SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File No. 000-22939
NEXTLINK COMMUNICATIONS, INC.
NEXTLINK CAPITAL, INC.
A Delaware Corporation I.R.S. Employer No. 91-1738221
A Washington Corporation I.R.S. Employer No. 91-1716062
500 108th Avenue, N.E., 22nd Floor, Bellevue, Washington 98004
Telephone Number (425) 519-8900
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, Par Value $0.02
Indicate by check mark whether the Registrants (1) have 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
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Registration S-K is not contained herein, and will not be contained, to the
best of Registrants' knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Class A and Class B Common Stock held by
non-affiliates of the Registrants, based upon the closing sale price of the
Common Stock on March 8, 1999 as reported on the NASDAQ National Market System,
was approximately $1,255,976,196. Shares of Class A and Class B Common Stock
held by each executive officer and director and by each person who owns 5% or
more of the outstanding Class A and Class B Common Stock have been excluded in
that such persons may be deemed to be affiliates. This determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
As of March 8, 1999, the number of outstanding shares of NEXTLINK
Communications, Inc.'s Class A Common Stock was 25,588,729 and Class B Common
Stock was 29,184,372. NEXTLINK Capital, Inc. had outstanding 1,000 shares of
Common Stock, par value $0.01 per share.
NEXTLINK Capital, Inc. ("NEXTLINK Capital" and together with NEXTLINK
Communications, Inc., the "Registrants") meets the conditions set forth in
General Instruction I (1)(a) and (b) of Form 10-K and is therefore filing this
form with the reduced disclosure format.
TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I
1. Business................................................................................... 1
2. Properties................................................................................. 25
3. Legal Proceedings.......................................................................... 25
4. Submission of Matters to a Vote of Security Holders........................................ 25
PART II
5. Market for Registrants' Common Stock and Related Stockholder Matters....................... 25
6. Selected Financial Data.................................................................... 26
7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 27
7A. Quantitative and Qualitative Disclosure About Market Risk.................................. 41
8. Financial Statements and Supplementary Data................................................ 42
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 42
PART III
10. Directors and Executive Officers of the Registrant......................................... 42
11. Executive Compensation..................................................................... 45
12. Security Ownership of Certain Beneficial Owners and Management............................. 49
13. Certain Relationships and Related Transactions............................................. 51
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................... 51
NEXTLINK COMMUNICATIONS, INC.
NEXTLINK CAPITAL, INC.
PART I
ITEM 1. BUSINESS
CAPITALIZED TERMS USED BELOW, WHICH ARE NOT OTHERWISE DEFINED, ARE
DEFINED IN THE GLOSSARY, BEGINNING ON PAGE 23.
OVERVIEW
Craig O. McCaw, our largest and controlling shareholder, founded
NEXTLINK in 1994. We provide telephone and other telecommunications and data
services to a targeted customer base of small and medium-sized businesses using
our facilities-based networks and switches. We were one of the first companies
to take advantage of the Telecommunications Act of 1996, or the Telecom Act,
which opened the market for local telecommunications services to competition. In
the industry, we are referred to as a "competitive local exchange carrier" or
CLEC. We compete in each of our markets principally against the incumbent
telephone company in each area that had a virtual monopoly on local
telecommunications service prior to the entry of the CLECs. Each of these
dominant carriers is referred to in the Telecom Act as an "incumbent local
exchange carrier" or ILEC.
We offer our customers high quality local, long distance, data and
enhanced telecommunications services at competitive prices, individually or
as part of an integrated package of services. We are developing a national
network strategy to enable us to offer our customers complete, end-to-end
voice and data communications services over facilities we control. We are
also developing plans for the deployment of data switching and transmission
equipment in 2000, including Asynchronous Transfer Mode, or ATM, Internet
Protocol, or IP, and frame-relay facilities, and Digital Subscriber Line, or
DSL, services and anticipate offering value added services such as complex web
hosting and distributed computing applications.
We develop and operate high capacity, local fiber optic networks with
broad market coverage in a growing number of markets across the United States.
We currently operate 23 facilities-based networks, and provide switched local,
long distance, data and enhanced services in 38 markets in 14 states. We serve
larger markets, including New York, Los Angeles, Chicago, Atlanta, the San
Francisco Bay Area, Denver, Dallas and Miami, medium-sized markets, such as Salt
Lake City and Nashville, and clusters of smaller markets in Orange County,
California and central Pennsylvania.
In the markets where we provide switched local telecommunications
services, we offer our customers local and resold long distance services. In
these same local markets we also offer customers dedicated transmission lines
for their sole use, as well as direct access to our networks to long distance
carriers and other end users. Our target customer base within our markets is
small and medium-sized businesses, generally those businesses with fewer than
50 telephone lines (these lines are generally called "access lines" in our
industry). Based on consultants' reports, we estimate that as of year-end
1997, there were approximately 170 million access lines nationwide, including
approximately 55 million business lines.
Our customer base has been growing rapidly, as the following table
demonstrates:
AS OF MARKETS IN SERVICE TOTAL ACCESS LINES INSTALLED
- ----- ------------------ ----------------------------
December 31, 1996........................ 7 8,511
December 31, 1997........................ 25 50,131
December 31, 1998........................ 37 174,182
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We have also improved our rate of quarterly access line installations. The
following table illustrates this improvement:
ACCESS LINE INSTALLATIONS
QUARTERLY PERIOD ENDED PER QUARTER
- ----------------------- -------------------------
December 31, 1996................................... 1,604
December 31, 1997................................... 19,187
December 31, 1998................................... 40,075
Based on our recent successes in operating and expanding our existing
networks, as well as opportunities arising in other new markets, we are pursuing
an aggressive growth plan. We intend to develop networks throughout a majority
of the nation's top 30 markets and to serve markets with 27 million addressable
business access lines by the end of 2000. The next phase of our expansion plan
includes the launch of switched services in Washington, D.C. and Seattle in the
second quarter of 1999. We plan to enter other large and medium-sized markets on
a stand-alone basis where economic, competitive and other market factors warrant
such entry, and will consider pursuing smaller markets where we can extend or
cluster an existing network with relatively little incremental capital.
Certain recent transactions, described in more detail below, have laid
the foundation for a substantial expansion of our ability to offer our customers
a more complete array of end-to-end voice and data communications services over
our own facilities:
- WIRELESS CONNECTIVITY TECHNOLOGY. We are in the process of
acquiring radio frequency spectrum covering substantially all
of the 30 largest markets in the United States. We plan to use
this spectrum to implement wireless technology to connect many
more customers directly to our local networks.
- INTERNEXT. We manage and own 50% of INTERNEXT, a joint venture formed
in July 1998 that owns exclusive interest in the national network fiber
optic cable that Level 3 Communications, Inc. is currently
constructing. That network is designed to cover more than 16,000 route
miles, connecting 50 cities in the United States and Canada.
We believe that a critical factor to successfully implementing our
strategy is the quality of our management team and their extensive experience
in the telecommunications industry. We have built a management team that we
believe is well suited to challenge the dominance of the ILECs in the local
exchange market. Craig O. McCaw, our founder and largest and controlling
shareholder, Steven W. Hooper, our Chairman of the Board and Chief Executive
Officer, Wayne M. Perry, our Vice Chairman, and George M. Tronsrue III, our
President and Chief Operating Officer, each has 16 or more years of
experience in leading companies in competitive segments of the
telecommunications industry. In addition, the presidents of our operating
subsidiaries and our senior officers have an average of 18 years of
experience in the telecommunications industry. Mr. Hooper and Mr. Perry were
members of the senior management team at McCaw Cellular Communications, Inc.
during the years in which it became the nation's largest cellular telephone
company. Following McCaw Cellular's sale to AT&T Corp. in 1994, Mr. Hooper was
Chief Executive Officer of AT&T Wireless Services, Inc. and Mr. Perry was Vice
Chairman of AT&T Wireless Services.
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MARKET OPPORTUNITY
Prior to 1984, AT&T Corp. dominated both the local exchange and
long distance marketplace by owning the operating entities that provided both
local exchange and long distance services to most of the U.S. population. While
long distance competition began to emerge in the late 1970s, the critical event
triggering the growth of long distance competition was the breakup of AT&T, when
AT&T was mandated to separate its local and long distance businesses. To foster
competition in the long distance market, AT&T's divested local exchange
businesses, the Regional Bell Operating Companies, or "RBOCs", were prohibited
from acting as a single source provider of telecommunications services.
We believe that a similarly critical event occurred in 1996 with the
passage of the Telecom Act. In most locations throughout the United States, the
ILEC has operated with a virtual monopoly over the provision of most local
exchange services. However, just as competition slowly emerged in the long
distance business prior to the mandated breakup of AT&T, competitive
opportunities also have slowly emerged over the last 10 years at the local
exchange level.
Industry sources estimate that in 1997 the total revenues from local
and long distance telecommunications services were approximately $192 billion,
of which approximately $103 billion were derived from local exchange services
and approximately $89 billion from long distance services. Based on FCC
information, total revenues for local and long distance services grew at a
compounded annual rate of approximately 5.7% between 1992 and 1997. While the
mandate relating to the breakup of AT&T established the conditions for
competition in the long distance services market in 1984, the market for local
exchange services has been, until recently, virtually closed to competition and
has largely been dominated by regulated monopolies. We believe the Telecom Act
provided the opportunity to accelerate the development of competition at the
local level.
The Telecom Act and the subsequent rules issued by the FCC governing
competition, as well as pro-competitive policies already developed by state
regulatory commissions, have caused fundamental changes in the structure of
the local exchange markets. These developments created opportunities for new
entrants into the local exchange market to capture a portion of the ILEC's
dominant, and historically monopoly controlled, market share of local services.
The development of switched local service competition, however, is in its early
stages.
The Telecom Act also includes provisions that require the ILECs to
cooperate with competitors' entry into the local exchange market. These
provisions include:
- Interconnection--provides competitors the right to connect to the
ILECs' networks at any technically feasible point and to obtain
access to its rights-of-way;
- Unbundling of the Local Network--allows competitors to purchase and
utilize components of the ILECs' network selectively;
- Reciprocal Compensation--establishes the framework for pricing
between the CLEC and the ILEC for use of each other's networks; and
- Number Portability--allows ILEC customers to retain their current
telephone numbers when they switch to a CLEC.
The Telecom Act prevents ILECs from combining long distance services
with the local services they currently offer until they have demonstrated that
they have complied with certain regulatory requirements relating to local
competition. For more information, see "Regulatory Overview." Given the
regulatory constraints imposed on the ILECs by the Telecom Act, we believe we
will have an opportunity to gain market share in certain markets by combining
local and long distance services in a single offering to our customers before
the ILEC is permitted to do so.
3
In addition to traditional voice local and long distance services,
telecommunication services have been growing at an accelerated pace because
of increased data telecommunications, such as Internet usage. As technology
advances, we believe the demand for broadband capacity and additional
business and consumer telecommunications services will increase. We have
designed our fiber networks to accommodate significant growth in traffic
volumes and, as discussed below with respect to our data strategy, we will
deploy data switches and transmission equipment in 2000 to become more
competitive in the provision of these services.
BUSINESS STRATEGY
We have built a customer-focused, locally oriented organization that
currently focuses on providing switched local and long distance telephone
service at competitive prices to small and medium-sized businesses. Our goal
is to become a leading provider of complete, end-to-end voice and data
telecommunications services and to maximize penetration of our targeted
customer base. We believe the key components to achieving our goal are as
follows:
DEVELOP HIGH CAPACITY FIBER OPTIC NETWORKS WITH BROAD MARKET
COVERAGE. We build high capacity local networks in the central business
districts of our target markets using large fiber optic cable bundles.
These cables are capable of carrying high volumes of voice, data, video
and Internet traffic as well as other high-bandwidth services. We
employ a uniform technology platform within these networks based on
Nortel DMS 500 switches and other common transmission technologies.
This architecture enables us to provide direct connections to a high
percentage of commercial buildings and ILEC central switching offices
situated near our network. We also expect this architecture to result
in a higher proportion of traffic that is both originated and
terminated on our network, thereby providing higher long-term operating
margins. In some markets, we lease unused fiber, generally called "dark
fiber," and fiber capacity from third parties to launch
facilities-based services.
CONTINUE MARKET EXPANSION. We plan to build our own local
facilities-based networks throughout a majority of the nation's top 30
markets and to provide services in markets with a total of 27 million
addressable business lines by the end of 2000. We anticipate continuing
our expansion into new geographic areas, including additional large
markets, as opportunities arise, either through building new networks,
acquiring existing networks or other telecommunications companies, or
acquiring or leasing dark fiber and fiber capacity.
USE FIXED WIRELESS SPECTRUM TO LEVERAGE THE LOCAL NETWORKS. We
currently use both direct connections from our fiber network to
buildings in the central business district as well as leased unbundled
loop lines from the ILEC to connect off-network customers to our
network (commonly referred to as the "last mile" to the customer). For
off-network buildings, we are also developing alternative means for
establishing transport that links our end users to our network through
the use of a radio service, generally called local multipoint
distribution service, or LMDS. LMDS is a newly authorized fixed
broadband point-to-multipoint radio service, which the license holder
may deploy for wireless local loop telephony, mobile wireless backhaul
services, high-speed data transfer, video broadcasting and
videoconferencing, in any combination. We control or have rights to
acquire LMDS wireless spectrum covering 95% of the persons located within
the licensed areas, or POPs, in the 30 largest markets in the United
States which, if the acquisition is consummated, will make us the largest
holder of LMDS wireless spectrum in North America.
4
DEVELOP NATIONAL CITY-TO-CITY LONG HAUL CONNECTIVITY. We are
developing a national network strategy that will link our local
networks to each other. We anticipate executing this strategy by using
our interest in a 16,000-route mile national fiber optic network that
is expected to link 50 cities in the United States and Canada. This
national network is now under construction, and we expect substantially
all of its segments to be completed in 2000 and 2001. Through this
network we will be able to provide our customers with complete,
end-to-end communications services over our own facilities over time. The
network is designed to support switched traditional voice circuits as well
as packet-switched data services, such as IP, ATM and frame relay.
IMPLEMENT DATA STRATEGY. We are developing plans for the
deployment of data switching and transmission equipment throughout our
networks in 2000. To date, our local networks have been used primarily for
traditional circuit-switched technologies through our Nortel DMS 500
switches. Our fiber networks have been designed, however, to support
the introduction of additional technologies for the switching and
transmission of data services. Our networks have also been designed to
allow voice, data and all network applications to be carried over a
single infrastructure using an IP based architecture. We anticipate
that these newer technologies will allow us to provide a full range of
data services more efficiently and cost effectively over our networks,
while continuing to provide traditional circuit switched voice services
to our customers.
CONTINUE TO FOSTER DECENTRALIZED LOCAL MANAGEMENT AND CONTROL.
We believe that our locally based management teams have enhanced our
execution success. We have recruited experienced entrepreneurs and
industry executives as presidents of each of our regional groups of
operating subsidiaries, many of whom have previously built and led
their own start-up telecommunications businesses. The local presidents
and their teams are charged with achieving growth objectives in their
respective markets and have decision making authority in the following
key areas: customer care, network growth and building connectivity, and
managing the relationship and provisioning efforts with the ILEC. We
believe that this local management focus will provide a critical
competitive edge in customer acquisition and retention in each market.
PROVIDE TELECOMMUNICATIONS SERVICES THROUGH DIRECT SALES AND
EFFECTIVE CUSTOMER CARE ORGANIZATIONS. Currently, we primarily focus
our sales efforts on businesses and professional groups having fewer
than 50 access lines. We have a record of success in penetrating this
market, where we believe that ILECs are less likely to apply
significant resources towards retaining customers. To reach and retain
these customers, we have established and are continuing to build a
highly motivated and experienced direct sales force and customer care
organization with direct and personal relationships with our customers.
To ensure customer satisfaction, each customer is assigned a single
customer care representative who is responsible for solving problems
and responding to customer inquiries.
CONTINUE TO IMPROVE PROVISIONING PROCESSES TO ACCELERATE
REVENUE GROWTH. The process of transitioning new customers from an
ILEC's network to ours is complex. Therefore, we continue to identify
and implement best provisioning practices so that we can provide rapid
and smooth customer transitions. To support the provisioning of our
services, we have begun to implement a comprehensive information
technology platform geared toward delivering information and automated
ordering and provisioning capability directly to our internal staff.
Eventually, we anticipate being able to deliver this capability to the
end user. We believe that our provisioning practices and our
comprehensive information technology platform, as it is developed, will
allow us to implement switched local services in our targeted markets
more rapidly and to shorten the time between the receipt of a customer
order and the generation of revenues. Our improving capacity to
provision access lines to our networks is reflected in the increased
number of access lines we install per business day. In those markets
where we have offered switched local services since 1996, we have
increased our installation rate from 108 installations per business day
during the fourth quarter of 1997 to 132 installations per business day
during the fourth quarter of 1998.
5
NEXTLINK'S TELECOMMUNICATIONS SERVICES
LOCAL AND LONG DISTANCE SERVICES
We began offering switched local and long distance services in seven
markets on July 4, 1996 and in 18 additional markets in 1997. During 1998, we
launched switched local and long distance services in 12 markets. In 1999, we
recently launched services in San Diego and expect to expand further to offer
switched local and long distance services in additional major markets including
Washington D.C. and Seattle, among others. We currently focus our product
offerings on basic circuit-switched telecommunications services, which we
believe remains the core of local exchange services. Pricing, which is
determined and implemented by our operating subsidiary in each local market, has
been generally 10% to 15% lower than the pricing for comparable local services
from the ILEC. We also offer promotional pricing from time to time. Our current
product offering includes:
- standard dial tone, including touch tone dialing, 911, and operator
assisted calling;
- multi-trunk services, including direct inward dialing (DID) and
direct outward dialing (DOD);
- long distance service, including 1+, 800/888 and operator services;
- voice messaging with personalized greetings, send, transfer, reply
and remote retrieval capabilities; and
- directory listings and assistance.
Additionally, we offer the following services to long distance carriers
and high volume customers in each of our markets:
- special access circuits that connect end users to long distance
carriers;
- special access circuits that connect long distance carriers'
facilities to one another; and
- private line circuits that connect several facilities owned by the
same end user.
Our customers use these services as both primary and back-up circuits.
DATA SERVICES
We currently offer customers the ability to use our networks for data
services including facsimile, email and other business Internet services. As
technology advances, we believe the demand for broadband capacity and additional
business and consumer telecommunications services will increase. To address the
increased demand more efficiently and cost-effectively than with
circuit-switched technologies, we are developing plans for the deployment of
specialized data switching and transmission equipment in 2000. This equipment
will include ATM, IP and frame-relay facilities.
Deploying ATM and frame relay facilities should enable us to offer our
customers extensive bandwidth capacity with increased speed and reliability.
Our network infrastructure has also been designed to allow voice, data and
all network applications to be carried over a single infrastructure using an
IP based architecture. We believe that supporting IP technology throughout
our network will provide us with an economic advantage, as IP networks
provide more efficient use of network capacity. Compared to circuit-switched
technologies, IP, as a packet-based technology, is able to transmit packets
from several communications sources together simultaneously onto a single
circuit or channel. By leveraging the efficiencies of IP technologies, we can
lower our incremental cost of providing
6
telecommunications services to our customers. Additionally, IP technology is
an open protocol that provides a high degree of flexibility, as it allows for
market driven development of new applications for IP networks. IP networks
also allow a standard web browser interface for data and applications that
makes it easier for end users to access and use these resources.
ENHANCED COMMUNICATIONS SERVICES
We operate an Interactive Voice Response, or IVR, platform which allows
a consumer to dial into a computer-based system using a toll-free number and a
touch-tone phone and, by following a customized menu, access a variety of
information. Simultaneously, a profile of the caller is left behind for either
our customers' or our use. Currently, we provide four types of IVR services:
- LeaveWord--prompts the consumer to leave messages of any length or
complexity, ranging from catalog requests and contest entries to
specific product questions and surveys;
- Dealer Locator--helps a consumer to locate the nearest dealer of the
client's products by instantly identifying the consumer's area and
responding with the names, addresses and phone numbers of the
client's locations within any desired mileage radius;
- Automated Order Entry--allows consumers to purchase products using
the interactive phone service 24-hours a day, with real-time order
and credit card confirmation as well as arranging for delivery of the
new item to the consumer's desired address; and
- Interactive Call Center--provides the consumer with a menu of
selections that include Dealer Locator, Automated Order Entry and
other functions, including receiving a catalog, registering the
warranty of a product, contest entry and an option for callers
to be forwarded to a live operator.
We anticipate that we will continue to explore other enhanced
communications services opportunities and may acquire, invest in or establish
marketing relationships with additional service providers in the future that
support our overall business and marketing strategies.
SALES AND CUSTOMER CARE
OVERVIEW
We use a two-pronged sales strategy in each of our markets, one
directed to the sale of local and long distance services and the other to
enhanced communications services. Our primary sales efforts currently focus on
selling switched local and long distance services to small and medium-sized
businesses and professional groups with fewer than 50 business lines. Our market
research indicates that these customers prefer a single source for all of their
telecommunications requirements, including products, billing, installation,
maintenance and customer service. Using direct sales efforts, we offer bundled
local and long distance services that are generally priced at a 10% to 15%
discount from the ILEC. By bundling local and long distance services, we believe
we provide our customers a level of convenience that has been generally
unavailable since the break-up of AT&T. In some of our markets, we also target
high concentrations of business customers in multi-tenant commercial office
buildings in major metropolitan areas. This allows these business customers to
benefit from voice and data services offered through our on-site facilities and
technical staff. We market our enhanced communications services nationally
through a separate direct sales force. In addition, we employ a national sales
team to market services to long distance carriers and large commercial users.
Sales efforts for these services are generally centralized to provide a single
point of contact for these customers.
SALES FORCE
We have established a highly motivated and experienced direct sales
force and customer care organization that is designed to establish a direct and
personal relationship with our customers. We seek
7
to recruit salespeople with strong sales backgrounds, including salespeople
from long distance companies, telecommunications equipment manufacturers,
network systems integrators and the ILECs. We have expanded our sales force
from 223 salespeople, with 152 dedicated to CLEC sales, at year-end 1997 to
319 salespeople, with 284 dedicated to CLEC sales, at December 31, 1998.
Salespeople are given incentives through a commission structure that
generally targets 40-50% of a salesperson's compensation to be based on
performance.
CUSTOMER CARE
We augment our direct sales approach with superior customer care and
support from locally based customer care representatives. We structure our
customer care organization in such a manner that each customer has a single
point of contact in customer care who is responsible for solving problems and
responding to customer inquiries. We have expanded our customer care
organization from 162 customer care employees at year end 1997 to 256 customer
care employees at December 31, 1998. Our goal is to provide a customer care
group that has the ability and resources to respond to and resolve customer
problems as they arise. We believe that customer care representatives are most
effective if they are based in the communities in which we offer services, which
also allows, among other things, the opportunity for the representatives to
visit the customer's location.
NETWORK DEVELOPMENT
GENERAL
Our general strategy is to design and construct high capacity fiber
optic networks with broad coverage. We design each network to connect the
maximal number of businesses, long distance carriers' points of presence and
ILEC principal central offices in the area to be served, using existing
rights-of-way and/or rights-of-way that we develop. We have, at times,
developed our networks by acquiring fully or partially constructed fiber
optic networks or by entering into leased dark fiber and fiber capacity
arrangements which allow us, by installing one or more switches and related
electronics, to enter a market before we complete the construction of a fiber
optic network. We regularly evaluate markets for potential locations to
expand our existing networks and to develop new, additional networks. The
decision to build or acquire a new network or increase capacity of an
existing network is not based on any single factor, but on a combination of a
number of factors including:
- demographic, economic, telecommunications demand and business line
characteristics of the market and the surrounding markets;
- level of capital expenditures relative to the number of addressable
business lines;
- availability of rights-of-way;
- actual and potential competitors; and
- potential for us to cluster additional networks in the region.
If a particular target market is determined to present an attractive
market opportunity, we evaluate whether economical acquisition opportunities are
available. In some cases a large network can be acquired, and in other cases a
small existing network can serve as a starting point for market entry. Using the
data collected during preliminary studies and visits with city officials,
providers of rights-of-way, potential end users and long distance companies,
we develop detailed financial estimates of the costs of constructing a
network, including the cost of fiber optic cable, transmission and
8
other electronic equipment, as well as costs related to switching,
engineering, building entrance requirements and rights-of-way acquisitions. If
the financial estimates deem the project economical, our market development
personnel prepare a detailed business and financial plan for the proposed
network, including competitive, regulatory and rights-of-way analyses. Based
on our review of these analyses, we determine whether to proceed.
In addition, to construction of new networks, we seek opportunities to
leverage existing networks and related equipment by constructing or acquiring
networks in adjacent areas. This allows us to expand our operations in areas
where we already provide services by establishing a cost effective and
operationally efficient cluster of networks in various geographic regions.
9
NEXTLINK'S NETWORKS
The following table provides information on the markets in which we
have launched or have announced plans to launch switched local and long distance
services.
LAUNCH DATE FOR
SWITCHED LOCAL SERVICES
------------------------------------
STATE MARKET ACTUAL PLANNED
- ----- ------ --------------- ----------------
TENNESSEE................... Memphis July 1996
Nashville July 1996
PENNSYLVANIA (SOME OF
THESE MARKETS ALSO SERVE
CUSTOMERS IN NEW JERSEY).... Allentown July 1996
Harrisburg July 1996
Lancaster July 1996
Reading July 1996
Philadelphia July 1997
Scranton/Wilkes Barre December 1997
WASHINGTON.................. Spokane July 1996
Seattle 2nd Quarter 1999
UTAH........................ Salt Lake City January 1997
Orem/Provo September 1997
NEVADA...................... Las Vegas April 1997
OHIO........................ Cleveland April 1997
Columbus April 1997
CALIFORNIA.................. Anaheim July 1997
Costa Mesa July 1997
Fullerton July 1997
Garden Grove July 1997
Huntington Beach July 1997
Inglewood July 1997
Irvine July 1997
Long Beach July 1997
Los Angeles July 1997
Orange July 1997
Santa Ana July 1997
Fremont May 1998
Milpitas May 1998
San Jose May 1998
Palo Alto May 1998
Sunnyvale May 1998
Mountain View 2nd Quarter 1999
Santa Clara 2nd Quarter 1999
San Diego March 1999
ILLINOIS.................... Chicago February 1998
NEW YORK.................... Manhattan September 1998
GEORGIA..................... Atlanta September 1998
Marietta September 1998
COLORADO.................... Denver December 1998
TEXAS....................... Dallas December 1998
FLORIDA..................... Miami December 1998
MARYLAND.................... Washington D.C. 2nd Quarter 1999
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NETWORK ARCHITECTURE
DESIGN
We believe that facilities-based, full service telecommunications
companies whose customers are directly connected to their networks have the
ability to respond more quickly to customer needs for capacity and services.
