<PAGE> 1
Filed Pursuant to Rule 424B3
Registration File No.: 333-78459
[NEXTEL LOGO]
14% SENIOR DISCOUNT NOTES DUE 2009
SUPPLEMENT DATED SEPTEMBER 29, 1999
to Prospectus dated July 30, 1999
The accompanying prospectus dated July 30, 1999 (the
"Prospectus"), as supplemented hereby and by the additional information
delivered herewith, may be used by Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") in connection with offers and sales of the new notes in
market-making transactions effected from time to time. DLJ may act as a
principal or agent in such transactions, including as agent for the counterparty
when acting as principal or as agent for both counterparties, and may receive
compensation in the form of discounts and commissions, including from both
counterparties when it acts as agent for both. Such sales will be made at
prevailing market prices at the time of sale, at prices related thereto or at
negotiated prices. Nextel Partners will not receive any of the proceeds from
these transactions.
DLJ has advised us that, subject to applicable laws and
regulations, it currently intends to make a market in the new notes. However,
there is no existing trading market for the new notes and we cannot assure you
of the future development of a market for the new notes or the ability of the
holders of the new notes to sell their new notes or the price at which such
holders may be able to sell their new notes. If such market were to develop, the
new notes could trade at prices that may be higher or lower than their initial
offering price depending on many factors, including prevailing interest rates,
our operating results and the market for similar securities. Any such
market-making activity may be discontinued at any time, for any reason, without
notice at the sole discretion of DLJ. In addition, such market-making activity
will be subject to the limits imposed by the Securities Act of 1933, as amended
and the Securities Exchange Act of 1934.
DLJ Merchant Banking Partners II, L.P. ("DLJMB"), an affiliate
of DLJ, and certain of its affiliates beneficially own approximately 12.2% of
our common stock on a fully-diluted basis. Andrew H. Rush, a managing director
of DLJMB, is a member of our Board of Directors. DLJ Capital Funding, Inc., an
affiliate of DLJ, has received customary fees and reimbursement of expenses in
connection with the arrangement and syndication of our credit facility,
including the amendment thereto as of September 9, 1999, and will receive other
fees and reimbursements as a lender thereunder. DLJ has acted as our financial
advisor, as arranger under our credit facility and as an initial purchaser in
the offering of the old notes. The aggregate amount of fees paid to the DLJ
entities in connection with these transactions was approximately $15.7 million.
We may from time to time enter into other investment banking relationships with
DLJ or one of its affiliates for which DLJ or its affiliate will receive
customary fees and will be entitled and will be entitled to reimbursement of
reasonable disbursements and out-of-pocket expenses incurred in connection with
such services. See "Certain Relationships and Related Party Transactions" in the
Prospectus.
<PAGE> 2
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[ X ] QUARTERLY REPORT PUSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
[ ] TRANSITION REPORT PURUSANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER 333-78459
NEXTEL PARTNERS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 91-1930918
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4500 CARILLON POINT, KIRKLAND
WASHINGTON 98033,
(425) 828-1713
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL
REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES NO X .
---- ----
<PAGE> 3
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE NO.
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
As of June 30, 1999 and December 31, 1998 (unaudited) 3
Condensed Consolidated Statements of Operations
Three and six months ended June 30, 1999 and
1998 (unaudited) 4
Condensed Consolidated Statement
of Changes in Stockholder's Equity
Six months ended June 30, 1999 (unaudited) 5
Condensed Consolidated Statements of Cash Flows
Six months ended June 30, 1999 and 1998 (unaudited) 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
PART II OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities and Use of Proceeds 24
Item 6. Exhibits and Reports on Form 8-K 25
</TABLE>
2
<PAGE> 4
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
--------- ---------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 271,017 $ 16
Short term investments 19,996 --
Accounts receivable, net of allowance $396 and $254, respectively 3,589 1,546
Subscriber equipment inventory 1,010 1,353
Other current assets 3,563 325
Restricted cash 175,000 --
--------- ---------
Total current assets 474,175 3,240
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, net 129,795 107,948
OTHER NON-CURRENT ASSETS:
FCC operating licenses, net 137,092 133,180
Debt issuance costs and other assets 20,058 3,298
Receivable from officer 2,200 --
--------- ---------
Total non-current assets 159,350 136,478
--------- ---------
TOTAL ASSETS $ 763,320 $ 247,666
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 866 $ 1,043
Accrued expenses 12,909 4,554
Due to Nextel 14,865 3,398
--------- ---------
Total current liabilities 28,640 8,995
--------- ---------
LONG-TERM DEBT
Credit facility 175,000 --
14% Senior discount notes, due 2009 430,411 --
--------- ---------
Total long-term debt 605,411 --
--------- ---------
Total liabilities 634,051 8,995
--------- ---------
COMMITMENTS AND CONTINGENCIES (See Notes)
STOCKHOLDERS' EQUITY
Preferred stock, Series A convertible, par value $.001 per share, 17 --
17,479,971 shares issued and outstanding
Preferred stock, Series B redeemable or convertible to 2 --
Series C preferred stock 2010, par value $.001 per share, 12% cumulative
annual dividend; 2,185,000 shares issued and outstanding
Preferred stock, Series C convertible, par value $.001 per share, 9 --
8,740,000 shares issued and outstanding
Preferred stock, Series D convertible, par value at $.001 per share, 2 --
2,185,000 shares issued and outstanding
Common stock, Class A, par value $.001 per share, 1,588,888 shares 6,733 1,604
issued and outstanding, and paid-in capital
Warrants outstanding 3,847 --
Common stock, Class B, par value $.001 per share convertible -- --
Other paid-in capital 298,259 260,761
Accumulated deficit (59,435) (22,553)
Subscriptions receivable from stockholders (114,926) --
Deferred compensation (5,239) (1,141)
--------- ---------
Total stockholders' equity 129,269 238,671
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 763,320 $ 247,666
========= =========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
<PAGE> 5
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
For the three months ended For the six months ended
JUNE 30, JUNE 30,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Service revenues $ 5,797 $ 284 $ 9,290 $ 437
Equipment revenues 1,033 -- 1,844 --
-------- -------- -------- --------
Total revenues 6,830 284 11,134 437
-------- -------- -------- --------
OPERATING EXPENSES:
Cost of service revenues 3,964 766 7,070 1,067
Cost of equipment revenues 3,080 -- 4,798 --
Selling, general and administrative 7,200 1,546 12,431 2,259
Deferred compensation 390 -- 1,031 --
Depreciation and amortization 3,023 397 5,538 626
-------- -------- -------- --------
Total operating expenses 17,657 2,709 30,868 3,952
-------- -------- -------- --------
LOSS FROM OPERATIONS (10,827) (2,425) (19,734) (3,515)
Interest expense, net (14,507) -- (27,036) --
Interest income 5,875 -- 9,888 --
-------- -------- -------- --------
LOSS BEFORE INCOME TAX PROVISION (19,459) (2,425) (36,882) (3,515)
Income tax provision -- -- -- --
-------- -------- -------- --------
Net loss $(19,459) $ (2,425) $(36,882) $ (3,515)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
<PAGE> 6
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Class A
Common Stock and
Paid-In Capital Preferred Stock Other
-------------------------- -------------------------- Paid-In
Shares Amount Shares Amount Capital
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE
December 31, 1998 1,588,888 $ 1,604 -- $ -- $ 260,761
Issuance of Series A preferred stock -- -- 17,479,971 17 170,935
Issuance of warrants -- -- -- -- --
Subscriptions receivable from stockholders -- -- -- -- --
Reclass of other paid-in capital to Preferred -- -- -- -- --
Series B, C, and D -- -- -- -- (133,180)
Issuance of Series B preferred stock -- -- 2,185,000 2 21,848
Issuance of Series C preferred stock -- -- 8,740,000 9 89,055
Issuance of Series D preferred stock -- -- 2,185,000 2 22,264
Return of capital to Nextel -- -- -- -- (130,900)
Deferred compensation -- 5,129 -- -- --
Vesting of deferred compensation -- -- -- -- --
Net loss -- -- -- -- --
Equity issuance costs -- -- -- -- (2,524)
Motorola credit -- -- -- -- --
---------- ---------- ---------- ---------- ----------
BALANCE
June 30, 1999 (unaudited) 1,588,888 $ 6,733 30,589,971 $ 30 $ 298,259
========== ========== ========== ========== ==========
<CAPTION>
Warrants Subscriptions Accumulated Deferred
Outstanding Receivable Deficit Compensation Totals
----------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C>
BALANCE
December 31, 1998 $ -- $ -- $ (22,553) $ (1,141) $ 238,671
Issuance of Series A preferred stock -- -- -- -- 170,952
Issuance of warrants 3,847 -- -- -- 3,847
Subscriptions receivable from stockholders -- (122,655) -- -- (122,655)
Reclass of other paid-in capital to Preferred -- -- -- -- --
Series B, C, and D -- -- -- -- (133,180)
Issuance of Series B preferred stock -- -- -- -- 21,850
Issuance of Series C preferred stock -- -- -- -- 89,064
Issuance of Series D preferred stock -- -- -- -- 22,266
Return of capital to Nextel -- -- -- -- (130,900)
Deferred compensation -- -- -- (5,129) --
Vesting of deferred compensation -- -- -- 1,031 1,031
Net loss -- -- (36,882) -- (36,882)
Equity issuance costs -- -- -- -- (2,524)
Motorola credit -- 7,729 -- 0 7,729
---------- ---------- ---------- ---------- ----------
BALANCE
June 30, 1999 (unaudited) $ 3,847 $ (114,926) $ (59,435) $ (5,239) $ 129,269
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
<PAGE> 7
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNAUDITED
For the six-months ended
JUNE 30,
--------------------------
1999 1998
--------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (36,882) $ (3,515)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities
Depreciation and amortization 5,538 626
Amortization of debt issuance costs 892 --
Interest accretion for senior discount notes 24,035 --
Deferred compensation 1,031 --
Allowance for doubtful accounts 120 --
Change in current assets and liabilities:
Accounts receivable (2,163) (102)
Subscriber equipment inventory 343 --
Other current assets (3,245) (323)
Accounts payable and accrued expenses 11,476 998
Operating advances from Nextel 11,467 --
--------- ---------
Net cash provided by (used in) operating activities 12,612 (2,316)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan to officer (2,200) --
Capital expenditures (19,388) (80,483)
FCC licenses (4,184) --
Purchase of short term investments (19,996) --
--------- ---------
Net cash used in investing activities (45,768) (80,483)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Equity contributions from Nextel -- 82,799
Proceeds from borrowings 581,376 --
Restricted cash transfer (175,000) --
Proceeds from equity contributions 52,144 --
Return of capital to Nextel (130,900) --
Equity costs (2,524) --
Debt issuance costs (20,939) --
--------- ---------
Net cash provided by financing activities 304,157 82,799
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 271,001 --
CASH AND CASH EQUIVALENTS, beginning of period 16 --
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 271,017 $ --
========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
Contribution of FCC licenses from Nextel Communications, Inc. $ -- $ 133,380
========= =========
Equipment purchased from Motorola's equity contribution credit $ 7,729 $ --
========= =========
Cash paid for interest $ 4,758 $ --
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE> 8
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The interim financial statements as of and for the three-and six-month periods
ended June 30, 1999 and 1998 have been prepared without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. These consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes contained in our Form S-4 Registration Statement
filed May 14, 1999 as amended.
