<PAGE>
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
FILED PURSUANT TO RULE 424(b)(3)
REGISTRATION NO. 333-78459
Subject to Completion. Dated January 27, 2000.
23,500,000 Shares
[LOGO]
Class A Common Stock
------------------
This is an initial public offering of shares of Class A common stock of
Nextel Partners, Inc. This prospectus relates to an offering of shares in
the United States. In addition, shares are being offered outside the
United States in an international offering. All of the 23,500,000 shares of
Class A common stock are being sold by Nextel Partners.
Prior to this offering, there has been no public market for the Class A
common stock. It is currently estimated that the initial public offering price
per share will be between $15.00 and $19.00. We intend to apply to list our
Class A common stock for quotation on the Nasdaq National Market under the
symbol "NXTP".
SEE "RISK FACTORS" BEGINNING ON PAGE 9 TO READ ABOUT CERTAIN FACTORS YOU
SHOULD CONSIDER BEFORE BUYING SHARES OF THE CLASS A COMMON STOCK.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
---------- ---------
<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discounts...................................... $ $
Proceeds, before expenses, to Nextel Partners............... $ $
</TABLE>
To the extent that the U.S. underwriters sell more than shares of
Class A common stock, the U.S. underwriters have the option to purchase up to an
additional shares from Nextel Partners at the initial public
offering price less the underwriting discount. The international underwriters
may similarly purchase up to an additional shares.
------------------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 2000.
GOLDMAN, SACHS & CO. DONALDSON, LUFKIN & JENRETTE
CREDIT SUISSE FIRST BOSTON
DEUTSCHE BANC ALEX. BROWN
FIRST UNION SECURITIES, INC.
MORGAN STANLEY DEAN WITTER
DLJDIRECT INC.
------------------
Prospectus dated , 2000.
<PAGE>
[MAP OF THE UNITED STATES MARKED TO
INDICATE LOCATION OF NEXTEL PARTNERS'
LICENSE/OPTION LICENSE TERRITORY AND
NEXTEL'S LICENSE TERRITORY]
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS BUT DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER
BEFORE INVESTING IN OUR CLASS A COMMON STOCK. AS USED IN THIS PROSPECTUS, "WE,"
"US" AND "OUR" REFER TO NEXTEL PARTNERS, INC. AND "NEXTEL" REFERS TO NEXTEL
COMMUNICATIONS, INC. YOU SHOULD READ THE ENTIRE PROSPECTUS CAREFULLY, ESPECIALLY
"RISK FACTORS" BEGINNING ON PAGE 9.
NEXTEL PARTNERS
We provide digital wireless communications services in mid-sized and smaller
markets throughout the United States and are the only U.S. affiliate of Nextel.
We hold broadband wireless licenses that cover 40 million persons, or Pops, in
46 markets. We are licensed to operate in 12 of the top 100 Metropolitan
Statistical Areas ranked by population and 51 of the top 200 Metropolitan
Statistical Areas. We also have the option to acquire from Nextel licenses that
cover an additional 13 million Pops, of which we currently intend to acquire
licenses covering 2.3 million Pops. In January 1999, we entered into our
exclusive affiliation agreement with Nextel, which owns 36.5% of our common
stock prior to this offering and is our largest stockholder. This affiliation
was created to accelerate the build-out of the Nextel digital mobile network by
granting us the exclusive right to offer wireless communications services under
the Nextel brand in selected strategic markets.
The Nextel digital mobile network utilizes a single digital transmission
technology called integrated digital enhanced network, or iDEN, which was
developed by Motorola, Inc. This network constitutes one of the largest
fully-integrated wireless communications systems in the United States. By the
end of 2000, we and Nextel together plan to provide service covering all of the
top 100 Metropolitan Statistical Areas in the United States. We offer a
differentiated package of services under the Nextel brand name targeted to
business users. We currently offer the following fully-integrated services
accessible through a single wireless telephone:
- digital mobile, or interconnect, telephone service;
- Nextel Direct Connect service that allows users to contact co-workers
instantly, on private one-to-one calls or on a group call; and
- the ability to receive pages and short-text messages.
In addition, Nextel has announced its plan to offer users access to new,
digital two-way mobile data and Internet connectivity services, expected to be
commercially available in mid-2000. As part of our agreements with Nextel, we
expect to offer these same data services in our markets after their commercial
implementation by Nextel.
Our senior management team has substantial operating experience, averaging
over 15 years in the communications industry. Each member of senior management
has significant experience working at AT&T Wireless, McCaw Cellular and/or
Nextel. Our senior management and employees own 6.7% of our common stock on a
fully diluted basis prior to this offering. Other key stockholders, in addition
to Nextel, include DLJ Merchant Banking Partners, Madison Dearborn Capital
Partners, Motorola and Eagle River Investments, LLC, an investment company
controlled by Craig O. McCaw.
STRATEGIC ALLIANCE WITH NEXTEL
Our affiliation with Nextel is an integral part of our strategy. Nextel has
contributed to us licenses and cash in exchange for an ownership stake in our
company. As Nextel's only U.S. affiliate, we enjoy numerous important benefits,
including the following:
- NEXTEL BRAND AND DIFFERENTIATED MARKETING PROGRAMS. We have the exclusive
right to offer digital wireless communications services using the Nextel
brand in all of our markets. We
3
<PAGE>
believe the Nextel brand is among the most recognized wireless brands in
the United States. In particular, we believe that the Nextel brand
represents a differentiated and value-added product in the wireless
marketplace. In using the Nextel brand name, we also benefit from Nextel's
national marketing campaigns.
- INTEGRATED NATIONWIDE NETWORK. Our systems are operationally seamless with
those of Nextel, enabling customers of both companies to roam on each
other's networks. As customers increasingly choose national rate plans, we
believe that the ability to offer national coverage is a competitive
advantage. Additionally, we believe that offering users a full digital
interconnect feature set wherever they travel within this broad network
differentiates our service from the services of many of our competitors.
- EXCLUSIVE ROAMING PARTNERSHIP. Under our agreements with Nextel, we are
the exclusive provider of wireless communication services to Nextel
customers who roam into our markets. We believe our Nextel affiliation
will continue to provide us with a consistent base of recurring roaming
services revenue and allow us to offer our customers roaming services on
Nextel's portion of the Nextel digital mobile network in a cost-effective
manner.
- INFRASTRUCTURE AND RELATIONSHIPS. We have the right to utilize Nextel's
current infrastructure, including certain switching facilities and network
monitoring systems. While we have implemented our own customer activation,
billing and customer care systems, we use Nextel's systems to offer
national accounts seamless customer service. Additionally, we benefit from
Nextel's strong relationships with its vendors and national account
customers to secure wireless equipment at competitive rates and penetrate
national accounts within our service area. For example, we purchase
wireless telephones and infrastructure equipment from Motorola at the same
prices as Motorola offers such equipment to Nextel.
BUSINESS STRATEGY
Our goal is to become the leading provider of integrated digital wireless
communication services in our markets. In addition to our relationship with
Nextel, we believe the following elements of our business strategy will
distinguish our wireless service offerings from those of our competitors and
will enable us to compete successfully:
- PROVIDE DIFFERENTIATED PACKAGE OF WIRELESS SERVICES. We offer a package of
services and features that combines multiple wireless communications
options in a single wireless telephone. We will continue to emphasize the
differentiated features of iDEN technology and implement advancements in
this technology platform as they become available. In addition, we
maintain uniformity with Nextel by offering the same rates to our
customers anywhere on the Nextel digital mobile network, billing based
upon the actual numbers of seconds of airtime after the first minute, and
having rate plans that do not distinguish between "peak" and "off-peak"
minutes.
- TARGET BUSINESS CUSTOMERS. We believe that our focus on business customers
will result in higher monthly average revenue per unit and lower average
monthly service cancellations or terminations. This is a market segment
for which we believe our product has high utility, and we further believe
that we and Nextel are the only major wireless carriers directing fully-
integrated offerings to this segment.
- DEPLOY ROBUST NETWORK RAPIDLY. Our objective is to build robust wireless
systems that cover all key areas of a given market before we launch our
network in that market. We are deploying these systems rapidly to capture
the current and projected growth in wireless usage in the United States.
We are also building our customer care and internal systems to support
future anticipated demand.
4
<PAGE>
- OPERATE IN MID-SIZED AND SMALLER MARKETS. We focus on mid-sized and
smaller markets with demographics similar to those served by Nextel. We
believe that this strategy will allow us to rapidly increase penetration
within our targeted segment, which we believe has historically been
underserved in these markets. We believe that this focus, combined with
our differentiated service offerings, will give us the ability to sustain
our pricing strategy.
MARKETS
As of January 15, 2000, we had commercial operations in markets with total
Pops of 9.9 million and the ability to offer service to, or cover, 7.7 million
Pops. These operational markets are in Hawaii, New York, Texas and Pennsylvania.
As of December 31, 1999, we had approximately 46,000 digital subscribers with a
covered market penetration of approximately 0.75%. We intend to be able to
provide service to over 20 million Pops by the end of 2000 and over 27 million
Pops by the end of 2001. The following table sets forth our markets with over
one million Pops:
<TABLE>
<CAPTION>
MARKETS TOTAL POPS MARKET LAUNCH
- ------- ---------- --------------
<S> <C> <C>
Kentucky (Lexington, Louisville)............................ 2,543,523 1st Half 2000
Syracuse, NY................................................ 2,308,433 Launched
Eastern Iowa (Waterloo, Dubuque)............................ 1,829,046 1st Half 2000
Arkansas (Fayetville, Ft. Smith, Pine Bluff)................ 1,804,738 1st Half 2001
Central Illinois (Peoria, Springfield, Champagne)........... 1,757,899 1st Half 2000
Evansville/Owensboro, IN.................................... 1,652,709 1st Half 2001
Harrisburg/York/Lancaster, PA............................... 1,641,088 Launched
Shreveport/Monroe/Tyler/Longview, LA/TX..................... 1,597,763 2nd Half 2000
Green Bay/Fond du Lac, WI................................... 1,435,451 1st Half 2001
Albany, NY.................................................. 1,407,264 Launched
Hattiesburg/Jackson, MS..................................... 1,390,583 1st Half 2001
Central Pennsylvania (Altoona, Williamsport, State
College).................................................. 1,366,464 2nd Half 2001
Buffalo, NY................................................. 1,282,387 Launched
Hawaii (all islands)........................................ 1,197,687 Launched
Roanoke/Lynchburg/Charlottesville, VA....................... 1,175,872 1st Half 2001
Rochester, NY............................................... 1,049,391 Launched
</TABLE>
------------------------
We were incorporated in the State of Delaware in July 1998. Our principal
executive offices are located at 4500 Carillon Point, Kirkland, Washington
98033. Our telephone number is (425) 828-1713.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Total Class A common stock
offered:
U.S. offering............... shares
International offering...... shares
Total Class A common stock to
be outstanding after this
offering.................... 158,927,974 shares
Total Class A common stock and
Class B common stock to be
outstanding after this
offering.................... 236,710,600 shares
Use of proceeds............... We expect to use the estimated $376.5 million in net
proceeds from this offering for general corporate purposes,
including:
- capital expenditures in connection with the build-out
and expansion of our portion of the Nextel digital
mobile network, including the build-out of territories
for which we have an option and intend to acquire;
- future acquisition of additional frequencies; and
- introduction of new services, sales and marketing
activities and working capital.
Proposed Nasdaq National
Market Symbol............... "NXTP"
</TABLE>
Except where otherwise indicated, all information in this prospectus:
- reflects the conversion of all outstanding Series A preferred stock into
shares of Class A common stock and the conversion of all outstanding
shares of Series C preferred stock and Series D preferred stock into
shares of Class B common stock upon the closing of this offering; our
Class B common stock is convertible on a one-for-one basis into shares of
our Class A common stock at any time upon a transfer by its current holder
to a third party and is otherwise identical in all respects to our
Class A common stock; the holders of our Class A and Class B common stock
are entitled to one vote per share on all matters;
- gives effect to a six-for-one stock split to be effective prior to the
closing of this offering;
- excludes 5,049,600 shares of Class A common stock issuable upon exercise
of options outstanding as of January 15, 2000 at a weighted average
exercise price of $1.78 per share;
- excludes 2,434,260 shares of Class A common stock issuable upon exercise
of outstanding warrants at an exercise price of less than $0.01 per share;
and
- assumes no exercise of the underwriters' over-allotment options.
Please see "Capitalization" on page 23 for a more complete discussion
regarding the outstanding shares of Class A common stock and other related
matters.
------------------------
This prospectus contains registered trademarks of Nextel, Motorola and other
companies.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
You should read the following consolidated summary financial data together
with "Management's Discussion and Analysis" and our consolidated financial
statements and the related notes, all of which appear elsewhere in this
prospectus. The as adjusted balance sheet information set forth below reflects:
- the receipt of estimated net proceeds from this offering;
- the reclassification on our balance sheet of our Series B preferred stock
between liabilities and stockholders' equity; and
- the conversion of our Series A preferred stock into shares of Class A
common stock and conversion of our Series C and Series D preferred stock
into shares of Class B common stock.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, -----------------------------
1998 1998 1999
-------------- ------------- -------------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Operating revenues:
Service revenues..................................... $3,745 $1,501 $17,617
Equipment revenues................................... 1,564 632 2,977
------------- ------------ ------------
Total revenues......................................... 5,309 2,133 20,594
------------- ------------ ------------
Operating expenses:
Cost of service revenues............................. 6,108 3,461 11,786
Cost of equipment revenues........................... 2,935 1,149 7,424
Selling, general and administrative.................. 13,531 7,342 22,591
Stock based compensation............................. 447 -- 1,579
Depreciation and amortization........................ 4,586 1,860 8,162
------------- ------------ ------------
Total operating expenses............................... 27,607 13,812 51,542
------------- ------------ ------------
Loss from operations................................... (22,298) (11,679) (30,948)
Interest expense, net.................................. -- -- (44,571)
Interest income........................................ -- -- 16,416
------------- ------------ ------------
Loss before income tax provision....................... (22,298) (11,679) (59,103)
Income tax provision................................... -- -- --
------------- ------------ ------------
Net loss............................................... $(22,298) $(11,679) $(59,103)
============= ============ ============
Basic and diluted net loss per common share(1)......... $-- $-- $(27.30)
============= ============ ============
Weighted average common shares outstanding(1).......... -- -- 2,164,771
Pro forma basic and diluted net loss per common
share(1)(2).......................................... $-- $-- $(0.39)
============= ============ ============
Pro forma weighted average common shares
outstanding(1)....................................... -- -- 157,043,210
</TABLE>
- --------------------------
(1) Weighted average common shares outstanding above were calculated assuming
that the shares of Class A and Class B common stock were issued and split on
January 29, 1999, the date of the capitalization transactions. Pro forma
weighted average common shares outstanding above were calculated assuming
that the Series A, Series C and Series D preferred stock were converted into
shares of Class A and Class B common stock, after giving effect to the
six-for-one stock split, on January 29, 1999. Per share information is not
included for periods prior to 1999 because the capitalization transactions
that occurred on January 29, 1999 substantially altered our capital
structure.
(2) Pro forma basic and diluted net loss per common share was calculated
assuming a $1,825 accrued dividend on the Series B preferred stock. The
Series B preferred stock becomes subject to mandatory redemption in
February 2010. This accrued dividend increases the net loss available to
common stockholders to $60,928.
7
<PAGE>
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, SEPTEMBER 30, 1999
1998 ------------------------
ACTUAL ACTUAL AS ADJUSTED
-------------- --------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents, short-term investments and
restricted cash(1)........................................ $16 $582,346 $958,874
Plant, property and equipment, net.......................... 107,948 167,647 167,647
FCC operating licenses, net................................. 133,180 148,600 148,600
Total assets.............................................. 247,666 934,634 1,311,162
Current liabilities......................................... 8,995 25,469 25,469
Long-term debt.............................................. -- 770,308 770,308
Mandatorily redeemable preferred stock...................... -- -- 23,675
Total stockholders' equity.................................. 238,671 138,857 491,710
Total liabilities and stockholders' equity............ $247,666 $934,634 $1,311,162
</TABLE>
- --------------------------
(1) Short-term investments include marketable debt securities and corporate
commercial paper with original purchase maturities greater than three
months. Restricted cash reflects the cash collateral account maintained
under our credit facility equal to borrowings outstanding under one of our
term loans, until the FCC approved the transfer of the broadband wireless
licenses to us.
<TABLE>
<CAPTION>
AS OF
AS OF SEPTEMBER 30,
DECEMBER 31, ---------------------
1998 1998 1999
-------------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OTHER DATA:
Covered Pops (end of period) (millions)..................... -- -- 5.4
Subscribers (end of period)................................. -- -- 33,401
EBITDA as adjusted (1)...................................... $(17,265) $(9,819) $(21,207)
Capital expenditures (2).................................... $104,334 $101,623 $52,756
</TABLE>
- --------------------------
(1) Earnings Before Interest, Taxes, Depreciation and Amortization, or EBITDA as
adjusted, represents net loss before interest expense, interest income,
depreciation, amortization and deferred compensation expense. EBITDA is
commonly used to analyze companies on the basis of operating performance,
leverage and liquidity. While EBITDA as adjusted should not be construed as
a substitute for operating income or a better measure of liquidity than cash
flow from operating activities, which are determined in accordance with
generally accepted accounting principles, we have presented EBITDA as
adjusted to provide additional information with respect to our ability to
meet future debt service, capital expenditure and working capital
requirements. EBITDA as adjusted is not a measure determined under generally
accepted accounting principles. Also, as calculated above, EBITDA as
adjusted may not be comparable to similarly titled measures reported by
other companies.
(2) Capital expenditures are cash outlays during the period related to
depreciable property, plant and equipment. Capital expenditures are required
to purchase network equipment, such as switching and radio transmission
equipment. Capital expenditures also include purchases of other equipment
used for administrative purposes, such as office equipment and computer and
telephone systems.
8
<PAGE>
RISK FACTORS
INVESTING IN SHARES OF OUR CLASS A COMMON STOCK INVOLVES A HIGH DEGREE OF
RISK. YOU SHOULD CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AS WELL AS ALL THE
OTHER INFORMATION IN THIS PROSPECTUS--INCLUDING OUR FINANCIAL STATEMENTS AND
RELATED NOTES--BEFORE INVESTING IN OUR CLASS A COMMON STOCK. OUR BUSINESS,
OPERATING RESULTS AND FINANCIAL CONDITION COULD BE SERIOUSLY HARMED DUE TO ANY
OF THE FOLLOWING RISKS. THE TRADING PRICE OF OUR CLASS A COMMON STOCK COULD
DECLINE DUE TO ANY OF THESE RISKS, AND YOU COULD LOSE ALL OR PART OF YOUR
INVESTMENT.
RISK FACTORS RELATING TO NEXTEL PARTNERS
WE HAVE A HISTORY OF OPERATING LOSSES, EXPECT TO CONTINUE TO INCUR SUBSTANTIAL
OPERATING LOSSES AND MAY NOT BE ABLE TO GENERATE THE EARNINGS NECESSARY TO FUND
OUR OPERATIONS, SUSTAIN THE CONTINUED GROWTH OF OUR BUSINESS OR REPAY OUR DEBT
OBLIGATIONS.
We did not commence commercial operations until January 29, 1999, and the
networks we acquired on that date only had a few months of operating history.
Since then, we have had a history of operating losses and, as of September 30,
1999, we had incurred cumulative operating losses of approximately
$30.9 million. We expect to continue to incur substantial operating losses and
to generate negative cash flow from operating activities through 2003. We cannot
assure you that we will become profitable or sustain profitability in the
future. If we fail to complete the commercial launch of our portion of the
Nextel 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 to fund our operations, sustain the continued growth of our
business or repay our debt obligations. Our failure to fund our operations or
continued growth would have an adverse impact on our financial condition and our
failure to make any required payments would result in defaults under all our
debt agreements, which could result in the cessation of our business.
WE MUST COMPLETE OUR PORTION OF THE NEXTEL DIGITAL MOBILE NETWORK BY SET
DEADLINES, OFFER CERTAIN SERVICES AND MEET PERFORMANCE REQUIREMENTS OR RISK
TERMINATION OF OUR AGREEMENTS WITH NEXTEL, WHICH WOULD ELIMINATE OUR ABILITY TO
CARRY OUT OUR CURRENT BUSINESS PLAN AND STRATEGY.
Our operating agreements with Nextel require us to construct our portion of
the Nextel digital mobile network to specific standards and by set deadlines,
offer certain services and meet performance requirements. Our failure to meet
any of these requirements could constitute a material default under the
operating agreements that would give Nextel the right to terminate these
agreements, including the right to use the Nextel brand. The non-renewal or
termination of the operating agreements would eliminate our ability to carry out
our current business plan and strategy and adversely affect our financial
condition. In addition, as described below, in certain circumstances, upon a
termination of the agreements by Nextel, Nextel could acquire all of our
outstanding stock, including shares of Class A common stock purchased in this
offering.
UNDER CERTAIN CIRCUMSTANCES, NEXTEL HAS THE RIGHT, AND CERTAIN OF OUR
STOCKHOLDERS HAVE THE RIGHT TO CAUSE NEXTEL, TO PURCHASE ALL OF OUR OUTSTANDING
STOCK, INCLUDING THE CLASS A COMMON STOCK SOLD IN THIS OFFERING.
Under the provisions of our certificate of incorporation and subject to
certain limitations, Nextel has the right to purchase all of the outstanding
shares of our Class A common stock, including shares sold in this offering:
- on January 29, 2008, subject to certain postponements by our board of
directors;
9
<PAGE>
- if Nextel changes the digital transmission technology for our frequency
range and determines not to provide us free of charge the equipment
necessary to provide our subscribers with service comparable to what they
had been receiving;
- if Nextel requires a change in our business, operations or systems without
subsidizing us for the costs of such change and we decline to implement
the required change; or
- upon the termination of our joint venture agreement with Nextel as a
result of our breach.
In addition, under the provisions of our certificate of incorporation and
upon the occurrence of any of the events listed below, with some exceptions, the
holders of a majority of our outstanding Class A common stock, excluding shares
held by Nextel, can cause Nextel to purchase all of the outstanding shares of
our Class A common stock, including the shares sold in this offering:
- a change of control of Nextel;
- if prior to January 29, 2003, Nextel exercises its right under the
shareholders' agreement to preempt the public offering of our stock by one
of our major stockholders;
- if we do not implement a change in our business, operations or systems
required by Nextel and our board of directors provides all non-Nextel
stockholders with the opportunity to put their stock to Nextel; or
- upon the termination of our joint venture agreement with Nextel as a
result of a breach by Nextel.
In the event that Nextel purchases or is required to purchase all of our
outstanding stock, the purchase price may be paid in cash, shares of Nextel
common stock, or a combination of both. The purchase price depends, in part, on
the triggering event for the purchase. There can be no assurance that such
purchase price will equal or exceed the price at which the Class A common stock
is then trading.
In addition, in any sale by Nextel of all of its shares of our stock to a
third party after January 29, 2011, the holders of a majority of our Class A
common stock may elect to participate in such sale. In the event of such an
election, then pursuant to our certificate of incorporation, all holders of
Class A common stock, including purchasers in this offering, will be required to
participate. See "Description of Capital Stock" for a more detailed description
of the put and call rights described above.
NEXTEL HAS APPROVAL RIGHTS THAT ALLOW IT TO EXERT SIGNIFICANT CONTROL OVER OUR
OPERATIONS AND IT CAN ACQUIRE ADDITIONAL SHARES OF OUR STOCK, WHICH COULD ALLOW
IT TO PROMOTE INTERESTS THAT MAY CONFLICT WITH THOSE OF OUR OTHER STOCKHOLDERS.
Pursuant to our shareholders' agreement and joint venture agreement, the
approval of the director designated by Nextel is required in order for us to:
- make a material change in our technology or business objectives;
- modify our material agreements, including our agreement with Nextel;
- determine senior management compensation;
- change our tax status;
- dispose of all or substantially all of our assets; or
- broaden the scope of our business beyond our current business objectives.
These approvals rights relate to significant transactions, and decisions by
Nextel's designated director could conflict with those of our other directors,
including our independent directors.
10
<PAGE>
The shareholders' agreement does not prohibit Nextel or any of our other
stockholders from purchasing shares of our Class A common stock in the open
market. Additionally, if we experience a defined change of control, Nextel could
purchase all of our FCC licenses for $1.00, provided that it enters into a
royalty-free agreement with us to allow us to use the licenses in our territory
for as long as our joint venture agreement is in effect. Such an agreement could
be subject to approval by the FCC.
OUR SUCCESS IS DEPENDENT ON NEXTEL COMPLETING ITS PORTION OF THE NEXTEL DIGITAL
MOBILE NETWORK AND CONTINUING TO BUILD AND SUSTAIN CUSTOMER SUPPORT OF ITS BRAND
AND TECHNOLOGY, AND IF NEXTEL EXPERIENCES FINANCIAL OR OPERATIONAL DIFFICULTIES
OUR BUSINESS WOULD BE ADVERSELY AFFECTED.
Our business plan depends on Nextel completing its portion of the Nextel
digital mobile network on schedule and continuing to build and sustain customer
support of its brand and technology. If Nextel encounters financial problems or
operating difficulties relating to its portion of the Nextel digital mobile
network or experiences a significant decline in customer acceptance of its
products or technology, our affiliation with and dependence on Nextel may
adversely affect our business, including the quality of our services, the
ability of our customers to roam in the entire network and our ability to
attract and retain new customers. Additional information regarding Nextel can be
found in Nextel's Annual Report on Form 10-K for the year ended December 31,
1998 and Nextel's other filings made under the Securities Act of 1933 and the
Securities Exchange Act of 1934 under Commission file number 0-19656. For a
description of where this information can be obtained, see "Where You Can Find
More Information."
OUR BUSINESS STRATEGY DEPENDS ON THE SUCCESSFUL AND CONTINUED INTEGRATION OF OUR
PORTION OF THE DIGITAL MOBILE NETWORK WITH NEXTEL'S PORTION.
Pursuant to our operating agreements with Nextel, Nextel provides us with
important services and assistance, including a license to use the Nextel brand
name and the sharing of switches that direct calls to their destinations. These
services are critical to the successful integration of our portion of the Nextel
digital mobile network with Nextel's portion, which is essential to the overall
success of our business.
Moreover, our business plan depends on our ability to implement an
integrated customer service, network management and billing system with Nextel
to allow our network to operate with Nextel's digital mobile network and 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 results of operations.
DIFFICULTIES IN CONSTRUCTING AND OPERATING OUR PORTION OF THE NEXTEL DIGITAL
MOBILE NETWORK COULD INCREASE THE ESTIMATED COSTS AND DELAY THE SCHEDULED
COMPLETION OF THE NETWORK, THEREBY ADVERSELY AFFECTING OUR ABILITY TO GENERATE
REVENUE.
The development and operation of our portion of the Nextel digital mobile
network involves a high degree of risk. Before we are in a position to commence
operations in our undeveloped markets, we will need to:
- select and acquire appropriate sites for our transmission equipment, or
cell sites;
- purchase and install low-power transmitters, receivers and control
equipment, or base radio equipment;
- build out the physical infrastructure;
- obtain interconnection services from local telephone service carriers on a
timely basis; and
11
<PAGE>
- test the network.
Our ability to perform these necessary steps successfully 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 approval
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. Before
fully implementing our digital mobile network in a new market area or expanding
coverage in an existing market area, we must complete systems design work, find
appropriate sites and construct necessary transmission structures, receive
regulatory approvals, free up frequency channels now devoted to non-digital
transmissions and begin systems optimization. These processes may take weeks or
months to complete, and may be hindered or delayed by many factors, including
unavailability of antenna sites at optimal locations, land use and zoning
controversies and limitations of available frequencies. Any failure to construct
our portion of the Nextel 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 MAY BE REQUIRED TO IMPLEMENT MATERIAL CHANGES TO OUR BUSINESS OPERATIONS TO
THE EXTENT THESE CHANGES ARE 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, our operating agreements with Nextel give it the right to
require similar changes to our operations. The failure to implement required
changes could, under certain circumstances, trigger the ability of Nextel to
terminate our operating agreements. Even if the required 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.
OUR HIGHLY LEVERAGED CAPITAL STRUCTURE LIMITS OUR ABILITY TO OBTAIN ADDITIONAL
FINANCING AND COULD ADVERSELY AFFECT OUR BUSINESS IN SEVERAL OTHER WAYS.
The level of our outstanding debt greatly exceeds the level of our revenues
and stockholders' equity. As of September 30, 1999, we had $770 million of total
indebtedness outstanding, including $325 million outstanding under our credit
facility and $445 million of senior discount notes at their accreted value. This
indebtedness represented approximately 85% of our total capitalization at that
date. As of September 30, 1999, we also had $23.7 million of mandatorily
redeemable preferred stock outstanding including accrued dividends.
12
<PAGE>
Our large amount of indebtedness could significantly impact our business for
the following reasons:
- it limits our ability to obtain additional financing, if needed, to
complete the buildout of our portion of the Nextel digital mobile network,
to cover our cash flow deficit or for working capital, other capital
expenditures, debt service requirements or other purposes;
- it means that we will need to dedicate a substantial portion of our
operating cash flow to fund interest expense on our credit facility and
other indebtedness, thereby reducing funds available for our build-out,
operations or other purposes;
- it makes us vulnerable to interest rate fluctuations because our credit
facility term loan bears interest at variable rates;
- it limits our ability to compete with competitors who are not as highly
leveraged, especially those who may be able to price their service
packages at levels below that which we can or are willing to match; and
- it limits our ability to react to changing market conditions, changes in
our industry and economic downturns.
OUR EXISTING DEBT INCLUDES RESTRICTIVE AND FINANCIAL COVENANTS THAT LIMIT OUR
OPERATING FLEXIBILITY.
Our credit facility and the indenture relating to our senior discount notes
contain covenants that, among other things, restrict our ability to take
specific actions even if we believe them to be in our best interest. These
include restrictions on our 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 Pops, minimum EBITDA
requirements and minimum fixed charge coverage ratios. We cannot assure you that
we will be able to meet these requirements or satisfy these covenants in the
future and if we fail to do so, our debts could become immediately payable at a
time when we are unable to pay them, which could adversely affect our ability to
carry out our business plan and would have a negative impact on our financial
condition.
13
<PAGE>
IF AN EVENT CONSTITUTING A CHANGE OF CONTROL OCCURS, WE MAY BE REQUIRED TO
PURCHASE ALL OF OUR OUTSTANDING NOTES EVEN IF OUR CREDIT FACILITY PROHIBITS SUCH
A PURCHASE OR WE LACK THE RESOURCES TO MAKE SUCH A PURCHASE.
Upon the occurrence of a defined change of control under the indenture
relating to our senior discount notes, we could be required to purchase all
outstanding notes. Our credit facility prohibits us from purchasing any of our
notes before their stated maturity. In the event we become subject to a change
of control at a time when we are prohibited from purchasing the notes, our
failure to purchase the tendered notes would constitute an event of default
under the indenture, which would in turn result in a default under the credit
facility. Any default under our indenture or credit facility would harm our
financial condition and could adversely impact our ability to effectuate our
business plan. Moreover, even if we obtained consent under our credit facility,
we cannot assure you that we would have sufficient resources to repurchase the
notes and still have sufficient funds available to successfully pursue our
business plan.
OUR FUTURE PERFORMANCE WILL DEPEND ON OUR AND NEXTEL'S ABILITY TO SUCCEED IN THE
HIGHLY COMPETITIVE WIRELESS COMMUNICATIONS TRANSMISSION INDUSTRY.
Our ability to compete effectively with established and prospective wireless
communications service providers depends on many factors, including:
- If the wireless communications technology provided by Nextel and us does
not perform in a manner that meets customer expectations, we will be
unable to attract and retain customers, which would adversely affect your
investment. Customer acceptance of the services we offer is and will
continue to be affected by technology-based differences and by the
operational performance and reliability of system transmissions on the
Nextel digital mobile network. If we are unable to address and resolve
satisfactorily performance or other transmission quality issues as they
arise, including transmission quality issues on Nextel's portion of the
Nextel digital mobile network, or if these issues limit our ability to
expand our network coverage or capacity as currently planned or place
either Nextel or us at a competitive disadvantage to other wireless
service providers in our markets, we may have difficulty attracting and
retaining customers, which would adversely affect our revenues and have a
negative impact on the value of the Class A common stock.
- If we or Nextel cannot expand, provide and maintain our respective system
coverage, then our growth and operations, and the value of your
investment, would be adversely affected. We will not be able to provide
roaming system coverage comparable to that currently available through
roaming arrangements from cellular and some personal communication
services operators, unless and until we and Nextel substantially complete
a nationwide digital mobile network. This places us at a competitive
disadvantage, as some other providers currently have roaming agreements
that provide coverage of each other's markets throughout the United
States, including areas where the Nextel digital mobile network has not
been or will not be built. In addition, some of our competitors provide
their customers with subscriber units with both digital and analog
capability, which expands their coverage, while we have only digital
capability. We cannot assure you that we will be able to achieve
sufficient system coverage or that a sufficient number of customers or
potential customers will be willing to accept system coverage limitations
as a trade-off for the enhanced multi-function wireless communications
package we provide on our portion and Nextel's portion of the Nextel
digital mobile network.
- Neither we nor Nextel have the extensive direct and indirect channels of
distribution for the Nextel digital mobile network products and services
that are available to some of our competitors. The lack of this
distribution channel could adversely affect our operating results and have
a negative impact on the value of your investment. Many of our competitors
have
14
<PAGE>
established extensive networks of retail locations and multiple
distribution channels, and so enjoy a competitive advantage over us in
these areas. We have increased the proportion of our digital mobile
network customers that we obtain through our indirect distributor network,
and we currently anticipate that we will rely more heavily on indirect
distribution channels to achieve greater market penetration for our
digital wireless service offerings. However, as we expand our retail
subscriber base through increased reliance on indirect distribution
channels and as price competition in the wireless industry intensifies,
our average revenue per digital subscriber unit may decrease and our
customer retention may be adversely affected.
- Our inability to maintain pricing packages attractive to customers may
adversely affect operating results, which could adversely affect the value
of your investment.
- If our competitors provide two-way radio dispatch services, we will lose a
competitive advantage. Our two-way radio dispatch services are currently
not available through traditional cellular or personal communication
services providers; however, if either personal communication services or
cellular operators provide two-way radio dispatch or comparable services
in the future, our competitive advantage may be impaired, which could have
an adverse effect on our revenue.
WE MAY FACE PRESSURE TO REDUCE OUR PRICES, WHICH WOULD ADVERSELY AFFECT OUR
OPERATING RESULTS AND THE VALUE OF YOUR INVESTMENT.
We expect that as the number of wireless communications providers in our
market areas increases, including providers of both digital and analog services,
our competitors' prices in these markets will decrease. We may encounter further
market pressures to:
- reduce our digital mobile network service offering prices;
- restructure our digital mobile network service offering packages to offer
more value; or
- respond to particular short-term, market-specific situations, for example,
special introductory pricing or packages that may be offered by new
providers launching their service in a particular market.
OUR EQUIPMENT IS MORE EXPENSIVE THAN THE EQUIPMENT OF SOME OF OUR COMPETITORS,
WHICH MAY ADVERSELY AFFECT OUR GROWTH AND OPERATING RESULTS.
We currently market multi-function digital wireless telephones, providing
mobile telephones and private and group dispatch service, in addition to paging
and alphanumeric short-text messaging. Our mobile telephones are, and are likely
to remain, significantly more expensive than mobile analog telephones and are,
and are likely to remain, somewhat more expensive than digital cellular or
personal communication services telephones that do not incorporate a comparable
multi-function capability. Although we believe that our multi-function wireless
telephones currently are competitively priced compared to multi-function digital
cellular and personal communication services telephones, the higher cost of our
equipment may make it more difficult or less profitable to attract customers who
do not place a high value on our unique multi-service offering. This may reduce
our growth opportunities or profitability and may adversely affect the value of
the Class A common stock.
OUR NETWORK MUST HAVE SUFFICIENT CAPACITY TO SUPPORT OUR ANTICIPATED CUSTOMER
GROWTH.
Our business plan depends on assuring that our portion of the Nextel digital
mobile network has adequate capacity to accommodate anticipated new customers
and the related increase in usage of our network. This plan relies on:
- the ability to obtain radio spectrum when and where required; and
15
<PAGE>
- the availability of wireless telephones of the appropriate model and type
to meet the demands and preferences of our customers.
We cannot assure you that we will not experience unanticipated difficulties
in obtaining these items which could adversely affect our ability to build our
network.
WE HAVE POTENTIAL SYSTEMS LIMITATIONS ON ADDING CUSTOMERS, WHICH MAY ADVERSELY
AFFECT OUR GROWTH AND PERFORMANCE.
Critical to our business plan is our success in attracting and retaining
large numbers of customers to our portion of the Nextel digital mobile network
to generate revenue. 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 basis, we may encounter other factors
that could adversely affect our ability to successfully add customers to our
portion of the Nextel digital mobile network, including:
- inadequate or inefficient information systems, business processes and
related support functions, especially as related to customer service and
accounts receivable collection; and
- an inappropriately long length of time between a customer's order and
activation of service for that customer, especially since the current
activation time is longer than that of some of our competitors.
Customer reliance on our customer service functions may increase as we add
new customers. Our inability to timely and efficiently meet the demands for
services could decrease or postpone subscriber growth, or delay or otherwise
impede billing and collection of amounts owed, which would adversely affect our
revenues.
WE ARE DEPENDENT ON OUR CURRENT KEY PERSONNEL AND OUR SUCCESS DEPENDS UPON OUR
CONTINUED ABILITY TO ATTRACT, TRAIN AND RETAIN ADDITIONAL QUALIFIED PERSONNEL.
