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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 June 30, 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 July 30, 1999
-------------- ----------------
Class A Common Stock, $0.001 par value 313,771,320
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 June 30, 1999 and December 31, 1998. 3
Condensed Consolidated Statements of Operations and Comprehensive
Loss - For the Six Months Ended June 30, 1999 and 1998. 4
Condensed Consolidated Statements of Operations and Comprehensive
Loss - For the Three Months Ended June 30, 1999 and 1998. 5
Condensed Consolidated Statement of Changes in Stockholders' Equity -
For the Six Months Ended June 30, 1999. 6
Condensed Consolidated Statements of Cash Flows -
For the Six Months Ended June 30, 1999 and 1998. 7
Notes to Condensed Consolidated Financial Statements. 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 30
PART II OTHER INFORMATION.
Item 1. Legal Proceedings. 32
Item 2. Changes in Securities. 32
Item 4. Submission of Matters to a Vote of Security Holders 32
Item 6. Exhibits and Reports on Form 8-K. 33
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PART I
ITEM 1. FINANCIAL STATEMENTS - UNAUDITED.
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998
(DOLLARS IN MILLIONS)
UNAUDITED
1999 1998
------------------ ------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents (of which $141 and $121 is restricted) $ 1,418 $ 321
Accounts and notes receivable, less allowance for doubtful accounts
of $61 and $63 527 443
Subscriber unit and accessory inventory 67 63
Assets held for sale -- 132
Prepaid expenses and other 77 93
------------------ ------------------
Total current assets 2,089 1,052
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation
of $1,556 and $1,202 5,330 4,915
INTANGIBLE ASSETS, net of accumulated amortization of $994 and $917 4,669 4,937
INVESTMENTS AND OTHER ASSETS 842 669
------------------ ------------------
$ 12,930 $ 11,573
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 636 $ 636
Accrued expenses and other 782 537
Current portion of long-term debt and finance obligation 30 9
------------------ ------------------
Total current liabilities 1,448 1,182
LONG-TERM DEBT 8,334 7,710
FINANCE OBLIGATION (NOTE 2) 532 --
DEFERRED INCOME TAXES 751 771
OTHER 79 73
------------------ ------------------
Total liabilities 11,144 9,736
------------------ ------------------
CONTINGENCIES (NOTE 4)
MINORITY INTEREST 24 29
MANDATORILY REDEEMABLE PREFERRED STOCK (NOTE 5) 1,672 1,578
STOCKHOLDERS' EQUITY
Preferred stock, Class A convertible redeemable,
7,905,981 shares issued and outstanding 291 291
Preferred stock, Class B convertible, 82 shares issued and outstanding -- --
Common stock, Class A, 297,722,981 and 272,087,322 shares issued,
297,243,181 and 271,386,227 shares outstanding -- --
Common stock, Class B, non-voting convertible, 17,830,000 shares
issued and outstanding -- --
Paid-in capital 5,023 4,379
Accumulated deficit (5,108) (4,401)
Treasury stock, at cost, 479,800 and 701,095 shares (10) (13)
Deferred compensation, net (1) (2)
Accumulated other comprehensive loss (105) (24)
------------------ ------------------
Total stockholders' equity 90 230
------------------ ------------------
$ 12,930 $ 11,573
================== ==================
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 SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
UNAUDITED
1999 1998
-------- ----------
OPERATING REVENUES $ 1,457 $ 749
------- ---------
OPERATING EXPENSES
Cost of revenues 329 229
Selling, general and administrative 984 697
Depreciation and amortization 471 379
------- ---------
1,784 1,305
------- ---------
OPERATING LOSS (327) (556)
------- ---------
OTHER INCOME (EXPENSE)
Interest expense (407) (297)
Interest income 12 21
Other, net (2) 3
------- ---------
(397) (273)
------- ---------
LOSS BEFORE INCOME TAX BENEFIT AND EXTRAORDINARY ITEM (724) (829)
INCOME TAX BENEFIT 17 83
------- ---------
LOSS BEFORE EXTRAORDINARY ITEM (707) (746)
EXTRAORDINARY ITEM - LOSS ON EARLY RETIREMENT OF DEBT,
NET OF INCOME TAX OF $0 -- (133)
------- ---------
NET LOSS (707) (879)
MANDATORILY REDEEMABLE PREFERRED STOCK DIVIDENDS (93) (67)
------- ---------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (800) $ (946)
======= =========
LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS,
BASIC AND DILUTED:
Loss before extraordinary item attributable to
common stockholders $ (2.69) $ (2.99)
Extraordinary item -- (0.49)
------- ---------
$ (2.69) $ (3.48)
======= =========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (IN THOUSANDS) 297,164 271,952
======= =========
COMPREHENSIVE LOSS, NET OF INCOME TAX
Net loss $ (707) $ (879)
Unrealized gain (loss) on available-for-sale securities 29 (7)
Foreign currency translation adjustment (110) (9)
------- ---------
COMPREHENSIVE LOSS $ (788) $ (895)
======= =========
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 JUNE 30, 1999 AND 1998
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
UNAUDITED
1999 1998
--------- ---------
OPERATING REVENUES $ 793 $ 422
------- -------
OPERATING EXPENSES
Cost of revenues 166 127
Selling, general and administrative 518 367
Depreciation and amortization 243 194
------- -------
927 688
------- -------
OPERATING LOSS (134) (266)
------- -------
OTHER INCOME (EXPENSE)
Interest expense (209) (152)
Interest income 8 7
Other, net 60 3
------- -------
(141) (142)
------- -------
LOSS BEFORE INCOME TAX BENEFIT AND EXTRAORDINARY ITEM (275) (408)
INCOME TAX BENEFIT 7 49
------- -------
LOSS BEFORE EXTRAORDINARY ITEM (268) (359)
EXTRAORDINARY ITEM - LOSS ON EARLY RETIREMENT OF DEBT,
NET OF INCOME TAX OF $0 -- (133)
------- -------
NET LOSS (268) (492)
MANDATORILY REDEEMABLE PREFERRED STOCK DIVIDENDS (47) (39)
------- -------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (315) $ (531)
======= =======
LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS,
BASIC AND DILUTED:
Loss before extraordinary item attributable to
common stockholders $ (1.04) $ (1.45)
Extraordinary item -- (0.49)
------- -------
$ (1.04) $ (1.94)
======= =======
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (IN THOUSANDS) 302,615 273,519
======= =======
COMPREHENSIVE LOSS, NET OF INCOME TAX
Net loss $ (268) $ (492)
Unrealized gain (loss) on available-for-sale securities 2 (17)
Foreign currency translation adjustment 29 (6)
------- -------
COMPREHENSIVE LOSS $ (237) $ (515)
======= =======
The accompanying notes are an integral part
of these condensed consolidated financial statements.
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NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(DOLLARS IN MILLIONS)
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 $291 82 $-- 272,087,322 $-- 17,830,000 $--
Issuance of common stock due to:
Exercise of options and warrants 8,968,992
Employee stock purchase plan
Cash investment 16,666,667
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, JUNE 30, 1999 7,905,981 $291 82 $-- 297,722,981 $-- 17,830,000 $--
========= ==== == === =========== === ========== ===
Treasury Stock
Paid-in Accumulated ------------------- Deferred
Capital Deficit Shares Amount Compensation
------- ----------- ----------- ------ ------------
BALANCE, JANUARY 1, 1999 $4,379 $(4,401) 701,095 $ (13) $ (2)
Issuance of common stock due to:
Exercise of options and warrants 128
Employee stock purchase plan (264,114) 5
Cash investment 600
Deferred compensation, net 9 1
Unrealized gain on available-for-sale
securities, net of income tax
Foreign currency translation adjustment
Mandatorily redeemable preferred
stock dividends (93)
Other 42,819 (2)
Net loss (707)
------ ------- -------- ----- ----
BALANCE, JUNE 30, 1999 $5,023 $(5,108) 479,800 $ (10) $ (1)
====== ======= ======== ===== ====
Accumulated Other
Comprehensive
(Loss) Income
-------------------------
Unrealized
Gain Cumulative
on Translation
Investments Adjustment Total
----------- ----------- -----
BALANCE, JANUARY 1, 1999 $-- $ (24) $ 230
Issuance of common stock due to:
Exercise of options and warrants 128
Employee stock purchase plan 5
Cash investment 600
Deferred compensation, net 10
Unrealized gain on available-for-sale
securities, net of income tax 29 29
Foreign currency translation adjustment (110) (110)
Mandatorily redeemable preferred
stock dividends (93)
Other (2)
Net loss (707)
--- ------ -----
BALANCE, JUNE 30, 1999 $29 $ (134) $ 90
=== ====== =====
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 SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(DOLLARS IN MILLIONS)
UNAUDITED
1999 1998
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (707) $ (879)
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 $12 and $21 216 247
Depreciation and amortization 471 379
Provision for losses on accounts receivable 73 33
Deferred income tax benefit (17) (83)
Extraordinary loss on retirement of debt -- 133
Foreign currency transaction loss, net 46 --
Gain on sale of equity in joint venture (70) --
Loss from unconsolidated equity investments 31 2
Other, net 20 14
Change in current assets and liabilities, net of effects from acquisitions:
Accounts and notes receivable (157) (81)
Subscriber unit and accessory inventory (10) (35)
Other assets (13) (19)
Accounts payable, accrued expenses and other 262 88
------- -------
Net cash provided by (used in) operating activities 145 (201)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (Note 1) (913) (1,154)
Proceeds from sale of assets to affiliates (Note 2) 270 --
Payments for acquisitions and purchase of licenses, net of cash acquired (42) (252)
Other investments in and advances to affiliates (27) (124)
Purchases of marketable securities (2) (8)
Proceeds from maturities and sales of marketable securities -- 135
------- -------
Net cash (used in) investing activities (714) (1,403)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt securities 600 1,401
Proceeds from finance obligation 560 --
Borrowings under long-term credit facilities 235 1,021
Repayments under long-term credit facilities -- (972)
Revolving line of credit repayments and borrowings, net (423) 433
Other long-term repayments, net (17) (3)
Sale of stock and exercise of stock options, warrants and other 733 17
Deferred financing costs (31) (103)
Capital contributions from minority stockholders 9 --
Issuance of mandatorily redeemable preferred stock -- 750
Retirement of debt securities -- (741)
------- -------
Net cash provided by financing activities 1,666 1,803
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,097 199
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 321 301
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,418 $ 500
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized of $7 and $6 $ 121 $ 58
======= =======
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.
