e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF
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THE SECURITIES EXCHANGE ACT OF
1934
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For the fiscal year ended
December 31, 2005
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or
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF
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THE SECURITIES EXCHANGE ACT OF
1934
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For the transition period
from
to
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Commission file number 0-32421
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NII HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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91-1671412
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.)
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incorporation or organization)
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10700 Parkridge Boulevard,
Suite 600
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20191
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Reston, Virginia
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(Zip Code)
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(Address of principal executive
offices)
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Registrants telephone number,
including area code:
(703) 390-5100
Securities registered pursuant to
Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which
registered
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None
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N/A
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Securities registered pursuant to
Section 12(g) of the Act:
Common Stock, par value
$0.001 per share
(Title of class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 þ No o
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 registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act.
(Check one): Large
accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
State the aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to
the price at which the common equity was last sold, or the
average bid and asked price of such common equity, as of the
last business day of the registrants most recently
completed second fiscal quarter: $4,349,549,895
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12,
13 or 15(d) of the Securities Exchange Act of 1934 subsequent to
the distribution of securities under a plan confirmed by a
court. Yes þ No o
Indicate the number of shares outstanding of each of the
registrants classes of common stock, as of the latest
practicable date.
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Number of Shares Outstanding
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Title of Class
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on March 3, 2006
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Common Stock, $0.001 par value
per share
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152,153,141
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Documents
Incorporated by Reference
Portions of the registrants Proxy Statement for the 2006
Annual Meeting of Stockholders are incorporated by reference
into Part III hereof.
NII
HOLDINGS, INC.
TABLE OF
CONTENTS
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Item
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Description
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Page
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PART I
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1.
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Business
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2
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1A.
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Risk Factors
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25
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1B.
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Unresolved Staff Comments
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35
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2.
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Properties
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35
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3.
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Legal Proceedings
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35
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4.
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Submission of Matters to a Vote of
Security Holders
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35
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Executive Officers of the
Registrant
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35
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PART II
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5.
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Market for Registrants
Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
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38
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6.
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Selected Financial Data
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38
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7.
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Managements Discussion and
Analysis of Financial Condition and Results of Operation
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45
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7A.
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Quantitative and Qualitative
Disclosures About Market Risk
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99
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8.
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Financial Statements and
Supplementary Data
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101
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9.
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Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
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101
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9A.
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Controls and Procedures
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101
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9B.
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Other Information
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103
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PART III
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10.
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Directors and Executive Officers
of the Registrant
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104
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11.
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Executive Compensation
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104
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12.
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Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters
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104
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13.
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Certain Relationships and Related
Transactions
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104
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14.
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Principal Accounting Fees and
Services
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104
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PART IV
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15.
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Exhibits, Financial Statement
Schedules
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105
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1
NII
HOLDINGS, INC.
Unless the context requires otherwise, NII Holdings,
Inc., NII Holdings, we,
our, us and the Company
refer to the combined businesses of NII Holdings, Inc. and its
consolidated subsidiaries. NII Holdings, Inc., formerly known as
Nextel International, Inc., was incorporated in Delaware in 2000.
Except as otherwise indicated, all dollar amounts are expressed
in U.S. dollars and references to dollars and
$ are to U.S. dollars. All consolidated
historical financial statements contained in this report are
prepared in accordance with accounting principles generally
accepted in the United States.
Our principal executive office is located at 10700 Parkridge
Boulevard, Suite 600, Reston, Virginia 20191. Our telephone
number at that location is
(703) 390-5100.
We maintain an internet website at www.nii.com. Stockholders of
the Company and the public may access our periodic and current
reports (including annual, quarterly and current reports on
Form 10-K,
Form 10-Q
and
Form 8-K,
respectively, and any amendments to those reports) filed with or
furnished to the Securities and Exchange Commission pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, through the investor relations
section of our website. The information is provided by a third
party link to the SECs online EDGAR database, is free of
charge and may be reviewed, downloaded and printed from our
website at any time.
Nextel, Nextel Direct Connect,
Nextel Online, Nextel Worldwide and
International Direct Connect are trademarks or
service marks of Nextel Communications, Inc., a wholly-owned
subsidiary of SprintNextel Corporation. Motorola and
iDEN are trademarks or service marks of Motorola,
Inc.
We provide digital wireless communication services primarily
targeted at meeting the needs of business customers through
operating companies located in selected Latin American markets.
Our principal operations are in major business centers and
related transportation corridors of Mexico, Brazil, Argentina
and Peru. We also provide analog specialized mobile radio, which
we refer to as SMR, services in Mexico, Brazil, Peru and Chile.
Our markets are generally characterized by high population
densities in major urban centers, which we refer to as major
business centers, and where we believe there is a concentration
of the countrys business users and economic activity. In
addition, vehicle traffic congestion, low wireline penetration
and unreliability of the land-based telecommunications
infrastructure encourage the use of mobile wireless
communications services in these areas.
We use a transmission technology called integrated digital
enhanced network, or iDEN, technology developed by Motorola,
Inc. to provide our digital mobile services on 800 MHz
spectrum holdings in all of our digital markets. This technology
allows us to use our spectrum more efficiently and offer
multiple digital wireless services integrated on one digital
handset device. Our digital mobile networks support multiple
digital wireless services, including:
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digital mobile telephone service, including advanced calling
features such as speakerphone, conference calling, voice-mail,
call forwarding and additional line service;
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Nextel Direct
Connect®
service, which allows subscribers anywhere on our network to
talk to each other instantly, on a
push-to-talk
basis, on a private
one-to-one
call or on a group call;
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International Direct
Connect®
service, in partnership with Nextel Communications, Nextel
Partners and TELUS Corporation, which allows subscribers to
communicate instantly across national borders with our
subscribers in Mexico, Brazil, Argentina and Peru, with Nextel
Communications and Nextel Partners subscribers in the United
States and with TELUS subscribers in Canada;
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2
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Internet services, mobile messaging services,
e-mail,
location-based services via Global Positioning System (GPS)
technologies and advanced
Javatm
enabled business applications, which are marketed as
Nextel
Onlinesm
services; and
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international roaming capabilities, which are marketed as
Nextel
Worldwidesm.
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As of December 31, 2005, our operating companies had
licenses in markets that cover about 296 million people, an
increase of 129 million people from December 31, 2004
mainly due to new licenses that we acquired in Mexico and
Brazil. Our licenses are concentrated in the areas of the
highest population and business activity in the countries in
which we operate. We currently provide integrated digital mobile
services in the three largest metropolitan areas in each of
Mexico, Brazil and Argentina, in the largest city in Peru and in
various other cities in each country. As of December 31,
2005, our operating companies had a total of about
2.51 million digital handsets in commercial service, an
increase of 630 thousand from the 1.88 million digital
handsets in commercial service as of December 31, 2004. We
refer to our operating companies by the countries in which they
operate, such as Nextel Mexico, Nextel Brazil, Nextel Argentina,
Nextel Peru and Nextel Chile. For financial information about
our operating companies, which we refer to as segments, see
Note 15 to our consolidated financial statements included
at the end of this annual report on
Form 10-K.
The table below provides an overview of our total digital
handsets in commercial service in the countries indicated as of
December 31, 2005 and 2004. For purposes of the table,
digital handsets in commercial service represent all digital
handsets in use by our customers on the digital mobile networks
in each of the listed countries. System type indicates whether
the local wireless communications system is based on an analog
SMR system or a digital enhanced SMR system.
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Population
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Digital Handsets
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Covered by
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in Commercial
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Licenses
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Service
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As of
December 31,
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As of
December 31,
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Country
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System Type
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2005
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2004
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2005
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2004
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(in millions)
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(in thousands)
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Mexico
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Digital/analog
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107
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46
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1,120
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835
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Brazil
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Digital/analog
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137
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71
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638
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481
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Argentina
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Digital
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21
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20
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500
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378
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Peru
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Digital/analog
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15
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15
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248
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185
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Chile
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Analog
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16
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15
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Total
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296
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167
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2,506
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1,879
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We were organized in 1995 as a holding company for the
operations of Nextel Communications, Inc. in selected
international markets. In December 2001, we changed our name
from Nextel International, Inc. to NII Holdings, Inc. On
May 24, 2002, we and NII Holdings (Delaware), Inc., our
wholly-owned subsidiary, filed voluntary petitions for
reorganization under Chapter 11 of the United States
Bankruptcy Code, which we refer to as the Bankruptcy Code, in
the United States Bankruptcy Court for the District of Delaware.
None of our international operating companies filed for
Chapter 11 reorganization. On October 28, 2002, the
Bankruptcy Court confirmed our plan of reorganization and on
November 12, 2002, we emerged from Chapter 11
proceedings.
Recent
Developments
Financing
and Hedging Activities
Mexico Syndicated
Loan Facility. In October 2004, Nextel
Mexico closed on a $250.0 million, five year syndicated
loan facility. Of the total amount of the facility,
$129.0 million is denominated in U.S. dollars with a
floating interest rate based on LIBOR (6.81% as of
December 31, 2005), $31.0 million is denominated in
Mexican pesos with a floating interest rate based on the Mexican
reference rate, the Interbank Equilibrium Interest Rate, or TIIE
(11.13% as of December 31, 2005), and $90.0 million is
denominated in Mexican pesos at an interest rate fixed at the
time of funding (12.48%). In April 2005, Nextel Mexico amended
the credit
3
agreement for the syndicated loan facility to extend the
availability period until May 31, 2005, and in May 2005,
Nextel Mexico drew down on the loan facility for the entire
$250.0 million.
Conversion of 3.5% Convertible
Notes. On June 10, 2005 and
June 21, 2005, certain noteholders converted
$40.0 million and $48.5 million, respectively,
principal face amount of our 3.5% convertible notes into
3,000,000 shares and 3,635,850 shares
(75.0 shares issued per $1,000 of debt principal multiplied
by the debt principal) in accordance with the original terms of
the debt securities. In connection with these conversions, we
paid in the aggregate $8.9 million in cash as additional
consideration for conversion, as well as $0.8 million of
accrued and unpaid interest. We recorded the $8.9 million
paid as debt conversion expense in our consolidated statement of
operations. We reclassified to paid-in capital the original
remaining deferred financing costs related to the notes that
were converted.
Interest Rate Swap. In July 2005,
Nextel Mexico entered into an interest rate swap agreement to
hedge the variability of future cash flows associated with the
$31.0 million Mexican peso-denominated variable rate
portion of its $250.0 million syndicated loan facility.
Under the interest rate swap, Nextel Mexico agreed to exchange
the difference between the variable Mexican reference rate,
TIIE, and a fixed rate, based on a notional amount of
$31.4 million. The interest rate swap fixed the amount of
interest expense associated with this portion of the syndicated
loan facility commencing on August 31, 2005 and will
continue over the life of the facility based on a fixed rate of
about 11.95% per year in local Mexican currency.
2.75% Convertible Notes. In August
2005, we privately placed $300.0 million aggregate
principal amount of 2.75% convertible notes due 2025, which
we refer to as our 2.75% notes. In addition, we granted the
initial purchaser an option to purchase up to an additional
$50.0 million principal amount of 2.75% notes, which the
initial purchaser exercised in full. As a result, we issued an
additional $50.0 million aggregate principal amount of
2.75% notes, resulting in total gross proceeds of
$350.0 million. We also incurred direct issuance costs of
$9.0 million, which we recorded as deferred financing costs
on our consolidated balance sheet and are amortizing over five
years. The notes were publicly registered, effective
February 10, 2006.
The 2.75% notes bear interest at a rate of 2.75% per annum
on the principal amount of the notes, payable semi-annually in
arrears in cash on February 15 and August 15 of each year,
beginning February 15, 2006, and will mature on
August 15, 2025, when the entire principal balance of
$350.0 million will be due. In addition, the noteholders
have the right to require us to repurchase the 2.75% notes on
August 15 of 2010, 2012, 2015 and 2020 at a repurchase price
equal to 100% of their principal amount, plus any accrued and
unpaid interest (including additional amounts, if any) up to,
but excluding, the repurchase date. The 2.75% notes are
convertible into 6,988,450 shares of our common stock at a
conversion rate of 19.967 shares per $1,000 principal
amount of notes, subject to adjustment, prior to the close of
business on the final maturity date under certain circumstances.
We have the option to satisfy the conversion of the
2.75% notes in shares of our common stock, in cash or a
combination of both.
Prior to August 20, 2010, the 2.75% notes are not
redeemable. On or after August 20, 2010, we may redeem for
cash some or all of the 2.75% notes, at any time and from time
to time, upon at least 30 days notice for a price
equal to 100% of the principal amount of the notes to be
redeemed plus any accrued and unpaid interest (including
additional amounts, if any) up to, but excluding, the redemption
date. See Note 7 to our consolidated financial statements
included at the end of this annual report on Form 10-K for
additional information regarding our 2.75% notes.
Foreign Currency Hedge. In September
2005, Nextel Mexico entered into a derivative agreement to
reduce its foreign currency transaction risk associated with
$129.4 million of its 2006 U.S. dollar forecasted
capital expenditures and handset purchases. This risk is hedged
by forecasting Nextel Mexicos capital expenditures and
handset purchases for a
12-month
period beginning in January 2006. Under this agreement, Nextel
Mexico purchased a U.S. dollar call option for
$3.6 million and sold a call option on the Mexican peso for
$1.1 million for a net cost of $2.5 million.
In October 2005, Nextel Mexico entered into another derivative
agreement to further reduce its foreign currency transaction
risk associated with $52.0 million of its 2006
U.S. dollar forecasted capital expenditures
4
and handset purchases. This risk is similarly hedged by
forecasting Nextel Mexicos capital expenditures and
handset purchases for a
12-month
period beginning in January 2006. Under this agreement, Nextel
Mexico purchased a U.S. dollar call option for
$1.4 million and sold a call option on the Mexican peso for
$0.3 million for a net cost of $1.1 million.
Acquisitions
Mexico Spectrum Auction. On
January 10, 2005, the Mexican government began an auction
for wireless spectrum licenses in the 806-821 MHz to
851-866 MHz frequency band. Inversiones Nextel de Mexico, a
subsidiary of Nextel Mexico, participated in this auction. The
spectrum auction was divided into three separate auctions:
Auction 15 for Northern Mexico Zone 1, Auction 16 for
Northern Mexico Zone 2 and Auction 17 for Central and Southern
Mexico. The auctions were completed between February 7 and
February 11. Nextel Mexico won an average of 15 MHz of
nationwide spectrum, except for Mexico City, where no spectrum
was auctioned and where Nextel Mexico already has approximately
21 MHz of spectrum licenses. The corresponding licenses and
immediate use of the spectrum were granted to Inversiones Nextel
de Mexico on March 17, 2005. These new licenses have an
initial term of 20 years, which we have estimated to be the
amortization period of the licenses, and are renewable
thereafter for 20 years. Nextel Mexico paid an up-front fee
of $3.4 million for these licenses, excluding certain
annual fees, and $0.5 million in other capitalizable costs.
The spectrum licenses that Nextel Mexico acquired will allow it
to significantly expand its digital mobile network over the next
two years, thereby allowing it to cover a substantial portion of
the Mexican national geography and population.
Purchase of AOL Mexico. In April 2005,
Nextel Mexico purchased the entire equity interest of AOL
Mexico, S. de R.L. de C.V. for approximately $14.1 million
in cash. As a result of this transaction, Nextel Mexico
obtained AOL Mexicos call center assets, certain accounts
receivable and access to AOL Mexicos customer list, as
well as tax loss carryforwards, which we believe are more likely
than not to be realized. We accounted for this transaction as a
purchase of assets. This acquisition is a related party
transaction as one of our board members is also the president
and chief executive officer of AOL Latin America. Due to this
board members involvement with our company, he recused
himself from our decision to make this acquisition.
Brazil Spectrum Purchases. During the
second quarter of 2005, Nextel Brazil acquired spectrum licenses
for $8.3 million, of which it paid $0.7 million. The
remaining $7.6 million is due in six annual installments
beginning in 2008, and we are amortizing these licenses over
15 years.
Other
Servico Movel Especializado (SME) Regulations in
Brazil. On May 16, 2005, the Brazilian
National Communications Agency, or Anatel, enacted certain
substantive modifications to the SME regulations that, among
other things, have the effect of treating Nextel Brazil equal to
all other Brazilian SMR and SME carriers with respect to billing
for use of other mobile networks. These modifications to the SME
regulations became immediately effective and resulted in savings
for Nextel Brazil in relation to interconnect charges made by
other carriers.
Stock Split. On October 27, 2005,
we announced a
2-for-1
common stock split to be effected in the form of a stock
dividend, which was paid on November 21, 2005 to holders of
record on November 11, 2005. All share and per share
amounts in this annual report on
Form 10-K
related to NII Holdings, Inc. reflect the common stock split.
Amendments to Infrastructure Supply and Installation
Services Agreements. In December 2005, we and each of
our operating companies entered into various amendments to our
existing infrastructure supply and installation services
agreements with Motorola, Inc. to extend the terms of these
agreements to December 31, 2007.
5
Currently, most mobile wireless communications services in our
markets are either SMR, cellular or personal communications
services systems. Our operating companies offer analog SMR or
digital enhanced SMR services, or a combination of both.
Our digital mobile networks combine the advanced iDEN technology
developed and designed by Motorola with a low-power, multi-site
transmitter and receiver configuration that permits frequency
reuse. iDEN is a hybrid technology employing a variant of the
global system for mobile communications (GSM) standard for the
switching layer with a time division multiple access (TDMA)
radio air interface. The design of our existing and proposed
digital mobile networks currently is premised on dividing a
service area into multiple sites. These sites have a typical
coverage area ranging from 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 referred to as the base station. The base station in
each site is connected by microwave, fiber optic cable or
telephone line to a computer controlled switching center. The
switching center controls the automatic transfer of wireless
calls from site to site as a subscriber travels, coordinates
calls to and from a digital handset and connects wireless calls
to the public switched telephone network. In the case of two-way
radio, equipment called a dispatch application processor
provides call setup, identifies the target radio and connects
the subscriber initiating the call to other targeted
subscribers. These two-way radio calls can be connected to one
or several other subscribers and can be made without
interconnecting to the public switched telephone network.
Under the infrastructure supply agreements in effect between us
and Motorola, Inc., Nortel Networks Corporation supplies through
Motorola, Inc. the majority of the mobile telephone switches for
our digital networks. As of December 31, 2005, our
operating companies had 11 operational switches and 3,571
transmitter and receiver sites constructed and in operation in
our digital mobile networks.
Currently, there are three principal digital technology formats
used by providers of cellular telephone service or personal
communications services:
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time division multiple access (TDMA) digital transmission
technology;
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code division multiple access (CDMA) digital transmission
technology; and
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global system for mobile communications (GSM) digital
transmission technology.
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Although TDMA, CDMA and GSM are digital transmission
technologies that share basic characteristics in contrast to
analog transmission technology, they are not compatible or
interchangeable with each other. Although Motorolas
proprietary iDEN technology is a hybrid of the TDMA technology
format, it differs in a number of significant respects from the
versions of this technology used by cellular and personal
communications services providers.
The implementation of a digital mobile network using iDEN
technology significantly increases the capacity of our existing
channels and permits us to utilize our current holdings of SMR
spectrum more efficiently. This increase in capacity is
accomplished in two ways:
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First, each channel on our digital mobile networks is capable of
carrying up to six voice
and/or
control paths, by employing six-time slot time division multiple
access digital technology. Each voice transmission is converted
into a stream of data bits that are compressed before being
transmitted. This compression allows each of these voice or
control paths to be transmitted on the same channel without
causing interference. Upon receipt of the coded voice data bits,
the digital handset decodes the voice signal. Using iDEN
technology, our two-way radio dispatch service achieves about
six times improvement over analog SMR in channel utilization
capacity. We also achieve up to six times improvement over
analog SMR in channel utilization capacity for channels used for
mobile telephone service.
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Second, our digital mobile networks reuse each channel many
times throughout the market area in a manner similar to that
used in the cellular industry, further improving channel
utilization capacity.
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6
Unlike other digital transmission technologies, iDEN can be
deployed on non-contiguous frequency holdings. This benefits us
because our 800 MHz channel holdings are, in large part,
composed of non-contiguous channels. Further, iDEN technology
allows us to offer our multi-functional package of digital
mobile services. While iDEN offers a number of advantages in
relation to other technology platforms, unlike other wireless
technologies, it is a proprietary technology that relies solely
on the efforts of Motorola and any future licensees of this
technology for technology and product development and
innovation. Motorola is also the sole source supplier of iDEN
infrastructure and digital handsets. Our agreements with
Motorola impose limitations and conditions on our ability to use
other technologies. These agreements may delay or prevent us
from employing new or different technologies that perform better
or are available at a lower cost. Furthermore, iDEN technology
is not as widely adopted in relation to other wireless
technologies and currently has fewer subscribers on a worldwide
basis than other digital technology formats.
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D.
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Network
Implementation, Design and Construction
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After obtaining necessary regulatory authorizations to develop
and deploy our networks, we undertake a careful frequency
planning and system design process. Our sites have been selected
on the basis of their proximity to targeted customers, the
ability to acquire and build the sites and frequency propagation
characteristics. Site procurement efforts include obtaining
leases and permits and, in many cases, zoning approvals. The
preparation of each site, including grounding, ventilation, air
conditioning and construction, typically takes three months. We
must also obtain all equipment necessary for the site. Equipment
installation, testing and optimization generally take at least
an additional four weeks. Any scheduled build-out or expansion
may be delayed due to typical permitting, construction and other
delays.
Our operating companies primarily market their wireless
communications services to businesses with mobile work forces
and/or
multiple locations, such as service companies, security firms,
contractors and delivery services. Companies with mobile work
forces often need to provide their personnel with the ability to
communicate directly with one another. To meet the needs of
these customers, we offer a package of services and features
that combines multiple communications services in one digital
handset. This package includes Nextel Direct Connect, which
allows users to contact other subscribers instantly on a
push-to-talk
basis, on a private
one-to-one
call or on a
one-to-many
group call. To further differentiate our service from that of
our competitors, we offer Nextel Direct Connect in, among and
throughout all areas covered by our digital wireless network in
each country in which we operate as well as internationally in
the United States and certain parts of Canada. The nationwide
and international network features of our Nextel Direct Connect
and International Direct Connect services allow our customers to
avoid the long distance and roaming charges that our competitors
may charge for long distance and international long distance
communications. For a more detailed description of the marketing
focus of each managed operating company, see the
Marketing discussion for each of those operating
companies under Operating Companies.
The Latin American mobile communications industry has undergone
significant growth over the past two years. Our total digital
handsets in commercial service within the markets we serve
reached about 2.5 million as of December 31, 2005,
which represents an increase of 32% compared to about
1.9 million handsets in commercial service as of
December 31, 2004. We believe that the wireless
communications industry has been and will continue to be
characterized by intense competition on the basis of price, the
types of services offered and quality of service.
In the countries in which we operate, there are principally
three other multinational providers of mobile wireless voice
communications with whom we compete:
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America Movil, which has the largest wireless market share in
Mexico, operates in eight of Brazils ten cellular licensed
areas and has nationwide coverage in Argentina, Peru and Chile;
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Telefonica Moviles, which has wireless operations throughout
Mexico, Argentina, Peru and Chile, is a joint controlling
shareholder of Vivo, the largest wireless operator in Brazil,
and recently purchased the Latin American operations of
BellSouth Corporation to become the second largest wireless
operator in Latin America; and
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Telecom Italia Mobile, or TIM, which has wireless operations
covering most of Brazil, and is a joint controlling shareholder
of the wireless affiliate of Telecom Argentina. During 2005, TIM
sold their operations in Peru to America Movil and their
operations in Chile to a Chilean investment group.
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We also compete with regional or national providers of mobile
wireless voice communications, such as Telemars Oi in
Brazil and Unefon and Iusacell in Mexico.
In addition, new licenses may be auctioned by governments in
markets in which we operate allowing for new competitors, as
well as the competitors listed above, many of whom have greater
financial resources, coverage areas
and/or name
recognition than we do, to expand into new markets and offer new
products and services. Some of these existing competitors have
more extensive distribution channels than ours, a more expansive
spectrum position than ours, or are able to acquire subscribers
at a lower cost than we can. We also expect current and future
competitors will continue to upgrade their systems to provide
additional services competitive with those available on our
networks. Additionally, some competitors operate in the wireline
business allowing them to bundle their wireless product to their
customers.
In each of the markets where our operating companies operate, we
compete with other communications services providers, based
primarily on our differentiated wireless service offerings and
products, principally our Direct Connect service, including
International Direct Connect, consultative distribution channels
and on our customer care and service. Our competitors include
other wireless communications companies and wireline telephone
companies. Although pricing is often an important factor in
potential customers purchase decisions, we believe that
our targeted customer base of primarily business users and
individuals who utilize premium mobile communications features
and services are also likely to base their purchase decisions on
quality of service and the availability of differentiated
features and services that make it easier for them to get things
done quickly and efficiently.
Many existing telecommunications enterprises in the markets in
which our operating companies conduct business have successfully
attracted significant investments from multinational
communications companies. Because of their financial resources,
these competitors significantly outspend us with their
advertising/brand awareness campaigns and may be able to reduce
prices to gain market share. We expect that the prices we charge
for our products and services will decline over the next few
years as competition intensifies in our markets. Several of our
competitors have introduced aggressive pricing promotions and
shared minutes between groups of callers. In addition, several
of our competitors have also introduced
Push-To-Talk
over Cellular service, which is a walkie-talkie type of service
similar to our Direct Connect service. While we believe that the
competitors current versions of
Push-To-Talk
over Cellular do not compare favorably with our Direct Connect
service, particularly in terms of latency, quality, reliability
or ease of use, if competitors are able to replicate a product
more comparable to ours, we may lose some of our competitive
advantages.
The Latin American wireless market is predominantly a pre-paid
market, which means that customers pay in advance for a
pre-determined number of minutes of use. However, our strategy
primarily focuses on the contract, or post-paid, market, which
generally offers higher average monthly revenue per handset and
higher operating cash flow per subscriber. This strategy has
allowed us to acquire and retain the most profitable subscribers
in the markets in which we operate. Since the wireless industry
has often competed based on price, increased competition could
require us to decrease prices or increase service and product
offerings, which would lower our revenues or increase our costs.
Additional service offerings by our competitors
and/or
product offerings could also impact our ability to retain
customers. While we believe that the post-paid market continues
to be growing, the market could become saturated as competition
in this customer segment increases.
Consolidation has created and may continue to create additional
large, well-capitalized competitors with substantial financial,
technical, marketing and other resources. Recent mergers have
included Telefonica
8
Moviles acquisition of BellSouth Internationals
wireless assets in Latin America and America Moviles
acquisitions of TIM Peru and Smartcom S.A. in Chile. We also
expect our digital mobile network businesses to face competition
from other technologies and services developed and introduced in
the future.
For a more detailed description of the competitive factors
affecting each operating company, see the
Competition discussion for each of those operating
companies under I. Operating Companies.
The licensing, construction, ownership and operation of wireless
communications systems are regulated by governmental entities in
the markets in which our operating companies conduct business.
The grant, maintenance, and renewal of applicable licenses and
radio frequency allocations are also subject to regulation. In
addition, these matters and other aspects of wireless
communications system operations, including rates charged to
customers and the resale of wireless communications services,
may be subject to public utility regulation in the jurisdiction
in which service is provided. Further, statutes and regulations
in some of the markets in which our operating companies conduct
business impose limitations on the ownership of
telecommunications companies by foreign entities. Changes in the
current regulatory environments, the interpretation or
application of current regulations or future judicial
intervention in those countries could impact our business. These
changes may affect interconnection arrangements, requirements
for increased capital investments, prices our operating
companies are able to charge for their services or foreign
ownership limitations, among other things. For a more detailed
description of the regulatory environment in each of the
countries in which our managed operating companies conduct
business, see the Regulatory and Legal Overview
discussion for each of those operating companies under
I. Operating Companies.
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H.
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Foreign
Currency Controls and Dividends
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In some of the countries in which we operate, the purchase and
sale of foreign currency is subject to governmental control.
Additionally, local law in some of these countries may limit the
ability of our operating companies to declare and pay dividends.
Local law may also impose a withholding tax in connection with
the payment of dividends. For a more detailed description of the
foreign currency controls and dividend limitations and taxes in
each of the countries in which our managed operating companies
conduct business, see the Foreign Currency Controls and
Dividends discussion for each of those operating companies
under I. Operating Companies.
9
Operating Company Overview. We refer to our
wholly-owned Mexican operating company, Comunicaciones Nextel de
Mexico, S.A. de C.V., as Nextel Mexico. Several wholly-owned
subsidiaries of Nextel Mexico provide digital mobile services
under the trade name Nextel in the following major
business centers with populations in excess of 1 million
and along related transportation corridors:
Digital
Mexico
City
Guadalajara
Puebla
Leon
Monterrey
Toluca
Tijuana
Torreon
Ciudad Juarez
Nextel Mexico is currently offering digital services in a number
of smaller markets, including Acapulco, Aguascalientes, Cancun,
Celaya, Irapuato, Salamanca, Chilpancingo, Cordoba, Cuernavaca,
Guanajuato, Lagos de Morena, La Piedad, Nuevo Laredo,
Orizaba, Queretaro, Cuautla, San Juan de Rio, Tlaxcala,
Morelia, San Luis Potosi, Veracruz, Ensenada, Rosarito,
Mexicali, Tecate, Saltillo, Valle de Bravo, San Miguel de
Allende, Pachuca, Matamoros and Reynosa. In addition, Nextel
Mexico continues to offer analog services in several other
markets.
Nextel Mexico has licenses in markets covering more than
107 million people. As of December 31, 2005, Nextel
Mexico provided service to about 1,119,800 digital handsets.
Nextel Mexico is headquartered in Mexico City and has 23
regional offices throughout Mexico. As of December 31,
2005, Nextel Mexico had 2,491 employees.
Marketing. Nextel Mexico offers both a broad
range of service options and pricing plans designed to meet the
specific needs of its targeted business customers. It currently
offers digital two-way radio only plans and integrated service
plans, including two-way radio, interconnect and internet data
services in its digital markets. Nextel Mexico also offers
analog two-way radio in its analog markets. Nextel Mexicos
target customers are primarily businesses with mobile work
forces.
Nextel Mexico markets its services through a distribution
network that includes a variety of direct sales representatives
and independent dealers. The development of alternate
distribution channels has been a key factor in its commercial
performance. Additionally, Nextel Mexico has used an advertising
campaign supported by press, radio, magazines, billboards,
television and direct marketing to develop brand awareness.
Competition. Nextel Mexicos digital
mobile network competes with cellular and personal
communications services system operators in its market areas.
The Mexican cellular and personal communications services market
is divided into nine regions. The Secretary of Communications
and Transportation of Mexico has issued 800 MHz cellular
licenses in each region in the Cellular A-Band and the Cellular
B-Band as well as 1900 MHz personal communications services
licenses. In each region, Radiomovil Dipsa, S.A. de C.V., known
as Telcel, and a subsidiary of America Movil, S.A. de C.V., in
turn a subsidiary of Carso Global Telecom, S.A. de C.V., the
holding company controlling Telefonos de Mexico, S.A. de C.V.,
known as Telmex, holds the Cellular B-Band concession and an
additional personal communications services license throughout
Mexico. Radiomovil Dipsa, S.A. de C.V. was the first wireless
operator in the country. Iusacell, S.A. de C.V. holds the
Cellular A-Band license in the Mexico City area and its
surroundings and the regions covering most of the central and
southern areas of Mexico, as well as personal communications
services licenses throughout Mexico. A controlling stake
10
in Iusacell was acquired by Biper S.A., an affiliate of Grupo
Salinas. TV Azteca, a subsidiary of Grupo Salinas, is the joint
controlling shareholder of Unefon, S.A. de C.V., which in turn
is the controlling shareholder of Operadora Unefon, S.A. de
C.V., which holds personal communications services licenses
throughout Mexico. In the northern region of Mexico, cellular
service is provided on the A-Band by operating companies owned
by Telefonica S.A. and also owns a controlling interest in
Pegaso PCS, S.A. de C.V., which has personal communications
services licenses throughout Mexico. Telefonica S.A. is the
second largest wireless operator in the country.
On January 10, 2005, the Mexican government began an
auction for spectrum in the 806-821 MHz to 851-866 MHz
frequency band. Inversiones Nextel de Mexico, a subsidiary of
Nextel Mexico, participated in this auction. The spectrum
auction was divided into three separate auctions: Auction 15 for
Northern Mexico Zone 1, Auction 16 for Northern Mexico Zone
2 and Auction 17 for Central and Southern Mexico. The auctions
were completed between February 7 and February 11. Nextel
Mexico won an average of 15 MHz of nationwide spectrum,
except for Mexico City, where no spectrum was auctioned off and
where Nextel Mexico has licenses covering approximately
21 MHz. The corresponding licenses and immediate use of the
spectrum were granted to Inversiones Nextel de Mexico on
March 17, 2005. These new licenses have an initial term of
20 years and are renewable thereafter for 20 years.
The spectrum licenses that Nextel Mexico acquired will allow it
to significantly expand its digital mobile network over the next
one to two years, thereby allowing it to cover a substantial
portion of the Mexican national geography and population.
As of December 31, 2005, Nextel Mexico provided service to
about 2% of the total digital wireless communications market in
Mexico.
We believe that the most important factors upon which Nextel
Mexico competes are customer service, a high quality network,
brand recognition, consultative distribution channels and its
differentiated services, primarily our Direct Connect service,
which is available throughout all areas where Nextel Mexico
provides digital service. While its competition generally
targets the prepaid market, Nextel Mexico primarily targets
businesses, and all of its subscribers are on postpaid
contracts. Iusacell, Telcel, Telefonica and Unefon are now
offering
Push-to-Talk
over Cellular services, which are similar to and compete with
our Direct Connect service. However, as of December 31,
2005, these companies had not received regulatory approval to
offer these services.
Regulatory and Legal Overview. The Secretary
of Communications and Transportation of Mexico regulates the
telecommunications industry in Mexico. The Mexican
Telecommunications Commission oversees specific aspects of the
telecommunications industry on behalf of the Secretary of
Communications and Transportation.
The existing telecommunications law, which went into effect in
1995, restricts foreign ownership in telecommunications to a
maximum of 49% voting equity interest except for cellular
telephony, which has no such restriction. However, most of the
licenses held by Nextel Mexico prior to 2000, except for one
license covering 10 channels along a major highway from Mexico
City to Guadalajara, are not subject to the 49% foreign
ownership limitation as such licenses were originally granted
under the old telecommunications law that had no such limitation
to foreign ownership. All of the licenses acquired by Nextel
Mexico after January 1, 2000 are held through Inversiones
Nextel de Mexico, a corporation with a capital structure known
under applicable corporate law as neutral stock, in
which Nextel Mexico owns approximately 99.99% of the economic
interest, but only 49% of the voting shares. The remaining 51%
of the voting shares in Inversiones Nextel de Mexico, which is
held by one Mexican shareholder, is subject to a voting trust
agreement and a shareholders agreement between Nextel
Mexico and this shareholder that establish adequate corporate
governance controls and locks to protect Nextel Mexicos
interests.
The current telecommunications law requires mandatory
interconnection between all telecommunication networks under
reciprocal terms and conditions when it is technically possible.
Notwithstanding the foregoing, some telecommunications companies
have had difficulty obtaining interconnection services under
reciprocal terms and conditions from other telephone operators.
Because Nextel Mexico operates under SMR licenses, it is not
deemed to be a telephone operator and has not been granted
telephone numbers. As a result, it is unclear whether Nextel
Mexico is entitled to reciprocal interconnection terms and
conditions with wireline and
11
wireless public telephone networks. Meanwhile, to ensure its
access to interconnection, Nextel Mexico entered into commercial
agreements with other local, point to point and long distance
carriers such as Alestra, Avantel, Axtel and Telmex that provide
interconnection between Nextel Mexicos networks and the
public switched telephone network.
As of December 31, 2005, Nextel Mexicos
license-holding subsidiaries had filed with the Secretary of
Communications and Transportation requests for renewal of 30
concessions. Although we do not foresee any problems with the
renewal applications, there is no guarantee that such renewals
will be granted.
Foreign Currency Controls and
Dividends. Because there are no foreign currency
controls in place, Mexican currency is convertible into U.S.
dollars and other foreign currency without restrictions. Mexican
companies may distribute dividends and profits outside of Mexico
if the Mexican company meets specified distribution and legal
reserve requirements. A Mexican company with employees must
distribute 10% of its pretax profits to employees and allocate
5% of net profits to the legal reserve until 20% of the stated
capital is set aside. Under Mexican corporate law, approval of a
majority of stockholders attending an ordinary
stockholders meeting of a corporation is required to pay
dividends. Dividends paid by Nextel Mexico to its
U.S. stockholders are not currently subject to a
withholding tax. Interest payments to U.S. residents are
subject to a 15% withholding tax; interest payments to a
U.S. financial institution registered with the Mexican tax
authorities are subject to a 4.9% withholding tax; and interest
payments to a U.S. fixed asset or machinery supplier
registered with the Mexican tax authorities are subject to a 10%
withholding tax.
Income Tax Legislation. In December 2002, the
Mexican government enacted tax legislation, effective as of
January 1, 2003, that reduced the corporate tax rate from
35% to 34% in 2003 and further reduced that rate to 33% in 2004.
In December 2004, the Mexican government enacted additional tax
legislation, effective January 1, 2005, which reduced the
corporate tax rate to 30% for 2005 and will further reduce the
corporate tax rate to 29% for 2006 and 28% for 2007.
Operating Company Overview. We refer to our
wholly-owned Brazilian operating company Nextel Telecomunicacoes
Ltda., as Nextel Brazil. Nextel Brazil provides analog and
digital mobile services under the tradename Nextel
in the following major business centers with populations in
excess of 1 million, along related transportation
corridors, as well as in a number of smaller markets:
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Digital
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Analog
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Rio de Janeiro
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Salvador
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Sao Paulo
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Recife
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Curitiba
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Fortaleza
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Brasilia
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Porto Alegre
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Belo Horizonte
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Campinas
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Sao Jose dos Campos
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Nextel Brazil has licenses in markets covering about
137 million people. As a result of new licenses obtained
throughout 2005, Nextel Brazil increased its population covered
by licenses from 71 million to 137 million. As of
December 31, 2005, Nextel Brazil provided service to about
637,600 digital handsets.
Nextel Brazils operations are headquartered in Sao Paulo,
with branch offices in Rio de Janeiro and various other cities.
As of December 31, 2005, Nextel Brazil had 1,739 employees.
Marketing. Nextel Brazil offers both a broad
range of service options and pricing plans primarily designed to
meet the specific needs of its targeted business customers. It
currently offers digital two-way radio only plans and integrated
service plans, including two-way radio, interconnect and
internet data services in its digital markets. Nextel Brazil
also offers analog two-way radio in its analog markets. Nextel
Brazils target customers are primarily businesses with
mobile work forces.
12
Nextel Brazil markets its services through a distribution
network that includes a variety of direct sales representatives
and independent dealers. The development of alternate
distribution channels has been a key factor in its commercial
performance. Additionally, Nextel Brazil has used an advertising
campaign supported by press, radio, magazines, billboards,
television, internet and direct marketing to develop brand
awareness.
Competition. Nextel Brazil competes with other
analog SMR and cellular and personal communications services
providers. The largest competitors are Vivo (a joint venture of
Telefonica S.A. and Portugal Telecom S.A.) which has the largest
market share in the Sao Paulo Metropolitan Area and Rio de
Janeiro, as well as several other regional operators: Telecom
Americas, which owns Claro and which is controlled by America
Movil; Telecom Italia Mobile; TNL PCS S.A. (a personal
communications services operating subsidiary of Telemar Norte
Leste S.A., Brazils largest wireline incumbent, and which
markets under the brand name Oi); and Brasil
Telecom GSM, a subsidiary of Brasil Telecom
S.A. Nextel Brazil also competes with other regional cellular
and wireless operators including Telemig Celular S.A. There are
also several small SME operators as competitors in the analog
market in different regions in Brazil.
As of December 31, 2005, Nextel Brazil provided service to
about 1% of the total digital handsets in commercial service in
Brazil.
We believe that the most important factors upon which Nextel
Brazil competes are customer service, a high quality network,
consultative distribution channels, a differentiated brand
positioning and its differentiated services, primarily our
Direct Connect service, which is available throughout all areas
where Nextel Brazil provides digital service. While its
competition generally targets the prepaid market, Nextel Brazil
primarily targets small and medium-sized businesses with mobile
workforces and high-end individuals. All of its subscribers are
on post-paid contracts.
Regulatory and Legal Overview. On
April 27, 2000, Brazils telecommunications regulatory
agency, Agencia Nacional de Telecomunicacoes, known as Anatel,
approved new rules relating to SMR services in Brazil. These
regulations were supplemented on September 26, 2001, with
regulations relating to areas of authorization and, on
October 17, 2001, with regulations regarding interconnect
charges between mobile operators. As a result, Brazil began
opening its markets to wider competition in the mobile wireless
communications segment where we operate. The former regulations
imposed various restrictions that significantly limited the
ability of Nextel Brazil to provide digital mobile services to
all potential customer groups.
Among others, the regulations issued in 2000 allowed affiliated
companies to hold more than one license in the same service
area, but still limited SMR licensees and their affiliates to a
maximum holding of 10 MHz of spectrum in the same service
area. Under those rules, Anatel was allowed to lift the spectrum
restriction from 10 MHz up to 15 MHz in localities
where the need for more spectrum would be duly justified. In the
case of Sao Paulo and Rio de Janeiro, the two largest and most
congested metropolitan areas in Brazil, Anatel approved the
increase in our spectrum to 15 MHz and published for
comments regulations that would lift the restriction of
15 MHz in other cities. A revised SMR services regulation
was approved by Anatel on May 5, 2005 under Resolution
No. 404 and expressly revoked the April 27, 2000
rules. Under the current regulation, SMR operators and their
affiliates are allowed to hold up to 15 MHz of spectrum in
the same service area. In addition, the May 5, 2005
regulations annulled the former regulation relating to areas of
authorization and replaced it with a new SMR Authorizations
General Plan issued by Anatel under Resolution No. 405.
Although we believe that these regulations give us significantly
greater flexibility to provide digital mobile services, we are
still required to provide two-way radio as a basic service
before we can provide any other service. For example, we cannot
offer interconnection to the public telephone system without
providing dispatch services.
On October 17, 2001, Anatel enacted certain rules that
allow carriers to charge calling party pays charges. These
regulations clarified, among other things, how SMR companies
like Nextel Brazil would be paid by other companies if they
wished to interconnect with Nextel Brazils network. These
rules also allowed Nextel Brazil to amend its interconnection
agreements to reflect the calling party pays charges. We have
negotiated agreements with all significant fixed line and
wireless operators in Brazil to reflect the additional payments
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between carriers as a result of the calling party pays charges.
These agreements are subject to annual renewals. Calling party
pays was also incorporated into the May 5, 2005
regulations, which, in addition, revoked and replaced the
October 17, 2001 rules with new SMR network remuneration
regulations, which were approved under Resolution No. 406.
Any company interested in obtaining new SMR licenses from Anatel
must apply and present documentation demonstrating the
technical, legal and financial qualifications. Anatel may
communicate its intention to grant new licenses, as well as the
terms and conditions applicable, such as the relevant price.
Before granting any license, Anatel is required to publish an
announcement in the official gazette. Any company willing to
respond to Anatels invitation, or willing to render the
applicable service in a given area claimed by another interested
party, may have the opportunity to obtain a license. Whenever
the number of claimants is larger than the available spectrum,
Anatel is required to conduct competitive bidding to determine
which interested party will be granted the available licenses.
A license for the right to provide SMR services is granted for
an undetermined period of time. While the associated radio
frequencies are licensed for a period of 15 years, they are
renewable only once for an additional
15-year
period. Renewal of the license is subject to rules established
by Anatel. The renewal process must be filed at least three
years before the expiration of the original term and must be
decided by Anatel within 12 months of its filing. Anatel
may deny a request for renewal of the license only if the
applicant is not making rational and adequate use of the
frequency, the applicant has committed repeated breaches in the
performance of its activities, or there is a need to modify the
radio frequency allocation.
The rules require that Nextel Brazils services comply with
start-up
terms and minimum service availability and quality requirements
detailed in the regulations. Failure to meet Anatels
requirements may result in forfeiture of the channels and
revocation of licenses. We believe that Nextel Brazil is
currently in compliance with the applicable operational
requirements of its licenses in all material respects.
On May 12, 2004, Nextel Brazil received approval from
Anatel to acquire the approximately 1,600 SMR channels held
directly or indirectly by Mcomcast S.A. and Mcom Wireless S.A.
and certain other license holders. The transaction was also
approved by CADE, the Brazilian antitrust agency. As a result of
both approvals, Nextel Brazil is authorized to use the channels
in certain markets, including the cities of Sao Paulo, Rio de
Janeiro and several other major markets. As a result of these
transactions, Nextel Brazil was able to increase its holdings in
the cities of Sao Paulo and Rio de Janeiro to the maximum
allowed spectrum of 15 MHz, as previously approved by
Anatel.
On October 21, 2004, Anatel also approved the realignment
spectrum plan for SMR channels in Brazil. As a result of this
new spectrum plan, Nextel Brazil will be able to obtain 200
contiguous channels in each of the major digital markets, which
may have a benefit of future technology implementation or
upgrades. However, all SMR operators have five years to
implement this new spectrum plan.
On March 23, 2005, Anatel approved the grant to Nextel
Brazil of approximately 8,200 SMR channels, which will be used
mainly to (i) expand its footprint in existing markets for
their respective area code and (ii) provide SMR services in
new cities.
On May 16, 2005, Anatel enacted certain substantive
modifications to the Servico Movel Especializado, or SME,
regulations that, among other things, have the effect of
treating Nextel Brazil equal to all other Brazilian SMR and SME
carriers with respect to billing for use of other mobile
networks. These modifications to the SME regulations became
immediately effective and resulted in savings for Nextel Brazil
in relation to interconnect charges made by other carriers.
Foreign Currency Controls and Dividends. The
purchase and sale of foreign currency in Brazil is subject to
governmental control. Until March 14, 2005, there were two
foreign exchange markets in Brazil that were subject to
regulation by the Central Bank of Brazil. The first was the
commercial/financial floating exchange rate market. This market
was reserved generally for trade-related transactions such as
import and export, registered foreign currency investments in
Brazil, and other specific transactions involving remittances
abroad. The second foreign exchange market was the tourism
floating exchange rate market. The commercial/financial exchange
rate market was restricted to transactions that require prior
approval by the Brazilian Central Bank.
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Both markets operated at floating rates freely negotiated
between the parties. The purchase of currency for repatriation
of capital invested in Brazil and for payment of dividends to
foreign stockholders of Brazilian companies used to be made in
the commercial/financial floating exchange rate market.
Purchases for these purposes could only be made if the original
investment of foreign capital and capital increases had been
previously registered with the Brazilian Central Bank. There
were no significant restrictions on the repatriation of
registered share capital and remittance of dividends.
In spite of changes that have been implemented by the Brazilian
Central Bank, the rules on repatriation of capital and payment
of dividends have not changed. The purchase of currency for
repatriation of capital invested in Brazil and for payment of
dividends to foreign stockholders of Brazilian companies still
may only be made if the original investment of foreign capital
and capital increases were registered with the Brazilian Central
Bank. There are no significant restrictions on the repatriation
of registered share capital and remittance of dividends.
Nextel S.A., the Nextel Brazil subsidiary through which any
dividend is expected to flow, has applied to the Brazilian
Central Bank for registration of its investments in foreign
currency. Nextel S.A. intends to structure future capital
contributions to Brazilian subsidiaries to maximize the amount
of share capital and dividends that can be repatriated through
the exchange market. However, Nextel S.A. may not be able to
repatriate share capital and dividends on foreign investments
that have not been registered.
Brazilian law provides that the Brazilian government may, for a
limited period of time, impose restrictions on the remittance by
Brazilian companies to foreign investors of the proceeds of
investments in Brazil. These restrictions may be imposed
whenever there is a material imbalance or a serious risk of a
material imbalance in Brazils balance of payments. The
Brazilian government may also impose restrictions on the
conversion of Brazilian currency into foreign currency. These
restrictions may hinder or prevent us from purchasing equipment
required to be paid for in any currency other than Brazilian
reais. Under current Brazilian law, a company may pay dividends
from current or accumulated earnings. Dividend payments from
current earnings are not subject to withholding tax. Interest
and payments other than principal amounts of foreign loans are
generally subject to a 15% withholding tax, 25% in the case of
payments made to companies located in a tax haven, as defined
under the Brazilian legislation, and a 0.38% financial
transactions tax.
Operating Company Overview. We refer to our
wholly-owned Argentine operating company Nextel Communications
Argentina S.A. (formerly, Nextel Argentina S.R.L.), as Nextel
Argentina. Nextel Argentina provides digital mobile services
under the tradename Nextel in the following major
business centers with populations in excess of 1 million,
along related transportation corridors, as well as in a number
of smaller markets:
Digital
Buenos
Aires
Cordoba
Rosario
Mendoza
Nextel Argentina has licenses in markets covering about
21 million people. As of December 31, 2005, Nextel
Argentina provided service to about 500,200 digital handsets.
Nextel Argentina is headquartered in Buenos Aires and has
regional offices in Mar del Plata, Rosario, Mendoza and Cordoba,
and seven branches in Buenos Aires. As of December 31,
2005, Nextel Argentina had 990 employees.
Marketing. Nextel Argentina offers both a
broad range of service options and pricing plans primarily
designed to meet the specific needs of its targeted business
customers. It currently offers digital two-way radio only plans
and integrated service plans, including two-way radio,
interconnect, short messaging and internet
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data services in its markets. Nextel Argentinas target
customers are primarily businesses with mobile work forces.
Nextel Argentina markets its services through a distribution
network that includes a variety of direct sales representatives
and independent dealers. The development of alternate
distribution channels has been a key factor in its commercial
performance. Additionally, Nextel Argentina has used an
advertising campaign supported by press, radio, magazines,
billboards, television, internet and direct marketing to develop
brand awareness.
Competition. There are three cellular service
providers in Argentina with which Nextel Argentina competes: the
Telefonica Moviles Group, which owns both Compania de
Radiocomunicaciones Moviles S.A. (previously Movicom) and
Telefonica Comunicaciones Moviles S.A. (previously Unifon), both
of which are commercially known as Movistar, Compania de
Telefonos del Interior S.A., or CTI, which is owned by America
Movil S.A. de C.V., and Telecom Personal S.A., or Personal,
which is owned by Telecom Argentina S.A. All of these companies
or their subsidiaries also hold personal communications
services, or PCS, licenses that were auctioned off by the
Argentine government in 1999. The cellular and PCS licenses each
cover only a specific geographic area, but together, the
licenses provide each company with national coverage. The grant
of PCS licenses did not result in the entry of new competitors
to the market because the licenses were awarded only to the
existing providers of cellular telephone services. The licenses
and associated frequencies provide existing cellular companies
with increased spectrum capabilities and the ability to launch a
wide range of wireless products. Affiliated companies of
Movistar, CTI and Personal also hold wireline local and long
distance telephone licenses. As a result of the purchase of
Movicom by the Telefonica Moviles Group, and due to existing
limitations in the amount of spectrum that a group may hold in
any given geographical region or area (50 MHz maximum),
Movistar may, in the near future, be forced to return
approximately 45 MHz of spectrum in certain regions where
it may exceed the 50 MHz limitation. This may create
opportunities for existing carriers or new entrants to bid for
such spectrum should such spectrum be auctioned off publicly.
The Argentine government, however, has announced that this
spectrum will be awarded to a new government sponsored mobile
services company made up of existing telephone cooperatives.
Although it was announced that the new company would begin
operations during 2006, no new announcements have been made. In
the specific SMR market, Nextel Argentinas only major
competitor is Movilink, which is now owned by the Telefonica
Moviles Group. During 2005, Movistar and CTI launched
Push-To-Talk
over Cellular service.
As of December 31, 2005, Nextel Argentina provided service
to about 3% of the total mobile handsets in commercial service
in Argentina.
We believe that the most important factors upon which Nextel
Argentina competes are customer service, a high quality network,
brand recognition, consultative distribution channels and its
differentiated services, primarily our Direct Connect service,
which is available throughout all areas where Nextel Argentina
provides digital service. While its competition generally
targets the prepaid market, Nextel Argentina primarily targets
small and medium-sized businesses with mobile workforces and
high-end individuals. All of its subscribers are on post-paid
contracts.
New telecommunications regulations aimed at opening the
Argentine market to wider competition went into effect in
November 2000. As a result, a number of new companies have
obtained licenses to offer a variety of services, some of which
have already started operations.
Regulatory and Legal Overview. The Comision
Nacional de Comunicaciones, referred to as the Argentina CNC,
the Secretary of Communications of Argentina, and the Ministry
of Federal Planning, Public Investments and Services are the
Argentine telecommunications authorities responsible for the
administration and regulation of the SMR industry.
SMR licenses have an indefinite term but are subject to
revocation for violation of applicable regulatory rules.
Argentina does not impose any limitation on foreign ownership of
SMR licenses. Analog and digital mobile service must begin
within 180 business days after receipt of channel assignment.
Failure to meet service or loading requirements can result in
revocation of the channel authorizations. The Argentina CNC may
revoke SMR licenses upon the occurrence of a third breach by the
licensee of service requirements. SMR
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licenses and channel authorizations also may be revoked for
violation of other regulatory authority rules and regulations.
Nextel Argentina believes it has satisfied all of its loading
requirements on its existing spectrum position.
SMR providers are assured interconnection with the public
switched telephone network according to the terms under which
the channels were awarded, as well as under other applicable
laws. Furthermore, interconnection with the public switched
telephone network must be on a nondiscriminatory basis. Nextel
Argentina provides interconnect services to its subscribers
under interconnection agreements with Telefonica de Argentina
S.A. and Telecom Argentina S.A., as well as other smaller local
carriers. In May 1999, the Argentina CNC authorized Nextel
Argentina to implement a calling party pays program with the
fixed line carriers with whom it interconnects, which it has
since implemented.
The tariffs for the SMR are freely fixed by the providers.
Charges for calling party pays calls originating in fixed lines
depend on a reference price set periodically by the Ministry.
In September 2000, Argentinas president signed a decree
that put into effect new telecommunications regulations. The
purpose of the regulations is to guarantee the complete
deregulation and free competition of the telecommunications
industry in Argentina. The rules cover the following:
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Licenses of telecommunications services. The
regulations establish a single license system that allows the
license holder to offer any and all types of telecommunications
services. The licensee is free to choose the geographic area,
technology and architecture through which its services will be
provided. However, each specific service to be offered must be
separately registered with the Secretary. Holders of existing
telecommunications licenses, including holders of cellular,
personal communications services and SMR licenses, are
automatically deemed to have a universal license under the new
regulatory scheme, and all services currently offered which had
been previously approved by the regulatory authorities are
treated as having been registered. However, to the extent an
existing license holder wishes to offer a new service, the new
service must be registered. In addition, existing license
holders who acquired spectrum under a public bid or auction must
continue to abide by the original terms and conditions under
which the spectrum was granted.
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The regulations do not impose any minimum investment, loading or
other requirements on holders, but to obtain trunking
frequencies they impose certain rules of origin that mandate
that at least 30% of any new infrastructure be of Argentine
origin (see New Spectrum Regulations below). Some
requirements do apply to the launch of a new service, such as a
requirement to launch the service within 18 months from the
date of its registration. The grant of a license is independent
of the resources required to provide a service and specifically
does not include the right to the use of spectrum.
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Network interconnection. The general
principles of the interconnection regulations are:
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freedom of negotiation and agreement between the parties with
respect to prices charged for interconnection, although the
regulations include guidelines which are generally followed in
practice and which can be imposed by the Secretary in the event
of a dispute between parties;
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mandatory provision of interconnection with other carriers so
long as interconnection is technically feasible;
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non-discrimination;
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reciprocal compensation; and
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maintenance of an open architecture to avoid conditions that
would restrict the efficiency of interconnected operators.
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All interconnection agreements entered into must be registered
with the Argentina CNC. Additional requirements may be imposed
on all dominant carriers to ensure that the Argentine
telecommunications market is open to competition.
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Universal service. The regulations establish a
levy equal to 1% of service revenue minus applicable taxes and
specified related costs. The license holder can choose either to
pay the resulting amount into a fund for universal service
development or participate directly in offering services to
specific geographical areas under an annual plan designed by the
federal government, which is known as a pay or play system.
Although regulations state that this levy would be applicable
beginning January 1, 2001, the regulatory authorities have
not taken the necessary actions to implement the levy. However,
Resolution No. 99/05, dated May 5, 2005, issued by the
Secretary of Communications prohibits telecommunications
operators from itemizing the levy in customer invoices or
passing through the levy to customers. In addition, following
the Secretarys instructions in July 2005, the Argentine
CNC has ordered operators, including Nextel Argentina, to return
the levy collected from customers, if any. Nextel Argentina
filed legal actions challenging these regulations. On
October 14, 2005, the Secretary of Communications issued
Resolution No. 301/05, which rejected Nextel
Argentinas claim against Resolution No. 99/05. As a
result, Nextel Argentina was ordered to reimburse the amounts
collected as universal service contributions plus interest
within a
15-day
period. In November 2005, Nextel Argentina filed an
administrative claim and requested a judicial injunction against
this resolution. All current legal actions are pending. See
Note 9 to our consolidated financial statements for more
information.
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Administration of spectrum. The regulations
contain only general principles and guidelines with respect to
the authorization of new spectrum and frequencies. To ensure the
efficient and effective use of spectrum, the Secretary is
empowered to partially or totally revoke awarded spectrum if it
is not used, or if it is not used in accordance with the terms
and conditions under which it was granted. Licenses and spectrum
authorizations may not be transferred nor assigned, in whole or
in part, without prior written approval of regulatory
authorities. Prior authorization is also required upon a change
of control as a result of the transfer of the licensees
capital stock.
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Spectrum regulations. In July 2001, the
Secretary of Communications issued Resolution No. 235/01,
modified by Resolution No. 262/05 SC, which established the
rules under which new spectrum is awarded. New spectrum
authorizations expire in 10 years. In April and October of
each year, authorizations to operate channels are granted
directly or by auction, depending on the number of available
channels existing in each city. Resolution No. 262/05 SC
also imposed certain rules of origin mandating
telecommunications operators that are awarded with new spectrum
authorizations to purchase at least 30% of new infrastructure
from Argentinean source goods. The regulation is not clear as to
the computation of this percentage. Nextel Argentina considers
it has plausible arguments to eventually challenge this rule.
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Foreign Currency Controls and Dividends. On
January 6, 2002, the Argentine Emergency Law
No. 25,561 became effective and formally declared a public
emergency in economic, administrative, financial and exchange
control matters. The law empowered the Federal Executive Power
to regulate those areas until December 10, 2003, subject to
overview by the National Congress. The Emergency Law amended
several provisions of the 1991 Convertibility Law
No. 23,928, the most significant of which was to repeal the
peg of the Argentine peso to the U.S. dollar. The
effectiveness of the Argentine Emergency Law was extended
through December 31, 2006.
On February 3, 2002, the Federal Executive Power issued
Decree No. 214/2002, which reorganized Argentinas
financial system and converted the economy into Argentine pesos.
All obligations to pay, of whatever origin, connected or not
with the financial system, were converted into pesos at the
exchange rate of one Argentine peso to one U.S. dollar.
Moreover, deposits within the financial system were converted
into pesos at the exchange rate of 1.40 Argentine pesos to one
U.S. dollar. These obligations are subject to restatement.
Under existing law, contracts can provide for payment in foreign
currency. However, due to an anti-evasion law, which requires
all amounts over $1,000 to be paid by check, credit card,
deposit or banking transfer, the legal possibility of entering
into contracts in U.S. dollars remains, but the economic
reality is that
18
this would only serve to determine the amount of Argentine pesos
that must be paid on the basis of the free exchange rate.
Pursuant to Decree No. 260/2002, the National Executive
Power and the Argentine Central Bank have placed certain
restrictions on the acquisition of foreign currency by Argentine
and non-Argentine residents and on the inflow and outflow of
capital to and from Argentina, including those for the purposes
of repayment of principal and interest, dividend payments and
repatriation of capital. In addition, there are specific
guidelines that must be complied with in order to make any
repayment of principal or interest to foreign creditors.
According to such regulations, payments of profits and dividends
abroad may be carried out as long as they correspond to
financial statements certified by external auditors. Moreover,
repatriations of capital by non-Argentine residents without an
Argentine Central Banks authorization are restricted to
$5,000 U.S. dollars per month. This limitation does not
apply to any repatriations of capital that are a result of a
final divestiture, in which case, non-Argentine residents may
transfer up to $2 million per month without requiring the
Argentine Central Bank prior authorization.
On June 9, 2005, the Federal Executive Power issued Decree
No. 616/2005, which introduced new restrictions to the
transfer of funds to and from Argentina and created a mandatory
deposit of 30% of the funds transferred to Argentina. Such
decree provides that, under certain circumstances, Argentineans
and foreign nationals transferring funds from abroad to
Argentina are obligated to make a
365-day
registered non-transferable non-interest bearing cash deposit
equal to 30% of the funds transferred by them to Argentina.
Among others, foreign direct investment that is not invested in
the capital or stock markets is exempt from such restricted
deposit requirement.
Under applicable Argentine corporate law, a company may pay
dividends only from liquid and realized profits as shown on the
companys financial statements prepared in accordance with
Argentine generally accepted accounting principles. Of those
profits, 5% must be set aside until a reserve of 20% of the
companys capital stock has been established. Subject to
these requirements, the balance of profits may be declared as
dividends and paid in cash upon a majority vote of the
stockholders. Under current law, dividend payments are not
subject to withholding tax, except when the dividend payments
are the result of profits paid out in excess of the profits
computed for income tax purposes for the financial year
preceding the date of the distribution of such dividends. If
paid in this manner, a 35% withholding tax applies on the amount
of the surplus. Interest payments are subject to withholding
taxes ranging from 15.05% to 35%, unless tax treaty benefits
apply.
Operating Company Overview. We refer to our
wholly-owned Peruvian operating company Nextel del Peru, S.A.,
as Nextel Peru. Nextel Peru provides digital mobile services
under the tradename Nextel in the following major
business centers with a population in excess of 1 million
and along related transportation corridors:
Digital
Lima
Ancash
La Libertad
Lambayeque
Piura
Nextel Peru operates some parallel analog and digital mobile
networks in the metropolitan area of Lima. It also operates an
analog network in the metropolitan area of Arequipa. Nextel Peru
launched digital mobile service in the greater Lima area in June
1999, and extended this service to the entire Department of Lima
by March 2000 and to the Departments of Ica, Ancash and
La Libertad by July 2001. In September 2000, Nextel Peru
began offering analog services in the major business centers of
Arequipa and Lima. In addition, Nextel Peru launched service in
the Department of Lambayeque in January 2003, in the Department
of Piura in April
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2004 and in the Department of Tumbes in May 2005. In December
2005, Nextel Peru obtained a nationwide SMR license.
Nextel Peru has licenses in markets covering about
15 million people. As of December 31, 2005, Nextel
Peru provided service to about 248,500 digital handsets.
Nextel Peru is headquartered in Lima. As of December 31,
2005, Nextel Peru had 673 employees.
Marketing. Nextel Peru offers both a broad
range of service options and pricing plans primarily designed to
meet the specific needs of its targeted business customers. It
currently offers digital two-way radio only plans and integrated
service plans, including two-way radio, interconnect and
internet data services in its digital markets. Nextel Peru also
offers analog two-way radio in its analog markets. Nextel
Perus target customers are primarily businesses with
mobile work forces.
Nextel Peru markets its services through a distribution network
that includes a variety of direct sales representatives and
independent dealers. The development of alternate distribution
channels has been a key factor in its commercial performance.
Additionally, Nextel Peru has used an advertising campaign
supported by press, radio, magazines, billboards, television and
direct marketing to develop brand awareness.
Competition. Nextel Peru competes with all
other providers of mobile services in Peru, including cellular
operator Telefonica Moviles S.A., which, as of October 2004,
acquired and consolidated with the company that was formerly
known as BellSouth Peru S.A., and personal communications
services provider America Movil Peru S.A.C., a subsidiary of
Mexicos America Movil, which in May 2005, won the
C Band in the PCS services auction and, as of August
2005, acquired and consolidated with TIM Peru S.A.C. Telefonica
Moviles S.A. provides nationwide coverage and operates under the
brand name MoviStar. America Movil provides
nationwide coverage and operates under the brand name
Claro.
As of December 31, 2005, Nextel Peru provided service to
about 5% of the total digital handsets in commercial service in
Peru.
We believe that the most important factors upon which Nextel
Peru competes are customer service, a high quality network,
brand recognition, and its differentiated services, primarily
our Direct Connect service, which is available throughout all
areas where Nextel Peru provides digital service. Nextel Peru
primarily targets mobile workforces, including large, mid-size
and small corporations and their respective business networks.
Regulatory and Legal Overview. The Organismo
Supervisor de Inversion Privada en Telecomunicaciones of Peru,
known as OSIPTEL, and the Ministry of Transportation and
Communications of Peru, referred to as the Peruvian Ministry of
Communications, regulate the telecommunications industry in
Peru. OSIPTEL oversees private investments and competition in
the telecommunications industry. The Peruvian Ministry of
Communications grants telecommunications licenses and issues
regulations governing the telecommunications industry. In 1991,
the Peruvian government began to deregulate the
telecommunications industry to promote free and open
competition. The Telecommunications Law of Peru, the general
regulations under that law and the regulations issued by OSIPTEL
govern the operation of SMR services in Peru, which is
considered a public mobile service, in the same category as
cellular and personal communications services operators.
In Peru, SMR service providers are granted
20-year
licenses, which may be extended for an additional
20-year
term, subject to compliance with the terms of the license.
Licenses may be revoked before their expiration for violations
of applicable regulatory and license requirements. Licensees
must also comply with a minimum expansion plan that establishes
the minimum loading and coverage requirements for the licensees,
as well as spectrum targets under the licenses. We believe that
Nextel Peru has met its loading and coverage requirements and
has reached its spectrum targets.
Under the general regulations of Perus telecommunications
law, all public telecommunications service providers have the
right to interconnect to the networks of other providers of
public telecommunications services. Furthermore, interconnection
with these networks must be on an equal and nondiscriminatory
basis. The terms and conditions of interconnection agreements
must be negotiated in good faith between the parties in
accordance with the interconnect regulations and procedures
issued by OSIPTEL. Nextel Peru is presently
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interconnected with all major telecommunications operators in
Peru, including Telefonica del Peru S.A.A., Telefonica Moviles
S.A., American Movil Peru S.A.C. (formerly TIM Peru S.A.C.) and
Telmex Peru S.A. (formerly AT&T Peru S.A.). Peru imposes no
limitation on foreign ownership of SMR or paging licenses or
licensees. In November 2005, OSIPTEL adopted regulations that
resulted in savings in interconnect rates over a three-year
period beginning January 1, 2006.
