e10vq
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended
March 31, 2006
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OR
|
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF 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
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
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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10700 Parkridge Boulevard,
Suite 600
Reston, Virginia
(Address of Principal
Executive Offices)
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20191
(Zip Code)
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(703) 390-5100
(Registrants Telephone
Number, Including Area Code)
Not Applicable
(Former Name, Former Address and
Former Fiscal Year, if Changed Since Last Report)
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 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 Exchange
Act). Yes o No þ
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Sections 12,
13 or 15(d) of the Securities 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
issuers classes of common stock, as of the latest
practicable date.
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Number of Shares Outstanding
|
Title of Class
|
|
on May 3, 2006
|
|
Common Stock, $0.001 par
value per share
|
|
152,522,296
|
NII
HOLDINGS, INC. AND SUBSIDIARIES
INDEX
1
PART I FINANCIAL
INFORMATION.
Item 1. Financial
Statements.
NII
HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par values)
|
|
|
|
|
|
|
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|
|
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March 31,
|
|
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December 31,
|
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2006
|
|
|
2005
|
|
|
|
Unaudited
|
|
|
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
853,736
|
|
|
$
|
877,536
|
|
Short-term investments
|
|
|
7,426
|
|
|
|
7,371
|
|
Accounts receivable, less
allowance for doubtful accounts of $14,978 and $11,677
|
|
|
226,908
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|
|
|
220,490
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|
Handset and accessory inventory,
net
|
|
|
54,105
|
|
|
|
54,158
|
|
Deferred income taxes, net
|
|
|
76,545
|
|
|
|
80,132
|
|
Prepaid expenses and other
|
|
|
54,594
|
|
|
|
42,506
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,273,314
|
|
|
|
1,282,193
|
|
Property, plant and equipment,
net of accumulated
depreciation of $317,376 and $277,059
|
|
|
1,030,311
|
|
|
|
933,923
|
|
Intangible assets,
net
|
|
|
83,273
|
|
|
|
83,642
|
|
Deferred income taxes,
net
|
|
|
197,854
|
|
|
|
200,204
|
|
Other assets
|
|
|
139,575
|
|
|
|
121,002
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,724,327
|
|
|
$
|
2,620,964
|
|
|
|
|
|
|
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|
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LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
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|
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Accounts payable
|
|
$
|
61,143
|
|
|
$
|
82,250
|
|
Accrued expenses and other
|
|
|
344,211
|
|
|
|
311,758
|
|
Deferred revenues
|
|
|
63,982
|
|
|
|
59,595
|
|
Accrued interest
|
|
|
5,866
|
|
|
|
11,314
|
|
Current portion of long-term debt
|
|
|
25,539
|
|
|
|
24,112
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
500,741
|
|
|
|
489,029
|
|
Long-term debt
|
|
|
1,156,388
|
|
|
|
1,148,846
|
|
Deferred revenues (related
party)
|
|
|
38,517
|
|
|
|
39,309
|
|
Other long-term
liabilities
|
|
|
136,582
|
|
|
|
132,379
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,832,228
|
|
|
|
1,809,563
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
(Note 6)
|
|
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|
|
|
|
|
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Stockholders
equity
|
|
|
|
|
|
|
|
|
Undesignated preferred stock, par
value $0.001, 10,000 shares
authorized 2006 and 2005, no shares
outstanding 2006 and 2005
|
|
|
|
|
|
|
|
|
Common stock, par value $0.001,
152,385 shares issued and
outstanding 2006, 152,148 shares issued
and outstanding 2005
|
|
|
152
|
|
|
|
152
|
|
Paid-in capital
|
|
|
513,357
|
|
|
|
508,209
|
|
Retained earnings
|
|
|
401,046
|
|
|
|
336,048
|
|
Deferred compensation
|
|
|
|
|
|
|
(7,428
|
)
|
Accumulated other comprehensive
loss
|
|
|
(22,456
|
)
|
|
|
(25,580
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
892,099
|
|
|
|
811,401
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
2,724,327
|
|
|
$
|
2,620,964
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
NII
HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
(in thousands, except per share amounts)
Unaudited
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
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March 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
505,956
|
|
|
$
|
354,195
|
|
Digital handset and accessory
revenues
|
|
|
22,315
|
|
|
|
16,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
528,271
|
|
|
|
370,207
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation and amortization included below)
|
|
|
134,350
|
|
|
|
106,104
|
|
Cost of digital handset and
accessory sales
|
|
|
69,801
|
|
|
|
54,250
|
|
Selling, general and administrative
|
|
|
170,536
|
|
|
|
109,549
|
|
Depreciation
|
|
|
40,210
|
|
|
|
24,755
|
|
Amortization
|
|
|
1,264
|
|
|
|
1,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
416,161
|
|
|
|
296,000
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
112,110
|
|
|
|
74,207
|
|
|
|
|
|
|
|
|
|
|
Other income
(expense)
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(21,415
|
)
|
|
|
(12,824
|
)
|
Interest income
|
|
|
12,601
|
|
|
|
4,524
|
|
Foreign currency transaction
(losses) gains, net
|
|
|
(1,141
|
)
|
|
|
1,914
|
|
Other expense, net
|
|
|
(2,364
|
)
|
|
|
(2,002
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,319
|
)
|
|
|
(8,388
|
)
|
|
|
|
|
|
|
|
|
|
Income before income tax
provision
|
|
|
99,791
|
|
|
|
65,819
|
|
Income tax provision
|
|
|
(34,793
|
)
|
|
|
(20,781
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
64,998
|
|
|
$
|
45,038
|
|
|
|
|
|
|
|
|
|
|
Net income, per common share,
basic
|
|
$
|
0.43
|
|
|
$
|
0.32
|
|
|
|
|
|
|
|
|
|
|
Net income, per common share,
diluted
|
|
$
|
0.38
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
common shares outstanding, basic
|
|
|
152,166
|
|
|
|
139,664
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
common shares outstanding, diluted
|
|
|
182,876
|
|
|
|
171,630
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income, net of
income taxes
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
$
|
1,823
|
|
|
$
|
(7,433
|
)
|
Unrealized gains (losses) on
derivatives, net
|
|
|
1,301
|
|
|
|
(155
|
)
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss)
|
|
|
3,124
|
|
|
|
(7,588
|
)
|
Net income
|
|
|
64,998
|
|
|
|
45,038
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
68,122
|
|
|
$
|
37,450
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
NII
HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY
For the Three Months Ended March 31, 2006 and 2005
(in thousands)
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Compensation
|
|
|
Loss
|
|
|
Total
|
|
|
Balance, January 1,
2006
|
|
|
152,148
|
|
|
$
|
152
|
|
|
$
|
508,209
|
|
|
$
|
336,048
|
|
|
$
|
(7,428
|
)
|
|
$
|
(25,580
|
)
|
|
$
|
811,401
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,998
|
|
|
|
|
|
|
|
|
|
|
|
64,998
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,124
|
|
|
|
3,124
|
|
Implementation of SFAS 123R
|
|
|
|
|
|
|
|
|
|
|
(7,428
|
)
|
|
|
|
|
|
|
7,428
|
|
|
|
|
|
|
|
|
|
Share-based payment expense
|
|
|
|
|
|
|
|
|
|
|
6,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,629
|
|
Exercise of stock options
|
|
|
237
|
|
|
|
|
|
|
|
695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
695
|
|
Tax benefit on exercise of stock
options
|
|
|
|
|
|
|
|
|
|
|
5,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31,
2006
|
|
|
152,385
|
|
|
$
|
152
|
|
|
$
|
513,357
|
|
|
$
|
401,046
|
|
|
$
|
|
|
|
$
|
(22,456
|
)
|
|
$
|
892,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Retained
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Compensation
|
|
|
Loss
|
|
|
Total
|
|
|
Balance, January 1,
2005
|
|
|
139,662
|
|
|
$
|
140
|
|
|
$
|
316,983
|
|
|
$
|
161,267
|
|
|
$
|
(12,644
|
)
|
|
$
|
(43,799
|
)
|
|
$
|
421,947
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,038
|
|
|
|
|
|
|
|
|
|
|
|
45,038
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,588
|
)
|
|
|
(7,588
|
)
|
Reversal of deferred tax asset
valuation allowance
|
|
|
|
|
|
|
|
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173
|
|
Amortization of restricted stock
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,358
|
|
|
|
|
|
|
|
1,358
|
|
Exercise of stock options
|
|
|
56
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31,
2005
|
|
|
139,718
|
|
|
$
|
140
|
|
|
$
|
317,180
|
|
|
$
|
206,305
|
|
|
$
|
(11,286
|
)
|
|
$
|
(51,387
|
)
|
|
$
|
460,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
NII
HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2006 and 2005
(in thousands)
Unaudited
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
64,998
|
|
|
$
|
45,038
|
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Amortization of debt financing
costs
|
|
|
1,163
|
|
|
|
496
|
|
Depreciation and amortization
|
|
|
41,474
|
|
|
|
26,097
|
|
Provision for losses on accounts
receivable
|
|
|
7,439
|
|
|
|
4,629
|
|
Provision for losses on inventory
|
|
|
147
|
|
|
|
1,699
|
|
Losses on derivative instruments
|
|
|
1,492
|
|
|
|
182
|
|
Foreign currency transaction
losses (gains), net
|
|
|
1,141
|
|
|
|
(1,914
|
)
|
Deferred income tax provision
|
|
|
10,693
|
|
|
|
302
|
|
Amortization of deferred credit
|
|
|
(2,218
|
)
|
|
|
|
|
Share-based payment expense
|
|
|
6,580
|
|
|
|
1,358
|
|
Excess tax benefit from
share-based payment
|
|
|
(5,177
|
)
|
|
|
|
|
Loss on disposal of property,
plant and equipment
|
|
|
237
|
|
|
|
21
|
|
Other, net
|
|
|
1,162
|
|
|
|
(593
|
)
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, gross
|
|
|
(13,994
|
)
|
|
|
(11,377
|
)
|
Handset and accessory inventory,
gross
|
|
|
(267
|
)
|
|
|
356
|
|
Prepaid expenses and other
|
|
|
(9,917
|
)
|
|
|
(5,115
|
)
|
Other long-term assets
|
|
|
(16,300
|
)
|
|
|
(1,178
|
)
|
Accounts payable, accrued expenses
and other
|
|
|
(10,196
|
)
|
|
|
(14,611
|
)
|
Current deferred revenue
|
|
|
4,387
|
|
|
|
746
|
|
Other long-term liabilities
|
|
|
1,697
|
|
|
|
1,028
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
84,541
|
|
|
|
47,164
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(107,792
|
)
|
|
|
(76,411
|
)
|
Payments for acquisitions,
purchases of licenses and other
|
|
|
(886
|
)
|
|
|
(3,924
|
)
|
Purchases of short-term investments
|
|
|
|
|
|
|
(4,887
|
)
|
Proceeds from maturities and sales
of short-term investments
|
|
|
|
|
|
|
26,393
|
|
Payments related to derivative
instruments
|
|
|
(515
|
)
|
|
|
(223
|
)
|
Other
|
|
|
422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(108,771
|
)
|
|
|
(59,052
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
Proceeds from stock option
exercises
|
|
|
695
|
|
|
|
24
|
|
Proceeds from tower financing
transactions
|
|
|
410
|
|
|
|
304
|
|
Repayments under capital leases
and tower financing transactions
|
|
|
(1,001
|
)
|
|
|
(493
|
)
|
Transfers from restricted cash, net
|
|
|
|
|
|
|
400
|
|
Excess tax benefit from
share-based payment
|
|
|
5,177
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
5,281
|
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes
on cash and cash equivalents
|
|
|
(4,851
|
)
|
|
|
(1,714
|
)
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash
equivalents
|
|
|
(23,800
|
)
|
|
|
(13,367
|
)
|
Cash and cash equivalents,
beginning of period
|
|
|
877,536
|
|
|
|
330,984
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end
of period
|
|
$
|
853,736
|
|
|
$
|
317,617
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
General. Our unaudited condensed
consolidated financial statements have been prepared under the
rules and regulations of the Securities and Exchange Commission,
or the SEC. While they do not include all of the information and
footnotes required by accounting principles generally accepted
in the United States of America for complete financial
statements, they reflect all adjustments that, in the opinion of
management, are necessary for a fair presentation of the results
for interim periods. In addition, the year-end condensed
consolidated balance sheet data was derived from audited
financial statements, but does not include all disclosures
required by accounting principles generally accepted in the
United States of America.
You should read these condensed consolidated financial
statements in conjunction with the consolidated financial
statements and notes contained in our 2005 annual report on
Form 10-K.
You should not expect results of operations of interim periods
to be an indication of the results for a full year.
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 condensed consolidated financial statements
reflect the common stock split.
Accumulated Other Comprehensive
Loss. The components of our accumulated other
comprehensive loss, net of taxes, are as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Cumulative foreign currency
translation adjustment
|
|
$
|
(18,629
|
)
|
|
$
|
(20,452
|
)
|
Unrealized losses on derivatives,
net of income taxes
|
|
|
(3,827
|
)
|
|
|
(5,128
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(22,456
|
)
|
|
$
|
(25,580
|
)
|
|
|
|
|
|
|
|
|
|
Supplemental
Cash Flow Information.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
Cash paid for capital
expenditures, including capitalized interest
|
|
$
|
107,792
|
|
|
$
|
76,411
|
|
Changes in capital expenditures
accrued and unpaid or financed
|
|
|
21,063
|
|
|
|
(3,391
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
128,855
|
|
|
$
|
73,020
|
|
|
|
|
|
|
|
|
|
|
Interest costs
|
|
|
|
|
|
|
|
|
Interest expense
|
|
$
|
21,415
|
|
|
$
|
12,824
|
|
Interest capitalized
|
|
|
3,166
|
|
|
|
2,340
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
24,581
|
|
|
$
|
15,164
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest, net of
amounts capitalized
|
|
$
|
20,796
|
|
|
$
|
13,097
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income
taxes
|
|
$
|
26,011
|
|
|
$
|
20,316
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2006 and 2005, we had
$4.0 million in non-cash investing and financing activities
related to co-location capital lease obligations on our
communication towers.
In addition, as discussed in Note 5, during the three
months ended March 31, 2006, Nextel Brazil financed
$3.8 million in software purchased from Motorola, Inc.,
which is due in equal quarterly installments over a period of
6
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
four years. During the three months ended March 31, 2005,
we paid $1.2 million for licenses acquired in Brazil using
restricted cash.
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 three months ended March 31, 2006, 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. As presented for the three
months ended March 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
employee share-based payment compensation plans and our
restricted stock, as well as common shares resulting from the
potential conversion of our 3.5% convertible notes and our
2.875% convertible notes.
