SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
NEXTEL COMMUNICATIONS, INC.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
TABLE OF CONTENTS
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
INDEX
PART I – FINANCIAL INFORMATION.
Item 1. Financial Statements — Unaudited.
Condensed Consolidated Balance Sheets
The accompanying notes are an integral part of these condensed consolidated financial statements.
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Condensed Consolidated Statements of Operations and Comprehensive Loss
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Condensed Consolidated Statement of Changes in Stockholders’ Equity
[Additional columns below]
[Continued from above table, first column(s) repeated]
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Condensed Consolidated Statements of Cash Flows
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Notes to Condensed Consolidated Financial Statements
Note 1. Basis of Presentation
Our unaudited condensed consolidated financial statements have been prepared under the rules and regulations of the Securities and Exchange Commission and reflect all adjustments that are necessary for a fair presentation of the results for interim periods. All adjustments made were normal recurring accruals.
You should read the condensed consolidated financial statements in conjunction with the consolidated financial statements and notes contained in our annual report on Form 10-K for the year ended December 31, 2000. You should also read Nextel International, Inc.’s annual report on Form 10-K for the year ended December 31, 2000 for matters related to the operations of Nextel International, our indirect, substantially wholly owned subsidiary. You should not expect the results of operations of interim periods to be an indication of the results for a full year.
Restricted Cash and Cash Equivalents. Nextel International and its subsidiaries held cash and cash equivalents of $215 million at March 31, 2001 and $474 million at December 31, 2000 that were not available to fund any of the cash needs of our domestic operations due to restrictions contained in their financing agreements.
Accumulated Other Comprehensive Loss.
Supplemental Cash Flow Information.
Accounting Change and New Accounting Pronouncements.Effective January 1, 2001, we adopted Statement of Financial Accounting Standards, or SFAS, No. 133, “Accounting for Derivative Instruments and Hedging Activities,” which, as amended by SFAS No. 138, establishes accounting and reporting standards for derivative instruments, including some derivative instruments embedded in other contracts, and for hedging activities. Upon adoption of SFAS No. 133, we recorded a $20 million transition adjustment in other comprehensive loss as a cumulative effect of a change in accounting principle. We will reclassify this
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Notes to Condensed Consolidated Financial Statements — (Continued)
amount into interest expense over the lives of the respective interest rate swaps, including $8 million during the twelve months ending December 31, 2001.
We hedge the cash flows on some of our long-term debt using interest rate swaps. We enter into these derivative contracts to manage our exposure to interest rate movements by achieving a desired proportion of fixed rate versus variable rate debt. In an interest rate swap, we agree to exchange the difference between a variable interest rate and either a fixed or another variable interest rate, multiplied by a notional principal amount.
As of March 31, 2001, we have recognized all derivatives at their fair values of $84 million in other current and other noncurrent liabilities on our balance sheet. For our interest rate swap that qualifies for cash flow hedge accounting, an unrealized loss of $12 million, representing the effective portion of the change in its fair value, is reported in other comprehensive loss and will be reclassified into interest expense in the same period during which the hedged item affects interest expense. We will reclassify $10 million of this amount into interest expense during the twelve months ending March 31, 2002. The ineffective portion of the change in fair value of our cash flow hedge and changes in the fair values of our derivative instruments not qualifying for hedge accounting are recognized in our statement of operations in the period of the change. For the three months ended March 31, 2001, interest expense includes an unrealized loss of $4 million representing changes in the fair values of our derivative instruments not qualifying as hedges and $0 relating to the ineffective portion of the change in fair value of our cash flow hedge.
In May 2000, the Emerging Issues Task Force, or EITF, reached a consensus on EITF Issue No. 00-14, “Accounting for Certain Sales Incentives,” which addresses the recognition, measurement and statement of operations classification for sales incentives offered voluntarily by vendors, without cost to consumers, as a result of a single exchange transaction. The adoption of EITF Issue No. 00-14 on April 1, 2001 did not have a material impact on our financial position or results of operations.