The loss of one or more key officers could impair our ability to
successfully build-out and operate our portion of the Nextel digital mobile
network. We believe that our future success will also depend on our continued
ability to attract and retain highly qualified technical and management
personnel. We believe that there is and will continue to be intense competition
for qualified personnel in the wireless communications industry. We may not be
successful in retaining our key personnel or in attracting and retaining other
highly qualified technical and management personnel.
THE TRANSMISSION TECHNOLOGY USED IN THE NEXTEL 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 Nextel 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." 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.
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. 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 technology to meet future advances
in competing technologies on a timely basis, or at an acceptable cost, because
of the restrictive
16
<PAGE>
provisions in our agreements, we will be less able to compete effectively and
could lose customers to our competitors.
WE ARE ENTIRELY DEPENDENT ON MOTOROLA FOR TELECOMMUNICATIONS EQUIPMENT NECESSARY
FOR THE OPERATION OF OUR BUSINESS AND ANY FAILURE OF MOTOROLA TO PERFORM WOULD
ADVERSELY AFFECT OUR OPERATING RESULTS AND THE VALUE OF YOUR INVESTMENT.
Motorola is currently our sole-source supplier of transmitters used in our
network and wireless telephone equipment used by our customers and we rely, and
expect to continue to rely, on Motorola to manufacture a substantial portion of
the equipment necessary to construct our portion of the Nextel digital mobile
network. We expect that for the next few years, Motorola, and competing
manufacturers who are licensed by Motorola, will be the only manufacturers of
wireless telephones that are compatible with the Nextel digital mobile network.
If Motorola becomes unable to deliver such equipment, or refuses to do so on
reasonable terms, then we may not be able to service our existing subscribers or
add new subscribers and our business would be adversely affected. Motorola and
its affiliates engage in wireless communications businesses and may in the
future engage in additional businesses which do or may compete with some or all
of the services we offer. We cannot assure you that the potential conflict of
interest will not adversely affect our ability to receive equipment in the
future. In addition, the failure by Motorola to deliver necessary technology
improvements and enhancements and system infrastructure and subscriber equipment
on a timely, cost-effective basis would have an adverse effect on our growth and
operations and would adversely affect your investment. We generally have been
able to obtain adequate quantities of base radios and other system
infrastructure equipment from Motorola, and adequate volumes and mix of wireless
telephones and related accessories from Motorola, to meet subscriber and system
loading rates, but we cannot assure you that quantities will be sufficient in
the future. Additionally, we have agreed with Nextel that, in the event of
shortages of that equipment, available supplies would be allocated
proportionately among Nextel and us.
RISK FACTORS RELATING TO OUR INDUSTRY
CONCERNS THAT THE USE OF WIRELESS TELEPHONES MAY POSE HEALTH AND SAFETY RISKS
MAY DISCOURAGE THE USE OF OUR WIRELESS TELEPHONES.
Media reports have suggested that, and studies are currently being
undertaken to determine whether, radio frequency emissions from ESMR, cellular
and PCS wireless telephones may be linked with health risks, including cancer,
and may interfere with various electronic medical devices, including hearing
aids and pacemakers. The actual or perceived risk of portable telephones could
adversely affect us through a reduced subscriber growth rate, a reduction in
subscribers, reduced network usage per subscriber or through reduced financing
available to the mobile communications industry.
Some state and local legislatures have passed or are considering legislation
that would restrict the use of wireless telephones while driving automobiles due
to safety concerns. The passage or proliferation of this type of legislation
could decrease demand for our services.
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 the 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
17
<PAGE>
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.
18
<PAGE>
RISK FACTORS RELATING TO OUR CAPITAL STRUCTURE AND COMMON STOCK
CERTAIN SIGNIFICANT STOCKHOLDERS REPRESENTED ON OUR BOARD OF DIRECTORS CAN EXERT
CONTROL OVER US AND MAY HAVE INTERESTS THAT CONFLICT WITH THOSE OF OTHER
STOCKHOLDERS, INCLUDING PURCHASERS IN THIS OFFERING.
After this offering, our officers, directors and greater than 5%
stockholders will together control approximately 79.3% of our outstanding common
stock. As a result, these stockholders, if they act together, will be able to
control the management and affairs of our company and all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. This concentration of ownership may have the
effect of delaying or preventing a change in control of our company and might
affect the market price of our common stock.
In addition, under the shareholders' agreement, Nextel, Madison Dearborn
Partners and Eagle River each have the right to designate a member to our
six-member board of directors. We cannot be certain that any conflicts that
arise between the interests of our company and those of these stockholders will
always be resolved in our favor. Moreover, as described above, Nextel has
certain approval rights that allow it to exert significant control over our
operations.
DLJ Merchant Banking, Madison Dearborn Partners and Eagle River each own
significent amounts of our capital stock and each currently has a representative
on our board of directors. Each of these entities has significant investments in
other telecommunications businesses, some of which may compete with us currently
or in the future. We do not have a noncompetition agreement with any of our
stockholders, and thus their current and future investments could create
conflict of interests.
ANTI-TAKEOVER PROVISIONS AFFECTING US COULD PREVENT OR DELAY A CHANGE OF CONTROL
THAT YOU MAY FAVOR.
Provisions of our organizational documents, shareholders' agreement, joint
venture agreement and Delaware law may discourage, delay or prevent a merger or
other change of control that stockholders may consider favorable. We have
authorized the issuance of "blank check" preferred stock and have imposed
certain restrictions on the calling of special meetings of stockholders. If we
experience a defined change of control, Nextel could purchase all of our FCC
licenses for $1.00, provided that Nextel enters into a royalty-free agreement
with us to allow us to use the licenses in our territory for as long as our
joint venture agreement is in effect. Such an agreement could be subject to
approval by the FCC. Moreover, a change of control of us could trigger an event
of default under provisions in our credit facility and the indenture with
respect to our senior discount notes. These provisions could have the effect of
delaying, deferring or preventing a change of control in our company, discourage
bids for our Class A common stock at a premium over the market price, lower the
market price of, and the voting and other rights of the holders of, our Class A
common stock, or impede the ability of the holders of our Class A common stock
to change our management. See "Related-Party Transactions," "Description of
Certain Indebtedness" and "Description of Capital Stock--Selected Anti-Takeover
Matters."
OUR CERTIFICATE OF INCORPORATION CONTAINS PROVISIONS THAT ALLOW US TO REDEEM
SHARES OF OUR SECURITIES IN ORDER TO MAINTAIN COMPLIANCE WITH APPLICABLE FEDERAL
AND STATE TELECOMMUNICATIONS LAWS AND REGULATIONS.
Our business is subject to regulation by the FCC and state regulatory
commissions or similar state regulatory agencies in the states in which we
operate. This regulation may prevent some investors from owning our securities,
even if that ownership may be favorable to us. The FCC and some states have
statutes or regulations that would require an investor who acquires a specified
percentage of our securities or the securities of one of our subsidiaries to
obtain approval to own
19
<PAGE>
those securities from the FCC or the applicable state commission. Moreover, our
certificate of incorporation allows us to redeem shares of our stock from any
stockholder in order to maintain compliance with applicable federal and state
telecommunications laws and regulations.
OUR SERIES B PREFERRED STOCK HAS A PREFERENCE IN A LIQUIDATION TO OUR COMMON
STOCK, CAN BE REDEEMED BY US AT ANY TIME AND MUST BE REDEEMED FOR CASH IN 2010.
Upon any liquidation of our company, holders of our Series B preferred stock
would be entitled to receive, prior to receipt of any funds by the holders of
our common stock, a liquidation preference equal to $21,850,000, plus interest
accrued on such amount from the date of issuance up to the liquidation date
equal to 12% per year, compounded quarterly. In addition, we can redeem all of
our Series B preferred stock at any time upon payment of the accreted
liquidation preference. We must redeem all such shares in February 2010, and we
cannot guarantee that we will have sufficient cash from operations at that time
to make such redemption.
OUR STOCK PRICE IS LIKELY TO BE VOLATILE.
Prior to this offering, you could not buy or sell our Class A common stock
publicly. The market price of our Class A common stock is likely to be volatile
and could be subject to wide fluctuations in response to factors such as the
following, some of which are beyond our control:
- quarterly variations in our or Nextel's operating results;
- variations in our or Nextel's operating results from the expectations of
securities analysts and investors;
- changes in expectations as to our or Nextel's future financial
performance, including financial estimates by securities analysts and
investors;
- changes in laws and regulations effecting the telecommunications industry;
- announcements by third parties of significant claims or proceedings
against us;
- changes in market valuations of Nextel or other telecommunications
companies;
- announcements of technological innovations or new services by us, Nextel
or our competitors;
- announcements by us, Nextel or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
- additions or departures of key personnel;
- future sales of our Class A common stock; and
- stock market price and volume fluctuations.
ADDITIONAL SHARES OF OUR CLASS A COMMON STOCK WILL BE ELIGIBLE FOR PUBLIC SALE
IN THE FUTURE AND MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR CLASS A COMMON
STOCK.
Sales of a substantial number of shares of our Class A common stock in the
public market following this offering could adversely affect the market price of
our Class A common stock. After this offering, we will have 158,927,974 shares
of Class A common stock outstanding, and 236,710,600 shares of Class A and
Class B common stock outstanding. Our Class B common stock is identical to our
Class A common stock and is convertible at any time into Class A common stock on
a one-for-one basis upon transfers by its original holders to third parties.
20
<PAGE>
The following table shows the timing of when the shares of Class A common
stock outstanding as of January 15, 2000 may be eligible for resale in the
public market:
<TABLE>
<CAPTION>
SHARES OF CLASS A COMMON
DATE STOCK FIRST ELIGIBLE FOR RESALE COMMENT
- ---------------------------------------- ------------------------------- ------------------------
<S> <C> <C>
- - Upon effectiveness.................... 23,500,000 - Freely tradable shares
sold in this offering
- - 181 days after date of this 42,804,024 - Shares eligible for
prospectus............................ sale under Rule 144(k)
without restriction
- - September 9, 2000..................... 9,974,526 - Shares eligible for
sale under Rule 144(k)
without restriction
- - 18 months after date of this 82,649,424 - Shares eligible for
prospectus............................ sale under Rule 144,
subject to certain
restrictions
</TABLE>
YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION
We expect the initial public offering price and, consequently, the price in
the concurrent offering to certain of our existing stockholders will be
substantially higher than the net tangible book value of each outstanding share
of Class A common stock. Purchasers of Class A common stock in this offering
will suffer immediate and substantial dilution. The dilution will be $15.41 per
share in the net tangible book value of the Class A common stock issued in the
initial public offering assuming an initial public offering price of $17.00 per
share.
21
<PAGE>
FORWARD-LOOKING STATEMENTS
Some statements and information contained in this prospectus are not
historical facts, but are forward-looking statements. They can be identified by
the use of forward-looking words such as "believes," "expects," "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 Nextel digital mobile network;
- general economic conditions in the geographic areas and occupational
markets that represent our portion of the Nextel digital mobile network;
- 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 can differ
materially from those expressed or implied, including those set forth under
"Risk Factors."
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the shares of Class A
common stock in this offering will be approximately $376.5 million after
deducting the underwriting discounts and estimated offering expenses. If the
underwriters exercise in full their options to purchase additional shares, we
estimate that our net proceeds in this offering will be approximately
$433.2 million.
We expect to use the net proceeds of this offering for general corporate
purposes, including:
- capital expenditures in connection with the build-out and expansion of our
portion of the Nextel digital mobile network, including build-out of the
territories for which we intend to exercise our option;
- future acquisition of additional frequencies; and
- introduction of new services, sales and marketing activities and working
capital.
Pending these uses, the net proceeds of this offering will be invested in
short-term, interest-bearing government or investment grade securities.
DIVIDEND POLICY
We have never paid cash dividends on any of our capital stock, including our
Class A common stock. We currently intend to retain any future earnings to fund
the development and growth of our business. Therefore, we do not currently
anticipate paying any cash dividends in the foreseeable future. In addition, our
credit facility prohibits us from paying dividends without our lender's consent,
and the indenture pursuant to which our senior discount notes were issued
prohibits us from paying dividends without the consent of the trustee.
22
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999:
- on an actual basis;
- on a pro forma basis after giving effect to the conversion of all
outstanding shares of Series A, Series C and Series D preferred stock into
shares of Class A and Class B common stock; and
- on a pro forma basis as adjusted to show the effect of our receipt of the
net proceeds from the sale of 23,500,000 shares of Class A common stock at
$17.00 per share in this offering, the midpoint of the range set forth on
the cover page of this prospectus.
You should read this table in conjunction with our consolidated financial
statements and the accompanying notes included elsewhere in this prospectus.
The outstanding share information excludes 5,049,600 shares of Class A
common stock issuable upon exercise of options outstanding as of January 15,
2000 having a weighted average exercise price of $1.78 per share. Also excludes
2,434,260 shares of Class A common stock issuable upon the exercise of warrants
outstanding as of January 15, 2000 having an exercise price of less than $0.01
per share.
<TABLE>
<CAPTION>
ACTUAL AS OF PRO FORMA
SEPTEMBER 30, 1999 PRO FORMA AS ADJUSTED
-------------------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents, short-term
investments and restricted cash............ $582,346 $582,346 $ 958,874
======== ======== ==========
Debt:
Credit facility(1)......................... 325,000 325,000 325,000
14% senior discount notes due 2009(2)...... 445,308 445,308 445,308
-------- -------- ----------
Total long-term debt....................... 770,308 770,308 770,308
-------- -------- ----------
Series B redeemable preferred stock due
2010(3).................................... -- 23,675 23,675
-------- -------- ----------
Stockholders' equity:
Series B preferred stock due 2010(3)....... 2 -- --
Convertible preferred stock................ 34 -- --
Class A common stock and additional paid-in
capital.................................. 7,474 215,637 592,165
Class B common stock and additional paid-in
capital.................................. 127,100 127,100
Warrants outstanding....................... 3,847 3,847 3,847
Other paid-in capital...................... 357,077 -- --
Subscription receivable.................... (142,489) (142,489) (142,489)
Deferred compensation...................... (5,432) (5,432) (5,432)
Accumulated deficit........................ (81,656) (83,481) (83,481)
-------- -------- ----------
Total stockholders' equity............... 138,857 115,182 491,710
-------- -------- ----------
Total capitalization..................... $909,165 $909,165 $1,285,693
======== ======== ==========
</TABLE>
- ------------------------
(1) Nextel Partners Operating Corp. entered into a $425 million credit facility
and, as of September 30, 1999, had drawn down an aggregate of $325 million
in term loans. See "Description of Certain Indebtedness."
(2) Represents the accreted value of the notes as of September 30, 1999.
(3) Relates to Series B preferred stock subject to mandatory redemption by us in
February 2010. Upon the closing of this offering we will record a charge to
accumulated deficit with a credit to the Series B preferred stock
representing the 12% dividend from issuance to date of effectiveness.
Through September 30, 1999 this amounted to $1.8 million and is reflected
above.
23
<PAGE>
DILUTION
If you invest in our Class A common stock, your interest will be diluted to
the extent of the difference between the public offering price per share of our
Class A common stock and the pro forma as adjusted net tangible book value per
share of our Class A common stock after this offering. We calculate net tangible
book value by dividing the net tangible book value, total assets less intangible
assets and total liabilities by the number of outstanding shares of our Class A
and Class B common stock. All of our Class B common stock is owned by Nextel and
one of its subsidiaries, has identical rights as the Class A common stock and is
convertible into Class A common stock at any time upon a transfer of such shares
to a third party.
At September 30, 1999, our pro forma net tangible book value, after giving
effect to the automatic conversion of all outstanding shares of Series A,
Series C and Series D preferred stock into an aggregate of 203,617,272 shares of
common stock upon the closing of this offering, was $(32,722), or $(.00015) per
share of common stock. After giving effect to the sale of the 23,500,000 shares
of Class A common stock at an assumed initial public offering price of
$17.00 per share, less estimated underwriting discounts and commissions and
estimated expenses we expect to pay in connection with this offering, our pro
forma as adjusted net tangible book value at September 30, 1999 would have been
$376,494,778, or $1.59 per share. This represents an immediate increase in the
as adjusted pro forma net tangible book value of $1.59 per share to existing
stockholders and an immediate dilution of $15.41 per share to new investors, or
approximately 91% of the assumed offering price of $17.00 per share.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $ 17.00
----------
Pro forma net tangible book value per share at September 30,
1999...................................................... $ (.00015)
---------
Increase per share attributable to new investors............ 1.59
---------
Pro forma as adjusted net tangible book value per share
after this offering....................................... 1.59
----------
Dilution per share to new investors......................... $ 15.41
==========
</TABLE>
The following table shows on a pro forma as adjusted basis at September 30,
1999, after giving effect to the automatic conversion of all outstanding shares
of Series A, Series C and Series D preferred stock into shares of common stock
upon the closing of this offering, the number of shares of common stock
purchased from us, the total consideration paid to us and the average price paid
per share by existing stockholders and by new investors purchasing Class A
common stock in this offering, before deducting underwriting discounts and
commissions and estimated offering expenses payable by us at an assumed public
offering price of $17.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ------------------------ PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ -------- ------------- -------- ----------
<S> <C> <C> <C> <C> <C>
Existing stockholders............ 213,210,600 90.1% $342,949,000 46.2% $ 1.61
New investors.................... 23,500,000 9.9 399,500,000 53.8 17.00
----------- ---- ------------ ----
Total.......................... 236,710,600 100% $742,449,000 100%
==== ====
</TABLE>
The number of shares outstanding excludes: 5,049,600 shares of Class A
common stock issuable upon exercise of options outstanding as of January 15,
2000 having a weighted average exercise price of $1.78 per share; and 2,434,260
shares of Class A common stock issuable upon the exercise of outstanding
warrants having an exercise price of less than $0.01 per share. To the extent
that any shares are issued upon exercise of options or warrants, there will be
further dilution to new investors.
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
We have summarized below our historical consolidated financial data as of
December 31, 1998 and September 30, 1999 and for the year-ended December 31,
1998 and for the nine-month periods ended September 30, 1998 and 1999. We
believe the unaudited historical interim consolidated financial statements have
been prepared on the same basis as the audited financial statements and include
all adjustments, which consist only of normal recurring adjustments, necessary
for the fair presentation of our financial position and results of operations.
The historical operating data presented below is derived from our records.
Please read this table together with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and our audited consolidated
financial statements and the notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30
DECEMBER 31 ---------------------------------
1998 1998 1999
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Operating revenues:
Service revenues........................... $3,745 $1,501 $17,617
Equipment revenues......................... 1,564 632 2,977
------------ ------------ ------------
Total revenues............................... 5,309 2,133 20,594
------------ ------------ ------------
Operating expenses:
Cost of service revenues................... 6,108 3,461 11,786
Cost of equipment revenues................. 2,935 1,149 7,424
Selling, general and administrative........ 13,531 7,342 22,591
Stock-based compensation................... 447 -- 1,579
Depreciation and amortization.............. 4,586 1,860 8,162
------------ ------------ ------------
Total operating expenses..................... 27,607 13,812 51,542
------------ ------------ ------------
Loss from operations......................... (22,298) (11,679) (30,948)
Interest expense............................. -- -- (44,571)
Interest income.............................. -- -- 16,416
------------ ------------ ------------
Loss before income tax provision............. (22,298) (11,679) (59,103)
------------ ------------ ------------
Income tax provision......................... -- -- --
------------ ------------ ------------
Net loss..................................... $(22,298) $(11,679) $(59,103)
============ ============ ============
Basic and diluted net loss per common
share(1)................................... $-- $-- $(27.30)
============ ============ ============
Weighted average common shares
outstanding(1)............................. -- -- 2,164,771
Pro forma basic and diluted net loss per
common share(1)(2)......................... $-- $-- $(0.39)
============ ============ ============
Pro forma weighted average common shares
outstanding(1)............................. -- -- 157,043,210
</TABLE>
- ------------------------
(1) Weighted average common shares outstanding above were calculated assuming
that the shares of Class A and Class B common stock were issued and split on
January 29, 1999, the date of the capitalization transactions. Pro forma
weighted average common shares outstanding were calculated assuming that the
Series A, Series C and Series D preferred stock were converted into shares
of Class A and Class B common stock, after giving effect to the six-for-one
stock split, on January 29, 1999. Per share information is not included for
periods prior to 1999 because the capitalization transactions that occurred
on January 29, 1999 substantially altered our capital structure.
(2) Pro forma basic and diluted net loss per common share was calculated
assuming a $1,825 accrued dividend on the Series B preferred stock. The
Series B preferred stock becomes subject to mandatory redemption in
February 2010. This accrued dividend increases the net loss available to
common stockholders to $60,928.
25
<PAGE>
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1998 SEPTEMBER 30, 1999 PRO FORMA(1)
------------------- -------------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents, short-
term investments and restricted
cash............................. $16 $582,346 $582,346
Plant, property and equipment,
net.............................. 107,948 167,647 167,647
FCC operating licenses, net........ 133,180 148,600 148,600
Total assets....................... 247,666 934,634 934,634
Current liabilities................ 8,995 25,469 25,469
Long term debt..................... -- 770,308 770,308
Mandatorily redeemable preferred
stock............................ -- -- 23,675
Total stockholders' equity......... $238,671 $138,857 $115,182
</TABLE>
- ------------------------
(1) Pro forma amounts reflect adjustments through September 30, 1999 for the
reclassification of the Series B preferred stock, plus accrued dividends,
from the stockholders' equity section of the balance sheet to between
liabilities and stockholders' equity. Upon consummation of this offering, we
will record a charge to accumulated deficit with a credit to Series B
preferred stock representing the 12% dividend accrued from the time of
issuance to the closing of this offering.
(2) Short-term investments include marketable securities and corporate
commercial paper with original purchase maturities greater than three
months. Restricted cash reflects the cash collateral account maintained
under the credit facility equal to borrowings outstanding, until the FCC has
approved the transfer applications.
<TABLE>
<CAPTION>
AS OF
AS OF SEPTEMBER 30,
DECEMBER 31, --------------------
1998 1998 1999
-------------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OTHER DATA:
Covered Pops (end of period) (millions)................ -- -- 5.4
Subscribers (end of period)............................ -- -- 33,401
EBITDA as adjusted(1).................................. $(17,265) $ (9,819) $(21,207)
Capital expenditures(2)................................ $104,334 $101,623 $ 52,756
</TABLE>
- ------------------------
(1) EBITDA as adjusted represents net loss before interest expense, interest
income, depreciation, amortization and deferred compensation expense. EBITDA
is commonly used to analyze companies on the basis of operating performance,
leverage and liquidity. While EBITDA as adjusted should not be construed as
a substitute for operating income or a better measure of liquidity than cash
flow from operating activities, which are determined in accordance with
generally accepted accounting principles, we have presented EBITDA as
adjusted to provide additional information with respect to our ability to
meet future debt service, capital expenditure and working capital
requirements. EBITDA as adjusted is not a measure determined under generally
accepted accounting principles. Also, EBITDA as adjusted as calculated above
may not be comparable to similarly titled measures reported by other
companies.
(2) Capital expenditures are cash outlays during the period related to
depreciable property, plant and equipment. Capital expenditures are required
to purchase network equipment, such as switching and radio transmission
equipment. Capital expenditures also include purchases of other equipment
used for administrative purposes, such as office equipment and computer and
telephone systems.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Some of the statements contained in the following discussion of our
financial condition and results of operations are forward-looking statements.
For a discussion of important factors, including but not limited to the
build-out of our portion of the Nextel digital mobile network, actions of
regulatory authorities and competitors, and other factors that could cause
results to differ materially from the forward-looking statements, see "Risk
Factors."
Please read this discussion together with the unaudited Summary Historical
and Pro Forma Consolidated Financial Information and Operating Data, the audited
consolidated financial statements and the notes thereto and the pro forma
unaudited financial statements and accompanying discussion and notes included
elsewhere in this prospectus.
Our historical results discussed in this section and throughout this
prospectus include the operations we assumed from Nextel in connection with our
initial capitalization which occurred on January 29, 1999. See Note 1 of our
audited consolidated financial statements for a discussion of the formation,
capitalization and basis of presentation.
OVERVIEW
We hold broadband wireless licenses that cover 40 million Pops in 46
markets. We are licensed to operate in 12 of the top 100 Metropolitan
Statistical Areas ranked by population and 51 of the top 200 Metropolitan
Statistical Areas. We also have the option to acquire from Nextel licenses that
cover an additional 13 million Pops, of which we currently intend to acquire
licenses covering 2.3 million Pops.
As of January 15, 2000, we had commercial operations in markets with total
Pops of 9.9 million and the ability to offer service to, or cover, 7.7 million
Pops. These operational markets are in Hawaii, New York, Texas and Pennsylvania.
As of December 31, 1999, we had approximately 46,000 digital subscribers with a
covered market penetration of approximately 0.75%. We intend to be able to
provide service to over 20 million Pops by the end of 2000 and over 27 million
Pops by the end of 2001.
At December 31, 1999, approximately 46,000 customer units subscribed to our
service. We added, net of deactivations, 12,682 subscriber units during the
fourth quarter, and 35,902 subscriber units for the year ended December 31,
1999.
Due to our continued development, build-out and enhancement of our portion
of the Nextel digital mobile network, including our launches in the fourth
quarter of 1999 and January 2000, we expect to continue to experience negative
operating margins. In addition, we anticipate costs such as site rentals,
telecommunications expenses, network equipment 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 our four new
markets.
Until recently, the wireless industry had generally experienced a decline in
average revenue per unit, or ARPU, an industry measure, as a result of
competition from other wireless providers, including new entrants into the
market. In contrast, as reported in its quarterly reports filed with the
Commission, Nextel monthly ARPU has increased over the past few years and
remains above the industry average. We cannot assure you that our results will
duplicate those of Nextel since we set our prices independently and our markets
are distinct from Nextel's markets.
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
27
<PAGE>
relative coverage advantages. These packages have increased subscriber usage in
the industry, while slowing the rate of decline in ARPU 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, we must offer our same rates anywhere on the Nextel digital mobile
network, billing based upon the actual numbers of seconds of airtime after the
first minute, and rate plans that do not distinguish between "peak" and
"off-peak" minutes.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 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 Nextel digital mobile network. Average revenue per unit, or ARPU,
measures total service revenues per month from our subscribers divided by the
average number of digital subscriber units for that month.
The following table sets forth our recent revenues (dollar amounts in
thousands, except for ARPU):
<TABLE>
<CAPTION>
FOR THE NINE FOR THE NINE
MONTHS ENDED PERCENT OF MONTHS ENDED PERCENT OF
SEPTEMBER 30, CONSOLIDATED SEPTEMBER 30, CONSOLIDATED
1998 REVENUES 1999 REVENUES
-------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Service and roaming
revenues................... $1,501 70% $17,617 86%
Equipment sales revenues..... 632 30 2,977 14
------ --- ------- ---
Total revenues............... $2,133 100% $20,594 100%
====== === ======= ===
ARPU (1)..................... N/A $63
=======
</TABLE>
- ------------------------
(1) ARPU does not include roaming revenues. ARPU is not calculated for
September 30, 1998 due to the information not being comparable to the period
ending September 30, 1999.
Our service and equipment sales revenues for the nine months ended
September 30, 1999 were primarily generated from our upstate New York and Hawaii
markets, which became operational July and September 1998, respectively. The
increase in revenues from 1998 to 1999 was due to the growth in the number of
subscribers since the initial launch. From the period ended September 30, 1998
to the period ended September 30, 1999, our subscriber base increased from 3,761
to 33,401. Since these markets were launched during the nine-month period ended
September 30, 1998, revenues for the nine-month period also include use of our
portion of the Nextel digital mobile network by Nextel customers.
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
28
<PAGE>
primarily on the number of cell sites on-air, total minutes of use and mix of
minutes of use between interconnect and Nextel Direct Connect services.
For the nine-month period ended September 30, 1999 our network costs were
$11.8 million compared to $3.5 million for the same period ended 1998. The
increase in expenses for 1999 compared to 1998 was primarily related to nine
months of operational activities compared to initial operating expenses for
upstate New York and Hawaii that launched July and September 1998, respectively.
COST OF EQUIPMENT REVENUES
The cost of the subscriber wireless telephones and accessories sold during
the nine-month period ended September 30, 1999 was $7.4 million compared to
$1.1 million for the same period ended 1998. The increase in cost resulted
primarily from the provision of wireless telephones and accessories to new
subscribers as we have expanded our portion of the Nextel digital mobile
network. As of September 30, 1999, we had 33,401 subscribers. 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 $4.4 million and $500,000 for
the nine-month period ended September 30, 1999 and 1998, respectively. We expect
to continue to employ these discounts and promotions, because we believe that
they will result in increased revenues as the number of our subscribers grows.
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 will 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, information technology,
treasury and accounting functions. While we have directly hired key personnel in
such areas, the nine-month period has been a transition period during which
Nextel has made certain accounting, payroll, customer care, purchasing, human
resources and billing functions available to us. In return for these services,
we pay monthly fees based on Nextel's cost of providing them. For the nine-month
period ended September 30, 1999 we paid Nextel approximately $1.8 million for
transition services. In late October 1999, our customer care center began
operations and at the end of 1999, we had transferred a majority of these
services from Nextel to our employees and systems.
For the nine-month period ended September 30, 1999, our selling, general and
administrative expenses were $22.6 million compared to $7.3 million for the same
period ended 1998. Of the total $22.6 million for the nine months ended
September 1999, $13.3 million pertained to our Hawaii and upstate New York
markets. The remaining amount reflects the costs to hire and set up functional
departments and offices in addition to increasing the sales and marketing
activities for new market launches. The $6.0 million increase in expenses for
the Hawaii and upstate New York markets for the same period reflects the growth
in sales and marketing activities to build the subscriber count to 33,401 at
September 30, 1999.
STOCK BASED COMPENSATION EXPENSE
For the nine-month period ended September 30, 1999, we recorded stock-based
compensation expense associated with our restricted stock purchase agreements of
$1.6 million. This expense is
29
<PAGE>
a non-cash expense. These grants were approved by our board in July 1998, but
shares were not issued until November 1998. For this reason, no expense was
recorded for the nine-month period ended September 30, 1998. These grants are
considered compensatory and we account for their deferred compensation expenses
on a basis similar to that used for stock appreciation rights. We expect the
charge to increase substantially for the fourth quarter of 1999.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expenses were $8.2 million for the nine-month
period ended September 30, 1999. Compared to the same period in 1998, this was
an increase of $6.3 million from $1.9 million. The increase relates primarily to
depreciating the wireless network assets for the launched Hawaii and upstate New
York markets and starting the amortization of our FCC licensed radio spectrum.
NET LOSS
For the nine-month period ended September 30, 1999 we reported a net loss of
approximately $59.1 million. Compared to the same period for 1998, the loss
increased $47.4 million from a total net loss of $11.7 million for the
nine-month period. Expenses increased in all categories as we have added
subscriber usage to the network, hired staff, set-up functional departments and
offices, and increased marketing and sales activities for new launch markets. We
anticipate reporting net losses for the foreseeable future as we grow and expand
to meet the requirements of the business.
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs arise from the capital requirements necessary to
complete the build-out of our portion of the Nextel digital mobile network,
including the future acquisitions of additional frequencies and the introduction
of new services. Currently, we estimate that capital requirements to build out
our portion of the Nextel digital mobile network, including build out of the two
markets that we intend to exercise our option to purchase, and operating losses
and working capital for the period from inception through the end of 2003, will
total approximately $1.2 billion, including the in-kind contributions of Nextel
and Motorola. We expect capital expenditures to include, among other things,
switches, base radios, transmission towers, antennae, radio frequency
engineering, cell site construction, and additional FCC licenses.
For the nine-month period ended September 30, 1999, our capital expenditures
were approximately $67.5 million, including $14.7 million from the Motorola
vendor credit, spent primarily to build out the Nextel digital mobile network in
the upstate New York, Hawaii, Pennsylvania, Kentucky, Iowa, and Texas markets.
The capital expenditures for the nine-month period ended September 30, 1999 was
$34.1 million less than the same period for 1998 due to the construction for the
initial launch of the upstate New York and Hawaii markets. We estimate capital
expenditures for 1999 will total approximately $153.0 million. This estimate
excludes approximately $127.0 million of reimbursements paid to Nextel for the
transactions on January 29, 1999 and September 9, 1999, respectively.
In addition, as of January 15, 2000 we had approximately $20 million in
commitments for additional frequency purchases.
BUILD-OUT SCHEDULE
For purposes of our build-out, we have divided our territory into 48
markets, including the two markets for which we intend to exercise our option to
build out. Our agreements with Nextel require
30
<PAGE>
us to build out and provide service in all of these markets by June 2001. The
table below identifies our currently planned build-out schedule for these
markets:
<TABLE>
<CAPTION>
NEXTEL PARTNERS BUILD-OUT SCHEDULE
- -----------------------------------------------------------------------------------------------
INCREMENTAL COVERED CUMULATIVE COVERED NUMBER OF MARKETS TO BE
YEAR POPULATION POPULATION LAUNCHED
- ---- -------------------- -------------------- -------------------------
<S> <C> <C> <C>
1998 4.6 million 4.6 million 5
1999 1.5 million 6.1 million 2
2000 14.4 million 20.5 million 27
2001 6.6 million 27.1 million 14*
</TABLE>
* including the two markets for which we intend to exercise our option to
acquire.
OPTION TERRITORIES
Under our agreements with Nextel, we have the right, but not the obligation,
to elect to build out additional markets covering approximately 13 million Pops
after we have launched services in five of our existing markets. This option
expires if not exercised prior to August 29, 2000. We intend to use a portion of
the proceeds of this offering to exercise our option to acquire licenses
covering 2.3 million Pops in two markets in Iowa, South Dakota and Pennsylvania.
If and when we elect to build out any option territory we must comply with
the same launch criteria applicable to our non-option markets. In addition, we
have the right to purchase from Nextel all related fixed network equipment and
operational contracts existing in such territories. Moreover, subject to
Nextel's ability to obtain appropriate waivers or approvals from its financing
entities and the FCC, Nextel will transfer to us its licenses to operate certain
frequencies in the option territories.
EQUIPMENT AND OPERATING AGREEMENTS
We have entered into agreements with Motorola to purchase necessary
infrastructure equipment and other related software and services we use as well
as subscriber wireless telephones and other accessories. In addition, in
connection with the capitalization transactions, Motorola contributed to us a
total of $22 million credit against future purchases in exchange for shares of
our preferred stock. As of December 31, 1999 we had fully utilized this credit.
See "Related-Party Transactions--Motorola Purchase Agreements."
Currently, our agreements with Nextel allow us access to Nextel's switches
and switching facilities. Nextel has agreed to cooperate with us to establish a
switch facility for our network and to deploy switches in our territory in a
manner which best meets the following criteria:
- integration of our cell sites into Nextel national switching
infrastructure;
- shared coverage of Nextel Direct Connect service to communities of
interest;
- minimized costs to us and to Nextel; and
- maximized quality of service to our customers and to Nextel customers.
These criteria provide for a flexible construction schedule of switches in
our territory, depending on the existing switches in Nextel's territory and the
amount of customer traffic handled by any one switch so that the call switching
on our network is completed through those switches and facilities. We have the
option of installing our own switching facilities within our territory. However,
our deployment of any switching facility requires coordination with Nextel and
may require Nextel's approval. Our agreements with Nextel require us to
implement and install appropriate switch elements as the number of our
subscribers and cell site levels increases. For example, we will need to install
a mobile switching office for every 120,000 subscriber units or a base site
controller for
31
<PAGE>
every 50 operational cell sites. To the extent contemplated by our original
business plan, we believe that we have sufficient funds on hand for these
installations.
SOURCES OF FUNDING
Third-party financing activities have provided all of our funding which for
the nine-month period ended September 30, 1999 totaled $799 million. This
includes proceeds from cash equity contributions of $67.6 million, the offering
of our 14% senior discount notes for $406.4 million and term loans taken by our
operating subsidiary.
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 agreement to
transfer the stock of Nextel WIP License Corp. to us, valued at $142 million,
all in exchange for our redeemable preferred stock and convertible preferred
stock, and
(2) the contribution by Motorola of a $22.0 million credit to use against
our purchases of Motorola manufactured infrastructure equipment in exchange for
our convertible preferred stock, all of which had been used by September 30,
1999.
In total, the equity contributions consisted of irrevocable commitments of
an aggregate of $202.8 million of cash in exchange for equity in the form of
convertible preferred stock. Our cash equity investors contributed
$52.1 million, $15.5 million, and $52.1 million in January, September and
December 1999, respectively. The remaining portions will be paid in installments
of $52.1 million in December 2000 and $15.5 million per year in September of
2000 and 2001.
Nextel Partners Operating Corp., one of our wholly owned subsidiaries,
entered into a credit facility in January 1999 with a syndicate of banks and
other financial institutions led by Donaldson, Lufkin & Jenrette Securities
Corporation, as arranger, DLJ Capital Funding, as syndication agent and Bank of
Montreal, as administrative agent. This credit facility was amended and restated
in September 1999. The credit facility includes a $175 million term loan, a
$150 million term loan and a $100 million reducing revolving credit facility.
Subject to Nextel Partners Operating Corp.'s right in the future to seek an
increase of up to $50 million, the credit facility will not exceed
$425 million. The $175 million term loan matures on January 29, 2008 and the
$150 million term loan matures on July 29, 2008. The revolving credit facility
will terminate on January 29, 2007.
On January 29, 1999, Nextel Partners Operating Corp. borrowed the full
amount of the $175 million term loan and on September 9, 1999, it borrowed the
full amount of the $150 million term loan. As of December 31, 1999, no amounts
were outstanding under the $100 million revolving credit facility.
The $175 million and the $150 million term loans both bear interest, at our
option, at the administrative agent's alternate base rate or reserve-adjusted
LIBOR plus, in each case, applicable margins. The applicable margin for the
$175 million term loan 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 applicable
margin for the $150 million term loan is 4.25% over LIBOR and 3.25% over the
base rate.
