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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
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
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NEXTEL COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 36-3939651
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1505 FARM CREDIT DRIVE, MCLEAN, VA 22102
(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (703) 394-3000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: CLASS A COMMON
STOCK, $0.001 PAR VALUE
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated herein by reference in Part III of this Form 10-K or any amendment
to this Form 10-K. [ ]
Based on the closing sales price on March 17, 1999, the aggregate market
value of the voting and non-voting common stock held by nonaffiliates of the
registrant was $6,779,456,970.
On March 17, 1999, the number of shares outstanding of the registrant's
Class A Common Stock and Class B Non-Voting Common Stock, $0.001 par value, was
274,369,629 and 17,830,000, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the Annual Meeting of
Stockholders scheduled to be held on or about May 11, 1999 are incorporated in
Part III, Items 10, 11, 12 and 13.
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NEXTEL COMMUNICATIONS, INC.
PART I
ITEM 1. BUSINESS
A. INTRODUCTION
On July 28, 1995, NEXTEL Communications, Inc., a Delaware corporation
organized in 1987 ("Old Nextel"), merged with ESMR, Inc. ("ESMR"), until then a
wholly owned subsidiary of Motorola, Inc. ("Motorola"). ESMR was the surviving
corporation in the merger (the "Motorola Transaction") and succeeded to Old
Nextel's assets and liabilities. ESMR changed its name to Nextel Communications,
Inc. ("Nextel"), after completing the Motorola Transaction. References herein to
Nextel for periods prior to July 28, 1995 refer to Old Nextel as the predecessor
to the business and operations of Nextel. Unless the context requires otherwise,
references to Nextel are intended to include Nextel Communications, Inc. and its
consolidated subsidiaries.
Nextel's principal executive and administrative facility is currently
located at 1505 Farm Credit Drive, McLean, Virginia 22102, and its telephone
number is (703) 394-3000.
B. OVERVIEW
Nextel provides a wide array of digital and analog wireless communications
services throughout the United States. Nextel offers a differentiated,
integrated package of digital wireless communications services under the Nextel
brand name, primarily to business users. Nextel's digital network ("Digital
Mobile Network") constitutes one of the largest integrated wireless
communications systems utilizing a single transmission technology in the United
States. Nextel has significant specialized mobile radio spectrum holdings in and
around every major business and population center in the country, including all
of the top 50 metropolitan statistical areas in the United States.
As of December 31, 1998:
- Nextel provided service to about 2,789,900 digital subscriber units in
the United States;
- Nextel's Digital Mobile Network was operational in areas in and around 91
of the top 100 metropolitan statistical areas in the United States; and
- Nextel operated analog wireless networks that provide analog specialized
mobile radio ("SMR") services throughout the continental United States
and in Hawaii to about 354,000 analog SMR subscriber units.
Nextel's Digital Mobile Network has been developed and deployed utilizing
advanced mobile communication systems employing digital technology with a
multi-site configuration permitting frequency reuse. This digital technology,
developed by Motorola, is referred to as the integrated Digital Enhanced Network
or iDEN(R) technology.
The number of Nextel's digital subscriber units in service has increased
significantly in recent years, reflecting the commencement of Digital Mobile
Network service in new markets and increased sales in existing markets. The
following table summarizes the approximate number of Nextel's digital subscriber
units in service at the dates indicated:
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DECEMBER 31,
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1996 1997 1998
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Digital subscriber units.............................. 300,300 1,270,700 2,789,900
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A customer using Nextel's Digital Mobile Network is able to access:
- digital mobile telephone service;
- digital two-way radio dispatch, which provides instant conferencing
capabilities and is marketed as "Nextel Direct Connect(SM)" service;
- paging; and
- short-messaging service.
Nextel recently announced its plans and anticipated schedule to offer its
customers access to new digital two-way mobile data and Internet connectivity
services.
In addition to its domestic operations, Nextel has ownership interests in
international wireless companies through its substantially wholly owned
subsidiary, Nextel International, Inc. ("Nextel International"). Nextel
International, through its operating subsidiaries and affiliates (collectively,
the "International Operating Companies"), owns, operates or has interests in
wireless communications systems in and around various major metropolitan market
areas in Latin America, Asia and Canada. Nextel International, together with
Nextel, provides service in ten of the world's 25 largest cities.
Nextel's 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. For selected financial information concerning
Nextel's domestic operations, the operations of Nextel International and
Nextel's operations on a consolidated basis, see Note 16 to the consolidated
financial statements. Additional, more detailed and focused information relating
to Nextel International may be found in the periodic and other reports filed by
Nextel International with the Securities and Exchange Commission (the
"Commission") pursuant to the Securities Exchange Act of 1934 and the rules
thereunder (the "Exchange Act"). Except as noted above and as otherwise
expressly indicated herein, the description of Nextel's business herein refers
to Nextel's United States operations.
As of December 31, 1998, Nextel International's proportionate share of
international digital subscriber units in service, based on its ownership
interests in the International Operating Companies, was estimated to be about
166,500, which includes total international digital subscriber units on networks
currently in operation in Argentina, Brazil, Canada, Japan, Mexico, the
Philippines and Shanghai, China. As of December 31, 1998, an estimated 618,800
total international digital subscriber units were in service on the
International Operating Companies' current commercial networks.
C. 1998 NETWORK EXPANSION
In 1998, Nextel implemented a business plan for its domestic operations
that contemplated an accelerated expansion of Nextel's Digital Mobile Network
with the objectives of:
- achieving additional penetration in its targeted business customer base
in markets where the Digital Mobile Network was operating or was planned
to be operating in early 1998;
- selecting and prioritizing additional markets for expansion of Digital
Mobile Network coverage by Nextel during 1998; and
- enhancing the quality and performance of its Digital Mobile Network
wireless services offerings to maintain and strengthen Nextel's
competitive position relative to other existing and emerging providers of
digital wireless services in the United States.
The growth in Nextel's Digital Mobile Network coverage and capacity, and
the related significant increases in the number of Nextel's digital subscriber
units in service and in system minutes of use, which began in 1997, continued
and accelerated through 1998. This growth contributed significantly to Nextel's
achievement of positive earnings before interest, taxes, depreciation and
amortization for its domestic operations for the second half of 1998.
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In particular, as of December 31, 1998, the implementation of Nextel's
business plan resulted in:
- an increase of roughly 173% in monthly total system minutes of use, from
about 403 million in December 1997 to about 1.1 billion in December 1998;
- around 2,200 additional digital cell sites being placed in service during
1998, for a total of about 6,200 digital cell sites in operation on the
Digital Mobile Network in addition to Nextel adding 14 switches to its
Digital Mobile Network during 1998 for 31 total switches in service at
December 31, 1998;
- coverage expansion from 75 of the top 100 U.S. markets at year end 1997
to 91 of the top 100 U.S. markets; and
- an increase in net domestic capital expenditures to about $1,900 million
in 1998 from about $1,500 million in 1997.
D. BUSINESS STRATEGY
Nextel's principal business objectives are:
- to offer high-capacity, high quality, advanced communications services on
its Digital Mobile Network to its customers in metropolitan markets
throughout the United States; and
- to become a major participant in the global wireless communications
business.
Nextel's initial efforts to achieve these objectives were focused on the
consolidation of the fragmented SMR industry through the acquisition of SMR
systems and SMR spectrum. More recently, these strategic efforts have been
expanded to include the accelerated deployment of Nextel's Digital Mobile
Network and the aggressive marketing of digital wireless services. Nextel
believes that the following elements of its business strategy and
characteristics of its business distinguish its wireless service offerings from
those of its competitors in the wireless communications marketplace:
1. NEXTEL PROVIDES A DIFFERENTIATED, INTEGRATED PACKAGE OF WIRELESS
SERVICES, INCLUDING ITS UNIQUE NEXTEL DIRECT CONNECT FEATURE. Nextel's Digital
Mobile Network service provides a bundled product offering currently consisting
of:
- digital mobile telephone service;
- digital two-way radio dispatch service, which provides instant
conferencing capabilities and is marketed as "Nextel Direct Connect(SM)"
service;
- paging; and
- short-messaging services.
All of these services are accessible using a single handset.
Nextel's market research indicates that a significant degree of overlap
exists in the customer population for these separate wireless communications
service offerings. Accordingly, Nextel believes that, for customers who already
subscribe to or who would benefit by access to multiple wireless services, the
convenience of combining multiple wireless communications options in a single
handset and of consolidating all wireless service charges into a single package
price and billing statement are important features that distinguish Nextel from
many of its competitors.
Nextel's market research also indicates that a sizeable portion of business
users' communications involves contacting others within the same organization.
Nextel believes that its Direct Connect service is especially well suited to
address these intracompany wireless communications needs. The Nextel Direct
Connect service, which gives customers the ability to instantly set up a
conference on either a private (i.e., one-to-one) or group (i.e., one-to-many)
basis, is a service that is not included in any integrated service package
currently available from competing cellular and personal communications services
("PCS") operators. To further expand the flexibility and convenience offered by
its Direct Connect service to users
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outside a single organization but within a single industry or interest group in
a particular dispatch service area, Nextel pioneered the "Nextel Business
Networks" concept. Nextel Business Networks extend Nextel Direct Connect service
beyond a company's employees to suppliers or other parties involved in the same
industry. Over 700,000 domestic digital subscriber units in service as of
December 31, 1998 (about 26% of total domestic digital subscriber units then in
service) were participating in the Nextel Business Networks program in markets
throughout the United States.
Nextel expects to further differentiate its unique package of services by
adding new digital two-way mobile data and Internet connectivity services in the
second half of 1999. A new handset developed and manufactured by Motorola, the
i1000plus(TM), is scheduled for commercial introduction in mid-1999. This new
handset is expected to be the first in a product line that will incorporate
wireless modem dial-up features, combined with capability to support Internet
access and other mobile data applications. Nextel is planning to deploy and test
market these new services in six domestic markets in the fourth quarter of 1999,
in contemplation of a planned national rollout beginning in the first quarter of
2000.
2. NEXTEL FOCUSES ON THE BUSINESS CUSTOMER. Nextel's corporate marketing
strategy focuses on targeting business users that Nextel believes will be likely
to perceive and appreciate the potential for Nextel's wireless communication
service capabilities to increase efficiencies and reduce costs in those users'
business activities. Nextel historically concentrated its sales efforts on a
number of distinct occupational groupings of mobile workers, including personnel
in the following sectors:
- professional services;
- transportation;
- delivery;
- real property and facilities management;
- construction and building trades; and
- landscaping.
Nextel is now expanding its targeted customers to include a wider group of
business users.
3. NEXTEL OFFERS INNOVATIVE PRICING FEATURES. Nextel has implemented
pricing features that it believes differentiate its services from those of many
of its competitors. These pricing features include:
- no roaming charges assessed for mobile telephone services provided to
Nextel's customers traveling anywhere on the Digital Mobile Network
outside the customer's home market in the United States, including in
those United States market areas in which a digital network employing the
iDEN technology has been constructed and is being operated by Nextel
Partners, Inc. ("Nextel Partners") (through Nextel's roaming agreement
with Nextel Partners), and in some parts of Canada (through Nextel's
roaming agreement with Clearnet Communications, Inc. ("Clearnet"), a
provider of analog and digital wireless services in Canada, which has
constructed and is operating a digital network employing the iDEN
technology in and around certain major metropolitan markets in Canada,
including Toronto, Montreal and Vancouver);
- billing its mobile telephone service customers based on the actual number
of seconds of airtime used after the first minute, in contrast to the
common cellular industry practice of rounding all calls up to the next
minute;
- charging one airtime rate and a single nationwide long distance rate,
regardless of the time of day a call is made;
- offering a flat rate plan marketed as the "Nextel National Business Plan"
which offers a predetermined mix of cellular and Direct Connect minutes
for one flat rate; and
- pricing plans that allow customers to aggregate the total number of
account minutes for all subscriber units and reallocate the aggregate
minutes among their subscriber units.
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4. NEXTEL'S MARKETING PROGRAM AND DISTRIBUTION CHANNELS. Nextel's
marketing program and related advertising campaigns are designed:
- to enhance brand name awareness; and
- to stimulate additional interest in and demand for its services by
stressing their versatility, value, simplicity and quality.
Nextel uses both direct and indirect sales forces as part of its strategy
to increase the number of digital subscriber units placed in service on its
Digital Mobile Network. Nextel expects to expand and enhance both direct and
indirect distribution channels as it further penetrates existing markets and
expands its geographic reach in those markets.
5. NEXTEL HAS STRATEGIC RELATIONSHIPS WITH CRAIG O. MCCAW AND
MOTOROLA. Through December 31, 1998, Craig O. McCaw ("Mr. McCaw") and members
of the McCaw family have invested more than $650 million in Nextel through
purchases of Nextel's equity securities from Nextel and Motorola. As of December
31, 1998, Mr. McCaw and his affiliates beneficially owned about 20% of the
common equity interest in Nextel, giving effect to the conversion of the
preferred stock and the exercise of all presently exercisable options issued by
Nextel to, and held by, Digital Radio, L.L.C. (the "McCaw Investor") or other
controlled affiliates of Mr. McCaw. Nextel also benefits from Mr. McCaw's more
than 20 years experience in the wireless communications business. Mr. McCaw
currently serves as a member of Nextel's Board of Directors and also as Chairman
of the Operations Committee of the Board of Directors, which is responsible for
formulating key aspects of Nextel's business strategy. See "-- K. Agreements
with Significant Stockholders -- 1. McCaw Interests."
Nextel has a number of important strategic and commercial relationships
with Motorola. Motorola provides the iDEN infrastructure and subscriber handset
equipment used throughout Nextel's domestic markets and in most of the
international markets served by the International Operating Companies. Nextel
and Motorola also work closely together to improve existing products and develop
new technologies such as the modified iDEN technology that is currently being
deployed in Nextel's Digital Mobile Network. As of December 31, 1998, Motorola
was the beneficial owner of about 20% of the common equity interest in Nextel,
giving effect to the conversion of shares of Nextel's Class B non-voting common
stock (the "non-voting common stock") and the exercise of a warrant held by
Motorola primarily as a result of the Motorola Transaction. See "-- K.
Agreements with Significant Stockholders -- 2. Motorola."
E. FISCAL YEAR 1998 DOMESTIC TRANSACTIONS AND DEVELOPMENTS
1. PREFERRED STOCK OFFERING. On December 23, 1998, Nextel completed the
sale of 591,308 shares of Zero Coupon Convertible Preferred Stock due 2013 (the
"Zero Coupon Preferred") with an initial liquidation preference of $253.675 per
share. Nextel's offering of the Zero Coupon Preferred generated about $145.0
million in net proceeds. No dividends will be payable with respect to the Zero
Coupon Preferred, but the liquidation preference will accrete from the issuance
date at an annual rate of 9.25%, compounded quarterly. The Zero Coupon Preferred
is convertible at the option of the holders into shares of Nextel's Class A
Common Stock, $0.001 par value per share (the "common stock"), at an initial
conversion rate of 9.7441 shares of common stock per share of Zero Coupon
Preferred (subject to adjustment upon the occurrence of certain events). The
Zero Coupon Preferred is redeemable at the option of Nextel commencing December
23, 2005 and may be tendered by the holders for acquisition by Nextel on
December 23, 2005 and December 23, 2008. The Zero Coupon Preferred is
mandatorily redeemable on December 23, 2013 at the fully accreted liquidation
preference of $1,000 per share. Nextel may elect, subject to the satisfaction of
specified requirements, to pay any redemption or tender price with common stock.
The offering of the Zero Coupon Preferred was effected as a private
placement under the Securities Act of 1933 (the "Securities Act"). Neither the
Zero Coupon Preferred nor the common stock issuable upon conversion thereof have
been registered under the Securities Act. No such shares may be offered or sold
in the United States absent an effective registration statement or an applicable
exemption from the
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registration requirements of the Securities Act. Nextel is obligated to file a
shelf registration statement with the Commission pursuant to which resales of
the Zero Coupon Preferred (and any shares of Nextel's common stock issued in
exchange therefor) may occur. If this registration statement is not declared
effective by June 28, 1999 and if it does not remain effective and available for
a defined period thereafter (subject to certain potential suspensions), certain
liquidated damages payments will accrue and be payable on such shares of Zero
Coupon Preferred or common stock until such registration obligations or certain
other requirements are met.
2. NOVEMBER 1998 NOTES OFFERING AND EXCHANGE OFFER. On November 4, 1998,
Nextel completed the sale of $300.0 million in principal amount at maturity of
its 12% Senior Serial Redeemable Notes due 2008. These originally issued
securities and any securities issued in exchange therefor in the related
exchange offer described below are collectively referred to as the "November
1998 Notes." Nextel's offering of the November 1998 Notes generated about $289.3
million in net proceeds. Cash interest on the November 1998 Notes will be
payable on May 1 and November 1 of each year commencing May 1, 1999, at a rate
of 12.0% per annum. The issue price of the November 1998 Notes was $985.78 per
$1,000 principal amount at maturity, representing an effective yield to maturity
of 12.25% computed on a semi-annual bond equivalent basis from the date of
issuance. The November 1998 Notes are redeemable at the option of Nextel, in
whole or in part, at any time on or after November 1, 2003, at specified
redemption prices. Up to 35% of the original principal amount of the November
1998 Notes may be redeemed (using the proceeds of one or more sales of common
stock) on or prior to November 1, 2001, at the option of Nextel under specified
circumstances, at 112% of their principal amount, plus accrued and unpaid
interest to the date of redemption. The November 1998 Notes are senior unsecured
indebtedness of Nextel and rank equal in right of payment with all
unsubordinated, unsecured indebtedness of Nextel.
The November 1998 Notes were issued in a private placement transaction. No
November 1998 Notes may be offered or sold in the United States absent an
effective registration statement or an applicable exemption from the
registration requirements of the Securities Act. A registration statement was
filed with the Commission on February 10, 1999 to register an offer to exchange
the outstanding November 1998 Notes for substantially identical notes of equal
value. In the event that the exchange offer is not consummated prior to June 1,
1999, additional incremental interest on the principal amount of the November
1998 Notes will accrue until the exchange offer is completed or other
requirements are met.
3. OPTION EXERCISE. On July 28, 1998, Option Acquisition, L.L.C., an
entity controlled by Mr. McCaw, exercised its options to purchase 25.0 million
shares of Nextel's common stock in a cashless exercise transaction. As a result
of this exercise, Option Acquisition, L.L.C. received about 10.0 million shares
of Nextel's common stock.
4. TENDER OFFER AND CONSENT SOLICITATION. On April 3, 1998, Nextel
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 "2004
Notes," collectively, the "Targeted Notes"). About $307.6 million in principal
amount at maturity of the 2003 Notes and $422.8 million in principal amount at
maturity of the 2004 Notes, which had carrying values of about $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, Nextel paid
about $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 net proceeds from the sale of the February Notes
referred to in paragraph 8, below.
5. NEW BANK FINANCING. On March 13, 1998, Nextel entered into definitive
agreements (the "Bank Credit Agreement") which increased Nextel's total secured
financing capacity under its bank credit facilities 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 final
maturity date of the $1.5 billion revolving loan and a $500.0 million portion of
the term loans is March 31, 2006. The final maturity date of the remaining $1.0
billion portion of the term loans is September 30, 2006. Principal amortization
of the loans begins in 2001. On October 28, 1998, Nextel obtained the approval
of its lenders to amend the Bank
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Credit Agreement to increase the total potential secured financing capacity
under the Bank Credit Agreement to a maximum of $3.5 billion. At the same time,
Nextel and its lenders agreed on the terms and conditions on which $195.0
million of additional term loans would be made available under the Bank Credit
Agreement. Additionally, on December 21, 1998, Nextel and its lenders agreed on
the terms and conditions on which $100.0 million of additional term loans would
be made available under the Bank Credit Agreement. The $295.0 million in
additional term loans have a maturity date of March 31, 2007. The loans bear
interest payable quarterly at an adjustable rate calculated based either on the
prime rate or the London Interbank Offered Rate ("LIBOR"). The maturity date of
all loans outstanding under the Bank Credit Agreement is subject to acceleration
if the aggregate principal amount of certain series of Nextel's senior
redeemable discount notes is not less than $1.0 billion by specified dates. At
December 31, 1998, Nextel had drawn an aggregate of $2.118 billion of its $3.295
billion in committed available financing under the Bank Credit Agreement.
6. LMDS AUCTION. On February 18, 1998, the Federal Communications
Commission (the "FCC") commenced an auction of Local Multipoint Distribution
Service ("LMDS") spectrum in the 28 GHz -- 31 GHz frequency range. Nextel's
participation in the LMDS spectrum auction and related activities was conducted
through NextBand Communications, L.L.C. ("NextBand"), a joint venture in which
Nextel has a 50% ownership interest, with the remaining 50% interest held by
NEXTLINK Communications, Inc. ("NEXTLINK"), a publicly traded company that is
controlled by Mr. McCaw. 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 about 96 million people throughout the United States. Nextel made $67.2
million in payments to the FCC, representing its full 50% share of the bid
amount in accordance with the relevant NextBand joint venture arrangements.
During the first quarter of 1999, Nextel and NEXTLINK announced that they had
reached a broad agreement in principle concerning NEXTLINK's acquisition of
Nextel's 50% ownership interest in NextBand. The parties are finalizing the
relevant definitive transaction agreements, and expect shortly to be seeking
required regulatory approvals.
7. SERIES E PREFERRED STOCK. On February 11, 1998, Nextel completed the
sale of 750,000 shares of 11.125% Series E Exchangeable Preferred Stock
mandatorily redeemable 2010. These originally issued shares, the shares issued
in exchange therefor in the related exchange offer completed July 16, 1998 and
any shares of such stock issued as payment in kind dividends thereon, are
collectively referred to as the "Series E Preferred." Nextel's offering of the
Series E Preferred generated about $727.9 million in net proceeds. Dividends on
the Series E Preferred 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. The Series E Preferred 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 may be redeemed (using the proceeds of one or more sales of common
stock) on or prior to February 15, 2001, in whole or in part, at the option of
Nextel in specified circumstances, at 111.125% of the liquidation preference
plus accrued and unpaid dividends. The Series E Preferred 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.
8. FEBRUARY NOTES. Concurrent with the sale of the Series E Preferred on
February 11, 1998, Nextel completed the sale of $1,627.0 million in principal
amount at maturity of its 9.95% Senior Serial Redeemable Discount Notes due
2008. These originally issued securities and the securities issued in exchange
therefor in the related exchange offer completed on July 16, 1998, are
collectively referred to as the "February Notes." Nextel's offering of the
February Notes generated about $975.9 million in net 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 issue price of the February Notes was $614.71 per
$1,000 principal amount at maturity,
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representing an effective yield to maturity of 9.95% computed on a semi-annual
bond equivalent basis from the date of issuance. The February Notes are
redeemable at the option of Nextel, in whole or in part, at any time on or after
February 15, 2003, at specified redemption prices plus accrued and unpaid
interest. Up to 35% of the aggregate accreted value of the outstanding February
Notes may be redeemed (using the proceeds of one or more sales of common stock)
on or prior to February 15, 2001, at the option of Nextel under specified
circumstances, at 109.95% of their accreted value on the date of redemption. The
February Notes are senior unsecured indebtedness of Nextel and rank equal in
right of payment with all unsubordinated, unsecured indebtedness of Nextel.
F. FISCAL YEAR 1998 INTERNATIONAL TRANSACTIONS AND DEVELOPMENTS
1. PHILIPPINES RESTRUCTURING. In April 1998, Nextel International and the
three other principal groups of local shareholders of Infocom Communications
Network, Inc. ("Nextel Philippines") entered into agreements relating to the
restructuring and governance of Nextel Philippines. Among other things, these
agreements triggered a repurchase and transfer of certain shares of Nextel
Philippines held by one of the local shareholder groups. As a result of
transactions relating to these agreements, Nextel International's aggregate
direct or indirect equity interests in Nextel Philippines increased from 30% to
38%.
2. JAPAN. On March 17, 1998, Nextel International purchased a 21% equity
interest in J-Com Co., Ltd., an enhanced specialized mobile radio provider in
Japan, for Y77.2 million and provided a shareholder loan of Y4.1 billion
(approximately $0.6 million and $31.5 million, respectively, based on the
exchange rate on the date of purchase). DJSMR Business Partnership, a Japanese
partnership in which an affiliate of Motorola is the majority partner, holds a
49% equity interest in J-Com Co., Ltd.
3. NEXTEL INTERNATIONAL NOTES ISSUANCE. On March 12, 1998, Nextel
International completed the sale of $730.0 million in principal amount at
maturity of its 12.125% Senior Redeemable Discount Notes due 2008 (the "1998 NI
Notes") generating about $387.0 million in net proceeds.
4. ARGENTINA CREDIT FACILITY. As of February 27, 1998, McCaw Argentina
S.R.L. ("Nextel Argentina") entered into an $83.0 million senior secured credit
facility with The Chase Manhattan Bank, which facility, as amended, was
increased to $100.0 million (the "Argentina Credit Facility"). Borrowings under
the Argentina Credit Facility are secured by substantially all of the assets of
Nextel Argentina and its subsidiaries and subject to the satisfaction or waiver
of applicable borrowing conditions.
5. ARGENTINA ACQUISITION. On January 30, 1998, Nextel International
acquired the remaining 50% equity interest in the holding company for Nextel
Argentina for $46.0 million.
6. PERU ACQUISITION AND PUT. On January 29, 1998, Nextel International
purchased 70.1% of the common equity of Communicaciones Nextel del Peru S.A.
("Nextel Peru") for $27.9 million. On October 30, 1998, Nextel International
exercised a put right and sold shares representing approximately 10% of the
outstanding shares of Nextel Peru to Motorola International Development
Corporation ("Motorola International") for a purchase price of about $6.0
million. As of December 31, 1998, Nextel International and Motorola
International held about 62.1% and 30.9%, respectively, of the outstanding
shares of Nextel Peru.
For additional information concerning transactions and developments
relating to Nextel International during 1998, including those summarized above,
see Nextel International's Annual Report on Form 10-K for the year ended
December 31, 1998 (the "NI 1998 Form 10-K") filed with the Commission.
G. POST FISCAL-YEAR 1998 TRANSACTIONS AND DEVELOPMENTS
1. TOWERS TRANSACTION. On February 10, 1999, Nextel and some of its
subsidiaries and SpectraSite Holdings, Inc. ("SpectraSite") and some of its
subsidiaries entered into definitive agreements pursuant to which specified
telecommunications towers and related assets currently owned by some of Nextel's
subsidiaries will be acquired by a subsidiary of SpectraSite and leased back to
Nextel. The agreements also establish an exclusive arrangement for the
construction by SpectraSite of additional towers in the
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United States to support Nextel's and Nextel Partners' expansion of their
digital networks. The transactions are subject to a number of significant
conditions, including certain regulatory approvals and the receipt of consents
from some of Nextel and SpectraSite's lenders. Nextel and SpectraSite each have
requested such approvals and consents from the relevant governmental authorities
and lender groups. Not all of these approvals and consents have been obtained as
of the date hereof.
2. MOTOROLA INTERNATIONAL FINANCING. On February 4, 1999, Nextel
International and Motorola Credit Corporation entered into definitive agreements
providing for $225.0 million in secured financing. Additional information
concerning this and the related financing arrangements between Nextel
International and Motorola is included in the NI 1998 Form 10-K.
3. NEXTEL PARTNERS TRANSACTION. On January 29, 1999, Nextel, Nextel
Partners and certain other parties, including Motorola and Eagle River
Investments, LLC, an affiliate of Mr. McCaw, entered into definitive agreements
relating to the capitalization, governance, financing and operation of Nextel
Partners. Nextel Partners plans to construct and operate a digital wireless
system utilizing iDEN technology in thirty-nine mid-size and smaller markets in
the United States containing about 33 million people. Under these agreements,
Nextel Partners will offer its customers the same basic package of digital
wireless communications services as Nextel, under the Nextel brand name, and
customers of Nextel and Nextel Partners will be allowed to roam between the
Nextel and Nextel Partners systems without incurring any roaming charges.
In connection with this transaction, Nextel sold assets, and is in the
process of transferring certain FCC licenses, to Nextel Partners. In exchange,
Nextel Partners issued to Nextel equity representing about a 29% voting interest
in Nextel Partners and having an agreed value of $131.1 million and paid Nextel
about $132.4 million in cash (which remains subject to post-closing adjustment)
related to the assets sold and the reimbursement of costs and net operating
expenses. The definitive agreements also establish certain circumstances in
which Nextel will have the right or the obligation to purchase the remaining
equity interests in Nextel Partners at specified prices.
4. SUBSCRIBER BASE ADJUSTMENT. In the course of an audit of its subscriber
base, Nextel identified a number of domestic Digital Mobile Network subscriber
units that were included as "in service" in accordance with then applicable
Nextel policies and practices, but were not in active use or generating revenue.
Such subscriber units were placed in "temporary suspend" status under these
policies and practices for various reasons, including the following:
- subscriber units that have been denied calling privileges due to
unresolved past due amounts or due to suspected fraudulent or improper
usage;
- subscriber units as to which the customer has requested "temporary
suspend" status for a variety of reasons, ranging from seasonal work
patterns to extended absence from the service area; and
- subscriber units that are in for repair, or have been reported lost or
stolen.
Nextel has decided to adjust its policies and practices to shorten the
length of time that a subscriber unit would be allowed to remain in
"temporary suspend" status without generating revenue. The length of time
selected will vary depending on the reason for the "temporary suspend"
classification. Applying the revised policies and practices to the subscriber
units in the "temporary suspend" categories, Nextel has determined that it will
be necessary to take a one time adjustment of existing subscriber units in
"temporary suspend" status, reducing its ending subscriber units in service by
approximately 40,000 subscriber units out of a customer base currently in excess
of three million subscriber units.
Because none of the subscriber units in the "temporary suspend" categories
are generating revenue, this adjustment to Nextel's policies and practices will
have no adverse revenue impact, and should have a slight positive effect on
reported average revenue per subscriber unit. The total number of subscriber
units estimated by Nextel to be in all "temporary suspend" categories is not
material in comparison to the total reported subscriber units in service. Nextel
expects that it will have fully implemented these adjustments
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to its policies and practices during 1999, so that no continuing "prior period"
effect should be associated with units in any of these categories in future
years.
H. WIRELESS INDUSTRY OVERVIEW
1. DEVELOPMENT OF THE WIRELESS COMMUNICATIONS INDUSTRY. Today's wireless
communications industry began in 1970 when the FCC reallocated 115 MHz of radio
spectrum in the 800/900 MHz bands from the federal government and UHF television
to land mobile service use to provide high-quality, high-capacity communications
services to vehicle-mounted and hand-held portable telephones and other two-way
radio units. The FCC has allocated 50 MHz for cellular service (which were
allocated in equal blocks to two cellular operators in each metropolitan
statistical area ("MSA") or rural statistical area ("RSA")) and 46 MHz for
private radio services, including SMR. The remaining 19 MHz are divided among
six different services. Because of regulatory delays, the first commercial
cellular systems were not operational until 1983. Since then, however, growth in
the industry has been rapid, with about 61 million wireless phone units
(consisting of analog cellular, digital cellular and PCS units) in service at
June 30, 1998. The first SMR systems became operational in 1974, and SMR units
in service had grown to about 4.6 million by December 31, 1998 (consisting of
both analog SMR units and wide-area digital SMR units). The number of other
private radio users is estimated to be about 15.8 million as of December 31,
1998.
2. SMR AND CELLULAR/PCS TELEPHONY. The cellular telephone industry was
created by the FCC as a regulated duopoly. The FCC awarded only two licenses to
provide cellular service in the service area of any given MSA or RSA.
Subsequently, the FCC allocated 120 MHz of spectrum in the 1.8-2.2 GHz band for
the provision of PCS, which include mobile wireless communications services
similar to those provided over Nextel's Digital Mobile Network. The FCC has
awarded three 30 MHz and three 10 MHz PCS licenses for this spectrum on either a
Major Trading Area ("MTA") or a Basic Trading Area ("BTA") (each as defined in
the Rand McNally Commercial Atlas) market definition through a competitive
bidding process. Since August 10, 1996, SMR operators have been subject to the
same common carrier obligations as cellular and PCS operators, although a more
limited amount of spectrum is assigned to a single SMR licensee as compared to
cellular and PCS licensees. See "-- L. Regulation." Within the limitations of
available spectrum and technology, SMR operators are authorized to provide
mobile communications services to business and individual users, including the
bundled products already offered by Nextel, as well as mobile data services.
I. NEXTEL'S DIGITAL MOBILE NETWORK
1. DIGITAL MOBILE NETWORK SERVICES. Nextel is designing and constructing
its Digital Mobile Network to support the full complement of digital wireless
services described above. See "--B. Overview." Additionally, Nextel has
announced its plans and anticipated schedule to be able to offer its customers
access to new mobile data and Internet connectivity in selected markets,
beginning in the fourth quarter of 1999.
Nextel's Digital Mobile Network provides customers desiring mobile
telephone service with access to features competitive with those offered by
other current wireless communications services, such as the "hand-off" of calls
from one site to another and "in-building" signal penetration for improved
portable performance in selected high usage areas. In addition to the mobile
telephone and two-way radio dispatch functions, Nextel's Digital Mobile Network
has been designed to include a signaling or paging capability, which also has
been built into each subscriber unit, to enable a customer to receive
alphanumeric short-text messages. In addition, Nextel's Digital Mobile Network
has been designed to offer customers additional features, such as voicemail,
call hold, call waiting, no-answer or busy-signal transfer, call forwarding,
three way calling and two lines. Working together with Motorola and others,
Nextel has adapted its iDEN-based packet data network to support the standard
suite of Internet Protocols that will enable more robust two-way mobile data
applications and Internet connectivity.
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The International Operating Companies are constructing and operating
digital networks employing iDEN technology on 800 MHz spectrum holdings in major
metropolitan market areas located in Argentina, Brazil, Mexico, Peru and the
Philippines and on 1.5 GHz spectrum holdings in major Japanese market areas,
including Tokyo. Nextel has entered into interoperability agreements with
Clearnet and with Communicaciones Nextel del Mexico S.A. de C.V., a subsidiary
of Nextel International ("Nextel Mexico"), to provide, among other things, for
coordination of customer identification and validation necessary to facilitate
cross-border roaming service in North America.
Nextel has roaming agreements currently in effect with Nextel Partners
(covering all of the United States market areas in which Nextel Partners
currently (or will in the future) provide iDEN-based digital mobile services)
and Clearnet (in Canadian market areas where Clearnet offers iDEN-based digital
mobile services). Beginning in the second half of 1999, Nextel plans to
introduce Motorola's i2000(TM) phone. The i2000 will offer dual mode
capabilities to switch back and forth from an iDEN standard into a Global System
for Mobile Communications ("GSM") standard, to facilitate global roaming for
Nextel's subscribers. As of December 31, 1998, Nextel had entered into over 28
international roaming agreements with GSM service providers throughout the world
in anticipation of the introduction of the i2000.
2. DIGITAL MOBILE NETWORK TECHNOLOGY. The Digital Mobile Network, as
currently deployed by Nextel, combines the advanced iDEN technology developed
and designed by Motorola, with a low-power, multi-site transmitter/receiver
configuration that permits frequency reuse. The iDEN technology shares many
common components with the GSM technology that has been established as the
digital cellular communications standard in Europe and is a variant of the GSM
technology that is being deployed by certain PCS operators in the United States.
The design of Nextel's existing and proposed Digital Mobile Network currently is
premised on dividing a service area into multiple sites having a typical
coverage area of from less than one mile to up to thirty miles in radius
(depending on the terrain and the power setting). Each site contains a low-power
transmitter, receiver and control equipment (the "base station"). The base
station in each site is connected by microwave, fiber optic or telephone line to
a computer controlled switching center (the "switching center"). The switching
center controls the automatic hand-off of cellular calls from site to site as a
subscriber travels, coordinates calls to and from a subscriber unit and connects
cellular calls to the public switched telephone network. In the case of two-way
dispatch, a dispatch application processor provides a call setup and identifies
the target radio and connects the subscriber initiating the call to the other
subscriber (in the case of a private call) or to a number of other subscribers
(in the case of a group call) to whom the call is directed in the requested
service areas. Northern Telecom, Inc. has supplied the mobile telephone switches
for Nextel's Digital Mobile Network. At December 31, 1998, Nextel had 31
operational switches and about 6,200 cell sites constructed and in operation in
its Digital Mobile Network.
Currently, there are three principal digital technology formats that are
being assessed or proposed for deployment or deployed currently by providers of
cellular telephone service or by certain PCS providers or licensees in the
United States. One such format is Time Division Multiple Access ("TDMA") digital
transmission technology, a version of which, known as "three-time slot TDMA,"
has been and is expected to be deployed by certain cellular operators. The
second principal format, known as Code Division Multiple Access ("CDMA") digital
transmission technology, has been and is expected to be deployed by certain
other cellular and PCS operators. The third principal format, known as GSM-PCS,
is an updated, up-banded, PCS-adapted version of the TDMA-based GSM digital
technology format that has become the standard for digital cellular technology
in Europe. GSM-PCS has been deployed and is expected to be deployed by certain
domestic PCS operators.
Although TDMA, CDMA and GSM-PCS are digital transmission technologies, and
thus share certain basic characteristics and areas of contrast to analog
transmission technology, TDMA, CDMA and GSM-PCS are not compatible or
interchangeable with each other. Although Motorola's proprietary iDEN technology
is based on the TDMA technology format, it differs in a number of significant
respects from the TDMA technology versions being assessed or deployed by
cellular operators and PCS licensees in the United States, which differences may
have important consequences.
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The implementation of Digital Mobile Network design and technology
significantly increases the capacity of Nextel's existing SMR channels. This
increase in capacity is accomplished in two ways.
- First, each channel is capable of carrying (1) up to six voice and/or
control paths by employing six-time slot TDMA digital technology or (2)
up to three voice and/or control paths by employing the three-time slot
TDMA digital technology. Each voice is converted into a stream of data
bits that are compressed before being transmitted, allowing each of the
time-slotted voice and/or control paths to be transmitted on the same
channel without causing interference. Upon receipt of the coded voice
data bits, the subscriber unit decodes the voice signal. Using the iDEN
technology, Nextel achieves about six times improvement in channel
utilization capacity for channels used for two-way dispatch service and
about three times improvement in channel utilization capacity for
channels used for mobile telephone service.
- Second, a system design is employed that reuses each channel many times
throughout the market area in a manner similar to that used in the
cellular industry. The ability to reuse channels is accomplished by
placing transmitters at low elevation sites and restricting the power
output to not more than 100 watts effective radiated power. This creates
a service area with a radius of from less than one mile to up to thirty
miles, depending on the terrain and the power setting.
The use of six-time slot TDMA technology for two-way dispatch service and
three-time slot TDMA technology for mobile telephone service, in combination
with Nextel's reuse of its licensed frequencies in a cellular-type system
design, permits Nextel to utilize its current holdings of SMR spectrum more
efficiently.
3. TECHNOLOGY COMMITMENTS. Pursuant to the equipment purchase agreements
between Nextel and Motorola first entered into in 1991, as subsequently amended,
Motorola provides the iDEN infrastructure and subscriber handset equipment to
Nextel throughout its markets. Nextel expects to rely on Motorola for the
manufacture of a substantial portion of the equipment necessary to construct its
Digital Mobile Network and all of its Digital Mobile handset equipment for the
next several years. See "-- N. Risk Factors -- 5. Nextel Principally Relies on
One Supplier to Implement Its Digital Mobile Network." In addition, Nextel has
agreed, subject to specified conditions, to purchase from Motorola at least 50%
of the base radios Nextel purchases in any calendar year.
Nextel continuously reviews alternate technologies as they are developed.
To date, however, it has not been regarded as necessary or as a commercially
feasible strategy to adapt currently available alternative technologies to
operate on Nextel's present spectrum position. Having been the high bidder on
475 Economic Area ("EA") licenses in the 800 MHz SMR auction held in 1997,
Nextel has the opportunity to operate on up to an average of 10 MHz of
contiguous spectrum in nearly every market in the United States. By relocating
incumbent operators out of this spectrum, Nextel will have access to contiguous
channel blocks, similar to its cellular and PCS competitors. Nextel continues to
pursue regulatory initiatives that would provide SMR operators, including
Nextel, with additional rights to use contiguous blocks of spectrum. See "-- L.
Regulation." The availability of a significant block of contiguous spectrum
would permit the introduction of a broader range of technology options not
available on non-contiguous spectrum blocks. However, Nextel's consideration of
alternative technologies, independent of technological feasibility, would likely
be materially affected by Nextel's contractual obligations to Motorola regarding
domestic deployment and utilization of iDEN technology as well as the additional
capital requirement associated with the deployment of an alternative technology.
Nextel also continues to pursue acquisition of additional 800 MHz and 900 MHz
SMR channels from third parties, and is working with Motorola to develop a dual
band 800/900 MHz iDEN system and compatible digital subscriber handsets to
expand the capacity of Nextel's Digital Mobile Network. See "-- N. Risk
Factors -- 6. Agreements With Motorola Reduce Nextel's Operational Flexibility."
4. SYSTEM CONSTRUCTION. The first step required to achieve the build-out
of the Digital Mobile Network in a market is the completion of the radio design
plan, which typically takes about four months. This stage involves the selection
of specific areas in the market for the placement of base station sites and
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the identification of specific frequencies that will be employed at each site in
the initial configuration. Sites are selected on the basis of:
- their proximity to targeted customers;
- the ability to acquire and build the site; and
- frequency propagation characteristics.
Site procurement efforts include obtaining leases and permits, and in many
cases, zoning approvals. This site acquisition process for the initial system to
be constructed in a market, depending on the number of sites, typically takes
from two to eighteen months. Preparation of each site for equipment
installation, including construction of equipment shelters, towers and power
systems, grounding, ventilation and air conditioning, typically takes six weeks,
while equipment installation, testing and pre-operational systems optimization
generally takes an additional six weeks prior to commencing system operation.
Following commencement of system operations in a selected market, Nextel expects
to continually add new sites to such system in order to improve coverage and
capacity. See "-- N. Risk Factors -- 17. Nextel's Forward Looking Statements Are
Subject to a Variety of Factors that Could Cause Actual Results to Differ
Materially From Current Beliefs."
5. CONVERSION TO DIGITAL MOBILE NETWORK. In order to activate Digital
Mobile Network service in a market, Nextel must have available a specified
number of 800 MHz frequencies that have been cleared of analog SMR traffic in
that market ("channel recovery"). Channel recovery may involve transferring 800
MHz customers to 900 MHz channels or other 800 MHz analog SMR channels. Upon
launch of commercial service in a market, Nextel commences marketing the Digital
Mobile Network services to potential customers, including certain of its
existing SMR analog system customers, and converts 800 MHz frequencies to the
Digital Mobile Network as such customers migrate ("migration") or as otherwise
required to support the Digital Mobile Network customer base in a particular
market. Nextel has commenced its channel recovery and migration efforts for
existing customers in each of the markets in which its Digital Mobile Network
has been activated. In many of those markets, Nextel's migration efforts have
been substantially concluded and its analog operations have been largely
eliminated or restricted to its 900 MHz frequency holdings in such markets.
Accordingly, Nextel does not expect that migration of its existing SMR analog
system customers will be a significant source of new subscribers on its Digital
Mobile Network in the future. See "-- N. Risk Factors -- 17. Nextel's Forward
Looking Statements Are Subject to a Variety of Factors that Could Cause Actual
Results to Differ Materially From Current Beliefs."
6. MARKETING. Nextel's marketing strategy focuses principally on targeting
business users that Nextel believes will be likely to perceive and appreciate
the potential for Nextel's wireless communication service capabilities to
increase efficiencies and reduce costs in such users' business activities.
Nextel continues to believe that its ability to deliver a full line of
integrated mobile communications services using a single, multi-function
subscriber unit on its Digital Mobile Network significantly differentiates
Nextel from other providers of wireless communications services. The progress of
Nextel's Digital Mobile Network services marketing efforts is and will continue
to depend upon numerous factors, including:
- system performance;
- subscriber equipment performance; and
- the ability to deliver services that satisfy customer needs and
expectations.
Nextel reviews its business and marketing plans in light of:
- perceived opportunities;
- actual experiences in the marketplace;
- availability of financial and other resources; and
- overall economic and/or competitive considerations.
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As a result of these reviews, Nextel may from time to time determine to change,
refine or redirect such plans. See "-- N. Risk Factors -- 17. Nextel's Forward
Looking Statements Are Subject to a Variety of Factors that Could Cause Actual
Results to Differ Materially From Current Beliefs."
7. COMPETITION. Nextel may compete with the two established cellular
licensees and may compete with as many as six PCS licensees in each of the
markets where its Digital Mobile Network operates. A substantial number of the
entities that have been awarded PCS licenses are current cellular communications
service providers and joint ventures of current and potential wireless
communications service providers, many of which have financial resources,
subscriber bases and name recognition greater than Nextel. PCS operators
currently compete and likely will continue to compete with Nextel in providing
some or all of the services available through Nextel's Digital Mobile Network.
Additionally, Nextel expects that existing PCS and cellular service providers
will continue to upgrade their systems to provide digital wireless
communications services competitive with those available on Nextel's Digital
Mobile Network. Moreover, cellular and wireline companies have been granted
authority to participate in dispatch and SMR services, respectively. Nextel also
expects its Digital Mobile Network business to face competition from other
technologies and services developed and introduced in the future. See "-- N.
Risk Factors -- 3. Nextel's Future Performance Will Depend on Its Ability to
Succeed in the Highly Competitive Wireless Voice Transmission Industry" and
"-- 17. Nextel's Forward Looking Statements Are Subject to a Variety of Factors
that Could Cause Actual Results to Differ Materially From Current Beliefs."
Pursuant to the Omnibus Appropriations Act of 1997, the FCC reallocated and
auctioned 30 MHz of 2.3 GHz spectrum to wireless services in the first quarter
of 1997. However, the strict operational and technical limitations the FCC
placed on use of the spectrum will likely prohibit the provision of mobile
services using current technology. Additionally, the FCC has reallocated 220 MHz
of radio spectrum for use by "emerging telecommunications technologies," such as
PCS, low-earth orbit satellites and mobile satellite systems. The FCC has
authorized a consortium of communications companies to provide nationwide mobile
satellite services. Additionally, the FCC recently reallocated 36 MHz of the
former analog television channels to commercial services, including broadcasts,
fixed and mobile services. Nextel cannot predict how these technologies will
develop or what impact, if any, they will have on Nextel's ability to compete
for wireless communications services customers.
J. NEXTEL'S EXISTING ANALOG SMR OPERATIONS
Nextel's existing analog SMR operations focus primarily on two-way radio
service provided to customers who need the ability to communicate with one
another in the field, either on a one-to-one or one-to-many basis. At December
31, 1998, Nextel provided analog SMR service to about 354,000 subscriber units.
Nextel expects that as its Digital Mobile Network is deployed in markets where
its analog SMR operations are in service, Nextel will continue to migrate its
analog SMR customers to its Digital Mobile Network and simultaneously phase-out
the then-existing analog SMR operations in those markets.
In addition to SMR systems for which it is the licensed owner, Nextel
manages analog SMR systems licensed to third parties in certain of its markets.
The management agreements generally have terms of 15 or 30 years. In many cases,
Nextel holds an option to acquire managed SMR systems.
1. MARKETING. Nextel's existing analog SMR services are provided primarily
to businesses that employ fleets of vehicles requiring two-way radio capability
and to a narrow group of businesses which require both two-way radio and mobile
telephone service for personnel. Nextel utilizes a direct sales and marketing
force as well as independent equipment dealers. Subscriber units sold by
Nextel's sales force for use on existing analog SMR networks are typically
installed and maintained by Nextel's service departments. In addition, the
service departments are responsible for system maintenance for most of Nextel's
existing analog SMR networks. Nextel's marketing of its analog SMR service has
been de-emphasized in most major markets by the activation of its Digital Mobile
Network in such markets. See "-- I. Nextel's Digital Mobile Network."
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2. COMPETITION. Nextel's analog SMR operations also compete in each of its
major markets with cellular operators and, in a limited number of such markets,
with PCS systems operators. On March 7, 1995, the FCC authorized cellular
operators to offer two-way dispatch services, which allows cellular operators to
offer, upon installation of the necessary infrastructure equipment, a service
that would be competitive with analog SMR two-way dispatch service.
Additionally, Nextel's analog SMR operations may face competition in the future
from other SMR operators utilizing digital technology.
K. AGREEMENTS WITH SIGNIFICANT STOCKHOLDERS
1. MCCAW INTERESTS. Under the terms of the Securities Purchase Agreement
dated as of April 4, 1995, as amended, among Nextel, the McCaw Investor and Mr.
McCaw (the "McCaw Securities Purchase Agreement") and certain other related
agreements and documents:
- the McCaw Investor purchased on April 5, 1995 from Nextel, about 1.2
million shares of Nextel's common stock for an aggregate purchase price
of about $14.9 million; and
- the McCaw Investor purchased from Nextel on July 28, 1995, for an
aggregate purchase price of $300.0 million, an aggregate of 8.2 million
units consisting of a total of:
- about 8.2 million shares of Nextel's Class A Convertible Redeemable
Preferred Stock, par value $0.01 per share (the "Class A Preferred
Stock");
- 82 shares of Nextel's Class B Convertible Preferred Stock, par value
$0.01 per share (the "Class B Preferred Stock"); and
- options to acquire an aggregate of up to 35.0 million shares of Nextel's
common stock at exercise prices ranging from $15.50 to $21.50 per share
(15.0 million of which were purchased on July 28, 1997 for an aggregate
exercise price of $232.5 million and about 4.9 million of which were
transferred by the McCaw Investor in November 1997).
In addition, in connection with the agreements relating to the exercise of
the options exercised on July 28, 1997, an affiliate of Mr. McCaw, Option
Acquisition, L.L.C. ("Option Acquisition"), purchased options that entitled
Option Acquisition to acquire up to 25.0 million shares of Nextel's common stock
at exercise prices of either $16.00 per share or $18.00 per share, in either
case at any time through July 28, 1998. On that date, Option Acquisition
acquired about 10.0 million shares of common stock in a cashless exercise
transaction, as permitted by the terms of such options. See "-- E. Fiscal Year
1998 Domestic Transactions and Developments -- 3. Option Exercise." As a result
of certain transfers and option exercises, at December 31, 1998, affiliates of
Mr. McCaw beneficially owned about 23.4 million shares of common stock, 7.9
million shares of Class A Preferred Stock convertible into about 23.7 million
shares of common stock, 82 shares of Class B Preferred Stock and options to
purchase up to an aggregate of about 15.7 million shares of common stock from
Nextel at prices ranging from $12.25 to $21.50 per share.
Additionally, in connection with such equity investments, Nextel, the McCaw
Investor and Mr. McCaw reached agreement on a number of matters relating to the
ownership, acquisition and disposition of the Class A Preferred Stock and the
Class B Preferred Stock, including without limitation, the granting of
registration and antidilutive rights to the McCaw Investor and specified
affiliates and limitations on investments by the McCaw Investor and its
affiliates in excess of about 45% of the voting securities of Nextel. Finally,
on July 28, 1995, pursuant to agreements between the McCaw Investor and Motorola
entered into in connection with the McCaw Securities Purchase Agreement, the
McCaw Investor purchased 4.0 million shares of Nextel's common stock from
Motorola and Motorola granted to the McCaw Investor the option to purchase up to
an additional 9.0 million shares of common stock held by Motorola (2.0 million
of which were exercised on September 3, 1997 and about 1.6 million of which were
transferred in November 1997).
Pursuant to the McCaw Securities Purchase Agreement, Nextel's Restated
Certificate of Incorporation (the "Certificate of Incorporation") and Nextel's
By-Laws (the "Nextel By-Laws"), Nextel, the McCaw Investor and Mr. McCaw have
established certain arrangements relating to the governance of
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Nextel associated with such investments, including, without limitation, the
rights relating to designation by the McCaw Investor and election of three
representatives of the McCaw Investor to the Board of Directors of Nextel
representing not less than 25% of the Board of Directors. On November 23, 1998,
Nextel announced the appointment of William A. Hoglund, effective November 18,
1998, as the third director designated by the McCaw Investor to the Board of
Directors.
Pursuant to the McCaw Securities Purchase Agreement, the Certificate of
Incorporation and the Nextel By-Laws, a five-member Operations Committee of the
Board of Directors was created, and the McCaw Investor is entitled to have a
majority of the members of such Operations Committee selected from among the
McCaw Investor's representatives on the Board of Directors.
The Operations Committee has the authority to formulate key aspects of
Nextel's business strategy, including decisions relating to the technology used
by Nextel, acquisitions, operating and capital budgets, marketing and strategic
plans, approval of financing plans and endorsement of nominees to the Board of
Directors and committees thereof, as well as nomination and oversight of certain
executive officers. Currently, the three McCaw Investor designees on the Board
of Directors also serve as members of the Operations Committee, of which Mr.
McCaw is the chairman. The Board of Directors, by a majority vote, may override
actions taken or proposed by the Operations Committee, although doing so would
give rise to a $25.0 million liquidated damages payment to the McCaw Investor,
the commencement of the accrual of a 12% dividend payable on the stated value of
all outstanding shares of Class A Preferred Stock (an aggregate stated value of
about $290.5 million) and the immediate vesting of the shares subject to the
Incentive Option (as defined below) granted pursuant to the McCaw Incentive
Option Agreement (as defined below). However, the Board of Directors, by a
defined super-majority vote, retains the power to override actions taken or
proposed by the Operations Committee without triggering the obligation to make a
liquidated damages payment, or to commence dividend accruals with respect to the
Class A Preferred Stock or to accelerate the vesting of the options granted
pursuant to the McCaw Incentive Option Agreement. In addition, the Board of
Directors also may act to terminate the Operations Committee, although such
action by the Board of Directors would, in certain circumstances, result in the
obligation to make such a liquidated damages payment and result in the
commencement of such dividend accrual and the accelerated vesting of the related
options.