In 1998, Nextel Peru entered into a
10-year tax
stability agreement with the Peruvian government that suspends
its net operating loss carryforwards from expiring until Nextel
Peru generates taxable income. Once Nextel Peru generates
taxable income, Nextel Peru has four years to utilize those tax
loss carryforwards and any taxable income in excess of the tax
loss carryforwards will be taxed at 30%. During 2005, Nextel
Peru generated taxable income and utilized a portion of the tax
loss carryforwards. The remaining tax loss carryforwards in Peru
will expire on December 31, 2008 if not used by that date.
At this time, we believe it is more likely than not that these
tax loss carryforwards will be fully utilized prior to their
expiration.
Foreign Currency Controls and Dividends. Under
current law, Peruvian currency is freely convertible into
U.S. dollars without restrictions. Peru has a free exchange
market for all foreign currency transactions. On October 1,
1998, Nextel Peru executed a legal stability agreement with the
Peruvian government, which, among other things, guarantees free
conversion of foreign currency for Nextel Peru and its
stockholders for a term of 10 years.
The payment and amount of dividends on Nextel Perus common
stock is subject to the approval of a majority of the
stockholders at a mandatory meeting of its stockholders.
According to Peruvian corporate law, the stockholders may decide
on the distribution of interim dividends or, alternatively,
delegate the decision to the board of directors. Dividends are
also subject to the availability of profits, determined in
accordance with Peruvian generally accepted accounting
principles. Profits are available for distribution only after
10% of pre-tax profits have been allocated for mandatory
employee profit sharing and 10% of the net profits have been set
aside to constitute a legal reserve. This reserve is not
available for use except to cover losses in the profit and loss
statement. This reserve obligation remains until the legal
reserve constitutes 20% of the capital stock once this legal
reserve has been met, the balance of the net profits is
available for distribution.
Operating Companies Overview. We own 100% of
the equity interests in two analog trunking companies in Chile,
Centennial Cayman Corp. Chile S.A. and Multikom S.A. We provide
and market our analog two-way radio service under the brandnames
Centennial and Multikom. In the future,
we intend to build and deploy a small scale digital system in
Santiago and market such services under the brandname
Centennial. These operating companies provide analog
services in the following major business centers with
populations in excess of 1 million and along related
transportation corridors:
Analog
Santiago
Our Chilean companies have licenses in markets covering about
16 million people. As of December 31, 2005, these
companies in Chile provided services to about 4,600 analog
handsets.
These companies are headquartered in Santiago, Chile. As of
December 31, 2005, these companies had 28 employees.
Our Chilean companies currently offer exclusively analog two-way
radio services, focusing on small and medium size companies. We
have received regulatory approvals to deploy a digital mobile
network, which we expect to deploy during 2006 in order to
launch a digital two-way radio service. For additional
information, see Regulatory and Legal
Overview.
Competition. Presently, there are no providers
of digital SMR services in Chile. Competitors in the analog SMR
business in Chile are Gallyas S.A., Mobilink S.A. and
Sharfstein, S.A.
There are also three mobile telephone service providers
authorized to operate throughout Chile. These providers are
Entel Chile, Telefonica Moviles de Chile S.A. and Smartcom S.A.
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Entel Chile, which was formerly controlled by Telecom Italia
Movil, or TIM, has been controlled by Chilean national investors
since 2005 and, through its subsidiaries Entel PCS
Telecomunicaciones S.A. and Entel Telefonica Movil S.A.,
operates two 30MHz concessions in the 1900MHz band with GSM
technology.
Telefonica Moviles de Chile S.A., also known by its commercial
name, Movistar, is controlled by Telefonica Moviles S.A. of
Spain and operates one 25MHz concession in the 800MHz band with
TDMA technology and one 20MHz concession in the 1900MHz band
with GSM/GPRS technology. Additionally, through the acquisition
of all of the assets of BellSouth Chile, S.A., since January
2005, Telefonica Moviles de Chile S.A. also operates one 25MHz
concession in the 800MHz band with TDMA technology and one 10MHz
concession in the 1900 MHz band with CDMA technology. Due
to the high spectrum concentration that resulted from this
acquisition, in January 2005, the Tribunal for the Defense of
Free Competition, also known as the Antitrust Court, ordered
Telefonica Moviles de Chile S.A. to transfer one concession of
25MHz in the 800MHz band. The Antitrust Court gave Telefonica
Moviles de Chile S.A. an
18-month
term from January 2005 to close the transfer.
Telefonica Moviles de Chile S.A. is currently offering a service
commonly known as PTT Movistar. This service, which is based in
Push-To-Talk
over Cellular technology, is competitive with our Direct Connect
service.
Finally, Smartcom S.A. is the third mobile operator in Chile.
Smartcom S.A. was formerly owned by Endesa and was acquired by
America Movil on August 2, 2005. Smartcom S.A. operates a
30MHz concession in the 1900MHz band under the trademark
Smartcom.
Regulatory and Legal Overview. The main
regulatory agency of the Chilean telecommunications sector is
the Ministry of Transportation and Telecommunications (the
Ministry), which acts primarily through the Undersecretary of
Telecommunications (the Undersecretary). The application,
control and interpretation of the provisions of the General
Telecommunications Law and other applicable regulations are the
responsibilities of the Ministry, which usually acts through the
Undersecretary for these purposes. The decisions of the Ministry
and the Undersecretary are subject to review by the Judiciary
and the Chilean Antitrust Court.
Public telecommunications services concessions, including SMR
concessions, may be granted only to legal entities duly
incorporated and domiciled in Chile. However, there is no
restriction or limitation on the participation or ownership of
foreign investors in Chilean public telecommunications services
concessionaires.
As a general rule, telecommunications concessions are granted in
Chile without any initial payment of fees. However,
telecommunications concessionaires that are granted the right to
use the radioelectric spectrum for the operation of their
respective concessions, such as SMR concessionaires, are subject
to a spectrum annual fee. The amount of the fee is based on the
size of the applicable system, the portion of the spectrum
utilized and the service area that has been authorized.
Telecommunications concessions are not limited as to their
number, type of service or geographical area. Therefore, it is
possible to grant two or more concessions for the provision of
the same service on the same location, except where technical
limitations exist. Concessions for the provision of public
telecommunications services are generally granted for a
30-year
period. These concessions may be renewed for additional
30-year
periods if requested by the concessionaire.
In Chile, concessionaires of public telecommunications services
and concessionaires of long distance telephonic services are
required by law to establish and accept interconnections with
each other. These interconnections allow subscribers and users
of public telecommunications services of the same type to make
and receive calls from and to the public switched telephone
network inside and outside of Chile. Telecommunications services
of the same type are all those that are technically compatible
with each other. The Undersecretary determines which
telecommunications services are technically compatible. The
interconnection must be performed according to the technical
rules, procedures and terms established by the Undersecretary.
The Undersecretary has issued regulations relating to the
interconnection of public telephone networks with other public
telecommunications services of the same type. On
January 31, 2001, the Undersecretary published a new
technical rule related to the provision of digital SMR services.
However, under these regulations, even if services are
determined to be of the same type, providers of public
telecommunications services may not be
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interconnected to the public telephone networks unless their
concessions expressly authorize interconnection, which in many
cases, including some of ours, requires an amendment to the
concession.
Additionally, under new regulations, providers of public
telecommunications services of the same type that are authorized
to be interconnected with public telephone networks are also
able to request the assignment of specific numbering blocks for
their subscribers. New rules governing routing procedures have
also been adopted. As with interconnection, a provider of public
telecommunications services of the same type must be
specifically authorized in its concessions to interconnect
before obtaining numbering. Our operating companies have been
granted numbering blocks.
SMR concessionaires may freely determine the fees charged to
their subscribers. However, the fees and tariffs charged by a
telecommunications concessionaire to other telecommunications
concessionaires for the services rendered through
interconnections, including the access fees, must be fixed by
the authorities. The authorities fix the access fees in
accordance with a tariff-setting procedure based upon, among
other things, the cost structure, including expansion plans, of
an efficient concessionaire, as set forth in the General
Telecommunications Law. This procedure is necessary for the
mandatory application of the calling-party-pays system among the
telecommunications concessionaires. The tariff-setting procedure
for our operating companies began on August 19, 2004 and
ended on July 22, 2005 when the Minister of Transports and
Telecommunications jointly with the Minister of Economy issued
two Tariff Decrees, one for each operating company. These Tariff
Decrees will be in effect for five years from its publication in
the official Gazette, which occurred on September 12, 2005.
In order to provide digital SMR services in Chile, incorporate
digital technology to the networks of our Chilean operating
companies and obtain the corresponding authorization to
interconnect such networks to the publicly switched telephone
network, in 2001, our Chilean operating companies have filed for
the amendment of a group of SMR concessions totaling 130
channels according to the procedures established in the General
Telecommunications Law. In accordance with these procedures,
third parties exercised the right to file oppositions against
the corresponding concessions amendment applications. The
Ministry rejected all such oppositions and granted us the
requested amendment to such concessions, authorizing the
deployment of an iDEN network and to interconnect such network
to the publicly switched telephone network. Appeals of the
Ministrys resolution rejecting the oppositions and
granting the requested amendments were filed before the Court of
Appeals of Santiago and later, before the Supreme Court, and
were rejected at both stages. On April 26, 2004, the
decrees amending the concessions where published in the official
gazette ending the amendment process.
Since the publication in the official gazette of the new decrees
amending our analog concessions and authorizing us to offer
digital service, we originally had a period of 14 to
28 months to build the network. However, in April 2005, we
obtained a two-year extension of the build-out deadline. If the
digital network is not built within this extended timeframe and
we cannot obtain a new extension, we may be sanctioned by the
Chilean authorities with a written admonition or fines up to
approximately US $52,934, and potentially lose our
authorization to install, operate and render digital service in
Santiago and Valparaiso. If we lose the authorization, we would
be able to request it again. The granting of the new
authorization, however, would be again subject to third party
oppositions.
On November 21, 2002, the 29th Civil Court of Santiago
issued two judgments which declared as void concessions totaling
150 channels in Santiago owned by our operating companies,
Centennial Cayman Corporation Chile S.A. and Multikom S.A.,
pursuant to a claim by the competition that these channels were
not originally awarded through public auction. We appealed these
judgments on December 3, 2002, and this appeal was
dismissed in December 2004. The Chilean government and our
Chilean companies filed a special remedy before the Supreme
Court to overturn this ruling. The case is currently pending
before the Supreme Court. In the event that the Supreme Court
does not overturn the ruling, we cannot be sure of the impact
that a final negative decision could have on our operations.
These 150 channels are not part of the 130 channels to which
digitalization and interconnection has already been granted and
which we expect to deploy during 2006.
Foreign Currency Controls and Dividends. The
purchase and sale of foreign currency in Chile is not subject to
governmental control. Accordingly, any person may freely engage
in foreign exchange transactions.
23
There are two foreign exchange markets in Chile. The first is
the formal exchange market, which is subject to the regulations
of the Chilean Central Bank and which consists of banks and
other entities authorized to participate in the market by the
Central Bank. This market is generally used for trade-related
transactions, such as import and export transactions, regulated
foreign currency investments and other transactions, such as
remittances abroad. Purchases and sales of foreign exchange may
be effected in the formal or the informal exchange markets. The
informal exchange market consists of entities not expressly
authorized to operate in the formal exchange market, such as
foreign exchange houses and travel agencies. Both markets
operate at floating rates freely negotiated between the
participants. There are no limits imposed on the extent to which
the informal exchange rate can fluctuate above or below the
formal exchange rate or the observed exchange rate. The observed
exchange rate is the official exchange rate determined each day
by the Central Bank based on the average exchange rates observed
in the formal exchange market.
Foreign investments in Chile are subject to exchange controls.
The investment of capital exceeding US $10,000 in Chile and
the repatriation of the investment and its profits must be
carried out under either Decree Law No. 600 or under
Chapter XIV of the Compendium of Foreign Exchange
Regulations issued by the Central Bank of Chile under the
Central Bank Act. Foreign funds registered under Decree Law
No. 600 provide specified guarantees with respect to the
ability to repatriate funds and the stability of the applicable
tax regime. Decree Law No. 600 permits foreign investors to
access the formal exchange market to repatriate their
investments and profits.
Access to the formal exchange market to repatriate investments
and profits derived from investments conducted under
Chapter XIV rules are governed by regulations in force and
effect at the time of repatriation.
The foreign investment regulations may permit foreign investors
to access the formal exchange market to repatriate their
investments and profits as stated above. They do not, however,
necessarily guarantee that foreign currency will be available in
the market.
Under Chilean corporate law, corporations, such as our Chilean
companies, may distribute dividends among their stockholders
only from the net profits of a specific fiscal year or from
retained profits recognized by balance sheets approved by the
stockholders meeting. However, if the company has
accumulated losses, profits of that corporation must first be
allocated to cover the losses. Losses in a specific fiscal year
must be offset with retained profits, if any.
Unless otherwise agreed at a stockholders meeting by the
unanimous vote of all issued shares, publicly traded
corporations must annually distribute at least 30% of the net
profits of each fiscal year. This distribution must be in the
form of a cash dividend to their stockholders in proportion to
their ownership or as otherwise stated in the bylaws. Privately
held corporations, such as our Chilean operating companies, must
follow the provisions of their bylaws; if the bylaws do not
contain these provisions, the rules described above for the
distribution of profits by publicly traded stock corporations
apply. As a general rule, any dividend distributed or remitted
by the operating companies to their shareholders abroad will be
subject to a 35% withholding tax rate. In such a case, the
operating companies shareholders will be entitled to a tax
credit equivalent to the corporate tax rate paid by the
operating companies on the income distributed or remitted
abroad. Such corporate tax rate is equivalent to 17%. This
credit must be added back in order to compute the taxable basis
of the withholding tax.
In any event, the board of directors may distribute provisional
dividends if the corporation has no accumulated losses, subject
to the personal responsibility of the directors approving the
distributions.
As of December 31, 2005, we had 117 employees at the
corporate level, and our operating companies had about 5,900
employees. Our Brazilian operating company is a party to a
collective bargaining agreement that covers all of its employees
and expires on April 30, 2006. Neither we nor any of our
other operating companies is a party to any collective
bargaining agreement. We believe the relationship between us and
our employees, and between each of our operating companies and
its employees, is good.
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Item 1A. Risk
Factors
Investors should be aware of various risks, including the risks
described below. Our business, financial condition or results of
operations could be materially adversely affected by any of
these risks. The trading price of our common stock could decline
due to any of these risks, and investors may lose all or part of
any investment. Our actual results could differ materially from
those anticipated in these forward-looking statements as a
result of certain factors, including the risks faced by us
described below and included elsewhere. Please note that
additional risks not presently known to us or that we currently
deem immaterial may also impair our business and operations.
If
we are not able to compete effectively in the highly competitive
wireless communications industry, our future growth and
operating results will suffer.
Our success will depend on the ability of our operating
companies to compete effectively with other telecommunications
services providers, including wireline companies and other
wireless telecommunications companies, in the markets in which
they operate.
Some of our competitors are financially stronger than we are,
which may limit our ability to compete based on price.
Because of their resources, and in some cases ownership by
larger companies, some of our competitors may be able to offer
services to customers at prices that are below the prices that
our operating companies can offer for comparable services. If we
cannot compete effectively based on the price of our service
offerings, our results of operations may be adversely affected.
For example, many of our competitors are well-established
companies that have:
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substantially greater financial and marketing resources;
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larger customer bases;
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better name recognition;
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bundled service offerings;
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larger spectrum positions; and
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larger coverage areas than those of our operating companies.
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Further, significant price competition could negatively impact
our operating results and our ability to attract and retain
customers. In addition, we anticipate that our operating
companies will continue to face market pressure to reduce the
prices charged for their products and services because of
increased competition in our markets.
Our operating companies may face disadvantages when competing
against formerly government-owned incumbent wireline operators
or wireless operators affiliated with them.
In some markets, our operating companies may not be able to
compete effectively against a formerly government-owned monopoly
telecommunications operator, which today enjoys a near monopoly
on the provision of wireline telecommunications services and may
have a wireless affiliate or may be controlled by shareholders
who also control a wireless operator. Our operating companies
may be at a competitive disadvantage in these markets because
formerly government-owned incumbents or affiliated competitors
may have:
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close ties with national regulatory authorities;
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control over connections to local telephone lines; or
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the ability to subsidize competitive services with revenues
generated from services they provide on a monopoly or
near-monopoly basis.
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Our operating companies may encounter obstacles and setbacks if
local governments adopt policies favoring these competitors or
otherwise afford them preferential treatment. As a result, our
operating companies may be at a competitive disadvantage to
incumbent providers, particularly as our operating companies
seek to offer new telecommunications services.
Our coverage is not as extensive as those of other wireless
service providers in our markets, which may limit our ability to
attract and retain customers.
Since our digital mobile networks do not offer nationwide
coverage in the countries in which we operate and our technology
limits our potential roaming partners, we may not be able to
compete effectively with cellular and personal communications
services providers in our markets. Many of the cellular and
personal communications services providers in our markets have
networks with substantially more extensive areas of service.
Additionally, many of these providers have entered into roaming
agreements with each other, which permit these providers to
offer coverage to their subscribers in each others
markets. The iDEN technology that we deploy is not compatible
with other wireless technologies such as digital cellular or
personal communications services technologies or with other iDEN
networks not operating in the 800 MHz spectrum. As a
result, with the exception of GSM 900 MHz systems, we
cannot enter into roaming agreements with the operators of these
other networks. Although the i2000 digital phone that we sell is
compatible with both iDEN 800 MHz and GSM 900 MHz
systems, our customers will not be able to roam on other iDEN
800 MHz or GSM 900 MHz systems where we do not have a
roaming agreement. As a result, we will not be able to provide
coverage to our subscribers outside of our currently operating
digital markets until:
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other operators deploy iDEN 800 MHz or GSM 900 MHz
technology in markets outside of our coverage areas and we enter
into roaming agreements with those operators; or
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handsets that can be used on both iDEN 800 MHz and non-GSM
900 MHz wireless communications networks become available
and we enter into roaming agreements with the operators of those
networks.
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If we do not keep pace with rapid technological changes, we
may not be able to attract and retain customers.
The wireless telecommunications industry is experiencing
significant technological change. Future technological
advancements may enable other wireless technologies to equal or
exceed our current level of service and render iDEN technology
obsolete. If Motorola, the sole supplier of iDEN technology, is
unable or unwilling to upgrade or improve iDEN technology or
develop other technology to meet future advances in competing
technologies on a timely basis, or at an acceptable cost, we
will be less able to compete effectively and could lose
customers to our competitors. In addition, competition among the
differing wireless technologies could:
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segment the user markets, which could reduce demand for our
technology; and
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reduce the resources devoted by third-party suppliers, including
Motorola, which supplies all of our current digital mobile
technology, to developing or improving the technology for our
systems.
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If our wireless communications technology does not perform in
a manner that meets customer expectations, we will be unable to
attract and retain customers.
Customer acceptance of the services we offer is and will
continue to be affected by technology-based differences and by
the operational performance and reliability of our digital
mobile networks. We may have difficulty attracting and retaining
customers if we are unable to address and resolve satisfactorily
performance or other transmission quality issues as they arise
or if these issues:
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limit our ability to expand our network coverage or capacity as
currently planned; or
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place us at a competitive disadvantage to other wireless service
providers in our markets.
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Our equipment is more expensive than that of some
competitors, which may affect our ability to establish and
maintain a significant subscriber base.
We currently market multi-function digital handsets, and
Motorola is the sole supplier of all our handsets. The higher
cost of our equipment may make it more difficult for us to
attract customers. In addition, the higher cost of our handsets
requires us to absorb a comparatively larger part of the cost of
offering handsets to new and existing customers. These higher
costs of handsets place us at a competitive disadvantage and may
reduce our growth and profitability.
We may lose a competitive advantage because our competitors
are providing two-way radio dispatch and other services.
We differentiate ourselves by providing two-way radio dispatch
push-to-talk
services. Several of our competitors have introduced
Push-To-Talk
over Cellular service, which is a walkie-talkie type of service
similar to our Direct Connect service. In addition, we do not
have short messaging system (SMS) interoperability agreements in
all our markets. Consequently, our competitive advantage may be
impaired.
Because
we rely on one supplier to implement our digital mobile
networks, any failure of that supplier to perform could
adversely affect our operations.
Motorola is currently our sole source for most of the digital
network equipment and all of the handsets used throughout our
markets. In addition, iDEN technology is a proprietary
technology of Motorola, meaning that there are no other
suppliers of this technology, and it is the only widespread,
commercially available digital technology that operates on
non-contiguous spectrum. Much of the spectrum that our operating
companies hold in each of the markets we serve is
non-contiguous. The non-contiguous nature of our spectrum may
make it more difficult for us to migrate to a new technology if
we choose to do so. Additionally, if Motorola fails to deliver
system infrastructure equipment and handsets or enhancements on
a timely, cost-effective basis, we may not be able to adequately
service our existing customers or add new customers. Nextel
Communications, a subsidiary of SprintNextel Corporation, is the
largest customer of Motorola with respect to iDEN technology and
provides significant support with respect to new product
development. Nextel Communications and Sprint merged on
August 12, 2005, and as a result, Nextel Communications
became a subsidiary of Sprint Nextel. The new combined company
had previously announced plans to migrate Nextels
push-to-talk
services to a next generation CDMA network platform. Nextel
Communications had also announced an agreement with Motorola for
a three-year extension of its iDEN infrastructure supply
agreement and handset purchase agreement, with certain
modifications. Any decrease by Nextel Communications in its use
of iDEN technology could significantly increase our costs for
equipment and new developments and could impact Motorolas
decision to continue to support iDEN technology. In the event
Motorola determines not to continue manufacturing, supporting or
enhancing our iDEN based infrastructure and handsets, because
Nextel Communications decreases its use of iDEN technology or
otherwise, we may be materially adversely affected. We expect to
continue to rely principally on Motorola for the manufacture of
a substantial portion of the equipment necessary to construct,
enhance and maintain our digital mobile networks and for the
manufacture of handsets for the next several years.
We
operate exclusively in foreign markets, and our assets,
customers and cash flows are concentrated in Latin America,
which presents risks to our operating and financing
plans.
We face political and economic risks in our markets, which
may limit our ability to implement our strategy and our
financial flexibility and may disrupt our operations.
The countries in which we operate are considered to be emerging
markets. Although political, economic and social conditions
differ in each country in which we currently operate, political
and economic developments in one country may affect our business
as a whole, including our access to international capital
markets. Negative developments or unstable conditions in the
countries in which we operate or in other emerging market
countries could have a material adverse effect on our financial
condition and results of operations. In Peru, for example, there
was significant terrorist activity in the 1980s and the early
1990s. During that time, anti-government groups escalated
violence against the government, the private sector and
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Peruvian residents. Incidents of terrorist activity continue to
occur. Similar outbreaks of terrorism or political violence have
occurred in Mexico and other countries in which we operate. In
addition, in 2001, after prolonged periods of recession followed
by political instability, the Argentine government announced it
would not service its public debt. In order to address the
worsening economic and social crisis, the Argentine government
abandoned its decade-old fixed Argentine peso-U.S. dollar
exchange rate, allowing the currency to float to market levels.
During 2006, there will be presidential elections held in three
of our major markets. We are unable to predict the impact that
presidential or other contested local or national elections and
the associated transfer of power from incumbent officials or
political parties to elected victors, may have on the local
economy or the growth and development of the local
telecommunications industry. Changes in leadership or in the
ruling party in the countries in which we operate may affect the
economic programs developed under the prior administration,
which in turn, may adversely affect the economies in the
countries in which we operate and our business operations and
prospects in these countries.
Due to our significant operations in Argentina and Brazil,
our business is particularly exposed to risks associated with
adverse economic and political conditions in those countries.
In recent years, both Argentina and Brazil have been negatively
affected by volatile economic and political conditions. These
volatile conditions pose risks for our business. In particular,
the volatility of the Argentine peso and the Brazilian real has
affected our recent financial results. The depreciation of the
currencies in Argentina and Brazil in 2002 had a material
negative impact on our financial results.
Argentina. After a prolonged period of
recession, followed by political instability, Argentina
announced in December 2001 that it would impose tight
restrictions on bank accounts, would not service its public
sector debt and suspended foreign currency trading. In January
2002, the Argentine government abandoned its decade-old fixed
Argentine peso-U.S. dollar exchange rate. The resulting
depreciation of the Argentine peso against the U.S. dollar
during the 2002 calendar year was 66%. A depreciation of the
Argentine peso generally affects our consolidated financial
statements by generating a foreign currency transaction loss on
U.S. dollar-denominated debt. Until October 31, 2002,
the liabilities of our Argentine operating company included
U.S. dollar-denominated secured debt, for which we
recognized foreign currency transaction losses of
$137.5 million for the ten months ended October 31,
2002. A depreciation of the Argentine peso also affects our
consolidated financial statements by reducing the translation
rate of all Argentine peso-denominated balances. To the extent
net income is generated by our Argentine operating company, the
amount would be reduced by a depreciation of the Argentine peso.
Brazil. The Brazilian economy has been
characterized by frequent and occasionally drastic intervention
by the Brazilian government and by volatile economic cycles. The
Brazilian government has often changed monetary, taxation,
credit, tariff and other policies to influence the course of
Brazils economy. In early 1999, the Brazilian government
allowed the Brazilian real to float freely, resulting in a 32%
depreciation against the U.S. dollar that year. In 2002,
the Brazilian real depreciated against the U.S. dollar by
18%.
In addition, economic and market conditions in other emerging
markets can influence the perception of Brazils economic
and political situation.
We are subject to fluctuations in currency exchange rates and
limitations on the expatriation or conversion of currencies,
which may result in significant financial charges, increased
costs of operations or decreased demand for our products and
services.
Nearly all of our revenues are earned in
non-U.S. currencies,
while a significant portion of our capital and operating
expenditures, including imported network equipment and handsets,
and substantially all of our outstanding debt, is priced in
U.S. dollars. In addition, we report our results of
operations in U.S. dollars. Accordingly, fluctuations in
exchange rates relative to the U.S. dollar could have a
material adverse effect on our earnings or assets. For example,
the 1999 and 2002 currency devaluations in Brazil resulted in
significant charges against our earnings in 1999 and 2002 and
negative adjustments to the carrying value of our assets in
Brazil. The economic upheaval in Argentina in 2002 led to the
unpegging of the Argentine peso to the U.S. dollar exchange
rate and the subsequent significant devaluation of the Argentine
peso, which resulted in
28
charges against our earnings in 2002 and negative adjustments to
the carrying values of our assets in Argentina.
Any depreciation of local currencies in the countries in which
our operating companies conduct business may result in increased
costs to us for imported equipment and may, at the same time,
decrease demand for our products and services in the affected
markets. If our operating companies distribute dividends in
local currencies in the future, the amount of cash we receive
will also be affected by fluctuations in exchange rates and
currency devaluations. In addition, some of the countries in
which we have operations do or may restrict the expatriation or
conversion of currency.
Our operating companies are subject to fluctuating economic
conditions in the local markets in which they operate, which
could hurt their performance.
Our operations depend on the economies of the markets in which
our operating companies conduct business. These markets are in
countries with economies in various stages of development or
structural reform, some of which are subject to rapid
fluctuations in terms of commodity prices, local consumer
prices, employment levels, gross domestic product, interest
rates and inflation rates. If these fluctuations have an effect
on the ability of customers to pay for our products and
services, our business may be adversely affected. As a result,
our operating companies may experience lower demand for their
products and services and a decline in the growth of their
customer base and in revenues.
Some of our operating companies conduct business in countries
where the rate of inflation is significantly higher than in the
United States. Any significant increase in the rate of inflation
in any of these countries may not be completely or partially
offset by corresponding price increases implemented by our
operating companies, even over the long term.
Our operating companies are subject to local laws and customs
in the countries in which they operate, which could impact our
financial results.
Our operations are subject to local laws and customs in the
countries in which we operate, which may differ from those in
the U.S. We could become subject to legal penalties in foreign
countries if we do not comply with local laws and regulations,
which may be substantially different from those in the United
States. In some foreign countries, particularly in those with
developing economies, persons may engage in business practices
that are prohibited by United States regulations applicable to
us such as the Foreign Corrupt Practices Act. Although we
implement policies and procedures designed to ensure compliance
with these laws, there can be no assurance that all of our
employees, consultants, contractors and agents will not take
actions in violations of our policies. Any such violation, even
if prohibited by our policies, could have a material adverse
effect on our business.
We pay significant import duties on our network equipment and
handsets, and any increases could impact our financial
results.
Our operations are highly dependent upon the successful and
cost-efficient importation of network equipment and handsets
from North America and, to a lesser extent, from Europe and
Asia. Any significant increase in import duties in the future
could significantly increase our costs. To the extent we cannot
pass these costs on to our customers, our financial results will
be negatively impacted. In the countries in which our operating
companies conduct business, network equipment and handsets may
be subject to significant import duties and other taxes.
We are subject to foreign taxes in the countries in which we
operate, which may reduce amounts we receive from our operating
companies or may increase our tax costs.
Many of the foreign countries in which we operate have
increasingly turned to new taxes, as well as aggressive
interpretations of current taxes, as a method of increasing
revenue. For instance, Brazil has a tax on financial
transactions, certain provinces in Argentina adopted higher tax
rates on telecommunications services in 2001, and Argentina
adopted a federal universal services tax in 2001. The provisions
of new tax laws may attempt to prohibit us from passing these
taxes on to our customers. These taxes may reduce the amount of
earnings that we can generate from our services.
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Distributions of earnings and other payments, including
interest, received from our operating companies may be subject
to withholding taxes imposed by some countries in which these
entities operate. Any of these taxes will reduce the amount of
after-tax cash we can receive from those operating companies.
In general, a U.S. corporation may claim a foreign tax
credit against its Federal income tax expense for foreign
withholding taxes and, under certain circumstances, for its
share of foreign income taxes paid directly by foreign corporate
entities in which the company owns 10% or more of the voting
stock. Our ability to claim foreign tax credits is, however,
subject to numerous limitations, and we may incur incremental
tax costs as a result of these limitations or because we do not
have U.S. Federal taxable income.
We may also be required to include in our income for
U.S. Federal income tax purposes our proportionate share of
specified earnings of our foreign corporate subsidiaries that
are classified as controlled foreign corporations, without
regard to whether distributions have been actually received from
these subsidiaries.
Nextel Brazil has received tax assessment notices from state and
federal Brazilian tax authorities asserting deficiencies in tax
payments related primarily to value added taxes, import duties
and matters surrounding the definition and classification of
equipment and services. Nextel Brazil has filed various
petitions disputing these assessments. In some cases we have
received favorable decisions, which are currently being appealed
by the respective governmental authorities. In other cases, our
petitions have been denied and we are currently appealing those
decisions. We currently estimate the range of possible losses
related to matters for which Nextel Brazil has not accrued
liabilities, as they are not deemed probable, to be between
$74.1 million and $78.1 million as of
December 31, 2005.
We have entered into a number of agreements that are subject
to enforcement in foreign countries, which may limit efficient
dispute resolution.
A number of the agreements that we and our operating companies
enter into with third parties are governed by the laws of, and
are subject to dispute resolution in the courts of or through
arbitration proceedings in, the countries or regions in which
the operations are located. We cannot accurately predict whether
these forums will provide effective and efficient means of
resolving disputes that may arise. Even if we are able to obtain
a satisfactory decision through arbitration or a court
proceeding, we could have difficulty enforcing any award or
judgment on a timely basis. Our ability to obtain or enforce
relief in the United States is also uncertain.
Government
regulations determine how we operate in various countries, which
could limit our growth and strategic plans.
In each market in which we operate, one or more regulatory
entities regulate the licensing, construction, acquisition,
ownership and operation of our wireless communications systems.
Adoption of new regulations, changes in the current
telecommunications laws or regulations or changes in the manner
in which they are interpreted or applied could adversely affect
our operations. Because of the uncertainty as to the
interpretation of regulations in some countries in which we
operate, we may not always be able to provide the services we
have planned in each market. In some markets, we are unable, or
have limitations on our ability, to offer some services, such as
interconnection to other telecommunications networks and
participation in calling party pays programs, which may increase
our net costs. Further, the regulatory schemes in the countries
in which we operate allow third parties, including our
competitors, to challenge our actions. For instance, some of our
competitors have challenged the validity of some of our licenses
or the scope of services we provide under those licenses, in
administrative or judicial proceedings, particularly in Chile.
It is possible that, in the future, we may face additional
regulatory prohibitions or limitations on our services.
Inability to provide planned services could make it more
difficult for us to compete in the affected markets. Further,
some countries in which we conduct business impose foreign
ownership limitations upon telecommunications companies.
Finally, in some of our markets, local governments have adopted
very stringent rules and regulations related to the placement
and construction of wireless towers, which can significantly
impede the planned expansion of our service coverage area,
eliminate existing towers and impose new and onerous taxes and
fees. These issues affect our ability to operate in each of our
markets, and therefore impact our business strategies. In
addition, local governments have placed embargoes on a number of
our cell sites owned by our operating companies in
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Argentina and Brazil. If we are not able to successfully
overcome these embargoes, we may have to remove the cell sites
and find a more acceptable location. See the Regulatory
and Legal Overview discussion for each operating company
under Business I. Operating
Companies.
If
our licenses to provide mobile services are not renewed, or are
modified or revoked, our business may be
restricted.
Wireless communications licenses and spectrum allocations are
subject to ongoing review and, in some cases, to modification or
early termination for failure to comply with applicable
regulations. If our operating companies fail to comply with the
terms of their licenses and other regulatory requirements,
including installation deadlines and minimum loading or service
availability requirements, their licenses could be revoked.
Further, compliance with these requirements is a condition for
eligibility for license renewal. Most of our wireless
communications licenses have fixed terms and are not renewed
automatically. Because governmental authorities have discretion
as to the grant or renewal of licenses, our licenses may not be
renewed or, if renewed, renewal may not be on acceptable
economic terms. For example, under existing regulations, our
licenses in Brazil and Peru are renewable once, but no
regulations presently exist regarding how or whether additional
renewals will be granted.
Any
modification or termination of our license or roaming agreements
with Nextel Communications could increase our
costs.
Nextel Communications has licensed to us the right to use
Nextel and other of its trademarks on a perpetual
royalty-free basis in Latin America. However, Nextel
Communications may terminate the license on 60 days notice
if we commit one of several specified defaults (namely, failure
to maintain agreed quality controls or a change in control of
NII Holdings). If there is a change in control of one of our
subsidiaries, upon 30 days notice, Nextel Communications
may terminate the sublicense granted by us to the subsidiary
with respect to the licensed marks. The loss of the use of the
Nextel tradename could have a material adverse
effect on our operations. We also depend upon our roaming
agreements with Nextel Communications for access to its iDEN
network in the United States.
We
have identified material weaknesses in our internal control over
financial reporting.
As required by Section 404 of the Sarbanes-Oxley Act of
2002, our management has conducted an assessment of our internal
control over financial reporting. As defined under the rules
implementing Section 404, internal control over financial
reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. To
evaluate the effectiveness of our internal control over
financial reporting, management uses the criteria described in
Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
In our 2004 annual report on
Form 10-K
and our quarterly reports on
Form 10-Q
for the quarters ended March 31, 2005, June 30, 2005
and September 30, 2005, we provided a detailed description
of two material weaknesses over internal control over financial
reporting we had identified at the time. In this 2005 annual
report on
Form 10-K,
we continue to identify the existence of one material weakness
in our internal controls over financial reporting. A material
weakness is a significant deficiency or a combination of
significant deficiencies that results in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. Based on
the material weaknesses we identified, and in accordance with
the PCAOB standards, we concluded that our internal control over
financial reporting was not effective as of the dates of the
applicable quarterly and annual reports.
We are in the process of developing and implementing remedial
measures to address the material weakness in our internal
control over financial reporting. We have extensive work
remaining to test the remedial measures and to remedy this
material weakness. There can be no assurance as to when the
remediation plan will be implemented and successfully tested.
Until our remedial efforts are completed, we
31
will continue to incur the expenses and management burdens
associated with the additional resources and oversight required
to prepare our consolidated financial statements.
If
we fail to maintain an effective system of internal controls, we
may not be able to accurately report our financial results or
prevent fraud. As a result, current and potential stockholders
could lose confidence in our financial reporting, which would
harm our business and the trading price of our
stock.
Effective internal controls are necessary for us to provide
reliable financial reports and effectively prevent fraud.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree
of compliance with the policies or procedures may deteriorate.
We have in the past discovered, and may in the future discover,
areas of our internal controls that need improvement. As
initially discussed in our 2004 annual report on
Form 10-K,
we identified a material weakness related to the accounting for
income taxes as a result of our assessment of internal controls
over financial reporting in 2004 and in 2005. We are continuing
to work to improve our internal controls. We cannot be certain
that these measures will ensure that we implement and maintain
adequate controls over our financial processes and reporting in
the future. Any failure to implement required new or improved
controls or difficulties encountered in their implementation
could harm our operating results or cause us to fail to meet our
reporting obligations. Inadequate internal controls could also
cause investors to lose confidence in our reported financial
information, which could have a negative effect on the trading
price of our stock.
Our
debt limits our flexibility and increases our risk of
default.
Our debt could have important consequences to you, such as:
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limiting our flexibility in planning for, or reacting to,
changes in our business and the industries in which we compete
and increasing our vulnerability to general adverse economic and
industry conditions; and
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limiting our ability to obtain additional financing that we may
need to fund future working capital, capital expenditures,
product development, acquisitions or other corporate
requirements.
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As of December 31, 2005, the book value of our long-term
debt was $1,148.8 million, including $350.0 million of
2.75% convertible notes due 2025, $300.0 million of
2.875% convertible notes due 2034, $91.5 million of
3.5% convertible notes due 2033, $232.4 million for a
syndicated loan facility, $124.8 million in obligations
associated with the sale and leaseback of communication towers,
$42.5 million in capital lease obligations and $7.6 million
in spectrum license financing in Brazil.
Our ability to meet our debt obligations and to reduce our
indebtedness will depend on our future performance. Our
performance, to a certain extent, is subject to general economic
conditions and financial, business, political and other factors
that are beyond our control. We cannot assure you that we will
continue to generate cash flow from operations at or above
current levels, that we will be able to meet our cash interest
payments on all of our debt or that the related assets currently
owned by us can be sustained in the future.
If our business plans change, including as a result of changes
in technology, or if we decide to offer new communication
services or expand into new markets or further in our existing
markets, as a result of the construction of additional portions
of our network or the acquisition of competitors or others, or
if economic conditions in any of our markets generally, or
competitive practices in the mobile wireless telecommunications
industry change materially from those currently prevailing or
from those now anticipated, or if other presently unexpected
circumstances arise that have a material effect on the cash flow
or profitability of our mobile wireless business, then the
anticipated cash needs of our business as well as the
conclusions presented herein as to the adequacy of the available
sources of cash and timing on our ability to generate net income
could change significantly. Any of these events or circumstances
could involve significant additional funding needs in excess of
the identified currently available sources, and could require us
to raise additional capital to meet those needs. In addition, we
continue to assess the opportunities to raise additional funding
on attractive terms
32
and conditions and at times that do not involve any of these
events or circumstances and may do so if the opportunity
presents itself. However, our ability to seek additional
capital, if necessary, is subject to a variety of additional
factors that we cannot presently predict with certainty,
including:
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the commercial success of our operations;
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the volatility and demand of the capital markets; and
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the future market prices of our securities.
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If we are unable to generate cash flow from operations in the
future to service our debt, we may try to refinance all or a
portion of our debt. We cannot assure you that sufficient future
borrowings will be available to pay or refinance our debt.
Our
financing agreements have had and may contain covenants that
limit how we conduct our business, which may affect our ability
to grow as planned.
As a result of restrictions that have been contained in certain
of our financing agreements and may be contained in future
financing agreements, we may be unable to raise additional
financing, compete effectively or take advantage of new business
opportunities. This may affect our ability to generate revenues
and profits. Our current financing agreements have, and any
future financing agreements may contain, covenants that limit
how we conduct business by restricting our ability to:
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incur or guarantee additional indebtedness;
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pay dividends and make other distributions;
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prepay subordinated indebtedness;
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make investments and other restricted payments;
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enter into sale and leaseback transactions;
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create liens;
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sell assets; and
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engage in transactions with affiliates.
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We
have significant intangible assets that are not likely to
generate adequate value to satisfy our obligations in the event
of liquidation.
If we were liquidated, the value of our assets likely would not
be sufficient to satisfy our obligations. We have a significant
amount of intangible assets, such as licenses. The value of
these licenses will depend significantly upon the success of our
digital mobile network business and the growth of the SMR and
wireless communications industries in general. Moreover, the
transfer of licenses in liquidation would be subject to
governmental or regulatory approvals that may not be obtained or
that may adversely impact the value of such licenses. Our net
tangible book value was $727.8 million as of
December 31, 2005.
Agreements
with Motorola reduce our operational flexibility and may
adversely affect our growth or operating results.
We have entered into agreements with Motorola that impose
limitations and conditions on our ability to use other
technologies that would displace our existing iDEN digital
mobile networks. These agreements may delay or prevent us from
employing new or different technologies that perform better or
are available at a lower cost because of the additional economic
costs and other impediments to change arising under the Motorola
agreements. For example, our infrastructure supply and
installation services agreements with Motorola require that we
must provide Motorola with notice of our determination that
Motorolas technology is no longer suited to our needs at
least six months before publicly announcing or entering into a
contract to purchase equipment utilizing an alternate technology.
In addition, if Motorola manufactures, or elects to manufacture,
the equipment utilizing the alternate technology that we elect
to deploy, we must give Motorola the opportunity to supply 50%
of our infrastructure
33
requirements for the equipment utilizing the alternate
technology for three years. This may limit our ability to
negotiate with an alternate equipment supplier.
We may
not be able to finance a change of control offer.
Upon the occurrence of certain kinds of change of control
events, we may be required to repurchase the majority of the
principal amount of all of our outstanding debt. However, it is
possible that we will not have sufficient funds at the time of
the change of control to make the required repurchase of our
convertible notes.
Concerns
about health risks associated with wireless equipment may reduce
the demand for our services.
Portable communications devices have been alleged to pose health
risks, including cancer, due to radio frequency emissions from
these devices. The actual or perceived risk of mobile
communications devices could adversely affect us through
increased costs of doing business, additional governmental
regulation that sets emissions standards or otherwise limits or
prohibits our devices from being marketed and sold, a reduction
in subscribers, reduced network usage per subscriber or reduced
financing available to the mobile communications industry.
Further research and studies are ongoing, and we cannot be sure
that these studies will not demonstrate a link between radio
frequency emissions and health concerns.
Our
forward-looking statements are subject to a variety of factors
that could cause actual results to differ materially from
current beliefs.
Safe Harbor Statement under the Private
Securities Litigation Reform Act of
1995. Certain statements made in this annual
report on
Form 10-K
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, intends, plans,
may, will, would,
could, should or anticipates
or other comparable words, or by discussions of strategy that
involve risks and uncertainties. We caution you that these
forward-looking statements are only predictions, which are
subject to risks and uncertainties, including technical
uncertainties, 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
effects of other risks and uncertainties in addition to the
other qualifying factors identified in this Item, including, but
not limited to:
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our ability to meet the operating goals established by our
business plan;
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general economic conditions in Latin America and in the market
segments that we are targeting for our digital mobile services;
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the political and social conditions in the countries in which we
operate, including political instability, which may affect the
economies of our markets and the regulatory schemes in these
countries;
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substantive terms of any international financial aid package
that may be made available to any country in which our operating
companies conduct business;
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the impact of foreign exchange volatility in our markets as
compared to the U.S. dollar and related currency
devaluations in countries in which our operating companies
conduct business;
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reasonable access to and the successful performance of the
technology being deployed in our service areas, and improvements
thereon, including technology deployed in connection with the
introduction of digital two-way mobile data or Internet
connectivity services in our markets;
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the availability of adequate quantities of system infrastructure
and subscriber equipment and components at reasonable pricing to
meet our service deployment and marketing plans and customer
demand;
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the success of efforts to improve and satisfactorily address any
issues relating to our digital mobile network performance;
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34
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future legislation or regulatory actions relating to our SMR
services, other wireless communication services or
telecommunications generally;
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the ability to achieve and maintain market penetration and
average subscriber revenue levels sufficient to provide
financial viability to our digital mobile network business;
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the quality and price of similar or comparable wireless
communications services offered or to be offered by our
competitors, including providers of cellular services and
personal communications services;
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market acceptance of our new service offerings;
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our ability to access sufficient debt or equity capital to meet
any future operating and financial needs; and
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other risks and uncertainties described in this annual report on
Form 10-K
and from time to time in our other reports filed with the
Securities and Exchange Commission.
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Item 1B. Unresolved
Staff Comments
None.
Item 2. Properties
Our principal executive and administrative offices are located
in Reston, Virginia, where we lease about 45,200 square
feet of office space under a lease expiring in January 2009. In
addition, our operating companies own and lease office space and
transmitter and receiver sites in each of the countries where
they conduct business.
Each operating company leases transmitter and receiver sites for
the transmission of radio service under various individual site
leases. Most of these leases are for terms of five years or
less, with options to renew. As of December 31, 2005, our
operating companies had constructed sites at leased and owned
locations for their digital mobile business, as shown below:
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Number
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Operating Company
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of Sites
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Nextel Mexico
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1,504
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Nextel Brazil
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1,240
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Nextel Argentina
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506
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Nextel Peru
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321
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Total
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3,571
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These sites include sites sold and leased back from American
Tower Corporation, as well as various co-location sites with
that company.
Item 3. Legal
Proceedings
We are subject to claims and legal actions that may arise in the
ordinary course of business. We do not believe that any of these
pending claims or legal actions will have a material effect on
our business, financial condition, results of operations or cash
flows.
Item 4. Submission
of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during
the fourth quarter of 2005.
Executive
Officers of the Registrant
The following people were serving as our executive officers as
of February 28, 2006. These executive officers were elected
to serve until their successors are elected. There is no family
relationship between any of our executive officers or between
any of these officers and any of our directors.
35
Steven M. Shindler, 43, has been a director on the board
of NII Holdings since 1997, chief executive officer since 2000
and chairman of the board since November 12, 2002.
Mr. Shindler also served as executive vice president and
chief financial officer of Nextel Communications from 1996 until
2000. From 1987 to 1996, Mr. Shindler was an officer with
Toronto Dominion Bank, a bank where he was a managing director
in its communications finance group.
Lo van Gemert, 51, has been the president and chief
operating officer of NII Holdings since 1999. Mr. van
Gemert served as senior vice president of Nextel Communications
from 1999 until 2000 and as president of the north region of
Nextel Communications from 1996 until 1999. Before joining
Nextel Communications in 1996, Mr. van Gemert served as
executive vice president at Rogers Cantel, Inc., a wireless
operator in Canada. From 1980 to 1994, Mr. van Gemert held
various senior management positions, domestically and overseas,
at Sony Corporation and BellSouth Corporation.
Byron R. Siliezar, 50, has been the vice president and
chief financial officer of NII Holdings since 1999.
Mr. Siliezar was the vice president and controller of NII
Holdings from 1998 to 1999. Mr. Siliezar served as vice
president of finance at Neodata Corporation, a subsidiary of
EDS Corporation, a global information technology company,
from 1997 to 1998, and from 1996 to 1997, he served as
international controller of Pagenet. From 1982 to 1996,
Mr. Siliezar held various executive and management
positions at GTE Corporation domestically and overseas.
Robert J. Gilker, 55, has been the vice president and
general counsel of NII Holdings since 2000. From 1998 to 2000,
he served as vice president, law and administration and
secretary of MPW Industrial Services Group, Inc., a provider of
industrial cleaning and facilities support services. From 1987
until he joined MPW, Mr. Gilker was a partner with the law
firm of Jones, Day, Reavis & Pogue.
John McMahon, 41, has been our vice president of business
operations since joining NII Holdings in 1999. Prior to that,
Mr. McMahon served as vice president of finance and
business operations, north region, for Nextel Communications
from 1997 to 1999, and as director of finance for the
mid-Atlantic region from 1995 to 1997.
Douglas Dunbar, 45, has been our vice president of
marketing and distribution since joining NII Holdings in 1999.
Since 1994, Mr. Dunbar held various positions at Nextel
Communications, including general manager of the west Florida
market from March 1999 to November 1999, where he was
responsible for sales, marketing, business operations and
customer care functions, and vice president of sales and
marketing, north region, from 1997 to 1999.
Alan Strauss, 46, has been our vice president of
engineering and chief technology officer since 2001. From 1998
until 2001, Mr. Strauss was the vice president and general
manager of Nextel Communications strategic business
operations group. From 1994 to 1998, Mr. Strauss held
various positions with Nextel Communications.
Daniel E. Freiman, 34, has been our vice president and
controller since April 27, 2005. Mr. Freiman was our
director of investor relations from June 2004 to April 2005,
director of external financial reporting from November 2002 to
June 2004 and senior manager of external financial reporting
from September 2000 to November 2002. Prior to September 2000,
he was a manager in the audit practice of PricewaterhouseCoopers
LLP in Washington, D.C.
Catherine E. Neel, 45, has been our vice president and
treasurer since November 1, 2002. From 1999 to 2002,
Ms. Neel was the assistant treasurer of NII Holdings. Prior
to 1999, Ms. Neel held various management positions with
BellSouth Corporation and was in public accounting with Arthur
Andersen LLP.
Jose Felipe, 55, has held several positions since joining
NII Holdings in 1998. He has been president of Nextel Mercosur,
which manages our operations in Argentina, Brazil and Chile
since February 2003. From 1999 to 2003, he served as president
of Nextel Cono Sur which managed our operations in Argentina and
Chile. From 1998 to 1999, Mr. Felipe was our vice
president Latin America. From 1991 to 1998,
Mr. Felipe held various senior management positions with
AT&T Corp., most recently president and chief executive
officer of the Puerto Rico and Virgin Islands region and vice
president of emerging markets of the Latin American region.
36
Peter A. Foyo, 40, has served as president of Nextel
Mexico since 1998. From 1988 to 1998, Mr. Foyo held various
senior management positions with AT&T Corp., including
corporate strategy director of Alestra, S.A. de C.V., a joint
venture between AT&T and a local Mexican partner, and
president of AT&T Argentina.
Roberto Peon, 56, became the chief operating officer of
Nextel Mexico in January of 2006. Mr. Peon served as chief
marketing officer for BellSouth International, the Latin
American wireless operation of BellSouth Corporation, a
telephone company, from 2000 until 2005. From 1997 to 2000,
Mr. Peon was president of Brazil Operations for BellSouth
International and chief executive officer of the companys
cellular affiliate in that country. Mr. Peon previously
held various management positions with BellSouth International.
Miguel E. Rivera, 53, has served as president of Nextel
Peru since 2000. Previously, Mr. Rivera was the general
manager of the Lima Stock Exchange from 1999 to 2000. From 1986
to 1998, Mr. Rivera held various executive positions with
IBM, most recently as general manager of Manufacturing Industry,
IBM Latin America.
37
PART II
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Item 5.
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Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
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1. Market
for Common Stock
Our common stock trades on the Nasdaq National Market under the
trading symbol NIHD. The following table sets forth
on a per share basis the reported high and low sales prices for
our common stock, as reported on the Nasdaq National Market, for
the quarters indicated. On February 26, 2004, we announced
a 3-for-1
common stock split which was effected in the form of a stock
dividend that was paid on March 22, 2004 to holders of
record as of March 12, 2004. In addition, on
October 27, 2005, we announced a
2-for-1
common stock split which was effected in the form of a stock
dividend that was paid on November 21, 2005 for holders of
record on November 11, 2005. The prices in this table have
been adjusted to reflect these stock splits.
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Price Range of
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Common Stock
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High
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Low
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2004
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|
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First Quarter
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$
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18.50
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$
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12.39
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Second Quarter
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20.98
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|
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15.63
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Third Quarter
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21.93
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|
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16.54
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Fourth Quarter
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23.88
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20.28
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2005
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First Quarter
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|
$
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30.74
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$
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23.59
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Second Quarter
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32.21
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|
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23.99
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Third Quarter
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42.40
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|
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31.54
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Fourth Quarter
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48.23
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35.25
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2. Number
of Stockholders of Record
As of February 17, 2006, there were approximately nine
holders of record of our common stock, including the Depository
Trust Corporation, which acts as a clearinghouse for multiple
brokerage and custodial accounts.
3. Dividends
We have not paid any dividends on our common stock and do not
plan to pay dividends on our common stock for the foreseeable
future. In addition, some of our financing documents have
contained, and some future financing agreements may contain,
restrictions on the payment of dividends. We anticipate that for
the foreseeable future any cash flow generated from our
operations will be used to develop and expand our business and
operations and make contractual payments under our debt
facilities in accordance with our business plan.
4. Issuer
Purchases of Equity Securities
We did not repurchase any of our equity securities during the
fourth quarter of 2005.
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Item 6.
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Selected
Financial Data
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The financial information presented below for the year ended
December 31, 2001, ten months ended October 31, 2002,
two months ended December 31, 2002 and years ended
December 31, 2003, 2004 and 2005 has been derived from our
audited consolidated financial statements. Our consolidated
financial statements as of and for the year ended
December 31, 2001, ten months ended October 31, 2002
and two months ended
38
December 31, 2002 have been audited by Deloitte &
Touche LLP, our former independent registered public accounting
firm. Our consolidated financial statements as of and for the
years ended December 31, 2003, 2004 and 2005 have been
audited by PricewaterhouseCoopers LLP, our current independent
registered public accounting firm. Our audited consolidated
financial statements as of December 31, 2004 and 2005 and
for the years ended December 31, 2003, 2004 and 2005 are
included at the end of this annual report on
Form 10-K.
This information is only a summary and should be read together
with our consolidated historical financial statements and
managements discussion and analysis appearing elsewhere in
this annual report on
Form 10-K.
As a result of the consummation of our Revised Third Amended
Joint Plan of Reorganization and the transactions contemplated
thereby on November 12, 2002, we are operating our existing
business under a new capital structure. In addition, we applied
fresh-start accounting rules on October 31, 2002.
Accordingly, our consolidated financial condition and results of
operations from and after our reorganization are not comparable
to our consolidated financial condition or results of operations
for periods prior to our reorganization reflected in our
historical financial statements included at the end of this
annual report on
Form 10-K
or in the selected consolidated historical financial information
set forth below. References below to the Predecessor Company
refer to NII Holdings for the period prior to November 1,
2002 and references to the Successor Company refer to NII
Holdings for the period from and after November 1, 2002.
39
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Successor Company
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Predecessor Company
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Two Months
|
|
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Ten Months
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Ended
|
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Ended
|
|
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Year Ended
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Year Ended
December 31,
|
|
|
December 31,
|
|
|
|
October 31,
|
|
|
December 31,
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|
|
2005
|
|
|
2004
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|
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2003
|
|
|
2002
|
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2002
|
|
|
2001
|
|
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(in thousands, except per share
data)
|
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Consolidated Statement of
Operations Data:
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Operating revenues
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|
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|
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|
|
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|
|
|
|
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|
|
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Service and other revenues
|
|
$
|
1,666,613
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|
|
$
|
1,214,837
|
|
|
$
|
895,615
|
|
|
$
|
137,623
|
|
|
|
$
|
610,341
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|
|
$
|
634,736
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Digital handset and accessory
revenues
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|
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79,226
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|
|
|
65,071
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|
|
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43,072
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|
|
|
5,655
|
|
|
|
|
26,754
|
|
|
|
27,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,745,839
|
|
|
|
1,279,908
|
|
|
|
938,687
|
|
|
|
143,278
|
|
|
|
|
637,095
|
|
|
|
662,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation and amortization included below)
|
|
|
421,037
|
|
|
|
332,487
|
|
|
|
240,021
|
|
|
|
29,929
|
|
|
|
|
164,995
|
|
|
|
173,000
|
|
Cost of digital handset and
accessory sales
|
|
|
251,192
|
|
|
|
207,112
|
|
|
|
134,259
|
|
|
|
19,569
|
|
|
|
|
87,582
|
|
|
|
150,536
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
672,229
|
|
|
|
539,599
|
|
|
|
374,280
|
|
|
|
49,498
|
|
|
|
|
252,577
|
|
|
|
323,536
|
|
Selling, general and administrative
|
|
|
588,849
|
|
|
|
391,571
|
|
|
|
317,400
|
|
|
|
47,108
|
|
|
|
|
262,405
|
|
|
|
426,679
|
|
Impairment, restructuring and other
charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,808
|
|
|
|
1,581,164
|
|
Depreciation
|
|
|
123,990
|
|
|
|
84,139
|
|
|
|
49,127
|
|
|
|
4,694
|
|
|
|
|
55,758
|
|
|
|
162,083
|
|
Amortization
|
|
|
6,142
|
|
|
|
14,236
|
|
|
|
30,374
|
|
|
|
6,392
|
|
|
|
|
9,219
|
|
|
|
56,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
354,629
|
|
|
|
250,363
|
|
|
|
167,506
|
|
|
|
35,586
|
|
|
|
|
41,328
|
|
|
|
(1,887,495
|
)
|
Interest expense, net
|
|
|
(72,470
|
)
|
|
|
(55,113
|
)
|
|
|
(64,623
|
)
|
|
|
(10,469
|
)
|
|
|
|
(151,579
|
)
|
|
|
(297,228
|
)
|
Interest income
|
|
|
32,611
|
|
|
|
12,697
|
|
|
|
10,864
|
|
|
|
1,797
|
|
|
|
|
3,928
|
|
|
|
13,247
|
|
Foreign currency transaction gains
(losses), net
|
|
|
3,357
|
|
|
|
9,210
|
|
|
|
8,856
|
|
|
|
2,616
|
|
|
|
|
(180,765
|
)
|
|
|
(61,282
|
)
|
Debt conversion expense
|
|
|
(8,930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) gain on extinguishment of
debt, net
|
|
|
|
|
|
|
(79,327
|
)
|
|
|
22,404
|
|
|
|
|
|
|
|
|
101,598
|
|
|
|
|
|
Reorganization items, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,180,998
|
|
|
|
|
|
Realized losses on investments, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(151,291
|
)
|
Equity in gains of unconsolidated
affiliates
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,640
|
|
Other expense, net
|
|
|
(8,621
|
)
|
|
|
(2,320
|
)
|
|
|
(12,166
|
)
|
|
|
(1,557
|
)
|
|
|
|
(8,918
|
)
|
|
|
(4,181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before income tax (provision) benefit and cumulative
effect of change in accounting principle
|
|
|
300,576
|
|
|
|
135,510
|
|
|
|
132,841
|
|
|
|
27,973
|
|
|
|
|
1,986,590
|
|
|
|
(2,378,590
|
)
|
Income tax (provision) benefit
|
|
|
(125,795
|
)
|
|
|
(79,191
|
)
|
|
|
(51,627
|
)
|
|
|
(24,874
|
)
|
|
|
|
(29,270
|
)
|
|
|
68,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before cumulative effect of change in accounting
principle
|
|
|
174,781
|
|
|
|
56,319
|
|
|
|
81,214
|
|
|
|
3,099
|
|
|
|
|
1,957,320
|
|
|
|
(2,309,840
|
)
|
Income (loss) from discontinued
operations of Nextel Philippines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,665
|
|
|
|
|
(2,025
|
)
|
|
|
(170,335
|
)
|
Income tax provision from
discontinued operations of Nextel Philippines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(252
|
)
|
|
|
(17,146
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative
effect of change in accounting principle
|
|
|
174,781
|
|
|
|
56,319
|
|
|
|
81,214
|
|
|
|
22,764
|
|
|
|
|
1,955,043
|
|
|
|
(2,497,321
|
)
|
Cumulative effect of change in
accounting principle, net of income taxes of $11,898 in 2004
|
|
|
|
|
|
|
970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
174,781
|
|
|
$
|
57,289
|
|
|
$
|
81,214
|
|
|
$
|
22,764
|
|
|
|
$
|
1,955,043
|
|
|
$
|
(2,497,321
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before cumulative effect of change in accounting
principle per common share, basic
|
|
$
|
1.19
|
|
|
$
|
0.40
|
|
|
$
|
0.64
|
|
|
$
|
0.03
|
|
|
|
$
|
7.24
|
|
|
$
|
(8.53
|
)
|
Income (loss) from discontinued
operations per common share, basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.16
|
|
|
|
|
(0.01
|
)
|
|
|
(0.69
|
)
|
Cumulative effect of change in
accounting principle per common share, basic
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share,
basic
|
|
$
|
1.19
|
|
|
$
|
0.41
|
|
|
$
|
0.64
|
|
|
$
|
0.19
|
|
|
|
$
|
7.23
|
|
|
$
|
(9.22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before cumulative effect of change in accounting
principle per common share, diluted
|
|
$
|
1.06
|
|
|
$
|
0.39
|
|
|
$
|
0.59
|
|
|
$
|
0.02
|
|
|
|
$
|
7.24
|
|
|
$
|
(8.53
|
)
|
Income (loss) from discontinued
operations per common share, diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.16
|
|
|
|
|
(0.01
|
)
|
|
|
(0.69
|
)
|
Cumulative effect of change in
accounting principle per common share, diluted
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share,
diluted
|
|
$
|
1.06
|
|
|
$
|
0.40
|
|
|
$
|
0.59
|
|
|
$
|
0.18
|
|
|
|
$
|
7.23
|
|
|
$
|
(9.22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding, basic
|
|
|
146,336
|
|
|
|
139,166
|
|
|
|
126,257
|
|
|
|
120,000
|
|
|
|
|
270,382
|
|
|
|
270,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding, diluted
|
|
|
176,562
|
|
|
|
145,015
|
|
|
|
140,106
|
|
|
|
126,858
|
|
|
|
|
270,382
|
|
|
|
270,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor Company
|
|
|
|
Company
|
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
2001
|
|
|
|
(in thousands)
|
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
877,536
|
|
|
$
|
330,984
|
|
|
$
|
405,406
|
|
|
$
|
231,161
|
|
|
|
$
|
250,250
|
|
Short-term investments
|
|
|
7,371
|
|
|
|
38,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
933,923
|
|
|
|
558,247
|
|
|
|
368,434
|
|
|
|
230,598
|
|
|
|
|
350,001
|
|
Intangible assets, net
|
|
|
83,642
|
|
|
|
67,956
|
|
|
|
85,818
|
|
|
|
182,264
|
|
|
|
|
192,649
|
|
Total assets
|
|
|
2,620,964
|
|
|
|
1,491,280
|
|
|
|
1,128,436
|
|
|
|
831,473
|
|
|
|
|
1,244,420
|
|
Long-term debt, including current
portion
|
|
|
1,172,958
|
|
|
|
603,509
|
|
|
|
536,756
|
|
|
|
432,157
|
|
|
|
|
2,665,144
|
|
Stockholders equity (deficit)
|
|
|
811,401
|
|
|
|
421,947
|
|
|
|
217,770
|
|
|
|
71,612
|
|
|
|
|
(2,022,150
|
)
|
Ratio of
Earnings to Fixed Charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Successor Company
|
|
|
|
Predecessor Company
|
|
|
|
|
|
|
|
|
|
|
Two Months
|
|
|
|
Ten Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
Ended
|
|
|
Year Ended
|
|
Year Ended
December 31,
|
|
|
December 31,
|
|
|
|
December 31,
|
|
|
December 31,
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
2002
|
|
|
2001
|
|
|
3.80x
|
|
|
|
2.88x
|
|
|
|
2.55x
|
|
|
|
3.09x
|
|
|
|
|
12.63x
|
|
|
|
|
|
For the purpose of computing the ratio of earnings to fixed
charges, earnings consist of income (loss) from continuing
operations before income taxes plus fixed charges and
amortization of capitalized interest less capitalized interest,
equity in gains (losses) of unconsolidated affiliates and
minority interest in losses of subsidiaries. Fixed charges
consist of:
|
|
|
|
|
interest on all indebtedness, amortization of debt financing
costs and amortization of original issue discount;
|
|
|
|
interest capitalized; and
|
|
|
|
the portion of rental expense we believe is representative of
interest.
|
The deficiency of earnings to cover fixed charges for the year
ended December 31, 2001 was $2.42 billion. Our ratio
of earnings to fixed charges for the ten months ended
October 31, 2002 reflects the impact of $2.18 billion
of non-recurring net reorganization gains that we recorded in
connection with our emergence from Chapter 11
reorganization.
Impairment, Restructuring and Other
Charges. During the third quarter of 2001,
following our review of the economic conditions, operating
performance and other relevant factors in the Philippines, we
decided to discontinue funding to Nextel Philippines. As a
result, we performed an assessment of the carrying values of the
long-lived assets related to Nextel Philippines in accordance
with Statement of Financial Accounting Standards, or SFAS,
No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. As a
result, during the third quarter of 2001, we wrote down the
carrying values of our long-lived assets related to Nextel
Philippines to their estimated fair market values and recorded a
$147.1 million pre-tax impairment charge, which is
classified in discontinued operations.
In view of the then capital constrained environment and our lack
of funding sources, during the fourth quarter of 2001, we
undertook an extensive review of our business plan and
determined to pursue a less aggressive growth strategy that
targeted conservation of cash resources by slowing enhancement
and expansion of our networks and reducing subscriber growth and
operating expenses. In connection with the implementation of
this plan, during the fourth quarter of 2001, we recorded
non-cash pre-tax impairment charges and pre-tax restructuring
and other charges of about $1.6 billion.
41
During 2002, some of our markets further restructured their
operations, which included workforce reductions. During the ten
months ended October 31, 2002, we recorded
$3.1 million in restructuring charges related to these
actions and a $7.9 million impairment charge to write down
the carrying values of Nextel Argentinas long-lived assets
to their estimated fair values as a result of the economic
decline in Argentina. In addition, through May 24, 2002, we
incurred $4.8 million in other charges for legal and
advisory costs incurred related to our debt restructuring
activities. Beginning May 24, 2002, we recognized these
costs in reorganization items, net, in accordance with
SOP 90-7,
Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code.
Depreciation and Amortization. As
mentioned above, during 2001, we wrote down substantially all of
the long-lived assets held by our operating companies, including
property, plant and equipment and intangible assets, to their
estimated fair values in accordance with SFAS No. 121.
We did not make any adjustments to depreciation or amortization
expense recorded during the year ended December 31, 2001.
The net book value of the impaired assets became the new cost
basis as of December 31, 2001. As a result of the lower
cost bases, depreciation and amortization decreased
significantly during the ten months ended October 31, 2002.
