<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO ___________.
COMMISSION FILE NUMBER 333-78459
NEXTEL PARTNERS, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 91-1930918
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
4500 CARILLON POINT,
KIRKLAND, WASHINGTON 98033,
(425) 828-1713
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE AND TELEPHONE NUMBER,
INCLUDING AREA CODE)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO .
--- ---
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF ISSUER'S CLASSES OF COMMON
STOCK AS OF THE LATEST PRACTICABLE DATE:
OUTSTANDING TITLE OF CLASS NUMBER OF SHARES ON APRIL 30, 2000
CLASS A COMMON STOCK 162,452,974 SHARES
CLASS B COMMON STOCK 77,782,626 SHARES
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE NO.
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
As of March 31, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations
Three months ended March 31, 2000 and 1999 4
Condensed Consolidated Statement of Changes in Stockholders' Equity
Three months ended March 31, 2000 5
Condensed Consolidated Statements of Cash Flows
Three months ended March 31, 2000 and 1999 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 12
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24
PART II OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities and Use of Proceeds 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
</TABLE>
2
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 872,056 $ 154,273
Short-term investments 323,744 239,456
Accounts receivable, net of allowance $346, and $1,193, respectively 11,767 7,172
Due from Nextel WIP 5,115 1,183
Subscriber equipment inventory 4,019 1,695
Other current assets 8,187 8,519
Restricted cash - 175,000
-------------- --------------
Total current assets 1,224,888 587,298
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT, at cost 320,884 268,766
Less - accumulated depreciation 21,202 16,543
-------------- --------------
Property, plant and equipment, net 299,682 252,223
-------------- --------------
OTHER NON-CURRENT ASSETS:
FCC operating licenses, net of accumulated amortization of $1,001 and $718,
respectively 152,950 151,056
Debt issuance costs and other assets 27,352 22,550
Receivable from officer 2,200 2,200
-------------- --------------
Total non-current assets 182,502 175,806
-------------- --------------
TOTAL ASSETS $ 1,707,072 $ 1,015,327
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 33,169 $ 33,968
Accrued expenses 24,330 24,535
-------------- --------------
Total current liabilities 57,499 58,503
-------------- --------------
LONG-TERM OBLIGATIONS
Credit facility - term B and C 325,000 325,000
14% Senior discount notes due 2009 476,360 460,484
11% Senior notes due 2010 200,000 -
Other long-term liabilities 1,545 724
-------------- --------------
Total long-term obligations 1,002,905 786,208
-------------- --------------
Total liabilities 1,060,404 844,711
-------------- --------------
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 25,141 -
-------------- --------------
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, 162,452,974, and 9,593,328
shares, respectively, issued and outstanding, and paid-in capital 863,464 145,420
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 127,051 -
Other paid-in capital - 357,028
Accumulated deficit (190,122) (134,966)
Subscriptions receivable from stockholders (83,048) (83,048)
Deferred compensation (99,665) (117,701)
-------------- --------------
Total stockholders' equity 621,527 170,616
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,707,072 $ 1,015,327
============== ==============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31,
-------------------------------------
2000 1999
------------- ------------
<S> <C> <C>
REVENUES:
Service revenues ($3,846 received from Nextel WIP in 2000) $ 14,983 $ 3,493
Equipment revenues 3,526 811
------------- ------------
Total revenues 18,509 4,304
------------- ------------
OPERATING EXPENSES:
Cost of service revenues ($2,185 paid to Nextel WIP in 2000) 11,208 3,106
Cost of equipment revenues 6,458 1,718
Selling, general and administrative (exclusive of stock based 19,831 5,231
compensation expense shown below) ($733 paid to Nextel WIP in 2000)
Stock based compensation 18,036 641
Depreciation and amortization 5,039 2,515
------------- ------------
Total operating expenses 60,572 13,211
------------- ------------
LOSS FROM OPERATIONS (42,063) (8,907)
Interest expense, net (21,614) (12,529)
Interest income 11,812 4,013
------------- ------------
LOSS BEFORE INCOME TAX PROVISION (51,865) (17,423)
Income tax provision - -
------------- ------------
NET LOSS (51,865) (17,423)
Manditorily redeemable preferred stock dividends (3,291) -
------------- ------------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (55,156) $ (17,423)
============= ============
LOSS PER SHARE
Basic and diluted loss per share $ (0.55) $ (6.06)
============= ============
Weighted average shares outstanding 101,002,064 2,874,348
============= ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK AND
PREFERRED STOCK PAID-IN CAPITAL
------------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
-------------- --------------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE
January 1, 1999 - $ - 9,533,328 $ 1,604
Issuance of common stock 60,000 61
Issuance of Series A preferred stock 125,834,646 21 - -
Issuance of warrants - - - -
Subscriptions receivable from stockholders - - - -
Proceeds from stockholders
Reclass of other paid-in capital to Preferred
Series B, C, and D - - - -
Issuance of Series B preferred stock 13,110,000 2 - -
Issuance of Series C preferred stock 64,672,626 11 - -
Issuance of Series D preferred stock 13,110,000 2 - -
Return of capital to Nextel - - - -
Deferred compensation - - - 143,755
Vesting of deferred compensation - - - -
Net loss - - - -
Equity issuance costs - - - -
Motorola credit - - - -
-------------- --------------- ----------- -----------
BALANCE
December 31, 1999 216,727,272 36 9,593,328 145,420
Initial public offering conversion to common stock
Series A preferred stock (125,834,646) (21) 125,834,646 208,163
Series C preferred stock (64,672,626) (11) - -
Series D preferred stock (13,110,000) (2) - -
Series B preferred stock reclassed (13,110,000) (2) - -
Series B redeemable preferred stock dividend - - - -
Initial public offering stock issued - - 27,025,000 540,500
Net loss - - - -
Equity issuance costs - - - (30,619)
Vesting of deferred compensation - - - -
-------------- --------------- ------------ -----------
BALANCE
March 31, 2000 - $ - 162,452,974 $ 863,464
============== =============== ============ ===========
<CAPTION>
CLASS B
COMMON STOCK AND
PAID-IN-CAPITAL
--------------------------------- WARRANTS
SHARES AMOUNT OUTSTANDING
-------------- --------------- -------------
<S> <C> <C> <C>
BALANCE
January 1, 1999 - $ - $ -
Issuance of common stock - -
Issuance of Series A preferred stock - - -
Issuance of warrants - - 3,847
Subscriptions receivable from stockholders - - -
Proceeds from stockholders - -
Reclass of other paid-in capital to Preferred
Series B, C, and D - - -
Issuance of Series B preferred stock - - -
Issuance of Series C preferred stock - - -
Issuance of Series D preferred stock - - -
Return of capital to Nextel - - -
Deferred compensation - - -
Vesting of deferred compensation - - -
Net loss - - -
Equity issuance costs - - -
Motorola credit - - -
-------------- --------------- -------------
BALANCE
December 31, 1999 - - 3,847
Initial public offering conversion to common stock -
Series A preferred stock - -
Series C preferred stock 64,672,626 110,742 -