The financial information included herein reflects all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary to a fair presentation of the results of the interim periods. The
results of operations for the three- and six-month periods ended June 30, 1999
are not necessarily indicative of the results to be expected for the full year.
NOTE 2 -- FORMATION AND CAPITALIZATION
Formation
Nextel Partners, Inc., which together with its subsidiaries is referred to as
"Partners" or the "Company," was formed as a shell corporation on July 8, 1998,
solely to facilitate the Capitalization Transactions discussed below. From July
8, 1998 to January 29, 1999, the activities of Partners were solely focused on
this objective. These activities were funded by Nextel Communications, Inc.
through one of its subsidiary ("Nextel") and Eagle River Investments LLC ("Eagle
River") through intercompany advances amounting to $3.4 million at December 31,
1998, which were repaid by using proceeds from the Capitalization Transactions.
The only common stock issuance of the Partners shell entity in 1998 consisted of
issuance of restricted stock to key employees of the Partners shell entity as
part of its compensation plan and to Eagle River.
Prior to January 29, 1999, Nextel formed and began to operate the digital
wireless communication service business in upstate New York and Hawaii described
in Note 3, which is referred to as the Nextel Carve-Out. The unincorporated
operations of the Nextel Carve-Out constitute the Company's business and were
contributed to the Company in the Capitalization Transactions.
Capitalization Transactions
On January 29, 1999, Nextel contributed the Nextel Carve-Out to the Company in
exchange for 2,185,000 shares of Series B Preferred Stock, 8,740,000 shares of
Series C Preferred Stock, 2,185,000 shares of Series D Preferred Stock and cash
of $130.9 million. Simultaneously, the Company sold equity securities in a
private placement in the amount of $174.8 million and debt securities in the
aggregate principal amount at maturity of $800 million. The equity securities
sold consisted of 17,479,971 shares of Series A Preferred Stock (valued at
$170.9 million) and warrants to purchase 405,710 shares of Class A Common Stock
for an exercise price of $.001 per share (valued at $3.8 million). The equity
securities were sold in exchange for cash of $52.1 million, an irrevocable cash
equity commitment of $104.3 million to be received over the subsequent two-year
period, and a vendor credit from Motorola, Inc. ("Motorola") of $18.4 million
towards the purchase of infrastructure equipment. As of June 30, 1999 the
Company has used approximately $7.7 million of the vendor credit from Motorola
and expects to utilize the remaining amount before the end of 1999.
Some of the principal assets used in the Nextel Carve-Out are Federal
Communications Commission ("FCC") licenses. To effect the contribution of the
business of the Nextel Carve-Out to the Company, Nextel filed for approval with
the FCC to transfer to the Company all the rights to the use of and benefits of
these licenses. Pending receipt of FCC approval, the Company has the right to
use the frequencies pursuant to a frequency management agreement (the "Frequency
Management Agreement") between the Company and a wholly owned subsidiary of
Nextel. The Company expects to receive the FCC's approval of the transfer of the
FCC licenses during 1999. Upon receipt of FCC approval, the Management Agreement
will expire.
Basis of Presentation
In substance, the Capitalization Transactions constituted (1) the incorporation
of the Nextel Carve-Out, (2) the formal assumption by the Nextel Carve-Out of
Partners' liabilities, (3) a $130.9 million distribution to Nextel, and (4)
sales of Nextel Carve-Out
7
<PAGE> 9
securities to outsiders in exchange for cash and irrevocable commitments.
Accordingly, the accompanying financial statements reflect the accounts of the
Nextel Carve-Out at Nextel's historical cost basis for all periods presented.
These accounts include Nextel's cost basis in the FCC licenses discussed above,
as all of the rights to the use of and the benefits of ownership of the FCC
licenses were held by the Nextel Carve-Out prior to the Capitalization
Transactions. In the Capitalization Transactions, the rights to the use of and
the benefits of the FCC licenses were transferred to the Company through the
Frequency Management Agreement in exchange for the issuance of preferred stock
to Nextel for $133.2 million. Since the Frequency Management Agreement is
analogous to a capital lease, the cost basis of the FCC licenses continue to be
reflected in the Company's accounts in a manner similar to the accounting for a
capital lease under Statement of Financial Accounting Standards ("SFAS") No. 13
"Accounting for Leases." The accompanying financial statements also include the
accounts of Partners prior to the Capitalization Transactions, as Nextel funded
the operations of Partners and they were incurred for the benefit of the Nextel
Carve-Out, and Partners had no substance apart from the Nextel Carve-Out. The
distribution and sale of securities transactions have been reflected in the
accompanying financial statements on January 29, 1999.
Investments in Short Term Investments
Marketable debt securities and certificates of deposit with original purchase
maturities greater than three months are classified as Short term investments.
Marketable debt securities include corporate commercial paper, which the Company
holds to maturity. These held to maturity securities are valued on the Company's
balance sheet at amortized cost.
Restricted Cash
Restricted cash reflects the cash collateral account maintained under the credit
facility equal to the $175.0 million borrowings outstanding at June 30, 1999.
These funds will not be available until the FCC has approved the transfer of
control from Nextel to the Company of the licenses held by Nextel WIP License
Corp.
3. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
Description of Business
The Company provides a wide array of digital wireless communications services
throughout the United States, primarily to business users, utilizing frequencies
licensed by the FCC. Partners' operations are primarily conducted by Nextel
Partners Operating Corp. ("OPCO"), a wholly owned subsidiary of Partners.
Partners' digital network ("Digital Mobile Network") has been developed with
advanced mobile communication systems employing digital technology with a
multi-site configuration permitting frequency reuse utilizing digital technology
developed by Motorola (such technology is referred to as the "integrated Digital
Enhanced Network" or "iDEN"(Trademark)). Partners' principal business objective
is to offer high capacity, high quality, advanced communication services in its
territories throughout the United States targeted towards mid-sized and smaller
markets. Various operating agreements entered into by subsidiaries of the
Company and Nextel (See Note 5) provide for support services to be provided by
Nextel. Additionally, the Company plans to use Nextel's back-office systems
initially to support customer activation, billing and customer care as well as
other services during a transition period.
Capitalized Interest
The Company's wireless communications systems and FCC operating licenses
represent qualifying assets pursuant to SFAS No. 34, "Capitalization of Interest
Cost." The Company capitalized interest of approximately $5.9 million for the
six-month period ended June 30, 1999.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"), which establishes accounting and reporting standards for derivative
instruments and for hedging activities by requiring that all derivatives be
recognized in the balance sheet and measured at fair value. SFAS No. 137, issued
August 1999, postpones for one year our mandatory effective date for SFAS No.
133 to January 1, 2001. The Company is still evaluating the effects of the
change in financial position or results of operations for SFAS No. 133.
