<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
[ X ] SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission File Number 0-19656
NEXTEL COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3939651
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1505 FARM CREDIT DRIVE, MCLEAN, VA 22102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (703) 394-3000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes X No _______
Indicate the number of shares outstanding of each of issuer's classes of
common stock as of the latest practicable date:
Number of Shares Outstanding
Title of Class on July 31, 1998
-------------- ----------------
Class A Common Stock, $0.001 par value 267,877,652
Class B Non-Voting Common Stock, 17,830,000
$0.001 par value
<PAGE> 2
NEXTEL COMMUNICATIONS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
PART I FINANCIAL INFORMATION.
<S> <C>
Item 1. Financial Statements - Unaudited.
Condensed Consolidated Balance Sheets -
As of June 30, 1998 and December 31, 1997. 3
Condensed Consolidated Statements of Operations -
For the Six Months Ended June 30, 1998 and 1997. 4
Condensed Consolidated Statements of Operations -
For the Three Months Ended June 30, 1998 and 1997. 5
Condensed Consolidated Statement of Changes in Stockholders' Equity -
For the Six Months Ended June 30, 1998. 6
Condensed Consolidated Statements of Cash Flows -
For the Six Months Ended June 30, 1998 and 1997. 7
Notes to Condensed Consolidated Interim Financial Statements. 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 13
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 25
PART II OTHER INFORMATION.
Item 1. Legal Proceedings. 28
Item 4. Submission of Matters to a Vote of Security Holders. 28
Item 5. Other Information. 29
Item 6. Exhibits and Reports on Form 8-K. 30
</TABLE>
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS - UNAUDITED.
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents (of which $333,570 and $159,790 is restricted) $ 500,444 $ 301,601
Marketable securities (of which $2,638 and $128,560 is restricted) 4,647 131,404
Accounts and notes receivable, less allowance for doubtful
accounts of $56,859 and $56,590 288,491 240,637
Subscriber equipment inventory 125,505 101,338
Prepaid expenses and other 94,171 64,617
------------ ------------
Total current assets 1,013,258 839,597
PROPERTY, PLANT AND EQUIPMENT, net of accumulated depreciation
of $882,297 and $594,473 4,165,630 3,225,603
INTANGIBLE ASSETS, net of accumulated amortization
of $836,937 and $764,554 4,895,344 4,699,746
OTHER ASSETS 654,792 462,855
------------ ------------
$ 10,729,024 $ 9,227,801
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, accrued expenses and other $ 849,229 $ 761,314
Current portion of long-term debt 6,540 7,577
------------ ------------
Total current liabilities 855,769 768,891
LONG-TERM DEBT 6,544,323 5,038,250
DEFERRED INCOME TAXES 886,417 951,192
OTHER 36,509 27,929
------------ ------------
Total liabilities 8,323,018 6,786,262
------------ ------------
SERIES D EXCHANGEABLE PREFERRED STOCK MANDATORILY REDEEMABLE 2009,
13% cumulative annual dividend; 549,195 and 515,166 shares issued;
549,182 and 515,166 shares outstanding; stated at liquidation value 564,056 529,119
SERIES E EXCHANGEABLE PREFERRED STOCK MANDATORILY REDEEMABLE 2010,
11.125% cumulative annual dividend; 771,786 shares issued and outstanding;
stated at liquidation value 782,505 --
STOCKHOLDERS' EQUITY
Preferred stock, Class A convertible redeemable,
7,905,981 shares issued and outstanding 290,545 290,545
Preferred stock, Class B convertible, 82 shares issued and outstanding -- --
Common stock, Class A, 258,167,930 and 253,246,237 shares issued,
257,189,570 and 252,028,617 shares outstanding 258 253
Common stock, Class B, non-voting convertible, 17,830,000 shares
issued and outstanding 18 18
Paid-in capital 4,414,134 4,379,810
Accumulated deficit (3,627,927) (2,749,105)
Treasury shares, at cost, 978,360 and 1,217,620 shares (18,787) (23,435)
Other stockholders' equity 1,204 14,334
------------ ------------
Total stockholders' equity 1,059,445 1,912,420
------------ ------------
$ 10,729,024 $ 9,227,801
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
UNAUDITED
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
OPERATING REVENUES $ 748,547 $ 256,614
------------ ------------
OPERATING EXPENSES
Cost of revenues 225,182 122,654
Selling, general and administrative 700,738 314,355
Depreciation and amortization 378,611 224,704
------------ ------------
1,304,531 661,713
------------ ------------
OPERATING LOSS (555,984) (405,099)
------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (297,133) (172,456)
Interest income 21,744 12,286
Other, net 2,932 (3,134)
------------ ------------
(272,457) (163,304)
------------ ------------
LOSS BEFORE INCOME TAX BENEFIT AND EXTRAORDINARY ITEM (828,441) (568,403)
INCOME TAX BENEFIT 82,844 85,930
------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (745,597) (482,473)
EXTRAORDINARY ITEM - LOSS ON EARLY RETIREMENT OF DEBT,
NET OF INCOME TAX OF $0 (133,225) --
------------ ------------
NET LOSS (878,822) (482,473)
REDEEMABLE PREFERRED STOCK DIVIDENDS (67,469) --
------------ ------------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (946,291) $ (482,473)
============ ============
BASIC AND DILUTED LOSS PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Loss before extraordinary item attributable to
common stockholders $ (2.99) $ (2.01)
Extraordinary item (0.49) --
----------- ------------
$ (3.48) $ (2.01)
=========== ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 271,952,000 239,591,000
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
UNAUDITED
<TABLE>
<CAPTION>
1998 1997
------------ -----------
<S> <C> <C>
OPERATING REVENUES $ 421,413 $ 145,938
------------ ------------
OPERATING EXPENSES
Cost of revenues 122,754 64,493
Selling, general and administrative 370,999 181,979
Depreciation and amortization 194,116 114,501
------------ ------------
687,869 360,973
------------ ------------
OPERATING LOSS (266,456) (215,035)
------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (151,753) (97,189)
Interest income 7,391 8,304
Other, net 2,879 (4,197)
------------ ------------
(141,483) (93,082)
------------ ------------
LOSS BEFORE INCOME TAX BENEFIT AND EXTRAORDINARY ITEM (407,939) (308,117)
INCOME TAX BENEFIT 49,204 46,494
------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (358,735) (261,623)
EXTRAORDINARY ITEM - LOSS ON EARLY RETIREMENT OF DEBT,
NET OF INCOME TAX OF $0 (133,225) --
------------ ------------
NET LOSS (491,960) (261,623)
REDEEMABLE PREFERRED STOCK DIVIDENDS (39,381) --
------------ ------------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (531,341) $ (261,623)
============ ============
BASIC AND DILUTED LOSS PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS:
Loss before extraordinary item attributable to
common stockholders $ (1.45) $ (1.08)
Extraordinary item (0.49) --
------------ ------------
$ (1.94) $ (1.08)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 273,519,000 241,831,000
=========== ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(DOLLARS IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
Class A Class B Class A
Preferred Stock Preferred Stock Common Stock
------------------ ----------------- ----------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1998 7,905,981 $290,545 82 $ -- 253,246,237 $253
Issuance of common stock:
Exercise of options and warrants 1,303,512 1
Employee stock purchase plan
Acquisitions 3,618,181 4
Deferred compensation
Unrealized loss on available-for-sale
securities, net of income taxes
Foreign currency translation adjustment
Preferred stock dividends
Net loss
--------- -------- ---- ------- ----------- -----
BALANCE, June 30, 1998 7,905,981 $290,545 82 $ -- 258,167,930 $ 258
========= ======== ==== ======= =========== =====
</TABLE>
<TABLE>
<CAPTION>
Class B
Common Stock
------------------ Paid-in
Shares Amount Capital
------ ------ -------
<S> <C> <C> <C>
BALANCE, January 1, 1998 17,830,000 $18 $4,379,810
Issuance of common stock:
Exercise of options and warrants 16,020
Employee stock purchase plan 454
Acquisitions 85,544
Deferred compensation (225)
Unrealized loss on available-for-sale
securities, net of income taxes
Foreign currency translation adjustment
Preferred stock dividends (67,469)
Net loss
---------- --- ----------
BALANCE, June 30, 1998 17,830,000 $18 $4,414,134
========== === ==========
</TABLE>
<TABLE>
<CAPTION>
Other Stockholders' Equity
---------------------------------
Accumulated Other
Comprehensive Income
---------------------
Unrealized Cumulative
Accumulated Treasury Gain (Loss) Translation Deferred
Deficit Shares on Investments Adjustment Compensation
------- -------- -------------- --------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1998 $(2,749,105) $(23,435) $22,798 $ -- $ (8,464)
Issuance of common stock:
Exercise of options and warrants 1,443
Employee stock purchase plan 3,205
Acquisitions
Deferred compensation 3,358
Unrealized loss on available-for-sale
securities, net of income taxes (7,576)
Foreign currency translation adjustment (8,912)
Preferred stock dividends
Net loss (878,822)
------------ ------- ------- -------- --------
BALANCE, June 30, 1998 $ (3,627,927) $(18,787) $15,222 $ (8,912) $ (5,106)
============ ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE> 7
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
UNAUDITED
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (878,822) $ (482,473)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of deferred financing costs and accretion of senior
redeemable discount notes, net of capitalized accreted interest
of $21,003 and $0 247,134 146,315
Depreciation and amortization 378,611 224,704
Provision for losses on accounts receivable 32,999 6,055
Deferred income tax benefit (82,844) (85,930)
Extraordinary loss on retirement of debt 133,225 --
Other, net 16,039 12,570
Change in current assets and liabilities, net of effects from acquisitions:
Accounts and notes receivable (81,513) (83,745)
Subscriber equipment inventory (35,095) (24,660)
Other assets (19,183) (8,089)
Accounts payable, accrued expenses and other 88,451 72,755
------------ -----------
Net cash used in operating activities (200,998) (222,498)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,154,149) (560,608)
Payments for acquisitions and purchase of licenses, net of cash acquired (251,452) (62,771)
Purchases of marketable securities (8,054) (72,712)
Proceeds from maturities and sales of marketable securities 134,811 5,102
Other investments in and advances to affiliates (124,168) (39,928)
------------ -----------
Net cash used in investing activities (1,403,012) (730,917)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt securities 1,401,013 500,003
Proceeds from redeemable preferred stock issuance 750,000 --
Retirement of debt securities (740,791) --
Borrowings under long-term credit facilities 1,021,000 --
Repayments under long-term credit facilities (972,021) --
Revolving line of credit borrowings, net 432,781 928,000
Other long-term (repayments) borrowings, net (3,183) 378
Deferred financing costs (103,351) (84,950)
Common stock and options issued 17,405 33,599
Option repurchase and other -- (24,513)
------------ ----------
Net cash provided by financing activities 1,802,853 1,352,517
------------ -----------
INCREASE IN CASH AND CASH EQUIVALENTS 198,843 399,102
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 301,601 139,681
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 500,444 $ 538,783
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized of $5,773 and $25,056 $ 57,929 $ 21,608
============ ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
7
<PAGE> 8
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
UNAUDITED
NOTE 1 -- BASIS OF PRESENTATION.