Moreover, we believe that facilities-based carriers develop a more
knowledgeable, cooperative relationship with their customers, thereby
improving their ability to provide new services and other telecommunications
solutions, which should result in higher long-term operating margins. This
philosophy applies equally in the context of our national network strategy,
in which we control and own a joint venture, INTERNEXT, that has exclusive
interest in a national fiber optic network that is expected to cover more
than 16,000 route miles with six or more conduits and connect 50 cities in
the United States and Canada. INTERNEXT has an exclusive interest in 24
fibers in a shared, filled conduit. INTERNEXT also has an exclusive interest
in one empty conduit and the right to 25% of the fibers pulled through the
sixth and any additional conduits in the network. The network, which is now
under construction, is designed to support voice and data services.
We also believe that customers will select their service provider based
on high quality and differentiated products, responsive customer service and
price. In some circumstances, depending in part on regulatory conditions, we use
our own network for one portion of a call and resell the services of another
carrier for the remaining portion of a call. In other instances, both the
origination and termination of calls take place on our networks. Our networks
are designed to maximize connectivity directly with significant numbers of
business end users, and to easily interconnect and provide a least-cost routing
flow of traffic between our network and other networks in the marketplace.
In general, we seek to build wide, expansive networks, rather than a
simple core fiber optic ring in a downtown metropolitan area. We believe that
this type of broad coverage in each of our markets will result in the
following advantages:
- an increased number of buildings can be directly connected to our
network, which should maximize the number of businesses to which we
can offer our services with relatively little incremental cost;
- a higher volume of telecommunications traffic that both originates
and terminates on our network, which should result in improved
operating margins;
- the ability to leverage our investment in high capacity switching
equipment and electronics; and
- the opportunity for our network to provide backhaul carriage for
other telecommunications service providers such as long distance and
wireless carriers.
We seek to use this network design to increase the number of buildings
and customers directly connected to our networks. We believe having a direct
connection to our customers will provide us with the highest long-term operating
margins. Additionally, because the network connection to be serviced is
controlled by us and not another service provider, it allows us to provide
greater feature and quality control as well as offer customer service that is
both prompt and effective.
We seek to build high capacity networks using a backbone density
ranging between 72 and 432 strands of fiber optic cable. A single pair of glass
fibers on our networks can currently transmit 32,256 simultaneous voice
conversations, whereas a typical pair of copper wires can currently carry a
maximum of 24 digitized simultaneous voice conversations. We believe that
installing high-count fiber strands will
11
allow us to offer a higher volume of voice and broadband services without
incurring significant additional construction costs.
CONSTRUCTION
The construction period of a new network varies, depending on a number
of factors. Such factors include the number of backbone route miles to be
installed, underground or aerial construction, available existing conduit, the
initial number of buildings targeted for connection to the network backbone and
the general configuration for network deployment. After installing the initial
network backbone, we then evaluate extensions to additional buildings and
expansion to other areas of the market, based on detailed assessments of that
market's potential.
Our network backbones are installed in conduits that are either owned
by us or leased from third parties. We lease conduit or pole space from entities
such as utilities, railroads, long distance carriers, state highway authorities,
local governments and transit authorities. These arrangements are generally for
multi-year terms with renewal options, and are nonexclusive. The availability of
these arrangements is an important part of our evaluation of a market.
Cancellation of any of our material rights-of-way agreements could have an
adverse effect on our business in that area and could have a material adverse
effect on our operations.
Buildings are connected to our networks primarily by backbone
extensions to one of a number of physical rings of fiber optic cable, which
originate and terminate at our central switch. Alternatively, we may access an
end user's location by interconnecting with the ILEC's central office. Signals
are generally sent through a network backbone to the central node simultaneously
on both primary and alternate protection paths. Most buildings served have a
discrete NEXTLINK presence, referred to as a "remote hub", located in the
building. Within each building, our internal wiring connects the remote hub to
the customer premise. Customer equipment is connected to our electronic
equipment generally located in the remote hub, where customer transmissions are
digitized, combined and converted to an optical signal. The traffic is then
transmitted through the network backbone to our central node where originating
traffic is reconfigured for routing to its ultimate destination. After
completion of network construction, we employ maintenance and line crews that
are responsible for responding to outages and routine maintenance of the
network. We are also evaluating other alternatives for establishing transport
that links an end user to our network using LMDS wireless spectrum for the "last
mile" of transport. We control or have entered into an agreement to acquire LMDS
wireless spectrum covering 95% of the POPs in the 30 largest markets in the
United States which, upon consummation of this acquisition, will make us the
largest holder of LMDS spectrum in North America.
UNIFORM TECHNOLOGY PLATFORM
We currently intend to continue implementing a consistent technology
platform based on the Nortel DMS 500 switch throughout our networks as well as
a consistent data and IP technology platform. Unlike a traditional long
distance or local switch, the Nortel DMS 500 switch enables us to provide
local and long distance services from a single platform. We
12
believe that having a standardized circuit switch platform will enable us to
(i) deploy features and functions quickly in all of our networks, (ii) expand
switch capacity in a cost effective manner and (iii) lower maintenance costs
through reduced training and spare parts requirements. In addition, the
scalability and capacity of these switches allow us to switch calls from more
than one market, which enhances our ability to use a clustered approach to
building our networks. For economic or strategic reasons, we may in the
future elect to use other switch vendors and may also acquire and use
non-Nortel switches in connection with acquisitions of other companies.
We also are establishing a uniform transmission technology utilizing
SONET design and standardized digital access and cross connect systems, or
DACCS, and other ancillary transmission equipment. DACCS allows the network to
increase transmission capacity by aggregating and disaggregating the capacity of
various digital circuits along the fiber optic network.
We also operate NEXTLAB, a testing facility that contains a fully
functional Nortel DMS 500 switch in a configuration that simulates the working
environment of our operational switches, as well as distribution and ancillary
equipment. Located in Plano, Texas, NEXTLAB operates separate and apart from our
operational switches, and serves as our network operations control center.
NEXTLAB provides us with a means to test switch software and service
configurations on our networks prior to their release. We believe that these
procedures should minimize network outages, save network operating and training
costs and improve customer service quality.
IMPLEMENTATION OF LOCAL TELECOMMUNICATIONS
To offer local exchange services, we not only need an installed switch,
but we also must have numerous network and routing arrangements in place. We
have established these arrangements for all states where we are currently
operating. These key elements include:
INTERCONNECTION. We have entered into interconnection agreements with
the applicable ILEC for all of our current operating networks. Our ILEC
interconnection agreements generally have two to three year terms and are
subject to renegotiation on a regular basis.
Our approach to interconnection has been a two-step process. To
accelerate our 1996 and 1997 launches of switched local services, we entered
into initial interconnection arrangements that allowed for the immediate
exchange of local traffic with the ILEC. These arrangements allowed us to begin
service immediately and then work to optimize our arrangements with the ILEC.
The actual operating experience gained through our initial interconnection
agreements gave us critical knowledge for negotiating longer-term arrangements.
In addition, the FCC's "pick and choose" rule may permit us to adopt specific
provisions of another carrier's interconnection agreement on a
"most-favored-nation" basis. In some cases, where agreement cannot be reached on
a long-term arrangement, we may pursue binding arbitration before the state
utility commissions as provided under the Telecom Act.
RIGHTS-OF-WAY. In order for us to acquire and develop our fiber optic
networks, we must obtain local franchises and permits, as well as rights-of-way
and fiber capacity from entities such as ILECs and other utilities, railroads,
long distance companies, state highway authorities, local governments and
transit authorities.
LOCAL NUMBER PORTABILITY. We have established permanent local number
portability in each of our markets. Number portability arrangements allow
customers to retain their telephone numbers when changing telephone service
providers. In addition, we receive blocks of telephone numbers for each of
our markets to assign to new customers.
13
SS7 POINT CODES. For each of our switches, we have been assigned Point
Codes to use with the advanced signaling system known as SS7. SS7 is an "out
of band" signaling network used between telecommunications carriers to set up
and take down telephone calls as well as provide call routing information and
support end user telephone features. Our signaling network improves
call-processing times and frees capacity for voice, data, and video
transmissions. Our agreement with a national SS7 service provider allows us
to utilize SS7 signaling nationwide, including each of our new markets.
REGULATORY OVERVIEW
OVERVIEW
The federal Telecom Act established the regulatory framework for the
introduction of competition for local telecommunications services throughout
the United States by new competitive entrants such as NEXTLINK. The Telecom
Act substantially revised the Communications Act of 1934. Prior to the passage
of the Telecom Act, states typically granted an exclusive franchise in each
local service area to a single dominant carrier - often a former subsidiary of
AT&T known as a "Baby Bell" - which owned and operated the entire local
exchange network. Among other things, the Telecom Act preempts any state or
local government from prohibiting any entity from providing telecommunications
service. This provision eliminated prohibitions on entry found in almost half
of the states in the country at the time the Telecom Act was passed.
The Telecom Act imposes on incumbent carriers certain obligations to
interconnect their facilities with those of their competitors, such as
NEXTLINK. This interconnection obligation is critical because it permits
customers of ours to exchange telecommunications traffic with the customers of
other carriers, including the incumbent carrier. This interconnection
obligation grants competitive entrants such as NEXTLINK what is commonly
referred to as "co-carrier" status with the incumbent carrier. The grant of
co-carrier status and the preemption of state and local prohibitions on entry
contained in the Telecom Act are essential to our ability to be a full service
provider of telecommunications services in our markets.
The Telecom Act preserved state and local jurisdiction over
many aspects of local telephone service, and, as a result, we are subject to
varying degrees of federal, state and local regulation. FCC, state and local
regulators, and other legislative and judicial initiatives relating to the
telecommunications industry, could help or hinder our business.
FEDERAL REGULATION
The FCC generally exercises jurisdiction over the facilities
of, and services offered by us that provide interstate or international
communications. We are not currently required to obtain FCC authorization for
the installation, acquisition or operation of our wireline network facilities.
We are, however, required to hold and have obtained FCC authorizations for the
operation of our wireless facilities. Unlike incumbent carriers, we are not
currently subject to price cap or rate of return regulation, which leaves us
more free to set our own pricing policies. The FCC does require us to file
interstate tariffs on an ongoing basis for interstate and international
interexchange traffic. An FCC order that could have exempted us from any
requirement to file tariffs for interstate access and domestic long distance
service has been stayed pending further judicial review, and, as a result, we
currently file tariffs for these services.
While the rights established in the Telecom Act are a necessary
prerequisite to the introduction of full local competition, they must be
properly implemented to permit widespread competitive entry by us and other
competitors to the incumbent carriers. The following table summarizes the
interconnection rights granted by the Telecom Act that are most important to
the achievement of this goal and our belief as to the effect of the
requirements, if properly implemented.
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ISSUE DEFINITION ANTICIPATED EFFECT
- ----- ------------------------------------ -------------------------------
Interconnection.................. Efficient network interconnection Allows the customers of
to transfer calls back and forth NEXTLINK and other
between incumbent carriers and competitors to exchange traffic
competitive networks (including with customers connected to
911, 0+, directory assistance, other networks
etc.)
Local Loop Unbundling............ Allows competitors to selectively Reduces the capital costs of
gain access to incumbent NEXTLINK and other
carriers' facilities and wires competitors to serve customers
which connect the incumbent not directly connected to its
carriers' central offices with networks
customer premises
Reciprocal Compensation.......... Mandates reciprocal Improves NEXTLINK's and
compensation for local traffic other competitors' margins for
exchange between incumbent local service
carriers and NEXTLINK and
other competitors
Number Portability............... Allows customers to change local Allows customers to switch to
carriers without changing NEXTLINK's and other
numbers. True portability allows competitor's local service
incoming calls to be routed without changing phone numbers
directly to a competitor. Interim
portability allows incoming calls
to be routed through the
incumbent carrier to a competitor
at the economic equivalent of
true portability
Access to Phone Numbers.......... Mandates assignment of new Allows NEXTLINK and other
telephone numbers to competitors to provide telephone
NEXTLINK's and other numbers to new customers on the
competitors' customers same basis as the incumbent
carrier
In January 1999, the U.S. Supreme Court upheld key provisions of the FCC
rules implementing the Telecom Act, in a decision that was generally
favorable to competitive telephone companies such as NEXTLINK. In two earlier
decisions, the United States Court of Appeals for the Eighth Circuit had
invalidated most of these FCC rules. In finding that the FCC has general
jurisdiction to implement the Telecom Act's local competition provisions,
including pricing and enforcement jurisdiction, the Supreme Court's decision
restored the balance of power in telecommunications regulation between the
FCC and the states. The decision confirms the FCC's role in establishing
national telecommunications policy and creates certainty regarding the rules
governing local competition going forward. For example, the Court held that
the FCC's "pick and choose" rule, which allows competitors to adopt specific
provisions of other carriers' interconnection agreements, is consistent with
the Telecom Act. The Court also affirmed that the FCC, rather than the
states, has the power to adopt rules implementing key provisions of the
Telecom Act and held that the FCC correctly interpreted the meaning of the
term "network element", which defines the parts of an incumbent carrier's
operations that may be subject to the "unbundling" requirement of the Telecom
Act. The Court, however, also held that the FCC did not correctly determine
which network elements must be unbundled and made available to competitive
telephone companies such as NEXTLINK. Based upon this ruling, a number of
incumbent carriers stated publicly that they may refuse to provide some or
all network elements or sign new interconnection agreements until the FCC
initiates and completes a new proceeding determining the list of network
elements
15
incumbent carriers are required to offer to competitive telephone companies
such as NEXTLINK. These incumbent carriers subsequently assured FCC officials
that they would continue to provide currently available network elements to
their competitors and continue to negotiate new interconnection agreements in
good faith. If, however, an incumbent carrier nonetheless refused to enter
into new interconnection agreements or make available network elements,
including unbundled loops, our ability to provision new services and enter
new markets may be adversely effected for some period of time in that
incumbent carrier's region.
The FCC also has primary jurisdiction over the implementation of Section
271 of the Telecom Act which provides that incumbent carriers that are Baby
Bells cannot combine in-region, long distance services with the local
services they offer until they have demonstrated that:
- they have entered into an approved interconnection agreement with
a facilities-based competitive telephone company or that no such
competitive telephone company has requested interconnection as of
a statutorily determined deadline,
- they have satisfied a 14-element checklist designed to ensure that
the Baby Bell is offering access and interconnection to all local
exchange carriers on competitive terms, and
- the FCC has determined that allowing the Baby Bell to offer in-region,
long distance services is consistent with the public interest,
convenience and necessity.
The Baby Bells consist of the following companies: Ameritech,
BellSouth, Bell Atlantic, U S WEST and SBC Communications. Several of the Baby
Bells have unsuccessfully applied for authority to provide in-region long
distance services under Section 271 of the Telecom Act. While no Baby Bell has
obtained Section 271 approval from the FCC to date, several applications are
currently pending before state commissions and it is expected that these
applications plus several new applications are likely to be filed with the FCC
in the near future. We cannot predict if any of these applications will be
approved or when such approval is likely to occur. Approval could have an
adverse affect on our ability to compete if approval is not accompanied by
safeguards to ensure that the Baby Bell continues to comply with the
market-opening requirements of Section 271 or if approval is granted prematurely
before the market-opening requirements of the Telecom Act have been completely
met.
In addition to the responsibilities discussed above, FCC has
other significant duties under the Telecom Act, especially in the areas of
establishing regulations governing universal service, access charges, numbering,
number portability and price caps. The details of the rules adopted by the FCC
have a significant effect in determining the extent to which barriers to
competition in local services are removed, as well as the time frame within
which such barriers are eliminated. The FCC may also grant incumbent carriers
and the Baby Bells increased pricing flexibility to enable them to respond to
competition for advanced telecommunications services (such as data services),
special access and private line services. To the extent such pricing flexibility
is granted, our ability to compete for certain services may be adversely
affected. The following FCC or court proceedings concern the FCC's establishment
of additional rules and policies significant to our operations:
- TEAMING ARRANGEMENTS. In September 1998, the FCC rules that certain
RBOC "teaming" arrangements with long distance carriers, which would
have allowed RBOCs to offer a form of "one stop shopping" for long
distance and local services in competition with our offerings,
violated the Telecom Act. The RBOCs have filed petitions with the
United States Court of Appeals for the District of Columbia seeking
review of this FCC ruling, and if the court upholds such "teaming"
arrangements, our ability to compete for certain services may be
adversely affected.
16
- PROVISION OF ADVANCED TELECOMMUNICATIONS SERVICES. In August,
1998, the FCC initiated a proceeding to relax restrictions on the
Baby Bells' ability to provide advanced telecommunications services,
such as data services. In the same proceeding, the FCC is also
examining initiatives that it could undertake to promote local
competition, including more stringent rules governing the Baby Bells'
provision of colocation space and unbundled network elements to their
competitors. An FCC decision to give the Baby Bells unfettered
ability to provide advanced telecommunication services before they
have met the local market-opening requirements of the Telecom Act may
adversely affect our ability to compete for those services. We may,
however, be positively affected by an FCC decision to strengthen the
rules governing our access to RBOC facilities, including colocation
space and unbundled network elements.
- UNIVERSAL SERVICE. In 1997, the FCC established a significantly
expanded federal telecommunications subsidy regime known as
"universal service." For example, the FCC established new subsidies
for services provided to qualifying schools and libraries with an
annual cap of $2.25 billion and for services provided to rural health
care providers with an annual cap of $400 million. The FCC also
expanded the federal subsidies to low income consumers. We, as well
as most other telecommunications companies, must pay for these
programs based on our share of certain defined telecommunications
revenues. The FCC may decide in the future to vary the size of our
subsidy payments and the scope of the subsidy program. In addition,
several appeals of the FCC's rules establishing the program are
pending. Any increase in the payments required or the scope of the
program may result in additional expense to NEXTLINK.
- ACCESS CHARGE REFORM. In 1997, the FCC announced its plan to bring
interstate access rate levels more in line with cost. We and other
LECs are paid interstate access charges by long distance carriers for
both originating and terminating the interstate calls of long
distance customers on their local networks. Historically, access
charges were set higher than cost by the Baby Bells because those
revenues were used to subsidize the cost of the provision of local
telephone service to high cost and rural customers. With the
establishment of an explicit universal service subsidy mechanism,
however, the FCC is under increasing pressure to revise the current
access charge regime to bring the charges closer to the cost of
providing access. The method selected and the timing of an FCC
decision to lower access charge levels may reduce our access charge
revenues. In addition, AT&T has petitioned the FCC for a ruling that
the access charge rates of competitive telephone companies, including
NEXTLINK, be set through negotiation rather than by tariff. If
AT&T's request is granted by the FCC, it is likely that AT&T will
attempt to significantly lower access charge rates, including our
access charge rates, though the negotiation process. We have opposed
AT&T's request with the FCC.
- LOCAL NUMBER PORTABILITY. In May 1998, the FCC adopted an order
establishing rules that permit carriers to recover the costs of
providing long-term number portability. Number portability allows
customers to switch to our local service without changing phone
numbers. Number portability is very important to our ability to
market our services because many consumers, especially business
customers, are reluctant to change telephone providers if they also
have to change their telephone number. Beginning in February 1999,
carriers such as us are allowed to recover their specific costs
directly related to providing long term number portability.
- ILEC MERGER. Finally, the FCC, along with the Department of Justice
and state commissions, has jurisdiction over several recent requests
among incumbent carriers to merge their operations. The FCC has pending
17
before it a request for approval of the merger of Ameritech with SBC
Communications and the merger of GTE with Bell Atlantic. We have
opposed these merger requests in certain state proceedings and have
urged the FCC to examine the proposed mergers carefully to ensure that
the mergers do not undermine the market-opening incentives of the
Telecom Act by permitting the Baby Bells to expand their operations
without opening their local markets to competition. In addition, we
have proposed that any approval of the mergers be conditioned on the
establishment of pro-competitive safeguards that would neutralize any
adverse affect on the mergers on Baby Bell competitors, such as
NEXTLINK. We cannot predict the outcome of these proceedings or
whether, if the mergers are approved, they will be subject to
conditions recommended by us.
STATE REGULATION
State regulatory commissions also retain jurisdiction over our
facilities and services to the extent they are used to provide intrastate
communications. We expect that as we offer local exchange and other intrastate
services in an increasing number of states, we will be subject to direct state
regulation in most, if not all, such states. In all states where we are
operational and certification as a competitive telephone company is currently
required, our operating subsidiaries are certificated. Although we have received
such authorization for each of our operational markets, there can be no
assurance that we will receive such authorization for markets to be launched in
the future.
In most states, we are required to file tariffs or price lists
setting forth the terms, conditions and prices for services that are classified
as intrastate. In some states, our tariff can list a range of prices for
particular services, and in others, such prices can be set on an individual
customer basis. We are not subject to price cap or to rate of return regulation
in any state in which we currently provide services.
As noted above, as a result of a Supreme Court decision, the
states also have an important role under the Telecom Act. The Telecom Act allows
state regulatory authorities to continue to impose competitively neutral
requirements designed to promote universal service, protect public safety and
welfare, maintain quality of service and safeguard the rights of consumers. In
addition, state and local authorities have broad jurisdiction to regulate their
rights-of-way and protect consumers. State and local regulation of our
activities must be consistent with the Telecom Act. The Telecom Act generally
disallows state or local requirements that prohibit us from providing
telecommunications services in any particular state or local jurisdiction. State
commissions also enforce some of the Telecom Act's local competition provisions,
including those governing the arbitration of interconnection disputes between
the incumbent carriers and competitive telephone companies such as NEXTLINK.
LOCAL GOVERNMENT REGULATION
In certain locations, we are required to obtain local
franchises, licenses or other operating rights and street opening and
construction permits to install, expand and operate our fiber-optic networks. In
some of the areas where we provide network services, our subsidiaries pay
license or franchise fees based on a percentage of gross revenues or on a per
linear foot basis. There is no assurance that certain cities that do not
currently impose fees will not seek to impose such fees in the future, nor is
there any assurance that, following the expiration of existing franchises, fees
will remain at their current levels. Under the Telecom Act, state and local
governments retain the right to manage the public rights-of-way and to require
fair and reasonable compensation from telecommunications providers, on a
competitively neutral and nondiscriminatory basis, for use of public
rights-of-way. As noted in the "State Regulation" section above, these
activities must be consistent with the Telecom Act. The Telecom Act generally
disallows state or local requirements that would prohibit us from providing
telecommunications services in any particular state or local jurisdiction.
If any of our existing franchise or license agreements were
terminated prior to its expiration date and we were forced to remove our fiber
from the streets or abandon our network in place, such termination would have a
material adverse effect on our subsidiary in that area and could have a material
adverse effect on NEXTLINK as a whole. We believe that the provisions of the
Telecom Act barring state and
18
local requirements that prohibit or have the effect of prohibiting any entity
from providing telecommunications service should be construed to limit any
such action. However, there can be no assurance that one or more local
authorities will not attempt to take such action. Nor is it clear that we
would prevail in any judicial or regulatory proceeding to resolve such a
dispute.
COMPETITION
As noted above, the regulatory environment in which we operate is
changing rapidly. The passage of the Telecom Act combined with other actions by
the FCC and state regulatory authorities continues to promote competition in the
provision of telecommunications services.
ILECS
In each market we serve, we face, and expect to continue to face,
significant competition from the ILECs, which currently dominate the local
telecommunications markets. We compete with the ILECs in our markets for local
exchange services on the basis of product offerings, reliability,
state-of-the-art technology, price, route diversity, ease of ordering and
customer service. However, the ILECs have long-standing relationships with their
customers and provide those customers with various transmission and switching
services that we, in many cases, do not currently offer. We have sought, and
will continue to seek, to achieve parity with the ILECs in order to provide a
full range of local telecommunications services. Current competition for
telecommunications services is based primarily on quality, capacity and
reliability of network facilities, customer service, response to customer needs,
service features and price, and is not based on any proprietary technology.
Because our fiber optic networks have been recently installed compared to those
of the ILECs, our networks' dual path architectures and state-of-the-art
technology may provide us with cost and service quality advantages over some
existing ILEC networks.
OTHER COMPETITORS
We also face, and expect to continue to face, competition for local
telecommunications services from other potential competitors in certain
markets where we offer services. In addition to the ILECs, potential
competitors capable of offering switched local and long distance services
include long distance carriers such as AT&T, MCI WorldCom, Inc. and Sprint
Corporation, cable television companies such as Tele-Communications, Inc. and
Time Warner, Inc., electric utilities, microwave carriers, wireless telephone
system operators and private networks built by large end users, as well as
other new entrants such as Qwest Communications and Level 3.
We also compete with long distance carriers in the provision of long
distance services. Although the long distance market is dominated by three major
competitors, AT&T, MCI, and Sprint, hundreds of other companies also compete in
the long distance marketplace. Although the Telecom Act prohibits RBOCs from
combining local and long distance services until they have complied with certain
market-opening requirements, ILECs that are not RBOCs may currently offer
combined service. In addition, several RBOCs have submitted applications for
authority to provide combined service.
Many of our existing and potential competitors have financial,
personnel and other resources, including name recognition, significantly greater
than ours.
Our enhanced communications service offerings are also subject to
competition. For example, there are several competitors that offer IVR services,
such as Call Interactive and West Teleservices Corporation, which we believe
focus their sales efforts on large volume IVR service users. Additionally, many
of the long distance competitors discussed above have their own enhanced
services products that compete with ours.
PURCHASING AND DISTRIBUTION
Our fiber optic networks constitute our most significant capital
investments. We have entered into general purchase agreements with key equipment
suppliers for fiber and fiber optic transmission
19
equipment, with Nortel for telecommunications switches, and with other
suppliers for various other components of each system. These agreements
provide the basic framework under which purchase orders for these system
components are made. The specific purchases made for each network depend on
the configuration and other factors related to the network, such as the
prospective customer base and location and the services to be offered over the
network. Once these decisions are made, purchase orders for the appropriate
fiber and selected equipment types are placed under the general purchase
agreements. In connection with the provisioning of long distance services, we
purchase capacity at wholesale rates from long distance carriers.
EMPLOYEES
As of December 31, 1998, we employed 2,299 people, including full-time
and part-time employees. We consider our employee relations to be good. None of
our employees is covered by a collective bargaining agreement.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of
NEXTLINK's executive officers. Their respective backgrounds are described
following the table.