Borrowings under our term loans are secured by a first priority pledge of
all assets of our subsidiaries and a pledge of their capital stock. The credit
facility contains customary financial and
32
<PAGE>
other covenants for the wireless industry. The credit facility also contains
covenants requiring us to maintain certain defined financial ratios and meet
operational targets including service revenues, subscriber units and network
coverage. As of December 31, 1999 we were in compliance with all covenants
associated with our credit facility.
We believe the net proceeds from this offering, together with the equity
investments, the proceeds from the issuance of the senior discount notes and
borrowings under the credit facility, provide us with funds sufficient to
complete the build-out of our existing markets and the two markets for which we
intend to exercise our option to buildout, acquire additional FCC licenses and
provide us with the 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. As of
September 30, 1999, our cash and cash equivalents, short-term investments and
restricted cash balance was $582 million. 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 Nextel digital mobile network and acquire additional FCC
licenses, which might be expensive or impossible to obtain.
MARKET RISKS
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 the term loans of
our subsidiary under its credit facility. As of December 31, 1999, our
subsidiary had $325 million outstanding under its credit facility. In
April 1999, we entered into an interest rate swap agreement for $60 million 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 a hypothetical, instantaneous and unfavorable change of 100
basis points in the interest rate of all our variable rate obligations would be
approximately $2.7 million.
In January 1999, we issued our 14% senior discount notes. While fluctuations
in interest rates may affect the fair value of this debt, interest expense will
not be affected due to the fixed interest rate of the notes.
We do not use financial instruments for trading or other speculative
purposes.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SOFTWARE COSTS--In March 1998, the American Institute of Certified Public
Accountants (the "AICPA") issued Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This
statement became effective for us on January 1, 1999 and established accounting
standards for costs incurred in the acquisition or development and
implementation of computer software. This new standard requires the
capitalization of certain software implementation costs relating to software
acquired or developed and implemented for our use. The adoption of this
statement has not had a significant effect on our financial position or results
of operations.
ACCOUNTING FOR START-UP ACTIVITIES--In April 1998, the AICPA issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities."
This statement became effective on January 1, 1999 and required that costs of
start-up activities and organization costs be expensed as incurred. This
statement has not had a significant effect on our financial position or results
of operations.
ACCOUNTING FOR DERIVATIVE INSTRUMENT AND HEDGING ACTIVITIES--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
33
<PAGE>
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 137 issued August 1999, postpones for one year the mandatory
effective date for SFAS 133 to January 1, 2001. We have not evaluated the
effects of this change on its financial position or results of operations.
REVENUE RECOGNITION IN FINANCIAL STATEMENTS--In November of 1999, the SEC
released Staff Accounting Bulletin Number 101--Revenue Recognition in Financial
Statements. This bulletin will become effective for us for the quarter ended
March 31, 2000. This bulletin establishes more clearly defined revenue
recognition criteria, than previously existing accounting pronouncements, and
specifically addresses revenue recognition requirements for nonrefundable fees,
such as activation fees, collected by a company upon entering into an
arrangement with a customer, such as an arrangement to provide telecommunication
services. We believe that the effects of this bulletin will not be material to
our financial position or results of operations.
34
<PAGE>
BUSINESS
OVERVIEW
We provide digital wireless communications services in mid-sized and smaller
markets throughout the United States and are the only U.S. affiliate of Nextel.
We also hold broadband wireless licenses that cover 40 million Pops in 46
markets. We are licensed to operate in 12 of the top 100 Metropolitan
Statistical Areas ranked by population and 51 of the top 200 Metropolitan
Statistical Areas. We also have the option to acquire from Nextel licenses that
cover an additional 13 million Pops, of which we currently intend to acquire
licenses covering 2.3 million Pops. In January 1999, we entered into our
exclusive affiliation agreement with Nextel, which owns 36.5% of our common
stock prior to this offering and is our largest stockholder. This affiliation
was created to accelerate the build-out of the Nextel digital mobile network by
granting us the exclusive right to offer wireless communications services under
the Nextel brand in selected strategic markets.
The Nextel digital mobile network utilizes a single digital transmission
technology called integrated digital enhanced network, or iDEN, which was
developed by Motorola. This network constitutes one of the largest
fully-integrated wireless communications systems in the United States. By the
end of 2000, we and Nextel together plan to provide service covering all of the
top 100 Metropolitan Statistical Areas in the United States ranked by
population. We offer a differentiated package of services under the Nextel brand
name targeted to business users. We currently offer the following
fully-integrated services accessible through a single wireless telephone:
- digital mobile, or interconnect, telephone service;
- Nextel Direct Connect service that allows users to contact co-workers
instantly, on private one-to-one calls or on a group call; and
- the ability to receive pages and short text messages.
In addition, Nextel has announced its plan to offer users access to new,
digital two-way mobile data and Internet connectivity services, expected to be
commercially available in mid-2000. As part of our agreements with Nextel, we
expect to offer these same data services in our markets after their commercial
implementation by Nextel.
Our senior management team has substantial operating experience, averaging
over 15 years in the communications industry. Each member of senior management
has significant experience working at AT&T Wireless, McCaw Cellular and/or
Nextel. Our senior management and employees own 6.7% of our common stock on a
fully diluted basis prior to this offering. Other key stockholders, in addition
to Nextel, include DLJ Merchant Banking, Madison Dearborn Partners, Motorola and
Eagle River, an investment company controlled by Craig O. McCaw.
BUSINESS STRATEGY
Our goal is to become the leading provider of integrated digital wireless
communication services in each market in our territory by offering
high-capacity, high-quality, advanced communications services on our portion of
the Nextel digital mobile network and implementing key elements of Nextel's
business strategy in our markets. In addition to our relationship with Nextel,
we believe the following elements of our business strategy will distinguish our
wireless service offerings from those of our competitors and will enable us to
compete successfully:
- PROVIDE DIFFERENTIATED PACKAGE OF WIRELESS SERVICES. We offer a package of
services and features that combines multiple wireless communications
options in a single wireless telephone. We will continue to emphasize the
differentiated features of iDEN technology and implement advancements in
this technology platform as they become available. In addition, we
maintain uniformity with Nextel by offering the same rates to our
customers anywhere on the Nextel digital mobile network, billing based
upon the actual numbers of seconds of
35
<PAGE>
airtime after the first minute, and having rate plans that do not
distinguish between "peak" and "off-peak" minutes.
- TARGET BUSINESS CUSTOMERS. We believe that our focus on business customers
will result in higher monthly average revenue per unit and lower average
monthly service cancellations, or terminations. This is a market segment
for which we believe our product has high utility, and we further believe
that we and Nextel are the only major wireless carriers directing fully-
integrated offerings to this segment.
- DEPLOY ROBUST NETWORK RAPIDLY. Our objective is to build robust wireless
systems that cover all key areas of a given market before we launch our
network in that market. We are deploying these systems rapidly to capture
the current and projected growth in wireless usage in the United States.
We are also building our customer care and internal systems to support
future anticipated demand.
- OPERATE IN MID-SIZED AND SMALLER MARKETS. We focus on mid-sized and
smaller markets with demographics similar to those served by Nextel. We
believe that this strategy will allow us to rapidly increase penetration
within our targeted segment, which we believe has historically been
underserved in these markets. We believe that this focus, combined with
our differentiated service offering, will give us the ability to sustain
our pricing strategy.
MARKETS
We hold broadband wireless licenses that cover 40 million Pops in 46
markets. We also have the option to acquire from Nextel licenses that cover an
additional 13 million Pops, of which we currently intend to acquire licenses
covering 2.3 million Pops. We consider these markets to be attractive because:
- based on our understanding of Nextel's plans, these markets are integral
to Nextel's strategy of providing digital wireless services nationwide;
- we believe that Nextel has experienced rapid subscriber growth and
competitive success in markets with similar economic and demographic
characteristics;
- our markets generally contain fewer wireless competitors than do large
urban markets; and
- a number of our markets are adjacent to operational Nextel markets and
include numerous offices and branches of Nextel's national accounts that
are expected to become our customers as soon as we launch service in their
vicinity.
The table below lists the 48 markets in which we intend to provide digital
wireless service:
<TABLE>
<CAPTION>
PLANNED
REGION MARKET NAME TOTAL POPS LAUNCH
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
NORTHEAST Syracuse, NY 2,308,433 2nd Half 1998
Harrisburg/York/Lancaster, PA 1,641,088 1st Half 2000
Albany, NY 1,407,264 2nd Half 1998
Central Pennsylvania (Altoona, Williamsport,
State College)* 1,366,464 2nd Half 2001
Buffalo, NY 1,282,387 2nd Half 1998
Rochester, NY 1,049,391 2nd Half 1998
Wilkes-Barre/Scranton, PA 795,694 1st Half 2000
Erie, PA 369,863 2nd Half 1999
Jamestown, PA 140,541 1st Half 2000
---------------------------
TOTAL 10,361,125
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
PLANNED
REGION MARKET NAME TOTAL POPS LAUNCH
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
MIDWEST Eastern Iowa (Waterloo, Dubuque) 1,829,046 1st Half 2000
Central Illinois (Peoria, Springfield,
Champagne) 1,757,899 1st Half 2000
Evansville/Owensboro, IN 1,652,709 1st Half 2001
Green Bay/Fond du Lac, WI 1,435,451 1st Half 2001
Sioux City, IA/Sioux Falls, SD* 982,519 2nd Half 2001
Nebraska (Omaha, Lincoln) 936,888 1st Half 2000
Des Moines, IA 842,622 1st Half 2000
Idaho (Boise, Sun Valley) 606,139 1st Half 2000
Eau Claire, WI 524,868 2nd Half 2000
Terre Haute, IN 337,121 1st Half 2001
Duluth, WN 263,627 1st Half 2001
Rochester, MN 238,733 1st Half 2001
----------
TOTAL 11,407,622
SOUTH Kentucky (Lexington, Louisville) 2,543,523 1st Half 2000
Arkansas (Fayetteville, Ft. Smith, Pine
Bluff) 1,804,738 1st Half 2001
Shreveport/Monroe/Tyler/Longview, LA/TX 1,597,763 2nd Half 2000
Hattiesburg/Jackson, MS 1,390,583 1st Half 2001
Roanoke/Lynchburg/Charlottesville, VA 1,175,872 1st Half 2001
McAllen/Harlingen/Brownsville, TX 963,565 1st Half 2001
Montgomery, MS 931,668 1st Half 2000
Pensacola/Panama City/Fort Walton Beach, FL 839,162 1st Half 2000
Macon/Warner Robins, GA 743,012 2nd Half 2000
Lafayette/Lake Charles, LA 719,335 1st Half 2000
Temple/Killeen/Waco, TX 672,352 2nd Half 1999
Albany, GA 651,977 2nd Half 2000
Corpus Christi, TX 619,954 2nd Half 2000
Little Rock, AR 560,297 1st Half 2001
Mobile, AL 530,315 1st Half 2000
Alexandria, LA 462,765 2nd Half 2000
Bristol/Johnson City/Kingsport, TN 455,691 2nd Half 2000
Tallahassee, FL 442,904 1st Half 2000
Beaumont, TX 373,194 1st Half 2000
Pascagoula, MS 351,431 1st Half 2000
Columbus, GA 338,865 2nd Half 2000
Texarkana, TX/AR 331,145 2nd Half 2000
Laredo, TX 284,574 1st Half 2001
Dothan/Auburn-Opelika, GA 248,951 2nd Half 2000
Abilene, TX 186,379 1st Half 2001
Bryan/College Station, TX 174,624 1st Half 2000
----------
TOTAL 19,394,639
NONCONTINENTAL US Hawaii (all islands) 1,197,687 2nd Half 1998
COMBINED TOTAL 42,361,073
==========
</TABLE>
* Territories for which we expect to exercise our option to build out.
37
<PAGE>
In addition to the medium-sized and smaller markets, our markets include
selected corridors along interstate highways and state highways. While these
corridors do not have large business or residential populations, we believe that
significant revenues will be earned from travelers on such highways.
Accordingly, the population of a given area may not fully indicate the amount of
the revenues that may be generated in such area.
THE NEXTEL DIGITAL MOBILE NETWORK
We are constructing our portion of the Nextel digital mobile network using
the same technology used by Nextel. This technology, developed by Motorola, is
referred to as integrated Digital Enhanced Network or iDEN.
We plan to operate our portion of the Nextel digital mobile network in
accordance with Nextel's standards to enable both companies to achieve a
consistent level of service throughout the United States. By the end of 2000,
together with Nextel, we plan to provide service covering all of the top 100
metropolitan statistical areas in the United States ranked by population.
Our customers are assured of digital quality and advanced features whether
they are using our or Nextel's portion of the Nextel digital mobile network.
This contrasts to the hybrid analog/digital networks of cellular competitors
that do not support these features in the large analog-only portions of their
networks.
DIGITAL MOBILE NETWORK SERVICES. We offer a bundled product consisting of
the following fully-integrated services accessible through a single wireless
telephone:
- digital mobile, or interconnect, telephone service;
- Nextel Direct Connect service that allows users to contact co-workers
instantly, on private one-to-one calls or on a group call; and
- the ability to receive pages and short-text messages.
In addition, the Nextel digital mobile network has been designed to offer
customers additional features, such as voicemail, call hold, call waiting,
no-answer or busy-signal transfer, call forwarding and three-way calling.
Nextel has announced its plans to offer customers access to new digital
two-way mobile data and Internet connectivity services. Three new wireless
telephones developed and manufactured by Motorola, the "i1000plus," "i500plus"
and "i700plus," have been available since May 1999. These new wireless
telephones are expected to be the first in a product line that incorporates
micro-browsers and wireless Internet capability, and are designed to be combined
with other mobile data applications to be used in connection with Nextel's
planned wireless data service offering. Nextel has begun testing the underlying
technology for these services in several U.S. markets and has announced that it
currently plans to commercially launch the wireless data service offering in
mid-2000. In addition, the "i2000," which is scheduled to be introduced in 2000,
will enable users to roam onto 900MHz GSM systems, which are widely deployed
outside of the U.S.
We believe that Nextel's experience demonstrates that a significant degree
of overlap exists in the customer population for these separate wireless
communications services and that business customers are attracted to the
convenience of combining multiple wireless communications options in a single
wireless telephone and consolidating all wireless service charges into a single
package price and billing statement.
Nextel's experience and market research show that a sizable portion of
business users' communications involve contacting others within the same
organization. Nextel Direct Connect service is especially well suited to address
these intracompany wireless communications needs. Nextel Direct Connect service
enables a user to instantly set up a conference on either a one-to-one or group
basis within the same geographic area. This is a feature that is not included in
38
<PAGE>
any integrated service package currently available from competing cellular and
digital operators. We believe that the Nextel Direct Connect feature currently
generates approximately 50% of our network traffic.
To further expand the flexibility and convenience offered by Nextel Direct
Connect service to users outside a single organization but within a single
industry or interest group in a particular dispatch service area, Nextel has
introduced the Nextel Business Networks service. Nextel Business Networks
extends Nextel Direct Connect service beyond a company's employees to suppliers,
customers and other parties involved in the same transaction, industry or work
site. Nextel reported in October 1999, that more than 1.25 million members were
using more than 150 Nextel Business Networks.
Nextel recently announced an agreement with Microsoft Corp. to deploy Nextel
Online, a wireless Internet service offering which enables Nextel subscribers to
access a customized set of Internet services offered through a version of
Microsoft's MSN portal anytime, anywhere on the Nextel digital mobile network.
We believe Nextel's focus on business customers, particularly those
customers who employ a mobile workforce with high demand for wireless
communications services, accounts, in part, for its performance in the following
areas:
- SUBSCRIBER GROWTH. Nextel reported in its quarterly report that as of
September 30, 1999, it provided digital service to more than 4.1 million
subscriber units in the United States. Based on information reported by
cellular and digital service providers, in seven of the eight quarters
through September 30, 1999, Nextel has been one of the top two U.S.
wireless industry growth leaders as measured by net customer additions.
- SUBSCRIBER LOYALTY. In addition, based on information reported by cellular
and digital service providers, Nextel has had an average monthly churn
rate in each of the four quarters through September 30, 1999 lower than
the industry average. "Churn" is an industry term referring to the
percentage of a service provider's customer base that cancels service or
whose service is terminated during a given month.
- SUBSCRIBER REVENUES. As reported in its quarterly and annual reports filed
with the Commission, Nextel's monthly average revenue per subscriber unit
for Nextel's services was approximately $71 for the first half of 1999, as
compared with a wireless industry average of approximately $40 for the six
months ended June 30, 1999, as reported by the Cellular Telecommunications
Industry Association.
INTERNATIONAL ROAMING AGREEMENTS. In cooperation with Nextel, we expect to
enter into international roaming agreements with carriers operating outside of
the United States. To the extent that Nextel is unable to obtain an independent
agreement for us due to a technological issue, our agreements with Nextel
require us to cooperate with it so that we may obtain the benefit of its
international roaming arrangement.
Currently, our and Nextel's subscribers can roam on Clearnet Communications
Inc.'s network in Canada and Clearnet's subscribers can roam on the Nextel
digital mobile network.
DIGITAL MOBILE NETWORK TECHNOLOGY. The Nextel digital mobile network
combines the iDEN digital technology developed and designed by Motorola with a
low-power, multi-site deployment of base radios similar to that used by cellular
service, that permits us to reuse the same frequency in different cells,
increasing our system's effective capacity. Nextel currently uses iDEN
technology throughout its portion of the Nextel digital mobile network, and we
intend to use it exclusively. iDEN technology is a proprietary format for
delivering signals over scattered, non-contiguous SMR frequencies.
39
<PAGE>
The iDEN technology shares the same basic platform as GSM and TDMA wireless
standards. iDEN shares many common components with the GSM technology that has
been established as the digital cellular communications standard in Europe and
is a variant of the GSM technology that is being deployed by certain PCS
operators in the United States. iDEN differs in a number of significant respects
from the TDMA technology versions being assessed or deployed by many cellular
and PCS providers in the United States. The iDEN technology, when utilized for
the two-way radio dispatch function, can be significantly more efficient than
TDMA technology formats.
The design of the Nextel digital mobile network is premised on dividing a
service area into multiple sites. Each site will contain the base radio
connected by a microwave, fiber optic or telephone line to a computer controlled
switching center. In the case of mobile telephone calls, the switching center
controls the automatic hand-off of calls from site to site as a customer
travels, coordinates calls to and from a customer unit and connects calls to the
public switched telecommunications network. In the case of two-way dispatch
calls, the switching center connects the customer initiating the call directly
to the other customer (in the case of a private call) and directly to a number
of other customers (in the case of a group call) to whom the call is directed in
the geographic service areas.
Nortel Networks supplied the mobile telephone switches for the Nextel
digital mobile network. Nextel reported in its 1998 annual report that as of the
end of that year, it had 31 operational switches and approximately 6,200 cell
sites constructed and in operation in its portion of the Nextel digital mobile
network. As of December 31, 1999, we had one operational switch and
approximately 530 cell sites constructed and in operation in our portion of the
Nextel digital mobile network.
Under our agreements, Nextel is required to cooperate with us to optimize
the location of the switching centers to support both its existing and planned
Nextel digital mobile network service and our launch of service until such time,
if ever, that we attract a customer base in a region sufficient to justify our
own purchase of a switch in that region. In areas where we do not have our own
switch, we obtain switching services from Nextel. See "Related-Party
Transactions."
The implementation of the Nextel digital mobile network design and
technology increases the capacity of a SMR channel significantly, as compared to
analog technology, in two ways:
(1) The content of every call made by a digital subscriber is converted into
a stream of data bits that are encoded and compressed before being
transmitted over the airwaves. By converting the call into digital bits,
both the content and the processing information used to route the call
can be transmitted over the same channel without causing interference
with other calls. Upon receipt of the coded data bits, the subscriber's
handset will decode the signal into an audible voice.
By using the iDEN digital technology instead of analog technology on our
systems, we achieve an approximate six times improvement in efficiency in
the use of our spectrum for two-way radio dispatch service and an
approximate three times improvement in efficiency for mobile telephone
service.
(2) Each cell site provides service in our licensed frequencies to a
particular geographic area by permitting the customer's handset to
communicate with our network. By designing our system with multiple cell
sites, we are able to reuse the frequency channels many times throughout
the same license area by placing our transmitters at low elevation sites
and restricting the power of each transmitter to a directed geographic
area, which may be less than a mile and up to thirty miles. This process
avoids interference, while permitting significantly more customers to use
the frequencies allotted to us.
The use of the spectrum in the manner described above, combining digital
compression technology with the reuse of spectrum throughout our license area,
allows us to support more customer calls than would otherwise be the case.
40
<PAGE>
NETWORK BUILD-OUT AND CAPITAL EXPENDITURE PLAN
For purposes of our build-out, we have divided our territory into 48
markets, including the two markets for which we intend to exercise our option to
build out. Our agreements with Nextel require us to build out and provide
service in all of these markets by June 2001. The table below identifies our
currently planned build-out schedule for these markets:
<TABLE>
<CAPTION>
NEXTEL PARTNERS BUILD-OUT SCHEDULE
- -----------------------------------------------------------------------------------------------
INCREMENTAL COVERED CUMULATIVE COVERED NUMBER OF MARKETS TO BE
YEAR POPULATION POPULATION LAUNCHED
- ---- -------------------- -------------------- -------------------------
<S> <C> <C> <C>
1998 4.6 million 4.6 million 5
1999 1.5 million 6.1 million 2
2000 14.4 million 20.5 million 27
2001 6.6 million 27.1 million 14*
</TABLE>
- ------------------------
* Including the two markets for which we intend to exercise our option to
acquire.
Under the terms of the operating agreements, specific areas, including
metropolitan areas, smaller communities and corridors, are "required build"
areas. Our agreements with Nextel require us to launch commercial service in
these areas and we have ongoing requirements to complete additional build-outs
in subsequent years.
In addition, we have the option to elect to build out certain additional
markets covering approximately 13 million Pops once we have launched services in
five of our existing markets. We currently intend to exercise this option with
respect to licenses covering 2.3 million Pops. This option expires if not
exercised prior to August 29, 2000. Nextel may build out option markets prior to
our exercise of an option if Nextel provides us with notice of its intent to
build out an optioned market and, in response to the notice, we decline to
exercise our option to build out that market. If our required markets are not
timely built-out or if we choose not to build out optional markets, Nextel will
have the right to build out these markets. If Nextel timely completes the
build-out of these areas, we will have no right to acquire or operate our
network in those areas.
Currently, we estimate that capital requirements to build out our portion of
the Nextel digital mobile network, including build-out of the two markets that
we intend to exercise our option to acquire, and operating losses and working
capital for the period from inception through the end of 2003, will total
approximately $1.2 billion, including the in-kind contributions of Nextel and
Motorola.
CELL SITE ACQUISITION AND CONSTRUCTION. As of December 31, 1999, we had
leasehold interests in 1,010 cell site locations for our transmission equipment
throughout our territory, which is more than 56% of the 1,800 sites that we
estimate will be required to complete the initial system build-out of our
portion of the Nextel digital mobile network. Of these sites, 530 were equipped
and operational at December 31, 1999. In April 1999, Nextel sold its towers to
SpectraSite Communications and entered into agreements pursuant to which
SpectraSite would build or purchase additional towers, including towers in our
territory. At Nextel's request, we have entered into leasing arrangements with
SpectraSite on agreed terms for space on all towers we need in our territory
that SpectraSite controls. With respect to all SpectraSite towers in our
territory on which we lease space, Nextel has agreed to subsidize us for amounts
owed SpectraSite in excess of amounts we had initially agreed to pay under our
master lease agreement with Nextel.
To reduce the risk of zoning and other local regulatory delays, construction
delays and site acquisition costs, we intend to locate our cell sites on
existing transmission towers owned by third parties wherever possible or if
necessary on towers constructed or purchased by SpectraSite or other contracted
third parties at our request. In addition, we plan to take advantage of the
capacity of iDEN technology to efficiently employ base radio equipment for less
densely-populated areas and for coverage along interstate highways.
41
<PAGE>
BUILD-OUT CRITERIA
Our agreements with Nextel require us to build out our markets in compliance
with the site acquisition, frequency design, launch criteria and construction
standards that are in effect from time to time and generally applicable to
Nextel and its operating subsidiaries. These standards evolve with changes in
technology and are subject to modification or adjustments to comply with local
rules and laws.
In general, the site acquisition and construction standards include the use
of standard lease or license agreements, appropriate environmental testing of
sites for our transmission equipment, compliance with local zoning and building
permit requirements and compliance with applicable FAA and FCC registration and
other requirements applicable to site construction and operation.
Frequency design requirements relate to specific frequencies, their required
signal strength and performance levels in a given area.
Similarly, the launch criteria include the ability to provide service in the
designated market at specified performance levels to both new customers and
existing Nextel digital mobile network customers who roam into our market and
the ability to support additional features as required by Nextel.
Delays in the build-out and launch of our markets will result in a delay in
our ability to acquire customers and generate revenue. Depending on the length
of the delay and the particular market involved, a delay could impede our
ability to attract customers and generate revenue in accordance with our
business plan. In addition, if we fail to launch two or more markets in any year
within 180 days of the scheduled launch date, or if we fail to complete the
build-out of two or more markets in any year within 180 days of the scheduled
build-out date, we could be in default of our agreements with Nextel.
RELATIONSHIP WITH NEXTEL
We intend to capitalize on our relationship with Nextel, and believe our
relationship provides strategic and cost-saving advantages, including the
following:
- NEXTEL BRAND AWARENESS AND MARKETING PROGRAMS. We benefit from the broad
scope and geographic coverage of Nextel's marketing efforts and related
advertising campaigns, which are designed to increase awareness of the
Nextel brand name and stimulate interest in and demand for Nextel service
by stressing its versatility, value, simplicity and quality.
- NATIONWIDE ROAMING. Our customers and customers of Nextel are able to use
interconnect service to roam on both networks at no additional charge to
the customer. Nextel provides our customers the same basic mobile
telephone functionality and related features available to them in our
markets when they roam into Nextel's markets. Conversely, Nextel's
customers generate revenue for us when they roam into our markets.
- NEXTEL COMMUNICATIONS SUPPORT SERVICES. The operating agreements enable us
to:
- use Nextel's switching facilities and network monitoring center;
- use Nextel's back-office systems to support customer activation and
billing;
- access technology improvements from Nextel's research and development;
and
- use Nextel's employee training courses.
Prices for these services are based on Nextel's cost to provide us these
services.
42
<PAGE>
- NEXTEL'S EXISTING RELATIONSHIPS WITH VENDORS AND DISTRIBUTORS. Through our
relationship with Nextel, we have access to many of Nextel's vendors that
provide the equipment and services that we need in our business.
Additionally Motorola sells base radios and iDEN-based wireless telephones
to us at the same prices it offers to Nextel. We intend to develop our own
relationships with vendors and seek from Nextel's distributors terms
similar to those agreed to with Nextel.
- NEXTEL'S NATIONAL ACCOUNTS. We anticipate that individuals in numerous
offices and branches of Nextel's national accounts will become our
subscribers when we launch service in their area. On January 29, 1999,
Nextel national accounts' subscribers who were located in our operational
markets became our subscribers.
SALES AND MARKETING
BUSINESS CUSTOMER FOCUS. Our marketing strategy targets business users who
we believe are particularly attracted to the Nextel digital mobile network's
potential for increasing efficiencies and reducing costs. Following Nextel's
marketing approach, we have initially concentrated our sales efforts on a number
of distinct groups of mobile workers, including personnel in the transportation,
delivery, real property and facilities management, construction and building
trades, landscaping and other service sectors. We will gradually expand our
target customer group to include additional industry groups.
As we launch in each of our markets, we receive leads and prospects
previously generated by the Nextel marketing organization within our territory,
either as a result of offices or branches of Nextel national accounts located
within our territory or as a result of inquiries directed to Nextel prior to the
launch of services. We expect to continue to benefit from Nextel's national
advertising campaigns. We utilize a direct sales force as well as indirect sales
channels, direct mail and telemarketing to market our services and products.
We believe, based on our experience, that this focus on business customers
and our unique bundle of services have resulted in higher monthly average
revenue per unit and lower average monthly churn rate than other wireless
services providers have experienced.
PRICING PLANS. Although we set our price levels in each of our markets
independently of Nextel, we are required to adopt several of Nextel's pricing
strategies that we believe to be both profitable and attractive to customers.
These pricing features include home-rate roaming, one-second rounding after the
first minute and flat-rate pricing, which we believe differentiate our services
from competitors, and enable us to benefit from Nextel's national advertising of
these features:
- HOME-RATE ROAMING. Our customers pay the same rates they pay at home when
traveling anywhere on either Nextel's or our portion of the Nextel digital
mobile network, without the complex dialing procedures, access fees or
higher roaming airtime rates frequently encountered by roaming customers
of cellular providers.
- ONE-SECOND ROUNDING. We bill our mobile telephone service customers based
on the actual number of seconds of airtime used after the first minute, in
contrast to the common cellular industry practice of rounding call lengths
up to the next minute.
- FLAT-RATE PRICING. Our rate plans do not distinguish between "peak" and
"off-peak" minutes, charging one airtime rate and a single nationwide long
distance rate, regardless of the time of day a call is made.
43
<PAGE>
CUSTOMER CARE
In October 1999 our customer call center in Las Vegas, Nevada became
operational and began to provide services to all of our subscribers. Our
subscribers can reach customer service by dialing 611 from their wireless
telephones or by calling the national 800 number advertised by Nextel. Nextel's
call center routes all calls from our customers to us. In addition to customer
care, we have strategically located our credit and activation, order
fulfillment, and collection services in the call center.
THE NEXTEL OPERATING AGREEMENTS
The operating agreements define the relationship between Nextel and us. The
initial terms of the agreements are for ten years and may be extended for up to
two and a half years, with four ten-year renewals available at our option.
Pursuant to the agreements, Nextel is obligated to share with us its
experience in operating iDEN networks by granting us access to meetings and
employee training sessions and providing specified services upon our request.
The most significant services Nextel may provide us are:
- use of certain of Nextel's switching facilities in exchange for a
per-minute fee based on Nextel's national average cost for such service,
including financing and depreciation costs;
- monitoring of switches owned by us on a 24-hour per day basis by Nextel's
network monitoring center in exchange for a fee based on pro-rata costs;
- use of Nextel's back-office systems in order to support customer
activation, billing and customer care for national accounts in exchange
for fees based on Nextel's national average cost for such services;
- use of the Nextel brand name and certain trademarks and service marks, and
the marketing and advertising materials developed by Nextel in exchange
for a marketing services fee described below;
- access to technology enhancements and improvements; and
- access to Nextel vendor contracts and terms wherever possible, including
Motorola infrastructure and subscriber unit pricing.
To further support us in our efforts, Nextel has also agreed that:
- the per-minute switching fees through the year 2001 will be based on the
estimated national average cost for such services in the year 2001;
- the switch monitoring services will be supplied for a fee based on
Nextel's average costs of providing such service;
- no marketing services fee is due until the later of January 2002 or the
first month of the quarter beginning after we achieve two consecutive
quarters of positive EBITDA as adjusted, at which time the fee will be
0.5% of gross monthly service revenues for the next three years of
operation and 1.0% of gross monthly service revenues thereafter; and
- when a Nextel subscriber roams on our system we receive a percentage of
the service revenues generated by the roaming subscriber. The percentage
is 90% of the service revenues in 2000, 85% in 2001 and 80% thereafter,
subject to upward or downward adjustment based on the relative customer
satisfaction levels of Nextel and us.
44
<PAGE>
In addition, the operating agreements demand that we adhere to certain key
operating requirements, including the following:
- we generally are required to offer the full complement of products and
services offered by Nextel in comparable service areas;
- we must abide by Nextel's standard pricing structure (principally
home-rate pricing, per-second billing, and flat-rate pricing), but we need
not charge the same prices as Nextel;
- we must meet minimum network performance and customer care thresholds; and
- we must adhere to standards in other operating areas, such as frequency
design, site acquisition, construction, cell site maintenance, and
marketing and advertising.
THE U.S. WIRELESS COMMUNICATIONS INDUSTRY
OVERVIEW
Wireless communications systems use a variety of radio frequencies to
transmit voice and data, and include cellular telephone services, ESMR, PCS and
paging. ESMR stands for enhanced specialized mobile radio, and is the regulatory
term applied to the services, including those provided by the Nextel digital
mobile network, that combine wireless telephone service with a dispatch feature
and paging. PCS stands for personal communications service, and refers to
digital wireless telephone service.
Since the first commercial cellular systems became operational in 1983,
wireless telecommunications services have grown dramatically as these services
have become widely available and increasingly affordable. This growth has been
driven by technological advances, changes in consumer preferences and increased
availability of spectrum to new operators.
The provision of cellular telephone service began with providers utilizing
the 800 MHz band of radio frequency in 1982 when the FCC began issuing two
licenses per market throughout the United States. Since then, the demand for
wireless telecommunications has grown rapidly, driven by the increased
availability of services, technological advancements, regulatory changes,
increased competition and lower prices. According to the Cellular
Telecommunications Industry Association, the number of wireless subscribers in
the United States, including cellular, PCS and ESMR, has grown from
approximately 200,000 at June 30, 1985 to over 76 million at June 30, 1999,
which reflected a penetration rate of 27.6%.
45
<PAGE>
The following graph and table set forth certain U.S. wireless industry
statistics:
U.S. WIRELESS SUBSCRIBERS
DECEMBER 1992 - JUNE 1999
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
NUMBER OF SUBSCRIBER
<S> <C>
(in millions)
1992 11,000
1993 16,000
1994 24,100
1995 33,800
1996 44,000
1997 55,300
1998 69,200
June 30,1999 76,300
</TABLE>
<TABLE>
<CAPTION>
SIX
MONTHS
YEAR ENDED DECEMBER 31, ENDED
-------------------------------------------------------------------------- JUNE 30,
WIRELESS INDUSTRY STATISTICS(1) 1992 1993 1994 1995 1996 1997 1998 1999
- ------------------------------- -------- -------- -------- -------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total service revenues (in
billions)..................... $ 7.8 $ 10.9 $ 14.2 $ 19.1 $ 23.6 $ 27.5 $ 33.1 $ 19.4
Wireless subscribers at end of
period (in millions).......... 11.0 16.0 24.1 33.8 44.0 55.3 69.2 76.3
Subscriber growth............... 46.0% 45.1% 50.8% 40.0% 30.4% 25.6% 25.1% 25.5%
Average monthly revenues per
subscriber.................... $68.68 $61.49 $56.21 $51.00 $47.70 $42.78 $39.43 $40.24
Ending penetration.............. 4.3% 6.2% 9.2% 12.9% 16.6% 20.0% 25.0% 27.6%
Digital subscribers at end of
period (in millions).......... -- -- -- -- -- 6.5 18.3 --
</TABLE>
- ------------------------
Source: Cellular Telecommunications Industry Association and Census Bureau Data.
(1) Reflects domestic U.S. commercially operational cellular, ESMR and PCS
providers.
In 1993, the FCC allocated a portion of the radio spectrum, 1850-1990 MHz,
for the provision of a new wireless communications service commonly known as
PCS. The FCC has described PCS as radio communications that encompass mobile and
ancillary communication that provide services to individuals and businesses and
can be integrated with a variety of competing networks. The FCC's stated
objectives in auctioning bandwidth for PCS were to foster competition to
existing cellular carriers, increase availability of wireless services to a
broader segment of the public, and bring innovative technology to the U.S.
wireless industry. From 1995 through 1997, the FCC conducted auctions in which
industry participants were awarded PCS licenses for designated areas throughout
the United States.
46
<PAGE>
WIRELESS COMMUNICATIONS SYSTEMS
In the U.S. wireless communications industry, there are three wireless
telephone services: cellular, ESMR and PCS. Currently, cellular is the
predominant service available and has several competitive advantages. Cellular
and ESMR services utilize radio spectrum in the 800 MHz band while PCS operates
at higher frequencies of 1850 to 1990 MHz. Use of the 800 MHz band gives
cellular and ESMR superior ability to penetrate objects and structures and
spread or "propagate" through air, reducing infrastructure costs since fewer
base radios are needed to cover a given area and increasing the ability to
penetrate buildings and other physical obstacles.
All cellular services transmissions were originally analog-based, although
some cellular providers have now overlaid digital systems alongside their analog
systems in many markets. Analog cellular technology has the advantage of using a
consistent standard nationwide, permitting nationwide roaming using a single
mode (i.e., analog), single band (i.e., cellular) handset. On the other hand,
analog technology has several disadvantages, including less efficient use of
spectrum, which reduces effective call capacity, inconsistent service quality,
reduced privacy, security and reliability as compared to digital technologies
and the inability to offer services such as voice mail, call waiting or caller
identification.
Beginning in 1995, the FCC allocated the 1850 to 1990 MHz portion of the
radio spectrum for PCS service. All PCS services, like ESMR, are all-digital
systems which convert voice or data signals into a stream of binary digits that
is compressed before transmission, enabling a single radio channel to carry
multiple simultaneous signal transmissions. This enhanced capacity, along with
improvements in digital signaling, allows digital-based wireless technologies to
offer new and enhanced services, improved voice quality and system flexibility,
as compared with analog technologies. Call forwarding, call waiting and greater
call privacy are among the enhanced services digital systems provide. In
addition, due to the reduced power consumption of digital handsets, users
benefit from an extended battery life.
The FCC assigned non-contiguous portions of the 800 MHz band to specialized
mobile radio service or "SMR," which was initially dedicated to analog two-way
radio dispatch services. This service only became viable in the wireless
telephone market with the introduction in 1993 of ESMR, which applies digital
technology to make use of the 800 MHz spectrum band and its superior propagation
characteristics to deliver the advantages of a digital wireless mobile telephone
system while retaining and significantly enhancing the value of SMR's
traditional dispatch feature.