The condensed consolidated interim financial statements of Nextel
Communications, Inc. and subsidiaries ("Nextel" or the "Company") included
herein have been prepared by the Company without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission (the "Commission")
and reflect all adjustments that are, in the opinion of management, necessary
for a fair statement of the results for the interim periods. All adjustments
made were normal recurring accruals.
The interim financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997 (the "1997 Form 10-K"), and
the Nextel International, Inc. Annual Report on Form 10-K for the year ended
December 31, 1997 (the "Nextel International 1997 Form 10-K"), for matters
related to Nextel International, Inc.'s operations. Operating results for the
interim periods are not necessarily indicative of results for an entire year.
Certain prior period amounts have been reclassified to conform to the 1998
presentation.
SUPPLEMENTAL CASH FLOW INFORMATION -- Total capital expenditures paid in cash
and financed during the six months ended June 30, 1998 and 1997 were $1,175.6
million and $530.7 million, respectively. Total capital expenditures includes
interest capitalized in connection with the construction and development of the
Company's advanced mobile communications systems employing digital technology
with a multi-site configuration permitting frequency reuse (the "Digital Mobile
network") of approximately $26.8 million and $25.1 million during the six
months ended June 30, 1998 and 1997, respectively.
RESTRICTED CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES -- As of June 30,
1998 and December 31, 1997, approximately $336.2 million and $288.4 million,
respectively, of cash, cash equivalents and marketable securities held by
Nextel International, Inc. and its subsidiaries ("Nextel International"), an
indirect, wholly owned subsidiary of Nextel, were not available to fund any of
the cash needs of Nextel's domestic Digital Mobile network and analog
specialized mobile radio ("SMR") businesses due to the restrictions contained
in (i) the indenture related to the 10-year discount notes issued by Nextel
International in March 1997 (the "1997 NI Notes") and (ii) the indenture
related to the 10-year discount notes issued by Nextel International in March
1998 (such indentures, collectively, the "NI Indentures").
COMPREHENSIVE INCOME -- Effective January 1, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), that establishes new rules for the reporting and display
of comprehensive income and its components. Adoption of SFAS 130 requires
unrealized gains or losses on the Company's available-for-sale securities and
foreign currency translation adjustments to be included in other comprehensive
income. The components of comprehensive income, net of related tax, are as
follows (in thousands):
8
<PAGE> 9
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Loss attributable to
common stockholders $(946,291) $(482,473) $(531,341) $ (261,623)
Other comprehensive income:
Unrealized (loss) gain
on investments, net of tax (7,576) 12,691 (17,350) 21,536
Foreign currency translation
loss (8,912) -- (5,442) --
--------- --------- --------- ----------
Comprehensive income $(962,779) $(469,782) $(554,133) $ (240,087)
========= ========= ========= ==========
</TABLE>
NEW ACCOUNTING PRONOUNCEMENT -- In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards 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 133 is
effective for fiscal years beginning after June 15, 1999. The Company has not
evaluated the effects of this change on its financial position or results of
operations.
NOTE 2 -- SIGNIFICANT TRANSACTIONS.
During the six months ended June 30, 1998, the Company completed the
following transactions. Transactions completed in the three-month period ended
June 30, 1998 are more fully discussed in "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
DOMESTIC ACQUISITIONS -- During the second quarter of 1998, the Company
acquired several analog SMR businesses for a total purchase price of $172.2
million, consisting of $88.6 million in cash and approximately 3.6 million
shares of Nextel's Class A Common Stock, par value $0.001 per share ("Common
Stock"), having an aggregate value of $83.6 million. The results of operations
of these businesses were not material in relation to the Company's consolidated
results of operations.
PREFERRED STOCK ISSUANCE -- On February 11, 1998, Nextel completed the sale
of 750,000 shares of 11.125% Series E Exchangeable Preferred Stock Mandatorily
Redeemable 2010 (the shares of such stock issued originally, any shares of
such stock issued in exchange therefor and any shares of such stock issued as
payment in kind dividends thereon, collectively, the "Series E Preferred
Stock"), with a liquidation preference of $1,000 per share, yielding net
proceeds of approximately $727.9 million (the "Series E Preferred Stock
Proceeds"). At June 30, 1998, accrued but unpaid dividends on the outstanding
shares of 13% Series D Exchangeable Preferred Stock Mandatorily Redeemable 2009
(the "Series D Preferred Stock") and Series E Preferred Stock were
approximately $14.9 million and $10.7 million, respectively.
NEXTEL INTERNATIONAL ARGENTINA INVESTMENT -- On January 30, 1998, Nextel
International acquired the remaining 50% equity interest in the holding company
for Nextel Argentina S.R.L. ("Nextel Argentina") for a purchase price of $46.0
million. As a result of the purchase, Nextel International commenced
consolidating the accounts of Nextel Argentina effective February 1, 1998.
9
<PAGE> 10
NOTE 3 -- LONG-TERM DEBT.
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
------------- -------------
(in thousands)
<S> <C> <C>
11.5% Senior Redeemable Discount Notes due 2003,
net of unamortized discount of $650 and $24,564 $ 35,161 $ 318,801
9.75% Senior Redeemable Discount Notes due 2004,
net of unamortized discount of $64,566 and $113,926 1,061,869 1,012,509
10.125% Senior Redeemable Discount Notes due 2004,
net of unamortized discount of $89,984 and $111,870 319,892 298,006
12.25% Senior Redeemable Discount Notes due 2004,
net of unamortized discount of $1,604 and $104,504 7,022 326,966
10.25% Senior Redeemable Discount Notes due 2005,
net of unamortized discount of $28,326 and $34,320 86,839 80,845
13.0% Senior Redeemable Discount Notes due 2007
(issued by Nextel International), net of unamortized
discount of $375,522 and $411,571 575,941 539,892
10.65% Senior Redeemable Discount Notes due 2007,
net of unamortized discount of $296,864 and $324,329 543,136 515,671
9.75% Senior Serial Redeemable Discount Notes due 2007,
net of unamortized discount of $381,306 and $416,021 747,794 713,079
9.95% Senior Serial Redeemable Discount Notes due 2008,
net of unamortized discount of $588,166 1,038,834 --
12.125% Senior Redeemable Discount Notes due 2008,
(issued by Nextel International), net of unamortized
discount of $314,398 415,602 --
Bank credit facility, interest payable quarterly at an
adjusted rate calculated either on the prime rate or
LIBOR (7.94% to 8.84% - 1998 and
7.94% to 9.75% - 1997) 1,592,000 1,021,000
Vendor credit facility, interest payable quarterly at 2.0%
over the prime rate (10.5%) -- 152,021
Nextel Argentina bank credit facility, interest payable
quarterly at an adjusted rate calculated either on the
prime rate or LIBOR (9.5%) 21,000 --
Nextel International vendor credit facility, interest payable
semiannually at 2.5% over the prime rate (11.0%) 92,031 50,250
Other 13,742 16,787
------------- -------------
6,550,863 5,045,827
Less current portion 6,540 7,577
------------- -------------
$ 6,544,323 $ 5,038,250
============= =============
</TABLE>
During the six months ended June 30, 1998, the Company completed the
following financing transactions, which are more fully discussed in "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
FEBRUARY NOTES ISSUANCE -- On February 11, 1998, the Company completed a
private placement of $1,627.0 million in principal amount at maturity of 9.95%
Senior Serial Redeemable Discount Notes due 2008 (the securities issued
originally, and any securities issued in exchange therefor collectively, the
"February Notes") yielding approximately $975.9 million in net cash proceeds
(the "February Notes Proceeds").
10
<PAGE> 11
NEW BANK FINANCING -- On March 13, 1998, the Company entered into definitive
agreements which increased the Company's total secured financing capacity
under its bank financing agreement to $3.0 billion (consisting of a $1.5
billion revolving loan and $1.5 billion in term loans) and concurrently
terminated its domestic vendor credit facilities. The maturity date of the
$1.5 billion revolving loan and a $500.0 million portion of the term loans is
March 31, 2006; the maturity date of the remaining $1.0 billion portion of the
term loans is September 30, 2006.
TENDER OFFER -- On April 3, 1998, the Company concluded a cash tender offer
and related consent solicitation with respect to all of the outstanding 11.5%
Senior Redeemable Discount Notes due 2003 (the "2003 Notes") and 12.25% Senior
Redeemable Discount Notes due 2004 (the "12.25% 2004 Notes" and collectively
with the 2003 Notes, the "Targeted Notes"). Pursuant to the terms of the
tender offer and consent solicitation, the Company paid approximately $740.8
million for the tendered Targeted Notes (representing both the purchase price
of the tendered Targeted Notes and related consent fees) utilizing a portion of
the February Notes Proceeds. As a result of the early retirement of the
tendered Targeted Notes, the Company recognized an extraordinary loss of
approximately $133.2 million, representing the sum of (i) the excess of the
purchase price for such tendered Targeted Notes over the sum of carrying values
of such tendered Targeted Notes and (ii) the write-off of the associated
unamortized deferred financing costs related to such tendered Targeted Notes of
approximately $19.3 million.