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 three months ended March 31, 2006 and
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2006
|
|
|
Three Months Ended
March 31, 2005
|
|
|
|
Income
|
|
|
Shares
|
|
|
Per Share
|
|
|
Income
|
|
|
Shares
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
|
(in thousands, except per share
data)
|
|
|
Basic net income per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
64,998
|
|
|
|
152,166
|
|
|
$
|
0.43
|
|
|
$
|
45,038
|
|
|
|
139,664
|
|
|
$
|
0.32
|
|
Effect of dilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
4,855
|
|
|
|
|
|
|
|
|
|
|
|
6,750
|
|
|
|
|
|
Restricted stock
|
|
|
|
|
|
|
733
|
|
|
|
|
|
|
|
|
|
|
|
446
|
|
|
|
|
|
Convertible notes, net of
capitalized interest and taxes
|
|
|
3,629
|
|
|
|
25,122
|
|
|
|
|
|
|
|
3,731
|
|
|
|
24,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
68,627
|
|
|
|
182,876
|
|
|
$
|
0.38
|
|
|
$
|
48,769
|
|
|
|
171,630
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassifications. We reclassified
prior year spectrum license fees of $9.6 million for the
three months ended March 31, 2005 from selling, general and
administrative expenses to cost of service. For the three months
ended March 31, 2006, we recorded $11.6 million of
spectrum fees in cost of service.
New Accounting Pronouncements. In
October 2005, the Financial Accounting Standards Board, or 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 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 Statement of Financial Accounting Standards, or SFAS, 154
is permitted but not required. We implemented FSP
No. 13-1,
effective January 1, 2006, as required. The adoption of FSP
No. 13-1
did not have a material impact on our consolidated financial
statements.
7
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise
would require bifurcation, clarifies that certain instruments
are not subject to the requirements of SFAS 133,
establishes a requirement to evaluate interests in securitized
financial assets to identify interests that may contain an
embedded derivative requiring bifurcation, clarifies what may be
an embedded derivative for certain concentrations of credit risk
and 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.
In March 2006, the Emerging Issues Task Force, or EITF,
discussed
Issue 05-1,
Accounting for the Conversion of an Instrument That
Becomes Convertible upon the Issuers Exercise of a Call
Option, or
EITF 05-1.
The EITF reached a tentative consensus that the issuance of
equity securities to settle an instrument that becomes
convertible upon the issuers exercise of a call option
should be accounted for as a conversion as opposed to an
extinguishment if, at issuance, the debt instrument contains a
substantive conversion feature other than the issuers call
option.
EITF 05-1
is tentatively effective after the FASBs ratification of
the consensus. We are currently evaluating the impact that
EITF 05-1
may have on our consolidated financial statements.
In March 2006, the EITF discussed
Issue 06-3,
How Sales Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross Versus Net Presentation), or
EITF 06-3.
The EITF reached a tentative consensus that a company should
disclose its accounting policy (gross or net presentation)
regarding presentation of sales and other similar taxes. If
taxes included in gross revenues are significant, a company
should disclose the amount of such taxes for each period for
which an income statement is presented. Tentatively,
EITF 06-3
would be applied to financial reports for interim and annual
reporting periods beginning after December 15, 2006. We are
currently evaluating the impact that
EITF 06-3
may have on our consolidated financial statements. 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 on
behalf of local government agencies. During the fourth quarter
of 2005, we increased our operating revenues and general and
administrative expenses 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. During the three months ended March 31, 2006,
Nextel Brazil recorded $6.3 million of revenue-based taxes
as a component of service and other revenues and a corresponding
amount as a component of selling, general and administrative
expenses.
We adopted SFAS No. 123 (Revised 2004),
Share-Based Payment, or SFAS 123R, effective
January 1, 2006. As of March 31, 2006, we had the
following share-based compensation 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 with our company for a specified period or in which
the recipients rights may be subject to forfeiture upon a
termination of employment. The 2002 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 2002 Management Incentive
Plan, of the common stock and performance units that entitle the
recipients to payments
8
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
upon the attainment of specified performance goals. The maximum
contractual term for all grants and awards under the 2002
Management Incentive Plan is ten years.
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. Through March 31, 2006, we have not granted any
SARs, performance share awards, incentive awards or stock units.
The 2004 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 SAR
entitles the holder to receive the excess of the fair market
value of each share of common stock encompassed by such SARs
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 2004 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 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 2004
Incentive Compensation Plan are governed by written agreements
between us and the participants and have a maximum contractual
term of ten years.
Through December 31, 2005, we accounted for share-based
payments under the recognition and measurement provisions of
Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, or
APB 25 and related interpretations, as permitted by SFAS
No. 123, Accounting for Stock Based
Compensation, or SFAS 123. In accordance with
APB 25, no compensation cost was required to be recognized
for options granted that had an exercise price equal to the
market value of the underlying common stock on the grant date.
Additionally, we provided pro forma disclosure amounts in
accordance with FASB Statement No. 148, Accounting
for Stock-Based Compensation Transition and
Disclosure, or SFAS 148, as if the fair value method
defined by SFAS 123 had been applied to the share-based
payment.
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 123, as amended by
SFAS 148, to employee share-based payments.
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31, 2005
|
|
|
|
(in thousands, except
|
|
|
|
per share data)
|
|
|
Net income, as
reported
|
|
$
|
45,038
|
|
Add:
|
|
|
|
|
Employee share-based payment
expense included in reported net income, net of related tax
effects
|
|
|
1,358
|
|
Deduct:
|
|
|
|
|
Total employee share-based payment
expense determined under fair value-based method for all awards,
net of related tax effects
|
|
|
(3,969
|
)
|
|
|
|
|
|
Pro forma net income
|
|
$
|
42,427
|
|
|
|
|
|
|
Net income per common
share:
|
|
|
|
|
Basic as reported
|
|
$
|
0.32
|
|
|
|
|
|
|
Basic pro forma
|
|
$
|
0.30
|
|
|
|
|
|
|
Diluted as
reported
|
|
$
|
0.28
|
|
|
|
|
|
|
Diluted pro forma
|
|
$
|
0.27
|
|
|
|
|
|
|
9
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Effective January 1, 2006, we adopted the fair value
recognition provisions of SFAS 123R. We used the modified
prospective transition method and therefore have not restated
our prior periods results. Under this transition method,
share-based payment expense for the three months ended
March 31, 2006 includes compensation expense for all
share-based payment awards granted prior to, but not fully
vested, as of January 1, 2006 based on the grant date fair
value estimated in accordance with the original provisions of
SFAS 123. Share-based payment expense for all share-based
payment awards granted after January 1, 2006 is based on
the grant date fair value estimated in accordance with the
provisions of SFAS 123R. We recognize these compensation
costs net of a forfeiture rate and recognize the compensation
costs for only those shares expected to vest on a straight-line
basis over the requisite service period of the award. The stock
options generally vest twenty-five percent per year over a
four-year period, and the restricted shares generally vest in
full on the third anniversary of the grant. We estimated the
forfeiture rate based on our historical experience during the
preceding three fiscal years.
For the three months ended March 31, 2006, the impact of
adopting SFAS 123R on operating income and income before
income taxes was $5.2 million, and the impact on net income
was $4.1 million. We include all share-based payment
expense as a component of selling, general and administrative
expenses. The impact of the share-based payment expense reduced
our basic and diluted earnings per share for the three months
ended March 31, 2006 by $0.02 and $0.02, respectively. In
addition, prior to the adoption of SFAS 123R, we presented
the tax benefit of stock option exercises as operating cash
flows. Upon the adoption of SFAS 123R, tax benefits
resulting from tax deductions in excess of the compensation cost
recognized for share-based awards are classified as financing
cash flows. Because we do not view share-based compensation as
related to our operational performance, we recognize share-based
payment expense at the corporate level and exclude it when
evaluating the business performance of our segments.
Stock
Option Awards
The following table summarizes stock option activity during the
first quarter of 2006 under all plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
Exercise Price
|
|
|
|
Options
|
|
|
per Option
|
|
|
Outstanding, January 1, 2006
|
|
|
11,270,219
|
|
|
$
|
22.70
|
|
Granted
|
|
|
118,000
|
|
|
|
47.24
|
|
Exercised
|
|
|
(237,155
|
)
|
|
|
2.93
|
|
Forfeited
|
|
|
(121,125
|
)
|
|
|
24.16
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2006
|
|
|
11,029,939
|
|
|
|
23.37
|
|
|
|
|
|
|
|
|
|
|
Exercisable, March 31, 2006
|
|
|
446,189
|
|
|
|
8.56
|
|
|
|
|
|
|
|
|
|
|
Following is a summary of the status of employee stock options
outstanding and exercisable as of March 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
Weighted
|
|
|
|
|
|
|
|
|
Average
|
|
Average
|
|
Aggregate
|
|
|
|
|
|
Average
|
|
Average
|
|
Aggregate
|
|
Exercise Price or
|
|
|
|
|
Remaining
|
|
Exercise
|
|
Intrinsic
|
|
|
|
|
|
Remaining
|
|
Exercise
|
|
Intrinsic
|
|
Range
|
|
Shares
|
|
|
Life
|
|
Price
|
|
Value
|
|
|
Shares
|
|
|
Life
|
|
Price
|
|
Value
|
|
|
$ 0.41 - 0.42
|
|
|
214,390
|
|
|
|
6.6 years
|
|
|
|
$0.42
|
|
|
$
|
10,657,036
|
|
|
|
214,390
|
|
|
|
6.6 years
|
|
|
|
$0.42
|
|
|
$
|
10,657,036
|
|
4.31 - 16.76
|
|
|
164,600
|
|
|
|
7.4 years
|
|
|
|
9.64
|
|
|
|
6,664,359
|
|
|
|
71,600
|
|
|
|
7.4 years
|
|
|
|
9.43
|
|
|
|
2,913,732
|
|
17.67 - 25.12
|
|
|
3,804,449
|
|
|
|
8.1 years
|
|
|
|
18.99
|
|
|
|
118,444,349
|
|
|
|
160,199
|
|
|
|
8.1 years
|
|
|
|
19.08
|
|
|
|
4,973,493
|
|
26.20 - 52.97
|
|
|
6,846,500
|
|
|
|
9.1 years
|
|
|
|
26.85
|
|
|
|
159,374,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,029,939
|
|
|
|
|
|
|
|
|
|
|
$
|
295,139,926
|
|
|
|
446,189
|
|
|
|
|
|
|
|
|
|
|
$
|
18,544,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The aggregate intrinsic value in the table above represents the
total pre-tax intrinsic value (the difference between our
closing stock price on the last trading day of the three months
ended March 31, 2006 and the exercise price, multiplied by
the number of
in-the-money
options) that would have been received by the option holders had
all option holders exercised their options on March 31,
2006. This amount changes based on the fair market value of our
stock. Total intrinsic value of options exercised for the three
months ended March 31, 2006 was $11.2 million. The
total fair value of options vested was $0.4 million for the
three months ended March 31, 2006.
For stock option awards granted prior to January 1, 2005
and valued in accordance with SFAS 123, the expected
volatility used to estimate the fair value of the stock option
awards was based solely on the historical volatility on our
stock. For stock option awards granted after January 1,
2005, the expected volatility was based on the implied
volatility from traded options on our common stock. We used the
straight line method for expense attribution, and we recognized
option forfeitures as they occurred as allowed by SFAS 123.
For stock option awards granted after January 1, 2006 and
valued in accordance with SFAS 123R, we use the
straight-line method for expense attribution, and we estimate
forfeitures and only recognize expense for those stock option
awards expected to vest. As of March 31, 2006, there was
approximately $56.1 million in unrecognized compensation
cost related to non-vested employee stock option awards. We
expect this cost to be recognized over a four year period and a
weighted average period of approximately 1.9 years.
The fair value of the stock option awards on their grant dates
using the Black-Scholes-Merton option-pricing model was $15.10
for the three months ended March 31, 2006 and $9.99 for the
three months ended March 31, 2005 based on the following
assumptions:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Risk free interest rate
|
|
|
4.79
|
%
|
|
|
3.82
|
%
|
Expected stock price volatility
|
|
|
31
|
%
|
|
|
45
|
%
|
Expected life in years
|
|
|
4
|
|
|
|
4
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Forfeiture rate
|
|
|
3.50
|
%
|
|
|
1.00
|
%
|
The expected term of stock option awards granted represents the
period that our stock option awards are expected to be
outstanding and was determined based on (1) historical data
on employee exercise and post-vesting employment termination
behavior, (2) the contractual terms of the stock option
awards, (3) vesting schedules and (4) expectations of
future employee behavior. The risk-free interest rate for
periods consistent with the contractual life of the stock option
award is based on the yield curve of U.S. Treasury strip
securities in effect at the time of the grant. Expected
volatility is based on the implied volatility from traded
options on our stock. SFAS 123R includes implied volatility
in its list of factors that should be considered in estimating
expected volatility. We believe implied volatility is more
useful than historical volatility in estimating expected
volatility because it is generally reflective of both historical
volatility and expectations of how future volatility will differ
from historical volatility. Additionally, we are required to
estimate the expected forfeiture rate and only recognize expense
for those stock option awards expected to vest. This pre-vesting
forfeiture rate is estimated using historical stock option
exercise information. If our actual forfeiture rate is
materially different from our estimate, the stock option awards
compensation expense could be materially different. 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.
The Black-Scholes-Merton 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-Merton model
require the input of highly subjective assumptions, including
the expected stock price volatility. The assumptions listed
above represent our best estimates, but these estimates involve
inherent
11
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
uncertainties and the application of management judgment.
Consequently, there is a risk that our estimates of the fair
values of our stock option awards on the grant dates may bear
little resemblance to the actual values realized upon the
exercise, expiration, early termination or forfeiture of those
stock option awards in the future. Certain stock option awards
may expire worthless or otherwise result in zero intrinsic value
as compared to the fair values originally estimated on the grant
date and reported in our financial statements. Alternatively,
value may be realized from the stock option awards that is
significantly in excess of the fair values originally estimated
on the grant date and reported in our financial statements.
Additionally, application of alternative assumptions could
produce significantly different estimates of the fair value of
stock option awards and consequently, the related amounts
recognized in the consolidated statements of operations.
Currently, there is no market-based mechanism or other practical
application to verify the reliability and accuracy of the
estimates from option-pricing valuation models, such as
Black-Scholes-Merton, nor is there a means to compare and adjust
the estimates to actual values. Although the fair value of stock
option awards is determined in accordance with SFAS 123R
and SAB Topic 14 (SAB 107) using the
Black-Scholes-Merton option-pricing model, the fair value may
not be indicative of the fair value observed in a willing
buyer/willing seller market transaction. 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.
Restricted
Stock Awards
A summary of the status of our non-vested restricted stock
awards as of January 1, 2006 and changes during the first
quarter of 2006 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
Number of
|
|
|
Average Grant
|
|
|
|
Shares
|
|
|
Date Fair Value
|
|
|
Non-vested restricted stock awards
as of January 1, 2006
|
|
|
864,000
|
|
|
$
|
19.13
|
|
Granted
|
|
|
30,000
|
|
|
|
46.51
|
|
Vested
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock awards
as of March 31, 2006
|
|
|
894,000
|
|
|
|
20.04
|
|
|
|
|
|
|
|
|
|
|
If a participant terminates employment prior to the vesting
dates, the unvested shares will be forfeited and available for
reissuance under the terms of the 2004 Incentive Compensation
Plan. The fair value of our restricted stock awards is
determined based on the quoted price of our common stock at the
grant date. As of March 31, 2006, there was approximately
$7.3 million in unrecognized compensation costs related to
non-vested restricted stock awards. We expect this cost to be
recognized over a weighted average period of approximately one
year.