Unlike analog cellular, which has been implemented in a uniform manner
across the United States, several mutually incompatible digital technologies are
currently in use in the United States. Roaming into different areas often
requires multi-mode (analog/digital) and/or multi-band (PCS/ cellular) handsets
that function at both cellular and PCS frequencies and/or are equipped for more
than one type of modulation technology. Time-division technologies, which
include Global System for Mobile Communications or "GSM," Time Division Multiple
Access or "TDMA" and iDEN break up each transmission channel into time slots
that increase effective capacity. Code Division Multiple Access or "CDMA"
technology is a spread-spectrum technology which transmits portions of many
messages over a broad portion of the available spectrum rather than a single
channel. iDEN phones presently operate only in the iDEN mode within SMR
frequencies, and therefore cannot roam onto other digital or analog wireless
networks.
NEXTEL
Nextel deployed a second generation of Motorola's iDEN technology beginning
in the third quarter of 1996. In its quarterly and annual reports, Nextel has
reported a high rate of customer growth since that time, making it one of the
industry's growth leaders as compared to information reported by other cellular
and digital service providers. Based on Nextel's quarterly reports, over the
47
<PAGE>
past three years, the number of Nextel's ESMR customers has grown at a 106.9%
compounded growth rate, quarter over quarter and as of September 30, 1999, the
number of Nextel's ESMR customers is estimated to have grown to more than 4.1
million.
The following chart illustrates the quarterly growth of Nextel's ESMR
customers over the past four years. Because our physical network will take
several years to build out fully, and because of the smaller size of our
territory as compared to Nextel's, our rate of customer growth may not equal or
exceed Nextel's results. Moreover, we cannot assure you that Nextel, whose
growth we believe has been driven primarily by its success in penetrating its
core market of industries dependent upon mobile work groups, will sustain its
recent growth rates in the future.
[THE NARRATIVE AND/OR TABULAR INFORMATION BELOW IS A FAIR AND ACCURATE
DESCRIPTION OF GRAPHIC OR IMAGE MATERIAL OMITTED FOR THE PURPOSE OF
EDGAR FILING.]
NEXTEL--QUARTERLY DIGITAL SUBSCRIBERS*
[(IN THOUSANDS)--2 COLUMNS]
<TABLE>
<S> <C>
Q4 94 13.5
Q1 95 22.6
Q2 95 37.0
Q3 95 61.0
Q4 95 85.0
Q1 96 129.1
Q2 96 175.0
Q3 96 228.0
Q4 96 300.3
Q1 97 422.9
Q2 97 624.4
Q3 97 946.8
Q4 97 1,270.7
Q1 98 1,641.5
Q2 98 2,042.1
Q3 98 2,417.4
Q4 98 2,956.0
Q1 99 3,152.9
Q2 99 3,592.9
Q3 99 4,050.9
</TABLE>
- ------------------------
* As reported in Nextel's quarterly and annual reports on Forms 10-Q and 10-K as
filed with the Commission.
Nextel's reported monthly average revenue per unit has generally increased
since 1993, a fact that stands in notable contrast to the overall trend in the
wireless industry, where, according to data reported by the Cellular
Telecommunications Industry Association, monthly average revenue per unit
declined from 1993 to 1998 with a slight increase in the first half of 1999.
Nextel's monthly average revenue per unit may be adversely affected in the
future as it attempts to broaden its customer base and faces increasing
competition. There can be no assurance that our monthly average revenue per unit
will duplicate that of Nextel, because we set our prices independently, and our
markets are geographically and demographically distinct from Nextel's.
48
<PAGE>
The following chart illustrates the quarterly growth of Nextel's monthly
average revenue per unit rates over the past three years.
[THE NARRATIVE AND/OR TABULAR INFORMATION BELOW IS A FAIR AND ACCURATE
DESCRIPTION OF GRAPHIC OR IMAGE MATERIAL OMITTED FOR THE PURPOSE OF
EDGAR FILING.]
NEXTEL--MONTHLY AVERAGE REVENUE PER DIGITAL SUBSCRIBER UNIT*
<TABLE>
<S> <C>
Q2 96 $52
Q3 96 $56
Q4 96 $56
Q1 97 $59
Q2 97 $63
Q3 97 $70
Q4 97 $68
Q1 98 $66
Q2 98 $69
Q3 98 $70
Q4 98 $70
Q1 99 $71
Q2 99 $74
Q3 99 $74
</TABLE>
- ------------------------
* As reported in Nextel's quarterly and annual reports on Forms 10-Q and 10-K as
filed with the Commission.
We believe that Nextel has maintained and increased its monthly ARPU as a
result of the unique features of its differentiated product and its focus on
mobile work groups. In its 1998 annual report, Nextel reported that it believes
that these groups have made its service an integral part of their business
operations, which we believe contributes to high usage and lower rates of churn.
iDEN service offers the same mobile telephone features as digital cellular and
PCS service, including call forwarding, call waiting and greater call privacy.
Moreover, iDEN technology's unique differentiation from other digital standards
is its dispatch service, which is marketed by Nextel Communications and us, as
Nextel Direct Connect service.
The Nextel Direct Connect dispatch capability allows any member of a mobile
team to immediately communicate with any or all of a prearranged Nextel
phone-equipped team of up to 100 members with the push of a button. This
"push-to-talk" feature works like a two-way radio, but, in contrast to analog
dispatch SMR radios, digital iDEN technology allows only the person or persons
being called to hear the conversation.
Nextel Direct Connect service, together with other enhancements, including
call alert, speakerphone capability, short text paging and "hot-sync"
programming (on certain subscriber unit models), differentiate Nextel's digital
service from cellular and PCS providers, and we believe it has been responsible
for Nextel's strong appeal to business users in mobile occupations, including
transportation, delivery, real property and facilities management, construction
and building, landscaping, and other service sectors. "Hot-sync" programming
allows users to quickly and easily program their subscriber units with the data
necessary to form a Direct Connect work group by inserting each unit into a
cradle connected to a personal computer. In addition to its advantages to users,
Nextel Direct Connect service uses only half the bandwidth that an
interconnected call over an iDEN network would use, and this efficient use of
spectrum gives the iDEN service provider the opportunity to offer attractive
pricing for Nextel Direct Connect service.
49
<PAGE>
COMPETITION
In each of the markets where our portion of the Nextel digital mobile
network will operate, we will compete with the two established cellular
licensees and as many as six PCS licensees, including AT&T Wireless, Sprint PCS,
Bell Atlantic, VoiceStream, BellSouth, SBC Communications, PrimeCo and AirTouch.
Our ability to compete effectively with other wireless communications service
providers depends on a number of factors, including:
- the continued satisfactory performance of iDEN technology;
- the establishment and maintenance of roaming service among our market
areas and those of Nextel; and
- the development of cost-effective direct and indirect channels of
distribution for our Nextel digital mobile network products and services.
A substantial number of the entities that have been awarded PCS licenses are
current cellular communications service providers and joint ventures of current
and potential wireless communications service providers, many of which have
financial resources, customer bases and name recognition greater than ours. PCS
operators will likely compete with us in providing some or all of the services
available through our network. Additionally, we expect that existing cellular
service providers, some of which have been operational for a number of years and
have significantly greater financial and technical resources, customer bases and
name recognition than ours, will continue to upgrade their systems to provide
digital wireless communications services competitive with those available on our
network. Moreover, cellular and wireline companies have been granted authority
to participate in dispatch and SMR services, respectively. We also expect our
business to face competition from other technologies and services developed and
introduced in the future.
While we believe that the mobile telephone service currently being provided
on the Nextel digital mobile network utilizing the iDEN technology is similar in
function to and achieves performance levels competitive with those being offered
by other current wireless communications service providers in our market areas,
there are and will in certain cases continue to be differences between the
services provided by us and by cellular and/or PCS system operators and the
performance of their respective systems. The all-digital networks that we and
Nextel operate provide customers with digital quality and advanced features
wherever they roam on the Nextel digital mobile network, in contrast to hybrid
analog/digital networks of cellular competitors, which do not support these
features in the large analog-only portion of their networks. Nevertheless, our
ability to provide roaming services will be more limited than that of carriers
whose subscribers use handsets that can operate on both analog and digital
cellular networks and who have roaming agreements covering larger parts of the
country. As we, with the assistance of Nextel, make progress toward building out
the Nextel digital mobile network nationwide, this disadvantage will be reduced,
but we can give no assurance that the Nextel digital mobile network will ever be
as ubiquitous as other mobile telephone services. In addition, if either PCS or
cellular operators provide two-way radio dispatch services in the future, our
competitive advantage in being uniquely able to combine that service with our
mobile telephone service would be impaired.
Subscriber units on the Nextel digital mobile network are not compatible
with those employed on cellular or PCS systems, and vice versa. This lack of
interoperability may impede our ability to attract cellular or PCS customers or
those new mobile telephone customers that desire the ability to access different
service providers in the same market.
We plan to market the multi-function subscriber units manufactured by
Motorola, and in the future, other manufacturers including Kyocera, who may
license the iDEN technology from Motorola. The subscriber units are and are
likely to remain significantly more expensive than analog handsets, and are and
are likely to remain somewhat more expensive than digital cellular or PCS
50
<PAGE>
handsets that do not incorporate a comparable multi-function capability. We
therefore expect to charge higher prices for the subscriber handsets to be used
by our customers than those charged by operators for analog cellular handsets
and possibly more than those charged by operators for digital cellular handsets.
However, we believe that our multi-function subscriber units currently are
competitively priced compared to multi-function (mobile telephone service and
short text messaging) digital, cellular and PCS handsets.
During the transition to digital technology, certain participants in the
United States cellular industry are offering subscriber units with dual mode
(analog and digital) compatibility. Additionally, certain analog cellular system
operators that directly or through their affiliates also are constructing and
operating digital PCS systems have made available to their customers dual
mode/dual band (800 MHz cellular/1900 MHz PCS) subscriber units, to combine the
enhanced feature set available on digital PCS systems within their digital
service coverage areas with the broader wireless coverage area available on the
analog cellular network. We do not have comparable hybrid subscriber units
available to our customers.
We can give no assurances that potential customers will be willing to accept
system coverage limitations as a trade-off for the enhanced multi-function
wireless communications package we plan to provide on our portion of the Nextel
digital mobile network.
Over the past several years as the number of wireless communications
providers in our market areas has increased, the prices of such providers'
wireless service offerings to customers in those markets have generally been
decreasing. We may encounter market pressures to reduce our service offering
prices or to restructure our service offering packages to respond to particular
short-term, market-specific situations, such as special introductory pricing or
packages that may be offered by new providers launching their service in a
market, or to remain competitive in the event that wireless service providers
generally continue to reduce the prices charged to their customers, particularly
if PCS operators enter the smaller markets that we intend to serve.
Because many of the cellular operators and certain of the PCS operators in
our markets have substantially greater financial resources than us, such
operators may be able to offer prospective customers equipment subsidies or
discounts that are substantially greater than those, if any, that could be
offered by us and may be able to offer services to customers at prices that are
below prices that we are able to offer for comparable services. Thus, our
ability to compete based on the price of our digital mobile network subscriber
units and service offerings will be limited. We cannot predict the competitive
effect that any of these factors, or any combination thereof, will have on us.
Cellular operators and certain PCS operators and entities that have been
awarded PCS licenses each control more spectrum than is allocated for SMR
service in each of the relevant market areas. Each cellular operator is licensed
to operate 25 MHz of spectrum and certain PCS licensees have been licensed for
30 MHz of spectrum in the markets in which they are licensed, while no more than
21.5 MHz is available in the 800 MHz band to all SMR systems, including our
systems, in those markets. The control of more spectrum gives cellular operators
and such PCS licensees the potential for more system capacity and, therefore,
more subscribers than SMR operators, including Nextel and us. We believe that we
generally have adequate spectrum to provide the capacity needed on our portion
of the Nextel digital mobile network currently and for the reasonably
foreseeable future.
In 1997, the FCC reallocated and auctioned 30 MHz of 2.3 GHz spectrum to
wireless services. However, the strict operational and technical limitations the
FCC placed on use of the spectrum will likely prohibit the provision of mobile
services using current technology. Additionally, the FCC has reallocated 220 MHz
of radio spectrum for use by "emerging telecommunications technologies," such as
PCS, low-earth orbit satellites and mobile satellite systems. The FCC has
authorized a consortium of communications companies to provide nationwide mobile
satellite services.
51
<PAGE>
Additionally, the FCC recently reallocated 36 MHz of the former analog
television channels to commercial services, including broadcasts, fixed and
mobile services. We cannot predict how these technologies will develop or what
impact, if any, they will have on our ability to compete for wireless
communications services customers.
The FCC has recently announced plans to reauction over 150 PCS licenses on
July 26, 2000. These licenses may be purchased by our competitors, subject to
FCC's spectrum cap discussed below, and may increase the level of competition in
our markets. The FCC may also allocate additional spectrum at any time and
create rules that would make services provided on that spectrum competitive with
our ESMR service.
EMPLOYEES
As of December 31, 1999, we had approximately 530 employees. None of our
employees are or are expected to be represented by a labor union or subject to a
collective bargaining agreement, nor have we experienced any work stoppage due
to labor disputes. We believe that our relations with our employees are good.
PROPERTIES
We own no material real property. We lease our headquarters located in
Kirkland, Washington. This facility is approximately 14,000 square feet and we
have a lease commitment on the facility through December 31, 2002. We lease
administrative offices of approximately 12,700 square feet in Minnetonka,
Minnesota under a lease expiring March 31, 2002. We lease office space of
approximately 23,000 square feet in Las Vegas, Nevada for operation of our
service call center under a lease expiring May 11, 2004. We lease cell sites for
the transmission of radio service under various master site lease agreements as
well as individual site leases. The terms of these leases generally range from
five to 25 years at monthly rents ranging from $300 to $2,200. As of
December 31, 1999, we had approximately 530 constructed sites at leased
locations.
52
<PAGE>
REGULATION
FEDERAL REGULATION
SMR REGULATION. We are an SMR operator regulated as such by the FCC. The
FCC also regulates the licensing, construction, operation and acquisition of all
other wireless telecommunications systems in the United States, including
cellular and PCS operators. We are generally subject to the same FCC rules and
regulations as cellular and PCS operators, but our status as an SMR operator
creates some important regulatory differences.
Within the limitations of available spectrum and technology, SMR operators
are authorized to provide mobile communications services to business and
individual users, including mobile telephone, two-way radio dispatch, paging and
mobile data services. SMR regulations have undergone significant changes during
the last five years and continue to evolve as new FCC rules and regulations are
adopted.
The first SMR systems became operational in 1974, but these early systems
were not permitted or designed to provide mobile telephone service competitive
with that provided by cellular operators. SMR operators originally emphasized
two-way dispatch service, which involves shorter duration communications than
mobile telephone service and places less demand on system capacity. SMR system
capacity and quality was originally limited by:
- the smaller portion of the radio spectrum allocated to SMR,
- the assignment of SMR frequencies on a non-contiguous basis,
- regulations and procedures that initially served to spread ownership of
SMR licenses among a large number of operators in each market, thereby
further limiting the amount of SMR spectrum available to any particular
operator, and
- older SMR technology, which employed analog transmission and a single
site, high-power transmitter configuration, thus precluding the use of any
given SMR frequency by more than one caller at a time within a given
licensed service area.
The original analog SMR market, therefore, was oriented largely to customers
such as contractors, service companies and delivery services that have
significant field operations and need to provide their personnel with the
ability to communicate directly with one another, either on a one-to-one or
one-to-many basis, within a limited geographic area. SMR licenses granted prior
to 1997 have several unfavorable characteristics, as compared with cellular or
PCS licenses. Because these SMR licenses were on a site-by-site basis, numerous
SMR licenses were required to cover the metropolitan area typically covered by a
single cellular or PCS license.
SMR licenses granted in 1997 and later were granted to cover a large area
(known as an economic area, or EA) rather than a particular antenna at a
particular site. EA licenses, therefore, are more like cellular or PCS licenses
in this regard, and eliminate one of the former regulatory disadvantages of SMR
licenses. Nextel was the largest successful bidder in the FCC's auction of EA
licenses, and, as a result, Nextel WIP License Corp. holds EA licenses for all
of the territories that we intend to serve.
EA licenses grant the licensee exclusive use of the frequencies in the EA
territory. To the extent that another SMR site-by-site licensee may be operating
in the same frequencies in the EA pursuant to another license, the EA licensee
has priority, but must compensate the incumbent for the cost of changing to
another frequency. Most of our EA licenses are free of incumbent carriers other
than Nextel. Nextel has transferred to us those site-by-site licenses located in
our EA territories operating at the same frequencies. EA licenses to operate on
these frequencies were granted pursuant to a one time auction and are issued for
ten years, after which we will need to apply for renewal from
53
<PAGE>
the FCC. EA licensees can generally expect to obtain renewal of their licenses
if they are otherwise in good standing before the FCC.
All of our SMR licenses are subject to FCC build-out requirements. The FCC
recently modified the build-out deadlines for our pre-1997 site-by-site SMR
licenses permitting us to utilize the same build-out schedule as our EA
licenses. Our EA licenses must provide coverage to at least one-third of the
population of the license area within three years of the initial grant and
two-thirds of the population within five years. Failure to comply with the
build-out requirements for both site-by-site licenses and EA licenses may result
in a revocation of these licenses by the FCC. We will be acquiring and utilizing
both site-by-site licenses and EA licenses.
FEDERAL REGULATION OF WIRELESS OPERATORS. SMR regulations have undergone
significant changes during the last five years and continue to evolve as new FCC
rules and regulations are adopted pursuant to the Omnibus Budget Reconciliation
Act of 1993 and the Telecommunications Act. Since 1996 SMR operators like us and
Nextel have been subject to common carrier obligations similar to those of
cellular and PCS operators. This regulatory change recognized the emergence of
Nextel's type of SMR service as competitive with the wireless service provided
by cellular and PCS providers.
As a result, SMR providers like us now have many of the same rights (such as
the right to interconnect with other carriers) and are subject to many of the
same obligations applicable to cellular and PCS operators.
The FCC prohibits any SMR, cellular, or PCS provider, collectively regulated
as "CMRS" providers, from restricting another carrier's ability to resell our
services until November 24, 2002. The FCC also has adopted requirements for CMRS
providers, including covered SMR providers, to implement various enhanced 911
capabilities. The FCC also requires CMRS providers to deploy technology that
would allow customers to keep their telephone numbers when switching to another
carrier. Covered SMR providers, including Nextel and us, along with other CMRS
services providers, must offer this number portability service in the 100
largest metropolitan areas, including the ability to support nationwide roaming,
by November 2002. This requirement also includes enabling calls from our network
to be delivered to telephone numbers which have been switched from one wireline
carrier to another. The FCC is presently considering whether to accelerate this
deployment schedule so that CMRS providers could use this technology to foster
more efficient utilization of telephone numbers. An acceleration of this
schedule could result in significant costs on us and other carriers.
The FCC's spectrum cap regulations limit any entity from holding
attributable interests in more than 45 MHz of licensed broadband PCS, cellular
or covered SMR spectrum with significant overlap in any geographic area. The FCC
has recently upheld this 45MHz cap, while increasing the cap in rural areas to
55MHz. An interest of 20% or more of the equity or voting rights in a PCS, SMR
or cellular licensee may subject an investor to restrictions on ownership of
overlapping wireless providers. These rules may affect our ability to obtain
additional spectrum.
Wireless providers, including us, also must satisfy FCC requirements
relating to technical and reporting matters. One such requirement is the
coordination of proposed frequency usage with adjacent wireless users,
permittees and licensees in order to avoid electrical interference between
adjacent networks. In addition, the height and power of base radio transmitting
facilities of certain wireless providers and the type of signals they emit must
fall within specified parameters.
The FCC is responsible for the other rules and policies which govern the
operations over the SMR spectrum which we intend to use. This includes the terms
under which CMRS providers interconnect their networks and the networks of
wireline and other wireless providers of interstate communications services. The
FCC also has the authority to adjudicate complaints filed under the
54
<PAGE>
Communications Act with respect to service providers subject to its jurisdiction
among other matters. Under its broad oversight authority with respect to market
entry and the promotion of a competitive marketplace for wireless providers, the
FCC regularly conducts rulemaking and other types of proceedings to determine
rules and policies that could affect SMR operations. These rules and policies
are applicable to our operations and we intend to comply with the FCC's
promulgations.
In August 1996, the FCC adopted rules implementing certain Communications
Act provisions that impose a number of obligations for local exchange carriers
to interconnect their network to other carriers' networks which affect wireless
service providers. Established local exchange carriers must provide for
collocation of equipment necessary for interconnection, as well as any
technically feasible method of interconnection requested by a CMRS provider. In
addition, all local exchange carriers are obligated to enter into reciprocal,
cost-based compensation arrangements with CMRS providers for the transmission of
local calls. If we cannot successfully negotiate an interconnection agreement
with an established local exchange carrier, it may require the relevant state
public utilities commission to serve as arbitrators.
In addition, the Communications Assistance for Law Enforcement Act of 1994
requires all telecommunications carriers, including wireless carriers, as of
June 30, 2000, to ensure that their equipment is capable of permitting the
government, pursuant to a court order or other lawful authorization, to
intercept any wire and electronic communications carried by the carrier to or
from its subscribers and to access certain call-identifying information that is
reasonably available to the carriers. Implementation of certain capabilities
required by the FCC must be completed by September 30, 2001. These requirements
are presently subject to appeal in Federal court. Compliance with the
requirements of this act and the FCC's rules could impose significant additional
direct and/or indirect costs on us and other wireless carriers.
Wireless networks are also subject to certain FCC and FAA regulations
respecting the relocation, lighting and construction of transmitter towers and
antennas and are subject to regulation under the National Environmental Policy
Act and the environmental regulations of the FCC. The FCC's rules require
antenna structure owners to notify the FAA of structures that may require
marking or lighting. In addition to our SMR licenses, we may also utilize other
carriers' facilities to connect base radio sites and to link them to their
respective main switching offices. These facilities may be separately licensed
by the FCC and may be subject to regulation as to technical parameters, service,
and transfer or assignment.
Pursuant to the Telecommunications Act, all telecommunications carriers that
provide interstate telecommunications services, including SMR providers such as
ourselves, are required to make an "equitable and non-discriminatory
contribution" to support the cost of federal universal service programs. These
programs are designed to achieve a variety of public interest goals, including
affordable telephone service nationwide, as well as subsidizing
telecommunications services for schools and libraries. Contributions are
calculated on the basis of each carrier's interstate telecommunications revenue.
The Telecommunications Act also permits states to adopt universal service
regulations not inconsistent with the Telecommunications Act or the FCC's
regulations. The FCC has concluded that states can require CMRS providers to
contribute to their universal services funds. Additional costs may be incurred
by us and ultimately by our subscribers as a result of our compliance with these
required contributions.
The Telecommunications Act also requires all telecommunications carriers,
including SMR licensees, to ensure that their services are accessible to and
useable by persons with disabilities, if readily achievable. Compliance with the
Telecommunications Act requirements, and the regulations promulgated thereunder,
could impose additional direct and/or indirect costs on us and other licensees.
55
<PAGE>
In addition, other regulations may be promulgated pursuant to the
Communications Act or the Telecommunications Act which would significantly raise
our cost of providing service. In response, we may be required to modify our
business plans or operations in order to comply with any such regulations.
Moreover, the FCC or other federal government agencies or any state regulatory
agency having jurisdiction over our business may adopt or change regulations or
take other action that could adversely affect our financial condition or results
of operations.
STATE REGULATION AND LOCAL APPROVALS
The states in which we operate generally have state agencies or commissions
charged under state law with regulating telecommunications companies, and local
governments generally seek to regulate placement of transmitters and rights of
way. While the powers of state and local governments to regulate wireless
carriers are limited to some extent by federal law, we will have to devote
resources to comply with state and local requirements. For example, state and
local governments generally may not regulate our rates or our entry into a
market, but are permitted to manage public rights of way, for which they can
require fair and reasonable compensation.
Under the Communications Act, states and local authorities maintain
authority over the zoning of sites where our antennas are located. These
authorities, however, may not discriminate against or prohibit our services
through their use of zoning authority. Therefore, while we may need approvals
for particular sites or may not be able to choose the exact location for our
site we do not foresee significant problems in placing our antennas at sites in
our territory.
PENDING REGULATORY INITIATIVES
The FCC and a number of state regulatory authorities have initiated
proceedings or indicated their intention to examine the implementation of number
portability to permit customers to retain their telephone numbers when they
change service providers, the implementation of various number conservation
mechanisms, and alterations in the structure of universal service funding, among
other matters. These initiatives could impose significant financial obligations
on us and other wireless service providers, the magnitude of which we cannot
predict. Pursuant to Congressional doctrine, the FCC may allocate additional
spectrum, at any time, which may lead to the offering by others of services
competitive with ours.
56
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND DIRECTOR NOMINEE
The following table sets forth certain information with respect to our
executive officers, directors and director nominee:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- ------------------------------------------
<S> <C> <C>
John Chapple.............................. 46 President, Chief Executive Officer and
Chairman of the Board
John Thompson............................. 46 Chief Financial Officer and Treasurer
David Thaler.............................. 44 Vice President--Business Operations
David Aas................................. 46 Vice President--Engineering and Technical
Operations
Perry Satterlee........................... 39 Vice President--Sales and Marketing
Mark Fanning.............................. 40 Vice President--People Development
Donald Manning............................ 39 Vice President, General Counsel and
Secretary
Timothy Donahue........................... 51 Director
Andrew Rush............................... 42 Director
Andrew Sinwell............................ 35 Director
Dennis Weibling........................... 47 Director
Steven Dodge.............................. 54 Director Nominee
</TABLE>
JOHN CHAPPLE worked to organize Nextel Partners throughout 1998 and has been
the President, Chief Executive Officer and Chairman of the Board of Nextel
Partners and our subsidiaries since August 1998. Mr. Chapple, a graduate of
Syracuse University and Harvard University's Advanced Management Program, has
nearly 20 years experience in the cable television and wireless communications
industries. Mr. Chapple was elected to our board of directors pursuant to the
terms of our shareholders' agreement. From 1978 to 1983, he served on the senior
management team of Rogers Cablesystems before moving to American Cablesystems as
Senior Vice President of Operations from 1983 to 1988. From 1988 to 1995, he
served as Executive Vice President of Operations for McCaw Cellular
Communications and subsequently AT&T Wireless Services following the merger of
those companies. From 1995 to 1997, Mr. Chapple was the President and Chief
Operating Officer for Orca Bay Sports and Entertainment in Vancouver, B.C. Orca
Bay owns and operates Vancouver's National Basketball Association and National
Hockey League sports franchises in addition to the General Motors Place sports
arena and retail interests. Mr. Chapple is the past Chairman of Cellular One
Group and the Personal Communications Industry Association, past Vice-Chairman
of the Cellular Telecommunications Industry Association and has been on the
Board of Governors of the NHL and NBA. Mr. Chapple is currently on the Syracuse
University Maxwell School Board of Advisors.
JOHN THOMPSON has been the Chief Financial Officer and Treasurer of Nextel
Partners and our subsidiaries since August 1998 and has approximately 20 years
of finance experience, including 12 years in the wireless communications
industry. Mr. Thompson holds both a B.A. in Accounting and a Juris Doctor from
the University of Puget Sound. From 1978 to 1986, he served as Tax Manager for
Laventhol & Horwath. In 1986, he joined McCaw Cellular Communications as Vice
President of Tax. In 1990, he became Senior Vice President of McCaw Cellular
Communications and assumed a significant role in a number of key initiatives for
the company, including its acquisition of LIN Broadcasting in 1990, the merger
of it and AT&T in 1993, and AT&T's PCS license acquisitions in 1996. In 1997, he
became Chief Financial Officer for AT&T Wireless Services. Mr. Thompson has
served on the boards of a number of AT&T Wireless Services joint ventures,
including Bay Area Cellular Telephone Company.
57
<PAGE>
DAVID THALER has been the Vice President-Business Operations of Nextel
Partners and our subsidiaries since August 1998 and has nearly 17 years of
management experience in the wireless and cable television industries. From
February 1997 to 1998, he served as Senior Vice President and Managing Director
of International Development and Operations for AT&T Wireless Services. In this
role, Mr. Thaler had overall responsibility for all operating facets related to
AT&T Wireless joint ventures in Brazil, Hong Kong, India, Colombia and Taiwan.
From 1995 to 1997, Mr. Thaler was Vice President of Operations for AT&T Wireless
Services' Central Region business unit. From 1988 to 1995, Mr. Thaler served as
Vice President and General Manager of McCaw Cellular Communications' Minnesota
District, providing overall leadership for an operation consisting of fourteen
metropolitan areas. From 1983 to 1988, he served as General Manager and Regional
Vice President for American Cablesystems.
DAVID AAS has been the Vice President-Engineering and Technical Operations
of Nextel Partners and our subsidiaries since August 1998. Prior to joining
Nextel Partners, Mr. Aas served as Vice President of Engineering and Operations
of AT&T Wireless' Messaging Division. Mr. Aas has 21 years of experience in the
wireless industry and has held a number of senior technical management
positions, including positions with Airsignal from 1977 to 1981, MCI from 1981
to 1986, and MobileComm from 1986 to 1989. From 1989 to August 1998, he was with
AT&T Wireless, where he led the design, development, construction and operation
of AT&T Wireless' national messaging network. Mr. Aas served on the Technical
Development Committee of the Personal Communications Industry Association and
led the development and deployment of the PACT two-way messaging system.
PERRY SATTERLEE has been the Vice President-Sales and Marketing of Nextel
Partners and our subsidiaries since August 1998 and has approximately ten years
of wireless industry experience. He spent the prior two years with Nextel, where
he held the position of President-Pacific Northwest Area since its inception in
1996. Prior to joining Nextel, Mr. Satterlee served from 1992 to 1996 as Vice
President and General Manager of AT&T Wireless Services' Central California
District. From 1990 to 1992, he was General Manager of McCaw Cellular
Communications' Ventura/Santa Barbara market. From 1988 to 1990, Mr. Satterlee
was Director of Planning for McCaw Cellular Communications, where he led the
company's planning and budgeting processes.
MARK FANNING has been the Vice President-People Development of Nextel
Partners and our subsidiaries since August 1998 and has over 17 years of human
resources experience, including nine years in the wireless industry with McCaw
Cellular Communications and AT&T Wireless Services. From 1995 to 1998,
Mr. Fanning served as Vice President for People Development Operations for AT&T
Wireless Services. From 1991 to 1995, he served as Director and later as Vice
President of Compensation & Benefits for AT&T Wireless Services. From 1989 to
1991, he was the Director of People Development for McCaw's California/Nevada
region.
DONALD MANNING has been the Vice President, General Counsel and Secretary of
Nextel Partners and our subsidiaries since July 1998. From July 1996 to July
1998, he served as Regional Attorney for the western region of AT&T Wireless
Services, an 11-state business unit generating over $400 million in revenues
annually. Prior to joining AT&T Wireless Services, from September 1989 to July
1998, Mr. Manning was an attorney with Heller Ehrman White and McAuliffe
specializing in corporate and commercial litigation. From September 1985 to
September 1989, he was an attorney with the Atlanta-based firm of Long,
Aldridge & Norman.
TIMOTHY DONAHUE has been a director of Nextel Partners and our subsidiaries
since January 1999. Mr. Donahue was elected to our board of directors as the
designee of Nextel pursuant to the terms of our shareholders' agreement.
Mr. Donahue has been a director of Nextel since June 1996, was the President and
Chief Operating Officer from February 1996 to July 1999, and has been the
President and Chief Executive Officer since July 1999. From 1986 to January
1996, Mr. Donahue held various senior management positions with AT&T Wireless
Services.
58
<PAGE>
ANDREW RUSH has been a director of Nextel Partners and Nextel Partners
Operating Corp. since January 1999. Mr. Rush was elected to our board of
directors as the designee of DLJ Merchant Banking pursuant to the terms of our
shareholders' agreement. Mr. Rush has been a Managing Director of DLJ Merchant
Banking since January 1997. From 1992 to 1997, Mr. Rush was an officer of DLJ
Merchant Banking and its predecessors. Mr. Rush currently serves as a member of
the advisory board of Triax Midwest Associates, L.P. and as a member of the
boards of directors of Societe d'Ethanol de Synthese, American Tissue, Inc. and
Worldwide Fiber, Inc.
ANDREW SINWELL has been a director of Nextel Partners and Nextel Partners
Operating Corp. since January 1999. Mr. Sinwell was elected to our board of
directors as the designee of Madison Dearborn Partners pursuant to the terms of
our shareholders' agreement. Mr. Sinwell is currently a Director of Madison
Dearborn Partners, which he joined in August 1996. From 1994 to 1996,
Mr. Sinwell was a Senior Policy Advisor at the FCC. He currently serves on the
boards of directors of @Link Networks, Inc., Enews.com, Hotwire Services, Inc.,
Reiman Holding Company, LLC, and Western Integrated Network, LLC.
DENNIS WEIBLING has been a director of Nextel Partners and Nextel Partners
Operating Corp. since January 1999. Mr. Weibling was elected to our board of
directors as the designee of Eagle River pursuant to the terms of our
shareholders' agreement. Mr. Weibling has been a director of NEXTLINK since
January 1997. Mr. Weibling has also been President of Eagle River, Inc. since
October 1993. Mr. Weibling is a director of Nextel and a member of the
operations, audit, finance and compensation committees for Nextel. Mr. Weibling
serves on the board and executive committee of Teledesic Corporation, a
satellite telecommunications company backed by Craig O. McCaw and Bill Gates.
STEVEN DODGE has been nominated to be a director of our company. Mr. Dodge
is currently the Chairman and Chief Executive Officer of American Tower
Corporation, an independent owner and operator of communications towers in the
United States. American Tower Corporation was organized in July 1995 as a
subsidiary of American Radio Systems Corporation, of which Mr. Dodge was the
founder and Chief Executive Officer, and was spun off to the American Radio
stockholders at the time of American Radio's merger with CBS in June 1998. At
that time, American Tower Corporation began trading publicly. Mr. Dodge was
employed with American Radio from March 1988 to June 1998, and prior to that
time, from 1978 to 1988, Mr. Dodge was the founder and Chief Executive Officer
of American Cablesystems, a publicly traded cable television company which was
merged into Continental Cable in 1988, now Media One. Mr. Dodge also serves on
the boards of directors of WebLink Wireless Inc., a publicly traded provider of
wireless messaging services, TD Waterhouse Group, Inc., a publicly traded
brokerage firm, and Sensitech, Inc., a supplier of environmentally-sensitive
products.
BOARD OF DIRECTORS
Upon consummation of this offering, our board of directors will be comprised
of six directors. Pursuant to the shareholders' agreement as amended prior to
this offering, certain parties to the agreement, who together will own
approximately 90% of our outstanding common stock upon completion of this
offering, have agreed to vote their shares of our common stock to elect as
directors:
- one person selected by Madison Dearborn Partners: currently, Andrew
Sinwell;
- one person selected by Nextel: currently, Timothy Donahue;
- one person selected by Eagle River: currently, Dennis Weibling; and
- our chief executive officer: currently, John Chapple.
59
<PAGE>
Prior to this offering DLJ Merchant Banking had the right to designate two
directors, one of whom was in turn designated by Madison Dearborn Partners, and
all of the parties to the shareholders' agreement had agreed to vote to appoint
such designees as directors. Andrew Rush was elected to our board as a result of
his designation by DLJ Merchant Banking prior to the amendement to the
shareholders' agreement.
All directors will hold office until the next annual meeting of stockholders
and until their successors are duly elected.
COMMITTEES
Upon consummation of this offering, our audit committee will consist of
Messrs. Rush, Sinwell and Dodge. The audit committee will make recommendations
to our board of directors regarding the selection of independent auditors,
review the scope of audit and other services by our independent auditors, review
the accounting principles and auditing practices and procedures to be used for
our financial statements and review the results of those audits.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We do not currently have a compensation committee, and, instead, our entire
board of directors makes compensation determinations. John Chapple, our Chief
Executive Officer and Chairman of the Board, participated in our board's
deliberations of executive officer compensation in 1999. No interlocking
relationship exists between any member of our board of directors and any member
of the board of directors or compensation committee of any other company, nor
has any such interlocking relationship existed in the past.
DIRECTOR COMPENSATION
To date, none of our directors has received compensation for services
provided to us as a director. Mr. Dodge will receive compensation of $2,500 per
quarter, plus $1,000 for each meeting he attends in person and $500 for each
meeting he attends via conference call. All directors are reimbursed for their
out-of-pocket expenses in serving on the board of directors.
EXECUTIVE COMPENSATION
Our executive officers are elected by, and serve at the discretion of, our
board of directors. There are no family relationships among our directors and
officers.
SUMMARY COMPENSATION TABLE. Prior to January 29, 1999, Nextel Partners did
not pay any compensation to its executive officers, and on January 29, 1999,
certain executive officers received a lump sum in recognition of such officer's
service prior to such date. See "--Executive Employment Contracts and
Termination of Employment Arrangements."
60
<PAGE>
The following table sets forth the compensation paid by us for services
rendered during fiscal year 1999 by our chief executive officer and our other
four most highly compensated executive officers.
