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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 SEPTEMBER 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, 20191
VIRGINIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
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 OCTOBER 29, 1999
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Class A Common Stock, $0.001 par value 315,595,665
Class B Non-Voting Common Stock, $0.001 par value 17,830,000
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NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
PAGE NO.
--------
PART I FINANCIAL INFORMATION.
Item 1. Financial Statements -- Unaudited.
Condensed Consolidated Balance Sheets --
As of September 30, 1999 and December 31, 1998............ 3
Condensed Consolidated Statements of Operations and
Comprehensive Loss -- For the Nine Months Ended September
30, 1999 and 1998......................................... 4
Condensed Consolidated Statements of Operations and
Comprehensive Loss -- For the Three Months Ended September
30, 1999 and 1998......................................... 5
Condensed Consolidated Statement of Changes in Stockholders'
Equity -- For the Nine Months Ended September 30, 1999.... 6
Condensed Consolidated Statements of Cash Flows -- For the
Nine Months Ended September 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...................................................... 29
PART II OTHER INFORMATION.
Item 1. Legal Proceedings........................................... 31
Item 2. Changes in Securities....................................... 31
Item 6. Exhibits and Reports on Form 8-K............................ 31
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PART I
ITEM 1. FINANCIAL STATEMENTS -- UNAUDITED.
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(DOLLARS IN MILLIONS)
UNAUDITED
1999 1998
------- -------
ASSETS
CURRENT ASSETS
Cash and cash equivalents (of which $78 and $121 is
restricted)............................................ $ 1,379 $ 321
Accounts and notes receivable, less allowance for doubtful
accounts of $73 and $63................................ 554 443
Subscriber unit and accessory inventory................... 76 63
Assets held for sale...................................... -- 132
Prepaid expenses and other................................ 60 93
------- -------
Total current assets.............................. 2,069 1,052
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation of $1,753 and $1,202......................... 5,597 4,915
INTANGIBLE ASSETS, net of accumulated amortization of $979
and $917.................................................. 4,610 4,937
INVESTMENTS AND OTHER ASSETS................................ 881 669
------- -------
$13,157 $11,573
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 678 $ 636
Accrued expenses and other................................ 836 537
Current portion of long-term debt and finance
obligation............................................. 28 9
------- -------
Total current liabilities......................... 1,542 1,182
LONG-TERM DEBT.............................................. 8,444 7,710
FINANCE OBLIGATION (NOTE 2)................................. 547 --
DEFERRED INCOME TAXES....................................... 756 771
OTHER....................................................... 69 73
------- -------
Total liabilities................................. 11,358 9,736
------- -------
CONTINGENCIES (NOTE 4)
MINORITY INTEREST........................................... 25 29
MANDATORILY REDEEMABLE PREFERRED STOCK (NOTE 5)............. 1,720 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, 315,451,507 and 272,087,322 shares
issued, 315,065,052 and 271,386,227 shares
outstanding............................................ -- --
Common stock, Class B, non-voting convertible, 17,830,000
shares issued and outstanding.......................... -- --
Paid-in capital........................................... 5,303 4,379
Accumulated deficit....................................... (5,420) (4,401)
Treasury stock, at cost, 386,455 and 701,095 shares....... (8) (13)
Deferred compensation, net................................ (21) (2)
Accumulated other comprehensive loss...................... (91) (24)
------- -------
Total stockholders' equity........................ 54 230
------- -------
$13,157 $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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
UNAUDITED
1999 1998
-------- --------
OPERATING REVENUES.......................................... $ 2,346 $ 1,255
-------- --------
OPERATING EXPENSES
Cost of revenues.......................................... 504 371
Selling, general and administrative....................... 1,523 1,101
Depreciation and amortization............................. 732 583
-------- --------
2,759 2,055
-------- --------
OPERATING LOSS.............................................. (413) (800)
-------- --------
OTHER INCOME (EXPENSE)
Interest expense.......................................... (627) (468)
Interest income........................................... 28 29
Other, net................................................ (32) (37)
-------- --------
(631) (476)
-------- --------
LOSS BEFORE INCOME TAX BENEFIT AND EXTRAORDINARY ITEM....... (1,044) (1,276)
INCOME TAX BENEFIT.......................................... 25 128
-------- --------
LOSS BEFORE EXTRAORDINARY ITEM.............................. (1,019) (1,148)
EXTRAORDINARY ITEM -- LOSS ON EARLY RETIREMENT OF DEBT, NET
OF INCOME TAX OF $0....................................... -- (133)
-------- --------
NET LOSS.................................................... (1,019) (1,281)
MANDATORILY REDEEMABLE PREFERRED STOCK DIVIDENDS............ (142) (107)
-------- --------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS.................... $ (1,161) $ (1,388)
======== ========
LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS, BASIC
AND DILUTED:
Loss before extraordinary item attributable to common
stockholders........................................... $ (3.78) $ (4.56)
Extraordinary item........................................ -- (0.48)
-------- --------
$ (3.78) $ (5.04)
======== ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (IN
THOUSANDS)................................................ 307,286 275,584
======== ========
COMPREHENSIVE LOSS, NET OF INCOME TAX
Net loss.................................................. $ (1,019) $ (1,281)
Unrealized gain (loss) on available-for-sale securities... 54 (25)
Foreign currency translation adjustment................... (121) (16)
-------- --------
COMPREHENSIVE LOSS.......................................... $ (1,086) $ (1,322)
======== ========
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 SEPTEMBER 30, 1999 AND 1998
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
UNAUDITED
1999 1998
-------- --------
OPERATING REVENUES.......................................... $ 889 $ 506
-------- --------
OPERATING EXPENSES
Cost of revenues.......................................... 175 142
Selling, general and administrative....................... 539 404
Depreciation and amortization............................. 261 204
-------- --------
975 750
-------- --------
OPERATING LOSS.............................................. (86) (244)
-------- --------
OTHER INCOME (EXPENSE)
Interest expense.......................................... (220) (171)
Interest income........................................... 16 8
Other, net................................................ (30) (40)
-------- --------
(234) (203)
-------- --------
LOSS BEFORE INCOME TAX BENEFIT.............................. (320) (447)
INCOME TAX BENEFIT.......................................... 8 45
-------- --------
NET LOSS.................................................... (312) (402)
MANDATORILY REDEEMABLE PREFERRED STOCK DIVIDENDS............ (49) (40)
-------- --------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS.................... $ (361) $ (442)
======== ========
LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS, BASIC
AND DILUTED............................................... $ (1.10) $ (1.56)
======== ========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (IN
THOUSANDS)................................................ 327,266 282,691
======== ========
COMPREHENSIVE LOSS, NET OF INCOME TAX
Net loss.................................................. $ (312) $ (402)
Unrealized gain (loss) on available-for-sale securities... 25 (18)
Foreign currency translation adjustment................... (11) (7)
-------- --------
COMPREHENSIVE LOSS.......................................... $ (298) $ (427)
======== ========
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 NINE MONTHS ENDED SEPTEMBER 30, 1999
(DOLLARS IN MILLIONS)
UNAUDITED
CLASS B
CLASS A PREFERRED CLASS A CLASS B
PREFERRED STOCK STOCK COMMON STOCK COMMON STOCK
------------------ --------------- -------------------- ------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- ------ ------ ------ ----------- ------ ---------- ------ -------
BALANCE, JANUARY 1, 1999....... 7,905,981 $291 82 $ -- 272,087,322 $ -- 17,830,000 $ -- $4,379
Issuance of common stock due
to:
Exercise of options and
warrants................. 26,697,518 -- 433
Employee stock purchase
plan..................... --
Cash investment (Note 2)... 16,666,667 -- 600
Deferred compensation, net... 33
Unrealized gain on
available-for-sale
securities, net of income
tax........................