Reclassifications and Other. We have reclassified some prior period amounts to conform to our current year presentation.
As a result of our adoption of Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements,” we recognized revenues from digital handset sales of $73 million during the first quarter of 2001 and $81 million during the first quarter of 2000 and equal amounts of cost of revenues for both periods, attributable to handset sales previously reported in periods prior to 2000.
Note 2. Long-Term Debt, Capital Lease and Finance Obligations
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9.5% Senior Serial Redeemable Notes. In January 2001, we completed the issuance and sale in a private placement of $1.25 billion in principal amount of 9.5% senior serial redeemable notes due 2011, generating $1.245 billion in net cash proceeds. Cash interest is payable semiannually beginning August 1, 2001 at a rate of 9.5% per year. We may choose to redeem some or all of these notes starting February 1, 2006 at an initial redemption price of 104.75% of the aggregate principal amount of these notes, plus accrued and unpaid interest. On or before February 1, 2004, we may choose to redeem up to 35% of the original principal amount of the notes using the proceeds of one or more sales of qualified equity securities at 109.5% of their principal amount, plus accrued and unpaid interest to the date of redemption. These notes are senior unsecured indebtedness of ours and rank equal in right of payment with all our other unsubordinated, unsecured indebtedness. We have agreed to specific registration rights with respect to these notes. If an exchange offer of new notes, without restrictive transfer legends, for these notes is not consummated by August 1, 2001, the interest rate on the notes will increase by 0.5% per year until this exchange offer is completed or until other specified conditions are met.
Note 3. Contingencies
Beginning in the second quarter of 2000, allegations of employment discrimination and harassment were leveled against us in the press and some related complaints subsequently were filed with the Equal Employment Opportunity Commission. Those complaints have since been withdrawn. Together with the law firm that represents our current and former employees who have asserted these allegations, we have structured mutually acceptable arrangements for processing and resolving these claims. Substantially all of the claimants have agreed to have their claims addressed exclusively under these arrangements. Based on the specific claim details and our related investigative results to date, we do not believe that the claims that have come to our attention are likely to result in a material liability to us.
See “Part II, Item 1. Legal Proceedings” for a discussion of other legal matters.
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Note 4. Mandatorily Redeemable Preferred Stock
Note 5. Segment Reporting
We operate in two business segments, domestic and international. These reportable segments are strategic business units in different phases of development that we manage and finance separately based on the fundamental differences in their operations. We evaluate performance based on earnings (losses) before interest, taxes, depreciation and amortization and other nonoperating charges, referred to as segment earnings (losses).
Note 6. Subsequent Event
In early May 2001, we purchased 800 MHz and 900 MHz specialized mobile radio licenses and related assets from Mobex Communications, Inc. for a cash purchase price of $102 million.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
The following is a discussion and analysis of:
You should read this discussion in conjunction with our 2000 annual report on Form 10-K. Historical results may not indicate future performance. See “Forward Looking Statements.”
Our consolidated financial statements include the accounts of Nextel International, Inc. and its consolidated subsidiaries. However, additional more detailed and focused information relating to Nextel International may be found in the periodic and other reports filed by Nextel International with the Securities and Exchange Commission pursuant to the rules under the Securities Exchange Act of 1934.
We provide a wide array of digital wireless communications services throughout the United States. We offer a differentiated, integrated package of digital wireless communications services under the Nextel brand name, primarily to business users. Our digital mobile network constitutes one of the largest integrated wireless communications systems utilizing a single transmission technology in the United States. This digital technology, developed by Motorola, Inc., is referred to as integrated Digital Enhanced Network, or iDEN®, technology.
A customer using our digital mobile network is able to access:
In addition to our domestic operations, we have ownership interests in international wireless companies through our substantially wholly owned subsidiary, Nextel International. Nextel International, through its subsidiaries, provides wireless communications services in and around various major metropolitan market areas in Latin America and the Philippines, referred to as its managed markets. Additionally, Nextel International has investments in wireless communications providers in Canada and Japan and owns analog specialized mobile radio companies in Chile.
