely have an impact on
Nextel's systems. Moreover, there can be no assurance that such impact will not
have a materially adverse effect on Nextel's operations.
Finally, in assessing its Year 2000 readiness exposure associated with
its international operations, Nextel has considered that certain operators of
public switched telecommunications networks or other service providers and
operations located in foreign countries may not be at the same level of
awareness or assessment of the Year 2000 readiness challenges and remedial
measures as their United States counterparts. These factors, to the extent
present with respect to Nextel's international operations, may result in delays
in identifying Year 2000 readiness challenges and a lag in implementing
remediation efforts as compared with Nextel's domestic operations. In the event
Nextel's international affiliates and their own material third parties fail to
timely address their Year 2000 readiness challenges, Nextel's international
operations could experience material disruptions after December 31, 1999.
4. NEXTEL'S CONTINGENCY PLANS
Nextel has not completed all systems and software testing in its critical
systems, nor has it been advised of the completion of such activities by all
third-party providers of critical products and services. As a result, Nextel has
not fully assessed its exposure from potential Year 2000 nonreadiness. Nextel is
preparing guidelines for addressing Year 2000 readiness contingency plans for
external and internal systems should it be determined that contingency plans are
necessary. Following testing of Nextel's critical systems, Nextel will evaluate
and possibly create alternative plans designed to address various potential
business interruptions that may occur as a result of non-readiness.
Additionally, since contingency plans may also be provided by third parties,
Nextel will assess the development of appropriate alternative solutions
presented by any relevant third party to determine its effectiveness and likely
impact on Nextel's Year 2000 readiness risk profile.
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I. NEXTEL'S FORWARD LOOKING STATEMENTS ARE SUBJECT TO A VARIETY OF FACTORS THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM CURRENT BELIEFS.
"SAFE HARBOR" STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995. A number of the matters and subject areas discussed in the
foregoing "Management's Discussion and Analysis of Financial Condition and
Results of Operations" (including the related discussions referred to above that
are also included in the 1998 Form 10-K and in the Nextel International Form
10-K) that are not historical or current facts deal with potential future
circumstances and developments. The discussion of such matters and subject areas
is qualified by the inherent risks and uncertainties surrounding future
expectations generally, and also may materially differ from Nextel's actual
future experience involving any one or more of such matters and subject areas.
Nextel has attempted to identify, in context and in the 1998 Form 10-K, some of
the factors that it currently believes may cause actual future experience and
results to differ from it's current expectations regarding the relevant matter
or subject area. The operation and results of Nextel's wireless communications
business also may be subject to the effect of other risks and uncertainties in
addition to the relevant qualifying factors identified or referred to elsewhere
in the foregoing "Management's Discussion and Analysis of Financial Condition
and Results of Operations" section and in the 1998 Form 10-K, including, but not
limited to, general economic conditions in the geographic areas and occupational
market segments that Nextel is targeting for its Digital Mobile Network service,
the availability of adequate quantities of system infrastructure and subscriber
equipment and components to meet Nextel's service deployment and marketing plans
and customer demand, the success of efforts to improve and satisfactorily
address any issues relating to Nextel's Digital Mobile Network performance, the
continued successful performance of the iDEN technology being deployed in
Nextel's various market areas, the ability to achieve market penetration and
average subscriber revenue levels sufficient to provide financial viability to
Nextel's Digital Mobile Network business, Nextel's ability to timely and
successfully accomplish required scale-up of its billing, collection, customer
care and similar back-room operations to keep pace with customer growth and
increased system usage rates and growth in levels of accounts receivables being
generated by the Digital Mobile Network customer base, access to sufficient debt
or equity capital to meet Nextel's operating and financial needs, the quality
and price of similar or comparable wireless communications services offered or
to be offered by Nextel's competitors, including providers of cellular and
personal communications services, the ability to successfully develop or obtain
from third parties and implement year 2000 readiness solutions in systems that
are critical to its business operations, future legislation or regulatory
actions relating to specialized mobile radio services, other wireless
communications services or telecommunications generally and other risks and
uncertainties described from time to time in Nextel's reports filed with the
Commission including the 1998 Form 10-K and, with specific reference to risk
factors relating to international operations, in Nextel International's reports
filed with the Commission including the Nextel International 1998 Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Nextel uses mandatorily redeemable preferred stock, senior redeemable
notes, and bank and vendor credit facilities to finance its operations. These
on-balance sheet financial instruments, to the extent they provide for variable
rates of interest, expose Nextel to interest rate risk. Nextel's primary
interest rate risk exposure results from changes in LIBOR or the prime rate
which are used to determine the interest rates that are applicable to borrowings
under Nextel's bank and vendor credit agreements. Nextel uses off-balance
sheet derivative financial instruments, including interest rate swap and collar
agreements, to partially hedge interest rate exposure associated with on-balance
sheet financial instruments. All of Nextel's derivative financial instrument
transactions are entered into for non-trading purposes. The terms and
characteristics of the derivative financial instruments are matched with the
existing on-balance sheet financial instrument and do not constitute speculative
or leveraged positions independent of these exposures.