Foreign currency translation
adjustment.................
Mandatorily redeemable
preferred stock
dividends.................. (142)
Other........................
Net loss.....................
--------- ---- -- ---- ----------- ---- ---------- ---- ------
BALANCE, SEPTEMBER 30, 1999.... 7,905,981 $291 82 $ -- 315,451,507 $ -- 17,830,000 $ -- $5,303
========= ==== == ==== =========== ==== ========== ==== ======
ACCUMULATED OTHER
COMPREHENSIVE
(LOSS) INCOME
-------------------------
TREASURY STOCK UNREALIZED CUMULATIVE
ACCUMULATED ----------------- DEFERRED GAIN ON TRANSLATION
DEFICIT SHARES AMOUNT COMPENSATION INVESTMENTS ADJUSTMENT TOTAL
----------- -------- ------ ------------ ----------- ----------- -------
BALANCE, JANUARY 1, 1999....... $(4,401) 701,095 $(13) $ (2) $-- $ (24) $ 230
Issuance of common stock due
to:
Exercise of options and
warrants................. 433
Employee stock purchase
plan..................... (357,459) 7 7
Cash investment (Note 2)... 600
Deferred compensation, net... (19) 14
Unrealized gain on
available-for-sale
securities, net of income
tax........................ 54 54
Foreign currency translation
adjustment................. (121) (121)
Mandatorily redeemable
preferred stock
dividends.................. (142)
Other........................ 42,819 (2) (2)
Net loss..................... (1,019) (1,019)
------- -------- ---- ---- --- ----- -------
BALANCE, SEPTEMBER 30, 1999.... $(5,420) 386,455 $ (8) $(21) $54 $(145) $ 54
======= ======== ==== ==== === ===== =======
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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(DOLLARS IN MILLIONS)
UNAUDITED
1999 1998
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(1,019) $(1,281)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of deferred financing costs and accretion
of senior redeemable notes............................ 311 364
Depreciation and amortization.......................... 732 583
Provision for losses on accounts receivable............ 110 52
Deferred income tax benefit............................ (25) (128)
Extraordinary loss on retirement of debt............... -- 133
Net foreign currency transaction loss (gain)........... 61 (7)
Gain on sale of equity in joint venture................ (70) --
Loss from unconsolidated equity investments............ 49 6
Loss on interest rate protection agreement............. -- 47
Other, net............................................. 23 30
Change in assets and liabilities, net of effects from
acquisitions:
Accounts and notes receivable........................ (230) (196)
Subscriber unit and accessory inventory.............. (21) 1
Other assets......................................... 12 (29)
Accounts payable, accrued expenses and other......... 31 125
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Net cash used in operating activities............. (36) (300)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (Note 1)............................. (1,075) (1,760)
Proceeds from sale of assets.............................. 290 --
Payments for acquisitions and purchase of licenses, net of
cash acquired.......................................... (58) (349)
Other investments in and advances to affiliates........... (37) (175)
Purchases of marketable securities........................ (1) (98)
Proceeds from maturities and sales of marketable
securities............................................. -- 176
------- -------
Net cash used in investing activities............. (881) (2,206)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of stock and exercise of stock options, warrants and
other.................................................. 1,033 28
Issuance of debt securities............................... 600 1,401
Proceeds from finance obligation.......................... 575 --
Borrowings under long-term credit facilities.............. 233 1,052
Repayments under long-term credit facilities.............. -- (972)
Revolving line of credit (repayments) borrowings, net..... (423) 1,064
Repayments under finance obligation....................... (10) --
Other long-term debt repayments, net...................... (13) (6)
Deferred financing costs.................................. (33) (90)
Capital contributions from minority stockholders.......... 13 10
Issuance of mandatorily redeemable preferred stock........ -- 750
Retirement of debt securities............................. -- (741)
------- -------
Net cash provided by financing activities......... 1,975 2,496
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 1,058 (10)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 321 302
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 1,379 $ 292
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 255 $ 107
======= =======
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 the 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 the results for a full year.
RECLASSIFICATIONS. Certain prior period amounts have been reclassified to
conform to our current year presentation.
SUPPLEMENTAL CASH FLOW INFORMATION. During the nine-month periods ended
September 30, 1999 and 1998, we incurred capital expenditures of $1,347 million
(including an increase of $272 million in amounts that were accrued and unpaid
or financed) and $1,726 million (excluding a decrease of $34 million in amounts
accrued and unpaid or financed), respectively.
For the nine-month periods ended September 30, 1999 and 1998, total
interest costs were $656 million and $510 million, respectively, of which $29
million and $42 million were capitalized.
REVENUE RECOGNITION. We refer to the handset device on which we deliver
services as a subscriber unit. We recognize revenue for airtime and other
services over the period earned, net of credits and adjustments and recognize
revenue from sales of subscriber units and accessories when the subscriber units
and accessories are 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.
DIGITAL SUBSCRIBER UNIT AND ACCESSORY SALES AND RELATED COSTS. 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):
NINE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- -------------
1999 1998 1999 1998
----- ----- ----- ----
Subscriber unit and accessory sales...................... $ 349 $ 308 $ 121 $126
Cost of subscriber unit and accessory sales.............. 659 502 236 192
----- ----- ----- ----
$(310) $(194) $(115) $(66)
===== ===== ===== ====
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 and the excess of purchase price over the fair
value of net assets acquired related to our international operations are
amortized on a straight-line basis over 20 years.
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We amortize customer lists over their expected useful lives, which is
generally 3 years for our digital customer base and up to 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 September 30, 1999 and December
31, 1998, approximately $78 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.
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 on the balance sheet
and measured at fair value. 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 TRANSACTIONS. 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, one of our
principal stockholders, we entered into definitive agreements relating to the
capitalization, governance, financing and operation of Nextel Partners. Nextel
Partners is constructing and operating a digital wireless system utilizing the
technology developed by Motorola employed in our national network. In connection
with this transaction, we sold assets, and have received regulatory approval to
transfer 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 related to the assets sold and the reimbursement
of costs and net operating expenses. The net book value of the assets sold was
classified as assets held for sale as of December 31, 1998. On September 9,
1999, pursuant to the definitive agreements, Nextel Partners exercised its
option to acquire certain additional territories and assets from us and related
Federal Communications Commission licenses (which we are in the process of
transferring), and we received an aggregate consideration of about $19 million
consisting of approximately $10 million in cash and $9 million in equity. Also
on September 9, 1999, we made an additional $13 million cash equity investment
in Nextel Partners to avoid dilution of our 29% voting interest.
The agreements with Nextel Partners establish certain circumstances in
which Nextel Partners will have the option to acquire certain additional
territories and related Federal Communications Commission licenses from us. In
addition, the definitive agreements also establish certain circumstances in
which we will have the right or the obligation to purchase the remaining equity
interests in Nextel Partners at specified prices. The investment in Nextel
Partners is accounted for by the equity method.
TOWERS TRANSACTIONS. 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 we reflected as a
finance obligation on our balance sheet at that time, and received about an 18%
ownership interest in SpectraSite, which has since been reduced to about 16% as
of September 30, 1999 as a result of the issuance of additional shares by
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. During
the third quarter of 1999, we received $15 million for the sale of additional
towers (then leased back to us), resulting in
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a corresponding increase in the finance obligation. Due to our continuing
involvement related to our ownership interest in SpectraSite, these
sale-leaseback transactions are accounted for by the financing method.
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.
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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NOTE 3 -- LONG-TERM DEBT.