On April 26, 2006, we granted 2.9 million stock
options and 549,000 restricted shares. These grants will
increase our share-based payment expense in future periods.
12
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
3.
|
Supplemental
Balance Sheet Information
|
Prepaid
Expenses and Other.
The components are as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Prepaid expenses
|
|
$
|
16,878
|
|
|
$
|
14,121
|
|
Value added tax receivables,
current
|
|
|
10,226
|
|
|
|
9,951
|
|
Advances to suppliers
|
|
|
6,654
|
|
|
|
7,436
|
|
Insurance claims
|
|
|
3,071
|
|
|
|
2,851
|
|
Advertising
|
|
|
7,365
|
|
|
|
36
|
|
Derivative asset
|
|
|
719
|
|
|
|
|
|
Other assets
|
|
|
9,681
|
|
|
|
8,111
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
54,594
|
|
|
$
|
42,506
|
|
|
|
|
|
|
|
|
|
|
Other
Assets.
The components are as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Value added tax receivables
|
|
$
|
64,277
|
|
|
$
|
55,116
|
|
Deferred financing costs
|
|
|
19,735
|
|
|
|
20,960
|
|
Income tax receivable
|
|
|
15,881
|
|
|
|
16,150
|
|
Deposits and restricted cash
|
|
|
21,615
|
|
|
|
14,671
|
|
Long-term prepaid expenses
|
|
|
12,918
|
|
|
|
8,790
|
|
Handsets under operating leases
|
|
|
4,565
|
|
|
|
4,410
|
|
Other
|
|
|
584
|
|
|
|
905
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
139,575
|
|
|
$
|
121,002
|
|
|
|
|
|
|
|
|
|
|
Accrued
Expenses and Other.
The components are as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Capital expenditures
|
|
$
|
76,178
|
|
|
$
|
65,018
|
|
Payroll related items and
commissions
|
|
|
38,453
|
|
|
|
50,729
|
|
Income taxes payable
|
|
|
37,350
|
|
|
|
34,312
|
|
Tax and non-tax accrued
contingencies
|
|
|
45,070
|
|
|
|
43,119
|
|
Network system and information
technology payables
|
|
|
45,548
|
|
|
|
37,689
|
|
Non-income based taxes
|
|
|
27,423
|
|
|
|
21,042
|
|
Customer deposits
|
|
|
24,091
|
|
|
|
22,164
|
|
Professional fees
|
|
|
5,027
|
|
|
|
3,457
|
|
Marketing
|
|
|
5,920
|
|
|
|
2,829
|
|
Insurance
|
|
|
2,737
|
|
|
|
3,301
|
|
Other
|
|
|
36,414
|
|
|
|
28,098
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
344,211
|
|
|
$
|
311,758
|
|
|
|
|
|
|
|
|
|
|
13
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
Long-Term Liabilities.
The components are as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Tax and non-tax accrued
contingencies
|
|
$
|
65,266
|
|
|
$
|
59,102
|
|
Deferred credit from AOL Mexico
acquisition
|
|
|
27,676
|
|
|
|
30,368
|
|
Deferred income tax liability
|
|
|
17,805
|
|
|
|
17,770
|
|
Asset retirement obligations
|
|
|
15,509
|
|
|
|
14,923
|
|
Severance plan liability
|
|
|
7,162
|
|
|
|
6,901
|
|
Derivative liability
|
|
|
1,137
|
|
|
|
1,174
|
|
Other
|
|
|
2,027
|
|
|
|
2,141
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
136,582
|
|
|
$
|
132,379
|
|
|
|
|
|
|
|
|
|
|
Our intangible assets primarily consist of our licenses,
customer base and trade name, all of which have finite useful
lives, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006
|
|
|
December 31, 2005
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
|
|
(in thousands)
|
|
|
Amortizable intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
$
|
98,760
|
|
|
$
|
(16,053
|
)
|
|
$
|
82,707
|
|
|
$
|
98,009
|
|
|
$
|
(15,205
|
)
|
|
$
|
82,804
|
|
Customer base
|
|
|
42,126
|
|
|
|
(41,560
|
)
|
|
|
566
|
|
|
|
42,727
|
|
|
|
(41,889
|
)
|
|
|
838
|
|
Trade name and other
|
|
|
1,648
|
|
|
|
(1,648
|
)
|
|
|
|
|
|
|
1,619
|
|
|
|
(1,619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible
assets
|
|
$
|
142,534
|
|
|
$
|
(59,261
|
)
|
|
$
|
83,273
|
|
|
$
|
142,355
|
|
|
$
|
(58,713
|
)
|
|
$
|
83,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based solely on the carrying amount of amortizable intangible
assets existing as of March 31, 2006 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
|
|
$
|
5,349
|
|
2007
|
|
|
5,210
|
|
2008
|
|
|
5,210
|
|
2009
|
|
|
5,210
|
|
2010
|
|
|
5,210
|
|
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 three months ended
March 31, 2006 and 2005, we did not acquire, dispose of or
write down any goodwill or intangible assets with indefinite
useful lives.
14
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
3.5% convertible notes due
2033
|
|
$
|
91,522
|
|
|
$
|
91,522
|
|
2.875% convertible notes
due 2034
|
|
|
300,000
|
|
|
|
300,000
|
|
2.75% convertible notes
due 2025
|
|
|
350,000
|
|
|
|
350,000
|
|
Mexico syndicated loan
facility
|
|
|
250,698
|
|
|
|
252,654
|
|
Tower financing
obligations
|
|
|
129,376
|
|
|
|
127,314
|
|
Capital lease
obligations
|
|
|
47,979
|
|
|
|
43,845
|
|
Brazil spectrum license
financing
|
|
|
8,495
|
|
|
|
7,583
|
|
Brazil software
financing
|
|
|
3,817
|
|
|
|
|
|
13.0% senior secured
discount notes
|
|
|
40
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
1,181,927
|
|
|
|
1,172,958
|
|
Less: current portion
|
|
|
(25,539
|
)
|
|
|
(24,112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,156,388
|
|
|
$
|
1,148,846
|
|
|
|
|
|
|
|
|
|
|
3.5% Convertible Notes. For the
fiscal quarter ended March 31, 2006, 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 March 31, 2006. As a
result, the conversion contingency was met, and our
3.5% convertible notes are currently convertible into
75.00 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.
2.875% Convertible Notes. For the
fiscal quarter ended March 31, 2006, 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 March 31, 2006.
As a result, the conversion contingency was met and our
2.875% convertible 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.
2.75% Convertible Notes. For the
fiscal quarter ended March 31, 2006, the closing sale price
of our common stock did not exceed 120% of the conversion price
of $50.08 per share for at least 20 trading days in the
30 consecutive trading days ending on March 31, 2006.
As a result, the conversion contingency was not met, and our
2.75% convertible notes are not convertible.
Brazil Software Financing. In March
2006, Nextel Brazil acquired software from Motorola, which will
enable Nextel Brazil to increase interconnect subscriber
capacity without increasing frequencies in their digital mobile
network while providing similar audio quality characteristics.
Nextel Brazil financed the purchase of the software through a
facility in which principal is due in equal quarterly
installments over a period of four years. Nextel Brazil is not
charged interest under this facility, however we are imputing
interest expense at an annual rate of 12%.
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
15
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 of March 31, 2006 and December 31, 2005, Nextel
Brazil had accrued liabilities related to contingencies of
$30.8 million and $27.6 million, respectively, all of
which were classified in tax and non-tax accrued contingencies
reported as a component of other long-term liabilities. Of the
total accrued liabilities as of March 31, 2006 and
December 31, 2005, Nextel Brazil had $24.3 million and
$21.7 million in unasserted claims, respectively. We
currently estimate the range of possible losses related to
matters for which Nextel Brazil has not accrued liabilities to
be between $91.8 million and $95.8 million as of
March 31, 2006. We have not accrued liabilities for these
matters because they are not deemed probable of loss. 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, until April 2006, we
continued to pay the turnover tax at the existing rate and
recorded a liability for the differential between the old rate
and the new rate, plus interest.
In March 2006, Nextel Argentina received an unfavorable decision
from the city of Buenos Aires related to the determination of
whether we are a cellular company for purposes of this tax. In
addition, the city of Buenos Aires confirmed a previously
assessed penalty equal to 80% of the principal amount of the
additional tax from December 1997 through May 2004. In April
2006, Nextel Argentina decided to pay under protest
$18.8 million, which represents the total amount of
principal and interest, related to this turnover tax. Nextel
Argentina decided not to pay penalties based on a legal opinion
that considers the probability of having to pay penalties to be
remote despite the citys decision. Nextel Argentina also
decided to begin paying the higher tax amount until this issue
is settled. Nextel Argentina plans to appeal the citys
decision at the judicial court level.
Similarly, one of the provincial governments in another one of
the markets where we operate also increased their turnover tax
rate from 4.55% to 6% of revenues for cellular companies.
Consistent with our earlier position, we continue to pay the
turnover tax in this province at the existing rate and accrue a
liability for the incremental difference in the rate. As of
March 31, 2006 and December 31, 2005, we accrued
$3.8 million and $3.4 million for local turnover taxes
in this province.
As of March 31, 2006 and December 31, 2005, Nextel
Argentina accrued $22.6 million and $20.4 million,
respectively for the local turnover tax issues, which are
included as components of accrued expenses and other. The
$22.6 million accrued liability includes the
$18.8 million paid in April 2006.
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 did 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 March 31,
2006 and December 31, 2005, the accrual for this liability
to the government was $5.5 million and $5.1 million,
respectively, which are included as components of accrued
expenses and other.
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
16
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 a result of various recent events and an opinion of counsel,
during the fourth quarter of 2005, Nextel Argentina accrued for
the maximum liability due to customers for all periods ending
December 31, 2005, plus interest. Nextel Argentina
continued accruing the higher amount during the first quarter of
2006 while continuing to maintain that there is no basis for
such reimbursement to customers. As of April 1, 2006,
Nextel Argentina changed its rate plan structure, which
eliminated all other charges and any further contingencies
related to this tax. As of March 31, 2006 and
December 31, 2005, the accrual for this liability to
customers was $6.0 million and $6.4 million,
respectively, which are included as components of accrued
expenses and other.
In March 2006, Nextel Argentina reimbursed to customers the
amounts invoiced during the period from January 2001 to August
2001 for a total amount of $0.2 million, plus interest. In
addition, in April 2006, Nextel Argentina filed a new judicial
injunction against the legislation passed in May 2005.
As of March 31, 2006 and December 31, 2005, Nextel
Argentina had accrued liabilities of $42.5 million and
$40.2 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
components 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
our tax liabilities in amounts that could be material.
|
|
7.
|
Derivative
Instruments
|
Foreign
Currency Hedges
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 March 31, 2006, our net purchased
option, which is designated as a cash flow hedge, decreased in
value by $2.2 million. We recorded this amount, net of tax,
to accumulated other comprehensive loss. During the three months
ended March 31, 2006, we reclassified $0.5 million
from accumulated other comprehensive loss to other expense since
the underlying capital expenditures and purchased handsets had
impacted earnings.
17
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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
March 31, 2006, our net purchased option, which is
designated as a cash flow hedge, decreased in value by
$0.6 million. We recorded this amount, net of tax, to
accumulated other comprehensive loss. During the three months
ended March 31, 2006, we reclassified $0.1 million
from accumulated other comprehensive loss to other expense since
the underlying capital expenditures and purchased handsets had
impacted earnings.
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 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 March 31, 2006, we
recognized a cumulative unrealized pre-tax loss of
$1.1 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.
The carrying values of our derivative instruments, which
represent fair values, as of March 31, 2006 and
December 31, 2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
2005
|
|
|
Total
|
|
|
|
Currency
|
|
|
Interest
|
|
|
March 31,
|
|
|
|
Hedge
|
|
|
Rate Swap
|
|
|
2006
|
|
|
|
(in thousands)
|
|
|
Purchased call options
|
|
$
|
493
|
|
|
$
|
|
|
|
$
|
493
|
|
Written put options
|
|
|
226
|
|
|
|
|
|
|
|
226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net purchased options
|
|
|
719
|
|
|
|
|
|
|
|
719
|
|
Interest rate swap
|
|
|
|
|
|
|
(1,137
|
)
|
|
|
(1,137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net derivative asset (liability)
|
|
$
|
719
|
|
|
$
|
(1,137
|
)
|
|
$
|
(418
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 options
|
|
|
(234
|
)
|
|
|
|
|
|
|
(234
|
)
|
Interest rate swap
|
|
|
|
|
|
|
(1,174
|
)
|
|
|
(1,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net derivative liability
|
|
$
|
(234
|
)
|
|
$
|
(1,174
|
)
|
|
$
|
(1,408
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred Tax Assets. We assessed the
realizability of our deferred tax assets during the first
quarter of 2006, consistent with the methodology we employed for
2005, and determined that the realizability of those deferred
assets has not changed. In that assessment, we considered the
reversal of existing temporary differences associated with
deferred tax assets and liabilities, future taxable income, tax
planning strategies and historical and future pre-tax book
income (as adjusted for permanent differences between financial
and tax accounting items) in order to determine if it is
more likely than not that the deferred tax asset
will be realized. We will continue to evaluate the amount of the
necessary valuation allowance for all of our foreign operating
companies and our U.S. companies throughout the remainder
of 2006.
Pre-Reorganization Tax Benefits. As of
March 31, 2006, we made no change to the deferred tax
assets and related valuation allowance in Brazil and Chile that
existed as of the date we emerged from reorganization. As of
December 31, 2005, there is no longer a deferred tax asset
and associated valuation allowance in the U.S. related to
pre-reorganization tax benefits.
Tax Benefits on Exercise of Stock
Options. During the three months ended
March 31, 2006, we realized $5.3 million of tax
benefit from excess tax deductions in the U.S. related to a
combination of current year stock option exercises and
utilization of net operating loss carryovers that resulted from
prior year stock option exercises. We recorded this benefit as
an increase to paid-in capital in accordance with SFAS 123R.
Mexican Taxes. 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 governing 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. As of March 31, 2006 and
December 31, 2005, our consolidated balance sheet includes
$15.9 million and $16.2 million in income tax
receivables, respectively, which are included as components of
other non-current assets. The income tax benefit for this item
is reflected in our income tax provision for the years ended
December 31, 2005, 2004 and 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
$17.0 million and $8.1 million in corporate overhead
costs to Nextel Mexico during the three months ended
March 31, 2006 and 2005, and we treat a portion of these
allocated amounts as tax deductions, where relevant. Nextel
Mexicos 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. In addition, because we do not view
share-based compensation as related to our operational
performance, we recognize share-based compensation expense at
the corporate level and exclude it when evaluating the business
performance of our segments.