8
<PAGE> 10
4. LONG-TERM DEBT (IN THOUSANDS):
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER
JUNE 30, 1999 31, 1998
------------- --------------
<S> <C> <C>
14% Senior Redeemable Discount Notes 2009, net of unamortized discount of $383.8
million $430,411 $ --
Bank Credit Facility, interest at Company's option, calculated on Administrative
Agent's alternate base rate or reserve adjusted London Interbank Offered Rate
("LIBOR") 175,000 --
-------- --------
Total Long-term Debt $605,411 $ --
======== ========
</TABLE>
Senior Redeemable Discount Notes
On January 29, 1999, the Company completed the issuance of Senior Redeemable
Discount Notes due 2009 (the "Notes"). The aggregate accreted value of the Notes
will increase from $406.4 million at issuance at a rate of 14%, compounded
semi-annually to a final accreted value equal to a principal amount at maturity
of $800 million. Thereafter, the Notes bear interest at a rate of 14% per annum
payable semi-annually in arrears.
The Notes represent senior unsecured obligations of the Company, and rank
equally in right of payment to all existing and future senior unsecured
indebtedness of the Company and senior in right of payment to all existing and
future subordinated indebtedness of the Company. The Notes are effectively
subordinated to (i) all secured obligations of the Company, including borrowings
under the bank credit facility, to the extent of assets securing such
obligations and (ii) all indebtedness including borrowings under the bank credit
facility and trade payables of OPCO.
The indenture contains certain covenants that limit, among other things, the
ability of the Company to: (i) pay dividends, redeem capital stock or make
certain other restricted payments or investments, (ii) incur additional
indebtedness or issue preferred equity interests, (iii) merge, consolidate or
sell all or substantially of its assets, (iv) create liens on assets, and (v)
enter into certain transactions with affiliates or related persons. As of June
30, 1999, the Company was in compliance with applicable covenants.
The Notes are redeemable at the option of the Company, in whole or in part, any
time on or after February 1, 2004 in cash at the redemption price on that date,
plus accrued and unpaid interest and liquidated damages if any, at the date of
liquidation. In addition, prior to February 1, 2002, the Company may on one or
more occasions redeem up to 35% of the aggregate principal amount at maturity of
Notes originally issued at a redemption price equal to 114% of the accreted
value at that date, plus accrued and unpaid interest and liquidated damages if
any, with the net cash proceeds of one or more public equity offerings; provided
that at least 65% of the aggregate principal amount at maturity of Notes
originally issued remain outstanding immediately after the occurrence of such
redemption.
Bank Credit Facility
On January 29, 1999, the Company, through OPCO, entered into a credit facility
(the "Facility") with a syndicate of banks and other financial institutions led
by Donaldson, Lufkin and Jenrette Securities Corporation, as arranger ("DLJSC"),
and DLJ Capital Funding, Inc., as syndication agent ("DLJ Capital"). The
Facility includes a $175 million term loan facility and initially, a $100
million revolving credit facility. The term loan facility has a maturity of nine
years. The revolving credit facility terminates eight years from the initial
funding of the Facility.
The Facility bears interest, at the option of the Company, at the Administrative
Agent's alternate base rate or reserve-adjusted LIBOR plus, in each case,
applicable margins. The applicable margin for the term loan facility is 4.75%
over LIBOR and 3.75% over the base rate. For the revolving credit facility, the
initial applicable margin is 4.25% over LIBOR and 3.25% over the base rate until
consolidated EBITDA as adjusted is positive at which time the applicable margin
will be initially 4.0% over LIBOR and 3.0% over the base rate and thereafter
will be determined on the basis of the ratio of total debt to annualized EBITDA
as adjusted and will range between 2.25% and 3.75% over LIBOR and between 1.25%
and 2.75% over the base rate.
The Company pays a commitment fee calculated at a rate equal to 2.00% per annum,
calculated on the daily average unused commitment under the revolving credit
facility (whether or not then available). Such fee will be payable quarterly in
arrears. The commitment fee is subject to reduction based on utilization of the
revolving credit facility.
9
<PAGE> 11
Prior to the date on which the Company's portion of the Digital Mobile Network
is substantially complete and operations and services are offered to customers
over a minimum coverage area, loans under the revolving credit facility will be
made subject to satisfaction of certain financial covenants and certain
build-out covenants.
The term loan facility is subject to mandatory prepayment: (i) with 100% of the
net cash proceeds from the issuance of debt, subject to certain exceptions, (ii)
with 100% of net cash proceeds of asset sales, subject to certain exceptions,
(iii) with 50% of the Company's excess cash flow (as defined), and (iv) with 50%
of the net cash proceeds from the issuance of equity.
The Company's obligations under the Facility are secured by a first-priority
perfected lien on all property and assets, tangible and intangible, of the
Company's subsidiaries including a pledge of the capital stock of all the
Company's subsidiaries. The Company and its subsidiaries guarantee the
obligations of OPCO under the Facility. Such guarantee will only be recourse to
the Company's pledge of all of the outstanding capital stock of the Company's
subsidiaries to secure the obligations of the Company under the Facility.
The Facility contains covenants and restrictions on the ability of the Company
to engage in certain activities, including but not limited to: (i) limitations
on the incidence of liens and indebtedness, (ii) restrictions on sale lease-back
transactions, consolidations, mergers, sale of assets, capital expenditures,
transactions with affiliates and investments, and (iii) severe restrictions on
dividends, and other similar distributions.
Additionally, the Facility also contains financial covenants requiring the
Company to maintain (i) certain defined ratios of senior debt and total debt to
EBITDA (net loss before interest expense, interest income, depreciation,
amortization and deferred compensation expense) as adjusted, (ii) a minimum
interest coverage ratio, (iii) a minimum fixed charge coverage ratio, (iv) a
maximum leverage ratio, and (v) minimum service revenues, subscriber units and
covered population equivalents. As of June 30, 1999, the Company was in
compliance with all of its required covenants.
5. RELATED PARTY TRANSACTIONS:
Motorola Purchase Agreements
Pursuant to the equipment purchase agreements between Partners and Motorola
dated January 29, 1999 (the "Equipment Purchase Agreements"), and prior to the
Capitalization Transactions, the purchase agreements between Nextel and
Motorola, Motorola provided the iDEN infrastructure and subscriber handset
equipment to Partners throughout its markets. The Company expects to rely on
Motorola for the manufacture of a substantial portion of the equipment necessary
to construct its Digital Mobile Network and handset equipment for the
foreseeable future. The Equipment Purchase Agreements govern Partners' rights
and obligations regarding purchases of system infrastructure equipment
manufactured by Motorola and others.
For the six month period ended June 30, 1999 and the year ended December 31,
1998, the Company purchased approximately $7.7 million and $47.5 million,
respectively, of infrastructure and other equipment, handsets, warranties and
services from Motorola.
The Joint Venture Agreement
The Company, OPCO and a wholly owned subsidiary of Nextel ("Nextel Sub") entered
into a joint venture agreement (the "Joint Venture Agreement") dated January 29,
1999. Summarized below are several of the important terms of the Joint Venture
Agreement.
MIS Services - Nextel provides the Company access to identified information
systems platforms on an ongoing basis, as more fully described in the Joint
Venture Agreement. The Company pays to Nextel a fee, based on Nextel's cost, for
these services. For the six-month period ended June 30, 1999, the Company was
charged approximately $146,000 for these services.
Roaming Agreement - Pursuant to a roaming agreement (the "Roaming Agreement")
entered into between Nextel Sub and OPCO, Nextel Sub and OPCO provide ESMR
service to subscribers of the other (in either case, the "Home Service
Provider") while such subscribers are out of the Home Service Provider's
territory and roaming in the territory of the other (in either case, the "Remote
Service Provider"). Under the Roaming Agreement, each Home Service Provider is
responsible for billing its own subscribers and designated users for roaming
usage in accordance with its own subscriber plans and service agreements. The
Roaming Agreement provides that each party pays the other's monthly roaming fees
in an amount based on the actual system minutes generated by the respective
subscribers of each Home Service Provider operating as authorized roamers in the
Remote Service Provider's territory. For the six month period ended June 30,
1999 the Company earned approximately $3.1 million from Nextel customers roaming
on the Company's system and was charged approximately $344,000 for the Company's
customers roaming on Nextel's system.
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Master Site Lease Agreement - OPCO leases from Nextel Sub, under a master site
lease agreement entered into between them (the "Master Site Lease"), space on
telecommunications towers and other sites, which are owned or leased by
affiliates of Nextel Sub in the Territory. Pursuant to the Master Site Lease, as
the network build-out progresses, additional sites may become subject to the
Master Site Lease. OPCO pays Nextel Sub monthly rental payments based on the
number of telecommunication tower sites leased by OPCO. For the six-month period
ended June 30, 1999 the Company was charged approximately $236,000 by Nextel
under these arrangements.
Transition Services Agreement - Nextel Sub, through its affiliates, provides
services to OPCO for a limited period under a transition services agreement
entered into between OPCO and Nextel Sub (the "Transition Services Agreement").
Under the Transition Services Agreement, accounting, payroll, customer care,
purchasing, human resources, billing and other such functions are made available
to OPCO. In return for the service received through Nextel Sub, OPCO pays
monthly fees to Nextel based on Nextel's cost. For the six-month period ended
June 30, 1999, the Company was charged approximately $1,019,000 for these
services.