Our unaudited condensed consolidated financial statements have been
prepared under the rules and regulations of the Securities and Exchange
Commission and reflect all adjustments that are necessary for a fair
presentation of the results for the interim periods. All adjustments made were
normal recurring accruals.
You should read the condensed consolidated financial statements in
conjunction with the consolidated financial statements and notes contained in
our Annual Report on Form 10-K for the year ended December 31, 1998, and Nextel
International, Inc.'s Annual Report on Form 10-K for the year ended December 31,
1998, for matters related to operations of Nextel International, Inc., an
indirect, substantially wholly-owned subsidiary of Nextel, and its subsidiaries.
You should not expect the results of operations of interim periods to be an
indication of results for a full year.
RECLASSIFICATIONS -- Certain prior period amounts have been reclassified to
conform to our current year presentation.
SUPPLEMENTAL CASH FLOW INFORMATION -- Total recorded capital expenditures
were $882 million and $1,176 million for the six months ended June 30, 1999 and
1998, respectively, reflecting decreases in amounts accrued and unpaid or
financed of $43 million at June 30, 1999 compared to December 31, 1998. Total
recorded capital expenditures include interest capitalized in connection with
the construction and development of our digital mobile network of approximately
$19 million and $27 million during the six months ended June 30, 1999 and 1998,
respectively.
REVENUE RECOGNITION -- We recognize revenue for airtime and other services
over the period earned, net of credits and adjustments and recognize revenue
from sales of equipment when the equipment is delivered. The costs of customer
discounts and rebates are recorded when the related revenues are recognized. We
establish an allowance for doubtful accounts sufficient to cover probable
losses.
INTANGIBLE ASSETS -- As a result of customer acceptance and support of the
financial community which became specifically apparent in the fourth quarter of
1997, we increased the amortization period from 20 years to 40 years for all of
our domestic Federal Communications Commission licenses and excess of purchase
price over the fair value of net assets acquired (goodwill) related to all
domestic acquisitions. Licenses for our international operations and the excess
of purchase price over the fair value of net assets acquired related to
international operations are amortized on a straight-line basis over 20 years.
We amortize customer lists over their expected useful lives, which is
generally 3 years for our digital customer base and 10 years for our analog
customer base, reflecting the relatively greater stability of our analog
customers. Other intangible assets with useful lives of up to 20 years include
non-compete agreements which are amortized over the lives of the related
agreements, generally 2 to 5 years; favorable leases which are amortized over 2
to 3 years; and trademarks which are amortized over 10 years for international
operations and 20 years for domestic operations.
RESTRICTED CASH AND CASH EQUIVALENTS -- At June 30, 1999 and December 31,
1998, approximately $141 million and $121 million, respectively, in cash and
cash equivalents held by Nextel International were not available to fund any of
the cash needs of our domestic business due to restrictions contained in Nextel
International's financing agreements.
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DIGITAL SUBSCRIBER UNIT AND ACCESSORY SALES AND RELATED COSTS -- We refer
to the handset device on which we deliver services as a subscriber unit. The
loss generated from the sale of the subscriber units used in our digital mobile
network primarily results from our subsidy of digital subscriber units and
accessories and represents marketing costs. Consolidated digital subscriber unit
and accessory sales 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 millions):
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------- ---------------------------------------
1999 1998 1999 1998
------------------ ------------------ ------------------ ------------------
Subscriber unit and accessory sales $ 228 $ 182 $ 118 $ 98
Cost of subscriber unit and accessory sales 423 310 225 167
------------- ------------- ------------- -------------
$ (195) $ (128) $ (107) $ (69)
============= ============= ============= =============
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," 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 and was to be effective for all quarters of fiscal
years beginning after June 15, 1999. In June 1999, the FASB issued SFAS No. 137,
"Deferral of the Effective Date of FASB Statement No. 133-an Amendment of FASB
Statement No. 133," which deferred the effective date for us until January 1,
2001. We are in the process of evaluating the potential impact of this standard
on our financial position and results of operations.
NOTE 2 -- SIGNIFICANT TRANSACTIONS AND DEVELOPMENTS.
NEXTEL PARTNERS TRANSACTION -- On January 29, 1999, along with Nextel
Partners, Inc. and certain other parties, including Motorola, Inc. and Eagle
River Investments, L.L.C., an affiliate of Mr. Craig O. McCaw, we 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 the technology developed by Motorola employed
in our national network. In connection with this transaction, we sold assets,
and are in the process of transferring certain Federal Communications Commission
licenses, to Nextel Partners. In exchange, Nextel Partners issued to us equity
representing about a 29% voting interest in Nextel Partners and having an agreed
value of $131 million and paid us about $132 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 Partners will have the
option to acquire certain additional territories and related FCC licenses from
us, and we 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 was classified as assets held for sale as of December 31, 1998.
The investment in Nextel Partners is accounted for by the equity method.
TOWERS TRANSACTION -- On April 20, 1999, Nextel and some of our
subsidiaries and SpectraSite Holdings, Inc. and some of its subsidiaries
consummated agreements under which we transferred specified telecommunications
towers and related assets to SpectraSite, which were then leased back to us. In
the transaction, we received $560 million in cash, which is reflected as a
finance obligation on our balance sheet, and received about an 18% ownership
interest in SpectraSite. In connection with the transaction, we 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 our continuing involvement related to our ownership interest in
SpectraSite, the sale-leaseback transaction is accounted for by the financing
method.
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MICROSOFT TRANSACTION -- On May 27, 1999, Microsoft Corporation purchased
about 16.7 million shares of our common stock for an aggregate cash investment
of $600 million, representing a per share price of $36.00. The agreements
related to the transaction establish certain transfer restrictions that apply to
the shares purchased by Microsoft and include an investor standstill provision.
Additionally, we agreed to provide specified registration rights that apply to
those shares. In connection with this transaction, we also entered into
agreements under which Microsoft is to provide certain portal services and
related assistance in connection with our Nextel Online(SM) service offering.
NEXTBAND TRANSACTION -- On June 3, 1999, we sold our 50% interest in
NEXTBAND Communications, L.L.C. to NEXTLINK Communications, Inc. for $138
million in cash and recognized a gain of $70 million which is included in other
income (expense) in our statement of operations.
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NOTE 3 -- LONG-TERM DEBT.
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
(dollars in millions)
11.5% SENIOR REDEEMABLE DISCOUNT NOTES DUE 2003,
net of unamortized discount of $0 $ 36 $ 36
9.75% SENIOR REDEEMABLE DISCOUNT NOTES DUE 2004,
net of unamortized discount of $0 and $13 1,127 1,114
10.125% SENIOR REDEEMABLE DISCOUNT NOTES DUE 2004,
net of unamortized discount of $59 and $67 350 342
12.25% SENIOR REDEEMABLE DISCOUNT NOTES DUE 2004,
net of unamortized discount of $1 and $1 8 8
10.25% SENIOR REDEEMABLE DISCOUNT NOTES DUE 2005,
net of unamortized discount of $21 and $22 94 93
13.0% SENIOR REDEEMABLE DISCOUNT NOTES DUE 2007,
(issued by Nextel International), net of
unamortized discount of $296 and $337 655 614
10.65% SENIOR REDEEMABLE DISCOUNT NOTES DUE 2007,
net of unamortized discount of $238 and $268 602 572
9.75% SENIOR SERIAL REDEEMABLE DISCOUNT NOTES DUE 2007,
net of unamortized discount of $306 and $345 823 784
9.95% SENIOR SERIAL REDEEMABLE DISCOUNT NOTES DUE 2008,
net of unamortized discount of $482 and $536 1,145 1,091
12.125% SENIOR REDEEMABLE DISCOUNT NOTES DUE 2008,
(issued by Nextel International), net of unamortized
discount of $263 and $289 467 441
12.0% SENIOR SERIAL REDEEMABLE NOTES DUE 2008,
net of unamortized discount of $4 and $4 296 296
4.75% CONVERTIBLE SENIOR NOTES DUE 2007,
net of unamortized discount of $0 600 --
BANK CREDIT FACILITY, interest payable quarterly at an
adjusted rate calculated based either on the prime rate or
LIBOR (6.94% to 8.63% - 1999; 7.06% to 10.50% - 1998) 1,795 2,118
NEXTEL INTERNATIONAL VENDOR CREDIT FACILITIES, interest payable
semiannually at 2.50% over the prime rate
(9.70% to 11.00% - 1999; 10.25% to 11.00% - 1998) 237 111
NEXTEL ARGENTINA BANK CREDIT FACILITY, interest payable quarterly at
an adjusted rate calculated based either on the prime rate or
LIBOR (8.75% to 9.50% - 1999 and 1998) 102 83
OTHER 4 16
------ ------
8,341 7,719
Less current portion (7) (9)
------ ------
$8,334 $7,710
====== ======
CONVERTIBLE NOTES OFFERING -- In June 1999, we completed the sale of $600
million in principal amount of our 4.75% Convertible Senior Notes due 2007,
generating approximately $588 million in net cash proceeds. Cash interest is
payable semi-annually on January 1 and July 1 of each year commencing on January
1, 2000. The notes are convertible at the option of the holders into common
stock at any time after the date of original issuance and prior to redemption,
repurchase or maturity at a conversion price of $47.308 per share, subject to
adjustment. The notes are redeemable at any time on or after July 6, 2002 at
specified redemption prices plus accrued interest. The
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notes are senior unsecured indebtedness of Nextel and rank equal in right of
payment with all our other unsubordinated, unsecured indebtedness.