Series D preferred stock 13,110,000 22,266 -
Series B preferred stock reclassed - - -
Series B redeemable preferred stock dividend - - -
Initial public offering stock issued - - -
Net loss - - -
Equity issuance costs - (5,957) -
Vesting of deferred compensation - - -
BALANCE -------------- --------------- -------------
March 31, 2000 77,782,626 $ 127,051 $ 3,847
============== =============== =============
<CAPTION>
OTHER
PAID-IN ACCUMULATED SUBSCRIPTIONS
CAPITAL DEFICIT RECEIVABLE
-------------- --------------- -------------
<S> <C> <C> <C>
BALANCE
January 1, 1999 $ 260,761 $ (22,553) $ -
Issuance of common stock -
Issuance of Series A preferred stock 208,142 - -
Issuance of warrants - - -
Subscriptions receivable from stockholders - - (157,203)
Proceeds from stockholders 52,145
Reclass of other paid-in capital to Preferred
Series B, C, and D (133,180) - -
Issuance of Series B preferred stock 21,848 - -
Issuance of Series C preferred stock 110,731 - -
Issuance of Series D preferred stock 22,264 - -
Return of capital to Nextel (130,900) - -
Deferred compensation - - -
Vesting of deferred compensation - - -
Net loss - (112,413) -
Equity issuance costs (2,638) - -
Motorola credit - - 22,010
-------------- --------------- -------------
BALANCE
December 31, 1999 357,028 (134,966) (83,048)
Initial public offering conversion to common stock - - -
Series A preferred stock (208,142) - -
Series C preferred stock (110,731) - -
Series D preferred stock (22,264) - -
Series B preferred stock reclassed (21,848) - -
Series B redeemable preferred stock dividend - (3,291) -
Initial public offering stock issued - - -
Net loss - (51,865) -
Equity issuance costs 5,957 - -
Vesting of deferred compensation - - -
BALANCE -------------- --------------- -------------
March 31, 2000 $ - $ (190,122) $ (83,048)
============== =============== =============
<CAPTION>
DEFERRED
COMPENSATION TOTALS
-------------- ---------------
<S> <C> <C>
BALANCE
January 1, 1999 $ (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)
Proceeds from stockholders 52,145
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 (143,755) -
Vesting of deferred compensation 27,256 27,256
Net loss - (112,413)
Equity issuance costs - (2,638)
Motorola credit 22,010
-------------- ---------------
BALANCE
December 31, 1999 (117,701) $ 170,616
Initial public offering conversion to common stock - -
Series A preferred stock - -
Series C preferred stock - -
Series D preferred stock - -
Series B preferred stock reclassed - (21,850)
Series B redeemable preferred stock dividend - (3,291)
Initial public offering stock issued - 540,500
Net loss - (51,865)
Equity issuance costs - (30,619)
Vesting of deferred compensation 18,036 18,036
BALANCE -------------- ---------------
March 31, 2000 $ (99,665) $ 621,527
============== ===============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE THREE-MONTHS ENDED
MARCH 31,
--------------------------------------
2000 1999
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (51,865) $ (17,423)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities
Depreciation and amortization 5,039 2,515
Amortization of debt issuance costs 696 356
Interest accretion for senior discount notes 12,624 9,802
Stock based compensation 18,036 641
Allowance for doubtful accounts (847) 92
Gain on deferred sale-leaseback (39) -
Change in current assets and liabilities:
Accounts receivable (3,748) (915)
Subscriber equipment inventory (2,324) 306
Other current assets 330 (2,654)
Accounts payable, accrued expenses and other liabilities (886) 3,512
Operating advances due from Nextel WIP (3,933) 9,495
------------ -------------
Net cash provided by (used in) operating activities (26,917) 5,727
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Loan to officer - (2,200)
Capital expenditures (55,036) (7,385)
Proceeds from sale of assets 5,503 -
FCC licenses (863) -
Purchase of short-term investments (84,288) -
------------ -------------
Net cash used in investing activities (134,684) (9,585)
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 540,500 -
Proceeds from borrowings 200,000 581,376
Restricted cash transfer 175,000 (175,000)
Proceeds from equity contributions - 52,144
Return of capital to Nextel WIP - (130,900)
Equity costs (30,618) (2,524)
Debt issuance costs (5,498) (20,442)
------------ -------------
Net cash provided by financing activities 879,384 304,654
------------ -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 717,783 300,796
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 154,273 16
------------ -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 872,056 $ 300,812
============ =============
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS
Capitalized interest on accretion of senior discount notes $ 3,252 $ -
============ =============
Accretion of redeemable preferred stock dividends $ 3,291 $ -
============ =============
CASH PAID FOR INTEREST, NET OF CAPITALIZED AMOUNT $ 6,988 $ -
============ =============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE>
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
Our interim financial statements for the three-month periods ended March 31,
2000 and 1999 have been prepared without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. These condensed consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and notes contained in our Form S-1 Registration Statement
declared effective on February 22, 2000.
The financial information included herein reflects all adjustments (consisting
only of normal recurring adjustments) which are, in the opinion of management,
necessary for the fair presentation of the results of the interim periods. The
results of operations for the three-month period ended March 31, 2000 are not
necessarily indicative of the results to be expected for the full year.
NOTE 2 - CAPITALIZATION
INITIAL PUBLIC OFFERING CAPITALIZATION TRANSACTIONS
In January 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"). On January 27, 2000
the Company filed a registration statement with the SEC to sell 27,025,000
shares of Class A common stock which became effective February 22, 2000. With
the consummation of the IPO on February 25, 2000 all the outstanding shares of
the Company's Series A preferred stock converted into 125,834,646 shares of
Class A common stock and all the outstanding Company's Series C and D preferred
stock automatically converted into 77,782,626 shares of Class B common stock. In
addition, the Series B redeemable preferred stock held by Nextel WIP became
subject to mandatory cash redemption 375 days after February 1, 2009. The Series
B preferred stock, plus accrued dividends, was reclassified from stockholder's
equity to the section of the balance sheet between liabilities and stockholder's
equity. Simultaneously, an adjustment was made to the accumulated deficit
representing the 12% dividend accrued from the time of issuance to the closing
date of the IPO.
NOTE 3 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS
The Company provides a wide array of digital wireless communications services
throughout the United States, primarily to business users, utilizing frequencies
licensed by the FCC. The Company's operations are primarily conducted by OPCO, a
wholly owned subsidiary of the Company.
The Company's 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"). The
Company's 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
WIP (see Note 6) provide for support services to be provided by Nextel WIP,
as required.
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 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.