Switch Sharing Agreement - Nextel, through its affiliates, provides
telecommunications switching services to OPCO pursuant to a switch sharing
agreement entered into between Nextel Sub and OPCO (the "Switch Sharing
Agreement"). The Switch Sharing Agreement permits OPCO to link cell sites to and
electronically access switching equipment used and maintained by affiliates of
Nextel in the operation of Nextel's Digital Mobile Network, which facilitates
OPCO provision of ESMR service to the Company's subscribers. Under the Switch
Sharing Agreement, OPCO pays Nextel Sub monthly switching fees based on a
pricing formula agreed to by the parties based on Nextel's cost of providing
such services in the year 2001. For the six-month period ended June 30, 1999,
the Company was charged approximately $865,000 for these services.
Payable to Nextel
Prior to the Capitalization Transactions discussed in Note 2, the Company had
limited financial resources. As a result, to fund the operations of the Company
prior to the Capitalization Transactions, Nextel and Eagle River advanced the
Company $3.4 million (as of December 31, 1998) to cover its costs during the
period. These advances did not bear interest and were repaid in majority on
January 29, 1999. As of June 30, 1999 the Company owed Nextel $14.9 million
under the same terms discussed above.
6. SUBSEQUENT EVENTS
On September 9, 1999 the Company exercised its option provided in the Joint
Venture Agreement with Nextel to acquire "Optional Territories." The funding for
the capital expenditures related to the build-out, operating losses and working
capital associated with the Option Territories will consist of $150.0 million of
a new Term C Loan Facility, $46.4 million of cash equity commitments, $3.6
million of equity commitment from Motorola in the form of equipment credit and a
contribution from Nextel of certain Specialized Mobile Radio ("SMR") frequencies
licensed to Nextel, subject to FCC approval, valued approximately at $8.9
million.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Some statements and information contained in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations" are
not historical facts, but are forward-looking statements. They can be identified
by the use of forward-looking words such as "believes", "expects", "intends",
"plans", "may", "will", "would", "could", "should" or "anticipates" or the
negative 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:
- - our business plan, its advantages and our strategy for implementing our
plan and meeting our scheduled build-out for commercial launch of our
portion of the Digital Mobile Network;
- - general economic conditions in the geographic areas and occupational
markets that represent our portion of the Digital Mobile Network;
- - the availability of adequate quantities of system infrastructure and
subscriber equipment and components to meet service deployment and
marketing plans and customer demand;
- - the ability to achieve market penetration and average subscriber
revenue levels sufficient to provide financial viability to our digital
mobile network business;
- - our expectation regarding the continued successful performance and
market acceptance of the technology we use;
- - our ability to attract and retain sufficient customers; and
- - our anticipated capital expenditures, funding and levels of debt and
our expectations regarding additional debt, including our ability to
access sufficient debt or equity capital to meet our operating and
financing needs.
We warn you that these forward-looking statements are only predictions,
subject to risks and uncertainties, including financial, regulatory environment,
industry growth and trend predictions. Actual events or results may differ
materially. For more discussion of important factors that could cause results to
differ materially from the forward-looking statements see "Risk Factors."
Please read the following discussion of our condensed consolidated
financial condition and results of operations for the three- and six-month
periods ended June 30, 1999 and 1998 together with our registration statement on
Form S-4 under the Securities Act of 1933 (No. 333-78459) filed on May 14, 1999,
as amended.
Our historical results discussed in this section and throughout this
Form 10-Q include the Nextel operations we assumed as part of our initial
capitalization, which occurred on January 29, 1999. See Note 2 of our Notes to
Condensed Consolidated Financial Statements contained elsewhere in this report.
OVERVIEW
In our territories, we are the only service provider licensed to use
the Nextel brand name and market Nextel digital wireless communication service
based on technology developed by Motorola. By the end of year 2001, we plan to
provide service to 39 mid-sized and smaller markets throughout the United
States, where we estimate that approximately 33 million people live or work. Our
initial target market is business users, and we offer or plan to offer them a
differentiated, integrated package of digital wireless communication services.
We currently operate five markets in Hawaii and upstate New York where
4.5 million people live or work. Our upstate New York and Hawaii markets
launched commercial service in July and September of 1998, respectively. We will
launch service in four additional markets (Erie, PA, Waco/Temple-Killeen, TX,
Glens Falls, NY and Binghamton/Elmira, NY) by the end of 1999, covering a
population of approximately 1.5 million.
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At June 30, 1999, we provided service to approximately 25,000
subscriber units, all from our Hawaii and upstate New York markets. These
markets added 9,630 subscriber units during the quarter and 14,813 subscriber
units for the six-month period ended June 30, 1999.
As we expect to launch four new markets for service during the second
half of 1999 and as we continue to develop, build-out and enhance our
Digital Mobile Network, we expect to continue to experience negative operating
margins. In addition, we anticipate costs such as site rentals,
telecommunications expenses, system and other capital items to increase. Sales
and marketing expenses and general and administrative costs are also expected to
increase with the commercialization of service in four additional markets.
Over the past few years the wireless industry has experienced a decline
in prices generally as a result of competition from other wireless providers,
including new entrants into the market. In contrast, as reported in its
quarterly reports, Nextel's monthly average revenue per unit has increased over
the past few years and remains above the industry average. We cannot assure you
that our results will duplicate Nextel's since we set our prices independently
and our markets are distinct from Nextel's.
Recently, service plans offering large blocks of minutes of airtime
have been introduced by wireless service providers as a means to gain market
share from established cellular carriers with relative coverage advantages.
These packages have increased subscriber usage in the industry, while slowing
the rate of decline in average revenue per unit during 1998.
Our agreements with Nextel permit us to establish our own local pricing
in our markets. However, we must provide national customers who have a national
rate with Nextel the same rates as they receive in Nextel's markets. In
addition, our pricing must conform to guidelines that ensure that our pricing
structure is consistent with Nextel's national marketing strategy.
RECENT DEVELOPMENTS
We exercised our option on September 9, 1999 in the Joint Venture
Agreement with Nextel to acquire from Nextel selected markets referred to as
"Option Territories." We expect to complete the planned network build-out of
these territories by end of the second quarter of 2001. The funding for the
increased capital expenditures related to the build-out, operating losses and
working capital of the Option Territories will consist of $150.0 million of a
new Term C Loan Facility, $46.4 million of cash equity commitments, $3.6 million
credit by Motorola for future purchases of infrastructure equipment in exchange
for equity and a contribution from Nextel of certain Specialized Mobile Radio
("SMR") frequencies licensed by Nextel, subject to FCC approval, valued at
approximately $8.9 million.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1998
REVENUES
Our primary sources of revenues are service and equipment sales
revenues. Our service revenues consist of charges for airtime usage, and monthly
network access fees from providing integrated wireless services within our
territory, particularly mobile telephone and two-way radio dispatch services.
Service revenues also include roaming revenues related to Nextel's customers
using our portion of the digital Mobile Network. The service revenues are the
product of the number of customers that subscribe to our service and our monthly
average revenue per unit. Average revenue per unit is an industry measure of
total service revenue from subscribers divided by the average number of digital
subscriber units generally equal to in service.
REVENUES
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR AVERAGE REVENUE PER UNIT)
<TABLE>
<CAPTION>
FOR THE THREE FOR THE THREE
MONTHS ENDED % OF CONSOLIDATED MONTHS ENDED % OF CONSOLIDATED
JUNE 30, 1999 REVENUES JUNE 30, 1998 REVENUES
------------- -------- ----------- --------
<S> <C> <C> <C> <C>
Service and Roaming Revenues $5,797 85% $ 284 100%
Equipment Sales Revenues 1,033 15% -- 0%
------ ------ ------ ------
Total Revenues $6,830 100% $ 284 100%
====== ====== ====== ======
Average Service Revenue per Unit $ 62
======
</TABLE>
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The service and equipment sales revenues for the three months ended
June 30, 1999 were primarily generated from our upstate New York and Hawaii
markets, which became operational July and September 1998, respectively. Since
these markets were launched after June 30, 1998, the revenues for the
three-month period ended June 30, 1998 related to Nextel's customers using our
portion of the Digital Mobile Network. The average service revenue per unit was
not calculated for the three-month period ended June 30, 1998 since the service
was not operational for subscribers in the upstate New York and Hawaii markets.
COST OF SERVICE REVENUES
The network expenses included in the cost of service revenues are site
rent, utilities, maintenance, engineering personnel and interconnect charges.
Network expenses depend primarily on the number of cell sites, total minutes of
use and mix of minutes of use between interconnect and Nextel Direct Connect
services. For the three-month period ended June 30, 1999 our network costs were
$4.0 million incurred primarily from the Hawaii and upstate New York markets.
These markets were not operational during the same period ended June 30, 1998,
thus the network costs of $800,000 during such period were generated primarily
from the roaming by Nextel customers on our portion of the Digital Mobile
Network.
COST OF EQUIPMENT REVENUES
The cost of the subscriber handsets and accessories sold during the
three-month period ended June 30, 1999 were $3.1 million. As part of our
business plan, we often offer our equipment at a discount or as part of a
promotion. As a result, the loss on equipment was $2.0 million for the same
three-month period ended June 30, 1999. We expect to continue to employ these
discounts and promotions, because we believe that the use of such promotions
will result in increased revenue as the number of our subscribers grows. For the
same period ended June 30, 1998, our markets were not operational, thus no
subscriber handsets and accessories were sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses consist of sales and
marketing expenses, and general and administrative costs. Sales and marketing
expenses relate to sales representatives, sales support personnel, indirect
distribution channels, marketing and advertising programs. We anticipate that
our cost per gross additional customer will be relatively high during our first
several years of operation, but to decline as sales representatives become more
efficient, we expand our indirect distribution channels and the cost of our
sales infrastructure is distributed over a greater base of customer additions.