SEPTEMBER 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 $57 and $67................ 352 342
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 $274 and $337................................. 677 614
10.65% SENIOR REDEEMABLE DISCOUNT NOTES DUE 2007,
net of unamortized discount of $222 and $268.............. 618 572
9.75% SENIOR SERIAL REDEEMABLE DISCOUNT NOTES DUE 2007,
net of unamortized discount of $287 and $345.............. 842 784
4.75% CONVERTIBLE SENIOR NOTES DUE 2007..................... 600 --
9.95% SENIOR SERIAL REDEEMABLE DISCOUNT NOTES DUE 2008,
net of unamortized discount of $453 and $536.............. 1,174 1,091
12.125% SENIOR REDEEMABLE DISCOUNT NOTES DUE 2008,
(issued by Nextel International), net of unamortized
discount of $249 and $289................................. 481 441
12.0% SENIOR SERIAL REDEEMABLE NOTES DUE 2008,
net of unamortized discount of $4 and $4.................. 296 296
BANK CREDIT FACILITY, interest payable quarterly at an
adjusted rate calculated based either on the prime rate or
LIBOR (6.94% to 9.06% -- 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 (10.28%
to 10.50% -- 1999; 10.25% to 11.00% -- 1998).............. 242 111
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)..................................................... 100 83
OTHER....................................................... 5 16
------ ------
8,447 7,719
Less current portion...................................... (3) (9)
------ ------
$8,444 $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 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
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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.
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(DOLLARS IN MILLIONS)
SERIES D EXCHANGEABLE PREFERRED STOCK MANDATORILY REDEEMABLE
2009,
13% cumulative annual dividend; 644,432 and 585,473 shares
issued; 644,419 and 585,460 shares outstanding, stated at
liquidation value........................................... $ 662 $ 601
SERIES E EXCHANGEABLE PREFERRED STOCK MANDATORILY REDEEMABLE
2010,
11.125% cumulative annual dividend; 885,251 and 815,314
shares issued; 885,236 and 815,299 shares outstanding,
stated at liquidation value............................... 897 827
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...... 161 150
------ ------
$1,720 $1,578
====== ======
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 have financed 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).
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DOMESTIC INTERNATIONAL CONSOLIDATED DOMESTIC INTERNATIONAL CONSOLIDATED
-------- ------------- ------------ -------- ------------- ------------
) (DOLLARS IN MILLIONS
FOR THE NINE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
--------------------------------------- ---------------------------------------
Operating revenues............. $ 2,277 $ 69 $ 2,346 $ 1,228 $ 27 $ 1,255
======= ====== ======= ======= ====== =======
EBITDA......................... $ 447 $ (128) $ 319 $ (141) $ (76) $ (217)
Depreciation and 651 81 732 550 33 583
amortization.................
Interest expense............... (499) (128) (627) (393) (75) (468)
Interest income................ 23 5 28 14 15 29
Other income (expense), net.... 34 (66) (32) (42) 5 (37)
------- ------ ------- ------- ------ -------
Loss before income tax benefit
and
extraordinary item........... $ (646) $ (398) $(1,044) $(1,112) $ (164) $(1,276)
======= ====== ======= ======= ====== =======
Capital expenditures........... $ 1,224 $ 123 $ 1,347 $ 1,428 $ 298 $ 1,726
======= ====== ======= ======= ====== =======
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
--------------------------------------- ---------------------------------------
Operating revenues............. $ 862 $ 27 $ 889 $ 497 $ 9 $ 506
======= ====== ======= ======= ====== =======
EBITDA......................... $ 210 $ (35) $ 175 $ 7 $ (47) $ (40)
Depreciation and 232 29 261 191 13 204
amortization.................
Interest expense............... (174) (46) (220) (140) (31) (171)
Interest income................ 14 2 16 3 5 8
Other income (expense), net.... (8) (22) (30) (46) 6 (40)
------- ------ ------- ------- ------ -------
Loss before income tax benefit
and
extraordinary item........... $ (190) $ (130) $ (320) $ (367) $ (80) $ (447)
======= ====== ======= ======= ====== =======
AS OF SEPTEMBER 30, 1999 AS OF DECEMBER 31, 1998
--------------------------------------- ---------------------------------------
Property, plant and equipment, $ 5,093 $ 504 $ 5,597 $ 4,384 $ 531 $ 4,915
net..........................
======= ====== ======= ======= ====== =======
Identifiable assets............ $11,662 $1,495 $13,157 $ 9,972 $1,601 $11,573
======= ====== ======= ======= ====== =======
NOTE 7 -- SUBSEQUENT EVENTS.
Subsequent to September 30, 1999, we completed the following transactions,
each of which are more fully discussed in "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations -- C. Post Third
Quarter Transactions and Developments."
EQUITY OFFERING. On November 5, 1999, we completed the public offering and
sale of 33,781,785 shares of our Class A common stock (including 3,781,785
shares issued upon exercise in full of the underwriters' over-allotment option)
at a price of $83.8125 per share. All of the shares sold were offered by Nextel.
We received net proceeds of approximately $2.75 billion from the offering.
NEW BANK FINANCING. Effective on November 12, 1999, we entered into
definitive agreements which increased our total secured financing capacity under
our bank financing agreement to $5.0 billion, the borrowing of which is subject
to the satisfaction or waiver of applicable borrowing conditions.
DEBT ISSUANCE. On November 12, 1999, we completed a private placement of
$2.0 billion in principal at maturity of 9.375% Senior Serial Redeemable Notes
due 2009, yielding approximately $1.96 billion in net cash proceeds.
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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 nine- and three-month periods ended September
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.
As of September 30, 1999:
- we provided service to about 4,050,900 digital subscriber units in the
United States, adding about 458,000 net subscriber units during the
quarter; and
- our digital network or the compatible digital network of Nextel
Partners, Inc., a joint venture in which we are a participant, was
operational in areas in and around 92 of the top 100 metropolitan
statistical areas in the United States.
We have announced our plans to offer our customers access to new digital
two-way mobile data and Internet connectivity services. Three new handsets
developed and manufactured by Motorola, the i1000plus(TM), the i500plus(TM) and
the i700plus(TM) have been introduced since May 1999. These new handsets are
expected to be the first in a product line that incorporates micro-browsers and
wireless Internet capability, which is planned to be combined with other mobile
data applications to be used in connection with our planned wireless data
service offering. We have begun testing the underlying technology for these
services in several U.S. markets and currently plan to commercially launch the
wireless data service offering in mid-2000. See, "H. Our Forward Looking
Statements Are Subject to a Variety of Factors that Could Cause Actual Results
to Differ Materially From Current Beliefs."
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. THIRD 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. ACTIVITIES INVOLVING NEXTWAVE. On August 12, 1999, we announced that we
had reached agreement with the United States Department of Justice and the
Federal Communications Commission concerning the terms and conditions that would
apply to the resolution of the claims of the United States Government asserted
against NextWave Personal Communications, Inc. and some of its affiliates in the
context of a plan of reorganization for the NextWave entities contemplated to be
proposed and sponsored by us. Information concerning these arrangements and
copies of the agreement and related term sheet between us and the United States
Government are included in our Current Reports on Form 8-K dated and filed with
the Securities and Exchange Commission on August 12, 1999 and August 18, 1999.
NextWave Personal Communications, Inc. and its affiliates hold personal
communications services spectrum licenses granted by the Federal Communications
Commission. In June 1998, NextWave sought protection by commencing a voluntary
bankruptcy proceeding.