NEXTEL INTERNATIONAL ARGENTINA CREDIT FACILITY -- On February 27, 1998,
Nextel Argentina entered into an $83.0 million senior secured credit facility
(the "Argentina Credit Facility"), which, as amended on May 8, 1998, was
increased to $100.0 million. The loans under the Argentina Credit Facility are
scheduled to be repaid in quarterly installments beginning September 30, 2000,
with a 50% balloon payment due March 31, 2003.
NEXTEL INTERNATIONAL NOTES ISSUANCE -- On March 12, 1998, Nextel
International completed a private placement of $730.0 million in principal
amount at maturity of 12.125% Senior Redeemable Discount Notes due 2008 (the
"1998 NI Notes") yielding approximately $387.0 million in net cash proceeds
(the "1998 NI Notes Proceeds").
NOTE 4 -- DIGITAL MOBILE NETWORK EQUIPMENT SALES AND RELATED COSTS.
The loss generated from the sale of subscriber units used in the Digital
Mobile network primarily results from the Company's subsidy of digital
subscriber units and represents marketing costs for the Digital Mobile network.
Equipment sales revenue and related cost of sales of digital subscriber units
and related accessories, which includes current period order fulfillment,
installation related expenses and write downs to estimated net realizable value
of subscriber unit inventory and related accessories, are classified within
selling, general and administrative expenses as follows (in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- ----------------------------
1998 1997 1998 1997
-------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Equipment sales $ 182,201 $ 98,676 $ 98,206 $55,393
Cost of equipment sales 310,272 146,316 167,197 84,182
---------- ------------ ----------- --------
$ (128,071) $ (47,640) $ (68,991) $(28,789)
========== ============ =========== ========
</TABLE>
NOTE 5 -- SUBSEQUENT EVENTS.
MCCAW INVESTOR OPTION EXERCISE -- On July 28, 1998, Option Acquisition,
L.L.C., an entity controlled by Craig O. McCaw ("Mr. McCaw"), exercised
options to purchase 9,953,821 shares of Common Stock in a cashless exercise
transaction as permitted by the terms of such options. The exercise of the
options was effected by surrendering a number of options determined (as
provided in such options) by dividing the full cash exercise price for all of
the options by the average closing sales price for a share
11
<PAGE> 12
of Common Stock on the Nasdaq National Market for the 20 trading days
immediately preceding the exercise date.
NOTE 6 -- CONTINGENCIES.
See Part II, Item 1. "Legal Proceedings" for a discussion of certain
lawsuits and other legal matters.
12
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
OVERVIEW.
The following discussion of the condensed consolidated financial condition
and results of operations of Nextel for the six- and three-month periods ended
June 30, 1998 and 1997, and certain factors that could affect Nextel's
prospective financial condition, should be read in conjunction with the
Company's 1997 Form 10-K.
Nextel provides a wide array of digital and analog wireless communications
services throughout the United States. The Company offers a differentiated,
integrated package of digital wireless communications services under the Nextel
brand name primarily to business users, and as of June 30, 1998, provided
service to approximately 2,042,100 digital subscriber units in the United
States. At June 30, 1998, the Company's Digital Mobile network was operational
in areas in or around 83 of the top 100 metropolitan statistical areas ("MSAs")
in the United States. In addition to its Digital Mobile network, Nextel also
operates analog wireless networks providing analog SMR services throughout the
continental United States and in Hawaii to approximately 486,400 analog SMR
subscriber units as of June 30, 1998. Nextel has significant SMR spectrum
holdings in and around every major business and population center in the
country, including all of the top 50 MSAs in the United States.
In early 1997, Nextel finalized and began implementing a business plan for
the period from March 31, 1997 through December 31, 1998 (the "Plan Period").
Nextel contemplated an accelerated build-out of its Digital Mobile network in
the United States (the "1997 Plan") incorporating the modified version of the
digital technology developed by Motorola, Inc., referred to as the "integrated
Digital Enhanced Network" or "iDEN." During 1997, Nextel achieved a significant
expansion of its Digital Mobile network and experienced a large increase in the
number of digital subscriber units in service and system minutes of use. This
growth resulted in greater capital expenditures and net cash used in Digital
Mobile network operations in the final three quarters of 1997 than estimated
for purposes of developing the 1997 Plan. The Company has updated and revised
its 1998 business plan for its domestic operations in light of its results and
experience in building out and commercializing its Digital Mobile network in
1997 (the "1998 Plan"). See "Part I, Item 1 Business -- 1998 Business Plan" in
the Company's 1997 Form 10-K.
The increased funding requirements reflected in the 1998 Plan include (i) a
$1,050.0 million increase in total system infrastructure and capital costs over
the $1,450.0 million in such costs that were contemplated by the 1997 Plan for
the Plan Period and (ii) a $500.0 million increase in non-system capital
expenditures and operating losses over the $1,050.0 million of such
expenditures and losses that were contemplated by the 1997 Plan for the
Plan Period. The 1998 Plan contemplates that the Company's funding
requirements for system and non-system capital expenditures for 1998 will be
approximately $1,496.0 million as compared to the approximately $1,452.5
million in funding used for such purposes during 1997. Such actual and
contemplated capital expenditures exclude capital expenditures relating to
international operations and capitalized interest relating to the Company's
domestic and international operations for the respective periods. During the
six months ended June 30, 1998, capital expenditures relating to the Company's
domestic operations (excluding capitalized interest) were approximately $920.2
million. The level of domestic capital expenditures during such period was
consistent with the 1998 Plan. The level of investment in system
infrastructure and capital expenditures that will be incurred by the Company
for the remainder of 1998 are subject to certain risks and uncertainties,
including those identified or referred to in the Company's 1997 Form 10-K. See
"-- Forward Looking Statements."
In particular, as the Company has recently disclosed, the Digital Mobile
network system usage increased by approximately 46%, to more than 2.2 billion
minutes of use, during the second quarter as compared to the first quarter of
1998. System usage during 1998 has been and remains well above system
utilization levels assumed and reflected in the 1998 Plan. The Company
believes that such increased levels of system utilization are likely to
continue for the remainder of the year, therefore the Company
13
<PAGE> 14
intends to accelerate the deployment of certain switching and related system
infrastructure equipment. The Company has estimated that such accelerated
deployment of equipment could increase system capital expenditures incurred
in 1998 by approximately $100 million. See "-- Forward Looking Statements."
Additionally, the Company has been evaluating a number of measures that
could be implemented to improve the performance and reliability of the Digital
Mobile network, to minimize the number of system affecting events that may
impact the stability of the network and to enhance customer satisfaction.
During the past several years, the Company has performed various network
upgrades on an ongoing basis in its market areas, which are network affecting
events in the sense that each element of the network involved in such an
upgrade in a particular market or area is connected with or otherwise impacts
a number of other network elements in such market or area. Such activities
normally are performed during scheduled maintenance windows (when the system is
taken down) and may occasionally result in service degradation or unexpected
fluctuations in performance levels when the system is turned back up,
producing attendant customer dissatisfaction. Although the Company typically
has been able to take corrective action to restore acceptable service levels
and system performance promptly, the Company believes that it will be able to
significantly improve network planning tasks and performance issues by adopting
a new approach of designing and conducting all network upgrade activities to
occur only on a periodic schedule. Initially, the Company intends to perform
network upgrades once per quarter in each relevant market or area, which will
require planning and building for likely growth in system usage and coverage at
least until the next scheduled quarterly upgrade. In addition to adopting the
approach of building further ahead of demand, the Company also intends to
implement sooner the conversion of selected existing sites throughout the
Digital Mobile network to a system design more directed to handling existing
and anticipated increased system usage. See "-- Forward Looking Statements."
The Company believes that such activities will lead to significantly enhanced
system performance and stability, will make the system design and planning
process more accurate and cost-effective and will make customers' experiences
on the Digital Mobile network more predictable and satisfying. The Company
expects that the aggregate capital expenditures associated with implementing
such measures in the final six months of 1998 would total approximately $100
million, the bulk of which would involve expenditures made to structure the
Digital Mobile network for anticipated early 1999 system usage and coverage
requirements. See "-- Forward Looking Statements."
During 1998, the Company has continued to make capital expenditures to
construct transmission towers and to expand the Digital Mobile network to new
market areas. The Company currently is pursuing two transactions, either
or both of which could be consummated in 1998, and (if consummated) are
expected to have an impact on the level of the Company's capital expenditures
and funding requirements that are related to such activities. First, the
Company is currently discussing with interested parties the terms on which it
would sell its portfolio of transmission tower assets, which includes towers
and related assets constructed during 1998. Second, the Company anticipates
finalizing an agreement on terms pursuant to which a newly formed affiliated
entity would build out and operate digital mobile systems, compatible with the
Digital Mobile network, in domestic markets outside or adjacent to the
Company's currently operating market areas. Upon consummation of that
transaction, the Company would transfer to such new entity various assets,
including completed or in-process portions of the Digital Mobile network
constructed by the Company in such new entity's market areas, and the Company
would be reimbursed for the related capital expenses incurred since 1997.
Final definitive agreements covering the potential transactions described in
this paragraph have not yet been entered into, and there can be no assurance
that such agreements will be entered into or that either or both of such
potential transactions will be consummated before the end of 1998, or at all.
See "-- Forward Looking Statements."
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<PAGE> 15
The Company also operates or has investments in international wireless
companies through Nextel International. Nextel International's subsidiaries
or other entities in which Nextel International holds equity or equivalent
interests own and operate wireless communications systems (the "Operating
Companies") in Latin America, Asia and Canada and (together with Nextel's
domestic Digital Mobile network operations) provide service in 12 of the
world's 25 largest cities. The Company's condensed consolidated financial
statements include financial information reflecting the assets, liabilities
and results of operations relating to Nextel International and its
consolidated subsidiaries as of the relevant dates or for periods indicated
therein. Since March 1997, the funding needs relating to international
operations have been met largely through separate financing arrangements
entered into by Nextel International and its operating subsidiaries and
affiliates. Nextel International currently estimates its funding
requirements for fiscal year 1998 to be approximately $810.0 million.
As of June 30, 1998, Nextel International's total cash expenditures for its
business activities, including system and related capital expenditures, were
approximately $460.0 million.