On October 31, 2002, as a result of our reorganization and
in accordance with fresh-start accounting requirements under
SOP 90-7,
we further adjusted the carrying values of our property, plant
and equipment and intangible assets based on their estimated
relative fair values, which we determined in consultation with
external valuation specialists. As a result of additional
write-downs to fixed assets, depreciation decreased further
during the two months ended December 31, 2002 and the year
ended December 31, 2003. Due to the expansion of our
digital mobile networks depreciation increased during the years
ended December 31, 2004 and 2005. Additionally,
amortization expense decreased during the years ended
December 31, 2004 and 2005 as a result of the reversal of
certain valuation allowances for deferred tax assets existing at
our emergence from reorganization, which we recorded as a
reduction to intangible assets in connection with our
application of fresh-start accounting.
Interest Expense, Net. We reported
interest expense incurred during our Chapter 11
reorganization only to the extent that it would be paid during
the reorganization or if it was probable that it would be an
allowed claim. Principal and interest payments could not be made
on pre-petition debt subject to compromise without approval from
the bankruptcy court or until the plan of reorganization
defining the repayment terms was confirmed. Further, the
Bankruptcy Code generally disallowed the payment of
post-petition interest that accrued with respect to unsecured or
under secured claims. As a result, we did not accrue interest
that we believed was not probable of being treated as an allowed
claim. During the ten months ended October 31, 2002, we did
not accrue interest aggregating $134.6 million on our
senior redeemable notes because payment of this interest was not
probable. In connection with the confirmation of our plan of
reorganization, our senior redeemable notes were extinguished
and we repurchased the outstanding balance of Nextel
Argentinas credit facilities from its creditors. As a
result, interest expense for the two months ended
December 31, 2002 and for the years ended December 31,
2003, 2004 and 2005 decreased significantly compared to prior
years. The decrease in interest expense during the year ended
December 31, 2003 was also due to a reduction in interest
expense related to the $100.0 million principal prepayment
of our international equipment facility and the extinguishment
of the Brazil equipment facility in September 2003, partially
offset by interest expense recognized during 2003 as a result of
financing obligations incurred in connection with the
sale-leaseback of commercial towers and interest expense
recognized on our 3.5% convertible notes that we issued in
September 2003. The decrease in interest expense during the year
ended December 31, 2004 was also due to a reduction in
interest expense related to the $125.0 million pay-off of
our international equipment facility and the retirement of
substantially all of our 13.0% senior secured discount
notes through a cash tender offer in March 2004, partially
offset by interest expense recognized during 2004 on our 2.875%
convertible notes that we issued in January 2004. The increase
in interest expense during the year ended December 31, 2005
is primarily a result of interest expense recognized on our
syndicated loan facility in Mexico, as well as interest expense
recognized on our 2.75% convertible notes, which we issued
in August 2005.
Foreign Currency Transaction Gains (Losses),
Net. Our operations are subject to
fluctuations in foreign currency exchange rates. We recognize
gains and losses on U.S. dollar-denominated assets and
42
liabilities in accordance with SFAS No. 52,
Foreign Currency Translation. As a result,
significant fluctuations in exchange rates can result in large
foreign currency transaction gains and losses.
In January 2002, the Argentine government devalued the Argentine
peso from its previous
one-to-one
peg with the U.S. dollar. Subsequently, the Argentine
peso-to-dollar
exchange rate significantly weakened in value. As a result,
during the ten months ended October 31, 2002, Nextel
Argentina recorded $137.8 million in foreign currency
transaction losses primarily related to its former
U.S. dollar-denominated credit facilities. As a result of
the settlement of our Argentine credit facilities in November
2002 and the retirement of our dollar-denominated equipment
credit facilities in Mexico and Brazil, our foreign currency
transaction loss exposure was significantly reduced.
Debt Conversion Expense. On
June 10, 2005 and June 21, 2005, $40.0 million
and $48.5 million, respectively, principal face amount of
our 3.5% convertible notes were converted into
3,000,000 shares and 3,635,850 shares in accordance
with the original terms of the debt securities. In connection
with these conversions, we paid in the aggregate
$8.9 million in cash as additional consideration for
conversion, which we recorded as debt conversion expense.
(Loss) Gain on Extinguishment of Debt,
Net. The $101.6 million net gain on
extinguishment of debt for the ten months ended October 31,
2002 represents a gain we recognized on the settlement of Nextel
Argentinas credit facilities in connection with the
confirmation of our plan of reorganization. The
$22.4 million net gain on extinguishment of debt for the
year ended December 31, 2003 represents a gain we
recognized in connection with the settlement of our Brazil
equipment facility. The $79.3 million net loss on early
extinguishment of debt for the year ended December 31, 2004
represents a loss we incurred in connection with the retirement
of substantially all of our 13.0% senior secured discount
notes through a cash tender offer in March 2004.
Reorganization Items, Net. In
accordance with
SOP 90-7,
we classified in reorganization items all items of income,
expense, gain or loss that were realized or incurred because we
were in reorganization. We expensed as incurred professional
fees associated with and incurred during our reorganization and
reported them as reorganization items. In addition, during the
second quarter of 2002, we adjusted the carrying value of our
senior redeemable notes to their face values by writing off the
remaining unamortized discounts totaling $92.2 million. We
also wrote off the entire remaining balance of our debt
financing costs of $31.2 million. We also classified in
reorganization items interest income earned by NII Holdings,
Inc. or NII Holdings (Delaware), Inc. that would not have been
earned but for our Chapter 11 filing. In addition, as a
result of our reorganization and our application of fresh-start
accounting, we recognized in reorganization items a
$2.3 billion gain on the extinguishment of our senior
redeemable notes, partially offset by a $115.1 million
charge related to the revaluation of our assets and liabilities.
Realized Losses on Investments, Net. In
October 2000, TELUS Corporation, a publicly traded Canadian
telecommunications company, acquired Clearnet Communications,
Inc., a publicly traded Canadian company in which we owned an
equity interest. During the third quarter of 2001, in connection
with our review of our investment portfolio, we recognized a
$188.4 million reduction in fair value of our investment in
TELUS, based on its stock price as of September 30, 2001.
During the fourth quarter of 2001, we sold our investment in
TELUS and recognized a $41.6 million pre-tax gain related
to the sale.
Equity in Gains of Unconsolidated
Affiliates. Prior to 2001, we recorded equity
in gains (losses) of unconsolidated affiliates related to our
equity method investments in Nextel Philippines and NEXNET. As a
result of the consolidation of Nextel Philippines during the
third quarter of 2000 and the sale of our entire minority
interest investment in NEXNET, we no longer record equity in
gains (losses) of unconsolidated affiliates. Equity in gains of
unconsolidated affiliates for 2001 represents a
$9.6 million gain realized during the fourth quarter of
2001 on the sale of our minority interest investment in NEXNET.
Income Tax (Provision) Benefit. The
$46.6 million increase in the income tax provision from the
year ended December 31, 2004 to the year ended
December 31, 2005 is primarily due to a $165.1 million
increase in income before tax, partially offset by a decrease in
our effective tax rate attributable to a large addition to our
deferred tax asset valuation allowance in 2004 that did not
recur in 2005.
43
The $27.6 million increase in the income tax provision from
the year ended December 31, 2003 to the year ended
December 31, 2004 primarily resulted from a
$23.2 million current income tax benefit that we recorded
in 2003 due to the reversal of valuation allowance on
post-reorganization deferred tax assets in the U.S.
During the two months ended December 31, 2002, we incurred
a net income tax provision of $24.9 million, which
primarily relates to deferred income tax expense in Mexico,
Argentina and Peru, as well as current income tax expense in
Mexico and withholding tax in the U.S. During the ten
months ended October 31, 2002, we incurred a net income tax
provision of $29.3 million, which primarily relates to
current U.S. income tax of $25.8 million.
During 2001, we recognized a net income tax benefit of
$68.8 million primarily due to the reduction of estimated
future tax effects of temporary differences related to the value
of our licenses held by our operating companies as a result of
our asset impairment charges, partially offset by taxes incurred
by our U.S. corporate entities related to interest income
and services provided to our markets.
Income (Loss) from Discontinued
Operations. In the fourth quarter of 2002, we
sold our remaining direct and indirect ownership in Nextel
Philippines. As a result of this sale and in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, we presented the financial
results of Nextel Philippines as discontinued operations for all
periods presented.
Cumulative Effect of Change in Accounting
Principle. Until September 30, 2004, we
presented the financial statements of our consolidated foreign
operating companies utilizing accounts as of a date one month
earlier than the accounts of our parent company,
U.S. subsidiaries and our non-operating
non-U.S. subsidiaries,
which we refer to as our one-month lag reporting policy, to
ensure timely reporting of consolidated results. As a result,
each year the financial position, results of operations and cash
flows of each of our wholly-owned foreign operating companies in
Mexico, Brazil, Argentina, Peru and Chile were presented as of
and for the year ended November 30. In contrast, financial
information relating to our parent company,
U.S. subsidiaries and our non-operating
non-U.S. subsidiaries
was presented as of and for the year ended December 31.
We eliminated the one-month reporting lag for the year ended
December 31, 2004 and report consolidated results using a
consistent calendar year reporting period for the entire Company
for 2004. We accounted for the elimination of the one-month lag
reporting policy as a change in accounting principle effective
January 1, 2004. See Note 2 to our consolidated
financial statements included at the end of this annual report
on
Form 10-K.
As a result, we treated the month of December 2003, which was
normally the first month in the fiscal year of our foreign
operating companies, as the lag month, and our fiscal year for
all of our foreign operating companies now begins with January
and ends with December.
44
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|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operation
|
INDEX TO
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
|
|
|
|
|
A. Executive Overview
|
|
|
46
|
|
B. Results of Operation
|
|
|
58
|
|
1. Year Ended
December 31, 2005 vs. Year Ended December 31, 2004
|
|
|
59
|
|
a. Consolidated
|
|
|
59
|
|
b. Nextel Mexico
|
|
|
63
|
|
c. Nextel Brazil
|
|
|
66
|
|
d. Nextel Argentina
|
|
|
69
|
|
e. Nextel Peru
|
|
|
72
|
|
f. Corporate and other
|
|
|
74
|
|
2. Year Ended
December 31, 2004 vs. Year Ended December 31, 2003
|
|
|
76
|
|
a. Consolidated
|
|
|
76
|
|
b. Nextel Mexico
|
|
|
80
|
|
c. Nextel Brazil
|
|
|
83
|
|
d. Nextel Argentina
|
|
|
86
|
|
e. Nextel Peru
|
|
|
89
|
|
f. Corporate and other
|
|
|
91
|
|
C. Liquidity and Capital
Resources
|
|
|
92
|
|
D. Future Capital Needs and
Resources
|
|
|
93
|
|
E. Effect of Inflation and
Foreign Currency Exchange
|
|
|
96
|
|
F. Effect of New Accounting
Standards
|
|
|
97
|
|
Item 7A. Quantitative
and Qualitative Disclosures About Market Risk
|
|
|
99
|
|
45
Introduction
The following is a discussion and analysis of:
|
|
|
|
|
our consolidated financial condition for the years ended
December 31, 2005 and 2004 and our consolidated results of
operations for the years ended December 31, 2005, 2004 and
2003; and
|
|
|
|
significant factors which we believe could affect our
prospective financial condition and results of operation.
|
You should read this discussion in conjunction with our
quarterly reports on
Form 10-Q
for the quarters ended March 31, 2005, June 30, 2005
and September 30, 2005. Historical results may not indicate
future performance. See Item 1A. Risk Factors
for risks and uncertainties that may impact our future
performance.
A. Executive
Overview
Our principal objective is to grow our business in selected
markets in Latin America by providing differentiated, high value
wireless communications services to business customers, while
improving profitability and cash flow. We intend to continue
growing our business in a balanced manner, with a primary focus
on generating earnings growth and free cash flow and maintaining
appropriate controls on costs and capital expenditures. We will
seek to add subscribers at rates which do not negatively impact
our operating metrics. We may also explore financially
attractive opportunities to expand our network coverage in areas
where we currently do not provide wireless service. Based on the
relatively low wireless penetration in our markets and our
current market share in our target customer segment, we believe
that we can continue our current subscriber and revenue growth
trends while improving our profitability and cash flow
generation. Although certain Latin American markets have been
historically volatile, the Latin American markets that we serve
have recently experienced improving economies that have been
relatively more stable compared to historical periods. We
believe we will be successful in meeting our objectives by:
Focusing on Major Business Centers in Key Latin American
Markets. We operate primarily in large urban
markets in Latin America that have a concentration of high usage
business customers, including the five largest cities in Latin
America. We target these markets because we believe they offer
favorable long-term growth prospects for our wireless
communications services. In addition, the cities in which we
operate account for a high proportion of total economic activity
in each of their respective countries and provide us with a
large potential market without the need to build out nationwide
wireless coverage. We believe that there are significant
opportunities for growth in these markets due to relatively low
overall wireless penetration rates and the large number of
target business customers. We have licenses in markets that
cover about 296 million people, of which our network
coverage extends to about 136 million people.
Targeting High Value Business Customers. Our
main focus is on high end, post-paid customers with medium to
high usage, targeting primarily businesses because they value
our multi-function handsets and our high level of customer
service. Our typical customers have between 3 and 30 handsets,
while some of our largest customers have over 500 handsets under
contract. We believe that our focus on these business customers
is a key reason why we have a significantly higher monthly
average revenue per unit than that reported by our competitors.
Providing Differentiated Services. We have
traditionally been the only wireless service provider in Mexico,
Peru and Brazil that offers digital mobile telephone service and
push-to-talk
digital radio communication, fully integrated in a single
wireless device in, among and throughout our service areas in
each of these countries. Our unique Direct Connect
push-to-talk
service provides significant value to our customers by
eliminating the long distance and domestic roaming fees charged
by other wireless service providers, while also providing added
functionality due to the near-instantaneous nature of the
communication and the ability to communicate on a
one-to-many
basis. Our competitors have begun to introduce competitive
push-to-talk
over cellular products, but we believe that the quality of our
Direct Connect service is superior at this time. We add further
value by customizing data applications that enhance the
productivity of our business customers, such as vehicle and
delivery tracking, order entry processing and workforce
monitoring applications. We also provide International Direct
Connect service, in conjunction with Nextel Communications,
Nextel Partners and
46
Telus, which allows subscribers to communicate instantly across
national borders with our subscribers in Mexico, Brazil,
Argentina and Peru and with Nextel Communications and Nextel
Partners subscribers in the United States and Telus subscribers
in Canada.
Delivering Superior Customer Service. In
addition to our unique service offerings, we seek to further
differentiate ourselves by providing a higher level of customer
service generally than our competitors. We work proactively with
our customers to match them with service plans offering greater
value. After analyzing customer usage and expense data, we
strive to minimize a customers per minute costs while
increasing overall usage of our array of services, thereby
providing higher value to our customers while increasing our
monthly revenues. This goal is also furthered by our efforts
during and after the sales process to educate customers about
our services, multi-function handsets and rate plans. In
addition, we have implemented proactive customer retention and
customer for life programs to increase customer
satisfaction and retention. We believe that many of our
competitors, who have primarily lower revenue generating prepaid
customer bases, do not generally offer the same level of service
to customers.
Selectively Expanding our Service Areas. We
believe that we have significant opportunities to grow through
selective expansion of our service into additional areas within
the countries in which we currently operate. Such expansion may
involve building out certain areas in which we already have
spectrum, obtaining additional 800 MHZ spectrum in new areas
which would enable us to expand our network service areas, and
further developing our business in key urban areas along the
U.S.-Mexico
border. In addition, we may consider selectively expanding into
other Latin American countries where we do not currently
operate. As a result of the spectrum that we won in the March
2005 spectrum auctions in Mexico, we plan to significantly
expand our service areas in Mexico over the next several years
and increase our covered population from about 40 million
to about 60 million. Similarly, we plan to expand our
service area in Brazil and increase our covered population from
about 43 million at the beginning of 2005 to at least
60 million over the next several years. See Capital
Expenditures for a discussion of the factors that drive
our capital spending.
We refer to our operating companies by the countries in which
they operate, such as Nextel Mexico, Nextel Brazil, Nextel
Argentina, Nextel Peru and Nextel Chile. See Item 1A.
Risk Factors for information on risks and uncertainties
that could affect the above objectives.
Foreign
Currency Exposure
Nearly all of our revenues are denominated in
non-U.S. currencies,
although a significant portion of our capital and operating
expenditures, including imported network equipment and handsets,
and a substantial portion of our outstanding debt, are
denominated in U.S. dollars. Accordingly, fluctuations in
exchange rates relative to the U.S. dollar could have a
material adverse effect on our earnings and assets. For example,
the economic upheaval in Argentina in 2002 led to the unpegging
of the Argentine peso to the U.S. dollar exchange rate and
the subsequent significant devaluation of the Argentine peso. As
a result, we recognized significant foreign currency transaction
losses in Argentina in 2002 and our revenues and earnings were
significantly adversely affected. Any depreciation of local
currencies in the countries in which our operating companies
conduct business may also result in increased costs to us for
imported equipment and may, at the same time, decrease demand
for our products and services in the affected markets.
Additional information regarding the impact of currency rates is
included in the discussion of our segments under Results
of Operation.
Recent
Developments
Financing
and Hedging Activities
Mexico Syndicated
Loan Facility. In October 2004, Nextel
Mexico closed on a $250.0 million, five year syndicated
loan facility. Of the total amount of the facility,
$129.0 million is denominated in U.S. dollars with a
floating interest rate based on LIBOR (6.81% as of
December 31, 2005), $31.0 million is denominated in
Mexican pesos with a floating interest rate based on the Mexican
reference rate, the Interbank Equilibrium Interest Rate, or TIIE
(11.13% as of December 31, 2005), and $90.0 million is
denominated in Mexican pesos at an interest rate fixed at the
time of funding (12.48%). In April 2005, Nextel Mexico amended
the credit
47
agreement for the syndicated loan facility to extend the
availability period until May 31, 2005, and in May 2005,
Nextel Mexico drew down on the loan facility for the entire
$250.0 million.
Conversion of 3.5% Convertible
Notes. On June 10, 2005 and
June 21, 2005, certain noteholders converted
$40.0 million and $48.5 million, respectively,
principal face amount of our 3.5% convertible notes into
3,000,000 shares and 3,635,850 shares
(75.0 shares issued per $1,000 of debt principal multiplied
by the debt principal) in accordance with the original terms of
the debt securities. In connection with these conversions, we
paid in the aggregate $8.9 million in cash as additional
consideration for conversion, as well as $0.8 million of
accrued and unpaid interest. We recorded the $8.9 million
that we paid as debt conversion expense in our consolidated
statement of operations. We reclassified to paid-in capital the
original remaining deferred financing costs related to the notes
that were converted.
Interest Rate Swap. In July 2005,
Nextel Mexico entered into an interest rate swap agreement to
hedge the variability of future cash flows associated with the
$31.0 million Mexican peso-denominated variable rate
portion of its $250.0 million syndicated loan facility.
Under the interest rate swap, Nextel Mexico agreed to exchange
the difference between the variable Mexican reference rate,
TIIE, and a fixed rate, based on a notional amount of
$31.4 million. The interest rate swap fixed the amount of
interest expense associated with this portion of the syndicated
loan facility commencing on August 31, 2005 and will
continue over the life of the facility based on a fixed rate of
about 11.95% per year in local Mexican currency.
2.75% Convertible Notes. In August
2005, we privately placed $300.0 million aggregate
principal amount of 2.75% convertible notes due 2025, which
we refer to as our 2.75% notes. In addition, we granted the
initial purchaser an option to purchase up to an additional
$50.0 million principal amount of 2.75% notes, which
the initial purchaser exercised in full. As a result, we issued
an additional $50.0 million aggregate principal amount of
2.75% notes, resulting in total gross proceeds of
$350.0 million. We also incurred direct issuance costs of
$9.0 million, which we recorded as deferred financing costs
on our consolidated balance sheet and are amortizing over five
years. The notes were publicly registered, effective
February 10, 2006.
The 2.75% notes bear interest at a rate of 2.75% per
annum on the principal amount of the notes, payable
semi-annually in arrears in cash on February 15 and August 15 of
each year, beginning February 15, 2006, and will mature on
August 15, 2025, when the entire principal balance of
$350.0 million will be due. In addition, the noteholders
have the right to require us to repurchase the 2.75% notes
on August 15 of 2010, 2012, 2015 and 2020 at a repurchase
price equal to 100% of their principal amount, plus any accrued
and unpaid interest (including additional amounts, if any) up
to, but excluding, the repurchase date. The 2.75% notes are
convertible into 6,988,450 shares of our common stock at a
conversion rate of 19.967 shares per $1,000 principal
amount of notes, subject to adjustment, prior to the close of
business on the final maturity date under certain circumstances:
We have the option to satisfy the conversion of the
2.75% notes in shares of our common stock, in cash or a
combination of both.
Prior to August 20, 2010, the 2.75% notes are not
redeemable. On or after August 20, 2010, we may redeem for
cash some or all of the 2.75% notes, at any time and from time
to time, upon at least 30 days notice for a price
equal to 100% of the principal amount of the notes to be
redeemed plus any accrued and unpaid interest (including
additional amounts, if any) up to, but excluding, the redemption
date. See Note 7 to our consolidated financial statements
included at the end of this annual report on
Form 10-K
for additional information regarding our 2.75% notes.
Foreign Currency Hedge. In September
2005, Nextel Mexico entered into a derivative agreement to
reduce its foreign currency transaction risk associated with
$129.4 million of its 2006 U.S. dollar forecasted
capital expenditures and handset purchases. This risk is hedged
by forecasting Nextel Mexicos capital expenditures and
handset purchases for a
12-month
period beginning in January 2006. Under this agreement, Nextel
Mexico purchased a U.S. dollar call option for
$3.6 million and sold a call option on the Mexican peso for
$1.1 million for a net cost of $2.5 million.
In October 2005, Nextel Mexico entered into another derivative
agreement to further reduce its foreign currency transaction
risk associated with $52.0 million of its 2006
U.S. dollar forecasted capital expenditures
48
and handset purchases. This risk is similarly hedged by
forecasting Nextel Mexicos capital expenditures and
handset purchases for a
12-month
period beginning in January 2006. Under this agreement, Nextel
Mexico purchased a U.S. dollar call option for
$1.4 million and sold a call option on the Mexican peso for
$0.3 million for a net cost of $1.1 million.
Acquisitions
Mexico Spectrum Auction. On
January 10, 2005, the Mexican government began an auction
for wireless spectrum licenses in the 806-821 MHz to
851-866 MHz frequency band. Inversiones Nextel de Mexico, a
subsidiary of Nextel Mexico, participated in this auction. The
spectrum auction was divided into three separate auctions:
Auction 15 for Northern Mexico Zone 1, Auction 16 for
Northern Mexico Zone 2 and Auction 17 for Central and Southern
Mexico. The auctions were completed between February 7 and
February 11. Nextel Mexico won an average of 15 MHz of
nationwide spectrum, except for Mexico City, where no spectrum
was auctioned and where Nextel Mexico already has approximately
21 MHz of spectrum licenses. The corresponding licenses and
immediate use of the spectrum were granted to Inversiones Nextel
de Mexico on March 17, 2005. These new licenses have an
initial term of 20 years, which we have estimated to be the
amortization period of the licenses, and are renewable
thereafter for 20 years. Nextel Mexico paid an up-front fee
of $3.4 million for these licenses, excluding certain
annual fees, and $0.5 million in other capitalizable costs.
The spectrum licenses that Nextel Mexico acquired will allow it
to significantly expand its digital mobile network over the next
two years, thereby allowing it to cover a substantial portion of
the Mexican national geography and population.
Purchase of AOL Mexico. In April 2005,
Nextel Mexico purchased the entire equity interest of AOL
Mexico, S. de R.L. de C.V. for approximately $14.1 million
in cash. As a result of this transaction, Nextel Mexico obtained
AOL Mexicos call center assets, certain accounts
receivable and access to AOL Mexicos customer list, as
well as tax loss carryforwards, which we believe are more likely
than not to be realized. We accounted for this transaction as a
purchase of assets. This acquisition is a related party
transaction as one of our board members is also the president
and chief executive officer of AOL Latin America. Due to this
board members involvement with our company, he recused
himself from our decision to make this acquisition.
Brazil Spectrum Purchases. During the
second quarter of 2005, Nextel Brazil acquired spectrum licenses
for $8.3 million, of which it paid $0.7 million. The
remaining $7.6 million is due in six annual installments
beginning in 2008, and we are amortizing these licenses over
15 years.
Other
Servico Movel Especializado (SME) Regulations in
Brazil. On May 16, 2005, the Brazilian
National Communications Agency, or Anatel, enacted certain
substantive modifications to the SME regulations that, among
other things, have the effect of treating Nextel Brazil equal to
all other Brazilian SMR and SME carriers with respect to billing
for use of other mobile networks. These modifications to the SME
regulations became immediately effective and resulted in savings
for Nextel Brazil in relation to interconnect charges made by
other carriers.
Stock Split. On October 27, 2005,
we announced a
2-for-1
common stock split to be effected in the form of a stock
dividend, which was paid on November 21, 2005 to holders of
record on November 11, 2005. All share and per share
amounts in this annual report on
Form 10-K
related to NII Holdings, Inc. reflect the common stock split.
Amendments to Infrastructure Supply and Installation
Services Agreements. In December 2005, we and each of
our operating companies entered into various amendments to our
existing infrastructure supply and installation services
agreements with Motorola, Inc. to extend the terms of these
agreements to December 31, 2007.
Out-of-Period
Adjustments
During the year ended December 31, 2005, we identified
errors in our financial statements for the year ended
December 31, 2004. These errors primarily related to
accounting for income taxes, a corporate aircraft
49
lease, bookkeeping errors in our operating company in Mexico and
other miscellaneous items. For the year ended December 31,
2005, we reduced operating income by $2.1 million and
increased net income by $2.8 million, respectively, related
to the correction of these errors. In connection with certain
balance sheet errors, during the year ended December 31,
2005, we increased total assets by approximately
$66.8 million, total liabilities by approximately
$34.9 million and stockholders equity by
approximately $31.9 million. We do not believe that these
adjustments are material to the financial statements for the
year ended December 31, 2005 or to any prior periods. See
Notes 7 and 12 to our consolidated financial statements
included at the end of this annual report on
Form 10-K
for additional disclosures related to the aircraft lease and
income tax adjustments, respectively.
Corporate
Aircraft Leases
In April 2004, we entered into an agreement to lease a corporate
aircraft for eight years for the purpose of enabling company
employees to visit and conduct business at our various operating
companies in Latin America. We originally accounted for this
agreement as an operating lease. However, upon further analysis
and review, in the fourth quarter of 2005, we determined that
because of certain cross-default provisions in the lease, we
should account for the agreement as a capital lease under
EITF 97-01, Implementation Issues in Accounting for
Lease Transactions, Including Those Involving Special Purpose
Entities. As a result of this and due to a lease
modification of the existing aircraft lease, in the fourth
quarter of 2005, we revised the accounting for this agreement to
a capital lease and recorded a capital lease asset and capital
lease liability for the present value of the future minimum
lease payments. We also adjusted our general and administrative
expenses, depreciation and interest expense to reflect the
change from an operating lease to a capital lease.
In November 2005, we entered into an agreement to lease a new
corporate aircraft beginning in 2009 for ten years. We refer to
this aircraft lease as the 2005 aircraft lease. This new
aircraft, which is scheduled to be delivered in May 2009, will
replace the existing corporate aircraft that we are currently
leasing. We determined that in accordance with EITF 97-10,
The Effect of Lessee Involvement in Asset
Construction, we are the owner of this new corporate
aircraft during its construction because we have substantially
all of the construction period risks. As a result, we will
record an asset for construction in progress and a corresponding
long-term liability for the new aircraft as construction occurs.
When construction of the new corporate aircraft is complete and
the lease term begins, we will record the 2005 aircraft lease as
a sale and a leaseback and evaluate the classification of the
lease as capital versus operating at that time.
Upon taking delivery of the new aircraft in May 2009, we are
required to immediately exercise our early purchase option on
the existing aircraft and pay all amounts due under the 2004
aircraft lease. If we fail to take delivery of the new aircraft
and acquire the existing aircraft, we will be subject to certain
penalties under the 2004 aircraft lease and the 2005 aircraft
lease. If we take delivery of the new aircraft and acquire the
existing aircraft, we intend to immediately sell the existing
aircraft.
In addition, we signed a demand promissory note to guarantee the
total advance payments for the construction of the new aircraft
to be financed by the lessor under the 2005 aircraft lease. The
first scheduled advance payment occurred in November 2005. The
lessor committed to make advance payments of up to
$25.2 million during the construction of the new aircraft.
We also provided a $1.0 million letter of credit to the
lessor as security for the first advance payment, which we paid
in the fourth quarter of 2005. To secure our obligations under
the letter of credit agreement, we deposited approximately
$1.0 million in a restricted cash account with the bank
issuing the letter of credit. We have classified this amount as
a long-term asset in our consolidated balance sheet as of
December 31, 2005. Under the 2005 aircraft lease, we are
obligated to increase the amount of the letter of credit up to a
maximum of $10.0 million as the lessor makes advance
payments. Under the terms of this promissory note, we are
required to maintain unencumbered cash, cash equivalents,
marketable securities and highly liquid investments of no less
than $60.0 million at all times.
Interest accrues on the portion of the outstanding principal
amount of the promissory note that is equal to or less than
$10.0 million, at a variable rate of interest, adjusted
monthly, equal to the monthly LIBOR rate plus 0.5% per year
and the portion of the outstanding principal amount of the note
in excess of $10.0 million, at a variable rate of interest,
adjusted monthly, equal to the monthly LIBOR rate plus
1.75% per year. As of December 31, 2005, we recorded
an asset and a corresponding liability of $1.0 million for
the amount
50
outstanding under this promissory note. In addition, for the
year ended December 31, 2005, we have accrued for interest
on the $1.0 million outstanding balance.
Brazilian
Contingencies
Nextel Brazil has received various assessment notices from state
and federal Brazilian authorities asserting deficiencies in
payments related primarily to value-added taxes and import
duties based on the classification of equipment and services.
Nextel Brazil has filed various administrative and legal
petitions disputing these assessments. In some cases, Nextel
Brazil has received favorable decisions, which are currently
being appealed by the respective governmental authority. In
other cases, Nextel Brazils petitions have been denied,
and Nextel Brazil is currently appealing those decisions. Nextel
Brazil is also disputing various other claims. As a result of
the expiration of the statute of limitations for certain
contingencies, during the year ended December 31, 2005,
Nextel Brazil reversed $6.5 million in accrued liabilities,
of which we recorded $3.2 million as a reduction to
operating expenses and the remainder to other income, which
represented monetary corrections.
During the year ended December 31, 2004, Nextel Brazil
reduced its liabilities by $35.4 million, of which we
recorded $14.4 million as a reduction to operating
expenses, reclassified $12.6 million of a settled claim to
current liabilities for payment, and recorded the remainder,
which primarily included monetary corrections on these
contingencies, in other income.
During 2003, we reversed $6.3 million in liabilities. Of
this total, we recorded $4.6 million as a reduction to
operating expenses and the remainder to other income.
As of December 31, 2005, Nextel Brazil had accrued
liabilities of $27.6 million related to contingencies, all
of which were classified in tax and non-tax accrued
contingencies reported as a component of other long-term
liabilities. As of December 31, 2004, Nextel Brazil had
accrued liabilities of $26.4 million related to
contingencies, of which $23.2 million were classified as
other long-term liabilities and $3.2 million were
classified as accrued expenses. The balance related to accrued
contingencies increased from 2004 primarily due to foreign
currency translation adjustments. Of the total accrued
liabilities as of December 31, 2005 and 2004, Nextel Brazil
had $21.7 million and $20.8 million in unasserted
claims, respectively. We currently estimate the range of
possible losses related to matters for which Nextel Brazil has
not accrued liabilities, as they are not deemed probable, to be
between $74.1 million and $78.1 million as of
December 31, 2005. We are continuing to evaluate the
likelihood of probable and reasonably possible losses, if any,
related to all known contingencies. As a result, future
increases or decreases to our accrued liabilities may be
necessary and will be recorded in the period when such amounts
are probable and estimable.
Argentine
Contingencies
Turnover Tax. In one of the markets in
which we operate in Argentina, the city government had
previously increased the turnover tax rate from 3% to 6% of
revenues for cellular companies. From a regulatory standpoint,
we are not considered a cellular company. As a result, we
continue to pay the turnover tax at the existing rate and record
a liability for the differential between the old rate and the
new rate. Similarly, one of the provincial governments in one of
the markets where we operate also increased their turnover tax
rate from 4% to 5.85% of revenues for cellular companies.
Consistent with our earlier position, we continue to pay the
turnover tax at the existing rate and accrue a liability for the
incremental difference in the rate. For the years ended
December 31, 2005 and 2004, we recorded $8.0 million
and $8.8 million, respectively, as increases in liabilities
for local turnover taxes.
Universal Service Tax. During the year
ended December 31, 2000, the Argentine government enacted
the Universal Service Regulation, which established a tax on
telecommunications licensees effective January 1, 2001,
equal to 1% of telecommunications service revenue, net of
applicable taxes and specified related costs. The license holder
can choose either to pay the tax into a fund for universal
service development or to participate directly in offering
services to specific geographical areas under an annual plan
designed by the federal government. Although the regulations
state that this tax would be applicable beginning
January 1, 2001, the authorities have not, until recently,
taken the necessary actions to implement this tax, such as
51
creating policies relating to collection or opening accounts
into which the funds would be deposited. As of December 31,
2005, the accrual for this liability to the government was
$5.1 million, which is included as a component of total
accrued liabilities of $40.2 million as of
December 31, 2005.
Nextel Argentina billed this tax as Universal Tax on customer
invoices during the period from January 2001 to August 2001 for
a total amount of $0.2 million. Subsequent to August 2001,
Nextel Argentina did not segregate a specific charge or identify
any portion of its customer billings as relating to the
Universal Tax and, in fact, raised its rates and service fees to
customers several times after this period unrelated to the
Universal Tax. As of December 31, 2005 and 2004, we had
accrued $0.2 million (from January 2001 to August
2001) for the refund.
In May 2005, the Secretariat of Communications, or the SC,
passed legislation stating that the fee was an obligation of the
service provider and could not be assessed to its clients. The
SC also instructed the National Communication Commission, or the
CNC, to request operators to reimburse all amounts collected. In
July 2005, the CNC issued a resolution which required operators
to reimburse amounts collected, plus interest, within
90 days.
In October 2005, Nextel Argentina sought a judicial injunction
against the resolution passed in July 2005. Shortly thereafter,
the SC rejected Nextel Argentinas administrative claim and
separately repealed the legislation passed in July 2005 that
required operators to reimburse amounts collected, plus
interest. The SC also instructed the CNC to issue new
resolutions on a
case-by-case
basis. As a result, the CNC ordered Nextel Argentina to
reimburse amounts collected as universal service, plus interest,
using the same methodology and rate that Nextel Argentina
utilizes to calculate interest charged to late-paying customers.
In November 2005, Nextel Argentina filed an administrative claim
and sought a judicial injunction against the legislation passed
in May 2005. The administrative claim and the judicial
injunction that Nextel Argentina filed in November 2005 are
still pending.
Also, in the fourth quarter of 2005, consumer advocate
organizations started taking a more active role in this matter
by filing administrative pleadings and judicial claims against
other telecommunications operators. In December 2005, Nextel
Argentina was notified that a consumer group filed a claim
against Nextel Argentina to reimburse all amounts collected as
Universal Tax.
As a result of the events described above and an opinion of
counsel, during the fourth quarter of 2005, Nextel Argentina
accrued $3.9 million for the amount due to its clients for
the period from September 2001 to December 2005 as a reduction
of operating revenues. In addition, Nextel Argentina accrued
$2.5 million for interest related to these charges, which
we classified as interest expense on our consolidated statement
of operations. The total amount of $6.4 million is
included as a component of total accrued liabilities of
$40.2 million as of December 31, 2005.
As of December 31, 2005 and 2004, Nextel Argentina had
accrued liabilities of $40.2 million and
$21.2 million, respectively, related primarily to local
turnover taxes and local government claims, all of which were
classified in tax and non-tax accrued contingencies reported as
a component of accrued expenses and other.
Critical
Accounting Policies and Estimates
The preparation of our financial statements in conformity with
accounting principles generally accepted in the United States
requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities, revenues and
expenses and related disclosures of contingent assets and
liabilities in the consolidated financial statements and
accompanying notes. Although we believe that our estimates,
assumptions and judgments are reasonable, they are based upon
information presently available. Due to the inherent uncertainty
involved in making those estimates, actual results reported in
future periods could differ from those estimates.
The SEC has defined a companys critical accounting
policies as those that are most important to the portrayal of
the companys financial condition and results of
operations, and which require a company to make its most
difficult and subjective judgments, often as a result of the
need to make estimates of matters that are
52
inherently uncertain. Based on this definition, we have
identified the critical accounting policies and judgments
addressed below. We also have other accounting policies, which
involve the use of estimates, judgments and assumptions that are
significant to understanding our results. For additional
information see Note 1 to our consolidated financial
statements included at the end of this annual report on
Form 10-K.
Revenue Recognition. While our revenue
recognition policy does not require the exercise of significant
judgment or the use of significant estimates, we believe that
our policy is significant as revenue is a key component of our
results of operations.
Operating revenues primarily consist of service revenues and
revenues generated from the sale of digital handsets and
accessories. In addition, operating revenues are presented net
of valued-added taxes and gross of certain revenue-based taxes.
Service revenues primarily include fixed monthly access charges
for digital mobile telephone service and digital two-way radio
and other services including revenues from calling party pays
programs where applicable and variable charges for airtime and
digital two-way radio usage in excess of plan minutes,
long-distance charges and international roaming revenues derived
from calls placed by our customers on other carriers
networks.
We also have other sources of revenues. Other revenues primarily
include amounts generated from our handset maintenance programs,
roaming revenues generated from other companies customers
that roam on our networks and co-location rental revenues from
third party tenants that rent space on our towers.
We recognize revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the sale price is fixed and
determinable and collectibility is reasonably assured. The
following are the policies applicable to our major categories of
revenue transactions.
We recognize revenue for access charges and other services
charged at fixed amounts ratably over the service period, net of
credits and adjustments for service discounts. We recognize
excess usage, local, long distance and calling party pays
revenue at contractual rates per minute as minutes are used. We
record cash received in excess of revenues earned as deferred
revenues.
We recognize revenue generated from our handset maintenance
programs on a monthly basis at fixed amounts over the service
period. We recognize roaming revenues at contractual rates per
minute as minutes are used. We recognize co-location revenues
from third party tenants on a monthly basis based on the terms
set by the underlying agreements.
We bill excess usage to our customers in arrears. In order to
recognize the revenues originated from excess usage subsequent
to customer invoicing through the end of the reporting period,
we estimate the unbilled portion based on the usage that the
handset had during the part of the month already billed, and we
use this actual usage to estimate the unbilled usage for the
rest of the month taking into consideration working days and
seasonality. Our estimates are based on our experience in each
market. We periodically evaluate our estimation process by
comparing our estimates to actual excess usage revenue billed
the following month. As a result, actual usage could differ from
our estimates.
We recognize revenue from handset and accessory sales when title
and risk of loss passes upon delivery of the handset or
accessory to the customer.
Allowance for Doubtful Accounts. We
establish an allowance for doubtful accounts receivable
sufficient to cover probable and reasonably estimated losses.
Our methodology for determining our allowance for doubtful
accounts receivable requires significant estimates. Since we
have several hundred thousand accounts, it is impracticable to
review the collectibility of all individual accounts when we
determine the amount of our allowance for doubtful accounts
receivable each period. Therefore, we consider a number of
factors in establishing the allowance on a market-by-market
basis, including historical collection experience, current
economic trends, estimates of forecasted write-offs, agings of
the accounts receivable portfolio and other factors. While we
believe that the estimates we use are reasonable, actual results
could differ from those estimates.
Depreciation of Property, Plant and
Equipment. Our business is capital intensive
because of our digital mobile networks. We record at cost our
digital network assets and other improvements that in our
opinion,
53
extend the useful lives of the underlying assets, and depreciate
the assets over their estimated useful lives. We calculate
depreciation using the straight-line method based on estimated
useful lives of 3 to 20 years for digital mobile network
equipment and software and 3 to 10 years for office
equipment, furniture and fixtures, and other. We amortize
leasehold improvements over the shorter of the lease terms or
the useful lives of the improvements. Our digital mobile
networks are highly complex and, due to constant innovation and
enhancements, certain components of the networks may lose their
utility faster than anticipated. We periodically reassess the
economic life of these components and make adjustments to their
expected lives after considering historical experience and
capacity requirements, consulting with the vendor and assessing
new product and market demands and other factors. When these
factors indicate network components may not be useful for as
long as originally anticipated, we depreciate the remaining book
value over the remaining useful lives. Further, the timing and
deployment of any new technologies could affect the estimated
remaining useful lives of our digital network assets, which
could significantly impact future results of operations.
Amortization of Intangible Assets. We
record our licenses at historical cost and amortize them using
the straight-line method based on an estimated useful life of 12
to 20 years. The terms of our licenses, including renewals,
range from 30 to 40 years. However, the wireless
telecommunications industry is experiencing significant
technological change. Future technological advancements may
render iDEN technology obsolete. Additionally, the political and
regulatory environments in the markets we serve are continuously
changing and, in many cases, the renewal fees could be
significant. Therefore, we do not view the renewal of our
licenses to be perfunctory. As a result, we classify our
licenses as finite lived assets. Our licenses and the
requirements to maintain the licenses are subject to renewal
after the initial term, provided that we have complied with
applicable rules and policies in each of our markets. We intend
to comply, and believe we have complied, with these rules and
policies in all material respects. However, because governmental
authorities have discretion as to the grant or renewal of
licenses, our licenses may not be renewed, which could have a
significant impact on our estimated useful lives. This would
affect our results of operations in the future.
Foreign Currency. We translate the
results of operations for our
non-U.S. subsidiaries
and affiliates from the designated functional currency to the
U.S. dollar using average exchange rates during the period,
while we translate assets and liabilities at the exchange rate
in effect at the reporting date. We report the resulting gains
or losses from translating foreign currency financial statements
as other comprehensive income or loss.
Because average exchange rates are used to translate the
operations of our
non-U.S. subsidiaries,
our operating companies trends may be impacted by the
translation. For example, in-country U.S. dollar-based
trends may be accentuated or attenuated by changes in
translation rates.
We report the effects of changes in exchange rates associated
with U.S. dollar-denominated assets and liabilities as
foreign currency transaction gains or losses. With regard to
intercompany loans and advances to our foreign subsidiaries that
are of a long-term investment nature and that are not expected
to be settled in the forseeable future, we report the effects of
changes in exchange rates as part of the cumulative foreign
currency translation adjustment in our consolidated financial
statements. We view the intercompany loans and advances from our
U.S. subsidiaries to Nextel Brazil and Nextel Chile and an
intercompany payable due to Nextel Mexico as of a long-term
investment nature. In contrast, we report the effects of
exchange rates associated with U.S. dollar denominated
intercompany loans and advances to our foreign subsidiaries that
are due, or for which repayment is anticipated, in the
foreseeable future, as foreign currency transaction gains, net
in our consolidated statements of operations. As a result, our
determination of whether intercompany loans and advances are of
a long-term investment nature can have a significant impact on
the calculation of foreign currency transaction gains and losses
and the foreign currency translation adjustment.
Loss Contingencies. We account for and
disclose loss contingencies such as pending litigation and
actual or possible claims and assessments in accordance with
SFAS No. 5, Accounting for Contingencies.
We accrue for loss contingencies if it is probable that a loss
will occur and if the loss can be reasonably estimated. We
disclose loss contingencies if it is reasonably possible that a
loss will occur and if the loss can be reasonably estimated. We
do not accrue for or disclose loss contingencies if there is
only a remote possibility that the loss will occur.
SFAS No. 5 requires us to make judgments regarding
future events,
54
including an assessment relating to the likelihood that a loss
may occur and an estimate of the amount of such loss. In
assessing loss contingencies, we often seek the assistance of
our legal counsel and in some instances, of third party legal
counsel. As a result of the significant judgment required in
assessing and estimating loss contingencies, actual losses
realized in future periods could differ significantly from our
estimates.
Stock-Based Compensation. We account
for stock-based compensation under the recognition and
measurement principles of Financial Accounting Standards
No. 123, Accounting for Stock Based
Compensation, or SFAS No. 123. As permitted by
SFAS No. 123, we have chosen to continue to apply APB
Opinion No. 25 Accounting for Stock Issued to
Employees, or APB No. 25, and related interpretations
in accounting for our employee related stock plans. Accordingly,
in each period, we used the intrinsic-value method to record
stock based employee compensation. We do not recognize
compensation expense for stock options granted to employees with
an exercise price equal to or above the trading price per share
of our common stock on the grant date. We account for
stock-based compensation to non-employees at fair value using a
Black-Scholes option pricing model in accordance with the
provisions of SFAS No. 123 and other applicable
accounting principles. Since compensation expense is measured
based on the estimated fair value of options rather than the
intrinsic value, if we had applied SFAS No. 123 to all
stock-based compensation, our results of operations would have
been different. Effective January 1, 2006, we will apply
the provisions in Statement No. 123 (revised 2004),
Share-Based Payment, or SFAS 123R, which will
require that we expense the cost of stock options and other
forms of shared-based payments. See Note 1 to our
consolidated financial statements included at the end of this
annual report on Form 10-K for further information
surrounding the effect of applying SFAS No. 123R on
our results of operations.
Income Taxes. We account for income
taxes using the asset and liability method under which we
recognize deferred income taxes for the tax consequences
attributable to differences between the financial statement
carrying amounts and the tax bases of existing assets and
liabilities, as well as for tax loss carryforwards and tax
credit carryforwards. We measure deferred tax assets and
liabilities using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recoverable or settled. We recognize the effect
on deferred taxes of a change in tax rates in income in the
period that includes the enactment date. We provide a valuation
allowance against deferred tax assets if, based upon the weight
of available evidence, we believe it is more likely than not
that some or all of the deferred tax assets will not be
realized. We report remeasurement gains and losses related to
deferred tax assets and liabilities in our income tax provision.
A substantial portion of our deferred tax asset valuation
allowance relates to deferred tax assets that, if realized, will
not result in a benefit to our income tax provision. In
accordance with
SOP 90-7,
we recognize decreases in the valuation allowance existing at
the reorganization date first as a reduction in the carrying
value of intangible assets existing at the reorganization date
and then as an increase to paid-in capital. As of
December 31, 2004, we reduced to zero the carrying value of
our intangible assets existing at the reorganization date. We
will record the future decreases, if any, of the valuation
allowance existing on the reorganization date as an increase to
paid-in capital. We will record decreases, if any, of the
post-reorganization valuation allowance as a benefit to our
income tax provision. In accordance with APB 25, we
recognize decreases in the valuation allowance attributable to
the tax benefits resulting from the exercise of employee stock
options as an increase to
paid-in
capital. In each market, we recognize decreases in the valuation
allowance first as a decrease in the remaining valuation
allowance that existed as of the reorganization date, then as a
decrease in any
post-reorganization
valuation allowance, and finally as a decrease of the valuation
allowance associated with stock option deductions.
Realization of deferred tax assets in any of our markets depends
on continued future profitability in these markets. Our ability
to generate the expected amounts of taxable income from future
operations is dependent upon general economic conditions,
technology trends, political uncertainties, competitive
pressures and other factors beyond managements control. If
our operations continue to demonstrate profitability, we may
further reverse additional deferred tax asset valuation
allowance balances during 2006. We will continue to evaluate the
deferred tax asset valuation allowance balances in all of our
foreign operating companies and in our U.S. companies
throughout 2006 to determine the appropriate level of valuation
allowances.
55
Related
Party Transactions
Transactions with Nextel Communications,
Inc. Following Nextel Communications
sale of 18,000,000 shares of our common stock on
November 13, 2003, Nextel Communications owned
24,712,128 shares of our common stock, either directly or
indirectly, which represented approximately 17.9% and 17.7% of
our issued and outstanding shares of common stock as of
December 31, 2003 and 2004, respectively.
Following Nextel Communications sale of
10,000,000 shares of our common stock on September 7,
2005, Nextel Communications owned, as of December 31, 2005,
either directly or indirectly, 14,712,128 shares of our
common stock, which represents approximately 9.7% of our issued
and outstanding shares of common stock.
The following are descriptions of other significant transactions
consummated with Nextel Communications on November 12, 2002
under our confirmed plan of reorganization. See
Item 13. Certain Relationships and
Related Transactions Transactions with Nextel
Communications for additional information.
New
Spectrum Use and Build-Out Agreement
On November 12, 2002, we and Nextel Communications entered
into a new spectrum use and build-out agreement. Under this
agreement, certain of our subsidiaries committed to complete the
construction of our network in the Baja region of Mexico, in
exchange for cash proceeds from Nextel Communications of
$50.0 million. We recorded the $50.0 million as
deferred revenues and we are recognizing the revenue ratably
over 15.5 years, the then remaining useful life of our
licenses in Tijuana. As of December 31, 2005 and 2004, we
had recorded $42.5 million and $45.7 million,
respectively, of deferred revenues related to this agreement, of
which $39.3 million and $42.5 million are classified
as long-term, respectively. We commenced service on our network
in the Baja region of Mexico in September 2003. As a result,
during the years ended December 31, 2005, 2004 and 2003, we
recognized $3.2 million, $3.5 million and
$0.8 million, respectively, in revenues related to this
arrangement.
Tax
Cooperation Agreement with Nextel Communications
We had a tax sharing agreement with Nextel Communications, dated
January 1, 1997, which was in effect through
November 11, 2002. On November 12, 2002, we terminated
the tax sharing agreement and entered into a tax cooperation
agreement with Nextel Communications under which Nextel
Communications and we agreed to retain, for 20 years
following the effective date of our plan of reorganization,
books, records, accounting data and other information related to
the preparation and filing of consolidated tax returns filed for
Nextel Communications consolidated group.
Amended
and Restated Overhead Services Agreement with Nextel
Communications
We had an overhead services agreement with Nextel Communications
in effect through November 11, 2002. On November 12,
2002, we entered into an amended and restated overhead services
agreement, under which Nextel Communications will provide us,
for agreed upon service fees, certain (i) information
technology services, (ii) payroll and employee benefit
services, (iii) procurement services, (iv) engineering
and technical services, (v) marketing and sales services,
and (vi) accounts payable services. Either Nextel
Communications or we can terminate one or more of the other
services at any time with 30 days advance notice. Effective
January 1, 2003, we terminated Nextel Communications
payroll and employee benefit services, procurement services and
accounts payable services. Effective October 15, 2004, we
terminated all other services with the exception of engineering
and technical services and marketing and sales services. In
addition, effective February 15, 2006, we terminated in its
entirety the overhead services agreement with Nextel
Communications.
Third
Amended and Restated Trademark License Agreement with Nextel
Communications, Inc.
On November 12, 2002, we entered into a third amended and
restated trademark license agreement with Nextel Communications,
which superseded a previous trademark license agreement. Under
the new agreement,
56
Nextel Communications granted to us an exclusive, royalty-free
license to use within Latin America, excluding Puerto Rico,
certain trademarks, including but not limited to the mark
Nextel. The license agreement continues indefinitely
unless terminated by Nextel Communications upon 60 days
notice if we commit any one of several specified defaults and
fail to cure the default within a 60 day period. Under a
side agreement, until the sooner of November 12, 2007 or
the termination of the new agreement, Nextel Communications
agreed not to offer iDEN service in Latin America, other than in
Puerto Rico, and we agreed not to offer iDEN service in the
United States.
Standstill
Agreement
As part of our Revised Third Amended Joint Plan of
Reorganization, we, Nextel Communications and certain of our
noteholders entered into a Standstill Agreement, pursuant to
which Nextel Communications and its affiliates agreed not to
purchase (or take any other action to acquire) any of our equity
securities, or other securities convertible into our equity
securities, that would result in Nextel Communications and its
affiliates holding, in the aggregate, more than 49.9% of the
equity ownership of us on a fully diluted basis, which we refer
to as the standstill percentage, without prior
approval of a majority of the non-Nextel Communications members
of the Board of Directors. We agreed not to take any action that
would cause Nextel Communications to hold more than 49.9% of our
common equity on a fully diluted basis. If, however, we take
action that causes Nextel Communications to hold more than 49.9%
of our common equity, Nextel is required to vote all shares in
excess of the standstill percentage in the same proportions as
votes are cast for such class or series of our voting stock by
stockholders other than Nextel Communications and its affiliates.
During the term of the Standstill Agreement, Nextel
Communications and its controlled affiliates have agreed not to
nominate to our Board of Directors, nor will they vote in favor
of the election to the Board of Directors, any person that is an
affiliate of Nextel Communications if the election of such
person to the Board of Directors would result in more than two
affiliates of Nextel Communications serving as directors. Nextel
Communications has also agreed that if at any time during the
term of the Standstill Agreement more than two of its affiliates
are directors, it will use its reasonable efforts to cause such
directors to resign to the extent necessary to reduce the number
of directors on our Board of Directors that are affiliates of
Nextel Communications to two.
We also bill Nextel Communications for roaming charges for their
customers use of our digital mobile networks in our
markets.
Transactions with Motorola,
Inc. Through September 2004, we considered
Motorola to be a related party.
On November 12, 2002, as part of our plan of
reorganization, we entered into a new master equipment financing
agreement and a new equipment financing agreement with Motorola
Credit Corporation. In July 2003, we entered into an agreement
to substantially reduce our indebtedness under the international
equipment facility to Motorola Credit Corporation. Under this
agreement, in September 2003, we prepaid, at face value,
$100.0 million of the $225.0 million in outstanding
principal under this facility. Concurrently, we entered into an
agreement with Motorola Credit Corporation to retire our
indebtedness under the Brazil equipment facility. In connection
with this agreement, in September 2003, we paid
$86.0 million in consideration of all of the
$103.2 million in outstanding principal as well as
$5.5 million in accrued and unpaid interest under the
Brazil equipment facility.
In February 2004, in compliance with our international equipment
facility credit agreement we prepaid, at face value,
$72.5 million of the $125.0 million in outstanding
principal to Motorola Credit Corporation using proceeds from a
convertible note offering made in January 2004. In July 2004, we
paid the remaining $52.6 million in outstanding principal
and related accrued interest under our international equipment
facility. Under the terms of the international equipment
facility and related agreements, Motorola Credit Corporation was
a secured creditor and held senior liens on substantially all of
our assets, as well as the assets of our various foreign and
domestic subsidiaries and affiliates. As a result of the
extinguishment of this facility, Motorola Credit Corporation
released its liens on these assets, all restrictive covenants
under this facility were terminated and all obligations under
this facility were discharged. We did not recognize any gain or
loss as a result of either of these transactions.
57
In addition, prior to the extinguishment of our international
equipment facility, Motorola Credit Corporation owned one
outstanding share of our Special Director Preferred Stock, which
gave Motorola Credit Corporation the right to nominate, elect,
remove and replace one member of our board of directors.
Mr. Charles F. Wright, one of the directors on our board,
was elected by Motorola through these rights under the Special
Director Preferred Stock. In connection with the extinguishment
of our international equipment facility and
Mr. Wrights resignation as a member of our board of
directors on September 13, 2004, Motorola Credit
Corporation lost this right to elect one member of our board of
directors and is no longer considered to be a related party.
We continue to have a number of important strategic and
commercial relationships with Motorola. We purchase handsets and
accessories and a substantial portion of our digital mobile
network equipment and related software from Motorola. Our
equipment purchase agreements with Motorola govern our rights
and obligations regarding purchases of digital mobile network
equipment manufactured by Motorola. We have purchase targets
under these agreements that, if not met, may result in us being
required to pay higher prices for this equipment. We also have
various equipment agreements with Motorola. We and Motorola have
agreed to warranty and maintenance programs and specified
indemnity arrangements. We also pay Motorola for handset service
and repair and training and are reimbursed for costs we incur
under various marketing and promotional arrangements.
Other Relationship. On
February 14, 2006, we elected Mr. John Donovan,
President and Chief Executive Officer of inCode, a wireless
business and technology consulting company, to our Board of
Directors in order to fill a vacancy. InCode has performed
various consulting services for us in the past.
B. Results
of Operation
Operating revenues primarily consist of wireless service
revenues and revenues generated from the sale of digital
handsets and accessories. Service revenues primarily include
fixed monthly access charges for digital mobile telephone
service and digital two-way radio and other services, including
revenues from calling party pays programs and variable charges
for airtime and digital two-way radio usage in excess of plan
minutes, long-distance charges and international roaming
revenues derived from calls placed by our customers. Digital
handset and accessory revenues represent revenues we earn on the
sale of digital handsets and accessories to our customers.
In addition, we also have other less significant sources of
revenues. These revenues primarily include revenues generated
from our handset maintenance programs, roaming revenues
generated from other companies customers that roam on our
networks and co-location rental revenues from third-party
tenants that rent space on our towers.
See Revenue Recognition above and Note 1 to
our consolidated financial statements included at the end of
this annual report on
Form 10-K
for a description of our revenue recognition methodology.
Cost of revenues primarily includes the cost of providing
wireless service and the cost of digital handset and accessory
sales. Cost of providing service consists largely of costs of
interconnection with local exchange carrier facilities and
direct switch and transmitter and receiver site costs, including
property taxes, expenses related to our handset maintenance
programs, insurance costs, utility costs, maintenance costs and
rent for the network switches and sites used to operate our
digital mobile networks. Interconnection costs have fixed and
variable components. The fixed component of interconnection
costs consists of monthly flat-rate fees for facilities leased
from local exchange carriers. The variable component of
interconnection costs, which fluctuates in relation to the
volume and duration of wireless calls, generally consists of
per-minute use fees charged by wireline and wireless providers
for wireless calls from our digital handsets terminating on
their networks. Cost of digital handset and accessory sales
consists largely of the cost of the handset and accessories,
order fulfillment and installation-related expenses, as well as
write-downs of digital handset and related accessory inventory
for shrinkage or obsolescence.
Our service and other revenues and the variable component of our
cost of service are primarily driven by the number of digital
handsets in service and not necessarily by the number of
customers, as one customer may purchase one or many digital
handsets. Our digital handset and accessory revenues and cost of
digital
58
handset and accessory sales are primarily driven by the number
of new handsets placed into service as well as handset upgrades
provided to existing customers during the year.
Selling and marketing expenses includes all of the expenses
related to acquiring customers. General and administrative
expenses include expenses related to revenue-based taxes,
billing, customer care, collections including bad debt,
management information systems, spectrum license fees and
corporate overhead.
1. Year
Ended December 31, 2005 vs. Year Ended December 31,
2004
a.
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Consolidated
|
|
|
|
Year Ended
|
|
|
Consolidated
|
|
|
|
Change from
|
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
Previous Year
|
|
|
|
|
2005
|
|
|
Revenues
|
|
|
|
2004
|
|
|
Revenues
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
(dollars in thousands)
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
1,666,613
|
|
|
|
95
|
|
%
|
|
$
|
1,214,837
|
|
|
|
95
|
|
%
|
|
$
|
451,776
|
|
|
|
37
|
|
%
|
Digital handset and accessory
revenues
|
|
|
79,226
|
|
|
|
5
|
|
%
|
|
|
65,071
|
|
|
|
5
|
|
%
|
|
|
14,155
|
|
|
|
22
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,745,839
|
|
|
|
100
|
|
%
|
|
|
1,279,908
|
|
|
|
100
|
|
%
|
|
|
465,931
|
|
|
|
36
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation and amortization included below)
|
|
|
(421,037
|
)
|
|
|
(24
|
)
|
%
|
|
|
(332,487
|
)
|
|
|
(26
|
)
|
%
|
|
|
(88,550
|
)
|
|
|
27
|
|
%
|
Cost of digital handset and
accessory sales
|
|
|
(251,192
|
)
|
|
|
(15
|
)
|
%
|
|
|
(207,112
|
)
|
|
|
(16
|
)
|
%
|
|
|
(44,080
|
)
|
|
|
21
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(672,229
|
)
|
|
|
(39
|
)
|
%
|
|
|
(539,599
|
)
|
|
|
(42
|
)
|
%
|
|
|
(132,630
|
)
|
|
|
25
|
|
%
|
Selling and marketing expenses
|
|
|
(233,540
|
)
|
|
|
(13
|
)
|
%
|
|
|
(162,343
|
)
|
|
|
(13
|
)
|
%
|
|
|
(71,197
|
)
|
|
|
44
|
|
%
|
General and administrative expenses
|
|
|
(355,309
|
)
|
|
|
(20
|
)
|
%
|
|
|
(229,228
|
)
|
|
|
(18
|
)
|
%
|
|
|
(126,081
|
)
|
|
|
55
|
|
%
|
Depreciation and amortization
|
|
|
(130,132
|
)
|
|
|
(7
|
)
|
%
|
|
|
(98,375
|
)
|
|
|
(8
|
)
|
%
|
|
|
(31,757
|
)
|
|
|
32
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
354,629
|
|
|
|
21
|
|
%
|
|
|
250,363
|
|
|
|
19
|
|
%
|
|
|
104,266
|
|
|
|
42
|
|
%
|
Interest expense, net
|
|
|
(72,470
|
)
|
|
|
(4
|
)
|
%
|
|
|
(55,113
|
)
|
|
|
(4
|
)
|
%
|
|
|
(17,357
|
)
|
|
|
31
|
|
%
|
Interest income
|
|
|
32,611
|
|
|
|
2
|
|
%
|
|
|
12,697
|
|
|
|
1
|
|
%
|
|
|
19,914
|
|
|
|
157
|
|
%
|
Foreign currency transaction gains,
net
|
|
|
3,357
|
|
|
|
|
|
|
|
|
9,210
|
|
|
|
1
|
|
%
|
|
|
(5,853
|
)
|
|
|
(64
|
)
|
%
|
Debt conversion expense
|
|
|
(8,930
|
)
|
|
|
(1
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(8,930
|
)
|
|
|
NM
|
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
(79,327
|
)
|
|
|
(6
|
)
|
%
|
|
|
79,327
|
|
|
|
(100
|
)
|
%
|
Other expense, net
|
|
|
(8,621
|
)
|
|
|
(1
|
)
|
%
|
|
|
(2,320
|
)
|
|
|
|
|
|
|
|
(6,301
|
)
|
|
|
272
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision
and cumulative effect of change in accounting principle, net
|
|
|
300,576
|
|
|
|
17
|
|
%
|
|
|
135,510
|
|
|
|
11
|
|
%
|
|
|
165,066
|
|
|
|
122
|
|
%
|
Income tax provision
|
|
|
(125,795
|
)
|
|
|
(7
|
)
|
%
|
|
|
(79,191
|
)
|
|
|
(6
|
)
|
%
|
|
|
(46,604
|
)
|
|
|
59
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
change in accounting principle, net
|
|
|
174,781
|
|
|
|
10
|
|
%
|
|
|
56,319
|
|
|
|
5
|
|
%
|
|
|
118,462
|
|
|
|
210
|
|
%
|
Cumulative effect of change in
accounting principle, net of income taxes of $11,898 in 2004
|
|
|
|
|
|
|
|
|
|
|
|
970
|
|
|
|
|
|
|
|
|
(970
|
)
|
|
|
(100
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
174,781
|
|
|
|
10
|
|
%
|
|
$
|
57,289
|
|
|
|
5
|
|
%
|
|
$
|
117,492
|
|
|
|
205
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM-Not Meaningful
1. Operating
revenues
The $451.8 million, or 37%, increase in consolidated
service and other revenues from the year ended December 31,
2004 to the year ended December 31, 2005 is primarily a
result of a 29% increase in the average number of total digital
handsets in service, an increase in average consolidated
revenues per handset and an increase of $30.2 million, or
58%, in consolidated revenues generated from our handset
maintenance programs, primarily in Mexico and Brazil.
59
The $14.2 million, or 22%, increase in consolidated digital
handset and accessory revenues from the year ended
December 31, 2004 to the year ended December 31, 2005
is primarily due to a 38% increase in handset sales, as well as
a 2% increase in handset upgrades.
2. Cost
of revenues
The $88.6 million, or 27%, increase in consolidated cost of
service from the year ended December 31, 2004 to the year
ended December 31, 2005 is principally a result of the
following:
|
|
|
|
|
a $51.5 million, or 29%, increase in consolidated
interconnect costs resulting from a 42% increase in consolidated
interconnect minutes of use;
|
|
|
|
a $24.7 million, or 27%, increase in consolidated direct
switch and transmitter and receiver site costs resulting from a
25% increase in the number of consolidated transmitter and
receiver sites in service from December 31, 2004 to
December 31, 2005; and
|
|
|
|
a $10.9 million, or 21%, increase in consolidated service
and repair costs mainly resulting from an increase in
subscribers participating under our handset maintenance
programs, primarily in Mexico and Brazil.
|
The $44.1 million, or 21%, increase in consolidated cost of
digital handset and accessory sales from the year ended
December 31, 2004 to the year ended December 31, 2005
is primarily due to a 38% increase in handset sales and a 2%
increase in handset upgrades.
3. Selling
and marketing expenses
The $71.2 million, or 44%, increase in consolidated selling
and marketing expenses from the year ended December 31,
2004 to the year ended December 31, 2005 is principally a
result of the following:
|
|
|
|
|
a $41.5 million, or 82%, increase in consolidated indirect
commissions resulting from a 51% increase in handset sales
earned by outside dealers;
|
|
|
|
a $16.3 million, or 24%, increase in consolidated direct
commissions and payroll expenses largely due to an increase in
commissions incurred as a result of a 23% increase in handset
sales across all markets by internal sales personnel; and
|
|
|
|
a $10.1 million, or 28%, increase in consolidated
advertising expenses, primarily in Mexico and Brazil, mainly
related to the launch of new markets and increased advertising
initiatives related to overall subscriber growth.
|
4. General
and administrative expenses
The $126.1 million, or 55%, increase in consolidated
general and administrative expenses from the year ended
December 31, 2004 to the year ended December 31, 2005
is primarily a result of the following:
|
|
|
|
|
a $60.6 million, or 71%, increase in consolidated other
general and administrative expenses largely due to
$18.6 million related to the
gross-up of
revenue-based taxes in Brazil, an increase in headcount and
facilities-related expenses due to continued subscriber growth
and an increase in corporate professional fees related to the
annual financial and Sarbanes-Oxley audit and legal services;
|
|
|
|
a $21.3 million, or 38%, increase in consolidated customer
care expenses resulting from an increase in payroll and related
expenses necessary to support a larger consolidated customer
base;
|
|
|
|
a $14.0 million, or 32%, increase from $44.4 million
to $58.4 million in spectrum license fees; and
|
|
|
|
a $12.3 million, or 165%, increase in consolidated bad debt
expense, which increased slightly as a percentage of revenues
from 0.6% in 2004 to 1.1% in 2005, primarily in Brazil and
Mexico. We do not expect bad debt expense as a percentage of
revenues to increase significantly in future periods.
|
60
The increase in general and administrative expenses is also due
to a $14.4 million reversal of contingent liabilities in
Brazil that we recorded as a reduction to general and
administrative expenses during the year ended December 31,
2004, partially offset by $1.7 million of net reversals of
contingent liabilities in Brazil related to the expiration of
the statute of limitations that we recorded as a reduction to
general and administrative expenses during the fourth quarter of
2005. We are continuing to evaluate the likelihood of probable
and reasonably possible losses, if any, related to all known
contingencies. As a result, future increases or decreases to our
accrued liabilities may be necessary and will be recorded in the
period when such charge is probable and estimable.