<TABLE>
<CAPTION>
ANNUAL LONG-TERM COMPENSATION
COMPENSATION ---------------------------------
NAME AND -------------------- RESTRICTED SECURITIES
PRINCIPAL BASE STOCK UNDERLYING ALL OTHER
POSITION SALARY $ BONUS $ AWARDS(1)($) OPTIONS/SARS(#) COMPENSATION(9)($)
- --------- --------- -------- ------------- ----------------- --------------------
<S> <C> <C> <C> <C> <C>
John Chapple
Chief Executive
Officer............ $150,000 -- $491,111(2) 105,000(7) $87,500
John Thompson
Chief Financial
Officer and
Treasurer.......... 150,000 -- 339,444(3) 315,000(8) 87,500
David Thaler
Vice President--
Business
Operations......... 150,000 -- 195,000(4) 60,000(7) 87,500
David Aas
Vice President--
Engineering and
Technical
Operations......... 140,000 -- 162,500(5) 60,000(7) 10,000
Perry Satterlee
Vice President--
Sales and
Marketing.......... 150,000 -- 137,222(6) 120,000(7) 44,000
</TABLE>
- ------------------------
(1) Represents estimated value of $.17 per share as of the date of grant (less
price paid per share by such officer) for shares of Class A common stock,
$.001 par value, sold to such officer at $.002 per share pursuant to
restricted stock purchase agreements. As of January 1, 2000, 44.5% of these
shares had vested. Assuming continued employment with us, the remaining
shares vest pursuant to the following schedule: an additional 19.5% vest as
of December 31, 2000 and an additional 18% vest as of each of December 31,
2001 and December 31, 2002. See "--Restricted Stock Purchase Agreements."
(2) Represents 2,946,666 shares of Class A common stock, of which 1,311,264
shares have vested as of January 1, 2000.
(3) Represents 2,036,664 shares of Class A common stock, of which 906,318 shares
have vested as of January 1, 2000.
(4) Represents 1,170,000 shares of Class A common stock, of which 520,650 shares
have vested as of January 1, 2000.
(5) Represents 975,000 shares of Class A common stock, of which 433,878 shares
have vested as of January 1, 2000.
61
<PAGE>
(6) Represents 823,332 shares of Class A common stock, of which 366,384 shares
have vested as of January 1, 2000.
(7) Represents options to purchase shares of Class A common stock granted on
December 31, 1999, which options have an exercise price of $1.85 per share
and vest in three equal annual installments.
(8) Represents an option to purchase up to 210,000 shares of Class A common
stock granted to Mr. Thompson on January 29, 1999, which option has an
exercise price of $1.67 per share and is fully vested, as well as an option
to purchase up to 105,000 shares granted on December 31, 1999, which option
has an exercise price of $1.85 per share and vests in three equal annual
installments. See "--Option Grants in Fiscal Year 1999."
(9) Represents lump sum payments made to officers on January 29, 1999 for
services rendered to us prior to that date. See "--Executive Employment
Contracts and Termination of Employment Arrangements."
OPTION GRANTS IN FISCAL YEAR 1999
The following table sets forth certain information with respect to stock
options granted to each of our named executive officers during the fiscal year
ended December 31, 1999. In accordance with the rules of the Securities and
Exchange Commission, also shown below is the potential realizable value over the
term of the option (the period from the grant date to the expiration date) based
on assumed rates of stock appreciation of 5% and 10%, compounded annually. These
amounts are mandated by the Securities and Exchange Commission and do not
represent our estimate of future stock price. Actual gains, if any, on stock
option exercises will depend on the future performance of our Class A common
stock. In fiscal year 1999, we granted options to acquire up to an aggregate of
5,049,600 shares to employees and directors, excluding options that were
subsequently forfeited due to termination, all under our stock option plan and
all at an exercise price equal to the fair market value of our Class A common
stock on the date of grant as determined in good faith by our board of
directors.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK
PERCENT OF TOTAL PRICE APPRECIATION FOR
NUMBER OF SECURITIES OPTIONS GRANTED EXERCISE OPTION TERM
UNDERLYING OPTIONS TO EMPLOYEES IN PRICE PER EXPIRATION -----------------------
NAME GRANTED (#) FISCAL 1999 SHARE DATE 5%($) 10%($)
- ------------------------------- --------------------- ---------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
John Chapple................... 105,000 2.1% $1.85 12/31/09 $2,907,577 $4,629,830
John Thompson.................. 210,000(1) 4.2 1.67 1/29/09 5,538,242 8,417,873
105,000 2.1 1.85 12/31/09 2,907,577 4,629,830
David Thaler................... 60,000 1.2 1.85 12/31/09 1,661,473 2,645,617
David Aas...................... 60,000 1.2 1.85 12/31/09 1,661,473 2,645,617
---------- ----------
Perry Satterlee................ 120,000 2.4 1.85 12/31/09 3,322,945 5,291,235
---------- ----------
</TABLE>
(1) After the fourth anniversary of the stock option agreement pursuant to which
this option was granted, Mr. Thompson may surrender, without payment of the
exercise price, all or a portion of the option for payment in cash by us of
$14.286 per share. The option is currently fully vested and exercisable by
Mr. Thompson and will expire on January 29, 2009.
AGGREGATE OPTION EXERCISES IN FISCAL 1999 AND FISCAL YEAR-END OPTION VALUES
None of our named executive officers exercised any options in fiscal 1999.
With respect to our named executive officers, the following table sets forth
information concerning exercisable and unexercisable options held as of
December 31, 1999. The "Value of Unexercised In-the-Money Options at
December 31, 1999" is based upon an assumed initial public offering price of
$17.00
62
<PAGE>
per share minus the per share exercise price multiplied by the number of shares
underlying the option.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT DECEMBER 31, 1999 DECEMBER 31, 1999 ($)(1)
--------------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
John Chapple...................................... 0 105,000 -- $1,590,750
John Thompson..................................... 210,000 105,000 $3,219,300 1,590,750
David Thaler...................................... 0 60,000 -- 909,000
David Aas......................................... 0 60,000 -- 909,000
----------
Perry Satterlee................................... 0 120,000 -- 1,818,000
</TABLE>
EXECUTIVE EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT ARRANGEMENTS
We have entered, through our wholly owned subsidiary, into employment
agreements with Messrs. Chapple, Thompson, Thaler, Aas, Satterlee and Fanning in
connection with their employment. Each receives an annual base salary ranging
from $125,000 to $150,000, with an additional cash payment of up to 40% of his
then current base salary if certain performance targets are met. On or about
January 29, 1999, each received a lump sum ranging from $70,000 to $90,000 in
recognition of services rendered to us prior to such date. Upon completion of
the build-out of initial sections and applicable optional sections of the Nextel
digital mobile network on or before March 1, 2002, each may receive a raise in
his base salary and a performance-based bonus. In addition, each has agreed that
while employed by us, and for one year thereafter, he will not compete against,
or solicit employees or business from, us or Nextel, or any of our affiliates.
Each agreement has an initial four-year term and further provides that in
the event the employee is terminated without cause or resigns for good reason,
as defined in the agreements the employee shall be entitled to receive up to one
year's base salary plus an amount equal to the employee's most recent annual
bonus.
RESTRICTED STOCK PURCHASE AGREEMENTS AND CHANGE OF CONTROL ARRANGEMENTS
On November 20, 1998, we entered into restricted stock purchase agreements
with each of Messrs. Chapple, Thompson, Thaler, Aas, Satterlee and Fanning in
consideration of their employment, which agreements were amended on January 29,
1999. We also entered into a restricted stock purchase agreement with Donald
Manning on September 9, 1999. Pursuant to these agreements, we sold an aggregate
of 8,834,994 shares of Class A common stock to these executive officers at a
price of $0.002 per share. These shares are subject to vesting provisions and,
subject to certain conditions, unvested shares may be repurchased by us for
$0.02 per share upon termination of the employment of such officer, and vested
shares may be repurchased by us upon termination for cause or resignation
without good reason at varying prices.
As of January 1, 2000, 44.5% of these shares had vested. Assuming continued
employment with us, the remaining shares vest pursuant to the following
schedule: an additional 19.5% vest as of December 31, 2000 and an additional 18%
vest as of each of December 31, 2001 and December 31, 2002. In addition, the
vesting of the shares may be accelerated upon:
- a change of control of us or Nextel;
- termination of employment on account of death or disability, or by us
without cause;
- resignation for good reason as defined in the agreements; or
- subject to certain conditions, upon the sale or other disposition by
affiliates of DLJ Merchant Banking of Series A preferred stock, or the
Class A common stock issuable upon conversion of the Series A preferred
stock.
63
<PAGE>
EMPLOYEE STOCK OPTION PLAN
Our nonqualified stock option plan was adopted by our board of directors
effective as of January 29, 1999 and is anticipated to be approved by our
stockholders in February 2000. This plan offers employees the opportunity to
purchase shares of Class A common stock at a price equal to the fair market
value of such stock as of the date of grant of such options. The total number of
shares that has been reserved for issuance under the plan is 16,545,354 shares
Class A common stock, provided that this number will be increased by the amount
of shares repurchased by us under the restricted stock purchase agreements or
our shareholders' agreement.
Under our stock option plan, no options may be granted to senior managers
unless we achieve certain performance criteria based on buildout, revenue and
EBITDA targets. The grants to employees, other than senior managers, may be
subject to similar performance criteria or other criteria established by our
board of directors. Under the terms of the plan, it is contemplated that
approximately 25% of the options subject to the plan will be granted in
connection with the recruitment of new employees and that senior managers will
receive in the aggregate approximately 20% of the total number of options
granted each year.
Moreover, under the terms of the plan, no more than 30% of the total number
of authorized options may be granted in any year and no options may be granted
under the plan after January 1, 2003. The options granted are exercisable for
ten years. The options are generally non-transferable, and the right to exercise
terminates concurrently with termination of employment. The plan contemplates
the acceleration of vesting of some or all outstanding options upon a change of
control of us.
EMPLOYEE STOCK PURCHASE PLAN
Our employee stock purchase plan was adopted by our board of directors in
January 2000 and is anticipated to be approved by our stockholders in February
2000. The employee stock purchase plan will be effective upon the completion of
this offering. Initially, a total of 3,000,000 shares of Class A common stock
will be reserved for issuance under the employee stock purchase plan.
The employee stock purchase plan, which is intended to qualify under Section
423 of the Internal Revenue Code of 1986, will be administered by a committee
appointed by our board. Our employees, including officers and employee
directors, are eligible to participate in the employee stock purchase plan if
they are employed for at least 20 hours per week.
The employee stock purchase plan will be implemented by consecutive offering
periods ranging in duration from three to 12 months. However, we currently
anticipate that the initial offering period under the employee stock purchase
plan will begin on April 1, 2000 and terminate on or before June 30, 2000. Our
board of directors may change the timing or duration of the offering periods.
The employee stock purchase plan permits eligible employees to purchase shares
of common stock through payroll deductions at 85% of the lesser of the fair
market value per share of the common stock on the first day of the offering
period or on the purchase date. Participants generally may not purchase shares
if, immediately after the grant, the participant would own stock or options to
purchase shares of Class A common stock totaling 5% or more of the total
combined voting power of all of our outstanding capital stock, or more than
$25,000 of our outstanding capital stock in any calendar year.
64
<PAGE>
RELATED-PARTY TRANSACTIONS
Prior to January 29, 1999, we had limited financial resources and Nextel and
Eagle River funded our operations. On January 29, 1999, we reimbursed Nextel and
Eagle River $1.5 million and $1.2 million, respectively, for operating advances
previously made to us, and we made a return of capital payment to Nextel of
$130.9 million representing the reimbursement of net operating expenses of
$15.1 million and capital expenditures of $115.8 million incurred by our
operations prior to January 29, 1999. As of September 30, 1999, we owed Nextel
$2.7 million.
As a result of the initial capitalization transactions which were
consummated on January 29, 1999, we raised $989.4 million in debt and equity
capital through cash and in-kind equity contribution and commitments, issuance
of the notes and borrowings by our principal operating subsidiary. On
September 9, 1999 we raised an additional $209 million through cash and in-kind
equity contribution and commitments and borrowings. In connection with these
transactions, we or one of our subsidiaries entered into several agreements with
our majority stockholders, including operating agreements with Nextel WIP Corp.,
a subsidiary of Nextel, and equipment purchase agreements with Motorola.
CAPITALIZATION TRANSACTIONS
JANUARY 29, 1999 TRANSACTIONS. On January 29, 1999, Nextel assigned to us,
subject to approval by the FCC, certain licenses in exchange for 13,110,000
shares of Series B preferred stock, 52,440,000 shares of Series C preferred
stock, 13,110,000 shares of Series D Preferred Stock and a cash contribution of
$130.9 million. Nextel is the beneficial owner of 36.5% of our common stock on
an as-converted basis prior to this offering and two of our directors, Timothy
M. Donahue and Dennis M. Weibling, are affiliated with Nextel.
Simultaneously, we sold equity securities in a private placement in the
amount of $174.8 million and issued 14% senior discount notes for aggregate
proceeds of approximately $406 million. The equity securities sold consisted of
104,879,826 shares of Series A preferred stock, valued at $170.9 million, and
warrants to purchase 2,434,260 shares of Class A common stock for an exercise
price of less than $0.01 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 of $18.4 million towards the purchase
of infrastructure equipment. As of September 30, 1999 the Company had used
approximately $14.7 million of the vendor credit from Motorola. Motorola is the
beneficial owner of 6.1% of our outstanding common stock on an as-converted
basis prior to this offering.
In addition to Motorola, purchasers of the Series A preferred stock and
warrants in the January 29, 1999 transaction included:
- DLJ Merchant Banking and its affiliates, who collectively hold 27,287,310
shares of Series A preferred stock and warrants to purchase 1,245,822
shares of Class A common stock and are the beneficial owners of 13.3% of
our outstanding common stock on an as-converted basis prior to this
offering. One of our directors, Andrew H. Rush, is affiliated with DLJ
Merchant Banking;
- Madison Dearborn Partners, which holds 26,030,466 shares of Series A
preferred stock and warrants to purchase 1,188,438 shares of Class A
common stock, and is the beneficial owner of 12.7% of our outstanding
common stock on an as-converted basis prior to this offering. One of our
directors, Andrew E. Sinwell, is affiliated with Madison Dearborn
Partners;
- Eagle River, which holds 18,741,678 shares of Series A preferred stock and
758,334 shares of Common A common stock and is the beneficial owner of
9.1% of our outstanding
65
<PAGE>
common stock on an as-converted basis prior to this offering. One of our
directors, Dennis M. Weibling, is affiliated with Eagle River;
- The Huff Alternative Income Fund, LP, which holds 14,239,380 shares of
Series A preferred stock and is the beneficial owner of 6.7% of our
outstanding common stock on an as-converted basis prior to this offering
and a portion of our 14% senior discount notes; and
- John Chapple, our chief executive officer and a director, and the
beneficial owner of 1.6% of our outstanding common stock on an
as-converted basis prior to this offering.
SEPTEMBER 9, 1999 EXPANSION TRANSACTIONS. On September 9,1999, one of our
subsidiaries entered into an expansion territory asset transfer and
reimbursement agreement with Nextel to acquire for $10.6 million certain assets,
properties, rights and interests to be used in connection with the construction
and operation of additional territories. To accomplish the build-out and
operation of this expansion territory, we issued 5,330,142 shares of Series C
preferred stock to Nextel having an aggregate implied value of $8.9 million in
exchange for the contribution of certain licenses and an extension of an
operating agreement governing the build- out of the Nextel digital mobile
network in the expansion territory. We also issued 20,954,820 shares of
Series A preferred stock, valued at $37.2 million, and 6,902,484 shares of
Series C preferred stock, valued at $12.8 million. The equity securities were
issued in exchange for cash of $15.5 million, an irrevocable cash equity
commitment of $30.9 million to be received over the subsequent two-year period,
and a vendor credit from Motorola of $3.6 million towards the purchase of
infrastructure equipment. In addition to Motorola, purchasers of the Series A
preferred stock in the September 9,1999 transaction included DLJ Merchant Bank
and its affiliates, Madison Dearborn Partners, Eagle River, The Huff Alternative
Income Fund, John Chapple, David Aas, our vice president--engineering and
technical operations, Mark Fanning, our vice president--people development,
Perry Satterlee, our vice president--business operations, David Thayler, our
vice president--field operations, and John D. Thompson, our chief financial
officer and treasurer.
Upon the closing of this offering, each outstanding share of Series A
preferred will convert into one share of Class A common stock and each share of
Series C and Series D preferred stock will convert into one share of Class B
common stock.
THE SHAREHOLDERS' AGREEMENT
GENERAL. On January 29, 1999, we entered into a shareholders' agreement
with Nextel WIP Corp., a subsidiary of Nextel, DLJ Merchant Banking, Madison
Dearborn Partners, Eagle River, Motorola and our senior management stockholders.
In that agreement, we agreed to certain matters in connection with our
management and operations and the sale, transfer or other disposition of our
capital stock by these stockholders. This agreement was amended in connection
with this offering.
MANAGEMENT. Under the terms of the shareholders' agreement, we have agreed
that our board of directors will consist of six persons. The parties to the
shareholders' agreement, other than DLJ Merchant Banking, who together will own
approximately 79% of our outstanding common stock upon completion of this
offering, have agreed to vote to appoint as directors:
- one person selected by Madison Dearborn Partners;
- one person selected by Nextel;
- one person selected by Eagle River; and
- our chief executive officer.
66
<PAGE>
Prior to this offering, DLJ Merchant Banking had the right to designate two
directors, one of whom was designated by Madison Dearborn Partners, and all of
the parties to the shareholders' agreement had agreed to vote to appoint such
designees as directors.
On January 29, 1999, the parties to the shareholders' agreement elected John
Chapple, our chief executive officer, Timothy M. Donahue, Nextel's designee,
Andrew H. Rush and Andrew E. Sinwell, DLJ Merchant Banking's designees, and
Dennis M. Weibling, Eagle River's designee, to our board of directors. The right
of a stockholder to designate a director terminates when the stockholder and its
affiliates own, in the aggregate, less than 50% of their original ownership of
our capital stock.
Certain matters, including our liquidation, modification of our material
agreements, determination of senior management compensation, change in our tax
status, modification of our management agreement with Nextel, changes in our
business strategy or objectives, a material change in the technology we use, or
a decision to broaden the scope of our business, require the approval of the
director selected by Nextel, although these approval rights terminate if, after
January 29, 2011, Nextel transfers all of its shares to a third party.
RESTRICTIONS ON TRANSFER. The shareholders' agreement imposes numerous
restrictions with respect to the sale, transfer or other disposition of our
capital stock by the parties to the shareholders' agreement. Generally, prior to
the completion of our portion of the Nextel digital mobile network and the
achievement of positive EBITDA for two consecutive fiscal quarters, excluding
the effects of any optional markets acquired by us, Eagle River, Nextel and the
management stockholders may transfer shares only to family members, affiliates
and certain other permitted transferees; provided, however, that after this
offering, each such stockholder may sell up to 30% of its shares subject to
certain rights of first offer and rights of first refusal available to DLJ
Merchant Banking, Madison Dearborn Partners, Eagle River, Motorola, Nextel, the
management stockholders and their permitted transferees. Other stockholders who
are parties to the shareholders' agreement may transfer their shares to third
parties, subject to these rights of first offer and rights of first refusal.
REGISTRATION RIGHTS. Following this offering, entities affiliated with DLJ
Merchant Banking and Madison Dearborn Partners, will have the following
registration rights, provided in each case that the aggregate proceeds from the
sale of the amount of securities demanded to be registered must be expected to
exceed $50,000,000:
- DLJ Merchant Banking and Madison Dearborn Partners may demand one
registration, at our expense, of up to all of their shares if they hold at
least 10% of our outstanding common stock at the time of demand, assuming
conversion of any outstanding warrants, options and convertible stock; and
- DLJ Merchant Banking and Madison Dearborn Partners may demand a second and
third registration, at their expense, if they hold at least 5% of our
outstanding common stock at the time of demand, assuming conversion of any
outstanding warrants, options and convertible stock.
If DLJ Merchant Banking or Madison Dearborn Partners exercises any of their
demand rights, all of the other parties to the shareholders' agreement would be
entitled to include their shares in such registration, subject to cutback by the
underwriters in any underwritten offering.
Additionally, under the terms of the shareholders' agreement, if we propose
to register any of our securities under the Securities Act, either for our own
account or for the account of other security holders exercising registration
rights, the parties to the shareholders' agreement are entitled to notice of the
registration and to include their shares of common stock in the registration at
our
67
<PAGE>
expense. All of these registration rights are subject to the right of the
underwriters of an offering to limit the number of shares included in such
registration.
Each of Nextel, DLJ Merchant Banking, and its affiliates, Madison Dearborn
Partners, Eagle River, and the management stockholders have entered into a
lock-up agreement with us and have agreed generally not to transfer their shares
or exercise their registration rights for a period of 18 months following this
offering.
PREEMPTIVE AND ANTIDILUTIVE RIGHTS. Prior to the later of completion of the
initial build-out of scheduled sections of our territory and January 29, 2003,
Nextel has the right to preempt any public offering of our stock by us or by DLJ
Merchant Banking and to purchase all of the stock being offered. Nextel has
waived its preemptive right with respect to this offering.
REIMBURSEMENT OF CERTAIN EXPENSES. In 1999 we reimbursed Nextel and Eagle
River $16.6 million and $1.2 million, respectively, for operating expenses made
and incurred by them prior to January 29, 1999 in order to facilitate the
construction of our portion of the Nextel digital mobile network. We also
reimbursed the actual out-of-pocket transaction costs, including fees and
expenses of counsel, for Nextel, Eagle River and DLJ Merchant Banking in
connection with the consummation of the capitalization transactions on
January 29, 1999.
TERMINATION. The shareholders' agreement terminates by its terms on
January 29, 2014, and thus will continue to remain in effect following the
closing of this offering.
NEXTEL OPERATING AGREEMENTS
We, through our principal subsidiary, entered into agreements with Nextel
WIP Corp. which govern the build-out and operation of our portion of the Nextel
digital mobile network. Except as specifically set forth below, these operating
agreements were executed on January 29, 1999 and, in some cases, were amended on
September 9, 1999, and have an initial term of ten years, which may be extended
for up to an additional two and a half years and renewed for up to four ten-year
renewal terms at our option. Summarized below are some important terms of these
agreements.
THE JOINT VENTURE AGREEMENT
BUILD-OUT AND OPERATIONS. Our agreements with Nextel require us to build
our portion of the Nextel digital mobile network on time and make it compatible
with Nextel systems. We have agreed to meet or exceed Nextel quality standards.
We are also required to offer a set of core service features and to upgrade our
system to comply with future Nextel standards. If we determine that
implementation of an upgrade required by Nextel would be materially adverse to
us, then we will not be required to implement the upgrade unless Nextel agrees
to pay a subsidy to us in an amount not to exceed the lesser of:
- our anticipated aggregate net losses resulting from the upgrade;
- our actual net losses associated with the upgrade through the date of the
subsidy payment;
- the anticipated cumulative losses for all the upgrades net of all
cumulative anticipated profits for all the upgrades; and
- the actual cumulative losses for all the upgrades net of all actual
cumulative profits for all the upgrades.
Alternatively, if Nextel elects not to pay us a subsidy in connection with the
required upgrade, then:
- Nextel can agree under certain circumstances to waive the requirement that
we make the upgrade;
68
<PAGE>
- we can exercise an option to provide all non-Nextel stockholders with the
opportunity to put their stock to Nextel, as described below; or
- we can request arbitration to determine the subsidy that Nextel will be
required to pay in connection with the implementation of the upgrade.
ACQUISITION OF LICENSES. In October 1999, we received FCC approval of the
transfer of control of Nextel's initial contribution of licenses to us. We are
currently awaiting FCC approval of the licenses contributed to us in
September 1999 by Nextel. To the extent that we require additional frequencies
to operate our business, the joint venture agreement sets forth the terms under
which we may acquire such frequencies from Nextel, from third parties or from
FCC auctions of spectrum. All of the frequencies we use are subject to transfer
restrictions and rights of first refusal in favor of Nextel.
EQUIPMENT, VENDORS AND DISCOUNTS. If we request, Nextel will try to obtain
for us the same discounts as are available to Nextel from any Nextel vendor or
service provider with whom we are negotiating for the purchase of equipment,
advertising, media buying, telemarketing and related services.
NEXTEL APPROVAL RIGHTS. We have agreed that we will obtain Nextel approval
prior to taking certain action, including:
- making a material change in our technology or business objectives;
- broadening the scope of our business beyond our current business
objectives; or
- disposing all or substantially all of our assets.
EXCLUSIVITY. Nextel has agreed that during the term of the joint venture
agreement, Nextel will not provide digital mobile wireless communications
services within our markets, except that Nextel:
- has certain rights in any of the option territories we elect not to build
out;
- may continue to provide analog 800 MHz service in our markets so long as
the services do not use any of the marks licensed to us under the
trademark license agreement;
- may provide digital wireless communications services in our markets on
non-800 MHz frequencies so long as these services:
- do not use any of the marks licensed to us under the trademark license
agreement, and
- do not use Motorola iDEN or other digital service on 800 MHz
frequencies.
In addition, Nextel has agreed to negotiate with us to give us the first right
to own and operate businesses using the 900 MHz frequency in our territory.
MARKETING, ADVERTISING AND PRICING. We are generally required to adhere to
Nextel's standards for pricing structure, advertising, promotions, customer
care, telemarketing and related activities. We do, however, set our own prices
in our markets, except that we are required to honor pricing plans established
by Nextel for their national account customers even with respect to subscribers
of those national accounts located in our markets.
BACK OFFICE/MIS SERVICES. Nextel provides us access to certain back-office
support and information systems on an ongoing basis. In exchange, we pay Nextel
fees, based on the cost to Nextel cost, for access to and use of these systems.
For the nine-month period ended September 30, 1999, we were charged
approximately $285,000 for these services.
69
<PAGE>
MATERIAL BREACH; TERMINATION. In the case of certain material breaches of
the operating agreements, including, without limitation, a delay in the
completion of the build-out of the Nextel digital mobile network and our failure
to offer services required by Nextel or to meet performance requirements, Nextel
may have the right to terminate the joint venture agreement and the other
operating agreements following an arbitration proceeding.
In the event of a termination of the joint venture agreement, Nextel could,
in certain circumstances, purchase or be forced to purchase, all of our
outstanding stock. See "Description of Capital Stock."
TRADEMARK LICENSE AGREEMENT
Under the trademark license agreement, Nextel granted us a license to use
certain Nextel trademarks and service marks.
We can sublicense the licensed marks to our subsidiaries and authorized
dealers in connection with the marketing, promotion and sale of our services and
equipment. We may pay royalties to Nextel for the use of the licensed marks,
beginning January 1, 2002, if and when, following January 1, 2002 we achieve two
consecutive fiscal quarters of positive EBITDA. In such event, we would pay 0.5%
of our gross monthly service revenues from the time of such event to
December 31, 2004, and thereafter we would pay 1.0% of our gross monthly service
revenues from the later of the time of such event and January 1, 2005. This
agreement terminates automatically upon termination of the joint venture
agreement. Nextel is entitled to seek termination of the trademark license
agreement upon the occurrence of certain material defaults under the joint
venture agreement, even if the joint venture agreement and other operating
agreements remain in effect. Termination of the trademark license agreement
would require, among other things, that we change our corporate name and all of
our promotional materials.
ROAMING AGREEMENT
Through the roaming agreement, we and Nextel have agreed to provide ESMR
service to each other's subscribers when those subscribers are roaming in the
territory of the other.
Subject to quarterly adjustment, we receive revenues from the payment of
roaming fees by Nextel equal to 95% of the aggregate service revenue generated
by Nextel customers roaming on our portion of the Nextel digital mobile network
through 1999, 90% in 2000, 85% in 2001 and 80% thereafter. When our customers
roam onto Nextel portion of the Nextel digital mobile network, 80% of the
aggregate service revenue generated by such customers is paid to Nextel. In
either case, such percentage payments are subject to adjustment based on a
comparison between customer satisfaction levels attained in Nextel's and our
portions of the Nextel digital mobile network. For the nine-month period ended
September 30, 1999, we earned approximately $5.8 million from Nextel customers
roaming on our network and paid approximately $653,000 for our customers roaming
on Nextel systems.
ANALOG MANAGEMENT AGREEMENT
Through the analog management agreement, we permit Nextel to use SMR
frequencies that are covered by the licenses being transferred to us and that
are not being used by us to operate our portion of the Nextel digital mobile
network, to operate analog systems and to offer analog service. If we need to
use these frequencies for our portion of the Nextel digital mobile network, we
may terminate Nextel's right to use any of these frequencies upon at least six
months notice. The analog management agreement requires Nextel to, among other
things, comply with all applicable FCC rules and regulations governing the
licenses covering the managed frequencies.
70
<PAGE>
ASSET AND STOCK TRANSFER AND REIMBURSEMENT AGREEMENTS
On January 29, 1999, we purchased from Nextel assets located in our markets
at a cost of approximately $115.8 million through the asset transfer
reimbursement agreement. We also reimbursed Nextel for operating losses incurred
by Nextel prior to January 29, 1999 in the amount of $15.1 million. On
September 29, 1999, one of our subsidiaries entered into an expansion territory
asset transfer and reimbursement agreement with Nextel to acquire for
$10.6 million certain assets, properties, rights and interests to be used in
connection with the construction and operation of additional territories.
MASTER SITE LEASE AGREEMENT
Under a master site lease agreement, we lease space on telecommunications
towers from Nextel. We pay Nextel monthly rental payments based on the number of
sites subject to the master site lease, and for the nine-month period ended
September 30, 1999, we were charged approximately $407,000 by Nextel under these
arrangements.
Nextel and SpectraSite Holdings, Inc. have entered into an agreement whereby
SpectraSite purchased certain existing telecommunications towers from Nextel and
will build or purchase, and lease back, additional towers, including in each
case towers located in our territory. Concurrent with these transactions, Nextel
and its subsidiaries entered into a master site lease agreement with SpectraSite
in order to lease space on the transferred towers. Currently we lease space on
these towers from Nextel and its affiliates which in turn leases the towers from
SpectraSite. We plan to execute a master site lease agreement with SpectraSite
to replace, and which will contain substantially similar economic terms as, the
current master lease with Nextel. In addition, Nextel has agreed that certain
economic terms, such as the rental amounts due for the first three years, will
be the same under the SpectraSite master lease and, if such terms are less
favorable to us, Nextel will compensate us for the difference.
TRANSITION SERVICES AGREEMENT
Under the transition services agreement, certain accounting, payroll,
customer care, purchasing, human resources and billing functions are made
available to us by Nextel during a defined transition period.
The services provided under the transition services agreement have different
variable terms agreed to by the parties. Subject to notice requirements, we have
the right to terminate any services covered by the transition services agreement
before the end of any term of service. The parties contemplate that in the event
we desire to purchase any services from Nextel following the expiration of the
transition services agreement, Nextel may, at its election, agree to provide
certain services to us on an arm's length basis, at prices to be agreed upon.
We pay monthly fees based on Nextel cost of providing such services. For the
nine-month period ended September 30, 1999, we were charged approximately
$1.9 million for these services.
SWITCH SHARING AGREEMENT
Nextel provides certain telecommunications switching services to us which
permits us to link cell sites to, and electronically access, certain switching
equipment used and maintained by affiliates of Nextel and thereby allows us to
provide ESMR service to our customers in areas in which we do not own a switch.
Until January 1, 2001, we pay Nextel monthly switching fees based on Nextel cost
of providing such services at a rate reflecting Nextel estimated cost as of
January 1, 2001 subject to adjustment, while we develop our own infrastructure.
For the nine-month period ended September 30, 1999, we were charged
approximately $1.5 million for these services.
71
<PAGE>
As Nextel and our operations expand and customer bases grow, the monthly
switching fees are expected to increase in the aggregate, but decrease on a per
customer basis (assuming a reduction in the minute of use charge). We are
entitled to a credit against our monthly switching fee charges based on the
operation of certain owned switching network elements as described in the switch
sharing agreement. If and when we install or acquire additional switching
equipment to serve additional areas within our markets, our dependency on Nextel
and its affiliates for switching services should decrease.
Nextel is obligated, on the terms set forth in the switch sharing agreement,
to implement upgrades so that sufficient switching capacity is available to meet
our predicted customer growth and increased service use during the term of the
joint venture agreement. We are also obligated to install our own equipment when
our customer usage reaches certain levels. At any time upon or following
termination or expiration of the joint venture agreement, either party will be
allowed to terminate the switch sharing agreement upon notice to the other.
AGREEMENT SPECIFYING OBLIGATIONS AND LIMITING LIABILITY OF, AND RECOURSE TO,
NEXTEL
Pursuant to the terms of this agreement, the maximum cumulative, aggregate
cash liability of Nextel and its controlled affiliates, other than Nextel WIP
Corp., for any and all actual or alleged claims or causes of action arising in
connection with any aspect of the agreements governing or otherwise relating to
the operating agreements is capped at $200 million.
The amount of the cap will be reduced, dollar for dollar, by the aggregate
amount that Nextel and its affiliates have advanced, expended or otherwise
provided to or for the benefit of Nextel WIP Corp. to enable Nextel WIP Corp. to
perform its obligations relating to the operating agreements other than
contributions for which Nextel has received equity securities or has received
consideration equal to Nextel's cost to provide the contribution.
Some significant Nextel obligations, including Nextel commitments to
subsidize required upgrades and to buy our stock from our other stockholders
under certain circumstances, will not be subject to the cap. This agreement will
survive the expiration or termination of any and all of the agreements governing
or otherwise relating to the operating agreements.
MOTOROLA PURCHASE AGREEMENTS
Under the iDEN infrastructure equipment purchase agreement and the
subscriber purchase and distribution agreement between us and Motorola we agreed
to purchase, and Motorola agreed to sell, certain infrastructure equipment and
related software and services required for the build-out of our portion of the
Nextel digital mobile network, as well as subscriber handsets and other
accessories.
We obtained pricing for the Motorola equipment and subscriber units on
financial and other terms that we believe are substantially similar to those
obtained by Nextel. Under these purchase agreements, we expect to purchase over
a three-year period $98.5 million worth of subscriber units and accessories and
over the same period approximately $145 million worth of Motorola equipment. For
the nine-month period ended September 30, 1999 and the year ended December 31,
1998, we purchased approximately $14.7 million and $47.5 million, respectively,
of infrastructure and other equipment, handsets, warranties and services from
Motorola.
We received, in connection with our purchases of Motorola equipment, an
aggregate $22 million credit from Motorola in return for the issuance of
13,076,376 shares of Series A convertible preferred stock to Motorola as part of
the capitalization transactions consummated on January 29, 1999 and
September 9, 1999.
72
<PAGE>
EAGLE RIVER SUBLEASE
On August 1, 1999 one of our subsidiaries entered into an assignment and
assumption of lease agreement with Eagle River, one of our stockholders,
pursuant to which we assumed Eagle River's obligations in connection with our
leased property in Kirkland, Washington.
DLJ MERCHANT BANKING RELATIONSHIP
Donaldson, Lufkin & Jenrette Securities Corporation served as an initial
purchaser of our senior discount notes and received a customary underwriting
discount. Donaldson, Lufkin & Jenrette Securities Corporation also acted as our
financial advisor and as arranger, and DLJ Capital Funding, Inc., an affiliate
of Donaldson, Lufkin & Jenrette Securities Corporation, acted as syndication
agent under our credit facility, and received customary fees and reimbursements
in connection therewith. DLJ Merchant Banking and certain related parties, all
of which are affiliates of Donaldson, Lufkin & Jenrette Securities Corporation,
own a significant amount of our equity and are represented on our board of
directors. The aggregate amount of all fees paid to the DLJ entities in
connection with the capitalization transactions was approximately
$14.7 million. Donaldson, Lufkin & Jenrette Securities Corporation is a co-lead
manager of this offering and we may from time to time enter into other
investment banking relationships with it or one of its affiliates. See
"Underwriting."
OTHER TRANSACTIONS WITH SENIOR MANAGEMENT
We have entered into restricted stock purchase agreements with each of
Messrs. Chapple, Thompson, Thaler, Aas, Satterlee, Fanning and Manning pursuant
to which we sold an aggregate of 8,834,994 shares of Class A common stock to
these executive officers at a price of $0.002 per share. See "--Restricted Stock
Purchase Agreements." In addition, on January 29, 1999, Mr. Thompson obtained an
interest free secured loan of $2.2 million from us, evidenced by a
non-negotiable promissory note due and payable on January 29, 2003.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING EXERCISE
NAME GRANT DATE OPTIONS PRICE
---- ---------- ---------------- --------
<S> <C> <C> <C>
John Chapple............................................ 12/31/99 105,000 $ 1.85
John Thompson........................................... 1/29/99 210,000 1.67
12/31/99 105,000 1.85
David Thaler............................................ 12/31/99 60,000 1.85
David Aas............................................... 12/31/99 60,000 1.85
Perry Satterlee......................................... 12/31/99 120,000 1.85
Mark Fanning............................................ 12/31/99 90,000 1.85
Donald Manning.......................................... 1/29/99 180,000 1.67
12/31/99 90,000 1.85
</TABLE>
73
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of all shares of our common stock as of January 1, 2000,
consisting of Class A and Class B common stock, and as adjusted to reflect the
sale of the Class A common stock offered hereby, by:
- each stockholder known to us to be a beneficial owner of more than 5% of
the outstanding shares of our common stock;
- each of our directors and our director nominee;
- each of our named executive officers; and
- all executive officers, directors and our director nominee as a group.
Our Class B common stock is convertible on a one-for-one basis into shares
of our Class A common stock at any time upon a transfer by its current holder to
a third party and is otherwise identical in all respects to our Class A common
stock. The holders of our Class A and Class B common stock are entitled to one
vote per share on all matters.
Beneficial ownership is determined in accordance with the rules of the SEC.
In computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares subject to options, warrants and
securities convertible into common stock held by that person that are currently
exercisable or exercisable within 60 days are deemed outstanding. Except as
indicated in the footnotes to this table, we believe that each stockholder named
in the table has sole voting and investment power with respect to the shares set
forth opposite such stockholder's name, except to the extent shared by a spouse
under applicable law.
Unless otherwise noted, the address for each stockholder below is: c/o
Nextel Partners, Inc., 4500 Carillon Point, Kirkland, WA 98033.