The McCaw Securities Purchase Agreement, the Certificate of Incorporation
and the Nextel By-Laws also delineate a number of circumstances, chiefly
involving or resulting from certain events with respect to the McCaw Investor or
Mr. McCaw, in which the Operations Committee could be terminated but such
liquidated damages payment, dividend accrual and vesting of options would not be
required.
The shares of Class A Preferred Stock are redeemable at Nextel's option,
and the shares of Class B Preferred Stock are mandatorily convertible, in the
event of a change of control of Nextel (as defined in the terms of such
preferred stock). Further, the McCaw Investor has agreed that, subject to
certain limited exceptions (including certain existing securities holdings and
relationships), until the later of July 28, 2000 or one year after the
termination of the Operations Committee, neither the McCaw Investor nor its
controlled affiliates will participate in other two-way terrestrial-based mobile
wireless communications systems in the region that includes any part of North
America or South America, unless such opportunities first have been presented to
and rejected by Nextel in accordance with the provisions of the McCaw Securities
Purchase Agreement.
Pursuant to an agreement entered into by Nextel and Motorola in connection
with the McCaw Securities Purchase Agreement, Motorola has agreed to support the
decisions and recommendations of the Operations Committee and to vote the shares
of common stock held by Motorola accordingly, subject to:
- the right of any Motorola-designated members of the Board of Directors to
vote in a manner consistent with their fiduciary duties; and
- the right of Motorola to vote its shares as it determines necessary with
respect to issues that conflict with Motorola's corporate ethics or that
present conflicts of interest, or in order to protect the value or
marketability of the shares of Nextel's common stock held by Motorola.
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Concurrently with the execution of the McCaw Securities Purchase Agreement,
Nextel entered into a Management Support Agreement (the "Support Agreement")
with Eagle River, Inc., an affiliate of the McCaw Investor ("Eagle River")
pursuant to which Eagle River provides management and consulting services to
Nextel, the Board of Directors and the Operations Committee from time to time as
requested. In consideration of the services to be provided to Nextel under the
Support Agreement, Nextel entered into an Incentive Option Agreement (the "McCaw
Incentive Option Agreement") concurrently with the execution of the McCaw
Securities Purchase Agreement granting to Eagle River the option to purchase an
aggregate of 1.0 million shares of common stock at an exercise price of $12.25
per share (the "Incentive Option"). The Incentive Option expires on April 4,
2005, and is presently exercisable with respect to 600,000 shares and becomes
exercisable for an additional 200,000 shares on each of April 4, 1999 and 2000.
Additionally, pursuant to the Support Agreement, Nextel agreed to reimburse
Eagle River for all out-of-pocket costs, plus up to $200,000 per year for all
allocable overhead costs reasonably incurred by Eagle River in connection with
the performance of its obligations under the Support Agreement. Payments in the
amount of about $111,400 were made to Eagle River pursuant to the Support
Agreement during 1998.
2. MOTOROLA. On July 28, 1995, Nextel acquired all of Motorola's 800 MHz
SMR licenses in the continental United States in exchange for 41.7 million
shares of common stock and 17.8 million shares of non-voting common stock.
Pursuant to the agreement relating to that acquisition, Motorola currently has
the right to nominate two persons for election as members of the Board of
Directors. Motorola has exercised this right only with respect to one director.
Nextel and Motorola are also parties to agreements pursuant to which Nextel
purchases Motorola infrastructure equipment and digital subscriber units. The
agreements with Motorola also include certain provisions concerning Nextel's
choice of technology deployment, the licensing of additional equipment
manufacturers and the selection of strategic equity investors. The agreements
relating to the acquisition of Motorola's SMR licenses also provided for the
purchase by Nextel of a portion of Motorola's equity interest in Clearnet (which
equity interest is currently held by Nextel International) in exchange for 2.5
million shares of Nextel's common stock.
On July 28, 1995, Motorola sold to the McCaw Investor 4.0 million shares of
Nextel's common stock at $12.25 per share and granted to the McCaw Investor the
option to purchase up to an additional 9.0 million shares of common stock over a
six-year period. The McCaw Investor exercised the first tranche of such option
on September 3, 1997 acquiring 2.0 million shares of common stock at $15.50 per
share. The remaining options will become exercisable for up to an additional 2.0
million shares at $18.50 per share during the 30-day period commencing July 28,
1999 and up to 5.0 million shares at $21.50 per share during the 30-day period
commencing July 28, 2001. In the event the option exercisable in 1999 is
exercised for only a portion of the shares covered thereby, the number of shares
purchasable pursuant to the options exercisable in 2001 will be reduced. In
addition, Motorola has granted to the McCaw Investor a right of first offer or a
right of first refusal to purchase shares of common stock that are owned by
Motorola. In November 1997, the McCaw Investor transferred portions of the
unexercised options on common stock held by Motorola relating to an aggregate of
about 1.6 million of the shares subject thereto.
L. REGULATION
1. FCC REGULATION. The licensing, operation, acquisition and sale of
Nextel's SMR businesses are regulated by the FCC pursuant to the Communications
Act of 1934, as amended, (the "Communications Act"). SMR regulations have
undergone significant changes during the last five years and continue to evolve
as new FCC rules and regulations are adopted pursuant to the Omnibus Budget
Reconciliation Act of 1993 ("OBRA '93") and the Telecommunications Act of 1996
("TCA '96"), each of which amended portions of the Communications Act. The rule
changes have been intended to provide SMR operators with a regulatory framework
similar to that imposed on cellular and PCS licensees.
With regard to the licensing of Nextel's Digital Mobile Network, Nextel
subsidiaries currently hold site-specific FCC licenses to use SMR radio channels
in each of their markets. Unlike the spectrum licenses assigned to cellular and
PCS providers, which are granted on a geographic-area basis (e.g., MTA or MSA),
SMR licenses historically have been granted on a site-by-site basis, requiring
Nextel to obtain
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numerous licenses to construct and operate its SMR systems. Nextel holds
hundreds of site-by-site SMR licenses which, pursuant to current FCC rules, must
be constructed by May 20, 1999. Nextel has requested an extension of this
deadline, which request is still pending with the FCC. Pursuant to a recent
decision of the United States Court of Appeals for the District of Columbia
Circuit, discussed below, Nextel has asserted to the FCC that regulatory parity
considerations should entitle it to an extension.
Commencing in 1997, the FCC began assigning 800 MHz SMR licenses on a
geographic area basis, similar to cellular and PCS licenses. In 1997, the FCC
auctioned the upper 200 800 MHz SMR channels in three blocks (20 channels, 60
channels and 120 channels) per EA throughout the U.S. (hereinafter "the Upper
Channel Auction"). These EA licenses will permit the licensee to construct and
operate base stations on any authorized channel throughout the licensed
geographic area, and to make system modifications within the service area
without prior FCC approval, thus providing the same operational flexibility
provided cellular and PCS licensees. Nextel was the high bidder on 475 of the
525 EA licenses auctioned at the Upper Channel Auction, covering all 50 states.
Nextel's system must cover one-third of the population of each licensed EA
within three years and two-thirds of the population of the EA within five years,
and Nextel must construct 50% of its licensed channels in at least one location
within each EA within three years. Given Nextel's existing constructed analog
and digital footprint, these buildout requirements already have been achieved in
a substantial number of the EAs.
Nextel is authorized to relocate incumbent providers out of its EA-licensed
areas to the lower 800 MHz channels. Pursuant to the FCC's relocation rules,
Nextel provided relocation notice to incumbent providers on or before March 4,
1999. Relocation of these incumbents will provide Nextel the ability to achieve
contiguous blocks of spectrum. Any incumbents that are not relocated must be
afforded co-channel protection by Nextel.
The FCC is expected to commence an auction of the lower 230 800 MHz SMR
channels during the latter part of 1999. Until the start of that auction, the
FCC has frozen all further awards of licenses on these channels. Although
auctioned on an EA basis, the licenses will be for channel blocks of only five
or 50 channels. After the auction of the lower 800 MHz channels, incumbents on
those channels will not be subject to relocation, and EA licensees must provide
co-channel protection to incumbents. Lower channel EA licensees must construct
systems adequate to cover one-third of the population in their service area
within three years of license grant, and two-thirds within five years.
Alternatively, these EA licensees may show "substantial service" to the
geographic area within five years. A number of parties are seeking FCC
reconsideration of the lower channel auction and service rules. The FCC has yet
to act on these petitions.
A number of incumbent SMR operators appealed the FCC's new 800 MHz auction
and licensing rules to the United States Court of Appeals for the District of
Columbia Circuit. On February 5, 1999, the court upheld the 800 MHz SMR auction
rules, but found that the FCC's incumbent wide-area SMR buildout requirements
resulted in regulatory disparity between those incumbents and EA SMR licensees.
The court remanded this issue to the FCC to either explain why incumbent
wide-area SMRs are not entitled to population-based buildout requirements (i.e.,
one-third of the population within three years and two-thirds within five
years), or provide them the same or similar buildout standards. Until the FCC
resolves the issue on remand, the court held that the FCC could not impose the
existing site-by-site construction deadlines on the incumbent wide-area SMR
operator that had challenged the rule. Although the court's decision refers to
staying the construction deadline for only one incumbent SMR operator, Nextel is
asserting to the FCC that regulatory parity requires a stay for all wide-area
incumbent SMRs, thereby tolling Nextel's May 20, 1999 construction deadline.
As a Commercial Mobile Radio Services ("CMRS") provider, Nextel's use and
aggregation of radio spectrum, its technical operation and, in some cases, its
relationship with third parties, are regulated by the FCC. Since the
establishment of the CMRS regulatory framework, the FCC has permitted cellular
licensees and wireline companies the authority to participate in dispatch and
SMR services, respectively, and the FCC has imposed on Nextel and other CMRS
operators a 45 MHz CMRS spectrum cap, thus limiting the amount of CMRS spectrum
(e.g., cellular, PCS, and SMR) any single provider can hold. No more than 10 MHz
of SMR spectrum in the 800 MHz SMR service can be attributed to one entity,
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however, under existing rules. The FCC recently commenced a rulemaking
proceeding to reevaluate this spectrum cap. Southern Company filed comments
requesting that a 15 MHz cap be placed on 800 MHz SMR spectrum. On February 10,
1999, Nextel submitted an opposition to Southern Company's proposal. If the 45
MHz CMRS spectrum cap is lifted, both Nextel and its competitors will have the
ability to obtain broadband wireless licenses even if resulting attributable
spectrum ownership exceeds the current 45 MHz CMRS cap, thereby enabling them to
strengthen their market positions in a particular market or markets. Elimination
of the CMRS spectrum cap would not eliminate antitrust review of industry
mergers by the Department of Justice. Moreover, acquisitions of CMRS licenses
could only be consummated after obtaining FCC consent to any required transfer
of control application. The FCC possesses the ability to review such
transactions under a broad public interest analysis.
The FCC also requires Nextel to permit its services to be resold. In 1998,
the FCC initiated an investigation into Nextel's resale policies. Nextel has
provided timely responses to all FCC inquiries. The proceeding is pending.
Additionally, the FCC requires Nextel to permit manual roaming by users with
technically compatible equipment, to provide enhanced 911 services, to
contribute to federal and state Universal Service Funds (as defined below), to
comply with requirements under the Communications Assistance for Law Enforcement
Act ("CALEA") as well as the disability access provisions of Section 255 of the
TCA '96, and to comply with customer proprietary network information ("CPNI")
use restrictions. Local telephone number portability for wireless carriers
recently was delayed until November 24, 2002. The FCC is also considering the
imposition of an automatic roaming obligation on all CMRS providers. Each of
these existing and potential regulatory obligations could increase the costs of
Nextel's operations. However, some of the obligations, such as enhanced 911, are
coupled with a right to recover the costs of implementation.
The FCC requires that CMRS providers be capable of transmitting calls for
911 assistance from individuals using teletext ("TTY") devices, primarily people
with speech or hearing disabilities. The obligation was scheduled to take effect
October 1, 1998. However, several industry trade associations petitioned the FCC
to extend the deadline citing unresolved technical and implementation problems.
By two separate actions, the FCC suspended enforcement of the requirement until
December 31, 1998, and then continued the extension pending resolution of
individual carriers' petitions, including one by Nextel, for temporary waiver of
the requirement.
In addition, state commissions have become increasingly aggressive in their
efforts to conserve numbering resources. These efforts may disproportionately
impact wireless service providers by imposing additional costs or limiting
access to numbering resources. Recently, the industry provided comment on
proposed number optimization methods discussed in a report prepared by the
Number Resource Optimization Working Group of the North American Numbering
Council.
In its implementation of TCA '96, the FCC established new federal universal
service mechanisms that affect CMRS operators. Under the new rules, wireless
service providers potentially are eligible to receive universal service
subsidies for the first time; however, they also are required to contribute to
both federal and state universal service funds (the "Universal Service Funds").
A number of parties have challenged the FCC's universal service order and the
cases have been consolidated in the United States Court of Appeals for the Fifth
Circuit in New Orleans. A judicial determination could result in a change in
CMRS carrier support payments required for federal universal service programs.
The ultimate resolution of the federal universal service rules could affect CMRS
carrier contribution obligations to state universal service programs. At this
time, however, many states are moving forward with Universal Service Fund
programs, a number of which require contributions, varying greatly from state to
state, from CMRS carriers including Nextel.
In a related decision, the United States Court of Appeals for the District
of Columbia Circuit held on March 16, 1999 that CMRS carriers can be required to
contribute to the Texas state universal service fund, concluding that TCA '96
did not preempt states from requiring such contributions. Although a number of
states had already required CMRS carriers to make contributions, this decision
increases the
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likelihood that additional states will impose this requirement on CMRS carriers.
Nextel cannot currently estimate the extent of any additional contribution
obligations that may be imposed upon it.
As is true for cellular and PCS operators, the interconnection of
subscriber units with the public switched telephone network requires Nextel to
obtain certain exchange and interexchange services from telephone companies. The
FCC established a national regulatory framework that sets pricing standards and
negotiation and arbitration guidelines. In 1997, the United States Court of
Appeals for the Eighth Circuit vacated certain of these standards and
guidelines, on the grounds that the FCC lacked the authority to bind state
regulators on the matter of local pricing of interconnection. The FCC then
appealed the decision to the Supreme Court. On January 25, 1999, the Supreme
Court reversed the Eighth Circuit's decision. Specifically, the Supreme Court
held that the FCC does have authority over interconnection pricing, as well as
other local competition provisions of TCA '96. This ruling generally vindicated
the FCC's approach to local competition and helped facilitate the
interconnection goals of CMRS carriers.
Furthermore, the FCC recently adopted new rules limiting the use of CPNI by
telecommunications carriers, including Nextel, in marketing a broad range of
telecommunications services and other services to their customers, and the
customers of affiliated companies. The FCC has stayed portions of the rules as
they apply to CMRS carriers. Once the stay is lifted, these new rules may affect
Nextel and the way it conducts its business, particularly its ability to compete
against incumbent local exchange carriers ("LECs") with wireless affiliates.
However, Nextel does not anticipate that the rules will result in a significant
adverse impact on its financial position, results of operation or liquidity.
Allegations of harmful effects from the use of hand-held cellular phones
have prompted new studies concerning the safety of the emissions of
electromagnetic energy from hand-held wireless phones. In August 1996, however,
the FCC adopted new standards for evaluating the extent to which wireless
facilities will expose both employees and the public to radio frequency
radiation. At that time, the FCC determined that state and local regulation of
radio frequency radiation from facilities used to provide personal wireless
services is preempted to the extent the facilities comply with the FCC's radio
frequency exposure limits. On August 25, 1997, the FCC affirmed the radio
frequency exposure limits adopted in 1996. At that time, it also revised a
number of rules, including extending the transition period for implementing
federal radio frequency emissions guidelines for existing facilities, and
expanded the coverage of its radio frequency emissions regulations to include
all SMR operators, rather than covering only those operators that offer services
comparable to cellular and PCS. In the face of an increase in local siting
disputes, the FCC concurrently issued a notice of proposed rulemaking to
consider, among other things, the procedure for obtaining relief from state and
local regulations pertaining to the placement of facilities, guidelines
governing the types of information that a state or local government can request
to judge compliance with FCC emissions rules, and the adoption of a presumption
that facilities licensed by the FCC comply with the FCC's radio frequency
emissions guidelines. On August 5, 1998, the FCC announced a facilities siting
agreement between state and local officials and several wireless industry
associations. This agreement establishes an informal dispute resolution process
that can be used by Nextel to resolve disputes affecting the siting of its
wireless facilities. The FCC has not yet followed up on the notice of proposed
rulemaking by adopting any new rules. Meanwhile, the informal dispute resolution
process has not been widely implemented and the scientific studies of
electromagnetic energy are still ongoing.
Nextel also is subject to limitations on foreign government investment as
set forth in the Communications Act, which currently restricts foreign ownership
or control over CMRS licenses, including SMR licenses. The TCA '96 relaxes these
restrictions by eliminating the statutory provisions restricting foreign
officers and directors in licensees and their parent corporations. In February
1997, the United States entered into a World Trade Organization ("WTO")
agreement with respect to telecommunications. The agreement requires the United
States, among other things, to afford "national" treatment to foreign investors
of WTO countries seeking indirect ownership of CMRS licenses in the United
States. These changes, and the FCC's rules implementing the agreement, which
became effective on February 9, 1998, will permit additional foreign investment
and participation in the United States' wireless marketplace through ownership
of FCC licenses.
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In October 1997, the FCC established uniform rules governing incumbent LEC
participation in broadband CMRS within each LEC's landline telephone region,
addressing incentives incumbent LECs may have to engage in anticompetitive
practices against CMRS providers, such as discriminatory interconnection,
cost-shifting and anticompetitive pricing. These rules will expire on January 1,
2002 unless extended by the FCC. The FCC also has released a notice of inquiry
on calling party pays ("CPP"), a mechanism that would allow CMRS providers to
offer service plans under which callers to CMRS customers would pay for the
calls that they make. Recently, the FCC indicated it will further consider a CPP
environment, which some proponents believe could increase traffic on wireless
networks by encouraging wireless subscribers to give out their wireless phone
numbers. Implementing CPP arrangements would create complicated billing and
customer relations issues, but should not have a significant impact on Nextel's
operating costs.
On April 20, 1998, the FCC released a notice of proposed rulemaking to
implement Section 255 of TCA '96, which requires telecommunications carriers to
make their services accessible to individuals with disabilities. The FCC has
proposed regulations implementing statutory requirements, and could adopt
proposals requiring modifications to existing customer equipment as well as
requirements governing new equipment and carrier networks.
On September 17, 1998, the FCC published proposed rules to govern customer
billing practices by telecommunications services providers such as Nextel.
Adoption of some of the FCC's proposals could increase the complexity of
Nextel's billing processes and restrict Nextel's ability to bill customers for
services in the most commercially advantageous way. For these reasons, Nextel,
as well as many other CMRS carriers, have filed comments urging caution in the
FCC's exercise of authority over CMRS customer billing.
The FCC has also extended, to June 30, 2000, the date by which wireless
carriers such as Nextel must comply with existing requirements under CALEA and
has proposed to adopt additional requirements, including, among other things, a
proposal to require the furnishing of location information when law enforcement
authorities monitor telephone calls under court order. Although CALEA provides
for some cost recovery, its availability is significantly restricted and the
funding limited. Thus, the adoption of additional CALEA requirements could
require additional expenditures by Nextel to ensure its ability to comply and
such expenditures may not be recovered.
On March 24, 1998 the FCC adopted the personal communications service PCS
C-Block restructuring order that allows financially troubled entities that won
C-Block licenses at auction to obtain partial financial relief from their
payment obligations and to return some or all of their C-Block licenses to the
FCC for reauctioning. The FCC began the reauction of returned licenses on March
23, 1999. The reauction will place additional spectrum in the hands of potential
competitors of Nextel.
2. FOREIGN REGULATION. The licensing, construction, ownership and
operation of wireless communications systems and radio frequency allocations are
regulated by governmental entities in the countries in which Nextel
International's Operating Companies conduct business. In addition, such matters
and certain other aspects of wireless communication system operations may be
subject to public utility regulation in the jurisdiction where service is
provided. Changes in the current regulatory environments in such countries, or
future judicial intervention could have a material adverse affect on Nextel
International and its business and results of operations. For additional
information concerning foreign government regulation relevant to Nextel
International, see Nextel International's Form 10-K for the year ending December
31, 1998.
3. STATE REGULATIONS AND LOCAL APPROVALS. In OBRA '93, Congress preempted
states from regulating CMRS rates or entry. The scope of the allowable level of
state regulations of CMRS, however, remains unclear since Congress allowed
states to retain jurisdiction over CMRS carriers' "other terms and conditions"
of service. OBRA '93 does not identify the "other terms and conditions" of CMRS
service that can be regulated by the states, and the resolution of this issue
will impact the extent to which SMR providers will be subject to state
regulation of CMRS. Some states have eliminated all regulation of CMRS
providers, for example, Virginia, while others, such as Kentucky and Louisiana,
continue to require
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CMRS tariff filings. The siting of base stations also remains subject to state
and local jurisdiction although Congress attempted to limit abuses of that
authority in adopting Section 704 of the TCA '96. Petitions seeking
clarification of states' siting authority are currently pending at the FCC.
Future changes in regulation or legislation affecting Digital Mobile
Network service and the recent allocation of additional CMRS spectrum by
Congress and the FCC could materially adversely affect Nextel's business.
M. EMPLOYEES
At December 31, 1998, Nextel had about 9,700 full-time employees. None of
Nextel's employees are covered by a collective bargaining agreement, and Nextel
believes that its relationship with its employees is good.
N. RISK FACTORS
1. NEXTEL HAS A HISTORY OF NET LOSSES AND NEGATIVE CASH FLOW AND MAY NOT BE
ABLE TO SATISFY ITS CASH NEEDS FROM OPERATIONS.
Nextel has focused on developing its business, rather than emphasizing
current earnings. Nextel has never been profitable and has experienced negative
cash flow since its start in 1987. Nextel had net losses attributable to common
stockholders of about $1.8 billion during 1998. Nextel's accumulated deficit was
about $4.4 billion at December 31, 1998. Nextel expects that losses will
continue over the next several years. Nextel's ability to obtain financing and
to generate revenue to support its operations and to meet its working capital
needs is subject to many risks and uncertainties. In addition, Nextel cannot
know when, if ever, net cash generated by its internal business operations will
support its growth and continued operations.
2. NEXTEL WILL NEED SUBSTANTIAL AMOUNTS OF ADDITIONAL FINANCING.
A. REASONS NEXTEL WILL NEED CASH.
Nextel anticipates that it will need substantial amounts of cash for:
- capital expenditures to build and enhance its Digital Mobile Network;
- operating expenses relating to its Digital Mobile Network and analog
specialized mobile radio business;
- potential acquisitions, including acquisition of rights to spectrum,
which Nextel requires to conduct its wireless communications business;
- debt service requirements; and
- other general corporate purposes.
Nextel expects its cash needs will exceed its cash flows from operating
activities through 1999. In addition, Nextel may need to revise its business
plan to respond to competitive and other factors, so its need for cash may
increase. See Part II, "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- C. Liquidity and Capital
Resources."
B. NEXTEL'S CURRENT CREDIT FACILITIES ARE LIMITED AND CONTAIN
RESTRICTIONS ON ADDITIONAL FINANCINGS.
Nextel's long-term cash needs are much greater than its availability under
its existing financing agreements. Nextel may not be able to generate sufficient
net cash through its internal business operations, or otherwise obtain access to
sufficient additional funds, for example, by selling non-strategic or non-core
assets, to meet its future cash needs. As a result, Nextel will have to raise
substantial amounts of additional funds, in the form of equity or debt, in the
future to support its growth and operations. Under its bank credit agreement as
in effect on December 31, 1998, Nextel may borrow up to $3.295 billion in
secured financing from its bank lenders provided that Nextel satisfies financial
and other conditions. Assets
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of some of Nextel's operating subsidiaries secure amounts outstanding under
these financing arrangements. As of December 31, 1998, about $2.1 billion of
this secured financing had been drawn. The availability of this financing is
also subject to Nextel satisfying covenants under indentures relating to
Nextel's public notes. Nextel's access to additional funds may be limited by the
terms of its existing financing agreements, including:
- covenants that restrict the amount of additional borrowings, including
additional borrowings under existing financing arrangements;
- covenants that restrict Nextel's grant of liens on assets that affect
Nextel's ability to obtain new secured financing; and
- existing debt service requirements.
C. FUNDING REQUIREMENTS FOR INTERNATIONAL OPERATIONS AND GROWTH MAY CAUSE
EVEN GREATER CASH NEEDS.
Based on Nextel International's assessment of the business activity and
related cash needs of its operating subsidiaries that are controlled by or that
rely substantially on Nextel International for further funding, Nextel
International believes that it will have adequate funding to continue its
operations only into the latter half of 1999. Nextel International is exploring
a number of alternative sources of debt and equity financing, and has entered
into arrangements with Motorola to obtain additional vendor financing, to fund
its operations, capital expenditures, working capital and other cash needs. If
sufficient financing does not become available at times or in amounts required
to meet Nextel International's needs, Nextel may fund some or all of Nextel
International's cash needs. This would increase Nextel's own cash needs. If
Nextel does provide funding to Nextel International and Nextel's remaining
financing sources are not sufficient to meet its own needs, Nextel may seek to
raise additional capital from public or private debt or equity sources.
D. OTHER FACTORS MAY ADVERSELY AFFECT NEXTEL'S ACCESS TO ADDITIONAL
FINANCING.
Nextel's access to additional funds also may be limited by:
- general market conditions that adversely affect the availability or cost
of financings;
- market conditions affecting the telecommunications industry in general;
and
- specific factors affecting Nextel's attractiveness as a borrower or
investment vehicle, including:
- the terms of Nextel's arrangements with Motorola that relate to
Motorola's ownership interest in Nextel, and the terms of options and
warrants issued to others, that may make equity financings more
difficult;
- the uncertainty concerning the ultimate outcomes of legal challenges
lodged against auctions of spectrum and licenses;
- the ability to retune certain incumbent licensees to remove them from
spectrum as to which Nextel was the highest bidder at an auction;
- the potential commercial opportunities and risks associated with
implementation of Nextel's business plan;
- the market's perception of Nextel's performance; and
- the actual amount of cash needed by Nextel to pursue its business
strategy.
E. NEXTEL DOES NOT HAVE SUFFICIENT ADDITIONAL FINANCING COMMITMENTS TO
MEET ITS LONG-TERM NEEDS.
Currently, other than under its existing bank facility, Nextel has no
legally binding commitments or understandings with any third parties to obtain
any material amount of additional equity or debt financing. Nextel cannot assure
you that it will be able to obtain any additional financing in the amounts or at
the times that it may require, or if Nextel does obtain any financing, that it
would be on acceptable terms. As a result, Nextel cannot assure you that it will
have adequate capital to implement the contemplated
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expansion and enhancement of its Digital Mobile Network. Additionally, although
Nextel has entered into arrangements with Nextel Partners that are separately
funded and are intended to result in a faster build-out and commencement of
Digital Mobile Network operations in secondary and smaller markets in the United
States, Nextel cannot assure you that Nextel Partners' efforts will succeed.
Nextel's failure to obtain sufficient additional financing could result in the
delay or abandonment of some or all of its development, expansion and
acquisition plans and expenditures, which could have an adverse effect on
Nextel.
3. NEXTEL'S FUTURE PERFORMANCE WILL DEPEND ON ITS ABILITY TO SUCCEED IN THE
HIGHLY COMPETITIVE WIRELESS VOICE TRANSMISSION INDUSTRY.
Nextel's ability to compete effectively with established and prospective
wireless communications service providers depends on many factors, including:
- THE CONTINUED SATISFACTORY PERFORMANCE OF NEXTEL'S VOICE TRANSMISSION
TECHNOLOGY. Technology performance issues could adversely affect the
implementation of Nextel's Digital Mobile Network. Customer acceptance of
the services Nextel offers is and will continue to be affected by
technology-based differences and by the operational performance and
reliability of system transmissions on Nextel's Digital Mobile Network.
In the past, using the first generation iDEN digital transmission
technology, Nextel encountered performance, reliability, accessibility
and transmission quality issues on its Digital Mobile Network. If Nextel
is unable to address and resolve satisfactorily performance or other
transmission quality issues as they arise, the further successful
commercialization of the Digital Mobile Network could be delayed and
Nextel could be adversely affected. If Nextel, for any reason, is unable
to continue to implement its Digital Mobile Network as it currently
expects, Nextel may not be competitive with other wireless communications
providers. In addition, Nextel would be unable, utilizing its analog
specialized mobile radio technology and systems, to provide mobile
telephone services comparable to those provided by other cellular and
wireless communications services providers or to achieve significant
further subscriber growth.
- THE ABILITY TO EXPAND, PROVIDE AND MAINTAIN SYSTEM COVERAGE. Nextel's
geographic system coverage could adversely affect Nextel's competitive
position. Nextel currently offers its mobile telephone customers the
ability to "roam" throughout Nextel's existing Digital Mobile Network
market areas and the roaming agreement with Nextel Partners permits
Nextel's customers the ability to "roam" in additional United States
market areas deployed and operated by Nextel Partners. Nextel, however,
will not be able to provide roaming system coverage comparable to that
currently available through roaming arrangements from cellular and
certain personal communication services operators, unless and until a
nationwide Digital Mobile Network build-out is substantially completed.
This places Nextel at a competitive disadvantage, as some other providers
currently have roaming agreements that provide coverage of each other's
markets throughout the United States. Nextel also cannot assure you that
a sufficient number of customers or potential customers will be willing
to accept system coverage limitations as a trade-off for the enhanced
multi-function wireless communications package Nextel provides on its
nationwide Digital Mobile Network.
- THE ABILITY TO PROVIDE DUAL MODE SERVICE. Nextel currently is not able
to provide its digital customers with analog capability. During the
transition to digital technology, some participants in the United States
cellular industry are offering subscriber units with dual mode, analog
and digital, compatibility. Additionally, some analog cellular system
operators that directly or through their affiliates also operate digital
personal communication services have made available to their customers
dual mode/dual band (800 MHz cellular/1900 MHz personal communication
services) subscriber units. These units combine the enhanced feature set
available on digital personal communication services within their digital
service coverage areas with the broader wireless coverage area available
on the analog cellular network. Nextel does not have comparable hybrid
subscriber units of either type currently available to its customers.
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- THE ABILITY TO FURTHER DEVELOP COST EFFECTIVE DIRECT AND INDIRECT
CHANNELS OF DISTRIBUTION FOR ITS DIGITAL MOBILE NETWORK PRODUCTS AND
SERVICES. Many of Nextel's competitors have offered cellular and other
telecommunications services for many years. During that period, those
competitors established extensive networks of retail locations and
multiple distribution channels, and so enjoy a competitive advantage over
Nextel in these areas. Nextel has increased the proportion of its Digital
Mobile Network customers that it obtains through its indirect distributor
network, and Nextel currently anticipates that it will rely more heavily
on indirect distribution channels to achieve greater market penetration
for its digital wireless service offerings. However, as Nextel expands
its retail subscriber base through increased reliance on indirect
distribution channels, and as price competition in the wireless industry
intensifies, the average revenue per subscriber unit may decrease and the
churn rate of subscribers may increase.
- THE ABILITY TO MAINTAIN PRICING PACKAGES ATTRACTIVE TO CUSTOMERS. Nextel
faces price competition.
A. SOME OF NEXTEL'S COMPETITORS ARE FINANCIALLY STRONGER THAN NEXTEL.
Some competitors may be able to offer prospective customers lower base
prices, or greater equipment subsidies or discounts than those, if any,
that Nextel could afford to offer. Nextel's competitors may also be able to
offer services to customers at prices that are below prices that Nextel
offers for comparable services. As a result, Nextel's ability to compete
based on the price of its Digital Mobile Network subscriber units and
service offerings will be limited.
B. NEXTEL'S EQUIPMENT IS MORE EXPENSIVE THAN SOME COMPETITORS'.
Nextel currently markets multi-function subscriber handsets, providing
mobile telephone and private and group dispatch service, in addition to
paging and alphanumeric short-text messaging. Nextel's handsets are, and
are likely to remain, significantly more expensive than analog handsets and
are, and are likely to remain, somewhat more expensive than digital
cellular or personal communication services handsets that do not
incorporate a comparable multi-function capability. However, Nextel
believes that its multi-function subscriber handsets currently are
competitively priced compared to multi-function digital cellular and
personal communication services handsets.
C. NEXTEL MAY FACE CONTINUING PRESSURE TO REDUCE PRICES.
Over the past several years as the number of wireless communications
providers in Nextel's market areas has increased, its competitors' prices
in such markets have generally decreased. Nextel may encounter further
market pressures:
- to reduce its Digital Mobile Network service offering prices;
- to restructure its Digital Mobile Network service offering packages to
offer more value;
- to respond to particular short term, market specific situations, for
example, special introductory pricing or packages that may be offered
by new providers launching their service in a particular market; or
- to remain competitive in the event that wireless service providers
generally continue to reduce the prices charged to their customers.
- THE ABILITY TO KEEP PACE WITH TECHNOLOGICAL CHANGE. Nextel's digital
technology could become obsolete. Nextel relies on digital technology
that is not compatible with, and competes with, other forms of digital
and non-digital voice communication technology. Competition among these
differing technologies can:
- segment the user markets, thereby reducing demand for specific
technologies, including Nextel's;
- reduce the resources devoted by third party suppliers, including
Motorola, which supplies all of Nextel's current digital technology,
in developing or improving the technology for Nextel's systems; and
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- adversely affect market acceptance of Nextel's services.
Nextel cannot assure you that its digital technology will successfully
compete with the other forms of digital and non-digital voice communication
systems. Further, new digital or non-digital voice communication
transmission technology may develop that will cause Nextel's existing
systems technology to be obsolete or otherwise impair market acceptance of
its technology.
- THE ABILITY TO MARKET SUCCESSFULLY ITS INTEGRATED WIRELESS COMMUNICATIONS
SERVICES. Nextel's growth may exceed the capabilities of its systems,
hurting its performance.
A. NEXTEL FACES LIMITATIONS ON ITS ABILITY TO INCREASE SUBSCRIBERS.
Nextel's ability to continue to increase the number of subscribers on
its Digital Mobile Network depends on a variety of factors, including:
- the ability to successfully plan for additional system capacity at
levels needed to meet anticipated new subscribers and the related
increases in system usage;
- the ability to obtain additional radio spectrum when and where
required; and
- the availability of a sufficient quantity of cell sites, system
infrastructure equipment and subscriber units, of the appropriate
models and types, to meet the demands and preferences of potential
subscribers to the Digital Mobile Network.
B. NEXTEL MAY FACE LIMITATIONS ON AVAILABILITY OF CELL SITES AND
EQUIPMENT.
Although Nextel believes it has secured sufficient cell sites at
appropriate locations in its markets to meet planned system coverage and
capacity targets, Nextel cannot assure you that it will meet those needs in
the future. In addition, Nextel generally has been able to obtain adequate
quantities of base radios and other system infrastructure equipment from
Motorola and other suppliers, and adequate volumes and mix of subscriber
units and related accessories from Motorola, to meet subscriber and system
loading rates. However, Nextel cannot assure you that quantities will be
sufficient in the future. Additionally, Nextel has contractual arrangements
with Nextel International and Nextel Partners that contemplate that, in the
event of shortages of that equipment, available supplies would be allocated
proportionately among Nextel and those entities.
C. NEXTEL HAS POTENTIAL SYSTEMS LIMITATIONS ON ADDING CUSTOMERS.
Other factors affecting Nextel's ability to successfully add customers
to its Digital Mobile Network include:
- the adequacy and efficiency of Nextel's information systems, business
processes and related support functions;
- the length of time between customer order to activation of service on
the Digital Mobile Network, which currently is much longer than that
typically encountered for "off the shelf" cellular and personal
communication services wireless offerings; and
- Nextel's ability to improve the efficiency and speed of the processes
for Nextel's customer service and accounts receivable collection
functions to adequately respond to the needs of a growing customer
base on the Digital Mobile Network and the increasing amounts of
billed digital service and equipment revenue.
Customer reliance on Nextel's customer service functions may increase
as Nextel adds Digital Mobile Network customers through indirect
distribution channels and through direct sales channels not involving
direct face-to-face contact with a sales representative, for example, phone
order sales or sales through web sites.
Although Nextel has taken steps to refine, improve and scale-up its
back-office and support systems and processes, Nextel cannot assure you
that these systems and processes will achieve levels
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of capacity, or improvements in speed and efficiency, sufficient to meet
customer and network growth and demands, or that Nextel will be able to do
so on a timely basis. Nextel's inability to:
- timely meet Digital Mobile Network capacity needs;
- have access to suitable cell sites and infrastructure and subscriber
equipment in any one or more of its market areas; or
- develop, when required, improvements or expansions to its systems and
processes adequate to meet desired levels of customer activation and
increased levels of usage and demand for wireless services on the
Digital Mobile Network
could decrease or postpone subscriber growth, or delay or otherwise
impede billing and collection of amounts owed, thereby adversely
affecting Nextel.
- THE ABILITY OF COMPETITORS TO PROVIDE TWO-WAY RADIO DISPATCH
SERVICES. Nextel's two-way radio dispatch services are currently not
available through traditional cellular or personal communication services
providers; however, if either personal communication services or cellular
operators provide two-way radio dispatch services in the future, Nextel's
competitive advantage may be impaired.
Nextel cannot predict the competitive effect that any of these factors, or
any combination thereof, will have on it, or whether it will compete
successfully in the future.
4. REGULATORY AND OTHER FACTORS COULD DELAY OR PREVENT NEXTEL FROM OFFERING
SERVICES IN NEW MARKET AREAS.
Before fully implementing its Digital Mobile Network in a new market area,
Nextel must complete systems design work, find appropriate sites and construct
necessary transmission structures, receive regulatory approvals, free up
frequency channels now devoted to non-digital transmissions and begin systems
optimization. In the past, these processes have taken weeks or months to
complete, and may be hindered or delayed by many factors, including
unavailability of antenna sites at optimal locations, land use and zoning
controversies and limitations of available frequencies. Nextel cannot know when,
if ever, its digital technology will be available for commercial use in new
markets. Nextel will rely on Nextel Partners to implement the Digital Mobile
Network in new markets located in Nextel Partners' territory. Nextel Partners
likely will encounter many of the same challenges as Nextel in implementing the
Digital Mobile Network in its new markets.
5. NEXTEL PRINCIPALLY RELIES ON ONE SUPPLIER TO IMPLEMENT ITS DIGITAL
MOBILE NETWORK.
Motorola is currently Nextel's sole source for the iDEN infrastructure and
subscriber handset equipment used by Nextel throughout its markets. Nextel
expects to rely on Motorola for the manufacture of a substantial portion of the
equipment necessary to construct its Digital Mobile Network and handset
equipment for the next several years. The failure by Motorola to deliver
necessary technology improvements and enhancements and iDEN system
infrastructure and subscriber equipment on a timely, cost-effective basis would
have an adverse effect on Nextel. Nextel expects that for the next few years,
Motorola and competing manufacturers who are licensed by Motorola will be the
only manufacturers of subscriber equipment that is compatible with Nextel's
Digital Mobile Network. The equipment purchase agreements between Nextel and
Motorola provide for the licensing by Motorola of interfaces relating to
infrastructure and subscriber equipment and of additional manufacturers for
subscriber equipment. Motorola has agreed to negotiate to enter into licenses
with at least one alternative manufacturer of iDEN infrastructure equipment.
Currently, however, there are no arrangements in effect with any additional
manufacturers to supply Nextel with alternative sources for either iDEN system
infrastructure or subscriber equipment.
6. AGREEMENTS WITH MOTOROLA REDUCE NEXTEL'S OPERATIONAL FLEXIBILITY.
Nextel must purchase from Motorola a significant amount of system
infrastructure equipment. Nextel has agreed not to install and use digital radio
frequency technology as an alternative to iDEN on more than 25% of its
specialized mobile radio channels in the 806-824 MHz band in one or more of its
top 20
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domestic markets, or to utilize any of its specialized mobile radio channels for
voice interconnect on United States cellular and/or personal communication
services radio telephony standards prior to August 4, 1999, unless:
- Nextel determines that the iDEN equipment fails to meet certain
performance specifications established in the equipment purchase
agreements with Motorola, which failure materially adversely affects the
commercial viability of the technology to provide reliable services as
intended by Motorola and Nextel, and Motorola does not cure the failure
within six months after receiving notice thereof; or
- Nextel or Digital Radio L.L.C., an entity controlled by Craig O. McCaw,
offers to acquire the remainder of Motorola's shares of Nextel common
stock at a per share price of at least 110% of the average of the closing
prices of the common stock over the 30 trading days before the public
announcement by Nextel of the decision to implement the plan.
In either case, if Motorola manufactures, or elects to manufacture, the
alternate technology that Nextel elects to deploy, Nextel must purchase 50% of
its infrastructure requirements and 25% of its subscriber equipment requirements
from Motorola for three years, so long as the equipment is competitive in price
and performance to the equipment utilizing or incorporating the alternate
technology then offered by other manufacturers.
Should Nextel choose to deploy a technology other than iDEN for any of its
wireless communications services, Nextel believes that its systems planning and
contractual relationships with Motorola would permit it to utilize a different
technology. Due to the considerable present uncertainty surrounding the factors
that might affect that decision, including the additional capital requirements
associated with the deployment of an alternative technology, the performance
characteristics and customer perceptions of iDEN or of competing digital
technologies and possible future improvements in the iDEN technology platform,
it is impossible to predict if or when Nextel would make that decision.
7. NEXTEL'S INTERESTS MAY CONFLICT WITH THOSE OF MOTOROLA.
Motorola and its affiliates engage in wireless communications businesses,
and may in the future engage in additional businesses, which do or may compete
with some or all of the services Nextel offers through its Digital Mobile
Network. Although Nextel believes that its relationship with Motorola reflects
the realities of purchasing from a competitor, Nextel cannot assure you that the
potential conflict of interest will not adversely affect Nextel in the future.
In addition, Motorola is a significant stockholder of Nextel, which creates
potential conflicts of interest, particularly with regard to significant
transactions.
8. NEXTEL'S FUTURE DEPENDS ON GOVERNMENTAL REGULATION.
The Federal Communications Commission regulates the licensing, operation,
acquisition and sale of Nextel's specialized mobile radio businesses. Federal
law governs the allocation and licensing of the radio frequency spectrum that
Nextel uses to conduct those businesses. The Federal Communications Commission's
regulations have significantly changed during the last few years and continue to
evolve as new regulations are adopted pursuant to the Omnibus Budget
Reconciliation Act of 1993 and the Telecommunications Act of 1996. Nextel's
ability to conduct its business depends, in part, on its compliance with these
regulations. Future changes in regulation or legislation affecting Digital
Mobile Network service and Congress' and the Federal Communications Commission's
continued allocation of additional commercial mobile radio services spectrum
could adversely affect Nextel's business. Similar government regulatory factors
affect Nextel's operations outside the United States.
In particular, Nextel may be impacted by the following recent regulatory
developments involving the Federal Communications Commission:
- a proposal to alter the allocation of Nextel's revenues between federal
and state jurisdictions for purposes of calculating universal service
fund contributions;
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- a proposal to regulate billing disclosures and billing practices in a
manner that could be disadvantageous to Nextel;
- a proposal to implement statutory requirements relating to the
accessibility by persons with disabilities to telecommunications
services, which may include proposals requiring modifications to
equipment used by those customers;
- extension of the date for compliance with federal statutory provisions
requiring telecommunications service providers to make their networks
accessible to law enforcement authorities and proposals that require
those providers to have additional capabilities to facilitate this
access;
- the temporary stay of some provisions of rules that protect against the
disclosure of customer proprietary network information and restrict the
manner in which that information may be used;
- the reauction of some spectrum licenses that could be used to provide
competing services, which began on March 23, 1999; and
- the extension of the date for implementation of local number portability
to November 24, 2002.
9. NEXTEL PRIMARILY HAS INTANGIBLE ASSETS.
Nextel has a significant amount of intangible assets, such as licenses
granted by the Federal Communications Commission. The value of these licenses
will depend significantly upon the success of Nextel's Digital Mobile Network
business and the growth of the specialized mobile radio and wireless
communications industries in general. If Nextel defaults on debt or if Nextel
were liquidated, Nextel cannot assure you that the value of these assets will be
sufficient to satisfy its obligations. Nextel had a net tangible book value
deficit of about $5.0 billion as of December 31, 1998. See "-- L. Regulation."
10. NEXTEL IS SUSCEPTIBLE TO CONTROL BY SIGNIFICANT STOCKHOLDERS.
Based on the ownership information relating to Nextel as of December 31,
1998, and giving effect to the conversion of Nextel's preferred stock and
non-voting common stock, and the exercise in full of all options to purchase
common stock issued by Nextel and Motorola to entities controlled by Mr. McCaw
and a warrant held by Motorola, Mr. McCaw's affiliates would hold about 20.4%,
and Motorola would hold about 15.4% of the outstanding Nextel stock.
Digital Radio L.L.C. may designate at least one fourth of the board of
directors of Nextel. In addition, Digital Radio may select, from its
representatives on the board of directors, a majority of the operations
committee of Nextel's board of directors, which has significant authority
relating to Nextel's business strategy, budgets, financing arrangements and in
the nomination and oversight of certain executive officers. As a result, Digital
Radio may exert significant influence over Nextel's affairs. Although the board
of directors retains the authority to override actions taken or proposed to be
taken by the operations committee, under agreements with Digital Radio, such
overrides may lead to certain adverse financial consequences. Motorola may
nominate two directors to the board of directors of Nextel. Although Motorola
has agreed to support the decisions and recommendations of the operations
committee and to vote its shares of common stock accordingly, any
Motorola-designated Nextel director retains the right to vote in a manner
consistent with his fiduciary duties and Motorola may vote its shares as it
determines necessary with respect to issues that conflict with Motorola's
corporate ethics or that present conflicts of interest, or in order to protect
the value or marketability of the shares of common stock held by it.
If Digital Radio and Motorola choose to act together, they could have a
sufficient voting interest in Nextel to, among other things:
- exert effective control over the approval of amendments to Nextel's
certificate of incorporation, mergers, sales of assets or other major
corporate transactions as well as other matters submitted for stockholder
vote;
- defeat a takeover attempt; and
- otherwise control whether particular matters are submitted for a vote of
the stockholders of Nextel.
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Digital Radio, Mr. McCaw and their affiliates have and, subject to the
terms of applicable agreements between Digital Radio and Nextel, may have an
investment or interest in entities that provide wireless telecommunications
services that could potentially compete with Nextel. Under the relevant
agreements, Mr. McCaw, Digital Radio and their controlled affiliates may not,
for a period of time, participate in other two-way terrestrial-based mobile
wireless communications systems in the region that includes any part of North
America or South America unless these opportunities have first been presented to
and rejected by Nextel. See "-- K. Agreements with Significant
Stockholders -- 1. McCaw Interests."
11. NEXTEL'S COMMITMENTS TO ISSUE ADDITIONAL COMMON STOCK MAY IMPAIR ITS
ABILITY TO RAISE CAPITAL.
Nextel currently has outstanding commitments in various forms, including
warrants, options and convertible securities, to issue a substantial number of
new shares of its common stock. The shares subject to these issuance
commitments, to some degree, will be issued in registered transactions and thus
will be freely tradeable. In many other instances, these shares will be subject
to grants of registration rights that, if and when exercised, would result in
those shares becoming freely tradeable. Nextel has also granted registration
rights with respect to a significant number of its outstanding shares, including
shares of common stock issuable upon conversion of securities issued in some
transactions. The exercise of registration rights by persons holding those
shares would permit those persons to sell those shares without regard to the
limitations of Rule 144 under the Securities Act of 1933. An increase in the
number of shares of Nextel's common stock that will become available for sale in
the public market may adversely affect the market price of the common stock and,
as a result, could impair Nextel's ability to raise additional capital through
the sale of its equity securities.
12. CONCERNS ABOUT HEALTH RISK MAY AFFECT NEXTEL'S PROSPECTS.
Mobile communications devices allegedly pose health risks due to radio
frequency emissions from these devices. Studies performed by wireless telephone
equipment manufacturers have investigated these allegations, and a major
industry trade association and governmental agencies have stated publicly that
the use of these phones poses no undue health risk. The actual or perceived risk
of mobile communications devices could adversely affect Nextel through a reduced
subscriber growth rate, a reduction in subscribers, reduced network usage per
subscriber or through reduced financing available to the mobile communications
industry.
13. NEXTEL DEPENDS ON ITS MANAGEMENT TEAM TO EFFECT ITS RAPID GROWTH
STRATEGY.
Nextel's senior management team develops and implements its business plans
and strategies, which contemplate an accelerated nationwide build-out, expansion
and enhancement of its Digital Mobile Network and related aggressive advertising
and marketing campaigns. Nextel's rapid growth depends on the focused activities
of its senior management team. The unexpected loss of the services of any of
these individuals could adversely affect Nextel's ability to maintain its growth
momentum.
14. NEXTEL'S OPERATIONS MAY BE DISRUPTED DUE TO YEAR 2000 READINESS ISSUES.
Nextel may be subject to risks associated with Year 2000 readiness. Nextel
has substantially completed the assessment phase with respect to the Year 2000
readiness status of its own internal systems and processes and recently
commenced the remediation and testing phase for some aspects of its business.
Nextel has not yet developed contingency plans for resolving issues that may be
identified and for which remediation is not possible on a timely or
cost-effective basis. Nextel does not currently anticipate that the cost of the
assessment, remediation and testing of its domestic and international financial
and operating systems will exceed $45 million or will require that it defer or
abandon any material projects, goals or objectives relating to its operations.
Nextel is subject to risks associated with the Year 2000 readiness problems
of third parties, especially providers of products and services that are
critical to its ability to conduct its business operations, including other
telephone service providers with which its service connects. Nextel also is
aware that, with respect to its operations outside the United States,
governmental authorities and third parties with whom it may have
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material business relationships may not be at the same level of awareness,
assessment or remediation of their potential Year 2000 readiness issues as are
their United States counterparts. If any of these third parties, or Nextel, is
unable to resolve material Year 2000 readiness issues on a timely or
cost-effective basis, there would be an adverse effect on Nextel. See Part II
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- G. Year 2000 Readiness."
15. NEXTEL IS SUBJECT TO RISKS RELATING TO ITS JOINT INVESTMENTS.
Nextel recently has entered into a contractual joint venture and other
relationships in connection with the formation and financing of Nextel Partners,
and may enter into other joint ventures or similar arrangements in the future.
Outside the United States, several of Nextel's international operations are
conducted through entities having one or more third-party owners, and some of
these entities are not controlled by Nextel. There are risks in participating in
arrangements of these types, including the risk that the other participants may
at any time have economic, business or legal interests or goals that are
inconsistent with those of the joint enterprise or Nextel. There also is the
risk that a participant may be unable to meet its economic or other obligations
to the joint enterprise and that Nextel may be required to fulfill some or all
of those obligations. Nextel also may be or become obligated to acquire all or a
portion of the ownership interest of some or all of the other participants in
such joint enterprises. In addition, to the extent that Nextel participates in
international arrangements of these types, the operations of the relevant entity
will be subject to various additional risks not present in domestic joint
enterprises.
16. NEXTEL IS SUBJECT TO RISKS RELATING TO ITS FOREIGN OPERATIONS.
Nextel owns interests in and operates international wireless companies
through Nextel International. The risks that relate to such foreign operations
include:
- political, economic and social conditions in the foreign countries where
Nextel conducts operations;
- currency risks and exchange controls;
- potential inflation in the applicable foreign economies;
- the impact of import duties on the costs or prices of infrastructure
equipment and subscriber handsets;
- foreign taxation of earnings and payments received by Nextel
International from its operating subsidiaries;
- regulatory changes affecting the telecommunications industry and wireless
communications; and
- operations being disrupted due to Year 2000 readiness issues affecting
Nextel International.
Nextel cannot assure you that the risks associated with its foreign
operations will not adversely affect its or Nextel International's operating
results or prospects, particularly as these operations expand in scope, scale
and significance.
17. NEXTEL'S FORWARD LOOKING STATEMENTS ARE SUBJECT TO A VARIETY OF FACTORS
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM CURRENT
BELIEFS.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT
OF 1995: A number of the statements made in this Annual Report are not
historical or current facts, but deal with potential future circumstances and
developments. Those statements are 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 these
matters and subject areas. Nextel has attempted to identify, in context, some of
the factors that it currently believes may cause actual future experience and
results to differ from Nextel's current expectations regarding the relevant
matter or subject area. The operation and results of Nextel's wireless
communications business also may be subject to the effect of
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other risks and uncertainties in addition to the relevant qualifying factors
identified elsewhere in the foregoing "Risk Factors" 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 Network
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 any issues
relating to Nextel's 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 Nextel's Digital
Mobile Network business;
- 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, increased system usage
rates and growth in levels of accounts receivables being generated by the
Digital Mobile Network customer base;
- access to sufficient debt or equity capital to meet Nextel's operating
and financing needs;
- 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 personal communication services;
- the ability to successfully develop or obtain from third parties and
implement Year 2000 readiness solutions in systems that are critical to
its business operations;
- future legislation or regulatory actions relating to specialized mobile
radio services, other wireless communications services or
telecommunications generally; and
- other risks and uncertainties described from time to time in Nextel's
reports and, with specific reference to risk factors relating to
international operations, in Nextel International's reports, filed with
the Commission.