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Nextel International's revenues are denominated in foreign currencies
while a significant portion of its operations are financed through senior
redeemable discount notes and bank and vendor credit facilities which are
denominated in United States dollars. Accordingly, fluctuations in exchange
rates relative to the United States dollar, primarily those related to the
Brazilian real, Mexican peso and Argentinean peso, expose Nextel to foreign
currency exchange rate risk. In the near term, Nextel's foreign currency
exchange rate exposure associated with the repayment of Nextel International's
debt obligations is limited since the terms of the senior redeemable discount
notes and bank and vendor credit facilities do not require significant principal
payments until after 1999. Accordingly, as of March 31, 1999, Nextel
International has not established any hedge or risk reduction strategies related
to its foreign currency exchange rate exposure.
Nextel International holds an available-for-sale investment in the common
stock of Clearnet Communications, Inc. ("Clearnet"), a publicly traded company
that had a fair value of $110.6 million as of March 31, 1999. In accordance with
Statement of Financial Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," this investment is recorded at its market value in
Nextel's financial statements. Negative fluctuations in Clearnet's stock price
expose Nextel to equity price risk. A 10% decline in the stock price would
result in a $11.1 million decrease in the fair value of Nextel's investment in
Clearnet.
The information below summarizes Nextel's sensitivity to market risks
associated with fluctuations in interest rates and foreign currency exchange
rates as of March 31, 1999 in United States dollars. To the extent that Nextel's
financial instruments expose Nextel to interest rate and foreign currency
exchange risk, these instruments are presented within each market risk category
in the table below. The table presents principal cash flows and related interest
rates by year of maturity for Nextel's mandatorily redeemable preferred stock,
senior redeemable notes, and bank and vendor credit facilities in effect at
March 31, 1999 and, in the case of the mandatorily redeemable preferred stock
and senior redeemable notes, excludes the potential exercise of the relevant
redemption features. The cash flows related to the variable portion of interest
rate swaps are determined by dealers using valuation models that estimate the
future level of interest rates, with consideration of the applicable yield curve
as of March 31, 1999. For interest rate swaps and collars, the table presents
notional amounts and the related reference interest rates by year of maturity.
Fair values included herein have been determined based on: (i) quoted market
prices for mandatorily redeemable preferred stock and senior redeemable notes;
(ii) the carrying value for the bank and vendor credit facilities at March 31,
1999 as interest rates are reset periodically; and (iii) estimates obtained from
dealers to settle interest rate swap and collar agreements. Descriptions of
Nextel's mandatorily redeemable preferred stock, senior redeemable notes, bank
and vendor credit facilities, and interest rate risk management agreements are
contained in Notes 8, 9 and 12 to the consolidated financial statements
contained in the 1998 Form 10-K and should be read in conjunction with the
following table. The increase in the fair values of Nextel's mandatorily
redeemable preferred stock, long-term debt, and interest rate swaps and collars
as compared to December 31, 1998 reflect the changes in the applicable market
conditions.