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Since reaching that agreement, we have engaged in negotiations with
representatives of the creditor and equity groups of the NextWave entities and
representatives of the Department of Justice and the Federal Communications
Commission regarding a potential Nextel-sponsored plan of reorganization. We
have not yet reached an agreement with these parties in interest, and we cannot
predict whether or when we will do so. Even if such agreement were to be
reached, any plan of reorganization that ultimately may be developed and
sponsored by us would be subject to various conditions to its successful
implementation, including consideration and approval of that plan in the
NextWave bankruptcy proceedings and the receipt of all required regulatory
approvals, consents and waivers. We do not intend to update our disclosures
concerning this matter unless and until we determine that future developments,
if any, warrant such updating disclosures or we determine that we are required
to do so to comply with disclosure obligations under applicable laws. See, "H.
Our Forward Looking Statements Are Subject to a Variety of Factors that Could
Cause Actual Results to Differ Materially From Current Beliefs."
3. MANAGEMENT CHANGES. On July 17, 1999, Timothy M. Donahue, formerly our
President and Chief Operating Officer, succeeded Daniel F. Akerson as our Chief
Executive Officer. Mr. Akerson stepped down from his position at Nextel to
become Co-Chairman of Eagle River, Inc., an entity controlled by Craig O. McCaw.
Mr. Akerson continues to serve as Chairman of our board of directors and also as
a member of the operations committee of the board. On September 22, 1999, Mr.
Akerson became Chairman and Chief Executive Officer of NEXTLINK Communications,
Inc., a publicly held competitive local exchange carrier controlled by Mr.
McCaw. NEXTLINK has significant fiber optic network capacity currently under
construction nationwide and significant holdings of local multipoint
distribution system fixed wireless spectrum in many metropolitan markets in the
United States.
C. POST THIRD QUARTER TRANSACTIONS AND DEVELOPMENTS.
1. EQUITY OFFERING. On November 5, 1999, we completed the public offering
and sale of 33,781,785 shares of our Class A common stock (including 3,781,785
shares issued upon exercise in full of the underwriters' over-allotment option)
at a price of $83.8125 per share. All of the shares sold were offered by Nextel.
We received net proceeds of approximately $2.75 billion from the offering.
2. NEW BANK FINANCING. Nextel, Nextel Finance Company, and certain other
subsidiaries of Nextel entered into definitive agreements effective on November
12, 1999, with respect to an amended and restated secured bank credit facility
that provides for up to $5.0 billion of secured financing, consisting of a $1.5
billion revolving loan and $3.5 billion in term loans. The maturity date of the
$1.5 billion revolving loan and a $1.7 billion portion of the term loans is
December 31, 2007. The remaining $1.8 billion in term loans mature in equal $900
million portions on June 30, 2008, and December 31, 2008. The maturity dates of
the loans can accelerate if our credit ratings are below specified levels and
the aggregate amount of specified debt obligations that mature before June 30,
2009, and the redemption price of redeemable stock that is mandatorily
redeemable before June 30, 2009, exceed specified amounts. Loans under the bank
credit facility bear interest payable quarterly, at variable rates calculated
based on either the prime rate or LIBOR.
Nextel contemplates accessing the bank credit facility and the proceeds of
the equity offering described above to finance investments and acquisitions, to
fund capital expenditures, and for working capital and other general corporate
purposes. Borrowings under the bank credit facility are secured by liens on
assets of our domestic subsidiaries that are "restricted" subsidiaries under the
terms of our indentures relating to our various outstanding issues of senior
discount notes. Certain of those indentures contain provisions that may limit
the amount of borrowings available under the bank credit facility in specified
circumstances.
3. DEBT ISSUANCE. On November 12, 1999, we completed the issuance and sale
in a private placement of $2.0 billion in principal of 9.375% Senior Serial
Redeemable Notes due 2009, generating about $1.96 billion in net proceeds. Cash
interest on these notes will be payable on May 15 and November 15 of each year,
commencing May 15, 2000, at a rate of 9.375% per annum. The notes are redeemable
at the option of Nextel, in whole or in part, at any time on or after November
15, 2004, at specified redemption prices. 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. We intend to
use a portion of the net proceeds to repurchase or redeem our outstanding public
notes originally issued prior to 1997.
4. BOARD DEVELOPMENTS. On October 15, 1999, Mr. Keisuke Nakasaki resigned
from his position on our board of directors, reducing the board's size to nine.
Mr. Nakasaki had occupied his position on the board as result of rights granted
to an affiliate of Nippon Telegraph and Telephone Corp. in connection with and
linked to that affiliate's equity investment in Nextel. The contractual rights
to representation on our board may continue in effect for some time under the
terms of the relevant agreement. Nippon Telegraph and Telephone Corp. has
advised us that it does not intend to exercise those rights by designating a
replacement for Mr. Nakasaki to our board.
D. RESULTS OF OPERATIONS.
The following discussion compares our consolidated financial condition and
results of operations for the nine- and three-month periods ended September 30,
1999 and 1998, and significant factors that could affect our prospective
financial condition and results of operations.
1. OPERATING REVENUES.
INCREASE/
% OF % OF (DECREASE) FROM
CONSOLIDATED CONSOLIDATED PREVIOUS YEAR
SEPTEMBER 30, OPERATING SEPTEMBER 30, OPERATING -----------------
1999 REVENUES 1998 REVENUES DOLLARS PERCENT
------------- ------------ ------------- ------------ ------- -------
(DOLLARS IN MILLIONS)
NINE MONTHS ENDED
Operating revenues.............. $2,346 100% $1,255 100% $1,091 87%
Domestic...................... 2,277 97% 1,228 98% 1,049 85%
International................. 69 3% 27 2% 42 156%
THREE MONTHS ENDED
Operating revenues.............. 889 100% 506 100% 383 76%
Domestic...................... 862 97% 497 98% 365 73%
International................. 27 3% 9 2% 18 200%
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 for
the nine- and three-month periods ending September 30, 1999 principally as a
result of a 68% increase in end-of-period domestic digital subscriber units in
service from about 2,417,400 at September 30, 1998 to about 4,050,900 at
September 30, 1999. In addition, we saw an increase in minutes of use per
digital subscriber unit along with an increase in the average monthly revenue
per digital subscriber unit from about $70 during the third quarter of 1998 to
about $74 during the third quarter of 1999. The growth in digital subscriber
units in service is the result of a number of factors, principally:
- the increased number of indirect distribution channels;
- expanded network coverage and capacity;
- differentiated products and services including instant conferencing
capabilities;
- 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 September 30,
1998 to September 30, 1999. This increase resulted from the launch of digital
services in major markets in Brazil, Argentina, and Mexico in the second half of
1998.
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2. COST OF REVENUES.
INCREASE/
% OF % OF (DECREASE) FROM
CONSOLIDATED CONSOLIDATED PREVIOUS YEAR
SEPTEMBER 30, OPERATING SEPTEMBER 30, OPERATING -----------------
1999 REVENUES 1998 REVENUES DOLLARS PERCENT
------------- ------------ ------------- ------------ ------- -------
(DOLLARS IN MILLIONS)
NINE MONTHS ENDED
Cost of revenues................ $504 21% $371 30% $133 36%
Domestic...................... 474 20% 358 29% 116 32%
International................. 30 1% 13 1% 17 131%
THREE MONTHS ENDED
Cost of revenues................ 175 20% 142 28% 33 23%
Domestic...................... 163 18% 136 27% 27 20%
International................. 12 2% 6 1% 6 100%
Cost of revenues consists primarily of network operating costs and
interconnection fees assessed by local exchange carriers. In the nine- and
three-month periods ended September 30, 1999, domestic cost of revenues
increased from the nine- and three-month periods ended September 30, 1998,
primarily as a result of a 44% increase in the number of digital switches in
service and a 31% increase in digital cell sites and related equipment deployed
by us from September 30, 1998 to September 30, 1999, as well as increases in
airtime usage. Increased airtime usage resulted from increased subscribers and
increased interconnect minutes of use per subscriber. 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 1999 and the last quarter of 1998.