General and administrative costs relate to corporate overhead personnel
including tax, legal, planning, human resources, treasury and accounting
functions. While we have directly hired key personnel in such areas, the
three-month period has been part of a transition period during which Nextel has
made accounting, payroll, customer care, purchasing, human resources and billing
functions available to us. In return for these services during the transition
period, we pay monthly fees based on Nextel's cost of providing them. For the
three-month period ended June 30, 1999, we paid Nextel $362,000 for the
transition services.
We have entered into agreements for back-office systems services to
support customer activation, billing and customer care with vendors who have
experience providing these services to Nextel, and we are currently negotiating
agreements with vendors for other services.
For the three-month period ended June 30, 1999, our selling, general
and administrative expenses were $7.2 million. These expenses were incurred
primarily from the upstate New York and Hawaii markets, which launched
commercial service July and September, 1998, respectively, and administrative
costs relating to hiring and setting up functional departments and offices.
Selling, general and administrative expenses for the three-month period ended
June 30, 1998 were $1.5 million. These costs related primarily to the pre-launch
activities for the upstate New York and Hawaii markets and administrative
start-up costs for Nextel Partners.
DEFERRED COMPENSATION EXPENSE
We recorded deferred compensation expense associated with our
restricted stock purchase plan of $0.4 million for the three-month period ended
June 30, 1999. This plan was initiated July 8, 1998, thus no expense was
recorded for the same period ended June 30, 1998. The plan is considered
compensatory and we account for its deferred compensation expenses on a basis
similar to that used for stock appreciation rights.
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<PAGE> 16
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expenses were $3.0 million and $400,000
for the three-month periods ended June 30, 1999 and 1998, respectively. . The
increase of $2.6 million relates primarily to launching the Hawaii and upstate
New York markets and starting the amortization of our FCC licensed radio
spectrum and depreciation on our wireless fixed asset network.
NET LOSS
For the three- month period ended June 30, 1999 we reported a net loss
of approximately $19.5 million. Compared to the same period for 1998, the loss
for the three-months increased $17.1 million from $2.4 million due largely to
launching the upstate New York and Hawaii markets July and September, 1998,
respectively, and our general and administrative expenses for transition
services from Nextel.
Increased expenses in all categories of expense occurred as we began
ramping up our operations in anticipation of additional markets becoming
operational, as well as the increase in costs associated with the Hawaii and
upstate New York markets which became operational in the second half of 1998. We
anticipate reporting net losses for the foreseeable future.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1998
REVENUES
REVENUES
(DOLLAR AMOUNT IN THOUSANDS, EXCEPT FOR AVERAGE REVENUE PER UNIT)
<TABLE>
<CAPTION>
FOR THE SIX
FOR THE SIX MONTHS
MONTHS ENDED % OF CONSOLIDATED ENDED % OF CONSOLIDATED
JUNE 30, 1999 REVENUES JUNE 30, 1998 REVENUES
------------- -------- ------------- --------
<S> <C> <C> <C> <C>
Service and Roaming Revenues $ 9,290 83% $ 437 100%
Equipment Sales Revenues 1,844 17% 0%
------- ------- ------- -------
Total Revenues $11,134 100% $ 437 100%
======= ======= ======= =======
Average Service Revenue per Unit $ 63
=======
</TABLE>
The service and equipment sales revenues for the six months ended June
30, 1999 were primarily generated from our upstate New York and Hawaii markets,
which became operational July and September 1998, respectively. Since these
markets were launched after June 30, 1998, the revenues for the six-month period
ended June 30, 1998 related to the use by Nextel customers of our portion of the
Digital Mobile Network. The average service revenue per unit was not calculated
for the six-month period ended June 30, 1998 since the service was not
operational for subscribers in the upstate New York and Hawaii markets.
COST OF SERVICE REVENUES
For the six-month period ended June 30, 1999 our network costs were
$7.1 million incurred primarily from Hawaii and upstate New York markets. These
markets were not operational during the same period ended June 30, 1998; thus
the network costs of $1.1 million were generated primarily from Nextel's
customers roaming on our portion of the Digital Mobile Network.
COST OF EQUIPMENT REVENUES.
The cost of the subscriber handsets and accessories sold during the
six-month period ended June 30, 1999 were $4.8 million. As part of our business
plan, we often offer our equipment at a discount or as part of a promotion. As a
result, the loss on equipment was $3.0 million for the same six-month period
ended June 30, 1999. We expect to continue to employ these discounts and
promotions, because we believe that the use of such promotions will result in
increased revenue as the number of our subscribers grows. For the same period
ended June 30, 1998 our upstate New York and Hawaii markets were not launched
for service, thus no subscriber handsets and accessories were sold.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
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<PAGE> 17
General and administrative costs relate to corporate overhead personnel
including tax, legal, planning, human resources, treasury and accounting
functions. While we have directly hired key personnel in such areas, the
six-month period has been a transition period which Nextel has made certain
accounting, payroll, customer care, purchasing, human resources and billing
functions available to us. In return for these services during the transition
period, we pay monthly fees based on Nextel's cost of providing them. For the
six-month period ended June 30, 1999 we paid Nextel $541,000 for transition
services.
For the six-month period ended June 30, 1999, our selling, general and
administrative expenses were $12.4 million. These expenses were incurred
primarily from the upstate New York and Hawaii markets, which launched
commercial service during third quarter of 1998, and administrative costs
relating to hiring and setting up functional departments and offices. Selling,
general and administrative expenses for the six-month period ended June 30, 1998
were $2.3 million. These costs related primarily to the pre-launch activities
for the upstate New York and Hawaii markets and administrative start-up costs
for Nextel Partners.
DEFERRED COMPENSATION EXPENSE
We recorded deferred compensation expense associated with our
restricted stock purchase plan of $1.0 million, for the six-month period ended
June 30, 1999. This plan was issued on July 8, 1998; thus no deferred
compensation expense was recorded for the six-month period. The plan is
considered compensatory and we account for its deferred compensation expenses on
a basis similar to that used for stock appreciation rights.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expenses were $5.5 million for the
six-month period ended June 30, 1999. Compared to the same period in 1998, this
was an increase of $4.9 million. The increase relates primarily to launching the
Hawaii and upstate New York markets and starting the amortization of our FCC
licensed radio spectrum and depreciation on our wireless fixed asset network.
NET LOSS
For the six-month period ended June 30, 1999 we reported a net loss of
approximately $36.9 million. Compared to the same period for 1998, the loss
increased $33.4 million from $3.5 million for the six-month period. Increased
expenses in all categories of expense occurred as we began ramping up our
operations in anticipation of additional markets becoming operational, as well
as the increase in costs associated with the Hawaii and upstate New York
markets, which became operational in the second half of 1998. We anticipate
reporting net losses for the foreseeable future.
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs arise from the capital requirements
necessary to complete the initial build-out of our portion of the Digital Mobile
Network. Currently, we estimate that capital requirements to build our initial
systems in our portion of the Digital Mobile Network, including operating losses
and working capital for the period from inception through the end of 2003, when
we expect to achieve positive Earnings Before Interest Taxes Depreciation and
Amortization ("EBITDA") as adjusted for a full fiscal year, will total
approximately $989.4 million, including the in-kind contributions by Nextel and
Motorola in exchange for equity interests in Nextel Partners. We expect capital
expenditures to include, among other things, switches, base radios, transmission
towers, antennae, radio frequency engineering and cell site construction. We
estimate capital expenditures for 1999 will total approximately $180.0 million.
This estimate excludes approximately $116.0 million of reimbursements paid to
Nextel on January 29, 1999.
The capital expenditure reimbursement paid to Nextel in January 1999
was for purchases of existing network equipment and capitalized expenses
incurred by Nextel on our behalf in certain markets including upstate New York
and Hawaii. Actual amounts of capital required to complete our portion of the
initial build-out may vary materially from these estimates. For the six- month
period ended June 30, 1999, our capital expenditures were approximately $27.1
million (including $7.7 million from the Motorola vendor credit), spent
primarily to begin the build-out of the Digital Mobile Network in the upstate
New York, Hawaii, Pennsylvania, Kentucky and Texas markets. The capital
expenditures for the six-month period ended June 30, 1999 was $53.4 million less
than the same period for 1998 due to the construction for the initial launch of
the update New York and Hawaii markets.
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EQUIPMENT AND OPERATING AGREEMENTS
In connection with our build-out, we have entered into agreements with
Motorola to purchase necessary infrastructure equipment and other related
software and services to implement the Motorola technology we use as well as
subscriber handset units and other accessories. In addition, in connection with
the capitalization transactions, Motorola contributed to us an $18.4 million
credit against future purchases in exchange for shares of our preferred stock.
As of June 30, 1999, we used approximately $7.7 million of the credit from
Motorola and expect to use the remainder of the credit by the end of the year.