As of June 30, 1998, Nextel International's proportionate share of the
approximately 357,000 international digital subscriber units in service, based
on its ownership interests in the Operating Companies, is estimated to be
approximately 67,000, which includes total digital subscriber units on networks
currently in operation in Argentina, Brazil, Canada, Japan, and Shanghai,
China.
During the second quarter of 1998, Nextel International, through its
subsidiaries or affiliated companies, launched commercial digital enhanced SMR
("ESMR") service in Sao Paolo and Buenos Aires, and in July 1998 launched
commercial digital ESMR service in Rio de Janeiro, Manila and in the Kanto
region of Japan (which includes Tokyo). In addition to the discussion below,
more detailed information relating to Nextel International's business
operations, financial condition and results of operations may be found in the
periodic and other reports filed by Nextel International with the Commission
pursuant to rules under the Securities and Exchange Act of 1934, as amended
(the "Exchange Act").
RECENT DOMESTIC TRANSACTIONS AND DEVELOPMENTS
SERIES E PREFERRED STOCK EXCHANGE OFFER: On July 16, 1998, Nextel completed an
exchange offer for its Series E Preferred Stock of which 750,000 shares were
initially issued on February 11, 1998 in a private placement transaction.
Nextel received approximately $727.9 million in Series E Preferred Stock
Proceeds upon completion of the private placement of such shares. Dividends on
the Series E Preferred Stock accrue at an annual rate of 11.125% of the
liquidation preference, are cumulative from the date of issuance and are
payable quarterly in cash or, on or prior to February 15, 2003, at the sole
option of Nextel, in additional shares of Series E Preferred Stock. The Series
E Preferred Stock is mandatorily redeemable on February 15, 2010 at the
liquidation preference plus accrued and unpaid dividends, and is redeemable in
whole or in part, at the option of Nextel, at any time after December 15, 2005,
at a price equal to the liquidation preference plus accrued and unpaid
dividends, and, in certain circumstances, after February 15, 2003, at specified
redemption prices. Up to 35% of the Series E Preferred Stock may be redeemed on
or prior to February 15, 2001, in whole or in part, at the option of Nextel in
certain circumstances, at 111.125% of the liquidation preference plus accrued
and unpaid dividends from the proceeds of one or more sales of Common Stock.
The Series E Preferred Stock is also exchangeable, in whole but not in part, at
the option of Nextel at any time after December 15, 2005, and in certain
circumstances sooner, into Nextel subordinated debentures.
FEBRUARY SENIOR NOTES EXCHANGE OFFER: Concurrent with the completed exchange
offer of the Series E Preferred Stock on July 16, 1998, Nextel completed an
exchange offer for $1,627.0 million in principal amount at maturity of its
February Notes, which were initially issued on February 11, 1998 in a private
placement transaction. Nextel received approximately $975.9 million in February
Notes Proceeds. Cash interest will not accrue on the February Notes prior to
February 15, 2003, and will be payable on February 15 and August 15 of each
year commencing August 15, 2003, at a rate of 9.95% per annum. The February
15
<PAGE> 16
Notes are senior unsecured indebtedness of Nextel and rank pari passu in right
of payment with all unsubordinated, unsecured indebtedness of Nextel.
LMDS AUCTION: On February 18, 1998, the Federal Communications Commission
("FCC") commenced an auction of Local Multipoint Distribution Service ("LMDS")
spectrum in the 28 GHz - 31 GHz frequency range. In connection with its
participation in the LMDS auction and potential pursuit of LMDS-related
business opportunities, the Company has entered into a joint venture with
NextLink Communications, Inc. ("NextLink"), a publicly traded company that is
controlled by Mr. McCaw. NextLink provides local facilities based
telecommunications services, with an emphasis on delivering switched services
to commercial customers. NextLink files periodic and other reports with the
Commission pursuant to the Exchange Act, and for additional information
concerning NextLink, reference is made to such reports. The Company's
participation with NextLink in the LMDS spectrum auction and related activities
have been conducted through NextBand Communications, L.L.C. ("NextBand"), a
joint venture in which the Company has a 50% ownership interest. As of the
conclusion of the LMDS spectrum auction on March 25, 1998, NextBand had
submitted $134.7 million in bids that represented the highest bids with respect
to the auction of LMDS spectrum in 42 markets covering approximately 96 million
people throughout the United States. Under the terms of the joint venture, in
June 1998 the Company made the final payment to the FCC of $42.2 million,
representing its 50% share of the bid amount after deducting the $25.0 million
deposit previously paid by the Company.
TENDER OFFER AND CONSENT SOLICITATION: On April 3, 1998, the Company concluded
a cash tender offer and related consent solicitation with respect to all of the
outstanding Targeted Notes. Approximately $307.6 million in principal amount
at maturity of the 2003 Notes and $422.8 million in principal amount at
maturity of the 12.25% 2004 Notes, which had carrying values of approximately
$294.2 million and $332.7 million, respectively, were validly tendered in the
tender offer. Pursuant to the terms of the tender offer and consent
solicitation, the Company paid approximately $740.8 million for the tendered
Targeted Notes (representing both the purchase price of the tendered Targeted
Notes and related consent fees) utilizing a portion of the February Notes
Proceeds.
NEW BANK FINANCING: On March 13, 1998, the Company entered into definitive
agreements which increased the Company's total secured financing capacity under
its bank financing agreement to $3.0 billion (consisting of a $1.5 billion
revolving loan and $1.5 billion in term loans) and concurrently terminated its
domestic vendor credit facilities. The loans bear interest payable quarterly
at an adjustable rate calculated based either on the prime rate or LIBOR. At
June 30, 1998, the Company had drawn an aggregate of approximately $1.6 billion
of its available financing under its bank credit facility. The maturity date
of the $1.5 billion revolving loan and a $500.0 million portion of the term
loans is March 31, 2006. The maturity date of the remaining $1.0 billion
portion of the term loans is September 30, 2006. The maturity date of the
loans is subject to acceleration if the aggregate principal amount of
certain series of the Company's senior redeemable discount notes is not
less than $1.0 billion by specified dates.
RECENT NEXTEL INTERNATIONAL TRANSACTIONS AND DEVELOPMENTS
PERU INVESTMENT: On January 29, 1998, Nextel International purchased a 70.1%
equity interest in Comunicaciones Nextel de Peru S.A., a Peruvian wireless SMR
operator ("Nextel Peru," formerly known as Valorcom, S.A.), for a purchase
price of $27.9 million, $23.8 million of which will represent new capital to be
contributed to Nextel Peru to finance the expansion, upgrade and operation of
its wireless services business. As of June 30, 1998, Nextel International had
paid $25.8 million to Nextel Peru, and the remaining $2.1 million was paid in
the form of capital contributions to Nextel Peru during July 1998. Nextel
Peru, through its subsidiaries, currently offers analog SMR services in the
greater Lima area, and holds licenses covering 138 SMR channels.
INDONESIA: On August 15, 1997, Nextel International entered into a preliminary
agreement with PT Gunung Sewu Kencana ("GSK"), a large diversified Indonesian
company, which gives Nextel International the right, upon receipt of required
regulatory approval, to purchase a 37.5% interest in PT
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<PAGE> 17
Mitra Kencana Telekomunindo ("MKT"), an Indonesian corporation owned by GSK.
MKT holds a provisional license for 80 SMR channels in Indonesia that can
be converted into an operating license upon satisfaction of certain
regulatory approvals by December 31, 1998. Although Nextel International
believes that MKT presents it with significant opportunities to expand its
SMR network in Asia, Nextel International does not intend to make any
substantial investment in MKT until the economic and political conditions
in Indonesia, in particular, and the economic conditions in Asia generally,
have stabilized.
PHILIPPINES RESTRUCTURING: In February 1998, Nextel International reached an
agreement in principle with the three groups of local shareholders of Infocom
Communications Network, Inc. ("Nextel Philippines"), including the Gotesco
group (the "Gotesco Group" and together with the other local shareholders, the
"Philippines Shareholders"), and consummated such agreement in April 1998 (the
"Philippines Partner Agreements"). On June 26, 1998, Nextel International and
the Gotesco Group entered into an Agreement to Accelerate Put Rights (the
"Gotesco Put Acceleration Agreement") pursuant to which the exercise date of
the Gotesco Group's right to put its 20% interest to Nextel International for
approximately $9.4 million was accelerated from January 1999 to August 21,
1998. Nextel International also agreed to other terms, amendments and
conditions relating to the Philippines Partner Agreements and affecting the
rights of the Philippines Shareholders. Additional information regarding
Nextel Philippines is more fully discussed in Nextel International's Form 10-Q
for the period ended June 30, 1998.
NEXTEL INTERNATIONAL NOTES ISSUANCE: On March 12, 1998, Nextel International
completed a private placement of its 1998 NI Notes yielding approximately
$387.0 million in 1998 NI Notes Proceeds. Cash interest will not accrue on the
1998 NI Notes prior to April 15, 2003, and will be payable on April 15 and
October 15 commencing October 15, 2003 at a rate of 12.125%. The 1998 NI Notes
become redeemable at Nextel International's option at any time, in whole or in
part, on or after April 15, 2003. The 1998 NI Notes are senior unsecured
indebtedness of Nextel International and rank pari passu in right of payment
with all other unsubordinated, unsecured indebtedness of Nextel International.
On August 4, 1998, Nextel International commenced a registered exchange offer
for the 1998 NI Notes. Such exchange offer is scheduled to be completed in
September 1998.
RESULTS OF OPERATIONS
The following discussion compares the consolidated results of operations for
the six- and three-month periods ended June 30, 1998 to the six- and
three-month periods ended June 30, 1997. The operating results of these six-
and three-month periods are not necessarily indicative of operating results in
future periods. The following comparative information should be read in
conjunction with the Condensed Consolidated Financial Statements and
accompanying Notes, as well as the information presented elsewhere herein and
in the financial statements and related notes for the year ended December 31,
1997, included in the Company's 1997 Form 10-K. The results of operations
attributable to Nextel International for the six- and three-month periods ended
June 30, 1997 were not significant to the Company's consolidated results of
operations.