As of March 31, 2001:
In January 2001, we opened our fifth customer care center in Temple, Texas and expect to open a sixth center near Bremerton, Washington in the second half of 2001. With the addition of these new customer care centers, we expect to be well positioned to handle the core needs of our growing customer base as we expand our product and service offerings.
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In January 2001, we agreed to purchase specified 900 MHz specialized mobile radio licenses from Arch Wireless, Inc. for an aggregate cash purchase price of $175 million and an investment of $75 million in a new Arch Wireless equity issue of redeemable cumulative preferred stock. In February 2001, we advanced to Arch Wireless the $175 million purchase price and the $75 million investment in the form of two loans which accrue interest until the necessary regulatory approvals to permit transfer of the 900 MHz licenses to us are obtained. Upon transfer of the licenses to us, Arch Wireless’ obligation to repay the $175 million loan will be satisfied, and the $75 million loan will be converted into the new series of preferred stock of Arch Wireless. Arch Wireless will pay accrued interest on the two loans by issuing us shares of its common stock at closing. The closing of this purchase is subject to customary conditions.
In February 2001, William E. Conway, Jr. was appointed Chairman of our board of directors, replacing Daniel F. Akerson, who remains on our board. Mr. Conway has served as one of our directors since February 1997. In April 2001, we announced that James F. Mooney had been named our Executive Vice President and Chief Operating Officer, replacing Steven P. Dussek.
In February 2001, we introduced the “i2000plus™” handset, our first global handset with Internet capabilities. The i2000plus, like the “i2000™,” is a dual-mode handset manufactured by Motorola that operates on both iDEN technology and the Global System for Mobile Communications, or GSM, digital wireless technology that is the current digital cellular communications standard in Europe and elsewhere. As of March 31, 2001, a customer using the i2000 or i2000plus could roam in more than 80 countries worldwide with the convenience of one phone, one number and one bill.
In April 2001, we introduced the “i85s™” and the “i50sx™” handsets, which are part of a new platform of handsets with embedded Java™ technology. These new handsets, developed and manufactured by Motorola, combine the qualities of our Internet capable handsets with additional features and functionality such as the ability to download Java-based applications, wireless synchronization capabilities and voice activated dialing and recorder features. As more Java-based applications are developed, we expect our customers to be able to download the associated new software onto their handsets from our website.
In May 2001, we purchased a substantial portion of the operations, assets and rights associated with about 200 retail stores from Let’s Talk Cellular & Wireless, Inc., a specialty cellular and wireless retailer, for a cash purchase price of about $32 million subject to adjustments. The stores are being rebranded as Nextel stores and will serve as additional points of contact for existing and new customers.
In May 2001, we announced a domestic restructuring, including a 5% workforce reduction, designed to reduce operating costs and improve operating efficiencies. We will record a restructuring charge related to these actions in the second quarter of 2001.
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Results of Operations
Operating revenues.
The increase in domestic operating revenues from the first quarter of 2000 to the first quarter of 2001 consists of a 45% increase in wireless service and other revenues of $463 million to $1.5 billion and a 19% increase in revenues from digital handset and accessory sales of $17 million to $108 million. We continue to sell handsets at prices below our cost to attract new customers and as handset upgrade and retention inducements for existing customers. Additionally, as competition has intensified, the prices at which we sell handsets to our new and existing customers have declined. Accordingly, revenues from domestic digital handset and accessory sales have not increased in proportion to the increase in number of handsets sold. However, for the remainder of 2001, this effect may be mitigated as we raise prices on existing handsets and introduce more feature rich and higher priced handsets, which we believe may allow us to limit the level of subsidy required to attract and retain customers in our targeted segments.