SOURCES OF FUNDS
Our primary sources of funding are the proceeds from the cash equity
contributions and commitments, the offering of the old notes and the credit
facility, which we received on January 29, 1999. Concurrently, we also received:
(1) the contribution by Nextel of FCC licenses to Nextel WIP License
Corp., and the grant of the right to use these licenses and Nextel's agreement
to transfer the stock of Nextel WIP License Corp. to us, all in exchange for our
redeemable preferred stock and convertible preferred stock, and
(2) the contribution by Motorola of an $18.4 million credit to use
against our future purchases of Motorola manufactured infrastructure equipment
in exchange for our convertible preferred stock.
The cash equity contributions consist of irrevocable commitments of an
aggregate of $156.4 million of cash in exchange for equity in the form of
convertible preferred stock. Our cash equity investors contributed $52.1 million
on January 29, 1999, with an additional $52.1 million to be funded no later than
December 31, 1999 and the remaining $52.1 million to be funded no later than
December 31, 2000.
Nextel Partners Operating Corp., our wholly owned subsidiary, has
entered into a $275.0 million credit facility which provides for a $100.0
million, eight-year revolving credit facility and a $175.0 million, nine-year
term loan facility. On January 29, 1999, it borrowed the $175.0 million term
loan under the credit facility. We are exposed to changes in interest rates
under the term loan facility. For every 1/8% change in the underlying interest
rate associated with the term loan, annual interest expense changes by
approximately $220,000. Borrowings under the credit facility are secured by a
first priority pledge of all assets of our subsidiaries and a pledge of their
capital stock, including the stock of Nextel WIP License Corp. following
approval by the FCC. The credit facility contains customary financial and other
covenants for the wireless industry. Our subsidiary established a cash
collateral account in which it maintains a balance equal to the amount of any
borrowings until we receive FCC approval. Failure to obtain such approval by
January 29, 2000 constitutes an event of default under the credit facility. In
addition, the credit facility contains covenants requiring us to maintain
certain defined financial ratios and meet operational targets including service
revenues, subscriber units and network coverage. As of June 30, 1999 we were in
compliance with all covenants associated with our credit facility.
We believe the net proceeds from the offering of the notes, together
with the equity investments and borrowings under the credit facility, provide us
with funds sufficient to complete our build-out and for working capital
necessary to cover our debt service requirements and operating losses, through
2003, which is when we anticipate achieving positive operating cash flow for the
full fiscal year. Although we estimate that we will have sufficient funds
through 2003, we cannot assure you that additional funding will not be
necessary. We could need additional financing in order to complete our portion
of the Digital Mobile Network or if we elect to build out optional territories,
which might be expensive or impossible to obtain.
YEAR 2000 DATE CONVERSION
We are in the process of evaluating and addressing Year 2000 compliance
of our computer systems. Such Year 2000 compliance efforts are designed to
identify, address and resolve issues that may be created by computer programs
being written using two digits rather than four to define the applicable year.
Any of our computer programs that have time-sensitive software may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices or engage in similar normal business activities.
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As of the end of this quarter we have acquired a significant amount of
hardware. This hardware has been purchased principally from Dell Corporation,
Hewlett-Packard, and Cisco and is warranted to be Y2K complaint. We have also
engaged in application development, principally in Oracle database and Microsoft
SQL server environments, both of which are warranted to be Y2K compliant.
In general, we will be implementing enterprise architecture similar to
Nextel Communications and will use the same vendors for these applications as
Nextel Communications. As new enterprise applications are installed we will
amend the readiness disclosure from the respective vendor or Nextel
Communications. To the extent we implement our own computer systems and
software, we will endeavor to ensure that such systems and software are Year
2000 compliant by the end of the third quarter of 1999. This process will
involve assessing overall Year 2000 risk and modifying or replacing certain
hardware and software maintained by us, as well as communicating with external
service providers to ensure that they are taking the appropriate action to
remedy certain Year 2000 compliance issues of their own.
However, our ability to reach our Year 2000 compliance goal is, and
will continue to be, dependent on the parallel efforts of certain third party
vendors, suppliers and business partners. In particular, we rely on services and
products offered by Motorola for our system infrastructure equipment and
subscriber handset units, and Nextel, and third-party providers of services and
products to Nextel, for sales, distribution and back office support services and
information systems, including customer activation, billing and customer care.
We are in the process of requesting from these third parties detailed action
plans and timetables for achieving Year 2000 compliance.
Since we are in the process of gathering information to determine the
Year 2000 compliance of Motorola, Nextel and relevant third parties, we have not
fully assessed the impact on our information systems of such third parties'
non-compliance. Any failure by Motorola or Nextel to become Year 2000 compliant
may have a material adverse effect on our ability to become Year 2000 compliant
if such failure were to adversely impact the ability of either party to provide
products or services that it is obligated to provide to us or products or
services that are critical to our operations. To the extent we are not in a
position to validate or certify that technology provided by third parties,
including Motorola, is Year 2000 compliant, we will seek assurances from such
third parties that their systems are or will be Year 2000 compliant no later
than the end of third quarter, 1999. We cannot assure you that the costs of
modifying, upgrading or replacing our information systems and equipment will not
have a material adverse effect on our ability to complete our portion of the
Digital Mobile Network on schedule, to conduct our operations or to implement
our business plans as currently contemplated.
Moreover we cannot independently assess the impact of Year 2000 risks,
issues and compliance activities and programs involving operators of public
telephone networks or other service providers, such as electric utilities. We
therefore must rely on these operators' estimates of their own Year 2000 risks,
issues and the status of their related compliance activities and programs in our
own risk assessment process. Because our systems are interconnected with public
telephone networks and are dependent upon the systems of other service
providers, the failure of these third parties to address their own Year 2000
risks and the disruption of operations in their computer programs may result in
material adverse effect on our operations, including:
- the inability of subscribers to make or receive phone calls;
- the inability of sites, switches and other interfaces to
accurately record call details of subscriber phone calls; and
- the inability of billing system to accurately report and bill
subscribers for phone usage.
Following the installation of enterprise applications and assessment of
their Year 2000 readiness, we will evaluate and create alternative plans
designed to address various potential business interruptions that may occur as a
result of non-readiness. Also, since our vendors will provide the business
contingency plans, we will assess the development of appropriate alternative
solutions presented by any relevant vendors to determine their effectiveness and
likely impact on our Year 2000 readiness risk.
We believe that the costs of modifying, upgrading or replacing our
systems and equipment will not have a material effect on our liquidity,
financial condition or results of operations. We currently estimate that our
expenditures in connection with our Year 2000 compliance efforts will not exceed
$2 million. To date, we have not deferred any specific projects, goals or
objectives relating to our operations as a result of our efforts.
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<PAGE> 20
RISK FACTORS
WE NEED TO BUILD SUBSTANTIAL NETWORK FACILITIES AND DEVELOP A CUSTOMER BASE
BEFORE WE CAN GENERATE EARNINGS TO SERVICE OUR DEBT
Nextel Partners had no operating history until January 29, 1999, and
the networks we acquired on that date only had a few months of operating
history. We expect to spend significant amounts for site acquisition,
construction, testing and deployment before our commencement of full-scale
commercial operations. If we fail to complete the commercial launch of our
portion of the Digital Mobile Network on schedule or if we fail to achieve
significant and sustained growth in our revenues and earnings from operations,
we will not have sufficient cash from operations to repay or refinance our
outstanding notes and our other debt.
OUR SUBSIDIARIES MAY NOT BE IN A POSITION TO PAY US THE CASH WE NEED TO OPERATE
OUR BUSINESS
We are a holding company and conduct our business principally through
operating subsidiaries. Accordingly, we depend on payments from our subsidiaries
to provide the cash necessary to make the payments on the notes. Our
subsidiaries may not generate earnings sufficient to enable us to operate our
business and meet our payment obligations.
Our principal operating subsidiary is the primary obligor on a $275.0
million credit facility that is structurally senior to the notes, secured by the
operating assets and a pledge of the stock of our subsidiaries, and contains
covenants that restrict dividends and other payments to us by our subsidiaries.
Future debt agreements of our subsidiaries likely will also impose significant
restrictions on the ability of our subsidiaries to pay dividends or make other
payments to us that would be necessary to make interest payments on our notes or
to repay the notes at maturity.
OUR EXISTING DEBT INCLUDE RESTRICTIVE AND FINANCIAL COVENANTS WHICH WE MAY NOT
BE ABLE TO MEET IN THE FUTURE
The indenture relating to the notes and the credit facility contain
certain covenants that, among other things, restrict our subsidiaries' ability
to:
- incur additional debt;
- pay dividends or distributions on, or redeem or repurchase,
capital stock;
- create liens on assets;
- make investments, loans or advances;
- issue or sell capital stock of certain of our subsidiaries;
- enter into transactions with affiliates;
- enter into sale and leaseback transactions;
- enter into a merger, consolidation or sale of assets; or
- engage in any other business other than telecommunications.
In addition, the credit facility imposes financial covenants which
require our principal subsidiary to comply with specified financial ratios and
tests, including minimum interest coverage ratios, maximum leverage ratios,
minimum service revenues, minimum subscriber units and covered populations,
minimum EBITDA as adjusted requirements and minimum fixed charge coverage
ratios. If the financial covenants are not met, the lenders under the credit
facility will be entitled to declare such indebtedness immediately due and
payable.