MOTOROLA INTERNATIONAL FINANCING -- On February 4, 1999, Nextel
International and Motorola Credit Corporation entered into definitive agreements
providing for $225 million in secured financings. The loans under this facility
will be repaid in eight equal semi-annual installments beginning June 30, 2001,
will mature December 31, 2004 and bear interest at variable rates based on
either the U.S. prime rate or the London Interbank Offered Rate. The facility is
secured by, among other things, a pledge of the shares of stock of some of
Nextel International's direct and indirect subsidiaries. The availability of
borrowings under this facility is subject to the satisfaction or waiver of
certain applicable borrowing conditions.
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.
JUNE 30, DECEMBER 31,
1999 1998
--------- ------------
(dollars in millions)
SERIES D EXCHANGEABLE PREFERRED STOCK MANDATORILY REDEEMABLE 2009, 13%
cumulative annual dividend; 624,147 and 585,473 shares issued;
624,132 and 585,460 shares outstanding, stated at liquidation value $ 641 $ 601
SERIES E EXCHANGEABLE PREFERRED STOCK MANDATORILY REDEEMABLE 2010,
11.125% cumulative annual dividend; 861,297 and 815,314 shares
issued; 861,284 and 815,299 shares outstanding, stated at liquidation value 873 827
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 158 150
------- -------
$ 1,672 $ 1,578
======= =======
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NOTE 6 -- SEGMENT REPORTING.
We operate in two business segments: domestic and international. These
reportable segments are strategic business units that are in different phases of
development that we manage and finance separately based on the fundamental
differences in their operations. We evaluate performance of these segments and
allocate resources to them based on earnings (losses) before interest, taxes,
depreciation and amortization and other non-recurring charges (EBITDA).
DOMESTIC INTERNATIONAL CONSOLIDATED DOMESTIC INTERNATIONAL CONSOLIDATED
-------- ------------- ------------ -------- ------------- ------------
(dollars in millions)
FOR THE SIX MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
------------------------------------- -------------------------------------
Operating revenues $ 1,415 $ 42 $ 1,457 $ 731 $ 18 $ 749
======== ======== ======== ======= ======= ========
EBITDA $ 237 (93) $ 144 $ (148) $ (29) $ (177)
Depreciation and amortization 419 52 471 359 20 379
Interest expense (325) (82) (407) (253) (44) (297)
Interest income 9 3 12 11 10 21
Other income (expense), net 42 (44) (2) 4 (1) 3
-------- -------- -------- ------- ------- --------
Loss before income tax benefit and
extraordinary item $ (456) $ (268) $ (724) $ (745) $ (84) $ (829)
======== ======== ======== ======= ======= ========
Capital expenditures $ 786 $ 96 $ 882 $ 938 $ 238 $ 1,176
======== ======== ======== ======= ======= ========
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
JUNE 30, 1999 JUNE 30, 1998
------------------------------------ ----------------------------------
Operating revenues $ 771 $ 22 $ 793 $ 413 $ 9 $ 422
======== ======== ======== ======= ======= ========
EBITDA $ 155 $ (46) $ 109 $ (53) $ (19) $ (72)
Depreciation and amortization 215 28 243 183 11 194
Interest expense (165) (44) (209) (127) (25) (152)
Interest income 7 1 8 2 5 7
Other income (expense), net 45 15 60 5 (2) 3
-------- -------- -------- ------- ------- --------
Loss before income tax benefit
and extraordinary item $ (173) $ (102) $ (275) $ (356) $ (52) $ (408)
======== ======== ======== ======= ======= ========
AS OF JUNE 30, 1999 AS OF DECEMBER 31, 1998
------------------------------------ ----------------------------------
Property, plant and equipment, net $ 4,821 $ 509 $ 5,330 $ 4,384 $ 531 $ 4,915
======== ======== ======== ======= ======= ========
Identifiable assets $ 11,377 $ 1,553 $ 12,930 $ 9,972 $ 1,601 $ 11,573
======== ======== ======== ======= ======= ========
NOTE 7 -- SUBSEQUENT EVENTS.
MCCAW INVESTOR OPTION EXERCISE -- On July 28, 1999, Digital Radio L.L.C.,
an entity controlled by Craig O. McCaw, exercised in full its option to purchase
15 million shares of our Class A common stock for an aggregate cash purchase
price of $278 million.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
A. OVERVIEW.
The following discussion of our condensed consolidated financial condition
and results of operations for the six-and three-month periods ended June 30,
1999 and 1998, and significant factors that could affect our prospective
financial condition and results of operations, should also be read in
conjunction with our 1998 Annual Report on Form 10-K. Additional information
regarding our international operations is available in Nextel International's
1998 Annual Report on Form 10-K.
We provide a wide array of digital wireless communications services
throughout our domestic markets. We offer a differentiated, integrated package
of digital wireless communications services under the Nextel brand name,
primarily to business users. Our digital mobile network constitutes one of the
largest integrated wireless communications systems utilizing a single
transmission technology in the United States. Along with Nextel Partners, we
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 June 30, 1999:
- - we provided service to about 3,592,900 digital subscriber units in the
United States, adding about 440,000 net subscriber units during the
quarter; and
- - along with Nextel Partners, Inc., our digital networks were operational in
areas in and around 92 of the top 100 metropolitan statistical areas in the
United States.
In addition to our domestic operations, we have ownership interests in
international wireless companies through our subsidiary, Nextel International,
Inc. The subsidiaries of Nextel International, or other entities in which Nextel
International holds equity or equivalent interests, own and operate wireless
communications systems in and around various major metropolitan market areas in
Latin America, Asia and Canada. Along with Nextel International, we provide
service in ten of the world's 25 largest cities.
B. SECOND 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 we transferred specified telecommunications towers and related
assets to SpectraSite which were then leased back to us. In the transaction, we
received $560 million in cash, which is reflected as a finance obligation on our
balance sheet, and received about an 18% ownership interest in SpectraSite. In
connection with the transaction, we 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 our
continuing involvement related to our ownership interest in SpectraSite, the
sale leaseback transaction is accounted for by the financing method.
2. MICROSOFT TRANSACTION. On May 27, 1999, Microsoft purchased about 16.7
million shares of our common stock for an aggregate cash investment of $600
million, representing a per share price of $36.00. The agreements related to the
transaction establish certain transfer restrictions that apply to the shares
purchased by Microsoft and include an investor standstill provision.
Additionally, we agreed to provide specified registration rights that apply
to those shares. In connection with this transaction, we also entered into
agreements under which Microsoft is to provide certain portal services and
related assistance in connection with our Nextel Online(SM) service offering.
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3. NEXTBAND TRANSACTION. On June 3, 1999, we sold our 50% interest in
NEXTBAND Communications, L.L.C. to NEXTLINK Communications, Inc. for $138
million in cash and recognized a gain of $70 million which is included in other
income (expense) in our statement of operations.
4. AGREEMENT WITH U.S. DEPARTMENT OF JUSTICE. On June 14, 1999, we reached
agreement with the U.S. Department of Justice regarding a proposed settlement of
our challenges to the consent decree entered in 1995 by the United States
District Court for the District of Columbia in the case, United States of
America v. Motorola, Inc. and Nextel Communications, Inc. The consent decree
prohibits us from owning or managing more than a limited amount of 900 MHz
frequencies in thirteen of the largest markets in the United States. Under the
terms of the proposed settlement between us and the Department of Justice, we
will, subject to certain limitations, be permitted to acquire ownership of or
rights to use 108 channels of the available 200 channels in the 900 MHz
frequency range allocated for specialized mobile radio and other uses, in most
of the thirteen markets that were subject to restrictions in the consent decree.
In certain of those major markets located near national boundaries, where only
100 channels are available in the 900 MHz frequency range, we will be permitted
to acquire up to 54 of those channels. Additionally, the consent decree and any
related restrictions on our utilization of additional 900 MHz channels in those
markets will terminate on October 30, 2000. As a component of the overall
settlement, we will not be permitted to complete our agreement to acquire the
900 MHz channels in the consent decree markets currently held by Geotek
Communications, Inc. ("Geotek"). Additionally, the Department of Justice
withdrew its objections to our acquisition of Geotek's 900 MHz channel holdings
outside the thirteen markets subject to the restrictions of the consent decree.
We expect that we will use any additional 900 MHz channels to expand the
capacity of our digital mobile network as part of a planned deployment of
dual-band 800/900 MHz technology being developed by Motorola.
