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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996,
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-19656
NEXTEL COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3939651
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1505 FARM CREDIT DRIVE, MCLEAN, VA 22102
(Address of principal executive offices) (Zip Code)
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 1, 1997, the aggregate market
value of the voting stock held by nonaffiliates of the registrant was
$2,218,713,158.
On March 1, 1997 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
225,230,943 (including 1,610,868 shares held in treasury) 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 15, 1997 are incorporated in
Part III, Items 10, 11, 12 and 13.
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NEXTEL COMMUNICATIONS, INC.
PART I
ITEM 1. BUSINESS
INTRODUCTION
On July 28, 1995, NEXTEL Communications, Inc., a corporation organized
under the laws of the State of Delaware in 1987 ("Old Nextel"), was 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" or the "Company"), effective
upon the consummation of the Motorola Transaction. References herein to Nextel
or the Company 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 the Company or to Nextel are intended to
include Nextel Communications, Inc. and its consolidated subsidiaries.
Information contained herein gives effect to the acquisition of
approximately 1,220,000 shares of the Company's Class A Common Stock, par value
$.001 per share (the "Class A Common Stock"), by Digital Radio L.L.C. (the
"McCaw Investor") on April 5, 1995, an additional acquisition of 8,163,265
shares of the Company's Class A Convertible Redeemable Preferred Stock, par
value $.01 per share (the "Class A Preferred Stock") and 82 shares of the
Company's Class B Convertible Preferred Stock, par value $.01 per share (the
"Class B Preferred Stock") by the McCaw Investor and the consummation of related
transactions on July 28, 1995 (the "McCaw Transaction"), the merger of OneComm
Corporation ("OneComm") with and into Nextel on July 28, 1995 (the "OneComm
Transaction"), the consummation of the Motorola Transaction on July 28, 1995,
the merger of a subsidiary of Nextel with American Mobile Systems Incorporated
("AMS") on July 31, 1995 (the "AMS Transaction"), and the merger of Dial Page,
Inc. ("Dial Page") with and into Nextel on January 30, 1996 (the "Dial Page
Transaction").
GENERAL
Nextel's business consists principally of providing a wide array of digital
and analog wireless communications services to its customers in the United
States, in each case utilizing frequencies licensed to its subsidiaries by the
Federal Communications Commission ("FCC"). Nextel provides a differentiated
package of integrated digital wireless communications services under the Nextel
brand name to customers of the various networks constructed and operated by
Nextel's subsidiaries in and around major metropolitan population centers
throughout the country. Collectively, the Company's operations constitute one of
the largest integrated wireless communications networks utilizing a single
digital transmission technology currently offering commercial service in the
United States. Through its digital and analog wireless communications networks,
Nextel is the leading provider of specialized mobile radio ("SMR") wireless
communications services in nearly all 48 states in the continental United States
and in Hawaii. Nextel has significant SMR spectrum holdings in and around
virtually every major business and population center in the country, including
all of the top 50 metropolitan market areas in the United States.
Nextel's operating revenues primarily arise from its digital and analog
wireless communications businesses in the United States, particularly the mobile
telephone service and two-way radio service and, to a lesser extent, from sales
and maintenance of related equipment. Nextel's business plans and efforts are to
a large extent directed toward replacing the remaining traditional analog SMR
systems that it currently operates with advanced mobile communications systems
employing digital technology with a multi-site configuration permitting
frequency reuse ("Digital Mobile networks"). A customer using Nextel's Digital
Mobile network currently is able to access mobile telephone services, two-way
dispatch, paging and alphanumeric short-messaging service, and in the future is
expected to be able to access data transmission. The Company is implementing its
Digital Mobile networks utilizing digital technology developed by Motorola (such
technology is referred to as the "integrated Digital Enhanced Network" or
"iDEN"). As of December 31, 1996,
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Nextel's Digital Mobile networks were operating in major metropolitan market
areas throughout the United States that collectively accounted for approximately
50% of the total United States population.
Prior to the second quarter of 1996, the Company implemented its Digital
Mobile networks in its market areas using Motorola's first generation iDEN
technology. During that time frame, the Company encountered certain technology
and system performance issues relating primarily to the voice transmission
quality of the mobile telephone service. In response to these issues, the
Company and Motorola took action on several fronts to address system performance
issues in general, and voice transmission quality concerns in particular. See
"Nextel's Digital Mobile Networks -- Experience with First Generation iDEN
Systems Implementation." Additionally, the Company, together with Motorola, in
1995 began pursuing a program directed toward the development and deployment of
modifications to the first generation iDEN technology platform, which
modifications were targeted specifically at improving the voice transmission
quality of the mobile telephone service. The Company commenced the full-scale
commercial launch of its first Digital Mobile networks incorporating the
modified iDEN technology (referred to herein as "Reconfigured iDEN") in the
Chicago metropolitan market area late in the third quarter of 1996.
Subsequently, Nextel commenced full-scale commercial launches of the
Reconfigured iDEN Digital Mobile networks in the Atlanta, Boston, Denver,
Detroit and Las Vegas metropolitan market areas and in the Northern California
market area, in each case accompanied by an aggressive, regionally focused
marketing campaign.
Recently, Nextel announced the introduction of its national digital network
and indicated that it will not charge roaming fees for its customers traveling
anywhere on the national digital network. Nextel's national digital network,
which covers major metropolitan areas representing approximately 50% of the
United States population, will enable Nextel's mobile telephone customers to
"roam" throughout the markets covered by the network at the same airtime rate
charged in their home markets. The Nextel national digital network provides the
same mobile telephone functionality and related features offered to customers in
their home markets and eliminates the complex dialing procedures, access fees
and higher per-minute airtime rates often encountered by "roaming" customers of
cellular providers. Additionally, the Company recently announced a new billing
policy, pursuant to which Nextel will bill its mobile telephone service
customers based on the actual number of seconds of airtime used after the first
minute, in contrast to the cellular industry practice of rounding all calls up
to the next minute.
Over the three years ended December 31, 1996, the number of subscriber
units in service on Nextel's Digital Mobile network has increased substantially,
reflecting acquisitions, the commencement of Digital Mobile network service in
certain markets and increased sales in markets in which Digital Mobile network
services are provided. As a result, the number of subscriber units in service on
Nextel's Digital Mobile network increased from 13,500 at December 31, 1994, to
85,000 at December 31, 1995 and to 300,300 at December 31, 1996. See also
"Nextel's Existing Analog SMR Operations." Nextel's business and marketing
strategy for its Digital Mobile networks continues to be based on, and reflect,
a principal focus on multi-service business users in its markets with Digital
Mobile networks.
During 1996 and into early 1997, Nextel also significantly expanded its
operations and investments involving wireless communications service providers
outside the United States, which are conducted under or are coordinated by or
through McCaw International, Ltd. ("McCaw International"), an indirect, wholly
owned subsidiary of Nextel. With the exception of the equity interests held by
Nextel and by McCaw International in Clearnet Communications, Inc. ("Clearnet"),
a major provider of analog and digital SMR wireless communications services
throughout Canada, and the holder of one of the two nationwide personal
communications services ("PCS") licenses awarded in Canada, McCaw
International's subsidiaries or other entities in which McCaw International
holds equity or equivalent interests own and operate wireless communications
systems in Latin America and Asia. McCaw International's operating companies
currently provide a variety of analog or digital wireless communications
services (including analog SMR dispatch and interconnect, paging and
alphanumeric short-messaging and digital mobile telephone services) in certain
major metropolitan areas in Argentina, Brazil, Mexico, the Philippines and
Shanghai, China.
Nextel's principal executive and administrative facility is located at 1505
Farm Credit Drive, McLean, Virginia 22102, and its telephone number at that
location is (703) 394-3000.
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BUSINESS STRATEGY
Nextel's principal business objective is to become a leading provider of
wireless communications services in major markets throughout the United States
and to become a major participant in the global wireless communications business
by making selective international investments in wireless communications
services companies in emerging markets with strong long-term economic growth
prospects. To accomplish its objective in the United States, the Company intends
to capitalize upon the opportunity made possible by the February 13, 1991
unanimous FCC decision approving the Company's proposal to create Digital Mobile
networks within its six then-existing markets. The Company's initial strategy
was to consolidate the fragmented SMR industry in the largest markets in the
United States through the acquisition of SMR systems that had achieved minimum
FCC loading requirements so as to permit aggregation of frequencies in a single
market. See "-- Regulation." The Company has also acquired spectrum through
mergers and acquisitions as well as by obtaining licenses from the FCC. More
recently, the Company's efforts have focused on the development and deployment
of Digital Mobile networks to replace its traditional analog SMR networks.
Customers of the Company's Digital Mobile networks currently are able to access
mobile telephone, two-way dispatch, paging and alphanumeric short-messaging
services using a single, multi-function subscriber unit. In the future, the
Digital Mobile network service offerings also are expected to include data
transmission capabilities.
The Company currently is considering adopting and implementing a newly
developed revised business plan (the "Revised Business Plan"), which would
involve a more accelerated and extensive deployment during 1997 and 1998 of the
Reconfigured iDEN technology platform throughout the Company's existing and
contemplated Digital Mobile networks (including primary connecting routes
between affected markets) in the United States. The Company anticipates that
deployment of Digital Mobile networks utilizing the Reconfigured iDEN technology
platform will enable it to provide potential customers in its markets with an
integrated package of wireless communications services competitive with the
service packages being offered currently or expected to be offered by other
providers of wireless communications services in those markets. The Revised
Business Plan does not contemplate a significant increase in the population
coverage to be achieved by the Digital Mobile networks in operation at the end
of 1998, as compared to the population coverage targets reflected in its current
business plan (the "Existing Business Plan"). However, there are significant
areas of difference between the Existing Business Plan and the Revised Business
Plan in terms of the geographical coverage objectives, the perceived customer
demands for and utilization of the relevant wireless services and the
positioning of the Company's products and services relative to those of
competing wireless communications service providers. The Company believes that
the implementation of its Revised Business Plan will better position Nextel both
to achieve its strategic objectives and to prepare for emerging competition in
the wireless communications industry, especially from certain current operators
that, on their existing cellular frequencies or on other frequencies acquired by
such operators or their affiliates in the recently concluded PCS spectrum
auctions, are in the process of converting their wireless communications systems
to digital technology formats and are moving to provide "nationwide coverage" on
the resulting systems. The Company believes that a significant strategic
advantage may exist in being "first to market," particularly in comparison to
the new "entrepreneur block" PCS licensees and other existing or potential
regional wireless communications service providers, which may encounter
significant financial and other challenges in replicating or overtaking the
Company's industry position once the Company successfully concludes its
nationwide Digital Mobile network build-out plan and develops a sufficient
customer base in its markets. See "-- Revised Business Plan."
Although the Company already has taken a number of significant steps in
anticipation of implementing the Revised Business Plan, and further actions
currently are underway to reach that objective, several of the actions that must
be taken to enable the Company to implement the Revised Business Plan are
dependent on certain actions by or responses from third parties, which as yet
have not been secured. See "-- Revised Business Plan" and "Risk
Factors -- Nextel to Require Additional Financing" and "-- Forward-Looking
Statements."
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CURRENT WIRELESS COMMUNICATIONS INDUSTRY
Today's wireless communications industry was created by the FCC in 1970 to
provide high-quality, high-capacity communications services to vehicle-mounted
and hand-held portable telephones and other two-way radio units. Toward this
end, 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. The FCC
allocated initially 40 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 30 MHz for private radio services,
including SMR. The FCC later increased the allocations to 50 MHz for cellular
service and 46 MHz for private radio services due to capacity constraints. The
remaining 19 MHz were 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
approximately 44,000,000 mobile telephone units (consisting of analog cellular,
digital cellular and PCS units) in service at December 31, 1996. The first SMR
systems became operational in 1974, and SMR units in service had grown to
approximately 2,300,000 by December 31, 1996. The number of other private radio
users is estimated to be approximately 16,500,000 as of December 31, 1996.
SMR AND CELLULAR/PCS TELEPHONY
The cellular telephone industry has been a regulated duopoly. The FCC
awarded only two licenses to provide cellular service in the service area of any
given cellular MSA or RSA. Additionally, the FCC has allocated 120 MHz 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
networks. The FCC has awarded three 30 MHz and three 10 MHz 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 the amount of spectrum assigned to a single SMR licensee is less than
that assigned to cellular and PCS licensees. See "-- Regulation." Within the
limitations of available spectrum and technology, SMR operators are authorized
to provide mobile communications services to business and individual users,
including mobile telephone, two-way dispatch, paging and mobile data services.
In the past, however, SMR operators have generally not been able to provide
mobile telephone service competitive with that provided by cellular operators
because of various factors affecting SMR system capacity and quality. The
primary factors affecting capacity include: the smaller portion of the radio
spectrum allocated to SMR; regulations and procedures that initially served to
spread ownership of SMR licenses among a large number of operators in each
market, thereby further limiting the amount of SMR spectrum available to any
particular operator, and traditional SMR technology, which employs analog
transmission and a single site, high-power transmitter configuration, thus
precluding the use of any given SMR frequency by more than one caller at a time
within a given licensed service area. Partially as a result of these capacity
constraints, SMR operators traditionally have emphasized two-way dispatch
service, which involves shorter duration communications than mobile telephone
service and places less demand on system capacity.
The traditional analog SMR market, therefore, has been oriented largely to
customers such as contractors, service companies and delivery services that have
significant field operations and need to provide their personnel with the
ability to communicate directly with one another, either on a one-to-one or
one-to-many basis. As a result of the foregoing, the broader market of wireless
communications users that are primarily interested in mobile telephone service
has to date been served only on a limited basis by the traditional analog SMR
operators.
NEXTEL'S DIGITAL MOBILE NETWORKS
The Company's business objective in constructing its Digital Mobile
networks is to enable the Company to offer high-capacity, high-quality, advanced
wireless communications services to customers in its markets. A customer using
Nextel's Digital Mobile network is able to access mobile telephone services,
two-way dispatch,
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paging and alphanumeric short-messaging services using a single, multi-function
subscriber unit. In the future, the Digital Mobile network service offerings
also are expected to include data transmission capabilities. As of December 31,
1996, Nextel's Digital Mobile networks were activated in major metropolitan
market areas throughout the United States that collectively accounted for
approximately 50% of the total United States population. As of December 31,
1996, approximately 300,300 subscriber units were operating on Nextel's Digital
Mobile networks. Nextel's Existing Business Plan and its Revised Business Plan,
both of which are discussed herein, are premised on several key assumptions,
including the availability of sufficient funding, continued achievement of
satisfactory system performance standards and maintenance of targeted service
and subscriber equipment pricing level. Each of the Existing Business Plan and
the Revised Business Plan contemplate the deployment of the Reconfigured iDEN
technology platform in the Digital Mobile networks constructed or to be
constructed in Nextel's major metropolitan market areas. Under both plans, by
the end of 1998, the Company expects its Digital Mobile networks will be
available in areas covering approximately 85% of the United States population.
The Existing Business Plan and the Revised Business Plan, however, differ in
certain significant areas, including the speed and scope of such deployment. See
"Risk Factors -- Nextel to Require Additional Financing" and "-- Forward-Looking
Statements."
Other SMR system operators, including Clearnet and Corporacion Mobilcom
S.A. de C.V. ("Mobilcom"), which operate in Canada and Mexico, respectively,
have indicated that they plan to employ technology compatible with the iDEN
technology used by Nextel. Nextel owns minority equity interests in each of
Clearnet and Mobilcom (and has certain rights to control or to influence, in
particular circumstances and contexts, Mobilcom's policies and operations) and
has entered into interoperability agreements with Clearnet and Mobilcom to
provide, among other things, for coordination of customer identification and
validation necessary to facilitate universal service in North America.
CONVERSION TO DIGITAL MOBILE NETWORKS. In order to activate Digital Mobile
network service in a market, the Company must have available a certain 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
commencement of commercial service, the Company intends to sell the Digital
Mobile network services to potential customers in the relevant markets,
including certain of its existing SMR analog system customers, and to convert
800 MHz frequencies to the Digital Mobile networks as such customers migrate
("migration"). The Company has commenced its channel recovery and migration
efforts for existing customers in each of the markets in which its Digital
Mobile networks have been activated. The Company expects that only a portion of
its SMR channels in each market will be needed for the initial phase of the
Digital Mobile network build-out. Accordingly, the Company expects to have the
opportunity to move the affected customers of its analog SMR networks to the
Digital Mobile networks gradually to avoid any significant disruption of service
to customers. See "Risk Factors -- Risks of Implementation of Digital Mobile
Networks" and "-- Forward-Looking Statements."
DIGITAL MOBILE NETWORK SERVICES. The Company is designing and constructing
its Digital Mobile networks to support a variety of service offerings, including
mobile telephone, two-way dispatch, paging and short-messaging services and, in
the future, data transmission. The Company's Digital Mobile networks will
provide customers desiring mobile telephone service with access to features
competitive with those offered by 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 dispatch functions, the Digital
Mobile networks have 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, Digital Mobile networks
have been designed to offer customers additional features, such as voicemail,
call hold, call waiting, no-answer or busy-signal transfer, and call forwarding.
The Digital Mobile network subscriber units, including both mobile models and
portable models providing two-way dispatch service only, mobile telephone
service only and both two-way dispatch and mobile telephone services, will also
support modems for use in data transmission. See "-- Marketing."
DIGITAL MOBILE NETWORK TECHNOLOGY. The Digital Mobile networks, as
deployed by the Company, combine an advanced digital technology developed and
designed by Motorola, referred to as "iDEN," with a
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low-power, multi-site transmitter/receiver configuration that permits frequency
reuse. The iDEN technology being deployed by Nextel shares many common
components with the Global System for Mobile Communications ("GSM") technology
that has been established as the digital cellular communications standard in
Europe and is being deployed by certain PCS operators in the United States. The
design of the Company's existing and proposed Digital Mobile networks currently
is premised on dividing a service area into multiple sites having a typical
coverage area of less than one mile 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 calls from site to site as a subscriber
travels, coordinates calls to and from a subscriber unit and connects calls to
the public switched telephone network, in the case of mobile telephone calls. In
the case of two-way dispatch, the switching center 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. ("Northern
Telecom") has supplied the mobile telephone switches for the Digital Mobile
networks.
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 known as Time Division Multiple Access
("TDMA") digital transmission technology, a version of which, known as
"three-time slot TDMA," has been deployed by AT&T Wireless Services, Inc. ("AT&T
Wireless," formerly McCaw Cellular Communications, Inc. ("McCaw Cellular")), a
subsidiary of AT&T, and by Southwestern Bell Mobile Systems in certain of their
cellular system markets, and is expected to be deployed by certain other
cellular operators. The second principal format is known as Code Division
Multiple Access ("CDMA") digital transmission technology, which has been
deployed by PrimeCo Personal Communications, Bell Atlantic/Nynex Mobile Services
and Sprint PCS in certain of their PCS markets and is expected to be deployed by
certain other cellular and other PCS operators. The third principal format,
known as GSM-PCS, is an updated, up-banded, PCS-adapted version of the
TDMA-based digital technology format that has become the standard for digital
cellular technology in Europe. GSM-PCS has been deployed by American Personal
Communications, a subsidiary of Sprint Spectrum, L.P. in its Washington,
D.C./Baltimore metropolitan market and Bell South in certain of its PCS markets,
and is expected to be deployed by certain other 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. The Motorola proprietary first generation iDEN
technology originally incorporated in Nextel's Digital Mobile networks is known
as "six-time slot TDMA." Although based on the TDMA technology format, this
first generation iDEN technology 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. Additionally, unlike the three-time slot TDMA technology
format being utilized for the mobile telephone function in the Reconfigured iDEN
technology platform or the three-time slot TDMA technology format being utilized
by certain cellular providers, the first generation iDEN technology, as well as
the "six-time slot TDMA" technology utilized for the two-way dispatch function
in the Reconfigured iDEN technology platform, can carry up to six voice and/or
control paths per channel.
The implementation of Digital Mobile network design and technology
increases significantly the capacity of the Company's existing SMR channels.
This increase in capacity is accomplished in two ways. First, each channel is
capable of carrying up to six voice and/or control paths by employing the
six-time slot TDMA digital technology or 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. By
using the Reconfigured iDEN technology employing six time slots per channel for
two-way dispatch service rather than analog transmission, the Company should
achieve an approximate six times improvement
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in channel utilization capacity. The Reconfigured iDEN technology, however, uses
three-time slots per channel for the mobile telephone service, resulting in a
reduction in capacity for mobile telephone service compared to the first
generation iDEN technology.
The second means of increasing capacity is based on employing a system
design in use in the cellular industry that reuses each channel many times
throughout the market area. The ability to reuse channels results from placing
transmitters at low elevation sites and restricting the power output to not more
than 100 watts effective radiated power (which creates a service area of less
than one mile to thirty miles, depending on the terrain and the power setting).
The transmitters are controlled by the switching center. 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 spectrum more efficiently. Efficient utilization
of spectrum is an important objective generally because less spectrum is
available in the SMR band than is or may be licensed to each cellular and
certain PCS operators in each market.
CUSTOMER ACCEPTANCE CONSIDERATIONS. Although Nextel believes that TDMA
technology, on balance, is superior to analog technology that is used in
traditional SMR systems, the use of digital technology in general, and the
six-time slot TDMA version of first generation iDEN in particular, as each is
currently deployed, involves certain performance trade-offs, for example, in
various characteristics affecting voice quality and fidelity. In general, as the
relevant technologies are currently deployed, digital voice transmission
produces a distinguishably different set of sound characteristics than analog
voice transmission (whether SMR or cellular). The difference results, in part,
from the fact that digital voice transmission requires the digital encoding and
decoding of the voice communication. Hence, the six-time slot TDMA version of
first generation iDEN, the three time-slot version of Reconfigured iDEN and
other digital cellular voice transmissions, as currently deployed, each sound
different from traditional analog cellular and SMR voice transmissions. These
trade-offs may have an effect on customer acceptance of iDEN technology and the
services offered by Nextel. See "Risk Factors -- Implementation of Digital
Mobile Networks Subject to Risks of Developing Technology."
EXPERIENCE WITH FIRST GENERATION iDEN SYSTEMS IMPLEMENTATION. In late
August of 1993, the Company initiated limited commercial service on the first of
its Digital Mobile networks to be constructed employing first generation iDEN
technology, which was located in greater Los Angeles. The Company continued
implementing Digital Mobile networks in its market areas using Motorola's first
generation iDEN technology prior to the second quarter of 1996. During that time
frame, the Company encountered certain technology and system performance issues
with respect to system reliability (the percentage of time the system is
operating), system access (how often a user can gain access to the system) and
various characteristics affecting voice transmission quality of mobile telephone
services utilizing the Company's Digital Mobile networks. Nextel provided
discounts and gave credits to customers in an effort to foster satisfactory
customer relations and delayed both its planned deployment of its Digital Mobile
networks and commencement of aggressive product and service marketing efforts
pending resolution of such system performance and voice quality issues. During
this period Nextel and Motorola also took actions to address system performance
issues in general, and voice transmission quality concerns in particular. These
actions consisted of efforts to enhance the performance of the first generation
iDEN networks in a number of areas that were believed to adversely affect system
performance, perceived voice transmission quality and customer satisfaction, and
included measures as diverse as improvements in system infrastructure and
subscriber equipment design and interaction, adjustments in cell site locations
and in radio frequency planning, development of enhanced network load and
traffic management and control systems, and development and deployment of more
sophisticated diagnostic and error correction software. These and other
measures, most of which can be categorized as systems optimization, are expected
to be ongoing activities connected with the Company's operation of its Digital
Mobile networks. Moreover, the Company expects that systems optimization,
software loading and planned maintenance activities will be ongoing components
of its operation of the Digital Mobile networks that will periodically require
the scheduled turndown of selected subsystems in the Company's Digital Mobile
networks during periods of very low system traffic, typically at night or on
weekend days. See "Risk Factors -- Forward-Looking Statements."
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Nextel's objectives in carrying out the initial phase of system development
and technology enhancement were to achieve satisfactory performance levels in
the areas of systems reliability and systems access. Nextel believes that its
existing Digital Mobile networks (including both those utilizing the
Reconfigured iDEN technology and those continuing to use the first generation
iDEN technology), as operated at December 31, 1996, were demonstrating
acceptable performance levels in these areas. Nextel also believes that the
successful development and national deployment throughout Nextel's Digital
Mobile networks of the Reconfigured iDEN technology, with its accompanying
improvements in the voice quality of the mobile telephone service provided on
Nextel's Digital Mobile networks, should enable Nextel to aggressively market
such services as part of a competitive wireless communications services
alternative to existing cellular telephone service in its markets. See "Risk
Factors -- Implementation of Digital Mobile Networks Subject to Risks of
Developing Technology" and "-- Forward-Looking Statements."
RECONFIGURED iDEN DEVELOPMENT AND DEPLOYMENT. The principal objective of
the Reconfigured iDEN development and deployment efforts has been to achieve
significant improvements in voice transmission quality for the mobile telephone
service provided on Nextel's Digital Mobile networks. These improvements result
principally from two significant differences between the first generation iDEN
and the Reconfigured iDEN technology platforms. First, the Reconfigured iDEN
technology (for the mobile telephone function) employs a higher "bit rate"
vocoder than is utilized (for both the two-way dispatch and the mobile telephone
functions) in Nextel's first generation iDEN subscriber units. Second, fewer
time slots per channel are used for the mobile telephone function in the
Reconfigured iDEN technology than the six time slots that are used for all voice
transmission functions in Nextel's first generation iDEN Digital Mobile
networks.
Generally, a vocoder (the component in the subscriber unit that digitally
encodes and decodes voice transmissions) operating at a higher "bit rate" will
be capable of producing a better audio voice quality than a vocoder operating at
a lower "bit rate." Additionally, the use of fewer time slots per channel means
that greater frequency bandwidth is devoted to mobile telephone voice
transmissions in the Reconfigured iDEN technology format than is the case in
Nextel's first generation iDEN Digital Mobile networks. Again, generally, the
greater the bandwidth devoted to a digital voice transmission the better the
resulting audio quality of that transmission. This reduction in time slots per
channel, however, results in a less efficient use of Nextel's SMR spectrum
(compared to six-time slot TDMA) for mobile telephone services. Moreover, such
reduction in time slots per channel may cause an increase in the amount of
system infrastructure equipment required to avoid a reduction in system capacity
resulting in increased capital expenditures. See Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Future Capital Needs and Resources."
Other enhancements to the iDEN technology also have been developed in
connection or contemporaneously with the development process of the Reconfigured
iDEN technology, such as the development of more sophisticated and effective
forward error correction algorithms, better voice sampling techniques and
related software improvements. Such other enhancements also are expected to
contribute positively to the perceived audio quality of voice transmissions on
the Digital Mobile networks. Further, other factors that also may raise the
level of customer satisfaction with overall system performance, such as
adjustments to Digital Mobile network design and layout, are a continuing part
of the ongoing process of system development and technology optimization. The
pursuit of activities relating to the Reconfigured iDEN technology, however, is
distinct from, and largely independent of, such ongoing system development and
technology optimization activities on the part of representatives of each of
Nextel and Motorola that also are designed, in part, to produce improvements in
the quality of voice transmissions on the Digital Mobile networks. See "Risk
Factors -- Implementation of Digital Mobile Networks Subject to Risks of
Developing Technology."
TECHNOLOGY COMMITMENTS. Pursuant to the equipment purchase agreements
between Nextel and Motorola first entered into in 1991, as subsequently amended
by, among others, the amendment entered into in connection with the Motorola
Transaction (the "Prior Equipment Agreement Amendment") and by the Second
Equipment Agreement Amendment entered into in connection with the McCaw
Transaction (the "Second Equipment Agreement Amendment"), Motorola provides the
iDEN infrastructure and subscriber handset equipment to Nextel throughout its
markets (such equipment purchase agreements, as amended, being referred to
herein as the "Equipment Purchase Agreements").
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The Company expects that it will need to rely on Motorola for the
manufacture of a substantial portion of the equipment necessary to construct its
Digital Mobile networks for the foreseeable future. The Equipment Purchase
Agreements include a commitment from Nextel to purchase from Motorola a
significant amount of system infrastructure equipment. Nextel has, among other
things, agreed (subject to certain conditions) to purchase and install iDEN
system infrastructure equipment during the four-year and six-year periods
beginning on August 4, 1994 sufficient to cover 70% and 85%, respectively, of
the United States population. In addition, subject to the applicable terms and
conditions under the Second Equipment Agreement Amendment, Nextel has agreed to
deploy Reconfigured 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. Such commitments are in addition to
amounts purchased from Motorola or for which Nextel, OneComm or Dial Page had
placed orders with Motorola prior to August 4, 1994, which orders, in the case
of OneComm and Dial Page, have become obligations of Nextel. To implement the
Existing Business Plan, which is based on Nextel's Digital Mobile networks
system build-out plan that contemplates deployment of the Reconfigured iDEN
technology in most of the major United States metropolitan market areas where
the Company's Digital Mobile networks are scheduled to be operational by the end
of 1998, Nextel estimates that an aggregate of approximately $1.0 billion in
infrastructure and other system capital costs would be incurred during 1997 and
1998. Nextel estimates that adoption and implementation of the more accelerated
and extensive Digital Mobile networks system build-out plan and Reconfigured
iDEN deployment contemplated in the Revised Business Plan would be likely to
increase total infrastructure and other system capital costs by at least
$450,000,000 during the same two-year period. In either case, the actual costs
incurred could be higher or lower than such cost estimates, due to (among other
factors) the uncertain impact of potential future developments, such as changes
in system design, changes in the producer price index, the timing of equipment
purchases and the success of Nextel's related marketing plans. See "Revised
Business Plan" and "-- Forward-Looking Statements."
As indicated herein, under "-- Agreements with Significant
Stockholders -- The McCaw Investor," the Second Equipment Agreement Amendment
limits Nextel's ability, prior to October 1, 1997 without Motorola's consent, to
deploy a "Switch in Technology" which, under the Second Equipment Agreement
Amendment, is defined to mean a decision by Nextel before August 4, 1999 to
install and use digital radio frequency technology as an alternative to iDEN on
more than 25% of its SMR channels in the 806-824 MHz band in one or more of its
top 20 domestic markets, or the utilization by Nextel of any of its SMR channels
for voice interconnect on certain United States cellular and/or PCS radio
telephony standards. After October 1, 1997, Nextel may not implement such a
Switch in Technology unless (1) Nextel determines that the iDEN or Reconfigured
iDEN equipment fails to meet certain performance specifications established in
the Second Equipment Agreement Amendment, 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 such failure
within six months after receiving notice thereof, or (2) Nextel or the McCaw
Investor offers to acquire the remainder of Motorola's shares of Class A Common
Stock at a per share price of at least 110% of the average of the closing prices
of the Class A Common Stock over the 30 trading days preceding the public
announcement by Nextel of the decision to implement such a Switch in Technology.
In either case, if Motorola manufactures (or elects to manufacture) the
alternate technology Nextel elects to deploy, Nextel must purchase 50% of its
infrastructure requirements and 25% of its subscriber equipment requirements
from Motorola for three years, provided such equipment is competitive in price
and performance to the equipment utilizing or incorporating such alternate
technology then offered by other manufacturers.
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.
Nextel continues to pursue certain regulatory initiatives that would
provide SMR operators, including Nextel, with the right to use contiguous blocks
of spectrum. The FCC issued an order in December 1995 that would provide SMR
operators, including Nextel, with the opportunity to obtain contiguous spectrum.
See "-- Regulation." Were Nextel to obtain a sufficient contiguous spectrum
position in its market areas, pursuant to the FCC's 1995 order, or otherwise, it
would become feasible to consider deployment of currently existing
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cellular digital technology transmission formats, including CDMA and TDMA, on
such contiguous spectrum blocks. Independent of such technological feasibility,
however, additional factors, including Nextel's contractual obligations to
Motorola regarding the domestic deployment and utilization of iDEN technology,
and additional capital requirements associated with any Switch in Technology,
would likely materially affect Nextel's consideration of such alternative
technologies.
Should Nextel choose to deploy a technology other than iDEN for any of its
wireless communications services, Nextel believes that its systems planning and
its contractual relationships with Motorola would permit it to utilize a
different technology. In light of the development period for Reconfigured iDEN,
however, Nextel has agreed, as described above, not to effect a Switch in
Technology on its SMR channels prior to October 1, 1997 without Motorola's
consent. Due to the considerable present uncertainty surrounding the factors
that might affect such a decision, including the performance characteristics and
customer perceptions of first generation iDEN, Reconfigured iDEN, or of
competing digital technologies and possible future improvements in first
generation iDEN or Reconfigured iDEN technology platforms, it is impossible to
predict if or when such a decision could be made.
SYSTEM CONSTRUCTION AND SUPPLIERS. The first step required to achieve the
build-out of a 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 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 18 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, the Company expects to add new sites to such
system continually in order to improve coverage and capacity. See
"-- Forward-Looking Statements."
It is expected that for the next few years of Digital Mobile network
operations by Nextel, 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 networks. The Prior Equipment Agreement
Amendment provides for the licensing by Motorola of interfaces relating to
infrastructure and subscriber equipment and of additional manufacturers for
subscriber equipment. In connection with the Second Equipment Agreement
Amendment, Motorola further 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 an alternative source for either iDEN system
infrastructure or subscriber equipment.