5. Depreciation
and amortization
The $31.8 million, or 32%, increase in consolidated
depreciation and amortization from the year ended
December 31, 2004 to the year ended December 31, 2005
is primarily due to increased deprecation on a larger base of
consolidated property, plant and equipment resulting from
continued expansion of our digital mobile networks, partially
offset by a decrease in amortization. The decrease in
amortization resulted from reversals that we recorded primarily
in the fourth quarter of 2004 of certain valuation allowances
for deferred tax assets. We recorded the reversals of valuation
allowances as reductions to the intangible assets that existed
as of the date of our application of fresh-start accounting.
The $17.4 million, or 31%, increase in consolidated net
interest expense from the year ended December 31, 2004 to
the year ended December 31, 2005 is primarily due to a
$14.0 million increase in interest incurred related to our
syndicated loan facility in Mexico that we drew down in May 2005
and an $8.3 million increase in interest related to our
tower financing obligations in Mexico and Brazil, partially
offset by a $2.9 million decrease in interest resulting
from the principal pay-downs of our international equipment
facility in February 2004 and July 2004 and a $2.8 million
decrease in interest resulting from the retirement of our
13.0% senior secured discount notes during the first
quarter of 2004.
The $19.9 million, or 157%, increase in interest income
from the year ended December 31, 2004 to the year ended
December 31, 2005 is largely the result of increases in
Nextel Mexicos average consolidated cash balances due to
the draw-down of Nextel Mexicos $250.0 million
syndicated loan facility in May 2005 and cash generated from
operations, as well as interest earned in the U.S. on the
$350.0 million proceeds received from the issuance of our
2.75% convertible notes in August 2005.
|
|
8.
|
Foreign
currency transaction gains, net
|
Foreign currency transaction gains, net, during the years ended
December 31, 2004 and 2005 are primarily related to gains
in Mexico due to the impact of increases in the average values
of the Mexican peso on Nextel Mexicos
U.S. dollar-denominated liabilities.
|
|
9.
|
Debt
conversion expense
|
The $8.9 million debt conversion expense represents
consideration that we paid in connection with the conversion of
$88.5 million of our 3.5% convertible notes during the
second quarter of 2005.
|
|
10.
|
Loss on
early extinguishment of debt
|
The $79.3 million loss on early extinguishment of debt for
the year ended December 31, 2004 represents the loss that
we incurred in connection with the retirement of substantially
all of our 13.0% senior secured discount notes through a
cash tender offer in the first quarter of 2004.
61
The $6.3 million, or 272%, increase in other expense, net,
from the year ended December 31, 2004 to the year ended
December 31, 2005 is largely due to $4.2 million in
realized losses related to Nextel Mexicos hedge of capital
expenditures and handset purchases that we reclassified from
accumulated other comprehensive loss during 2005.
The $46.6 million, or 59%, increase in the income tax
provision from the year ended December 31, 2004 to the year
ended December 31, 2005 is primarily due to a
$165.1 million increase in income before tax, partially
offset by a decrease in our effective tax rate attributable to a
large addition to our deferred tax asset valuation allowance in
2004 that did not recur in 2005.
|
|
13.
|
Cumulative
effect of change in accounting principle, net
|
The $1.0 million cumulative effect of change in accounting
principle for the year ended December 31, 2004 represents
net income for our foreign operating companies for the one month
ended December 31, 2003. We accounted for the elimination
of the one-month lag reporting policy as a change in accounting
principle in accordance with APB Opinion No. 20 effective
January 1, 2004. As a result, we treated the month of
December 2003, which is normally the first month in the fiscal
year of our foreign operating companies, as the lag month, and
our fiscal year for all of our foreign operating companies now
begins with January and ends with December.
Segment
Results
We evaluate performance of our segments and provide resources to
them based on operating income before depreciation and
amortization and impairment, restructuring and other charges,
which we refer to as segment earnings. We allocated
$68.1 million, $56.6 million and $18.8 million in
corporate overhead costs to Nextel Mexico during the years ended
December 31, 2005, 2004 and 2003, respectively, and we
treat a portion of these allocated amounts as tax deductions,
where relevant. The segment information below does not reflect
any allocations of corporate overhead costs because the amounts
of these expenses are not provided to or used by our chief
operating decision maker in making operating decisions related
to these segments. The tables below provide a summary of the
components of our consolidated segments for the years ended
December 31, 2005 and 2004. The results of Nextel Chile are
included in Corporate and other.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Selling,
|
|
|
Selling,
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
Consolidated
|
|
|
General and
|
|
|
General and
|
|
|
Segment
|
|
Year Ended
|
|
Operating
|
|
|
Operating
|
|
|
Cost of
|
|
|
Cost of
|
|
|
Administrative
|
|
|
Administrative
|
|
|
Earnings
|
|
December 31, 2005
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Expenses
|
|
|
Expenses
|
|
|
(Losses)
|
|
|
|
(dollars in thousands)
|
|
|
Nextel Mexico
|
|
$
|
1,013,320
|
|
|
|
58
|
%
|
|
$
|
(310,043
|
)
|
|
|
46
|
%
|
|
$
|
(303,579
|
)
|
|
|
51
|
%
|
|
$
|
399,698
|
|
Nextel Brazil
|
|
|
347,530
|
|
|
|
20
|
%
|
|
|
(176,718
|
)
|
|
|
26
|
%
|
|
|
(126,621
|
)
|
|
|
21
|
%
|
|
|
44,191
|
|
Nextel Argentina
|
|
|
269,572
|
|
|
|
15
|
%
|
|
|
(130,011
|
)
|
|
|
20
|
%
|
|
|
(68,729
|
)
|
|
|
12
|
%
|
|
|
70,832
|
|
Nextel Peru
|
|
|
114,201
|
|
|
|
7
|
%
|
|
|
(54,634
|
)
|
|
|
8
|
%
|
|
|
(33,196
|
)
|
|
|
6
|
%
|
|
|
26,371
|
|
Corporate and other
|
|
|
1,886
|
|
|
|
|
|
|
|
(1,493
|
)
|
|
|
|
|
|
|
(56,724
|
)
|
|
|
10
|
%
|
|
|
(56,331
|
)
|
Intercompany eliminations
|
|
|
(670
|
)
|
|
|
|
|
|
|
670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated
|
|
$
|
1,745,839
|
|
|
|
100
|
%
|
|
$
|
(672,229
|
)
|
|
|
100
|
%
|
|
$
|
(588,849
|
)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Selling,
|
|
|
Selling,
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
Consolidated
|
|
|
General and
|
|
|
General and
|
|
|
Segment
|
|
Year Ended
|
|
Operating
|
|
|
Operating
|
|
|
Cost of
|
|
|
Cost of
|
|
|
Administrative
|
|
|
Administrative
|
|
|
Earnings
|
|
December 31, 2004
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Expenses
|
|
|
Expenses
|
|
|
(Losses)
|
|
|
|
(dollars in thousands)
|
|
|
Nextel Mexico
|
|
$
|
775,925
|
|
|
|
61
|
%
|
|
$
|
(245,760
|
)
|
|
|
46
|
%
|
|
$
|
(205,915
|
)
|
|
|
53
|
%
|
|
$
|
324,250
|
|
Nextel Brazil
|
|
|
212,016
|
|
|
|
17
|
%
|
|
|
(143,025
|
)
|
|
|
27
|
%
|
|
|
(55,460
|
)
|
|
|
14
|
%
|
|
|
13,531
|
|
Nextel Argentina
|
|
|
194,799
|
|
|
|
15
|
%
|
|
|
(101,829
|
)
|
|
|
19
|
%
|
|
|
(50,874
|
)
|
|
|
13
|
%
|
|
|
42,096
|
|
Nextel Peru
|
|
|
96,070
|
|
|
|
7
|
%
|
|
|
(47,777
|
)
|
|
|
8
|
%
|
|
|
(28,441
|
)
|
|
|
7
|
%
|
|
|
19,852
|
|
Corporate and other
|
|
|
1,574
|
|
|
|
|
|
|
|
(1,684
|
)
|
|
|
|
|
|
|
(50,881
|
)
|
|
|
13
|
%
|
|
|
(50,991
|
)
|
Intercompany eliminations
|
|
|
(476
|
)
|
|
|
|
|
|
|
476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated
|
|
$
|
1,279,908
|
|
|
|
100
|
%
|
|
$
|
(539,599
|
)
|
|
|
100
|
%
|
|
$
|
(391,571
|
)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A discussion of the results of operations in each of our
reportable segments is provided below.
b. Nextel
Mexico
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Mexicos
|
|
|
|
Year Ended
|
|
|
Mexicos
|
|
|
|
Change from
|
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
Previous Year
|
|
|
|
|
2005
|
|
|
Revenues
|
|
|
|
2004
|
|
|
Revenues
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
(dollars in thousands)
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
986,936
|
|
|
|
97
|
|
%
|
|
$
|
749,923
|
|
|
|
97
|
|
%
|
|
$
|
237,013
|
|
|
|
32
|
|
%
|
Digital handset and accessory
revenues
|
|
|
26,384
|
|
|
|
3
|
|
%
|
|
|
26,002
|
|
|
|
3
|
|
%
|
|
|
382
|
|
|
|
1
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,013,320
|
|
|
|
100
|
|
%
|
|
|
775,925
|
|
|
|
100
|
|
%
|
|
|
237,395
|
|
|
|
31
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation and amortization included below)
|
|
|
(176,670
|
)
|
|
|
(17
|
)
|
%
|
|
|
(135,355
|
)
|
|
|
(17
|
)
|
%
|
|
|
(41,315
|
)
|
|
|
31
|
|
%
|
Cost of digital handset and
accessory sales
|
|
|
(133,373
|
)
|
|
|
(13
|
)
|
%
|
|
|
(110,405
|
)
|
|
|
(15
|
)
|
%
|
|
|
(22,968
|
)
|
|
|
21
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(310,043
|
)
|
|
|
(30
|
)
|
%
|
|
|
(245,760
|
)
|
|
|
(32
|
)
|
%
|
|
|
(64,283
|
)
|
|
|
26
|
|
%
|
Selling and marketing expenses
|
|
|
(148,096
|
)
|
|
|
(15
|
)
|
%
|
|
|
(101,503
|
)
|
|
|
(13
|
)
|
%
|
|
|
(46,593
|
)
|
|
|
46
|
|
%
|
General and administrative expenses
|
|
|
(155,483
|
)
|
|
|
(15
|
)
|
%
|
|
|
(104,412
|
)
|
|
|
(13
|
)
|
%
|
|
|
(51,071
|
)
|
|
|
49
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings
|
|
|
399,698
|
|
|
|
40
|
|
%
|
|
|
324,250
|
|
|
|
42
|
|
%
|
|
|
75,448
|
|
|
|
23
|
|
%
|
Depreciation and amortization
|
|
|
(69,300
|
)
|
|
|
(7
|
)
|
%
|
|
|
(67,322
|
)
|
|
|
(9
|
)
|
%
|
|
|
(1,978
|
)
|
|
|
3
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
330,398
|
|
|
|
33
|
|
%
|
|
|
256,928
|
|
|
|
33
|
|
%
|
|
|
73,470
|
|
|
|
29
|
|
%
|
Interest expense, net
|
|
|
(28,670
|
)
|
|
|
(3
|
)
|
%
|
|
|
(18,902
|
)
|
|
|
(2
|
)
|
%
|
|
|
(9,768
|
)
|
|
|
52
|
|
%
|
Interest income
|
|
|
22,465
|
|
|
|
2
|
|
%
|
|
|
3,648
|
|
|
|
|
|
|
|
|
18,817
|
|
|
|
NM
|
|
|
Foreign currency transaction
gains, net
|
|
|
2,602
|
|
|
|
|
|
|
|
|
8,613
|
|
|
|
1
|
|
%
|
|
|
(6,011
|
)
|
|
|
(70
|
)
|
%
|
Other expense, net
|
|
|
(4,167
|
)
|
|
|
|
|
|
|
|
(576
|
)
|
|
|
|
|
|
|
|
(3,591
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax and
cumulative effect of change in accounting principle, net
|
|
$
|
322,628
|
|
|
|
32
|
|
%
|
|
$
|
249,711
|
|
|
|
32
|
|
%
|
|
$
|
72,917
|
|
|
|
29
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM-Not Meaningful
63
Nextel Mexico is our largest and most profitable market segment,
comprising 58% of our consolidated revenues for the year ended
December 31, 2005. In recent years, we have directed a
substantial portion of our capital investment to Nextel Mexico.
Nextel Mexicos profitability is a result of subscriber
growth with increasing average revenues per subscriber and
operating costs maintained relatively in line with revenues.
Additional subscriber growth was the result of selectively
expanding coverage in new markets and improving network quality
and capacity. Coverage expansion and network improvements were
attributable to capital expenditures totaling
$208.3 million for the year ended December 31, 2005
and a 44% share of all capital expenditure investments that we
made during 2005, a trend that we expect will likely continue in
the near future. Average revenues per subscriber improved due to
the implementation of new rate plans, increased minutes of use
in interconnect and dispatch traffic and favorable exchange
rates. Nextel Mexico also decreased its customer turnover by
making concentrated investments in customer retention programs.
We expect subscriber growth in Mexico to continue as we build
out new markets over the next one to two years using spectrum
licenses that we acquired in March 2005 in the 800 MHz
auctions.
In accordance with generally accepted accounting principles in
the United States, we translated Nextel Mexicos results of
operations using the average exchange rate for the year ended
December 31, 2005. The average exchange rate of the Mexican
peso for the year ended December 31, 2005 appreciated in
value against the U.S. dollar by 4% from the year ended
December 31, 2004. As a result, compared to 2004, the
components of Nextel Mexicos results of operations for
2005 after translation into U.S. dollars reflect higher
increases than would have occurred if it were not for the impact
of the appreciation in the average value of the peso.
The $237.0 million, or 32%, increase in service and other
revenues from the year ended December 31, 2004 to the year
ended December 31, 2005 is primarily due to the following:
|
|
|
|
|
a 28% increase in the average number of digital handsets in
service resulting from Nextel Mexicos expansion of service
coverage into new markets in 2005, as well as growth in existing
markets;
|
|
|
|
a $7.7 million, or 28%, increase in revenues generated from
Nextel Mexicos handset maintenance program due to growth
in the number of Nextel Mexicos customers that are
utilizing this program; and
|
|
|
|
an increase in average revenues per handset on a local currency
basis largely due to price increases applied to the existing
customer base, as well as higher access revenues.
|
The $41.3 million, or 31%, increase in cost of service from
the year ended December 31, 2004 to the year ended
December 31, 2005 is principally due to the following:
|
|
|
|
|
a $29.8 million, or 41%, increase in interconnect costs
generally resulting from a 45% increase in interconnect minutes
of use;
|
|
|
|
a $7.6 million, or 37%, increase in service and repair
costs largely due to increased activity under Nextel
Mexicos handset maintenance program; and
|
|
|
|
a $4.5 million, or 12%, increase in direct switch and
transmitter and receiver site costs resulting from a 34%
increase in the number of transmitter and receiver sites in
service from December 31, 2004 to December 31, 2005,
partially offset by a $3.4 million reduction in certain
spectrum fees due to a favorable court ruling received during
the fourth quarter of 2005.
|
The $23.0 million, or 21%, increase in cost of digital
handset and accessory sales from the year ended
December 31, 2004 to the year ended December 31, 2005
is primarily due to a 43% increase in handset sales, as well as
an increase in handset upgrades.
64
|
|
3.
|
Selling and
marketing expenses
|
The $46.6 million, or 46%, increase in selling and
marketing expenses from the year ended December 31, 2004 to
the year ended December 31, 2005 is primarily a result of
the following:
|
|
|
|
|
a $32.4 million, or 92%, increase in indirect commissions
primarily due to a 59% increase in handset sales by Nextel
Mexicos outside dealers and higher indirect commission
earned per handset sale;
|
|
|
|
a $7.5 million, or 21%, increase in direct commissions and
payroll expenses principally due to a 15% increase in handset
sales by Nextel Mexicos sales personnel; and
|
|
|
|
a $4.7 million, or 18%, increase in advertising costs
largely due to the launch of new markets, the launch of new rate
plans in 2005, international Direct Connect campaigns, which
were generally launched in the middle of 2004, and objectives to
reinforce market awareness of the Nextel brand name.
|
4. General
and administrative expenses
The $51.1 million, or 49%, increase in general and
administrative expenses from the year ended December 31,
2004 to the year ended December 31, 2005 is largely a
result of the following:
|
|
|
|
|
a $23.9 million, or 78%, increase in general corporate
costs resulting from an increase in payroll and related expenses
caused by more general and administrative personnel, higher
business insurance expenses and increased facilities costs due
to expansion into new markets;
|
|
|
|
a $9.6 million, or 34%, increase in customer care expenses
primarily due to higher payroll and employee related expenses
caused by an increase in customer care personnel necessary to
support a larger customer base;
|
|
|
|
an $8.3 million, or 27%, increase in spectrum license
fees; and
|
|
|
|
a $6.1 million increase in bad debt expense, which
increased slightly as a percentage of revenues from 0.4% in 2004
to 0.9% in 2005.
|
5. Depreciation
and amortization
Depreciation and amortization increased $2.0 million, or
3%, from the year ended December 31, 2004 to the year ended
December 31, 2005 due to an increase in depreciation,
partially offset by a decrease in amortization. Depreciation
increased $11.6 million, or 22%, primarily as a result of
an increase in Nextel Mexicos property, plant and
equipment mostly due to the continued build-out of Nextel
Mexicos digital mobile network. This increase was
partially offset by a $9.6 million, or 68%, decrease in
amortization due to a reversal recorded primarily in the fourth
quarter of 2004 of certain valuation allowances for deferred tax
assets that were created in connection with our application of
fresh-start accounting and which we recorded as a reduction to
intangible assets.
6. Interest
expense, net
The $9.8 million, or 52%, increase in net interest expense
from the year ended December 31, 2004 to the year ended
December 31, 2005 is largely a result of $14.0 million
of interest expense incurred in 2005 on Nextel Mexicos
syndicated loan facility, which we drew down in May 2005, and an
increase in interest related to tower financing obligations,
partially offset by a decrease in interest resulting from the
principal pay-downs on Nextel Mexicos portion of the
international equipment facility in February and July 2004.
7. Interest
income
The $18.8 million increase in interest income from the year
ended December 31, 2004 to the year ended December 31,
2005 is largely the result of an increase in Nextel
Mexicos average cash balances resulting primarily from the
draw-down of Nextel Mexicos $250.0 million syndicated
loan facility in May 2005 and cash generated from operations.
65
8. Foreign
currency transaction gains, net
Foreign currency transaction gains of $2.6 million and
$8.6 million for the years ended December 31, 2005 and
2004 are mostly due to the impact of the relative strengthening
of the peso compared to the U.S. dollar on Nextel
Mexicos U.S. dollar-denominated liabilities.
9. Other
expense, net
Other expense, net of $4.2 million for the year ended
December 31, 2005 is due to $4.2 million in realized
losses related to Nextel Mexicos hedge of capital
expenditures and handset purchases that we reclassified from
accumulated other comprehensive loss during 2005.
c. Nextel
Brazil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Brazils
|
|
|
|
Year Ended
|
|
|
Brazils
|
|
|
|
Change from
|
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
Previous Year
|
|
|
|
|
2005
|
|
|
Revenues
|
|
|
|
2004
|
|
|
Revenues
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
(dollars in thousands)
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
321,655
|
|
|
|
93
|
|
%
|
|
$
|
192,830
|
|
|
|
91
|
|
%
|
|
$
|
128,825
|
|
|
|
67
|
|
%
|
Digital handset and accessory
revenues
|
|
|
25,875
|
|
|
|
7
|
|
%
|
|
|
19,186
|
|
|
|
9
|
|
%
|
|
|
6,689
|
|
|
|
35
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
347,530
|
|
|
|
100
|
|
%
|
|
|
212,016
|
|
|
|
100
|
|
%
|
|
|
135,514
|
|
|
|
64
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation and amortization included below)
|
|
|
(117,567
|
)
|
|
|
(34
|
)
|
%
|
|
|
(92,820
|
)
|
|
|
(44
|
)
|
%
|
|
|
(24,747
|
)
|
|
|
27
|
|
%
|
Cost of digital handset and
accessory sales
|
|
|
(59,151
|
)
|
|
|
(17
|
)
|
%
|
|
|
(50,205
|
)
|
|
|
(23
|
)
|
%
|
|
|
(8,946
|
)
|
|
|
18
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(176,718
|
)
|
|
|
(51
|
)
|
%
|
|
|
(143,025
|
)
|
|
|
(67
|
)
|
%
|
|
|
(33,693
|
)
|
|
|
24
|
|
%
|
Selling and marketing expenses
|
|
|
(46,949
|
)
|
|
|
(13
|
)
|
%
|
|
|
(29,161
|
)
|
|
|
(14
|
)
|
%
|
|
|
(17,788
|
)
|
|
|
61
|
|
%
|
General and administrative expenses
|
|
|
(79,672
|
)
|
|
|
(23
|
)
|
%
|
|
|
(26,299
|
)
|
|
|
(13
|
)
|
%
|
|
|
(53,373
|
)
|
|
|
203
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings
|
|
|
44,191
|
|
|
|
13
|
|
%
|
|
|
13,531
|
|
|
|
6
|
|
%
|
|
|
30,660
|
|
|
|
227
|
|
%
|
Depreciation and amortization
|
|
|
(31,768
|
)
|
|
|
(9
|
)
|
%
|
|
|
(13,081
|
)
|
|
|
(6
|
)
|
%
|
|
|
(18,687
|
)
|
|
|
143
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
12,423
|
|
|
|
4
|
|
%
|
|
|
450
|
|
|
|
|
|
|
|
|
11,973
|
|
|
|
NM
|
|
|
Interest expense, net
|
|
|
(18,113
|
)
|
|
|
(5
|
)
|
%
|
|
|
(12,054
|
)
|
|
|
(6
|
)
|
%
|
|
|
(6,059
|
)
|
|
|
50
|
|
%
|
Interest income
|
|
|
1,941
|
|
|
|
|
|
|
|
|
2,733
|
|
|
|
1
|
|
%
|
|
|
(792
|
)
|
|
|
(29
|
)
|
%
|
Foreign currency transaction
gains, net
|
|
|
225
|
|
|
|
|
|
|
|
|
575
|
|
|
|
|
|
|
|
|
(350
|
)
|
|
|
(61
|
)
|
%
|
Other expense, net
|
|
|
(3,817
|
)
|
|
|
(1
|
)
|
%
|
|
|
(1,819
|
)
|
|
|
|
|
|
|
|
(1,998
|
)
|
|
|
110
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax and
cumulative effect of change in accounting principle, net
|
|
$
|
(7,341
|
)
|
|
|
(2
|
)
|
%
|
|
$
|
(10,115
|
)
|
|
|
(5
|
)
|
%
|
|
$
|
2,774
|
|
|
|
(27
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM-Not Meaningful
Over the last two years, Nextel Brazils subscriber base
and segment earnings have continued to increase as a result of a
continued focus on customer service, the expansion of its
digital mobile network and significant improvements in its
operating cost structure. In addition to these factors, as a
result of the improvement in the Brazilian economy over the same
period, Nextel Brazil has continued to grow its existing
66
markets and made significant investments in new markets. Over
the next two years, Nextel Brazil plans to continue to expand
its digital mobile network, grow its subscriber base and improve
its operating margins through economies of scale and
interconnect savings resulting from amended interconnect
regulations implemented in May 2005.
In accordance with accounting principles generally accepted in
the United States, we translated Nextel Brazils results of
operations using the average exchange rate for the year ended
December 31, 2005. The average exchange rate for the year
ended December 31, 2005 appreciated against the
U.S. dollar by 20% from the year ended December 31,
2004. As a result, the components of Nextel Brazils
results of operations for the year ended December 31, 2005
after translation into U.S. dollars reflect significantly
higher increases than would have occurred if it were not for the
impact of the appreciation in the average value of the real.
1. Operating
revenues
The $128.8 million, or 67%, increase in service and other
revenues from the year ended December 31, 2004 to the year
ended December 31, 2005 is primarily a result of the
following:
|
|
|
|
|
a 28% increase in the average number of digital handsets in
service resulting from growth in Nextel Brazils existing
markets, as well as expansion into new markets;
|
|
|
|
$18.6 million related to the
gross-up of
revenue-based taxes that were presented on a net basis in 2004;
|
|
|
|
the 20% appreciation of the Brazilian real against the
U.S. dollar; and
|
|
|
|
an $11.6 million increase, or 174%, in revenues generated
from Nextel Brazils handset maintenance program due to
growth in Nextel Brazils existing markets, as well as
expansion into new markets.
|
The $6.7 million, or 35%, increase in digital handset and
accessory revenues from the year ended December 31, 2004 to
the year ended December 31, 2005 is largely the result of a
36% increase in handset sales.
2. Cost
of revenues
The $24.7 million, or 27%, increase in cost of service from
the year ended December 31, 2004 to the year ended
December 31, 2005 is primarily due to the following:
|
|
|
|
|
a $15.1 million, or 55%, increase in direct switch and
transmitter and receiver site costs resulting from a 25%
increase in the number of transmitter and receiver sites in
service from December 31, 2004 to December 31, 2005,
as well as an increase in cost per site in service;
|
|
|
|
a $4.4 million, or 8%, increase in interconnect costs
mainly resulting from a 43% increase in interconnect minutes of
use, partially offset by a significant reduction of these costs
due to amended interconnect regulations implemented in May 2005
that have the effect of treating Nextel Brazil on the same basis
with respect to billing for use of other mobile networks as
other Brazilian wireless operators currently have in place;
|
|
|
|
a $3.1 million, or 45%, increase in payroll and employee
related costs resulting from an increase in personnel and
various training costs; and
|
|
|
|
a $2.7 million, or 31%, increase in service and repair
costs primarily due to an increase in subscribers participating
under Nextel Brazils handset maintenance program.
|
The $8.9 million, or 18%, increase in cost of digital
handset and accessory sales from the year ended
December 31, 2004 to the year ended December 31, 2005
is primarily due to a 36% increase in handset sales.
All of these increases also resulted from the 20% appreciation
of the Brazilian real against the U.S. dollar.
67
3. Selling
and marketing expenses
The $17.8 million, or 61%, increase in selling and
marketing expenses from the year ended December 31, 2004 to
the year ended December 31, 2005 is principally due to the
following:
|
|
|
|
|
a $7.1 million, or 50%, increase in payroll and direct
commissions largely as a result of a 37% increase in handset
sales by Nextel Brazils sales force;
|
|
|
|
a $4.8 million, or 73%, increase in indirect commissions
resulting from a 36% increase in handset sales by Nextel
Brazils outside dealers, as well as increases in indirect
commissions earned per handset sale; and
|
|
|
|
a $4.7 million, or 87%, increase in advertising expenses
due to the implementation of more advertising campaigns during
2005 primarily as a result of increased initiatives related to
overall subscriber growth and the launch of new markets.
|
All of these increases also resulted from the 20% appreciation
of the Brazilian real against the U.S. dollar.
4. General
and administrative expenses
The $53.4 million, or 203%, increase in general and
administrative expenses from the year ended December 31,
2004 to the year ended December 31, 2005 is primarily a
result of the following:
|
|
|
|
|
a $40.5 million increase in general corporate costs mainly
due to $18.6 million related to the
gross-up of
revenue-based taxes that were presented on a net basis in 2004
and a $14.4 million reversal of contingent liabilities that
we recorded as a reduction to general and administrative
expenses during 2004 related to the expiration of the statute of
limitations and the favorable resolution of other contingencies,
partially offset by $1.7 million in contingency reversals
recorded in the fourth quarter of 2005;
|
|
|
|
an $8.7 million, or 65%, increase in customer care expenses
resulting from an increase in payroll and related expenses due
to more customer care personnel necessary to support a larger
customer base; and
|
|
|
|
a $4.4 million increase in bad debt expense, which
increased as a percentage of revenues from 1.7% in 2004 to 2.3%
in 2005, primarily related to certain municipal accounts that
temporarily suspended payments of all services, but which began
to pay in mid-2005.
|
All of these increases also resulted from the 20% appreciation
of the Brazilian real against the U.S. dollar.
|
|
5.
|
Depreciation
and amortization
|
The $18.7 million, or 143%, increase in depreciation and
amortization from the year ended December 31, 2004 to the
year ended December 31, 2005 is primarily due to increased
depreciation on Nextel Brazils significantly higher
property, plant and equipment base primarily as a result of
accelerating the build-out of Nextel Brazils digital
mobile network, as well as the 20% appreciation of the Brazilian
real against the U.S. dollar.
The $6.1 million, or 50%, increase in net interest expense,
from the year ended December 31, 2004 to the year ended
December 31, 2005 is primarily the result of increased
interest incurred on Nextel Brazils tower financing
obligations, as well as the 20% appreciation of the Brazilian
real against the U.S. dollar.
The $2.0 million, or 110%, increase in other expense from
the year ended December 31, 2004 to the year ended
December 31, 2005 is primarily due to more reversals of
monetary corrections on certain contingencies during 2004
compared to 2005.
68
d. Nextel
Argentina
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Argentinas
|
|
|
|
Year Ended
|
|
|
Argentinas
|
|
|
|
Change from
|
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
Previous Year
|
|
|
|
|
2005
|
|
|
Revenues
|
|
|
|
2004
|
|
|
Revenues
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
(dollars in thousands)
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
248,262
|
|
|
|
92
|
|
%
|
|
$
|
177,658
|
|
|
|
91
|
|
%
|
|
$
|
70,604
|
|
|
|
40
|
|
%
|
Digital handset and accessory
revenues
|
|
|
21,310
|
|
|
|
8
|
|
%
|
|
|
17,141
|
|
|
|
9
|
|
%
|
|
|
4,169
|
|
|
|
24
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
269,572
|
|
|
|
100
|
|
%
|
|
|
194,799
|
|
|
|
100
|
|
%
|
|
|
74,773
|
|
|
|
38
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation and amortization included below)
|
|
|
(89,687
|
)
|
|
|
(33
|
)
|
%
|
|
|
(68,806
|
)
|
|
|
(35
|
)
|
%
|
|
|
(20,881
|
)
|
|
|
30
|
|
%
|
Cost of digital handset and
accessory sales
|
|
|
(40,324
|
)
|
|
|
(15
|
)
|
%
|
|
|
(33,023
|
)
|
|
|
(17
|
)
|
%
|
|
|
(7,301
|
)
|
|
|
22
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(130,011
|
)
|
|
|
(48
|
)
|
%
|
|
|
(101,829
|
)
|
|
|
(52
|
)
|
%
|
|
|
(28,182
|
)
|
|
|
28
|
|
%
|
Selling and marketing expenses
|
|
|
(21,254
|
)
|
|
|
(8
|
)
|
%
|
|
|
(16,245
|
)
|
|
|
(8
|
)
|
%
|
|
|
(5,009
|
)
|
|
|
31
|
|
%
|
General and administrative expenses
|
|
|
(47,475
|
)
|
|
|
(17
|
)
|
%
|
|
|
(34,629
|
)
|
|
|
(18
|
)
|
%
|
|
|
(12,846
|
)
|
|
|
37
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings
|
|
|
70,832
|
|
|
|
27
|
|
%
|
|
|
42,096
|
|
|
|
22
|
|
%
|
|
|
28,736
|
|
|
|
68
|
|
%
|
Depreciation and amortization
|
|
|
(16,460
|
)
|
|
|
(6
|
)
|
%
|
|
|
(11,512
|
)
|
|
|
(6
|
)
|
%
|
|
|
(4,948
|
)
|
|
|
43
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
54,372
|
|
|
|
21
|
|
%
|
|
|
30,584
|
|
|
|
16
|
|
%
|
|
|
23,788
|
|
|
|
78
|
|
%
|
Interest expense, net
|
|
|
(5,407
|
)
|
|
|
(2
|
)
|
%
|
|
|
(3,161
|
)
|
|
|
(2
|
)
|
%
|
|
|
(2,246
|
)
|
|
|
71
|
|
%
|
Interest income
|
|
|
661
|
|
|
|
|
|
|
|
|
416
|
|
|
|
|
|
|
|
|
245
|
|
|
|
59
|
|
%
|
Foreign currency transaction gains
(losses), net
|
|
|
500
|
|
|
|
|
|
|
|
|
(266
|
)
|
|
|
|
|
|
|
|
766
|
|
|
|
(288
|
)
|
%
|
Other (expense) income, net
|
|
|
(33
|
)
|
|
|
|
|
|
|
|
184
|
|
|
|
|
|
|
|
|
(217
|
)
|
|
|
(118
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax and
cumulative effect of change in accounting principle, net
|
|
$
|
50,093
|
|
|
|
19
|
|
%
|
|
$
|
27,757
|
|
|
|
14
|
|
%
|
|
$
|
22,336
|
|
|
|
80
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM-Not Meaningful
Since the beginning of 2003, the macroeconomic environment in
Argentina has improved from the adverse conditions existing in
2002 as evidenced by the appreciation of the Argentine peso
relative to the U.S. dollar and the continued expansion of
the gross domestic product. Consistent with this improved
economic environment, Nextel Argentina has continued growing its
subscriber base, significantly lowering its customer turnover
and reducing its bad debt expense while substantially increasing
its operating revenues. As a result of the uncertainty
surrounding economic conditions in Argentina, we cannot predict
whether this trend will continue.
In accordance with accounting principles generally accepted in
the United States, we translated Nextel Argentinas results
of operations using the average exchange rate for the years
ended December 31, 2005 and 2004. The average exchange rate
of the Argentine peso for the year ended December 31, 2005
appreciated modestly against the U.S. dollar by 1% from the
year ended December 31, 2004. As a result, the components
69
of Nextel Argentinas results of operations for 2005 after
translation into U.S. dollars are generally comparable to
its results of operations for 2004.
The $70.6 million, or 40%, increase in service and other
revenues from the year ended December 31, 2004 to the year
ended December 31, 2005 is primarily a result of the
following:
|
|
|
|
|
a 34% increase in the average number of digital handsets in
service, resulting mostly from growth in Nextel Argentinas
existing markets; and
|
|
|
|
a $10.4 million, or 80%, increase in revenues generated
from Nextel Argentinas handset maintenance program due to
growth in Nextel Argentinas existing markets.
|
The $4.2 million, or 24%, increase in digital handset and
accessory revenues from the year ended December 31, 2004 to
the year ended December 31, 2005 is primarily due to a 27%
increase in handset sales, as well as a 34% increase in handset
upgrades.
The $20.9 million, or 30%, increase in cost of service from
the year ended December 31, 2004 to the year ended
December 31, 2005 is principally a result of the following:
|
|
|
|
|
a $13.8 million, or 39%, increase in interconnect costs
primarily caused by a 33% increase in interconnect minutes of
use, as well as an increase in termination fees between
mobile-to-mobile
handsets; and
|
|
|
|
a $6.0 million, or 39%, increase in direct switch and
transmitter and receiver site costs due to a 15% increase in the
number of transmitter and receiver sites in service from
December 31, 2004 to December 31, 2005, as well as an
increase in new claims on cell sites by municipalities.
|
The $7.3 million, or 22%, increase in cost of digital
handset and accessory sales is largely a result of a 27%
increase in handset sales and a $3.4 million increase in
the cost of handset upgrades due to a significant change in the
mix of handsets upgraded to more expensive models.
|
|
3.
|
Selling and
marketing expenses
|
The $5.0 million, or 31%, increase in selling and marketing
expenses from the year ended December 31, 2004 to the year
ended December 31, 2005 is largely a result of the
following:
|
|
|
|
|
a $2.7 million, or 47%, increase in indirect commissions
primarily due to a 40% increase in handset sales obtained
through indirect channels;
|
|
|
|
a $1.1 million, or 16%, increase in other sales costs
largely due to an increase in direct commissions resulting from
a 14% increase in handset sales by Nextel Argentinas sales
force; and
|
|
|
|
a $1.0 million, or 41%, increase in advertising expenses
primarily related to efforts to reinforce market awareness of
the Nextel brand name and to support the launch of the Atlantic
Coast region, as well as increased initiatives related to
overall subscriber growth.
|
|
|
4.
|
General and
administrative expenses
|
The $12.8 million, or 37%, increase in general and
administrative expenses from the year ended December 31,
2004 to the year ended December 31, 2005 is largely a
result of the following:
|
|
|
|
|
a $7.1 million, or 31%, increase in general corporate costs
resulting from certain revenue-based taxes and an increase in
payroll and related expenses caused by an increase in general
and administrative personnel;
|
70
|
|
|
|
|
a $2.2 million, or 33%, increase in customer care expenses
primarily as a result of an increase in customer care and
billing operations personnel caused by the need to support a
growing customer base;
|
|
|
|
a $2.0 million increase in bad debt expense, which
increased as a percentage of revenue from 0.1% in 2004 to 0.8%
in 2005, largely as the result of higher revenues, as well as a
change in Nextel Argentinas customer mix as its customer
base continues to expand; and
|
|
|
|
a $1.5 million, or 37%, increase in information technology
expenses due to higher software maintenance costs associated
with a larger customer base and increases in payroll and related
expenses caused by an increase in information technology
personnel.
|
|
|
5.
|
Depreciation
and amortization
|
The $4.9 million, or 43%, increase in depreciation and
amortization from the year ended December 31, 2004 to the
year ended December 31, 2005 is primarily due to a
$4.0 million, or 35%, increase in depreciation resulting
from a larger property, plant and equipment base related to the
continued build-out of Nextel Argentinas digital mobile
network.
The $2.2 million, or 71%, increase in net interest expense
from the year ended December 31, 2004 to the year ended
December 31, 2005 is principally the result of interest
related to Nextel Argentinas Universal Service tax
contingency related to amounts due to customers.
71
e. Nextel
Peru
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Perus
|
|
|
|
Year Ended
|
|
|
Perus
|
|
|
|
Change from
|
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
Previous Year
|
|
|
|
|
2005
|
|
|
Revenues
|
|
|
|
2004
|
|
|
Revenues
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
(dollars in thousands)
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
108,544
|
|
|
|
95
|
|
%
|
|
$
|
93,328
|
|
|
|
97
|
|
%
|
|
$
|
15,216
|
|
|
|
16
|
|
%
|
Digital handset and accessory
revenues
|
|
|
5,657
|
|
|
|
5
|
|
%
|
|
|
2,742
|
|
|
|
3
|
|
%
|
|
|
2,915
|
|
|
|
106
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114,201
|
|
|
|
100
|
|
%
|
|
|
96,070
|
|
|
|
100
|
|
%
|
|
|
18,131
|
|
|
|
19
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation included below)
|
|
|
(36,290
|
)
|
|
|
(32
|
)
|
%
|
|
|
(34,298
|
)
|
|
|
(36
|
)
|
%
|
|
|
(1,992
|
)
|
|
|
6
|
|
%
|
Cost of digital handset and
accessory sales
|
|
|
(18,344
|
)
|
|
|
(16
|
)
|
%
|
|
|
(13,479
|
)
|
|
|
(14
|
)
|
%
|
|
|
(4,865
|
)
|
|
|
36
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54,634
|
)
|
|
|
(48
|
)
|
%
|
|
|
(47,777
|
)
|
|
|
(50
|
)
|
%
|
|
|
(6,857
|
)
|
|
|
14
|
|
%
|
Selling and marketing expenses
|
|
|
(12,606
|
)
|
|
|
(11
|
)
|
%
|
|
|
(10,773
|
)
|
|
|
(11
|
)
|
%
|
|
|
(1,833
|
)
|
|
|
17
|
|
%
|
General and administrative expenses
|
|
|
(20,590
|
)
|
|
|
(18
|
)
|
%
|
|
|
(17,668
|
)
|
|
|
(18
|
)
|
%
|
|
|
(2,922
|
)
|
|
|
17
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings
|
|
|
26,371
|
|
|
|
23
|
|
%
|
|
|
19,852
|
|
|
|
21
|
|
%
|
|
|
6,519
|
|
|
|
33
|
|
%
|
Depreciation and amortization
|
|
|
(8,718
|
)
|
|
|
(8
|
)
|
%
|
|
|
(5,795
|
)
|
|
|
(6
|
)
|
%
|
|
|
(2,923
|
)
|
|
|
50
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
17,653
|
|
|
|
15
|
|
%
|
|
|
14,057
|
|
|
|
15
|
|
%
|
|
|
3,596
|
|
|
|
26
|
|
%
|
Interest expense, net
|
|
|
(152
|
)
|
|
|
|
|
|
|
|
(188
|
)
|
|
|
|
|
|
|
|
36
|
|
|
|
(19
|
)
|
%
|
Interest income
|
|
|
880
|
|
|
|
1
|
|
%
|
|
|
2,707
|
|
|
|
3
|
|
%
|
|
|
(1,827
|
)
|
|
|
(67
|
)
|
%
|
Foreign currency transaction
gains, net
|
|
|
20
|
|
|
|
|
|
|
|
|
273
|
|
|
|
|
|
|
|
|
(253
|
)
|
|
|
(93
|
)
|
%
|
Other (expense) income, net
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
483
|
|
|
|
|
|
|
|
|
(494
|
)
|
|
|
(102
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax and
cumulative effect of change in accounting principle, net
|
|
$
|
18,390
|
|
|
|
16
|
|
%
|
|
$
|
17,332
|
|
|
|
18
|
|
%
|
|
$
|
1,058
|
|
|
|
6
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM-Not Meaningful
The Peruvian economy has showed continuous growth in terms of
gross domestic product over the prior four years with internal
demand and private investment acting as engines of growth in
addition to the traditional and non-traditional export sectors
of the economy. This favorable economic situation, together with
a solid financial system that shows all time lows in terms of
bad debt provisions and a sound fiscal stance from the
government side, is generating investment opportunities that
Nextel Peru is capitalizing on in terms of growth in its
subscriber base, operating revenues and operating income.
Because the U.S. dollar is the functional currency in Peru,
Nextel Perus results of operations are not significantly
impacted by changes in the U.S. dollar to Peruvian sol
exchange rate.
The $15.2 million, or 16%, increase in service and other
revenues from the year ended December 31, 2004 to the year
ended December 31, 2005 is primarily due to a 31% increase
in the average number of digital handsets in service, partially
offset by a decrease in average revenue per handset mainly
resulting from increased competition.
The $2.9 million, or 106%, increase in digital handset and
accessory revenues from the year ended December 31, 2004 to
the year ended December 31, 2005 is primarily the result of
a 41% increase in handset
72
sales mainly as a result of a stronger local economy, as well as
Nextel Perus strategy of increasing penetration in small
to mid-size accounts.
The $2.0 million, or 6%, increase in cost of service from
the year ended December 31, 2004 to the year ended
December 31, 2005 is primarily due to a $3.7 million,
or 22%, increase in interconnect costs largely as a result of a
50% increase in interconnect minutes of use, partially offset by
a $0.7 million, or 14%, decrease in service and repair
costs.
The $4.9 million, or 36%, increase in cost of digital
handsets and accessories from the year ended December 31,
2004 to the year ended December 31, 2005 is largely a
result of 41% increase in handset sales.
|
|
3.
|
Selling and
marketing expenses
|
The $1.8 million, or 17%, increase in selling and marketing
expenses from the year ended December 31, 2004 to the year
ended December 31, 2005 is primarily a result of a
$1.4 million, or 71%, increase in indirect commissions
primarily due to a 61% increase in handset sales by Nextel
Perus outside dealers, as well as a $0.7 million, or
13%, increase in other sales costs largely due to an increase in
direct commissions resulting from a 26% increase in handset
sales by Nextel Perus sales force.
|
|
4.
|
General and
administrative expenses
|
The $2.9 million, or 17%, increase in general and
administrative expenses from the year ended December 31,
2004 to the year ended December 31, 2005 is principally the
result of a $2.0 million, or 33%, increase in general
corporate costs largely due to increases in general and
administrative personnel and various taxes paid to regulatory
agencies. The remaining increase is due to higher payroll and
related expenses for customer care personnel necessary to
support a larger customer base.
|
|
5.
|
Depreciation
and amortization
|
The $2.9 million, or 50%, increase in depreciation and
amortization from the year ended December 31, 2004 to the
year ended December 31, 2005 is primarily due to increased
depreciation resulting from a larger property, plant and
equipment base.
73
f. Corporate
and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
and other
|
|
|
|
Year Ended
|
|
|
and other
|
|
|
|
Change from
|
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
Previous Year
|
|
|
|
|
2005
|
|
|
Revenues
|
|
|
|
2004
|
|
|
Revenues
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
(dollars in thousands)
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
1,886
|
|
|
|
100
|
|
%
|
|
$
|
1,574
|
|
|
|
100
|
|
%
|
|
$
|
312
|
|
|
|
20
|
|
%
|
Digital handset and accessory
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,886
|
|
|
|
100
|
|
%
|
|
|
1,574
|
|
|
|
100
|
|
%
|
|
|
312
|
|
|
|
20
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation and amortization included below)
|
|
|
(1,493
|
)
|
|
|
(79
|
)
|
%
|
|
|
(1,684
|
)
|
|
|
(107
|
)
|
%
|
|
|
191
|
|
|
|
(11
|
)
|
%
|
Cost of digital handset and
accessory sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,493
|
)
|
|
|
(79
|
)
|
%
|
|
|
(1,684
|
)
|
|
|
(107
|
)
|
%
|
|
|
191
|
|
|
|
(11
|
)
|
%
|
Selling and marketing expenses
|
|
|
(4,635
|
)
|
|
|
(246
|
)
|
%
|
|
|
(4,661
|
)
|
|
|
(296
|
)
|
%
|
|
|
26
|
|
|
|
(1
|
)
|
%
|
General and administrative expenses
|
|
|
(52,089
|
)
|
|
|
NM
|
|
|
|
|
(46,220
|
)
|
|
|
NM
|
|
|
|
|
(5,869
|
)
|
|
|
13
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment losses
|
|
|
(56,331
|
)
|
|
|
NM
|
|
|
|
|
(50,991
|
)
|
|
|
NM
|
|
|
|
|
(5,340
|
)
|
|
|
10
|
|
%
|
Depreciation and amortization
|
|
|
(4,279
|
)
|
|
|
(227
|
)
|
%
|
|
|
(1,080
|
)
|
|
|
(69
|
)
|
%
|
|
|
(3,199
|
)
|
|
|
296
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(60,610
|
)
|
|
|
NM
|
|
|
|
|
(52,071
|
)
|
|
|
NM
|
|
|
|
|
(8,539
|
)
|
|
|
16
|
|
%
|
Interest expense, net
|
|
|
(20,202
|
)
|
|
|
NM
|
|
|
|
|
(20,950
|
)
|
|
|
NM
|
|
|
|
|
748
|
|
|
|
(4
|
)
|
%
|
Interest income
|
|
|
6,738
|
|
|
|
NM
|
|
|
|
|
3,335
|
|
|
|
212
|
|
%
|
|
|
3,403
|
|
|
|
102
|
|
%
|
Foreign currency transaction
gains, net
|
|
|
10
|
|
|
|
1
|
|
%
|
|
|
15
|
|
|
|
1
|
|
%
|
|
|
(5
|
)
|
|
|
(33
|
)
|
%
|
Debt conversion expense
|
|
|
(8,930
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,930
|
)
|
|
|
NM
|
|
|
Loss on early extinguishment of
debt
|
|
|
|
|
|
|
|
|
|
|
|
(79,327
|
)
|
|
|
NM
|
|
|
|
|
79,327
|
|
|
|
(100
|
)
|
%
|
Other expense, net
|
|
|
(593
|
)
|
|
|
(31
|
)
|
%
|
|
|
(449
|
)
|
|
|
(29
|
)
|
%
|
|
|
(144
|
)
|
|
|
32
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax and
cumulative effect of change in accounting principle, net
|
|
$
|
(83,587
|
)
|
|
|
NM
|
|
|
|
$
|
(149,447
|
)
|
|
|
NM
|
|
|
|
$
|
65,860
|
|
|
|
(44
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM-Not Meaningful
1. Operating
revenues and cost of revenues
Corporate and other operating revenues and cost of revenues
primarily represent the results of analog operations reported by
Nextel Chile. Operating revenues and cost of revenues did not
significantly change from the year ended December 31, 2004
to the year ended December 31, 2005 because Nextel
Chiles subscriber base remained stable.
2. General
and administrative expenses
The $5.9 million, or 13%, increase in general and
administrative expenses from the year ended December 31,
2004 to the year ended December 31, 2005 is primarily due
to an increase in corporate payroll and related expenses, an
increase in costs related to outside services, specifically for
audit, tax, Sarbanes-Oxley-related, restatement and consulting
activities, an increase in business insurance costs and an
increase in stock compensation expense for restricted stock.
74
3. Depreciation
and amortization
The $3.2 million, or 296%, increase in depreciation and
amortization from the year ended December 31, 2004 to the
year ended December 31, 2005 is primarily the result of
increased depreciation due to the change in the classification
of our corporate aircraft from an operating lease to a capital
lease.
4. Interest
expense, net
The $0.7 million, or 4%, decrease in net interest expense
from the year ended December 31, 2004 to the year ended
December 31, 2005 is substantially the result of the
elimination of interest related to our 13.0% senior secured
discount notes in connection with the retirement of all of these
notes during the first half of 2004 and a decrease in interest
expense related to the elimination of interest on our
international equipment facility, which was extinguished in
2004, partially offset by an increase in interest related to our
2.75% convertible notes that we issued in August 2005.
5. Interest
income
The $3.4 million, or 102%, increase in interest income from
the year ended December 31, 2004 to the year ended
December 31, 2005 is primarily due to interest earned on
the $350.0 million proceeds received from the issuance of
our 2.75% convertible notes.
6. Debt
conversion expense
The $8.9 million debt conversion expense represents
consideration that we paid in connection with the conversion of
$88.5 million of our 3.5% convertible notes during the
second quarter of 2005.
7. Loss
on early extinguishment of debt
The $79.3 million loss on early extinguishment of debt for
the year ended December 31, 2004 represents the loss we
incurred in connection with the retirement of substantially all
of our 13.0% senior secured discount notes through a cash
tender offer in March 2004.
75
2. Year
Ended December 31, 2004 vs. Year Ended December 31,
2003
a. Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Consolidated
|
|
|
|
Year Ended
|
|
|
Consolidated
|
|
|
|
Change from
|
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
Previous Year
|
|
|
|
|
2004
|
|
|
Revenues
|
|
|
|
2003
|
|
|
Revenues
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
(dollars in thousands)
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
1,214,837
|
|
|
|
95
|
|
%
|
|
$
|
895,615
|
|
|
|
95
|
|
%
|
|
$
|
319,222
|
|
|
|
36
|
|
%
|
Digital handset and accessory
revenues
|
|
|
65,071
|
|
|
|
5
|
|
%
|
|
|
43,072
|
|
|
|
5
|
|
%
|
|
|
21,999
|
|
|
|
51
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,279,908
|
|
|
|
100
|
|
%
|
|
|
938,687
|
|
|
|
100
|
|
%
|
|
|
341,221
|
|
|
|
36
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation included below)
|
|
|
(332,487
|
)
|
|
|
(26
|
)
|
%
|
|
|
(240,021
|
)
|
|
|
(26
|
)
|
%
|
|
|
(92,466
|
)
|
|
|
39
|
|
%
|
Cost of digital handset and
accessory sales
|
|
|
(207,112
|
)
|
|
|
(16
|
)
|
%
|
|
|
(134,259
|
)
|
|
|
(14
|
)
|
%
|
|
|
(72,853
|
)
|
|
|
54
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(539,599
|
)
|
|
|
(42
|
)
|
%
|
|
|
(374,280
|
)
|
|
|
(40
|
)
|
%
|
|
|
(165,319
|
)
|
|
|
44
|
|
%
|
Selling and marketing expenses
|
|
|
(162,343
|
)
|
|
|
(13
|
)
|
%
|
|
|
(128,575
|
)
|
|
|
(14
|
)
|
%
|
|
|
(33,768
|
)
|
|
|
26
|
|
%
|
General and administrative expenses
|
|
|
(229,228
|
)
|
|
|
(18
|
)
|
%
|
|
|
(188,825
|
)
|
|
|
(20
|
)
|
%
|
|
|
(40,403
|
)
|
|
|
21
|
|
%
|
Depreciation and amortization
|
|
|
(98,375
|
)
|
|
|
(8
|
)
|
%
|
|
|
(79,501
|
)
|
|
|
(8
|
)
|
%
|
|
|
(18,874
|
)
|
|
|
24
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
250,363
|
|
|
|
19
|
|
%
|
|
|
167,506
|
|
|
|
18
|
|
%
|
|
|
82,857
|
|
|
|
49
|
|
%
|
Interest expense
|
|
|
(55,113
|
)
|
|
|
(4
|
)
|
%
|
|
|
(64,623
|
)
|
|
|
(7
|
)
|
%
|
|
|
9,510
|
|
|
|
(15
|
)
|
%
|
Interest income
|
|
|
12,697
|
|
|
|
1
|
|
%
|
|
|
10,864
|
|
|
|
1
|
|
%
|
|
|
1,833
|
|
|
|
17
|
|
%
|
Foreign currency transaction gains,
net
|
|
|
9,210
|
|
|
|
1
|
|
%
|
|
|
8,856
|
|
|
|
1
|
|
%
|
|
|
354
|
|
|
|
4
|
|
%
|
(Loss) gain on early extinguishment
of debt
|
|
|
(79,327
|
)
|
|
|
(6
|
)
|
%
|
|
|
22,404
|
|
|
|
2
|
|
%
|
|
|
(101,731
|
)
|
|
|
NM
|
|
|
Other expense, net
|
|
|
(2,320
|
)
|
|
|
|
|
|
|
|
(12,166
|
)
|
|
|
(1
|
)
|
%
|
|
|
9,846
|
|
|
|
(81
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision
and cumulative effect of change in accounting principle, net
|
|
|
135,510
|
|
|
|
11
|
|
%
|
|
|
132,841
|
|
|
|
14
|
|
%
|
|
|
2,669
|
|
|
|
2
|
|
%
|
Income tax provision
|
|
|
(79,191
|
)
|
|
|
(6
|
)
|
%
|
|
|
(51,627
|
)
|
|
|
(5
|
)
|
%
|
|
|
(27,564
|
)
|
|
|
53
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
change in accounting principle, net
|
|
|
56,319
|
|
|
|
5
|
|
%
|
|
|
81,214
|
|
|
|
9
|
|
%
|
|
|
(24,895
|
)
|
|
|
(31
|
)
|
%
|
Cumulative effect of change in
accounting principle, net of income taxes of $11,898
|
|
|
970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
970
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
57,289
|
|
|
|
5
|
|
%
|
|
$
|
81,214
|
|
|
|
9
|
|
%
|
|
$
|
(23,925
|
)
|
|
|
(29
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM-Not Meaningful
1. Operating
revenues
Consolidated service and other revenues increased
$319.2 million, or 36%, from the year ended
December 31, 2003 to the year ended December 31, 2004
primarily as a result of the following:
|
|
|
|
|
a 26% increase in the average number of consolidated digital
handsets in service;
|
|
|
|
a $28.6 million increase in revenues related to handset
maintenance programs;
|
|
|
|
a $13.5 million increase in digital two-way radio and
international roaming revenues; and
|
|
|
|
a $6.7 million increase in revenues earned by Nextel Mexico
and Nextel Brazil related to the co-location of third-party
tenants on their communication towers.
|
76
The increase in consolidated service and other revenues is also
due to an increase in average consolidated revenues per handset
resulting from higher access charges and increased revenues
generated from service agreements between mobile carriers.
The $22.0 million, or 51%, increase in consolidated digital
handset and accessory revenues from the year ended
December 31, 2003 to the year ended December 31, 2004
is primarily the result of a 31% increase in consolidated
handset sales, as well as an increase in handset upgrades
provided to existing customers.
2. Cost
of revenues
Consolidated cost of service increased $92.5 million, or
39%, from the year ended December 31, 2003 to the year
ended December 31, 2004 mainly as a result of the following:
|
|
|
|
|
a $57.2 million, or 48%, increase in interconnect costs
primarily as a result of a 43% increase in consolidated minutes
of use, as well as an increase in interconnect costs per minute
of use, primarily in Brazil and Argentina;
|
|
|
|
a $19.8 million, or 63%, increase in service and repair
costs due to increased claims related to the handset maintenance
programs in all of our markets; and
|
|
|
|
a $9.3 million, or 11%, increase in direct switch and
transmitter and receiver site costs largely due to a 14%
increase in transmitter and receiver sites in service from
December 31, 2003 to December 31, 2004.
|
Consolidated cost of digital handset and accessory sales
increased $72.9 million, or 54%, from the year ended
December 31, 2003 to the year ended December 31, 2004
primarily due to a 31% increase in consolidated handset sales,
as well as an increase in handset upgrades provided to existing
customers.
3. Selling
and marketing expenses
The $33.8 million, or 26%, increase in consolidated selling
and marketing expenses from the year ended December 31,
2003 to the year ended December 31, 2004 is primarily due
to the following:
|
|
|
|
|
an $18.2 million, or 38%, increase in direct commissions
and related payroll expenses mainly caused by a 50% increase in
handset sales by our market sales personnel;
|
|
|
|
a $7.7 million, or 18%, increase in indirect commissions
mostly due to a 19% increase in handset sales by indirect
dealers; and
|
|
|
|
a $7.6 million, or 27%, increase in advertising costs
primarily as a result of additional advertising campaigns,
primarily in Mexico, in connection with the launch of its
Morelia market in the first quarter of 2004, as well as
international Direct
Connectsm
campaigns.
|
4. General
and administrative expenses
The $40.4 million, or 21%, increase in consolidated general
and administrative expenses from the year ended
December 31, 2003 to the year ended December 31, 2004
is largely a result of the following:
|
|
|
|
|
a $22.7 million, or 21%, increase in general corporate
expenses primarily caused by an increase in taxes on operating
revenues in Mexico and Argentina;
|
|
|
|
an $11.1 million, or 25%, increase in customer care
expenses mainly caused by the 26% increase in the average number
of consolidated digital handsets in service and an associated
increase in payroll and employee related expenses due to more
customer care personnel required to support a larger customer
base; and
|
|
|
|
a $4.4 million, or 18%, increase in information technology
related maintenance costs and expenses related to various
projects initiated during 2004.
|
77
5. Depreciation
and amortization
Consolidated depreciation and amortization increased
$18.9 million, or 24%, from the year ended
December 31, 2003 to the year ended December 31, 2004
primarily as a result of increased depreciation on a higher
consolidated property, plant and equipment base, partially
offset by a decrease in amortization. This decrease is a result
of the reversal of certain valuation allowances for deferred tax
assets created in connection with our application of fresh-start
accounting, which was recorded as a reduction to intangible
assets that existed as of the date of our application of
fresh-start accounting.
The $9.5 million, or 15%, decrease in consolidated interest
expense from the year ended December 31, 2003 to the year
ended December 31, 2004 is primarily due to the following:
|
|
|
|
|
the elimination of interest incurred on our 13.0% senior
secured discount notes in connection with the retirement of
substantially all of these notes in the first quarter of
2004; and
|
|
|
|
the elimination of interest related to our international
equipment facility which was extinguished in 2004, and the
extinguishment of our Brazil equipment facility in 2003.
|
These decreases were partially offset by interest incurred on
our 3.5% convertible notes and our 2.875% convertible notes
during the year ended December 31, 2004.
|
|
7.
|
(Loss) gain
on early extinguishment of debt
|
The $79.3 million net loss on early extinguishment of debt
for the year ended December 31, 2004 represents a loss we
incurred in connection with the retirement of substantially all
of our 13.0% senior secured discount notes through a cash
tender offer in March 2004.
The $22.4 million net gain on early extinguishment of debt
for the year ended December 31, 2003 represents a gain we
recognized in connection with the extinguishment of our Brazil
equipment facility in September 2003.
Other expense, net, decreased $9.8 million, or 81%, from
the year ended December 31, 2003 to the year ended
December 31, 2004 primarily as the result of a decrease in
monetary corrections on certain tax and other contingencies in
Brazil.
The $27.6 million increase in the income tax provision from
the year ended December 31, 2003 to the year ended
December 31, 2004 primarily resulted from a
$23.2 million current income tax benefit that we recorded
in 2003 due to the reversal of valuation allowance on
post-reorganization deferred tax assets in the U.S.
|
|
10.
|
Cumulative
effect of change in accounting principle, net
|
The $1.0 million cumulative effect of the change in
accounting principle for the year ended December 31, 2004
represents net income for our international markets for the one
month ended December 31, 2003. We accounted for the
elimination of the one-month lag reporting policy as a change in
accounting principle in accordance with APB Opinion No. 20
effective January 1, 2004. As a result, we treated the
month of December 2003, which is normally the first month in the
fiscal year of our foreign operating companies, as the lag
month, and our fiscal year for all of our foreign operating
companies now begins with January and ends with December.
78
Segment
Results
The tables below provide a summary of the components of our
consolidated segments for the years ended December 31, 2004
and 2003. The results of Nextel Chile are included in
Corporate and other.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Selling,
|
|
|
Selling,
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
Consolidated
|
|
|
General and
|
|
|
General and
|
|
|
Segment
|
|
Year Ended
|
|
Operating
|
|
|
Operating
|
|
|
Cost of
|
|
|
Cost of
|
|
|
Administrative
|
|
|
Administrative
|
|
|
Earnings
|
|
December 31, 2004
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Expenses
|
|
|
Expenses
|
|
|
(Losses)
|
|
|
|
(dollars in thousands)
|
|
|
Nextel Mexico
|
|
$
|
775,925
|
|
|
|
61
|
%
|
|
$
|
(245,760
|
)
|
|
|
46
|
%
|
|
$
|
(205,915
|
)
|
|
|
53
|
%
|
|
$
|
324,250
|
|
Nextel Brazil
|
|
|
212,016
|
|
|
|
17
|
%
|
|
|
(143,025
|
)
|
|
|
27
|
%
|
|
|
(55,460
|
)
|
|
|
14
|
%
|
|
|
13,531
|
|
Nextel Argentina
|
|
|
194,799
|
|
|
|
15
|
%
|
|
|
(101,829
|
)
|
|
|
19
|
%
|
|
|
(50,874
|
)
|
|
|
13
|
%
|
|
|
42,096
|
|
Nextel Peru
|
|
|
96,070
|
|
|
|
7
|
%
|
|
|
(47,777
|
)
|
|
|
8
|
%
|
|
|
(28,441
|
)
|
|
|
7
|
%
|
|
|
19,852
|
|
Corporate and other
|
|
|
1,574
|
|
|
|
|
|
|
|
(1,684
|
)
|
|
|
|
|
|
|
(50,881
|
)
|
|
|
13
|
%
|
|
|
(50,991
|
)
|
Intercompany eliminations
|
|
|
(476
|
)
|
|
|
|
|
|
|
476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated
|
|
$
|
1,279,908
|
|
|
|
100
|
%
|
|
$
|
(539,599
|
)
|
|
|
100
|
%
|
|
$
|
(391,571
|
)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Selling,
|
|
|
Selling,
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
Consolidated
|
|
|
General and
|
|
|
General and
|
|
|
Segment
|
|
Year Ended
|
|
Operating
|
|
|
Operating
|
|
|
Cost of
|
|
|
Cost of
|
|
|
Administrative
|
|
|
Administrative
|
|
|
Earnings
|
|
December 31, 2003
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Expenses
|
|
|
Expenses
|
|
|
(Losses)
|
|
|
|
(dollars in thousands)
|
|
|
Nextel Mexico
|
|
$
|
578,368
|
|
|
|
62
|
%
|
|
$
|
(193,423
|
)
|
|
|
51
|
%
|
|
$
|
(169,642
|
)
|
|
|
53
|
%
|
|
$
|
215,303
|
|
Nextel Brazil
|
|
|
148,545
|
|
|
|
16
|
%
|
|
|
(84,973
|
)
|
|
|
23
|
%
|
|
|
(49,969
|
)
|
|
|
16
|
%
|
|
|
13,603
|
|
Nextel Argentina
|
|
|
118,143
|
|
|
|
12
|
%
|
|
|
(48,651
|
)
|
|
|
13
|
%
|
|
|
(36,824
|
)
|
|
|
12
|
%
|
|
|
32,668
|
|
Nextel Peru
|
|
|
92,575
|
|
|
|
10
|
%
|
|
|
(45,295
|
)
|
|
|
12
|
%
|
|
|
(26,341
|
)
|
|
|
8
|
%
|
|
|
20,939
|
|
Corporate and other
|
|
|
1,571
|
|
|
|
|
|
|
|
(2,453
|
)
|
|
|
1
|
%
|
|
|
(34,624
|
)
|
|
|
11
|
%
|
|
|
(35,506
|
)
|
Intercompany eliminations
|
|
|
(515
|
)
|
|
|
|
|
|
|
515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated
|
|
$
|
938,687
|
|
|
|
100
|
%
|
|
$
|
(374,280
|
)
|
|
|
100
|
%
|
|
$
|
(317,400
|
)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A discussion of the results of operations in each of our
reportable segments is provided below.