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
NUMBER OF SHARES COMMON STOCK OUTSTANDING
SHARES OF UNDERLYING OPTIONS OR --------------------------------
NAME AND ADDRESS COMMON STOCK WARRANTS BEFORE OFFERING AFTER OFFERING
- ---------------- -------------- --------------------- --------------- --------------
<S> <C> <C> <C> <C>
Nextel WIP Corp.(1)(2)
2001 Edmund Halley Drive
Reston, VA 20191.................... 77,782,626 -- 36.5% 32.9%
Entities affiliated with DLJ Merchant
Banking Partners II, L.P.(3)
277 Park Avenue
New York, NY 10172.................. 27,287,310 1,245,822 13.3 12.0
Madison Dearborn Capital Partners
II, L.P.
Three First National Plaza, Suite
3800
Chicago, IL 60602................... 26,030,466 1,188,438 12.7 11.4
Eagle River Investments, LLC
2300 Carillon Point
Kirkland, WA 98033.................. 19,500,012 -- 9.1 8.2
The Huff Alternative Income Fund, L.P.
1776 On The Green
67 Park Place
Morristown, NJ 07960................ 14,239,380 -- 6.7 6.0
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF PERCENTAGE OF
NUMBER OF SHARES COMMON STOCK OUTSTANDING
SHARES OF UNDERLYING OPTIONS OR --------------------------------
NAME AND ADDRESS COMMON STOCK WARRANTS BEFORE OFFERING AFTER OFFERING
- ---------------- -------------- --------------------- --------------- --------------
<S> <C> <C> <C> <C>
Motorola, Inc.
1303 East Algonquin Road, 11th Floor
Schaumburg, IL 60196................ 13,076,376 -- 6.1 5.5
John Chapple(4)....................... 3,336,024 -- 1.6 1.4
John Thompson(5)...................... 2,210,664 210,000 1.1 1.0
David Thaler.......................... 1,254,000 -- * *
David Aas............................. 1,064,130 -- * *
Perry Satterlee....................... 1,003,332 -- * *
Mark Fanning.......................... 903,486 -- * *
Andrew Rush(6)........................ 27,287,310 1,245,822 13.3 12.0
Dennis Weibling(7).................... 97,282,638 -- 45.6 41.1
Timothy Donahue(8).................... 77,782,626 -- 36.5 32.9
Andrew Sinwell(9)..................... 26,030,466 1,188,438 12.7 11.4
Steven Dodge.......................... -- -- -- --
Directors and officers as a group (12
persons)(10)........................ 160,432,050 2,704,260 75.6% 68.1%
</TABLE>
- --------------------------
*Less than 1%
(1) Nextel WIP Corp. is a wholly owned subsidiary of Nextel.
(2) Consists of shares of Class A common stock which Nextel WIP Corp. has the
right to acquire upon conversion of its Class B common stock. The rights of
the Class B common stock are otherwise identical in all respects to the
Class A common stock.
(3) Consists of shares held directly by DLJ Merchant Banking Partners and the
following related investors: DLJ Merchant Banking Partners II-A, L.P., DLJ
Offshore Partners II, C.V., DLJ Diversified Partners, L.P., DLJ Diversified
Partners-A, L.P., DLJ Millennium Partners, L.P., DLJ Millennium Partners-A,
L.P., DLJMB Funding II, Inc., UK Investment Plan 1997 Partners, DLJ EAB
Partners, L.P., DLJ First ESC, L.P. and DLJ ESC II, L.P.
(4) Includes 736,667 shares held by JRC Coho LLC, an entity controlled by
Mr. Chapple.
(5) Includes 509,166 shares held by JDT-JRT, LLC, an entity controlled by
Mr. Thompson.
(6) Consists of shares held by entities affiliated with DLJ Merchant Banking
Partners II, L.P., all of which are funds managed by DLJ Merchant Banking,
of which Mr. Rush is a Managing Director. Mr. Rush disclaims beneficial
ownership of such shares.
(7) Consists of shares held by Eagle River Investments, LLC, of which
Mr. Weibling serves as President, and by Nextel WIP Corp., a wholly owned
subsidiary of Nextel, of which Mr. Weibling serves as a director.
Mr. Weibling disclaims beneficial ownership of such shares.
(8) Consists of shares held by Nextel WIP Corp., a wholly owned subsidiary of
Nextel, of which Mr. Donahue is president, chief executive officer and
director. Mr. Donahue disclaims beneficial ownership of such shares.
(9) Consists of shares held by Madison Dearborn Partners II, L.P., of which
Mr. Sinwell serves as a director. Mr. Sinwell disclaims beneficial ownership
of such shares.
(10) See footnotes 4 through 9 above. Also includes an option to purchase up to
60,000 shares of Class A common stock granted to Mr. Manning, which option
is exercisable within 60 days of the date of this prospectus.
See "Description of Capital Stock" for a description of certain agreements
relating to change of control events.
75
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
14% SENIOR DISCOUNT NOTES
In January 1999, we sold $800 million aggregate principal amount at maturity
14% senior discount notes due February 1, 2009. The notes were issued at a
discount to their aggregate principal amount at maturity and generated aggregate
gross proceeds to us of approximately $406 million. In July 1999 these notes
were exchanged by us for registered notes having the same financial terms and
covenants as the notes issued in January 1999. The notes will accrete in value
representing the amortization of original issue discount at a rate of 14%,
compounded semiannually, to an aggregate principal amount of $800 million by
February 1, 2004. Cash interest will not accrue on the notes prior to
February 1, 2004. As of September 30, 1999, the accreted value of the
outstanding senior notes was $445 million.
These notes:
- are subject to the provisions of an indenture;
- are senior unsecured obligations of ours;
- will mature on February 1, 2009; and
- bear interest at the rate of 14% per annum, which interest is to be paid
semi-annually on February 1 and August 1 of each year, commencing
August 1, 2004.
We may redeem the notes, in whole or in part, at any time on or after
February 1, 2004. If we choose this optional redemption, we are required to
redeem the notes at the redemption prices set forth below, plus an amount in
cash equal to all accrued and unpaid interest and liquidated damages, if any, to
the redemption date:
<TABLE>
<CAPTION>
REDEMPTION PRICE
(EXPRESSED AS PERCENTAGES OF THE PRINCIPAL
YEAR AMOUNT AT MATURITY OF THE NOTES)
- -------------------------------- ------------------------------------------
<S> <C>
2004............................ 107.000%
2005............................ 104.667%
2006............................ 102.333%
2007 and there after............ 100.000%
</TABLE>
Prior to February 1, 2002, we may redeem up to 35% of the notes at a
redemption price of 114% of the accreted value of the notes on the redemption
date, plus liquidated damages, if any, to the redemption date if:
- we receive net proceeds of at least $75 million from one or more sales of
our capital stock, other than redeemable stock, prior to February 1, 2002;
- at least 65% of the aggregate accreted value of the notes originally
issued remain outstanding immediately after the redemption; and
- the redemption occurs within 60 days of such sale.
In the indenture relating to the notes, we agreed to certain restrictions
that limit our ability to:
- incur additional debt;
- pay dividends, acquire our shares, make certain investments or redeem
outstanding debt which is subordinate in right of payment to the notes;
- designate unrestricted subsidiaries;
76
<PAGE>
- enter into transactions with affiliates;
- engage in any business other than telecommunications;
- create liens;
- pay dividends, make loans or advances to our subsidiaries or transfer any
of our property or assets to our subsidiaries;
- issue or sell shares of capital stock of our subsidiaries; and
- sell assets.
In addition, in the event of a change of control as defined in the
indenture, each holder of notes will have the right to require us to repurchase
all or part of such holder's notes at a price equal to 101% of the accreted
value plus any liquidated damages to any purchase date prior to February 1, 2004
or 101% of the aggregate principal amount of the notes, plus accrued and unpaid
interest and any liquidated damages to any purchase date after February 1, 2004.
A change of control would occur under the indenture if any of the following
occurs:
(1) any person or group of persons, as such term is used in
Section 13(d)(3) of the Exchange Act and related regulations, other than Nextel,
Craig O. McCaw or entities affiliated with him, Motorola, DLJ Merchant Banking
or entities affiliated with it, and certain other corporations is or becomes the
beneficial owner, directly or indirectly, of more than 50% of our total voting
stock or total common equity; or
(2) we consolidate with, or merge with or into, another person other Nextel,
Craig O. McCaw or entities affiliated with him, Motorola, DLJ Merchant Banking
or entities affiliated with it, or sell, assign, convey, transfer, lease or
otherwise dispose of all or substantially all of our assets to any person other
than Nextel, Craig O. McCaw or entities affiliated with him, Motorola, DLJ
Merchant Banking or entities affiliated with it, or any person other than
Nextel, Craig O. McCaw or entities affiliated with him, Motorola, DLJ Merchant
Banking or entities affiliated with it, consolidates with, or merges with or
into, us, in any such event pursuant to a transaction in which our outstanding
voting stock is converted into or exchanged for cash, securities or other
property, other than any such transaction where:
(a) our outstanding voting stock is converted into or exchanged for:
(A) voting stock of the surviving or transferee person or entity;
(B) cash, securities and other property in an amount which could be
paid by us as a "restricted payment" under the indenture; and
(b) immediately after such transaction no person or group of persons is
the beneficial owner, directly or indirectly, of more than 50% of the total
voting stock or total common equity of the surviving or transferee person;
(3) during any consecutive two-year period, individuals who at the beginning
of such period constituted the board of directors together with:
(a) any directors who are members of the board of directors on
January 29, 1999;
(b) any new directors whose election by such board of directors or whose
nomination for election by our stockholders was approved by a vote of
66 2/3% of the directors then still in office who were either directors at
the beginning of such period or whose election or nomination for election
was previously so approved; and
77
<PAGE>
(c) any new directors appointed or selected by a permitted holder,
whether pursuant to a transaction of a type described in either of the
preceding paragraphs (a) and (b), pursuant to a contractual right or
pursuant to a right granted under our certificate of incorporation or
by-laws,
cease for any reason to constitute a majority of the board of directors then in
office; or
(4) the adoption of a plan relating to the liquidation or dissolution of us.
In addition, one of the events that constitutes a change of control under
the indenture is a sale, transfer, assignment, lease, conveyance or other
disposition of all or substantially all of our assets. The indenture is governed
by New York law, and there is no established definition under New York law of
substantially all of the assets of a corporation. Accordingly, if we were to
engage in a transaction in which we disposed of less than all of our assets, a
question of interpretation could arise as to whether such disposition was of
substantially all of our assets and whether we were required to make an offer to
purchase in accordance with the indenture.
Under the indenture, we may not, in any transaction or series of related
transactions:
(1) merge or consolidate with or into, or sell, assign, convey, transfer or
otherwise dispose of our properties and assets substantially as an entirety to,
any person; or
(2) permit any of our subsidiaries to enter into any such transaction or
series of transactions if such transaction or series of transactions, in the
aggregate, would result in a sale, assignment, conveyance, transfer or other
disposition of our properties and assets and those of our subsidiaries, taken as
a whole, substantially as an entirety to any person,
unless:
(a) either:
(A) if the transaction or series of transactions is a consolidation
of us with or a merger of us with or into any other person, we shall be
the surviving person of such merger or consolidation; or
(B) the person formed by any consolidation with or merger with or
into us, or to which our properties and assets or those of our
subsidiaries, taken as a whole, as the case may be, substantially as an
entirety are sold, assigned, conveyed or otherwise transferred shall be a
corporation, partnership, limited liability company or trust, and shall
assure all our obligations under the notes and the indenture and, the
indenture, shall remain in full force and effect;
(b) immediately before and immediately after giving effect to such
transaction or series of transactions on a pro forma basis (including any
debt incurred or anticipated to be incurred in connection with or in respect
of such transaction or series of transactions), no default or event of
default shall have occurred and be continuing; and
(c) we or the successor entity, at the time of such transaction and
after giving pro forma effect thereto as if such transaction had occurred at
the beginning of the applicable period:
(A) have consolidated net worth immediately after the transaction
equal to or greater than our consolidated net worth immediately preceding
the transaction; and
(B) be permitted to incur at least $1.00 of additional debt.
The indenture also provides that we may not, directly or indirectly, lease
all or substantially all of our properties or assets, in one or more related
transactions, to any other person.
78
<PAGE>
The following are events of default under the indenture:
- failure to pay principal of or premium, if any, on, any note when due;
- failure to pay any interest on any note when due, such failure continuing
for 30 days;
- default in the payment of principal and interest on notes required to be
purchased;
- failure to perform or comply with the provisions described under "Mergers,
Sales of Assets, Etc." of the indenture;
- failure to perform any other covenant or agreement under the indenture or
the notes continued for 60 days after written notice;
- failure to pay when due the principal of, or acceleration of, any debt
having an outstanding principal amount of at least $25 million;
- the rendering of a final judgment for the payment of money against us in
an aggregate amount in excess of $25 million; and
- certain events of bankruptcy, insolvency or reorganization.
If an event of default, other than events of bankruptcy, insolvency or
reorganization, occurs and is continuing, the maturity date of all of the notes
may be accelerated. If a bankruptcy, insolvency or reorganization occurs, the
outstanding notes will automatically become immediately due and payable.
DESCRIPTION OF CREDIT FACILITY
Nextel Partners Operating Corp., one of our wholly owned subsidiaries,
entered into a credit facility in January 1999 with a syndicate of banks and
other financial institutions led by Donaldson, Lufkin & Jenrette Securities
Corporation, as arranger, DLJ Capital Funding, as syndication agent and Bank of
Montreal, as administrative agent. This credit facility was amended and restated
in September 1999. The credit facility includes a $175 million term loan, a
$150 million term loan and a $100 million reducing revolving credit facility.
Subject to Nextel Partners Operating Corp.'s right in the future to seek an
increase of up to $50 million, the credit facility will not exceed
$425 million. The $175 million term loan matures on January 29, 2008 and the
$150 million term loan matures on July 29, 2008. The revolving credit facility
will terminate on January 29, 2007.
On January 29, 1999, Nextel Partners Operating Corp. borrowed the full
amount of the $175 million term loan and on September 9, 1999, it borrowed the
full amount of the $150 million term loan. As of December 31, 1999, no amounts
were outstanding under the $100 million revolving credit facility.
The $175 million and the $150 million term loans both bear interest, at our
option, at the administrative agent's alternate base rate or reserve-adjusted
LIBOR plus, in each case, applicable margins. The applicable margin for the
$175 million term loan 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 applicable
margin for the $150 million term loan is 4.25% over LIBOR and 3.25% over the
base rate.
We pay a commitment fee calculated at a rate equal to 2.0% per annum,
calculated on the daily average unused commitment under the revolving credit
facility, whether or not then available.
79
<PAGE>
Such fee is payable quarterly in arrears. The commitment fee is subject to
reduction based on utilization of the revolving credit facility.
Prior to the date on which our portion of the Nextel 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.
PREPAYMENTS. The term loans are subject to mandatory prepayment:
- with 100% of the net cash proceeds from the issuance of debt, subject to
exceptions;
- with 100% of the net cash proceeds of asset sales, subject to exceptions;
- after December 31, 2002, with 50% of Nextel Partners Operating Corp.'s
excess earnings over interest expense, taxes, capital expenditures,
payments made in connection with the credit facility, and other
adjustments; and
- after January 29, 2004, with 50% of the net cash proceeds from the
issuance of equity by us.
Nextel Partners Operating Corp.'s obligations under the credit facility is
secured by:
- a first-priority lien on all property and assets, tangible and intangible,
of the borrower and its subsidiaries, including accounts receivable,
inventory, equipment, intellectual property, general intangibles, cash and
proceeds of the foregoing; and
- a first-priority pledge of its capital stock and the stock of its current
and future subsidiaries, including the subsidiary holding our FCC
licenses.
Our other subsidiaries have guaranteed the obligations of Nextel Partners
Operating Corp. under the credit facility. We and our other subsidiaries have
agreed to certain restrictions, including among others, restrictions that limit
our ability to:
- incur additional debt, other than unsecured debt in the ordinary course of
business;
- engage in any business activity other than in connection with its
ownership of the capital stock of, and the holding of permitted
investments in, the borrower; or
- merge or consolidate with any person.
The credit facility contains customary covenants and restrictions on Nextel
Partners Operating Corp.'s ability to engage in certain activities, including
but not limited to:
- limitations on the incurrence of liens and indebtedness;
- restrictions on sale lease-back transactions, consolidations, mergers,
sale of assets, capital expenditures, transactions with affiliates and
investments; and
- severe restrictions on dividends and distributions on, and redemptions and
repurchases of, capital stock, and other similar distributions.
In addition, Nextel Partners Operating Corp. is required to comply with
specified financial ratios and tests, including the term loans contain financial
covenants requiring Nextel Partners Operating Corp. to maintain:
- certain defined ratios of senior debt and total debt to EBITDA, as
adjusted;
- a minimum interest coverage ratio;
- a minimum fixed charge coverage ratio;
- a maximum leverage ratio; and
80
<PAGE>
- minimum service revenues, subscriber units and covered population
equivalents. As of September 30, 1999, the Company was in compliance with
all of its required covenants.
The credit facility contains customary events of default, including defaults
relating to payments, breach of representations, warranties and covenants,
cross-defaults and cross-acceleration to other indebtedness, bankruptcy and
insolvency, judgments, and actual or asserted invalidity of security, as well
as, among others, events of default relating to:
- the change of control of us or Nextel Partners Operating Corp.;
- the early termination of our right to use the Nextel brand name or right
to acquire equipment incorporating iDEN technology;
- the termination of, revocation of, or failure to renew by the FCC of
licenses material to our business;
- the early termination or failure to renew of operating agreements with
Nextel;
- certain material breaches of obligations under these operating agreements
or default by Nextel WIP Corp. of certain obligations to provide agreed
upon services; or
- the failure of certain of our stockholders to make funding or contribution
obligations in accordance with the subscription and contribution
agreement.
81
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of this offering, we will be authorized to issue up to
500,000,000 shares of Class A common stock, $.001 par value, 100,000,000 shares
of Class B common stock, $.001 par value, and 102,185,000 shares of preferred
stock, $.001 par value. The following summary of our common stock and preferred
stock is not complete and may not contain all the information you should
consider before investing in the Class A common stock. This description is
subject to and qualified in its entirety by provisions of our restated
certificate of incorporation and bylaws, which are included as exhibits to the
registration statement of which this prospectus is a part, and by provisions of
applicable Delaware law.
COMMON STOCK
The common stock is classified into two classes: Class A common stock and
Class B convertible common stock.
As of January 15, 2000, assuming conversion of all outstanding shares of
Series A, Series C and Series D preferred stock, there were 135,427,974 shares
of Class A common stock outstanding that were held of record by 41 stockholders
and 77,782,626 shares of Class B common stock outstanding that were held of
record by two stockholders. After giving effect to the sale of Class A common
stock offered in this offering, there will be 236,710,600 shares of Class A
common stock outstanding, assuming no exercise of outstanding options or
warrants. As of January 15, 2000, there were outstanding options to purchase a
total of 5,049,600 shares of Class A common stock and outstanding warrants to
purchase a total of 2,434,260 shares of Class A common stock.
The holders of Class A common stock and Class B common stock will generally
vote as a single class on all matters upon which stockholders have a right to
vote, subject to the requirements of applicable laws. The holders of Class A and
Class B common stock are entitled to one vote per share on all matters to be
voted on by the stockholders. Subject to preferences that may be granted to any
outstanding shares of preferred stock, the holders of Class A and Class B common
stock are entitled to receive ratably only those dividends our board of
directors declares out of funds legally available for the payment of dividends
as well as any other distributions to the stockholders.
If we are liquidated, dissolved or wound-up, the holders of common stock are
entitled to share pro rata all of our assets remaining after payment of our
liabilities and liquidation preferences of any then-outstanding shares of
preferred stock. Holders of common stock have no preemptive rights and there are
no redemption or sinking fund provisions applicable to the common stock. In the
event of a merger or consolidation, holders of Class A and Class B common stock
are entitled to receive the same kind and amount of consideration per share. All
outstanding shares of common stock are fully paid and non-assessable, and the
shares of Class A common stock to be issued in this offering will be fully paid
and non-assessable.
Shares of Class B common stock are convertible into shares of Class A common
stock on a one-for-one basis at the option of any holder of Class B common stock
concurrently with a sale or other transfer of such shares to a transferee that
does not hold any shares of Class B common stock prior to such transfer. Shares
of Class A common stock are immediately and automatically convertible into an
equal number of shares of Class B common stock upon their acquisition by Nextel
or its affiliates or transferees.
82
<PAGE>
PREFERRED STOCK
GENERAL
Upon the closing of this offering, all outstanding shares of Series A
preferred stock will be converted into 125,834,646 shares of Class A common
stock and all outstanding shares of Series C and D preferred stock will be
converted into an aggregate of 77,782,626 shares of Class B common stock.
Thereafter, pursuant to our restated certificate of incorporation, our board of
directors will have the authority, without further action by the stockholders,
to issue up to 100,000,000 shares of preferred stock in one or more series and
to fix the relative designations, powers, preferences and privileges of the
preferred stock, any or all of which may be greater than the rights of the
common stock. Our board of directors, without stockholder approval, can issue
preferred stock with voting, conversion or other rights that could adversely
affect the voting power and other rights of the holders of common stock.
Preferred stock could thus be issued quickly with terms that could delay or
prevent a change in control of us or make removal of our management more
difficult. Additionally, the issuance of preferred stock may decrease the market
price of the Class A common stock and may adversely affect the voting and other
rights of the holders of Class A common stock. We have no present plans to issue
any preferred stock.
SERIES B PREFERRED STOCK
Upon the closing of this offering, our only preferred stock that will remain
outstanding is 2,185,000 shares of our Series B preferred stock.
With respect to rights on liquidation, dissolution or winding up, the
Series B preferred stock ranks senior to the Class A common stock and Class B
common stock. In addition, upon any liquidation of us, holders of the Series B
preferred stock will be entitled to receive a liquidation preference of
approximately $21.9 million, plus interest of 12% per year.
The Series B preferred stock does not have any voting rights except with
respect to the following, in which case it shall vote as a separate class:
- amendments to our bylaws or restated certificate of incorporation,
including the authorization of additional shares of existing series of
preferred stock;
- the authorization of securities senior to any existing series of preferred
stock;
- approval of mergers or consolidations adverse to the rights of the holders
of the Series B preferred stock, subject to exceptions; or
- redemption of any outstanding shares of common or preferred stock, subject
to exceptions.
The holders of Series B preferred stock are not entitled to receive
dividends on their shares of preferred stock and have no conversion rights.
We may redeem the Series B preferred stock, in whole but not in part, at any
time in exchange for an aggregate amount equal to its accrued liquidation
preference. If the Series B preferred stock has not been redeemed by us by
February 11, 2010, we will be required to redeem it in exchange for an aggregate
amount equal to its accrued liquidation preference. Our ability to redeem the
Series B preferred stock may be limited by the provisions of both the indenture
governing our outstanding notes and our credit facility.
WARRANTS
As of January 15, 2000, we had warrants outstanding to purchase 2,434,260
shares of Class A common stock.
83
<PAGE>
CERTAIN RIGHTS AND OBLIGATIONS OF NEXTEL
Under the provisions of our restated certificate of incorporation, and
subject to certain limitations, Nextel has the right to purchase for cash or
shares of its common stock, or a combination of both, all of the outstanding
shares of our Class A common stock:
- on January 29, 2008, subject to certain postponements by our board of
directors;
- if Nextel changes the digital transmission technology for our frequency
range and determines not to provide us free of charge the equipment
necessary to provide our subscribers with service comparable to what they
had been receiving;
- if Nextel requires a change in our business, operations or systems without
subsidizing us for the costs of such change and we decline to implement
the required change; or
- upon the termination of our joint venture agreement with Nextel as a
result of our breach.
If Nextel is able to purchase all of our outstanding Class A common stock for
any reason other than as a result of the termination of the joint venture
agreement, then the purchase price to be paid will be the fair market value of
the Class A common stock, "Fair market value" is determined by an appraisal
process, and is defined in our restated certificate as the price that a buyer
would be willing to pay for all of our outstanding capital stock, excluding the
Series B preferred stock, in an arm's-length transaction in a manner designed to
maximize stockholder value, and includes a control premium. In the event of a
termination of the joint venture agreement, then Nextel may purchase the
Class A common stock for an amount based on 80% of the average closing price of
our common stock for the 20 prior trading days.
In addition, under the provisions of our restated certificate of
incorporation and upon the occurrence of any of the events listed below, with
some exceptions, the holders of a majority of our outstanding Class A common
stock, excluding Nextel, can cause Nextel to purchase for cash or shares of
Nextel common stock, or a combination of both, all of the outstanding shares of
our Class A common stock:
- a change of control of Nextel;
- if prior to January 29, 2003, Nextel exercises its right under the
shareholders' agreement to preempt the public offering of our stock by DLJ
Merchant Banking, as described below;
- if we do not implement a change in our business, operations or systems
required by Nextel and our board of directors provides all non-Nextel
stockholders with the opportunity to put their stock to Nextel; or
- upon the termination of our joint venture agreement with Nextel as a
result of a breach by Nextel.
If the event giving rise to the stockholders' right to cause Nextel to buy all
of the outstanding shares of Class A common stock:
- is a change in control of Nextel, the purchase price that Nextel is
required to pay for shares of Class A common stock is the fair market
value of the Class A common stock, as determined by an appraisal process;
- is the preemption of a public offering of our stock by DLJ Merchant
Banking, the purchase price that Nextel is required to pay for shares of
Class A common stock is the same per share price that was paid by Nextel
to purchase the shares from DLJ Merchant Banking;
- is the election of such stockholders to put their stock to Nextel after
our failure to implement changes in our business, operations or systems
required by Nextel, the purchase price that
84
<PAGE>
Nextel is required to pay for shares of Class A common stock is an amount
that would equal a 20% rate of return on the amount of capital invested by
such stockholders to purchase such shares; or
- is the termination of the joint venture agreement as a result of a breach
by Nextel, the purchase price that Nextel is required to pay for shares of
Class A common stock is an amount based on 120% of the average closing
price of our Class A common stock for the 20 prior trading days.
In addition, holders of our Class A common stock have the right to
participate in any sale by Nextel of all of its shares to a third party
occurring after January 29, 2011. In the event that the holders of a majority of
the Class A common stock elect to participate in such sale, then pursuant to our
restated certificate of incorporation all holders of Class A common stock,
including purchasers in this offering, will be required to participate.
REGISTRATION RIGHTS
Following this offering, entities affiliated with DLJ Merchant Banking and
Madison Dearborn Partners will have the following registration rights, provided
in each case that the aggregate proceeds from the sale of the amount of
securities demanded to be registered must be expected to exceed $50,000,000:
- DLJ Merchant Banking and Madison Dearborn Partners may demand one
registration, at our expense, of up to all of their shares if they hold at
least 10% of our outstanding common stock at the time of demand, assuming
conversion of any outstanding warrants, options and convertible stock; and
- DLJ Merchant Banking and Madison Dearborn Partners may demand a second and
third registration, at their expense, if they hold at least 5% of our
outstanding common stock at the time of demand, assuming conversion of any
outstanding warrants, options and convertible stock.
If DLJ Merchant Banking or Madison Dearborn Partners exercises any of their
demand rights, all of the other parties to our shareholders' agreement would be
entitled to include their shares in such registration, subject to cutback by the
underwriters in any underwritten offering.
Additionally, under the terms of the shareholders' agreement, if we propose
to register any of our securities under the Securities Act, either for our own
account or for the account of other security holders exercising registration
rights, the parties to the shareholders' agreement are entitled to notice of the
registration and to include their shares of common stock in the registration at
our expense. All of these registration rights are subject to the right of the
underwriters of the offering to limit the number of shares included in such
registration. Each of Nextel, DLJ Merchant Banking and its affiliates, Madison
Dearborn, Eagle River, and the management stockholders have entered into a
lock-up agreement and have waived their registration rights for a period of
18 months following this offering.
SELECTED ANTI-TAKEOVER MATTERS
CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
Our certificate of incorporation and bylaws include provisions that may have
the effect of deterring, delaying or preventing a change of control of us. Our
bylaws provide that special meetings of our stockholders may only be called by
our board of directors, president, or holders of not less than 50% of our
outstanding capital stock, which could delay or prevent such meetings from
taking place altogether.
85
<PAGE>
Our certificate of incorporation provides for 102,185,000 authorized shares
of preferred stock and grants our board of directors broad power to establish
the rights and preferences of authorized and unissued preferred stock. Upon the
closing of this offering, only 2,185,000 shares of preferred stock will be
designated and issued. The existence of authorized but unissued preferred stock
may enable our board of directors to render more difficult or discourage an
attempt to obtain control over us by means of a merger, tender offer, proxy
contest or otherwise. For example, if in the due exercise of its fiduciary
obligations, the board of directors were to determine that a takeover proposal
is not in our best interests, our board of directors could cause shares of
preferred stock to be issued without stockholder approval in one or more private
offerings or other transactions that might dilute the voting or other rights of
the proposed acquirer or insurgent stockholder or stockholder group. The
issuance of shares of preferred stock pursuant to our board of directors'
authority described above could have the effect of delaying, deferring or
preventing a change in control of us. In addition, our certificate of
incorporation allows us to redeem shares of our stock from any stockholder in
order to maintain compliance with applicable federal and state
telecommunications laws and regulations.
DELAWARE ANTI-TAKEOVER LAW
Section 203 of the Delaware General Corporation Law prohibits certain
"business combination" transactions between a Delaware corporation and any
"interested stockholder" owning 15% or more of the corporation's outstanding
voting stock for a period of three years after the date on which such
stockholder became an interested stockholder, unless (1) the board of directors
approves, prior to such date, either the proposed business combination or the
proposed acquisition of stock which resulted in the stockholder becoming an
interested stockholder, (2) upon consummation of the transaction in which the
stockholder becomes an interested stockholder, the interested stockholder
acquires at least 85% of those shares of the voting stock of the corporation
which are not held by the directors, officers or certain employee stock plans or
(3) on or subsequent to the consummation date, the business combination with the
interested stockholder is approved by the board of directors and also approved
at a stockholders' meeting by the affirmative vote of the holders of at least
two-thirds of the outstanding shares of the corporation's voting stock other
than shares held by the interested stockholder. Under Delaware law, a "business
combination" includes a merger, asset sale or other transaction resulting in a
financial benefit to the interested stockholder.
FCC-RELATED REDEMPTION RIGHTS
Our certificate of incorporation allows us to redeem shares of our stock
from any stockholder in order to maintain compliance with applicable federal and
state telecommunications laws and regulations.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is The Bank of New
York. The transfer agent's address is 101 Barclay Street, 12W, New York, New
York 10286, and its telephone number is (212) 635-7134.
NATIONAL MARKET LISTING
We intend to apply to list our common stock on The Nasdaq Stock Market's
National Market under the symbol "NXTP."
86
<PAGE>
LIMITATION ON DIRECTORS' LIABILITIES
The Delaware General Corporation Law authorizes corporations to limit or
eliminate the personal liability of directors to corporations and their
stockholders for monetary damages for breach of directors' fiduciary duty of
care. The duty of care requires that, when acting on behalf of the corporation,
directors must exercise an informed business judgment based on all material
information reasonably available to them. In the absence of the limitations of
personal liability authorized by the Delaware statute, directors could be
accountable to corporations and their stockholders for monetary damages for
conduct that does not satisfy their duty of care. Although the statute does not
change directors' duty of care, it enables corporations to limit available
relief to equitable remedies such as injunction or rescission. The restated
certificate of incorporation limits the liability of our directors or our
stockholders to the fullest extent permitted by the Delaware statute.
Specifically, our directors will not be personally liable for monetary damages
for breach of a director's fiduciary duty as a director, except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law regarding
liability for any unlawful payment of dividends or unlawful stock purchase
or redemption; or
- for any transaction from which a director derived an improper personal
benefit. The inclusion of this provision in the restated certificate of
incorporation may have the effect of reducing the likelihood of derivative
litigation against directors and may discourage or deter stockholders or
management from bringing a lawsuit against directors for beach of their
duty of care, even though such an action, if successful, might otherwise
have benefited us and our stockholders.
Additionally, certain of our outside directors may be covered by
indemnification arrangements under the organizational documents of their
employers and/or by liability insurance policies provided by their employers.
To the extent the provisions of our restated certificate of incorporation
provide for indemnification of directors for liabilities arising under the
Securities Act, those provisions are, in the opinion of the SEC, against public
policy as expressed in the Securities Act and are therefore unenforceable.
87
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for our
Class A common stock. Future sales of substantial amounts of our Class A common
stock in the public market could adversely affect the market price of our
Class A common stock.
Upon completion of this offering, assuming no exercise of outstanding
options or warrants and no conversion into shares of Class A common stock of the
77,782,626 shares of Class B common stock that will be outstanding after this
offering, we will have outstanding 158,927,974 shares of Class A common stock.
Of these shares, the 23,500,000 shares that we expect to sell in this offering,
will be freely tradable in the public market without restriction under the
Securities Act, unless such shares are held by our "affiliates," as that term is
defined in Rule 144 under the Securities Act.
The remaining 135,427,974 shares of Class A common stock that will be
outstanding after this offering will be restricted shares. We issued and sold
these restricted shares in private transactions in reliance on exemptions from
registration under the Securities Act. Restricted shares may be sold in the
public market only if they are registered or if they qualify for an exemption
from registration under Rule 144 under the Securities Act.
As a result of the contractual restrictions described below and the
provisions of Rule 144, the restricted shares will be available for sale in the
public market as follows:
- On the date of the expiration of the 180-day lock-up agreements described
below, 42,804,024 shares of the restricted securities will be eligible for
immediate sale in the public market under Rule 144(k) without any
restrictions, subject to the transfer provisions in the shareholders'
agreement.
- On September 9, 2000, an additional 9,974,526 shares of the restricted
securities will be eligible for immediate sale in the public market under
Rule 144(k) without any restrictions, subject to the transfer provisions
in the shareholders' agreement.
- On the date of the expiration of the 18-month lock-up agreement described
below, the remaining 82,649,424 shares of the restricted securities will
be eligible for immediate sale in the public market under Rule 144,
subject to the transfer provisions of the shareholders' agreement, and
subject to certain volume, manner of sale and other limitations under
Rule 144.
EMPLOYEE STOCK OPTION AND STOCK PURCHASE PLANS
As of January 15, 2000, there were a total of 5,049,600 shares of Class A
common stock subject to outstanding options under our stock option plan, 210,000
of which were vested. All of these vested options are subject to a lock-up
agreement. There were no shares of stock reserved for issuance pursuant to our
employee stock purchase plan as of January 15, 2000. Within 90 days after the
completion of this offering, we intend to file registration statements on
Form S-8 under the Securities Act to register all of the shares of common stock
issued or reserved for future issuance under our stock option plan and our
employee stock purchase plan. After the effective dates of the registration
statements on Form S-8, shares purchased upon exercise of options granted
pursuant to our stock option plan and employee stock purchase plan generally
would be available for resale in the public market.
LOCK-UP AGREEMENTS
Pursuant to certain "lock-up" agreements, we and several of our stockholders
have agreed not to offer, sell, contract to sell, announce an intention to sell
or otherwise dispose of, directly or
88
<PAGE>
indirectly, or file with the Securities and Exchange Commission a registration
statement under the Securities Act relating to, any shares of common stock or
securities convertible into or exchangeable or exercisable for any common stock
without the prior written consent of Goldman, Sachs & Co. for a period of
180 days after the date of this prospectus.
In addition, Nextel, DLJ Merchant Banking and its affiliates, Madison
Dearborn Partners, Eagle River and the management stockholders have entered into
a lock-up agreement with us pursuant to which they have agreed generally not to
transfer their shares or exercise their registration rights for a period of
18 months following this offering.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned restricted
shares for at least one year would be entitled to sell in any three-month period
up to the greater of
- 1% of the then-outstanding shares of Class A common stock, approximately
1,589,280 shares immediately after this offering; and
- the average weekly trading volume of the Class A common stock during the
four calendar weeks preceding the filing of a Form 144 with respect to
such sale.
Sales under Rule 144 are also subject to certain manner of sale and notice
requirements and to the availability of current public information about us.
RULE 144(K)
Under Rule 144(k), a person who has not been one of our affiliates during
the preceding 90 days and who has beneficially owned the restricted shares for
at least two years is entitled to sell them without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
RULE 701
Any of our employees, directors, officers, consultants or advisors who
purchase shares from us in connection with a compensatory stock or option plan
or written agreement before the effective date of this offering is entitled to
rely on the resell provisions of Rule 701, subject to the lock-up provisions
described above. In general, Rule 701 permits non-affiliates to sell their
Rule 701 shares without having to comply with the public information, holding
period, volume limitation or notice provisions of Rule 144 and permits
affiliates to sell their Rule 701 shares without having to comply with the
holding period of Rule 144.
REGISTRATION RIGHTS
Following this offering and the expiration of the 18-month lock-up
agreement, DLJ Merchant Banking and Madison Dearborn Partners, who together will
own 53,317,776 shares of Class A common stock upon completion of this offering,
will have rights to demand that we register their shares with the SEC.
Additionally, under the terms of the shareholders' agreement, if we propose to
register any of our securities under the Securities Act, either for our own
account or for the account of other security holders exercising registration
rights, the parties to the shareholders' agreement are entitled to notice of the
registration and to include their shares of common stock in the registration at
our expense. All of these registration rights are subject to the right of the
underwriters of the offering to limit the number of shares included in such
registration. Each of Nextel, DLJ Merchant Banking and its affiliates, Madison
Dearborn, Eagle River, and the management
89
<PAGE>
stockholders have entered into a lock-up agreement and have waived their
registration rights for a period of 18 months following this offering.