7
<PAGE>
The basic and diluted net loss per share is computed based on the weighted
average number of shares of common stock issued for the IPO plus the common
stock outstanding that was automatically converted from the preferred stock
outstanding upon completion of the Company's initial public offering. The
weighted average number of shares for the three months ended March 31, 2000 does
not represent a complete reporting period since the IPO was consummated on
February 25, 2000. In addition, net loss available to common stockholders
increased by the amount of the accrued dividend on the Series B Redeemable
preferred stock.
RESTRICTED CASH
The restricted cash has been made available to use since the FCC approved the
transfer of control of the Initial Capitalization Transaction FCC licenses to
the Company from Nextel WIP.
DEBT ISSUANCE COSTS
In connection with the issuance of the 11% Senior Notes (the "Senior Notes")
discussed in Note 4, the Company has incurred a total of $5.5 million in
deferred financing costs of which $400,000 relates to amending the Amended
and Restated Credit Agreement for the Term B and C loans for these Senior
Notes. These debt issuance costs will be amortized over the terms of the
underlying obligation using the effective interest rate method.
PROCEEDS FROM SALE OF ASSETS
On October 13, 1999, the Company signed a Letter of Agreement by and among
Nextel and some of its subsidiaries and Spectrasite Holdings, Inc. and some
of its subsidiaries to transfer specified telecommunication towers and
related assets to Spectrasite for cash. The Company will then lease space on
the telecommunication towers from Spectrasite pursuant to a master lease
agreement. During the three-month period ending March 31, 2000, the Company
received proceeds of approximately $5.5 million in cash for the assets sold
to Spectrasite Holdings, Inc. These sale-leaseback transactions are accounted
for as real-estate lease agreements and normal sales-leasebacks.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 become effective for the Company for the quarter
ended June 30, 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. The Company believes that the effects of this bulletin will not be
material to its financial position or the results of its operations.
8
<PAGE>
NOTE 4 - LONG-TERM DEBT (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
14% Senior Redeemable Discount Notes due 2009, net of
unamortized discount of $323.6 million at March 31, 2000...................... $476,360 $460,484
11% Senior Notes due 2010, interest payable semiannually in cash and
in arrears................................................................... 200,000 ---
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").............................................. 175,000 175,000
Bank Credit Facility--Term C Loan, interest at Company's
option, calculated on Administrative Agent's alternate
base rate or reserve adjusted LIBOR......................................... 150,000 150,000
------- -------
Total Long-term Debt $1,001,360 $785,484
========== ========
</TABLE>
11% SENIOR NOTES
On February 29, 2000, the Company issued $200.0 million in aggregate principal
amount 11% Senior Notes due 2010 (the "Senior Notes"). Interest will accrue at
the rate of 11% per annum, payable semiannually in cash in arrears on March 15
and September 15 of each year, commencing September 15, 2000.
The Senior 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 Senior Notes are
effectively subordinated to (i) all secured obligations of the Company,
including borrowings under the bank credit facility, to the extent of assets
securing such obligations and (ii) all indebtedness including borrowings
under the bank credit facility and trade payables of OPCO.
The indenture contains certain covenants that limit, among other things, the
ability of the Company to: (i) pay dividends, redeem capital stock or make
certain other restricted payments or investments, (ii) incur additional
indebtedness or issue preferred equity interests, (iii) merge, consolidate or
sell all or substantially all of its assets, (iv) create liens on assets, and
(v) enter into certain transactions with affiliates or related persons.
The Senior Notes are redeemable at the option of the Company, in whole or in
part, any time on or after March 15, 2005 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 March 15, 2003, the Company may
on one or more occasions redeem up to 35% of the aggregate principal amount at
maturity of the Senior Notes originally issued at a redemption price equal to
111% of the principal amount of the notes redeemed, 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 Senior Notes
originally issued remains outstanding immediately after the occurrence of such
redemption.
NOTE 5 - COMMITMENTS AND CONTINGENCIES:
REGULATORY MATTERS
The FCC granted approval to transfer ownership of the Initial Capitalization
Transaction licenses on January 21, 2000 from Nextel WIP to the Company.
Pursuant to this event the cash collateral account (restricted cash)
established by the Company to maintain a balance equal to the amounts
outstanding under the term B credit facility was made available.
On March 20, 2000 the FCC granted approval to transfer ownership of the Option
Territory licenses from Nextel WIP to the Company.
9
<PAGE>
NOTE 6 - RELATED PARTY TRANSACTIONS
MOTOROLA PURCHASE AGREEMENTS
Pursuant to the equipment purchase agreements between the Company and Motorola,
and prior to the Capitalization Transactions, pursuant to purchase agreements
between Nextel WIP and Motorola, Motorola provided the iDEN infrastructure and
subscriber handset equipment to the Company 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 portion of the Nextel digital mobile network and handset equipment for the
foreseeable future. The Equipment Purchase Agreements govern the Company's
rights and obligations regarding purchases of system infrastructure equipment
manufactured by Motorola and others.
For the three-months ended March 31, 2000 and 1999, the Company purchased
approximately $25.5 million and $1.7 million, respectively, of infrastructure
and other equipment, handsets, warranties and services from Motorola.
THE JOINT VENTURE AGREEMENT
The Company, OPCO and Nextel WIP 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.
BACK OFFICE/MIS SERVICES--Nextel WIP 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 three-months ended March 31,
2000 and 1999, the Company was charged approximately $206,000 and $45,000 for
these services, respectively.
ROAMING AGREEMENT--Pursuant to a roaming agreement (the "Roaming Agreement")
entered into between Nextel WIP and OPCO, Nextel WIP 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 the respective
subscribers of each Home Service Provider operating as authorized roamers in the
Remote Service Provider's territory. For the three-months ended March 31, 2000
and 1999, the Company earned approximately $3.8 million and $7,500, respectively
from Nextel customers roaming on the Company's system and was charged
approximately $618,000 and $3,300 for the same period, for the Company's
customers roaming on Nextel's system.
MASTER SITE LEASE AGREEMENT--OPCO leases from Nextel WIP, 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 WIP in the Territory. Pursuant
to the Master Site Lease, as the network build-out progresses, additional sites
may become subject to the Master Site Lease. OPCO pays Nextel WIP monthly
rental payments based on the number of telecommunication towers leased by OPCO.
For the three-months ended March 31, 2000 and 1999, the Company was charged
approximately $178,000 and $94,000, respectively, by Nextel WIP under these
arrangements.
TRANSITION SERVICES AGREEMENT--Nextel WIP, through its affiliates, provides
certain services to OPCO under a transition services agreement entered into
between OPCO and Nextel WIP (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 WIP, OPCO pays monthly
fees to Nextel WIP based on Nextel WIP's cost. For the three-months ended
March 31, 2000, the Company was charged approximately $743,000 for the
transition services still required relating mostly to Nextel telemarketing
and customer care, fulfillment, activations and billing for the national
accounts. For the same period ended March 31, 1999, the Company was charged
approximately $327,000.