79
b. Nextel
Mexico
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Mexicos
|
|
|
|
Year Ended
|
|
|
Mexicos
|
|
|
|
Change from
|
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
Previous Year
|
|
|
|
|
2004
|
|
|
Revenues
|
|
|
|
2003
|
|
|
Revenues
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
(dollars in thousands)
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
749,923
|
|
|
|
97
|
|
%
|
|
$
|
559,198
|
|
|
|
97
|
|
%
|
|
$
|
190,725
|
|
|
|
34
|
|
%
|
Digital handset and accessory
revenues
|
|
|
26,002
|
|
|
|
3
|
|
%
|
|
|
19,170
|
|
|
|
3
|
|
%
|
|
|
6,832
|
|
|
|
36
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
775,925
|
|
|
|
100
|
|
%
|
|
|
578,368
|
|
|
|
100
|
|
%
|
|
|
197,557
|
|
|
|
34
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation included below)
|
|
|
(135,355
|
)
|
|
|
(17
|
)
|
%
|
|
|
(115,207
|
)
|
|
|
(20
|
)
|
%
|
|
|
(20,148
|
)
|
|
|
17
|
|
%
|
Cost of digital handset and
accessory sales
|
|
|
(110,405
|
)
|
|
|
(15
|
)
|
%
|
|
|
(78,216
|
)
|
|
|
(13
|
)
|
%
|
|
|
(32,189
|
)
|
|
|
41
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(245,760
|
)
|
|
|
(32
|
)
|
%
|
|
|
(193,423
|
)
|
|
|
(33
|
)
|
%
|
|
|
(52,337
|
)
|
|
|
27
|
|
%
|
Selling and marketing expenses
|
|
|
(101,503
|
)
|
|
|
(13
|
)
|
%
|
|
|
(80,791
|
)
|
|
|
(14
|
)
|
%
|
|
|
(20,712
|
)
|
|
|
26
|
|
%
|
General and administrative expenses
|
|
|
(104,412
|
)
|
|
|
(13
|
)
|
%
|
|
|
(88,851
|
)
|
|
|
(15
|
)
|
%
|
|
|
(15,561
|
)
|
|
|
18
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings
|
|
|
324,250
|
|
|
|
42
|
|
%
|
|
|
215,303
|
|
|
|
38
|
|
%
|
|
|
108,947
|
|
|
|
51
|
|
%
|
Depreciation and amortization
|
|
|
(67,322
|
)
|
|
|
(9
|
)
|
%
|
|
|
(67,681
|
)
|
|
|
(12
|
)
|
%
|
|
|
359
|
|
|
|
(1
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
256,928
|
|
|
|
33
|
|
%
|
|
|
147,622
|
|
|
|
26
|
|
%
|
|
|
109,306
|
|
|
|
74
|
|
%
|
Interest expense
|
|
|
(18,902
|
)
|
|
|
(2
|
)
|
%
|
|
|
(19,762
|
)
|
|
|
(3
|
)
|
%
|
|
|
860
|
|
|
|
(4
|
)
|
%
|
Interest income
|
|
|
3,648
|
|
|
|
|
|
|
|
|
2,609
|
|
|
|
|
|
|
|
|
1,039
|
|
|
|
40
|
|
%
|
Foreign currency transaction gains
(losses), net
|
|
|
8,613
|
|
|
|
1
|
|
%
|
|
|
(16,381
|
)
|
|
|
|
|
|
|
|
24,994
|
|
|
|
(153
|
)
|
%
|
Other expense, net
|
|
|
(576
|
)
|
|
|
|
|
|
|
|
(959
|
)
|
|
|
|
|
|
|
|
383
|
|
|
|
(40
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax and
cumulative effect of change in accounting principle, net
|
|
$
|
249,711
|
|
|
|
32
|
|
%
|
|
$
|
113,129
|
|
|
|
20
|
|
%
|
|
$
|
136,582
|
|
|
|
121
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nextel Mexico is our largest and most profitable market segment,
comprising 61% of our total revenues and 103% of our total
operating income for the year ended December 31, 2004. In
recent years, we have directed the substantial portion of our
capital investment to Nextel Mexico. Nextel Mexicos
profitability is a result of subscriber growth with increasing
average revenues per subscriber and operating costs maintained
in line with revenues. Additional subscriber growth was the
result of selectively expanding coverage in new markets and
improving network quality and capacity, including launching
service in Baja California and providing voice and data coverage
to a busy cross-border area between Tijuana and San Diego.
Coverage expansion and network improvements were attributable to
capital expenditures totaling $101.7 million for the year
ended December 31, 2004 and a 41% share of all capital
expenditure investments that we made during 2004, a trend that
we expect will likely continue in the near future. Average
revenues per subscriber improved due to the implementation of
new rate plans and increased minutes of use in interconnect and
dispatch traffic. Nextel Mexico also decreased its customer
turnover by making concentrated investments in customer
retention programs. We expect growth to continue as we build out
new markets using spectrum that we acquired in March 2005 in the
800 MHz auctions.
In accordance with generally accepted accounting principles in
the United States, we translated Nextel Mexicos results of
operations using the average exchange rate for the year ended
December 31, 2004. The
80
average exchange rate of the Mexican peso for the year ended
December 31, 2004 decreased in value against the
U.S. dollar by 5% from the year ended December 31,
2003. As a result, compared to 2003, the components of Nextel
Mexicos results of operations for 2004 after translation
into U.S. dollars reflect lower increases than would have
occurred if it were not for the impact of the decrease in the
average value of the peso.
1. Operating
revenues
The $190.7 million, or 34%, increase in service and other
revenues from the year ended December 31, 2003 to the year
ended December 31, 2004 is primarily a result of the
following:
|
|
|
|
|
a 31% increase in the average number of digital handsets in
service resulting from growth in Mexicos existing markets,
as well as the expansion of service coverage into new markets,
mainly Tijuana and the border region; and
|
|
|
|
a $14.6 million increase in revenues generated from Nextel
Mexicos handset maintenance program.
|
The $6.8 million, or 36%, increase in digital handset and
accessory revenues from the year ended December 31, 2003 to
the year ended December 31, 2004 is mostly the result of a
48% increase in handset sales, as well as an increase in handset
upgrades provided to existing customers.
2. Cost
of revenues
The $20.1 million, or 17%, increase in cost of service from
the year ended December 31, 2003 to the year ended
December 31, 2004 is principally a result of the following:
|
|
|
|
|
a $9.7 million, or 16%, increase in interconnect costs,
primarily resulting from a 41% increase in total system minutes
of use, partially offset by a decrease in interconnect cost per
minute of use due to the renegotiation of interconnect rates
with some of Nextel Mexicos traffic carriers;
|
|
|
|
a $3.1 million, or 18%, increase in service and repair
costs largely due to Nextel Mexicos handset maintenance
program, as well as increased claims under this program; and
|
|
|
|
a $3.1 million, or 9%, increase in direct switch and
transmitter and receiver site costs resulting from a 15%
increase in the number of transmitter and receiver sites in
service from December 31, 2003 to December 31, 2004.
|
The $32.2 million, or 41%, increase in Nextel Mexicos
cost of digital handset and accessory sales from the year ended
December 31, 2003 to the year ended December 31, 2004
is primarily the result of a 48% increase in handset sales, as
well as an increase in handset upgrades provided to current
customers.
3. Selling
and marketing expenses
The $20.7 million, or 26%, increase in Nextel Mexicos
selling and marketing expenses from the year ended
December 31, 2003 to the year ended December 31, 2004
is primarily a result of the following
|
|
|
|
|
an $11.8 million, or 49%, increase in direct commissions
and payroll expenses, primarily as a result of a 45% increase in
handset sales by Nextel Mexicos sales personnel;
|
|
|
|
a $5.2 million, or 24%, increase in advertising expenses
mostly due to advertising campaigns promoting the launch of
Mexicos Morelia market during the first quarter of 2004,
an increase in Nextels racing sponsorship activity during
the third quarter of 2004 and additional advertising campaigns
focused on promoting International Direct
Connectsm
in the third and forth quarters of 2004; and
|
|
|
|
a $3.0 million, or 9%, increase in indirect commissions
largely resulting from a 8% increase in handset sales by outside
dealers.
|
81
4. General
and administrative expenses
The $15.6 million, or 18%, increase in Nextel Mexicos
general and administrative expenses from the year ended
December 31, 2003 to the year ended December 31, 2004
is primarily a result of the following:
|
|
|
|
|
a $9.6 million, or 19%, increase in general corporate costs
resulting from an increase in various taxes on operating
revenues and government mandated employee profit sharing
programs;
|
|
|
|
a $5.2 million, or 23%, increase in customer care expenses
primarily due to an increase in payroll and employee related
expenses caused by an increase in customer care personnel
required to support a larger customer base; and
|
|
|
|
a $2.1 million, or 24%, increase in information technology
expenses largely due to increased contractual labor caused by
the implementation of new information technology projects in
Mexico, as well as increased expenses related to hardware
maintenance.
|
These increases were partially offset by a decrease of
$1.4 million, or 33%, in bad debt expense, which also
decreased as a percentage of revenues from 0.7% for the year
ended December 31, 2003 to 0.4% for the year ended
December 31, 2004 primarily due to improved collections and
stricter credit screening procedures.
5. Interest
expense
The $0.9 million, or 4%, decrease in interest expense from
the year ended December 31, 2003 to the year ended
December 31, 2004 is primarily due to a decrease in
interest related to Nextel Mexicos portion of the
international equipment facility in connection with the
extinguishment of this facility in 2004. This decrease was
partially offset by an increase in interest incurred on Nextel
Mexicos tower financing obligations due to a full year of
interest incurred on tower sale-leaseback transactions that
occurred throughout 2003.
6. Foreign
currency transaction gains (losses), net
Net foreign currency transaction gains of $8.6 million for
the year ended December 31, 2004 are primarily due to the
relative strengthening of the Mexican peso during the fourth
quarter of 2004 compared to the U.S. dollar on Nextel
Mexicos U.S. dollar-based liabilities during that
period.
Net foreign currency transaction losses of $16.4 million
for the year ended December 31, 2003 is primarily due to
the decrease in value of the Mexican peso on a larger base of
Nextel Mexicos U.S. dollar-denominated net
liabilities.
82
c. Nextel
Brazil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Brazils
|
|
|
|
Year Ended
|
|
|
Brazils
|
|
|
|
Change from
|
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
Previous Year
|
|
|
|
|
2004
|
|
|
Revenues
|
|
|
|
2003
|
|
|
Revenues
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
(dollars in thousands)
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
192,830
|
|
|
|
91
|
|
%
|
|
$
|
138,244
|
|
|
|
93
|
|
%
|
|
$
|
54,586
|
|
|
|
39
|
|
%
|
Digital handset and accessory
revenues
|
|
|
19,186
|
|
|
|
9
|
|
%
|
|
|
10,301
|
|
|
|
7
|
|
%
|
|
|
8,885
|
|
|
|
86
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
212,016
|
|
|
|
100
|
|
%
|
|
|
148,545
|
|
|
|
100
|
|
%
|
|
|
63,471
|
|
|
|
43
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation included below)
|
|
|
(92,820
|
)
|
|
|
(44
|
)
|
%
|
|
|
(57,057
|
)
|
|
|
(38
|
)
|
%
|
|
|
(35,763
|
)
|
|
|
63
|
|
%
|
Cost of digital handset and
accessory sales
|
|
|
(50,205
|
)
|
|
|
(23
|
)
|
%
|
|
|
(27,916
|
)
|
|
|
(19
|
)
|
%
|
|
|
(22,289
|
)
|
|
|
80
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(143,025
|
)
|
|
|
(67
|
)
|
%
|
|
|
(84,973
|
)
|
|
|
(57
|
)
|
%
|
|
|
(58,052
|
)
|
|
|
68
|
|
%
|
Selling and marketing expenses
|
|
|
(29,161
|
)
|
|
|
(14
|
)
|
%
|
|
|
(21,862
|
)
|
|
|
(15
|
)
|
%
|
|
|
(7,299
|
)
|
|
|
33
|
|
%
|
General and administrative expenses
|
|
|
(26,299
|
)
|
|
|
(13
|
)
|
%
|
|
|
(28,107
|
)
|
|
|
(19
|
)
|
%
|
|
|
1,808
|
|
|
|
(6
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings
|
|
|
13,531
|
|
|
|
6
|
|
%
|
|
|
13,603
|
|
|
|
9
|
|
%
|
|
|
(72
|
)
|
|
|
(1
|
)
|
%
|
Depreciation and amortization
|
|
|
(13,081
|
)
|
|
|
(6
|
)
|
%
|
|
|
(4,520
|
)
|
|
|
(3
|
)
|
%
|
|
|
(8,561
|
)
|
|
|
189
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
450
|
|
|
|
|
|
|
|
|
9,083
|
|
|
|
6
|
|
%
|
|
|
(8,633
|
)
|
|
|
(95
|
)
|
%
|
Interest expense
|
|
|
(12,054
|
)
|
|
|
(6
|
)
|
%
|
|
|
(11,165
|
)
|
|
|
(8
|
)
|
%
|
|
|
(889
|
)
|
|
|
8
|
|
%
|
Interest income
|
|
|
2,733
|
|
|
|
1
|
|
%
|
|
|
5,747
|
|
|
|
4
|
|
%
|
|
|
(3,014
|
)
|
|
|
(52
|
)
|
%
|
Gain on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
22,739
|
|
|
|
15
|
|
%
|
|
|
(22,739
|
)
|
|
|
(100
|
)
|
%
|
Foreign currency transaction gains,
net
|
|
|
575
|
|
|
|
|
|
|
|
|
23,751
|
|
|
|
16
|
|
%
|
|
|
(23,176
|
)
|
|
|
(98
|
)
|
%
|
Other expense, net
|
|
|
(1,819
|
)
|
|
|
|
|
|
|
|
(8,239
|
)
|
|
|
(5
|
)
|
%
|
|
|
6,420
|
|
|
|
(78
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income tax and
cumulative effect of change in accounting principle, net
|
|
$
|
(10,115
|
)
|
|
|
(5
|
)
|
%
|
|
$
|
41,916
|
|
|
|
28
|
|
%
|
|
$
|
(52,031
|
)
|
|
|
(124
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In accordance with accounting principles generally accepted in
the United States, we translated Nextel Brazils results of
operations using the average exchange rate for the year ended
December 31, 2004. The average exchange rate for the year
ended December 31, 2004 appreciated against the
U.S. dollar by 7% from the year ended December 31,
2003. As a result, the components of Nextel Brazils
results of operations for the year ended December 31, 2004
after translation into U.S. dollars reflect increases
compared to its results of operations for the year ended
December 31, 2003.
1. Operating
revenues
The $54.6 million, or 39%, increase in service and other
revenues from the year ended December 31, 2003 to the year
ended December 31, 2004 is primarily a result of the
following:
|
|
|
|
|
a 13% increase in the average number of digital handsets in
service resulting from growth in Nextel Brazils existing
markets;
|
|
|
|
an increase in average revenue per handset, largely as a result
of higher access revenues and an increase in revenues generated
from calling-party-pays agreements;
|
83
|
|
|
|
|
an increase in revenues related to the co-location of
third-party tenants on Nextel Brazils communication
towers; and
|
|
|
|
an increase in revenues related to Nextel Brazils handset
maintenance program, which was launched during the third quarter
of 2003.
|
The $8.9 million, or 86%, increase in digital handset and
accessory sales from the year ended December 31, 2003 to
the year ended December 31, 2004 is mainly due to a 40%
increase in handset sales, as well as an increase in handset
upgrades provided to existing customers and a change in the mix
of handsets sold and leased, which included a higher proportion
of expensive models during 2004 compared to 2003 when more
refurbished handsets were sold.
The $35.8 million, or 63%, increase in cost of service from
the year ended December 31, 2003 to the year ended
December 31, 2004 is primarily a result of the following:
|
|
|
|
|
a $25.2 million, or 91%, in interconnect costs primarily
resulting from a 44% increase in total minutes of use, as well
as an increase in interconnect costs per minute of use as a
result of an increase in traffic terminated with other mobile
carriers that have higher costs per minute;
|
|
|
|
a $7.2 million increase in service and repair costs caused
by increased activity associated with Nextel Brazils
handset maintenance program; and
|
|
|
|
a $2.0 million, or 8%, increase in direct switch and
transmitter and receiver site costs largely due to a 14%
increase in the number of transmitter and receiver sites in
service from December 31, 2003 to December 31, 2004.
|
The $22.3 million, or 80%, increase in cost of digital
handset and accessory sales from the year ended
December 31, 2003 to the year ended December 31, 2004
is largely due to the 40% increase in handset sales, as well as
an increase in handset upgrades provided to existing customers
and a change in the mix of handsets sold and leased, which
included a higher proportion of expensive models during 2004
compared to 2003 when more refurbished handsets were sold.
3. Selling
and marketing expenses
Nextel Brazils selling and marketing expenses increased
$7.3 million, or 33%, from the year ended December 31,
2003 to the year ended December 31, 2004 mostly as a result
of the following:
|
|
|
|
|
a $3.6 million, or 34%, increase in direct commissions and
payroll related expenses largely resulting from a 58% increase
in handset sales by Nextel Brazils sales force and an
increase in sales personnel;
|
|
|
|
a $1.8 million, or 37%, increase in indirect commissions
mostly resulting from a 24% increase in handset sales by
indirect dealers, as well as increases in indirect commissions
per handset sale; and
|
|
|
|
a $1.5 million, or 40%, increase in advertising expenses
due to more advertising campaigns in 2004 compared to 2003
primarily as a result of increased initiatives related to brand
awareness.
|
4. General
and administrative expenses
Nextel Brazils general and administrative expenses
decreased $1.8 million, or 6%, from the year ended
December 31, 2003 to the year ended December 31, 2004
primarily as the result of an $8.0 million, or 75%,
decrease in general corporate costs due to $14.4 million in
tax and other contingency liability reversals during the year
ended December 31, 2004 resulting from settlements of
contingencies and the expiration of the statute of limitations.
This decrease was partially offset by the following:
|
|
|
|
|
a $3.3 million increase in bad debt expense, which also
increased as a percentage of revenues from less than one percent
for the year ended December 31, 2003 to 1.7% for the year
ended December 31, 2004, primarily as a result of the
collection of a significant amount of old accounts during 2003;
|
84
|
|
|
|
|
a $1.7 million, or 15%, increase in customer care expenses
resulting from an increase in payroll and related expenses due
to more customer care personnel necessary to support a larger
customer base; and
|
|
|
|
a $1.0 million, or 20%, increase in information technology
expenses due to increased maintenance expenses.
|
5. Depreciation
and amortization
In connection with the application of fresh-start accounting
principles on October 31, 2002, Nextel Brazil recorded
$27.8 million of fixed asset write-downs, which
substantially reduced the cost bases of Nextel Brazils
fixed assets and resulted in less depreciation during 2003.
During 2004, Nextel Brazil spent $72.4 million on capital
expenditures, which represented a significant increase in gross
property, plant and equipment from December 31, 2003 to
December 31, 2004. The $8.6 million increase in
depreciation and amortization from the year ended
December 31, 2003 to the year ended December 31, 2004
is primarily a result of depreciation on this higher property,
plant and equipment base during 2004, partially offset by a
decrease in amortization.
6. Interest
expense
The $0.9 million, or 8%, increase in interest expense from
the year ended December 31, 2003 to the year ended
December 31, 2004 is primarily due to an increase in
interest incurred on Nextel Brazils tower financing
obligations during 2004 due to a full year of interest incurred
on tower sale-leaseback transactions that occurred throughout
2003, partially offset by the elimination of interest relating
to Nextel Brazils equipment financing facility as a result
of the extinguishment of this facility in the third quarter of
2003.
7. Interest
income
The $3.0 million, or 52%, decrease in interest income from
the year ended December 31, 2003 to the year ended
December 31, 2004 is primarily the result of a decrease in
Nextel Brazils outstanding cash balances due to an
increase in capital expenditures, as well as a decrease in
interest rates from 2003 to 2004.
8. Gain
on extinguishment of debt
In July 2003, we entered into an agreement with Motorola Credit
Corporation to retire our indebtedness under Nextel
Brazils equipment financing facility. In connection with
this agreement, in September 2003, we paid $86.0 million to
Motorola Credit Corporation in consideration of the
$103.2 million in outstanding principal and
$5.5 million in accrued and unpaid interest under Nextel
Brazils equipment financing facility which was
extinguished. As a result, Nextel Brazil recognized a
$22.7 million gain on the retirement of this facility
during the year ended December 31, 2003.
9. Foreign
currency transaction gains, net
Net foreign currency transaction gains of $23.8 million for
the year ended December 31, 2003 are largely due to a sharp
increase in the value of the Brazilian real compared to the
U.S. dollar on a larger base of Nextel Brazils
U.S. dollar-based liabilities during that period, primarily
its equipment financing facility. Nextel Brazils exposure
to foreign currency transaction losses was reduced significantly
in the third quarter of 2003 as a result of the extinguishment
of this facility.
10. Other
expense, net
The $6.4 million, or 78%, decrease in other expense, net,
from the year ended December 31, 2003 to the year ended
December 31, 2004 is primarily due to the reversal of
$4.6 million of monetary corrections on certain
contingencies related to the reversal of these contingencies.
85
d. Nextel
Argentina
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Argentinas
|
|
|
Year Ended
|
|
|
Argentinas
|
|
|
Change from
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
December 31,
|
|
|
Operating
|
|
|
Previous Year
|
|
|
|
2004
|
|
|
Revenues
|
|
|
2003
|
|
|
Revenues
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
177,658
|
|
|
|
91
|
%
|
|
$
|
106,730
|
|
|
|
90
|
%
|
|
$
|
70,928
|
|
|
|
66
|
%
|
Digital handset and accessory
revenues
|
|
|
17,141
|
|
|
|
9
|
%
|
|
|
11,413
|
|
|
|
10
|
%
|
|
|
5,728
|
|
|
|
50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194,799
|
|
|
|
100
|
%
|
|
|
118,143
|
|
|
|
100
|
%
|
|
|
76,656
|
|
|
|
65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation included below)
|
|
|
(68,806
|
)
|
|
|
(35
|
)%
|
|
|
(32,740
|
)
|
|
|
(28
|
)%
|
|
|
(36,066
|
)
|
|
|
110
|
%
|
Cost of digital handset and
accessory sales
|
|
|
(33,023
|
)
|
|
|
(17
|
)%
|
|
|
(15,911
|
)
|
|
|
(13
|
)%
|
|
|
(17,112
|
)
|
|
|
108
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(101,829
|
)
|
|
|
(52
|
)%
|
|
|
(48,651
|
)
|
|
|
(41
|
)%
|
|
|
(53,178
|
)
|
|
|
109
|
%
|
Selling and marketing expenses
|
|
|
(16,245
|
)
|
|
|
(8
|
)%
|
|
|
(11,030
|
)
|
|
|
(9
|
)%
|
|
|
(5,215
|
)
|
|
|
47
|
%
|
General and administrative expenses
|
|
|
(34,629
|
)
|
|
|
(18
|
)%
|
|
|
(25,794
|
)
|
|
|
(22
|
)%
|
|
|
(8,835
|
)
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings
|
|
|
42,096
|
|
|
|
22
|
%
|
|
|
32,668
|
|
|
|
28
|
%
|
|
|
9,428
|
|
|
|
29
|
%
|
Depreciation and amortization
|
|
|
(11,512
|
)
|
|
|
(6
|
)%
|
|
|
(3,983
|
)
|
|
|
(4
|
)%
|
|
|
(7,529
|
)
|
|
|
189
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
30,584
|
|
|
|
16
|
%
|
|
|
28,685
|
|
|
|
24
|
%
|
|
|
1,899
|
|
|
|
7
|
%
|
Interest expense
|
|
|
(3,161
|
)
|
|
|
(2
|
)%
|
|
|
(61
|
)
|
|
|
|
|
|
|
(3,100
|
)
|
|
|
NM
|
|
Interest income
|
|
|
416
|
|
|
|
|
|
|
|
520
|
|
|
|
|
|
|
|
(104
|
)
|
|
|
(20
|
)%
|
Foreign currency transaction
(losses) gains, net
|
|
|
(266
|
)
|
|
|
|
|
|
|
1,335
|
|
|
|
2
|
%
|
|
|
(1,601
|
)
|
|
|
(120
|
)%
|
Other income, net
|
|
|
184
|
|
|
|
|
|
|
|
8,383
|
|
|
|
7
|
%
|
|
|
(8,199
|
)
|
|
|
(98
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax and
cumulative effect of change in accounting principle, net
|
|
$
|
27,757
|
|
|
|
14
|
%
|
|
$
|
38,862
|
|
|
|
33
|
%
|
|
$
|
(11,105
|
)
|
|
|
(29
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM-Not Meaningful
Since the beginning of 2003, the macroeconomic environment in
Argentina has improved from the adverse conditions existing in
2002 as evidenced by the appreciation of the Argentine peso
relative to the U.S. dollar. Consistent with this improved
economic environment, Nextel Argentina has continued growing its
subscriber base, significantly lowering its customer turnover
and reducing its bad debt expense, while substantially
increasing its operating revenues. As a result of the
uncertainty surrounding the economic conditions in Argentina, we
cannot predict whether this trend will continue.
In accordance with accounting principles generally accepted in
the United States, we translated Nextel Argentinas results
of operations using the average exchange rate for the years
ended December 31, 2004 and 2003. The average exchange rate
of the Argentine peso for the year ended December 31, 2004
depreciated against the U.S. dollar by 2% from the year
ended December 31, 2003. As a result, the components of
Nextel Argentinas results of operations for 2004 after
translation into U.S. dollars are generally comparable to
its results of operations for 2003.
86
1. Operating
revenues
The $70.9 million, or 66%, increase in service and other
revenues from the year ended December 31, 2003 to the year
ended December 31, 2004 is primarily a result of the
following:
|
|
|
|
|
a 38% increase in the average number of digital handsets in
service, resulting from growth in Nextel Argentinas
existing and new markets;
|
|
|
|
a 19% increase in average revenue per handset, largely due to
the implementation of a termination fee between mobile carriers
during the second quarter of 2003 as well as higher access
revenues; and
|
|
|
|
a $6.7 million increase in revenues related to Nextel
Argentinas handset maintenance program.
|
The $5.7 million, or 50%, increase in digital handset and
accessory revenues from the year ended December 31, 2003 to
the year ended December 31, 2004 is primarily a result of a
48% increase in handset sales.
2. Cost
of revenues
The $36.1 million, or 110%, increase in cost of service
from the year ended December 31, 2003 to the year ended
December 31, 2004 is largely a result of the following:
|
|
|
|
|
a $22.3 million, or 166%, increase in interconnect costs
primarily caused by a 58% increase in total system minutes of
use, as well as significant increases in interconnect costs per
minute of use resulting from the implementation of a termination
fees between mobile carriers during the second quarter of 2003;
|
|
|
|
a $9.2 million, or 122%, increase in service and repair
costs due to an increase in activity associated with Nextel
Argentinas handset maintenance program; and
|
|
|
|
a $4.5 million, or 41%, increase in direct switch and
transmitter and receiver site costs due to a 13% increase in the
number of cell sites on-air from December 31, 2003 to
December 31, 2004 and the accrual of site tax contingencies
levied by the municipalities.
|
The $17.1 million, or 108%, increase in cost of digital
handset and accessory sales from the year ended
December 31, 2003 to the year ended December 31, 2004
is primarily due to the 48% increase in handset sales as well as
the $4.6 million increase in handset upgrade subsidies from
2003 to 2004 as a result of an increase in upgrade activities.
3. Selling
and marketing expenses
The $5.2 million, or 47%, increase in Nextel
Argentinas selling and marketing expenses from the year
ended December 31, 2003 to the year ended December 31,
2004 is primarily a result of the following:
|
|
|
|
|
a $2.1 million, or 56%, increase in indirect commissions
resulting from a 50% increase in handset sales by indirect
dealers;
|
|
|
|
a $0.8 million, or 53%, increase in advertising expenses
primarily resulting from new advertising and branding
promotions; and
|
|
|
|
a $2.0 million, or 39%, increase in payroll, payroll
related costs and direct commissions primarily as the result of
an increase in sales and marketing personnel and a 45% increase
in handset sales by Nextel Argentinas sales force.
|
87
|
|
4.
|
General and
administrative expenses
|
The $8.8 million, or 34%, increase in general and
administrative expenses from the year ended December 31,
2003 to the year ended December 31, 2004 is primarily a
result of the following:
|
|
|
|
|
an $8.1 million, or 52%, increase in general corporate
costs, principally as a result of increases in operating taxes
on gross revenues in Argentina and an increase in payroll and
payroll related costs caused by a 16% increase in general and
administrative headcount;
|
|
|
|
a $2.0 million, or 43%, increase in customer care expenses
primarily caused by an increase in customer care headcount
required to support larger a customer base. Credit and
collections headcount also increased during 2004 which
contributed to the overall increase.
|
These expenses were somewhat offset by a $1.6 million, or
93%, decrease in bad debt expense, which also decreased as a
percentage of revenues from 1.5% for the year ended
December 31, 2003 to 0.1% for the year ended
December 31, 2004. Bad debt decreased mainly due to
improved collection procedures in 2004 compared with 2003.
|
|
5.
|
Depreciation
and amortization
|
The $7.5 million, or 189%, increase in depreciation and
amortization from the year ended December 31, 2003 to the
year ended December 31, 2004 is primarily due to a 198%
increase in Nextel Argentinas gross property, plant and
equipment as a result of expansion to new areas and existing
markets.
The $3.1 million increase in interest expense is due to the
recognition of interest incurred on gross revenue tax
contingencies recorded in 2004.
In connection with our emergence from Chapter 11
reorganization in 2002, one of our corporate entities
repurchased Nextel Argentinas credit facilities from its
creditors. While this corporate entity contributed the principal
balance to Nextel Argentina as a capital investment, it forgave
the accrued interest related to these credit facilities during
the first quarter of 2003. Other income, net, of
$8.4 million for the year ended December 31, 2003
consists primarily of the gain related to the forgiveness of
this accrued interest. We eliminated this intercompany loan for
consolidation purposes so it did not impact our consolidated
results.
88
e. Nextel
Peru
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Perus
|
|
|
|
Year Ended
|
|
|
Perus
|
|
|
|
Change from
|
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
Previous Year
|
|
|
|
|
2004
|
|
|
Revenues
|
|
|
|
2003
|
|
|
Revenues
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
(dollars in thousands)
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
93,328
|
|
|
|
97
|
|
%
|
|
$
|
90,391
|
|
|
|
98
|
|
%
|
|
$
|
2,937
|
|
|
|
3
|
|
%
|
Digital handset and accessory
revenues
|
|
|
2,742
|
|
|
|
3
|
|
%
|
|
|
2,184
|
|
|
|
2
|
|
%
|
|
|
558
|
|
|
|
26
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,070
|
|
|
|
100
|
|
%
|
|
|
92,575
|
|
|
|
100
|
|
%
|
|
|
3,495
|
|
|
|
4
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation included below)
|
|
|
(34,298
|
)
|
|
|
(36
|
)
|
%
|
|
|
(34,049
|
)
|
|
|
(37
|
)
|
%
|
|
|
(249
|
)
|
|
|
1
|
|
%
|
Cost of digital handset and
accessory sales
|
|
|
(13,479
|
)
|
|
|
(14
|
)
|
%
|
|
|
(11,246
|
)
|
|
|
(12
|
)
|
%
|
|
|
(2,233
|
)
|
|
|
20
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47,777
|
)
|
|
|
(50
|
)
|
%
|
|
|
(45,295
|
)
|
|
|
(49
|
)
|
%
|
|
|
(2,482
|
)
|
|
|
5
|
|
%
|
Selling and marketing expenses
|
|
|
(10,773
|
)
|
|
|
(11
|
)
|
%
|
|
|
(10,762
|
)
|
|
|
(11
|
)
|
%
|
|
|
(11
|
)
|
|
|
|
|
|
General and administrative expenses
|
|
|
(17,668
|
)
|
|
|
(18
|
)
|
%
|
|
|
(15,579
|
)
|
|
|
(17
|
)
|
%
|
|
|
(2,089
|
)
|
|
|
13
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings
|
|
|
19,852
|
|
|
|
21
|
|
%
|
|
|
20,939
|
|
|
|
23
|
|
%
|
|
|
(1,087
|
)
|
|
|
(5
|
)
|
%
|
Depreciation and amortization
|
|
|
(5,795
|
)
|
|
|
(6
|
)
|
%
|
|
|
(3,054
|
)
|
|
|
(4
|
)
|
%
|
|
|
(2,741
|
)
|
|
|
90
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
14,057
|
|
|
|
15
|
|
%
|
|
|
17,885
|
|
|
|
19
|
|
%
|
|
|
(3,828
|
)
|
|
|
(21
|
)
|
%
|
Interest expense
|
|
|
(188
|
)
|
|
|
|
|
|
|
|
(2,027
|
)
|
|
|
(2
|
)
|
%
|
|
|
1,839
|
|
|
|
(91
|
)
|
%
|
Interest income
|
|
|
2,707
|
|
|
|
3
|
|
%
|
|
|
85
|
|
|
|
|
|
|
|
|
2,622
|
|
|
|
NM
|
|
|
Foreign currency transaction
gains, net
|
|
|
273
|
|
|
|
|
|
|
|
|
165
|
|
|
|
|
|
|
|
|
108
|
|
|
|
65
|
|
%
|
Other income (expense), net
|
|
|
483
|
|
|
|
|
|
|
|
|
(328
|
)
|
|
|
|
|
|
|
|
811
|
|
|
|
(247
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax and
cumulative effect of change in accounting principle, net
|
|
$
|
17,332
|
|
|
|
18
|
|
%
|
|
$
|
15,780
|
|
|
|
17
|
|
%
|
|
$
|
1,552
|
|
|
|
10
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM-Not Meaningful
Nextel Perus revenue growth continued to slow during 2004
compared to prior years due to a reduction in the average
revenue per handset in service offset by an increase in Nextel
Perus customer base. Operating revenues increased 4% from
the year ended December 31, 2003 to the year ended
December 31, 2004. In combination with the 4% increase in
operating revenues, an increase in interconnect fees resulting
from an increase in rates led to stable segment earnings from
2003 to 2004. We expect Nextel Peru to grow its subscriber base
and revenues as it broadens its target market to incorporate
subscribers from microenterprises in addition to its existing
focus on small and medium-sized corporate and business users.
Because the U.S. dollar is the functional currency in Peru,
Nextel Perus results of operations are not significantly
impacted by changes in the U.S. dollar to Peruvian sol
exchange rate.
The $2.9 million, or 3%, increase in service and other
revenues from the year ended December 31, 2003 to the year
ended December 31, 2004 is primarily the result of a 19%
increase in the average number of digital handsets in service,
partially offset by a decrease in average revenue per handset
largely due to
89
increased competition in Peru. The $0.6 million, or 26%,
increase in digital handset and accessory revenues from the year
ended December 31, 2003 to the year ended December 31,
2004 is primarily the result of 42% growth in handset sales
partially offset by the launch of operating lease programs for
handsets, which reduced the revenues from digital handset sales.
The $2.2 million, or 20%, increase in cost of digital
handset and accessory sales from the year ended
December 31, 2003 to the year ended December 31, 2004
is primarily a result of a 42% increase in handset sales,
partially offset by lower subsidies per handset due to partial
utilization of refurbished phones for operating leases.
|
|
3.
|
General and
administrative expenses
|
The $2.1 million, or 13%, increase in Nextel Perus
general and administrative expenses from the year ended
December 31, 2003 to the year ended December 31, 2004
is primarily a result of the following:
|
|
|
|
|
a $1.0 million, or 17%, increase in customer care expenses
primarily as a result of an increase in payroll and related
expenses related to an increase in customer care personnel
necessary to support a larger customer base; and
|
|
|
|
a $0.9 million, or 17%, increase in general corporate costs
primarily as a result of an increase in payroll and related
expenses caused by an increase in general and administrative
headcount.
|
|
|
4.
|
Depreciation
and amortization
|
The $2.7 million, or 90%, increase in depreciation and
amortization from the year ended December 31, 2003 to the
year ended December 31, 2004 is partially due to an 85%
increase in gross property, plant and equipment additions during
2004 principally due to the build-out of new service areas in
Peru.
The $1.8 million, or 91%, decrease in interest expense from
the year ended December 31, 2003 to the year ended
December 31, 2004 is primarily a result of the elimination
of interest on Nextel Perus portion of the international
equipment facility, which it repaid during the third quarter of
2003.
90
f.
Corporate and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
and other
|
|
|
|
Year Ended
|
|
|
and other
|
|
|
|
Change from
|
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
Previous Year
|
|
|
|
|
2004
|
|
|
Revenues
|
|
|
|
2003
|
|
|
Revenues
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
(dollars in thousands)
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
1,574
|
|
|
|
100
|
|
%
|
|
$
|
1,567
|
|
|
|
100
|
|
%
|
|
$
|
7
|
|
|
|
|
|
|
Digital handset and accessory
revenues
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
(4
|
)
|
|
|
(100
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,574
|
|
|
|
100
|
|
%
|
|
|
1,571
|
|
|
|
100
|
|
%
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation included below)
|
|
|
(1,684
|
)
|
|
|
(107
|
)
|
%
|
|
|
(1,483
|
)
|
|
|
(94
|
)
|
%
|
|
|
(201
|
)
|
|
|
14
|
|
%
|
Cost of digital handset and
accessory sales
|
|
|
|
|
|
|
|
|
|
|
|
(970
|
)
|
|
|
(62
|
)
|
%
|
|
|
970
|
|
|
|
(100
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,684
|
)
|
|
|
(107
|
)
|
%
|
|
|
(2,453
|
)
|
|
|
(156
|
)
|
%
|
|
|
769
|
|
|
|
(31
|
)
|
%
|
Selling and marketing expenses
|
|
|
(4,661
|
)
|
|
|
(296
|
)
|
%
|
|
|
(4,130
|
)
|
|
|
(263
|
)
|
%
|
|
|
(531
|
)
|
|
|
13
|
|
%
|
General and administrative expenses
|
|
|
(46,220
|
)
|
|
|
NM
|
|
|
|
|
(30,494
|
)
|
|
|
NM
|
|
|
|
|
(15,726
|
)
|
|
|
52
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment losses
|
|
|
(50,991
|
)
|
|
|
NM
|
|
|
|
|
(35,506
|
)
|
|
|
NM
|
|
|
|
|
(15,485
|
)
|
|
|
44
|
|
%
|
Depreciation and amortization
|
|
|
(1,080
|
)
|
|
|
(69
|
)
|
%
|
|
|
(755
|
)
|
|
|
(48
|
)
|
%
|
|
|
(325
|
)
|
|
|
43
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(52,071
|
)
|
|
|
NM
|
|
|
|
|
(36,261
|
)
|
|
|
NM
|
|
|
|
|
(15,810
|
)
|
|
|
44
|
|
%
|
Interest expense
|
|
|
(20,950
|
)
|
|
|
NM
|
|
|
|
|
(36,683
|
)
|
|
|
NM
|
|
|
|
|
15,733
|
|
|
|
(43
|
)
|
%
|
Interest income
|
|
|
3,335
|
|
|
|
212
|
|
%
|
|
|
6,978
|
|
|
|
NM
|
|
|
|
|
(3,643
|
)
|
|
|
(52
|
)
|
%
|
Foreign currency transaction
gains, (losses), net
|
|
|
15
|
|
|
|
1
|
|
%
|
|
|
(14
|
)
|
|
|
(1
|
)
|
%
|
|
|
29
|
|
|
|
(207
|
)
|
%
|
Loss on early extinguishment of
debt
|
|
$
|
(79,327
|
)
|
|
|
NM
|
|
|
|
|
(335
|
)
|
|
|
(21
|
)
|
%
|
|
|
(78,992
|
)
|
|
|
NM
|
|
|
Other expense, net
|
|
|
(449
|
)
|
|
|
(29
|
)
|
%
|
|
|
(8,564
|
)
|
|
|
NM
|
|
|
|
|
8,115
|
|
|
|
(95
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax and
cumulative effect of change in accounting principle, net
|
|
$
|
(149,447
|
)
|
|
|
NM
|
|
|
|
$
|
(74,879
|
)
|
|
|
NM
|
|
|
|
$
|
(74,568
|
)
|
|
|
100
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM-Not
Meaningful
Corporate and other operating revenues and cost of revenues
primarily represent the results of analog operations reported by
Nextel Chile. Operating revenues and cost of revenues did not
significantly change from the year ended December 31, 2003
to the year ended December 31, 2004 because Nextel
Chiles subscriber base remained stable.
|
|
1.
|
General and
administrative expenses
|
The $15.7 million, or 52%, increase in general and
administrative expenses from the year ended December 31,
2003 to the year ended December 31, 2004 is primarily due
to a $12.2 million increase in general corporate costs,
which increased due to the following:
|
|
|
|
|
a $3.2 million increase in outside services specifically
for audit, tax and consulting activities during 2004;
|
|
|
|
a $1.9 million increase in payroll and related expenses due
to an increase in corporate personnel;
|
|
|
|
a $3.6 million increase in stock compensation
expense; and
|
91
|
|
|
|
|
a $1.2 million increase in business insurance expense
caused by increased insurance premiums and new business
insurance coverage.
|
The $15.7 million, or 43%, decrease in interest expense
from the year ended December 31, 2003 to the year ended
December 31, 2004 is primarily related to the elimination
of interest on our 13% senior secured discount notes in
connection with the retirement of substantially all of these
notes during the first quarter of 2004, as well as a decrease in
our interest expense related to our international equipment
facility and our Brazil equipment facility in connection with
the extinguishment of these facilities. These decreases were
partially offset by interest incurred on our
3.5% convertible notes and our 2.875% convertible
notes during 2004.
The $3.6 million, or 52%, decrease in interest income from
the year ended December 31, 2003 to the year ended
December 31, 2004 is primarily the result of lower rates on
outstanding corporate cash balances compared to 2003.
|
|
4.
|
Loss on
early extinguishment of debt
|
The $79.3 million loss on early extinguishment of debt for
the year ended December 31, 2004 represents the loss we
incurred in connection with the retirement of substantially all
of our 13.0% senior secured discount notes through a cash
tender offer in March 2004.
Other expense, net, of $8.6 million for the year ended
December 31, 2003 consists primarily of a loss related to
accrued interest that we forgave on Nextel Argentinas
credit facilities that the corporate entity repurchased in the
fourth quarter of 2002. Since this accrued interest was due
between a corporate entity and a consolidated subsidiary, the
forgiveness of accrued interest did not impact our consolidated
results of operations.
|
|
C.
|
Liquidity
and Capital Resources
|
We had a working capital surplus of $793.2 million as of
December 31, 2005, a $538.6 million increase compared
to December 31, 2004. The increase in our working capital,
which is defined as total current assets less total current
liabilities, is primarily attributable to higher consolidated
cash and cash equivalent balances resulting from the draw-down
of our $250.0 million Mexico syndicated loan facility in
May 2005 and $350.0 million in gross proceeds that we
received from the issuance of our 2.75% convertible notes
in August 2005.
We recognized net income of $174.8 million for the year
ended December 31, 2005, $57.3 million for the year
ended December 31, 2004 and $81.2 million for the year
ended December 31, 2003. During 2005, 2004 and 2003, our
operating revenues more than offset our operating expenses,
excluding depreciation and amortization, and cash capital
expenditures. However, we cannot be sure that this trend will
continue in the future as we intend to continue the current
expansion of our networks, primarily in Mexico and Brazil. See
D. Future Capital Needs and Resources
for a discussion of our future outlook and anticipated sources
and uses of funds for 2006.
Cash
Flows
Our operating activities provided us with $316.3 million of
net cash and cash equivalents during 2005, a $60.3 million
increase from 2004. Our operating activities provided us with
$256.0 million of net cash during 2004, a
$45.0 million increase from 2003. Both increases were due
to the generation of higher operating income resulting from our
profitable growth strategy, partially offset by increases in
cash used for working capital.
92
We used $389.1 million of net cash in our investing
activities during 2005, a $96.0 million increase from 2004.
Cash capital expenditures increased $158.2 million from
$227.7 million in 2004 to $385.9 million in 2005 due
to the accelerated build-out of our digital mobile networks
during 2005. We paid $27.4 million and $24.3 million
in cash for acquisitions and purchases of spectrum licenses in
2005 and 2004, respectively. During 2005, we purchased
$14.1 million of short-term investments and received
$45.6 million in proceeds from maturities and sales of
short-term investments. We also purchased foreign currency
derivative instruments at a net cost of $7.3 million.
We used $293.2 million of net cash in our investing
activities during 2004, a $46.7 million increase from 2003.
Cash capital expenditures increased $30.3 million from
$197.4 million in 2003 to $227.7 million in 2004 due
to investments made in advance of our planned expansion
activities in 2005. We paid $24.3 million and
$49.1 million in cash for acquisitions and purchases of
licenses in 2004 and 2003, respectively. During 2004, we
purchased $87.8 million in short-term investments of which
we received $49.4 million in proceeds from maturities and
sales of these short-term investments. We also purchased a
foreign currency derivative instrument at a net cost of
$2.7 million. We did not make similar purchases of
short-term investments or foreign currency derivative
instruments during 2003.
Our financing activities provided us with $611.6 million of
net cash during 2005, primarily due to the following:
|
|
|
|
|
$350.0 million in gross proceeds that we raised in
connection with the issuance of our 2.75% convertible notes;
|
|
|
|
$250.0 million in gross proceeds that we received in
connection with the draw-down of our Mexico syndicated loan
facility; and
|
|
|
|
$23.9 million in proceeds received from stock option
exercises by our employees.
|
These increases were partially offset by $9.6 million in
cash we used to pay debt financing costs in connection with the
issuance of our 2.75% convertible notes.
We used $44.1 million of net cash in our financing
activities during 2004, primarily due to the following:
|
|
|
|
|
$211.2 million in cash we used to retire substantially all
of our 13.0% senior secured discount notes in connection
with our tender offer;
|
|
|
|
$126.1 million in cash we used to repay our international
equipment facility with Motorola; and
|
|
|
|
$8.5 million in cash we used to pay debt financing costs in
connection with the issuance of our 2.875% convertible
notes.
|
These decreases were partially offset by $300.0 million in
gross proceeds that we raised in connection with the issuance of
our 2.875% convertible notes.
Our financing activities provided us with $210.0 million of
net cash during 2003, primarily due to $113.1 million in
net proceeds that we received from the sale of common stock,
$174.6 million in proceeds, net of debt financing costs,
that we received from our 3.5% convertible note issuance
and $106.4 million in proceeds that we received from our
telecommunication tower sale-leaseback financing transactions
that closed during 2003, partially offset by $186.0 million
that we used to repay our long-term credit facilities with
Motorola, Inc.
|
|
D.
|
Future
Capital Needs and Resources
|
Capital Resources. Our ongoing capital
resources depend on a variety of factors, including our existing
cash and cash equivalents balances, cash flows generated by our
operating companies and external financial sources that may be
available. As of December 31, 2005, our capital resources
included $877.5 million of cash and cash equivalents and
$7.4 million of available short-term investments. Our
ability to generate sufficient net cash from our operating
activities is dependent upon, among other things:
|
|
|
|
|
the amount of revenue we are able to generate and collect from
our customers;
|
|
|
|
the amount of operating expenses required to provide our
services;
|
93
|
|
|
|
|
the cost of acquiring and retaining customers, including the
subsidies we incur to provide handsets to both our new and
existing customers;
|
|
|
|
our ability to continue to grow our customer base; and
|
|
|
|
fluctuations in foreign exchange rates.
|
In October 2004, Nextel Mexico closed on a $250.0 million,
five year syndicated loan facility. Of the total amount of the
facility, $129.0 million is denominated in
U.S. dollars, with a floating interest rate based on LIBOR,
$31.0 million is denominated in Mexican pesos, with a
floating interest rate based on the Mexican reference interest
rate, TIIE, and $90.0 million is denominated in Mexican
pesos, at an interest rate fixed at the time of funding. In
April 2005, Nextel Mexico amended the credit agreement for the
syndicated loan facility to extend the availability period until
May 31, 2005, and in May 2005, Nextel Mexico drew down on
the loan facility for the entire $250.0 million.
On June 10, 2005 and June 20, 2005, certain
noteholders converted $40.0 million and $48.5 million,
respectively, principal face amount of our 3.5% convertible
notes into 3,000,000 shares and 3,635,850 shares
(75.0 shares issued per $1,000 of debt principal multiplied
by the debt principal) in accordance with the original terms of
the debt agreement. In connection with these conversions, we
paid in the aggregate $8.9 million in cash as additional
consideration, as well as $0.8 million of accrued interest.
In August 2005, we issued $300.0 million aggregate
principal amount of 2.75% convertible notes due 2025. In
addition, we granted the initial purchaser an option to purchase
up to an additional $50.0 million principal amount of
notes, which the initial purchaser exercised in full. As a
result, we issued an additional $50.0 million aggregate
principal amount of convertible notes, resulting in total net
proceeds of about $341.3 million. The notes bear interest
at a rate of 2.75% per annum on the principal amount of the
notes, payable semi-annually in arrears in cash on
February 15 and August 15 of each year, beginning
February 15, 2006. The notes will mature on August 15,
2025 unless earlier converted or redeemed by the holders or
repurchased by us.
Under an existing agreement with American Tower Corporation,
during 2005 we received $2.2 million in gross proceeds from
tower sale-leaseback transactions in Mexico and Brazil.
Capital Needs. We currently anticipate
that our future capital needs will principally consist of funds
required for:
|
|
|
|
|
operating expenses relating to our digital mobile networks;
|
|
|
|
capital expenditures to expand and enhance our digital mobile
networks, as discussed below under Capital
Expenditures;
|
|
|
|
future spectrum or other related purchases;
|
|
|
|
debt service requirements, including tower financing and capital
lease obligations;
|
|
|
|
cash taxes; and
|
|
|
|
other general corporate expenditures.
|
94
The following table sets forth the amounts and timing of
contractual payments for our most significant contractual
obligations determined as of December 31, 2005. The
information in the table reflects future unconditional payments
and is based upon, among other things, the current terms of the
relevant agreements, appropriate classification of items under
accounting principles generally accepted in the United States
that are currently in effect and certain assumptions, such as
future interest rates. Future events could cause actual payments
to differ significantly from these amounts. See
Item 1A. Risk
Factors Our forward-looking statements are
subject to a variety of factors that could cause actual results
to differ materially from current beliefs. Except as
required by law, we disclaim any obligation to modify or update
the information contained in the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
|
Contractual
Obligations
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
Convertible notes(1)
|
|
$
|
21,453
|
|
|
$
|
42,907
|
|
|
$
|
42,907
|
|
|
$
|
1,162,260
|
|
|
$
|
1,269,527
|
|
Tower financing obligations(1)
|
|
|
35,629
|
|
|
|
71,542
|
|
|
|
71,417
|
|
|
|
264,617
|
|
|
|
443,205
|
|
Mexico syndicated loan facility(1)
|
|
|
42,489
|
|
|
|
170,221
|
|
|
|
108,370
|
|
|
|
|
|
|
|
321,080
|
|
Capital lease obligations(2)
|
|
|
5,423
|
|
|
|
20,236
|
|
|
|
11,816
|
|
|
|
34,122
|
|
|
|
71,597
|
|
Spectrum fees(3)
|
|
|
18,086
|
|
|
|
25,684
|
|
|
|
25,568
|
|
|
|
178,976
|
|
|
|
248,314
|
|
Spectrum acquisition obligations(4)
|
|
|
250
|
|
|
|
1,271
|
|
|
|
2,542
|
|
|
|
3,813
|
|
|
|
7,876
|
|
Operating leases(5)
|
|
|
73,655
|
|
|
|
119,367
|
|
|
|
96,158
|
|
|
|
110,149
|
|
|
|
399,329
|
|
Purchase obligations(6)
|
|
|
65,739
|
|
|
|
504
|
|
|
|
|
|
|
|
|
|
|
|
66,243
|
|
Other long-term obligations(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96,049
|
|
|
|
96,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual commitments
|
|
$
|
262,724
|
|
|
$
|
451,732
|
|
|
$
|
358,778
|
|
|
$
|
1,849,986
|
|
|
$
|
2,923,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These amounts include estimated principal and interest payments
over the full term of the obligation based on our expectations
as to future interest rates, assuming the current payment
schedule. |
|
(2) |
|
These amounts represent principal and interest payments due
under our co-location agreements to American Tower and our
existing corporate aircraft lease. The amounts related to our
existing aircraft lease exclude amounts that are contingently
due in the event of our default under the lease, but do include
remaining amounts due under the letter of credit provided for
our new corporate aircraft. |
|
(3) |
|
These amounts do not include variable fees based on certain
operating revenues and are subject to increases in the Mexican
Consumer Pricing Index. |
|
(4) |
|
These amounts primarily relate to spectrum obligations related
to SME licenses in Brazil. |
|
(5) |
|
These amounts principally include future lease costs related to
our transmitter and receiver sites and switches and office
facilities as of December 31, 2005. |
|
(6) |
|
These amounts represent maximum contractual purchase obligations
under various agreements with our vendors. |
|
(7) |
|
The amounts due in more than five years include our current
estimates of asset retirement obligations based on our
expectations as to future retirement costs, inflation rates and
timing of retirements. |
Capital Expenditures. Our capital
expenditures, including capitalized interest, were
$469.9 million for the year ended December 31, 2005
compared to $249.8 million for the year ended
December 31, 2004 and $214.3 million for the year
ended December 31, 2003. In the future, we expect to
finance our capital spending using the most effective
combination of cash from operations, cash on hand and any other
external financing that becomes available. Our capital spending
is driven by several factors, including:
|
|
|
|
|
the expansion of our digital mobile networks to new market areas;
|
|
|
|
the construction of additional transmitter and receiver sites to
increase system capacity and maintain system quality and the
installation of related switching equipment in some of our
existing market coverage areas;
|
|
|
|
the enhancement of our digital mobile network coverage around
some major market areas;
|
95
|
|
|
|
|
enhancements to our existing iDEN technology to increase voice
capacity; and
|
|
|
|
non-network related information technology projects.
|
Our future capital expenditures will be significantly affected
by future technology improvements and technology choices. In
October 2001, Motorola and Nextel Communications announced an
anticipated significant technology upgrade to the iDEN digital
mobile network, the 6:1 voice coder software upgrade. Beginning
in 2004, we started selling handsets that can operate on the new
6:1 voice coder. We expect that this software upgrade will
increase our voice capacity for interconnect calls and leverage
our existing investment in infrastructure. With the exception of
Mexico, we do not expect to realize the benefits from the
operation of the 6:1 voice coder until after 2006. If there are
substantial delays in realizing the benefits of the 6:1 voice
coder, we could be required to invest additional capital in our
infrastructure to satisfy our network capacity needs. See
Item 1A. Risk Factors
Future Outlook. We believe that our
current business plan, which contemplates significant expansions
in Mexico and Brazil, will not require any additional external
funding, and we will be able to operate and grow our business
while servicing our debt obligations. Our revenues are primarily
denominated in foreign currencies. We expect that if current
foreign currency exchange rates do not significantly adversely
change, we will continue to generate net income for the
foreseeable future. See
Item 1A. Risk Factors
In making our assessments of a fully funded business plan and
net income, we have considered:
|
|
|
|
|
cash, cash equivalents and short-term investments on hand and
available to fund our operations;
|
|
|
|
expected cash flows from operations;
|
|
|
|
the anticipated level of capital expenditures;
|
|
|
|
the anticipated level of spectrum acquisitions;
|
|
|
|
our scheduled debt service; and
|
|
|
|
cash taxes.
|
If our business plans change, including as a result of changes
in technology, or if we decide to expand into new markets or
further in our existing markets, as a result of the construction
of additional portions of our network or the acquisition of
competitors or others, or if economic conditions in any of our
markets generally, or competitive practices in the mobile
wireless telecommunications industry change materially from
those currently prevailing or from those now anticipated, or if
other presently unexpected circumstances arise that have a
material effect on the cash flow or profitability of our mobile
wireless business, then the anticipated cash needs of our
business as well as the conclusions presented herein as to the
adequacy of the available sources of cash and timing on our
ability to generate net income could change significantly. Any
of these events or circumstances could involve significant
additional funding needs in excess of the identified currently
available sources, and could require us to raise additional
capital to meet those needs. In addition, we continue to assess
the opportunities to raise additional funding on attractive
terms and conditions and at times that do not involve any of
these events or circumstances and may do so if the opportunity
presents itself. However, our ability to seek additional
capital, if necessary, is subject to a variety of additional
factors that we cannot presently predict with certainty,
including:
|
|
|
|
|
the commercial success of our operations;
|
|
|
|
the volatility and demand of the capital markets; and
|
|
|
|
the future market prices of our securities.
|
|
|
E.
|
Effect of
Inflation and Foreign Currency Exchange
|
Our net assets are subject to foreign currency exchange risks
since they are primarily maintained in local currencies.
Additionally, a substantial portion of our long-term debt is
denominated entirely in U.S. dollars, which exposes us to
foreign currency exchange risks. Nextel Argentina, Nextel Brazil
and Nextel Mexico
96
conduct business in countries in which the rate of inflation has
historically been significantly higher than that of the United
States. We seek to protect our earnings from inflation and
possible currency depreciation by periodically adjusting the
local currency prices charged by each operating company for
sales of handsets and services to its customers. We routinely
monitor our foreign currency exposure and the cost effectiveness
of hedging instruments.
In November 2004, Nextel Mexico entered into a derivative
agreement to reduce its foreign currency transaction risk
associated with a portion of its 2005 U.S. dollar
forecasted capital expenditures and handset purchases. This risk
was hedged by forecasting Nextel Mexicos capital
expenditures and handset purchases for a
12-month
period that began in January 2005 and ended in December 2005.
In September 2005 and October 2005, Nextel Mexico entered into
derivative agreements to reduce its foreign currency transaction
risk associated with a significant portion of its 2006
U.S. dollar forecasted capital expenditures and handset
purchases. This risk was hedged by forecasting Nextel
Mexicos capital expenditures and handset purchases for a
12-month
period beginning in January 2006.
Inflation is not currently a material factor affecting our
business. General operating expenses such as salaries, employee
benefits and lease costs are, however, subject to normal
inflationary pressures. From time to time, we may experience
price changes in connection with the purchase of system
infrastructure equipment and handsets, but we do not currently
believe that any of these price changes will be material to our
business.
|
|
F.
|
Effect of
New Accounting Standards
|
In December 2004, the Financial Accounting Standards Board, or
FASB, issued Statement No. 153, Exchanges of
Nonmonetary Assets An Amendment of APB Opinion
No. 29, or SFAS 153, to produce financial
reporting that more accurately represents the economics of
nonmonetary exchange transactions. APB Opinion No. 29, or
APB 29, provided an exception to the basic measurement
principle (fair value) for exchanges of similar productive
assets. That exception required that some nonmonetary exchanges,
although commercially substantive, be recorded on a carryover
basis. SFAS 153 amends APB 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance.
SFAS 153 is effective for fiscal periods beginning after
June 15, 2005. The adoption of SFAS 153 did not have a
material impact on our consolidated financial statements.
In December 2004, the FASB issued Statement No. 123 (revised
2004), Share-Based Payment, or SFAS 123R, that
requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the statement of
operations based on their fair values. Previously, as permitted
under Statement No. 123, Accounting for Stock-Based
Compensation, or SFAS 123, we recognized no compensation
cost for employee stock options, other than certain accelerated
vesting options. However, in accordance with SFAS 123R, pro
forma disclosure of share-based payment awards as implemented
under SFAS 123, is no longer an alternative.
SFAS 123R permits public companies to adopt its requirements
using one of two methods:
(1) A modified prospective method in which
compensation cost is recognized beginning with the effective
date (a) for all share-based payments granted on or after
the effective date and (b) for all awards granted to
employees prior to the effective date of SFAS 123R that remain
unvested on the effective date; or
(2) A modified retrospective method which
includes the requirements of the modified prospective method
described above, but also permits entities to restate their
financial statements based on the amounts previously recognized
under SFAS 123 for purposes of pro forma disclosures either
(a) for all prior periods presented or (b) for prior
interim periods of the year of adoption.
The effective adoption date for SFAS 123R is the first annual
reporting period for public companies that begins after June 15,
2005 and applies to all outstanding and unvested share-based
payment awards at the companys adoption date. We adopted
SFAS 123R effective January 1, 2006, as required, under the
modified
97
prospective method of application. Using the guidance of the
modified prospective method we do not expect to adjust our prior
period financial statements. We estimate that the adoption of
SFAS 123R in 2006 will result in a pre-tax charge in the
statement of operations to compensation expense of approximately
$21.0 million.
SFAS 123R also requires that the benefits of tax deductions in
excess of recognized compensation cost be reported as a
financing cash flow rather than an operating cash flow as
required under current literature. This requirement will reduce
net operating cash flows and increase net financing cash flows
in the periods after adoption. The effect of this change is
conditioned on the number and timing of future stock option
exercises, and as such, cannot be reasonably estimated.
In November 2005, the FASB issued Staff Position
No. 123R-3,
Transition Election Related to Accounting for the Tax
Effects of Share-Based Payment Awards, or FSP 123R-3,
which provides that companies may elect to use a specified
short cut method to calculate the pool of excess tax
benefits available to absorb tax deficiencies recognized
subsequent to adopting the accounting requirements of
SFAS 123R, which is referred to as the APIC pool, assuming
the company had been following the recognition provisions
prescribed by SFAS 123. The short cut method is
available to any company regardless of whether the company
adopts SFAS 123R using the modified prospective application
or the modified retrospective application transition method or
whether the company has the ability to calculate the APIC pool
in accordance with the guidance in Paragraph 81 of
SFAS 123R. FSP 123R-3 is effective immediately when a
company transitions to the accounting requirements of
SFAS 123R. In accordance with FSP 123R-3, we will not
determine whether we will elect to use the short cut
method to calculate the APIC pool until such time that it
becomes required.
In February 2006, the FASB issued Staff Position
No. 123R-4,
Classification of Options and Similar Instruments as
Employee Compensation That Allow for Cash Settlement upon the
Occurrence of a Contingent Event, or FSP 123R-4, to
address the classification of options and similar instruments
issued as employee compensation that are required under
SFAS 123R to be classified as liabilities if the entity can
be required under any circumstances to settle the option or
similar instrument by transferring cash or other assets. FSP
123R-4 amends SFAS 123R to allow companies to classify such
options as equity if the cash settlement feature can only be
exercised upon the occurrence of a contingent event that is
outside the employees control and is not probable of
occurring. On the date the contingent award becomes probable of
occurring, the option or similar instrument should be accounted
for as a modification from an equity award to a liability award
in accordance with the guidance of SFAS 123R. The guidance
in FSP 123R-4 should be applied upon the initial adoption of
FAS 123R. We do not expect the adoption of FSP 123R-4 to
have a material impact on our consolidated financial statements.
In March 2005, the FASB issued FASB Interpretation No. 47,
Accounting for Conditional Asset Retirement
Obligations, or FIN 47. FIN 47 clarifies that a
conditional asset retirement obligation, as used in SFAS
No. 143, Accounting for Asset Retirement
Obligations, refers to a legal obligation to perform an
asset retirement activity in which the time and/or method of the
settlement are conditional on a future event that may or may not
be within the control of the entity. FIN 47 also clarifies
when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. The
statement is effective for companies no later than their first
fiscal year ending after December 15, 2005. The adoption of
FIN 47 resulted in additional asset retirement cost and
asset retirement obligations of $4.8 million and
$7.7 million, respectively, as of December 31, 2005.
The cumulative effect of adopting FIN 47 was not material,
and as such, we recorded $2.9 million of additional
operating expense for accretion and $1.0 million of
additional depreciation expense in the fourth quarter of 2005.
In June 2005, the FASB issued Statement No. 154,
Accounting Changes and Error Corrections, or
SFAS 154, a replacement of APB Opinion No. 20 and FASB
Statement No. 3. SFAS 154 applies to all voluntary
changes in accounting principles, and changes the requirements
for accounting for and reporting of a change in accounting
principle. SFAS 154 requires retroactive application to
prior periods financial statements of a voluntary change
in accounting principle unless it is impractical to do so.
SFAS 154 will be effective for accounting changes and
corrections of errors made in fiscal years beginning after
December 15, 2005. We do
98
not expect the adoption of SFAS 154 to have a material
impact on our consolidated financial statements except to the
extent that it requires retroactive application in circumstances
that would previously have been effected in the period of change
under APB Opinion No. 20.
At the June 15-16, 2005 Emerging Issues Task Force, or EITF,
meeting, the EITF discussed Issue
No. 05-04,
The Effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument Subject to EITF Issue
No. 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own
Stock, or
EITF 05-04
which addresses how a liquidated damages clause payable in cash
affects the accounting for a freestanding financial instrument
subject to the provisions of EITF
Issue 00-19.
The EITF discussed (a) whether a registration rights
penalty meets the definition of a derivative and
(b) whether the registration rights agreement and the
financial instrument to which it pertains should be considered
as a combined instrument or as separate freestanding
instruments. At the September 15, 2005 EITF meeting, the
EITF postponed further deliberations on
EITF 05-04,
and the FASB staff requested that the FASB consider a separate
Derivatives Issue Guide, or DIG, issue that addresses whether a
registration rights agreement is a derivative in accordance with
FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging. Following the resolution of that
DIG issue, the FASB staff will request that the EITF reconvene
deliberations on
EITF 05-04.
While
EITF 05-04
remains unresolved, we have determined that the liquidated
damage clauses contained in our convertible note agreements have
been properly considered and accounted for in accordance with
the prevailing guidance.
In October 2005, the FASB issued Staff Position
No. 13-1,
Accounting for Rental Costs Incurred during a Construction
Period, or FSP
No. 13-1,
to address accounting for rental costs associated with building
and ground operating leases. FSP
No. 13-1
requires that rental costs associated with ground or building
operating leases that are incurred during a construction period
be recognized as rental expense. FSP
No. 13-1
is effective for the first reporting period beginning after
December 15, 2005 and requires that public companies that
are currently capitalizing these rental costs for operating
lease arrangements entered into prior to the effective date to
cease capitalizing such costs. Retroactive application in
accordance with SFAS 154 is permitted but not required. We
intend to implement FSP
No. 13-1
effective January 1, 2006. Accordingly, we will begin
expensing rental costs incurred under the construction period on
January 1, 2006. We do not expect that the adoption of FSP
No. 13-1
will have a material effect on our consolidated financial
statements.
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial
Instruments An Amendment of FASB Statements
No. 133 and 150, or SFAS 155. SFAS 155
(a) permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that
otherwise would require bifurcation, (b) clarifies that
certain instruments are not subject to the requirements of
SFAS 133, (c) establishes a requirement to evaluate
interests in securitized financial assets to identify interests
that may contain an embedded derivative requiring bifurcation,
(d) clarifies what may be an embedded derivative for
certain concentrations of credit risk and (e) amends
SFAS 140 to eliminate certain prohibitions related to
derivatives on a qualifying special-purpose entity.
SFAS 155 is effective for fiscal years beginning after
September 15, 2006. We are currently evaluating the impact
that SFAS 155 may have on our consolidated financial
statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Our revenues are primarily denominated in foreign currencies,
while a significant portion of our operations are financed in
U.S. dollars through our convertible notes and a portion of
our syndicated loan facility in Mexico. As a result,
fluctuations in exchange rates relative to the U.S. dollar
expose us to foreign currency exchange risks. These risks
include the impact of translating our local currency reported
earnings into U.S. dollars when the U.S. dollar
strengthens against the local currencies of our foreign
operations. In addition, Nextel Mexico, Nextel Brazil and Nextel
Argentina purchase some capital assets and all handsets in
U.S. dollars but record the related revenue generated from
these purchases in local currency. As a result, fluctuations in
exchange rates relative to the U.S. dollar expose us to
foreign currency exchange risks.