Domestic service and other revenues increased principally as a result of a 42% increase in domestic handsets in service. Average monthly revenue per domestic handset decreased slightly from about $72 during the first quarter of 2000 to about $71 during the first quarter of 2001. Additionally, as compared to the first quarter of 2000, average monthly minutes of use per subscriber increased 16% in the first quarter of 2001 to about 510 minutes, which we attribute to increased phone usage primarily driven by the introduction of pricing plans designed to provide additional value to our customers. These new pricing plans, developed in part to meet competitive demands, generally provide lower per-minute rates made available in conjunction with fixed-rate service plans. These plans typically include a fixed amount of interconnect minutes combined with unlimited digital two-way radio service, unlimited Nextel Wireless Web services, free incoming calls or free long distance service, all for a stated package price. The growth in handsets in service is the result of a number of factors, principally:
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Our average monthly revenue per domestic handset may decrease in the future if our customers migrate to lower priced service offering packages or if competitive pressures require us to:
Operating revenues for our international operations increased from the first quarter of 2000 to the first quarter of 2001 primarily as a result of a 160% increase in the number of digital handsets in service in Nextel International’s managed markets, particularly in its Brazilian and Mexican markets. Additionally, the introduction of higher priced service plans primarily in Brazil and Mexico and the launch of new services, such as calling party pays in Peru, also contributed to the increase.
Cost of revenues.
The increase in cost of revenues from the first quarter of 2000 to the first quarter of 2001 for our domestic operations consists of a 49% increase in cost of providing wireless services of $97 million to $297 million and a 61% increase in cost of digital handset and accessory sales of $125 million to $330 million. Cost of digital handset and accessory sales increased due to the increase in the number of handsets sold to new and existing customers, partially offset by a decrease in the average cost we paid for the handsets sold.
Domestic cost of service revenues increased primarily as a result of variable costs related to interconnect fees on higher minutes of use and increased fixed costs related to direct switch and transmitter and receiver site costs including rent, utility and interconnection fees that we incurred. Total system minutes of use grew 68% from the first quarter of 2000 to the first quarter of 2001, principally due to the larger number of handsets in service as well as the 16% increase in average monthly minutes of use per subscriber in the first quarter of 2001 compared to the same period in 2000. The fixed transmitter and receiver site and switch costs increased due to a 42% increase in transmitter and receiver sites and related equipment and a 42% increase in the number of switches we placed in service from March 31, 2000 to March 31, 2001.
The increase in international cost of revenues consists of an increase in cost of providing wireless services of $21 million or 150%, and an increase in cost of digital handset and accessory sales of $19 million or 110%. The increase in the cost of providing international wireless services is primarily attributable to:
The increase in international cost of digital handset and accessory sales is primarily due to the increase in the number of digital handsets sold, partially offset by a decrease in the average cost Nextel International paid for the handsets sold.
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We expect the amount of cost of revenues to increase as we place more sites and switches into service to add capacity and coverage to our networks, as customer usage of the digital mobile networks increases and as we sell more handsets and accessories to new customers and provide handset upgrade and retention inducements to existing customers.
Selling, general and administrative expenses.
The increase in domestic selling and marketing expenses from the first quarter of 2000 to the first quarter of 2001 primarily reflects increased costs incurred in connection with higher sales of handsets including:
The increase in international selling and marketing expenses is primarily due to increased direct sales labor costs attributable to a larger direct sales force and increased commissions from higher levels of digital handset sales.
Domestic general and administrative expenses increased from the first quarter of 2000 to the first quarter of 2001 primarily as a result of activities to support a larger customer base, specifically:
International general and administrative expenses increased due to a $28 million increase in general corporate expenses, including payroll, related expenses for collection and customer care activities and facilities and information technology related costs to support a growing customer base.
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The aggregate amount of selling, general and administrative expenses is expected to increase both domestically and internationally as a result of a number of factors, including but not limited to:
Segment earnings (losses).
