e10vk
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF
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THE SECURITIES EXCHANGE ACT OF
1934
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For the fiscal year ended
December 31, 2006
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or
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o
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF
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THE SECURITIES EXCHANGE ACT OF
1934
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For the transition period
from to
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Commission file number
0-32421
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NII HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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91-1671412
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(State or other jurisdiction of
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(I.R.S. Employer Identification No.)
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incorporation or organization)
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10700 Parkridge Boulevard,
Suite 600
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20191
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Reston, Virginia
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(Zip Code)
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(Address of principal executive
offices)
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Registrants telephone number,
including area code:
(703) 390-5100
Securities registered pursuant to
Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered
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Common Stock, par value
$0.001 per share
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The Nasdaq Stock Market
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Securities registered pursuant to
Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act.
(Check one): Large
accelerated
filer þ Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes No þ
State the aggregate market value of the voting and non-voting
common equity held by non-affiliates computed by reference to
the price at which the common equity was last sold, or the
average bid and asked price of such common equity, as of
June 30, 2006: $7,864,275,030
Indicate by check mark whether the registrant has filed all
documents and reports required to be filed by Section 12,
13 or 15(d) of the Securities Exchange Act of 1934 subsequent to
the distribution of securities under a plan confirmed by a
court. Yes þ No o
Indicate the number of shares outstanding of each of the
registrants classes of common stock, as of the latest
practicable date.
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Number of Shares Outstanding
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Title of Class
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on February 20, 2007
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Common Stock, $0.001 par value
per share
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162,132,667
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Documents
Incorporated by Reference
Portions of the registrants Proxy Statement for the 2007
Annual Meeting of Stockholders are incorporated by reference
into Part III hereof.
NII
HOLDINGS, INC.
TABLE OF
CONTENTS
1
NII
HOLDINGS, INC.
Unless the context requires otherwise, NII Holdings,
Inc., NII Holdings, we,
our, us and the Company
refer to the combined businesses of NII Holdings, Inc. and its
consolidated subsidiaries. NII Holdings, Inc., formerly known as
Nextel International, Inc., was incorporated in Delaware in 2000.
Except as otherwise indicated, all amounts are expressed in
U.S. dollars and references to dollars and
$ are to U.S. dollars. All consolidated
historical financial statements contained in this report are
prepared in accordance with accounting principles generally
accepted in the United States.
Our principal executive office is located at 10700 Parkridge
Boulevard, Suite 600, Reston, Virginia 20191. Our telephone
number at that location is
(703) 390-5100.
We maintain an internet website at www.nii.com. Information
contained on our website is not part of this annual report.
Stockholders of the Company and the public may access our
periodic and current reports (including annual, quarterly and
current reports on
Form 10-K,
Form 10-Q
and
Form 8-K,
respectively, and any amendments to those reports) filed with or
furnished to the Securities and Exchange Commission pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, through the investor relations
section of our website. The information is provided by a third
party link to the SECs online EDGAR database, is free of
charge and may be reviewed, downloaded and printed from our
website at any time.
We also provide public access to our Code of Ethics, entitled
the NII Holdings, Inc. Code of Business Conduct and Ethics and
the charters of the following committees of our Board of
Directors: the Audit Committee, the Compensation Committee and
the Nominating Committee. The Code of Business Conduct and
Ethics, corporate governance guidelines and committee charters
may be viewed free of charge on the Investor Relations link of
our website at the following address: www.nii.com. You may
obtain copies of any of these documents free of charge by
writing to: NII Holdings Investor Relations, 10700 Parkridge
Boulevard, Suite 600, Reston, Virginia 20191. If a
provision of our Code of Business Conduct and Ethics required
under the Nasdaq Global Select Market corporate governance
standards is materially modified, or if a waiver of our Code of
Business Conduct and Ethics is granted to a director or
executive officer, we will post a notice of such action on the
Investor Relations link of our website at the following address:
www.nii.com. Only the Board of Directors or the Audit Committee
may consider a waiver of the Code of Business Conduct and Ethics
for an executive officer or director.
Nextel, Nextel Direct Connect,
Nextel Online, Nextel Worldwide and
International Direct Connect are trademarks or
service marks of Nextel Communications, Inc., a wholly-owned
subsidiary of Sprint Nextel Corporation. Motorola
and iDEN are trademarks or service marks of
Motorola, Inc.
1. Our
Networks and Services
We provide digital wireless communication services, primarily
targeted at meeting the needs of customers who use our services
primarily for business purposes, 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.
In addition, we recently launched our digital services on a
limited basis in Santiago, Chile. 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 and
suburban 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. We believe
that vehicle traffic congestion, low wireline service
penetration and the expanded coverage of wireless networks
encourage the use of the mobile wireless communications services
that we offer in these areas.
2
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, which is the only digital technology currently
available that can be used on non-contiguous spectrum like ours,
allows us to use our spectrum efficiently and offer multiple
digital wireless services integrated into a variety of digital
handset devices. Our digital mobile networks support multiple
digital wireless services, including:
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digital mobile telephone service, including advanced calling
features such as speakerphone, conference calling, voice-mail,
call forwarding and additional line service;
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Nextel Direct
Connect®
service, which allows subscribers anywhere on our network to
talk to each other instantly, on a
push-to-talk
basis, on a private
one-to-one
call or on a group call;
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International Direct
Connect®
service, together with Sprint Nextel Corporation and
TELUS Corporation, which allows subscribers to communicate
instantly across national borders with our subscribers in
Mexico, Brazil, Argentina, Peru and Chile, and, except for our
customers in Chile, with Sprint Nextel Corporation subscribers
in the United States and with TELUS subscribers in Canada;
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mobile internet services, text messaging services,
e-mail
services including
Blackberrytm
services that were recently introduced in Mexico and Peru,
location-based services, which includes the use of Global
Positioning System (GPS) technologies, digital media services
and advanced
Javatm
enabled business applications, which are generally marketed as
Nextel
Onlinesm
services; and
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international roaming capabilities, which are marketed as
Nextel
Worldwidesm
services.
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As of December 31, 2006, our operating companies had
licenses to use 800 MHz spectrum in markets that cover
about 308 million people, an increase of 16 million
people from December 31, 2005. Our licenses are
concentrated in the areas of the highest population and business
activity in the countries in which we operate. We currently
provide integrated digital mobile services in the three largest
metropolitan areas in each of Mexico, Brazil and Argentina, in
the largest city in Peru and in various other cities in each
country. In December 2006, we announced the launch of digital
mobile services in Santiago, Chile, the largest metropolitan
area in Chile. As of December 31, 2006, our operating
companies had a total of about 3.44 million digital
handsets in commercial service, an increase of 933 thousand from
the 2.51 million digital handsets in commercial service as
of December 31, 2005.
The table below provides an overview of our total digital
handsets in commercial service in the countries indicated as of
December 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. System type indicates whether
the local wireless communications system is based on an analog
SMR system or a digital enhanced SMR system.
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Population
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Digital Handsets
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Covered by
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in Commercial
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Licenses
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Service
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As of December 31,
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As of December 31,
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Country
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System Type
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2006
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2005
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2006
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2005
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(in millions)
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(in thousands)
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Mexico
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Digital/analog
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104
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103
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1,544
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1,120
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Brazil
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Digital/analog
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147
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137
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899
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638
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Argentina
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Digital
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21
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21
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651
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500
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Peru
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Digital/analog
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20
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15
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345
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248
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Chile
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Digital/analog
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16
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16
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1
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Total
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308
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292
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3,440
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2,506
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We refer to our operating companies by the countries in which
they operate, such as Nextel Mexico, Nextel Brazil, Nextel
Argentina, Nextel Peru and Nextel Chile. For financial
information about our operating
3
companies, which we refer to as segments, see Note 15 to
our consolidated financial statements included at the end of
this annual report on
Form 10-K.
We were organized in 1995 as a holding company for the
operations of Nextel Communications, Inc. in selected
international markets. In December 2001, we changed our name
from Nextel International, Inc. to NII Holdings, Inc. On
May 24, 2002, we and NII Holdings (Delaware), Inc., our
wholly-owned subsidiary, filed voluntary petitions for
reorganization under Chapter 11 of the United States
Bankruptcy Code, which we refer to as the Bankruptcy Code, in
the United States Bankruptcy Court for the District of Delaware.
None of our international operating companies filed for
Chapter 11 reorganization. On October 28, 2002, the
Bankruptcy Court confirmed our plan of reorganization and on
November 12, 2002, we emerged from Chapter 11
proceedings.
2. 2006
Significant Developments
Spectrum
Acquisitions
Cosmofrecuencias Acquisition. In
October 2006, Nextel Mexico acquired all of the shares of
Cosmofrecuencias, S.A. de C.V. for $200.0 million in cash.
This acquisition provides Nextel Mexico with a local
fixed/mobile wireless telephone concession, which we expect will
result in interconnect and operating cost savings, as well as
additional revenue generating opportunities in the future. This
acquisition also provides Nextel Mexico with 50MHz of 3.4GHz
spectrum nationwide in Mexico. We accounted for this acquisition
as an asset purchase and have recorded the fair value of the
acquired assets on our consolidated balance sheet.
Other Acquisitions. During 2006, we
acquired 50MHz of 3.4GHz spectrum in all major provinces in
Peru, and we entered into an agreement to acquire 50MHz of
3.4GHz spectrum nationwide in Argentina, subject to regulatory
approval. See K. Operating Companies.
Argentina. and K. Operating Companies.
Peru. for further information.
Operational
Activities
Telmex Agreement. In connection with
its network expansion plan, Nextel Mexico signed an agreement
with Telefonos de Mexico, S.A. de C.V., or Telmex, effective
February 14, 2006, that allows Nextel Mexico to
interconnect and terminate traffic with Telmex in 27 cities
throughout Mexico using five local connections. The agreement
covers each individual city for its own term of 15 years
from the date service begins in that city and provides Nextel
Mexico with an unlimited amount of traffic termination on the
Telmex network for a total cost of $44.5 million, plus any
applicable value-added taxes. We are accounting for the Telmex
agreement as a service agreement. As a result, we are expensing
any payments made under this agreement in the period to which
they relate. Nextel Mexico paid a $7.0 million deposit to
Telmex on March 31, 2006. The agreement specifies the
second of three total installment payments in the amount of
$18.5 million should be made on March 15, 2007, and
the last payment in the amount of $19.0 million should be
made on March 15, 2008.
Motorola Purchase Commitments. In
September 2006, we entered into agreements to extend our
relationship with Motorola for the supply of iDEN handsets and
iDEN network infrastructure through December 31, 2011.
Under these agreements, Motorola agreed to maintain an adequate
supply of the iDEN handsets and equipment used in our business
for the term of the agreement and to continue to invest in the
development of new iDEN devices and infrastructure features. In
addition, we agreed to annually escalating handset volume
purchase commitments and certain pricing parameters for handsets
and infrastructure linked to the volume of our purchases. If we
do not meet the specified handset volume commitments, we would
be required to pay an additional amount based on any shortfall
of actual purchased handsets compared to the related annual
volume commitment.
Digital Operations in Chile. In
December 2006, we announced the launch of digital operations in
Chile, which extended our services to Santiago, Chile and
certain surrounding areas. As a result of this launch, customers
in our service areas in Chile will have access to some of our
voice services, including Direct Connect and International
Direct Connect,
push-to-talk
service and telephone interconnect. Initial operations
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are targeted to select business and roaming customers, as our
customers across Argentina, Brazil, Mexico and Peru have access
to roaming services when conducting business in Chile.
SMS Agreements. During 2006, several of
our operating companies agreed with other telecommunications
companies to allow for short messaging services, or SMS, between
the companies respective networks. The interoperability of
SMS between the companies under these agreements will allow
wireless users in the areas served by these parties to exchange
SMS and text messages with the other partys customers. We
believe that this capability may enhance our ability to generate
revenues from data services to the extent our customers decide
to use these services.
Financing
Activities
Refinancing of Mexico Syndicated
Loan Facility. On June 27, 2006,
Nextel Mexico entered into an agreement to refinance its
syndicated loan. The loan principal was increased from the
original $250.0 million to $296.6 million after the
refinancing. Under the agreement, the loan was refinanced using
the same variable (i.e., LIBOR and TIIE) and fixed rates as the
original agreement but with lower spreads for each tranche. Of
the total amount of the refinanced loan, $156.6 million is
denominated in U.S. dollars, with a floating interest rate
based on LIBOR (Tranche A 6.69% as of
December 31, 2006), $57.0 million is denominated in
Mexican pesos, with a floating interest rate based on the
Mexican reference rate TIIE (Tranche C 8.51% as
of December 31, 2006), and $83.0 million is
denominated in Mexican pesos, at an interest rate fixed at the
time of funding (Tranche B 11.36%). For
Tranche B and Tranche C, the principal and interest
payments will take place on the same dates as previously
scheduled under the original agreement. Under the original
agreement, principal for Tranche A was also due on the same
dates as the principal under Tranches B and C. However, after
the refinancing, principal for Tranche A will now be due in
a lump sum of $156.6 million in June 2011.
Tender Offer for Conversion of 3.5% Convertible
Notes. In November 2006, we announced an
offer designed to induce holders of our 3.5% convertible
notes to convert those notes into shares of our common stock.
Under the terms of the offer, we agreed to pay a cash premium of
$50.00, plus accrued and unpaid interest up to but excluding the
conversion date, for each of the remaining $1,000 principal
amount of the notes to the extent the holders elected to convert
those notes into shares of our common stock pursuant to the
offer. In connection with this offer, on December 14, 2006,
all of the holders of our 3.5% convertible notes converted
the $91.4 million remaining aggregate principal face amount
of our 3.5% convertible notes into 6,852,150 shares of
common stock (75.0 shares issued per $1,000 of debt
principal multiplied by the debt principal) in accordance with
the original terms of the convertible notes, and we paid a total
of $4.6 million as additional consideration for conversion,
as well as $0.8 million of accrued interest and
$0.5 million of direct external costs associated with this
transaction. We recorded the $4.6 million paid to the
noteholders and the $0.5 million of direct external costs
as debt conversion expense in our consolidated statement of
operations. In addition, we reclassified to paid-in capital the
remaining $1.5 million of deferred financing costs related
to the notes that were converted.
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C.
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Our
Products, Services and Solutions
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We offer a wide range of wireless communications services and
related subscriber equipment designed to meet the needs of our
targeted customer groups, including small, medium and large
businesses and individuals who utilize premium mobile
communications features and services. These services and
equipment have been designed to provide innovative features that
meet those customers needs for fast and reliable voice and
data communications that allow them to conduct business quickly
and efficiently.
1. Nextel Direct
Connect®. One
of our key competitive differentiators is Nextel Direct Connect,
the long-range walkie-talkie service that allows communication
at the touch of one button. The Nextel Direct Connect feature
gives customers the ability to instantly set up a
conference either privately
(one-to-one)
or with a group
(one-to-many)
which allows our customers to initiate and complete
communications much more quickly than is possible using a
traditional wireless call. Nextel Direct Connect service greatly
enhances the instant communication abilities of business users
within their organizations and with suppliers, vendors and
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customers, and provides individuals the ability to contact
business colleagues, friends and family instantly. This unique
service is enhanced by our International Direct
Connect®
service, which allows our subscribers to communicate instantly
across national borders. In addition, our agreements with Sprint
Nextel Corporation and TELUS Corporation, allow our
subscribers in Mexico, Brazil, Argentina and Peru to Direct
Connect subscribers in the United States and Canada.
We also offer other
push-to-talk-based
applications in some of the markets in which we operate,
including a
push-to-email
application that allows a user to send a streaming voice message
from his or her handset to an email recipient using our Direct
Connect feature, Direct
Talksm,
a service available on certain handsets that enables
off-network
walkie-talkie communication, and Desktop Dispatch, a service
that allows users to Direct Connect messages between Nextel
handsets and any internet connected personal computer.
Although a number of our competitors have launched or announced
plans to launch services that are designed to compete with
Direct Connect, we do not believe that the current versions of
these services compare favorably with our service in terms of
latency, quality, reliability or ease of use.
2. Wireless Data Solutions and Nextel
Online®. We
offer a variety of wireless data solutions that are designed to
help companies increase productivity through the delivery of
real-time information to mobile workers anytime and anywhere,
including remote
e-mail
access and mobile messaging services using two-way text
communications capabilities from their handsets. Accessible via
our wireless handsets, in addition to laptop computers and
handheld computing devices, wireless data solutions enable quick
response among workers in the field and streamline operations
through faster exchanges of information to support workforce
mobility. We also design wireless business solutions to meet the
needs of specific customers based on their industry and
individualized business needs, including a wide array of fleet
and workforce management services that utilize the unique
capabilities of our data network, such as the ability to
accurately and in near real time, locate handsets using assisted
global positioning system, or A-GPS, technology. Wireless
business services are backed by customer support teams in each
country that help customers build, distribute, and manage
wireless applications. In addition, we offer our customers
always-on connectivity to the Internet directly from their
handset through Nextel Online, which combines the vast resources
of the Internet with convenient mobile content services, all
from their handset. We also offer a range of messaging services,
including two-way SMS and text messaging, as well as additional
mobile data communications services. We have also recently
introduced email services such as Blackberry enterprise and
internet services that are available using our Blackberry
devices in Mexico and Peru.
3. Handsets. We offer all of our
voice and data communications features and services through
handsets that incorporate Motorolas iDEN technology and
offer our unique
4-in-1
service, including digital wireless service, Nextel Direct
Connect walkie-talkie service, wireless Internet access and
two-way messaging capabilities. All of our handsets are
developed and manufactured by Motorola, other than the
Blackberry devices, which are manufactured by Research in
Motion, or RIM. Our handsets range from basic models designed to
serve the needs of customers who require basic wireless services
without sacrificing the essential features they depend upon to
do their jobs, to more advanced Blackberry devices, which, in
addition to digital wireless and Nextel Direct Connect features,
provide integrated access to one or multiple corporate and
personal email accounts. Our handsets offer a wide range of
features, and many include a built-in speakerphone, additional
line service, conference calling, an external screen that lets
customers view caller ID, voice-activated dialing for hands-free
operation, a voice recorder for calls and memos, an advanced
phonebook that manages contacts and datebook tools to manage
calendars and alert users of business and personal meetings. All
of our current handset offerings have subscriber identification
module, or SIM, cards, which carry relevant authentication
information and address book information, thereby greatly easing
subscribers abilities to upgrade their handsets quickly
and easily, particularly in conjunction with our on-line
web-based
back-up
tools. Many of our handsets include pre-installed
Javatm
applications. Java enables users to create and execute a number
of mobile applications and supports a wide range of downloadable
digital media capabilities.
4. International Roaming
Services. In addition to offering subscribers
the ability to roam in areas in other countries served by our
operating companies iDEN networks and those operated by
Sprint Nextel in the United States and TELUS in Canada, we offer
handsets that are capable of roaming on the networks in other
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countries that operate using the global system for mobile
communications, or GSM, standard. The availability of these
services is subject to reaching agreements with the operators of
those networks. Our customers can roam in over 60 countries in
the world. We market these roaming capabilities as Roaming
International
and/or
Nextel
Worldwidesm
services.
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D.
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Our
Network and Wireless Technology
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1.
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Our
iDEN Network Technology
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Currently, most mobile wireless communications services in our
markets are either SMR, cellular or personal communications
services systems. Our operating companies offer analog SMR or
digital enhanced SMR services, or a combination of both.
Our digital mobile networks utilize the advanced iDEN technology
developed and designed by Motorola. iDEN technology is able to
operate on non-contiguous spectrum frequencies, which previously
were usable only for two-way radio calls. Most of the iDEN
handsets that we offer are not currently designed to roam onto
non-iDEN wireless networks. Although iDEN offers a number of
advantages in relation to other technology platforms, including
the ability to operate on non-contiguous spectrum like ours and
to offer the Nextel Direct Connect walkie-talkie feature, unlike
other wireless technologies, it is a proprietary technology that
relies solely on the efforts of Motorola and any future
licensees of this technology for product development and
innovation. We also rely on Motorola to provide us with
technology improvements designed to expand our wireless voice
capacity and improve our services. Motorola is currently and is
expected to continue to be our sole source supplier of iDEN
infrastructure and all of our handsets except Blackberry
devices, which are manufactured by RIM.
The iDEN technology shares many common components with the
global system for mobile communications, or GSM, technology that
has been established as the digital cellular communications
standard in Europe and with a variation of that GSM technology
being deployed by certain personal communications services, or
PCS, operators in the United States. The design of our existing
and proposed digital mobile networks currently is premised on
dividing a service area into multiple sites. These sites have a
typical coverage area ranging from less than one mile to thirty
miles in radius, depending on the terrain and the power setting.
Each site contains a low-power transmitter, receiver and control
equipment referred to as the base station. The base station in
each site is connected by microwave, fiber optic cable or
telephone line to a computer controlled switching center. The
switching center controls the automatic transfer of wireless
calls from site to site as a subscriber travels, coordinates
calls to and from a digital handset and connects wireless calls
to the public switched telephone network. In the case of two-way
radio, equipment called a dispatch application processor
provides call setup, identifies the target radio and connects
the subscriber initiating the call to other targeted
subscribers. These two-way radio calls can be connected to one
or several other subscribers and can be made without
interconnecting to the public switched telephone network.
Currently, there are three principal digital technology formats
used by providers of cellular telephone service or personal
communications services:
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time division multiple access (TDMA) digital transmission
technology;
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code division multiple access (CDMA) digital transmission
technology; and
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global system for mobile communications (GSM) digital
transmission technology.
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Although TDMA, CDMA and GSM are digital transmission
technologies that share basic characteristics in contrast to
analog transmission technology, they are not compatible or
interchangeable with each other. Motorolas proprietary
iDEN technology is a hybrid of the TDMA technology format, but
it differs in a number of significant respects from the versions
of the TDMA technology used by cellular and personal
communications services providers.
7
The iDEN technology substantially increases the capacity of our
existing spectrum channels and permits us to utilize our current
holdings of SMR spectrum more efficiently. This increase in
capacity is accomplished in two ways:
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First, each channel on our digital mobile networks is capable of
carrying up to six voice
and/or
control paths, by employing six-time slot TDMA digital
technology. Each voice transmission is converted into a stream
of data bits that are compressed before being transmitted. This
compression allows each of these voice or control paths to be
transmitted on the same channel without causing interference.
Upon receipt of the coded voice data bits, the digital handset
decodes the voice signal. Using iDEN technology, our two-way
radio dispatch service achieves about six times improvement over
analog SMR in channel utilization capacity and about three times
improvement over analog SMR in channel utilization capacity for
channels used for mobile telephone service. We have recently
implemented enhancements to the voice coder and related
technology used in our iDEN-based network in certain markets
that are designed to further increase the capacity for channels
used for mobile telephone service.
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Second, our digital mobile networks reuse each channel many
times throughout the market area in a manner similar to that
used in the cellular industry, further improving channel
utilization capacity.
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Motorola provides the iDEN infrastructure equipment and handsets
throughout our markets under agreements that set the prices we
must pay to purchase and license this equipment, as well as a
structure to develop new features and make long-term
improvements to our networks. Motorola also provides integration
services in connection with the deployment of our iDEN network
elements. Our agreements with Motorola impose limitations and
conditions on our ability to use other technologies. These
agreements may delay or prevent us from employing new or
different technologies that perform better or are available at a
lower cost. Furthermore, iDEN technology is not as widely
adopted in relation to other wireless technologies and currently
has fewer subscribers on a worldwide basis than other digital
technology formats. See Item 1A. Risk Factors 7.
Because we rely on one supplier to implement our digital mobile
networks, any failure of that supplier to perform could
adversely affect our operations.
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2.
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Network
Expansion and Future Technologies
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During 2006, we expanded the geographic coverage of our
networks, as well as their capacity and quality, by adding 953
transmitter and receiver sites to our networks, bringing the
total number of sites as of December 31, 2006 to 4,524.
This expansion, which was focused primarily in our two largest
operating markets, Mexico and Brazil, was a part of our strategy
to expand our networks geographic coverage and capacity
where necessary to meet the growing demand of our customers. In
2007, we expect to build over 750 additional transmitter and
receiver sites to improve both our geographic coverage and to
meet the capacity needs of our growing customer base.
Another key component in our overall strategy to improve the
coverage and capacity of, and services offered on, our networks
and the quality of our services currently and in the future is
ensuring that we have sufficient radio spectrum in the
geographic areas in which we operate. During 2005, we acquired
licenses to use additional 800 MHz spectrum in Mexico in a
government auction. In addition, during 2006, we purchased
licenses to use other radio spectrum bands in Mexico and Peru.
We are in the process of acquiring licenses to use other radio
spectrum bands in Argentina, pending regulatory approval. The
licenses relating to the newly acquired spectrum outside the
800 MHz band generally provide for nationwide rights to
utilize a significant block of contiguous spectrum that may
support the future deployment of new network technologies and
services. Consistent with this overall strategy, we review
alternate technologies as they are developed to assess their
technical performance, as well as their ability to meet our
customers requirements, and to evaluate customer demand
for the features and services they support. We will deploy a new
technology only if and when it is warranted by expected customer
demand and the anticipated benefits of services supported by the
new technology outweigh the costs of providing those services.
Our decision whether and how to deploy alternative technologies,
as well as our choice of alternative technologies, would likely
be affected by a number of factors, including the types of
features and services supported by the technology, the
availability
8
and pricing of related equipment and our need to continue to
support iDEN-based services for our existing customer base
either on an ongoing or transitional basis.
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E.
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Network
Implementation, Design and Construction
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After obtaining necessary regulatory authorizations to develop
and deploy our networks, we undertake a careful frequency
planning and system design process. Our sites have been selected
on the basis of their proximity to targeted customers, the
ability to acquire and build the sites and frequency propagation
characteristics. Site procurement efforts include obtaining
leases and permits and, in many cases, zoning approvals. The
preparation of each site, including grounding, ventilation, air
conditioning and construction, typically takes three months. We
must also obtain all equipment necessary for the site. Equipment
installation, testing and optimization generally take at least
an additional four weeks. Any scheduled build-out or expansion
may be delayed due to typical permitting, construction and other
delays.
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F.
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Sales and
Distribution
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Our differentiated products and services allow us to target
customers who use our services primarily for business purposes,
which we believe represent the most valuable customers in the
wireless industry. Our focus on these customers has resulted in
the acquisition of what we believe to be the most valuable
customer base in the markets we serve, with higher customer
loyalty rates and monthly average revenue per subscriber and the
highest lifetime revenue per subscriber of any service provider
in our markets. Our operating companies use a variety of sales
channels as part of our strategy to increase our customer base.
These sales channels may include direct sales representatives,
indirect sales agents, Nextel stores and other customer
convenient sales channels such as the web. Each of our operating
companies is continuously optimizing the mix of sales channels
to take into consideration the methods that best meet local
customer preferences and facilitate our overall strategy of
attracting and retaining customers in our targeted groups.
Our operating companies employ direct sales representatives who
market our services directly to potential and existing
customers. The focus of our direct sales force is primarily on
mid-to-large
businesses that value our industry expertise and extensive
product portfolio, as well as our ability to develop tailored
custom communications capabilities that meet the specific needs
of these customers.
Our operating companies also utilize indirect sales agents,
which mainly consist of local and national non-affiliated
dealers. Dealers are independent contractors that solicit
customers for our service and are generally paid through
commissions. Dealers participate with our operating
companies direct sales forces in varying degrees in
pursuing each of our targeted customer groups. Our sales
channels in some of our markets also include distribution
through customer-convenient channels, including telesales and
sales through our Nextel stores. On the web, customers are able
to compare our various rate plans and research the suite of our
products and services, including handsets, accessories and
special promotions.
Our operating companies primarily market their wireless
communications services to businesses with mobile work forces
and/or
multiple locations, such as service companies, security firms,
contractors and delivery services. Companies with mobile work
forces often need to provide their personnel with the ability to
communicate directly with one another. To meet the needs of
these customers, we offer a package of services and features
that combines multiple communications services in one digital
handset. This package includes Nextel Direct Connect, which
allows users to contact other subscribers instantly on a
push-to-talk
basis, on a private
one-to-one
call or on a
one-to-many
group call. To further differentiate our service from that of
our competitors, we offer Nextel Direct Connect in, among and
throughout all areas covered by our digital wireless network in
each country in which we operate as well as internationally in
the United States and certain parts of Canada. The nationwide
and international network features of our Nextel Direct Connect
and International Direct Connect services allow our customers to
avoid the long distance and roaming charges that our competitors
may charge for long distance and international long distance
communications.
9
The Latin American mobile communications industry has undergone
significant growth in recent years. Our total digital handsets
in commercial service within the markets we serve reached about
3.4 million as of December 31, 2006, which represents
an increase of 37% compared to about 2.5 million handsets
in commercial service as of December 31, 2005. We believe
that the wireless communications industry has been and will
continue to be characterized by intense competition on the basis
of price, the types of services offered and quality of service.
In the countries in which we operate, there are principally
three other multinational providers of mobile wireless voice
communications with whom we compete:
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America Movil, which has the largest wireless market share in
Mexico, operates in eight of Brazils ten cellular licensed
areas and has nationwide coverage in Argentina, Peru and Chile;
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Telefonica Moviles, which has wireless operations throughout
Mexico, Argentina, Peru and Chile, is a joint controlling
shareholder of Vivo, the largest wireless operator in
Brazil; and
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Telecom Italia Mobile, or TIM, which has wireless operations
covering most of Brazil, and is a joint controlling shareholder
of the wireless affiliate of Telecom Argentina.
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We also compete with regional or national providers of mobile
wireless voice communications, such as Telemars Oi in
Brazil and Unefon and Iusacell in Mexico.
In addition, new licenses for spectrum may be auctioned by
governments in markets in which we operate allowing for new
competitors, as well as the competitors listed above, many of
whom have greater financial resources, coverage areas
and/or name
recognition than we do, to expand into new markets and offer new
products and services. Some of these existing competitors have
more extensive distribution channels than ours, a more expansive
spectrum position than ours, or are able to acquire subscribers
at a lower cost than we can. We also expect current and future
competitors will continue to upgrade their systems to provide
additional services competitive with those available on our
networks. We also expect competition to increase as a result of
other technologies and services that are developed and
introduced in the future. These technologies and services may
potentially include those using either licensed or unlicensed
spectrum including World Interoperability for Microwave Access,
or WiMax, and wireless fidelity, or WiFi. Additionally, some
competitors operate in the wireline business allowing them to
offer a bundle of wireline and wireless services to their
customers.
In each of the markets where our operating companies operate, we
compete with other communications services providers, based
primarily on our differentiated wireless service offerings and
products, principally our Direct Connect service, including
International Direct Connect. We also believe that we
differentiate ourselves from our competition by focusing on the
quality of our customer care and service. Our competition in
many of our markets focus their marketing efforts on retail
customers who purchase pre-paid services. Our focus on customer
service and care is an important component of our strategy to
attract and retain our target customers, primarily business
users and individuals who use premium services. Our competitors
include other wireless communications companies and wireline
telephone companies. Although pricing is often an important
factor in potential customers purchase decisions, we
believe that our targeted customer base of primarily business
users and individuals who utilize premium mobile communications
features and services are also likely to base their purchase
decisions on quality of service and the availability of
differentiated features and services that make it easier for
them to get things done quickly and efficiently.
Many existing telecommunications enterprises in the markets in
which our operating companies conduct business have successfully
attracted significant investments from multinational
communications companies. Because of their financial resources,
these competitors significantly outspend us with their
advertising/brand awareness campaigns and may be able to reduce
prices to gain market share. Moreover, the higher cost of our
subscriber equipment relative to our competitors requires us to
absorb a comparatively larger part of the cost of offering
handsets to new and existing customers and places us at a
competitive disadvantage with respect to the pricing of our
handsets. We expect that the prices we charge for our products
and services will decline
10
over the next few years as competition intensifies in our
markets. Several of our competitors have introduced aggressive
pricing promotions and shared minutes between groups of callers.
In addition, several of our competitors have also introduced
Push-To-Talk
over Cellular service, which is a walkie-talkie type of service
similar to our Direct Connect service. While we believe that the
competitors current versions of Push- To-Talk over
Cellular do not compare favorably with our Direct Connect
service, particularly in terms of latency, quality, reliability
or ease of use, if competitors are able to replicate a product
more comparable to ours, we may lose some of our competitive
advantage.
The Latin American wireless market is predominantly a pre-paid
market, which means that customers pay in advance for a
pre-determined number of minutes of use. However, our strategy
primarily focuses on customers who use our services primarily
for business purposes, purchase our services under contract and
pay for their services on a monthly basis based on usage. These
customers typically represent the premium segment within our
markets and they generally offer higher average monthly revenue
and higher operating income per subscriber. We believe that this
strategy has allowed us to acquire and retain the most
profitable subscribers in the markets in which we operate. Since
the wireless industry has often competed based on price,
increased competition could require us to decrease prices or
increase service and product offerings, which would lower our
revenues or increase our costs. Additional service offerings by
our competitors
and/or
product offerings could also impact our ability to retain
customers. While we believe that the market for premium
customers will continue to grow, the market could become
saturated as competition in this customer segment increases.
For a more detailed description of the competitive factors
affecting each operating company, see the
Competition discussion for each of those operating
companies under K. Operating Companies.
The licensing, construction, ownership and operation of wireless
communications systems are regulated by governmental entities in
the markets in which our operating companies conduct business.
The grant, maintenance, and renewal of applicable licenses and
radio frequency allocations are also subject to regulation. In
addition, these matters and other aspects of wireless
communications system operations, including rates charged to
customers and the resale of wireless communications services,
may be subject to public utility regulation in the jurisdiction
in which service is provided. Further, statutes and regulations
in some of the markets in which our operating companies conduct
business impose limitations on the ownership of
telecommunications companies by foreign entities. Changes in the
current regulatory environments, the interpretation or
application of current regulations or future judicial
intervention in those countries could impact our business. These
changes may affect interconnection arrangements, requirements
for increased capital investments, prices our operating
companies are able to charge for their services or foreign
ownership limitations, among other things. For a more detailed
description of the regulatory environment in each of the
countries in which our managed operating companies conduct
business, see the Regulatory and Legal Overview
discussion for each of those operating companies under
K. Operating Companies.
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J.
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Foreign
Currency Controls and Dividends
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In some of the countries in which we operate, the purchase and
sale of foreign currency is subject to governmental control.
Additionally, local law in some of these countries may limit the
ability of our operating companies to declare and pay dividends.
Local law may also impose a withholding tax in connection with
the payment of dividends. For a more detailed description of the
foreign currency controls and dividend limitations and taxes in
each of the countries in which our managed operating companies
conduct business, see the Foreign Currency Controls and
Dividends discussion for each of those operating companies
under K. Operating Companies.
11
Operating Company Overview. We refer to our
wholly-owned Mexican operating company, Comunicaciones Nextel de
Mexico, S.A. de C.V., as Nextel Mexico. Several wholly-owned
subsidiaries of Nextel Mexico provide digital mobile services
under the trade name Nextel in the following major
business centers with populations in excess of 1 million
and along related transportation corridors:
Digital
Mexico
City
Guadalajara
Puebla
Leon
Monterrey
Toluca
Tijuana
Torreon
Ciudad Juarez
Merida
San Luis Potosi
Cuernavaca
In addition, Nextel Mexico is currently offering digital
services in a number of additional cities and related connecting
routes and continues to offer analog services in several other
markets.
Nextel Mexico has licenses to use 800 MHz spectrum in
markets covering about 104 million people. In addition,
Nextel Mexico has a total covered population for digital
services of about 60 million people. As of
December 31, 2006, Nextel Mexico provided service to about
1,544,600 digital handsets.
In September 2006, Nextel Mexico signed an agreement to acquire
all of the shares of Cosmofrecuencias, S.A. de C.V. for
$200.0 million in cash. On October 25, 2006, Nextel
Mexico received the necessary regulatory approvals and released
the $200.0 million to complete this acquisition. This
acquisition provides Nextel Mexico with a local fixed/mobile
wireless telephone concession, which we expect will result in
interconnect and operating cost savings, as well as additional
revenue generating opportunities in the future. This acquisition
also provides Nextel Mexico with 50MHz of 3.4GHz spectrum
nationwide in Mexico.
Nextel Mexico is headquartered in Mexico City and has many
regional offices throughout Mexico. As of December 31,
2006, Nextel Mexico had 3,337 employees.
Competition. Nextel Mexicos digital
mobile network competes with cellular and personal
communications services system operators in its market areas.
We compete on a nationwide basis with Radiomovil Dipsa, S.A. de
C.V., known as Telcel, which is a subsidiary of America Movil,
S.A. de C.V., an affiliate of Telefonos de Mexico, S.A. de C.V.,
known as Telmex, which holds the Cellular B-Band concession and
an additional personal communications services license
throughout Mexico. Telcel was the first wireless operator in the
country and is the largest provider of wireless services in
Mexico. We also compete on a nationwide basis with Iusacell,
S.A. de C.V. and its affiliate Operadora Unefon, S.A. de C.V.,
as well as with Telefonica, S.A., which is the second largest
wireless operator in the country. All of these wireless
operators use a combination of cellular and PCS licenses.
On January 10, 2005, the Mexican government began an
auction for spectrum in the
806-821 MHz
to
851-866 MHz
frequency band. Inversiones Nextel de Mexico, a subsidiary of
Nextel Mexico, participated in this auction. The spectrum
auction was divided into three separate auctions: Auction 15 for
Northern Mexico Zone 1, Auction 16 for Northern Mexico Zone
2 and Auction 17 for Central and Southern Mexico. The auctions
were completed between February 7 and February 11. Nextel
Mexico won an average of 15 MHz of nationwide spectrum,
except for Mexico City, where no spectrum was auctioned off and
where Nextel Mexico
12
has licenses covering approximately 21 MHz in the
800 MHz band. The corresponding licenses and immediate use
of the spectrum were granted to Inversiones Nextel de Mexico on
March 17, 2005. These new licenses have an initial term of
20 years and are renewable thereafter for 20 years.
The spectrum licenses that Nextel Mexico acquired have allowed
it to significantly expand its digital mobile network over the
past two years and will allow it to continue that expansion in
the future, thereby allowing it to cover a substantial portion
of the Mexican national geography and population.
As of December 31, 2006, Nextel Mexico provided service to
about 3% of the total digital handsets in commercial service in
Mexico.
We believe that the most important factors upon which Nextel
Mexico competes are customer service, a high quality network,
brand recognition, consultative distribution channels (through
which the characteristics, features and benefits of our services
and details concerning our available rate plans, as well as what
plans and features best meet the customers needs, are
discussed directly with prospective customers) and its
differentiated services, primarily our Direct Connect service,
which is available throughout all areas where Nextel Mexico
provides digital service. While its competition generally
targets the prepaid market, Nextel Mexico primarily targets
businesses, and all of its subscribers are on postpaid contracts.
Regulatory and Legal Overview. The Secretary
of Communications and Transportation of Mexico regulates the
telecommunications industry in Mexico. The Mexican
Telecommunications Commission oversees specific aspects of the
telecommunications industry on behalf of the Secretary of
Communications and Transportation.
The existing telecommunications law, which went into effect in
1995, restricts foreign ownership in telecommunications to a
maximum of 49% voting equity interest except for cellular
telephony, which has no such restriction. However, most of the
licenses held by Nextel Mexico prior to 2000 are not subject to
the 49% foreign ownership limitation as such licenses were
originally granted under the old telecommunications law that had
no such limitation to foreign ownership. All of the licenses
acquired by Nextel Mexico after January 1, 2000 are held
through Inversiones Nextel de Mexico, a corporation with a
capital structure known under applicable corporate law as
neutral stock, in which Nextel Mexico owns
approximately 99.99% of the economic interest, but only 49% of
the voting shares. The remaining 51% of the voting shares in
Inversiones Nextel de Mexico, which is held by one Mexican
shareholder, is subject to a voting trust agreement and a
shareholders agreement between Nextel Mexico and this
shareholder that establish governance controls and transfer
restrictions that are designed to protect Nextel Mexicos
interests.
The current telecommunications law requires mandatory
interconnection between all telecommunication networks under
reciprocal terms and conditions when it is technically possible.
Notwithstanding the foregoing, some telecommunications companies
have had difficulty obtaining interconnection services under
reciprocal terms and conditions from other telephone operators.
Because Nextel Mexico has operated under SMR licenses in the
800 MHz band, it was not deemed a telephone operator and
has historically not been granted telephone numbers. As a
result, it was unclear whether Nextel Mexico was entitled to
reciprocal interconnection terms and conditions with wireline
and wireless public telephone networks. Meanwhile, to ensure its
access to interconnection, Nextel Mexico entered into commercial
agreements with other local, point to point and long distance
carriers such as Alestra, Avantel, Axtel, Bestel and Telmex that
provide interconnection between Nextel Mexicos networks
and the public switched telephone network. Nextel Mexico has
also executed commercial agreements to exchange SMS traffic with
Telcel, Telefonica, Iusacell and Unefon. In 2006, in connection
with the acquisition of Cosmofrecuencias, S.A. de C.V., Nextel
Mexico acquired a local license that is expected to provide it
with cost benefits as a result of its right to reciprocal
interconnection terms with wireline and wireless public
telephone networks and with the right to acquire local numbers.
As of December 31, 2006, Nextel Mexicos
license-holding subsidiaries had filed with the Secretary of
Communications and Transportation requests for renewal of 30
concessions. Although we do not foresee any problems with the
renewal applications, there is no guarantee that such renewals
will be granted. Failure to renew these licenses could have a
significant adverse impact on our operations.
13
Foreign Currency Controls and
Dividends. Because there are no foreign currency
controls in place, Mexican currency is convertible into
U.S. dollars and other foreign currency without
restrictions. Mexican companies may distribute dividends and
profits outside of Mexico if the Mexican company meets specified
distribution and legal reserve requirements. Under Mexican
corporate law, approval of a majority of stockholders attending
an ordinary stockholders meeting of a corporation is
required to pay dividends. Dividends paid out of Nextel
Mexicos accumulated taxable income are not subject to
withholding tax; a tax of up to 40% is imposed on Nextel Mexico
if it pays dividends in excess of this amount. This tax may be
creditable against Nextel Mexicos future tax liability. A
15% withholding tax applies to interest paid by Nextel Mexico to
NII or its U.S. affiliates.
Income Tax Legislation. In December 2002, the
Mexican government enacted tax legislation, effective as of
January 1, 2003, that reduced the corporate tax rate from
35% to 34% in 2003 and further reduced that rate to 33% in 2004.
In December 2004, the Mexican government enacted additional tax
legislation, effective January 1, 2005, which reduced the
corporate tax rate to 30% for 2005 and 29% for 2006 and will
further reduce the corporate tax rate to 28% for 2007.
2. Brazil
Operating Company Overview. We refer to our
wholly-owned Brazilian operating company, Nextel
Telecomunicacoes Ltda., as Nextel Brazil. Nextel Brazil provides
analog and digital mobile services under the tradename
Nextel in the following major business centers with
populations in excess of 1 million, along related
transportation corridors, as well as in a number of smaller
markets:
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Digital
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Analog
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Rio de Janeiro
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Salvador
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Sao Paulo
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Recife
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Curitiba
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Fortaleza
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Brasilia
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Goiania
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Belo Horizonte
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Campinas
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Porto Alegre
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Nextel Brazil has licenses in markets with an aggregate
population of about 147 million people. In addition, Nextel
Brazil has a total covered population for digital services of
about 63 million people. As of December 31, 2006,
Nextel Brazil provided service to about 899,000 digital
handsets.
Nextel Brazils operations are headquartered in Sao Paulo,
with branch offices in Rio de Janeiro and various other cities.
As of December 31, 2006, Nextel Brazil had
2,146 employees.
Competition. Nextel Brazil competes with other
analog SMR and cellular and personal communications services
providers. The largest competitors are Vivo (a joint venture of
Telefonica S.A. and Portugal Telecom S.A.), which has the
largest market share in the Sao Paulo Metropolitan Area and Rio
de Janeiro, as well as several other regional operators; Telecom
Americas, which owns Claro and is controlled by America Movil;
Telecom Italia Mobile; TNL PCS S.A. (a personal communications
services operating subsidiary of Telemar Norte Leste S.A.,
Brazils largest wireline incumbent, and which markets
under the brand name Oi); and Brasil
Telecom GSM, a subsidiary of Brasil Telecom S.A.
Nextel Brazil also competes with other regional cellular and
wireless operators including Telemig Celular S.A. There are also
several small SME competitors in the analog market in various
regions in Brazil.
As of December 31, 2006, Nextel Brazil provided service to
about 1% of the total digital handsets in commercial service in
Brazil.
We believe that the most important factors upon which Nextel
Brazil competes are customer service, a high quality network,
consultative distribution channels (through which the
characteristics, features and benefits of our services and
details concerning our available rate plans, as well as what
plans and features best
14
meet the customers needs, are discussed directly with
prospective customers), a differentiated brand positioning and
its differentiated services, primarily our Direct Connect
service, which is available throughout all areas where Nextel
Brazil provides digital service. While its competition generally
targets the prepaid market, Nextel Brazil primarily targets
small and medium-sized businesses with mobile workforces and
high-end individuals. Substantially all of its subscribers are
on contracts that provide for recurring monthly payments for
services for a specified term.
Regulatory and Legal Overview. Prior to 2000,
the Brazilian telecommunications regulations imposed various
restrictions that significantly limited the ability of Nextel
Brazil to provide digital mobile services to all potential
customer groups. On April 27, 2000, Brazils
telecommunications regulatory agency, Agencia Nacional de
Telecomunicacoes, known as Anatel, approved new rules relating
to SMR services in Brazil. As a result of these regulations,
together with subsequent supplements and modifications, Brazil
began opening its markets to wider competition in the mobile
wireless communications market where we operate.
Among others, the regulations issued in 2000 allowed affiliated
companies to hold more than one license in the same service
area, but still limited SMR licensees and their affiliates to a
maximum holding of 10 MHz of spectrum in the same service
area. Under those rules, Anatel was allowed to lift the spectrum
restriction from 10 MHz up to 15 MHz in localities
where the need for more spectrum would be duly justified. In the
case of Sao Paulo and Rio de Janeiro, the two largest and most
congested metropolitan areas in Brazil, Anatel approved the
increase in our spectrum to 15 MHz and published for
comment regulations that would lift the restriction of
15 MHz in other cities. A revised SMR services regulation
was approved by Anatel on May 5, 2005 under Resolution
No. 404 and expressly revoked the April 27, 2000
rules. Under the current regulation, SMR operators and their
affiliates are allowed to hold up to 15 MHz of spectrum in
the same service area. In addition, the May 5, 2005
regulations annulled the former regulation relating to areas of
authorization and replaced it with a new SMR Authorizations
General Plan issued by Anatel under Resolution No. 405.
Although we believe that these regulations give us significantly
greater flexibility to provide digital mobile services, we are
still required to provide two-way radio as a basic service
before we can provide any other service. For example, we cannot
offer interconnection to the public telephone system without
providing dispatch services.
On October 17, 2001, Anatel enacted certain rules that
allow carriers to charge calling party pays charges. These
regulations clarified, among other things, how SMR companies
like Nextel Brazil would be paid by other companies if they
wished to interconnect with Nextel Brazils network. These
rules also allowed Nextel Brazil to amend its interconnection
agreements to reflect the calling party pays charges. We have
negotiated agreements with all significant fixed line and
wireless operators in Brazil to reflect the additional payments
between carriers as a result of the calling party pays charges.
These agreements are subject to annual renewals. Calling party
pays was also incorporated into the May 5, 2005
regulations, which, in addition, revoked and replaced the
October 17, 2001 rules with new SMR network remuneration
regulations, which were approved under Resolution No. 406.
In effect, the new regulations permit Nextel Brazil to
compensate other operators for calls terminated in their network
under a formula that reduces the amount paid to them by allowing
a percentage of these calls to be treated as bill and
keep. These modifications to the SME regulations became
immediately effective and resulted in savings to Nextel Brazil
in relation to interconnect charges made by other carriers.
Any company interested in obtaining new SMR licenses from Anatel
must apply and present documentation demonstrating certain
technical, legal and financial qualifications. Anatel may
communicate its intention to grant new licenses, as well as the
terms and conditions applicable, such as the relevant price.
Before granting any license, Anatel is required to publish an
announcement in the official gazette. Any company willing to
respond to Anatels invitation, or willing to render the
applicable service in a given area claimed by another interested
party, may have the opportunity to obtain a license. Whenever
the number of claimants is larger than the available spectrum,
Anatel is required to conduct competitive bidding to determine
which interested party will be granted the available licenses.
A license for the right to provide SMR services is granted for
an undetermined period of time. While the associated radio
frequencies are licensed for a period of 15 years, they are
renewable only once for an
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additional
15-year
period. Renewal of the license is subject to rules established
by Anatel. The renewal process must be filed at least three
years before the expiration of the original term and must be
decided by Anatel within 12 months of its filing. Anatel
may deny a request for renewal of the license only if the
applicant is not making rational and adequate use of the
frequency, the applicant has committed repeated breaches in the
performance of its activities, or there is a need to modify the
radio frequency allocation. Nextel Brazil recently renewed
licenses for an additional term of 15 years, which begins
from the respective expiration of each license.
The rules require that Nextel Brazils services comply with
start-up
terms and minimum service availability and quality requirements
detailed in the regulations. Failure to meet Anatels
requirements may result in forfeiture of the channels and
revocation of licenses. We believe that Nextel Brazil is
currently in compliance with the applicable operational
requirements of its licenses in all material respects.
Foreign Currency Controls and Dividends. The
purchase and sale of foreign currency in Brazil is subject to
governmental control. Until March 14, 2005, there were two
foreign exchange markets in Brazil that were subject to
regulation by the Central Bank of Brazil. The first was the
commercial/financial floating exchange rate market. This market
was reserved generally for trade-related transactions such as
import and export, registered foreign currency investments in
Brazil, and other specific transactions involving remittances
abroad. The second foreign exchange market was the tourism
floating exchange rate market. The commercial/financial exchange
rate market was restricted to transactions that require prior
approval by the Brazilian Central Bank. Both markets operated at
floating rates freely negotiated between the parties. The
purchase of currency for repatriation of capital invested in
Brazil and for payment of dividends to foreign stockholders of
Brazilian companies used to be made in the commercial/financial
floating exchange rate market. Purchases for these purposes
could only be made if the original investment of foreign capital
and capital increases had been previously registered with the
Brazilian Central Bank. There were no significant restrictions
on the repatriation of registered share capital and remittance
of dividends.
In spite of changes that have been implemented by the Brazilian
Central Bank, the rules on repatriation of capital and payment
of dividends have not changed. The purchase of currency for
repatriation of capital invested in Brazil and for payment of
dividends to foreign stockholders of Brazilian companies still
may only be made if the original investment of foreign capital
and capital increases were registered with the Brazilian Central
Bank. There are no significant restrictions on the repatriation
of registered share capital and remittance of dividends.
The Nextel Brazil subsidiaries through which any dividend is
expected to flow have applied to the Brazilian Central Bank for
registration of its investments in foreign currency. We intend
to structure future capital contributions to Brazilian
subsidiaries to maximize the amount of share capital and
dividends that can be repatriated through the exchange market.
However, we may not be able to repatriate share capital and
dividends on foreign investments that have not been registered.
Brazilian law provides that the Brazilian government may, for a
limited period of time, impose restrictions on the remittance by
Brazilian companies to foreign investors of the proceeds of
investments in Brazil. These restrictions may be imposed
whenever there is a material imbalance or a serious risk of a
material imbalance in Brazils balance of payments. The
Brazilian government may also impose restrictions on the
conversion of Brazilian currency into foreign currency. These
restrictions may hinder or prevent us from purchasing equipment
required to be paid for in any currency other than Brazilian
reais. Under current Brazilian law, a company may pay dividends
from current or accumulated earnings. Dividend payments from
current earnings are not subject to withholding tax. Interest
and payments other than principal amounts of foreign loans are
generally subject to a 15% withholding tax and a 0.38% financial
transactions tax.
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3. Argentina
Operating Company Overview. We refer to our
wholly-owned Argentine operating company, Nextel Communications
Argentina S.A. (formerly, Nextel Argentina S.R.L.), as Nextel
Argentina. Nextel Argentina provides digital mobile services
under the tradename Nextel in the following major
business centers with populations in excess of 1 million,
along related transportation corridors, as well as in a number
of smaller markets:
Digital
Buenos
Aires
Cordoba
Rosario
Mendoza
Nextel Argentina has licenses in markets with an aggregate
population of about 21 million people. In addition, Nextel
Argentina has a total covered population for digital services of
about 20.5 million people. As of December 31, 2006,
Nextel Argentina provided service to about 650,700 digital
handsets.
Nextel Argentina is headquartered in Buenos Aires and has
regional offices in Mar del Plata, Rosario, Mendoza, Cordoba and
Santa Fe, and seven branches in Buenos Aires. As of
December 31, 2006, Nextel Argentina had 1,197 employees.
In July 2006, Nextel Argentina signed an agreement, pending
regulatory approval, to purchase all of the stock of Velocom
Argentina, S.A., a wireless internet access and data
transmission company, for $6.0 million in cash and the
assumption of certain liabilities, of which $0.6 million
has been paid as of December 31, 2006. As a result of this
transaction, Nextel Argentina will acquire 50 MHz of
3.4 GHz spectrum nationwide in Argentina.
Competition. There are three cellular service
providers in Argentina with which Nextel Argentina competes: the
Telefonica Moviles Group, which owns both Compania de
Radiocomunicaciones Moviles S.A. (previously Movicom) and
Telefonica Comunicaciones Moviles S.A. (previously Unifon), both
of which are now commercially known as Movistar, Compania de
Telefonos del Interior S.A., or CTI, which is owned by America
Movil S.A. de C.V., and Telecom Personal S.A., or Personal,
which is owned by Telecom Argentina S.A. All of these companies
or their subsidiaries also hold personal communications
services, or PCS, licenses. The cellular and PCS licenses each
cover only a specific geographic area, but together, the
licenses provide each of Nextel Argentinas competitors
with national coverage. The PCS licenses and associated
frequencies provide existing cellular companies with increased
spectrum capabilities and the ability to launch a wide range of
wireless products and services. Affiliated companies of
Movistar, CTI and Personal also hold wireline local and long
distance telephone licenses. As a result of the purchase of
Movicom by the Telefonica Moviles Group, and due to existing
limitations in the amount of spectrum that a group may hold in
any given geographical region or area (50 MHz maximum),
Movistar may, in the near future, be forced to return
approximately 45 MHz of spectrum in certain regions where
it may exceed the 50 MHz limitation. This may create
opportunities for existing carriers or new entrants to bid for
such spectrum should such spectrum be auctioned off publicly.
The Argentine government, however, has announced that this
spectrum will be awarded to a new government sponsored mobile
services company made up of existing telephone cooperatives.
Although it was announced that the new company would begin
operations during 2006, no new announcements have been made. In
the specific SMR market, Nextel Argentinas only major
competitor is Movilink, which is now owned by the Telefonica
Moviles Group.
As of December 31, 2006, Nextel Argentina provided service
to about 2% of the total mobile handsets in commercial service
in Argentina.
We believe that the most important factors upon which Nextel
Argentina competes are customer service, a high quality network,
brand recognition, consultative distribution channels (through
which the characteristics, features and benefits of our services
and details concerning our available rate plans, as well as what
plans and features best meet the customers needs, are
discussed directly with prospective customers) and its
differentiated services, primarily our Direct Connect service,
which is available throughout all areas where Nextel
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Argentina provides digital service. While its competition
generally targets the prepaid market, Nextel Argentina primarily
targets small and medium-sized businesses with mobile workforces
and high-end individuals. Substantially all of its subscribers
are on contracts that provide for recurring monthly payments for
services for a specified term.
New telecommunications regulations aimed at opening the
Argentine market to wider competition went into effect in
November 2000. As a result, a number of new companies have
obtained licenses to offer a variety of services.
Regulatory and Legal Overview. The Comision
Nacional de Comunicaciones, referred to as the Argentine CNC,
the Secretary of Communications of Argentina, and the Ministry
of Federal Planning, Public Investments and Services are the
Argentine telecommunications authorities responsible for the
administration and regulation of the SMR industry.
SMR licenses granted through December 31, 2000 have an
indefinite term, and those licenses granted beginning
January 1, 2001 expire after a
10-year
term. Both types of licenses are subject to revocation for
violation of applicable regulatory rules. Argentina does not
impose any limitation on foreign ownership of SMR licenses.
Analog and digital mobile service must begin within 180 business
days after receipt of channel assignment. Failure to meet
service or loading requirements can result in revocation of the
channel authorizations. The Argentina CNC may revoke SMR
licenses upon the occurrence of a third breach by the licensee
of service requirements. SMR licenses and channel authorizations
also may be revoked for violation of other regulatory authority
rules and regulations. Nextel Argentina believes it has
satisfied all of its loading requirements on its existing
spectrum position.
SMR providers are assured interconnection with the public
switched telephone network according to the terms under which
the channels were awarded, as well as under other applicable
laws. Furthermore, interconnection with the public switched
telephone network must be on a nondiscriminatory basis. Nextel
Argentina provides interconnect services to its subscribers
under interconnection agreements with Telefonica de Argentina
S.A. and Telecom Argentina S.A., as well as other smaller local
carriers. In May 1999, the Argentina Secretary of Communications
authorized Nextel Argentina to implement a calling party pays
program with the fixed line carriers with whom it interconnects,
which it has since implemented.
The tariffs for the SMR are freely fixed by the providers.
Charges for calling party pays calls originating in fixed lines
depend on a reference price set periodically by the Ministry of
Federal Planning, Public Investments and Services.
In September 2000, Argentinas president signed a decree
that put into effect new telecommunications regulations. The
purpose of the regulations is to guarantee the complete
deregulation and free competition of the telecommunications
industry in Argentina. The rules apply to all telecommunications
companies and cover the following:
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Licenses of telecommunications services. The
regulations establish a single license system that allows the
license holder to offer any and all types of telecommunications
services. The licensee is free to choose the geographic area,
technology and architecture through which its services will be
provided. However, each specific service to be offered must be
separately registered with the Secretary. Holders of existing
telecommunications licenses, including holders of cellular,
personal communications services and SMR licenses, are
automatically deemed to have a universal license under the new
regulatory scheme, and all services currently offered which had
been previously approved by the regulatory authorities are
treated as having been registered. However, to the extent an
existing license holder wishes to offer a new service, the new
service must be registered. In addition, existing license
holders who acquired spectrum under a public bid or auction must
continue to abide by the original terms and conditions under
which the spectrum was granted.
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The regulations do not impose any minimum investment, loading or
other requirements on holders of licenses, but to obtain
trunking frequencies they impose certain rules of origin that
mandate that at least 30% of any new infrastructure be of
Argentine origin (see SMR spectrum
regulations below). Some requirements do apply to the
launch of a new service, such as a requirement to launch the
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service within 18 months from the date of its registration.
The grant of a license is independent of the resources required
to provide a service and specifically does not include the right
to the use of spectrum.
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Network interconnection. The general
principles of the interconnection regulations are:
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freedom of negotiation and agreement between the parties with
respect to prices charged for interconnection, although the
regulations include guidelines which are generally followed in
practice and which can be imposed by the Secretary in the event
of a dispute between parties;
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mandatory provision of interconnection with other carriers so
long as interconnection is technically feasible;
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non-discrimination;
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reciprocal compensation; and
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maintenance of an open architecture to avoid conditions that
would restrict the efficiency of interconnected operators.
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All interconnection agreements entered into must be registered
with the Argentina CNC. Additional requirements may be imposed
on all dominant carriers to ensure that the Argentine
telecommunications market is open to competition.
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Universal service. The regulations establish a
levy equal to 1% of service revenue minus applicable taxes and
specified related costs to fund service in remote and
underserved areas. The license holder can choose either to pay
the resulting amount into a fund for universal service
development or participate directly in offering services to
specific geographical areas under an annual plan designed by the
federal government. Although regulations state that this levy
would be applicable beginning January 1, 2001, the
regulatory authorities have not taken the necessary actions to
implement the levy. However, Resolution No. 99/05, dated
May 5, 2005, issued by the Secretary of Communications
prohibits telecommunications operators from itemizing the levy
in customer invoices or passing through the levy to customers.
In addition, following the Secretarys instructions in July
2005, the Argentine CNC has ordered operators, including Nextel
Argentina, to return the levy collected from customers, if any.
Nextel Argentina filed legal actions challenging these
regulations. On October 14, 2005, the Secretary of
Communications issued Resolution No. 301/05, which rejected
Nextel Argentinas claim against Resolution No. 99/05.
As a result, Nextel Argentina was ordered to reimburse the
amounts collected as universal service contributions plus
interest within a
15-day
period. In November 2005, Nextel Argentina filed an
administrative claim and requested a judicial injunction against
this resolution. All current legal actions are pending. Nextel
Argentina billed this tax as Universal Tax on customer invoices
during the period from January 2001 to August 2001 for a total
amount of $0.2 million. Subsequent to August 2001, Nextel
Argentina did not segregate a specific charge or identify any
portion of its customer billings as relating specifically to the
Universal Tax and, in fact, raised its rates and service fees to
customers several times after this period unrelated to the
Universal Tax. As of April 1, 2006, Nextel Argentina
changed its rate plan structure, which eliminated all other
charges and any further contingencies related to this tax. As
required by legislation that was passed in October 2005, 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 judicial claim against
the legislation passed in May 2005, which is currently pending.
See Note 9 to our consolidated financial statements included at
the end of this annual report on
Form 10-K
for more information.
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Administration of spectrum. The regulation
contains only general principles and guidelines with respect to
the authorization of new spectrum and frequencies, thus this
general regulation is governed by other regulations ruling each
specific service. To ensure the efficient and effective use of
spectrum, the Secretary is empowered to partially or totally
revoke awarded spectrum if it is not used, or if it is not used
in accordance with the terms and conditions under which it was
granted. Licenses and
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spectrum authorizations may not be transferred nor assigned, in
whole or in part, without prior written approval of regulatory
authorities. Prior authorization is also required upon a change
of control as a result of the transfer of the licensees
capital stock.
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SMR spectrum regulations. In July 2001,
the Secretary of Communications established rules under which
new SMR spectrum is awarded. New spectrum authorizations expire
in 10 years. Currently, approximately half of Nextel
Argentinas channels have no expiration term, and the
remaining half of Nextel Argentinas channels have
10-year
terms. These rules also require telecommunications operators
that are awarded with new spectrum authorizations to purchase at
least 30% of new infrastructure from Argentinean source goods.
The regulation is not clear as to the method to be used to
compute this percentage.