19
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Intercompany
|
|
|
|
|
|
|
Mexico
|
|
|
Brazil
|
|
|
Argentina
|
|
|
Peru
|
|
|
and Other
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in thousands)
|
|
|
Three Months Ended
March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
298,115
|
|
|
$
|
106,690
|
|
|
$
|
70,263
|
|
|
$
|
30,516
|
|
|
$
|
540
|
|
|
$
|
(168
|
)
|
|
$
|
505,956
|
|
Digital handset and accessory
revenues
|
|
|
6,991
|
|
|
|
8,565
|
|
|
|
4,907
|
|
|
|
1,852
|
|
|
|
|
|
|
|
|
|
|
|
22,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
305,106
|
|
|
$
|
115,255
|
|
|
$
|
75,170
|
|
|
$
|
32,368
|
|
|
$
|
540
|
|
|
$
|
(168
|
)
|
|
$
|
528,271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings (losses)
|
|
$
|
123,397
|
|
|
$
|
22,312
|
|
|
$
|
22,534
|
|
|
$
|
6,398
|
|
|
$
|
(21,057
|
)
|
|
$
|
|
|
|
$
|
153,584
|
|
Depreciation and amortization
|
|
|
(20,694
|
)
|
|
|
(12,036
|
)
|
|
|
(5,578
|
)
|
|
|
(2,510
|
)
|
|
|
(754
|
)
|
|
|
98
|
|
|
|
(41,474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
102,703
|
|
|
|
10,276
|
|
|
|
16,956
|
|
|
|
3,888
|
|
|
|
(21,811
|
)
|
|
|
98
|
|
|
|
112,110
|
|
Interest expense, net
|
|
|
(9,059
|
)
|
|
|
(5,569
|
)
|
|
|
(515
|
)
|
|
|
(36
|
)
|
|
|
(6,259
|
)
|
|
|
23
|
|
|
|
(21,415
|
)
|
Interest income
|
|
|
7,841
|
|
|
|
735
|
|
|
|
534
|
|
|
|
291
|
|
|
|
3,223
|
|
|
|
(23
|
)
|
|
|
12,601
|
|
Foreign currency transaction
(losses) gains, net
|
|
|
(1,351
|
)
|
|
|
(101
|
)
|
|
|
273
|
|
|
|
41
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
(1,141
|
)
|
Other (expense) income, net
|
|
|
(1,486
|
)
|
|
|
(991
|
)
|
|
|
229
|
|
|
|
|
|
|
|
(116
|
)
|
|
|
|
|
|
|
(2,364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax
|
|
$
|
98,648
|
|
|
$
|
4,350
|
|
|
$
|
17,477
|
|
|
$
|
4,184
|
|
|
$
|
(24,966
|
)
|
|
$
|
98
|
|
|
$
|
99,791
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
73,795
|
|
|
$
|
41,680
|
|
|
$
|
7,894
|
|
|
$
|
4,611
|
|
|
$
|
875
|
|
|
$
|
|
|
|
$
|
128,855
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
212,879
|
|
|
$
|
62,245
|
|
|
$
|
53,850
|
|
|
$
|
24,934
|
|
|
$
|
424
|
|
|
$
|
(137
|
)
|
|
$
|
354,195
|
|
Digital handset and accessory
revenues
|
|
|
5,127
|
|
|
|
5,199
|
|
|
|
4,608
|
|
|
|
1,078
|
|
|
|
|
|
|
|
|
|
|
|
16,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
218,006
|
|
|
$
|
67,444
|
|
|
$
|
58,458
|
|
|
$
|
26,012
|
|
|
$
|
424
|
|
|
$
|
(137
|
)
|
|
$
|
370,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings (losses)
|
|
$
|
91,348
|
|
|
$
|
3,033
|
|
|
$
|
15,769
|
|
|
$
|
5,345
|
|
|
$
|
(15,191
|
)
|
|
$
|
|
|
|
$
|
100,304
|
|
Depreciation and amortization
|
|
|
(15,172
|
)
|
|
|
(5,379
|
)
|
|
|
(3,368
|
)
|
|
|
(1,909
|
)
|
|
|
(367
|
)
|
|
|
98
|
|
|
|
(26,097
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
76,176
|
|
|
|
(2,346
|
)
|
|
|
12,401
|
|
|
|
3,436
|
|
|
|
(15,558
|
)
|
|
|
98
|
|
|
|
74,207
|
|
Interest expense, net
|
|
|
(5,066
|
)
|
|
|
(3,094
|
)
|
|
|
(589
|
)
|
|
|
(35
|
)
|
|
|
(4,056
|
)
|
|
|
16
|
|
|
|
(12,824
|
)
|
Interest income
|
|
|
3,158
|
|
|
|
386
|
|
|
|
95
|
|
|
|
123
|
|
|
|
778
|
|
|
|
(16
|
)
|
|
|
4,524
|
|
Foreign currency transaction gains
(losses), net
|
|
|
1,660
|
|
|
|
137
|
|
|
|
87
|
|
|
|
37
|
|
|
|
(7
|
)
|
|
|
|
|
|
|
1,914
|
|
Other (expense) income, net
|
|
|
(127
|
)
|
|
|
(1,734
|
)
|
|
|
10
|
|
|
|
(9
|
)
|
|
|
(142
|
)
|
|
|
|
|
|
|
(2,002
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax
|
|
$
|
75,801
|
|
|
$
|
(6,651
|
)
|
|
$
|
12,004
|
|
|
$
|
3,552
|
|
|
$
|
(18,985
|
)
|
|
$
|
98
|
|
|
$
|
65,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
35,094
|
|
|
$
|
25,347
|
|
|
$
|
10,092
|
|
|
$
|
2,313
|
|
|
$
|
174
|
|
|
$
|
|
|
|
$
|
73,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
531,369
|
|
|
$
|
296,026
|
|
|
$
|
108,974
|
|
|
$
|
61,487
|
|
|
$
|
33,310
|
|
|
$
|
(855
|
)
|
|
$
|
1,030,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$
|
1,529,666
|
|
|
$
|
475,416
|
|
|
$
|
292,297
|
|
|
$
|
149,799
|
|
|
$
|
278,004
|
|
|
$
|
(855
|
)
|
|
$
|
2,724,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
INDEX TO
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
22
|
|
|
|
|
22
|
|
|
|
|
23
|
|
|
|
|
24
|
|
|
|
|
25
|
|
|
|
|
25
|
|
|
|
|
25
|
|
|
|
|
26
|
|
|
|
|
30
|
|
|
|
|
33
|
|
|
|
|
35
|
|
|
|
|
37
|
|
|
|
|
38
|
|
|
|
|
39
|
|
|
|
|
39
|
|
|
|
|
41
|
|
|
|
|
42
|
|
21
Introduction
The following is a discussion and analysis of:
|
|
|
|
|
our consolidated financial condition and results of operations
for the three-month periods ended March 31, 2006 and
2005; and
|
|
|
|
significant factors which we believe could affect our
prospective financial condition and results of operations.
|
You should read this discussion in conjunction with our 2005
annual report on
Form 10-K,
including but not limited to, the discussion regarding our
critical accounting judgments, as described below. Historical
results may not indicate future performance. See Forward
Looking Statements for risks and uncertainties that may
impact our future performance.
Critical
Accounting Policies and Estimates
The preparation of our financial statements in conformity with
accounting principles generally accepted in the United States of
America 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 condensed consolidated financial statements
and related notes for the periods presented. Due to the inherent
uncertainty involved in making those estimates, actual results
to be reported in future periods could differ from those
estimates.
We consider the following accounting policies to be the most
important to our financial position and results of operations or
policies that require us to exercise significant judgment
and/or
estimates:
|
|
|
|
|
revenue recognition;
|
|
|
|
allowance for doubtful accounts;
|
|
|
|
depreciation of property, plant and equipment;
|
|
|
|
amortization of intangible assets;
|
|
|
|
foreign currency;
|
|
|
|
loss contingencies;
|
|
|
|
share-based payments; and
|
|
|
|
income taxes.
|
We believe that, except for the change in our accounting for
share-based payment awards with the adoption of Financial
Accounting Standards Board Statement No. 123,
Share-based Payment, or SFAS 123R, there have
been no material changes to our critical accounting policies and
estimates during the three months ended March 31, 2006
compared to those discussed in our 2005 annual report of
Form 10-K
under Managements Discussion and Analysis of
Financial Condition and Results of Operations.
Share-Based
Payments
Effective January 1, 2006, we adopted the fair value
recognition provisions of SFAS 123R, which requires that we
expense the cost of stock options and other forms of
shared-based payments. We used the modified prospective
transition method and therefore we have not restated prior
periods results. In accordance with SFAS 123R:
|
|
|
|
|
We calculate estimated compensation cost based on the fair value
of the stock option awards and restricted stock awards on their
grant date;
|
|
|
|
We account for the estimated compensation cost under the
modified prospective transition method for all share-based
payment awards granted after January 1, 2006 and awards
granted prior to January 1, 2006 that had not vested as of
January 1, 2006;
|
|
|
|
We recognize share-based payment expense over the estimated
expected term of the award;
|
22
|
|
|
|
|
We expense share-based payment cost only for those shares
expected to vest on a straight-line basis over the expected term
of the award, net of an estimated forfeiture rate;
|
|
|
|
We do not recognize share-based payment cost for awards for
which the requisite service is not completed; and
|
|
|
|
We account for share-based payment for stock option awards to
employees and non-employees at fair value.
|
For stock option awards under SFAS 123R, we use the
Black-Scholes-Merton option-pricing model and managements
assumptions to estimate their fair values. The
Black-Scholes-Merton option-pricing model was developed for use
in estimating the fair value of traded options that have no
vesting restrictions and are fully transferable. Option-pricing
models such as the Black-Scholes-Merton model require the input
of highly subjective assumptions, including the expected term of
the share-based payment awards and the stock price volatility.
The assumptions represent our best estimates, but these
estimates involve inherent uncertainties and the application of
management judgment. Consequently, there is a risk that our
estimates of the fair values of our stock option awards on the
grant dates may bear little resemblance to the actual values
realized upon the exercise, expiration, early termination or
forfeiture of those stock option awards in the future. Certain
stock option awards may expire worthless or otherwise result in
zero intrinsic value as compared to the fair values originally
estimated on the grant date and reported in our financial
statements. Alternatively, value may be realized from the stock
option awards that is significantly in excess of the fair values
originally estimated on the grant date and reported in our
financial statements. Additionally, application of alternative
assumptions could produce significantly different estimates of
the fair value of stock option awards and consequently, the
related amounts recognized in the consolidated statements of
operations. Currently, there is no market-based mechanism or
other practical application to verify the reliability and
accuracy of the estimates from option-pricing valuation models,
such as Black-Scholes-Merton, nor is there a means to compare
and adjust the estimates to actual values. Although the fair
value of stock option awards is determined in accordance with
SFAS 123R and SAB Topic 14 (SAB 107) using
the Black-Scholes-Merton option-pricing model, the fair value
may not be indicative of the fair value observed in a willing
buyer/willing seller market transaction. 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.
See Note 2 to the condensed consolidated financial
statements in this quarterly report on
Form 10-Q
for a further discussion on share-based payments.
Business
Overview
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:
|
|
|
|
|
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;
|
23
|
|
|
|
|
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.
|
The table below provides an overview of our total digital
handsets in commercial service in the countries indicated as of
March 31, 2006 and 2005. 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.
|
|
|
|
|
|
|
|
|
|
|
Total Digital Handsets in
|
|
|
|
Commercial Service
|
|
|
|
March 31,
|
|
|
March 31,
|
|
Country
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Mexico
|
|
|
1,209
|
|
|
|
883
|
|
Brazil
|
|
|
694
|
|
|
|
504
|
|
Argentina
|
|
|
530
|
|
|
|
400
|
|
Peru
|
|
|
270
|
|
|
|
198
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,703
|
|
|
|
1,985
|
|
|
|
|
|
|
|
|
|
|
Recent
Developments
Argentina Turnover Tax Contingency. 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, until April 2006, we continued to pay the turnover tax
at the existing rate and recorded a liability for the
differential between the old rate and the new rate, plus
interest.
In March 2006, Nextel Argentina received an unfavorable decision
from the city of Buenos Aires related to the determination of
whether we are a cellular company for purposes of this tax. In
addition, the city of Buenos Aires confirmed a previously
assessed penalty equal to 80% of the principal amount of the
additional tax from December 1997 through May 2004. In April
2006, Nextel Argentina decided to pay under protest
$18.8 million, which represents the total amount of
principal and interest, related to this turnover tax. Nextel
Argentina decided not to pay penalties based on a legal opinion
that considers the probability of having to pay penalties to be
remote despite the citys decision. Nextel Argentina also
decided to begin paying the higher tax amount until this issue
is settled. Nextel Argentina plans to appeal the citys
decision at the judicial court level.
Similarly, one of the provincial governments in another one of
the markets where we operate also increased their turnover tax
rate from 4.55% to 6% of revenues for cellular companies.
Consistent with our earlier position, we continue to pay the
turnover tax in this province at the existing rate and accrue a
liability for the incremental difference in the rate. As of
March 31, 2006 and December 31, 2005, we accrued
$3.8 million and $3.4 million for local turnover taxes
in this province.
As of March 31, 2006 and December 31, 2005, Nextel
Argentina accrued $22.6 million and $20.4 million,
respectively for the local turnover tax issues, which are
included as components of accrued expenses and other. The
$22.6 million accrued liability includes the
$18.8 million paid in April 2006.
24
Ratio of
Earnings to Fixed Charges
|
|
|
Three Months Ended
|
March 31,
|
2006
|
|
2005
|
|
4.10x
|
|
4.23x
|
For the purpose of computing the ratio of earnings to fixed
charges, earnings consist of income from continuing operations
before income taxes plus fixed charges and amortization of
capitalized interest less capitalized interest. 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.
|
Reclassifications
We reclassified prior year spectrum license fees of
$9.6 million for the three months ended March 31, 2005
from selling, general and administrative expenses to cost of
service. For the three months ended March 31, 2006, we
recorded $11.6 million of spectrum fees in cost of service.
Results
of Operations
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.
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,
spectrum license fees 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 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 and corporate overhead.