We define segment earnings as earnings before interest, taxes, depreciation and amortization and other nonoperating charges. Based on the current stage of development of each of our reportable segments, most of our operating revenues and identifiable assets, as well as all of our segment earnings pertain to our domestic operations. In 2001, domestic segment earnings improved but decreased slightly as a percentage of consolidated operating revenues as we began to feel the impact of a slowing economy. Domestic operating revenues increased 43% from the first quarter of 2000 to the first quarter of 2001 as our customer base increased while domestic operating expenses increased 45% primarily due to customer acquisition, retention and handset upgrade activities. As described in “Future Capital Needs and Resources,” beginning in the second quarter of 2001, we began taking various actions designed to reduce costs and increase domestic segment earnings. However, we cannot be sure that our actions will be successful in decreasing our overall operating costs or increasing domestic segment earnings. See “Forward Looking Statements.”
International segment losses were unchanged due to increasing operating revenues from growth in digital handset sales offset by increased costs attributable to:
We expect international segment losses to continue while we are building out our digital mobile networks and expanding our presence in international markets.
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Depreciation and amortization.
Depreciation increased from the first quarter of 2000 to the first quarter of 2001 primarily as a result of placing into service, as well as modifying, additional switches and transmitter and receiver sites in existing domestic and international markets primarily to enhance the coverage and capacity of our digital mobile networks. We expect the amount of depreciation to continue to increase as we place additional switches and transmitter and receiver sites into service.
The increase in amortization is primarily attributable to international acquisition activities completed during the second half of 2000. We expect the amount of amortization to increase as we acquire, place into service and continue to amortize intangible assets such as licenses and customer lists.
Interest expense, interest income and other.
The increase in interest expense from the first quarter of 2000 to the first quarter of 2001 resulted primarily from the issuance of our senior notes in January 2001 and Nextel International’s senior notes in August 2000, as well as a higher average level of outstanding borrowings under our credit facilities.
The decrease in equity in losses of unconsolidated affiliates from the first quarter of 2000 to the first quarter of 2001 is due to $7 million of decreased losses attributable to our equity method investment in Nextel Partners, Inc. The remaining decrease is attributable to our Philippine affiliate, which we began consolidating in the third quarter of 2000, and to our Japanese investment, which was written off in the fourth quarter of 2000.
The foreign currency transaction loss in 2001 is due primarily to the weakening of the Brazilian real as a result of the current economic environment in both Brazil and Argentina. The foreign currency transaction gain in 2000 is primarily attributable to the strengthening of the Brazilian real.
The extraordinary loss in 2000 relates to the early retirement of some of our senior notes during the first quarter of 2000.
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Liquidity and Capital Resources
We had losses attributable to common stockholders of $428 million for the three months ended March 31, 2001 and $435 million for the three months ended March 31, 2000. The operating expenses and capital expenditures associated with developing, enhancing and operating our digital mobile network have more than offset operating revenues. Our operating expenses, debt service obligations and anticipated capital expenditures are expected to continue to more than offset operating revenues for the next several years. We have consistently used external sources of funds, primarily from debt incurrences and equity issuances, to fund operations, capital expenditures, acquisitions and other nonoperating needs.
Cash Flows. Net cash provided by operating activities of $309 million during the three months ended March 31, 2001 improved by $59 million compared to net cash provided by operating activities of $250 million during the three months ended March 31, 2000. This improvement in net cash provided by operating activities is primarily attributable to domestic operations, reflecting improved domestic performance resulting from the growth in our customer base, offset slightly by increasing interest payments on outstanding debt.
Capital expenditures to fund the continued expansion and enhancement of our digital mobile network continue to represent the largest use of our funds for investing activities. Net cash used in investing activities of $779 million during the three months ended March 31, 2001 remained virtually the same as compared to $778 million during the three months ended March 31, 2000 primarily due to a $677 million increase in net proceeds from short-term investing activities, offset by a $370 million increase in cash paid for other investments and licenses and a $308 million increase in cash paid for capital expenditures. Cash payments for capital expenditures totaled $1,005 million during the three months ended March 31, 2001 and $697 million during the three months ended March 31, 2000, including $157 million during 2001 and $71 million during 2000 for international operations. Cash paid for capital expenditures during the three months ended March 31, 2001 increased primarily due to an increase in the number of switches and transmitter and receiver sites and related equipment placed in service during the fourth quarter of 2000 and the first quarter of 2001. The increase in cash paid for other investments and licenses is primarily due to $250 million advanced to Arch Wireless for the acquisition of 900 MHz licenses and preferred stock, which is expected to close during 2001, and $32 million applied towards the purchase of retail stores from Let’s Talk Cellular and Wireless. We also purchased more domestic licenses in the first quarter of 2001 than in the first quarter of 2000.