As described herein, see "-- Technology Commitments," system infrastructure
purchases under agreements with Motorola and other vendors of equipment related
to the Digital Mobile networks, and inventory purchases made in anticipation of
the commencement of commercial service in Nextel's markets, have caused and will
continue to cause a significant increase in liabilities during the start-up
phase of the Digital Mobile networks. Nextel anticipates that its net losses
will increase significantly during the ongoing start-up phase of Digital Mobile
networks and that it will continue to generate significant operating losses over
the next several years. Nextel's ability to arrange sufficient equity and/or
debt financing or to generate sufficient revenue to cover its operating and
capital needs is subject to a number of risks and contingencies. See "Risk
Factors -- Nextel to Require Additional Financing" and "-- Forward-Looking
Statements."
MARKETING. Nextel is continuing to focus its marketing efforts on
attracting customers from its previously identified targeted groups of potential
subscribers, chiefly its existing analog SMR subscribers and other business
users, including current users of multiple wireless communications services and
those new users who may be attracted to the combination of services made
possible by its Digital Mobile networks. The
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Company's marketing focuses on the differentiated package of integrated services
offered by the Company (mobile telephone, two-way dispatch, which the Company
markets as its "instant conferencing" feature under the "Nextel Direct
Connect"(SM) service name, alphanumeric short-messaging and paging) and
available to its customers using a single, multi-function subscriber unit.
Nextel's strategy is to focus principally on multi-service business users in its
markets with Digital Mobile networks.
The Company commenced the full-scale commercial launch of its first Digital
Mobile network using the Reconfigured iDEN technology in the Chicago
metropolitan market area late in the third quarter of 1996, accompanied by the
commencement of a more broadly focused, regionally based marketing campaign in
that market area. Subsequently, Nextel initiated additional full-scale
commercial launches, accompanied by more broadly focused marketing campaigns, in
the Atlanta, Boston, Denver, Detroit and Las Vegas metropolitan market areas and
in the Northern California market area. Nextel's commercial launch activities in
these markets represent the first phase of a planned nationwide deployment of
the Reconfigured iDEN technology in Nextel's significant Digital Mobile markets.
Nextel currently expects that implementation of its Existing Business Plan will
involve budgeted infrastructure and other system capital expenditures totaling
approximately $1.0 billion during 1997 and 1998 and that implementation of the
Revised Business Plan would raise such total infrastructure and other system
capital expenditures by at least $450,000,000 during the same two-year period.
In this connection, Nextel anticipates that purchases of Motorola-manufactured
infrastructure equipment will represent the largest category of capital
spending. In the final six months of 1996, Nextel placed orders with Motorola
totaling more than $300 million for products incorporating the Reconfigured iDEN
technology, including system infrastructure equipment and related software and
the new, compact Reconfigured iDEN handsets that Nextel plans to market
nationally, principally under the "PowerFone"(TM) brand name. Assuming the
successful and timely completion of its nationwide Digital Mobile network build-
out plan, Nextel expects that its Digital Mobile networks would provide coverage
to areas representing approximately 85% of the United States population by the
end of 1998. Implementation of the Revised Business Plan would significantly
accelerate Nextel's use of and needs for capital resources and would therefore
be dependent on, among other things, availability of necessary capital. See
"Risk Factors -- Nextel to Require Additional Financing" and "-- Forward-Looking
Statements."
The Company believes that its ability to provide a full line of mobile
communications services in an integrated package using a single, multi-function
subscriber unit on its Digital Mobile networks will distinguish it from other
providers of wireless communications services. The focus and the progress of
Nextel's Digital Mobile network services marketing efforts is and will continue
to be dependent on a number of factors, including system performance, subscriber
equipment performance and the ability to provide services that satisfy customer
needs and expectations. Nextel reviews its business and marketing plans in light
of a variety of factors, including perceived opportunities, actual experiences
in the marketplace, availability of financial and other resources and overall
economic and/or competitive considerations, and may from time to time determine
to change, refine or redirect such plans. See "Risk Factors -- Forward-Looking
Statements."
In January 1997, the Company announced the introduction of its national
digital network and indicated that it will not charge roaming fees for its
customers traveling anywhere on its national digital network. Conventional
cellular customers often are subject to expensive system access fees and higher
per-minute airtime rates when "roaming" outside of their home market.
Additionally, in March 1997, the Company announced a new billing policy,
pursuant to which Nextel will bill its mobile telephone service customers based
on the actual number of seconds of airtime used after the first minute, in
contrast to the cellular industry practice of rounding up all calls to the next
minute.
COMPETITION. Each of the markets in which the Company's Digital Mobile
networks operate or will operate is served by multiple other wireless
communications service providers. In each of the markets where the Company's
Digital Mobile networks operate, the Company may compete with the two
established cellular licensees in such market and as many as six PCS licensees.
The FCC has described PCS as a digital, wireless communications system
consisting of a variety of new mobile and portable services and technologies,
using small, lightweight units. PCS services may include portable, two-way voice
and data services. A substantial number of the entities that have been awarded
PCS licenses are current cellular communications service providers and joint
ventures of current and potential wireless communications service providers,
many of
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which have financial resources greater than those of Nextel. PCS operators will
likely compete with Nextel in providing some or all of the services available
through the Company's Digital Mobile networks. Additionally, the Company expects
that existing cellular service providers, some of which have been operational
for a number of years and have significantly greater financial and technical
resources than those available to the Company, will continue to upgrade their
systems to provide digital wireless communications services competitive with the
Company's Digital Mobile networks. Nextel also expects to face competition from
other technologies and services developed and introduced in the future. See
"Risk Factors -- Success of Nextel Dependent on its Ability to Compete."
Pursuant to the Omnibus Appropriations Act of 1997, the FCC has reallocated
30 MHz of 2.3 GHz spectrum to wireless services and will assign that spectrum
via an auction that must commence no later than April 15, 1997. The FCC will
allow these licensees to offer a broad range of fixed and mobile services, but
has imposed certain technical restrictions that will 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. 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.
REVISED BUSINESS PLAN
The Company currently is considering adopting and implementing its Revised
Business Plan, which would involve a more accelerated and extensive deployment
during 1997 and 1998 of the Reconfigured iDEN technology platform throughout its
existing and contemplated Digital Mobile networks (including primary connecting
routes between affected markets). The Company's Existing Business Plan was
adopted, to endorse and outline the proposed incorporation of the Reconfigured
iDEN technology in the Company's plans to build out its nationwide Digital
Mobile networks following the favorable development and deployment experience
associated with the Reconfigured iDEN technology platform. The Revised Business
Plan does not contemplate a significant increase in the population coverage to
be achieved by the Digital Mobile networks in operation at the end of 1998 as
compared to the population coverage level expected to be reached by that time
under the Existing Business Plan. However, there are significant areas of
difference between the Existing Business Plan and the Revised Business Plan in
terms of the geographical coverage objectives, the perceived customer demands
for and utilization of the relevant wireless services and the positioning of the
Company's products and services relative to those of competing wireless
communications service providers. Implementation of the Revised Business Plan
would have important implications for the nature, speed and scope of the
Company's plans to deploy the Reconfigured iDEN technology platform, the extent
and focus of the Company's related marketing efforts and the consequent impacts
on the Company's capital expenditures and operating expenses over the next
several years.
The Company anticipates that deployment of Digital Mobile networks
utilizing the Reconfigured iDEN technology platform will enable it to provide
potential customers in its markets with an integrated package of wireless
communications services that is competitive with the service packages being
offered currently or expected to be offered by other providers of wireless
communications services in those markets. The Company believes that the
implementation of the Revised Business Plan will better position Nextel both to
achieve its strategic objectives and to prepare for emerging competition in the
wireless communications industry, especially from certain current or future
operators that, on their existing cellular frequencies or on other frequencies
acquired by such operators or their affiliates in the recently concluded PCS
spectrum auctions, are in the process of converting their wireless
communications services systems to digital technology formats and are moving to
provide "nationwide coverage" on the resulting systems. The Company believes
that a significant strategic advantage may exist in being "first to market,"
particularly in comparison to the new "entrepreneur block" PCS licensees and
other existing or potential regional wireless communications service providers,
which may encounter significant financial and other challenges in replicating or
overtaking the Company's industry position once the Company successfully
concludes its nationwide Digital Mobile network build-out plan and develops a
sufficient customer base in its markets.
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Pursuant to its Revised Business Plan, the Company proposes to expand and
intensify its Digital Mobile network construction and related marketing programs
over the remainder of 1997 and 1998 to capitalize on the potential advantages
provided by the Company's ability to deploy a single, proven competitive digital
technology throughout its national network, the potential to economize on
network build-out expenses by concentrating more of its purchases of Motorola
manufactured system infrastructure equipment into 1997 and 1998, and the
opportunity to capture a significant share of the potential customers included
within the groups of mobile workers located in the Company's markets. The
principal objectives targeted by the Revised Business Plan are: (i) expanding
the coverage area of the Nextel national Digital Mobile networks by (A)
including "roaming capable" cities that were not contemplated to be built under
the Existing Business Plan during 1997 and 1998; and (B) instituting a
significantly more robust coverage plan to provide wireless communications
services along major highway corridors joining Nextel's existing and planned
market areas; (ii) increasing the capacity of Nextel's national Digital Mobile
networks by adding incremental base radios, cell sites and switching
infrastructure to the existing and newly constructed Reconfigured iDEN markets
more rapidly than such capacity-enhancing steps were scheduled in the Existing
Business Plan for the affected markets; and (iii) achieving additional growth in
the Nextel national Digital Mobile networks' subscriber base by (A) launching
more aggressive advertising campaigns and marketing efforts emphasizing the
benefits of Nextel's differentiated package of integrated wireless services,
Nextel's expanded roaming network and simplified approach to roaming service and
pricing and Nextel's new "to the second" billing policy, (B) accelerating and
focusing marketing activities on potential customers in markets to be converted
from "roaming only" to "full build" status and (C) offering more competitive
subscriber handset pricing to potential customers made possible by structuring
new volume purchase and production commitments with Motorola.
Implementing such revised construction and marketing plans will involve
substantial increases in the level of capital expenditures and also is likely to
increase operating losses over the next several years. To a large extent, the
increased capital expenditures will involve shifting forward capital
expenditures that Nextel had planned to incur in years subsequent to 1998, based
either on the acceleration of incremental system coverage or incremental system
capacity during 1997 and 1998. Any increased operating losses Nextel might
generate during 1997 and 1998 would to a certain degree likely be attributable
to increased marketing expenses, associated growth in sales and service
organizations and related back-office functions to produce or meet the potential
incremental subscriber growth. Any such increase in operating losses also would
be expected to be magnified by the fact that customer procurement costs tend to
be front-end loaded, whereas the offsetting contributions to revenue would be
expected to be realized over time, including periods subsequent to 1998. Based
on Nextel's currently available and reasonably anticipated sources of equity and
debt financing, including assumed exercise in full of the first McCaw option
later in 1997 (see "-- Agreements with Significant Stockholders -- The McCaw
Investor"), Nextel will require significant additional funds to implement these
revised construction and operating plans. Depending on a variety of factors and
assumptions that Nextel deems within a range of reasonably expected outcomes
(recognizing that such matters remain subject to the impact of future
developments and costs that cannot be predicted accurately), Nextel believes
that it would require significant additional funding during 1997 and 1998 to
meet the capital expenditure and operating loss financing needs of its Digital
Mobile networks (under the Revised Business Plan outlined above) and its analog
SMR networks businesses. See "Risk Factors -- Nextel to Require Additional
Financing" and "-- Forward-Looking Statements."
NEXTEL'S EXISTING ANALOG SMR OPERATIONS
The Company'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. Due to
capacity constraints on its existing analog SMR systems in major metropolitan
areas, Nextel has been able to offer mobile telephone service on such systems to
only a limited number of its customers. Nextel acquired significant additional
analog business operations from Motorola in late July 1995, and spent much of
late 1995 and most of 1996 in a lengthy and complicated process to transition
billing and reporting functions for these acquired operations to Nextel's
existing analog SMR business unit. Certain of the reporting practices that were
in place with respect to these acquired operations involved subscriber tracking
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based on equipment serial number identification, and customer counts for these
business operations were routinely compiled on the same basis. In Nextel's
recently concluded audits of these business operations, it was determined that
including all persons currently assigned an equipment serial number as a
customer of the analog SMR business results in an overstatement in the number of
revenue generating subscribers on the affected analog SMR systems for the
relevant period. This outcome could result for a number of reasons, such as
including in the customer counts persons who were intermittent or seasonal users
of analog SMR services, but were not active customers during the periods being
reported, or including persons who had canceled or otherwise terminated their
active use of the system without turning in their subscriber units and having
their equipment identifications removed from the system.
Nextel is currently in the process of identifying and making appropriate
adjustments to the previously released analog subscriber unit counts for the
affected periods, presently believed to extend from mid-1995 through year end
1996. In connection with these efforts, which have focused first on the most
recently reported analog customer counts, Nextel has determined that the
previously reported number of total analog system subscribers at December 31,
1996, which was estimated to be 814,200, may be overstated by approximately
10-12%. Nextel does not believe that any adjustments to customer counts should
be required other than with respect to these acquired analog SMR operations,
since Nextel's other analog SMR business operations typically have generated
their subscriber counts based on a different approach using current billing
records information.
None of the overstatements of the number of analog units in service with
respect to these acquired analog SMR business operations has had any impact on
the accuracy of any of the revenue, expense or other financial information
(other than in the context of information expressed as per subscriber unit
amounts) released by Nextel concerning its analog SMR business operations over
the affected periods, nor do such matters have any impact on the reported
subscriber counts outside these specific acquired analog SMR operations.
MANAGEMENT AGREEMENTS. In addition to SMR systems for which it is the
licensed owner, the Company manages analog SMR systems licensed to third parties
in certain of its markets. As of December 31, 1996, of the 800 MHz licenses
operated by the Company, approximately 24.3% were managed for third parties; of
the 900 MHz licenses operated by the Company, approximately 4.1% were managed
for third parties. The management agreements generally have terms of 15 or 30
years. In many cases, the Company holds an option to acquire managed SMR
systems. Pursuant to a consent decree addressing all outstanding antitrust
issues in connection with Nextel's recent acquisitions, the Company has agreed
to alter the terms of certain management agreements with third parties with
respect to 900 MHz channels in certain markets.
MARKETING. The Company markets its existing analog SMR services primarily
to businesses that employ fleets of vehicles requiring two-way radio capability
and, to a limited extent, to customers who require both two-way radio and mobile
telephone service, such as sales or service managers. The Company's sales
efforts are directed to both the 900 MHz and 800 MHz systems. The Company
utilizes a direct sales and marketing force as well as independent equipment
dealers. Subscriber units sold by the Company's sales force for use on existing
analog SMR networks are typically installed and maintained by the Company's
service departments. In addition, the service departments are responsible for
system maintenance for most of the Company's existing analog SMR networks. The
Company's marketing of its analog SMR service may be affected in certain markets
by the activation of its Digital Mobile networks in such markets. See
"-- Nextel's Digital Mobile Networks."
COMPETITION. The Company's existing analog SMR operations compete in each
market with a number of other operators of traditional analog SMR networks
providing service on the 220 MHz, 800 MHz and 900 MHz bands. The Company also
competes with SMR and other private radio operators utilizing other frequencies
for the provision of two-way dispatch services.
The Company also competes in each of its major markets with cellular
operators and, in a limited number of such markets, with PCS systems operators,
that offer services similar to the mobile telephone service now offered on
traditional analog SMR networks. At the present time, analog cellular systems
are generally believed to offer better quality wireless telephone transmission
(at a higher price) than traditional analog SMR operators. On March 7, 1995, the
FCC authorized cellular operators to offer two-way dispatch services,
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which allows cellular operators to offer, upon installation of the necessary
infrastructure equipment, a service that may be competitive with analog SMR or
digital two-way dispatch service. Additionally, Nextel may face competition in
the future from other SMR operators utilizing digital technology.
Although a less direct substitute for SMR service, one-way and two-way
paging services may also be competitive with the Company's services. The
principal factors relevant to competition in providing communications services
in the traditional analog SMR service field are the size of coverage area, the
pricing of such services, the quality of the communications (e.g., clarity, lack
of interference), and the reliability and availability of the service (e.g.,
waiting time for a "clear channel," absence of busy signals, absence of
transmission disconnects or failures). The Company has numerous competitors in
the sales and maintenance of communications equipment used by the customers of
its analog SMR networks. Competition in the sale of such subscriber equipment is
intense. The principal factors relevant to competition in selling subscriber
equipment for use by customers of analog SMR networks are the pricing of such
equipment, the warranty and repair service coverage offered, the features
available and the quality of the equipment.
FISCAL YEAR 1996 TRANSACTIONS AND DEVELOPMENTS
DIAL PAGE MERGER. On January 30, 1996, Nextel consummated the Dial Page
Transaction pursuant to an Agreement of Merger and Plan of Reorganization dated
February 17, 1995. As a result of such transaction, Dial Page was merged with
Nextel and the former stockholders of Dial Page received an aggregate of
approximately 26,800,000 shares of Class A Common Stock. Prior to the merger,
Dial Page was a leading provider of analog SMR and integrated digital wireless
communications services in the southeastern United States.
COMCAST STOCK PURCHASE AGREEMENT. Nextel, Comcast Corporation ("Comcast")
and Comcast FCI, Inc., a wholly owned subsidiary of Comcast ("Comcast FCI"),
entered into an Amendment to the Stock Purchase Agreement, dated as of February
9, 1996, which amended the original Stock Purchase Agreement dated as of
September 14, 1992, as previously amended (the "Comcast Agreement"). Such
amendment set forth certain terms and conditions applicable to the exercise by
Comcast of its anti-dilutive rights with respect to the issuance of shares of
Class A Common Stock in the Dial Page Transaction and also to potential
exercises of Comcast's anti-dilutive rights with respect to issuances of Nextel
equity securities occurring in connection with any subsequent acquisition
transaction. Also on February 9, 1996, Comcast completed the purchase of
8,155,506 shares of Class A Common Stock for an aggregate purchase price of
$99,904,948, pursuant to Comcast's exercise of its anti-dilutive right with
respect to the Dial Page Transaction. In March 1997, Nextel entered into
arrangements with Comcast and Comcast FCI that eliminated a number of previously
existing relationships between the parties, including certain rights under the
Comcast Agreement and related documents. See "Post Fiscal Year-End Transactions
and Developments -- Comcast Option Repurchase."
MANAGEMENT. In early 1996, Nextel announced changes in its senior
management team. In February 1996, the Company announced that Timothy M. Donahue
had been named President and Chief Operating Officer of the Company. Mr. Donahue
had previously been regional president of AT&T Wireless operations in the
Northeast. In March 1996, the Company announced that Daniel F. Akerson had
agreed to join the Company as Chairman and Chief Executive Officer. Mr. Akerson
was previously the chairman and chief executive officer of General Instrument
Corporation and the president of MCI Communications Corporation. Additionally,
in April 1996, Nextel named Steven M. Shindler as its Senior Vice President and
Chief Financial Officer. Mr. Shindler previously served as managing director of
communications finance at The Toronto-Dominion Bank in New York.
MOTOROLA AMENDMENT. Nextel and Motorola entered into an amendment, dated
as of April 28, 1996, to the Equipment Purchase Agreements, which amendment
established payment terms for all purchases made by Nextel under the Equipment
Purchase Agreements and confirmed certain warranty coverages and commencement
dates for system infrastructure equipment and software.
CREDIT FACILITIES. Nextel, Nextel Finance Company, a wholly owned
subsidiary of Nextel ("NFC"), and certain subsidiaries of Nextel entered into
definitive agreements, which became effective on Septem-
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ber 30, 1996, with respect to a secured credit facility arranged by Chase
Securities, Inc., J.P. Morgan Securities Inc. and Toronto-Dominion Securities
(USA), Inc. (the "Bank Credit Facility"). Concurrently therewith, Nextel, NFC
and certain subsidiaries of Nextel entered into definitive agreements, which
also became effective on September 30, 1996, with respect to the amendment,
restatement and consolidation of the previously existing financing arrangements
with Motorola and NTFC Capital Corporation ("NTFC") (the "Vendor Credit
Facility"; and collectively with the Bank Credit Facility, the "Bank and Vendor
Credit Facilities"). The Credit Agreement relating to the Bank Credit Facility
(the "Bank Credit Agreement") provides for up to $1,655,000,000 of secured
financing, consisting of a $1,085,000,000 revolving loan and $570,000,000 in
term loans. The Amended, Restated and Consolidated Credit Agreement relating to
the Vendor Credit Facility (the "Vendor Credit Agreement") provides for up to
$345,000,000 of secured financing, consisting of a $195,000,000 revolving loan
and $150,000,000 in term loans. Borrowings under the Bank Credit Facility and
the Vendor Credit Facility are ratably secured by liens on assets of Nextel's
subsidiaries that are "restricted" subsidiaries under the terms of the Nextel's
public indentures (the "Nextel Indentures") relating to the Company's five
outstanding issues of Senior Redeemable Discount Notes (the "Nextel Notes").
Additionally, the Nextel Indentures contain provisions that operate to limit the
amount of borrowings available under the Bank Credit Facility and the Vendor
Credit Facility in certain circumstances. See "Risk Factors -- Nextel to Require
Additional Financing." Subsequent to 1996, Nextel and Motorola reached agreement
on certain of the terms and conditions pursuant to which Nextel could access up
to an additional $450,000,000 of equipment financing through Motorola
("Additional Motorola Financing"). See "Post-Fiscal Year End Transactions and
Developments -- Nextel/Motorola Agreements." In order to access such Additional
Motorola Financing, Nextel would be required to procure certain consents,
waivers and/or participation commitments from a number of third parties, to
obtain modifications to the terms of the Bank and Vendor Credit Facilities, the
related security documents and the Nextel Indentures and to satisfy certain
other conditions. Nextel is in the process of seeking certain of such consents,
waivers, commitments and other actions to obtain access to a portion of the
Additional Motorola Financing, but there can be no assurance that Nextel will be
successful in this regard, or that other conditions to access such Additional
Motorola Financing, including those that Nextel is not currently seeking to
fulfill, will be satisfied or otherwise will be dealt with in a timely fashion.
Access to a significant portion of the Additional Motorola Financing, among
other things, would be required for Nextel to successfully implement the Revised
Business Plan. See "Post Fiscal Year-End Transactions and Developments" and
"Risk Factors -- Nextel to Require Additional Financing" and "-- Forward-Looking
Statements."
MERGER AGREEMENT WITH PCI. Nextel entered into an Agreement of Merger and
Plan of Reorganization dated as of October 2, 1996, as amended, with
Pittencrieff Communications, Inc. ("PCI") providing for the merger of PCI with a
wholly owned indirect subsidiary of Nextel. PCI has approximately 6,000 800 MHz
SMR channels covering a total population of over 27 million people predominantly
in the states of Texas, Oklahoma, New Mexico and Arizona. The stockholders of
PCI will receive a maximum of 8,782,403 shares of Class A Common Stock, subject
to certain adjustments, as a result of the merger. The merger is subject to
regulatory and PCI stockholder approval and customary closing conditions, and is
expected to occur during 1997.
POST FISCAL YEAR-END TRANSACTIONS AND DEVELOPMENTS
WVB MERGER. On January 30, 1997, Nextel acquired 81% of the outstanding
shares of Wireless Ventures of Brazil, Inc., an operator of analog SMR systems
in Brazil ("WVB"), for a purchase price of $186,300,000, which was paid with the
issuance of approximately 11,964,000 shares of Class A Common Stock, through a
merger of WVB with a wholly owned subsidiary of Nextel. Nextel simultaneously
contributed its interest in WVB, which was renamed McCaw International
("Brazil"), Ltd., to McCaw International.
MCCAW INTERNATIONAL BOND OFFERING. On March 6, 1997, McCaw International
completed a private placement of 951,463 units for gross proceeds of
approximately $500,000,000. Each unit is comprised of a 10-year senior discount
note and a warrant to purchase 0.10616 shares of McCaw International common
stock. The notes have a 13% yield to maturity, are noncallable for five years,
and require no interest payments for the
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first five years. The warrants are exercisable at a price of $36.45 and entitle
the holders thereof to purchase in the aggregate 1%, on a fully diluted basis,
of the common stock of McCaw International.
CONSENT SOLICITATION. Under the Nextel Indentures, the Company and its
restricted subsidiaries may only incur debt (other than certain categories of
"Permitted Debt" (as defined in the Nextel Indentures)) if the aggregate amount
of its debt does not exceed 30% of its "Total Market Capitalization" (as defined
in the Nextel Indentures) or if its ratio of "Consolidated Debt" to "Annualized
Operating Cash Flow" (as defined in the Nextel Indentures) does not exceed
certain levels. Because it is anticipated (under both the Existing Business Plan
and the Revised Business Plan) that Nextel will continue to incur significant
operating expenses during the construction and deployment of its Digital Mobile
networks, Nextel is not expected to generate sufficient Annualized Operating
Cash Flow to support the incurrence of debt based on the ratio of its
Consolidated Debt to Annualized Operating Cash Flow.
Nextel's ability to incur debt (other than Permitted Debt) in the
foreseeable future will, therefore, be based on the value of Nextel's Total
Market Capitalization which is primarily affected by the market price of
Nextel's Class A Common Stock. Based on the number of outstanding shares of, and
the recent prices of, Nextel's Class A Common Stock, Nextel is not able to incur
debt based on the value of its Total Market Capitalization under the terms of
the Nextel Indentures, effectively limiting Nextel's ability to raise debt
capital to borrowings that qualify as Permitted Debt. Further, under the Nextel
Indentures, the maximum aggregate amount of Permitted Debt that Nextel may incur
(excluding debt represented by the Nextel Notes) is approximately $1.56 billion.
Because the Nextel Indentures may have the effect of limiting Nextel's
ability (under both the Existing Business Plan and the Revised Business Plan) to
borrow the funds necessary to complete its planned deployment of the
Reconfigured iDEN technology in its Digital Mobile networks, Nextel intends to
seek the consent of the holders of the Nextel Notes to certain amendments to the
Nextel Indentures in April 1997. These amendments would, among other things,
modify the debt incurrence limitations of the Nextel Indentures by expanding the
categories of Permitted Debt to allow the Company to incur additional
indebtedness to fund such accelerated deployment. See "Risk Factors -- Nextel to
Require Additional Financing." See also "-- Nextel/Motorola Agreements," below.
The Company cannot currently estimate the aggregate consideration that will
be paid to all holders of the Nextel Notes in connection with such consents. As
of the date hereof, no such consents have been sought or received by the
Company. No assurances can be given that any such consents will be obtained or
that the aggregate consideration to be paid for such consents will not exceed
amounts that the Company would consider reasonable under the circumstances. See
"Risk Factors -- Forward-Looking Statements."
The foregoing statements relating to the Nextel Indentures are summaries of
the relevant provisions and do not purport to be complete. Where reference is
made to particular provisions of the Nextel Indentures, such provisions,
including the definitions of certain terms, are incorporated by reference as
part of such summaries, and are qualified in their entirety by such reference.
Each of the Nextel Indentures has previously been filed with the Securities and
Exchange Commission (the "Commission"), and each of the Nextel Indentures is
incorporated by reference herein.
COMCAST OPTION REPURCHASE. On March 18, 1997, Nextel and Comcast reached
agreement regarding the terms on which a wholly owned subsidiary of Nextel
agreed to purchase Comcast FCI's rights pursuant to the Amended and Restated
Option Agreement dated as of September 11, 1995 between Nextel and Comcast FCI
(the "Option Agreement") for an aggregate cash purchase price of $25,000,000.
The Option Agreement, which was entered into in connection with the transactions
pursuant to the Comcast Agreement, granted Comcast FCI an option to purchase up
to 25,000,000 shares of Class A Common Stock at an exercise price of $16.00 per
share. In connection with the purchase of Comcast FCI's rights under the Option
Agreement, certain rights of Comcast and Comcast FCI pursuant to the Comcast
Agreement, including anti-dilutive rights and the rights relating to the
appointment of directors of Nextel, were terminated. The transaction was
completed on March 20, 1997.
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NEXTEL/MOTOROLA AGREEMENTS. On March 27, 1997, Nextel and Motorola entered
into a new agreement which, among other things, establishes certain pricing and
other terms on which Nextel will purchase infrastructure and subscriber
equipment for deployment in the United States pursuant to the existing Equipment
Purchase Agreements between Nextel and Motorola ("1997-1998 Agreement"). The
1997-1998 Agreement also establishes certain infrastructure and subscriber
equipment pricing terms for Nextel's international affiliates and provides for
an infrastructure rebate program pursuant to which Nextel will receive purchase
price rebates from Motorola that will be applied to subscriber equipment
purchased and deployed in the U.S. by Nextel in 1997 and 1998 based on the
levels of Nextel's purchases of infrastructure equipment. The 1997-1998
Agreement also contains commitments by Nextel and Motorola with respect to
Nextel's domestic infrastructure and subscriber equipment purchases in 1997 and
the deployment of equipment utilizing Motorola's iDEN technology in
international markets.
In addition to the 1997-1998 Agreement, Nextel and Motorola also reached a
related understanding regarding the terms and conditions on which Motorola will
provide financing for Nextel's purchases of equipment and services provided by
Motorola, in addition to the amounts contemplated by Motorola's existing
financing commitments. Pursuant to the Additional Motorola Financing commitment,
Motorola has agreed to make up to an additional $450,000,000 in secured
financing available to Nextel consisting of (i) $50,000,000 in additional senior
secured borrowings pursuant to the Vendor Credit Agreement, (ii) up to
$200,000,000 in secured borrowings that are to be second in ranking to the
borrowings made pursuant to both the Vendor Credit Agreement and Nextel's
existing Bank Credit Agreement (the "Second Secured Borrowings"), and (iii) up
to an additional $200,000,000 in borrowings that would be required to be ratably
secured on an equal ranking with borrowings pursuant to the Vendor Credit
Agreement and such existing Bank Credit Agreement (the "Senior Secured
Borrowings").
Availability of the additional financing is subject to a number of
conditions including, among others, with respect to the Second Secured
Borrowings and the Senior Secured Borrowings, the prior borrowing of all amounts
available under the Vendor Credit Agreement (including the additional
$50,000,000 borrowings pursuant thereto described above) and pursuant to
Nextel's existing Bank Credit Agreement (including, with respect to the second
$100 million of the Second Secured Borrowings and all of the Senior Secured
Borrowings, the additional $250,000,000 in borrowings contemplated by such Bank
Credit Agreement), Nextel's receipt of $232.5 million in equity contributions
from the exercise of options held by the McCaw Investor, and the receipt of the
approval of a majority of the lenders and secured parties under the Vendor
Credit Agreement and Nextel's existing Bank Credit Agreement (in the case of the
Second Secured Borrowings) and all of such lenders and secured parties (in the
case of the Senior Secured Borrowings). The availability of the Senior Secured
Borrowings is also conditioned upon Nextel raising $250 million in additional
unsubordinated debt financing and Nextel's receipt of $50,000,000 of debt
financing from an affiliate of Craig O. McCaw on terms equivalent to such Senior
Secured Borrowings. The availability of all of such additional financing is also
subject to Nextel's satisfying certain requirements under the Nextel Indentures
or obtaining waivers of such requirements. The parties contemplate negotiating
and entering into a definitive agreement implementing the terms of the financing
agreements described above. Except for the Additional Financing Commitment with
Motorola, Nextel does not yet have any legally binding agreement or commitment
from third parties relating to, or that may be required to satisfy conditions to
implement all or any portion of, the proposed financing pursuant to such
Additional Motorola Financing. See "Risk Factors -- Nextel to Require Additional
Financing" and "-- Forward-Looking Statements."
AGREEMENTS WITH SIGNIFICANT STOCKHOLDERS
THE MCCAW INVESTOR. Pursuant to the terms of the Securities Purchase
Agreement dated as of April 4, 1995, as amended, among Nextel, the McCaw
Investor and Mr. Craig O. McCaw (the "McCaw Securities Purchase Agreement") and
certain other related agreements and documents, which contemplate certain
completed and potential equity investments by the McCaw Investor in several
types of Nextel securities and certain related agreements and transactions, (i)
the McCaw Investor purchased on April 5, 1995 from Nextel, 1,220,000 shares of
Class A Common Stock for an aggregate purchase price of $14,945,000; and (ii)
the McCaw Investor purchased on July 28, 1995 from Nextel, for an aggregate
purchase price of $300,000,000, an aggregate of 8,163,265 units consisting of a
total of (a) 8,163,265 shares of Class A Preferred Stock;
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(b) 82 shares of Class B Preferred Stock; and (c) three separate options (the
"McCaw Options"), exercisable for periods of two, four and six years,
respectively, from July 28, 1995, to acquire an aggregate of up to 35,000,000
shares of Class A Common Stock at exercise prices ranging from $15.50 to $21.50
per share. Such shares of Class A Preferred Stock and Class B Preferred Stock
are convertible into an aggregate of approximately 24,490,000 shares of Class A
Common Stock.
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 anti-dilutive rights to the McCaw Investor and certain
affiliates, limitations on investments by the McCaw Investor and its affiliates
in excess of approximately 45% of the voting securities of Nextel and certain
transfer restrictions applicable to the shares of Nextel capital stock held by
the McCaw Investor and certain affiliates. 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
4,000,000 shares of Class A Common Stock from Motorola and Motorola granted to
the McCaw Investor options to purchase up to an additional 9,000,000 shares of
Class A Common Stock held by Motorola.