25
a. Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
Consolidated
|
|
|
Change from
|
|
|
|
March 31,
|
|
|
Operating
|
|
|
March 31,
|
|
|
Operating
|
|
|
Previous Year
|
|
|
|
2006
|
|
|
Revenues
|
|
|
2005
|
|
|
Revenues
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
505,956
|
|
|
|
96
|
%
|
|
$
|
354,195
|
|
|
|
96
|
%
|
|
$
|
151,761
|
|
|
|
43
|
%
|
Digital handset and accessory
revenues
|
|
|
22,315
|
|
|
|
4
|
%
|
|
|
16,012
|
|
|
|
4
|
%
|
|
|
6,303
|
|
|
|
39
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
528,271
|
|
|
|
100
|
%
|
|
|
370,207
|
|
|
|
100
|
%
|
|
|
158,064
|
|
|
|
43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation and amortization included below)
|
|
|
(134,350
|
)
|
|
|
(26
|
)%
|
|
|
(106,104
|
)
|
|
|
(28
|
)%
|
|
|
(28,246
|
)
|
|
|
27
|
%
|
Cost of digital handset and
accessory sales
|
|
|
(69,801
|
)
|
|
|
(13
|
)%
|
|
|
(54,250
|
)
|
|
|
(15
|
)%
|
|
|
(15,551
|
)
|
|
|
29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(204,151
|
)
|
|
|
(39
|
)%
|
|
|
(160,354
|
)
|
|
|
(43
|
)%
|
|
|
(43,797
|
)
|
|
|
27
|
%
|
Selling and marketing expenses
|
|
|
(69,841
|
)
|
|
|
(13
|
)%
|
|
|
(44,952
|
)
|
|
|
(12
|
)%
|
|
|
(24,889
|
)
|
|
|
55
|
%
|
General and administrative expenses
|
|
|
(100,695
|
)
|
|
|
(19
|
)%
|
|
|
(64,597
|
)
|
|
|
(18
|
)%
|
|
|
(36,098
|
)
|
|
|
56
|
%
|
Depreciation and amortization
|
|
|
(41,474
|
)
|
|
|
(8
|
)%
|
|
|
(26,097
|
)
|
|
|
(7
|
)%
|
|
|
(15,377
|
)
|
|
|
59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
112,110
|
|
|
|
21
|
%
|
|
|
74,207
|
|
|
|
20
|
%
|
|
|
37,903
|
|
|
|
51
|
%
|
Interest expense, net
|
|
|
(21,415
|
)
|
|
|
(4
|
)%
|
|
|
(12,824
|
)
|
|
|
(3
|
)%
|
|
|
(8,591
|
)
|
|
|
67
|
%
|
Interest income
|
|
|
12,601
|
|
|
|
2
|
%
|
|
|
4,524
|
|
|
|
1
|
%
|
|
|
8,077
|
|
|
|
179
|
%
|
Foreign currency transaction
(losses) gains, net
|
|
|
(1,141
|
)
|
|
|
|
|
|
|
1,914
|
|
|
|
1
|
%
|
|
|
(3,055
|
)
|
|
|
(160
|
)%
|
Other expense, net
|
|
|
(2,364
|
)
|
|
|
|
|
|
|
(2,002
|
)
|
|
|
(1
|
)%
|
|
|
(362
|
)
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision
|
|
|
99,791
|
|
|
|
19
|
%
|
|
|
65,819
|
|
|
|
18
|
%
|
|
|
33,972
|
|
|
|
52
|
%
|
Income tax provision
|
|
|
(34,793
|
)
|
|
|
(7
|
)%
|
|
|
(20,781
|
)
|
|
|
(6
|
)%
|
|
|
(14,012
|
)
|
|
|
67
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
64,998
|
|
|
|
12
|
%
|
|
$
|
45,038
|
|
|
|
12
|
%
|
|
$
|
19,960
|
|
|
|
44
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $151.8 million, or 43%, increase in consolidated
service and other revenues from the three months ended
March 31, 2005 to the three months ended March 31,
2006 is primarily a result of a 35% increase in the average
number of total digital handsets in service, an increase in
average consolidated revenues per handset and an increase of
$9.1 million, or 54%, in consolidated revenues generated
from our handset maintenance programs, primarily in Mexico and
Brazil.
The $6.3 million, or 39%, increase in consolidated digital
handset and accessory revenues from the three months ended
March 31, 2005 to the three months ended March 31,
2006 is primarily due to a 52% increase in total handset sales,
as well as a 24% increase in total handset upgrades.
26
The $28.2 million, or 27%, increase in consolidated cost of
service from the three months ended March 31, 2005 to the
three months ended March 31, 2006 is principally a result
of the following:
|
|
|
|
|
a $12.7 million, or 24%, increase in consolidated
interconnect costs resulting from a 48% increase in consolidated
interconnect minutes of use;
|
|
|
|
a $9.9 million, or 27%, increase in consolidated direct
switch and transmitter and receiver site costs resulting from a
28% increase in the total number of consolidated transmitter and
receiver sites in service from March 31, 2005 to
March 31, 2006; and
|
|
|
|
a $4.1 million, or 28%, 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 $15.6 million, or 29%, increase in consolidated cost of
digital handset and accessory sales from the three months ended
March 31, 2005 to the three months ended March 31,
2006 is primarily due to a 52% increase in total handset sales,
as well as a 24% increase in total handset upgrades.
|
|
3.
|
Selling and
marketing expenses
|
The $24.9 million, or 55%, increase in consolidated selling
and marketing expenses from the three months ended
March 31, 2005 to the three months ended March 31,
2006 is principally a result of the following:
|
|
|
|
|
a $12.8 million, or 83%, increase in consolidated indirect
commissions resulting from a 53% increase in handset sales
through indirect channels;
|
|
|
|
an $8.4 million, or 49%, increase in consolidated direct
commissions and payroll expenses largely due to an increase in
commissions incurred as a result of a 50% increase in handset
sales across all markets by internal sales personnel; and
|
|
|
|
a $3.6 million, or 38%, 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 $36.1 million, or 56%, increase in consolidated general
and administrative expenses from the three months ended
March 31, 2005 to the three months ended March 31,
2006 is primarily a result of the following:
|
|
|
|
|
a $21.5 million, or 62%, increase largely due to
$5.2 million in incremental share-based payment expense in
connection with the implementation of SFAS 123R, higher
personnel costs related to an increase in headcount, higher
facilities-related expenses due to continued subscriber growth
and $6.3 million in revenue-based taxes in Brazil that we
started reporting on a gross basis in the fourth quarter of
2005, which resulted in an $18.6 million cumulative
adjustment for the year ended December 31, 2005;
|
|
|
|
an $8.4 million, or 54%, increase in consolidated customer
care expenses resulting from an increase in payroll and related
expenses necessary to support a larger consolidated customer
base; and
|
|
|
|
a $2.8 million, or 61%, increase in consolidated bad debt
expense, which increased slightly as a percentage of revenues
from 1.3% in 2005 to 1.4% in 2006, primarily in Mexico. We do
not expect bad debt expense as a percentage of revenues to
increase significantly in future periods.
|
|
|
5.
|
Depreciation
and amortization
|
The $15.4 million, or 59%, increase in consolidated
depreciation and amortization from the three months ended
March 31, 2005 to the three months ended March 31,
2006 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, mainly in
Mexico and Brazil.
27
The $8.6 million, or 67%, increase in consolidated net
interest expense from the three months ended March 31, 2005
to the three months ended March 31, 2006 is primarily due
to $6.1 million interest incurred related to our syndicated
loan facility in Mexico that we drew down in May 2005 and
$2.4 million in interest incurred on our
2.75% convertible notes that we issued in August 2005.
The $8.1 million, or 179%, increase in interest income from
the three months ended March 31, 2005 to the three months
ended March 31, 2006 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 (losses) gains, net
|
Foreign currency transaction gains of $1.9 million for the
three months ended March 31, 2005 are primarily related to
gains in Mexico due to the impact of an increase in the value of
the Mexican peso on Nextel Mexicos
U.S. dollar-denominated liabilities.
Foreign currency transaction losses of $1.1 million for the
first quarter of 2006 primarily represent foreign currency
transaction losses in Mexico caused by a decline in the value of
the Mexican peso compared to the U.S. dollar on Nextel
Mexicos U.S. dollar-denominated liabilities.
The $14.0 million, or 67%, increase in the income tax
provision from the three months ended March 31, 2005 to the
three months ended March 31, 2006 is primarily due to a
$34.0 million, or 52%, increase in income before tax.
28
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
$17.0 million and $8.1 million in corporate overhead
costs to Nextel Mexico during the three months ended
March 31, 2006 and 2005, 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. In addition, because we do not view
share-based compensation as related to our operational
performance, we recognize share-based payment expense at the
corporate level and exclude it when evaluating the business
performance of our segments. The tables below provide a summary
of the components of our consolidated segments for the three
months ended March 31, 2006 and 2005. The results of Nextel
Chile are included in Corporate and other.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Selling,
|
|
|
Selling,
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
Consolidated
|
|
|
General and
|
|
|
General and
|
|
|
Segment
|
|
Three Months Ended
|
|
Operating
|
|
|
Operating
|
|
|
Cost of
|
|
|
Cost of
|
|
|
Administrative
|
|
|
Administrative
|
|
|
Earnings
|
|
March 31, 2006
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Expenses
|
|
|
Expenses
|
|
|
(Losses)
|
|
|
|
(dollars in thousands)
|
|
|
Nextel Mexico
|
|
$
|
305,106
|
|
|
|
58
|
%
|
|
$
|
(100,461
|
)
|
|
|
49
|
%
|
|
$
|
(81,248
|
)
|
|
|
48
|
%
|
|
$
|
123,397
|
|
Nextel Brazil
|
|
|
115,255
|
|
|
|
22
|
%
|
|
|
(53,332
|
)
|
|
|
26
|
%
|
|
|
(39,611
|
)
|
|
|
23
|
%
|
|
|
22,312
|
|
Nextel Argentina
|
|
|
75,170
|
|
|
|
14
|
%
|
|
|
(33,778
|
)
|
|
|
17
|
%
|
|
|
(18,858
|
)
|
|
|
11
|
%
|
|
|
22,534
|
|
Nextel Peru
|
|
|
32,368
|
|
|
|
6
|
%
|
|
|
(16,422
|
)
|
|
|
8
|
%
|
|
|
(9,548
|
)
|
|
|
6
|
%
|
|
|
6,398
|
|
Corporate and other
|
|
|
540
|
|
|
|
|
|
|
|
(326
|
)
|
|
|
|
|
|
|
(21,271
|
)
|
|
|
12
|
%
|
|
|
(21,057
|
)
|
Intercompany eliminations
|
|
|
(168
|
)
|
|
|
|
|
|
|
168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated
|
|
$
|
528,271
|
|
|
|
100
|
%
|
|
$
|
(204,151
|
)
|
|
|
100
|
%
|
|
$
|
(170,536
|
)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Selling,
|
|
|
Selling,
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
Consolidated
|
|
|
General and
|
|
|
General and
|
|
|
Segment
|
|
Three Months Ended
|
|
Operating
|
|
|
Operating
|
|
|
Cost of
|
|
|
Cost of
|
|
|
Administrative
|
|
|
Administrative
|
|
|
Earnings
|
|
March 31, 2005
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Expenses
|
|
|
Expenses
|
|
|
(Losses)
|
|
|
|
(dollars in thousands)
|
|
|
Nextel Mexico
|
|
$
|
218,006
|
|
|
|
59
|
%
|
|
$
|
(74,796
|
)
|
|
|
47
|
%
|
|
$
|
(51,862
|
)
|
|
|
47
|
%
|
|
$
|
91,348
|
|
Nextel Brazil
|
|
|
67,444
|
|
|
|
18
|
%
|
|
|
(44,126
|
)
|
|
|
27
|
%
|
|
|
(20,285
|
)
|
|
|
19
|
%
|
|
|
3,033
|
|
Nextel Argentina
|
|
|
58,458
|
|
|
|
16
|
%
|
|
|
(28,160
|
)
|
|
|
18
|
%
|
|
|
(14,529
|
)
|
|
|
13
|
%
|
|
|
15,769
|
|
Nextel Peru
|
|
|
26,012
|
|
|
|
7
|
%
|
|
|
(12,839
|
)
|
|
|
8
|
%
|
|
|
(7,828
|
)
|
|
|
7
|
%
|
|
|
5,345
|
|
Corporate and other
|
|
|
424
|
|
|
|
|
|
|
|
(570
|
)
|
|
|
|
|
|
|
(15,045
|
)
|
|
|
14
|
%
|
|
|
(15,191
|
)
|
Intercompany eliminations
|
|
|
(137
|
)
|
|
|
|
|
|
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated
|
|
$
|
370,207
|
|
|
|
100
|
%
|
|
$
|
(160,354
|
)
|
|
|
100
|
%
|
|
$
|
(109,549
|
)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A discussion of the results of operations in each of our
reportable segments is provided below.
29
b. Nextel
Mexico
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexicos
|
|
|
|
|
|
Mexicos
|
|
|
Change from
|
|
|
|
March 31,
|
|
|
Operating
|
|
|
March 31,
|
|
|
Operating
|
|
|
Previous Year
|
|
|
|
2006
|
|
|
Revenues
|
|
|
2005
|
|
|
Revenues
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
298,115
|
|
|
|
98
|
%
|
|
$
|
212,879
|
|
|
|
98
|
%
|
|
$
|
85,236
|
|
|
|
40
|
%
|
Digital handset and accessory
revenues
|
|
|
6,991
|
|
|
|
2
|
%
|
|
|
5,127
|
|
|
|
2
|
%
|
|
|
1,864
|
|
|
|
36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
305,106
|
|
|
|
100
|
%
|
|
|
218,006
|
|
|
|
100
|
%
|
|
|
87,100
|
|
|
|
40
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation and amortization included below)
|
|
|
(62,217
|
)
|
|
|
(20
|
)%
|
|
|
(46,110
|
)
|
|
|
(21
|
)%
|
|
|
(16,107
|
)
|
|
|
35
|
%
|
Cost of digital handset and
accessory sales
|
|
|
(38,244
|
)
|
|
|
(13
|
)%
|
|
|
(28,686
|
)
|
|
|
(13
|
)%
|
|
|
(9,558
|
)
|
|
|
33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100,461
|
)
|
|
|
(33
|
)%
|
|
|
(74,796
|
)
|
|
|
(34
|
)%
|
|
|
(25,665
|
)
|
|
|
34
|
%
|
Selling and marketing expenses
|
|
|
(43,902
|
)
|
|
|
(14
|
)%
|
|
|
(29,220
|
)
|
|
|
(14
|
)%
|
|
|
(14,682
|
)
|
|
|
50
|
%
|
General and administrative expenses
|
|
|
(37,346
|
)
|
|
|
(12
|
)%
|
|
|
(22,642
|
)
|
|
|
(10
|
)%
|
|
|
(14,704
|
)
|
|
|
65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings
|
|
|
123,397
|
|
|
|
41
|
%
|
|
|
91,348
|
|
|
|
42
|
%
|
|
|
32,049
|
|
|
|
35
|
%
|
Depreciation and amortization
|
|
|
(20,694
|
)
|
|
|
(7
|
)%
|
|
|
(15,172
|
)
|
|
|
(7
|
)%
|
|
|
(5,522
|
)
|
|
|
36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
102,703
|
|
|
|
34
|
%
|
|
|
76,176
|
|
|
|
35
|
%
|
|
|
26,527
|
|
|
|
35
|
%
|
Interest expense, net
|
|
|
(9,059
|
)
|
|
|
(3
|
)%
|
|
|
(5,066
|
)
|
|
|
(2
|
)%
|
|
|
(3,993
|
)
|
|
|
79
|
%
|
Interest income
|
|
|
7,841
|
|
|
|
3
|
%
|
|
|
3,158
|
|
|
|
1
|
%
|
|
|
4,683
|
|
|
|
148
|
%
|
Foreign currency transaction
(losses) gains, net
|
|
|
(1,351
|
)
|
|
|
(1
|
)%
|
|
|
1,660
|
|
|
|
1
|
%
|
|
|
(3,011
|
)
|
|
|
(181
|
)%
|
Other expense, net
|
|
|
(1,486
|
)
|
|
|
(1
|
)%
|
|
|
(127
|
)
|
|
|
|
|
|
|
(1,359
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
$
|
98,648
|
|
|
|
32
|
%
|
|
$
|
75,801
|
|
|
|
35
|
%
|
|
$
|
22,847
|
|
|
|
30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM-Not Meaningful
In accordance with accounting principles generally accepted in
the United States of America, we translated Nextel Mexicos
results of operations using the average exchange rates for the
three months ended March 31, 2006 and 2005. The average
exchange rate of the Mexican peso for the three months ended
March 31, 2006 appreciated in value against the
U.S. dollar by 6% from the three months ended
March 31, 2005. As a result, compared to 2005, the
components of Nextel Mexicos results of operations for
2006 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 $85.2 million, or 40%, increase in service and other
revenues from the three months ended March 31, 2005 to the
three months ended March 31, 2006 is primarily due to the
following:
|
|
|
|
|
a 36% increase in the average number of digital handsets in
service resulting from growth in Nextel Mexicos existing
markets, as well as the expansion of service coverage into new
markets during 2005 and the first quarter of 2006; and
|
|
|
|
a $3.1 million, or 41%, 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.
|
30
The $1.9 million, or 36%, increase in digital handset and
accessory revenues from the three months ended March 31,
2005 to the three months ended March 31, 2006 is primarily
due to a 58% increase in handset sales, as well as a 30%
increase in handset upgrades.