NAME AGE POSITION
- ---- --- --------
Steven W. Hooper............. 46 Chief Executive Officer, Chairman of the Board
of Directors
George M. Tronsrue III....... 42 President and Chief Operating Officer
Kathleen H. Iskra............ 42 Vice President, Chief Financial Officer and
Treasurer
Jan Loichle.................. 51 Vice President, Chief of Local Exchange
Operations
R. Bruce Easter, Jr.......... 41 Vice President, General Counsel and Secretary
Charles P. Daniels........... 42 Vice President, Chief Technology Officer
Michael J. McHale, Jr........ 42 Vice President, Chief Marketing Officer
R. Gerard Salemme............ 45 Senior Vice President, External Affairs and
Industry Relations
The following persons are the presidents of NEXTLINK's operating
subsidiaries:
NAME AGE POSITION
- ---- --- --------
Don Hillenmeyer.............. 53 President of NEXTLINK Southeast Region
Richard Kingston............. 39 President of NEXTLINK Midwest Region
Howard Murray................ 45 President of NEXTLINK Florida Region
Dwayne Nielson............... 44 President of NEXTLINK West Region
Dennis O'Connell............. 39 President of NEXTLINK Northeast Region
Michael Ruley................ 39 President of NEXTLINK Southwest Region
David Runge.................. 42 President of NEXTLINK Interactive, L.L.C.
Ron Scott.................... 51 President of NEXTLINK One, Inc.
Donald W. Sessamen........... 66 President of NEXTLINK California Region
The following are brief biographies of persons identified above.
STEVEN W. HOOPER. Mr. Hooper has been Chief Executive Officer of
NEXTLINK since March 1999 and Chairman of the Board since July 1997. Since
December 1997, he has also been Co-Chief Executive Officer with Craig O. McCaw
of Teledesic Corporation, a satellite telecommunications company. From January
1995 to June 1997, Mr. Hooper was President and Chief Executive Officer of
AT&T Wireless Services, Inc. From January 1993 to January 1995, he served as
Chief Financial Officer of AT&T Wireless Services. This was preceded by five
years as Regional President for McCaw Cellular's Pacific
20
Northwest/Rocky Mountain region, where his responsibilities included managing
the cellular operations in six western states and Alaska.
GEORGE M. TRONSRUE III. Mr. Tronsrue has been President of NEXTLINK
since July 1998 and Chief Operating Officer of NEXTLINK since October 1997. From
February 1994 to September 1997, Mr. Tronsrue was part of the initial management
team of ACSI, and was responsible for planning and overseeing the operations of
ACSI for its first three years serving as Chief Operating Officer, President,
Strategy and Technology Development Division and Executive Vice President,
Planning and Development. Prior to that, Mr. Tronsrue served as the Regional
Vice President of the Central Region of Teleport Communications Group, or TCG,
and as Vice President, Emerging Markets overseeing the start-up of TCG's initial
eight cable television partnerships. Before TCG, Mr. Tronsrue was at MFS
Communications from its inception in 1987 until 1992. At MFS, Mr. Tronsrue
served as Vice President, Corporate Planning and Information Management; Vice
President, Field Sales; Vice President and General Manager for MFS New York
during its first year of operations and Executive Vice President, MFS Internet.
From 1983 to 1986, Mr. Tronsrue served at MCI in a variety of engineering and
operations roles, culminating as Director of Operations, Michigan and Ohio.
KATHLEEN H. ISKRA. Ms. Iskra has been Vice President, Chief Financial
Officer and Treasurer of NEXTLINK since January 1996. Prior to that, she was
President and Chief Executive Officer of Horizon Air, a wholly owned
subsidiary of Alaska Air Group. Prior to her appointment at Horizon Air, Ms.
Iskra served as staff Vice President of Finance and Controller of Alaska
Airlines and Alaska Air Group. Ms. Iskra's service with Alaska began in 1987,
when she was appointed Controller. Prior to joining Alaska, she was an audit
manager with Arthur Andersen.
JAN LOICHLE. Ms. Loichle has been Vice President, Chief of Local
Exchange Operations of NEXTLINK since October 1996. From July 1995 to October
1996, Ms. Loichle was the President of NEXTLINK Solutions (a virtual
communications center). From April 1993 to July 1995, Ms. Loichle was
Executive Vice President at U.S. Signal in Detroit and Grand Rapids, Michigan.
From 1990 to 1993, Ms. Loichle was Assistant Vice President of Finance for SP
Telecom in San Francisco. From 1980 to 1989, Ms. Loichle was Vice President
of Financial Operations for Lexitel/Allnet/ALC in Birmingham, Michigan.
R. BRUCE EASTER, JR. Mr. Easter has been Vice President, General Counsel
and Secretary of NEXTLINK since January 1995. From 1986 to December 1994, Mr.
Easter was an associate and then partner in the law firm of Davis Wright
Tremaine in Seattle, Washington, where he focused on communications law and
media matters.
CHARLES P. DANIELS. Mr. Daniels has been Vice President, Chief
Technology Officer of NEXTLINK since July 1997. From November 1995 to July
1997, Mr. Daniels was Vice President, Chief Marketing Officer of NEXTLINK.
From 1992 to 1995, Mr. Daniels worked for MCI where he was the founder and
Program Manager of the network MCI Developers Lab. Mr. Daniels was also a
founding member of MCI's Advanced Technology Group. Prior to joining MCI, Mr.
Daniels worked for Manufacturers Hanover Trust from 1989 to 1992 as Vice
President/Strategic Technology and Research, where he was responsible for
evaluating and implementing new technologies that either reduced costs or
generated new revenue.
MICHAEL J. MCHALE, JR. Mr. McHale has been Vice President, Chief
Marketing Officer of NEXTLINK since November 1997. From 1993 to 1997, Mr.
McHale served as Regional Vice President and General Manager of the Phoenix
market for Teleport Communications Group, Inc., developing the Phoenix market
from its inception. From 1991 to 1993, he was Vice President, Product
Marketing and Development at MFS Intelenet, Inc. where he was responsible for
planning and implementing MFS's initial introduction of switched services in
New York City.
R. GERARD SALEMME. Mr. Salemme has been Senior Vice President, External
Affairs and Industry Relations of NEXTLINK since March 1998, and from July
1997 to March 1998, he was Vice President, External Affairs and Industry
Relations of NEXTLINK. Prior to joining NEXTLINK, Mr. Salemme was Vice
President, Government Affairs at
21
AT&T Corp. from December 1994. Prior to joining AT&T Corp., Mr. Salemme was
Senior Vice President, External Affairs at McCaw Cellular from 1991 to
December 1994.
The following individuals are the senior management of NEXTLINK's
subsidiaries:
DON HILLENMEYER. Mr. Hillenmeyer is the President of NEXTLINK's
Southeast Region. Prior to joining NEXTLINK in March of 1995, Mr. Hillenmeyer
was president of MCMG, Inc., a Nashville-based wireless communications
management consulting and operations firm specializing in running Rural Service
Areas for independent cellular telephone owners. Before founding MCMG, Inc., Mr.
Hillenmeyer held various senior management positions at McCaw Cellular and was
responsible for 13 southern states from August 1986 to February 1990.
RICHARD KINGSTON. Mr. Kingston is the President of NEXTLINK's Midwest
Region. Prior to joining NEXTLINK in July 1997, Mr. Kingston was the Western
Regional Vice President/General Manager of American Communications Services,
Inc. from April 1994 to July 1997. Prior to that, Mr. Kingston operated his
own telecommunications company, King Communications, Inc. from January 1992 to
January 1994. From December 1990 to January 1992, Mr. Kingston was West Region
Agent Manager for Telesphere Communications, Inc. and from 1988 to December
1990, Mr. Kingston was Director of Carrier Sales at MFS Communications
Company, Inc.
HOWARD MURRAY. Mr. Murray, President of NEXTLINK's Florida Region, has
twenty-three years of experience in the telecommunications industry. Prior to
coming to NEXTLINK in February 1998, Mr. Murray was the General Manager of
KMC Telecom's South Florida business. Prior to that, Mr. Murray owned
FiberCAP, from December 1992 until he sold it to ICG Communications in May of
1994. He was the General Manager at ICG Communications from June of 1994
through July of 1997. He has also held a variety of sales and engineering
positions with telephone equipment and fiber cable manufacturers such as
Siecor, Alcatel, and Sumitomo.
DWAYNE NIELSON. Mr. Nielson is the President of NEXTLINK's West Region.
Prior to joining NEXTLINK in February 1996, Mr. Nielson was Assistant Vice
President, Consumer and Small Business Market, at Sprint Corporation from
October 1994 to February 1996. Prior to that, from August 1985 through October
1994, Mr. Nielson held a variety of sales and marketing positions at Sprint
and United Telephone.
DENNIS O'CONNELL. Mr. O'Connell is the President of NEXTLINK's
Northeast Region. Prior to joining NEXTLINK in April 1998, Mr. O'Connell was
President of the Northeast Region for AT&T Wireless (previously McCaw
Cellular) from June 1995 to March 1998. Prior to that, from January 1992 to
May 1995, Mr. O'Connell was the New York Vice President of Operations for
AT&T Wireless.
MICHAEL RULEY. Mr. Ruley is President of NEXTLINK's Southwest Region. He
has over 15 years of experience in the telecommunications field. Before
joining NEXTLINK in May 1998, Mr. Ruley held various positions at TCG from
June 1996 through April 1998, including Regional Vice President of the
Pacific Bell Territory and Vice President and General Manager of both the San
Francisco and Colorado markets. Prior to his tenure at TCG, Mr. Ruley was the
Director of New Business Development for BPI Communications, a Colorado based
telecommunications and technology company, from March 1993 to June 1996.
Mr. Ruley has also managed District Sales for Librex Computer Express in
Colorado; and was Vice-President of Sales and Marketing for Integrated
Management Systems of Denver, Colorado.
DAVID RUNGE. Mr. Runge has been the President of NEXTLINK Interactive
since October 1998. Prior to joining NEXTLINK, Mr. Runge was a partner in the
Deloitte & Touche Consulting Group from August 1997 to October 1998 where he
specialized in telecommunications and media. From January 1993 to August
1995, Mr. Runge was President of Information Network Systems, a data
networking and software development company that specializes in claims
processing for many Fortune 500 companies. Mr. Runge has also held executive
positions with Information Strategy Partners, MCI Communications and AT&T.
22
RON SCOTT. Mr. Scott has been the President of NEXTLINK One, Inc. since
September 1997. From 1996 to 1997, Mr. Scott owned and operated his own
company, Reslink, a residential multi-tenant telecommunications firm. From
1994 to 1996, Mr. Scott was the Vice-Chairman and Chief Operating Officer of
Shared Technologies. From 1990 to 1994 he was President and Chief Executive
Officer of Access Telemanagement, Inc., and Managing General Partner of
Access Telecommunications Group LP. In 1984, Mr. Scott co-founded Access'
predecessor, Martnet, Inc. From 1987 to 1990, he was President and Chief
Executive Officer and from 1984 to 1987 he was Vice President and General
Manager of Martnet.
DONALD W. SESSAMEN. Mr. Sessamen is the President of NEXTLINK's
California Region. Prior to joining NEXTLINK in November 1996, Mr. Sessamen
acted as a consultant to NEXTLINK. Prior to acting as a consultant to
NEXTLINK, Mr. Sessamen joined Brooks Fiber California in 1994 as President,
after it acquired Phoenix Fiberlink. At Brooks Fiber California, Mr. Sessamen
completed the installation of the San Jose system and managed the entry into
switched services in the Sacramento market. From 1991 to 1994, Mr. Sessamen
was Executive Vice President of Operations, Engineering and MIS at SP
Telecom, a fiber optic systems construction and wholesale transmission
company using Southern Pacific Railroad rights-of-way east of the Mississippi
River. At SP Telecom, Mr. Sessamen led SP Telecom's entry into switch-based
products utilizing the Northern Telecom DMS 250 Super Node, introducing
innovative switch-based products.
TRADEMARKS, TRADE NAMES AND INTELLECTUAL PROPERTY RIGHTS
We use the name "NEXTLINK" as our primary business name. In July 1995,
we filed for federal trademark protection of this name and received our notice
of allowance from the U.S. Patent and Trademark Office, or the PTO, on July 1,
1997. In addition, we have received a notice of allowance from the PTO of our
distinctive floating "X" and related marks as protected trademarks under federal
law. From time to time, we receive requests to consider licensing certain
patents held by third parties that may have bearing on our IVR services. We
consider such requests on their merits, and have entered into one such
license agreement to date.
GLOSSARY
ACCESS LINES--A telephone connection between a customer purchasing
local telephone services and NEXTLINK. This connection does not include the
concept of access line equivalents (ALEs), and is a one-for-one relationship
with no multipliers used for trunk ratios, except for those trunks over which
primary rate interface (PRI) service is provided, which are counted as 23 access
lines
ADDRESSABLE BUSINESS LINES--In accordance with industry practice,
NEXTLINK includes in its calculation of actual and targeted addressable business
lines all business lines currently in active use through any service provider in
each market area in which we have or plans to build a network.
CENTRAL OFFICES--The switching centers or central switching facilities
of the LECs.
CLEC (COMPETITIVE LOCAL EXCHANGE CARRIER)--A company providing local
telephone services in competition with the ILEC.
COLOCATION--The ability of a CLEC such as NEXTLINK to connect its
network to the ILECs' central offices. Physical colocation occurs when a CLEC
places its network connection equipment inside the ILEC's central offices.
Virtual colocation is an alternative to physical colocation pursuant to which
the ILEC permits a CLEC to connect its network to the ILEC's central offices on
comparable terms, even though the CLEC's network connection equipment is not
physically located inside the central offices.
23
DARK FIBER--Unused fiber through which no light is transmitted. Dark
fiber is not equipped with the required electronics and signals to enable
transport of information.
DEDICATED--Telecommunications lines dedicated or reserved for use by
particular customers and charged on a flat, usually monthly, basis.
FCC--The United States Federal Communications Commission.
FIBER MILE--The number of route miles installed (excluding pending
installations) along a telecommunications path multiplied by the number of
fibers along that path. See the definition of "route mile" below.
ILEC (INCUMBENT LOCAL EXCHANGE CARRIER) --A company that was providing
local exchange service prior to the entry of the CLECs.
LOCAL EXCHANGE--A geographic area determined by the appropriate state
regulatory authority in which calls generally are transmitted without toll
charges to the calling or called party.
LINE--An electrical path between an ILEC central office and a
subscriber.
LONG DISTANCE CARRIERS (INTEREXCHANGE CARRIERS)--Long distance carriers
provide services between local exchanges on an interstate or intrastate basis. A
long distance carrier may offer services over its own or another carrier's
facilities.
NUMBER PORTABILITY--The ability of an end user to change local exchange
carriers while retaining the same telephone number.
POINTS OF PRESENCE--Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long distance carrier.
PUC (PUBLIC UTILITY COMMISSION) --A state regulatory body, established
in most states, which regulates utilities, including telephone companies,
providing intrastate services.
PRIVATE LINE--A dedicated telecommunications connection between end
user locations.
RECIPROCAL COMPENSATION--The compensation paid to and from a new
competitive local exchange carrier and the ILEC for termination of a local call
on each other's networks.
ROUTE MILE--The number of miles of the telecommunications path in which
NEXTLINK-owned or leased fiber optic cables are installed.
SPECIAL ACCESS SERVICES--The lease of private, dedicated
telecommunications lines or "circuits" along the network of an ILEC or a CAP,
which lines or circuits run to or from the long distance carrier points of
presence. Examples of special access services are telecommunications lines
running between points of presence of a single long distance carrier, from one
long distance carrier point of presence to the point of presence of another
long distance carrier or from an end user to a long distance carrier point of
presence.
SWITCH--A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is a process of
interconnecting circuits to form a transmission path between users.
SWITCHED SERVICES--Transmission of switched calls through the local
switched network.
24
ITEM 2. PROPERTIES
NEXTLINK owns or leases, in its operating territories, telephone
property which includes: fiber optic backbone and distribution network
facilities; point-to-point distribution capacity; central office switching
equipment; connecting lines between customers' premises and the central offices;
and customer premise equipment.
The fiber optic backbone and distribution network and connecting lines
include aerial and underground cable, conduit, and poles and wires. These
facilities are located on public streets and highways or on privately owned
land. NEXTLINK has permission to use these lands pursuant to consent or lease,
permit, easement, or other agreements. The central office switching equipment
includes electronic switches and peripheral equipment.
NEXTLINK and its subsidiaries lease facilities for their administrative
and sales offices, network nodes and warehouse space. The various leases expire
in years ranging from 1999 to 2028. Most have renewal options. Additional office
space and equipment rooms will be leased as the Company's operations and
networks are expanded and as new networks are constructed.
ITEM 3. LEGAL PROCEEDINGS
NEXTLINK is not currently a party to any legal proceedings, other than
regulatory and other proceedings that are in the normal course of its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter ended December 31, 1998.
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
MARKET INFORMATION
NEXTLINK's Class A Common Stock began trading on the Nasdaq National
Market on September 26, 1997, under the symbol "NXLK". Prior to that date,
NEXTLINK's Class A Common Stock was not publicly traded. The following table
shows, for the periods indicated, the high and low bid prices for NEXTLINK's
Class A Common Stock as reported by the Nasdaq National Market tier of The
Nasdaq Stock Market.
1998 1997
---------------- -----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
First Quarter............................... $36.88 $21.19 $ -- $ --
Second Quarter.............................. $37.81 $25.88 $ -- $ --
Third Quarter (since September 26, 1997).... $40.75 $20.63 $25.50 $23.13
Fourth Quarter.............................. $33.50 $11.00 $27.75 $19.50
There is no public trading market for NEXTLINK's Class B Common Stock
or NEXTLINK Capital's common equity.
25
As of March 8, 1999, the approximate number of shareholders of record of
NEXTLINK's Class A and Class B Common Stock was 8,270 and 8, respectively.
NEXTLINK is the sole holder of record of NEXTLINK Capital's Common Stock.
USE OF PROCEEDS
NEXTLINK filed a registration statement on Form S-1 (File No.
333-32001) which became effective on September 26, 1997, whereby 15,200,000
shares of Class A Common Stock, $0.02 par value per share, were sold in an
initial public offering at a price of $17 per share. Of the 15,200,000 shares of
Class A Common Stock sold, 12,000,000 shares were sold by NEXTLINK and 3,200,000
shares were sold by a selling shareholder. NEXTLINK did not receive any of the
proceeds from the sale of shares by the selling shareholder. In addition, the
underwriters of the IPO, led by Salomon Brothers Inc., exercised an option to
purchase 2,280,000 additional shares of Class A Common Stock at the same price
per share. Net proceeds to NEXTLINK from the IPO totaled approximately $226.8
million, after deducting underwriting discounts, advisory fees and expenses
aggregating approximately $16.0 million. NEXTLINK intends to use substantially
all of the net proceeds from the IPO for expenditures relating to the expansion
of existing networks and services, the development and acquisition of new
networks and services and the funding of operating losses and working capital.
None of the net proceeds from the IPO had been used by NEXTLINK as of December
31, 1998.
NEXTLINK filed a registration statement on Form S-1 (File No. 333-32003)
which became effective on September 26, 1997, whereby NEXTLINK sold $400.0
million aggregate principal amount of 9 5/8% Senior Notes. The offering was
led by Salomon Brothers Inc. Net proceeds from the sale of the 9 5/8% Senior
Notes totaled approximately $388.5 million, after deducting issuance costs
aggregating approximately $11.5 million, relating to underwriting discounts,
advisory fees and expenses. As of December 31, 1998 all of the net proceeds
from the sale of the 9 5/8% Senior Notes had been used. Approximately $209.1
million of the net proceeds were used for the purchase of property and
equipment, $20.5 million for the network lease agreement entered into in
February 1998, and the remainder was used to fund the Company's operations
and working capital requirements.
DIVIDENDS
Neither NEXTLINK nor NEXTLINK Capital has declared a cash dividend on any
of their respective equity securities. Covenants in the indentures pursuant
to which NEXTLINK's and NEXTLINK Capital's Senior Notes have been issued
restrict the ability of NEXTLINK to pay cash dividends on its capital stock.
SALES OF UNREGISTERED SECURITIES
None.
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- -------- -------- -----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $ 139,667 $ 57,579 $ 25,686 $ 7,552 $ --
Loss from operations........................................ (206,184) (102,621) (51,015) (12,462) (352)
Net loss.................................................... (278,340) (129,004) (71,101) (12,731) (349)
Net loss applicable to common shares........................ (337,113) (168,324) (71,101) (12,731) (349)
Net loss per share.......................................... (6.26) (3.91) (1.81) -- --
OTHER DATA:
26
EBITDA (1).................................................. $ (140,937) $ (72,184) $(30,761) $ (8,629) $(338)
AS OF DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- -------- -------- -----
(in thousands)
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities............ $1,478,062 $ 742,357 $124,520 $ 1,350 $ 25
Property and equipment, net................................. 594,408 253,653 97,784 29,664 134
Total assets................................................ 2,483,106 1,219,978 390,683 53,461 690
Long-term debt.............................................. 2,013,192 750,000 350,000 -- --
Preferred stock, net of issuance costs...................... 556,168 313,319 -- -- --
Total shareholders' equity (deficit)........................ (246,463) 71,285 (18,654) 36,719 672
(1) EBITDA represents net loss before interest expense, interest income,
depreciation, amortization and deferred compensation expense. EBITDA is
commonly used to analyze companies on the basis of operating performance,
leverage and liquidity. While EBITDA should not be construed as a
substitute for operating income or a better measure of liquidity than
cash flow from operating activities, which are determined in accordance
with generally accepted accounting principles, it is included herein to
provide additional information with respect to our ability to meet future
debt service, capital expenditure and working capital requirements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Since its inception in 1994, NEXTLINK has executed a strategy of
constructing and acquiring fiber optic networks and acquiring related
telecommunications businesses. Over this period, NEXTLINK has pursued this
strategy by constructing, acquiring, leasing fibers or capacity on, and entering
into agreements to acquire local telecommunications networks.
NEXTLINK develops and operates high capacity, local fiber optic
networks with broad market coverage in a growing number of markets across the
United States. In its switched local services markets, NEXTLINK offers its
customers a bundled package of local and long distance services and also offers
dedicated transmission and competitive access services to long distance carriers
and end users. NEXTLINK plans to acquire, build or develop networks in new
areas, expand its current networks, and also explore the acquisition or
licensing of additional enhanced communications services and other
telecommunications service providers. These efforts should allow NEXTLINK to
increase its presence in the marketplace, and facilitate providing a single
source solution for the telecommunications needs of its customers.
NEXTLINK currently operates 23 facilities-based networks providing
switched local and long distance services in 38 markets in 14 states. NEXTLINK
serves larger markets including New York, Los Angeles, Chicago, Atlanta, the San
Francisco Bay Area, Denver, Dallas and Miami, medium-sized markets such as Salt
Lake City and Nashville, and clusters of smaller markets in Orange County,
California and central Pennsylvania. NEXTLINK anticipates developing additional
new markets throughout a majority of the nation's top 30 markets which, together
with its existing markets, are expected to have a total of approximately 27
million addressable business lines by the end of 2000. NEXTLINK recently
launched service in San Diego in March 1999, and plans to launch services in
Washington, D.C. and Seattle in the second quarter of 1999. NEXTLINK is also
developing a national network strategy to enable it to offer its customers
complete, end-to-end voice and data communications services over NEXTLINK-owned
facilities.
The table provides selected key operational data:
27
AS OF DECEMBER 31,
-------------------
1998 1997
------- -------
OPERATING DATA (1):
Route miles (2)..................................... 2,477 1,897
Fiber miles (3)..................................... 195,531 133,224
On-net buildings connected (4)...................... 801 513
Off-net buildings connected (5)..................... 13,443 3,504
Switches installed.................................. 21 13
Access lines in service (6)......................... 174,182 50,131
Employees........................................... 2,299 1,327
(1) The operating data includes 100% of the statistics of the Las Vegas
network, which NEXTLINK manages and in which NEXTLINK has a 40%
membership interest.
(2) Route miles refer to the number of miles of the telecommunications path
in which NEXTLINK-owned or leased fiber optic cables are installed.
(3) Fiber miles refers to the number of route miles installed along a
telecommunications path, multiplied by NEXTLINK's estimate of the number
of fibers along that path.
(4) Represents buildings physically connected to NEXTLINK's networks,
excluding those connected by unbundled incumbent local exchange carrier,
or ILEC, facilities.
(5) Represents buildings connected to NEXTLINK's networks through leased or
unbundled ILEC facilities.
(6) Represents the number of access lines in service, including those lines
that are provided through resale of Centrex services, for which NEXTLINK
is billing services. NEXTLINK serviced 2,995 resold access lines as of
December 31, 1998. NEXTLINK defines an access line as a telephone
connection between a customer purchasing local telephone services and
NEXTLINK. This connection does not include the concept of access line
equivalents (ALEs), and is a one-for-one relationship with no multipliers
used for trunk ratios, except for those trunks over which primary rate
interface (PRI) service is provided, which are counted as 23 access lines.
NEXTLINK builds its networks to encompass the significant business
concentrations in each area it serves, focusing on direct connections to end
user locations and ILEC central offices. NEXTLINK employs a uniform technology
platform for each of its local exchange networks that is based on the Nortel DMS
500 digital local and long distance combination switching platform and
associated distribution technology. As of December 31, 1998, NEXTLINK had 19
operational Nortel DMS 500 switches, including one switch in its NEXTLAB
facility. NEXTLAB is a fully functional model of one of NEXTLINK's networks,
which serves as a testing facility for switch software and NEXTLINK's products
and services and NEXTLINK's network operations control center.
The development of NEXTLINK's businesses and the construction,
acquisition and expansion of its networks require significant expenditures,
substantial portions of which are incurred before the realization of revenues.
These expenditures, together with the associated early operating expenses,
result in negative cash flow until an adequate customer base is established.
However, as the customer base grows, NEXTLINK expects that incremental revenues
can be generated with decreasing incremental operating expenses, which may
provide positive contributions to cash flow. NEXTLINK has made the strategic
decision to build high capacity networks with broad market coverage, which
initially increases its level of capital expenditures and operating losses.
NEXTLINK believes that over the long term this will enhance its financial
performance by increasing the traffic flow over its networks. NEXTLINK has also
entered into leased dark fiber and fiber capacity arrangements which allow it,
by installing one or more switches and related electronics, to enter a market
prior to completing construction of its own fiber optic network.
RESULTS OF OPERATIONS
28
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
Revenue increased 143% to $139.7 million in 1998 from $57.6 million in
1997. The increase was driven by 277% growth in revenues from bundled local
and long distance services and dedicated services, as well as by the
acquisitions of Start Technologies Corporation, a shared tenant services
provider, and Chadwick Telecommunications Corporation, a switch-based long
distance service reseller, in the fourth quarter of 1997. Revenue reported
consisted of the following components (in thousands):
1998 1997
-------- -------
CLEC services................................. $ 76,654 $20,342
Shared tenant services........................ 12,781 2,018
Long distance telephone services.............. 26,937 16,478
Enhanced services............................. 23,295 18,741
-------- -------
Total revenue................................. $139,667 $57,579
-------- -------
-------- -------
Revenue from CLEC services includes bundled local and long distance services
and dedicated services. Enhanced revenue consists primarily of interactive voice
response (IVR) services.