Pursuant to the McCaw Securities Purchase Agreement, Nextel's Restated
Certificate of Incorporation (the "Nextel Charter") and Nextel's Amended and
Restated By-Laws (the "Nextel By-Laws"), Nextel, the McCaw Investor and Mr.
McCaw have established certain arrangements relating to the governance of 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 Nextel Board of Directors (the
"Nextel Board") representing not less than 25% of the Nextel Board. Currently,
the McCaw Investor has designated only two directors for election to the Nextel
Board.
Pursuant to the McCaw Securities Purchase Agreement, the Nextel Charter and
the Nextel By-Laws, a five-member Operations Committee of the Nextel Board was
created, and the McCaw Investor is entitled to have a majority of the members
selected from among the McCaw Investor's representatives on the Nextel Board.
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 Nextel
Board and committees thereof, as well as nomination and oversight of certain
executive officers. Currently, both of the McCaw Investor's designees on the
Nextel Board also serve as members of the Operations Committee, of which Mr.
McCaw is the chairman. The Nextel Board, by a majority vote, may override
actions taken or proposed by the Operations Committee, although doing so would
give rise to a $25,000,000 liquidated damages payment to the McCaw Investor, the
commencement of accrual of a 12% dividend payable on the stated value of all
outstanding shares of Class A Preferred Stock (an aggregate stated value of
approximately $300,000,000) and the immediate vesting of the options granted
pursuant to the McCaw Incentive Option Agreement (as defined below). However,
the Nextel Board, 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 Nextel Board also may act to terminate the
Operations Committee, although such action by the Nextel Board 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 Nextel Charter 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
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exceptions (including certain existing securities holdings and relationships),
until the later of (i) five years after the closing of the McCaw Transaction or
(ii) one year after the termination of the Operations Committee, neither it 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 Amendment, dated as of April 4, 1995, to the Agreement and
Plan of Contribution and Merger by and among Nextel, Motorola, ESMR, and certain
other subsidiaries of Motorola (the "Motorola Merger Amendment") 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 Class A Common Stock held by
Motorola accordingly, subject to (i) the right of any Motorola-designated
members of the Nextel Board to vote in a manner consistent with their fiduciary
duties and (ii) 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 Class A Common Stock held by Motorola.
Concurrently with the execution of the McCaw Securities Purchase Agreement,
Nextel entered into a Management Support Agreement (the "Support Agreement")
with Eagle River, Inc. ("Eagle River"), an affiliate of the McCaw Investor which
also is controlled by Mr. McCaw, pursuant to which Eagle River will provide
management and consulting services to Nextel, the Nextel Board 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")
concurrent with the execution of the McCaw Securities Purchase Agreement
granting to Eagle River the Incentive Option to purchase an aggregate of
1,000,000 shares of Class A Common Stock at an exercise price of $12.25 per
share, with such option vesting over a five-year period beginning April 4, 1997,
with full vesting on April 4, 2000.
In connection with the McCaw Transaction, Nextel submitted certain purchase
orders for Motorola-manufactured Digital Mobile network system infrastructure
equipment and confirmed its anticipated infrastructure equipment purchase
commitments for calendar year 1995. Nextel and Motorola also entered into the
Second Equipment Agreement Amendment pursuant to which, among other things, (1)
Motorola agreed to use its best efforts to develop Reconfigured iDEN, (2)
Motorola agreed to more favorable infrastructure and subscriber unit pricing for
Nextel, (3) Motorola agreed to certain performance benchmarks both for iDEN and
Reconfigured iDEN in the areas of voice quality, delay and system access and
reliability which, if not met, will result in credits by Motorola against
Nextel's invoiced costs with respect to equipment shipments, (4) Nextel agreed,
subject to certain conditions, to purchase and implement Reconfigured iDEN when
and as it is made available by Motorola, (5) Motorola agreed to negotiate to
enter into licenses with at least one alternative manufacturer of infrastructure
equipment to permit the manufacture and sale of iDEN compatible infrastructure
equipment, (6) Nextel agreed, 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 and (7) Nextel agreed to certain limitations on
changing the technology deployed on its SMR channels, including an agreement not
to effect such a change prior to October 1, 1997 without Motorola's consent.
MOTOROLA. On July 28, 1995, Nextel consummated the Motorola Transaction
pursuant to the Agreement and Plan of Contribution and Merger, dated August 4,
1994, as amended, by and among Nextel, Motorola, ESMR and ESMR Sub, Inc. (the
"Motorola Agreement"). Pursuant to the Motorola Transaction, Nextel effectively
acquired all of Motorola's 800 MHz SMR licenses in the continental United States
(the "Motorola SMR Business"), in exchange for 59,500,000 shares of Nextel
common stock (comprised of 41,670,000 shares of Class A Common Stock and
17,830,000 shares of Nextel's Class B Non-Voting Common Stock, par value $.001
per share ("Class B Common Stock")). Pursuant to the Motorola Agreement,
Motorola currently has the right to nominate two persons for election as members
of the Nextel Board; although, to date, Motorola has exercised such right only
with respect to one director. Also, in connection with the Motorola Transaction,
Nextel entered into an agreement for the purchase of Motorola infrastructure
equipment for certain of Nextel's Digital Mobile networks, and Motorola agreed
to provide additional new
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vendor financing (which agreements have been subsequently replaced by the Vendor
Credit Facility). The agreements relating to the Motorola Transaction also
include certain provisions concerning Nextel's choice of technology deployment,
the licensing of additional equipment manufacturers and the selection of
strategic equity investors, as well as transactions involving Motorola Canada
Limited ("Motorola Canada") and Clearnet, including the purchase by Nextel of a
portion of Motorola Canada's equity interest in Clearnet in exchange for
2,500,000 shares of Class A Common Stock, which was consummated effective as of
October 19, 1994.
In connection with the McCaw Transaction, Nextel submitted certain purchase
orders for Motorola-manufactured Digital Mobile network system infrastructure
equipment and confirmed its anticipated infrastructure equipment purchase
commitments for calendar year 1995 and Nextel and Motorola entered into the
Second Equipment Agreement Amendment, as described in "-- The McCaw Investor."
On July 28, 1995, Motorola sold to the McCaw Investor 4,000,000 shares of
Class A Common Stock at $12.25 per share and granted to the McCaw Investor
options to purchase up to an additional 9,000,000 shares of Class A Common Stock
over a six-year period ("McCaw Investor/Motorola Options"). The McCaw
Investor/Motorola Options are exercisable for up to 2,000,000 shares of Class A
Common Stock at $15.50 per share during the 30-day period following the second
anniversary of the closing of the Motorola Transaction (the "Motorola First
Tranche"), up to an additional 2,000,000 shares at $18.50 per share during the
30-day period following the fourth anniversary of the closing of the Motorola
Transaction (the "Motorola Second Tranche") and up to 5,000,000 shares at $21.50
per share during the 30-day period following the sixth anniversary of the
closing of the Motorola Transaction (the "Motorola Third Tranche"). In the event
the Motorola First Tranche is not fully exercised, the number of shares
purchasable in the Motorola Second Tranche will be reduced on a share-for-share
basis. In the event the Motorola Second Tranche is exercised for only a portion
of the shares covered thereby, the number of shares purchasable in the Motorola
Third Tranche will be reduced to the percentage of the Motorola Second Tranche
actually purchased. In addition, Motorola has granted to the McCaw Investor a
right of first offer or a right of first refusal to purchase shares of Class A
Common Stock that are owned by Motorola.
REGULATION
The licensing, operation, acquisition and sale of Nextel's SMR businesses
are regulated by the FCC. FCC regulations have undergone significant changes
during the last three 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").
With regard to the licensing of Nextel's Digital Mobile networks, Nextel
subsidiaries currently hold FCC licenses to use SMR radio channels in each of
their markets. Unlike other Commercial Mobile Radio Services ("CMRS") licenses,
i.e., cellular and PCS, which are granted on a geographic-area basis (e.g.,
Major Trading Area, Metropolitan Statistical Area), SMR licenses are granted on
a site-by-site basis, requiring that Nextel obtain hundreds of licenses to
construct and operate its SMR systems. In addition, each of these SMR station
licenses generally must be a minimum of 70 miles away from all non-affiliated
SMR base stations operating on the same SMR frequencies and must be constructed
and operational within one year of grant or the licenses will cancel
automatically.
As is true for cellular service and PCS system operators, the
interconnection of subscriber units with the public switched telephone network
requires Nextel to obtain certain exchange and inter-exchange services from
telephone companies and certain common carriers. Also, like cellular service and
PCS system operators, Nextel is permitted to profit from the resale of certain
services or facilities purchased from common carriers, such as local and long
distance service.
On December 15, 1995, the FCC released new 800 MHz SMR licensing rules
intended to address this licensing disparity among SMRs and other CMRS
providers. The new rules provide for the auction of geographic-area based SMR
licenses in the top 200 SMR channels on an Economic Area ("EA") basis. The 200
channels are proposed to be auctioned in blocks of 120 channels, 60 channels and
20 channels in an auction that the FCC has announced will occur in 1997. Once an
upper 200-channel EA license is obtained,
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the licensee will have the authority to construct, operate and modify its
systems within the licensed geographic area without first obtaining FCC
approval. To ensure proper construction and use of the spectrum, EA licensees
will be required to provide services to one-third of the population within two
years, and two-thirds of the population within five years using approximately
50% of the EA licensee's channels. Failure to meet these build out requirements
will result in loss of the EA license.
Because the upper 200 channels in the 800 MHz SMR service are currently
licensed to existing SMR providers, an EA licensee will have the authority to
relocate incumbents within the EA to the lower 230 SMR channels. Consequently,
Nextel may be subject to relocation in an EA for which it currently holds
licenses but fails to obtain the EA geographic-area license. Any incumbent not
relocated out of the EA licensed area must be provided co-channel protection by
the EA licensee, and will be permitted to make only those system modifications
that do not expand their current interference contour. The incumbent licensees
will also be provided an opportunity to convert their current site-by-site
licenses to a single license encompassing their existing authorized service area
contours.
In addition to promulgating new rules for the upper 200 800 MHz SMR
channels, the FCC proposed on December 15, 1995 to license the lower 230 SMR
channels on an EA basis. The FCC has proposed to auction the lower channels as
an "entrepreneur block," thus limiting auction participation to small businesses
which would likely exclude Nextel from eligibility to bid on the lower channels.
The FCC proposal would not permit lower EA licensees to relocate incumbents.
Nextel has filed comments and reply comments on the lower channel auction
proposal, and has proffered a consensus proposal with SMR WON (a trade
association of small business SMR operators), the American Mobile
Telecommunications Association, and the Personal Communications Industry
Association which, among other things, opposes an "entrepreneur" auction for the
lower channels, and would allow lower channel incumbents, including those that
have been relocated from the upper 200 channels, to enter into partnerships,
consortia, buyouts or other arrangements to determine who would be licensed on
each of the lower 230 channels in each EA. Any channel that incumbents cannot
settle, i.e., those channels that continue to have more than one licensee in an
EA, would be auctioned by the FCC. The FCC is considering this consensus
proposal and has indicated that it will issue final rules on the lower channels
in early 1997. As soon as these rules are finalized, the FCC can proceed with
both of the 800 MHz SMR auctions.
In August 1994, when the FCC first began its consideration of
geographic-area licensing for 800 MHz SMRs, all 800 MHz SMR licensing was frozen
(1) due to a large backlog of SMR applications and (2) in an effort to stabilize
the 800 MHz SMR landscape to prepare for new geographic-area licensing. In the
spring of 1996, the FCC was able to process all of the backlogged applications,
resulting in a number of license grants to Nextel. Many of these grants were the
subject of petitions for reconsideration, but Nextel has retained a large number
of these granted licenses, which will enable further implementation of Nextel's
Digital Mobile network.
At the same time it suspended all 800 MHz SMR licensing, the FCC
established a waiver process whereby parties could obtain new licenses if they
could show that their application (i) affects only channels on which the
applicant is already permanently licensed and (ii) affects coverage only within
the applicant's geographic area. Nextel and other SMR licensees subsequently
filed numerous applications pursuant to this waiver process, and have continued
to pursue FCC grant of these applications. On October 23, 1996, the Chief of the
Wireless Telecommunications Bureau released an order directing the FCC's
Licensing Division to process the waiver applications. On February 6 and 7,
1997, Nextel was granted nearly all of its waiver applications.
Among other regulatory changes being imposed by the FCC on Nextel are a 45
MHz CMRS spectrum cap, thus limiting the amount of CMRS, e.g., cellular, PCS,
and SMR, spectrum any single provider can hold. No more than 10 MHz of SMR
spectrum can be attributed to one entity, however. Cellular licensees and
wireline companies have been granted the authority to participate in dispatch
and SMR services, respectively. The FCC also has required Nextel to permit its
services to be resold, to permit manual roaming by users with technically
compatible equipment, to provide enhanced 911 services by April 1998, and to
offer local
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telephone number portability by the end of 1998. Nextel also is subject to
limitations on foreign investment as set forth in the Communications Act of
1934, as amended.
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.
EMPLOYEES
At December 31, 1996, the Company had approximately 3,600 full-time
employees. None of the Company's employees are covered by a collective
bargaining agreement and the Company believes that its relationship with its
employees is good.
RISK FACTORS
The Company's business, financial condition and future prospects are
subject to a number of risks and contingencies. Those that the Company regards
currently as among the most significant are summarized below. See also
"-- Forward-Looking Statements."
RISKS OF IMPLEMENTATION OF DIGITAL MOBILE NETWORKS. The implementation of
Digital Mobile networks involves systems design, site procurement, construction,
electronics installation, receipt of necessary FCC and other regulatory
approvals, channel recovery and initial systems optimization prior to commencing
commercial service. Each stage can take from several weeks to several months and
involves various risks and contingencies, the outcome of which cannot be
predicted. There can be no assurance that Nextel will be able to implement
Digital Mobile networks in any particular market in accordance with its current
plans and schedules. See "-- Forward-Looking Statements."
IMPLEMENTATION OF DIGITAL MOBILE NETWORKS SUBJECT TO RISKS OF DEVELOPING
TECHNOLOGY. The use of six-time and three-time slot TDMA technology in
combination with Nextel's re-use of its licensed frequencies in a cellular-type
system design permits Nextel to utilize its current holdings of spectrum more
efficiently. Efficient utilization of spectrum is an important objective
generally because less spectrum is available in the SMR band than is or will be
licensed to each cellular and certain PCS operators in each market. Although
Nextel believes that TDMA technology, on balance, is superior to analog
technology that is used in traditional SMR systems, the use of digital
technology in general, and the six-time slot TDMA version of first generation
iDEN in particular, as each is currently deployed, involves certain performance
trade-offs, for example, in various characteristics affecting voice quality and
fidelity. See "Nextel's Digital Mobile Networks -- Digital Mobile Network
Technology," "-- Customer Acceptance Considerations" and "-- Experience with
First Generation iDEN System Implementation."
In the future, a digital transmission technology other than TDMA may gain
acceptance sufficient to adversely affect the resources devoted by third parties
to developing or improving TDMA-based technologies. In addition, existing
digital cellular technology formats including cellular TDMA cannot currently be
utilized on Nextel's present SMR spectrum holdings. Accordingly, if any
improvements were to be made to such currently existing digital cellular
technology formats, the prospect of achievement of parallel improvements in the
TDMA-based iDEN technology presently utilized by Nextel is not certain. Any
difference that may from time to time exist between the technology deployed in
Nextel's Digital Mobile networks and competitive technologies then deployed by
other wireless communications service providers, such as analog, CDMA, TDMA or
other transmission technology formats that may be developed in the future, may
affect customer acceptance of the services offered by Nextel. See
"-- Forward-Looking Statements."
Customer acceptance of the services offered by Nextel will be affected not
only by technology-based differences, but also by the operational performance
and reliability of system transmissions on Nextel's Digital Mobile networks. As
is frequently the case both in the development and implementation of new
technologies and the offering of related services, Nextel has experienced
difficulties and delays in the implementation of the first generation iDEN TDMA
technology in its Digital Mobile networks. See "Nextel's Digital Mobile
Networks -- Experience with First Generation iDEN System Implementation."
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Motorola has advised Nextel that it contemplates continuing to install
software upgrades and Nextel anticipates it will continue to advise and consult
with Motorola concerning potential measures that could be taken to address any
issues concerning system performance issues and/or expressed customer
satisfaction levels as revealed by Nextel's continuing system testing and
customer surveys. To date, Nextel's experience has been derived mainly based on
customers in its markets employing the first generation iDEN technology, who are
primarily oriented to the two-way dispatch service, and such experience should
not necessarily be regarded as an accurate predictor of Nextel's experience in
the future, particularly as Nextel continues to implement its planned nationwide
roll-out of the Reconfigured iDEN technology and as Nextel's customer base
expands beyond such group of initial customers. Any inability to address and
resolve satisfactorily performance issues that affect customer acceptance of
Digital Mobile network service could delay or adversely affect the successful
commercialization of the Digital Mobile networks and could adversely affect the
business and financial prospects of Nextel. If Nextel for any reason is unable
to implement Digital Mobile networks and provide service to its target customers
that is competitive with the services of other wireless communications
providers, Nextel would be unable, utilizing its existing analog SMR networks,
to provide mobile telephone services comparable to those provided by other
wireless communications services providers or to achieve significant further
subscriber growth. See "-- Forward-Looking Statements."
Nextel anticipates that there will be an ongoing focus on systems and
technology optimization activities directed at achieving improvements in the
overall performance of the Digital Mobile networks. and that such technology
optimization activities will be a continuing component of normal Digital Mobile
network operation, and the satisfactory resolution of certain system performance
issues in a particular market or at a particular stage of operation will not
necessarily preclude the need to address those issues again, for example, as a
result of a significant increase in the number of subscribers using the Digital
Mobile networks. and future upgrades or modifications to the Digital Mobile
networks may have unexpected adverse effects on performance issues previously
addressed and resolved. Each of Nextel and Motorola believes, however, that a
large portion of the hardware and software adjustments developed in the course
of system development and technology optimization activities to address
particular issues, and the resulting system performance improvements realized,
should be applicable to similar issues in different markets. Nevertheless, as is
often the case in the deployment of wireless communications networks, it should
be expected that there will be market-specific characteristics, such as local
terrain, topography, the number of licensed frequencies, the utilization of
adjacent radio frequencies and other factors, that will require customized
optimization activities to address related system performance issues
successfully. See "-- Forward-Looking Statements."
Pursuant to the Second Equipment Agreement Amendment, Motorola agreed to
use its best efforts to develop, and Nextel agreed to implement when developed,
the Reconfigured iDEN technology. Although the Reconfigured iDEN development and
deployment activities to date have proceeded in a timely and satisfactory
manner, no assurance can be given that any further modifications or to the
Reconfigured iDEN technology will be developed successfully, or on the currently
anticipated time schedule, or that any such modifications or enhancements, if
developed, would be deployed in Nextel's Digital Mobile networks or, if
deployed, would perform successfully or would satisfy customer requirements, or
that Nextel's mobile telephone services utilizing the Reconfigured iDEN
technology would continue to be regarded as competitive in the wireless
communications services markets as such markets currently exist and as they are
expected to develop in the future. See "-- Forward-Looking Statements."
NEXTEL TO REQUIRE ADDITIONAL FINANCING. Nextel anticipates that, for the
foreseeable future, it will be utilizing significant amounts of its available
cash for capital expenditures for the construction of Digital Mobile networks
(including the anticipated conversion of its existing Digital Mobile networks to
utilize the Reconfigured iDEN technology platform), operating expenses relating
both to the Digital Mobile networks and to Nextel's analog SMR networks,
potential acquisitions (including the acquisition of rights to spectrum through
the contemplated 800 MHz spectrum auction process) and corporate expenditures.
Nextel anticipates that its cash utilization for capital expenditures and other
investing activities and operating losses will continue to exceed its cash flows
from operating activities over the next several years. During fiscal year 1996,
Nextel's average monthly cash utilization rate for investing activities
(principally attributable to capital expenditures for the build-out of the
Digital Mobile networks) was approximately $33,390,000, and its average monthly
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operating losses (exclusive of non-cash items) were approximately $20,400,000.
Such average monthly amounts are not necessarily representative of Nextel's
anticipated experience in such areas and would be expected to increase during
1997 and 1998 in connection with the deployment of the Reconfigured iDEN
technology platform, particularly if the Company is able and decides to
implement the Revised Business Plan. During the ongoing start-up phase of its
Digital Mobile networks, Nextel expects that it will need to utilize its
existing cash and funding from outside sources to meet its cash needs resulting
from such activities and losses. Nextel's aggregate cash, cash equivalents and
marketable securities at December 31, 1996 totaled approximately $144,693,000.
At December 31, 1996, Nextel had drawn approximately $590,000,000 of its
available financing under the Bank Credit Facility, leaving an aggregate of
approximately $1,065,000,000 available for borrowing under such facility, and
had drawn $150,000,000 of its available financing under the Vendor Credit
Facility, leaving an aggregate of approximately $195,000,000 available for
borrowing under such facility, subject in each case to the satisfaction or
waiver of applicable borrowing conditions. The Bank Credit Agreement
contemplates that the Company, with the consent of the lenders under the Bank
Credit Agreement and the Vendor Credit Agreement, may borrow up to an additional
$250,000,000 (subject to certain limitations) under the Bank Credit Facility
(the "Additional Bank Borrowings"). The Bank Credit Agreement also contemplates
that borrowings under the Vendor Credit Facility may be increased by up to
$50,000,000 (subject to certain limitations) (the "Additional Vendor
Borrowings"). See "Post Fiscal Year-End Transactions and Developments -- Consent
Solicitation."
Nextel is currently taking steps to obtain additional sources of funding in
addition to the amounts currently available under the Bank and Vendor Credit
Facilities, including the Additional Bank Borrowings and Additional Vendor
Borrowings. Availability of the Additional Bank Borrowings is subject, among
other things, to the approval of a majority of the lenders under the Bank Credit
Agreement and the Vendor Credit Agreement. There are currently no legally
binding agreements or understandings with any lenders with respect to the terms
(other than the provisions contained in the Bank Credit Agreement and the Vendor
Credit Agreement that would permit such additional borrowing with majority
approval of the lenders thereunder) on which such Additional Bank Borrowings may
be made available. Nextel has also reached an understanding with Motorola
concerning the terms on which Motorola would make the $50,000,000 in Additional
Vendor Borrowings available and the terms on which Motorola would make
additional secured equipment financing available. See "Post Fiscal Year-End
Transactions and Developments -- Nextel/Motorola Agreements."
Nextel believes that is has sufficient funds currently available pursuant
to the Bank and Vendor Credit Facilities currently in place (but excluding any
amounts that would be available to it through the Additional Bank Borrowings,
the Additional Vendor Borrowings, the Second Secured Borrowings and the Senior
Secured Borrowings the availability of each of which is subject to certain
conditions, including those described herein) and pursuant to the assumed
exercise of the currently outstanding warrants and options to acquire shares of
Class A Common Stock described below, to meet its cash needs for the remainder
of 1997 and into early 1998, based on continuation of its first stage nationwide
Digital Mobile networks build out approach consistent with its Existing Business
Plan, in light of its current (and currently committed) business and investment
activities and assuming a conservative ramp up in Digital Mobile systems
subscriber growth. To fully complete its first stage nationwide Digital Mobile
networks build out in 1998 as envisioned in the Existing Business Plan, and to
adopt and implement the Revised Business Plan, Nextel would need to obtain
additional amounts of debt or equity financing beyond that available under the
Bank and Vendor Facilities currently in place (excluding amounts constituting
Additional Bank Borrowings, Additional Vendor Borrowings, Second Secured
Borrowings and Senior Secured Borrowings) and equity proceeds of $232,500,000
associated with an assumed exercise in full of certain options held by the McCaw
Investor (discussed below). The additional financing that would be required to
carry out the Existing Business Plan activities through 1998 would primarily
consist of equity or debt funding to substitute for the proceeds that would have
been received upon an exercise in full of the warrants for 25,000,000 shares of
Class A Common Stock previously held by Comcast FCI. To the extent such
additional financing were in the form of debt rather than equity, it is likely
that changes to the terms of the Nextel Indentures would be required to permit
the Company the needed flexibility to incur such debt. See "Post Fiscal Year-End
Transactions and Developments -- Consent Solicitation" and
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27
"-- Nextel/Motorola Agreements." See also "-- Forward-Looking Statements."
Significant additional financing would be required to adopt and implement the
Revised Business Plan. As indicated above under "Post Fiscal Year-End
Transactions and Developments," the Company is currently investigating and
taking a variety of actions directed to obtain access to significant additional
amounts of debt financing. However, assuming (i) that the Company obtains the
relief it is seeking from the holders of the Nextel Notes, especially the
changes in the provisions of the Nextel Indentures that relate to "Permitted
Debt," and (ii) that the Company secures access to all of the available funds
under the existing Bank and Vendor Credit Facility, and is able to structure
satisfactory arrangements to make the additional $200,000,000 in Second Secured
Borrowings from Motorola available (including obtaining access to the
$250,000,000 in Additional Bank Borrowings and to the $50,000,000 in Additional
Vendor Borrowings), the Company estimates that it would have sufficient
financing available to meet its cash needs through 1998 and completion of the
Existing Business Plan. The Company estimates that approximately an additional
$500,000,000 in financing would be required to meet the Company's anticipated
cash needs through 1998, assuming implementation and completion of the Revised
Business Plan. See "Revised Business Plan." In all of such financing scenarios,
Nextel has assumed that all of the funds currently available pursuant to the
Bank and Vendor Credit Facilities may be borrowed thereunder and that certain
currently outstanding warrants and options to acquire shares of Class A Common
Stock described below will be exercised in full before their respective
currently scheduled expiration dates. See "-- Forward-Looking Statements."
Other than the arrangements summarized under "Post Fiscal Year-End
Transactions and Developments -- Nextel/Motorola Agreements," which are subject
to a number of conditions, there are currently no commitments or understandings
with third parties to obtain funding required to meet such funding shortfall.
Moreover, there can be no assurance that the Additional Bank Borrowings,
Additional Vendor Borrowings or Second Secured Borrowings will be available or
that the outstanding warrants and options will be exercised. Both the Bank and
Vendor Credit Facilities and the Nextel Indentures contain provisions that
operate to limit the amount of borrowings that may be incurred by the Company.
The Company intends to seek the consent of the holders of the Nextel Notes to
certain amendments to the Nextel Indentures that would, among other things,
permit the Company to incur additional indebtedness to meet the funding
requirements associated with completion of its Existing Business Plan and
implementation of its Revised Business Plan. See "Post Fiscal Year-End
Transactions and Developments -- Consent Solicitation." In addition, Nextel's
capital needs, and its ability to adequately address those needs through debt or
equity funding sources, are subject to a variety of factors that cannot
presently be predicted with certainty, such as the commercial success of
Nextel's Digital Mobile networks incorporating the Reconfigured iDEN technology,
the amount and timing of Nextel's capital expenditures and operating losses, and
the market price of the Class A Common Stock. See "-- Forward-Looking
Statements."
Nextel currently is aware of numerous factors and considerations, any one
or more of which could have a material effect on the timing and/or amount of the
future funding to be required by Nextel, but Nextel cannot currently quantify
with precision either the magnitude or the certainty of the effects associated
with any such factors. These factors include: (i) the timing of the anticipated
800 MHz spectrum auction process, and the amounts required to be bid to acquire
any or all of the available spectrum blocks in the major metropolitan market
areas where Nextel currently operates, or currently plans to operate, its
Digital Mobile network and the amounts that may be required to accomplish
retuning or acquisition of 800 MHz incumbent channels in spectrum blocks that
may be acquired by Nextel in the 800 MHz spectrum auction process; (ii) the
uncertainty with respect to the success and/or timing of the continuing
development and deployment activities relating to the Reconfigured iDEN
technology format and, assuming successful and timely completion of such
efforts, the uncertainty with respect to the successful commercial introduction
and customer acceptance of Nextel's Digital Mobile services in new market areas
using such technology; (iii) the potential commercial opportunities and risks
associated with implementation of Nextel's Revised Business Plan and (iv) the
net impact on Nextel's capital budget of certain developments currently expected
to increase capital needs (e.g., the additional capital needed if Nextel
acquires for cash additional spectrum in certain markets to increase the
capacity and/or efficiency of Nextel's operating Digital Mobile networks in such
markets, the additional capital needed for more extensive construction of
Digital Mobile networks in additional market areas acquired or that may be
acquired by Nextel in the future and in connection with the conversion of
existing Digital
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Mobile networks to the Reconfigured iDEN technology format, the expenditures
associated with analog SMR station construction requirements under the currently
effective FCC 800 MHz channel licensing approach) that may be offset (whether
wholly or partially) by other developments anticipated to (or to have the
potential to) reduce capital needs (e.g., co-location of antenna and/or
transmitter sites with other providers of wireless services in the relevant
markets, reductions in infrastructure and subscriber unit prices obtained from
Motorola pursuant to the Second Equipment Agreement Amendment and the 1997-1998
Agreement, alternative and more economical means for increasing system capacity,
other than constructing additional cell sites and/or installing additional base
radios, such as use of so-called "smart antennas," mini-cells and
software-driven and/or system design performance enhancements). Many of the
foregoing involve elements wholly or partly beyond Nextel's control or
influence. See "-- Forward-Looking Statements."
Other considerations in addition to the factors identified above may
significantly affect Nextel's decisions to seek additional financing, including
general economic conditions, conditions in the telecommunications and/or
wireless communications industry and the feasibility and attractiveness of
structuring particular financings for specific purposes (e.g., separate
capital-raising activities with respect to international activities and
opportunities). Finally, Nextel could obtain significant additional funds in
connection with the exercise of outstanding warrants and options, and the amount
and timing of receipt of such funds also would play a role in Nextel's
determinations concerning the need for or attractiveness of other potentially
available sources of financing. As Nextel has disclosed previously, full
exercise of the options granted to the McCaw Investor at the July 1995 closing
of the McCaw Transaction would result in the receipt by Nextel of approximately
$232,500,000, $277,500,000 and $107,500,000 of additional funds prior to July 29
in the years 1997, 1999 and 2001, respectively, and full exercise of the
warrants initially issued to Motorola for 3,000,000 shares of Class A Common
Stock would result in the receipt by Nextel of approximately $45,000,000 in
additional funds ($32,100,000 of which would be received in 1999 and
substantially all of the remainder of which would be received prior to 2001).
Finally, proceeds from the exercise by the McCaw Investor of its anti-dilutive
rights to acquire additional Nextel equity in connection with certain issuances
by Nextel of its capital stock and proceeds from the exercise of other warrants
and options currently outstanding and held by third parties, including options
granted pursuant to the Nextel Amended and Restated Incentive Equity Plan
(including its predecessor plans) and the Nextel Associates Stock Purchase Plan,
may provide other available sources of funding.
The foregoing discussion concerning potential exercise of various third
party rights to acquire shares of Class A Common Stock is subject to the
qualification that no assurance can be given that any of such rights will be
exercised or, if exercised, that the contemplated investment will in fact be
consummated. In the case of the Bank Credit Facility and the Vendor Credit
Facility (or the Additional Bank Borrowing and/or any of the additional
borrowings contemplated by the Additional Motorola Financing, if structured
successfully), there can be no assurance that the conditions to access such
facilities will be met. To the extent any of the aforementioned proceeds from
option and warrant exercises or financing arrangements are not available when
required, it will be necessary for Nextel to obtain alternate sources of
financing to meet its anticipated funding needs.
Nextel has had and may in the future have discussions with other parties
regarding potential equity investments and debt financing arrangements to
satisfy actual or anticipated financing needs. Pursuant to the Motorola
Transaction, 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. Motorola
consented with respect to the grant of superior governance rights by Nextel in
connection with the McCaw Transaction. The ability of Nextel to incur additional
indebtedness (including, in certain circumstances, indebtedness incurred under
the Bank Credit Agreement and/or under the Vendor Credit Facility) is and will
be limited by the terms of the Nextel Indentures, the Bank Credit Agreement and
the Vendor Credit Agreement. The Bank Credit Agreement and the Vendor Credit
Agreement also require Nextel and its relevant subsidiaries at specified times
to satisfy certain financial covenants or ratios including certain covenants and
ratios specifically related to leverage.
At present, other than the existing equity or debt financing arrangements
that have been consummated and/or disclosed, Nextel has no commitments or
understandings with any third parties to obtain any material
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amount of additional equity or debt financing. Moreover, no assurances can be
made that Nextel will be able to obtain any such additional financing in the
amounts or at the times such financing may be required, or that, if obtained,
any such financing would be on acceptable terms. Nextel also anticipates that it
will continue to experience significant net losses during the ongoing start up
phase of the Digital Mobile networks over the next several years. Accordingly,
there can be no assurances as to whether or when the operations of Nextel will
become profitable. As a result of Nextel's anticipated continuing losses, the
uncertainty regarding the exercise of options and warrants, the availability of
financing under the Bank and Vendor Credit Facilities and the impact of
Reconfigured iDEN technology and other matters discussed above, there can be no
assurance that Nextel will be able to obtain adequate capital to implement the
nationwide build-out of its Digital Mobile networks in accordance with either
the Existing Business Plan or the Revised Business Plan. See "-- Forward-Looking
Statements."