Net cash provided by financing activities of $1.24 billion during 2001 consisted primarily of $1.245 billion in net proceeds from the private placement of our 9.5% senior serial redeemable notes due 2011. Net cash provided by financing activities of $1.03 billion during the first quarter of 2000 was primarily attributable to $1.13 billion in net proceeds from the sale of debt securities and $1.0 billion in proceeds from borrowings under our domestic bank credit facility, offset by $1.21 billion used for the retirement of debt securities.
Future Capital Needs and Resources
We anticipate that, for the foreseeable future, significant amounts of available cash flows will be utilized both domestically and internationally for:
We anticipate that our cash utilization for capital expenditures and other investing activities will continue to exceed our positive cash flows from domestic operating activities throughout 2001, as we build out, expand and enhance our digital mobile networks. See “Forward Looking Statements.”
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During the first quarter of 2001, our domestic operations began to feel the impact of a slowing economy. We incurred higher operating costs in our business primarily attributable to customer acquisition, handset upgrade and retention activities. As a result, we experienced lower segment earnings from our domestic business in the first quarter of 2001 as compared to the fourth quarter of 2000. To offset this trend during the remainder of 2001, we are taking various actions designed to reduce costs and increase domestic segment earnings, including:
However, we cannot be sure that our actions will be successful in decreasing our overall operating costs or increasing domestic segment earnings. See “Forward Looking Statements.”
As of March 31, 2001, our domestic bank credit facility provided for total secured financing capacity of up to $6.0 billion, subject to the satisfaction or waiver of applicable borrowing conditions. This facility consists of a $1.5 billion revolving loan and $4.5 billion in term loans that mature over a period from December 31, 2007 to March 31, 2009. At March 31, 2001, the entire $4.5 billion of term loans available under our bank credit facility was outstanding. Amounts outstanding under this bank credit facility are secured by liens on assets of substantially all our domestic subsidiaries and bear interest payable quarterly at an adjustable rate calculated based either on the U.S. prime rate or the London Interbank Offered Rate, or LIBOR. The maturity dates of the loans can accelerate if our credit ratings are below specified levels and if the aggregate amount of specified debt obligations that mature before June 30, 2009, including the redemption price of redeemable stock that is mandatorily redeemable before June 30, 2009, exceed specified amounts. The availability of financing under this bank credit facility is subject to requirements under the indentures governing our public notes and the terms applicable to some of our preferred stock. As of March 31, 2001, under our bank credit agreement, as then in effect, we were able to access substantially all of the $6.0 billion available in compliance with our financial ratio tests, the debt incurrence covenants contained in our indentures and the relevant terms of applicable issues of preferred stock.
As part of our cost containment initiatives, we expect to reduce our level of domestic capital expenditures during the remainder of 2001 as compared to our domestic capital expenditures for 2000. Our capital spending for the remainder of 2001 is expected to be driven by several factors, including:
Nextel International will require a significant amount of capital to fund its operations and any planned network build-out for at least the next several years. In March 2001, due to adverse market conditions, Nextel International announced its decision to discontinue its initial public offering at that time and withdrew its registration statement on file with the Securities and Exchange Commission. We have historically provided Nextel International with significant financial support. In April 2001, through a wholly owned subsidiary, we contributed $250 million to Nextel International in exchange for 2,500 shares of its series A exchangeable
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If Nextel International is unable to raise additional funds or obtain funds from other sources on acceptable terms and in a timely manner, Nextel International may be required to conserve its available cash for use in funding its existing business activities, by slowing enhancement and expansion of its digital mobile networks and minimizing or eliminating certain expenditures. Although we have no legal obligation to make any investments in, or otherwise advance funds to, Nextel International, to the extent Nextel International is unable to obtain necessary funding from other sources, we may supply Nextel International with additional funds, including the commitments outlined above. Any funding that we elect to provide to Nextel International will reduce the amount of funding available for our domestic operations.