NEXTLINK began offering switched local and long distance services in
seven of its markets in July 1996, 18 markets during 1997 and 12 additional
markets during 1998. In addition, since January 1995, NEXTLINK has offered
private leased line, or dedicated services. Since April 1995, NEXTLINK has
resold Centrex access lines, which is a leased telephone service that allows
businesses to obtain custom features, such as call forwarding, without having to
purchase their own equipment for these features. NEXTLINK increased its
quarterly customer access line installation rate from 19,187 in the fourth
quarter of 1997 to 40,075 during the fourth quarter of 1998. As of December 31,
1998, NEXTLINK had 174,182 access lines in service, compared to 50,131 as of
December 31, 1997. Revenues from the provision of such services are expected to
continue to increase as a component of total revenues over future periods.
Access lines in service includes those lines which are provided through resale
of Centrex services, the number of which is decreasing over time as NEXTLINK
converts those customers to its own network.
Operating expenses consist of costs directly related to providing
facilities-based network and enhanced communications services and also include
salaries and benefits and related costs of operations and engineering personnel.
Operating expenses increased 129% in 1998 to $123.7 million, an increase of
$69.6 million over the same period in 1997. These increases were attributed to
increased network costs related to provisioning higher volumes of local, long
distance and enhanced communications services, an increase in employees and an
increase in other related costs primarily to expand NEXTLINK's switched local
and long distance service businesses in its existing and planned markets. To a
lesser extent, the acquisitions of Start and Chadwick in the fourth quarter of
1997 also contributed to the increase in operating costs over those in 1997.
Selling, general and administrative expenses include salaries and
related personnel costs, facilities expenses, sales and marketing, information
systems costs, consulting and legal fees and equity in loss of affiliates.
Selling, general and administrative expenses increased 107% for the year ended
December 31, 1998 as compared to the corresponding period in 1997. The increase
was primarily due to NEXTLINK's increase in employees, as well as other costs
associated with the expansion of NEXTLINK's switched local and long distance
service businesses in its existing and planned markets.
Deferred compensation expense was recorded in connection with
NEXTLINK's Equity Option Plan until April 1997, and in connection with
NEXTLINK's Stock Option Plan, which replaced the Equity Option Plan, subsequent
to April 1997. The stock options granted under the Equity Option Plan were
considered compensatory and were accounted for on a basis similar to that for
stock appreciation rights.
29
All options outstanding under the Equity Option Plan were regranted under the
Stock Option Plan with terms and conditions substantially the same as under
the Equity Option Plan. As such, NEXTLINK continues to record deferred
compensation expense for those compensatory stock options issued, as well as
for compensatory stock options issued subsequent to the Stock Option Plan
inception date. Compensation expense is recognized over the vesting periods of
the options based on the excess of the fair value of the stock options at the
date of grant over the exercise price.
Depreciation expense increased primarily due to placement in service of
additional telecommunications network assets, including switches, fiber optic
cable, network electronics and related equipment. Depreciation expense is
expected to continue to increase as NEXTLINK expands its networks and installs
additional switches and related equipment. Amortization of intangible assets
increased primarily as a result of the Start and Chadwick acquisitions in the
fourth quarter of 1997.
Interest expense increased 165% in 1998 over the prior year due to an
increase in NEXTLINK's average outstanding indebtedness over the respective
periods. Interest expense will increase in future periods in conjunction with
the sale of $500.0 million in aggregate principal amount of 10 3/4% Senior Notes
in November 1998. For more information, see "Liquidity and Capital Resources."
Pursuant to Statement of Financial Accounting Standards No. 34, NEXTLINK
capitalizes a portion of its interest costs as part of the construction cost of
its communications networks. Capitalized interest during 1998 totaled $4.3
million. Interest income results from investment of excess cash and certain
securities that have been pledged as collateral for interest payments on the
12 1/2% Senior Notes. The increase in interest income in 1998 over 1997
corresponded to the increase in NEXTLINK's average outstanding cash balances.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
Revenue increased 124% to $57.6 million in 1997 from $25.7 million in
the same period in 1996. The increase was primarily due to 45% growth in
NEXTLINK's local and long distance services (both switched and resale),
dedicated services and enhanced communications services, as well as due to
recording a full year's revenue from ITC, a switch-based long distance reseller
acquired in December 1996. To a lesser extent, the acquisitions of Start and
Chadwick in the fourth quarter of 1997 also contributed to the increase in
revenue. Revenues reported in 1997 included $38.9 million derived from local and
long distance, competitive access, dedicated line services and shared tenant
services and $18.7 million derived from enhanced communications services.
NEXTLINK's interactive voice response subsidiary contributed 27% and 52% of
NEXTLINK's revenues during 1997 and 1996, respectively.
NEXTLINK increased its quarterly customer access line installation rate
from 1,604 in the fourth quarter of 1996 to 19,187 during the fourth quarter
of 1997. As of December 31, 1997, NEXTLINK had 50,131 access lines in
service, compared to 8,511 as of December 31, 1996. Access lines in service
includes those lines which are provided through resale of Centrex services.
Operating expenses consist of costs directly related to providing
facilities-based network and enhanced communications services and also include
salaries and benefits and related costs of operations and engineering personnel.
Operating expenses increased 115% in 1997 to $54.0 million, an increase of $28.9
million over the same period in 1996. These increases were attributed to factors
that include an increase in network costs related to the provision of increased
volumes of local, long distance and enhanced communications services, NEXTLINK's
increase in employees, as well as other related costs primarily to expand
NEXTLINK's switched local and long distance service businesses in its existing
and planned markets. Additionally, the effects of the ITC acquisition in
December 1996 and the Start and Chadwick acquisitions in the fourth quarter of
1997 further resulted in an increase in 1997 operating expenses over those of
the prior year.
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Selling, general and administrative expenses include salaries and
related personnel costs, facilities expenses, sales and marketing, consulting
and legal fees and equity in loss of affiliates. Selling, general and
administrative expenses increased 142% for the year ended December 31, 1997 as
compared to the corresponding period in 1996. The increase was primarily due to
NEXTLINK's increase in employees and other costs associated with the expansion
of NEXTLINK's switched local and long distance service businesses in its
existing and planned markets, as well as the ITC acquisition.
Deferred compensation expense was recorded in connection with
NEXTLINK's Equity Option Plan until April 1997, and in connection with
NEXTLINK's Stock Option Plan, which replaced the Equity Option Plan, subsequent
to April 1997. The stock options granted under the Equity Option Plan were
considered compensatory and were accounted for on a basis similar to that for
stock appreciation rights. All options outstanding under the Equity Option Plan
were regranted under the Stock Option Plan with terms and conditions
substantially the same as under the Equity Option Plan. As such, NEXTLINK
continues to record deferred compensation expense for those compensatory stock
options issued, as well as for compensatory stock options issued subsequent to
the Stock Option Plan inception date. Compensation expense is recognized over
the vesting periods of the options based on the excess of the fair value of the
stock options at the date of grant over the exercise price.
Depreciation expense increased primarily due to placement in service of
additional telecommunications network assets, including switches, fiber optic
cable, network electronics and related equipment. Amortization of intangible
assets increased primarily as a result of the ITC acquisition in December 1996,
as well as the acquisitions of Linkatel Pacific, which owned and operated a
fiber optic network that provided communication services to customers in
portions of Orange and Los Angeles counties, Start and Chadwick in 1997.
Interest expense increased 76% in 1997 over the prior year due to an
increase in NEXTLINK's average outstanding indebtedness over the respective
periods, primarily relating to the 12 1/2% and 9 5/8% Senior Notes issued in
April 1996 and October 1997, respectively. For more information, see "Liquidity
and Capital Resources." Pursuant to Statement of Financial Accounting Standards
No. 34, NEXTLINK capitalizes a portion of its interest costs as part of the
construction cost of its communications networks. Capitalized interest during
1997 totaled $1.8 million. Interest income results from investment of excess
cash as well as certain securities that have been pledged as collateral for
interest payments on the 12 1/2% Senior Notes. The increase in interest income
in 1997 over 1996 corresponded to the increase in NEXTLINK's average outstanding
cash balances.
LIQUIDITY AND CAPITAL RESOURCES
The competitive local telecommunications service business is a
capital-intensive business. NEXTLINK's existing operations have required and
will continue to require substantial capital investment. The capital
expenditures will be used for the acquisition and installation of fiber,
electronics and related equipment in order to provide switched voice and data
services through NEXTLINK's networks and to fund operating losses during the
start-up phase of each market. In addition, NEXTLINK's strategic plan calls
for expansion into additional market areas. Such expansion will require
significant additional capital for: potential acquisitions of businesses or
assets; design, development and construction of new networks; and the funding
of operating losses during the start-up phase of each market. During 1998,
NEXTLINK used $174.5 million in cash for operating activities, compared to
$97.3 million used in 1997 and $40.6 million used in 1996. The increase was
primarily due to a substantial increase in NEXTLINK's activities associated
with the continued development and expansion of switched local and long
distance service operations. In addition, during 1998, NEXTLINK invested an
additional $508.4 million in property and equipment, acquisitions of
telecommunications assets and equity investments in telecommunications
businesses. During 1997 and 1996, NEXTLINK invested $210.5 million and $78.0
million, respectively, in property and equipment, acquisitions of
telecommunications assets and businesses and equity investments in
telecommunications businesses.
CAPITAL USES
In January 1999, NEXTLINK entered into an agreement to acquire WNP
Communications, Inc. for approximately $695.0 million. Of this amount,
approximately $152.9 million will be paid in cash to the
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FCC for license fees, including interest thereon. The remainder will be paid
to stockholders of WNP, and will consist of cash and, at NEXTLINK's election,
shares of its Class A common stock. However, at least approximately $187.0
million of the purchase price paid to WNP must be paid in cash. Pursuant to
this acquisition, NEXTLINK will receive 39 A block LMDS wireless licenses
covering 98 million POPs and one B block LMDS wireless license covering 16
million POPs. The acquisition of WNP is subject to certain conditions,
including approval by federal regulatory authorities. NEXTLINK is in process
of defining its operational and financial plans for implementation of an LMDS
strategy, which will involve additional capital expenditures.
In January 1999, NEXTLINK also entered into a strategic agreement with
Covad Communications Group, Inc., a leading provider of high-speed digital
communications services using DSL technology. Pursuant to this agreement,
NEXTLINK will become a preferred provider to Covad for local transport and
colocation services for Covad's regional data centers. NEXTLINK also invested
$20.0 million in Covad under this agreement, and Covad will become NEXTLINK's
preferred provider of DSL services.
In July 1998, NEXTLINK announced the formation of INTERNEXT L.L.C.,
which is beneficially owned 50% each by NEXTLINK and Eagle River Investments
L.L.C. and managed by NEXTLINK. INTERNEXT entered into an agreement with
Level 3 Communications, Inc. Level 3 is constructing a national fiber optic
network that is expected to cover more than 16,000 route miles with six or
more conduits and connect 50 cities in the United States and Canada. Pursuant
to this agreement, INTERNEXT will receive an exclusive interest in 24 fibers
in a shared, filled conduit, one entire empty conduit and the right to 25% of
the fibers pulled through the sixth and any additional conduits in the
network. INTERNEXT will pay $700.0 million in exchange for these rights, the
majority of which will be payable as segments of the network are completed
and accepted by INTERNEXT, which is expected to occur substantially during
2000 and 2001. NEXTLINK has guaranteed 50% of the financial obligations of
INTERNEXT under this agreement and, together with Eagle River, has also
guaranteed the performance of certain other obligations of INTERNEXT
thereunder. NEXTLINK is in the process of defining its plans for
implementation of a national network strategy, which will require additional
capital expenditures.
In February 1998, NEXTLINK signed a definitive agreement with
Metromedia Fiber Network for exclusive rights to multiple fibers and innerducts
for 20 years, with two 10-year renewals. The route covered by the agreement
extends from Manhattan to White Plains (NY), to Stamford (CT), to Newark (NJ)
and south from Manhattan through Philadelphia, Wilmington (DE), Baltimore, and
to Washington (DC). The route will offer frequent splice points within
metropolitan areas and on routes between metropolitan areas, as well as provide
access to ILEC central and tandem switching offices. NEXTLINK paid $97.0 million
in cash for this transaction, $80.3 million of which was placed into escrow, to
be released as segments of the route are constructed and delivered to NEXTLINK.
As of December 31, 1998, none of such funds had been released.
In January 1998, NEXTLINK and Nextel formed NEXTBAND, a joint venture
that is owned 50% each by NEXTLINK and Nextel. NEXTBAND was the successful
bidder in 42 markets in the FCC's LMDS auctions. NEXTLINK's pro rata share of
NEXTBAND's total bid in the LMDS auctions was $67.4 million, which was paid in
full in June 1998. In January 1999, NEXTLINK announced an agreement in principle
to acquire Nextel's 50% interest in NEXTBAND for approximately $137.7 million.
Consummation of the agreement is subject to certain conditions, including
federal regulatory approvals.
CAPITAL RESOURCES
On March 3, 1998, NEXTLINK completed the sale of $335.0 million in
aggregate principal amount of 9% Senior Notes due March 15, 2008. Proceeds from
the sale net of discounts, underwriting commissions, advisory fees and expenses
totaled approximately $326.5 million. Interest payments on the 9% Senior Notes
are due semi-annually, beginning September 1998.
On March 31, 1998, NEXTLINK completed the sale of 4,000,000 shares of
6 1/2% cumulative convertible preferred stock with a liquidation preference of
$50 per share. The sale generated gross proceeds to NEXTLINK of $200.0 million,
and proceeds net of underwriting discounts, advisory fees and expenses of
approximately $193.8 million. Each share of 6 1/2% Preferred Stock is
convertible, at the
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option of the holder, into 1.145 shares of NEXTLINK's Class A common stock,
subject to adjustments in certain circumstances. Dividends on the 6 1/2%
Preferred Stock accrue from March 31, 1998 and are payable quarterly in cash,
beginning on June 30, 1998.
On April 1, 1998, NEXTLINK completed the sale of 9.45% Senior Discount
Notes, due April 15, 2008. The 9.45% Notes were issued at a discount from their
principal amount to generate aggregate gross proceeds to NEXTLINK of
approximately $400.0 million. Proceeds net of underwriting commissions, advisory
fees and expenses totaled $390.9 million. The 9.45% Notes accrete at a rate of
9.45% compounded semi-annually, to an aggregate principal amount of
approximately $637.0 million by April 15, 2003. No cash interest will accrue on
the 9.45% Notes until April 15, 2003. Interest will become payable in cash
semi-annually beginning on October 15, 2003.
On November 12, 1998, NEXTLINK completed the sale of $500.0 million in
aggregate principal amount of 10 3/4% Senior Notes due November 15, 2008.
Proceeds from the sale net of underwriting commissions, advisory fees and
expenses totaled approximately $488.5 million. Interest payments on the 10 3/4%
Senior Notes are due semi-annually, beginning in May 1999. Pursuant to a
covenant in the indenture under which the 10 3/4% Senior Notes were issued,
NEXTLINK has agreed to use the net proceeds from the sale for expenditures
relating to the construction, improvement and acquisition of new and existing
networks and services and direct or indirect investments in certain joint
ventures, including NEXTBAND and INTERNEXT, to fund similar expenditures.
NEXTLINK will use the net proceeds from the sale of the 9% Senior
Notes, the 6 1/2% Preferred Stock, the 9.45% Notes, the 10 3/4% Senior Notes
(subject to the limitations described above) and existing unrestricted cash
balances for expenditures relating to the development, construction, acquisition
and operation of telecommunications networks and service providers and the
offering of telecommunications services in those areas where NEXTLINK currently
operates or intends to operate. Expenditures for the construction and operation
of networks include:
- the purchase and installation of switches and related electronics in
existing networks and in networks to be constructed or acquired in
new or adjacent markets,
- the purchase and installation of fiber optic cable and electronics
to expand existing networks and develop new networks, including the
connection of new buildings,
- the development of NEXTLINK's comprehensive information technology
platform,
- the acquisition of LMDS spectrum and the construction and deployment
of associated facilities and
- the funding of operating losses and working capital.
NEXTLINK may also acquire or invest in businesses that consist of
existing networks or companies engaged in businesses similar to those engaged in
by NEXTLINK and its subsidiaries or other complementary businesses.
As of December 31, 1998, NEXTLINK had unrestricted cash and investments
of $1,478.1 million. NEXTLINK's current plan contemplates an aggressive
expansion into a number of new markets throughout the United States. NEXTLINK
may pursue various alternatives for achieving its growth strategy, including:
- additional network construction,
- additional leases of network capacity from third party providers,
- acquisitions of existing networks, and
33
- the purchase of LMDS spectrum and associated facilities construction
and deployment.
NEXTLINK also anticipates that it will spend a substantial amount of
additional capital in 1999 and beyond. NEXTLINK expects to fund these capital
expenditures with existing cash balances, future vendor and/or credit
facilities, future public or private sales of debt securities, future sales of
public or private capital stock and joint ventures.
In addition, NEXTLINK's operating flexibility with respect to certain
business matters is, and will continue to be, limited by covenants associated
with the 12 1/2% Senior Notes, the 9 5/8% Senior Notes, the 9% Senior Notes,
the 9.45% Notes and the 10 3/4% Senior Notes, collectively referred to as the
Notes. Among other things, these covenants limit NEXTLINK's and its
subsidiaries' ability to incur additional indebtedness, create liens upon
assets, apply the proceeds from the disposal of assets, make dividend payments
and other distributions on capital stock and redeem capital stock. In addition,
the terms of the 14% Senior Exchangeable Redeemable Preferred Shares contain
certain covenants that may limit NEXTLINK's flexibility in incurring additional
indebtedness and issuing additional preferred shares. These covenants may
adversely affect NEXTLINK's ability to finance its future operations or capital
needs or to engage in other business activities that may be in the interest of
NEXTLINK. NEXTLINK was in compliance with all covenants associated with the
Notes and the 14% Preferred Shares as of December 31, 1998.
IMPACT OF YEAR 2000
Certain of NEXTLINK's older computer systems and applications were
written to define a given year with abbreviated dates using the last two digits
in a year rather than the entire four digits. As a result, when computer systems
attempt to process dates both before and after January 1, 2000, two digit year
fields may create processing ambiguities that can cause errors and system
failures. For example, systems and applications may have time-sensitive software
that recognize an abbreviated year "00" as the year 1900 rather than the year
2000. These errors or failures may have limited effects, or the effects may be
widespread, depending on the computer chip, system, or software, and its
location and function.
STATE OF READINESS
NEXTLINK is currently assessing the impact of the Year 2000, and has
adopted a Year 2000 plan, or the Plan. The purpose of the Plan will be to
develop and perform reasonable steps intended to prevent NEXTLINK's critical
operational functions from being impaired due to the Year 2000 problem. The
first phase of NEXTLINK's Year 2000 assessment, which has been completed,
included:
- taking an inventory of priority systems and equipment to determine
the extent of remediation required for Year 2000 readiness
(generally defined as the ability of information systems to
accurately process data from, into and between the twentieth and
twenty-first centuries, including leap year calculations),
- developing a strategy to manage vendors' and other outside entities'
progress toward Year 2000 compliance,
- designing a company-wide Year 2000 communications plan, and
- creating a risk assessment and impact analysis from which the Plan
is developed.
NEXTLINK has engaged outside consultants to aid in formulating and implementing
the Plan.
NEXTLINK's assessments to date have indicated that its major operational
support systems, including its billing, order management, network management,
and financial systems are Year 2000 ready. In addition, NEXTLINK has
received positive confirmation from its vendor that NEXTLINK's Nortel DMS 500
switches are also Year 2000 compliant.
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NEXTLINK does not have control of outside entities or their systems.
However, NEXTLINK's Plan will include ongoing identification of and contact
with such outside entities whose systems may have a substantial effect on
NEXTLINK's ability to continue to conduct the critical aspects of its
operations without disruption from Year 2000 problems. In the event such
outside systems are identified, NEXTLINK will work with the outside entities
in a reasonable attempt to inventory, assess, analyze, test, and develop
contingency plans for NEXTLINK's connections to these outside entities and
their systems and to determine the extent to which they are, or can be made
to be, Year 2000 compliant.
COSTS TO ADDRESS YEAR 2000 ISSUES
NEXTLINK has not incurred material historical costs for Year 2000
awareness, inventory, assessment, analysis, conversion, or contingency
planning. Further, NEXTLINK anticipates that its future costs for these
purposes will not be material.
Year 2000 costs are difficult to estimate accurately because of
unanticipated vendor delays, technical difficulties, and similar events.
Although management believes that its estimates are reasonable, NEXTLINK
cannot assure you that the actual costs of implementing the Plan will not
differ materially from the estimated costs or that NEXTLINK will not be
materially adversely affected by Year 2000 issues. Furthermore, the estimated
costs of implementing the Plan do not consider the costs, if any, that might
be incurred as a result of Year 2000-related failures that occur despite
NEXTLINK's implementation of the Plan.
YEAR 2000 RISK FACTORS
Between now and the year 2000 there will be increased competition for
people with the technical and managerial skills necessary to deal with the Year
2000 problem. NEXTLINK believes it employs an adequate number of personnel
skilled in dealing with the Year 2000 problem and has retained outside
consultants who bring additional skilled people to deal with the Year 2000
problem as it affects NEXTLINK. Nevertheless, NEXTLINK could face shortages of
skilled personnel or other resources, such as Year 2000 compliant computer
chips. These shortages might delay or otherwise impair NEXTLINK's ability to
assure that its critical systems are Year 2000 compliant. Outside entities could
face similar problems that could materially affect NEXTLINK. NEXTLINK believes
that the possible impact of the shortage of skilled people and resources is not,
and will not be, unique to NEXTLINK.
NEXTLINK believes that its critical systems will be Year 2000 ready
before January 1, 2000. However, there is no assurance that the Plan will
succeed in accomplishing its purposes and unforeseen circumstances may arise
during implementation of the Plan that would materially and adversely affect
NEXTLINK.
NEXTLINK is taking reasonable steps to identify, assess, and, where
appropriate, replace devices that contain embedded chips. Despite these
reasonable efforts, NEXTLINK may not be able to find and remediate all embedded
chips in all of NEXTLINK's systems. Further, outside entities on which NEXTLINK
depends also may not be able to find and remediate all embedded chips in their
systems. Some chips that are not Year 2000 compliant may create system
disruptions or failures, which may, in turn, cause disruptions or failures in
other systems. These cascading problems could impair NEXTLINK's ability to serve
its customers and otherwise fulfill contractual and legal obligations.
NEXTLINK believes that the possible adverse impact of the embedded chip problem
is not, and will not be, unique to NEXTLINK.
NEXTLINK cannot ensure that suppliers upon which it depends for
essential supplies and services will convert and test their critical systems and
processes in a timely manner. Failure or delay by all or some of these entities,
including federal, state, or local governments, to make their systems and
processes Year 2000
35
compliant could create substantial disruptions having a material adverse
effect on NEXTLINK's operations.
In a recent Securities and Exchange Commission release regarding Year
2000 disclosure, the Securities and Exchange Commission stated that public
companies must disclose the most reasonably likely worst case Year 2000
scenario. Although it is not possible to assess the likelihood of any of the
following events, each must be included in a consideration of worst case
scenarios: widespread disruption of the services provided by common
communications carriers; similar disruption to the means and modes of
transportation for NEXTLINK and its employees, contractors, suppliers, and
customers; significant disruption to NEXTLINK's ability to gain access to, and
remain working in, office buildings and other facilities; the failure of
substantial numbers of NEXTLINK's critical computer hardware and software
systems, including both internal business systems and systems controlling
operational facilities such as electrical generation, transmission, and
distribution systems; and the failure of outside entities' systems, including
systems related to banking and finance. Among other things, NEXTLINK could
face substantial claims by customers or loss of revenue due to service
interruptions, inability to fulfill contractual obligations or to bill
customers accurately and on a timely basis, and increased expenses associated
with litigation, stabilization of operations following critical system
failures, and the execution of contingency plans. NEXTLINK could also
experience an inability by customers and others to pay, on a timely basis or
at all, obligations owed to NEXTLINK. Under these circumstances, the adverse
effects on NEXTLINK would be material, although not quantifiable at this time.
Further, the cumulative effect of these failures could have a substantial
adverse effect on the economy, domestically and internationally. The adverse
effect on NEXTLINK from a domestic or global recession or depression also
could be material, although not quantifiable at this time. NEXTLINK will
continue to monitor business conditions to assess and quantify material
adverse effects, if any, that may result from the Year 2000 problem.
CONTINGENCY PLANS
As part of the Plan, NEXTLINK is developing contingency plans that deal
with internal aspects of the Year 2000 problem. Despite its good faith and
reasonable efforts, NEXTLINK may not have satisfactorily addressed the Year
2000 problem with respect to its critical internal systems. NEXTLINK plans to
address all Year 2000 problems as it does with any problem that occurs with
its networks and systems. At this point in NEXTLINK's Year 2000 program, based
on information gathered to date, and because NEXTLINK's information technology
and fiber optic switched telephone networks systems and infrastructure has
been deployed only since 1995 and corporate policy requires all hardware and
software vendors to warrant that their systems are Year 2000 compliant, we do
not believe that any date-related problems that do occur on or after January
1, 2000 will be of the type that cannot be addressed using practices for
addressing any network or system problem.
OUTLOOK: ISSUES AND UNCERTAINTIES
WE DO NOT CURRENTLY GENERATE CASH FLOW.
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For the year ended December 31, 1998, we had a net loss of $278.3
million and negative cash flow from operations of $ 174.5 million. For the
comparable period in 1997, we had a net loss of $129.0 million and negative
cash flow from operations of $97.3 million.
Our plan to develop our businesses and expand our networks, which has
required and will continue to require substantial capital expenditures,
contributes to our negative cash flow. We will continue to have negative cash
flow and operating losses until we begin to realize adequate revenues. We
cannot assure you that we will ever establish an adequate revenue base to
produce an operating profit or generate adequate cash flow to provide future
capital expenditures and repayment of debt. For more information, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
IF WE ARE NOT SUCCESSFUL IN RAISING ADDITIONAL CAPITAL WE WILL NOT BE
ABLE TO BUILD AND MAINTAIN OUR NETWORKS.
Because our anticipated future capital requirements will exceed the
$1,478.1 million in cash and marketable securities we had on hand as of
December 31, 1998, we will required to raise additional capital. If we fail
to raise sufficient capital, we will be required to delay or abandon some of
our planned future expansion or
37
expenditures, which could have a material adverse effect on our growth and our
ability to compete in the telecommunications services industry, and could even
result in a payment default on our existing debt. For more information, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
IF WE CANNOT QUICKLY AND EFFICIENTLY INSTALL OUR HARDWARE, WE WILL BE
UNABLE TO GENERATE REVENUE.