The $16.1 million, or 35%, increase in cost of service from
the three months ended March 31, 2005 to the three months
ended March 31, 2006 is principally due to the following:
|
|
|
|
|
a $7.5 million, or 36%, increase in interconnect costs
resulting from a 57% increase in interconnect minutes of use,
partially offset by lower per minute charges achieved through
volume discounts negotiated with various carriers;
|
|
|
|
a $4.2 million, or 22%, increase in direct switch and
transmitter and receiver site costs, including spectrum license
fees, resulting from a 38% increase in the number of transmitter
and receiver sites in service from March 31, 2005 to
March 31, 2006; and
|
|
|
|
a $3.4 million, or 65%, increase in service and repair
costs largely due to increased activity under Nextel
Mexicos handset maintenance program.
|
The $9.6 million, or 33%, increase in cost of digital
handset and accessory sales from the three months ended
March 31, 2005 to the three months ended March 31,
2006 is primarily due to a 58% increase in handset sales, as
well as a 30% increase in handset upgrades.
|
|
3.
|
Selling and
marketing expenses
|
The $14.7 million, or 50%, increase in selling and
marketing expenses from the three months ended March 31,
2005 to the three months ended March 31, 2006 is primarily
a result of the following:
|
|
|
|
|
a $9.3 million, or 81%, increase in indirect commissions
primarily due to a 55% increase in handset sales by Nextel
Mexicos outside dealers, as well as higher commissions per
handset sale;
|
|
|
|
a $3.0 million, or 31%, increase in direct commissions and
payroll expenses principally due to a 63% increase in handset
sales by Nextel Mexicos sales personnel; and
|
|
|
|
a $2.1 million, or 31%, increase in advertising costs
largely due to the launch of new markets, the launch of new rate
plans and objectives to reinforce market awareness of the Nextel
brand name.
|
|
|
4.
|
General and
administrative expenses
|
The $14.7 million, or 65%, increase in general and
administrative expenses from the three months ended
March 31, 2005 to the three months ended March 31,
2006 is largely a result of the following:
|
|
|
|
|
a $5.5 million, or 51%, 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 $4.5 million, or 59%, 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;
|
|
|
|
a $3.3 million increase in bad debt expense, which
increased as a percentage of revenues from 0.4% in the first
quarter of 2005 to 1.4% in the first quarter of 2006; and
|
|
|
|
a $1.2 million, or 41%, increase in information technology
expenses.
|
|
|
5.
|
Depreciation
and amortization
|
Depreciation and amortization increased $5.5 million, or
36%, from the three months ended March 31, 2005 to the
three months ended March 31, 2006 primarily due to
increased depreciation on Nextel Mexicos significantly
31
higher property, plant and equipment base primarily as a result
of accelerating the build-out of Nextel Mexicos digital
mobile network.
The $4.0 million, or 79%, increase in net interest expense
from the three months ended March 31, 2005 to the three
months ended March 31, 2006 is largely a result of interest
incurred on Nextel Mexicos syndicated loan facility during
the first quarter of 2006, which we drew down in May 2005.
The $4.7 million, or 148%, increase in interest income from
the three months ended March 31, 2005 to the three months
ended March 31, 2006 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.
|
|
8.
|
Foreign
currency transaction (losses) gains, net
|
Foreign currency transaction losses of $1.4 million for the
three months ended March 31, 2006 is primarily the result
of the impact of the relative weakening of the peso compared to
the U.S. dollar on Nextel Mexicos
U.S. dollar-denominated liabilities. Foreign currency
transaction gains of $1.7 million for the three months
ended March 31, 2005 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.
The $1.4 million increase in other expense, net, from the
three months ended March 31, 2005 to the three months ended
March 31, 2006 is mostly due to an increase in realized
losses related to Nextel Mexicos hedge of capital
expenditures and handset purchases that we reclassified from
accumulated other comprehensive loss.
32
c. Nextel
Brazil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
|
|
|
|
|
|
Brazils
|
|
|
|
|
|
Brazils
|
|
|
Change from
|
|
|
|
March 31,
|
|
|
Operating
|
|
|
March 31,
|
|
|
Operating
|
|
|
Previous Year
|
|
|
|
2006
|
|
|
Revenues
|
|
|
2005
|
|
|
Revenues
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
106,690
|
|
|
|
93
|
%
|
|
$
|
62,245
|
|
|
|
92
|
%
|
|
$
|
44,445
|
|
|
|
71
|
%
|
Digital handset and accessory
revenues
|
|
|
8,565
|
|
|
|
7
|
%
|
|
|
5,199
|
|
|
|
8
|
%
|
|
|
3,366
|
|
|
|
65
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,255
|
|
|
|
100
|
%
|
|
|
67,444
|
|
|
|
100
|
%
|
|
|
47,811
|
|
|
|
71
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation and amortization included below)
|
|
|
(36,588
|
)
|
|
|
(32
|
)%
|
|
|
(31,328
|
)
|
|
|
(46
|
)%
|
|
|
(5,260
|
)
|
|
|
17
|
%
|
Cost of digital handset and
accessory sales
|
|
|
(16,744
|
)
|
|
|
(15
|
)%
|
|
|
(12,798
|
)
|
|
|
(19
|
)%
|
|
|
(3,946
|
)
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(53,332
|
)
|
|
|
(47
|
)%
|
|
|
(44,126
|
)
|
|
|
(65
|
)%
|
|
|
(9,206
|
)
|
|
|
21
|
%
|
Selling and marketing expenses
|
|
|
(15,169
|
)
|
|
|
(13
|
)%
|
|
|
(7,484
|
)
|
|
|
(11
|
)%
|
|
|
(7,685
|
)
|
|
|
103
|
%
|
General and administrative expenses
|
|
|
(24,442
|
)
|
|
|
(21
|
)%
|
|
|
(12,801
|
)
|
|
|
(20
|
)%
|
|
|
(11,641
|
)
|
|
|
91
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings
|
|
|
22,312
|
|
|
|
19
|
%
|
|
|
3,033
|
|
|
|
4
|
%
|
|
|
19,279
|
|
|
|
NM
|
|
Depreciation and amortization
|
|
|
(12,036
|
)
|
|
|
(10
|
)%
|
|
|
(5,379
|
)
|
|
|
(8
|
)%
|
|
|
(6,657
|
)
|
|
|
124
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
10,276
|
|
|
|
9
|
%
|
|
|
(2,346
|
)
|
|
|
(4
|
)%
|
|
|
12,622
|
|
|
|
NM
|
|
Interest expense, net
|
|
|
(5,569
|
)
|
|
|
(5
|
)%
|
|
|
(3,094
|
)
|
|
|
(5
|
)%
|
|
|
(2,475
|
)
|
|
|
80
|
%
|
Interest income
|
|
|
735
|
|
|
|
1
|
%
|
|
|
386
|
|
|
|
1
|
%
|
|
|
349
|
|
|
|
90
|
%
|
Foreign currency transaction
(losses) gains, net
|
|
|
(101
|
)
|
|
|
|
|
|
|
137
|
|
|
|
|
|
|
|
(238
|
)
|
|
|
(174
|
)%
|
Other expense, net
|
|
|
(991
|
)
|
|
|
(1
|
)%
|
|
|
(1,734
|
)
|
|
|
(2
|
)%
|
|
|
743
|
|
|
|
(43
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax
|
|
$
|
4,350
|
|
|
|
4
|
%
|
|
$
|
(6,651
|
)
|
|
|
(10
|
)%
|
|
$
|
11,001
|
|
|
|
(165
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM-Not Meaningful
In accordance with accounting principles generally accepted in
the United States of America, we translated Nextel Brazils
results of operations using the average exchange rate for the
three months ended March 31, 2006. The average exchange
rate for the three months ended March 31, 2006 appreciated
against the U.S. dollar by 21% from the three months ended
March 31, 2005. As a result, the components of Nextel
Brazils results of operations for the three months ended
March 31, 2006 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.
The $44.4 million, or 71%, increase in service and other
revenues from the three months ended March 31, 2005 to the
three months ended March 31, 2006 is primarily a result of
the following:
|
|
|
|
|
a 35% 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;
|
|
|
|
the 21% appreciation of the Brazilian real against the
U.S. dollar; and
|
|
|
|
a $3.2 million increase in revenues generated from Nextel
Brazils handset maintenance program due to growth in the
number of customers that are utilizing this program.
|
33
The increase in service and other revenues is also due to
$6.3 million in revenue-based taxes that we recorded in the
first quarter of 2006. During the fourth quarter of 2005, we
began recording these taxes on a gross basis, and as a result,
we recorded $18.6 million as the cumulative impact of
recording these revenue-based taxes gross for the year ended
December 31, 2005.
The $3.4 million, or 65%, increase in digital handset and
accessory revenues from the three months ended March 31, 2005 to
the three months ended March 31, 2006 is largely the result
of a 57% increase in handset sales, as well as a 13% increase in
handset upgrades.
The $5.3 million, or 17%, increase in cost of service from
the three months ended March 31, 2005 to the three months
ended March 31, 2006 is primarily due to a
$4.6 million, or 48%, increase in direct switch and
transmitter and receiver site costs, including spectrum license
fees, resulting from a 29% increase in the number of transmitter
and receiver sites in service from March 31, 2005 to
March 31, 2006, as well as an increase in cost per site in
service and the 21% appreciation of the Brazilian real.
The $3.9 million, or 31%, increase in cost of digital
handset and accessory sales from the three months ended
March 31, 2005 to the three months ended March 31,
2006 is primarily due to a 57% increase in handset sales, as
well as a 13% increase in handset upgrades.
|
|
3.
|
Selling and
marketing expenses
|
The $7.7 million, or 103%, increase in selling and
marketing expenses from the three months ended March 31,
2005 to the three months ended March 31, 2006 is
principally due to the following:
|
|
|
|
|
a $4.1 million, or 116%, increase in payroll and direct
commissions largely as a result of a 57% increase in handset
sales by Nextel Brazils sales force;
|
|
|
|
a $2.0 million, or 115%, increase in indirect commissions
resulting from a 57% increase in handset sales through Nextel
Brazils indirect channels, as well as an increase in
indirect commissions earned per handset sale; and
|
|
|
|
a $1.8 million, or 142%, increase in advertising expenses
due to the implementation of more advertising campaigns during
the first quarter of 2006 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 21% appreciation
of the Brazilian real against the U.S. dollar.
|
|
4.
|
General and
administrative expenses
|
The $11.6 million, or 91%, increase in general and
administrative expenses from the three months ended
March 31, 2005 to the three months ended March 31,
2006 is primarily a result of the following:
|
|
|
|
|
an $8.3 million increase in general corporate costs mainly
due to $6.3 million in revenue-based taxes that we started
reporting on a gross basis in the fourth quarter of 2005, which
resulted in an $18.6 million cumulative adjustment for the
year ended December 31, 2005; and
|
|
|
|
a $3.0 million, or 73%, 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.
|
All of these increases also resulted from the 21% appreciation
of the Brazilian real against the U.S. dollar.
|
|
5.
|
Depreciation
and amortization
|
The $6.7 million, or 124%, increase in depreciation and
amortization from the three months ended March 31, 2005 to
the three months ended March 31, 2006 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 21% appreciation of the Brazilian
real against the U.S. dollar.
34
The $2.5 million, or 80%, increase in net interest expense
from the three months ended March 31, 2005 to the three
months ended March 31, 2006 is primarily the result of
increased interest incurred on Nextel Brazils tower
financing obligations, as well as the 21% appreciation of the
Brazilian real against the U.S. dollar.
d. Nextel
Argentina
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
|
|
|
|
|
|
Argentinas
|
|
|
|
|
|
Argentinas
|
|
|
Change from
|
|
|
|
March 31,
|
|
|
Operating
|
|
|
March 31,
|
|
|
Operating
|
|
|
Previous Year
|
|
|
|
2006
|
|
|
Revenues
|
|
|
2005
|
|
|
Revenues
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
70,263
|
|
|
|
93
|
%
|
|
$
|
53,850
|
|
|
|
92
|
%
|
|
$
|
16,413
|
|
|
|
30
|
%
|
Digital handset and accessory
revenues
|
|
|
4,907
|
|
|
|
7
|
%
|
|
|
4,608
|
|
|
|
8
|
%
|
|
|
299
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,170
|
|
|
|
100
|
%
|
|
|
58,458
|
|
|
|
100
|
%
|
|
|
16,712
|
|
|
|
29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation and amortization included below)
|
|
|
(24,828
|
)
|
|
|
(33
|
)%
|
|
|
(19,560
|
)
|
|
|
(33
|
)%
|
|
|
(5,268
|
)
|
|
|
27
|
%
|
Cost of digital handset and
accessory sales
|
|
|
(8,950
|
)
|
|
|
(12
|
)%
|
|
|
(8,600
|
)
|
|
|
(15
|
)%
|
|
|
(350
|
)
|
|
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(33,778
|
)
|
|
|
(45
|
)%
|
|
|
(28,160
|
)
|
|
|
(48
|
)%
|
|
|
(5,618
|
)
|
|
|
20
|
%
|
Selling and marketing expenses
|
|
|
(5,939
|
)
|
|
|
(8
|
)%
|
|
|
(4,386
|
)
|
|
|
(8
|
)%
|
|
|
(1,553
|
)
|
|
|
35
|
%
|
General and administrative expenses
|
|
|
(12,919
|
)
|
|
|
(17
|
)%
|
|
|
(10,143
|
)
|
|
|
(17
|
)%
|
|
|
(2,776
|
)
|
|
|
27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings
|
|
|
22,534
|
|
|
|
30
|
%
|
|
|
15,769
|
|
|
|
27
|
%
|
|
|
6,765
|
|
|
|
43
|
%
|
Depreciation and amortization
|
|
|
(5,578
|
)
|
|
|
(7
|
)%
|
|
|
(3,368
|
)
|
|
|
(6
|
)%
|
|
|
(2,210
|
)
|
|
|
66
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
16,956
|
|
|
|
23
|
%
|
|
|
12,401
|
|
|
|
21
|
%
|
|
|
4,555
|
|
|
|
37
|
%
|
Interest expense, net
|
|
|
(515
|
)
|
|
|
(1
|
)%
|
|
|
(589
|
)
|
|
|
(1
|
)%
|
|
|
74
|
|
|
|
(13
|
)%
|
Interest income
|
|
|
534
|
|
|
|
1
|
%
|
|
|
95
|
|
|
|
|
|
|
|
439
|
|
|
|
NM
|
|
Foreign currency transaction
gains, net
|
|
|
273
|
|
|
|
|
|
|
|
87
|
|
|
|
|
|
|
|
186
|
|
|
|
214
|
%
|
Other income, net
|
|
|
229
|
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
|
219
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
$
|
17,477
|
|
|
|
23
|
%
|
|
$
|
12,004
|
|
|
|
20
|
%
|
|
$
|
5,473
|
|
|
|
46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM-Not Meaningful
In accordance with accounting principles generally accepted in
the United States of America, we translated Nextel
Argentinas results of operations using the average
exchange rates for the three months ended March 31, 2006
and 2005. The average exchange rate of the Argentine peso for
the three months ended March 31, 2006 depreciated against
the U.S. dollar by 5% from the same period in 2005. As a
result, compared to 2005, the components of Nextel
Argentinas results of operations for 2006 after
translation into U.S. dollars reflect lower increases than
would have occurred if it were not for the impact of the
depreciation of the peso.
