e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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(Mark One) |
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended December 31, 2005 |
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OR |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to |
Commission file number: 000-29633
NEXTEL PARTNERS, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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91-1930918 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
4500 Carillon Point
Kirkland, Washington 98033
(425) 576-3600
(Address of principal executive offices, zip code and
registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Class A Common Stock, $0.001 par value
Indicate by check mark 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
(§ 229.405 of this chapter) 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
Exchange
Act). Yes o No þ.
Based on the closing sales price on June 30, 2005, the
aggregate market value of the voting and non-voting common stock
held by non-affiliates of the registrant was $4,143,558,871.
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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Outstanding Title of Class |
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Number of Shares on February 28, 2006 |
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Class A Common Stock |
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208,764,059 shares |
Class B Common Stock |
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84,632,604 shares |
DOCUMENTS INCORPORATED BY REFERENCE:
None.
NEXTEL PARTNERS, INC.
FORM 10-K
Table of Contents
2
PART I
As used in this Annual Report on
Form 10-K,
we, us and our refer to
Nextel Partners, Inc., Sprint Nextel refers to
Sprint Nextel Communications, Inc. (and/or, where appropriate,
its subsidiaries including Nextel, referring to
Nextel Communications, Inc.) and Nextel WIP refers
to Nextel WIP Corp., an indirect wholly owned subsidiary of
Sprint Nextel.
On August 12, 2005, Nextel merged with Sprint Corporation.
The merger constituted a Nextel sale pursuant to our charter and
on October 24, 2005, our Class A common stockholders
voted to exercise the put right set forth in our charter, to
require Nextel WIP to purchase all of our outstanding shares of
Class A common stock. On December 20, 2005, we
announced, along with Sprint Nextel, that the put price at which
Nextel WIP will purchase our outstanding Class A common
stock was determined to be $28.50 per share. The
transaction is subject to the customary regulatory approvals,
including review by the Federal Communications Commission
(FCC) and review under the Hart-Scott-Rodino
Antitrust Improvements Act (Hart-Scott-Rodino
Act), and is expected to be completed by the end of the
second quarter of 2006. On February 6, 2006, the Federal
Trade Commission and the Department of Justice provided early
termination of the waiting period under the Hart-Scott-Rodino
Act for Sprint Nextel to purchase our outstanding Class A
common stock. This Annual Report on
Form 10-K relates
only to Nextel Partners, Inc. and its subsidiaries prior to the
consummation of the transaction.
Overview
We provide fully integrated, wireless digital communications
services using the
Nextel®
brand name in mid-sized and rural markets throughout the United
States. We offer four distinct wireless services in a single
wireless handset. These services include International and
Nationwide Direct
Connectsm,
digital cellular voice, short messaging and cellular Internet
access, which provides users with wireless access to the
Internet and an organizations internal databases as well
as other applications, including
e-mail. We hold
licenses for wireless frequencies in markets where approximately
54 million people, or Pops, live and work. We have
constructed and operate a digital mobile network compatible with
the iDEN digital mobile network constructed by Nextel and
operated by Sprint Nextel (the Nextel Digital Wireless
Network) in targeted portions of these markets, including
13 of the top 100 metropolitan statistical areas and 57 of the
top 200 metropolitan statistical areas in the United States
ranked by population. Our combined Nextel Digital Wireless
Network constitutes one of the largest fully integrated digital
wireless communications systems in the United States, currently
covering 297 of the top 300 metropolitan statistical areas in
the United States. As of December 31, 2005, our portion of
the Nextel Digital Wireless Network covered approximately
42 million Pops and we had approximately 2,017,700 digital
handsets in service in our markets.
Our relationship with Nextel was created to accelerate the
build-out and expand the reach of the Nextel Digital Wireless
Network. In January 1999, we entered into a joint venture
agreement with Nextel WIP, pursuant to which Nextel, through
Nextel WIP, contributed to us cash and licenses for wireless
frequencies and granted us the exclusive right to use the Nextel
brand name in exchange for ownership in us and our commitment to
build out our compatible digital wireless network in selected
markets and corridors, in most cases adjacent to operating
Nextel markets. As of December 31, 2005, Nextel WIP owned
29.7% of our outstanding common stock and was our largest
stockholder. By the end of 2002, we had successfully built all
of the markets we were initially required to build under our
1999 agreement with Nextel. Since 1999 we have exercised options
to expand our network into additional markets. By June 2003, we
had completed the construction of all of these additional
markets. Through our affiliation with Nextel, our customers have
seamless nationwide coverage on the entire Nextel Digital
Wireless Network.
3
We offer a package of wireless voice and data services under the
Nextel brand name. We currently offer the following four
services, which are fully integrated and accessible through a
single wireless handset:
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digital cellular voice, including advanced calling features such
as speakerphone, conference calling, voicemail, call forwarding
and additional line service; |
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Direct
Connect®
service, the digital walkie-talkie service that allows customers
to instantly connect with business associates, family and
friends without placing a phone call; |
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short messaging, the service that utilizes the Internet to keep
customers connected to clients, colleagues and family with text,
numeric and two-way messaging; and |
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Nextel
Online®
services, which provide customers with Internet-ready handsets
access to the World Wide Web and an organizations internal
database, as well as web-based applications such as
e-mail, address books,
calendars and advanced
Javatm
enabled business applications. |
We were incorporated in the State of Delaware in July 1998. Our
principal executive offices are located at 4500 Carillon Point,
Kirkland, Washington 98033. Our telephone number is
(425) 576-3600.
Strategic Alliance with Nextel
Our affiliation with Nextel is an integral part of our business
strategy. Under our agreements with Nextel WIP, which are
described in more detail below, we enjoy numerous important
benefits, including:
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Nextel Brand and Differentiated Marketing Programs. We
have the exclusive right to build, operate and provide fully
integrated digital wireless communication services using the
integrated Digital Enhanced Network, or iDEN, platform developed
by Motorola, Inc. (Motorola) and the Nextel brand
name in all of our markets. |
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Integrated Nationwide Network. Our network is
operationally seamless with Sprint Nextels iDEN network,
enabling our respective customers to utilize the same voice and
data services when operating on either companys iDEN
network. |
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Exclusive Roaming Arrangement. We have the exclusive
right to provide wireless communication services to Sprint
Nextels iDEN customers who roam into our markets. Pursuant
to our operating agreements with Nextel WIP, Sprint
Nextels iDEN subscribers generate revenue for us when they
roam into our markets, and we pay Sprint Nextel when our
subscribers roam into its markets. For the year ended
December 31, 2005, we earned $211.6 million in roaming
revenues from Sprint Nextel customers who utilized our portion
of the Nextel Digital Wireless Network. |
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Coordinated Infrastructure Development. In exchange for a
fee, based on Sprint Nextels cost to provide the service,
we have the right to utilize portions of Sprint Nextels
iDEN network infrastructure, including certain switching
facilities and network monitoring systems, until our customer
volume makes it advantageous for us to build our own. The
operating agreements with Nextel WIP also provide us access to
technology improvements resulting from Sprint Nextels
research and development. |
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Supplier Relationships. Sprint Nextel assists us in
obtaining substantially the same terms it receives from
suppliers of equipment and services. We also have the ability to
develop our own relationships with suppliers of our choice. |
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National Accounts. Numerous offices and branches of
legacy Nextels national accounts have become our customers
when we have launched service in their area. |
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International Roaming. We have the ability to either
operate under Nextels international roaming agreements or,
under certain circumstances, to require Nextel WIP to provide us
with comparable international roaming capabilities under its
agreements with international carriers. Accordingly, our
customers are able to travel worldwide and still receive the
benefits of their Sprint Nextel iDEN- |
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based service. For example, in coordination with Sprint Nextel,
our customers have the ability to roam in the Mexico market area
where NII Holdings, Inc. offers iDEN-based services and also in
the Canadian market areas where TELUS offers iDEN-based
services. Furthermore, by using the Motorola i920 and i930
handsets, dual mode handsets that operate on both the iDEN
technology and the GSM 900 MHz standard, our customers
receive digital roaming services on iDEN 800 MHz and GSM
900 MHz networks in over 80 countries. |
On August 12, 2005, Nextel merged with Sprint Corporation.
The merger constituted a Nextel sale pursuant to our charter,
and on October 24, 2005, our Class A common
stockholders voted to exercise the put right set forth in our
charter to require Nextel WIP to purchase all our outstanding
shares of Class A common stock. On December 20, 2005,
we announced, along with Sprint Nextel, that the put price at
which Nextel WIP will purchase our outstanding Class A
common stock was determined to be $28.50 per share. The put
price was determined after the two appraisers appointed pursuant
to our charter, Morgan Stanley and Lazard, issued their reports
that determined fair market value as defined in our charter. On
February 6, 2006 the Federal Trade Commission and the
Department of Justice provided early termination of the waiting
period under the Hart-Scott-Rodino Act for Sprint Nextel to
purchase our outstanding Class A common stock.
In addition, on January 24, 2006, Nextel Partners and
Sprint Nextel filed a series of applications requesting FCC
consent, pursuant to section 310(d) of the Communications
Act of 1934, as amended, to the transfer of control of Nextel
Partners to Nextel WIP. Nextel Partners and Sprint Nextel filed
a series of minor amendments to these applications on
February 2, 2006.
The wireless licenses held by Nextel Partners include
approximately 6,500 Economic Area (EA) licenses and
site-based licenses in the 800 MHz Specialized Mobile Radio
(SMR) service, one Metropolitan Trading Area
(MTA) license in the 900 MHz SMR service, and
21 common carrier fixed
point-to-point
microwave licenses, and an international 214 authorization.
It is our belief that the transfer of control is consistent with
the FCCs rules and policies and will further the public
interest. We believe the proposed transaction will yield
incremental efficiencies and benefits, such as increased
coverage and improved service quality, a more cost-effective
migration path to new technologies, elimination of redundant
administrative and back-office systems, and reduced reliance on
outside networks for backhaul operations. We believe these
benefits will promote competition in the CMRS marketplace and
foster competition between the wireless and wireline industries,
particularly in the small and medium-sized markets where Nextel
Partners primarily operates. The proposed transfer should also
facilitate 800 MHz band reconfiguration in the markets
currently served by Nextel Partners.
FCC approval of the transfer of control application represents
the final regulatory approval needed to complete the transaction.
You may find more information about the put right, including the
definition of fair market value and the procedures pursuant to
which fair market value was determined, in our charter, the
December 20, 2005 agreement between us and Sprint Nextel,
and the valuation letters from the two appraisers. These
documents are available on our website at
www.nextelpartners.com in the investor relations section,
at the select corporate documents link.
Business Strategy
Our mission is to provide high quality, integrated wireless
service that maximizes customer and investor value. To achieve
this mission, we strive to build a corporate culture around five
guiding principles:
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Strive for 100% partner satisfaction. |
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Strive for 100% customer satisfaction. |
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Achieve targeted revenue growth with a low cost structure. |
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Achieve win-win results through the power of teamwork. |
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Work smart while remaining humble. |
Our mission statement and guiding principles serve as the
bedrock for all of our business strategies. In addition to our
relationship with Sprint Nextel, we believe the following
elements of our business strategy will distinguish our wireless
service offerings from those of our competitors and will enable
us to compete successfully:
Provide Differentiated Package of Wireless Services.
Along with Sprint Nextel, we offer fully integrated, wireless
communications services International and Nationwide
Direct Connect, digital cellular voice, short messaging and
Nextel Online all in a single wireless device with
no roaming charges nationwide. We believe this
four-in-one
offering is particularly attractive to business users. We
further believe that for customers who desire multiple wireless
services, the convenience of combining multiple wireless
communications options in a single handset for a single package
price with a single billing statement is an important feature
that helps distinguish us from many of our competitors.
A sizeable portion of business users communications
involves contacting others within the same organization or those
within a community of interest (e.g., contractors,
sub-contractors and suppliers). We believe that our Nationwide
Direct Connect service is especially well suited to address the
wireless communications needs of these customers. In 2005,
Direct Connect minutes used by our customers comprised
approximately 22% of the total minutes used by our customers on
our network.
Direct Connect allows all of our customers and Sprint
Nextels iDEN customers to instantly communicate with each
other on private
one-on-one calls on an
international and nationwide basis. Nationwide Direct Connect
provides full
coast-to-coast
availability of the push to talk feature to all of our customers
and all of Sprint Nextels iDEN customers across the
continental United States and Hawaii. In conjunction with
Nextel, we expanded our Direct Connect service in July 2004 to
include International Direct
Connectsm
in Canada, Argentina, Brazil, Peru and Mexico.
Deliver Unparalleled Customer Service. In addition to
providing our
four-in-one service
offering, our goal is to differentiate ourselves by delivering
the highest quality customer service in the industry, including
low rates of dropped and blocked calls. In 2005, a significant
part of our employees bonus was tied to achieving a
targeted level of customer satisfaction as measured in monthly
surveys conducted by an outside vendor. We believe that this
monetary bonus helped focus our entire company on achieving our
customer service business objective, and we intend to provide a
similar incentive to our employees in 2006.
Target Business Customers. We believe our Direct Connect
service is particularly valuable to certain business segments.
While we have a growing emphasis on consumer retail stores and
customers, we continue to focus on business customers,
particularly those customers who employ a mobile workforce.
Initially, we have concentrated our sales efforts on a number of
distinct groups of mobile workers, including personnel in the
transportation, delivery, real property and facilities
management, construction and building trades, landscaping,
government, public safety and other service sectors. We have
developed disciplined sales training procedures and strategies
that are specifically tailored to a
business-to-business
sales process. In addition, we, along with Sprint Nextel, work
with third-party vendors to develop unique data applications for
our business customers.
We have begun to expand our target customer groups to include
additional industry groups as well as consumer retail customers.
We believe that our customers value our fully integrated
services, including virtually instantaneous Direct Connect
communications, and that this, along with our efforts to achieve
100% customer satisfaction, resulted in higher monthly average
revenue per unit, or ARPU, and lower average monthly service
cancellations than industry averages. Our ARPU for the year
ended December 31, 2005 was $68 (or $78, including roaming
revenues received from Sprint Nextel) compared to an industry
average of $53 as of September 30, 2005. In addition, the
average monthly rate at which our customers canceled service
with us, or churn, was approximately 1.4% for 2005
compared to an industry average of 2.1% for the third quarter of
2005. Our ARPU and churn rate equated to lifetime revenue per
subscriber, or LRS, of approximately $4,857 for 2005, which we
believe is one of the highest in the industry. See
6
Selected Financial Data Additional
Reconciliations of Non-GAAP Financial Measures (Unaudited)
for more information regarding our use of ARPU and LRS as
non-GAAP financial measures. Our monthly average minutes of use
increased from 743 minutes per subscriber in 2004 to 826 minutes
per subscriber in 2005, an increase of 11%. In addition, our
customer base grew 26% from approximately 1,602,400 customers as
of December 31, 2004 to approximately 2,017,700 customers
as of December 31, 2005.
Maintain a Robust, Reliable Network. Our objective is to
maintain a robust and reliable digital wireless network in our
markets that covers all key population areas in those markets
and operates seamlessly with Sprint Nextels iDEN network.
We have constructed our portion of the Nextel Digital Wireless
Network using the same Motorola-developed iDEN technology used
by Nextel. As required, we built and now operate our portion of
the Nextel Digital Wireless Network in accordance with
Nextels standards, which enables both companies to achieve
a consistent level of service throughout the United States. Our
customers have access to digital quality and advanced features
whether they are using our or Nextels portion of the
Nextel Digital Wireless Network. This contrasts with the hybrid
analog/digital networks of cellular competitors, which do not
support all features in the analog-only portions of their
networks.
In January 1999 when we executed our agreements with Nextel WIP
and obtained our initial financing, we acquired two operational
markets in upstate New York and Hawaii. The remainder of our
markets had not been fully constructed. By June 2003, we had
completed construction and had successfully launched service in
all of our markets. As of December 31, 2005, we had 4,630
cell sites fully constructed and operational throughout our
markets and our network provided coverage to approximately
42 million Pops compared to 40 million Pops as of
December 31, 2004.
To reduce the risk of zoning and other local regulatory delays,
construction delays and site acquisition costs, we have located
our cell sites on existing transmission towers or other
structures such as building rooftops owned by third parties
wherever possible. If necessary, we contract with third parties
to construct transmission towers and, wherever possible, sell
these towers and lease back space for our equipment. In
addition, as of December 31, 2005, we had six mobile
switching offices in service on our network and had successfully
switched over 90% of all of our customers wireless
interconnect traffic through these switches. The remaining 10%
of our wireless interconnect traffic is routed to switches
operated by Sprint Nextel in accordance with our switch sharing
agreement. Operating our own switches and switching our own
traffic have reduced the switch sharing fees we pay to Nextel
WIP under our switch sharing agreement.
We believe our existing packet data service on the Nextel
Digital Wireless Network is robust and far-reaching. Based on
our current outlook, we anticipate eventually deploying advanced
digital technology that will allow wireless voice and high-speed
data transmission and potentially other advanced digital
services. The technology that we would deploy to provide these
types of broadband wireless services is sometimes referred to as
a next-generation technology. Until we deploy a
next-generation technology, we will continue to fully utilize
our iDEN digital wireless network. In addition, we expect
technology upgrades to continue to be made to our iDEN digital
wireless network in 2006 based on developments being made by
Motorola and Sprint Nextel.
Maintain Effective Pricing Strategy with Focus on Mid-Sized
and Rural Markets. We operate in mid-sized and rural
markets, which we believe have demographics similar to markets
served by Nextel. We believe our business customer base in these
markets has historically been underserved and thus finds our
differentiated service offering very attractive. We believe our
focus on high quality, underserved customers, coupled with our
differentiated service offering, helps us to increase
penetration within our targeted customer base while maintaining
an effective pricing strategy.
Although we set our local service prices in each of our markets
independently of Sprint Nextel, we are required to adopt
Nextels overall pricing strategies. We offer pricing
options that we believe differentiate our services from those of
many of our competitors. Our pricing packages offer our
customers simplicity and predictability in their wireless
telecommunications billing by combining Direct Connect minutes
with a mix of cellular and long-distance minutes. Furthermore,
no roaming charges are assessed
7
for mobile telephone services provided to our customers
traveling anywhere on our portion or Sprint Nextels
portion of the Nextel Digital Wireless Network in the United
States. We also offer special pricing plans that allow some
customers to aggregate the total number of account minutes for
all of their handsets and reallocate the aggregate minutes among
those handsets.
Markets
As of December 31, 2005, we had established digital
wireless service in all of the following markets:
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Region |
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Markets(1) |
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Licensed Pops | |
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Northeast
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Central PA (Wilkes-Barre/ Scranton/ Harrisburg/ York/ Lancaster) |
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2,958,580 |
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Syracuse/ Utica-Rome/ Binghamton/ Elmira, NY |
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2,064,814 |
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Buffalo/ Jamestown, NY |
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1,477,499 |
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Western PA (Altoona/ Johnstown/ State College/ Williamsport) |
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1,351,301 |
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Rochester, NY |
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1,215,557 |
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Albany/ Glens Falls, NY |
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1,196,059 |
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Burlington, VT |
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711,939 |
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Erie, PA |
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372,245 |
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Total |
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11,347,994 |
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Midwest
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Nebraska (Omaha/ Lincoln) |
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1,852,085 |
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Green Bay, WI |
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1,726,194 |
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Eastern Iowa (Waterloo/ Dubuque/ Davenport/ Cedar Rapids/ Iowa
City) |
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1,683,014 |
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E. Minnesota/ W. Wisconsin (Duluth/ Rochester/ Eau Claire/
La Crosse) |
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1,502,128 |
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Central Iowa (Des Moines) |
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1,400,726 |
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Idaho (Idaho Falls/ Pocatello/ Boise/ Twin Falls) |
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1,087,188 |
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Western IL (Peoria/ Springfield/ Decatur) |
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1,060,400 |
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North Dakota/ Western Minnesota (Fargo/ Grand Forks) |
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987,494 |
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Sioux City/ Sioux Falls IA/ SD |
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844,418 |
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Central IL (Champaign/ Bloomington) |
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727,836 |
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Total |
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12,871,483 |
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South
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Arkansas (Fayetteville/ Fort Smith/ Pine Bluff/ Little Rock) |
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2,465,485 |
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South Texas (McAllen/ Harlingen/ Brownsville/ Corpus Christi/
Victoria) |
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2,126,321 |
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West Virginia (Charleston) |
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2,048,519 |
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East Texas/ Northern Louisiana (Tyler/ Longview/ Shreveport/
Monroe) |
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2,041,183 |
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Indiana (Terre Haute/ Evansville/ Owensboro) |
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1,972,669 |
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Louisville, KY |
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1,893,110 |
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West Texas (Amarillo/ Abilene/ Lubbock/ Odessa-Midland/
San Angelo) |
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1,800,983 |
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Virginia (Roanoke/ Lynchburg/ Charlottesville) |
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1,733,552 |
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Southern Louisiana (Lafayette/ Lake Charles) |
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1,663,877 |
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Lexington, KY |
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1,517,133 |
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Mississippi (Hattiesburg/ Jackson) |
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1,457,341 |
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Georgia (Macon-Warner Robins/ Albany) |
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1,338,108 |
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Pensacola, FL |
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1,206,948 |
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Region |
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Markets(1) |
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Licensed Pops | |
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Mobile, AL |
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1,067,069 |
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Central Texas (Temple-Killeen/ Waco/ Bryan-College Station) |
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927,875 |
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Tennessee (Bristol/ Johnson City/ Kingsport, VA/ TN) |
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794,304 |
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Tallahassee, FL |
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745,623 |
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Montgomery, AL |
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741,949 |
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Augusta, GA |
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610,480 |
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Columbus, GA |
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429,960 |
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Total |
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28,582,489 |
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Noncontinental US
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Hawaii (all islands) |
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1,262,840 |
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Total |
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54,064,806 |
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(1) |
We may, from time to time, reconfigure our markets to take
advantage of build-out and management synergies and marketing
opportunities. Accordingly, the way we group our markets may
increase or decrease the total number of markets and,
correspondingly, increase or decrease the population estimates
for the newly configured market. |
We have calculated total Pops for a given market by utilizing
Census 2004 data published by the U.S. Census Bureau, which
lists population estimates by county.
In addition to medium-sized and rural markets, our markets
include selected corridors along interstate and state highways.
While these corridors do not always have large business or
residential populations, we believe that revenues may be earned
from travelers on the highways located in these markets.
Accordingly, the population of a given area may not fully
indicate the amount of the revenues that may be generated in
such area.
General Business
Revenues. We operate in one reportable segment, wireless
services. Our primary sources of revenues are service revenues
and equipment revenues, with service revenues constituting
approximately 94% of our total revenues in 2005. For more
information about our revenues and other financial results, see
our audited consolidated financial statements and the related
notes included elsewhere in this Annual Report on
Form 10-K.
Distribution Channels. Our traditional methods of
distribution have been through our direct and indirect sales
force. While we will continue to support these approaches, in
2005 we opened 62 new company-owned retail stores throughout our
markets for a total of 135 retail stores in operation at
December 31, 2005. Initial sales and revenue results from
these company-owned stores indicate that they attract high value
customers with a lower acquisition cost than our traditional
distribution channels. In addition, our telephone and website
sales distribution channels that we implemented in 2002 also
allow us to acquire new customers at relatively lower costs. For
2005, our low cost distribution channels, which include
telesales, websales and company-owned stores, accounted for
approximately 28% of our gross additional new subscribers as
compared to approximately 22% during 2004.