ITEM 2. PROPERTIES
At December 31, 1998, Nextel leased its principal executive and
administrative office, which is located at 1505 Farm Credit Drive, in McLean,
Virginia. This facility is about 99,900 square feet and has an initial lease
term of 10 years, expiring August 14, 2006, with two five-year renewal options.
During the second quarter of 1999, Nextel is scheduled to relocate its principal
executive and administrative office to 2001 and 2003 Edmund Halley Drive,
Reston, Virginia, comprised of about 330,000 square feet. The initial lease term
is for ten years, with four five-year renewal options. Nextel is currently
exploring alternate arrangements with its landlord and other parties regarding
the 1505 Farm Credit Drive facilities. Nextel also leases for some of its
administrative operations about 110,000 square feet of office space in Denver,
Colorado, under a lease expiring in 2004; about 95,600 square feet of office
space in Norcross, Georgia, under a lease expiring in 2005; about 50,000 square
feet of office space in McLean, Virginia, under a lease expiring in 2002; about
49,600 square feet of space in McLean, Virginia, under a lease expiring in 2003;
and about 99,700 square feet in Rutherford, New Jersey, under a lease expiring
in 2008. Nextel also leases office facilities for sales, maintenance and
administrative operations in its markets. There are about 190 office leases in
effect at December 31, 1998, with terms ranging from 1 to 10 years (not
including extensions related to the exercise of renewal options).
Nextel leases antenna sites for the transmission of its radio service.
These sites are located, in the case of its analog SMR operations, primarily on
either building tops or mountain tops and in the case of
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its Digital Mobile Network operations, on towers, generally at heights ranging
from 150 to 300 feet above the ground. The terms of these leases generally range
from month-to-month to 20 years. As of December 31, 1998, Nextel had about 1,900
site leases for its analog SMR business in the United States and about 6,200
constructed sites at leased locations in the United States for its Digital
Mobile Network. Nextel also owns properties and transmission towers where
management considers it is in the best interest of Nextel to do so. In this
connection, Nextel, SpectaSite and some of their respective subsidiaries entered
into definitive agreements which provide for specified telecommunications towers
and related assets owned by Nextel's subsidiaries to be acquired by a subsidiary
of SpectraSite. See "-- Item 1. Business -- G. Post Fiscal-Year 1998
Transactions and Developments -- 1. Towers Transaction."
ITEM 3. LEGAL PROCEEDINGS
In July 1995, a lawsuit titled In Re Nextel Communications Securities
Litigation was filed in the United States District Court for the District of New
Jersey. This litigation, which is being pursued as a class action suit, amends
and consolidates three previously filed class action complaints and seeks
damages allegedly incurred by certain stockholders and claimed to result from
defendants' alleged violations of Section 10(b) of the Securities Exchange Act
and Rule 10b-5 promulgated thereunder. The litigation also makes claims of fraud
and deceit. Specifically, the plaintiffs claim that such damages resulted from
certain defendants' alleged false and misleading statements regarding the
digital communications technology developed by Motorola and deployed by Nextel
in its Digital Mobile Network. While Nextel cannot predict the outcome of this
litigation, Nextel believes that the claims against it are without merit and
intends to vigorously defend against them. On July 23, 1997, the United States
District Court for the District of New Jersey declined to grant Nextel's motions
to dismiss, pursuant to Federal Rule of Civil Procedure Rules 12(b)(6) and
(9)(b), substantially all of the causes of action alleged in the plaintiff's
complaint filed in this lawsuit. A ruling on class certification has not yet
been made.
In September 1994, a lawsuit titled Charles Dascal v. Morgan O'Brien,
Becker, Gurman, Lukas, Meyers, O'Brien and McGowan, P.C. and Nextel
Communications, Inc., was filed in the Circuit Court of Dade County, Florida.
The lawsuit, which has been transferred to the United States District Court for
the Southern District of Florida, seeks compensatory damages, lost profits and
special damages based on the defendants' alleged breach of fiduciary duty,
misappropriation of trade secrets, negligent misrepresentation, fraud,
conversion, civil theft, breach of good faith and fair dealing and unjust
enrichment. The claims, which primarily concern alleged conduct by Nextel's
current Vice Chairman and former Chairman of the Board, Morgan O'Brien, in the
1970s and early 1980s prior to the formation of Nextel, assert that business
plans allegedly formulated by the plaintiff relating to the development of a
wireless communications system were disclosed to, and have been improperly used
by, the defendants. The Nextel Board of Directors determined that Morgan O'Brien
in his capacities as an officer, director and authorized representative of
Nextel, was entitled to indemnification in respect of this matter. Nextel has
filed counterclaims against Mr. Dascal and has also filed third-party claims
against Tel Air Network, Inc. ("Tel Air"), and Knight-Ridder, Inc. ("Knight
Ridder"). The counterclaim against Mr. Dascal has been dismissed. All other
motions for summary judgment have been denied, with the exception of the
following: Nextel has been granted summary judgment with respect to Mr. Dascal's
claim against it for fraud; Tel Air and Knight Ridder have been granted summary
judgment with respect to Nextel's claims against them for fraudulent inducement
and conspiracy. The remainder of the parties' respective claims and
counterclaims are expected to go to trial. While Nextel cannot predict the
outcome of this litigation, Nextel believes that the claims against it are
without merit and intends to vigorously defend against them. A trial date
currently is scheduled for October 1999.
Unless otherwise indicated, the relevant plaintiffs have not specified
amounts of damages being sought. Given Nextel's assessment of the claims
asserted against it in each such lawsuit, and in other pending or threatened
litigation (including litigation incidental to the conduct of its business),
Nextel does not believe that such lawsuits, individually or in the aggregate,
will have a material adverse effect on Nextel's financial condition, results of
operations or liquidity.
33
<PAGE> 35
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of Nextel during
the fourth quarter of fiscal 1998.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following section provides information regarding those persons serving
as executive officers of Nextel as of March 26, 1999. These executive officers
were elected to their present positions by action of the Board of Directors of
Nextel to serve until their successors have been elected. There is no family
relationship between any of the executive officers of Nextel, or between any of
these officers and any of the Directors of Nextel.
Daniel F. Akerson. Mr. Akerson is 50 years old and has served as Chairman
of the Board and Chief Executive Officer since joining Nextel on March 6, 1996.
From 1993 until March 5, 1996, Mr. Akerson served as a general partner of
Forstmann Little & Co., a private investment firm ("Forstmann Little"). While
serving as a general partner of Forstmann Little, Mr. Akerson also held the
positions of Chairman of the Board and Chief Executive Officer of General
Instrument Corporation, a technology company acquired by Forstmann Little. From
1983 to 1993, Mr. Akerson held various senior management positions with MCI
Communications Corporation ("MCI"), including President and Chief Operating
Officer. Mr. Akerson serves as a director of American Express Company, America
OnLine, Inc. and Nextel International.
Morgan E. O'Brien. Mr. O'Brien is 54 years old and has served as a
director of Nextel since co-founding it in 1987. Since March 6, 1996, Mr.
O'Brien has served as a Vice Chairman of the Board of Directors. From 1987 to
March 5, 1996, Mr. O'Brien served as Chairman of the Board of Directors, and
from 1987 to October 1994, Mr. O'Brien also served as General Counsel of Nextel.
Timothy M. Donahue. Mr. Donahue is 50 years old and has served as
President of Nextel since joining it on February 1, 1996 and as a director of
Nextel since May 1996. On February 29, 1996, Mr. Donahue was elected to the
additional position of Chief Operating Officer of Nextel. From 1986 to January
1996, Mr. Donahue held various senior management positions with AT&T Wireless
Services, Inc. ("AT&T Wireless"), including Regional President for the
Northeast. Mr. Donahue serves as a director of Nextel International.
Steven M. Shindler. Mr. Shindler is 36 years old, joined Nextel in May
1996 and serves as Vice President and Chief Financial Officer. Between 1987 and
1996, Mr. Shindler was an officer with Toronto Dominion Bank, where most
recently he was a Managing Director in its Communications Finance Group. Mr.
Shindler serves as a director of Nextel International.
Barry West. Mr. West is 53 years old, joined Nextel in March 1996 and
serves as Vice President and Chief Technology Officer. Prior thereto Mr. West
served in various senior positions with British Telecom for more than five
years, most recently as Director of Value-Added Services and Corporate Marketing
at Cellnet, a cellular communications subsidiary of British Telecom.
Thomas Kelly. Mr. Kelly is 51 years old, joined Nextel in April 1996 and
serves as Vice President of Marketing. Between 1993 and 1996, Mr. Kelly was
Regional Vice President of Marketing for AT&T Wireless. Prior to joining AT&T
Wireless, Mr. Kelly worked for 12 years with the marketing consulting firm of
Howard Bedford Nolan, where he was most recently an Executive Vice President.
Robert S. Foosaner. Mr. Foosaner is 56 years old, joined Nextel in April
1992 and serves as Vice President and Chief Regulatory Officer.
Keith D. Grinstein. Mr. Grinstein is 38 years old and has served as Chief
Executive Officer and as a director of Nextel International since January 1996.
Between January 1996 and March 1999, Mr. Grinstein served as President of Nextel
International and from January 1991 to December 1995, Mr. Grinstein was
President and Chief Executive Officer of the aviation communications division of
AT&T Wireless. Mr. Grinstein is a director of Clearnet.
34
<PAGE> 36
Thomas J. Sidman. Mr. Sidman is 44 years old, joined Nextel in October
1994 and serves as Vice President and General Counsel. From January 1988 to
October 1994, Mr. Sidman was a partner of the law firm Jones, Day, Reavis &
Pogue, specializing in corporate and securities law and mergers and
acquisitions.
William G. Arendt. Mr. Arendt is 41 years old and has served as Vice
President and Controller since joining Nextel in May 1997. From June 1996 until
joining Nextel, Mr. Arendt was Vice President and controller for Pocket
Communications, Inc., a personal communications services company. From September
1992 until June 1996, he was Controller for American Mobile Satellite
Corporation.
John S. Brittain, Jr. Mr. Brittain is 40 years old, joined Nextel in March
1999 and serves as Vice President and Treasurer. From 1994 to March 1999, Mr.
Brittain was Senior Vice President and Treasurer of Sotheby's Holdings, Inc., an
international art auction and related services firm. Prior to joining Sotheby's,
Mr. Brittain was the Assistant Corporate Treasurer of the Great Atlantic &
Pacific Tea Company and was an officer of Chemical Bank.
Nathaniel A. Davis. Mr. Davis is 45 years old, joined Nextel in October
1998 and serves as Vice President of Technical Services. From November 1996 to
September 1998, Mr. Davis was Chief Financial Officer of U.S. Operations at MCI.
From January 1994 to October 1996, he was Chief Operating Officer of MCImetro, a
subsidiary of MCI and from July 1992 to December 1993, he was Senior Vice
President of Access Services for MCI.
Steven P. Dussek. Mr. Dussek is 42 years old and was named President and
Chief Operating Officer of Nextel International in March 1999. From May 1996 to
March 1999, Mr. Dussek served in various senior management positions for Nextel,
most recently as Vice President of Operations. From May 1995 to May 1996, he was
Vice President and General Manager of the Northeast region for the PCS division
of AT&T Wireless. From January 1993 to March 1995, he was Senior Vice President
and Chief Operating Officer of Paging Networks, Inc.
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<PAGE> 37
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
A. MARKET FOR COMMON STOCK
Nextel's common stock is traded on the Nasdaq National Market of The Nasdaq
Stock Market Inc. under the symbol "NXTL." Prior to February 3, 1997, the common
stock traded under the symbol "CALL." The table below presents high and low
closing price information for the common stock as reported by the Nasdaq
National Market for the periods indicated.
<TABLE>
<CAPTION>
QUARTERLY COMMON STOCK PRICE RANGES
YEARS ENDED DECEMBER 31,
-------------------------------------
1998 1997
----------------- -----------------
QUARTER ENDED HIGH LOW HIGH LOW
------------- ---- --- ---- ---
<S> <C> <C> <C> <C>
March 31........................................ $33.750 $22.125 $15.750 $12.875
June 30......................................... 33.750 23.375 19.188 12.250
September 30.................................... 31.000 18.063 29.438 19.688
December 31..................................... 23.750 17.313 31.000 22.500
</TABLE>
B. NUMBER OF STOCKHOLDERS OF RECORD
As of March 17, 1999, the number of stockholders of record of Nextel's
common stock was 3,879. Nextel has authority to issue shares of non-voting
common stock, which are convertible on a share-for-share basis into shares of
common stock. As of March 17, 1999, there was a single stockholder of record
holding all of the 17,830,000 outstanding shares of non-voting common stock.
C. DIVIDENDS
Nextel has not paid any dividends on the common stock, and does not plan to
pay dividends on the common stock for the foreseeable future. The indentures
governing Nextel's public notes and the Bank Credit Agreement prohibit, and are
expected to continue to prohibit, Nextel from paying dividends. In addition,
some of the collateral security mechanisms and related provisions associated
with the Bank Credit Agreement limit the amount of cash available to make
dividends, loans and cash distributions to Nextel from Nextel's subsidiaries
that operate the Digital Mobile Network in Nextel's markets. Provisions in the
indentures to which Nextel International is a party also place significant
restrictions on Nextel's ability to receive cash from Nextel International or
any of its subsidiaries. Accordingly, while such restrictions are in place, any
profits generated by such subsidiaries will not be available to Nextel for,
among other things, payment of dividends.
Nextel anticipates that for the foreseeable future any cash flow generated
from its operations will be used to develop and expand its business and
operations. Any future determination as to the payment of dividends will be at
the discretion of Nextel's Board of Directors and will depend upon Nextel's
operating results, financial condition and capital requirements, contractual
restrictions, general business conditions and such other factors as Nextel's
Board of Directors deems relevant. There can be no assurance that Nextel will
pay dividends at any time in the future. Under specific limited circumstances,
Nextel may be obligated to pay dividends on its Class A Preferred Stock. See
Part I, "Item 1. Business -- K. Agreements with Significant Stockholders -- 1.
McCaw Interests."
D. RECENT SALES OF UNREGISTERED SECURITIES
Nextel sold securities that were not registered under the Securities Act in
the following transactions during the fourth quarter of 1998:
1. NOTES OFFERING. On November 4, 1998, Nextel completed the issuance and
sale in a private placement of $300.0 million in principal amount of the
November 1998 Notes. These notes are senior
36
<PAGE> 38
unsecured indebtedness of Nextel and rank equally in right of payment with all
unsubordinated, unsecured indebtedness of Nextel including all other outstanding
public notes issued by Nextel. Morgan Stanley & Co. Incorporated acted as
placement agent and received about $5.9 million in fees in connection with the
sale of these notes.
2. PREFERRED STOCK OFFERING. On December 23, 1998 Nextel completed the
sale in a private placement of 591,308 shares of Zero Coupon Preferred with an
initial liquidation preference of $253.675 per share, generating about $145.0
million in net proceeds. Goldman, Sachs & Co., Morgan Stanley & Co. Incorporated
and Nationsbanc Montgomery Securities LLC acted as placement agents and received
about $4.5 million in fees in connection with the sale of the Zero Coupon
Preferred Stock.
Each of these transactions was effected pursuant to the exemption of
Section 4(2) of the Securities Act and Rule 144A and, with regard to the Notes,
Regulation S thereunder, in reliance upon the representations of the initial
purchasers of each of the offerings described above.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain consolidated financial data for the
periods indicated and should be read in conjunction with the Consolidated
Financial Statements, related notes and other financial information appearing
elsewhere in Part II of this Form 10-K Annual Report (dollar amounts in
thousands, except per share amounts).
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------------------------- DECEMBER 31,
1998 1997 1996 1995 1994 (1)
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
RESULT OF OPERATIONS (2):
Operating Revenues............................... $ 1,846,758 $ 738,897 $ 332,938 $ 171,703 $ 74,857
Cost of revenues................................. 516,393 288,752 247,717 151,718 51,406
Selling, general and administrative.............. 1,550,323 861,588.... 330,256 193,321 85,077
Expenses related to corporate reorganization
(3)............................................ -- -- -- 17,372 --
Depreciation and amortization.................... 832,299 526,377 400,831 236,178 94,147
----------- ----------- ----------- ----------- -----------
Operating loss................................... (1,052,257) (937,820) (645,866) (426,886) (155,773)
Interest (expense), net.......................... (622,056) (378,032) (206,480) (89,509) (41,454)
Other, net (4)(5)(6)............................. (36,462) 6,511 (10,866) (15,372) 33
Income tax benefit (provision) (7)............... 191,912 (258,726) 307,192 200,602 71,345
----------- ----------- ----------- ----------- -----------
Loss before extraordinary item................... (1,518,863) (1,568,067) (556,020) (331,165) (125,849)
Extraordinary item -- loss on early retirement of
debt........................................... (133,225) (45,787) -- -- --
Mandatorily redeemable preferred stock
dividends...................................... (149,161) (29,119) -- -- --
----------- ----------- ----------- ----------- -----------
Loss attributable to common stockholders......... $(1,801,249) $(1,642,973) $ (556,020) $ (331,165) $ (125,849)
=========== =========== =========== =========== ===========
Loss per share attributable to common stockholders,
basic and diluted:
Loss before extraordinary item attributable to
common stockholders............................ $ (5.98) $ (6.41) $ (2.50) $ (2.31) $ (1.25)
Extraordinary item............................... (0.48) (0.18) -- -- --
----------- ----------- ----------- ----------- -----------
$ (6.46) $ (6.59) $ (2.50) $ (2.31) $ (1.25)
=========== =========== =========== =========== ===========
Weighted average number of common shares
outstanding.................................... 278,643,000 249,320,000 222,779,000 143,283,000 100,639,000
=========== =========== =========== =========== ===========
</TABLE>
37
<PAGE> 39
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents (8).................... $ 321,379 $ 301,601 $ 139,681 $ 340,826 $ 301,679
Marketable securities (9)........................ -- 131,404 5,012 68,443 172,313
Current assets................................... 1,052,712 839,597 309,097 504,661 504,248
Intangible assets, net........................... 4,937,124 4,699,746 4,076,300 3,549,622 1,451,780
Total assets..................................... 11,573,361 9,227,801 6,472,439 5,547,256 2,918,985
Long-term debt (10).............................. 7,710,373 5,038,250 2,783,041 1,687,829 1,193,096
Mandatorily redeemable preferred stock (11)...... 1,578,252 529,119 -- -- --
Stockholders' equity............................. 229,502 1,912,420 2,808,138 2,945,141 1,268,575
</TABLE>
- ---------------
(1) Effective December 31, 1994, Nextel changed its fiscal year end from March
31 to December 31. Accordingly, the income statement data is presented for
the transition period from April 1, 1994 to December 31, 1994.
(2) See Note 2 to the Notes to Nextel's consolidated financial statements for a
description of acquisitions completed during 1998, 1997 and 1996. In July
1995, Nextel completed the Motorola Transaction and the mergers with
OneComm Corporation and American Mobile Systems, Incorporated. Each of
these transactions was accounted for as a purchase and the data herein
reflect the financial results attributable to each acquired company from
the date of the respective acquisition.
(3) As a result of the business combinations consummated in 1995, Nextel
undertook a corporate reorganization to consolidate, resize, and relocate
its corporate headquarters and certain other functions, resulting in a
one-time charge to operations for certain expenses for closure of duplicate
facilities and employee severance.
(4) Other expense in 1998 primarily reflects losses on interest rate protection
activities of $46.9 million.
(5) Other expense in 1996 primarily reflects equity in the losses of certain
foreign investments accounted for under the equity method. See Note 2 to
the Notes to Nextel's consolidated financial statements.
(6) Other expense in 1995 includes a $15.0 million write-down of the investment
in Nextel Mexico as a result of the devaluation of the Mexican peso.
(7) As a result of the change in useful lives of certain intangible assets and
recent operating results, Nextel increased its valuation allowance, which
resulted in a tax provision of about $258.7 million in 1997. See Note 10 to
the Notes to Nextel's consolidated financial statements.
(8) Includes about $121.1 million and $159.8 million in cash and cash
equivalents held by Nextel International and its subsidiaries as of
December 31, 1998 and 1997, respectively, which are not available to fund
any of the cash needs of Nextel's domestic digital mobile and analog SMR
businesses due to restrictions contained in the Nextel International
indentures.
(9) Includes about $128.6 million in marketable securities held by Nextel
International and its subsidiaries as of December 31, 1997, which are not
available to fund any of the cash needs of Nextel's domestic digital mobile
and analog SMR businesses due to restrictions contained in the Nextel
International indentures.
(10) Excludes the current portions of long-term debt. See Note 8 to the Notes to
Nextel's consolidated financial statements.
(11) See Note 12 to the Notes to Nextel's consolidated financial statements.
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<PAGE> 40
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
A. OVERVIEW
The following is a discussion of:
- the consolidated financial condition and results of operations of Nextel
for the years ended December 31, 1998, 1997 and 1996; and
- significant factors that could affect Nextel's prospective financial
condition and results of operations.
Historical results may not indicate future performance. See Part I, "Item
1. Business -- N. Risk Factors -- 17. Nextel's Forward Looking Statements Are
Subject to a Variety of Factors that Could Cause Actual Results to Differ
Materially From Current Beliefs."
Nextel's 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
the relevant periods. However, additional more detailed and focused information
relating to Nextel International may be found in the periodic and other reports
filed by Nextel International with the Commission pursuant to the rules under
the Exchange Act. Except as noted above and as otherwise expressly indicated
herein, the description of Nextel's business herein refers to Nextel's domestic
operations.
B. RESULTS OF OPERATIONS
The following discussion compares the consolidated financial condition and
results of operations for Nextel for the years ended December 31, 1998, 1997 and
1996, and significant factors that could affect Nextel's prospective financial
condition and results of operations.
<TABLE>
<CAPTION>
CHANGE FROM
YEAR % OF YEAR % OF PREVIOUS YEAR
ENDED OPERATING ENDED OPERATING ------------------
1998 REVENUES 1997 REVENUES DOLLARS PERCENT
-------- --------- -------- --------- -------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Operating revenues....................... $1,846.8 100% $ 738.9 100% $1,107.9 150%
Cost of revenues......................... 516.4 28% 288.8 39% 227.6 79%
Selling, general and administrative
expense................................ 1,550.3 84% 861.6 117% 688.7 80%
Selling and marketing expense.......... 953.9 52% 515.1 70% 438.8 85%
General and administrative expense..... 596.4 32% 346.4 47% 250.0 72%
Depreciation and amortization............ 832.3 45% 526.4 71% 305.9 58%
Depreciation expense................... 627.1 34% 282.1 38% 345.0 122%
Amortization expense................... 205.2 11% 244.3 33% (39.1) (16)%
Interest expense......................... 656.1 36% 407.8 55% 248.3 61%
Interest income.......................... 34.0 2% 29.8 4% 4.2 14%
Other (expense) income, net.............. (36.5) (2)% 6.5 1% (43.0) NM
Extraordinary loss....................... 133.2 7% 45.8 6% 87.4 191%
Net loss attributable to common
stockholders........................... 1,801.2 98% 1,643.0 222% 158.2 10%
</TABLE>
- ---------------
NM -- change not meaningful
1. YEAR ENDED DECEMBER 31, 1998 VS. YEAR ENDED DECEMBER 31, 1997
A. OPERATING REVENUES
Operating revenues include service revenues, which consist primarily of
charges for airtime usage and monthly network access fees from providing mobile
wireless services, as well as revenue from sales of analog equipment and
accessories. In 1998, domestic operating revenues increased $1,078.4 million
(148.6%) and international operating revenues increased $29.5 million (226.5%)
compared to 1997. Domestic operating revenues for 1998 increased from 1997
principally as a result of a 120% increase in end-of-period domestic digital
subscriber units in service from about 1,270,700 at December 31, 1997, to about
2,789,900 at December 31, 1998. The increase in operating revenues primarily
reflects the increased
39
<PAGE> 41
number of subscriber units in service in both new and existing markets and an
increase in minutes of use producing an increase in the average monthly revenue
per digital subscriber unit from about $66 in 1997 to about $69 in 1998. The
growth in digital subscriber units in service is the result of a number of
factors, including principally Nextel's increased sales force and marketing
staff, increased distribution channels, expanded network capacity, increased
consumer awareness and acceptance of wireless communications and pricing plans
targeted at particular market segments. International operating revenues
increased primarily as a result of increased units in service in Brazil,
Argentina and Mexico, chiefly due to the launch of digital services in major
markets in those countries during the second half of 1998.
The average churn rate for the domestic Digital Mobile Network operations
has increased from about 1.3% per month in 1997 to about 1.8% per month in 1998.
During the fourth quarter of 1998, the average monthly churn rate was about 2.0%
as compared to about 1.4% for the fourth quarter of 1997.
B. COST OF REVENUES
Cost of revenues consists primarily of network operating costs and
interconnection fees assessed by local exchange carriers. In 1998, domestic cost
of revenues increased $215.0 million (76.4%) and international cost of revenues
increased $12.7 million or (170.5%) compared to 1997. Domestic cost of revenues
for 1998 increased from 1997 primarily as a result of an 82% increase in the
number of switches placed in service and a greater than 50% increase in cell
sites and related equipment activated by Nextel during 1998, as well as
increases in airtime usage and digital subscriber units in service. Cost of
revenues as a percentage of revenues decreased from 39% for 1997 to 28% for
1998. This improvement primarily resulted from economies of scale achieved as a
result of increases in system usage and digital subscriber units placed in
service during 1998.
C. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
The increase in selling, general and administrative expenses for 1998 over
1997 consisted of an increase in domestic expenses of $573.2 million and an
increase in international expenses of $115.5 million.
Selling and marketing expenses for 1998 increased by 85% or $438.8 million
and decreased as a percentage of revenue from 70% in 1997 to 52% in 1998. The
increase in selling and marketing expenses consisted primarily of increased
costs incurred in connection with higher consolidated sales of digital
subscriber units including:
- $120.9 million of increased domestic dealer commissions and residuals
earned by indirect distributors as a result of increased unit sales
through, and increased reliance on, indirect distribution channels;
- $103.2 million of increased losses generated from consolidated sales of
digital subscriber units and related accessories (including a loss of
$11.7 million relating to international digital subscriber unit sales);
- $93.5 million of increased domestic salaries, commissions and related
personnel costs associated with increased internal sales and marketing
staffing;
- $67.7 million of increased domestic advertising, telemarketing and other
marketing expenses attributable to the aggressive national and regional
marketing campaigns that began in March 1997 and largely continued
through most of 1998; and
- $53.5 million of increased advertising and marketing expenses related to
international operations as a result of the launch of digital service in
Sao Paulo and Buenos Aires in the second quarter of 1998 and Rio de
Janeiro and Mexico City in the third quarter 1998.
Nextel 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. Nextel 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. The loss on digital subscriber
unit and related accessory sales for 1998 increased 68% to $254.1 million,
compared to
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<PAGE> 42
$150.9 million for 1997 and decreased as a percentage of revenue. The increase
in the loss on digital subscriber unit and related accessory sales compares
favorably to the 120% increases in end-of-period domestic digital subscriber
units in service due to decreases in subsidies and discounts on a per unit basis
offered to customers purchasing digital subscriber units 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 Nextel 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 1998 increased by 72% or $250.0
million (but decreased as a percentage of operating revenues from 47% in 1997 to
32% in 1998). The increase is attributable to the following:
- $93.6 million of increased personnel, facilities and general corporate
expenses reflecting increased staffing for back-office activities;
- $44.1 million of increased general and administrative expenses to support
the growth of international operations;
- $86.9 million of increased expenses related to billing and collection
activities as a result of a larger customer base; and
- $25.4 million of increased consolidated bad debt expense.
Selling, general and administrative expenses are expected to increase both
domestically and internationally as a result of a number of factors, including
but not limited to:
- continuing aggressive marketing campaigns;
- increasing sales and marketing, customer care and back-office support
staffing; and
- increasing subsidies associated with the sale of additional digital
subscriber units, related accessories and network service.
D. BAD DEBT EXPENSE
Nextel recognized consolidated bad debt expense of $82.1 million for the
year ended December 31, 1998 (of which $7.1 million is attributable to Nextel
International) compared to $56.8 million for the year ended December 31, 1997
(of which $1.1 million was attributable to Nextel International). Nextel
initiated a comprehensive and aggressive program for more stringent credit
reviews and the collection of past due receivables in the second half of 1997
with respect to its domestic operations, including involuntarily disconnecting
certain non-paying customer accounts. As a result of such initiatives, bad debt
expense as a percentage of total revenues, including both operating revenues and
digital equipment revenues classified within selling and marketing expense,
decreased from 5.8% for 1997 to 3.6% for 1998.
E. DEPRECIATION AND AMORTIZATION
The increase in depreciation and amortization expense from 1997 to 1998
consisted of an increase in depreciation expense of $345.0 million offset by a
decrease in amortization expense of $39.1 million.
Depreciation expense for 1998 increased 122% to $627.1 million, compared to
$282.1 million for 1997. This increase reflects:
- the effect of activating additional operational cell sites and switches
in new and existing domestic and international markets; and
- the effect of business acquisitions completed during 1998 and the last
quarter of 1997.
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 in
the relevant markets.
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<PAGE> 43
Effective October 1, 1997, Nextel changed the estimated useful lives of
certain intangible assets, including licenses issued by the FCC 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 1998 decreased 16% to $205.2 million, as compared to $244.3 million
for 1997.
F. INTEREST EXPENSE, INTEREST INCOME AND OTHER
The increase in interest expense for 1998 from 1997 resulted from Nextel's
and Nextel International's issuance of senior notes during 1997 and 1998, as
well as a higher average level of borrowings under the Bank Credit Agreement and
Nextel International's bank and vendor credit facilities. 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 domestic
vendor credit facility during the first quarter of 1998 and the retirement of a
portion of the Targeted Notes during the fourth quarter of 1997 and
substantially all of the remaining Targeted Notes during the second quarter of
1998. In April 1998, Nextel purchased $294.2 million in book value of its 2003
Notes and $332.7 million in book value of its 2004 Notes at a cost in excess of
related carrying amounts. Accordingly, Nextel recorded an extraordinary loss of
$133.2 million related to the early retirement of debt. This extraordinary loss
represented the difference between the purchase price and the book value of
those Targeted Notes on the date of purchase plus unamortized deferred financing
costs.
The increase in interest income for 1998 from 1997 is primarily
attributable to income recognized on the investment of the net proceeds received
from Nextel's sale of the Series E Preferred and the public notes issued in
February 1998.
In the fourth quarter of 1997, Nextel entered into an interest rate
protection agreement to lock in interest rates on 10-year U.S. Treasury notes in
anticipation of a future debt issuance. During the quarter ended September 30,
1998, management determined that this anticipated transaction was not likely to
occur before the interest rate protection agreement expiration date. The
interest rate protection agreement was terminated on September 29, 1998 and
about $46.9 million was recognized as other expense within Nextel's statement of
operations for the quarter ended September 30, 1998.
Nextel recorded an income tax benefit of $191.9 million (an effective tax
rate of 11.2%) in 1998, compared to a provision of $258.7 million (an effective
tax rate of 19.8%) in 1997. A change in the tax law for 1998 extended the net
operating loss carryforward period from 15 to 20 years for losses generated in
or after 1998. Income tax benefits in 1998 were derived primarily from the
recognition of net operating losses generated in 1998 that can be carried
forward twenty years and that can be recognized 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 carryforward
period. Nextel increased its valuation allowance related to net operating losses
by $486.8 million in 1998 and $767.5 million in 1997 since a significant portion
of Nextel's deferred tax liabilities will reverse after existing net operating
losses expire. The financial statement limitation on the recognition of income
tax benefits for net operating losses will not have an impact on Nextel's
ability to utilize its net operating losses for income tax purposes. Nextel
anticipates that the income tax benefit to be recognized in 1999 will decrease
significantly from the income tax benefit recognized in 1998.
2. YEAR ENDED DECEMBER 31, 1997 VS. YEAR ENDED DECEMBER 31, 1996
A. OPERATING REVENUES
Operating revenues for the year ended December 31, 1997 increased 122%
compared to 1996 primarily attributable to the 323% increase in digital
subscriber units in service from about 300,300 at December 31, 1996 to about
1,270,700 at December 31, 1997. Operating revenues did not keep pace with the
rate of increase in digital subscriber units primarily because about two-thirds
of the new customers were added in the last half of 1997. The increase in
operating revenues reflects the commencement of Digital Mobile Network service
in certain markets and increased sales in markets in which Digital Mobile
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Network services are provided. Key factors contributing to Nextel's customer
growth include increased sales force and marketing staff, increased distribution
channels, expanded network capacity, declining prices for equipment, 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 about $54 for the year ended December 31, 1996
to about $66 for the year ended December 31, 1997.
The average churn rate for the Digital Mobile Network operation increased
from less than 1% per month for the year ended December 31, 1996 to about 1.3%
per month for the year ended December 31, 1997. During the fourth quarter of
1997, the average monthly churn rate was about 1.4%.
B. COST OF REVENUES
Cost of revenues for the year ended December 31, 1997 increased 17%
primarily resulting from an increase in cell sites activated in 1997 as well as
an increase in airtime usage and an increase in digital subscriber units in
service. Cost of revenues as a percentage of operating revenues have decreased
from 74% for the year ended December 31, 1996 to 39% for the year ended December
31, 1997, primarily as a result of economies of scale achieved due to the
increase in digital subscriber units in service.
C. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the year ended December
31, 1997 increased 161% compared to 1996, primarily as a result of increased
staffing and other back-office and customer care activities supporting the
accelerated growth in Nextel's implementation and operation of the Digital
Mobile Network. Selling expenses increased primarily due to increased sales and
marketing labor costs and related commission expenses. Also contributing to the
increase was the rollout of aggressive national and regional marketing campaigns
to increase awareness of Nextel's products and services associated with the
full-scale commercial launch of the Digital Mobile Network incorporating the
modified iDEN technology beginning in March 1997. Nextel includes the loss
generated from the sale of digital subscriber units in selling, general and
administrative expenses, as the loss primarily represents marketing costs for
the Digital Mobile Network. The loss on Digital Mobile subscriber equipment
sales for the year ended December 31, 1997 increased by 493% compared to 1996,
primarily reflecting:
- the continued effect of customer subsidies and discounts on increased
sales of digital subscriber units and other related digital subscriber
equipment; and
- the expenses associated with programs designed to stimulate the orderly
migration of customers from Nextel's traditional analog SMR systems to
its new Digital Mobile Network systems.
The loss on digital mobile subscriber equipment sales during 1997 also
includes a $16.3 million write down during 1997 for inventory shrinkage and
obsolescence of subscriber unit inventory utilizing first generation iDEN
technology.
D. BAD DEBT EXPENSE
Nextel recognized consolidated bad debt expense of about $56.8 million for
the year ended December 31, 1997. Bad debt expense as a percentage of total
revenues, including both operating revenues and digital equipment revenues
classified within selling and marketing expense, increased to 5.8% in 1997 from
1.2% in 1996. The amount of bad debt expense recognized by Nextel during 1997
was significantly higher compared to 1996 as a result of a number of factors,
including principally delays in the billing of amounts due on purchases of
digital network subscriber equipment and the inability of Nextel's billing and
collection systems, processes and personnel to fully keep pace with the rapid
growth of Nextel's customer base and Digital Mobile Network utilization. As a
result, Nextel instituted a more comprehensive and aggressive program for the
collection of past due receivables in the latter part of 1997 and increased its
bad debt reserve, which contributed to the increased bad debt expense.
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E. DEPRECIATION AND AMORTIZATION
Effective October 1, 1997, Nextel 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. The change in the estimated useful
lives of these intangible assets had the effect of decreasing amortization
expense by about $27.7 million for the quarter and the year ended December 31,
1997. Depreciation and amortization for the year ended December 31, 1997
increased 31%, net of the effect of the change in useful lives of certain
intangible assets, reflecting the effect of the activation of additional cell
sites and switches, the expansion of the existing Digital Mobile Network and the
effect of certain asset and license acquisitions during 1997. System assets
relating to the development of the Digital Mobile Network represent the largest
portion of capital expenditures during the year ended December 31, 1997.
Depreciation of such assets begins upon commencement of commercial service in
the relevant markets.
F. INTEREST EXPENSE, INTEREST INCOME AND OTHER
Interest expense for the year ended December 31, 1997 increased 79%
compared to 1996, reflecting higher debt balances primarily attributable to
additional borrowings under Nextel's secured credit facilities. Interest expense
also increased during 1997 as a result of the issuance of discount notes by
Nextel and Nextel International.
During the fourth quarter of 1997, Nextel purchased $166.2 million book
value of the 2003 Notes and $81.8 million book value of the 2004 Notes at a cost
in excess of related carrying amounts. Accordingly, Nextel recorded an
extraordinary loss of about $45.8 million related to the early retirement of
debt. The extraordinary loss represented the difference between the purchase
price and the book value of these notes on the date of purchase plus unamortized
deferred financing costs.
Interest income for the year ended December 31, 1997 increased 42%,
reflecting higher average cash balances available for investment during the year
ended December 31, 1997 as compared to the prior year, primarily as a result of
the capital raised from discount notes issued by Nextel International and to a
lesser extent, the proceeds received from the issuance of preferred stock and
discount notes by Nextel.
Other income for the year ended December 31, 1997 was $6.5 million,
primarily reflecting a $10.6 million gain on the disposal of assets, foreign
currency transaction gains of $6.0 million and $2.1 million of net losses
derived from foreign investments charged to minority shareholders offset by
$13.1 million of net losses of certain foreign investments accounted for under
the equity method.
Nextel recorded an income tax provision of $258.7 million (an effective tax
rate of 19.1%) in 1997, compared to a benefit of $307.2 million (an effective
tax rate of 35.6%) in 1996. The 1997 results were unfavorably impacted as a
result of an increase in Nextel's valuation allowance related to net operating
losses. Nextel recorded substantial deferred tax liabilities related to its FCC
licenses, and as a result of the change in estimated useful lives, a large
portion of such deferred tax liabilities will now reverse after current net
operating losses expire. After considering the effect of this change and other
factors, such as recent operating results, Nextel increased its valuation
reserves, resulting in an income tax provision in 1997 versus a benefit in 1996.
C. LIQUIDITY AND CAPITAL RESOURCES
Nextel had net losses attributable to common stockholders of $1,801.2
million for 1998 and $1,643.0 million for 1997. The operating expenses
associated with developing, enhancing and operating the Digital Mobile Network
have more than offset operating revenues, and such operating expenses, debt
service obligations and anticipated capital expenditures 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, anticipated positive earnings before interest,
taxes, depreciation and amortization and externally generated
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funds from debt and equity sources (as discussed below) to cover the majority of
its future liquidity needs, including funding required for the design,
implementation and operation of its Digital Mobile Network.
CASH FLOWS -- Net cash used in operating activities for 1998 decreased by
$43.5 million compared to 1997. The improvement in the cash used in operating
activities reflects improved domestic operating results coupled with
strengthened cost controls and cash management practices.
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 1998 increased $500.1
million as compared to 1997, primarily attributable to the $484.5 million
increase in capital expenditures. Cash payments for capital expenditures totaled
$2,081.9 million for 1998 (net of $112.6 million of gross proceeds received from
a sale-leaseback transaction involving switch equipment), and $1,597.4 million
for 1997, including $371.2 million and $101.9 million representing capital
expenditures for international operations for 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. Also contributing to the increase in cash used in investing activities
was a $75.1 million increase in payments for acquisitions and purchases of
licenses, including $76.1 million and $67.2 million in payments required in
connection with the recently concluded FCC auctions for 800 MHz and LMDS
licenses, respectively, and $104.5 million of additional cash investments in
international subsidiaries. The increases in cash used in investing activities
were offset in part by $129.6 million in net proceeds from marketable securities
transactions.
Cash flows provided by financing activities for 1998 increased by $314.4
million as compared to 1997, primarily reflecting net proceeds in 1998 from the
issuance of long-term debt and mandatorily redeemable preferred stock and
additional borrowings under domestic and international credit facilities. Net
cash provided by financing activities during 1998 consisted primarily of gross
proceeds from:
- the Series E Preferred of $750.0 million;
- the February Notes of $1,000.1 million;
- the November 1998 Notes of $295.7 million;
- the Zero Coupon Preferred of $150.0 million; and
- the 1998 NI Notes of $400.9 million
along with $1,089.0 million in net borrowings under Nextel's Bank Credit
Agreement and Nextel International's bank and vendor credit facilities and $38.5
million in proceeds from common stock issuances and option exercises offset in
part by repurchases of the Targeted Notes in April 1998 of $740.8 million and
deferred financing cost payments of $105.1 million.
During 1998, working capital decreased by $200.2 million to $(129.5)
million at December 31, 1998. This decrease primarily resulted from the
utilization of working capital derived from the proceeds of the discount notes
issued by Nextel International in 1997 to fund international investing and
operating activities. Proceeds of the discount notes issued by Nextel
International in 1998 are primarily available to finance international
operations, capital expenditures and acquisitions and are not available to fund
any of the cash needs of Nextel's domestic businesses due to restrictions
contained in the related indentures. Nextel's construction and operation of its
domestic Digital Mobile Network have been and continue to be principally
financed by incurring long-term debt.
D. 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;
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- potential acquisitions including any negotiated acquisitions of spectrum
from third parties and any future auctions of spectrum in auctions
conducted 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
domestic operating activities throughout 1999 as it builds out, expands and
enhances its Digital Mobile Network.
The Bank Credit Agreement, as amended, provides total potential secured
financing capacity of $3.5 billion, of which $3.295 billion in secured financing
is currently available to Nextel, subject to the satisfaction or waiver of
applicable borrowing conditions. This facility consists of a $1.5 billion
revolving loan and $1.795 billion in term loans which mature over a period from
September 30, 2001 to March 31, 2007. At December 31, 1998, Nextel had drawn
$2.118 billion of its available financing under the Bank Credit Agreement.
Amounts outstanding under the Bank Credit Agreement are secured by liens on
assets of certain of Nextel's domestic subsidiaries and bear interest payable
quarterly at an adjustable rate calculated based either on the prime rate or
LIBOR. The maturity date of the loans is subject to acceleration if the
aggregate principal amount of certain series of Nextel's senior redeemable
discount notes is not less than $1.0 billion by specified dates. The
availability of such financing is subject to Nextel's satisfying certain
requirements under the indentures governing its public notes issued before 1997,
which require Nextel to issue new equity for cash as a condition to obtaining
access to all amounts not constituting "permitted debt" (as that term is defined
in the applicable indentures). Based on the amount of equity issuances,
including issuances of preferred stock in 1997 and 1998, and Nextel's
outstanding debt at December 31, 1998, Nextel may access $3.295 billion
available under the Bank Credit Agreement in compliance with the debt incurrence
covenants contained in those indentures.
Based on its preliminary assessment of business activity and related net
cash needs through the end of 1999, Nextel anticipates that its cash on hand
(including proceeds of the November 1998 Notes and Zero Coupon Preferred), the
remaining amounts available for borrowing under the Bank Credit Agreement, the
cash proceeds assumed to be received upon the exercise in 1999 of options held
by the McCaw Investor, the cash payment recently received upon completing the
sale of assets to Nextel Partners, the cash proceeds assumed to be received upon
closing of the currently pending towers sale transaction with SpectraSite and
the net cash expected to be generated by domestic operations through the end of
1999, collectively, will provide sufficient funds to finance Nextel's domestic
operations, meet its domestic debt service obligations and fund its domestic
capital expenditures, all at levels Nextel currently anticipates would be
consistent with maintaining growth within an assumed range of an annual rate of
1.4 to 1.6 million net domestic digital subscriber unit additions during 1999.
Access to additional funding would likely enhance Nextel's growth prospects. See
"-- C. Liquidity and Capital Resources" and Part I, "Item 1. Business -- N. Risk
Factors -- 17. Nextel's Forward Looking Statements Are Subject to a Variety of
Factors that Could Cause Actual Results to Differ Materially From Current
Beliefs."
Nextel may require substantial additional financing to fund further
deployment, expansion and enhancement of its Digital Mobile Network after 1999.
Nextel also may require additional financing to pursue activities related to new
business opportunities (including commercial activities involving its deployment
of data transmission services), additional spectrum acquisitions (including any
negotiated acquisitions of spectrum from third parties and spectrum auctions by
the FCC) and other potential transactions or investments not a part of its
current domestic mobile wireless communications businesses. Finally, the above
funding requirements and estimates relate only to Nextel's domestic business
operations and opportunities, and do not reflect any of the separate funding
needs of Nextel International.
The availability of borrowings pursuant to the Bank Credit Agreement is
subject to certain conditions, and Nextel cannot provide assurance that such
conditions will be met. Moreover, Nextel cannot provide assurances that it will
receive funding from its other existing or assumed sources, such as the exercise
of outstanding options to purchase Nextel's common stock, or the closing of
pending transactions that would
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provide additional cash proceeds. The instruments relating to Nextel's financing
arrangements and preferred stock contain provisions that operate to limit the
amount of borrowings that may be incurred by Nextel. The terms of the Bank
Credit Agreement also require 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 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, for example, the commercial success of
Nextel's Digital Mobile Network, the amount and timing of Nextel's capital
expenditures and operating losses, the availability and volatility of the equity
and debt markets, the market price of its common stock and consummation of
specific pending transactions. See Part I, "Item 1. Business -- N. Risk
Factors -- 17. Nextel's Forward Looking Statements Are Subject to a Variety of
Factors that Could Cause Actual Results to Differ Materially From Current
Beliefs."
Nextel has had and may in the future have discussions with third parties
regarding potential equity investments and debt financing arrangements to
satisfy actual or anticipated financing needs. At present, other than the
existing equity or debt financing arrangements that have been consummated and/or
are disclosed herein, Nextel has no legally binding commitments or
understandings with any third parties to obtain any material amount of equity or
debt financing. Under the terms of the agreements between Nextel and Motorola
pursuant to which Nextel acquired substantially all of Motorola's domestic 800
MHz specialized mobile radio licenses in 1995, Nextel has agreed, under certain
circumstances, not to grant superior governance rights to any third-party
investor without Motorola's consent which may make securing equity investments
more difficult. The ability of Nextel to incur additional indebtedness
including, in certain circumstances, indebtedness incurred under the Bank Credit
Agreement is and will be limited by the terms of the indentures relating to
Nextel's senior notes, the terms of some of Nextel's preferred stock and the
Bank Credit Agreement.
E. NEXTEL INTERNATIONAL CAPITAL NEEDS
To fund its currently planned network build-out requirements and
operations, Nextel International will require a significant amount of capital.
Based on Nextel International's assessment of the business activity and related
cash needs of the International Operating Companies that are controlled by or
that rely substantially on Nextel International for further funding, Nextel
International believes that it will have adequate funding to continue operations
only into the latter half of 1999. Nextel International is reviewing various
financing options, including private debt or equity financing, that if obtained
would provide Nextel International with sufficient funds to meet such funding
requirements for the remainder of fiscal year 1999. There can be no assurance
that Nextel International will obtain any such funds on satisfactory terms, if
at all, or that such funds, if obtained, would be sufficient to meet Nextel
International's funding requirements for the remainder of fiscal year 1999
consistent with its current plans. If Nextel International is unable to raise
additional funds or obtain funds on acceptable terms and in a timely manner,
Nextel International will be required to reduce the scope of the build-out,
expansion and enhancement of its digital network and curtail its operations
significantly in 1999, which could have a material adverse effect on Nextel
International's ability to compete and its financial condition and results of
operations. See Part I, "Item 1. Business -- N. Risk Factors -- 17. Nextel's
Forward-Looking Statements Are Subject to a Variety of Factors that Could Cause
Actual Results to Differ Materially From Current Beliefs" and the NI 1998 Form
10-K.
F. EFFECT OF INFLATION AND FOREIGN CURRENCY EXCHANGE
Inflation is not a material factor affecting Nextel's business. General
operating expenses such as salaries, employee benefits and lease costs are,
however, subject to normal inflationary pressures. From time to time Nextel may
experience price changes in connection with the purchase of certain system
infrastructure and subscriber equipment, but Nextel does not currently believe
that any of such price changes will be material to its business.
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The net assets of the International Operating Companies are subject to
foreign currency exchange risks since they are primarily maintained in local
currency. Additionally, the long-term debt of Nextel International and its
subsidiaries is almost entirely in U.S. dollar denominated form, which also
exposes such entities to local foreign exchange risks. Certain subsidiaries
conduct business in countries in which the rate of inflation is significantly
higher than that of the United States. Nextel International will attempt to
protect its earnings from inflation and possible currency devaluation by trying
to periodically adjust the relevant subsidiaries' prices in local currencies,
and in some cases setting such prices in direct relation to the U.S. dollar.
However, there can be no assurance that any significant devaluation of a foreign
currency against the U.S. dollar could be offset, in whole or in part, by a
corresponding price increase. While Nextel International routinely assesses its
foreign currency exposure, Nextel International has not entered into any hedging
transactions.
As a result of the recent devaluation in the Brazilian real, Nextel
International will record for the quarter ended March 31, 1999, a pre-tax charge
(net of minority interest) of about $45 million for foreign currency transaction
losses. This amount has been calculated based on the outstanding amount of U.S.
dollar-denominated debt of Nextel International's Brazilian subsidiaries, the
average exchange rate of the Brazilian real during the first quarter of 1999 and
Nextel International's percentage ownership interest in its Brazilian
subsidiaries at the end of such period. Additionally, Nextel International will
record a negative cumulative translation adjustment on its balance sheet
(determined in a manner consistent with prior periods) of about $136 million
based on the exchange rate as of February 28, 1999 (in accordance with Nextel
International's consolidation policy), which will be reflected as an adjustment
to the cumulative translation adjustment account within stockholders' equity.
The countries in which Nextel International's subsidiaries now conduct
business generally do not restrict the repatriation or conversion of local or
foreign currency. There can be no assurance, however, that this will be the case
in each market that Nextel International may enter in the future or that this
situation will continue in Nextel International's existing markets. Nextel
International's subsidiaries are all directly affected by their respective
countries' governmental, economic, fiscal and monetary policies and other
political factors.
G. YEAR 2000 READINESS
As is the case with most other businesses using computers in their
operations, Nextel is in the process of evaluating and addressing Year 2000
readiness of its computer systems. Such Year 2000 readiness efforts are designed
to identify, address and resolve issues that may be created by computer programs
being written using two digits rather than four to define the applicable year.
Any of Nextel's computer programs that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations that result in disruptions
of operations, including, among other things, a temporary inability to process
transactions, send invoices or engage in similar normal business activities.
1. STATE OF READINESS: Nextel has had a program in place since February
1998 to address Year 2000 readiness issues in its critical business areas
related to products, networks, information management systems, non-information
systems with embedded technology, suppliers and customers. Nextel has taken and
will continue to take actions designed to advance its progress toward becoming
Year 2000 ready by the end of the third quarter of 1999. Nextel's Year 2000
readiness goal focuses on the ability of Nextel to perform its business
functions and to process information in an unambiguous manner under various date
conditions.
However, Nextel's ability to reach its Year 2000 readiness goal depends and
will continue to depend on the efforts of significant third-party vendors,
suppliers, subcontractors and business partners. Some of these significant third
parties are not yet Year 2000 ready, while others have provided Nextel with
detailed action plans and timetables for achieving Year 2000 readiness. Nextel
monitors the progress of these third parties towards Year 2000 readiness on a
regular basis. Nextel regularly contacts and attempts to obtain from these third
parties relevant details and schedules concerning their contemplated development
of Year
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2000 ready applications for Nextel's utilization in its domestic and
international operations and systems. Specifically, Nextel relies on services
and products offered by the following significant third parties:
- Motorola, for Nextel's system infrastructure and subscriber handset
units;
- International Telecommunications Data Systems, Inc., as the software
vendor for Nextel's domestic order entry and provisioning systems, as
well as Nextel's domestic billing information systems;
- LHS Group, Inc. as the software vendor for Nextel International's billing
information systems;
- Vantive Corporation, which provides information systems used in Nextel's
customer care function and provides order entry systems for Nextel
International;
- Oracle Corporation, which provides Nextel with information systems,
development tools and database management used to support its human
resources function and financial systems; and
- Hewlett-Packard, Inc., which supplies computer hardware, for example,
monitors and peripherals, and UNIX operating systems.
Nextel has identified five phases that assist in defining the status of
progress toward Year 2000 readiness. The five phases are:
- awareness -- locating, listing and prioritizing specific technology used
in Nextel's operations that is potentially subject to Year 2000 readiness
related challenges;
- assessment -- determining the level of risk of Year 2000 readiness
challenges that exist on Nextel's systems through inquiry, research and
testing;
- renovation -- determining and resolving Year 2000 readiness related
challenges identified in previous phases through replacement, upgrade or
repair and planning for the scheduled implementation of the selected Year
2000 ready resolution;
- validation -- testing, monitoring, certification and verification of the
correct manipulation of dates and date related data on Information
Technology ("IT") and non-IT systems, including those of material third
parties; and
- implementation -- installing and integrating the application of Year 2000
ready resolutions by replacement, upgrade or repair of non-IT and IT
systems, including those of material third parties.