35
The $16.4 million, or 30%, increase in service and other
revenues from the three months ended March 31, 2005 to the
three months ended March 31, 2006 is primarily a result of
the following:
|
|
|
|
|
a 32% increase in the average number of digital handsets in
service, resulting mostly from growth in Nextel Argentinas
existing markets; and
|
|
|
|
a $2.4 million, or 53%, increase in revenues generated from
Nextel Argentinas handset maintenance program due to
growth in the number of customers that are utilizing this
program.
|
The $5.3 million, or 27%, increase in cost of service from
the three months ended March 31, 2005 to the three months
ended March 31, 2006 is principally a result of the
following:
|
|
|
|
|
a $3.1 million, or 31%, increase in interconnect costs
primarily caused by a 27% increase in interconnect minutes of
use, as well as an increase in termination fees between
mobile-to-mobile
handsets;
|
|
|
|
a $1.2 million, or 25%, increase in direct switch and
transmitter and receiver site costs, including spectrum license
fees, due to a 15% increase in the number of transmitter and
receiver sites in service from March 31, 2005 to
March 31, 2006, an increase in new claims on cell sites by
municipalities and increases in costs associated with site
termination leases; and
|
|
|
|
a $0.8 million, or 19%, increase in service and repair
costs resulting from increased activity under Nextel
Argentinas handset maintenance program.
|
|
|
3.
|
Selling and
marketing expenses
|
The $1.6 million, or 35%, increase in selling and marketing
expenses from the three months ended March 31, 2005 to the
three months ended March 31, 2006 is largely a result of
the following:
|
|
|
|
|
a $1.0 million, or 63%, increase in indirect commissions
primarily due to a 43% increase in handset sales obtained
through indirect channels as well as higher commission per
handset sale due to higher volumes; and
|
|
|
|
a $0.5 million, or 26%, increase in other sales costs
largely due to an increase in direct commissions resulting from
a 22% increase in handset sales by Nextel Argentinas sales
force.
|
|
|
4.
|
General and
administrative expenses
|
The $2.8 million, or 27%, increase in general and
administrative expenses from the three months ended
March 31, 2005 to the three months ended March 31,
2006 is largely a result of the following:
|
|
|
|
|
a $2.0 million, or 31%, increase in general corporate costs
resulting from certain revenue-based taxes, an increase in
payroll and related expenses caused by an increase in general
and administrative personnel and an increase in legal
fees; and
|
|
|
|
a $0.6 million, or 30%, increase in customer care and
billing operations expenses primarily as a result of an increase
in personnel needed to support a growing customer base.
|
|
|
5.
|
Depreciation
and amortization
|
The $2.2 million, or 66%, increase in depreciation and
amortization from the three months ended March 31, 2005 to
the three months ended March 31, 2006 is primarily due to
increased depreciation resulting from a larger property, plant
and equipment base related to the continued build-out of Nextel
Argentinas digital mobile network.
36
e. Nextel
Peru
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
|
|
|
|
|
|
Perus
|
|
|
|
|
|
Perus
|
|
|
Change from
|
|
|
|
March 31,
|
|
|
Operating
|
|
|
March 31,
|
|
|
Operating
|
|
|
Previous Year
|
|
|
|
2006
|
|
|
Revenues
|
|
|
2005
|
|
|
Revenues
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
30,516
|
|
|
|
94
|
%
|
|
$
|
24,934
|
|
|
|
96
|
%
|
|
$
|
5,582
|
|
|
|
22
|
%
|
Digital handset and accessory
revenues
|
|
|
1,852
|
|
|
|
6
|
%
|
|
|
1,078
|
|
|
|
4
|
%
|
|
|
774
|
|
|
|
72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,368
|
|
|
|
100
|
%
|
|
|
26,012
|
|
|
|
100
|
%
|
|
|
6,356
|
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation and amortization included below)
|
|
|
(10,559
|
)
|
|
|
(33
|
)%
|
|
|
(8,673
|
)
|
|
|
(33
|
)%
|
|
|
(1,886
|
)
|
|
|
22
|
%
|
Cost of digital handset and
accessory sales
|
|
|
(5,863
|
)
|
|
|
(18
|
)%
|
|
|
(4,166
|
)
|
|
|
(16
|
)%
|
|
|
(1,697
|
)
|
|
|
41
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,422
|
)
|
|
|
(51
|
)%
|
|
|
(12,839
|
)
|
|
|
(49
|
)%
|
|
|
(3,583
|
)
|
|
|
28
|
%
|
Selling and marketing expenses
|
|
|
(3,523
|
)
|
|
|
(11
|
)%
|
|
|
(2,833
|
)
|
|
|
(11
|
)%
|
|
|
(690
|
)
|
|
|
24
|
%
|
General and administrative expenses
|
|
|
(6,025
|
)
|
|
|
(18
|
)%
|
|
|
(4,995
|
)
|
|
|
(19
|
)%
|
|
|
(1,030
|
)
|
|
|
21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings
|
|
|
6,398
|
|
|
|
20
|
%
|
|
|
5,345
|
|
|
|
21
|
%
|
|
|
1,053
|
|
|
|
20
|
%
|
Depreciation and amortization
|
|
|
(2,510
|
)
|
|
|
(8
|
)%
|
|
|
(1,909
|
)
|
|
|
(8
|
)%
|
|
|
(601
|
)
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
3,888
|
|
|
|
12
|
%
|
|
|
3,436
|
|
|
|
13
|
%
|
|
|
452
|
|
|
|
13
|
%
|
Interest expense, net
|
|
|
(36
|
)
|
|
|
|
|
|
|
(35
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
3
|
%
|
Interest income
|
|
|
291
|
|
|
|
1
|
%
|
|
|
123
|
|
|
|
1
|
%
|
|
|
168
|
|
|
|
137
|
%
|
Foreign currency transaction
gains, net
|
|
|
41
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
4
|
|
|
|
11
|
%
|
Other expense, net
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
9
|
|
|
|
(100
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
$
|
4,184
|
|
|
|
13
|
%
|
|
$
|
3,552
|
|
|
|
14
|
%
|
|
$
|
632
|
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $5.6 million, or 22%, increase in service and other
revenues from the three months ended March 31, 2005 to the
three months ended March 31, 2006 is primarily due to a 35%
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 $1.9 million, or 22%, increase in cost of service from
the three months ended March 31, 2005 to the three months
ended March 31, 2006 is primarily due to a
$1.9 million, or 42%, increase in interconnect costs
largely as a result of an 83% increase in interconnect minutes
of use, partially offset by a decrease in per minute costs due
to new interconnect regulations that became effective in January
2006.
The $1.7 million, or 41%, increase in cost of digital
handsets and accessories from the three months ended
March 31, 2005 to the three months ended March 31,
2006 is largely a result of a 45% increase in handset sales.
37
|
|
3.
|
General and
administrative expenses
|
The $1.0 million, or 21%, increase in general and
administrative expenses from the three months ended
March 31, 2005 to the three months ended March 31,
2006 is principally due to the following:
|
|
|
|
|
a $0.4 million, or 23%, 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; and
|
|
|
|
a $0.2 million, or 12%, increase in general corporate costs
due to increases in general and administrative personnel and
various taxes paid to regulatory agencies.
|
f. Corporate
and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
|
and Other
|
|
|
|
|
|
and Other
|
|
|
Change from
|
|
|
|
March 31,
|
|
|
Operating
|
|
|
March 31,
|
|
|
Operating
|
|
|
Previous Year
|
|
|
|
2006
|
|
|
Revenues
|
|
|
2005
|
|
|
Revenue
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
540
|
|
|
|
100
|
%
|
|
$
|
424
|
|
|
|
100
|
%
|
|
$
|
116
|
|
|
|
27
|
%
|
Digital handset and accessory
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
540
|
|
|
|
100
|
%
|
|
|
424
|
|
|
|
100
|
%
|
|
|
116
|
|
|
|
27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation and amortization included below)
|
|
|
(326
|
)
|
|
|
(60
|
)%
|
|
|
(570
|
)
|
|
|
(134
|
)%
|
|
|
244
|
|
|
|
(43
|
)%
|
Cost of digital handset and
accessory sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(326
|
)
|
|
|
(60
|
)%
|
|
|
(570
|
)
|
|
|
(134
|
)%
|
|
|
244
|
|
|
|
(43
|
)%
|
Selling and marketing expenses
|
|
|
(1,308
|
)
|
|
|
(242
|
)%
|
|
|
(1,029
|
)
|
|
|
(243
|
)%
|
|
|
(279
|
)
|
|
|
27
|
%
|
General and administrative expenses
|
|
|
(19,963
|
)
|
|
|
NM
|
|
|
|
(14,016
|
)
|
|
|
NM
|
|
|
|
(5,947
|
)
|
|
|
42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment losses
|
|
|
(21,057
|
)
|
|
|
NM
|
|
|
|
(15,191
|
)
|
|
|
NM
|
|
|
|
(5,866
|
)
|
|
|
39
|
%
|
Depreciation and amortization
|
|
|
(754
|
)
|
|
|
(140
|
)%
|
|
|
(367
|
)
|
|
|
(87
|
)%
|
|
|
(387
|
)
|
|
|
105
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(21,811
|
)
|
|
|
NM
|
|
|
|
(15,558
|
)
|
|
|
NM
|
|
|
|
(6,253
|
)
|
|
|
40
|
%
|
Interest expense, net
|
|
|
(6,259
|
)
|
|
|
NM
|
|
|
|
(4,056
|
)
|
|
|
NM
|
|
|
|
(2,203
|
)
|
|
|
54
|
%
|
Interest income
|
|
|
3,223
|
|
|
|
NM
|
|
|
|
778
|
|
|
|
183
|
%
|
|
|
2,445
|
|
|
|
314
|
%
|
Foreign currency transaction
losses, net
|
|
|
(3
|
)
|
|
|
(1
|
)%
|
|
|
(7
|
)
|
|
|
(2
|
)%
|
|
|
4
|
|
|
|
(57
|
)%
|
Other expense, net
|
|
|
(116
|
)
|
|
|
(21
|
)%
|
|
|
(142
|
)
|
|
|
(33
|
)%
|
|
|
26
|
|
|
|
(18
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax
|
|
$
|
(24,966
|
)
|
|
|
NM
|
|
|
$
|
(18,985
|
)
|
|
|
NM
|
|
|
$
|
(5,981
|
)
|
|
|
32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 three months ended March 31,
2005 to the three months ended March 31, 2006 because
Nextel Chiles subscriber base remained stable.
38
|
|
2.
|
General and
administrative expenses
|
The $5.9 million, or 42%, increase in general and
administrative expenses from the three months ended
March 31, 2005 to the three months ended March 31,
2006 is primarily due to $5.2 million in incremental stock
compensation expense recorded in connection with the
implementation of SFAS 123R.
The $2.2 million, or 54%, increase in interest expense from
the three months ended March 31, 2005 to the three months
ended March 31, 2006 is substantially the result of
interest related to our 2.75% convertible notes that we
issued in August 2005.
The $2.4 million, or 314%, increase in interest income from
the three months ended March 31, 2005 to the three months
ended March 31, 2006 is primarily due to interest earned on
the $350.0 million proceeds received from the issuance of
our 2.75% convertible notes.
Liquidity
and Capital Resources
We had a working capital surplus of $772.6 million as of
March 31, 2006, a $20.6 million decrease compared to
December 31, 2005. The decrease in our working capital,
which is defined as total current assets less total current
liabilities, is primarily attributable to lower consolidated
cash and cash equivalent balances resulting from cash used to
fund the expansion of our digital mobile networks in Mexico and
Brazil.
We recognized net income of $65.0 million for the three
months ended March 31, 2006 and $45.0 million for the
three months ended March 31, 2005. During the first quarter
of 2006, 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
Future Capital Needs and Resources for a discussion
of our future outlook and anticipated sources and uses of funds
for the remainder of 2006.
Cash Flows. Our operating activities
provided us with $84.5 million of net cash during the three
months ended March 31, 2006 and $47.2 million of net
cash during the three months ended March 31, 2005. The
$37.3 million increase in generation of cash is primarily
due to higher operating income resulting from our profitable
growth strategy.
We used $108.8 million of net cash in our investing
activities during the three months ended March 31, 2006
compared to $59.1 million during the three months ended
March 31, 2005. The $49.7 million increase in cash
used in our investing activities is primarily due to a
$31.4 million increase in cash capital expenditures during
the first three months of 2006 compared to the same period in
2005 related to the accelerated build out of our digital mobile
networks in Mexico and Brazil, as well as $26.4 million in
proceeds from the maturity of short-term investments that we
received during the first quarter of 2005.
Our financing activities provided us with $5.3 million of
net cash during the three months ended March 31, 2006,
primarily due to the excess tax benefit we recognized in
connection with our adoption of SFAS 123R, which was
effective January 1, 2006. We did not have any significant
cash flows from financing activities during the three months
ended March 31, 2005.
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 March 31, 2006, our capital resources
included $853.7 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;
|
39
|
|
|
|
|
the amount of operating expenses required to provide our
services;
|
|
|
|
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.
|
Under an existing agreement with American Tower Corporation,
during the three months ended March 31, 2006 we received
$0.4 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.
|
Capital Expenditures. Our capital
expenditures, including capitalized interest, were
$128.9 million for the three months ended March 31,
2006 compared to $73.0 million for the three months ended
March 31, 2005. 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;
|
|
|
|
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 significant 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
Forward Looking Statements.
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 Forward Looking Statements.