9
Business Developments
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Customer Products and Solutions. |
Products. We currently offer a wide variety of handsets,
with a broad range of features and price points. In 2005, we
greatly expanded our current product line to include over a
dozen new wireless handsets manufactured by Motorola
the i265, i325IS, v505, v180, i275, i355, i605, i836, i560,
i760, i850, i930 and i870. In the fourth quarter of 2005 we also
introduced the second-generation iDEN BlackBerry device, the
7100itm
manufactured by Research in Motion, Inc. (RIM).
These new handsets expand our product line and allow customers
to select a handset that best meets the demands of their work
environment or lifestyle. All of our handsets offer an advanced,
intuitive user interface, assignable ring tones, Internet access
and global position satellite (GPS) receivers for
E911 (the 911 emergency mobile telephone service) and other
location-based services. Camera phones are popular with our
customers, and we offer cameras in a number of different phone
styles (i275, i850, i870 and i930). The i870 is noteworthy for
its 1.3 mega-pixel camera and its ability to capture and
playback video images. The i870 is also the first iDEN phone to
include a built-in MP3 player and it is our first handset with
Direct
Sendsm
Picture capability. This
first-of-its-kind
service allows our subscribers with Direct
Sendsm
capable phones to send and review pictures while on a Nextel
walkie-talkie call.
Many of the handsets introduced in 2005 include three key
features designed to help businesses be more productive: Direct
Talk, Multimedia Messaging and Direct
Sendsm.
Direct Talk is the off-network walkie-talkie feature that
provides back-up
communications in times of emergency, network outage or when
traveling to remote areas not under Nextel Digital Wireless
Network coverage. Direct Talk operates by using the handsets to
transmit and receive walkie-talkie service without using our
cell sites or switches as long as the handsets are within a
relatively short distance from each other. Multimedia Messaging
allows customers to wirelessly send text, audio or pictures to
email addresses or other Nextel handsets. Direct
Sendsm,
described above, also allows customers to instantly send contact
information stored in their handset, via the
push-to-talk button, to
other Direct
Sendsm
capable handsets.
Also included in several of the new handsets is integrated
Bluetooth technology, which provides freedom from tethered wires
and cables by letting owners exchange information with other
compatible Bluetooth enabled devices such as wireless phones,
headsets, personal data assistants (PDAs) and
computers.
To further expand our differentiated suite of products and
services, we also offer
BlackBerry®
handheld devices manufactured by RIM with both voice and data
capabilities. This PDA style handset operates on the Nextel
Digital Wireless Network, integrates our
four-in-one
offering and supports Java 2 Micro Edition
(J2MEtm)
applications. We believe this product is an ideal tool for
mobile professionals who need instant and constant access to
their business email. In addition, it eliminates the need to
carry separate PDAs, cellular phones and laptops. In 2005, we
introduced the second-generation iDEN BlackBerry
device the BlackBerry
7100itm.
The Blackberry 7100i builds on the success of earlier iDEN
BlackBerry devices by featuring an enhanced color display,
Bluetooth capability, Multimedia Messaging capability, a Sure
Typetm
keyboard and a smaller handset design.
Wireless Data Solutions. In 2005, we significantly
increased sales of wireless data solutions based on
Nextels key differentiators. By partnering with key
application providers and leveraging the GPS technology built
into our handsets, we offer high value location-based services
to business and individual customers. Specifically, we are
offering asset tracking, workforce management, navigation and
wireless payment solutions. We believe these location-based
services are providing our customers with substantial increases
in productivity. In 2005, we significantly enhanced our
portfolio of GPS enabled solutions for our customers by making
our asset tracking, workforce and navigation solutions available
on the BlackBerry platform.
We also launched several solutions specifically targeted at the
individual consumer including location enabled weather
applications, applications converting a Nextel handset into a
GPS receiver for outdoor enthusiasts and access to MapQuest.com
on the mobile device. Our digital media solutions like
10
downloadable ringtones, wallpapers and mobile games have been
very popular with customers in 2005. We enhanced our messaging
capabilities by allowing our customers to exchange picture
messages with users on all the largest wireless networks in the
United States. With a simplified pricing structure and a broad
suite of consumer applications, we believe that we are well
positioned to serve the wireless data needs of our individual
customer base.
In addition to BlackBerry, we extended our email solutions to
all handsets with one of the first Java-based email solutions
available on mass market handsets. Our business customers also
have greater options for access to the Internet via their
laptops using an improved wireless PC connection card as well as
a WiFi solution, which is conveniently bundled as part of their
Nextel service.
For the year ended December 31, 2005, revenues we received
from the sale of all data products and services contributed
approximately $2.67 to our ARPU almost triple what
we reported for our 2004 average data revenue per subscriber.
Walkie-Talkie Services. In May 2005, we expanded our
walkie-talkie services with the introduction of Nationwide Group
Walkie-Talkie. Nextel customers can instantly create talk groups
of up to 20 individuals directly from their handset with other
Nextel subscribers across the country. Previously Group
Walkie-Talkie was limited to local walkie-talkie usage and talk
groups were managed by us and not the customer.
Our International Walkie-Talkie service, introduced in 2004,
gained popularity in our markets, especially those markets that
are adjacent to Canada and Mexico. International Walkie-Talkie
allows customers to instantly connect with other users in and
between the United States and up to five countries including
Peru, Brazil, Argentina, Canada and Mexico.
Our exclusive NextMail walkie-talkie service enables customers
using the walkie-talkie Connect button on their handset to
instantly send a voice message from their Nextel phone to any
email address, even if the recipient is not a Sprint Nextel
user. The recipient may retrieve the voice message from his or
her laptop or PC.
Capital Structure Transactions. During 2005 we
engaged in the following capital structure and de-leveraging
transactions:
Debt Redemption. On April 29, 2005, we redeemed for
cash the remainder of our outstanding 11% senior notes due
2010, representing approximately $1.2 million aggregate
principal amount at maturity. In addition, on November 15,
2005 we redeemed for cash the remainder of our outstanding
121/2% senior
discount notes due 2009, representing approximately
$146.2 million aggregate principal amount at maturity, for
a total redemption price of approximately $164.5 million.
Credit Facility Refinancing. On May 23, 2005, Nextel
Partners Operating Corp. (OPCO) refinanced its
existing $700.0 million tranche C term loan with a new
$550.0 million tranche D term loan. The borrowings
under the new term loan were used along with available funds to
repay the existing tranche C term loan. The tranche D
term loan has a maturity date of May 31, 2012.
The Nextel WIP Operating Agreements
Our operating agreements with Nextel WIP define the
relationship, rights and obligations between Nextel WIP and us.
The agreements began on January 29, 1999 and have an
initial term of ten years, which may be extended for up to two
and a half years. At the end of the initial term, we have the
right at our option to extend the agreements for up to four
ten-year renewals.
Under these agreements, Nextel WIP is obligated to share with us
Sprint Nextels experience in operating iDEN networks by,
among other things, granting us access to meetings and
coordinating with us
11
on network build-out and enhancements. In addition, Nextel WIP
is obligated to provide specified services to us upon request.
The most significant services Nextel WIP provides us are:
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use of some of Sprint Nextels switching facilities in
exchange for a per-minute fee based on Nextels national
average cost for such service, including financing and
depreciation costs; |
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monitoring of switches owned by us on a
24-hour per day basis
by Sprint Nextels network monitoring center in exchange
for a fee based on pro-rata costs; |
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use of Sprint Nextels back-office systems in order to
support customer activation, billing and customer care for
national accounts in exchange for fees based on Nextels
national average cost for such services; |
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use of the Nextel brand name and certain trademarks and service
marks, and the marketing and advertising materials developed by
Sprint Nextel, in exchange for a marketing services fee
described below; |
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access to technology enhancements and improvements; and |
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assisting us in contracting with Sprint Nextels suppliers
on substantially the same terms as Sprint Nextel wherever
possible. |
To further support us in our efforts, Nextel WIP has also agreed
that:
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our marketing service fee, which started accruing in January
2003, was 0.5% of gross monthly service revenues, excluding
roaming revenues, from January 1, 2003 through
December 31, 2004 and increased to 1.0% of gross monthly
service revenues, excluding roaming revenues, thereafter; and |
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when a Sprint Nextel subscriber roams on our portion of the
network we receive a certain percentage of the service revenues
generated by the roaming subscriber. That percentage was 90% of
the service revenues in 2000, 85% in 2001 and 80% in 2002 and
thereafter, subject to upward or downward adjustment based on
the relative customer satisfaction levels of Sprint Nextel and
us as measured by a customer satisfaction survey administered on
a regular basis by a third-party vendor engaged by Sprint Nextel
and us. |
In addition, the operating agreements require that we adhere to
certain key operating requirements, including the following:
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we generally are required to offer the full complement of
products and services offered by Sprint Nextel in comparable
service areas; |
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we must abide by Sprint Nextels standard pricing structure
(principally home-rate roaming), but we need not charge the same
prices as Sprint Nextel; |
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we must meet minimum network performance and customer care
thresholds; and |
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we must adhere to standards in other operating areas, such as
frequency design, site acquisition, construction, cell site
maintenance and marketing and advertising. |
Currently, our agreements with Nextel WIP also allow us access
to Sprint Nextels switches and switching facilities.
Nextel WIP has agreed to cooperate with us to establish a switch
facility for our network and to deploy switches in our territory
in a manner which best meets the following criteria:
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integration of our cell sites into Sprint Nextels national
switching infrastructure; |
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shared coverage of Direct Connect service to communities of
interest; |
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minimized costs to us and to Sprint Nextel; and |
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maximized quality of service to our customers and to Sprint
Nextels customers. |
12
These criteria provide for a flexible construction schedule of
switches to serve our territory, depending on the existing
switches in Sprint Nextels territory and the amount of
customer traffic handled by any one switch. We have the option
of installing our own switching facilities within our territory.
However, our deployment of any switching facility requires
coordination with Nextel WIP and may require Nextel WIPs
approval. Our agreements with Nextel WIP require us to implement
and install appropriate switch elements as the number of our
subscribers and cell site levels increases. For example, we will
need to establish a location and install switch equipment on our
network for every 120,000 subscriber units or a base site
controller for every 50 operational cell sites. We believe that
we have sufficient funds for these installations under our
current business plans. As of December 31, 2005, we had six
switches in operation.
Overview of the U.S. Wireless Communications Industry
Mobile wireless communications systems use a variety of radio
frequencies to transmit voice and data, and include cellular
telephone services, ESMR, PCS and paging. ESMR stands for
enhanced specialized mobile radio and is the regulatory term
applied to the services, including those provided by the Nextel
Digital Wireless Network, that combine wireless telephone
service with a dispatch feature and paging. PCS stands for
personal communications service and refers to digital wireless
telephone service.
Since the first commercial cellular systems became operational
in 1983, mobile wireless telecommunications services have grown
dramatically as these services have become widely available and
increasingly affordable. This growth has been driven by
technological advances, changes in consumer preferences and
increased availability of spectrum to new operators.
The provision of cellular telephone service began with providers
utilizing the 800 MHz band of radio frequency in 1982 when
the Federal Communications Commission (FCC) began
issuing two licenses per market throughout the United States. In
1993, the FCC allocated a portion of the radio spectrum,
1850-1990 MHz, for a new wireless communications service
commonly known as PCS. The FCCs stated objectives in
auctioning bandwidth for PCS were to foster competition among
existing cellular carriers, increase availability of wireless
services to a broader segment of the public, and bring
innovative technology to the U.S. wireless industry. Since
1995, the FCC has conducted auctions in which industry
participants have been awarded PCS licenses for designated areas
throughout the United States.
The demand for wireless telecommunications has grown rapidly,
driven by the increased availability of services, technological
advancements, regulatory changes, increased competition and
lower prices. According to the Cellular
Telecommunications & Internet Association, the number
of wireless subscribers in the United States, including
cellular, PCS and ESMR, has grown from approximately 200,000 as
of June 30, 1985 to 194.5 million as of June 2005
which reflected a penetration rate of over 65% at that time.
In the U.S. wireless communications industry, there are
three mobile wireless telephone services: cellular, ESMR and
PCS. Cellular and ESMR services utilize radio spectrum in the
800 MHz band while PCS operates at higher frequencies of
1850 to 1990 MHz. Use of the 800 MHz band gives
cellular and ESMR superior ability to penetrate buildings and
other physical obstacles and spread or propagate
through air, thereby reducing infrastructure costs since fewer
base radios are needed to cover a given area.
All cellular service transmissions were originally analog-based,
although most cellular providers have now overlaid digital
systems alongside their analog systems in large markets. Analog
cellular technology has the advantage of using a consistent
standard nationwide, permitting nationwide roaming using a
single-mode, single-band telephone. On the other hand, analog
technology has several disadvantages, including less efficient
use of spectrum, which reduces effective call capacity;
inconsistent service quality; decreased privacy, security and
reliability as compared to digital technologies; and the
inability to offer services such as voice mail, call waiting or
caller identification.
All PCS services, like ESMR, are all-digital systems that
convert voice or data signals into a stream of binary digits
that is compressed before transmission, enabling a single radio
channel to carry multiple simultaneous signal transmissions.
This enhanced capacity, along with improvements in digital
signaling,
13
allows digital-based wireless technologies to offer new and
enhanced services and improved voice quality and system
flexibility, as compared to analog technologies. Call
forwarding, call waiting and greater call privacy are among the
enhanced services that digital systems provide. In addition, due
to the reduced power consumption of digital handsets, users
benefit from an extended battery life.
The FCC has also assigned non-contiguous portions of the
800 MHz band to specialized mobile radio (SMR),
which was initially dedicated to analog two-way radio dispatch
services. This service only became viable in the mobile wireless
telephone market with the introduction in 1993 of ESMR, which
applies digital technology to make use of the 800 MHz
spectrum band and its superior propagation characteristics to
deliver the advantages of a digital wireless mobile telephone
system while retaining and significantly enhancing the value of
SMRs traditional dispatch feature.
Unlike analog cellular, which has been implemented in a uniform
manner across the United States, several mutually incompatible
digital technologies are currently in use in the United States.
Roaming into different areas often requires multi-mode
(analog/digital) and/or multi-band (PCS/cellular) handsets that
function at both cellular and PCS frequencies and/or are
equipped for more than one type of modulation technology.
Time-division technologies, which include global system for
mobile communications (GSM), time division multiple
access (TDMA) and iDEN, break up each transmission
channel into time slots that increase effective capacity. Code
division multiple access (CDMA) technology is a
spread-spectrum technology that transmits portions of many
messages over a broad portion of the available spectrum rather
than a single channel. Most iDEN handsets presently operate only
in the iDEN mode within SMR frequencies and therefore cannot
roam onto other digital or analog wireless networks.
The Nextel Digital Wireless Network
Nextel deployed a second generation of Motorolas iDEN
technology beginning in the third quarter of 1996. The Nextel
Digital Wireless Network combines the iDEN technology developed
and designed by Motorola with a low-power, multi-site deployment
of base radios similar to that used by cellular service that
permits us to reuse the same frequency in different cells,
increasing our systems effective capacity. We and Sprint
Nextel currently use iDEN technology throughout our respective
portions of the Nextel Digital Wireless Network. iDEN technology
is a proprietary format for delivering signals over scattered,
non-contiguous SMR frequencies.
The iDEN technology shares the same basic platform as the
wireless standards underlying GSM and TDMA. iDEN shares many
common components with the GSM technology that has been
established as the digital cellular communications standard in
Europe and is a variant of the GSM technology that is being
deployed by certain cellular and PCS operators in the United
States. iDEN differs in a number of significant respects from
the GSM or TDMA technology versions being assessed or deployed
by many cellular and PCS providers in the United States. The
iDEN technology, when utilized for the two-way radio dispatch
function, can be significantly more efficient than GSM or TDMA
technology formats.
The design of the Nextel Digital Wireless Network is premised on
dividing a service area into multiple sites. Each site will
contain the base radio connected by landline facilities or a
microwave to a computer-controlled switching center. Each cell
site provides service on our licensed frequencies to a
particular geographic area permitting the customers
telephone to communicate with our network. By designing our
system with multiple cell sites, we are able to reuse the
frequency channels many times throughout the same license area
by placing our transmitters at low elevation sites and
restricting the power of each transmitter to a directed
geographic area, which may be less than one mile and up to
30 miles. This process avoids interference, while
permitting significantly more customers to use the frequencies
allotted to us. This system, combining digital compression
technology with the reuse of spectrum throughout our license
area, allows us to support more customer calls than would
otherwise be the case with analog technologies.
In the case of mobile telephone calls, the switching center
controls the automatic transfer of calls from site to site as a
customer travels, coordinates calls to and from a
customers telephone and connects calls to the public
switched telecommunications network. In the case of two-way
dispatch calls, the
14
switching center connects the customer initiating the call
directly to the other customer in the case of a private call,
and directly to a number of other customers in the case of a
group call. Direct Connect dispatch capability allows any member
of a mobile team to immediately communicate with the push of a
button with another member on private
one-to-one calls on an
international and nationwide basis or on group calls with up to
100 other customers within a Direct Connect calling area. This
push-to-talk
feature works like a two-way radio, but in contrast to analog
dispatch SMR radios, iDEN technology allows only the person or
persons being called to hear the conversation.
Nationwide Direct Connect, together with other enhancements,
including call alert, speakerphone capability and short
messaging, differentiates our digital service from those of most
cellular and PCS providers, and we believe it has been
responsible for our strong appeal to business users in mobile
occupations, including transportation, delivery, real property
and facilities management, construction and building,
landscaping, and other service sectors. In addition to its
advantages to customers, Direct Connect uses only half the
bandwidth that an interconnected call over an iDEN network would
use, and this efficient use of spectrum gives us the opportunity
to offer attractive pricing for Direct Connect.
Like Sprint Nextel, we have adapted the iDEN-based packet data
network to enable wireless Internet connectivity and new digital
two-way mobile data services, marketed as Nextel Online
Services. We completed the rollout of these services in all of
our operating markets by the end of 2001. Our customers may
elect to access a broad array of content directly from their
Internet-ready handsets, such as email, news, weather, travel,
sports and leisure information and shopping. In 2003 we made
available in our markets certain Nextel Industry Solutions that
are currently available in Nextels markets and included
industry-specific applications such as fleet management
applications, timesheet programs and customer service assistance
applications, all designed to keep customers businesses
functioning smoothly through their mobile workforce.
Combined with Nextel, we have helped build one of the largest
all-digital wireless networks in the country covering thousands
of communities across the United States. Through this network,
we, together with Nextel, currently serve 297 of the top 300
U.S. markets and the major transportation corridors between
these markets.
Competition
In each of the markets where our portion of the Nextel Digital
Wireless Network operates, we compete with at least two
established cellular licensees and as many as five PCS
licensees, including the legacy Sprint, Verizon Wireless,
T-Mobile and Cingular
Wireless. Our ability to compete effectively with other wireless
communications service providers depends on a number of factors,
including:
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the continued satisfactory performance of the iDEN technology
especially in relation to emerging next generation wireless
technologies; |
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the maintenance and competitive coverage of areas throughout our
markets; |
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the establishment and maintenance of roaming service among our
market areas and those of Nextel; and |
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the development of cost-effective direct and indirect channels
of distribution for our products and services on our portion of
the Nextel Digital Wireless Network. |
A substantial number of the entities that were awarded PCS
licenses are current cellular communications service providers
and joint ventures of current and potential wireless
communications service providers, many of which have financial
resources, customer bases and name recognition greater than
ours. These operators compete with us in providing some or all
of the services available through our network. Additionally, we
expect that existing cellular service providers, some of which
have been operational for a number of years and have
significantly greater financial and technical resources,
customer bases and name recognition than we have, will continue
to upgrade their systems to provide digital wireless
communications services competitive with those available on our
network. Moreover, cellular and wireline
15
companies are authorized to participate in dispatch and SMR
services. We also expect our business to face competition from
other technologies and services developed and introduced in the
future.
Consolidation has and may continue to result in additional
large, well-capitalized competitors with substantial financial,
technical, marketing and other resources. For example, the
acquisition of AT&T Wireless by Cingular Wireless, which
closed in October 2004, created the largest wireless services
provider in the United States, with significantly more resources
and a larger customer base than we or any other competing
company. In addition, in August 2005, Sprint acquired Nextel and
Alltel Communications acquired regional wireless service
provider Western Wireless. Late in 2005, Alltel also announced
the acquisition of Midwest Wireless, a cellular and PCS licensee
with about 400,000 subscribers, for $1.075 billion. Some of our
competitors are also creating joint ventures that will fund and
construct a shared infrastructure that the venture participants
will use to provide advanced services and are entering into
roaming arrangements that provide similar benefits. By using
joint ventures and roaming arrangements, these competitors may
lower their cost of providing advanced services to their
customers. In addition, we expect that in the future, providers
of wireless communications services may compete more directly
with providers of traditional wireline telephone services and,
potentially, energy companies, utility companies and cable
operators that expand their services to offer communications
services. We also expect that we will face competition from
other technologies and services developed and introduced in the
future, including potentially those using unlicensed spectrum,
including WiFi.
We believe that the mobile telephone service currently being
provided on the Nextel Digital Wireless Network utilizing the
iDEN technology is similar in function to and achieves
performance levels competitive with those being offered by other
current wireless communications service providers in our market
areas. There are, however, and will in certain cases continue to
be, differences between the services provided by us and by
cellular and/or PCS system operators and the performance of our
respective systems. The all-digital networks that we and Nextel
operate provide customers with digital quality and advanced
features wherever they roam on the Nextel Digital Wireless
Network, in contrast to hybrid analog/digital networks of
cellular competitors, which do not support these features in the
analog-only portion of their networks. Nevertheless, our ability
to provide roaming services will be more limited than that of
carriers whose subscribers use wireless handsets that can
operate on both analog and digital cellular networks and who
have roaming agreements covering larger parts of the country. As
the Nextel Digital Wireless Network has continued to expand to
cover a greater geographic area, this disadvantage has been
reduced, but we anticipate that the Nextel Digital Wireless
Network may never cover the same geographic areas as other
mobile telephone services. In addition, other two-way radio
dispatch services offered by personal communication services
providers or cellular operators, including Verizon
Wireless push to talk service, Sprints ReadyLink and
Alltels Touch2Talk, could impair our competitive advantage
of being uniquely able to combine that service with our mobile
telephone service. However, Direct Connect has been available
for over 11 years and is a proven technology.
Wireless handsets used on the Nextel Digital Wireless Network
are not compatible with those employed on cellular or PCS
systems, and vice-versa. This lack of interoperability may
impede our ability to attract cellular or PCS customers or those
new mobile telephone customers that desire the ability to access
different service providers in the same market.
In addition, digital handsets are likely to remain significantly
more expensive than analog handsets, and are likely to remain
somewhat more expensive than digital cellular or PCS handsets
that do not incorporate a comparable multi-function capability.
We therefore expect to continue to charge higher prices for our
handsets than the prices charged by operators for analog
cellular handsets and possibly than the prices charged by
operators for digital cellular handsets. However, we believe
that our multi-function handsets currently are competitively
priced compared to multi-function mobile telephone
service and short text messaging digital, cellular
and PCS handsets.
During the transition to digital technology, certain
participants in the U.S. cellular industry offer handsets
with dual mode analog and digital
compatibility. Additionally, certain analog cellular system
operators that are also directly or through their affiliates
constructing and operating digital PCS systems
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have made available to their customers dual mode/dual
band 800 MHz cellular/1900 MHz
PCS handsets, to combine the enhanced feature set
available on digital PCS systems within their digital service
coverage areas with the broader wireless coverage area available
on their analog cellular network. We do not have comparable
hybrid handsets available to our customers. We can give no
assurances that potential customers will be willing to accept
system coverage limitations as a trade-off for the enhanced
multi-function wireless communications package we plan to
provide on our portion of the Nextel Digital Wireless Network.