Each of our networks consists of many different pieces of hardware,
including switches, fiber optic cables, electronics, and wireless
transmitters and receivers which are difficult to install. If we cannot
install this hardware quickly, the time in which customers can be connected
to our network and we can begin to generate revenue from our network will be
delayed. You should be aware that the construction of the INTERNEXT national
fiber optic network is not under our control, but is under the control of
Level 3 Communications. We cannot assure you that the Level 3 network will be
completed, that it will be placed in service within the expected time frame
or that it will contain the contemplated number of fibers and conduits
throughout the entire network. Failure of Level 3 to complete its network
would delay implementation of our strategy of linking our local networks to
one another.
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WE MAY NOT BE ABLE TO CONNECT OUR NETWORK TO THE INCUMBENT CARRIER'S
NETWORK ON FAVORABLE TERMS.
We require interconnection agreements with the incumbent carrier to
connect calls between our on-net customers and non-customers. We cannot
assure you that we will be able to negotiate or renegotiate interconnection
agreements in all of our markets on favorable terms.
THE REQUIREMENT THAT WE OBTAIN PERMITS AND RIGHTS OF WAY INCREASES OUR
COST OF DOING BUSINESS.
In order for us to acquire and develop our fiber networks, we must
obtain local franchises and other permits, as well as rights-of-way and fiber
capacity from entities such as incumbent carriers and other utilities,
railroads, long distance companies, state highway authorities, local
governments and transit authorities. You should be aware that the process of
obtaining these permits and rights-of-way increases our cost of doing
business.
We cannot assure you that we will be able to maintain our existing
franchises, permits and rights-of-way that we need to implement our business.
Nor can we assure you that we will be able to obtain and maintain the other
franchises, permits and rights that we require. A sustained and material
failure to obtain or maintain these rights could materially adversely affect
our business in the affected metropolitan area.
IN LOCAL MARKETS, WE COMPETE AGAINST THE INCUMBENT CARRIER, WHICH HAS A
VESTED INTEREST IN MAKING IT DIFFICULT FOR US TO CONNECT CUSTOMERS TO
OUR NETWORK.
In each of the local markets served by our networks, we compete
principally with the incumbent carrier in that market.
The incumbent carriers are already established providers of local
telephone services to all or virtually all telephone subscribers within their
respective service areas. The physical connections from their premises to
those of their customers are expensive and difficult to duplicate. In
addition, they have long-standing relationships with regulatory authorities
at the federal and state levels.
It is expensive and difficult for us to switch a new customer to our
network because:
- a potential customer faces switching costs if they decide to become
our customer, and
- we require cooperation from the incumbent carrier.
We cannot assure you that we will be able to overcome these advantages
and compete successfully with the incumbent carrier.
WE ALSO FACE COMPETITION IN LOCAL MARKETS FROM NEW ENTRANTS, PUTTING
DOWNWARD PRESSURE ON PRICES.
We also face competition from potential market entrants, including long
distance carriers seeking to enter, reenter or expand entry into the local
exchange marketplace such as AT&T, MCI WorldCom, and Sprint. This places
downward pressure on prices for local telephone service and makes it more
difficult for us to achieve positive operating cash flow. In addition, we
expect competition from other companies like ourselves, cable television
companies, electric utilities, microwave carriers, wireless telephone system
operators and private networks built by large end users. We cannot assure you
that we will be able to compete effectively with these industry participants.
WE FACE COMPETITION IN LONG DISTANCE MARKETS, PUTTING DOWNWARD PRESSURE
ON PRICES.
We also face intense competition from long distance carriers in the
provision of long distance services, which places downward pressure on prices
for long distance service and makes it difficult for us to achieve positive
operating cash flow. Although the long distance market is dominated by three
major competitors, AT&T, MCI WorldCom and Sprint, hundreds of other companies
also compete in the long distance marketplace. We cannot assure you that we
will be able to effectively compete with any of these industry participants.
OUR COMPETITION MAY HAVE SUPERIOR RESOURCES PLACING US AT A COST AND
PRICE DISADVANTAGE.
Many of our current and potential competitors have financial, personnel
and other resources, including brand name recognition, substantially greater
than those of NEXTLINK. As a result, some of our competitors can raise capital
at a lower cost than we can. Also, our competitors' greater name recognition
requires us to price our services at lower levels in order to win business.
Finally, our competitors' cost advantages give them the ability to reduce
their prices for an extended period of time if they so choose.
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OUR COMPANY AND INDUSTRY ARE HIGHLY REGULATED, IMPOSING SUBSTANTIAL
COMPLIANCE COSTS AND RESTRICTING OUR ABILITY TO COMPETE IN OUR TARGET
MARKETS.
We are subject to varying degrees of federal, state and local
regulation. This regulation imposes substantial compliance costs on us. It
also restricts our ability to compete. For example, in each state in which we
desire to offer our services, we are required to obtain authorization from
the appropriate state commission. We cannot assure you that we will receive
authorization for markets to be launched in the future.
The FCC licenses for fixed wireless radio spectrum held by our 50%-owned
affiliate, NEXTBAND, are subject to a petition for reconsideration filed by
another auction participant. The petition asks the FCC to revoke and
reauction NEXTBAND's licenses. Because the matter remains pending, NEXTLINK
cannot assure you that the FCC will not grant the petitions and relief
sought. Our acquisition of additional high frequency spectrum from WNP
remains subject to FCC approval.
THE TECHNOLOGIES THAT WE USE MAY BECOME OBSOLETE, WHICH WOULD LIMIT OUR
ABILITY TO COMPETE EFFECTIVELY.
The telecommunications industry is subject to rapid and significant
changes in technology. If we do not replace or upgrade technology and
equipment that becomes obsolete, we will be unable to compete effectively
because we will not be able to meet the expectations of our customers.
The following technology and equipment that we use or will use is
subject to obsolescence: wireline and wireless transmission technologies,
circuit, frame relay and packet switching technologies and data transmission
technologies, including, the Nortel DMS 500 switches, DSL, ATM, frame relay
and IP technologies. We regularly consider and reconsider the focus and
direction of our technology strategy. In addition, we cannot assure you that
the technologies that we choose to invest in will lead to successful
implementation of our business plan.
WE MAY BE REQUIRED TO PAY PATENT LICENSING FEES.
From time to time we receive requests to consider licensing certain
patents held by third parties that may have bearing on our interactive voice
response services. Should we be required to pay license fees in the future,
such payments, if substantial, could have a material adverse affect on our
results of operations.
IF WE LOSE KEY PERSONNEL AND QUALIFIED TECHNICAL STAFF, OUR ABILITY TO
MANAGE THE DAY TO DAY ASPECTS OF OUR COMPLEX NETWORK WILL BE WEAKENED.
We believe that a critical component for our success will be the
attraction and retention of qualified professional and technical personnel. If
we lose key personnel and qualified technical staff, or are unable to recruit
qualified personnel, our ability to manage the day-to-day aspects of our
complex network will be weakened. You should be aware that we face significant
competition in the attraction and retention of personnel who possess the skill
sets that we seek.
In addition, our subsidiaries must also develop and retain a large and
sophisticated sales force. If our subsidiaries do not develop and retain a
large and sophisticated sales force, there will be an adverse effect on our
ability to generate revenue and, consequently, our operating cash flow.
OUR QUARTERLY OPERATING RESULTS MAY VARY SIGNIFICANTLY.
We anticipate that our operating results will vary significantly
from period to period as a result of the significant expenses associated with
the expansion and development of our networks and services. This variability may
affect our ability to service our debt, including our senior notes. For more
information, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
CRAIG O. MCCAW, WHO CONTROLS APPROXIMATELY 59% OF NEXTLINK'S VOTING
POWER, MAY HAVE INTERESTS THAT ARE ADVERSE TO YOUR INTERESTS.
Craig O. McCaw, primarily through his majority ownership and control of
Eagle River Investments, LLC, controls approximately 59% of NEXTLINK's total
voting power. Because Mr. McCaw has the ability to control the direction and
future operations of NEXTLINK he may make decisions which are adverse to your
interest. In addition to his investment in NEXTLINK through Eagle River, Mr.
McCaw has significant investments in other communications companies,
including Nextel, Teledesic Corporation and INTERNEXT, some of which could
compete with us or act as one of our suppliers of certain telecommunications
services. You should be aware that we do not have a noncompetition agreement
with either Mr. McCaw or Eagle River. Mr. McCaw is not bound by any contracts
with NEXTLINK restricting his future sales of our common stock.
THE MARKET PRICE OF OUR COMMON STOCK MAY BE VOLATILE.
40
The market price of our common stock has been volatile. Factors
that can cause such volatility include variations in our quarterly
operating results, the introduction of new products by us or our
competitors, changes in other conditions or trends in the telecommunications
industry, changes in governmental regulations, changes in securities analysts'
estimates of our, or our competitors' or industry's, future performance
or general market conditions. In addition, stock markets have experienced
extreme price and volume volatility in recent years, which has had a substantial
effect on the market prices of securities of many smaller public companies for
reasons frequently unrelated to the operating performance of such companies.
WE MAY FACE ADDITIONAL COSTS AND OTHER ADVERSE EFFECTS DUE TO YEAR 2000
ISSUES.
To ensure that our computer systems and applications will function
properly beyond 1999, we have implemented a year 2000 program. As part of this
program, we conducted an inventory of network equipment and enterprise systems
that execute primary business processes, such as accounting, service
assurance, service delivery, customer service and billing. We cannot be sure
that mission critical equipment has not been overlooked.
Our determinations whether any systems or applications require
modification or replacement are based in part on statements made to us by
vendors as to the year 2000 compliance of their systems and applications that
we use. We will not be able to independently confirm the accuracy or
completeness of these vendor representations.
Telecommunications and data traffic between our customers who are
directly connected to one of our networks and parties who are not customers of
ours are routed over networks that we do not control. In addition, many of our
customers are connected to one of our networks through facilities of the
incumbent local exchange carrier. Consequently, our customers may not be able
to complete calls or data transmissions if the computer, telecommunications
and other systems of outside entities, including local and interexchange
carriers and Internet service providers that interchange traffic, are not year
2000 compliant. A failure by some or all of these entities to make their
system year 2000 compliant could create substantial disruptions, which in turn
could have a material adverse effect on our operations. For further discussion
on our year 2000 program, see "Management's Discussions and Analysis of
Financial Condition and Results of Operations--Impact of Year 2000."
THIS ANNUAL REPORT INCLUDES FORWARD-LOOKING STATEMENTS
Some statements and information contained in this annual report are not
historical facts, but are "forward-looking statements", as such term is defined
in the Private Securities Litigation Reform Act of 1995. We wish to caution you
that these forward-looking statements are only predictions, and actual events or
results may differ materially as a result of risks that we face, including those
set forth herein under "Risk Factors." These forward-looking statements can be
identified by the use of forward-looking terminology such as "believes",
"expects", "plans", "may", "will", "would," "could," "should", or "anticipates"
or the negative of these words or other variations of these words or other
comparable words, or by discussions of strategy that involve risks and
uncertainties. Such forward-looking statements include, but are not limited to:
- the number of markets we expect to serve by the end of 2000, the
expected number of addressable business lines in markets in which we
currently provide service and the markets in which we expect to provide
service by the end of 2000;
- our expectations regarding our ability to attract and retain customers;
- our beliefs regarding certain competitive advantages, including that of
our management structure and provisioning processes and systems;
- our expectation regarding the size of our sales and customer care
forces;
- our belief regarding traffic flow over our networks and the effects and
benefits of high capacity networks with broad coverage based on a
uniform technology platform;
- our plans to install additional switches, data networking capabilities
such as frame-relay, IP and ATM facilities, high speed technologies
such as DSL and wireless technologies;
- our expectation regarding the development of a national network and the
implementation of a national network end-to-end strategy;
- our anticipated capital expenditures, funding thereof and levels of
indebtedness and our expectations regarding additional indebtedness;
- statements with respect to our Year 2000 project.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
NEXTLINK currently has instruments sensitive to market risk relating to
exposure to changing interest rates. As disclosed in Notes 6 and 7 to the
consolidated financial statements, NEXTLINK had $2,013.2 million in fixed rate
debt and $556.2 million in fixed rate redeemable preferred stock as of December
31, 1998. NEXTLINK does not have significant cash flow exposure to changing
interest rates on its long term debt and redeemable preferred stock because the
interest rates are fixed. However, the estimated fair values of the fixed-rate
debt and redeemable preferred stock are subject to market risk.
NEXTLINK also maintains an investment portfolio consisting of U.S.
government and other securities with an average maturity of less than one year.
These securities are classified as "available for sale". If interest rates were
to increase or decrease immediately, it could have a material impact on the fair
value of these financial instruments. However, changes in interest rates would
not likely have a material impact on interest earned on NEXTLINK's investment
portfolio. NEXTLINK does not currently hedge these interest rate exposures.
Presented below is an analysis of NEXTLINK's financial instruments, as
of December 31, 1998, that are sensitive to changes in interest rates. The model
demonstrates the change in fair value of the instruments calculated for an
instantaneous parallel shift in interest rates, plus or minus 50 basis points
(BPS), 100 BPS, and 150 BPS (in thousands).
VALUATION OF SECURITIES GIVEN NO CHANGE VALUATION OF SECURITIES GIVEN
AN INTEREST RATE DECREASE OF IN INTEREST AN INTEREST RATE INCREASE OF
INTEREST RATE RISK X BASIS POINTS RATES X BASIS POINTS
- ------------------ ---------------------------------- ----------- ----------------------------
(150 BPS) (100 BPS) (50 BPS) 50 BPS 100 BPS 150 BPS
--------- --------- -------- ------ ------- -------
FINANCIAL ASSETS:
Marketable securities...................... $1,168 $1,165 $1,162 $1,160 $1,156 $1,153 $1,149
FINANCIAL LIABILITIES:
Fixed rate debt............................ $2,150 $2,085 $2,023 $1,963 $1,905 $1,850 $1,797
Fixed rate redeemable preferred stock...... $ 533 $ 517 $ 501 $ 486 $ 472 $ 458 $ 445
41
The sensitivity analysis provides only a limited, point-in-time view of
the market risk sensitivity of certain of NEXTLINK's financial instruments.
The actual impact of market interest rate and price changes on the financial
instruments may differ significantly from those shown in the sensitivity
analysis.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
NEXTLINK's consolidated financial statements are filed under this Item,
beginning on page 56 of this Report, and NEXTLINK Capital's balance sheet is
filed under this Item, on Page 77 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the names, ages and positions of the
members of NEXTLINK's Board of Directors. Their respective backgrounds are
described following the table. The information required under this item with
respect to the Company's Executive Officers is incorporated by reference from
Part I, Item I of this report under "Executive Officers of the Registrant".
NAME AGE POSITION
- ---- --- --------
Steven W. Hooper(2)................... 46 Chief Executive Officer,
Chairman of the Board of Directors
Wayne M. Perry(1)..................... 49 Vice Chairman of the Board of Directors
Craig O. McCaw........................ 49 Director
Dennis Weibling(1)(2)(3).............. 47 Director
William A. Hoglund(1)(3).............. 45 Director
Sharon L. Nelson(2)................... 52 Director
Jeffrey S. Raikes..................... 40 Director
Nicolas Kauser........................ 59 Director
Gregory J. Parker..................... 41 Director
- -----------------
(1) Member of the Executive Committee
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
NEXTLINK's directors are elected annually at the annual meeting of
shareholders. All of the officers identified above serve at the discretion of
NEXTLINK's Board of Directors. There are no family relationships between any
person identified above.
The Audit Committee is responsible for reviewing the services provided
by NEXTLINK's independent auditors, consulting with the independent auditors on
audits and proposed audits of NEXTLINK and reviewing the need for internal
auditing procedures and the adequacy of internal controls. The Compensation
Committee determines executive compensation and stock option awards. The
Executive Committee exercises, to the maximum extent permitted by law, all
powers of the Board of
42
Directors between board meetings, except those functions assigned to specific
committees. The Board of Directors may establish additional committees from
time to time.
The following are brief biographies of persons identified above.
STEVEN W. HOOPER. Mr. Hooper has been Chief Executive Officer of
NEXTLINK since March 1999 and Chairman of the Board of Directors since July
1997. Since December 1997, he has also been Co-Chief Executive Officer with
Craig O. McCaw of Teledesic Corporation, a satellite telecommunications
company. From January 1995 to June 1997, Mr. Hooper was President and Chief
Executive Officer of AT&T Wireless Services, Inc. From January 1993 to January
1995, he served as Chief Financial Officer of AT&T Wireless Services. This was
preceded by five years as Regional President for McCaw Cellular's Pacific
Northwest/Rocky Mountain region, where his responsibilities included managing
the cellular operations in six western states and Alaska.
WAYNE M. PERRY. Mr. Perry has been Vice Chairman of NEXTLINK since
June 1997. From July 1997 to March 1999, Mr. Perry was Chief Executive Officer
of NEXTLINK. From September 1994 to July 1997, Mr. Perry was also Vice
Chairman of AT&T Wireless Services, Inc., following the merger with McCaw
Cellular. From June 1989 to September 1994, he served as Vice Chairman of the
Board of McCaw Cellular, and from December 1985 to June 1989, served as
President. From 1976 to 1985, Mr. Perry served as Executive Vice President
and General Counsel of McCaw Cellular. From 1990 to 1994, Mr. Perry was Vice
Chairman of the Board of LIN Broadcasting Corporation. He also served as
Chairman of the Board of Directors of the Cellular Telecommunications
Industry Association, the nationwide wireless industry association, for the
1993/94 term.
CRAIG O. MCCAW. Mr. McCaw has been a director of NEXTLINK since
September 1994 and was Chief Executive Officer of NEXTLINK from September
1994 to July 1997. Since 1993, Mr. McCaw has been Chairman and Chief
Executive Officer of Eagle River, a company formed and owned by Mr. McCaw to
make strategic investments in telecommunications ventures. Mr. McCaw was the
founder, Chairman and Chief Executive Officer of McCaw Cellular, the nation's
leading provider of wireless communications services, until the company was
sold to AT&T in August 1994. Prior to entering the cellular telephone
business in 1983, Mr. McCaw was requested by his family to assume
responsibility for the daily operations of a small cable television operation
in Centralia, Washington, that he and his three brothers owned. The
one-system operation serving 4,000 subscribers eventually grew to be the
nation's 20th largest cable operator serving 450,000 subscribers. In 1974,
the cable company's services expanded by entering the paging and conventional
mobile telephone industries. The company eventually became the fifth largest
paging operator in the country, serving approximately 320,000 subscribers in
13 states. In 1981, the company began to develop broad-based cellular
telephone services. Later, McCaw Cellular became the nation's largest
cellular telephone operator, with cellular system positions in more than 100
U.S. cities, representing more than 100 million potential customers. The
company also had interests in wireless data transmissions, personal
communications services, air-to-ground phone systems and satellite
communications at the time of its sale to AT&T. Mr. McCaw is Chairman and one
of the principal owners of Teledesic Corporation, which in March 1994
announced plans for a worldwide satellite-based telecommunications system.
Mr. McCaw is indirectly a significant stockholder, a director and Chairman of
the Operating Committee of Nextel Communications, Inc., a provider of
wireless telecommunications services, and is also a director of Nextel
International, Inc.
DENNIS WEIBLING. Mr. Weibling has been a director of NEXTLINK since
January 1997. From September 1994 to January 1997, he was Executive Vice
President of NEXTLINK. Since 1993, Mr. Weibling has been President of Eagle
River, Inc. Since 1993, Mr. Weibling has been a member of Nextel
Communications Inc.'s Board of Directors and its operating, audit and
compensation committees. Mr. Weibling is also a member of the Board of
Directors of Nextel International, Inc. and serves on its audit and plan
administration committees. He also is a member of the Board of Directors of
Nextel Partners, Inc. and serves on its audit committee. Since 1993, Mr.
Weibling has been a member of the Board of Directors and has served on the
executive and compensation committees of Teledesic Corporation. A licensed
certified public accountant in Washington, Mr. Weibling is a member of the
American Society of Certified Public Accountants and
43
the Washington Society of Certified Public Accountants. In addition, Mr.
Weibling is a licensed attorney in Ohio and a member of the American Bar
Association and Ohio State Bar Association.
WILLIAM A. HOGLUND. Mr. Hoglund has been a director of NEXTLINK since
January 1997 and, prior to that, had been Executive Vice President of NEXTLINK
since February 1996. Mr. Hoglund has also been Vice President and Chief
Financial Officer of Eagle River, Inc. since January 1996. Prior to joining
Eagle River, Inc., Mr. Hoglund was Managing Director of J.P. Morgan & Co. in
its investment banking group. Mr. Hoglund was employed by J.P. Morgan & Co.
from 1977 through 1995, focusing for the last nine of those years on clients
in the telecommunications, cable and media industries.
SHARON L. NELSON. Ms. Nelson has been director of NEXTLINK since
September 1997. From 1985 to 1997 she was Chairman of the Washington Utilities
and Transportation Commission, or WUTC. Prior to serving on the WUTC, Ms. Nelson
served as staff coordinator for the Washington State Legislature's Joint Select
Committee on Telecommunications (1983 to 1985), an attorney in private practice
(1982 to 1983), legislative counsel to the Consumers Union of the United States
(1978 to 1981), staff counsel to the Commerce Committee of the U.S. Senate (1976
to 1978) and secondary school teacher of history and anthropology (1969 to
1973). Ms. Nelson is also the past president of the National Association of
Regulatory Utility Commissioners. Ms. Nelson also served on the Federal-State
Joint Board on Universal Service created under the Telecommunications Act of
1996 and as one of the 20-member negotiating team appointed by the Governors of
Washington, Idaho, Oregon and Montana to review the Northwest electric power
system. Since January 1998, Ms. Nelson has been a member of the Advisory Board
of Covad Communications Group, Inc.
JEFFREY S. RAIKES. Mr. Raikes has been a director of NEXTLINK since
September 1997. He is also a member of the Executive Committee and the Group
Vice President, Sales and Marketing of Microsoft Corporation. As Group Vice
President, Mr. Raikes has responsibility for Microsoft's worldwide customer
units as well as sales, marketing, support and service in the United States and
Canada. Prior to joining the Executive Committee in July 1996, Mr. Raikes was
Senior Vice President of Microsoft North America since 1993. Prior to serving as
Senior Vice President of Microsoft North America, from 1990, Mr. Raikes was Vice
President of Office Systems, where he was responsible for the development and
marketing of word processing, workgroup applications and pen computing. From
1984 to 1990, Mr. Raikes was the Director of Applications Marketing, where he
was the chief strategist behind Microsoft's graphical applications for the Apple
Macintosh and Microsoft Windows as well as leading the product strategy and
design of Microsoft Office. Mr. Raikes is also a member of the University of
Nebraska Foundation and a Trustee of the Washington State University Foundation
of Directors.
NICOLAS KAUSER. Mr. Kauser has been a director of NEXTLINK since
January 1999. Until September 1, 1998, Mr. Kauser was an executive Vice
President and Chief Technology Officer for AT&T Wireless Services. As Chief
Technology Officer, Mr. Kauser was responsible for all aspects of engineering
and Technology projects, network operations and long-range planning and
evolution of the network and the supporting technologies for AT&T Wireless
Services. As a member of the leadership team he also had significant input to
product development. Prior to his joining AT&T Wireless Services in 1990, Mr.
Kauser was Vice President of Engineering and subsequently Senior Vice President
Operations at Cantel, the Canadian nationwide cellular provider based in
Toronto, Canada. As one of the earliest employees at Cantel, he assumed
responsibility for all facets of the initial design, equipment selection,
service introduction and network operation. He spent the 20 years prior to
joining Cantel in Venezuela, the first six years of which working for the
National Telephone Co. (CANTV). Subsequently, he co-founded two companies, one
specializing in telephone central office equipment installation and the other in
the sale, installation and support of office telecommunications and automation
products. In May 1998, Mr. Kauser received the prestigious Gold Prize awarded by
the Carnegie Melon Institute and American Management Systems for excellence in
the application of information technology.
44
GREGORY J. PARKER. Mr. Parker has been a director of NEXTLINK since
June 1998. Since August 1998, he has been President of Ampersand Holdings,
Inc. From February 1998 to August 1998, he was Vice President and Chief
Operating Officer of Ampersand Holdings. From 1990 to 1998, he was a partner
of the law firm of Seed, Mackall & Cole LLP, where his practice emphasizes
financing, capital investment and real estate matters. From 1994 to 1997, he
was Managing Partner of the firm. Mrs. Wendy P. McCaw and Mr. Craig O. McCaw
are parties to a NEXTLINK Stock Distribution Agreement effective as of
November 3, 1997, entered into in connection with a portion of the settlement
of a divorce action between Mr. and Mrs. McCaw. Under the Stock Distribution
Agreement, Mrs. McCaw is entitled to designate one member of NEXTLINK's Board
of Directors. Eagle River Investments and Mr. McCaw have agreed to vote, and
to cause Mr. McCaw's affiliates to vote all of their respective shares of
NEXTLINK stock to support the election to the Board of Directors of Mrs.
McCaw's designee. Mr. Parker is Mrs. McCaw's designee to the NEXTLINK Board
of Directors under the Stock Purchase Agreement.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires
NEXTLINK's directors, executive officers and any person who owns more than 10%
of NEXTLINK's Common Stock (the "Reporting Persons") to file with the Securities
and Exchange Commission reports of ownership and reports of changes in ownership
of NEXTLINK's Common Stock. Under SEC rules, we receive copies of all Section
16(a) forms that these Reporting Persons file. We have reviewed copies of these
reports and written representations from the Reporting Persons. We believe all
Reporting Persons complied with their Section 16(a) reporting obligations during
1998, except for the following individuals who had late filings: Charles P.
Daniels, who had two late filings with respect to purchases of shares under
the NEXTLINK Empoloyee Stock Purchase Plan, Kathleen H. Iskra, who had one late
filing to report a sale of Class A Common Stock, Scot Jarvis, a former
director, who had two late Form 4 filings, one for the sale of Class A
Common Stock and the other for the conversion of Class B Common Stock into
Class A Common Stock and Jan Loichle, who had three late filings, two with
respect to purchases under the NEXTLINK Employee Stock Purchase Plan and one
for the exercise of stock options.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth, for the fiscal years ended December 31,
1998, 1997 and 1996, individual compensation information for the Chief Executive
Officer of NEXTLINK, and each of the four most highly compensated executive
officers of NEXTLINK who were serving as executive officers at December 31,
1998, and any individual who was not a NEXTLINK executive officer at December
31, 1998, but was one of the four most highly compensated individuals at
NEXTLINK during 1998 (the "Named Executive Officers").