SWITCH SHARING AGREEMENT--Nextel WIP provides certain telecommunications
switching services to OPCO pursuant to a switch sharing agreement entered into
between Nextel WIP 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 WIP in the
operation of the Nextel digital mobile network, which facilitates OPCO provision
of ESMR service to the Company's subscribers. Under the Switch Sharing
Agreement, OPCO pays Nextel WIP 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 three-months
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ended March 31, 2000 and 1999, the Company was charged approximately $1.2
million and $224,000, respectively, for these services.
NOTE 7 - SUBSEQUENT EVENTS
On April 6, 2000 the Company entered into an interest rate swap agreement
with the Bank of Montreal for $50 million to partially hedge interest rate
exposure. The hedge transaction was locked in at a three-month LIBOR rate of
6.7325%. It is a five-year swap transaction, with a one-time cancellation
option by the Bank of Montreal at the end of three years.
On April 18, 2000 the Company redeemed 35% of its 14% Senior Discount notes
for approximately $191 million, net a loss of approximately $23 million. The
redemption was made with the proceeds received by the Company from its
initial public offering.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Some statements and information contained in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" are not historical
facts, but are forward-looking statements. 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 the following discussion of our condensed consolidated financial
condition and results of operations for the three-month periods ended March 31,
2000 and 1999 together with our Form S-1 Registration Statement declared
effective on February 22, 2000.
Our historical results discussed in this section and throughout this Form 10-Q
include the operations we acquired from Nextel WIP on January 29, 1999 in
connection with our Initial and Expansion Territory Capitalization
transactions, which operations had previously been managed by Nextel.
OVERVIEW
We hold or have the right to use broadband wireless frequencies that cover 40
million persons, or Pops in 46 markets. We also have the option to acquire from
Nextel WIP frequencies that cover an additional 13 million Pops, of which we
currently intend to acquire frequencies covering 2.3 million Pops. As of March
31, 2000, we had commercial operations in markets with total Pops of 13.9
million and the ability to offer service to, or cover approximately 11.0 million
Pops. These operational markets are in Hawaii, New York, Texas, Pennsylvania,
Kentucky, and Florida.
As of March 31, 2000, we had approximately 75,000 digital subscribers. Compared
to March 31, 1999 with an ending subscriber count of approximately 15,000, our
subscriber base grew 390%. In the three-month period ended March 31, 2000, we
added (net of deactivations) approximately 29,000 subscriber units.
Due to the continued development, build-out and enhancement of our portion of
the Nextel digital mobile network, 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 new markets.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1999
REVENUES
Our primary sources of revenues are service revenues and equipment 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 the use by Nextel subscribers
of our portion of the Nextel digital mobile network.
Our equipment revenues consist of revenues received for wireless telephones
purchased by our subscribers. Certain of our digital equipment sales are made
through independent distributors under agreements allowing rights of return on
merchandise unsold by the distributors. We defer recognition of such sales until
the merchandise is sold by the distributors.
Total revenues increased 330% to $18.5 million during the first quarter of 2000,
from $4.3 million in the same period in 1999. The growth in revenues was due to
launching new markets along with increased revenues from the existing markets.
The following table sets forth those markets launched during the first quarter
of 2000 and our previously launched markets:
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<TABLE>
<CAPTION>
MARKETS MARKET LAUNCH
------- -------------
<S> <C>
Harrisburg/York/Lancaster, PA 1st Quarter 2000
Wilkes-Barre/Scranton, PA 1st Quarter 2000
Kentucky (Lexington-Fayette, Louisville) 1st Quarter 2000
Tallahassee, FL 1st Quarter 2000
Bryan/College Station, TX 1st Quarter 2000
Temple/Killeen/Waco, TX 4th Quarter 1999
Erie, PA 4th Quarter 1999
Hawaii (all islands) 3rd Quarter 1998
Rochester, NY 3rd Quarter 1998
Buffalo, NY 3rd Quarter 1998
Syracuse/Utica-Rome/Binghamton/Elmira, NY 3rd Quarter 1998
Albany/Glen Falls, NY 3rd Quarter 1998
</TABLE>
Average revenue per unit, or ARPU, is an industry term that measures total
service revenues per month from our subscribers divided by the average number of
digital subscriber units in commercial service for that month. Our ARPU
increased from $64 to $65 for the three-month period ended March 31, 2000. For
second quarter 2000, we believe that ARPU may decline due to additional markets
launching during this period. The following table sets forth our recent revenues
and ARPU:
<TABLE>
<CAPTION>
REVENUES
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR AVERAGE REVENUE PER UNIT)
FOR THE THREE FOR THE THREE
MONTHS ENDED % OF CONSOLIDATED MONTHS ENDED % OF CONSOLIDATED
MARCH 31, 2000 REVENUES MARCH 31, 1999 REVENUES
-------------- -------- -------------- --------
<S> <C> <C> <C> <C>
Service and roaming revenues $14,983 81% $3,493 81%
Equipment revenues 3,526 19% 811 19%
------- ------- ------- -------
Total revenues $18,509 100% $4,304 100%
======= ==== ====== ====
ARPU (1) $65 $64
=== ===
</TABLE>
(1) ARPU does not include roaming revenues generated from the use by Nextel
subscribers of our portion of the Nextel digital mobile network.
COST OF SERVICE REVENUES
Cost of service revenues consists primarily of network operating costs composed
of site and switch rent, utilities, maintenance and interconnect charges. It
also includes the amounts we must pay Nextel WIP when our customers roam onto
Nextel's portion of the Nextel digital mobile network. These expenses depend
mainly on the number of operating cell sites, total minutes of use and mix of
minutes of use between interconnect and Nextel Direct Connect services.
For the three-months ended March 31, 2000 our cost of service revenues was
$11.2 million compared to $3.1 million for the same period in 1999. The
increase in costs is primarily the result of bringing on-air approximately
585 sites during the period from March 31, 1999 to March 31, 2000 for a total
of 803 operating cell sites, as well as increases in airtime usage. Increased
airtime usage resulted from the growth in number of subscribers along with
the increased interconnect minutes of use per subscriber. We expect cost of
service revenues to increase as we place more cell sites in service and the
usage of minutes increases as our subscriber base grows.
COST OF EQUIPMENT REVENUES
Cost of equipment revenues includes the cost of the subscriber wireless
telephones and accessories sold by us. For the three-months ended March 31, 2000
our cost of equipment revenues was $6.5 million compared to $1.7 million for the
same period in 1999. The increase in costs is related mostly to the growth in
volume of 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 difference
between equipment revenues and cost of equipment revenues was ($2.9) million and
($900,000) for the three-months ended March 31, 2000 and 1999, respectively. We
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expect to continue to employ these discounts and promotions in an effort to grow
our number of subscribers. Therefore, for the foreseeable future, we expect that
cost of equipment revenues will exceed our equipment revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses consist of sales and marketing
expenses, customer care services and general and administrative costs. For the
three-months ended March 31, 2000 these costs were $19.8 million compared to
$5.2 million for the same period ended March 31, 1999.