We enter into derivative transactions only for hedging or risk
management purposes. We have not and will not enter into any
derivative transactions for speculative or profit generating
purposes. In November 2004,
99
Nextel Mexico entered into a hedge agreement to reduce its
foreign currency transaction risk associated with a portion of
its 2005 U.S. dollar forecasted capital expenditures and
handset purchases. This risk was hedged by forecasting Nextel
Mexicos capital expenditures and handset purchases for a
12-month
period from January to December 2005. Under this agreement,
Nextel Mexico purchased U.S. dollar call options and sold
call options on the Mexican peso. In September and October 2005,
Nextel Mexico entered into derivative agreements to reduce its
foreign currency transaction risk associated with a portion of
its 2006 U.S. dollar forecasted capital expenditures and
handset purchases. This risk was hedged by forecasting Nextel
Mexicos capital expenditures and handset purchases for a
12-month
period that began in January 2006. Under this agreement, Nextel
Mexico purchased U.S. dollar call options and sold call
options on the Mexican peso.
Interest rate changes expose our fixed rate long-term borrowings
to changes in fair value and expose our variable rate long-term
borrowings to changes in future cash flows. In July 2005, Nextel
Mexico entered into an interest rate swap agreement to hedge the
variability of future cash flows associated with the
$31.0 million Mexican peso-denominated variable interest
rate portion of its $250.0 million syndicated loan
facility. Under the interest rate swap, Nextel Mexico agreed to
exchange the difference between the variable Mexican reference
rate, TIIE, and a fixed interest rate, based on a notional
amount of $31.4 million. The interest rate swap fixed the
amount of interest expense associated with this portion of the
Mexico syndicated loan facility effective August 31, 2005
and continues over the life of the facility based on a fixed
interest rate of about 11.95% per year. As of
December 31, 2005, a significant portion of our borrowings
were fixed-rate long-term debt obligations.
The table below presents principal amounts, related interest
rates by year of maturity and aggregate amounts as of
December 31, 2005 for our fixed rate debt obligations,
including our convertible notes, our syndicated loan facility in
Mexico and our tower financing obligations, the notional amounts
of our purchased call options and written put options and the
fair value of our interest rate swap. We determined the fair
values included in this section based on:
|
|
|
|
|
quoted market prices for our convertible notes;
|
|
|
|
carrying values for our tower financing obligations and
syndicated loan facility as interest rates were set recently
when we entered into these transactions; and
|
|
|
|
market values as determined by an independent third party
investment banking firm for our purchased call options, written
put options and interest rate swap.
|
100
The changes in the fair values of our debt compared to their
fair values as of December 31, 2004 reflect changes in
applicable market conditions, as well as the issuance of our
syndicated loan facility in Mexico and the issuance of our
2.75% convertible notes. The amount of our forecasted hedge
agreements as of December 31, 2004 represents our 2005
foreign currency hedge, and the amount of our forecasted hedge
agreements as of December 31, 2005 represents our 2006
foreign currency hedge. All of the information in the table is
presented in U.S. dollar equivalents, which is our
reporting currency. The actual cash flows associated with our
long-term debt are denominated in U.S. dollars (US$),
Mexican pesos (MP) and Brazilian reais (BR).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year of Maturity
|
|
|
2005
|
|
|
2004
|
|
|
|
1 Year
|
|
|
2 Years
|
|
|
3 Years
|
|
|
4 Years
|
|
|
5 Years
|
|
|
Thereafter
|
|
|
Total
|
|
|
Fair Value
|
|
|
Total
|
|
|
Fair Value
|
|
|
|
(dollars in thousands)
|
|
|
Long-Term Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rate (US$)
|
|
$
|
1,226
|
|
|
$
|
1,261
|
|
|
$
|
1,642
|
|
|
$
|
1,846
|
|
|
$
|
1,858
|
|
|
$
|
763,117
|
|
|
$
|
770,950
|
|
|
$
|
1,301,140
|
|
|
$
|
480,040
|
|
|
$
|
713,164
|
|
Average Interest Rate
|
|
|
10.0%
|
|
|
|
10.0%
|
|
|
|
10.0%
|
|
|
|
10.0%
|
|
|
|
10.0%
|
|
|
|
3.1%
|
|
|
|
3.2%
|
|
|
|
|
|
|
|
3.1%
|
|
|
|
|
|
Fixed Rate (MP)
|
|
$
|
9,586
|
|
|
$
|
13,775
|
|
|
$
|
39,903
|
|
|
$
|
40,549
|
|
|
$
|
4,518
|
|
|
$
|
74,517
|
|
|
$
|
182,848
|
|
|
$
|
182,848
|
|
|
$
|
77,978
|
|
|
$
|
77,978
|
|
Average Interest Rate
|
|
|
13.8%
|
|
|
|
13.6%
|
|
|
|
12.9%
|
|
|
|
13.0%
|
|
|
|
18.0%
|
|
|
|
18.0%
|
|
|
|
15.3%
|
|
|
|
|
|
|
|
17.7%
|
|
|
|
|
|
Fixed Rate (BR)
|
|
$
|
423
|
|
|
$
|
573
|
|
|
$
|
2,014
|
|
|
$
|
2,278
|
|
|
$
|
2,604
|
|
|
$
|
50,304
|
|
|
$
|
58,196
|
|
|
$
|
58,196
|
|
|
$
|
40,224
|
|
|
$
|
40,224
|
|
Average Interest Rate
|
|
|
28.3%
|
|
|
|
28.3%
|
|
|
|
18.1%
|
|
|
|
19.3%
|
|
|
|
20.4%
|
|
|
|
27.1%
|
|
|
|
26.2%
|
|
|
|
|
|
|
|
28.0%
|
|
|
|
|
|
Variable Rate (US$)
|
|
$
|
10,320
|
|
|
$
|
15,480
|
|
|
$
|
51,600
|
|
|
$
|
51,600
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
129,000
|
|
|
$
|
129,000
|
|
|
$
|
|
|
|
$
|
|
|
Average Interest Rate
|
|
|
6.8%
|
|
|
|
6.8%
|
|
|
|
6.8%
|
|
|
|
6.8%
|
|
|
|
|
|
|
|
|
|
|
|
6.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Rate (MP)
|
|
$
|
2,557
|
|
|
$
|
3,835
|
|
|
$
|
12,786
|
|
|
$
|
12,786
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
31,964
|
|
|
$
|
31,964
|
|
|
$
|
|
|
|
$
|
|
|
Average Interest Rate
|
|
|
11.1%
|
|
|
|
11.1%
|
|
|
|
11.1%
|
|
|
|
11.1%
|
|
|
|
|
|
|
|
|
|
|
|
11.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forecasted Hedge
Agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased call options
|
|
$
|
181,426
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
181,426
|
|
|
$
|
2,016
|
|
|
$
|
120,000
|
|
|
$
|
2,135
|
|
Written put options
|
|
$
|
181,426
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
181,426
|
|
|
$
|
(2,250
|
)
|
|
$
|
120,000
|
|
|
$
|
(1,967
|
)
|
Interest Rate
Swap:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable to Fixed
|
|
$
|
2,557
|
|
|
$
|
3,835
|
|
|
$
|
12,786
|
|
|
$
|
12,786
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
31,964
|
|
|
$
|
(1,174
|
)
|
|
$
|
|
|
|
$
|
|
|
Average Pay Rate
|
|
|
11.95%
|
|
|
|
11.95%
|
|
|
|
11.95%
|
|
|
|
11.95%
|
|
|
|
|
|
|
|
|
|
|
|
11.95%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Receive Rate
|
|
|
11.13%
|
|
|
|
11.13%
|
|
|
|
11.13%
|
|
|
|
11.13%
|
|
|
|
|
|
|
|
|
|
|
|
11.13%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
We have listed the consolidated financial statements required
under this Item in Part IV, Item 15(a)(1) of this
annual report on
Form 10-K.
We have listed the financial statement schedule required under
Regulation S-X
in Part IV, Item 15(a)(2) of this annual report on
Form 10-K.
The financial statements and schedule appear following the
signature page of this annual report on
Form 10-K.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
Not applicable.
|
|
Item 9A.
|
Controls
and Procedures
|
Disclosure
Controls and Procedures
We maintain disclosure controls and procedures that are designed
to ensure that information required to be disclosed by us in the
reports that we file or submit under the Securities Exchange Act
of 1934 is recorded, processed, summarized and reported within
the time periods required by the Securities and Exchange
Commission and that such information is accumulated and
communicated to management to allow timely decisions regarding
required disclosure.
As of December 31, 2005, an evaluation of the effectiveness
of the design and operation of our disclosure controls and
procedures was carried out under the supervision and with the
participation of our management teams in the United States and
in our operating companies, including our chief executive
officer and chief financial officer. This evaluation included
the identification of the item described in managements
report on internal control over financial reporting below. Based
on and as of the date of such evaluation and as a result
101
of the material weakness described below, our chief executive
officer and chief financial officer concluded that our
disclosure controls and procedures were not effective.
In light of the material weakness described below, we performed
additional analysis and other post-closing procedures to ensure
our consolidated financial statements are prepared in accordance
with generally accepted accounting principles. Accordingly,
management believes that the financial statements included in
this report fairly present in all material respects our
financial condition, results of operations and cash flows for
the periods presented.
Managements
Report on Internal Control over Financial
Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined
in
Rule 13a-15(f)
under the Securities Exchange Act of 1934, as amended). In order
to evaluate the effectiveness of internal control over financial
reporting, as required by Section 404 of the Sarbanes-Oxley
Act, management conducted an assessment using the criteria
established in Internal Control Integrated
Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of
control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. As of
December 31, 2005, we did not maintain effective controls
over the completeness and accuracy of the income tax provision
and the related balance sheet accounts and note disclosures.
Specifically, our controls over the processes and procedures
related to the determination and review of the quarterly and
annual tax provisions were not adequate to ensure that the
income tax provision was prepared in accordance with generally
accepted accounting principles. This control deficiency resulted
in audit adjustments to the 2005 consolidated financial
statements. Additionally, this control deficiency could result
in a misstatement of the income tax provision and the related
balance sheet accounts and note disclosures that would result in
a material misstatement to the annual or interim consolidated
financial statements that would not be prevented or detected.
Accordingly, management determined that this control deficiency
constitutes a material weakness. Because of this material
weakness, management has concluded that the Company did not
maintain effective internal control over financial reporting as
of December 31, 2005, based on criteria established in
Internal Control Integrated Framework
issued by the COSO.
Managements assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2005 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report that appears herein.
Changes
in Internal Control over Financial Reporting
There have been no changes in the Companys internal
control over financial reporting during the most recently
completed fiscal quarter that have materially affected, or is
reasonably likely to materially affect, the Companys
internal control over financial reporting.
Remediation
of Material Weakness Existing at December 31,
2004
During managements assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2004, we identified a material weakness
related to ineffective control over reconciliations for accounts
receivable, accounts payable and accrued expense balances at our
Mexican subsidiary. During 2005, the Company completed its
remediation plan with regard to this material weakness and
implemented
102
appropriate corrective action to ensure proper design and
operating effectiveness of our control activities related to
this area. The remediation plan implemented by management
included the following:
|
|
|
|
|
personnel changes, including the termination of the controller
responsible for the unreconciled accounts and the hiring of a
new controller and a new chief financial officer at our Mexican
subsidiary;
|
|
|
|
the implementation of additional procedures surrounding the
account reconciliation process, including specific procedures
for the approval of manual journal entries in our operating
companies and procedures related to the monitoring by us of key
control procedures in our operating companies;
|
|
|
|
revisions to system controls surrounding general ledger posting
restrictions and enhancement of related monitoring
activities; and
|
|
|
|
the provision of specific guidance regarding procedures that
must be completed by our operating companies executives
before signing the certifications related to Section 302 of
Sarbanes-Oxley.
|
We have evaluated and tested the effectiveness of these controls
as of December 31, 2005 and determined that the material
weakness related to account reconciliations has been remediated.
Plan
for Remediation of Income Tax Material Weakness
Starting in the second quarter of 2005, we have been working on
a number of initiatives to improve our processes and procedures
related to the calculation of the income tax provision and
related balance sheet accounts including the following:
|
|
|
|
|
Working with a third party advisor, we evaluated all of the
processes and procedures related to the calculation of the
income tax provision and redesigned the control procedures
occurring both in our foreign subsidiaries and at our corporate
headquarters. We completed the redesign during September 2005;
|
|
|
|
We implemented new control procedures, resulting in a more
structured, uniform process of computing the income tax
provision by increasing the level of review of the computations
and streamlining the process. Additional resources in the income
tax area have also enhanced our analytical capabilities with
regard to tax balances;
|
|
|
|
We evaluated and restructured the staffing resources and
oversight of the income tax area, including the hiring of a Vice
President of Tax at corporate headquarters, the hiring of
additional tax-dedicated individuals in our Brazil, Argentina
and Peru subsidiaries, and the creation of additional positions
at our corporate headquarters. We are currently working to fill
the positions at corporate headquarters with individuals having
appropriate and relevant qualifications and experience;
|
|
|
|
We initiated an on-going training program to deepen and broaden
the understanding of U.S. GAAP income tax provision
calculation procedures in our foreign subsidiaries; and
|
|
|
|
We retained a third party tax advisor to perform detailed
reviews of the quarterly and annual income tax calculations as a
means to both improve the accuracy of our income tax
calculations and assess the effectiveness of the control
procedures being performed by our own employees.
|
The control deficiencies identified during 2005 relate to
instances where specific controls were not carried out in
accordance with our newly redesigned procedures. While we
recognize that significant process change requires time to
mature, we continue to assess the level of assurance provided by
our control procedures, the adequacy and expertise of our tax
resources, and focus areas for our training program. We also
continue to test the effectiveness of these new control
procedures as part of our determination of whether these
corrective actions are sufficient to remediate the material
weakness.
Item 9B. Other
Information
None.
103
PART III
|
|
Item 10.
|
Directors
and Executive Officers of the Registrant
|
Except as to certain information regarding executive officers
included in Part I hereof and incorporated herein by
reference, the information required by this item will be
provided by being incorporated herein by reference to the
Companys definitive proxy statement for the 2006 Annual
Meeting of Stockholders under the captions Election of
Directors, Governance of the
Company Committees of the
Board Audit Committee, Securities
Ownership Section 16(a) Beneficial
Ownership Reporting Compliance and Governance of the
Company Code of Ethics.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this item will be provided by being
incorporated herein by reference to the Companys
definitive proxy statement for the 2006 Annual Meeting of
Stockholders under the captions Governance of the
Company Director Compensation and
Executive Compensation (except for the information
set forth under the captions Executive
Compensation Compensation Committee Report on
Executive Compensation).
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this item will be provided by being
incorporated herein by reference to the Companys
definitive proxy statement for the 2006 Annual Meeting of
Stockholders under the captions Securities
Ownership Securities Ownership of Certain
Beneficial Owners and Securities
Ownership of Management and Executive
Compensation Equity Compensation Plan
Information.
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
The information required by this item will be provided by being
incorporated herein by reference to the Companys
definitive proxy statement for the 2006 Annual Meeting of
Stockholders under the caption Certain Relationships and
Related Transactions.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required by this item will be provided by being
incorporated herein by reference to the Companys
definitive proxy statement for the 2006 Annual Meeting of
Stockholders under the captions Audit
Information Fees Paid to Independent Registered
Public Accounting Firm and Audit
Committee Pre-Approval Policies and Procedures.
104
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules.
|
(a)(1) Financial Statements. Financial statements and report of
independent registered public accounting firm filed as part of
this report are listed below:
|
|
|
|
|
|
|
Page
|
|
Report of Independent Registered
Public Accounting Firm
|
|
|
F-2
|
|
Consolidated Balance
Sheets As of December 31, 2005 and 2004
|
|
|
F-4
|
|
Consolidated Statements of
Operations For the Years Ended
December 31, 2005, 2004 and 2003
|
|
|
F-5
|
|
Consolidated Statements of Changes
in Stockholders Equity For the Years
Ended December 31, 2005, 2004 and 2003
|
|
|
F-6
|
|
Consolidated Statements of Cash
Flows For the Years Ended December 31,
2005, 2004 and 2003
|
|
|
F-7
|
|
Notes to Consolidated Financial
Statements
|
|
|
F-8
|
|
|
|
|
|
(2)
|
Financial Statement Schedule. The following financial statement
schedule is filed as part of this report. Schedules other than
the schedule listed below are omitted because they are either
not required or not applicable.
|
|
|
|
|
|
|
|
Page
|
|
Report of Independent Registered
Public Accounting Firm on Financial Statement Schedule
|
|
|
F-56
|
|
Schedule II Valuation
and Qualifying Accounts
|
|
|
F-57
|
|
|
|
|
|
(3)
|
List of Exhibits. The exhibits filed as part of this report are
listed in the Exhibit Index, which is incorporated in this
item by reference.
|
(b) Exhibits. See Item 15(a)(3) above.
(c) Financial Statement Schedule. See Item 15(a)(2)
above.
105
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
NII HOLDINGS, INC.
|
|
|
|
By:
|
/s/ Daniel
E. Freiman
|
Daniel E. Freiman
Vice President and Controller
(On behalf of the registrant and as
Principal Accounting Officer)
March 21, 2006
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated on
March 21, 2006.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
/s/ Steven
M. Shindler
Steven
M. Shindler
|
|
Chief Executive Officer and
Chairman of the
Board of Directors
|
|
|
|
/s/ Byron
R. Siliezar
Byron
R. Siliezar
|
|
Vice President and Chief Financial
Officer
(Principal Financial Officer)
|
|
|
|
/s/ George
A. Cope
George
A. Cope
|
|
Director
|
|
|
|
/s/ John
Donovan
John
Donovan
|
|
Director
|
|
|
|
/s/ Steven
P. Dussek
Steven
P. Dussek
|
|
Director
|
|
|
|
/s/ Neal
P. Goldman
Neal
P. Goldman
|
|
Director
|
|
|
|
/s/ Charles
M. Herington
Charles
M. Herington
|
|
Director
|
|
|
|
/s/ Carolyn
Katz
Carolyn
Katz
|
|
Director
|
|
|
|
/s/ Donald
E. Morgan
Donald
E. Morgan
|
|
Director
|
|
|
|
/s/ John
W. Risner
John
W. Risner
|
|
Director
|
106
NII
HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
|
|
|
|
|
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
|
|
|
F-2
|
|
|
|
|
|
  |
CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
|
Consolidated Balance
Sheets As of December 31, 2005 and 2004
|
|
|
F-4
|
|
Consolidated Statements of
Operations For the Years Ended
December 31, 2005, 2004 and 2003
|
|
|
F-5
|
|
Consolidated Statements of Changes
in Stockholders Equity For the Years
Ended December 31, 2005, 2004 and 2003
|
|
|
F-6
|
|
Consolidated Statements of Cash
Flows For the Years Ended December 31,
2005, 2004 and 2003
|
|
|
F-7
|
|
Notes to Consolidated Financial
Statements
|
|
|
F-8
|
|
|
|
|
|
  |
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT
SCHEDULE
|
|
|
F-56
|
|
|
|
|
|
  |
FINANCIAL STATEMENT
SCHEDULE
|
|
|
|
|
Schedule II Valuation
and Qualifying Accounts
|
|
|
F-57
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board
of Directors and Stockholders of NII Holdings, Inc.:
We have completed integrated audits of NII Holdings, Inc.s
2005 and 2004 consolidated financial statements and of its
internal control over financial reporting as of
December 31, 2005, and an audit of its 2003 consolidated
financial statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Our
opinions, based on our audits, are presented below.
Consolidated
financial statements
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of NII Holdings,
Inc. and its subsidiaries at December 31, 2005 and 2004,
and the results of their operations and their cash flows for
each of the three years in the period ended December 31,
2005 in conformity with accounting principles generally accepted
in the United States of America. These financial statements are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). 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 of financial statements
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
As discussed in Note 2 to the consolidated financial
statements, the Company changed its method of accounting for the
financial results of its foreign operating companies in 2004.
Internal
control over financial reporting
Also, we have audited managements assessment, included in
Managements Report on Internal Control over Financial
Reporting appearing under Item 9A, that NII Holdings, Inc.
did not maintain effective internal control over financial
reporting as of December 31, 2005, because the Company did
not maintain effective control over the calculation of the
income tax provision and related balance sheet accounts in
accordance with generally accepted accounting principles, based
on criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Companys management is responsible for
maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express
opinions on managements assessment and on the
effectiveness of the Companys internal control over
financial reporting based on our audit.
We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial
F-2
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of
control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The
following material weakness has been identified and included in
managements assessment. As of December 31, 2005, the
Company did not maintain effective controls over the
completeness and accuracy of the income tax provision and the
related balance sheet accounts and note disclosures.
Specifically, the Companys controls over the processes and
procedures related to the determination and review of the
quarterly and annual tax provisions were not adequate to ensure
that the income tax provision was prepared in accordance with
generally accepted accounting principles. This control
deficiency resulted in audit adjustments to the 2005
consolidated financial statements. Additionally, this control
deficiency could result in a misstatement of the income tax
provision and the related balance sheet accounts and note
disclosures that would result in a material misstatement to the
annual or interim consolidated financial statements that would
not be prevented or detected. Accordingly, the Company
determined that this control deficiency constitutes a material
weakness. This material weakness was considered in determining
the nature, timing and extent of audit tests applied in our
audit of the 2005 consolidated financial statements, and our
opinion regarding the effectiveness of the Companys
internal control over financial reporting does not affect our
opinion on those consolidated financial statements.
In our opinion, managements assessment that NII Holdings,
Inc. did not maintain effective internal control over financial
reporting as of December 31, 2005, is fairly stated, in all
material respects, based on criteria established in Internal
Control Integrated Framework issued by the
COSO. Also, in our opinion, because of the effect of the
material weakness described above on the achievement of the
objectives of the control criteria, NII Holdings, Inc. has not
maintained effective internal control over financial reporting
as of December 31, 2005, based on criteria established in
Internal Control Integrated Framework
issued by the COSO.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
March 21, 2006
F-3
NII
HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
877,536
|
|
|
$
|
330,984
|
|
Short-term investments
|
|
|
7,371
|
|
|
|
38,401
|
|
Accounts receivable, less
allowance for doubtful accounts of $11,677 and $8,145
|
|
|
220,490
|
|
|
|
160,727
|
|
Handset and accessory inventory,
net
|
|
|
54,158
|
|
|
|
32,034
|
|
Deferred income taxes, net
|
|
|
80,132
|
|
|
|
17,268
|
|
Prepaid expenses and other
|
|
|
42,506
|
|
|
|
43,919
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,282,193
|
|
|
|
623,333
|
|
Property, plant and equipment,
net
|
|
|
933,923
|
|
|
|
558,247
|
|
Intangible assets,
net
|
|
|
83,642
|
|
|
|
67,956
|
|
Deferred income taxes,
net
|
|
|
200,204
|
|
|
|
154,757
|
|
Other assets
|
|
|
121,002
|
|
|
|
86,987
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,620,964
|
|
|
$
|
1,491,280
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
82,250
|
|
|
$
|
85,431
|
|
Accrued expenses and other
|
|
|
311,758
|
|
|
|
230,704
|
|
Deferred revenues
|
|
|
59,595
|
|
|
|
44,993
|
|
Accrued interest
|
|
|
11,314
|
|
|
|
5,479
|
|
Current portion of long-term debt
|
|
|
24,112
|
|
|
|
2,117
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
489,029
|
|
|
|
368,724
|
|
Long-term debt
|
|
|
1,148,846
|
|
|
|
601,392
|
|
Deferred revenues (related
party)
|
|
|
39,309
|
|
|
|
42,528
|
|
Other long-term
liabilities
|
|
|
132,379
|
|
|
|
56,689
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,809,563
|
|
|
|
1,069,333
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
(Note 9)
|
|
|
|
|
|
|
|
|
Stockholders
equity
|
|
|
|
|
|
|
|
|
Undesignated preferred stock, par
value $0.001, 10,000,000 shares authorized 2005
and 2004, no shares outstanding 2005 and 2004
|
|
|
|
|
|
|
|
|
Common stock, par value $0.001,
300,000,000 shares authorized 2005 and 2004,
152,148 shares issued and
outstanding 2005, 139,662 shares issued
and outstanding 2004
|
|
|
152
|
|
|
|
140
|
|
Paid-in capital
|
|
|
508,209
|
|
|
|
316,983
|
|
Retained earnings
|
|
|
336,048
|
|
|
|
161,267
|
|
Deferred compensation
|
|
|
(7,428
|
)
|
|
|
(12,644
|
)
|
Accumulated other comprehensive
loss
|
|
|
(25,580
|
)
|
|
|
(43,799
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
811,401
|
|
|
|
421,947
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
2,620,964
|
|
|
$
|
1,491,280
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
NII
HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
1,666,613
|
|
|
$
|
1,214,837
|
|
|
$
|
895,615
|
|
Digital handset and accessory
revenues
|
|
|
79,226
|
|
|
|
65,071
|
|
|
|
43,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,745,839
|
|
|
|
1,279,908
|
|
|
|
938,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation and amortization included below)
|
|
|
421,037
|
|
|
|
332,487
|
|
|
|
240,021
|
|
Cost of digital handset and
accessory sales
|
|
|
251,192
|
|
|
|
207,112
|
|
|
|
134,259
|
|
Selling, general and administrative
|
|
|
588,849
|
|
|
|
391,571
|
|
|
|
317,400
|
|
Depreciation
|
|
|
123,990
|
|
|
|
84,139
|
|
|
|
49,127
|
|
Amortization
|
|
|
6,142
|
|
|
|
14,236
|
|
|
|
30,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,391,210
|
|
|
|
1,029,545
|
|
|
|
771,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
354,629
|
|
|
|
250,363
|
|
|
|
167,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
(expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(72,470
|
)
|
|
|
(55,113
|
)
|
|
|
(64,623
|
)
|
Interest income
|
|
|
32,611
|
|
|
|
12,697
|
|
|
|
10,864
|
|
Foreign currency transaction
gains, net
|
|
|
3,357
|
|
|
|
9,210
|
|
|
|
8,856
|
|
Debt conversion expense
|
|
|
(8,930
|
)
|
|
|
|
|
|
|
|
|
(Loss) gain on extinguishment of
debt, net
|
|
|
|
|
|
|
(79,327
|
)
|
|
|
22,404
|
|
Other expense, net
|
|
|
(8,621
|
)
|
|
|
(2,320
|
)
|
|
|
(12,166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54,053
|
)
|
|
|
(114,853
|
)
|
|
|
(34,665
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
provision and cumulative effect of change in accounting
principle
|
|
|
300,576
|
|
|
|
135,510
|
|
|
|
132,841
|
|
Income tax provision
|
|
|
(125,795
|
)
|
|
|
(79,191
|
)
|
|
|
(51,627
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect
of change in accounting principle
|
|
|
174,781
|
|
|
|
56,319
|
|
|
|
81,214
|
|
Cumulative effect of change in
accounting principle, net of income taxes of $11,898 in
2004
|
|
|
|
|
|
|
970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
174,781
|
|
|
$
|
57,289
|
|
|
$
|
81,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect
of change in accounting principle, per common share, basic
(Note 2)
|
|
$
|
1.19
|
|
|
$
|
0.40
|
|
|
$
|
0.64
|
|
Cumulative effect of change in
accounting principle, per common share, basic
(Note 2)
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, per common share,
basic
|
|
$
|
1.19
|
|
|
$
|
0.41
|
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect
of change in accounting principle, per common share, diluted
(Note 2)
|
|
$
|
1.06
|
|
|
$
|
0.39
|
|
|
$
|
0.59
|
|
Cumulative effect of change in
accounting principle, per common share, diluted
(Note 2)
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, per common share,
diluted
|
|
$
|
1.06
|
|
|
$
|
0.40
|
|
|
$
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
common shares outstanding, basic
|
|
|
146,336
|
|
|
|
139,166
|
|
|
|
126,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
common shares outstanding, diluted
|
|
|
176,562
|
|
|
|
145,015
|
|
|
|
140,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
NII
HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Cumulative
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Deferred
|
|
|
Loss on
|
|
|
Translation
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Compensation
|
|
|
Investments
|
|
|
Adjustment
|
|
|
Total
|
|
|
Balance, January 1,
2003
|
|
|
120,000
|
|
|
$
|
120
|
|
|
$
|
49,078
|
|
|
$
|
22,764
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(350
|
)
|
|
$
|
71,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,214
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(50,632
|
)
|
|
|
(50,632
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
5,766
|
|
|
|
6
|
|
|
|
2,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,523
|
|
Public offering, net
|
|
|
12,000
|
|
|
|
12
|
|
|
|
113,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2003
|
|
|
137,766
|
|
|
|
138
|
|
|
|
164,636
|
|
|
|
103,978
|
|
|
|
|
|
|
|
|
|
|
|
(50,982
|
)
|
|
|
217,770
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,289
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,004
|
|
|
|
9,004
|
|
Unrealized loss on derivative, net
of taxes of $744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,821
|
)
|
|
|
|
|
|
|
(1,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of deferred tax asset
valuation allowance
|
|
|
|
|
|
|
|
|
|
|
128,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128,370
|
|
Issuance of restricted stock
|
|
|
|
|
|
|
|
|
|
|
16,295
|
|
|
|
|
|
|
|
(16,295
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of restricted stock
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,651
|
|
|
|
|
|
|
|
|
|
|
|
3,651
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
213
|
|
Exercise of stock options
|
|
|
1,896
|
|
|
|
2
|
|
|
|
1,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,107
|
|
Tax benefits on exercise of stock
options
|
|
|
|
|
|
|
|
|
|
|
6,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2004
|
|
|
139,662
|
|
|
|
140
|
|
|
|
316,983
|
|
|
|
161,267
|
|
|
|
(12,644
|
)
|
|
|
(1,821
|
)
|
|
|
(41,978
|
)
|
|
|
421,947
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
174,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
174,781
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,526
|
|
|
|
21,526
|
|
Unrealized loss on derivatives, net
of taxes of $1,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,307
|
)
|
|
|
|
|
|
|
(3,307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
193,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock
|
|
|
|
|
|
|
|
|
|
|
229
|
|
|
|
|
|
|
|
(229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of restricted stock
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,445
|
|
|
|
|
|
|
|
|
|
|
|
5,445
|
|
Reversal of deferred tax asset
valuation allowances
|
|
|
|
|
|
|
|
|
|
|
69,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69,228
|
|
Conversion of 3.5% convertible
notes to common stock
|
|
|
6,636
|
|
|
|
6
|
|
|
|
88,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,478
|
|
Reversal of deferred financing
costs on debt conversion
|
|
|
|
|
|
|
|
|
|
|
(1,974
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,974
|
)
|
Exercise of stock options
|
|
|
5,850
|
|
|
|
6
|
|
|
|
23,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,891
|
|
Tax benefits on exercise of stock
options
|
|
|
|
|
|
|
|
|
|
|
11,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2005
|
|
|
152,148
|
|
|
$
|
152
|
|
|
$
|
508,209
|
|
|
$
|
336,048
|
|
|
$
|
(7,428
|
)
|
|
$
|
(5,128
|
)
|
|
$
|
(20,452
|
)
|
|
$
|
811,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
NII
HOLDINGS, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
change in accounting principle
|
|
$
|
174,781
|
|
|
$
|
56,319
|
|
|
$
|
81,214
|
|
Adjustments to reconcile income
before cumulative effect of change in accounting principle to
net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss (gain) on extinguishment of
debt, net
|
|
|
|
|
|
|
79,327
|
|
|
|
(22,404
|
)
|
Amortization of debt financing
costs and accretion of senior secured discount notes
|
|
|
3,365
|
|
|
|
6,866
|
|
|
|
25,295
|
|
Depreciation and amortization
|
|
|
130,132
|
|
|
|
98,375
|
|
|
|
79,501
|
|
Provision for losses on accounts
receivable
|
|
|
19,751
|
|
|
|
13,041
|
|
|
|
7,179
|
|
Provision for losses on inventory
|
|
|
771
|
|
|
|
2,953
|
|
|
|
1,716
|
|
Losses on derivative instruments
|
|
|
4,273
|
|
|
|
|
|
|
|
|
|
Foreign currency transaction gains,
net
|
|
|
(3,357
|
)
|
|
|
(9,210
|
)
|
|
|
(8,856
|
)
|
Deferred income tax provision
|
|
|
49,693
|
|
|
|
30,675
|
|
|
|
51,095
|
|
Amortization of deferred credit
|
|
|
(3,390
|
)
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
5,445
|
|
|
|
3,864
|
|
|
|
|
|
Loss on disposal of property, plant
and equipment, net of proceeds received
|
|
|
1,291
|
|
|
|
2,150
|
|
|
|
1,587
|
|
Other, net
|
|
|
6,908
|
|
|
|
(2,548
|
)
|
|
|
385
|
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, gross
|
|
|
(80,674
|
)
|
|
|
(53,855
|
)
|
|
|
(27,340
|
)
|
Handset and accessory inventory,
gross
|
|
|
(24,235
|
)
|
|
|
(13,605
|
)
|
|
|
(4,879
|
)
|
Prepaid expenses and other
|
|
|
7,002
|
|
|
|
12,959
|
|
|
|
(9,691
|
)
|
Other long-term assets
|
|
|
(23,136
|
)
|
|
|
(44,159
|
)
|
|
|
1,367
|
|
Accounts payable, accrued expenses
and other
|
|
|
33,642
|
|
|
|
51,153
|
|
|
|
42,382
|
|
Current deferred revenue
|
|
|
14,602
|
|
|
|
11,533
|
|
|
|
5,753
|
|
Due to related parties
|
|
|
|
|
|
|
20,557
|
|
|
|
(38,325
|
)
|
Other long-term liabilities
|
|
|
(545
|
)
|
|
|
(10,406
|
)
|
|
|
|
|
Proceeds from spectrum sharing
agreement with Nextel Communications
|
|
|
|
|
|
|
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
316,319
|
|
|
|
255,989
|
|
|
|
210,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(385,908
|
)
|
|
|
(227,702
|
)
|
|
|
(197,376
|
)
|
Payments for acquisitions,
purchases of licenses and other
|
|
|
(27,357
|
)
|
|
|
(24,307
|
)
|
|
|
(49,137
|
)
|
Purchases of short-term investments
|
|
|
(14,143
|
)
|
|
|
(87,849
|
)
|
|
|
|
|
Proceeds from maturities and sales
of short-term investments
|
|
|
45,629
|
|
|
|
49,448
|
|
|
|
|
|
Payments related to derivative
instruments
|
|
|
(7,346
|
)
|
|
|
(2,742
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(389,125
|
)
|
|
|
(293,152
|
)
|
|
|
(246,513
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of
convertible notes
|
|
|
350,000
|
|
|
|
300,000
|
|
|
|
180,000
|
|
Borrowings under syndicated loan
facility
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
Proceeds from stock option exercises
|
|
|
23,891
|
|
|
|
1,107
|
|
|
|
2,523
|
|
Proceeds from towers financing
transactions
|
|
|
2,241
|
|
|
|
6,367
|
|
|
|
106,414
|
|
Net proceeds from sale of common
stock
|
|
|
|
|
|
|
|
|
|
|
113,053
|
|
Repayments under long-term credit
facilities
|
|
|
|
|
|
|
(125,000
|
)
|
|
|
(186,000
|
)
|
Repayments under senior secured
discount notes
|
|
|
|
|
|
|
(211,212
|
)
|
|
|
|
|
Repayments under capital leases and
tower financing transactions
|
|
|
(4,220
|
)
|
|
|
(1,111
|
)
|
|
|
(517
|
)
|
Transfers to restricted cash, net
|
|
|
(652
|
)
|
|
|
(5,695
|
)
|
|
|
|
|
Payment of debt financing costs
|
|
|
(9,632
|
)
|
|
|
(8,538
|
)
|
|
|
(5,428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
611,628
|
|
|
|
(44,082
|
)
|
|
|
210,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in
accounting principle, net
|
|
|
|
|
|
|
7,962
|
|
|
|
|
|
Effect of exchange rate changes
on cash and cash equivalents
|
|
|
7,730
|
|
|
|
(1,139
|
)
|
|
|
(266
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
and cash equivalents
|
|
|
546,552
|
|
|
|
(74,422
|
)
|
|
|
174,245
|
|
Cash and cash equivalents,
beginning of year
|
|
|
330,984
|
|
|
|
405,406
|
|
|
|
231,161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end
of year
|
|
$
|
877,536
|
|
|
$
|
330,984
|
|
|
$
|
405,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Summary
of Operations and Significant Accounting Policies
|
Operations. We provide digital wireless
communication services primarily targeted at meeting the needs
of business customers through operating companies located in
selected Latin American markets. Our principal operations are in
major business centers and related transportation corridors of
Mexico, Brazil, Argentina and Peru. We also provide analog
specialized mobile radio, which we refer to as SMR, services in
Chile.
Our digital mobile networks support multiple digital wireless
services, including:
|
|
|
|
|
digital mobile telephone service, including advanced calling
features such as speakerphone, conference calling, voice-mail,
call forwarding and additional line service;
|
|
|
|
|
|
Nextel Direct
Connect®
service, which allows subscribers anywhere on our network to
talk to each other instantly, on a
push-to-talk
basis, on a private
one-to-one
call or on a group call;
|
|
|
|
International Direct
Connect®
service, in partnership with Nextel Communications, Nextel
Partners and TELUS Corporation, which allows subscribers to
communicate instantly across national borders with our
subscribers in Mexico, Brazil, Argentina and Peru, with Nextel
Communications and Nextel Partners subscribers in the United
States and with TELUS subscribers in Canada;
|
|
|
|
Internet services, mobile messaging services,
e-mail,
location-based services via Global Positioning System (GPS)
technologies and advanced
Javatm
enabled business applications, which are marketed as
Nextel
Onlinesm
services; and
|
|
|
|
international roaming capabilities, which are marketed as
Nextel
Worldwidesm.
|
Stock Split. On October 27, 2005, we
announced a
2-for-1
common stock split to be effected in the form of a stock
dividend, which was paid on November 21, 2005 to holders of
record on November 11, 2005. All share and per share
amounts in these consolidated financial statements reflect the
common stock split.
Use of Estimates. The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States requires us 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. Due to the
inherent uncertainty involved in making estimates, actual
results to be reported in future periods could differ from our
estimates.
Principles of Consolidation. The consolidated
financial statements include the accounts of NII Holdings, Inc.
and our wholly-owned subsidiaries. Our decision to consolidate
an entity is based on our direct and indirect ownership of a
majority interest in the entity. We eliminate all significant
intercompany transactions, including intercompany profits and
losses, in consolidation.
We refer to our subsidiaries by the countries in which they
operate, such as Nextel Mexico, Nextel Brazil, Nextel Argentina,
Nextel Peru and Nextel Chile.
Change in Accounting Principle. Until
September 30, 2004, we presented the financial information
of our consolidated foreign operating companies in our
consolidated financial statements utilizing accounts as of a
date one month earlier than the accounts of the parent company,
U.S. subsidiaries and our non-operating
non-U.S. subsidiaries,
which we refer to as our one-month lag reporting policy, to
ensure timely reporting of consolidated results. As a result,
each year the financial position, results of operations and cash
flows of each of our wholly-owned foreign operating companies in
Mexico, Brazil, Argentina, Peru and Chile were presented as of
and for the year ended November 30. In contrast, financial
information relating to our parent company,
U.S. subsidiaries and our non-operating
non-U.S. subsidiaries
was presented as of and for the year ended December 31.
F-8
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
1.
|
Summary
of Operations and Significant Accounting
Policies (Continued)
|
Over the past several years, we redesigned processes to increase
the timeliness of internal reporting. We established common and
updated financial information systems. These improvements
enabled us to eliminate the one-month reporting lag on
October 1, 2004, effective January 1, 2004, and report
consolidated results using a consistent calendar year reporting
period for the entire company (see Note 2).
Concentrations of Risk. Substantially all of
our revenues are generated from our operations located in
Mexico, Brazil, Argentina and Peru. Regulatory entities in each
country regulate the licensing, construction, acquisition,
ownership and operation of our digital mobile networks, and
certain other aspects of our business, including some of the
rates we charge our customers. Changes in the current
telecommunications statutes or regulations in any of these
countries could adversely affect our business. In addition, as
of December 31, 2005 and 2004, about $1,860.3 million
and $1,008.1 million, respectively, of our assets were
owned by Nextel Mexico and Nextel Brazil. Political, financial
and economic developments in Mexico and Brazil could impact the
recoverability of our assets.
Motorola is currently our sole source for the digital mobile
network equipment, software, maintenance and handsets used
throughout our markets. If Motorola fails to deliver system
infrastructure, handsets or necessary technology improvements
and enhancements on a timely, cost-effective basis, we may not
be able to adequately service our existing customers or add new
customers. Nextel Communications, a subsidiary of Sprint, is the
largest customer of Motorola with respect to iDEN technology and
provides significant support with respect to new product
development. Any decrease by Nextel Communications in its use of
iDEN technology could significantly increase our costs for
equipment and new developments and could potentially impact
Motorolas decision to continue to support iDEN technology.
In the event Motorola determines not to continue manufacturing,
supporting or enhancing our iDEN-based infrastructure and
handsets because Nextel Communications decreases its use of iDEN
technology or otherwise, we may be materially adversely
affected. We expect to rely principally on Motorola or its
licensees for the manufacture of our handsets and a substantial
portion of the equipment necessary to construct, enhance and
maintain our digital mobile networks for the next several years.
Financial instruments that potentially subject us to significant
amounts of credit risk consist of cash, cash equivalents,
short-term investments and accounts receivable. Our cash, cash
equivalents and short-term investment balances are deposited
with high-quality financial institutions. At times, we maintain
cash balances in excess of Federal Deposit Insurance Corporation
(or the foreign country equivalent institution) limits. Our
accounts receivable are generally unsecured. In some cases, for
certain higher risk customers, we require a customer deposit. We
routinely assess the financial strength of our customers and
maintain allowances for anticipated losses, where necessary.
Foreign Currency. In Mexico, Brazil, Argentina
and Chile, the functional currency is the local currency, while
in Peru the functional currency is the U.S. dollar since it
is the currency used for substantially all transactions. We
translate the results of operations for our
non-U.S. subsidiaries
and affiliates from the designated functional currency to the
U.S. dollar using average exchange rates during the period,
while we translate assets and liabilities at the exchange rate
in effect at the reporting date. We translate equity balances at
historical rates. We report the resulting gains or losses from
translating foreign currency financial statements as other
comprehensive income or loss. We remeasure Nextel Perus
financial statements into U.S. dollars and record
remeasurement gains and losses in the statement of operations.
We have reported a remeasurement gain related to deferred tax
assets and liabilities of $2.4 million related to Nextel
Peru in our income tax provision for the year ended
December 31, 2005.
In general, monetary assets and liabilities designated in
U.S. dollars give rise to foreign currency realized and
unrealized transaction gains and losses and are recorded in the
statement of operations as foreign currency transaction gains,
net. We report the effects of changes in exchange rates
associated with certain U.S. dollar-
F-9
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
1.
|
Summary
of Operations and Significant Accounting
Policies (Continued)
|
denominated intercompany loans and advances to our foreign
subsidiaries that are of a long-term investment nature as part
of the cumulative foreign currency translation adjustment in our
consolidated financial statements as other comprehensive loss.
We have determined that U.S. dollar-denominated
intercompany loans and advances to Nextel Brazil and Nextel
Chile and an intercompany payable due to Nextel Mexico are of a
long-term investment nature. We report impacts of changes in our
various foreign currencies to the U.S. dollar exchange rate
on loans determined to be long-term as part of the cumulative
foreign currency translation adjustment in our consolidated
financial statements.
Supplemental
Cash Flow Information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(in thousands)
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for capital
expenditures, including capitalized interest
|
|
$
|
385,908
|
|
|
$
|
227,702
|
|
|
$
|
197,376
|
|
Change in capital expenditures
accrued and unpaid or financed, including accreted interest
capitalized
|
|
|
83,958
|
|
|
|
22,060
|
|
|
|
16,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
469,866
|
|
|
$
|
249,762
|
|
|
$
|
214,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest costs
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
72,470
|
|
|
$
|
55,113
|
|
|
$
|
64,623
|
|
Interest capitalized
|
|
|
9,544
|
|
|
|
2,598
|
|
|
|
6,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
82,014
|
|
|
$
|
57,711
|
|
|
$
|
71,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions of assets and
business combinations
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired
|
|
$
|
48,442
|
|
|
$
|
19,672
|
|
|
$
|
39,469
|
|
Less: liabilities assumed and
deferred tax liabilities incurred
|
|
|
(34,340
|
)
|
|
|
(6,672
|
)
|
|
|
(136
|
)
|
Less: cash acquired
|
|
|
(9
|
)
|
|
|
(4
|
)
|
|
|
(82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,093
|
|
|
$
|
12,996
|
|
|
$
|
39,251
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest, net of
amounts capitalized
|
|
$
|
40,304
|
|
|
$
|
67,424
|
|
|
$
|
26,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income
taxes
|
|
$
|
81,057
|
|
|
$
|
50,954
|
|
|
$
|
21,672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2005 and 2004, we had
$9.1 million and $5.2 million in non-cash investing
and financing activities related to co-location capital lease
obligations on our communication towers.
During the first quarter of 2005, we paid $1.2 million for
licenses acquired in Brazil using restricted cash. In addition,
during the second quarter of 2005, we financed $7.6 million
of licenses acquired in Brazil.
During 2005, we revised the accounting for our corporate
aircraft lease from operating to capital. See Note 7 for
additional information.
Cash and Cash Equivalents. We consider all
highly liquid investments with an original maturity of three
months or less at the time of purchase to be cash equivalents.
Cash equivalents primarily consist of money market funds.
F-10
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
1.
|
Summary
of Operations and Significant Accounting
Policies (Continued)
|
Short-Term Investments. All of our short-term
investments represent investments in debt securities of
commercial paper and government securities with maturities less
than one year. We classify investments in debt securities as
available-for-sale
as of the balance sheet date and report them at fair value. All
of our
available-for-sale
securities mature within one year. We record unrealized gains
and losses, net of income tax, as other comprehensive income or
loss. During the years ended December 31, 2005, 2004 and
2003, we did not have any material unrealized gains or losses
for available-for-sale securities. We report realized gains or
losses, as determined on a specific identification basis, and
other-than-temporary
declines in value, if any, in realized gains or losses on
investments. As of December 31, 2005, our short-term
investments consisted of $7.4 million of government
securities. As of December 31, 2004, our short-term
investments consisted of $34.8 million of government
securities and $3.6 million of commercial paper.
We assess declines in the value of individual investments to
determine whether the decline is
other-than-temporary
and thus the investment is impaired. We make this assessment by
considering available evidence, including changes in general
market conditions, specific industry and individual company
data, the length of time and the extent to which the market
value has been less than cost, the financial condition and
near-term prospects of the individual company and our intent and
ability to hold the investment.
Handset and Accessory Inventory. We record
handsets and accessories at the lower of cost or market. We
determine cost by the weighted average costing method. Since we
subsidize the cost of our handsets to our customers, we use
market prices as established by Motorola to determine the market
price of our inventory. We expense handset costs at the time of
sale and classify such costs in cost of digital handset and
accessory sales. We establish an allowance to cover losses
related to obsolete and slow moving inventory. As of
December 31, 2005 and 2004, our provision for inventory
losses was $5.9 million and $9.1 million, respectively.
Property, Plant and Equipment. We record
property, plant and equipment, including improvements that
extend useful lives or enhance functionality, at cost, while
maintenance and repairs are charged to operations as incurred.
We calculate depreciation using the straight-line method based
on estimated useful lives ranging from 3 to 20 years for
digital mobile network equipment and network software and 3 to
10 years for office equipment, furniture and fixtures, and
other. We depreciate our corporate aircraft capital lease using
the straight-line method based on the lease term of
8 years. We amortize leasehold improvements over the
shorter of the lease terms or the useful lives of the
improvements.
Construction in progress includes internal and external labor,
materials, transmission and related equipment, engineering, site
development, interest and other costs relating to the
construction and development of our digital wireless networks.
We do not depreciate assets under construction until they are
ready for their intended use. We capitalize interest and other
costs, including labor and software upgrades, that are
applicable to the construction of, and significant improvements
that enhance functionality to, our digital mobile network
equipment.
We periodically review the depreciation method, useful lives and
estimated salvage value of our property, plant and equipment and
revise those estimates if current estimates are significantly
different from previous estimates.
Asset Retirement Obligations. We record an
asset retirement obligation and an associated asset retirement
cost when we have a legal obligation in connection with the
retirement of tangible long-lived assets. Our obligations arise
from certain of our leases and relate primarily to the cost of
removing our equipment from such leased sites. We report asset
retirement obligations and related asset retirement costs at
fair value computed using discounted cash flow techniques.
F-11
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
1.
|
Summary
of Operations and Significant Accounting
Policies (Continued)
|
The balances of our asset retirement obligations were as follows
as of December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands)
|
|
|
Asset retirement obligations
|
|
$
|
14,504
|
|
|
$
|
3,722
|
|
We incurred additional asset retirement obligations of
$1.9 million and $0.2 million for the years ended
December 31, 2005 and 2004, respectively, related to the
continued build-out of our network, as well as changes in our
expected cash flows due mainly to reduced discount rates in our
operating companies. Also, upon the adoption of FIN 47, we
incurred an additional $4.8 million of asset retirement
obligations for the year ended December 31, 2005. We
incurred accretion of $4.0 million and $0.7 million
for the years ended December 31, 2005 and 2004,
respectively. The remaining changes in our asset retirement
obligations are due to foreign currency translation adjustments
and a small amount of asset sales, which had retirement
obligations associated with them. We review the adequacy of
asset retirement obligations on a regular basis.
Software Developed for Internal Use. We
capitalize internal and external costs incurred to develop
internal-use software, which consist primarily of costs related
to configuration, interfaces, installation and testing. We also
capitalize internal and external costs incurred to develop
specified upgrades and enhancements if they result in
significant additional functionalities for our existing
software. We expense all costs related to evaluation of software
needs, data conversion, training, maintenance and other
post-implementation operating activities.
Derivative Financial Instruments. We enter
into derivative transactions only for hedging or risk management
purposes. We have not and will not enter into any derivative
transactions for speculative or profit generating purposes. We
formally document all relationships between hedging instruments
and hedged items, as well as our risk management objectives for
undertaking various hedge transactions before entering into the
transaction.
We currently have a foreign currency hedge and an interest rate
swap. We record our derivative financial instruments on the
balance sheet at fair value as either assets or liabilities. We
recognize changes in fair value either in earnings or equity,
depending on the nature of the underlying exposure being hedged
and how effective the derivatives are at offsetting price
movements in the underlying exposure. We evaluate the
effectiveness of our hedging relationships both at the hedge
inception and on an ongoing basis. Our derivative instruments
are designated as cash-flow hedges and are considered to be
highly effective. We record the changes in fair value of our
derivatives financial instruments as a component of accumulated
other comprehensive loss until the underlying hedged item is
recognized in earnings. We recognize in earnings immediately any
ineffective portion of a derivatives change in fair value.
Valuation of Long-Lived Assets. We review
long-lived assets such as property, plant and equipment and
identifiable intangible assets, which includes our licenses, for
impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. If the total of
the expected undiscounted future cash flows is less than the
carrying amount of the asset, we recognize a loss, if any, for
the difference between the fair value and carrying value of the
asset.
Intangible Assets. Our intangible assets are
composed of wireless licenses, customer base and a trade name.
We amortize our intangible assets using the straight-line method
over the estimated period benefited. We amortize all of our
licenses that existed as of the date we emerged from
reorganization over their estimated useful lives, which range
from 16 to 17 years. We amortize licenses acquired after
our emergence from reorganization over their estimated useful
lives of 12 to 20 years. In the countries in which we
operate, licenses are customarily issued conditionally for
specified periods of time ranging from 30 to 40 years,
including renewals. The licenses are generally renewable
provided the licensee has complied with applicable
F-12
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
1.
|
Summary
of Operations and Significant Accounting
Policies (Continued)
|
rules and policies. We believe we have complied with these
standards in all material respects. However, the wireless
telecommunications industry is experiencing significant
technological change. Future technological advancements may
render iDEN technology obsolete. Additionally, the political and
regulatory environments in the markets we serve are continuously
changing and, in many cases, the renewal fees could be
significant. Therefore, we do not view the renewal of our
licenses to be perfunctory. As a result, we classify our
licenses as finite lived assets.
We amortize our customer base over their respective estimated
useful lives, generally two to three years. Through
December 31, 2004, we amortized the Nextel trade name in
each of the countries in which we operate over the estimated
remaining useful lives of our licenses as of the date we emerged
from reorganization, generally 16 to 17 years. As of
December 31, 2004, the net book value of the trade name was
reduced to zero due to the reversal of deferred tax asset
valuation allowances existing at our emergence from
reorganization.
A substantial portion of our deferred tax asset valuation
allowances existed as of the date of the application of
fresh-start accounting. As such, under the American Institute of
Certified Public Accountants Statement of Position, or
SOP, 90-7, Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code, we record
decreases in the valuation allowance existing at the
reorganization date first as a reduction in the carrying value
of intangible assets existing at the reorganization date and
then as an increase to paid-in capital. As of December 31,
2004, we reduced to zero the carrying value of our intangible
assets existing at the reorganization date. As a result, we will
record further decreases, if any, of the valuation allowance
existing on the reorganization date as an increase to paid-in
capital.
Revenue Recognition. Operating revenues
primarily consist of service revenues and revenues generated
from the sale of digital handsets and accessories. Service
revenues primarily include fixed monthly access charges for
digital mobile telephone service and digital two-way radio and
other services, including revenues from calling party pays
programs and variable charges for airtime and digital two-way
radio usage in excess of plan minutes, long-distance charges and
international roaming revenues derived from calls placed by our
customers.
We also have other sources of revenues. Other revenues primarily
include amounts generated from our handset maintenance programs,
roaming revenues generated from other companies customers
that roam on our networks and co-location rental revenues from
third party tenants that rent space on our towers.
We recognize revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the sale price is fixed and
determinable and collectibility is reasonably assured. The
following are the policies applicable to our major categories of
revenue transactions.
We recognize revenue for access charges and other services
charged at fixed amounts ratably over the service period, net of
credits and adjustments for service discounts and value-added
taxes. We recognize excess usage, local, long distance and
calling party pays revenue at contractual rates per minute as
minutes are used. We record cash received in excess of revenues
earned as deferred revenues. For the year ended
December 31, 2005 we began recognizing revenue-based taxes
that are the primary obligation of the company as revenue and
operating expense. We did not record a similar adjustment to our
prior period financial statements because the amounts were not
material.
We bill excess usage to our customers in arrears. In order to
recognize the revenues originated from excess usage subsequent
to customer invoicing through the end of the reporting period,
we estimate the unbilled portion based on the usage that the
handset had during the part of the month already billed, and we
use the actual usage to estimate the usage for the rest of the
month taking into consideration working days and seasonality.
Our estimates are based on our experience in each market. We
periodically evaluate our estimation
F-13
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
1.
|
Summary
of Operations and Significant Accounting
Policies (Continued)
|
methodology and process by comparing our estimates to actual
excess usage revenue billed the following month. As a result,
actual usage could differ from our estimates.
We recognize all revenue from sales and related cost of sales of
handsets and accessories when title and risk of loss passes upon
delivery of the handset or accessory to the customer.
We recognize revenue generated from our handset maintenance
programs on a monthly basis at fixed amounts over the service
period. We recognize roaming revenues at contractual rates per
minute as minutes are used. We recognize co-location revenues
from third party tenants on a monthly basis based on the terms
set by the underlying agreements.
We recognized the proceeds received from our spectrum use and
build-out agreement with Nextel Communications as deferred
revenues. We amortize this amount into revenue on a
straight-line basis over 15.5 years, which represents the
average remaining useful life of our licenses in the Baja region
of Mexico as of the date we began providing service under this
agreement. See Note 14 for additional information relating
to this agreement.
Allowance for Doubtful Accounts. We establish
an allowance for doubtful accounts receivable for estimated
losses. Our methodology for determining our allowance for
doubtful accounts requires significant judgment. Since we have a
large number of accounts, it is impracticable to review the
collectibility of all individual accounts when we determine the
amount of our allowance for doubtful accounts. Therefore, we
consider a number of factors in establishing the allowance,
including historical collection experience, current economic
trends, customer deposits, estimates of forecasted write-offs,
agings of the accounts receivable portfolio and other factors.
While we believe that the estimates we use are reasonable,
actual results could differ from those estimates.
Handsets Provided Under Leases. Our operating
companies periodically provide handsets to our customers under
lease agreements. We evaluate each lease agreement at its
inception to determine whether the agreement represents a
capital lease or an operating lease. Under capital lease
agreements, we expense the full cost of the handset at the
inception of the lease term and recognize digital handset sales
revenue upon delivery of the handset to the customer and
collection of the up-front rental payment, which corresponds to
the inception of the lease term. Under operating lease
agreements, we expense the cost of the handset in excess of the
sum of the minimum contractual revenues associated with the
handset lease. We recognize revenue ratably over the lease term.
Revenue generated under the operating lease arrangement relates
primarily to the up-front rental payments required at the
inception of lease terms.
Customer Related Direct Costs. We recognize
all costs of handset sales when title and risk of loss passes
upon delivery of the handset to the customer.
Advertising Costs. We expense costs related to
advertising and other promotional expenditures as incurred.
Advertising costs totaled $46.4 million, $36.3 million
and $28.7 million during the years ended December 31,
2005, 2004 and 2003, respectively.
Stock-Based Compensation. We currently have
two equity incentive plans. In addition to our 2002 Management
Incentive Plan, in 2004, our Board of Directors approved the
2004 Incentive Compensation Plan (the Plan), which provides us
with the opportunity to compensate selected employees with stock
options, stock appreciation rights, stock awards, performance
share awards, incentive awards,
and/or stock
units. During the year ended December 31, 2005, we granted
to our employees 7,019,500 options to purchase shares of our
common stock. The stock options vest twenty-five percent per
year over a four-year period.
During the year ended December 31, 2004, our Board of
Directors approved grants under the Plan of 859,000 shares
of restricted stock to our officers and 5,370,400 stock options
to the officers and other selected
F-14
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
1.
|
Summary
of Operations and Significant Accounting
Policies (Continued)
|
employees. The restricted shares vest in full on the third
anniversary of the grant. The stock options vest twenty-five
percent per year over a four-year period.
We account for these grants using the intrinsic value method.
Compensation expense is based on the intrinsic value on the
measurement date, calculated as the difference between the fair
value of the common stock and the relevant exercise price. The
fair value of the restricted shares on the grant date was
$16.3 million, which we are amortizing on a straight-line
basis over the three year vesting period. We recognized
compensation expense of $5.4 million and $3.7 million
for the years ended December 31, 2005 and 2004 related to
the restricted shares. Additionally, we recognized
$0.2 million in stock-based employee compensation cost
during the year ended December 31, 2004 related to our
employee stock options as a result of accelerated vesting on
certain options. No other stock-based employee compensation cost
related to our employee stock options is reflected in net income
as the relevant exercise price of the options issued was equal
to the fair market value on the date of the grant.
The following table illustrates the effect on net income and net
income per common share if we had applied the fair value
recognition provisions of SFAS No. 123,
Accounting for Stock-Based Compensation, as amended
by SFAS No. 148, Accounting for Stock-Based
Compensation Transition and
Disclosure an Amendment of FASB Statement
No. 123, to stock-based employee compensation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(in thousands, except per share
amounts)
|
|
|
Net income, as
reported
|
|
$
|
174,781
|
|
|
$
|
57,289
|
|
|
$
|
81,214
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based employee compensation
expense included in reported net income, net of related tax
effects
|
|
|
3,193
|
|
|
|
2,367
|
|
|
|
|
|
Deduct:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based employee
compensation expense determined under fair value-based method
for all awards, net of related tax effects
|
|
|
(13,612
|
)
|
|
|
(7,140
|
)
|
|
|
(1,372
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
164,362
|
|
|
$
|
52,516
|
|
|
$
|
79,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
1.19
|
|
|
$
|
0.41
|
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic pro forma
|
|
$
|
1.12
|
|
|
$
|
0.38
|
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted as
reported
|
|
$
|
1.06
|
|
|
$
|
0.40
|
|
|
$
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted pro forma
|
|
$
|
1.01
|
|
|
$
|
0.36
|
|
|
$
|
0.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In our prior year financial statements we did not consider the
tax effects of stock based compensation in our earnings per
share calculation related to our SFAS 123 footnote
disclosure for 2004. As a result, the net income per basic and
diluted pro forma share was understated by $0.02 per share.
We have corrected these errors in the above table.
Net Income Per Common Share, Basic and
Diluted. Basic net income per common share
includes no dilution and is computed by dividing the net income
by the weighted average number of common shares outstanding for
the period. Diluted net income per common share reflects the
potential dilution of securities that could participate in our
earnings. As presented for the year ended December 31,
2005, our calculation of diluted net income per share includes
common shares resulting from shares issuable upon the potential
exercise of stock options under our stock-based employee
compensation plans and our restricted stock, as well as common
shares resulting from the potential conversion of our
3.5% convertible notes, our 2.875% convertible notes
and our 2.75% convertible notes.
F-15
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
1.
|
Summary
of Operations and Significant Accounting
Policies (Continued)
|
As presented for the year ended December 31, 2004, our
calculation of diluted net income per share includes common
shares resulting from shares issuable upon the potential
exercise of stock options under our stock-based employee
compensation plans and our restricted stock, but does not
include common shares resulting from the potential conversion of
our 3.5% convertible notes or our 2.875% convertible
notes since their effect would have been antidilutive to our net
income per share.
As presented for the year ended December 31, 2003, our
calculation of diluted net income per share includes common
shares resulting from shares issuable upon the potential
exercise of stock options under our stock-based employee
compensation plans, as well as common shares resulting from the
potential conversion of our 3.5% convertible notes. There
was no restricted stock outstanding during 2003.
The following tables provide a reconciliation of the numerators
and denominators used to calculate basic and diluted net income
per common share as disclosed in our consolidated statements of
operations for the years ended December 31, 2005, 2004 and
2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2005
|
|
|
|
Income
|
|
|
Shares
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
|
(in thousands, except per share
data)
|
|
|
Basic net income per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
174,781
|
|
|
|
146,336
|
|
|
$
|
1.19
|
|
Effect of dilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
5,796
|
|
|
|
|
|
Restricted stock
|
|
|
|
|
|
|
646
|
|
|
|
|
|
Convertible notes, net of
capitalized interest and taxes
|
|
|
11,861
|
|
|
|
23,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
186,642
|
|
|
|
176,562
|
|
|
$
|
1.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2004
|
|
|
|
Income
|
|
|
Shares
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
|
(in thousands, except per share
data)
|
|
|
Basic net income per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
57,289
|
|
|
|
139,166
|
|
|
$
|
0.41
|
|
Effect of dilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
5,705
|
|
|
|
|
|
Restricted stock
|
|
|
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
57,289
|
|
|
|
145,015
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-16
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
1.
|
Summary
of Operations and Significant Accounting
Policies (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2003
|
|
|
|
Income
|
|
|
Shares
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
|
(in thousands, except per share
data)
|
|
|
Basic net income per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
81,214
|
|
|
|
126,257
|
|
|
$
|
0.64
|
|
Effect of dilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
9,718
|
|
|
|
|
|
Convertible notes
|
|
|
1,835
|
|
|
|
4,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
83,049
|
|
|
|
140,106
|
|
|
$
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Financing Costs. We capitalize costs
incurred to obtain new debt financing as other non-current
assets. We amortize debt financing costs over the shorter of the
term of the underlying debt or the holders first put date,
when applicable, using the effective interest method.
Income Taxes. We account for income taxes
using the asset and liability method, under which we recognize
deferred income taxes for the tax consequences attributable to
differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities, tax loss
carryforwards and tax credit carryforwards. We measure deferred
tax assets and liabilities using enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to be recoverable or settled. We
recognize the effect on deferred taxes of a change in tax rates
in income in the period that includes the enactment date. We
provide a valuation allowance against deferred tax assets if,
based upon the weight of available evidence, we believe it is
more likely than not that some or all of the deferred tax assets
will not be realized. We report remeasurement gains and losses
related to deferred tax assets and liabilities in our income tax
provision.
A substantial portion of our deferred tax asset valuation
allowance relates to deferred tax assets that, if realized, will
not result in a benefit to our income tax provision. In
accordance with
SOP 90-7,
we recognize decreases in the valuation allowance existing at
the reorganization date first as a reduction in the carrying
value of intangible assets existing at the reorganization date
and then as an increase to paid-in capital. As of
December 31, 2004, we reduced to zero the carrying value of
our intangible assets existing at the reorganization date. We
will record further decreases, if any, of the valuation
allowance existing on the reorganization date as an increase to
paid-in capital and decreases, if any, of the
post-reorganization valuation allowance as a benefit to our
income tax provision. In accordance with APB 25,
Accounting for Stock Issued to Employees, we
recognize decreases in the valuation allowance attributable to
the tax benefits resulting from the exercise of employee stock
options as an increase to paid-in capital. In each market, we
recognize decreases in the valuation allowance first as a
decrease in the remaining valuation allowance that existed as of
the reorganization date, then as a decrease in any
post-reorganization valuation allowance, and finally as a
decrease of the valuation allowance associated with stock option
deductions.
We assess the realizability of our deferred tax assets at each
reporting period. Our assessments generally consider several
factors, including the reversal of existing deferred tax asset
temporary differences, projected future taxable income, tax
planning strategies and historical and future book income
adjusted for permanent
book-to-tax
differences.
Reclassifications. We have reclassified some
prior period amounts to conform to our current year
presentation. These reclassifications did not have a material
impact on previously reported balances.
F-17
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
1.
|
Summary
of Operations and Significant Accounting
Policies (Continued)
|
Out-of-Period
Adjustments. During the year ended
December 31, 2005, we identified errors in our financial
statements for the year ended December 31, 2004. These
errors primarily related to accounting for income taxes, a
corporate aircraft lease, bookkeeping errors in our operating
company in Mexico and other miscellaneous items. For the year
ended December 31, 2005, we reduced operating income by
$2.1 million and increased net income by $2.8 million,
respectively, related to the correction of these errors. In
connection with certain balance sheet errors, during the year
ended December 31, 2005, we increased total assets by
approximately $66.8 million, total liabilities by
approximately $34.9 million and stockholders equity
by approximately $31.9 million. We do not believe that
these adjustments are material to the financial statements for
the year ended December 31, 2005 or to any prior periods.
See Notes 7 and 12 for additional disclosures related to
the aircraft lease and income tax adjustments, respectively.
New Accounting Pronouncements. In December
2004, the Financial Accounting Standards Board, or FASB, issued
Statement No. 153, Exchanges of Nonmonetary
Assets An Amendment of APB Opinion
No. 29, or SFAS 153, to produce financial
reporting that more accurately represents the economics of
nonmonetary exchange transactions. APB Opinion No. 29, or
APB 29, provided an exception to the basic measurement
principle (fair value) for exchanges of similar productive
assets. That exception required that some nonmonetary exchanges,
although commercially substantive, be recorded on a carryover
basis. SFAS 153 amends APB 29 to eliminate the
exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance.