SUCCESS OF NEXTEL IS DEPENDENT ON ITS ABILITY TO COMPETE. Nextel's success
depends on its Digital Mobile networks' ability to compete with other wireless
communications systems in each relevant market and its ability to successfully
market integrated wireless communication services. Nextel is continuing to focus
its marketing efforts on attracting customers from its previously identified
targeted groups of potential subscribers, chiefly its existing analog SMR
subscribers and other business users, including current users of multiple
wireless communications services and those new users who may be attracted to the
combination of services made possible by its Digital Mobile networks. See
"Nextel's Digital Mobile Networks -- Competition" and "-- Marketing."
Following implementation of its Digital Mobile networks and completion of
related system optimization activities, the Company's Digital Mobile networks
will compete with established and future wireless communications operators in
its efforts to attract customers, dealers and possibly resellers to its services
in each of the markets in which it operates a Digital Mobile network. The
Company believes that following software upgrades and additional system
optimization efforts and equipment and technology enhancements that occurred
during 1996, and the commercial deployment of the Reconfigured iDEN technology,
Nextel's Digital Mobile networks will have the capacity, functionality and
quality of service necessary to be competitive with current wireless
communications services in the markets in which the Company operates Digital
Mobile networks. Nextel's ability to compete effectively with other wireless
communications service providers, however, will depend on a number of factors,
including the successful deployment of the Reconfigured iDEN technology platform
in its market areas, the continued satisfactory performance of such technology,
the establishment of roaming service among such market areas and the development
of cost effective direct and indirect channels of distribution for its products
and services. Although the Company has made significant progress in these areas
to date, no assurance can be given that such objectives will be achieved. See
"Risk Factors -- Forward-Looking Statements."
While Nextel believes that the mobile telephone service provided on its
Digital Mobile networks utilizing the Reconfigured iDEN technology is similar in
function to and achieves performance levels competitive with those being offered
by other current wireless communications services providers in Nextel's market
areas, there are (and will in certain cases continue to be) differences between
the services provided by Nextel and by cellular and/or PCS system operators and
the performance of their respective systems. As a result of these differences,
there can be no assurance that services provided on Nextel's Digital Mobile
networks will be competitive with those available from other providers of mobile
telephone services. As part of its marketing strategy, Nextel will continue to
emphasize the benefits to its customers of obtaining an integrated package of
services consisting of mobile telephone service, two-way dispatch, alphanumeric
short-messaging and paging services, and in the future, data transmission.
Neither PCS system operators nor cellular operators currently provide such
integrated services, but recent FCC rulings permit cellular operators to offer
two-way dispatch services. If either PCS system or cellular operators do provide
two-way dispatch services in the future, Nextel's competitive advantage from
using such a marketing strategy may be impaired.
Nextel currently offers its mobile telephone customers the ability to
"roam" among Nextel's existing Digital Mobile network market areas, which as of
December 31, 1996 represented coverage of approximately 50% of the United States
population. Accordingly, Nextel will not be able to provide roaming service
comparable to that currently available from cellular operators, which have
roaming agreements covering each
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other's markets throughout the United States, unless and until a nationwide
Digital Mobile networks build-out is substantially completed. Moreover, the
cellular systems in each of Nextel's markets, as well as in the markets in which
Nextel expects to provide services in the future, have been operational for a
number of years, currently service a significant subscriber base and typically
have significantly greater financial and other resources than those available to
Nextel. As is true for cellular operators, the interconnection of subscriber
units with the public switched telephone network requires Nextel to purchase
certain exchange and inter-exchange services from telephone companies and
certain other common carriers.
Subscriber units on the Digital Mobile networks will not be compatible with
cellular or PCS systems, and vice versa. This lack of interoperability may
impede the Company's ability to attract cellular subscribers or those new mobile
telephone subscribers that desire the ability to access different service
providers in the same market. Nextel currently markets a multi-function
subscriber unit that is (and is likely to remain) significantly more expensive
than analog cellular handsets, and is (and is likely to remain) somewhat more
expensive than digital cellular handsets, that do not incorporate a comparable
multi-function capability. Accordingly, the prices expected to be charged to
Nextel for the subscriber handsets to be used by Nextel's customers will be
higher than those charged to operators for analog cellular handsets and may be
higher than those charged to operators for digital cellular handsets. The
Company's multi-function subscriber units, however, are competitively priced
compared to multi-function (mobile telephone service and alphanumeric short-text
messaging) digital cellular and PCS handsets. During the transition to digital
technology, certain participants in the United States cellular industry are
offering subscriber units with dual mode (analog and digital) compatibility.
There can be no assurances that existing analog SMR customers will be willing to
invest in new subscriber equipment necessary to migrate to the Digital Mobile
networks. Moreover, because many of the cellular operators and certain of the
PCS operators in Nextel's markets have substantially greater financial resources
than Nextel, such operators may be able to offer prospective customers equipment
subsidies or discounts that are substantially greater than those, if any, that
could be offered by Nextel. Thus, Nextel's ability to compete based on the price
of subscriber units will be limited. Nextel cannot predict the competitive
effect that any of these factors, or any combination thereof, will have on
Nextel. See "-- Forward-Looking Statements."
Cellular operators and certain PCS operators and entities that have been
awarded PCS licenses each control more spectrum than is allocated for SMR
service in each of the relevant market areas. Each cellular operator is licensed
to operate 25 MHz of spectrum and certain PCS licensees have been licensed for
30 MHz of spectrum in the markets in which they are licensed, while no more than
21.5 MHz is available in the 800 MHz band to all SMR systems, including Nextel's
systems, in those markets. The control of more spectrum gives cellular operators
and such PCS licensees the potential for more system capacity, and, therefore,
more subscribers, than SMR operators, including the Company. The Company
believes that it generally has adequate spectrum to provide the capacity needed
on its Digital Mobile networks for the foreseeable future. See
"-- Forward-Looking Statements."
RELIANCE ON ONE PRINCIPAL SUPPLIER IN IMPLEMENTATION OF DIGITAL MOBILE
NETWORKS. Pursuant to the Equipment Purchase Agreements between Nextel and
Motorola, Motorola provides the iDEN infrastructure and subscriber handset
equipment to Nextel throughout its markets. The Company expects that it will
need to rely on Motorola for the manufacture of a substantial portion of the
equipment necessary to construct its Digital Mobile networks for the foreseeable
future. The Equipment Purchase Agreements include a commitment from Nextel to
purchase from Motorola a significant amount of system infrastructure equipment.
Nextel has, among other things, agreed (subject to certain conditions) to
purchase and install iDEN equipment during the four-year and six-year periods
beginning on August 4, 1994 sufficient to cover 70% and 85%, respectively, of
the United States population. In addition, subject to the applicable terms and
conditions under the Second Equipment Agreement Amendment, Nextel has agreed to
deploy Reconfigured 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. See "Nextel's Digital Mobile Networks --
Technology Commitments" and "-- Forward-Looking Statements." Such commitments
are in addition to amounts purchased from Motorola or for which Nextel or
companies acquired by Nextel had placed orders with Motorola prior to August 4,
1994, which orders have become obligations of Nextel. Nextel estimates that
system infrastructure and other system capital costs to be incurred through 1998
to implement the Existing
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Business Plan will be approximately $1.0 billion and that implementation of the
Revised Business Plan would increase such costs by at least $450,000,000. See
"-- Nextel to Require Additional Financing."
The Second Equipment Agreement Amendment places certain limits on Nextel's
ability to use other technologies as an alternative to iDEN. See "Nextel's
Digital Mobile Networks -- Technology Commitments."
It is expected that for the first few years of Digital Mobile network
operations by Nextel, 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 networks. The Prior Equipment Agreement
Amendment provides for the licensing by Motorola of interfaces relating to
infrastructure and subscriber equipment and of additional manufacturers for
subscriber equipment. In connection with the Second Equipment Agreement
Amendment, Motorola further agreed to negotiate to enter into licenses with at
least one alternative manufacturer of iDEN system 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.
NEXTEL'S PROSPECTS ARE DEPENDENT ON GOVERNMENTAL REGULATION. The
licensing, operation, acquisition and sale of Nextel's SMR businesses are
regulated by the FCC. FCC regulations have undergone significant changes during
the last three years and continue to evolve as new FCC rules and regulations are
adopted pursuant to OBRA '93 and TCA '96. The Company's ability to conduct its
business is dependent, in part, on its compliance with FCC rules and
regulations. See "-- Regulation." Future changes in regulation or legislation
affecting Digital Mobile network service and Congress' and the FCC's recent
allocation of additional CMRS spectrum by Congress and the FCC could materially
adversely affect Nextel's business.
NEXTEL'S ASSETS PRIMARILY CONSIST OF INTANGIBLE FCC LICENSES. Nextel's
assets consist primarily of intangible assets, principally FCC licenses, the
value of which will depend significantly upon the success of Nextel's business
and the growth of the SMR and wireless communications industries in general. In
the event of default on indebtedness or liquidation of Nextel, there can be no
assurance that the value of these assets will be sufficient to satisfy its
obligations. Nextel had a negative net tangible book value of $1,268,000 as of
December 31, 1996.
NEXTEL SUSCEPTIBLE TO CONTROL BY SIGNIFICANT STOCKHOLDERS. Based on
securities ownership information relating to Nextel as of March 21, 1997, and
giving effect to the repurchase of the Option Agreement from Comcast FCI, the
conversion of the outstanding shares of Nextel's preferred stock and Class B
Common Stock and the exercise in full of (i) three separate options held by the
McCaw Investor exercisable for periods of two, four and six years, respectively,
from July 28, 1995, to acquire an aggregate of up to 35,000,000 shares of Class
A Common Stock at exercise prices ranging from $15.50 to $21.50 per share (the
"McCaw Options"), (ii) the option held by Eagle River, Inc., an affiliate of the
McCaw Investor ("Eagle River"), to purchase an aggregate of 1,000,000 shares of
Class A Common Stock at an exercise price of $12.25, which option vests over a
five-year period from April 4, 1995 (the "Incentive Option"), (iii) the options
granted on July 28, 1995 to the McCaw Investor by Motorola to purchase up to
9,000,000 shares of Class A Common Stock over a six-year period (the "McCaw
Investor/Motorola Options"), and (iv) a warrant held by Motorola to purchase
2,700,000 shares of Class A Common Stock, the McCaw Investor would hold
approximately 24.5% and Motorola would hold approximately 16.9% of the Class A
Common Stock outstanding as of such date.
In connection with the consummation of the McCaw Transaction and pursuant
to the Securities Purchase Agreement dated as of April 4, 1995, as amended,
among Nextel, the McCaw Investor and Mr. Craig O. McCaw (the "McCaw Securities
Purchase Agreement"), the McCaw Investor has the right to designate not less
than 25% of the Board of Directors of Nextel (the "Nextel Board"). Additionally,
the McCaw Investor is entitled to have a majority of the members of the
Operations Committee of the Nextel Board selected from the McCaw Investor's
representatives on the Nextel Board. The Operations Committee has the authority
to formulate key aspects of Nextel's business strategy, including decisions
relating to the technology used by Nextel (subject to existing equipment
purchase agreements), acquisitions, the creation and approval of operating and
capital budgets and marketing and strategic plans, approval of financing plans,
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endorsement of nominees to the Nextel Board and committees thereof and
nomination and oversight of certain executive officers. As a result, based upon
the McCaw Investor's stock ownership position, as well as its ability to
designate at least 25% of the members of the Nextel Board and control the
Operations Committee, the McCaw Investor is in a position to exert significant
influence over Nextel's affairs. The Nextel Board retains the authority to
override actions taken or proposed to be taken by the Operations Committee,
subject, in certain circumstances, to certain financial consequences. The
creation and existence of the Operations Committee does not change the normal
fiduciary duties of the Nextel Board, including fiduciary duties in connection
with any proposal to override any action of or to terminate the Operations
Committee, whether or not such action would give rise to such financial
consequences. Although Motorola is entitled to nominate two directors to the
Nextel Board, presently only one person designated by Motorola is a Nextel
director. Pursuant to an amendment to the Motorola Agreement, dated as of April
4, 1995, by and among Nextel, Motorola and certain subsidiaries of Motorola (the
"Motorola Amendment"), Motorola has agreed to support the decisions and
recommendations of the Operations Committee and to vote the shares of Class A
Common Stock held by it accordingly, subject to (1) the right of any
Motorola-designated Nextel directors to vote in a manner consistent with their
fiduciary duties and (2) 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 Class A Common Stock held by it.
Based upon their respective ownership positions, if the McCaw Investor and
Motorola chose to act together, such parties could have a sufficient voting
interest in Nextel, among other things, to (1) exert effective control over the
approval of amendments to Nextel's Restated Certificate of Incorporation, as
amended (the "Nextel Charter"), mergers, sales of assets or other major
corporate transactions as well as other matters submitted for stockholder vote,
(2) defeat a takeover attempt, and (3) otherwise control whether particular
matters are submitted for a vote of the stockholders of Nextel. Although
Motorola has made certain commitments as described in the last sentence of the
preceding paragraph, Nextel is not aware of any current agreements among the
McCaw Investor and Motorola with respect to the ownership or voting of Class A
Common Stock and neither of Motorola nor the McCaw Investor has indicated to
Nextel that it has any present intention to seek to exercise such control.
Pursuant to the McCaw Securities Purchase Agreement, the McCaw Investor has
agreed that it will not vote for any nominee to the Nextel Board other than
persons it is entitled to designate under the terms of the securities it owns or
of the McCaw Securities Purchase Agreement. Upon request of Nextel, the McCaw
Investor has also agreed to cause shares of Class A Common Stock, the voting of
which is controlled by it or its affiliates, to be voted in a manner
proportionate to the votes of other holders of Class A Common Stock in the
election of directors so designated by the Nextel Board.
Each of the McCaw Investor and Motorola has and (subject to the terms of
applicable agreements between such parties and Nextel) may have an investment or
interest in entities that provide wireless telecommunications services that
could potentially compete with Nextel. Under the McCaw Securities Purchase
Agreement, the McCaw Investor, Mr. McCaw and their Controlled Affiliates (as
defined in the McCaw Securities Purchase Agreement) may not, for a period of
time after consummation of the McCaw Transaction, 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
have first been presented to and rejected by Nextel in accordance with the
provisions of the McCaw Securities Purchase Agreement. Such limitation is
subject to certain limited exceptions, including certain existing securities
holdings and relationships (and expressly including Mr. McCaw's investment in
AT&T resulting from AT&T's acquisition of McCaw Cellular Communications, Inc.,
which investment may not exceed 3% of the outstanding stock of AT&T). Such
restrictions terminate on the later to occur of July 28, 2000 or one year after
the termination of the Operations Committee.
POTENTIAL DILUTION FROM PENDING AND FUTURE TRANSACTIONS. As indicated
elsewhere herein, Nextel has commitments, and from time to time, may enter into
additional commitments, to issue a substantial number of new shares of Class A
Common Stock.
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As of March 1, 1997, there were approximately 267,550,000 shares of Class A
Common Stock outstanding (assuming the conversion of the outstanding shares of
Class B Common Stock and Nextel's preferred stock), on a primary, rather than a
fully diluted, basis, and approximately 355,706,000 shares of Common Stock
outstanding assuming the exercise of all options (including employee options,
Motorola's warrant to purchase 2,700,000 shares, and the options to purchase an
aggregate of 36,000,000 shares pursuant to the McCaw Options and the Incentive
Option), warrants and other existing rights to acquire Class A Common Stock,
outstanding on such date.
On April 29, 1996, the Commission declared effective the Company's
Registration Statement on Form S-4, covering 10,000,000 shares of Class A Common
Stock, or warrants to acquire such shares, which contemplates issuances from
time to time on a "shelf" basis in accordance with Rule 415(a)(1)(viii)
promulgated under the Securities Act in connection with acquisitions of other
businesses, properties or securities in business combination transactions. As of
the date hereof, the Company has not issued any of such Class A Common Stock or
warrants. Additionally, on April 29, 1996, the Commission declared effective the
Company's Registration Statement on Form S-3, covering 8,848,469 shares of Class
A Common Stock, which was filed by Nextel on behalf of Comcast and Comcast FCI
in satisfaction of the Company's obligations pursuant to the registration rights
of Comcast and Comcast FCI. According to the most recent amendment to the
Schedule 13D of Comcast filed on October 1, 1996, Comcast and Comcast FCI have
sold an aggregate of 5,570,000 of such shares of Class A Common Stock pursuant
to brokerage transactions.
Pursuant to the McCaw Securities Purchase Agreement, the McCaw Investor was
granted anti-dilutive rights with respect to certain Nextel share issuances. In
connection with the issuance of Class A Common Stock by Nextel in connection
with an acquisition, the McCaw Investor exercised its anti-dilutive rights,
which resulted in the sale of 373,846 treasury shares of Class A Common Stock to
the McCaw Investor on November 26, 1996. The McCaw Investor has the right to
acquire additional shares of Class A Common Stock as a result of future
issuances of shares of Class A Common Stock. An increase in the number of shares
of Class A Common Stock that will become available for sale in the public market
may adversely affect the market price of Class A Common Stock and could impair
Nextel's ability to raise additional capital through the sale of its equity
securities.
POTENTIAL CONFLICT OF INTEREST RELATIONSHIP WITH MOTOROLA. Motorola and
its affiliates have and currently are engaged in wireless communications
businesses, and may in the future engage in additional such businesses, which
are or may be competitive with some or all of the services offered by Nextel's
Digital Mobile networks, although the Motorola Land Mobile Products Sector
("Motorola LMPS") may not, prior to July 28, 1998, make use (with certain
limited exceptions) of the customer lists conveyed by Motorola to ESMR in
connection with the Motorola Transaction to solicit subscribers for any 800 MHz
SMR commercial mobile voice business owned or managed by Motorola LMPS in the
continental United States. Pursuant to the Second Equipment Agreement Amendment,
Motorola has agreed that from the date thereof until eighteen months after
certain development targets for Reconfigured iDEN technology have been achieved,
Motorola LMPS will not solicit other iDEN customers and neither Motorola LMPS
nor Motorola's credit corporation subsidiary will make any equity investment in,
or provide equipment/vendor financing to, certain iDEN customers with respect to
purchases of iDEN equipment.
In light of the competitive posture of Motorola, Nextel and Motorola have
agreed that any information relating to Nextel's business plans and projections
will be used by Motorola only for purposes of ensuring compliance with Nextel's
obligations under the various equipment purchase agreements and financing
agreements between Nextel and Motorola. Motorola has designated one director to
the Nextel Board and, hence, such director has access to Nextel's business plans
subject to certain confidentiality restrictions.
Although Nextel believes that its equipment purchase and financing
relationship with Motorola has been structured to reflect the realities of
purchasing and borrowing from a competitor, there can be no assurance that the
potential conflict of interest will not adversely affect Nextel in the future.
Moreover, Motorola's role as a significant stockholder of Nextel, in addition to
its role as a major creditor and supplier, also creates potential conflicts of
interest, particularly with regard to significant transactions.
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CONCERNS ABOUT MOBILE COMMUNICATIONS HEALTH RISK MAY AFFECT PROSPECTS OF
NEXTEL. Allegations have been made, but not proven, that the use of portable
mobile communications devices may pose health risks due to radio frequency
emissions from such devices. Studies performed by wireless telephone equipment
manufacturers have rebutted these allegations, and a major industry trade
association and certain governmental agencies have stated publicly that the use
of such 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.
FORWARD-LOOKING STATEMENTS. A number of the matters and subject areas
discussed in the foregoing "Risk Factors" section and elsewhere in this Annual
Report that are not historical or current facts deal with potential future
circumstances and developments. The discussion of such matters and subject areas
is qualified by the inherent risks and uncertainties surrounding future
expectations generally, and also may materially differ from Nextel's actual
future experience involving any one or more of such matters and subject areas.
Nextel has attempted to identify, in context, certain of the factors that it
currently believes may cause actual future 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 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 (such as, for example,
construction, delivery, and real estate management services) 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 systems deployment and marketing plans and customer demand, the
success of efforts to improve and satisfactorily address any issues relating to
Digital Mobile system performance, the successful nationwide deployment of the
Reconfigured iDEN technology, the ability to achieve market penetration and
average subscriber revenue levels sufficient to provide financial viability to
the Digital Mobile network business, 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 PCS service, future
legislative or regulatory actions relating to SMR services, other wireless
communications services or telecommunications generally and other risks and
uncertainties described from time to time in Nextel's reports filed with the
Commission.
ITEM 2. PROPERTIES
The Company leases its principal executive and administrative office, which
is located at 1505 Farm Credit Drive, in McLean, Virginia, comprising
approximately 80,400 square feet, for an initial term of 10 years, expiring
August 14, 2006, with two five-year renewal options. The Company also leases for
certain administrative operations approximately 110,000 square feet of office
space in Denver, Colorado under a lease expiring in 2004, approximately 95,600
square feet of office space in Norcross, Georgia under a lease expiring in 2005
and approximately 58,170 square feet in Rutherford, New Jersey under a lease
expiring in April 2001. The Company also leases office facilities for sales,
maintenance and administrative operations in its markets. There are
approximately 100 office leases in effect at December 31, 1996 with terms
ranging from 1 to 10 years (not including extensions related to the exercise of
renewal options).
The Company leases antenna sites for the transmission of its radio service
which are located, in the case of its analog SMR operations, primarily on either
building tops or mountain tops and in the case of its Digital Mobile networks
operations, on towers, generally at heights ranging from 150 to 300 feet above
the ground. The terms on approximately 97% of the leases range from
month-to-month to 20 years. As of December 31, 1996, the Company had
approximately 2,500 site leases for its analog SMR business and approximately
2,800 constructed sites at leased locations for its Digital Mobile networks. The
Company also owns properties and transmission towers where management considers
it is in the best interest of the Company to do so. See "Business -- Nextel's
Digital Mobile Networks -- System Construction and Suppliers" for a discussion
of factors relevant to additional equipment, transmission and antenna sites that
will need to be procured and constructed in connection with the implementation
of the Company's Digital Mobile networks in the designated markets.
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ITEM 3. LEGAL PROCEEDINGS
On July 10, 1995, a lawsuit titled In Re Nextel Communications Securities
Litigation was filed in the United States District Court in the District of New
Jersey. This litigation, which is being pursued as a class action, 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 and Rule 10b-5 promulgated thereunder. The litigation also makes claims
of fraud and deceit. Specifically, plaintiffs claim that such damages resulted
from defendants' certain alleged false and misleading statements made by
defendants regarding the digital communications technology developed by Motorola
and deployed by Nextel in its Digital Mobile networks. 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 September 19, 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
late 1970's and early 1980's 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. Nextel has filed counterclaims against Mr. Dascal and
has also filed third-party claims against Tel Air Network, Inc. and
Knight-Ridder, Inc. 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 September 13, 1994, the 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 was also named as a defendant in the case titled Angelo Mesiero,
William Schiemann and Dennis Donnegan v. American Mobile Systems, Inc., Richard
Somers, William Wedum, Gary Howard and Nextel Communications, Inc. filed in the
Court of Chancery, New Castle County, Delaware on September 9, 1994. This
lawsuit, which is being pursued as a class action, seeks declaratory and
injunctive relief and damages based upon the defendants' alleged breach of their
respective alleged fiduciary duties. Specifically, plaintiffs allege that
Nextel, based on the relationships created by the stock purchase agreement
entered into in connection with the AMS Transaction, owed a fiduciary duty to
the stockholders of AMS that was alleged to have been breached in connection
with the negotiation of a proposed merger with AMS. Nextel expects that all
relevant parties will enter into a stipulation agreeing to a dismissal of this
lawsuit without prejudice.
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 non-material 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 position,
results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the period commencing October 1, 1996 and concluding December 31, 1996,
which is the final quarter covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following section provides certain information regarding those persons
serving as executive officers of the Company as of March 15, 1997. All of such
executive officers were most recently elected to their present officer positions
by action of the Board of Directors of Nextel. There is no family relationship
between any of
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the executive officers of the Company, or between any of such officers and any
of the Directors of the Company. Officers of the Company are elected to serve
until their successors have been elected.
DANIEL F. AKERSON. (48) Mr. Akerson has served as Chairman of the Board and
Chief Executive Officer since joining the Company 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, including president and chief operating officer. Mr.
Akerson serves as a director of American Express Company and as Chairman of the
Board of McCaw International.
MORGAN E. O'BRIEN. (52) Mr. O'Brien has served as a director of the Company
since co-founding the Company in 1987. Since March 1996, Mr. O'Brien has served
as a Vice Chairman of the Nextel Board. From 1987 to March 5, 1996, Mr. O'Brien
served as Chairman of the Nextel Board, and from 1987 to October 16, 1994, Mr.
O'Brien also served as General Counsel of the Company. Mr. O'Brien was with the
firm of Jones, Day, Reavis & Pogue, an international law firm, from January 1986
to January 1990, during which time he served as partner-in-charge of the firm's
telecommunications section from January 1986 until co-founding the Company in
1987. Mr. O'Brien also served as a consultant to Jones, Day, Reavis & Pogue from
January 1990 to October 1991. From June 1979 until April 1987, Mr. O'Brien was
in private legal practice and represented major SMR operators in proceedings
before the FCC. From October 1970 to June 1979, Mr. O'Brien served in a variety
of legal and managerial positions with the FCC in the areas of private radio and
radio common carrier administration. Mr. O'Brien serves on the Board of
Directors of CTIA, a leading wireless communications trade association.
TIMOTHY M. DONAHUE. (48) Mr. Donahue has served as President of the Company
since joining the Company on February 1, 1996 and as a director of the Company
since May 1996. On February 29, 1996, Mr. Donahue was elected to the additional
position of Chief Operating Officer of the Company. From 1986 to January 1996,
Mr. Donahue held various senior management positions with AT&T Wireless, most
recently regional president for the northeast.
STEVEN M. SHINDLER. (34) Mr. Shindler has served as Senior Vice President
and Chief Financial Officer since joining the Company in May 1996. Between 1987
and 1996, Mr. Shindler was an officer with The Toronto Dominion Bank, where most
recently he was a Managing Director in its Communications Finance Group.
BARRY WEST. (51) Mr. West has served as Senior Vice President and Chief
Technology Officer since joining the Company in March 1996. Mr. West served in
various senior positions with British Telecom, most recently as Director of
Value-Added Services and Corporate Marketing at Cellnet, a cellular
communications subsidiary of British Telecom.
THOMAS KELLY. (49) Mr. Kelly joined the Company in April 1996 and serves as
Senior Vice President of Marketing. Between 1993 and 1996, Mr. Kelly was
Regional Vice President of Marketing for AT&T Wireless Services. Prior to
joining AT&T, 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. (54) Mr. Foosaner joined the Company in April 1992 and
serves as Senior Vice President of Government Affairs. Prior to joining the
Company, Mr. Foosaner was a partner at the law firm of Jones, Day, Reavis &
Pogue where he most recently served as head of the communications group. Before
joining the law firm in November 1986, Mr. Foosaner held various positions at
the FCC where he most recently served as Chief, Private Radio Bureau.
KEITH D. GRINSTEIN. (36) Mr. Grinstein has served as President, Chief
Executive Officer and as a director of McCaw International since January 1996.
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 held a number of positions at McCaw Cellular and its subsidiaries,
including Vice President,
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General Counsel and Secretary of LIN Broadcasting Company, a subsidiary of McCaw
Cellular, and Vice President and Assistant General Counsel of McCaw Cellular.
THOMAS J. SIDMAN. (42) Mr. Sidman has served as Vice President and General
Counsel of the Company since joining the Company on October 17, 1994. From
January 1988 to October 1994, Mr. Sidman was a partner of Jones, Day, Reavis &
Pogue specializing in corporate and securities law and mergers and acquisitions.
A.J. LONG. (35) Mr. Long has served as Vice President and Treasurer since
joining the Company in June 1996. From June 1994 to June 1996, Mr. Long served
as Assistant Treasurer at Sprint Communications, L.P. ("Sprint"). From January
1993 to June 1994, Mr. Long served as Manager of Mergers and Acquisitions at
Sprint. From August 1991 to January 1993, Mr. Long served as Manager of
Corporate Audit Staff at Sprint.
STEPHEN M. BAILOR. (53) Mr. Bailor has served as Vice President and
Corporate Controller since joining the Company in May 1996. From 1993 to 1995,
Mr. Bailor was the Vice President of Financial and Local Billing Services at
Sprint. From 1986 to 1993, Mr. Bailor was the Vice President and Controller of
Telephone Operations at Centel.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
MARKET FOR CLASS A COMMON STOCK
Nextel's Class A Common Stock is traded on the Nasdaq Stock Market ("NSM")
under the symbol "NXTL." Prior to February 3, 1997, the Class A Common Stock
traded under the symbol "CALL." The table below presents high and low sale price
information for the Class A Common Stock as reported by the NSM for the periods
indicated.
QUARTERLY CLASS A
COMMON STOCK PRICE RANGES
----------------------------------------
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------ ------------------
QUARTER HIGH LOW HIGH LOW
------------------------------------------------ ------- ------- ------- -------
March 31........................................ $15.625 $ 9.375 $18.875 $13.500
June 30......................................... 18.000 13.000 23.375 16.750
September 30.................................... 21.750 14.000 20.250 14.375
December 31..................................... 18.125 13.875 18.500 12.750
NUMBER OF STOCKHOLDERS OF RECORD
As of December 31, 1996, the number of stockholders of record of the
Company's Class A Common Stock was 2,886. Nextel has authority to issue shares
of Class B Non-Voting Common Stock, which are convertible on a share-for-share
basis into shares of Class A Common Stock. As of December 31, 1996 there was a
single stockholder of record holding all of the 17,830,000 outstanding shares of
Class B Non-Voting Common Stock.
DIVIDENDS
The Company has not paid any dividends on the Class A Common Stock, and
does not plan to pay dividends on the Class A Common Stock for the foreseeable
future. The Nextel Indentures, the Bank Credit Agreement and the Vendor Credit
Agreement presently prohibit, and are expected to operate so as to continue to
prohibit, Nextel from paying dividends. In addition, the collateral security
mechanisms and related provisions associated with the Bank and Vendor Credit
Facilities limit the amount of cash available to make dividends, loans and cash
distributions to Nextel from Nextel's subsidiaries that operate Digital Mobile
networks in Nextel's markets. 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.
The Company anticipates that for the foreseeable future any cash flow
generated from its operations will be used to develop and expand the Company's
business. Any future determination as to the payment of dividends will be at the
discretion of the Company's Board of Directors and will depend upon the
Company's operating results, financial condition and capital requirements,
contractual restrictions, general business conditions and such other factors as
the Company's Board of Directors deems relevant. There can be no assurance that
the Company will pay dividends at any time in the future. Under certain limited
circumstances, the Company may be obligated to pay dividends on the Class A
Preferred Stock. See Part I, Item 1, "Business -- Agreements with Significant
Stockholders -- The McCaw Investor."
RECENT SALES OF UNREGISTERED SECURITIES
Nextel sold securities that were not registered under the Securities Act of
1933, as amended (the "Securities Act") in the following transactions during the
fourth quarter of 1996. On October 24, 1996, Nextel issued 1,319,902 shares of
Class A Common Stock to certain stockholders of Mobilcom valued at $20,128,505,
in exchange for shares of Mobilcom stock in a transaction exempted by Section
4(2) of the Securities Act and Rule 506 of Regulation D thereunder in reliance
upon such stockholders' representations that they were accredited investors and
their agreement to resell such securities only pursuant to a registration
statement or in a transaction exempt from the registration requirements of the
Securities Act.
In connection with the issuance of the shares in connection with the
Mobilcom transaction described above, the McCaw Investor exercised its
anti-dilutive rights, which resulted in the sale of 373,846 treasury shares of
Class A Common Stock to the McCaw Investor on November 26, 1996 for an aggregate
cash consideration of $6,549,034 in a transaction exempted by Section 4(2) of
the Securities Act.
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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).
FISCAL YEAR NINE MONTHS
ENDED ENDED
MARCH 31, DECEMBER 31, YEAR ENDED DECEMBER 31,
------------------------ ------------ ----------------------------
1993 1994 1994(8) 1995 1996
---------- ---------- ------------ ------------ ------------
INCOME STATEMENT DATA(1):
Revenues........................ $ 53,002 $ 67,928 $ 74,857 $ 171,703 $ 332,938
Cost of Operations.............. 20,979 28,666 51,406 151,718 247,717
Selling, general and
administrative expenses....... 18,971 41,107 85,077 193,321 330,256
Expenses related to corporate
reorganization(2)............. -- -- -- 17,372 --
Depreciation and amortization... 25,942 58,398 94,147 236,178 400,831
---------- ---------- ------------ ------------ ------------
Operating loss............. (12,890) (60,243) (155,773) (426,886) (645,866)
Interest income (expense),
net........................... 1,324 (18,101) (41,454) (89,509) (206,480)
Other income (expense),
net(3)(4)..................... 924 3 33 (15,372) (10,866)
Income tax benefit.............. 1,027 21,437 71,345 200,602 307,192
---------- ---------- ------------ ------------ ------------
Net loss........................ $ (9,615) $ (56,904) $ (125,849) $ (331,165) $ (556,020)
========= ========= ========== ========== ==========
Net loss per share.............. $ (0.16) $ (0.73) $ (1.25) $ (2.31) $ (2.50)
========= ========= ========== ========== ==========
Number of shares used in
computations(5)............... 58,736,000 78,439,000 100,639,000 143,283,000 222,779,000
========= ========= ========== ========== ==========
AS OF MARCH 31, AS OF DECEMBER 31,
---------------------- --------------------------------------
1993 1994 1994 1995 1996
-------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA:
Cash and cash equivalents........... $ 17,083 $ 483,483 $ 301,679 $ 340,826 $ 139,681
Marketable securities............... 14,768 426,113 172,313 68,443 5,012
Current assets...................... 39,932 921,983 504,248 504,661 309,097
Intangible assets, net.............. 144,666 889,912 1,451,780 3,549,622 4,076,300
Total assets........................ 333,557 2,229,832 2,918,985 5,547,256 6,472,439
Long-term debt(6)................... 55,024 1,113,268 1,193,096 1,687,829 2,783,041
Stockholders' equity(7)............. 255,224 846,304 1,268,575 2,945,141 2,808,138
- ---------------
(1) See Part II, Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 2 to the Notes to Nextel's
consolidated financial statements for a description of acquisitions.