Sales and marketing expenses relate to salaries for sales representatives and
sales support personnel, and costs associated with indirect distribution
channels, marketing and advertising programs. These expenses increased as a
result of:
- - increased sales and marketing activities to grow our subscriber base;
- - our hiring of additional sales and marketing employees to accommodate the
growth in new and existing markets; and
- - higher expenses related to higher sales from the indirect distribution
channel.
We anticipate that our cost per 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, accounting and our customer care center operations. The three-month
period ended March 31, 1999 was a transition period during which Nextel WIP
made many of the above services available to us. By March 31, 2000, we
transferred the majority of these services to our employees and systems.
Therefore, our general and administrative costs increased as a result of our:
- - hiring employees to set-up functional departments and offices to support
the growth of the new and existing markets;
- - staffing and operating our own customer care and fulfillment service center
in Las Vegas, NV to support the growing subscriber base; and
- - hiring employees to maintain and support systems that were in development
during 1999.
STOCK BASED COMPENSATION EXPENSE
For the three-month periods ended March 31, 2000 and 1999, we recorded stock
based compensation expense associated with our restricted stock purchase plan
and employee stock options granted during 1999 of $18.0 million and $641,000,
respectively. This expense is a non-cash expense. These grants are considered
compensatory and we account for their deferred compensation expenses on a basis
similar to that used for stock appreciation rights.
DEPRECIATION AND AMORTIZATION EXPENSE
For the three-months ended March 31, 2000, our depreciation and amortization
expense was $5.0 million compared to $2.5 million for the same period in 1999.
The $2.5 million increase relates primarily to depreciating the wireless network
assets for the 585 additional cell sites placed in service and amortizing
additional FCC licensed radio spectrum associated with the new markets launched.
NET LOSS
For the three-months ended March 31, 2000 we reported a net loss attributable
to common shareholders of approximately ($55.2) million. This represents an
increase of ($37.8) million from our loss of ($17.4) million for the same
period in 1999. 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 the 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. 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. 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 $1.7
billion, including the in-kind contributions we have received or expect to
receive from Nextel WIP and Motorola.
For the first three months of 2000, we used $26.9 million in cash for operating
activities, compared to providing cash of $5.7 million for the same period in
1999. The increased use of funds for operating activities was primarily due to
expenses relating to hiring employees, setting-up functional departments and
offices, network operating costs for additional sites placed in service and
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increased marketing and sales activities. In addition, during the first three
months of 2000, we invested $57.0 million in capital expenditures, including
$1.9 of non-cash capitalized interest, spent primarily to build out the Nextel
digital mobile network in the upstate New York, Hawaii, Pennsylvania, Kentucky,
Iowa, Florida and Texas markets. During the same period in 1999, we invested
$7.4 million in capital expenditures, which was primarily for the Hawaii and
upstate New York markets. We also invested $84.3 million in short-term
investments for the three-month period ended March 31, 2000.
In addition, as of March 31, 2000 we had approximately $20.1 million in
commitments for additional frequency purchases.
SOURCES OF FUNDING
To date, third-party financing activities have provided all of our funding. As
of December 31, 1999 these financings totaled $851.1 million and included:
- - proceeds from cash equity contributions of $119.7 million;
- - the offering of our 14% senior discount notes for $406.4 million; and
- - term loans incurred by our operating subsidiary of $325.0 million.
For the year ended December 31, 1999, we also received:
- - the contribution by Nextel WIP of FCC licenses valued at $142 million, in
exchange for preferred stock; and
- - the contribution by Motorola of a $22.0 million credit to use against our
purchases of Motorola manufactured infrastructure equipment in exchange for
preferred stock, all of which had been used by December 31, 1999.
In addition, as of December 31, 1999, we had irrevocable commitments from our
current stockholders to contribute an additional $83.1 million. An installment
of $52.1 million was contributed in December 1999. The remaining commitments
will be paid in installments of $15.5 million in September of 2000, $52.1
million in December 2000, and $15.5 million in September 2001.
During the three-months ending March 31, 2000, additional third-party financing
provided $740.5 million of funding and included:
- - proceeds from the sale of common stock in our initial public offering of
$540.5 million; and
- - the offering of 11% senior notes for $200.0 million.
Our 14% senior discount notes due February 1, 2009 were sold in January 1999.
The notes were issued at a discount to their aggregate principal amount at
maturity and generated aggregate gross proceeds to us of approximately $406.4
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. Cash interest will not accrue on the notes prior to February 1, 2004. As
of March 31, 2000, the accreted value of the outstanding senior discount notes
was approximately $476.4 million. On April 18, 2000, we redeemed approximately
$191 million of these outstanding notes with proceeds from our initial public
offering. The notes still outstanding will accrete in value representing the
amortization of original issue discount at a rate of 14%, compounded
semiannually, to an aggregate principal amount of $520 million by February 1,
2004.
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, as amended, 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 may 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 March 31, 2000, no amounts were outstanding
under the $100 million revolving credit facility.
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<PAGE>
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 of the higher
of 0.5% per annum above the latest federal funds rate or the prime rate. The
applicable margin for the $150 million term loan is 4.25% over LIBOR and 3.25%
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.
Borrowings under the 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 other covenants for the wireless
industry. The credit facility also contains covenants requiring the
maintenance of certain defined financial ratios and meeting operational
targets including service revenues, subscriber units and network coverage. As
of March 31, 2000 we were in compliance with all covenants associated with
this credit facility.
On February 29, 2000, we issued $200 million of 11% Senior Notes due 2010. These
notes will be exchanged by us for registered notes having the same financial
terms and covenants within 120 days of the closing date of March 10, 2000.
Interest will accrue for these notes at the rate of 11% per annum, payable
semiannually in cash in arrears on March 15 and September 15 of each year,
commencing September 15, 2000.
We believe the net proceeds from the IPO offering and 11% Senior Notes, together
with the initial 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 frequencies 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 March 31, 2000, our cash and cash equivalents and short-term
investments balance was approximately $1.2 billion. Although we estimate that we
will have sufficient funds through 2003, we cannot assure you that additional
funding will not be necessary. We could require additional financing in order to
complete our portion of the Nextel digital mobile network, to acquire additional
FCC licenses, to add capacity and to offer additional services, and such
additional financing might be expensive or impossible to obtain.