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------- --------------
SECURITIES ALL OTHER
NAME AND PRINCIPAL FISCAL UNDERLYING COMPENSATION
POSITION YEAR SALARY ($) BONUS ($)(1) OPTIONS (#)(2) ($)(3)
- ------------------ ---- ---------- ------------ -------------- ------------
Wayne M. Perry............................... 1998 8,023 -- 75 --
Chief Executive Officer (4) 1997 -- -- 441,336 --
1996 -- -- -- --
George M. Tronsrue III....................... 1998 247,115 223,000 75 5,152
President, Chief Operating Officer 1997 43,535 70,000 255,000 --
1996 -- -- -- --
Kathleen H. Iskra............................ 1998 180,077 92,874 190,075 8,000
Vice President, Chief Financial 1997 126,923 68,100 31,777 6,130
Officer and Treasurer 1996 121,233 62,250 67,745 1,575
R. Gerard Salemme............................ 1998 212,885 410,000(5) 112,500 8,000
Senior Vice President External Affairs 1997 126,154 -- 66,200 --
and Industry Relations 1996 -- -- -- --
45
Jan Loichle.................................. 1998 180,077 92,874 180,075 8,000
Vice President, Chief of Local 1997 123,424 65,938 31,777 6,476
Exchange Operations 1996 109,075 32,040 37,514 5,498
James F. Voelker (6)......................... 1998 284,615 250,000 250,000 10,000
1997 218,509 225,000 1,686,506 8,641
1996 160,600 200,000 15,000 6,523
- -----------------
(1) Includes bonuses for the corresponding fiscal years that were paid
subsequent to the stated calendar year end.
(2) Represents options to acquire shares of Class A and Class B Common
Stock. Effective January 31, 1997, NEXTLINK Communications, L.L.C. was
merged with and into NEXTLINK Communications, Inc. The information for
1996 presented in this table reflects the grant of options for the
purchase of Class A Common Stock under NEXTLINK's Stock Option Plan and
Class B Common Stock in substitution for options granted previously
pursuant to the Amended and Restated Equity Option Plan of NEXTLINK
Communications, L.L.C. See Note 11 to the Consolidated Financial
Statements.
(3) Represents contributions made by NEXTLINK on behalf of the executive
officer under NEXTLINK's 401(k) Plan.
(4) Mr. Perry became Chief Executive Officer of NEXTLINK on July 21, 1997.
Prior to that date, Mr. Perry was a Director of NEXTLINK since June 1997.
For information regarding Mr. Perry's annual compensation, see the
"Report of the Compensation Committee" of the Board of Directors. In
March 1999, Mr. Perry resigned as Chief Executive Officer, although
retained his position as Vice Chairman of the Board of Directors. Steven
W. Hooper, NEXTLINK's Chairman of the Board of Directors, filled the
position of Chief Executive Officer that was vacated by Mr. Perry.
(5) Includes a signing bonus paid in 1998 at Mr. Salemme's one-year
anniversary.
(6) Effective July 17, 1998, Mr. Voelker resigned as President and from
NEXTLINK's Board of Directors. The Board of Directors elected George M.
Tronsrue III, who had been serving as NEXTLINK's Chief Operating
Officer, to fill the position of President vacated by Mr. Voelker.
OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
----------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
NUMBER OF % OF TOTAL VALUE AT ASSUMED
SECURITIES OPTIONS GRANTED ANNUAL RATES OF STOCK
UNDERLYING TO EMPLOYEES EXERCISE OR PRICE APPRECIATION FOR
OPTIONS IN FISCAL BASE PRICE OPTION TERMS
NAME GRANTED (#) YEAR (%) ($/SH) EXPIRATION DATE 5%($) 10%($)
- ---- ----------- --------------- ----------- ----------------- --------- ----------
Wayne M. Perry............... 75 0.00 22.56 December 16, 2008 1,064 2,697
George M. Tronsrue III....... 75 0.00 22.56 December 16, 2008 1,064 2,697
Kathleen H. Iskra............ 100,000 1.30 24.50 January 21, 2008 1,540,792 3,904,669
70,000 0.91 36.00 August 14, 2008 1,470,792 3,834,669
75 0.00 22.56 December 16, 2008 1,064 2,697
20,000 0.26 22.56 December 16, 2008 283,789 719,176
R. Gerard Salemme............ 100,000 1.30 21.25 October 1, 2008 1,153,150 3,094,907
12,500 0.16 22.56 December 16, 2008 177,368 449,485
Jan Loichle.................. 105,000 1.36 24.50 January 21, 2008 1,617,831 4,099,902
55,000 0.71 36.00 August 14, 2008 1,155,622 3,012,954
75 0.00 22.56 December 16, 2008 1,064 2,697
20,000 0.26 22.56 December 16, 2008 283,789 719,176
James F. Voelker............. 250,000 3.24 24.50 (1) July 15, 2008 7,924,216 16,246,029
- -----------------
(1) Market value on the date of grant was $34.50 per security or $8.6 million
in the aggregate.
46
AGGREGATED FISCAL YEAR END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-THE
UNDERLYING OPTIONS AT MONEY OPTIONS AT FISCAL
SHARES FISCAL YEAR END (#) YEAR END ($)
ACQUIRED ON VALUE ------------------------------------------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ ------------ ----------- ------------- ----------- -------------
Wayne M. Perry.................... -- -- 110,409 331,002 2,256,215 6,767,336
George M. Tronsrue III............ 63,750 1,036,416 51,075 140,250 1,043,131 2,867,411
R. Gerard Salemme................. -- -- 16,550 162,150 338,365 1,800,251
Kathleen H. Iskra................. 10,851 327,075 18,178 234,088 279,378 1,750,083
Jan Loichle....................... 2,206 41,034 25,664 222,068 515,497 1,664,998
James F. Voelker.................. 362,609 9,378,616 676,210 424,329 19,064,689 5,254,045
EMPLOYMENT AGREEMENTS AND OTHER ARRANGEMENTS
We have entered into an employment agreement with James F. Voelker,
former NEXTLINK President, expiring on December 31, 1999, subject to earlier
termination under certain conditions. Under this agreement, Mr. Voelker will
receive a base salary at a rate equivalent to an annual salary of $275,000
from July 16, 1998 to December 31, 1999. Mr. Voelker will also receive an
annual bonus of $250,000 for 1998 and 1999. All stock options which had been
granted to Mr. Voelker prior to the date we entered into the employment
agreement will continue to vest according to their original vesting
schedules through December 31, 2000. On December 31, 2000, all unvested
options will immediately vest at that time. Mr. Voelker's employment
agreement also contains non-competition and confidentiality provisions.
We have entered into an employment agreement with George M. Tronsrue
III, expiring on October 6, 2001, subject to earlier termination. The agreement
provides for a base salary of $235,000 and $255,000 for the first and second
years of employment, respectively, and no less than $255,000 for each year
thereafter, subject to negotiation. The agreement also provides for a bonus
payment of $140,000 in the first year of employment, and bonuses thereafter to
be determined based upon the performance of Mr. Tronsrue and NEXTLINK. In
addition, in connection with the execution of this employment agreement,
NEXTLINK granted Mr. Tronsrue options to purchase 255,000 shares of Class A
Common Stock, 25% of which vested immediately and the remainder of which vest in
tranches over the four years following Mr. Tronsrue's employment date. The
options have an exercise price of $7.93 per share. Mr. Tronsrue's employment
agreement also contains confidentiality provisions.
The vesting of certain options granted to some Named Executive Officers
accelerate under certain circumstances. The vesting of an option to purchase
441,336 shares of Class A Common Stock granted to Mr. Perry in June 1997, an
option to purchase 255,000 shares of Class A Common Stock granted to Mr.
Tronsrue in September 1997, an option to purchase 66,200 shares of Class A
Common Stock granted to Mr. Salemme in June 1997, and an option to purchase
100,000 shares of Class A Common Stock granted to Mr. Salemme in October 1998
accelerates in the event that Mr. McCaw, or an entity or entities he
controls, no longer has control of a majority of the votes of NEXTLINK. In
addition, the option to purchase 255,000 shares of Class A Common Stock
granted to Mr. Tronsrue and the option to purchase 100,000 shares of Class A
Common Stock granted to Mr. Salemme in October 1998 each provide for
acceleration of vesting upon the happening of certain mergers, sales of
substantially all of NEXTLINK's assets, acquisitions of voting power of
NEXTLINK, and changes in the composition of NEXTLINK's Board of Directions, or
upon liquidation or dissolution of NEXTLINK. In all other cases, these options
become fully vested over four years.
COMPENSATION OF DIRECTORS
47
Each director is entitled to reimbursement for out-of-pocket expenses
incurred for each Board or Committee meeting attended. Mr. Hooper received
$8,023 in 1998 for services as Chairman of the Board. No other compensation
was paid to any directors in 1998.
REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
NEXTLINK's compensation program is designed to attract and retain
qualified employees and to ensure that they have a continuing stake in the
long-term success of NEXTLINK. NEXTLINK offers its employees a competitive
compensation package that includes a salary, incentives based upon individual
and company performance and health and other benefits. In addition, the Board of
Directors currently believes that NEXTLINK's success is effectively promoted
through a stock option program in which substantially all employees are eligible
to participate.
NEXTLINK's compensation policy for executive officers is similar to
that for other employees, and is designed to promote continued performance and
attainment of individual and company goals. The Compensation Committee
determined and administered the compensation of NEXTLINK's executive officers
during 1998. The Committee is currently comprised of two non-employee directors,
Messrs. William Hoglund and Dennis Weibling, and also included Mr. Scot Jarvis
until his resignation from the Board in January 1999.
EXECUTIVE OFFICER COMPENSATION PHILOSOPHY. NEXTLINK believes that
compensation of executive officers should be directly and materially linked to
NEXTLINK's operating performance and the interests of its stockholders. To
implement this philosophy, NEXTLINK combines base compensation with incentive
awards.
NEXTLINK sets executive officer salaries in line with the duties and
scope of responsibilities of each officer's position and the salaries paid to
comparable officers by competitors in the telecommunications industry. NEXTLINK
periodically reviews executive officer salaries and makes adjustments to reflect
individual performance.
NEXTLINK has designed an incentive program for executive officers. Each
officer is eligible to receive a discretionary bonus of up to 20% to 55%,
except in certain circumstances as determined by the Board of Directors, of his
or her salary based upon individual and company-wide performance goals. For
1998, the Committee established revenue, lines installed, earnings and other
financial and operating measures as an incentive for individual and company
performance. The Committee also recognized various qualitative factors, such as
demonstrated leadership ability.
NEXTLINK believes that stock option grants to executive officers and
other employees promote Company success by aligning the financial interests of
officers and other employees with the long-term interests of the stockholders.
Stock option grants are based on various subjective factors primarily relating
to the responsibilities of each officer and employee and to his or her expected
future contribution. Although the Committee considers the number of options
previously awarded to and held by executive officers and other employees, they
were not determinative factors in setting the size of 1998 option grants.
As noted above, NEXTLINK's compensation program is performance based.
Under Section 162(m) of the Internal Revenue Code, NEXTLINK may not deduct
nonperformance-based compensation in excess of $1 million paid to any Named
Executive Officer. The Committee currently believes that NEXTLINK will be able
to continue to manage its compensation program for Named Executive Officers so
as to preserve related federal income tax deductions.
CHIEF EXECUTIVE OFFICER COMPENSATION. In evaluating the compensation of
Wayne M. Perry, NEXTLINK's Vice Chairman and Chief Executive Officer for 1998,
the Committee considered the option to purchase 441,336 shares of NEXTLINK
Class A common stock granted to Mr. Perry at the time he assumed the role of
Chief Executive Officer in July 1997. The Committee also focused on Mr.
Perry's superior leadership in managing the business, experience in leading
companies in competitive segments of the telecommunications industry, as well
as NEXTLINK's financial and operating
48
performance.
COMPENSATION COMMITTEE
William A. Hoglund
Dennis Weibling
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 8, 1999,
with respect to the beneficial ownership of NEXTLINK's capital stock by (i) each
person known by us to own beneficially 5% or more of the outstanding shares of
capital stock, (ii) NEXTLINK's Board of Directors and persons having agreed to
be named thereto, (iii) NEXTLINK's Chief Executive Officer and each of the Named
Executive Officers and (iv) all directors, and persons having agreed to be named
a director, and executive officers as a group.
SHARES BENEFICIALLY OWNED (1)
--------------------------------------------------------
PERCENT OF
TOTAL PERCENT OF
AMOUNT AND PERCENT SHARES TOTAL
NAME AND ADDRESS OF TITLE OF NATURE OF OF OUTSTANDING VOTING
BENEFICIAL OWNER CLASS OWNERSHIP CLASS (%) (%) POWER (%)
- ------------------- -------- ----------- --------- ----------- ----------
BWP, Inc............................. Class A 2,610,280 10.20
707 S.W. Washington, 8th Floor Class B 0 0 4.77 *
Portland, OR 97205
Eagle River Investments, LLC(2)...... Class A 0 0
2300 Carillon Point Class B 18,871,787 64.66 34.45 59.45
Kirkland, WA 98033
Ampersand Telecom, LLC............... Class A 0 0
1332 Anacapa, Suite 200 Class B 9,722,649 33.31 17.75 30.63
Santa Barbara, CA 93101
The Ampersand Telecom Trust(3)....... Class A 0 0
1332 Anacapa, Suite 200 Class B 9,722,649 33.31 17.75 30.63
Santa Barbara, CA 93101
Wendy P. McCaw(4).................... Class A 0 0
1332 Anacapa, Suite 200 Class B 9,722,649 33.31 17.75 30.63
Santa Barbara, CA 93101
Craig O. McCaw....................... Class A 6,620 *
2300 Carillon Point Class B 19,138,253(5) 65.58 34.95 60.29
Kirkland, WA 98033
Dennis Weibling...................... Class A 1,500 *
2300 Carillon Point Class B 18,871,787(6) 64.66 34.45 59.45
Kirkland, WA 98033
Gregory Parker....................... Class A 2,000 *
1332 Anacapa, Suite 200 Class B 9,722,649(7) 33.31 17.75 30.63
Santa Barbara, CA 93101
William A. Hoglund................... Class A 8,400(8) *
Class B 0 0 * *
Sharon L. Nelson..................... Class A 5,516 *
Class B 0 0 * *
Jeffrey S. Raikes.................... Class A 55,516 *
Class B 0 0 * *
Nicolas Kauser....................... Class A 0 0
Class B 0 0 * *
Wayne M. Perry ...................... Class A 148,049(9) *
Class B 58,825 * * *
Steven W. Hooper .................... Class A 156,409(10) *
Class B 58,825 * * *
George M. Tronsrue III............... Class A 155,145 *
Class B 0 0 * *
Kathleen H. Iskra.................... Class A 87,105 *
Class B 0 0 * *
R. Gerard Salemme.................... Class A 29,050 *
Class B 0 0 * *
Jan Loichle.......................... Class A 120,830 *
Class B 0 0 * *
49
James F. Voelker (11)................ Class A 425,910(12) 1.66
Class B 654,858(13) 2.19 1.95 2.15
All directors and executive
officers as a group (16 persons).... Class A 981,598(14) 3.74
Class B 28,978,552(14) 97.12 53.45 89.58
- -----------------
(1) In accordance with Commission rules, each beneficial owner's holdings
have been calculated assuming full exercise of outstanding options
exercisable by such owner within 60 days after March 8, 1999, but no
exercise of outstanding options held by any other person.
(2) Eagle River has pledged substantially all of its shares of NEXTLINK
stock to secure a credit arrangement.
(3) The Ampersand Telecom Trust is the Managing Member of Ampersand Telecom
LLC and has sole right to vote on all matters affecting Ampersand
Telecom, LLC.
(4) Mrs. McCaw is the sole beneficiary of The Ampersand Telecom Trust, a
revocable trust. The trustee of the Trust, Gregory Parker, may exercise
his duties under the trust only pursuant to the written directions of
Mrs. McCaw.
(5) Represents shares of Class B Common Stock held beneficially by Mr. McCaw
as a result of his ownership interests in Eagle River and NEXTLINK, Inc.
Pursuant to the terms of the Stock Distribution Agreement between Mr.
and Mrs. McCaw, Mr. McCaw holds a proxy to vote the number of shares of
NEXTLINK stock held by Mrs. McCaw that, when added to all NEXTLINK
capital stock held by Mr. McCaw or any of his affiliates proves which
they have voting rights, are necessary for Mr. McCaw to hold 51% of the
voting power of NEXTLINK. No shares owned or controlled by Mrs. McCaw
are included in the beneficial holdings of Mr. McCaw.
(6) Mr. Weibling, who is President of Eagle River, Inc., an affiliate of
Eagle River, disclaims beneficial ownership in all securities held by
Eagle River, except to the extent of his pecuniary interest therein. Mr.
Weibling is a member of Eagle River.
(7) Mr. Parker is a member of Ampersand Telecom, LLC. Mr. Parker disclaims
beneficial ownership of such shares, except to the extent of his pecuniary
interest therein.
(8) Includes 3,250 shares of Class A Common Stock that Mr. Hoglund holds as
trustee of trusts for the benefit of his children. Mr. Hoglund disclaims
beneficial ownership of such shares.
(9) Includes 3,640 shares of Class A common stock held by Mr. Perry's
children. Mr. Perry disclaims beneficial ownership of such shares.
(10) Includes 21,000 shares of Class A common stock held by Mr. Hooper as
trustee of trusts for the benefit of his children and 25,000 shares of
stock Class A Common Stock of irrevocable trusts for the benefit of Mr.
Perry's four children, for which Mr. Perry exercises no voting or
investment control.
(11) Effective July 17, 1998, Mr. Voelker resigned from NEXTLINK's Board of
Directors and as President of NEXTLINK. The beneficial holdings of Mr.
Voelker presented in the table are based on representations from Mr.
Voelker.
(12) Includes 90,000 shares of Class A Common Stock that Mr. Voelker holds as
trustee of trusts for the benefit of his children.
(13) Includes shares of Class B Common Stock that are eligible for acquisition
upon exercise of a currently exercisable stock option, which was
exercised in part on August 26, 1997, resulting in the issuance of
921,314 shares (all of which were subsequently converted into Class
A Common Stock), leaving 654,858 unissued.
(14) See notes (1), (5), (6), (7), (8), (9) and (10).
* Less than 1%.
50
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On August 18, 1995, NEXTLINK lent $93,141 to James F. Voelker, former
President of NEXTLINK, in connection with his relocation to Washington.
Interest on the loan accrued at the prime rate. In April 1997, $25,000 in
principal amount of this loan was paid as part of payment of Mr. Voelker's
1996 bonus. The balance of the loan was repaid in March 1999.
On August 26, 1997, NEXTLINK lent Mr. Voelker and R. Bruce Easter, Jr.,
Vice President, General Counsel and Secretary of NEXTLINK, $2.2 million and
$79,000, respectively, in connection with the payment of income taxes
incurred upon the exercise of stock options. These loans (i) bear interest at
a fixed rate of 7.70%, and (ii) are secured by shares of Class A Common Stock
with a market value equal to 2.5 times the amount of the loan. Mr. Voelker
and Mr. Easter paid the remaining balances on their loans in March 1999.
In October 1998, NEXTLINK lent $1.5 million to George M. Tronsrue III,
President. Interest accrued on the loan at rate of 7.31% per year. Principal
and interest on the loan had been repaid as of December 31, 1998.
In March 1999, a wholly owned subsidiary of NEXTLINK aquired all of the
ownership interest of Falcon Administration, LLC, a Washington limited
liability company, from Bruce R. McCaw, brother of Craig O. McCaw, a director
and beneficial owner of NEXTLINK. Falcon Administration's primary asset is a
Falcon 50 aircraft. NEXTLINK acquired Falcon Administration for approximately
$14.7 million, which was paid upon closing of the transaction. The purchase
price paid by NEXTLINK approximated the amount paid by Bruce R. McCaw to
acquire Falcon Administration plus capital contributions made to Falcon
Administration for debt retirement, improvements and fees associated with the
Falcon 50 aircraft. Bruce R. McCaw purchased Falcon Administration from Craig
O. McCaw in November 1997 for $3.6 million. Capital contributions made by
Bruce R. McCaw since that time total approximately $11.0 million. NEXTLINK's
purchase price of Falcon Administration was considered to be comparable to
the fair value of the assets acquired, based on independent sale
specifications of comparable aircraft.
Each shareholder of NEXTLINK's Class B Common Stock has the option, at
any time, to convert each share of Class B Common Stock owned into one share of
Class A Common Stock. The current holders of Class B Common Stock, and holders
of options to purchase Class B Common Stock, have certain rights to require
NEXTLINK to register, under the Securities Act of 1933, shares of Class A Common
Stock acquired by the holders. The holders also have the right to include shares
of Class A Common Stock held by them in certain NEXTLINK registration
statements.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. and 2. Financial Statements and Schedules
NEXTLINK COMMUNICATIONS, INC.
Report of Independent Public Accountants.............................................. 55
Consolidated Balance Sheets as of December 31, 1998 and 1997.......................... 56
Consolidated Statements of Operations for the Years Ended December 31, 1998,
1997 and 1996....................................................................... 57
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the Years
Ended December 31, 1998, 1997 and 1996.............................................. 58
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998,
1997 and 1996....................................................................... 60
Notes to Consolidated Financial Statements............................................ 62
NEXTLINK CAPITAL, INC.
Report of Independent Public Accountants.............................................. 76
Balance Sheets as of December 31, 1998 and 1997....................................... 77
Note to Balance Sheets................................................................ 78
(a) 3. List of Exhibits:
51
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 --Articles of Incorporation of NEXTLINK Communications Inc. (2)
3.2 --Certificate of NEXTLINK Communications, Inc. (1)
3.3 --Articles of Incorporation of NEXTLINK Capital, Inc. (1)
3.4 --By-laws of NEXTLINK Capital, Inc. (2)
4.1 --Indenture, dated as of November 12, 1998, by and among NEXTLINK
Communications, Inc. and United States Trust Company of New
York, as trustee, relating to 10 3/4% Notes due 2008 including
form of global note. (8)
4.2 --Certificate of Designations of the Powers, Preferences and
Relative, Participating, Optional and Other Special Rights
of 14% Senior Exchangeable Redeemable Preferred Shares and
Qualifications, Limitations and Restrictions Thereof. (1)
4.3 --Form of stock certificate of 14% Senior Exchangeable
Redeemable Preferred Shares. (3)
4.4 --Indenture, dated as of April 25, 1996, by and among
NEXTLINK Communications, Inc., NEXTLINK Capital, Inc. and
United States Trust Company of New York, as Trustee,
relating to 12 1/2% Senior Notes due April 15, 2006,
including form of global note. (2)
4.5 --First Supplemental Indenture, dated as of January 31, 1997,
by and among the Company, NEXTLINK Communications, L.L.C.,
NEXTLINK Capital and United States Trust Company of New
York, as Trustee. (3)
4.6 --Form of Indenture between United States Trust Company, as
Trustee and NEXTLINK Communications, Inc., relating to the
9 5/8% Senior Notes due 2007. (4)
4.7 --Indenture, dated March 3, 1998, between United States Trust
Company, as Trustee and NEXTLINK Communications, Inc.,
relating to the 9% Senior Notes due 2008. (5)
4.8 --Certificate of Designation of Powers, Preferences and
Relative, Participating, Optional and Other Special Rights
of 6 1/2% Cumulative Convertible Preferred Stock and
Qualifications, Limitations and Restrictions Thereof. (1)
4.9 --Indenture, dated April 1, 1998, between United States Trust
Company, as Trustee and NEXTLINK Communications, Inc.,
relating to the 9.45% Senior Discount Notes due 2008. (6)
4.10 --Second Supplemental Indenture, dated June 3, 1998, amending
Indenture dated April 25, 1996, by and among NEXTLINK
Communications, Inc., NEXTLINK Capital, Inc. and United
States Trust Company of New York, as Trustee. (1)
52
4.11 --First Supplemental Indenture, dated June 3, 1998, amending
Indenture dated September 25, 1997, by and between NEXTLINK
Communications, Inc. and United States Trust Company of New
York, as Trustee. (1)
4.12 --First Supplemental Indenture, dated June 3, 1998, amending
Indenture dated March 3, 1998, by and between NEXTLINK
Communications, Inc. and United States Trust Company of New
York, as Trustee. (1)
4.13 --First Supplemental Indenture, dated June 3, 1998, amending
Indenture dated April 1, 1998, by and between NEXTLINK
Communications, Inc. and United States Trust Company of New
York, as Trustee. (1)
10.1 --Stock Option Plan of NEXTLINK Communiations, Inc., as
amended. (1)
10.2 --Employee Stock Purchase Plan of NEXLINK Communications, Inc.
(1)
10.3 --Registration Rights Agreement dated as of January 15, 1997,
between the Company and the signatories listed therein. (3)
10.4 --Preferred Exchange and Registration Rights Agreement, dated
as of January 31, 1997, by and among the Company and the
Initial Purchasers. (3)
10.5 --Fiber Lease and Innerduct Use Agreement, dated as of
February 23, 1998, by and between NEXTLINK Communications,
Inc. and Metromedia Fiber Network, Inc. (5)
10.6 --Amendment No.1 to Fiber Lease and Innerduct Use Agreement,
dated March 4, 1998, by and between NEXTLINK Communications,
Inc. and Metromedia Fiber Network, Inc. (5)
10.7 --Agreement and Plan of Merger, dated as of January 14, 1999,
among NEXTLINK Communications, Inc. WNP Communications, Inc. and PCO
Acquisition Corp. (7)
10.8 --Registration Rights Agreement, dated January 14, 1999,
between NEXTLINK Communications, Inc. and Thomas H. Jones,
as Stockholder Representative for certain stockholders of
WNP Communications, Inc. (7)
21 --Subsidiaries of the Registrants.
23 --Consent of Independent Public Accountants.
27 --Financial Data Schedule.
53
---------------------
(1) Incorporated herein by reference to the exhibit filed with the
Registration Statement on Form S-4 of NEXTLINK Communications,
Inc. (Commission File No. 333-53975).
(2) Incorporated herein by reference to the exhibit filed with the
Registration Statement on Form S-4 of NEXTLINK Communications,
L.L.C. (the predecessor of NEXTLINK Communications, Inc.) and
NEXTLINK Capital, Inc. (Commission File No. 333-4603).
(3) Incorporated herein by reference to the exhibit filed with the
Annual Report on Form 10-KSB for the year ended December 31, 1996
of NEXTLINK Communications, Inc. and NEXTLINK Capital, Inc.
(Commission File Nos. 33-04603 and 333-04603-01).
(4) Incorporated herein by reference to the exhibit filed with the
Registration Statement on Form S-1 of NEXTLINK Communications,
Inc. (Commission File No. 333-32003).
(5) Incorporated herein by reference to the exhibit filed with the
Annual Report on Form 10-KSB for the year ended December 31, 1997
of NEXTLINK Communications, Inc. and NEXTLINK Capital, Inc.