(2) See Note 2 to the Notes to Nextel's consolidated financial statements.
(3) Other expenses in 1995 include a $15.0 million write-down of the investment
in Mobilcom as a result of the devaluation of the Mexican peso.
(4) Other expenses in 1996 primarily reflect 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.)
(5) Includes the weighted average number of shares of Nextel common stock
outstanding during the respective periods.
(6) Excludes the current portions of long-term debt. See Note 6 to the Notes to
Nextel's consolidated financial statements.
(7) See Notes 10 and 11 to the Notes to Nextel's consolidated financial
statements.
(8) 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.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is a discussion of the consolidated financial condition and
results of operations of Nextel for the fiscal year ended December 31, 1996, the
fiscal year ended December 31, 1995 and the nine month period ended December 31,
1994, and certain factors that are expected to affect the Company's prospective
financial condition. See Part I, Item 1, "Business -- Risk
Factors -- Forward-Looking Statements."
To further its objective of achieving nationwide Digital Mobile network
coverage, Nextel consummated the Motorola, OneComm and AMS Transactions in July
1995 and consummated the Dial Page Transaction on January 30, 1996 (hereinafter
referred to collectively as the "Acquisitions"). Also in July 1995, the Company
consummated the McCaw Transaction, pursuant to which Nextel received net equity
investment proceeds totaling approximately $312,645,000 and has issued shares of
common and preferred stock and stock options expiring at various dates through
July 28, 2001. (See Part I, Item 1, "Business -- Agreements with Significant
Stockholders -- The McCaw Investor" and note 10 to the consolidated financial
statements.) Funds received in the McCaw Transaction are being used for the
implementation and operation of the Digital Mobile networks and to satisfy other
cash requirements of the Company.
In April 1996, the Federal Communications Commission (the "FCC") concluded
its auction of 900 MHz SMR frequencies. Nextel successfully bid a total of
approximately $29,079,000 for 177 ten-channel licenses in markets throughout the
United States, including Alaska and Hawaii. The Company made its final payment
to the FCC for these licenses in July 1996. The Company intends to use the newly
acquired 900 MHz licenses in its ongoing wireless communications operations,
including as part of its ongoing process of transferring its analog SMR
customers from certain 800 MHz frequencies to 900 MHz or other 800 MHz
frequencies.
Nextel entered into an Agreement of Merger and Plan of Reorganization dated
as of October 2, 1996, as amended, with PCI providing for the merger of PCI with
a wholly owned indirect subsidiary of Nextel. PCI has approximately 6,000 800
MHz SMR channels covering a total population of over 27 million people
predominantly in the states of Texas, Oklahoma, New Mexico and Arizona. The
stockholders of PCI will receive a maximum of 8,782,403 shares of Common Stock,
subject to certain adjustments, as a result of the merger. The merger is subject
to regulatory and PCI stockholder approval and customary closing conditions and
is expected to occur during 1997.
Prior to the second quarter of 1996, the Company implemented its Digital
Mobile networks in its market areas using Motorola's first generation iDEN
technology. During that time frame, the Company encountered certain technology
and system performance issues relating primarily to the voice transmission
quality of the mobile telephone service. In response to these issues, the
Company and Motorola took action on several fronts to address system performance
issues in general, and voice transmission quality concerns in particular. See
Part I, Item 1, "Business -- Nextel's Digital Mobile Networks -- Experience with
First Generation iDEN Systems Implementation." In 1995, the Company, together
with Motorola, began pursuing a program directed toward the development and
deployment of modifications to the first generation iDEN technology platform,
which modifications (referred to herein as "Reconfigured iDEN") were targeted
specifically at improving the voice transmission quality of the mobile telephone
service. The Company commenced the full-scale commercial launch of its first
Digital Mobile networks incorporating the Reconfigured iDEN technology in its
Chicago market late in the third quarter of 1996. Subsequently, Nextel commenced
full-scale commercial launches of the Reconfigured iDEN Digital Mobile networks
in the Atlanta, Boston, Denver, Detroit and Las Vegas metropolitan market areas
and the Northern California market area, in each case accompanied by an
aggressive, regionally focused marketing campaign.
The Company is currently considering adopting and implementing the Revised
Business Plan (See Part I, Item 1, "Business -- Revised Business Plan") that
contemplates, among other things, a more aggressive deployment of its Digital
Mobile networks incorporating the Reconfigured iDEN technology based on an
anticipated implementation schedule during 1997 to 1998, which it currently
expects may involve infrastructure and other system capital costs totaling at
least $1.45 billion. In this connection, the Company anticipates that purchases
of Motorola-manufactured infrastructure equipment will represent the largest
category of capital spending. During the last six months of 1996, Nextel placed
orders with Motorola totaling more than
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41
$300 million of products incorporating the Reconfigured iDEN technology,
including system infrastructure equipment and related software and the new,
compact Reconfigured iDEN handsets that the Company plans to market nationally,
principally under the "PowerFone"(TM) brand name.
Assuming the successful and timely completion of the Company's build-out
plan, under either Nextel's Existing Business Plan or Revised Business Plan, the
Company expects that its Digital Mobile networks would provide coverage to areas
representing approximately 85% of the United States population by the end of
1998. Implementation of the more rapid and extensive nationwide deployment
strategy contemplated pursuant to the Revised Business Plan would significantly
accelerate the Company's use of and needs for capital resources beyond the
levels associated with the Existing Business Plan and would therefore be
dependent on, among other things, the availability of necessary capital. In the
event Nextel determines to implement the more accelerated and extensive
deployment strategy contemplated by the Revised Business Plan, the Company's
capital expenditures and operating losses would substantially increase over the
next several years. See also "-- Future Capital Needs and Resources" and
"-- Forward-Looking Statements."
The Company also has pursued various international investment and operating
relationships in wireless communications ventures. In 1994, the Company invested
an aggregate of approximately $18,100,000 in cash and exchanged 2,500,000 shares
of Class A Common Stock for an equity interest in Clearnet that as of December
31, 1996 represented an approximate 19.5% equity interest (representing an
approximate 1.7% voting interest) in Clearnet. Clearnet operates wireless
communications systems in Canada and in 1995 was one of two entities awarded a
nationwide PCS license in Canada.
In 1994 and 1995, the Company invested an aggregate of approximately
$57,200,000 for an approximate 18.5% equity interest in Mobilcom, a Mexican SMR
operator, and obtained options to increase its equity interest in Mobilcom. In
August 1996, a wholly owned subsidiary of the Company entered into an agreement
to purchase up to an additional 19.8% equity interest in Mobilcom from certain
shareholders of Mobilcom in two tranches. In October 1996, such subsidiary
completed the acquisition of the first tranche by acquiring an additional 11.6%
equity interest in Mobilcom in exchange for 1,319,902 shares of Class A Common
Stock. As of December 31, 1996, the Company's equity interest in Mobilcom was
approximately 30.1%, not including any of the Mobilcom shares that would be
acquired upon consummation of the second tranche purchase nor any of the
Mobilcom shares currently subject to options or other arrangements providing for
potential acquisition thereof by a wholly owned subsidiary of the Company. (See
note 2 to the consolidated financial statements.)
In 1995, the Company, through McCaw International, invested approximately
$10,000,000 for an approximate 25.2% equity-equivalent interest and committed an
additional $13,200,000 in loan funding in the initial phase of a newly created
GSM digital cellular telephone system operating in Shanghai, China. McCaw
International advanced a total of $10,300,000 of such loan funding to the
Shanghai operations during the year ended December 31, 1996.
In June 1996, McCaw International invested $16,000,000 for a 30% equity
interest in Infocom Communications Network, Inc. ("Infocom"), a wireless
communications company in the Philippines. Infocom currently operates a
nationwide paging business and has 100 pairs of 800 MHz SMR channels in the
Philippines. Infocom was recently awarded a 25-year license by the Philippine
government to provide wireless communications services throughout the
Philippines. The license allows Infocom to provide paging and SMR services, and
gives Infocom the right to seek authority to operate a personal communications
network throughout the Philippines. Infocom plans to use its SMR channels to
implement a national digital network using the same Motorola-developed iDEN
technology deployed by Nextel in its United States Digital Mobile networks.
In August 1996, McCaw International obtained 100% ownership of Com Control
Comunicacion Controlada S.A. (renamed McCaw Argentina S.A., "McCaw Argentina"),
an Argentine SMR company with 800 MHz SMR licenses in areas covering more that
17 million people. Through McCaw International, the Company invested
approximately $15,000,000 in the form of cash and equipment to acquire McCaw
Argentina. McCaw Argentina intends to provide wireless communications services
in Buenos Aires and the
41
42
next three largest cities in Argentina. McCaw Argentina will focus initially on
providing high-quality analog SMR service and ultimately on providing digital
service.
On January 30, 1997, Nextel acquired 81% of the outstanding shares of WVB,
an operator of analog SMR systems in Brazil, for a purchase price of
$186,300,000, which was paid with approximately 11,964,000 shares of Class A
Common Stock, through a merger of WVB with a wholly owned subsidiary of Nextel.
Nextel simultaneously contributed its interest in WVB, which was renamed McCaw
International ("Brazil"), Ltd., to McCaw International.
The Company intends to continue to investigate and pursue investment,
operating and other relationships in, with or concerning wireless communications
ventures outside the United States, to the extent the Company believes that such
opportunities present the potential to achieve attractive rates of return on
investment or to provide important strategic or other benefits to the Company.
For the most part, such activities have been, and are expected to continue to
be, pursued through subsidiaries of the Company that are classified as
"unrestricted" for purposes of the Company's Nextel Indentures, including McCaw
International. While such classification gives those subsidiaries the
flexibility to participate in and structure transactions in ways that comply
with the covenants in the Nextel Indentures that are applicable to the Company
and its "restricted" subsidiaries, the Nextel Indentures do contain certain
limitations with respect to such "unrestricted" subsidiaries, including limits
on the amount and type of financial support that they may receive from the
Company and its "restricted" subsidiaries. Currently, the Company believes that
these "unrestricted" subsidiaries have or can obtain (in a manner consistent
with the terms of the Indentures) adequate funding to satisfy their existing and
reasonably expected commitments. In March 1997, McCaw International completed a
private placement of units pursuant to which it received gross proceeds of
approximately $500,000,000. The pursuit of international wireless communications
opportunities in the future by such "unrestricted" subsidiaries, however, may be
dependent on, among other factors, their ability to secure necessary equity
and/or debt financing from third parties. There can be no assurance that such
financing could be obtained or, if obtainable, would be made available on
acceptable terms. See also "-- Future Capital Needs and Resources" and
"-- Forward-Looking Statements."
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 VS. YEAR ENDED DECEMBER 31, 1995
Total revenues for the year ended December 31, 1996 increased 94% to
$332,938,000, compared to $171,703,000 for the year ended December 31, 1995.
Radio service revenue increased 119% to $297,512,000. The increase in radio
service revenue was principally a result of a modest increase in subscriber
units in service attributable to the completion of the Dial Page Transaction,
the commencement of Digital Mobile network service in certain markets during
1996 and the increased units in service in markets that commenced Digital Mobile
network service in 1994 and 1995.
The increase in the total number of digital subscriber units in service as
of December 31, 1996 was approximately 215,300 units, to approximately 300,300
units as compared to the approximately 85,000 digital subscriber units in
service as of December 31, 1995, primarily reflecting continued expansion of the
Company's Digital Mobile networks.
The average churn rate for the Digital Mobile networks operation was less
than 1% per month for the year ended December 31, 1996. There was insufficient
history of customer activity on the Digital Mobile networks to derive a
meaningful churn rate for the year ended December 31, 1995.
Cost of radio service revenue for the year ended December 31, 1996
increased 79% to $221,382,000, compared to $123,496,000 for the year ended
December 31, 1995, primarily as a result of a modest increase in subscriber
units in service attributable to the completion of the Dial Page Transaction,
the commencement of Digital Mobile network service in certain markets during
1996 and the increased units in service in markets that commenced Digital Mobile
network service in 1994 and 1995. The direct costs associated with the Digital
Mobile networks, such as site rental and telephone expenses, will continue to
increase as networks are placed into service.
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43
Selling, general and administrative expenses for the year ended December
31, 1996 increased 71% to $330,256,000, compared to $193,321,000 for the year
ended December 31, 1995. The increase is primarily related to the increased
staffing and other activities to support the implementation and operation of the
Digital Mobile networks. Selling expenses increased also due to the rollout of
aggressive marketing campaigns associated with the full-scale commercial launch
of the Digital Mobile networks incorporating the Reconfigured iDEN technology in
certain markets in late 1996. Selling, general and administrative expenses
include a loss on Digital Mobile equipment sales of $25,426,000 in 1996,
compared to a loss of $13,759,000 in 1995, reflecting the continued effect of
customer subsidies or discounts on increased sales of Digital Mobile subscriber
units during 1996 as compared to 1995 and the effect of migrating customers from
traditional analog SMR systems to Digital Mobile Network systems. The Company
anticipates that it will continue to offer customers subsidies or discounts in
connection with the sale and installation of Digital Mobile units as a part of
its overall Digital Mobile network service offering.
Expenses related to the corporate reorganization for the year ended
December 31, 1995 reflect estimates of employee and facility related costs
resulting from the consolidation, resizing and relocation of the Company's
headquarters and customer care operations in connection with certain business
combinations consummated in 1995 (see note 2 to the consolidated financial
statements). No such costs were recorded during the year ended December 31,
1996.
Depreciation and amortization for the year ended December 31, 1996
increased 70% to $400,831,000, compared to $236,178,000 for the year ended
December 31, 1995, reflecting the effect of the Acquisitions and the activation
of additional Digital Mobile networks. System assets relating to the development
of Digital Mobile networks represent the largest portion of capital expenditures
during the period. Depreciation and amortization of such assets begins upon
commencement of commercial service in each market. The Company anticipates that
depreciation and amortization expense will continue to increase as a result of
the activation of additional Digital Mobile networks during 1996 and 1997 and
the deployment of additional depreciable assets in markets where commercial
service has commenced and as first generation iDEN Digital Mobile networks are
converted to the Reconfigured iDEN technology platform.
Interest income for the year ended December 31, 1996 decreased 18% to
$21,015,000, compared to $25,525,000 for the year ended December 31, 1995. The
decrease relates to the utilization of cash for the development and
implementation of the Company's Digital Mobile networks and to fund operating
activities.
Interest expense for the year ended December 31, 1996 increased 98% to
$227,495,000, compared to $115,034,000 from the year ended December 31, 1995,
reflecting principally increased interest expense attributable to the assumption
of OneComm's Senior Redeemable Discount Notes due 2004 and the Dial Call Senior
Redeemable Discount Notes due 2004 and 2005 in the Acquisitions and interest
expense attributable to increased borrowings under the Company's Bank and Vendor
Credit Facilities, to fund capital expenditures, acquisitions and operations.
Other expenses for the year ended December 31, 1996 were $10,866,000,
primarily reflecting equity in the losses of certain foreign investments
accounted for under the equity method.
The income tax benefit for the year ended December 31, 1996 was
$307,192,000 as compared to $200,602,000 for the year ended December 31, 1995.
These benefits resulted from the utilization of net operating losses against
deferred tax liabilities. The effective tax rate for 1996 of 35.6% decreased
from 37.7% in 1995 as a result of a decrease in the utilization of state net
operating losses for financial reporting purposes. The Company expects that the
effective tax rate for 1997 will decrease to approximately 14% as a result of a
decrease in the utilization of federal and state net operating losses for
financial reporting purposes. The decrease will have no impact on the Company's
ability to utilize its net operating losses for income tax purposes.
YEAR ENDED DECEMBER 31, 1995 VS. NINE MONTHS ENDED DECEMBER 31, 1994
Total revenues for the year ended December 31, 1995 were $171,703,000, an
increase of 129% from the nine months ended December 31, 1994. Radio service
revenue increased 171% to $135,753,000 and analog
43
44
equipment sales and maintenance revenue increased 46% to $35,950,000 for the
year ended December 31, 1995 as compared to the nine months ended December 31,
1994.
The increase in radio service revenue was principally a result of (other
than the financial impact of the additional quarter in the 1995 fiscal year) an
increase in analog units in service attributable to the Acquisitions, the
commencement of Digital Mobile network service in certain markets during 1995
and the increased units in service in markets that commenced Digital Mobile
network services in 1994.
The total number of subscriber units in service as of December 31, 1995
increased significantly from the 323,500 subscriber units in service as of
December 31, 1994 reflecting growth from the Acquisitions, the commencement of
Digital Mobile network service in certain markets and increased sales in markets
that commenced Digital Mobile service in 1994. The increase in the total number
of digital subscriber units in service as of December 31, 1995 was approximately
71,500 units, to approximately 85,000 units as compared to the approximately
13,500 digital subscriber units in service as of December 31, 1994 primarily
reflecting expansion of the Company's Digital Mobile networks.
The monthly churn rate for analog SMR operations (not including the
OneComm, AMS and Motorola operations, for which comparable churn data for the
period prior to the completion of the respective transactions is not available)
for the year ended December 31, 1995 was 1.3%, up from the monthly rate of 1.2%
for the nine months ended December 31, 1994. This increase was due principally
to reductions in analog capacity resulting from the migration of frequencies
from the analog SMR systems to Digital Mobile networks and higher churn rates
experienced in the analog SMR operations related to certain of the Acquisitions.
There was insufficient history of customer activity on the Digital Mobile
networks to derive a meaningful churn rate for the Digital Mobile networks for
the respective periods.
Analog equipment sales and maintenance revenue for the year ended December
31, 1995 was $35,950,000 as compared to $24,702,000 for the nine months ended
December 31, 1994. Cost of analog equipment sales and maintenance increased by
$10,011,000 to $28,222,000 for the year ended December 31, 1995 as compared to
the nine months ended December 31, 1994. The increase in analog equipment sales
and maintenance and the related costs reflect primarily the full year impact of
companies acquired in 1994. Nextel's analog SMR unit sales decreased as a result
of the Company's continuing focus away from the sale of SMR analog radios and
migration of analog SMR customers to the Digital Mobile networks in the markets
in which Digital Mobile networks have begun operating.
Cost of radio service revenue for the year ended December 31, 1995
increased by $90,301,000 to $123,496,000 for the nine months ended December 31,
1994 as compared to the nine months ended December 31, 1994, reflecting
primarily increased infrastructure costs associated with the Digital Mobile
networks. Direct costs associated with the Digital Mobile networks, such as site
rental and telephone expenses, will continue to increase as Digital Mobile
networks are placed into service.
Selling, general and administrative expenses increased by $108,244,000 to
$193,321,000 for the year ended December 31, 1995 as compared to the nine months
ended December 31, 1994. The increase (other than the financial impact of the
additional quarter in the current fiscal year) principally related to additional
selling, general and administrative expenses associated with the operations
acquired in acquisitions and increased staffing and other activities to support
the implementation and operation of the Digital Mobile networks. Selling,
general and administrative expenses include a loss on Digital Mobile equipment
sales of $13,759,000, compared to a loss of $6,032,000 for the nine months ended
December 31, 1994, reflecting, in part, the effect of customer subsidies or
discounts on increased sales of Digital Mobile units during the year ended
December 31, 1995.
Expenses related to the corporate reorganization for the year ended
December 31, 1995 result from accrual of estimated employee and facility related
costs pursuant to the announced consolidation, resizing and relocation of the
Company's headquarters and customer care operations in connection with certain
business
44
45
combinations consummated during 1995 (see note 2 to the consolidated financial
statements). No such costs were incurred in 1994.
Depreciation and amortization increased $142,031,000 to $236,178,000 for
the year ended December 31, 1995 compared to the nine months ended December 31,
1994, reflecting principally (other than the financial impact of the additional
quarter in the current fiscal year) the effect of the additional depreciation
and amortization charges associated with the operations acquired and the
activation of Digital Mobile networks in additional market areas during 1995.
System assets relating to the development of Digital Mobile networks represent
the largest portion of capital expenditures incurred by the Company.
Depreciation and amortization of such assets begins upon commencement of
commercial service in each market. As the Company anticipates that additional
Digital Mobile networks may be activated during fiscal years 1996 and 1997
through growth and acquisitions, depreciation and amortization expense is
expected to continue to increase significantly during these years.
Interest income decreased by $2,512,000 to $25,525,000 for the year ended
December 31, 1995 as compared to the nine months ended December 31, 1994,
principally reflecting the Company's utilization of cash for the development and
implementation of its Digital Mobile networks and for acquisitions. This
utilization was partially offset by the cash investment from the McCaw
Transaction. See Part I, Item 1, "Business -- Agreements with Significant
Stockholders -- The McCaw Investor" and note 10 to the consolidated financial
statements.
Interest expense totaled $115,034,000 for the year ended December 31, 1995,
up $45,543,000 from the nine months ended December 31, 1994, reflecting
principally (other than the financial impact of the additional quarter in the
1995 fiscal year) increased interest expense attributable to the assumption of
OneComm's Senior Redeemable Discount Notes due 2004. The increase in interest
expense from such notes was partially offset by an increase in capitalized
interest relating to construction in progress of Digital Mobile networks. During
the year ended December 31, 1995, the Company capitalized interest of
approximately $31,000,000 as compared to $21,300,000 for the nine months ended
December 31, 1994.
Other expenses of $15,372,000 primarily reflect the Company's $15,000,000
write-down of its investment in Mobilcom as a result of the devaluation of the
Mexican peso during 1995.
The income tax benefit for the year ended December 31, 1995 was
$200,602,000 as compared to $71,345,000 for the nine months ended December 31,
1994. These benefits resulted from the utilization of net operating losses
against deferred tax liabilities.
The effect of the Acquisitions, the increase in Digital Mobile network
related costs and increased depreciation and amortization (other than the
financial impact of the additional quarter in the 1995 fiscal year) were the
primary factors in the $205,316,000 increase in net loss to $331,165,000 for the
twelve months ended December 31, 1995 as compared to the nine months ended
December 31, 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company had net losses of $556,020,000 and $331,165,000 for the years
ended December 31, 1996 and December 31, 1995, respectively. The operating
expenses associated with developing and operating the Digital Mobile networks
have more than offset digital service revenues and the operating earnings of the
analog SMR operations, including those acquired in the Acquisitions, and are
expected to continue to offset such operating earnings for the next several
years. The Company has consistently used external sources of funds, primarily
from equity issuances and the incurrence of debt, to fund operations,
acquisitions, capital expenditures and other non-operating needs. For the next
several years, the Company anticipates using its existing cash and investments,
cash flow from analog operations and externally generated funds from debt and
equity sources as discussed below to cover future needs including the design,
implementation and operation of the Digital Mobile networks.
Working capital was $(66,647,000) and $139,652,000 at December 31, 1996 and
December 31, 1995, respectively. The decrease is primarily attributable to the
use of cash of $201,145,000 resulting from increased capital expenditures
related to the Digital Mobile networks and increased operating expenses.
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46
BANK AND VENDOR CREDIT FACILITY. Effective September 30, 1996, Nextel, NFC
and certain subsidiaries of Nextel entered into the Bank Credit Facility.
Concurrently therewith, Nextel, NFC and certain subsidiaries of Nextel entered
into the Vendor Credit Facility, which superseded the previous financing
agreement among Nextel, certain of its subsidiaries, Motorola and NTFC. The Bank
Credit Facility provides for up to $1,655,000,000 of secured financing,
consisting of a $1,085,000,000 revolving loan and $570,000,000 in term loans.
The Vendor Credit Facility provides for up to $345,000,000 of secured financing,
consisting of a $195,000,000 revolving loan and $150,000,000 in term loans.
Borrowings under the Bank Credit Facility and the Vendor Credit Facility are
ratably secured by liens on assets of Nextel's subsidiaries that are
"restricted" subsidiaries under the terms of the Nextel Indentures. As of
December 31, 1996, Nextel had drawn approximately $590,000,000 of its available
financing under the Bank Credit Facility, leaving an aggregate of approximately
$1,065,000,000 available for borrowing under such facility, and had drawn
$150,000,000 of its available financing under the Vendor Credit Facility,
leaving an aggregate of approximately $195,000,000 available for borrowing under
such facility, subject in each case to the satisfaction or waiver of applicable
borrowing conditions. The proceeds from these borrowings were used primarily to
repay the outstanding principal and accrued interest on the prior financing
agreements with Motorola and to fund operations.
Subsequent to 1996, Nextel and Motorola reached agreement on the Additional
Motorola Financing, pursuant to which Nextel could access up to an additional
$450,000,000 of equipment financing through Motorola. See Part I, Item 1,
"Business -- Post Fiscal Year-End Transactions and Developments --
Nextel/Motorola Agreements." In order to access such Additional Motorola
Financing, Nextel would be required to procure certain consents, waivers and/or
participation commitments from a number of third parties, and to obtain
modifications to the terms of the Bank and Vendor Credit Facilities, the related
security documents and the Nextel Indentures and to satisfy certain other
conditions. Nextel is in the process of seeking certain of such consents,
waivers, commitments and other actions to obtain access to a portion of the
Additional Motorola Financing, but there can be no assurance that Nextel will be
successful in this regard, or that other conditions to access such Additional
Motorola Financing, including those that Nextel is not currently seeking to
fulfill, will be satisfied or otherwise will be dealt with in a timely fashion.
On March 3, 1997, McCaw International completed a private placement of
951,463 units yielding approximately $500,000,000 of gross proceeds. Each unit
is comprised of a 10-year senior discount note and a warrant to purchase 0.10616
shares of McCaw International common stock. The notes have a 13% yield to
maturity, are noncallable for five years, and require no interest payments for
the first five years. The warrants are exercisable at a price of $36.45 and
entitle the holders to purchase in the aggregate 1%, on a fully diluted basis,
of the common stock of McCaw International.
CASH FLOWS. Net cash used in operating activities for the year ended
December 31, 1996 was $227,576,000 as compared to net cash used in operating
activities of $137,761,000 for the year ended December 31, 1995. The primary
reason for the increase was the increase in costs incurred during the year ended
December 31, 1996 related to the operation of the Digital Mobile networks. Net
cash used in investing activities was $336,242,000 for the year ended December
31, 1996, net of the $64,438,000 decrease in marketable securities and
$75,827,000 received from the acquisition of Dial Page. Cash used in investing
activities related principally to capital expenditures for the build-out of the
Digital Mobile networks and acquisitions and certain foreign investments made
during the period. Financing activities during the year ended December 31, 1996
consisted primarily of the $248,037,000 net borrowings and proceeds from stock
issuances of $114,636,000. The resulting decrease in cash and cash equivalents
from December 31, 1995 was $201,145,000, to a balance of $139,681,000 at
December 31, 1996.
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 of Digital Mobile networks (including the anticipated conversion of
its existing Digital Mobile networks to utilize the Reconfigured iDEN technology
platform), operating expenses relating both to the Digital Mobile networks and
to Nextel's analog SMR networks, potential acquisitions (including the
acquisition of rights to spectrum through the contemplated 800 MHz spectrum
auction process) and corporate expenditures. Nextel anticipates that its cash
utilization for capital
46
47
expenditures and other investing activities and operating losses will continue
to exceed its cash flows from operating activities over the next several years.
During fiscal year 1996, Nextel's average monthly cash utilization rate for
investing activities (principally attributable to capital expenditures for the
build-out of the Digital Mobile networks) was approximately $33,390,000, and its
average monthly operating losses (exclusive of non-cash items) were
approximately $20,400,000. Such average monthly amounts are not necessarily
representative of Nextel's anticipated experience in such areas and would be
expected to increase during 1997 and 1998 in connection with the deployment of
the Reconfigured iDEN technology platform, particularly if the Company is able
and decides to implement the Revised Business Plan. During the ongoing start-up
phase of its Digital Mobile networks, Nextel expects that it will need to
utilize its existing cash and funding from outside sources to meet its cash
needs resulting from such activities and losses. Nextel's aggregate cash, cash
equivalents and marketable securities at December 31, 1996 totaled approximately
$144,693,000.
At December 31, 1996, Nextel had drawn approximately $590,000,000 of its
available financing under the Bank Credit Facility, leaving an aggregate of
approximately $1,065,000,000 available for borrowing under such facility, and
had drawn $150,000,000 of its available financing under the Vendor Credit
Facility, leaving an aggregate of approximately $195,000,000 available for
borrowing under such facility, subject in each case to the satisfaction or
waiver of applicable borrowing conditions. The Bank Credit Agreement
contemplates that the Company, with the consent of the lenders under the Bank
Credit Agreement and the Vendor Credit Agreement, may borrow up to an additional
$250,000,000 (subject to certain limitations) under the Bank Credit Facility
(the "Additional Bank Borrowings"). The Bank Credit Agreement also contemplates
that borrowings under the Vendor Credit Facility may be increased by up to
$50,000,000 (subject to certain limitations) (the "Additional Vendor
Borrowings"). See "Post Fiscal Year-End Transactions and Developments -- Consent
Solicitation."
Nextel is currently taking steps to obtain additional sources of funding in
addition to the amounts currently available under the Bank and Vendor Credit
Facilities, including the Additional Bank Borrowings and Additional Vendor
Borrowings. Availability of the Additional Bank Borrowings is subject, among
other things, to the approval of a majority of the lenders under the Bank Credit
Agreement and the Vendor Credit Agreement. There are currently no legally
binding agreements or understandings with any lenders with respect to the terms
(other than the provisions contained in the Bank Credit Agreement and the Vendor
Credit Agreement that would permit such additional borrowing with majority
approval of the lenders thereunder) on which such Additional Bank Borrowings may
be made available. Nextel has also reached an understanding with Motorola
concerning the terms on which Motorola would make the $50,000,000 in Additional
Vendor Borrowings available and the terms on which Motorola would make
additional secured equipment financing available. See "Post Fiscal Year-End
Transactions and Developments -- Nextel/Motorola Agreements."
Nextel believes that is has sufficient funds currently available pursuant
to the Bank and Vendor Credit Facilities currently in place (but excluding any
amounts that would be available to it through the Additional Bank Borrowings,
the Additional Vendor Borrowings, the Second Secured Borrowings and the Senior
Secured Borrowings the availability of each of which is subject to certain
conditions, including those described herein) and pursuant to the assumed
exercise of the currently outstanding warrants and options to acquire shares of
Class A Common Stock described below, to meet its cash needs for the remainder
of 1997 and into early 1998, based on continuation of its first stage nationwide
Digital Mobile networks build out approach consistent with its Existing Business
Plan, in light of its current (and currently committed) business and investment
activities and assuming a conservative ramp up in Digital Mobile systems
subscriber growth. To fully complete its first stage nationwide Digital Mobile
networks build out in 1998 as envisioned in the Existing Business Plan, and to
adopt and implement the Revised Business Plan, Nextel would need to obtain
additional amounts of debt or equity financing beyond that available under the
Bank and Vendor Facilities currently in place (excluding amounts constituting
Additional Bank Borrowings, Additional Vendor Borrowings, Second Secured
Borrowings and Senior Secured Borrowings) and equity proceeds of $232,500,000
associated with an assumed exercise in full of certain options held by the McCaw
Investor (discussed below). The additional financing that would be required to
carry out the Existing Business Plan activities through 1998 would primarily
consist of equity or debt funding to substitute for the proceeds that would have
been received upon an exercise in full of the warrants for 25,000,000 shares of
Class A Common Stock previously held by
47
48
Comcast FCI. To the extent such additional financing were in the form of debt
rather than equity, it is likely that changes to the terms of the Nextel
Indentures would be required to permit the Company the needed flexibility to
incur such debt. See "Post Fiscal Year-End Transactions and
Developments -- Consent Solicitation" and "-- Nextel/Motorola Agreements." See
also "-- Forward-Looking Statements." Significant additional financing would be
required to adopt and implement the Revised Business Plan. As indicated above
under "Post Fiscal Year-End Transactions and Developments," the Company is
currently investigating and taking a variety of actions directed to obtain
access to significant additional amounts of debt financing. However, assuming
(i) that the Company obtains the relief it is seeking from the holders of the
Nextel Notes, especially the changes in the provisions of the Nextel Indentures
that relate to "Permitted Debt," and (ii) that the Company secures access to all
of the available funds under the existing Bank and Vendor Credit Facility, and
is able to structure satisfactory arrangements to make the additional
$200,000,000 in Second Secured Borrowings from Motorola available (including
obtaining access to the $250,000,000 in Additional Bank Borrowings and to the
$50,000,000 in Additional Vendor Borrowings), the Company estimates that it
would have sufficient financing available to meet its cash needs through 1998
and completion of the Existing Business Plan. The Company estimates that
approximately an additional $500,000,000 in financing would be required to meet
the Company's anticipated cash needs through 1998, assuming implementation and
completion of the Revised Business Plan. See "Revised Business Plan." In all of
such financing scenarios, Nextel has assumed that all of the funds currently
available pursuant to the Bank and Vendor Credit Facilities may be borrowed
thereunder and that certain currently outstanding warrants and options to
acquire shares of Class A Common Stock described below will be exercised in full
before their respective currently scheduled expiration dates. See
"-- Forward-Looking Statements."