RISK FACTORS
RISK FACTORS RELATING TO OUR BUSINESS
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
portion of the Nextel digital mobile network 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 March 31, 2000, we had incurred operating losses of
approximately $113.7 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 current 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 WIP, WHICH WOULD ELIMINATE OUR ABILITY
TO CARRY OUT OUR CURRENT BUSINESS PLAN AND STRATEGY.
Our operating agreements with Nextel WIP 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 WIP the right to terminate these
agreements, including the right to use the Nextel brand. The non-renewal or
termination of the Nextel WIP 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 termination of the agreements by Nextel WIP, Nextel WIP could acquire all
of our outstanding stock, including shares of Class A common stock.
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OUR SUCCESS IS DEPENDENT, IN PART, ON NEXTEL COMPLETING ITS PORTION OF THE
NEXTEL DIGITAL MOBILE NETWORK AND CONTINUING TO BUILD AND SUSTAIN CUSTOMER
SUPPORT OF ITS BRAND AND THE MOTOROLA IDEN TECHNOLOGY, AND IF NEXTEL EXPERIENCES
FINANCIAL OR OPERATIONAL DIFFICULTIES OUR BUSINESS WOULD BE ADVERSELY AFFECTED.
Our business plan depends, in part, 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 the Motorola iDEN 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 the Motorola iDEN 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
within the entire network and our ability to attract and retain new customers.
Additional information regarding Nextel and its domestic digital mobile network
business can be found in Nextel's Annual Report on Form 10-K for the year ended
December 31, 1999 and Nextel's other filings made under the Securities Act of
1933 and the Securities Exchange Act of 1934 under SEC file number 0-19656. You
should read these filings to more fully understand the risks presented by our
affiliation with Nextel.
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 WIP, Nextel WIP 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's systems to
allow our respective portions of the Nextel digital mobile network to operate
together, 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
- - 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 WIP;
- - 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.
Before fully implementing our portion of the Nextel 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. In addition, we may experience cost overruns and delays
not within our control caused by acts of governmental entities, design changes,
material and equipment shortages, delays in delivery and catastrophic
occurrences. Any failure to construct our portion of the 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.
Moreover, 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
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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 operating agreements
with Nextel WIP, which would impede our ability to execute our business plan.
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 technology, our operating agreements with Nextel WIP 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 WIP to
terminate its operating agreements with us. 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 plan and potentially give Nextel WIP the right to
purchase all of our outstanding stock for a price per share equal to 80% of the
average closing price of our stock for the 20 day trading days prior to the
default.
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 March 31, 2000, we had $1.0 billion of total
indebtedness outstanding, including $325 million outstanding under our credit
facility, $476.4 million of 14% senior discount notes outstanding at their
accreted value and $200 million of 11% senior notes. This indebtedness
represented approximately 61% of our total capitalization at that date. As of
March 31, 2000, we also had $25.1 million of mandatorily redeemable preferred
stock outstanding, including accrued dividends.
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 build-out 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.
Despite current indebtedness levels, our subsidiaries and we may still be
able to incur substantially more debt. Our credit facility would permit
additional borrowing of up to $50 million and all of those borrowings would
be senior to our outstanding notes. The debt service requirements of any
additional indebtedness could make it very difficult for us to make payments
of cash interest on our outstanding notes.
WE WILL REQUIRE A SIGNIFICANT AMOUNT OF CASH TO SERVICE OUR INDEBTEDNESS. OUR
ABILITY TO GENERATE CASH DEPENDS ON MANY FACTORS BEYOND OUR CONTROL.
Our ability to make payments on our indebtedness, including our outstanding
notes, and to fund planned capital expenditures will depend on our ability to
generate cash in the future. This, to a certain extent, is subject to general
economic, financial, competitive, legislative, regulatory and other factors that
are beyond our control. These factors include, among other things, our ability
to: (a) successfully implement our business plan and related strategy, including
the construction and operation of our portion of the Nextel digital mobile
network; (b) obtain and retain a significant number of subscribers; and (c)
achieve significant and sustained growth in our revenues and earnings from
operations.
We cannot assure you, however, that our business will generate sufficient
cash flow from operations, that currently anticipated cost savings and
operating improvements will be realized on schedule or that future borrowings
will be available to us under our credit facility in an amount sufficient to
enable us to pay our indebtedness, including our outstanding notes, or to
fund our other liquidity needs.
IN THE FUTURE WE MAY NEED TO REFINANCE OUR INDEBTEDNESS AND OUR ABILITY TO
REFINANCE OUR INDEBTEDNESS WILL DEPEND ON MANY FACTORS, SOME OF WHICH ARE BEYOND
OUR CONTROL, AND WE CANNOT ASSURE YOU THAT WE WILL BE ABLE TO DO SO.
Our credit facility will mature prior to the maturity of our outstanding notes,
and our obligations thereunder are senior to the notes in right of payment and
are secured by liens on assets of our subsidiaries and a pledge of their capital
stock. We expect that we may be required to refinance our indebtedness under our
credit facility. Our ability to refinance our indebtedness will depend on, among
other factors, our financial condition at the time of the refinancing, the
restrictions contained in the instruments governing
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our other indebtedness then outstanding and other factors beyond our control,
including market conditions. If our indebtedness under our credit facility
cannot be repaid at maturity or refinanced, then we will be unable to meet our
obligations under our indentures and outstanding notes.
OUR OUTSTANDING DEBT INCLUDES RESTRICTIVE AND FINANCIAL COVENANTS THAT LIMIT OUR
OPERATING FLEXIBILITY.
The indentures governing our outstanding notes and our credit facility 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 a merger, consolidation or sale of assets; or
- - engage in any 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.
IF AN EVENT CONSTITUTING A CHANGE OF CONTROL OCCURS, WE MAY BE REQUIRED TO
REDEEM ALL OF OUR OUTSTANDING NOTES EVEN IF OUR CREDIT FACILITY PROHIBITS SUCH
REDEMPTION OR WE LACK THE RESOURCES TO MAKE SUCH REDEMPTION.
Upon the occurrence of a defined change of control under the indentures
governing our outstanding notes, other than a change of control involving
certain of our existing stockholders, we could be required to redeem all
outstanding notes. Our credit facility prohibits us, except under certain
circumstances, from redeeming any of the notes before their stated maturity. In
the event we become subject to a change of control at a time when we are
prohibited from redeeming the notes our failure to redeem the tendered notes
would constitute an event of default under the respective indentures, which
would in turn result in a default under the credit facility. Any default under
our indentures 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 redeem 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 used 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 our business. 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.
- - If Nextel or we cannot expand, provide and maintain our respective system
coverage on a nationwide basis in the United States, then our growth and
operations 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 our portion and/or Nextel's portion of 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 Nextel
and we have only digital capability.
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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 Nextel nor we 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 our business. Many of our competitors have 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.
- - If we cannot offer pricing packages attractive to customers, our revenues
may be adversely affected, which could adversely affect our operating
results.
- - 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
telephone 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 our operating
results.