17
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<TABLE>
<CAPTION>
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 1998 VS. 1997 JUNE 30, 1998 VS. 1997
--------------------------------- -------------------------------
INCREASE PERCENT INCREASE PERCENT
(DECREASE) CHANGE (DECREASE) CHANGE
-------------- --------------- --------------- -------
(in millions) (in millions)
<S> <C> <C> <C> <C>
Operating revenues $ 491.9 191.7% $ 275.5 188.8%
Cost of revenues 102.5 83.6% 58.3 90.3%
Selling, general and
administrative expenses 386.4 122.9% 189.0 103.9%
Depreciation and
amortization expense 153.9 68.5% 79.6 69.5%
Interest expense 124.7 72.3% 54.6 56.1%
Interest income 9.5 77.0% (1.0) (11.0%)
Other income (expense), net 6.1 193.6% 7.1 168.6%
</TABLE>
Operating revenues for the six- and three-month periods ended June 30, 1998
increased principally as a result of a 227% increase in end-of-period digital
subscriber units in service from approximately 624,400 at June 30, 1997, to
approximately 2,042,100 at June 30, 1998. The increase in operating revenues
primarily reflects an increase in minutes of use as a result of increased sales
in domestic markets in which Digital Mobile network services are provided as
well as the commencement of Digital Mobile network service in a significant
number of domestic markets during 1997. Minutes of use increased from
approximately 915.8 million to approximately 3.7 billion for the six-month
periods and from approximately 575.9 million to approximately 2.2 billion for
the three-month periods ended June 30, 1997 and 1998, respectively. Operating
revenues include service revenues, which consist primarily of charges for
airtime usage and monthly network access fees, as well as revenue from sales of
analog equipment and accessories. Key factors contributing to the Company's
customer growth include increased sales force and marketing staff, increased
distribution channels, expanded network capacity, declining equipment prices,
increased consumer awareness and acceptance of wireless communications and
pricing plans targeted at particular market segments. Additionally, average
monthly revenue per digital unit increased from approximately $61 to
approximately $67 for the six-month periods and from approximately $63 to
approximately $69 for the three-month periods ended June 30, 1997 and 1998,
respectively. As price competition in the wireless industry intensifies, the
average revenue per subscriber unit is expected to decrease.
The average churn rate for the Digital Mobile network operation has increased
from approximately 1% per month for the six- and three-month periods ended June
30, 1997, to approximately 1.6% per month for the six- and three-month periods
ended June 30, 1998. Contributing to this increase was an increase in the
number of involuntary disconnects initiated by the Company for older non-paying
customer accounts.
Cost of revenues for the six- and three-month periods ended June 30, 1998,
increased from the comparable periods in 1997 primarily as a result of an
increase in operational cell sites and related equipment activated by the
Company during 1997 and 1998 as well as increases in airtime usage and digital
subscriber units in service. Cost of revenues consists primarily of network
operating costs and interconnection fees assessed by local exchange carriers.
Cost of revenues, as a percentage of revenues, decreased from 48% for the six
months ended June 30, 1997 to 30% for the six months ended June 30, 1998, and
from 44% for the three months ended June 30, 1997 to 29% for the three months
ended June 30, 1998. This improvement primarily resulted from economies of
scale achieved by the Company due to the increase in digital subscriber units
placed in service during 1998 and the second half of 1997.
The increase in selling, general and administrative expenses for the
six-month period ended June 30, 1998 consisted of an increase in selling and
marketing expenses of $255.4 million and an increase in
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<PAGE> 19
general and administrative expenses of $131.0 million from the comparable period
in 1997. The increase in selling, general and administrative expenses for the
three-month period ended June 30, 1998 consisted of an increase in selling and
marketing expenses of $125.9 million and an increase in general and
Administrative expenses of $63.1 million from the comparable period in 1997.
Selling and marketing expenses for the six months ended June 30, 1998
increased by 139% to $439.2 million, as compared to $183.8 million for the six
months ended June 30, 1997. Selling and marketing expenses for the three months
ended June 30, 1998 increased by 114% to $235.8 million, as compared to $109.9
million for the three months ended June 30, 1997. These increases in selling and
marketing expenses consisted primarily of increased costs incurred in connection
with higher sales of digital subscriber units, including an increase in the loss
generated from the sale of digital subscriber units and related accessories of
$80.4 million and $40.2 million, respectively, for the six- and three-month
periods ended June 30, 1998 and an increase in commissions and residuals to
indirect distributors of $68.9 million and $33.7 million, respectively, for the
six- and three-month periods ended June 30, 1998. Also contributing to the
increase in selling and marketing expenses were higher advertising and promotion
expenses related to the aggressive national and regional marketing campaigns,
which began in March 1997 and continued into 1998. The remaining increase in
selling and marketing expenses is attributable to increased salaries,
commissions and related personnel costs associated with increased sales and
marketing staffing. Selling and marketing expenses are expected to increase as
the Company continues to expand its presence in existing markets and expands the
geographic coverage of its Digital Mobile network.
The Company offers digital subscriber units and related accessories at
competitive prices, which are below cost, as an incentive for new customers to
subscribe to its services and for certain existing customers to remain
subscribers. The Company includes the loss generated from the sale of digital
subscriber units and related accessories in selling and marketing expenses, as
the loss primarily represents marketing costs for the Digital Mobile network.
The loss on digital subscriber unit and related accessory sales for the six
months ended June 30, 1998, increased 169% to $128.1 million, as compared to
$47.6 million for the six months ended June 30, 1997. The loss on digital
subscriber unit and related accessory sales for the three months ended June 30,
1998, increased 140% to $69.0 million, as compared to $28.8 million for the
three months ended June 30, 1997. These increases primarily reflect the
continued effect of customer subsidies and discounts on increased sales of
digital subscriber units and related accessories and also includes write downs
to estimated net realizable value of subscriber unit inventory and related
accessories. Competitive market pressures are expected to result in a continued
trend of negative gross margins on digital subscriber unit and related accessory
sales as the Company anticipates that it will continue to offer customers
subsidies and/or discounts in connection with the sale and installation of
digital subscriber units and related accessories.
General and administrative expenses for the six months ended June 30, 1998,
increased 100% to $261.5 million, as compared to $130.5 million for the six
months ended June 30, 1997, and decreased as a percentage of operating revenues
from 51% for 1997 to 35% for 1998. General and administrative expenses for the
three months ended June 30, 1997, increased 88% to $135.2 million, as compared
to $72.0 million for the three months ended June 30, 1997, and decreased as a
percentage of operating revenues from 49% for 1997 to 32% for 1998. The increase
in general and administrative expenses is primarily related to increased
corporate salaries and related personnel costs of $31.4 million and $14.0
million, including increased staffing for back-office, customer care and
collection activities, for the six- and three-month periods ended June 30, 1998,
increased bad debt expense of $26.9 million and $6.2 million for the six- and
three-month periods ended June 30, 1998, and increased general and
administrative expenses of $21.8 million and $10.8 million for the six- and
three-month periods ended June 30, 1998, to support the growth of international
operations. To a lesser extent the increase is attributable to general corporate
expenses to support the additional staffing required as a result of the
accelerated growth in the Company's implementation and operation of the Digital
Mobile network.
19
<PAGE> 20
The Company recognized an aggregate of $33.0 million and $10.8 million in bad
debt expense for the six- and three-month periods ended June 30, 1998. Bad debt
expense as a percentage of total revenues, including digital equipment revenues
classified within selling and marketing expense, increased to 3.5% for the six
months ended June 30, 1998, from 1.7% for the six months ended June 30, 1997,
and decreased slightly to 2.1% for the three months ended June 30, 1998, from
2.3% for the three months ended June 30, 1997. The Company initiated a
comprehensive and aggressive program for the collection of past due receivables
in the second half of 1997, including involuntarily disconnecting certain
non-paying customer accounts. As a result of such initiatives, bad debt expense
for the quarter ended June 30, 1998 has decreased by approximately $11.3 million
as compared to the first quarter of 1998.
The increase in depreciation and amortization expense for the six months ended
June 30, 1998 from the comparable period in 1997, was attributable to an $182.6
million increase in depreciation expense offset by a $28.6 million decrease in
amortization expense. The increase in depreciation and amortization expense for
the three months ended June 30, 1998 from the comparable period in 1997, was
attributable to an $95.6 million increase in depreciation expense offset by a
$16.0 million decrease in amortization expense.
Depreciation expense for the six months ended June 30, 1998, increased 191% to
$278.0 million, as compared to $95.4 million for the six months ended June 30,
1997. Depreciation expense for the three months ended June 30, 1998, increased
199% to $143.5 million, as compared to $47.9 million for the three months ended
June 30, 1997. These increases reflect the effect of activating
additional operational cell sites and switches, the expansion of the existing
Digital Mobile network and the effect of certain business acquisitions during
the second half of 1997 and the first half of 1998. System assets relating to
the development and expansion of the Digital Mobile network represent the
largest portion of capital expenditures during the period. Depreciation of such
assets begins upon commencement of commercial service.
Effective October 1, 1997, the Company changed the estimated useful lives of
certain intangible assets, including FCC licenses and the excess of purchase
price over fair value of net assets acquired related to domestic acquisitions,
from 20 to 40 years to better reflect the period over which the economic
benefits of such assets will be realized. Accordingly, amortization expense for
the six months ended June 30, 1998 decreased 22% to $100.7 million, as compared
to $129.3 million for the six months ended June 30, 1997. Amortization expense
for the three months ended June 30, 1998 decreased 24% to $50.6 million, as
compared to $66.6 million for the three months ended June 30, 1997.
The increase in interest expense for the six- and three-month periods ended
June 30, 1998 from the comparable periods in 1997, resulted from the Company's
issuance of discount notes during 1997, the February Notes and the 1998 NI
Notes. The increase was partially offset by a decrease in the weighted average
interest rate on the total outstanding debt which was a result of the
refinancing of the vendor credit facility and the retirement of a portion of
Targeted Notes during the fourth quarter of 1997 and the second quarter of 1998.
In April 1998, a portion of the net proceeds from the February Notes were
applied to retire approximately 94% of the principal amount of Targeted Notes
then outstanding. See "-- Recent Domestic Transactions and Developments."