Other than the arrangements summarized under "Post Fiscal Year-End
Transactions and Developments -- Nextel/Motorola Agreements," which are subject
to a number of conditions, there are currently no commitments or understandings
with third parties to obtain funding required to meet such funding shortfall.
Moreover, there can be no assurance that the Additional Bank Borrowings or any
portion of the Additional Motorola Financing will be available or that the
outstanding warrants and options will be exercised. Both the Bank and Vendor
Credit Facilities and the Nextel Indentures contain provisions that operate to
limit the amount of borrowings that may be incurred by the Company. The Company
intends to seek the consent of the holders of the Nextel Notes to certain
amendments to the Nextel Indentures that would, among other things, permit the
Company to incur additional indebtedness to meet the funding requirements
associated with completion of its Existing Business Plan and implementation of
its Revised Business Plan. See "Post Fiscal Year-End Transactions and
Developments -- Consent Solicitation." In addition, Nextel's capital needs, and
its ability to adequately address those needs through debt or equity funding
sources, are subject to a variety of factors that cannot presently be predicted
with certainty, such as the commercial success of Nextel's Digital Mobile
networks incorporating the Reconfigured iDEN technology, the amount and timing
of Nextel's capital expenditures and operating losses, and the market price of
the Class A Common Stock. See "-- Forward-Looking Statements."
Nextel currently is aware of numerous factors and considerations, any one
or more of which could have a material effect on the timing and/or amount of the
future funding to be required by Nextel, but Nextel cannot currently quantify
with precision either the magnitude or the certainty of the effects associated
with any such factors. These factors include: (i) the timing of the anticipated
800 MHz spectrum auction process, and the amounts required to be bid to acquire
any or all of the available spectrum blocks in the major metropolitan market
areas where Nextel currently operates, or currently plans to operate, its
Digital Mobile network and the amounts that may be required to accomplish
retuning or acquisition of 800 MHz incumbent channels in spectrum blocks that
may be acquired by Nextel in the 800 MHz spectrum auction process; (ii) the
uncertainty with respect to the success and/or timing of the continuing
development and deployment activities relating to the Reconfigured iDEN
technology format and, assuming successful and timely completion of such
efforts, the uncertainty with respect to the successful commercial introduction
and customer acceptance of Nextel's Digital Mobile services in new market areas
using such technology; (iii) the potential commercial opportunities and risks
associated with implementation of Nextel's Revised Business Plan and (iv) the
net impact on Nextel's capital budget of certain developments currently expected
to increase capital needs (e.g., the additional capital needed if Nextel
acquires for cash additional spectrum in certain markets to increase the
48
49
capacity and/or efficiency of Nextel's operating Digital Mobile networks in such
markets, the additional capital needed for more extensive construction of
Digital Mobile networks in additional market areas acquired or that may be
acquired by Nextel in the future and in connection with the conversion of
existing Digital Mobile networks to the Reconfigured iDEN technology format, the
expenditures associated with analog SMR station construction requirements under
the currently effective FCC 800 MHz channel licensing approach) that may be
offset (whether wholly or partially) by other developments anticipated to (or to
have the potential to) reduce capital needs (e.g., co-location of antenna and/or
transmitter sites with other providers of wireless services in the relevant
markets, reductions in infrastructure and subscriber unit prices obtained from
Motorola pursuant to the Second Equipment Agreement Amendment and the 1997-1998
Agreement, alternative and more economical means for increasing system capacity,
other than constructing additional cell sites and/or installing additional base
radios, such as use of so-called "smart antennas," mini-cells and
software-driven and/or system design performance enhancements). Many of the
foregoing involve elements wholly or partly beyond Nextel's control or
influence. See "-- Forward-Looking Statements."
Other considerations in addition to the factors identified above may
significantly affect Nextel's decisions to seek additional financing, including
general economic conditions, conditions in the telecommunications and/or
wireless communications industry and the feasibility and attractiveness of
structuring particular financings for specific purposes (e.g., separate
capital-raising activities with respect to international activities and
opportunities). Finally, Nextel could obtain significant additional funds in
connection with the exercise of outstanding warrants and options, and the amount
and timing of receipt of such funds also would play a role in Nextel's
determinations concerning the need for or attractiveness of other potentially
available sources of financing. As Nextel has disclosed previously, full
exercise of the options granted to the McCaw Investor at the July 1995 closing
of the McCaw Transaction would result in the receipt by Nextel of approximately
$232,500,000, $277,500,000 and $107,500,000 of additional funds prior to July 29
in the years 1997, 1999 and 2001, respectively, and full exercise of the
warrants initially issued to Motorola for 3,000,000 shares of Class A Common
Stock would result in the receipt by Nextel of approximately $45,000,000 in
additional funds ($32,100,000 of which would be received in 1999 and
substantially all of the remainder of which would be received prior to 2001).
Finally, proceeds from the exercise by the McCaw Investor of its anti-dilutive
rights to acquire additional Nextel equity in connection with certain issuances
by Nextel of its capital stock and proceeds from the exercise of other warrants
and options currently outstanding and held by third parties, including options
granted pursuant to the Nextel Amended and Restated Incentive Equity Plan
(including its predecessor plans) and the Nextel Associates Stock Purchase Plan,
may provide other available sources of funding.
The foregoing discussion concerning potential exercise of various third
party rights to acquire shares of Class A Common Stock is subject to the
qualification that no assurance can be given that any of such rights will be
exercised or, if exercised, that the contemplated investment will in fact be
consummated. In the case of the Bank Credit Facility and the Vendor Credit
Facility (or the Additional Bank Borrowing and/or any of the additional
borrowings contemplated by the Additional Motorola Financing, if structured
successfully), there can be no assurance that the conditions to access such
facilities will be met. To the extent any of the aforementioned proceeds from
option and warrant exercises or financing arrangements are not available when
required, it will be necessary for Nextel to obtain alternate sources of
financing to meet its anticipated funding needs.
Nextel has had and may in the future have discussions with other parties
regarding potential equity investments and debt financing arrangements to
satisfy actual or anticipated financing needs. Pursuant to the Motorola
Transaction, 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. Motorola
consented with respect to the grant of superior governance rights by Nextel in
connection with the McCaw Transaction. The ability of Nextel to incur additional
indebtedness (including, in certain circumstances, indebtedness incurred under
the Bank Credit Agreement and/or under the Vendor Credit Facility) is and will
be limited by the terms of the Nextel Indentures, the Bank Credit Agreement and
the Vendor Credit Agreement. The Bank Credit Agreement and the Vendor Credit
Agreement also require
49
50
Nextel and its relevant subsidiaries at specified times to satisfy certain
financial covenants or ratios including certain covenants and ratios
specifically related to leverage.
At present, other than the existing equity or debt financing arrangements
that have been consummated and/or disclosed, Nextel has no commitments or
understandings with any third parties to obtain any material amount of
additional equity or debt financing. Moreover, no assurances can be made that
Nextel will be able to obtain any such additional financing in the amounts or at
the times such financing may be required, or that, if obtained, any such
financing would be on acceptable terms. Nextel also anticipates that it will
continue to experience significant net losses during the ongoing start up phase
of the Digital Mobile networks over the next several years. Accordingly, there
can be no assurances as to whether or when the operations of Nextel will become
profitable. As a result of Nextel's anticipated continuing losses, the
uncertainty regarding the exercise of options and warrants, the availability of
financing under the Bank and Vendor Credit Facilities and the impact of
Reconfigured iDEN technology and other matters discussed above, there can be no
assurance that Nextel will be able to obtain adequate capital to implement the
nationwide build-out of its Digital Mobile networks in accordance with either
the Existing Business Plan or the Revised Business Plan. See "-- Forward-Looking
Statements."
EFFECT OF INFLATION
Inflation is not a material factor affecting the Company's business.
General operating expenses such as salaries, employee benefits and lease costs
are, however, subject to normal inflationary pressures.
EFFECT OF NEW ACCOUNTING STANDARDS
NEW ACCOUNTING PRONOUNCEMENTS -- In March 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
128, "Earnings per share" ("SFAS 128"), which supersedes Accounting Principles
Board Opinion No. 15. SFAS 128 is effective for 1997 and simplifies the
computation of earnings per share by replacing the presentation of primary
earnings per share with a presentation of basic earnings per share. The
Statement 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 income available 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, similar to fully diluted earnings per share.
Management of the Company does not believe that there will be any material
effect of adopting SFAS 128 in 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company are filed under this
Item, beginning on page F-1 of this Report. The financial statement schedules
required under Regulation S-X are filed pursuant to Item 14 of this Report,
beginning on page F-28 of this Report.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISCLOSURE
None.
50
51
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
PAGE
-----
INDEPENDENT AUDITORS' REPORT......................................................... F-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1995 and 1996....................... F-3
Consolidated Statements of Operations for the Nine Months Ended December 31, 1994
and the Years Ended December 31, 1995 and 1996.................................. F-4
Consolidated Statements of Changes in Stockholders' Equity for the Nine Months
Ended December 31, 1994 and the Years Ended December 31, 1995 and 1996.......... F-5
Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 1994
and the Years Ended December 31, 1995 and 1996.................................. F-6
Notes to Consolidated Financial Statements......................................... F-7
FINANCIAL STATEMENT SCHEDULES
Schedule I -- Condensed Financial Information of Registrant........................ F-28
Schedule II -- Valuation and Qualifying Accounts................................... F-32
F-1
52
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, 1995
and 1996, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for the nine months ended December 31,
1994, and the years ended December 31, 1995 and 1996. 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, 1995 and 1996, and the results of their operations
and their cash flows for the nine months ended December 31, 1994 and the years
ended December 31, 1995 and 1996, 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
March 20, 1997, except for Note 13, as to
which the date is March 27, 1997
F-2
53
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
1995 1996
---------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents......................................... $ 340,826 $ 139,681
Marketable securities............................................. 68,443 5,012
Accounts and notes receivable, net................................ 41,451 90,392
Radios and accessories............................................ 21,220 45,168
Other............................................................. 32,721 28,844
---------- -----------
Total current assets........................................... 504,661 309,097
PROPERTY, PLANT AND EQUIPMENT, net.................................. 1,192,204 1,803,739
INTANGIBLE ASSETS, net.............................................. 3,549,622 4,076,300
OTHER ASSETS........................................................ 300,769 283,303
---------- -----------
$5,547,256 $ 6,472,439
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.................................................. $ 233,269 $ 225,309
Accrued expenses and other........................................ 130,463 148,911
Current portion of long-term debt................................. 1,277 1,524
---------- -----------
Total current liabilities...................................... 365,009 375,744
DEFERRED INCOME TAXES............................................... 549,277 505,516
LONG-TERM DEBT...................................................... 1,687,829 2,783,041
---------- -----------
Total liabilities.............................................. 2,602,115 3,664,301
---------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 6, 9 and 12)
STOCKHOLDERS' EQUITY
Preferred stock, Class A convertible redeemable, 8,163,265 shares
issued and outstanding......................................... 300,000 300,000
Preferred stock, Class B convertible, 82 shares issued and
outstanding.................................................... -- --
Common stock, Class A, 175,749,359 and 211,374,665 shares
issued......................................................... 176 211
Common stock, Class B, non-voting convertible, 17,830,000 shares
issued and outstanding......................................... 18 18
Paid-in capital................................................... 3,197,528 3,672,908
Accumulated deficit............................................... (579,231) (1,135,251)
Treasury shares, at cost, 24,860 and 1,621,568 shares............. (768) (31,400)
Unrealized gain on investments.................................... 32,054 14,993
Notes receivable from stockholders................................ (1,018) (1,100)
Deferred compensation, net........................................ (3,618) (12,241)
---------- -----------
Total stockholders' equity..................................... 2,945,141 2,808,138
---------- -----------
$5,547,256 $ 6,472,439
========= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
54
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1994, AND THE
YEARS ENDED DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1994 1995 1996
----------- ----------- -----------
REVENUES
Radio service revenue............................... $ 50,155 $ 135,753 $ 297,512
Analog equipment sales and maintenance.............. 24,702 35,950 35,426
----------- ----------- -----------
74,857 171,703 332,938
----------- ----------- -----------
OPERATING EXPENSES
Cost of radio service revenue....................... 33,195 123,496 221,382
Cost of analog equipment sales and maintenance...... 18,211 28,222 26,335
Selling, general and administrative................. 85,077 193,321 330,256
Expenses related to corporate reorganization........ -- 17,372 --
Depreciation and amortization....................... 94,147 236,178 400,831
----------- ----------- -----------
230,630 598,589 978,804
----------- ----------- -----------
OPERATING LOSS........................................ (155,773) (426,886) (645,866)
----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest expense.................................... (69,491) (115,034) (227,495)
Interest income..................................... 28,037 25,525 21,015
Other............................................... 33 (15,372) (10,866)
----------- ----------- -----------
(41,421) (104,881) (217,346)
----------- ----------- -----------
LOSS BEFORE INCOME TAX BENEFIT........................ (197,194) (531,767) (863,212)
INCOME TAX BENEFIT.................................... 71,345 200,602 307,192
----------- ----------- -----------
NET LOSS.............................................. $ (125,849) $ (331,165) $ (556,020)
========== ========== ==========
NET LOSS PER COMMON SHARE............................. $ (1.25) $ (2.31) $ (2.50)
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING......................................... 100,639,000 143,283,000 222,779,000
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
55
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED DECEMBER 31, 1994 AND THE
YEARS ENDED DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
CLASS A CLASS B CLASS A CLASS B
PREFERRED STOCK PREFERRED STOCK COMMON STOCK COMMON STOCK
--------------------- ---------------- --------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- -------- ------ ------ ----------- ------ ---------- ------
BALANCE March 31, 1994............ -- $ -- -- $-- 87,336,756 $ 87 504,010 $ 1
Issuance of common stock:
Exercise of options and
warrants....................... 331,314
NTT purchase..................... 1,532,959 2
Acquisitions..................... 15,890,589 16
Conversion of Class B common
stock............................ 504,010 1 (504,010) (1)
Deferred compensation.............
Collection of notes receivable,
net of accrued interest..........
Unrealized loss on investments....
Net loss..........................
--------- -------- --- --- ----------- ---- ---------- ----
BALANCE December 31, 1994......... -- -- -- -- 105,595,628 106 -- --
Issuance of common stock:
Exercise of options and
warrants....................... 1,622,778 2
Digital Radio purchase........... 8,163,265 300,000 82 1,220,000 1
Acquisitions..................... 67,310,953 67 17,830,000 18
Deferred compensation.............
Collection of notes receivable,
net of accrued interest..........
Unrealized gain on investments....
Net loss..........................
--------- -------- --- --- ----------- ---- ---------- ----
BALANCE December 31, 1995......... 8,163,265 300,000 82 -- 175,749,359 176 17,830,000 18
Issuance of common stock:
Exercise of options and
warrants....................... 1,580,981 1
Employee stock purchase plan.....
Acquisitions..................... 25,888,819 26
Comcast purchase................. 8,155,506 8
Exercise of anti-dilutive
rights...........................
Deferred compensation.............
Interest on notes receivable......
Unrealized loss on investments....
Net loss..........................
--------- -------- --- --- ----------- ---- ---------- ----
BALANCE December 31, 1996......... 8,163,265 $300,000 82 $-- 211,374,665 $211 17,830,000 $ 18
========= ======== === === =========== ==== ========== ====
UNREALIZED NOTES
(LOSS) RECEIVABLE
PAID-IN ACCUMULATED TREASURY GAIN ON FROM DEFERRED
CAPITAL DEFICIT SHARES INVESTMENTS STOCKHOLDERS COMPENSATION
---------- ----------- -------- ----------- ------------ ------------
BALANCE March 31, 1994............ $ 972,499 $ (122,217) $ (1,613) $ -- $ (1,259) $ (1,194)
Issuance of common stock:
Exercise of options and
warrants....................... 8,366 827
NTT purchase..................... 73,498
Acquisitions..................... 468,796
Conversion of Class B common
stock............................
Deferred compensation............. (2,837) 652
Collection of notes receivable,
net of accrued interest.......... 14
Unrealized loss on investments.... (1,214)
Net loss.......................... (125,849)
---------- ----------- -------- ------- -------- --------
BALANCE December 31, 1994......... 1,520,322 (248,066) (786) (1,214) (1,245) (542)
Issuance of common stock:
Exercise of options and
warrants....................... 5,722 18
Digital Radio purchase........... 12,644
Acquisitions..................... 1,654,440
Deferred compensation............. 4,400 (3,076)
Collection of notes receivable,
net of accrued interest.......... 227
Unrealized gain on investments.... 33,268
Net loss.......................... (331,165)
---------- ----------- -------- ------- -------- --------
BALANCE December 31, 1995......... 3,197,528 (579,231) (768) 32,054 (1,018) (3,618)
Issuance of common stock:
Exercise of options and
warrants....................... 16,836 (1,242)
Employee stock purchase plan..... (112) 227
Acquisitions..................... 341,984 (37,009)
Comcast purchase................. 99,897
Exercise of anti-dilutive
rights........................... (842) 7,392
Deferred compensation............. 17,617 (8,623)
Interest on notes receivable...... (82)
Unrealized loss on investments.... (17,061)
Net loss.......................... (556,020)
---------- ----------- -------- ------- -------- --------
BALANCE December 31, 1996......... $3,672,908 $(1,135,251) $(31,400) $14,993 $ (1,100) $(12,241)
========== =========== ======== ======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
56
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1994 AND THE
YEARS ENDED DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
1994 1995 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................. $(125,849) $(331,165) $(556,020)
Adjustments to reconcile net loss to net cash used in
operating activities--
Amortization of debt issuance costs................... 2,490 3,739 5,752
Depreciation and amortization......................... 94,147 236,178 400,831
Deferred income taxes................................. (71,730) (201,427) (308,262)
Accretion of senior redeemable notes, net of
capitalization...................................... 60,175 90,691 182,935
Other................................................. (407) 18,339 5,393
Change in current assets and liabilities, net of
effects from acquisitions:
Accounts and notes receivable....................... (2,971) (20,484) (37,403)
Radios and accessories.............................. (6,448) (1,179) (19,939)
Other current assets................................ 109 (18,936) 4,535
Accounts payable, accrued expenses and other........ 42,429 86,483 94,602
--------- --------- ---------
Net cash used in operating activities............ (8,055) (137,761) (227,576)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisitions, net of cash acquired.......... (81,457) (75,917) 56,736
Other investments and advances to affiliates............. (63,576) (51,605) (38,380)
Payments for acquisitions of FCC licenses................ (1,780) (10,000) (19,031)
Capital expenditures (Note 1)............................ (340,715) (270,943) (434,641)
Maturities of marketable securities...................... 252,586 112,095 64,438
Other.................................................... (10,883) 9,162 34,636
--------- --------- ---------
Net cash used in investing activities............ (245,825) (287,208) (336,242)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit agreements....................... -- -- 581,408
Borrowings (repayments) on revolving line of credit,
net................................................... -- 154,134 (296,704)
Other (repayments) borrowings, net....................... (2,623) (6,357) 1,009
Debt issuance costs...................................... -- -- (37,676)
Common stock issued...................................... 74,685 16,112 108,087
Preferred stock issued................................... -- 300,000 --
Treasury stock issued.................................... -- -- 6,549
Notes receivable from stockholders....................... 14 227 --
--------- --------- ---------
Net cash provided by financing activities........ 72,076 464,116 362,673
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS....... (181,804) 39,147 (201,145)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............. 483,483 301,679 340,826
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD................... $ 301,679 $ 340,826 $ 139,681
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
57
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 wireless communications services to their customers
utilizing specialized mobile radio ("SMR") frequencies licensed to them by the
Federal Communications Commission ("FCC"). The Company is principally engaged in
the acquisition and operation of SMR communications systems in the United States
and the sale and servicing of related equipment. Through its subsidiaries McCaw
International, Ltd. ("MIL") and Nextel Investment Company ("NIC"), and other
subsidiaries that are involved in the international wireless investments and
business activities managed and/or coordinated through MIL, Nextel has interests
in wireless operations in Canada, Mexico, Brazil, Argentina, the Philippines,
and Shanghai, China. The Company's initial strategy was to consolidate the
fragmented SMR industry in the largest markets in the United States through the
acquisition of SMR systems that had achieved minimum FCC loading requirements so
as to permit the aggregation of frequencies in a single market. Subsequently,
the Company's business plan has been focused on the development and deployment
of Digital Mobile networks to replace its traditional analog SMR networks.
The Company's principal business objective is to become a leading provider
of wireless telecommunications services in major markets throughout the United
States. The Company's efforts to accomplish its principal objective have
consisted largely of acquiring spectrum and implementing wireless communications
services in its markets by constructing and operating advanced mobile
communications systems employing digital technology with a multi-site
configuration permitting frequency reuse ("Digital Mobile networks"). The
Company has acquired spectrum domestically and internationally through mergers
and acquisitions.
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.
The Company is party to certain equipment purchase agreements with Motorola
(see Notes 6 and 12). For the foreseeable future the Company expects that it
will need to rely on Motorola for the manufacture of a substantial portion of
the equipment necessary to construct its Digital Mobile networks.
USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION AND CHANGE IN FISCAL YEAR -- The consolidated
financial statements include the accounts of the Company and its majority-owned
subsidiaries. Investments in companies in which ownership interests range from
twenty to fifty percent and in which the Company exercises significant influence
over operating and financial policies are accounted for using the equity method.
Other investments are accounted for using the cost method. All significant
intercompany transactions and balances have been eliminated in consolidation.
Effective December 31, 1994, the Company changed its fiscal year end from
March 31 to December 31.
CASH AND CASH EQUIVALENTS -- Cash equivalents consist of time deposits and
highly liquid investments with original maturities of three months or less.
F-7
58
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Supplemental disclosures of cash flow information and non-cash investing
and financing activities are as follows:
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
DECEMBER 31, -----------------
1994 1995 1996
------------ ------ -------
(IN THOUSANDS)
CASH PAID:
Interest paid................................ $6,628 $8,454 $32,660
====== ====== =======
Income taxes paid............................ $ 519 $ 389 $ 1,290
====== ====== =======
Under its previous vendor financing agreements (see Note 6), the Company
directly financed certain of its equipment purchases. During the nine months
ended December 31, 1994 and the years ended December 31, 1995 and 1996 the total
equipment acquired under these vendor financing agreements was $104.6 million,
$117.8 million and $102.5 million, respectively, resulting in total cash and
non-cash capital expenditures of $466.6 million, $419.7 million and $570.0
million, respectively. Total capital expenditures include interest capitalized
in connection with the construction and development of the Digital Mobile
networks of approximately, $21.3 million, $31.0 million and $32.9 million during
the nine months ended December 31, 1994 and the years ended December 31, 1995
and 1996, respectively.
INVESTMENTS -- Marketable debt securities and certificates of deposits with
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.
The Company accounts for investments in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." All of the Company's marketable investments 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 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 instruments 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.
RADIOS AND ACCESSORIES -- Radios and 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 computed using the straight-line method based on estimated useful lives of
31 years for buildings, 3 to 10 years for equipment, and 3 years for furniture
and fixtures. Leasehold improvements are amortized over the shorter of the
respective lives of the leases or the useful lives of the improvements.
Construction in Progress includes labor, material, transmission and related
equipment, engineering, site development, interest and other costs relating to
the construction and development of the Digital Mobile networks.
INTANGIBLE ASSETS -- Intangible assets are recorded at cost and are
amortized using the straight-line method based on estimated useful lives of 20
years for FCC licenses and the excess of purchase price over fair value of net
assets acquired, 10 years for customer lists, and up to 20 years for other
intangibles. Noncompetition covenants are amortized over the lives of the
covenants.
F-8
59
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LONG-LIVED ASSETS -- Effective January 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed of "
("SFAS 121"). Long-lived assets and identifiable intangibles to be held and used
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. Impairment is measured by
comparing the carrying value of the long-lived asset to the estimated
undiscounted future cash flows expected to result from use of the assets and
their eventual disposition. The Company determined that as of December 31, 1996,
there had been no impairment in the carrying value of long-lived assets.
INTEREST RATE SWAP AGREEMENTS -- The Company entered into interest rate
swap agreements as a means of managing its interest rate exposure. These
agreements have the effect of converting certain of the Company's variable rate
obligations to fixed rate obligations. Net amounts paid or received are
reflected as adjustments to interest expense.
REVENUE RECOGNITION -- Revenue is recognized for air-time and other
services over the period earned and for sales of equipment when delivered.
DIGITAL MOBILE NETWORK EQUIPMENT SALES AND RELATED COSTS -- Effective
January 1, 1996, the Company classified equipment sales revenue and related
costs of its Digital Mobile network operations within selling, general and
administrative expenses. The loss on the sale of subscriber units used in the
Digital Mobile networks results from the Company's subsidy of Digital Mobile
unit sales and represents marketing costs for the Digital Mobile networks. The
statements of operations for the nine months ended December 31, 1994 and the
year ended December 31, 1995 have been reclassified to conform with this
presentation. Equipment sales and related costs of the Company's Digital Mobile
network operations are as follows:
NINE YEAR ENDED
MONTHS ENDED DECEMBER 31,
DECEMBER 31, ----------------------------
1994 1995 1996
------------ ------------ ------------
(IN THOUSANDS)
Equipment Sales............................ $ 8,820 $ 53,515 $ 129,252
Cost of Equipment Sales.................... 14,852 67,274 154,678
-------- ---------- ----------
$ (6,032) $ (13,759) $ (25,426)
======== ========== ==========
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.
FOREIGN CURRENCY TRANSLATION -- Results of operations for foreign
investments are translated using average exchange rates during the period, while
assets and liabilities are translated at the exchange rate in effect at the
reporting date. Gains or losses from translating foreign currency financial
statements are accumulated in a separate component of stockholders' equity.
There were no material foreign currency translation gains or losses for the
periods presented.
NET LOSS PER SHARE -- Net loss per share is based on the weighted average
number of common shares outstanding during the period and does not include
common equivalent shares since their effect would be anti-dilutive.
RECLASSIFICATIONS -- Certain prior year amounts have been reclassified to
conform to the current year presentation.
F-9
60
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS -- In March 1997, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
128, "Earnings per share" ("SFAS 128"), which supersedes Accounting Principles
Board Opinion No. 15. SFAS 128 is effective for 1997 and simplifies the
computation of earnings per share by replacing the presentation of primary
earnings per share with a presentation of basic earnings per share. The
Statement 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 income available 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, similar to fully diluted earnings per share.
Management of the Company does not believe that there will be any material
effect from adopting SFAS 128 in 1997.
2. BUSINESS COMBINATIONS AND OTHER TRANSACTIONS
BUSINESS COMBINATIONS
NINE MONTHS ENDED DECEMBER 31, 1994 -- During the nine months ended
December 31, 1994, the Company consummated various acquisitions of SMR
operations in Florida with an aggregate purchase price of approximately $52.3
million.
In April 1994, the Company acquired PowerFone Holdings, Inc. ("PowerFone"),
an operator of SMR systems in Detroit, Cleveland, Cincinnati, Indianapolis, St.
Louis, Pittsburgh and upstate New York, for approximately 7.6 million shares of
Class A Common Stock, having an aggregate market value of approximately $266.0
million at closing.
In August 1994, the Company completed the acquisition of Questar Telecom,
Inc. ("QTI"), a wholly-owned subsidiary of Questar Corporation, and certain
subsidiaries of Advanced Mobilcomm, Inc. (collectively "AMI-West"). QTI and
AMI-West operated SMR systems in the Western regions of the United States. The
Company issued approximately 3.9 million and 1.9 million shares of Class A
Common Stock to the stockholders of QTI and AMI-West, respectively, having an
aggregate market value of approximately $153.0 million at closing.
In a series of transactions, the Company completed the acquisition of Saber
Communications, Inc., an operator of SMR systems in Alabama, Louisiana and
Mississippi, for approximately $48.0 million in cash.
YEAR ENDED DECEMBER 31, 1995 -- On July 28, 1995, the Company acquired from
Motorola, Inc. ("Motorola") substantially all of its owned or managed 800 MHz
SMR licenses and related assets located throughout the continental United States
(the "Motorola SMR Business") in exchange for approximately 41.7 million shares
of Class A Common Stock and 17.8 million shares of Class B Non-voting Common
Stock (the "Motorola Transaction"), having an aggregate market value of
approximately $1,160.0 million at closing.
On July 28, 1995, the merger with OneComm Corporation ("OneComm") was
consummated (the "OneComm Merger") whereby the stockholders of OneComm received
approximately 22.5 million shares of Class A Common Stock (or rights to receive
such stock) , having an aggregate market value of approximately $402.0 million
at closing. OneComm is an operator of SMR systems in the Rocky Mountain, Pacific
Northwest, Midwest, North Central and Ohio Valley areas.
On July 31, 1995, the merger with American Mobile Systems Incorporated
("AMS"), an operator of SMR systems in Florida, was consummated (the "AMS
Transaction"), whereby the stockholders of AMS received approximately 4.2
million shares of Class A Common Stock (or rights to receive such stock), having
an aggregate market value of approximately $81.3 million at closing.
F-10
61
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In October 1995, the Company acquired certain SMR Properties from Comcast
Corporation (see Note 10) in exchange for approximately 463,000 shares of Class
A Common Stock, having an aggregate market value of approximately $7.2 million
at closing.
As a result of the business combinations consummated in 1995, the Company
began to implement a plan to consolidate, resize and relocate the corporate
headquarters and certain other functions of the various combining entities (the
"Corporate Reorganization"). Accordingly, the Company accrued certain estimated
expenses directly related to such Corporate Reorganization activities, including
employee severance and closure of duplicate facilities. The charge to operations
relating to the Corporate Reorganization ($17.4 million) represents costs with
respect to employees, facilities and related items of the Company prior to the
consummation of such business combinations. Corporate Reorganization costs
related to the acquired entities ($9.9 million) have been included in the cost
of the respective business combinations. As of December 31, 1995 and 1996,
approximately $361,000 and $13.9 million, respectively, of such costs have been
paid relating to the Company and $1.5 million and $9.9 million, respectively, of
such costs have been paid relating to acquired entities.
YEAR ENDED DECEMBER 31, 1996 -- On January 30, 1996, the merger with Dial
Page, Inc. ("Dial Page"), was consummated (the "Dial Page Merger"), whereby the
stockholders of Dial Page received approximately 26.8 million shares of Class A
Common Stock (or rights to receive such stock), having an aggregate value of
approximately $277.9 million on the contract date. Dial Page is an operator of
analog SMR systems in the Southeastern United States.
The following presents the unaudited pro forma consolidated results of
operations for the nine months ended December 31, 1994 and the year ended
December 31, 1995, as if the acquisitions described above, had occurred at the
beginning of each period presented. The 1995 pro forma results include
acquisitions consummated during the years ended December 31, 1995 and 1996 and
the 1994 pro forma results include acquisitions consummated during the nine
months ended December 31, 1994 and the year ended December 31, 1995. The pro
forma effects of acquisitions consummated in 1996 were not material. The pro
forma results are not necessarily indicative of the actual results of operations
that would have occurred had the transactions been consummated as indicated nor
are they intended to indicate results that may occur in the future.
NINE MONTHS
ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1994 1995
------------ ------------
(IN THOUSANDS)
Revenues............................................ $ 172,631 $ 261,393
========== ==========
Net loss............................................ $ (289,252) $ (526,699)
========== ==========
Net loss per share.................................. $ (1.37) $ (2.34)
========== ==========
In 1996, the Company also acquired several other businesses at a net cost
of $20.0 million. The results of operations of these businesses were not
material in relation to the Company's consolidated results of operations.
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.
F-11
62
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The total purchase price and net assets acquired for acquisitions completed
are as follows:
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
DECEMBER 31, --------------------------
1994 1995 1996
----------- ----------- -----------
(IN THOUSANDS)
Direct cost of acquisitions:
Cash and accrued transaction costs.............. $ 91,780 $ 89,626 $ 30,487
Note payable.................................... 132 -- --
Common stock, warrants and options.............. 418,195 1,654,525 296,881
Expenses related to corporate reorganization.... -- 9,915 --
--------- ----------- ----------
$ 510,107 $ 1,754,066 $ 327,368
========= =========== ==========
Net assets acquired:
Working capital -- net.......................... $ 1,923 $ (44,992) $ 53,641
Property, plant and equipment................... 26,948 207,070 202,420
Intangible assets............................... 629,024 2,278,310 556,250
Other assets.................................... 14,020 37,790 4,290
Long-term debt.................................. (837) (215,835) (379,017)
Deferred income taxes........................... (160,971) (508,277) (110,216)
--------- ----------- ----------
$ 510,107 $ 1,754,066 $ 327,368
========= =========== ==========
OTHER TRANSACTIONS
In 1994, the Company invested an aggregate of approximately $18.1 million
in cash and exchanged 2.5 million shares of Class A Common Stock for an equity
interest in Clearnet Communications Inc. ("Clearnet") that as of December 31,
1996 represented an approximately 19.5% equity interest (representing
approximately 1.7% of voting interest) in Clearnet. Such equity interest in
Clearnet had an aggregate market value of approximately $69.0 million at
closing. The Company's investment in Clearnet (classified as other long-term
assets in the accompanying consolidated balance sheets) is accounted for at fair
market value.