SHAREHOLDERS' AGREEMENT
The shareholders' agreement imposes numerous restrictions with respect to
the sale, transfer or other disposition of our capital stock by the parties to
the shareholders' agreement. Generally, prior to the completion of our portion
of the Nextel digital mobile network and the achievement of positive EBITDA for
two consecutive fiscal quarters, excluding the effects of any optional markets
acquired by us, Eagle River, Nextel and the management stockholders may transfer
shares only to family members, affiliates and certain other permitted
transferees; provided, however, that after this offering, each such stockholder
may sell up to 30% of its shares subject to certain rights of first offer and
rights of first refusal available to DLJ Merchant Banking, Madison Dearborn
Partners, Eagle River, Motorola, Nextel, the management stockholders and their
permitted transferees. Other stockholders who are parties to the shareholders'
agreement may transfer their shares to third parties, subject to these rights of
first offer and rights of first refusal.
90
<PAGE>
MATERIAL U.S. TAX CONSEQUENCES TO NON-U.S. HOLDERS
Following is a general discussion of material U.S. federal income and estate
tax consequences of the ownership and disposition of the Class A common stock
applicable to non-U.S. holders of Class A common stock. For purposes of this
discussion, a non-U.S. holder is any holder or other beneficial owner of
Class A common stock that, for U.S. federal income tax purposes, is not a U.S.
person. This discussion does not address all aspects of U.S. federal income and
estate taxation that may be relevant in light of a non-U.S. holder's particular
facts and circumstances, such as being a U.S. expatriate, and does not address
any tax consequences arising under the laws of any state, local or non-U.S.
taxing jurisdiction. Furthermore, the following discussion is based on current
provisions of the Internal Revenue Code of 1986 and administrative and judicial
interpretations thereof, all as in effect on the date of this prospectus, and
all of which are subject to change, possibly with retroactive effect. We have
not and will not seek a ruling from the Internal Revenue Service with respect to
the U.S. federal income and estate tax consequences described below, and as a
result, there can be no assurance that the Internal Revenue Service will agree
with and not challenge any of the conclusions set forth in this discussion. For
purposes of this discussion, the term U.S. person means:
- a citizen or resident of the United States;
- a corporation, partnership or other entity treated as a corporation or a
partnership for U.S. federal income tax purposes created or organized in
the United States or under the laws of the United States or any state
thereof including the District of Columbia;
- an estate whose income is included in gross income for U.S. federal income
tax purposes regardless of its source; or
- a trust whose administration is subject to the primary supervision of a
U.S. court and which has one or more U.S. persons who have the authority
to control all substantial decisions of the trust.
DIVIDENDS
We have not paid any dividends on our common stock, and we do not plan to
pay any dividends on our common stock for the foreseeable future. However, if we
do pay dividends on our common stock, those dividends generally will constitute
dividends for U.S. federal income tax purposes to the extent paid from our
current or accumulated earnings and profits, as determined under U.S. federal
income tax principles. To the extent such dividends exceed our current and
accumulated earnings and profits, the dividends will constitute a return of
capital that will be applied against and will reduce your basis in our Class A
common stock, but not below zero, and then will be treated as gain from the sale
of the stock. Dividends paid to a non-U.S. holder that are not effectively
connected with a U.S. trade or business of the non-U.S. holder will, to the
extent paid out of earnings and profits, be subject to U.S. withholding tax at a
30% rate or, if a tax treaty applies, a lower rate specified by the treaty.
Under currently applicable Treasury regulations, dividends paid to an address
outside the United States are presumed to be paid to a resident of such country,
unless the payor has knowledge to the contrary, for purposes of withholding
discussed above, and, under the current interpretation of these Treasury
regulations, for purpose of determining the applicability of a tax treaty rate.
Under Treasury regulations scheduled to be effective for payments after
December 31, 2000, to receive a reduced treaty rate, a non-U.S. holder must
furnish to us or our paying agent a duly completed Form W-8BEN, or substitute
form, certifying to its qualification for such rate.
Dividends that are effectively connected with the conduct of a trade or
business within the United States of a non-U.S. holder are generally exempt from
U.S. federal withholding tax, provided that the non-U.S. holder furnishes to us
or our paying agent a duly completed Form 4224 or Form W-8ECI, or substitute
form, certifying the exemption. A Form 4224 is replaced with a
91
<PAGE>
Form W-8ECI for payments after December 31, 2000. However, dividends exempt from
U.S. withholding because they are effectively connected with the conduct of a
trade or business within the United States are subject to U.S. federal income
tax on a net income basis at the regular graduated U.S. federal income tax
rates. Any such effectively connected dividends received by a foreign
corporation may, under certain circumstances, be subject to an additional
"branch profits tax" at a 30 % rate or a lower rate specified by an applicable
income tax treaty.
GAIN ON DISPOSITION OF CLASS A COMMON STOCK
A non-U.S. holder generally will not be subject to U.S. federal income tax
on any gain realized upon the sale or other disposition of Class A common stock
unless:
- the gain is effectively connected with a trade or business of the non-U.S.
holder in the United States. In this case, the non-U.S. holder will,
unless an applicable treaty provides otherwise, be taxed on its net gain
derived from the sale under regular graduated U.S. federal income tax
rates. If the non-U.S. holder is a foreign corporation, it may be subject
to an additional branch profits tax equal to 30% of its effectively
connected earnings and profits within the meaning of the Internal Revenue
Code for the taxable year, as adjusted for certain items, unless it
qualifies for a lower rate under an applicable income tax treaty and duly
demonstrates such qualification;
- the non-U.S. holder is an individual who holds his or her Class A common
stock as a capital asset, which generally means as an asset held for
investment purposes, and who is present in the United States for a period
or periods aggregating 183 days or more during the calendar year in which
the sale or disposition occurs and certain other conditions are met; or
- we are or have been a U.S. real property holding corporation for U.S.
federal income tax purposes at any time within the shorter of the
five-year period preceding the disposition or the holder's holding period
for its Class A common stock. We believe that we are not and will not
become a U.S. real property holding corporation for U.S. federal income
tax purposes.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Generally, we would be required to report annually to the Internal Revenue
Service the amount of dividends, if any, paid on the Class A common stock, the
name and address of the recipient, and the amount, if any, of tax withheld. A
similar report would be sent to the recipient. Pursuant to applicable income tax
treaties or other agreements, the Internal Revenue Service may make its reports
available to tax authorities in the recipient's country of residence.
Dividends paid to a non-U.S. holder, other than an exempt holder, at an
address within the United States may be subject to backup withholding at a rate
of 31% if the non-U.S. holder fails to certify its foreign status or otherwise
establish an exemption. Backup withholding will generally not apply to dividends
paid to non-U.S. holders at an address outside the United States on or prior to
December 31, 2000 unless the payer has knowledge that the payee is a U.S.
person. Under the recently finalized Treasury regulations regarding withholding
and information reporting, payment of dividends to non-U.S. holders at an
address outside the United States after December 31, 2000 may be subject to
backup withholding at a rate of 31% unless such non-U.S. holder satisfies
various certification requirements.
Under current Treasury regulations, the payment of the proceeds of the
disposition of Class A common stock to or through the U.S. office of a broker is
subject to information reporting and backup withholding at a rate of 31% unless
the holder certifies its non-U.S. status under penalties of perjury or otherwise
establishes an exemption. Generally, the payment of the proceeds of the
disposition by a non-U.S. holder of Class A common stock outside the United
States to or through
92
<PAGE>
a foreign office of a broker will not be subject to backup withholding but will
be subject to information reporting requirements if the broker is:
- a U.S. person;
- a controlled foreign corporation for U.S. federal income tax purposes; or
- a foreign person 50% or more of whose gross income for certain periods is
from the conduct of a U.S. trade or business,
unless the broker has documentary evidence in its files of the holder's non-U.S.
status and certain other conditions are met, or the non-U.S. holder otherwise
establishes an exemption. Neither backup withholding nor information reporting
generally will apply to a payment of the proceeds of a disposition of Class A
common stock by or through a foreign office of a foreign broker not subject to
the preceding sentence.
In general, the recently finalized Treasury regulations, described above, do
not significantly alter substantive withholding and information reporting
requirements but would alter procedures for claiming benefits of an income tax
treaty and change the certification procedures relating to the receipt by
intermediaries of payments on behalf of the beneficial owner of shares of
Class A common stock. Non-U.S. holders should consult their tax advisors
regarding the effect, if any, of those final Treasury regulations on an
investment in the Class A common stock. Those final Treasury regulations are
generally effective for payments made after December 31, 2000.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the Internal
Revenue Service.
ESTATE TAX
An individual non-U.S. holder who owns Class A common stock at the time of
his or her death, or who had made certain lifetime transfers of an interest in
Class A common stock while retaining certain powers, rights or interests in the
stock, will be required to include the value of that Class A common stock in his
or her gross estate for U.S. federal estate tax purposes, unless an applicable
estate tax treaty provides otherwise.
The foregoing discussion is a summary of the principal U.S. federal income
and estate tax consequences of the ownership, sale or other disposition of
Class A common stock by non-U.S. holders. Accordingly, investors are urged to
consult their own tax advisors with respect to the income and estate tax
consequences of the ownership and disposition of Class A common stock, including
the application and effect of the laws of any state, local, foreign or other
taxing jurisdiction.
93
<PAGE>
UNDERWRITING
We and the underwriters for the U.S. offering (the "U.S. Underwriters")
named below have entered into an underwriting agreement with respect to the
shares of Class A common stock being offered in the United States. Subject to
certain conditions, each U.S. Underwriter has severally agreed to purchase the
number of shares of Class A common stock indicated in the following table.
Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette Securities Corporation,
Credit Suisse First Boston Corporation, Deutsche Bank Securities Inc., First
Union Securities, Inc., Morgan Stanley & Co. Incorporated and DLJDIRECT Inc. are
the representatives of the U.S. Underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ -----------------
<S> <C>
Goldman, Sachs & Co.........................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Credit Suisse First Boston Corporation......................
Deutsche Bank Securities Inc................................
First Union Securities, Inc.................................
Morgan Stanley & Co. Incorporated...........................
DLJDIRECT Inc...............................................
----------
Total.....................................................
==========
</TABLE>
If the U.S. Underwriters sell more shares of Class A common stock than the
total number set forth in the table above, the U.S. Underwriters have an option
to buy up to an additional shares of Class A common stock from us
to cover such sales. They may exercise that option for 30 days. If any shares of
Class A common stock are purchased pursuant to this option, the U.S.
Underwriters will severally purchase shares of Class A common stock in
approximately the same proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the U.S. Underwriters by us. Such amounts are shown
assuming both no exercise and full exercise of the U.S. Underwriters' option to
purchase additional shares of Class A common stock.
<TABLE>
<CAPTION>
Paid by Nextel Partners
---------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share................................................... $ $
Total....................................................... $ $
</TABLE>
Shares of Class A common stock sold by the underwriters to the public will
initially be offered at the initial public offering price set forth on the cover
of this prospectus. Any shares of Class A common stock sold by the underwriters
to securities dealers may be sold at a discount of up to $ per share
from the initial public offering price. Any such securities dealers may resell
any shares of Class A common stock purchased from the underwriters to certain
other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares of Class A common stock are not
sold at the initial public offering price, the representatives may change this
offering price and the other selling terms.
We have entered into an underwriting agreement with the underwriters for the
international offering for the sale of shares outside of the United
States. The terms and conditions of both offerings are the same and the sale of
shares in both offerings are conditioned on each other. Goldman Sachs
International, Donaldson, Lufkin & Jenrette International, Credit Suisse First
Boston (Europe) Limited, Deutsche Bank AG London, First Union Securities, Inc.,
and Morgan Stanley & Co. International Limited are representatives of the
underwriters for the international offering outside
94
<PAGE>
the United States (the "International Underwriters"). We have granted the
International Underwriters a similar option to purchase up to an aggregate of an
additional shares.
The underwriters for both of the offerings have entered into an agreement in
which they have agreed to restrictions on where and to whom they and any dealer
purchasing from them may offer shares as a part of the distribution of the
shares. The underwriters have also agreed that they may sell shares among each
of the underwriting groups.
Our company, all of our directors and executive officers and certain of our
stockholders have agreed with the underwriters not to dispose of or hedge any of
their common stock or securities convertible into or exchangeable for shares of
Class A common stock during the period from the date of this prospectus
continuing through the date 180 days after the date of this prospectus, except
with the prior written consent of Goldman, Sachs & Co. This agreement does not
apply to the issuance of shares under our existing employee benefit plans. See
"Shares Eligible for Future Sale" for a description of certain transfer
restrictions.
In addition, Nextel, DLJ Merchant Banking, Madison Dearborn Partners, Eagle
River and the management stockholders have each entered into a lock-up agreement
with us and have agreed generally not to transfer their shares or exercise their
registration rights for a period of 18 months after the date of this prospectus.
Prior to this offering, there has been no public market for our shares of
Class A common stock. The initial public offering price will be negotiated among
us and the underwriters. Among the factors to be considered in determining the
initial public offering price of the shares of Class A common stock, in addition
to prevailing market conditions, will be our historical performance, estimates
of our business potential and earnings prospects, an assessment of our
management and the consideration of the above factors in relation to market
valuation of companies in related businesses.
We intend to apply to have our Class A common stock included for quotation
on the Nasdaq National Market under the symbol "NXTP."
In connection with this offering, the underwriters may purchase and sell
shares of Class A common stock in the open market. These transactions may
include short sales, stabilizing transactions and purchases to cover positions
created by short sales. Short sales involve the sale by the underwriters of a
greater number of shares of Class A common stock than they are required to
purchase in this offering. Stabilizing transactions consist of certain bids or
purchases made for the purpose of preventing or retarding a decline in the
market price of the Class A common stock while this offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares of
Class A common stock sold by or for the account of such underwriter in
stabilizing or short covering transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the Class A common stock. As a result, the price of
the Class A common stock may be higher than the price that otherwise might exist
in the open market. If these activities are commenced, they may be discontinued
by the underwriters at any time. These transactions may be effected on the
Nasdaq National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed 5%
of the total number of shares of Class A common stock offered.
We currently anticipate that we will request the underwriters to reserve up
to 5% of the shares of our Class A common stock for sale at the initial public
offering price to persons designated by us
95
<PAGE>
through a directed share program. The number of shares available for sale to the
general public will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares not so purchased will be offered by the underwriters
to the general public on the same basis as other shares offered hereby.
We estimate that our share of the total expenses of this offering, excluding
underwriting discounts and commissions, will be approximately $1,000,000.
Certain of the underwriters and their affiliates have in the past provided,
and may in the future from time to time provide, investment banking and general
financing and banking services to us and our affiliates for which they have in
the past received, and may in the future receive, customary fees and
reimbursement of expenses. Donaldson, Lufkin & Jenrette Securities Corporation
and First Union Securities, Inc. (formerly known as First Union Capital Markets)
served as initial purchasers of our senior discount notes and received a
customary underwriting discount. Donaldson, Lufkin & Jenrette Securities
Corporation also acted as our financial advisor and as arranger, and DLJ Capital
Funding, Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation, acted as syndication agent under our credit facility, and received
customary fees and reimbursements in connection therewith. DLJ Merchant Banking
and certain related parties, all of which are affiliates of Donaldson, Lufkin &
Jenrette Securities Corporation, own a significant amount of our equity. See
"Principal Stockholders" and "Related-Party Transactions."
We have agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
This prospectus may be used by the underwriters and other dealers in
connection with offers and sales of the shares of Class A common stock,
including sales of shares initially sold by the underwriters in the offering
being made outside of the United States, to persons located in the United
States.
96
<PAGE>
LEGAL MATTERS
The validity of the common stock offered hereby will be passed on for Nextel
Partners by Summit Law Group, PLLC, Seattle, Washington. Certain legal matters
will be passed upon for the underwriters by Latham & Watkins, New York, New
York. Certain other legal matters will be passed upon for us by our special FCC
counsel, Willkie Farr & Gallagher, Washington, D.C.
EXPERTS
The consolidated financial statements of Nextel Partners, Inc. and
Subsidiaries as of and for the year ended December 31, 1998 included in this
prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1. This
prospectus, which forms part of the registration statement, does not contain all
of the information included in that registration statement. Certain information
is omitted and you should refer to the registration statement and its exhibits.
With respect to references made in this prospectus to any of our contracts or
other documents, such references are not necessarily complete and you should
refer to the exhibits attached to the registration statement for copies of the
actual contract or document. You may review a copy of the registration
statement, including its exhibits and schedules, at the SEC's public reference
facilities in Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the regional offices of the SEC located at 7 World Trade
Center, Suite 1300, New York, New York 10048, and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You may also obtain copies
of such materials from the Public Reference Section of the SEC, Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The SEC maintains a website (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding registrants,
such as us and Nextel Communications, that file electronically with the SEC.
97
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
September 30, 1999 (unaudited), and Proforma Stockholder's
Equity as of September 30, 1999 (unaudited)............... F-3
Consolidated Statements of Operations for the year ended
December 31, 1998 and for the nine month periods ended
September 30, 1998 and 1999 (unaudited)................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the year ended December 31, 1998 and for the nine
month period ended September 30, 1999 (unaudited)......... F-5
Consolidated Statements of Cash Flows for the year ended
December 31, 1998 and for the nine month periods ended
September 30, 1998 and 1999 (unaudited)................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE>
After the stock split discussed in Note 2 to the Nextel Partners, Inc.
consolidated financial statements is effected, we expect to be in a position to
render the following audit report.
/s/ Arthur Andersen LLP
January 27, 2000
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Nextel Partners, Inc.:
We have audited the accompanying consolidated balance sheet of Nextel
Partners, Inc. (a Delaware corporation) and Subsidiaries as of December 31,1998
and the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Nextel Partners, Inc. and
Subsidiaries as of December 31, 1998, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
Seattle, Washington,
January 27, 2000
F-2
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDER'S
EQUITY
AS OF
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1999 1999
-------------- -------------- ---------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 16 $ 214,173
Short-term investments.................................... -- 193,173
Accounts receivable, net of allowance of $254 and $839,
respectively............................................ 1,546 5,013
Subscriber equipment inventory............................ 1,353 1,439
Other current assets...................................... 325 4,410
Restricted cash........................................... -- 175,000
-------- ---------
Total current assets........................................ 3,240 593,208
-------- ---------
PROPERTY, PLANT AND EQUIPMENT, at cost...................... 112,334 179,805
Less--accumulated depreciation............................ 4,386 12,158
-------- ---------
Property, plant and equipment, net...................... 107,948 167,647
-------- ---------
OTHER NON-CURRENT ASSETS:
FCC operating licenses, net of accumulated amortization of
$200 and $590, respectively............................. 133,180 148,600
Debt issuance costs and other assets...................... 3,298 22,979
Receivable from officer................................... -- 2,200
-------- ---------
Total non-current assets.................................... 136,478 173,779
-------- ---------
TOTAL ASSETS................................................ $247,666 $ 934,634
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 1,043 $ 8,045
Accrued expenses.......................................... 4,554 14,678
Due to Nextel............................................. 3,398 2,746
-------- ---------
Total current liabilities................................... 8,995 25,469
-------- ---------
LONG-TERM DEBT
Credit facility--term B and C............................. -- 325,000
14% Senior discount notes, due 2009....................... -- 445,308
-------- ---------
Total long-term debt...................................... -- 770,308
-------- ---------
Total liabilities........................................... 8,995 795,777
-------- ---------
COMMITMENTS AND CONTINGENCIES (See Notes)
REDEEMABLE PREFERRED STOCK, Series B redeemable 2010, par
value $.001 per share, 12% cumulative annual dividend;
13,110,000 shares issued and outstanding.................. $ 23,675
=========
STOCKHOLDERS' EQUITY
Preferred stock, Series A convertible, par value $.001 per
share, 125,834,646 shares issued and outstanding........ -- 21 $ --
Preferred stock, Series B redeemable or convertible to
Series C preferred stock 2010, par value $.001 per
share, 12% cumulative annual dividend; 13,110,000 shares
issued and outstanding.................................. -- 2 --
Preferred stock, Series C convertible, par value $.001 per
share 64,672,626 shares issued and outstanding.......... -- 11 --
Preferred stock, Series D convertible, par value at $.001
per share, 13,110,000 shares issued and outstanding..... -- 2 --
Common stock, Class A, par value $.001 per share,
9,533,328, 9,593,328 and 135,427,974 shares,
respectively, issued and outstanding, and paid-in
capital................................................. 1,604 7,474 215,637
Warrants outstanding...................................... -- 3,847 3,847
Common stock, Class B, par value $.001 per share
convertible, 77,782,626 shares issued and outstanding,
and paid-in capital..................................... -- -- 127,100
Other paid-in capital..................................... 260,761 357,077 --
Accumulated deficit....................................... (22,553) (81,656) (83,481)
Subscriptions receivable from stockholders................ -- (142,489) (142,489)
Deferred compensation..................................... (1,141) (5,432) (5,432)
-------- --------- ---------
Total stockholders' equity.................................. 238,671 138,857 $ 115,182
-------- --------- =========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $247,666 $ 934,634
======== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTH PERIODS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
-------------- ---------------------------
1998 1998 1999
-------------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES:
Service revenues ($5,770 received from Nextel
in 1999).................................... $ 3,745 $ 1,501 $ 17,617
Equipment revenues............................ 1,564 632 2,977
-------- -------- ------------
Total revenues.............................. 5,309 2,133 20,594
-------- -------- ------------
OPERATING EXPENSES:
Cost of service revenues ($2,911 paid to
Nextel in 1999)............................. 6,108 3,461 11,786
Cost of equipment revenues.................... 2,935 1,149 7,424
Selling, general and administrative ($1,936
paid to Nextel in 1999)..................... 13,531 7,342 22,591
Stock based compensation...................... 447 -- 1,579
Depreciation and amortization................. 4,586 1,860 8,162
-------- -------- ------------
Total operating expenses.................... 27,607 13,812 51,542
-------- -------- ------------
LOSS FROM OPERATIONS............................ (22,298) (11,679) (30,948)
Interest expense, net......................... -- -- (44,571)
Interest income............................... -- -- 16,416
-------- -------- ------------
LOSS BEFORE INCOME TAX PROVISION................ (22,298) (11,679) (59,103)
Income tax provision.......................... -- -- --
-------- -------- ------------
Net loss...................................... $(22,298) $(11,679) $ (59,103)
======== ======== ============
LOSS PER SHARE
Basic and diluted loss per share.............. $ (27.30)
============
Weighted average shares outstanding........... 2,164,771
============
PRO FORMA LOSS PER SHARE
Series B Redeemable preferred stock
dividend.................................... $ (1,825)
============
Basic and diluted loss per share.............. $ (0.39)
============
Weighted average shares outstanding........... 157,043,210
============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK
AND
PREFERRED STOCK PAID-IN CAPITAL OTHER
---------------------- -------------------- WARRANTS PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT OUTSTANDING CAPITAL DEFICIT
----------- -------- --------- -------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE
January 1, 1998........................ -- $-- -- $ -- $ -- 8,255 $ (255)
Equity contributions................... -- -- -- -- -- 252,506 --
Issuance of common stock under
restricted stock purchase plan....... -- -- 9,533,328 1,604 -- -- --
Vesting of deferred compensation....... -- -- -- -- -- -- --
Net loss............................... -- -- -- -- -- -- (22,298)
----------- --- --------- ------ ------ --------- --------
BALANCE
December 31, 1998...................... -- -- 9,533,328 1,604 -- 260,761 (22,553)
Issuance of common stock............... 60,000 61
Issuance of Series A preferred stock... 125,834,646 21 -- -- -- 208,142 --
Issuance of warrants................... -- -- -- -- 3,847 -- --
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... 13,110,000 2 -- -- -- 21,848 --
Issuance of Series C preferred stock... 64,672,626 11 -- -- -- 110,731 --
Issuance of Series D preferred stock... 13,110,000 2 -- -- -- 22,264 --
Return of capital to Nextel............ -- -- -- -- -- (130,900) --
Deferred compensation.................. -- -- -- 5,809 -- -- --
Vesting of deferred compensation....... -- -- -- -- -- -- --
Net loss............................... -- -- -- -- -- -- (59,103)
Equity issuance costs.................. -- -- -- -- -- (2,589) --
Motorola credit........................ -- -- -- -- -- -- --
----------- --- --------- ------ ------ --------- --------
BALANCE
September 30, 1999 (unaudited)......... 216,727,272 $36 9,593,328 $7,474 $3,847 $ 357,077 $(81,656)
=========== === ========= ====== ====== ========= ========
<CAPTION>
SUBSCRIPTIONS DEFERRED
RECEIVABLE COMPENSATION TOTALS
-------------- -------------- ---------
<S> <C> <C> <C>
BALANCE
January 1, 1998........................ $ -- $ -- 8,000
Equity contributions................... -- -- 252,506
Issuance of common stock under
restricted stock purchase plan....... -- (1,588) 16
Vesting of deferred compensation....... -- 447 447
Net loss............................... -- -- (22,298)
--------- ------- ---------
BALANCE
December 31, 1998...................... -- (1,141) 238,671
Issuance of common stock............... (61) --
Issuance of Series A preferred stock... -- -- 208,163
Issuance of warrants................... -- -- 3,847
Subscriptions receivable from
stockholders......................... (157,203) -- (157,203)
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... -- -- 110,742
Issuance of Series D preferred stock... -- -- 22,266
Return of capital to Nextel............ -- -- (130,900)
Deferred compensation.................. -- (5,809) --
Vesting of deferred compensation....... -- 1,579 1,579
Net loss............................... -- -- (59,103)
Equity issuance costs.................. -- -- (2,589)
Motorola credit........................ 14,714 14,714
--------- ------- ---------
BALANCE
September 30, 1999 (unaudited)......... $(142,489) $(5,432) $ 138,857
========= ======= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTH PERIODS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
-------------- -------------------------
1998 1998 1999
-------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (22,298) $ (11,679) $ (59,103)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities..........................
Depreciation and amortization............................. 4,586 1,860 8,162
Amortization of debt issuance costs....................... -- -- 1,464
Interest accretion for senior discount notes.............. -- -- 38,932
Stock-based compensation.................................. 447 -- 1,579
Allowance for doubtful accounts........................... 254 -- 585
Change in current assets and liabilities:
Accounts receivable..................................... (1,800) (809) (4,052)
Subscriber equipment inventory.......................... (1,353) (1,778) (86)
Other current assets.................................... (325) (430) (4,085)
Accounts payable and accrued expenses................... 2,300 1,043 20,426
Operating advances from Nextel.......................... 3,398 -- (652)
--------- --------- ---------
Net cash provided by (used in) operating activities....... (14,791) (11,793) 3,170
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan to officer........................................... -- -- (2,200)
Capital expenditures...................................... (104,334) (101,623) (52,756)
FCC licenses.............................................. -- -- (6,950)
Purchase of short-term investments........................ -- -- (193,173)
--------- --------- ---------
Net cash used in investing activities................... (104,334) (101,623) (255,079)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock.................................. 16 -- --
Equity contributions from Nextel.......................... 119,125 113,416 --
Proceeds from borrowings.................................. -- -- 731,376
Restricted cash transfer.................................. -- -- (175,000)
Proceeds from equity contributions........................ -- -- 67,596
Return of capital to Nextel............................... -- -- (130,900)
Equity costs.............................................. -- -- (2,589)
Debt issuance costs....................................... -- -- (24,417)
--------- --------- ---------
Net cash provided by financing activities............... 119,141 113,416 466,066
--------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 16 -- 214,157
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. -- -- 16
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 16 $ -- $ 214,173
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
Contribution of FCC licenses from Nextel Communications,
Inc..................................................... $ 133,380 $ 133,380 $ 8,884
========= ========= =========
Accrued debt and equity issuance costs.................... $ 3,298 $ 3,298 $ --
========= ========= =========
Equipment purchased from Motorola's equity contribution
credit.................................................. $ -- $ -- $ 14,714
========= ========= =========
CASH PAID FOR INTEREST...................................... $ -- $ -- $ 12,644
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND SEPTEMBER 30, 1998 AND 1999
(AMOUNTS AS OF AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1999 ARE UNAUDITED)
1. FORMATION, CAPITALIZATION AND BASIS OF PRESENTATION
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 subsidiaries ("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 2, 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.
INITIAL CAPITALIZATION TRANSACTIONS
On January 29, 1999, Nextel contributed the Nextel Carve-Out to the Company
in exchange for 13,110,000 shares of Series B Preferred Stock, 52,440,000 shares
of Series C Preferred Stock, 13,110,000 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 104,879,826 shares of Series A Preferred Stock (valued at
$170.9 million) and warrants to purchase 2,434,260 shares of Class A Common
Stock for an exercise price of $.000167 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
September 30, 1999 the Company has used approximately $14.7 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 in the fourth quarter of 1999 (see Note 11). Upon receipt of FCC
approval, the Frequency Management Agreement will expire.
F-7
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30, 1998 AND 1999
(AMOUNTS AS OF AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1999 ARE UNAUDITED)
1. FORMATION, CAPITALIZATION AND BASIS OF PRESENTATION (CONTINUED)
EXPANSION TERRITORY CAPITALIZATION TRANSACTIONS
On September 9, 1999, Nextel Partners Operating Corporation ("OPCO"), a
wholly owned subsidiary of Nextel Partners, entered into an Expansion Territory
Asset Transfer and Reimbursement Agreement with Nextel to acquire certain
assets, properties, rights and interests to be used in connection with the
construction and operation of additional territories ("Expansion Territory") for
$10.6 million. To accomplish the build-out and operation of the Expansion
Territory, the Company issued 5,330,142 shares of Series C Preferred Stock to
Nextel having an aggregate implied value of $8.9 million in exchange for the
contribution of certain licenses and an extension of an operating agreement
governing the build-out of the Network in the Expansion Territory. The Company
also issued Series A and C Preferred Stock for equity contributions of
$50 million. The issuance of Series A Preferred Stock consisted of 20,954,820
shares (valued at $37.2 million) and Series C Preferred stock of 6,902,484
shares (valued at $12.8 million). The equity securities were issued in exchange
for cash of $15.5 million, an irrevocable cash equity commitment of
$30.9 million to be received over the subsequent two-year period, and a vendor
credit from Motorola of $3.6 million towards the purchase of infrastructure
equipment.
The following summarizes the dollar amount and number of shares issued as
part of the Initial and Expansion Territory Capitalization Transactions
described above.
<TABLE>
<CAPTION>
SHARES EQUITY
ISSUED CONTRIBUTIONS
----------- -------------
<S> <C> <C>
Series A Preferred Shares................................... 125,834,646 $208,160,194
Series B Preferred Shares................................... 13,110,000 21,850,000
Series C Preferred Shares................................... 64,672,626 110,740,170
Series D Preferred Shares................................... 13,110,000 22,266,000
Subscription Receivable..................................... (157,203,019)
Warrants to purchase Class A common shares issued for a
purchase price of $.000167 per share...................... 2,434,260 3,847,000
</TABLE>
Approximately $2.5 million of issuance costs were charged to equity as part
of the Capitalization Transactions.
The following chart reflects ownership by major shareholders after the
Capitalization Transactions. Prior to the Capitalization Transactions, the
Company had only Class A Common
F-8
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30, 1998 AND 1999
(AMOUNTS AS OF AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1999 ARE UNAUDITED)
1. FORMATION, CAPITALIZATION AND BASIS OF PRESENTATION (CONTINUED)
Stock outstanding. This stock was owned by management employees, subject to
restrictions, and Eagle River. The Company had no preferred stock outstanding.
<TABLE>
<CAPTION>
MAJOR SHAREHOLDER CLASS OF STOCK VOTING % EQUITY %
- ----------------- --------------------------------- ----------- ----------
<S> <C> <C> <C>
Nextel Preferred--Series B Redeemable or
Convertible 0.00% 5.61%
Nextel Preferred--Series C Convertible 31.93% 27.66%
Nextel Preferred--Series D Convertible 0.00% 5.61%
----- -----
Subtotal--Nextel 31.93% 38.88%
===== =====
DLJ Merchant Banking Partners II, Preferred--Series A Convertible
L.P. and affiliates ("DLJ and warrants to buy Class A
Merchant Banking") common stock 14.09% 12.20%
===== =====
Madison Dearborn Capital Partners Preferred--Series A Convertible
II, L.P. and warrants to buy Class A
common stock 13.44% 11.64%
===== =====
Eagle River Common--Class A 0.37% 0.32%
Eagle River Preferred--Series A Convertible 9.25% 8.02%
----- -----
Subtotal--Eagle River 9.62% 8.34%
===== =====
Motorola Preferred--Series A Convertible 6.46% 5.59%
===== =====
Management Common--Class A 4.36% 3.78%
Management Preferred--Series A Convertible .49% .43%
----- -----
Subtotal--Management 4.85% 4.21%
===== =====
</TABLE>
BASIS OF PRESENTATION
In substance, the Capitalization Transactions on January 29, 1999
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
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
F-9
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30, 1998 AND 1999
(AMOUNTS AS OF AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1999 ARE UNAUDITED)
1. FORMATION, CAPITALIZATION AND BASIS OF PRESENTATION (CONTINUED)
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.
The accompanying financial statements also reflect the acquisition of the
Expansion Territory for $10.6 million from Nextel and related Capitalization
Transactions on September 9, 1999 as described above.
INTERIM FINANCIAL STATEMENT PRESENTATION
The financial statements as of and for the nine month periods ended
September 30, 1998 and 1999 have been prepared without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission.
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
period. The results of operations for the nine month period ended September 30,
1999 are not necessarily indicative of the results to be expected for the full
year.
2. 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
OPCO, a wholly owned subsidiary of Partners.
Partners' digital network ("Nextel 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"). 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 9) 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.
CONCENTRATION OF RISK
The Company believes that the geographic and industry diversity of its
customer base minimizes the risk of incurring material losses due to
concentration of credit risk.
The Company is party to certain equipment purchase agreements with Motorola
(see Notes 2 and 9). For the foreseeable future the Company expects that it will
need to rely on Motorola for the manufacture of a substantial portion of the
infrastructure equipment necessary to construct and make operational its digital
mobile network as well as for the provision of digital mobile telephone handsets
and accessories.
F-10
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30, 1998 AND 1999
(AMOUNTS AS OF AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1999 ARE UNAUDITED)
2. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
As previously discussed, the Company is reliant on Nextel for the provision
of certain services. For the foreseeable future, the Company will need to rely
on Nextel for the provision of these services as the Company will not have the
infrastructure to support those services.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Partners and
its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
PRO FORMA STOCKHOLDERS' EQUITY
In December 1999, the Board of Directors of the Company authorized the
filing of a registration statement with the Securities and Exchange Commission
(the SEC) that would permit the Company to sell shares of the Company's common
stock in connection with a proposed initial public offering (IPO). If the
offering is consummated under the terms presently anticipated, all the
outstanding shares of the Company's Series A preferred stock will automatically
convert into 125,834,646 shares of Class A common stock and all outstanding
shares of the Company's Series C and D preferred stock will automatically
convert into 77,782,626 shares of Class B common stock, upon the closing of the
proposed IPO. The unaudited pro forma stockholders' equity at September 30, 1999
is adjusted for the conversion of preferred stock. In addition, the Series B
convertible/redeemable preferred stock held by a subsidiary of Nextel
Communications, becomes subject to mandatory redemption 375 days after
February 1, 2009, upon effectiveness of this registration statement. The pro
forma stockholders' equity at September 30, 1999 is adjusted to reflect a change
to accumulated deficit representing the 12% dividend accrued as of
September 30, 1999, and the reclassification of the Series B preferred stock,
plus accrued dividends, from stockholders' equity to the section of the balance
sheet between liabilities and stockholders' equity.
PROFORMA NET LOSS PER SHARE
In accordance with SFAS No. 128, "Computation of Earnings Per Share," basic
earnings per share is computed by dividing net loss by the weighted average
number of shares of common stock outstanding during the period. Diluted earnings
per share is computed by dividing net loss by the weighted average number of
common and dilutive common equivalent shares outstanding during the period.
Common equivalent shares consist of shares of common stock issuable upon the
conversion of the convertible preferred stock (using the if-converted method)
and shares issuable upon the exercise of stock options and warrants (using the
treasury stock method); common equivalent shares are excluded from the
calculation as their effects are antidilutive. The
F-11
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30, 1998 AND 1999
(AMOUNTS AS OF AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1999 ARE UNAUDITED)
2. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
PROFORMA NET LOSS PER SHARE (CONTINUED)
Company has not had any issuances or grants for nominal consideration as defined
under Staff Accounting Bulletin 98. Diluted net loss per share for all periods
shown does not include the effects of the convertible preferred stock and shares
issuable upon the exercise of stock options, warrants and restricted stock as
the effect of their inclusion is antidilutive during each period. Pro forma
basic and diluted net loss per share is computed based on the weighted average
number of shares of common stock outstanding giving effect to the conversion of
convertible preferred stock outstanding that will automatically convert upon
completion of the Company's initial public offering (using the if-converted
method from the original issue date). In addition, net loss available to common
stockholders increased by the amount of the accrued dividend on the Series B
redeemable preferred stock. Pro forma diluted net loss per share excludes the
impact of stock options, warrants and restricted stock as the effect of their
inclusion would be antidilutive.
PROPOSED STOCK SPLIT
The Company intends to effect a 6-for-1 stock split or dividend of its
common stock. The split/ dividend will be effective prior to the consummation of
the initial public offering. Accordingly, all common and convertible preferred
shares have been adjusted to reflect the proposed split.
CASH AND CASH EQUIVALENTS
Cash equivalents include time deposits and highly liquid investments with
remaining maturities of three months or less at the time of purchase.
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
September 30, 1999 under one of the Company's term loans. 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.
SUBSCRIBER EQUIPMENT INVENTORY
Subscriber equipment is valued at the lower of cost or market. Cost is
determined by the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, including improvements that extend useful
lives, are recorded at cost, while maintenance and repairs are charged to
operations as incurred. Depreciation and amortization are computed using the
straight-line method based on estimated useful lives of three
F-12
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30, 1998 AND 1999
(AMOUNTS AS OF AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1999 ARE UNAUDITED)
2. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
to ten years for equipment and three to seven years for furniture and fixtures.