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YEAR OF MATURITY
--------------------------------------------------
1999 2000 2001
-------------- -------------- --------------
(U.S. DOLLARS IN THOUSANDS)
I. INTEREST RATE SENSITIVITY
MANDATORILY REDEEMABLE PREFERRED STOCK AND LONG-TERM DEBT:
Fixed Rate -- -- --
Average Interest Rate -- -- --
Variable Rate -- $30,751 $96,956
Average Interest Rate -- 9.4% 8.9 %
INTEREST RATE SWAPS:
Variable to Fixed -- -- 200,000
Average Pay Rate -- -- 5.4%
Average Receive Rate -- -- 5.3%
Variable to Variable -- 50,000 100,000
Average Pay Rate -- 5.1% 5.3%
Average Receive Rate -- 5.2% 5.7%
INTEREST RATE COLLARS:
Collars -- -- --
Average Cap -- -- --
Average Floor -- -- --
II. FOREIGN EXCHANGE RATE SENSITIVITY
LONG-TERM DEBT:
Fixed Rate -- -- --
Average Interest Rate -- -- --
Variable Rate -- 30,751 66,956
Average Interest Rate -- 9.4% 9.7%
YEAR OF MATURITY
-----------------------------------------------
2002 2003 THEREAFTER
-------------- -------------- ----------
(U.S. DOLLARS IN THOUSANDS)
I. INTEREST RATE SENSITIVITY
MANDATORILY REDEEMABLE PREFERRED STOCK AND LONG-TERM DEBT:
Fixed Rate -- $35,811 $8,833,596
Average Interest Rate -- 11.5% 10.9%
Variable Rate $140,282 220,282 2,014,305
Average Interest Rate 8.6% 8.2% 7.6%
INTEREST RATE SWAPS:
Variable to Fixed -- 100,000 570,000
Average Pay Rate -- 5.5% 8.1%
Average Receive Rate -- 5.0% 5.1%
Variable to Variable -- 400,000 --
Average Pay Rate -- 4.9% --
Average Receive Rate -- 5.0% --
INTEREST RATE COLLARS:
Collars -- 200,000 --
Average Cap -- 6.7% --
Average Floor -- 4.5% --
II. FOREIGN EXCHANGE RATE SENSITIVITY
LONG-TERM DEBT:
Fixed Rate -- -- 1,681,463
Average Interest Rate -- -- 12.6%
Variable Rate 77,332 107,332 26,205
Average Interest Rate 9.7% 9.4% 10.3%
TOTAL FAIR VALUE
---------- ----------
I. INTEREST RATE SENSITIVITY
MANDATORILY REDEEMABLE PREFERRED STOCK AND LONG-TERM DEBT:
Fixed Rate $8,869,407 $7,202,439
Average Interest Rate 10.9%
Variable Rate 2,502,576 2,502,576
Average Interest Rate 7.9%
INTEREST RATE SWAPS:
Variable to Fixed 870,000 (85,563)
Average Pay Rate 7.2%
Average Receive Rate 5.1%
Variable to Variable 550,000 1,945
Average Pay Rate 5.0%
Average Receive Rate 5.1%
INTEREST RATE COLLARS:
Collars 200,000 (2,121)
Average Cap 6.7%
Average Floor 4.5%
II. FOREIGN EXCHANGE RATE SENSITIVITY
LONG-TERM DEBT:
Fixed Rate 1,681,463 928,578
Average Interest Rate 12.6%
Variable Rate 308,576 308,576
Average Interest Rate 9.6%
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PART II
ITEM 1. LEGAL PROCEEDINGS.
The Company is involved in certain legal proceedings that are described
in the 1998 Form 10-K. During the three months ended March 31, 1999, there were
no material changes in the status of or developments regarding those legal
proceedings.
ITEM 2. CHANGES IN SECURITIES.
(a) Inapplicable
(b) Inapplicable
(c) On January 29, 1999, in connection with the formation of Nextel
Partners, Nextel entered into certain agreements pursuant to which the
holders of Nextel Partners common stock have the right, under specified
circumstances, to require a subsidiary of Nextel to purchase such shares,
and the Nextel subsidiary has the right, under specified circumstances,
to require the Nextel Partners stockholders to sell their Nextel Partners
stock to the subsidiary. In either event, the Nextel subsidiary has the
right, at its option, to pay for the Nextel Partners stock with shares of
Nextel Common Stock (the "Contingent Right"). In that event, the Nextel
Common Stock would be valued based on its market price at that time, and
the Nextel Partners stock would be valued, depending on the circumstances
of the purchase and sale, at a formula price or at its fair market value
at that time. These rights, together with the other assets that Nextel
contributed, were exchanged for stock in Nextel Partners and other rights
described in Item 2. "Management's Discussion and Analysis of Financial
Condition and Results of Operations - B. First Quarter Transactions and
Developments."
This transaction was effected pursuant to the exemption of Section
4(2) of the Securities Act of 1933 in reliance upon the representations
made by the purchasers of the Nextel Partners securities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits.
EXHIBIT NUMBER EXHIBIT DESCRIPTION
- -------------- -------------------
4.1 Amendment No. 3 to Credit Agreement dated as of March 23, 1999 between
Nextel Communications, Inc., Nextel Finance Company and the other
Restricted Companies, Toronto Dominion (Texas), Inc. in its capacity as
Administrative Agent and The Chase Manhattan Bank in its capacity as
Collateral Agent (filed herein as Exhibit 4.1 to the March 31, 1999 Form
10-Q and incorporated herein by reference).