The increase in international cost of revenues from the nine- and
three-month periods ended September 30, 1998 to those ended September 30, 1999
is attributable primarily to the increase in the number of cell sites and
switches placed in service from September 30, 1998 to September 30, 1999, as
well as increases in international expenses associated with increased airtime
usage. International cost of revenues, such as site rental and
telecommunications expenses, are expected to increase as additional cell sites
and switches are placed into service and additional markets are launched. See,
"H. Our Forward Looking Statements Are Subject to a Variety of Factors that
Could Cause Actual Results to Differ Materially From Current Beliefs."
3. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.
INCREASE/
% OF % OF (DECREASE) FROM
CONSOLIDATED CONSOLIDATED PREVIOUS YEAR
SEPTEMBER 30, OPERATING SEPTEMBER 30, OPERATING -----------------
1999 REVENUES 1998 REVENUES DOLLARS PERCENT
------------- ------------ ------------- ------------ ------- -------
(DOLLARS IN MILLIONS)
NINE MONTHS ENDED
Selling, general and
administrative................ $1,523 65% $1,101 88% $422 38%
Selling and marketing......... 930 40% 692 55% 238 34%
General and administrative.... 593 25% 409 33% 184 45%
THREE MONTHS ENDED
Selling, general and
administrative................ 539 61% 404 80% 135 33%
Selling and marketing......... 329 37% 251 50% 78 31%
General and administrative.... 210 24% 153 30% 57 37%
The increase in selling, general and administrative expenses consisted of
an increase in domestic expenses of $345 million and an increase in
international expenses of $77 million for the nine-month period ended September
30, 1999 from the comparable 1998 period. For the three-month period ended
September 30, 1999
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as compared to the three-month period ended September 30, 1998, the increase is
attributable almost entirely to an increase in domestic expenses.
The increase in selling and marketing expenses in the nine- and three-month
periods ended September 30, 1999 from the comparable 1998 periods consists
primarily of increased costs incurred in connection with higher consolidated
sales of digital subscriber units including:
- $116 million and $49 million, respectively, of increased losses
generated from increased consolidated sales of digital subscriber units
and related accessories (including losses of $15 million and $2 million
relating to international digital subscriber unit sales);
- $83 million and $30 million, respectively, of increased domestic
commissions and residuals earned by indirect dealers and distributors as
a result of increased digital subscriber unit sales through, and
increased reliance on, indirect distribution channels; and
- $29 million of increased advertising and marketing expenses for the
nine-month period ended September 30, 1999 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.
The increase in general and administrative expenses during the nine- and
three-month periods ended September 30, 1999 from the comparable 1998 periods is
primarily attributable to the following:
- $83 million and $33 million, respectively, of increased domestic
expenses related to billing, collection and customer care activities as
a result of a larger customer base;
- $68 million and $27 million, respectively, 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
- $33 million of increased international general and administrative
expenses during the nine-month period ended September 30, 1999, incurred
to support the growth in our international markets, including $26
million of 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. As a
result of these initiatives, bad debt expense decreased $8 million from
$15 million for the quarter ended June 30, 1999 to about $7 million for
the quarter ended September 30, 1999.
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:
- 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 anticipate
the total cost per customer added to increase.
See, "H. Our Forward Looking Statements Are Subject to a Variety of Factors
that Could Cause Actual Results to Differ Materially From Current Beliefs."
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4. DEPRECIATION AND AMORTIZATION.
INCREASE/
% OF % OF (DECREASE) FROM
CONSOLIDATED CONSOLIDATED PREVIOUS YEAR
SEPTEMBER 30, OPERATING SEPTEMBER 30, OPERATING -----------------
1999 REVENUES 1998 REVENUES DOLLARS PERCENT
------------- ------------ ------------- ------------ ------- -------
(DOLLARS IN MILLIONS)
NINE MONTHS ENDED
Depreciation and amortization... $732 31% $583 46% $149 26%
THREE MONTHS ENDED
Depreciation and amortization... 261 29% 204 40% 57 28%
Depreciation and amortization increased primarily due to depreciation as a
result of placing into service additional cell sites and switches both in
existing domestic markets (primarily to expand the coverage and capacity of our
digital mobile network) and in existing and new international markets launched
in the second half of 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 begins upon commencement of placing the system assets into service
in the relevant markets.
Beginning in the fourth quarter of 1997, we extended the amortization
period applicable to our Federal Communications Commissions licenses and certain
goodwill from 20 years to 40 years. 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 lives of both the Federal
Communications Commissions 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 enhancing 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 Federal
Communications Commissions licenses. The majority of our Federal Communications
Commissions licenses have been obtained through business acquisitions. Our
experience is that the value attributed to the net assets acquired in these
business acquisitions, 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 to the life of the licenses.
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5. SEGMENT EARNINGS (LOSSES), INTEREST EXPENSE, INTEREST INCOME AND OTHER.
INCREASE/
% OF % OF (DECREASE) FROM
CONSOLIDATED CONSOLIDATED PREVIOUS YEAR
SEPTEMBER 30, OPERATING SEPTEMBER 30, OPERATING -----------------
1999 REVENUES 1998 REVENUES DOLLARS PERCENT
------------- ------------ ------------- ------------ ------- -------
(DOLLARS IN MILLIONS)
NINE MONTHS ENDED
Segment earnings (losses)..... $ 319 14% $ (217) (17)% $ 536 (247)%
Interest expense.............. 627 27% 468 37% 159 34%
Interest income............... 28 1% 29 2% (1) (3)%
Other, net:
Realized gain on sale of
investment............... 70 3% -- -- 70 NM
Foreign currency transaction
gain (loss).............. (61) (3)% 7 1% (68) NM
Equity in losses of
subsidiaries............. (49) (2)% (6) -- (43) NM
Other income (expense),
net...................... 8 -- (38) (3)% 46 NM
Income tax benefit............ 25 1% 128 10% (103) (80)%
Loss attributable to common
stockholders................ 1,161 49% 1,388 111% (227) (16)%
THREE MONTHS ENDED
Segment earnings (losses)..... 175 20% (40) (8)% 215 NM
Interest expense.............. 220 25% 171 34% 49 29%
Interest income............... 16 2% 8 2% 8 100%
Other, net:
Foreign currency transaction
gain (loss).............. (15) (2)% 7 1% (22) NM
Equity in losses of
subsidiaries............. (18) (2)% (4) (1)% (14) NM
Other income (expense),
net...................... 3 -- (43) (8)% 46 NM
Income tax benefit............ 8 1% 45 9% (37) (82)%
Loss attributable to common
stockholders................ 361 41% 442 87% (81) (18)%
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, "H. 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 $447 million and $210 million for the nine-
and three-months ended September 30, 1999, compared to segment losses of $141
million and segment earnings of $7 million for the nine- and three-months ended
September 30, 1998. International segment losses were $128 million and $35
million for the nine- and three-months ended September 30, 1999, compared to
segment losses of $76 million and $47 million for the nine- and three-months
ended September 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 segment losses are related
to our international operations.
The increase in interest expense for the nine months ended September 30,
1999 from the comparable 1998 periods resulted from Nextel's issuance of senior
redeemable notes during 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
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21
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 in 1999 on the sale of our 50% ownership
interest in NEXTBAND Communications, L.L.C. The increase in the foreign currency
transaction loss for the nine- and three-month periods ended September 30, 1999
is due primarily to the devaluation of the Brazilian real relative to the U.S.
dollar during 1999. The increase in equity in losses of subsidiaries is
primarily due to our equity method investments in Nextel Partners and Infocom
Communications Network, Inc., a Philippine company.