Over the past several years, as the number of wireless
communications providers in our market areas have increased, the
prices of such providers wireless service offerings to
customers in those markets have generally been decreasing. We
may encounter market pressures to reduce our service offering
prices or to restructure our service offering packages to
respond to particular short-term, market-specific situations,
such as special introductory pricing or packages that may be
offered by new providers launching their service in a market, or
to remain competitive in the event that wireless service
providers generally continue to reduce the prices charged to
their customers, particularly as PCS operators enter the smaller
markets that we serve.
Because many of the cellular operators and certain of the PCS
operators in our markets have substantially greater financial
resources than we have, they may be able to offer prospective
customers equipment subsidies or discounts that are
substantially greater than those, if any, that could be offered
by us and may be able to offer services to customers at prices
that are below prices that we are able to offer for comparable
services. Thus, our ability to compete based on the price of our
digital handsets and service offerings will be limited. We
cannot predict the competitive effect that any of these factors,
or any combination thereof, will have on us.
The FCC mandated that wireless carriers provide for local number
portability (LNP) by November 24, 2003 in the
top 100 metropolitan statistical areas (MSAs) in the
United States. In addition, wireless carriers in areas outside
the top 100 MSAs were required to port a telephone number on
request within six months, or by May 24, 2004, whichever
was later. LNP allows subscribers to keep their wireless phone
number when switching to a different service provider. We
implemented LNP in our markets that are within the top 100 MSAs
in the United States that were required to be completed by
November 24, 2003 and implemented LNP in our remaining
markets by the May 24, 2004 deadline. To date, we have not
experienced an increase in churn, or the rate at which our
customers leave our service and obtain service from a
competitive carrier. However, number portability could increase
churn. We may be required to subsidize product upgrades and/or
reduce pricing to match competitors initiatives and retain
customers, which could adversely impact our revenue and
profitability. Since the launch, the wireless industry has
continued to work to improve its ability to support number
portability.
Cellular operators and PCS operators and entities that have been
awarded PCS licenses generally control more spectrum than is
allocated for SMR service in each of the relevant market areas.
Specifically, each cellular operator is licensed to operate
25 MHz of spectrum and certain PCS licensees have been
licensed for between 10 MHz and 30 MHz of spectrum in
the markets in which they are licensed, while only approximately
20 MHz is available to all competing SMR systems, including
Nextels and our systems, in those markets. The control of
more spectrum gives cellular operators and many PCS licensees
the potential for more system capacity and, therefore, the
ability to serve more subscribers than SMR operators, including
Nextel and us. We believe that we generally have adequate
spectrum to provide the capacity needed on our portion of the
Nextel Digital Wireless Network currently and for the reasonably
foreseeable future, although we may need to acquire additional
spectrum in some markets to ensure that the quality of our
network keeps pace with anticipated growth in our customer base
and to enable the implementation of new and innovative service
offerings, some of which may require additional bandwidth.
We may also face new competition from licensees of new spectrum
made available for mobile communications by the FCC. In July
2004, the FCC changed the rules and policies governing the
Multipoint Distribution Service (MDS) and the
Instructional Television Fixed Service (ITFS) in the
2500-2690 MHz band by providing licensees with greater
flexibility and establishing a more functional
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band plan. As one part of this action, the FCC renamed the MDS
service the Broadband Radio Service
(BRS) and renamed the ITFS service the Educational
Broadband Service (EBS). Importantly, the FCC
created a new band plan for the 2495-2690 MHz band that
eliminated the use of interleaved channels by MDS and ITFS
licensees and created distinct band segments for high power
operations, such as one-way video transmission, and low power
operations, such as two-way fixed and mobile broadband
applications. By grouping high and low power users into separate
portions of the band, the new band plan reduces the likelihood
of interference caused by incompatible uses and creates
incentives for the development of low-power, cellularized
broadband operations, which were inhibited by the prior band
plan.
In February 2005, the FCC also issued rules for mobile satellite
service (MSS) providers to add ancillary terrestrial
components (ATC) to their service offerings. MSS
operators could develop ATC offerings that would better enable
them to compete with terrestrial mobile communications services
like ESMR. Two MSS operators Mobile Satellite
Ventures (MSV) in May 2005 and Globalstar in January
2006 have been authorized to offer ATC. At least two
other MSS operators Inmarsat and New ICO
have filed applications for ATC authorization. In addition, in
December 2005, the FCC increased the spectrum holdings of the
existing 2 GHz MSS licensees New ICO and TMI
(an affiliate of MSV) by reassigning to them
2 GHz spectrum that was surrendered by previous MSS
licensees such that each of them now have 20 GHz of
spectrum in that band.
Since it received auction authority, the FCC has held more than
60 spectrum auctions. Generally, the auctions do not involve
spectrum used to compete with our services. During 2004, the FCC
held an auction of SMR spectrum in the 896-901 MHz and
935-940 MHz bands in various major trading areas
(MTAs) throughout the United States. During 2005,
the FCC held an auction of 234 broadband PCS spectrum licenses
in the 1800 MHz and 1900 MHz bands in various basic
trading areas (BTAs) throughout the United States.
This auction included spectrum returned to the Commission
through its settlements in bankruptcy litigation, including the
settlement with NextWave Communications, Inc. and other license
cancellations. In addition, the FCC has authorized a consortium
of communications companies to provide nationwide mobile
satellite services, which may compete with traditional mobile
wireless services. Additionally, the FCC has reallocated
frequencies in the 700 MHz band of the former analog
television channels 52-69 to commercial services. The FCC
auctioned some of this spectrum during 2002, and completed
additional auctions of this spectrum in June 2003 and July 2005.
It is possible that this spectrum will be used to offer services
that are competitive with our service. In addition, the FCC will
continue to auction spectrum in the future, and we cannot
predict how these frequencies will be used, the technologies
that will develop or what impact, if any, they will have on our
ability to compete for wireless communications services
customers.
On January 31, 2006, the FCC announced the auction of
Advanced Wireless Services (third-generation, or
3G services) licenses in the 1710-1755 MHz and
2110-2155 MHz bands. The competitive bidding for Advance
Wireless Services licenses is scheduled to commence on
June 29, 2006.
It is impossible to predict the outcome or timeframe for FCC
action on these matters. However, the outcome of these
proceedings will likely affect the ability of all carriers,
including us, to obtain additional spectrum to be used in
offering both traditional and advanced wireless services.
Public Safety Spectrum Realignment. Our iDEN technology
allows us to use scattered, non-contiguous spectrum frequencies
in the 800 MHz band. Under the licensing scheme for SMR
spectrum developed by the FCC during the 1970s, we occupy
spectrum that is intermixed and adjacent to that used by other
SMR licenses for commercial, business and industrial/land
transportation, and for public safety users in the 800 MHz
band. Different types of SMR licensees successfully coexisted
for many years, but changes over the past few years to the
network architecture necessary to support commercial digital
technology have created isolated, intermittent situations where
commercial and non-commercial licensees experience system
interference. In particular, older analog networks used by
public safety entities are experiencing system problems that
have been traced to the digital operations of nearby commercial
SMR and cellular licensees, even though all licensees are
operating within the authorized parameters of their licenses and
in compliance with FCC rules. Because the public safety
interference issue is directly linked
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to the current SMR license allocations for public safety and
commercial users, the FCC instituted a rulemaking proceeding, in
response to a proposal filed by Nextel on November 21,
2001, that considered elimination of interference and more
efficient use of spectrum by all parties through the realignment
of spectrum licenses and spectrum allocations in the
800 MHz bands. This proceeding is referred to as the
800 MHz Rebanding Proceeding.
On August 6, 2004, the FCC released a Report and
Order, Fifth Report and Order, Fourth Memorandum Opinion and
Order, and Order in the 800 MHz Rebanding Proceeding.
On December 22, 2004, the FCC released a Supplemental Order
and Order on Reconsideration in the same proceeding. On
October 5, 2005, the FCC released another Memorandum
Opinion and Order clarifying its 800 MHz rebanding rules in
response to petitions for reconsideration, declaratory ruling
and wavier filed by various parties. These three orders are
referred to as the 800 MHz Order,
800 MHz Supplemental Order, and
800 MHz Further Reconsideration Order,
respectively, and are collectively referred to as the
Orders. The Orders seek to reallocate spectrum in
the 800 MHz band to provide public safety with a contiguous
block of spectrum free from interference from other 800 MHz
licensees. As part of the reallocation, the FCC has ordered
Nextel to relinquish certain 700 MHz spectrum as well as
all of its 800 MHz holdings below the 817/862 frequencies
and to relocate certain of its systems to the portion of the
800 MHz band in the range of 817/862 to 824/869 (the
ESMR Band). As part of the relocation, all other
800 MHz licensees will be required to relinquish certain
800 MHz holdings and to relocate their operations to new
spectrum assignments. The Orders require Nextel to pay the full
cost of relocation of all 800 MHz band public safety
systems and other 800 MHz band incumbents to their new
spectrum assignments with comparable frequencies.
In exchange for Nextels surrendered spectrum rights and
its financial responsibilities for 800 MHz relocation, the
Orders assign Nextel nationwide authority to operate in the
1910/1915 MHz and 1990/1995 MHz bands (the
1.9 GHz Spectrum). Nextel must reimburse
certain incumbent entities using the 1.9 GHz Spectrum for
costs of clearing spectrum in and around those bands. In
addition, in the event that the value of the 1.9 GHz
Spectrum exceeds the value of the spectrum rights relinquished
by Nextel plus the 800 MHz relocation and 1.9 GHz
Spectrum clearing costs Nextel is obligated to pay, Nextel may
be required to make an additional windfall avoidance
payment to the U.S. Treasury.
The Orders require Nextel to obtain from Nextel Partners and
submit to the FCC a Letter of Cooperation binding
Nextel Partners to the obligations imposed on Nextel to the
extent such obligations are necessary or desirable in the
completion of reconfiguration of the 800 MHz band. Nextel
Partners has supported Nextels efforts with respect to the
800 MHz Rebanding Proceeding based on the understanding
that Nextel would bear the costs associated with any spectrum
relinquishment and relocation requirements ultimately placed on
Nextel Partners, that Nextel would ensure that Nextel Partners
is made whole with respect to any spectrum contributions made by
Nextel Partners as part of the rebanding effort, and that the
parties would otherwise cooperate in good faith to accomplish
the requirements of the Orders in a manner that is mutually
beneficial to both parties and without material disruption to
either partys operations, rights or responsibilities under
their respective operating agreements. We signed an agreement
with Nextel dated March 7, 2005 that sets forth our
respective rights and obligations with respect to the efforts
needed to accomplish the requirements of the 800 MHz
Rebanding Proceeding and we filed with the FCC the required
Letter of Cooperation on March 7, 2005. We do not expect
our cooperation with Nextel as part of the 800 MHz
Rebanding Proceeding to materially disrupt our operations and we
anticipate that upon completion of the rebanding efforts we
would have essentially the same amount of spectrum as we hold
currently and most of that spectrum will be in a contiguous
block in the ESMR Band. We anticipate that the rebanding effort
will take up to three years and potentially longer to be
completed.
The Orders are subject to a petition for judicial review filed
by Mobile Relay Services, Inc., an SMR provider affected by the
rebanding process. Another SMR provider, Preferred
Communications, Inc., has also indicated an intention to file a
petition for judicial review, although its request for a stay of
the Orders was denied by the FCC on January 30, 2006. We
cannot be sure that a Court of Appeal will not overturn
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the Orders and, if this were to occur, we cannot be certain that
the FCC would not take action adverse to us.
Regulation
Federal Regulation
SMR Regulation. We are an SMR operator regulated by the
FCC. The FCC also regulates the licensing, construction,
operation and acquisition of all other wireless
telecommunications systems in the United States, including
cellular and PCS operators. We are generally subject to the same
FCC rules and regulations as cellular and PCS operators, but our
status as an SMR operator creates some important regulatory
differences.
Within the limitations of available spectrum and technology, SMR
operators are authorized to provide mobile communications
services to business and individual users, including mobile
telephone, two-way radio dispatch, paging and mobile data
services. SMR regulations have undergone significant changes
during the last several years and continue to evolve as new FCC
rules and regulations are adopted.
The first SMR systems became operational in 1974, but these
early systems were not permitted or designed to provide
interconnected telephone service competitive with that provided
by cellular operators. SMR operators originally emphasized
two-way dispatch service, which involves shorter duration
communications than mobile telephone service and places less
demand on system capacity. SMR system capacity and quality was
originally limited by:
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the smaller portion of the radio spectrum allocated to SMR; |
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the assignment of SMR frequencies on a non-contiguous basis; |
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regulations and procedures that initially served to spread
ownership of SMR licenses among a large number of operators in
each market, further limiting the amount of SMR spectrum
available to any particular operator; and |
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older SMR technology, which employed analog transmission and a
single site, high-power transmitter configuration, precluding
the use of any given SMR frequency by more than one caller at a
time within a given licensed service area. |
The original analog SMR market was oriented largely to customers
such as contractors, service companies and delivery services
that have significant field operations and need to provide their
personnel with the ability to communicate directly with one
another, either on a
one-to-one or
one-to-many basis,
within a limited geographic area. SMR licenses granted prior to
1997 have several unfavorable characteristics, as compared with
cellular or PCS licenses. Because these SMR licenses were on a
site-by-site basis, numerous SMR licenses were required to cover
the metropolitan area typically covered by a single cellular or
PCS license.
SMR licenses granted in 1997 and later were granted to cover a
large area (known as an economic area, or EA) rather than a
specified contour around a particular antenna site. EA licenses
therefore are more like cellular or PCS licenses in this regard,
and eliminate one of the former regulatory disadvantages of SMR
licenses. The FCC has held 800 SMR auctions for EA licenses,
which include the frequencies on which we and Nextel operate in
the 800 MHz band. In these auctions, Nextel, or a bidding
consortium made up of Nextel and us, was the largest successful
bidder, and as a result, we or a Nextel subsidiary hold most but
not all of the EA licenses for the territories that we intend to
serve.
The first EA licenses granted the licensee exclusive use of the
frequencies in the EA territory. Three such licenses were issued
in each EA, one for 20 channels, one for 60 channels, and one
for 120 channels. To the extent that another SMR site-by-site
licensee was operating in the same frequencies in the EA
pursuant to another license, the EA licensee was given priority,
but was also required to provide the incumbent site-by-site
licensee with alternative spectrum and to compensate the
incumbent for the cost of changing to the other frequency. To
date, nearly all of the existing incumbents in 800 MHz
spectrum have
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been moved through voluntary agreements. We, or a Nextel
subsidiary, hold all of the EA licenses from the first auction
that include our frequencies, except for a small number of the
20-channel licenses in various locations where we, or a Nextel
subsidiary, hold much of the same spectrum through site-by-site
licenses. Most of our EA licenses are free of incumbent carriers
other than Nextel. Nextel WIP has transferred to us those
site-by-site licenses located in our EA territories operating at
the same frequencies.
In the second and third EA auctions, Nextel acquired almost all
of the EA licenses that include frequencies that we operate on a
site-by-site basis. As part of our relationship with Nextel, we
have entered into long-term lease agreements with Nextel
covering these EA licenses and the FCC has issued authorizations
to us for operations under these EA licenses. As a result, we
are able to provide service throughout the EA territory on those
frequencies. Unlike the previous EA auction, however, the EA
licensee does not have exclusive use of the frequencies in the
EA territory. Therefore, in those limited areas where another
entity may have acquired the EA license at auction but where we
are an incumbent licensee operating on a site-by-site basis on
the same frequency, we have the right to continue to operate
under the existing site-by-site authorization.
EA licenses to operate on these frequencies are issued for ten
years, after which we need to apply for renewal from the FCC.
Under current rules, we expect to obtain renewal of our EA
licenses if we are otherwise in good standing before the FCC. In
addition, all of our SMR licenses are subject to FCC build-out
requirements. The FCC has modified the build-out deadlines for
our pre-1997
site-by-site SMR licenses permitting us to utilize the same
build-out schedules as our EA licenses. Our EA licenses must
provide coverage to at least one-third of the population of the
license area within three years of the initial grant and
two-thirds of the population within five years. Alternatively,
the build-out requirement can be met by providing
substantial service to the respective market within
five years of the license grant. Failure to comply with the
build-out requirements for both site-by-site licenses and EA
licenses may result in a cancellation of these licenses by the
FCC. We hold and utilize both site-by-site licenses and EA
licenses. We have met all of the applicable time and population
based build-out requirements and associated filings of licenses
to date or have otherwise elected to meet the requirement by
satisfying the five-year substantial service option.
In 2003, the FCC, as part of its efforts to establish secondary
markets in spectrum, adopted rules that allow the leasing of
spectrum that is authorized for exclusive commercial operations
and that otherwise facilitates spectrum transfers among
licensees. Previously, the FCC did not allow spectrum leasing,
although the FCC did allow licensees to enter into management
agreements providing for third parties to operate spectrum under
certain circumstances as long as the licensee retained control
over the operations. These new spectrum leasing rules became
effective on January 26, 2004. These new rules facilitate
agreements whereby system operators needing additional spectrum
are able to lease or otherwise gain access to that spectrum from
parties holding exclusive FCC licenses for that spectrum.
Pursuant to these leasing rules, we have entered into
FCC-approved leasing agreements with Nextel under which we have
been able to gain access to additional spectrum throughout our
service territory.
Federal Regulation of Wireless Operators. SMR regulations
have undergone significant changes during the last eight years
and continue to evolve as new FCC rules and regulations are
adopted. Since 1996, SMR operators like us and Nextel have been
subject to common carrier obligations similar to those of
cellular and PCS operators. This regulatory change recognized
the emergence of SMR service as competitive with the wireless
service provided by cellular and PCS providers. As a result, SMR
providers like us now have many of the same rights (such as the
right to interconnect with other carriers) and are subject to
many of the same obligations applicable to cellular and PCS
operators.
The FCC and the Communications Act impose a number of mandates
with which we must comply, and that may impose certain costs and
technical challenges on our operations. For example, we must
provide consumers the ability to manually roam on
our network. In that regard, on August 31, 2005, the FCC
initiated a proceeding to re-examine roaming obligations and to
determine whether an automatic roaming requirement
should be adopted. We and other wireless providers have filed
comments and reply comments opposing such a requirement on both
legal and policy grounds. Should the FCC adopt such a
21
requirement or dictate the terms under which automatic roaming
must be provided, such requirements could have a significant
impact on our operations and may impose certain costs on us.
The FCC also has adopted requirements for commercial mobile
radio service (or CMRS) providers, including covered SMR
providers, to implement various enhanced 911 capabilities,
including the ability to locate emergency callers and deliver
that information to emergency responders. We were obligated to
meet certain benchmark dates for deployment of handsets capable
of providing such location information. To date, we have met all
of the periodic benchmark dates established by the FCC, except
for the final benchmark date of December 31, 2005, by which
we were required to ensure that 95% of all subscriber handsets
in service nationwide on our system can deliver location
information. As a result, on October 17, 2005, we filed a
Petition for Limited Waiver with the FCC seeking an additional
limited period of 24 months, until December 31, 2007,
to achieve 95% penetration of A-GPS handsets capable of
completing Phase II calls to requesting public safety
answering points (PSAPs). That Petition remains
pending before the FCC. Meeting these requirements has imposed
certain costs. In some states, we may not be able to recover our
costs of implementing such enhanced 911 capabilities.
The FCC also requires CMRS providers to deploy LNP technology to
allow customers to keep their telephone numbers when switching
to another carrier. Covered SMR providers, including us, along
with all other CMRS services providers, are required to offer
this number portability service in all service territories. The
LNP implementation requirement also includes enabling calls from
our network to be delivered to telephone numbers that have been
switched from one wireline carrier to another. In November 2003,
the FCC issued clarification that wireline carriers must meet
customer requests to port numbers to wireless carriers where the
wireless carriers geographic coverage area includes the
rate center in which the wireline phone number is assigned. In
order to recover our costs for implementing number portability,
we have instituted a one-time charge applicable to all customers
that port numbers off our system, which we believe to be in
compliance with applicable FCC rules and policies. Number
portability may make it easier for customers to switch among
carriers.
In 2003, the FCC completely eliminated its wireless spectrum cap
regulations which previously limited any entity from holding
attributable interests in more than 55 MHz of licensed
broadband PCS, cellular or covered SMR spectrum with significant
overlap in any geographic area. The FCC has stated that rather
than having a set spectrum cap, spectrum aggregation affecting
competition will be handled on a case-by-case basis and through
auction rules. These rules may affect our ability, as well as
our competitors ability, to obtain additional spectrum.
The FCC has an ongoing proceeding examining methods to
facilitate the development and deployment of spectrum-based
services in rural areas. During 2004, as part of this effort,
the FCC promulgated rule changes intended to increase the
flexibility of wireless service providers to use spectrum in
rural areas, and to increase access to capital for rural
buildout. The FCC also instituted a further inquiry examining
methods for fostering the availability of spectrum in rural
areas. As part of this inquiry, the FCC is considering whether
to promulgate new keep-what-you-use re-licensing
measures under which unused spectrum would revert to the FCC at
the end of a license term without regard to whether applicable
construction requirements have been timely satisfied. We and
other wireless providers have filed comments in this proceeding
opposing on both legal and policy grounds such a regulatory
change. The outcome of this proceeding cannot be predicted, and
if the FCC adopts such a change applicable to our existing
spectrum licenses, we could be subject to increased costs or
potential loss of a portion of our existing spectrum rights.
The FCC is responsible for other rules and policies, which
govern the operations over the SMR spectrum necessary for the
offering of our services. This includes the terms under which
CMRS providers interconnect their networks and the networks of
wireline and other wireless providers of interstate
communications services. The FCC also has the authority to
adjudicate, among other matters, complaints filed under the
Communications Act with respect to service providers subject to
its jurisdiction. Under its broad oversight authority with
respect to market entry and the promotion of a competitive
marketplace for wireless providers, the FCC regularly conducts
rulemaking and other types of proceedings to determine
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rules and policies that could affect SMR operations, and the
CMRS industry generally. These rules and policies are applicable
to our operations and we could face fines or other sanctions if
we do not comply.
The FCC imposes a number of obligations for local exchange
carriers to interconnect their network to other carriers
networks that affect wireless service providers. Established
local exchange carriers must provide for co-location of
equipment necessary for interconnection, as well as any
technically feasible method of interconnection requested by a
CMRS provider. In addition, local exchange carriers and CMRS
providers are obligated to negotiate with each other upon
request to establish rates and terms governing the exchange of
telecommunications between the parties networks. If
negotiations between an incumbent local exchange carrier and a
CMRS provider are not successful, either party can ask the
relevant state public utilities commission to establish terms
and cost-based rates in a binding arbitration proceeding. These
negotiations, and the outcome of state public utilities
commission arbitration proceedings, may significantly affect the
charges we pay to other carriers and receive from other carriers.
For several years, the FCC has considered amending its rules
regarding the compensation that carriers must pay each other for
both the transmission of local and non-local calls. In February
2005, the FCC adopted a Further Notice of Proposed Rulemaking
that seeks comment on seven comprehensive proposals for
reforming the intercarrier compensation system. This proceeding
is still ongoing. The outcome of this proceeding may
significantly affect the charges we pay to other carriers and
the compensation we receive for these services. We filed
comments and reply comments recommending that the FCC eliminate
payments between carriers so that carriers would recover their
costs from their own customers. Other carriers have made
recommendations regarding the rates charged, the scope of
compensation obligations and the manner in which parties
interconnect their networks that, if accepted, could impose
additional costs on us.