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Foreign Currency Controls and Dividends. On
January 6, 2002, the Argentine Emergency Law
No. 25,561 became effective and formally declared a public
emergency in economic, administrative, financial and exchange
control matters. The law empowered the Federal Executive Power
to regulate those areas until December 10, 2003, subject to
overview by the National Congress. The Emergency Law amended
several provisions of the 1991 Convertibility Law
No. 23,928, the most significant of which was to repeal the
peg of the Argentine peso to the U.S. dollar. The
effectiveness of the Argentine Emergency Law was recently
extended through December 31, 2007 by the passing of Law
No. 26,204.
On February 3, 2002, the Federal Executive Power issued
Decree No. 214/2002, which reorganized Argentinas
financial system and converted the economy into Argentine pesos.
All obligations to pay, of whatever origin, connected or not
with the financial system, were converted into pesos at the
exchange rate of one Argentine peso to one U.S. dollar.
Moreover, deposits within the financial system were converted
into pesos at the exchange rate of 1.40 Argentine pesos to one
U.S. dollar. These obligations are subject to restatement.
Under existing law, contracts can provide for payment in foreign
currency. However, due to an anti-evasion law, which requires
all amounts over $1,000 to be paid by check, credit card,
deposit or banking transfer, the legal possibility of entering
into contracts in U.S. dollars remains, but the economic
reality is that this would only serve to determine the amount of
Argentine pesos that must be paid on the basis of the free
exchange rate.
Pursuant to Decree No. 260/2002, the National Executive
Power and the Argentine Central Bank have placed certain
restrictions on the acquisition of foreign currency by Argentine
and non-Argentine residents and on the inflow and outflow of
capital to and from Argentina, including those for the purposes
of repayment of principal and interest, dividend payments and
repatriation of capital. In addition, there are specific
guidelines that must be complied with in order to make any
repayment of principal or interest to foreign creditors.
According to such regulations, payments of profits and dividends
abroad may be carried out as long as they correspond to
financial statements certified by external auditors. Moreover,
repatriations of capital by non-Argentine residents without an
Argentine Central Banks authorization are restricted to
$5,000 U.S. dollars per month. This limitation does not
apply to any repatriations of capital that are a result of a
final divestiture, in which case, non-Argentine residents may
transfer up to $2 million per month without requiring the
Argentine Central Bank prior authorization.
On June 9, 2005, the Federal Executive Power issued Decree
No. 616/2005, which introduced new restrictions to the
transfer of funds to and from Argentina and created a mandatory
deposit of 30% of the funds transferred to Argentina. Such
decree provides that, under certain circumstances, both
Argentinean residents and non-Argentinean residents transferring
funds from abroad to Argentina are obligated to make a
365-day
registered non-transferable non-interest bearing cash deposit
equal to 30% of the funds transferred by them to Argentina.
Among others, foreign direct investment and primary issuances of
debt or cash securities with public offering in the capital or
stock markets are exempt from such restricted deposit
requirement.
Under applicable Argentine corporate law, a company may pay
dividends only from liquid and realized profits as shown on the
companys financial statements prepared in accordance with
Argentine generally accepted accounting principles and duly
approved by the shareholders meeting. Of those profits, 5% must
be
20
set aside until a reserve of 20% of the companys capital
stock has been established. Subject to these requirements, the
balance of profits may be declared as dividends and paid in cash
upon a majority vote of the stockholders. Dividends paid out of
Nextel Argentinas accumulated taxable income are not
subject to a withholding tax; a 35% withholding tax applies to
dividends paid in excess of this amount. A withholding tax of
35% applies to interest paid by Nextel Argentina to NII or its
U.S. subsidiaries.
4. Peru
Operating Company Overview. We refer to our
wholly-owned Peruvian operating company, Nextel del Peru, S.A.,
as Nextel Peru. Nextel Peru provides digital mobile services
under the tradename Nextel in the following major
business centers with a population in excess of 1 million
and along related transportation corridors:
Digital
Lima
Ancash
La Libertad
Lambayeque
Piura
Arequipa
Cuzco
Puno
Nextel Peru operates parallel analog and digital mobile networks
in the metropolitan area of Lima. It also operates an analog
network in the metropolitan area of Arequipa. Nextel Peru has
licenses in markets with an aggregate population of about
20 million people. In addition, Nextel Peru has a total
covered population for digital services of about 16 million
people. As of December 31, 2006, Nextel Peru provided
service to about 345,200 digital handsets.
Nextel Peru is headquartered in Lima. As of December 31,
2006, Nextel Peru had 864 employees.
In October 2006, Nextel Peru purchased all of the shares of
Millicom Peru, S.A., or Millicom, for a purchase price of
$5.0 million. As a result of this transaction, Nextel Peru
acquired 50 MHz of 3.4 GHz spectrum in all major
provinces, as well as various network assets and equipment.
Competition. Nextel Peru competes with all
other providers of mobile services in Peru, including cellular
operator Telefonica Moviles S.A., which, as of October 2004,
acquired and consolidated with the company that was formerly
known as Bellsouth Peru S.A., and personal communications
services provider America Movil Peru S.A.C., a subsidiary of
Mexicos America Movil, which in May 2005, won the
C Band in the PCS services auction and, as of August
2005, acquired and consolidated with TIM Peru S.A.C., another
provider of PCS services. Telefonica Moviles S.A. provides
nationwide coverage and operates under the brand name
Movistar. America Movil provides nationwide coverage
and operates under the brand name Claro.
As of December 31, 2006, Nextel Peru provided service to
about 4% of the total digital handsets in commercial service in
Peru.
We believe that the most important factors upon which Nextel
Peru competes are customer service, a high quality network,
brand recognition and its differentiated services, primarily our
Direct Connect service, which is available throughout all areas
where Nextel Peru provides digital service. Nextel Peru
primarily targets mobile workforces, including large, mid-size
and small corporations and their respective business networks.
Regulatory and Legal Overview. The Organismo
Supervisor de Inversion Privada en Telecomunicaciones of Peru,
known as OSIPTEL, and the Ministry of Transportation and
Communications of Peru, referred to as the Peruvian Ministry of
Communications, regulate the telecommunications industry in
Peru. OSIPTEL oversees private investments and competition in
the telecommunications industry. The Peruvian Ministry of
Communications grants telecommunications licenses and issues
regulations governing the telecommunications
21
industry. In 1991, the Peruvian government began to deregulate
the telecommunications industry in an effort to promote free and
open competition. The Telecommunications Law of Peru, the
general regulations under that law and the regulations issued by
OSIPTEL govern the operation of SMR services in Peru, which is
considered a public mobile service in the same category as
cellular and personal communications services operators.
In Peru, SMR service providers are granted
20-year
licenses, which may be extended for an additional
20-year
term, subject to compliance with the terms of the license.
Licenses may be revoked before their expiration for violations
of applicable regulatory and license requirements. Licensees
must also comply with a minimum expansion plan that establishes
the minimum loading and coverage requirements for the licensees,
as well as spectrum targets under the licenses. We believe that
Nextel Peru has met its loading and coverage requirements and
has reached its spectrum targets.
Under the general regulations of Perus telecommunications
law, all public telecommunications service providers have the
right to interconnect to the networks of other providers of
public telecommunications services. Furthermore, interconnection
with these networks must be on an equal and nondiscriminatory
basis. The terms and conditions of interconnection agreements
must be negotiated in good faith between the parties in
accordance with the interconnect regulations and procedures
issued by OSIPTEL. Nextel Peru is presently interconnected with
all major telecommunications operators in Peru, including
Telefonica del Peru S.A.A., Telefonica Moviles S.A., America
Movil Peru S.A.C. (formerly TIM Peru S.A.C.) and Telmex Peru
S.A. (formerly AT&T Peru S.A.). Peru imposes no limitation
on foreign ownership of SMR or paging licenses or licensees. In
November 2005, OSIPTEL adopted regulations that resulted in
savings in interconnect rates over a three-year period beginning
January 1, 2006.
In 1998, Nextel Peru entered into a
10-year tax
stability agreement with the Peruvian government that suspends
its net operating loss carryforwards from expiring until Nextel
Peru generates taxable income. Once Nextel Peru generates
taxable income, Nextel Peru has four years to utilize those tax
loss carryforwards and any taxable income in excess of the tax
loss carryforwards will be taxed at 30%. During 2005 and 2006,
Nextel Peru generated taxable income and utilized a portion of
the tax loss carryforwards. The remaining tax loss carryforwards
in Peru will expire on December 31, 2008 if not used by
that date. At this time, we believe it is more likely than not
that these tax loss carryforwards will be fully utilized prior
to their expiration.
Foreign Currency Controls and Dividends. Under
current law, Peruvian currency is freely convertible into
U.S. dollars without restrictions. Peru has a free exchange
market for all foreign currency transactions. On October 1,
1998, Nextel Peru executed a legal stability agreement with the
Peruvian government, which, among other things, guarantees free
conversion of foreign currency for Nextel Peru and its
stockholders for a term of 10 years.
The payment and amount of dividends on Nextel Perus common
stock is subject to the approval of a majority of the
stockholders at a mandatory meeting of its stockholders.
According to Peruvian corporate law, the stockholders may decide
on the distribution of interim dividends or, alternatively,
delegate the decision to the board of directors. Dividends are
also subject to the availability of profits, determined in
accordance with Peruvian generally accepted accounting
principles. Profits are available for distribution only after
10% of pre-tax profits have been allocated for mandatory
employee profit sharing, and 10% of the net profits have been
set aside to constitute a legal reserve. This reserve is not
available for use except to cover losses in the profit and loss
statement. This reserve obligation remains until the legal
reserve constitutes 20% of the capital stock. Once this legal
reserve is met, the balance of the net profits is available for
distribution. A 4.1% withholding tax applies to dividends paid
by Nextel Peru to its foreign shareholders, and a 30%
withholding tax applies to interest paid by Nextel Peru to NII
or its non-Peruvian subsidiaries.
5. Chile
Operating Companies Overview. We refer to our
wholly-owned Chilean operating company, Centennial Cayman
Corporation Chile S.A., as Nextel Chile. Nextel Chile provides
analog services under the tradenames Centennial and
Multikom and digital mobile services under the
tradename Nextel. These operating
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companies provide digital service in Santiago and analog service
in Santiago, Valparaiso and Vina del Mar and along related
transportation corridors, as well as in a number of smaller
markets.
Our Chilean companies have licenses covering about
16 million people, of which about 5.5 million are now
covered with our digital mobile service. As of December 31,
2006, Nextel Chile provided services to about 900 digital
handsets and 3,800 analog handsets.
Nextel Chile is headquartered in Santiago, Chile. As of
December 31, 2006, Nextel Chile had 65 employees.
Competition. Currently, there are no other
providers of digital SMR services in Chile. Competitors in the
analog SMR business in Chile are Gallyas S.A., Mobilink S.A. and
Sharfstein, S.A.
There are also three mobile telephone service providers
authorized to operate throughout Chile. These providers are
Entel Chile, Telefonica Moviles de Chile S.A. and Claro S.A.
Entel Chile, which was formerly controlled by Telecom Italia
Movil, or TIM, has been controlled by Chilean national investors
since 2005 and, through its subsidiaries Entel PCS
Telecomunicaciones S.A. and Entel Telefonica Movil S.A.,
operates two 30MHz concessions in the 1900MHz band with GSM
technology.
Telefonica Moviles de Chile S.A., also known by its commercial
name, Movistar, is controlled by Telefonica Moviles S.A. of
Spain and operates one 25MHz concession in the 800MHz band with
TDMA technology and one 20MHz concession in the 1900MHz band
with GSM/GPRS technology. It also operates another 10MHz
concession in the 1900 MHz band with CDMA technology and
previously held another concession of 25MHz in the 800MHz band
that was acquired by Claro S.A. during the second half of 2006.
Finally, Claro S.A., which is owned by America Movil, is the
third mobile operator in Chile. Claro S.A. operates a 30MHz
concession in the 1900MHz band under the trademark
Claro and auctioned a 25MHz concession in the 800MHz
band from Telefonica Moviles de Chile S.A.
Regulatory and Legal Overview. The main
regulatory agency of the Chilean telecommunications sector is
the Ministry of Transportation and Telecommunications (the
Ministry), which acts primarily through the Undersecretary of
Telecommunications (the Undersecretary). The application,
control and interpretation of the provisions of the General
Telecommunications Law and other applicable regulations are the
responsibilities of the Ministry, which usually acts through the
Undersecretary for these purposes. The decisions of the Ministry
and the Undersecretary are subject to review by the Judiciary
and the Chilean Antitrust Court.
Telecommunications concessions granted by the Chilean regulatory
authorities are not limited as to their number, type of service
or geographical area. Therefore, it is possible to grant two or
more concessions for the provision of the same service on the
same location, except where technical limitations exist.
Concessions for the provision of public telecommunications
services are generally granted for a
30-year
period. These concessions may be renewed for additional
30-year
periods if requested by the concessionaire.
In Chile, concessionaires of public telecommunications services
and concessionaires of long distance telephonic services are
required by law to establish and accept interconnections with
each other. These interconnections allow subscribers and users
of public telecommunications services of the same type to make
and receive calls from and to the public switched telephone
network inside and outside of Chile. Telecommunications services
of the same type are all those that are technically compatible
with each other. The Undersecretary determines which
telecommunications services are technically compatible. The
interconnection must be performed according to the technical
rules, procedures and terms established by the Undersecretary.
The Undersecretary has issued regulations relating to the
interconnection of public telephone networks with other public
telecommunications services of the same type. On
January 31, 2001, the Undersecretary published a new
technical rule related to the provision of digital SMR services.
However, under these regulations, even if services are
determined to be of the same type, providers of public
telecommunications services may not be interconnected to the
public telephone networks unless their concessions expressly
authorize interconnection, which in many cases, including some
of ours, requires an amendment to the concession. Nextel Chile
has been granted that authorization.
23
Additionally, providers of public telecommunications services of
the same type that are authorized to be interconnected with
public telephone networks are also able to request the
assignment of specific numbering blocks for their subscribers.
Rules governing routing procedures have also been adopted to
this effect. As with interconnection, a provider of public
telecommunications services of the same type must be
specifically authorized in its concessions to interconnect
before obtaining numbering. Our operating companies have been
granted numbering blocks and is currently interconnected to the
public switched telephone network.
SMR concessionaires may freely determine the fees charged to
their subscribers. However, the fees and tariffs charged by a
telecommunications concessionaire to other telecommunications
concessionaires for the services rendered through
interconnections, including the access fees, must be fixed by
the authorities. The authorities fix the access fees in
accordance with a tariff-setting procedure based upon, among
other things, the cost structure, including expansion plans, of
an efficient concessionaire, as set forth in the General
Telecommunications Law. This procedure is necessary for the
mandatory application of the calling-party-pays system among the
telecommunications concessionaires. The tariff-setting procedure
for our operating companies began on August 19, 2004 and
ended on July 22, 2005 when the Minister of Transports and
Telecommunications jointly with the Minister of Economy issued
two Tariff Decrees, one for each operating company. These Tariff
Decrees will be in effect for five years from its publication in
the official Gazette, which occurred on September 12, 2005.
In order to provide digital SMR services in Chile, incorporate
digital technology to the networks of our Chilean operating
companies and obtain the corresponding authorization to
interconnect such networks to the publicly switched telephone
network, in 2001, our Chilean operating companies filed for the
amendment of a group of SMR concessions totaling 130 channels
according to the procedures established in the General
Telecommunications Law. On April 26, 2004, the decrees
amending the concessions where published in the official gazette
ending the amendment process, and authorizing the deployment and
interconnection of Nextel Chiles iDEN network.
Since the publication in the official gazette of the new decrees
amending our analog concessions and authorizing us to offer
digital service, we originally had a period of 14 to
28 months to build the network. However, in April 2005, we
obtained a two-year extension of the build-out deadline.
Currently the network has been partly built and approval upon
completion of such network has been granted by the authorities,
granting Nextel Chile the permission to begin rendering digital
services and charging for them. If the rest of the digital
network is not completely built within this extended timeframe,
and if we cannot obtain a new extension, we may be sanctioned by
the Chilean authorities with a written admonition or nominal
fines unless Nextel Chile decides to resign the right to build
those sites still under building commitments.
On June 14, 2006, the Supreme Court issued a final decision
on a lawsuit filed by our mobile telephony competition
(Bellsouth and Smartcom, which is currently known as Claro)
regarding the validity of a portion of our spectrum concessions.
In its decision, the Supreme Court declared that a group of
concessions totaling 150 channels in Santiago and additional
channels in other parts of the country, which are owned by our
operating companies, had been legally granted by the State of
Chile, and therefore overturned a prior lower court ruling that
had declared them null and void.
These 150 channels are not part of the 130 channels to which
digitalization and interconnection had already been granted and
with which we deployed our current digital network. In October
2006, Nextel Chile received authorization to use the switch and
20 sites in Santiago and to charge its digital customers for the
use of services through its network.
Foreign Currency Controls and Dividends. The
purchase and sale of foreign currency in Chile is not subject to
governmental control. Accordingly, any person may freely engage
in foreign exchange transactions. There are two foreign exchange
markets in Chile. The first is the formal exchange market, which
is subject to the regulations of the Chilean Central Bank and
which consists of banks and other entities authorized to
participate in the market by the Central Bank. This market is
generally used for trade-related transactions, such as import
and export transactions, regulated foreign currency investments
and other transactions, such as remittances abroad. Purchases
and sales of foreign exchange may be effected in the formal or
the informal exchange markets. The informal exchange market
consists of entities not expressly authorized to operate in the
24
formal exchange market, such as foreign exchange houses and
travel agencies. Both markets operate at floating rates freely
negotiated between the participants. There are no limits imposed
on the extent to which the informal exchange rate can fluctuate
above or below the formal exchange rate or the observed exchange
rate. The observed exchange rate is the official exchange rate
determined each day by the Central Bank based on the average
exchange rates observed in the formal exchange market.
Foreign investments in Chile are subject to exchange controls.
The investment of capital exceeding US $10,000 in Chile and
the repatriation of the investment and its profits must be
carried out under either Decree Law No. 600 or under
Chapter XIV of the Compendium of Foreign Exchange
Regulations issued by the Central Bank of Chile under the
Central Bank Act. Foreign funds registered under Decree Law
No. 600 provide specified guarantees with respect to the
ability to repatriate funds and the stability of the applicable
tax regime. Decree Law No. 600 permits foreign investors to
access the formal exchange market to repatriate their
investments and profits.
Access to the formal exchange market to repatriate investments
and profits derived from investments conducted under
Chapter XIV rules are governed by regulations in force and
effect at the time of repatriation.
The foreign investment regulations may permit foreign investors
to access the formal exchange market to repatriate their
investments and profits as stated above. They do not, however,
necessarily guarantee that foreign currency will be available in
the market.
Under Chilean corporate law, corporations, such as our Chilean
companies, may distribute dividends among their stockholders
only from the net profits of a specific fiscal year or from
retained profits recognized by balance sheets approved by the
stockholders meeting. However, if the company has
accumulated losses, profits of that corporation must first be
allocated to cover the losses. Losses in a specific fiscal year
must be offset with retained profits, if any.
Unless otherwise agreed at a stockholders meeting by the
unanimous vote of all issued shares, publicly traded
corporations must annually distribute at least 30% of the net
profits of each fiscal year. This distribution must be in the
form of a cash dividend to their stockholders in proportion to
their ownership or as otherwise stated in the bylaws. Privately
held corporations, such as our Chilean operating companies, must
follow the provisions of their bylaws; if the bylaws do not
contain these provisions, the rules described above for the
distribution of profits by publicly traded stock corporations
apply. As a general rule, any dividend paid by Nextel Chile to
its foreign shareholders will be subject to a 35% withholding
tax rate, reduced by a tax credit to recognize the 17% corporate
tax paid by Nextel Chile on the income distributed or remitted
abroad. A 35% withholding tax applies to interest paid by Nextel
Chile to NII or its U.S. affiliates.
In any event, the board of directors may distribute provisional
dividends if the corporation has no accumulated losses, subject
to the personal responsibility of the directors approving the
distributions.
As of December 31, 2006, we had 140 employees at the
corporate level, and our operating companies had 7,609
employees. Nextel Brazil is a party to a collective bargaining
agreement that covers all of its employees and expires on
April 30, 2007. Neither we nor any of our other operating
companies is a party to any collective bargaining agreement
although certain of our operating companies are subject to
employment statutes and regulations that establish collective
bargaining arrangements that are similar in substance to
collective bargaining agreements. We believe the relationship
between us and our employees, and between each of our operating
companies and its employees, is good.
Investors should be aware of various risks, including the risks
described below. Our business, financial condition or results of
operations could be materially adversely affected by any of
these risks. The trading price of our common stock could decline
due to any of these risks, and investors may lose all or part of
any investment. Our actual results could differ materially from
those anticipated in these forward-looking statements as a
result of certain factors, including the risks faced by us
described below and included
25
elsewhere. Please note that additional risks not presently known
to us or that we currently deem immaterial may also impair our
business and operations.
1. If
we are not able to compete effectively in the highly competitive
wireless communications industry, our future growth and
operating results will suffer.
Our success will depend on the ability of our operating
companies to compete effectively with other telecommunications
services providers, including wireline companies and other
wireless telecommunications companies, in the markets in which
they operate.
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a.
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Some of our competitors are financially stronger than we are,
which may limit our ability to compete based on price.
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Because of their size and resources, and in some cases ownership
by larger companies, some of our competitors may be able to
offer services to customers at prices that are below the prices
that our operating companies can offer for comparable services.
If we cannot compete effectively based on the price of our
service offerings and related cost structure, our results of
operations may be adversely affected. For example, many of our
competitors are well-established companies that have:
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substantially greater financial and marketing resources;
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larger customer bases;
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better name recognition;
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bundled service offerings;
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larger spectrum positions; and
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larger coverage areas than those of our operating companies.
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Further, significant price competition could negatively impact
our operating results and our ability to attract and retain
customers. In addition, we anticipate that our operating
companies will continue to face market pressure to reduce the
prices charged for their products and services because of
increased competition in our markets.
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b.
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Our digital mobile networks utilize a proprietary technology
and our equipment is more expensive than that of our
competitors, which may limit our ability to compete with other
companies that rely on more prevalent technologies and less
expensive equipment.
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Our digital mobile networks utilize iDEN technology developed
and designed by Motorola. iDEN is a proprietary technology that
relies solely on the efforts of Motorola and any future
licensees of this technology for product development and
innovation. Additionally, Motorola and RIM are the sole
suppliers of all of our handsets. In contrast, our competitors
use infrastructure and subscriber equipment that are based on
standard technologies like GSM, which is a more widely used
technology than iDEN and is available from a number of
suppliers. As a result, our competitors benefit from economies
of scale and lower costs for handsets and infrastructure
equipment. The higher cost of our handsets and other equipment
may make it more difficult for us to attract customers, and may
require us to absorb a comparatively larger part of the cost of
offering handsets to new and existing customers. The combination
of these factors may place us at a competitive disadvantage and
may reduce our growth and profitability.
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c.
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Our operating companies may face disadvantages when competing
against formerly government-owned incumbent wireline operators
or wireless operators affiliated with them.
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In some markets, our operating companies may not be able to
compete effectively against a formerly government-owned monopoly
telecommunications operator, which today enjoys a near monopoly
on the provision of wireline telecommunications services and may
have a wireless affiliate or may be controlled by shareholders
who also control a wireless operator. Our operating companies
may be at a competitive
26
disadvantage in these markets because formerly government-owned
incumbents or affiliated competitors may have:
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close ties with national regulatory authorities;
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control over connections to local telephone lines; or
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the ability to subsidize competitive services with revenues
generated from services they provide on a monopoly or
near-monopoly basis.
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Our operating companies may encounter obstacles and setbacks if
local governments adopt policies favoring these competitors or
otherwise afford them preferential treatment. As a result, our
operating companies may be at a competitive disadvantage to
incumbent providers, particularly as our operating companies
seek to offer new telecommunications services.
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d.
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Our coverage is not as extensive as those of other wireless
service providers in our markets, which may limit our ability to
attract and retain customers.
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We have recently expanded the coverage of our networks,
particularly in Mexico and Brazil, but our digital mobile
networks do not offer nationwide coverage in all of the
countries in which we operate and our technology limits our
potential roaming partners. As a result, we may not be able to
compete effectively with cellular and personal communications
services providers, many of whom operate cellular and personal
communications networks with more extensive areas of service.
Additionally, many of these providers have entered into roaming
agreements with each other, which permit these providers to
offer coverage to their subscribers in each others
markets. The iDEN technology that we deploy is not compatible
with other wireless technologies such as the digital cellular or
personal communications services technologies used by our
competitors or with other iDEN networks not operating in the
800 MHz spectrum. Although some of the handset models that
we sell are compatible with both iDEN 800 MHz and GSM
900/1800 MHz systems, our customers are not able to roam on
other iDEN 800 MHz or GSM 900/1800 MHz systems where
we do not have a roaming agreement. As a result, we will not be
able to provide roaming coverage to our subscribers outside of
our currently operating digital markets until we enter into
additional roaming agreements with operators who have deployed
IDEN 800 MHz or GSM 900/1800 MHz technology in markets
outside of our coverage.
To date, we have not entered into roaming agreements with
respect to GSM services offered in the countries in which our
operating companies conduct business, but have entered into
agreements that allow our customers to utilize roaming services
in other countries using the handsets that are compatible with
both iDEN and GSM systems and using other GSM handsets.
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e.
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If we do not keep pace with rapid technological changes, we
may not be able to attract and retain customers.
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The wireless telecommunications industry is experiencing
significant technological change. Future technological
advancements may enable other wireless technologies to equal or
exceed our current level of service and render iDEN technology
obsolete. If Motorola, the sole supplier of iDEN technology, is
unable to upgrade or improve iDEN technology or develop other
technology to meet future advances in competing technologies on
a timely basis, or at an acceptable cost, we will be less able
to compete effectively and could lose customers to our
competitors. Motorolas support of the evolution of the
iDEN technology and of the development of new features,
functionality and handset models could be adversely affected if
Sprint Nextel Corporations purchases of iDEN equipment
decline due to its announced plans to migrate to the next
generation CDMA network platform. In addition, competition among
the differing wireless technologies could:
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segment the user markets, which could reduce demand for our
technology; and
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reduce the resources devoted by third-party suppliers, including
Motorola, which supplies all of our current digital mobile
technology, to developing or improving the technology for our
systems.
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f.
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If our wireless communications technology does not perform in
a manner that meets customer expectations, we will be unable to
attract and retain customers.
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27
Customer acceptance of the services we offer is and will
continue to be affected by technology-based differences and by
the operational performance and reliability of our digital
mobile networks. We may have difficulty attracting and retaining
customers if we are unable to address and resolve satisfactorily
performance or other transmission quality issues as they arise
or if these issues:
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limit our ability to expand our network coverage or capacity as
currently planned; or
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place us at a competitive disadvantage to other wireless service
providers in our markets.
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g.
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We may be limited in our ability to grow unless we expand
network capacity and coverage and address increased demands on
our business systems and processes as needed.
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Our subscriber base continues to grow rapidly. To continue to
successfully increase our number of subscribers and pursue our
business plan, we must economically:
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expand the capacity and coverage of our networks;
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secure sufficient transmitter and receiver sites at appropriate
locations to meet planned system coverage and capacity targets;
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obtain adequate quantities of base radios and other system
infrastructure equipment; and
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obtain an adequate volume and mix of handsets to meet subscriber
demand.
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Our operating performance and ability to retain these new
customers may be adversely affected if we are not able to timely
and efficiently meet the demands for our services and address
any increased demands on our customer service, billing and other
back-office functions. We plan to deploy new systems that are
designed to support the expected demands on our customer care
and billing functions, but the transition to these new systems
could heighten these risks.
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2.
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Because
we rely on one supplier to implement our digital mobile
networks, any failure of that supplier to perform could
adversely affect our operations.
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Motorola is currently our sole source for most of the digital
network equipment and substantially all of the handsets used
throughout our markets, except for the Blackberry handset. In
addition, iDEN technology is a proprietary technology of
Motorola, meaning that there are no other suppliers of this
technology, and it is the only widespread, commercially
available digital technology that operates on non-contiguous
spectrum. Much of the spectrum that our operating companies hold
in each of the markets we serve is non-contiguous. The
non-contiguous nature of our spectrum may make it more difficult
for us to migrate to a new technology in this spectrum if we
choose to do so. Additionally, if Motorola fails to deliver
system infrastructure equipment and handsets or enhancements to
the features and functionality of our networks on a timely,
cost-effective basis, we may not be able to adequately service
our existing customers or attract new customers. Nextel
Communications, a subsidiary of Sprint Nextel Corporation, is
the largest customer of Motorola with respect to iDEN technology
and provides significant support with respect to new product
development. Nextel Communications and Sprint merged on
August 12, 2005, and as a result, Nextel Communications
became a subsidiary of Sprint Nextel. The new combined company
had previously announced plans to migrate Nextels
push-to-talk
services to a next generation CDMA network platform. Any
decrease by Nextel Communications in its use of iDEN technology
could significantly increase our costs for equipment and new
developments and could impact Motorolas decision to
continue to support iDEN technology. In the event Motorola
determines not to continue supporting or enhancing our iDEN
based infrastructure and handsets, because Nextel Communications
decreases its use of iDEN technology or otherwise, we may be
materially adversely affected. We expect to continue to rely
principally on Motorola for the manufacture of a substantial
portion of the equipment necessary to construct, enhance and
maintain our iDEN-based digital mobile networks and for the
manufacture of iDEN compatible handsets.
28
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3.
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We
operate exclusively in foreign markets, and our assets,
customers and cash flows are concentrated in Latin America,
which presents risks to our operating and financing
plans.
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a.
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We face political and economic risks in our markets, which
may limit our ability to implement our strategy and our
financial flexibility and may disrupt our operations.
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The countries in which we operate are considered to be emerging
markets. Although political, economic and social conditions
differ in each country in which we currently operate, political
and economic developments in one country may affect our business
as a whole, including our access to international capital
markets. Negative developments or unstable conditions in the
countries in which we operate or in other emerging market
countries could have a material adverse effect on our financial
condition and results of operations.
In recent years, both Argentina and Brazil have been negatively
affected by volatile economic and political conditions. These
volatile conditions pose risks for our business. In particular,
the volatility of the Argentine peso and the Brazilian real has
affected our recent financial results. The depreciation of the
currencies in Argentina and Brazil in 2002 had a material
negative impact on our financial results.
Argentina. After a prolonged period of
recession, followed by political instability, Argentina
announced in December 2001 that it would impose tight
restrictions on bank accounts, would not service its public
sector debt and suspended foreign currency trading. In January
2002, the Argentine government abandoned its decade-old fixed
Argentine peso-U.S. dollar exchange rate. The resulting
depreciation of the Argentine peso against the U.S. dollar
during the 2002 calendar year was 66%. A depreciation of the
Argentine peso generally affects our consolidated financial
statements by generating a foreign currency transaction loss on
U.S. dollar-denominated debt. Until October 31, 2002,
the liabilities of our Argentine operating company included
U.S. dollar-denominated secured debt, for which we
recognized foreign currency transaction losses of
$137.5 million for the ten months ended October 31,
2002. A depreciation of the Argentine peso also affects our
consolidated financial statements by reducing the translation
rate of all Argentine peso-denominated balances. To the extent
net income is generated by our Argentine operating company, the
amount would be reduced by a depreciation of the Argentine peso.
Brazil. The Brazilian economy has been
characterized by frequent and occasionally drastic intervention
by the Brazilian government and by volatile economic cycles. The
Brazilian government has often changed monetary, taxation,
credit, tariff and other policies to influence the course of
Brazils economy. In early 1999, the Brazilian government
allowed the Brazilian real to float freely, resulting in 32%
depreciation against the U.S. dollar that year. In 2002,
the Brazilian real depreciated against the U.S. dollar by
18%.
In addition, economic and market conditions in other emerging
markets can influence the perception of Brazils economic
and political situation.
We are unable to predict the impact that presidential or other
contested local or national elections and the associated
transfer of power from incumbent officials or political parties
to elected victors, such as the recent elections in Mexico,
Brazil and Peru, may have on the local economy or the growth and
development of the local telecommunications industry. Changes in
leadership or in the ruling party in the countries in which we
operate may affect the economic programs developed under the
prior administration, which in turn, may adversely affect the
economies in the countries in which we operate and our business
operations and prospects in these countries.
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b.
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We are subject to fluctuations in currency exchange rates and
limitations on the expatriation or conversion of currencies,
which may result in significant financial charges, increased
costs of operations or decreased demand for our products and
services.
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Nearly all of our revenues are earned in
non-U.S. currencies,
while a significant portion of our capital and operating
expenditures, including imported network equipment and handsets,
and a significant amount of our outstanding debt, is priced in
U.S. dollars. In addition, we report our results of
operations in U.S. dollars. Accordingly, fluctuations in
exchange rates relative to the U.S. dollar could have a
material adverse effect on our earnings or assets. For example,
the 1999 and 2002 currency devaluations in Brazil resulted in
significant
29
charges against our earnings in 1999 and 2002 and negative
adjustments to the carrying value of our assets in Brazil. The
economic upheaval in Argentina in 2002 led to the unpegging of
the Argentine peso to the U.S. dollar exchange rate and the
subsequent significant devaluation of the Argentine peso, which
resulted in charges against our earnings in 2002 and negative
adjustments to the carrying values of our assets in Argentina.
Any depreciation of local currencies in the countries in which
our operating companies conduct business may result in increased
costs to us for imported equipment and may, at the same time,
decrease demand for our products and services in the affected
markets. If our operating companies distribute dividends in
local currencies in the future, the amount of cash we receive
will also be affected by fluctuations in exchange rates and
currency devaluations. In addition, some of the countries in
which we have operations do or may restrict the expatriation or
conversion of currency.
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c.
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Our operating companies are subject to fluctuating economic
conditions in the local markets in which they operate, which
could hurt their performance.
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Our operations depend on the economies of the markets in which
our operating companies conduct business. These markets are in
countries with economies in various stages of development or
structural reform, some of which are subject to rapid
fluctuations in terms of commodity prices, local consumer
prices, employment levels, gross domestic product, interest
rates and inflation rates. If these fluctuations have an effect
on the ability of customers to pay for our products and
services, our business may be adversely affected. As a result,
our operating companies may experience lower demand for their
products and services and a decline in the growth of their
customer base and in revenues.
Some of our operating companies conduct business in countries
where the rate of inflation is generally higher, and in prior
years has been significantly higher, than in the United States.
Any significant increase in the rate of inflation in any of
these countries may not be completely or partially offset by
corresponding price increases implemented by our operating
companies, even over the long term.
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d.
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Our operating companies are subject to local laws and customs
in the countries in which they operate, which could impact our
financial results.
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Our operations are subject to local laws and customs in the
countries in which we operate, which may differ from those in
the U.S. We could become subject to legal penalties in
foreign countries if we do not comply with local laws and
regulations, which may be substantially different from those in
the United States. In some foreign countries, particularly in
those with developing economies, persons may engage in business
practices that are prohibited by United States regulations
applicable to us such as the Foreign Corrupt Practices Act.
Although we have implemented policies and procedures designed to
ensure compliance with these laws, there can be no assurance
that all of our employees, consultants, contractors and agents
will not take actions in violations of our policies. Any such
violation, even if prohibited by our policies, could have a
material adverse effect on our business.
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e.
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We pay significant import duties on our network equipment and
handsets, and any increases could impact our financial
results.
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Our operations are highly dependent upon the successful and
cost-efficient importation of network equipment and handsets
from North America and, to a lesser extent, from Europe and
Asia. Any significant increase in import duties in the future
could significantly increase our costs. To the extent we cannot
pass these costs on to our customers, our financial results will
be negatively impacted. In the countries in which our operating
companies conduct business, network equipment and handsets may
be subject to significant import duties and other taxes.
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f.
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We are subject to foreign taxes in the countries in which we
operate, which may reduce amounts we receive from our operating
companies or may increase our tax costs.
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Many of the foreign countries in which we operate have
increasingly turned to new taxes, as well as aggressive
interpretations of current taxes, as a method of increasing
revenue. For instance, Brazil has a tax on financial
transactions, certain provinces in Argentina adopted higher tax
rates on telecommunications services
30
in 2001, and Argentina adopted a federal universal services tax
in 2001. The provisions of new tax laws may attempt to prohibit
us from passing these taxes on to our customers. These taxes may
reduce the amount of earnings that we can generate from our
services.
Distributions of earnings and other payments, including
interest, received from our operating companies may be subject
to withholding taxes imposed by some countries in which these
entities operate. Any of these taxes will reduce the amount of
after-tax cash we can receive from those operating companies.
In general, a U.S. corporation may claim a foreign tax
credit against its Federal income tax expense for foreign
withholding taxes and, under certain circumstances, for its
share of foreign income taxes paid directly by foreign corporate
entities in which the company owns 10% or more of the voting
stock. Our ability to claim foreign tax credits is, however,
subject to numerous limitations, and we may incur incremental
tax costs as a result of these limitations or because we do not
have U.S. Federal taxable income.
We may also be required to include in our income for
U.S. Federal income tax purposes our proportionate share of
specified earnings of our foreign corporate subsidiaries that
are classified as controlled foreign corporations, without
regard to whether distributions have been actually received from
these subsidiaries.
Nextel Brazil has received tax assessment notices from state and
federal Brazilian tax authorities asserting deficiencies in tax
payments related primarily to value added taxes, import duties
and matters surrounding the definition and classification of
equipment and services. Nextel Brazil has filed various
petitions disputing these assessments. In some cases we have
received favorable decisions, which are currently being appealed
by the respective governmental authorities. In other cases, our
petitions have been denied and we are currently appealing those
decisions. We currently estimate the range of possible losses
related to matters for which Nextel Brazil has not accrued
liabilities, as they are not deemed probable, to be between
$138.7 million and $142.7 million as of
December 31, 2006.
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g.
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We have entered into a number of agreements that are subject
to enforcement in foreign countries, which may limit efficient
dispute resolution.
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A number of the agreements that we and our operating companies
enter into with third parties are governed by the laws of, and
are subject to dispute resolution in the courts of or through
arbitration proceedings in, the countries or regions in which
the operations are located. We cannot accurately predict whether
these forums will provide effective and efficient means of
resolving disputes that may arise. Even if we are able to obtain
a satisfactory decision through arbitration or a court
proceeding, we could have difficulty enforcing any award or
judgment on a timely basis. Our ability to obtain or enforce
relief in the United States is also uncertain.
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h.
|
The costs we incur to connect our operating companies
networks with those of other carriers are subject to local laws
in the countries in which they operate and may increase, which
could adversely impact our financial results.
|
Our operating companies must connect their telecommunication
networks with those of other carriers in order to provide the
services we offer. We incur costs relating to these
interconnection arrangements and for local and long distance
transport services relating to the connection of our transmitter
sites and other network equipment. These costs include
interconnection charges and fees, charges for terminating calls
on the other carriers networks and transport costs, most
of which are measured based on the level of our use of the
related services. We are able to recover a portion of these
costs through revenues earned from charges we are entitled to
bill other carriers for terminating calls on our network, but
because users of mobile telecommunications services who purchase
those services under contract generally, and business customers
like ours in particular, tend to make more calls that terminate
on other carriers networks and because we have a smaller
number of customers than most other carriers, we usually incur
more charges than we are entitled to receive under these
arrangements. The terms of the interconnection and transport
arrangements, including the rates that we pay, are subject to
local regulation in most of the countries in which we operate,
and often require us to negotiate agreements with the other
carriers, some of whom are our competitors, in order to provide
our services. Our costs relating to these interconnection and
transport arrangements are subject to fluctuation both as a
result of changes in regulations in the countries in which we
operate and the negotiations with the other carriers.
31
Changes in these factors could result in increased costs for the
related services that we may not be able to recover through
increased revenues, which could adversely impact our financial
results.
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4.
|
Government
regulations determine how we operate in various countries, which
could limit our growth and strategic plans.
|
In each market in which we operate, one or more regulatory
entities regulate the licensing, construction, acquisition,
ownership and operation of our wireless communications systems.
Adoption of new regulations, changes in the current
telecommunications laws or regulations or changes in the manner
in which they are interpreted or applied could adversely affect
our operations. Because of the uncertainty as to the
interpretation of regulations in some countries in which we
operate, we may not always be able to provide the services we
have planned in each market. In some markets, we are unable, or
have limitations on our ability, to offer some services, such as
interconnection to other telecommunications networks and
participation in calling party pays programs, which may increase
our net costs. Further, the regulatory schemes in the countries
in which we operate allow third parties, including our
competitors, to challenge our actions. For instance, some of our
competitors have challenged the validity of some of our licenses
or the scope of services we provide under those licenses, in
administrative or judicial proceedings, particularly in Chile.
It is possible that, in the future, we may face additional
regulatory prohibitions or limitations on our services.
Inability to provide planned services could make it more
difficult for us to compete in the affected markets. Further,
some countries in which we conduct business impose foreign
ownership limitations upon telecommunications companies.
Finally, in some of our markets, local governments have adopted
very stringent rules and regulations related to the placement
and construction of wireless towers, which can significantly
impede the planned expansion of our service coverage area,
eliminate existing towers and impose new and onerous taxes and
fees. These issues affect our ability to operate in each of our
markets, and therefore impact our business strategies. In
addition, local governments have placed embargoes on a number of
our cell sites owned by our operating companies in Argentina and
Brazil. If we are not able to successfully overcome these
embargoes, we may have to remove the cell sites and find a more
acceptable location.
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5.
|
If our
licenses to provide mobile services are not renewed, or are
modified or revoked, our business may be
restricted.
|
Wireless communications licenses and spectrum allocations are
subject to ongoing review and, in some cases, to modification or
early termination for failure to comply with applicable
regulations. If our operating companies fail to comply with the
terms of their licenses and other regulatory requirements,
including installation deadlines and minimum loading or service
availability requirements, their licenses could be revoked.
Further, compliance with these requirements is a condition for
eligibility for license renewal. Most of our wireless
communications licenses have fixed terms and are not renewed
automatically. Because governmental authorities have discretion
as to the grant or renewal of licenses, our licenses may not be
renewed or, if renewed, renewal may not be on acceptable
economic terms. For example, under existing regulations, our
licenses in Brazil and Peru are renewable once, and no
regulations presently exist regarding how or whether additional
renewals will be granted in future periods.
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6.
|
Agreements
with Motorola reduce our operational flexibility and may
adversely affect our growth or operating results.
|
We have entered into agreements with Motorola that impose
limitations and conditions on our ability to use other
technologies that would displace our existing iDEN digital
mobile networks. These agreements may delay or prevent us from
employing new or different technologies that perform better or
are available at a lower cost because of the additional economic
costs and other impediments to change arising under the Motorola
agreements. For example, our infrastructure supply and
installation services agreements with Motorola require that we
must provide Motorola with notice of our determination that
Motorolas technology is no longer suited to our needs at
least six months before publicly announcing or entering into a
contract to purchase equipment utilizing an alternate technology.
32
In addition, if Motorola manufactures, or elects to manufacture,
the equipment utilizing the alternate technology that we elect
to deploy, we must give Motorola the opportunity to supply 50%
of our infrastructure requirements for the equipment utilizing
the alternate technology for three years. This may limit our
ability to negotiate with alternate equipment suppliers.
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7.
|
Costs
and other aspects of a future deployment of advanced digital
technology could adversely affect our operations and
growth.
|
If we were to deploy new digital technologies to support our
wireless voice services or new wireless services including high
speed data transmission in our operating markets, significant
capital expenditures may be required. Those expenditures could
increase in the event of unforeseen delays, cost overruns,
unanticipated expenses, regulatory changes, engineering design
changes, problems with network or systems compatibility,
equipment unavailability and technological or other
complications, such as our inability to successfully coordinate
this change with our customer care, billing, order fulfillment
and other back-office operations. There can be no guarantee that
any such technology will provide the advantages that we expect.
Motorola and Sprint Nextel Corporation have developed and
deployed a significant technology upgrade to the iDEN digital
mobile network, the 6:1 voice coder software upgrade, which is
designed to increase the capacity of iDEN networks for
interconnect calls. Beginning in 2004, we started selling
handsets that can operate on the new 6:1 voice coder, and we
have deployed the related network software modifications that
are necessary to utilize this technology in our networks in
Mexico, Brazil and Argentina. This network software allows us to
adjust the extent to which we utilize the 6:1 voice coder
technology and the transmitter locations in which to use it as
required to meet our network capacity needs. This software
upgrade is designed to increase our voice capacity for
interconnect calls without requiring the investment in
additional network infrastructure equipment. However, if there
are substantial delays in realizing the benefits of the 6:1
voice coder or if the technology does not perform
satisfactorily, we could be required to invest significant
additional capital in our infrastructure to satisfy our network
capacity needs.
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8.
|
Any
modification or termination of our trademark license with Nextel
Communications could increase our costs.
|
Nextel Communications has licensed to us the right to use
Nextel and other of its trademarks on a perpetual
royalty-free basis in Latin America. However, Nextel
Communications may terminate the license on 60 days notice
if we commit one of several specified defaults (namely, failure
to maintain agreed quality controls or a change in control of
NII Holdings). If there is a change in control of one of our
subsidiaries, upon 30 days notice, Nextel Communications
may terminate the sublicense granted by us to the subsidiary
with respect to the licensed marks. The loss of the use of the
Nextel name and trademark could have a material
adverse effect on our operations.
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9.
|
If we
fail to maintain an effective system of internal controls, we
may not be able to accurately report our financial results or
prevent fraud. As a result, current and potential stockholders
could lose confidence in our financial reporting, which could
harm our business and the trading price of our
stock.
|
Effective internal controls are necessary for us to provide
reliable financial reports and effectively prevent fraud.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions or that the degree
of compliance with the policies or procedures may deteriorate.
We have in the past discovered, and may in the future discover,
areas of our internal controls that need improvement. For
example, in 2004, we identified a weakness in our internal
controls relating to accounting for income taxes, which we
remediated in 2006. See Item 9A. Controls and
Procedures Remediation of Income Tax Material
Weakness. We continue to monitor and improve our
internal controls as needed. Any failure to implement required
new or improved controls or difficulties encountered in their
implementation could harm our operating results or cause us to
fail to meet our reporting obligations. Inadequate internal
controls could also cause investors to lose confidence in our
reported financial information, which could have a negative
effect on the trading price of our stock.
33
|
|
10.
|
Our
debt may limit our flexibility and increase our risk of
default.
|
Our existing debt and debt we may incur in the future could have
important consequences to you, such as:
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|
|
|
|
limiting our flexibility in planning for, or reacting to,
changes in our business and the industries in which we compete
and increasing our vulnerability to general adverse economic and
industry conditions; and
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|
|
|
limiting our ability to obtain additional financing that we may
need to fund future working capital, capital expenditures,
product development, acquisitions or other corporate
requirements.
|
As of December 31, 2006, the book value of our long-term
debt was $1,134.4 million, including $350.0 million of
2.75% convertible notes due 2025, $300.0 million of
2.875% convertible notes due 2034, $279.2 million for
a syndicated loan facility, $134.5 million in obligations
associated with the sale and leaseback of communication towers,
$60.9 million in capital lease obligations and
$9.8 million in spectrum license financing.
Our ability to meet our debt obligations and to reduce our
indebtedness will depend on our future performance and the other
cash requirements of our business. Our performance, to a certain
extent, is subject to general economic conditions and financial,
business, political and other factors that are beyond our
control. We cannot assure you that we will continue to generate
cash flow from operations at or above current levels, that we
will be able to meet our cash interest payments on all of our
debt or that the related assets currently owned by us can be
sustained in the future.
If our business plans change, including as a result of changes
in technology, or if we decide to offer new communication
services or expand into new markets or further in our existing
markets, as a result of the construction of additional portions
of our network or the acquisition of competitors or others, or
if economic conditions in any of our markets generally, or
competitive practices in the mobile wireless telecommunications
industry change materially from those currently prevailing or
from those now anticipated, or if other presently unexpected
circumstances arise that have a material effect on the cash flow
or profitability of our mobile wireless business, then the
anticipated cash needs of our business as well as the
conclusions presented herein as to the adequacy of the available
sources of cash and timing on our ability to generate net income
could change significantly. Any of these events or circumstances
could involve significant additional funding needs in excess of
the identified currently available sources, and could require us
to raise additional capital to meet those needs. In addition, we
continue to assess the opportunities to raise additional funding
on attractive terms and conditions and at times that do not
involve any of these events or circumstances and may do so if
the opportunity presents itself. However, our ability to seek
additional capital, if necessary, is subject to a variety of
additional factors that we cannot presently predict with
certainty, including:
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|
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the commercial success of our operations;
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|
|
the volatility and demand of the capital markets; and
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|
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the future market prices of our securities.
|
If we are unable to generate cash flow from operations in the
future to service our debt, we may try to refinance all or a
portion of our debt. We cannot assure you that sufficient future
borrowings will be available to pay or refinance our debt.
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11.
|
Our
financing agreements have included, and future financing
agreements may include, covenants that limit how we conduct our
business, which may affect our ability to grow as
planned.
|
Certain of our financing agreements include covenants that
impose restrictions on our business, and similar restrictions
may be contained in future financing agreements. If we are
subject to these restrictions, we may be unable to raise
additional financing, compete effectively or take advantage of
new business opportunities. This may affect our ability to
generate revenues and profits. Examples of the types of
covenants
34
that may limit how we conduct business include those contained
in Nextel Mexicos syndicated loan facility that restricts
our ability to:
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|
|
incur or guarantee additional indebtedness;
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|
|
pay dividends and make other distributions;
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|
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prepay subordinated indebtedness;
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make investments and other restricted payments;
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|
|
enter into sale and leaseback transactions;
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|
create liens;
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|
sell assets; and
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engage in transactions with affiliates.
|
Nextel Mexicos syndicated loan facility also requires
Nextel Mexico to maintain specified financial ratios and satisfy
financial tests. If Nextel Mexico is not able to meet these
ratios and satisfy other tests, or if we fail to comply with any
of the other restrictive covenants noted above or that are
contained in any other financing agreements, we will be in
default with respect to one or more of the applicable financing
agreements, which in turn may result in defaults under the
remaining financing arrangements, giving our lenders the right
to require us to repay all amounts then outstanding.
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12.
|
We
have significant intangible assets that may not generate
adequate value to satisfy our obligations in the event of
liquidation.
|
If we were liquidated, the value of our assets may not be
sufficient to satisfy our obligations. We have a significant
amount of intangible assets, primarily telecommunications
licenses. The value of these licenses will depend significantly
upon the success of our digital mobile network business and the
growth of the SMR and wireless communications industries in
general. Moreover, the transfer of licenses in liquidation would
be subject to governmental or regulatory approvals that may not
be obtained or that may adversely impact the value of such
licenses. Our net tangible book value was $977.3 million as
of December 31, 2006.
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13.
|
We may
not be able to finance a change of control offer.
|
Upon the occurrence of certain kinds of change of control
events, we may be required to repurchase or repay a significant
portion of our outstanding debt. However, it is possible that we
will not have sufficient funds at the time of the change of
control to make the required repurchase or repayment.
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14.
|
Sales
of large amounts of our common stock, or the perception that
sales could occur, may depress our stock price.
|
Even if our business is doing well, the market price of our
common stock could drop if our existing stockholders decide to
sell their shares. In January 2004, we issued
2.875% convertible notes due 2034 that are convertible into
about 11,269,800 shares of our common stock based on the
current conversion rate of such notes and in August 2005 we
issued 2.75% convertible notes due 2025 that are
convertible into about 6,988,450 shares of our common stock
based on the current conversion rate of such notes. In
connection with the issuance of such notes, we entered into
registration rights agreements with the initial purchasers of
such notes. Under the terms of those registration rights
agreements, we have filed registration statements to register
the notes and the shares of common stock that could be issued
upon the conversion of the notes that will cover sales to third
parties by the holders of such notes or common stock making
those shares freely tradable. In addition, as of
December 31, 2006, we had 11,106,900 options and 1,423,000
restricted shares outstanding under our option plans. As of
December 31, 2006, about 23,378,068 shares of our
common stock were reserved for future issuance under our option
plans. Sales of substantial amounts of the shares issuable upon
conversion of the convertible notes or upon exercise of options,
or the perception by investors that significant sales of these
shares are imminent, could cause the market price of our common
stock to drop significantly.
35
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15.
|
The
issuance of shares pursuant to the terms of our convertible
notes and under our option plans could be dilutive of our
investors interests.
|
As of December 31, 2006, our outstanding convertible notes
were convertible into about 18,258,250 shares of our common
stock based on the current conversion rate of such notes, and
the options outstanding under our option plans were exercisable
for about 837,775 shares of our common stock. In the
aggregate, these shares represented about 11.8% of our
outstanding shares of common stock at that date. The effective
conversion price at which shares are issued upon conversion of
our convertible notes and the exercise price for most of the
options outstanding under our option plans are lower than the
market price of our common stock as of December 31, 2006.
To the extent that holders of convertible notes exercise their
conversion rights or these stock options are exercised, the
interest of investors who have purchased their shares at market
prices that are higher than the relevant conversion or exercise
prices may be diluted.
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16.
|
Concerns
about health risks associated with wireless equipment may reduce
the demand for our services.
|
Portable communications devices have been alleged to pose health
risks, including cancer, due to radio frequency emissions from
these devices. The actual or perceived risk of mobile
communications devices could adversely affect us through
increased costs of doing business, additional governmental
regulation that sets emissions standards or otherwise limits or
prohibits our devices from being marketed and sold, a reduction
in subscribers, reduced network usage per subscriber or reduced
financing available to the mobile communications industry.
Further research and studies are ongoing, and we cannot be sure
that these studies will not demonstrate a link between radio
frequency emissions and health concerns.
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17.
|
Our
forward-looking statements are subject to a variety of factors
that could cause actual results to differ materially from
current beliefs.
|
Safe Harbor Statement under the Private
Securities Litigation Reform Act of 1995. Certain
statements made in this annual report on
Form 10-K
are not historical or current facts, but deal with potential
future circumstances and developments. They can be identified by
the use of forward-looking words such as believes,
expects, intends, plans,
may, will, would,
could, should or anticipates
or other comparable words, or by discussions of strategy that
involve risks and uncertainties. We caution you that these
forward-looking statements are only predictions, which are
subject to risks and uncertainties, including technical
uncertainties, financial variations, changes in the regulatory
environment, industry growth and trend predictions. We have
attempted to identify, in context, some of the factors that we
currently believe may cause actual future experience and results
to differ from our current expectations regarding the relevant
matter or subject area. The operation and results of our
wireless communications business also may be subject to the
effects of other risks and uncertainties in addition to the
other qualifying factors identified in this Item, including, but
not limited to:
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our ability to meet the operating goals established by our
business plan;
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general economic conditions in Latin America and in the market
segments that we are targeting for our digital mobile services;
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the political and social conditions in the countries in which we
operate, including political instability, which may affect the
economies of our markets and the regulatory schemes in these
countries;
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substantive terms of any international financial aid package
that may be made available to any country in which our operating
companies conduct business;
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the impact of foreign exchange volatility in our markets as
compared to the U.S. dollar and related currency
depreciation in countries in which our operating companies
conduct business;
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reasonable access to and the successful performance of the
technology being deployed in our service areas, and improvements
thereon, including technology deployed in connection with the
introduction of digital two-way mobile data or Internet
connectivity services in our markets;
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36
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the availability of adequate quantities of system infrastructure
and subscriber equipment and components at reasonable pricing to
meet our service deployment and marketing plans and customer
demand;
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Motorolas ability and willingness to provide handsets and
related equipment and software applications or to develop new
technologies or features for us, including the timely
development and availability of new handsets with expanded
applications and features;
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our ability to successfully scale our billing, collection,
customer care and similar back-office operations to keep pace
with customer growth, increased system usage rates and growth;
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the success of efforts to improve and satisfactorily address any
issues relating to our digital mobile network performance;
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future legislation or regulatory actions relating to our SMR
services, other wireless communication services or
telecommunications generally;
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the ability to achieve and maintain market penetration and
average subscriber revenue levels sufficient to provide
financial viability to our digital mobile network business;
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the quality and price of similar or comparable wireless
communications services offered or to be offered by our
competitors, including providers of cellular services and
personal communications services;
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market acceptance of our new service offerings;
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our ability to access sufficient debt or equity capital to meet
any future operating and financial needs; and
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other risks and uncertainties described in this annual report on
Form 10-K
and from time to time in our other reports filed with the
Securities and Exchange Commission.
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Item 1B.
|
Unresolved
Staff Comments
|
None.
Our principal executive and administrative offices are located
in Reston, Virginia, where we lease about 45,200 square
feet of office space under a lease expiring in January 2009. In
addition, our operating companies own and lease office space and
transmitter and receiver sites in each of the countries where
they conduct business.
Each operating company leases transmitter and receiver sites for
the transmission of radio service under various individual site
leases. Most of these leases are for terms of five years or
less, with options to renew. As of December 31, 2006, our
operating companies had constructed sites at leased and owned
locations for their digital mobile business, as shown below:
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Number
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Operating Company
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|
of Sites
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Nextel Mexico
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2,038
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Nextel Brazil
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1,524
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Nextel Argentina
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565
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Nextel Peru
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371
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Nextel Chile
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26
|
|
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Total
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4,524
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These sites include sites sold and leased back from American
Tower Corporation, as well as various co-location sites with
American Tower Corporation and other operators.
37
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Item 3.
|
Legal
Proceedings
|
We are subject to claims and legal actions that may arise in the
ordinary course of business. We do not believe that any of these
pending claims or legal actions will have a material effect on
our business, financial condition, results of operations or cash
flows. See Note 9 to our consolidated financial statements
at the end of this annual report on
Form 10-K
for more information.
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Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of security holders during
the fourth quarter of 2006.
Executive
Officers of the Registrant
The following people were serving as our executive officers as
of February 13, 2007. These executive officers were elected
to serve until their successors are elected. There is no family
relationship between any of our executive officers or between
any of these officers and any of our directors.
Steven M. Shindler, 44, has been a director on the board
of NII Holdings since 1997, chief executive officer since 2000
and chairman of the board since November 12, 2002.
Mr. Shindler also served as executive vice president and
chief financial officer of Nextel Communications from 1996 until
2000. From 1987 to 1996, Mr. Shindler was an officer with
Toronto Dominion Bank, a bank where he was a managing director
in its communications finance group.
Lo van Gemert, 52, has been the president and chief
operating officer of NII Holdings since 1999. Mr. van
Gemert served as senior vice president of Nextel Communications
from 1999 until 2000 and as president of the north region of
Nextel Communications from 1996 until 1999. Before joining
Nextel Communications in 1996, Mr. van Gemert served as
executive vice president at Rogers Cantel, Inc., a wireless
operator in Canada. From 1980 to 1994, Mr. van Gemert held
various senior management positions, domestically and overseas,
at Sony Corporation and Bellsouth Corporation.
Byron R. Siliezar, 51, has been the vice president and
chief financial officer of NII Holdings since 1999.
Mr. Siliezar was the vice president and controller of NII
Holdings from 1998 to 1999. Mr. Siliezar served as vice
president of finance at Neodata Corporation, a subsidiary of
EDS Corporation, a global information technology company,
from 1997 to 1998, and from 1996 to 1997, he served as
international controller of Pagenet. From 1982 to 1996,
Mr. Siliezar held various executive and management
positions at GTE Corporation domestically and overseas.
Gary D. Begeman, 48, has been the vice president and
general counsel of NII Holdings since February 2007 having
joined NII Holdings as vice president and deputy general counsel
in November 2006. From 2003 through 2006, he served as senior
vice president and deputy general counsel of Sprint Nextel
Corporation and was a vice president of Nextel Communications,
Inc. prior to its merger with Sprint. From 1999 through 2003, he
was senior vice president and general counsel of XO
Communications, Inc. From 1997 to 1999, Mr. Begeman was
vice president and deputy general counsel of Nextel
Communications, Inc. From 1991 until he joined Nextel,
Mr. Begeman was a partner with the law firm of Jones, Day,
Reavis & Pogue.
Robert J. Gilker, 56, has been our vice president of
regulatory affairs and secretary since February 2007. From 2000
to February 2007, Mr. Gilker was the vice president and
general counsel of NII Holdings. From 1998 to 2000, he served as
vice president, law and administration and secretary of MPW
Industrial Services Group, Inc., a provider of industrial
cleaning and facilities support services. From 1987 until he
joined MPW, Mr. Gilker was a partner with the law firm of
Jones, Day, Reavis & Pogue.
John McMahon, 42, has been our vice president of business
operations since joining NII Holdings in 1999. Prior to that,
Mr. McMahon served as vice president of finance and
business operations, north region, for Nextel Communications
from 1997 to 1999, and as director of finance for the
mid-Atlantic region from 1995 to 1997.
Alan Strauss, 47, has been our vice president and chief
technology and engineering officer since 2001. From 1998 until
2001, Mr. Strauss was the vice president and general
manager of Nextel Communications
38
strategic business operations group. From 1994 to 1998,
Mr. Strauss held various positions with Nextel
Communications.
Greg Santoro, 44, has been our vice president and chief
marketing and strategy officer since February 2007. From 2000
until 2006, Mr. Santoro was the vice president of products
and services at Nextel Communications, Inc. and most recently as
the vice president of product innovation at Sprint Nextel
Corporation. Before Nextel, Mr. Santoro served as the vice
president of internet services at Bellsouth.net where he was
responsible for launching Bellsouths narrowband and
broadband internet services.
Daniel E. Freiman, 35, has been our vice president and
controller since April 27, 2005. Mr. Freiman was our
director of investor relations from June 2004 to April 2005,
director of external financial reporting from November 2002 to
June 2004 and senior manager of external financial reporting
from September 2000 to November 2002. Prior to September 2000,
he was a manager in the audit practice of PricewaterhouseCoopers
LLP in Washington, D.C.
Catherine E. Neel, 46, has been our vice president,
treasurer and assistant secretary since November 1, 2002.
From 1999 to 2002, Ms. Neel was the assistant treasurer of
NII Holdings. Prior to 1999, Ms. Neel held various
management positions with Bellsouth Corporation and was in
public accounting with Arthur Andersen LLP.
Jose Felipe, 56, has held several positions since joining
NII Holdings in 1998. He has been president of Nextel Mercosur,
which manages our operations in Argentina, Brazil and Chile
since February 2003. From 1999 to 2003, he served as president
of Nextel Cono Sur which managed our operations in Argentina and
Chile. From 1998 to 1999, Mr. Felipe was our vice
president Latin America. From 1991 to 1998,
Mr. Felipe held various senior management positions with
AT&T Corp., most recently president and chief executive
officer of the Puerto Rico and Virgin Islands region and vice
president of emerging markets of the Latin American region.
Peter A. Foyo, 41, has served as president of Nextel
Mexico since 1998. From 1988 to 1998, Mr. Foyo held various
senior management positions with AT&T Corp., including
corporate strategy director of Alestra, S.A. de C.V., a joint
venture between AT&T and a local Mexican partner, and
president of AT&T Argentina.