We recorded an income tax benefit of $25 million (an effective tax rate of
2%) in 1999, compared to $128 million (an effective tax rate of 10%) in 1998.
The change in the effective tax rate primarily resulted from a change in the tax
law which extended the net operating loss carryforward period from 15 to 20
years for losses generated in or after 1998. In certain circumstances, Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes," limits
the recognition of income tax benefits for net operating losses to the amount of
deferred tax liabilities that are expected to reverse within the statutory
carryforward period. The financial statement limitation on the recognition of
income tax benefits for net operating losses will not have an impact on 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 $361 million and
$442 million for the three-month periods ended September 30, 1999 and 1998,
respectively, and $1,161 million and $1,388 million for the nine-month periods
ended September 30, 1999 and 1998, respectively. The operating expenses and
capital expenditures 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 more than 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. See, "H. Our Forward Looking Statements Are
Subject to a Variety of Factors that Could Cause Actual Results to Differ
Materially From Current Beliefs."
CASH FLOWS
Working capital increased by $657 million to $527 million at September 30,
1999 compared to a working capital deficit of $130 million at December 31, 1998.
During May, June, and July 1999, we received $600 million for an equity
investment from Microsoft, $588 million in net proceeds from the issuance of
debt securities, and $278 million from the Digital Radio option exercise. We
used these proceeds primarily to pay down $423 million of the revolving line of
credit component of our domestic bank credit facility and to fund operations.
Net cash used in operating activities of $36 million for the nine months
ended September 30, 1999 improved by $264 million compared to net cash used in
operating activities of $300 million for the nine months ended September 30,
1998. The decrease in net cash used by operating activities consisted of a
domestic decrease of $271 million offset slightly by an increase in cash used in
international operations of $7 million. The improvement in the cash used 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 our digital mobile
network continue to represent the largest use of our funds for investing
activities. Net cash used in investing activities for the nine-month period
ended September 30, 1999 decreased $1,325 million compared to the same period in
1998 primarily due to the $685 million decrease in cash paid for capital
expenditures, the receipt of $270 million related to the
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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
$1,075 million for the nine months ended September 30, 1999 and $1,760 million
for the nine-month period ended September 30, 1998, including $110 million and
$291 million in capital expenditures for international operations for the nine
months ended September 30, 1999 and 1998, respectively. While domestic capital
spending decreased for the nine-month period ended September 30, 1999 compared
to the same 1998 period due to a number of factors, this level of capital
expenditures is not expected to be indicative of the fourth quarter of 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. See, "H. Our Forward Looking Statements Are Subject
to a Variety of Factors that Could Cause Actual Results to Differ Materially
From Current Beliefs."
Net cash provided by financing activities for the nine months ended
September 30, 1999 consisted primarily of $588 million in net proceeds from the
issuance of debt securities, $600 million in proceeds from the Microsoft
investment, $575 million in proceeds from SpectraSite Holdings, Inc. in
connection with the transfer of specified telecommunications towers in the
second quarter of 1999 along with subsequent tower sales in the third quarter of
1999 and $433 million in proceeds from the exercise of stock options and
warrants, offset by the net repayment of $423 million of our domestic bank
credit facility.
F. FUTURE CAPITAL NEEDS AND RESOURCES.
We anticipate that, for the foreseeable future, we will be utilizing
significant amounts of our available cash flows 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 Federal Communications Commission
auctions of spectrum;
- debt service requirements; and
- other general corporate expenditures.
We anticipate that our cash utilization for capital expenditures and other
investing activities will continue to exceed our positive cash flows from
domestic operating activities through the remainder of 1999 and into 2000, as we
build out, expand and enhance our digital mobile network. See, "H. Our Forward
Looking Statements Are Subject to a Variety of Factors that Could Cause Actual
Results to Differ Materially From Current Beliefs."
Nextel's domestic bank credit agreement, as amended, currently provides
total secured financing capacity of up to $5.0 billion, subject to the
satisfaction or waiver of applicable borrowing conditions. This facility
consists of a $1.5 billion revolving loan and $3.5 billion in term loans that
mature over a period from December 31, 2007 to December 31, 2008. At September
30, 1999, we had drawn $1.8 billion of our available financing under the bank
credit agreement as in effect prior to its amendment and restatement in November
1999. As of November 12, 1999, we had $2.7 billion of debt outstanding under the
amended and restated 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 LIBOR. The maturity dates of the
loans can accelerate if our credit ratings are below specified levels and the
aggregate amount of specified debt obligations that mature before June 30, 2009,
and the redemption price of redeemable stock that is mandatorily redeemable
before June 30, 2009, exceed specified amounts.
As of September 30, 1999, approximately $138 million has been borrowed by
Nextel International under its equipment financing facility with Motorola Credit
Corporation, leaving approximately $91 million available for future borrowings
under such facility to finance the purchase from Motorola Inc. of equipment and
related services (approximately $4 million of the $138 million borrowed relates
to financed accrued interest and does not decrease the borrowing availability).
Additionally, as of September 30, 1999, approximately $104 million
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has been borrowed by McCaw International (Brazil) Ltd. under their vendor
financing agreement with Motorola Credit Corporation, leaving approximately $21
million available for future borrowings to finance the purchase from Motorola
Inc. of equipment and related services. As of September 30, 1999, Nextel
Argentina S.R.L. 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 and can be used to fund
purchases of qualifying equipment and services.
Finally, in addition to the financing sources described above, Nextel
received approximately $2.75 billion in net proceeds from the sale of 33,781,785
shares of Class A common stock completed on November 5, 1999 as well as
approximately $1.96 billion in net proceeds from the November issuance of 9.375%
Senior Serial Redeemable Notes due 2009 completed on November 12, 1999.
Nextel and Nextel International each are currently in the early stages of
developing their detailed business plans and related budgets for calendar year
2000. These processes, and the resulting detailed business plans and related
budgets, are not likely to be finalized until late 1999 or early 2000. Moreover,
any such plans and budgets that are developed and finalized by Nextel and Nextel
International may later be revised by them in light of competitive factors in
the relevant markets, new business opportunities, including additional spectrum
acquisitions and other strategic or opportunistic transactions or investments,
prevailing conditions in domestic and international debt and equity capital
markets and the actual operating results and apparent prospects of their
respective businesses.
Currently, Nextel expects to increase the level of domestic and
international capital expenditures in the remainder of 1999 and during 2000.
This increase is expected to be driven by several factors, including:
- the contemplated expansion of digital mobile network coverage around
most major domestic and selected international market areas;
- the contemplated construction of additional cell sites to increase
system capacity and improve system quality, and the installation of
related switching equipment, in the existing core market coverage areas
of Nextel and Nextel International, including the installation of system
infrastructure and cell sites sufficient to meet expected increases in
system demand four to six months ahead of anticipated growth;
- the carrying over of certain planned system capital expenditures from
1999 to early 2000; and
- the installation of system capital hardware and software items in
connection with the planned initial commercial launch of the wireless
data service offering nationwide in 2000.
Taking such anticipated capital expenditures into account in both the
Nextel and Nextel International organizations, including an assumption that the
bulk of Nextel International's funding needs for calendar year 2000 will be
satisfied with funds invested or advanced by Nextel, and factoring in
anticipated operating cash flow performance of the existing and planned wireless
businesses, both domestic and international, Nextel believes that it will be
able to fully fund both its and Nextel International's operations through
calendar year 2000. This conclusion is premised on the availability of funds
from the following sources:
- consolidated cash on hand as of September 30, 1999 of approximately $1.4
billion;
- the availability of approximately $3.2 billion of incremental funding
over the amounts outstanding as of September 30, 1999 under Nextel's
domestic bank credit facility amended and restated in November 1999;
- the availability of the funding under Nextel International's funding
agreements described above;
- the proceeds of the public offering of 33,781,785 shares of our Class A
common stock of approximately $2.8 billion; and
- the net proceeds remaining from the November 1999 debt issuance, if any,
following the repurchase or redemption of all of our outstanding public
notes originally issued prior to 1997.