(Communication File Nos. 333-04603 and 333-04603-01).
(6) Incorporated herein by reference to the exhibit filed with the
quarterly report on Form 10-Q for the quarterly period ended
March 31, 1998 of NEXTLINK Communications, Inc. (Commission File
No. 000-22939).
(7) Incorporated herein by reference to the exhibits filed with the
current report on Form 8-K filed on January 19, 1999 (Commission
File No. 000-22939).
(8) Incorporated herein by reference to the exhibits filed with the
Registration Statement on Form S-4 of NEXTLINK Communications,
Inc. (Commission File No. 333-71749).
(b) Reports on Form 8-K
Current report on Form 8-K, filed December 8, 1998 regarding the
ownership of INTERNEXT, LLC.
54
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
NEXTLINK Communications, Inc.:
We have audited the accompanying consolidated balance sheets of
NEXTLINK Communications, Inc. (a Delaware Corporation) and subsidiaries as of
December 31, 1998 and 1997, and the related consolidated statements of
operations, changes in shareholders' equity (deficit) and cash flows for each of
the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of NEXTLINK
Communications, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Seattle, Washington,
February 22, 1999
55
NEXTLINK COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DECEMBER 31,
--------------------------
1998 1997
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents................................ $ 319,496 $ 389,074
Marketable securities.................................... 1,158,566 353,283
Accounts receivable, net................................. 36,115 22,955
Other current assets..................................... 16,480 7,355
Pledged securities....................................... 21,500 41,425
---------- ----------
Total current assets................................... 1,552,157 814,092
Pledged securities......................................... -- 21,185
Property and equipment, net................................ 594,408 253,653
Other assets, net.......................................... 336,541 131,048
---------- ----------
Total assets........................................... $2,483,106 $1,219,978
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................................... $ 61,175 $ 26,776
Accrued compensation..................................... 11,410 5,886
Other accrued liabilities................................ 33,646 7,196
Accrued interest payable................................. 34,670 18,880
Current portion of long-term obligations................. 2,755 10,844
---------- ----------
Total current liabilities.............................. 143,656 69,582
Long-term debt............................................. 2,013,192 750,000
Other long-term liabilities................................ 16,553 10,842
---------- ----------
Total liabilities...................................... 2,173,401 830,424
Redeemable preferred stock, par value $0.01 per share,
25,000,000 shares authorized; 14% Preferred, aggregate
liquidation preference $371,199; 7,254,675 and 6,322,031
shares issued and outstanding in 1998 and 1997,
respectively; 6 1/2% Convertible Preferred, aggregate
liquidation preference $200,000; 4,000,000 and 0 shares
issued and outstanding in 1998 and 1997, respectively...... 556,168 313,319
Class B common stock subject to redemption, par value
$0.02 per share, 519,950 shares issued and outstanding
in 1997................................................... -- 4,950
Shareholders' equity (deficit):
Common stock, par value $0.02 per share, stated at
amounts paid in; Class A, 110,334,000 shares
authorized, 24,170,117 and 19,167,899 shares
issued and outstanding in 1998 and 1997,
respectively; Class B, 44,133,600 shares authorized,
30,297,902 and 33,746,573 shares issued and
outstanding in 1998 and 1997, respectively.............. 354,525 330,561
Deferred compensation.................................... (11,370) (6,771)
Accumulated deficit...................................... (589,618) (252,505)
---------- ----------
Total shareholders' equity (deficit)................... (246,463) 71,285
---------- ----------
Total liabilities and shareholders' equity (deficit)... $2,483,106 $1,219,978
---------- ----------
---------- ----------
See accompanying notes to consolidated financial statements.
56
NEXTLINK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
------------------------------------------
1998 1997 1996
---------- ---------- ----------
Revenue.......................................... $ 139,667 $ 57,579 $ 25,686
Costs and expenses:
Operating...................................... 123,675 54,031 25,094
Selling, general and administrative............ 156,929 75,732 31,353
Deferred compensation.......................... 4,993 3,247 9,914
Depreciation................................... 45,638 18,851 6,640
Amortization................................... 14,616 8,339 3,700
---------- ---------- ----------
Total costs and expenses..................... 345,851 160,200 76,701
---------- ---------- ----------
Loss from operations............................. (206,184) (102,621) (51,015)
Interest income.................................. 72,409 28,112 10,790
Interest expense................................. (144,565) (54,495) (30,876)
---------- ---------- ----------
Net loss......................................... $ (278,340) $ (129,004) $ (71,101)
---------- ---------- ----------
---------- ---------- ----------
Preferred stock dividends and accretion of
preferred stock redemption obligation,
including issue costs........................... (58,773) (39,320) --
---------- ---------- ----------
Net loss applicable to common shares............. $ (337,113) $ (168,324) $ (71,101)
---------- ---------- ----------
---------- ---------- ----------
Net loss per share (basic and diluted)........... $ (6.26) $ (3.91) $ (1.81)
---------- ---------- ----------
---------- ---------- ----------
Shares used in computation of net loss per
share (1996 amounts have been adjusted for
conversion of membership units into shares
of the Company's Class A and Class B common
stock upon incorporation; see Note 9)........... 53,854,132 43,055,885 39,312,482
---------- ---------- ----------
---------- ---------- ----------
See accompanying notes to consolidated financial statements.
57
NEXTLINK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
COMMON STOCK
----------------------------------
SHARES
----------------------- DEFERRED ACCUMULATED MEMBERS'
CLASS A CLASS B AMOUNT COMPENSATION DEFICIT CAPITAL TOTAL
---------- ---------- -------- ------------ ----------- -------- ---------
Balance at December 31, 1995................ -- -- $ -- $ -- $ (13,080) $ 49,799 $ 36,719
Contributed capital....................... -- -- -- -- -- 9,502 9,502
Issuance of units for NEXTLINK
Ohio acquisition......................... -- -- -- -- -- 652 652
Impact of recapitalization and
merger of affiliates..................... -- -- -- -- -- 5,574 5,574
Net loss.................................. -- -- -- -- (71,101) -- (71,101)
---------- ---------- -------- -------- --------- -------- ---------
Balance at December 31, 1996................ -- -- -- -- (84,181) 65,527 (18,654)
Merger of NEXTLINK Communications,
L.L.C. with and into NEXTLINK
Communications, Inc...................... -- 36,165,259 65,527 -- -- (65,527) --
Conversion of Equity Option Plan
into Stock Option Plan................... -- -- 15,363 (4,234) -- -- 11,129
Issuance of compensatory stock options.... -- -- 4,872 (4,872) -- -- --
Compensation attributable to stock
options vesting.......................... -- -- -- 2,335 -- -- 2,335
Issuance of common stock under leasing
arrangement.............................. 176,534 -- 1,400 -- -- -- 1,400
Issuance of common stock through Stock
Option Plan.............................. 672,878 921,314 115 -- -- -- 115
Issuance of common stock in initial
public offering.......................... 14,280,000 -- 226,760 -- -- -- 226,760
Sale of common stock by selling
shareholder in initial public offering... 3,200,000 (3,200,000) -- -- -- -- --
Issuance of common stock in acquisitions.. 698,487 -- 16,524 -- -- -- 16,524
Conversion of Class B common stock into
Class A common stock..................... 140,000 (140,000) -- -- -- -- --
Cumulative redeemable preferred stock
dividends and accretion of preferred
stock redemption obligation, including
issue costs.............................. -- -- -- -- (39,320) -- (39,320)
Net loss.................................. -- -- -- -- (129,004) -- (129,004)
---------- ---------- -------- -------- --------- -------- ---------
Balance at December 31, 1997................ 19,167,899 33,746,573 330,561 (6,771) (252,505) -- 71,285
Issuance of compensatory stock options.... -- -- 9,592 (9,592) -- -- --
Compensation attributable to stock
options vesting.......................... -- -- -- 4,993 -- -- 4,993
Issuance of common stock through Stock
Option and Employee Stock Purchase Plans. 844,285 -- 3,695 -- -- -- 3,695
Issuance of common stock for purchase of
minority interest........................ -- 189,312 5,727 -- -- -- 5,727
Conversion of Class B common stock into
Class A common stock..................... 4,157,933 (4,157,933) -- -- -- -- --
Termination of common stock redemption
obligation............................... -- 519,950 4,950 -- -- -- 4,950
Cumulative redeemable preferred stock
dividends and
58
accretion of preferred stock redemption
obligation, including issue costs........ -- -- -- -- (58,773) -- (58,773)
Net loss.................................. -- -- -- -- (278,340) -- (278,340)
---------- ---------- -------- -------- --------- -------- ---------
Balance at December 31, 1998................ 24,170,117 30,297,902 $354,525 $(11,370) $(589,618) $ -- $(246,463)
---------- ---------- -------- -------- --------- -------- ---------
---------- ---------- -------- -------- --------- -------- ---------
See accompanying notes to consolidated financial statements.
59
NEXTLINK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
----------- ----------- ---------
OPERATING ACTIVITIES:
Net loss..................................... $ (278,340) $ (129,004) $ (71,101)
Adjustments to reconcile net loss to net
cash used in operating activities:
Deferred compensation expense.............. 4,993 3,247 9,914
Equity in loss of affiliates............... 3,677 2,544 1,100
Depreciation and amortization.............. 60,254 27,190 10,340
Accretion of interest on senior notes...... 28,869 -- --
Changes in assets and liabilities, net of
effects from acquisitions:
Accounts receivable........................ (13,160) (11,206) (1,659)
Other current assets....................... (4,996) (4,778) (42)
Other long-term assets..................... (16,179) (1,208) (1,430)
Accounts payable........................... 5,742 4,116 993
Accrued expenses and other liabilities..... 18,866 2,149 2,072
Accrued interest payable................... 15,790 9,630 9,250
----------- ----------- ---------
Net cash used in operating activities........ (174,484) (97,320) (40,563)
INVESTING ACTIVITIES:
Purchase of property and equipment........... (335,609) (142,170) (51,920)
Investment in assets of acquired businesses
(net of cash acquired)..................... -- (61,609) (15,169)
Cash withdrawn from (placed into) escrow to
be used in business acquisition............. -- 6,000 (6,000)
Assets acquired in network lease............. (92,000) -- --
Investments in unconsolidated affiliates..... (80,836) (6,766) (4,953)
Purchase of pledged securities............... -- -- (117,688)
Maturity of pledged securities............... 36,981 39,920 16,431
Purchase of marketable securities............ (4,699,018) (2,100,916) (839,481)
Sale of marketable securities................ 3,893,735 1,795,346 791,768
----------- ----------- ---------
Net cash used in investing activities........ (1,276,747) (470,195) (227,012)
--Continued--
60
NEXTLINK COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
----------- ----------- ---------
FINANCING ACTIVITIES:
Net proceeds from issuance of redeemable
preferred stock............................. $ 193,824 $ 274,000 $ --
Capital contributions........................ -- -- 9,935
Proceeds from payable to affiliates.......... -- -- 28,766
Repayment of payable to affiliates........... -- (1,500) (33,703)
Repayment of note payable and other
obligations................................. (11,417) (7,865) (771)
Dividends paid on convertible
preferred stock............................. (9,750) -- --
Net proceeds from sale of common stock....... -- 226,760 --
Proceeds from sale of senior notes........... 1,234,323 400,000 350,000
Proceeds from issuance of common stock upon
exercise of stock options................... 3,695 115 --
Costs incurred in connection with debt
financing................................... (29,022) (11,728) (11,195)
----------- ----------- ---------
Net cash provided by financing activities.... 1,381,653 879,782 343,032
----------- ----------- ---------
Net increase (decrease) in cash and cash
equivalents................................. (69,578) 312,267 75,457
Cash and cash equivalents, beginning of year. 389,074 76,807 1,350
----------- ----------- ---------
Cash and cash equivalents, end of year....... $ 319,496 $ 389,074 $ 76,807
----------- ----------- ---------
----------- ----------- ---------
See accompanying notes to consolidated financial statements.
61
NEXTLINK COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
The consolidated financial statements include the accounts of NEXTLINK
Communications, Inc., a Delaware corporation, and its majority-owned
subsidiaries (collectively referred to as the Company). The Company, through
predecessor entities, was formed on September 16, 1994 and, through its
subsidiaries, provides competitive local, long distance and enhanced
telecommunications services in selected markets in the United States. The
Company is a majority-owned subsidiary of Eagle River Investments, L.L.C. (Eagle
River).
As the competitive local telecommunications service business is a
capital intensive business, the Company's operations are subject to significant
risks and uncertainties including competitive, financial, developmental
operational, growth and expansion, technological, regulatory, and other risks
associated with developing the Company's business.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The Company's financial statements include 100% of the assets,
liabilities and results of operations of subsidiaries in which the Company has a
controlling interest of greater than 50%. The Company's investments in
unconsolidated companies in which the Company has a 20% interest or more are
accounted for on the equity method. Investments in entities in which the Company
has voting interests of not more than 20% are accounted for on the cost method.
All significant intercompany accounts and transactions have been eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less at the time of purchase to be cash equivalents.
MARKETABLE SECURITIES
According to Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities",
available-for-sale securities are to be carried at fair value, with
unrealized holding gains and losses reported as a separate component of
comprehensive income, if significant. The Company's marketable securities
consist of U.S. government and other securities with original maturities
beyond three months. Of the marketable securities outstanding as of December
31, 1998, $546.2 million matures within one year.
The Company's marketable securities, at amortized cost, consisted of the
following (in thousands):
December 31,
---------------------
1998 1997
--------- --------
U.S. Government and agency notes and bonds.......... $ 653,554 $203,945
State and municipal notes and bonds................. 28,561 --
Foreign government notes and bonds.................. 7,016 --
Corporate notes and bonds........................... 469,435 149,338
---------- --------
$1,158,566 $353,283
---------- --------
---------- --------
The fair value of the Company's marketable securities approximated the carrying
value as of December 31, 1998.
PLEDGED SECURITIES
62
In connection with the sale of 12 1/2% Senior Notes (see Note 6), a
portion of the net proceeds was used to purchase a portfolio consisting of U.S.
government securities, which mature at dates sufficient to provide for payment
in full of interest on the 12 1/2% Senior Notes through April 15, 1999. The
pledged securities are stated at cost, adjusted for premium amortization and
accrued interest. The fair value of the pledged securities approximates the
carrying value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Direct costs of construction
are capitalized, including $4,311,000, $1,793,000 and $853,000 of interest costs
related to construction during 1998, 1997 and 1996, respectively. Depreciation
is computed using the straight-line method over the estimated useful lives of
the assets.
Estimated useful lives of property and equipment are as follows:
Telecommunications networks................ 5-20 years
Office equipment, furniture and other...... 3-5 years
Leasehold improvements..................... the lesser of the estimated
useful lives or the
terms of the leases
INTANGIBLE ASSETS
Intangible assets primarily represent costs allocated in acquisitions
to customer bases, software and related intellectual property and goodwill.
Intangible assets are amortized using the straight-line method over the
estimated useful lives of the assets as follows:
Customer bases................................. 5 years
Software and related intellectual property..... 5 years
Goodwill....................................... 15-20 years
Costs incurred in connection with securing the Company's debt facilities,
including underwriting and advisory fees and other such costs, are deferred
and amortized over the term of the financing using the straight-line method.
INCOME TAXES
Prior to January 31, 1997, the Company was organized and operated as a
limited liability company that was classified and taxed as a partnership for
federal and state income tax purposes. Effective February 1, 1997, the Company
became subject to federal and state income taxes directly as a C corporation.
The Company accounts for income taxes in accordance with the provisions
of SFAS No. 109, "Accounting for Income Taxes", which requires that deferred
income taxes be determined based on the estimated future tax effects of
differences between the financial statement and tax bases of assets and
liabilities given the provisions of the enacted tax laws.
REVENUE RECOGNITION
The Company recognizes revenue on telecommunications and enhanced
communications services in the period that services are provided.
NET LOSS PER SHARE
Net loss per share has been computed in accordance with SFAS No. 128,
"Earnings Per Share." Accordingly, net loss per share amounts are based on the
weighted average number of common shares
63
outstanding during each period. Pursuant to the Securities and Exchange
Commission Staff Accounting Bulletin No. 98, nominal issuances of shares and
common stock equivalents during the twelve-month period preceding the
Company's initial public offering have been included as if such shares were
outstanding for all periods presented. All other common share equivalents are
excluded from the calculation of net loss per share due to their antidilutive
effect. Therefore, the weighted average number of common shares outstanding
for basic and dilutive net loss per share calculations are equal for all
periods presented.
STOCK-BASED COMPENSATION
As allowed by SFAS No. 123, "Accounting for Stock-Based Compensation",
the Company has chosen to account for compensation cost associated with its
stock option plans in accordance with APB Opinion No. 25.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade receivables. The
Company's trade receivables are geographically dispersed and include
customers in many different industries. Management believes that any risk of
loss is significantly reduced due to the diversity of its customers and
geographic sales areas. The Company continually evaluates the
creditworthiness of its customers; however, it generally does not require
collateral. The Company's allowance for doubtful accounts is based on
historical trends, current market conditions and other relevant factors.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to prior period amounts in
order to conform to the current year presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In April 1998, the AICPA released Statement of Position 98-5,
"Reporting on the Costs of Start-up Activities" (SOP 98-5). The new standard
requires that all entities expense costs of start-up activities as those costs
are incurred. SOP 98-5 defines "start-up costs" as those costs directly related
to pre-operating, pre-opening, and organization activities. This standard must
be adopted in fiscal years beginning after December 15, 1998. The adoption of
SOP 98-5 will not have a material impact on the Company's financial position.
3. ACQUISITIONS
On November 1, 1997, the Company acquired all of the outstanding shares
of Start Technologies Corporation (Start), a shared tenant services provider
offering local and long distance services, Internet access and customer premise
equipment management in Texas and Arizona. The Company paid consideration for
the transaction consisting of $20.0 million in cash, 441,336 shares of Class A
common stock, and the assumption of approximately $5.3 million of liabilities.
On October 1, 1997, the Company acquired all of the outstanding shares
of Chadwick Telecommunications Corporation (Chadwick), a switch-based long
distance reseller in central Pennsylvania, through a merger transaction between
Chadwick and a wholly owned subsidiary of the Company. The purchase price of the
transaction consisted of a $5.0 million promissory note paid in January 1998,
issuance of 257,151 shares of Class A common stock, and the repayment of
long-term debt and other liabilities totaling $6.6 million. The merger agreement
also provides for additional payments of up to a maximum of
64
192,863 shares of Class A common stock over a two-year period, with these
payments being contingent upon the acquired operation achieving specified
performance goals.
On February 4, 1997, the Company acquired substantially all of the
assets of Linkatel Pacific, L.P. (Linkatel), a Los Angeles-based competitive
access telecommunications provider. At the time of the acquisition, Linkatel
operated an 80-mile fiber optic telecommunications network covering several
markets from the downtown Los Angeles area to the city of Irvine in Orange
County. As part of the assets acquired, the Company obtained access to
approximately 250 route miles of right-of-way, of which 190 miles have been
completed, creating one network in Los Angeles and one network in the Orange
County area. The Company has been providing competitive access services over
these networks since the acquisition date and launched switched local and long
distance services in July 1997. The total purchase price of $42.5 million
consisted of a cash payment of $36.1 million, the repayment of debt of $5.6
million and the assumption of net liabilities of $0.8 million.
In December 1996, the Company acquired ITC, a switched-based long
distance reseller based in Salt Lake City, Utah. Consideration for the
acquisition of ITC consisted of a cash payment of $4.0 million, of which $2.6
million was placed into escrow and paid during 1998, plus the issuance of
397,202 Class A Units of the Company valued at approximately $5.0 million, which
were subsequently converted into 519,950 shares of the Company's Class B common
stock.
In January 1996, the Company acquired certain assets of FoneNet, Inc. and
U.S. Network, Inc. through NEXTLINK Ohio, L.L.C. Consideration for the
purchase consisted of a cash payment of $9.6 million, the issuance of 287,721
Class A Units of the Company, valued at $651,933, plus the assumption of
capital lease obligations of $6.1 million.
The above acquisitions were accounted for using the purchase method of
accounting and, accordingly, the results of operations of the acquired companies
have been included in the Company's consolidated financial statements since the
effective dates of acquisition. The aggregate purchase price for the
acquisitions occurring in 1997 and 1996 were allocated based on fair values as
follows (in thousands):
1997 1996
------- -------
Fair value of tangible assets acquired
and liabilities assumed............................ $12,525 $12,579
Fair value of intangible assets acquired............ 70,705 16,425
------- -------
$83,230 $29,004
------- -------
------- -------
Purchase price...................................... $83,230 $29,004
------- -------
------- -------
The following unaudited condensed pro forma information presents the
results of operations of the Company for the years ended December 31, 1997 and
1996 as if the above transactions had occurred on January 1, 1996 (in
thousands):
1997 1996
--------- --------
Revenue............................................. $ 79,070 $ 58,050
Net loss............................................ $(134,404) $(74,423)
Net loss per share.................................. $ (3.12) $ (1.89)
The unaudited pro forma information is provided for informational
purposes only and is not necessarily indicative of the results of operations
that would have occurred had the purchases been made on January 1, 1996, or of
the future anticipated results of operations of the combined companies.
65
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following components (in
thousands):
DECEMBER 31,
---------------------
1998 1997
-------- --------
Telecommunications networks.......................... $379,277 $189,629
Office equipment, leasehold improvements,
furniture and other................................. 107,991 38,979
-------- --------
487,268 228,608
Less accumulated depreciation........................ 81,212 36,417
-------- --------
406,056 192,191
Network construction in progress..................... 188,352 61,462
-------- --------
$594,408 $253,653
-------- --------
-------- --------
In February 1998, the Company entered into a 20-year capital lease for
exclusive rights to multiple fibers and innerducts throughout New York, New
Jersey, Connecticut, Pennsylvania, Delaware, Maryland and Washington D.C. The
Company paid $97.0 million in the transaction, of which $5.0 million was paid
for rights-of-way and $80.3 million was placed into escrow pending completion
and delivery of segments of the network route to the Company. The payment was
recorded as a long-term asset, and will be reclassified as property and
equipment as portions of the network are completed. As of December 31, 1998,
none of such segments had been completed. The Company has the option to renew
the lease for two additional 10-year terms.
5. OTHER ASSETS
Other assets consisted of the following components (in thousands):
DECEMBER 31,
---------------------
1998 1997
-------- --------
Customer bases....................................... $ 53,397 $ 53,033
Investments in unconsolidated affiliates............. 85,191 8,021
Financing costs...................................... 50,572 21,552
Assets acquired in network lease..................... 92,000 --
Goodwill............................................. 62,330 56,603
Other non-current assets............................. 27,886 8,415
-------- --------
371,376 147,624
Less accumulated amortization........................ 34,835 16,576
-------- --------
$336,541 $131,048
-------- --------
-------- --------
Investments in unconsolidated affiliates consisted of the following:
In January 1998, the Company and Nextel Communications, Inc.,
a nationwide provider of wireless telephone services, formed a joint venture
called NEXTBAND Communications, L.L.C., which is owned 50% each by
the Company and Nextel. NEXTBAND was the successful bidder in 42 markets
covering approximately 105 million POPs, or persons located within the licensed
areas owned, in the FCC's local multipoint distribution service (LMDS) auctions,
which concluded in March 1998.
66
The Company has contributed $67.4 million to NEXTBAND, representing its pro
rata share of NEXTBAND's total bid in the LMDS auctions. In January 1999, the
Company announced an agreement in principle to acquire Nextel's 50% interest
in NEXTBAND (see Note 17).
In July 1998, the Company announced the formation of INTERNEXT L.L.C.,
which is beneficially owned 50% each by the Company and Eagle River. INTERNEXT
has entered into an agreement with Level 3 Communications, LLC. Level
3 is constructing a national fiber optic network that is expected to cover more
than 16,000 route miles with six or more conduits and connect 50 cities in the
United States and Canada. Pursuant to this agreement, INTERNEXT will receive an
exclusive interest in 24 fibers in a shared, filled conduit, one entire empty
conduit and the right to 25% of the fibers pulled through the sixth and any
additional conduits in the network. INTERNEXT will pay $700.0 million in
exchange for these rights, the majority of which will be payable as segments of
the network are completed and accepted by INTERNEXT, which is expected to occur
substantially during 2000 and 2001. To date, the Company has contributed $13.5
million to INTERNEXT.
The Company's investments in unconsolidated affiliates also include (i)
a 40% investment in Telecommunications of Nevada, L.L.C., which operates a fiber
optic telecommunications network that is managed by the Company in Las Vegas,
Nevada and (ii) a $3.7 million investment in convertible preferred stock of
Intermind Corporation (Intermind). Intermind has developed and patented an
interactive communications tool for the World Wide Web and intranet
applications.
6. LONG-TERM DEBT
Long-term debt consisted of the following components (in thousands):
DECEMBER 31,
-----------------------
1998 1997
---------- --------
Senior Notes, 10 3/4%, due November 15, 2008........ $ 500,000 $ --
Senior Discount Notes, 9.45%, due April 15, 2008.... 428,813 --
Senior Notes, 9%, due March 15, 2008................ 334,379 --
Senior Notes, 9 5/8%, due October 1, 2007........... 400,000 400,000
Senior Notes, 12 1/2%, due April 15, 2006........... 350,000 350,000
---------- --------
$2,013,192 $750,000
---------- --------
---------- --------
On November 12, 1998, the Company completed the sale of $500.0 million
in aggregate principal amount of 10 3/4% Senior Notes due November 15, 2008
(10 3/4% Senior Notes). Proceeds from the sale net of underwriting commissions,
advisory fees and expenses totaled approximately $488.5 million. Interest
payments on the notes are due semi-annually, beginning May 15, 1999. The 10 3/4%
Senior Notes are redeemable at the option of the Company, in whole or in part,
beginning November 15, 2003 at established redemption prices which decline to
100% of the stated principal amount thereof by November 12, 2006. As of December
31, 1998, the carrying value of the 10 3/4% Senior Notes approximated fair
value.
On April 1, 1998, the Company completed the sale of 9.45% Senior
Discount Notes due April 15, 2008, (9.45% Notes). The 9.45% Notes were issued at
a discount from their principal amount to generate aggregate gross proceeds to
the Company of approximately $400.0 million. Proceeds net of underwriting
commissions, advisory fees and expenses totaled $390.9 million. The 9.45% Notes
accrete at a rate of 9.45% compounded semi-annually, to an aggregate principal
amount of approximately $637.0 million by April 15, 2003. No cash interest will
accrue on the 9.45% Notes until April 15, 2003. Interest will become payable in
cash semi-annually beginning on October 15, 2003. The 9.45% Notes are redeemable
at the option of the Company, in whole or in part, at any time after April 15,
2003 at established redemption prices, which decline to 100% of the stated
principal amount thereof by April 1, 2006. As of December 31, 1998, the
fair value of the 9.45% Notes was approximately $406.1 million.