As of March 1, 1999, with respect to its non-IT devices and/or systems
containing embedded circuitry, Nextel is, primarily, in the assessment phase.
Additionally, with respect to its IT systems that are critical to Nextel's
business operations and issues relating to material third parties, Nextel is in
various phases noted as follows:
- International Telecommunications Data Systems, Inc., informed Nextel that
software that operates Nextel's domestic order entry and provisioning
system has successfully completed the renovation phase and is scheduled
for delivery to Nextel for user acceptance testing and implementation.
This vendor has also informed Nextel that the software used for domestic
billing capabilities has successfully completed the assessment and
renovation phases and is currently in unit and system integration testing
phases;
- Motorola informed Nextel that the subscriber unit models i390 and i1000
are Year 2000 ready, and all other subscriber units are Year 2000 ready
with the exception of the short message service feature. With regard to
the Digital Mobile Network, Motorola has indicated that the following
system infrastructure components are Year 2000 ready:
- critical call and data processing systems applicable to a significant
portion of the Digital Mobile Network have passed Year 2000 readiness
testing;
- Nortel switches and CISCO routers have passed Year 2000 readiness
testing appropriate for Nextel's use; and
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- Voice mail system components have passed Year 2000 readiness testing.
- Oracle provided information to Nextel that the software that supports
Nextel's human resources function and financial systems is Year 2000
ready in conjunction with recommended upgrades. Nextel is in the process
of establishing the environment to test and apply these upgrades;
- Vantive provided information to Nextel that it has tested and certified
the Year 2000 readiness of the software that will be used to develop Year
2000 ready customer care systems for Nextel International's operations;
- LHS informed Nextel that the software currently in use in Nextel
International's systems that support the billing processes is Year 2000
ready in conjunction with recommended upgrades. Nextel International is
currently conducting in-house Year 2000 readiness testing and its
implementation plans include making the appropriate upgrades recommended
by LHS; and
- Motorola Communications Israel Ltd., which provides the provisioning
systems for Nextel International, certified that its software is Year
2000 ready.
To ensure the continued progress and success in managing all of Nextel's
systems Year 2000 readiness requirements, a special steering committee that
includes members of senior management responsible for Nextel's information
technology and network systems was formed to oversee this effort. Internal
employees, as well as outside contractors, staff Nextel's Year 2000 readiness
program. Members include employees across functional and divisional departments
who are responsible for assisting in the identification, assessment and
remediation of Year 2000 readiness challenges. In addition, the representatives
from some of the material third parties identified above participate in this
project.
2. THE COSTS TO ADDRESS NEXTEL'S YEAR 2000 READINESS CHALLENGES: Based on
information developed to date, as a result of Nextel's assessment efforts,
Nextel believes that the costs of modifying, upgrading or replacing its systems
and equipment will not have a material effect on Nextel's liquidity, its
financial condition or results of operations. Although Nextel's 1999 budget for
Year 2000 readiness efforts has not yet been finalized, Nextel currently
estimates that its domestic and international expenditures in connection with
these efforts will not exceed $45 million. To date, Nextel has not deferred any
specific projects, goals or objectives relating to its domestic and
international operations as a result of implementing its Year 2000 readiness
efforts.
3. THE RISKS OF NEXTEL'S YEAR 2000 READINESS CHALLENGES: In light of the
progress made to date, Nextel does not anticipate delays or postponements in
finalizing and implementing Year 2000 readiness solutions by the end of the
third quarter of 1999. Until Nextel's renovation and validation phases are
substantially complete, however, Nextel cannot fully and accurately estimate any
uncertainty in timely resolving its Year 2000 readiness challenges or in
finalizing and implementing related Year 2000 readiness resolutions.
Additionally, any failure by third parties which have a material relationship
with Nextel to achieve full Year 2000 readiness may be a potential risk if such
failure were to adversely impact the ability of such third parties to provide
any products or services that are critical to Nextel's operations. Finally,
where Nextel cannot validate or certify that technology provided by material
third parties is fully Year 2000 ready, Nextel is seeking to obtain assurances
from these material third parties that their systems are or will be Year 2000
ready no later than the end of the third quarter of 1999. If these material
third parties fail to appropriately address their own Year 2000 readiness
challenges, there could be a materially adverse effect on Nextel's financial
condition and results of operations. These risks include, but are not limited
to:
- inability of subscribers to make or receive phone calls;
- inability of sites, switches and other interfaces to accurately record
call details of subscriber phone calls; and
- inability of billing systems to accurately report and bill subscribers
for phone usage.
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<PAGE> 52
Other risks associated with the inability of Nextel or material third parties to
develop and deploy Year 2000 ready solutions in a timely and successful manner
may involve or result in conditions that could preclude Nextel from:
- deploying an alternative technology that is Year 2000 ready;
- implementing commercial launches in new markets or introducing new
services in existing markets;
- pursuing additional business opportunities; and
- obtaining equity or debt financing.
Significantly, Nextel cannot independently assess the impact of Year 2000
readiness challenges, activities and programs involving operators of public
switched telecommunications networks or other service providers, for example,
electric utilities. Nextel therefore must rely on public switched
telecommunications networks and utility providers' estimates of their own Year
2000 readiness challenges and the status of their related compliance activities
and programs in Nextel's own Year 2000 readiness assessment process. Because
Nextel's systems will be interconnected with public switched telecommunications
networks and will be dependent upon the systems of other service providers, any
disruption of operations in the computer programs of such public switched
telecommunications networks or service providers would likely have an impact on
Nextel's systems. Moreover, there can be no assurance that such impact will not
have a materially adverse effect on Nextel's operations.
Finally, in assessing its Year 2000 readiness exposure associated with its
international operations, Nextel has considered that certain operators of public
switched telecommunications networks or other service providers and operations
located in foreign countries may not be at the same level of awareness or
assessment of the Year 2000 readiness challenges and remedial measures as their
United States counterparts. These factors, to the extent present with respect to
Nextel's international operations, may result in delays in identifying Year 2000
readiness challenges and a lag in implementing remediation efforts as compared
with Nextel's domestic operations. In the event Nextel's international
affiliates and their own material third parties fail to timely address their
Year 2000 readiness challenges, Nextel's international operations could
experience disruption after December 31, 1999.
4. NEXTEL'S CONTINGENCY PLANS: Nextel has not completed all systems and
software testing in its critical systems, nor has it been advised of the
completion of such activities by all third-party providers of critical products
and services. As a result, Nextel has not fully assessed its exposure from
potential Year 2000 nonreadiness. Nextel is preparing guidelines for addressing
Year 2000 readiness contingency plans for external and internal systems should
it be determined that contingency plans are necessary. Following testing of
Nextel's critical systems, Nextel will evaluate and possibly create alternative
plans designed to address various potential business interruptions that may
occur as a result of non-readiness. Additionally, since contingency plans may
also be provided by third parties, Nextel will assess the development of
appropriate alternative solutions presented by any relevant third party to
determine its effectiveness and likely impact on Nextel's Year 2000 readiness
risk profile.
H. EFFECT OF NEW ACCOUNTING STANDARDS
1. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which establishes accounting and reporting standards
for derivative instruments (including certain derivatives embedded in other
contracts) and for hedging activities by requiring that all derivatives be
recognized in the balance sheet and measured at fair value. This statement is
effective for all quarters of fiscal years beginning after June 15, 1999. Nextel
is in the process of evaluating the potential impact of this standard on its
financial position and results of operations.
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<PAGE> 53
2. STATEMENT OF POSITION 98-1
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement will be
effective in 1999 and establishes accounting standards for costs incurred in the
acquisition or development and implementation of computer software. This
statement will require the capitalization of certain software implementation
costs relating to software that Nextel acquires, develops and implements for its
use. This statement is not expected to have a significant effect on Nextel's
financial position or results of operations.
3. STATEMENT OF POSITION 98-5
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities." This statement will be effective in 1999 and will require costs of
start-up activities and organization costs to be expensed as incurred. This
statement is not expected to have a significant effect on Nextel's financial
position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Nextel uses mandatorily redeemable preferred stock, senior 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 Nextel to interest rate risk. Nextel's primary interest rate
risk exposure results from changes in LIBOR or the prime rate which are used to
determine the interest rates that are applicable to borrowings under Nextel's
bank and vendor credit agreements. Nextel uses off-balance sheet derivative
financial instruments, including interest rate swap and collar agreements to
partially hedge interest rate exposure associated with on-balance sheet
financial instruments. All of Nextel's derivative financial instrument
transactions are entered into for non-trading purposes. The terms and
characteristics of the derivative financial instruments are matched with the
existing on-balance sheet instruments 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 United
States dollars. Accordingly, fluctuations in exchange rates relative to the
United States dollar, primarily those related to the Brazilian real, Mexican
peso and the Argentinean peso, expose Nextel to foreign currency exchange rate
risk. In the near term, Nextel'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 significant principal payments until after 1999.
Accordingly, as of December 31, 1998, Nextel has not established any hedge or
risk reduction strategies related to its foreign currency exchange rate
exposure.
Nextel International holds an available-for-sale investment in the common
stock of Clearnet, a publicly traded company that had a fair value of $68.0
million as of December 31, 1998. In accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," this investment is reported at its market value in Nextel's
financial statements. Negative fluctuations in Clearnet's stock price exposes
Nextel to equity price risk. A 10% decline in the stock price would result in a
$6.8 million decrease in the fair value of Nextel's investment in Clearnet.
The information below summarizes Nextel's sensitivity to market risks
associated with fluctuations in interest rates and foreign currency exchange
rates as of December 31, 1998 in United States dollars. To the extent that
Nextel's financial instruments expose Nextel to interest rate and foreign
currency exchange risk, these instruments 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 Nextel's mandatorily redeemable preferred
stock, senior notes and bank and vendor credit facilities in effect at December
31, 1998 and, in the case of the mandatorily redeemable preferred stock and
senior notes, excludes the potential exercise of the relevant redemption
features. This table also assumes that Nextel will repay its senior notes to
levels necessary to avoid an earlier repayment obligation with respect to its
Bank Credit Agreement; See "Item 7. Management's Discussion and Analysis of
Financial Conditions and Results of
52
<PAGE> 54
Operations -- D. Future Capital Needs and Resources." The cash flows related to
the variable portion of interest rate swap and collar agreements are determined
by dealers using valuation models that estimate the future level of interest
rates, with consideration of the applicable yield curve as of December 31, 1998.
For interest rate swap and collar agreements, the table presents notional
amounts and the related reference interest rates by year of maturity. Fair
values included herein have been determined, based on:
- quoted market prices for mandatorily redeemable preferred stock and
senior notes;
- carrying value for the bank and vendor credit facilities at December 31,
1998 as interest rates are reset periodically; and
- estimates obtained from dealers to settle interest rate swap and collar
agreements.
Notes 8, 9 and 12 to the consolidated financial statements contain
descriptions of Nextel's mandatorily redeemable preferred stock, senior notes,
bank and vendor credit facilities and interest rate risk management agreements
and should be read in conjunction with the table below. A description of
significant changes in outstanding amounts of mandatorily redeemable preferred
stock, senior notes and available bank borrowings that occurred in 1998 is
included in Part I, "Item 1. Business -- E. Fiscal Year 1998 Domestic
Transactions and Developments." and "-- F. Fiscal Year 1998 International
Transactions and Developments." The mandatorily redeemable preferred stock and
senior notes issuances, amended bank and vendor credit agreements and the new
interest rate swap agreement increased the amount of fixed and variable
obligations due after December 31, 2003.
<TABLE>
<CAPTION>
YEAR OF MATURITY
(U.S. DOLLARS IN THOUSANDS)
-------------------------------------------------------------- FAIR
1999 2000 2001 2002 2003 THEREAFTER TOTAL VALUE
------ ------- -------- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
I. INTEREST RATE
SENSITIVITY
Mandatorily Redeemable
Preferred Stock and
Long-Term Debt:
Fixed Rate............. -- -- -- -- $ 35,811 $8,788,722 $8,824,533 $6,513,498
Average Interest
Rate................. -- -- -- -- 11.5% 10.9% 10.9%
Variable Rate.......... $2,061 $30,562 $ 69,801 $111,971 187,021 1,918,479 2,319,895 2,319,895
Average Interest
Rate................. 14.1% 10.3% 8.9% 8.6% 8.3% 8.0% 8.1%
Interest Rate Swaps:
Variable to Fixed...... -- -- 200,000 -- 100,000 570,000 870,000 (108,727)*
Average Pay Rate....... -- -- 5.4% -- 5.5% 8.1% 7.2% --
Average Receive Rate... -- -- 5.3% -- 5.4% 5.3% 5.3% --
Variable to Variable... -- 50,000 100,000 -- 400,000 -- 550,000 (5,559)
Average Pay Rate....... -- 5.3% 5.4% -- 5.2% -- 5.3% --
Average Receive Rate... -- 5.5% 5.2% -- 5.4% -- 5.4% --
Interest Rate Collars:
Collars................ -- -- -- -- 200,000 -- 200,000 (4,695)
Average Cap Rate....... -- -- -- -- 6.7% 6.7%
Average Floor Rate..... -- -- 4.5% 4.5%
II. FOREIGN EXCHANGE
RATE SENSITIVITY
Long-Term Debt:
Fixed Rate............. -- -- -- -- -- 1,681,463 1,681,463 886,048
Average Interest
Rate................. -- -- -- -- -- 12.6% 12.6%
Variable Rate.......... 2,061 30,562 39,801 50,021 75,071 4,379 201,895 201,895
Average Interest
Rate................. 14.1% 10.3% 9.9% 10.0% 9.7% 12.2% 10.0%
</TABLE>
- ---------------
* Of this amount, about $46.9 million was recognized as a loss in Nextel's
statement of operations during the quarter ended September 30, 1998.
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<PAGE> 55
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Nextel are filed under this Item,
beginning on page F-1 of this Annual Report on Form 10-K. The financial
statement schedules required under Regulation S-X are filed pursuant to Item 14
of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
54
<PAGE> 56
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required herein regarding directors is incorporated herein
by reference from the definitive Proxy Statement for Nextel's 1999 Annual
Meeting, which is scheduled to be filed on or before April 9, 1999, under the
caption "Election of Directors." The information required herein regarding
executive officers required is set forth in Part I hereof under the heading
"Executive Officers of the Registrant," which information is incorporated herein
by reference. The information required by this item regarding compliance with
Section 16(a) of the Securities and Exchange Act of 1934 by Nextel's directors
and executive officers, and holders of ten percent of a registered class of
Nextel's equity securities is incorporated herein by reference from the
definitive Proxy Statement for Nextel's 1999 Annual Meeting which is scheduled
to be filed on or before April 9, 1999, under the caption "Section 16(a)
Beneficial Ownership Reporting Compliance."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item regarding compensation of executive
officers and directors is incorporated herein by reference from the definitive
Proxy Statement for Nextel's 1999 Annual Meeting, which is scheduled to be filed
on or before April 9, 1999, under the captions "Election of Directors --
Compensation of Directors" and "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated herein by reference
from the definitive Proxy Statement for Nextel's 1999 Annual Meeting, which is
scheduled to be filed on or before April 9, 1999, under the caption "Securities
Ownership of Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference
from the definitive Proxy Statement for Nextel's 1999 Annual Meeting, which is
scheduled to be filed on or before April 9, 1999, under the caption "Certain
Relationships and Related Transactions."
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<PAGE> 57
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) The following Financial Statements are included in Part II Item 8:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-3
Consolidated Statements of Operations and Comprehensive
Income for the Years Ended December 31, 1998, 1997 and
1996...................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996...... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
(2) The following Financial Statement Schedules are submitted herewith
and are included herein in Item 14(d) below. Schedules other than
those listed below are omitted because they are either not required
or not applicable.
<TABLE>
<S> <C>
Schedule I.................................................. F-38
Schedule II................................................. F-42
</TABLE>
(3) List of Exhibits -- Refer to Exhibit Index, which is incorporated
herein by reference.
(b) Reports on Form 8-K:
(1) Current Report on Form 8-K dated October 29, 1998, reporting under
Item 5, Nextel's offering of Senior Serial Redeemable Notes due
2008 and reporting the amendment to Nextel's Bank Credit
Agreement.
(2) Current Report on Form 8-K dated December 18, 1998, reporting
under Item 5, Nextel's offering of Zero Coupon Convertible
Preferred Stock due 2013.
(c) Exhibits listed above in Item 14(a)(3) are included herein.
(d) Financial Statement Schedules listed above in Item 14(a)(2) are
included herein.
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<PAGE> 58
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
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/ STEVEN M. SHINDLER
------------------------------------
March 30, 1999 Steven M. Shindler
Vice President and Chief Financial
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated below.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DANIEL F. AKERSON Chairman of the Board and Chief March 30, 1999
- --------------------------------------------- Executive Officer (Principal
Daniel F. Akerson Executive Officer)
/s/ TIMOTHY M. DONAHUE President, Chief Operating Officer March 30, 1999
- --------------------------------------------- and Director
Timothy M. Donahue
/s/ STEVEN M. SHINDLER Vice President and Chief Financial March 30, 1999
- --------------------------------------------- Officer (Principal Financial Officer)
Steven M. Shindler
/s/ WILLIAM G. ARENDT Vice President and Controller March 30, 1999
- --------------------------------------------- (Principal Accounting Officer)
William G. Arendt
/s/ MORGAN E. O'BRIEN Vice Chairman of the Board March 30, 1999
- ---------------------------------------------
Morgan E. O'Brien
/s/ KEITH BANE Director March 30, 1999
- ---------------------------------------------
Keith Bane
/s/ CRAIG O. MCCAW Director March 30, 1999
- ---------------------------------------------
Craig O. McCaw
/s/ KEISUKE NAKASAKI Director March 30, 1999
- ---------------------------------------------
Keisuke Nakasaki
/s/ WILLIAM A. HOGLUND Director March 30, 1999
- ---------------------------------------------
William A. Hoglund
/s/ DENNIS M. WEIBLING Director March 30, 1999
- ---------------------------------------------
Dennis M. Weibling
/s/ WILLIAM E. CONWAY, JR. Director March 30, 1999
- ---------------------------------------------
William E. Conway, Jr.
/s/ FRANK M. DRENDEL Director March 30, 1999
- ---------------------------------------------
Frank M. Drendel
</TABLE>
57
<PAGE> 59
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
3.1.1 Restated Certificate of Incorporation of Nextel (filed on
July 31, 1995 as Exhibits No. 4.1.1 and 4.1.2 to Nextel's
Post-Effective Amendment No. 1 on Form S-8 to Registration
Statement No. 33-91716 on Form S-4 (the "Nextel S-8
Registration Statement") and incorporated herein by
reference).
3.1.2 Certificate of Designation of the Powers, Preferences and
Relative, Participating, Optional and Other Special Rights
of 13% Series D Exchangeable Preferred Stock and
Qualifications, Limitations and Restrictions Thereof (filed
on July 21, 1997 as Exhibit 4.1 to the Current Report on
Form 8-K dated on July 21, 1997 and incorporated herein by
reference).
3.1.3 Certificate of Designation of the Powers, Preferences and
Relative, Participating, Optional and Other Special Rights
of 11.125% Series E Exchangeable Preferred Stock and
Qualifications, Limitations and Restrictions Thereof (filed
on February 12, 1998 as Exhibit 4.1 to the Current Report on
Form 8-K dated on February 11, 1998 (the "February 11 Form
8-K") and incorporated herein by reference).
3.1.4 Certificate of Designation of the Powers, Preferences and
Relative, Participating, Optional and Other Special Rights
of Zero Coupon Convertible Preferred Stock due 2013 and
Qualifications, Limitations and Restrictions Thereof (filed
on February 10, 1999 as Exhibit 4.16 to Nextel's
Registration Statement on Form S-4 (the "February 1999 Form
S-4") and incorporated herein by reference).
3.2 Amended and Restated By-Laws of Nextel (filed on July 31,
1995 as Exhibit No. 4.2 to the Nextel S-8 Registration
Statement and incorporated herein by reference).
4.1.1 Indenture between Old Nextel and The Bank of New York, as
Trustee, dated August 15, 1993 (the "August Indenture")
(filed on December 23, 1993 as Exhibit 4.13 to Old Nextel's
Registration Statement No. 33-73388 on Form S-4 and
incorporated herein by reference).
4.1.2 Supplemental Indenture, dated as of June 30, 1995, to the
August Indenture between Old Nextel and The Bank of New York
(filed on November 14, 1995 as Exhibit 4.1 to Nextel's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995 (the "November 14 Form 10-Q") and
incorporated herein by reference).
4.1.3 Second Supplemental Indenture, dated as of July 28, 1995,
between ESMR, Inc. (now known as Nextel), as Successor by
Merger to Old Nextel and The Bank of New York (relating to
the August Indenture) (filed on November 14, 1995 as Exhibit
4.3 to the November 14 Form 10-Q and incorporated herein by
reference).
4.1.4 Third Supplemental Indenture to the August Indenture, dated
as of June 13, 1997, between Nextel and The Bank of New
York, as Trustee (filed on June 17, 1997 as Exhibit 4.1 to
the Current Report on Form 8-K dated June 13, 1997 (the
"June 13 Form 8-K") and incorporated herein by reference).
4.1.5 Fourth Supplemental Indenture, dated March 24, 1998, to the
August Indenture between Nextel Communications, Inc. and The
Bank of New York, as Trustee (filed on May 13, 1998 as
Exhibit 4.3 to Nextel's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1998 (the "May 13 Form 10-Q")
and incorporated herein by reference).
4.2.1 Indenture between Old Nextel and the Bank of New York, as
Trustee, dated as of February 15, 1994 (the "February
Indenture") (filed on March 1, 1994 as Exhibit 4.1 to Old
Nextel's Current Report on Form 8-K dated February 16, 1994
and incorporated herein by reference).
4.2.2 Supplemental Indenture, dated as of June 30, 1995, to the
February Indenture between Old Nextel and The Bank of New
York (filed on November 14, 1995 as Exhibit 4.2 to the
November 14 Form 10-Q and incorporated herein by reference).
</TABLE>
58
<PAGE> 60
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
4.2.3 Second Supplemental Indenture, dated as of July 28, 1995,
between ESMR, Inc. (now known as Nextel), as Successor by
Merger to Old Nextel and The Bank of New York (relating to
the February Indenture) (filed on November 14, 1995 as
Exhibit 4.4 to the November 14 Form 10-Q and incorporated
herein by reference).
4.2.4 Third Supplemental Indenture to the February Indenture,
dated as of June 13, 1997, between Nextel Communications,
Inc., and The Bank of New York, as Trustee (filed on June
17, 1997 as Exhibit 4.2 to the June 13 Form 8-K and
incorporated herein by reference).
4.3.1 Indenture for Senior Redeemable Discount Notes due 2004,
dated as of January 13, 1994, between OneComm (formerly
called CenCall Communications Corp.) and The Bank of New
York (the "OneComm Indenture") (filed on June 7, 1995 as
Exhibit 99.2 to Old Nextel's Registration Statement No
33-93182 on Form S-4 (the "OneComm S-4 Registration
Statement") and incorporated herein by reference).
4.3.2 Supplemental Indenture, dated as of June 30, 1995, to the
OneComm Indenture between OneComm (formerly called CenCall
Communications Corp.) and The Bank of New York (filed on
November 14, 1995 as Exhibit 10.12 to the November 14 Form
10-Q and incorporated herein by reference).
4.3.3 Second Supplemental Indenture, dated as of July 28, 1995,
between Nextel (formerly known as ESMR, Inc.), as successor
to OneComm, and The Bank of New York (relating to the
OneComm Indenture) (filed on November 14, 1995 as Exhibit
10.13 to the November 14 Form 10-Q and incorporated herein
by reference).
4.3.4 Third Supplemental Indenture to the OneComm Indenture
between Nextel (as successor to OneComm) and The Bank of New
York (filed on June 17, 1997 as Exhibit 4.5 to the June 13
Form 8-K and incorporated herein by reference).
4.4.1 Indenture for Senior Redeemable Discount Notes due 2004,
dated as of April 25,1994, between Dial Call and The Bank of
New York (the "Dial Call 2004 Indenture") (filed on June 7,
1995 as Exhibit 99.4 to the OneComm S-4 Registration
Statement and incorporated herein by reference).
4.4.2 Supplemental Indenture, dated as of August 7, 1995, to the
Dial Call 2004 Indenture between Dial Call and The Bank of
New York (filed on December 5, 1995 as Exhibit 99.3 to the
Nextel's Registration Statement No. 33-80021 on Form S-4
(the "Dial Page S-4 Registration Statement") and
incorporated herein by reference).
4.4.3 Second Supplemental Indenture, dated as of January 30, 1996,
to the Dial Call 2004 Indenture between Dial Page (as
successor to Dial Call) and The Bank of New York (filed on
April 1, 1996 as Exhibit 4.26 to Nextel's Annual Report on
Form 10-K for the year ended December 31, 1995 (the "1995
Form 10-K") and incorporated herein by reference).
4.4.4 Third Supplemental Indenture, dated as of January 30, 1996,
to the Dial Call 2004 Indenture between Nextel (as successor
to Dial Page) and The Bank of New York (filed on April 1,
1996 as Exhibit 4.27 to the 1995 Form 10-K and incorporated
herein by reference).
4.4.5 Fourth Supplemental Indenture to the Dial Call 2004
Indenture between Nextel (as successor to Dial Call) and The
Bank of New York (filed on June 17, 1997 as Exhibit 4.3 to
the June 13 Form 8-K and incorporated herein by reference).
4.4.6 Fifth Supplemental Indenture, dated March 24, 1998, to the
Dial Call 2004 Indenture between Nextel and The Bank of New
York (filed on May 13, 1998 as Exhibit 4.4 to the May 13
Form 10-Q and incorporated herein by reference).
4.5.1 Indenture for Senior Discount Notes due 2005, dated as of
December 22, 1993, between Dial Call and The Bank of New
York (the "Dial Call 2005 Indenture") (filed as Exhibit 99.3
to the OneComm S-4 Registration Statement and incorporated
herein by reference).
</TABLE>
59
<PAGE> 61
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
4.5.2 Supplemental Indenture, dated as of April 25, 1994, to the
Dial Call 2005 Indenture between Dial Call and The Bank of
New York (filed on April 1, 1996 as Exhibit 4.29 to the 1995
Form 10-K and incorporated herein by reference).
4.5.3 Supplemental Indenture, dated as of June 30, 1995, to the
Dial Call 2005 Indenture between Dial Call and The Bank of
New York (filed on December 5, 1995 as Exhibit 99.4 to the
Dial Page S-4 Registration Statement and incorporated herein
by reference).
4.5.4 Third Supplemental Indenture, dated as of January 30, 1996,
to the Dial Call 2005 Indenture between Dial Page (as
successor to Dial Call) and The Bank of New York (filed on
April 1, 1996 as Exhibit 4.31 to the 1995 Form 10-K and
incorporated herein by reference).
4.5.5 Fourth Supplemental Indenture, dated as of January 30, 1996,
to the Dial Call 2005 Indenture between Nextel (as successor
to Dial Call) and The Bank of New York (filed on April 1,
1996 as Exhibit 4.32 to the 1995 Form 10-K and incorporated
herein by reference).
4.5.6 Fifth Supplemental Indenture to the Dial Call 2005 Indenture
between Nextel (as successor to Dial Call) and The Bank of
New York (filed on June 17, 1997 as Exhibit 4.4 to the June
13 Form 8-K and incorporated herein by reference).
4.6.1 Indenture for Senior Discount Notes due 2007, dated as of
March 6, 1997, between McCaw International, Ltd. and The
Bank of New York, as Trustee (filed on March 31, 1997 as
Exhibit 4.24 to Nextel's Annual Report on Form 10-K for the
year ended December 31, 1996 (the "1996 Form 10-K") and
incorporated herein by reference).
4.6.2 Warrant Agreement, dated as of March 6, 1997, between Nextel
International, Inc. and The Bank of New York (filed on March
31, 1997 as Exhibit 4.26 to the 1996 Form 10-K and
incorporated herein by reference).
4.7 Indenture dated September 17, 1997 between Nextel
Communications, Inc. and Harris Trust and Savings Bank, as
Trustee, relating to Nextel's 10.65% Senior Redeemable
Discount Notes due 2007 (filed on September 22, 1997 as
Exhibit 4.1 to Nextel's Current Report on Form 8-K dated
September 22, 1997 and incorporated herein by reference).
4.8 Indenture, dated as of October 22, 1997, between Nextel
Communications, Inc. and Harris Trust and Savings Bank, as
Trustee, relating to Nextel's 9.75% Senior Serial Redeemable
Discount Notes due 2007 (filed on October 23, 1997 as
Exhibit 4.1 to Nextel's Current Report on Form 8-K dated
October 23, 1997 and incorporated herein by reference).
4.9 Indenture, dated as of February 11, 1998, between Nextel
Communications, Inc. and Harris Trust and Savings Bank, as
Trustee, relating to Nextel's 9.95% Senior Serial Redeemable
Discount Notes due 2008 (filed on February 12, 1998 as
Exhibit 4.2 to the February 11 Form 8-K and incorporated
herein by reference).
4.10 Indenture, dated as of November 4, 1998, between Nextel
Communications, Inc. and Harris Trust and Savings Bank, as
Trustee, relating to Nextel's 12.0% Senior Serial Redeemable
Notes due 2008 (filed on February 10, 1999 as Exhibit 4.13.1
to the February 1999 Form S-4 and incorporated herein by
reference).
4.11 Indenture for Senior Discount Notes due 2008, dated March
12, 1998, between Nextel International, Inc. and The Bank of
New York (filed on May 14, 1998 as Exhibit 4.1 to Nextel
International Inc.'s Quarterly Report on Form 10-Q for the
quarter ended March 31, 1998 and incorporated herein by
reference).
4.12 Registration Rights Agreement, dated as of November 4, 1998,
by and between Nextel and Morgan Stanley & Co. Incorporated
(filed on February 10, 1999 as Exhibit 4.14 to the February
1999 Form S-4 and incorporated herein by reference).
</TABLE>
60
<PAGE> 62
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
4.13 Registration Rights Agreement, dated December 23, 1998, by
and between Nextel, Goldman, Sachs & Co., Morgan Stanley &
Co., Incorporated and Nationsbanc Montgomery Securities LLC
(filed as Exhibit 4.13 hereto).
4.14.1 Credit Agreement, dated as of March 12, 1998, among Nextel,
NFC, the Restricted Companies party thereto, the Lenders
party thereto, Toronto Dominion (Texas) Inc., as
Administrative Agent, and The Chase Manhattan Bank as
Collateral Agent (filed as Exhibit 4.12 to Nextel's Annual
Report on Form 10-K for the year ended December 31, 1997
(the "1997 Form 10-K") and incorporated herein by
reference).
4.14.2 Amendment No. 1, dated as of October 28, 1998, amending the
Credit Agreement dated as of March 12, 1998, between Nextel
Communications, Inc., Nextel Finance Company, the other
restricted companies party thereto, the lenders party
thereto and the Administrative Agent and Collateral Agent
(filed on October 29, 1998, as Exhibit 10.1 to Nextel's
Current Report on Form 8-K dated October 29, 1998, and
incorporated herein by reference).
4.14.3 Amendment No. 2, dated as of December 21, 1998, amending the
Credit Agreement dated as of March 12, 1998, between Nextel
Communications, Inc., Nextel Finance Company, the other
restricted companies party thereto, the lenders party
thereto and the Administrative Agent and Collateral Agent
(filed as Exhibit 4.14.3 hereto).
10.1* Letter Agreement between Motorola, Inc. and Old Nextel,
dated as of November 4, 1991 (filed on November 15, 1991 as
Exhibit 10.47 to the Registration Statement No. 33-43415 on
Form S-1 (the "S-1 Registration Statement") and incorporated
herein by reference).
10.2.1* Enhanced Specialized Mobile Radio System Purchase Agreement
between Motorola, Inc. and Old Nextel, dated as of November
4, 1991 (filed on November 15, 1991 as Exhibit 10.48 to the
S-1 Registration Statement and incorporated herein by
reference).
10.2.2* Amendment, dated August 4, 1994, to the Enhanced Specialized
Mobile Radio System Equipment Purchase Agreement, between
Old Nextel and Motorola, dated November 1, 1991, as amended
and to the Letter Agreement, between Old Nextel and
Motorola, dated November 4, 1991, as amended (collectively
the "Equipment Purchase Agreements") (filed as Exhibit 10.02
to ESMR's Registration Statement No. 33-91716 on Form S-4
(the "ESMR Form S-4 Registration Statement") and
incorporated herein by reference).
10.2.3* Second Amendment to Equipment Purchase Agreements, dated
April 4, 1995 (filed as Exhibit 10.03 to the ESMR Form S-4
Registration Statement and incorporated herein by
reference).
10.2.4* Amendment 004 to Enhanced Specialized Mobile Radio System
Purchase Agreement, dated as of April 28, 1996, between
Nextel and Motorola, Inc. (filed on July 5, 1996 as Exhibit
99.1 to Nextel's Current Report on Form 8-K dated July 5,
1996 and incorporated herein by reference).
10.2.5* Nextel/Motorola Agreement (relating to equipment purchase),
dated March 27, 1997 (filed on May 14, 1997 as Exhibit 10.1
to Nextel's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997 and incorporated herein by reference).
10.3.1 Agreement and Plan of Contribution and Merger, dated August
4, 1994, as amended, by and among Old Nextel, Motorola,
Inc., ESMR, Inc. (now known as Nextel), ESMR Sub, Inc. and
Others (filed on April 28, 1995 as Exhibit 2.01 to the ESMR
Form S-4 Registration Statement and incorporated herein by
reference).
10.3.2 Registration Rights Agreement, dated July 28, 1995, by and
between Nextel and Motorola (filed on November 14, 1995 as
Exhibit 10.8 to the November 14 Form 10-Q and incorporated
herein by reference).
</TABLE>
61
<PAGE> 63
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
10.4.1 Warrant Agreement between Motorola, Inc. and Old Nextel,
dated November 1, 1991 (filed on November 15, 1991 as
Exhibit 10.53 to the S-1 Registration Statement and
incorporated herein by reference).
10.4.2 Amendment, dated as of April 26, 1996, to Warrant Agreement
between Motorola, Inc. and Nextel (f/k/a Fleet Call, Inc.)
(filed on August 14, 1996 as Exhibit 10.2 to Nextel's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1996 and incorporated herein by reference).
10.5.1 Warrant Acquisition Agreement, dated as of July 14, 1993, by
and between OneComm and The Chase Manhattan Bank (National
Association), and Form of Stock Purchase Warrant (filed as
Exhibit 10.42 to the OneComm S-1 Registration Statement and
incorporated herein by reference).
10.5.2 Registration Rights Agreement, dated July 28, 1995, by and
among Nextel, The Chase Manhattan Bank (National
Association), Canadian Imperial Bank of Commerce and Fleet
National Bank (filed on April 1, 1996 as Exhibit 10.57 to
the 1995 Form 10-K and incorporated herein by reference).
10.6.1 Securities Purchase Agreement between Old Nextel, Digital
Radio, L.L.C and Craig O. McCaw, dated April 4, 1995 (filed
on April 11, 1995 as Exhibit 2.1 to Old Nextel's Current
Report on Form 8-K dated April 10, 1995 and incorporated
herein by reference).
10.6.2 Incentive Option Agreement, dated April 4, 1995, between Old
Nextel and Eagle River, Inc. filed as Exhibit 99.3 to Old
Nextel's Current Report on Form 8-K dated April 10, 1995 and
filed on April 11, 1995 and incorporated herein by
reference).
10.6.3 Forms of Option Agreements dated April 6, 1995 between Old
Nextel, Report on Form 8-K dated April 10, 1995 and filed on
April 11, 1995 and incorporated herein by reference).
10.6.4 Form of Registration Rights Agreement, dated July 28, 1995,
by and among Nextel and Digital Radio, L.L.C. (filed on
March 31, 1997 as Exhibit 10.38 to the 1996 Form 10-K and
incorporated herein by reference).
10.6.5 First Amendment to Registration Rights Amendment (amending
that certain Registration Rights Agreement dated June 29,
1995) by and among Digital Radio, L.L.C., and Option
Acquisition, L.L.C., dated as of June 18, 1997 (filed on
July 9, 1997 as Exhibit 10.7 to the Current Report on Form
8-K (the "July 9, 1997 8-K") and incorporated herein by
reference).
10.7 Option Exercise and Lending Commitment Agreement by and
among Nextel and Digital Radio, L.L.C., dated as of June 16,
1997 (filed on July 9, 1997 as Exhibit 10.1 to the July 9,
1997 8-K and incorporated herein by reference).
10.8.1 Option Purchase Agreement by and among Nextel, Unrestricted
Subsidiary Funding Company and Option Acquisition, L.L.C.,
dated as of June 16, 1997 (filed on July 9, 1997 as Exhibit
10.3 to the July 9, 1997 Form 8-K and incorporated herein by
reference).
10.8.2 Option Agreement (First New Option) by and between Option
Acquisition, L.L.C., and Nextel, dated as of June 18, 1997
(filed on July 9, 1997 as Exhibit 10.4 to the July 9, 1997
Form 8-K and incorporated herein by reference).
10.8.3 Option Agreement (Second New Option) by and between Option
Acquisition, L.L.C., and Nextel, dated as of June 18, 1997
(filed on July 9, 1997 as Exhibit 10.5 to the July 9, 1997
Form 8-K and incorporated herein by reference).
10.8.4 Registration Rights Agreement (Option Acquisition) by and
among Nextel and Option Acquisition, L.L.C., dated as of
June 18, 1997 (filed on July 9, 1997 as Exhibit 10.6 to the
July 9, 1997 Form 8-K and incorporated herein by reference).
</TABLE>
62
<PAGE> 64
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
10.9*** Form of Indemnification Agreement, and Exhibits thereto
between Old Nextel and each of its directors (filed on June
24, 1992 as Exhibit 10.56 to Old Nextel's Annual Report on
Form 10-K for the year ended March 31, 1992 and incorporated
herein by reference).
10.10*** Employment Agreement, dated as of March 26, 1992, between
Old Nextel and Robert Foosaner (filed on May 27, 1993 as
Exhibit 10.41 to Old Nextel's Annual Report on Form 10-K for
the year ended March 31, 1993 and incorporated herein by
reference).
10.11*** The Nextel Stock Option Plan (filed on December 21, 1992 as
Exhibit 4(c) to Old Nextel's Registration Statement No.
33-56080 on Form S-8 and incorporated herein by reference).
10.12*** Nextel Amended and Restated Incentive Equity Plan (as
amended and restated on March 24, 1998) (filed on May 22,
1998 as Exhibit 4.3 to Nextel's Registration Statement No.
333-53429 on Form S-8 and incorporated herein by reference).
10.13*** Nextel Associate Stock Purchase Plan (filed on June 21, 1996
as Exhibit 4.3 to Nextel's Registration Statement No.
333-06523 on Form S-8 and incorporated herein by reference).
10.14*** Nextel Communications, Inc. Cash Compensation Deferral Plan
(filed on December 17, 1997 as Exhibit 4.1 to Nextel's
Registration Statement No 333-42537 on Form S-8 and
incorporated herein by reference).
10.15.1*** Employment Agreement dated as of March 5, 1996 between
Daniel Akerson and Nextel (filed on March 31, 1997 as
Exhibit 10.35 to the 1996 Form 10-K and incorporated herein
by reference).
10.15.2*** Letter Amendment to Employment Agreement dated as of March
24, 1998 between Daniel Akerson and Nextel (filed on March
31, 1998 as Exhibit 10.20.2 to the 1997 Form 10-K and
incorporated herein by reference).
10.15.3*** Letter Amendment to Employment Agreement, dated as of
February 26, 1999, between Daniel Akerson and Nextel (filed
as Exhibit 10.15.3 hereto).
10.15.4*** Non-Negotiable Unsecured Promissory Note, dated March 10,
1999, issued by Daniel Akerson to a subsidiary of Nextel
(filed as Exhibit 10.15.4 hereto).
10.16.1*** Employment Agreement, dated February 1, 1996, between Tim
Donahue and Nextel, (filed on March 31, 1997 as Exhibit
10.36 to the 1996 Form 10-K and incorporated herein by
reference).
10.16.2*** Addendum to Employment Agreement between Tim Donahue and
Nextel, dated March 24, 1997 (filed on March 31, 1997 as
Exhibit 10.37 to the 1996 Form 10-K and incorporated herein
by reference).
10.17*** Employment Agreement, dated as of June 15, 1987, between Old
Nextel and Morgan E. O'Brien, and Amendment dated January
29, 1990 (filed on October 17, 1991 as Exhibit 10.34 to the
S-1 Registration Statement and incorporated herein by
reference).
10.18*** Employment Agreement, dated as of October 17, 1994, between
Thomas J. Sidman and Nextel (filed on March 31, 1998 as
Exhibit 10.23 to the 1997 Form 10-K and incorporated herein
by reference).
10.19.1 Joint Venture Agreement by and among Nextel Partners, Inc.,
Nextel Partners Operating Corp., and Nextel WIP Corp., dated
as of January 29, 1999 (filed on February 24, 1999 as
Exhibit 10.1 to the Current Report on Form 8-K dated
February 24, 1999 (the "February 24 8-K") and incorporated
herein by reference).
10.19.2 Shareholders' Agreement among Nextel Partners, Inc., and the
Shareholders named therein, dated as of January 29, 1999
(filed on February 24, 1999 as Exhibit 10.2 to the February
24 8-K and incorporated herein by reference).
</TABLE>
63
<PAGE> 65
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
10.19.3 Agreement Specifying Obligations of, and Limiting Liability
and Recourse to, Nextel, dated as of January 29, 1999 (filed
on February 24, 1999 as Exhibit 10.3 to the February 24 8-K
and incorporated herein by reference).
21 Subsidiaries of Nextel (filed as Exhibit 21 hereto).
23 Consent of Deloitte & Touche LLP (filed as Exhibit 23
hereto).
27** Financial Data Schedule (filed as Exhibit 27 hereto).
99.1 Memorandum Opinion and Order of the Federal Communications
Commission, dated as of February 13, 1991 (filed on December
5, 1992 as Exhibit 28.1 to the S-1 Registration Statement
and incorporated herein by reference).
99.2 Letter from Motorola, Inc. to Old Nextel dated as of January
13, 1992 (filed on January 16, 1992 as Exhibit 28.2 to the
S-1 Registration Statement and incorporated herein by
reference).
99.3 Order entered by the United States District Court for the
District of Columbia on July 25, 1995 approving the proposed
consent decree be tween the Antitrust Division of the United
States Justice Department, Motorola, Inc. and Nextel (filed
on April 1, 1996 as Exhibit 99.3 to the 1995 Form 10-K and
incorporated herein by reference).
</TABLE>
- ---------------
* Portions of this exhibit have been omitted and filed separately with the
Commission pursuant to a request for confidential treatment.
** Submitted only with the electronic filing of this document with the
Commission pursuant to Regulation S-T under the Securities Act.
*** Management contract or compensatory plan or arrangement.
64
<PAGE> 66
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITORS' REPORT................................ F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1998 and
1997................................................... F-3
Consolidated Statements of Operations and Comprehensive
Income for the Years Ended December 31, 1998, 1997 and
1996................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1998, 1997 and 1996... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996....................... F-6
Notes to Consolidated Financial Statements................ F-7
FINANCIAL STATEMENT SCHEDULES
Schedule I -- Condensed Financial Information of
Registrant............................................. F-38
Schedule II -- Valuation and Qualifying Accounts.......... F-42
</TABLE>
F-1
<PAGE> 67
INDEPENDENT AUDITORS' REPORT
To the Stockholders and Board of Directors of
Nextel Communications, Inc.
We have audited the accompanying consolidated balance sheets of Nextel
Communications, Inc. and subsidiaries (the "Company") as of December 31, 1998
and 1997, and the related consolidated statements of operations and
comprehensive income, changes in stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1998. Our audits also
included the financial statement schedules listed in the Index at Item 14(a)(2).
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Nextel Communications, Inc. and
subsidiaries at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. Also, in
our opinion, such financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly, in
all material respects, the information set forth therein.
DELOITTE & TOUCHE LLP
McLean, Virginia
February 22, 1999
F-2
<PAGE> 68
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents (of which $121,116 and $159,790,
respectively, is restricted)........................... $ 321,379 $ 301,601
Marketable securities (of which $128,560 is restricted)... -- 131,404
Accounts and notes receivable, net........................ 443,447 240,637
Subscriber equipment and accessory inventory.............. 62,639 101,338
Assets held for sale...................................... 132,370 --
Other..................................................... 92,877 64,617
----------- ----------
Total current assets................................. 1,052,712 839,597
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 4,915,025 3,225,603
INTANGIBLE ASSETS, NET...................................... 4,937,124 4,699,746
OTHER ASSETS................................................ 668,500 462,855
----------- ----------
$11,573,361 $9,227,801
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.......................................... $ 635,510 $ 529,191
Accrued expenses and other................................ 536,841 232,123
Current portion of long-term debt......................... 9,875 7,577
----------- ----------
Total current liabilities............................ 1,182,226 768,891
LONG-TERM DEBT.............................................. 7,710,373 5,038,250
DEFERRED INCOME TAXES....................................... 771,326 951,192
OTHER....................................................... 73,005 6,005
----------- ----------
Total liabilities.................................... 9,736,930 6,764,338
----------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 8, 11, 15)
MINORITY INTEREST........................................... 28,677 21,924
MANDATORILY REDEEMABLE PREFERRED STOCK (Note 12)............ 1,578,252 529,119
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, 272,087,322 and 253,246,237 shares
issued, 271,386,227 and 252,028,617 shares
outstanding............................................ 272 253
Common stock, Class B, non-voting convertible, 17,830,000
shares issued and outstanding.......................... 18 18
Paid-in capital........................................... 4,379,724 4,379,810
Accumulated deficit....................................... (4,401,193) (2,749,105)
Treasury shares, at cost, 701,095 and 1,217,620 shares.... (13,398) (23,435)
Deferred compensation, net................................ (1,989) (8,464)
Accumulated other comprehensive (loss) income
Unrealized (loss) gain on investments, net of taxes.... (427) 22,798
Cumulative translation adjustment...................... (24,050) --
----------- ----------
Total accumulated other comprehensive (loss)
income............................................ (24,477) 22,798
----------- ----------
Total stockholders' equity........................ 229,502 1,912,420
----------- ----------
$11,573,361 $9,227,801
=========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 69
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING REVENUES............................. $ 1,846,758 $ 738,897 $ 332,938
------------ ------------ ------------
OPERATING EXPENSES
Cost of revenues............................. 516,393 288,752 247,717
Selling, general and administrative.......... 1,550,323 861,588 330,256
Depreciation and amortization................ 832,299 526,377 400,831
------------ ------------ ------------
2,899,015 1,676,717 978,804
------------ ------------ ------------
OPERATING LOSS................................. (1,052,257) (937,820) (645,866)
------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense............................. (656,080) (407,805) (227,495)
Interest income.............................. 34,024 29,773 21,015
Other, net................................... (36,462) 6,511 (10,866)
------------ ------------ ------------
(658,518) (371,521) (217,346)
------------ ------------ ------------
LOSS BEFORE INCOME TAX BENEFIT (PROVISION)AND
EXTRAORDINARY ITEM........................... (1,710,775) (1,309,341) (863,212)
INCOME TAX BENEFIT (PROVISION)................. 191,912 (258,726) 307,192
------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM................. (1,518,863) (1,568,067) (556,020)
EXTRAORDINARY ITEM -- LOSS ON EARLY RETIREMENT
OF DEBT, NET OF INCOME TAX OF $0............. (133,225) (45,787) --
------------ ------------ ------------
NET LOSS....................................... (1,652,088) (1,613,854) (556,020)
MANDATORILY REDEEMABLE PREFERRED STOCK
DIVIDENDS.................................... (149,161) (29,119) --
------------ ------------ ------------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS....... $ (1,801,249) $ (1,642,973) $ (556,020)
============ ============ ============
COMPREHENSIVE LOSS, NET OF INCOME TAX:
Net loss..................................... $ (1,652,088) $ (1,613,854) $ (556,020)
Unrealized (loss) gain on available-for-sale
securities................................ (23,225) 7,805 (17,061)
Foreign currency translation adjustment...... (24,050) -- --
------------ ------------ ------------
COMPREHENSIVE LOSS............................. $ (1,699,363) $ (1,606,049) $ (573,081)
============ ============ ============
LOSS PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS, BASIC AND DILUTED:
Loss before extraordinary item attributable
to common stockholders.................... $ (5.98) $ (6.41) $ (2.50)
Extraordinary item........................... (0.48) (0.18) --
------------ ------------ ------------
$ (6.46) $ (6.59) $ (2.50)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING.................................. 278,643,000 249,320,000 222,779,000
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 70
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(dollars in thousands)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS A
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
------------------------- ------------------------- -----------
SHARES AMOUNT SHARES AMOUNT SHARES
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995.......................... 8,163,265 $ 300,000 82 $ -- 175,749,359
Issuance of common stock:
Exercise of options and warrants.................. 1,580,981
Employee stock purchase plan......................
Acquisitions...................................... 25,888,819
Comcast purchase.................................. 8,155,506
Exercise of antidilutive rights....................
Deferred compensation..............................
Interest on notes receivable.......................
Unrealized loss on available-for-sale securities,
net of income taxes...............................
Net loss...........................................
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996.......................... 8,163,265 300,000 82 -- 211,374,665
Issuance of common stock:
Exercise of options and warrants.................. 2,598,649
Employee stock purchase plan......................
Acquisitions...................................... 19,556,399
Digital Radio option.............................. 15,000,000
Consent solicitation.............................. 3,944,672
Conversion of preferred stock..................... (257,284) (9,455) 771,852
Issuance of warrants of subsidiary.................
Repurchase of Comcast option.......................
Issuance of McCaw option to purchase common
stock.............................................
Deferred compensation..............................
Collection of notes receivable.....................
Unrealized gain on available-for-sale securities,
net of income taxes...............................
Redeemable preferred stock dividends...............
Net loss...........................................
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997.......................... 7,905,981 290,545 82 -- 253,246,237
Issuance of common stock:
Exercise of options and warrants.................. 3,820,395
Employee stock purchase plan......................
Acquisitions...................................... 5,066,869
Option Acquisition exercise....................... 9,953,821
Deferred compensation...............................
Unrealized gain on available-for-sale securities,
net of income taxes...............................
Foreign currency translation adjustment............
Redeemable preferred stock dividends...............
Net loss...........................................
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998.......................... 7,905,981 $ 290,545 82 $ -- 272,087,322
=========== =========== =========== =========== ===========
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK
------------ ------------------------- PAID-IN ACCUMULATED
AMOUNT SHARES AMOUNT CAPITAL DEFICIT
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995.......................... $ 176 17,830,000 $ 18 $ 3,197,528 $ (579,231)
Issuance of common stock:
Exercise of options and warrants.................. 1 16,836
Employee stock purchase plan...................... (112)
Acquisitions...................................... 26 341,984
Comcast purchase.................................. 8 99,897
Exercise of antidilutive rights.................... (842)
Deferred compensation.............................. 17,617
Interest on notes receivable.......................
Unrealized loss on available-for-sale securities,
net of income taxes...............................
Net loss........................................... (556,020)
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1996.......................... 211 17,830,000 18 3,672,908 (1,135,251)
Issuance of common stock:
Exercise of options and warrants.................. 3 23,621
Employee stock purchase plan...................... (1,848)
Acquisitions...................................... 19 388,062
Digital Radio option.............................. 15 232,471
Consent solicitation.............................. 4 63,452
Conversion of preferred stock..................... 1 9,454
Issuance of warrants of subsidiary................. 14,800
Repurchase of Comcast option....................... (25,000)
Issuance of McCaw option to purchase common
stock............................................. 24,743
Deferred compensation.............................. 6,266
Collection of notes receivable.....................
Unrealized gain on available-for-sale securities,
net of income taxes...............................
Redeemable preferred stock dividends............... (29,119)
Net loss........................................... (1,613,854)
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1997.......................... 253 17,830,000 18 4,379,810 (2,749,105)
Issuance of common stock:
Exercise of options and warrants.................. 4 28,157
Employee stock purchase plan...................... 326
Acquisitions...................................... 5 121,077
Option Acquisition exercise....................... 10 (10)
Deferred compensation............................... (475)
Unrealized gain on available-for-sale securities,
net of income taxes...............................
Foreign currency translation adjustment............
Redeemable preferred stock dividends............... (149,161)
Net loss........................................... (1,652,088)
----------- ----------- ----------- ----------- -----------
BALANCE, DECEMBER 31, 1998.......................... $ 272 17,830,000 $ 18 $ 4,379,724 $(4,401,193)
=========== =========== =========== =========== ===========
<CAPTION>
TREASURY STOCK NOTES
AMOUNT RECEIVABLE
------------------------- DEFERRED FROM
SHARES AMOUNT COMPENSATION STOCKHOLDERS
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995.......................... 24,860 $ (768) $ (3,618) $ (1,018)
Issuance of common stock:
Exercise of options and warrants.................. 73,914 (1,242)
Employee stock purchase plan...................... (7,360) 227
Acquisitions...................................... 1,904,000 (37,009)
Comcast purchase..................................
Exercise of antidilutive rights.................... (373,846) 7,392
Deferred compensation.............................. (8,623)
Interest on notes receivable....................... (82)
Unrealized loss on available-for-sale securities,
net of income taxes...............................