Miguel E. Rivera, 54, has served as president of Nextel
Peru since 2000. Previously, Mr. Rivera was the general
manager of the Lima Stock Exchange from 1999 to 2000. From 1986
to 1998, Mr. Rivera held various executive positions with
IBM, most recently as general manager of Manufacturing Industry,
IBM Latin America.
39
PART II
|
|
Item 5.
|
Market
for Registrants Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
1. Market
for Common Stock
Our common stock trades on the Nasdaq Global Select Market under
the trading symbol NIHD. Our common stock had traded
on the Nasdaq National Market under the same symbol until
July 3, 2006. The following table sets forth on a per share
basis the reported high and low sales prices for our common
stock, as reported on the market at the time, for the quarters
indicated. On October 27, 2005, we announced a
2-for-1
common stock split which was effected in the form of a stock
dividend that was paid on November 21, 2005 for holders of
record on November 11, 2005. The prices in this table have
been adjusted to reflect this stock split.
|
|
|
|
|
|
|
|
|
|
|
Price Range of
|
|
|
|
Common Stock
|
|
|
|
High
|
|
|
Low
|
|
|
2005
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
30.74
|
|
|
$
|
23.59
|
|
Second Quarter
|
|
|
32.21
|
|
|
|
23.99
|
|
Third Quarter
|
|
|
42.40
|
|
|
|
31.54
|
|
Fourth Quarter
|
|
|
48.23
|
|
|
|
35.25
|
|
2006
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
59.34
|
|
|
$
|
42.80
|
|
Second Quarter
|
|
|
67.18
|
|
|
|
44.45
|
|
Third Quarter
|
|
|
63.34
|
|
|
|
48.03
|
|
Fourth Quarter
|
|
|
69.94
|
|
|
|
61.22
|
|
2. Number
of Stockholders of Record
As of February 20, 2007, there were approximately 11
holders of record of our common stock, including the Depository
Trust Corporation, which acts as a clearinghouse for multiple
brokerage and custodial accounts.
3. Dividends
We have not paid any dividends on our common stock and do not
plan to pay dividends on our common stock for the foreseeable
future. In addition, some of our financing documents have
contained, and some future financing agreements may contain,
restrictions on the payment of dividends. We anticipate that for
the foreseeable future any cash flow generated from our
operations will be used to develop and expand our business and
operations and make contractual payments under our debt
facilities in accordance with our business plan.
|
|
4.
|
Issuer
Purchases of Equity Securities
|
We did not repurchase any of our equity securities during the
fourth quarter of 2006.
40
Performance
Graph
The following graph presents the cumulative total stockholder
return on our common stock from our listing on the
Over-the-Counter
Bulletin Board on November 20, 2002 and our move to
the Nasdaq National Market on February 28, 2003 until July
3, 2006 and the Nasdaq Global Select Market through
December 31, 2006. This graph also compares our common
stock to the cumulative total stockholder return on the Nasdaq
100 Index, the common stock of America Movil, S.A. de C.V. and
Millicom International Cellular S.A. The graph assumes an
initial investment of $100 in our common stock on
November 20, 2002 and in each of the comparative indices or
peer issuers, and that all dividends were reinvested.
In the proxy statement for our 2006 annual meeting of
stockholders, the peer group index to which we compared our
stock tracked the cumulative total stockholder return weighted
by market capitalization of American Movil, S.A. de C.V., Grupo
Iusacell, S.A. de C.V., Telefonica Moviles, S.A. and Telesp
Celular Participacoes, S.A. During 2006, the ADRs of
Iusacell, S.A. de C.V. ceased to trade on the NYSE, and the
ADRs of Telefonica Moviles, S.A. and Telesp Celular
Participacoes, S.A. were replaced by the ADRs of their
parent company, Telefonica, S.A. Given the geographic
distribution of its segments and the wireline products and
services provided by Telefonica, S.A., we do not consider it to
be a peer issuer. For purposes of the 2006 performance graph
presented below, we added Millicom International as a peer
issuer due to its international wireless holdings, especially in
Latin America.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Index
|
|
11/22/2002
|
|
12/31/2002
|
|
12/31/2003
|
|
12/31/2004
|
|
12/31/2005
|
|
12/31/2006
|
|
NII Holdings
|
|
$
|
100.00
|
|
|
$
|
139.05
|
|
|
$
|
883.20
|
|
|
$
|
1,684.62
|
|
|
$
|
3,101.54
|
|
|
$
|
4,575.62
|
|
Nasdaq 100
|
|
$
|
100.00
|
|
|
$
|
87.91
|
|
|
$
|
131.53
|
|
|
$
|
144.01
|
|
|
$
|
145.78
|
|
|
$
|
155.70
|
|
America Movil
|
|
$
|
100.00
|
|
|
$
|
101.63
|
|
|
$
|
193.49
|
|
|
$
|
370.49
|
|
|
$
|
621.23
|
|
|
$
|
960.08
|
|
Millicom International
|
|
$
|
100.00
|
|
|
$
|
98.89
|
|
|
$
|
1,296.30
|
|
|
$
|
1,683.70
|
|
|
$
|
1,988.15
|
|
|
$
|
4,565.93
|
|
41
|
|
Item 6.
|
Selected
Financial Data
|
The financial information presented below for the ten months
ended October 31, 2002, two months ended December 31,
2002 and years ended December 31, 2003, 2004, 2005 and 2006
has been derived from our audited consolidated financial
statements. Our consolidated financial statements as of and for
the ten months ended October 31, 2002 and two months ended
December 31, 2002 have been audited by our former
independent registered public accounting firm. Our consolidated
financial statements as of and for the years ended
December 31, 2003, 2004, 2005 and 2006 have been audited by
PricewaterhouseCoopers LLP, our current independent registered
public accounting firm. Our audited consolidated financial
statements as of December 31, 2005 and 2006 and for the
years ended December 31, 2004, 2005 and 2006 are included
at the end of this annual report on
Form 10-K.
This information is only a summary and should be read together
with our consolidated historical financial statements and
managements discussion and analysis appearing elsewhere in
this annual report on
Form 10-K.
As a result of the consummation of our Revised Third Amended
Joint Plan of Reorganization and the transactions contemplated
thereby on November 12, 2002, we are operating our existing
business under a new capital structure. In addition, we applied
fresh-start accounting rules on October 31, 2002.
Accordingly, our consolidated financial condition and results of
operations from and after our reorganization are not comparable
to our consolidated financial condition or results of operations
for periods prior to our reorganization reflected in our
historical financial statements included at the end of this
annual report on
Form 10-K
or in the selected consolidated historical financial information
set forth below. References below to the Predecessor Company
refer to NII Holdings for the period prior to November 1,
2002 and references to the Successor Company refer to NII
Holdings for the period from and after November 1, 2002.
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
|
|
Successor Company
|
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two Months
|
|
|
|
Ten Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
Ended
|
|
|
|
Year Ended December 31,
|
|
|
December 31,
|
|
|
|
October 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
2002
|
|
|
|
(in thousands, except per share data)
|
|
Consolidated Statement of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
2,279,922
|
|
|
$
|
1,666,613
|
|
|
$
|
1,214,837
|
|
|
$
|
895,615
|
|
|
$
|
137,623
|
|
|
|
$
|
610,341
|
|
Digital handset and accessory
revenues
|
|
|
91,418
|
|
|
|
79,226
|
|
|
|
65,071
|
|
|
|
43,072
|
|
|
|
5,655
|
|
|
|
|
26,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,371,340
|
|
|
|
1,745,839
|
|
|
|
1,279,908
|
|
|
|
938,687
|
|
|
|
143,278
|
|
|
|
|
637,095
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation and amortization included below)
|
|
|
617,669
|
|
|
|
464,651
|
|
|
|
365,982
|
|
|
|
266,709
|
|
|
|
34,514
|
|
|
|
|
184,046
|
|
Cost of digital handset and
accessory sales
|
|
|
311,307
|
|
|
|
251,192
|
|
|
|
207,112
|
|
|
|
134,259
|
|
|
|
19,569
|
|
|
|
|
87,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
928,976
|
|
|
|
715,843
|
|
|
|
573,094
|
|
|
|
400,968
|
|
|
|
54,083
|
|
|
|
|
271,628
|
|
Selling, general and administrative
|
|
|
780,373
|
|
|
|
545,235
|
|
|
|
358,076
|
|
|
|
290,712
|
|
|
|
42,523
|
|
|
|
|
243,354
|
|
Impairment, restructuring and other
charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,808
|
|
Depreciation
|
|
|
194,817
|
|
|
|
123,990
|
|
|
|
84,139
|
|
|
|
49,127
|
|
|
|
4,694
|
|
|
|
|
55,758
|
|
Amortization
|
|
|
7,405
|
|
|
|
6,142
|
|
|
|
14,236
|
|
|
|
30,374
|
|
|
|
6,392
|
|
|
|
|
9,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
459,769
|
|
|
|
354,629
|
|
|
|
250,363
|
|
|
|
167,506
|
|
|
|
35,586
|
|
|
|
|
41,328
|
|
Interest expense, net
|
|
|
(89,379
|
)
|
|
|
(72,470
|
)
|
|
|
(55,113
|
)
|
|
|
(64,623
|
)
|
|
|
(10,469
|
)
|
|
|
|
(151,579
|
)
|
Interest income
|
|
|
51,057
|
|
|
|
32,611
|
|
|
|
12,697
|
|
|
|
10,864
|
|
|
|
1,797
|
|
|
|
|
3,928
|
|
Foreign currency transaction gains
(losses), net
|
|
|
3,557
|
|
|
|
3,357
|
|
|
|
9,210
|
|
|
|
8,856
|
|
|
|
2,616
|
|
|
|
|
(180,765
|
)
|
Debt conversion expense
|
|
|
(5,070
|
)
|
|
|
(8,930
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) gain on extinguishment of
debt, net
|
|
|
|
|
|
|
|
|
|
|
(79,327
|
)
|
|
|
22,404
|
|
|
|
|
|
|
|
|
101,598
|
|
Reorganization items, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,180,998
|
|
Other expense, net
|
|
|
(6,000
|
)
|
|
|
(8,621
|
)
|
|
|
(2,320
|
)
|
|
|
(12,166
|
)
|
|
|
(1,557
|
)
|
|
|
|
(8,918
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income tax provision and cumulative effect of change in
accounting principle
|
|
|
413,934
|
|
|
|
300,576
|
|
|
|
135,510
|
|
|
|
132,841
|
|
|
|
27,973
|
|
|
|
|
1,986,590
|
|
Income tax provision
|
|
|
(119,444
|
)
|
|
|
(125,795
|
)
|
|
|
(79,191
|
)
|
|
|
(51,627
|
)
|
|
|
(24,874
|
)
|
|
|
|
(29,270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before cumulative effect of change in accounting principle
|
|
|
294,490
|
|
|
|
174,781
|
|
|
|
56,319
|
|
|
|
81,214
|
|
|
|
3,099
|
|
|
|
|
1,957,320
|
|
Income (loss) from discontinued
operations of Nextel Philippines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,665
|
|
|
|
|
(2,025
|
)
|
Income tax provision from
discontinued operations of Nextel Philippines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(252
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
change in accounting principle
|
|
|
294,490
|
|
|
|
174,781
|
|
|
|
56,319
|
|
|
|
81,214
|
|
|
|
22,764
|
|
|
|
|
1,955,043
|
|
Cumulative effect of change in
accounting principle, net of income taxes of $11,898 in 2004
|
|
|
|
|
|
|
|
|
|
|
970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
294,490
|
|
|
$
|
174,781
|
|
|
$
|
57,289
|
|
|
$
|
81,214
|
|
|
$
|
22,764
|
|
|
|
$
|
1,955,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before cumulative effect of change in accounting principle per
common share, basic
|
|
$
|
1.91
|
|
|
$
|
1.19
|
|
|
$
|
0.40
|
|
|
$
|
0.64
|
|
|
$
|
0.03
|
|
|
|
$
|
7.24
|
|
Income (loss) from discontinued
operations per common share, basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.16
|
|
|
|
|
(0.01
|
)
|
Cumulative effect of change in
accounting principle per common share, basic
|
|
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share, basic
|
|
$
|
1.91
|
|
|
$
|
1.19
|
|
|
$
|
0.41
|
|
|
$
|
0.64
|
|
|
$
|
0.19
|
|
|
|
$
|
7.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before cumulative effect of change in accounting principle per
common share, diluted
|
|
$
|
1.67
|
|
|
$
|
1.06
|
|
|
$
|
0.39
|
|
|
$
|
0.59
|
|
|
$
|
0.02
|
|
|
|
$
|
7.24
|
|
Income (loss) from discontinued
operations per common share, diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.16
|
|
|
|
|
(0.01
|
)
|
Cumulative effect of change in
accounting principle per common share, diluted
|
|
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share, diluted
|
|
$
|
1.67
|
|
|
$
|
1.06
|
|
|
$
|
0.40
|
|
|
$
|
0.59
|
|
|
$
|
0.18
|
|
|
|
$
|
7.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding, basic
|
|
|
154,085
|
|
|
|
146,336
|
|
|
|
139,166
|
|
|
|
126,257
|
|
|
|
120,000
|
|
|
|
|
270,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding, diluted
|
|
|
184,282
|
|
|
|
176,562
|
|
|
|
145,015
|
|
|
|
140,106
|
|
|
|
126,858
|
|
|
|
|
270,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(in thousands)
|
|
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
708,591
|
|
|
$
|
877,536
|
|
|
$
|
330,984
|
|
|
$
|
405,406
|
|
|
$
|
231,161
|
|
Short-term investments
|
|
|
|
|
|
|
7,371
|
|
|
|
38,401
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
1,389,150
|
|
|
|
933,923
|
|
|
|
558,247
|
|
|
|
368,434
|
|
|
|
230,598
|
|
Intangible assets, net
|
|
|
369,196
|
|
|
|
83,642
|
|
|
|
67,956
|
|
|
|
85,818
|
|
|
|
182,264
|
|
Total assets
|
|
|
3,297,678
|
|
|
|
2,620,964
|
|
|
|
1,491,280
|
|
|
|
1,128,436
|
|
|
|
831,473
|
|
Long-term debt, including current
portion
|
|
|
1,157,681
|
|
|
|
1,172,958
|
|
|
|
603,509
|
|
|
|
536,756
|
|
|
|
432,157
|
|
Stockholders equity
|
|
|
1,346,480
|
|
|
|
811,401
|
|
|
|
421,947
|
|
|
|
217,770
|
|
|
|
71,612
|
|
Ratio of
Earnings to Fixed Charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predecessor
|
|
Successor Company
|
|
|
|
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Two Months
|
|
|
|
Ten Months
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
Ended
|
|
Year Ended December 31,
|
|
|
December 31,
|
|
|
|
October 31,
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
2002
|
|
|
4.05x
|
|
|
|
3.80x
|
|
|
|
2.88x
|
|
|
|
2.55x
|
|
|
|
3.09x
|
|
|
|
|
12.63x
|
|
For the purpose of computing the ratio of earnings to fixed
charges, earnings consist of income (loss) from continuing
operations before income taxes plus fixed charges and
amortization of capitalized interest less capitalized interest.
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.
|
Our ratio of earnings to fixed charges for the ten months ended
October 31, 2002 reflects the impact of $2.18 billion
of non-recurring net reorganization gains that we recorded in
connection with our emergence from Chapter 11
reorganization.
Reclassifications. We have reclassified
spectrum license fees from selling, general and administrative
expenses to cost of service in prior periods to conform to our
current year presentation.
Depreciation and Amortization. On
October 31, 2002, as a result of our reorganization and in
accordance with fresh-start accounting requirements under
SOP 90-7,
Financial Reporting by Entities in Reorganization Under
the Bankruptcy Code, we adjusted the carrying values of
our property, plant and equipment and intangible assets based on
their estimated relative fair values, which we determined in
consultation with external valuation specialists. As a result of
write-downs to fixed assets, depreciation decreased during the
two months ended December 31, 2002 and the year ended
December 31, 2003. Due to the expansion of our digital
mobile networks, depreciation expense increased during the years
ended December 31, 2004, 2005 and 2006. Conversely,
amortization expense decreased during the years ended
December 31, 2004 and 2005 as a result of the reversal of
certain valuation allowances for deferred tax assets existing at
our emergence from reorganization, which we recorded as a
reduction to intangible assets in connection with our
application of fresh-start accounting. Amortization expense
increased slightly during the year ended December 31, 2006.
Interest Expense, Net. We reported
interest expense incurred during our Chapter 11
reorganization only to the extent that it would be paid during
the reorganization or if it was probable that it would be an
allowed claim. Principal and interest payments could not be made
on pre-petition debt subject to compromise without approval from
the bankruptcy court or until the plan of reorganization
defining the repayment terms was
44
confirmed. Further, the Bankruptcy Code generally disallowed the
payment of post-petition interest that accrued with respect to
unsecured or under secured claims. As a result, we did not
accrue interest that we believed was not probable of being
treated as an allowed claim. During the ten months ended
October 31, 2002, we did not accrue interest aggregating
$134.6 million on our senior redeemable notes because
payment of this interest was not probable. In connection with
the confirmation of our plan of reorganization, our senior
redeemable notes were extinguished and we repurchased the
outstanding balance of Nextel Argentinas credit facilities
from its creditors. As a result, interest expense for the two
months ended December 31, 2002 and for the years ended
December 31, 2003 and 2004 decreased significantly compared
to prior years. The decrease in interest expense during the year
ended December 31, 2003 was also due to a reduction in
interest expense related to the $100.0 million principal
prepayment of our international equipment facility and the
extinguishment of the Brazil equipment facility in September
2003, partially offset by interest expense recognized during
2003 as a result of financing obligations incurred in connection
with the sale-leaseback of commercial towers and interest
expense recognized on our 3.5% convertible notes that we
issued in September 2003. The decrease in interest expense
during the year ended December 31, 2004 was also due to a
reduction in interest expense related to the $125.0 million
pay-off of our international equipment facility and the
retirement of substantially all of our 13.0% senior secured
discount notes through a cash tender offer in March 2004,
partially offset by interest expense recognized during 2004 on
our 2.875% convertible notes that we issued in January 2004. The
increases in interest expense during the years ended
December 31, 2005 and 2006 are primarily a result of
interest expense recognized on our syndicated loan facility in
Mexico, as well as interest expense recognized on our
2.75% convertible notes, which we issued in August 2005.
Foreign Currency Transaction Gains (Losses),
Net. Our operations are subject to
fluctuations in foreign currency exchange rates. We recognize
gains and losses on U.S. dollar-denominated assets and
liabilities in accordance with SFAS No. 52, Foreign
Currency Translation. As a result, significant
fluctuations in exchange rates can result in large foreign
currency transaction gains and losses.
In January 2002, the Argentine government devalued the Argentine
peso from its previous
one-to-one
peg with the U.S. dollar. Subsequently, the Argentine
peso-to-dollar
exchange rate significantly weakened in value. As a result,
during the ten months ended October 31, 2002, Nextel
Argentina recorded $137.8 million in foreign currency
transaction losses primarily related to its former
U.S. dollar-denominated credit facilities. As a result of
the settlement of our Argentine credit facilities in November
2002 and the retirement of our dollar-denominated equipment
credit facilities in Mexico and Brazil, our foreign currency
transaction loss exposure was significantly reduced.
Debt Conversion Expense. On
June 10, 2005 and June 21, 2005, $40.0 million
and $48.5 million, respectively, aggregate principal amount
of our 3.5% convertible notes were converted into
3,000,000 shares of our common stock and
3,635,850 shares of our common stock in accordance with the
original terms of the debt securities. In connection with these
conversions, we paid in the aggregate $8.9 million in cash
as additional consideration for conversion, which we recorded as
debt conversion expense.
As discussed in Note 7 to our consolidated financial
statements, on December 14, 2006, all of the holders of the
$91.4 million remaining aggregate principal face amount of
our 3.5% convertible notes converted those notes into
6,852,150 shares of common stock in accordance with the
original terms of the debt agreement. In connection with this
conversion, we paid a total of $4.6 million as additional
consideration for conversion, as well as $0.8 million of
accrued interest and $0.5 million of direct external costs
associated with the transaction. We recorded the
$4.6 million paid to the noteholders and the
$0.5 million of direct external costs as debt conversion
expense in our consolidated statement of operations.
(Loss) Gain on Extinguishment of Debt,
Net. The $101.6 million net gain on
extinguishment of debt for the ten months ended October 31,
2002 represents a gain we recognized on the settlement of Nextel
Argentinas credit facilities in connection with the
confirmation of our plan of reorganization. The
$22.4 million net gain on extinguishment of debt for the
year ended December 31, 2003 represents a gain we
recognized in connection with the settlement of our Brazil
equipment facility. The $79.3 million net loss on early
extinguishment of debt for the year ended December 31, 2004
represents a loss we incurred in connection
45
with the retirement of substantially all of our
13.0% senior secured discount notes through a cash tender
offer in March 2004.
Reorganization Items, Net. In
accordance with
SOP 90-7,
we classified in reorganization items all items of income,
expense, gain or loss that were realized or incurred because we
were in reorganization. We expensed as incurred professional
fees associated with and incurred during our reorganization and
reported them as reorganization items. In addition, during the
second quarter of 2002, we adjusted the carrying value of our
senior redeemable notes to their face values by writing off the
remaining unamortized discounts totaling $92.2 million. We
also wrote off the entire remaining balance of our debt
financing costs of $31.2 million. We also classified in
reorganization items interest income earned by NII Holdings,
Inc. or NII Holdings (Delaware), Inc. that would not have been
earned but for our Chapter 11 filing. In addition, as a
result of our reorganization and our application of fresh-start
accounting, we recognized in reorganization items a
$2.3 billion gain on the extinguishment of our senior
redeemable notes, partially offset by a $115.1 million
charge related to the revaluation of our assets and liabilities.
Income (Loss) from Discontinued
Operations. During the third quarter of 2001,
following our review of the economic conditions, operating
performance and other relevant factors in the Philippines, we
decided to discontinue funding to Nextel Philippines. As a
result, we performed an assessment of the carrying values of the
long-lived assets related to Nextel Philippines in accordance
with SFAS No. 121. As a result, during the third
quarter of 2001, we wrote down the carrying values of our
long-lived assets related to Nextel Philippines to their
estimated fair market values and recorded a $147.1 million
pre-tax impairment charge, which is classified in discontinued
operations. In the fourth quarter of 2002, we sold our remaining
direct and indirect ownership in Nextel Philippines. As a result
of this sale and in accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, we presented the financial results of Nextel
Philippines as discontinued operations for all periods presented.
Cumulative Effect of Change in Accounting Principle,
Net. Until September 30, 2004, we
presented the financial statements of our consolidated foreign
operating companies utilizing accounts as of a date one month
earlier than the accounts of our parent company,
U.S. subsidiaries and our non-operating
non-U.S. subsidiaries,
which we refer to as our one-month lag reporting policy, to
ensure timely reporting of consolidated results. As a result,
each year the financial position, results of operations and cash
flows of each of our wholly-owned foreign operating companies in
Mexico, Brazil, Argentina, Peru and Chile were presented as of
and for the year ended November 30. In contrast, financial
information relating to our parent company,
U.S. subsidiaries and our non-operating
non-U.S. subsidiaries
was presented as of and for the year ended December 31.
We eliminated the one-month reporting lag for the year ended
December 31, 2004 and report consolidated results using a
consistent calendar year reporting period for the entire company
for 2004. We accounted for the elimination of the one-month lag
reporting policy as a change in accounting principle effective
January 1, 2004.
As a result, we treated the month of December 2003, which was
normally the first month in the fiscal year of our foreign
operating companies, as the lag month, and our fiscal year for
all of our foreign operating companies now begins with January
and ends with December.
46
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
INDEX TO
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
|
|
|
|
|
|
|
48
|
|
|
|
|
60
|
|
|
|
|
61
|
|
|
|
|
61
|
|
|
|
|
65
|
|
|
|
|
68
|
|
|
|
|
71
|
|
|
|
|
73
|
|
|
|
|
75
|
|
|
|
|
77
|
|
|
|
|
77
|
|
|
|
|
81
|
|
|
|
|
84
|
|
|
|
|
87
|
|
|
|
|
90
|
|
|
|
|
92
|
|
|
|
|
93
|
|
|
|
|
94
|
|
|
|
|
98
|
|
|
|
|
99
|
|
|
|
|
101
|
|
47
Introduction
The following is a discussion and analysis of:
|
|
|
|
|
our consolidated financial condition for the years ended
December 31, 2006 and 2005 and our consolidated results of
operations for the years ended December 31, 2006, 2005 and
2004; and
|
|
|
|
significant factors which we believe could affect our
prospective financial condition and results of operation.
|
You should read this discussion in conjunction with our
quarterly reports on
Form 10-Q
for the quarters ended March 31, 2006, June 30, 2006
and September 30, 2006. Historical results may not indicate
future performance. See Item 1A. Risk Factors
for risks and uncertainties that may impact our future
performance.
A. Executive
Overview
Business
Overview
We provide digital wireless communication services, primarily
targeted at meeting the needs of customers who use our services
primarily for business purposes, 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.
In addition, we recently launched our digital services on a
limited basis in Santiago, Chile. 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 and
suburban 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. We believe
that vehicle traffic congestion, low wireline service
penetration and the expanded coverage of wireless networks
encourage the use of the mobile wireless communications services
that we offer in these areas. As of December 31, 2006, our
operating companies had licenses to use 800 MHz spectrum in
markets that cover about 308 million people and our
networks covered about 165 million people. As of
December 31, 2006, our operating companies had a total of
about 3.44 million digital handsets in commercial service,
an increase of 933 thousand from the 2.51 million digital
handsets in commercial service as of December 31, 2005.
Our principal objective is to grow our business in selected
markets in Latin America by providing differentiated, high value
wireless communications services to customers who use our
services primarily for business purposes, while improving our
profitability and cash flow. Our digital mobile networks support
multiple digital wireless services, including:
|
|
|
|
|
digital mobile telephone service, including advanced calling
features such as speakerphone, conference calling, voice-mail,
call forwarding and additional line service;
|
|
|
|
Nextel Direct
Connect®
service, which allows subscribers anywhere on our network to
talk to each other instantly, on a
push-to-talk
basis, on a private
one-to-one
call or on a group call;
|
|
|
|
International Direct
Connect®
service, together with Sprint Nextel Corporation and
TELUS Corporation, which allows subscribers to communicate
instantly across national borders with our subscribers in
Mexico, Brazil, Argentina, Peru and Chile, and, except for our
customers in Chile, with Sprint Nextel Corporation subscribers
in the United States and with TELUS subscribers in Canada;
|
|
|
|
mobile internet services, text messaging services,
e-mail
services including
Blackberrytm
services that were recently introduced in Mexico and Peru,
location-based services, which includes the use of Global
Positioning System (GPS) technologies, digital media services
and advanced
Javatm
enabled business applications, which are generally marketed as
Nextel
Onlinesm
services; and
|
|
|
|
international roaming capabilities, which are marketed as
Nextel
Worldwidesm
services.
|
We intend to continue growing our business in a balanced manner,
with a primary focus on generating growth in operating income
and free cash flow and enhancing our profitability by
maintaining appropriate controls on costs and capital
expenditures. To support this goal, we plan to continue to
expand the coverage
48
and capacity of our digital mobile networks in our existing
markets, increase our existing subscriber base and improve our
operating margins through economies of scale. Specifically, we
will seek to add subscribers at rates which do not negatively
impact our financial performance as reflected in several key
operating measures including average revenue per unit, customer
turnover and segment earnings per subscriber. We may also
explore financially attractive opportunities to expand our
network coverage in areas where we currently do not provide
wireless service. Based on the relatively low wireless
penetration in our markets and our current market share in our
markets, we believe that we can continue our current subscriber
and revenue growth trends while improving our profitability and
cash flow generation. Although certain Latin American markets
have been historically volatile, the Latin American markets in
which we operate have recently experienced improving economies
that have been relatively more stable compared to historical
periods. The key components of our strategy are as follows:
Focusing on Major Business Centers in Key Latin American
Markets. We operate primarily in large urban
markets in Latin America, including five of the six largest
cities in Latin America, which have a concentration of high
usage business customers We target these markets because we
believe they offer favorable long-term growth prospects for our
wireless communications services while offering the cost
benefits associated with offering services in more concentrated
population centers. In addition, the cities in which we operate
account for a high proportion of total economic activity in each
of their respective countries and provide us with a large
potential market without the need to build out nationwide
wireless coverage. We believe that there are significant
opportunities for growth in these markets due to the high demand
for wireless communications services and the large number of
target business customers.
Targeting High Value Business Customers. Our
main focus is on high end customers who purchase services under
contract with medium to high usage patterns, targeting customers
who primarily use our services in their businesses because they
value our multi-function handsets and our high level of customer
service. Our typical customers have between 3 and 30 handsets,
while some of our largest customers have over 500 handsets. We
believe that our focus on these business customers is a key
reason why we have a significantly higher monthly average
revenue per unit than that reported by our competitors that rely
predominantly on consumer customers who purchase services on a
pre-paid basis.
Providing Differentiated Services. We
differentiate ourselves from our competitors by offering unique
services like our
push-to-talk
digital radio communication service, which we refer to as Direct
Connect. This service, which is available throughout our service
areas and is fully integrated in a single wireless device that
also provides digital mobile telephone service, provides
significant value to our customers by eliminating the long
distance and domestic roaming fees charged by other wireless
service providers, while also providing added functionality due
to the near-instantaneous nature of the communication and the
ability to communicate on a
one-to-many
basis. Our competitors have begun to introduce competitive
push-to-talk
over cellular products, but we believe that the quality of our
Direct Connect service is superior at this time. We add further
value by customizing data applications that enhance the
productivity of our business customers, such as vehicle and
delivery tracking, order entry processing and workforce
monitoring applications.
We believe that the wireless communications industry in the
markets in which we operate has been and will continue to be
highly competitive on the basis of price, the types of services
offered and quality of service. In each of our markets, we
compete with at least two large, well-capitalized competitors
with substantial financial and other resources. Some of these
competitors have the ability to offer bundled telecommunications
services that include local, long distance and data services.
Although competitive pricing is often an important factor, we
believe that the business users who primarily make up our
targeted customer base are also likely to base their purchase
decisions on quality of service and the availability of
differentiated features and services, like our Direct Connect
services, that make it easier for them to conduct business
quickly and efficiently.
Delivering Superior Customer Service. In
addition to our unique service offerings, we seek to further
differentiate ourselves by providing a higher level of customer
service generally than our competitors. We work proactively with
our customers to match them with service plans offering greater
value based on their usage patterns. After analyzing customer
usage and expense data, we strive to minimize a customers
per
49
minute costs while increasing overall usage of our array of
services, thereby providing higher value to our customers while
increasing our monthly revenues. This goal is also furthered by
our efforts during and after the sales process to educate
customers about our services, multi-function handsets and rate
plans. In addition, we have implemented proactive customer
retention programs to increase customer satisfaction and
retention. We believe that many of our competitors, who have
primarily lower revenue generating prepaid customer bases, do
not generally offer the same level of service to customers.
Selectively Expanding our Service Areas. We
believe that we have significant opportunities to grow through
selective expansion of our service into additional areas within
the countries in which we currently operate. Such expansion may
involve building out certain areas in which we already have
spectrum, obtaining additional 800 MHZ spectrum in new areas
which would enable us to expand our network service areas, and
further developing our business in key urban areas along the
U.S.-Mexico
border. In addition, we may consider selectively expanding into
other Latin American countries where we do not currently
operate. As a result of the spectrum that we won in the March
2005 spectrum auctions in Mexico, we have been significantly
expanding our service areas in Mexico and increased our covered
population to about 60 million as of the end of 2006. See
Capital Expenditures for a discussion of the factors
that drive our capital spending.
Preserving the iDEN Opportunity. The iDEN
networks that we operate allow us to offer differentiated
services like Direct Connect while offering high quality voice
telephony and innovative data services. The iDEN technology is
unique in that it is the only widespread, commercially available
digital technology that operates on non-contiguous spectrum,
which is important to us because much of the spectrum that our
operating companies hold in each of the markets we serve is
non-contiguous. Because Motorola is the sole supplier of iDEN
technology, we are dependent on Motorolas support of the
evolution of the iDEN technology and of the development of new
features, functionality and handset models. Historically, Nextel
Communications, Motorolas largest iDEN customer, provided
significant support in the ongoing development of the iDEN
technology and related equipment, but following the merger of
Nextel Communications and Sprint, Sprint Nextel announced plans
to migrate Nextels
push-to-talk
services to a next generation CDMA network platform. As a
result, we have entered into arrangements with Motorola that are
designed to provide us with a continued source of iDEN network
equipment and handsets in an environment in which Sprint
Nextels purchases and support of that equipment may
decline. Specifically, in September 2006, we entered into
agreements to extend our relationship with Motorola for the
supply of iDEN handsets and iDEN network infrastructure through
December 31, 2011. Under these agreements, Motorola agreed
to maintain an adequate supply of the iDEN handsets and
equipment used in our business for the term of the agreement and
to continue to invest in the development of new iDEN devices and
infrastructure features. In addition, we agreed to annually
escalating handset volume purchase commitments and certain
pricing parameters for handsets and infrastructure linked to the
volume of our purchases. If we do not meet the specified handset
volume commitments, we would be required to pay an additional
amount based on any shortfall of actual purchased handsets
compared to the related annual volume commitment.
Planning for the Future. Another key component
in our overall strategy is to expand and improve the innovative
and differentiated services we offer and evaluate the
technologies necessary to provide those services. One such
initiative is to develop and offer a broader range of data
services on our networks like those available on the Blackberry
devices we recently launched in some of our markets, and to
evaluate the feasibility of offering broadband data services in
the future. This focus on offering innovative and differentiated
services requires that we continue to invest in, evaluate and,
if appropriate, deploy new services and enhancements to our
existing services as well as, in some cases, to acquire spectrum
licenses to deploy these services. During 2005, we acquired
licenses to use additional 800MHz spectrum in Mexico in a
government auction. In addition, during 2006, we purchased
licenses to use other radio spectrum bands in Mexico and Peru.
We are in the process of acquiring licenses to use other radio
spectrum bands in Argentina, pending regulatory approval. The
licenses relating to the newly acquired spectrum outside the
800MHz band generally provide for nationwide rights to utilize a
significant block of contiguous spectrum that may support the
future deployment of new network technologies and services. As
part of our ongoing data services initiatives we will review
alternate technologies as they are developed to assess their
technical performance costs, as well as their ability to meet
our customers requirements, and to evaluate customer
demand for the features and services
50
they support. We will deploy a new technology only if it is
warranted by expected customer demand and when the anticipated
benefits of services supported by the new technology outweigh
the costs of providing those services. Our decision whether and
how to deploy alternative technologies, as well as our choice of
alternative technologies, would likely be affected by a number
of factors, including the types of features and services
supported by the technology, the availability and pricing of
related equipment, and our need to continue to support
iDEN-based services for our existing customer base either on an
ongoing or transitional basis.
We refer to our operating companies by the countries in which
they operate, such as Nextel Mexico, Nextel Brazil, Nextel
Argentina, Nextel Peru and Nextel Chile. See Item 1A.
Risk Factors for information on risks and uncertainties
that could affect the above objectives.
Foreign
Currency Exposure
Nearly all of our revenues are denominated in
non-U.S. currencies,
although a significant portion of our capital and operating
expenditures, including imported network equipment and handsets,
and a substantial portion of our outstanding debt, are
denominated in U.S. dollars. Accordingly, fluctuations in
exchange rates relative to the U.S. dollar could have a
material adverse effect on our earnings and assets. We translate
the results of operations for our
non-U.S. subsidiaries
and affiliates from the designated functional currency to the
U.S. dollar using average exchange rates during the
relevant period. As a result, any depreciation of local
currencies in the countries in which our operating companies
conduct business relative to the U.S. dollar could decrease
our operating income, increase our costs for imported equipment
and, at the same time, decrease demand for our products and
services in the affected markets. In addition, changes in
exchange rates associated with U.S. dollar-denominated
assets and liabilities result in foreign currency transaction
gains or losses. Additional information regarding the impact of
currency rates is included in the discussion of our segments
under Results of Operations.
Brazilian
Contingencies
Nextel Brazil has received various assessment notices from state
and federal Brazilian authorities asserting deficiencies in
payments related primarily to value-added taxes and import
duties based on the classification of equipment and services.
Nextel Brazil has filed various administrative and legal
petitions disputing these assessments. In some cases, Nextel
Brazil has received favorable decisions, which are currently
being appealed by the respective governmental authority. In
other cases, Nextel Brazils petitions have been denied,
and Nextel Brazil is currently appealing those decisions. Nextel
Brazil is also disputing various other claims. As a result of
the expiration of the statute of limitations for certain
contingencies, during the years ended December 31, 2006 and
2005, Nextel Brazil reversed $9.2 million and
$6.5 million, respectively, in accrued liabilities, of
which we recorded $4.4 million and $3.2 million,
respectively, as a reduction to operating expenses and the
remainder to other income, which represented monetary
corrections. Monetary corrections are specific indexation
factors under Brazilian law that are used to restore the real
economic value of tax and other contingent obligations in local
Brazilian currency after taking into consideration the effects
of inflation.
During the year ended December 31, 2004, Nextel Brazil
reduced its liabilities by $35.4 million, of which we
recorded $14.4 million as a reduction to operating
expenses, reclassified $12.6 million of a settled claim to
current liabilities for payment, and recorded the remainder,
which primarily included monetary corrections on these
contingencies, in other income.
As of December 31, 2006 and 2005, Nextel Brazil had accrued
liabilities of $24.7 million and $27.6 million,
respectively, related to contingencies, all of which were
classified in accrued contingencies reported as a component of
other long-term liabilities. Of the total accrued liabilities as
of December 31, 2006 and 2005, Nextel Brazil had
$18.0 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, as they are not deemed probable, to be between
$138.7 million and $142.7 million as of
December 31, 2006. We are continuing to evaluate the
likelihood of probable and reasonably possible losses, if any,
related to all
51
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 determined to be probable
and estimable.
Argentine
Contingencies
Turnover Tax. In the city of Buenos
Aires, 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 of 3% and recorded a liability
and related expense 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 also decided to begin paying the tax based on the
higher rate until this issue is settled.
In August 2006, Nextel Argentina filed a lawsuit against the
city of Buenos Aires to pursue the reimbursement of the
$18.8 million paid under protest in April 2006. Subsequent
to this payment, Nextel Argentina paid $4.5 million under
protest from April 2006 through December 2006 related to this
tax.
In December 2006, the city of Buenos Aires issued new laws,
which Nextel Argentina believes support its position that it
should be taxed at the general 3% rate and not at the 6%
cellular rate. Beginning in January 2007, Nextel Argentina began
paying the 3% general turnover tax rate and will continue with
its efforts to obtain reimbursement of amounts previously paid
under protest.
Similarly, one of the provincial governments in another one of
the markets where Nextel Argentina operates also increased their
turnover tax rate from 4.55% to 6% of revenues for cellular
companies. Consistent with its earlier position, Nextel
Argentina continues to pay the turnover tax in this province at
the existing rate and accrues a liability for the incremental
difference in the rate. As of December 31, 2006 and 2005,
Nextel Argentina accrued $5.1 million and
$3.4 million, respectively, for local turnover taxes in
this province, which are included as components of accrued
expenses and other.
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 minus
applicable taxes and specified related costs. The license holder
can choose either to pay the resulting amount into a fund for
universal service development or to participate directly in
offering services to specific geographical areas under an annual
plan designed by the federal government. Although the
regulations state that this tax would be applicable beginning
January 1, 2001, the authorities have not taken the
necessary actions to implement the tax. However, on May 5,
2005, the Secretary of Communications issued a resolution that
prohibits telecommunications operators from itemizing the levy
in customer invoices or passing through the levy to customers.
In addition, following the Secretarys instructions in July
2005, the Argentine CNC has ordered operators, including Nextel
Argentina, to return the levy collected from customers, if any.
Nextel Argentina filed legal actions challenging these
regulations. On October 14, 2005, the Secretary of
Communications issued another resolution, which rejected Nextel
Argentinas claim against the initial resolution. As a
result, Nextel Argentina was ordered to reimburse the amounts
collected as universal service contributions plus interest
within a
15-day
period. In November 2005, Nextel Argentina filed an
administrative claim and requested a judicial injunction against
this resolution. All current legal actions are pending.
Nextel Argentina billed this tax as Universal Tax on customer
invoices during the period from January 2001 to August 2001 for
a total amount of $0.2 million. Subsequent to August 2001,
Nextel Argentina did not segregate a specific charge or identify
any portion of its customer billings as relating to the
Universal Tax and, in fact, raised its rates and service fees to
customers several times after this period unrelated to the
Universal Tax.
52
As a result of various events and opinion of counsel, during the
fourth quarter of 2005, Nextel Argentina accrued for the maximum
liability due to customers for amounts billed during all periods
ending December 31, 2005, plus interest. Nextel Argentina
continued accruing the higher amount during the first quarter of
2006 while maintaining its position 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 required by legislation that was passed
in October 2005, 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 judicial claim against the legislation passed in May
2005, which is currently pending. As of December 31, 2006
and 2005, the accrual for the liability to customers was
$6.9 million and $6.4 million, respectively, which is
included as components of accrued expenses and other.
2006
Significant Developments
Spectrum
Acquisitions
Cosmofrecuencias Acquisition. In
October 2006, Nextel Mexico acquired all of the shares of
Cosmofrecuencias, S.A. de C.V. for $200.0 million in cash.
This acquisition provides Nextel Mexico with a local
fixed/mobile wireless telephone concession, which we expect will
result in interconnect and operating cost savings, as well as
additional revenue generating opportunities in the future. This
acquisition also provides Nextel Mexico with 50MHz of 3.4GHz
spectrum nationwide in Mexico. We accounted for this acquisition
as an asset purchase and have recorded the fair value of the
acquired assets on our consolidated balance sheet.
Other Acquisitions. During 2006, we
acquired 50MHz of 3.4GHz spectrum in all major provinces in
Peru, and we entered into an agreement to acquire 50MHz of
3.4GHz spectrum nationwide in Argentina, subject to regulatory
approval. See Note 3 to our consolidated financial
statements at the end of this annual report on
Form 10-K
for further information.
Operational
Activities
Telmex Agreement. In connection with
its network expansion plan, Nextel Mexico signed an agreement
with Telefonos de Mexico, S.A. de C.V., or Telmex, effective
February 14, 2006, that allows Nextel Mexico to
interconnect and terminate traffic with Telmex in 27 cities
throughout Mexico using five local connections. The agreement
covers each individual city for its own term of 15 years
from the date service begins in that city and provides Nextel
Mexico with an unlimited amount of traffic termination on the
Telmex network for a total cost of $44.5 million, plus any
applicable value-added taxes. We are accounting for the Telmex
agreement as a service agreement. As a result, we are expensing
any payments made under this agreement in the period to which
they relate. Nextel Mexico paid a $7.0 million deposit to
Telmex on March 31, 2006. The agreement specifies the
second of three total installment payments in the amount of
$18.5 million should be made on March 15, 2007, and
the last payment in the amount of $19.0 million should be
made on March 15, 2008.
Motorola Purchase Commitments. In
September 2006, we entered into agreements to extend our
relationship with Motorola for the supply of iDEN handsets and
iDEN network infrastructure through December 31, 2011.
Under these agreements, Motorola agreed to maintain an adequate
supply of the iDEN handsets and equipment used in our business
for the term of the agreement and to continue to invest in the
development of new iDEN devices and infrastructure features. In
addition, we agreed to annually escalating handset volume
purchase commitments and certain pricing parameters for handsets
and infrastructure linked to the volume of our purchases. If we
do not meet the specified handset volume commitments, we would
be required to pay an additional amount based on any shortfall
of actual purchased handsets compared to the related annual
volume commitment.
Digital Operations in Chile. In
December 2006, we announced the launch of digital operations in
Chile, which extended our services to Santiago, Chile and
certain surrounding areas. As a result of this launch, customers
in our service areas in Chile will have access to some of our
voice services, including Direct Connect and International
Direct Connect,
push-to-talk
service and telephone interconnect. Initial operations
53
are targeted to select business and roaming customers, as our
customers across Argentina, Brazil, Mexico and Peru have access
to roaming services when conducting business in Chile.
SMS Agreements. During 2006, several of
our operating companies agreed with other telecommunications
companies to allow for short messaging services, or SMS, between
the companies respective networks. The interoperability of
SMS between the companies under these agreements will allow
wireless users in the areas served by these parties to exchange
SMS and text messages with the other partys customers. We
believe that this capability may enhance our ability to generate
revenues from data services to the extent our customers decide
to use these services.
Financing
Activities
Refinancing of Mexico Syndicated
Loan Facility. On June 27, 2006,
Nextel Mexico entered into an agreement to refinance its
syndicated loan. The loan principal was increased from the
original $250.0 million to $296.6 million after the
refinancing. Under the agreement, the loan was refinanced using
the same variable (i.e., LIBOR and TIIE) and fixed rates as the
original agreement but with lower spreads for each tranche. Of
the total amount of the refinanced loan, $156.6 million is
denominated in U.S. dollars, with a floating interest rate
based on LIBOR (Tranche A 6.69% as of
December 31, 2006), $57.0 million is denominated in
Mexican pesos, with a floating interest rate based on the
Mexican reference rate TIIE (Tranche C 8.51% as
of December 31, 2006), and $83.0 million is
denominated in Mexican pesos, at an interest rate fixed at the
time of funding (Tranche B 11.36%). For
Tranche B and Tranche C, the principal and interest
payments will take place on the same dates as previously
scheduled under the original agreement. Under the original
agreement, principal for Tranche A was also due on the same
dates as the principal under Tranches B and C. However, after
the refinancing, principal for Tranche A will now be due in
a lump sum of $156.6 million in June 2011.
Tender Offer for Conversion of 3.5% Convertible
Notes. In November 2006, we announced an
offer designed to induce holders of our 3.5% convertible
notes to convert those notes into common stock. Under the terms
of the offer, we agreed to pay a cash premium of $50.00, plus
accrued and unpaid interest up to but excluding the conversion
date, for each of the remaining $1,000 principal amount of the
notes to the extent the holders elected to convert those notes
into shares of our common stock pursuant to the offer. In
connection with this offer, on December 14, 2006, all of
the holders of our 3.5% convertible notes converted the
$91.4 million remaining aggregate principal face amount of
our 3.5% convertible notes into 6,852,150 shares
(75.0 shares issued per $1,000 of debt principal multiplied
by the debt principal) in accordance with the original terms of
the convertible notes, and we paid a total of $4.6 million
as additional consideration for conversion, as well as
$0.8 million of accrued interest and $0.5 million of
direct external costs associated with this transaction. We
recorded the $4.6 million paid to the noteholders and the
$0.5 million of direct external costs as debt conversion
expense in our consolidated statement of operations. In
addition, we reclassified to paid-in capital the remaining
$1.5 million of deferred financing costs related to the
notes that were converted.
Out-of-Period
Adjustments
During the year ended December 31, 2006, we identified
errors in our financial statements for the years ended
December 31, 2003, 2004 and 2005. These errors primarily
related to accounting for income taxes, the classification of
debt between short-term and long-term liabilities, the
amortization of leasehold improvements and delays in the
transfer of
construction-in-progress
to depreciable assets in Mexico and amortization of certain
software costs in Argentina. We corrected these errors during
2006. For the year ended December 31, 2006, we decreased
operating income by $1.3 million, decreased income before
income tax provision by $1.5 million and increased net
income by $14.5 million to correct these errors. We do not
believe that these adjustments are material to our consolidated
financial statements for the year ended December 31, 2006
or to any prior periods.
54
Critical
Accounting Policies and Estimates
The preparation of our financial statements in conformity with
accounting principles generally accepted in the United States
requires us to make estimates and assumptions that affect the
reported amounts of assets and liabilities, revenues and
expenses and related disclosures of contingent assets and
liabilities in the consolidated financial statements and
accompanying notes. Although we believe that our estimates,
assumptions and judgments are reasonable, they are based upon
information presently available. Due to the inherent uncertainty
involved in making those estimates, actual results reported in
future periods could differ from those estimates.
The SEC has defined a companys critical accounting
policies as those that are most important to the portrayal of
the companys financial condition and results of
operations, and which require a company to make its most
difficult and subjective judgments, often as a result of the
need to make estimates of matters that are inherently uncertain.
Based on this definition, we have identified the critical
accounting policies and judgments addressed below. We also have
other accounting policies, which involve the use of estimates,
judgments and assumptions that are significant to understanding
our results. For additional information see Note 1 to our
consolidated financial statements included at the end of this
annual report on
Form 10-K.
Revenue Recognition. While our revenue
recognition policy does not require the exercise of significant
judgment or the use of significant estimates, we believe that
our policy is significant as revenue is a key component of our
results of operations.
Operating revenues primarily consist of service revenues and
revenues generated from the sale and rental of digital handsets
and accessories. We present our operating revenues net of
value-added taxes, but we include certain revenue-based taxes
that are our primary obligation. Service revenues primarily
include fixed monthly access charges for digital mobile
telephone service and digital two-way radio and other services
including revenues from calling party pays programs where
applicable and variable charges for airtime and digital two-way
radio usage in excess of plan minutes, long-distance charges and
international roaming revenues derived from calls placed by our
customers on other carriers networks.
We also have other sources of revenues. Other revenues primarily
include amounts generated from our handset maintenance programs,
roaming revenues generated from other companies customers
that roam on our networks and co-location rental revenues from
third party tenants that rent space on our towers.
We recognize revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the sale price is fixed and
determinable and collectibility is reasonably assured. The
following are the policies applicable to our major categories of
revenue transactions.
We recognize revenue for access charges and other services
charged at fixed amounts ratably over the service period, net of
credits and adjustments for service discounts and value-added
taxes. We recognize excess usage, local, long distance and
calling party pays revenue at contractual rates per minute as
minutes are used. We record cash received in excess of revenues
earned as deferred revenues.
We recognize revenue generated from our handset maintenance
programs on a monthly basis at fixed amounts over the service
period. We recognize roaming revenues at contractual rates per
minute as minutes are used. We recognize co-location revenues
from third party tenants on a monthly basis based on the terms
set by the underlying agreements.
We bill excess usage to our customers in arrears. In order to
recognize the revenues originated from excess usage subsequent
to customer invoicing through the end of the reporting period,
we estimate the unbilled portion based on the usage that the
handset had during the part of the month already billed, and we
use this actual usage to estimate the unbilled usage for the
rest of the month taking into consideration working days and
seasonality. Our estimates are based on our experience in each
market. We periodically evaluate our estimation process by
comparing our estimates to actual excess usage revenue billed
the following month. As a result, actual usage could differ from
our estimates.
55
We recognize revenue from handset and accessory sales when title
and risk of loss passes upon delivery of the handset or
accessory to the customer as this is considered to be a separate
earnings process from the sale of wireless services.
Allowance for Doubtful Accounts. We
establish an allowance for doubtful accounts receivable
sufficient to cover probable and reasonably estimated losses.
Our methodology for determining our allowance for doubtful
accounts receivable requires significant estimates. Since we
have several hundred thousand accounts, it is impracticable to
review the collectibility of all individual accounts when we
determine the amount of our allowance for doubtful accounts
receivable each period. Therefore, we consider a number of
factors in establishing the allowance on a
market-by-market
basis, including historical collection experience, current
economic trends, estimates of forecasted write-offs, agings of
the accounts receivable portfolio and other factors. While we
believe that the estimates we use are reasonable, actual results
could differ from those estimates.
Depreciation of Property, Plant and
Equipment. Our business is capital intensive
because of our digital mobile networks. We record at cost our
digital network assets and other improvements that in our
opinion, extend the useful lives of the underlying assets, and
depreciate the assets over their estimated useful lives. We
calculate depreciation using the straight-line method based on
estimated useful lives ranging from 3 to 20 years for
digital mobile network equipment and network software and 3 to
10 years for office equipment, furniture and fixtures, and
other, which includes
non-network
internal use software. We depreciate our corporate aircraft
capital lease using the straight-line method based on the lease
term of 8 years. We amortize leasehold improvements over
the shorter of the lease terms or the useful lives of the
improvements. Our digital mobile networks are highly complex
and, due to constant innovation and enhancements, certain
components of the networks may lose their utility faster than
anticipated. We periodically reassess the economic life of these
components and make adjustments to their expected lives after
considering historical experience and capacity requirements,
consulting with the vendor and assessing new product and market
demands and other factors. When these factors indicate network
components may not be useful for as long as originally
anticipated, we depreciate the remaining book value over the
remaining useful lives. Further, the timing and deployment of
any new technologies could affect the estimated remaining useful
lives of our digital network assets, which could significantly
impact future results of operations.
Amortization of Intangible Assets. We
record our licenses at historical cost and amortize them using
the straight-line method based on an estimated useful life of 12
to 20 years. The terms of our licenses, including renewals,
range from 30 to 40 years. The political and regulatory
environments in the markets we serve are continuously changing
and, in many cases, the renewal fees could be significant.
Therefore, we do not view the renewal of our licenses to be
perfunctory. In addition, the wireless telecommunications
industry is experiencing significant technological change, and
the commercial life of any particular technology is difficult to
predict. Most of our licenses give us the right to use
800 MHz spectrum that is non-contiguous, and the iDEN
technology is the only widespread, commercially available
digital technology that operates on non-contiguous spectrum. As
a result, our ability to deploy new technologies on our licensed
800MHz spectrum is limited. In light of the uncertainty
regarding the availability of alternative technologies and
regarding the commercial life of any technology, including the
iDEN technology, our ability to use our 800MHz spectrum for an
indefinite period cannot be assured. As a result, we classify
our licenses as finite lived assets. Our licenses and the
requirements to maintain the licenses are subject to renewal
after the initial term, provided that we have complied with
applicable rules and policies in each of our markets. We intend
to comply, and believe we have complied, with these rules and
policies in all material respects. However, because governmental
authorities have discretion as to the grant or renewal of
licenses, our licenses may not be renewed, which could have a
significant impact on our estimated useful lives. This would
affect our results of operations in the future.
Asset Retirement Obligations. We record
an asset retirement obligation, or ARO, and an associated asset
retirement cost, or ARC, when we have a legal obligation in
connection with the retirement of tangible long-lived assets. We
have certain legal obligations, conditional and otherwise,
related to network infrastructure, principally tower and related
assets and certain administrative facilities. These legal
obligations include obligations to remove our network
infrastructure and administrative assets from the leased space
where these
56
assets are located. Estimating this obligation requires us to
make certain assumptions that are highly judgmental in nature.
The significant assumptions used in estimating our asset
retirement obligations include the following: the probability
that our assets with asset retirement obligations will be
removed at the lessors directive; expected settlement
dates that coincide with lease expiration dates plus estimates
of lease extensions; removal costs that are indicative of what
third party vendors would charge us to remove the assets;
expected inflation rates that are consistent with historical
inflation rates; and credit-adjusted risk-free rates that
approximate our incremental borrowing rates. We review these
assumptions to ensure that the estimates are reasonable. Any
change in the assumptions used could significantly affect the
amounts recorded. Over time, we accrete the ARO to its future
value, and depreciate the ARC over the estimated useful life of
the related asset. Upon settlement of the ARO, we either settle
the obligation for its recorded amount or incur a gain or loss
if the actual settlement cost is different from the recorded
amount.
Foreign Currency. We translate the
results of operations for our
non-U.S. subsidiaries
and affiliates from the designated functional currency to the
U.S. dollar using average exchange rates during the
relevant period, while we translate assets and liabilities at
the exchange rate in effect at the reporting date. We report the
resulting gains or losses from translating foreign currency
financial statements as other comprehensive income or loss.
Because average exchange rates are used to translate the
operations of our
non-U.S. subsidiaries,
our operating companies trends may be impacted by the
translation. For example, in-country U.S. dollar-based
trends may be accentuated or attenuated by changes in
translation rates.
We report the effects of changes in exchange rates associated
with U.S. dollar-denominated assets and liabilities as
foreign currency transaction gains or losses. With regard to
intercompany loans and advances to our foreign subsidiaries that
are of a long-term investment nature and that are not expected
to be settled in the foreseeable future, we report the effects
of changes in exchange rates as part of the cumulative foreign
currency translation adjustment in our consolidated financial
statements. We view the intercompany loans and advances from our
U.S. subsidiaries to Nextel Brazil and Nextel Chile and an
intercompany payable due to Nextel Mexico as of a long-term
investment nature. In contrast, we report the effects of
exchange rates associated with U.S. dollar denominated
intercompany loans and advances to our foreign subsidiaries that
are due, or for which repayment is anticipated, in the
foreseeable future, as foreign currency transaction gains, net
in our consolidated statements of operations. As a result, our
determination of whether intercompany loans and advances are of
a long-term investment nature can have a significant impact on
the calculation of foreign currency transaction gains and losses
and the foreign currency translation adjustment.
Loss Contingencies. We account for and
disclose loss contingencies such as pending litigation and
actual or possible claims and assessments in accordance with
SFAS No. 5, Accounting for Contingencies.
We accrue for loss contingencies if it is probable that a loss
will occur and if the loss can be reasonably estimated. We
disclose, but do not accrue for, loss contingencies if it is
reasonably possible that a loss will occur and if the loss can
be reasonably estimated. We do not accrue for or disclose loss
contingencies if there is only a remote possibility that the
loss will occur. SFAS No. 5 requires us to make
judgments regarding future events, including an assessment
relating to the likelihood that a loss may occur and an estimate
of the amount of such loss. In assessing loss contingencies, we
often seek the assistance of our legal counsel and in some
instances, of third party legal counsel. As a result of the
significant judgment required in assessing and estimating loss
contingencies, actual losses realized in future periods could
differ significantly from our estimates.
Stock-Based Compensation. Through
December 31, 2005, we accounted for share-based payments
using the intrinsic value method 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.
On January 1, 2006, we adopted the fair value recognition
provisions of SFAS 123R, Shared-Based Payment,
which requires the measurement and recognition of compensation
expense, based on estimated fair
57
values, for all share-based awards, made to employees and
directors, including stock options and restricted stock. We used
the modified prospective transition method and therefore have
not restated our prior periods results. Share-based
compensation expense recognized in our consolidated statement of
operations for the year ended December 31, 2006 includes
compensation expense for share-based awards granted
(i) prior to, but not yet vested as of January 1,
2006, based on the grant date fair value estimated in accordance
with the provisions of SFAS 123, and (ii) subsequent
to January 1, 2006, based on the grant date fair value
estimated in accordance with the provisions of SFAS 123R.
We use the Black-Scholes-Merton option pricing model, which we
refer to as the Black-Scholes Model, for purposes of determining
the estimated fair value of share-based payment awards on the
date of grant under SFAS 123R. The Black-Scholes Model was
developed for use in estimating the fair value of traded options
that have no vesting restrictions and are fully transferable. In
addition, option-pricing models such as the Black-Scholes-Model
require the input of highly subjective assumptions, including
expected stock price volatility and expected exercise behavior,
as well as other assumptions including the average risk free
interest rate and expected dividend yield.
Each year we use an independent consulting firm with expertise
in this area to review our assumptions, methodology and
calculations. The assumptions we use in the Black-Scholes Model
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, 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 Staff Accounting Bulletin Topic 14
(SAB 107) using the Black-Scholes Model, the fair
value may not be indicative of the fair value observed in a
willing buyer/willing seller market transaction. Because stock
options granted to employees 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, including
the Black-Scholes model, do not necessarily provide a reliable
single measure of the fair value of the stock options.
Income Taxes. We account for income
taxes using the asset and liability method, under which we
recognize deferred income taxes for the tax consequences
attributable to differences between the financial statement
carrying amounts and the tax bases of existing assets and
liabilities, as well as for tax loss carryforwards and tax
credit carryforwards. We measure deferred tax assets and
liabilities using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are
expected to be recoverable or settled. We recognize the effect
on deferred taxes of a change in tax rates in income in the
period that includes the enactment date. We provide a valuation
allowance against deferred tax assets if, based upon the weight
of available evidence, we believe it is more likely than not
that some or all of the deferred tax assets will not be
realized. We report remeasurement gains and losses related to
deferred tax assets and liabilities in our income tax provision.
A substantial portion of our deferred tax asset valuation
allowance relates to deferred tax assets that, if realized, will
not result in a benefit to our income tax provision. In
accordance with
SOP 90-7,
we recognize decreases in the valuation allowance existing at
the reorganization date first as a reduction in the carrying
value of intangible assets existing at the reorganization date
and then as an increase to paid-in capital. As of
December 31, 2004, we reduced to zero the carrying value of
our intangible assets existing at the reorganization date. We
will record the future decreases, if any, of the valuation
allowance existing on the
58
reorganization date as an increase to paid-in capital. We will
record decreases, if any, of the post-reorganization valuation
allowance as a benefit to our income tax provision. In
accordance with SFAS 123R, we recognize decreases in the
valuation allowance attributable to the excess tax benefits
resulting from the exercise of employee stock options as an
increase to paid-in capital. In each market and in the U.S., we
recognize decreases in the valuation allowance first as a
decrease in the remaining valuation allowance that existed as of
the reorganization date, then as a decrease in any
post-reorganization valuation allowance, and finally as a
decrease of the valuation allowance associated with stock option
deductions.
Realization of deferred tax assets in any of our markets depends
on continued future profitability in these markets. Our ability
to generate the expected amounts of taxable income from future
operations is dependent upon general economic conditions,
technology trends, political uncertainties, competitive
pressures and other factors beyond managements control. If
our operations continue to demonstrate profitability, we may
further reverse additional deferred tax asset valuation
allowance balances during 2007. We will continue to evaluate the
deferred tax asset valuation allowance balances in all of our
foreign and U.S. companies throughout 2007 to determine the
appropriate level of valuation allowances.
We are subject to income taxes in both the United States and the
non-U.S. jurisdictions
in which we operate. Certain of our entities are under
examination by the relevant taxing authorities for various tax
years. We regularly assess the potential outcome of current and
future examinations in each of the taxing jurisdictions when
determining the adequacy of the provision for income taxes. We
have established tax reserves, which we believe to be adequate
in relation to the potential for additional assessments. Once
established, we adjust the reserves only when there is more
information available or when an event occurs necessitating a
change to the reserves. While we believe that the amount of the
tax estimates is reasonable, it is possible that the ultimate
outcome of current or future examinations may exceed current
reserves in amounts that could be material.
Related
Party Transactions
Transactions
with Nextel Communications, Inc.
Following Nextel Communications sale of
18,000,000 shares of our common stock on November 13,
2003, Nextel Communications owned 24,712,128 shares of our
common stock, either directly or indirectly, which represented
approximately 17.7% of our issued and outstanding shares of
common stock as of December 31, 2004.
Following Nextel Communications sale of
10,000,000 shares of our common stock on September 7,
2005, Nextel Communications owned 14,712,128 shares of our
common stock, either directly or indirectly, which represented
approximately 9.7% and 9.1% of our issued and outstanding shares
of common stock as of December 31, 2005 and 2006,
respectively.