Based on available cash resources and the anticipated cash needs of our domestic and international operations for capital expenditures and acquisitions and the combined anticipated operating cash flow of our domestic and international wireless businesses, we believe that we will be able to fully fund both our domestic and international operations through calendar year 2001. See “Forward Looking Statements.” In making this assessment, we have considered:
If our or Nextel International’s business plans change, or if economic conditions in any of our combined markets generally or competitive practices in the mobile wireless telecommunications industry change materially from those currently prevailing or from those now anticipated in 2001, or if other presently unexpected circumstances are encountered that have a material effect on the cash flow or profitability of the domestic or international mobile wireless businesses conducted by us or Nextel International, the anticipated cash needs of those businesses, and the conclusions as to the adequacy of the available sources, each also could change significantly. Finally, our conclusion that we will be able to fully fund both our domestic and international operations through 2001 does not take into account the impact of our participation in any auctions for the purchase of licenses other than those already concluded or any significant acquisition transactions or the pursuit of any significant new business opportunities other than those currently being pursued by us or Nextel International. Any acquisition or new business opportunity could involve significant additional funding needs in excess of the identified currently available sources, and could require us or Nextel International to raise additional equity and debt funding to meet those needs.
The availability of borrowings under our domestic bank credit facility is subject to certain conditions and limitations, and we cannot be sure that those conditions will be met. The instruments relating to our financing arrangements and preferred stock contain provisions that operate to limit the amount of borrowings that we may incur. The terms of the domestic bank credit facility and Nextel International’s financing agreements also require us and our subsidiaries at specified times to maintain compliance with specified operating and financial covenants or ratios, including specified covenants and ratios related to leverage, which become more stringent over time. In March 2001, we amended our $6.0 billion domestic bank credit facility to modify certain financial covenants to better reflect our anticipated financial performance and to permit ongoing compliance
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In addition, our capital needs, and our ability to adequately address those needs through debt or equity funding sources, are subject to a variety of factors that we cannot presently predict with certainty, for example:
We have had and may in the future have discussions with third parties regarding potential equity investments and debt financing arrangements to satisfy actual or anticipated financing needs. At present, other than the existing equity or debt financing arrangements that have been consummated or are described in this quarterly report, we have no legally binding commitments or understandings with any third parties to obtain any material amount of equity or debt financing. Under the terms of the agreements between us and Motorola pursuant to which we acquired substantially all of Motorola’s domestic 800 MHz specialized mobile radio licenses in 1995, we have agreed, under specified circumstances, not to grant superior governance rights to any third-party investor without Motorola’s consent, which may make securing certain strategic equity investments more difficult. Our ability to incur additional indebtedness, including, in certain circumstances, indebtedness incurred under our domestic bank credit agreement, is and will be limited by the terms of our financing agreements and the terms of some series of our outstanding preferred stock.