We cannot assure you that our subsidiaries or we will be able to meet
these requirements or satisfy these covenants in the future, which could harm
our business.
WE MAY BE UNABLE TO REFINANCE OUR DEBT WHEN PAYMENTS ON THE NOTES BEGIN
To prevent default under our outstanding notes, we might need
additional financing or refinancing. Our failure to pay cash interest on the
notes as required would result in defaults under our other debt agreements,
including our principal operating subsidiary's credit facility. We cannot assure
you that we will be able to effect such a financing transaction on acceptable
terms, if at all.
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<PAGE> 21
DIFFICULTIES IN CONSTRUCTING AND OPERATING OUR PORTION OF THE DIGITAL MOBILE
NETWORK COULD INCREASE ITS ESTIMATED COSTS AND DELAY ITS SCHEDULED COMPLETION,
THEREBY ADVERSELY AFFECTING OUR ABILITY TO GENERATE REVENUE
The development and operation of our portion of the Digital Mobile
Network involves a high degree of risk. Before we are in a position to commence
operations in our unbuilt markets, we will need to:
- select and acquire appropriate sites for our transmission
equipment, commonly called cell sites;
- purchase and install low-power transmitters, receivers and
control equipment, which are collectively referred to as the
base radio;
- build out the physical infrastructure; and
- test the network.
Our ability to successfully perform these necessary steps may be
hindered by, among other things, any failure:
- to lease or obtain rights to sites for the location of our
base radio equipment;
- to obtain necessary zoning and other local approvals with
respect to the placement, construction and modification of our
facilities;
- to acquire additional necessary radio frequencies from third
parties or to exchange radio frequency licenses with Nextel;
- to commence and complete the construction of sites for our
equipment in a timely and satisfactory manner; and
- to obtain necessary approvals, licenses and permits from
federal, state and local agencies, including land use
regulatory approvals and approvals from the Federal Aviation
Administration with respect to the transmission towers that we
will be using.
In addition, we may experience cost overruns and delays not within our
control caused by acts of governmental entities, design changes, material and
equipment shortages, delays in delivery and catastrophic occurrences. Any
failure to construct our portion of the Digital Mobile Network on a timely basis
may affect our ability to provide services in our markets on a schedule
consistent with our current business plan, and any significant delays could have
a material adverse effect on our business.
WE COULD NEED ADDITIONAL FINANCING IN ORDER TO COMPLETE OUR PORTION OF THE
DIGITAL MOBILE NETWORK, WHICH MIGHT BE EXPENSIVE OR IMPOSSIBLE TO OBTAIN
If we encounter unanticipated construction cost overruns or incur
additional costs beyond those currently reflected in our business plan, we would
require additional financing that may not be permitted by the financial
covenants in our debt agreements. If that financing is unavailable, we could
have inadequate cash flow to operate our business and service our debt.
Such failure could also result in the delay or abandonment of some or
all of our acquisition, development and expansion plans and expenditures and
thereby adversely affect our business.
Our network must have sufficient capacity to support our anticipated customer
growth
Our business plan depends on the proper and timely construction of our
portion of the Digital Mobile Network with adequate capacity to accommodate
anticipated new customers and the related increase in usage of our network. This
plan relies on:
- the availability of a sufficient quantity of sites for our
transmission equipment;
- the availability and quality of the infrastructure equipment
necessary to operate our network;
- the availability of subscriber units used by our customers to
receive our services; and
- the ability to add capacity to serve additional customers as
they are added to the network.
We cannot assure you that we will not experience delays in the
availability of, or unanticipated difficulties in obtaining, these items, which
may adversely affect our ability to attract customers.
WE MUST DEVELOP EFFECTIVE BUSINESS PRACTICES AND PROCEDURES TO MAINTAIN CUSTOMER
SATISFACTION
Critical to our business plan is our success in attracting and
retaining large numbers of customers to our portion of the Digital Mobile
Network to generate revenue.
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<PAGE> 22
In order to do so, we must develop effective procedures for customer
activation, customer service, billing and other support services. Even if our
system is functional on a technical level, we could lose customers if they are
displeased with the quality of our customer service operations.
OUR BUSINESS STRATEGY DEPENDS ON THE SUCCESSFUL AND CONTINUED INTEGRATION OF OUR
PORTION OF THE DIGITAL MOBILE NETWORK WITH NEXTEL'S PORTION
Pursuant to operating agreements, Nextel provides us with important
services and assistance, including a license to use the Nextel brand name and
the sharing of switches, devices that direct calls to their destinations. These
services are critical to the successful integration of our network with Nextel's
as well as to the overall success of our business.
Our business plan depends on our ability to implement an integrated
customer service, network management and billing system with Nextel's systems
that allows our network to operate with Nextel's network to provide our and
Nextel's customers with "seamless" service. Integration requires that numerous
and diverse computer hardware and software systems work together. Any failure to
integrate these information systems on schedule may have an adverse effect on
our ability to achieve the revenues contemplated by the plan.
WE MUST COMPLETE OUR PORTION OF THE DIGITAL MOBILE NETWORK BY SET DEADLINES OR
OTHERWISE RISK LOSING NEXTEL'S SUPPORT
Our agreements with Nextel require us to construct our portion of the
Digital Mobile Network to specific standards and by set deadlines. Our failure
to do so may constitute a material default under the operating agreements that
would give Nextel the right to terminate these agreements. The non-renewal or
termination of the operating agreements would adversely affect our financial
condition and eliminate our ability to carry out our current business plan and
strategy.
WE MAY BE REQUIRED TO IMPLEMENT MATERIAL CHANGES ADOPTED BY NEXTEL, WHICH MAY
NOT BE BENEFICIAL TO OUR BUSINESS
If Nextel adopts material changes to its operations, including the
adoption of new technologies, the operating agreements give Nextel the right to
require similar changes to our operations. Even if the change is beneficial to
Nextel, the effect on our business may differ due to differences in markets and
customers. We cannot assure you that such changes would not adversely affect our
business.
NEXTEL MAY EXPERIENCE BUSINESS PROBLEMS WHICH COULD ADVERSELY AFFECT OUR
BUSINESS
Our business plan depends on Nextel completing its portion of the
Digital Mobile Network on schedule. If Nextel encounters financial problems or
operating difficulties relating to its portion of the Digital Mobile Network,
our affiliation and dependence on Nextel may adversely affect our business,
including the quality of our services and the ability of our customers to roam
in the entire network.
WE ARE ENTIRELY DEPENDENT ON MOTOROLA FOR TELECOMMUNICATIONS EQUIPMENT NECESSARY
FOR THE OPERATION OF OUR BUSINESS
Motorola, Inc. is our sole-source supplier of transmitters used in our
network and handset equipment used by our customers and we rely on Motorola to
manufacture a substantial portion of the equipment necessary to construct our
portion of the Digital Mobile Network. We expect that for the foreseeable
future, Motorola and competing manufacturers who are licensed by Motorola will
be the only manufacturers of this equipment. If Motorola becomes unable to
deliver such equipment, or refuses to do so on reasonable terms, our business
would be adversely affected.
THE TRANSMISSION TECHNOLOGY USED IN THE DIGITAL MOBILE NETWORK IS DIFFERENT FROM
THAT USED BY MOST OTHER WIRELESS CARRIERS, AND, AS A RESULT, WE MIGHT NOT BE
ABLE TO KEEP PACE WITH INDUSTRY STANDARDS IF MORE WIDELY USED TECHNOLOGIES
ADVANCE
The Digital Mobile Network uses scattered, non-contiguous radio
spectrum near the frequencies used by cellular carriers. Because of their
fragmented character, these frequencies traditionally were only usable for
two-way radio calls, such as those used to dispatch taxis and delivery vehicles.
Nextel became able to use these frequencies to provide a wireless telephone
service competitive with cellular only when Motorola developed a proprietary
technology it calls "iDEN(Trademark)". We and Nextel are currently the only
major wireless service providers utilizing iDEN technology in the United States,
and iDEN phones are not currently designed to roam onto other wireless networks.
Future technological advancements may enable other wireless
technologies to equal or exceed our current levels of service, and render iDEN
technology obsolete. If Motorola is unable to upgrade or improve iDEN technology
or develop other
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<PAGE> 23
technology to meet future advances in competing technologies on a timely basis,
or at an acceptable cost, we will be less able to compete effectively and could
lose customers to our competitors.
OUR ABILITY TO CHANGE TECHNOLOGY IS LIMITED BY THE TECHNOLOGICAL REQUIREMENTS OF
OUR FRAGMENTED RADIO SPECTRUM AND OUR AGREEMENTS WITH NEXTEL
The iDEN technology is currently the only wireless industry technology
in general use on the spectrum we control. Our agreements with Nextel require us
to use the iDEN technology in the deployment of our system and prevent us from
adopting any new communications technology without Nextel's consent. Therefore,
even if we wished to change our technology for competitive reasons, our options
to do so might be limited by the unavailability of alternative technologies, or
by Nextel's decision not to consent.
CERTAIN SIGNIFICANT SHAREHOLDERS REPRESENTED ON OUR BOARD OF DIRECTORS MAY HAVE
INTERESTS THAT CONFLICT WITH OURS AND YOURS
Nextel, DLJ Merchant Banking Partners II and Eagle River Investments
have the right to designate members to our board of directors. We cannot be
certain that any conflicts that arise between our interests and those of these
shareholders will always be resolved in our favor.