SFAS 153 is effective for fiscal periods beginning after
June 15, 2005. The adoption of SFAS 153 did not have a
material impact on our consolidated financial statements.
In December 2004, the FASB issued Statement No. 123
(revised 2004), Share-Based Payment, or
SFAS 123R, that requires all share-based payments to
employees, including grants of employee stock options, to be
recognized in the statement of operations based on their fair
values. Previously, as permitted under Statement No. 123,
Accounting for Stock-Based Compensation, or
SFAS 123, we recognized no compensation cost for employee
stock options, other than certain accelerated vesting options.
However, in accordance with SFAS 123R, pro forma disclosure
of share-based payment awards as implemented under
SFAS 123, is no longer an alternative.
SFAS 123R permits public companies to adopt its
requirements using one of two methods:
1) A modified prospective method in which
compensation cost is recognized beginning with the effective
date (a) for all share-based payments granted on or after
the effective date and (b) for all awards granted to
employees prior to the effective date of SFAS 123R that
remain unvested on the effective date; or
2) A modified retrospective method, which
includes the requirements of the modified prospective method
described above, but also permits entities to restate their
financial statements based on the amounts previously recognized
under SFAS 123 for purposes of pro forma disclosures either
(a) for all prior periods presented or (b) for prior
interim periods of the year of adoption.
The effective adoption date for SFAS 123R is the first
annual reporting period for public companies that begins after
June 15, 2005 and applies to all outstanding and unvested
share-based payment awards at the companys adoption date.
We adopted SFAS 123R effective January 1, 2006, as
required, under the modified prospective method of application.
Using the guidance of the modified prospective method we do not
expect to adjust our prior period financial statements. We
estimate that the adoption of SFAS 123R in 2006 will result
in a pre-tax charge in the statement of operations to
compensation expense of approximately $21.0 million.
SFAS 123R also requires that the benefits of tax deductions
in excess of recognized compensation cost be reported as a
financing cash flow rather than an operating cash flow as
required under current literature. This
F-18
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
1.
|
Summary
of Operations and Significant Accounting
Policies (Continued)
|
requirement will reduce net operating cash flows and increase
net financing cash flows in the periods after adoption. The
effect of this change is conditioned on the number and timing of
future stock option exercises, and as such, cannot be reasonably
estimated.
In November 2005, the FASB issued Staff Position
No. 123R-3,
Transition Election Related to Accounting for the Tax
Effects of Share-Based Payment Awards, or
FSP 123R-3,
which provides that companies may elect to use a specified
short cut method to calculate the pool of excess tax
benefits available to absorb tax deficiencies recognized
subsequent to adopting the accounting requirements of
SFAS 123R, which is referred to as the APIC pool, assuming
the company had been following the recognition provisions
prescribed by SFAS 123. The short cut method is
available to any company regardless of whether the company
adopts SFAS 123R using the modified prospective application
or the modified retrospective application transition method or
whether the company has the ability to calculate the APIC pool
in accordance with the guidance in Paragraph 81 of
SFAS 123R.
FSP 123R-3
is effective immediately when a company transitions to the
accounting requirements of SFAS 123R. In accordance with
FSP 123R-3, we will not determine whether we will elect to use
the short cut method to calculate the APIC pool
until such time that it becomes required.
In February 2006, the FASB issued Staff Position
No. 123R-4,
Classification of Options and Similar Instruments as
Employee Compensation That Allow for Cash Settlement upon the
Occurrence of a Contingent Event, or
FSP 123R-4,
to address the classification of options and similar instruments
issued as employee compensation that are required under
SFAS 123R to be classified as liabilities if the entity can
be required under any circumstances to settle the option or
similar instrument by transferring cash or other assets.
FSP 123R-4
amends SFAS 123R to allow companies to classify such
options as equity if the cash settlement feature can only be
exercised upon the occurrence of a contingent event that is
outside the employees control and is not probable of
occurring. On the date the contingent award becomes probable of
occurring, the option or similar instrument should be accounted
for as a modification from an equity award to a liability award
in accordance with the guidance of SFAS 123R. The guidance
in
FSP 123R-4
should be applied upon the initial adoption of FAS 123R. We
do not expect the adoption of
FSP 123R-4
to have a material impact on our consolidated financial
statements.
In March 2005, the FASB issued FASB Interpretation No. 47,
Accounting for Conditional Asset Retirement
Obligations, or FIN 47. FIN 47 clarifies that a
conditional asset retirement obligation, as used in
SFAS No. 143, Accounting for Asset Retirement
Obligations, refers to a legal obligation to perform an
asset retirement activity in which the time and/or method of the
settlement are conditional on a future event that may or may not
be within the control of the entity. FIN 47 also clarifies
when an entity would have sufficient information to reasonably
estimate the fair value of an asset retirement obligation. The
statement is effective for companies no later than their first
fiscal year ending after December 15, 2005. The adoption of
FIN 47 resulted in additional asset retirement cost and
asset retirement obligations of $4.8 million and
$7.7 million, respectively, as of December 31, 2005.
The cumulative effect of adopting FIN 47 was not material, and
as such, we recorded $2.9 million of additional operating
expense for accretion and $1.0 million of additional
depreciation expense in the fourth quarter of 2005.
In June 2005, the FASB issued Statement No. 154,
Accounting Changes and Error Corrections, or
SFAS 154, a replacement of APB Opinion No. 20 and FASB
Statement No. 3. SFAS 154 applies to all voluntary
changes in accounting principles, and changes the requirements
for accounting for and reporting of a change in accounting
principle. SFAS 154 requires retroactive application to
prior periods financial statements of a voluntary change
in accounting principle unless it is impractical to do so.
SFAS 154 will be effective for accounting changes and
corrections of errors made in fiscal years beginning after
December 15, 2005. We do not expect the adoption of
SFAS 154 to have a material impact on our consolidated
financial statements except to the extent that it requires
retroactive application in circumstances that would previously
have been effected in the period of change under APB Opinion
No. 20.
F-19
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
1.
|
Summary
of Operations and Significant Accounting
Policies (Continued)
|
At the June 15-16, 2005 Emerging Issues Task Force, or EITF,
meeting, the EITF discussed Issue
No. 05-04,
The Effect of a Liquidated Damages Clause on a
Freestanding Financial Instrument Subject to EITF Issue
No. 00-19,
Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Companys Own
Stock, or
EITF 05-04
which addresses how a liquidated damages clause payable in cash
affects the accounting for a freestanding financial instrument
subject to the provisions of EITF
Issue 00-19.
The EITF discussed (a) whether a registration rights
penalty meets the definition of a derivative and
(b) whether the registration rights agreement and the
financial instrument to which it pertains should be considered
as a combined instrument or as separate freestanding
instruments. At the September 15, 2005 EITF meeting, the
EITF postponed further deliberations on
EITF 05-04,
and the FASB staff requested that the FASB consider a separate
Derivatives Issue Guide, or DIG, issue that addresses whether a
registration rights agreement is a derivative in accordance with
FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging. Following the resolution of that
DIG issue, the FASB staff will request that the EITF reconvene
deliberations on
EITF 05-04.
While
EITF 05-04
remains unresolved, we have determined that the liquidated
damage clauses contained in our convertible note agreements have
been properly considered and accounted for in accordance with
the prevailing guidance.
In October 2005, the FASB issued Staff Position
No. 13-1,
Accounting for Rental Costs Incurred during a Construction
Period, or FSP
No. 13-1,
to address accounting for rental costs associated with building
and ground operating leases. FSP
No. 13-1
requires that rental costs associated with ground or building
operating leases that are incurred during a construction period
be recognized as rental expense. FSP
No. 13-1
is effective for the first reporting period beginning after
December 15, 2005 and requires that public companies that
are currently capitalizing these rental costs for operating
lease arrangements entered into prior to the effective date to
cease capitalizing such costs. Retroactive application in
accordance with SFAS 154 is permitted but not required. We
intend to implement FSP
No. 13-1
effective January 1, 2006. Accordingly, we will begin
expensing rental costs incurred under the construction period on
January 1, 2006. We do not expect that the adoption of FSP
No. 13-1
will have a material effect on our consolidated financial
statements.
In February 2006, the FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial
Instruments An Amendment of FASB Statements
No. 133 and 150, or SFAS 155. SFAS 155
(a) permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that
otherwise would require bifurcation, (b) clarifies that
certain instruments are not subject to the requirements of
SFAS 133, (c) establishes a requirement to evaluate
interests in securitized financial assets to identify interests
that may contain an embedded derivative requiring bifurcation,
(d) clarifies what may be an embedded derivative for
certain concentrations of credit risk and (e) amends
SFAS 140 to eliminate certain prohibitions related to
derivatives on a qualifying special-purpose entity.
SFAS 155 is effective for fiscal years beginning after
September 15, 2006. We are currently evaluating the impact
that SFAS 155 may have on our consolidated financial
statements.
|
|
2.
|
Change in
Accounting Principle
|
Until September 30, 2004, we presented the financial
information of our consolidated foreign operating companies in
our consolidated financial statements utilizing accounts as of a
date one month earlier than the accounts of our parent company,
U.S. subsidiaries and our non-operating
non-U.S. subsidiaries,
which we refer to as our one-month lag reporting policy, to
ensure timely reporting of consolidated results. As a result,
each year the financial position, results of operations and cash
flows of each of our wholly-owned foreign operating companies in
Mexico, Brazil, Argentina, Peru and Chile were presented as of
and for the year ended November 30. In contrast, financial
information relating to our parent company,
U.S. subsidiaries and our non-operating
non-U.S. subsidiaries
was presented as of and for the year ended December 31.
F-20
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
Change in
Accounting Principle (Continued)
|
Over the past several years, we enhanced our financial reporting
systems in our markets, while redesigning processes to increase
the timeliness of internal reporting. These enhancements have
been in the form of aligned financial processes and common and
updated information systems. As a result of these improvements,
we are able to more quickly accumulate, analyze and consolidate
our financial statement information, which enabled us to
eliminate the one-month reporting lag for the year ended
December 31, 2004 and report consolidated results using a
consistent calendar year reporting period for the entire
Company. The change in reporting policy also results in the
communication of more current and useful information to our
investors. We believe these benefits justified the elimination
of the one-month lag reporting policy and resulted in a
preferable method of accounting.
Effective January 1, 2004, we accounted for the elimination
of the one-month lag reporting policy as a change in accounting
principle in accordance with Accounting Principle Board, or APB,
Opinion No. 20, Accounting Changes. Under APB
Opinion No. 20, a change in accounting principle is
determined in the beginning of the period of change. As a
result, we treated the month of December 2003, which is normally
the first month in the fiscal year of our foreign operating
companies, as the lag month, and our fiscal year for all of our
foreign operating companies now begins with January and ends
with December. Each of our successive quarterly and annual
consolidated financial statements continued to follow the same
basis of consolidation for our foreign operating companies. For
example, our consolidated financial statements for the quarter
ended March 31, 2005 reflected the consolidation of our
foreign operating companies accounts for the period from
January 1 through March 31, 2005. Based on the requirements
in APB Opinion No. 20, we have not recast the comparable
financial information for the year ended December 31, 2003
presented in our consolidated financial statements.
In accordance with the requirements of APB Opinion No. 20,
we have reflected our foreign operating companies net
income for December 2003 on the face of our consolidated
statement of operations for the year ended December 31,
2004 as the cumulative effect of a change in accounting
principle. In addition, we have reflected the related net cash
flows for the month of December 2003 as a separate line item in
our consolidated statement of cash flows for the year ended
December 31, 2004.
The table below contains the pro forma results for the year
ended December 31, 2003 reflecting the retroactive
application of eliminating the one-month lag as compared to the
as reported results.
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2003
|
|
|
|
As Reported
|
|
|
Pro Forma
|
|
|
|
(in thousands)
|
|
|
Income before cumulative effect of
change in accounting principle
|
|
$
|
81,214
|
|
|
$
|
66,001
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
change in accounting principle, per common share, basic
|
|
$
|
0.64
|
|
|
$
|
0.52
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
change in accounting principle, per common share, diluted
|
|
$
|
0.59
|
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
81,214
|
|
|
$
|
72,153
|
|
|
|
|
|
|
|
|
|
|
Net income per common share, basic
|
|
$
|
0.64
|
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
|
Net income per common share,
diluted
|
|
$
|
0.59
|
|
|
$
|
0.53
|
|
|
|
|
|
|
|
|
|
|
F-21
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2.
|
Change in
Accounting Principle (Continued)
|
The combined statement of operations of our foreign operating
companies for the month of December 2003 is as follows (in
thousands):
|
|
|
|
|
Operating revenues
|
|
|
|
|
Service and other revenues
|
|
$
|
82,108
|
|
Digital handset and accessory
revenues
|
|
|
9,293
|
|
|
|
|
|
|
|
|
|
91,401
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
Cost of service (exclusive of
depreciation included below)
|
|
|
22,256
|
|
Cost of digital handset and
accessory sales
|
|
|
12,169
|
|
Selling, general and administrative
|
|
|
29,460
|
|
Depreciation
|
|
|
5,842
|
|
Amortization
|
|
|
1,260
|
|
|
|
|
|
|
|
|
|
70,987
|
|
|
|
|
|
|
Operating income
|
|
|
20,414
|
|
|
|
|
|
|
Other income
(expense)
|
|
|
|
|
Interest expense
|
|
|
(2,436
|
)
|
Interest income
|
|
|
741
|
|
Foreign currency transaction
losses, net
|
|
|
(5,404
|
)
|
Other expense, net
|
|
|
(447
|
)
|
|
|
|
|
|
|
|
|
(7,546
|
)
|
|
|
|
|
|
Income before income tax
provision
|
|
|
12,868
|
|
Income tax provision
|
|
|
(11,898
|
)
|
|
|
|
|
|
Net income (cumulative effect
of change in accounting principle)
|
|
$
|
970
|
|
|
|
|
|
|
The components of the $11.9 million income tax provision
related to the cumulative effect of the change in accounting
principle consist of $6.7 million in current foreign tax
expense and $5.2 million in deferred foreign tax expense.
The combined statement of cash flows of our foreign operating
companies for the month of December 2003 is as follows (in
thousands):
|
|
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
Net income
|
|
$
|
970
|
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
|
|
|
|
Depreciation and amortization
|
|
|
7,102
|
|
Provision for losses on accounts
receivable
|
|
|
670
|
|
Provision for losses on inventory
|
|
|
81
|
|
Foreign currency transaction
losses, net
|
|
|
5,404
|
|
Deferred income tax provision
|
|
|
11,207
|
|
Loss on disposal of property,
plant and equipment
|
|
|
37
|
|
Other, net
|
|
|
(273
|
)
|
F-22
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
2. Change in
Accounting Principle (Continued)
|
|
|
|
|
Change in assets and liabilities:
|
|
|
|
|
Accounts receivable, gross
|
|
|
955
|
|
Handset and accessory inventory,
gross
|
|
|
(942
|
)
|
Prepaid expenses and other assets
|
|
|
(582
|
)
|
Other long-term assets
|
|
|
(1,716
|
)
|
Accounts payable, accrued expenses
and other
|
|
|
(1,636
|
)
|
Current deferred revenue
|
|
|
1,420
|
|
Due to related parties
|
|
|
(1,921
|
)
|
Other long-term liabilities
|
|
|
3,060
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
23,836
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
Capital expenditures
|
|
|
(22,824
|
)
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(22,824
|
)
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
Gross proceeds from towers
financing transactions
|
|
|
5,890
|
|
Repayments under financing
obligations
|
|
|
(169
|
)
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
5,721
|
|
|
|
|
|
|
Effect of exchange rate changes
on cash and cash equivalents
|
|
|
1,229
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents (cumulative effect of change in accounting
principle)
|
|
$
|
7,962
|
|
|
|
|
|
|
|
|
3.
|
Significant
Transactions
|
Nextel Mexico. In April 2005, Nextel Mexico
purchased AOL Mexico, S. de R.L. de C.V. for approximately
$14.1 million in cash. As a result of this transaction, we
obtained AOL Mexicos call center assets, certain accounts
receivable and access to AOL Mexicos customer list, as
well as tax loss carryforwards which we believe are more likely
than not to be realized. We accounted for this transaction as a
purchase of assets. This acquisition is a related party
transaction as one of our board members is also the president
and chief executive officer of AOL Latin America. Due to this
board members involvement with our company, he recused
himself from our decision to make this acquisition. The total
purchase price and net assets acquired for our AOL acquisition
are presented below (in thousands):
|
|
|
|
|
|
|
2005
|
|
|
Direct cost of acquisition
|
|
$
|
14,093
|
|
|
|
|
|
|
Net assets acquired:
|
|
|
|
|
Deferred tax
assets net operating loss carryforward
|
|
|
48,433
|
|
Deferred credit
|
|
|
(34,340
|
)
|
|
|
|
|
|
|
|
$
|
14,093
|
|
|
|
|
|
|
The deferred credit represents the excess of the estimated fair
value of the tax loss carryforwards acquired over the allocated
purchase price. We decrease the deferred credit as a reduction
of income tax expense in proportion to the utilization of the
acquired tax loss carryforwards. During 2005, we recognized
$3.4 million of income tax benefit related to the deferred
credit reduction. As of December 31, 2005, the remaining
balance
F-23
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3.
|
Significant
Transactions (Continued)
|
of the deferred credit was $30.4 million, and the remaining
balance of the deferred tax asset related to the tax loss
carryforward was $44.4 million.
On January 10, 2005, the Mexican government began an
auction for wireless spectrum licenses in the 806-821 MHz
to 851-866 MHz frequency band. Inversiones Nextel de
Mexico, a subsidiary of Nextel Mexico, participated in this
auction. The spectrum auction was divided into three separate
auctions: Auction 15 for Northern Mexico Zone 1, Auction 16
for Northern Mexico Zone 2 and Auction 17 for Central and
Southern Mexico. The auctions were completed between February 7
and February 11. Nextel Mexico won an average of
15 MHz of nationwide spectrum, except for Mexico City,
where no spectrum was auctioned off and where Nextel Mexico has
licenses covering approximately 21 MHz. The corresponding
licenses and immediate use of the spectrum were granted to
Inversiones Nextel de Mexico on March 17, 2005. These new
licenses have an initial term of 20 years, which we have
estimated to be the amortization period of the licenses, and are
renewable thereafter for 20 years. Nextel Mexico paid an
up-front fee of $3.4 million for these licenses, excluding
certain annual fees, and $0.5 million in other
capitalizable costs. The spectrum licenses that Nextel Mexico
acquired will allow it to significantly expand its digital
mobile network over the next one to two years, thereby allowing
it to cover a substantial portion of the Mexican national
geography and population.
In September 2003, Nextel Mexico purchased in cash
$9.0 million of licenses from Servicios Troncalizados, S.A.
de C.V. to further consolidate and expand our spectrum position
in some central Mexican cities.
In August 2003, Nextel Mexico purchased all of the equity
interests of Delta Comunicaciones Digitales S.A. de C.V., an
analog trunking company, for a purchase price of
$39.3 million. We allocated the purchase price as follows:
$35.8 million to licenses, $3.0 million to customer
base, $0.2 million to current assets and $0.4 million
to other non-current assets. In addition, Nextel Mexico assumed
$0.1 million in current liabilities. The licenses acquired
provide coverage in numerous areas of Mexico, including Mexico
City, Queretaro and Leon, and are intended to help consolidate
and expand our spectrum position in Mexico. We are amortizing
the licenses acquired over 20 years.
Nextel Brazil. During the second quarter of
2005, Nextel Brazil acquired spectrum licenses for
$8.3 million, of which it paid $0.7 million. The
remaining $7.6 million is due in six annual installments
beginning in 2008, and we are amortizing these licenses over
15 years.
On May 16, 2005, the Brazilian National Communications
Agency, or Anatel, enacted certain substantive modifications to
the SME regulations that, among other things, have the effect of
treating Nextel Brazil equal to all other Brazilian SMR and SME
carriers with respect to billing for use of other mobile
networks. These modifications to the SME regulations became
immediately effective and resulted in savings for Nextel Brazil
in relation to interconnect charges made by other carriers.
Nextel Argentina. In November 2004, Nextel
Argentina purchased all of the equity interests of Radio Movil
Digital Argentina S.A. (RMD), for a purchase price of
$13.0 million, of which $8.5 million was paid through
December 31, 2004, and the remaining $4.5 million was
paid in March 2005. RMD had no operations other than its
ownership of licenses for 650 channels of wireless spectrum. We
allocated the purchase price to the licenses acquired
($19.5 million), a deferred tax liability
($6.6 million), which represents the tax effect of the
difference between the book basis and tax basis of the acquired
licenses and other miscellaneous assets ($0.1 million). We
accounted for this acquisition as a purchase of assets. In
connection with this acquisition, Nextel Argentina obtained 650
channels of additional spectrum that will help to consolidate
and expand our spectrum position in Argentina. 150 of the
channels purchased provide coverage in Buenos Aires, and the
remaining 500 channels provide coverage in numerous other areas
of Argentina. We are amortizing the licenses acquired over
20 years.
F-24
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4.
|
Property,
Plant and Equipment
|
The components of our property, plant and equipment are as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands)
|
|
|
Land
|
|
$
|
3,910
|
|
|
$
|
3,842
|
|
Leasehold improvements
|
|
|
26,523
|
|
|
|
12,661
|
|
Digital mobile network equipment
and network software
|
|
|
892,639
|
|
|
|
521,989
|
|
Office equipment, furniture and
fixtures and other
|
|
|
130,936
|
|
|
|
87,242
|
|
Corporate aircraft capital lease
|
|
|
31,450
|
|
|
|
|
|
Less: Accumulated depreciation and
amortization
|
|
|
(277,059
|
)
|
|
|
(146,073
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
808,399
|
|
|
|
479,661
|
|
Construction in progress
|
|
|
125,524
|
|
|
|
78,586
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
933,923
|
|
|
$
|
558,247
|
|
|
|
|
|
|
|
|
|
|
As a result of an analysis of property, plant and equipment
Nextel Mexico completed in 2005, we corrected amounts related to
2004 by recording a $15.1 million decrease in leasehold
improvements, a $7.6 million decrease in office equipment,
furniture and fixtures and other, a $3.2 million increase
in land, a $19.5 million increase in digital mobile network
equipment and network software and a $0.1 million increase
in accumulated depreciation. These corrections resulted in a
cumulative immaterial reduction to depreciation expense that was
recorded during the year ended December 31, 2005. These
corrections did not impact net property, plant and equipment as
of December 31, 2004.
As discussed in Note 7, during 2005, we revised the
accounting for our corporate aircraft lease from operating to
capital, resulting in a $28.8 million capital lease asset,
net of accumulated depreciation, as of December 31, 2005.
Our intangible assets consist of our licenses, customer base and
trade name, all of which have finite useful lives, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
|
|
(in thousands)
|
|
|
Amortizable intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
$
|
98,009
|
|
|
$
|
(15,205
|
)
|
|
$
|
82,804
|
|
|
$
|
75,954
|
|
|
$
|
(9,804
|
)
|
|
$
|
66,150
|
|
Customer base
|
|
|
42,727
|
|
|
|
(41,889
|
)
|
|
|
838
|
|
|
|
40,917
|
|
|
|
(39,111
|
)
|
|
|
1,806
|
|
Trade name and other
|
|
|
1,619
|
|
|
|
(1,619
|
)
|
|
|
|
|
|
|
1,538
|
|
|
|
(1,538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible
assets
|
|
$
|
142,355
|
|
|
$
|
(58,713
|
)
|
|
$
|
83,642
|
|
|
$
|
118,409
|
|
|
$
|
(50,453
|
)
|
|
$
|
67,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-25
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
5.
|
Intangible
Assets (Continued)
|
Based solely on the carrying amount of amortizable intangible
assets existing as of December 31, 2005 and current
exchange rates, we estimate amortization expense for each of the
next five years ending December 31 to be as follows (in
thousands):
|
|
|
|
|
|
|
Estimated
|
|
|
|
Amortization
|
|
Years
|
|
Expense
|
|
|
2006
|
|
$
|
5,596
|
|
2007
|
|
|
5,154
|
|
2008
|
|
|
5,154
|
|
2009
|
|
|
5,154
|
|
2010
|
|
|
5,154
|
|
Actual amortization expense to be reported in future periods
could differ from these estimates as a result of additional
acquisitions of intangibles, as well as changes in exchange
rates and other relevant factors. During the years ended
December 31, 2005 and 2004, we did not acquire, dispose of
or write down any goodwill or intangible assets with indefinite
useful lives.
Prepaid
Expenses and Other.
The components are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands)
|
|
|
Prepaid expenses
|
|
$
|
12,778
|
|
|
$
|
11,212
|
|
Value added tax receivables, current
|
|
|
9,951
|
|
|
|
13,385
|
|
Advances to suppliers
|
|
|
8,894
|
|
|
|
3,492
|
|
Insurance claims
|
|
|
2,851
|
|
|
|
3,000
|
|
Advertising
|
|
|
36
|
|
|
|
3,702
|
|
Derivative asset
|
|
|
|
|
|
|
179
|
|
Other assets
|
|
|
7,996
|
|
|
|
8,949
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
42,506
|
|
|
$
|
43,919
|
|
|
|
|
|
|
|
|
|
|
Other
Assets.
The components are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands)
|
|
|
Value added tax receivables
|
|
$
|
55,116
|
|
|
$
|
31,019
|
|
Deferred financing costs
|
|
|
20,960
|
|
|
|
16,474
|
|
Income tax receivable
|
|
|
16,150
|
|
|
|
15,315
|
|
Deposits and restricted cash
|
|
|
14,671
|
|
|
|
12,105
|
|
Long-term prepaid expenses
|
|
|
8,790
|
|
|
|
7,651
|
|
Handsets under operating leases
|
|
|
4,410
|
|
|
|
2,375
|
|
Other
|
|
|
905
|
|
|
|
2,048
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
121,002
|
|
|
$
|
86,987
|
|
|
|
|
|
|
|
|
|
|
F-26
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
6.
|
Balance
Sheet Details (Continued)
|
Accrued
Expenses and Other.
The components are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands)
|
|
|
Capital expenditures
|
|
$
|
65,018
|
|
|
$
|
30,880
|
|
Payroll related items and
commissions
|
|
|
50,834
|
|
|
|
34,714
|
|
Income taxes payable
|
|
|
34,312
|
|
|
|
41,731
|
|
Tax and non-tax accrued
contingencies
|
|
|
43,119
|
|
|
|
27,245
|
|
Network system and information
technology payables
|
|
|
37,256
|
|
|
|
33,578
|
|
Non-income based taxes
|
|
|
20,943
|
|
|
|
18,509
|
|
Customer deposits
|
|
|
22,170
|
|
|
|
17,950
|
|
Professional fees
|
|
|
3,563
|
|
|
|
3,203
|
|
Marketing
|
|
|
2,829
|
|
|
|
1,316
|
|
Insurance
|
|
|
3,301
|
|
|
|
185
|
|
Other
|
|
|
28,413
|
|
|
|
21,393
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
311,758
|
|
|
$
|
230,704
|
|
|
|
|
|
|
|
|
|
|
Other
Long-Term Liabilities.
The components are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands)
|
|
|
Tax and non-tax accrued
contingencies
|
|
$
|
59,102
|
|
|
$
|
47,259
|
|
Deferred credit from AOL Mexico
acquisition
|
|
|
30,368
|
|
|
|
|
|
Deferred income tax liability
|
|
|
17,770
|
|
|
|
|
|
Asset retirement obligations
|
|
|
14,923
|
|
|
|
4,126
|
|
Severance plan liability
|
|
|
6,901
|
|
|
|
5,075
|
|
Derivative liability
|
|
|
1,174
|
|
|
|
|
|
Other
|
|
|
2,141
|
|
|
|
229
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
132,379
|
|
|
$
|
56,689
|
|
|
|
|
|
|
|
|
|
|
F-27
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands)
|
|
|
3.5% convertible notes due
2033
|
|
$
|
91,522
|
|
|
$
|
180,000
|
|
2.875% convertible notes
due 2034
|
|
|
300,000
|
|
|
|
300,000
|
|
2.75% convertible notes
due 2025
|
|
|
350,000
|
|
|
|
|
|
Mexico syndicated loan
facility
|
|
|
252,654
|
|
|
|
|
|
Tower financing
obligations
|
|
|
127,314
|
|
|
|
118,202
|
|
Capital lease
obligations
|
|
|
43,845
|
|
|
|
5,267
|
|
Brazil spectrum license
financing
|
|
|
7,583
|
|
|
|
|
|
13.0% senior secured
discount notes
|
|
|
40
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
1,172,958
|
|
|
|
603,509
|
|
Less: current portion
|
|
|
(24,112
|
)
|
|
|
(2,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,148,846
|
|
|
$
|
601,392
|
|
|
|
|
|
|
|
|
|
|
3.5% Convertible Notes. Our
3.5% convertible notes due 2033, which we refer to as our
3.5% notes, are senior unsecured obligations and rank equal
in right of payment with all of our other existing and future
senior unsecured debt. Historically, some of our long-term debt
has been secured and may be secured in the future. In addition,
since we conduct all of our operations through our subsidiaries,
our 3.5% notes effectively rank junior in right of payment
to all liabilities of our subsidiaries. The notes bear interest
at a rate of 3.5% per year, payable semi-annually in
arrears and in cash on March 15 and September 15 of each year,
beginning March 15, 2004. Our 3.5% notes will mature
on September 15, 2033, when the entire principal balance
will be due. The 3.5% notes were publicly registered, effective
March 11, 2004.
On June 10, 2005 and June 20, 2005, certain
noteholders converted $40.0 million and $48.5 million,
respectively, principal face amount of our 3.5% convertible
notes into 3,000,000 shares and 3,635,850 shares
(75.0 shares issued per $1,000 of debt principal multiplied
by the debt principal) in accordance with the original terms of
the debt agreement. In connection with these conversions, we
paid in the aggregate $8.9 million in cash as additional
consideration for conversion, as well as $0.8 million of
accrued interest. We recorded the $8.9 million that we paid
as debt conversion expense in our consolidated statement of
operations. We reclassified to paid-in capital the original
remaining deferred financing costs related to the notes that
were converted.
The noteholders have the right to require us to repurchase the
3.5% notes on September 15 of 2010, 2013, 2018, 2023 and
2028 at a repurchase price equal to 100% of the principal
amount, plus any accrued and unpaid interest up to but excluding
the repurchase date. In addition, if a fundamental change or
termination of trading, as defined, occurs prior to maturity,
the noteholders have the right to require us to repurchase all
or part of the notes at a repurchase price equal to 100% of the
principal amount, plus accrued and unpaid interest.
The 3.5% notes are convertible, at the option of the
holder, into shares of our common stock at an adjusted
conversion rate of 75.0 shares per $1,000 principal amount
of notes, or 6,864,150 aggregate common shares, at a conversion
price of about $13.34 per share. The 3.5% notes are
convertible, subject to adjustment, at any time prior to the
close of business on the final maturity date under any of the
following circumstances:
|
|
|
|
|
during any fiscal quarter commencing after December 31,
2003, if the closing sale price of our common stock exceeds 110%
of the conversion price of $13.34 per share for at least 20
trading days in the 30 consecutive trading days ending on the
last trading day of the preceding fiscal quarter;
|
F-28
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
during the five business day period after any five consecutive
trading day period in which the trading price per note for each
day of this period was less than 98% of the product of the
closing sale price of our common stock and the number of shares
issuable upon conversion of $1,000 principal amount of the
notes, or 6,864,150 aggregate common shares, subject to certain
limitations;
|
|
|
|
if the notes have been called for redemption by us; or
|
|
|
|
upon the occurrence of specified corporate events, including a
fundamental change, as defined in the 3.5% note agreement, the
issuance of certain rights or warrants or the distribution of
certain assets or debt securities.
|
The conversion feature related to the trading price per note
meets the criteria of an embedded derivative under Statement of
Financial Accounting Standards, or SFAS, No. 133,
Accounting for Derivative Instruments and Hedging
Activities. As a result, we are required to separate the
value of the conversion feature from the notes and record a
liability on our consolidated balance sheet. As of
December 31, 2005 and 2004, the conversion feature had a
nominal value, and therefore it did not have a material impact
on our financial position or results of operations. We will
continue to evaluate the materiality of the value of this
conversion feature on a quarterly basis and record the resulting
adjustment, if any, in our consolidated balance sheet and
statement of operations.
For the fiscal quarter ended December 31, 2005, the closing
sale price of our common stock exceeded 110% of the conversion
price of $13.34 per share for at least 20 trading days in
the 30 consecutive trading days ending on December 31,
2005. As a result, the conversion contingency was met, and our
3.5% notes are currently convertible into 75.0 shares
of our common stock per $1,000 principal amount of notes, or an
aggregate of 6,864,150 common shares, at a conversion price of
about $13.34 per share. As presented for the years ended
December 31, 2005 and 2003, our calculation of diluted net
income per share includes the common shares resulting from the
potential conversion of our 3.5% convertible notes. As presented
for the year ended December 31, 2004, our calculation of
diluted net income per share does not include the common shares
resulting from the potential conversion of our
3.5% convertible notes since their effect would have been
antidilutive to our net income per share.
The conversion rate of the 3.5% notes is subject to
adjustment if any of the following events occur:
|
|
|
|
|
we issue common stock as a dividend or distribution on our
common stock;
|
|
|
|
we issue to all holders of common stock certain rights or
warrants to purchase our common stock;
|
|
|
|
we subdivide or combine our common stock;
|
|
|
|
we distribute to all holders of our common stock shares of our
capital stock, evidences of indebtedness or assets, including
cash or securities but excluding the rights, warrants, dividends
or distributions specified above;
|
|
|
|
we or one of our subsidiaries makes a payment in respect of a
tender offer or exchange offer for our common stock to the
extent that the cash and value of any other consideration
included in the payment per share of common stock exceeds the
current market price per share of common stock on the trading
day next succeeding the last date on which tenders or exchanges
may be made pursuant to this tender or exchange offer; or
|
|
|
|
someone other than us or one of our subsidiaries makes a payment
in respect of a tender offer or exchange offer in which, as of
the closing date of the offer, our board of directors is not
recommending the rejection of the offer, subject to certain
conditions.
|
F-29
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Prior to September 20, 2008, the 3.5% notes are not
redeemable. Beginning September 20, 2008, we may redeem the
3.5% notes in whole or in part at the following prices
expressed as a percentage of the principal amount:
|
|
|
|
|
Redemption Period
|
|
Price
|
|
|
Beginning on September 20,
2008 and ending on September 14, 2009
|
|
|
101.0
|
%
|
Beginning on September 15,
2009 and ending on September 14, 2010
|
|
|
100.5
|
%
|
Beginning on September 15,
2010 and thereafter
|
|
|
100.0
|
%
|
Neither we, nor any of our subsidiaries, are subject to any
financial covenants under our 3.5% notes. In addition, the
indenture governing our 3.5% notes does not restrict us or any
of our subsidiaries from paying dividends, incurring debt, or
issuing or repurchasing our securities.
2.875% Convertible Notes. In
January 2004, we issued $250.0 million aggregate principal
amount of 2.875% convertible notes due 2034, which we refer
to as our 2.875% notes. In addition, we granted the initial
purchaser an option to purchase up to an additional
$50.0 million principal amount of 2.875% notes, which
was exercised in full in February 2004. As a result, we issued
an additional $50.0 million aggregate principal amount of
2.875% notes, resulting in total net proceeds of
$291.5 million after the payment of direct issuance costs
of $8.5 million, which we recorded as deferred financing
costs on our consolidated balance sheet and are amortizing over
five years. Our 2.875% notes are senior unsecured
obligations and rank equal in right of payment with all of our
other existing and future senior unsecured debt. Historically,
some of our long-term debt has been secured and may be secured
in the future. In addition, since we conduct all of our
operations through our subsidiaries, our 2.875% notes
effectively rank junior in right of payment to all liabilities
of our subsidiaries. The 2.875% notes bear interest at a
rate of 2.875% per year, payable semi-annually in arrears
and in cash on February 1 and August 1 of each year,
beginning August 1, 2004. The 2.875% notes will mature
on February 1, 2034, when the entire principal balance of
$300.0 million will be due. The 2.875% notes were publicly
registered, effective July 22, 2004.
The noteholders have the right to require us to repurchase the
2.875% notes on February 1 of 2011, 2014, 2019, 2024 and
2029 at a repurchase price equal to 100% of the principal
amount, plus any accrued and unpaid interest up to but excluding
the repurchase date. In addition, if a fundamental change or
termination of trading, as defined, occurs prior to maturity,
the noteholders have a right to require us to repurchase all or
part of the notes at a repurchase price equal to 100% of the
principal amount, plus accrued and unpaid interest.
The 2.875% notes are convertible, at the option of the
holder, into shares of our common stock at an adjusted
conversion rate of 37.5660 shares per $1,000 principal
amount of notes, or 11,269,800 aggregate common shares, at a
conversion price of about $26.62 per share. The
2.875% notes are convertible, subject to adjustment, prior
to the close of business on the final maturity date under any of
the following circumstances:
|
|
|
|
|
during any fiscal quarter commencing after March 31, 2004,
if the closing sale price of our common stock exceeds 120% of
the conversion price of $26.62 per share for at least 20
trading days in the 30 consecutive trading days ending on
the last trading day of the preceding fiscal quarter;
|
|
|
|
during the five business day period after any five consecutive
trading day period in which the trading price per note for each
day of this period was less than 98% of the product of the
closing sale price of our common stock and the number of shares
issuable upon conversion of $1,000 principal amount of the
notes, or 11,269,800 aggregate common shares, subject to certain
limitations;
|
|
|
|
if the notes have been called for redemption by us; or
|
F-30
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
upon the occurrence of specified corporate events, including a
fundamental change, as defined in the 2.875% note agreement, the
issuance of certain rights or warrants or the distribution of
certain assets or debt securities.
|
We have the option to satisfy the conversion of the
2.875% notes in shares of our common stock, in cash or a
combination of both.
The conversion feature related to the trading price per note
meets the criteria of an embedded derivative under
SFAS No. 133. As a result, we are required to separate
the value of the conversion feature from the notes and record a
liability on our consolidated balance sheet. As of
December 31, 2005 and 2004, the conversion feature had a
nominal value, and therefore it did not have a material impact
on our financial position or results of operations. We will
continue to evaluate the materiality of the value of this
conversion feature on a quarterly basis and record the resulting
adjustment, if any, in our consolidated balance sheet and
statement of operations.
For the fiscal quarter ended December 31, 2005, the closing
sale price of our common stock exceeded 120% of the conversion
price of $26.62 per share for at least 20 trading days in
the 30 consecutive trading days ending on December 31,
2005. As a result, the conversion contingency was met and our
2.875% notes are currently convertible into
37.5660 shares of our common stock per $1,000 principal
amount of notes, or an aggregate of 11,269,800 common shares, at
a conversion price of about $26.62 per share.
The conversion rate of the 2.875% notes is subject to
adjustment if any of the following events occur:
|
|
|
|
|
we issue common stock as a dividend or distribution on our
common stock;
|
|
|
|
we issue to all holders of common stock certain rights or
warrants to purchase our common stock;
|
|
|
|
we subdivide or combine our common stock;
|
|
|
|
we distribute to all holders of our common stock shares of our
capital stock, evidences of indebtedness or assets, including
cash or securities but excluding the rights, warrants, dividends
or distributions specified above;
|
|
|
|
we or one of our subsidiaries makes a payment in respect of a
tender offer or exchange offer for our common stock to the
extent that the cash and value of any other consideration
included in the payment per share of common stock exceeds the
current market price per share of common stock on the trading
day next succeeding the last date on which tenders or exchanges
may be made pursuant to this tender or exchange offer; or
|
|
|
|
someone other than us or one of our subsidiaries makes a payment
in respect of a tender offer or exchange offer in which, as of
the closing date of the offer, our board of directors is not
recommending the rejection of the offer, subject to certain
conditions.
|
Prior to February 7, 2011, the 2.875% notes are not
redeemable. On or after February 7, 2011, we may redeem for
cash some or all of the 2.875% notes, at any time and from
time to time, upon at least 30 days notice for a
price equal to 100% of the principal amount of the
2.875% notes to be redeemed plus any accrued and unpaid
interest up to but excluding the redemption date.
Neither we, nor any of our subsidiaries, are subject to any
financial covenants under our 2.875% notes. In addition,
the indenture governing our 2.875% notes does not restrict
us or any of our subsidiaries from paying dividends, incurring
debt, or issuing or repurchasing our securities.
As presented for the year ended December 31, 2005, our
calculation of diluted net income per share includes the common
shares resulting from the potential conversion of our
2.875% convertible notes. As
F-31
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
presented for the year ended December 31, 2004, our
calculation of diluted net income per share does not include the
common shares resulting from the potential conversion of our
2.875% convertible notes since their effect would have been
antidilutive to our net income per share.
2.75% Convertible Notes. In August
2005, we privately placed $300.0 million aggregate
principal amount of 2.75% convertible notes due 2025, which
we refer to as our 2.75% notes. In addition, we granted the
initial purchaser an option to purchase up to an additional
$50.0 million principal amount of 2.75% notes, which
the initial purchaser exercised in full. As a result, we issued
an additional $50.0 million aggregate principal amount of
2.75% notes, resulting in total gross proceeds of
$350.0 million. We also incurred direct issuance costs of
$9.0 million, which we recorded as deferred financing costs
on our consolidated balance sheet and are amortizing over five
years. The 2.75% notes were publicly registered, effective
February 10, 2006.
Our 2.75% notes are senior unsecured obligations and rank
equal in right of payment with all of our other existing and
future senior unsecured debt. Historically, some of our
long-term debt has been secured and may be secured in the
future. In addition, since we conduct all of our operations
through our subsidiaries, our 2.75% notes effectively rank
junior in right of payment to all liabilities of our
subsidiaries.
The 2.75% notes bear interest at a rate of 2.75% per
annum on the principal amount of the notes, payable
semi-annually in arrears in cash on February 15 and August 15 of
each year, beginning February 15, 2006, and will mature on
August 15, 2025, when the entire principal balance of
$350.0 million will be due.
The noteholders have the right to require us to repurchase the
2.75% notes on August 15 of 2010, 2012, 2015 and 2020 at a
repurchase price equal to 100% of their principal amount, plus
any accrued and unpaid interest (including additional amounts,
if any) up to, but excluding, the repurchase date. In addition,
if a fundamental change or termination of trading, as defined,
occurs prior to maturity, the noteholders have a right to
require us to repurchase all or part of the notes at a
repurchase price equal to 100% of the principal amount, plus
accrued and unpaid interest.
The 2.75% notes are convertible, at the option of the
holder, into shares of our common stock at an adjusted
conversion rate of 19.967 shares per $1,000 principal
amount of notes, or 6,988,450 aggregate common shares, at a
conversion price of about $50.08 per share. The
2.75% notes are convertible, subject to adjustment, prior
to the close of business on the final maturity date under any of
the following circumstances:
|
|
|
|
|
during any fiscal quarter commencing after September 30,
2005 if the closing sale price of our common stock exceeds 120%
of the conversion price of about $50.08 for at least
20 trading days in the 30 consecutive trading days
ending on the last trading day of the preceding fiscal quarter;
|
|
|
|
prior to July 15, 2010, during the five business day period
after any five consecutive trading day period in which the
trading price per note for each day of such period was less than
98% of the product of the closing sale price of our common stock
and the number of shares issuable upon conversion of $1,000
principal amount of notes;
|
|
|
|
at any time on or after July 15, 2010; or
|
|
|
|
upon the occurrence of specified corporate events, including a
fundamental change, as defined in the 2.75% note agreement, the
issuance of certain rights or warrants or the distribution of
certain assets or debt securities.
|
We have the option to satisfy the conversion of the notes in
shares of our common stock, in cash or a combination of both.
F-32
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The conversion feature related to the trading price per note
meets the criteria of an embedded derivative under
SFAS No. 133. As a result, we are required to separate
the value of the conversion feature from the notes and record a
liability on our consolidated balance sheet. As of
December 31, 2005, the conversion feature had a nominal
value, and therefore it did not have a material impact on our
financial position or results of operations. We will continue to
evaluate the materiality of the value of this conversion feature
on a quarterly basis and record the resulting adjustment, if
any, in our consolidated balance sheet and statement of
operations.
For the fiscal quarter ended December 31, 2005, the closing
sale price of our common stock did not exceed 120% of the
conversion price of about $50.08 per share for at least 20
trading days in the 30 consecutive trading days ending on
December 31, 2005. As a result, the conversion contingency
was not met.
The conversion rate of the 2.75% notes is subject to
adjustment if any of the following events occur:
|
|
|
|
|
we issue common stock as a dividend or distribution on our
common stock;
|
|
|
|
we issue to all holders of common stock certain rights or
warrants to purchase our common stock;
|
|
|
|
we subdivide or combine our common stock;
|
|
|
|
we distribute to all holders of our common stock shares of our
capital stock, evidences of indebtedness or assets, including
cash or securities but excluding the rights, warrants, dividends
or distributions specified above;
|
|
|
|
we or one of our subsidiaries makes a payment in respect of a
tender offer or exchange offer for our common stock to the
extent that the cash and value of any other consideration
included in the payment per share of common stock exceeds the
current market price per share of common stock on the trading
day next succeeding the last date on which tenders or exchanges
may be made pursuant to this tender or exchange offer; or
|
|
|
|
someone other than us or one of our subsidiaries makes a payment
in respect of a tender offer or exchange offer in which, as of
the closing date of the offer, our board of directors is not
recommending the rejection of the offer, subject to certain
conditions.
|
Prior to August 20, 2010, the notes will not be redeemable.
On or after August 20, 2010, we may redeem for cash some or
all of the notes, at any time and from time to time, upon at
least 30 days notice for a price equal to 100% of the
principal amount of the notes to be redeemed, plus any accrued
and unpaid interest (including additional amounts, if any) up to
but excluding the redemption date.
Neither we, nor any of our subsidiaries, are subject to any
financial covenants under our 2.75% notes. In addition, the
indenture governing our 2.75% notes does not restrict us or any
of our subsidiaries from paying dividends, incurring debt, or
issuing or repurchasing our securities.
As presented for the year ended December 31, 2005, our
calculation of diluted net income per share includes the common
shares resulting from the potential conversion of our
2.75% convertible notes.
Mexico Syndicated
Loan Facility. In October 2004, we
closed on a $250.0 million, five year syndicated loan
facility in Mexico. Of the total amount of the facility,
$129.0 million is denominated in U.S. dollars with a
floating interest rate based on LIBOR (6.81% as of
December 31, 2005), $31.0 million is denominated in
Mexican pesos with a floating interest rate based on the Mexican
reference interest rate TIIE (11.13% as of December 31,
2005), and $90.0 million is denominated in Mexican pesos,
at an interest rate fixed at the time of funding (12.48%). In
April 2005, we amended the credit agreement for the syndicated
loan facility to extend the availability period until
May 31, 2005, and in May 2005, we drew down on the loan
facility for the entire $250.0 million. In July 2005,
Nextel Mexico entered into an interest rate swap agreement to
hedge the
F-33
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$31.4 million portion of the syndicated loan facility. This
interest rate swap fixed the amount of interest expense
associated with this portion of the syndicated loan facility
commencing on August 31, 2005 and continuing over the life
of the facility based on a fixed rate of about 11.95% per
year (see Note 11). Due to changes in foreign currency
exchange rates, the balance of the syndicated loan facility as
of December 31, 2005 was $252.7 million. We did not
have any borrowings outstanding under the syndicated loan
facility as of December 31, 2004.
Tower Financing Obligations. During the
years ended December 31, 2005 and 2004, Nextel Mexico and
Nextel Brazil sold communications towers as follows (proceeds in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
Towers
|
|
|
Proceeds
|
|
|
Towers
|
|
|
Proceeds
|
|
|
Nextel Mexico
|
|
|
7
|
|
|
$
|
870
|
|
|
|
18
|
|
|
$
|
3,305
|
|
Nextel Brazil
|
|
|
13
|
|
|
|
1,371
|
|
|
|
25
|
|
|
|
3,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
20
|
|
|
$
|
2,241
|
|
|
|
43
|
|
|
$
|
6,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We account for these tower sales as financing arrangements. As a
result, we did not recognize any gains from the sales, and we
maintain the tower assets on our balance sheet and continue to
depreciate them. We recognize the proceeds received as financing
obligations that will be repaid through monthly payments. To the
extent that American Tower leases space on these communication
towers to third party companies, our base rent and ground rent
related to the towers leased are reduced. We recognize ground
rent payments as operating expenses in cost of service and tower
base rent payments as interest expense and a reduction in the
financing obligation using the effective interest method. In
addition, we recognize co-location rent payments made by the
third party lessees to American Tower as other operating
revenues because we are maintaining the tower assets on our
balance sheet. Both the proceeds received and rent payments due
are denominated in Mexican pesos for the Mexican transactions
and in Brazilian reais for the Brazilian transactions. Rent
payments are subject to local inflation adjustments. During the
years ended December 31, 2005, 2004 and 2003, we recognized
$15.2 million, $10.3 million and $3.6 million,
respectively, in other operating revenues related to these
co-location lease arrangements, a portion of which we recognized
as interest expense.
On March 22, 2005, we amended the sale-leaseback agreement
with respect to the construction
and/or the
acquisition by American Tower of any new towers to be
constructed or purchased by our Mexican and our Brazilian
operating companies. The most significant of these amendments
provides for the elimination of minimum purchase and
construction commitments, the establishment of new purchase
commitments for the following four years, subject to certain
co-location conditions, the extension for an additional four
years, subject to certain conditions and limitations, of the
right of American Tower to market for co-location existing and
new towers and the reduction of the monthly rent payments, as
well as the purchase price, of any existing towers not
previously purchased or identified for purchase and of any new
sites built.
Capital
Lease Obligations
Corporate Aircraft Leases. In April 2004, we
entered into an agreement to lease a corporate aircraft for
eight years for the purpose of enabling company employees to
visit and conduct business at our various operating companies in
Latin America. We originally accounted for this agreement as an
operating lease. However, upon further analysis and review, in
the fourth quarter of 2005, we determined that because of
certain cross-default provisions in the lease, we should account
for the agreement as a capital lease under EITF 97-1,
Implementation Issues in Accounting for Lease
Transactions, Including Those Involving Special Purpose
Entities. As a result of this and due to a lease
modification of the existing aircraft lease, in the fourth
F-34
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
quarter of 2005, we revised the accounting for this agreement to
a capital lease and recorded a capital lease asset and capital
lease liability for the present value of the future minimum
lease payments. We also adjusted our general and administrative
expenses, depreciation and interest expense to reflect the
change from an operating lease to a capital lease. As of
December 31, 2005, the capital lease liability for our 2004
corporate aircraft was $29.4 million.
In November 2005, we entered into an agreement to lease a new
corporate aircraft beginning in 2009 for ten years. We refer to
this aircraft lease as the 2005 aircraft lease. This new
aircraft, which is scheduled to be delivered in May 2009, will
replace the existing corporate aircraft that we are currently
leasing. We determined that in accordance with EITF 97-10,
The Effect of Lessee Involvement in Asset
Construction, we are the owner of this new corporate
aircraft during its construction because we have substantially
all of the construction period risks. As a result, we will
record an asset for construction in progress and a corresponding
long-term liability for the new aircraft as construction occurs.
When construction of the new corporate aircraft is complete and
the lease term begins, we will record the 2005 aircraft lease as
a sale and a leaseback and evaluate the classification of the
lease as capital versus operating at that time.
Upon taking delivery of the new aircraft in May 2009, we are
required to immediately exercise our early purchase option on
the existing aircraft and pay all amounts due under the 2004
aircraft lease. If we fail to take delivery of the new aircraft
and acquire the existing aircraft, we will be subject to certain
penalties under the 2004 aircraft lease and the 2005 aircraft
lease. If we take delivery of the new aircraft and acquire the
existing aircraft, we intend to immediately sell the existing
aircraft.
In addition, we signed a demand promissory note to guarantee the
total advance payments for the construction of the new aircraft
to be financed by the lessor under the 2005 aircraft lease. The
first scheduled advance payment occurred in November 2005. The
lessor committed to make advance payments of up to
$25.2 million during the construction of the new aircraft.
We also provided a $1.0 million letter of credit to the
lessor as security for the first advance payment, which we paid
in the fourth quarter of 2005. To secure our obligations under
the letter of credit agreement, we deposited approximately
$1.0 million in a restricted cash account with the bank
issuing the letter of credit. We have classified this amount as
a long-term asset in our consolidated balance sheet as of
December 31, 2005. Under the 2005 aircraft lease, we are
obligated to increase the amount of the letter of credit up to a
maximum of $10.0 million as the lessor makes advance
payments. Under the terms of this promissory note, we are
required to maintain unencumbered cash, cash equivalents,
marketable securities and highly liquid investments of no less
than $60.0 million at all times.
Interest accrues on the portion of the outstanding principal
amount of the promissory note that is equal to or less than
$10.0 million, at a variable rate of interest, adjusted
monthly, equal to the monthly LIBOR rate plus 0.5% per year
and the portion of the outstanding principal amount of the note
in excess of $10.0 million, at a variable rate of interest,
adjusted monthly, equal to the monthly LIBOR rate plus
1.75% per year. As of December 31, 2005, we recorded
an asset and a liability of $1.0 million for the amount
outstanding under this promissory note. In addition, for the
year ended December 31, 2005, we have accrued for interest
on the $1.0 million outstanding balance.
Other Capital Lease Obligations. Under the
master lease agreement with American Tower, in certain
circumstances, Nextel Mexico and Nextel Brazil are permitted to
co-locate communications equipment on sites owned by American
Tower. Nextel Mexico and Nextel Brazil account for these
co-location agreements as capital leases.
Brazil Spectrum License
Financing. During the second quarter of 2005,
Nextel Brazil acquired spectrum licenses for $8.3 million,
of which it paid $0.7 million. The remaining
$7.6 million is due in six annual installments beginning in
2008, and we are amortizing these licenses over 15 years.
F-35
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
13.0% Senior Secured Discount Notes. In
March 2004, NII Holdings (Cayman), Ltd. (NII Cayman), one of
our wholly-owned subsidiaries, retired substantially all of its
$180.8 million aggregate principal amount 13.0% senior
secured discount notes due 2009 through a cash tender offer,
resulting in a $79.3 million pre-tax loss, including a
$47.2 million write-off of the unamortized discount and
$2.3 million in charges representing the write-off of debt
financing costs and the payment of transaction costs. For the
year ended December 31, 2004, the basic and diluted loss
per share amount resulting from the loss on the early
extinguishment of our 13.0% senior secured discount notes was
$0.57 and $0.55, respectively.
In July 2004, the trustee for our 13.0% senior secured discount
notes due 2009 released its security interests in the underlying
collateral, and the remaining amount under these notes was
defeased. As a result, our assets are no longer encumbered under
these notes.
Brazil Equipment Facility. In July
2003, we entered into an agreement with Motorola Credit
Corporation to retire our indebtedness under the Brazil
equipment facility. In connection with this agreement, in
September 2003 we paid $86.0 million to Motorola Credit
Corporation in consideration of all of the $103.2 million
in outstanding principal as well as $5.5 million in accrued
and unpaid interest under the Brazil equipment facility using a
portion of the proceeds received from our convertible notes
offering and common stock offering. As a result, we recognized a
$22.7 million gain on the retirement of this facility as a
component of income before continuing operations in our
consolidated statement of operations for the year ended
December 31, 2003. For the year ended December 31,
2003, the basic and diluted per share amounts resulting from the
net gain on the retirement of the Brazil equipment facility were
$0.53 and $0.50, respectively.
Debt Maturities. For the years
subsequent to December 31, 2005, scheduled annual
maturities of all long-term debt outstanding as of
December 31, 2005 are as follows (in thousands):
|
|
|
|
|
|
|
Principal
|
|
Year
|
|
Repayments
|
|
|
2006
|
|
$
|
24,112
|
|
2007
|
|
|
34,925
|
|
2008
|
|
|
107,946
|
|
2009
|
|
|
109,058
|
|
2010
|
|
|
8,980
|
|
Thereafter
|
|
|
887,937
|
|
|
|
|
|
|
Total
|
|
$
|
1,172,958
|
|
|
|
|
|
|
|
|
8.
|
Fair
Value of Financial Instruments
|
We have estimated the fair value of our financial instruments
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 below are not necessarily
indicative of the amounts that we could realize in a current
market exchange. The use of different market assumptions and
estimation methodologies may have a material effect on the
estimated fair value amounts.
Cash and Cash Equivalents, Short-Term Investments, Accounts
Receivable, Accounts Payable, Accrued Expenses and Accrued
Interest. We believe the carrying amounts of
these items are reasonable estimates of their fair values based
on the short-term nature of the items.
F-36
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
8.
|
Fair
Value of Financial
Instruments (Continued)
|
Debt. The estimated fair values of our
convertible notes are based on quoted market prices. The
carrying value of Nextel Mexicos syndicated loan facility,
our capital lease obligations and our tower financing
obligations approximates their fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
|
Debt, including current portion
|
|
$
|
1,172,958
|
|
|
$
|
1,703,148
|
|
|
$
|
603,509
|
|
|
$
|
836,633
|
|
Derivatives. Our derivative instruments are
recorded in our consolidated balance sheet at fair value, based
on market values as determined by an independent third party
investment banking firm.
|
|
9.
|
Commitments
and Contingencies
|
Capital
and Operating Lease Commitments.
We have co-location capital lease obligations on some of our
communication towers in Mexico and Brazil. The remaining terms
of these lease agreements range from twelve to fifteen years. In
addition, we have a capital lease obligation on our existing
corporate aircraft. The remaining term of this lease agreement
is six years.
We lease various cell sites, office facilities and other assets
under operating leases. Some of these leases provide for annual
increases in our rent payments based on changes in locally-based
consumer price indices. The remaining terms of our cell site
leases range from one to ten years and are generally renewable,
at our option, for additional terms. The remaining terms of our
office leases range from less than one to ten years. Total rent
expense under operating leases was $76.9 million during
2005, $56.5 million during 2004 and $48.2 million
during 2003.
For years subsequent to December 31, 2005, future minimum
payments for all capital and operating lease obligations that
have initial noncancelable lease terms exceeding one year, net
of rental income, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
|
|
|
|
Leases
|
|
|
Leases
|
|
|
Total
|
|
|
2006
|
|
$
|
5,423
|
|
|
$
|
73,655
|
|
|
$
|
79,078
|
|
2007
|
|
|
5,447
|
|
|
|
61,599
|
|
|
|
67,046
|
|
2008
|
|
|
5,789
|
|
|
|
57,768
|
|
|
|
63,557
|
|
2009
|
|
|
5,908
|
|
|
|
51,950
|
|
|
|
57,858
|
|
2010
|
|
|
5,908
|
|
|
|
44,208
|
|
|
|
50,116
|
|
Thereafter
|
|
|
53,318
|
|
|
|
110,149
|
|
|
|
163,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
81,793
|
|
|
|
399,329
|
|
|
|
481,122
|
|
Less: imputed interest
|
|
|
(37,948
|
)
|
|
|
|
|
|
|
(37,948
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
43,845
|
|
|
$
|
399,329
|
|
|
$
|
443,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Motorola
Commitments.
We are a party to agreements with Motorola, Inc. under which
Motorola provides us with infrastructure equipment and services,
including installation, implementation and training. We and
Motorola have also agreed to warranty and maintenance programs
and specified indemnity arrangements. We have also agreed to
provide
F-37
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
9.
|
Commitments
and Contingencies (Continued)
|
Motorola with notice of our determination that Motorolas
technology is no longer suited to our needs at least six months
before publicly announcing or entering into a contract to
purchase equipment utilizing an alternate technology. In
addition, if Motorola manufactures, or elects to manufacture,
the equipment utilizing the alternate technology that we elect
to deploy, we must give Motorola the opportunity to supply 50%
of our infrastructure requirements for the equipment utilizing
the alternate technology for three years.
In December 2005, we entered into a handset purchase agreement
with Motorola, which continues our prior handset purchase
relationship. In addition, this agreement sets new pricing terms
for handsets, new commitments to purchase a minimum number of
handsets, new limitations on Motorolas liability in the
event of their breach of the agreement, new restrictions on our
ability to resell handsets and new termination provisions. The
initial term of the agreement is from January 1, 2005 to
December 31, 2005, and the term will automatically renew
indefinitely for successive one-year periods unless it is
superseded by a new agreement, terminated by either party at
least ninety days prior to the expiration of the initial term or
corresponding renewal term or terminated by a party after the
default of the other party if such default is not remedied. In
addition, in December 2005, we and each of our operating
companies entered into various amendments to our existing
infrastructure supply and installation services agreements with
Motorola to extend the terms of these agreements to
December 31, 2007.
Amendments
to Infrastructure Supply and Installation Services
Agreements
In December 2005, we and each of our operating companies entered
into various amendments to our existing infrastructure supply
and installation services agreements with Motorola to extend the
terms of these agreements to December 31, 2007.
Brazilian
Contingencies.
Nextel Brazil has received various assessment notices from state
and federal Brazilian authorities asserting deficiencies in
payments related primarily to value-added taxes and import
duties based on the classification of equipment and services.
Nextel Brazil has filed various administrative and legal
petitions disputing these assessments. In some cases, Nextel
Brazil has received favorable decisions, which are currently
being appealed by the respective governmental authority. In
other cases, Nextel Brazils petitions have been denied,
and Nextel Brazil is currently appealing those decisions. Nextel
Brazil is also disputing various other claims. As a result of
the expiration of the statute of limitations for certain
contingencies during the year ended December 31, 2005,
Nextel Brazil reversed $6.5 million in accrued liabilities,
of which we recorded $3.2 million as a reduction to
operating expenses and the remainder to other income, which
represented monetary corrections.
During the year ended December 31, 2004, Nextel Brazil
reduced its liabilities by $35.4 million, of which we
recorded $14.4 million as a reduction to operating
expenses, reclassified $12.6 million of a settled claim to
current liabilities for payment, and recorded the remainder,
which primarily included monetary corrections on these
contingencies, in other income.
During 2003, we reversed $6.3 million in liabilities. Of
this total, we recorded $4.6 million as a reduction to
operating expenses and the remainder to other income.
As of December 31, 2005, Nextel Brazil had accrued
liabilities of $27.6 million related to contingencies, all
of which were classified in tax and non-tax accrued
contingencies reported as a component of other long-term
liabilities. As of December 31, 2004, Nextel Brazil had
accrued liabilities of $26.4 million related to
contingencies, of which $23.2 million were classified as
other long-term liabilities and $3.2 million were
classified as accrued expenses. The balance related to accrued
contingencies increased from 2004 primarily due to foreign
currency translation adjustments. Of the total accrued
liabilities as of December 31, 2005 and
F-38
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
9.
|
Commitments
and Contingencies (Continued)
|
2004, Nextel Brazil had $21.7 million and
$20.8 million in unasserted claims, respectively. We
currently estimate the range of possible losses related to
matters for which Nextel Brazil has not accrued liabilities, as
they are not deemed probable, to be between $74.1 million
and $78.1 million as of December 31, 2005. We are
continuing to evaluate the likelihood of probable and reasonably
possible losses, if any, related to all known contingencies. As
a result, future increases or decreases to our accrued
liabilities may be necessary and will be recorded in the period
when such amounts are probable and estimable.
Argentine
Contingencies.
Turnover Tax. In one of the markets in
which we operate in Argentina, the city government had
previously increased the turnover tax rate from 3% to 6% of
revenues for cellular companies. From a regulatory standpoint,
we are not considered a cellular company. As a result, we
continue to pay the turnover tax at the existing rate and record
a liability for the differential between the old rate and the
new rate. Similarly, one of the provincial governments in one of
the markets where we operate also increased their turnover tax
rate from 4% to 5.85% of revenues for cellular companies.
Consistent with our earlier position, we continue to pay the
turnover tax at the existing rate and accrue a liability for the
incremental difference in the rate. For the years ended
December 31, 2005 and 2004, we recorded $8.0 million
and $8.8 million as increases in liabilities for local
turnover taxes.
Universal Service Tax. During the year
ended December 31, 2000, the Argentine government enacted
the Universal Service Regulation, which established a tax on
telecommunications licensees effective January 1, 2001,
equal to 1% of telecommunications service revenue, net of
applicable taxes and specified related costs. The license holder
can choose either to pay the tax into a fund for universal
service development or to participate directly in offering
services to specific geographical areas under an annual plan
designed by the federal government. Although the regulations
state that this tax would be applicable beginning
January 1, 2001, the authorities have not, until recently,
taken the necessary actions to implement this tax, such as
creating policies relating to collection or opening accounts
into which the funds would be deposited. As of December 31,
2005, the accrual for this liability to the government was
$5.1 million, which is included as a component of total
accrued liabilities of $40.2 million as of
December 31, 2005.
Nextel Argentina billed this tax as Universal Tax on customer
invoices during the period from January 2001 to August 2001 for
a total amount of $0.2 million. Subsequent to August 2001,
Nextel Argentina did not segregate a specific charge or identify
any portion of its customer billings as relating to the
Universal Tax and, in fact, raised its rates and service fees to
customers several times after this period unrelated to the
Universal Tax. As of December 31, 2005 and 2004, we had
accrued $0.2 million (from January 2001 to August
2001) for the refund.
In May 2005, the Secretariat of Communications, or the SC,
passed legislation stating that the fee was an obligation of the
service provider and could not be assessed to its clients. The
SC also instructed the National Communication Commission, or the
CNC, to request operators to reimburse all amounts collected. In
July 2005, the CNC issued a resolution which required operators
to reimburse amounts collected, plus interest, within
90 days.
In October 2005, Nextel Argentina sought a judicial injunction
against the resolution passed in July 2005. Shortly thereafter,
the SC rejected Nextel Argentinas administrative claim and
repealed the legislation passed in July 2005 that required
operators to reimburse amounts collected, plus interest. The SC
also instructed the CNC to issue new resolutions on a
case-by-case
basis. As a result, the CNC ordered Nextel Argentina to
reimburse amounts collected as universal service, plus interest,
using the same methodology and rate that Nextel Argentina
utilizes to calculate interest charged to late-paying customers.
In November 2005, Nextel Argentina filed an administrative claim
and sought a judicial injunction against the legislation passed
in
F-39
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
9.
|
Commitments
and Contingencies (Continued)
|
May 2005. The administrative claim and the judicial
injunction that Nextel Argentina filed in November 2005 are
still pending.
Also, in the fourth quarter of 2005, consumer advocate
organizations started taking a more active role in this matter
by filing administrative pleadings and judicial claims against
other telecommunications operators. In December 2005, Nextel
Argentina was notified that a consumer group filed a claim
against Nextel Argentina to reimburse all amounts collected as
Universal Tax.
As a result of the events described above and an opinion of
counsel, during the fourth quarter of 2005, Nextel Argentina
accrued $3.9 million for the amount due to its clients for
the period from September 2001 to December 2005 as a reduction
of operating revenues. In addition, Nextel Argentina accrued
$2.5 million for interest related to these charges, which
we classified as interest expense on our consolidated statement
of operations. The total amount of $6.4 million is included
as a component of total accrued liabilities of
$40.2 million as of December 31, 2005.