We, along with the Department of Justice, filed a joint motion with the
court to commence the process of implementing the settlement agreement, and also
jointly filed a stipulation with the court concerning the proposed modification
of the consent decree as agreed by the parties.
5. CONVERTIBLE NOTES OFFERING. In June 1999, we completed the sale of $600
million in principal amount of 4.75% Convertible Senior Notes due 2007,
generating approximately $588 million in net cash proceeds. Cash interest is
payable semi-annually on January 1 and July 1 of each year commencing on January
1, 2000. The notes are convertible at the option of the holders into common
stock at any time after the date of original issuance and prior to redemption,
repurchase or maturity at a conversion price of $47.308 per share subject to
adjustment. The notes are redeemable at any time on or after July 6, 2002 at
specified redemption prices plus accrued interest. The notes are senior
unsecured indebtedness of Nextel and rank equal in right of payment with all our
other unsubordinated, unsecured indebtedness.
C. POST SECOND QUARTER TRANSACTIONS AND DEVELOPMENTS.
1. MCCAW INVESTOR OPTION EXERCISES. On July 28, 1999, Digital Radio L.L.C.,
an entity controlled by Craig O. McCaw, exercised in full its option to purchase
15 million shares of our Class A common stock for an aggregate cash purchase
price of $278 million.
2. MANAGEMENT CHANGES. In July 1999, we announced that Timothy Donohue
became our Chief Executive Officer. Mr. Donohue previously served as our Chief
Operating Officer and President. Mr. Daniel Akerson, our former Chief Executive
Officer, continues to serve as Chairman of the Board of Directors until December
31, 1999, at which time it is anticipated that Craig O. McCaw will serve as our
Chairman.
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D. RESULTS OF OPERATIONS.
The following discussion compares our consolidated financial condition and
results of operations for the six- and three-month periods ended June 30, 1999
and 1998, and significant factors that could affect our prospective financial
condition and results of operations.
1. OPERATING REVENUES
% OF % OF CHANGE FROM
CONSOLIDATED CONSOLIDATED PREVIOUS YEAR
JUNE 30, OPERATING JUNE 30, OPERATING --------------------
1999 REVENUES 1998 REVENUES DOLLARS PERCENT
---------- ------------ ---------- ------------ --------- ---------
(dollars in millions)
SIX MONTHS ENDED
- ----------------
Operating revenues $1,457 100% $749 100% $708 95%
Domestic 1,415 97% 731 98% 684 94%
International 42 3% 18 2% 24 133%
THREE MONTHS ENDED
- ------------------
Operating revenues 793 100% 422 100% 371 88%
Domestic 771 97% 413 98% 358 87%
International 22 3% 9 2% 13 144%
Consolidated operating revenues include service revenues, which consist
primarily of charges for airtime usage and monthly network access fees from
providing mobile wireless services. Domestic operating revenues increased
principally as a result of a 76% increase in end-of-period domestic digital
subscriber units in service from about 2,042,100 at June 30, 1998 to about
3,592,900 at June 30, 1999. The increase in domestic operating revenues reflects
the increased number of digital subscriber units in service and an increase in
minutes of use per digital subscriber unit, producing an increase in the average
monthly revenue per digital subscriber unit from about $69 during the second
quarter of 1998 to about $74 during the second quarter of 1999. The growth in
digital subscriber units in service is the result of a number of factors,
principally:
- increased number of indirect distribution channels;
- expanded network coverage and 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 an
increase in end-of-period digital subscriber units in service from June 30, 1998
to June 30, 1999. This increase resulted from the launch of digital services in
major markets in Brazil, Argentina and Mexico in the second and third quarters
of 1998.
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2. COST OF REVENUES
% OF % OF CHANGE FROM
CONSOLIDATED CONSOLIDATED PREVIOUS YEAR
JUNE 30, OPERATING JUNE 30, OPERATING --------------------
1999 REVENUES 1998 REVENUES DOLLARS PERCENT
---------- ------------ ---------- ------------ --------- ---------
(dollars in millions)
SIX MONTHS ENDED
- ----------------
Cost of revenues $329 23% $229 31% $100 44%
Domestic 311 22% 222 30% 89 40%
International 18 1% 7 1% 11 157%
THREE MONTHS ENDED
- ------------------
Cost of revenues 166 21% 127 30% 39 31%
Domestic 157 20% 123 29% 34 28%
International 9 1% 4 1% 5 125%
Cost of revenues consists primarily of network operating costs and
interconnection fees assessed by local exchange carriers. In the six- and
three-month periods ended June 30, 1999, domestic cost of revenues increased
from the six- and three-month periods ended June 30, 1998, primarily as a result
of a 42% increase in the number of digital switches in service and a 38%
increase in digital cell sites and related equipment activated by us from June
30, 1998 to June 30, 1999, as well as increases in airtime usage and digital
subscriber units in service. Domestic cost of revenues as a percentage of
consolidated operating revenues decreased due to the economies of scale achieved
as a result of increases in system usage and digital subscriber units placed in
service during the first half of 1999 and the latter half of 1998.
The increase in cost of international revenues from the six-and three-month
periods ended June 30, 1998 to those ended June 30, 1999 is attributable
primarily to the increase in digital subscriber units in service from June 30,
1998 to June 30, 1999 as a result of the launch of digital services in major
markets in Brazil, Argentina, and Mexico in the second and third quarters of
1998.
3. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
% OF % OF CHANGE FROM
CONSOLIDATED CONSOLIDATED PREVIOUS YEAR
JUNE 30, OPERATING JUNE 30, OPERATING --------------------
1999 REVENUES 1998 REVENUES DOLLARS PERCENT
---------- ------------ ---------- ------------ --------- ---------
(dollars in millions)
SIX MONTHS ENDED
- ----------------
Selling, general and
administrative expenses $984 68% $697 93% $287 41%
Selling and marketing 601 41% 441 59% 160 36%
General and administrative 383 27% 256 34% 127 50%
THREE MONTHS ENDED
- ------------------
Selling, general and
administrative expenses 518 65% 367 87% 151 41%
Selling and marketing 317 40% 238 56% 79 33%
General and administrative 201 25% 129 31% 72 56%
The increase in selling, general and administrative expenses consisted of
an increase in domestic expenses of $211 million and an increase in
international expenses of $76 million for the six-month period ended June 30,
1999 from the comparable 1998 period. For the three-month period ended June 30,
1999 as compared to the
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three-month period ended June 30, 1998, the increase consisted of an increase in
domestic expenses of $117 million and an increase in international expenses of
$34 million.
The increase in selling and marketing expenses in the six- and three-month
periods ended June 30, 1999 from the comparable 1998 periods consists primarily
of increased costs incurred in connection with higher consolidated sales of
digital subscriber units including, respectively:
- $67 million and $38 million of increased losses generated from increased
consolidated sales of digital subscriber units and related accessories
(including losses of $14 million and $7 million relating to
international digital subscriber unit sales);
- $53 million and $30 million of increased domestic dealer commissions and
residuals earned by indirect distributors as a result of increased
digital subscriber unit sales through, and increased reliance on,
indirect distribution channels;
- $28 million and $10 million of increased advertising and marketing
expenses from international operations due to aggressive marketing
campaigns directed at increasing customer awareness of digital services
and an increase in the size of the international sales force to achieve
this expansion; and
- $12 million and $1 million of increased domestic advertising,
telemarketing and other selling and marketing expenses attributable to
expanded marketing campaigns to maintain and increase market share.
The increase in general and administrative expenses during the six- and
three-month periods ended June 30, 1999 from the comparable 1998 periods is
primarily attributable to the following, respectively:
- $50 million and $30 million of increased domestic expenses related to
billing, collection and customer care activities as a result of a larger
customer base;
- $43 million and $25 million of increased domestic personnel, facilities
and general corporate expenses primarily reflecting increased staffing
for back-office activities required to serve the larger customer base;
and
- $34 million and $17 million of increased international general and
administrative expenses, incurred to support the growth in our
international markets, including $20 million and $12 million in bad debt
expenses resulting from a concerted program initiated in the first
quarter of 1999 to aggressively review and take action on outstanding
accounts of delinquent paying customers.
The aggregate amount of selling, general and 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:
- continuing aggressive marketing campaigns;
- increasing sales and marketing, customer care and back-office support
staffing; and
- increasing aggregate amounts of subsidies as we sell additional digital
subscriber units and related accessories, although we do not currently
expect that these subsidies will increase on a per unit basis.
Selling, general and administrative expenses are expected to continue to decline
as a percentage of consolidated operating revenues as the revenue base
increases.
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4. DEPRECIATION AND AMORTIZATION
% OF % OF CHANGE FROM
CONSOLIDATED CONSOLIDATED PREVIOUS YEAR
JUNE 30, OPERATING JUNE 30, OPERATING --------------------
1999 REVENUES 1998 REVENUES DOLLARS PERCENT
---------- ------------ ---------- ------------ --------- ---------
(dollars in millions)
SIX MONTHS ENDED
- ----------------
Depreciation and
amortization expense $471 32% $379 51% $92 24%
Depreciation 367 25% 278 37% 89 32%
Amortization 104 7% 101 14% 3 3%
THREE MONTHS ENDED
- ------------------
Depreciation and
amortization expense 243 31% 194 46% 49 25%
Depreciation 192 24% 144 34% 48 33%
Amortization 51 7% 50 12% 1 2%
Depreciation expense increased primarily due to the effect of activating
additional operational cell sites and switches both in existing domestic markets
(where such activations were made primarily to expand the coverage and
capacity of our digital mobile network) and in new international markets
launched subsequent to June 30, 1998. 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.