Certain incumbent local exchange carriers, or ILECs, in rural
areas have attempted to impose on wireless carriers, including
us, charges to terminate traffic that we send to them by filing
wireless termination tariffs with state public utility
commissions. These rural ILEC tariffs feature high termination
rates that are not based on the rural ILECs cost of
terminating the traffic we send. The rural ILECs justify
termination tariffs as a legitimate means of recovering their
costs for transport and termination of wireless traffic. On
September 6, 2002 we, Nextel and other wireless carriers
filed a petition for declaratory ruling with the FCC to have
these tariffs declared unlawful. On February 24, 2005, the
FCC denied this petition for declaratory ruling, finding that
such tariffs were not necessarily unlawful; concurrently, the
FCC adopted new rules prohibiting ILECs from filing such tariffs
in the future. As a result, we may have liability for payment of
previously filed tariffs that we refrained from paying during
the pendency of the petition for declaratory ruling. In
addition, a number of petitions for reconsideration of the
FCCs order have been filed. While none of the petitions
challenge the FCCs prospective prohibition on the filing
of such tariffs, we cannot be certain that the FCC will not act
on those petitions in a manner adverse to our interests.
In addition, the Communications Assistance for Law Enforcement
Act of 1994 (or CALEA) requires all telecommunications carriers,
including wireless carriers, to ensure that their equipment is
capable of permitting the government, pursuant to a court order
or other lawful authorization, to intercept any wire and
electronic communications carried by the carrier to or from its
subscribers. We have timely complied with implementation
deadlines for our interconnected voice network and our digital
dispatch network.
Wireless networks are also subject to certain FCC and Federal
Aviation Administration (FAA) regulations regarding
the relocation, lighting and construction of transmitter towers
and antennas and are subject to regulation under the National
Environmental Policy Act, the National Historic Preservation
Act, and various environmental regulations. Compliance with
these provisions could impose additional direct and/or indirect
costs on us and other licensees. The FCCs rules require
antenna structure owners to notify the FAA of structures that
may require marking or lighting, and there are specific
restrictions applicable to antennas placed near airports. In
addition to our SMR licenses, we may also utilize other
carriers facilities to connect base radio sites and to
link them to their respective main switching offices. These
facilities may
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be separately licensed by the FCC and may be subject to
regulation as to technical parameters, service, and transfer or
assignment.
Pursuant to the Communications Act, all telecommunications
carriers that provide interstate telecommunications services,
including SMR providers such as ourselves, are required to make
an equitable and non-discriminatory contribution to
support the cost of federal universal service programs. These
programs are designed to achieve a variety of public interest
goals, including affordable telephone service nationwide, as
well as subsidizing telecommunications services for schools and
libraries. Contributions are calculated on the basis of each
carriers interstate end-user telecommunications revenue.
The Communications Act also permits states to adopt universal
service regulations not inconsistent with the Communications Act
or the FCCs regulations, including requiring CMRS
providers to contribute to their universal service funds.
Additional costs may be incurred by us and ultimately by our
subscribers as a result of our compliance with these required
contributions.
Monies from the federal Universal Service Fund are used in part
to provide several types of cost support to common carriers
providing qualified services in high cost, rural and insular
areas. Carriers entitled to receive support payments are termed
Eligible Telecommunications Carriers or ETCs. In
addition to the incumbent local exchange wireline carriers
operating in high cost, rural and insular areas, the
Communications Act and the FCCs implementing regulations
allow in certain circumstances the designation of other
competitive carriers, including wireless carriers like us, as
ETCs for our qualified coverage areas in a given state
jurisdiction. Determinations as to whether to grant ETC status
are made in response to detailed petitions and showings on a
state-by-state basis, either by a state regulatory commission,
or, if the state declines jurisdiction, by the FCC. Pursuant to
petitions filed by us during the past two years, we have been
granted ETC designation in 15 of the states in which we operate.
Several rural incumbent local exchange carriers are currently
seeking FCC review of our ETC designations in seven of these
states, and we cannot predict the outcome of that proceeding. We
may file additional petitions in the future seeking new
designations or to expand existing designations to cover
additional service territory. Under current rules, we are
entitled to receive the same universal service support payments
(on a per-line basis) received by the incumbent wireline carrier
in a given study area or wire center covered by our service. We
are required by law to use the universal service support funds
we receive within a given state for the provision, maintenance
and upgrading of facilities and services for which the funds are
earmarked under law. The precise terms and conditions applicable
to universal service support payments to incumbent and
competitive carriers are subject to change, and are being
considered in an ongoing proceeding before the Joint Board on
Universal Service.
In February 2005, the FCC adopted new rules, applicable to ETCs
designated by the FCC, that changed the standards for
designation of ETCs and imposed new ongoing regulatory
obligations that must be met in order to maintain ETC status and
receive universal service support payments. Similar, and in some
cases identical, standards and requirements have been adopted by
many states. These regulatory requirements include an obligation
to provide annually a multi-year (up to 5 years) service
improvement plan, progress updates on service improvements that
have been completed, and certifications regarding our compliance
with certain service provisioning and consumer protection
standards. These new rules may impose some additional costs on
us, and if the FCC or a state public utilities commission
determines that we have not met the requirements that have been
imposed, that could lead to the loss of some universal service
fund payments that we currently receive. Several petitions for
reconsideration, including one by us, have been filed in this
proceeding. The petitions for reconsideration are still pending
before the FCC.
The Communications Act also requires all telecommunications
carriers, including SMR licensees, to ensure that their services
are accessible to and useable by persons with disabilities, if
readily achievable. Compliance with these provisions, and the
regulations promulgated thereunder, could impose additional
direct and/or indirect costs on us and other licensees. In
August 2003, the FCC modified the statutory exemption of mobile
telephones from hearing aid compatibility in its rules
promulgated under the Hearing Aid Compatibility Act, and the
FCCs rules now require that each digital wireless provider
must offer at least two phones that are capable of being
effectively used with hearing aids. In addition, there is a 2008
deadline requiring that half of all handsets offered to
customers are hearing aid compliant. We are
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required to make periodic progress reports to the FCC and have
met all applicable deadlines for hearing aid compatible handset
deployment. These requirements may result in additional costs to
us and other licensed mobile phone service providers.
In addition, other regulations may be promulgated pursuant to
the Communications Act or other acts of Congress, which could
significantly raise our cost of providing service. In response,
we may be required to modify our business plans or operations in
order to comply with any such regulations. Moreover, other
federal or state government agencies having jurisdiction over
our business may adopt or change regulations or take other
action that could adversely affect our financial condition or
results of operations.
State Regulation and Local Approvals. The states in which
we operate generally have agencies or commissions charged under
state law with regulating telecommunications companies, and
local governments generally seek to regulate placement of
transmitters and rights of way. While the powers of state and
local governments to regulate wireless carriers are limited to
some extent by federal law, we will have to devote resources to
comply with state and local requirements. For example, state and
local governments generally may not regulate our rates or our
entry into a market, but are permitted to manage public rights
of way, for which they can require fair and reasonable
compensation. Nevertheless, some states, have attempted to
assert certification requirements that we believe are in
conflict with provisions of the Communications Act that prohibit
states from regulating entry of wireless carriers. States may
also impose certain surcharges on our customers that could make
our service, and the service of other wireless carriers, more
expensive.
Under the Communications Act, state and local authorities
maintain authority over the zoning of sites where our antennas
are located. These authorities, however, may not legally
discriminate against or prohibit our services through their use
of zoning authority. Therefore, while we may need approvals for
particular sites or may not be able to choose the exact location
for our sites we do not foresee significant problems in placing
our antennas at sites in our territory.
In addition, a number of states and localities are considering
banning or restricting the use of wireless phones while driving
a motor vehicle. In 2001, New York enacted a statewide ban on
driving while holding a wireless phone. Connecticut, New Jersey
and the District of Columbia have enacted similar measures.
Several states have also enacted partial bans for certain
classes of drivers. Comparable legislation is pending in other
states. A handful of localities also have enacted ordinances
banning or restricting the use of handheld wireless phones by
drivers. Should this become a nationwide initiative, all
wireless carriers could experience a decline in the number of
minutes of use by subscribers.
Employees
As of December 31, 2005, we had 2,905 employees. None of
our employees is represented by a labor union or subject to a
collective bargaining agreement, nor have we experienced any
work stoppage due to labor disputes. We believe that our
relations with our employees are good.
Available Information
Our Internet address is www.NextelPartners.com. We
make available free of charge, on or through our Internet
website, access to our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q, current
reports on
Form 8-K, and
amendments to those reports filed pursuant to Section 13(a)
or 15 (d) of the Securities Exchange Act of 1934, as
amended (the Exchange Act) as soon as reasonably
practicable after such material is filed with, or furnished to,
the Securities and Exchange Commission (the SEC).
The information found on or through our website is not part of
this or any other report we file with or furnish to the SEC.
25
Executive Officers of the Registrant
The following table sets forth certain information with respect
to our executive officers:
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Name |
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Age | |
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Position |
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| |
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John Chapple
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52 |
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President, Chief Executive Officer and Chairman of the Board |
Barry Rowan
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49 |
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Executive Vice President, Chief Financial Officer |
David Aas
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52 |
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Vice President, Chief Technology Officer |
Donald Manning
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|
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45 |
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Vice President, General Counsel and Secretary |
James Ryder
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|
36 |
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Vice President, Chief Operating Officer |
Philip Gaske
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47 |
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Vice President, Customer Care |
John Chapple worked to organize Nextel Partners
throughout 1998 and has been the president, chief executive
officer and chairman of the board of directors of Nextel
Partners and our subsidiaries since August 1998.
Mr. Chapple was elected to the board of directors pursuant
to the terms of the amended and restated shareholders
agreement. Mr. Chapple, a graduate of Syracuse University
and Harvard Universitys Advanced Management Program, has
22 years of experience in the wireless communications and
cable television industries. From 1978 to 1983, he served on the
senior management team of Rogers Cablesystems before moving to
American Cablesystems as senior vice president of operations
from 1983 to 1988. From 1988 to 1995, he served as executive
vice president of operations for McCaw Cellular Communications
and subsequently AT&T Wireless Services following the merger
of those companies. From 1995 to 1997, Mr. Chapple was the
president and chief operating officer for Orca Bay Sports and
Entertainment in Vancouver, B.C. During Mr. Chapples
tenure, Orca Bay owned and operated Vancouvers National
Basketball Association and National Hockey League sports
franchises in addition to the General Motors Place sports arena
and retail interests. Mr. Chapple is the past chairman of
Cellular One Group and the Personal Communications Industry
Association, past vice-chairman of the Cellular
Telecommunications & Internet Association and has been
on the Board of Governors of the NHL and NBA. Mr. Chapple
currently serves on the Fred Hutchinson Cancer Research Business
Alliance board of governors, the Syracuse University board of
trustees and the Advisory Board for the Maxwell School of
Syracuse University. He is also on the board of directors of two
private companies: Cbeyond Communications, Inc., a private VOIP
(voice over internet protocol) company, and SeaMobile, Inc., a
provider of wireless voice and data communications at sea.
Barry Rowan became executive vice president and chief
financial officer of Nextel Partners and our subsidiaries in
August 2005. Mr. Rowan joined Nextel Partners in 2003 as
vice president and chief financial officer, and from 2003 to
2004 he also served as the companys treasurer. He has
approximately 24 years of financial and operational
experience in building technology and communications companies.
Mr. Rowan earned his M.B.A. from Harvard Business School
and his B.S., summa cum laude, in business administration
and chemical biology from The College of Idaho. In 1992 he
joined Fluke Corporation as vice president and chief financial
officer. In 1995, he became vice president and general manager
of the verification tools division, and in 1996, he became
senior vice president and general manager of the networks
division, a position he held until January 1999. From 1999 to
2001 Mr. Rowan was the chief financial officer at Velocom,
Inc., during which time he served as chief executive officer of
Vesper, the companys Brazilian subsidiary, for a period of
six months. From 2002 to 2003, he was a principal at
Rowan & Company, LLC. Mr. Rowan serves on the
board of trustees of Seattle Pacific University and Bellevue
Christian School.
David Aas has been the vice president and chief
technology officer of Nextel Partners and our subsidiaries since
August 1998. Prior to joining Nextel Partners, Mr. Aas
served as vice president of engineering and operations of
AT&T Wirelesss Messaging Division. Mr. Aas has
over 22 years of experience in the wireless industry and
has held a number of senior technical management positions,
including positions with Airsignal from 1977 to 1981, MCI from
1981 to 1986, and MobileComm from
26
1986 to 1989. From 1989 to August 1998, he was with AT&T
Wireless, where he led the design, development, construction and
operation of AT&T Wirelesss national messaging network.
Donald Manning has been the vice president, general
counsel and secretary of Nextel Partners and our subsidiaries
since August 1998. From July 1996 to July 1998, he served as
regional attorney for the Western Region of AT&T Wireless
Services, an 11-state
business unit generating over $400 million in revenues
annually. Prior to joining AT&T Wireless Services, from
September 1989 to July 1998, Mr. Manning was an attorney
with Heller Ehrman White & McAuliffe specializing in
corporate and commercial litigation. From September 1985 to
September 1989, he was an attorney with the Atlanta-based firm
of Long, Aldridge & Norman.
James Ryder has been the vice president and chief
operating officer for Nextel Partners and our subsidiaries since
April 2005. Prior to this position, Mr. Ryder served as the
vice president sales and marketing of Nextel
Partners and our subsidiaries since July 2004. Previously he
served as our director of sales since October 2001. He has
approximately 10 years of wireless industry experience.
Before joining Nextel Partners in 2000, he spent six years with
Metrocall Paging, Inc., where he was most recently director of
sales.
Philip Gaske has been the vice president
customer care for Nextel Partners and our subsidiaries since
July 2004. Previously he served as our director of customer
care, leading our customer service team since the companys
founding and strengthening our focus on striving for 100%
customer satisfaction. He has more than 22 years of
management and operations experience. Prior to joining Nextel
Partners, he served as vice president of customer operations for
the California/ Nevada Region for McCaw Communications and
director of business operations integration for AT&T
Wireless. Mr. Gaske has a bachelors degree in
marketing from the University of Maryland and an MBA in Finance
from George Washington University.
Our executive officers do not serve for any specified terms and,
instead, are appointed by, and serve at the discretion of, our
Board of Directors. However, the executive officers may from
time to time be subject to employment agreements that provide
such officers with severance payments in the event that they are
terminated without cause, or in the event of a change in control
of us, as defined in those agreements. There are no family
relationships among our directors and officers.
Forward-Looking Statements
Our forward-looking statements are subject to a variety of
factors that could cause actual results to differ materially
from current expectations.
This report contains forward-looking statements. They can be
identified by the use of forward-looking words such as
believes, expects, plans,
may, will, would,
could, should or anticipates
or other comparable words, or by discussions of strategy, plans
or goals that involve risks and uncertainties that could cause
actual results to differ materially from those currently
anticipated. You are cautioned that any forward-looking
statements are not guarantees of future performance and involve
risks and uncertainties, including those set forth below in
Item 1A, Risk Factors. Forward-looking
statements include, but are not limited to, statements with
respect to the following:
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our business plan, its advantages and our strategy for
implementing our plan; |
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the success of efforts to improve and enhance, and
satisfactorily address any issues relating to, our network
performance; |
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the characteristics of the geographic areas and occupational
markets that we are targeting in our portion of the Nextel
Digital Wireless Network; |
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our ability to attract and retain customers; |
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our anticipated capital expenditures, funding requirements and
contractual obligations, including our ability to access
sufficient debt or equity capital to meet operating and
financing needs; |
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the availability of adequate quantities of system infrastructure
and subscriber equipment and components to meet our service
deployment, marketing plans and customer demand; |
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no significant adverse change in Motorolas ability or
willingness to provide handsets and related equipment and
software applications or to develop new technologies or features
for us, or in our relationship with it; |
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our ability to achieve and maintain market penetration and
average subscriber revenue levels; |
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our ability to successfully scale, in some circumstances in
conjunction with third parties under our outsourcing
arrangements, our billing, collection, customer care and similar
back-office operations to keep pace with customer growth,
increased system usage rates and growth in levels of accounts
receivables being generated by our customers; |
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the development and availability of new handsets with expanded
applications and features, including those that operate using
the 6:1 voice coder, and market acceptance of such handsets and
service offerings; |
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the availability and cost of acquiring additional spectrum; |
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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 PCS and cellular services
including, for example, two-way walkie- talkie services that
have been introduced by several of our competitors; |
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future legislation or regulatory actions relating to SMR
services, other wireless communications services or
telecommunications services generally; |
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the potential impact on us of the reconfiguration of the
800 MHz band required by the Orders; |
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delivery and successful implementation of any new technologies
deployed in connection with any future enhanced iDEN or next
generation or other advanced services we may offer; |
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the costs of compliance with regulatory mandates, particularly
the requirement to deploy location-based 911 capabilities and
wireless number portability; and |
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the anticipated closing of the acquisition of our shares of
Class A common stock by Sprint Nextel. |
The following risk factors and other information included in
this Annual Report on
Form 10-K should
be carefully considered. The risks and uncertainties described
below are not the only ones we face. Additional risks and
uncertainties not presently known to us or that we currently
deem immaterial also may impair our business operations. If any
of the following risks occur, our business, operating results
and financial condition could be seriously harmed.
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If Sprint Nextel experiences financial or operational
difficulties, our business may be adversely affected. |
Our business plan depends, in part, on Sprint Nextel continuing
to build and sustain customer support of the Nextel brand and
the Motorola iDEN technology. If Sprint Nextel encounters
financial problems or operating difficulties relating to its
portion of the Nextel Digital Wireless Network or experiences a
significant decline in customer acceptance of its products or
the Motorola iDEN technology or otherwise ceases to support the
Motorola iDEN technology, the iDEN network or the Nextel brand,
our affiliation with and dependence on Sprint Nextel may
adversely affect our business, including the quality of our
services, the ability of our customers to roam within the entire
network and our ability to attract and retain customers.
Additional information regarding Sprint Nextel, its domestic
digital mobile network business and the risks associated with
that business can be found in Sprint Nextels Annual Report
on Form 10-K for
the year ended December 31, 2005, as well as their other
filings made under the Securities Act of 1933, as amended (the
Securities Act), and the Exchange Act (SEC file
number 1-04721).
28
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Nextel WIP is obligated to purchase all of our outstanding
Class A common stock as a result of the Sprint Nextel
transaction. |
On December 20, 2005, we entered into a letter agreement
with Nextel WIP, Nextel and Sprint Nextel Corporation
(collectively, the Sprint Parties). The letter
agreement acknowledges that pursuant to the written reports of
the First Appraiser and the Second Appraiser (as such terms are
defined in our charter), our Fair Market Value (as defined in
our charter) for purposes of the put right described in the
charter is $9,167,571,573, which results in a price per share of
our Class A common stock of $28.50. Each of the Sprint
Parties agrees to complete the put transaction for cash. Each
party agrees to use its reasonable best efforts to promptly
consummate the put transaction and to obtain the necessary
regulatory approvals to consummate the put transaction as
promptly as practicable. We also agreed, among other things, to
use commercially reasonable efforts to conduct business in the
ordinary course of business and in a manner consistent with
prior practice, and to restrictions with specified exceptions on
changes in our capitalization and employee benefit arrangements.
The completion of the acquisition is subject to customary
regulatory approvals including the approval of the FCC. If the
FCC fails to approve the transfer of control of our licenses to
Sprint Nextel or substantially delays its approval, our ability
to successfully operate our business could be impaired.
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Our highly leveraged capital structure and other factors
could limit both our ability to obtain additional financing and
our growth opportunities and could adversely affect our business
in several other ways. |
The total non-current portion of our outstanding debt, including
capital lease obligations, was approximately $1.2 billion
as of December 31, 2005 and greatly exceeds the level of
our stockholders equity. As of December 31, 2005, the
non-current portion of total long-term debt outstanding included
$550.0 million outstanding under our credit facility,
$188.3 million of outstanding
11/2% convertible
senior notes due 2008, $474.6 million of outstanding
81/2% senior
notes due 2011, and $13.7 million of capital lease
obligations. In aggregate, this indebtedness represented
approximately 60% of our total book capitalization at that date.
Our large amount of outstanding indebtedness, and the fact that
we may need to incur additional debt in the future, could
significantly impact our business for the following reasons:
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it limits our ability to obtain additional financing, if needed,
to implement any enhancement of our portion of the Nextel
Digital Wireless Network, including any enhanced iDEN services,
to expand wireless voice capacity, enhanced data services or
potential next-generation mobile wireless services,
to cover our cash flow deficit or for working capital, other
capital expenditures, debt service requirements or other
purposes; |
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it will require us to dedicate a substantial portion of our
operating cash flow to fund interest expense on our credit
facility and other indebtedness, reducing funds available for
our operations or other purposes; |
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it makes us vulnerable to interest rate fluctuations because our
credit facility term loan bears interest at variable
rates; and |
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it limits our ability to compete with competitors who are not as
highly leveraged, especially those who may be able to price
their service packages at levels below those which we can or are
willing to match. |
Our ability to make payments on our indebtedness and to fund
planned capital expenditures will depend on our ability to
generate cash in the future. This, to a certain extent, is
subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our
control. Based on our current level of operations and
anticipated cost savings and operating improvements, we believe
our cash flow from operations, available cash and available
borrowings under our credit facility will be adequate for the
foreseeable future to meet our estimated capital requirements to
build out and maintain our portion of the Nextel Digital
Wireless Network using the current 800 MHz iDEN system.
29
We cannot be sure, however, that our business will generate
sufficient cash flow from operations, that currently anticipated
cost savings and operating improvements will be realized on
schedule or that future borrowings will be available to us under
our credit facility in an amount sufficient to enable us to pay
our indebtedness and our obligations under our credit facility
or our existing convertible senior notes and senior notes, or to
fund our other liquidity needs. In addition, if our indebtedness
cannot be repaid at maturity or refinanced, we will not be able
to meet our obligations under our debt agreements, which could
result in the cessation of our business.
If we default on our debt or if we are liquidated, the value of
our assets may not be sufficient to satisfy our obligations. We
have a significant amount of intangible assets, such as licenses
granted by the FCC. The value of these licenses will depend
significantly upon the success of our business and the growth of
the SMR and wireless communications industries in general.
General conditions in the wireless communications industry or
specific competitors results, including potential
decreases in new subscriber additions, declining ARPU or
increased customer dissatisfaction, may adversely affect the
market price of our notes and Class A common stock and, as
a result, could impair our ability to raise additional capital
through the sale of our equity or debt securities. In addition,
the fundraising efforts of Sprint Nextel or any of its
affiliates may also adversely affect our ability to raise
additional funds.
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We have a history of operating losses, may incur operating
losses in the future and may not be able to generate the
earnings necessary to fund our operations, sustain the continued
growth of our business or repay our debt obligations. |
We did not commence commercial operations until January 29,
1999, and the portion of the Nextel Digital Wireless Network we
began operating on that date only had a few months of operating
history. Since then, we have had a history of operating losses,
and, as of December 31, 2005, we had an accumulated deficit
of approximately $545.5 million. Fiscal year 2004 was the
first year that we achieved positive net income for the full
year. We may incur operating losses in the future. We cannot
assure you that we will sustain profitability in the future. If
we fail to achieve significant and sustained growth in our
revenues and earnings from operations, we will not have
sufficient cash to fund our current operations, sustain the
continued growth of our business or repay our debt obligations.