Net loss...........................................
----------- ----------- ------------ ------------
BALANCE, DECEMBER 31, 1996.......................... 1,621,568 (31,400) (12,241) (1,100)
Issuance of common stock:
Exercise of options and warrants.................. (74,903) 1,569
Employee stock purchase plan...................... (279,045) 5,424
Acquisitions...................................... (50,000) 972
Digital Radio option..............................
Consent solicitation..............................
Conversion of preferred stock.....................
Issuance of warrants of subsidiary.................
Repurchase of Comcast option.......................
Issuance of McCaw option to purchase common
stock.............................................
Deferred compensation.............................. 3,777
Collection of notes receivable..................... 1,100
Unrealized gain on available-for-sale securities,
net of income taxes...............................
Redeemable preferred stock dividends...............
Net loss...........................................
----------- ----------- ------------ ------------
BALANCE, DECEMBER 31, 1997.......................... 1,217,620 (23,435) (8,464) --
Issuance of common stock:
Exercise of options and warrants.................. (95,183) 1,850
Employee stock purchase plan...................... (421,342) 8,187
Acquisitions......................................
Option Acquisition exercise.......................
Deferred compensation............................... 6,475
Unrealized gain on available-for-sale securities,
net of income taxes...............................
Foreign currency translation adjustment............
Redeemable preferred stock dividends...............
Net loss...........................................
----------- ----------- ------------ ------------
BALANCE, DECEMBER 31, 1998.......................... 701,095 $ (13,398) $ (1,989) $ --
=========== =========== ============ ============
<CAPTION>
ACCUMULATED OTHER
COMPREHENSIVE (LOSS)
INCOME
-------------------------
UNREALIZED
GAIN CUMULATIVE
(LOSS) ON TRANSLATION
INVESTMENTS ADJUSTMENT TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1995.......................... $ 32,054 $ -- $ 2,945,141
Issuance of common stock:
Exercise of options and warrants.................. 15,595
Employee stock purchase plan...................... 115
Acquisitions...................................... 305,001
Comcast purchase.................................. 99,905
Exercise of antidilutive rights.................... 6,550
Deferred compensation.............................. 8,994
Interest on notes receivable....................... (82)
Unrealized loss on available-for-sale securities,
net of income taxes............................... (17,061) (17,061)
Net loss........................................... (556,020)
----------- ----------- -----------
BALANCE, DECEMBER 31, 1996.......................... 14,993 -- 2,808,138
Issuance of common stock:
Exercise of options and warrants.................. 25,193
Employee stock purchase plan...................... 3,576
Acquisitions...................................... 389,053
Digital Radio option.............................. 232,486
Consent solicitation.............................. 63,456
Conversion of preferred stock..................... --
Issuance of warrants of subsidiary................. 14,800
Repurchase of Comcast option....................... (25,000)
Issuance of McCaw option to purchase common
stock............................................. 24,743
Deferred compensation.............................. 10,043
Collection of notes receivable..................... 1,100
Unrealized gain on available-for-sale securities,
net of income taxes............................... 7,805 7,805
Redeemable preferred stock dividends............... (29,119)
Net loss........................................... (1,613,854)
----------- ----------- -----------
BALANCE, DECEMBER 31, 1997.......................... 22,798 -- 1,912,420
Issuance of common stock:
Exercise of options and warrants.................. 30,011
Employee stock purchase plan...................... 8,513
Acquisitions...................................... 121,082
Option Acquisition exercise....................... --
Deferred compensation............................... 6,000
Unrealized gain on available-for-sale securities,
net of income taxes............................... (23,225) (23,225)
Foreign currency translation adjustment............ (24,050) (24,050)
Redeemable preferred stock dividends............... (149,161)
Net loss........................................... (1,652,088)
----------- ----------- -----------
BALANCE, DECEMBER 31, 1998.......................... $ (427) $ (24,050) $ 229,502
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-5
<PAGE> 71
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................... $(1,652,088) $(1,613,854) $(556,020)
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.................................... 513,411 346,289 188,687
Depreciation and amortization................. 832,299 526,377 400,831
Provision for losses on accounts receivable... 82,131 56,753 6,968
Deferred income tax (benefit) provision....... (191,912) 258,726 (308,262)
Extraordinary loss on retirement of debt...... 133,225 45,787 --
Loss on interest rate protection agreement.... 46,873 -- --
Other, net.................................... 23,232 28,520 5,393
Change in current assets and liabilities, net
of effects from acquisitions:
Accounts and notes receivable............... (298,311) (205,178) (28,954)
Subscriber equipment and accessory
inventory................................ 19,425 (68,840) (19,939)
Other assets................................ (14,578) (37,398) 11,985
Accounts payable, accrued expenses and
other.................................... 184,396 297,404 94,486
----------- ----------- ---------
Net cash used in operating activities.... (321,897) (365,414) (204,825)
----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (Note 1).................... (2,081,932) (1,597,420) (434,641)
Payments for acquisitions and purchase of
licenses, net of cash acquired................ (340,165) (265,085) 49,474
Proceeds from maturities and sales of marketable
securities.................................... 224,472 107,667 196,771
Purchases of marketable securities............... (94,860) (234,071) (132,333)
Payments for capital assets made on behalf of an
affiliate (Note 3)............................ (92,022) -- --
Other investments and advances to affiliates..... (163,982) (59,480) (38,380)
----------- ----------- ---------
Net cash used in investing activities.... (2,548,489) (2,048,389) (359,109)
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt securities...................... 1,696,747 1,700,279 --
Issuance of redeemable preferred stock........... 900,000 500,000 --
Retirement of debt securities.................... (740,791) (283,288) --
Borrowings under long-term credit facilities..... 1,839,021 250,000 581,408
Repayments under long-term credit facilities..... (972,021) -- --
Revolving line of credit borrowings (repayments),
net........................................... 222,000 231,250 (296,704)
Other long-term (repayments) borrowings, net..... (7,711) (8,023) 1,009
Deferred financing costs......................... (105,133) (138,845) (37,676)
Issuance of common stock and options............. 38,463 285,479 114,752
Capital contributions from minority
stockholders.................................. 19,589 (685) --
Consent solicitation proceeds.................... -- 63,456 --
Option repurchase................................ -- (25,000) --
Notes receivable from stockholders............... -- 1,100 --
----------- ----------- ---------
Net cash provided by financing
activities............................. 2,890,164 2,575,723 362,789
----------- ----------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................... 19,778 161,920 (201,145)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD..... 301,601 139,681 340,826
----------- ----------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD........... $ 321,379 $ 301,601 $ 139,681
=========== =========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 72
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS -- Nextel Communications, Inc., and its subsidiaries ("Nextel"
or the "Company") provide a wide array of digital wireless communications
services throughout the United States, primarily to business users, utilizing
frequencies licensed by the Federal Communications Commission ("FCC"). In
addition to its digital operations, Nextel also operates analog wireless
networks that provide analog specialized mobile radio ("SMR") services. Nextel's
digital network ("Digital Mobile Network") has been developed and deployed
advanced digital mobile communication systems technology with a multi-site
configuration permitting frequency reuse. Nextel's Digital Mobile Network
utilizes digital transmission technology developed by Motorola Inc. ("Motorola")
(such technology is referred to as the "integrated Digital Enhanced Network" or
"iDEN"). Nextel's principal business objective is to offer high-capacity, high
quality, advanced communications services on its Digital Mobile Network to its
customers in metropolitan markets throughout the United States and to become a
major participant in the global wireless communications business.
Through Nextel's substantially wholly-owned subsidiary Nextel
International, Inc. ("Nextel International"), and Nextel International's
operating subsidiaries and affiliates that own and operate wireless
communications systems, Nextel has interests in wireless operations in Latin
America, Asia and Canada. To fund its network build-out requirements and
operations, Nextel International will require a significant amount of capital.
Based on Nextel International's current estimate of its funding requirements for
1999, Nextel International believes that it will have adequate funding to
continue its operations into the latter half of 1999. Such assessment is based
on Nextel International's assumed utilization of its available cash and cash
equivalents and borrowings expected to be available in connection with the
Brazil Motorola Financing, the Argentina Credit Facility and the International
Motorola Financing (each as defined in Note 8) to meet Nextel International's
assumed cash needs during 1999. Future cash needs include reasonably foreseeable
capital expenditures, funding of operating losses and any debt service
obligations. Nextel International is reviewing various financing options,
including private debt or equity financing, that if obtained would provide
Nextel International with sufficient funds to meet its funding requirements for
the remainder of fiscal year 1999. If Nextel International is unable to obtain
such additional capital, or to obtain it on acceptable terms and in a timely
manner, Nextel International would be required to curtail its operations
significantly in 1999 to reduce the scope of its expansion and the enhancement
of its networks.
RECLASSIFICATIONS -- Certain prior year amounts have been reclassified to
conform to the current year presentation.
CONCENTRATIONS OF RISK -- The Company believes that the geographic and
industry diversity of its customer base minimizes the risk of incurring material
losses due to concentrations of credit risk.
Motorola is currently Nextel's sole source for the iDEN infrastructure and
subscriber handset equipment used by Nextel throughout its markets. Nextel
expects to rely on Motorola for the manufacture of a substantial portion of the
equipment necessary to construct its Digital Mobile Network and handset
equipment for the next several years. The failure by Motorola to deliver
necessary technology improvements and enhancements, iDEN system infrastructure
and subscriber equipment on a timely, cost-effective basis would have an adverse
effect on Nextel. Currently, however, there are no arrangements in effect with
any additional manufacturers to supply Nextel with alternative sources for
either iDEN system infrastructure or subscriber equipment.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the
F-7
<PAGE> 73
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of Nextel and its majority-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation. To facilitate the timely reporting of consolidated results, the
accounts of Nextel International's foreign subsidiaries are consolidated on a
one-month lag based on a fiscal year ending November 30.
The equity method is used to account for unconsolidated investments in
companies in which the Company exercises significant influence over operating
and financial policies but does not have a controlling interest and the cost
method is used to account for unconsolidated investments in companies in which
the Company does not exercise significant influence over operating or financial
policies and does not have a controlling interest.
FOREIGN CURRENCY TRANSLATION -- Results of operations for foreign
investments are translated from the designated functional currency to the U.S.
dollar using average exchange rates during the period, while assets and
liabilities are translated at the exchange rate in effect at the reporting date.
Resulting gains or losses from translating foreign currency financial statements
are accumulated in a separate component of stockholders' equity. All gains or
losses resulting from foreign currency transactions are included in other income
(expense) in the accompanying consolidated statements of operations. During the
years ended December 31, 1998 and 1997, the Company recognized approximately
$9.5 million and $6.0 million in transaction gains; no significant transaction
gains or losses were recorded during the year ended December 31, 1996.
Through 1997, Communicaciones Nextel de Mexico S.A. de C.V. ("Nextel
Mexico") and McCaw International (Brazil), Ltd. ("Nextel Brazil") were
considered to be operating in highly inflationary economies as defined by
Statement of Financial Accounting Standards No. 52, "Foreign Currency
Translation." Accordingly, Nextel Mexico and Nextel Brazil used the U.S. dollar
as their functional currency. Due to the economic environment in which it
operates, Nextel Peru also uses the U.S. dollar as its functional currency.
Effective January 1, 1998, Nextel Brazil was no longer considered to be
operating in a highly inflationary economy and began using the Brazilian real as
its functional currency. Effective January 1, 1999, Nextel Mexico was no longer
considered to be operating in a highly inflationary economy and began using the
Mexican peso as its functional currency.
CASH AND CASH EQUIVALENTS; SUPPLEMENTAL CASH FLOW INFORMATION -- Cash
equivalents consist of time deposits and highly liquid investments with
remaining maturities of three months or less at the time of purchase. At
December 31, 1998 and 1997, approximately $121.1 million and $159.8 million,
respectively, in cash and cash equivalents held by Nextel International and its
subsidiaries were not available to fund any of the cash needs of Nextel's
domestic businesses due to restrictions contained in the indentures related to
the 10-year discount notes issued by Nextel International in March 1997 (the
"1997 NI Notes") and in March 1998 (the "1998 NI Notes" and the related
indentures collectively, the "NI Indentures").
F-8
<PAGE> 74
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Supplemental disclosures of cash flow information are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
CASH PAID:
Interest paid.......................................... $151,495 $105,464 $ 32,660
======== ======== ========
Income taxes paid...................................... $ -- $ -- $ 1,290
======== ======== ========
</TABLE>
Total recorded capital expenditures were $2,336.2 million, $1,641.5 million
and $570.0 million for 1998, 1997 and 1996, respectively, including increases in
amounts accrued and unpaid or financed of $254.3 million, $44.1 million and
$135.3 million at December 31, 1998, 1997 and 1996, respectively. Total capital
expenditures include interest capitalized in connection with the construction
and development of Nextel's Digital Mobile Network of approximately $55.2
million, $43.0 million and $32.9 million during the years ended December 31,
1998, 1997 and 1996, respectively. Total capital expenditures in 1998 are net of
gross proceeds of approximately $112.6 million in switch equipment sold in a
sale-leaseback transaction (see Note 11).
INVESTMENTS -- Marketable debt securities and certificates of deposit with
original maturities greater than three months are classified as marketable
securities. Marketable equity securities intended to be held more than one year
are classified as other long-term assets. At December 31, 1997, approximately
$128.6 million of investments held by Nextel International and its subsidiaries
were not available to fund any of the cash needs of Nextel's domestic Digital
Mobile Network and SMR businesses due to restrictions contained in the NI
Indentures.
All of the Company's debt and equity securities are classified as
available-for-sale as of the balance sheet date and are reported at fair value,
with unrealized gains and losses, net of tax, recorded as a component of
stockholders' equity. Realized gains or losses, as determined on a specific
identification basis, and declines in value, if any, judged to be other than
temporary on available-for-sale securities are reported in other income or
expense. Investments that are not considered marketable securities are recorded
at the lower of cost or market and included in other assets. Management of the
Company believes its investment policy limits exposure to concentrations of
credit risk.
SUBSCRIBER EQUIPMENT AND ACCESSORY INVENTORY -- Subscriber equipment and
related accessories are valued at the lower of cost or market. Cost is
determined by the first-in, first-out method.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment, including
improvements that extend useful lives, are recorded at cost, while maintenance
and repairs are charged to operations as incurred. Depreciation and amortization
are calculated using the straight-line method based on estimated useful lives of
up to 31 years for buildings, 3 to 10 years for equipment, and 3 to 7 years for
furniture and fixtures. Leasehold improvements are amortized over the shorter of
the respective lives of the leases or the useful lives of the improvements. The
Company recorded additional depreciation expense of $27.5 million in the fourth
quarter of 1998 to reflect depreciation on assets placed in service in prior
quarters.
Construction in progress includes labor, materials, transmission and
related equipment, engineering, site development, interest and other costs
relating to the construction and development of Nextel's Digital Mobile Network.
Assets under construction are not depreciated until placed into service. The
Company capitalizes interest that is applicable to the construction of
significant additions to system equipment.
INTANGIBLE ASSETS -- Intangible assets are recorded at cost and are
amortized using the straight-line method based on estimated useful lives of 40
years for FCC licenses and the excess of purchase price over
F-9
<PAGE> 75
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fair value of domestic net assets acquired, 3 to 10 years for customer lists,
and up to 20 years for other intangibles. Licenses for the Company's
international operations and the excess of purchase price over the fair value of
net assets acquired related to international acquisitions are amortized on a
straight-line basis over 20 years.
Effective October 1, 1997, the Company changed the estimated useful lives
of 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 economic benefits of such assets are expected to be
realized. The change in the estimated useful lives of these intangible assets
had the effect of decreasing amortization expense by approximately $27.7 million
for the quarter and year ended December 31, 1997.
FCC licenses are issued on both a site-specific and wide-area basis,
enabling wireless carriers to provide service either in specific 800 MHz
Economic Areas or 900 MHz Metropolitan Trading Areas in the U.S. Currently, FCC
licenses are issued for a period of ten years, and are subject to certain
construction and operational requirements. The FCC has routinely granted license
renewals providing the licensees have complied with applicable rules, policies,
and the Communications Act of 1934, as amended. The Company believes that it has
met and will continue to meet all requirements necessary to secure the retention
and renewal of its FCC licenses.
REVENUE RECOGNITION -- Revenue is recognized for airtime and other services
over the period earned, net of credits and adjustments. Revenue from sales of
equipment is recognized when the equipment is delivered. The cost of customer
discounts and rebates are recorded when the related revenues are recognized.
Certain of the Company's digital equipment sales are made through
independent distributors under agreements allowing rights of return on
merchandise unsold by the distributors. The Company defers recognition of such
sales until the distributors sell the merchandise.
DIGITAL MOBILE NETWORK EQUIPMENT AND ACCESSORY SALES AND RELATED COSTS --
The loss generated from the sale of subscriber units used in Nextel's Digital
Mobile Network primarily results from the Company's subsidy of digital
subscriber units and accessories and represents marketing costs. Consolidated
equipment and accessory sales revenue and the related cost of sales of digital
subscriber units and related accessories, which include current period order
fulfillment and installation related expenses and write downs of subscriber unit
inventory and related accessories for shrinkage and obsolescence, are classified
within selling, general and administrative expenses as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1998 1997 1996
--------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Equipment and accessory sales............................. $ 448,428 $ 246,074 $129,252
Cost of equipment and accessory sales..................... 702,543 396,948 154,678
--------- --------- --------
$(254,115) $(150,874) $(25,426)
========= ========= ========
</TABLE>
INCOME TAXES -- Deferred tax assets and liabilities are determined based on
the temporary difference between the financial reporting and tax bases of assets
and liabilities, applying enacted statutory tax rates in effect for the year in
which the differences are expected to reverse. Future tax benefits, such as net
operating loss carryforwards, are recognized to the extent that realization of
such benefits is considered to be more likely than not.
LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS, BASIC AND DILUTED -- In
March 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards
F-10
<PAGE> 76
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
No. 128, "Earnings per Share" ("SFAS 128"), which supersedes Accounting
Principles Board Opinion No. 15. SFAS 128 requires dual presentation of basic
and diluted earnings per share by entities with complex capital structures.
Basic earnings per share includes no dilution and is computed by dividing the
loss attributable to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted earnings per share reflects
the potential dilution of securities that could share in the earnings of an
entity. As presented, the Company's basic and diluted net loss per share
attributable to common stockholders is based on the weighted average number of
common shares outstanding during the period and does not include other potential
common shares (including shares issuable upon exercise of options, warrants or
conversion rights) since their effect would be antidilutive due to the Company's
losses.
COMPREHENSIVE INCOME -- In June 1997, the FASB issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"), that establishes standards for reporting and display of comprehensive
income and its components. SFAS 130 requires unrealized gains or losses on
available-for-sale securities and foreign currency translation adjustments to be
included in other comprehensive income. The adoption of this statement effective
January 1, 1998 had no impact on the Company's results of operations or
financial position since the statement requires only additional financial
information disclosure. Prior years' financial statements have been reclassified
to conform to the requirements of SFAS 130.
NEW ACCOUNTING PRONOUNCEMENTS -- In June 1998, the 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 (including certain derivatives embedded in
other contracts) 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 all quarters of fiscal years beginning after June 15, 1999. The
Company is in the process of evaluating the potential impact of this standard on
its financial position and results of operations.
In March 1998, the American Institute of Certified Public Accountants (the
"AICPA") issued Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." This statement will
be effective in 1999 and establishes accounting standards for costs incurred in
the acquisition or development and implementation of computer software. These
new standards will require the capitalization of certain software implementation
costs relating to software acquired or developed and implemented for the
Company's use. This statement is not expected to have a significant effect on
the Company's financial position or results of operations.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities." This statement will be effective in 1999 and
will require costs of start-up activities and organization costs to be expensed
as incurred. This statement is not expected to have a significant effect on the
Company's financial position or results of operations.
2. SIGNIFICANT BUSINESS COMBINATIONS AND INVESTMENTS
DOMESTIC TRANSACTIONS
During 1998, the Company acquired several analog SMR businesses for a total
purchase price of $204.4 million, consisting of $80.8 million in cash and
approximately 5.1 million shares of Nextel Class A Common Stock, par value
$0.001 per share ("Common Stock") having an aggregate value of $119.1 million on
the contract date. The results of operations of these businesses were not
material in relation to the Company's consolidated results of operations.
In November 1997, the merger with Pittencrieff Communications, Inc.
("Pittencrieff"), an operator of analog SMR systems in Texas, Oklahoma, New
Mexico and Arizona, was consummated, whereby the
F-11
<PAGE> 77
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stockholders of Pittencrieff received approximately 6.2 million shares of Common
Stock (or rights to receive such stock) having an aggregate value of
approximately $169.6 million at closing.
In January 1996, the merger with Dial Page, Inc. ("Dial Page"), an operator
of analog SMR systems in the southeastern United States, was consummated,
whereby the stockholders of Dial Page received approximately 26.8 million shares
of Common Stock (or rights to receive such stock), having an aggregate value of
approximately $277.9 million on the contract date.
INTERNATIONAL TRANSACTIONS
MEXICO -- Through a series of investments in 1995 and 1996, Nextel
International acquired approximately 30.1% of the outstanding shares of Nextel
Mexico. Upon acquiring a 30.1% ownership interest, Nextel International
commenced accounting for Nextel Mexico using the equity method of accounting.
During the year ended December 31, 1996, Nextel International recorded a $10.8
million charge as a result of changing from the cost method to the equity method
of accounting.
Through a series of transactions during 1997, Nextel International acquired
substantially all of the remaining shares of Nextel Mexico, thereby increasing
Nextel International's equity interest to approximately 100%. Nextel
International began consolidating the accounts of Nextel Mexico on September 1,
1997, as a result of its having obtained greater than 50% of the outstanding
common stock and control of Nextel Mexico.
BRAZIL -- In January 1997, Nextel acquired an 81% interest in Nextel
Brazil, from Telcom Ventures, Inc. ("Telcom Ventures") for a purchase price of
$186.3 million, which was paid with approximately 12.0 million shares of Common
Stock. Nextel simultaneously contributed its interest in Nextel Brazil to Nextel
International. Telcom Ventures has the right between October 31, 2001 and
November 1, 2003, to require Nextel International to redeem its 19% interest in
Nextel Brazil at fair market value as determined pursuant to an appraisal
procedure. Nextel International is currently required to fund 100% of Nextel
Brazil's capital requirements until April 30, 1999 when Telcom Ventures must
either (i) contribute its pro rata share plus accrued interest or (ii) dilute
its ownership interest. Dividends may be declared at the discretion of Nextel
Brazil's board of directors and are allocated based on the ownership percentages
in effect at the date of declaration. No dividends have been declared to date.
In September 1997, a subsidiary of Nextel Brazil acquired 49% of the
capital stock and certain assets of a Brazilian indirect wholly-owned subsidiary
of Motorola ("MCS") for total consideration of approximately $19.3 million. In
connection with this transaction, Nextel International's ownership in its
Brazilian operations was effectively reduced to 77%. In September 1998, Nextel
International exercised its option to purchase the remaining 51% interest in MCS
for an exercise price of $3.2 million.
ARGENTINA -- In August 1996, Nextel International acquired all of the
outstanding shares of McCaw Argentina S.R.L. ("Nextel Argentina"). On May 6,
1997, Nextel International contributed its 100% ownership interest in Nextel
Argentina into a joint venture (the "Argentina Joint Venture") between Nextel
International and Wireless Ventures of Argentina, L.L.C. ("WVA"). As of December
31, 1997, Nextel International had a 50% voting interest and shared equally in
the profits and losses of the joint venture. Commencing on May 6, 1997, Nextel
International accounted for its investment in the joint venture under the equity
method of accounting. On January 30, 1998, Nextel International acquired the
remaining 50% interest in the Argentina Joint Venture from WVA for a purchase
price of $46.0 million. As a result of the purchase, Nextel International began
consolidating the accounts of Nextel Argentina effective February 1, 1998.
PERU -- On January 29, 1998, Nextel International acquired a 70.1% interest
in Communicaciones Nextel del Peru, S.A. ("Nextel Peru") for a purchase price of
$27.9 million, which was paid in the form
F-12
<PAGE> 78
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of capital contributions from January 29, 1998 through July 30, 1998. As of the
closing date of Nextel International's investment in Nextel Peru, Motorola
International Development Corporation, a wholly-owned subsidiary of Motorola
("Motorola International") held a 19.9% interest in Nextel Peru. The acquisition
was accounted for as a purchase and, accordingly, Nextel International began
consolidating the accounts of Nextel Peru on February 1, 1998.
On October 30, 1998, Nextel International sold approximately 10% of the
outstanding shares of Nextel Peru to Motorola International for approximately
$6.0 million (the "Nextel Peru Put Transaction"). Additionally, as a result of
the decision of the other minority shareholder of Nextel Peru not to contribute
his pro rata share of capital contributions to Nextel Peru during 1998, such
shareholder's equity interests in Nextel Peru has been diluted and Nextel
International's and Motorola International's equity interests in Nextel Peru
have increased. Immediately following the closing of the Nextel Peru Put
Transaction, and giving effect to the dilution of the equity interest of the
other minority shareholder during 1998, Nextel International and Motorola
International held approximately 62.1% and 30.9%, respectively, of the
outstanding shares of Nextel Peru.
PHILIPPINES -- In April 1998, Nextel International and the three other
principal groups of local shareholders of Infocom Communications Network, Inc.
("Nextel Philippines") entered into agreements relating to the restructuring and
governance of Nextel Philippines. Among other things, these agreements triggered
a repurchase and transfer of certain shares of Nextel Philippines held by one of
the local shareholder groups. As a result of transactions relating to these
agreements, Nextel International's aggregate direct or indirect equity interests
in Nextel Philippines increased from 30% to 38%.
JAPAN -- On March 17, 1998, Nextel International purchased a 21% equity
interest in J-Com Co., Ltd., an ESMR provider in Japan ("J-Com"), for a purchase
price of Y77.2 million and provided a shareholder loan of Y4.1 billion
(approximately $0.6 million and $31.5 million, respectively based on the
exchange rate on the date of purchase). DJSMR Business Partnership, a Japanese
partnership in which an affiliate of Motorola is the majority partner, holds a
49% equity interest in J-Com. Nextel International's investment in J-Com is
accounted for using the equity method.
SHANGHAI, PEOPLE'S REPUBLIC OF CHINA -- As of December 31, 1998, Nextel
International maintained a 30% ownership interest in Shanghai CCT -- McCaw
Telecommunications Systems Co., Ltd. ("Shanghai CCT McCaw"), a Chinese equity
joint venture. Shanghai CCT McCaw currently participates in a Global System for
Mobile communications network in Shanghai, China (the "Shanghai GSM System")
through a profit sharing arrangement (the "Unicom Agreement") with China United
Communications, Ltd., the owner of the Shanghai GSM system. Foreign entities or
individuals are not permitted to directly own or operate telecommunications
systems in China under current law. The Company does not have the right to
influence the operations of the Shanghai GSM System and therefore accounts for
its investment in Shanghai CCT McCaw under the cost method.
Under the Unicom Agreement as amended, Shanghai CCT McCaw has the right to
receive 40.2% of the profits, as defined, of the Shanghai GSM System. Nextel
International, through its 30% interest in Shanghai CCT McCaw and Shanghai CCT
McCaw's right to receive 40.2% of the profits of the Shanghai GSM System, has
the right to receive approximately 12.1% of the profits of the Shanghai GSM
System.
F-13
<PAGE> 79
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACQUISITIONS - The total purchase price and net assets acquired for
domestic and international acquisitions completed are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
-------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Direct cost of acquisitions:
Cash and accrued transaction costs................... $125,435 $ 154,462 $ 30,487
Common stock, warrants and options................... 119,373 382,910 296,881
Intangible assets.................................... 2,080 -- --
-------- --------- ---------
$246,888 $ 537,372 $ 327,368
======== ========= =========
Net assets acquired:
Working capital - net................................ $ (7,287) $ (29,218) $ 53,641
Property, plant and equipment........................ 46,235 51,661 202,420
Intangible assets.................................... 233,330 700,582 556,250
Other assets......................................... 6,117 7,377 4,290
Long-term debt....................................... (138) (15,280) (379,017)
Deferred income taxes................................ (31,369) (177,750) (110,216)
-------- --------- ---------
$246,888 $ 537,372 $ 327,368
======== ========= =========
</TABLE>
PRO FORMA RESULTS -- Results of operations for the years ended December 31,
1998, 1997 and 1996 were not materially affected by the acquisitions consummated
in 1998, 1997 and 1996; accordingly, pro forma results are not presented. All of
the acquisitions described above were accounted for by the purchase method.
Accordingly, assets and liabilities have been reflected at fair value at the
date of acquisition. The operating results of the acquired companies are
included in the consolidated statements of operations from their respective
acquisition dates.
3. ASSETS HELD FOR SALE
On January 29, 1999, Nextel, Nextel Partners, Inc. ("Nextel Partners") and
certain other parties, including Motorola and Eagle River Investments, L.L.C.,
an affiliate of Mr. Craig O. McCaw ("Mr. McCaw") entered into definitive
agreements related to the capitalization, governance, financing, and operation
of Nextel Partners. Nextel Partners plans to construct and operate a digital
wireless system utilizing iDEN technology employed in Nextel's national network
in certain mid-size and smaller markets in the United States.
In connection with this transaction, the Company received cash of $132.4
million related to the sale of assets and the reimbursement of certain costs and
net operating expenses, subject to certain post closing adjustments.
Additionally, Nextel agreed to transfer certain FCC licenses in these markets to
Nextel Partners in exchange for equity interests in Nextel Partners having an
agreed value at issuance of $131.1 million. Nextel's voting interest in Nextel
Partners is approximately 29%. Under certain circumstances, Nextel will have the
right or the obligation to purchase the remaining equity interests in Nextel
Partners at specified prices. The Company's investment in Nextel Partners will
be accounted for using the equity method. During 1998, Nextel paid approximately
$92 million for capital assets and related expenditures purchased on behalf of
Nextel Partners, all of which was sold to Nextel Partners on January 29, 1999.
F-14
<PAGE> 80
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments as of December 31, 1998 and 1997 is made in accordance with the
requirements of Statement of Financial Accounting Standards No. 107,
"Disclosures about Fair Value of Financial Instruments." The estimated fair
value amounts have been determined by the Company, using available market
information and appropriate valuation methodologies. However, considerable
judgment is required in interpreting market data to develop the estimates of
fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------
1998 1997
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Time deposits........................... $ 8,013 $ 8,013 $ 131,404 $ 131,404
Equity securities classified within
other assets.......................... $ 68,037 $ 68,037 $ 95,252 $ 95,252
Other assets............................ $ 71,472 $ 71,472 $ 68,623 $ 68,623
Debt.................................... $7,720,248 $7,350,444 $5,045,827 $5,243,627
Interest rate risk management
agreements............................ $ (59,708) $ (118,980) $ -- $ (7,919)
Mandatorily redeemable preferred
stock................................. $1,578,252 $1,491,563 $ 529,119 $ 578,289
</TABLE>
CASH AND CASH EQUIVALENTS, TIME DEPOSITS, ACCOUNTS AND NOTES RECEIVABLE,
ACCOUNTS PAYABLE AND ACCRUED EXPENSES -- The carrying amounts of these items are
a reasonable estimate of their fair value. Time deposits are restricted and
cannot be used to fund normal business operations.
MARKETABLE SECURITIES -- The fair value of these securities are estimated
based on quoted market prices. At December 31, 1998 and 1997, marketable
securities consist of the following:
<TABLE>
<CAPTION>
UNREALIZED
COST FAIR VALUE GAIN (LOSS)
-------- ---------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
1998
Available for sale:
Equity securities, included in other assets........... $ 69,159 $ 68,037 $(1,122)
1997
Available for sale:
Debt securities due in one year or less............... $129,978 $131,404 $ 1,426
Equity securities, included in other assets........... $ 69,159 $ 95,252 $26,093
</TABLE>
OTHER ASSETS -- The carrying value of other assets, consisting primarily of
escrow deposits, is a reasonable estimate of their fair value. At December 31,
1998 and 1997, it was not practicable to value investments in nonmarketable
equity securities (primarily of Shanghai CCT McCaw) with a carrying value of
approximately $15.7 million and $19.7 million, respectively. Accordingly, these
investments are excluded from the above table.
F-15
<PAGE> 81
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DEBT -- The fair value of these securities is estimated based on quoted
market prices of the Company's senior redeemable notes. Carrying value
approximates fair value for the Company's bank and vendor credit facilities, as
interest rates are reset periodically.
INTEREST RATE RISK MANAGEMENT AGREEMENTS -- The fair value of these
agreements is based on estimates obtained from dealers to settle the interest
rate swap and collar agreements.
MANDATORILY REDEEMABLE PREFERRED STOCK -- The fair value of these
securities is estimated based on quoted market prices.
5. ACCOUNTS AND NOTES RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1997
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Trade....................................................... $487,980 $284,053
Notes receivable............................................ -- 2,964
Other....................................................... 18,014 10,210
Less allowance for doubtful accounts........................ (62,547) (56,590)
-------- --------
$443,447 $240,637
======== ========
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Land........................................................ $ 4,218 $ 3,047
Buildings and improvements.................................. 72,163 37,901
System equipment............................................ 4,307,943 2,835,534
Office equipment, furniture and fixtures and other.......... 512,457 247,852
Less accumulated depreciation and amortization.............. (1,202,066) (594,473)
----------- -----------
3,694,715 2,529,861
Construction in progress.................................... 1,220,310 695,742
----------- -----------
$ 4,915,025 $ 3,225,603
=========== ===========
</TABLE>
7. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
FCC licenses................................................ $ 4,299,230 $ 3,945,838
Excess of purchase price over fair value of net assets
acquired.................................................. 1,284,329 1,258,400
Customer lists.............................................. 209,614 173,673
Noncompetition covenants.................................... 29,472 55,109
Other....................................................... 31,790 31,280
----------- -----------
5,854,435 5,464,300
Less accumulated amortization............................... (917,311) (764,554)
----------- -----------
$ 4,937,124 $ 4,699,746
=========== ===========
</TABLE>
F-16
<PAGE> 82
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
11.5% Senior Redeemable Discount Notes due 2003, net of
unamortized discount of $0 and $24,564.................... $ 35,811 $ 318,801
9.75% Senior Redeemable Discount Notes due 2004, net of
unamortized discount of $12,800 and $113,926.............. 1,113,635 1,012,509
10.125% Senior Redeemable Discount Notes due 2004, net of
unamortized discount of $66,491 and $111,870.............. 343,385 298,006
12.25% Senior Redeemable Discount Notes due 2004, net of
unamortized discount of $1,083 and $104,504............... 7,543 326,966
10.25% Senior Redeemable Discount Notes due 2005, net of
unamortized discount of $22,411 and $34,320............... 92,754 80,845
13.0% Senior Redeemable Discount Notes due 2007, (issued by
Nextel International), net of unamortized discount of
$337,065 and $411,571..................................... 614,398 539,892
10.65% Senior Redeemable Discount Notes due 2007, net of
unamortized discount of $267,942 and $324,329............. 572,058 515,671
9.75% Senior Serial Redeemable Discount Notes due 2007, net
of unamortized discount of $344,849 and $416,021.......... 784,251 713,079
9.95% Senior Serial Redeemable Discount Notes due 2008, net
of unamortized discount of $536,495....................... 1,090,505 --
12.125% Senior Redeemable Discount Notes due 2008, (issued
by Nextel International), net of unamortized discount of
$289,349.................................................. 440,651 --
12.0% Senior Serial Redeemable Notes due 2008, net of
unamortized discount of $4,228............................ 295,772 --
Bank credit facility, interest payable quarterly at an
adjusted rate calculated either on the prime rate or LIBOR
(7.0625% to 10.5% -- 1998; 8.25% to 9.0% -- 1997)......... 2,118,000 1,021,000
Vendor credit facility, interest payable quarterly at 2.0%
over the prime rate (10.5% -- 1998 and 1997).............. -- 152,021
Nextel International vendor credit facility, interest
payable semiannually at 2.5% over the prime rate (10.25%
to 11.0% -- 1998; 11.0% -- 1997).......................... 110,771 50,250
Nextel Argentina bank credit facility, interest payable
quarterly at an adjusted rate calculated either on the
prime rate or LIBOR (8.75% to 9.50% -- 1998).............. 83,500 --
Other....................................................... 17,214 16,787
---------- ----------
7,720,248 5,045,827
Less current portion........................................ (9,875) (7,577)
---------- ----------
$7,710,373 $5,038,250
========== ==========
</TABLE>
SENIOR REDEEMABLE DISCOUNT NOTES
OLD SENIOR NOTES ISSUED BEFORE 1997 -- The 11.5% Senior Redeemable Discount
Notes due 2003 (the "Nextel 2003 Notes") were noncallable until September 1,
1998. Cash interest on the Nextel 2003 Notes accrues beginning September 1, 1998
and is payable semiannually beginning March 1, 1999 at a rate of 11.5% per
annum.
F-17
<PAGE> 83
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The 9.75% Senior Redeemable Discount Notes due 2004 (the "Nextel 2004
Notes") were noncallable until February 15, 1999. Accrual of cash interest on
the Nextel 2004 Notes commenced on February 15, 1999 and is payable semiannually
beginning August 15, 1999 at a rate of 9.75% per annum.
The 10.125% Senior Redeemable Discount Notes due 2004 (the "OneComm 2004
Notes") were noncallable until January 15, 1999. Accrual of cash interest on the
OneComm 2004 Notes commenced on January 15, 1999 and is payable semiannually
beginning July 15, 1999 at a rate of 10.125% per annum.
The 12.25% Senior Redeemable Discount Notes due 2004 (the "Dial Page 2004
Notes") are noncallable until April 15, 1999. Cash interest on the Dial Page
2004 Notes will accrue beginning on April 15, 1999 and is payable semiannually
beginning October 15, 1999 at a rate of interest of 12.25% per annum.
The 10.25% Senior Redeemable Discount Notes due 2005 (the "Dial Page 2005
Notes") were noncallable until December 15, 1998. Accrual of cash interest on
the Dial Page 2005 Notes commenced on December 15, 1998 and is payable
semiannually beginning June 15, 1999 at a rate of 10.25% per annum.
Each of the notes issued before 1997 is an unsecured obligation that ranks
equal in right of payment with all other unsubordinated, unsecured indebtedness
of Nextel.
NEXTEL INTERNATIONAL 2007 NOTES -- On March 3, 1997, Nextel International
completed the sale of 951,463 units generating approximately $482.0 million in
net proceeds. Each unit is comprised of a 10-year senior discount note with a
principal due at maturity of $1,000 and one warrant to purchase 0.38748 shares
of Nextel International's common stock ("NI Common") at an exercise price of
$9.99 per share any time after March 6, 1998 and prior to March 6, 2007. The
warrants entitle the holders to purchase an aggregate of approximately 1% of the
current outstanding shares of NI Common on a fully diluted basis and were valued
at approximately $14.8 million based on the difference between the gross
proceeds and the present value of the accreted amount of the bond at time of
first call including the call premium. Cash interest will not accrue on the 1997
NI Notes prior to April 15, 2002 and will be payable in cash semiannually
beginning October 15, 2002 at a rate of 13% per annum. The 1997 NI Notes are
redeemable in whole or in part, at Nextel International's option at any time on
or after April 15, 2002 at specified redemption prices plus accrued and unpaid
interest. Up to 35% of the aggregate accreted value of the outstanding 1997 NI
Notes may be redeemed (using the proceeds of one or more sales of qualified
Nextel International equity securities) prior to April 15, 2000, at the option
of Nextel International under specified circumstances, at 113% of their accreted
value on the date of redemption. The 1997 NI Notes are senior unsecured
indebtedness of Nextel International and rank equal in right of payment with all
other unsubordinated, unsecured indebtedness of Nextel International.
SEPTEMBER 2007 NOTES -- On September 17, 1997, Nextel completed the sale of
$840.0 million in principal amount at maturity of its 10.65% Senior Redeemable
Discount Notes due 2007 (the "September 2007 Notes"), generating approximately
$486.0 million in net cash proceeds. Cash interest will not accrue on the
September 2007 Notes prior to September 15, 2002 and will be payable
semiannually beginning March 15, 2003 at a rate of 10.65% per annum. The
September 2007 Notes are redeemable in whole or in part, at Nextel's option, on
or after September 15, 2002 at specified redemption prices plus accrued and
unpaid interest. Up to 33 1/3% of the aggregate accreted value of the
outstanding September 2007 Notes may be redeemed (using the proceeds of one or
more sales of Common Stock) prior to September 15, 2000, at the option of Nextel
under specified circumstances, at 110.65% of their accreted value on the date of
redemption. The September 2007 Notes are senior unsecured indebtedness of Nextel
and rank equal in right of payment with all other unsubordinated, unsecured
indebtedness of Nextel.
F-18
<PAGE> 84
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
OCTOBER 2007 NOTES -- On October 22, 1997, Nextel completed the sale of
$1,129.1 million in principal amount at maturity of its 9.75% Senior Serial
Redeemable Discount Notes due 2007 (the "October 2007 Notes") generating
approximately $682.0 million in net cash proceeds. Cash interest will not accrue
on the October 2007 Notes prior to October 31, 2002 and will be payable
semiannually beginning April 30, 2003, at a rate of 9.75% per annum. The October
2007 Notes are redeemable in whole or in part, at Nextel's option, on or after
October 31, 2002 at specified redemption prices plus accrued and unpaid
interest. Up to 33 1/3% of the aggregate accreted value of the outstanding
October 2007 Notes may be redeemed (using the proceeds of one or more sales of
Common Stock) prior to October 31, 2000, at the option of Nextel under specified
circumstances, at 109.75% of their accreted value on the date of redemption. The
October 2007 Notes are senior unsecured indebtedness of Nextel and rank equal in
right of payment with all other unsubordinated, unsecured indebtedness of
Nextel.
FEBRUARY 2008 NOTES -- On February 11, 1998, Nextel completed the sale of
$1,627.0 million in principal amount at maturity of its 9.95% Senior Serial
Redeemable Discount Notes due 2008 (the "February 2008 Notes") generating
approximately $975.9 million in net cash proceeds. Cash interest will not accrue
on the February 2008 Notes prior to February 15, 2003, and will be payable
semiannually beginning August 15, 2003 at a rate of 9.95% per annum. The
February 2008 Notes are redeemable in whole or in part, at Nextel's option at
any time, on or after February 15, 2003 at specified redemption prices plus
accrued and unpaid interest. Up to 35% of the aggregate accreted value of the
outstanding February 2008 Notes may be redeemed (using the proceeds of one or
more sales of Common Stock) on or prior to February 15, 2001, at the option of
Nextel under specified circumstances, at 109.95% of their accreted value on the
date of redemption. The February 2008 Notes are senior unsecured indebtedness of
Nextel and rank equal in right of payment with all other unsubordinated,
unsecured indebtedness of Nextel.
NEXTEL INTERNATIONAL 2008 NOTES -- On March 12, 1998, Nextel International
completed the sale of $730.0 million in principal amount at maturity of 12.125%
Senior Discount Notes due 2008, generating approximately $387.0 million in net
cash proceeds. Cash interest will not accrue on the 1998 NI Notes prior to April
15, 2003, and will be payable semiannually beginning October 15, 2003 at a rate
of 12.125% per annum. The 1998 NI Notes become redeemable in whole or in part at
Nextel International's option at any time, on or after April 15, 2003 at
specified redemption prices plus accrued and unpaid interest. Up to 35% of the
aggregate accreted value of the outstanding 1998 NI Notes may be redeemed (using
the proceeds of one or more sales of qualified Nextel International equity
securities) prior to April 15, 2001, at the option of Nextel International under
specified circumstances, at 112.125% of their accreted value on the date of
redemption. The 1998 NI Notes are senior unsecured indebtedness of Nextel
International and rank equal in right of payment with all other unsubordinated,
unsecured indebtedness of Nextel International.
NOVEMBER 1998 NOTES -- On November 4, 1998, the Company completed a private
placement of $300.0 million in principal amount at maturity of its 12.0% Senior
Serial Redeemable Notes due 2008 (the "November 1998 Notes") generating
approximately $289.3 million in net cash proceeds. Cash interest on the November
1998 Notes will be payable semiannually beginning May 1, 1999 at a rate of 12.0%
per annum. The November 1998 Notes are redeemable in whole or in part at
Nextel's option on or after November 1, 2003, at specified redemption prices
plus accrued and unpaid interest. Up to 35% of the original principal amount of
the November 1998 Notes may be redeemed (using the proceeds of one or more sales
of Common Stock) on or prior to November 1, 2001, at the option of Nextel under
specified circumstances, at 112% of their principal amount, plus accrued and
unpaid interest to the date of redemption. The November 1998 Notes are senior
unsecured indebtedness of Nextel and rank equal in right of payment with all
other unsubordinated, unsecured indebtedness of Nextel.
F-19
<PAGE> 85
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
EXTRAORDINARY ITEMS -- During the fourth quarter of 1997, the Company
utilized $283.3 million of the proceeds from the issuance of the October 2007
Notes to repurchase $182.5 million in principal amount at maturity of Nextel
2003 Notes and $110.4 million in principal amount at maturity of Dial Page 2004
Notes (collectively, the "Targeted Notes") at a cost in excess of related
carrying amounts. Accordingly, the Company recognized an extraordinary loss of
approximately $45.8 million related to the early retirement of debt representing
the excess of the purchase price over the carrying value of the repurchased
Targeted Notes and the write-off of associated unamortized deferred financing
costs of approximately $10.5 million.
On April 3, 1998, the Company concluded a cash tender offer and related
consent solicitation with respect to all of the remaining outstanding Targeted
Notes. 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 proceeds from the issuance of
the February 2008 Notes. 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 excess of the purchase price over the carrying
values of the tendered Targeted Notes and the write-off of associated
unamortized deferred financing costs of approximately $19.3 million.
INDENTURE AMENDMENTS -- On June 13, 1997, Nextel concluded a solicitation
to obtain the consent of the requisite number of holders of the Nextel 2003
Notes, Nextel 2004 Notes, OneComm 2004 Notes, Dial Page 2004 Notes and Dial Page
2005 Notes (collectively, the "Old Senior Notes") to certain amendments and
waivers to specific provisions of the indentures governing the Old Senior Notes
(as amended and modified, the "Old Indentures"). The amendments included certain
modifications to the debt incurrence limitations to allow Nextel to incur
additional indebtedness and modifications to make the terms and covenants
uniform among the Old Indentures.
BANK AND VENDOR CREDIT FACILITIES
DOMESTIC FACILITIES -- In September 1996, Nextel, Nextel Finance Company
("NFC"), a wholly-owned subsidiary of Nextel, and certain other domestic
subsidiaries of Nextel entered into definitive agreements with respect to a
secured credit facility arranged by a group of banks (the "Old Bank Credit
Facility") which provided for up to $1,905.0 million of secured financing,
consisting of $1,085.0 million in revolving loans and $820.0 million in term
loans. Concurrently, NFC and such subsidiaries entered into amended financing
arrangements with Motorola and NTFC Capital Corporation (the "Vendor Credit
Facility") which provided for up to $395.0 million of secured financing,
consisting of a $195.0 million revolving loan and $200.0 million in term loans.
Borrowings under the Old Bank Credit Facility and the Vendor Credit
Facility (collectively, the "Old Facilities") were ratably secured by liens on
certain assets and capital stock of Nextel's subsidiaries that are "restricted"
subsidiaries under the terms of the indentures relating to the Company's various
outstanding issues of senior discount notes (the "Nextel Indentures"). At
December 31, 1997, substantially all of the Company's assets were pledged in
connection with the Old Facilities.
On March 13, 1998, Nextel entered into definitive agreements with respect
to a secured credit facility arranged by a group of banks (the "Bank Credit
Agreement") and repaid and terminated the Old Facilities. The Bank Credit
Agreement initially provided for up to $3.0 billion of secured financing
(consisting of a $1.5 billion revolving loan and $1.5 billion in term loans). On
October 28, 1998, the Company obtained the approval of its lenders to increase
the total potential secured financing capacity under the Bank Credit Agreement
to a maximum of $3.5 billion. At the same time, Nextel and its lenders agreed to
terms and conditions on which $195.0 million of additional term loans would be
made available. Additionally, on December 21, 1998, the Company and its lenders
agreed on the terms and conditions on
F-20
<PAGE> 86
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which an additional $100.0 million of term loans would be made available. The
term loans mature from March 31, 2006 through March 31, 2007 (with principal
repayments beginning September 30, 2001) and the revolving loan commitment is
reduced from September 30, 2001 through March 31, 2006. The maturity date of all
loans outstanding under the Bank Credit Agreement is subject to acceleration if
the aggregate principal amount of some series of Nextel's senior redeemable
discount notes is not less than $1.0 billion by specified dates. Borrowings
under the Bank Credit Agreement are secured by liens on assets of certain of
Nextel's domestic subsidiaries and bear interest payable quarterly at an
adjustable rate calculated based either on the prime rate or LIBOR. The Nextel
Indentures contain provisions that may operate to limit the amount of borrowings
available under the Bank Credit Agreement in certain circumstances. Based on the
amount of equity issuances and debt outstanding at December 31, 1998, the
Company may access the $3.295 billion available under the Bank Credit Agreement.
The Bank Credit Agreement contains covenants which limit the ability of the
Company and certain of its subsidiaries to incur additional indebtedness; create
liens; pay dividends or make distributions in respect of its capital stock or
make certain other restricted payments; consolidate, merge or sell all or
substantially all of its assets; guarantee obligations of other entities; enter
into hedging agreements; enter into transactions with affiliates or related
persons; or engage in any business other than the telecommunications business.
Except for distributions for certain limited purposes, these covenants and the
NI Indentures impose limitations which restrict the distribution to Nextel
Communications, Inc. of substantially all of the net assets of its subsidiaries.
Additionally, Nextel must comply with various financial ratios and the
attainment of certain operating results during the term of the Bank Credit
Agreement.
INTERNATIONAL FACILITIES -- In October 1997, Nextel Brazil and Motorola
Credit Corporation, a subsidiary of Motorola ("MCC"), entered into an equipment
financing agreement whereby MCC agreed to provide up to $125.0 million in term
loans (the "Brazil Motorola Financing") to Nextel Brazil to be used to acquire
infrastructure equipment and related services from Motorola. The Brazil Motorola
Financing is repayable in U.S. dollars in semiannual installments over 42 months
beginning June 30, 2000 and bears interest at an adjustable rate equal to either
the prime rate plus 2.5% or LIBOR plus 4.625%. The loans are secured by a first
priority lien on substantially all of Nextel Brazil's assets, a pledge of all of
the stock of Nextel Brazil and its subsidiaries, and guarantees by Nextel
International and Motorola International of 93.9% and 6.1%, respectively of
Nextel Brazil's obligations under such financing. Additionally, approximately
$17 million of Nextel International's cash, cash equivalents and marketable
securities was restricted at December 31, 1998 for use as future equity
investments in Nextel Brazil and its subsidiaries. The Brazil Motorola Financing
contains certain financial and operating covenants. In the event of
noncompliance with certain of the financial covenants, Nextel Brazil may cure
any such noncompliance by receiving additional equity contributions. The
availability of borrowings under the Brazil Motorola Financing is subject to the
satisfaction or waiver of certain applicable borrowing conditions.
On February 27, 1998, Nextel Argentina entered into a senior secured credit
facility (the "Argentina Credit Facility") with Chase Manhattan Bank, which, as
amended on May 8, 1998 and September 30, 1998, provides up to $100.0 million in
term loans. Borrowings under the Argentina Credit Facility are subject to the
satisfaction or waiver of certain conditions and are secured by a pledge of the
stock of Nextel Argentina and a first priority lien on substantially all of
Nextel Argentina's assets. Loans under the Argentina Credit Facility bear
interest at a rate equal to either (i) the ABR plus 2.75% (ABR is the highest of
the prime rate, the base CD rate plus 1% or the federal funds rate plus 0.5%) or
(ii) the Eurodollar rate plus 3.75% (the Eurodollar rate is LIBOR multiplied by
the statutory reserve rate). The loans under the Argentina Credit Facility will
be repaid in quarterly installments beginning September 30, 2000 through March
31, 2003. The first nine installments will be equal to 1/18 of the
then-outstanding balance and the final installment will be in an amount equal to
the then-outstanding balance. The Argentina Credit Facility also contains
certain financial and operating covenants. In March 1999, Nextel
F-21
<PAGE> 87
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Argentina notified the administrative agent under the Argentina Credit Facility
of its anticipated noncompliance with certain financial covenants under such
facility applicable in the first quarter of 1999. Nextel Argentina received a
waiver from the lenders under such facility with regard to such covenants for
the first quarter of 1999 and is currently in negotiations with such lenders
regarding an amendment to the Argentina Credit Facility to modify the covenants
in question for future quarters. There can be no assurance that the lenders will
agree to the proposed amendment to the Argentina Credit Facility. Failure to
agree to an amendment of the Argentina Credit Facility as proposed could subject
the entire amount outstanding under the Argentina Credit Facility to
acceleration by the lenders and any such acceleration by the lenders would have
a material adverse effect on Nextel International.