We believe that some events occurred throughout 1997 and became
specifically apparent during the fourth quarter of 1997 that supported the
extension of the useful life of both the licenses and goodwill. These events
provided specific evidence that our long-term business plan was more likely to
be achieved, resulting in the ability to economically utilize these assets over
a longer period (i.e. 40 years) than was originally foreseeable.
Specifically, our technology was modified throughout 1995, 1996 and 1997
to resolve concerns regarding the performance our wireless technology
experienced when the technology was initially deployed. The new product and
digital technology became firmly established in October 1997 when we reached 1
million digital subscriber units in service and noted increases in average
revenue per unit. Further, we raised substantial capital during 1996 and 1997
fortifying our ability to complete the network build-out in accordance with our
business plan. The combination of our proven technology, customer acceptance
and financial support have allowed us to build our network and provide
substantially more than the minimal level of service necessary to assure the
renewal of our licenses.
The majority of our licenses have been obtained through business
acquisitions. Our experience is that the value attributed to the net assets
acquired, excluding the Federal Communications Commission licenses, and
liabilities assumed is generally small, reflecting the less significant value we
attach to such net assets and liabilities. Accordingly, the purchase price
offered to the seller reflects primarily the value of the licenses acquired. Any
resulting goodwill is amortized over the same life as our Federal Communications
Commission licenses because we believe the two are closely related and provide
benefits to us over the same periods. Therefore, we extended the life of
goodwill to coincide with the life of the licenses.
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5. SEGMENT EARNINGS (LOSSES), INTEREST EXPENSE, INTEREST INCOME AND OTHER
% OF % OF CHANGE FROM
CONSOLIDATED CONSOLIDATED PREVIOUS YEAR
JUNE 30, OPERATING JUNE 30, OPERATING --------------------
1999 REVENUES 1998 REVENUES DOLLARS PERCENT
---------- ------------ ---------- ------------ --------- ---------
(dollars in millions)
SIX MONTHS ENDED
- ----------------
Segment earnings (losses) $144 10% $(177) (24)% $321 181%
Interest expense 407 28% 297 40% 110 37%
Interest income 12 1% 21 3% (9) (43)%
Other, net:
Realized gain on sale of investment 70 5% -- 0% 70 NM
Foreign currency transaction loss (46) (3)% -- 0% (46) NM
Equity in losses of subsidiaries (31) (2)% (2) 0% (29) NM
Other income, net 5 0% 5 1% -- 0%
Income tax benefit 17 1% 83 11% (66) (80)%
Loss attributable to
common stockholders 800 55% 946 126% (146) (15)%
THREE MONTHS ENDED
- ------------------
Segment earnings (losses) 109 14% $(72) (17)% 181 251%
Interest expense 209 26% 152 36% 57 38%
Interest income 8 1% 7 2% 1 14%
Other, net:
Realized gain on sale of investment 70 9% -- 0% 70 NM
Foreign currency transaction gain 21 3% -- 0% 21 NM
Equity in losses of subsidiaries (25) (3)% (1) 0% (24) NM
Other (expense) income, net (6) (1)% 4 1% (10) (250)%
Income tax benefit 7 1% 49 12% (42) (86)%
Loss attributable to
common stockholders 315 40% 531 126% (216) (41)%
NM-Not Meaningful
We define segment earnings as earnings (losses) before interest, taxes,
depreciation and amortization and other non-recurring charges. Domestic segment
earnings are expected to grow due to an increasing customer base and decreasing
operating expenses as a percentage of revenues due to the economies of scale
achieved as a result of increases in system usage. We expect international
segment losses to continue while we are building out our digital systems and
expanding our presence in our international markets. See, "I. Our Forward
Looking Statements Are Subject to a Variety of Factors that Could Cause Actual
Results to Differ Materially From Current Beliefs."
Domestic segment earnings were $237 million and $155 million for the six-
and three-months ended June 30, 1999, compared to segment losses of $148
million and $53 million for the six- and three-months ended June 30, 1998.
International segment losses were $93 million and $46 million for the six- and
three-months ended June 30, 1999, compared to segment losses of $29 million and
$19 million for the six- and three-months ended June 30, 1998. Based on the
current stage of development of each of our reportable segments, most of our
operating revenues and identifiable assets pertain to our domestic operations,
while most of our losses are related to our international operations.
The increase in interest expense for the six- and three-months ended June
30, 1999 from the comparable 1998 periods resulted from Nextel's and Nextel
International's issuance of senior redeemable notes during February, March, and
November of 1998 and June of 1999, as well as a higher average level of
borrowings under our 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 March of 1998
and the retirement of a portion of two series of senior redeemable discount
notes during April of 1998.
A $70 million gain was recognized on the sale of our 50% ownership interest
in NEXTBAND Communications, L.L.C. The increase in the foreign currency
transaction loss for the six-month period ended June 30, 1999 is due primarily
to the devaluation of the Brazilian real relative to the U.S. dollar during the
first quarter of 1999 slightly offset by the strengthening of the Brazilian real
relative to the U.S. dollar during the second quarter of 1999. The
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increase in equity in loss of subsidiaries is primarily due to our equity method
investments in Nextel Partners and Infocom Communications Network, Inc., a
Philippine company ("Nextel Philippines").
We recorded an income tax benefit of $17 million (an effective tax rate of
2%) in 1999, compared to $83 million (an effective tax rate of 10%) in 1998. The
change in effective tax rate primarily resulted from a change in the tax law
which extended the net operating loss carry forward 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 carry
forward period. The financial statement limitation on the recognition of income
tax benefits for net operating losses will not have an impact on our ability to
utilize our net operating losses for income tax purposes.
E. LIQUIDITY AND CAPITAL RESOURCES
We had net losses attributable to common stockholders of $315 million and
$531 million for the three-month periods ended June 30, 1999 and 1998,
respectively, and $800 million and $946 million for the six-month periods ended
June 30, 1999 and 1998, respectively. The operating expenses associated with
developing, enhancing and operating the digital mobile network have more than
offset our operating revenues. Our operating expenses, debt service obligations
and anticipated capital expenditures are expected to continue to offset
operating revenues for the next several years. We have 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, we intend to use our existing cash and
investments, earnings before interest, taxes, depreciation and amortization from
our domestic operations and externally generated funds from debt and equity
sources (as discussed below) to cover our currently anticipated future needs,
including funding requirements related to the design, implementation and
operation of our domestic digital mobile network.
CASH FLOWS
Working capital increased by $771 million to $641 million at June 30, 1999
compared to a working capital deficit of $130 million at December 31, 1998.
During May and June 1999, we received $588 million in net proceeds from the
issuance of debt securities and $600 million for an equity investment from
Microsoft. We used $423 million of these proceeds to pay down the revolving line
of credit component of our domestic bank credit facility.
Net cash provided by operating activities of $145 million for the six
months ended June 30, 1999 improved by $346 million compared to net cash used in
operating activities of $201 million for the six months ended June 30, 1998. The
increase in net cash provided by operating activities consisted of a domestic
increase of $236 million partially offset by cash used in international
operations of $91 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 our funds for investing
activities. Net cash used in investing activities for the six-month period ended
June 30, 1999 decreased $689 million compared to the same period in 1998
primarily due to the $241 million decrease in capital expenditures and the
receipt of $270 million related to the sale of our interest in NEXTBAND
Communications L.L.C., a joint venture, and the sale of assets to Nextel
Partners and reimbursement of costs and operating expenses by Nextel Partners.
Cash payments for capital expenditures totaled $913 million for the six months
ended June 30, 1999 and $1,154 million for the six-month period ended June 30,
1998, including $87 million and $218 million in capital expenditures for
international operations for the six months ended June 30, 1999 and 1998,
respectively. While domestic capital spending decreased for the six-month period
ended June 30, 1999 from June 30, 1998 due to a number of factors, this level of
capital expenditures is not expected to be indicative of the final two quarters
in
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1999, during which the rate of capital spending is expected to increase. In
addition, to the extent capital expenditures currently planned for the remainder
of 1999 are not carried out on their anticipated schedule, those expenditures
would be carried over to early 2000. Also contributing to the decrease in cash
used in investing activities was a $210 million decrease in payments for
acquisitions and purchases of licenses, a decrease of $97 million in cash
investments in international subsidiaries, and a decrease of $129 million in net
proceeds from marketable securities transactions.
Cash flows provided by financing activities decreased by $137 million from
$1,803 million to $1,666 million for the six months ended June 30, 1998 and
1999, respectively. Net cash provided by financing activities consisted
primarily of $588 million in net proceeds from the issuance of debt securities,
$600 million in proceeds from the Microsoft investment, $560 million in proceeds
from SpectraSite Holdings, Inc. in connection with the transfer of specified
telecommunications towers in the second quarter of 1999 and $133 million in
proceeds from the exercise of stock options and warrants, offset by the net
repayment of $188 million of our consolidated bank and vendor credit facilities.
F. FUTURE CAPITAL NEEDS AND RESOURCES.
We anticipate that, for the foreseeable future, we will be utilizing
significant amounts of our available cash for:
- capital expenditures for the construction and enhancement of the
digital mobile network, both domestically and internationally;
- operating expenses relating to our digital mobile network, both
domestically and internationally;
- potential acquisitions including any negotiated acquisitions of
spectrum from third parties and any future FCC auctions of spectrum;
- debt service requirements; and
- other general corporate expenditures.