Our failure to fund our operations or continued growth would
have an adverse impact on our financial condition, and our
failure to make any required payments would result in defaults
under all of our debt agreements, which could result in the
cessation of our business.
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Our existing debt agreements contain restrictive and
financial covenants that limit our operating flexibility. |
The indentures governing our existing convertible senior notes,
senior notes and the credit facility of OPCO, contain covenants
that, among other things, restrict our ability to take specific
actions even if we believe them to be in our best interest.
These include restrictions on our ability to:
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incur additional debt; |
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pay dividends or distributions on, or redeem or repurchase,
capital stock; |
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create liens on assets; |
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make investments, loans or advances; |
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issue or sell capital stock of certain of our subsidiaries; |
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enter into transactions with affiliates; or |
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engage in any business other than telecommunications. |
In addition, our credit facility imposes financial covenants
that require our principal subsidiary to comply with specified
financial ratios and tests, including minimum interest coverage
ratios, maximum
30
leverage ratios and minimum fixed charge coverage ratios. We
cannot assure you that we will be able to meet these
requirements or satisfy these covenants in the future, and if we
fail to do so, our debts could become immediately payable at a
time when we are unable to pay them, which would adversely
affect our ability to carry out our business plan and would have
a negative impact on our financial condition.
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Our future performance will depend on our and
Nextels ability to succeed in the highly competitive
wireless communications industry. |
Our ability to compete effectively with established and
prospective wireless communications service providers depends on
many factors, including the following:
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If the wireless communications technology that we and Nextel use
does not continue to perform in a manner that meets customer
expectations, or if Sprint Nextel abandons, sells or otherwise
decreases or eliminates its support of the Nextel Digital
Wireless Network and the iDEN technology, we will be unable to
attract and retain customers. Customer acceptance of the
services we offer is and will continue to be affected by
technology-based differences and by the operational performance
and reliability of system transmissions on the Nextel Digital
Wireless Network. If we are unable to address and satisfactorily
resolve performance or other transmission quality issues as they
arise, including transmission quality issues on Sprint
Nextels portion of the Nextel Digital Wireless Network, we
may have difficulty attracting and retaining customers, which
would adversely affect our revenues. |
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As personal communication services and cellular operators, such
as Verizon Wireless, Cingular and Alltel, begin to offer two-way
radio dispatch services, our historical competitive advantage of
being uniquely able to combine that service with our mobile
telephone service may be impaired. Further, some of our
competitors have attempted to compete with Direct Connect by
offering unlimited
mobile-to-mobile
calling plan features and reduced rate calling plan features for
designated groups. If these calling plan modifications are
perceived by our existing and potential customers as viable
substitutes for our differentiated services, our business may be
adversely affected. |
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Because the Nextel Digital Wireless Network does not currently
provide roaming or similar coverage on a nationwide basis that
is as extensive as is available through most cellular and
personal communication services providers, we may not be able to
compete effectively against those providers. |
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In addition, some of our competitors provide their customers
with handsets with both digital and analog capability, which
expands their coverage, while we have only digital capability.
We cannot be sure that we, either alone or together with Sprint
Nextel, will be able to achieve comparable system coverage or
that a sufficient number of customers or potential customers
will be willing to accept system coverage limitations as a
trade-off for our multi-function wireless communications package. |
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We do not have the extensive direct and indirect channels of
products and services distribution that are available to some of
our competitors. The lack of these distribution channels could
adversely affect our operating results. Although we have
expanded our distribution channels to include retail locations,
we cannot assure you that these distribution channels will be
successful. Moreover, many of our competitors have established
extensive networks of retail locations, including locations
dedicated solely to their products, and multiple distribution
channels and, therefore, have access to more potential customers
than we do. |
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Because of their greater resources and potentially greater
leverage with multiple suppliers, some of our competitors may be
able to offer handsets and services to customers at prices that
are below the prices that we can offer for comparable handsets
and services. If we cannot, as a result, compete effectively
based on the price of our product and service offerings, our
revenues and growth may be adversely affected. |
31
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The wireless telecommunications industry is experiencing
significant technological change. Our digital technology could
become obsolete or it may not be a suitable platform for the
implementation of new and emerging technologies and service
offerings. We rely on digital technology that is not compatible
with, and that competes with, other forms of digital and
non-digital voice communication technology. |
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Competition among these differing technologies could result in
the following: segment the user markets, which could reduce
demand for specific technologies, including our technology;
reduce the resources devoted by third-party suppliers, including
Motorola, which supplies all of our current digital technology,
to developing or improving the technology for our systems; and
otherwise adversely affect market acceptance of our services. |
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We offer our subscribers access to digital two-way mobile data
and Internet connectivity under the brand name Nextel Online. We
cannot be sure that these services will continue to perform
satisfactorily, be utilized by a sufficient number of our
subscribers or produce sufficient levels of customer
satisfaction or revenues. Because we have less spectrum than
some of our competitors, and because we have elected to defer
the implementation of next-generation services, any digital
two-way mobile data and Internet connectivity services that we
may offer could be significantly limited compared to those
services offered by other wireless communications providers with
larger spectrum positions. The success of these new services
will be jeopardized if: we are unable to offer these new
services profitably; these new service offerings adversely
impact the performance or reliability of the Nextel Digital
Wireless Network; we, Sprint Nextel or third-party developers
fail to develop new applications for our customers; or we
otherwise do not achieve a satisfactory level of customer
acceptance and utilization of these services. |
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We expect that as the number of wireless communications
providers in our market areas increases, including providers of
both digital and analog services, our competitors prices
in these markets will decrease. We may encounter further market
pressures to reduce our digital wireless network service
offering prices; restructure our digital wireless network
service offering packages to offer more value; or respond to
particular short-term, market-specific situations, for example,
special introductory pricing or packages that may be offered by
new providers launching their services in a particular market. A
reduction in our pricing would likely have an adverse effect on
our revenues and operating results. |
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Because of the numerous features we offer and the fact that
Motorola is our sole source of handsets (with the exception of
our Blackberry handsets, which are available only from RIM), our
mobile handsets are, and are likely to remain, significantly
more expensive than mobile analog telephones and are, and are
likely to remain, somewhat more expensive than digital cellular
or personal communication services telephones that do not
incorporate a comparable multi-function capability. The higher
cost of our equipment may make it more difficult or less
profitable to attract customers who do not place a high value on
our multi-service offering. This may reduce our growth
opportunities or profitability. |
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Consolidation has and may continue to result in additional
large, well-capitalized competitors with substantial financial,
technical, marketing and other resources. For example, the
acquisition of AT&T Wireless by Cingular Wireless, which
closed in October 2004, created the largest wireless phone
provider in the United States, with significantly more resources
and a larger customer base than we or any other competing
company. In addition, in August 2005, Sprint acquired Nextel and
Alltel Communications acquired regional wireless service
provider Western Wireless. Late in 2005, Alltel announced the
acquisition of Midwest Wireless, a cellular and PCS licensee.
This concentration of resources in the marketplace could result
in increased cost efficiency for the acquiring companies,
allowing them to obtain more favorable terms from their
suppliers, which could enable them to discount their handsets or
services to customers. |
32
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Any failure to effectively integrate our portion of the
Nextel Digital Wireless Network with Sprint Nextels
portion would have an adverse effect on our results of
operations. |
Pursuant to our operating agreements with Nextel WIP, Nextel WIP
provides us with important services and assistance, including a
license to use the Nextel brand name and the sharing of switches
that direct calls to their destinations. Any interruption in the
provision of these services, or any failure by Sprint Nextel to
continue to provide the level of support consistent with past
practices between us and Nextel prior to the merger of Nextel
and Sprint, could delay or prevent the continued seamless
operation of our portion of the Nextel Digital Wireless Network
with Sprint Nextels portion, which is essential to the
overall success of our business.
Moreover, our business plan depends on our ability to implement
integrated customer service, network management and billing
systems with Sprint Nextels systems to allow our
respective portions of the Nextel Digital Wireless Network to
operate together and to provide our and Sprint Nextels
customers with seamless service. Integration requires that
numerous and diverse computer hardware and software systems work
together. Any failure to integrate these systems effectively may
have an adverse effect on our results of operations.
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Difficulties in operating our portion of the Nextel
Digital Wireless Network could increase the costs of operating
the network, which would adversely affect our ability to
generate revenues. |
The continued operation of our portion of the Nextel Digital
Wireless Network involves certain risks. Before we are able to
build additional cell sites in our markets to expand coverage,
fill in gaps in coverage or increase capacity, we will need to:
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select and acquire appropriate sites for our transmission
equipment, or cell sites; |
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purchase and install low-power transmitters, receivers and
control equipment, or base radio equipment; |
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build out the physical infrastructure; |
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obtain interconnection services from local telephone service
carriers on a timely basis; and |
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test the cell site. |
Our ability to perform these necessary steps successfully may be
hindered by, among other things, any failure to:
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lease or obtain rights to sites for the location of our base
radio equipment; |
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obtain necessary zoning and other local approvals with respect
to the placement, construction and modification of our
facilities; |
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acquire additional necessary radio frequencies from third
parties or exchange radio frequency licenses with Nextel WIP; |
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commence and complete the construction of sites for our
equipment in a timely and satisfactory manner; or |
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obtain necessary approvals, licenses or permits from federal,
state or local agencies, including land use regulatory approvals
and approvals from the Federal Aviation Administration and
Federal Communications Commission with respect to the
transmission towers that we will be using. |
Before fully implementing our portion of the Nextel Digital
Wireless Network in a new market area or expanding coverage in
an existing market area, we must complete systems design work,
find appropriate sites and construct necessary transmission
structures, receive regulatory approvals, free up frequency
channels now devoted to non-digital transmissions and begin
systems optimization. These processes may take weeks or months
to complete and may be hindered or delayed by many factors,
including unavailability of antenna sites at optimal locations,
land use and zoning controversies and limitations of
33
available frequencies. In addition, we may experience cost
overruns and delays not within our control caused by acts of
governmental entities, design changes, material and equipment
shortages, delays in delivery and catastrophic occurrences. Any
failure to construct our portion of the Nextel Digital Wireless
Network on a timely basis may adversely affect our ability to
provide the quality of services in our markets consistent with
our current business plan, and any significant delays could have
a material adverse effect on our business.
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If we do not offer services that Nextel WIP requires us to
offer or we fail to meet performance standards, we risk
termination of our agreements with Nextel WIP, which would
eliminate our ability to carry out our current business plan and
strategy. |
Our operating agreements with Nextel WIP require us to construct
and operate our portion of the Nextel Digital Wireless Network
in accordance with specific standards and to offer certain
services by Nextel and its domestic subsidiaries. Our failure to
satisfy these obligations could constitute a default under the
operating agreements that would give Nextel WIP the right to
terminate these agreements and would terminate our right to use
the Nextel brand. The non-renewal or termination of the Nextel
WIP operating agreements would eliminate our ability to carry
out our current business plan and strategy and adversely affect
our financial condition.
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We may be required to implement material changes to our
business operations to the extent these changes are adopted by
Nextel, which may not be beneficial to our business. |
If Nextel adopts material changes to its operations, our
operating agreements with Nextel WIP give it the right to
require us to make similar changes to our operations. The
failure to implement required changes could, under certain
circumstances, trigger the ability of Nextel WIP to terminate
the operating agreements, which could result in the adverse
effects described above. Even if the required change is
beneficial to Nextel, the effect on our business may vary due to
differences in markets and customers. We cannot assure you that
such changes would not adversely affect our business plan.
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The iDEN transmission technology used by us and Nextel is
different from that used by most other wireless carriers, and,
as a result, we might not be able to keep pace with industry
standards if more widely used technologies advance. |
The Nextel Digital Wireless Network uses scattered,
non-contiguous radio spectrum near the frequencies used by
cellular carriers. Because of their fragmented character, these
frequencies traditionally were only usable for two-way radio
calls, such as those used to dispatch taxis and delivery
vehicles. Nextel became able to use these frequencies to provide
a wireless telephone service competitive with cellular carriers
only when Motorola developed a proprietary technology it calls
iDEN. We, Sprint Nextel and Southern LINC are
currently the only major U.S. wireless service providers
utilizing iDEN technology on a nationwide basis, and iDEN
handsets are not currently designed to roam onto other domestic
wireless networks.
Our operating agreements with Nextel WIP require us to use the
iDEN technology in our system and prevent us from adopting any
new communications technologies that may perform better or may
be available at a lower cost without Nextel WIPs consent.
Future technological advancements may enable other wireless
technologies to equal or exceed our current levels of service
and render iDEN technology obsolete. If Motorola 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, because of the restrictive
provisions in our operating agreements with Nextel WIP, we will
be less able to compete effectively and could lose customers to
our competitors, all of which would have an adverse effect on
our business and financial condition. Moreover, if Sprint Nextel
migrates its customers and network to a CDMA platform or
otherwise concentrates its capital resources on its CDMA
operations and not its iDEN operations, we will be less able to
compete effectively and could lose our customers to competitors.
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We are dependent on Motorola for telecommunications
equipment necessary for the operation of our business, and any
failure of Motorola to perform would adversely affect our
operating results. |
Motorola is currently our sole-source supplier of transmitters
used in our network and wireless handset equipment used by our
customers (with the exception of our Blackberry handsets, which
are available only from RIM), and we rely, and expect to
continue to rely, on Motorola to manufacture a substantial
portion of the equipment necessary to construct our share of the
Nextel Digital Wireless Network. We expect that for the next few
years, Motorola will be the only manufacturer of wireless
handsets, other than RIM, that are compatible with the Nextel
Digital Wireless Network. If Motorola becomes unable to deliver
such equipment, or refuses to do so on reasonable terms, then we
may not be able to service our existing subscribers or add new
subscribers and our business would be adversely affected.
Motorola and its affiliates engage in wireless communications
businesses and may in the future engage in additional businesses
that do or may compete with some or all of the services we
offer. If these or other factors affecting our relationship with
Motorola were to result in a significant adverse change in
Motorolas ability or willingness to provide handsets and
related equipment and software applications, or to develop new
technologies or features for us, or in Motorolas ability
or willingness to do so on a timely, cost-effective basis, we
may not be able to adequately service our existing subscribers
or add new subscribers and may not be able to offer competitive
services. We cannot assure you that any potential conflict of
interest between us and Motorola will not adversely affect our
ability to obtain equipment in the future.
In addition, the failure by Motorola to deliver necessary
technology improvements and enhancements and system
infrastructure and subscriber equipment on a timely,
cost-effective basis would have an adverse effect on our growth
and operations. For instance, we rely on Motorola to provide us
with technology improvements designed to expand our wireless
voice capacity and improve our services, such as the 6:1 voice
coder software upgrade, and the handset-based A-GPS location
technology solution necessary for us to comply with the
FCCs E911 requirements. The failure by Motorola to deliver
these improvements and solutions, or its inability to do so
within our anticipated timeframe, could impose significant
additional costs on us.
We generally have been able to obtain adequate quantities of
base radios and other system infrastructure equipment from
Motorola, and adequate volumes and mix of wireless telephones
and related accessories from Motorola, to meet subscriber and
system loading rates, but we cannot be sure that equipment
quantities will be sufficient in the future. Additionally, in
the event of shortages of that equipment, our agreements with
Nextel WIP provide that available supplies of this equipment
would be allocated proportionately between Sprint Nextel and us.
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Costs and other aspects of a future deployment of advanced
digital technology could adversely affect our operations and
growth. |
Based on our current outlook we anticipate eventually deploying
advanced digital technology that will allow high capacity
wireless voice and high-speed data transmission, and potentially
other advanced digital services. The technology that we would
deploy to provide these types of broadband wireless services is
sometimes referred to as next-generation
technologies. We are focusing activities on maximizing our
ability to offer next-generation capabilities while continuing
to fully utilize our iDEN digital wireless network. Significant
capital expenditures may be required in implementing this
next-generation technology, and we cannot assure you that we
will have the financial resources necessary to fund these
expenditures or, if we do implement this technology, that it
would provide the advantages that we would expect. Moreover, it
may be necessary to acquire additional frequencies to implement
next-generation technologies, and we cannot be sure that we will
be able to obtain such spectrum on reasonable terms, if at all.
The actual amount of the funds required to finance and implement
this technology may significantly exceed our current estimate.
Further, any future implementation could require additional
unforeseen capital expenditures in the event of unforeseen
delays, cost overruns, unanticipated expenses, regulatory
changes, engineering design changes, equipment unavailability
and technological or other complications. In addition, there are
several types of next-generation technologies that may not be
fully compatible with each other or with other currently
deployed digital technologies. If the type of technology that we
either choose to
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deploy or are required to deploy to maintain compatibility with
the technology chosen by Sprint Nextel does not gain widespread
acceptance or perform as expected, or if our competitors develop
next-generation technology that is more effective or economical
than ours, our business would be adversely affected.
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We may not be able to obtain additional spectrum, which
may adversely impact our ability to implement our business
plan. |
We may seek to acquire additional spectrum, including through
participation as a bidder, or member of a bidding group, in
government-sponsored auctions of spectrum. We may not be able to
accomplish any spectrum acquisition or the necessary additional
capital for that purpose may not be available on acceptable
terms, or at all. If sufficient additional capital is not
available, to the extent we are able to complete any spectrum
acquisition, the amount of funding available to us for our
existing businesses would be reduced. Even if we are able to
acquire additional spectrum, we may still require additional
capital to finance the pursuit of any new business opportunities
associated with our acquisition of additional spectrum,
including those associated with the potential provision of any
new next-generation wireless services. This additional capital
may not be available on reasonable terms, or at all.
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Our network may not have sufficient capacity to support
our anticipated subscriber growth. |
Our business plan depends on assuring that our portion of the
Nextel Digital Wireless Network has adequate capacity to
accommodate anticipated new subscribers and the related increase
in usage of our network. This plan relies on:
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our ability to economically expand the capacity and coverage of
our network; |
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the ability to obtain additional spectrum when and where
required; |
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the availability of wireless handsets of the appropriate model
and type to meet the demands and preferences of our
customers; and |
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the ability to obtain and construct additional cell sites and
obtain other infrastructure equipment. |
We cannot assure you that we will not experience unanticipated
difficulties in obtaining these items, which could adversely
affect our ability to build our portion of the network.
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Potential systems limitations on adding subscribers may
adversely affect our growth and performance. |
Our success in generating revenues by attracting and retaining
large numbers of subscribers to our portion of the Nextel
Digital Wireless Network is critical to our business plan. In
order to do so, we must maintain effective procedures for
customer activation, customer service, billing and other support
services. Even if our system is technically functional, we may
encounter other factors that could adversely affect our ability
to successfully add customers to our portion of the Nextel
Digital Wireless Network, including:
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inadequate or inefficient systems or business processes and
related support functions, especially related to customer
service and accounts receivable collection; and |
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an inappropriately long length of time between a customers
order and activation of service for that customer, especially
because the current activation time for our new customers is
longer than that of some of our competitors. |
Customer reliance on our customer service functions may increase
as we add new customers. Our inability to timely and efficiently
meet the demands for these services could decrease or postpone
subscriber growth, or delay or otherwise impede billing and
collection of amounts owed, which would adversely affect our
revenues.
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If an event constituting a change of control or
fundamental change occurs under our indentures, we may be
required to redeem or repurchase all of our outstanding notes
even if our credit facility prohibits such redemption or
repurchase or we lack the resources to make such redemption or
repurchase. |
Upon the occurrence of a defined change of control or
fundamental change under the indentures governing our existing
convertible senior notes and senior notes, other than a change
of control involving certain of our existing stockholders, we
could be required to redeem or repurchase our existing
convertible senior notes and senior notes. However, our credit
facility prohibits us, except under certain circumstances, from
redeeming or repurchasing any of our outstanding notes before
their stated maturity. In the event we become subject to a
change of control at a time when we are prohibited from
redeeming or repurchasing our outstanding notes our failure to
redeem or repurchase such notes would constitute an event of
default under the respective indentures, which would in turn
result in a default under our credit facility. Any default under
our indentures or credit facility would result in an
acceleration of such indebtedness, which would harm our
financial condition and adversely impact our ability to
implement our business plan and could result in the cessation of
our business. Moreover, even if we obtained consent under our
credit facility, we cannot be sure that we would have sufficient
resources to redeem or repurchase our outstanding notes and
still have sufficient funds available to successfully pursue our
business plan.
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We are dependent on our current key personnel, and our
success depends upon our continued ability to attract, train and
retain additional qualified personnel. |
The loss of one or more key employees could impair our ability
to successfully operate our portion of the Nextel Digital
Wireless Network. We believe that our future success will also
depend on our continued ability to attract and retain highly
qualified technical, sales and management personnel.
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Concerns that the use of wireless telephones may pose
health and safety risks may discourage the use of our wireless
telephones. |
Studies and reports have suggested that, and additional studies
are currently being undertaken to determine whether, radio
frequency emissions from ESMR, cellular and PCS wireless
telephones may be linked with health risks, including cancer,
and may interfere with various electronic medical devices,
including hearing aids and pacemakers. The actual or perceived
risk of wireless telephones could adversely affect us through a
reduced subscriber growth rate, a reduction in subscribers,
reduced network usage per subscriber or reduced financing
available to the mobile communications industry generally.
Litigation by individuals alleging injury from health effects
associated with radio frequency emissions from wireless
telephones has been brought against us and other mobile wireless
carriers and manufacturers. In addition, purported class action
litigation has been filed seeking to require all wireless
telephones to include an earpiece that would enable use of the
telephones without holding them against the users head.
While it is not possible to predict the outcome of this
litigation, circumstances surrounding it could increase the cost
of our wireless telephones as well as increase other costs of
doing business.
Due to safety concerns, some state and local legislatures have
passed or are considering legislation restricting the use of
wireless telephones while driving automobiles. Federal
legislation has been proposed that would affect funding
available to states that do not adopt similar legislation. The
passage of this type of legislation could decrease demand for
our services, which could have a material adverse effect on our
results of operations.
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Regulatory authorities exercise considerable power over
our operations, which could be exercised against our interests
and impose additional unanticipated costs. |
The FCC and state telecommunications authorities regulate our
business to a substantial degree. The regulation of the wireless
telecommunications industry is subject to constant change by
legislation and by new rules and regulations of the FCC. We
cannot predict the effect that any legislation or FCC rulemaking
may have on our future operations. We must comply with all
applicable regulations to conduct our business. Modifications of
our business plans or operations to comply with changing
regulations or
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actions taken by regulatory authorities might increase our costs
of providing service and adversely affect our financial
condition. In addition, we anticipate FCC regulation or
Congressional legislation that creates additional spectrum
allocations that may also have the effect of adding new entrants
into the mobile telecommunications market.
If we fail to comply with the terms of our licenses or
applicable regulations, we could lose one or more licenses or
face penalties and fines. For example, we could lose a license
if we fail to construct or operate facilities as required by the
license. If we lose licenses, that loss could have a material
adverse effect on our business and financial condition.
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We were not able to meet a December 31, 2005 FCC
deadline with respect to A-GPS handset subscriber
penetration. |
On October 17, 2005, we filed a Petition for Limited Waiver
with the FCC seeking an additional limited period of
24 months, until December 31, 2007, to achieve 95%
penetration of A-GPS handsets capable of completing
Phase II calls to requesting PSAPs. The Petition remains
pending before the FCC. The FCC could impose fines or take other
regulatory action that could have an adverse effect on our
business for failing to meet this requirement that could have an
adverse effect on our business.