The increase in interest income for the six months ended June 30, 1998 from
the comparable period in 1997, is primarily attributable to income recognized on
the investment of the net proceeds received from the Company's sale of the
Series E Preferred Stock and the February Notes.
The effective tax benefit rate for the six months ended June 30, 1998, of
10.0% decreased from 15.1% for the six months ended June 30, 1997. The effective
tax benefit rate for the three months ended June 30, 1998 of 12.1% decreased
from 15.1% for the three months ended June 30, 1997. These income tax benefits
were derived from the recognition of net operating losses that can be utilized
against existing deferred tax liabilities. In certain circumstances, Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes," limits
the recognition of income tax benefits for net operating losses to the amount of
deferred tax liabilities that are expected to reverse within the statutory carry
forward period.
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<PAGE> 21
This limitation resulted in a reduction in the Company's effective tax rate for
1998 as compared to 1997. The decrease is not expected to have an impact on the
Company's ability to utilize its net operating losses for income tax purposes.
During April 1998, the Company purchased $294.2 million in book value of its
2003 Notes and $332.7 million in book value of its 12.25% 2004 Notes at a cost
in excess of related carrying amounts. Accordingly, the Company recorded an
extraordinary loss of $133.2 million related to the early retirement of debt.
The extraordinary loss represented the difference between the purchase price of
$740.8 million and the book value of such purchased Targeted Notes on the date
of purchase plus the write-off of the associated unamortized deferred financing
costs related to such purchased Targeted Notes of approximately $19.3 million.
LIQUIDITY AND CAPITAL RESOURCES
Nextel had net losses attributable to common stockholders of $946.3 million
and $482.5 million for the six months ended June 30, 1998 and 1997,
respectively. The operating expenses associated with developing, enhancing and
operating the Digital Mobile network have more than offset operating revenues,
and are expected to continue to offset such operating revenues for the next
several years. Nextel has consistently used external sources of funds, primarily
from equity issuances and debt incurrences, to fund operations, capital
expenditures, acquisitions and other non-operating needs. For the next several
years, Nextel intends to use its existing cash and investments and externally
generated funds from debt and equity sources (as discussed below) to cover the
majority of its future needs, including the design, implementation and operation
of its Digital Mobile network.
Since December 31, 1997, working capital has increased by $86.8 million to
$157.5 million at June 30, 1998. The increase in working capital is primarily
related to the increase in cash and cash equivalents resulting from the net cash
proceeds of $2,090.8 million generated by the private placement of the Series E
Preferred Stock, the February Notes and the 1998 NI Notes remaining after the
utilization of a portion of the February Notes Proceeds to fund the repurchase
of the Targeted Notes and for operating and investing activities. The Company's
construction and operation of its domestic Digital Mobile network have been and
will continue to be principally financed by incurring long-term debt. Proceeds
of the 1998 NI Notes are primarily used to finance international operations,
capital expenditures and acquisitions and are not available to fund any of the
cash needs of the Company's domestic Digital Mobile and analog SMR businesses
due to restrictions contained in the NI Indentures.
CASH FLOWS
Capital expenditures to fund the continued expansion of the Digital Mobile
network continue to represent the largest use of Company funds for investing
activities. Net cash used in investing activities for the six months ended June
30, 1998 increased $672.1 million, as compared to the six months ended June 30,
1997, and is primarily attributable to the $593.5 million increase in capital
expenditures. Cash payments for capital expenditures totaled $1,154.1 million
and $560.6 million for the six months ended June 30, 1998 and 1997,
respectively. Of these amounts, $217.8 million and $15.5 million represent
capital expenditures for international operations for the six months ended June
30, 1998 and 1997, respectively. Capital spending has increased as a result of
the continued build-out of the Digital Mobile network to enhance or expand
coverage and increase network capacity. See "-- Future Capital Needs and
Resources." Also contributing to the increase in cash used in investing
activities was a $188.7 million increase in payments for acquisitions and
purchases of licenses, consisting primarily of $44.5 million of additional cash
investments in international subsidiaries and $67.2 million in payments required
in connection with the recently concluded FCC auction for LMDS licenses. The
increases in cash used in investing activities were offset by $126.8 million in
net proceeds from purchases and maturities of marketable securities.
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<PAGE> 22
Cash flows provided by financing activities for the six months ended June 30,
1998 increased by $450.3 million as compared to the six months ended June 30,
1997, primarily reflecting higher net proceeds in the first quarter of 1998 from
the issuance of long-term debt and mandatorily redeemable preferred stock. Net
cash provided by financing activities for the six months ended June 30, 1998
consisted primarily of gross proceeds from the Series E Preferred Stock of
$750.0 million, the February Notes of $1,000.1 million and the 1998 NI Notes of
$400.9 million, along with $1,592.0 million in borrowings under the Company's
bank credit facility, offset in part by repurchases of the Targeted Notes of
$740.8 million, deferred financing cost payments of $103.4 million and $972.0
million used to repay the outstanding borrowings under the bank and vendor
credit facilities in effect prior to March 1998.
FUTURE CAPITAL NEEDS AND RESOURCES
Nextel anticipates that, for the foreseeable future, it will be utilizing
significant amounts of its available cash for capital expenditures for the
construction and enhancement of the Digital Mobile network, operating expenses
relating both to the Digital Mobile network and to its analog SMR business,
potential acquisitions (including any future auctions of spectrum by the FCC),
debt service requirements and other general corporate expenditures. Nextel
anticipates that its cash utilization for capital expenditures and other
investing activities will continue to exceed its positive cash flows from
operating activities over the next several years.
In connection with the Company's implementation of its 1998 Plan, Nextel has
previously estimated that the external funding required to meet the cash needs
of its domestic business activities during 1998, including principally the
funding required for the purchase or redemption of the Targeted Notes, the
funding of anticipated capital expenditures and acquisitions (including
approximately $70.0 million for acquisitions of licenses in the FCC's 800 MHz
spectrum auction concluded in December 1997 and paid to the FCC in July 1998,
but excluding $67.2 million paid to the FCC in 1998 to acquire LMDS licenses)
and operating losses, will be approximately $2,970.0 million, which includes
approximately $1,335.0 million of system infrastructure and other system capital
costs relating to Nextel's Digital Mobile network expected to be incurred during
1998. Such estimates were based in part on the Company's experience and the
Company's results of operations and financial results during 1997 and on a
number of significant assumptions, including assumptions regarding continued
subscriber growth and increased demand for the Company's wireless services and
enhancements to existing Digital Mobile system infrastructure to expand and
improve systems coverage and performance to address competitive pressures faced
or anticipated by the Company in its domestic markets.
During the six months ended June 30, 1998, capital expenditures relating to
the Company's domestic operations (excluding capitalized interest) were
approximately $920.2 million. The level of domestic capital expenditures during
such period was consistent with the 1998 Plan. The level of investment in system
infrastructure and capital expenditures that will be incurred by the Company for
the remainder of 1998 are subject to certain risks and uncertainties identified
or referred to in the Company's 1997 Form 10-K. See "-- Forward Looking
Statements."
In particular, as the Company has recently disclosed, the Digital Mobile
network system usage increased by approximately 46%, to more than 2.2 billion
minutes of use, during the second quarter as compared to the first quarter of
1998. System usage during 1998 has been and remains well above system
utilization levels assumed and reflected in the 1998 Plan. The Company believes
that such increased levels of system utilization are likely to continue for the
remainder of the year, therefore the Company intends to accelerate the
deployment of certain switching and related system infrastructure equipment. The
Company has estimated that such accelerated deployment of equipment could
increase system capital expenditures incurred in 1998 by approximately $100
million. See " -- Forward Looking Statements."
The Company also intends to implement certain measures in the latter part of
1998 that it believes will improve the performance and reliability of the
Digital Mobile network. Such measures involve planning and building for likely
growth in system usage and coverage at least a quarter in advance and converting
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<PAGE> 23
selected existing sites throughout the Digital Mobile network sooner to a system
design more directed to handling existing and anticipated increased system
usage. The Company believes that such activities will lead to significantly
enhanced system performance and stability, will make the system design and
planning process more accurate and cost-effective and will make customers'
experiences on the Digital Mobile network more predictable and satisfying. The
Company expects that the aggregate capital expenditures associated with
implementing such measures in the final six months of 1998 would total
approximately $100 million, the bulk of which would involve expenditures made to
structure the Digital Mobile network for anticipated early 1999 system usage and
coverage requirements. See " -- Overview" and " -- Forward Looking Statements."
During 1998, the Company has continued to make capital expenditures to
construct transmission towers and to expand the Digital Mobile network to new
market areas. The Company currently is pursuing two transactions, either or
both of which could be consummated in 1998, and (if consummated) are expected to
have an impact on the level of the Company's capital expenditures and funding
requirements that are related to such activities. First, the Company is
currently discussing with interested parties the terms on which it would sell
its portfolio of transmission tower assets, which includes towers and related
assets constructed during 1998. Second, the Company anticipates finalizing an
agreement on terms pursuant to which a newly formed affiliated entity would
build out and operate digital mobile systems, compatible with the Digital Mobile
network, in domestic markets outside or adjacent to the Company's currently
operating market areas. Upon consummation of that transaction, the Company would
transfer to such new entity various assets, including completed or in-process
portions of the Digital Mobile network constructed by the Company in such new
entity's market areas, and the Company would be reimbursed for the related
capital expenses incurred since 1997. Final definitive agreements covering the
potential transactions described in this paragraph have not yet been entered
into, and there can be no assurance that such agreements will be entered into or
that either or both of such potential transactions will be consummated before
the end of 1998, or at all. See " -- Forward Looking Statements."
Additionally, the 1998 Plan does not include any portion of the $67.2 million
actually paid by the Company in 1998 to acquire LMDS licenses, nor any
additional amounts that may be required to pursue LMDS or other business
opportunities or other potential transactions or investments that are not part
of Nextel's domestic digital and analog SMR wireless communications businesses
and assets and related corporate support services, personnel and overhead. See
"Recent Domestic Transactions and Developments -- LMDS Auction."
The telecommunications industry is rapidly evolving and there can be no
assurance that the Company will not experience levels of demand for its services
or competitive pressures that differ from those experienced in 1997 and the
first half of 1998 and those assumed in developing the Company's 1998 Plan,
which could cause an increase in the Company's need for additional financing.