40
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
|
|
|
|
income 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.
|
Forward
Looking Statements
Safe Harbor Statement under the Private
Securities Litigation Reform Act of
1995. Certain statements made in this
quarterly report on
Form 10-Q
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:
|
|
|
|
|
our ability to meet the operating goals established by our
business plan;
|
|
|
|
general economic conditions in Latin America and in the market
segments that we are targeting for our digital mobile services;
|
|
|
|
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;
|
|
|
|
substantive terms of any international financial aid package
that may be made available to any country in which our operating
companies conduct business;
|
|
|
|
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;
|
41
|
|
|
|
|
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;
|
|
|
|
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;
|
|
|
|
the success of efforts to improve and satisfactorily address any
issues relating to our digital mobile network performance;
|
|
|
|
future legislation or regulatory actions relating to our
specialized mobile radio services, other wireless communication
services or telecommunications generally;
|
|
|
|
the ability to achieve and maintain market penetration and
average subscriber revenue levels sufficient to provide
financial viability to our digital mobile network business;
|
|
|
|
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;
|
|
|
|
market acceptance of our new service offerings;
|
|
|
|
our ability to access sufficient debt or equity capital to meet
any future operating and financial needs; and
|
|
|
|
other risks and uncertainties described in this quarterly report
on
Form 10-Q
and from time to time in our other reports filed with the
Securities and Exchange Commission.
|
Effect of
New Accounting Standards
In October 2005, the Financial Accounting Standards Board, or
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 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 Statement of Financial Accounting Standards, or SFAS, 154
is permitted but not required. We implemented FSP
No. 13-1,
effective January 1, 2006, as required. The adoption of FSP
No. 13-1
did not have a material impact 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
permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise
would require bifurcation, clarifies that certain instruments
are not subject to the requirements of SFAS 133,
establishes a requirement to evaluate interests in securitized
financial assets to identify interests that may contain an
embedded derivative requiring bifurcation, clarifies what may be
an embedded derivative for certain concentrations of credit risk
and 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.
In March 2006, the Emerging Issues Task Force, or EITF,
discussed
Issue 05-1,
Accounting for the Conversion of an Instrument That
Becomes Convertible upon the Issuers Exercise of a Call
Option, or
EITF 05-1.
The EITF reached a tentative consensus that the issuance of
equity securities to settle an instrument that becomes
convertible upon the issuers exercise of a call option
should be accounted for as a conversion as opposed to an
extinguishment if, at issuance, the debt instrument contains a
substantive conversion feature other than the issuers call
option.
EITF 05-1
is tentatively effective after the FASBs ratification of
the consensus. We are currently evaluating the impact that
EITF 05-1
may have on our consolidated financial statements.
In March 2006, the EITF discussed
Issue 06-3,
How Sales Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross Versus Net Presentation),
42
or
EITF 06-3.
The EITF reached a tentative consensus that a company should
disclose its accounting policy (gross or net presentation)
regarding presentation of sales and other similar taxes. If
taxes included in gross revenues are significant, a company
should disclose the amount of such taxes for each period for
which an income statement is presented. Tentatively,
EITF 06-3
would be applied to financial reports for interim and annual
reporting periods beginning after December 15, 2006. We are
currently evaluating the impact that
EITF 06-3
may have on our consolidated financial statements. 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 on
behalf of local government agencies. During the fourth quarter
of 2005, we increased our operating revenues and general and
administrative expenses 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. During the three months ended March 31, 2006,
Nextel Brazil recorded $6.3 million of revenue-based taxes
as a component of service and other revenues.
|
|
Item 3.
|
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.
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, 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 $31.4 million. The interest rate swap fixed the
amount of interest expense associated with this portion of the
Mexico syndicated loan facility effective August 31, 2005
and continues over the life of the facility based on a fixed
interest rate of about 11.95% per year. As of
March 31, 2006, a significant portion of our borrowings
were fixed-rate long-term debt obligations.
The table below presents principal amounts, related interest
rates by year of maturity and aggregate amounts as of
March 31, 2006 for our fixed rate debt obligations,
including our convertible notes, our syndicated loan facility in
Mexico and our tower financing obligations, the notional amounts
of our purchased call options and written put options and the
fair value of our interest rate swap. We determined the fair
values included in this section based on:
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|
|
|
|
quoted market prices for our convertible notes;
|
|
|
|
carrying values for our tower financing obligations and
syndicated loan facility as interest rates were set recently
when we entered into these transactions; and
|
43
|
|
|
|
|
market values as determined by an independent third party
investment banking firm for our purchased call options, written
put options and interest rate swap.
|
The changes in the fair values of our debt compared to their
fair values as of December 31, 2005 reflect changes in
applicable market conditions. The amount of our forecasted hedge
agreements as of March 31, 2006 represents our 2006 foreign
currency hedges. All of the information in the table is
presented in U.S. dollar equivalents, which is our
reporting currency. The actual cash flows associated with our
long-term debt are denominated in U.S. dollars (US$),
Mexican pesos (MP) and Brazilian reais (BR).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year of Maturity
|
|
|
March 31, 2006
|
|
|
December 31, 2005
|
|
|
|
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
|
|
|
$
|
1,270
|
|
|
$
|
1,768
|
|
|
$
|
1,859
|
|
|
$
|
1,872
|
|
|
$
|
762,652
|
|
|
$
|
770,647
|
|
|
$
|
1,586,456
|
|
|
$
|
770,950
|
|
|
$
|
1,301,140
|
|
Average Interest Rate
|
|
|
10.0
|
%
|
|
|
10.0
|
%
|
|
|
10.0
|
%
|
|
|
10.0
|
%
|
|
|
10.0
|
%
|
|
|
3.1
|
%
|
|
|
3.2
|
%
|
|
|
|
|
|
|
3.2
|
%
|
|
|
|
|
Fixed Rate (MP)
|
|
$
|
9,567
|
|
|
$
|
13,634
|
|
|
$
|
39,415
|
|
|
$
|
40,038
|
|
|
$
|
4,686
|
|
|
$
|
74,593
|
|
|
$
|
181,933
|
|
|
$
|
181,933
|
|
|
$
|
182,848
|
|
|
$
|
182,848
|
|
Average Interest Rate
|
|
|
13.7
|
%
|
|
|
13.5
|
%
|
|
|
12.9
|
%
|
|
|
13.0
|
%
|
|
|
17.6
|
%
|
|
|
17.5
|
%
|
|
|
15.1
|
%
|
|
|
|
|
|
|
15.3
|
%
|
|
|
|
|
Fixed Rate (BR)
|
|
$
|
1,909
|
|
|
$
|
1,318
|
|
|
$
|
3,357
|
|
|
$
|
3,672
|
|
|
$
|
3,134
|
|
|
$
|
55,500
|
|
|
$
|
68,890
|
|
|
$
|
68,890
|
|
|
$
|
58,196
|
|
|
$
|
58,196
|
|
Average Interest Rate
|
|
|
16.8
|
%
|
|
|
21.1
|
%
|
|
|
16.7
|
%
|
|
|
17.7
|
%
|
|
|
20.8
|
%
|
|
|
26.7
|
%
|
|
|
25.1
|
%
|
|
|
|
|
|
|
26.2
|
%
|
|
|
|
|
Variable Rate (US$)
|
|
$
|
10,320
|
|
|
$
|
15,480
|
|
|
$
|
51,600
|
|
|
$
|
51,600
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
129,000
|
|
|
$
|
129,000
|
|
|
$
|
129,000
|
|
|
$
|
129,000
|
|
Average Interest Rate
|
|
|
7.1
|
%
|
|
|
7.1
|
%
|
|
|
7.1
|
%
|
|
|
7.1
|
%
|
|
|
|
|
|
|
|
|
|
|
7.1
|
%
|
|
|
|
|
|
|
6.8
|
%
|
|
|
|
|
Variable Rate (MP)
|
|
$
|
2,517
|
|
|
$
|
3,775
|
|
|
$
|
12,583
|
|
|
$
|
12,584
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
31,459
|
|
|
$
|
31,459
|
|
|
$
|
31,964
|
|
|
$
|
31,964
|
|
Average Interest Rate
|
|
|
9.9
|
%
|
|
|
9.9
|
%
|
|
|
9.9
|
%
|
|
|
9.9
|
%
|
|
|
|
|
|
|
|
|
|
|
9.9
|
%
|
|
|
|
|
|
|
11.1
|
%
|
|
|
|
|
Forecasted Hedge
Agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased call options
|
|
$
|
142,156
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
142,156
|
|
|
$
|
493
|
|
|
$
|
181,426
|
|
|
$
|
2,016
|
|
Written put options
|
|
$
|
142,156
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
142,156
|
|
|
$
|
226
|
|
|
$
|
181,426
|
|
|
$
|
(2,250
|
)
|
Interest Rate
Swap:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable to Fixed
|
|
$
|
2,517
|
|
|
$
|
3,775
|
|
|
$
|
12,583
|
|
|
$
|
12,584
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
31,459
|
|
|
$
|
(1,137
|
)
|
|
$
|
31,964
|
|
|
$
|
(1,174
|
)
|
Average Pay Rate
|
|
|
11.95
|
%
|
|
|
11.95
|
%
|
|
|
11.95
|
%
|
|
|
11.95
|
%
|
|
|
|
|
|
|
|
|
|
|
11.95
|
%
|
|
|
|
|
|
|
11.95
|
%
|
|
|
|
|
Average Receive Rate
|
|
|
9.85
|
%
|
|
|
9.85
|
%
|
|
|
9.85
|
%
|
|
|
9.85
|
%
|
|
|
|
|
|
|
|
|
|
|
9.85
|
%
|
|
|
|
|
|
|
11.13
|
%
|
|
|
|
|
|
|
Item 4.
|
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 the end of the period covered in this report, 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 item described in managements
report on internal control over financial reporting included in
Item 9A of our 2005 annual report on
Form 10-K.
Based on and as of the date of such evaluation and as a result
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.
44
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 tax provisions were not adequate to
ensure that the income tax provision was prepared in accordance
with generally accepted accounting principles. This control
deficiency, which continues to exist as of March 31, 2006,
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 our interim consolidated financial
statements that would not be prevented or detected. Accordingly,
management determined that this control deficiency constitutes a
material weakness.
Changes
in Internal Control over Financial Reporting
During the first quarter of 2006, we implemented Hyperion
Financial Management at our corporate headquarters as a tool to
support our accounting consolidation and external reporting
processes. These changes will reduce the need for manual
spreadsheets and facilitate our workflow thus allowing more time
for analysis. We have realigned our teams and have trained them
to adapt the new processes and controls. As a direct result, we
have been updating our key control activities documentation
related to our compliance with Section 404 of the
Sarbanes-Oxley
Act.
We have also continued to work on a number of initiatives to
remediate the material weakness related to the calculation of
the income tax provision and related balance sheet accounts,
including the following:
|
|
|
|
|
We have made significant progress in filling the positions at
corporate headquarters, with the hiring of a senior tax manager
experienced in income tax calculations under U.S. GAAP, a
senior tax manager experienced in many aspects of income tax
accounting in both Mexico and the U.S., and an additional income
tax specialist with broad experience in tax and finance in Latin
America;
|
|
|
|
We are currently training our recently-hired U.S. based
individuals with regard to controls surrounding the calculation
of the income tax provision and related accounts;
|
|
|
|
We are maintaining our on-going training program to deepen and
broaden the understanding of U.S. GAAP income tax provision
calculation procedures in our foreign subsidiaries;
|
|
|
|
We have evaluated our quarterly procedures, and reallocated the
ownership of some of those controls between headquarters and our
foreign markets to increase the effectiveness of those
procedures; and
|
|
|
|
We continue to work with a third party tax advisor to perform
detailed reviews of the 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.
|
No other changes have been identified that would have materially
affected, or are likely to materially affect, our internal
control over financial reporting.
45
PART II OTHER
INFORMATION
|
|
Item 1.
|
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.
For information on our various loss contingencies, see
Note 6 to our condensed consolidated financial statements
above.
There have been no material changes in our risk factors from
those disclosed in our 2005 annual report on
Form 10-K.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
(a) Our Annual Meeting of Stockholders was held on
Wednesday, April 26, 2006.
(c) The common stockholders voted for the election of three
(3) directors to serve for terms of three (3) years
each, expiring on the date of the annual meeting in 2009 or
until their successors are elected. The results of the voting in
these elections are set forth below.
|
|
|
|
|
|
|
|
|
|
|
|
|
Nominee
|
|
Votes For
|
|
|
Votes Withheld
|
|
|
Broker Non-Votes
|
|
|
Carolyn Katz
|
|
|
141,002,829
|
|
|
|
177,410
|
|
|
|
N/A
|
|
Donald E. Morgan
|
|
|
140,846,111
|
|
|
|
331,128
|
|
|
|
N/A
|
|
George A. Cope
|
|
|
137,372,570
|
|
|
|
3,804,669
|
|
|
|
N/A
|
|
The terms of office of the following directors continued after
the meeting:
|
|
|
Class of 2007
|
|
Class of 2008
|
|
John Donovan
|
|
Neal P. Goldman
|
Steven P. Dussek
|
|
Charles M. Herington
|
Steven M. Shindler
|
|
John W. Risner
|
In addition, the stockholders voted (1) to approve an
Amendment to our Restated Certificate of Incorporation to
increase the number of authorized shares of common stock from
300 million to 600 million shares, (2) to ratify
the appointment of PricewaterhouseCoopers LLP as our independent
registered public accounting firm for fiscal year 2006 and
(3) to approve an adjournment of the Annual Meeting to a
later date or dates, if necessary, in order to permit the
further solicitation of proxies. The results of the voting are
set forth below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Votes
|
|
Votes
|
|
|
|
Proposal
|
|
Votes For
|
|
Against
|
|
Withheld
|
|
Broker Non-Votes
|
|
|
Amendment to our Restated
Certificate of Incorporation
|
|
128,948,967
|
|
12,211,593
|
|
16,679
|
|
|
N/A
|
|
Ratification of Independent
Registered Public Accounting Firm
|
|
140,612,958
|
|
555,121
|
|
9,160
|
|
|
N/A
|
|
Adjournment of the Annual Meeting
|
|
N/A
|
|
N/A
|
|
N/A
|
|
|
N/A
|
|
No other matters were voted upon at the Annual Meeting or during
the quarter covered by this report.
46
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Description
|
|
|
12
|
.1
|
|
Ratio of Earnings to Fixed Charges.
|
|
|
|
|
|
|
|
|
|
|
|
31
|
.1
|
|
Statement of Chief Executive
Officer Pursuant to
Rule 13a-14(a).
|
|
|
|
|
|
|
|
|
|
|
|
31
|
.2
|
|
Statement of Chief Financial
Officer Pursuant to
Rule 13a-14(a).
|
|
|
|
|
|
|
|
|
|
|
|
32
|
.1
|
|
Statement of Chief Executive
Officer Pursuant to 18 U.S.C. Section 1350.
|
|
|
|
|
|
|
|
|
|
|
|
32
|
.2
|
|
Statement of Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350.
|
47
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
By:
|
/s/ DANIEL E. FREIMAN
|
Daniel E. Freiman
Vice President and Controller
(on behalf of the registrant and as
chief accounting officer)
Date: May 8, 2006
48
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Description
|
|
|
12
|
.1
|
|
Ratio of Earnings to Fixed Charges.
|
|
|
|
|
|
|
|
|
|
|
|
31
|
.1
|
|
Statement of Chief Executive
Officer Pursuant to
Rule 13a-14(a).
|
|
|
|
|
|
|
|
|
|
|
|
31
|
.2
|
|
Statement of Chief Financial
Officer Pursuant to
Rule 13a-14(a).
|
|
|
|
|
|
|
|
|
|
|
|
32
|
.1
|
|
Statement of Chief Executive
Officer Pursuant to 18 U.S.C. Section 1350.
|
|
|
|
|
|
|
|
|
|
|
|
32
|
.2
|
|
Statement of Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350.
|
49