67
On March 3, 1998, the Company completed the sale of $335.0 million in
aggregate principal amount of 9% Senior Notes due March 15, 2008 (9% Senior
Notes). Proceeds from the sale net of discounts, underwriting commissions,
advisory fees and expenses totaled approximately $326.5 million. Interest
payments on the 9% Senior Notes are due semi-annually. The 9% Senior Notes are
redeemable at the option of the Company, in whole or in part, beginning March
15, 2003 at established redemption prices which decline to 100% of the stated
principal amount thereof by March 3, 2006. As of December 31, 1998, the fair
value of the 9% Senior Notes was approximately $301.7 million.
On October 1, 1997, the Company sold $400.0 million in aggregate
principal amount of 9 5/8% Senior Notes due October 1, 2007, which, after
deducting issue costs, resulted in net proceeds to the Company of $388.5
million. Interest payments on the 9 5/8% Senior Notes are due semi-annually. The
9 5/8% Senior Notes are redeemable at the option of the Company, in whole or in
part, at any time on or after October 1, 2002 at established redemption prices
which decline to 100% of the stated principal amount thereof by October 1, 2005.
As of December 31, 1998, the fair value of the 9 5/8% Senior Notes was
approximately $375.3 million.
On April 25, 1996, the Company completed the sale and issuance of
$350.0 million in principal amount of 12 1/2% Senior Notes due April 15, 2006.
The Company used $117.7 million of the gross proceeds to purchase U.S.
government securities, representing funds sufficient to provide for payment in
full of interest on the 12 1/2% Senior Notes through April 15, 1999 and used an
additional $32.2 million to repay advances and accrued interest from Eagle
River. In addition, the Company incurred costs of $9.8 million in connection
with the financing (including underwriter discounts and commissions). Interest
payments on the 12 1/2% Senior Notes are due semi-annually. The 12 1/2% Senior
Notes are redeemable at the option of the Company, in whole or in part, at any
time on or after April 15, 2001 at established redemption prices which decline
to 100% of the stated principal amount thereof by April 15, 2004. As of December
31, 1998, the fair value of the 12 1/2% Senior Notes was approximately $379.9
million.
The indentures pursuant to which the 10 3/4% Senior Notes, the 9%
Senior Notes, the 9.45% Notes, the 9 5/8% Senior Notes, and the 12 1/2% Senior
Notes (collectively referred to as the Notes) are issued contain certain
covenants that, among other things, limit the ability of the Company and its
subsidiaries to incur additional indebtedness, issue stock in subsidiaries, pay
dividends or make other distributions, repurchase equity interests or
subordinated indebtedness, engage in sale and leaseback transactions, create
certain liens, enter into certain transactions with affiliates, sell assets of
the Company and its subsidiaries, and enter into certain mergers and
consolidations. In addition, under the indenture pursuant to which the 10 3/4%,
Senior Notes were issued, the Company agreed to use the net proceeds from the
sale of the 10 3/4% Senior Notes for expenditures relating to the construction,
improvement and acquisition of new and existing networks and services and direct
and indirect investments in certain joint ventures to fund similar expenditures.
In the event of a change in control of the Company as defined in the
indentures, holders of the Notes will have the right to require the Company to
purchase their Notes, in whole or in part, at a price equal to 101% of the
stated principal amount thereof, plus accrued and unpaid interest, if any,
thereon to the date of purchase. The Notes are senior unsecured obligations of
the Company, and are subordinated to all current and future indebtedness of the
Company's subsidiaries, including trade payables.
7. REDEEMABLE PREFERRED STOCK
On March 31, 1998, the Company completed the sale of 4,000,000
shares of 6 1/2% cumulative convertible preferred stock (6 1/2% Preferred Stock)
with a liquidation preference of $50 per share. The sale generated gross
proceeds to the Company of $200.0 million, and proceeds net of underwriting
discounts, advisory fees and expenses of $193.8 million. Each share of 6 1/2%
Preferred Stock is convertible, at the option of the holder, into 1.145 shares
of the Company's Class A common stock (subject to adjustments in certain
circumstances). The Company may cause such conversion rights to expire if the
closing price of the Class A common stock exceeds 120% of an implied conversion
price (as defined) for 20 days in a 30 consecutive day trading period after
April 15, 2001 and through April 15, 2006. Dividends on the 6 1/2%
68
Preferred Stock accrue from March 31, 1998 and are payable in cash quarterly,
at an annual rate of 6 1/2% of the liquidation preference thereof. The Company
is required to redeem all of the 6 1/2% Preferred Stock outstanding on March
31, 2010 at a redemption price equal to 100% of the liquidation preference
thereof, plus accumulated and unpaid dividends to the date of redemption. As
of December 31, 1998, the fair value of the 6 1/2% Preferred Stock was
approximately $146.0 million.
On January 31, 1997, the Company completed the sale of 5.7
million units consisting of (i) 14% senior exchangeable redeemable preferred
shares (14% Preferred Shares), liquidation preference $50 per share, and (ii)
contingent warrants to acquire in the aggregate 5% of each class of outstanding
junior shares (as defined) of the Company on a fully diluted basis as of
February 1, 1998, which resulted in gross proceeds to the Company of $285.0
million, and proceeds net of underwriting discounts, advisory fees and expenses
of $274.0 million. The contingent warrants expired unused on October 31, 1997
(30 days after the Company's initial public offering of its Class A common
stock). Dividends on the 14% Preferred Shares accrue from January 31, 1997 and
are payable quarterly, at an annual rate of 14% of the liquidation preference
thereof. Dividends may be paid, at the Company's option, on any dividend payment
date occurring on or prior to February 1, 2002, either in cash or by issuing
additional 14% Preferred Shares with an aggregate liquidation preference equal
to the amount of such dividends. The Company is required to redeem all of the
14% Preferred Shares outstanding on February 1, 2009 at a redemption price equal
to 100% of the liquidation preference thereof, plus accumulated and unpaid
dividends to the date of redemption. As of December 31, 1998, the fair value of
the 14% Preferred Shares was approximately $340.1 million.
Subject to certain conditions, the 14% Preferred Shares are
exchangeable in whole, but not in part, at the option of the Company, on any
dividend payment date, for the 14% senior subordinated notes (Senior
Subordinated Notes) due February 1, 2009 of the Company. All terms and
conditions (other than interest, ranking and maturity) of the Senior
Subordinated Notes would be substantially the same as those of the Company's
outstanding 12 1/2% Senior Notes.
8. INCOME TAXES
Prior to January 31, 1997, the Company was organized and operated as a
limited liability company that was classified and taxed as a partnership for
federal and state income tax purposes. Effective February 1, 1997, the Company
became subject to federal and state income taxes directly as a C corporation,
which resulted in the Company recording a deferred tax liability and deferred
tax provision at that time.
Components of deferred tax assets and liabilities were as follows (in
thousands):
DECEMBER 31,
----------------------
1998 1997
--------- --------
Deferred tax assets:
Provisions not currently deductible....................... $ 3,004 $ 1,191
Property, equipment and other long term assets (net)..... 47,613 7,624
Net operating loss carryforwards.......................... 119,292 47,734
--------- --------
Total deferred tax assets................................... 169,909 56,549
Valuation allowance......................................... (148,953) (34,064)
--------- --------
20,956 22,485
Deferred tax liabilities:
Property, equipment and other long term assets (net)...... (19,513) (21,873)
Other..................................................... (1,443) (612)
--------- --------
Total deferred tax liabilities.............................. (20,956) (22,485)
--------- --------
Net deferred taxes.......................................... $ -- $ --
--------- --------
--------- --------
69
The net change in the valuation allowance for the years ended December
31, 1998 and 1997 was an increase of $114.9 million and $34.1 million,
respectively.
As of December 31, 1998, the Company had net operating loss
carryforwards of approximately $298.2 million, of which $119.3 million and
$178.9 million expire in 2012 and 2018, respectively.
A reconciliation of the Company's effective income tax rate and the
U.S. federal tax rate is as follows:
1998 1997
------ ------
Statutory rate..................................... 34.0% 34.0%
State income taxes, net of federal benefit......... 6.0% 6.0%
Conversion to C corporation........................ -- (1.9%)
Valuation allowance for deferred tax assets........ (40.0%) (26.2%)
Purchase acquisitions.............................. -- (11.9%)
------ ------
--% --%
------ ------
------ ------
9. SHAREHOLDERS' EQUITY (DEFICIT)
On October 1, 1997, the Company completed an initial public offering
(IPO) of 12,000,000 shares of Class A common stock at a price of $17 per share.
In addition, the underwriters of the IPO exercised an option to purchase
2,280,000 additional shares of Class A common stock at the same price per share.
Gross proceeds from the IPO totaled approximately $242.8 million, and proceeds
net of underwriting discounts, advisory fees and expenses aggregated
approximately $226.8 million.
On August 27, 1997, the Company effected a 0.441336-for-1 reverse stock
split of the issued and outstanding shares of Class A and Class B common stock.
All common stock, membership units, and per share amounts in the consolidated
financial statements have been adjusted retroactively to give effect to the
reverse stock split.
From January 31, 1997, the Company had two classes of common stock
outstanding, Class A common stock and Class B common stock. The Company's Class
A common stock and Class B common stock are identical in dividend and
liquidation rights, and vote together as a single class on all matters, except
as otherwise required by applicable law, with the Class A shareholders entitled
to cast one vote per share, and the Class B shareholders entitled to cast 10
votes per share.
On January 31, 1997, NEXTLINK Communications, L.L.C. was merged with
and into the Company in a tax-free transaction. In that merger, the Class A
membership interests of NEXTLINK Communications, L.L.C. were converted into
Class B common stock, options to acquire Class A membership interests were
converted into options to purchase Class B common stock, and options to purchase
Class B membership interests were converted into options to purchase Class A
common stock. In calculating the number of shares of the Company's Class B
common stock that each of the Class A members received in the merger, the
Company applied a formula that reflected each member's revalued capital account
balance as of January 31, 1997. Options to purchase Class B membership interests
were converted into the right to receive options to purchase shares of Class A
common stock on a one to one basis.
Prior to January 31, 1997, the Company's limited liability company
agreement provided for both Class A and Class B membership interests in the
Company. Class A Unit holders were entitled to a preferred return on their
investment in the Company plus a return of their capital upon the dissolution of
the Company. Class B Units were granted in connection with the Company's Amended
and Restated Equity Option Plan. Although Class B Units, when exercised,
constituted an ownership interest in the Company, the interest was limited to
the appreciation in the value of the Company, or the distributable profits
interest, if any, of the Company.
70
10. PRO FORMA NET LOSS PER SHARE
Shares used in the computation of net loss per share amounts were
calculated as follows:
1998 1997 1996
---------- ---------- ----------
Weighted average common shares outstanding............ 53,854,132 41,144,275 36,208,588
Nominal issuances during the 12 month period prior
to the Company's filing of its IPO, treated as if
outstanding for all periods presented................ -- 1,911,610 3,103,894
---------- ---------- ----------
Shares used in computation of net loss per share...... 53,854,132 43,055,885 39,312,482
---------- ---------- ----------
---------- ---------- ----------
11. STOCK OPTIONS
The Company maintains the NEXTLINK Communications, Inc. Stock Option
Plan (the Plan) to provide a performance incentive for certain officers,
employees and individuals or companies who provide services to the Company. The
Plan provides for the granting of qualified and non-qualified stock options. The
Company has reserved 9,854,696 shares of Class A common stock for issuance under
the Plan. The options become exercisable over vesting periods of up to four
years and expire no later than 10 years after the date of grant.
The exercise price of qualified stock options granted under the Plan
may not be less than the fair market value of the common shares on the date of
grant. The exercise price of non-qualified stock options granted under the Plan
may be greater or less than the fair market value of the common stock on the
date of grant, as determined at the discretion of the Board of Directors. Stock
options granted at prices below fair market value at the date of grant are
considered compensatory, and compensation expense is deferred and recognized
ratably over the option vesting period based on the excess of the fair market
value of the stock at the date of grant over the exercise price of the option.
Prior to February 1997, the Company maintained an Equity Option Plan,
which provided for the granting of equity option interests in the Company. These
option grants were considered compensatory and were accounted for similar to
stock appreciation rights. The Company recognized compensation expense over the
vesting periods based on the excess of the fair value of the equity option
interests, as determined by the Administrative Committee, over the exercise
price of the option interests. Such expense was periodically adjusted for
changes in the fair value of the equity interest units. The Equity Option Plan
was replaced by the Plan upon incorporation of the Company (see Note 9). All
options outstanding under the Equity Option Plan were regranted under the Plan
with terms and conditions substantially the same as under the Equity Option
Plan, except that option holders no longer have the option to require the
Company to repurchase units for cash upon exercise of such units, nor does the
Company have the option to repurchase exercised units for cash. The regranted
options also maintained their original expiration periods of 15 years after the
date of grant. In connection with the regranting of options under the new Plan,
the Company reclassified the deferred compensation liability relating to
compensatory options issued under the Equity Option Plan to common stock, stated
at amounts paid in. The remaining, unrecognized compensation expense
attributable to these compensatory options was also recorded as deferred
compensation, a contra-equity balance, and will be recognized over the remaining
vesting periods of the options.
The Company recorded approximately $4,993,000 and $2,335,000 of deferred
compensation expense related to the Plan for the years ended, December 31,
1998 and 1997, respectively. During 1997 and 1996, the Company recorded
approximately $892,000 and $9,914,000 of deferred compensation expense related
to the Equity Option Plan, respectively.
71
The Company has adopted the disclosure-only provisions of SFAS 123. Had
compensation costs been recognized based on the fair value at the date of grant
for options awarded under the Plan and the Equity Option Plan, the pro forma
amounts of the Company's net loss and net loss per share for the years ended
December 31, 1998, 1997 and 1996 would have been as follows (in thousands,
except per share amounts):
1998 1997 1996
--------- --------- --------
Net loss applicable to common shares - as reported...... $(337,113) $(168,324) $(71,101)
Net loss applicable to common shares - pro forma........ $(353,466) $(182,571) $(64,512)
Net loss per share - as reported........................ $ (6.26) $ (3.91) $ (1.81)
Net loss per share - pro forma.......................... $ (6.56) $ (4.24) $ (1.64)
The fair value of each option grant was estimated using the Black-Scholes
option-pricing model assuming no dividend yield and the following weighted
average assumptions:
1998 1997 1996
------- ------- -------
Expected volatility..................................... 70.0% 45.0% 45.0%
Risk free interest rate................................. 5.04% 6.11% 6.12%
Expected life (range in years).......................... 2.0-4.0 3.0-5.0 3.0-5.0
The weighted average fair value of options granted during 1998, 1997 and
1996 was $15.71, $5.94 and $6.87, respectively.
Information with respect to the Plan and the Equity Option Plan is as
follows:
WEIGHTED
AVERAGE
SHARES SUBJECT OPTION PRICE EXERCISE
TO OPTION RANGE PRICE
-------------- ------------- --------
Options outstanding at December 31, 1995..... 1,594,471 $0.02 $ 0.02
Granted.................................... 455,018 $0.02 - 7.93 $ 1.93
Canceled................................... (44,843) $0.02 $ 0.02
---------
Options outstanding at December 31, 1996..... 2,004,646 $0.02 - 7.93 $ 0.45
Granted.................................... 2,569,156 $7.93 - 26.50 $ 9.24
Canceled................................... (205,398) $0.02 - 21.31 $ 1.19
Exercised.................................. (672,878) $0.02 - 7.93 $ 0.18
---------
Options outstanding at December 31, 1997..... 3,695,526 $0.02 - 26.50 $ 6.45
Granted.................................... 7,714,430 $7.93 - 40.50 $27.83
Canceled................................... (796,805) $0.02 - 37.88 $16.22
Exercised.................................. (796,855) $0.02 - 32.13 $ 2.98
---------
Options outstanding at December 31, 1998..... 9,816,296 $0.02- 40.50 $22.74
---------
---------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------- -----------------------
WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF EXERCISE OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
----------------- ----------- ----------- -------- ----------- --------
$ 0.02 - $10.99 2,194,851 9.5 $ 5.93 604,499 $ 5.62
72
$11.00 - $24.99 3,989,371 9.3 $22.88 322,839 $22.01
$25.00 - $34.99 1,979,445 9.7 $29.90 29,912 $30.56
$35.00 - $40.50 1,652,629 9.6 $36.09 150,097 $36.07
At December 31, 1998, there were no shares of Class A common stock
available for future grants. The Board of Directors, however, had authorized
an increase of 6,000,000 in the number of shares that may be issued pursuant
to options under the Plan, subject to shareholder approval. The Company has
received a written consent approving the Board's action from a stockholder
that holds shares representing more than the minimum number of votes
necessary for such approval. The increase in authorized shares will be
effective following notification of the action to all stockholders pursuant
to Delaware law and SEC regulations.
12. EMPLOYEE STOCK PURCHASE PLAN
Effective July 1, 1998, the Company adopted the Employee Stock Purchase
Plan, or the Purchase Plan. Under the Purchase Plan, the Company has
authorized the issuance of 3,000,000 Class A common shares, which allows
eligible employees of the Company to purchase common shares of the Company at
85% of the simple average of the fair value of the common stock on the first
and the last trading day of each month. Employees who own 5% or more of the
voting rights of the Company's outstanding common shares may not participate
in the Purchase Plan. Employees purchased 55,967 shares of Class A Common
Stock under the Purchase Plan during 1998.
13. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Supplemental disclosure of the Company's cash flow information is as
follows (in thousands):
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- ------- -------
Noncash financing and investing activities were as follows:
Class A common stock issued in acquisitions and
under lease arrangement ............................... $ -- $17,924 $ --
Redeemable preferred stock dividends, paid in
redeemable preferred shares............................ $ 46,632 $31,102 $ --
Accrued redeemable preferred stock dividends,
payable in redeemable preferred shares, and
accretion of preferred stock redemption obligation..... $ 2,391 $ 8,218 $ --
Issuance of notes payable and assumption of
liabilities in acquisitions............................ $ -- $21,280 $ 8,228
Issuance of Class B common stock for purchase of
minority interest...................................... $ 5,727 $ -- $ --
Other long term obligations assumed..................... $ 10,139 $ 4,725 $ 1,377
Goodwill and members' equity recorded upon merger
of affiliates.......................................... $ -- $ -- $ 8,481
Exchange of minority interests for Class A units........ $ -- $ -- $ 2,667
Cash paid for interest.................................... $100,551 $44,865 $20,912
14. LEASES
The Company is leasing premises under various operating leases which,
in addition to rental payments, require payments for insurance, maintenance,
property taxes and other executory costs related to the leases. The lease
agreements have various expiration dates and renewal options through 2028.
73
Future minimum lease commitments required under operating leases that
have an initial or remaining noncancelable lease term in excess of one year at
December 31, 1998 were as follows (in thousands):
YEAR ENDING DECEMBER 31,
1999............................................ $ 16,202
2000............................................ 15,991
2001............................................ 15,910
2002............................................ 15,625
2003............................................ 12,930
Thereafter...................................... 71,844
--------
Total minimum lease commitments................. $148,502
--------
--------
Rent expense totaled approximately $13,335,000, $6,376,000 and
$2,248,000 in 1998, 1997 and 1996, respectively.
15. OPERATING SEGMENTS
REPORTABLE SEGMENTS
The Company has two reportable segments as defined by SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information": a
switched telecommunication services segment and an Interactive Voice
Response, or IVR, service segment. The switched telecommunications services
segment is the Company's largest segment and includes operations relating to
the Company's bundled local and long distance switched services, dedicated
services, and long distance services. These services have similar network
operations and technology requirements and are sold through identical sales
channels to a targeted customer base. Therefore, the Company manages these
services as a single segment that is divided into geographic profit centers,
or markets, within the United States. The Company's IVR services manages an
IVR platform that allows a consumer to dial into a computer-based system
using a toll-free number and a touch-tone phone and, by following a
customized menu, access a variety of information. Simultaneously, a profile
of the caller is left behind for either the Company's or its customers' use.
The Company manages its IVR operations as a separate segment due to
differences in technology requirements, sales and marketing strategy, and
targeted customer base.
The accounting policies followed by these segments are consistent with
those described in Note 2. There are no significant intersegment
transactions. The Company does not allocate overhead expenses generated by
its headquarters to individual segments.
The Company's IVR segment contributed the following percentages to the
Company's total:
DECEMBER 31,
---------------------------
1998 1997 1996
----- ----- -----
Revenue..................................... 15.4% 27.3% 51.7%
Net loss (excluding corporate overhead)..... .7% 3.6% 2.4%
Total assets................................ .8% 1.8% 4.5%
PRODUCTS AND SERVICES
The Company groups its products and services offered by its switched
telecommunications services segment into CLEC services, shared tenant
services, long distance telephone services and enhanced services. Revenues
from the IVR services segment are included in the enhanced services product
group. The revenues generated by the Company's products and services were as
follows (in thousands):
74
1998 1997 1996
-------- ------- -------
CLEC services.............................. $ 76,654 $20,342 $ 9,778
Shared tenant services..................... 12,781 2,018 --
Long distance telephone services........... 26,937 16,478 953
Enhanced services.......................... 23,295 18,741 14,955
-------- ------- -------
Total revenue.............................. $139,667 $57,579 $25,686
-------- ------- -------
-------- ------- -------
16. SELECTED QUARTERLY DATA (UNAUDITED)
Summarized quarterly financial information for the year was as follows
(in thousands, except per share amounts):
1998
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- ---------
Revenue..................................... $ 26,545 $ 32,030 $ 37,817 $ 43,275
Loss from operations........................ (40,769) (45,057) (53,074) (67,284)
Net loss.................................... (52,312) (60,573) (68,949) (96,506)
Net loss applicable to common shares........ (63,863) (75,901) (84,683) (112,666)
Net loss per share.......................... (1.19) (1.42) (1.57) (2.07)
1997
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
Revenue $ 10,067 $ 11,601 $ 13,390 $ 22,521
Loss from operations........................ (18,409) (21,013) (25,707) (37,492)
Net loss.................................... (24,423) (26,348) (31,585) (46,648)
Net loss applicable to common shares........ (31,226) (36,898) (42,383) (57,817)
Net loss per share.......................... (0.79) (0.94) (1.08) (1.09)
17. SUBSEQUENT EVENTS
ACQUISITIONS
In January 1999, the Company entered into an agreement to acquire WNP
Communications, Inc. (WNP) for approximately $695.0 million, payable in cash and
Class A common stock. Of this amount, approximately $152.9 million will be
paid to the FCC for license charges. The Company will receive WNP's 39 A block
LMDS wireless licenses covering 98 million POPs and one B block LMDS wireless
license covering 16 million POPs. The Company plans to use the licenses to
build fixed wireless extensions to its local fiber optic networks planned to
cover most major cities in the United States. The agreement is subject to
Federal regulatory approvals.
Also in January 1999, the Company announced an agreement in principle
to acquire Nextel's 50% interest in NEXTBAND for approximately $137.7 million.
NEXTBAND owns 13 A block LMDS licenses and 29 B block licenses.
STRATEGIC AGREEMENT
In January 1999, the Company entered into a strategic agreement with
Covad Communications Group, Inc. (Covad). Pursuant to this agreement, the
Company will become a preferred provider to Covad for local transport and
colocation services for Covad's regional data centers. The Company has also
invested $20.0 million in Covad under this agreement, and Covad will become the
Company's preferred provider of DSL services. Covad is a leading provider of
high-speed digital communications services using DSL technology.
75
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To NEXTLINK Capital, Inc.:
We have audited the accompanying balance sheets of NEXTLINK Capital, Inc.
(a Washington Corporation) as of December 31, 1998 and 1997. These balance
sheets are the responsibility of the Company's management. Our responsibility
is to express an opinion on these balance sheets based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheets are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheets. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the balance sheets referred to above present fairly, in
all material respects, the financial position of NEXTLINK Capital, Inc. as of
December 31, 1998 and 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Seattle, Washington,
February 22, 1999
76
NEXTLINK CAPITAL, INC.
BALANCE SHEETS
DECEMBER 31,
1998 1997
---- ----
ASSETS
Cash in bank......................................... $100 $100
---- ----
---- ----
SHAREHOLDER'S EQUITY
Common stock, no par value,
1,000 shares authorized, issued and outstanding..... $100 $100
---- ----
---- ----
77
NEXTLINK CAPITAL, INC.
NOTE TO BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
1. Description
NEXTLINK Capital, Inc. (NEXTLINK Capital) is a Washington
corporation and a wholly owned subsidiary of NEXTLINK Communications, Inc.
(NEXTLINK). NEXTLINK Capital was formed for the sole purpose of obtaining
financing from external sources and is a joint obligor on the 12 1/2% Senior
Notes due April 15, 2006 of NEXTLINK. NEXTLINK Capital was initially funded with
a $100 contribution from NEXTLINK and has had no operations to date. NEXTLINK
Capital's sole source and repayment for the 12 1/2% Senior Notes will be from
the operations of NEXTLINK. Therefore, these balance sheets should be read in
conjunction with the consolidated financial statements of NEXTLINK.
78
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrants have duly caused this report to be
signed on their behalf by the undersigned thereunto duly authorized.
NEXTLINK Communications, Inc.
Date: March 29, 1999 By: /s/ Steven W. Hooper
--------------------------------
Steven W. Hooper
Chief Executive Officer
Chairman of the Board of Directors
NEXTLINK Capital, Inc.
Date: March 29, 1999 By: /s/ Steven W. Hooper
--------------------------------
Steven W. Hooper
Chief Executive Officer
Chairman of the Board of Directors
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on March 29, 1999 by the following persons on
behalf of the Registrants and in the capacities indicated:
NAME TITLE
By: /s/ Steven W. Hooper Chief Executive Officer
---------------------------------------- (Principal Executive Officer)
Steven W. Hooper Chairman of the Board of Directors
By: /s/Kathleen H. Iskra Vice President
---------------------------------------- Chief Financial Officer
Kathleen H. Iskra (Principal Financial Officer and
Principal Accounting Officer)
By: /s/ Wayne M. Perry Vice Chairman of the Board
----------------------------------------
Wayne M. Perry
By: /s/ Craig O. McCaw Director
----------------------------------------
Craig O. McCaw
By: /s/ Dennis Weibling Director
----------------------------------------
Dennis Weibling
By: /s/ William A. Hoglund Director
----------------------------------------
William A. Hoglund
By: /s/ Sharon L. Nelson Director
----------------------------------------
Sharon L. Nelson
By: Director
----------------------------------------
Jeffrey S. Raikes
BY: /s/ Gregory J. Parker Director
----------------------------------------
Gregory J. Parker
BY: /s/ Nicolas Kauser Director
----------------------------------------
Nicolas Kauser
79