In 1995, the Company, through MIL, invested approximately $10.0 million for
an approximate equity-equivalent interest of 25.2% and committed an additional
$13.2 million in loan funding in the initial phase of a newly created Group
Special Mobile ("GSM") digital cellular telephone system operating in Shanghai,
China. During 1996, MIL advanced a total of $10.4 million of such loan funding
to the Shanghai operations.
On March 2, 1995, the Company, through NIC, acquired approximately a 16.5%
interest in Corporacion Mobilcom S.A. de C.V. ("Mobilcom"), a Mexican SMR
operator, for $10.0 million and the conversion of $42.5 million in principal
amount of notes, representing funds advanced to Mobilcom in 1994. In August
1995, the Company acquired an additional 1.5% equity interest in Mobilcom for
approximately $4.7 million. During the year ended December 31, 1995, the Company
recorded a $15.0 million charge to operations representing an other than
temporary decline in this investment as a result of the decline in the Mexican
peso during 1995. The investment was accounted for using the cost method as of
December 31, 1995.
On August 23, 1996, the Company, through NIC, entered into certain
agreements to purchase up to 19.8% of additional equity interest in Mobilcom
from the selling stockholders and Grupo Comunicaciones San Luis, S.A. De C.V.
("Grupo"), the associated company of Mobilcom, in two tranches. An additional
11.6% equity interest in Mobilcom was acquired on October 24, 1996 in exchange
for 1.3 million shares of Class A Common Stock valued at $23.1 million. On
January 24, 1997, the Company acquired an additional 8.2% equity interest in
Mobilcom from the selling stockholders in exchange for 1.3 million shares of
Class A Common Stock valued at $16.5 million bringing the Company's aggregate
interest in Mobilcom to
F-12
63
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approximately 38%. Upon the closing of the first tranche, the ownership interest
increased from 18.5% to 30.1% requiring a change in the accounting method used
to account for the investment from the cost method to the equity method,
resulting in a $10.8 million charge to other expenses.
The Company, through NIC, has the right to appoint a majority of Mobilcom
board members. In order to retain the contractual right to designate a majority
of the board of directors of Mobilcom, the Company must invest approximately
$76.8 million in Mobilcom through certain qualified capital transactions by
March 1998. As of January 31, 1997, the Company had invested $43.6 million in
such qualified capital transactions. The Company has the option to purchase
before March 1998, up to an additional 29.5% of Mobilcom's common stock. Certain
shareholders of Mobilcom retain the right to approve certain significant
transactions such as acquisitions and dispositions, and the approval of business
plans of Mobilcom. In addition, beginning on October 24, 1997, holders of
approximately 33% of the outstanding capital stock of Mobilcom have the right
for two years to put (the "Mobilcom Put") the entire amount of their holdings to
the company at its appraised fair market value of cash upon occurrence of
certain events. The Mobilcom Put is automatically exercisable on October 24,
1999.
NIC has agreed under certain circumstances to attempt to provide Grupo with
liquidity with respect to its 21% equity interest in Mobilcom. At any time after
January 1, 1999, NIC, if requested by Grupo, will cause Mobilcom to undertake a
U.S. registered public offering or sale for cash to a third party of Grupo's
shares at their appraised fair market value within one year of such request. If
Mobilcom fails to provide Grupo with liquidity through either of these methods,
Grupo has the right to cause Mobilcom to file a registration statement in the
United States covering Grupo's Mobilcom shares.
On June 14, 1996, the Company, through MIL, invested $16.0 million in cash
to obtain a 30% interest in Infocom Communications Network, Inc. ("Infocom"), a
wireless communications company located in the Philippines. This investment is
accounted for by the equity method.
On August 6, 1996, the Company, through MIL, acquired all of the
outstanding shares of Com Control Comunicacion Controlada S.A. (renamed McCaw
Argentina S.A.), an Argentine company with 800 MHz SMR licenses, for $15.0
million in the form of cash and equipment.
SUBSEQUENT TRANSACTIONS -- On January 30, 1997, Nextel acquired 81% of the
outstanding shares of Wireless Ventures of Brazil, Inc., an operator of SMR
systems in Brazil ("WVB"), for a purchase price of $186.3 million, which was
paid with Class A Common Stock, through a merger of WVB with a wholly-owned
subsidiary of Nextel. Nextel simultaneously contributed its interest in WVB,
which was renamed McCaw International ("Brazil"), Ltd., to MIL.
PENDING TRANSACTIONS -- In October 1996, the Company entered into a
definitive agreement with Pittencrieff Communications, Inc. ("Pittencrieff"), an
SMR operator with licenses in Texas, Oklahoma, New Mexico and Arizona, providing
for the merger of Pittencrieff with a wholly-owned indirect subsidiary of the
Company (the "Pittencrieff Transaction"). Pursuant to the Pittencrieff
Transaction, the Company will issue a maximum of 8,782,403 shares of Class A
Common Stock, subject to certain adjustments, in exchange for all of the
outstanding shares (or rights to acquire shares) of Pittencrieff common stock.
The maximum dollar value of the shares of Class A Common Stock to be issued to
the Pittencrieff stockholders is set at $170.0 million (subject to certain
adjustments). Accordingly, if the price of the Class A Common Stock exceeds
$19.36 at the closing of the Pittencrieff Transaction, the number of shares to
be issued to the Pittencrieff stockholders would be decreased so that the total
maximum dollar value threshold would not be exceeded. The closing of the
Pittencrieff Transaction, which is subject to certain conditions, including
regulatory approval and the approval of the Pittencrieff stockholders, is
expected to occur in 1997.
F-13
64
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. ACCOUNTS AND NOTES RECEIVABLE
DECEMBER 31,
-------------------
1995 1996
------- --------
(IN THOUSANDS)
Trade:
Billed................................................. $34,855 $ 68,166
Unbilled............................................... 6,267 12,478
Reserve for doubtful accounts.......................... (5,232) (10,774)
------- --------
35,890 69,870
Notes receivable......................................... -- 12,295
Other.................................................... 5,561 8,227
------- --------
$41,451 $ 90,392
======= ========
Notes receivable, all due within one year, primarily consist of advances to
foreign investees bearing interest at rates from 6% - 14.5%.
4. PROPERTY, PLANT AND EQUIPMENT
DECEMBER 31,
------------------------
1995 1996
---------- ----------
(IN THOUSANDS)
Land................................................. $ 980 $ 1,948
Buildings and improvements........................... 15,267 78,036
Equipment............................................ 972,063 1,287,489
Furniture and fixtures............................... 71,603 98,555
Construction in progress............................. 271,592 652,519
---------- ----------
1,331,505 2,118,547
Less accumulated depreciation and amortization....... 139,301 314,808
---------- ----------
$1,192,204 $1,803,739
========= =========
5. INTANGIBLE ASSETS
DECEMBER 31,
------------------------
1995 1996
---------- ----------
(IN THOUSANDS)
FCC licenses......................................... $2,762,502 $3,300,176
Excess of purchase price over fair value of net
assets acquired.................................... 867,639 1,083,963
Customer lists....................................... 137,519 134,320
Noncompetition covenants............................. 93,248 85,385
Other................................................ 32,204 38,783
---------- ----------
3,893,112 4,642,627
Less accumulated amortization........................ 343,490 566,327
---------- ----------
$3,549,622 $4,076,300
========= =========
F-14
65
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT
DECEMBER 31,
------------------------
1995 1996
---------- ----------
(IN THOUSANDS)
11.5% Senior redeemable discount notes due 2003,
interest payable semi-annually beginning March 1,
1999, net of unamortized discount of $143,835 and
$89,024............................................ $ 390,569 $ 436,831
9.75% Senior redeemable discount notes due 2004,
interest payable semi-annually beginning August 15,
1999, net of unamortized discount of $307,329 and
$205,773........................................... 837,102 920,662
10.125% Senior redeemable OneComm discount notes due
2004, interest payable semi-annually beginning July
15, 1999, net of unamortized discount of $193,638
and $151,810....................................... 224,122 258,066
12.25% Senior redeemable Dial Page discount notes due
2004, interest payable semi-annually beginning
October 15, 1999, net of unamortized discount of
$186,584........................................... -- 355,246
10.25% Senior redeemable Dial Page discount notes due
2005, interest payable semi-annually beginning June
15, 1999, net of unamortized discount of $45,192... -- 69,973
Bank credit facility, interest payable quarterly at
an adjusted rate calculated either on the prime
rate or LIBOR (8% to 9.75%)........................ -- 590,000
Vendor credit facility, interest payable quarterly at
2% over the prime rate (10.25%).................... -- 150,000
Equipment notes payable, interest at 2% over
corporate base rate as defined (10.5%)............. 235,075 --
Other................................................ 2,238 3,787
---------- ----------
1,689,106 2,784,565
Less current portion................................. 1,277 1,524
---------- ----------
$1,687,829 $2,783,041
========== ==========
SENIOR REDEEMABLE DISCOUNT NOTES -- In August 1993, the Company completed
the issuance of $525.9 million principal amount of senior redeemable discount
notes due 2003 (the "2003 Notes"). The 2003 Notes, which are unsecured
obligations and noncallable until September 1, 1998, generated $300.0 million of
gross proceeds.
In February 1994, the Company completed the issuance of $1,126.4 million
principal amount of senior redeemable discount notes due 2004 (the "2004
Notes"). The 2004 Notes, which are unsecured obligations and noncallable until
February 15, 1999, generated $700.0 million of gross proceeds.
The $409.9 million principal amount of OneComm's senior redeemable discount
notes due 2004 (the "OneComm 2004 Notes") are unsecured obligations and
noncallable until January 15, 1999. The OneComm 2004 Notes were assumed in
connection with the OneComm Merger and were adjusted to fair value at the date
of acquisition at an annual yield to stated maturity of approximately 14.2%.
The $541.8 million principal amount of Dial Page's senior redeemable
discount notes due 2004 (the "Dial Page 2004 Notes") are unsecured obligations
and noncallable until April 15, 1999. The Dial Page 2004 Notes were assumed in
connection with the Dial Page Merger and were adjusted to fair value at the date
of acquisition at an annual yield to stated maturity of approximately 14.3%.
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NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The $115.2 million principal amount of Dial Page's senior redeemable
discount notes due 2005 (the "Dial Page 2005 Notes") are unsecured obligations
and noncallable until December 15, 1998. The Dial Page 2005 Notes were assumed
in connection with the Dial Page Merger and were adjusted to fair value at the
date of acquisition at the annual yield to stated maturity of approximately
14.3%.
The indentures governing the 2003 Notes, 2004 Notes, OneComm 2004 Notes,
Dial Page 2004 Notes, and Dial Page 2005 Notes (collectively the "Notes")
contain substantially similar covenants which, among other things, restrict the
ability of the Company and certain of its subsidiaries to: incur additional
indebtedness; pay dividends or make distributions in respect of its capital
stock or make certain other restricted payments; create liens; enter into
transactions with affiliates or related persons; sell certain assets; engage in
any business other than the telecommunications business; or consolidate, merge
or sell all or substantially all of its assets. Additionally, the indentures
governing the 2003 Notes restrict the Company from encumbering the ability of
certain of its restricted subsidiaries, as defined in the Notes, to pay
dividends or make certain payments to the Company. Assets of the restricted
subsidiaries may not be transferred to Nextel except for payments of overhead
services, taxes or principal and interest on Notes. Also under these indentures,
the Company and its restricted subsidiaries may only incur debt other than
certain categories of permitted debt (as defined in the indentures), if the
aggregate amount of its debt does not exceed 30% of its total market
capitalization or if its ratio of consolidated debt to annualized operating cash
flow does not exceed certain levels.
Prior to the consummation of the Motorola Transaction and the OneComm and
Dial Page Mergers, the Company received consents of holders of the 2003 Notes,
2004 Notes, the OneComm 2004 Notes and the Dial Page 2004 and 2005 Notes that
were required under terms of the respective indentures. In exchange for the
consents, the Company agreed to pay each consenting holder of the respective
notes an amount equal to $10.00 per $1,000 of principal amount at maturity of
the respective notes. The Company, OneComm and Dial Page paid approximately
$26.9 million for these consents, which is included in transaction costs related
to the Motorola Transaction and the OneComm and Dial Page Mergers, as
appropriate (see Note 2).
BANK AND VENDOR CREDIT FACILITIES -- On September 30, 1996, Nextel, Nextel
Finance Company ("NFC"), a wholly-owned subsidiary of Nextel, and certain other
subsidiaries of Nextel entered into definitive agreements with respect to a
secured credit facility arranged by a group of banks (the "Bank Credit
Facility"). The Bank Credit Facility provides for up to $1,655.0 million of
secured financing, consisting of $1,085.0 million in revolving loans and $570.0
million in term loans. The commitments to make revolving loans are reduced
beginning March 31, 2001 with final maturities of the revolving loans occurring
on March 31, 2003. Quarterly principal payments on the term loans commence March
31, 2001 with final maturities on June 30, 2003. Concurrently therewith, Nextel,
NFC and certain other subsidiaries of Nextel entered into definitive agreements,
which also became effective on September 30, 1996, with respect to the
amendment, restatement and consolidation of the previously existing financing
arrangements with Motorola and NTFC Capital Corporation ("NTFC") (the "Vendor
Credit Facility"). The Vendor Credit Facility supersedes the previous financing
agreements and provides for up to $345.0 million of secured financing,
consisting of a $195.0 million revolving loan and $150.0 million in term loans,
with revolving credit commitment reductions and term loan payments parallel to
those of the Bank Credit Facility.
Borrowings under the Bank Credit Facility and the Vendor Credit Facility
(collectively, the "Facilities") are ratably secured by liens on assets of
Nextel's subsidiaries that are "restricted" subsidiaries under the terms of
Nextel's public indentures. As of December 31, 1996, Nextel had drawn $590.0
million of its available financing under the Bank Credit Facility, leaving an
aggregate of $1,065.0 million available for borrowing under such facility.
Additionally, Nextel had drawn $150.0 million of its available financing under
the Vendor Credit Facility, leaving an aggregate of $195.0 million available for
borrowing under such facility. The proceeds from these borrowings were used
primarily to repay the outstanding principal and accrued interest under the
previous financing agreements with Motorola and NTFC and to fund operations.
Commitment fees of 0.5% are payable quarterly based on the average unused
balance of the Bank Credit Facility. However, the
F-16
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NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
maximum permitted indebtedness (excluding indebtedness represented by the Notes)
pursuant to the indentures relating to the Notes is limited to $1,560.0 million
as of December 31, 1996.
The Facilities agreements contain similar 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 or engage in certain acquisitions; 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. Additionally, the agreements require
compliance with various financial ratios and the attainment of certain operating
results during the terms of the credit facilities. The Facilities are secured by
certain assets and capital stock of Nextel's restricted subsidiaries. At
December 31, 1996, substantially all of the Company's assets were pledged in
connection with these facilities.
PREVIOUS VENDOR FINANCING -- In 1991, the Company entered into agreements,
as amended, with Motorola for the purchase, installation and maintenance of the
Company's Digital Mobile networks infrastructure and related subscriber
equipment. In addition, the Company and certain of its subsidiaries entered into
financing and security agreements with Motorola which provided and secured
equipment financing totaling $685.0 million (the "Motorola Financing").
Borrowings under these facilities were limited to the cost of equipment and
services provided by Motorola (excluding subscriber equipment) and evidenced by
individual promissory notes. At December 31, 1995, approximately $225.1 million
was outstanding under these facilities. On September 30, 1996, the agreements
relating to this facility were amended and restated to become the Vendor Credit
Facility and the balances outstanding under the Motorola Financing were
refinanced with the Vendor Credit Facility discussed above.
The Company entered into a warrant agreement with Motorola providing for
the issuance of warrants for the purchase of 3.0 million shares of Class A
Common Stock as an inducement to enter into certain of the aforementioned
agreements. The exercise price of the warrants is $15.00 per share, the market
value of the stock at the date of grant. The warrants are issuable in varying
installments corresponding with the commencement date of commercial service of
Digital Mobile networks in certain regional market areas. At December 31, 1995
and 1996, warrants for approximately 2.1 million shares and 2.7 million shares,
respectively, were issued and exercisable, and such warrants expire at various
dates ranging from October 1999 to December 2000.
In 1991, the Company entered into a financing agreement, as amended, with
the NTFC providing for a $40.0 million line of credit for the purchase of six
Northern Telecom Corporation switching systems and related services. The terms
and conditions of the agreement were substantially identical to the Motorola
Financing agreements. At December 31, 1995, $10.0 million was outstanding under
this facility. On September 30, 1996, the agreements relating to this facility
were amended and restated to become the Vendor Credit Facility and the balances
outstanding under the NTFC financing were refinanced with the Vendor Credit
Facility discussed above.
For the years subsequent to December 31, 1996, annual maturities of
long-term debt are as follows (in thousands):
1997............................................................ $ 1,524
1998............................................................ 1,109
1999............................................................ 53,852
2000............................................................ 98,960
2001............................................................ 207,193
Thereafter...................................................... 3,100,310
----------
3,462,948
Less unamortized discount....................................... 678,383
----------
$2,784,565
=========
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NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INTEREST RATE SWAPS -- In October 1996, NFC entered into an interest rate
swap agreement with a notional amount of $320.0 million which will convert
floating rate debt into fixed rate obligations with an effective interest rate
of 5.9%. This swap commenced on October 2, 1996 for a one-year period expiring
on October 2, 1997. As of December 31, 1996 based on estimates obtained from
dealers, the Company would be obligated to pay $872,000 to settle this contract.
In December 1996, NFC entered into an interest rate swap agreement with a
notional amount of $100.0 million which will convert floating rate debt into
fixed rate obligations with an effective interest rate of 5.36%. This swap
commenced on December 13, 1996 and will terminate either on December 13, 1999 or
on the first day of the quarterly interest payment period when the floating rate
is equal to or exceeds 6.25%, whichever comes first. As of December 31, 1996
based on estimates obtained from dealers, the Company would receive $142,000 to
settle this contract.
SUBSEQUENT TRANSACTION -- On March 3, 1997, MIL completed a private
placement of 951,463 units yielding $500.0 million of gross proceeds. Each unit
is comprised of a 10-year senior discount note and a warrant to purchase 0.10616
shares of MIL common stock. The notes have a 13% yield to maturity, are
noncallable for five years, and require no coupon payments for the first five
years. The warrants are exercisable at a price of $36.45 and entitle the holders
to purchase in the aggregate 1%, on a fully diluted basis, of the common stock
of MIL.
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments 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.
DECEMBER 31,
----------------------------------------------------
1995 1996
------------------------ ------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
Marketable securities (including equity
securities classified within other long-term
assets)..................................... $ 183,544 $ 183,544 $ 97,356 $ 97,344
Other assets.................................. $ 56,117 $ 65,007 $ 10,082 $ 10,082
Long-term debt................................ $1,687,829 $1,386,808 $2,783,041 $2,354,400
CASH AND CASH EQUIVALENTS, ACCOUNTS AND NOTES RECEIVABLE, ACCOUNTS PAYABLE
AND ACCRUED EXPENSES -- The carrying amounts of these items are a reasonable
estimate of their fair value.
MARKETABLE SECURITIES -- The fair value of these securities are estimated
based on quoted market prices.
F-18
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NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1995 and 1996, marketable securities (including equity
securities classified within other long-term assets) consist of the following:
UNREALIZED
COST FAIR VALUE (LOSS) GAIN
------- ---------- -----------
(IN THOUSANDS)
1995
Available for sale:
Debt securities............................. $69,679 $ 68,443 $(1,236)
Equity securities........................... $59,618 $115,101 $55,483
1996
Available for sale:
Debt securities............................. $ 4,991 $ 5,000 $ 9
Equity securities........................... $69,159 $ 92,344 $23,185
At December 31, 1996, the net unrealized gain on investments of
approximately $15.0 million included in stockholders' equity is net of a related
deferred income tax liability of approximately $8.2 million.
OTHER ASSETS -- The fair value of other assets, consisting primarily of
investments in promissory notes and escrow deposits, are estimated by
discounting future cash flows using current rates at which similar notes would
be issued to similar borrowers and quoted market prices, as applicable. At
December 31, 1995 and 1996, it was not practicable to value investments in
nonmarketable equity securities of foreign entities with a carrying value of
approximately $55.5 million and $19.7 million, respectively. Accordingly, these
investments are excluded from the above table.
LONG-TERM DEBT -- The fair value of these securities are estimated based on
quoted market prices of the 2003 Notes, 2004 Notes, OneComm 2004 Notes, Dial
Page 2004 Notes, and Dial Page 2005 Notes. Interest rates that are currently
available to the Company for issuance of debt with similar terms and remaining
maturities are used to estimate fair value for debt issues for which no market
quotes are available.
8. INCOME TAXES
The components of the income tax (benefit) provision were as follows:
NINE MONTHS
ENDED YEAR ENDED DECEMBER 31,
DECEMBER 31, ----------------------------
1994 1995 1996
------------ ------------ ------------
(IN THOUSANDS)
Current:
State................................... $ 385 $ 825 $ 1,070
--------- ----------- -----------
Deferred:
Federal................................. (59,612) (161,700) (272,279)
State................................... (12,118) (39,727) (35,983)
--------- ----------- -----------
(71,730) (201,427) (308,262)
--------- ----------- -----------
Income tax benefit........................ $(71,345) $ (200,602) $ (307,192)
========= =========== ===========
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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 is as follows:
NINE MONTHS YEAR ENDED
ENDED DECEMBER 31,
DECEMBER 31, ----------------------
1994 1995 1996
------------ --------- ---------
(IN THOUSANDS)
Income tax benefit at statutory rate...... $(69,018) $(186,118) $(302,124)
State tax benefit -- net.................. (7,626) (25,286) (22,701)
Amortization of goodwill.................. 4,766 8,400 14,104
Other..................................... 533 2,402 3,529
------------ --------- ---------
$(71,345) $(200,602) $(307,192)
========== ========= =========
Deferred tax assets and liabilities consist of the following:
DECEMBER 31,
----------------------
1995 1996
-------- ----------
(IN THOUSANDS)
Deferred tax assets:
Operating loss carryforwards........................ $405,784 $ 725,452
Deferred interest................................... 20,098 61,773
Other............................................... 24,196 28,459
-------- ----------
450,078 815,684
Valuation allowance -- net operating losses........... -- (41,065)
-------- ----------
450,078 774,619
-------- ----------
Deferred tax liabilities:
Property, plant and equipment....................... 66,348 112,012
Intangibles......................................... 910,814 1,103,047
Unrealized gain..................................... 22,193 22,724
Other............................................... -- 42,352
-------- ----------
999,355 1,280,135
-------- ----------
Net deferred tax liability............................ $549,277 $ 505,516
======== =========
At December 31, 1996, the Company had approximately $1,511.0 million of
consolidated net operating loss carryforwards for Federal income tax purposes
which expire through 2011, and approximately $326.0 million of separate return
net operating loss carryforwards which expire through 2011. The utilization of
tax net operating losses may be subject to certain limitations.
During the years ended December 31, 1995 and 1996, tax benefits of
approximately $1.1 million and $7.4 million, respectively, related to the
exercise of employee stock options, were credited to stockholders' equity.
9. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE COMMITMENTS -- The Company leases various equipment and
office facilities under operating leases. Leases for analog antenna sites are
generally a one year term or month-to-month; digital antenna sites are generally
five year terms but are cancelable after a short notice period under certain
circumstances. Future rental payments for such antenna site leases will
approximate $30.5 million for the year ending December 31, 1997, including
amounts due to Motorola of approximately $25.9 million (see Note 12).
F-20
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NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
For years subsequent to December 31, 1996, future minimum payments for all
lease obligations that have initial noncancellable lease terms exceeding one
year are as follows (in thousands):
1997...................................................... $ 74,957
1998...................................................... 58,826
1999...................................................... 40,694
2000...................................................... 28,849
2001...................................................... 18,982
Thereafter................................................ 41,649
--------
$263,957
========
Total rental expense was approximately $37.0 million, $58.9 million and
$84.5 million for the nine months ended December 31, 1994, and the years ended
December 31, 1995 and 1996, respectively.
LEGAL CONTINGENCIES -- On July 10, 1995, a lawsuit titled In Re Nextel
Communications Securities Litigation was filed in the United States District
Court in 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 and Rule 10b-5 promulgated thereunder. The
litigation also makes claims of fraud and deceit. Specifically, plaintiffs claim
that such damages resulted from defendants' certain alleged false and misleading
statements regarding the digital communications technology developed by Motorola
and deployed by Nextel in its Digital Mobile networks. 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 September 19, 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. 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 September 13, 1994, the 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.
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, 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.
The Company and its subsidiaries are involved in certain other
administrative proceedings and matters concerning legal issues rising in the
ordinary course of business. Management can not predict the final
F-21
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NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
disposition of such issues, but believes that adequate provision has been made
for probable losses and that the ultimate resolution of these proceedings will
not have a material adverse effect on the accompanying financial statements.
REGULATORY CONTINGENCIES -- On December 15, 1995, the FCC released new 800
MHz SMR licensing rules intended to provide for the auction of geographic-area
based SMR licenses in the top 200 SMR channels on an Economic Area ("EA") basis.
The 200 channels will be auctioned in blocks of 120 channels, 60 channels and 20
channels in an auction that the FCC has announced will occur in 1997. Once an
upper 200-channel EA license is obtained, the licensee will have the authority
to construct, operate and modify its systems within the licensed geographic area
without first obtaining FCC approval. To ensure proper construction and use of
the spectrum, EA licensees will be required to provide services to one-third of
the population within two years, and two-thirds of the population within five
years using more than 50% of the EA licensee's channels. Failure to meet these
build out requirements will result in loss of the EA license.
Because the upper 200 channels in the 800 MHz SMR service are licensed to
existing SMR providers, the EA licensee will have the authority to relocate
incumbents within the EA to the lower 230 SMR channels. Consequently, Nextel may
be subject to relocation in an EA for which it currently holds licenses but
fails to obtain the EA geographic-area license. Any incumbent not relocated out
of the EA licensed area must be provided co-channel protection by the EA
licensee, and will be permitted to make only those system modifications that do
not expand their current interference contour. The incumbent licenses will also
be provided an opportunity to convert their current site-by-site licenses to a
single license encompassing their existing authorized service area contours.
In addition to promulgating new rules for the upper 200 800 MHz channels,
the FCC proposed on December 15, 1995 to license the lower 230 SMR channels on
an EA basis. The FCC has proposed to auction the lower channels as an
"entrepreneur block" thus limiting auction participation to small businesses
which would likely exclude Nextel from eligibility to bid on the lower channels.
The FCC proposal would not permit lower EA licensees to relocate incumbents.
10. STOCKHOLDERS' EQUITY
During 1995, the Company increased its authorized shares to 613.9 million
of which 515.0 million shares are authorized as Class A Common Stock (par value
$.001 per share), 35.0 million shares as Class B nonvoting convertible common
stock (par value $.001 per share), and 63.9 million shares as Preferred Stock
(par value $.01 per share). The Class B Common Stock is convertible on a
one-to-one basis into Class A Common Stock at the option of the holder subject
to certain restrictions on the holder.
STOCK ISSUANCES -- In 1992, the Company entered into a Stock Purchase
Agreement (the "Comcast Agreement") and related Option Agreement (the "Comcast
Option"), as amended, with Comcast Corporation and/or its wholly-owned
subsidiary, Comcast FCI, Inc. (collectively, "Comcast") whereby Comcast agreed
to purchase $100.0 million of Class A Common Stock. The first $50.0 million was
purchased for cash in 1992 at $14.00 per share. The second $50.0 million, was
comprised of $35.0 million which was subject to a contingent purchase
opportunity for a cash price set on June 30, 1995 at 90% of the then prevailing
market price (such contingent purchase opportunity was not exercised) and $15.0
million which was deemed to be satisfied upon the Company's purchase of Comcast
SMR properties located in Philadelphia (see Note 2). Under the terms of the
Comcast Option, Comcast purchased for $20.0 million a five-year option to
acquire an additional 25.0 million shares of Class A Common Stock at an exercise
price of $16.00 per share. The option price was paid in the form of a $20.0
million five-year promissory note which accrued interest at 5% per annum. On
June 30, 1995, the rights and obligations of the Company and Comcast with
respect to the potential $35.0 million equity investment expired, and on July
18, 1995, Comcast repaid the $20.0 million note, plus accrued interest. On March
20, 1997, Nextel entered into arrangements with Comcast that provided for the
purchase by Unrestricted Subsidiary Funding Company, a wholly-owned subsidiary
of Nextel
F-22
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NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
("USFC"), of the Comcast rights pursuant to the options described above for a
purchase price of $25.0 million (the "Comcast Repurchase Option"). The terms of
the agreement relating to such option purchases provided for the termination of
a number of previously existing relationships between Nextel and Comcast,
including the Comcast Agreement and related documents.
Pursuant to the Comcast Agreement, Comcast was granted certain rights to
purchase additional shares of Class A Common Stock upon any public or private
issuances of such shares by the Company as specified in the Comcast Agreement
(the "Comcast Purchase Right"). On May 1, 1995, Comcast exercised its right to
purchase shares in connection with the Dial Page Merger (see Note 2). Under the
terms of the Company's agreement with Comcast, the rights with respect to the
issuance of shares in the transactions with Motorola, OneComm and Digital Radio,
L.L.C. ("Digital Radio") (as described below) lapsed on April 30, 1995. On
February 9, 1996, Comcast purchased approximately 8.2 million shares of Class A
Common Stock for approximately $99.9 million, pursuant to Comcast's exercise of
its anti-dilutive rights with respect to the Dial Page Merger. The Comcast
Purchase Right was terminated in connection with the Comcast Option Repurchase.
On July 28, 1995, the Company consummated a securities purchase agreement
with Digital Radio and Craig O. McCaw ("McCaw") (the "McCaw Securities Purchase
Agreement" or the "McCaw Transaction") pursuant to which Digital Radio purchased
for an aggregate price of $300.0 million, Nextel units (the "Units") consisting
of approximately 8.2 million shares of a newly created Class A Convertible
Redeemable Preferred Stock and 82 shares of a newly created Class B Convertible
Preferred Stock. The Units are convertible into approximately 24.5 million
shares of the Class A Common Stock and are redeemable under certain
circumstances solely at the Company's option. The Preferred Stock only pays
dividends under certain limited circumstances. In addition, pursuant to three
separate option agreements, Digital Radio may purchase for cash up to 35.0
million shares of Class A Common Stock at exercise prices ranging from $15.50 to
$21.50 per share for periods of two to six years from July 28, 1995. On April 5,
1995, Digital Radio purchased approximately 1.2 million shares of Class A Common
Stock for an aggregate purchase price of approximately $14.9 million ($12.6
million net of applicable expenses attributable to both such initial investment
and the additional investments described above).
Pursuant to the McCaw Securities Purchase Agreement, the McCaw Investor was
granted anti-dilutive rights with respect to certain Nextel share issuances,
which rights and related terms are largely comparable to the Comcast Purchase
Right ("McCaw Purchase Right"). In November 1996, upon the issuance of shares in
connection with an acquisition, the McCaw Investor exercised its anti-dilutive
rights, which resulted in the sale of 373,846 treasury shares of Nextel Class A
Common Stock to the McCaw Investor for $6.5 million.
In connection with the McCaw Transaction, the Company also entered into a
management support agreement with Eagle River, Inc. ("Eagle River"), an
affiliate of Digital Radio, 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 an option to
purchase an aggregate of up to 1.0 million shares of Class A Common Stock at an
exercise price of $12.25 per share, exercisable over two, four and six years.
For the years ended December 31, 1995 and 1996 approximately $905,000 and $1.8
million of compensation expense was charged to operations in connection with
these agreements. During the years ended December 31, 1995 and 1996, the Company
paid Eagle River approximately $247,000 and $348,000 under the terms of this
agreement for reimbursement of expenses.
F-23
74
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
WARRANT ISSUANCES -- The following is a summary of issued and outstanding
warrants for the purchase of the Company's Class A Common Stock:
SHARES
COVERED BY
WARRANTS PRICE
---------- -------------------
Issued and outstanding, April 1, 1994 and December 31,
1994................................................... 32,614,485 $0.001 - $16.00
Acquired................................................. 497,139 17.64
Exercised................................................ (580,000) 0.001 - 2.00
---------- ------ ------
Issued and outstanding, December 31, 1995................ 32,531,624 2.00 - 17.64
Acquired................................................. 2,160,067 12.14 - 43.16
---------- ------ ------
Issued and outstanding, December 31, 1996................ 34,691,691 $ 2.00 - $43.16
========= ====== ======
Exercisable, December 31, 1996........................... 34,391,691 $ 2.00 - $43.16
========= ====== ======
On March 20, 1997, an option to acquire 25.0 million shares, covered by
warrants outstanding as of December 31, 1996, was repurchased pursuant to the
Comcast Option Repurchase described above.