We anticipate that our cash utilization for capital expenditures and other
investing activities will continue to exceed our positive cash flows from
domestic operating activities throughout 1999 and into 2000, as we build out,
expand and enhance our digital mobile network.
1. DOMESTIC
Our bank credit agreement, as amended (the "Bank Credit Agreement"),
provides total potential secured financing capacity of up to $3.5 billion, of
which $3.295 billion in secured financing is currently available to us, 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 June 30,
1999, we had drawn $1.795 billion of our available financing under the Bank
Credit Agreement.
Amounts outstanding under the Bank Credit Agreement are secured by liens on
assets of some of our 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 can accelerate
if the aggregate principal amount of certain series of our senior redeemable
discount notes is not less than $1.0 billion by specified dates. The
availability of this financing is subject to our satisfying specific
requirements under the indentures governing our public notes issued before 1997,
which require us 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
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indentures). Based on the amount of equity issuances, including issuances of
preferred stock in 1997, 1998 and 1999, and our outstanding debt at June 30,
1999, we 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 our current assessment of business activity and related net cash
needs, we anticipate that our cash on hand, the remaining amounts available for
borrowing under the Bank Credit Agreement, the cash proceeds recently received
upon the exercise of options held by Digital Radio L.L.C., and the net cash
expected to be generated by domestic operations, collectively, will provide
sufficient funds to finance our domestic operations, meet our domestic debt
service obligations and fund our domestic capital expenditures, all at levels we
currently anticipate would be consistent with maintaining growth at the levels
contemplated by our current business plans, through December 31, 2000. See, "I.
Our Forward Looking Statements Are Subject to a Variety of Factors that
Could Cause Actual Results to Differ Materially From Current Beliefs."
We may require additional financing to fund further deployment, expansion
and enhancement of our digital mobile network in the United States after 2000.
We also may require additional financing prior to December 31, 2000, to pursue
activities related to new business opportunities (including commercial
activities involving our 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 our current domestic mobile wireless communications
businesses. Finally, the above funding requirements and estimates relate only to
our domestic business operations and opportunities, and do not reflect any of
the separate funding needs of Nextel International. See below,
"2. International."
The availability of borrowings pursuant to the Bank Credit Agreement is
subject to certain conditions, and we cannot provide assurance that those
conditions will continue to be met. The instruments relating to our financing
arrangements and preferred stock contain provisions that operate to limit the
amount of borrowings that we may incur. The terms of the Bank Credit Agreement
also require us and our 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, our capital needs, and our ability to
adequately address those needs through debt or equity funding sources, are
subject to a variety of factors that cannot presently be predicted with
certainty, for example, the commercial success of our digital mobile network,
the amount and timing of our capital expenditures and operating losses, the
availability and volatility of the equity and debt markets, and the market price
of our common stock. See, "I. Our Forward Looking Statements Are Subject to
a Variety of Factors that Could Cause Actual Results to Differ Materially From
Current Beliefs."
We have had and may in the future have discussions with third parties
regarding potential equity investments and debt financing arrangements to
satisfy actual or anticipated financing needs. At present, other than the
existing equity or debt financing arrangements that have been consummated and/or
are disclosed herein, we have 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 us and Motorola pursuant to
which we acquired substantially all of Motorola's domestic 800 MHz specialized
mobile radio licenses in 1995, we have 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 by Microsoft did not involve granting any
superior governance rights. Our ability to incur additional indebtedness
including, in certain circumstances, indebtedness incurred under the Bank Credit
Agreement, is and will be limited by the terms of our financing agreements and
the terms of some series of our outstanding preferred stock.
2. INTERNATIONAL
Nextel International currently estimates its remaining cash expenditures
for its fiscal year ending December 31, 1999 to be approximately $200 million.
This amount consists of cash to fund operations, capital
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expenditures for the construction and enhancement of its enhanced specialized
mobile radio networks, including contributions to affiliates for those purposes,
working capital and debt interest payments.
As of June 30, 1999, approximately $133 million has been borrowed by Nextel
International under its equipment financing facility with Motorola Credit
Corporation (the "International Motorola Financing Facility"), leaving
approximately $92 million available for future borrowings under such facility.
On June 18, 1999, the Company refinanced $24 million owed by Nextel Philippines
under the existing financing facility between Motorola Credit and Nextel
Philippines (the "Philippines Motorola Financing") with proceeds from loans
under the International Motorola Financing Facility. Additionally, as of June
30, 1999, approximately $104 million has been borrowed by McCaw International
(Brazil), Ltd. ("Nextel Brazil") under the vendor financing agreement between
Nextel Brazil and Motorola Credit (the "Brazil Motorola Financing"), leaving
approximately $21 million available for future borrowings. As of June 30, 1999,
Nextel Argentina S.R.L. ("Nextel Argentina") had borrowed $100 million pursuant
to its original bank credit facility (representing all amounts available) and
had not borrowed any of the $50 million in incremental term loans that are
available under that facility as a result of amendments entered into in May 1999
(the "Argentina Incremental Facility Loans"). The availability of the remaining
borrowings under each of the International Motorola Financing Facility, the
Brazil Motorola Financing and the Argentina Incremental Facility Loans is
subject to the satisfaction or waiver of certain applicable borrowing conditions
under each facility and such borrowings are limited to amounts used to finance
purchases of Motorola equipment and services.
In May 1999, Nextel International completed a preferred stock issuance,
pursuant to which Nextel International received proceeds of $100 million and
Nextel International entered into a commitment with Motorola Credit pursuant to
which Motorola Credit agreed to provide up to $57 million in incremental term
loans to Nextel International (the "Motorola Incremental Facility") for working
capital purposes. Nextel International contemplates negotiating and entering
into definitive agreements with Motorola Credit implementing the terms of the
Motorola Incremental Facility Commitment during the third quarter of 1999.
Nextel International has taken and expects to continue to take various
measures designed to conserve its available cash for use in funding its existing
core enhanced specialized mobile radio network business activities. In
particular, Nextel International has prioritized and expects to continue to
prioritize its expenditures to focus on its key markets in Latin America and
anticipates that it will not provide any significant funding to Nexnet or the
Shanghai GSM System in 1999.
Based on Nextel International's current estimate of its funding requirement
for 1999, it believes that it will have adequate funding to continue its
operations through December 31, 1999. Such assessment is based on Nextel
International's assumed utilization of its current available cash and cash
equivalents (including the proceeds from the preferred stock issuance) and the
assumed availability of funds under the financing arrangements described above
to meet its projected 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 December 31,
1999. After December 31, 1999, Nextel International will requires significant
additional capital to fund the build-out 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 purpose until its operations begin to generate
positive cash flows.
G. YEAR 2000 READINESS
As is the case with most other businesses using computers in their
operations, we are 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 our 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.
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1. STATE OF READINESS
We have had a program in place since February 1998 to address Year 2000
readiness issues in our critical business areas related to products, networks,
information management systems, non-information systems with embedded
technology, suppliers and customers. We have taken and will continue to take
actions designed to advance our progress toward becoming substantially Year
2000 ready by the end of the third quarter of 1999. Our Year 2000 readiness
goal focuses on our ability to perform our critical business functions and to
process information in an unambiguous manner under various date conditions.
To ensure the continued progress and success in managing all of our systems
Year 2000 readiness requirements, a special steering committee that includes
members of senior management responsible for our information technology and
network systems was formed to oversee this effort. Internal employees, as well
as outside contractors, staff our 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 below participate in this project.
We have identified five phases that assist in defining the status of progress
toward Year 2000 readiness. The five phases are:
1. Awareness -- locating, listing and prioritizing specific technology
used in our operations that is potentially subject to Year 2000
readiness related challenges;
2. Assessment -- determining the level of risk of Year 2000 readiness
challenges that exist on our systems through inquiry, research and
testing;
3. Remediation -- 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;
4. Testing - evaluating and reviewing results to monitor and assess
completeness of the manipulation of dates and date-related data on
Information Technology ("IT") and non-IT systems, including those of
material third parties; and
5. 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 July 15, 1999, we have completed the Awareness and Assessment phases
of the Year 2000 readiness project for both IT and non-IT systems. All material
systems are in or have completed the Remediation phase. Several major systems
have been validated by the respective vendor and are now in the Implementation
phase.
All Nextel International local markets have created plans for or have begun
testing critical local IT systems for Year 2000 readiness. The Assessment phase
has been completed and all international markets are in various stages of
Remediation, Testing and Implementation phases.
However, our ability to reach our Year 2000 readiness goal depends and will
continue to depend on the efforts of significant third-party vendors, suppliers,
subcontractors and business partners. We monitor the progress of these third
parties towards Year 2000 readiness. We regularly contact and attempt to obtain
from these third parties relevant details and schedules concerning their
contemplated development of Year 2000 ready applications
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for utilization in our domestic and international operations and systems.
Specifically, we rely on services and products offered by the following
significant third parties:
MOTOROLA, for our system infrastructure and subscriber handset units.
Motorola has informed us that the subscriber unit models manufactured after
June 1, 1998 are Year 2000 ready. All other digital subscriber units are Year
2000 ready with the exception of the short message service feature on those
phones, which is not expected to cause a material disruption in our service
offerings. With regard to the digital mobile network, Motorola has indicated
that the following system infrastructure components are Year 2000 ready:
- - critical call and data processing systems for the digital mobile network
have passed Year 2000 readiness testing;
- - Nortel switches and CISCO routers have passed Year 2000 readiness testing
appropriate for our use; and
- - Voice mail system components have passed Year 2000 readiness testing.