Pursuant to a shareholders' agreement and the joint venture agreement,
the approval of the director selected by Nextel is required in order for us to:
- dispose of all or substantially all of our assets,
- broaden the scope of our business, or
- make a material change in our technology.
The approval of a director selected by DLJ Merchant Banking is
currently required for significant matters, including:
- the determination of compensation and benefits of senior
management,
- modifications of our long-term business strategy or scope of
business, or
- material modifications of any material customer relationships.
These approvals relate to significant transactions and such decisions
by the director could involve a conflict between our interests and those of the
shareholder appointing the director, which may not be resolved in our favor.
In addition, Nextel has preemptive rights relating to any public
offering of our capital stock by us or DLJ Merchant Banking. Moreover, under
certain circumstances, Nextel has the ability, and our shareholders have the
ability to cause Nextel, to purchase all of our outstanding capital stock.
Eagle River, which is owned and controlled by Craig O. McCaw, has
interests in a number of other telecommunications companies and ventures,
including significant investments in Nextel, NEXTLINK Communications, which
provides telephone and other telecommunications services to businesses, and
Teledesic Corporation, which is building a satellite constellation to provide
data services worldwide. NEXTLINK and Teledesic are not currently our
competitors but could be in the future. We do not have a noncompetition
agreement with Eagle River, and thus these investments and future investments by
Eagle River may create a conflict of interest.
WE FACE COMPETITION FROM OTHER WIRELESS SERVICE PROVIDERS AND OTHER
COMMUNICATIONS TECHNOLOGIES, PUTTING DOWNWARD PRESSURE ON PRICES
We compete for market share and customers with current or potential
cellular and digital wireless communications service providers, including AT&T
Wireless Services, Sprint PCS, Bell Atlantic, BellSouth, Southwestern Bell,
PrimeCo Personal Communications and Airtouch. Many of our competitors have
financial resources, subscriber bases and name recognition greater than ours.
Our competitors may offer prospective customers equipment subsidies or discounts
that are substantially greater than those, if any, that we could offer and may
offer services to customers at prices that are below prices that we are able or
willing to offer. Such competition may cause downward pressures on prices, which
may adversely affect our profits.
In the future, wireless services may also compete more directly with
traditional telephone service providers who offer services over wire lines and
with cable operators who may expand their services by offering traditional
telecommunications services over their cable systems. In addition, we expect to
compete with other communications technologies, such as paging and
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global satellite networks. Moreover, we may face competition from technologies
that may be introduced in the future. All such competition is expected to be
intense. We cannot assure you that we will be able to attract enough customers
either to compete successfully or implement our business plan in this
environment.
REGULATORY AUTHORITIES EXERCISE CONSIDERABLE POWER OVER OUR OPERATIONS, WHICH
COULD BE EXERCISED AGAINST OUR INTERESTS AND IMPOSE ADDITIONAL UNANTICIPATED
COSTS
The FCC and relevant state telecommunications authorities regulate our
business to a substantial degree. The regulation of the wireless
telecommunications industry is subject to constant change. New rules and
regulations may be adopted pursuant to the Communications Act of 1934, as
amended by Telecommunications Act of 1996. The Telecommunications Act provided
for significant deregulation of the U.S. telecommunications industry and such
legislation remains subject to judicial review and additional FCC rulemaking. As
a result, we cannot predict the effect that the legislation and any FCC
rulemaking may have on our future operations. We must comply with all applicable
regulations to conduct our business. Modifications of our business plans or
operations to comply with changing regulations or certain action taken by
regulatory authorities might increase our costs of providing service and
adversely affect our financial condition.
The FCC has the right to revoke licenses at any time for cause,
including failure to comply with the terms of the licenses, failure to continue
to qualify for the licenses, malfeasance or other misconduct. In addition, at
the end of a ten-year term, we will have to apply to the FCC for renewal of some
of our licenses to provide our core services, which combine wireless telephone
service with dispatch and paging features. We cannot assure you that these
licenses will be renewed.
THE COMPLETION OF OUR PORTION OF THE DIGITAL MOBILE NETWORK DEPENDS ON APPROVAL
BY THE FCC OF THE TRANSFER OF LICENSES TO US FROM NEXTEL
As an equity contribution to us, Nextel has contributed certain
licenses for use in the operation of our markets to a wholly owned subsidiary,
whose shares will be transferred to us following approval by the FCC. Pending
FCC approval, we have the right to use the frequencies covered by these licenses
under a management agreement. However, failure to obtain FCC approval by January
29, 2000 constitutes an event of default under the credit facility and any
indebtedness outstanding under the credit facility may be accelerated. We cannot
assure you that the FCC will grant approval of the transfer of control of these
licenses.
WE MAY FACE ADDITIONAL COST AND OTHER ADVERSE EFFECTS DUE TO YEAR 2000 ISSUES
Many computer systems and software programs may not function properly
in the year 2000 and beyond because of a once common programming standard, which
used two digits instead of four digits to signify a year. These computer systems
and software programs read the year "1999" as "99" and not "1999." Because of
this, the year 2000 may appear as the year 1900, which could result in system
failures or disruptions. This problem is often referred to as the "Year 2000"
issue.
If we are unable to fix a material Year 2000 problem, we could
experience an interruption or failure of our business operations. Likewise, if
parties upon which we depend for products or service, especially Motorola,
Nextel or the operators of public telephone networks in markets where we
operate, are unable to fix a material Year 2000 problem, a resulting
interruption or failure of their ability to provide products or services could
hurt us.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to market risks arising from changes in interest rates.
Our primary interest rate exposure results from changes in LIBOR or the prime
rate which are used to determine the interest rate applicable to borrowings by
our subsidiary under its credit facility. As of June 30, 1999, our subsidiary
had $175 million outstanding under its credit facility. In April 1999, we
entered into an interest rate swap agreement for approximately one-third of
these borrowings to partially hedge our interest rate exposure. Interest rate
swaps have the effect of converting the applicable variable rate obligations to
fixed or other variable rate obligations. Our potential loss over one year that
would result from an instantaneous and unfavorable change of 100 basis points in
the interest rate of all our variable rate obligations would be approximately
$1.2 million.
We do not use financial instruments for trading or other speculative
purposes.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS 133"), which establishes accounting and reporting standards for
derivative instruments and for hedging activities by requiring that all
derivatives be recognized in the balance sheet and measured at fair
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value. SFAS No. 137, issued August 1999, postpones for one year our mandatory
effective date for SFAS No. 133 to January 1, 2001. We are still evaluating the
effects of the change in our financial position or results of operations for
SFAS No. 133.
PART II
ITEM 1. LEGAL PROCEEDINGS
From time to time we are subject to legal proceedings that
arise in the ordinary course of business. We do not believe
that these actions, when finally concluded, will have a
material adverse effect on our business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
USE OF PROCEEDS
The Company did not receive any cash proceeds from the issuance of the
new notes as described in our Form S-4 Registration Statement (No. 333-78459).
Instead, the Company will receive in exchange for the new notes, old notes in
like principal amount. The old notes surrendered in exchange for the new notes
were retired and canceled and cannot be reissued. Accordingly, the issuance of
the new notes did not result in any change in the indebtedness of the Company.
The net proceeds from the offering of the old notes, the cash equity
contributions, the capital contributions by Nextel and Motorola and the
borrowings under the credit facility which we received on January 29, 1999, the
closing date of the capitalization transactions, are being used to complete our
portion of the Digital Mobile Network and to fund operating losses and working
capital through 2003, when we expect to achieve positive operating cash flow for
that full fiscal year.
The following table shows the sources and anticipated uses of the
proceeds from the capitalization transactions through 2003:
SOURCES AND ANTICIPATED USES OF FUNDS AND ASSETS
(IN MILLIONS)
<TABLE>
<CAPTION>
SOURCES: USES:
<S> <C> <C> <C>
Gross proceeds of the offering of old notes $406.4 Nextel capital expenditure reimbursement $115.8
Nextel and Eagle River operating loss 17.6
Revolving borrowings under credit facility(1) 100.0 reimbursement
Term borrowings under credit Capital expenditures 486.5
Facility(1) 175.0
Cash equity contributed 52.1 Operating losses 71.9
Transaction expenses, net cash interest and 97.8
Committed cash equity(2) 104.3 working capital
Motorola contribution 18.4 FCC licenses 133.2
Nextel contribution 133.2 Excess cash 66.6
------ ------
Total sources $989.4 Total uses $989.4
====== ======
</TABLE>
(1) Nextel Partners' principal operating subsidiary entered into a $275.0
million credit facility of which $100.0 million is a reducing revolving credit
facility and $175.0 million is a term loan facility. The term loan was drawn
down on January 29, 1999. See Note 4 to Notes to Condensed Consolidated
Financial Statements.
(2) Of the $104.3 million of committed cash equity, the subscription and
contribution agreement provides that $52.1 million will be funded no later than
December 31, 1999 and the remainder will be funded no later than December 31,
2000.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrants has duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
NEXTEL PARTNERS, INC.
Date: September 13, 1999 By: /s/ John D. Thompson
----------------------
John D. Thompson
Chief Financial Officer and Treasurer