On February 4, 1999, Nextel International and MCC entered into definitive
agreements pursuant to which Nextel International may borrow up to $225.0
million of term loan financing (the "International Motorola Financing")
consisting of (i) up to $100.0 million in loans to reimburse Nextel
International for payments made to Motorola after January 1, 1997 for the
purchase of iDEN equipment and related services by or for the benefit of its
operating subsidiaries (the "Reimbursement Loans"); and (ii) up to $225.0
million in loans (less the amount of Reimbursement Loans advanced) to (a)
finance the cost of iDEN equipment and related services (including ancillary
products and services) purchased by or for the benefit of the Borrowing
Affiliates (as defined below) and (b) repay the principal amounts outstanding
under the existing financing facilities between MCC and Nextel Philippines. The
"Borrowing Affiliates," for purposes of these agreements include Nextel Mexico,
Nextel Peru, Nextel Philippines and J-Com and such other entities in which
Nextel International holds an equity interest and which have been so designated
by agreement between Nextel International and MCC. The International Motorola
Financing will be repaid in eight equal semiannual installments beginning June
30, 2001 through December 31, 2004, will bear interest at variable rates based
upon either the U.S. prime rate or LIBOR and will be secured by, among other
things, a pledge of the shares of stock of the Borrowing Affiliates held by
Nextel International, a pledge of the shares of stock of certain other direct
and indirect subsidiaries of Nextel International and a pledge of the shares of
stock of the Borrowing Affiliates held by certain third party shareholders.
DEFERRED FINANCING COSTS
During 1998, the Company paid $105.1 million in deferred financing costs
related to the issuances of the February 2008 Notes, the November 2008 Notes,
the Nextel International 2008 Notes, the Series E Preferred Stock, the Zero
Coupon Preferred Stock and to the Bank Credit Agreement. During 1997, the
Company paid $138.8 million in deferred financing costs primarily related to the
issuances of the Nextel International 2007 Notes, the September 2007 Notes, the
October 2007 Notes, the Series D Preferred Stock and to the consent
solicitation. Costs incurred in 1997 in connection with the consent solicitation
of $67.2 million were substantially offset by approximately $63.5 million in
proceeds from the sale of approximately 3.9 million shares of Common Stock,
offered exclusively to validly consenting holders of the Old Senior Notes, at a
price of $16.14 per share.
F-22
<PAGE> 88
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FUTURE MATURITIES OF LONG-TERM DEBT
For the years subsequent to December 31, 1998, scheduled annual maturities
of long-term debt outstanding as of December 31, 1998 under existing long-term
debt agreements are as follows (dollars in thousands):
<TABLE>
<S> <C>
1999..................................................... $ 9,875
2000..................................................... 31,687
2001..................................................... 69,825
2002..................................................... 111,995
2003..................................................... 222,852
Thereafter................................................. 9,156,727
----------
9,602,961
Less unamortized discount.................................. (1,882,713)
----------
$7,720,248
==========
</TABLE>
9. INTEREST RATE RISK MANAGEMENT AGREEMENTS
The Company uses derivative financial instruments consisting of interest
rate swap, collar, and rate protection agreements to manage its exposure to
adverse movements in interest rates. The Company currently does not hedge
foreign currency translation of assets or liabilities or foreign currency
transactions. The Company does not use financial instruments for trading or
other speculative purposes. While these instruments are subject to fluctuations
in value, such fluctuations are generally offset by fluctuations in the value of
the underlying instrument or anticipated transaction. The use of derivative
financial instruments is monitored through regular communication with senior
management. The counterparties expose the Company to credit loss in the event of
nonperformance; however, this credit risk is minimized by dealing with a group
of major financial institutions with which the Company has other financial
relationships. Therefore, the Company does not anticipate nonperformance by
these counterparties.
The Company attempts to achieve a desired proportion of fixed versus
floating rate debt by using interest rate swap and collar agreements to change
the interest rate characteristics of certain of its debt obligations. Interest
rate swap agreements have the effect of converting certain of the Company's
variable rate obligations to fixed or other variable rate obligations. In an
interest rate swap, the Company agrees to exchange, at specified intervals, the
difference between a variable interest rate and either a fixed or another
variable interest rate calculated by reference to notional principal amount.
Interest rate collar agreements consist of both an interest rate cap and floor
and enable the Company to lock in a predetermined interest rate range. In an
interest rate cap, if interest rates rise above a specified level, the Company
will receive the differential calculated based on a notional principal amount.
In an interest rate floor, if interest rates fall below a specified level, the
Company will pay the differential. The resulting amount to be paid or received
based on the interest rate differential is accrued as interest rates change and
is reflected as an adjustment to interest expense over the life of the swap or
collar. The incremental effect on interest expense for the years ended December
31, 1998, 1997 and 1996 was not material. The fair value of the swap and collar
agreements is not recognized in the consolidated financial statements (except
for the loss associated with terminating the interest rate protection agreement
as discussed below), since these agreements meet the criteria for matched swap
accounting. The notional amounts of interest rate swap, collar, and interest
rate protection agreements were $1,620.0 million and $1,020.0 million at
December 31, 1998 and 1997, respectively. At December 31, 1998, based on
estimates obtained from dealers, the
F-23
<PAGE> 89
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company would be obligated to pay an aggregate of $119.0 million to settle these
contracts, which is an estimate of fair value. However, it is not the Company's
intention to terminate these agreements.
In the fourth quarter of 1997, the Company entered into an interest rate
protection agreement to hedge interest rates on 10-year U.S. Treasury notes in
anticipation of a future debt issuance with terms identical to the September
2007 Notes and October 2007 Notes. The interest rate protection agreement was
terminated on September 29, 1998 since management determined that this
anticipated transaction was not likely to occur before the interest rate
protection agreement expired. Accordingly, a loss of approximately $46.9 million
was recognized as other expense within the Company's statement of operations and
comprehensive income. The obligation resulting from the termination of this
agreement was incorporated into a new interest rate swap agreement, which is
payable quarterly through March 31, 2006. As of December 31, 1998, approximately
$59.7 million is accrued in other liabilities related to this obligation.
The following table summarizes the Company's interest rate swap and collar
agreements at December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
--------------------------
NOTIONAL FAIR PAY RECEIVE
AMOUNT VALUE MATURITY RATE RATE
--------- ---------- --------- ---- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Pay fixed rate, receive floating rate........ $870,000 $(108,727) 5.9 years 7.2% 5.3%
Pay floating rate, receive floating rate..... 550,000 (5,559) 3.6 years 5.3% 5.4%
CAP FLOOR
RATE RATE
--- ---
Collars...................................... 200,000 (4,695) 4.5 years 6.7% 4.5%
</TABLE>
10. INCOME TAXES
The components of the income tax benefit (provision) were as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
-------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
State................................................. $ -- $ -- $ (1,070)
-------- --------- --------
Deferred:
Federal............................................... 169,554 (266,753) 272,279
State................................................. -- -- 35,983
Foreign............................................... 22,358 8,027 --
-------- --------- --------
191,912 (258,726) 308,262
-------- --------- --------
Income tax benefit (provision).......................... $191,912 $(258,726) $307,192
======== ========= ========
</TABLE>
F-24
<PAGE> 90
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of taxes computed at the statutory rate to the income
tax benefit (provision) is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
-------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Income tax benefit at statutory rate.................... $598,771 $ 458,269 $302,124
State tax benefit, net.................................. 50,366 62,487 22,701
Amortization of goodwill................................ (10,111) (17,483) (14,104)
Increase in valuation allowance......................... (438,676) (767,467) --
Other................................................... (8,438) 5,468 (3,529)
-------- --------- --------
$191,912 $(258,726) $307,192
======== ========= ========
</TABLE>
Deferred tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards.............................. $1,817,537 $1,213,250
Deferred interest......................................... 34,141 85,537
Foreign affiliates........................................ 21,944 11,958
Other..................................................... 45,749 46,629
---------- ----------
1,919,371 1,357,374
Valuation allowance......................................... (1,318,882) (832,069)
---------- ----------
600,489 525,305
---------- ----------
Deferred tax liabilities:
Property, plant and equipment............................. 110,554 138,763
Intangibles............................................... 1,207,958 1,269,759
Other..................................................... 53,303 67,975
---------- ----------
1,371,815 1,476,497
---------- ----------
Net deferred tax liability.................................. $ 771,326 $ 951,192
========== ==========
</TABLE>
At December 31, 1998, the Company had approximately $4.3 billion of
consolidated net operating loss carryforwards for federal income tax purposes
which expire through 2018, and approximately $380.7 million of separate return
net operating loss carryforwards which expire through 2017. The utilization of
tax net operating losses may be subject to certain limitations.
At December 31, 1998, the Company's foreign subsidiaries had approximately
$50.7 million, $61.7 million, and $5.5 million of net operating loss
carryforwards for Mexican, Argentinean, and Peruvian income tax purposes,
respectively, which expire through 2008. Additionally, the Company's foreign
subsidiaries had approximately $74.3 million of net operating loss carryforwards
for Brazilian income tax purposes which have no expiration date and can only be
utilized up to the limit of 30% of taxable income for the year. The Company's
foreign subsidiaries may be limited in their ability to use foreign tax net
operating losses in any single year depending on their ability to generate
sufficient taxable income.
A significant portion of the Company's deferred tax liabilities will
reverse after current net operating losses expire. After considering this and
other factors, including recent operating results, the Company
F-25
<PAGE> 91
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
increased its valuation allowance in 1998 and 1997 by $486.8 million and $767.5
million, respectively. Of the 1997 amount, approximately $384.1 million was
recorded as a charge in the fourth quarter of 1997.
11. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE COMMITMENTS -- The Company leases various equipment and
office facilities under capital and operating leases. Leases for antenna sites
are generally month-to-month or cancelable after a short notice period. Office
facilities and equipment other than antenna sites are leased under agreements
with terms ranging from 1 to 10 years. The leases normally provide for the
payment of minimum annual rentals and certain leases include provisions for
renewal options of up to ten years.
During December 1998, the Company completed a sale-leaseback transaction
involving certain owned switch equipment that will be accounted for as an
operating lease. Total net proceeds were approximately $109.9 million, resulting
in a pre-tax gain of approximately $4.9 million. The gain, which has been
deferred, is being amortized on a straight-line basis over the seven-year lease
term.
For years subsequent to December 31, 1998, future minimum payments for all
operating lease obligations that have initial noncancellable lease terms
exceeding one year, net of rental income, are as follows (dollars in thousands):
<TABLE>
<S> <C>
1999........................................................ $154,030
2000........................................................ 147,237
2001........................................................ 137,635
2002........................................................ 118,550
2003........................................................ 75,664
Thereafter.................................................. 170,893
--------
$804,009
========
</TABLE>
Total rental expense, net of rental income, was approximately $181.7
million, $119.4 million and $84.5 million for the years ended December 31, 1998,
1997 and 1996, respectively.
LEGAL CONTINGENCIES -- In July 1995, a lawsuit titled In Re Nextel
Communications Securities Litigation was filed in the United States District
Court for the District of New Jersey. This litigation, which is being pursued as
a class action suit, amends and consolidates three previously filed class action
complaints and seeks damages allegedly incurred by certain stockholders and
claimed to result from defendants' alleged violations of Section 10(b) of the
Securities Exchange Act of 1934, as amended and Rule 10b-5 promulgated
thereunder. The litigation also makes claims of fraud and deceit. Specifically,
the plaintiffs claim that such damages resulted from certain defendants' alleged
false and misleading statements made by defendants regarding the digital
communications technology developed by Motorola and deployed by Nextel in its
Digital Mobile Network. While Nextel cannot predict the outcome of this
litigation, Nextel believes that the claims against it are without merit and
intends to vigorously defend against them. On July 23, 1997, the United States
District Court for the District of New Jersey declined to grant Nextel's motions
to dismiss, pursuant to Federal Rule of Civil Procedure Rules 12(b)(6) and
(9)(b), substantially all of the causes of action alleged in the plaintiff's
complaint filed in this lawsuit. A ruling on class certification has not yet
been made.
In September 1994, a lawsuit titled Charles Dascal v. Morgan O'Brien,
Becker, Gurman, Lukas, Meyers, O'Brien and McGowan, P.C. and Nextel
Communications, Inc., was filed in the Circuit Court of Dade County, Florida.
The lawsuit, which has been transferred to the United States District Court for
the Southern District of Florida, seeks compensatory damages, lost profits and
special damages based on the defendants' alleged breach of fiduciary duty,
misappropriation of trade secrets, negligent misrepresentation,
F-26
<PAGE> 92
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fraud, conversion, civil theft, breach of good faith and fair dealing and unjust
enrichment. The claims, which primarily concern alleged conduct by Nextel's
current Vice Chairman and former Chairman of the Board, Morgan O'Brien, in the
1970s and early 1980s prior to the formation of Nextel, assert that business
plans allegedly formulated by the plaintiff relating to the development of a
wireless communications system were disclosed to, and have been improperly used
by, the defendants. The Nextel Board of Directors determined that Morgan O'Brien
in his capacities as an officer, director and authorized representative of
Nextel, was entitled to indemnification in respect of this matter. Nextel has
filed counterclaims against Mr. Dascal and has also filed third-party claims
against Tel Air Network, Inc. ("Tel Air"), and Knight-Ridder, Inc.
("Knight-Ridder"). The counterclaim against Mr. Dascal has been dismissed. All
other motions for summary judgment have been denied, with the exception of the
following: Nextel has been granted summary judgment with respect to Mr. Dascal's
claim against it for fraud; Tel Air and Knight-Ridder have been granted summary
judgment with respect to Nextel's claims against them for fraudulent inducement
and conspiracy. The remainder of the parties' respective claims remain viable
for trial. While Nextel cannot predict the outcome of this litigation, Nextel
believes that the claims against it are without merit and intends to vigorously
defend against them. A trial date currently is scheduled for October 1999.
Unless otherwise indicated, the relevant plaintiffs have not specified
amounts of damages being sought. Given the Company's assessment of the claims
asserted against it in each such lawsuit, and in other pending or threatened
litigation (including litigation incidental to the conduct of its business), the
Company does not believe that such lawsuits, individually or in the aggregate,
will have a material adverse effect on the Company's financial condition,
results of operations or liquidity.
12. MANDATORILY REDEEMABLE PREFERRED STOCK
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1998 1997
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
SERIES D EXCHANGEABLE PREFERRED STOCK MANDATORILY REDEEMABLE
2009
13% cumulative annual dividend; 585,473 and 515,166 shares
issued; 585,460 and 515,166 shares outstanding, stated
at liquidation value................................... $ 601,317 $ 529,119
SERIES E EXCHANGEABLE PREFERRED STOCK MANDATORILY REDEEMABLE
2010
11.125% cumulative annual dividend; 815,314 shares issued;
815,299 shares outstanding; stated at liquidation
value.................................................. 826,637 --
ZERO COUPON CONVERTIBLE PREFERRED STOCK MANDATORILY
REDEEMABLE 2013
no dividend; convertible into 5,761,764 shares of Class A
Common Stock; 591,308 shares issued and outstanding;
stated at fair value when issued plus accretion of
liquidation preference at 9.25% compounded quarterly... 150,298 --
---------- ----------
$1,578,252 $ 529,119
========== ==========
</TABLE>
SERIES D PREFERRED STOCK -- On July 21, 1997, Nextel completed the sale of
500,000 shares of its 13% Series D Exchangeable Preferred Stock due 2009,
liquidation preference of $1,000 per share ("Series D Preferred Stock"),
generating approximately $482.0 million in net cash proceeds. Dividends on the
Series D Preferred Stock accrue at an annual rate of 13% of the liquidation
preference, are cumulative from the date of issuance and are payable quarterly
in cash or, on or prior to July 15, 2002, at Nextel's option in additional
shares of Series D Preferred Stock. At December 31, 1998, accrued but unpaid
dividends were approximately $15.9 million. The Series D Preferred Stock is
mandatorily redeemable on
F-27
<PAGE> 93
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
July 15, 2009 at the liquidation preference plus accrued and unpaid dividends,
and is redeemable in whole or in part, at Nextel's option after December 15,
2005, at a price equal to the liquidation preference plus accrued and unpaid
dividends, and, in certain circumstances, after July 15, 2002 at specified
redemption prices. Up to 35% of the Series D Preferred Stock may be redeemed
(using the proceeds of one or more sales of Common Stock) on or prior to July
15, 2000, in whole or in part, at the option of Nextel in specified
circumstances, at 113% of the liquidation preference plus accrued and unpaid
dividends. The Series D Preferred Stock is also exchangeable, in whole but not
in part, at Nextel's option after December 15, 2005 and in certain circumstances
sooner, into Nextel subordinated debentures.
SERIES E PREFERRED STOCK -- On February 11, 1998, Nextel completed the sale
of 750,000 shares of its 11.125% Series E Exchangeable Preferred Stock due 2010,
liquidation preference of $1,000 per share ("Series E Preferred Stock"),
generating approximately $727.9 million in net cash proceeds. 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 Nextel's option, in additional
shares of Series E Preferred Stock. At December 31, 1998, accrued but unpaid
dividends were approximately $11.3 million. 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 Nextel's
option 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 (using the proceeds of one or more sales of
Common Stock) on or prior to February 15, 2001, in whole or in part, at the
option of Nextel in specified circumstances, at 111.125% of the liquidation
preference plus accrued and unpaid dividends. The Series E Preferred Stock is
also exchangeable, in whole but not in part, at Nextel's option after December
15, 2005 and in certain circumstances sooner, into Nextel subordinated
debentures.
ZERO COUPON PREFERRED STOCK -- On December 23, 1998, Nextel completed the
sale of 591,308 shares of its Zero Coupon Convertible Preferred Stock due 2013,
liquidation preference of $1,000 per share at maturity ("Zero Coupon Preferred
Stock") generating approximately $145.0 million in net cash proceeds. The Zero
Coupon Preferred Stock had an initial liquidation preference of $253.675 per
share. No dividends will be payable with respect to the Zero Coupon Preferred
Stock; however, the liquidation preference will accrete from the issuance date
at an annual rate of 9.25% compounded quarterly. The Zero Coupon Preferred Stock
is convertible at the option of the holders prior to redemption or maturity into
Common Stock at a conversion rate of 9.7441 common shares per share of Zero
Coupon Preferred Stock (subject to adjustment upon the incurrence of certain
events). The Zero Coupon Preferred Stock is redeemable at Nextel's option
beginning December 23, 2005 and may be tendered by the holders for acquisition
by the Company on December 23, 2005 and 2008. The Zero Coupon Preferred Stock is
mandatorily redeemable on December 23, 2013 at the fully accreted liquidation
preference of $1,000 per share. Nextel may elect, subject to the satisfaction of
certain requirements, to pay any redemption or tender price with Common Stock.
13. CAPITAL STOCK AND STOCK RIGHTS
Pursuant to the Certificate of Incorporation, the Company has the authority
to issue 613,883,948 shares of capital stock, divided into nine classes as
follows: (i) 515,000,000 shares of Common Stock; (ii) 35,000,000 shares of Class
B Non-Voting Common Stock, par value $0.001 per share; (iii) 26,941,933 shares
of Class A Convertible Redeemable Preferred Stock, stated value $36.75 per share
("Class A Preferred Stock"); (iv) 82 shares of Class B Convertible Preferred
Stock, stated value $1.00 per share ("Class B Preferred Stock"); (v) 26,941,933
shares of Class C Convertible Redeemable Preferred Stock, stated value $36.75
per share; (vi) 1,600,000 shares of Series D Preferred Stock;
F-28
<PAGE> 94
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(vii) 2,200,000 shares of Series E Preferred Stock; (viii) 800,000 shares of
Zero Coupon Preferred Stock; and (ix) 5,400,000 shares of undesignated preferred
stock.
COMMON STOCK RESERVED FOR ISSUANCE -- As of December 31, 1998, the Company
had reserved Common Stock for future issuance as detailed below.
<TABLE>
<S> <C>
Class A Preferred Stock conversion rights................... 23,718,000
Warrants & non-employee options outstanding................. 28,145,200
Employee options outstanding................................ 20,293,500
Employee options available for grant........................ 14,736,300
Zero Coupon Preferred Stock conversion rights............... 5,761,800
Deferred & restricted shares................................ 1,025,000
Employee Stock Purchase Plan................................ 4,292,000
Acquisitions................................................ 4,870,000
-----------
102,841,800
===========
</TABLE>
THE MCCAW INVESTOR -- In July 1995, the Company consummated a securities
purchase agreement with Digital Radio L.L.C., an affiliate of Mr. McCaw ("the
McCaw Investor"), pursuant to which the McCaw Investor purchased, for an
aggregate price of $300.0 million, units consisting of approximately 8.2 million
shares of Class A Preferred Stock convertible into approximately 24.5 million
shares of Common Stock and 82 shares of Class B Preferred Stock convertible into
82 shares of Common Stock (the "McCaw Transaction"). The 7.9 million currently
outstanding shares of Class A Preferred Stock are convertible into approximately
23.7 million shares of Common Stock and are redeemable under certain
circumstances solely at the Company's option. The Class A Preferred Stock only
pays dividends under certain limited circumstances. Pursuant to three separate
option agreements, the McCaw Investor obtained the right to purchase for cash up
to 35.0 million shares of Common Stock at exercise prices ranging from $15.50 to
$21.50 per share for periods of two to six years.
Pursuant to the McCaw Transaction, the McCaw Investor was granted
antidilutive rights with respect to certain Nextel public or private share
issuances. Upon the issuance of shares in connection with an acquisition, in
November 1996 the McCaw Investor exercised its antidilutive rights, which
resulted in the sale of 373,846 treasury shares of Common Stock to the McCaw
Investor for $6.5 million.
On July 28, 1997, the McCaw Investor exercised in full the outstanding
option that was scheduled to expire on that date (the "First Option") to
purchase 15.0 million shares of Common Stock for an aggregate purchase price of
$232.5 million.
On November 4, 1997, the McCaw Investor exercised its right to convert
257,284 shares of Class A Preferred Stock into 771,852 shares of Common Stock.
In connection with the McCaw Transaction, the Company also entered into a
management support agreement with Eagle River, Inc., an affiliate of Mr. McCaw,
to provide management and consulting services from time to time as requested. In
consideration for these services, the Company entered into an incentive option
agreement granting Eagle River, Inc. an option to purchase an aggregate of up to
1.0 million shares of Common Stock at an exercise price of $12.25 per share.
This option expires on April 4, 2005, and is presently exercisable with respect
to 600,000 shares and becomes exercisable for an additional 200,000 shares on
each of April 4, 1999 and 2000. For the years ended December 31, 1998, 1997, and
1996 approximately $0.9 million, $4.6 million, and $1.8 million of compensation
expense was charged to operations in connection with these agreements. During
the years ended December 31, 1998, 1997, and 1996 the Company paid Eagle River,
Inc. approximately $111,400, $504,000 and $348,000 under the terms of this
agreement for reimbursement of expenses.
F-29
<PAGE> 95
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the agreements relating to the commitment to exercise
the First Option, Nextel reached an agreement with Option Acquisition, L.L.C.,
an affiliate of Mr. McCaw ("Option Acquisition"), pursuant to which Option
Acquisition acquired, for an aggregate purchase price of $25.0 million, an
option to purchase 15,000,000 shares of Common Stock at $16.00 per share and a
second option to purchase 10,000,000 shares of Common Stock at $18.00 per share.
On July 28, 1998, Option Acquisition exercised these options in a cashless
exercise transaction, as permitted by the terms of such options, and received
9,953,821 shares of Common Stock.
In 1992, the Company entered into a stock purchase agreement and related
Option Agreement as amended and restated as of September 11, 1995 (the "Comcast
Option") with a wholly-owned subsidiary of Comcast Corporation ("CFCI"). Under
the terms of the Comcast Option, CFCI was granted a five-year option to acquire
an additional 25.0 million shares of Common Stock at an exercise price of $16.00
per share. The purchase price for the Comcast Option was paid in the form of a
$20.0 million five-year promissory note, which accrued interest at 5% per annum.
On July 18, 1995, Comcast repaid the note plus accrued interest. On March 20,
1997, a wholly-owned unrestricted subsidiary of Nextel repurchased the Comcast
Option from CFCI for an aggregate purchase price of $25.0 million.
WARRANTS AND NON-EMPLOYEE OPTIONS -- The following is a summary of issued
and outstanding warrants and non-employee options for the purchase of Common
Stock:
<TABLE>
<CAPTION>
EXERCISE PRICE
----------------
SHARES LOW HIGH
----------- ------ ------
<S> <C> <C> <C>
Issued and outstanding, December 31, 1995.................. 68,531,624 $ 2.00-- $21.50
Issued in connection with acquisitions................... 2,160,067 12.14-- 43.16
-----------
Issued and outstanding, December 31, 1996.................. 70,691,691 2.00-- 43.16
Granted.................................................. 25,068,276 15.13-- 18.00
Issued in connection with acquisitions................... 151,539 20.09-- 56.95
Repurchased.............................................. (25,000,000) 16.00
Exercised................................................ (15,092,816) 2.00-- 15.50
-----------
Issued and outstanding, December 31, 1997.................. 55,818,690 2.00-- 56.95
Issued in connection with acquisitions................... 7,748 59.66
Exercised................................................ (27,501,738) 3.50-- 18.00
Expired.................................................. (179,502) 43.16
-----------
Issued and outstanding, December 31, 1998.................. 28,145,198 3.50-- 59.66
===========
Exercisable, December 31, 1998............................. 27,745,198 3.50-- 59.66
===========
</TABLE>
14. STOCK AND EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OPTION PLAN -- The Company's Incentive Equity Plan (the
"Plan") provides for the issuance of up to 45.0 million shares of Common Stock
to officers and key employees. Generally, nonqualified stock options outstanding
under the Company's stock option plan: (i) are granted at prices equal to or
exceeding the market value of the stock on the grant date; (ii) vest ratably
over either a four or five year service period; and (iii) expire ten years
subsequent to award.
F-30
<PAGE> 96
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the Plan activity is as follows:
<TABLE>
<CAPTION>
OPTION WEIGHTED AVERAGE
SHARES PRICE RANGE EXERCISE PRICE
---------- ---------------- ----------------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1995............. 9,216,323 $ 1.25-- $40.75 $18.60
Granted.................................. 5,332,995 13.50-- 19.75 15.64
Issued in connection with acquisitions... 2,198,192 10.28-- 42.97 12.77
Exercised................................ (1,522,873) 1.25-- 15.00 7.39
Canceled................................. (2,969,568) 1.75-- 40.25 17.11
----------
Outstanding, December 31, 1996............. 12,255,069 1.75-- 42.97 16.50
Granted.................................. 6,087,340 13.88-- 26.94 15.78
Issued in connection with acquisitions... 200,240 17.88-- 64.82 23.83
Exercised................................ (2,550,543) 1.75-- 20.12 9.51
Canceled................................. (787,617) 2.82-- 40.25 16.95
----------
Outstanding, December 31, 1997............. 15,204,489 1.75-- 64.82 17.32
Granted.................................. 8,308,633 18.91-- 31.19 26.29
Issued in connection with acquisitions... 20,907 5.71 5.71
Exercised................................ (1,555,168) 1.75-- 26.56 11.79
Canceled................................. (1,685,345) 13.46-- 64.82 21.46
----------
Outstanding, December 31, 1998............. 20,293,516 2.82-- 42.97 20.64
==========
Exercisable, December 31, 1998............. 5,480,017 2.82-- 42.97 18.13
==========
</TABLE>
Following is a summary of the status of employee stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OUTSTANDING OUTSTANDING EXERCISABLE
OUTSTANDING WEIGHTED AVERAGE EXERCISABLE WEIGHTED
EXERCISE NUMBER OF LIFE EXERCISE NUMBER OF AVERAGE
PRICE RANGE SHARES REMAINING PRICE SHARES EXERCISE PRICE
- ----------- ----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 2.82 -- $ 7.00............ 385,920 1.2 years $ 5.08 385,920 $ 5.08
10.28 -- 15.00............ 2,933,725 5.6 years 14.01 1,351,304 13.56
15.13............ 5,903,082 7.7 years 15.13 1,847,773 15.13
15.38 -- 18.94............ 1,816,184 6.5 years 16.97 865,082 16.71
19.09 -- 26.31............ 1,281,845 8.8 years 22.85 189,536 22.65
26.56............ 6,557,245 9.1 years 26.56 50,952 26.56
26.94 -- 42.97............ 1,415,515 5.8 years 36.87 789,450 39.29
---------- ---------
20,293,516 7.5 years 20.64 5,480,017 18.13
========== =========
</TABLE>
The Plan also provides for the grant of deferred shares at no cost to the
participants in consideration of services performed. Generally, these deferred
shares vest over a three-year period. An accelerated vesting schedule may be
triggered in the event of a change in control of the Company. During the year
ended December 31, 1996, the Company granted 1,100,000 deferred shares having a
weighted average fair value at grant date of $16.28. Compensation expense of
$5.1 million, $5.6 million and $4.2 million has been recognized in relation to
the deferred share grants for the years ended December 31, 1998, 1997 and 1996,
respectively.
EMPLOYEE STOCK PURCHASE PLAN -- Under the 1996 Employee Stock Purchase Plan
("ESPP"), eligible employees may subscribe to purchase shares of Common Stock
through payroll deductions of up to 10% of
F-31
<PAGE> 97
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
eligible compensation. The purchase price is the lower of 85% of market value at
the beginning or the end of each quarter. The aggregate number of shares
purchased by an employee may not exceed $25,000 of fair market value annually
(subject to limitations imposed by Section 423 of the Internal Revenue Code). A
total of 5.0 million shares are available for purchase under the plan. The ESPP
will terminate on the tenth anniversary of its adoption. During the years ended
December 31, 1998, 1997 and 1996, 421,642, 279,045 and 7,360 treasury shares
were issued at a weighted average price per share of $20.383, $12.813 and
$15.725, respectively.
FAIR VALUE OF EMPLOYEE OPTION AND ESPP GRANTS -- In October 1995, the FASB
issued Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"). SFAS 123 encourages but does not require
companies to account for employee stock compensation awards based on their
estimated fair value at the grant date with the resulting cost charged to
operations. The Company has elected to continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Under the intrinsic value method, any excess of the
fair value of the Common Stock over the exercise price on the date of grant is
recognized as compensation expense on a straight-line basis over the vesting
period. If the Company had elected to recognize compensation expense based on
the fair value of the awards granted in 1998, 1997 and 1996, consistent with the
provisions of SFAS 123, the Company's loss and loss per common share
attributable to common stockholders would have been increased to the pro forma
amounts indicated below. The effects of applying SFAS 123 in this pro forma
disclosure are not necessarily indicative of the effect on future amounts.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Loss attributable to common stockholders (dollars
in thousands):
As reported..................................... $(1,801,249) $(1,642,973) $ (556,020)
=========== =========== ===========
Pro forma....................................... $(1,882,704) $(1,685,065) $ (570,467)
=========== =========== ===========
Loss per common share attributable to common
stockholders, basic and diluted:
As reported..................................... $ (6.46) $ (6.59) $ (2.50)
=========== =========== ===========
Pro forma....................................... $ (6.76) $ (6.76) $ (2.56)
=========== =========== ===========
Weighted average fair value of options granted.... $ 16.60 $ 10.91 $ 10.56
=========== =========== ===========
</TABLE>
The fair value of each option grant is estimated on the grant date using
the Black-Scholes option pricing model with the following assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Expected stock price volatility.............. 51% 53% 55%
Risk-free interest rate...................... 4.6% -- 6.7% 6.0% -- 7.1% 5.7% -- 7.1%
Expected life of options..................... 8 years 8 years 8 years
Expected dividend yield...................... 0.00% 0.00% 0.00%
</TABLE>
The Company's stock options are nontransferable (except to family members
or by will, as provided for in the Plan), and the actual value of the stock
options that an employee may realize, if any, will depend on the excess of the
market price on the date of exercise over the exercise price. The Company has
based its assumption for stock price volatility on the variance of weekly
closing prices of the Company's stock for the past 5 years. The risk-free rate
of return used equals the yield on 10-year zero-
F-32
<PAGE> 98
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
coupon U.S. Treasury issues on the grant date. No discount was applied to the
value of the grants for restrictions on transferability or risk of forfeiture.
NEXTEL INTERNATIONAL PLAN -- On June 23, 1997, Nextel International's board
of directors adopted the Nextel International Employee Stock Option Plan (the
"Nextel International Plan"), under which Nextel International's employees
participate. Generally, options outstanding under the Nextel International Plan
(i) are granted at fair value, based on periodic valuations of Nextel
International using industry valuation techniques; (ii) vest ratably over a
four-year service period; and (iii) expire ten years subsequent to award.
In November 1996, Nextel International adopted a Stock Appreciation Rights
Plan (the "SAR Plan"), which was effective as of November 1, 1995, whereby
selected employees and agents of Nextel International were granted rights (not
an equity interest) to share in the future appreciation in the value of Nextel
International ("SARs"). Nextel International retroactively granted 1,140,000
SARs under the SAR plan, at an exercise price of $10.00 per SAR, on dates
ranging from October 1, 1995 to December 31, 1996, with vesting periods of four
years.
In connection with adoption of the Nextel International Plan, Nextel
International's board of directors approved a plan to terminate the SAR Plan.
Each holder of previously granted SARs was given the option to exchange the SARs
for stock options to be granted under the Nextel International Plan.
As of December 31, 1998 and 1997, there were 5,000 and 25,000 SARs
outstanding, respectively. At December 31, 1998, approximately 4,200 SARs are
exercisable under the SAR Plan.
EMPLOYEE BENEFIT PLAN -- The Company maintains a defined contribution plan
pursuant to Section 401(k) of the Internal Revenue Code covering all eligible
officers and employees. Participants may contribute up to 15% of their
compensation. The Company provides a matching contribution of 50% of the first
4% of salary contributed by the employee. Such contributions were approximately
$4.3 million, $3.3 million and $2.0 million for the years ended December 31,
1998, 1997 and 1996, respectively.
CASH DEFERRAL PLAN -- Effective December 31, 1997, the Company adopted a
nonqualified Cash Compensation Deferral Plan (the "Compensation Deferral Plan")
to provide certain eligible employees and directors the opportunity to defer
cash compensation in excess of amounts permitted under its 401(k) defined
contribution plan. Eligible employees may defer up to 90% of base salary and
100% of annual bonus; the Company may (but is not obligated to) make
discretionary contributions. Distribution payments are made at retirement,
death, disability, or termination of employment. The Compensation Deferral Plan
is unfunded and all benefits will be paid from the Company's general assets. As
of December 31, 1998, approximately $2.0 million is included in other noncurrent
liabilities, representing deferrals made by participating employees and earnings
based on hypothetical investment elections.
15. RELATED PARTY TRANSACTIONS
The equipment purchase agreements between Nextel and Motorola govern
Nextel's rights and obligations regarding purchases of system infrastructure
equipment manufactured by Motorola. Under these agreements, Nextel has agreed to
deploy iDEN technology and, until August 4, 1999 and subject to certain
conditions, to purchase from Motorola at least 50% of the base radios Nextel
purchases in any calendar year.
During the years ended December 31, 1998, 1997 and 1996, the Company
acquired approximately $1,540.3 million, $1,086.1 million and $490.8 million,
respectively, of infrastructure and other equipment, handsets, warranties, rent
and services from Motorola. At December 31, 1998 and 1997, amounts payable to
Motorola, classified within accounts payable, accrued expense and other,
approximated $455.0 million and $133.0 million, respectively.
F-33
<PAGE> 99
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1996, the Company completed the acquisition of certain 800 MHz
trunked SMR systems located in Hawaii from Motorola for approximately $5.4
million in cash. In September 1997, an unrestricted subsidiary of the Company
acquired 49% of the capital stock and certain assets of a Brazilian indirect
wholly-owned subsidiary of Motorola for approximately $19.3 million in cash.
In January 1998, an affiliate of the McCaw Investor sold an aircraft to an
unrestricted subsidiary of the Company for approximately $8.2 million in cash
and 50,000 shares of Common Stock.
In February 1998, the FCC commenced an auction of Local Multipoint
Distribution Service ("LMDS") spectrum. In connection with this auction, the
Company entered into a joint venture through NextBand Communications, L.L.C.
("NextBand") with NEXTLINK Communications, Inc. ("NextLink"), a publicly traded
company controlled by Mr. McCaw. The Company has a 50% interest in NextBand. As
of the conclusion of the LMDS spectrum auction, NextBand had submitted $134.7
million in winning bids. Under the terms of the joint venture, Nextel made $67.2
million in payments to the FCC representing its share of the bid amount. During
the first quarter of 1999, Nextel and NextLink announced that they had reached a
broad agreement in principle concerning NextLink's acquisition of Nextel's 50%
ownership interest in NextBand. The parties have not yet entered into definitive
transaction agreements, or sought required regulatory approvals.
16. SEGMENT INFORMATION
The Company operates in two business segments: domestic and international.
These reportable segments are strategic business units that are in different
phases of development and are managed and financed separately based on the
fundamental differences in their operations. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies. The results for foreign subsidiaries are reported as of a
date one month earlier to facilitate timely reporting of consolidated results.
Nextel evaluates performance based on segment earnings (loss) before interest,
taxes, depreciation and amortization and other non-recurring charges.
F-34
<PAGE> 100
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective December 31, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information" ("SFAS 131"). SFAS 131
requires the Company to disclose selected segment information, which is provided
below:
<TABLE>
<CAPTION>
DOMESTIC INTERNATIONAL CONSOLIDATED
----------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
1998
Digital service revenues.......................... $ 1,681,671 $ 11,935 $ 1,693,606
Other revenues.................................... 122,599 30,553 153,152
----------- ----------- -----------
Total operating revenues..................... 1,804,270 42,488 1,846,758
Segment loss...................................... (99,263) (120,695) (219,958)
Depreciation and amortization expense............. 776,260 56,039 832,299
Interest expense.................................. (549,256) (106,824) (656,080)
Interest income................................... 17,369 16,655 34,024
Other, net........................................ (43,872) 7,410 (36,462)
Loss before income taxes and extraordinary item... (1,451,282) (259,493) (1,710,775)
Long-lived assets................................. 8,769,159 1,082,990 9,852,149
Identifiable assets............................... 9,972,225 1,601,136 11,573,361
Capital expenditures.............................. 1,936,352 399,867 2,336,219
1997
Digital service revenues.......................... $ 552,892 $ -- $ 552,892
Other revenues.................................... 172,990 13,015 186,005
----------- ----------- -----------
Total operating revenues..................... 725,882 13,015 738,897
Segment loss...................................... (390,266) (21,177) (411,443)
Depreciation and amortization expense............. 507,996 18,381 526,377
Interest expense.................................. (351,222) (56,583) (407,805)
Interest income................................... 10,107 19,666 29,773
Other, net........................................ 10,266 (3,755) 6,511
Loss before income taxes and extraordinary item... (1,229,111) (80,230) (1,309,341)
Long-lived assets................................. 7,263,139 662,210 7,925,349
Identifiable assets............................... 8,104,763 1,123,038 9,227,801
Capital expenditures.............................. 1,539,644 101,892 1,641,536
1996
Digital service revenues.......................... $ 118,545 $ -- $ 118,545
Other revenues.................................... 214,393 -- 214,393
----------- ----------- -----------
Total operating revenues..................... 332,938 -- 332,938
Segment loss...................................... (235,717) (9,318) (245,035)
Depreciation and amortization expense............. 400,663 168 400,831
Interest expense.................................. (227,172) (323) (227,495)
Interest income................................... 16,715 4,300 21,015
Other, net........................................ (5,254) (5,612) (10,866)
Loss before income taxes and extraordinary item... (852,091) (11,121) (863,212)
Long-lived assets................................. 5,860,458 19,581 5,880,039
Identifiable assets............................... 6,273,072 199,367 6,472,439
Capital expenditures.............................. 561,166 8,818 569,984
</TABLE>
F-35
<PAGE> 101
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1998
Revenues.................................. $ 327,134 $ 421,413 $ 506,598 $ 591,613
Operating loss............................ (289,528) (266,456) (244,044) (252,229)
Income tax benefit........................ 33,640 49,204 44,658 64,410
Loss before extraordinary item and
redeemable preferred stock dividends.... (386,862) (358,735) (401,923) (371,343)
Loss attributable to common
stockholders............................ (414,950) (531,341) (442,020) (412,938)
Loss per share before extraordinary item
attributable to common stockholders..... $ (1.53) $ (1.45) $ (1.56) $ (1.43)
Extraordinary item, net of income tax..... -- (0.49) -- --
--------- --------- --------- ---------
Basic and diluted loss per share
attributable to common stockholders..... $ (1.53) $ (1.94) $ (1.56) $ (1.43)
========= ========= ========= =========
1997
Revenues.................................. $ 110,676 $ 145,938 $ 207,224 $ 275,059
Operating loss............................ (190,064) (215,035) (256,009) (276,712)
Income tax benefit (provision)............ 39,436 46,494 39,472 (384,128)
Loss before extraordinary item and
redeemable preferred stock dividends.... (220,850) (261,623) (306,134) (779,460)
Loss attributable to common
stockholders............................ (220,850) (261,623) (318,956) (841,544)
Loss per share before extraordinary item
attributable to common stockholders..... $ (0.93) $ (1.08) $ (1.26) $ (3.01)
Extraordinary item, net of income tax..... -- -- -- (0.17)
--------- --------- --------- ---------
Basic and diluted loss per share
attributable to common stockholders..... $ (0.93) $ (1.08) $ (1.26) $ (3.18)
========= ========= ========= =========
</TABLE>
The sum of the per share amounts may not equal the annual amounts because
of the changes in the weighted-average number of shares outstanding during the
year.
Significant fourth quarter adjustments are described in Notes 1, 8 and 10.
18. SUBSEQUENT EVENTS
TOWERS TRANSACTION -- On February 10, 1999, Nextel and certain of its
subsidiaries and SpectraSite Holdings, Inc. and certain of its subsidiaries
("SpectraSite") entered into definitive agreements pursuant to which certain
telecommunications towers and related assets currently owned by Nextel's
subsidiaries will be acquired by a subsidiary of SpectraSite and leased back to
Nextel. The agreements also would establish an exclusive arrangement for the
construction by SpectraSite of additional towers in the United States to support
the Nextel subsidiaries' and Nextel Partners' expansion of their digital
networks. Under the terms of the agreement, Nextel will receive $560.0 million
in cash and a 17% ownership interest in SpectraSite. The transactions are
subject to a number of significant conditions including certain regulatory
approvals and the receipt of consents from certain of Nextel's and SpectraSite's
lenders. Due to the continuing involvement related to the ownership interest in
SpectraSite, the sale-leaseback transaction will be accounted for by the
financing method. Under the financing method, lease payments (exclusive of an
F-36
<PAGE> 102
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
interest portion) decrease the finance obligation. The towers will continue to
be reported by Nextel as assets and will be depreciated over their useful lives.
BRAZIL CURRENCY DEVALUATION (UNAUDITED) -- As a result of the recent
devaluation in the Brazilian real, Nextel will record for the quarter ended
March 31, 1999, a pre-tax charge (net of minority interest) of about $45 million
for foreign currency transaction losses. This amount is based on the outstanding
amount of U.S. dollar-denominated debt of Nextel International's Brazilian
subsidiaries, the average exchange rate of the Brazilian real for the quarter
ended February 28, 1999 (in accordance with Nextel's consolidation policy of
utilizing accounts as of a date one month earlier than the accounts) and
Nextel's percentage ownership interest in its Brazilian subsidiaries at the end
of such period. Additionally, Nextel will record a negative cumulative
translation adjustment on its balance sheet (determined in a manner consistent
with prior periods) of approximately $136 million based on the exchange rate as
of February 28, 1999 (in accordance with Nextel's consolidation policy of
utilizing accounts as of a date one month earlier than the accounts), which will
be reflected as an adjustment to the cumulative translation adjustment account
within stockholders' equity.
F-37
<PAGE> 103
NEXTEL COMMUNICATIONS, INC.
(PARENT ONLY)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 1,246 $ 3,678
Other receivables......................................... 148 402
Prepaids and other current assets......................... 12,376 2,431
---------- ----------
Total current assets................................... 13,770 6,511
PROPERTY, PLANT AND EQUIPMENT, NET.......................... 115,294 42,189
INTANGIBLE ASSETS, NET...................................... 624 536
DEFERRED INCOME TAXES....................................... 111,023 61,964
INVESTMENTS IN SUBSIDIARIES................................. 6,612,375 5,471,191
OTHER ASSETS................................................ 160,573 204,424
---------- ----------
$7,013,659 $5,786,815
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, accrued expenses and other.............. $ 94,050 $ 48,941
Current portion of long-term debt......................... 336 883
---------- ----------
Total current liabilities.............................. 94,386 49,824
DUE TO SUBSIDIARIES......................................... 772,781 28,694
LONG-TERM DEBT.............................................. 4,336,258 3,266,758
OTHER LIABILITIES........................................... 2,480 --
COMMITMENTS AND CONTINGENCIES
SERIES D EXCHANGEABLE PREFERRED STOCK MANDATORILY REDEEMABLE
2009...................................................... 601,317 529,119
SERIES E EXCHANGEABLE PREFERRED STOCK MANDATORILY REDEEMABLE
2010...................................................... 826,637 --
ZERO COUPON CONVERTIBLE PREFERRED STOCK MANDATORILY
REDEEMABLE 2013........................................... 150,298 --
STOCKHOLDERS' EQUITY........................................ 229,502 1,912,420
---------- ----------
$7,013,659 $5,786,815
========== ==========
</TABLE>
F-38
<PAGE> 104
NEXTEL COMMUNICATIONS, INC.
(PARENT ONLY)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING EXPENSES
Selling, general and administrative............. $ 182,546 $ 141,962 $ 80,559
Depreciation and amortization................... 7,230 3,608 2,122
----------- ----------- -----------
189,776 145,570 82,681
----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest expense................................ (410,507) (276,012) (202,035)
Interest income ($0, $125,293 and $131,997
intercompany)................................ 10,169 127,651 144,057
Intercompany management fee..................... 182,546 141,962 80,559
Equity in net losses of subsidiaries............ (1,168,823) (1,403,107) (532,483)
Other, net...................................... (933) 501 49
----------- ----------- -----------
(1,387,548) (1,409,005) (509,853)
----------- ----------- -----------
LOSS BEFORE INCOME TAX BENEFIT (PROVISION) AND
EXTRAORDINARY ITEM.............................. (1,577,324) (1,554,575) (592,534)
INCOME TAX BENEFIT (PROVISION).................... 58,461 (13,492) 36,514
----------- ----------- -----------
LOSS BEFORE EXTRAORDINARY ITEM.................... (1,518,863) (1,568,067) (556,020)
EXTRAORDINARY ITEM -- LOSS ON EARLY RETIREMENT OF
DEBT, NET OF INCOME TAX OF $0................... (133,225) (45,787) --
----------- ----------- -----------
NET LOSS.......................................... (1,652,088) (1,613,854) (556,020)
MANDATORILY REDEEMABLE PREFERRED STOCK
DIVIDENDS....................................... (149,161) (29,119) --
----------- ----------- -----------
LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS.......... $(1,801,249) $(1,642,973) $ (556,020)
=========== =========== ===========
COMPREHENSIVE LOSS, NET OF INCOME TAX:
Net loss........................................ $(1,652,088) $(1,613,854) $ (556,020)
Unrealized (loss) gain on available-for-sale
securities................................... (23,225) 7,805 (17,061)
Foreign currency translation adjustment......... (24,050) -- --
----------- ----------- -----------
COMPREHENSIVE LOSS................................ $(1,699,363) $(1,606,049) $ (573,081)
=========== =========== ===========
</TABLE>
F-39
<PAGE> 105
NEXTEL COMMUNICATIONS, INC.
(PARENT ONLY)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(dollars in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................... $(1,652,088) $(1,613,854) $(556,020)
Adjustment to reconcile net loss to net cash
provided by used in operating activities.... 522,081 374,033 234,408
----------- ----------- ---------
Net cash used in operating activities......... (1,130,007) (1,239,821) (321,612)
----------- ----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in and advances to affiliates........ (190,089) (346,338) (123,244)
Payments for acquisitions, net of cash
acquired...................................... (42,207) (6,100) 73,183
Capital expenditures............................. (74,599) (35,281) (5,951)
Decrease in marketable securities................ -- -- 65,692
----------- ----------- ---------
Net cash (used in) provided by investing
activities.................................. (306,895) (387,719) 9,680
----------- ----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt securities...................... 1,295,867 1,200,276 --
Issuance of preferred stock...................... 900,000 500,000 --
Retirement of debt securities.................... (740,791) (283,288) --
Other long-term (repayments) borrowings, net..... (885) (949) 1,969
Deferred financing costs......................... (58,208) (118,694) --
Issuance of common stock and options............. 38,487 285,480 114,752
Consent solicitation proceeds.................... -- 63,456 --
Option repurchase................................ -- (25,000) --
Notes receivable from stockholders............... -- 1,100 --
----------- ----------- ---------
Net cash provided by financing activities..... 1,434,470 1,622,381 116,721
----------- ----------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS.......... (2,432) (5,159) (195,211)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD..... 3,678 8,837 204,048
----------- ----------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD........... $ 1,246 $ 3,678 $ 8,837
=========== =========== =========
</TABLE>
F-40
<PAGE> 106
NEXTEL COMMUNICATIONS, INC.
(PARENT ONLY)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. For accounting policies and other information, see the Notes to the
Consolidated Financial Statements of Nextel Communications Inc. and
Subsidiaries, included elsewhere herein.
2. The parent company accounts for its investments in subsidiaries by the
equity method of accounting.
3. The parent company income tax benefit (provision) represents the difference
between taxes computed on a consolidated basis and taxes calculated by the
subsidiaries on a separate return basis.
4. Effective October 9, 1997, the parent company assigned and transferred to a
wholly-owned subsidiary all of the parent company's right, title and
interest in and to accounts receivable and intercompany accounts now owing,
or in the future owing, to the parent company from each of the subsidiaries
designated as restricted under the Nextel Indentures. All assignments and
transfers of such intercompany accounts were recorded as a contribution to
capital to the extent of the amount of the accounts receivable and
intercompany accounts assigned and transferred.
5. The parent company has an agreement with each of its wholly-owned
subsidiaries whereby the parent company provides administrative services
for each of its subsidiaries and charges the subsidiaries a fee equal to
the actual costs incurred in performing these administrative services. The
fees charged to the subsidiaries for the performance of administrative
services totaled approximately $182.5 million, $142.0 million and $80.6
million for the years ended December 31, 1998, 1997 and 1996, respectively.
6. Certain prior year amounts have been reclassified to conform with the
current presentation.
F-41
<PAGE> 107
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(dollars in thousands)
<TABLE>
<CAPTION>
(1)
BALANCE AT CHARGED TO CHARGED BALANCE
BEGINNING COSTS AND TO OTHER AT END OF
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
---------- ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Allowance for Doubtful Accounts...... $ 56,590 $ 82,131 $ 1,396 $(77,570) $ 62,547
======== ======== ======== ======== ========
Reserve for Inventory Obsolescence... $ 10,897 $ 22,134 $ 136 $(19,603) $ 13,564
======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1997
Allowance for Doubtful Accounts...... $ 10,774 $ 56,753 $ 7,119 $(18,056) $ 56,590
======== ======== ======== ======== ========
Reserve for Inventory Obsolescence... $ 7,542 $ 16,289 $ 1,103 $(14,037) $ 10,897
======== ======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1996
Allowance for Doubtful Accounts...... $ 5,232 $ 6,968 $ 2,477 $ (3,903) $ 10,774
======== ======== ======== ======== ========
Reserve for Inventory Obsolescence... $ 8,656 $ 304 $ 78 $ (1,496) $ 7,542
======== ======== ======== ======== ========
</TABLE>
- ---------------
(1) Primarily allowances of acquired companies.
F-42
<PAGE> 1
Exhibit 4.13
- --------------------------------------------------------------------------------
REGISTRATION RIGHTS AGREEMENT
Dated December 23, 1998
between
NEXTEL COMMUNICATIONS, INC.
and
GOLDMAN, SACHS & CO.
MORGAN STANLEY & CO. INCORPORATED
NATIONSBANC MONTGOMERY SECURITIES LLC
- -------------------------------------------------------------------------------
<PAGE> 2
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered
into December 23, 1998, between NEXTEL COMMUNICATIONS, INC., a Delaware
corporation (the "Company"), and GOLDMAN, SACHS & CO., MORGAN STANLEY & CO.
INCORPORATED and NATIONSBANC MONTGOMERY SECURITIES LLC (the "Initial
Purchasers").
This Agreement is made pursuant to the Purchase Agreement dated December
17, 1998, between the Company and the Initial Purchasers (the "Purchase
Agreement"), which provides for the sale by the Company to the Initial
Purchasers of 591,308 shares of Zero Coupon Convertible Preferred Stock due
2013 of the Company plus up to an additional 147,827 shares in the event the
Initial Purchasers exercise the over-allotment option in full (the "Preferred
Stock"), which will be mandatorily redeemable on December 23, 2013 (the
"Shares"), as set forth in the Certificate of Designation of the Powers,
Preferences and Relative Participating, Optional and Other Rights relating to
the Shares (the "Certificate of Designation"). The Shares will be convertible,
at the option of the holder thereof, in whole or in part, into Class A Common
Stock, par value $.001 per share, of the Company. In order to induce the
Initial Purchasers to enter into the Purchase Agreement, the Company has agreed
to provide to the Initial Purchasers and their direct and indirect transferees
the registration rights with respect to the Shares and the Common Shares (as
defined herein) set forth in this Agreement. The execution of this Agreement
is a condition to the closing under the Purchase Agreement.
In consideration of the foregoing, the parties hereto agree as follows:
1. Definitions.
As used in this Agreement, the following capitalized defined terms shall
have the following meanings:
"1933 Act" shall mean the Securities Act of 19333, as amended from time to
time.