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 additional radio spectrum when and where required;
- - the availability of wireless telephones of the appropriate model and type
to meet the demands and preferences of our customers; and
- - the ability to obtain additional cell sites and other infrastructure
equipment.
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, and 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
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- - 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 carriers only when Motorola developed a proprietary
technology it calls "iDEN." Nextel and we are currently the only major U.S.
wireless service providers utilizing iDEN technology on a nationwide basis, and
iDEN phones are not currently designed to roam onto other wireless networks.
Our operating agreements with Nextel WIP require us to use the iDEN technology
in our system and prevent us from adopting any new communications technology
without Nextel WIP'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 provisions in our agreements, we will be less able to compete
effectively and could lose customers to our competitors.
WE ARE 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. 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 that do or may compete with some
or all of the services we offer. We cannot assure you that any potential
conflict of interest between Motorola and us 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, in the event of
shortages of that equipment, our agreements with Nextel WIP provide that
available supplies of this equipment 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 enhanced specialized mobile
radio, or ESMR, cellular and personal communications service, or 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
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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 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. The Telecommunications Act of
1996 provided for significant deregulation of the U.S. telecommunications
industry and such legislation remains subject to judicial review and additional
FCC rulemaking. As a result, we cannot predict the effect that the legislation
and any FCC rulemaking may have on our future operations. We must comply with
all applicable regulations to conduct our business. Modifications of our
business plans or operations to comply with changing regulations or certain
action taken by regulatory authorities might increase our costs of providing
service and adversely affect our financial condition. We anticipate FCC
regulation or Congressional legislation that creates additional spectrum
allocations that may also have the effect of adding new entrants into the mobile
telecommunications market.
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.
RISK FACTORS RELATING TO OUR CAPITAL STRUCTURE
UNDER CERTAIN CIRCUMSTANCES, NEXTEL WIP HAS THE ABILITY TO PURCHASE, AND THE
MAJORITY OF OUR CLASS A STOCKHOLDERS CAN CAUSE NEXTEL WIP TO PURCHASE, ALL OF
OUR OUTSTANDING STOCK, INCLUDING THE CLASS A COMMON STOCK.
Under our restated certificate of incorporation and our operating agreements, in
certain circumstances and subject to certain limitations, Nextel WIP has the
ability to purchase, or to cause and fund a redemption by us, of all of the
outstanding shares of our Class A common stock. In addition, under the
provisions of our restated certificate of incorporation, upon the occurrence of
certain events, the holders of a majority of our outstanding Class A common
stock can require Nextel WIP to purchase, or to cause and fund a redemption by
us of, all of the outstanding share of our Class A common stock.
NEXTEL WIP HAS APPROVAL RIGHTS THAT ALLOW IT TO EXERT SIGNIFICANT INFLUENCE OVER
OUR OPERATIONS, AND IT CAN ACQUIRE ADDITIONAL SHARES OF OUR STOCK, WHICH COULD
ALLOW US TO PROMOTE INTERESTS THAT MAY CONFLICT WITH THOSE OF OUR CLASS A
STOCKHOLDERS.
Pursuant to our amended shareholders' agreement and operating agreements, the
approval of the director designated by Nextel WIP, and/or Nextel WIP itself, is
required in order for us to:
- - make a material change in our technology;
- - modify our business objectives in any way that is inconsistent with our
objectives under our material agreements, including our operating
agreements with Nextel WIP;
- - dispose of all or substantially all of our assets;
- - make a material change in or broaden the scope of our business beyond our
current business objectives; or
- - enter into any agreement the terms of which would be materially altered in
the event that Nextel WIP either exercises or declines to exercise its
rights to acquire additional shares of our stock under the terms of the
amended shareholders' agreement or our restated certificate of
incorporation.
These approval rights relate to significant transactions, and decisions by the
Nextel WIP-designated director could conflict with those of our other directors,
including our independent directors.
The amended shareholders' agreement does not prohibit Nextel WIP or any of our
other stockholders or any of their respective affiliates from purchasing shares
of our Class A common stock in the open market. Any such purchases would
increase the voting power and influence of the purchasing stockholder, and could
result in a change of control of us. Additionally, if we experience a change of
control, Nextel WIP could purchase all of our broadband 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 operating agreements with
Nextel WIP remain in effect. Such an agreement would be subject to approval by
the Federal Communications Commission, or FCC.
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CERTAIN SIGNIFICANT STOCKHOLDERS REPRESENTED ON OUR BOARD OF DIRECTORS CAN EXERT
SIGNIFICANT INFLUENCE OVER US AND MAY HAVE INTERESTS THAT CONFLICT WITH THOSE OF
OUR NOTE HOLDERS, INCLUDING PURCHASERS IN THIS OFFERING.
Our officers, directors and greater than 5% stockholders together control
approximately 78.2% 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.
In addition, under our amended shareholders' agreement, Nextel WIP, 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 WIP has
certain approval rights that allow it to exert significant influence over our
operations.
DLJ Merchant Banking, Madison Dearborn Partners and Eagle River each own
significant amounts of our capital stock and each currently has a representative
on our board of directors. Each of these entities or their affiliates 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 or their affiliates'
current and future investments could create conflicts of interest.
ANTI-TAKEOVER PROVISIONS AFFECTING US COULD PREVENT OR DELAY A CHANGE OF CONTROL
THAT INVESTORS MAY FAVOR.
Provisions of our organizational documents, amended shareholders' agreement,
operating agreements and Delaware law may discourage, delay or prevent a merger
or other change of control that investors 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 change of control, Nextel WIP could purchase all of our broadband
licenses for $1.00, provided that it enters into a royalty-free agreement with
us to allow us to use the frequencies in our territory for as long as our
operating agreements remain in effect. Such an agreement would 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, the indenture governing the
notes 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.
OUR RESTATED 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 those securities from the FCC or the applicable state
commission. Moreover, our restated 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 LIQUIDATION TO OUR COMMON
STOCK, CAN BE REDEEMED BY US AT ANY TIME AND MUST BE REDEEMED IN CASH IN 2010.
Upon 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, an aggregate liquidation preference equal to $21,850,000, plus
dividends accrued on such amount from the date of issuance up to the liquidation
date equal to 12% per year, compounded quarterly. As of March 31, 2000, we had
$25.1 million of Series B preferred stock outstanding, including accrued
dividends. 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 VOLATILE.
The market price of our Class A common stock is volatile and has and will likely
continue to 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;
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- - changes in laws and regulations affecting the telecommunications industry;
- - announcements by third parties or us 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.
FORWARD LOOKING STATEMENTS
OUR FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A VARIETY OF FACTORS THAT COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM CURRENT BELIEFS.