As of January 5, 2007, Nextel Communications sold all of
its remaining shares of our common stock. As a result, we no
longer consider Nextel Communications to be a related party.
The following are descriptions of significant transactions
consummated with Nextel Communications on November 12, 2002
under our confirmed plan of reorganization.
New
Spectrum Use and Build-Out Agreement
On November 12, 2002, we and Nextel Communications entered
into a new spectrum use and build-out agreement. Under this
agreement, certain of our subsidiaries committed to complete the
construction of our network in the Baja region of Mexico, in
exchange for cash proceeds from Nextel Communications of
$50.0 million. We recorded the $50.0 million as
deferred revenues, and we are recognizing the revenue ratably
over 15.5 years, the then remaining useful life of our
licenses in Tijuana. As of December 31, 2006 and 2005, we
had recorded $39.2 million and $42.5 million,
respectively, of deferred revenues related to this agreement, of
which $36.0 million and $39.3 million are classified
as long-term, respectively. During each of the years ended
December 31, 2006, 2005 and 2004, we recognized
$3.2 million in revenues related to this arrangement.
59
Third
Amended and Restated Trademark License Agreement with Nextel
Communications, Inc.
On November 12, 2002, we entered into a third amended and
restated trademark license agreement with Nextel Communications,
which superseded a previous trademark license agreement. Under
the new agreement, Nextel Communications granted to us an
exclusive, royalty-free license to use within Latin America,
excluding Puerto Rico, certain trademarks, including but not
limited to the mark Nextel. The license agreement
continues indefinitely unless terminated by Nextel
Communications upon 60 days notice if we commit any one of
several specified defaults and fail to cure the default within a
60 day period. As of December 31, 2004, the net
carrying value of the trademark was fully exhausted as the
result of the reversal of valuation allowances related to
deferred tax assets generated subsequent to our reorganization.
Under a side agreement, until the sooner of November 12,
2007 or the termination of the new agreement, Nextel
Communications agreed not to offer iDEN service in Latin
America, other than in Puerto Rico, and we agreed not to offer
iDEN service in the United States.
Operating revenues primarily consist of wireless service
revenues and revenues generated from the sale of digital
handsets and accessories. Service revenues primarily include
fixed monthly access charges for digital mobile telephone
service and digital two-way radio and other services, including
revenues from calling party pays programs and variable charges
for airtime and digital two-way radio usage in excess of plan
minutes, long-distance charges and international roaming
revenues derived from calls placed by our customers. Digital
handset and accessory revenues represent revenues we earn on the
sale of digital handsets and accessories to our customers.
In addition, we also have other less significant sources of
revenues. These revenues primarily include revenues generated
from our handset maintenance programs, roaming revenues
generated from other companies customers that roam on our
networks and co-location rental revenues from third-party
tenants that rent space on our towers.
See Revenue Recognition above and Note 1 to our
consolidated financial statements included at the end of this
annual report on
Form 10-K
for a description of our revenue recognition methodology.
Cost of revenues primarily includes the cost of providing
wireless service and the cost of digital handset and accessory
sales. Cost of providing service consists largely of costs of
interconnection with local exchange carrier facilities and
direct switch and transmitter and receiver site costs, including
property taxes, expenses related to our handset maintenance
programs, insurance costs, utility costs, maintenance costs and
rent for the network switches and transmitter 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, primarily for
circuits required to connect our transmitter sites to our
network switches and to connect our switches. 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, repairs
and maintenance of management information systems, spectrum
license fees, corporate overhead and share-based payment for
stock options and restricted stock.
60
|
|
1.
|
Year
Ended December 31, 2006 vs. Year Ended December 31,
2005
|
a.
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Consolidated
|
|
|
|
Year Ended
|
|
|
Consolidated
|
|
|
|
Change from
|
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
Previous Year
|
|
|
|
|
2006
|
|
|
Revenues
|
|
|
|
2005
|
|
|
Revenues
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
(dollars in thousands)
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
2,279,922
|
|
|
|
96
|
|
%
|
|
$
|
1,666,613
|
|
|
|
95
|
|
%
|
|
$
|
613,309
|
|
|
|
37
|
|
%
|
Digital handset and accessory
revenues
|
|
|
91,418
|
|
|
|
4
|
|
%
|
|
|
79,226
|
|
|
|
5
|
|
%
|
|
|
12,192
|
|
|
|
15
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,371,340
|
|
|
|
100
|
|
%
|
|
|
1,745,839
|
|
|
|
100
|
|
%
|
|
|
625,501
|
|
|
|
36
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation and amortization included below)
|
|
|
(617,669
|
)
|
|
|
(26
|
)
|
%
|
|
|
(464,651
|
)
|
|
|
(27
|
)
|
%
|
|
|
(153,018
|
)
|
|
|
33
|
|
%
|
Cost of digital handset and
accessory sales
|
|
|
(311,307
|
)
|
|
|
(13
|
)
|
%
|
|
|
(251,192
|
)
|
|
|
(14
|
)
|
%
|
|
|
(60,115
|
)
|
|
|
24
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(928,976
|
)
|
|
|
(39
|
)
|
%
|
|
|
(715,843
|
)
|
|
|
(41
|
)
|
%
|
|
|
(213,133
|
)
|
|
|
30
|
|
%
|
Selling and marketing expenses
|
|
|
(321,240
|
)
|
|
|
(14
|
)
|
%
|
|
|
(233,540
|
)
|
|
|
(13
|
)
|
%
|
|
|
(87,700
|
)
|
|
|
38
|
|
%
|
General and administrative expenses
|
|
|
(459,133
|
)
|
|
|
(19
|
)
|
%
|
|
|
(311,695
|
)
|
|
|
(18
|
)
|
%
|
|
|
(147,438
|
)
|
|
|
47
|
|
%
|
Depreciation and amortization
|
|
|
(202,222
|
)
|
|
|
(9
|
)
|
%
|
|
|
(130,132
|
)
|
|
|
(7
|
)
|
%
|
|
|
(72,090
|
)
|
|
|
55
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
459,769
|
|
|
|
19
|
|
%
|
|
|
354,629
|
|
|
|
21
|
|
%
|
|
|
105,140
|
|
|
|
30
|
|
%
|
Interest expense, net
|
|
|
(89,379
|
)
|
|
|
(4
|
)
|
%
|
|
|
(72,470
|
)
|
|
|
(4
|
)
|
%
|
|
|
(16,909
|
)
|
|
|
23
|
|
%
|
Interest income
|
|
|
51,057
|
|
|
|
2
|
|
%
|
|
|
32,611
|
|
|
|
2
|
|
%
|
|
|
18,446
|
|
|
|
57
|
|
%
|
Foreign currency transaction gains,
net
|
|
|
3,557
|
|
|
|
|
|
|
|
|
3,357
|
|
|
|
|
|
|
|
|
200
|
|
|
|
6
|
|
%
|
Debt conversion expense
|
|
|
(5,070
|
)
|
|
|
|
|
|
|
|
(8,930
|
)
|
|
|
(1
|
)
|
%
|
|
|
3,860
|
|
|
|
(43
|
)
|
%
|
Other expense, net
|
|
|
(6,000
|
)
|
|
|
|
|
|
|
|
(8,621
|
)
|
|
|
(1
|
)
|
%
|
|
|
2,621
|
|
|
|
(30
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision
|
|
|
413,934
|
|
|
|
17
|
|
%
|
|
|
300,576
|
|
|
|
17
|
|
%
|
|
|
113,358
|
|
|
|
38
|
|
%
|
Income tax provision
|
|
|
(119,444
|
)
|
|
|
(5
|
)
|
%
|
|
|
(125,795
|
)
|
|
|
(7
|
)
|
%
|
|
|
6,351
|
|
|
|
(5
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
294,490
|
|
|
|
12
|
|
%
|
|
$
|
174,781
|
|
|
|
10
|
|
%
|
|
$
|
119,709
|
|
|
|
68
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1. Operating
revenues
The $613.3 million, or 37%, increase in consolidated
service and other revenues from 2005 to 2006 is primarily due to
a 37% increase in the average number of total digital handsets
in service resulting from continued strong demand for our
services and our balanced growth and expansion objectives.
The $12.2 million, or 15%, increase in consolidated digital
handset and accessory revenues from 2005 to 2006 is primarily
due to a 39% increase in total handset sales, as well as an 8%
increase in handset upgrades, partially offset by lower revenues
earned per handset sale resulting from handset promotions.
2. Cost
of revenues
The $153.0 million, or 33%, increase in consolidated cost
of service from 2005 to 2006 is principally a result of the
following:
|
|
|
|
|
an $80.1 million, or 35%, increase in consolidated
interconnect costs resulting from a 43% increase in consolidated
interconnect minutes of use, partially offset by lower costs per
minute of use primarily resulting from volume discounts
negotiated with various carriers in Mexico;
|
|
|
|
a $40.3 million, or 25%, increase in consolidated direct
switch and transmitter and receiver site costs resulting from a
27% increase in the total number of consolidated transmitter and
receiver sites in service from December 31, 2005 to
December 31, 2006;
|
|
|
|
a $25.0 million, or 40%, increase in consolidated service
and repair costs mainly resulting from an increase in
subscribers participating under our handset maintenance
programs; and
|
61
|
|
|
|
|
a $7.5 million, or 23%, increase in engineering payroll and
related expenses resulting from an increase in personnel
necessary to support our larger wireless networks.
|
The $60.1 million, or 24%, increase in consolidated cost of
digital handset and accessory sales from 2005 to 2006 is
primarily due to a 39% increase in total handset sales, as well
as an 8% increase in handset upgrades, partially offset by lower
cost per handset sale resulting from a reduction in handset unit
costs in 2006.
3. Selling
and marketing expenses
The $87.7 million, or 38%, increase in consolidated selling
and marketing expenses from 2005 to 2006 is principally a result
of the following:
|
|
|
|
|
a $39.0 million, or 43%, increase in consolidated indirect
commissions resulting from a 43% increase in total handset sales
through external sales channels;
|
|
|
|
a $30.9 million, or 36%, increase in consolidated direct
commissions and payroll expenses largely due to an increase in
commissions incurred as a result of a 33% increase in total
handset sales by internal sales personnel and an increase in
salaries; and
|
|
|
|
a $17.6 million, or 38%, increase in consolidated
advertising expenses, primarily in Mexico and Brazil, mainly
related to the launch of new markets in connection with our
expansion plan and increased advertising initiatives related to
overall subscriber growth.
|
4. General
and administrative expenses
The $147.4 million, or 47%, increase in consolidated
general and administrative expenses from 2005 to 2006 is
primarily a result of the following:
|
|
|
|
|
a $37.1 million, or 25%, increase largely due to higher
personnel costs related to an increase in headcount and higher
facilities-related expenses due to continued subscriber growth
and expansion into new markets;
|
|
|
|
a $35.3 million, or 46%, increase in consolidated customer
care expenses, mainly payroll and related expenses, resulting
from additional customer care personnel necessary to support a
larger consolidated customer base;
|
|
|
|
$31.8 million in incremental stock option compensation
expense that we recognized in 2006 as a result of the
implementation of SFAS 123R on January 1, 2006;
|
|
|
|
an $11.0 million, or 33%, increase in information
technology repair and maintenance costs primarily in Mexico and
Brazil related to the expansion of their networks and the
implementation of new systems;
|
|
|
|
a $10.7 million, or 58%, increase in revenue-based taxes in
Brazil that we report on a gross basis as both service and other
revenues and general and administrative expenses;
|
|
|
|
a $10.6 million, or 54%, increase in consolidated bad debt
expense, which increased slightly as a percentage of revenues
from 1.13% in 2005 to 1.28% in 2006; and
|
|
|
|
a $6.4 million, or 118%, increase in share-based payment
expense for restricted stock.
|
5. Depreciation
and amortization
The $72.1 million, or 55%, increase in consolidated
depreciation and amortization from 2005 to 2006 is primarily due
to a 63% increase in our consolidated property, plant and
equipment in service resulting from the continued expansion of
our digital mobile networks, mainly in Mexico and Brazil.
62
6. Interest
expense, net
The $16.9 million, or 23%, increase in consolidated net
interest expense from 2005 to 2006 is primarily due to the
following:
|
|
|
|
|
an $11.1 million increase in interest expense related to
the draw-down of Nextel Mexicos syndicated loan facility
in May 2005, which resulted in seven months of interest expense
in 2005 compared to a full year of interest expense in 2006;
|
|
|
|
an $8.3 million increase in interest incurred on our towers
financing transactions and capital lease obligations in Mexico
and Brazil primarily due to an increase in both the number of
towers sold and capital leases; and
|
|
|
|
a $6.0 million increase in interest expense related to the
issuance of our 2.75% convertible notes in August 2005,
which resulted in five months of interest expense in 2005
compared to a full year of interest expense in 2006.
|
These increases were partially offset by a $3.9 million
increase in capitalized interest and a $4.0 million
decrease in interest expense on Nextel Argentinas turnover
tax contingency because Nextel Argentina paid the full liability
due in April 2006.
7. Interest income
The $18.4 million, or 57%, increase in interest income from
2005 to 2006 is largely the result of an increase in average
consolidated cash balances due to the draw-down of Nextel
Mexicos syndicated loan facility in May 2005, cash
generated from operations in Mexico and the $350.0 million
proceeds received from the issuance of our
2.75% convertible notes in August 2005.
8. Debt conversion expense
Debt conversion expense for 2006 represents $5.1 million in
cash consideration and direct external costs that we paid in
connection with the conversion of the remaining
$91.4 million of our 3.5% convertible notes during the
fourth quarter of 2006.
Debt conversion expense for 2005 represents $8.9 million in
cash consideration and direct external costs that we paid in
connection with the conversion of $88.5 million of our
3.5% convertible notes during the second quarter of 2005.
9. Income tax provision
The $6.4 million, or 5%, decrease in the income tax
provision from 2005 to 2006 is primarily due to a
$17.1 million benefit related to an
out-of-period
adjustment and a reduced effective tax rate, partially offset by
a $113.4 million, or 38%, increase in income before tax.
The 2006 effective tax rate decreased by 13% in comparison to
2005 primarily due to the effects of the
out-of-period
adjustment (4%), a smaller valuation allowance increase compared
to 2005 (3%), a reduction in the amount of non-deductible
expenses outside the U.S. (3%) and various other items (3%,
net). Without the effect of the
out-of-period
adjustment, our 2006 effective tax rate would have been 33%
rather than 29%.
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. Because we do not view
share-based compensation as an important element of operational
performance, we recognize share-based payment expense at the
corporate level and exclude it when evaluating the business
performance of our segments. We charged management fees of
$47.9 million, $68.1 million and $37.8 million to
Nextel Mexico during the years ended December 31, 2006,
2005 and 2004, respectively. The segment information below does
not reflect any of these management fees because the amounts of
these fees are not provided to or used by our chief operating
decision maker in making operating decisions related to
63
these segments. The tables below provide a summary of the
components of our consolidated segments for the years ended
December 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
|
|
Year Ended
|
|
Operating
|
|
|
Operating
|
|
|
Cost of
|
|
|
Cost of
|
|
|
Administrative
|
|
|
Administrative
|
|
|
Earnings
|
|
December 31, 2006
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Expenses
|
|
|
Expenses
|
|
|
(Losses)
|
|
|
|
(dollars in thousands)
|
|
|
Nextel Mexico
|
|
$
|
1,341,297
|
|
|
|
57
|
%
|
|
$
|
(448,072
|
)
|
|
|
48
|
%
|
|
$
|
(362,541
|
)
|
|
|
46
|
%
|
|
$
|
530,684
|
|
Nextel Brazil
|
|
|
536,988
|
|
|
|
23
|
%
|
|
|
(243,288
|
)
|
|
|
26
|
%
|
|
|
(178,556
|
)
|
|
|
23
|
%
|
|
|
115,144
|
|
Nextel Argentina
|
|
|
345,034
|
|
|
|
14
|
%
|
|
|
(159,025
|
)
|
|
|
17
|
%
|
|
|
(87,013
|
)
|
|
|
11
|
%
|
|
|
98,996
|
|
Nextel Peru
|
|
|
146,373
|
|
|
|
6
|
%
|
|
|
(77,385
|
)
|
|
|
9
|
%
|
|
|
(42,910
|
)
|
|
|
6
|
%
|
|
|
26,078
|
|
Corporate and other
|
|
|
2,425
|
|
|
|
|
|
|
|
(1,983
|
)
|
|
|
|
|
|
|
(109,353
|
)
|
|
|
14
|
%
|
|
|
(108,911
|
)
|
Intercompany eliminations
|
|
|
(777
|
)
|
|
|
|
|
|
|
777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated
|
|
$
|
2,371,340
|
|
|
|
100
|
%
|
|
$
|
(928,976
|
)
|
|
|
100
|
%
|
|
$
|
(780,373
|
)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
%of
|
|
|
|
|
|
%of
|
|
|
Selling,
|
|
|
Selling,
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
Consolidated
|
|
|
General and
|
|
|
General and
|
|
|
Segment
|
|
Year Ended
|
|
Operating
|
|
|
Operating
|
|
|
Cost of
|
|
|
Cost of
|
|
|
Administrative
|
|
|
Administrative
|
|
|
Earnings
|
|
December 31, 2005
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Expenses
|
|
|
Expenses
|
|
|
(Losses)
|
|
|
|
(dollars in thousands)
|
|
|
Nextel Mexico
|
|
$
|
1,013,320
|
|
|
|
58
|
%
|
|
$
|
(348,019
|
)
|
|
|
49
|
%
|
|
$
|
(265,603
|
)
|
|
|
49
|
%
|
|
$
|
399,698
|
|
Nextel Brazil
|
|
|
347,530
|
|
|
|
20
|
%
|
|
|
(181,418
|
)
|
|
|
25
|
%
|
|
|
(121,921
|
)
|
|
|
22
|
%
|
|
|
44,191
|
|
Nextel Argentina
|
|
|
269,572
|
|
|
|
15
|
%
|
|
|
(130,949
|
)
|
|
|
18
|
%
|
|
|
(67,791
|
)
|
|
|
13
|
%
|
|
|
70,832
|
|
Nextel Peru
|
|
|
114,201
|
|
|
|
7
|
%
|
|
|
(54,634
|
)
|
|
|
8
|
%
|
|
|
(33,196
|
)
|
|
|
6
|
%
|
|
|
26,371
|
|
Corporate and other
|
|
|
1,886
|
|
|
|
|
|
|
|
(1,493
|
)
|
|
|
|
|
|
|
(56,724
|
)
|
|
|
10
|
%
|
|
|
(56,331
|
)
|
Intercompany eliminations
|
|
|
(670
|
)
|
|
|
|
|
|
|
670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated
|
|
$
|
1,745,839
|
|
|
|
100
|
%
|
|
$
|
(715,843
|
)
|
|
|
100
|
%
|
|
$
|
(545,235
|
)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64
A discussion of the results of operations in each of our
reportable segments is provided below.
b. Nextel
Mexico
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%of
|
|
|
|
|
|
|
%of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Mexicos
|
|
|
|
Year Ended
|
|
|
Mexicos
|
|
|
|
Change from
|
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
Previous Year
|
|
|
|
|
2006
|
|
|
Revenues
|
|
|
|
2005
|
|
|
Revenues
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
(dollars in thousands)
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
1,319,371
|
|
|
|
98
|
|
%
|
|
$
|
986,936
|
|
|
|
97
|
|
%
|
|
$
|
332,435
|
|
|
|
34
|
|
%
|
Digital handset and accessory
revenues
|
|
|
21,926
|
|
|
|
2
|
|
%
|
|
|
26,384
|
|
|
|
3
|
|
%
|
|
|
(4,458
|
)
|
|
|
(17
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,341,297
|
|
|
|
100
|
|
%
|
|
|
1,013,320
|
|
|
|
100
|
|
%
|
|
|
327,977
|
|
|
|
32
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation and amortization included below)
|
|
|
(275,950
|
)
|
|
|
(20
|
)
|
%
|
|
|
(214,646
|
)
|
|
|
(21
|
)
|
%
|
|
|
(61,304
|
)
|
|
|
29
|
|
%
|
Cost of digital handset and
accessory sales
|
|
|
(172,122
|
)
|
|
|
(13
|
)
|
%
|
|
|
(133,373
|
)
|
|
|
(13
|
)
|
%
|
|
|
(38,749
|
)
|
|
|
29
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(448,072
|
)
|
|
|
(33
|
)
|
%
|
|
|
(348,019
|
)
|
|
|
(34
|
)
|
%
|
|
|
(100,053
|
)
|
|
|
29
|
|
%
|
Selling and marketing expenses
|
|
|
(197,653
|
)
|
|
|
(15
|
)
|
%
|
|
|
(148,096
|
)
|
|
|
(15
|
)
|
%
|
|
|
(49,557
|
)
|
|
|
33
|
|
%
|
General and administrative expenses
|
|
|
(164,888
|
)
|
|
|
(12
|
)
|
%
|
|
|
(117,507
|
)
|
|
|
(11
|
)
|
%
|
|
|
(47,381
|
)
|
|
|
40
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings
|
|
|
530,684
|
|
|
|
40
|
|
%
|
|
|
399,698
|
|
|
|
40
|
|
%
|
|
|
130,986
|
|
|
|
33
|
|
%
|
Depreciation and amortization
|
|
|
(105,867
|
)
|
|
|
(8
|
)
|
%
|
|
|
(69,300
|
)
|
|
|
(7
|
)
|
%
|
|
|
(36,567
|
)
|
|
|
53
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
424,817
|
|
|
|
32
|
|
%
|
|
|
330,398
|
|
|
|
33
|
|
%
|
|
|
94,419
|
|
|
|
29
|
|
%
|
Interest expense, net
|
|
|
(38,424
|
)
|
|
|
(3
|
)
|
%
|
|
|
(28,670
|
)
|
|
|
(3
|
)
|
%
|
|
|
(9,754
|
)
|
|
|
34
|
|
%
|
Interest income
|
|
|
32,377
|
|
|
|
2
|
|
%
|
|
|
22,465
|
|
|
|
2
|
|
%
|
|
|
9,912
|
|
|
|
44
|
|
%
|
Foreign currency transaction
gains, net
|
|
|
3,957
|
|
|
|
|
|
|
|
|
2,602
|
|
|
|
|
|
|
|
|
1,355
|
|
|
|
52
|
|
%
|
Other expense, net
|
|
|
(3,173
|
)
|
|
|
|
|
|
|
|
(4,167
|
)
|
|
|
|
|
|
|
|
994
|
|
|
|
(24
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
$
|
419,554
|
|
|
|
31
|
|
%
|
|
$
|
322,628
|
|
|
|
32
|
|
%
|
|
$
|
96,926
|
|
|
|
30
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nextel Mexico is our largest and most profitable market segment,
comprising 57% of our consolidated revenues for 2006. Nextel
Mexicos growth in profitability is primarily a result of
year-over-year
subscriber growth that was achieved while Nextel Mexico
maintained operating costs at consistent levels as a percentage
of revenues. Additional subscriber growth was the result of
continued customer demand, selectively expanding coverage in new
and existing markets and improving network quality and capacity.
Coverage expansion and network improvements resulted in capital
expenditures totaling $308.3 million for 2006, which is a
49% share of all capital expenditure investments. We expect that
Nextel Mexico will continue to represent a significant portion
of our total capital expenditure investments in the future.
Nextel Mexico decreased its customer turnover by making
concentrated investments in customer retention programs. We
expect subscriber growth in Mexico to continue as we complete
the build out of new markets over the next year using 800MHz
spectrum licenses that we acquired in March 2005. In addition,
as Nextel Mexico continues to grow its business, we expect that
Nextel Mexicos average revenue per subscriber may decrease
slightly in 2007.
In accordance with generally accepted accounting principles in
the United States, we translated Nextel Mexicos results of
operations using the average exchange rate for 2006, which
remained relatively constant
65
against the U.S. dollar from 2005. As a result, the
components of Nextel Mexicos results of operations for
2006 after translation into U.S. dollars are generally
comparable to its results of operations for 2005.
1. Operating
revenues
The $332.4 million, or 34%, increase in service and other
revenues from 2005 to 2006 is primarily due to a 38% 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 during 2005 and 2006 into new
markets in connection our balanced growth and expansion
objectives.
The $4.5 million, or 17%, decrease in digital handset and
accessory revenues from 2005 to 2006 is the result of promotions
to new and existing customers that significantly lowered the
average revenue earned per handset sale. These decreases were
partially offset by a 42% increase in handset sales.
2. Cost
of revenues
The $61.3 million, or 29%, increase in cost of service from
2005 to 2006 is principally due to the following:
|
|
|
|
|
a $26.2 million, or 26%, increase in interconnect costs
generally resulting from a 51% increase in interconnect minutes
of use, partially offset by lower per minute charges achieved
through volume discounts negotiated with various carriers;
|
|
|
|
a $20.2 million, or 26%, increase in direct switch and
transmitter and receiver site costs resulting from a 36%
increase in the number of transmitter and receiver sites in
service from December 31, 2005 to December 31, 2006
and an increase in spectrum license fees;
|
|
|
|
a $10.7 million, or 38%, increase in service and repair
costs largely due to increased activity under Nextel
Mexicos handset maintenance program; and
|
|
|
|
a $2.2 million, or 12%, increase in engineering payroll and
related expenses resulting from an increase in personnel
necessary to support a larger wireless network.
|
The $38.7 million, or 29%, increase in cost of digital
handset and accessory sales from 2005 to 2006 is primarily due
to a 42% increase in handset sales, as well as a 10% increase in
handset upgrades.
3. Selling
and marketing expenses
The $49.6 million, or 33%, increase in selling and
marketing expenses from 2005 to 2006 is primarily a result of
the following:
|
|
|
|
|
a $26.0 million, or 40%, increase in indirect commissions
primarily due to a 47% increase in handset sales by Nextel
Mexicos external sales channels;
|
|
|
|
a $10.9 million, or 24%, increase in direct commissions and
payroll expenses principally due to a 33% increase in handset
sales by Nextel Mexicos sales personnel; and
|
|
|
|
an $11.7 million, or 38%, increase in advertising costs
largely due to the launch of new markets in connection with
Nextel Mexicos expansion plan, the launch of new rate
plans and objectives to reinforce market awareness of the Nextel
brandname.
|
|
|
4.
|
General and
administrative expenses
|
The $47.4 million, or 40%, increase in general and
administrative expenses from 2005 to 2006 is largely a result of
the following:
|
|
|
|
|
an $18.5 million, or 49%, increase in customer care
expenses primarily due to an increase in payroll and employee
related expenses caused by an increase in customer care
personnel necessary to support a larger customer base, as well
as an increase in the number of retail stores;
|
66
|
|
|
|
|
a $16.6 million, or 30%, 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 $7.5 million, or 84%, increase in bad debt expense, which
increased as a percentage of revenues from 0.9% in 2005 to 1.2%
in 2006; and
|
|
|
|
a $3.8 million, or 28%, increase in information technology
repairs and maintenance expenses related to the expansion of
Nextel Mexicos network and the implementation of new
systems.
|
|
|
5.
|
Depreciation
and amortization
|
The $36.6 million, or 53%, increase in depreciation and
amortization from 2005 to 2006 is primarily due to a 60%
increase in Nextel Mexicos property, plant and equipment
in service resulting from the continued build-out of Nextel
Mexicos digital mobile network in connection with its
expansion plan.
The $9.8 million, or 34%, increase in net interest expense
from 2005 to 2006 is largely a result of the draw-down of Nextel
Mexicos syndicated loan facility in May 2005, which
resulted in seven months of interest expense in 2005 compared to
twelve months of interest expense in 2006, and an increase in
interest incurred on Nextel Mexicos tower financing
transactions and capital lease obligations due to an increase in
both the number of towers financed and capital leases.
The $9.9 million, or 44%, increase in interest income from
2005 to 2006 is largely due to an increase in Nextel
Mexicos average cash balances resulting primarily from the
draw-down of Nextel Mexicos syndicated loan facility in
May 2005 and cash generated from operations.
67
c. Nextel
Brazil
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%of
|
|
|
|
|
|
|
%of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Brazils
|
|
|
|
Year Ended
|
|
|
Brazils
|
|
|
|
Change from
|
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
Previous Year
|
|
|
|
|
2006
|
|
|
Revenues
|
|
|
|
2005
|
|
|
Revenues
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
(dollars in thousands)
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
500,315
|
|
|
|
93
|
|
%
|
|
$
|
321,655
|
|
|
|
93
|
|
%
|
|
$
|
178,660
|
|
|
|
56
|
|
%
|
Digital handset and accessory
revenues
|
|
|
36,673
|
|
|
|
7
|
|
%
|
|
|
25,875
|
|
|
|
7
|
|
%
|
|
|
10,798
|
|
|
|
42
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
536,988
|
|
|
|
100
|
|
%
|
|
|
347,530
|
|
|
|
100
|
|
%
|
|
|
189,458
|
|
|
|
55
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation and amortization included below)
|
|
|
(173,570
|
)
|
|
|
(32
|
)
|
%
|
|
|
(122,267
|
)
|
|
|
(35
|
)
|
%
|
|
|
(51,303
|
)
|
|
|
42
|
|
%
|
Cost of digital handset and
accessory sales
|
|
|
(69,718
|
)
|
|
|
(13
|
)
|
%
|
|
|
(59,151
|
)
|
|
|
(17
|
)
|
%
|
|
|
(10,567
|
)
|
|
|
18
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(243,288
|
)
|
|
|
(45
|
)
|
%
|
|
|
(181,418
|
)
|
|
|
(52
|
)
|
%
|
|
|
(61,870
|
)
|
|
|
34
|
|
%
|
Selling and marketing expenses
|
|
|
(70,411
|
)
|
|
|
(13
|
)
|
%
|
|
|
(46,949
|
)
|
|
|
(13
|
)
|
%
|
|
|
(23,462
|
)
|
|
|
50
|
|
%
|
General and administrative expenses
|
|
|
(108,145
|
)
|
|
|
(21
|
)
|
%
|
|
|
(74,972
|
)
|
|
|
(22
|
)
|
%
|
|
|
(33,173
|
)
|
|
|
44
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings
|
|
|
115,144
|
|
|
|
21
|
|
%
|
|
|
44,191
|
|
|
|
13
|
|
%
|
|
|
70,953
|
|
|
|
161
|
|
%
|
Depreciation and amortization
|
|
|
(59,199
|
)
|
|
|
(11
|
)
|
%
|
|
|
(31,768
|
)
|
|
|
(9
|
)
|
%
|
|
|
(27,431
|
)
|
|
|
86
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
55,945
|
|
|
|
10
|
|
%
|
|
|
12,423
|
|
|
|
4
|
|
%
|
|
|
43,522
|
|
|
|
350
|
|
%
|
Interest expense, net
|
|
|
(23,961
|
)
|
|
|
(5
|
)
|
%
|
|
|
(18,113
|
)
|
|
|
(5
|
)
|
%
|
|
|
(5,848
|
)
|
|
|
32
|
|
%
|
Interest income
|
|
|
3,490
|
|
|
|
1
|
|
%
|
|
|
1,941
|
|
|
|
|
|
|
|
|
1,549
|
|
|
|
80
|
|
%
|
Foreign currency transaction
(losses) gains, net
|
|
|
(387
|
)
|
|
|
|
|
|
|
|
225
|
|
|
|
|
|
|
|
|
(612
|
)
|
|
|
(272
|
)
|
%
|
Other expense, net
|
|
|
(1,876
|
)
|
|
|
|
|
|
|
|
(3,817
|
)
|
|
|
(1
|
)
|
%
|
|
|
1,941
|
|
|
|
(51
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax
|
|
$
|
33,211
|
|
|
|
6
|
|
%
|
|
$
|
(7,341
|
)
|
|
|
(2
|
)
|
%
|
|
$
|
40,552
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM-Not Meaningful
Over the last three years, Nextel Brazils subscriber base
and segment earnings have increased as a result of a continued
focus on customer service, the expansion of its digital mobile
network and significant improvements in its operating cost
structure. In addition to these factors, as a result of the
improvement in the Brazilian economy over the same period and
increasing demand for its services, Nextel Brazil has continued
to grow its existing markets and made significant investments in
new markets. Over the next year, Nextel Brazil plans to continue
to expand its digital mobile network and grow its subscriber
base.
In accordance with accounting principles generally accepted in
the United States, we translated Nextel Brazils results of
operations using the average exchange rate for 2006, which
appreciated against the U.S. dollar by 12% from 2005. As a
result, the components of Nextel Brazils 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
Brazilian real relative to the U.S. dollar.
68
The $178.7 million, or 56%, increase in service and other
revenues from 2005 to 2006 is primarily a result of the
following:
|
|
|
|
|
a 39% increase in the average number of digital handsets in
service resulting from growth in Nextel Brazils existing
markets, as well as the expansion of service coverage during
2005 and 2006 into new markets in connection with our balanced
growth and expansion objectives;
|
|
|
|
the 12% appreciation of the Brazilian real against the
U.S. dollar; and
|
|
|
|
a $15.6 million, or 85%, increase in revenues generated
from Nextel Brazils handset maintenance program due to
growth in the number of subscribers that are utilizing this
program.
|
The $10.8 million, or 42%, increase in digital handset and
accessory revenues from 2005 to 2006 is largely the result of a
39% increase in handset sales.
The $51.3 million, or 42%, increase in cost of service from
2005 to 2006 is primarily due to the following:
|
|
|
|
|
a $26.2 million, or 46%, increase in interconnect costs
resulting from a 48% increase in interconnect minutes of use;
|
|
|
|
a $15.6 million, or 33%, increase in direct switch and
transmitter and receiver site costs, including spectrum license
fees, resulting from a 23% increase in the number of transmitter
and receiver sites in service from December 31, 2005 to
December 31, 2006; and
|
|
|
|
a $6.5 million, or 56%, increase in service and repair
costs largely due to increased subscribers under Nextel
Brazils handset maintenance program.
|
The increase in cost of service also resulted from the 12%
appreciation of the Brazilian real against the U.S. dollar.
The $10.6 million, or 18%, increase in cost of digital
handset and accessory sales from 2005 to 2006 is primarily due
to a 39% increase in handset sales, partially offset by a
decrease in cost per handset sale due to a change in the mix of
handsets sold, which included a higher proportion of less
expensive models during 2006 compared to 2005.
|
|
3.
|
Selling and
marketing expenses
|
The $23.5 million, or 50%, increase in selling and
marketing expenses from 2005 to 2006 is principally due to the
following:
|
|
|
|
|
a $12.3 million, or 57%, increase in payroll and direct
commissions largely as a result of a 39% increase in handset
sales by Nextel Brazils sales force and an increase in
salaries primarily resulting from additional selling and
marketing personnel necessary to support continued sales growth;
|
|
|
|
a $7.0 million, or 62%, increase in indirect commissions
resulting from a 39% increase in handset sales through Nextel
Brazils external sales channels, as well as an increase in
indirect commissions earned per handset sale resulting from
premiums paid on sales exceeding pre-established
thresholds; and
|
|
|
|
a $5.1 million, or 51%, increase in advertising expenses
due to the implementation of more advertising campaigns during
2006 primarily as a result of increased initiatives related to
overall subscriber growth and the launch of new markets in
connection with Nextel Brazils expansion plan.
|
All of these increases also resulted from the 12% appreciation
of the Brazilian real against the U.S. dollar.
69
|
|
4.
|
General and
administrative expenses
|
The $33.2 million, or 44%, increase in general and
administrative expenses from 2005 to 2006 is primarily a result
of the following:
|
|
|
|
|
a $10.9 million, or 50%, increase in customer care expenses
resulting from an increase in customer care personnel necessary
to support a larger customer base, as well as an increase in the
number of retail stores;
|
|
|
|
a $10.7 million, or 58%, increase in revenue-based taxes
that we report on a gross basis as both service and other
revenues and general and administrative expenses;
|
|
|
|
a $5.8 million, or 29%, increase in general corporate costs
resulting from an increase in general and administrative
personnel; and
|
|
|
|
a $3.5 million, or 59%, increase in information technology
expenses related to the expansion of Nextel Brazils
network and the implementation of new systems.
|
All of these increases also resulted from the 12% appreciation
of the Brazilian real against the U.S. dollar.
|
|
5.
|
Depreciation
and amortization
|
The $27.4 million, or 86%, increase in depreciation and
amortization from 2005 to 2006 is primarily due to a 78%
increase in Nextel Brazils property, plant and equipment
in service resulting from the continued build-out of Nextel
Brazils digital mobile network, as well as the 12%
appreciation of the Brazilian real against the U.S. dollar.
The $5.8 million, or 32%, increase in net interest expense
from 2005 to 2006 is primarily the result of increased interest
incurred on Nextel Brazils tower financing and capital
lease obligations due to an increase in both the number of
towers financed and capital leases, as well as the 12%
appreciation of the Brazilian real against the U.S. dollar.
70
d. Nextel
Argentina
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%of
|
|
|
|
|
|
|
%of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Argentinas
|
|
|
|
Year Ended
|
|
|
Argentinas
|
|
|
|
Change from
|
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
Previous Year
|
|
|
|
|
2006
|
|
|
Revenues
|
|
|
|
2005
|
|
|
Revenues
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
(dollars in thousands)
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
320,664
|
|
|
|
93
|
|
%
|
|
$
|
248,262
|
|
|
|
92
|
|
%
|
|
$
|
72,402
|
|
|
|
29
|
|
%
|
Digital handset and accessory
revenues
|
|
|
24,370
|
|
|
|
7
|
|
%
|
|
|
21,310
|
|
|
|
8
|
|
%
|
|
|
3,060
|
|
|
|
14
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
345,034
|
|
|
|
100
|
|
%
|
|
|
269,572
|
|
|
|
100
|
|
%
|
|
|
75,462
|
|
|
|
28
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation and amortization included below)
|
|
|
(113,918
|
)
|
|
|
(33
|
)
|
%
|
|
|
(90,625
|
)
|
|
|
(34
|
)
|
%
|
|
|
(23,293
|
)
|
|
|
26
|
|
%
|
Cost of digital handset and
accessory sales
|
|
|
(45,107
|
)
|
|
|
(13
|
)
|
%
|
|
|
(40,324
|
)
|
|
|
(15
|
)
|
%
|
|
|
(4,783
|
)
|
|
|
12
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(159,025
|
)
|
|
|
(46
|
)
|
%
|
|
|
(130,949
|
)
|
|
|
(49
|
)
|
%
|
|
|
(28,076
|
)
|
|
|
21
|
|
%
|
Selling and marketing expenses
|
|
|
(27,752
|
)
|
|
|
(8
|
)
|
%
|
|
|
(21,254
|
)
|
|
|
(8
|
)
|
%
|
|
|
(6,498
|
)
|
|
|
31
|
|
%
|
General and administrative expenses
|
|
|
(59,261
|
)
|
|
|
(17
|
)
|
%
|
|
|
(46,537
|
)
|
|
|
(17
|
)
|
%
|
|
|
(12,724
|
)
|
|
|
27
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings
|
|
|
98,996
|
|
|
|
29
|
|
%
|
|
|
70,832
|
|
|
|
26
|
|
%
|
|
|
28,164
|
|
|
|
40
|
|
%
|
Depreciation and amortization
|
|
|
(20,141
|
)
|
|
|
(6
|
)
|
%
|
|
|
(16,460
|
)
|
|
|
(6
|
)
|
%
|
|
|
(3,681
|
)
|
|
|
22
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
78,855
|
|
|
|
23
|
|
%
|
|
|
54,372
|
|
|
|
20
|
|
%
|
|
|
24,483
|
|
|
|
45
|
|
%
|
Interest expense, net
|
|
|
(2,330
|
)
|
|
|
(1
|
)
|
%
|
|
|
(5,407
|
)
|
|
|
(1
|
)
|
%
|
|
|
3,077
|
|
|
|
(57
|
)
|
%
|
Interest income
|
|
|
2,509
|
|
|
|
1
|
|
%
|
|
|
661
|
|
|
|
|
|
|
|
|
1,848
|
|
|
|
280
|
|
%
|
Foreign currency transaction
(losses) gains, net
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
500
|
|
|
|
|
|
|
|
|
(518
|
)
|
|
|
(104
|
)
|
%
|
Other income (expense), net
|
|
|
329
|
|
|
|
|
|
|
|
|
(33
|
)
|
|
|
|
|
|
|
|
362
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
$
|
79,345
|
|
|
|
23
|
|
%
|
|
$
|
50,093
|
|
|
|
19
|
|
%
|
|
$
|
29,252
|
|
|
|
58
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM-Not Meaningful
In accordance with accounting principles generally accepted in
the United States, we translated Nextel Argentinas results
of operations using the average exchange rate for 2006 and 2005.
The average exchange rate of the Argentine peso for 2006
depreciated against the U.S. dollar by 5% from 2005. As a
result, the components of Nextel Argentinas results of
operations for 2006 after translation into U.S. dollars
reflect slightly lower increases than would have occurred if it
were not for the impact of the depreciation in the average value
of the Argentine peso.
The $72.4 million, or 29%, increase in service and other
revenues from 2005 to 2006 is primarily a result of the
following:
|
|
|
|
|
a 31% increase in the average number of digital handsets in
service, resulting primarily from growth in Nextel
Argentinas existing markets; and
|
71
|
|
|
|
|
an $8.6 million, or 37%, increase in revenues generated
from Nextel Argentinas handset maintenance program due to
growth in the number of Nextel Argentinas subscribers that
are utilizing this program.
|
The $3.1 million, or 14%, increase in digital handset and
accessory revenues from 2005 to 2006 is primarily the result of
a 28% increase in handset sales, as well as an 8% increase in
handset upgrades.
The $23.3 million, or 26%, increase in cost of service from
2005 to 2006 is principally a result of the following:
|
|
|
|
|
a $13.6 million, or 27%, increase in interconnect costs
largely as a result of a 21% increase in interconnect minutes of
use;
|
|
|
|
a $6.7 million, or 37%, increase in service and repair
costs largely due to increased subscribers under Nextel
Argentinas handset maintenance program; and
|
|
|
|
a $2.6 million, or 11%, increase in direct switch and
transmitter and receiver site costs, including spectrum license
fees, due to a 12% increase in the number of transmitter and
receiver sites in service from December 31, 2005 to
December 31, 2006.
|
The $4.8 million, or 12%, increase in cost of digital
handsets and accessories from 2005 to 2006 is primarily the
result of a 28% increase in handset sales, as well as an 8%
increase in handset upgrades, partially offset by lower handset
costs.
|
|
3.
|
Selling and
marketing expenses
|
The $6.5 million, or 31%, increase in selling and marketing
expenses from 2005 to 2006 is largely a result of the following:
|
|
|
|
|
a $3.4 million, or 39%, increase in indirect commissions
primarily due to a 37% increase in handset sales obtained
through Nextel Argentinas external sales channels; and
|
|
|
|
a $2.2 million, or 27%, increase in payroll and direct
commissions largely due to an increase in direct commissions
resulting from an 18% increase in handset sales by Nextel
Argentinas sales force.
|
|
|
4.
|
General and
administrative expenses
|
The $12.7 million, or 27%, increase in general and
administrative expenses from 2005 to 2006 is largely a result of
the following:
|
|
|
|
|
a $7.4 million, or 25%, increase in general corporate costs
resulting from certain revenue-based taxes and an increase in
payroll and related expenses caused by an increase in general
and administrative personnel;
|
|
|
|
a $3.3 million, or 38%, increase in customer care expenses
resulting from additional customer care personnel needed to
support a growing customer base and higher facilities-related
expenses caused by continued subscriber growth; and
|
|
|
|
a $1.6 million, or 30%, increase in information technology
expenses related to higher software maintenance costs.
|
|
|
5.
|
Depreciation
and amortization
|
The $3.7 million, or 22%, increase in depreciation and
amortization from 2005 to 2006 is primarily due to a 44%
increase in Nextel Argentinas property, plant and
equipment in service, partially offset by a decrease in
depreciation due to the correction of an error in the
computation of the useful life of certain software as described
in Note 1 to our consolidated financial statements.
72
The $3.1 million, or 57%, decrease in net interest expense
from 2005 to 2006 is largely the result of a decrease in
interest expense on Nextel Argentinas turnover tax
contingency because Nextel Argentina paid the full liability due
in April 2006.
e. Nextel
Peru
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%of
|
|
|
|
|
|
|
%of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Perus
|
|
|
|
Year Ended
|
|
|
Perus
|
|
|
|
Change from
|
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
Previous Year
|
|
|
|
|
2006
|
|
|
Revenues
|
|
|
|
2005
|
|
|
Revenues
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
(dollars in thousands)
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
137,924
|
|
|
|
94
|
|
%
|
|
$
|
108,544
|
|
|
|
95
|
|
%
|
|
$
|
29,380
|
|
|
|
27
|
|
%
|
Digital handset and accessory
revenues
|
|
|
8,449
|
|
|
|
6
|
|
%
|
|
|
5,657
|
|
|
|
5
|
|
%
|
|
|
2,792
|
|
|
|
49
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
146,373
|
|
|
|
100
|
|
%
|
|
|
114,201
|
|
|
|
100
|
|
%
|
|
|
32,172
|
|
|
|
28
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation included below)
|
|
|
(53,145
|
)
|
|
|
(36
|
)
|
%
|
|
|
(36,290
|
)
|
|
|
(32
|
)
|
%
|
|
|
(16,855
|
)
|
|
|
46
|
|
%
|
Cost of digital handset and
accessory sales
|
|
|
(24,240
|
)
|
|
|
(17
|
)
|
%
|
|
|
(18,344
|
)
|
|
|
(16
|
)
|
%
|
|
|
(5,896
|
)
|
|
|
32
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(77,385
|
)
|
|
|
(53
|
)
|
%
|
|
|
(54,634
|
)
|
|
|
(48
|
)
|
%
|
|
|
(22,751
|
)
|
|
|
42
|
|
%
|
Selling and marketing expenses
|
|
|
(17,213
|
)
|
|
|
(12
|
)
|
%
|
|
|
(12,606
|
)
|
|
|
(11
|
)
|
%
|
|
|
(4,607
|
)
|
|
|
37
|
|
%
|
General and administrative expenses
|
|
|
(25,697
|
)
|
|
|
(17
|
)
|
%
|
|
|
(20,590
|
)
|
|
|
(18
|
)
|
%
|
|
|
(5,107
|
)
|
|
|
25
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings
|
|
|
26,078
|
|
|
|
18
|
|
%
|
|
|
26,371
|
|
|
|
23
|
|
%
|
|
|
(293
|
)
|
|
|
(1
|
)
|
%
|
Depreciation and amortization
|
|
|
(12,927
|
)
|
|
|
(9
|
)
|
%
|
|
|
(8,718
|
)
|
|
|
(8
|
)
|
%
|
|
|
(4,209
|
)
|
|
|
48
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
13,151
|
|
|
|
9
|
|
%
|
|
|
17,653
|
|
|
|
15
|
|
%
|
|
|
(4,502
|
)
|
|
|
(26
|
)
|
%
|
Interest expense, net
|
|
|
(145
|
)
|
|
|
|
|
|
|
|
(152
|
)
|
|
|
|
|
|
|
|
7
|
|
|
|
(5
|
)
|
%
|
Interest income
|
|
|
1,070
|
|
|
|
1
|
|
%
|
|
|
880
|
|
|
|
1
|
|
%
|
|
|
190
|
|
|
|
22
|
|
%
|
Foreign currency transaction
gains, net
|
|
|
106
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
86
|
|
|
|
NM
|
|
|
Other income (expense), net
|
|
|
2
|
|
|
|
|
|
|
|
|
(11
|
)
|
|
|
|
|
|
|
|
13
|
|
|
|
(118
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
|
|
$
|
14,184
|
|
|
|
10
|
|
%
|
|
$
|
18,390
|
|
|
|
16
|
|
%
|
|
$
|
(4,206
|
)
|
|
|
(23
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM-Not Meaningful
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 $29.4 million, or 27%, increase in service and other
revenues from 2005 to 2006 is primarily due to a 37% increase in
the average number of digital handsets in service, partially
offset by a decrease in average revenue per handset mainly
resulting from lower rate plans implemented in response to
increased competition.
The $2.8 million, or 49%, increase in digital handset and
accessory revenues from 2005 to 2006 is primarily the result of
a 45% increase in handset sales mainly resulting from Nextel
Perus strategy of increasing penetration in small to
mid-size accounts.
73
The $16.9 million, or 46%, increase in cost of service from
2005 to 2006 is largely a result of the following:
|
|
|
|
|
a $14.1 million, or 68%, increase in interconnect costs due
to a 58% increase in interconnect minutes of use;
|
|
|
|
a $1.8 million, or 18%, increase in direct switch and
transmitter and receiver site costs due to a 16% increase in the
number of transmitter and receiver sites in service from
December 31, 2005 to December 31, 2006; and
|
|
|
|
a $1.0 million, or 25%, increase in service and repair
costs largely due to increased subscribers under Nextel
Perus handset maintenance program.
|
The $5.9 million, or 32%, increase in cost of digital
handsets and accessories from 2005 to 2006 is largely the result
of a 45% increase in handset sales.
3. Selling and marketing expenses
The $4.6 million, or 37%, increase in selling and marketing
expenses from 2005 to 2006 is primarily due to the following:
|
|
|
|
|
a $2.2 million, or 64%, increase in indirect commissions
resulting from a 48% increase in handset sales through Nextel
Perus external sales channels, as well as an increase in
indirect commission per handset sale; and
|
|
|
|
a $2.2 million, or 33%, increase in direct commissions and
payroll expenses principally due to a 42% increase in handset
sales by Nextel Perus sales personnel, partially offset by
a decrease in direct commission per handset sale.
|
|
|
4.
|
General and
administrative expenses
|
The $5.1 million, or 25%, increase in general and
administrative expenses from 2005 to 2006 is primarily due to
the following:
|
|
|
|
|
a $1.9 million, or 24%, increase in customer care expenses,
mainly caused by an increase in customer care and billing
operations personnel needed to support a growing customer base;
|
|
|
|
a $1.5 million, or 18%, increase in general corporate costs
due to an increase in general and administrative personnel and
various taxes paid to regulatory agencies; and
|
|
|
|
a $1.2 million, or 32%, increase in information technology
costs.
|
|
|
5.
|
Depreciation
and amortization
|
The $4.2 million, or 48%, increase in depreciation and
amortization from 2005 to 2006 is primarily due to a 71%
increase in Nextel Perus property, plant and equipment in
service.
74
f. Corporate
and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
%of
|
|
|
|
|
|
|
%of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
and other
|
|
|
|
Year Ended
|
|
|
and other
|
|
|
|
Change from
|
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
Previous Year
|
|
|
|
|
2006
|
|
|
Revenues
|
|
|
|
2005
|
|
|
Revenues
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
(dollars in thousands)
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
2,425
|
|
|
|
100
|
|
%
|
|
$
|
1,886
|
|
|
|
100
|
|
%
|
|
$
|
539
|
|
|
|
29
|
|
%
|
Digital handset and accessory
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,425
|
|
|
|
100
|
|
%
|
|
|
1,886
|
|
|
|
100
|
|
%
|
|
|
539
|
|
|
|
29
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation and amortization included below)
|
|
|
(1,863
|
)
|
|
|
(77
|
)
|
%
|
|
|
(1,493
|
)
|
|
|
(79
|
)
|
%
|
|
|
(370
|
)
|
|
|
25
|
|
%
|
Cost of digital handset and
accessory sales
|
|
|
(120
|
)
|
|
|
(5
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(120
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,983
|
)
|
|
|
(82
|
)
|
%
|
|
|
(1,493
|
)
|
|
|
(79
|
)
|
%
|
|
|
(490
|
)
|
|
|
33
|
|
%
|
Selling and marketing expenses
|
|
|
(8,211
|
)
|
|
|
(339
|
)
|
%
|
|
|
(4,635
|
)
|
|
|
(246
|
)
|
%
|
|
|
(3,576
|
)
|
|
|
77
|
|
%
|
General and administrative expenses
|
|
|
(101,142
|
)
|
|
|
NM
|
|
|
|
|
(52,089
|
)
|
|
|
NM
|
|
|
|
|
(49,053
|
)
|
|
|
94
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment losses
|
|
|
(108,911
|
)
|
|
|
NM
|
|
|
|
|
(56,331
|
)
|
|
|
NM
|
|
|
|
|
(52,580
|
)
|
|
|
93
|
|
%
|
Depreciation and amortization
|
|
|
(4,481
|
)
|
|
|
(185
|
)
|
%
|
|
|
(4,279
|
)
|
|
|
(227
|
)
|
%
|
|
|
(202
|
)
|
|
|
5
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(113,392
|
)
|
|
|
NM
|
|
|
|
|
(60,610
|
)
|
|
|
NM
|
|
|
|
|
(52,782
|
)
|
|
|
87
|
|
%
|
Interest expense, net
|
|
|
(24,613
|
)
|
|
|
NM
|
|
|
|
|
(20,202
|
)
|
|
|
NM
|
|
|
|
|
(4,411
|
)
|
|
|
22
|
|
%
|
Interest income
|
|
|
11,705
|
|
|
|
NM
|
|
|
|
|
6,738
|
|
|
|
357
|
|
%
|
|
|
4,967
|
|
|
|
74
|
|
%
|
Foreign currency transaction
gains, net
|
|
|
(101
|
)
|
|
|
(4
|
)
|
%
|
|
|
10
|
|
|
|
1
|
|
%
|
|
|
(111
|
)
|
|
|
NM
|
|
|
Debt conversion expense
|
|
|
(5,070
|
)
|
|
|
(209
|
)
|
%
|
|
|
(8,930
|
)
|
|
|
NM
|
|
|
|
|
3,860
|
|
|
|
(43
|
)
|
%
|
Other expense, net
|
|
|
(1,282
|
)
|
|
|
(53
|
)
|
%
|
|
|
(593
|
)
|
|
|
(31
|
)
|
%
|
|
|
(689
|
)
|
|
|
116
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax
|
|
$
|
(132,753
|
)
|
|
|
NM
|
|
|
|
$
|
(83,587
|
)
|
|
|
NM
|
|
|
|
$
|
(49,166
|
)
|
|
|
59
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM-Not Meaningful
Corporate and other operating revenues and cost of revenues
primarily represent the results of analog operations reported by
Nextel Chile. Operating revenues and cost of revenues did not
significantly change from 2005 to 2006 because Nextel
Chiles subscriber base remained stable. In December 2006,
we announced the launch of digital operations in Chile, which
extended our services to Santiago, Chile and certain surrounding
areas. As a result of this launch, customers in our service
areas in Chile will have access to some of our digital voice
services, including Direct Connect and International Direct
Connect to the other countries in which we operate,
push-to-talk
service and telephone interconnect. Initial operations are
targeted to select business and roaming customers, as our
customers across Argentina, Brazil, Mexico and Peru have access
to roaming services when conducting business in Chile.
|
|
1.
|
General and
administrative expenses
|
The $49.1 million, or 94%, increase in general and
administrative expenses from 2005 to 2006 is primarily due to
$31.8 million in incremental stock option expense that we
recognized in 2006 as a result of the implementation of
SFAS 123R on January 1, 2006, a $6.4 million
increase in share-based payment expense
75
for restricted stock, an increase in corporate payroll and
related expenses and an increase in outside service costs,
specifically for consulting services.
The $4.4 million, or 22%, increase in net interest expense
from 2005 to 2006 is substantially the result of interest
related to our 2.75% convertible notes that we issued in
August 2005, which resulted in five months of interest expense
for 2005 compared to twelve months of interest expense for 2006.
We believe that if we do not obtain any new funding, net
interest expense in corporate and other will decrease in 2007 as
a result of the conversion of the remainder of our
3.5% convertible notes.
The $5.0 million, or 74%, increase in interest income from
2005 to 2006 is primarily due to higher cash balances at the
corporate level resulting from the $350.0 million proceeds
received from the issuance of our 2.75% convertible notes,
as well as higher interest rates in the U.S.
|
|
4.
|
Debt
conversion expense
|
Debt conversion expense for 2006 represents $5.1 million in
cash consideration and direct external costs that we paid in
connection with the conversion of the remaining
$91.4 million of our 3.5% convertible notes during the
fourth quarter of 2006.
Debt conversion expense for 2005 represents $8.9 million in
cash consideration and direct external costs that we paid in
connection with the conversion of $88.5 million of our
3.5% convertible notes that occurred during the second
quarter in 2005.
76
|
|
2.
|
Year
Ended December 31, 2005 vs. Year Ended December 31,
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Consolidated
|
|
|
|
Year Ended
|
|
|
Consolidated
|
|
|
|
Change from
|
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
Previous Year
|
|
|
|
|
2005
|
|
|
Revenues
|
|
|
|
2004
|
|
|
Revenues
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
(dollars in thousands)
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
1,666,613
|
|
|
|
95
|
|
%
|
|
$
|
1,214,837
|
|
|
|
95
|
|
%
|
|
$
|
451,776
|
|
|
|
37
|
|
%
|
Digital handset and accessory
revenues
|
|
|
79,226
|
|
|
|
5
|
|
%
|
|
|
65,071
|
|
|
|
5
|
|
%
|
|
|
14,155
|
|
|
|
22
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,745,839
|
|
|
|
100
|
|
%
|
|
|
1,279,908
|
|
|
|
100
|
|
%
|
|
|
465,931
|
|
|
|
36
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation and amortization included below)
|
|
|
(464,651
|
)
|
|
|
(27
|
)
|
%
|
|
|
(365,982
|
)
|
|
|
(29
|
)
|
%
|
|
|
(98,669
|
)
|
|
|
27
|
|
%
|
Cost of digital handset and
accessory sales
|
|
|
(251,192
|
)
|
|
|
(14
|
)
|
%
|
|
|
(207,112
|
)
|
|
|
(16
|
)
|
%
|
|
|
(44,080
|
)
|
|
|
21
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(715,843
|
)
|
|
|
(41
|
)
|
%
|
|
|
(573,094
|
)
|
|
|
(45
|
)
|
%
|
|
|
(142,749
|
)
|
|
|
25
|
|
%
|
Selling and marketing expenses
|
|
|
(233,540
|
)
|
|
|
(13
|
)
|
%
|
|
|
(162,343
|
)
|
|
|
(13
|
)
|
%
|
|
|
(71,197
|
)
|
|
|
44
|
|
%
|
General and administrative expenses
|
|
|
(311,695
|
)
|
|
|
(18
|
)
|
%
|
|
|
(195,733
|
)
|
|
|
(15
|
)
|
%
|
|
|
(115,962
|
)
|
|
|
59
|
|
%
|
Depreciation and amortization
|
|
|
(130,132
|
)
|
|
|
(7
|
)
|
%
|
|
|
(98,375
|
)
|
|
|
(8
|
)
|
%
|
|
|
(31,757
|
)
|
|
|
32
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
354,629
|
|
|
|
21
|
|
%
|
|
|
250,363
|
|
|
|
19
|
|
%
|
|
|
104,266
|
|
|
|
42
|
|
%
|
Interest expense, net
|
|
|
(72,470
|
)
|
|
|
(4
|
)
|
%
|
|
|
(55,113
|
)
|
|
|
(4
|
)
|
%
|
|
|
(17,357
|
)
|
|
|
31
|
|
%
|
Interest income
|
|
|
32,611
|
|
|
|
2
|
|
%
|
|
|
12,697
|
|
|
|
1
|
|
%
|
|
|
19,914
|
|
|
|
157
|
|
%
|
Foreign currency transaction gains,
net
|
|
|
3,357
|
|
|
|
|
|
|
|
|
9,210
|
|
|
|
1
|
|
%
|
|
|
(5,853
|
)
|
|
|
(64
|
)
|
%
|
Debt conversion expense
|
|
|
(8,930
|
)
|
|
|
(1
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
(8,930
|
)
|
|
|
NM
|
|
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
(79,327
|
)
|
|
|
(6
|
)
|
%
|
|
|
79,327
|
|
|
|
(100
|
)
|
%
|
Other expense, net
|
|
|
(8,621
|
)
|
|
|
(1
|
)
|
%
|
|
|
(2,320
|
)
|
|
|
|
|
|
|
|
(6,301
|
)
|
|
|
272
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax provision
and cumulative effect of change in accounting principle, net
|
|
|
300,576
|
|
|
|
17
|
|
%
|
|
|
135,510
|
|
|
|
11
|
|
%
|
|
|
165,066
|
|
|
|
122
|
|
%
|
Income tax provision
|
|
|
(125,795
|
)
|
|
|
(7
|
)
|
%
|
|
|
(79,191
|
)
|
|
|
(6
|
)
|
%
|
|
|
(46,604
|
)
|
|
|
59
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
change in accounting principle, net
|
|
|
174,781
|
|
|
|
10
|
|
%
|
|
|
56,319
|
|
|
|
5
|
|
%
|
|
|
118,462
|
|
|
|
210
|
|
%
|
Cumulative effect of change in
accounting principle, net of income taxes of $11,898 in 2004
|
|
|
|
|
|
|
|
|
|
|
|
970
|
|
|
|
|
|
|
|
|
(970
|
)
|
|
|
(100
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
174,781
|
|
|
|
10
|
|
%
|
|
$
|
57,289
|
|
|
|
5
|
|
%
|
|
$
|
117,492
|
|
|
|
205
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM-Not Meaningful
1. Operating
revenues
The $451.8 million, or 37%, increase in consolidated
service and other revenues from the year ended December 31,
2004 to the year ended December 31, 2005 was primarily a
result of a 29% increase in the average number of total digital
handsets in service, an increase in average consolidated
revenues per handset and an increase of $30.2 million, or
58%, in consolidated revenues generated from our handset
maintenance programs, primarily in Mexico and Brazil.
The $14.2 million, or 22%, increase in consolidated digital
handset and accessory revenues from the year ended
December 31, 2004 to the year ended December 31, 2005
was primarily due to a 38% increase in handset sales, as well as
a 2% increase in handset upgrades.