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If Nextel's and/or Nextel International's business plans change, or if
economic conditions in either of their markets generally or competitive
practices in the mobile wireless telecommunications industry change materially
from those currently prevailing or from those now anticipated in the next
calendar year, or if other presently unexpected circumstances are encountered
that have a material effect on the cash flow and/or profitability of the
domestic or international mobile wireless businesses conducted by Nextel and/or
Nextel International, the anticipated cash needs of those businesses, and the
conclusions as to the adequacy of the available sources, each also could change
significantly. Finally, the above estimates and conclusions specifically exclude
the activities involving NextWave and the impact of any significant acquisition
transaction, or the pursuit of any significant new business opportunity not now
contemplated, by Nextel or Nextel International in the periods referenced above.
Any such acquisition or new business opportunity could involve significant
additional funding needs in excess of the identified currently available
sources, and thus could require Nextel and/or Nextel International to raise
additional equity and/or debt funding to meet those needs.
The availability of borrowings pursuant to the domestic bank credit
facility and Nextel International's financing agreements is subject to certain
conditions and limitations, 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 domestic bank credit
facility and Nextel International's financing agreements also require us and our
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 domestic and international digital mobile networks, 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, "H. 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 certain strategic 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
our domestic bank credit agreement, is and will be limited by the terms of our
financing agreements and the terms of some series of our outstanding preferred
stock.
G. YEAR 2000 READINESS.
We are close to completion and evaluation of implementing Year 2000
readiness solutions on our computer systems. Such Year 2000 readiness efforts
are designed to identify, address and resolve issues that may be created by
computer programs 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
inability to recognize dates could result in a system failure or miscalculations
that result in disruptions of operations, including, among other things, a
temporary inability to process transactions, send invoices or engage in similar
normal business activities.
1. STATE OF READINESS.
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. 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
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date conditions. These functions rely on our critical Information Technology
("IT") and non-IT systems and their supporting network elements. These critical
systems and network elements have been divided into two major categories: our
core business systems and network infrastructure systems and support functions
with high customer impact and our secondary business systems with low customer
impact.
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.
During the course of developing our Year 2000 readiness solutions we
identified five phases that define the status of our 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 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 IT and
non-IT systems, including those of material third parties.
OUR CORE BUSINESS SYSTEMS AND NETWORK INFRASTRUCTURE
As of September 30, 1999, our core business systems and network
infrastructure and support systems successfully passed integrated testing in a
Year 2000 environment. The purpose of that test was to confirm the Year 2000
readiness of our essential system elements that are integrated with our digital
mobile network and that are necessary to enable us to add subscriber units to
the digital mobile network, to provide the currently available and planned
wireless communications services on our network, and to correctly bill our
customers for those services.
The core business systems and network infrastructure systems and
operational functions that were tested include:
- new customer account set-up and modifications;
- activation and provisioning of new phones and implementation of
modifications in existing customers' service plans;
- processing of calls and other mobile communication services (including
interconnect, voicemail, short message service, and private and group
dispatch services);
- collection and rating of call data for billing purposes; and
- customer bill generation.
These integrated systems were tested by applying certain date specific
sequences to determine their functionality in a Year 2000 environment. These
tests specifically involved testing both Year 2000 transition and leap-year
transition. These integrated systems tests were conducted in a laboratory
setting which simulated Nextel's network configuration, core business systems
and handsets. Based on this testing, we believe that these systems will perform
normally during and after the transition into the Year 2000.
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OUR SECONDARY BUSINESS SYSTEMS
These systems are mostly internal to Nextel with little or no direct impact
on our customers and include items like payroll, benefits management and
low-level facility issues.
The majority of these secondary systems have passed Year 2000 readiness
testing and have been successfully implemented into the Nextel environment.
However, some of these systems are completing the Testing or Implementation
phases of our Year 2000 readiness program. All remaining secondary systems are
expected to be tested and implemented by the end of November 1999.
THIRD PARTY YEAR 2000 COMPLIANCE
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 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, supplies our system infrastructure and subscriber handset units.
Motorola has informed us that all 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.
We believe that our testing of our core business systems and network
infrastructure has confirmed the Year 2000 readiness of these system
infrastructure components.
MOTOROLA COMMUNICATIONS ISRAEL LTD., which provides the provisioning
systems for Nextel International, has notified Nextel that its software is Year
2000 ready. We believe that our testing of our core business systems and network
infrastructure systems and operational support functions confirm these systems'
Year 2000 readiness.
INTERNATIONAL TELECOMMUNICATIONS DATA SYSTEMS, INC. ("ITDS"), is 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 systems, as well as the
software used for our domestic billing capabilities has successfully performed
under various Year 2000 date conditions. We believe that our testing of our core
business systems and network infrastructure systems and operational support
functions confirm these systems' Year 2000 readiness.
LHS GROUP, INC. ("LHS"), is 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 has
completed the necessary upgrades and it has tested successfully.
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 has been used to develop
Year 2000 ready customer care systems for domestic operations and order entry
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 completed and successfully tested
these upgrades for our domestic
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operations. Nextel International has installed these upgrades, and testing is
significantly underway and should be completed by the end of November 1999.
HEWLETT-PACKARD, INC., supplies us with computer hardware, such as monitors
and peripherals, and UNIX operating systems. Hewlett-Packard has provided us
with sufficient information to make all of the Hewlett-Packard software and
hardware supplied products Year 2000 ready. We are currently making significant
progress toward applying all of these Year 2000 solutions, and this effort is
scheduled to be completed by the end of November 1999.
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. As of September 30, 1999, our
year-to-date spending, both domestically and internationally, is approximately
$15 million. We currently estimate that our domestic and international
expenditures in connection with these efforts will not exceed $45 million. To
date, we have not deferred any significant 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.
Although our core business systems and network infrastructure and support
systems components have tested successfully under Year 2000 date conditions in
tests conducted in a laboratory setting, there is still some risk to our service
and systems. 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. In addition, where
we cannot validate that technology provided by remaining vendors, suppliers, and
other material third parties is Year 2000 ready, we have obtained assurances
from these material third parties that their systems are or will be Year 2000
ready. 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 material third parties
to 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 and
the status of their related compliance activities and programs in our own Year
2000 readiness assessment process. Because our systems are interconnected with
and dependent on 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
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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.
While our integrated testing on our core business systems was successful in
tests conducted in a laboratory setting, we have developed guidelines for
addressing Year 2000 readiness business contingency plans for external and
internal systems should it be determined that contingency plans are necessary.
Our contingency planning process focuses on the major components of our core
business system and network and has as its primary goal the minimization of
customer impact events resulting from the Year 2000 transition. Final
preparation of our contingency plans is underway, which establishes the
framework and logistic strategy for executing our contingency plans, if
required. These plans are designed to support our core business in the event of
an unexpected Year 2000 related complication. These plans are being developed by
representatives from all areas of our business, and are being coordinated and
compiled by our Year 2000 Program Management Office group.
H. 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;
- 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;
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- 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 Reports on Form 10-Q
for the quarters ended March 31, 1999 and June 30, 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, June 30, 1999, and September 30, 1999.
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 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
instruments and do not constitute speculative or leveraged positions independent
of these exposures.
Nextel International's revenues are denominated in foreign currencies while
a significant portion of its operations are financed through senior 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
September 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 $151 million as of September 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 $15
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
September 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 September 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 September 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 September 30, 1999 as interest rates are reset
periodically; and (3) estimates obtained from dealers to settle interest rate
swap and collar agreements.