Forward Looking Statements
“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995. A number of statements made in the foregoing “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are not historical or current facts, but deal with potential future circumstances and developments. They can be identified by the use of forward looking words such as “believes,” “expects,” “plans,” “may,” “will,” “would,” “could,” “should” or “anticipates” or other comparable words, or by discussions of strategy that may involve risks and uncertainties. We caution you that these forward looking statements are only predictions, which are subject to risks and uncertainties including financial variations, changes in the regulatory environment, industry growth and trend predictions. We have attempted to identify, in context, some of the factors that we currently believe may cause actual future experience and results to differ from our current expectations regarding the relevant matter or subject area. The operation and results of our wireless communications business also may be subject to the effect of other risks and uncertainties in addition to the relevant qualifying factors identified in the foregoing “Management’s Discussion and Analysis of Financial Condition and Results of Operations” including, but not limited to:
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We primarily use senior notes, bank and vendor credit facilities and mandatorily redeemable preferred stock to finance our obligations. These financial instruments, to the extent they provide for variable rates of interest, expose us to interest rate risk. Our primary interest rate risk exposure results from changes in LIBOR, the U.S. prime rate, Eurodollar Rate and Adjusted Base Rate, which are used to determine the interest rates that are applicable to borrowings under our bank and vendor credit agreements. We use interest rate swap agreements to partially hedge interest rate exposure associated with our long-term debt. All of our derivative financial instrument transactions are entered into for non-trading purposes.
Nextel International’s revenues are denominated in foreign currencies while a significant portion of its operations are financed through senior notes and bank and vendor credit facilities, which are denominated in U.S. dollars. As a result, fluctuations in exchange rates relative to the U.S. dollar, primarily those related to the Brazilian real, Mexican peso and Philippine peso, expose us to foreign currency exchange risks.
As of March 31, 2001, we held $1.44 billion of debt securities in the form of commercial paper and corporate bonds as short-term investments. As the weighted average maturity from the date of purchase was less than five months, these short-term investments do not expose us to a significant amount of interest rate risk.
As of March 31, 2001, we had investments in the common stock of publicly traded companies, which had an aggregate fair value of $327 million. These investments are reported at their market value in our financial statements. Negative fluctuations in the stock prices of these companies expose us to equity price risks. A 10% decline in their stock price would result in a $33 million decrease in the fair value of our investments in these public companies.
The information below summarizes our market risks associated with fluctuations in interest rates as of March 31, 2001 in U.S. dollars. To the extent that our financial instruments expose us to interest rate and foreign currency exchange risk, these instruments are presented within each market risk category in the table below. The table presents principal cash flows and related interest rates by year of maturity for our senior notes, bank and vendor credit facilities, capital lease and finance obligations and mandatorily redeemable preferred stock in effect at March 31, 2001. In the case of the mandatorily redeemable preferred stock and senior notes, the table excludes the potential exercise of the relevant redemption or conversion features. This table also assumes that we will repay our senior notes to levels necessary to avoid an earlier repayment
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Descriptions of our senior notes, bank and vendor credit facilities, capital lease and finance obligations, interest rate risk management agreements and mandatorily redeemable preferred stock are contained in notes 4, 6, 7 and 10 to the consolidated financial statements included in our 2000 annual report on Form 10-K and should be read in conjunction with the following table.
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PART II — OTHER INFORMATION.
Item 1. Legal Proceedings.
Nextel is involved in certain legal proceedings that are described in our 2000 annual report on Form 10-K. During the three months ended March 31, 2001, there were no material changes in the status of or developments regarding those legal proceedings that have not been previously disclosed in our 2000 annual report on Form 10-K.
On April 19, 2001, a purported class action lawsuit was filed in the Circuit Court in Baltimore, Maryland by the Law Offices of Peter Angelos, and subsequently in other state courts in Pennsylvania and New York, alleging that wireless telephones pose a health risk to users of those telephones and that the defendants failed to disclose these risks. We, along with numerous other companies, are defendants in these cases. Mr. Angelos’ firm has also participated in the filing of an amended complaint in a similar suit pending in federal court in Louisiana, in which we are also named. These suits seek to require the defendants to provide headsets, or reimburse the cost of headsets, for use with wireless telephones, as well as attorneys’ fees and punitive damages. While we cannot predict the outcome of this litigation, we believe that the claims against us are without merit and intend to vigorously defend against them.
Item 6. Exhibits and Reports on Form 8-K.
(a) List of Exhibits.
(b) Reports on Form 8-K filed with the Securities and Exchange Commission.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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EXHIBIT INDEX
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