As of December 31, 2005 and 2004, Nextel Argentina had
accrued liabilities of $40.2 million and
$21.2 million, respectively, related primarily to local
turnover taxes and local government claims, all of which were
classified in tax and non-tax accrued contingencies reported as
a component of accrued expenses and other.
Legal
Proceedings.
We are subject to claims and legal actions that may arise in the
ordinary course of business. We do not believe that any of these
pending claims or legal actions will have a material effect on
our business, financial condition, results of operations or cash
flows.
Income
Taxes.
We are subject to income taxes in both the United States and the
non-U.S. jurisdictions
in which we operate. Certain of our subsidiaries are under
examination by the relevant taxing authorities for various tax
years. We regularly assess the potential outcome of current and
future examinations in each of the taxing jurisdictions when
determining the adequacy of the provision for income taxes. We
have established tax liabilities which we believe to be adequate
in relation to the potential for additional assessments. Once
established, we adjust the liabilities only when there is more
information available or when an event occurs necessitating a
change to the liabilities. While we believe that the amount of
the tax estimates is reasonable, it is possible that the
ultimate outcome of current or future examinations may exceed
current liabilities in amounts that could be material.
We currently have 300,000,000 shares of authorized common
stock, par value $0.001 per share, and
10,000,000 shares of authorized undesignated preferred
stock, par value $0.001 per share.
We issued 120,000,000 shares of our new common stock in
connection with our emergence from Chapter 11
reorganization in November 2002, and we issued an additional
12,000,000 shares of our common stock in our September 2003
public offering. In addition, as described in Note 7, we
issued 3,000,000 shares and 3,635,850 shares of our
common stock in connection with the conversion of our
3.5% convertible notes on June 10, 2005 and
June 21, 2005, respectively.
During the years ended December 31, 2005, 2004 and 2003, we
issued common shares of stock in connection with the exercise of
stock options by employees.
F-40
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
10.
|
Capital
Stock (Continued)
|
As of December 31, 2005 and 2004, there were 152,147,641
shares and 139,661,410 shares of our common stock
outstanding, respectively.
Common Stock. Holders of our common stock are
entitled to one vote per share on all matters submitted for
action by the stockholders and share equally, share for share,
if dividends are declared on the common stock. If our Company is
partially or completely liquidated, dissolved or wound up,
whether voluntarily or involuntarily, the holders of the common
stock are entitled to share ratably in the net assets remaining
after payment of all liquidation preferences, if any, applicable
to any outstanding preferred stock. There are no redemption or
sinking fund provisions applicable to the common stock.
Special Director Preferred Stock. Prior to the
extinguishment of our international equipment facility, Motorola
Credit Corporation owned one outstanding share of our special
director preferred stock, which gave Motorola Credit Corporation
the right to nominate, elect, remove and replace one member of
our board of directors. Mr. Charles F. Wright, one of the
directors on our board, was elected by Motorola through these
rights under the special director preferred stock. In connection
with Mr. Wrights resignation as a member of our board
of directors on September 13, 2004, Motorola Credit
Corporation relinquished this right to elect one member of our
board of directors.
Undesignated Preferred Stock. Our board of
directors has the authority to issue undesignated preferred
stock of one or more series and in connection with the creation
of such series, to fix by resolution the designation, voting
powers, preferences and relative, participating, optional and
other special rights of such series, and the qualifications,
limitations and restrictions thereof. As of December 31,
2005, we had not issued any shares of undesignated preferred
stock.
Common Stock Reserved for Issuance. As of
December 31, 2005 and 2004, under our employee stock option
plan, we had reserved for future issuance 26,855,316 shares and
33,446,312 shares of our common stock, respectively.
|
|
11.
|
Derivative
Instruments
|
Foreign
Currency Hedges
In November 2004, Nextel Mexico entered into a derivative
agreement to reduce its foreign currency transaction risk
associated with a portion of its 2005 U.S. dollar
forecasted capital expenditures and handset purchases. This risk
was hedged by forecasting Nextel Mexicos capital
expenditures and handset purchases for a
12-month
period that began in January 2005. Under this agreement, Nextel
Mexico purchased a U.S. dollar call option for
$3.6 million and sold a call option on the Mexican peso for
$0.9 million for a net cost of $2.7 million, which we
refer to as the net purchased option. Nextel Mexicos
objective for entering into this derivative transaction was for
protection from adverse economic or financial impacts of foreign
exchange rate changes.
We recorded the initial net purchase price of the derivative
instrument as a non-current asset of $2.7 million in
November 2004. As of December 31, 2005, our net purchase
option, designated as a cash flow hedge, decreased in value by
$2.7 million as the hedge expired in December 2005. We
recorded this amount, net of tax, to accumulated other
comprehensive loss in the stockholders equity section of
our consolidated balance sheet. During the year ended
December 31, 2005, we reclassified $4.2 million from
accumulated other comprehensive loss to other expense since the
underlying capital expenditures and purchased handsets had
impacted earnings. As of December 31, 2005, we had
$1.6 million of accumulated other comprehensive loss
remaining related to this hedge. We will reclassify this amount
to other expense as the underlying capital expenditures and
purchased handsets impact our earnings in future periods.
F-41
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
11.
|
Derivative
Instruments (Continued)
|
In September 2005, Nextel Mexico entered into a derivative
agreement to reduce its foreign currency transaction risk
associated with a portion of its 2006 U.S. dollar
forecasted capital expenditures and handset purchases. This risk
is hedged by forecasting Nextel Mexicos capital
expenditures and handset purchases for a
12-month
period that began in January 2006. Under this agreement, Nextel
Mexico purchased a U.S. dollar call option for
$3.6 million and sold a call option on the Mexican peso for
$1.1 million for a net cost of $2.5 million. We
recorded the initial net purchase price of the derivative
instrument as a non-current asset of $2.5 million in
September 2005. As of December 31, 2005, our net purchased
option, which is designated as a cash flow hedge, decreased in
value by $3.0 million. We recorded this amount, net of tax,
to accumulated other comprehensive loss.
In October 2005, Nextel Mexico entered into another derivative
agreement to further reduce its foreign currency transaction
risk associated with a portion of its 2006 U.S. dollar
forecasted capital expenditures and handset purchases. This risk
is hedged by forecasting Nextel Mexicos capital
expenditures and handset purchases for a
12-month
period that began in January 2006. Under this agreement, Nextel
Mexico purchased a U.S. dollar call option for
$1.4 million and sold a call option on the Mexican peso for
$0.3 million for a net cost of $1.1 million. As of
December 31, 2005, our net purchased option, which is
designated as a cash flow hedge, decreased in value by
$0.7 million. We recorded this amount, net of tax, to
accumulated other comprehensive loss.
Interest
Rate Swap
In July 2005, Nextel Mexico entered into an interest rate swap
agreement to hedge the variability of future cash flows
associated with the $31.0 million Mexican peso-denominated
variable interest rate portion of its $250.0 million
syndicated loan facility. Under the interest rate swap, Nextel
Mexico agreed to exchange the difference between the variable
Mexican reference interest rate, TIIE, and a fixed interest
rate, based on a notional amount of $31.4 million. The
interest rate swap fixed the amount of interest expense
associated with this portion of the syndicated loan facility
commencing on August 31, 2005 and will continue over the
life of the facility based on a fixed rate of about
11.95% per year.
The interest rate swap qualifies for cash flow hedge accounting
under SFAS No. 133. As a result, and because the
instrument is 100% effective in hedging interest exposure, we
record, net of any tax, the unrealized gain or loss upon
measuring the change in the swap at its fair value at each
balance sheet date as a component of other comprehensive income
and either a derivative instrument asset or liability on the
balance sheet. We reclassify the amount recorded as a component
of other comprehensive income into earnings as the future
interest payments affect earnings. As of December 31, 2005,
we recognized a cumulative unrealized pre-tax loss of
$1.2 million, which represents the current fair value of
the interest rate swap, net of tax, in accumulated other
comprehensive loss and a corresponding liability on our
consolidated balance sheet.
F-42
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
11.
|
Derivative
Instruments (Continued)
|
The carrying values of our derivative instruments, which
represent fair values, as of December 31, 2005 and 2004 are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
2005
|
|
|
Total
|
|
|
|
Currency
|
|
|
Interest
|
|
|
December 31,
|
|
|
|
Hedge
|
|
|
Rate Swap
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Purchased call options
|
|
$
|
2,016
|
|
|
$
|
|
|
|
$
|
2,016
|
|
Written put options
|
|
|
(2,250
|
)
|
|
|
|
|
|
|
(2,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net purchased option
|
|
|
(234
|
)
|
|
|
|
|
|
|
(234
|
)
|
Interest rate swap
|
|
|
|
|
|
|
(1,174
|
)
|
|
|
(1,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net derivative liability
|
|
$
|
(234
|
)
|
|
$
|
(1,174
|
)
|
|
$
|
(1,408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2004
|
|
|
|
(in thousands)
|
|
|
Purchased call options
|
|
$
|
2,135
|
|
Written put options
|
|
|
(1,967
|
)
|
|
|
|
|
|
Net purchased option
|
|
$
|
168
|
|
|
|
|
|
|
12. Income
Taxes
The components of the income tax (provision) benefit from
continuing operations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(5,076
|
)
|
|
$
|
134
|
|
|
$
|
23,252
|
|
State
|
|
|
(566
|
)
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
(70,460
|
)
|
|
|
(48,650
|
)
|
|
|
(23,784
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current income tax provision
|
|
|
(76,102
|
)
|
|
|
(48,516
|
)
|
|
|
(532
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(28,297
|
)
|
|
|
(4,230
|
)
|
|
|
(2,646
|
)
|
State
|
|
|
(3,143
|
)
|
|
|
(510
|
)
|
|
|
|
|
Foreign
|
|
|
(18,253
|
)
|
|
|
(25,935
|
)
|
|
|
(48,449
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax provision
|
|
|
(49,693
|
)
|
|
|
(30,675
|
)
|
|
|
(51,095
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
$
|
(125,795
|
)
|
|
$
|
(79,191
|
)
|
|
$
|
(51,627
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-43
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
12. Income
Taxes (Continued)
A reconciliation of the U.S. statutory Federal income tax
rate to our effective tax rate as a percentage of income before
taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Statutory Federal tax rate
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
State taxes, net of Federal tax
benefit
|
|
|
1
|
|
|
|
|
|
|
|
|
|
Effect of foreign operations
|
|
|
(4
|
)
|
|
|
(4
|
)
|
|
|
(1
|
)
|
Non-consolidated subsidiary
adjustments
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
Change in deferred tax asset
valuation allowance
|
|
|
3
|
|
|
|
17
|
|
|
|
15
|
|
Intercompany transactions
|
|
|
6
|
|
|
|
7
|
|
|
|
|
|
Withholding tax and tax on subpart
F income
|
|
|
3
|
|
|
|
|
|
|
|
(11
|
)
|
Loss on Mexican fixed asset
disposals
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
Non-deductible expenses
|
|
|
|
|
|
|
2
|
|
|
|
|
|
Foreign tax rate reduction
|
|
|
|
|
|
|
3
|
|
|
|
|
|
Inflation adjustments
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
Amortization of acquired tax
benefits (deferred credit)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
Other
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
42
|
%
|
|
|
58
|
%
|
|
|
39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant components of our deferred tax assets and
liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating losses and capital
loss carryforwards
|
|
$
|
325,792
|
|
|
$
|
273,809
|
|
Allowance for doubtful accounts
|
|
|
17,799
|
|
|
|
12,156
|
|
Provision for expenses
|
|
|
24,756
|
|
|
|
17,658
|
|
Accrual for contingent liabilities
|
|
|
9,371
|
|
|
|
11,327
|
|
Intangible assets
|
|
|
38,687
|
|
|
|
6,382
|
|
Property, plant and equipment
|
|
|
201,841
|
|
|
|
206,682
|
|
Capital lease obligations
|
|
|
51,866
|
|
|
|
13,808
|
|
Deferred revenue
|
|
|
14,255
|
|
|
|
3,303
|
|
Other
|
|
|
32,990
|
|
|
|
15,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
717,357
|
|
|
|
560,412
|
|
Valuation allowance
|
|
|
(417,341
|
)
|
|
|
(365,136
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax asset
|
|
|
300,016
|
|
|
|
195,276
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
16,323
|
|
|
|
9,961
|
|
Property, plant and equipment
|
|
|
12,209
|
|
|
|
703
|
|
Other
|
|
|
13,103
|
|
|
|
12,587
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liability
|
|
|
41,635
|
|
|
|
23,251
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
258,381
|
|
|
$
|
172,025
|
|
|
|
|
|
|
|
|
|
|
F-44
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
12. Income
Taxes (Continued)
During 2005, we identified errors in the notes to our
consolidated financial statements for the year ended
December 31, 2004 related to deferred tax assets and
liabilities of Nextel Brazil. As a result of the Brazil errors,
we increased the gross deferred tax asset and valuation
allowance by $69.8 million and $111.1 million,
respectively, and decreased the total deferred tax liability by
$41.3 million as of December 31, 2004 in the preceding
schedule of deferred tax assets and liabilities. These
adjustments did not change the net deferred tax asset disclosed
above, nor did they change any financial statement line item.
In addition, we identified errors related to deferred tax assets
primarily in Mexico. As a result, we decreased the valuation
allowance and increased paid-in capital by $33.5 million
during 2005. The increase to paid-in capital recorded in 2005 of
$33.5 million should have been recorded in 2004 as part of
the reversal of our deferred tax asset valuation allowance that
existed as of the reorganization date. In accordance with
SOP 90-7,
when valuation allowances on deferred tax assets are reversed
following an entitys emergence from reorganization, the
resulting credit should first reduce the carrying value of
intangible assets existing at the reorganization date and then
increase paid-in capital.
We have not recorded a deferred tax liability on Nextel
Brazils unrealized foreign currency gain on the
intercompany loan from NII as it is our intention to not subject
that unrealized gain to Brazilian tax. If this gain is subject
to tax, it could result in an additional income tax liability.
As of December 31, 2005, the cumulative amount of
additional tax liability would have been approximately
$54.5 million.
We have not recorded a provision for U.S. Federal and state
or foreign taxes that may result from future remittances of
undistributed earnings of foreign subsidiaries. It is our
intention to indefinitely reinvest the undistributed earnings of
our foreign subsidiaries outside the United States and
accordingly, we have not recorded U.S. deferred income
taxes or foreign withholding taxes with respect to such
earnings. Should the earnings be remitted to the U.S. as
dividends, we may be subject to additional U.S. income
taxes (net of allowable foreign tax credits) and foreign
withholding taxes. It is not practicable to estimate the amount
of any additional taxes which may be payable on the
undistributed earnings.
As of December 31, 2005, we had approximately
$104.8 million of net operating loss carryforwards for
U.S. Federal income tax purposes that expire beginning at
various periods from 2010 to 2024. The timing and manner in
which we will utilize the net operating loss carryforwards in
any year, or in total, may be limited in the future under the
provisions of Internal Revenue Code Section 382 regarding
changes in our ownership.
As of December 31, 2005, we had approximately
$169.4 million, $52.1 million and $69.0 million
of net operating loss carryforwards in our Mexican, Argentine,
and Peruvian subsidiaries, respectively. These carryforwards
expire in various amounts and at various periods from 2006 to
2014. Nextel Chile had approximately $22.9 million of net
operating loss carryforwards that can be carried forward
indefinitely. In addition, our Brazilian subsidiaries had
approximately $571.2 million of net operating loss
carryforwards that can also be carried forward indefinitely, but
the amount that we can utilize annually is limited to 30% of
Brazilian taxable income before the net operating loss
deduction. Our foreign subsidiaries ability to utilize the
foreign tax net operating losses in any single year ultimately
depends upon their ability to generate sufficient taxable income.
During 2005, we increased the deferred tax asset valuation
allowance by $52.2 million due mainly to increased net
operating loss carryforwards in Brazil and the U.S., for which
it is more likely than not that the benefits will not be
realized, partially offset by decreases of the deferred tax
asset valuation allowance in Argentina and Peru due to changes
in our projections of the future taxable income that will be
generated in those markets.
During 2004, we decreased the deferred tax asset valuation
allowance by $9.7 million due mainly to decreases of
$170.2 million of deferred tax asset valuation allowances
in Mexico, Argentina and Peru as
F-45
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
12. Income
Taxes (Continued)
mainly to increased net operating loss carryforwards in Brazil
for which it is more likely than not that the benefits will not
be realized.
In accordance with
SOP 90-7,
we recognize decreases in the deferred tax asset valuation
allowance that existed at the reorganization date first as a
reduction in the carrying value of our intangible assets
existing at the reorganization date until fully exhausted, and
then as an increase to paid-in capital. As of December 31,
2004, we have reduced to zero the carrying value of our
intangible assets existing at the reorganization date. We will
record the future decreases, if any, of the valuation allowance
existing on the reorganization date as an increase to paid-in
capital and decreases, if any, of the post-reorganization
valuation allowance as a benefit to our income tax provision.
The following table reflects the impact on our intangible
assets, stockholders equity and income tax provision of
the deferred tax asset valuation allowance decreases that we
recorded during 2005 and 2004 in accordance with
SOP 90-7
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
Reduction to intangible assets
|
|
$
|
|
|
|
$
|
27,870
|
|
Increase to stockholders
equity
|
|
|
69,228
|
|
|
|
128,922
|
|
Reduction to income tax provision
|
|
|
1,240
|
|
|
|
13,422
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
70,468
|
|
|
$
|
170,214
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005, Nextel Brazil, Nextel Chile and
Nextel Mexico have $366.2 million, $3.9 million, and
$3.7 million of deferred tax asset valuation allowances,
respectively. In addition, our U.S. operations have
$43.5 million of deferred tax asset valuation allowance as
of December 31, 2005. Of the total $417.3 million
consolidated deferred tax asset valuation allowance as of
December 31, 2005, $337.3 million existed as of our
emergence from Chapter 11 reorganization and therefore, any
future decreases in this amount will be recorded in accordance
with
SOP 90-7
as an increase to paid-in capital. In addition,
$43.5 million relates to the tax benefit of employee stock
option exercises and, if realized, will result in an increase to
paid-in capital.
Realization of any additional deferred tax assets in any of our
markets depends on future profitability in these markets. Our
ability to generate the expected amounts of taxable income from
future operations is dependent upon general economic conditions,
technology trends, political uncertainties, competitive
pressures and other factors beyond managements control. If
our operations demonstrate profitability, we may reverse
additional deferred tax asset valuation allowances by
jurisdiction in the future. We will continue to evaluate the
deferred tax asset valuation allowance balances in all of our
foreign operating companies and in our U.S. companies
throughout 2006 to determine the appropriate level of valuation
allowance.
In 1998, Nextel Peru entered into a
10-year tax
stability agreement with the Peruvian government that suspends
its net operating loss carryforwards from expiring until Nextel
Peru generates taxable income. Once Nextel Peru generates
taxable income, Nextel Peru has four years to utilize those tax
loss carryforwards and any taxable income in excess of the tax
loss carryforwards will be taxed at 30%. During 2005, Nextel
Peru generated taxable income and utilized a portion of the tax
loss carryforwards. The remaining tax loss carryforwards in Peru
will expire on December 31, 2008 if not used by that date.
At this time, we believe it is more likely than not that these
tax loss carryforwards will be fully utilized prior to their
expiration.
In December 2004, the Mexican government enacted tax
legislation, effective January 1, 2005, which reduced the
corporate tax rate to 30% for 2005, and will further reduce the
corporate tax rate to 29% for 2006 and 28% for 2007. As a
result, we recorded a $3.4 million increase to our income
tax provision for the year ended December 31, 2004
reflecting the impact of these rate changes on our net deferred
tax assets.
F-46
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
12. Income
Taxes (Continued)
We are subject to income taxes in both the United States and the
non-U.S. jurisdictions
in which we operate. Certain of our subsidiaries are under
examination by the relevant taxing authorities for various tax
years. We regularly assess the potential outcome of current and
future examinations in each of the taxing jurisdictions when
determining the adequacy of the provision for income taxes. We
have established tax reserves, which we believe to be adequate
in relation to the potential for additional assessments. Once
established, we adjust the reserves only when there is more
information available or when an event occurs necessitating a
change to the reserves. While we believe that the amount of the
tax estimates is reasonable, it is possible that the ultimate
outcome of current or future examinations may exceed current
reserves in amounts that could be material.
During 2004, Nextel Mexico amended its Mexican Federal income
tax returns in order to reverse a benefit previously claimed for
a disputed provision of the Federal income tax law covering
deductions and gains from the sale of property. We filed the
amended returns in order to avoid potential penalties and we
also filed administrative petitions seeking clarification of our
right to the tax benefits claimed on the original income tax
returns. The tax authorities constructively denied our
administrative petitions in January 2005 and in May 2005 we
filed an annulment suit challenging the constructive denial.
Resolution of the annulment suit is still pending. Based on an
opinion by our independent legal counsel in Mexico, we believe
it is probable that we will recover this amount. Our
consolidated balance sheet as of December 31, 2005 includes
a $16.2 million income tax receivable regarding this
matter, which is the benefit reflected in our income tax
provisions for the years ended December 31, 2005, 2004 and
2003.
13. Employee
Stock and Benefit Plans
Employee Stock Option Plans. Under our Revised
Third Amended Joint Plan of Reorganization, on November 12,
2002 we adopted the 2002 Management Incentive Plan for the
benefit of our employees and directors. The 2002 Management
Incentive Plan provides equity and equity-related incentives to
non-affiliate directors, officers or key employees of, and
consultants to, our company up to a maximum of
13,333,332 shares of common stock, subject to adjustments.
The 2002 Management Incentive Plan provides for the issuance of
options for the purchase of shares of common stock, as well as
grants of shares of common stock where the recipients
rights may vest upon the fulfillment of specified performance
targets or the recipients continued employment by our
company for a specified period, or in which the recipients
rights may be subject to forfeiture upon a termination of
employment. The Management Incentive Plan also provides for the
issuance to non-affiliate directors, officers or key employees
of, and consultants to, our company of stock appreciation rights
whose value is tied to the market value per share, as defined in
the Management Incentive Plan, of the common stock, and
performance units that entitle the recipients to payments upon
the attainment of specified performance goals.
In April 2004, our Board of Directors adopted the 2004 Incentive
Compensation Plan, which provides us the opportunity to
compensate selected employees with stock options, stock
appreciation rights (SAR), stock awards, performance share
awards, incentive awards,
and/or stock
units. The Incentive Compensation Plan provides equity and
equity-related incentives to directors, officers or key
employees of, and consultants to, our company up to a maximum of
39,600,000 shares of common stock subject to adjustments. A
stock option entitles the optionee to purchase shares of common
stock from us at the specified exercise price. A stock
appreciation right entitles the holder to receive the excess of
the fair market value of each share of common stock encompassed
by such stock appreciation rights over the initial value of such
share as determined on the date of grant. Stock awards consist
of awards of common stock, subject to certain restrictions
specified in the Incentive Compensation Plan. An award of
performance shares entitles the participant to receive cash,
shares of common stock, stock units, or a combination thereof if
certain requirements are satisfied. An incentive
F-47
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
13. Employee
Stock and Benefit Plans (Continued)
award is a cash-denominated award that entitles the participant
to receive a payment in cash or common stock, stock units, or a
combination thereof. Stock units are awards stated with
reference to a specified number of shares of common stock that
entitle the holder to receive a payment for each stock unit
equal to the fair market value of a share of common stock on the
date of payment. All grants or awards made under the Incentive
Compensation Plan are governed by written agreements between us
and the participants.
A summary of the activity under our stock option plans is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Outstanding, January 1, 2003
|
|
|
13,314,600
|
|
|
$
|
0.42
|
|
Granted
|
|
|
334,800
|
|
|
|
5.47
|
|
Exercised
|
|
|
(5,766,420
|
)
|
|
|
0.44
|
|
Cancelled
|
|
|
(637,620
|
)
|
|
|
0.42
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2003
|
|
|
7,245,360
|
|
|
|
0.64
|
|
Granted
|
|
|
5,370,400
|
|
|
|
18.93
|
|
Exercised
|
|
|
(1,894,996
|
)
|
|
|
0.60
|
|
Cancelled
|
|
|
(183,660
|
)
|
|
|
11.60
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2004
|
|
|
10,537,104
|
|
|
|
9.78
|
|
Granted
|
|
|
7,019,500
|
|
|
|
26.48
|
|
Exercised
|
|
|
(5,850,381
|
)
|
|
|
4.08
|
|
Cancelled
|
|
|
(436,004
|
)
|
|
|
20.99
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2005
|
|
|
11,270,219
|
|
|
|
22.70
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2003
|
|
|
2,052,360
|
|
|
|
0.47
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2004
|
|
|
3,897,214
|
|
|
|
0.50
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2005
|
|
|
619,769
|
|
|
|
6.03
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005, the maximum term of outstanding
stock options was 9.9 years and the weighted average
remaining life of outstanding stock options was 8.9 years.
Following is a summary of the status of employee stock options
outstanding and exercisable as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
Weighted Average
|
|
Exercise Price or
|
|
|
|
|
Weighted Average
|
|
Exercise
|
|
|
|
|
Exercise
|
|
Range
|
|
|
Shares
|
|
Remaining Life
|
|
Price
|
|
|
Shares
|
|
Price
|
|
|
$
|
0.42
|
|
|
|
417,095
|
|
|
|
6.9 years
|
|
|
$
|
0.42
|
|
|
|
417,095
|
|
|
$
|
0.42
|
|
|
4.31 - 16.76
|
|
|
|
184,600
|
|
|
|
7.7 years
|
|
|
|
10.39
|
|
|
|
31,400
|
|
|
|
10.04
|
|
|
18.97 - 25.12
|
|
|
|
3,853,024
|
|
|
|
8.3 years
|
|
|
|
18.99
|
|
|
|
171,274
|
|
|
|
18.98
|
|
|
26.20 - 43.35
|
|
|
|
6,815,500
|
|
|
|
9.3 years
|
|
|
|
26.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,270,219
|
|
|
|
|
|
|
|
|
|
|
|
619,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-48
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
13. Employee
Stock and Benefit Plans (Continued)
All options that we granted during the years ended
December 31, 2005, 2004 and 2003 had an exercise price
equal to the fair value at the date of grant.
Fair Value Disclosures. The fair value of each
option grant is estimated on the date of grant using the
Black-Scholes option-pricing model as prescribed by
SFAS No. 123 using the following assumptions:
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2003
|
|
Expected stock price volatility
|
|
30.5%
|
|
45%
|
|
59% - 64%
|
Risk-free interest rate
|
|
3.7 - 4.5%
|
|
3.1%
|
|
3.2% - 4.4%
|
Expected life in years
|
|
4
|
|
4
|
|
5
|
Expected dividend yield
|
|
0.00%
|
|
0.00%
|
|
0.00%
|
Forfeiture rate
|
|
3.50%
|
|
1.00%
|
|
1.00%
|
The Black-Scholes option-pricing model was developed for use in
estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition,
option-pricing models such as the Black-Scholes model require
the input of highly subjective assumptions, including the
expected stock price volatility. Because stock options have
characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, we believe that
the existing models do not necessarily provide a reliable single
measure of the fair value of the stock options. The weighted
average estimated fair value of the stock options granted during
the year ended December 31, 2005 was $7.90, during the year
ended December 31, 2004 was $7.49 and during the year ended
December 31, 2003 was $3.02.
Generally, our stock options are non-transferable, except to
family members or by will, and the actual value of the stock
options that a recipient may realize, if any, will depend on the
excess of the market price on the date of exercise over the
exercise price. Since our new common stock at emergence from
reorganization did not begin trading publicly until
November 21, 2002, we based our assumptions for stock price
volatility for 2003 in part on the historical variance of weekly
closing prices of Nextel Communications class A
common stock.
Employee Benefit Plan. Effective
January 1, 2003, we implemented a defined contribution plan
established pursuant to section 401(k) of the Internal
Revenue Code under which some of our officers and employees are
eligible to participate. Participants may contribute up to 15%
of their compensation and be fully vested over four years of
employment. We provide a matching contribution of 100% of the
first 4% of salary contributed by the employee. Our
contributions to this plan were about $483,000, $438,000 and
$399,000 for the years ended December 31, 2005, 2004 and
2003, respectively.
Nextel Mexico Pension Plan. We have a pension
plan which is administered in accordance with local laws and
income tax regulations. We do not expect contributions to this
plan to be material in 2006 or thereafter.
14. Related
Party Transactions
Transactions
with Nextel Communications, Inc.
Following Nextel Communications sale of
18,000,000 shares of our common stock on November 13,
2003, Nextel Communications owned 24,712,128 shares of our
common stock, either directly or indirectly, which represented
approximately 17.9% and 17.7% of our issued and outstanding
shares of common stock as of December 31, 2003 and 2004,
respectively.
F-49
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
14. Related
Party Transactions (Continued)
Following Nextel Communications sale of
10,000,000 shares of our common stock on September 7,
2005, Nextel Communications owned, as of December 31, 2005,
either directly or indirectly, 14,712,128 shares of our
common stock, which represents approximately 9.7% of our issued
and outstanding shares of common stock.
The following are descriptions of other significant transactions
consummated with Nextel Communications on November 12, 2002
under our confirmed plan of reorganization.
New
Spectrum Use and Build-Out Agreement
On November 12, 2002, we and Nextel Communications entered
into a new spectrum use and build-out agreement. Under this
agreement, certain of our subsidiaries committed to complete the
construction of our network in the Baja region of Mexico, in
exchange for cash proceeds from Nextel Communications of
$50.0 million, of which $25.0 million was received in
each of 2002 and 2003. We recorded the $50.0 million as
deferred revenues, and we are recognizing the revenue ratably
over 15.5 years, the then remaining useful life of our
licenses in Tijuana. As of December 31, 2005 and 2004, we
had recorded $42.5 million and $45.7 million,
respectively, of deferred revenues related to this agreement, of
which $39.3 million and $42.5 million are classified
as long-term, respectively. We commenced service on our network
in the Baja region of Mexico in September 2003. As a result,
during the years ended December 31, 2005, 2004 and 2003, we
recognized $3.2 million, $3.5 million and
$0.8 million, respectively, in revenues related to this
arrangement.
Tax
Cooperation Agreement with Nextel Communications
We had a tax sharing agreement with Nextel Communications, dated
January 1, 1997, which was in effect through
November 11, 2002. On November 12, 2002, we terminated
the tax sharing agreement and entered into a tax cooperation
agreement with Nextel Communications under which Nextel
Communications and we agreed to retain, for 20 years
following the effective date of our plan of reorganization,
books, records, accounting data and other information related to
the preparation and filing of consolidated tax returns filed for
Nextel Communications consolidated group.
Amended
and Restated Overhead Services Agreement with Nextel
Communications
We had an overhead services agreement with Nextel Communications
in effect through November 11, 2002. On November 12,
2002, we entered into an amended and restated overhead services
agreement, under which Nextel Communications will provide us,
for agreed upon service fees, certain (i) information
technology services, (ii) payroll and employee benefit
services, (iii) procurement services, (iv) engineering
and technical services, (v) marketing and sales services,
and (vi) accounts payable services. Either Nextel
Communications or we can terminate one or more of the other
services at any time with 30 days advance notice. Effective
January 1, 2003, we terminated Nextel Communications
payroll and employee benefit services, procurement services and
accounts payable services. Effective October 15, 2004, we
terminated all other services with the exception of engineering
and technical services and marketing and sales services. In
addition, effective February 15, 2006, we terminated in its
entirety the overhead services agreement with Nextel
Communications.
We periodically reimburse Nextel Communications for costs
incurred under the overhead services agreements, which totaled
$0.8 million during 2005, $0.9 million during 2004 and
$0.5 million during 2003. In the past, we have also
reimbursed Nextel Communications for some vendor payments made
on our behalf. However, we did not reimburse Nextel
Communications for any vendor payments during 2005 or 2004.
F-50
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
14. Related
Party Transactions (Continued)
Third
Amended and Restated Trademark License Agreement with Nextel
Communications, Inc.
On November 12, 2002, we entered into a third amended and
restated trademark license agreement with Nextel Communications,
which superseded a previous trademark license agreement. Under
the new agreement, Nextel Communications granted to us an
exclusive, royalty-free license to use within Latin America,
excluding Puerto Rico, certain trademarks, including but not
limited to the mark Nextel. The license agreement
continues indefinitely unless terminated by Nextel
Communications upon 60 days notice if we commit any one of
several specified defaults and fail to cure the default within a
60 day period. The net carrying value of the trademark was
$3.2 million as of December 31, 2003. As of
December 31, 2004, the net carrying value of the trademark
was fully exhausted as the result of the reversal of valuation
allowances related to deferred tax assets generated subsequent
to our reorganization. Under a side agreement, until the sooner
of November 12, 2007 or the termination of the new
agreement, Nextel Communications agreed not to offer iDEN
service in Latin America, other than in Puerto Rico, and we
agreed not to offer iDEN service in the United States.
Standstill
Agreement
As part of our Revised Third Amended Joint Plan of
Reorganization, we, Nextel Communications and certain of our
noteholders entered into a Standstill Agreement, pursuant to
which Nextel Communications and its affiliates agreed not to
purchase (or take any other action to acquire) any of our equity
securities, or other securities convertible into our equity
securities, that would result in Nextel Communications and its
affiliates holding, in the aggregate, more than 49.9% of the
equity ownership of us on a fully diluted basis, which we refer
to as the standstill percentage, without prior
approval of a majority of the non-Nextel Communications members
of the Board of Directors. We agreed not to take any action that
would cause Nextel Communications to hold more than 49.9% of our
common equity on a fully diluted basis. If, however, we take
action that causes Nextel Communications to hold more than 49.9%
of our common equity, Nextel is required to vote all shares in
excess of the standstill percentage in the same proportions as
votes are cast for such class or series of our voting stock by
stockholders other than Nextel Communications and its affiliates.
During the term of the Standstill Agreement, Nextel
Communications and its controlled affiliates have agreed not to
nominate to our Board of Directors, nor will they vote in favor
of the election to the Board of Directors, any person that is an
affiliate of Nextel Communications if the election of such
person to the Board of Directors would result in more than two
affiliates of Nextel Communications serving as directors. Nextel
Communications has also agreed that if at any time during the
term of the Standstill Agreement more than two of its affiliates
are directors, it will use its reasonable efforts to cause such
directors to resign to the extent necessary to reduce the number
of directors on our Board of Directors that are affiliates of
Nextel Communications to two.
The total receivable due from Nextel Communications, which
represents roaming charges that we billed to Nextel
Communications for their customers use of our digital
mobile networks in our markets and is included in accounts
receivable on our consolidated balance sheet, and total payable
due to Nextel Communications, which is included in accrued
expenses and other on our consolidated balance sheet, as of
December 31, 2005 and 2004 are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands)
|
|
|
Due from Nextel Communications
|
|
$
|
4,196
|
|
|
$
|
2,978
|
|
Due to Nextel Communications
|
|
|
1,442
|
|
|
|
2,867
|
|
F-51
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
14. Related
Party Transactions (Continued)
Transactions
with Motorola, Inc.
Through September 2004, we considered Motorola to be a related
party.
On November 12, 2002, as part of our plan of
reorganization, we entered into a new master equipment financing
agreement and a new equipment financing agreement with Motorola
Credit Corporation. In July 2003, we entered into an agreement
to substantially reduce our indebtedness under the international
equipment facility to Motorola Credit Corporation. Under this
agreement, in September 2003, we prepaid, at face value,
$100.0 million of the $225.0 million in outstanding
principal under this facility. Concurrently, we entered into an
agreement with Motorola Credit Corporation to retire our
indebtedness under the Brazil equipment facility. In connection
with this agreement, in September 2003, we paid
$86.0 million in consideration of all of the
$103.2 million in outstanding principal as well as
$5.5 million in accrued and unpaid interest under the
Brazil equipment facility.
In February 2004, in compliance with our international equipment
facility credit agreement we prepaid, at face value,
$72.5 million of the $125.0 million in outstanding
principal to Motorola Credit Corporation using proceeds from a
convertible note offering made in January 2004. In July 2004, we
paid the remaining $52.6 million in outstanding principal
and related accrued interest under our international equipment
facility. Under the terms of the international equipment
facility and related agreements, Motorola Credit Corporation was
a secured creditor and held senior liens on substantially all of
our assets, as well as the assets of our various foreign and
domestic subsidiaries and affiliates. As a result of the
extinguishment of this facility, Motorola Credit Corporation
released its liens on these assets, all restrictive covenants
under this facility were terminated and all obligations under
this facility were discharged. We did not recognize any gain or
loss as a result of either of these transactions.
In addition, prior to the extinguishment of our international
equipment facility, Motorola Credit Corporation owned one
outstanding share of our Special Director Preferred Stock, which
gave Motorola Credit Corporation the right to nominate, elect,
remove and replace one member of our board of directors.
Mr. Charles F. Wright, one of the directors on our board,
was elected by Motorola through these rights under the Special
Director Preferred Stock. In connection with the extinguishment
of our international equipment facility and
Mr. Wrights resignation as a member of our board of
directors on September 13, 2004, Motorola Credit
Corporation lost this right to elect one member of our board of
directors and is no longer considered to be a related party.
We continue to have a number of important strategic and
commercial relationships with Motorola. Our key relationships
with Motorola include the following:
|
|
|
|
|
Digital mobile network equipment We purchase a
substantial portion of our digital mobile network equipment and
related software from Motorola. Our equipment purchase
agreements with Motorola govern our rights and obligations
regarding purchases of digital mobile network equipment
manufactured by Motorola;
|
|
|
|
Handsets We also purchase handsets and
accessories from Motorola;
|
|
|
|
Software upgrades and maintenance Motorola and
we have agreed to warranty and maintenance programs and
specified indemnity arrangements; and
|
|
|
|
Training and other We pay Motorola for handset
service and repair and training and are reimbursed for costs we
incur under various marketing and promotional arrangements.
These marketing and promotional reimbursements totaled
$2.5 million through September 13, 2004, the date of
Mr. Wrights resignation from our board of directors,
and $3.0 million in 2003.
|
F-52
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
14. Related
Party Transactions (Continued)
Our purchases from Motorola during the year ended
December 31, 2004, which include transactions through
September 13, 2004, the date of Mr. Wrights
resignation from our board of directors, and the year ended
December 31, 2003 consisted of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2004
|
|
|
2003
|
|
|
Digital mobile network equipment
|
|
$
|
51,948
|
|
|
$
|
54,756
|
|
Handsets
|
|
|
171,120
|
|
|
|
125,178
|
|
Software upgrades and maintenance
|
|
|
9,611
|
|
|
|
14,293
|
|
Training and other
|
|
|
79
|
|
|
|
537
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
232,758
|
|
|
$
|
194,764
|
|
|
|
|
|
|
|
|
|
|
Other Relationship.
On February 14, 2006, we elected Mr. John Donovan,
President and Chief Executive Officer of inCode, a wireless
business and technology consulting company, to our Board of
Directors in order to fill a vacancy. InCode has performed
various consulting services for us in the past. During the years
ended December 31, 2005 and 2004, we paid inCode
$0.2 million and $0.3 million, respectively. We did
not pay any amounts to inCode during the year ended
December 31, 2003.
We have determined that our reportable segments are those that
are based on our method of internal reporting, which
disaggregates our business by geographical location. Our
reportable segments are: (1) Mexico, (2) Brazil,
(3) Argentina and (4) Peru. The operations of all
other businesses that fall below the segment reporting
thresholds are included in the Corporate and other
segment below. This segment includes our Chilean operating
companies, our corporate operations in the U.S. and our Cayman
entity that issued our senior secured discount notes. We
evaluate performance of these segments and provide resources to
them based on operating income before depreciation and
amortization and impairment, restructuring and other charges,
which we refer to as segment earnings. We allocated
$68.1 million, $56.6 million and $18.8 million in
corporate overhead costs to Nextel Mexico during the years ended
December 31, 2005, 2004 and 2003 and we treat a portion of
these allocated amounts as tax deductions, where relevant. The
segment information below does not reflect the allocations of
the corporate overhead costs because the amounts of these
expenses are not provided to or used by our chief operating
decision maker in making operating decisions related to these
segments.
F-53
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
15. Segment
Information (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Intercompany
|
|
|
|
|
|
|
Mexico
|
|
|
Brazil
|
|
|
Argentina
|
|
|
Peru
|
|
|
and other
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in thousands)
|
|
Year Ended December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
986,936
|
|
|
$
|
321,655
|
|
|
$
|
248,262
|
|
|
$
|
108,544
|
|
|
$
|
1,886
|
|
|
$
|
(670
|
)
|
|
$
|
1,666,613
|
|
Digital handset and accessory
revenues
|
|
|
26,384
|
|
|
|
25,875
|
|
|
|
21,310
|
|
|
|
5,657
|
|
|
|
|
|
|
|
|
|
|
|
79,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
1,013,320
|
|
|
$
|
347,530
|
|
|
$
|
269,572
|
|
|
$
|
114,201
|
|
|
$
|
1,886
|
|
|
$
|
(670
|
)
|
|
$
|
1,745,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings (losses)
|
|
$
|
399,698
|
|
|
$
|
44,191
|
|
|
$
|
70,832
|
|
|
$
|
26,371
|
|
|
$
|
(56,331
|
)
|
|
$
|
|
|
|
$
|
484,761
|
|
Depreciation and amortization
|
|
|
(69,300
|
)
|
|
|
(31,768
|
)
|
|
|
(16,460
|
)
|
|
|
(8,718
|
)
|
|
|
(4,279
|
)
|
|
|
393
|
|
|
|
(130,132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
330,398
|
|
|
|
12,423
|
|
|
|
54,372
|
|
|
|
17,653
|
|
|
|
(60,610
|
)
|
|
|
393
|
|
|
|
354,629
|
|
Interest expense, net
|
|
|
(28,670
|
)
|
|
|
(18,113
|
)
|
|
|
(5,407
|
)
|
|
|
(152
|
)
|
|
|
(20,202
|
)
|
|
|
74
|
|
|
|
(72,470
|
)
|
Interest income
|
|
|
22,465
|
|
|
|
1,941
|
|
|
|
661
|
|
|
|
880
|
|
|
|
6,738
|
|
|
|
(74
|
)
|
|
|
32,611
|
|
Foreign currency transaction gains,
net
|
|
|
2,602
|
|
|
|
225
|
|
|
|
500
|
|
|
|
20
|
|
|
|
10
|
|
|
|
|
|
|
|
3,357
|
|
Debt conversion expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,930
|
)
|
|
|
|
|
|
|
(8,930
|
)
|
Other expense, net
|
|
|
(4,167
|
)
|
|
|
(3,817
|
)
|
|
|
(33
|
)
|
|
|
(11
|
)
|
|
|
(593
|
)
|
|
|
|
|
|
|
(8,621
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax
|
|
$
|
322,628
|
|
|
$
|
(7,341
|
)
|
|
$
|
50,093
|
|
|
$
|
18,390
|
|
|
$
|
(83,587
|
)
|
|
$
|
393
|
|
|
$
|
300,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
208,286
|
|
|
$
|
150,159
|
|
|
$
|
52,562
|
|
|
$
|
25,152
|
|
|
$
|
33,707
|
|
|
$
|
|
|
|
$
|
469,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
749,923
|
|
|
$
|
192,830
|
|
|
$
|
177,658
|
|
|
$
|
93,328
|
|
|
$
|
1,574
|
|
|
$
|
(476
|
)
|
|
$
|
1,214,837
|
|
Digital handset and accessory
revenues
|
|
|
26,002
|
|
|
|
19,186
|
|
|
|
17,141
|
|
|
|
2,742
|
|
|
|
|
|
|
|
|
|
|
|
65,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
775,925
|
|
|
$
|
212,016
|
|
|
$
|
194,799
|
|
|
$
|
96,070
|
|
|
$
|
1,574
|
|
|
$
|
(476
|
)
|
|
$
|
1,279,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings (losses)
|
|
$
|
324,250
|
|
|
$
|
13,531
|
|
|
$
|
42,096
|
|
|
$
|
19,852
|
|
|
$
|
(50,991
|
)
|
|
$
|
|
|
|
$
|
348,738
|
|
Depreciation and amortization
|
|
|
(67,322
|
)
|
|
|
(13,081
|
)
|
|
|
(11,512
|
)
|
|
|
(5,795
|
)
|
|
|
(1,080
|
)
|
|
|
415
|
|
|
|
(98,375
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
256,928
|
|
|
|
450
|
|
|
|
30,584
|
|
|
|
14,057
|
|
|
|
(52,071
|
)
|
|
|
415
|
|
|
|
250,363
|
|
Interest expense, net
|
|
|
(18,902
|
)
|
|
|
(12,054
|
)
|
|
|
(3,161
|
)
|
|
|
(188
|
)
|
|
|
(20,950
|
)
|
|
|
142
|
|
|
|
(55,113
|
)
|
Interest income
|
|
|
3,648
|
|
|
|
2,733
|
|
|
|
416
|
|
|
|
2,707
|
|
|
|
3,335
|
|
|
|
(142
|
)
|
|
|
12,697
|
|
Foreign currency transaction gains
(losses), net
|
|
|
8,613
|
|
|
|
575
|
|
|
|
(266
|
)
|
|
|
273
|
|
|
|
15
|
|
|
|
|
|
|
|
9,210
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(79,327
|
)
|
|
|
|
|
|
|
(79,327
|
)
|
Other (expense) income, net
|
|
|
(576
|
)
|
|
|
(1,819
|
)
|
|
|
184
|
|
|
|
483
|
|
|
|
(449
|
)
|
|
|
(143
|
)
|
|
|
(2,320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax
|
|
$
|
249,711
|
|
|
$
|
(10,115
|
)
|
|
$
|
27,757
|
|
|
$
|
17,332
|
|
|
$
|
(149,447
|
)
|
|
$
|
272
|
|
|
$
|
135,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
101,682
|
|
|
$
|
72,370
|
|
|
$
|
53,174
|
|
|
$
|
20,255
|
|
|
$
|
2,424
|
|
|
$
|
(143
|
)
|
|
$
|
249,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
559,198
|
|
|
$
|
138,244
|
|
|
$
|
106,730
|
|
|
$
|
90,391
|
|
|
$
|
1,567
|
|
|
$
|
(515
|
)
|
|
$
|
895,615
|
|
Digital handset and accessory
revenues
|
|
|
19,170
|
|
|
|
10,301
|
|
|
|
11,413
|
|
|
|
2,184
|
|
|
|
4
|
|
|
|
|
|
|
|
43,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
578,368
|
|
|
$
|
148,545
|
|
|
$
|
118,143
|
|
|
$
|
92,575
|
|
|
$
|
1,571
|
|
|
$
|
(515
|
)
|
|
$
|
938,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings (losses)
|
|
$
|
215,303
|
|
|
$
|
13,603
|
|
|
$
|
32,668
|
|
|
$
|
20,939
|
|
|
$
|
(35,506
|
)
|
|
$
|
|
|
|
$
|
247,007
|
|
Depreciation and amortization
|
|
|
(67,681
|
)
|
|
|
(4,520
|
)
|
|
|
(3,983
|
)
|
|
|
(3,054
|
)
|
|
|
(755
|
)
|
|
|
492
|
|
|
|
(79,501
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
147,622
|
|
|
|
9,083
|
|
|
|
28,685
|
|
|
|
17,885
|
|
|
|
(36,261
|
)
|
|
|
492
|
|
|
|
167,506
|
|
Interest expense, net
|
|
|
(19,762
|
)
|
|
|
(11,165
|
)
|
|
|
(61
|
)
|
|
|
(2,027
|
)
|
|
|
(36,683
|
)
|
|
|
5,075
|
|
|
|
(64,623
|
)
|
Interest income
|
|
|
2,609
|
|
|
|
5,747
|
|
|
|
520
|
|
|
|
85
|
|
|
|
6,978
|
|
|
|
(5,075
|
)
|
|
|
10,864
|
|
Foreign currency transaction
(losses) gains, net
|
|
|
(16,381
|
)
|
|
|
23,751
|
|
|
|
1,335
|
|
|
|
165
|
|
|
|
(14
|
)
|
|
|
|
|
|
|
8,856
|
|
Gain (loss) on extinguishment of
debt
|
|
|
|
|
|
|
22,739
|
|
|
|
|
|
|
|
|
|
|
|
(335
|
)
|
|
|
|
|
|
|
22,404
|
|
Other (expense) income, net
|
|
|
(959
|
)
|
|
|
(8,239
|
)
|
|
|
8,383
|
|
|
|
(328
|
)
|
|
|
(8,564
|
)
|
|
|
(2,459
|
)
|
|
|
(12,166
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax
|
|
$
|
113,129
|
|
|
$
|
41,916
|
|
|
$
|
38,862
|
|
|
$
|
15,780
|
|
|
$
|
(74,879
|
)
|
|
$
|
(1,967
|
)
|
|
$
|
132,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
139,896
|
|
|
$
|
32,993
|
|
|
$
|
22,919
|
|
|
$
|
15,876
|
|
|
$
|
2,663
|
|
|
$
|
|
|
|
$
|
214,347
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
486,841
|
|
|
$
|
247,222
|
|
|
$
|
108,238
|
|
|
$
|
59,388
|
|
|
$
|
33,187
|
|
|
$
|
(953
|
)
|
|
$
|
933,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$
|
1,459,298
|
|
|
$
|
401,013
|
|
|
$
|
274,397
|
|
|
$
|
148,429
|
|
|
$
|
338,780
|
|
|
$
|
(953
|
)
|
|
$
|
2,620,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
328,021
|
|
|
$
|
111,031
|
|
|
$
|
73,674
|
|
|
$
|
43,107
|
|
|
$
|
3,761
|
|
|
$
|
(1,347
|
)
|
|
$
|
558,247
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$
|
774,058
|
|
|
$
|
234,091
|
|
|
$
|
223,180
|
|
|
$
|
114,354
|
|
|
$
|
146,944
|
|
|
$
|
(1,347
|
)
|
|
$
|
1,491,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-54
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
16.
|
Quarterly
Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
(in thousands, except per share
amounts)
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
370,207
|
|
|
$
|
410,656
|
|
|
$
|
452,365
|
|
|
$
|
512,611
|
|
Operating income
|
|
|
74,207
|
|
|
|
88,741
|
|
|
|
94,435
|
|
|
|
97,246
|
|
Net income
|
|
|
45,038
|
|
|
|
30,512
|
|
|
|
49,842
|
|
|
|
49,389
|
|
Net income, per common share, basic
|
|
$
|
0.32
|
|
|
$
|
0.21
|
|
|
$
|
0.33
|
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, per common share,
diluted
|
|
$
|
0.28
|
|
|
$
|
0.20
|
|
|
$
|
0.30
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
(in thousands, except per share
amounts)
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
287,691
|
|
|
$
|
303,896
|
|
|
$
|
325,424
|
|
|
$
|
362,897
|
|
Operating income
|
|
|
57,273
|
|
|
|
57,713
|
|
|
|
56,052
|
|
|
|
79,325
|
|
Cumulative effect of change in
accounting principle, net of income taxes of $11,898
|
|
|
970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(51,776
|
)
|
|
|
29,767
|
|
|
|
22,606
|
|
|
|
56,692
|
|
Cumulative effect of change in
accounting principle, per common share, basic
|
|
$
|
0.01
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income, per common
share, basic
|
|
$
|
(0.37
|
)
|
|
$
|
0.21
|
|
|
$
|
0.16
|
|
|
$
|
0.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in
accounting principle, per common share, diluted
|
|
$
|
0.01
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income, per common
share, diluted
|
|
$
|
(0.37
|
)
|
|
$
|
0.20
|
|
|
$
|
0.15
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant events that occurred during the fourth quarter of
2005 are described in Notes 3, 7, 9, 11 and 14.
During 2005, we identified errors in our financial statements
for 2004 and the first three quarters of 2005. As a result of
these errors and the resulting corrections, we increased
operating income $1.8 million, $0.8 million and
$2.1 million in the first, second and third quarters of
2005, respectively. We decreased operating income
$2.7 million in the fourth quarter of 2005 related to these
errors. We decreased net income $2.4 million,
$0.1 million and $1.7 million in the first, third and
fourth quarters of 2005 and increased net income
$1.4 million in the second quarter of 2005 to correct for
these errors.
Historically, we have reported certain revenue-based taxes
imposed on us in Brazil as a reduction of revenue. We viewed
them as pass-through costs since they were billed to and
collected from customers. During the fourth quarter of 2005, we
increased our operating revenues and general and administrative
expenses by $18.6 million to
gross-up
these revenue-based taxes related to the full year 2005 because
they are the primary obligation of Nextel Brazil. This
presentation is in accordance with EITF 99-19,
Reporting Revenue Gross as a Principal Versus Net as an
Agent. We did not record a similar adjustment to our prior
period financial statements because the amounts were not
material.
The sum of the per share amounts do not equal the annual amounts
due to changes in the number of weighted average number of
common shares outstanding during the year.
F-55
Report of
Independent Registered Public Accounting Firm on Financial
Statement Schedule
To the Board of Directors and Stockholders of NII Holdings, Inc.:
Our audits of the consolidated financial statements, of
managements assessment of the effectiveness of internal
control over financial reporting and of the effectiveness of
internal control over financial reporting referred to in our
report dated March 21, 2006, appearing on
pages F-2
and F-3 in this Annual Report on
Form 10-K
of NII Holdings, Inc. for the year ended December 31, 2005,
also included an audit of the financial statement schedule
listed in Item 15(a)(2) of this
Form 10-K.
In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated
financial statements.
As discussed in Note 3 to the financial statement schedule,
the Company changed its method of accounting for the financial
results of its foreign operating companies in 2004.
As discussed in Note 2 to the financial statement schedule,
the Company restated its financial statement schedule for the
year ended December 31, 2004.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
March 21, 2006
F-56
NII
HOLDINGS, INC. AND SUBSIDIARIES
SCHEDULE II VALUATION
AND QUALIFYING ACCOUNTS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Deductions
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
and Other
|
|
|
End of
|
|
|
|
Period
|
|
|
Expenses
|
|
|
Adjustments(1)
|
|
|
Period
|
|
|
Year Ended December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
8,145
|
|
|
$
|
19,751
|
|
|
$
|
(16,219
|
)
|
|
$
|
11,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for inventory
|
|
$
|
9,107
|
|
|
$
|
771
|
|
|
$
|
(3,958
|
)
|
|
$
|
5,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance for deferred
tax assets
|
|
$
|
365,136
|
|
|
$
|
21,179
|
|
|
$
|
31,026
|
|
|
$
|
417,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2004(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
9,020
|
|
|
$
|
13,041
|
|
|
$
|
(13,916
|
)
|
|
$
|
8,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for inventory
|
|
$
|
5,439
|
|
|
$
|
2,953
|
|
|
$
|
715
|
|
|
$
|
9,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance for deferred
tax assets as restated(2)
|
|
$
|
374,879
|
|
|
$
|
124,398
|
|
|
$
|
(134,141
|
)
|
|
$
|
365,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
7,143
|
|
|
$
|
7,179
|
|
|
$
|
(5,302
|
)
|
|
$
|
9,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for inventory
|
|
$
|
5,538
|
|
|
$
|
1,716
|
|
|
$
|
(1,815
|
)
|
|
$
|
5,439
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance for deferred
tax assets
|
|
$
|
428,294
|
|
|
$
|
16,211
|
|
|
$
|
(69,626
|
)
|
|
$
|
374,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes the impact of foreign currency translation adjustments. |
|
(2) |
|
During 2005, we identified errors in
Schedule II Valuation and Qualifying
Accounts for the year ended December 31, 2004 related to
the deferred tax asset valuation allowance activity of Nextel
Brazil. As a result of the Brazil errors, we increased the
deferred tax asset valuation allowance as of December 31,
2004 by $111.1 million. The correction of the error for the
year ended December 31, 2004 had the following impact to
our previously reported Schedule II financial data: |
|
|
|
|
|
|
|
|
|
|
|
As Previously
|
|
|
|
|
|
|
Reported
|
|
|
As Restated
|
|
|
|
(in thousands)
|
|
|
Balance at beginning of period
|
|
$
|
374,879
|
|
|
$
|
374,879
|
|
Charged to costs and expenses
|
|
|
124,398
|
|
|
|
124,398
|
|
Deductions and other adjustments
|
|
|
(245,243
|
)
|
|
|
(134,141
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
254,034
|
|
|
$
|
365,136
|
|
|
|
|
|
|
|
|
|
|
There was no change to income before cumulative effect of change
in accounting principle, net income or earnings per share
amounts as a result of these adjustments.
|
|
|
(3) |
|
Effective January 1, 2004, we changed our method of
accounting for the financial results of our foreign companies
from a one-month lag reporting policy to a current period basis,
consistent with our fiscal reporting period. |
F-57
EXHIBIT INDEX
For periods before December 21, 2001, references to NII
Holdings, Inc. refer to Nextel International, Inc. the former
name of NII Holdings. All documents referenced below were filed
pursuant to the Securities Exchange Act of 1934 by NII Holdings,
file number 0-32421, unless otherwise indicated.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Description
|
|
|
2
|
.1
|
|
Revised Third Amended Joint Plan
of Reorganization under Chapter 11 of the Bankruptcy Code
for NII Holdings and NII Holdings (Delaware), Inc. (incorporated
by reference to Exhibit 2.1 to NII Holdings
Form 8-K,
filed on November 12, 2002).
|
|
3
|
.1
|
|
Amended and Restated Certificate
of Incorporation of NII Holdings (incorporated by reference to
Exhibit 3.1 to NII Holdings
Form 10-Q,
filed on May 7, 2004).
|
|
3
|
.2
|
|
Amended and Restated Bylaws of NII
Holdings (incorporated by reference to Exhibit 3.2 to NII
Holdings
Form 10-K,
filed on March 12, 2004).
|
|
4
|
.1
|
|
Indenture governing our
3.5% convertible notes due 2033, dated as of
September 16, 2003, by and between NII Holdings, Inc. and
Wilmington Trust Company, as Indenture Trustee (incorporated by
reference to Exhibit 4.1 to NII Holdings
Form S-3,
File
No. 333-110980,
filed on December 5, 2003).
|
|
4
|
.2
|
|
Form of Indenture governing our
2.875% convertible notes due 2034, dated as of
January 30, 2004, by and between NII Holdings, Inc. and
Wilmington Trust Company, as Indenture Trustee (incorporated by
reference to Exhibit 4.5 to NII Holdings
Form 10-K,
filed on March 12, 2004).
|
|
4
|
.3
|
|
Indenture governing the
2.75% convertible notes due 2025, dated as of
August 15, 2005, by and between NII Holdings, Inc. and
Wilmington Trust Company, as Indenture Trustee (incorporated by
reference to Exhibit 4.1 to NII Holdings
Form 10-Q,
filed on November 9, 2005).
|
|
10
|
.1
|
|
Subscriber Unit Purchase
Agreement, dated as of January 1, 2005, by and between NII
Holdings, Inc. and Motorola Inc. (filed herewith) (portions of
this exhibit have been omitted pursuant to a request for
confidential treatment).
|
|
10
|
.2
|
|
Amendment 003 to iDEN Subscriber
Supply Agreement, dated December 10, 2001, between NII
Holdings and Motorola, Inc. (incorporated by reference to
Exhibit 10.51 to NII Holdings
Form 10-K,
filed on March 29, 2002).
|
|
10
|
.3
|
|
Form of iDEN Installation Services
Agreement, dated August 14, 2000 by and between NII
Holdings, Motorola, Inc. and each of Nextel,
Telecomunicações Ltda., Nextel Argentina S.R.L.,
Nextel de Mexico, S.A. de C.V., Nextel del Peru, S.A. and Nextel
Communications Philippines, Inc. (incorporated by reference to
Exhibit 10.1 to NII Holdings
Form 8-K,
filed on December 22, 2000).
|
|
10
|
.4
|
|
Form of Amendment 001 to iDEN
Infrastructure Installation Services Agreement, dated as of
January 1, 2005, by and between NII Holdings, Motorola,
Inc. and each of Nextel Argentina, S.A., Nextel
Telecomunicacoes, Ltda., Communicaciones Nextel de Mexico, S.A.
de C.V. and Nextel del Peru, S.A. (filed herewith).
|
|
10
|
.5
|
|
Third Amended and Restated
Trademark License Agreement, dated as of November 12, 2002,
between Nextel Communications, Inc. and NII Holdings
(incorporated by reference to Exhibit 10.12 to NII
Holdings
Form S-1,
File
No. 333-102077,
filed on December 20, 2002).
|
|
10
|
.6
|
|
Form of iDEN Infrastructure
Equipment Supply Agreement dated August 14, 2000 by and
between NII Holdings, Motorola, Inc. and each of Nextel
Telecommunicacoes Ltda., Nextel Argentina S.R.L., Nextel de
Mexico, S.A. de C.V., Nextel del Peru, S.A. and Nextel
Communications Philippines, Inc. (incorporated by reference to
Exhibit 10.2 to NII Holdings
Form 8-K,
filed on December 22, 2000).
|
|
10
|
.7
|
|
Amendment 003 to iDEN
Infrastructure Equipment Supply Agreement, dated
December 7, 2001, between NII Holdings, Motorola, Inc.,
Nextel Argentina, S.A., Nextel Telecomunicações Ltda.,
Comunicaciones Nextel de México, S.A. de C.V., Nextel del
Peru S.A. and Nextel Communications Philippines, Inc.
(incorporated by reference to Exhibit 10.48 to NII
Holdings
Form 10-K,
filed on March 29, 2002).
|
|
10
|
.8
|
|
Form of Amendment 005 to iDEN
Infrastructure Supply Agreement, dated as of December 15,
2004, between NII Holdings, Motorola, Inc. and each of Nextel
Telecommunicacoes Ltda., Nextel Argentina S.R.L., Comunicaciones
Nextel de Mexico, S.A. de C.V. and Nextel del Peru, S.A.
(incorporated by reference to Exhibit 10.11 to NII
Holdings
Form 10-K,
filed on March 31, 2005).
|
107
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Description
|
|
|
10
|
.9
|
|
Form of Amendment 006 to the iDEN
Infrastructure Equipment Supply Agreement, dated as of
January 1, 2005, between NII Holdings, Motorola, Inc. and
each of Nextel Communications Argentina, S.A., Nextel
Telecomunicacoes Ltda., Communicaciones Nextel de Mexico, S.A.
de C.V. and Nextel del Peru, S.A. (filed herewith) (portions of
this exhibit have been omitted pursuant to a request for
confidential treatment).
|
|
10
|
.10
|
|
Registration Rights Agreement, as
of November 12, 2002, between NII Holdings and Eligible
Holders (incorporated by reference to Exhibit 10.19 to NII
Holdings
Form S-1,
File
No. 333-102077,
filed on December 20, 2002).
|
|
10
|
.11*
|
|
Management Incentive Plan, dated
as of November 12, 2002 (incorporated by reference to
Exhibit 99.1 to NII Holdings Registration Statement
on
Form S-8,
filed on November 12, 2002).
|
|
10
|
.12
|
|
Standstill Agreement, dated as of
November 12, 2002, among NII Holdings, Nextel
Communications, Inc. and certain other parties thereto
(incorporated by reference to Exhibit 10.21 to NII
Holdings
Form S-1,
File
No. 333-102077,
filed on December 20, 2002).
|
|
10
|
.13
|
|
Spectrum Use and Build Out
Agreement, dated as of November 12, 2002 (incorporated by
reference to Exhibit 10.22 to NII Holdings
Form 10-K,
filed on March 27, 2003).
|
|
10
|
.14
|
|
Registration Rights Agreement
related to our 3.5% convertible notes due 2033, dated as of
September 16, 2003, by and between NII Holdings, Inc. and
Morgan Stanley & Co. Incorporated on behalf of the
initial purchasers (incorporated by reference to
Exhibit 4.2 to NII Holdings
Form S-3,
File
No. 333-110980,
filed on December 5, 2003).
|
|
10
|
.15
|
|
Form of Registration Rights
Agreement related to our 2.875% convertible notes due 2034,
dated as of January 27, 2004, by and between NII Holdings,
Inc. and Banc of America Securities LLC as the initial purchaser
(incorporated by reference to Exhibit 10.24 to NII
Holdings
Form 10-K,
filed on March 12, 2004).
|
|
10
|
.16
|
|
Registration Rights Agreement
related to our 2.75% convertible notes due 2025, dated as
of August 15, 2005, by and between NII Holdings, Inc., and
Goldman, Sachs & Co. (incorporated by reference to
Exhibit 10.2 to NII Holdings
Form 10-Q,
filed on November 9, 2005).
|
|
10
|
.17*
|
|
Form of NII Holdings, Inc. Change
of Control Severance Plan (incorporated by reference to
Exhibit 10.26 to NII Holdings
Form 10-K,
filed on March 12, 2004).
|
|
10
|
.18*
|
|
2004 Incentive Compensation Plan
(incorporated by reference to Exhibit 4.1 to NII
Holdings
Form S-8,
File
No. 333-117394,
filed on July 15, 2004).
|
|
10
|
.19
|
|
Form of Credit Agreement, dated as
of October 27, 2004, by and between Communicaciones Nextel
de Mexico, S.A. de C.V., the banks named therein as lenders,
Citibank, N.A., Citigroup Global Markets, Inc. and Scotiabank
Inverlat, S.A. (incorporated by reference to Exhibit 10.1
to NII Holdings
Form 10-Q,
filed on November 15, 2004).
|
|
10
|
.20
|
|
Amendment Number One to the
Subscriber Unit Purchase Agreement for NII Holdings, Inc., dated
as of December 12, 2005, between Motorola, Inc. and NII
Holdings, Inc. (filed herewith) (portions of this exhibit have
been omitted pursuant to a request for confidential treatment).
|
|
12
|
.1
|
|
Ratio of Earnings to Fixed Charges
(filed herewith).
|
|
14
|
.1
|
|
Code of Business Conduct and
Ethics (incorporated by reference to Exhibit 14.1 to NII
Holdings
Form 10-K,
filed on March 12, 2004).
|
|
21
|
.1
|
|
Subsidiaries of NII Holdings
(filed herewith).
|
|
23
|
.1
|
|
Consent of PricewaterhouseCoopers
LLP (filed herewith).
|
|
31
|
.1
|
|
Statement of Chief Executive
Officer Pursuant to
Rule 13a-14(a)
(filed herewith).
|
|
31
|
.2
|
|
Statement of Chief Financial
Officer Pursuant to
Rule 13a-14(a)
(filed herewith).
|
|
32
|
.1
|
|
Statement of Chief Executive
Officer Pursuant to 18 U.S.C. Section 1350 (filed
herewith).
|
|
32
|
.2
|
|
Statement of Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350 (filed
herewith).
|
|
|
|
* |
|
Indicates Management Compensatory Plan. |
108