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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.
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 $12,702
Average Interest Rate................................... -- -- -- -- 12% 11% 11%
Variable Rate........................................... -- $31 $105 $149 229 1,626 2,140 2,140
Average Interest Rate................................... -- 10% 9% 9% 9% 9% 9%
INTEREST RATE SWAPS:
Variable to Fixed....................................... -- -- 200 -- 100 570 870 (52)
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% 6% -- 5% -- 5%
INTEREST RATE COLLARS:
Collars................................................. -- -- -- -- 200 -- 200 --
Average Cap............................................. -- -- -- -- 7% -- 7%
Average Floor........................................... -- -- -- -- 4% -- 4%
II. FOREIGN EXCHANGE RATE SENSITIVITY
LONG-TERM DEBT:
Fixed Rate.............................................. -- -- -- -- -- 1,681 1,681 919
Average Interest Rate................................... -- -- -- -- -- 13% 13%
Variable Rate........................................... -- 31 75 86 116 37 345 345
Average Interest Rate................................... -- 10% 10% 10% 10% 10% 10%
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PART II
ITEM 1. LEGAL PROCEEDINGS.
Nextel is involved in certain legal proceedings that are described in our
1998 Annual Report on Form 10-K. During the three months ended September 30,
1999, there were no material changes in the status of or developments regarding
those legal proceedings other than as discussed below.
On October 25, 1999, Nextel entered into an agreement pursuant to which the
lawsuit titled Charles Dascal v. Morgan O'Brien, Becker, Gurman, Lukas, Meyers,
O'Brien and McGowan, P.C. and Nextel Communications, Inc. was resolved. The
terms of such settlement will not have a material effect on Nextel's financial
condition, results of operations, or liquidity.
ITEM 2. CHANGES IN SECURITIES.
(a) Inapplicable.
(b) Inapplicable.
(c) On July 28, 1999, the Digital Radio L.L.C. exercised in full its
option to purchase 15 million shares of our Class A common stock for
an aggregate purchase price of $278 million. The foregoing transaction
was effected pursuant to the exemption of Section 4(2) of the
Securities Act in reliance upon representations of the relevant
purchaser and its agreement to resell such securities only pursuant to
a registration statement or in a transaction exempt from the
registration requirements of such act.
On September 23, 1999, Nextel issued 2,039 shares of its Class A common
stock as liquidated damages for failure to register timely 591,308
shares of the Zero Coupon Convertible Preferred Stock due 2013. The
issuance of common stock was exempt from the registration requirements
of the Securities Act of 1933 pursuant to Section 4(2) of the
Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits.
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- - ------- -------------------
4.1 Indenture, dated as of November 12, 1999, by and between
Nextel Communications, Inc. and Harris Trust and Savings
Bank, as Trustee, relating to Nextel's 9.375% Senior Serial
Redeemable Notes due 2009.
4.2 Registration Rights Agreement, dated as of November 12,
1999, by and between Nextel Communications, Inc. and
Goldman, Sachs & Co., as representative of the several
initial purchasers.
4.3 Amended and Restated Credit Agreement, dated as of November
9, 1999, among Nextel Communications, Inc., Nextel Finance
Company and the other Restricted Companies party thereto,
the Lenders party thereto, Toronto Dominion (Texas) Inc., as
Administrative Agent and The Chase Manhattan Bank, as
Collateral Agent.
10.1 Master Site Lease Agreement between Nextel of New York, Inc.
Nextel Communications of the Mid-Atlantic, Inc., Nextel
South Corp., Nextel of Texas, Inc. Nextel West Corp., and
Nextel of California, Inc. and Tower Asset Sub Inc. and
Landlord Parties As Defined Therein (filed on April 29, 1999
as Exhibit 10.33 to the Registration Statement No. 333-67043
on Form S-4 (the "SpectraSite Holdings S-4 Registration
Statement") and incorporated herein by reference)
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EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- - ------- -------------------
10.2 Master Site Commitment Agreement between Nextel
Communications, Inc., Nextel of New York, Inc., Nextel
Communications of the Mid-Atlantic, Inc., Nextel South
Corp., Nextel of Texas, Inc., Nextel West Corp., Nextel of
California, Inc., Tower Parent Corp., SpectraSite Holdings,
Inc. and Tower Asset Sub Inc. (filed on April 29, 1999 as
Exhibit 10.34 to the SpectraSite Holdings S-4 Registration
Statement and incorporated herein by reference)
10.3 Nextel Communications, Inc. Amended and Restated Incentive
Equity Plan (as amended and restated as of July 14, 1999)
27* Financial Data Schedule
- - ---------------
* Submitted only with the electronic filing of this document with the Commission
pursuant to Regulation S-T under the Securities Act.
(b) Reports on Form 8-K.
(i) Current Report on Form 8-K dated August 10, 1999 and filed on
August 12, 1999 with the Commission reporting under Item 5 the
announcement of Nextel's agreement with the United States
Department of Justice and the Federal Communications Commission
concerning matters relating to NextWave Personal Communications,
Inc.
(ii) Current Report on Form 8-K dated August 10, 1999 and filed on
August 18, 1999 with the Commission reporting under Item 5 the
terms of the term sheet and related agreements with the United
States Department of Justice and the Federal Communications
Commission related to the potential acquisition of spectrum from
NextWave Personal Communications, Inc.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEXTEL COMMUNICATIONS, INC.
Date: November 15, 1999
WILLIAM G. ARENDT
By:
--------------------------------------
William G. Arendt
Vice President and Controller
(Principal Accounting Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- - ------- -------------------
4.1 Indenture, dated as of November 12, 1999, by and between
Nextel Communications, Inc. and Harris Trust and Savings
Bank, as Trustee, relating to Nextel's 9.375% Senior Serial
Redeemable Notes due 2009.
4.2 Registration Rights Agreement, dated as of November 12,
1999, by and between Nextel Communications, Inc. and
Goldman, Sachs & Co., as representative of the several
initial purchasers.
4.3 Amended and Restated Credit Agreement, dated as of November
9, 1999, among Nextel Communications, Inc., Nextel Finance
Company and the other Restricted Companies party thereto,
the Lenders party thereto, Toronto Dominion (Texas) Inc., as
Administrative Agent and The Chase Manhattan Bank, as
Collateral Agent.
10.1 Master Site Lease Agreement between Nextel of New York, Inc.
Nextel Communications of the Mid-Atlantic, Inc., Nextel
South Corp., Nextel of Texas, Inc. Nextel West Corp., and
Nextel of California, Inc. and Tower Asset Sub Inc. and
Landlord Parties As Defined Therein (filed on April 29, 1999
as Exhibit 10.33 to the Registration Statement No. 333-67043
on Form S-4 (the "SpectraSite Holdings S-4 Registration
Statement") and incorporated herein by reference)
10.2 Master Site Commitment Agreement between Nextel
Communications, Inc., Nextel of New York, Inc., Nextel
Communications of the Mid-Atlantic, Inc., Nextel South
Corp., Nextel of Texas, Inc., Nextel West Corp., Nextel of
California, Inc., Tower Parent Corp., SpectraSite Holdings,
Inc. and Tower Asset Sub Inc. (filed on April 29, 1999 as
Exhibit 10.34 to the SpectraSite Holdings S-4 Registration
Statement and incorporated herein by reference)
10.3 Nextel Communications, Inc. Amended and Restated Incentive
Equity Plan (as amended and restated as of July 14, 1999)
27* Financial Data Schedule
- - ---------------
* Submitted only with the electronic filing of this document with the Commission
pursuant to Regulation S-T under the Securities Act.
34