"1934 Act" shall mean the Securities Exchange Act of 1934, as amended from
time to time.
"Accrual Date" shall have the meaning set forth in the Certificate of
Designation.
"Additional Shares" shall mean any Shares issued in payment of Liquidated
Damages to any Holder.
"Certificate of Designation" shall have the meaning set forth in the
preamble.
-1-
<PAGE> 3
"Closing Date" shall mean the Closing Date as defined in the
Purchase Agreement.
"Common Shares" shall mean any shares of Class A Common Stock, par
value $.001 per share, of the Company issued in payment of Liquidated
Damages or upon conversion, repurchase or redemption of the Preferred
Stock at the rate and in the manner described in the Certificate of
Designation and any other capital stock of the Company into which such
Common Shares may be converted, or reclassified or that may be issued in
respect of, in exchange for or in substitution of, such Common Shares by
reason of any stock splits, stock dividends, distributions, mergers,
consolidations or other like events.
"Company" shall have the meaning set forth in the preamble and shall
also include the Company's successors.
"Company Representative " means the Company's Corporate Counsel - SEC
Finance, 1505 Farm Credit Drive, McLean, Virginia 22102, phone: (703)
394-4000 or such different person and or such different address and/or
phone number as the Company may specify in a notice to the Purchaser
Representative given in accordance with the provisions of Section 5(d).
"Conversion Rate" shall have the meaning set forth in the
Certificate of Designation.
"Effectiveness Period" shall have the meaning set forth in Section
2(a) hereof.
"Effective Time" means the date on which the SEC declares the Resale
Registration Statement effective or on which the Resale Registration
Statement otherwise becomes effective.
"Electing Holder" shall mean any holder of Registrable Shares that
has returned a properly completed and signed Notice and Questionnaire to
the Company in accordance with Section 3(A)(a)(i) or 3(A)(a)(ii) hereof.
"Filing Notice" shall have the meaning set forth in Section 3(A)(g)
hereof.
"Holder" shall mean the Initial Purchasers, for so long as they own
any Registrable Shares, and each of their successors, assigns and direct
and indirect transferees who become registered owners of Registrable
Shares under and in compliance with the Certificate of Designation.
"Initial Purchaser" shall have the meaning set forth in the
preamble.
"Liquidated Damage" shall have the meaning set forth in Section 2(c)
hereof.
"Liquidation Preference" shall have the meaning set forth in the
Certificate of Designation.
-2-
<PAGE> 4
"Market Price" shall have the meaning set forth in the Certificate
of Designation.
"NASD Rules" means the Rules of the National Association of
Securities Dealers, Inc., as amended from time to time.
"Notice and Questionnaire" means a Notice of Registration Statement
and Securityholder Questionnaire substantially in the form of Exhibit A
hereto.
"Person" shall mean an individual, partnership, corporation, trust
or unincorporated organization, or a government or agency or political
subdivision thereof.
"Prospectus" shall mean the prospectus included in the Resale
Registration Statement, including any preliminary prospectus, and any
such prospectus as amended or supplemented by any prospectus supplement,
including a prospectus supplement with respect to the terms of the
offering of any portion of the Registrable Shares covered by the Resale
Registration Statement, and by all other amendments and supplements to
such prospectus, and in each case including all material incorporated by
reference therein.
"Purchase Agreement" shall have the meaning set forth in the
preamble.
"Purchaser Representative" means a representative of Goldman, Sachs
& Co., on behalf of the Initial Purchasers or such other persons as may
be appointed from time to time.
"Registrable Shares" shall mean the Shares, the Additional Shares
and the Common Shares; provided, however, that the Shares, the Additional
Shares and the Common Shares shall cease to be Registrable Shares (i)
when the Resale Registration Statement with respect to such Shares, such
Additional Shares and such Common Shares shall have been declared
effective under the 1933 Act and such Shares, such Additional Shares and
such Common Shares, as applicable, shall have been disposed of pursuant
to such Resale Registration Statement, (ii) when such Shares, such
Additional Shares or such Common Shares are saleable to the public
pursuant to Rule 144(k) (or any similar provision then in force, but not
Rule 144(A) under the 1933 Act, (iii) when such Shares, such Additional
Shares and such Common Shares shall have ceased to be outstanding or (iv)
on December 23, 2000.
"Registration Default" shall have the meaning set forth in Section
2(c) hereof.
"Registration Expenses" shall mean any and all expenses incident to
performance of or compliance by the Company with this Agreement,
including without limitation: (i) all SEC, stock exchange or National
Association of Securities Dealers, Inc. registration and filing fees,
(ii) all fees and expenses incurred in connection with compliance with
state securities or blue sky laws (including reasonable fees and
disbursements of counsel for any Underwriters or Holders in connection
with blue sky qualification of any of the Registrable Shares), (iii) all
expenses of any Persons in preparing or assisting in preparing, word
processing, printing and distributing the Resale Registration Statement,
any Prospectus, any
-3-
<PAGE> 5
amendments or supplements thereto, any underwriting agreements,
securities sales agreements and other documents relating to the
performance of and compliance with this Agreement, (iv) all rating agency
fees, if any, (v) the fees and disbursements of the Transfer Agent and
its counsel, if any, (vi) the fees and disbursements of counsel for the
Company, the fees and disbursements of one counsel for the Electing
Holders (which counsel shall be selected by the Electing Holders holding
a majority of the Registrable Shares and which counsel may also be
counsel for the Initial Purchasers) and in the case of an Underwritten
Offering, the fees and disbursements of one counsel for the Electing
Holders (which counsel shall be selected by a plurality of the Electing
Holders (which plurality shall be not less than 25% of the Registrable
Shares to be included in such Underwritten Offering) to represent them in
connection therewith and which counsel may also be counsel for the
Initial Purchasers) and (vii) the fees and disbursements of the
independent public accountants of the Company, including the expenses of
any special audits or "cold comfort" letters required by or incident to
such performance and compliance, but excluding fees and expenses of
counsel to the Underwriters (other than fees and expenses set forth in
clause (ii) above) or the Electing Holders and underwriting discounts and
commissions and transfer taxes, if any, relating to the sale or
disposition of Registrable Shares by an Electing Holder.
"Resale Registration Statement" shall have the meaning set forth in
Section 2(a) hereof.
"SEC" shall mean the Securities and Exchange Commission.
"Transfer Agent" shall mean First Chicago Trust Company of New York,
or such other transfer agent as shall be appointed by the Company from
time to time as transfer agent for the Shares and/or the Common Shares,
and who is designated as such in a written notice sent by the Company to
the Holders.
"Underwriters" shall have the meaning set forth in Section 3(D)
hereof.
"Underwritten Registration" or "Underwritten Offering" shall mean a
registration in which Registrable Shares are sold to an Underwriter for
reoffering to the public.
2. Registration Under the 1933 Act.
(a) The Company shall file as soon as practicable after the Closing
Date a Resale Registration Statement (the "Resale Registration Statement")
providing for the offer and sale of the Registrable Shares. The Company
shall use its best efforts:
(i) to cause such Resale Registration Statement to be declared
effective by the SEC as promptly as is practicable after filing and in any
event, within 180 days after the Closing Date; provided, however, that no
Holder shall be entitled to be named as a selling securityholder in the
Resale Registration Statement or to use the Prospectus forming a part
thereof for resales of Registrable Shares unless such Holder is an
Electing Holder;
-4-
<PAGE> 6
(ii) to keep the Resale Registration Statement continuously
effective (subject to the last sentence of Section 3(A)(k) and 3(C)
hereof) until the earliest of (w) the expiration of the period referred
to in Rule 144(k) (or any successor provision thereto) with respect to
all Registrable Shares held by Persons that are not Affiliates of the
Company, (x) such time as all of the Registrable Shares covered by the
Resale Registration Statement have been sold pursuant to the Resale
Registration Statement, (y) the date on which all Registrable Shares have
ceased to be outstanding as such and (z) December 23, 2000 (the
"Effectiveness Period");
(iii) upon receipt of a properly completed Notice and Questionnaire,
after the Effective Time of the Resale Registration Statement (subject to
Section 3(A)(k) hereof) and promptly upon the request of any Electing
Holder of Registrable Shares to take any action reasonably necessary to
enable such Electing Holder to use the Prospectus forming a part thereof
for resales of Registrable Shares, including, without limitation, any
action necessary to identify such Electing Holder as a selling
securityholder in the Resale Registration Statement; provided, however,
that nothing in this subparagraph shall relieve such Electing Holder of
the obligation to return a properly completed and signed Notice and
Questionnaire to the Company in accordance with Section 3(A)(a)(ii)
hereof; and
(iv) if at any time prior to the end of the Effectiveness Period the
Shares, pursuant to the Certificate of Designation, are convertible into
securities other than Common Shares, the Company shall, or shall cause
any successor under the Certificate of Designation to, cause such
securities to be included in the Resale Registration Statement no later
than the date on which the Shares may then be convertible into such
securities.
The Company further agrees to supplement or amend the Resale Registration
Statement if required by the rules, regulations or instructions applicable to
the registration form used by the Company for such Resale Registration Statement
or by the 1933 Act or by any other rules and regulations thereunder for shelf
registration or if reasonably requested by an Electing Holder with respect to
information timely furnished to the Company in writing by, and relating to such
Electing Holder, and to use its best efforts to cause any such amendment to
become effective and such Resale Registration Statement to become usable as soon
as thereafter practicable. The Company agrees to furnish to the Electing
Holders of Registrable Shares a reasonable number of copies of any such
supplement or amendment promptly after its being used or filed with the SEC.
(b) The Company shall pay all Registration Expenses in connection
with the registration pursuant to Sections 2 and 3. Each Electing Holder shall
pay all underwriting discounts and commissions and transfer taxes, if any,
relating to the sale or disposition of such Electing Holder's Registrable Shares
pursuant to the Resale Registration Statement.
(c) A Resale Registration Statement pursuant to Section 2(a) hereof
will not be deemed to have become effective unless it has been declared
effective by the SEC; provided, however, that if, after it has been declared
effective, the offering of Registrable Shares pursuant to a Resale Registration
Statement is interfered with by any stop order, injunction or other order or
-5-
<PAGE> 7
requirement of the SEC or any other governmental agency or court, such Resale
Registration Statement will be deemed not to have become effective during the
period of such interference until the offering of Registrable Shares pursuant
to such Resale Registration Statement may legally resume. As provided for in
the Certificate of Designation, in the event (w) the Resale Registration
Statement with respect to all Registrable Shares is not declared effective on
or prior to 180 days after the Closing Date, (x) prior to the end of the
Effectiveness Period the Prospectus is unavailable (including pursuant to any
suspension under Section 3(A)(k) for periods in excess of those specified in
Section 3(C)), (y) the Company fails to make any filing within the periods
required under Section 3(A)(a)(ii) (x) or (z) any filing required pursuant to
Section 3(A)(a)(ii) (y) is a post-effective amendment required to be declared
under the 1933 Act and such amendment is not declared effective within 45 days
of the filing thereof (each, a "Registration Default"), then the Company shall
pay liquidated damages ("Liquidated Damages") to the Holders of Shares and
Common Shares (but in the case of any Registration Default described in clauses
(x), (y) and (z), such Liquidated Damages shall only be paid to the Holders of
Shares and Common Shares that are Registrable Shares and that are, by reason of
such Registration Default, not entitled (or legally permitted) to effect sales
of such Registrable Shares pursuant to the Resale Registration Statement) from
and including the day on which such Registration Default first occurs to (but
excluding) the day on which such Registration Default is cured. Such
Liquidated Damages shall accrue (i) in respect of any such Shares, at a rate
per annum equal to 0.5% of the Liquidation Preference thereof as of the
preceding Accrual Date and (ii) in respect of each such Common Share, at a rate
per annum, equal to 0.5% of the Liquidation Preference of a Share divided by
the Conversion Rate. Liquidated Damages may be paid in Additional Shares
having an aggregate Liquidation Preference equal thereto or in Common Shares
having an aggregate Market Price equal thereto. Any such Liquidated Damages
shall be payable on the next succeeding Accrual Date following the occurrence
of a Registration Default to the holders of record on the fifth business day
prior to such Accrual Date of the Shares and/or Common Shares entitled to
receive such Liquidated Damages.
(d) Without limiting the remedies available to the Initial Purchasers and
the Electing Holders, the Company acknowledges that any failure by the Company
to comply with its obligations under Section 2(a) hereof may result in material
irreparable injury to the Initial Purchasers or the Electing Holders for which
there is no adequate remedy at law, that it will not be possible to measure
damages for such injuries precisely and that, in the event of any such failure,
the Initial Purchasers or any Electing Holder may obtain such relief as may be
required to specifically enforce the Company's obligations under Section 2(a)
hereof.
3. Registration Procedures.
(A) In connection with the obligations of the Company with respect to the
Resale Registration Statement pursuant to Section 2(a) hereof (and subject to
Section 3(A)(k) hereof), the Company shall as promptly as possible:
(a) (i) on the date of the Filing Notice, mail the Notice and
Questionnaire to the Holders of Registrable Shares as of such date. Any Person
that acquires any Registrable Shares from an Electing Holder in compliance with
the applicable provisions of the
-6-
<PAGE> 8
Certificate of Designation (excluding any Registrable Shares that were
not identified in the Notice and Questionnaire delivered by such Electing
Holder) will be entitled to have such Registrable Shares included in the
Resale Registration Statement so long as such transferee provides the
Company with an updated Notice and Questionnaire. If any such Electing
Holder's or transferee's Notice and Questionnaire is received on or prior
to the tenth day prior to the Effective Time, such Electing Holder or
transferee will be entitled to have such Electing Holder's or
transferee's Registrable Shares included in the Resale Registration
Statement at the Effective Time; if such Electing Holder's or
transferee's Notice and Questionnaire is received subsequent to such
tenth day, the Registrable Shares covered by such Notice and
Questionnaire will be included in the Resale Registration Statement
reasonably promptly after receipt (which date of inclusion may be
subsequent to the Effective Time), as provided in Section 3(A)(a)(ii)
below. No Holder shall be entitled to be named as a selling
securityholder in the Resale Registration Statement as of the Effective
Time and no Holder shall be entitled to use the Prospectus forming a part
thereof for resales of Registrable Shares at any time, unless such Holder
has returned a properly completed and signed Notice and Questionnaire to
the Company by the deadline for response set forth therein; provided,
however, Holders of Registrable Shares shall have 30 calendar days from
the date on which the Notice and Questionnaire is first mailed to such
Holders to return a completed and signed Notice and Questionnaire to the
Company.
(ii) After the Effective Time of the Resale Registration Statement
and prior to the end of the Effectiveness Period, the Company shall, upon
the request of any Holder of Registrable Shares that is not then an
Electing Holder, promptly send a Notice and Questionnaire to such Holder.
The Company shall not be required to take any action to name such Holder
as a selling securityholder in the Resale Registration Statement or to
enable such Holder to use the Prospectus forming a part thereof for
resales of Registrable Shares until such holder has returned a properly
completed and signed Notice and Questionnaire to the Company. Upon
receipt of a properly completed and signed Notice and Questionnaire,
together with such other information as may be reasonably requested by
the Company, from a Holder following the Effective Time and prior to the
end of the Effectiveness Period, the Company will (x) as promptly as
practicable but in any event within five business days of such receipt,
file such amendments to the Resale Registration Statement or supplements
to the Prospectus as are necessary to permit such holder to deliver the
Prospectus to purchasers of Registrable Shares (subject to the Company's
right to suspend the use of the Prospectus as provided in Section 3(C)
hereof) and (y) if a post-effective amendment to the Resale Registration
Statement is required to be declared effective under the Securities Act,
use its best efforts to cause such amendment to be declared effective
within 45 days of the filing thereof;
(b) prepare and file with the SEC the Resale Registration Statement
on the appropriate form under the 1933 Act (x) which form shall be
selected by the Company, (y) which form shall be available for the sale of
the Registrable Shares by the Electing Holders and (z) which Resale
Registration Statement and any amendment thereto and the Prospectus
forming part thereof and any amendment or supplement thereto (and each
other document
-7-
<PAGE> 9
incorporated therein by reference in each case) shall comply as to form
in all material respects with the 1933 Act and the 1934 Act and the
respective rules and regulations thereunder and shall include (or
incorporate by reference) all financial statements required by the SEC to
be filed therewith, and use its best efforts to cause such Resale
Registration Statement to become effective and remain effective in
accordance with Section 2 hereof;
(c) promptly take such action as may be necessary so that (x) each
of the Resale Registration Statement and any amendment thereto does not,
when it becomes effective, contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and (y) each of
the Prospectus forming part of the Resale Registration Statement, and any
amendment or supplement to such Prospectus, does not at any time during
the Effectiveness Period in which such Prospectus or amendment or
supplement thereto is furnished and available for use as provided herein,
include an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not misleading ;
(d) prepare and file with the SEC such amendments and post-effective
amendments to the Resale Registration Statement as may be necessary to
keep such Resale Registration Statement effective for the Effectiveness
Period and cause each Prospectus to be supplemented by any required
prospectus supplement and, as so supplemented, to be filed pursuant to
Rule 424 under the 1933 Act; to keep each Prospectus current during the
period described under Section 4(3) and Rule 174 under the 1933 Act that
is applicable to transactions by brokers or dealers with respect to the
Registrable Shares;
(e) (i) furnish to each Electing Holder of Registrable Shares, to
counsel for the initial Purchasers, to counsel for the Electing Holders
and to each Underwriter of an Underwritten Offering of Registrable
Shares, if any, without charge, as many copies, as reasonable, of each
Prospectus, including each preliminary Prospectus, and any amendment or
supplement thereto and such other documents as such Holder or Underwriter
may reasonably request, in order to facilitate the public sale or other
disposition of the Registrable Shares and (ii) if requested, promptly
include or incorporate in a Prospectus supplement or post-effective
amendment to the Resale Registration Statement such information as the
Underwriters reasonably agree should be included therein (provided that
such information is timely furnished to the Company in writing for
inclusion therein (A) by any underwriter, concerning such underwriter,
the underwriting arrangements or similar matters or (B) by any Electing
Holder, relating to such Electing Holder or such holder's participation
in the Underwritten Offering), and to which the Company does not
reasonably object and make all required filings of such Prospectus
supplement or post-effective amendment as soon as practicable after the
Company is notified of (and furnished appropriate information in writing
concerning) the matters to be included or incorporated in such Prospectus
supplement or post-effective amendment; and the Company consents to the
use of such Prospectus and any amendment or supplement thereto (except
during the continuance of any event described in Section 3(A)(g)(vii)) in
accordance with applicable law by each of the selling Electing
-8-
<PAGE> 10
Holders of Registrable Shares and any such Underwriters in connection
with the offering and sale of the Registrable Shares covered by and in
the manner described in such Prospectus or any amendment or supplement
thereto in accordance with applicable law;
(f) register or qualify the Registrable Shares under all applicable
state securities or "blue sky" laws of such jurisdictions as any Electing
Holder of Registrable Shares covered by the Resale Registration Statement
shall reasonably request in writing by the time the Resale Registration
Statement is declared effective by the SEC, to cooperate with such Holder
in connection with any filings required to be made with the National
Association of Securities Dealers, Inc. and do any and all other acts and
things which may be reasonably necessary or advisable to enable such
Electing Holder to consummate the disposition in each such jurisdiction
of such Registrable Shares owned by such Electing Holder, provided,
however, that the Company shall not be required to (i) qualify as a
foreign corporation or as a dealer in securities in any jurisdiction
where it would not otherwise be required to qualify but for this Section
3(f), (ii) file any general consent to service of process or (iii)
subject itself to taxation in any such jurisdiction if it is not so
subject;
(g) notify the Purchaser Representative, counsel for the Electing
Holders and counsel for the Initial Purchasers promptly and, if requested
by any such Purchaser Representative or counsel, confirm such advice in
writing (i) when the Resale Registration Statement and any amendment
thereto has been filed with the SEC (a "Filing Notice") and when the
Resale Registration Statement or any post-effective amendment thereto has
become effective, in each case making a public announcement thereof by
release made to Reuters Economic Services and Bloomberg Business News,
(ii) of any request by the SEC or any state securities authority for
amendments and supplements to the Resale Registration Statement and
Prospectus or for additional information after the Resale Registration
Statement has become effective, (iii) of the issuance by the SEC or any
state securities authority of any stop order suspending the effectiveness
of the Resale Registration Statement or the initiation of any proceedings
for that purpose, (iv) if, between the effective date of the Resale
Registration Statement and the closing of any sale of Registrable Shares
covered thereby, the representations and warranties of the Company
contained in any underwriting agreement, securities sales agreement or
other similar agreement, if any, relating to the offering cease to be
true and correct in all material respects or if the Company receives any
notification with respect to the suspension of the qualification of the
Registrable Shares for sale in any jurisdiction or the initiation of any
proceeding for such purpose, (v) of the receipt by the Company of any
notification with respect to the suspension of the qualification of the
Registrable Shares included in the Resale Registration Statement for sale
in any jurisdiction or the initiation of any proceeding for such purpose,
(vi) of the happening of any event during the period the Resale
Registration Statement is effective which makes any statement made in
such Resale Registration Statement or the related Prospectus untrue in
any material respect or which requires the making of any changes in such
Resale Registration Statement or Prospectus in order to make the
statements therein not misleading and (vii) of any determination by the
Company that a post-effective amendment to the Resale Registration
Statement would be appropriate;
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(h) make every reasonable effort to prevent the issuance and, if
issued to obtain the withdrawal of, any order suspending the
effectiveness of the Resale Registration Statement at the earliest
possible moment and provide immediate notice to each Electing Holder of
the withdrawal of any such order;
(i) upon request, furnish to each Electing Holder of Registrable
Shares, without charge, at least one conformed copy of the Resale
Registration Statement and any post-effective amendment thereto (without
documents incorporated therein by reference or exhibits thereto, unless
requested);
(j) cooperate with the selling Electing Holders of Registrable
Shares to facilitate the timely preparation and delivery of certificates
representing Registrable Shares to be sold and not bearing any
restrictive legends, other than those relating to restrictions imposed on
"Non-U.S. Holders" with respect to the Shares under the Certificate of
Designation, and enable such Registrable Shares to be in such
denominations (consistent with the provisions of the Certificate of
Designation) and registered in such names as the selling Electing Holders
may reasonably request at least two business days prior to the closing of
any sale of Registrable Shares;
(k) upon the occurrence of any event contemplated by Section
3(g)(vi) hereof, use its best efforts to prepare and file with the SEC a
supplement or post-effective amendment to the Resale Registration
Statement or the related Prospectus or any document incorporated therein
by reference or file any other required document so that, as thereafter
delivered to the purchasers of the Registrable Shares, such Prospectus
will not contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Company
agrees to notify the Purchaser Representative to suspend use of the
Prospectus as promptly as practicable after the occurrence of such an
event, and the Electing Holders will not be permitted to use of the
Prospectus until the Company has amended or supplemented the Prospectus
to correct such misstatement or omission;
(l) a reasonable time prior to the filing of the Resale Registration
Statement, any Prospectus, any amendment to the Resale Registration
Statement or amendment or supplement to a Prospectus or any document
which is to be incorporated by reference into the Resale Registration
Statement (other than filings pursuant to the 1934 Act) or a Prospectus
after the initial filing of the Resale Registration Statement, provide
upon request a reasonable number of copies of such document to the
Initial Purchasers, their counsel, the Purchaser Representative or its
counsel and make such of the representatives of the Company as shall be
reasonably requested by the Initial Purchasers, their counsel, the
Electing Holders or their counsel available for discussion of such
document, and shall not at any time file or make any amendment to the
Resale Registration Statement, any Prospectus or any amendment of or
supplement to the Resale Registration Statement or a Prospectus or any
document which is to be incorporated by reference into the Resale
Registration Statement (other than filings pursuant to the 1934 Act) or a
Prospectus, of which the Initial Purchasers,
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<PAGE> 12
their counsel, the Purchaser Representative or its counsel shall not have
previously been advised and furnished a copy or to which the Initial
Purchasers, their counsel, the Purchaser Representative or its counsel
shall object;
(m) obtain a CUSIP number, and, if applicable, a CINS number, for
all Registrable Shares not later than the effective date of the Resale
Registration Statement;
(n) use its best efforts to comply with all applicable rules and
regulations under the 1933 Act and the 1934 Act, and to make generally
available to its securityholders as soon as practicable, but in any event
not later than eighteen months after (i) the Effective Time, (ii) the
effective date of each post-effective amendment to the Resale
Registration Statement and (iii) the date of each filing by the Company
with the SEC of an Annual Report on Form 10-K that is incorporated by
reference in the Resale Registration Statement, an earning statement of
the Company and its subsidiaries complying with Section 11(a) of the 1933
Act and the rules and regulations of the SEC thereunder (including, at
the option of the Company, Rule 158);
(o) (i) make available for inspection by the Purchaser
Representative, any Underwriter participating in any disposition pursuant
to the Resale Registration Statement, and attorneys and accountants
designated by the Electing Holders, at reasonable times and in a
reasonable manner, all financial and other records, pertinent documents
and properties of the Company, and cause the respective officers,
directors and employees of the Company to supply all information
reasonably requested by any such Purchaser Representative, Underwriter,
attorney or accountant in connection with the Resale Registration
Statement and (ii) cause the Company's officers, directors and employees
to supply all information reasonably requested by such Purchaser
Representative, Underwriter, attorney or accountant in connection with
the Resale Registration Statement, in each case, as is customary for
similar due diligence examinations; provided, however, that all records,
information and documents that are designated in writing by the Company,
in good faith, as confidential shall be kept confidential by such
Electing Holders and any such Purchaser Representative, Underwriter,
attorney or accountant, unless such disclosure is made in connection with
a court proceeding or required by law, or such records, information or
documents become available to the public generally or through a third
party without an accompanying obligation of confidentiality; and
provided, further that, if the foregoing inspection and information
gathering would otherwise disrupt the Company's conduct of its business,
such inspection and information gathering shall, to the greatest extent
possible, be coordinated on behalf of the Electing Holders through a
single counsel and the other parties entitled thereto by one counsel
designated by and on behalf of Electing Holders and other parties;
(p) use its best efforts to cause all Common Shares to be listed on
any securities exchange or any automated quotation system on which
similar securities issued by the Company are then listed, to the extent
such Common Shares satisfy applicable listing requirements on or prior to
the Effective Time;
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<PAGE> 13
(q) use its best efforts to cause the Registrable Shares to be rated
by two nationally recognized statistical rating organizations (as such
term is defined in Rule 436(g)(2) under the 1933 Act);
(r) if reasonably requested by any Electing Holder of Registrable
Shares covered by the Resale Registration Statement, (i) promptly
incorporate in a Prospectus supplement or post-effective amendment such
information with respect to such Electing Holder as such Electing Holder
furnished in writing to the Company to be included therein and (ii) make
all required filings of such Prospectus supplement or such post-effective
amendment as soon as the Company has received notification of the matters
to be incorporated in such filing;
(s) enter into such customary agreements and take all such other
actions in connection therewith (including those requested by the
Electing Holders of a majority of the Registrable Shares being sold) in
order to expedite or facilitate the disposition of such Registrable
Shares including, but not limited to, an Underwritten Offering and in
such connection, (i) if an underwriting agreement is entered into, cause
the same to contain indemnification provisions and procedures
substantially identical to those set forth in Section 4 hereof with
respect to all parties to be indemnified pursuant to Section 4 hereof,
(ii) to the extent possible, make such representations and warranties to
the Holders and any Underwriters of such Registrable Shares with respect
to the business of the Company and its subsidiaries, the Resale
Registration Statement, Prospectus and documents incorporated by
reference or deemed incorporated by reference, if any, in each case, in
form, substance and scope as are customarily made by issuers to
underwriters in underwritten offerings and confirm the same if and when
requested, (iii) obtain opinions of counsel to the Company (which counsel
and opinions, in form, scope and substance, shall be reasonably
satisfactory to the Electing Holders and such Underwriters and their
respective counsel) addressed to each selling Electing Holder and
Underwriter of Registrable Shares, covering the matters customarily
covered in opinions requested in underwritten offerings, (iv) obtain
"cold comfort" letters from the independent certified public accountants
of the Company (and, if necessary, any other certified public accountant
of any subsidiary of the Company, or of any business acquired by the
Company for which financial statements and financial data are or are
required to be included in the Resale Registration Statement) addressed
to each selling Electing Holder and Underwriter of Registrable Shares,
such letters to be in customary form and covering matters of the type
customarily covered in "cold comfort" letters in connection with
underwritten offerings, and (v) deliver such documents and certificates
as may be reasonably requested by the Electing Holders of a majority of
the Registrable Shares being sold or the Underwriters, and which are
customarily delivered in underwritten offerings, to evidence the
continued validity of the representations and warranties of the Company
made pursuant to clause (ii) above and to evidence compliance with any
customary conditions contained in an underwriting agreement; and
(t) in the event that any broker-dealer registered under the 1934
Act shall be an "affiliate" (as defined in Rule 2720(b)(1) of the NASD
Rules (or any successor provision thereto)) of the Company or has a
"conflict of interest" (as defined in Rule 2720(b)(7) of the
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<PAGE> 14
NASD Rules (or any successor provision thereto)) and such
broker-dealer shall underwrite, participate as a member of an
underwriting syndicate or selling group or assist in the
distribution of any Registrable Shares covered by the Resale
Registration Statement, whether as a holder of such Registrable
Shares or as an underwriter, a placement or sales agent or a
broker or dealer in respect thereof, or otherwise, the Company
shall assist such broker-dealer in complying with the requirements
of the NASD Rules, including, without limitation, by (i) engaging
a "qualified independent underwriter" (as defined in Rule
2720(b)(15) of the NASD Rules (or any successor provision
thereto)) to participate in the preparation of the Resale
Registration Statement, to exercise usual standards of due
diligence in respect thereto and to recommend the public offering
price of such Registrable Shares, (ii) indemnifying such qualified
independent underwriter to the extent of the indemnification of
underwriters provided in Section 4 hereof and (iii) providing such
information to such broker-dealer as may be required in order for
such broker-dealer to comply with the requirements of the NASD
Rules.
(B) The Company may require each Electing Holder of Registrable
Shares to furnish to the Company in writing such information regarding the
Electing Holder and the proposed distribution by such Electing Holder of
such Registrable Shares as the Company may from time to time reasonably
request in writing.
(C) Each Holder agrees that, upon receipt of any notice from the
Company or being advised by the Purchaser Representative of the happening
of any event of the kind described in Section 3(A)(g)(vi) hereof, such
Electing Holder will forthwith discontinue disposition of Registrable
Shares pursuant to the Resale Registration Statement until such Electing
Holder's receipt of the copies of the supplemented or amended Prospectus
contemplated by Section 3(A)(k) hereof, and, if so directed by the Company
or by the Purchaser Representative such Electing Holder will deliver to
the Company (at its expense) all copies in its possession, other than
permanent file copies then in such Electing Holder's possession, of the
Prospectus covering such Registrable Shares current at the time of receipt
of such notice. The Company will be permitted to suspend the use of the
Prospectus (x) in connection with pending corporate developments, public
filings with the SEC and similar events, for a period not to exceed 30
days in any three-month period or 90 days (whether or not consecutive) in
any twelve-month period or (y) in connection with any corporate
acquisition or similar transaction, for a period not to exceed 60 days in
any three-month period or 90 days (whether or not consecutive) in any
twelve-month period.
In the event use of the Prospectus is suspended due to the
occurrence of any event described in Subsection 3(A)(g)(vi), the Company
shall deliver written notice thereof to the Purchaser Representative as
promptly as practicable thereafter. Absence of the receipt of any such
notice by the Purchaser Representative shall constitute a deemed
representation by the Company to the Purchaser Representative and the
Electing Holders that no such suspension is in effect. Prior to selling
Registrable Shares pursuant to the Resale Registration Statement an
Electing Holder must, at any time during the Effectiveness Period, contact
the Company Representative or the Purchaser Representative, prior to
selling any Registrable Shares pursuant to the Prospectus, in order to
determine whether the Prospectus is available for use at such time. The
Company shall comply with
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<PAGE> 15
the procedures set forth in Annex II hereto with respect to notification of the
Purchaser Representative as to the availability for use of any Resale
Registration Statement.
(D) The Electing Holders whose Registrable Shares are covered by the
Resale Registration Statement and who desire to do so may sell such Registrable
Shares in an Underwritten Offering upon request to the Company. Upon receipt
of such a request, the Company shall provide all Holders of Registrable Shares
written notice of the request, which notice shall inform such Holders that they
have the opportunity to participate in the offering. In any such Underwritten
Offering, the investment banker or investment bankers and manager or managers
(the "Underwriters") that will administer the offering will be selected by the
Electing Holders holding a majority of the Registrable Shares to be included in
such offering. No Holder that is not an Electing Holder may participate in any
Underwritten Offering and no Electing Holder may participate in any
Underwritten Offering contemplated hereby unless (i) such Electing Holder
agrees to sell such Holders Registrable Shares to be included in the
Underwritten Offering in accordance with any approved underwriting
arrangements, (ii) such Holder completes and executes all reasonable
questionnaires, powers of attorney, indemnities, underwriting agreements,
lock-up letters and other documents required under the terms of such approved
underwriting arrangements, and (iii) if such Holder is not then an Electing
Holder, such Holder returns a completed and signed Notice and Questionnaire to
the Company in accordance with Section 3(A)(a)(i) hereof within a reasonable
amount of time before such Underwritten Offering. The Electing Holders
participating in any Underwritten Offering shall be responsible for any
underwriting discounts and commissions and fees. The Company shall pay all
expenses customarily borne by issuers, including but not limited to filing
fees, the fees and disbursements of its counsel and independent public
accountants and any printing expenses incurred in connection with such
Underwritten Offering. Notwithstanding the foregoing or the provisions of
Section 3(A)(e)(ii) hereof, upon receipt of a request from the Underwriters or
a representative of the Electing Holders holding a majority of the Registrable
Shares to be included in an Underwritten Offering to prepare and file an
amendment or supplement to the Resale Registration Statement and Prospectus in
connection with an Underwritten Offering, the Company may delay the filing of
any such amendment or supplement for up to 90 days if the Board of Directors of
the Company shall have determined in good faith that the Company has a bona
fide business reason for such delay.
4. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless the Initial
Purchasers, each Electing Holder and each Person, if any, who controls any
Initial Purchaser or any Electing Holder within the meaning of either Section
15 of the 1933 Act or Section 20 of the 1934 Act, or is under common control
with, or is controlled by, any Initial Purchaser or any Electing Holder, from
and against all losses, claims, damages and liabilities (including, without
limitation, any legal or other expenses reasonably incurred by the Initial
Purchasers, any Electing Holder or any such controlling or affiliated Person in
connection with defending or investigating any such action or claim) caused by
any untrue statement or alleged untrue statement of a material fact contained
in any Resale Registration Statement (or any amendment thereto) pursuant to
which Registrable Shares were registered under the 1933 Act, including all
documents incorporated therein by reference, or
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<PAGE> 16
caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or caused by any untrue statement or alleged untrue statement of a
material fact contained in any Prospectus (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto), or caused
by any omission or alleged omission to state therein a material fact necessary
to make the statements therein in light of the circumstances under which they
were made not misleading, except insofar as such losses, claims, damages or
liabilities are caused by any such untrue statement or omission or alleged
untrue statement or omission based upon information relating to the Initial
Purchasers or any Electing Holder furnished to the Company in writing by the
Initial Purchasers or any selling Electing Holder expressly for use therein.
In connection with any Underwritten Offering permitted by Section 3(D) of this
Agreement, the Company will also indemnify the Underwriters, if any, selling
brokers, dealers and similar securities industry professionals participating in
the distribution, their officers and directors and each Person who controls
such Persons (within the meaning of the 1933 Act and the 1934 Act) to the same
extent as provided above with respect to the indemnification of the Electing
Holders, if requested in connection with any Resale Registration Statement.
(b) Each Electing Holder agrees, severally and not jointly, to indemnify
and hold harmless the Company, the Initial Purchasers and the other selling
Electing Holders, and each of their respective directors, officers who sign the
Resale Registration Statement and each Person, if any, who controls the
Company, any Initial Purchaser and any other selling Electing Holder within the
meaning of either Section 15 of the 1933 Act or Section 20 of the 1934 Act to
the same extent as the foregoing indemnity from the Company to the Initial
Purchasers and the Electing Holders, but only with reference to information
relating to such Electing Holder furnished to the Company in writing by such
Electing Holder expressly for use in any Resale Registration Statement (or any
amendment hereto) or any Prospectus (or any amendment or supplement thereto).
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any Person in respect of which indemnity may be
sought pursuant to either paragraph (a) or paragraph (b) above, such Person
(the "indemnified party") shall promptly notify the Person against whom such
indemnity may be sought (the "indemnifying party") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding
and shall pay the fees and disbursements of such counsel related to such
proceeding. In any such proceeding, any indemnified party shall have the right
to retain its own counsel, but the fees and expenses of such counsel shall be
at the expense of such indemnified party unless (i) the indemnifying party and
the indemnified party shall have mutually agreed to the retention of such
counsel or (ii) the named parties to any such proceeding (including any
impleaded parties) include both the indemnifying party and the indemnified
party and representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between them. It
is understood that the indemnifying party shall not, in connection with any
proceeding or related proceedings in the same jurisdiction, be liable for (a)
the fees and expenses of more than one separate firm (in addition to any local
counsel) for the Initial Purchasers and all Persons, if any, who control any
Initial Purchaser within the meaning of either Section 15 of
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<PAGE> 17
the 1933 Act or Section 20 of the 1934 Act, (b) the fees and expenses of more
than one separate firm (in addition to any local counsel) for the Company, its
directors, its officers who sign the Resale Registration Statement and each
Person, if any, who controls the Company within the meaning of either such
Section and (c) the fees and expenses of more than one separate firm (in
addition to any local counsel) for all Electing Holders and all Persons, if
any, who control any Electing Holders within the meaning of either such
Section, and that all such fees and expenses shall be reimbursed as they are
incurred. In such case involving the Initial Purchasers and Persons who
control any Initial Purchaser, such firm shall be designated in writing by
Goldman, Sachs & Co. In such case involving the Electing Holders and such
Persons who control Electing Holders, such firm shall be designated in writing
by the Electing Holders holding a majority of the Registrable Shares. In all
other cases, such firm shall be designated by the Company. The indemnifying
party shall not be liable for any settlement of any proceeding effected without
its written consent (which consent shall not be unreasonably withheld) but, if
settled with such consent or if there be a final judgment for the plaintiff,
the indemnifying party agrees to indemnify the indemnified party from and
against any loss or liability by, reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified party
for fees and expenses of counsel as contemplated by the second and third
sentences of this paragraph, the indemnifying party agrees that it shall be
liable for any settlement of any proceeding effected without its written
consent if (i) such settlement is entered into more than 45 days after receipt
by such indemnifying party of the aforesaid request (ii) such indemnifying
party shall have received notice of the terms of such settlement at least 30
days prior to such settlement being entered into and (iii) such indemnifying
party shall not have reimbursed the indemnified party for such fees and
expenses of counsel in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written consent of
the indemnified party, effect any settlement of any pending or threatened
proceeding in respect of which such indemnified party is or could have been a
party and indemnity could have been sought hereunder by such indemnified party,
unless such settlement (i) includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter of
such proceeding; provided that such unconditional release may be subject to a
parallel release of a claimant or plaintiff by such indemnified party from all
liability in respect of claims or counterclaims asserted by such indemnified
party and (ii) does not include a statement as to, or as admission of, fault,
culpability or a failure to act by or on behalf of such indemnified party.
(d) If the indemnification provided for in paragraph (a) or paragraph (b)
of this Section 4 is unavailable to an indemnified party or insufficient in
respect of any losses, claims, damages or liabilities, then each indemnifying
party under such paragraph, in lieu of indemnifying such indemnified party
thereunder, shall contribute to the amount paid or payable by such indemnified
party as a result of such losses, claims, damages or liabilities in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party or parties on the one hand and of the indemnified party or parties on the
other hand in connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative fault of the Company and the Electing Holders
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the
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<PAGE> 18
Company or by the Electing Holders and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Electing Holders' obligations to contribute pursuant to this
Section 4(d) are several in proportion to the liquidation preference of the
Shares and/or the number of Common Shares, as applicable, of such Electing
Holder that were registered pursuant to the Resale Registration Statement.
(e) The Company and each Electing Holder agree that it would not be just
or equitable if contribution pursuant to this Section 4 were determined by pro
rata allocation or by any other method of allocation that does not take account
of the equitable considerations referred to in paragraph (d) above. The amount
paid or payable by an indemnified party as a result of the losses, claims,
damages and liabilities referred to in paragraph (d) above shall be deemed to
include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 4, no Electing Holder shall be required to indemnify
or contribute any amount in excess of the amount by which the total price at
which Registrable Shares were sold by such Electing Holder exceeds the amount
of any damages that such Electing Holder has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No Person guilty of fraudulent misrepresentation (within the meaning
of Section 11 (f) of the 1933 Act) shall be entitled to contribution from any
Person who was not guilty of such fraudulent misrepresentation. The remedies
provided for in this Section 4 are not exclusive and shall not limit any rights
or remedies which may otherwise be available to any indemnified party at law or
in equity.
The indemnity and contribution provisions contained in this Section 4
shall remain operative and in full force and effect regardless of (i) any
termination of this Agreement, (ii) any investigation made by or on behalf of
the Initial Purchasers, any Electing Holder or any Person controlling any
Initial Purchaser or any Electing Holder, or by or on behalf of the Company,
its officers or directors or any Person controlling the Company and (iii) any
sale of Registrable Shares pursuant to the Resale Registration Statement.
5. Miscellaneous.
(a) Other Registration Rights. The Company may grant registration rights
that would permit any Person that is a third party the right to piggy-back on
any Resale Registration Statement; provided that if the Underwriters of any
underwritten offering conducted pursuant to Section 3(D) hereof notifies the
Company and the Electing Holders that the total amount of securities which the
Electing Holders and the holders of such piggy-back rights intend to include in
any Resale Registration Statement is so large as to materially threaten the
success of such offering (including the price at which such securities can be
sold), then the amount, number or kind of securities to be offered for the
account of holders of such piggy-back rights will be reduced to the extent
necessary to reduce the total amount of securities to be included in such
offering to the amount, number and kind recommended by the Underwriters prior
to any reduction in the amount of Registrable Shares to be included in such
Resale Registration Statement.
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(b) No Inconsistent Agreements. The Company has not entered into, and on
or after the date of this Agreement will not enter into, any agreement which is
inconsistent with the rights granted to the Holders of Registrable Shares in
this Agreement or otherwise conflicts with the provisions hereof. The rights
granted to the Holders hereunder do not in any way conflict with and are not
inconsistent with the rights granted to the holders of the Company's other
issued and outstanding securities under any such agreements.
(c) Amendments and Waivers. The provisions of this Agreement, including
the provisions of this sentence, may not be amended, modified or supplemented,
and waivers or consents to departures from the provisions hereof may not be
given unless the Company has obtained the written consent of Holders of at
least a majority in aggregate liquidation preference, in respect of the Shares,
and a majority of the Common Shares, of the outstanding Registrable Shares
affected by such amendment modification, supplement, waiver or consent;
provided, however, that no amendment, modification, supplement, waiver or
consents to any departure from the provisions of Section 4 hereof shall be
effective as against any Holder of Registrable Shares unless consented to in
writing by such Holder.
(d) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, registered
first-class mail, telex, telecopier, or any courier guaranteeing overnight
delivery (i) if to a Holder, at the most current address given by such Holder to
the Company by means of a notice given in accordance with the provisions of this
Section 5(d), which address initially is, with respect to the Initial
Purchasers, the address set forth in the Purchase Agreement; (ii) if to the
Company, initially at the Company's address set forth in the Purchase Agreement
and thereafter at such other address, notice of which is given in accordance
with the provisions of this Section 5(d) and (iii) if to the Purchaser
Representative at: Goldman, Sachs & Co., New York Plaza, 50th Floor, New York,
New York 10004, Attention: Michael D. Ryan, (212) 902-2378 or Jeffrey J.
Zajkowski, (212) 902-4652.
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; two business
days after being deposited in the mail, postage prepaid, if mailed; when
answered back, if telexed; when receipt is acknowledged, if telecopied; and on
the next business day if timely delivered to an air courier guaranteeing
overnight delivery.
Copies of all such notices, demands, or other communications shall be
concurrently delivered by the person giving the same to the Transfer Agent, at
First Chicago Trust Company of New York, 525 Washington Blvd., Jersey City, New
Jersey 07311, (212) 222-4368, Attention: Bob Hohman, or to such other Transfer
Agent as may be appointed by the Company from time to time at the address
indicated in writing by the Company to the Holders.
(e) Successors and Assigns. This Agreement shall inure to the benefit of
and be binding upon the successors, assigns and transferees of each of the
parties, including, without limitation and without the need for an express
assignment, subsequent Holders; provided that nothing herein shall be deemed to
permit any assignment, transfer or other disposition of Registrable
-18-
<PAGE> 20
Shares in violation of the terms of the Purchase Agreement. If any transferee
of any Holder shall acquire Registrable Shares, in any manner, whether by
operation of law or otherwise, such Registrable Shares shall be held subject to
all of the terms of this Agreement, and by taking and holding such Registrable
Shares such person shall be conclusively deemed to have agreed to be bound by
and to perform all of the terms and provisions of this Agreement and such
person shall be entitled to receive the benefits hereof. The Initial
Purchasers (in their capacity as Initial Purchasers) shall have no liability or
obligation to the Company with respect to any failure by a Holder to comply
with, or any breach by any Holder of, any of the obligations of such Holder
under this Agreement.
(f) Purchases and Sales of Registrable Shares. The Company shall not, and
shall use its best efforts to cause its affiliates (as defined in Rule 405
under the 1933 Act) not to, purchase and then resell or otherwise transfer any
Registrable Shares.
(g) Third Party Beneficiary. The Holders shall be third party
beneficiaries to the agreements made hereunder between the Company, on the one
hand, and the Initial Purchasers, on the other hand, and each Holder shall have
the right to enforce such agreements directly to the extent it deems such
enforcement necessary or advisable to protect its rights or the rights of
Holders hereunder.
(h) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(i) Heading. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(j) Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York.
(k) Severability. In the event that any one or more of the provisions
contained herein, or the application thereof in any circumstance, is held
invalid, illegal or unenforceable, the validity, legality and enforceability of
any such provision in every other respect and of the remaining provisions
contained herein shall not be affected or impaired thereby.
-19-
<PAGE> 21
NEXTEL COMMUNICATIONS, INC.
By: /s/ Steven M. Shindler
-----------------------------
Name: Steven M. Shindler
Title: Vice President
Confirmed and accepted as of
the date first above written:
GOLDMAN, SACHS & CO.
MORGAN STANLEY & CO. INCORPORATED
NATIONSBANC MONTGOMERY SECURITIES LLC
By Goldman, Sachs & Co.
By: __________________________
Name:
Title:
<PAGE> 22
NEXTEL COMMUNICATIONS, INC.
By: ______________________________
Name:
Title:
Confirmed and accepted as of
the date first above written:
GOLDMAN, SACHS & CO.
MORGAN STANLEY & CO. INCORPORATED
NATIONSBANC MONTGOMERY SECURITIES LLC
By Goldman, Sachs & Co.
By: /s/ Goldman, Sachs & Co.
-------------------------------
Name:
Title:
<PAGE> 1
Exhibit 4.14.3
EXECUTION COPY
AMENDMENT NO. 2 TO CREDIT AGREEMENT
AMENDMENT NO. 2 TO CREDIT AGREEMENT dated as of December 21, 1998 between
NEXTEL COMMUNICATIONS, INC. ("NCI"); NEXTEL FINANCE COMPANY (the "Borrower")
and the other Restricted Companies listed on the signature pages hereto under
the caption "RESTRICTED COMPANIES" (individually, a "Restricted Company" and,
collectively, the "Restricted Companies"); TORONTO DOMINION (TEXAS) INC., in
its capacity as Administrative Agent pursuant to authority granted by the
Required Lenders pursuant to Section 10.02(b) of the Credit Agreement (as
defined below); and the Lenders listed on the signature pages hereto under the
caption "LENDERS" (individually, a "Lender" and, collectively, the "Lenders").
NCI, the Restricted Companies, the Lenders, Toronto Dominion (Texas) Inc.,
as Administrative Agent, and The Chase Manhattan Bank, as Collateral Agent, are
parties to a Credit Agreement dated as of March 12, 1998 (as modified and
supplemented and in effect from time to time, the "Credit Agreement"),
providing, subject to the terms and conditions thereof, for extensions of
credit (by means of loans and letters of credit) to be made by the Lenders to
the Borrower in an aggregate principal or face amount not exceeding
$3,000,000,000 (which, in the circumstances contemplated by Section 7.01(e)
thereof, may be increased by up to $500,000,000 to $3,500,000,000). NCI, the
Restricted Companies, the Administrative Agent (pursuant to authority granted
by, and having obtained all necessary consents of, the Required Lenders) and
the Lenders wish now to provide for an increase of $100,000,000 pursuant to
said Section 7.01(e) and to the amendment of the Credit Agreement in certain
other respects, and accordingly, the parties hereto hereby agree as follows:
Section 1. Definitions. Except as otherwise defined in this Amendment
No. 2, terms defined in the Credit Agreement are used herein as defined
therein.
Section 2. Consent. Subject to the satisfaction of the conditions
precedent specified in Section 5 below, but effective as of the date hereof,
the Administrative Agent (having previously obtained the authorization of, and
all necessary consents of, the Required Lenders under the Credit Agreement)
hereby consents to the making of Tranche D Term Loans under the Credit
Agreement upon the terms and conditions provided for in this Amendment No. 2.
In addition, the Administrative Agent hereby consents to each Tranche D Term
Loan Lender (as defined below), that is not already a "Lender" under the Credit
Agreement becoming a Lender under the Credit Agreement pursuant to this
Amendment No. 2.
Section 3. Amendments. Subject to the satisfaction of the conditions
precedent specified in Section 5 below, but effective as of the date hereof,
the Credit Agreement shall be amended as follows:
Amendment No. 2 to Credit Agreement
<PAGE> 2
-2-
3.01 References Generally. References in the Credit Agreement (including
references to the Credit Agreement as amended hereby) to "this Agreement" (and
indirect references such as "hereunder", "hereby", "herein" and "hereof") shall
be deemed to be references to the Credit Agreement as amended hereby.
3.02 Definitions. Appropriate references to matters relating to the
Tranche D Term Loans are inserted into Section 1.01 of the Credit Agreement by
adding the following new definitions (to the extent not already included in
said Section 1.01) and inserting the same in the appropriate alphabetical
locations and amending the following definitions (to the extent already
included in said Section 1.01), as follows:
(i) Amendment No. 2: a definition of "Amendment No. 2" is hereby
inserted as follows:
"Amendment No. 2" means Amendment No. 2 to this Agreement.
(ii) Amendment No. 2 Effective Date: a definition of "Amendment No.
2 Effective Date" is hereby inserted as follows:
"Amendment No. 2 Effective Date" means (i) the date on which the
conditions to the effectiveness of the amendments provided for in Amendment
No. 2 set forth in Section 5 thereof are satisfied (or waived in accordance
with said Section 5) and (ii) the date on which the Tranche D Term Loans
are made.
(iii) Applicable Rate: the first paragraph of the definition of
"Applicable Rate" is hereby amended to read in its entirety as follows:
"Applicable Rate" means (a) in the case of Tranche B Term
Loans, for any day, 1.75% with respect to any Base Rate Loan and
2.75% with respect to any Eurodollar Loan, (b) in the case of
Tranche C Term Loans, for any day, 2.50% with respect to any Base
Rate Loan and 3.50% with respect to any Eurodollar Loan, (c) in the
case of Tranche D Term Loans, for any day, 2.50% with respect to
any Base Rate Loan and 3.50% with respect to any Eurodollar Loan
and (d) in the case of Revolving Credit Loans, Tranche A Term Loans
or commitment fees, for any day, the applicable rate per annum set
forth below under the caption "Base Rate Spread", "Eurodollar
Spread" or "Commitment Fee Rate", as applicable, based upon the
Total Indebtedness to Cash Flow Ratio as at the last day of the
fiscal quarter most recently ended as to which NCI has delivered
financial statements pursuant to Section 6.01:
(iv) Class: in the definition of "Class", a comma is inserted in
lieu of the word "or" after the reference to "Tranche B Term Loans" and the
words "or Tranche D Term Loans" are inserted after the reference to
"Tranche C Term Loans".
Amendment No. 2 to Credit Agreement
<PAGE> 3
-3-
(v) Commitments: in the definition of "Commitments", a comma is
inserted in lieu of the word "and" after the reference to "Tranche B Term
Loan Commitments" and the words "and Tranche D Term Loan Commitments" are
inserted after the reference to "Tranche C Term Loan Commitments".
(vi) Incremental Facility Loan: the definition of "Incremental
Facility Loan" is hereby amended in its entirety to read as follows:
"Incremental Facility Loan" has the meaning assigned to such term
in Section 7.01(e). Any Tranche C Term Loans made pursuant to the
Tranche C Term Loan Commitments and any Tranche D Term Loans made
pursuant to the Tranche D Term Loan Commitments are hereby
designated as "Incremental Facility Loans".