A-GPS capable handsets are used to locate customers placing
emergency 911-telephone calls. The FCC required that by
December 31, 2005, 95% of our subscriber base must use
A-GPS capable handsets. On October 17, 2005, we filed a
Petition for Limited Waiver with the FCC seeking an additional
limited period of 24 months, until December 31, 2007,
to achieve 95% penetration of A-GPS handsets capable of
completing Phase II calls to requesting PSAPs. The Petition
remains pending before the FCC. In our last quarterly
Phase I and II E911 Quarterly Report to the FCC filed
February 1, 2006, we notified the FCC that, as of
January 31, 2006, we had attainted an estimated 75.4%
functional A-GPS handset penetration rate. The FCC could impose
fines or take other regulatory action for failing to meet this
requirement that could have an adverse effect on our business.
In addition, we may incur significant additional costs in order
to satisfy the Phase II E911 requirement because our
compliance requires that the non-A-GPS capable handsets in our
subscriber base be replaced with A-GPS capable handsets. The
amount of the costs we would incur is highly dependent on both
the number of new subscribers added to our network who purchase
an A-GPS capable handset, and the number of existing subscribers
who upgrade from non-A-GPS capable handsets to A-GPS capable
handsets. If our rate of churn remains low, unless substantial
numbers of subscribers upgrade their handsets, we may have to
incur significant costs to get a sufficient number of A-GPS
capable handsets into our network.
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Nextel WIP has contractual approval rights that allow it
to exert significant influence over our operations, and it can
acquire additional shares of our stock. |
Pursuant to our amended and restated shareholders
agreement and Sprint Nextel operating agreements, the approval
of the director designated by Nextel WIP, and/or of Nextel WIP
itself, is required in order for us to:
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make a material change in our technology; |
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modify our business objectives in any way that is inconsistent
with our objectives under our material agreements, including our
operating agreements with Nextel WIP; |
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dispose of all or substantially all of our assets; |
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make a material change in or broaden the scope of our business
beyond our current business objectives; or |
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enter into any agreement the terms of which would be materially
altered in the event that Nextel WIP either exercises or
declines to exercise its rights to acquire additional shares of
our stock |
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under the terms of the amended and restated shareholders
agreement or our restated certificate of incorporation. |
These approval rights relate to significant transactions, and
decisions by the Nextel
WIP-designated director
could conflict with those of our other directors, including our
independent directors.
In addition, the amended and restated shareholders
agreement does not prohibit Nextel WIP or any of our other
stockholders or any of their respective affiliates from
purchasing shares of our Class A common stock in the open
market or in private transactions. In September 2004, Nextel
purchased approximately 5.6 million shares of our
Class A common stock from another stockholder. Such
purchases increase the voting power and influence of the
purchasing stockholder and could ultimately result in a change
of control of us. Shares of Class A common stock are
immediately and automatically convertible into an equal number
of shares of Class B common stock upon the acquisition of
such shares of Class A common stock by Sprint Nextel, by
any of its majority-owned subsidiaries, or by any person or
group that controls Nextel. Additionally, if we experience a
change of control, Nextel WIP could purchase all of our licenses
for $1.00, provided that it enters into a royalty-free agreement
with us to allow us to use the licenses in our territory for as
long as our operating agreements with Nextel WIP remain in
effect. Such an agreement would be subject to approval by the
FCC.
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Significant stockholders represented on our board of
directors can exert significant influence over us and may have
interests that conflict with those of our other
stockholders. |
As of December 31, 2005, our officers, directors and
greater than 5% stockholders together controlled approximately
45% of our outstanding common stock. As a result, these
stockholders, if they act together, will be able to greatly
affect the management and affairs of our company and matters
requiring stockholder approval, including the election of
directors and approval of significant corporate transactions.
This concentration of ownership may have the effect of delaying
or preventing a change in control of our company.
In addition, under our amended and restated shareholders
agreement, Nextel WIP and Madison Dearborn Capital
Partners II, L.P. each have the right to designate a member
to our board of directors. We cannot be certain that any
conflicts that arise between our interests and those of these
stockholders will always be resolved in our favor. Moreover, as
described above, Nextel WIP has certain approval rights that
allow it to exert significant influence over our operations.
Madison Dearborn Partners and Eagle River Investments, LLC each
own significant amounts of our capital stock, and Madison
Dearborn Partners currently has a representative on our board of
directors. Each of these entities or their affiliates has
significant investments in other telecommunications businesses,
some of which may compete with us currently or in the future. We
do not have a non-competition agreement with any of our
stockholders, and thus their or their affiliates current
and future investments could create conflicts of interest with
us.
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Anti-takeover provisions could prevent or delay a change
of control that stockholders may favor. |
Provisions of our charter documents, amended and restated
shareholders agreement, operating agreements and Delaware
law may discourage, delay or prevent a merger or other change of
control of our company that stockholders may consider favorable.
We have authorized the issuance of blank check
preferred stock and have imposed certain restrictions on the
calling of special meetings of stockholders. If we experience a
change of control, Nextel WIP could purchase all of our licenses
for $1.00, provided that it enters into a royalty-free agreement
with us to allow us to use the frequencies in our territory for
as long as our operating agreements remain in effect. Such an
agreement would be subject to approval by the FCC. Moreover, a
change of control could trigger an event of default under our
credit facility and the indentures governing our senior discount
notes, convertible senior notes and senior notes. These
provisions could have the effect of delaying, deferring or
preventing a change of control in our company, discourage bids
for our Class A common stock at a premium over the market
price, lower the market price of our
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Class A common stock, or impede the ability of the holders
of our Class A common stock to change our management.
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Regulations to which we are subject may affect the ability
of some of our investors to have an equity interest in us.
Additionally, our restated certificate of incorporation contains
provisions that allow us to redeem shares of our securities in
order to maintain compliance with applicable federal and state
telecommunications laws and regulations. |
Our business is subject to regulation by the FCC and state
regulatory commissions or similar state regulatory agencies in
the states in which we operate. This regulation may prevent some
investors from owning our securities, even if that ownership may
be favorable to us. The FCC and some states have statutes or
regulations that would require an investor who acquires a
specified percentage of our securities or the securities of one
of our subsidiaries to obtain approval from the FCC or the
applicable state commission to own those securities. Moreover,
our restated certificate of incorporation allows us to redeem
shares of our stock from any stockholder in order to maintain
compliance with applicable federal and state telecommunications
laws and regulations.
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Item 1B. |
Unresolved Staff Comments |
None.
We own no material real property. We lease our headquarters
located in Kirkland, Washington. This facility is approximately
22,600 square feet, and we have a lease commitment on the
facility through July 2009. We lease additional administrative
office space of approximately 59,000 square feet in Eden
Prairie, Minnesota under a lease expiring October 2007. To
operate our customer service call centers, we lease
approximately 67,000 square feet of office space in Las
Vegas, Nevada under a lease expiring October 2006. In addition,
in March 2005 we began leasing warehouse space in Las Vegas of
approximately 16,000 square feet under a lease expiring
February 2007. We operate another customer service call center
in Panama City Beach, Florida where we lease approximately
67,000 square feet of office space under a lease expiring
July 2013 and we lease additional space in Panama City Beach,
Florida of approximately 45,000 square feet under a lease
expiring July 2010. In addition, we lease space for our retail
stores under various operating lease agreements with terms
ranging from one to seven years. As of December 31, 2005,
we had 135 retail stores.
We lease cell sites for the transmission of radio service under
various master site lease agreements as well as individual site
leases. The terms of these leases generally range from five to
25 years at monthly rents ranging from $300 to $3,200. As
of December 31, 2005, we had 4,630 operational cell sites.
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Item 3. |
Legal Proceedings |
On December 5, 2001, a purported class action lawsuit was
filed in the United States District Court for the Southern
District of New York against us, two of our executive officers
and four of the underwriters involved in our initial public
offering. The lawsuit is captioned Keifer v. Nextel
Partners, Inc., et al,
No. 01 CV 10945. It was filed on behalf of all
persons who acquired our common stock between February 22,
2000 and December 6, 2000 and initially named as defendants
us, John Chapple, our president, chief executive officer and
chairman of the board, John D. Thompson, our chief financial
officer and treasurer until August 2003, and the following
underwriters of our initial public offering: Goldman
Sachs & Co., Credit Suisse First Boston Corporation
(predecessor of Credit Suisse First Boston LLC), Morgan
Stanley & Co. Incorporated and Merrill Lynch Pierce
Fenner & Smith Incorporated. Mr. Chapple and
Mr. Thompson have been dismissed from the lawsuit without
prejudice. The complaint alleges that the defendants violated
the Securities Act and the Exchange Act by issuing a
registration statement and offering circular that were false and
misleading in that they failed to disclose that: (i) the
defendant underwriters allegedly had solicited and received
excessive and undisclosed commissions from certain
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investors who purchased our common stock issued in connection
with our initial public offering; and (ii) the defendant
underwriters allegedly allocated shares of our common stock
issued in connection with our initial public offering to
investors who allegedly agreed to purchase additional shares of
our common stock at pre-arranged prices. The complaint seeks
rescissionary and/or compensatory damages. We dispute the
allegations of the complaint that suggest any wrongdoing on our
part or by our officers. However, the plaintiffs and the issuing
company defendants, including us, have reached a settlement of
the issues in the lawsuit. The court granted preliminary
approval of the settlement on February 15, 2005, subject to
certain modifications. On August 31, 2005, the court issued
a preliminary order further approving the modifications to the
settlement and certifying the settlement classes. The court also
appointed the Notice Administrator for the settlement and
ordered that notice of the settlement be distributed to all
settlement class members beginning on November 15, 2005.
The settlement fairness hearing has been set for April 24,
2006. Following the hearing, if the court determines that the
settlement is fair to the class members, the settlement will be
approved. There can be no assurance that this proposed
settlement would be approved and implemented in its current
form, or at all. The settlement would provide, among other
things, a release of us and of the individual defendants for the
conduct alleged to be wrongful in the amended complaint. We
would agree to undertake other responsibilities under the
partial settlement, including agreeing to assign away, not
assert, or release certain potential claims we may have against
the underwriters. Any direct financial impact of the proposed
settlement is expected to be borne by our insurance carriers.
Due to the inherent uncertainties of litigation and because the
settlement approval process is at a preliminary stage, we cannot
accurately predict the ultimate outcome of the matter.
On April 1, 2003, a purported class action lawsuit was
filed in the 93rd District Court of Hidalgo County, Texas
against us, Nextel and Nextel West Corp. The lawsuit is
captioned Rolando Prado v. Nextel Communications,
et al, Civil Action No. C-695-03-B. On
May 2, 2003, a purported class action lawsuit was filed in
the Circuit Court of Shelby County for the Thirtieth Judicial
District at Memphis, Tennessee against us, Nextel and Nextel
West Corp. The lawsuit is captioned Steve Strange v. Nextel
Communications, et al, Civil Action
No. 01-002520-03. On May 3, 2003, a purported class
action lawsuit was filed in the Circuit Court of the Second
Judicial Circuit in and for Leon County, Florida against Nextel
Partners Operating Corp. d/b/a Nextel Partners and Nextel South
Corp. d/b/a Nextel Communications. The lawsuit is captioned
Christopher Freeman and Susan and Joseph Martelli v. Nextel
South Corp., et al, Civil Action No. 03-CA1065.
On July 9, 2003, a purported class action lawsuit was filed
in Los Angeles Superior Court, California against us, Nextel,
Nextel West, Inc., Nextel of California, Inc. and Nextel
Operations, Inc. The lawsuit is captioned Nicks Auto
Sales, Inc. v. Nextel West, Inc., et al, Civil
Action No. BC298695. On August 7, 2003, a purported
class action lawsuit was filed in the Circuit Court of Jefferson
County, Alabama against us and Nextel. The lawsuit is captioned
Andrea Lewis and Trish Zruna v. Nextel Communications,
Inc., et al, Civil Action No. CV-03-907. On
October 3, 2003, an amended complaint for a purported class
action lawsuit was filed in the United States District Court for
the Western District of Missouri. The amended complaint named us
and Nextel Communications, Inc. as defendants; Nextel Partners
was substituted for the previous defendant, Nextel West Corp.
The lawsuit is captioned Joseph Blando v. Nextel West
Corp., et al, Civil Action No. 02-0921 (the
Blando Case). All of these complaints alleged that
we, in conjunction with the other defendants, misrepresented
certain cost-recovery line-item fees as government taxes.
Plaintiffs sought to enjoin such practices and sought a refund
of monies paid by the class based on the alleged
misrepresentations. Plaintiffs also sought attorneys fees,
costs and, in some cases, punitive damages. We believe the
allegations are groundless. In October 2003, the court in the
Blando Case entered an order granting preliminary approval of a
nationwide class action settlement that encompasses most of the
claims involved in these cases. In April 2004, the court
approved the settlement. Various objectors and class members
appealed to the United States Court of Appeals for the Eighth
Circuit, and in February 2005 the appellate court affirmed the
settlement. One of the objectors petitioned for a rehearing and
in March 2005, the Eighth Circuit denied the petition for
rehearing and rehearing en banc. Thereafter, one of the
objectors filed a motion to stay the mandate for 90 days.
The Eighth Circuit denied that motion in April and in June 2005
that objector filed with the United States Supreme Court a
petition for writ of certiorari. On October 3, 2005, the
Supreme Court denied the objectors writ of certiorari,
which constitutes a final order resolving all
appeals in these cost recovery fee
41
cases. In accordance with the terms of the settlement, we began
distributing settlement benefits within 90 days from the
final order. The Rolando Prado v. Nextel Communciations,
et al, Civil
Action No. C-695-03-B
was dismissed with prejudice in November 2005. The remaining
cases are subject to immediate dismissal according to the terms
of the final order, which directs the plaintiffs to dismiss
their actions. In conjunction with the settlement, we recorded
an estimated liability during the third quarter of 2003, which
did not materially impact our financial results.
On December 27, 2004, Dolores Carter and Donald Fragnoli
filed purported class action lawsuits in the Court of Chancery
of the State of Delaware against us, Nextel WIP Corp., Nextel
Communications, Inc., Sprint Corporation, and several of
the members of our board of directors. The lawsuits are
captioned Dolores Carter v. Nextel WIP Corp.,
et al. and Donald Fragnoli v. Nextel WIP.,
et al, Civil Action No. 955-N. On February 1,
2005, Selena Mintz filed a purported class action lawsuit in the
Court of Chancery of the State of Delaware against us, Nextel
WIP Corp., Nextel Communications, Inc., Sprint Corporation, and
several of the members of our board of directors. The lawsuit is
captioned Selena Mintz v. John Chapple, et al,
Civil Action No. 1065-N. In all three lawsuits, the
plaintiffs seek declaratory and injunctive relief declaring that
the announced merger transaction between Sprint Corporation and
Nextel is an event that triggers the put right set forth in our
restated certificate of incorporation and directing the
defendants to take all necessary measures to give effect to the
rights of our Class A common stockholders arising
therefrom. We believe that the allegations in the lawsuits to
the effect that the Nextel Partners defendants may take action,
or fail to take action, that harms the interests of our public
stockholders are without merit.
On July 5, 2005, we delivered a Notice Invoking Alternate
Dispute Resolution Process to Nextel and Nextel WIP under the
joint venture agreement dated January 29, 1999 among us,
OPCO and Nextel WIP. In the Notice, we asserted that certain
elements of the merger integration process involving Nextel and
Sprint violated several of Nextels and Nextel WIPs
obligations under the joint venture agreement and related
agreements, including, without limitation, the following:
|
|
|
|
|
The changes that Nextel and Sprint had announced they were
planning to make with respect to branding after the close of the
Sprint Nextel merger would violate the joint venture agreement
if we could not use the same brand identity that Nextel used
after the merger, i.e., the Sprint brand. |
|
|
|
Other operational changes that we believed Nextel and Sprint
planned to implement after the Sprint Nextel merger (including,
without limitation, changes with respect to marketing and
national accounts) would violate the joint venture agreement. |
|
|
|
The operations of the combined Sprint Nextel could violate our
exclusivity rights under the joint venture agreement. |
|
|
|
Nextel and Nextel WIP had not complied with their obligation to
permit us to participate in and contribute to discussions
regarding branding and a variety of other operational matters. |
The parties subsequently agreed that the dispute would be
resolved by arbitration. On September 2, 2005, the
arbitration panel issued a ruling denying our request for a
preliminary injunction against violations of the joint venture
agreement, but finding that we were likely to prevail on our
claim that the use of the new Sprint Nextel brand by
Nextels operating subsidiaries, without making the new
brand available to us, violated the non-discrimination
provisions of the joint venture agreement and that we could seek
damages in the event that the put price established by the
appraisal process was negatively impacted by that violation.
With respect to our remaining claims, the panel reserved these
matters for future ruling if necessary.
On October 7, 2005, Nextel and Nextel WIP filed a lawsuit
against us in Delaware Chancery Court. The lawsuit is captioned
Nextel Communications, Inc. and Nextel WIP Corp. v. Nextel
Partners, Inc., Civil Action No. 1704-N. The lawsuit sought
to prohibit us from disclosing to our public shareholders the
valuation reports of the first two appraisers to be appointed
under our put process. The suit also sought to require us to
provide Nextel and its appraiser with certain financial
information, and asked the court to concur with certain
positions that Nextel had previously taken with respect to the
definition of fair market
42
value under our charter. On October 18, 2005, Nextel WIP
filed a second lawsuit against us in Delaware Chancery Court,
seeking certain information pursuant to Section 220 of the
Delaware General Corporation Law. The lawsuit is captioned
Nextel WIP Corp. v. Nextel Partners, Inc., Civil Action
No. 1722-N.
On October 19, 2005, we filed an answer and counterclaims
in the first lawsuit in Delaware Chancery Court, which we
amended on October 25, 2005. In our counterclaims, among
other things, we asked the court to order that the parties
comply with the put process time frames required by our charter
and to require Nextel to provide us and our appraiser with
certain information. We also asked the court to require full
disclosure of the first two appraisers reports to our
Class A common stockholders as required by our charter, and
we asked the court to reject Nextels views of the
definition of fair market value under our charter.
The court conducted a two-day trial of certain of the claims
asserted by the parties on November 17 and 18, 2005. Prior
to the trial, we voluntarily provided Sprint Nextel with the
information that it had sought the court to compel us to
provide, and Sprint Nextel provided our appraiser with some of
the information that it had requested. At the conclusion of the
trial, the court denied all of Sprint Nextels claims, and
ruled that the two appraisal reports should be disclosed to the
companys stockholders as required by our charter. The
court also rejected one of the interpretations of fair market
value offered by Sprint Nextel, and otherwise left the
interpretation of the fair market value determination to the
appraisers.
As described under Business Strategic Alliance
with Nextel, on December 20, 2005, we entered into an
agreement with Nextel and Sprint Nextel with respect to the put
process. As part of that agreement, the parties agreed to
dismiss the Delaware litigation and the arbitration upon
consummation of the put transaction.
We are subject to other claims and legal actions that may arise
in the ordinary course of business. We do not believe that any
of these other pending claims or legal actions will have a
material effect on our business, financial position or results
of operations.
|
|
Item 4. |
Submission of Matters to a Vote of Security Holders |
On September 22, 2005 we sent notice to our Class A
common stockholders of a special meeting that was held on
October 24, 2005 in Bellevue, Washington. Only holders of
record of our Class A common stock on the record date of
September 9, 2005 were entitled to vote at the special
meeting. Each holder of record of Class A common stock at
the close of business on the record date was entitled to one
vote per share on each matter voted upon by the stockholders at
the special meeting.
A proposal on whether to exercise the put right, as defined in
our charter, was approved and received the following votes:
|
|
|
|
|
|
|
Votes | |
|
|
| |
For
|
|
|
158,199,276 |
|
Against
|
|
|
57,691 |
|
Abstain
|
|
|
99,286 |
|
Broker Non-votes
|
|
|
27,379,260 |
|
Because the proposal to exercise the put right was approved, a
separate proposal on whether to adjourn the special meeting
until a date no later than February 8, 2007 was not
considered.
43
PART II
|
|
Item 5. |
Market for Registrants Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities |
Market for Common Stock
Our Class A common stock is traded on the Nasdaq National
Stock Market under the symbol NXTP. The following
table sets forth, for the periods indicated, the high and low
per share stock prices of our Class A common stock as
reported on the Nasdaq National Stock Market:
Quarterly Common Stock Price Ranges for the Year Ended:
|
|
|
|
|
|
|
|
|
|
|
High | |
|
Low | |
|
|
| |
|
| |
December 31, 2005
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
21.99 |
|
|
$ |
19.08 |
|
Second Quarter
|
|
$ |
26.81 |
|
|
$ |
21.76 |
|
Third Quarter
|
|
$ |
27.40 |
|
|
$ |
23.76 |
|
Fourth Quarter
|
|
$ |
28.00 |
|
|
$ |
24.29 |
|
December 31, 2004
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$ |
15.20 |
|
|
$ |
11.65 |
|
Second Quarter
|
|
$ |
16.80 |
|
|
$ |
12.47 |
|
Third Quarter
|
|
$ |
17.50 |
|
|
$ |
13.70 |
|
Fourth Quarter
|
|
$ |
20.32 |
|
|
$ |
15.82 |
|
Number of Stockholders of Record
As of February 28, 2006, there were approximately 226
holders of record of outstanding shares of our Class A
common stock and a single stockholder of record holding all
84,632,604 outstanding shares of our Class B common stock.
Dividends
We have never paid cash dividends on any of our capital stock,
including our Class A common stock. We currently intend to
retain any future earnings to fund the development and growth of
our business. Therefore, we do not currently anticipate paying
any cash dividends on any of our capital stock in the
foreseeable future. In addition, our credit facility prohibits
us from paying dividends without our lenders consent.
Furthermore, the indentures pursuant to which our senior notes
and senior discount notes were issued each prohibit us from
declaring a cash dividend unless, after giving effect to such
dividend, we would not be in default under such indentures, we
remained in compliance with certain financial ratios and the
amount of the dividend did not exceed the limits set forth in
the indentures.
Equity Compensation Plan
See Item 12, Security Ownership of Certain Beneficial
Owners and Management for additional information regarding
our equity compensation plans.