77
The $98.7 million, or 27%, increase in consolidated cost of
service from the year ended December 31, 2004 to the year
ended December 31, 2005 was principally a result of the
following:
|
|
|
|
|
a $51.5 million, or 29%, increase in consolidated
interconnect costs resulting from a 42% increase in consolidated
interconnect minutes of use;
|
|
|
|
a $34.8 million, or 28%, increase in consolidated direct
switch and transmitter and receiver site costs resulting from a
25% increase in the number of consolidated transmitter and
receiver sites in service from December 31, 2004 to
December 31, 2005; and
|
|
|
|
a $10.9 million, or 21%, increase in consolidated service
and repair costs mainly resulting from an increase in
subscribers participating under our handset maintenance
programs, primarily in Mexico and Brazil.
|
The $44.1 million, or 21%, increase in consolidated cost of
digital handset and accessory sales from the year ended
December 31, 2004 to the year ended December 31, 2005
was primarily due to a 38% increase in handset sales and a 2%
increase in handset upgrades.
|
|
3.
|
Selling and
marketing expenses
|
The $71.2 million, or 44%, increase in consolidated selling
and marketing expenses from the year ended December 31,
2004 to the year ended December 31, 2005 was principally a
result of the following:
|
|
|
|
|
a $41.5 million, or 82%, increase in consolidated indirect
commissions resulting from a 51% increase in handset sales
earned by outside dealers;
|
|
|
|
a $16.3 million, or 24%, increase in consolidated direct
commissions and payroll expenses largely due to an increase in
commissions incurred as a result of a 23% increase in handset
sales across all markets by internal sales personnel; and
|
|
|
|
a $10.1 million, or 28%, increase in consolidated
advertising expenses, primarily in Mexico and Brazil, mainly
related to the launch of new markets and increased advertising
initiatives related to overall subscriber growth.
|
|
|
4.
|
General and
administrative expenses
|
The $116.0 million, or 59%, increase in consolidated
general and administrative expenses from the year ended
December 31, 2004 to the year ended December 31, 2005
was primarily a result of the following:
|
|
|
|
|
a $77.3 million, or 81%, increase in consolidated other
general and administrative expenses largely due to
$18.6 million related to the
gross-up of
revenue-based taxes in Brazil, an increase in headcount and
facilities-related expenses due to continued subscriber growth
and an increase in corporate professional fees related to the
annual financial and Sarbanes-Oxley audit and legal services;
|
|
|
|
a $21.3 million, or 38%, increase in consolidated customer
care expenses resulting from an increase in payroll and related
expenses necessary to support a larger consolidated customer
base; and
|
|
|
|
a $12.3 million, or 165%, increase in consolidated bad debt
expense, which increased slightly as a percentage of revenues
from 0.6% in 2004 to 1.1% in 2005, primarily in Brazil and
Mexico.
|
The increase in general and administrative expenses was also due
to a $14.4 million reversal of contingent liabilities in
Brazil that we recorded as a reduction to general and
administrative expenses during the year ended December 31,
2004, partially offset by $1.7 million of net reversals of
contingent liabilities in Brazil related to the expiration of
the statute of limitations that we recorded as a reduction to
general and administrative expenses during the fourth quarter of
2005.
78
|
|
5.
|
Depreciation
and amortization
|
The $31.8 million, or 32%, increase in consolidated
depreciation and amortization from the year ended
December 31, 2004 to the year ended December 31, 2005
was primarily due to increased deprecation on a larger base of
consolidated property, plant and equipment resulting from
continued expansion of our digital mobile networks, partially
offset by a decrease in amortization. The decrease in
amortization resulted from reversals that we recorded primarily
in the fourth quarter of 2004 of certain valuation allowances
for deferred tax assets. We recorded the reversals of valuation
allowances as reductions to the intangible assets that existed
as of the date of our application of fresh-start accounting.
The $17.4 million, or 31%, increase in consolidated net
interest expense from the year ended December 31, 2004 to
the year ended December 31, 2005 was primarily due to a
$14.0 million increase in interest incurred related to our
syndicated loan facility in Mexico that we drew down in May 2005
and an $8.3 million increase in interest related to our
tower financing obligations in Mexico and Brazil, partially
offset by a $2.9 million decrease in interest resulting
from the principal pay-downs of our international equipment
facility in February 2004 and July 2004 and a $2.8 million
decrease in interest resulting from the retirement of our
13.0% senior secured discount notes during the first
quarter of 2004.
The $19.9 million, or 157%, increase in interest income
from the year ended December 31, 2004 to the year ended
December 31, 2005 was largely the result of increases in
Nextel Mexicos average consolidated cash balances due to
the draw-down of Nextel Mexicos $250.0 million
syndicated loan facility in May 2005 and cash generated from
operations, as well as interest earned in the U.S. on the
$350.0 million proceeds received from the issuance of our
2.75% convertible notes in August 2005.
|
|
8.
|
Foreign
currency transaction gains, net
|
Foreign currency transaction gains, net, during the years ended
December 31, 2004 and 2005 were primarily related to gains
in Mexico due to the impact of increases in the average values
of the Mexican peso on Nextel Mexicos
U.S. dollar-denominated liabilities.
|
|
9.
|
Debt
conversion expense
|
The $8.9 million debt conversion expense represents cash
consideration that we paid in connection with the conversion of
$88.5 million of our 3.5% convertible notes during the
second quarter of 2005.
|
|
10.
|
Loss on
early extinguishment of debt
|
The $79.3 million loss on early extinguishment of debt for
the year ended December 31, 2004 represents the loss that
we incurred in connection with the retirement of substantially
all of our 13.0% senior secured discount notes through a
cash tender offer in the first quarter of 2004.
The $6.3 million, or 272%, increase in other expense, net,
from the year ended December 31, 2004 to the year ended
December 31, 2005 was largely due to $4.2 million in
realized losses related to Nextel Mexicos hedge of capital
expenditures and handset purchases that we reclassified from
accumulated other comprehensive loss during 2005.
The $46.6 million, or 59%, increase in the income tax
provision from the year ended December 31, 2004 to the year
ended December 31, 2005 was primarily due to a
$165.1 million increase in income before tax,
79
partially offset by a decrease in our effective tax rate
attributable to a large addition to our deferred tax asset
valuation allowance in 2004 that did not recur in 2005.
|
|
13.
|
Cumulative
effect of change in accounting principle, net
|
The $1.0 million cumulative effect of change in accounting
principle for the year ended December 31, 2004 represents
net income for our foreign operating companies for the one month
ended December 31, 2003. We accounted for the elimination
of the one-month lag reporting policy as a change in accounting
principle in accordance with APB Opinion No. 20 effective
January 1, 2004. As a result, we treated the month of
December 2003, which was normally the first month in the fiscal
year of our foreign operating companies, as the lag month, and
our fiscal year for all of our foreign operating companies now
begins with January and ends with December.
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 charged management
fees of $68.1 million, $37.8 million and
$18.8 million to Nextel Mexico during the years ended
December 31, 2005, 2004 and 2003, respectively. The segment
information below does not reflect any of these management fees
because the amounts of these fees are not provided to or used by
our chief operating decision maker in making operating decisions
related to these segments. The tables below provide a summary of
the components of our consolidated segments for the years ended
December 31, 2005 and 2004. The results of Nextel Chile are
included in Corporate and other.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Selling,
|
|
|
Selling,
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
Consolidated
|
|
|
General and
|
|
|
General and
|
|
|
Segment
|
|
Year Ended
|
|
Operating
|
|
|
Operating
|
|
|
Cost of
|
|
|
Cost of
|
|
|
Administrative
|
|
|
Administrative
|
|
|
Earnings
|
|
December 31, 2005
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Expenses
|
|
|
Expenses
|
|
|
(Losses)
|
|
|
|
(dollars in thousands)
|
|
|
Nextel Mexico
|
|
$
|
1,013,320
|
|
|
|
58
|
%
|
|
$
|
(348,019
|
)
|
|
|
49
|
%
|
|
$
|
(265,603
|
)
|
|
|
49
|
%
|
|
$
|
399,698
|
|
Nextel Brazil
|
|
|
347,530
|
|
|
|
20
|
%
|
|
|
(181,418
|
)
|
|
|
25
|
%
|
|
|
(121,921
|
)
|
|
|
22
|
%
|
|
|
44,191
|
|
Nextel Argentina
|
|
|
269,572
|
|
|
|
15
|
%
|
|
|
(130,949
|
)
|
|
|
18
|
%
|
|
|
(67,791
|
)
|
|
|
13
|
%
|
|
|
70,832
|
|
Nextel Peru
|
|
|
114,201
|
|
|
|
7
|
%
|
|
|
(54,634
|
)
|
|
|
8
|
%
|
|
|
(33,196
|
)
|
|
|
6
|
%
|
|
|
26,371
|
|
Corporate and other
|
|
|
1,886
|
|
|
|
|
|
|
|
(1,493
|
)
|
|
|
|
|
|
|
(56,724
|
)
|
|
|
10
|
%
|
|
|
(56,331
|
)
|
Intercompany eliminations
|
|
|
(670
|
)
|
|
|
|
|
|
|
670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated
|
|
$
|
1,745,839
|
|
|
|
100
|
%
|
|
$
|
(715,843
|
)
|
|
|
100
|
%
|
|
$
|
(545,235
|
)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
Selling,
|
|
|
Selling,
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
|
|
|
Consolidated
|
|
|
General and
|
|
|
General and
|
|
|
Segment
|
|
Year Ended
|
|
Operating
|
|
|
Operating
|
|
|
Cost of
|
|
|
Cost of
|
|
|
Administrative
|
|
|
Administrative
|
|
|
Earnings
|
|
December 31, 2004
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Revenues
|
|
|
Expenses
|
|
|
Expenses
|
|
|
(Losses)
|
|
|
|
(dollars in thousands)
|
|
|
Nextel Mexico
|
|
$
|
775,925
|
|
|
|
61
|
%
|
|
$
|
(276,260
|
)
|
|
|
48
|
%
|
|
$
|
(175,415
|
)
|
|
|
49
|
%
|
|
$
|
324,250
|
|
Nextel Brazil
|
|
|
212,016
|
|
|
|
17
|
%
|
|
|
(145,343
|
)
|
|
|
26
|
%
|
|
|
(53,142
|
)
|
|
|
15
|
%
|
|
|
13,531
|
|
Nextel Argentina
|
|
|
194,799
|
|
|
|
15
|
%
|
|
|
(102,506
|
)
|
|
|
18
|
%
|
|
|
(50,197
|
)
|
|
|
14
|
%
|
|
|
42,096
|
|
Nextel Peru
|
|
|
96,070
|
|
|
|
7
|
%
|
|
|
(47,777
|
)
|
|
|
8
|
%
|
|
|
(28,441
|
)
|
|
|
8
|
%
|
|
|
19,852
|
|
Corporate and other
|
|
|
1,574
|
|
|
|
|
|
|
|
(1,684
|
)
|
|
|
|
|
|
|
(50,881
|
)
|
|
|
14
|
%
|
|
|
(50,991
|
)
|
Intercompany eliminations
|
|
|
(476
|
)
|
|
|
|
|
|
|
476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated
|
|
$
|
1,279,908
|
|
|
|
100
|
%
|
|
$
|
(573,094
|
)
|
|
|
100
|
%
|
|
$
|
(358,076
|
)
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A discussion of the results of operations in each of our
reportable segments is provided below.
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Mexicos
|
|
|
|
Year Ended
|
|
|
Mexicos
|
|
|
|
Change from
|
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
Previous Year
|
|
|
|
|
2005
|
|
|
Revenues
|
|
|
|
2004
|
|
|
Revenues
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
986,936
|
|
|
|
97
|
|
%
|
|
$
|
749,923
|
|
|
|
97
|
|
%
|
|
$
|
237,013
|
|
|
|
32
|
%
|
|
Digital handset and accessory
revenues
|
|
|
26,384
|
|
|
|
3
|
|
%
|
|
|
26,002
|
|
|
|
3
|
|
%
|
|
|
382
|
|
|
|
1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,013,320
|
|
|
|
100
|
|
%
|
|
|
775,925
|
|
|
|
100
|
|
%
|
|
|
237,395
|
|
|
|
31
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation and amortization included below)
|
|
|
(214,646
|
)
|
|
|
(21
|
)
|
%
|
|
|
(165,855
|
)
|
|
|
(22
|
)
|
%
|
|
|
(48,791
|
)
|
|
|
29
|
%
|
|
Cost of digital handset and
accessory sales
|
|
|
(133,373
|
)
|
|
|
(13
|
)
|
%
|
|
|
(110,405
|
)
|
|
|
(14
|
)
|
%
|
|
|
(22,968
|
)
|
|
|
21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(348,019
|
)
|
|
|
(34
|
)
|
%
|
|
|
(276,260
|
)
|
|
|
(36
|
)
|
%
|
|
|
(71,759
|
)
|
|
|
26
|
%
|
|
Selling and marketing expenses
|
|
|
(148,096
|
)
|
|
|
(15
|
)
|
%
|
|
|
(101,503
|
)
|
|
|
(13
|
)
|
%
|
|
|
(46,593
|
)
|
|
|
46
|
%
|
|
General and administrative expenses
|
|
|
(117,507
|
)
|
|
|
(11
|
)
|
%
|
|
|
(73,912
|
)
|
|
|
(9
|
)
|
%
|
|
|
(43,595
|
)
|
|
|
59
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings
|
|
|
399,698
|
|
|
|
40
|
|
%
|
|
|
324,250
|
|
|
|
42
|
|
%
|
|
|
75,448
|
|
|
|
23
|
%
|
|
Depreciation and amortization
|
|
|
(69,300
|
)
|
|
|
(7
|
)
|
%
|
|
|
(67,322
|
)
|
|
|
(9
|
)
|
%
|
|
|
(1,978
|
)
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
330,398
|
|
|
|
33
|
|
%
|
|
|
256,928
|
|
|
|
33
|
|
%
|
|
|
73,470
|
|
|
|
29
|
%
|
|
Interest expense, net
|
|
|
(28,670
|
)
|
|
|
(3
|
)
|
%
|
|
|
(18,902
|
)
|
|
|
(2
|
)
|
%
|
|
|
(9,768
|
)
|
|
|
52
|
%
|
|
Interest income
|
|
|
22,465
|
|
|
|
2
|
|
%
|
|
|
3,648
|
|
|
|
|
|
|
|
|
18,817
|
|
|
|
NM
|
|
|
Foreign currency transaction
gains, net
|
|
|
2,602
|
|
|
|
|
|
|
|
|
8,613
|
|
|
|
1
|
|
%
|
|
|
(6,011
|
)
|
|
|
(70
|
)
|
%
|
Other expense, net
|
|
|
(4,167
|
)
|
|
|
|
|
|
|
|
(576
|
)
|
|
|
|
|
|
|
|
(3,591
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax and
cumulative effect of change in accounting principle, net
|
|
$
|
322,628
|
|
|
|
32
|
|
%
|
|
$
|
249,711
|
|
|
|
32
|
|
%
|
|
$
|
72,917
|
|
|
|
29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM-Not Meaningful
Nextel Mexico is our largest and most profitable market segment,
comprising 58% of our consolidated revenues for the year ended
December 31, 2005. Additional subscriber growth in 2005 was
the result of selectively expanding coverage in new markets and
improving network quality and capacity. Coverage expansion and
network improvements were supported by capital expenditures
totaling $208.3 million for the year ended
December 31, 2005 and a 44% share of all capital
expenditure investments that we made during 2005. Average
revenues per subscriber improved in 2005 due to the
implementation of new rate plans, increased minutes of use in
interconnect and dispatch traffic and favorable exchange rates.
Nextel Mexico also decreased its customer turnover in 2005
compared to 2004 by making concentrated investments in customer
retention programs.
In accordance with generally accepted accounting principles in
the United States, we translated Nextel Mexicos results of
operations using the average exchange rate for the year ended
December 31, 2005. The average exchange rate of the Mexican
peso for the year ended December 31, 2005 appreciated in
value against the U.S. dollar by 4% from the year ended
December 31, 2004. As a result, compared to 2004, the
components
81
of Nextel Mexicos results of operations for 2005 after
translation into U.S. dollars reflect higher increases than
would have occurred if it were not for the impact of the
appreciation in the average value of the peso.
The $237.0 million, or 32%, increase in service and other
revenues from the year ended December 31, 2004 to the year
ended December 31, 2005 was primarily due to the following:
|
|
|
|
|
a 28% increase in the average number of digital handsets in
service resulting from Nextel Mexicos expansion of service
coverage into new markets in 2005, as well as growth in existing
markets;
|
|
|
|
a $7.7 million, or 28%, increase in revenues generated from
Nextel Mexicos handset maintenance program due to growth
in the number of Nextel Mexicos customers that are
utilizing this program; and
|
|
|
|
an increase in average revenues per handset on a local currency
basis largely due to price increases applied to the existing
customer base, as well as higher access revenues.
|
The $48.8 million, or 29%, increase in cost of service from
the year ended December 31, 2004 to the year ended
December 31, 2005 was principally due to the following:
|
|
|
|
|
a $29.8 million, or 41%, increase in interconnect costs
generally resulting from a 45% increase in interconnect minutes
of use;
|
|
|
|
a $12.0 million, or 18%, increase in direct switch and
transmitter and receiver site costs resulting from a 34%
increase in the number of transmitter and receiver sites in
service from December 31, 2004 to December 31, 2005,
partially offset by a $3.4 million reduction in certain
spectrum fees due to a favorable court ruling received during
the fourth quarter of 2005; and
|
|
|
|
a $7.6 million, or 37%, increase in service and repair
costs largely due to increased activity under Nextel
Mexicos handset maintenance program.
|
The $23.0 million, or 21%, increase in cost of digital
handset and accessory sales from the year ended
December 31, 2004 to the year ended December 31, 2005
was primarily due to a 43% increase in handset sales, as well as
an increase in handset upgrades.
|
|
3.
|
Selling and
marketing expenses
|
The $46.6 million, or 46%, increase in selling and
marketing expenses from the year ended December 31, 2004 to
the year ended December 31, 2005 was primarily a result of
the following:
|
|
|
|
|
a $32.4 million, or 92%, increase in indirect commissions
primarily due to a 59% increase in handset sales by Nextel
Mexicos outside dealers and higher indirect commission
earned per handset sale;
|
|
|
|
a $7.5 million, or 21%, increase in direct commissions and
payroll expenses principally due to a 15% increase in handset
sales by Nextel Mexicos sales personnel; and
|
|
|
|
a $4.7 million, or 18%, increase in advertising costs
largely due to the launch of new markets, the launch of new rate
plans in 2005, international Direct Connect campaigns, which
were generally launched in the middle of 2004, and objectives to
reinforce market awareness of the Nextel brand name.
|
82
|
|
4.
|
General and
administrative expenses
|
The $43.6 million, or 59%, increase in general and
administrative expenses from the year ended December 31,
2004 to the year ended December 31, 2005 was largely a
result of the following:
|
|
|
|
|
a $24.7 million, or 81%, increase in general corporate
costs resulting from an increase in payroll and related expenses
caused by more general and administrative personnel, higher
business insurance expenses and increased facilities costs due
to expansion into new markets;
|
|
|
|
a $9.6 million, or 34%, increase in customer care expenses
primarily due to higher payroll and employee related expenses
caused by an increase in customer care personnel necessary to
support a larger customer base; and
|
|
|
|
a $6.1 million increase in bad debt expense, which
increased slightly as a percentage of revenues from 0.4% in 2004
to 0.9% in 2005.
|
|
|
5.
|
Depreciation
and amortization
|
Depreciation and amortization increased $2.0 million, or
3%, from the year ended December 31, 2004 to the year ended
December 31, 2005 due to an increase in depreciation,
partially offset by a decrease in amortization. Depreciation
increased $11.6 million, or 22%, primarily as a result of
an increase in Nextel Mexicos property, plant and
equipment mostly due to the continued build-out of Nextel
Mexicos digital mobile network. This increase was
partially offset by a $9.6 million, or 68%, decrease in
amortization due to a reversal recorded primarily in the fourth
quarter of 2004 of certain valuation allowances for deferred tax
assets that were created in connection with our application of
fresh-start accounting and which we recorded as a reduction to
intangible assets.
The $9.8 million, or 52%, increase in net interest expense
from the year ended December 31, 2004 to the year ended
December 31, 2005 was largely a result of
$14.0 million of interest expense incurred in 2005 on
Nextel Mexicos syndicated loan facility, which we drew
down in May 2005, and an increase in interest related to tower
financing obligations, partially offset by a decrease in
interest resulting from the principal pay-downs on Nextel
Mexicos portion of the international equipment facility in
February and July 2004.
The $18.8 million increase in interest income from the year
ended December 31, 2004 to the year ended December 31,
2005 was 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 gains, net
|
Foreign currency transaction gains of $2.6 million and
$8.6 million for the years ended December 31, 2005 and
2004 were 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.
Other expense, net of $4.2 million for the year ended
December 31, 2005 was due to $4.2 million in realized
losses related to Nextel Mexicos hedge of capital
expenditures and handset purchases that we reclassified from
accumulated other comprehensive loss during 2005.
83
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Brazils
|
|
|
|
Year Ended
|
|
|
Brazils
|
|
|
|
Change from
|
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
|
Previous Year
|
|
|
|
|
2005
|
|
|
Revenues
|
|
|
|
2004
|
|
|
Revenues
|
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
|
(dollars in thousands)
|
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
321,655
|
|
|
|
93
|
|
%
|
|
$
|
192,830
|
|
|
|
91
|
|
%
|
|
$
|
128,825
|
|
|
|
67
|
%
|
|
Digital handset and accessory
revenues
|
|
|
25,875
|
|
|
|
7
|
|
%
|
|
|
19,186
|
|
|
|
9
|
|
%
|
|
|
6,689
|
|
|
|
35
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
347,530
|
|
|
|
100
|
|
%
|
|
|
212,016
|
|
|
|
100
|
|
%
|
|
|
135,514
|
|
|
|
64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation and amortization included below)
|
|
|
(122,267
|
)
|
|
|
(35
|
)
|
%
|
|
|
(95,138
|
)
|
|
|
(45
|
)
|
%
|
|
|
(27,129
|
)
|
|
|
29
|
%
|
|
Cost of digital handset and
accessory sales
|
|
|
(59,151
|
)
|
|
|
(17
|
)
|
%
|
|
|
(50,205
|
)
|
|
|
(24
|
)
|
%
|
|
|
(8,946
|
)
|
|
|
18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(181,418
|
)
|
|
|
(52
|
)
|
%
|
|
|
(145,343
|
)
|
|
|
(69
|
)
|
%
|
|
|
(36,075
|
)
|
|
|
25
|
%
|
|
Selling and marketing expenses
|
|
|
(46,949
|
)
|
|
|
(13
|
)
|
%
|
|
|
(29,161
|
)
|
|
|
(14
|
)
|
%
|
|
|
(17,788
|
)
|
|
|
61
|
%
|
|
General and administrative expenses
|
|
|
(74,972
|
)
|
|
|
(22
|
)
|
%
|
|
|
(23,981
|
)
|
|
|
(11
|
)
|
%
|
|
|
(50,991
|
)
|
|
|
213
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings
|
|
|
44,191
|
|
|
|
13
|
|
%
|
|
|
13,531
|
|
|
|
6
|
|
%
|
|
|
30,660
|
|
|
|
227
|
%
|
|
Depreciation and amortization
|
|
|
(31,768
|
)
|
|
|
(9
|
)
|
%
|
|
|
(13,081
|
)
|
|
|
(6
|
)
|
%
|
|
|
(18,687
|
)
|
|
|
143
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
12,423
|
|
|
|
4
|
|
%
|
|
|
450
|
|
|
|
|
|
|
|
|
11,973
|
|
|
|
NM
|
|
|
Interest expense, net
|
|
|
(18,113
|
)
|
|
|
(5
|
)
|
%
|
|
|
(12,054
|
)
|
|
|
(6
|
)
|
%
|
|
|
(6,059
|
)
|
|
|
50
|
%
|
|
Interest income
|
|
|
1,941
|
|
|
|
|
|
|
|
|
2,733
|
|
|
|
1
|
|
%
|
|
|
(792
|
)
|
|
|
(29
|
)
|
%
|
Foreign currency transaction gains,
net
|
|
|
225
|
|
|
|
|
|
|
|
|
575
|
|
|
|
|
|
|
|
|
(350
|
)
|
|
|
(61
|
)
|
%
|
Other expense, net
|
|
|
(3,817
|
)
|
|
|
(1
|
)
|
%
|
|
|
(1,819
|
)
|
|
|
|
|
|
|
|
(1,998
|
)
|
|
|
110
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax and
cumulative effect of change in accounting principle, net
|
|
$
|
(7,341
|
)
|
|
|
(2
|
)
|
%
|
|
$
|
(10,115
|
)
|
|
|
(5
|
)
|
%
|
|
$
|
2,774
|
|
|
|
(27
|
)
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM-Not Meaningful
In 2004 and 2005, Nextel Brazils subscriber base and
segment earnings increased as a result of a continued focus on
customer service, the expansion of its digital mobile network
and significant improvements in its operating cost structure. In
addition to these factors, as a result of the improvement in the
Brazilian economy over the same period, Nextel Brazil continued
to grow its existing markets and made significant investments in
new markets.
In accordance with accounting principles generally accepted in
the United States, we translated Nextel Brazils results of
operations using the average exchange rate for the year ended
December 31, 2005. The average exchange rate for the year
ended December 31, 2005 appreciated against the
U.S. dollar by 20% from the year ended December 31,
2004. As a result, the components of Nextel Brazils
results of operations for the year ended December 31, 2005
after translation into U.S. dollars reflect significantly
higher increases than would have occurred if it were not for the
impact of the appreciation in the average value of the real.
The $128.8 million, or 67%, increase in service and other
revenues from the year ended December 31, 2004 to the year
ended December 31, 2005 was primarily a result of the
following:
|
|
|
|
|
a 28% increase in the average number of digital handsets in
service resulting from growth in Nextel Brazils existing
markets, as well as expansion into new markets;
|
|
|
|
$18.6 million related to the
gross-up of
revenue-based taxes that were presented on a net basis in 2004;
|
|
|
|
the 20% appreciation of the Brazilian real against the
U.S. dollar; and
|
|
|
|
an $11.6 million increase, or 174%, in revenues generated
from Nextel Brazils handset maintenance program due to
growth in Nextel Brazils existing markets, as well as
expansion into new markets.
|
84
The $6.7 million, or 35%, increase in digital handset and
accessory revenues from the year ended December 31, 2004 to
the year ended December 31, 2005 was largely the result of
a 36% increase in handset sales.
The $27.1 million, or 29%, increase in cost of service from
the year ended December 31, 2004 to the year ended
December 31, 2005 was primarily due to the following:
|
|
|
|
|
a $17.5 million, or 59%, increase in direct switch and
transmitter and receiver site costs resulting from a 25%
increase in the number of transmitter and receiver sites in
service from December 31, 2004 to December 31, 2005,
as well as an increase in cost per site in service;
|
|
|
|
a $4.4 million, or 8%, increase in interconnect costs
mainly resulting from a 43% increase in interconnect minutes of
use, partially offset by a significant reduction of these costs
due to amended interconnect regulations implemented in May 2005;
|
|
|
|
a $3.1 million, or 45%, increase in payroll and employee
related costs resulting from an increase in personnel and
various training costs; and
|
|
|
|
a $2.7 million, or 31%, increase in service and repair
costs primarily due to an increase in subscribers participating
under Nextel Brazils handset maintenance program.
|
The $8.9 million, or 18%, increase in cost of digital
handset and accessory sales from the year ended
December 31, 2004 to the year ended December 31, 2005
was primarily due to a 36% increase in handset sales.
All of these increases also resulted from the 20% appreciation
of the Brazilian real against the U.S. dollar.
|
|
3.
|
Selling and
marketing expenses
|
The $17.8 million, or 61%, increase in selling and
marketing expenses from the year ended December 31, 2004 to
the year ended December 31, 2005 was principally due to the
following:
|
|
|
|
|
a $7.1 million, or 50%, increase in payroll and direct
commissions largely as a result of a 37% increase in handset
sales by Nextel Brazils sales force;
|
|
|
|
a $4.8 million, or 73%, increase in indirect commissions
resulting from a 36% increase in handset sales by Nextel
Brazils outside dealers, as well as increases in indirect
commissions earned per handset sale; and
|
|
|
|
a $4.7 million, or 87%, increase in advertising expenses
due to the implementation of more advertising campaigns during
2005 primarily as a result of increased initiatives related to
overall subscriber growth and the launch of new markets.
|
All of these increases also resulted from the 20% appreciation
of the Brazilian real against the U.S. dollar.
|
|
4.
|
General and
administrative expenses
|
The $51.0 million, or 213%, increase in general and
administrative expenses from the year ended December 31,
2004 to the year ended December 31, 2005 was primarily a
result of the following:
|
|
|
|
|
a $38.1 million increase in general corporate costs mainly
due to $18.6 million related to the
gross-up of
revenue-based taxes that were presented on a net basis in 2004
and a $14.4 million reversal of contingent liabilities that
we recorded as a reduction to general and administrative
expenses during 2004 related to the expiration of the statute of
limitations and the favorable resolution of other contingencies,
partially offset by $1.7 million in contingency reversals
recorded in the fourth quarter of 2005;
|
85
|
|
|
|
|
an $8.7 million, or 65%, increase in customer care expenses
resulting from an increase in payroll and related expenses due
to more customer care personnel necessary to support a larger
customer base; and
|
|
|
|
a $4.4 million increase in bad debt expense, which
increased as a percentage of revenues from 1.7% in 2004 to 2.3%
in 2005, primarily related to certain municipal accounts that
temporarily suspended payments of all services, but which began
to pay in mid-2005.
|
All of these increases also resulted from the 20% appreciation
of the Brazilian real against the U.S. dollar.
|
|
5.
|
Depreciation
and amortization
|
The $18.7 million, or 143%, increase in depreciation and
amortization from the year ended December 31, 2004 to the
year ended December 31, 2005 was primarily due to increased
depreciation on Nextel Brazils significantly higher
property, plant and equipment base primarily as a result of
accelerating the build-out of Nextel Brazils digital
mobile network, as well as the 20% appreciation of the Brazilian
real against the U.S. dollar.
6. Interest
expense, net
The $6.1 million, or 50%, increase in net interest expense,
from the year ended December 31, 2004 to the year ended
December 31, 2005 was primarily the result of increased
interest incurred on Nextel Brazils tower financing
obligations, as well as the 20% appreciation of the Brazilian
real against the U.S. dollar.
7. Other
expense, net
The $2.0 million, or 110%, increase in other expense from
the year ended December 31, 2004 to the year ended
December 31, 2005 was primarily due to more reversals of
monetary corrections on certain contingencies during 2004
compared to 2005.
86
d. Nextel
Argentina
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Argentinas
|
|
|
Year Ended
|
|
|
Argentinas
|
|
|
Change from
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
December 31,
|
|
|
Operating
|
|
|
Previous Year
|
|
|
|
2005
|
|
|
Revenues
|
|
|
2004
|
|
|
Revenues
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
248,262
|
|
|
|
92
|
%
|
|
$
|
177,658
|
|
|
|
91
|
%
|
|
$
|
70,604
|
|
|
|
40
|
%
|
Digital handset and accessory
revenues
|
|
|
21,310
|
|
|
|
8
|
%
|
|
|
17,141
|
|
|
|
9
|
%
|
|
|
4,169
|
|
|
|
24
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
269,572
|
|
|
|
100
|
%
|
|
|
194,799
|
|
|
|
100
|
%
|
|
|
74,773
|
|
|
|
38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation and amortization included below)
|
|
|
(90,625
|
)
|
|
|
(34
|
)%
|
|
|
(69,483
|
)
|
|
|
(36
|
)%
|
|
|
(21,142
|
)
|
|
|
30
|
%
|
Cost of digital handset and
accessory sales
|
|
|
(40,324
|
)
|
|
|
(15
|
)%
|
|
|
(33,023
|
)
|
|
|
(17
|
)%
|
|
|
(7,301
|
)
|
|
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(130,949
|
)
|
|
|
(49
|
)%
|
|
|
(102,506
|
)
|
|
|
(53
|
)%
|
|
|
(28,443
|
)
|
|
|
28
|
%
|
Selling and marketing expenses
|
|
|
(21,254
|
)
|
|
|
(8
|
)%
|
|
|
(16,245
|
)
|
|
|
(8
|
)%
|
|
|
(5,009
|
)
|
|
|
31
|
%
|
General and administrative expenses
|
|
|
(46,537
|
)
|
|
|
(17
|
)%
|
|
|
(33,952
|
)
|
|
|
(17
|
)%
|
|
|
(12,585
|
)
|
|
|
37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings
|
|
|
70,832
|
|
|
|
26
|
%
|
|
|
42,096
|
|
|
|
22
|
%
|
|
|
28,736
|
|
|
|
68
|
%
|
Depreciation and amortization
|
|
|
(16,460
|
)
|
|
|
(6
|
)%
|
|
|
(11,512
|
)
|
|
|
(6
|
)%
|
|
|
(4,948
|
)
|
|
|
43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
54,372
|
|
|
|
20
|
%
|
|
|
30,584
|
|
|
|
16
|
%
|
|
|
23,788
|
|
|
|
78
|
%
|
Interest expense, net
|
|
|
(5,407
|
)
|
|
|
(1
|
)%
|
|
|
(3,161
|
)
|
|
|
(2
|
)%
|
|
|
(2,246
|
)
|
|
|
71
|
%
|
Interest income
|
|
|
661
|
|
|
|
|
|
|
|
416
|
|
|
|
|
|
|
|
245
|
|
|
|
59
|
%
|
Foreign currency transaction gains
(losses), net
|
|
|
500
|
|
|
|
|
|
|
|
(266
|
)
|
|
|
|
|
|
|
766
|
|
|
|
(288
|
)%
|
Other (expense) income, net
|
|
|
(33
|
)
|
|
|
|
|
|
|
184
|
|
|
|
|
|
|
|
(217
|
)
|
|
|
(118
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax and
cumulative effect of change in accounting principle, net
|
|
$
|
50,093
|
|
|
|
19
|
%
|
|
$
|
27,757
|
|
|
|
14
|
%
|
|
$
|
22,336
|
|
|
|
80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Since the beginning of 2003, the macroeconomic environment in
Argentina has improved from the adverse conditions existing in
2002 as evidenced by the appreciation of the Argentine peso
relative to the U.S. dollar in 2003, 2004, and, to a lesser
extent, in 2005 and the continued expansion of the gross
domestic product. Consistent with this improved economic
environment, in 2004 and 2005, Nextel Argentina continued to
grow its subscriber base and increase its operating revenues
while significantly reducing its customer turnover rate and bad
debt expense.
In accordance with accounting principles generally accepted in
the United States, we translated Nextel Argentinas results
of operations using the average exchange rate for the years
ended December 31, 2005 and 2004. The average exchange rate
of the Argentine peso for the year ended December 31, 2005
appreciated modestly against the U.S. dollar by 1% from the
year ended December 31, 2004. As a result, the components
of Nextel Argentinas results of operations for 2005 after
translation into U.S. dollars are generally comparable to
its results of operations for 2004.
87
1. Operating
revenues
The $70.6 million, or 40%, increase in service and other
revenues from the year ended December 31, 2004 to the year
ended December 31, 2005 was primarily a result of the
following:
|
|
|
|
|
a 34% increase in the average number of digital handsets in
service, resulting mostly from growth in Nextel Argentinas
existing markets; and
|
|
|
|
a $10.4 million, or 80%, increase in revenues generated
from Nextel Argentinas handset maintenance program due to
growth in Nextel Argentinas existing markets.
|
The $4.2 million, or 24%, increase in digital handset and
accessory revenues from the year ended December 31, 2004 to
the year ended December 31, 2005 was primarily due to a 27%
increase in handset sales, as well as a 34% increase in handset
upgrades.
The $21.1 million, or 30%, increase in cost of service from
the year ended December 31, 2004 to the year ended
December 31, 2005 was principally a result of the following:
|
|
|
|
|
a $13.8 million, or 39%, increase in interconnect costs
primarily caused by a 33% increase in interconnect minutes of
use, as well as an increase in termination fees between
mobile-to-mobile
handsets; and
|
|
|
|
a $6.3 million, or 39%, increase in direct switch and
transmitter and receiver site costs due to a 15% increase in the
number of transmitter and receiver sites in service from
December 31, 2004 to December 31, 2005, as well as an
increase in new claims on cell sites by municipalities.
|
The $7.3 million, or 22%, increase in cost of digital
handset and accessory sales was largely a result of a 27%
increase in handset sales and a $3.4 million increase in
the cost of handset upgrades due to a significant change in the
mix of handsets upgraded to more expensive models.
|
|
3.
|
Selling and
marketing expenses
|
The $5.0 million, or 31%, increase in selling and marketing
expenses from the year ended December 31, 2004 to the year
ended December 31, 2005 was largely a result of the
following:
|
|
|
|
|
a $2.7 million, or 47%, increase in indirect commissions
primarily due to a 40% increase in handset sales obtained
through indirect channels;
|
|
|
|
a $1.1 million, or 16%, increase in other sales costs
largely due to an increase in direct commissions resulting from
a 14% increase in handset sales by Nextel Argentinas sales
force; and
|
|
|
|
a $1.0 million, or 41%, increase in advertising expenses
primarily related to efforts to reinforce market awareness of
the Nextel brand name and to support the launch of the Atlantic
Coast region, as well as increased initiatives related to
overall subscriber growth.
|
|
|
4.
|
General and
administrative expenses
|
The $12.6 million, or 37%, increase in general and
administrative expenses from the year ended December 31,
2004 to the year ended December 31, 2005 was largely a
result of the following:
|
|
|
|
|
a $7.0 million, or 30%, increase in general corporate costs
resulting from certain revenue-based taxes and an increase in
payroll and related expenses caused by an increase in general
and administrative personnel;
|
|
|
|
a $2.2 million, or 33%, increase in customer care expenses
primarily as a result of an increase in customer care and
billing operations personnel caused by the need to support a
growing customer base;
|
88
|
|
|
|
|
a $2.0 million increase in bad debt expense, which
increased as a percentage of revenue from 0.1% in 2004 to 0.8%
in 2005, largely as the result of higher revenues, as well as a
change in Nextel Argentinas customer mix as its customer
base continues to expand; and
|
|
|
|
a $1.5 million, or 37%, increase in information technology
expenses due to higher software maintenance costs associated
with a larger customer base and increases in payroll and related
expenses caused by an increase in information technology
personnel.
|
|
|
5.
|
Depreciation
and amortization
|
The $4.9 million, or 43%, increase in depreciation and
amortization from the year ended December 31, 2004 to the
year ended December 31, 2005 was primarily due to a
$4.0 million, or 35%, increase in depreciation resulting
from a larger property, plant and equipment base related to the
continued build-out of Nextel Argentinas digital mobile
network.
6. Interest
expense, net
The $2.2 million, or 71%, increase in net interest expense
from the year ended December 31, 2004 to the year ended
December 31, 2005 was principally the result of interest
related to Nextel Argentinas Universal Service tax
contingency related to amounts due to customers.
89
e. Nextel
Peru
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
Nextel
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Perus
|
|
|
Year Ended
|
|
|
Perus
|
|
|
Change from
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
December 31,
|
|
|
Operating
|
|
|
Previous Year
|
|
|
|
2005
|
|
|
Revenues
|
|
|
2004
|
|
|
Revenues
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
108,544
|
|
|
|
95
|
%
|
|
$
|
93,328
|
|
|
|
97
|
%
|
|
$
|
15,216
|
|
|
|
16
|
%
|
Digital handset and accessory
revenues
|
|
|
5,657
|
|
|
|
5
|
%
|
|
|
2,742
|
|
|
|
3
|
%
|
|
|
2,915
|
|
|
|
106
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114,201
|
|
|
|
100
|
%
|
|
|
96,070
|
|
|
|
100
|
%
|
|
|
18,131
|
|
|
|
19
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation included below)
|
|
|
(36,290
|
)
|
|
|
(32
|
)%
|
|
|
(34,298
|
)
|
|
|
(36
|
)%
|
|
|
(1,992
|
)
|
|
|
6
|
%
|
Cost of digital handset and
accessory sales
|
|
|
(18,344
|
)
|
|
|
(16
|
)%
|
|
|
(13,479
|
)
|
|
|
(14
|
)%
|
|
|
(4,865
|
)
|
|
|
36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(54,634
|
)
|
|
|
(48
|
)%
|
|
|
(47,777
|
)
|
|
|
(50
|
)%
|
|
|
(6,857
|
)
|
|
|
14
|
%
|
Selling and marketing expenses
|
|
|
(12,606
|
)
|
|
|
(11
|
)%
|
|
|
(10,773
|
)
|
|
|
(11
|
)%
|
|
|
(1,833
|
)
|
|
|
17
|
%
|
General and administrative expenses
|
|
|
(20,590
|
)
|
|
|
(18
|
)%
|
|
|
(17,668
|
)
|
|
|
(18
|
)%
|
|
|
(2,922
|
)
|
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings
|
|
|
26,371
|
|
|
|
23
|
%
|
|
|
19,852
|
|
|
|
21
|
%
|
|
|
6,519
|
|
|
|
33
|
%
|
Depreciation and amortization
|
|
|
(8,718
|
)
|
|
|
(8
|
)%
|
|
|
(5,795
|
)
|
|
|
(6
|
)%
|
|
|
(2,923
|
)
|
|
|
50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
17,653
|
|
|
|
15
|
%
|
|
|
14,057
|
|
|
|
15
|
%
|
|
|
3,596
|
|
|
|
26
|
%
|
Interest expense, net
|
|
|
(152
|
)
|
|
|
|
|
|
|
(188
|
)
|
|
|
|
|
|
|
36
|
|
|
|
(19
|
)%
|
Interest income
|
|
|
880
|
|
|
|
1
|
%
|
|
|
2,707
|
|
|
|
3
|
%
|
|
|
(1,827
|
)
|
|
|
(67
|
)%
|
Foreign currency transaction
gains, net
|
|
|
20
|
|
|
|
|
|
|
|
273
|
|
|
|
|
|
|
|
(253
|
)
|
|
|
(93
|
)%
|
Other (expense) income, net
|
|
|
(11
|
)
|
|
|
|
|
|
|
483
|
|
|
|
|
|
|
|
(494
|
)
|
|
|
(102
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax and
cumulative effect of change in accounting principle, net
|
|
$
|
18,390
|
|
|
|
16
|
%
|
|
$
|
17,332
|
|
|
|
18
|
%
|
|
$
|
1,058
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Peruvian economy showed continuous growth in terms of gross
domestic product over the four years ending December 31,
2005, with internal demand and private investment acting as
engines of growth in addition to the traditional and
non-traditional export sectors of the economy. This favorable
economic situation supported Nextel Perus growth in its
subscriber base, operating revenues and operating income in 2004
and 2005.
Because the U.S. dollar is the functional currency in Peru,
Nextel Perus results of operations are not significantly
impacted by changes in the U.S. dollar to Peruvian sol
exchange rate.
The $15.2 million, or 16%, increase in service and other
revenues from the year ended December 31, 2004 to the year
ended December 31, 2005 was primarily due to a 31% increase
in the average number of digital handsets in service, partially
offset by a decrease in average revenue per handset mainly
resulting from increased competition.
The $2.9 million, or 106%, increase in digital handset and
accessory revenues from the year ended December 31, 2004 to
the year ended December 31, 2005 was primarily the result
of a 41% increase in
90
handset sales mainly as a result of a stronger local economy, as
well as Nextel Perus strategy of increasing penetration in
small to mid-size accounts.
The $2.0 million, or 6%, increase in cost of service from
the year ended December 31, 2004 to the year ended
December 31, 2005 was primarily due to a $3.7 million,
or 22%, increase in interconnect costs largely as a result of a
50% increase in interconnect minutes of use, partially offset by
a $0.7 million, or 14%, decrease in service and repair
costs.
The $4.9 million, or 36%, increase in cost of digital
handsets and accessories from the year ended December 31,
2004 to the year ended December 31, 2005 was largely a
result of 41% increase in handset sales.
|
|
3.
|
Selling and
marketing expenses
|
The $1.8 million, or 17%, increase in selling and marketing
expenses from the year ended December 31, 2004 to the year
ended December 31, 2005 was primarily a result of a
$1.4 million, or 71%, increase in indirect commissions
primarily due to a 61% increase in handset sales by Nextel
Perus outside dealers, as well as a $0.7 million, or
13%, increase in other sales costs largely due to an increase in
direct commissions resulting from a 26% increase in handset
sales by Nextel Perus sales force.
|
|
4.
|
General and
administrative expenses
|
The $2.9 million, or 17%, increase in general and
administrative expenses from the year ended December 31,
2004 to the year ended December 31, 2005 was principally
the result of a $2.0 million, or 33%, increase in general
corporate costs largely due to increases in general and
administrative personnel and various taxes paid to regulatory
agencies. The remaining increase is due to higher payroll and
related expenses for customer care personnel necessary to
support a larger customer base.
|
|
5.
|
Depreciation
and amortization
|
The $2.9 million, or 50%, increase in depreciation and
amortization from the year ended December 31, 2004 to the
year ended December 31, 2005 was primarily due to increased
depreciation resulting from a larger property, plant and
equipment base.
91
f. Corporate
and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
and other
|
|
|
Year Ended
|
|
|
and other
|
|
|
Change from
|
|
|
|
December 31,
|
|
|
Operating
|
|
|
December 31,
|
|
|
Operating
|
|
|
Previous Year
|
|
|
|
2005
|
|
|
Revenues
|
|
|
2004
|
|
|
Revenues
|
|
|
Dollars
|
|
|
Percent
|
|
|
|
(dollars in thousands)
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
1,886
|
|
|
|
100
|
%
|
|
$
|
1,574
|
|
|
|
100
|
%
|
|
$
|
312
|
|
|
|
20
|
%
|
Digital handset and accessory
revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,886
|
|
|
|
100
|
%
|
|
|
1,574
|
|
|
|
100
|
%
|
|
|
312
|
|
|
|
20
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation and amortization included below)
|
|
|
(1,493
|
)
|
|
|
(79
|
)%
|
|
|
(1,684
|
)
|
|
|
(107
|
)%
|
|
|
191
|
|
|
|
(11
|
)%
|
Cost of digital handset and
accessory sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,493
|
)
|
|
|
(79
|
)%
|
|
|
(1,684
|
)
|
|
|
(107
|
)%
|
|
|
191
|
|
|
|
(11
|
)%
|
Selling and marketing expenses
|
|
|
(4,635
|
)
|
|
|
(246
|
)%
|
|
|
(4,661
|
)
|
|
|
(296
|
)%
|
|
|
26
|
|
|
|
(1
|
)%
|
General and administrative expenses
|
|
|
(52,089
|
)
|
|
|
NM
|
|
|
|
(46,220
|
)
|
|
|
NM
|
|
|
|
(5,869
|
)
|
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment losses
|
|
|
(56,331
|
)
|
|
|
NM
|
|
|
|
(50,991
|
)
|
|
|
NM
|
|
|
|
(5,340
|
)
|
|
|
10
|
%
|
Depreciation and amortization
|
|
|
(4,279
|
)
|
|
|
(227
|
)%
|
|
|
(1,080
|
)
|
|
|
(69
|
)%
|
|
|
(3,199
|
)
|
|
|
296
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(60,610
|
)
|
|
|
NM
|
|
|
|
(52,071
|
)
|
|
|
NM
|
|
|
|
(8,539
|
)
|
|
|
16
|
%
|
Interest expense, net
|
|
|
(20,202
|
)
|
|
|
NM
|
|
|
|
(20,950
|
)
|
|
|
NM
|
|
|
|
748
|
|
|
|
(4
|
)%
|
Interest income
|
|
|
6,738
|
|
|
|
357
|
%
|
|
|
3,335
|
|
|
|
212
|
%
|
|
|
3,403
|
|
|
|
102
|
%
|
Foreign currency transaction
gains, net
|
|
|
10
|
|
|
|
1
|
%
|
|
|
15
|
|
|
|
1
|
%
|
|
|
(5
|
)
|
|
|
(33
|
)%
|
Debt conversion expense
|
|
|
(8,930
|
)
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
(8,930
|
)
|
|
|
NM
|
|
Loss on early extinguishment of
debt
|
|
|
|
|
|
|
|
|
|
|
(79,327
|
)
|
|
|
NM
|
|
|
|
79,327
|
|
|
|
(100
|
)%
|
Other expense, net
|
|
|
(593
|
)
|
|
|
(31
|
)%
|
|
|
(449
|
)
|
|
|
(29
|
)%
|
|
|
(144
|
)
|
|
|
32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income tax and
cumulative effect of change in accounting principle, net
|
|
$
|
(83,587
|
)
|
|
|
NM
|
|
|
$
|
(149,447
|
)
|
|
|
NM
|
|
|
$
|
65,860
|
|
|
|
(44
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM-Not Meaningful
|
|
1.
|
Operating
revenues and cost of revenues
|
Corporate and other operating revenues and cost of revenues
primarily represent the results of analog operations reported by
Nextel Chile. Operating revenues and cost of revenues did not
significantly change from the year ended December 31, 2004
to the year ended December 31, 2005 because Nextel
Chiles subscriber base remained stable.
|
|
2.
|
General and
administrative expenses
|
The $5.9 million, or 13%, increase in general and
administrative expenses from the year ended December 31,
2004 to the year ended December 31, 2005 was primarily due
to an increase in corporate payroll and related expenses, an
increase in costs related to outside services, specifically for
audit, tax, Sarbanes-Oxley-related, restatement and consulting
activities, an increase in business insurance costs and an
increase in stock compensation expense for restricted stock.
92
|
|
3.
|
Depreciation
and amortization
|
The $3.2 million, or 296%, increase in depreciation and
amortization from the year ended December 31, 2004 to the
year ended December 31, 2005 was primarily the result of
increased depreciation due to the change in the classification
of our corporate aircraft from an operating lease to a capital
lease.
The $0.7 million, or 4%, decrease in net interest expense
from the year ended December 31, 2004 to the year ended
December 31, 2005 was substantially the result of the
elimination of interest related to our 13.0% senior secured
discount notes in connection with the retirement of all of these
notes during the first half of 2004 and a decrease in interest
expense related to the elimination of interest on our
international equipment facility, which was extinguished in
2004, partially offset by an increase in interest related to our
2.75% convertible notes that we issued in August 2005.
The $3.4 million, or 102%, increase in interest income from
the year ended December 31, 2004 to the year ended
December 31, 2005 was primarily due to interest earned on
the $350.0 million proceeds received from the issuance of
our 2.75% convertible notes.
|
|
6.
|
Debt
conversion expense
|
The $8.9 million debt conversion expense represents cash
consideration that we paid in connection with the conversion of
$88.5 million of our 3.5% convertible notes during the
second quarter of 2005.
|
|
7.
|
Loss on
early extinguishment of debt
|
The $79.3 million loss on early extinguishment of debt for
the year ended December 31, 2004 represents the loss we
incurred in connection with the retirement of substantially all
of our 13.0% senior secured discount notes through a cash
tender offer in March 2004.
C. Liquidity
and Capital Resources
We had a working capital surplus of $605.0 million as of
December 31, 2006, a $185.6 million decrease compared
to the working capital surplus of $790.6 million as of
December 31, 2005. The decrease in working capital, which
is defined as total current assets less total current
liabilities, resulted from a $70.5 million, or 6%, decrease
in current assets and an $80.1 million, or 16%, increase in
current liabilities. The decrease in current assets is primarily
due to Nextel Mexicos acquisition of Cosmofrecuencias,
S.A. de C.V. for $200.0 million in cash, partially offset
by increases in accounts receivable, inventory and other current
assets due to subscriber growth. The increase in current
liabilities is primarily driven by increased costs to support a
larger customer base.
We recognized net income of $278.9 million for the year
ended December 31, 2006, $174.8 million for the year
ended December 31, 2005 and $57.3 million for the year
ended December 31, 2004. During 2006, 2005 and 2004, our
operating revenues more than offset our operating expenses,
excluding depreciation and amortization, and cash capital
expenditures.
Cash
Flows
Our operating activities provided us with $489.0 million of
cash during 2006, a $172.7 million increase from 2005. Our
operating activities provided us with $316.3 million of
cash during 2005, a $60.3 million increase from 2004. Both
increases were due to our profitable growth strategy, which
resulted in the generation of higher operating income, which was
partially offset by increases in cash used for working capital.
We used $752.9 million of cash in our investing activities
during 2006, a $363.8 million increase from 2005 due
primarily to increased capital expenditures and acquisition
costs. Cash capital expenditures increased
93
$165.4 million from $385.9 million in 2005 to
$551.3 million in 2006 due to the accelerated build-out of
our digital mobile networks during 2006. We paid
$209.7 million in cash for acquisitions and purchases of
spectrum licenses in 2006 primarily due to our acquisition of
Cosmofrecuencias, S.A. de C.V. in Mexico. We paid
$27.4 million in cash for acquisitions and purchases of
spectrum licenses in 2005.
We used $389.1 million of cash in our investing activities
during 2005, a $96.0 million increase from 2004. Cash
capital expenditures increased $158.2 million from
$227.7 million in 2004 to $385.9 million in 2005 due
to investments made in connection with our planned expansion
activities in 2006. We paid $27.4 million and
$24.3 million in cash for acquisitions and purchases of
licenses in 2005 and 2004, respectively. During 2005, we
purchased $14.1 million in short-term investments and we
received $45.6 million in proceeds from maturities and
sales of these short-term investments. We also purchased a
foreign currency derivative instrument at a net cost of
$7.3 million.
Our financing activities provided us with $96.6 million of
cash during 2006, primarily due to the following:
|
|
|
|
|
$60.9 million in additional borrowings from the refinancing
of Nextel Mexicos syndicated loan;
|
|
|
|
$55.4 million in proceeds from stock option exercises by
our employees; and
|
|
|
|
$6.6 million in excess tax benefits from share-based
payments we recognized in connection with our adoption of
SFAS 123R, which was effective January 1, 2006.
|
These increases were partially offset by $28.1 million in
repayments under long-term credit facilities and software
financing transactions.
Our financing activities provided us with $611.6 million of
cash in our financing activities during 2005, primarily due to
the following:
|
|
|
|
|
$350.0 million in gross proceeds that we raised in
connection with the issuance of our 2.75% convertible notes;
|
|
|
|
$250.0 million in gross proceeds that we received in
connection with the draw-down of our Mexico syndicated loan
facility; and
|
|
|
|
$23.9 million in proceeds received from stock option
exercises by our employees.
|
These increases were partially offset by $9.6 million in
cash we used to pay debt financing costs in connection with the
issuance of our 2.75% convertible notes.
We used $44.1 million of cash in our financing activities
during 2004, primarily due to the following:
|
|
|
|
|
$211.2 million in cash we used to retire substantially all
of our 13.0% senior secured discount notes in connection with
our tender offer;
|
|
|
|
$125.0 million in cash we used to repay our international
equipment facility with Motorola; and
|
|
|
|
$8.5 million in cash we used to pay debt financing costs in
connection with the issuance of our 2.875% convertible
notes.
|
These decreases were partially offset by $300.0 million in
gross proceeds that we raised in connection with the issuance of
our 2.875% convertible notes.
|
|
D.
|
Future
Capital Needs and Resources
|
Capital Resources. Our ongoing capital
resources depend on a variety of factors, including our existing
cash and cash equivalents balances, cash flows generated by our
operating companies and external financial sources that may be
available. As of December 31, 2006, our capital resources
included $708.6 million of cash
94
and cash equivalents. Our ability to generate sufficient net
cash from our operating activities is dependent upon, among
other things:
|
|
|
|
|
the amount of revenue we are able to generate and collect from
our customers;
|
|
|
|
the amount of operating expenses required to provide our
services;
|
|
|
|
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.
|
Financing Activities. We have engaged
in a number of financing transactions in order to provide
funding for our business and optimize our capital structure
including the following:
On June 10, 2005 and June 20, 2005, certain
noteholders converted $40.0 million and $48.5 million,
respectively, principal face amount of our 3.5% convertible
notes into 3,000,000 shares and 3,635,850 shares
(75.0 shares issued per $1,000 of debt principal multiplied
by the debt principal) in accordance with the original terms of
the debt agreement. In connection with these conversions, we
paid in the aggregate $8.9 million in cash as additional
consideration, as well as $0.8 million of accrued interest.
In August 2005, we issued $300.0 million aggregate
principal amount of 2.75% convertible notes due 2025. In
addition, we granted the initial purchaser an option to purchase
up to an additional $50.0 million principal amount of
notes, which the initial purchaser exercised in full. As a
result, we issued an additional $50.0 million aggregate
principal amount of convertible notes, resulting in total net
proceeds of about $341.3 million. The notes bear interest
at a rate of 2.75% per annum on the principal amount of the
notes, payable semi-annually in arrears in cash on February 15
and August 15 of each year, beginning February 15, 2006.
The notes will mature on August 15, 2025 unless earlier
converted or redeemed by the holders or repurchased by us.
On June 27, 2006, Nextel Mexico entered into an agreement
to refinance its syndicated loan. The loan principal was
increased from the original $250.0 million to
$296.6 million after the refinancing. Under the agreement,
the loan was refinanced using the same variable (i.e., LIBOR and
TIIE) and fixed rates as the original agreement but with lower
spreads for each tranche. Of the total amount of the refinanced
loan, $156.6 million is denominated in U.S. dollars,
with a floating interest rate based on LIBOR
(Tranche A 6.69% and 6.81% as of
December 31, 2006 and 2005, respectively),
$57.0 million is denominated in Mexican pesos, with a
floating interest rate based on the Mexican reference rate TIIE
(Tranche C 8.51% and 11.13% as of
December 31, 2006 and 2005, respectively), and
$83.0 million is denominated in Mexican pesos, at an
interest rate fixed at the time of funding
(Tranche B 11.36% and 12.48% as of
December 31, 2006 and 2005, respectively). For
Tranche B and Tranche C, the principal and interest
payments will take place on the same dates as previously
scheduled under the original agreement. Under the original
agreement, principal for Tranche A was also due on the same
dates as the principal under Tranches B and C. However, after
the refinancing, principal for Tranche A will now be due in
a lump sum of $156.6 million in June 2011. Due to changes
in foreign currency exchange rates, the balance of the
syndicated loan facility as of December 31, 2006 and 2005
was $297.6 million and $252.7 million, respectively.
On December 12, 2006 the remaining noteholders of our
3.5% convertible notes converted $91.4 million
principal face amount of our 3.5% convertible notes into
6,852,150 shares (75.0 shares issued per $1,000 of
debt principal multiplied by the debt principal) in accordance
with the original terms of the debt agreement. In connection
with these conversions, we paid $4.6 million in cash as
additional consideration, as well as $0.8 million of
accrued interest.
Under an existing agreement with American Tower Corporation,
during 2006 and 2005 we received $9.0 million and
$2.2 million in gross proceeds, respectively, from tower
sale-leaseback transactions in Mexico and Brazil.
95
Capital Needs and Contractual
Obligations. 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.
|
The following table sets forth the amounts and timing of
contractual payments for our most significant contractual
obligations determined as of December 31, 2006. The
information in the table reflects future unconditional payments
and is based upon, among other things, the current terms of the
relevant agreements, appropriate classification of items under
accounting principles generally accepted in the United States
that are currently in effect and certain assumptions, such as
future interest rates. Future events could cause actual payments
to differ significantly from these amounts. See
Item 1A. Risk Factors
17. Our forward-looking statements are subject to a variety of
factors that could cause actual results to differ materially
from current beliefs. Except as required by law, we
disclaim any obligation to modify or update the information
contained in the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
|
Contractual Obligations
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Convertible notes(1)
|
|
$
|
18,250
|
|
|
$
|
36,500
|
|
|
$
|
36,500
|
|
|
$
|
978,813
|
|
|
$
|
1,070,063
|
|
Tower financing obligations(1)
|
|
|
38,805
|
|
|
|
77,609
|
|
|
|
77,607
|
|
|
|
256,687
|
|
|
|
450,708
|
|
Mexico syndicated loan facility(1)
|
|
|
43,234
|
|
|
|
159,598
|
|
|
|
174,287
|
|
|
|
|
|
|
|
377,119
|
|
Capital lease obligations(2)
|
|
|
9,516
|
|
|
|
19,832
|
|
|
|
19,946
|
|
|
|
85,458
|
|
|
|
134,752
|
|
Spectrum fees(3)
|
|
|
13,171
|
|
|
|
25,569
|
|
|
|
25,569
|
|
|
|
166,197
|
|
|
|
230,506
|
|
Spectrum license financing(4)
|
|
|
|
|
|
|
9,075
|
|
|
|
4,493
|
|
|
|
3,416
|
|
|
|
16,984
|
|
Operating leases(5)
|
|
|
83,803
|
|
|
|
152,336
|
|
|
|
116,744
|
|
|
|
146,991
|
|
|
|
499,874
|
|
Purchase obligations(6)
|
|
|
686,587
|
|
|
|
60,059
|
|
|
|
53,214
|
|
|
|
|
|
|
|
799,860
|
|
Other long-term obligations(7)
|
|
|
1,171
|
|
|
|
8,895
|
|
|
|
10,913
|
|
|
|
138,917
|
|
|
|
159,896
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual commitments
|
|
$
|
894,537
|
|
|
$
|
549,473
|
|
|
$
|
519,273
|
|
|
$
|
1,776,479
|
|
|
$
|
3,739,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
These amounts include estimated principal and interest payments
over the full term of the obligation based on our expectations
as to future interest rates, assuming the current payment
schedule. |
|
(2) |
|
These amounts represent principal and interest payments due
under our co-location agreements to American Tower and our
existing corporate aircraft lease. The amounts related to our
existing aircraft lease exclude amounts that are contingently
due in the event of our default under the lease, but do include
remaining amounts due under the letter of credit provided for
our new corporate aircraft. |
|
(3) |
|
These amounts do not include variable fees based on certain
operating revenues and are subject to increases in the Mexican
Consumer Pricing Index. |
|
(4) |
|
These amounts represent payments related to spectrum license
financing in Brazil. |
|
(5) |
|
These amounts principally include future lease costs related to
our transmitter and receiver sites and switches and office
facilities. |
96
|
|
|
(6) |
|
These amounts include maximum contractual purchase obligations
under various agreements with our vendors, as well as estimated
payments related to spectrum obligations in Argentina. |
|
(7) |
|
These amounts include our current estimates of asset retirement
obligations based on our expectations as to future retirement
costs, inflation rates and timing of retirements. |
In addition to the aforementioned items, as discussed in
Note 9 to the accompanying consolidated financial
statements, we have entered into an agreement with Motorola,
which requires us to purchase a certain amount of handsets each
year through December 31, 2011. Prices for handsets that
will be purchased in years subsequent to 2007 are not stipulated
in the agreement as they will be negotiated annually. In
addition, the mix of handsets will be determined in years
subsequent to 2007 based on customer demand. As a result, we are
not able to quantify the dollar amount of minimum purchases
required under this agreement for years subsequent to 2007, and
therefore, they are not included in the table above.
Capital Expenditures. Our capital
expenditures, including capitalized interest, were
$627.4 million for the year ended December 31, 2006
compared to $469.9 million for the year ended
December 31, 2005 and $249.8 million for the year
ended December 31, 2004. In the future, we expect to
finance our capital spending using the most effective
combination of cash from operations, cash on hand and proceeds
from external financing that may become available. Our capital
spending is expected to be driven by several factors, including:
|
|
|
|
|
the expansion of the coverage of our digital mobile networks to
new market areas, primarily in Mexico and Brazil;
|
|
|
|
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;
|
|
|
|
future minimum build out requirements related to the
3.4 GHz spectrum and local concession that we acquired
through the purchase of Cosmofrecuencias in Mexico;
|
|
|
|
potential funding of future technology initiatives; and
|
|
|
|
non-network
related information technology projects.
|
Our future capital expenditures will be significantly affected
by future technology improvements and technology choices.