(vii) Interest Period: clause (y) of the definition of "Interest
Period" is hereby amended to read in its entirety as follows:
"(y) no Interest Period for any Tranche B Term Loan
Borrowing, Tranche C Term Loan Borrowing or Tranche D Term Loan
Borrowing may commence before and end after any Principal Payment
Date unless, after giving effect thereto, the aggregate principal
amount of the Tranche B Term Loans, Tranche C Term Loans or Tranche
D Term Loans, as the case may be, having Interest Periods that end
after such Principal Payment Date shall be equal to or less than
the aggregate principal amount of the Tranche B Term Loans, Tranche
C Term Loans or Tranche D Term Loans, respectively, scheduled to be
outstanding after giving effect to the payments of principal
required to be made on such Principal Payment Date and"
(viii) Required Tranche D Term Loan Lenders: a definition of
"Required Tranche D Term Loan Lenders" is hereby inserted as follows:
"Required Tranche D Term Loan Lenders" means, at any time,
Lenders having Tranche D Term Loans representing at least 51% of
the total Tranche D Term Loans at such time.
(ix) Tranche D Term Loan: a definition of "Tranche D Term Loan" is
hereby inserted as follows:
"Tranche D Term Loan" means a Loan made pursuant to Section 2.01(d).
(x) Tranche D Term Loan Commitment: a definition of "Tranche D Term
Loan Commitment" is hereby inserted as follows:
Amendment No. 2 to Credit Agreement
<PAGE> 4
-4-
"Tranche D Term Loan Commitment" means, with respect to each
Lender, the commitment of such Lender to make Tranche D Term Loans
hereunder. The amount of each Lender's Tranche D Term Loan
Commitment is set forth on Schedule 2.01. The aggregate original
amount of the Tranche D Term Loan Commitments is $100,000,000.
(xi) Tranche D Term Loan Commitment Termination Date: a definition
of "Tranche D Term Loan Commitment Termination Date" is hereby inserted as
follows:
"Tranche D Term Loan Commitment Termination Date" means the
date on which each Tranche D Term Loan Lender makes a single
Tranche D Term Loan to the Borrower, which in any case shall be no
later than January 15, 1999.
(xii) Tranche D Term Loan Lender: a definition of "Tranche D Term
Loan Lender" is hereby inserted as follows:
"Tranche D Term Loan Lender" means (a) a Lender that has a
Tranche D Term Loan Commitment set forth opposite its name on
Schedule 2.01 and (b) thereafter, the Lenders from time to time
holding Tranche D Term Loans after giving effect to any assignments
thereof permitted by Section 10.04.
3.03 Tranche D Term Loan Commitments. Section 2.01 of the Credit
Agreement is hereby amended by inserting a new paragraph (e) at the end thereof
to read as follows:
"(e) Tranche D Term Loans. Subject to the terms and conditions set
forth herein, each Tranche D Term Loan Lender agrees to make a single
Tranche D Term Loan to the Borrower during the period from and including
January 4, 1999 to and including January 15, 1999, in a principal amount
equal to such Lender's Tranche D Term Loan Commitment. Proceeds of
Tranche D Term Loans shall be available for any use permitted under
Section 6.09."
3.04 Requests for Borrowings. Clause (i) of Section 2.03 of the
Credit Agreement is hereby amended to read in its entirety as follows:
"(i) whether the requested Borrowing is to be a Revolving Credit
Borrowing, Tranche A Term Loan Borrowing, Tranche B Term Loan Borrowing,
Tranche C Term Loan Borrowing or Tranche D Term Loan Borrowing
In addition, the fourth sentence of Section 2.03 of the Credit Agreement is
hereby amended to read in its entirety as follows:
"If no election as to the Type of Borrowing is specified, then the
requested Borrowing shall (x) in the case of a Revolving Credit
Borrowing, be a Base Rate Borrowing and (y) in the case of a Tranche A
Term Loan Borrowing, Tranche B Term Loan Borrowing,
Amendment No. 2 to Credit Agreement
<PAGE> 5
-5-
Tranche C Term Loan Borrowing or Tranche D Term Loan Borrowing, be a
Eurodollar Borrowing having an Interest Period of one month's duration."
3.05 Interest Elections; Presumption if No Notice. Section 2.06(e)
of the Credit Agreement is hereby amended to read in its entirety as follows:
"(e) Presumption if No Notice. If the Borrower fails to deliver a
timely Interest Election Request with respect to a Eurodollar Borrowing
prior to the end of the Interest Period applicable thereto, then, unless
such Borrowing is repaid as provided herein, at the end of such Interest
Period such Borrowing shall (x) if a Revolving Credit Borrowing, be
converted to a Base Rate Borrowing and (y) if a Tranche A Term Loan
Borrowing, a Tranche B Term Loan Borrowing, a Tranche C Term Loan
Borrowing or a Tranche D Term Loan Borrowing, be converted into, or
continued as, a Eurodollar Borrowing having an Interest Period of one
month's duration. Notwithstanding any contrary provision hereof, if a
Specified Default has occurred and is continuing and the Administrative
Agent, at the request of the Required Lenders, so notifies the Borrower,
then, so long as a Specified Default is continuing (i) no outstanding
Borrowing may be converted to or continued as a Eurodollar Borrowing and
(ii) unless repaid, each Eurodollar Borrowing shall be converted to a
Base Rate Borrowing at the end of the Interest Period applicable
thereto."
3.06 Termination of Commitments. Section 2.07(a) of the Credit
Agreement is hereby amended to read in its entirety as follows:
"(a) Termination of Commitments. Unless previously terminated, (i)
the Revolving Credit Commitments shall terminate at the close of business
on the Revolving Credit Maturity Date, (ii) the Tranche A Term Loan
Commitments shall terminate at the close of business on the last day of
the Tranche A Term Loan Availability Period, (iii) the Tranche B Term
Loan Commitments shall terminate after the Borrowing of Tranche B Term
Loans on the Effective Date, (iv) the Tranche C Term Loan Commitments
shall terminate after the Borrowing of Tranche C Term Loans on the
Amendment No. 1 Effective Date, (v) the Tranche D Term Loan Commitments
shall terminate on the Tranche D Term Loan Commitment Termination Date."
3.07 Repayment of Loans. Section 2.08(c) of the Credit Agreement is
hereby amended by adding a new paragraph at the end thereof to read as follows:
"The Borrower hereby unconditionally promises to pay to the
Administrative Agent for the account of the Tranche D Term Loan Lenders
the principal of the Tranche D Term Loans in twenty-one installments
payable on the Principal Payment Dates as set forth below (the amount of
each such installment to be in an amount equal to the percentage of the
aggregate principal amount of the Tranche D Term Loans outstanding on the
Tranche D Term Loan Commitment Termination Date):
Amendment No. 2 to Credit Agreement
<PAGE> 6
-6-
<TABLE>
<CAPTION>
Principal Payment Date Percentage of
Falling on or Nearest to: Tranche D Term Loans
------------------------- --------------------
<S> <C>
March 31, 2002 0.25%
June 30, 2002 0.25%
September 30, 2002 0.25%
December 31, 2002 0.25%
March 31, 2003 0.25%
June 30, 2003 0.25%
September 30, 2003 0.25%
December 31, 2003 0.25%
March 31, 2004 0.25%
June 30, 2004 0.25%
September 30, 2004 0.25%
December 31, 2004 0.25%
March 31, 2005 0.25%
June 30, 2005 0.25%
September 30, 2005 0.25%
December 31, 2005 0.25%
March 31, 2006 0.25%
June 30, 2006 0.25%
September 30, 2006 0.25%
December 31, 2006 0.25%
March 31, 2007 95%
</TABLE>
Notwithstanding the foregoing, unless the Required Tranche D Term
Loan Lenders consent otherwise (by notice to the Borrower through the
Administrative Agent delivered at any time after the date twenty-four
months prior to the earliest maturity date for the then-outstanding Public
Notes maturing in 2003, 2004 or 2005 or for any Indebtedness incurred in
accordance with Section 7.01(b)(i) that matures prior to June 30, 2007),
the Tranche D Term Loans shall be paid in full on the date that is three
months prior to such earliest maturity date, provided that the foregoing
shall not apply if on the date three months prior to such earliest
maturity date the sum of (i) the aggregate principal amount of all
outstanding Public Notes maturing in 2003, 2004 and 2005 plus (ii) the
principal amount of Indebtedness incurred in accordance with Section
7.01(b)(i) that matures prior to June 30, 2007, is less than
$1,000,000,000."
3.08 Prepayments. Paragraph (a) of Section 2.09 of the Credit
Agreement is hereby amended in its entirety to read as follows:
Amendment No. 2 to Credit Agreement
<PAGE> 7
-7-
"(a) Optional Prepayments. The Borrower shall have the right at
any time and from time to time to prepay any Borrowing in whole or in
part, subject to prior notice in accordance with paragraph (d) of this
Section 2.09. Prepayments of Tranche A Term Loan Borrowings, Tranche B
Term Loan Borrowings, Tranche C Term Loan Borrowings and Tranche D Term
Loan Borrowings under this Section 2.09(a) shall be applied to each of
such Classes of Borrowings (i) as between such Classes of Borrowings, pro
rata in accordance with the respective aggregate principal amounts of the
Loans of such Classes outstanding on the date of prepayment and (ii) as
within such Classes of Loans, to the respective installments thereof in
the direct order of their maturities (i.e., so that the earliest maturing
installments are prepaid first). Notwithstanding the foregoing, the
Borrower may at its option make prepayments of the Tranche B Term Loan
Borrowings up to an aggregate amount not exceeding $250,000,000 without
making a ratable prepayment of Tranche A Term Loan Borrowings, Tranche C
Term Loan Borrowings and Tranche D Term Loan Borrowings, provided that
any such prepayment of Tranche B Term Loan Borrowings shall be applied to
the installments thereof in the inverse order of maturity (i.e., so that
the latest maturing installments are prepaid first)."
3.09 Mandatory Prepayments - Sale of Assets. The last paragraph of
Section 2.09(b)(ii) of the Credit Agreement is hereby amended to read in its
entirety as follows:
"In the event that any Reserved Commitment Amount with respect to
any Disposition shall remain unutilized for twelve months and the
Borrower shall for any reason not borrow Revolving Credit Loans the
proceeds of which are applied to the prepayment of Loans (and cover for
LC Exposure) and reductions of Commitments as provided above in this
clause (ii), the Revolving Credit Lenders agree (which agreement shall be
absolute and unconditional, regardless of whether or not the conditions
to a borrowing of Revolving Credit Loans hereunder shall have been
satisfied and regardless of the occurrence or continuance of any Event of
Default, including any Event of Default described in paragraphs (h) or
(i) of Article VIII) to purchase participations in the Loans of the
Tranche A Term Loan Lenders, the Tranche B Term Loan Lenders, Tranche C
Term Loan Lenders and Tranche D Term Loan Lenders in amounts equivalent
to the amount of the respective prepayments that each of such Lenders
would have received had such borrowing of Revolving Credit Loans occurred
as provided above."
3.10 Payment of Interest. Section 2.11(d) of the Credit Agreement
is hereby amended to read in its entirety as follows:
"(d) Payment of Interest. Accrued interest on each Loan shall be
payable in arrears on each Interest Payment Date for such Loan; provided
that (i) interest accrued pursuant to paragraph (c) of this Section 2.11
shall be payable on demand, (ii) in the event of any repayment or
prepayment of any Eurodollar Loan (or the repayment or prepayment in full
of the Tranche A, Tranche B, Tranche C or Tranche D Term Loans), accrued
interest on the principal amount repaid or prepaid shall be payable on
the date of
Amendment No. 2 to Credit Agreement
<PAGE> 8
-8-
such repayment or prepayment, (iii) in the event of any conversion of any
Eurodollar Loan prior to the end of the current Interest Period therefor,
accrued interest on such Loan shall be payable on the effective date of
such conversion and (iv) all accrued interest on Revolving Credit Loans
shall be payable upon termination of the Revolving Credit Commitments."
3.11 Alternate Rate of Interest. Section 2.12(b) of the Credit
Agreement is hereby amended to read in its entirety as follows:
"(b) if such Borrowing is of a particular Class of Loans, the
Administrative Agent is advised by the Required Revolving Credit Lenders,
the Required Tranche A Term Loan Lenders, the Required Tranche B Term Loan
Lenders, the Required Tranche C Term Loan Lenders or the Required Tranche
D Term Loan Lenders, as the case may be, that the Adjusted LIBO Rate or
the LIBO Rate, as applicable, for such Interest Period will not adequately
and fairly reflect the cost to such Lenders of making or maintaining their
Loans of such Class included in such Borrowing for such Interest Period;"
3.12 Use of Proceeds. Section 6.09(b) of the Credit Agreement is
hereby amended to read in its entirety as follows:
"(b) Tranche B Term Loans, Tranche C Term Loans and Tranche D Term
Loans. The proceeds of the Tranche B Term Loans hereunder will be used
for refinancing of Indebtedness under the Existing Credit Agreement and
the Existing Vendor Financing Agreements and, to the extent that after all
Indebtedness under the Existing Credit Agreement and the Existing Vendor
Financing Agreements shall have been paid in full, will be used for any
other purpose to which Revolving Credit Loans or Tranche A Term Loans may
be applied pursuant to Section 6.09(a). The proceeds of Tranche C Term
Loans and Tranche D Term Loans will be used for capital expenditures,
investments, acquisitions and general corporate purposes."
3.13 Agency Provisions. The third sentence of the third paragraph
of Article IX of the Credit Agreement is hereby amended to read in its entirety
as follows:
"Neither Agent shall be liable for any action taken or not taken by
it with the consent or at the request of the Required Lenders or, if
provided herein, with the consent or at the request of the Required
Revolving Credit Lenders, the Required Tranche A Term Loan Lenders, the
Required Tranche B Term Loan Lenders, the Required Tranche C Term Loan
Lenders or the Required Tranche D Term Loan Lenders, or in the absence of
its own gross negligence or willful misconduct."
3.14 Amendments. Clause (vi) of Section 10.02(b) of the Credit
Agreement is hereby amended to read in its entirety as follows:
Amendment No. 2 to Credit Agreement
<PAGE> 9
-9-
"(vi) change any of the provisions of this Section 10.02 or the
definition of "Required Lenders", "Required Revolving Credit Lenders",
"Required Tranche A Term Loan Lenders", "Required Tranche B Term Loan
Lenders", "Required Tranche C Term Loan Lenders" or "Required Tranche D
Term Loan Lenders", or any other provision hereof specifying the number or
percentage of Lenders required to waive, amend or modify any rights
hereunder or under any other Loan Document or make any determination or
grant any consent hereunder or thereunder, without the written consent of
each Lender (except as a result of the designation of Incremental Facility
Loans, and the related commitments to provide such Incremental Facility
Loans hereunder, as a "Class" of Loans or Commitments hereunder which, as
contemplated by Section 7.01(e), shall only require the consent of the
Required Lenders); or"
In addition, the last paragraph of Section 10.02(b) of the Credit Agreement is
hereby amended to read in its entirety as follows:
"Anything in this Agreement to the contrary notwithstanding, no
waiver or modification of any provision of this Agreement that has the
effect (either immediately or at some later time) of enabling the Borrower
to satisfy a condition precedent to the making of a Loan of any Class
shall be effective against the Lenders of such Class, unless the Required
Revolving Credit Lenders, Required Tranche A Term Loan Lenders, Required
Tranche B Term Loan Lenders, Required Tranche C Term Loan Lenders or
Required Tranche D Term Loan Lenders (whichever of such Class is so
affected) shall have concurred with such waiver or modification."
3.15 Designation of Loans as "Credit Facility". Section 10.13 of
the Credit Agreement is hereby amended to read in its entirety as follows:
"SECTION 10.13. Designation as Credit Facility. NCI hereby
designates each of the Commitments and Loans hereunder as the "Credit
Facility" under and for all purposes of the Public Note Indentures. In
that connection, NCI hereby represents and warrants as of the Amendment
No. 2 Effective Date that there is not currently in effect any designation
of any other credit facility as a "Credit Facility" under any of the
Public Note Indentures. NCI further agrees that, until the principal of
and interest on all of the Loans have been paid in full and all of the
Commitments terminated, it will not designate any credit facility (other
than the Commitments and Loans hereunder pursuant to this Section 10.13)
as a "Credit Facility" for purposes of any of the Public Note Indentures."
3.16 Supplement to Schedule 2.01. Schedule 2.01 is hereby
supplemented to set forth the respective Tranche D Term Loan Commitments of the
Lenders as provided in Schedule 2.01 to this Amendment No. 2.
Section 4. Representations and Warranties. NCI and each Restricted
Company represents and warrants to the Lenders and the Agents, as to
itself and each of its subsidiaries, that the representations and
warranties set forth in Article IV of the Credit Agreement are true
Amendment No. 2 to Credit Agreement
<PAGE> 10
-10-
and complete on the date hereof as if made on and as of the date hereof (or, if
any such representation or warranty is expressly stated to have been made as of
a specific date or as of the date of the Credit Agreement, such representation
or warranty shall be true and correct as of such specific date or as of March
12, 1998, as applicable), and as if each reference in said Article IV to "this
Agreement" included reference to this Amendment No. 2 and as if each reference
in said Article IV to "the Transactions" included reference to the execution and
delivery of this Amendment No. 2.
Section 5. Conditions Precedent. The consent set forth in Section 2
hereof, and the amendments set forth in Section 3 hereof, shall become effective
on the date on which each of the following conditions is satisfied (or waived in
accordance with the last paragraph hereof), and on such date (as provided in
Section 2.01(d) of the Credit Agreement, as amended hereby), the Tranche D Term
Loans shall be made by each of the Tranche D Term Loan Lenders:
(a) Counterparts of Amendment. The Administrative Agent (or Special
Counsel) shall have received from NCI, the Restricted Companies and the
Tranche D Term Loan Lenders, either (i) a counterpart of this Amendment
No. 2 signed on behalf of such party or (ii) written evidence satisfactory
to the Administrative Agent (which may include telecopy transmission of a
signed signature page of this Amendment No. 2) that such party has signed
a counterpart of this Amendment No. 2.
(b) Opinion of Counsel to Credit Parties. The Administrative Agent
(or Special Counsel) shall have received a favorable written opinion
(addressed to the Administrative Agent and the Lenders and dated the
Amendment No. 2 Effective Date) of Jones, Day, Reavis & Pogue, counsel to
the Credit Parties, covering such matters relating to the Credit Parties,
this Amendment No. 2, the other Loan Documents or the Transactions as the
Required Lenders shall request (and each Credit Party hereby requests
such counsel to deliver such opinion). To the extent deemed appropriate
by the Restricted Companies, internal corporate matters in such opinion
(such as due incorporation and the like) may be rendered in a separate
opinion from the General Counsel of NCI.
(c) Financial Officer Certificate. The Administrative Agent (or
Special Counsel) shall have received a certificate, dated the Amendment
No. 2 Effective Date and signed by the President, a Vice President or a
Financial Officer of the Borrower, confirming compliance with the
conditions set forth in paragraphs (a) and (b) of Section 5.02 of the
Credit Agreement on the Amendment No. 2 Effective Date after giving
effect to the Borrowing of Tranche D Term Loans.
(d) Notes. The Administrative Agent (or Special Counsel) shall
have received for each Tranche D Term Loan Lender that shall have
requested a promissory note, a duly completed and executed promissory
note for such Lender.
Amendment No. 2 to Credit Agreement
<PAGE> 11
-11-
(e) Fees and Expenses. The Administrative Agent shall have received
all fees and other amounts due and payable on or prior to the Amendment
No. 2 Effective Date, including, to the extent invoiced, reimbursement or
payment of all out-of-pocket expenses required to be reimbursed or paid by
the Borrower hereunder.
The Administrative Agent shall notify the Borrower and the Lenders of the
Amendment No. 2 Effective Date, and such notice shall be conclusive and
binding. Notwithstanding the foregoing, the obligations of the Tranche D Term
Loan Lenders to make Tranche D Term Loans under the Credit Agreement as amended
hereby shall not become effective unless each of the foregoing conditions is
satisfied (or waived pursuant to Section 10.02) at or prior to 3:00 p.m., New
York City time, on the earlier to occur of (i) the date on which the Tranche D
Term Loans are made and (ii) January 15, 1999 (and, in the event such
conditions are not so satisfied or waived, the consent and amendments
contemplated hereby shall not become effective).
None of the foregoing conditions may be waived, amended or modified
except pursuant to an agreement or agreements in writing entered into by NCI,
the Restricted Companies and the Required Lenders or by NCI, the Restricted
Companies and the Administrative Agent with the consent of the Required Lenders.
Section 6. Consent to Additional Term Loans. By its signature below
each Tranche D Term Loan Lender that is a new Lender under the Credit Agreement
authorizes the Administrative Agent to execute one or more additional amendments
on behalf of the Lenders pursuant to which one or more additional tranches of
term loans under the Credit Agreement in an aggregate principal amount up to
$500,000,000 (including the aggregate principal amount of the Tranche C Term
Loans and the Tranche D Term Loans) would be added to the Credit Agreement
subject to the requirements of Section 7.01(e) of the Credit Agreement.
Section 7. Confirmation of Guarantees and Security.
(i) By its signature below NCI and each Restricted Company (other
than the Borrower) agrees that the obligations of the Borrower under the
Credit Agreement as amended hereby and as previously amended by Amendment
No. 1 are entitled to the benefits of the Guarantee by NCI pursuant to the
Credit Agreement and the Guarantee of each Restricted Company (other than
the Borrower) pursuant to the Guarantee and Security Agreement dated as of
March 12, 1998 (the "Guarantee and Security Agreement") between the
Borrower, each of the subsidiaries of the Borrower listed on the signature
pages thereto under the caption "INITIAL GUARANTORS", each additional
entity, if any, that becomes a "Guarantor" thereunder as contemplated by
Section 7.12 of the Credit Agreement and The Chase Manhattan Bank, as
Collateral Agent (and shall constitute "Guaranteed Obligations" under and
for all purposes of the Credit Agreement and the Guarantee and Security
Agreement).
Amendment No. 2 to Credit Agreement
<PAGE> 12
-12-
(ii) By its signature below each Restricted Company agrees that the
obligations of the Borrower under the Credit Agreement as amended hereby
and as previously amended by Amendment No. 1 are entitled to the benefits
of the pledge of collateral security by each Restricted Company pursuant
to the Guarantee and Security Agreement (and shall constitute "Secured
Obligations" under and for all purposes of the Guarantee and Security
Agreement).
(iii) By its signature below NCI and each Restricted Company agrees
together with each of the other parties party hereto, that references in
the Guarantee and Security Agreement to the Credit Agreement (including
indirect references) shall be deemed to be references to the Credit
Agreement as amended hereby.
Section 8. Miscellaneous. Except as herein provided, the Credit
Agreement shall remain unchanged and in full force and effect. This Amendment
No. 2 may be executed in any number of counterparts, all of which taken together
shall constitute one and the same amendatory instrument and any of the parties
hereto may execute this Amendment No. 2 by signing any such counterpart. This
Amendment No. 2 shall be governed by, and construed in accordance with, the law
of the State of New York.
Amendment No. 2 to Credit Agreement
<PAGE> 13
-13
IN WITNESS WHEREOF, the parties hereto have caused this Amendment No. 2 to
Credit Agreement to be duly executed and delivered as of the day and year first
above written.
NEXTEL COMMUNICATIONS, INC.
By /s/Steven M. Shindler
---------------------------------
Name: Steven M. Shindler
Title: Vice President
RESTRICTED COMPANIES
NEXTEL FINANCE COMPANY
By /s/Steven M. Shindler
---------------------------------
Name: Steven M. Shindler
Title: Vice President
Amendment No. 2 to Credit Agreement
<PAGE> 14
-14-
A & B ELECTRONICS, INC.
CELL CALL, INC.
DIAL DISTANCE, INC.
FCI 900, Inc.
NEXTEL COMMUNICATIONS OF
THE MID-ATLANTIC, INC.
NEXTEL OF CALIFORNIA, INC.
NEXTEL LICENSE ACQUISITION
CORP.
NEXTEL LICENSE HOLDINGS
INC.
NEXTEL LICENSE HOLDINGS 2,
INC.
NEXTEL LICENSE HOLDINGS 3,
INC.
NEXTEL LICENSE HOLDINGS 4,
INC.
NEXTEL OF NEW YORK, INC.
NEXTEL OPERATIONS, INC.
NEXTEL SOUTH CORP.
NEXTEL SOCAL, INC.
NEXTEL OF TEXAS, INC.
NEXTEL SYSTEMS CORP.
NEXTEL WEST CORP.
PITTENCRIEFF
COMMUNICATIONS, INC.
RADIOCALL SERVICE AND
SYSTEMS, INC.
SAFETY NET, INC.
SMART SMR, INC.
SPECTRUM RESOURCES OF
THE NORTHEAST, INC.
SRI, INC.
By /s/Steven M. Shindler
--------------------------
Name: Steven M. Shindler
Title: Vice President
Amendment No. 2 to Credit Agreement
<PAGE> 15
-15-
FORT WORTH TRUNKED RADIO
LIMITED PARTNERSHIP
By Nextel of Texas, Inc.,
a General Partner
By /s/Steven M. Shindler
--------------------------
Name: Steven M. Shindler
Title: Vice President
Amendment No. 2 to Credit Agreement
<PAGE> 16
-16-
ADMINISTRATIVE AGENT
TORONTO DOMINION (TEXAS) INC.,
as Administrative Agent
By /s/Jeffrey R. Lents
---------------------------
Name: Jeffrey R. Lents
Title: Vice President
TRANCHE D TERM LOAN LENDERS
NORTHERN TELECOM INC.
By___________________________
Name:
Title:
Amendment No. 2 to Credit Agreement
<PAGE> 17
-16-
ADMINISTRATIVE AGENT
TORONTO DOMINION (TEXAS) INC.,
as Administrative Agent
By____________________________
Name: Jeffrey R. Lents
Title: Vice President
TRANCHE D TERM LOAN LENDERS
NORTHERN TELECOM INC.
By /s/Michael W. McCorkle
------------------------------------
Name: Michael W. McCorkle
Title: Director, Customer Finance
Amendment No. 2 to Credit Agreement
<PAGE> 1
Exhibit 10.15.3
February 26, 1999
Mr. Daniel F. Akerson
1100 Mill Ridge
McLean, Virginia 22102
Re: Employment Agreement
Dear Mr. Akerson:
This letter is intended to memorialize the basic terms of certain agreed
amendments, supplements and other changes to the terms of the Employment
Agreement, effective on and as of March 5, 1996, as amended by letter agreement
dated March 24, 1998 (such original agreement, as so amended, the "Employment
Agreement"), currently in place between you and Nextel Communications, Inc.
("Nextel"). Such amendments, supplements and other changes are in consideration
for and/or reflect your agreements to extend the term of your employment with
Nextel for an additional year, to enter into a post-employment consulting
relationship with Nextel, and to further defer distribution of 1,000,000 shares
of Nextel Common Stock awarded to you as deferred shares in connection with
your entry into the Employment Agreement.
Specifically, we have agreed that, effective upon the execution of this
letter agreement, certain provisions of the Employment Agreement shall be
amended, supplemented or otherwise changed to read as indicated below:
A. The last sentence of Section 2.b. of the Employment Agreement
shall be replaced in its entirety by the following sentence:
"Notwithstanding the foregoing, (i) Executive may continue to
serve as a director of America Online, Inc. and American
Express Company, (ii) Executive may serve as a director of
other corporations (but while his employment continues
hereunder, only with the consent of the Operations Committee)
and (iii) nothing in the foregoing shall be construed so as to
limit or prohibit personal investments by Executive; provided
that while his employment continues hereunder, such investments
shall not amount to a controlling interest in any entity."
B. Each of Sections 3 and 4.c.(i)(A) of the Employment Agreement
shall be amended by replacing the date "March 5, 1999" each
time it appears in such Sections with the date "March 5, 2000".
<PAGE> 2
-2-
C. The third sentence of Section 4.c.(ii) of the Employment
Agreement shall be replaced in its entirety by the following
sentence: "If Executive's employment hereunder is terminated on
or after March 5, 1999 but prior to March 5, 2006 for any
reason by either Executive or Employer, then Executive's right
to vesting of the Inducement Options shall be forfeited (it
being understood that Executive's right to receive all
1,000,000 Deferred Shares shall then be vested and
nonforfeitable), the Inducement Options shall thereupon expire
unexercised (except as provided in subparagraphs (iii) and (iv)
below); and thereafter Executive shall have no further rights,
claims or interest in or to any of the Inducement Options,
except as provided in subparagraphs (iii) and (iv) below."
D. The third sentence of the first paragraph of Section 4.c.(iv)
of the Employment Agreement shall be replaced in its entirety
by the following sentence: "The Vested Portion shall mean (1)
for any Termination Date prior to March 5, 1999, 2,000,000
multiplied by a fraction, the numerator of which is the number
of days from the Commencement Date to and including the Vesting
Reference Date (as defined below) and the denominator of which
is 1825 (i.e., the number of days from the Commencement Date to
and including the fifth anniversary of the Commencement Date
("Fraction") and (2) for any Termination Date on or after March
5, 1999, (x) 1,000,000 multiplied by the lesser of (A) one or
(B) the Fraction plus (y) 1,000,000 (i.e., the number of vested
and nonforfeitable Deferred Shares)."
E. The first sentence of the penultimate paragraph of Section
4.c.(iv) of the Employment Agreement shall be replaced in its
entirety by the following sentence: "By way of illustrative
example, if Executive's employment were terminated as of March
5, 2000, whether upon prior written notice to Executive
pursuant to Section 10.b.(ii) below or to Employer pursuant to
Section 10.b.(iii) below, then the Vesting Reference Date would
be March 5, 2000 (i.e., the Termination Date); the Vested
Portion would be 1,800,000 (i.e., 1,000,000 x (1460/1825, or
0.80, plus 1,000,000), with 1460 being the number of days from
the Commencement Date to and including the Termination Date);
Executive would already have received (or would have
nonforfeitable rights to receive) all 1,000,000 of the Deferred
Shares pursuant to subparagraphs (i) and (ii) above; and,
accordingly, the number of shares subject to the
Purchase/Exercise Options would be 800,000."
F. The first sentence of the final paragraph of Section 4.c.(iv)
of the Employment Agreement shall be replaced in its entirety
by the following sentence: "The Purchase/Exercise Options (and
any Inducement Options vested pursuant to subparagraph (iii)
above) will
<PAGE> 3
-3-
be exercisable (x) in the event of a termination of Executive's
employment by reason of death, Permanent Disability of
Constructive Termination, for a period of one year following
the Termination Date, (y) in the event of a termination of
employment by Employer for any other reason (but subject to
clause (z) below), for a period of six months following the
Termination Date and (z) in the event of a termination of
employment by Executive or by Employer for any other reason
that is followed by Executive accepting the consulting
relationship contemplated by Section 21 hereof, for the longer
of (1) the period provided in clause (y) above, where
applicable or (2) thirty (30) days after termination of
Executive's post-employment consulting relationship with
Employer pursuant to Section 21."
G. The second sentence of Section 4.c.(v) of the Employment
Agreement shall be replaced in its entirety by the following
sentence: "Any such election shall be irrevocable and set a
specific date for receipt of such Deferred Shares; provided
that if Executive makes such election while he is employed
hereunder and at least six months prior to the end of the
Initial Term, Executive may also specify that, in lieu of
distribution of such applicable Deferred Shares to Executive on
the final day of the Initial Term or any specific later date,
the applicable Deferred Shares shall be distributed to
Executive on (x) such later date on which Executive's
employment hereunder is terminated or (y) such later date on
which Executive's post-employment consulting relationship with
the Company, as described in Section 21 hereof, is terminated,
as indicated by Executive in the written notice delivered to
the Company."
H. The following four sentences shall be inserted immediately
after the existing last sentence of Section 5 of the Employment
Agreement: "For a period of five years after the termination
of Executive's employment hereunder, the Company shall furnish
Executive, free of charge, with two subscriber units (to be
reasonably selected by Executive) and shall provide a full
package of multi-functional wireless communications services
(of the types then generally being marketed by the Company),
including local and long distance interconnect service, also
without charge, to Executive (it being understood that such
free phones and service are intended to be principally for use
by Executive and members of his immediate family). For a
period of one year after the termination of Executive's
employment hereunder (or, if sooner, until the date of a
Disqualifying Event, as defined below), Employer will permit
Executive to continue his participation (on a family coverage
basis) in all group major medical, dental, vision and other
group health benefits plans maintained by Employer and provided
generally to its executive officers, on the same terms as apply
to participation therein by
<PAGE> 4
-4-
management generally and as if Executive's employment hereunder
were continuing during such one year period. At the expiration
of such one year period (but only if no Disqualifying Event has
occurred), Employer shall permit Executive to continue
participation for an additional eighteen month period (or, if
sooner, the date of a Disqualifying Event), by purchasing (at
Executive's sole expense) continuing medical or other
appropriate benefit coverage under Employer's medical benefit
and other welfare benefit plans and programs maintained by it,
but only as and to the extent required by Part 6 of Subtitle B
of Title I of the Employee Retirement Income Security Act of
1974, as amended ("COBRA"), if COBRA were applicable and
required such coverage to be provided during the entirety of
such period. Executive acknowledges and agrees (1) that the
continuation of coverage arrangements described in the
preceding two sentences satisfies any and all rights of
Executive to continuation of coverage under Employer's group
health and welfare benefit plans pursuant to COBRA and (2) that
upon the earliest to occur of (w) Executive's death, (x)
termination of Executive's employment hereunder for Cause, (y)
termination of Executive's consulting relationship with the
Company for Material Breach (as defined in Section 21) and (z)
Executive obtaining employment with any person or entity that
makes available to Executive medical insurance coverage that is
substantially comparable to (including the payment by such
person or entity of the employer's portion of the related
coverage premiums) that then being maintained by Employer (each
of the events described in the foregoing clauses (w), (x), (y)
and (z) a "Disqualifying Event"), Executive's rights under the
preceding two sentences shall automatically and completely
terminate, and Executive then shall be entitled only to such
rights to continue participation in medical or other health or
welfare benefit plans then being maintained by Employer as is
specifically provided elsewhere in this Agreement or as may be
required pursuant to applicable law, including, without
limitation, COBRA."
I. The following proviso shall be inserted immediately prior to
the end of the first sentence of the first paragraph of Section
10(b) of the Employment Agreement: "provided, that on or after
March 6, 1999, Employer shall be entitled to terminate
Executive's employment hereunder for any other reason or for no
reason upon 60 days' prior written notice to Executive."
Clause (ii) of the last sentence in the first paragraph of
Section 10(b) of the Employment Agreement shall be replaced in
its entirety by the following new clause (ii): "(ii) for any
other reason or for no reason upon 60 days prior written notice
to Executive."
<PAGE> 5
-5-
J. The following proviso shall be inserted immediately prior to
the end of the first sentence in the first paragraph of
Section 10(c) of the Employment Agreement: " provided, that on
or after March 6, 1999, Executive shall be entitled to
terminate his employment hereunder for any other reason or for
no reason upon 60 days prior written notice to Employer."
Clause (ii) of the last sentence in the first paragraph of
Section 10(c) of the Employment Agreement shall be replaced in
its entirety by the following new clause (ii): "for any other
reason or for no reason upon 60 days prior written notice to
Employer."
K. The final sentence of Section 14 of the Employment Agreement
shall be deleted in its entirety and replaced by the following
sentence: "Subject to applicable law and upon the consent of
the Board of Directors of Employer or the consent of the
Compensation Committee (subject to any required approval of
the Operations Committee) thereof, this Employment Agreement
may be amended, modified and supplemented by written agreement
of Employer and Executive with respect to any of the terms
contained herein."
L. The following new Sections 21 and 22 shall be inserted
immediately following existing Section 20 of the Employment
Agreement:
"21. Post-Employment Consulting Relationship. Upon any
termination of Executive's employment hereunder (other than
pursuant to Section 10(a) hereof or by Employer for Cause or
Permanent Disability pursuant to Section 10(b) hereof),
Employer shall retain Executive for a period of one year
(commencing on the applicable Termination Date), subject to
earlier termination as provided below, to render services as a
consultant to the Company, all on terms and conditions and
otherwise as provided below.
During the term of his services as a consultant to Employer,
Executive shall report to Employer's Chief Executive Officer
and/or President and shall have such duties as such individuals
shall assign to him from time to time; provided, however, that
such duties shall primarily involve the rendering of advice or
views concerning the business, strategic direction and
commercial opportunities of Employer, and shall not require
Executive to devote more than 8 hours in any month, or more
than 16 hours in any calendar quarter, thereto. Executive shall
be entitled to perform such duties at such times and places as
Executive may reasonably select; provided, that upon reasonable
prior notice, Executive shall make himself available for
telephone conferences with appropriate officers, directors,
employees and agents of Employer and shall be present for
meetings (scheduled with reasonable prior notice) at Employer's
principal offices, if requested, not more than 2 day(s) in any
calendar quarter, so long as such
<PAGE> 6
-6-
scheduled meetings do not unreasonably interfere with
Executive's other activities.
As compensation for Executive's service as a consultant
hereunder, Executive shall be compensated at an annual rate of
$60,000, payable $5,000 on the commencement date of his
consultancy, and on each of the subsequent eleven monthly
anniversaries thereof, subject to proration upon termination of
Executive's services as a consultant hereunder prior to the end
of such one year period. Executive shall be responsible for the
full and timely payment of all federal, state, local and other
taxes or similar charges due in connection with Executive's
compensation as a consultant hereunder. Executive may elect to
terminate this consulting relationship at any time upon written
notice to that effect given to Employer; such notice shall be
effective when received, unless a later effective date is
specified therein. Employer shall be entitled to terminate
this consulting relationship only upon (w) Executive's death or
Permanent Disability; (x) Executive being found to have
violated his obligations under Section(s) 8 and/or 9 of this
Employment Agreement; (y) Executive accepting employment with,
or providing a material amount of services to or for the
benefit of, or having any significant ownership interest in
(which shall be deemed to be present only if Executive owns 5%
or more of the outstanding voting capital stock of any publicly
traded issuer or a controlling interest in any private issuer),
any entity whose principal business, directly or indirectly, is
providing mobile wireless communications services in any market
where Employer or its subsidiaries or affiliates is providing
such services; or (z) Executive being found to have materially
breached (and not subsequently cured such breach of) his
obligations under this consulting relationship (the events and
circumstances described in the preceding clauses (y) and (z)
each being a "Material Breach"), by written notice delivered to
Executive to that effect. The procedures and time periods for
terminating (or contesting bases for termination of) this
consulting relationship shall be as nearly as possible
identical to those applicable to a termination of Executive's
employment hereunder, as set forth herein.
The parties hereto acknowledge that the terms of Employer's
Incentive Equity Plan, as currently in effect, would allow
Executive to continue his participation therein, for both
vesting and exercise purposes, during the period of his service
as a consultant to Employer. Notwithstanding the terms of such
Incentive Equity Plan or of any other agreement or
understanding, which are superseded in their entirety hereby,
the parties hereby confirm that: (i) all options that Executive
(or any of his permitted transferees) holds under the Incentive
Equity Plan and that are vested and unexercised as of the
<PAGE> 7
-7-
Termination Date (including any Inducement Options and any
Original Options that vest on an accelerated basis as of the
Termination Date pursuant to the proviso below) shall continue
to be exercisable by him (or such permitted transferees, as
applicable) until the termination of his consulting
relationship hereunder and, as provided by the Incentive Equity
Plan, for 30 days thereafter (or the applicable longer period
in the case of Executive's death or Permanent Disability, all
as provided under the Incentive Equity Plan) and (ii) if the
Termination Date hereunder occurs prior to March 5, 2000,
Executive (and his permitted transferees, as applicable) shall
be entitled to continued or further vesting in any options
granted to Executive under the Incentive Equity Plan that have
not fully vested at or prior to such Termination Date until the
earlier of (A) the termination of Executive's post-employment
consulting relationship with the Company hereunder and (B)
March 5, 2000; provided that if the closing price of a share of
Employer's common stock on the NASDAQ National Market (or such
other exchange or market on which such shares shall be listed
and traded) on the Termination Date is less than $25.00, then
Executive shall be entitled to accelerated vesting of all
Inducement Options and all Original Options that are not vested
as of such Termination Date; and further provided that in the
event of any conflict or inconsistency between the terms of
this Section 21 and those of Section 4(c) hereof in any
circumstances regarding Executive's exercise and/or vesting
rights as to the Inducement Options or the Original Options,
the terms that provide the most favorable treatment to
Executive shall be controlling."
"22. Forgivable Loan. In partial consideration of Executive's
agreement to extend the term of his employment hereunder,
Employer agrees (at Executive's request) to cause a designated
wholly-owned subsidiary of Employer to advance a loan in the
amount of $500,000 to Executive. Such loan shall have a
scheduled term not to exceed three years, shall be unsecured,
shall bear simple interest (payable on each anniversary date of
the original extension of such loan) at an annual rate of 4.75%
and shall provide that the principal thereof, and all accrued
but unpaid interest thereon, shall be forgiven (and deemed
fully and finally discharged) upon the Termination Date of
Executive's employment hereunder. Such loan shall be evidenced
by appropriate documentation to be entered into between
Employer and Executive, and shall be funded by delivery of cash
or wire transfer of funds, as designated by Executive, promptly
following Executive's delivery of executed loan documents to
Employer. Executive shall be solely responsible for, and shall
hold Employer harmless from and against, any federal, state,
local or other income or other tax liability that arises upon
or by reason of the forgiveness of amounts due on or in respect
of such loan."
<PAGE> 8
-8-
The amendments, supplements and other changes to the Employment Agreement
set forth above shall take effect immediately upon your execution of the
enclosed duplicate copy of this letter, and thereafter all references to the
Employment Agreement in the Employment Agreement or any other agreement between
us shall be deemed a reference to the Employment Agreement, as amended by this
letter. Except as specifically set forth herein, the Employment Agreement is
not modified or changed in any respect, and is confirmed by each of us to
continue in full force and effect as amended hereby. The parties also agree
that, at the request of either party made after March 5, 1999, the Employment
Agreement, as amended by this letter, may be restated in its entirety to
incorporate in a single agreement all terms and conditions of the agreement
currently in effect between the parties, but modifying or deleting those
provisions that are no longer operative or relevant to Executive's service as
an employee or a consultant to the Employer after March 5, 1999, and if such a
restated agreement is prepared and signed by each of the parties, such restated
agreement thereafter shall be deemed the Employment Agreement for all of the
purposes noted above.
To signify your agreement with the foregoing, please sign and return the
enclosed duplicate copy of this letter, keeping a fully executed original copy
for your files.
Very truly yours,
NEXTEL COMMUNICATIONS, INC.
By: /s/Thomas J. Sidman
----------------------
Its:Vice President
Agreed:
/s/Daniel F. Akerson
-----------------------------
Daniel F. Akerson
<PAGE> 1
Exhibit 10.15.4
NON-NEGOTIABLE UNSECURED PROMISSORY NOTE
$500,000.00 March 10, 1999
FOR VALUE RECEIVED, Daniel F. Akerson, an individual residing at 1100 Mill
Ridge, McLean, Virginia 22102 ("Executive"), promises to pay to Unrestricted
Subsidiary Funding Company, a Delaware corporation ("USF Co."), or to any
corporation controlled by Nextel Communications, Inc., a Delaware corporation
("NCI") and the parent of USF Co., that is designated by USF Co. (USF Co. or
its designee, the "Company") at its offices located at 1505 Farm Credit Drive,
McLean, Virginia 22102 (or at such other location as the Company may advise
Executive in writing prior to the relevant payment date(s)), the principal sum
of Five Hundred Thousand Dollars ($500,000.00), in lawful money of the United
States, together with simple interest at an annual rate of 4.75%, calculated on
the basis of a 360 day year having twelve equal 30 day months. Accrued
interest shall be payable annually on each March 10 (beginning March 10, 2000)
and the entire principal amount hereof, together with all accrued and unpaid
interest thereon (from and including the most recent interest payment date to
and excluding the date of payment thereof), shall be due and payable in full on
March 10, 2002 (the "Due Date"), unless such amounts shall have been forgiven,
and Executive shall have been discharged from his payment obligations
hereunder, prior to such Due Date as provided below. Executive shall be
entitled to make any prepayment and/or partial payment of any principal and/or
interest amount due under this Note at any time without needing to seek or
obtain the consent of the Company thereto, and the amounts due under this Note,
and accrual of interest thereon, if relevant, shall be appropriately adjusted
to reflect any such prepayment or partial payment, as the case may be.
If Executive's employment by NCI should be terminated prior to the Due
Date for any reason, including, without limitation, voluntarily by Executive,
or by NCI with or without cause, then the entire principal amount outstanding
hereunder as of the time of such termination of employment, and all accrued and
unpaid interest thereon, shall be forgiven completely and unconditionally
(subject to Executive's obligations to satisfy any
<PAGE> 2
tax liability arising from or relating to such forgiveness of amounts due
hereunder, as provided below), automatically and without need of any action on
the part of either Executive or the Company, and thereupon Executive shall be
discharged from all other or further payment obligations hereunder of any type,
character or amount. In consideration of such forgiveness and discharge,
Executive agrees to be solely responsible for, and to hold each of the Company
and NCI harmless from and against, any federal, state, local or other income or
other tax liability that arises upon or by reason of the forgiveness of any
amounts due on or in respect of this Note.
This Note is an unsecured obligation of Executive, is non-negotiable (but
shall be assignable by USF Co., without the need to seek or obtain Executive's
consent, to any entity designated by USF Co. as the Company), shall be binding
on and inure to the benefit of Executive, his heirs, administrators, executors
and legatees, and shall be binding on and inure to the benefit of the Company
and its successors.
Executive hereby waives presentment for payment, notice of dishonor,
protest and notice of protest. This Note is executed by Executive in, and
shall be subject to and governed by the internal substantive laws (without
regard to principles of conflicts or choices of laws thereof) of, the
Commonwealth of Virginia.
IN WITNESS WHEREOF, Executive has executed and delivered, and the Company
has acknowledged and delivered, this Note on the date first above written.
/s/ Daniel F. Akerson
----------------------------
Daniel F. Akerson
Acknowledged:
UNRESTRICTED SUBSIDIARY FUNDING COMPANY
By: /s/ Thomas J. Sidman
--------------------------------
Thomas J. Sidman, Vice President
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF NEXTEL COMMUNICATIONS, INC.
(as of March 1, 1999)
Corporation Jurisdiction of Incorporation
<TABLE>
<S> <C>
Airfone Holdings, Inc. DE
Air-fone Participacoes e Empreendimentos S/C Ltda. Brazil
Arrendadora de Equipos Telecommunicaciones S.A. de C.V. Mexico
Art Consult Global International S.A. British Virgin Is.
ATG-Telecomunicacoes e Comercio Ltda. Brazil
Butler Gorge International Corp. British Virgin Is.
Car-Tel Telefonica Movel S.A. de C.V. Ltda. Brazil
CellCall, Inc. DE
Comercial Telecar Ltda. Brazil
Comercial Teleservice Ltda. Brazil
Comercializadora Protel S.A. de C.V. Mexico
Comunicacion Integral San Luis S.A. de C.V. Mexico
Comunicaciones Nextel de Mexico, S.A. de C.V Mexico
Dial Call Midwest, Inc. DE
Domestic USF Corp. DE
FCI 900, Inc. DE
Fonotransportes Nacionales S.A. de C.V. Mexico
Fort Worth Trunked Radio Limited Partnership TX
Gamboa Holdings, Inc. Philippines
Infocom Communications Network, Inc. Philippines
J-Com Co., Ltd. Japan
LMP Consultoria e Representacoes Ltda. Brazil
Master-Tec Industria e Comercio de Productos Electronicos
Ltda. Brazil
McCaw International (Brazil), Ltd. VA
MCS Radio Telefonia, Ltda. Brazil
Multifon S.A. de C.V. Mexico
Nextel S.A. Brazil
Nextel 220 License Acquisition Corp. DE
Nextel Argentina, S.R.L Argentina
Nextel Aviation, Inc. DE
Nextel of California, Inc. DE
Nextel Communications of the Mid-Atlantic, Inc. DE
Nextel Finance Company DE
Nextel International (Argentina) LLC Cayman Is.
Nextel International (Argentina), Ltd. Cayman Is.
Nextel International (Delaware), Ltd. DE
Nextel International (Holdings), Ltd. Cayman Is.
Nextel International, Inc. WA
Nextel International (Indonesia) LLC Cayman Is.
Nextel International Investment Company DE
Nextel International (Japan), Ltd. DE
Nextel International (Mexico), Ltd. DE
Nextel International (Peru) LLC Cayman Is.
Nextel International (Philippines) LLC Cayman Is.
Nextel International (Services), Ltd. DE
Nextel License Acquisition Corp. DE
Nextel License Holdings 1, Inc. DE
Nextel License Holdings 2, Inc. DE
Nextel License Holdings 3, Inc. DE
Nextel License Holdings 4, Inc. DE
Nextel de Mexico S.A. de C.V. Mexico
Nextel of New York, Inc. DE
Nextel Operations, Inc. DE
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
Nextel del Peru, S.A. Peru
Nextel Socal, Inc. CA
Nextel South Corp. GA
Nextel Spectrum Acqusition Corp. DE
Nextel Systems Corp. DE
Nextel Telecomunicacoes Ltda. Brazil
Nextel of Texas, Inc. TX
Nextel West Corp. DE
Nextel WIP Corp. DE
Nextel WIP License Corp. DE
NXLD Company DE
Pittencrieff Communications, Inc. DE
Promobile Telecomunicacoes Ltda. Brazil
RadioCall Service and Systems, Inc. CA
Radiophone S.A. de C.V. Mexico
Radio Telecomunicacoes do Brasil Ltda. Brazil
Safety Net, Inc. DE
Servicios de Radiocomunicacion Movil de Mexico S.A. de
C.V. Mexico
Servicios Protel S.A. de C.V. Mexico
Shanghai CCT - McCaw Telecommunications Systems Co., Peoples Republic of
Ltd. China
Shanghai GSM Project Peoples Republic of
China
Sistemas de Comunicaciones Tronicales S.A. de C.V. Mexico
SOW Comercio e Servicos de Radiofonia Movel Ltda. Brazil
Spectrum Resources of the Northeast, Inc. DE
SRI, Inc. VA
Telecomunicacoes Brastel, S.A. de C.V., Ltda. Brazil
Telecomunicaciones Globales S.A. de C.V. Mexico
Telemobile Telecomunicacoes Ltda. Brazil
Telemovel Servicos Ltda. Brazil
Teletransportes Nacionales, S.A. de C.V. Mexico
Top Mega Enterprises Limited Hong Kong
Tower Asset Sub, Inc. DE
Tower Merger Vehicle, Inc. DE
Tower Parent Corp. DE
Trunking do Brasil Servicos de Telecomunicacoes Ltda. Brazil
Trunkline Telecomunicacoes e Servicos Ltda. Brazil
Unrestricted Subscriber Equipment Leasing Company, Inc. DE
Unrestricted Subsidiary Funding Company DE
Via Radio-1 Telecomunicacoes Ltda. Brazil
Via Radio Administacao e Participacoes Ltda. Brazil
</TABLE>
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Post-Effective Amendment No. 1
to Registration Statement No. 33-91716 on Form S-8 to Form S-4 of Nextel
Communications, Inc., Post-Effective Amendment No. 1 to Registration Statement
No. 333-1290 of Nextel Communications, Inc. on Form S-4,Post Effective
Amendment No. 1 to Registration Statement No. 33-80021 on Form S-8 to Form S-4
of Nextel Communications, Inc., Post-Effective Amendment No. 3 to Registration
Statement No. 33-80021 on Form S-4 to Form S-3 of Nextel Communications, Inc.,
Registration Statement No. 333-06521 of Nextel Communications, Inc. on Form S-8,
Registration Statement No. 333-06523 of Nextel Communications, Inc. on Form S-8,
Post-Effective Amendment No. 1 to Registration Statement No. 333-26369 on Form
S-8 to Form S-4 of Nextel Communications, Inc., Registration Statement No.
333-42537 of Nextel Communications, Inc. on Form S-8, Registration Statement No.
333-53429 of Nextel Communications, Inc. on Form S-8 of our report dated
February 22, 1999, appearing in this Annual Report on Form 10-K of Nextel
Communications, Inc. for the year ended December 31, 1998.
DELOITTE & TOUCHE LLP
McLean, Virginia
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet at December 31, 1998 and the Consolidated Statement
of Operations for the Year Ended December 31, 1998 and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 321,379
<SECURITIES> 0
<RECEIVABLES> 505,994
<ALLOWANCES> 62,547
<INVENTORY> 62,639
<CURRENT-ASSETS> 1,052,712
<PP&E> 6,117,091
<DEPRECIATION> 1,202,066
<TOTAL-ASSETS> 11,573,361
<CURRENT-LIABILITIES> 1,182,226
<BONDS> 7,710,373
<COMMON> 290
1,578,252
290,545
<OTHER-SE> (61,333)
<TOTAL-LIABILITY-AND-EQUITY> 11,573,361
<SALES> 0
<TOTAL-REVENUES> 1,846,758
<CGS> 0
<TOTAL-COSTS> 516,393
<OTHER-EXPENSES> 832,299
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 656,080
<INCOME-PRETAX> (1,710,775)
<INCOME-TAX> (191,912)
<INCOME-CONTINUING> (1,518,863)
<DISCONTINUED> 0
<EXTRAORDINARY> (133,225)
<CHANGES> 0
<NET-INCOME> (1,652,088)
<EPS-PRIMARY> (6.46)
<EPS-DILUTED> (6.46)
</TABLE>