MOTOROLA COMMUNICATIONS ISRAEL LTD., which provides the provisioning
systems for Nextel International, has notified Nextel that its software is Year
2000 ready.
INTERNATIONAL TELECOMMUNICATIONS DATA SYSTEMS, INC. ("ITDS"), as the
software vendor for our domestic order entry and provisioning systems, as well
as our domestic billing information systems. ITDS informed us that the software
that operates our domestic order entry and provisioning system has successfully
completed the Remediation phase and has been delivered to us for user acceptance
testing and implementation. This vendor has also informed us that the software
used for domestic billing capabilities has successfully completed the
assessment, remediation and module testing phases and is currently in system
integration and joint client testing phases.
LHS GROUP, INC. ("LHS"), as the software vendor for Nextel International's
billing information systems. LHS informed us 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.
VANTIVE CORPORATION ("VANTIVE"), provides information systems used in our
customer care function and provides order entry systems for Nextel
International. Vantive provided information to us that it has successfully
tested the Year 2000 readiness of the software that will be used to develop Year
2000 ready customer care systems for Nextel International's operations.
ORACLE CORPORATION ("ORACLE"), provides us with information systems,
development tools and database management software that supports our human
resources and financial functions. Oracle has advised us that the software that
supports our human resources and financial functions is Year 2000 ready in
conjunction with recommended upgrades. We have established the environment to
test and apply these upgrades for our domestic operations. Nextel International
has installed these upgrades, and they are currently being tested.
HEWLETT-PACKARD, INC., which supplies computer hardware, for example,
monitors and peripherals, and UNIX operating systems. Hewlett-Packard has
provided us with sufficient information and instruction regarding how we
should remediate and implement Year 2000 readiness solutions to all
Hewlett-Packard software and hardware products. Hewlett-Packard is not expected
to participate directly in these remediation activities.
We have begun conducting an end-to-end system integrated Year 2000 test
utilizing Motorola's laboratories. The purpose of the test is to validate the
Year 2000 readiness of our essential system elements that are integrated
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with Motorola's iDEN network. This end-to-end test is expected to provide us
guidance regarding the Year 2000 readiness issues of crucial customer-oriented
systems where modifications to address Year 2000 readiness have been made and to
assist us in planning for any related business contingency issues.
2. THE COSTS TO ADDRESS OUR YEAR 2000 READINESS CHALLENGES
Based on information developed to date as a result of our assessment
efforts, we believe that the costs of modifying, upgrading or replacing our
systems and equipment will not have a material effect on our liquidity, our
financial condition or the results of operations. We currently estimate that our
domestic and international expenditures in connection with these efforts during
1999 will not exceed $45 million. To date, we have not deferred any specific
projects, goals or objectives relating to our domestic and international
operations as a result of implementing our Year 2000 readiness efforts.
3. THE RISKS OF OUR YEAR 2000 READINESS CHALLENGES
In light of the progress made to date, we do not anticipate any significant
delays or postponements in finalizing and implementing Year 2000 readiness
solutions for our critical systems by the end of the third quarter of 1999.
Until our remediation and testing phases are substantially complete, however, we
cannot fully and accurately estimate any uncertainty in the timely resolution of
our 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 us 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 our
operations. Finally, where we cannot validate that technology provided by
material third parties is Year 2000 ready, we are 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 appropriately address their own Year 2000 readiness
challenges, there could be a materially adverse effect on our 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 our inability or that of our 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 us 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, we 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. We 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
our own Year 2000 readiness assessment process. Because our systems are
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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 our systems.
Moreover, there can be no assurance that such impact will not have a materially
adverse effect on our operations.
Finally, in assessing our Year 2000 readiness exposure associated with our
international operations, we have 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
our international operations, may result in delays in identifying Year 2000
readiness challenges and a lag in implementing remediation efforts as compared
with our domestic operations. In the event our international affiliates and
their own material third parties fail to address their Year 2000 readiness
challenges, in a timely manner, our international operations could experience
material disruptions.
4. OUR CONTINGENCY PLANS
We have not completed all systems and software testing for our critical
systems, nor have we been advised of the completion of such activities by all
third-party providers of critical products and services. As a result, we have
not fully assessed our exposure from potential Year 2000 non-readiness. We are
preparing guidelines for addressing Year 2000 readiness business contingency
plans for external and internal systems should it be determined that contingency
plans are necessary. Following our testing of critical systems, we will evaluate
and create alternative plans designed to address various potential business
interruptions that may occur as a result of non-readiness. Additionally, since
business contingency plans may also be provided by third parties, we will assess
the development of appropriate alternative solutions presented by any relevant
third party to determine their effectiveness and likely impact on our Year 2000
readiness risk profile.
I. OUR 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 statements made in the foregoing "Management's
Discussion and Analysis of Financial Condition and Results of Operations" are
not historical or current facts, but deal with potential future circumstances
and developments. Those statements are qualified by the inherent risks and
uncertainties surrounding expectations generally, and also may materially differ
from actual future experience involving any one or more of these matters and
subject areas. We have attempted to identify, in context, some of the factors
that we currently believe may cause actual future experience and results to
differ from current expectations regarding the relevant matter or subject area.
The operation and results of our wireless communications business also may be
subject to the effect of other risks and uncertainties in addition to the
relevant qualifying factors identified in the foregoing "Management's Discussion
and Analysis of Financial Condition and Results of Operations" section,
including, but not limited to:
- - general economic conditions in the geographic areas and occupational market
segments that we are targeting for our digital mobile network service;
- - the availability of adequate quantities of system infrastructure and
subscriber equipment and components to meet service deployment and
marketing plans and customer demand;
- - the success of efforts to improve and satisfactorily address any issues
relating to our digital mobile network performance;
- - the continued successful performance of the technology being deployed in
our various market areas;
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- - the ability to achieve market penetration and average subscriber revenue
levels sufficient to provide financial viability to our digital mobile
network business;
- - Our ability to timely and successfully accomplish required scale-up of our
billing, collection, customer care and similar back-room operations to keep
pace with customer growth, increased system usage rates and growth in
levels of accounts receivable being generated by the digital mobile network
customer base;
- - access to sufficient debt or equity capital to meet operating and financing
needs;
- - the quality and price of similar or comparable wireless communications
services offered or to be offered by our competitors, including providers
of cellular and personal communication services;
- - the ability to successfully develop or obtain from third parties and
implement Year 2000 readiness solutions in systems that are critical to our
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 our reports
filed with the Commission including our Annual Report on Form 10-K for the
year ended December 31, 1998 and, our Quarterly Report on Form 10-Q for the
quarter ended March 31, 1999 and, with specific reference to risk factors
relating to international operations in Nextel International, Inc.'s
reports filed with the Commission, including Nextel International's Annual
Report on Form 10-K for the year ended December 31, 1998 and its Quarterly
Reports on Form 10-Q for the quarters ended March 31, 1999 and June 30,
1999.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We use mandatorily redeemable preferred stock, senior notes, and bank and
vendor credit facilities to finance our operations. These on-balance sheet
financial instruments, to the extent they provide for variable rates of
interest, expose us to interest rate risk. Our 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 our bank
and vendor credit agreements. We use 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 our 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.
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 us to foreign currency exchange rate risk. In
the near term, our 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
June 30, 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., a publicly traded company that had a
fair value of $114 million as of June 30, 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 our
financial statements. Negative fluctuations in Clearnet's stock price expose us
to equity price risk. A 10% decline in the stock price would result in a $11
million decrease in the fair value of Nextel International's investment in
Clearnet.
The information below summarizes our sensitivity to market risks associated
with fluctuations in interest rates and foreign currency exchange rates as of
June 30, 1999 in United States dollars. To the extent that our financial
instruments expose us 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 our mandatorily redeemable preferred stock, senior notes, and bank
and vendor credit facilities in effect at June 30, 1999 and, in the case of the
mandatorily redeemable preferred stock and senior 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 June 30, 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: (1) quoted market prices for mandatorily redeemable
preferred stock and senior notes; (2) the carrying value for the bank and vendor
credit facilities at June 30, 1999 as interest rates are reset periodically; and
(3) estimates obtained from dealers to settle interest rate swap and collar
agreements. Descriptions of our mandatorily redeemable preferred stock, senior
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 our 1998 Annual Report on Form 10-K and should be read
in conjunction with the following table. The increase in the total and fair
values of our mandatorily redeemable preferred stock, long-term debt, and
interest rate swaps and collars as compared to December 31, 1998 reflect the
June 1999 issuance of convertible notes and the changes in the applicable
market conditions.
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YEAR OF MATURITY
----------------
1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE
------ ------ ------ ------- ------ ------------ ------- ------------
(U.S. DOLLARS IN MILLIONS)
I. INTEREST RATE SENSITIVITY
MANDATORILY REDEEMABLE PREFERRED STOCK AND LONG-TERM DEBT:
Fixed Rate -- -- -- -- $36 $10,674 $10,710 $8,925
Average Interest Rate -- -- -- -- 12% 11% 11%
Variable Rate -- $31 $104 $147 228 1,624 2,134 2,134
Average Interest Rate -- 9% 9% 9% 8% 8% 8%
INTEREST RATE SWAPS:
Variable to Fixed -- -- 200 -- 100 570 870 (58)
Average Pay Rate -- -- 5% -- 6% 8% 7%
Average Receive Rate -- -- 5% -- 5% 5% 5%
Variable to Variable -- 50 100 -- 400 -- 550 2
Average Pay Rate -- 5% 5% -- 5% -- 5%
Average Receive Rate -- 5% 5% -- 5% -- 5%
INTEREST RATE COLLARS:
Collars -- -- -- -- 200 -- 200 (1)
Average Cap -- -- -- -- 7% -- 7%
Average Floor -- -- -- -- 4% -- 4%
II. FOREIGN EXCHANGE RATE SENSITIVITY
LONG-TERM DEBT:
Fixed Rate -- -- -- -- -- 1,681 1,681 950
Average Interest Rate -- -- -- -- -- 13% 13%
Variable Rate -- 31 74 84 115 35 339 339
Average Interest Rate -- 9% 10% 10% 9% 10% 10%
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PART II
ITEM 1. LEGAL PROCEEDINGS.