See "--Forward Looking Statements."
The Company's available financing under the bank credit agreement currently
provides for up to $3.0 billion in secured financing, subject to the
satisfaction or waiver of applicable borrowing conditions. At June 30, 1998, the
Company had drawn an aggregate of approximately $1.6 billion of its available
financing under its bank credit facility leaving a total of approximately $1.4
billion available for borrowing under such facility, subject to the satisfaction
or waiver of applicable borrowing conditions. Nextel contemplates accessing the
bank credit facility to finance investments and acquisitions, to fund capital
expenditures and for working capital and general corporate purposes. Borrowings
under the bank credit facility are secured by liens on assets of Nextel's
subsidiaries that are "restricted" subsidiaries under the terms of Nextel's
public indentures (the "Nextel Indentures") relating to the Company's various
outstanding issues of senior discount notes (the "Nextel Notes") and bear
interest payable quarterly at an adjustable rate calculated based either on the
prime rate or LIBOR. The Nextel Indentures contain
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<PAGE> 24
provisions that operate to limit the amount of borrowings available under the
bank credit facility in certain circumstances.
The availability of such financing is subject to Nextel's satisfying certain
requirements under the Nextel Indentures which require Nextel to issue new
equity for cash as a condition to obtaining access to all amounts not
constituting "permitted debt" (as such term is defined in the indentures in
effect prior to June 1997). Based on (i) the amount of equity issuances
including the issuances of Series D Preferred Stock and Series E Preferred Stock
completed since June 1, 1997, and (ii) the Company's outstanding debt at June
30, 1998, the Company may access the entire $3.0 billion available under the
bank credit facility in compliance with the debt incurrence requirements
contained in the Nextel Indentures. See the discussion under the caption "Risk
Factors--Nextel to Require Additional Financing" in the Company's 1997 Form 10-K
and "--Forward Looking Statements."
Assuming that it has access to all of the available funds under the bank
credit facility, the Company believes that such amounts, coupled with the
Company's available cash and cash equivalents, including the proceeds from the
financing transactions completed in 1998 remaining after completing the tender
offer for the Targeted Notes, will provide funds that in the aggregate are
expected to be sufficient to implement the Company's 1998 Plan and meet the
other currently anticipated cash needs of the domestic business activities
contemplated by the 1998 Plan through the end of 1998, after taking into account
the aggregate payment of $67.2 million made by the Company in 1998 in connection
with the recent acquisition of LMDS spectrum by NextBand. Thereafter, Nextel may
require substantial additional financing to fund further deployment, expansion
and enhancement of its Digital Mobile network, to fund operating losses, for
other general corporate purposes, including the pursuit of LMDS or other new
business opportunities or other potential transactions or investments that are
not a part of the 1998 Plan. To the extent the Company's existing financing
sources are insufficient to meet such needs, the Company may seek to raise
additional capital from public or private equity or debt sources. See "--
Forward Looking Statements."
The availability of borrowings pursuant to the bank credit facility is subject
to certain conditions, and there can be no assurance that such conditions will
be met. The bank credit facility, the Nextel Indentures, and the terms of the
certificate of designations for each of the Series D Preferred Stock and the
Series E Preferred Stock contain and will continue to contain provisions that
operate to limit the amount of borrowings that may be incurred by Nextel. The
bank credit agreement also requires Nextel and its restricted subsidiaries at
specified times to maintain compliance with certain operating and financial
covenants or ratios including certain covenants and ratios specifically related
to leverage which may become more stringent over time. In addition, Nextel's
capital needs, and its ability to adequately address those needs through debt or
equity funding sources, are subject to a variety of factors that cannot
presently be predicted with certainty, such as the commercial success of
Nextel's Digital Mobile network, the amount and timing of Nextel's capital
expenditures and operating losses, the market price of its Common Stock and
consummation of certain currently contemplated transactions. See "-- Forward
Looking Statements."
As described in the Nextel International 1997 Form 10-K, Nextel International
currently estimates its funding requirements for fiscal year 1998 to be
approximately $810.0 million. These amounts consist primarily of the costs of
building Nextel International's ESMR networks, including the purchase of
switches and other equipment, the acquisition of cell sites, the costs of
constructing the networks and loading subscribers and the acquisition of
licenses and investments and funding of operating losses. Nextel International
has estimated that approximately $227.0 million of such requirements in fiscal
year 1998 will be related to expenditures in Brazil, $161.0 million in
Argentina, $152.0 million in Mexico, $29.0 million in Peru and $74.0 million in
the Philippines. See Nextel International 1997 Form 10-K, Part I, Item 1,
"Business -- 1998 Plan." As of June 30, 1998, Nextel International's total cash
expenditures for its business activities for fiscal year 1998, including system
and related capital expenditures, were $460.0 million. Such expenditures were
consistent with the levels estimated for fiscal year 1998. Nextel
International's cash expenditures, funding requirements and access to funding
sources, as well as its
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<PAGE> 25
business, financial condition and future prospects, are subject to a number of
risks and contingencies. For a detailed description of the risks and
contingencies that Nextel International regards as significant, see the Nextel
International 1997 Form 10-K and Nextel International's Quarterly Reports on
Form 10-Q for the quarters ended March 31, 1998, and June 30, 1998.
FORWARD LOOKING STATEMENTS
"SAFE HARBOR" STATEMENTS UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. A number of the matters and subject areas discussed in the foregoing
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" (including the related discussions referred to above that are
included in Nextel's 1997 Form 10-K) that are not historical or current facts
deal with potential future circumstances and developments. The discussion of
such matters and subject areas is qualified by the inherent risks and
uncertainties surrounding future expectations generally, and also may materially
differ from Nextel's actual future experience involving any one or more of such
matters and subject areas. Nextel has attempted to identify, in context, certain
of the factors that it currently believes may cause actual future experiences
and results to differ from Nextel's current expectations regarding the relevant
matter or subject area. Certain of such risks are also discussed in "Risk
Factors" section of Nextel's 1997 Form 10-K. The operation and results of
Nextel's wireless communications business also may be subject to the effect of
other risks and uncertainties in addition to the relevant qualifying factors
identified or referred to elsewhere in the foregoing "Management's Discussion
and Analysis of Financial Condition and Results of Operations" section,
including, but not limited to, general economic conditions in the geographic
areas and occupational market segments that Nextel is targeting for its Digital
Mobile system service; the availability of adequate quantities of system
infrastructure and subscriber equipment and components to meet Nextel's service
deployment and marketing plans and customer demand; the success of efforts to
improve and satisfactorily address issues relating to Digital Mobile network
performance; the continued successful performance of the iDEN technology being
deployed in Nextel's various market areas; the ability to achieve market
penetration and average subscriber revenue levels sufficient to provide
financial viability to the Digital Mobile network business; the consummation of
currently contemplated transactions involving dispositions of capital assets and
corresponding reductions in current year and ongoing capital expenditures;
Nextel's ability to timely and successfully accomplish required scale-up of its
billing, collection, customer care and similar back-room operations to keep pace
with customer growth and increased system usage rates; access to sufficient debt
or equity capital to meet Nextel's operating and financial needs; the impact of
introduction of new products and services on utilization rates, revenues, and
expenditures relating to the Digital Mobile network; the quality and price of
similar or comparable wireless communications services offered or to be offered
by Nextel's competitors, including providers of cellular and PCS service; future
legislative or regulatory actions relating to SMR services, other wireless
communications services or telecommunications generally and other risks and
uncertainties described from time to time in Nextel's reports filed with the
Commission, including the Company's 1997 Form 10-K and, with specific reference
to risk factors relating to international operations, in Nextel International's
reports filed with the Commission, including the Nextel International 1997 Form
10-K and Form 10-Q for the quarters ended March 31, 1998, and June 30, 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Nextel uses mandatorily redeemable preferred stock, senior discount notes, and
bank and vendor credit facilities to finance its operations. These on-balance
sheet financial instruments, to the extent they provide for variable rates of
interest, expose the Company to interest rate risk, with the primary interest
rate risk exposure resulting from changes in LIBOR or the prime rate which are
used to determine the interest rates that are applicable to borrowings under the
Company's bank and vendor credit facilities. Nextel uses off-balance sheet
derivative financial instruments, including interest rate swap, interest rate
collar and interest rate protection agreements to partially hedge interest rate
exposure associated with both on-balance sheet financial instruments and
anticipated debt transactions. All of the Company's financial instrument
transactions are entered into for non-trading purposes. The terms and
characteristics of the
25
<PAGE> 26
derivative financial instruments are matched with the related underlying
on-balance sheet financial instrument or anticipated transaction and do not
constitute speculative or leveraged positions independent of these exposures.
Nextel International's revenues are denominated in foreign currencies, while a
significant portion of its operations are financed through senior discount notes
and bank and vendor credit facilities, which are denominated in U.S. dollars.
Accordingly, fluctuations in exchange rates relative to the U.S. dollar,
primarily those related to the Brazilian Real, expose the Company to foreign
currency exchange rate risk. In the near term, the Company's foreign currency
exchange rate exposure associated with the repayment of Nextel International's
debt obligations is limited as the terms of the senior discount notes and bank
and vendor credit facilities do not require principal payments until after 1999.
Accordingly, as of June 30, 1998, the Company has not established any hedge or
risk reduction strategies related to its foreign currency exchange rate
exposure.
The information below summarizes Nextel's sensitivity to market risks
associated with fluctuations in interest rates and foreign currency exchange
rates as of June 30, 1998 in U.S. dollars. To the extent that the Company's
financial instruments expose the Company to interest rate and foreign currency
exchange risk, they are presented within each market risk category in the table
below. The table presents principal cash flows and related interest rates by
year of maturity for the Company's mandatorily redeemable preferred stock,
senior discount notes, and bank and vendor credit facilities in effect as of
June 30, 1998 and, in the case of the mandatorily redeemable preferred stock and
senior discount notes, exclude the potential exercise of the relevant redemption
features. The cash flows related to the variable portion of interest rate swaps
are determined by dealers using valuation models that estimate the future level
of interest rates, with consideration of the applicable yield curve as of June
30, 1998. For interest rate swaps, interest rate collars and the interest rate
protection agreement, the table presents notional amounts and the related
reference interest rates by year of maturity. Fair values included herein have
been determined based on: (i) quoted market prices for mandatorily redeemable
preferred stock and senior discount notes; (ii) the carrying value for the bank
and vendor credit facilities at June 30, 1998, as interest rates are reset
periodically; and (iii) estimates obtained from dealers to settle interest rate
swap, interest rate collar and interest rate protection agreements.