44
|
|
Item 6. |
Selected Financial Data |
Please read this table together with Managements
Discussion and Analysis of Financial Condition and Results of
Operations and our audited consolidated financial
statements and the related notes included elsewhere in this
Annual Report on
Form 10-K. The
selected financial data for the periods ended December 31,
2005, 2004 and 2003 are derived from our consolidated financial
statements that have been included in this Annual Report on
Form 10-K. The
selected financial data as of December 31, 2002 and 2001
and for the periods then ended are derived from consolidated
financial statements that have not been included in this Annual
Report on
Form 10-K. The
historical operating data presented as of December 31,
2005, 2004, 2003, 2002 and 2001 and for the periods then ended
are derived from our records.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
(Unaudited) | |
|
|
(In thousands, except per share amounts) | |
Consolidated Statements of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues(1)
|
|
$ |
1,695,017 |
|
|
$ |
1,291,352 |
|
|
$ |
964,386 |
|
|
$ |
646,169 |
|
|
$ |
363,573 |
|
|
Equipment revenues(1)
|
|
|
106,634 |
|
|
|
85,784 |
|
|
|
60,826 |
|
|
|
28,229 |
|
|
|
15,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,801,651 |
|
|
|
1,377,136 |
|
|
|
1,025,212 |
|
|
|
674,398 |
|
|
|
379,308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service revenues (excludes depreciation of $137,488,
$121,644, $109,572, $85,750, and $62,899, respectively)
|
|
|
432,248 |
|
|
|
361,059 |
|
|
|
322,475 |
|
|
|
271,420 |
|
|
|
196,002 |
|
|
Cost of equipment revenues(1)
|
|
|
178,261 |
|
|
|
152,557 |
|
|
|
121,036 |
|
|
|
90,840 |
|
|
|
61,146 |
|
|
Selling, general and administrative
|
|
|
615,944 |
|
|
|
492,335 |
|
|
|
402,300 |
|
|
|
313,668 |
|
|
|
210,310 |
|
|
Stock-based compensation (primarily selling, general and
administrative related)
|
|
|
639 |
|
|
|
755 |
|
|
|
1,092 |
|
|
|
12,670 |
|
|
|
30,956 |
|
|
Depreciation and amortization(2)
|
|
|
170,133 |
|
|
|
149,708 |
|
|
|
135,417 |
|
|
|
101,185 |
|
|
|
76,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,397,225 |
|
|
|
1,156,414 |
|
|
|
982,320 |
|
|
|
789,783 |
|
|
|
574,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) from operations
|
|
|
404,426 |
|
|
|
220,722 |
|
|
|
42,892 |
|
|
|
(115,385 |
) |
|
|
(195,597 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net of capitalized interest(3)
|
|
|
(94,901 |
) |
|
|
(106,500 |
) |
|
|
(152,294 |
) |
|
|
(164,583 |
) |
|
|
(126,096 |
) |
|
Interest income
|
|
|
7,759 |
|
|
|
2,891 |
|
|
|
2,811 |
|
|
|
7,091 |
|
|
|
32,473 |
|
|
Gain (loss) on early retirement of debt
|
|
|
(17,707 |
) |
|
|
(54,971 |
) |
|
|
(95,093 |
) |
|
|
4,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before income tax provision and cumulative
effect of change in accounting principle
|
|
|
299,577 |
|
|
|
62,142 |
|
|
|
(201,684 |
) |
|
|
(268,450 |
) |
|
|
(289,220 |
) |
Income tax (provision) benefit
|
|
|
305,775 |
|
|
|
(8,396 |
) |
|
|
(7,811 |
) |
|
|
(18,188 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) before cumulative effect of change in
accounting principle
|
|
|
605,352 |
|
|
|
53,746 |
|
|
|
(209,495 |
) |
|
|
(286,638 |
) |
|
|
(289,220 |
) |
Cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,787 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss)
|
|
|
605,352 |
|
|
|
53,746 |
|
|
|
(209,495 |
) |
|
|
(286,638 |
) |
|
|
(291,007 |
) |
Mandatorily redeemable preferred stock dividends(3)
|
|
|
|
|
|
|
|
|
|
|
(2,141 |
) |
|
|
(3,950 |
) |
|
|
(3,504 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) attributable to common stockholders
|
|
$ |
605,352 |
|
|
$ |
53,746 |
|
|
$ |
(211,636 |
) |
|
$ |
(290,588 |
) |
|
$ |
(294,511 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (Loss) per share attributable to common
stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
2.24 |
|
|
$ |
0.20 |
|
|
$ |
(0.84 |
) |
|
$ |
(1.19 |
) |
|
$ |
(1.21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
1.96 |
|
|
$ |
0.19 |
|
|
$ |
(0.84 |
) |
|
$ |
(1.19 |
) |
|
$ |
(1.21 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
270,462 |
|
|
|
263,671 |
|
|
|
252,440 |
|
|
|
244,933 |
|
|
|
242,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
309,440 |
|
|
|
304,985 |
|
|
|
252,440 |
|
|
|
244,933 |
|
|
|
242,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
(Unaudited) | |
|
|
(In thousands) | |
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, and short-term investments
|
|
$ |
165,027 |
|
|
$ |
264,579 |
|
|
$ |
268,811 |
|
|
$ |
195,029 |
|
|
$ |
557,285 |
|
Property, plant and equipment, net
|
|
|
1,079,050 |
|
|
|
1,042,718 |
|
|
|
1,025,096 |
|
|
|
1,000,076 |
|
|
|
845,934 |
|
FCC operating licenses, net
|
|
|
376,254 |
|
|
|
375,470 |
|
|
|
371,898 |
|
|
|
348,440 |
|
|
|
283,728 |
|
Total assets
|
|
|
2,293,928 |
|
|
|
1,975,699 |
|
|
|
1,889,310 |
|
|
|
1,735,925 |
|
|
|
1,821,721 |
|
Current liabilities
|
|
|
208,432 |
|
|
|
205,659 |
|
|
|
185,425 |
|
|
|
161,567 |
|
|
|
127,972 |
|
Long-term debt
|
|
|
1,226,608 |
|
|
|
1,632,518 |
|
|
|
1,653,539 |
|
|
|
1,424,600 |
|
|
|
1,327,829 |
|
Series B redeemable preferred stock(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,971 |
|
|
|
31,021 |
|
Total stockholders equity (deficit)
|
|
|
819,197 |
|
|
|
51,315 |
|
|
|
(27,205 |
) |
|
|
66,907 |
|
|
|
314,186 |
|
Total liabilities and stockholders equity
|
|
$ |
2,293,928 |
|
|
$ |
1,975,699 |
|
|
$ |
1,889,310 |
|
|
$ |
1,735,925 |
|
|
$ |
1,821,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
|
|
|
|
|
|
|
|
(Unaudited) | |
|
|
(In thousands) | |
Consolidated Statements of Cash Flows Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
$ |
379,812 |
|
|
$ |
202,466 |
|
|
$ |
87,154 |
|
|
$ |
(116,469 |
) |
|
$ |
(153,894 |
) |
Net cash from investing activities
|
|
$ |
(132,815 |
) |
|
$ |
(131,620 |
) |
|
$ |
(214,504 |
) |
|
$ |
(201,648 |
) |
|
$ |
(260,249 |
) |
Net cash from financing activities
|
|
$ |
(244,078 |
) |
|
$ |
(45,982 |
) |
|
$ |
182,448 |
|
|
$ |
81,280 |
|
|
$ |
224,950 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
|
|
(Unaudited) | |
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Covered Pops (end of period)(millions)
|
|
|
42 |
|
|
|
40 |
|
|
|
38 |
|
|
|
36 |
|
|
|
33 |
|
Subscribers (end of period)
|
|
|
2,017,700 |
|
|
|
1,602,400 |
|
|
|
1,233,200 |
|
|
|
877,800 |
|
|
|
515,900 |
|
Adjusted EBITDA(4)
|
|
$ |
575,198 |
|
|
$ |
371,185 |
|
|
$ |
179,401 |
|
|
$ |
(1,530 |
) |
|
$ |
(88,150 |
) |
Net capital expenditures(5)
|
|
$ |
199,975 |
|
|
$ |
164,584 |
|
|
$ |
161,845 |
|
|
$ |
250,841 |
|
|
$ |
374,001 |
|
|
|
(1) |
Effective July 1, 2003, we adopted Emerging Issues Task
Force (EITF), Issue
No. 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables, and elected to apply the provisions
prospectively to our existing customer arrangements. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical
Accounting Policies for a more detailed description of the
impact of our adoption of this policy. |
|
(2) |
Effective January 2002, we no longer amortize the cost of FCC
licenses as a result of implementing Statement of Financial
Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets. See
Managements Discussion and Analysis of Financial
Condition and Results of Operations-Critical Accounting
Policies and Note 1 of the Notes to Consolidated
Financial Statements included elsewhere herein under the caption
FCC Licenses for a more detailed description of the
impact and adoption of SFAS No. 142. |
|
(3) |
In May 2003, the FASB issued SFAS No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity. This
statement establishes standards for how an issuer classifies and
measures in its statement of financial position certain
financial instruments with |
46
|
|
|
characteristics of both liabilities and equity. It requires that
an issuer classify a financial instrument that is within the
scope of the statement as a liability (or an asset in some
circumstances) because that financial instrument embodies an
obligation of the issuer. This statement was effective for all
freestanding financial instruments entered into or modified
after May 31, 2003; otherwise it was effective at the
beginning of the first interim period beginning after
June 15, 2003. We identified that our Series B
mandatorily redeemable preferred stock was within the scope of
this statement and reclassified it to long-term debt and began
recording the Series B mandatorily redeemable preferred
stock dividends as interest expense beginning July 1, 2003.
We redeemed all of our outstanding Series B mandatorily
redeemable preferred stock on November 21, 2003 and
currently have no other preferred stock outstanding. |
|
(4) |
The term EBITDA refers to a financial measure that
is defined as earnings (loss) before interest, taxes,
depreciation and amortization; we use the term Adjusted
EBITDA to reflect that our financial measure also excludes
cumulative effect of change in accounting principle, loss from
disposal of assets, gain (loss) from early extinguishment of
debt and stock-based compensation. Adjusted EBITDA is commonly
used to analyze companies on the basis of leverage and
liquidity. However, Adjusted EBITDA is not a measure determined
under generally accepted accounting principles, or GAAP, in the
United States of America and may not be comparable to similarly
titled measures reported by other companies. Adjusted EBITDA
should not be construed as a substitute for operating income or
as a better measure of liquidity than cash flow from operating
activities, which are determined in accordance with GAAP. We
have presented Adjusted EBITDA to provide additional information
with respect to our ability to meet future debt service, capital
expenditure and working capital requirements. The following
schedule reconciles Adjusted EBITDA to net cash from operating
activities reported on our Consolidated Statements of Cash
Flows, which we believe is the most directly comparable GAAP
measure: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
|
(In thousands) | |
Net cash from operating activities (as reported on Consolidated
Statements of Cash Flows)
|
|
$ |
379,812 |
|
|
$ |
202,466 |
|
|
$ |
87,154 |
|
|
$ |
(116,469 |
) |
|
$ |
(153,894 |
) |
Adjustments to reconcile to Adjusted EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid interest expense, net of capitalized amount
|
|
|
95,167 |
|
|
|
114,815 |
|
|
|
103,485 |
|
|
|
98,777 |
|
|
|
70,138 |
|
Interest income
|
|
|
(7,759 |
) |
|
|
(2,891 |
) |
|
|
(2,811 |
) |
|
|
(7,091 |
) |
|
|
(32,473 |
) |
Change in working capital and other
|
|
|
107,978 |
|
|
|
56,795 |
|
|
|
(8,427 |
) |
|
|
23,253 |
|
|
|
28,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$ |
575,198 |
|
|
$ |
371,185 |
|
|
$ |
179,401 |
|
|
$ |
(1,530 |
) |
|
$ |
(88,150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5) |
Net capital expenditures exclude capitalized interest and are
offset by net proceeds from the sale and leaseback transactions
of telecommunication towers and related assets to third parties
accounted for as operating leases. Net capital expenditures as
defined are not a measure determined under GAAP in the United
States of America and may not be comparable to similarly titled
measures reported by other companies. Net capital expenditures
should not be construed as a substitute for capital expenditures
reported on the Consolidated Statements of Cash Flows, which is
determined in accordance with GAAP. We report net capital
expenditures in this manner because we believe it reflects the
net cash used by us for capital expenditures and to satisfy the
reporting requirements for our debt covenants. The following
schedule reconciles net capital expenditures to capital
expenditures |
47
|
|
|
reported on our Consolidated Statements of Cash Flows, which we
believe is the most directly comparable GAAP measure: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Unaudited) | |
|
|
(In thousands) | |
Capital expenditures (as reported on Consolidated Statements of
Cash Flows)
|
|
$ |
233,853 |
|
|
$ |
156,843 |
|
|
$ |
179,794 |
|
|
$ |
274,911 |
|
|
$ |
398,611 |
|
Less: cash paid portion of capitalized interest
|
|
|
(1,620 |
) |
|
|
(1,242 |
) |
|
|
(1,283 |
) |
|
|
(1,993 |
) |
|
|
(5,449 |
) |
Less: cash proceeds from sale and lease-back transactions
accounted for as operating leases
|
|
|
(15,439 |
) |
|
|
(1,939 |
) |
|
|
(6,860 |
) |
|
|
(2,562 |
) |
|
|
(10,425 |
) |
Change in capital expenditures accrued or unpaid
|
|
|
(16,819 |
) |
|
|
10,922 |
|
|
|
(9,806 |
) |
|
|
(19,515 |
) |
|
|
(8,736 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net capital expenditures
|
|
$ |
199,975 |
|
|
$ |
164,584 |
|
|
$ |
161,845 |
|
|
$ |
250,841 |
|
|
$ |
374,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional Reconciliations of Non-GAAP Financial Measures
(Unaudited)
The information presented in this Annual Report on
Form 10-K includes
financial information prepared in accordance with GAAP, as well
as other financial measures that may be considered non-GAAP
financial measures. Generally, a non-GAAP financial measure is a
numerical measure of a companys performance, financial
position or cash flows that either excludes or includes amounts
that are not normally excluded or included in the most directly
comparable measure calculated and presented in accordance with
GAAP. As described more fully below, management believes these
non-GAAP measures provide meaningful additional information
about our performance and our ability to service our long-term
debt and other fixed obligations and to fund our continued
growth. The non-GAAP financial measures should be considered in
addition to, but not as a substitute for, the information
prepared in accordance with GAAP.
|
|
|
ARPU Average Revenue Per Unit |
ARPU is an industry term that measures service revenues per
month from our subscribers divided by the average number of
subscribers in commercial service during the period. ARPU itself
is not a measurement under GAAP in the United States of America
and may not be similar to ARPU measures of other companies;
however, ARPU uses GAAP measures as the basis for calculation.
We believe that ARPU provides useful information concerning the
appeal of our rate plans and service offerings and our
performance in attracting high value customers. The following
schedule reflects the ARPU calculation and
48
reconciliation of service revenues reported on the Consolidated
Statements of Operations to service revenues used for the ARPU
calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except ARPU) | |
ARPU (without roaming revenues)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues (as reported on Consolidated Statements of
Operations)
|
|
$ |
1,695,017 |
|
|
$ |
1,291,352 |
|
|
$ |
964,386 |
|
|
$ |
646,169 |
|
|
$ |
363,573 |
|
Adjust: activation fees deferred and recognized for
SAB No. 101
|
|
|
(2,036 |
) |
|
|
(3,748 |
) |
|
|
(1,006 |
) |
|
|
3,197 |
|
|
|
2,398 |
|
Add: activation fees reclassed for EITF No. 00-21(1)
|
|
|
20,966 |
|
|
|
11,310 |
|
|
|
4,256 |
|
|
|
|
|
|
|
|
|
Less: roaming and other revenues
|
|
|
(236,176 |
) |
|
|
(163,022 |
) |
|
|
(115,893 |
) |
|
|
(80,452 |
) |
|
|
(58,545 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues for ARPU
|
|
$ |
1,477,771 |
|
|
$ |
1,135,892 |
|
|
$ |
851,743 |
|
|
$ |
568,914 |
|
|
$ |
307,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average units (subscribers)
|
|
|
1,809 |
|
|
|
1,410 |
|
|
|
1,051 |
|
|
|
694 |
|
|
|
360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARPU
|
|
$ |
68 |
|
|
$ |
67 |
|
|
$ |
68 |
|
|
$ |
68 |
|
|
$ |
71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands, except ARPU) | |
ARPU (including roaming revenues)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues (as reported on Consolidated Statements of
Operations)
|
|
$ |
1,695,017 |
|
|
$ |
1,291,352 |
|
|
$ |
964,386 |
|
|
$ |
646,169 |
|
|
$ |
363,573 |
|
Adjust: activation fees deferred and recognized for
SAB No. 101
|
|
|
(2,036 |
) |
|
|
(3,748 |
) |
|
|
(1,006 |
) |
|
|
3,197 |
|
|
|
2,398 |
|
Add: activation fees reclassed for EITF No. 00-21(1)
|
|
|
20,966 |
|
|
|
11,310 |
|
|
|
4,256 |
|
|
|
|
|
|
|
|
|
Less: other revenues
|
|
|
(24,548 |
) |
|
|
(4,312 |
) |
|
|
|
|
|
|
(981 |
) |
|
|
(458 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues for ARPU
|
|
$ |
1,689,399 |
|
|
$ |
1,294,602 |
|
|
$ |
967,636 |
|
|
$ |
648,385 |
|
|
$ |
365,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average units (subscribers)
|
|
|
1,809 |
|
|
|
1,410 |
|
|
|
1,051 |
|
|
|
694 |
|
|
|
360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARPU
|
|
$ |
78 |
|
|
$ |
77 |
|
|
$ |
77 |
|
|
$ |
78 |
|
|
$ |
85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
As described below under Managements Discussion and
Analysis of Financial Condition and Results of
Operations-Critical Accounting Policies, on July 1,
2003, we adopted EITF Issue
No. 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables, and elected to apply the provisions
prospectively to our existing customer arrangements. Subsequent
to that date, each month we recognize the activation fees,
handset equipment revenues and equipment costs that had been
previously deferred in accordance with Staff Accounting Bulletin
(SAB) No. 101. Based on EITF Issue
No. 00-21, we now
recognize the activation fees that were formerly deferred and
recognized as services revenues as equipment revenues. |
49
|
|
|
LRS Lifetime Revenue per Subscriber |
LRS is an industry term calculated by dividing ARPU (see above)
by the subscriber churn rate. The subscriber churn rate is an
indicator of subscriber retention and represents the monthly
percentage of the subscriber base that disconnects from service.
Subscriber churn is calculated by dividing the number of
handsets disconnected from commercial service during the period
by the average number of handsets in commercial service during
the period. LRS itself is not a measurement determined under
GAAP in the United States of America and may not be similar to
LRS measures of other companies; however, LRS uses GAAP measures
as the basis for calculation. We believe that LRS is an
indicator of the expected lifetime revenue of our average
subscriber, assuming that churn and ARPU remain constant as
indicated. We also believe that this measure, like ARPU,
provides useful information concerning the appeal of our rate
plans and service offering and our performance in attracting and
retaining high value customers. The following schedule reflects
the LRS calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
ARPU
|
|
$ |
68 |
|
|
$ |
67 |
|
|
$ |
68 |
|
|
$ |
68 |
|
|
$ |
71 |
|
Divided by: churn
|
|
|
1.4 |
% |
|
|
1.4 |
% |
|
|
1.6 |
% |
|
|
1.6 |
% |
|
|
1.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lifetime revenue per subscriber (LRS)
|
|
$ |
4,857 |
|
|
$ |
4,786 |
|
|
$ |
4,250 |
|
|
$ |
4,250 |
|
|
$ |
4,438 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In addition, see Notes 4 and 5 above for reconciliations of
Adjusted EBITDA and net capital expenditures as non-GAAP
financial measures.
|
|
Item 7. |
Managements Discussion and Analysis of Financial
Condition and Results of Operation |
The following is a discussion of our consolidated financial
condition and results of operations for each of the three years
ended December 31, 2005, 2004 and 2003. Some statements and
information contained in this Managements Discussion
and Analysis of Financial Condition and Results of
Operations are not historical facts but are
forward-looking statements. For a discussion of these
forward-looking statements and of important factors that could
cause results to differ materially from the forward-looking
statements contained in this Annual Report on
Form 10-K, see
Item 1, Business Forward-Looking
Statements and Item 1A, Risk Factors.
Please read the following discussion together with Item 6,
Selected Financial Data, the consolidated financial
statements and the related notes included elsewhere in this
Annual Report on
Form 10-K.
On August 12, 2005, Nextel merged with Sprint Corporation.
The merger constituted a Nextel sale pursuant to our charter,
and on October 24, 2005, our Class A common
stockholders voted to exercise the put right set forth in our
charter to require Nextel WIP to purchase all of our outstanding
shares of Class A common stock. On December 20, 2005,
we announced, along with Sprint Nextel, that the put price at
which Nextel WIP will purchase our outstanding Class A
common stock was determined to be $28.50 per share. The
transaction is subject to the customary regulatory approvals,
including review by the FCC and review under the
Hart-Scott-Rodino Act, and is expected to be completed by the
end of the second quarter of 2006. On February 6, 2006, the
Federal Trade Commission and the Department of Justice provided
early termination of the waiting period under the
Hart-Scott-Rodino Act for Sprint Nextel to purchase our
outstanding Class A common stock. This Annual Report on
Form 10-K relates
only to Nextel Partners, Inc. and its subsidiaries prior to the
consummation of the transaction. Upon completion of this
transaction NXTP will no longer be traded on the
Nasdaq National Stock Market and Nextel Partners will cease to
exist as a separate public company.
Overview
We are a FORTUNE 1000 company that provides fully
integrated, wireless digital communications services using the
Nextel brand name in mid-sized and rural markets throughout the
United States. We offer four distinct wireless services in a
single wireless handset. These services include International and
50
Nationwide Direct Connect, digital cellular voice, short
messaging and cellular Internet access, which provides users
with wireless access to the Internet and an organizations
internal databases as well as other applications, including
e-mail. We hold
licenses for wireless frequencies in markets where approximately
54 million people, or Pops, live and work. We have
constructed and operate a digital mobile network compatible with
the Nextel Digital Wireless Network in targeted portions of
these markets, including 13 of the top 100 metropolitan
statistical areas and 57 of the top 200 metropolitan statistical
areas in the United States ranked by population. Our combined
Nextel Digital Wireless Network constitutes one of the largest
fully integrated digital wireless communications systems in the
United States, currently covering 297 of the top 300
metropolitan statistical areas in the United States.
We offer a package of wireless voice and data services under the
Nextel brand name targeted to business users, but with an
increasing retail or consumer presence as well. We currently
offer the following four services, which are fully integrated
and accessible through a single wireless handset:
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digital cellular voice, including advanced calling features such
as speakerphone, conference calling, voicemail, call forwarding
and additional line service; |
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Direct Connect service, the digital walkie-talkie service that
allows customers to instantly connect with business associates,
family and friends without placing a phone call; |
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short messaging, the service that utilizes the Internet to keep
customers connected to clients, colleagues and family with text,
numeric and two-way messaging; and |
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Nextel Online services, which provide customers with
Internet-ready handsets access to the World Wide Web and an
organizations internal database, as well as web-based
applications such as
e-mail, address books,
calendars and advanced Java enabled business applications. |
As of December 31, 2005, we had approximately 2,017,700
digital subscribers. Our network provides coverage to
approximately 42 million Pops in 31 different states, which
include markets in Alabama, Arkansas, Florida, Georgia, Hawaii,
Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland,
Minnesota, Mississippi, Missouri, Nebraska, New York, North
Dakota, Ohio, Oklahoma, Pennsylvania, South Carolina, South
Dakota, Tennessee, Texas, Virginia, Vermont, West Virginia,
Wisconsin and Wyoming. We also hold licenses in Kansas but
currently do not have any cell sites operational in that state.
We believe our markets are relatively young as compared to those
of the national carriers who had been in operation for several
years prior to our inception. Approximately 85% of our covered
Pops are in markets that are less than
61/4
years old. Based on our historical results, we believe that as
our markets mature, covered Pop penetration will continue to
increase. As of December 31, 2005, our covered Pop
penetration was approximately 4.8%. Our historical results also
support our belief that as our markets mature, the increase in
penetration will continue to drive higher service revenue
margins as we benefit from growing economies of scale.
During 2005 we continued to focus on our key financial and
operating performance metrics, including increasing our growth
in subscribers, service revenues, Adjusted EBITDA, net cash from
operating activities and LRS. Our subscriber growth has been
driven by increasing market penetration resulting in substantial
part from ongoing development of our distribution channels
(including company-owned stores) and by continuing to tailor
programs that meet the needs of our customers, including
consumer-credit customers, that we believe provide attractive
economics to the company.