Motorola and Sprint Nextel Corporation have developed and
deployed a significant technology upgrade to the iDEN digital
mobile network, the 6:1 voice coder software upgrade, which is
designed to increase the capacity of iDEN networks for
interconnect calls. Beginning in 2004, we started selling
handsets that can operate on the new 6:1 voice coder, and we
have deployed the related network software modifications that
are necessary to utilize this technology in some of our
networks. This network software allows us to adjust the extent
to which we utilize the 6:1 voice coder technology as required
to meet our network capacity needs. This software is designed to
increase our voice capacity for interconnect calls without
requiring the investment in additional network infrastructure
equipment. However, if there are substantial delays in realizing
the benefits of the 6:1 voice coder or if the technology does
not perform satisfactorily, we could be required to invest
significant additional capital in our infrastructure to satisfy
our network capacity needs. See Item 1A.
Risk Factors.
Future Outlook. We believe that our
current business plan, which contemplates significant network
expansions in Mexico and Brazil, will not require any additional
external funding, and we will be able to operate and grow our
business while servicing our debt obligations. Our revenues are
primarily denominated in foreign currencies. We expect that if
current foreign currency exchange rates do not significantly
adversely change, we will continue to generate net income for
the foreseeable future. See Item 1A. Risk
Factors 17. Our forward-looking statements are
subject to a variety of factors that could cause actual results
to differ materially from current beliefs.
97
In making our assessments of a fully funded business plan and
net income, we have considered:
|
|
|
|
|
cash and cash equivalents 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 networks or the acquisition of
competitors or others, or if economic conditions in any of our
markets change generally, or competitive practices in the mobile
wireless telecommunications industry change materially from
those currently prevailing or from those now anticipated, or if
other presently unexpected circumstances arise that have a
material effect on the cash flow or profitability of our mobile
wireless business, then the anticipated cash needs of our
business as well as the conclusions presented herein as to the
adequacy of the available sources of cash and timing on our
ability to generate net income could change significantly. Any
of these events or circumstances could involve significant
additional funding needs in excess of the identified currently
available sources, and could require us to raise additional
capital to meet those needs. In addition, we continue to assess
the opportunities to raise additional funding on attractive
terms and conditions and at times that do not involve any of
these events or circumstances and may do so if the opportunity
presents itself. However, our ability to seek additional
capital, if necessary, is subject to a variety of additional
factors that we cannot presently predict with certainty,
including:
|
|
|
|
|
the commercial success of our operations;
|
|
|
|
the volatility and demand of the capital markets; and
|
|
|
|
the future market prices of our securities.
|
E. Effect
of Inflation and Foreign Currency Exchange
Our net assets are subject to foreign currency exchange risks
since they are primarily maintained in local currencies.
Additionally, a significant portion of our long-term debt is
denominated entirely in U.S. dollars, which exposes us to
foreign currency exchange risks. Nextel Argentina, Nextel Brazil
and Nextel Mexico conduct business in countries in which the
rate of inflation has historically been significantly higher
than that of the United States. We seek to protect our earnings
from inflation and possible currency depreciation by
periodically adjusting the local currency prices charged by each
operating company for sales of handsets and services to its
customers. We routinely monitor our foreign currency exposure
and the cost effectiveness of hedging instruments.
In November 2004, Nextel Mexico entered into a derivative
agreement to reduce its foreign currency transaction risk
associated with a portion of its 2005 U.S. dollar
forecasted capital expenditures and handset purchases. This risk
was hedged by forecasting Nextel Mexicos capital
expenditures and handset purchases for a
12-month
period that began in January 2005 and ended in December 2005.
In September 2005 and October 2005, Nextel Mexico entered into
derivative agreements to reduce its foreign currency transaction
risk associated with a significant portion of its 2006
U.S. dollar forecasted capital expenditures and handset
purchases. This risk was hedged by forecasting Nextel
Mexicos capital expenditures and handset purchases for a
12-month
period beginning in January 2006.
As of December 31, 2006, we have not entered into any
derivative transactions to hedge Nextel Mexicos foreign
currency transaction risk in 2007.
98
Inflation is not currently a material factor affecting our
business, although rates of inflation in some of the countries
in which we operate have been historically volatile. General
operating expenses such as salaries, employee benefits and lease
costs are, however, subject to normal inflationary pressures.
From time to time, we may experience price changes in connection
with the purchase of system infrastructure equipment and
handsets, but we do not currently believe that any of these
price changes will be material to our business.
|
|
F.
|
Effect of
New Accounting Standards
|
In 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
on a prospective basis, 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 re-measurement 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. The adoption of SFAS 155 did not
have a material impact on our consolidated financial statements.
In June 2006, the FASB ratified the consensus of the EITF on
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. EITF
05-1 states
that the issuance of equity securities to settle an instrument
(pursuant to the instruments original conversion terms)
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
effective for all conversions within its scope occurring in
interim or annual periods beginning after June 28, 2006.
The future impact of EITF
05-1 on our
financial statements will depend on the facts and circumstances
specific to a given conversion within the scope of this Issue.
The adoption of EITF
05-1 did not
have a material impact on our consolidated financial statements
based on the terms of our existing securities.
In June 2006, the FASB ratified the consensus of the Emerging
Issues Task Force, or EITF, on 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.
EITF
06-3 states
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. EITF
06-3 is
effective for financial reports in interim and annual reporting
periods beginning after December 15, 2006. Prior to 2005,
we reported certain revenue-based taxes imposed on us in Brazil
as a reduction of revenue. We viewed these taxes 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 by the amount of
these taxes, and our consolidated financial statements reflected
corresponding general and administrative expenses, to present
these revenue-based taxes related to the full year 2005 on a
gross basis 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 year ended December 31, 2005,
Nextel Brazil recorded
99
$18.6 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
currently disclose our policy with regard to these types of
taxes in our revenue recognition policy. Therefore, we do not
believe the adoption of EITF
06-3 will
have a material impact on our consolidated financial statements.
In July 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes An
Interpretation of FASB Statement No. 109, or
FIN 48. FIN 48 clarifies the accounting for
uncertainty in income tax positions and is effective for fiscal
years beginning after December 15, 2006. FIN 48
provides that the financial statement effects of an income tax
position can only be recognized in the financial statements
when, based on the technical merits, it is
more-likely-than-not that the position will be
sustained upon examination. The cumulative effect of applying
the provisions of FIN 48 should be reported as an
adjustment to the opening balance of retained earnings for that
fiscal year. We are currently evaluating the impact that
FIN 48 may have on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurement, or SFAS 157, which
provides guidance for using fair value to measure assets and
liabilities when required for recognition or disclosure
purposes. SFAS 157 is intended to make the measurement of
fair value more consistent and comparable and improve
disclosures about these measures. Specifically, SFAS 157
(1) clarifies the principle that fair value should be based
on the assumptions market participants would use when pricing
the asset or liability, (2) establishes a fair value
hierarchy that prioritizes the information used to develop those
assumptions, (3) clarifies the information required to be
used to measure fair value, (4) determines the frequency of
fair value measures and (5) requires companies to make
expanded disclosures about the methods and assumptions used to
measure fair value and the fair value measurements effect
on earnings. However, SFAS 157 does not expand the use of
fair value to any new circumstances or determine when fair value
should be used in the financial statements. SFAS 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods
within those fiscal years, with some exceptions. SFAS 157
is to be applied prospectively as of the first interim period
for the fiscal year in which it is initially adopted, except for
a limited form of retrospective application for some specific
items. We are currently evaluating the impact that SFAS 157
may have on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans An Amendment of FASB
Statements No. 87, 88, 106, and 132R, or
SFAS 158. This standard requires an employer to:
(a) recognize in its statement of financial position an
asset for a plans overfunded status or a liability for a
plans underfunded status; (b) measure a plans
assets and its obligations that determine its funded status as
of the end of the employers fiscal year (with limited
exceptions); and (c) recognize changes in the funded status
of a defined benefit postretirement plan in the year in which
the changes occur. Those changes will be reported in
comprehensive income of a business entity and in changes in net
assets of a
not-for-profit
organization. The requirement to recognize the funded status of
a benefit plan and the disclosure requirements are effective as
of the end of the fiscal year ending after December 15,
2006. The requirement to measure plan assets and benefit
obligations as of the date of the employers fiscal
year-end statement of financial position is effective for fiscal
years ending after December 15, 2008. The adoption of
SFAS 158 in the fourth quarter of 2006 did not have a
material impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities, Including an Amendment of FASB Statement
No. 115. SFAS No. 159 permits entities to
choose to measure many financial instruments and certain other
items at fair value that are not currently required to be
measured at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in
earnings. SFAS No. 159 does not affect any existing
accounting literature that requires certain assets and
liabilities to be carried at fair value. SFAS No. 159
is effective for fiscal years beginning after November 15,
2007. We are currently evaluating the impact that
SFAS No. 159 will have on our consolidated financial
statements.
100
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Our revenues are primarily denominated in foreign currencies,
while a significant portion of our operations are financed in
U.S. dollars through our convertible notes and a portion of
our syndicated loan facility in Mexico. As a result,
fluctuations in exchange rates relative to the U.S. dollar
expose us to foreign currency exchange risks. These risks
include the impact of translating our local currency reported
earnings into U.S. dollars when the U.S. dollar
strengthens against the local currencies of our foreign
operations. In addition, Nextel Mexico, Nextel Brazil and Nextel
Argentina purchase some capital assets and the majority of
handsets in U.S. dollars, but record the related revenue
generated from their operations 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 similar 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. As of December 31, 2006, we
have not entered into any derivative transactions to hedge
Nextel Mexicos foreign currency transaction risk in 2007.
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. As of
December 31, 2006, $943.7 million, or 82%, or our
total consolidated debt was fixed rate debt, and the remaining
$214.0 million, or 18%, of our total consolidated debt was
variable rate debt. 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.
In June 2006, Nextel Mexico refinanced its syndicated loan. The
loan amount was increased from the original $250.0 million
to $296.6 million after the refinancing. The loan was
refinanced using the same variable (i.e., LIBOR and TIIE) and
fixed rates as the original agreement but with lower spreads for
each tranche. Of the total amount of the refinanced loan,
$57.0 million is denominated in Mexican pesos, with a
floating interest rate based on the Mexican reference rate TIIE
(Tranche C). The refinancing of the syndicated loan had no
effect on Nextel Mexicos interest rate swap.
The table below presents principal amounts, related interest
rates by year of maturity and aggregate amounts as of
December 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:
|
|
|
|
|
quoted market prices for our convertible notes;
|
|
|
|
carrying values for our tower financing obligations and
syndicated loan facility as interest rates were set recently
when we entered into these transactions; and
|
|
|
|
market values as determined by an independent third party
investment banking firm for our purchased call options, written
put options and interest rate swap.
|
101
The changes in the fair values of our consolidated debt compared
to their fair values as of December 31, 2005 reflect
changes in applicable market conditions, a $60.9 million
increase due to the refinancing of Nextel Mexicos
syndicated loan and a $91.4 million decrease due to the
conversion of our 3.5% convertible notes. All of the information
in the table is presented in U.S. dollar equivalents, which
is our reporting currency. The actual cash flows associated with
our consolidated long-term debt are denominated in
U.S. dollars (US$), Mexican pesos (MP) and Brazilian reais
(BR).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year of Maturity
|
|
|
2006
|
|
|
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$)
|
|
$
|
1,261
|
|
|
$
|
1,642
|
|
|
$
|
1,846
|
|
|
$
|
1,858
|
|
|
$
|
1,912
|
|
|
$
|
669,683
|
|
|
$
|
678,202
|
|
|
$
|
1,258,202
|
|
|
$
|
770,950
|
|
|
$
|
1,301,140
|
|
Average Interest Rate
|
|
|
10.0%
|
|
|
|
10.0%
|
|
|
|
10.0%
|
|
|
|
10.0%
|
|
|
|
10.0%
|
|
|
|
3.0%
|
|
|
|
3.1%
|
|
|
|
|
|
|
|
3.2%
|
|
|
|
|
|
Fixed Rate (MP)
|
|
$
|
13,879
|
|
|
$
|
39,858
|
|
|
$
|
40,517
|
|
|
$
|
4,972
|
|
|
$
|
5,907
|
|
|
$
|
84,734
|
|
|
$
|
189,867
|
|
|
$
|
189,867
|
|
|
$
|
182,848
|
|
|
$
|
182,848
|
|
Average Interest Rate
|
|
|
12.6%
|
|
|
|
11.9%
|
|
|
|
11.9%
|
|
|
|
16.9%
|
|
|
|
16.9%
|
|
|
|
16.6%
|
|
|
|
14.4%
|
|
|
|
|
|
|
|
15.3%
|
|
|
|
|
|
Fixed Rate (BR)
|
|
$
|
666
|
|
|
$
|
2,712
|
|
|
$
|
3,023
|
|
|
$
|
3,431
|
|
|
$
|
3,967
|
|
|
$
|
61,790
|
|
|
$
|
75,589
|
|
|
$
|
75,589
|
|
|
$
|
58,196
|
|
|
$
|
58,196
|
|
Average Interest Rate
|
|
|
27.6%
|
|
|
|
18.2%
|
|
|
|
19.2%
|
|
|
|
20.2%
|
|
|
|
21.2%
|
|
|
|
26.6%
|
|
|
|
25.5%
|
|
|
|
|
|
|
|
26.2%
|
|
|
|
|
|
Variable Rate (US$)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
156,600
|
|
|
$
|
|
|
|
$
|
156,600
|
|
|
$
|
156,600
|
|
|
$
|
129,000
|
|
|
$
|
129,000
|
|
Average Interest Rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.7%
|
|
|
|
|
|
|
|
6.7%
|
|
|
|
|
|
|
|
6.8%
|
|
|
|
|
|
Variable Rate (MP)
|
|
$
|
7,490
|
|
|
$
|
24,966
|
|
|
$
|
24,967
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
57,423
|
|
|
$
|
57,423
|
|
|
$
|
31,964
|
|
|
$
|
31,964
|
|
Average Interest Rate
|
|
|
8.5%
|
|
|
|
8.5%
|
|
|
|
8.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.5%
|
|
|
|
|
|
|
|
11.1%
|
|
|
|
|
|
Forecasted Hedge
Agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased call options
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
181,426
|
|
|
$
|
2,016
|
|
Written put options
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
181,426
|
|
|
$
|
(2,250)
|
|
Interest Rate
Swap:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable to Fixed
|
|
$
|
3,799
|
|
|
$
|
12,664
|
|
|
$
|
12,665
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
29,128
|
|
|
$
|
(1,406)
|
|
|
$
|
31,964
|
|
|
$
|
(1,174)
|
|
Average Pay Rate
|
|
|
10.8%
|
|
|
|
10.8%
|
|
|
|
10.8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10.8%
|
|
|
|
|
|
|
|
12.0%
|
|
|
|
|
|
Average Receive Rate
|
|
|
8.5%
|
|
|
|
8.5%
|
|
|
|
8.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8.5%
|
|
|
|
|
|
|
|
11.1%
|
|
|
|
|
|
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
We have listed the consolidated financial statements required
under this Item in Part IV, Item 15(a)(1) of this
annual report on
Form 10-K.
We have listed the financial statement schedule required under
Regulation S-X
in Part IV, Item 15(a)(2) of this annual report on
Form 10-K.
The financial statements and schedule appear following the
signature page of this annual report on
Form 10-K.
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
Not applicable.
|
|
Item 9A.
|
Controls
and Procedures
|
Evaluation
of 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, as amended, 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 the Companys management, including our
chief executive officer and chief financial officer, as
appropriate to allow timely decisions regarding required
disclosure.
As of December 31, 2006, 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. Based on and as of the date
of such evaluation, our chief executive officer and chief
financial officer concluded that the design and operation of our
disclosure controls and procedures were effective.
102
Managements
Report on Internal Control over Financial
Reporting
Management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined
in
Rule 13a-15(f)
under the Securities Exchange Act of 1934, as amended). Because
of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In order to evaluate the effectiveness of internal control over
financial reporting, as required by Section 404 of the
Sarbanes-Oxley Act, management conducted an assessment using the
criteria established in Internal Control
Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on this
assessment, management has concluded that as of
December 31, 2006, our internal control over financial
reporting was effective.
Managements assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2006 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report that appears herein.
Changes
in Internal Control over Financial Reporting
There have been no changes in the Companys internal
control over financial reporting during the most recently
completed fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the Companys
internal control over financial reporting.
Remediation
of Income Tax Material Weakness
A material weakness is a control deficiency, or combination of
control deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. During
2006, we completed our remediation plan with regard to the
material weakness in our controls over the completeness and
accuracy of the income tax provision and the related balance
sheet accounts and note disclosures. Our remediation actions
during 2006 represent a continuation of the initiatives
undertaken in 2005, which included redesigning the control
procedures related to the income tax provision both in our
foreign subsidiaries and at our corporate headquarters to create
a more structured, uniform process; restructuring the staffing
resources and oversight of the tax area; initiating an on-going
training program for tax professionals in our foreign
subsidiaries and at our corporate headquarters; and working with
a third party tax advisor to perform detailed reviews as a means
to improve accuracy and assess the effectiveness of our
procedures.
The completion of the implementation of our plan included a
number of steps during the year ended December 31, 2006 to
strengthen our control procedures. These steps included:
|
|
|
|
|
Completion of our hiring plan at our corporate headquarters,
which included the hiring of two senior tax managers experienced
in income tax accounting under U.S. GAAP and taxation of
multinational corporations and three additional income tax
specialists with broad experience in tax and finance;
|
|
|
|
Continuation of our training program for our recently hired
U.S.-based
employees with regard to controls surrounding the calculation of
the income tax provision and related accounts;
|
103
|
|
|
|
|
Maintenance of our on-going training program to deepen and
broaden the understanding of U.S. GAAP income tax provision
calculation procedures by employees in our foreign subsidiaries;
|
|
|
|
A reallocation of the responsibility for some of the quarterly
procedures between headquarters and our foreign markets to
increase the effectiveness of the procedures; and
|
|
|
|
Continued work with a third-party tax advisor as a means to
monitor on an on-going basis the effectiveness of the procedures
performed by our own employees.
|
We have evaluated and tested the effectiveness of these controls
as of December 31, 2006 and determined that the material
weakness related to income tax accounting has been remediated.
|
|
Item 9B.
|
Other
Information
|
None.
104
PART III
|
|
Item 10.
|
Directors,
Executive Officers of the Registrant and Corporate
Governance
|
Except as to certain information regarding executive officers
included in Part I hereof and incorporated herein by
reference, the information required by this item will be
provided by being incorporated herein by reference to the
Companys definitive proxy statement for the 2007 Annual
Meeting of Stockholders under the captions Election of
Directors, Governance of the Company
Committees of the Board Audit Committee,
Securities Ownership Section 16(a)
Beneficial Ownership Reporting Compliance and
Governance of the Company Code of Ethics.
|
|
Item 11.
|
Executive
Compensation
|
The information required by this item will be provided by being
incorporated herein by reference to the Companys
definitive proxy statement for the 2007 Annual Meeting of
Stockholders under the captions Director
Compensation and Executive Compensation
(except for the information set forth under the captions
Executive Compensation Compensation Committee
Report on Executive Compensation).
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this item will be provided by being
incorporated herein by reference to the Companys
definitive proxy statement for the 2007 Annual Meeting of
Stockholders under the captions Securities
Ownership Securities Ownership of Certain Beneficial
Owners and Securities Ownership of
Management and Executive Compensation
Equity Compensation Plan Information.
|
|
Item 13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
The information required by this item will be provided by being
incorporated herein by reference to the Companys
definitive proxy statement for the 2007 Annual Meeting of
Stockholders under the caption Certain Relationships and
Related Transactions.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
The information required by this item will be provided by being
incorporated herein by reference to the Companys
definitive proxy statement for the 2007 Annual Meeting of
Stockholders under the captions Audit
Information Fees Paid to Independent Registered
Public Accounting Firm and Audit
Committee Pre-Approval Policies and Procedures.
105
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules.
|
(a)(1) Financial Statements. Financial statements and report of
independent registered public accounting firm filed as part of
this report are listed below:
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-2
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
|
|
|
|
(2)
|
Financial Statement Schedule. The following financial statement
schedule is filed as part of this report. Schedules other than
the schedule listed below are omitted because they are either
not required or not applicable.
|
|
|
|
|
(3)
|
List of Exhibits. The exhibits filed as part of this report are
listed in the Exhibit Index, which is incorporated in this
item by reference.
|
(b) Exhibits. See Item 15(a)(3) above.
(c) Financial Statement Schedule. See Item 15(a)(2)
above.
106
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NII HOLDINGS, INC.
|
|
|
|
By:
|
/s/ Daniel
E. Freiman
Daniel
E. Freiman
Vice President and Controller
(On behalf of the registrant and as
Principal Accounting Officer)
|
February 27, 2007
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated on
February 27, 2007.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
/s/ Steven
M. Shindler
Steven
M. Shindler
|
|
Chief Executive Officer and
Chairman of the
Board of Directors
|
|
|
|
/s/ Byron
R. Siliezar
Byron
R. Siliezar
|
|
Vice President and Chief Financial
Officer
(Principal Financial Officer)
|
|
|
|
/s/ George
A. Cope
George
A. Cope
|
|
Director
|
|
|
|
/s/ John
Donovan
John
Donovan
|
|
Director
|
|
|
|
/s/ Steven
P. Dussek
Steven
P. Dussek
|
|
Director
|
|
|
|
/s/ Neal
P. Goldman
Neal
P. Goldman
|
|
Director
|
|
|
|
/s/ Charles
M.
Herington
Charles
M. Herington
|
|
Director
|
|
|
|
/s/ Carolyn
Katz
Carolyn
Katz
|
|
Director
|
|
|
|
/s/ Donald
E. Morgan
Donald
E. Morgan
|
|
Director
|
|
|
|
/s/ John
W. Risner
John
W. Risner
|
|
Director
|
107
NII
HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
|
|
|
|
|
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
|
|
|
F-2
|
|
|
|
|
|
|
CONSOLIDATED FINANCIAL
STATEMENTS
|
|
|
|
|
Consolidated Balance
Sheets As of December 31, 2006 and 2005
|
|
|
F-4
|
|
Consolidated Statements of
Operations For the Years Ended December 31,
2006, 2005 and 2004
|
|
|
F-5
|
|
Consolidated Statements of Changes
in Stockholders Equity For the Years Ended
December 31, 2006, 2005 and 2004
|
|
|
F-6
|
|
Consolidated Statements of Cash
Flows For the Years Ended December 31, 2006,
2005 and 2004
|
|
|
F-7
|
|
Notes to Consolidated Financial
Statements
|
|
|
F-8
|
|
FINANCIAL STATEMENT
SCHEDULE
|
|
|
|
|
Schedule II
Valuation and Qualifying Accounts
|
|
|
F-56
|
|
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of NII Holdings, Inc.:
We have completed integrated audits of NII Holdings, Inc.s
consolidated financial statements and of its internal control
over financial reporting as of December 31, 2006, in
accordance with the standards of the Public Company Accounting
Oversight Board (United States). Our opinions, based on our
audits, are presented below.
Consolidated
financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in
the index appearing under Item 15(a)(1) present fairly, in
all material respects, the financial position of NII Holdings,
Inc. and its subsidiaries at December 31, 2006 and 2005,
and the results of their operations and their cash flows for
each of the three years in the period ended December 31,
2006 in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the index appearing
under Item 15(a)(2) presents fairly, in all material
respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits of these statements in accordance with
the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit of financial statements includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial
statements, the Company changed its method of accounting for the
financial results of its foreign operating companies in 2004 and
the manner in which it accounts for share-based compensation in
2006.
Internal
control over financial reporting
Also, in our opinion, managements assessment, included in
Managements Report on Internal Control over Financial
Reporting appearing under Item 9A, that the Company
maintained effective internal control over financial reporting
as of December 31, 2006 based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects,
based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2006,
based on criteria established in Internal Control
Integrated Framework issued by the COSO. The Companys
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on managements
assessment and on the effectiveness of the Companys
internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting
in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over
financial reporting was maintained in all material respects. An
audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and
evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external
F-2
purposes in accordance with generally accepted accounting
principles. A companys internal control over financial
reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
McLean, Virginia
February 27, 2007
F-3
NII
HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(in
thousands, except par values)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
708,591
|
|
|
$
|
877,536
|
|
Short-term investments
|
|
|
|
|
|
|
7,371
|
|
Accounts receivable, less
allowance for doubtful accounts of $15,928 and $11,677
|
|
|
298,470
|
|
|
|
220,578
|
|
Handset and accessory inventory
|
|
|
70,247
|
|
|
|
54,158
|
|
Deferred income taxes, net
|
|
|
60,450
|
|
|
|
80,132
|
|
Prepaid expenses and other
|
|
|
71,376
|
|
|
|
39,820
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,209,134
|
|
|
|
1,279,595
|
|
Property, plant and equipment,
net
|
|
|
1,389,150
|
|
|
|
936,521
|
|
Intangible assets,
net
|
|
|
369,196
|
|
|
|
83,642
|
|
Deferred income taxes,
net
|
|
|
186,867
|
|
|
|
200,204
|
|
Other assets
|
|
|
143,331
|
|
|
|
121,002
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
3,297,678
|
|
|
$
|
2,620,964
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
107,687
|
|
|
$
|
82,250
|
|
Accrued expenses and other
|
|
|
342,465
|
|
|
|
311,758
|
|
Deferred revenues
|
|
|
83,952
|
|
|
|
59,595
|
|
Accrued interest
|
|
|
11,703
|
|
|
|
11,314
|
|
Current portion of long-term debt
|
|
|
23,294
|
|
|
|
24,112
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
569,101
|
|
|
|
489,029
|
|
Long-term debt
|
|
|
1,134,387
|
|
|
|
1,148,846
|
|
Deferred revenues (related
party)
|
|
|
36,156
|
|
|
|
39,309
|
|
Deferred credits
|
|
|
110,033
|
|
|
|
48,138
|
|
Other long-term
liabilities
|
|
|
101,521
|
|
|
|
84,241
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,951,198
|
|
|
|
1,809,563
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
(Note 9)
|
|
|
|
|
|
|
|
|
Stockholders
equity
|
|
|
|
|
|
|
|
|
Undesignated preferred stock, par
value $0.001, 10,000 shares authorized 2006 and
2005, no shares issued or outstanding 2006 and 2005
|
|
|
|
|
|
|
|
|
Common stock, par value $0.001,
600,000 shares authorized 2006 and 2005,
161,814 shares issued and outstanding 2006,
152,148 shares issued and outstanding 2005
|
|
|
162
|
|
|
|
152
|
|
Paid-in capital
|
|
|
723,644
|
|
|
|
508,209
|
|
Retained earnings
|
|
|
630,538
|
|
|
|
336,048
|
|
Deferred compensation
|
|
|
|
|
|
|
(7,428
|
)
|
Accumulated other comprehensive
loss
|
|
|
(7,864
|
)
|
|
|
(25,580
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
1,346,480
|
|
|
|
811,401
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
3,297,678
|
|
|
$
|
2,620,964
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
NII
HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Operating revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
2,279,922
|
|
|
$
|
1,666,613
|
|
|
$
|
1,214,837
|
|
Digital handset and accessory
revenues
|
|
|
91,418
|
|
|
|
79,226
|
|
|
|
65,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,371,340
|
|
|
|
1,745,839
|
|
|
|
1,279,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service (exclusive of
depreciation and amortization included below)
|
|
|
617,669
|
|
|
|
464,651
|
|
|
|
365,982
|
|
Cost of digital handset and
accessory sales
|
|
|
311,307
|
|
|
|
251,192
|
|
|
|
207,112
|
|
Selling, general and administrative
|
|
|
780,373
|
|
|
|
545,235
|
|
|
|
358,076
|
|
Depreciation
|
|
|
194,817
|
|
|
|
123,990
|
|
|
|
84,139
|
|
Amortization
|
|
|
7,405
|
|
|
|
6,142
|
|
|
|
14,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,911,571
|
|
|
|
1,391,210
|
|
|
|
1,029,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
459,769
|
|
|
|
354,629
|
|
|
|
250,363
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income
(expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(89,379
|
)
|
|
|
(72,470
|
)
|
|
|
(55,113
|
)
|
Interest income
|
|
|
51,057
|
|
|
|
32,611
|
|
|
|
12,697
|
|
Foreign currency transaction
gains, net
|
|
|
3,557
|
|
|
|
3,357
|
|
|
|
9,210
|
|
Debt conversion expense
|
|
|
(5,070
|
)
|
|
|
(8,930
|
)
|
|
|
|
|
Loss on extinguishment of debt, net
|
|
|
|
|
|
|
|
|
|
|
(79,327
|
)
|
Other expense, net
|
|
|
(6,000
|
)
|
|
|
(8,621
|
)
|
|
|
(2,320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(45,835
|
)
|
|
|
(54,053
|
)
|
|
|
(114,853
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax
provision and cumulative effect of change in accounting
principle
|
|
|
413,934
|
|
|
|
300,576
|
|
|
|
135,510
|
|
Income tax provision
|
|
|
(119,444
|
)
|
|
|
(125,795
|
)
|
|
|
(79,191
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect
of change in accounting principle
|
|
|
294,490
|
|
|
|
174,781
|
|
|
|
56,319
|
|
Cumulative effect of change in
accounting principle, net of income taxes of $11,898 in
2004
|
|
|
|
|
|
|
|
|
|
|
970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
294,490
|
|
|
$
|
174,781
|
|
|
$
|
57,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect
of change in accounting principle, per common share, basic
(Note 2)
|
|
$
|
1.91
|
|
|
$
|
1.19
|
|
|
$
|
0.40
|
|
Cumulative effect of change in
accounting principle, per common share, basic
(Note 2)
|
|
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, per common share,
basic
|
|
$
|
1.91
|
|
|
$
|
1.19
|
|
|
$
|
0.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect
of change in accounting principle, per common share, diluted
(Note 2)
|
|
$
|
1.67
|
|
|
$
|
1.06
|
|
|
$
|
0.39
|
|
Cumulative effect of change in
accounting principle, per common share, diluted
(Note 2)
|
|
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, per common share,
diluted
|
|
$
|
1.67
|
|
|
$
|
1.06
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
common shares outstanding, basic
|
|
|
154,085
|
|
|
|
146,336
|
|
|
|
139,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of
common shares outstanding, diluted
|
|
|
184,282
|
|
|
|
176,562
|
|
|
|
145,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
NII
HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Cumulative
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Deferred
|
|
|
Loss on
|
|
|
Translation
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Compensation
|
|
|
Investments
|
|
|
Adjustment
|
|
|
Equity
|
|
|
Balance, January 1,
2004
|
|
|
137,766
|
|
|
$
|
138
|
|
|
$
|
164,636
|
|
|
$
|
103,978
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(50,982
|
)
|
|
$
|
217,770
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,289
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,004
|
|
|
|
9,004
|
|
Unrealized loss on derivatives, net
of reclassification for losses included in other expense and net
of taxes of $744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,821
|
)
|
|
|
|
|
|
|
(1,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reversal of deferred tax asset
valuation allowance
|
|
|
|
|
|
|
|
|
|
|
128,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128,370
|
|
Issuance of restricted stock
|
|
|
|
|
|
|
|
|
|
|
16,295
|
|
|
|
|
|
|
|
(16,295
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of restricted stock
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,651
|
|
|
|
|
|
|
|
|
|
|
|
3,651
|
|
Stock option expense
|
|
|
|
|
|
|
|
|
|
|
213
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
213
|
|
Exercise of stock options
|
|
|
1,896
|
|
|
|
2
|
|
|
|
1,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,107
|
|
Tax benefits on exercise of stock
options
|
|
|
|
|
|
|
|
|
|
|
6,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2004
|
|
|
139,662
|
|
|
|
140
|
|
|
|
316,983
|
|
|
|
161,267
|
|
|
|
(12,644
|
)
|
|
|
(1,821
|
)
|
|
|
(41,978
|
)
|
|
|
421,947
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
174,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
174,781
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,526
|
|
|
|
21,526
|
|
Unrealized loss on derivatives, net
of reclassification for losses included in other expense and net
of taxes of $1,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,307
|
)
|
|
|
|
|
|
|
(3,307
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
193,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of restricted stock
|
|
|
|
|
|
|
|
|
|
|
229
|
|
|
|
|
|
|
|
(229
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of restricted stock
expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,445
|
|
|
|
|
|
|
|
|
|
|
|
5,445
|
|
Reversal of deferred tax asset
valuation allowances
|
|
|
|
|
|
|
|
|
|
|
69,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69,228
|
|
Conversion of 3.5% convertible
notes to common stock
|
|
|
6,636
|
|
|
|
6
|
|
|
|
88,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88,478
|
|
Reclassification of deferred
financing costs on debt conversion
|
|
|
|
|
|
|
|
|
|
|
(1,974
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,974
|
)
|
Exercise of stock options
|
|
|
5,850
|
|
|
|
6
|
|
|
|
23,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,891
|
|
Tax benefits on exercise of stock
options
|
|
|
|
|
|
|
|
|
|
|
11,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2005
|
|
|
152,148
|
|
|
|
152
|
|
|
|
508,209
|
|
|
|
336,048
|
|
|
|
(7,428
|
)
|
|
|
(5,128
|
)
|
|
|
(20,452
|
)
|
|
|
811,401
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
294,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
294,490
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,532
|
|
|
|
15,532
|
|
Reclassification for losses on
derivatives included in other expense, net of taxes of $882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,184
|
|
|
|
|
|
|
|
2,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
312,206
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Implementation of SFAS 123R
|
|
|
|
|
|
|
|
|
|
|
(7,428
|
)
|
|
|
|
|
|
|
7,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based payment expense
|
|
|
|
|
|
|
|
|
|
|
45,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,864
|
|
Reversal of deferred tax asset
valuation allowances
|
|
|
|
|
|
|
|
|
|
|
24,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,573
|
|
Conversion of 3.5% convertible
notes to common stock
|
|
|
6,864
|
|
|
|
7
|
|
|
|
91,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,522
|
|
Reclassification of deferred
financing costs on debt conversion
|
|
|
|
|
|
|
|
|
|
|
(1,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,453
|
)
|
Exercise of stock options
|
|
|
2,802
|
|
|
|
3
|
|
|
|
55,401
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,404
|
|
Tax benefits on exercise of stock
options
|
|
|
|
|
|
|
|
|
|
|
6,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,963
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2006
|
|
|
161,814
|
|
|
$
|
162
|
|
|
$
|
723,644
|
|
|
$
|
630,538
|
|
|
$
|
|
|
|
$
|
(2,944
|
)
|
|
$
|
(4,920
|
)
|
|
$
|
1,346,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
NII
HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
change in accounting principle
|
|
$
|
294,490
|
|
|
$
|
174,781
|
|
|
$
|
56,319
|
|
Adjustments to reconcile income
before cumulative effect of change in accounting principle to
net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) loss on extinguishment of
debt, net
|
|
|
(386
|
)
|
|
|
|
|
|
|
79,327
|
|
Amortization of debt financing
costs and accretion of senior secured discount notes
|
|
|
4,724
|
|
|
|
3,365
|
|
|
|
6,866
|
|
Depreciation and amortization
|
|
|
202,222
|
|
|
|
130,132
|
|
|
|
98,375
|
|
Provision for losses on accounts
receivable
|
|
|
30,327
|
|
|
|
19,751
|
|
|
|
13,041
|
|
Write-down of inventory
|
|
|
1,165
|
|
|
|
771
|
|
|
|
2,953
|
|
Losses on derivative instruments
|
|
|
3,308
|
|
|
|
4,273
|
|
|
|
|
|
Foreign currency transaction gains,
net
|
|
|
(3,557
|
)
|
|
|
(3,357
|
)
|
|
|
(9,210
|
)
|
Deferred income tax provision
|
|
|
38,836
|
|
|
|
49,693
|
|
|
|
30,675
|
|
Amortization of deferred credit
|
|
|
(8,854
|
)
|
|
|
(3,390
|
)
|
|
|
|
|
Share-based payment expense
|
|
|
45,951
|
|
|
|
5,445
|
|
|
|
3,864
|
|
Excess tax benefit from share-based
payment
|
|
|
(6,599
|
)
|
|
|
|
|
|
|
|
|
Loss on disposal of property, plant
and equipment
|
|
|
548
|
|
|
|
1,291
|
|
|
|
2,150
|
|
Accretion of asset retirement
obligations
|
|
|
4,273
|
|
|
|
3,902
|
|
|
|
948
|
|
Contingency reversals, net of
charges
|
|
|
(5,563
|
)
|
|
|
(2,100
|
)
|
|
|
(14,417
|
)
|
Other, net
|
|
|
(14,427
|
)
|
|
|
3,006
|
|
|
|
(3,496
|
)
|
Change in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, gross
|
|
|
(108,353
|
)
|
|
|
(80,674
|
)
|
|
|
(53,855
|
)
|
Handset and accessory inventory
|
|
|
(15,414
|
)
|
|
|
(24,235
|
)
|
|
|
(13,605
|
)
|
Prepaid expenses and other
|
|
|
(30,674
|
)
|
|
|
7,002
|
|
|
|
12,959
|
|
Other long-term assets
|
|
|
(19,911
|
)
|
|
|
(23,136
|
)
|
|
|
(44,159
|
)
|
Accounts payable, accrued expenses
and other
|
|
|
50,474
|
|
|
|
33,642
|
|
|
|
51,153
|
|
Current deferred revenue
|
|
|
23,981
|
|
|
|
14,602
|
|
|
|
11,533
|
|
Due to related parties
|
|
|
|
|
|
|
|
|
|
|
20,557
|
|
Other long-term liabilities
|
|
|
2,419
|
|
|
|
1,555
|
|
|
|
4,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
488,980
|
|
|
|
316,319
|
|
|
|
255,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(551,256
|
)
|
|
|
(385,908
|
)
|
|
|
(227,702
|
)
|
Payments for acquisitions,
purchases of licenses and other
|
|
|
(209,650
|
)
|
|
|
(27,357
|
)
|
|
|
(24,307
|
)
|
Transfers to restricted cash
|
|
|
(298
|
)
|
|
|
|
|
|
|
|
|
Purchases of short-term investments
|
|
|
|
|
|
|
(14,143
|
)
|
|
|
(87,849
|
)
|
Proceeds from maturities and sales
of short-term investments
|
|
|
7,371
|
|
|
|
45,629
|
|
|
|
49,448
|
|
Proceeds from sale of fixed assets
and insurance claims
|
|
|
1,008
|
|
|
|
|
|
|
|
|
|
Payments related to derivative
instruments
|
|
|
(99
|
)
|
|
|
(7,346
|
)
|
|
|
(2,742
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(752,924
|
)
|
|
|
(389,125
|
)
|
|
|
(293,152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of
convertible notes
|
|
|
|
|
|
|
350,000
|
|
|
|
300,000
|
|
Borrowings under syndicated loan
facility
|
|
|
60,885
|
|
|
|
250,000
|
|
|
|
|
|
Repayments under long-term credit
facilities
|
|
|
(14,725
|
)
|
|
|
|
|
|
|
(125,000
|
)
|
Proceeds from stock option exercises
|
|
|
55,404
|
|
|
|
23,891
|
|
|
|
1,107
|
|
Excess tax benefit from share-based
payment
|
|
|
6,599
|
|
|
|
|
|
|
|
|
|
Proceeds from towers financing
transactions
|
|
|
8,735
|
|
|
|
2,241
|
|
|
|
6,367
|
|
Transfers to restricted cash
|
|
|
|
|
|
|
(652
|
)
|
|
|
(5,695
|
)
|
Repayments under senior secured
discount notes
|
|
|
|
|
|
|
|
|
|
|
(211,212
|
)
|
Repayments under capital leases and
tower financing transactions
|
|
|
(4,220
|
)
|
|
|
(4,220
|
)
|
|
|
(1,111
|
)
|
Repayments under software financing
transactions
|
|
|
(13,375
|
)
|
|
|
|
|
|
|
|
|
Payment of debt financing costs
|
|
|
(2,668
|
)
|
|
|
(9,632
|
)
|
|
|
(8,538
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
96,635
|
|
|
|
611,628
|
|
|
|
(44,082
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of change in
accounting principle, net
|
|
|
|
|
|
|
|
|
|
|
7,962
|
|
Effect of exchange rate changes
on cash and cash equivalents
|
|
|
(1,636
|
)
|
|
|
7,730
|
|
|
|
(1,139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
and cash equivalents
|
|
|
(168,945
|
)
|
|
|
546,552
|
|
|
|
(74,422
|
)
|
Cash and cash equivalents,
beginning of year
|
|
|
877,536
|
|
|
|
330,984
|
|
|
|
405,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end
of year
|
|
$
|
708,591
|
|
|
$
|
877,536
|
|
|
$
|
330,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
|
|
1.
|
Summary
of Operations and Significant Accounting Policies
|
Operations. We provide digital wireless
communication services, primarily targeted at meeting the needs
of customers who use our services primarily for business
purposes, 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. In addition, we recently launched our
digital services on a limited basis in Santiago, Chile. 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 and suburban 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. We believe
that vehicle traffic congestion, low wireline service
penetration and the expanded coverage of wireless networks
encourage the use of the mobile wireless communications services
that we offer 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, which is the only digital technology currently
available that can be used on non-contiguous spectrum like ours,
allows us to use our spectrum efficiently and offer multiple
digital wireless services integrated into a variety of digital
handset devices. Our digital mobile networks support multiple
digital wireless services, including:
|
|
|
|
|
digital mobile telephone service, including advanced calling
features such as speakerphone, conference calling, voice-mail,
call forwarding and additional line service;
|
|
|
|
Nextel Direct
Connect®
service, which allows subscribers anywhere on our network to
talk to each other instantly, on a
push-to-talk
basis, on a private
one-to-one
call or on a group call;
|
|
|
|
International Direct
Connect®
service, together with Sprint Nextel Corporation and
TELUS Corporation, which allows subscribers to communicate
instantly across national borders with our subscribers in
Mexico, Brazil, Argentina, Peru and Chile, and, except for our
customers in Chile, with Sprint Nextel Corporation subscribers
in the United States and with TELUS subscribers in Canada;
|
|
|
|
mobile internet services, text messaging services,
e-mail
services including
Blackberrytm
services that were recently introduced in Mexico and Peru,
location-based services, which includes the use of Global
Positioning System (GPS) technologies, digital media services
and advanced
Javatm
enabled business applications, which are generally marketed as
Nextel
Onlinesm
services; and
|
|
|
|
international roaming capabilities, which are marketed as
Nextel
Worldwidesm
services.
|
Stock Split. On October 27, 2005, we
announced a
2-for-1
common stock split to be effected in the form of a stock
dividend, which was paid on November 21, 2005 to holders of
record on November 11, 2005. All share and per share
amounts in these consolidated financial statements reflect the
common stock split.
Use of Estimates. The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States requires us to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Due to the
inherent uncertainty involved in making estimates, actual
results to be reported in future periods could differ from our
estimates.
Principles of Consolidation. The consolidated
financial statements include the accounts of NII Holdings, Inc.
and our wholly-owned subsidiaries. Our decision to consolidate
an entity is based on our direct and indirect majority interest
in the entity. We eliminate all significant intercompany
transactions, including intercompany profits and losses, in
consolidation.
F-8
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
1.
|
Summary
of Operations and Significant Accounting
Policies (Continued)
|
We refer to our subsidiaries by the countries in which they
operate, such as Nextel Mexico, Nextel Brazil, Nextel Argentina,
Nextel Peru and Nextel Chile.
Concentrations of Risk. Substantially all of
our revenues are generated from our operations located in
Mexico, Brazil and Argentina. Regulatory entities in each
country regulate the licensing, construction, acquisition,
ownership and operation of our digital mobile networks, and
certain other aspects of our business, including some of the
rates we charge our customers. Changes in the current
telecommunications statutes or regulations in any of these
countries could adversely affect our business. In addition, as
of December 31, 2006 and 2005, approximately
$2,615.7 million and $1,860.3 million, respectively,
of our assets were owned by Nextel Mexico and Nextel Brazil.
Political, financial and economic developments in Mexico and
Brazil could impact the recoverability of our assets.
Motorola is currently our sole source for most of the digital
network equipment and substantially all of the handsets used
throughout our markets, except for the Blackberry handset. In
addition, iDEN technology is a proprietary technology of
Motorola, meaning that there are no other suppliers of this
technology, and it is the only widespread, commercially
available digital technology that operates on non-contiguous
spectrum. Much of the spectrum that our operating companies hold
in each of the markets we serve is non-contiguous. The
non-contiguous nature of our spectrum may make it more difficult
for us to migrate to a new technology in this spectrum if we
choose to do so. Additionally, if Motorola fails to deliver
system infrastructure equipment and handsets or enhancements to
the features and functionality of our networks on a timely,
cost-effective basis, we may not be able to adequately service
our existing customers or attract new customers. Nextel
Communications, a subsidiary of Sprint Nextel Corporation, is
the largest customer of Motorola with respect to iDEN technology
and provides significant support with respect to new product
development. Nextel Communications and Sprint merged on
August 12, 2005, and as a result, Nextel Communications
became a subsidiary of Sprint Nextel. The new combined company
had previously announced plans to migrate Nextels
push-to-talk
services to a next generation CDMA network platform. Any
decrease by Nextel Communications in its use of iDEN technology
could significantly increase our costs for equipment and new
developments and could impact Motorolas decision to
continue to support iDEN technology. In the event Motorola
determines not to continue supporting or enhancing our iDEN
based infrastructure and handsets, because Nextel Communications
decreases its use of iDEN technology or otherwise, we may be
materially adversely affected. We expect to continue to rely
principally on Motorola for the manufacture of a substantial
portion of the equipment necessary to construct, enhance and
maintain our iDEN-based digital mobile networks and for the
manufacture of iDEN compatible handsets. See Note 9 for
more information.
Financial instruments that potentially subject us to significant
amounts of credit risk consist of cash, cash equivalents,
short-term investments and accounts receivable. Our cash, cash
equivalents and short-term investment balances are deposited
with high-quality financial institutions. At times, we maintain
cash balances in excess of Federal Deposit Insurance Corporation
(or the foreign country equivalent institution) limits. Our
accounts receivable are generally unsecured. In some cases, for
certain higher risk customers, we require a customer deposit. We
routinely assess the financial strength of our customers and
maintain allowances for anticipated losses, where necessary.
Foreign Currency. In Mexico, Brazil, Argentina
and Chile, the functional currency is the local currency, while
in Peru the functional currency is the U.S. dollar since it
is the currency used for substantially all transactions. We
translate the results of operations for our
non-U.S. subsidiaries
and affiliates from the designated functional currency to the
U.S. dollar using average exchange rates during the
relevant period, while we translate assets and liabilities at
the exchange rate in effect at the reporting date. We translate
equity balances at historical rates. We report the resulting
gains or losses from translating foreign currency financial
statements as other comprehensive income or loss. We remeasure
Nextel Perus financial statements into U.S. dollars
and record remeasurement gains and losses in the statement of
operations. For the years ended
F-9
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
1.
|
Summary
of Operations and Significant Accounting
Policies (Continued)
|
December 31, 2006 and 2005, we reported remeasurement gains
in our income tax provision of $2.3 million and
$2.4 million, respectively, related to Nextel Perus
deferred tax assets and liabilities.
In general, monetary assets and liabilities designated in
U.S. dollars give rise to foreign currency realized and
unrealized transaction gains and losses, which we record in the
consolidated statement of operations as foreign currency
transaction gains, net. We report the effects of changes in
exchange rates associated with certain
U.S. dollar-denominated intercompany loans and advances to
our foreign subsidiaries that are of a long-term investment
nature as other comprehensive income or loss in our consolidated
financial statements. We have determined that
U.S. dollar-denominated intercompany loans and advances to
Nextel Brazil and Nextel Chile and an intercompany payable due
to Nextel Mexico are of a long-term investment nature.
Supplemental
Cash Flow Information.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands)
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for capital
expenditures, including capitalized interest
|
|
$
|
551,256
|
|
|
$
|
385,908
|
|
|
$
|
227,702
|
|
Change in capital expenditures
accrued and unpaid or financed, including accreted interest
capitalized
|
|
|
76,169
|
|
|
|
83,958
|
|
|
|
22,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
627,425
|
|
|
$
|
469,866
|
|
|
$
|
249,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest costs
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
$
|
89,379
|
|
|
$
|
72,470
|
|
|
$
|
55,113
|
|
Interest capitalized
|
|
|
13,483
|
|
|
|
9,544
|
|
|
|
2,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
102,862
|
|
|
$
|
82,014
|
|
|
$
|
57,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions of assets and
business combinations
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired
|
|
$
|
288,735
|
|
|
$
|
48,442
|
|
|
$
|
19,672
|
|
Less: liabilities assumed and
deferred tax liabilities incurred
|
|
|
(78,854
|
)
|
|
|
(34,340
|
)
|
|
|
(6,672
|
)
|
Less: cash acquired
|
|
|
(231
|
)
|
|
|
(9
|
)
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
209,650
|
|
|
$
|
14,093
|
|
|
$
|
12,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest, net of
amounts capitalized
|
|
$
|
61,561
|
|
|
$
|
40,304
|
|
|
$
|
67,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income
taxes
|
|
$
|
87,738
|
|
|
$
|
81,057
|
|
|
$
|
50,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2006, 2005 and 2004, we
had $20.1 million, $9.1 million and $5.2 million
in non-cash financing activities related to co-location capital
lease obligations on our communication towers. As discussed in
Note 7, during the year ended December 31, 2006,
Nextel Brazil and Nextel Argentina financed $4.0 million
and $3.0 million, respectively, in software purchased from
Motorola, Inc. During the year ended December 31, 2005,
Nextel Mexico financed $7.7 million in software purchased
from Motorola, Inc. and Nextel Brazil financed $7.6 million
of licenses it acquired from the Brazilian government.
During 2005, we revised the accounting for our corporate
aircraft lease from operating to capital. See Note 7 for
additional information.
As discussed in Note 7, in the fourth quarter of 2006, the
remaining principal amount of our 3.5% convertible notes was
fully converted into 6,852,150 shares of our common stock.
F-10
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
1.
|
Summary
of Operations and Significant Accounting
Policies (Continued)
|
Cash and Cash Equivalents. We consider all
highly liquid investments with an original maturity of three
months or less at the time of purchase to be cash equivalents.
Cash equivalents primarily consist of money market funds.
Short-Term Investments. All of our short-term
investments represent investments in debt securities of
commercial paper and government securities with maturities less
than one year. We classify investments in debt securities as
available-for-sale
as of the balance sheet date and report them at fair value. All
of our
available-for-sale
securities mature within one year. We record unrealized gains
and losses, net of income tax, as other comprehensive income or
loss. During the years ended December 31, 2006, 2005 and
2004, we did not have any material unrealized gains or losses
for
available-for-sale
securities. We report realized gains or losses, as determined on
a specific identification basis, and
other-than-temporary
declines in value, if any, in realized gains or losses on
investments. We did not have any short-term investments as of
December 31, 2006. As of December 31, 2005, our
short-term investments consisted of $7.4 million of
government securities.
We assess declines in the value of individual investments to
determine whether the decline is
other-than-temporary
and thus the investment is impaired. We make this assessment by
considering available evidence, including changes in general
market conditions, specific industry and individual company
data, the length of time and the extent to which the market
value has been less than cost, the financial condition and
near-term prospects of the individual company and our intent and
ability to hold the investment.
Handset and Accessory Inventory. We record
handsets and accessories at the lower of cost or market. We
determine cost by the weighted average costing method. Since we
subsidize the cost of our handsets to our customers, we use
market prices as established by Motorola to determine the market
price of our inventory. We expense handset costs at the time of
sale and classify such costs in cost of digital handset and
accessory sales. We write down our inventory to cover losses
related to obsolete and slow moving inventory. As of
December 31, 2006 and 2005, our provision for inventory
losses was $6.0 million and $5.9 million, respectively.
Property, Plant and Equipment. We record
property, plant and equipment, including improvements that
extend useful lives or enhance functionality, at cost, while we
charge maintenance and repairs to operations as incurred. We
capitalize internal and external costs incurred to develop
internal-use software, which consist primarily of costs related
to configuration, interfaces, installation and testing. We also
capitalize internal and external costs incurred to develop
specified upgrades and enhancements if they result in
significant additional functionalities for our existing
software. We expense all costs related to evaluation of software
needs, data conversion, training, maintenance and other
post-implementation operating activities.
We calculate depreciation using the straight-line method based
on estimated useful lives ranging from 3 to 20 years for
digital mobile network equipment and network software and 3 to
10 years for office equipment, furniture and fixtures, and
other, which includes
non-network
internal use software. We depreciate our corporate aircraft
capital lease using the straight-line method based on the lease
term of 8 years. We amortize leasehold improvements over
the shorter of the lease terms or the useful lives of the
improvements.
Construction in progress includes internal and external labor,
materials, transmission and related equipment, engineering, site
development, interest and other costs relating to the
construction and development of our digital wireless networks.
We do not depreciate assets under construction until they are
ready for their intended use. We capitalize interest and other
costs, including labor and software upgrades, which are
applicable to the construction of, and significant improvements
that enhance functionality to, our digital mobile network
equipment.
F-11
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
1.
|
Summary
of Operations and Significant Accounting
Policies (Continued)
|
We periodically review the depreciation method, useful lives and
estimated salvage value of our property, plant and equipment and
revise those estimates if current estimates are significantly
different from previous estimates.
Asset Retirement Obligations. We record an
asset retirement obligation and an associated asset retirement
cost when we have a legal obligation in connection with the
retirement of tangible long-lived assets. Our obligations arise
from certain of our leases and relate primarily to the cost of
removing our equipment from such leased sites. We report asset
retirement obligations and related asset retirement costs at
fair value computed using discounted cash flow techniques. In
addition, we review the adequacy of asset retirement obligations
on a regular basis and more often if changes in events or
circumstances warrant it. As of December 31, 2006 and 2005,
our asset retirement obligations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Balance, January 1
|
|
$
|
14,923
|
|
|
$
|
4,126
|
|
New asset retirement obligations
|
|
|
10,498
|
|
|
|
6,702
|
|
Accretion
|
|
|
4,273
|
|
|
|
3,902
|
|
Settlement of asset retirement
obligations
|
|
|
(111
|
)
|
|
|
|
|
Foreign currency translation and
other
|
|
|
(286
|
)
|
|
|
193
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31
|
|
$
|
29,297
|
|
|
$
|
14,923
|
|
|
|
|
|
|
|
|
|
|
Derivative Financial Instruments. We enter
into derivative transactions for hedging or risk management
purposes only. We have not and will not enter into any
derivative transactions for speculative or profit generating
purposes. We formally document all relationships between hedging
instruments and hedged items, as well as our risk management
objectives for undertaking various hedge transactions before
entering into the transaction.
We record our derivative financial instruments at fair value as
either assets or liabilities. We recognize changes in fair value
either in earnings or equity, depending on the nature of the
underlying exposure being hedged and how effective the
derivatives are at offsetting price movements and the underlying
exposure. We evaluate the effectiveness of our hedging
relationships both at the hedge inception and on an ongoing
basis. Our derivative instruments are designated as cash-flow
hedges and are considered to be highly effective. We record the
changes in fair value of our derivatives financial instruments
as other comprehensive income or loss until the underlying
hedged item is recognized in earnings. We recognize in earnings
immediately any ineffective portion of a derivatives
change in fair value.
Valuation of Long-Lived Assets. We review
long-lived assets such as property, plant and equipment and
identifiable intangible assets with definite useful lives, which
includes our licenses, for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be
recoverable. If the total of the expected undiscounted future
cash flows is less than the carrying amount of the asset, we
recognize a loss, if any, for the difference between the fair
value and carrying value of the asset.
Intangible Assets. Our intangible assets are
composed of wireless telecommunications licenses, customer base
and a trade name. We amortize our intangible assets using the
straight-line method over the estimated period benefited. We
amortize all of our licenses that existed as of the date we
emerged from reorganization over their estimated useful lives,
which range from 16 to 17 years. We
amortize licenses acquired after our emergence from
reorganization over their estimated useful lives of 12 to
20 years. In the countries in which we operate, licenses
are customarily issued conditionally for specified periods of
time ranging from 30 to 40 years, including renewals. The
licenses are generally renewable provided the licensee has
complied with applicable rules and policies. We believe we have
complied with
F-12
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
1.
|
Summary
of Operations and Significant Accounting
Policies (Continued)
|
these standards in all material respects. However, the political
and regulatory environments in the markets we serve are
continuously changing and, in many cases, the renewal fees could
be significant. Therefore, we do not view the renewal of our
licenses to be perfunctory. In addition, the wireless
telecommunications industry is experiencing significant
technological change, and the commercial life of any particular
technology is difficult to predict. Most of our licenses give us
the right to use 800 MHz spectrum that is non-contiguous,
and the iDEN technology is the only widespread, commercially
available digital technology that operates on non-contiguous
spectrum. As a result, our ability to deploy new technologies on
our licensed 800MHz spectrum is limited. In light of the
uncertainty regarding the availability of alternative
technologies and regarding the commercial life of any
technology, including the iDEN technology, our ability to use
our 800MHz spectrum for an indefinite period cannot be assured.
As a result, we classify our licenses as finite lived assets.
Through December 31, 2005, we amortized our customer base
intangible assets over their respective estimated useful lives,
generally two to three years. As of December 31, 2005, our
customer base intangible assets were fully amortized. Through
December 31, 2004, we amortized the Nextel trade name in
each of the countries in which we operate over the estimated
remaining useful lives of our licenses as of the date we emerged
from reorganization, generally 16 to 17 years. As of
December 31, 2004, the net book value of the trade name was
reduced to zero due to the reversal of deferred tax asset
valuation allowances existing at our emergence from
reorganization.
Revenue Recognition. Operating revenues
primarily consist of service revenues and revenues generated
from the sale and rental of digital handsets and accessories. We
present our operating revenues net of value-added taxes, but we
include certain revenue-based taxes for which we are the primary
obligor. Service revenues primarily include fixed monthly access
charges for digital mobile telephone service and digital two-way
radio and other services, including revenues from calling party
pays programs where applicable and variable charges for airtime
and digital two-way radio usage in excess of plan minutes, long
distance charges and international roaming revenues derived from
calls placed by our customers on other carriers networks.
We also have other sources of revenues. Other revenues primarily
include amounts generated from our handset maintenance programs,
roaming revenues generated from other companies customers
that roam on our networks and co-location rental revenues from
third party tenants that rent space on our towers.
We recognize revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the sale price is fixed and
determinable and collectibility is reasonably assured. The
following are the policies applicable to our major categories of
revenue transactions.
We recognize revenue for access charges and other services
charged at fixed amounts ratably over the service period, net of
credits and adjustments for service discounts and value-added
taxes. We recognize excess usage, local, long distance and
calling party pays revenue at contractual rates per minute as
minutes are used. We record cash received in excess of revenues
earned as deferred revenues.
We recognize revenue generated from our handset maintenance
programs on a monthly basis at fixed amounts over the service
period. We recognize roaming revenues at contractual rates per
minute as minutes are used. We recognize co-location revenues
from third party tenants on a monthly basis based on the terms
set by the underlying agreements.
We bill excess usage to our customers in arrears. In order to
recognize the revenues originated from excess usage subsequent
to customer invoicing through the end of the reporting period,
we estimate the unbilled portion based on the usage that the
handset had during the part of the month already billed, and we
use the actual usage to estimate the unbilled usage for the rest
of the month taking into consideration working days and
seasonality. Our estimates are based on our experience in each
market. We periodically evaluate our
F-13
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
1.
|
Summary
of Operations and Significant Accounting
Policies (Continued)
|
estimation process by comparing our estimates to actual excess
usage revenue billed the following month. As a result, actual
usage could differ from our estimates.
We recognize revenue from handset and accessory sales when title
and risk of loss passes upon delivery of the handset or
accessory to the customer as this is considered to be a separate
earnings process from the sale of wireless services.
We recognized the proceeds received from our spectrum use and
build-out agreement with Nextel Communications as deferred
revenues. We amortize this amount into revenue on a
straight-line basis over 15.5 years, which represents the
average remaining useful life of our licenses in the Baja region
of Mexico as of the date we began providing service under this
agreement. See Note 14 for additional information relating
to this agreement.
Handsets Provided Under Leases. Our operating
companies periodically provide handsets to our customers under
lease agreements. We evaluate each lease agreement at its
inception to determine whether the agreement represents a
capital lease or an operating lease. Under capital lease
agreements, we expense the full cost of the handset at the
inception of the lease term and recognize digital handset sales
revenue upon delivery of the handset to the customer and
collection of the up-front rental payment, which corresponds to
the inception of the lease term. Under operating lease
agreements, we expense the cost of the handset in excess of the
sum of the minimum contractual revenues associated with the
handset lease. We recognize revenue ratably over the lease term.
Revenue generated under the operating lease arrangement relates
primarily to the up-front rental payments required at the
inception of lease terms.
Allowance for Doubtful Accounts. We establish
an allowance for doubtful accounts receivable sufficient to
cover probable and reasonably estimated losses. Our methodology
for determining our allowance for doubtful accounts receivable
requires significant estimates. Since we have several hundred
thousand accounts, it is impracticable to review the
collectibility of all individual accounts when we determine the
amount of our allowance for doubtful accounts receivable each
period. Therefore, we consider a number of factors in
establishing the allowance on a
market-by-market
basis, including historical collection experience, current
economic trends, estimates of forecasted write-offs, agings of
the accounts receivable portfolio and other factors. While we
believe that the estimates we use are reasonable, actual results
could differ from those estimates.
Customer Related Direct Costs. We recognize
all costs of handset sales when title and risk of loss passes
upon delivery of the handset to the customer.
Advertising Costs. We expense costs related to
advertising and other promotional expenditures as incurred.
Advertising costs totaled $63.9 million, $46.4 million
and $36.3 million during the years ended December 31,
2006, 2005 and 2004, respectively.
Stock-Based Compensation. Through
December 31, 2005, we accounted for share-based payments
using the intrinsic value method 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 Statement of Financial Accounting Standards, or
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.
Effective January 1, 2006, we adopted the fair value
recognition provisions of SFAS No. 123 (Revised 2004),
Share-Based Payment, or 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 year ended
December 31, 2006 includes compensation expense for all
share-based payment awards granted prior to, but not fully
vested as of, January 1, 2006. Share-based payment
F-14
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
1.
|
Summary
of Operations and Significant Accounting
Policies (Continued)
|
expense for all share-based payment awards granted after
January 1, 2006 is estimated in accordance with the
provisions of SFAS 123R. We recognize these compensation
costs net of actual forfeitures for only those shares expected
to vest on a straight-line basis over the requisite service
period of the award. See Note 13 for more information.