Some statements and information contained in this report 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 other comparable
words, or by discussions of strategy that involve risks and uncertainties. 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 as a result of a variety of
factors, including those set forth under "Risk Factors." Such forward-looking
statements include, but are not limited to, statements with respect to the
following:
- - our plan for meeting our scheduled build-out for commercial launch of
markets within our portion of the Nextel digital mobile network;
- - our business plan, its advantages and our strategy for implementing our
plan;
- - general economic conditions in the geographic areas and occupational
markets that we are targeting in 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 subscribers;
- - our anticipated capital expenditures and funding requirements, including
our ability to access sufficient debt or equity capital to meet operating
and financing needs;
- - the availability of adequate quantities of system infrastructure and
subscriber equipment and components to meet our service deployment,
marketing plans and customer demand;
- - the ability to achieve and maintain market penetration and average
subscriber revenue levels sufficient to provide financial viability;
- - our ability to timely and successfully accomplish required scale-up of our
billing, collection, customer care and similar back-office operations to
keep pace with customer growth, increased system usage rates and growth in
levels of accounts receivables;
- - the quality and price of similar or comparable wireless communications
services offered or to be offered by our competitors, including providers
of PCS and cellular services;
- - future legislation or regulatory actions relating to specialized mobile
radio services, other wireless communications services or
telecommunications services generally; and
- - other risks and uncertainties described from time to time in our reports
filed with the SEC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to market risks arising from changes in interest rates. Our
primary interest rate exposure results from changes in LIBOR or the prime rate
which are used to determine the interest rate applicable to the term loans of
our subsidiary 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.
We do not use financial instruments for trading or other speculative
purposes.
24
<PAGE>
In September 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. We are still evaluating the effects of this change on its
financial position or results of operations.
25
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
We have pending only ordinary routine litigation that is incidental to
our business.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Nextel Partners filed a Registration Statement on Form S-1
(File No. 333-95473) which became effective on February 22, 2000,
whereby 27,025,000 shares of Class A common stock, $0.001 par value per
share, were sold in an initial public offering at a price of $20.00 per
share. The managing underwriters of the offering were Goldman, Sachs &
Company, Donaldson, Lufkin & Jenerette Securities Corporation, Credit
Suisse First Boston Corporation, Deutsche Bank Securities Inc., First
Union Securities, Inc. Morgan Stanley & Co. Incorporated, and
DLJDirect, Inc. Net proceeds to Nextel Partners from the offering
totaled approximately $509.9 million, after deducting underwriting
fees of approximately $29.7 million and approximately $900,000 for
other fees and expenses. In April 2000 we used approximately $191
million to redeem a portion of our 14% senior discount notes. We
intend to use substantially all of the remaining net proceeds from
the offering for expenditures relating to the build-out and
expansion of our portion of the Nextel digital mobile network,
including build-out for 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.
With the consummation of the initial public offering all the
outstanding shares of the Company's Series A preferred stock converted
into 125,834,646 shares of Class A common stock and all the outstanding
Company's Series C and D preferred stock automatically converted into
77,782,626 shares of Class B common stock. In addition, the Series B
redeemable preferred stock held by Nextel WIP became subject to
mandatory cash redemption 375 days after February 1, 2009. The Series B
preferred stock, plus accrued dividends, was reclassified from
stockholder's equity to the section of the balance sheet between
liabilities and stockholder's equity. Simultaneously, an adjustment was
made to the accumulated deficit representing the 12% dividend accrued
from the time of issuance to the closing date of the offering.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FROM 8-K
(a) List of Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
-------- -------------------
<S> <C>
10.50 Registration Rights Agreement dated as of March 10,
2000 by and among Nextel Partners, Inc., and
Donaldson, Lufkin & Jenrette Securities Corporation.
10.51 Purchase Agreement for $200,000,000 11% Senior Notes
due 2010 dated February 28, 2000 by and between
Nextel Partners, Inc. and Donaldson, Lufkin &
Jenrette Securities Corporation.
10.52 Indenture dated as of March 10, 2000 by and between
Nextel Partners, Inc. and The Bank of New York, as
trustee, relating to the 11% Senior Notes due 2010.
26
<PAGE>
10.53 Amendment No. 1 to Credit Agreement and Parent
Guaranty and Pledge Agreement dated as of March 10,
2000 by and among Nextel Partners, Inc., Nextel
Partners Operating Corp., DLJ Capital Funding, Inc.,
The Bank of New York, Bank of Montreal and certain
other financial institutions.
27.1 Financial Data Schedule.
</TABLE>
(b) Reports on Form 8-K.
(i) Current Report on Form 8-K dated January 27, 2000 and
filed January 31, 2000 with the Commission reporting
under Item 5 the announcement of Nextel Partners,
Inc. filing a registration statement with the
Securities and Exchange Commission for an initial
public offering of 23,500,000 shares of its class A
common stock.
(ii) Current Report on Form 8-K dated February 7, 2000 and
filed February 7, 2000 with the Commission under Item
5 the announcement of Nextel Partners, Inc. fourth
quarter results for 1999.
(iii) Current Report on Form 8-K dated February 22, 2000
and filed February 22, 2000 with the Commission
reporting under Item 5 the announcement of Nextel
Partners, Inc. filing Amendment No. 2 to Registration
Statement on Form S-1.
(iv) Current Report on Form 8-K dated February 28, 2000
and filed February 29, 2000 with the Commission
reporting under Item 5 the announcement that Nextel
Partners, Inc. entered into a purchase agreement to
sell $200 million of 11% Senior Notes due 2010 in a
private placement transaction. In addition, the
Company announced that it notified the trustee under
the indenture pursuant to its 14% Senior Discount
Notes due February 2009 that it intended to redeem
35% of the aggregate accreted value of such notes.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
NEXTEL PARTNERS, INC.
(Registrant)
Date: May 10, 2000 By: /s/ John D. Thompson
-----------------------
John D. Thompson
Chief Financial Officer and Treasurer
27
<PAGE>
NEXTEL PARTNERS, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
-------- -------------------
<S> <C>
10.50 Registration Rights Agreement dated as of March 10,
2000 by and among Nextel Partners Inc., and
Donaldson, Lufkin & Jenrette Securities Corporation.
10.51 Purchase Agreement for $200,000,000 11% Senior Notes
due 2010 dated February 28, 2000 by and between
Nextel Partners, Inc. and Donaldson, Lufkin &
Jenrette Securities Corporation.
10.52 Indenture dated as of March 10, 2000 by and between
Nextel Partners, Inc. and The Bank of New York, as
trustee, relating to the 11% Senior Notes due 2010.
10.53 Amendment No. 1 to Credit Agreement and Parent
Guaranty and Pledge Agreement dated as of March 10,
2000 by and between Nextel Partners, Inc., Nextel
Partners Operating Corp., DLJ Capital Funding, Inc.,
The Bank of New York, Bank of Montreal and certain
other financial institutions.
27.1 Financial Data Schedule.
</TABLE>
28