10.1 Letter Amendment to Employment Agreement dated as of February 26, 1999,
between Daniel Akerson and Nextel (filed as Exhibit 10.15.3 to the 1998
Form 10-K filed on March 30, 1999 and incorporated herein by reference).
10.2 Non-Negotiable Unsecured Promissory Note, dated March 10, 1999, issued by
Daniel Akerson to a subsidiary of Nextel (filed as Exhibit 10.15.4 to the
1998 Form 10-K filed on March 30, 1999 and incorporated herein by
reference).
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10.3 Joint Venture Agreement by and among Nextel Partners, Inc., Nextel
Partners Operating Corp., and Nextel WIP Corp., dated as of January 29,
1999 (filed as Exhibit 10.1 to the Current Report on Form 8-K dated and
filed on February 24, 1999 (the "February 24 8-K") and incorporated
herein by reference).
10.4 Shareholders' Agreement among Nextel Partners, Inc., and the Shareholders
named therein, dated as of January 29, 1999 (filed as Exhibit 10.2 to the
February 24 8-K and incorporated herein by reference).
10.5 Agreement Specifying Obligations of, and Limiting Liability and Recourse
to, Nextel, dated as of January 29, 1999 (filed as Exhibit 10.3 to the
February 24 8-K and incorporated herein by reference).
10.6 NEXTBAND Interests Purchase Agreement, dated as of March 31, 1999, by and
between Nextel Spectrum Acquisition Corp. and NEXTLINK Communications,
Inc. (including the form of Registration Rights Agreement attached as
Exhibit A thereto) (filed as Exhibit 10.1 to the Current Report on Form
8-K dated and filed on April 1, 1999 and incorporated herein by
reference).
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.
(i) Current Report on Form 8-K dated and filed on February 24, 1999
with the Commission reporting under Item 5 the Nextel Partners
transaction and the towers sale transaction with SpectraSite, Inc.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEXTEL COMMUNICATIONS, INC.
By: /s/WILLIAM G. ARENDT
-----------------------------------
Date: May 17, 1999 William G. Arendt
Vice President and Controller
(Principal Accounting Officer)
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EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT DESCRIPTION
- -------------- -------------------
4.1 Amendment No. 3 to Credit Agreement dated as of March 23, 1999
between Nextel Communications, Inc., Nextel Finance Company the
other Restricted Companies, Toronto Dominion (Texas), Inc. in its
capacity as Administrative Agent and The Chase Manhattan Bank in
its capacity as Collateral Agent (filed herein as Exhibit 4.1 to
the March 31, 1999 Form 10-Q and incorporated herein by
reference).
10.1 Letter Amendment to Employment Agreement dated as of February 26,
1999, between Daniel Akerson and Nextel (filed as Exhibit 10.15.3
to the 1998 Form 10-K filed on March 30, 1999 and incorporated
herein by reference).
10.2 Non-Negotiable Unsecured Promissory Note, dated March 10, 1999,
issued by Daniel Akerson to a subsidiary of Nextel (filed as
Exhibit 10.15.4 to the 1998 Form 10-K filed on March 30, 1999 and
incorporated herein by reference).
10.3 Joint Venture Agreement by and among Nextel Partners, Inc., Nextel
Partners Operating Corp., and Nextel WIP Corp., dated as of
January 29, 1999 (filed as Exhibit 10.1 to the Current Report on
Form 8-K dated and filed on February 24, 1999 (the "February 24
8-K") and incorporated herein by reference).
10.4 Shareholders' Agreement among Nextel Partners, Inc., and the
Shareholders named therein, dated as of January 29, 1999 (filed as
Exhibit 10.2 to the February 24 8-K and incorporated herein by
reference).
10.5 Agreement Specifying Obligations of, and Limiting Liability and
Recourse to, Nextel, dated as of January 29, 1999 (filed as
Exhibit 10.3 to the February 24 8-K and incorporated herein by
reference).
10.6 NEXTBAND Interests Purchase Agreement, dated as of March 31, 1999,
by and between Nextel Spectrum Acquisition Corp. and NEXTLINK
Communications, Inc. (including the form of Registration Rights
Agreement attached as Exhibit A thereto) (filed as Exhibit 10.1 to
the Current Report on Form 8-K dated and filed on April 1, 1999
and incorporated herein by reference).
27** Financial Data Schedule.
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** Submitted only with the electronic filing of this document with the
Commission pursuant to Regulation S-T under the Securities Act.