Net Income Per Common Share, Basic and
Diluted. Basic net income per common share
includes no dilution and is computed by dividing the net income
by the weighted average number of common shares outstanding for
the period. Diluted net income per common share reflects the
potential dilution of securities that could participate in our
earnings. As presented for the year ended December 31,
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
2.875% convertible notes and our 2.75% convertible
notes as if they were converted at the beginning of the year.
Our calculation of diluted net income per share for the year
ended December 31, 2006 also includes shares that would
have been issued had our 3.5% convertible notes been
converted at the beginning of the year instead of on the actual
conversion date.
As presented for the year ended December 31, 2005, our
calculation of diluted net income per share includes common
shares resulting from shares issuable upon the potential
exercise of stock options under our stock-based employee
compensation plans and our restricted stock, as well as common
shares resulting from the potential conversion of our
3.5% convertible notes, our 2.875% convertible notes
and our 2.75% convertible notes.
As presented for the year ended December 31, 2004, our
calculation of diluted net income per share includes common
shares resulting from shares issuable upon the potential
exercise of stock options under our stock-based employee
compensation plans and our restricted stock, but does not
include common shares resulting from the potential conversion of
our 3.5% convertible notes or our 2.875% convertible notes
since their effect would have been antidilutive to our net
income per share.
The following tables provide a reconciliation of the numerators
and denominators used to calculate basic and diluted net income
per common share as disclosed in our consolidated statements of
operations for the years ended December 31, 2006, 2005 and
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
|
Income
|
|
|
Shares
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
|
(in thousands, except per share data)
|
|
|
Basic net income per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
294,490
|
|
|
|
154,085
|
|
|
$
|
1.91
|
|
Effect of dilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
4,521
|
|
|
|
|
|
Restricted stock
|
|
|
|
|
|
|
936
|
|
|
|
|
|
Convertible notes, net of
capitalized interest and taxes
|
|
|
14,106
|
|
|
|
24,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
308,596
|
|
|
|
184,282
|
|
|
$
|
1.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-15
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
1.
|
Summary
of Operations and Significant Accounting
Policies (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2005
|
|
|
|
Income
|
|
|
Shares
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
|
(in thousands, except per share data)
|
|
|
Basic net income per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
174,781
|
|
|
|
146,336
|
|
|
$
|
1.19
|
|
Effect of dilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
5,796
|
|
|
|
|
|
Restricted stock
|
|
|
|
|
|
|
646
|
|
|
|
|
|
Convertible notes, net of
capitalized interest and taxes
|
|
|
11,861
|
|
|
|
23,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
186,642
|
|
|
|
176,562
|
|
|
$
|
1.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004
|
|
|
|
Income
|
|
|
Shares
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
|
(in thousands, except per share data)
|
|
|
Basic net income per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
57,289
|
|
|
|
139,166
|
|
|
$
|
0.41
|
|
Effect of dilutive
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
|
5,705
|
|
|
|
|
|
Restricted stock
|
|
|
|
|
|
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
57,289
|
|
|
|
145,015
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Financing Costs. We capitalize costs
incurred to obtain new debt financing as other non-current
assets. We amortize debt financing costs over the shorter of the
term of the underlying debt or the holders first put date,
when applicable, using the effective interest method. We
reclassify to paid-in capital the net carrying value of deferred
financing costs related to convertible notes that are converted
by the holder.
Income Taxes. We account for income taxes
using the asset and liability method, under which we recognize
deferred income taxes for the tax consequences attributable to
differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities, as well as for
tax loss carryforwards and tax credit carryforwards. We measure
deferred tax assets and liabilities using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recoverable or settled.
We recognize the effect on deferred taxes of a change in tax
rates in income in the period that includes the enactment date.
We provide a valuation allowance against deferred tax assets if,
based upon the weight of available evidence, we believe it is
more likely than not that some or all of the deferred tax assets
will not be realized. We report remeasurement gains and losses
related to deferred tax assets and liabilities in our income tax
provision.
A substantial portion of our deferred tax asset valuation
allowance relates to deferred tax assets that, if realized, will
not result in a benefit to our income tax provision. In
accordance with Statement of Position, or SOP,
90-7,
Financial Reporting By Entities in Reorganization Under
the Bankruptcy Code, or
SOP 90-7,
we recognize decreases in the valuation allowance existing at
the reorganization date first as a reduction in the carrying
value of intangible assets existing at the reorganization date
and then as an increase to paid-in capital. As of
December 31, 2004, we reduced to zero the carrying value of
our intangible assets existing at the reorganization date. We
will record future decreases, if any, of the valuation allowance
existing on the reorganization date as an increase to paid-in
capital. We will record decreases, if any, of the post-
F-16
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
1.
|
Summary
of Operations and Significant Accounting
Policies (Continued)
|
reorganization valuation allowance as a benefit to our income
tax provision. In accordance with SFAS 123R, we recognize
decreases in the valuation allowance attributable to the excess
tax benefits resulting from the exercise of employee stock
options as an increase to paid-in capital. In each market and in
the U.S., we recognize decreases in the valuation allowance
first as a decrease in the remaining valuation allowance that
existed as of the reorganization date, then as a decrease in any
post-reorganization valuation allowance, and finally as a
decrease of the valuation allowance associated with stock option
deductions.
We assess the realizability of our deferred tax assets at each
reporting period. Our assessments generally consider several
factors, including the reversal of existing deferred tax asset
temporary differences, projected future taxable income, tax
planning strategies and historical and future book income
adjusted for permanent
book-to-tax
differences.
Reclassifications. We have reclassified some
prior period amounts to conform to our current year
presentation. These reclassifications did not have a material
impact on previously reported balances.
Out-of-Period
Adjustments. During the year ended
December 31, 2006, we identified errors in our financial
statements for the years ended December 31, 2003, 2004 and
2005. These errors primarily related to accounting for income
taxes, the classification of debt between short-term and
long-term liabilities, the amortization of leasehold
improvements and delays in the transfer of
construction-in-progress
to depreciable assets in Mexico and amortization of certain
software costs in Argentina. We corrected these errors during
2006. For the year ended December 31, 2006, we decreased
operating income by $1.3 million, decreased income before
income tax provision by $1.5 million and increased net
income by $14.5 million to correct these errors. We do not
believe that these adjustments are material to our consolidated
financial statements for the year ended December 31, 2006
or to any prior periods.
New Accounting Pronouncements. In October
2005, the FASB issued Staff Position
No. 13-1,
Accounting for Rental Costs Incurred during a Construction
Period, or FSP
No. 13-1,
to address accounting for rental costs associated with building
and ground operating leases. FSP
No. 13-1
requires that rental costs associated with ground or building
operating leases that are incurred during a construction period
be recognized as rental expense. FSP
No. 13-1
is effective for the first reporting period beginning after
December 15, 2005 and requires 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
on a prospective basis, 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 re-measurement 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. The adoption of SFAS 155 did not
have a material impact on our consolidated financial statements.
In June 2006, the FASB ratified the consensus of the EITF on
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. EITF
05-1 states
that the issuance of equity securities to settle an instrument
(pursuant to the instruments original conversion terms)
that becomes convertible upon the issuers exercise of a
call option should be accounted for
F-17
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
1.
|
Summary
of Operations and Significant Accounting
Policies (Continued)
|
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
effective for all conversions within its scope occurring in
interim or annual periods beginning after June 28, 2006.
The future impact of EITF
05-1 on our
financial statements will depend on the facts and circumstances
specific to a given conversion within the scope of this Issue.
The adoption of EITF
05-1 did not
have a material impact on our consolidated financial statements
based on the terms of our existing securities.
In June 2006, the FASB ratified the consensus of the Emerging
Issues Task Force, or EITF, on
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.
EITF
06-3 states
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. EITF
06-3 is
effective for financial reports in interim and annual reporting
periods beginning after December 15, 2006. Prior to 2005,
we reported certain revenue-based taxes imposed on us in Brazil
as a reduction of revenue. We viewed these taxes 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 by the amount of
these taxes, and our financial statements reflected
corresponding general and administrative expenses to present
these revenue-based taxes related to the full year 2005 on a
gross basis 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 year ended December 31, 2005,
Nextel Brazil recorded $18.6 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 currently disclose our policy with regard to these
types of taxes in our revenue recognition policy. Therefore, we
do not believe the adoption of EITF
06-3 will
have a material impact on our consolidated financial statements.
In July 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes An
Interpretation of FASB Statement No. 109, or
FIN 48. FIN 48 clarifies the accounting for
uncertainty in income tax positions and is effective for fiscal
years beginning after December 15, 2006. FIN 48
provides that the financial statement effects of an income tax
position can only be recognized in the financial statements
when, based on the technical merits, it is
more-likely-than-not that the position will be
sustained upon examination. The cumulative effect of applying
the provisions of FIN 48 should be reported as an
adjustment to the opening balance of retained earnings for that
fiscal year. We are currently evaluating the impact that
FIN 48 may have on our consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurement, or SFAS 157, which
provides guidance for using fair value to measure assets and
liabilities when required for recognition or disclosure
purposes. SFAS 157 is intended to make the measurement of
fair value more consistent and comparable and improve
disclosures about these measures. Specifically, SFAS 157
(1) clarifies the principle that fair value should be based
on the assumptions market participants would use when pricing
the asset or liability, (2) establishes a fair value
hierarchy that prioritizes the information used to develop those
assumptions, (3) clarifies the information required to be
used to measure fair value, (4) determines the frequency of
fair value measures and (5) requires companies to make
expanded disclosures about the methods and assumptions used to
measure fair value and the fair value measurements effect
on earnings. However, SFAS 157 does not expand the use of
fair value to any new circumstances or determine when fair value
should be used in the financial statements. SFAS 157 is
effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods
within those fiscal years, with some exceptions. SFAS 157
is to be applied prospectively as of the first interim period
for the fiscal year in which it is initially
F-18
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
1.
|
Summary
of Operations and Significant Accounting
Policies (Continued)
|
adopted, except for a limited form of retrospective application
for some specific items. We are currently evaluating the impact
that SFAS 157 may have on our consolidated financial
statements.
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans An Amendment of FASB
Statements No. 87, 88, 106, and 132R, or
SFAS 158. This standard requires an employer to:
(a) recognize in its statement of financial position an
asset for a plans overfunded status or a liability for a
plans underfunded status; (b) measure a plans
assets and its obligations that determine its funded status as
of the end of the employers fiscal year (with limited
exceptions); and (c) recognize changes in the funded status
of a defined benefit postretirement plan in the year in which
the changes occur. Those changes will be reported in
comprehensive income of a business entity and in changes in net
assets of a
not-for-profit
organization. The requirement to recognize the funded status of
a benefit plan and the disclosure requirements are effective as
of the end of the fiscal year ending after December 15,
2006. The requirement to measure plan assets and benefit
obligations as of the date of the employers fiscal
year-end statement of financial position is effective for fiscal
years ending after December 15, 2008. The adoption of
SFAS 158 in the fourth quarter of 2006 did not have a
material impact on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities, Including an Amendment of FASB Statement
No. 115. SFAS No. 159 permits entities to
choose to measure many financial instruments and certain other
items at fair value that are not currently required to be
measured at fair value. Unrealized gains and losses on items for
which the fair value option has been elected are reported in
earnings. SFAS No. 159 does not affect any existing
accounting literature that requires certain assets and
liabilities to be carried at fair value. SFAS No. 159
is effective for fiscal years beginning after November 15,
2007. We are currently evaluating the impact that
SFAS No. 159 will have on our consolidated financial
statements.
|
|
2.
|
Changes
in Accounting Principles
|
Adoption
of SFAS 123R
Effective January 1, 2006, we adopted the fair value
recognition provisions of SFAS 123R. We used the modified
prospective transition method and therefore did not restate our
prior periods results. Under this transition method,
share-based payment expense for the year ended December 31,
2006 includes compensation expense for all share-based payment
awards granted prior to, but not fully vested as of,
January 1, 2006. Share-based payment expense for all
share-based payment awards granted after January 1, 2006 is
estimated in accordance with the provisions of SFAS 123R.
See Note 13 for more information.
Elimination
of One-Month Lag Reporting Policy
Until September 30, 2004, we presented the financial
information of our consolidated foreign operating companies in
our consolidated financial statements utilizing accounts as of a
date one month earlier than the accounts of our parent company,
U.S. subsidiaries and our non-operating
non-U.S. subsidiaries,
which we refer to as our one-month lag reporting policy, to
ensure timely reporting of consolidated results. As a result,
each year the financial position, results of operations and cash
flows of each of our wholly-owned foreign operating companies in
Mexico, Brazil, Argentina, Peru and Chile were presented as of
and for the year ended November 30. In contrast, financial
information relating to our parent company,
U.S. subsidiaries and our non-operating
non-U.S. subsidiaries
was presented as of and for the year ended December 31.
We enhanced our financial reporting systems in our markets and
redesigned processes to increase the timeliness of internal
reporting. These enhancements were in the form of aligned
financial processes and common and updated information systems.
As a result of these improvements, we are able to more quickly
F-19
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
2.
|
Changes
in Accounting Principles (Continued)
|
accumulate, analyze and consolidate our financial statement
information, which enabled us to eliminate the one-month
reporting lag for the year ended December 31, 2004 and
report consolidated results using a consistent calendar year
reporting period for the entire Company. The change in reporting
policy also resulted in the communication of more current and
useful information to our investors. We believe these benefits
justified the elimination of the one-month lag reporting policy
and resulted in a preferable method of accounting.
Effective January 1, 2004, we accounted for the elimination
of the one-month lag reporting policy as a change in accounting
principle in accordance with Accounting Principle Board, or APB,
Opinion No. 20, Accounting Changes. Under APB
Opinion No. 20, a change in accounting principle is
determined in the beginning of the period of change. As a
result, we treated the month of December 2003, which was
normally the first month in the fiscal year of our foreign
operating companies, as the lag month, and our fiscal year for
all of our foreign operating companies begins with January and
ends with December. Each of our successive quarterly and annual
consolidated financial statements has continued to follow the
same basis of consolidation for our foreign operating companies.
In accordance with the requirements of APB Opinion No. 20,
we have reflected our foreign operating companies net
income for December 2003 on the face of our consolidated
statement of operations for the year ended December 31,
2004 as the cumulative effect of a change in accounting
principle. In addition, we have reflected the related net cash
flows for the month of December 2003 as a separate line item in
our consolidated statement of cash flows for the year ended
December 31, 2004.
F-20
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
2.
|
Changes
in Accounting Principles (Continued)
|
The combined statement of operations of our foreign operating
companies for the month of December 2003 is as follows (in
thousands):
|
|
|
|
|
Operating revenues
|
|
|
|
|
Service and other revenues
|
|
$
|
82,108
|
|
Digital handset and accessory
revenues
|
|
|
9,293
|
|
|
|
|
|
|
|
|
|
91,401
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
Cost of service (exclusive of
depreciation included below)
|
|
|
22,256
|
|
Cost of digital handset and
accessory sales
|
|
|
12,169
|
|
Selling, general and administrative
|
|
|
29,460
|
|
Depreciation
|
|
|
5,842
|
|
Amortization
|
|
|
1,260
|
|
|
|
|
|
|
|
|
|
70,987
|
|
|
|
|
|
|
Operating income
|
|
|
20,414
|
|
|
|
|
|
|
Other income
(expense)
|
|
|
|
|
Interest expense
|
|
|
(2,436
|
)
|
Interest income
|
|
|
741
|
|
Foreign currency transaction
losses, net
|
|
|
(5,404
|
)
|
Other expense, net
|
|
|
(447
|
)
|
|
|
|
|
|
|
|
|
(7,546
|
)
|
|
|
|
|
|
Income before income tax
provision
|
|
|
12,868
|
|
Income tax provision
|
|
|
(11,898
|
)
|
|
|
|
|
|
Net income (cumulative effect
of change in accounting principle)
|
|
$
|
970
|
|
|
|
|
|
|
The components of the $11.9 million income tax provision
related to the cumulative effect of the change in accounting
principle consist of $6.7 million in current foreign tax
expense and $5.2 million in deferred foreign tax expense.
F-21
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
2.
|
Changes
in Accounting Principles (Continued)
|
The combined statement of cash flows of our foreign operating
companies for the month of December 2003 is as follows (in
thousands):
|
|
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
Net income
|
|
$
|
970
|
|
Adjustments to reconcile net
income to net cash provided by operating activities:
|
|
|
|
|
Depreciation and amortization
|
|
|
7,102
|
|
Provision for losses on accounts
receivable
|
|
|
670
|
|
Provision for losses on inventory
|
|
|
81
|
|
Foreign currency transaction
losses, net
|
|
|
5,404
|
|
Deferred income tax provision
|
|
|
11,207
|
|
Loss on disposal of property,
plant and equipment
|
|
|
37
|
|
Other, net
|
|
|
(273
|
)
|
Change in assets and liabilities:
|
|
|
|
|
Accounts receivable, gross
|
|
|
955
|
|
Handset and accessory inventory,
gross
|
|
|
(942
|
)
|
Prepaid expenses and other assets
|
|
|
(582
|
)
|
Other long-term assets
|
|
|
(1,716
|
)
|
Accounts payable, accrued expenses
and other
|
|
|
(1,636
|
)
|
Current deferred revenue
|
|
|
1,420
|
|
Due to related parties
|
|
|
(1,921
|
)
|
Other long-term liabilities
|
|
|
3,060
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
23,836
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
Capital expenditures
|
|
|
(22,824
|
)
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(22,824
|
)
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
Gross proceeds from towers
financing transactions
|
|
|
5,890
|
|
Repayments under financing
obligations
|
|
|
(169
|
)
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
5,721
|
|
|
|
|
|
|
Effect of exchange rate changes
on cash and cash equivalents
|
|
|
1,229
|
|
|
|
|
|
|
Net increase in cash and cash
equivalents (cumulative effect of change in accounting
principle)
|
|
$
|
7,962
|
|
|
|
|
|
|
|
|
3.
|
Significant
Transactions
|
Nextel
Mexico Transactions
Cosmofrecuencias Acquisition. In September
2006, Nextel Mexico purchased all of the equity interests of
Cosmofrecuencias S.A. de C.V., or Cosmofrecuencias, and
Operadora de Communicaciones S.A. de C.V., or Operadora, for a
purchase price of $200.0 million in cash. Cosmofrecuencias
is the holding company of Operadora, which operated a public
telecommunications network using concession rights granted by
the Mexican government. On October 25, 2006, Nextel Mexico
received the necessary regulatory approvals and released the
$200.0 million to complete this acquisition. The
acquisition of these concessions gives Nextel Mexico a 50MHz
nationwide footprint of 3.4GHz spectrum and a local fixed/mobile
wireless telephone
F-22
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
3.
|
Significant
Transactions (Continued)
|
concession, which we expect will result in interconnect and
operating cost savings, as well as additional revenue generating
opportunities in the future. We accounted for this acquisition
as a purchase of assets. We allocated the purchase price to the
licenses acquired ($278.1 million) and a deferred tax
liability ($77.8 million), which represents the tax effect
of the difference between the book basis and tax basis of the
acquired licenses. We classify the licenses acquired as finite
lived assets, and we will amortize them over the remaining
statutory term, which was 12 years and 9 months as of
December 31, 2006.
AOL Mexico Acquisition. In April 2005, Nextel
Mexico purchased AOL Mexico, S. de R.L. de C.V. for
approximately $14.1 million in cash. As a result of this
transaction, Nextel Mexico obtained AOL Mexicos call
center assets, certain accounts receivable and access to AOL
Mexicos customer list, as well as tax loss carryforwards
which we believe are more likely than not to be realized. We
accounted for this transaction as a purchase of assets. This
acquisition is a related party transaction as one of our board
members was, at the time of the acquisition, also the president
and chief executive officer of AOL Latin America. Due to this
board members involvement with our company, he recused
himself from our decision to make this acquisition. We allocated
the purchase price to deferred tax assets ($48.4 million)
and a deferred credit ($34.3 million), which represents the
excess of the estimated fair value of the acquired tax
attributes over the allocated purchase price. We decrease the
deferred credit as a reduction of income tax expense in
proportion to the utilization of the acquired tax loss
carryforwards. As of December 31, 2006 and 2005, the
remaining balance of the deferred tax asset related to the tax
loss carryforward was $32.6 million and $44.4 million,
respectively.
Spectrum Auctions. On January 10, 2005,
the Mexican government began an auction for wireless spectrum
licenses in the
806-821 MHz
to
851-866 MHz
frequency band. Inversiones Nextel de Mexico, a subsidiary of
Nextel Mexico, participated in this auction. The spectrum
auction was divided into three separate auctions: Auction 15 for
Northern Mexico Zone 1, Auction 16 for Northern Mexico Zone
2 and Auction 17 for Central and Southern Mexico. The auctions
were completed between February 7 and February 11. Nextel
Mexico won an average of 15 MHz of nationwide spectrum,
except for Mexico City, where no spectrum was auctioned off and
where Nextel Mexico has licenses covering approximately
21 MHz. The corresponding licenses and immediate use of the
spectrum were granted to Inversiones Nextel de Mexico on
March 17, 2005. These new licenses have an initial term of
20 years, which we have estimated to be the amortization
period of the licenses, and are renewable thereafter for
20 years. Nextel Mexico paid an up-front fee of
$3.4 million for these licenses, excluding certain annual
fees, and $0.5 million in other capitalizable costs. The
spectrum licenses that Nextel Mexico acquired have allowed it to
significantly expand its digital mobile network, thereby
allowing it to cover a substantial portion of the Mexican
national geography and population.
Nextel
Brazil Transaction
Spectrum License Acquisitions. During the
second quarter of 2005, Nextel Brazil acquired spectrum licenses
from the Brazilian government for $8.3 million, of which it
paid $0.7 million. The remaining $7.6 million is due
in six annual installments beginning in 2008, and we are
amortizing these licenses over 15 years.
Nextel
Argentina Transactions
Velocom Acquisition. In July 2006, Nextel
Argentina signed an agreement, pending regulatory approval, to
purchase all of the stock of Velocom Argentina, S.A., a wireless
internet access and data transmission company, for
$6.0 million in cash and the assumption of certain
liabilities, of which $0.6 million has been paid. As a
result of this transaction, Nextel Argentina will acquire
50 MHz of 3.4 GHz spectrum nationwide.
F-23
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
3.
|
Significant
Transactions (Continued)
|
RMD Acquisition. In November 2004, Nextel
Argentina purchased all of the equity interests of Radio Movil
Digital Argentina S.A. (RMD), for a purchase price of
$13.0 million, of which $8.5 million was paid through
December 31, 2004, and the remaining $4.5 million was
paid in March 2005. RMD had no operations other than its
ownership of licenses for 650 channels of wireless spectrum. We
allocated the purchase price to the licenses acquired
($19.5 million), a deferred tax liability
($6.6 million), which represents the tax effect of the
difference between the book basis and tax basis of the acquired
licenses and other miscellaneous assets ($0.1 million). We
accounted for this acquisition as a purchase of assets. In
connection with this acquisition, Nextel Argentina obtained 650
channels of additional spectrum that will help to consolidate
and expand our spectrum position in Argentina. 150 of the
channels purchased provide coverage in Buenos Aires, and the
remaining 500 channels provide coverage in numerous other areas
of Argentina. We are amortizing the licenses acquired over
20 years.
Nextel
Peru Transaction
Millicom Acquisition. In October 2006, Nextel
Peru purchased all of the equity interests of Millicom Peru,
S.A., or Millicom, for a purchase price of $5.0 million.
Millicom provided limited high-speed data transmission and
internet access services mainly in Lima, Peru. We accounted for
this acquisition as a business combination. We allocated the
purchase price as follows: $4.8 million to licenses,
$0.5 million to a deferred tax asset, which represents the
tax effect of the difference between the book basis and tax
basis of the acquired licenses, and $0.8 million to current
assets. In addition, Nextel Peru assumed $1.1 million in
current liabilities. Nextel Peru did not acquire any other
intangible assets in connection with this transaction. The
licenses acquired by Nextel Peru in this transaction will give
it a 50MHz footprint of 3.5GHz spectrum in several markets in
Peru. We classify the licenses acquired as finite lived assets,
and we are amortizing them over the remaining statutory term of
14 years and 3 months.
|
|
4.
|
Property,
Plant and Equipment
|
The components of our property, plant and equipment are as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Land
|
|
$
|
3,767
|
|
|
$
|
3,910
|
|
Leasehold improvements
|
|
|
46,967
|
|
|
|
26,523
|
|
Digital mobile network equipment
and network software
|
|
|
1,494,638
|
|
|
|
892,639
|
|
Office equipment, furniture and
fixtures and other
|
|
|
200,762
|
|
|
|
130,936
|
|
Corporate aircraft capital lease
|
|
|
31,450
|
|
|
|
31,450
|
|
Less: Accumulated depreciation and
amortization
|
|
|
(474,520
|
)
|
|
|
(277,059
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
1,303,064
|
|
|
|
808,399
|
|
Construction in progress
|
|
|
86,086
|
|
|
|
128,122
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,389,150
|
|
|
$
|
936,521
|
|
|
|
|
|
|
|
|
|
|
F-24
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Our intangible assets consist of our licenses, customer base and
trade name, all of which have finite useful lives, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
|
Value
|
|
|
Amortization
|
|
|
Value
|
|
|
|
(in thousands)
|
|
|
Amortizable intangible
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licenses
|
|
$
|
389,526
|
|
|
$
|
(20,330
|
)
|
|
$
|
369,196
|
|
|
$
|
98,009
|
|
|
$
|
(15,205
|
)
|
|
$
|
82,804
|
|
Customer base
|
|
|
42,401
|
|
|
|
(42,401
|
)
|
|
|
|
|
|
|
42,727
|
|
|
|
(41,889
|
)
|
|
|
838
|
|
Trade name and other
|
|
|
1,664
|
|
|
|
(1,664
|
)
|
|
|
|
|
|
|
1,619
|
|
|
|
(1,619
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible
assets
|
|
$
|
433,591
|
|
|
$
|
(64,395
|
)
|
|
$
|
369,196
|
|
|
$
|
142,355
|
|
|
$
|
(58,713
|
)
|
|
$
|
83,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based solely on the carrying amount of amortizable intangible
assets existing as of December 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
|
|
|
2007
|
|
$
|
15,381
|
|
2008
|
|
|
28,810
|
|
2009
|
|
|
28,810
|
|
2010
|
|
|
28,810
|
|
2011
|
|
|
28,810
|
|
Actual amortization expense to be reported in future periods
could differ from these estimates as a result of additional
acquisitions of intangibles, as well as changes in exchange
rates and other relevant factors. During the years ended
December 31, 2006 and 2005, we did not acquire, dispose of
or write down any goodwill or intangible assets with indefinite
useful lives.
F-25
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Prepaid
Expenses and Other.
The components are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
General prepaid expenses
|
|
$
|
17,388
|
|
|
$
|
14,121
|
|
Commissions
|
|
|
16,164
|
|
|
|
|
|
Value added tax receivables
|
|
|
14,813
|
|
|
|
9,951
|
|
Advances to suppliers
|
|
|
4,793
|
|
|
|
3,715
|
|
Local income taxes
|
|
|
4,630
|
|
|
|
2,731
|
|
Spectrum fees
|
|
|
3,773
|
|
|
|
3,721
|
|
Insurance claims
|
|
|
3,193
|
|
|
|
2,851
|
|
Indefeasible rights of use
|
|
|
2,325
|
|
|
|
443
|
|
Due from employees
|
|
|
1,222
|
|
|
|
1,713
|
|
Other assets
|
|
|
3,075
|
|
|
|
574
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
71,376
|
|
|
$
|
39,820
|
|
|
|
|
|
|
|
|
|
|
Commissions includes advance payments made to certain
distributors for sales activities in subsequent periods,
typically three to four months. These payments are consistent
with our strategy of accelerated market expansion, particularly
in new cities.
Other
Assets.
The components are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Value added tax receivables
|
|
$
|
66,931
|
|
|
$
|
55,116
|
|
Deposits
|
|
|
20,983
|
|
|
|
14,671
|
|
Deferred financing costs
|
|
|
17,304
|
|
|
|
20,960
|
|
Income tax receivable
|
|
|
15,996
|
|
|
|
16,150
|
|
Long-term prepaid expenses
|
|
|
14,516
|
|
|
|
8,790
|
|
Handsets under operating leases
|
|
|
5,970
|
|
|
|
4,410
|
|
Other
|
|
|
1,631
|
|
|
|
905
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
143,331
|
|
|
$
|
121,002
|
|
|
|
|
|
|
|
|
|
|
F-26
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
6.
|
Balance
Sheet Details (Continued)
|
Accrued
Expenses and Other.
The components are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Capital expenditures
|
|
$
|
81,839
|
|
|
$
|
65,018
|
|
Payroll related items and
commissions
|
|
|
55,654
|
|
|
|
50,729
|
|
Income taxes
|
|
|
16,774
|
|
|
|
34,312
|
|
Network system and information
technology
|
|
|
46,741
|
|
|
|
37,689
|
|
Customer deposits
|
|
|
31,044
|
|
|
|
22,164
|
|
Non-income based taxes
|
|
|
30,430
|
|
|
|
26,133
|
|
Accrued contingencies
|
|
|
24,369
|
|
|
|
38,028
|
|
License fees
|
|
|
10,765
|
|
|
|
8,566
|
|
Deferred tax liability
|
|
|
7,756
|
|
|
|
4,188
|
|
Marketing
|
|
|
5,551
|
|
|
|
2,829
|
|
Professional fees
|
|
|
4,288
|
|
|
|
3,457
|
|
Insurance
|
|
|
3,163
|
|
|
|
3,301
|
|
Inventory
|
|
|
2,236
|
|
|
|
889
|
|
Other
|
|
|
21,855
|
|
|
|
14,455
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
342,465
|
|
|
$
|
311,758
|
|
|
|
|
|
|
|
|
|
|
Deferred
Credits.
The components are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Deferred income tax liability
|
|
$
|
88,886
|
|
|
$
|
17,770
|
|
Deferred credit from AOL Mexico
acquisition
|
|
|
21,147
|
|
|
|
30,368
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
110,033
|
|
|
$
|
48,138
|
|
|
|
|
|
|
|
|
|
|
Other
Long-Term Liabilities.
The components are as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Accrued contingencies
|
|
$
|
61,516
|
|
|
$
|
59,102
|
|
Asset retirement obligations
|
|
|
29,297
|
|
|
|
14,923
|
|
Severance plan liability
|
|
|
6,468
|
|
|
|
6,901
|
|
Derivative liability
|
|
|
1,408
|
|
|
|
1,174
|
|
Other
|
|
|
2,832
|
|
|
|
2,141
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
101,521
|
|
|
$
|
84,241
|
|
|
|
|
|
|
|
|
|
|
F-27
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
3.5% convertible notes due
2033
|
|
$
|
|
|
|
$
|
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
|
|
|
297,577
|
|
|
|
252,654
|
|
Tower financing
obligations
|
|
|
137,625
|
|
|
|
127,314
|
|
Capital lease
obligations
|
|
|
62,669
|
|
|
|
43,845
|
|
Brazil spectrum license
financing
|
|
|
9,770
|
|
|
|
7,583
|
|
Other
|
|
|
40
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
1,157,681
|
|
|
|
1,172,958
|
|
Less: current portion
|
|
|
(23,294
|
)
|
|
|
(24,112
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,134,387
|
|
|
$
|
1,148,846
|
|
|
|
|
|
|
|
|
|
|
3.5% Convertible Notes. Our
3.5% convertible notes due 2033, which we refer to as our
3.5% notes, were senior unsecured obligations and ranked
equal in right of payment with all of our other existing and
future senior unsecured debt. In addition, since we conduct all
of our operations through our subsidiaries, our 3.5% notes
effectively ranked junior in right of payment to all liabilities
of our subsidiaries. Cash interest on the 3.5% convertible
notes began to accrue on March 15, 2004 at an annual rate
of 3.5%.
On June 10, 2005 and June 20, 2005, certain
noteholders converted $40.0 million and $48.5 million,
respectively, principal face amount of our 3.5% convertible
notes into 3,000,000 shares and 3,635,850 shares
(75.0 shares issued per $1,000 of debt principal multiplied
by the debt principal) in accordance with the original terms of
the debt agreement. In connection with these conversions, we
paid in the aggregate $8.9 million in cash as additional
consideration for conversion, as well as $0.8 million of
accrued interest. We recorded the $8.9 million that we paid
as debt conversion expense in our consolidated statement of
operations. We reclassified to paid-in capital the remaining
$2.0 million of deferred financing costs related to the
notes that were converted.
In November 2006, we announced an offer to pay a cash premium of
$50.00, plus accrued and unpaid interest up to (but excluding)
the conversion date, for each of the remaining $1,000 principal
amount of the notes. The notes would be converted into shares of
our common stock pursuant to the terms defined at issuance (i.e.
a conversion rate of 75 shares per $1,000 principal
amount). On December 14, 2006, all of the holders of our
3.5% convertible notes converted the $91.4 million
remaining aggregate principal face amount of our 3.5%
convertible notes into 6,852,150 shares (75.0 shares
issued per $1,000 of debt principal multiplied by the debt
principal) in accordance with the original terms of the debt
agreement. In connection with this conversion, we paid in the
aggregate $4.6 million in cash as additional consideration
for conversion, as well as $0.8 million of accrued interest
and $0.5 million of direct external costs associated with
the transaction. We recorded the $4.6 million paid to the
noteholders and the $0.5 million of direct external costs
as debt conversion expense in our consolidated statement of
operations. We reclassified to paid-in capital the remaining
$1.5 million of deferred financing costs related to the
notes that were converted.
As presented for the year ended December 31, 2006, our
calculation of diluted net income per share includes shares that
would have been issued had our 3.5% convertible notes been
converted at the beginning of the year instead of on the
conversion date. As presented for the year ended
December 31, 2005, our calculation of diluted net income
per share includes the common shares resulting from the
potential conversion of our 3.5% convertible notes. As
presented for the year ended December 31, 2004, our
calculation of diluted
F-28
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
net income per share does not include the common shares
resulting from the potential conversion of our
3.5% convertible notes since their effect would have been
antidilutive to our net income per share.
2.875% Convertible Notes. In the
first quarter of 2004, we issued $300.0 million aggregate
principal amount of 2.875% convertible notes due 2034,
which we refer to as our 2.875% notes, resulting in total
net proceeds of $291.5 million after the payment of direct
issuance costs of $8.5 million, which we recorded as
deferred financing costs on our consolidated balance sheet and
are amortizing over five years. Our 2.875% notes are senior
unsecured obligations and rank equal in right of payment with
all of our other existing and future senior unsecured debt.
Historically, some of our long-term debt has been secured and
may be secured in the future. In addition, since we conduct all
of our operations through our subsidiaries, our
2.875% notes effectively rank junior in right of payment to
all liabilities of our subsidiaries. The 2.875% notes bear
interest at a rate of 2.875% per year on the principal
amount of the notes, payable semi-annually in arrears and in
cash on February 1 and August 1 of each year. The
2.875% notes will mature on February 1, 2034, when the
entire principal balance of $300.0 million will be due. The
2.875% notes were publicly registered, effective
July 22, 2004.
The noteholders have the right to require us to repurchase the
2.875% notes on February 1 of 2011, 2014, 2019, 2024 and 2029 at
a repurchase price equal to 100% of the principal amount, plus
any accrued and unpaid interest up to but excluding the
repurchase date. In addition, if a fundamental change or
termination of trading, as defined, occurs prior to maturity,
the noteholders have a right to require us to repurchase all or
part of the notes at a repurchase price equal to 100% of the
principal amount, plus accrued and unpaid interest.
The 2.875% notes are convertible, at the option of the
holder, into shares of our common stock at an adjusted
conversion rate of 37.5660 shares per $1,000 principal
amount of notes, or 11,269,800 aggregate common shares,
representing a conversion price of about $26.62 per share.
The 2.875% notes are convertible, subject to adjustment,
prior to the close of business on the final maturity date under
any of the following circumstances:
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during any fiscal quarter if the closing sale price of our
common stock exceeds 120% of the conversion price of
$26.62 per share for at least 20 trading days in the 30
consecutive trading days ending on the last trading day of the
preceding fiscal quarter;
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during the five business day period after any five consecutive
trading day period in which the trading price per note for each
day of this period was less than 98% of the product of the
closing sale price of our common stock and the number of shares
issuable upon conversion of $1,000 principal amount of the
notes, or 11,269,800 aggregate common shares, subject to certain
limitations;
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if the notes have been called for redemption by us; or
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upon the occurrence of specified corporate events, including a
fundamental change, as defined in the 2.875% note
agreement, the issuance of certain rights or warrants or the
distribution of certain assets or debt securities.
|
For the fiscal quarter ended December 31, 2006, the closing
sale price of our common stock exceeded 120% of the conversion
price for at least 20 trading days in the 30 consecutive trading
days ending on December 31, 2006. As a result, the
conversion contingency was met, and our 2.875% notes are
currently convertible into 37.5660 shares of our common
stock per $1,000 principal amount of notes, or an aggregate of
11,269,800 common shares, at a conversion price of about
$26.62 per share. We have the option to satisfy the
conversion of the 2.875% notes in shares of our common
stock, in cash or a combination of both.
The conversion feature related to the trading price per note
meets the criteria of an embedded derivative under
SFAS No. 133. As a result, we are required to separate
the value of the conversion feature from the
F-29
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
notes and record a liability on our consolidated balance sheet.
As of December 31, 2006 and 2005, the conversion feature
had a nominal value, and therefore it did not have a material
impact on our financial position or results of operations. We
will continue to evaluate the materiality of the value of this
conversion feature on a quarterly basis and record the resulting
adjustment, if any, in our consolidated balance sheet and
statement of operations.
The conversion rate of the 2.875% notes is subject to
adjustment if any of the following events occur:
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we issue common stock as a dividend or distribution on our
common stock;
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we issue to all holders of common stock certain rights or
warrants to purchase our common stock;
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we subdivide or combine our common stock;
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we distribute to all holders of our common stock shares of our
capital stock, evidences of indebtedness or assets, including
cash or securities but excluding the rights, warrants, dividends
or distributions specified above;
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we or one of our subsidiaries makes a payment in respect of a
tender offer or exchange offer for our common stock to the
extent that the cash and value of any other consideration
included in the payment per share of common stock exceeds the
current market price per share of common stock on the trading
day next succeeding the last date on which tenders or exchanges
may be made pursuant to this tender or exchange offer; or
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someone other than us or one of our subsidiaries makes a payment
in respect of a tender offer or exchange offer in which, as of
the closing date of the offer, our board of directors is not
recommending the rejection of the offer, subject to certain
conditions.
|
Prior to February 7, 2011, the 2.875% notes are not
redeemable. On or after February 7, 2011, we may redeem for
cash some or all of the 2.875% notes, at any time and from
time to time, upon at least 30 days notice for a
price equal to 100% of the principal amount of the 2.875% notes
to be redeemed plus any accrued and unpaid interest up to but
excluding the redemption date.
Neither we, nor any of our subsidiaries, are subject to any
financial covenants under our 2.875% notes. In addition,
the indenture governing our 2.875% notes does not restrict
us or any of our subsidiaries from paying dividends, incurring
debt, or issuing or repurchasing our securities.
As presented for the years ended December 31, 2006 and
2005, our calculation of diluted net income per share includes
the common shares resulting from the potential conversion of our
2.875% convertible notes. As presented for the year ended
December 31, 2004, our calculation of diluted net income
per share does not include the common shares resulting from the
potential conversion of our 2.875% convertible notes since
their effect would have been antidilutive to our net income per
share.
2.75% Convertible Notes. In the
third quarter of 2005, we privately placed $350.0 million
aggregate principal amount of 2.75% convertible notes due
2025, which we refer to as our 2.75% notes. We also
incurred direct issuance costs of $9.0 million, which we
recorded as deferred financing costs on our consolidated balance
sheet and are amortizing over five years. Our 2.75% notes
are senior unsecured obligations and rank equal in right of
payment with all of our other existing and future senior
unsecured debt. Historically, some of our long-term debt has
been secured and may be secured in the future. In addition,
since we conduct all of our operations through our subsidiaries,
our 2.75% notes effectively rank junior in right of payment to
all liabilities of our subsidiaries. The 2.75% notes bear
interest at a rate of 2.75% per year on the principal
amount of the notes, payable semi-annually in arrears in cash on
February 15 and August 15 of each
F-30
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
year, and will mature on August 15, 2025, when the entire
principal balance of $350.0 million will be due. The 2.75%
notes were publicly registered, effective February 10, 2006.
The noteholders have the right to require us to repurchase the
2.75% notes on August 15 of 2010, 2012, 2015 and 2020 at a
repurchase price equal to 100% of their principal amount, plus
any accrued and unpaid interest up to, but excluding, the
repurchase date. In addition, if a fundamental change or
termination of trading, as defined, occurs prior to maturity,
the noteholders have a right to require us to repurchase all or
part of the notes at a repurchase price equal to 100% of the
principal amount, plus accrued and unpaid interest.
The 2.75% notes are convertible, at the option of the
holder, into shares of our common stock at an adjusted
conversion rate of 19.967 shares per $1,000 principal
amount of notes, or 6,988,450 aggregate common shares,
representing a conversion price of about $50.08 per share.
The 2.75% notes are convertible, subject to adjustment,
prior to the close of business on the final maturity date under
any of the following circumstances:
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during any fiscal quarter commencing after September 30,
2005 if the closing sale price of our common stock exceeds 120%
of the conversion price of $50.08 for at least 20 trading days
in the 30 consecutive trading days ending on the last trading
day of the preceding fiscal quarter;
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prior to July 15, 2010, during the five business day period
after any five consecutive trading day period in which the
trading price per note for each day of such period was less than
98% of the product of the closing sale price of our common stock
and the number of shares issuable upon conversion of $1,000
principal amount of notes, or 6,988,450 aggregate common shares;
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at any time on or after July 15, 2010; or
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upon the occurrence of specified corporate events, including a
fundamental change, as defined in the 2.75% note agreement,
the issuance of certain rights or warrants or the distribution
of certain assets or debt securities.
|
For the fiscal quarter ended December 31, 2006, the closing
sale price of our common stock exceeded 120% of the conversion
price of about $50.08 per share for at least 20 trading
days in the 30 consecutive trading days ending on
December 31, 2006. As a result, the conversion contingency
was met and our 2.75% notes are currently convertible into
19.967 shares of our common stock per $1,000 principal
amount of notes, or an aggregate of 6,988,450 common shares, at
a conversion price of about $50.08. We have the option to
satisfy the conversion of the notes in shares of our common
stock, in cash or a combination of both.
The conversion feature related to the trading price per note
meets the criteria of an embedded derivative under
SFAS No. 133. As a result, we are required to separate
the value of the conversion feature from the notes and record a
liability on our consolidated balance sheet. As of
December 31, 2006 and 2005, the conversion feature had a
nominal value, and therefore it did not have a material impact
on our financial position or results of operations. We will
continue to evaluate the materiality of the value of this
conversion feature on a quarterly basis and record the resulting
adjustment, if any, in our consolidated balance sheet and
statement of operations.
The conversion rate of the 2.75% notes is subject to
adjustment if any of the following events occur:
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we issue common stock as a dividend or distribution on our
common stock;
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we issue to all holders of common stock certain rights or
warrants to purchase our common stock;
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we subdivide or combine our common stock;
|
F-31
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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we distribute to all holders of our common stock shares of our
capital stock, evidences of indebtedness or assets, including
cash or securities but excluding the rights, warrants, dividends
or distributions specified above;
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|
we or one of our subsidiaries makes a payment in respect of a
tender offer or exchange offer for our common stock to the
extent that the cash and value of any other consideration
included in the payment per share of common stock exceeds the
current market price per share of common stock on the trading
day next succeeding the last date on which tenders or exchanges
may be made pursuant to this tender or exchange offer; or
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someone other than us or one of our subsidiaries makes a payment
in respect of a tender offer or exchange offer in which, as of
the closing date of the offer, our board of directors is not
recommending the rejection of the offer, subject to certain
conditions.
|
Prior to August 20, 2010, the notes will not be redeemable.
On or after August 20, 2010, we may redeem for cash some or
all of the notes, at any time and from time to time, upon at
least 30 days notice for a price equal to 100% of the
principal amount of the notes to be redeemed, plus any accrued
and unpaid interest up to but excluding the redemption date.
Neither we, nor any of our subsidiaries, are subject to any
financial covenants under our 2.75% notes. In addition, the
indenture governing our 2.75% notes does not restrict us or any
of our subsidiaries from paying dividends, incurring debt, or
issuing or repurchasing our securities.
As presented for the years ended December 31, 2006 and
2005, our calculation of diluted net income per share includes
the common shares resulting from the potential conversion of our
2.75% convertible notes.
Mexico Syndicated
Loan Facility. In October 2004, we
closed on a $250.0 million, five year syndicated loan
facility in Mexico. Of the total amount of the facility,
$129.0 million was denominated in U.S. dollars with a
floating interest rate based on LIBOR, $31.0 million was
denominated in Mexican pesos with a floating interest rate based
on the Mexican reference interest rate TIIE, and
$90.0 million was denominated in Mexican pesos, at an
interest rate fixed at the time of funding. In May 2005, we drew
down on the loan facility for the entire $250.0 million. As
part of this agreement, Nextel Mexico is subject to various
legal and financial covenants that, among other things, require
Nextel Mexico to maintain certain financial ratios and may limit
the amount of funds that could be repatriated in certain
periods. In July 2005, Nextel Mexico entered into an interest
rate swap agreement to hedge the $31.4 million portion of
the syndicated loan facility. This interest rate swap fixed the
amount of interest expense associated with this portion of the
syndicated loan facility commencing on August 31, 2005 and
continuing over the life of the facility based on a fixed rate
of about 11.95% per year (see Note 11).
On June 27, 2006, Nextel Mexico entered into an agreement
to refinance its syndicated loan. The loan principal was
increased from the original $250.0 million to
$296.6 million after the refinancing. Under the agreement,
the loan was refinanced using the same variable (i.e., LIBOR and
TIIE) and fixed rates as the original agreement but with lower
spreads for each tranche. Of the total amount of the refinanced
loan, $156.6 million is denominated in U.S. dollars,
with a floating interest rate based on LIBOR
(Tranche A 6.69% and 6.81% as of
December 31, 2006 and 2005, respectively),
$57.0 million is denominated in Mexican pesos, with a
floating interest rate based on the Mexican reference rate TIIE
(Tranche C 8.51% and 11.13% as of
December 31, 2006 and 2005, respectively), and
$83.0 million is denominated in Mexican pesos, at an
interest rate fixed at the time of funding
(Tranche B 11.36% and 12.48% as of
December 31, 2006 and 2005, respectively). For
Tranche B and Tranche C, the principal and interest
payments will take place on the same dates as previously
scheduled under the original agreement. Under the original
agreement, principal for Tranche A was also due on the same
dates as the principal under Tranches B and C. However, after
the
F-32
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
refinancing, principal for Tranche A will now be due in a
lump sum of $156.6 million in June 2011. Due to changes in
foreign currency exchange rates, the balance of the syndicated
loan facility as of December 31, 2006 and 2005 was
$297.6 million and $252.7 million, respectively.
Tower Financing Obligations. During the
years ended December 31, 2006 and 2005, Nextel Mexico and
Nextel Brazil sold communications towers as follows (proceeds in
thousands):
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|
|
|
Year Ended December 31,
|
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|
2006
|
|
|
2005
|
|
|
|
Towers
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|
|
|
|
Towers
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|
|
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|
Sold
|
|
|
Proceeds
|
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|
Sold
|
|
|
Proceeds
|
|
|
Nextel Mexico
|
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|
25
|
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|
$
|
3,090
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|
|
|
7
|
|
|
$
|
870
|
|
Nextel Brazil
|
|
|
58
|
|
|
|
5,894
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|
|
|
13
|
|
|
|
1,371
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
83
|
|
|
$
|
8,984
|
|
|
|
20
|
|
|
$
|
2,241
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|
|
|
|
|
|
|
|
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|
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|
|
|
|
We account for these tower sales as financing arrangements. As a
result, we did not recognize any gains from the sales, and we
maintain the tower assets on our consolidated balance sheet and
continue to depreciate them. We recognize the proceeds received
as financing obligations that will be repaid through monthly
payments. To the extent that American Tower leases space on
these communication towers to third party companies, our base
rent and ground rent related to the towers leased are reduced.
We recognize ground rent payments as operating expenses in cost
of service and tower base rent payments as interest expense and
a reduction in the financing obligation using the effective
interest method. In addition, we recognize co-location rent
payments made by the third party lessees to American Tower as
other operating revenues because we are maintaining the tower
assets on our consolidated balance sheet. Both the proceeds
received and rent payments due are denominated in Mexican pesos
for the Mexican transactions and in Brazilian reais for the
Brazilian transactions. Rent payments are subject to local
inflation adjustments. During the years ended December 31,
2006, 2005 and 2004, we recognized $18.6 million,
$15.2 million and $10.3 million, respectively, in
other operating revenues related to these co-location lease
arrangements, a significant portion of which we recognized as
interest expense.
On March 22, 2005, we amended the sale-leaseback agreement
with respect to the construction
and/or the
acquisition by American Tower of any new towers to be
constructed or purchased by our Mexican and our Brazilian
operating companies. The most significant of these amendments
provides for the elimination of minimum purchase and
construction commitments, the establishment of new purchase
commitments for the following four years, subject to certain
co-location conditions, the extension for an additional four
years, subject to certain conditions and limitations, of the
right of American Tower to market for co-location existing and
new towers and the reduction of the monthly rent payments, as
well as the purchase price, of any existing towers not
previously purchased or identified for purchase and of any new
sites built.
Capital
Lease Obligations
Corporate Aircraft Leases. In April 2004, we
entered into an agreement to lease a corporate aircraft for
eight years for the purpose of enabling company employees to
visit and conduct business at our various operating companies in
Latin America. We account for this agreement as a capital lease
and recorded a capital lease asset and capital lease liability
for the present value of the future minimum lease payments. As
of December 31, 2006 and 2005, the capital lease liability
for our 2004 corporate aircraft was $28.2 million and
$29.4 million, respectively.
In November 2005, we entered into an agreement to lease a new
corporate aircraft beginning in 2009 for ten years. We refer to
this aircraft lease as the 2005 aircraft lease. This new
aircraft, which is scheduled to be
F-33
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
delivered in May 2009, will replace the existing corporate
aircraft that we are currently leasing. We determined that in
accordance with
EITF 97-10,
The Effect of Lessee Involvement in Asset
Construction, we are the owner of this new corporate
aircraft during its construction because we have substantially
all of the construction period risks. As a result, we will
record an asset for construction in progress and a corresponding
long-term liability for the new aircraft as construction occurs.
When construction of the new corporate aircraft is complete and
the lease term begins, we will record the 2005 aircraft lease as
a sale and a leaseback and evaluate the classification of the
lease as capital versus operating at that time.
Upon taking delivery of the new aircraft in May 2009, we are
required to immediately exercise our early purchase option on
the existing aircraft and pay all amounts due under the 2004
aircraft lease. If we fail to take delivery of the new aircraft
and acquire the existing aircraft, we will be subject to certain
penalties under the 2004 aircraft lease and the 2005 aircraft
lease. If we take delivery of the new aircraft and acquire the
existing aircraft, we intend to immediately sell the existing
aircraft.
In addition, we signed a demand promissory note to guarantee the
total advance payments for the construction of the new aircraft
to be financed by the lessor under the 2005 aircraft lease. The
first scheduled advance payment occurred in November 2005. The
lessor committed to make advance payments of up to
$25.2 million during the construction of the new aircraft.
We also provided a $1.0 million letter of credit to the
lessor as security for the first advance payment, which we paid
in the fourth quarter of 2005. To secure our obligations under
the letter of credit agreement, we deposited approximately
$1.0 million in a restricted cash account with the bank
issuing the letter of credit. We have classified this amount as
a long-term asset in our consolidated balance sheet as of
December 31, 2006 and 2005. Under the 2005 aircraft lease,
we are obligated to increase the amount of the letter of credit
up to a maximum of $10.0 million as the lessor makes
advance payments. Under the terms of this promissory note, we
are required to maintain unencumbered cash, cash equivalents,
marketable securities and highly liquid investments of no less
than $60.0 million at all times.
Interest accrues on the portion of the outstanding principal
amount of the promissory note that is equal to or less than
$10.0 million, at a variable rate of interest, adjusted
monthly, equal to the monthly LIBOR rate plus 0.5% per year
and the portion of the outstanding principal amount of the note
in excess of $10.0 million, at a variable rate of interest,
adjusted monthly, equal to the monthly LIBOR rate plus
1.75% per year. As of December 31, 2006 and 2005, we
recorded an asset and a liability of $1.0 million for the
amount outstanding under this promissory note. In addition, for
the year ended December 31, 2005, we accrued for interest
on the $1.0 million outstanding balance.
Other Capital Lease Obligations. Under the
master lease agreement with American Tower, in certain
circumstances, Nextel Mexico and Nextel Brazil are permitted to
co-locate communications equipment on sites owned by American
Tower. Nextel Mexico and Nextel Brazil account for the majority
of these co-location agreements as capital leases.
Brazil Spectrum License
Financing. During the second quarter of 2005,
Nextel Brazil acquired spectrum licenses from the Brazilian
government for $8.3 million, of which it paid
$0.7 million. The remaining $7.6 million is due in six
annual installments beginning in 2008, and we are amortizing
these licenses over 15 years. Due to changes in foreign
currency exchange rates and accrued interest, the balance of the
spectrum license financing as of December 31, 2006 was
$9.8 million.
Software Financing. In 2005, Nextel
Mexico financed software from Motorola for $7.7 million.
Subsequently, in March 2006, Nextel Brazil financed software
from Motorola for $4.0 million, and in June 2006, Nextel
Argentina financed software from Motorola for $3.0 million.
This software is designed to enable Nextel Mexico, Nextel Brazil
and Nextel Argentina to increase interconnect subscriber
capacity without increasing frequencies in their digital mobile
networks or incurring the cost of building additional
transmitter sites. Each of these operating companies financed
the purchase of this software through facilities in which
F-34
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
principal was due in equal quarterly installments over a period
of four years. None of these operating companies was charged
interest under these facilities, however we imputed interest
expense at an annual rate of 12% on the facilities in Brazil and
Argentina and at an annual rate of 6% on the facility in Mexico.
In September 2006, Nextel Mexico, Nextel Brazil and Nextel
Argentina paid off the long-term debt balances related to these
software purchases at a discount and recognized an aggregate
$0.6 million gain on the extinguishment.
Debt Maturities. For the years
subsequent to December 31, 2006, scheduled annual
maturities of all long-term debt outstanding as of
December 31, 2006 are as follows (in thousands):
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Principal
|
|
Year
|
|
Repayments
|
|
|
2007
|
|
$
|
23,294
|
|
2008
|
|
|
69,178
|
|
2009
|
|
|
70,353
|
|
2010
|
|
|
10,261
|
|
2011
|
|
|
168,386
|
|
Thereafter
|
|
|
816,209
|
|
|
|
|
|
|
Total
|
|
$
|
1,157,681
|
|
|
|
|
|
|
|
|
8.
|
Fair
Value of Financial Instruments
|
We have estimated the fair value of our financial instruments
using available market information and appropriate valuation
methodologies. However, considerable judgment is required in
interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented below are not necessarily
indicative of the amounts that we could realize in a current
market exchange. The use of different market assumptions and
estimation methodologies may have a material effect on the
estimated fair value amounts.
Cash and Cash Equivalents, Short-Term Investments, Accounts
Receivable, Accounts Payable, Accrued Expenses and Accrued
Interest. We believe the carrying amounts of
these items are reasonable estimates of their fair values based
on the short-term nature of the items.
Debt. The estimated fair values of our
convertible notes are based on quoted market prices. The
carrying value of Nextel Mexicos syndicated loan facility,
our capital lease obligations, our tower financing obligations
and Brazils spectrum license financing approximates their
fair value.
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|
|
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|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
(in thousands)
|
|
|
Debt, including current portion
|
|
$
|
1,157,681
|
|
|
$
|
1,737,681
|
|
|
$
|
1,172,958
|
|
|
$
|
1,703,148
|
|
Derivatives. Our derivative instruments are
recorded in our consolidated balance sheet at fair value, based
on market values as determined by an independent third party
investment banking firm.
|
|
9.
|
Commitments
and Contingencies
|
Capital
and Operating Lease Commitments.
We have co-location capital lease obligations on some of our
communication towers in Mexico and Brazil. The remaining terms
of these lease agreements range from ten to fifteen years. In
addition, we have a
F-35
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
9.
|
Commitments
and Contingencies (Continued)
|
capital lease obligation on our existing corporate aircraft. The
remaining term of this lease agreement is five years. See
Note 7 for further information regarding these agreements.
We lease various cell sites, office facilities and other assets
under operating leases. Some of these leases provide for annual
increases in our rent payments based on changes in locally-based
consumer price indices. The remaining terms of our cell site
leases range from one to ten years and are generally renewable,
at our option, for additional terms. The remaining terms of our
office leases range from less than one to ten years. During the
years ended December 31, 2006, 2005 and 2004, total rent
expense under operating leases was $100.5 million,
$76.9 million and $56.5 million, respectively.
For years subsequent to December 31, 2006, future minimum
payments for all capital and operating lease obligations that
have initial noncancelable lease terms exceeding one year, net
of rental income, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
|
|
|
|
Leases
|
|
|
Leases
|
|
|
Total
|
|
|
2007
|
|
$
|
9,516
|
|
|
$
|
83,803
|
|
|
$
|
93,319
|
|
2008
|
|
|
9,859
|
|
|
|
79,883
|
|
|
|
89,742
|
|
2009
|
|
|
9,973
|
|
|
|
72,453
|
|
|
|
82,426
|
|
2010
|
|
|
9,973
|
|
|
|
64,834
|
|
|
|
74,807
|
|
2011
|
|
|
9,973
|
|
|
|
51,910
|
|
|
|
61,883
|
|
Thereafter
|
|
|
85,458
|
|
|
|
146,991
|
|
|
|
232,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
134,752
|
|
|
|
499,874
|
|
|
|
634,626
|
|
Less: imputed interest
|
|
|
(72,083
|
)
|
|
|
|
|
|
|
(72,083
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
62,669
|
|
|
$
|
499,874
|
|
|
$
|
562,543
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Motorola
Commitments.
We are a party to agreements with Motorola, Inc. under which
Motorola provides us with infrastructure equipment and services,
including installation, implementation and training. We and
Motorola have also agreed to warranty and maintenance programs
and specified indemnity arrangements. We have also agreed to
provide Motorola with notice of our determination that
Motorolas technology is no longer suited to our needs at
least six months before publicly announcing or entering into a
contract to purchase equipment utilizing an alternate
technology. In addition, if Motorola manufactures, or elects to
manufacture, the equipment utilizing the alternate technology
that we elect to deploy, we must give Motorola the opportunity
to supply 50% of our infrastructure requirements for the
equipment utilizing the alternate technology for three years.
In September 2006, we entered into agreements to extend our
relationship with Motorola for the supply of iDEN handsets and
iDEN network infrastructure through December 31, 2011.
Under these agreements, Motorola agreed to maintain an adequate
supply of the iDEN handsets and equipment used in our business
for the term of the agreement and to continue to invest in the
development of new iDEN devices and infrastructure features. In
addition, we agreed to annually escalating handset volume
purchase commitments and certain pricing parameters for handsets
and infrastructure linked to the volume of our purchases. If we
do not meet the specified handset volume commitments, we would
be required to pay an additional amount based on any shortfall
of actual purchased handsets compared to the related annual
volume commitment.
F-36
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
9.
|
Commitments
and Contingencies (Continued)
|
Telmex
Agreement.
Nextel Mexico signed an agreement with Telefonos de Mexico, S.A.
de C.V., or Telmex, effective February 14, 2006, that
allows Nextel Mexico to interconnect and terminate traffic with
Telmex in 27 nationwide cities throughout Mexico using five
local connections. The agreement covers each individual city for
its own term of 15 years from the date service begins in
that city and provides Nextel Mexico with an unlimited amount of
traffic termination on the Telmex network for a total cost of
$44.5 million, plus any applicable value-added taxes. We
are accounting for the Telmex agreement as a service agreement.
As a result, we are expensing any payments made under this
agreement in the period to which they relate. Nextel Mexico paid
a $7.0 million deposit to Telmex on March 31, 2006, of
which $1.9 million was recorded as a component of prepaid
expenses and other and $2.6 million was recorded as a
component of other assets as of December 31, 2006. The
difference of $2.5 million between the amount paid and the
amounts recorded in our consolidated balance sheet as of
December 31, 2006 was expensed as incurred. The agreement
specifies the second of three total installment payments in the
amount of $18.5 million should be made on March 15,
2007, and the last payment in the amount of $19.0 million
should be made on March 15, 2008.
Brazilian
Contingencies.
Nextel Brazil has received various assessment notices from state
and federal Brazilian authorities asserting deficiencies in
payments related primarily to value-added taxes and import
duties based on the classification of equipment and services.
Nextel Brazil has filed various administrative and legal
petitions disputing these assessments. In some cases, Nextel
Brazil has received favorable decisions, which are currently
being appealed by the respective governmental authority. In
other cases, Nextel Brazils petitions have been denied,
and Nextel Brazil is currently appealing those decisions. Nextel
Brazil is also disputing various other claims. As a result of
the expiration of the statute of limitations for certain
contingencies, during the years ended December 31, 2006 and
2005, Nextel Brazil reversed $9.2 million and
$6.5 million, respectively, in accrued liabilities, of
which we recorded $4.4 million and $3.2 million,
respectively, as a reduction to operating expenses and the
remainder to other income, which represented monetary
corrections. Monetary corrections are specific indexation
factors under Brazilian law that are used to restore the real
economic value of tax and other contingent obligations in local
Brazilian currency after taking into consideration the effects
of inflation.
During the year ended December 31, 2004, Nextel Brazil
reduced its liabilities by $35.4 million, of which we
recorded $14.4 million as a reduction to operating
expenses, reclassified $12.6 million of a settled claim to
current liabilities for payment, and recorded the remainder,
which primarily included monetary corrections on these
contingencies, in other income.
As of December 31, 2006 and 2005, Nextel Brazil had accrued
liabilities of $24.7 million and $27.6 million,
respectively, related to contingencies, all of which were
classified in accrued contingencies reported as a component of
other long-term liabilities. Of the total accrued liabilities as
of December 31, 2006 and 2005, Nextel Brazil had
$18.0 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, as they are not deemed probable, to be between
$138.7 million and $142.7 million as of
December 31, 2006. 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 determined to be probable and estimable.