Leasehold improvements are amortized over the shorter of the respective lives of
the leases or the useful lives of the improvements.
Construction in progress includes labor, material, transmission and related
equipment, engineering, site design, interest and other costs relating to the
construction of the Nextel digital mobile network.
The Company periodically reviews the carrying value of its long-lived assets
(including property, plant and equipment and operating licenses) whenever events
or changes in circumstances indicate that the carrying value may not be
recoverable. If the estimated future cash inflows attributable to the asset,
less estimated future cash outflows is less than the carrying amount, an
impairment loss will be recognized.
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 $6.3 million for the
year ended December 31, 1998 and approximately, 3.8 and $9.7 million for the
nine month periods ended September 30, 1998 and 1999, respectively.
FCC OPERATING LICENSES
FCC operating licenses are recorded at historical cost and are amortized
using the straight-line method based on estimated useful lives of 40 years. The
Company's FCC licenses and the requirements to maintain the licenses are similar
to other licenses granted by the FCC, including Personal Communications Services
("PCS") and cellular licenses in that they are subject to renewal after the
initial 10-year term. Historically, the renewal process associated with these
FCC licenses has been perfunctory. The accounting for these licenses has
historically not been constrained by the renewal and operational requirements.
Amortization begins with the commencement of service to customers in a
particular market. During the second half of 1998, the Upstate New York and
Hawaii markets became operational. Amortization expense of approximately
$200,000 was recorded in relation to these markets for the year ended
December 31, 1998 and approximately $71,200 and $390,000 was recorded for the
nine month periods ended September 30, 1998 and 1999, respectively.
INTEREST RATE RISK MANAGEMENT
The Company uses derivative financial instruments consisting of interest
rate swap and interest rate protection agreements in the management of its
interest rate exposures. In April 1999, the Company entered into an interest
rate swap agreement for $60 million to partially hedge interest rate exposure
with respect to its $175 million term loan. This interest rate swap agreement
has the effect of converting certain of the Company's variable rate obligations
to fixed or other variable rate obligations. Amounts paid or received under the
interest rate swap agreement is accrued as interest rates change and is
recognized over the life of the swap agreement as an adjustment to interest
F-13
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30, 1998 AND 1999
(AMOUNTS AS OF AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1999 ARE UNAUDITED)
2. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
expense. The fair value of the swap agreement is not recognized in the
consolidated financial statements, since the swap agreement meets the criteria
for hedge accounting.
The Company will not use financial instruments for trading or other
speculative purposes, nor will it be a party to any leveraged derivative
instrument. The use of derivative financial instruments will be monitored
through regular communication with senior management. The Company will be
exposed to credit loss in the event of nonperformance by the counterparties.
This credit risk is minimized by dealing with a group of major financial
institutions with which the Company has other financial relationships. The
Company does not anticipate nonperformance by these counterparties.
REVENUE RECOGNITION
Revenue net of customer discounts and rebates is recognized for airtime and
other services over the period earned and for sales of equipment when delivered.
Certain of the Company's digital equipment sales are made through independent
distributors under agreements allowing rights of return on merchandise unsold by
the distributors. The Company defers recognition of such sales until the
merchandise is sold by the distributors.
ADVERTISING COSTS
Costs related to advertising and other promotional expenditures are expensed
as incurred. Advertising costs totaled approximately $1.5 million for the year
ended December 31, 1998 and approximately, $0.8 and $2.3 million for the nine
month periods ended September 30, 1998 and 1999, respectively.
DEBT ISSUANCE COSTS
In relation to the issuance of long-term debt discussed in Note 4, the
Company has incurred a total of $24.4 million ($1.3 million had been incurred as
of December 31, 1998) in deferred financing costs related to the issuance of the
Notes and the bank credit facility. These debt issuance costs will be amortized
over the terms of the underlying obligation using the effective interest method.
No debt issuance costs were amortized for the nine-month period ended
September 30, 1998. For the nine-month period ended September 30, 1999,
$1.5 million of amortization on debt issuance costs was included in interest
expense.
STOCK BASED COMPENSATION
As allowed by SFAS No. 123, "Accounting for Stock Based Compensation"
("SFAS123"), the Company has chosen to account for compensation cost associated
with its stock compensation plans in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations. For the
year ended December 31, 1998 and the nine month period ended September 30, 1999
compensation expense under SFAS 123 and APB Opinion No. 25 were identical. In
the future, the Company will disclose pro forma net loss as if compensation
expense costs had been determined consistent with SFAS 123.
F-14
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30, 1998 AND 1999
(AMOUNTS AS OF AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1999 ARE UNAUDITED)
2. OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INCOME TAXES
Deferred tax assets and liabilities are determined based on the temporary
differences between the financial reporting and tax bases of assets and
liabilities applying enacted statutory tax rates in effect for the year in which
the differences are expected to reverse. Future tax benefits, such as net
operating loss carryforwards, are recognized to the extent that realization of
such benefits is considered to be more likely than not. Net operating losses
incurred by the Nextel Carve-Out prior to the closing of the Capitalization
Transactions will be retained by Nextel.
SEGMENT REPORTING
The Company adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information" ("SFAS 131") during 1998. SFAS 131 requires
companies to disclose certain information about operating segments. Based on the
criteria within SFAS 131, the Company has determined that it has one reportable
segment, wireless services.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SOFTWARE COSTS--In March 1998, the American Institute of Certified Public
Accountants (the "AICPA") issued Statement of Position 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use." This
statement became effective for the Company on January 1, 1999 and established
accounting standards for costs incurred in the acquisition or development and
implementation of computer software. This new standard requires the
capitalization of certain software implementation costs relating to software
acquired or developed and implemented for the Company's use. The adoption of
this statement has not had a significant effect on the Company's financial
position or results of operations.
ACCOUNTING FOR START-UP ACTIVITIES--In April 1998, the AICPA issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities."
This statement became effective on January 1, 1999 and required that costs of
start-up activities and organization costs be expensed as incurred. This
statement has not had a significant effect on the Company's financial position
or results of operations.
ACCOUNTING FOR DERIVATIVE INSTRUMENT AND HEDGING ACTIVITIES--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 137 issued
August 1999, postpones for one year the mandatory effective date for SFAS 133 to
January 1, 2001. The Company has not evaluated the effects of this change on its
financial position or results of operations.
REVENUE RECOGNITION IN FINANCIAL STATEMENTS--In November of 1999, the SEC
released Staff Accounting Bulletin Number 101--Revenue Recognition in Financial
Statements. This bulletin will
F-15
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30,1998 AND 1999
(AMOUNTS AS OF AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1999 ARE UNAUDITED)
3. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
Building and improvements................................... $ 320 $ 537
Equipment................................................... 87,523 129,214
Furniture and fixtures...................................... 2,926 2,989
Less--accumulated depreciation and amortization............. (4,386) (12,158)
-------- --------
86,383 120,582
Construction in progress.................................... 21,565 47,065
-------- --------
$107,948 $167,647
======== ========
</TABLE>
4. LONG-TERM DEBT:
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, SEPTEMBER 30,
1998 1999
-------------- --------------
(IN THOUSANDS)
<S> <C> <C>
14% Senior Redeemable Discount Notes due 2009, net of
unamortized discount of $354.7 million at September 30,
1999...................................................... $ -- $445,308
Bank Credit Facility--Term B Loan, interest at Company's
option, calculated on Administrative Agent's alternate
base rate or reserve adjusted London Interbank Offered
Rate ("LIBOR")............................................ -- 175,000
Bank Credit Facility--Term C Loan, interest at Company's
option, calculated on Administrative Agent's alternate
base rate or reserve adjusted London Interbank Offered
Rate ("LIBOR")............................................ -- 150,000
-------- --------
Total Long-term Debt........................................ $ -- $770,308
======== ========
</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
F-16
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30,1998 AND 1999
(AMOUNTS AS OF AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1999 ARE UNAUDITED)
4. LONG-TERM DEBT: (CONTINUED)
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 all of its assets, (iv) create liens on assets, and
(v) enter into certain transactions with affiliates or related persons. As of
September 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.
In accordance with the requirements of SFAS 107 -- "Disclosure about Fair
Value of Financial Instruments", the Company estimates the fair market value of
its redeemable discount notes to be approximately $462 million, based upon
quoted market prices of the notes.
BANK CREDIT FACILITY
On January 29, 1999, the Company, through OPCO, entered into a credit
facility ("Term B Loan") 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 Term B Loan includes a $175 million term loan facility and
initially, a $100 million revolving credit facility. The Term B Loan has a
maturity of nine years. The revolving credit facility terminates eight years
from the initial funding.
On September 9, 1999, the Company, through OPCO entered into an Amended and
Restated Credit Agreement (the "Amended and Restated Credit Agreement") with a
syndicate of banks and other financial institutions with DLJ Capital
Funding, Inc., as syndication agent. The parties agreed to amend and restate in
its entirety the credit agreement to, among other things, obtain from certain of
the Lenders an additional term loan commitment ("Term C Loan") in the maximum
aggregate principle amount of $150.0 million. The Term C Loan facility has a
maturity of nine years.
The Term B and Term C Loans bear 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 B Loan is
4.75% over LIBOR and 3.75% over the base rate. For the revolving credit
facility, which is part of Term B Loan, the initial applicable margin is
F-17
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30,1998 AND 1999
(AMOUNTS AS OF AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1999 ARE UNAUDITED)
4. LONG-TERM DEBT: (CONTINUED)
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 applicable margin for the Term C Loan is 4.25% over LIBOR and 3.25%
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.
Prior to the date on which the Company's portion of the Nextel 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 B and C Loans are 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),
(iv) with 50% of the net cash proceeds from the issuance of equity at any time
after the fifth anniversary of the credit facility, and (v) with 100% of net
casualty proceeds, subject to certain exceptions.
The Company's obligations under the Term B and C Loans 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 Term B and C Loans. 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 Term B and C Loans.
The Term B and C Loans contain 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 Term B and C Loans contain 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 September 30, 1999, the Company was in
compliance with all of its required covenants.
F-18
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30,1998 AND 1999
(AMOUNTS AS OF AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1999 ARE UNAUDITED)
4. LONG-TERM DEBT: (CONTINUED)
FUTURE MATURITIES OF LONG-TERM DEBT
Based on the debt issued on January 29, 1999 and September 9, 1999, as
discussed above, for the years subsequent to December 31, 1998, scheduled annual
maturities of long-term debt outstanding as of September 30, 1999, under
existing long-term debt agreements are as follows (in thousands):
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1999
--------------
(IN THOUSANDS)
<S> <C>
1999....................................................... $ --
2000....................................................... --
2001....................................................... --
2002....................................................... --
2003....................................................... 1,688
Thereafter................................................. 1,123,312
----------
1,125,000
Less- unamortized discount................................. (354,692)
----------
$ 770,308
==========
</TABLE>
F-19
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30,1998 AND 1999
(AMOUNTS AS OF AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1999 ARE UNAUDITED)
5. INCOME TAXES:
Deferred tax assets and liabilities consist of the following and are
presented as if Nextel Partners holding company, which was incorporated in 1998
to serve as the parent company of the Nextel Carve-Out, had conducted operations
in 1998:
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1998
--------------
(IN THOUSANDS)
<S> <C>
Deferred tax assets:
Operating loss carryforwards................................ $14,731
Valuation allowance......................................... (8,182)
-------
6,549
-------
Deferred tax liabilities:
Property, plant and equipment............................... (6,097)
Other....................................................... (452)
-------
(6,549)
-------
Net deferred tax liability.................................. $ --
=======
</TABLE>
At December 31, 1998, the Company would have had approximately
$39.8 million of consolidated net operating loss ("NOL") carryforwards for
federal income tax purposes expiring through 2018. The Company would have
recorded a valuation allowance of approximately $8.2 million for 1998 because
available objective evidence would have created sufficient uncertainty regarding
the realization of the net deferred tax assets. Such factors primarily would
have included anticipated recurring operating losses resulting from the
development of the Company's business. On a stand-alone Company basis, ignoring
the tax effects of the Nextel Carve-Out whose tax impacts will be included in
the consolidated tax return of Nextel for the year ended December 31, 1998 and
for the period through January 29, 1999, and given that the Company had no
actual operations in 1998, the Company would have reported a deferred tax asset
of $1.5 million, a deferred tax liability of $400,000 offset by a valuation
allowance on the net deferred tax asset of $1.1 million. The Company prior to
January 29, 1999 had no operations on a stand-alone basis. As a result, the
Company capitalized and amortized over future periods for tax purposes costs
incurred by the Company prior to January 29, 1999, which were expensed for
financial reporting purposes resulting in the deferred tax asset. The Company,
on a stand-alone basis, did not generate any NOL for the year ended
December 31, 1998.
The difference between the statutory tax rate of approximately 37% (35%
federal and 2% state, net of federal benefits) and the tax benefit of zero
disclosed above by the Company is primarily due to the Company's full valuation
allowance against the net deferred tax assets. The Company's ability to utilize
the NOL in any given year may be limited by certain events, including a
significant change in ownership interest.
F-20
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30,1998 AND 1999
(AMOUNTS AS OF AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1999 ARE UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASE COMMITMENTS
The Company leases various equipment and office facilities under operating
leases. Leases for antenna sites are typically five years with renewal options.
Office facilities and equipment other than antenna sites are leased under
agreements with terms ranging from one month to 20 years. The leases normally
provide for the payment of minimum annual rentals and certain leases include
provisions for renewal options of up to five years.
For years subsequent to September 30, 1999, future minimum payments for all
operating lease obligations that have initial noncancellable lease terms
exceeding one year are as follows (in thousands):
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
1999 (3 months)............................................. $ 3,474
2000........................................................ 12,257
2001........................................................ 12,037
2002........................................................ 11,195
2003........................................................ 8,275
2004........................................................ 4,605
Thereafter.................................................. 8,638
-------
$60,481
=======
</TABLE>
Total rental expense was approximately $3 million for the year ended
December 31, 1998 and $1.9 and $6.1 million for the nine month periods ended
September 30, 1998 and 1999, respectively.
REGULATORY MATTERS
The FCC issues Specialized Mobile Radio ("SMR") licenses on both a
site-specific and wide-area basis. Each license enables SMR carriers to provide
service either on a site-specific basis, in specific 800 MHz Economic
Areas("EA") or 900 MHz Metropolitan Trading Areas ("MTA") in the U.S. Currently,
SMR licenses are issued for a period of 10 years, and are subject to certain
construction and operational requirements.
Pursuant to the credit facility, until FCC approval of the ownership
transfer, the Company has established a cash collateral account in which it
maintains a balance equal to amounts outstanding under the credit facility.
Failure of the Company to obtain such FCC approval prior to January 29, 2000,
would constitute an event of default under the credit facility and any
indebtedness outstanding thereunder may be accelerated. On October 29, 1999 the
FCC issued an order approving the transfer as described in Note 11.
The FCC has routinely granted license renewals providing the licensees have
complied with applicable rules, policies and the Communications Act of 1934, as
amended. The Company believes that it has met and will continue to meet all
requirements necessary to secure the retention
F-21
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30,1998 AND 1999
(AMOUNTS AS OF AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1999 ARE UNAUDITED)
6. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
and renewal of its SMR licenses subsequent to the FCC approved transfer of the
licenses from Nextel.
7. CAPITAL STOCK AND STOCK RIGHTS:
Pursuant to the Restated Certificate of Incorporation, the Company has the
authority to issue 1,020 million shares of capital stock, divided into five
classes as follows: (i) 600 million shares of Common Stock, par value, $.001 per
share; (ii) 150 million shares of Series A Convertible Preferred Stock, par
value $.001 per share ("Series A Preferred Stock"); (iii) 150 million shares of
Series B Redeemable or Convertible Preferred Stock, par value $.001 per share
("Series B Preferred Stock"); (iv) 90 million shares of Series C Convertible
Preferred Stock, stated value $.001 per share ("Series C Preferred Stock"); and
(v) 30 million shares of Series D Convertible Preferred Stock, par value, $.001
per share ("Series D Preferred Stock").
The following is a summary description of the Company's capital stock.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters submitted for action by the shareholders. There is no provision for
cumulative voting with respect to the election of directors. Holders of Common
Stock are entitled to share equally, share for share, if dividends are declared
on Common Stock, whether payable in cash, property or securities.
CLASS A COMMON STOCK--Under certain circumstances, shares of Class A Common
Stock and securities convertible into Class B Common Stock (other than Class B
Common Stock) are callable at the option of Nextel or may be put to Nextel at
the option of the holders.
CLASS B COMMON STOCK--Shares of Class B Common Stock are convertible at any
time at the option of the holder into an equal number of shares of Class A
Common Stock.
PREFERRED STOCK
RANKING--With respect to rights on liquidation, dissolution or winding up
the order of preference is as follows:
1. the Series B Preferred Stock;
2. the Series A Preferred Stock;
3. the Series C and Series D Preferred Stock
4. the Class A and Class B Common Stock
The holders of the Series A and Series C Preferred Stock are entitled to
vote on an as converted basis on all matters submitted for action by the
shareholders. Series D and Series B Preferred Stock do not have any voting
rights other than to approve mergers or consolidations
F-22
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30,1998 AND 1999
(AMOUNTS AS OF AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1999 ARE UNAUDITED)
7. CAPITAL STOCK AND STOCK RIGHTS: (CONTINUED)
adverse to the rights of holders of such securities. The holders of Series A,
Series C and Series D Preferred Stock are entitled to share equally, share for
share on an as converted basis, if dividends are declared on Common Stock,
whether payable in cash, property or securities.
SERIES A PREFERRED STOCK--Each share of Series A Preferred Stock is
convertible into one share of Class A Common Stock at any time upon transfer
from its current holder.
SERIES B PREFERRED STOCK--The Series B Preferred Stock is subject to
mandatory redemption by the Company 375 days after February 1, 2009. The price
for redemption will be the liquidation value, which accretes at an annual rate
of 12% from the date of issuance. The Company may elect under certain
circumstances to pay the redemption price by issuing Series C Preferred Stock
for each share of Series B Preferred Stock so redeemed as long as an IPO has not
occurred. The Series B Preferred Stock is subject to voluntary redemption. The
Series B Preferred Stock is subject to voluntary redemption for cash at the
Company's option at any time at its then current liquidation value.
F-23
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30,1998 AND 1999
(AMOUNTS AS OF AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1999 ARE UNAUDITED)
7. CAPITAL STOCK AND STOCK RIGHTS: (CONTINUED)
SERIES C PREFERRED STOCK AND SERIES D PREFERRED STOCK--Each share of
Series C and Series D Preferred Stock is convertible into one share of Class B
Common Stock upon the closing of the proposed initial public offering.
COMMON STOCK RESERVED FOR ISSUANCE
As of the closing of the Capitalization Transactions and as of
September 30, 1999, the Company had reserved Common Stock for future issuance as
detailed below.
<TABLE>
<CAPTION>
AS OF AS OF
JANUARY 29, SEPTEMBER 30,
1999 1999
------------ --------------
<S> <C> <C>
Preferred Stock conversion rights............. 183,539,826 216,727,272
Warrants outstanding.......................... 2,434,260 2,434,260
Employee options outstanding.................. 1,572,000 1,912,200
Employee options available for grant.......... 10,771,332 11,633,154
----------- -----------
Total......................................... 198,317,418 232,706,886
=========== ===========
</TABLE>
8. STOCK AND EMPLOYEE BENEFIT PLANS:
RESTRICTED STOCK PURCHASE PLAN
Pursuant to the Company's Restricted Stock Purchase Plan (the "Plan"), in
1998, the Company issued 8,774,994 shares of Class A Common Stock to senior
managers of the Company and 758,334 shares of Class A Common Stock to Eagle
River at $.00167 per share. During 1999 an additional 60,000 shares were issued
to senior management of the Company at $.00167 per share. Pursuant to the Plan,
the shares issued to senior managers vest over a four-year period based on the
passing of time and based on certain Company performance goals related to
revenue, EBITDA as adjusted and the successful build-out of the Company's
Network. As of December 31, 1998, 2,679,282 shares were considered fully vested,
including the 758,334 shares issued to Eagle River which vested immediately upon
issuance. Compensation expense recognized by the Company, which accounts for the
Plan using variable accounting, for the nine month period ended September 30,
1999 and for the year ended December 31, 1998 was approximately $1,579,000 and
$447,000, respectively.
NONQUALIFIED STOCK OPTION PLAN
In January 1999, the Company adopted the Nonqualified Stock Option Plan (the
Plan). Under the Plan, the Board of Directors may grant nonqualified stock
options to eligible employees at a price equal to the fair market value as of
the date of grant. Options have a term of up to 10 years and vest over 3 years
with 1/3 vesting at the end of each year. No more than 30% of the number of
F-24
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30,1998 AND 1999
(AMOUNTS AS OF AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1999 ARE UNAUDITED)
8. STOCK AND EMPLOYEE BENEFIT PLANS: (CONTINUED)
authorized options will be granted in any year and no options under this plan
may be granted after January 1, 2003.
The following table includes all stock options granted by the Company
including options issued outside of the nonqualified stock option plan.
<TABLE>
<CAPTION>
WEIGHTED
NUMBER OF AVERAGE
OPTIONS AVAILABLE EXERCISE
OUTSTANDING FOR ISSUANCE PRICE
------------ ------------ ---------
<S> <C> <C> <C>
Balance December 31, 1998............ -- -- --
Authorized........................... -- 13,545,354 --
Granted.............................. 1,929,000 (1,929,000) $ 1.67
Exercised............................ -- -- --
Canceled............................. (16,800) 16,800 $ 1.67
--------- ---------- ------
Balance September 30, 1999........... 1,912,200 11,633,154 $ 1.67
========= ==========
</TABLE>
The outstanding stock options all have an exercise price of $1.67 per share,
and average remaining contractual life of approximately 9 years.
STOCK OPTION GRANT
On January 29, 1999, pursuant to an employment agreement entered into by the
Company and an officer of the Company, the Company issued 210,000 options for
the Company's unrestricted Class A Common Stock with an exercise price of $1.67
per share which was more than the estimated fair value at that time ($1.25 per
share). These options vested immediately. The agreement provides that the
Company will be required to purchase the unexercised options on the fourth
anniversary for an aggregate purchase price of $500,000 if directed to do so by
the officer. Beginning with the period after January 29, 1999, the date of
issuance of these shares, the Company will recognize compensation expense on a
straight-line basis over the four year life of the put contract (up to a maximum
of $500,000) adjusted for actual exercises, if any, by the executive.
OFFICER NOTE RECEIVABLE
On January 29, 1999, the Company advanced $2.2 million to an officer of the
Company. The note does not bear interest and is collateralized by proceeds of
the loan and the restricted stock of the officer and is due on January 29, 2003.
The advance was made to the same officer to whom the stock option grant
discussed in the previous paragraph was made. The advance was a separate
arrangement not related to the stock option grant discussed above.
F-25
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30,1998 AND 1999
(AMOUNTS AS OF AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1999 ARE UNAUDITED)
8. STOCK AND EMPLOYEE BENEFIT PLANS: (CONTINUED)
EMPLOYEE BENEFIT PLAN
The Company has a defined contribution plan pursuant to Section 401(k) of
the Internal Revenue Code covering all eligible officers and employees. The
Company provides a matching contribution of $0.50 for every $1.00 contributed by
the employee up to 4% of each employee's salary. Such contributions were
approximately $103,000 for the nine month period ended September 30, 1999 and
approximately $50,000 for the year ended December 31, 1998. At September 30,
1999 and December 31,1998, the Company had no other pension or post employment
benefit plans.
9. RELATED PARTY TRANSACTIONS:
Prior to January 29, 1999, Nextel and Eagle River funded the operations of
the Company and accordingly all transactions were considered to be related party
transactions. The Company made a return of capital payment to Nextel of
$130.9 million representing the reimbursement of net operating expenses of
$15.1 million and capital expenditures of $115.8 million incurred by the Nextel
Carve-Out operations prior to January 29, 1999. In order 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 September 30, 1999 the Company owed Nextel
and Eagle River $2.7 million under the same terms discussed above.
MOTOROLA PURCHASE AGREEMENTS
Pursuant to the equipment purchase agreements between Partners and Motorola,
and prior to the Capitalization Transactions, purchase agreements between Nextel
and Motorola dated January 29, 1999, Motorola provided the iDEN infrastructure
and subscriber handset equipment to Partners throughout its markets (such
equipment purchase agreements, are referred to herein as the "Equipment Purchase
Agreements"). 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 nine month period ended September 30, 1999 and the year ended
December 31,1998, the Company purchased approximately $14.7 million (unaudited)
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.
F-26
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30,1998 AND 1999
(AMOUNTS AS OF AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1999 ARE UNAUDITED)
9. RELATED PARTY TRANSACTIONS: (CONTINUED)
BUILD-OUT--The Company is bound to certain operational obligations,
including meeting the construction requirements set forth in an agreed-upon
minimum build-out plan, ensuring compatibility of the Company's systems with the
Nextel digital mobile network, offering certain core service features with
respect to its systems (including upgrading its system to comply with future
Nextel standards) and causing the Company's systems to comply with Nextel's iDEN
quality standards.
ACQUISITION OF LICENSES--Nextel has transferred SMR licenses to Nextel WIP
License Corp. (a Delaware corporation and currently a wholly owned subsidiary of
Nextel). Upon approval of the FCC, Nextel will transfer the stock of Nextel WIP
License Corp. to Partners. These licenses will allow the Company to provide
wireless communication service to customers in 39 mid-sized and smaller markets
throughout the United States.
NEXTEL VENDOR RELATIONSHIPS--If requested by the Company, Nextel Sub has
agreed to use reasonable efforts to assist the Company in obtaining access to
many of the goods and services available through Nextel's vendors with whom the
Company is negotiating for the purpose of obtaining equipment as well as
advertising, media buying, telemarketing and related services.
NEXTEL APPROVAL RIGHTS--Subject to Nextel maintaining a certain percentage
ownership in Partners, and without the approval of Nextel Sub, the Company may
not (i) make a material change in the technology used in its business,
(ii) dispose of all or substantially all of its assets or (iii) prior to the
occurrence of certain specified events, broaden the scope of its business beyond
the limits provided for in the Joint Venture Agreement.
EXCLUSIVITY--Nextel Sub has agreed, on behalf of Nextel and its affiliates,
that during the term of the Joint Venture Agreement, Nextel and its affiliates
will not provide digital wireless communication services within the Company's
territory (the "Territory") using 800 MHz frequencies. Nextel and its affiliates
may continue to provide analog 800 MHz service in the Territory provided that
such analog service is not offered under any of the trademarks licensed to the
Company under the parties Trademark License Agreement and do not involve the use
of iDEN or other digital transmission technology. In addition, Nextel and its
affiliates may offer digital services in the Territory using non-800 MHz
frequencies provided that these services are not offered under the licensed
trademarks and do not offer interconnection with landline telecommunication
providers. Nextel may engage in national advertising (including print,
television, radio and Internet), promotions and sponsorships to promote Nextel
service, but will coordinate with the Company to ensure that customers in the
Company service areas adjacent to Nextel service areas do not switch between
Nextel and Company territories. Nextel may continue to service national
accounts, accounts with virtual private networks and national indirect
distributors within the Territory.
STANDARD OF CARE--Nextel Sub (on behalf of Nextel and its affiliates) has
agreed to provide services to the Company at the same level that such services
are provided to subsidiaries of Nextel and not to discriminate between the
Company and subsidiaries of Nextel with respect to providing such services. In
the event that Nextel Sub (on behalf of Nextel and its affiliates) has agreed to
F-27
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30,1998 AND 1999
(AMOUNTS AS OF AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1999 ARE UNAUDITED)
9. RELATED PARTY TRANSACTIONS: (CONTINUED)
provide services to the Company that are not provided to subsidiaries of Nextel,
Nextel Sub will only be liable in cases of gross negligence or willful
misconduct in the provision of such services.
MARKETING, ADVERTISING, PRICING, ETC.--The Company is generally required to
adhere to Nextel standards for pricing structure, advertising, promotions,
customer care, telemarketing and related activities.
BACK OFFICE/MIS SERVICES--Nextel provides the Company access to certain back
office and 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 nine month periods ended
September 30, 1998 and 1999, the Company was charged approximately $139,000 and
$285,000, respectively, for these services.
TRADEMARK LICENSE AGREEMENT--Pursuant to a trademark license agreement (the
"Trademark License Agreement"), Nextel Sub has granted OPCO a non-exclusive
license to use certain trademarks and other intellectual property (the "Licensed
Marks") that are now or in the future may be used by or licensed to Nextel.
The Trademark License Agreement allows OPCO to sublicense the Licensed Marks
solely to its wholly owned subsidiaries and to authorized dealers of OPCO in
connection with the marketing, promotion and sale of OPCO services, and the
marketing, promotion and sale of certain equipment to be used by OPCOs
customers. OPCO is obligated to pay royalties to Nextel Sub for its use of the
Licensed Marks, beginning on a date (the "Royalty Commencement Date") that is
the latter of January 1, 2002 or the first day of the month after the Company
has achieved two consecutive fiscal quarters of positive EBITDA as adjusted.
After the Royalty Commencement Date and through December 31, 2004, the royalty
will be equal to 0.5% of gross monthly service revenues, and will equal 1% of
the gross monthly service revenues from January 1, 2005 and thereafter.
Either OPCO or Nextel Sub is allowed to, at any time upon or following the
termination of the Joint Venture Agreement, terminate the Trademark License
Agreement, and Nextel Sub is entitled to seek to terminate the Trademark License
Agreement upon the occurrence of certain material defaults under the Joint
Venture Agreement, even if the Joint Venture Agreement and other Operating
Agreements remain in effect. Termination of the Trademark License Agreement
requires, among other things, that OPCO discontinue use of the Licensed Marks as
part of its corporate, assumed or trade name.
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 others monthly roaming fees
in an amount based on the actual system minutes generated by
F-28
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30,1998 AND 1999
(AMOUNTS AS OF AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1999 ARE UNAUDITED)
9. RELATED PARTY TRANSACTIONS: (CONTINUED)
the respective subscribers of each Home Service Provider operating as authorized
roamers in the Remote Service Provider's territory. For the nine month period
ended September 30, 1999, the Company earned approximately $5.8 million from
Nextel customers roaming on the Company's system and was charged approximately
$653,000 for the Company's customers roaming on Nextel's system.
FREQUENCY MANAGEMENT AGREEMENT--Pending FCC approval of the Company's
acquisition of SMR licenses from Nextel, its right to utilize those frequencies
are governed by the Frequency Management Agreement. The Frequency Management
Agreement entitles the Company to utilize those licenses without the payment of
a management fee or other charge throughout the term of the Frequency Management
Agreement. The Frequency Management Agreement obligates the Company to, among
other things, comply with all applicable FCC rules and regulations governing the
licenses underlying the managed frequencies and with various standards and
criteria established by Nextel relating to the construction, implementation and
operation of the Digital Mobile Network. Pending FCC approval of the license
transfer, Nextel Sub will represent the Company before the FCC with respect to
any matters relating to the managed frequencies. The Frequency Management
Agreement will terminates upon FCC approval of the license transfer.
MASTER SITE LEASE AGREEMENT--OPCO will lease from Nextel Sub, under a master
site lease agreement entered into between them (the "Master Site Lease"),
telecommunications towers and sites and space on telecommunications towers,
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
will become subject to the Master Site Lease. OPCO will pay Nextel Sub monthly
rental payments based on the number of telecommunication towers leased by OPCO.
For the nine month period ended September 30, 1999, the Company was charged
approximately $407,000 by Nextel under these arrangements.
The Master Site Lease, and each site lease thereunder, has an initial term
of five years, renewable at OPCO's option for up to nine additional terms of
five years. Either OPCO or Nextel Sub is allowed to, at any time upon or
following the termination of the Joint Venture Agreement, terminate the Master
Site Lease. Neither party is permitted to assign or transfer the Master Site
Lease or any of its rights or obligations thereunder without the consent of the
other, except that Nextel Sub will be entitled to assign or transfer the Master
Site Lease to any affiliate or any tower aggregator.
TRANSITION SERVICES AGREEMENT--Nextel Sub, through its affiliates, provides
certain services to OPCO for a limited period under a transition services
agreement entered into between OPCO and Nextel (the "Transition Services
Agreement"). Under the Transition Services Agreement, certain accounting,
payroll, customer care, purchasing, human resources and billing functions are
made available to OPCO. In return for the services received through Nextel, OPCO
pays monthly fees to Nextel based on Nextel's cost. For the nine month period
ended September 30, 1999, the Company was charged approximately $1,852,000 for
these services.
F-29
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30,1998 AND 1999
(AMOUNTS AS OF AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1999 ARE UNAUDITED)
9. RELATED PARTY TRANSACTIONS: (CONTINUED)
The services provided under the Transition Services Agreement have different
variable terms agreed to by OPCO and Nextel Sub. OPCO has the sole discretion to
terminate its use of any services covered by the Transition Services Agreement
before the end of any term of service. The parties contemplate that in the event
OPCO desires to purchase any services from Nextel Sub following the expiration
of the Transition Services Agreement, Nextel Sub may, at its election, agree to
provide certain services to OPCO on an arm's length basis, at prices to be
agreed upon.
SWITCH SHARING AGREEMENT--Nextel, through its affiliates, provides certain
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 certain 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 nine month period ended
September 30, 1999, the Company was charged approximately $1,529,000 for these
services.
AGREEMENT LIMITING LIABILITY AND RECOURSE TO NEXTEL--Pursuant to the terms
of an agreement (the "Limitation on Liability and Recourse Agreement") entered
into by Nextel and the Company, the maximum cumulative, aggregate cash liability
of Nextel and its controlled affiliates (other than Nextel Sub) for any and all
actual or alleged claims or causes of action arising in connection with any
aspect of the agreements governing or otherwise relating to the operating
agreements will be capped at $200 million. The cap amount will be reduced,
dollar for dollar, by the cumulative, aggregate amount that Nextel and its
controlled affiliates have advanced, expended or otherwise provided to or for
the benefit of Nextel Sub to enable Nextel Sub to perform its obligations
relating to the Operating Agreements. Among other things, the Limitation on
Liability and Recourse Agreement also provides that Nextel will have no
obligation to pay any sum to the Company if the Company has not pursued and
exhausted all remedies available to the Company in connection with any relevant
claim or cause of action. The Limitation on Liability and Recourse Agreement
will survive the expiration or termination of any and all of the agreements
governing or otherwise relating to the operating agreements.
DLJMB AFFILIATION WITH INITIAL PURCHASER/BANK SYNDICATE--DLJ Capital, an
affiliate of DLJ Merchant Banking, has received customary fees and reimbursement
of expenses in connection with the arrangement and syndication of the Facility
and as a lender thereunder. Donaldson, Lufkin & Jenrette Securities Corporation
("DLJSC"), which is also an affiliate of DLJ Merchant Banking, has acted as a
financial advisor to the Company, as an arranger under the Facility and as an
initial purchaser in the Notes offering. The aggregate amount of all fees paid
to the DLJ entities in connection with the Capitalization Transactions was
approximately $14.7 million. The Company and its affiliates may from time to
time enter into other investment banking relationships with DLJSC or one of its
affiliates pursuant to which DLJSC or its affiliate will receive customary fees
and will be
F-30
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND SEPTEMBER 30,1998 AND 1999
(AMOUNTS AS OF AND FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1998 AND 1999 ARE UNAUDITED)
9. RELATED PARTY TRANSACTIONS: (CONTINUED)
entitled to reimbursement of reasonable disbursements and out-of-pocket expenses
incurred in connection therewith. The Company expects that any such arrangement
will include provisions for the indemnification of DLJSC against certain
liability, including liabilities under the federal securities laws.
10. VALUATION AND QUALIFYING ACCOUNTS (IN THOUSANDS):
<TABLE>
<CAPTION>
BALANCE
BEGINNING COSTS AND AT END OF
OF PERIOD EXPENSES WRITE-OFFS PERIOD
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year Ended December 31, 1998 Allowance for
doubtful accounts......................... $ -- $ 254 $ -- $254
==== ====== ==== ====
Period Ended September 30, 1999 Allowance
for doubtful accounts..................... $254 $1,064 $479 $839
==== ====== ==== ====
</TABLE>
11. SUBSEQUENT EVENTS
On or about October 29, 1999 the FCC issued an order approving the transfer
of FCC licenses from Nextel to the Company. This order was issued and made
public by the FCC. On January 21, 2000, Nextel transferred all of its interests
in the licenses from the January 29, 1999 Capitalization Transaction, to the
Company.
F-31
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares of Class A common stock offered hereby, but only under
circumstances and in jurisdictions where it is lawful to do so. The information
contained in this prospectus is current only as of its date.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 9
Forward-Looking Statements..................... 22
Use of Proceeds................................ 22
Dividend Policy................................ 22
Capitalization................................. 23
Dilution....................................... 24
Selected Consolidated Financial Data........... 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 27
Business....................................... 35
Regulation..................................... 53
Management..................................... 57
Related-Party Transactions..................... 65
Principal Stockholders......................... 74
Description of Certain Indebtedness............ 76
Description of Capital Stock................... 82
Limitation on Directors' Liabilities........... 87
Shares Eligible For Future Sale................ 88
Material U.S. Tax Consequences to Non-U.S.
Holders...................................... 91
Underwriting................................... 94
Legal Matters.................................. 97
Experts........................................ 97
Where You Can Find More Information............ 97
Index to Consolidated Financial Statements..... F-1
</TABLE>
------------------------
Through and including , 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to an unsold allotment or subscription.
23,500,000 Shares
NEXTEL PARTNERS, INC.
Class A Common Stock
------------------
[LOGO]
------------------
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
CREDIT SUISSE FIRST BOSTON
DEUTSCHE BANC ALEX. BROWN
FIRST UNION SECURITIES, INC.
MORGAN STANLEY DEAN WITTER
DLJDIRECT INC.
Representatives of the Underwriters
------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