Descriptions of the Company's mandatorily redeemable preferred stock, senior
discount notes, bank and vendor credit facilities, and interest rate risk
management agreements are contained in Notes 6, 7 and 10 to the consolidated
financial statements contained in the Company's 1997 Form 10-K and should be
read in conjunction with the table below.
In June 1998, the FASB issued 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 133 is effective for fiscal years beginning after June 15,
1999. The Company has not evaluated the effects of this change on its financial
position or results of operations.
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<PAGE> 27
Year of Maturity (US $ in thousands)
<TABLE>
<CAPTION>
Total
There- Due at Fair
1998 1999 2000 2001 2002 After Maturity Value
----------- ----------- ----------- ----------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
I. Interest Rate Sensitivity
Redeemable Preferred Stock and Long-Term Debt:
Fixed Rate -- -- -- -- -- $ 8,294,444 $ 8,294,444 $6,512,489
Average Interest Rate -- -- -- -- -- 10.8% 10.8%
Variable Rate -- -- $ 20,506 $ 27,606 $ 41,809 $ 1,615,109 $ 1,705,031 $1,705,031
Average Interest Rate -- -- 10.8% 10.3% 10.2% 8.3% 8.4%
Interest Rate Swaps:
Variable to Fixed -- $ 100,000 -- $ 200,000 -- -- $ 300,000 $ (218)
Average Pay Rate -- 5.4% -- 5.5% -- -- 5.4%
Average Receive Rate -- 5.7% -- 5.7% -- -- 5.7%
Variable to Variable -- -- $ 50,000 $ 100,000 -- $ 400,000 $ 550,000 $ (6,036)
Average Pay Rate -- -- 5.7% 5.9% -- 5.2% 5.4%
Average Receive Rate -- -- 5.8% 5.7% -- 5.7% 5.7%
Interest Rate Collars:
Collars -- -- -- -- -- $ 200,000 $ 200,000 $ (737)
Average Cap Rate -- -- -- -- -- 6.7% 6.7%
Average Floor Rate -- -- -- -- -- 4.5% 4.5%
Anticipated Transaction Interest Rate Protection Agreement:
Treasury Lock $ 570,000 -- -- -- -- -- $ 570,000 $ (20,950)
Average Pay Rate 6.0% -- -- -- -- -- 6.0%
II. Foreign Exchange Rate Sensitivity
Note Receivable:
Fixed Rate - Yen -- -- -- -- -- $ 31,490 $ 31,490 $ 29,630
Average Interest Rate -- -- -- -- -- 3.8% 3.8%
Long-Term Debt:
Fixed Rate -- -- -- -- -- $ 1,681,463 $ 1,681,463 $1,078,802
Average Interest Rate -- -- -- -- -- 12.6% 12.6%
Variable Rate -- -- $ 20,506 $ 22,606 $ 31,809 $ 38,109 $ 113,031 $ 113,031
Average Interest Rate -- -- 10.8% 10.7% 10.8% 10.6% 10.7%
</TABLE>
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<PAGE> 28
PART II
ITEM 1. LEGAL PROCEEDINGS.
The Company is involved in certain legal proceedings that are described in the
Company's 1997 Form 10-K. During the six months ended June 30, 1998, there were
no material changes in the status of or developments regarding those legal
proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 14, 1998, the Company held its 1998 Annual Meeting of Stockholders in
Vienna, Virginia. Only holders of record of Common Stock and of Class A
Convertible Redeemable Preferred Stock, par value $0.01 per share (the "Class A
Preferred Stock") on March 27, 1998 (the "Record Date"), were entitled to vote
at the Annual Meeting. Each holder of record of Common Stock at the close of
business on the Record Date was entitled to one vote per share on each matter
voted upon by the stockholders at the Annual Meeting. The holder of record of
the Class A Preferred Stock at the close of business on the Record Date was
entitled to one vote per share of Common Stock into which its shares of Class A
Preferred Stock were convertible on the Record Date. The holder of Class A
Preferred Stock, in its capacity as such, was entitled to vote together with the
holders of Common Stock on each matter voted upon at the Annual Meeting other
than the election of directors. As of the Record Date, there were 252,945,185
shares of Common Stock outstanding and 7,905,981 shares of Class A Preferred
Stock (convertible into 23,717,943 shares of Common Stock) outstanding.
The following matters were submitted for a vote by security holders:
Proposal 1 To elect a total of three directors of the Company, each to
hold office for a three-year term ending on the date of the
third succeeding Annual Meeting of Stockholders of the Company
and until their respective successors shall have been duly
elected and qualified.
Set forth below is information regarding the 204,597,242 shares of
Common Stock voted in the election of two directors (80.886% of the total number
of shares of Common Stock entitled to vote on such matter at the Annual Meeting)
and the 7,905,981 shares of Class A Preferred Stock (convertible into 23,717,943
shares of Common Stock) voted in the election of the Class A Preferred Director
(100% of the total number of Class A Preferred Stock entitled to vote for the
election of the Class A Preferred Director).
<TABLE>
<CAPTION>
NAME FOR WITHHELD BROKER NON-VOTE
- ---- --- -------- ---------------
<S> <C> <C>
Keith Bane 201,165,168 3,432,074 --
Masaaki Torimoto 191,347,737 13,249,505 --
Class A Preferred Director
Craig O. McCaw 23,717,943 0 --
</TABLE>
The following are the names of each of the Company's other directors whose term
of office continued after the meeting:
Directors Holding Office Until 1999: Daniel F. Akerson, Timothy M. Donahue,
Frank M. Drendel and Dennis M. Weibling.
Directors Holding Office Until 2000: William E. Conway, Jr., Keisuke Nakasaki
and Morgan E. O'Brien.
Proposal 2 To consider and vote upon a proposal to approve the
Company's Amended and Restated Incentive Equity Plan, as
amended and restated as of March 24, 1998, which incorporates
amendments to, among other things, increase from 24,000,000 to
28
<PAGE> 29
45,000,000 the number of shares of Common Stock that may be
issued or transferred thereunder.
Set forth below is information regarding the 228,315,185 aggregate common
stock equivalents representing shares of Common Stock and Class A Preferred
Stock voted to approve the Company's Amended and Restated Incentive Equity Plan.
Votes FOR 129,676,092
Votes AGAINST 53,731,471
Votes ABSTAINED 562,636
Broker NON-VOTE 44,344,986
Proposal 3 To ratify the appointment of Deloitte & Touche LLP as the
firm of independent auditors to audit the consolidated
financial statements of the Company and its subsidiaries for
1998.
Set forth below is information regarding the 228,315,185 aggregate common
stock equivalents representing shares of Common Stock and Class A Preferred
Stock voted to ratify the appointment of Deloitte & Touche LLP as independent
auditors.
Votes FOR 227,854,557
Votes AGAINST 228,842
Votes ABSTAINED 231,786
Broker NON-VOTE 0
ITEM 5. OTHER INFORMATION.
Effective June 29, 1998, the Commission adopted amendments to its rules on
Rule 14a-4 shareholder proposals. The following notice discloses the Company's
45-day deadline contemplated by amended Rule 14a-4 regarding matters to be
included in the Company's Annual Meeting:
Proposals by stockholders intended to be presented at the 1999 Annual Meeting
must be forwarded in writing and received at the principal executive office of
the Company no later than December 12, 1998, 120 days prior to the anniversary
of mailing the prior year's proxy materials, directed to the attention of the
Company's Secretary, for consideration for inclusion in the Company's proxy
statement for the Annual Meeting of Stockholders to be held in 1999. Moreover,
with regard to any proposal by a stockholder not seeking to have such proposal
included in the proxy statement but seeking to have such proposal considered at
the 1999 Annual Meeting, if such stockholder fails to notify the Company in the
manner set forth above of such proposal no later than February 25, 1999, 45 days
prior to the anniversary of mailing the prior year's proxy statement, then the
persons appointed as proxies may exercise their discretionary voting authority
with respect to such proposal if the proposal is considered at the 1999 Annual
Meeting notwithstanding that stockholders have not been advised of the proposal
in the proxy statement for the 1999 Annual Meeting. Any proposals submitted by
stockholders must comply in all respects with the rules and regulations of the
Commission and the provisions of the Company's Certificate of Incorporation and
Bylaws and of Delaware law.
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<PAGE> 30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) List of Exhibits.
EXHIBIT NUMBER EXHIBIT DESCRIPTION
10.1 Nextel Communications, Inc. Amended and
Restated Incentive Equity Plan (as amended and
restated on March 24, 1998) filed on May 22, 1998,
as Exhibit 4.3 to the Nextel Registration
Statement on Form S-8 No. 333-53429 and
incorporated herein by reference).
27** Financial Data Schedule.
----------------
** Submitted only with the electronic filing of this
document with the Commission pursuant to
Regulation S-T under the Securities Act.
(b) Reports on Form 8-K.
None
30
<PAGE> 31
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NEXTEL COMMUNICATIONS, INC.
By: /s/WILLIAM G. ARENDT
--------------------------------------
Date: August 13, 1998 William G. Arendt
Vice President and Controller
(Principal Accounting Officer)
31
<PAGE> 32
EXHIBIT INDEX
EXHIBIT NUMBER EXHIBIT DESCRIPTION
10.1 Nextel Communications, Inc. Amended
and Restated Incentive Equity Plan (as amended and
restated on March 24, 1998) filed on May 22, 1998,
as Exhibit 4.3 to the Nextel Registration
Statement on Form S-8 No. 333-53429 and
incorporated herein by reference).
27** Financial Data Schedule.
----------------
** Submitted only with the electronic filing
of this document with the Commission pursuant to
Regulation S-T under the Securities Act.
32
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
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