11. STOCK AND EMPLOYEE BENEFIT PLANS
EMPLOYEE STOCK OPTION PLANS -- The Company's Incentive Equity Plan (the
"Plan") provides for the issuance of up to 24.0 million shares of Class A Common
Stock to officers and key employees. Generally, options outstanding under the
Company's stock option plan: (1) are granted at prices equal to or exceeding the
market value of the stock on the grant date; (2) vest ratably over either a four
or five year service period; and (3) expire ten years subsequent to award.
A summary of the Plan activity is as follows:
WEIGHTED
OPTION AVERAGE
SHARES PRICE RANGE EXERCISE PRICE
---------- ------------------- ----------------
Outstanding, March 31, 1994............... 5,497,777 $ 1.25 - $40.75 $16.65
Granted................................... 288,600 13.50 - 40.25 19.12
Acquired.................................. 38,026 14.20 - 14.20 14.20
Canceled.................................. (118,088) 3.50 - 40.25 33.81
Exercised................................. (248,694) 1.25 - 15.87 5.56
---------- ------ ------ -------
Outstanding, December 31, 1994............ 5,457,621 1.25 - 40.75 17.47
Granted................................... 3,246,050 12.25 - 19.38 21.92
Acquired.................................. 1,382,835 2.82 - 19.09 11.34
Canceled.................................. (141,417) 3.50 - 40.25 21.59
Exercised................................. (728,766) 1.25 - 15.00 2.79
---------- ------ ------ -------
Outstanding, December 31, 1995............ 9,216,323 1.25 - 40.75 18.60
Granted................................... 5,332,995 13.50 - 19.75 15.64
Acquired.................................. 2,198,192 10.28 - 42.97 12.77
Canceled.................................. (2,969,568) 1.75 - 40.25 17.11
Exercised................................. (1,522,873) 1.25 - 15.00 7.39
---------- ------ ------ -------
Outstanding, December 31, 1996............ 12,255,069 $ 1.75 - $42.97 $16.50
========= ====== ====== =============
Exercisable, December 31, 1996............ 4,912,535 $ 1.75 - $42.97 $13.45
========= ====== ====== =============
F-24
75
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following is a summary of the status of stock options outstanding at
December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- ------------------------------
WEIGHTED-AVERAGE AVERAGE WEIGHTED-AVERAGE
EXERCISE NUMBER OF LIFE EXERCISE NUMBER OF EXERCISE
PRICE RANGE SHARES REMAINING PRICE SHARES PRICE
- ---------------- ---------- ---------------- -------- --------- ----------------
(YEARS)
$1.75 - $5.00 1,422,227 3.7 $ 4.50 1,361,981 $ 4.56
7.00 - 10.28 1,358,120 5.3 9.30 1,358,120 9.30
13.08 - 18.38 7,729,357 8.7 15.19 1,562,915 14.44
19.09 - 25.63 242,776 8.6 21.99 42,060 25.07
30.75 - 42.97 1,502,589 6.9 40.17 587,459 40.20
---------- ---------
12,255,069 7.5 16.50 4,912,535 13.45
========= ========
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 nine
months ended December 31, 1994, and the years ended December 31, 1995 and 1996,
the Company granted deferred shares of 29,000, 77,000, and 1,100,000,
respectively. Compensation expense of $160,000, $1.7 million and $4.2 million
has been recognized in relation to the deferred share grants for the nine months
ended December 31, 1994 and the years ended December 31, 1995 and 1996,
respectively.
In connection with the nationwide construction of the Digital Mobile
network, the Company entered into a stock performance compensation arrangement
covering certain senior managers and granted options covering 578,500 shares of
Class A Common Stock with an exercise price of $16.125. Vesting is based upon
completion of the buildout by certain dates; one-third of the options vest
immediately upon completion, one-third vest 12 months after completion, and the
remainder vest 24 months after completion.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). This Statement 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. If the Company had elected to recognize compensation
expense based on the fair value of the awards granted in 1995 and 1996,
consistent with the provisions of SFAS 123, the Company's net loss and net loss
per common share would have been increased to the pro forma amounts indicated
below:
YEAR ENDED
DECEMBER 31,
----------------------
1995 1996
--------- ---------
(IN THOUSANDS)
Net loss
As reported......................................... $(331,165) $(556,020)
========= =========
Pro forma........................................... $(337,271) $(570,467)
========= =========
Loss per common share:
As reported......................................... $ (2.31) $ (2.50)
========= =========
Pro forma........................................... $ (2.35) $ (2.56)
========= =========
Weighted average fair value of options granted........ $ 14.79 $ 10.56
========= =========
F-25
76
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effects of applying SFAS 123 in this pro forma disclosure are not
necessarily indicative of the effect on future amounts. SFAS 123 does not apply
to awards granted prior to 1995.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions:
1995 1996
----------- -----------
Expected stock price volatility................... 55% 55%
Risk-free interest rate........................... 5.9% - 7.9% 5.7% - 7.1%
Expected life of options.......................... 8 years 8 years
Expected dividend yield........................... 0.00% 0.00%
The Company's stock options are not transferable, 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 from its initial offering date to
the present. The risk-free rate of return used equals the yield on ten-year
zero-coupon U.S. Treasury issues on the grant date. No discount was applied to
the value of the grants for non-transferability or risk of forfeiture.
NOTES RECEIVABLE FROM STOCKHOLDERS -- As of December 31, 1995 and 1996,
notes receivable from stockholders of approximately $1.0 million and $1.1
million were outstanding. These notes, included in stockholders' equity,
represent advances to certain former officers for the exercise of options, are
non-interest bearing and are payable on the expiration dates of the option
grants.
STOCK APPRECIATION RIGHTS -- On November 1, 1996, MIL adopted a Stock
Appreciation Rights Plan, which was effective as of November 1, 1995, whereby
selected employees and agents of MIL may be granted rights to share in the
future appreciation in the value of MIL. Such rights do not represent an equity
interest in MIL, only a right to compensation under the terms of the plan.
MIL retroactively granted 1,160,000 rights under the plan, at an exercise
price of $10.00 per right, on dates ranging from October 1, 1995 to October 28,
1996, with vesting periods of 4 years. Rights under the plan may not be
exercised until the employee has vested in 50% of the grants. As of December 31,
1995 and 1996, there were 755,000 and 1,240,000 rights outstanding,
respectively. None of those rights were exercisable under the terms of the plan.
MIL had no commitment to make payments under the plan at December 31, 1995 and
1996 and no compensation expense had been recognized because there had been no
appreciation in the value of the rights from the time of issuance to December
31, 1995 and 1996.
EMPLOYEE STOCK PURCHASE PLAN -- Under the 1996 Employee Stock Purchase Plan
("ESPP"), eligible employees may subscribe to purchase shares of the Company's
Class A Common Stock through payroll deductions up to 10% of 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 plan will
terminate on the tenth anniversary of its adoption. During 1996, 7,360 treasury
shares were issued pursuant to the plan at a price per share of $15.725.
EMPLOYEE BENEFIT PLAN -- The Company has defined contribution plans
pursuant to Section 401(k) of the Internal Revenue Code covering all eligible
officers and employees. The Company provides a matching contribution of $.50 for
every $1.00 contributed by the employee up to 4% of each employee's salary. Such
contributions were approximately $287,000, $997,000 and $2.0 million for the
nine months ended December 31, 1994 and the years ended December 31, 1995 and
1996, respectively. At December 31, 1996, the Company had no other pension or
postemployment benefit plans.
F-26
77
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. RELATED PARTY TRANSACTIONS
At December 31, 1996, Motorola owned approximately 19% and 100% of the
Company's outstanding Class A and Class B Common Stock, respectively.
During the years ended December 31, 1995 and 1996, the Company acquired
approximately $217.2 million and $490.8 million of infrastructure and other
equipment, handsets, warranties, rent and services from Motorola. At December
31, 1995 and 1996, amounts payable to Motorola, classified within accounts
payable, accrued expense and other, approximated $179.4 million and $61.0
million. Under certain agreements, as amended, the Company is committed to
purchase from Motorola a significant amount of system infrastructure equipment
through 1999. Motorola is the principal supplier of the Company's Digital Mobile
infrastructure equipment and handsets.
On June 28, 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.
On August 23, 1996, the Company through NIC loaned Grupo $12.0 million. The
principal and accrued interest outstanding as of December 31, 1996 was
approximately $3.4 million.
13. SUBSEQUENT EVENTS
On March 27, 1997, Nextel and Motorola reached agreement on terms and
conditions pursuant to which Nextel could access up to an additional $450.0
million of equipment financing through Motorola. In order to access such
additional financing, Nextel would be required to procure certain consents,
waivers and/or participation commitments from a number of third parties, and to
obtain modifications to the terms of the Bank and Vendor Credit Facilities, the
related security documents and the Nextel Indentures and to satisfy certain
other conditions.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996
----------------------------------------
Revenues................................ $ 68,318 $ 77,619 $ 91,040 $ 95,961
Operating loss.......................... (146,944) (160,420) (159,638) (178,864)
Net loss................................ (118,718) (130,028) (148,883) (158,391)
Net loss per common share............... (0.56) (0.58) (0.66) (0.70)
1995
----------------------------------------
Revenues................................ $ 29,501 $ 30,177 $ 51,074 $ 60,951
Operating loss.......................... (70,139) (73,223) (133,440) (150,084)
Net loss................................ (53,199) (56,982) (102,134) (118,850)
Net loss per common share............... (0.50) (0.53) (0.61) (0.62)
F-27
78
NEXTEL COMMUNICATIONS, INC.
(PARENT ONLY)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
1995 1996
---------- ----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents.......................................... $ 204,048 $ 8,837
Marketable securities.............................................. 64,685 --
Accounts receivable................................................ 311 15
Other.............................................................. 151 4,446
---------- ----------
Total current assets....................................... 269,195 13,298
PROPERTY, PLANT AND EQUIPMENT, net................................... 1,602 6,028
INTANGIBLE ASSETS, net............................................... 587 4,541
DEFERRED INCOME TAXES................................................ 32,263 71,110
INVESTMENTS IN AND ADVANCES TO SUBSIDIARIES.......................... 4,063,337 4,711,946
OTHER ASSETS......................................................... 65,676 125,796
---------- ----------
$4,432,660 $4,932,719
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, accrued expenses and other....................... $ 35,039 $ 81,090
Current portion of long-term debt.................................. 517 951
---------- ----------
Total current liabilities.................................. 35,556 82,041
LONG-TERM DEBT....................................................... 1,451,963 2,042,540
COMMITMENTS AND CONTINGENCIES (NOTE 1)
STOCKHOLDERS' EQUITY................................................. 2,945,141 2,808,138
---------- ----------
$4,432,660 $4,932,719
========== ==========
The accompanying notes are an integral part of these condensed financial
statements.
F-28
79
NEXTEL COMMUNICATIONS, INC.
(PARENT ONLY)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1994
AND THE YEARS ENDED DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
1994 1995 1996
--------- --------- ---------
OPERATING EXPENSES
Selling, general and administrative...................... $ 11,846 $ 28,293 $ 80,559
Expenses related to corporate reorganization............. -- 6,379 --
Depreciation and amortization............................ 2,053 1,770 2,122
--------- --------- ---------
13,899 36,442 82,681
--------- --------- ---------
OTHER INCOME (EXPENSE)
Interest expense......................................... (80,465) (116,034) (202,035)
Interest income ($43,219, $96,485 and $131,997
intercompany)......................................... 60,626 113,501 144,057
Intercompany management fee.............................. 14,811 23,413 80,559
Other.................................................... 20 (30) 49
--------- --------- ---------
(5,008) 20,850 22,630
--------- --------- ---------
LOSS BEFORE INCOME TAX BENEFIT AND EQUITY IN NET LOSSES OF
SUBSIDIARIES............................................. (18,907) (15,592) (60,051)
INCOME TAX BENEFIT......................................... 7,000 46,232 36,514
--------- --------- ---------
INCOME (LOSS) BEFORE EQUITY IN NET LOSSES OF
SUBSIDIARIES............................................. (11,907) 30,640 (23,537)
EQUITY IN NET LOSSES OF SUBSIDIARIES....................... (113,942) (361,805) (532,483)
--------- --------- ---------
NET LOSS................................................... $(125,849) $(331,165) $(556,020)
========= ========= =========
The accompanying notes are an integral part of these condensed financial
statements.
F-29
80
NEXTEL COMMUNICATIONS, INC.
(PARENT ONLY)
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1994
AND THE YEARS ENDED DECEMBER 31, 1995 AND 1996
(DOLLARS IN THOUSANDS)
1994 1995 1996
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................. $(125,849) $(331,165) $(556,020)
Adjustment to reconcile net loss to net cash provided by
(used in) operating activities........................ 150,885 334,021 236,417
--------- --------- ---------
Net cash provided by (used in) operating
activities..................................... 25,036 2,856 (319,603)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in and advances to subsidiaries.............. (622,928) (335,399) (123,244)
(Increase) decrease in other assets...................... (6,246) (4,495) 9,873
Payments for acquisitions, net of cash acquired.......... (13,011) (48,577) 61,417
Capital expenditures..................................... (4,968) (925) (5,951)
Decrease in marketable securities........................ 257,576 102,616 65,692
--------- --------- ---------
Net cash (used in) provided by investing
activities..................................... (389,577) (286,780) 7,787
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt financing activities -- other....................... (768) (611) 1,969
Common stock issued...................................... 74,685 16,112 108,087
Preferred stock issued................................... -- 300,000 --
Treasury stock issued.................................... -- -- 6,549
Notes receivable -- incentive equity plan................ 14 227 --
--------- --------- ---------
Net cash provided by financing activities........ 73,931 315,728 116,605
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS....... (290,610) 31,804 (195,211)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............. 462,854 172,244 204,048
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD................... $ 172,244 $ 204,048 $ 8,837
========= ========= =========
The accompanying notes are an integral part of these condensed financial
statements.
F-30
81
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 represents the difference between taxes
computed on a consolidated basis and taxes calculated by the subsidiaries on
a separate return basis.
4. Certain net assets and related operations of the parent company were
contributed to a wholly-owned subsidiary. The accompanying condensed
financial statements for 1994 and 1995 have been reclassified as a result of
these contributions.
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 $14.8 million, $23.4 million and $80.6 million for the
nine months ended December 31, 1994 and the years ended December 31, 1995 and
1996, respectively.
F-31
82
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
BALANCE AT CHARGED TO CHARGED
BEGINNING COSTS AND TO OTHER BALANCE AT
OF PERIOD EXPENSES ACCOUNTS(1) DEDUCTIONS END OF PERIOD
---------- ---------- ----------- ---------- -------------
Nine Months Ended December 31, 1994
Allowance for Doubtful Accounts...... $ 642 $1,139 $ 377 $ (335) $ 1,823
====== ====== ====== ======= =======
Year Ended December 31, 1995
Allowance for Doubtful Accounts...... $1,823 $1,936 $2,538 $(1,065) $ 5,232
====== ====== ====== ======= =======
Year Ended December 31, 1996
Allowance for Doubtful Accounts...... $5,232 $6,968 $2,477 $(3,903) $10,774
====== ====== ====== ======= =======
- ---------------
(1) Allowances of acquired companies.
F-32
83
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 1997 Annual
Meeting, which is scheduled to be filed on or before April 29, 1997, 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 herein regarding compliance with Section
16(a) of the Securities Exchange Act of 1934 (the "Exchange Act") by the
Company's directors and executive officers, and persons who own more than ten
percent of a registered class of the Company's equity securities is incorporated
herein by reference from the definitive Proxy Statement for Nextel's 1997 Annual
Meeting, which is scheduled to be filed on or before April 29, 1997, under the
caption "Compliance with Section 16(a) of the Securities Exchange Act of 1934 by
Company Officers, Directors and 10% Stockholders."
ITEM 11. EXECUTIVE COMPENSATION
The information required herein regarding compensation of executive
officers and directors is incorporated herein by reference from the definitive
Proxy Statement for Nextel's 1997 Annual Meeting, which is scheduled to be filed
on or before April 29, 1997, under the captions "Executive Compensation" And
"Election of Directors -- Compensation of Directors."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required herein is incorporated herein by reference from
the definitive Proxy Statement for Nextel's 1997 Annual Meeting, which is
scheduled to be filed on or before April 29, 1997, under the caption "Securities
Ownership of Management and Certain Beneficial Owners."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required herein is incorporated herein by reference from
the definitive Proxy Statement for Nextel's 1997 Annual Meeting, which is
scheduled to be filed on or before April 29, 1997, under the caption "Certain
Relationships and Related Transactions."
51
84
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 10-K
(a) (1) The following Financial Statements are included in Part II Item 8:
PAGE
----
Independent Auditors' Report................................................. F-2
Consolidated Balance Sheets, December 31, 1995 and 1996...................... F-3
Consolidated Statements of Operations, Nine Months Ended December 31, 1994
and Years Ended December 31, 1995 and 1996................................. F-4
Consolidated Statements of Changes in Stockholders' Equity, Nine Months Ended
December 31, 1994 and Years Ended December 31, 1995 and 1996............... F-5
Consolidated Statements of Cash Flows, Nine Months Ended December 31, 1994
and Years Ended December 31, 1995 and 1996................................. F-6
Notes to Consolidated Financial Statements................................... F-7
(2) Financial Statement Schedules are submitted herewith and are
included herein in 14(d):
Schedule I................................................................... F-28
Schedule II.................................................................. F-32
------------------------
(3) List of Exhibits -- Refer to Exhibit Index on pages 54-59, which is
incorporated herein by reference.
(b) Reports on Form 8-K:
(1) The Registrant filed a Current Report on Form 8-K dated September
30, 1996 and filed with the Commission on October 1, 1996 reporting under
Item 5 the execution of the Bank and Vendor Credit Facility.
(2) The Registrant filed a Current Report on Form 8-K dated and filed
with the Commission on October 3, 1996 reporting under Item 5 thereof the
execution of an agreement of merger and plan of reorganization dated
October 2, 1996 between the Company and PCI providing for the merger of PCI
with a wholly owned subsidiary of the Company.
(3) The Registrant filed a Current Report on Form 8-K dated and filed
with the Commission on November 4, 1996 reporting under Item 5 thereof the
execution of an agreement and plan of merger between the Company and WVB
providing for the merger of WVB with a wholly owned subsidiary of the
Company.
(4) The Registrant filed a Current Report on Form 8-K dated November
22, 1996 and filed with the Commission on November 26, 1996 reporting under
Item 5 thereof the execution of an amendment to the Registration Agreement
dated as of August 23, 1996 and filed as an Exhibit to the Company's
Registration on Form S-3 (File No. 333-11733).
(c) Exhibits listed above in Item 14(a)(3) are included herein.
(d) Financial Statement Schedules listed above in Item 14(a)(2) are
incorporated herein by reference herein.
52
85
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, in the City of McLean,
Commonwealth of Virginia.
NEXTEL COMMUNICATIONS, INC.
By: /s/ STEVEN M. SHINDLER
------------------------------------
March 31, 1997 Steven M. Shindler
Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons in the capacities indicated below.
SIGNATURE TITLE
- ----------------------------------- ------------------------------------------------------------
/s/ DANIEL F. AKERSON Chairman of the Board, Chief Executive Officer and Director
- ----------------------------------- (Principal Executive Officer)
Daniel F. Akerson
/s/ TIMOTHY M. DONAHUE President and Chief Operating Officer
- -----------------------------------
Timothy M. Donahue
/s/ STEVEN M. SHINDLER Senior Vice President and Chief Financial Officer
- ----------------------------------- (Principal Financial Officer)
Steven M. Shindler
/s/ STEPHEN M. BAILOR Vice President and Corporate Controller
- ----------------------------------- (Principal Accounting Officer)
Stephen M. Bailor
/s/ MORGAN E. O'BRIEN Vice Chairman of the Board and Director
- -----------------------------------
Morgan E. O'Brien
/s/ KEITH BANE Director
- -----------------------------------
Keith Bane
Director
- -----------------------------------
Robert Cooper
/s/ CRAIG O. MCCAW Director
- -----------------------------------
Craig O. McCaw
/s/ KEISUKE NAKASAKI Director
- -----------------------------------
Keisuke Nakasaki
/s/ MASAAKI TORIMOTO Director
- -----------------------------------
Masaaki Torimoto
/s/ DENNIS M. WEIBLING Director
- -----------------------------------
Dennis M. Weibling
/s/ WILLIAM E. CONWAY Director
- -----------------------------------
William E. Conway
53
86
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- -------- ----------------------------------------------------------------------------------
2.1 Amended and Restated Agreement of Merger and Plan Reorganization by and between
Nextel Finance Company, DCCI Merger Inc. and Pittencrieff Communications, Inc.,
dated as of December 3, 1996.
3.1 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).
3.2 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 Restated Certificate of Incorporation of Nextel (see Exhibit No. 3.1 above).
4.2 Amended and Restated By-Laws of Nextel (see Exhibit No. 3.2 above).
4.3 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 No. 4.13
to Old Nextel's Registration Statement No. 33-73388 on Form S-4 (the "PowerFone
S-4") and incorporated herein by reference).
4.4 Form of Note issued pursuant to the August Indenture (included in Exhibit No.
4.3).
4.5 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
No. 4.1 to Old Nextel's Current Report on Form 8-K dated February 16, 1994 and
incorporated herein by reference).
4.6 Form of Note issued pursuant to the February Indenture (included in Exhibit No.
4.5).
4.7 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
and incorporated herein by reference).
4.8 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
Nextel's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995
and incorporated herein by reference).
4.9 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
Nextel's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995
and incorporated herein by reference).
4.10 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
Nextel's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995
and incorporated herein by reference).
4.11 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 No. 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).
4.12 Form of Note issued pursuant to the OneComm Indenture (included in Exhibit 4.11).
54
87
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- -------- ----------------------------------------------------------------------------------
4.13 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 Nextel's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995 and incorporated herein by
reference).
4.14 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 Nextel's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1995 and
incorporated herein by reference).
4.15 Indenture for Senior Redeemable Discount Notes due 2004, dated as of April
25,1994, between Dial Call and The Bank of New York (the "2004 Indenture") (filed
on June 7, 1995 as Exhibit 99.4 to the OneComm S-4 Registration Statement and
incorporated herein by reference).
4.16 Supplemental Indenture, dated as of August 7, 1995, to the 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).
4.17 Second Supplemental Indenture, dated as of January 30, 1996, to the 2004 Indenture
between Dial Page (as successor to Dial Call) and The Bank of New York (filed on
April 1, 1996 as Exhibit No. 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).
4.18 Third Supplemental Indenture, dated as of January 30, 1996, to the 2004 Indenture
between Nextel (as successor to Dial Page) and The Bank of New York (filed on
April 1, 1996 as Exhibit No. 4.27 to the 1995 Form 10-K and incorporated herein by
reference).
4.19 Indenture for Senior Discount Notes due 2005, dated as of December 22, 1993,
between Dial Call and The Bank of New York (the "2005 Indenture") (filed as
Exhibit 99.3 to the OneComm S-4 Registration Statement and incorporated herein by
reference).
4.20 Supplemental Indenture, dated as of April 25, 1994, to the 2005 Indenture between
Dial Call and The Bank of New York (filed on April 1, 1996 as Exhibit No. 4.29 to
the 1995 Form 10-K and incorporated herein by reference).
4.21 Supplemental Indenture, dated as of June 30, 1995, to the 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).
4.22 Third Supplemental Indenture, dated as of January 30, 1996, to the 2005 Indenture
between Dial Page (as successor to Dial Call) and The Bank of New York (filed on
April 1, 1996 as Exhibit No. 4.31 to the 1995 Form 10-K and incorporated herein by
reference).
4.23 Fourth Supplemental Indenture, dated as of January 30, 1996, to the 2005 Indenture
between Nextel (as successor to Dial Page) and The Bank of New York (filed on
April 1, 1996 as Exhibit No. 4.32 to the 1995 Form 10-K and incorporated herein by
reference).
4.24 Indenture for Senior Discount Notes due 2007, dated as of March 6, 1997, between
McCaw International and The Bank of New York, as Trustee (the "McCaw Indenture").
4.25 Form of Note issued pursuant to the McCaw Indenture (included in Exhibit 4.24).
4.26 Warrant Agreement, dated as of March 6, 1997, between McCaw International and The
Bank of New York.
4.27 Credit Agreement dated as of September 27, 1996 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
on October 1, 1996 as Exhibit 99.1 to the Company's Current Report on Form 8-K
dated September 27, 1996 (the "September 27 Form 8-K") and incorporated herein by
reference).
55
88
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- -------- ----------------------------------------------------------------------------------
4.28 Amended, Restated and Consolidated Credit Agreement dated as of September 27, 1996
among Nextel, NFC, the Restricted Companies party thereto and the Vendors party
thereto (filed on October 1, 1996 as Exhibit 99.2 to the September 27 Form 8-K and
incorporated herein by reference).
10.1 Amended and Restated Current Stock Unit Purchase Warrant No. CM-1 dated June 15,
1990 issued by Old Nextel to Chase Manhattan Investment Holdings, Inc. (filed on
October 17, 1991 as Exhibit No. 10.8 to the S-1 Registration Statement and
incorporated herein by reference).
10.2 Current Stock Unit Purchase Warrant No. CM-3 dated June 15, 1990 issued by Old
Nextel to Chase Manhattan Investment Holdings, Inc. (filed on October 17, 1991 as
Exhibit No. 10.10 to the S-1 Registration Statement and incorporated herein by
reference).
10.3 Current Stock Unit Purchase Warrant No. 2 dated January 29, 1988 issued by Old
Nextel to Kansallis-Osake-Pankki (filed on October 17, 1991 as Exhibit No. 10.12
to the S-1 Registration Statement and incorporated herein by reference).
10.4 Registration Rights Agreement dated as of June 15, 1990 between Old Nextel and
Chase Manhattan Investment Holdings, Inc. (filed on October 17, 1991 as Exhibit
No. 10.21 to the S-1 Registration Statement and incorporated herein by reference.)
10.5 Registration Rights Agreement dated as of December 20, 1990 between Old Nextel and
the persons appearing on the signature pages thereof under the caption "ORIGINAL
INVESTORS" (filed on October 17, 1991 as Exhibit No. 10.22 to the S-1 Registration
Statement and incorporated herein by reference).
10.6 Stock Purchase Agreement dated as of September 26, 1988 by and among Old Nextel,
First Capital Corporation of Chicago and Madison Dearborn Partners IV, as amended
by the letter dated February 7, 1989 (filed on October 17, 1991 as Exhibit No.
10.27 to the S-1 Registration Statement and incorporated herein by reference).
10.7 Stock Purchase Agreement dated as of December 4, 1989 by and among Old Nextel,
First Chicago Investment Corporation and Madison Dearborn Partners IV (filed on
November 15, 1991 as Exhibit No. 10.28 to the S-1 Registration Statement and
incorporated herein by reference).
10.8 Subscription Agreement dated as of July 24, 1989 by and between First Chicago
Investment Corporation and Old Nextel, as amended pursuant to, and in accordance
with, the Stock Purchase Agreement, dated as of December 4, 1989 (filed on
November 15, 1991 as Exhibit No. 10.29 to the S-1 Registration Statement and
incorporated herein by reference).
10.9 Subscription Agreement dated as of July 24, 1989 by and between Old Nextel and
Madison Dearborn Partners V, as amended pursuant to, and in accordance with, the
Stock Purchase Agreement, dated as of December 4, 1989 (filed on November 15, 1991
as Exhibit No. 10.30 to the S-1 Registration Statement and incorporated herein by
reference).
10.10*** 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 No. 10.34 to the S-1 Registration Statement and incorporated herein by
reference).
10.11*** Employment Agreement, dated as of June 15, 1987, between Old Nextel and Brian D.
McAuley, and Amendment dated January 29, 1990 (filed on October 17, 1991 as
Exhibit No. 10.35 to the S-1 Registration Statement and incorporated herein by
reference).
10.12* Letter Agreement between Motorola, Inc. and Old Nextel, dated as of November 4,
1991 (filed on November 15, 1991 as Exhibit No. 10.47 to the S-1 Registration
Statement and incorporated herein by reference).
56
89
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- -------- ----------------------------------------------------------------------------------
10.13* 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 No. 10.48 to the S-1 Registration and incorporated herein by reference).
10.14 Warrant Agreement between Motorola, Inc. and Old Nextel, dated November 1, 1991
(filed on November 15, 1991 as Exhibit No. 10.53 to the S-1 Registration Statement
and incorporated herein by reference).
10.15 Form of Indemnification Agreement, and Exhibits thereto between Old Nextel and
each of its directors (filed on June 24, 1992 as Exhibit No. 10.56 to Old Nextel's
Annual Report on Form 10-K for the year ended March 31, 1992 and incorporated
herein by reference).
10.16*** Employment Agreement, dated as of March 26, 1992, between Old Nextel and Robert
Foosaner (filed on May 27, 1993 as Exhibit No. 10.41 to Old Nextel's Annual Report
on Form 10-K for the year ended March 31, 1993 and incorporated herein by
reference).
10.17 Stock Purchase Agreement by and between Nippon Telegraph and Telephone Corporation
and Old Nextel, dated as of January 20, 1994 (filed on January 27, 1994 as Exhibit
No. 4.17 to Amendment No. 1 to the PowerFone S-4 and incorporated herein by
reference).
10.18 Technical Services Agreement dated as of January 20, 1994 between Old Nextel and
NTT America, Inc. (filed as Exhibit No. 10.49 on June 8, 1994 to Old Nextel's
Annual Report on Form 10-K for the year ended March 31, 1994 and incorporated
herein by reference).
10.19 Registration Rights Agreement dated as of June 30, 1993 among Old Nextel, First
Capital Corporation of Chicago, Madison Dearborn Partners V, Madison Dearborn
Partners VI and Madison Dearborn Partners VIII (filed on June 8, 1994 as Exhibit
No. 10.50 to Old Nextel's Annual Report on Form 10-K for the year ended March 31,
1994 and incorporated herein by reference).
10.20 The Nextel Stock Option Plan (filed on December 21, 1992 as Exhibit No. 4(c) to
the Registration Statement No. 33-56080 on Form S-8 and incorporated herein by
reference).
10.21 Agreement of Merger and Plan of Reorganization, dated as of February 17, 1995, by
and between Old Nextel and Dial Page, as amended by Amendment No. 1 to the
Agreement of Merger and Plan of Reorganization, dated as of July 31, 1995,
Amendment No. 2 to the Agreement of Merger and Plan of Reorganization, dated as of
July 31, 1995 and Amendment No. 3 to the Agreement of Merger and Plan of
Reorganization, dated as of December 4, 1995 (filed on December 13, 1995 as
Exhibit 2.1 to Nextel's Registration Statement No. 33-80021 on Form S-4 and
incorporated herein by reference).
10.22 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).
10.23* 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 the ESMR Form S-4 Registration Statement
and incorporated herein by reference).
10.24* 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).
10.25 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).
57
90
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- -------- ----------------------------------------------------------------------------------
10.26 Forms of Option Agreements dated April 6, 1995 between Old Nextel, Digital Radio,
L.L.C. and Craig O. McCaw.
10.27 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 No. 10.57 to the 1995 Form
10-K and incorporated herein by reference).
10.28 Registration Rights Agreement, dated July 28, 1995, by and between Nextel and
Motorola (filed on November 14, 1995 as Exhibit 10.8 to Nextel's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1995 and incorporated herein by
reference).
10.29 Settlement Agreement dated as of October 2, 1995 between Nextel and Wayland R.
Hicks (filed on November 14, 1995 as Exhibit 10.15 to Nextel's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1995 and incorporated herein by
reference).
10.30 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).
10.31* 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).
10.32 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).
10.33*** Nextel Amended and Restated Incentive Equity Plan ("Nextel Plan") (filed on June
21, 1996 as Exhibit 4.3 to Nextel's Registration Statement No. 333-06521 on Form
S-8 and incorporated herein by reference).
10.34 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).
10.35*** Employment Agreement dated as of March 5, 1996 between Daniel Akerson and Nextel.
10.36*** Employment Agreement dated February 1, 1996 between Tim Donahue and Nextel.
10.37*** Addendum to Employment Agreement between Tim Donahue and Nextel dated March 24,
1997.
10.38 Form of Registration Rights Agreement, dated July 28, 1995, by and among the
Company and Digital Radio, L.L.C.
10.39 Term Sheet For Debt Financing, dated as of March 26, 1997, between the Company and
Motorola.
10.40*** Amendment No. 1, adopted March 28, 1997, to Nextel Plan.
10.41 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 No. 2.01 to ESMR's
Registration Statement No. 33-91716 on Form S-4 (the "ESMR S-4 Registration
Statement") and incorporated herein by reference).
21 Subsidiaries of the Company.
23 Consent of Deloitte & Touche LLP.
27** Financial Data Schedule.
58
91
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- -------- ----------------------------------------------------------------------------------
99.1 Memorandum Opinion and Order of the Federal Communications Commission, dated as of
February 13, 1991 (filed on December 5, 1992 as Exhibit No. 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 No. 28.2 to the S-1 Registration Statement and
incorporated 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 between 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).
- ---------------
* 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.
59