We are involved in certain legal proceedings that are described in our 1998
Annual Report on Form 10-K. During the three months ended June 30, 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 June 16, 1999, we completed the sale of $500 million in principal
amount at maturity of convertible notes to qualified institutional
buyers and institutional accredited investors. Also, on June 22,
1999, we completed the sale of an additional $100 million in
principal amount at maturity of convertible notes to the placement
agents to cover over-allotments. These transactions generated
approximately $588 million in net proceeds. Morgan Stanley Dean
Witter, Banc of America Securities LLC, Goldman Sachs & Co. and
Credit Suisse First Boston acted as placement agents and received
approximately $12 million in fees.
The offering of the Convertible Notes was effected as a private
placement exempt under Section 4(2) and Rule 144A under the
Securities Act.
On May 27, 1999, Microsoft purchased about 16.7 million shares of
common stock, which generated $600 million in proceeds. The purchase
of the 16.7 million common shares was effected as a private placement
exempt under Section 4(2) of the Securities Act.
On April 30, 1999 Motorola exercised warrants purchasing 2,895,384
shares of common stock, which generated about $43.3 million in
proceeds. The issuance of shares was effected as a private placement
exempt under Section 4(2) of the Securities Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 11, 1999, we held our 1999 Annual Meeting of Stockholders in Reston,
Virginia. Only holders of record of common stock and of the Class A Convertible
Redeemable Preferred Stock on the record date of March 17, 1999, were entitled
to vote at the Annual Meeting. Each holder of record of common stock at the
close of business on the record date was entitled to one vote per share on each
matter voted upon by the stockholders at the annual meeting. The holder of
record of the Class A Convertible Redeemable Preferred Stock at the close of
business on the record date was entitled to one vote per share of common stock
into which its shares of Class A Convertible Redeemable Preferred Stock were
convertible on the record date. The holder of Class A Convertible Redeemable
Preferred Stock, in its capacity as such, was entitled to vote as a separate
class with respect to the election of one Class A Convertible Redeemable
Preferred Stock director and to vote together with the holders of common stock
on each matter voted upon at the annual meeting other than the election of
directors. As of the record date, there were 274,369,629 shares of common stock
outstanding and 7,905,981 shares of Class A Convertible Redeemable Preferred
Stock (convertible into 23,717,943 shares of common stock) outstanding.
The following matters were submitted for a vote by security holders:
Proposal 1 To elect a total of three directors, each to hold office for
a three-year term ending on the date of our third succeeding
annual meeting of stockholders and until their respective
successors shall have been duly elected and qualified.
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Set forth below is information regarding the 241,662,376 shares of common
stock voted in the election of these three directors (86.7% of the total number
of shares of common stock entitled to vote on such matter at the annual meeting)
and the 7,905,981 shares of Class A Convertible Redeemable Preferred Stock
(convertible into 23,717,943 shares of common stock) voted in the election of
the Class A Convertible Redeemable Preferred Stock director (100% of the total
number of shares of Class A Convertible Redeemable Preferred Stock entitled to
vote for the election of the Class A Convertible Redeemable Preferred Stock
director).
NAME FOR WITHHELD BROKER NON-VOTE
- ---- ----------- ----------- ---------------
Daniel F. Akerson 237,997,360 3,665,016 --
Timothy Donahue 238,004,455 3,657,921 --
Frank Drendel 237,994,042 3,668,334 --
Class A Convertible Redeemable Preferred Stock director
Dennis Weibling 23,717,943 0 --
The following are the names of each of our other directors whose term of office
continued after the meeting:
Directors Holding Office Until 2000: William E. Conway, Jr., Keisuke Nakasaki,
William A. Hoglund and Morgan E. O'Brien.
Directors Holding Office Until 2001: Keith Bane and Craig McCaw.
Proposal 2 To ratify the appointment of Deloitte & Touche LLP as the firm
of independent auditors to audit our consolidated financial
statements for 1999.
Set forth below is information regarding the 265,380,319 aggregate common
stock equivalents representing shares of common stock and Class A Convertible
Redeemable Preferred Stock voted to ratify the appointment of Deloitte & Touche
LLP as independent auditors.
Votes FOR 264,580,193
Votes AGAINST 271,373
Votes ABSTAINED 528,753
Broker NON-VOTE 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits.
EXHIBIT NUMBER EXHIBIT DESCRIPTION
- -------------- -------------------
4.1 Indenture, dated as of June 16, 1999, between Nextel
Communications, Inc. and Harris Trust and Savings Bank, as
Trustee, relating to Nextel's 4.75% Convertible Senior
Notes due 2007 (filed as Exhibit 4.1 to the Current Report
on Form 8-K dated and filed on June 23, 1999 and
incorporated herein by reference).
10.1 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).
10.2* iDEN Infrastructure [*] Supply Agreement between Motorola,
Inc. and Nextel Communications, Inc. dated as of April 13,
1999 (filed herewith).
33
34
10.3 Investment Agreement by and between Nextel Communications,
Inc. and Microsoft Corporation dated as of May 7, 1999
(including the form of Registration Rights Agreement
attached as Exhibit A thereto)(filed as Exhibits 10.1 and
10.2 respectively, to the Current Report on Form 8-K dated
May 12, 1999 and filed on May 13, 1999 and incorporated
herein by reference).
99.1 Joint Motion filed by Nextel Communications, Inc. and the
U.S. Department of Justice (the "DOJ") on June 14, 1999
with the U.S. District Court for the District of Columbia
(the "Court") (filed as Exhibit 99.1 to the Current Report
on Form 8-K dated and filed on June 15, 1999 (the "June 15
8-K") and incorporated herein by reference).
99.2 Stipulation jointly filed by Nextel Communications, Inc.
and the DOJ on June 14, 1999 with the Court (filed as
Exhibit 99.2 to the June 15 8-K and incorporated herein by
reference).
27** Financial Data Schedule.
----------------
* Confidential portions omitted and filed separately with
the Commission pursuant to an application for confidential
treatment pursuant to Rule 24b-2 under the Securities and
Exchange Act of 1934, as amended.
** 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 April 1, 1999
with the Commission reporting under Item 5 the Nextel Sale of
Interest in NEXTBAND to NEXTLINK.
(ii) Current Report on Form 8-K dated May 12, 1999 and filed on
May 13, 1999 with the Commission reporting under Item 5 the
Nextel Sale of Interest in NEXTBAND to NEXTLINK.
(iii) Current Report on Form 8-K dated and filed on June 15, 1999
with the Commission reporting under Item 5 the settlement of
the Consent Decree proceeding with the Department of Justice.
(iv) Current Report on Form 8-K dated and filed June 23, 1999 with
the Commission reporting under Item 5 the consummation of the
Convertible Notes offering.
34
35
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: August 16, 1999 William G. Arendt
Vice President and Controller
(Principal Accounting Officer)
36
EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT DESCRIPTION
- -------------- -------------------
4.1 Indenture, dated as of June 16, 1999, between Nextel
Communications, Inc. and Harris Trust and Savings Bank, as
Trustee, relating to Nextel's 4 3/4% Convertible Senior
Notes due 2007 (filed as Exhibit 4.1 to the Current Report
on Form 8-K dated and filed on June 23 1999, and
incorporated herein by reference).
10.1 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).
10.2* iDEN Infrastructure [*] Supply Agreement between Motorola,
Inc. and Nextel Communications, Inc. dated as of April 13,
1999 (filed herewith).
10.3 Investment Agreement by and between Nextel Communications,
Inc. and Microsoft Corporation dated as of May 7, 1999
(including the form of Registration Rights Agreement
attached as Exhibit A thereto)(filed as Exhibits 10.1 and
10.2 respectively, to the Current Report on Form 8-K dated
May 12, 1999 and filed on May 13, 1999 and incorporated
herein by reference).
99.1 Joint Motion filed by Nextel Communications, Inc. and the
U.S. Department of Justice (the "DOJ") on June 14, 1999
with the U.S. District Court for the District of Columbia
(the "Court") (filed as Exhibit 99.1 to the Current Report
on Form 8-K dated and filed on June 15, 1999 (the "June 15
8-K") and incorporated herein by reference).
99.2 Stipulation jointly filed by Nextel Communications, Inc.
and the DOJ on June 14, 1999 with the Court (filed as
Exhibit 99.2 to the June 15 8-K and incorporated herein by
reference).
27** Financial Data Schedule.
----------------
* Confidential portions omitted and filed separately with
the Commission pursuant to an application for confidential
treatment pursuant to Rule 24b-2 under the Securities and
Exchange Act of 1934, as amended.
** Submitted only with the electronic filing of this document
with the Commission pursuant to Regulation S-T under the
Securities Act.