F-37
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
9.
|
Commitments
and Contingencies (Continued)
|
Argentine
Contingencies.
Turnover Tax. In the city of Buenos
Aires, 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 of 3% and recorded a liability
and related expense 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 represented the total amount of
principal and interest, related to this turnover tax. Nextel
Argentina also decided to begin paying the higher tax amount
until this issue is settled.
In August 2006, Nextel Argentina filed a lawsuit against the
city of Buenos Aires to pursue the reimbursement of the
$18.8 million paid under protest in April 2006. Subsequent
to this payment, Nextel Argentina paid $4.5 million under
protest from April 2006 through December 2006 related to this
tax.
In December 2006, the city of Buenos Aires issued new laws,
which Nextel Argentina believes support its position that it
should be taxed at the general 3% rate and not at the 6%
cellular rate. Beginning in January 2007, Nextel Argentina will
pay the 3% general turnover tax rate and continue with its
efforts to obtain reimbursement of amounts previously paid under
protest.
Similarly, one of the provincial governments in another one of
the markets where Nextel Argentina operates also increased their
turnover tax rate from 4.55% to 6% of revenues for cellular
companies. Consistent with its earlier position, Nextel
Argentina continues to pay the turnover tax in this province at
the existing rate and accrues a liability for the incremental
difference in the rate. As of December 31, 2006 and 2005,
Nextel Argentina accrued $5.1 million and
$3.4 million, respectively, for local turnover taxes in
this province, which are included as components of accrued
expenses and other.
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 minus
applicable taxes and specified related costs. The license holder
can choose either to pay the resulting amount into a fund for
universal service development or to participate directly in
offering services to specific geographical areas under an annual
plan designed by the federal government. Although the
regulations state that this tax would be applicable beginning
January 1, 2001, the authorities have not taken the
necessary actions to implement the tax. However, Resolution
No. 99/05, dated May 5, 2005, issued by the Secretary
of Communications prohibits telecommunications operators from
itemizing the levy in customer invoices or passing through the
levy to customers. In addition, following the Secretarys
instructions in July 2005, the Argentine CNC has ordered
operators, including Nextel Argentina, to return the levy
collected from customers, if any. Nextel Argentina filed legal
actions challenging these regulations. On October 14, 2005,
the Secretary of Communications issued Resolution
No. 301/05, which rejected Nextel Argentinas claim
against Resolution No. 99/05. As a result, Nextel Argentina
was ordered to reimburse the amounts collected as universal
service contributions plus interest within a
15-day
period. In November 2005, Nextel Argentina filed an
administrative claim and requested a judicial injunction against
this resolution. All current legal actions are pending.
Nextel Argentina billed this tax as Universal Tax on customer
invoices during the period from January 2001 to August 2001 for
a total amount of $0.2 million. Subsequent to August 2001,
Nextel Argentina did not segregate a specific charge or identify
any portion of its customer billings as relating to the
Universal Tax and,
F-38
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
9.
|
Commitments
and Contingencies (Continued)
|
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 events and opinion of counsel, during the
fourth quarter of 2005, Nextel Argentina accrued for the maximum
liability due to customers for amounts billed during all periods
ending December 31, 2005, plus interest. Nextel Argentina
continued accruing the higher amount during the first quarter of
2006 while maintaining its position 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 required by legislation that was passed
in October 2005, 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 judicial claim against the legislation passed in May
2005, which is currently pending. As of December 31, 2006
and 2005, the accrual for the liability to customers was
$6.9 million and $6.4 million, respectively, which is
included as components of accrued expenses and other.
As of December 31, 2006 and 2005, Nextel Argentina had
accrued liabilities of $29.4 million and
$40.2 million, respectively, related primarily to local
turnover taxes and local government claims, all of which were
classified in accrued contingencies reported as a component of
accrued expenses and other.
Legal
Proceedings.
We are subject to claims and legal actions that may arise in the
ordinary course of business. We do not believe that any of these
pending claims or legal actions will have a material effect on
our business, financial condition, results of operations or cash
flows.
Income
Taxes.
We are subject to income taxes in both the United States and the
non-U.S. jurisdictions
in which we operate. Certain of our entities are under
examination by the relevant taxing authorities for various tax
years. We regularly assess the potential outcome of current and
future examinations in each of the taxing jurisdictions when
determining the adequacy of the provision for income taxes. We
have established tax liabilities which we believe to be adequate
in relation to the potential for additional assessments. Once
established, we adjust the liabilities only when there is more
information available or when an event occurs necessitating a
change to the liabilities. While we believe that the amount of
the tax estimates is reasonable, it is possible that the
ultimate outcome of current or future examinations may exceed
current liabilities in amounts that could be material.
We currently have 600,000,000 shares of authorized common
stock, par value $0.001 per share, and
10,000,000 shares of authorized undesignated preferred
stock, par value $0.001 per share.
We issued 120,000,000 shares of our new common stock in
connection with our emergence from Chapter 11
reorganization in November 2002, and we issued an additional
12,000,000 shares of our common stock in our September 2003
public offering. In addition, as described in Note 7, we
issued 3,000,000 shares, 3,635,850 shares and
6,852,150 shares of our common stock in connection with the
conversion of our 3.5% convertible notes on June 10,
2005, June 21, 2005 and December 14, 2006,
respectively.
During the years ended December 31, 2006, 2005 and 2004, we
issued common shares of stock in connection with the exercise of
stock options by employees.
F-39
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
10.
|
Capital
Stock (Continued)
|
As of December 31, 2006 and 2005, there were 161,813,864
and 152,147,641 shares of our common stock outstanding,
respectively.
Common Stock. Holders of our common stock are
entitled to one vote per share on all matters submitted for
action by the stockholders and share equally, share for share,
if dividends are declared on the common stock. If our Company is
partially or completely liquidated, dissolved or wound up,
whether voluntarily or involuntarily, the holders of the common
stock are entitled to share ratably in the net assets remaining
after payment of all liquidation preferences, if any, applicable
to any outstanding preferred stock. There are no redemption or
sinking fund provisions applicable to the common stock.
Undesignated Preferred Stock. Our board of
directors has the authority to issue undesignated preferred
stock of one or more series and in connection with the creation
of such series, to fix by resolution the designation, voting
powers, preferences and relative, participating, optional and
other special rights of such series, and the qualifications,
limitations and restrictions thereof. As of December 31,
2006, we had not issued any shares of undesignated preferred
stock.
Common Stock Reserved for Issuance. As of
December 31, 2006 and 2005, under our employee stock option
plan, we had reserved for future issuance 23,378,068 shares
and 26,855,316 shares of our common stock, respectively.
|
|
11.
|
Derivative
Instruments
|
Foreign
Currency Hedges
In November 2004, Nextel Mexico entered into a derivative
agreement to reduce its foreign currency transaction risk
associated with a portion of its 2005 U.S. dollar
forecasted capital expenditures and handset purchases. This risk
was hedged by forecasting Nextel Mexicos capital
expenditures and handset purchases for a
12-month
period that began in January 2005. Under this agreement, Nextel
Mexico purchased a U.S. dollar call option for
$3.6 million and sold a call option on the Mexican peso for
$0.9 million for a net cost of $2.7 million. We
recorded the initial net purchase price of the derivative
instrument as a non-current asset of $2.7 million in
November 2004. As of December 31, 2005, our net purchased
option, which was designated as a cash flow hedge, decreased in
value by $2.7 million as the hedge expired in December
2005. We recorded this amount to accumulated other comprehensive
loss. During the years ended December 31, 2006 and 2005, we
reclassified $1.0 million and $1.6 million,
respectively, from accumulated other comprehensive loss to other
expense, net, since the underlying capital expenditures and
purchased handsets had impacted earnings. The foreign currency
hedge qualified for cash flow hedge accounting under
SFAS 133. As a result, and because the instrument was 100%
effective in hedging foreign currency exposure, we recorded the
unrealized gain or loss upon measuring the change in the hedge
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 continue to
reclassify the amount recorded as a component of other
comprehensive income into other expense, net, as the underlying
capital expenditures impact earnings.
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
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 a U.S. dollar call option for
$3.6 million and sold a call option on the Mexican peso for
$1.1 million for a net cost of $2.5 million. We
recorded the initial net purchase price of the derivative
instrument as a non-current asset of $2.5 million in
September 2005. As of December 31, 2006, our net purchased
option, which was designated as a cash flow hedge, decreased in
value by $2.5 million as the hedge expired in December
2006. We recorded this amount to accumulated other comprehensive
loss. During the year ended December 31,
F-40
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
11.
|
Derivative
Instruments (Continued)
|
2006, we reclassified $1.7 million from accumulated other
comprehensive loss to other expense, net, since the underlying
capital expenditures and purchased handsets had impacted
earnings. The foreign currency hedge qualified for cash flow
hedge accounting under SFAS 133. As a result, and because
the instrument was 100% effective in hedging foreign currency
exposure, we recorded the unrealized gain or loss upon measuring
the change in the hedge 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 continue to reclassify the amount recorded as a component of
other comprehensive income into other expense, net, as the
underlying capital expenditures and purchased handsets impact
earnings.
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
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 a U.S. dollar call option for
$1.4 million and sold a call option on the Mexican peso for
$0.3 million for a net cost of $1.1 million. As of
December 31, 2006, our net purchased option, which was
designated as a cash flow hedge, decreased in value by
$1.1 million as the hedge expired in December 2006. We
recorded this amount to accumulated other comprehensive loss.
During the year ended December 31, 2006, we reclassified
$0.4 million from accumulated other comprehensive loss to
other expense, net, since the underlying capital expenditures
and purchased handsets had impacted earnings. The foreign
currency hedge qualifies for cash flow hedge accounting under
SFAS 133. As a result, and because the instrument was 100%
effective in hedging foreign currency exposure, we recorded the
unrealized gain or loss upon measuring the change in the hedge
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 continue to
reclassify the amount recorded as a component of other
comprehensive income into other expense, net as the underlying
capital expenditures and purchased handsets impact earnings.
We view the foreign currency hedges in Mexico as investment
transactions as they relate to financial instruments. Therefore,
we have classified the cash flows related to the hedges as an
investing activity in our consolidated statements of cash flows.
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 approximately
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 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 accumulated other comprehensive loss 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 other expense, net, as the future
interest payments affect earnings.
As discussed in Note 7, in June 2006, Nextel Mexico entered
into an agreement to refinance its syndicated loan. Based on
Derivatives Implementation Group Issue No. G13, Cash
Flow Hedges: Hedging the Variable Interest Payments on a Group
of Floating-Rate Interest-Bearing Loans, the interest rate
swap is still effective based on the following: (1) our
original hedge documentation referred to hedging Tranche C
as a whole, (2) the terms of the debt and swap remained the
same, (3) the principal amount of Tranche C after
F-41
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
11.
|
Derivative
Instruments (Continued)
|
refinancing is greater than the original $31.0 million, and
(4) the hedged forecasted transactions in the documented
cash flow hedging relationships are probable of occurring.
Accordingly, no settlement adjustments from other comprehensive
income to our statement of operations are necessary. As of
December 31, 2006 and 2005, we recognized a cumulative
unrealized pre-tax loss of $1.4 million and
$1.2 million, which represents the fair value of the
interest rate swap 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 December 31, 2005 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
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
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of the income tax (provision) benefit from
continuing operations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(5,086
|
)
|
|
$
|
(5,076
|
)
|
|
$
|
134
|
|
State
|
|
|
(444
|
)
|
|
|
(566
|
)
|
|
|
|
|
Foreign
|
|
|
(75,078
|
)
|
|
|
(70,460
|
)
|
|
|
(48,650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current income tax provision
|
|
|
(80,608
|
)
|
|
|
(76,102
|
)
|
|
|
(48,516
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(6,265
|
)
|
|
|
(28,297
|
)
|
|
|
(4,230
|
)
|
State
|
|
|
(698
|
)
|
|
|
(3,143
|
)
|
|
|
(510
|
)
|
Foreign
|
|
|
(31,873
|
)
|
|
|
(18,253
|
)
|
|
|
(25,935
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax provision
|
|
|
(38,836
|
)
|
|
|
(49,693
|
)
|
|
|
(30,675
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
$
|
(119,444
|
)
|
|
$
|
(125,795
|
)
|
|
$
|
(79,191
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-42
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
12.
|
Income
Taxes (Continued)
|
A reconciliation of the U.S. statutory Federal income tax
rate to our effective tax rate as a percentage of income before
taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Statutory Federal tax rate
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
State taxes, net of Federal tax
benefit
|
|
|
|
|
|
|
1
|
|
|
|
|
|
Effect of foreign operations
|
|
|
(4
|
)
|
|
|
(4
|
)
|
|
|
(4
|
)
|
Nondeductible SFAS 123R
expense
|
|
|
2
|
|
|
|
|
|
|
|
|
|
Change in deferred tax asset
valuation allowance
|
|
|
|
|
|
|
3
|
|
|
|
17
|
|
Intercompany transactions
|
|
|
3
|
|
|
|
6
|
|
|
|
7
|
|
Withholding tax and tax on subpart
F income
|
|
|
2
|
|
|
|
3
|
|
|
|
|
|
Loss on Mexican fixed asset
disposals
|
|
|
(4
|
)
|
|
|
|
|
|
|
(1
|
)
|
Non-deductible expenses
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Foreign tax rate reduction
|
|
|
|
|
|
|
|
|
|
|
3
|
|
Inflation adjustments
|
|
|
(4
|
)
|
|
|
(2
|
)
|
|
|
|
|
Amortization of acquired tax
benefits (deferred credit)
|
|
|
(2
|
)
|
|
|
(1
|
)
|
|
|
|
|
Other
|
|
|
1
|
|
|
|
1
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
|
29
|
%
|
|
|
42
|
%
|
|
|
58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-43
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
12.
|
Income
Taxes (Continued)
|
Significant components of our deferred tax assets and
liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating losses and capital
loss carryforwards
|
|
$
|
305,163
|
|
|
$
|
325,792
|
|
Allowance for doubtful accounts
|
|
|
14,601
|
|
|
|
17,799
|
|
Accrued expenses
|
|
|
32,522
|
|
|
|
24,756
|
|
Accrual for contingent liabilities
|
|
|
8,391
|
|
|
|
9,371
|
|
Intangible assets
|
|
|
31,969
|
|
|
|
38,687
|
|
Property, plant and equipment
|
|
|
206,037
|
|
|
|
201,841
|
|
Capital lease obligations
|
|
|
57,134
|
|
|
|
51,866
|
|
Deferred revenue
|
|
|
18,579
|
|
|
|
14,255
|
|
Other
|
|
|
35,531
|
|
|
|
32,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
709,927
|
|
|
|
717,357
|
|
Valuation allowance
|
|
|
(444,393
|
)
|
|
|
(417,341
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax asset
|
|
|
265,534
|
|
|
|
300,016
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
90,298
|
|
|
|
16,323
|
|
Property, plant and equipment
|
|
|
10,897
|
|
|
|
12,209
|
|
Other
|
|
|
13,650
|
|
|
|
13,103
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liability
|
|
|
114,845
|
|
|
|
41,635
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
150,689
|
|
|
$
|
258,381
|
|
|
|
|
|
|
|
|
|
|
During 2006, we identified errors in our consolidated financial
statements for the years ended December 31, 2003 and 2004
related to accounting for income taxes in Nextel Mexico. As a
result of the Nextel Mexico errors in the fourth quarter of
2006, we decreased our tax provision by $17.1 million and
our current tax payable liability by $35.0 million,
increased amortization expense by $1.4 million and
increased paid-in capital by $18.6 million as of
December 31, 2006. Without this decrease to the income tax
provision, our 2006 effective tax rate would have been 33%
rather than 29%.
We have not recorded a deferred tax liability on Nextel
Brazils unrealized foreign currency gain on the
intercompany loan from NII Holdings, Inc. as it is our intention
to not subject that unrealized gain to Brazilian tax. If this
gain is subject to tax, it could result in an additional income
tax liability. As of December 31, 2006 and 2005, the
cumulative amount of additional tax liability would have been
approximately $73.3 million and $56.3 million,
respectively.
We have not recorded a provision for U.S. Federal and state
or foreign taxes that may result from future remittances of
undistributed earnings of foreign subsidiaries other than income
that has been previously taxed in the U.S. under the
subpart F rules, as it is our intention to indefinitely reinvest
such undistributed earnings outside the United States. Should
our foreign subsidiaries undistributed earnings be
remitted to the U.S. as dividends, we may be subject to
additional U.S. income taxes (net of allowable foreign tax
credits) and foreign withholding taxes. It is not practicable to
estimate the amount of any additional taxes which may be payable
on the undistributed earnings.
F-44
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
12.
|
Income
Taxes (Continued)
|
As of December 31, 2006, we had approximately
$122.2 million of net operating loss carryforwards for
U.S. Federal and state income tax purposes that expire
beginning at various periods from 2010 to 2026. The timing and
manner in which we will utilize the net operating loss
carryforwards in any year, or in total, may be limited in the
future under the provisions of Internal Revenue Code
Section 382 regarding changes in our ownership.
As of December 31, 2006, we had approximately
$129.3 million and $64.6 million of net operating loss
carryforwards in our Mexican and Peruvian subsidiaries,
respectively. These carryforwards expire in various amounts and
at various periods from 2007 to 2016 in Mexico, and from 2008 to
no expiration date in Peru. Nextel Chile had approximately
$29.8 million of net operating loss carryforwards that can
be carried forward indefinitely. In addition, our Brazilian
subsidiaries had approximately $650.4 million of net
operating loss carryforwards that can also be carried forward
indefinitely, but the amount that we can utilize annually is
limited to 30% of Brazilian taxable income before the net
operating loss deduction. Our foreign subsidiaries ability
to utilize the foreign tax net operating losses in any single
year ultimately depends upon their ability to generate
sufficient taxable income.
We excluded $62.1 million of the $122.2 million
U.S. net operating loss carryforwards from the calculation
of the deferred tax asset above because it represents excess
stock option deductions that did not reduce taxes payable in the
U.S. These unrealized excess stock option deductions, if
realized in the future, will result in an increase to paid-in
capital. We recognize the benefits of net operating loss
carryforwards in the following order: (1) net operating
losses from items other than excess stock option deductions;
(2) net operating losses from excess stock option
deductions accounted for under SFAS 123R; and (3) from
excess stock option deductions accounted for under
SFAS 123R. We calculated our adoption date pool of excess
tax benefits previously included in paid-in capital under the
standard method outlined in SFAS 123R.
During 2006, the deferred tax asset valuation allowance
increased by $27.1 million due mainly to the impact of
foreign currency translation adjustments in Brazil and an
increased net operating loss carryforward in Chile, for which it
is more likely than not that the benefits will not be realized.
This increase was partially offset by a $6.9 million
realization of U.S. excess stock option deductions and a
$5.9 million release of pre-reorganization valuation
allowance in Brazil. We recorded these two valuation allowance
decreases as increases to paid-in capital.
During 2005, we increased the deferred tax asset valuation
allowance by $52.2 million due mainly to increased net
operating loss carryforwards in Brazil and the U.S., for which
it is more likely than not that the benefits will not be
realized, partially offset by decreases of the deferred tax
asset valuation allowance in Argentina and Peru due to changes
in our projections of the future taxable income that will be
generated in those markets.
Our deferred tax asset valuation allowances generally consist of
three components. We record decreases in these valuation
allowances as coming first from valuation allowances existing as
of the reorganization date, second from valuation allowances
created subsequent to the reorganization from items other than
excess stock option deductions, and third from
post-reorganization excess stock option deductions accounted for
under SFAS 123R. In accordance with
SOP 90-7,
we recognize decreases in the deferred tax asset valuation
allowance that existed at the reorganization date first as a
reduction in the carrying value of our intangible assets
existing at the reorganization date until fully exhausted, and
then as an increase to paid-in capital. As of December 31,
2004, we reduced to zero the carrying value of our intangible
assets existing at the reorganization date. We will record the
future decreases, if any, of the valuation allowance existing on
the reorganization date as an increase to paid-in capital. The
table below reflects the impact on our stockholders equity
and income tax provision of the deferred tax asset valuation
allowance decreases that we recorded during 2006 and 2005 in
accordance with
SOP 90-7
(in thousands). $18.6 million of the 2006 increase to
F-45
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
12.
|
Income
Taxes (Continued)
|
stockholders equity relates to errors identified in our
consolidated financial statements for the years ended
December 31, 2003 and 2004 related to accounting for income
taxes in Nextel Mexico.
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31, 2006
|
|
|
December 31, 2005
|
|
|
|
(in thousands)
|
|
|
Increase to stockholders
equity
|
|
$
|
24,573
|
|
|
$
|
69,228
|
|
Reduction to income tax provision
|
|
|
|
|
|
|
1,240
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,573
|
|
|
$
|
70,468
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, Nextel Brazil, Nextel Chile,
Nextel Peru and Nextel Mexico have $396.3 million,
$5.8 million, $2.0 million and $3.8 million of
deferred tax asset valuation allowances, respectively. In
addition, our U.S. operations have $36.5 million of
deferred tax asset valuation allowance as of December 31,
2006. Of the total $444.4 million consolidated deferred tax
asset valuation allowance as of December 31, 2006,
$357.9 million existed as of our emergence from
Chapter 11 reorganization and therefore, any future
decreases in this amount will be recorded in accordance with
SOP 90-7
as an increase to paid-in capital. In addition,
$36.5 million relates to the tax benefit of employee stock
option exercises and, if realized, will result in an increase to
paid-in capital.
Realization of any additional deferred tax assets in any of our
markets depends on future profitability in these markets. Our
ability to generate the expected amounts of taxable income from
future operations is dependent upon general economic conditions,
technology trends, political uncertainties, competitive
pressures and other factors beyond managements control. If
our operations demonstrate profitability, we may reverse
additional deferred tax asset valuation allowances by
jurisdiction in the future. We will continue to evaluate the
deferred tax asset valuation allowance balances in all of our
foreign and U.S. companies throughout 2007 to determine the
appropriate level of valuation allowance.
In 1998, Nextel Peru entered into a
10-year tax
stability agreement with the Peruvian government that suspends
its net operating loss carryforwards from expiring until Nextel
Peru generates taxable income. Once Nextel Peru generates
taxable income, Nextel Peru has four years to utilize those tax
loss carryforwards and any taxable income in excess of the tax
loss carryforwards will be taxed at 30%. During both 2005 and
2006, Nextel Peru generated taxable income and utilized a
portion of the tax loss carryforwards. The remaining tax loss
carryforwards in Peru will expire on December 31, 2008 if
not used by that date. At this time, we believe it is more
likely than not that these tax loss carryforwards will be fully
utilized prior to their expiration.
In December 2004, the Mexican government enacted tax
legislation, effective January 1, 2005, which reduced the
corporate tax rate to 30% for 2005 and 29% for 2006 and will
further reduce the corporate tax rate to 28% for 2007. As a
result, we recorded a $3.4 million increase to our income
tax provision for the year ended December 31, 2004
reflecting the impact of these rate changes on our net deferred
tax assets.
We are subject to income taxes in both the United States and the
non-U.S. jurisdictions
in which we operate. Certain of our entities are under
examination by the relevant taxing authorities for various tax
years. We regularly assess the potential outcome of current and
future examinations in each of the taxing jurisdictions when
determining the adequacy of the provision for income taxes. We
have established tax reserves, which we believe to be adequate
in relation to the potential for additional assessments. Once
established, we adjust the reserves only when there is more
information available or when an event occurs necessitating a
change to the reserves. While we believe that the amount of the
tax estimates is reasonable, it is possible that the ultimate
outcome of current or future examinations may exceed current
reserves in amounts that could be material.
During 2004, Nextel Mexico amended its Mexican Federal income
tax returns in order to reverse a benefit previously claimed for
a disputed provision of the Federal income tax law covering
deductions and gains from the
F-46
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
12.
|
Income
Taxes (Continued)
|
sale of property. We filed the amended returns in order to avoid
potential penalties and we also filed administrative petitions
seeking clarification of our right to the tax benefits claimed
on the original income tax returns. The tax authorities
constructively denied our administrative petitions in January
2005 and in May 2005 we filed an annulment suit challenging the
constructive denial. Resolution of the annulment suit is still
pending. Based on an opinion by our independent legal counsel in
Mexico, we believe it is probable that we will recover this
amount. Our consolidated balance sheet as of December 31,
2006 includes a $16.0 million income tax receivable
regarding this matter, which is the benefit reflected in our
income tax provisions in prior years.
|
|
13.
|
Employee
Stock and Benefit Plans
|
As of December 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. Although
there are 144,095 stock options outstanding under the 2002
Management Incentive Plan as of December 31, 2006, no
additional awards will be granted under the Plan. We adopted the
2004 Incentive Compensation Plan in April 2004. The 2004
Incentive Compensation Plan 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 December 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. We issue new shares when both stock options
and stock awards are exercised.
Generally, our Board of Directors grants stock options and other
equity awards to employees on an annual basis to coincide with
our Annual Meeting of Shareholders. On April 26, 2006, our
Board of Directors granted 2.9 million stock options and
519,000 restricted shares to certain of our employees and
directors. In addition, our chief executive officer may grant,
under authority delegated to him by the Compensation Committee
of our Board of Directors, a limited number of stock options
(not to exceed 10,000 shares in any single grant and
100,000 shares in the aggregate) to employees who are not
executive officers.
Through December 31, 2005, we accounted for share-based
payments using the intrinsic value method 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 SFAS 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.
F-47
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
13.
|
Employee
Stock and Benefit Plans (Continued)
|
We adopted SFAS 123R effective January 1, 2006. 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 in 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(in thousands, except per share data)
|
|
|
Net income, as
reported
|
|
$
|
174,781
|
|
|
$
|
57,289
|
|
Add:
|
|
|
|
|
|
|
|
|
Stock-based employee compensation
expense included in reported net income, net of related tax
|
|
|
|
|
|
|
|
|
Effects
|
|
|
3,193
|
|
|
|
2,367
|
|
Deduct:
|
|
|
|
|
|
|
|
|
Total stock-based employee
compensation expense determined under fair value-based method
for all awards, net of related tax effects
|
|
|
(13,612
|
)
|
|
|
(7,140
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
164,362
|
|
|
$
|
52,516
|
|
|
|
|
|
|
|
|
|
|
Net income per common
share:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
1.19
|
|
|
$
|
0.41
|
|
|
|
|
|
|
|
|
|
|
Basic pro forma
|
|
$
|
1.12
|
|
|
$
|
0.38
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported
|
|
$
|
1.06
|
|
|
$
|
0.40
|
|
|
|
|
|
|
|
|
|
|
Diluted pro forma
|
|
$
|
1.01
|
|
|
$
|
0.36
|
|
|
|
|
|
|
|
|
|
|
We used the modified prospective transition method to adopt
SFAS 123R and therefore have not restated our prior periods
results. Under this transition method, share-based payment
expense for the year ended December 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
for only those shares expected to vest on a straight-line basis
over the requisite service period of the award. Our stock
options generally vest twenty-five percent per year over a
four-year period, and our restricted shares generally vest in
full on the third
and/or
fourth anniversaries of the grant. The estimated forfeiture rate
for awards granted during the year ended December 31, 2005
was 1%. We estimated the forfeiture rate based on our historical
experience during the preceding three fiscal years. We used
actual forfeitures to calculate our compensation expense for the
year ended December 31, 2006.
For the year ended December 31, 2006, the impact of
adopting SFAS 123R on operating income and income before
income taxes was $34.0 million ($28.3 million, after
tax). We include substantially all share-based payment expense,
including restricted stock expense, as a component of selling,
general and administrative expenses. For the year ended
December 31, 2006, the impact of the share-based payment
expense reduced our basic earnings per share by $0.18 and our
diluted earnings per share by $0.15. 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, we classify tax benefits resulting
from tax deductions in excess of the compensation cost
recognized for share-based awards as financing cash flows.
Because we do not view share-
F-48
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
13.
|
Employee
Stock and Benefit Plans (Continued)
|
based compensation as an important element of operational
performance, we recognize share-based payment expense at the
corporate level and exclude it when evaluating the business
performance of our segments. As of December 31, 2006, there
was approximately $92.1 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
1.77 years.
Stock
Option Awards
The following table summarizes stock option activity under all
plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
Number of
|
|
Exercise Price
|
|
|
Options
|
|
per Option
|
|
Outstanding, January 1, 2004
|
|
|
7,245,360
|
|
|
$
|
0.63
|
|
Granted
|
|
|
5,370,400
|
|
|
|
18.93
|
|
Exercised
|
|
|
(1,894,996
|
)
|
|
|
0.59
|
|
Forfeited
|
|
|
(183,660
|
)
|
|
|
11.60
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2004
|
|
|
10,537,104
|
|
|
|
9.77
|
|
Granted
|
|
|
7,019,500
|
|
|
|
26.48
|
|
Exercised
|
|
|
(5,850,381
|
)
|
|
|
4.08
|
|
Forfeited
|
|
|
(436,004
|
)
|
|
|
20.99
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2005
|
|
|
11,270,219
|
|
|
|
22.70
|
|
Granted
|
|
|
3,313,900
|
|
|
|
59.89
|
|
Exercised
|
|
|
(2,802,067
|
)
|
|
|
19.77
|
|
Forfeited
|
|
|
(675,152
|
)
|
|
|
33.37
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2006
|
|
|
11,106,900
|
|
|
|
33.96
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2004
|
|
|
3,897,214
|
|
|
|
0.49
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2005
|
|
|
619,769
|
|
|
|
6.03
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2006
|
|
|
837,775
|
|
|
|
20.39
|
|
|
|
|
|
|
|
|
|
|
Following is a summary of the status of employee stock options
outstanding and exercisable as of December 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
|
|
|
|
71,695
|
|
|
|
5.87 years
|
|
|
$
|
0.42
|
|
|
$
|
4,590,158
|
|
|
|
71,695
|
|
|
|
5.87 years
|
|
|
$
|
0.42
|
|
|
$
|
4,590,158
|
|
|
4.31 - 16.76
|
|
|
|
72,400
|
|
|
|
6.89 years
|
|
|
|
13.05
|
|
|
|
3,720,453
|
|
|
|
37,400
|
|
|
|
6.61 years
|
|
|
|
9.66
|
|
|
|
2,048,953
|
|
|
17.67 - 25.12
|
|
|
|
2,666,888
|
|
|
|
7.33 years
|
|
|
|
18.99
|
|
|
|
121,220,737
|
|
|
|
357,638
|
|
|
|
7.35 years
|
|
|
|
18.98
|
|
|
|
16,258,028
|
|
|
26.20 - 52.97
|
|
|
|
5,312,417
|
|
|
|
8.36 years
|
|
|
|
27.08
|
|
|
|
198,465,097
|
|
|
|
371,042
|
|
|
|
8.34 years
|
|
|
|
26.68
|
|
|
|
14,010,967
|
|
|
53.46 - 65.20
|
|
|
|
2,983,500
|
|
|
|
9.35 years
|
|
|
|
60.90
|
|
|
|
10,597,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,106,900
|
|
|
|
|
|
|
|
|
|
|
$
|
338,594,015
|
|
|
|
837,775
|
|
|
|
|
|
|
|
|
|
|
$
|
36,908,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-49
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
13.
|
Employee
Stock and Benefit Plans (Continued)
|
The aggregate intrinsic values in the table above represent the
total pre-tax intrinsic value (the difference between our
closing stock price on the last trading day of the three months
ended December 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 December 31,
2006. This amount changes based on the fair market value of our
common stock. Total intrinsic value of options exercised for the
year ended December 31, 2006 was $112.0 million. The
total fair value of options vested was $22.5 million for
the year ended December 31, 2006. Generally, our stock
options are non-transferable, except by will or laws of descent
or distribution, 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 weighted average fair value of the stock option awards on
their grant dates using the Black-Scholes-Merton option-pricing
model was $22.28 for the year ended December 31, 2006,
$7.90 for the year ended December 31, 2005 and $7.49 for
the year ended December 31, 2004 based on the following
assumptions:
|
|
|
|
|
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
Risk free interest rate
|
|
4.73% - 5.10%
|
|
3.70% - 4.49%
|
|
3.10%
|
Expected stock price volatility
|
|
31.0% - 38.5%
|
|
30.5% - 45.0%
|
|
45.0%
|
Expected term in years
|
|
4.00 - 4.75
|
|
4.00
|
|
4.00
|
Expected dividend yield
|
|
0.00%
|
|
0.00%
|
|
0.00%
|
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 for options granted after April 1, 2006 takes
into consideration historical volatility, as well as 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. For stock
option awards granted between January 1, 2005 and
April 1, 2006, the expected volatility was based on the
implied volatility from traded options on our common stock.
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. We hired an independent
consulting firm with expertise in this area to review our
assumptions, methodology and calculations. The assumptions
listed above 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 Staff Accounting Bulletin Topic 14
F-50
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
13.
|
Employee
Stock and Benefit Plans (Continued)
|
(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
Following is a summary of the status of our non-vested
restricted stock awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average Grant
|
|
|
|
Number of
|
|
|
Date Fair Value
|
|
|
|
Shares
|
|
|
Per Share
|
|
|
Non-vested restricted stock awards
as of January 1, 2004
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
859,000
|
|
|
|
18.97
|
|
Vested
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock awards
as of December 31, 2004
|
|
|
859,000
|
|
|
|
18.97
|
|
Granted
|
|
|
5,000
|
|
|
|
45.80
|
|
Vested
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock awards
as of December 31, 2005
|
|
|
864,000
|
|
|
|
19.13
|
|
Granted
|
|
|
632,000
|
|
|
|
52.77
|
|
Vested
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(73,000
|
)
|
|
|
40.59
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock awards
as of December 31, 2006
|
|
|
1,423,000
|
|
|
|
32.97
|
|
|
|
|
|
|
|
|
|
|
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 December 31, 2006, there was
approximately $28.9 million in unrecognized compensation
cost related to non-vested restricted stock awards. We expect
this cost to be recognized over a weighted average period of
approximately 1.71 years.
Nextel Mexico Pension Plan. We have a pension
plan which is administered in accordance with local laws and
income tax regulations. As of December 31, 2006 and 2005,
we had accrued pension costs of $8.4 million and
$6.9 million, respectively. We do not expect contributions
to this plan to be material in 2007 or thereafter.
14. Related
Party Transactions
Transactions
with Nextel Communications, Inc.
Following Nextel Communications sale of
18,000,000 shares of our common stock on November 13,
2003, Nextel Communications owned 24,712,128 shares of our
common stock, either directly or indirectly, which represented
approximately 17.7% of our issued and outstanding shares of
common stock as of December 31, 2004.
F-51
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
14. Related
Party Transactions (Continued)
Following Nextel Communications sale of
10,000,000 shares of our common stock on September 7,
2005, Nextel Communications owned 14,712,128 shares of our
common stock, either directly or indirectly, which represented
approximately 9.7% and 9.1% of our issued and outstanding shares
of common stock as of December 31, 2005 and 2006,
respectively.
On January 5, 2007, Nextel Communications sold all of its
remaining shares of our common stock. As a result, we no longer
consider Nextel Communications to be a related party.
The following are descriptions of significant transactions
consummated with Nextel Communications on November 12, 2002
under our confirmed plan of reorganization.
New
Spectrum Use and Build-Out Agreement
On November 12, 2002, we and Nextel Communications entered
into a new spectrum use and build-out agreement. Under this
agreement, certain of our subsidiaries committed to complete the
construction of our network in the Baja region of Mexico, in
exchange for cash proceeds from Nextel Communications of
$50.0 million, of which $25.0 million was received in
each of 2002 and 2003. We recorded the $50.0 million as
deferred revenues, and we are recognizing the revenue ratably
over 15.5 years, the then remaining useful life of our
licenses in Tijuana. As of December 31, 2006 and 2005, we
had recorded $39.2 million and $42.5 million,
respectively, of deferred revenues related to this agreement, of
which $36.0 million and $39.3 million are classified
as long-term, respectively. During each of the years ended
December 31, 2006, 2005 and 2004, we recognized
$3.2 million in revenues related to this arrangement.
Third
Amended and Restated Trademark License Agreement with Nextel
Communications, Inc.
On November 12, 2002, we entered into a third amended and
restated trademark license agreement with Nextel Communications,
which superseded a previous trademark license agreement. Under
the new agreement, Nextel Communications granted to us an
exclusive, royalty-free license to use within Latin America,
excluding Puerto Rico, certain trademarks, including but not
limited to the mark Nextel. The license agreement
continues indefinitely unless terminated by Nextel
Communications upon 60 days notice if we commit any one of
several specified defaults and fail to cure the default within a
60 day period. As of December 31, 2004, the net
carrying value of the trademark was fully exhausted as the
result of the reversal of valuation allowances related to
deferred tax assets generated subsequent to our reorganization.
Under a separate agreement, until the sooner of
November 12, 2007 or the termination of the new agreement,
Nextel Communications agreed not to offer iDEN service in Latin
America, other than in Puerto Rico, and we agreed not to offer
iDEN service in the United States.
The total receivable due from Nextel Communications, which
represents roaming charges that we billed to Nextel
Communications for their customers use of our digital
mobile networks in our markets and is included in accounts
receivable on our consolidated balance sheet, and total payable
due to Nextel Communications, which is included in accrued
expenses and other on our consolidated balance sheet are as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Due from Nextel Communications
|
|
$
|
4,376
|
|
|
$
|
4,196
|
|
Due to Nextel Communications
|
|
|
317
|
|
|
|
1,442
|
|
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,
F-52
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
15.
|
Segment
Information (Continued)
|
(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. Because we do not view
share-based compensation as an important element of operational
performance, we recognize share-based payment expense at the
corporate level and exclude it when evaluating the business
performance of our segments. We charged management fees of
$47.9 million, $68.1 million and $37.8 million to
Nextel Mexico during the years ended December 31, 2006,
2005 and 2004, respectively. The segment information below does
not reflect these management fees because the amounts of these
fees are not provided to or used by our chief operating decision
maker in making operating decisions related to these segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Intercompany
|
|
|
|
|
|
|
Mexico
|
|
|
Brazil
|
|
|
Argentina
|
|
|
Peru
|
|
|
and other
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in thousands)
|
|
Year Ended December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
1,319,371
|
|
|
$
|
500,315
|
|
|
$
|
320,664
|
|
|
$
|
137,924
|
|
|
$
|
2,425
|
|
|
$
|
(777
|
)
|
|
$
|
2,279,922
|
|
Digital handset and accessory
revenues
|
|
|
21,926
|
|
|
|
36,673
|
|
|
|
24,370
|
|
|
|
8,449
|
|
|
|
|
|
|
|
|
|
|
|
91,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
1,341,297
|
|
|
$
|
536,988
|
|
|
$
|
345,034
|
|
|
$
|
146,373
|
|
|
$
|
2,425
|
|
|
$
|
(777
|
)
|
|
$
|
2,371,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings (losses)
|
|
$
|
530,684
|
|
|
$
|
115,144
|
|
|
$
|
98,996
|
|
|
$
|
26,078
|
|
|
$
|
(108,911
|
)
|
|
$
|
|
|
|
$
|
661,991
|
|
Depreciation and amortization
|
|
|
(105,867
|
)
|
|
|
(59,199
|
)
|
|
|
(20,141
|
)
|
|
|
(12,927
|
)
|
|
|
(4,481
|
)
|
|
|
393
|
|
|
|
(202,222
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
424,817
|
|
|
|
55,945
|
|
|
|
78,855
|
|
|
|
13,151
|
|
|
|
(113,392
|
)
|
|
|
393
|
|
|
|
459,769
|
|
Interest expense, net
|
|
|
(38,424
|
)
|
|
|
(23,961
|
)
|
|
|
(2,330
|
)
|
|
|
(145
|
)
|
|
|
(24,613
|
)
|
|
|
94
|
|
|
|
(89,379
|
)
|
Interest income
|
|
|
32,377
|
|
|
|
3,490
|
|
|
|
2,509
|
|
|
|
1,070
|
|
|
|
11,705
|
|
|
|
(94
|
)
|
|
|
51,057
|
|
Foreign currency transaction gains
(losses), net
|
|
|
3,957
|
|
|
|
(387
|
)
|
|
|
(18
|
)
|
|
|
106
|
|
|
|
(101
|
)
|
|
|
|
|
|
|
3,557
|
|
Debt conversion expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,070
|
)
|
|
|
|
|
|
|
(5,070
|
)
|
Other (expense) income, net
|
|
|
(3,173
|
)
|
|
|
(1,876
|
)
|
|
|
329
|
|
|
|
2
|
|
|
|
(1,282
|
)
|
|
|
|
|
|
|
(6,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax
|
|
$
|
419,554
|
|
|
$
|
33,211
|
|
|
$
|
79,345
|
|
|
$
|
14,184
|
|
|
$
|
(132,753
|
)
|
|
$
|
393
|
|
|
$
|
413,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
308,254
|
|
|
$
|
201,828
|
|
|
$
|
61,718
|
|
|
$
|
37,575
|
|
|
$
|
18,050
|
|
|
$
|
|
|
|
$
|
627,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
986,936
|
|
|
$
|
321,655
|
|
|
$
|
248,262
|
|
|
$
|
108,544
|
|
|
$
|
1,886
|
|
|
$
|
(670
|
)
|
|
$
|
1,666,613
|
|
Digital handset and accessory
revenues
|
|
|
26,384
|
|
|
|
25,875
|
|
|
|
21,310
|
|
|
|
5,657
|
|
|
|
|
|
|
|
|
|
|
|
79,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
1,013,320
|
|
|
$
|
347,530
|
|
|
$
|
269,572
|
|
|
$
|
114,201
|
|
|
$
|
1,886
|
|
|
$
|
(670
|
)
|
|
$
|
1,745,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings (losses)
|
|
$
|
399,698
|
|
|
$
|
44,191
|
|
|
$
|
70,832
|
|
|
$
|
26,371
|
|
|
$
|
(56,331
|
)
|
|
$
|
|
|
|
$
|
484,761
|
|
Depreciation and amortization
|
|
|
(69,300
|
)
|
|
|
(31,768
|
)
|
|
|
(16,460
|
)
|
|
|
(8,718
|
)
|
|
|
(4,279
|
)
|
|
|
393
|
|
|
|
(130,132
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
330,398
|
|
|
|
12,423
|
|
|
|
54,372
|
|
|
|
17,653
|
|
|
|
(60,610
|
)
|
|
|
393
|
|
|
|
354,629
|
|
Interest expense, net
|
|
|
(28,670
|
)
|
|
|
(18,113
|
)
|
|
|
(5,407
|
)
|
|
|
(152
|
)
|
|
|
(20,202
|
)
|
|
|
74
|
|
|
|
(72,470
|
)
|
Interest income
|
|
|
22,465
|
|
|
|
1,941
|
|
|
|
661
|
|
|
|
880
|
|
|
|
6,738
|
|
|
|
(74
|
)
|
|
|
32,611
|
|
Foreign currency transaction gains,
net
|
|
|
2,602
|
|
|
|
225
|
|
|
|
500
|
|
|
|
20
|
|
|
|
10
|
|
|
|
|
|
|
|
3,357
|
|
Debt conversion expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,930
|
)
|
|
|
|
|
|
|
(8,930
|
)
|
Other expense, net
|
|
|
(4,167
|
)
|
|
|
(3,817
|
)
|
|
|
(33
|
)
|
|
|
(11
|
)
|
|
|
(593
|
)
|
|
|
|
|
|
|
(8,621
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax
|
|
$
|
322,628
|
|
|
$
|
(7,341
|
)
|
|
$
|
50,093
|
|
|
$
|
18,390
|
|
|
$
|
(83,587
|
)
|
|
$
|
393
|
|
|
$
|
300,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
208,286
|
|
|
$
|
150,159
|
|
|
$
|
52,562
|
|
|
$
|
25,152
|
|
|
$
|
33,707
|
|
|
$
|
|
|
|
$
|
469,866
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-53
NII
HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15. Segment
Information (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Intercompany
|
|
|
|
|
|
|
Mexico
|
|
|
Brazil
|
|
|
Argentina
|
|
|
Peru
|
|
|
and other
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
(in thousands)
|
|
Year Ended December 31,
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and other revenues
|
|
$
|
749,923
|
|
|
$
|
192,830
|
|
|
$
|
177,658
|
|
|
$
|
93,328
|
|
|
$
|
1,574
|
|
|
$
|
(476
|
)
|
|
$
|
1,214,837
|
|
Digital handset and accessory
revenues
|
|
|
26,002
|
|
|
|
19,186
|
|
|
|
17,141
|
|
|
|
2,742
|
|
|
|
|
|
|
|
|
|
|
|
65,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
775,925
|
|
|
$
|
212,016
|
|
|
$
|
194,799
|
|
|
$
|
96,070
|
|
|
$
|
1,574
|
|
|
$
|
(476
|
)
|
|
$
|
1,279,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment earnings (losses)
|
|
$
|
324,250
|
|
|
$
|
13,531
|
|
|
$
|
42,096
|
|
|
$
|
19,852
|
|
|
$
|
(50,991
|
)
|
|
$
|
|
|
|
$
|
348,738
|
|
Depreciation and amortization
|
|
|
(67,322
|
)
|
|
|
(13,081
|
)
|
|
|
(11,512
|
)
|
|
|
(5,795
|
)
|
|
|
(1,080
|
)
|
|
|
415
|
|
|
|
(98,375
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
256,928
|
|
|
|
450
|
|
|
|
30,584
|
|
|
|
14,057
|
|
|
|
(52,071
|
)
|
|
|
415
|
|
|
|
250,363
|
|
Interest expense, net
|
|
|
(18,902
|
)
|
|
|
(12,054
|
)
|
|
|
(3,161
|
)
|
|
|
(188
|
)
|
|
|
(20,950
|
)
|
|
|
142
|
|
|
|
(55,113
|
)
|
Interest income
|
|
|
3,648
|
|
|
|
2,733
|
|
|
|
416
|
|
|
|
2,707
|
|
|
|
3,335
|
|
|
|
(142
|
)
|
|
|
12,697
|
|
Foreign currency transaction gains
(losses), net
|
|
|
8,613
|
|
|
|
575
|
|
|
|
(266
|
)
|
|
|
273
|
|
|
|
15
|
|
|
|
|
|
|
|
9,210
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(79,327
|
)
|
|
|
|
|
|
|
(79,327
|
)
|
Other (expense) income, net
|
|
|
(576
|
)
|
|
|
(1,819
|
)
|
|
|
184
|
|
|
|
483
|
|
|
|
(449
|
)
|
|
|
(143
|
)
|
|
|
(2,320
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax
|
|
$
|
249,711
|
|
|
$
|
(10,115
|
)
|
|
$
|
27,757
|
|
|
$
|
17,332
|
|
|
$
|
(149,447
|
)
|
|
$
|
272
|
|
|
$
|
135,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
101,682
|
|
|
$
|
72,370
|
|
|
$
|
53,174
|
|
|
$
|
20,255
|
|
|
$
|
2,424
|
|
|
$
|
(143
|
)
|
|
$
|
249,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
690,573
|
|
|
$
|
415,577
|
|
|
$
|
152,818
|
|
|
$
|
83,920
|
|
|
$
|
46,822
|
|
|
$
|
(560
|
)
|
|
$
|
1,389,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$
|
1,978,469
|
|
|
$
|
637,230
|
|
|
$
|
322,813
|
|
|
$
|
171,871
|
|
|
$
|
187,855
|
|
|
$
|
(560
|
)
|
|
$
|
3,297,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
486,841
|
|
|
$
|
247,222
|
|
|
$
|
110,836
|
|
|
$
|
59,388
|
|
|
$
|
33,187
|
|
|
$
|
(953
|
)
|
|
$
|
936,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
$
|
1,459,298
|
|
|
$
|
401,013
|
|
|
$
|
274,397
|
|
|
$
|
148,429
|
|
|
$
|
338,780
|
|
|
$
|
(953
|
)
|
|
$
|
2,620,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16.
|
Quarterly
Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
(in thousands, except per share amounts)
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
528,271
|
|
|
$
|
556,429
|
|
|
$
|
615,586
|
|
|
$
|
671,054
|
|
Operating income
|
|
|
112,109
|
|
|
|
111,587
|
|
|
|
105,615
|
|
|
|
130,458
|
|
Net income
|
|
|
64,998
|
|
|
|
55,903
|
|
|
|
65,688
|
|
|
|
107,901
|
|
Net income, per common share, basic
|
|
$
|
0.43
|
|
|
$
|
0.36
|
|
|
$
|
0.43
|
|
|
$
|
0.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, per common share,
diluted
|
|
$
|
0.38
|
|
|
$
|
0.32
|
|
|
$
|
0.38
|
|
|
$
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
(in thousands, except per share amounts)
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues
|
|
$
|
370,207
|
|
|
$
|
410,656
|
|
|
$
|
452,365
|
|
|
$
|
512,611
|
|
Operating income
|
|
|
74,207
|
|
|
|
88,741
|
|
|
|
94,435
|
|
|
|
97,246
|
|
Net income
|
|
|
45,038
|
|
|
|
30,512
|
|
|
|
49,842
|
|
|
|
49,389
|
|
Net income, per common share, basic
|
|
$
|
0.32
|
|
|
$
|
0.21
|
|
|
$
|
0.33
|
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income, per common share,
diluted
|
|
$
|
0.28
|
|
|
$
|
0.20
|
|
|
$
|
0.30
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant events that occurred during the fourth quarter of
2006 are described in Notes 3, 7 and 9.
See Note 1 for information regarding
out-of-period
adjustments recorded in the fourth quarter of 2006.
F-54
|
|
16.
|
Quarterly
Financial Data
(Unaudited) (Continued)
|
Historically, we have reported certain revenue-based taxes
imposed on us in Brazil as a reduction of revenue. We viewed
them as pass-through costs since they were billed to and
collected from customers. During the fourth quarter of 2005, we
increased our operating revenues and general and administrative
expenses by $18.6 million to
gross-up
these revenue-based taxes related to the full year 2005 because
they are the primary obligation of Nextel Brazil. This
presentation is in accordance with
EITF 99-19,
Reporting Revenue Gross as a Principal Versus Net as an
Agent. We did not record a similar adjustment to our prior
period financial statements because the amounts were not
material.
The sum of the per share amounts do not equal the annual amounts
due to changes in the number of weighted average number of
common shares outstanding during the year.
On January 12, 2007, Nextel Brazil renewed 11,900 SMR
channels of its 800 MHz spectrum licenses with
Brazils telecommunications regulatory agency, which is
known as Anatel, for a term of 15 years, which begins from
the respective expiration of each license. Nextel Brazil paid a
total cost of $13.0 million to Anatel in connection with
this renewal, which will be amortized over the remaining license
renewal period.
F-55
NII
HOLDINGS, INC. AND SUBSIDIARIES
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Deductions
|
|
|
Balance at
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
and Other
|
|
|
End of
|
|
|
|
Period
|
|
|
Expenses
|
|
|
Adjustments(1)
|
|
|
Period
|
|
|
Year Ended December 31,
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
11,677
|
|
|
$
|
30,327
|
|
|
$
|
(26,076
|
)
|
|
$
|
15,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance for deferred
tax assets
|
|
$
|
417,341
|
|
|
$
|
5,258
|
|
|
$
|
21,794
|
|
|
$
|
444,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
8,145
|
|
|
$
|
19,751
|
|
|
$
|
(16,219
|
)
|
|
$
|
11,677
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance for deferred
tax assets
|
|
$
|
365,136
|
|
|
$
|
21,179
|
|
|
$
|
31,026
|
|
|
$
|
417,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
2004(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
9,020
|
|
|
$
|
13,041
|
|
|
$
|
(13,916
|
)
|
|
$
|
8,145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance for deferred
tax assets
|
|
$
|
374,879
|
|
|
$
|
124,398
|
|
|
$
|
(134,141
|
)
|
|
$
|
365,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes the impact of foreign currency translation adjustments. |
|
(2) |
|
Effective January 1, 2004, we changed our method of
accounting for the financial results of our foreign companies
from a one-month lag reporting policy to a current period basis,
consistent with our fiscal reporting period. |
F-56
EXHIBIT INDEX
For periods before December 21, 2001, references to NII
Holdings, Inc. refer to Nextel International, Inc. the former
name of NII Holdings. All documents referenced below were filed
pursuant to the Securities Exchange Act of 1934 by NII Holdings,
file number 0-32421, unless otherwise indicated.
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Description
|
|
|
2
|
.1
|
|
Revised Third Amended Joint Plan
of Reorganization under Chapter 11 of the Bankruptcy Code
for NII Holdings and NII Holdings (Delaware), Inc. (incorporated
by reference to Exhibit 2.1 to NII Holdings
Form 8-K,
filed on November 12, 2002).
|
|
3
|
.1
|
|
Restated Certificate of
Incorporation of NII Holdings, Inc., as amended (filed herewith).
|
|
3
|
.2
|
|
Amended and Restated Bylaws of NII
Holdings (incorporated by reference to Exhibit 3.2 to NII
Holdings
Form 10-K,
filed on March 12, 2004).
|
|
4
|
.1
|
|
Form of Indenture governing our
2.875% convertible notes due 2034, dated as of
January 30, 2004, by and between NII Holdings and
Wilmington Trust Company, as Indenture Trustee (incorporated by
reference to Exhibit 4.5 to NII Holdings
Form 10-K,
filed on March 12, 2004).
|
|
4
|
.2
|
|
Indenture governing our
2.75% convertible notes due 2025, dated as of
August 15, 2005, by and between NII Holdings and Wilmington
Trust Company, as Indenture Trustee (incorporated by reference
to Exhibit 4.1 to NII Holdings
Form 10-Q,
filed on November 9, 2005).
|
|
10
|
.1
|
|
Subscriber Unit Purchase
Agreement, dated as of January 1, 2005, by and between NII
Holdings and Motorola, Inc. (incorporated by reference to
Exhibit 10.1 to NII Holdings
Form 10-K,
filed on March 22, 2006) (portions of this exhibit have
been omitted pursuant to a request for confidential treatment).
|
|
10
|
.2
|
|
Amendment Number One to the
Subscriber Unit Purchase Agreement for NII Holdings, Inc., dated
as of December 12, 2005, between NII Holdings and Motorola,
Inc. (incorporated by reference to Exhibit 10.20 to NII
Holdings
Form 10-K,
filed on March 22, 2006) (portions of this exhibit have
been omitted pursuant to a request for confidential treatment).
|
|
10
|
.3
|
|
Amendment Number Three to the
Subscriber Unit Purchase Agreement, dated September 28,
2006, by and between NII Holdings and Motorola, Inc.
(incorporated by reference to Exhibit 10.1 to NII
Holdings
Form 10-Q,
filed on November 6, 2006) (portions of this exhibit have
been omitted pursuant to a request for confidential treatment).
|
|
10
|
.4
|
|
Amendment 003 to iDEN Subscriber
Supply Agreement, dated December 10, 2001, between NII
Holdings and Motorola, Inc. (incorporated by reference to
Exhibit 10.51 to NII Holdings
Form 10-K,
filed on March 29, 2002).
|
|
10
|
.5
|
|
Form of iDEN Installation Services
Agreement, dated August 14, 2000 by and between NII
Holdings, Motorola, Inc. and each of Nextel,
Telecomunicações Ltda., Nextel Argentina S.R.L.,
Nextel de Mexico, S.A. de C.V., Nextel del Peru, S.A. and Nextel
Communications Philippines, Inc. (incorporated by reference to
Exhibit 10.1 to NII Holdings
Form 8-K,
filed on December 22, 2000).
|
|
10
|
.6
|
|
Form of Amendment 001 to iDEN
Infrastructure Installation Services Agreement, dated as of
January 1, 2005, by and between NII Holdings, Motorola,
Inc. and each of Nextel Argentina, S.A., Nextel
Telecomunicacoes, Ltda., Communicaciones Nextel de Mexico, S.A.
de C.V. and Nextel del Peru, S.A. (incorporated by reference to
Exhibit 10.4 to NII Holdings
Form 10-K,
filed on March 22, 2006).
|
|
10
|
.7
|
|
Form of iDEN Infrastructure
Equipment Supply Agreement dated August 14, 2000 by and
between NII Holdings, Motorola, Inc. and each of Nextel
Telecommunicacoes Ltda., Nextel Argentina S.R.L., Nextel de
Mexico, S.A. de C.V., Nextel del Peru, S.A. and Nextel
Communications Philippines, Inc. (incorporated by reference to
Exhibit 10.2 to NII Holdings
Form 8-K,
filed on December 22, 2000).
|
|
10
|
.8
|
|
Amendment 003 to iDEN
Infrastructure Equipment Supply Agreement, dated
December 7, 2001, between NII Holdings, Motorola, Inc.,
Nextel Argentina, S.A., Nextel Telecomunicações Ltda.,
Comunicaciones Nextel de México, S.A. de C.V., Nextel del
Peru S.A. and Nextel Communications Philippines, Inc.
(incorporated by reference to Exhibit 10.48 to NII
Holdings
Form 10-K,
filed on March 29, 2002).
|
|
10
|
.9
|
|
Form of Amendment 005 to iDEN
Infrastructure Supply Agreement, dated as of December 15,
2004, between NII Holdings, Motorola, Inc. and each of Nextel
Telecommunicacoes Ltda., Nextel Argentina S.R.L., Comunicaciones
Nextel de Mexico, S.A. de C.V. and Nextel del Peru, S.A.
(incorporated by reference to Exhibit 10.11 to NII
Holdings
Form 10-K,
filed on March 31, 2005).
|
F-57
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Exhibit Description
|
|
|
10
|
.10
|
|
Form of Amendment 006 to the iDEN
Infrastructure Equipment Supply Agreement, dated as of
January 1, 2005, between NII Holdings, Motorola, Inc. and
each of Nextel Communications Argentina, S.A., Nextel
Telecomunicacoes Ltda., Communicaciones Nextel de Mexico, S.A.
de C.V. and Nextel del Peru, S.A. (incorporated by reference to
Exhibit 10.9 to NII Holdings
Form 10-K,
filed on March 22, 2006) (portions of this exhibit have
been omitted pursuant to a request for confidential treatment).
|
|
10
|
.11
|
|
Form of Amendment 007A to the iDEN
Infrastructure Equipment Supply Agreement, dated
September 28, 2006, between NII Holdings, Motorola, Inc.
and each of Nextel Communications Argentina, S.A., Nextel
Telecomunicacoes, Ltda., Centennial Cayman Corp. Chile, S.A.,
Comunicaciones Nextel de Mexico, S.A. de C.V. and Nextel del
Peru, S.A. (incorporated by reference to Exhibit 10.2 to
NII Holdings
Form 10-Q,
filed on November 6, 2006) (portions of this exhibit have
been omitted pursuant to a request for confidential treatment).
|
|
10
|
.12
|
|
Amended and Restated Credit
Agreement, dated as of June 27, 2006, by and among
Communicaciones Nextel de Mexico, S.A. de C.V., the financial
institutions thereto, as lenders, Citibank, N.A., Citigroup
Global Markets, Inc. and Scotiabank Inverlat, S.A. (incorporated
by reference to Exhibit 10.1 to NII Holdings
Form 10-Q,
filed on August 7, 2006).
|
|
10
|
.13
|
|
Third Amended and Restated
Trademark License Agreement, dated as of November 12, 2002,
between Nextel Communications, Inc. and NII Holdings
(incorporated by reference to Exhibit 10.12 to NII
Holdings
Form S-1,
File
No. 333-102077,
filed on December 20, 2002).
|
|
10
|
.14*
|
|
Management Incentive Plan, dated
as of November 12, 2002 (incorporated by reference to
Exhibit 99.1 to NII Holdings Registration Statement
on
Form S-8,
filed on November 12, 2002).
|
|
10
|
.15
|
|
Spectrum Use and Build Out
Agreement, dated as of November 12, 2002 (incorporated by
reference to Exhibit 10.22 to NII Holdings
Form 10-K,
filed on March 27, 2003).
|
|
10
|
.16
|
|
Form of Registration Rights
Agreement related to our 2.875% convertible notes due 2034,
dated as of January 27, 2004, by and between NII Holdings
and Banc of America Securities LLC as the initial purchaser
(incorporated by reference to Exhibit 10.24 to NII
Holdings
Form 10-K,
filed on March 12, 2004).
|
|
10
|
.17
|
|
Registration Rights Agreement
related to our 2.75% convertible notes due 2025, dated as
of August 15, 2005, by and between NII Holdings, and
Goldman, Sachs & Co. (incorporated by reference to
Exhibit 10.2 to NII Holdings
Form 10-Q,
filed on November 9, 2005).
|
|
10
|
.18*
|
|
Form of NII Holdings Change of
Control Severance Plan (incorporated by reference to
Exhibit 10.26 to NII Holdings
Form 10-K,
filed on March 12, 2004).
|
|
10
|
.19*
|
|
2004 Incentive Compensation Plan
(incorporated by reference to Exhibit 4.1 to NII
Holdings
Form S-8,
File
No. 333-117394,
filed on July 15, 2004).
|
|
10
|
.20*
|
|
Form of Executive Officer
Restricted Stock Award Agreement (incorporated by reference to
Exhibit 10.1 to NII Holdings
Form 8-K,
filed on May 2, 2006).
|
|
10
|
.21*
|
|
Form of Executive Officer
Nonqualified Stock Option Agreement (incorporated by reference
to Exhibit 10.2 to NII Holdings
Form 8-K,
filed on May 2, 2006).
|
|
10
|
.22*
|
|
Form of Non-employee Director
Restricted Stock Award Agreement (incorporated by reference to
Exhibit 10.3 to NII Holdings
Form 8-K,
filed on May 2, 2006).
|
|
10
|
.23*
|
|
Form of Non-employee Director
Nonqualified Stock Option Agreement (incorporated by reference
to Exhibit 10.4 to NII Holdings
Form 8-K,
filed on May 2, 2006).
|
|
12
|
.1
|
|
Ratio of Earnings to Fixed Charges
(filed herewith).
|
|
14
|
.1
|
|
Code of Business Conduct and
Ethics (incorporated by reference to Exhibit 14.1 to NII
Holdings
Form 10-K,
filed on March 12, 2004).
|
|
21
|
.1
|
|
Subsidiaries of NII Holdings
(filed herewith).
|
|
23
|
.1
|
|
Consent of PricewaterhouseCoopers
LLP (filed herewith).
|
|
31
|
.1
|
|
Statement of Chief Executive
Officer Pursuant to
Rule 13a-14(a)
(filed herewith).
|
|
31
|
.2
|
|
Statement of Chief Financial
Officer Pursuant to
Rule 13a-14(a)
(filed herewith).
|
|
32
|
.1
|
|
Statement of Chief Executive
Officer Pursuant to 18 U.S.C. Section 1350 (filed
herewith).
|
|
32
|
.2
|
|
Statement of Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350 (filed
herewith).
|
|
|
|
* |
|
Indicates Management Compensatory Plan. |
F-58