Accomplishments during 2005 which we believe are important
indicators of our overall performance and financial well being
include:
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Growing our subscriber base approximately 26% by adding
approximately 415,300 net new customers to end the year
with over 2,017,700 customers compared to 1,602,400 as of
December 31, 2004. |
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Growing our service revenues approximately 31% to
$1,695.0 million for 2005 compared to $1,291.4 million
for 2004. |
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Increasing Adjusted EBITDA 55% to $575.2 million for 2005
compared to $371.2 million for 2004. |
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Generating $379.8 million net cash from operating
activities during 2005 compared to $202.5 million during
2004. |
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Remaining one of the industry leaders in LRS with an LRS of
$4,857 for 2005 compared to $4,786 for 2004. |
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Refinancing and reducing our senior credit facility and
receiving credit rating upgrades, including an investment grade
rating of BBB- from S&P on our credit facility. |
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Redeeming for cash the remainder of our outstanding
11% senior notes due 2010 in April 2005 and our
121/2% senior
discount notes due 2009 in November 2005. |
Please see Item 6, Selected Financial Data and
Additional Reconciliations of Non-GAAP
Financial Measures (Unaudited) for more information
regarding our use of Adjusted EBITDA and LRS as non-GAAP
financial measures. Our operations are primarily conducted by
OPCO.
During the year ended December 31, 2005, we also
accomplished the following:
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Opened 62 new company-owned stores bringing the total stores
operating throughout the country to 135 at December 31,
2005 compared to 73 stores at December 31, 2004. |
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Implemented redesigned customer invoices to improve the look and
feel of the invoice in order to better serve the customers
needs. |
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In conjunction with Nextel, launched service which enables
instant group walkie-talkie conversations nationwide; Nextel
WiFi
HotSpotsm
service, which delivers features focused on remote-access needs
to business travelers; Mobile Email Enhanced, the first email
service for Java-enabled mobile phones with full synchronization
and a PDA-like feel; MapQuest Find Me GPS-enabled
wireless service; and Nextel Direct
Sendsm
Picture which allows picture sharing on walkie-talkie calls. |
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Introduced over a dozen new wireless handsets by
Motorola the i265, i325IS, v505, v180, i275, i355,
i605, i836, i560, i760, i850, i930 and i870. |
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Launched the
7100itm
Blackberry handset featuring phone, wireless
e-mail, Bluetooth and
GPS navigation. |
RESULTS OF OPERATIONS
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Year Ended December 31, 2005 Compared to Year Ended
December 31, 2004 |
Total revenues for 2005 were $1,801.7 million, an increase
of $424.6 million, or 31%, compared to
$1,377.1 million generated in the same period in 2004. This
growth in revenues was due mostly to the increase in our
subscriber base and a higher ARPU in 2005 than 2004. Subject to
the risk and uncertainties described under Item 1A,
Risk Factors and Item 1,
Business Forward-Looking Statements
above, we expect our revenues to continue to increase as we add
more subscribers and continue to introduce new products and data
services.
For 2005 our ARPU was $68, which is an increase of $1 compared
to $67 in 2004 (or $78, including roaming revenues from Sprint
Nextel, which is an increase of $1 compared to the same period
in 2004). We expect to continue to achieve ARPU levels above the
industry average and anticipate our ARPU to be in the mid to
high $60s for 2006. Subject to the risk and uncertainties
described under Item 1A, Risk Factors and
Item 1, Business Forward-Looking
Statements above, we expect to continue the strong growth
of our data services revenues from both business and individual
customers, specifically GPS
52
services, workforce management tools, navigation tools and
wireless payment solutions. We believe growth in these services
and solutions will continue to enhance our ARPU during the year.
The following table illustrates service and equipment revenues
as a percentage of total revenues for the years ended
December 31, 2005 and 2004 and our ARPU for those periods.
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For the Year | |
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For the Year | |
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Ended | |
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% of | |
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Ended | |
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% of | |
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2005 vs 2004? | |
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December 31, | |
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Consolidated | |
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December 31, | |
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Consolidated | |
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2005 | |
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Revenues | |
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2004 | |
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Revenues | |
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$ Change | |
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% Change | |
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(Dollars in thousands, except ARPU) | |
Service and roaming revenues
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$ |
1,695,017 |
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94 |
% |
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$ |
1,291,352 |
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94 |
% |
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$ |
403,665 |
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31 |
% |
Equipment revenues
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106,634 |
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6 |
% |
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85,784 |
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6 |
% |
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20,850 |
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24 |
% |
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Total revenues
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$ |
1,801,651 |
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100 |
% |
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$ |
1,377,136 |
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100 |
% |
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$ |
424,515 |
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31 |
% |
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ARPU(1)
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$ |
68 |
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$ |
67 |
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(1) |
See Item 6, Selected Financial Data
Additional Reconciliations of Non-GAAP Financial Measures
(Unaudited) for more information regarding our use of ARPU
as a non-GAAP financial measure. |
Our primary sources of revenues are service revenues and
equipment revenues. Service revenues increased 31% to
$1,695.0 million for the year ended December 31, 2005
as compared to $1,291.4 million for the same period in
2004. Our service revenues consist of charges to our customers
for airtime usage and monthly network access fees from providing
integrated wireless services within our territory, specifically
digital cellular voice services, Direct Connect services, text
messaging and Nextel Online services. Service revenues also
include roaming revenues from Sprint Nextel subscribers using
our portion of the Nextel Digital Wireless Network. Roaming
revenues for 2005 accounted for approximately 12% of our service
revenues, which was the same percentage for 2004. Although we
continue to see growth in roaming revenues due to an increase in
coverage and on-air cell sites, we expect roaming revenues as a
percentage of our service revenues to remain flat or decline due
to the anticipated revenue growth that we expect to achieve from
our own customer base.
53
Under EITF Issue
No. 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables, we are no longer required to consider
whether a customer is able to realize utility from the phone in
the absence of the undelivered service. A more detailed
description of this policy is described below under
Critical Accounting Policies. The
following table shows the reconciliation of the reported service
revenues, equipment revenues and cost of equipment revenues to
the adjusted amounts that exclude the adoption of EITF
No. 00-21 and
SAB No. 101 for the years ended December 31, 2005
and 2004. We believe the adjusted amounts best represent the
actual service revenues and the actual subsidy on equipment
costs when equipment revenues are netted with cost of equipment
revenues that we use to measure our operating performance.
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For the Year Ended | |
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December 31, | |
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2005 | |
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2004 | |
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(In thousands) | |
Revenues:
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Service revenues (as reported on Consolidated Statements of
Operations)
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$ |
1,695,017 |
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$ |
1,291,352 |
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Previously deferred activation fees recognized
(SAB No. 101)
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(2,036 |
) |
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(3,748 |
) |
Activation fees to equipment revenues (EITF No. 00-21)
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20,966 |
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11,310 |
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Total service revenues without SAB No. 101 and EITF
No. 00-21
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$ |
1,713,947 |
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$ |
1,298,914 |
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Equipment revenues (as reported on Consolidated Statements of
Operations)
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$ |
106,634 |
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$ |
85,784 |
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Previously deferred equipment revenues recognized
(SAB No. 101)
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(11,427 |
) |
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(20,258 |
) |
Activation fees from service revenues (EITF No. 00-21)
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(20,966 |
) |
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(11,310 |
) |
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Total equipment revenues without SAB No. 101 and
EITF No. 00-21
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$ |
74,241 |
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$ |
54,216 |
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Cost of equipment revenues (as reported on Consolidated
Statements of Operations)
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$ |
178,261 |
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$ |
152,557 |
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Previousy deferred cost of equipment revenues recognized
(SAB No. 101)
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(13,463 |
) |
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(24,006 |
) |
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Total cost of equipment revenues without
SAB No. 101 and EITF No. 00-21
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$ |
164,798 |
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$ |
128,551 |
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Equipment revenues reported for 2005 were $106.6 million as
compared to $85.8 million reported for the same period in
2004, representing an increase of $20.8 million. Of the
$20.8 million increase from 2004 to 2005, $9.6 million
was for additional activation fees recorded as equipment
revenues based on EITF No. 00-21 and $20.0 million was
due to growth in our subscriber base offset by $8.8 million
of equipment revenues previously deferred pursuant to
SAB No. 101. Our equipment revenues consist of
revenues received for wireless handsets and accessories
purchased by our subscribers.
Cost of service revenues consists primarily of network operating
costs, which include site rental fees for cell sites and
switches, utilities, maintenance and interconnect and other
wireline transport charges. Cost of service revenues also
includes the amounts we must pay Nextel WIP when our customers
roam onto Sprint Nextels portion of the Nextel Digital
Wireless Network. These expenses depend mainly on the number of
operating cell sites, total minutes of use and the mix of
minutes of use between interconnect and Direct Connect. The use
of Direct Connect is more efficient than interconnect and,
accordingly, less costly for us to provide.
For the year ended December 31, 2005, our cost of service
revenues was $432.2 million as compared to
$361.1 million for the same period in 2004, representing an
increase of $71.1 million, or 20%. The increase in costs
was partially the result of bringing on-air approximately 546
additional cell sites during
54
2005. In addition, several hurricanes affecting the Gulf Coast
region for the year ended December 31, 2005 increased our
costs by $5.2 million. Furthermore, our number of customers
grew 26% compared to 2004, and we experienced an increase in
average airtime usage by our customers, both of which resulted
in higher network operating costs. Compared to 2004, the average
monthly minutes of use per subscriber increased by 11%, to 826
average monthly minutes of use per subscriber for 2005 from 743
average monthly minutes of use per subscriber for 2004. Our
roaming fees paid to Sprint Nextel also increased as our growing
subscriber base roamed on Sprint Nextels compatible
network.
We expect cost of service revenues to increase as we place more
cell sites in service and the usage of minutes increases as our
customer base grows. However, we expect our cost of service
revenues as a percentage of service revenues and cost per
average minute of use to decrease as economies of scale continue
to be realized. From 2004 to 2005 our cost of service revenues
as a percentage of service revenues declined from 28% to 26%.
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Cost of Equipment Revenues |
Cost of equipment revenues includes the cost of the subscriber
wireless handsets and accessories sold by us. Our cost of
equipment revenues for the year ended December 31, 2005 was
$178.3 million as compared to $152.6 million for the
same period in 2004, or an increase of $25.7 million. The
increase in costs relates mostly to $36.2 million of costs
resulting from the increased volume of subscribers offset by
recognizing $10.5 million less of equipment costs that were
previously deferred in accordance with SAB No. 101.
Due to the push to talk functionality of our
handsets, the cost of our equipment tends to be higher than that
of our competitors. As part of our business plan, we often offer
our equipment at a discount or as part of a promotion as an
incentive to our customers to commit to contracts for our higher
priced service plans and to compete with the lower priced
competitor handsets. The table below shows that the gross
subsidy (without the effects of SAB No. 101 and EITF
No. 00-21) between
equipment revenues and cost of equipment revenues was a loss of
$90.6 million for 2005, as compared to a loss of
$74.3 million for the same period in 2004. We expect to
continue to employ these discounts and promotions in an effort
to grow our subscriber base. Therefore, for the foreseeable
future, we expect that cost of equipment revenues will continue
to exceed our equipment revenues.
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For the Year Ended | |
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December 31, | |
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2005 | |
|
2004 | |
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(In thousands) | |
Equipment revenues billed
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$ |
74,241 |
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$ |
54,216 |
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Cost of equipment revenues billed
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(164,798 |
) |
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(128,551 |
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Total gross subsidy for equipment
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$ |
(90,557 |
) |
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$ |
(74,335 |
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Selling, General and Administrative Expenses |
Selling, general and administrative expenses consist of sales
and marketing expenses, expenses related to customer care
services and general and administrative costs. For the year
ended December 31, 2005, selling, general and
administrative expenses were $615.9 million compared to
$492.3 million for the same period in 2004, representing an
increase of 25%.
Sales and marketing expenses for the year ended
December 31, 2005 were $237.2 million, an increase of
$31.2 million, or 15%, from the same period in 2004 due to
the following:
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$7.6 million increase in advertising and media expenses as
a result of general marketing campaigns and additional expenses
incurred as the result of Sprint Nextels refusal to allow
us to use the Sprint Nextel brand; |
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$2.8 million increase in facility and lease costs primarily
for the additional company-owned stores put in operation during
2005; and |
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$20.8 million increase in commissions, commission bonuses
and residuals paid to account representatives and the indirect
sales channel due primarily to the indirect sales channel adding
20% more customers in 2005 than in 2004. The indirect sales
channel will remain a vital part of our distribution and we
expect to see continued growth from this channel in 2006 coupled
with significant growth from company-owned stores. |
General and administrative costs include costs associated with
customer care center operations and service and repair for
customer handsets along with corporate personnel including
billing, collections, legal, finance, human resources and
information technology. For the year ended December 31,
2005, general and administrative costs were $378.7 million,
an increase of $92.4 million, or 32%, compared to the same
period in 2004 due to the following:
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$43.2 million increase in support of our information
systems, facilities and corporate expenses, including
approximately $12.4 million in expenses incurred in
conjunction with the put process and legal proceedings with
Sprint Nextel and Nextel WIP (see Item 3, Legal
Proceedings above for additional information); |
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$2.4 million increase due to hiring additional staff and
operating expenses to support our growing customer base and
related activities in Las Vegas, Nevada and Panama City Beach,
Florida; and |
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$46.8 million increase in expenses for service and repair,
billing, bad debt expense, collection and customer retention
expenses including handset upgrades to support a larger and
growing customer base. Bad debt expense as a percent of service
revenues for 2005 was 1.9% compared to 1.0% for the same period
in 2004 due mainly to higher activation rates from
consumer-credit customers. The programs tailored for these
consumer-credit customers include prescribed spending limits,
enrollment fees and upfront deposits, as well as additional
monthly recurring charges that in aggregate help to limit the
potential bad debt exposure from customer-credit customers,
which we expect to continue to add during 2006. |
We expect the aggregate amount of selling, general and
administrative expenses to continue increasing due to the
following factors, including but not limited to:
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increased costs to support our growing customer base, including
costs associated with billing, bad debt expense, collections,
customer retention, customer care activities and handset
upgrades; |
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increased marketing and advertising expenses to offset the loss
of national advertising of the Nextel brand name exclusively; |
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increased costs associated with opening additional retail
stores; and |
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costs related to the pending acquisition of us by Sprint Nextel. |
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Stock-Based Compensation Expense |
For the years ended December 31, 2005 and 2004, we recorded
non-cash, stock-based compensation expense associated with our
grants of restricted stock and employee stock options of
$0.6 million and $0.8 million, respectively. We expect
stock-based compensation expense to increase upon mandatory
adoption of SFAS No. 123R beginning on January 1,
2006. See additional discussion under Recently
Issued Accounting Pronouncements.
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Depreciation and Amortization Expense |
For 2005 our depreciation and amortization expense was
$170.1 million compared to $149.7 million for the same
period in 2004, representing an increase of 14%. The
$20.4 million increase in depreciation and amortization
expense was due to adding approximately 546 cell sites in 2005.
We also acquired furniture and equipment for the expansion of
our existing customer call center in Panama City Beach,
56
Florida, which became operational during the third quarter of
2004, and 62 new company-owned stores. We expect depreciation
and amortization to continue to increase due to additional cell
sites we plan to place in service along with furniture and
equipment for new company-owned stores.
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Interest Expense and Interest Income |
Interest expense, net of capitalized interest, declined
$11.6 million, or 11%, from $106.5 million for the
year ended December 31, 2004 to $94.9 million for the
year ended December 31, 2005. This decline was due mostly
to the debt reduction activity related to our repurchase for
cash of our 11% senior notes due 2010 and
121/2% senior
discount notes due 2009 and the refinance of our credit
facility. In addition, for our interest rate swap agreements we
recorded non-cash fair market value gains of $1.1 million
and $3.4 million for 2005 and 2004, respectively. For 2005,
interest income was $7.8 million compared to
$2.9 million for 2004. The increase was due mostly to
improved rates of return as well as a larger investment
portfolio.
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Loss on Early Retirement of Debt |
During 2005 we recorded approximately a $17.7 million loss
on early retirement of debt representing approximately a
$9.2 million premium paid to purchase for cash our
121/2% senior
discount notes due 2009 and our remaining 11% senior notes
due 2010 and approximately $8.5 million to write-off the
deferred financing costs and discount for the
121/2% senior
discount notes due 2009, the 11% senior notes due 2010 and
the tranche C term loan of the credit facility that was
refinanced in May 2005.
During 2004 we recorded a $55.0 million loss on early
retirement of debt related to our repurchase for cash of the
remaining $1.8 million (principal amount at maturity) of
our 14% senior discount notes due 2009 and
$366.3 million (principal amount at maturity) of our
11% senior notes due 2010. Of the $55.0 million loss,
$45.2 million represents a premium paid to repurchase our
11% senior notes due 2010 for cash and $9.8 million
relates to the write-off of the deferred financing costs for the
14% senior discount notes due 2009, the 11% senior
notes due 2010 and the tranche B term loan of the credit
facility that was refinanced in May 2004.
We recorded a tax benefit of $305.8 million for 2005
compared to a tax provision of $8.4 million for income
taxes for 2004. The change from a provision for income taxes to
an income tax benefit is related to the release of a significant
portion of our valuation allowance on our federal and certain
state deferred tax assets. The majority of these federal and
state deferred tax assets are related to net operating loss
carryforwards which now are more likely than not to be realized.
See Note 7 to the accompanying consolidated financial
statements for additional information. With the release of a
significant portion of the valuation allowance we will record
income tax expense at the estimated annual federal and state
effective tax rate of approximately 40%. Income tax provisions
for interim periods are based on estimated effective annual tax
rates. Income tax expense varies from federal statutory rates
primarily because of state taxes. We do not expect to pay cash
taxes, other than the required alternative minimum tax
(AMT) and state tax payments, until the net
operating loss and tax credits have been fully utilized.
For 2005, there was $431.6 million of net tax benefit
related to the release of the valuation allowance on deferred
tax assets.
|
|
|
Net Income Attributable to Common Stockholders |
For 2005, we had net income attributable to common stockholders
of $605.4 million compared to $53.7 million for 2004,
representing an improvement of $551.7 million. The year
ended December 31, 2005 included a tax benefit related to
the release of the valuation allowance of $431.6 million.
We expect to continue generating positive net income in 2006.
57
|
|
|
Year Ended December 31, 2004 Compared to Year Ended
December 31, 2003 |
Total revenues for 2004 were $1,377.1 million, an increase
of $351.9 million, or 34%, compared to
$1,025.2 million generated in the same period in 2003. Of
the $351.9 million growth in revenues, $334.3 million
was due to the 30% increase in our subscriber base during 2004,
while $17.6 million of the growth was from recognizing
revenue previously deferred in accordance with
SAB No. 101, Revenue Recognition in Financial
Statements.
Service revenues increased 34% to $1,291.4 million for the
year ended December 31, 2004 as compared to
$964.4 million for the same period in 2003. Roaming
revenues for 2004 accounted for approximately 12% of our service
revenues, which was the same percentage as for 2003.
The following table illustrates service and equipment revenues
as a percentage of total revenues for the years ended
December 31, 2004 and 2003 and our ARPU for those periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year | |
|
|
|
For the Year | |
|
|
|
|
|
|
Ended | |
|
% of | |
|
Ended | |
|
% of | |
|
2004 vs 2003 | |
|
|
December 31, | |
|
Consolidated | |
|
December 31, | |
|
Consolidated | |
|
| |
|
|
2004 | |
|
Revenues | |
|
2003 | |
|
Revenues | |
|
$ Change | |
|
% Change | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands, except ARPU) | |
Service and roaming revenues
|
|
$ |
1,291,352 |
|
|
|
94 |
% |
|
$ |
964,386 |
|
|
|
94 |
% |
|
$ |
326,966 |
|
|
|
34 |
% |
Equipment revenues
|
|
|
85,784 |
|
|
|
6 |
% |
|
|
60,826 |
|
|
|
6 |
% |
|
|
24,958 |
|
|
|
41 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$ |
1,377,136 |
|
|
|
100 |
% |
|
$ |
1,025,212 |
|
|
|
100 |
% |
|
$ |
351,924 |
|
|
|
34 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ARPU(1)
|
|
$ |
67 |
|
|
|
|
|
|
$ |
68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
See Item 6, Selected Financial Data
Additional Reconciliations of Non-GAAP Financial Measures
(Unaudited) for more information regarding our use of ARPU
as a non-GAAP financial measure. |
58
The following table shows the reconciliation of the reported
service revenues, equipment revenues and cost of equipment
revenues to the adjusted amounts that exclude the adoption of
EITF No. 00-21 and
SAB No. 101 for the years ended December 31, 2004
and 2003.
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended | |
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Revenues:
|
|
|
|
|
|
|
|
|
Service revenues (as reported on Consolidated Statements of
Operations)
|
|
$ |
1,291,352 |
|
|
$ |
964,386 |
|
Activation fees deferred (SAB No. 101)
|
|
|
|
|
|
|
3,319 |
|
Previously deferred activation fees recognized
(SAB No. 101)
|
|
|
(3,748 |
) |
|
|
(4,325 |
) |
Activation fees to equipment revenues (EITF No. 00-21)
|
|
|
11,310 |
|
|
|
4,256 |
|
|
|
|
|
|
|
|
Total service revenues without SAB No. 101 and EITF
No. 00-21
|
|
$ |
1,298,914 |
|
|
$ |
967,636 |
|
|
|
|
|
|
|
|
Equipment revenues (as reported on Consolidated Statements of
Operations)
|
|
$ |
85,784 |
|
|
$ |
60,826 |
|
Equipment revenues deferred (SAB No. 101)
|
|
|
|
|
|
|
19,947 |
|
Previously deferred equipment revenues recognized
(SAB No. 101)
|
|
|
(20,258 |
) |
|
|
(25,380 |
) |
Activation fees from service revenues (EITF No. 00-21)
|
|
|
(11,310 |
) |
|
|
(4,256 |
) |
|
|
|
|
|
|
|
Total equipment revenues without SAB No. 101 and
EITF No. 00-21
|
|
$ |
54,216 |
|
|
$ |
51,137 |
|
|
|
|
|
|
|
|
Cost of equipment revenues (as reported on Consolidated
Statements of Operations)
|
|
$ |
152,557 |
|
|
$ |
121,036 |
|
Cost of equipment revenues deferred (SAB No. 101)
|
|
|
|
|
|
|
23,266 |
|
Previously deferred cost of equipment revenues recognized
(SAB No. 101)
|
|
|
(24,006 |
) |
|
|
(29,705 |
) |
|
|
|
|
|
|
|
Total cost of equipment revenues without
SAB No. 101 and EITF No. 00-21
|
|
$ |
128,551 |
|
|
$ |
114,597 |
|
|
|
|
|
|
|
|
Equipment revenues reported for 2004 were $85.8 million as
compared to $60.8 million reported for the same period in
2003, representing an increase of $25.0 million. Of the
$25.0 million increase from 2003 to 2004,
$14.8 million relates to recognizing equipment revenues
previously deferred pursuant to SAB No. 101 and
recording $7.1 million as activation fees to equipment
revenues based on EITF
No. 00-21. The
remaining $3.1 million increase in equipment revenues are
due to the growth in our subscriber base.
For the year ended December 31, 2004, our cost of service
revenues was $361.1 million as compared to
$322.5 million for the same period in 2003, representing an
increase of $38.6 million, or 12%. The increase in costs
was partially due to adding approximately 478 cell sites during
2004 to our wireless network. Furthermore, our number of
customers grew 30% compared to 2003, and we experienced an
increase in average airtime usage by our customers, both of
which resulted in higher network operating costs. Compared to
2003, the average monthly minutes of use per subscriber
increased by 9%, to 743 average monthly minutes of use per
subscriber for 2004 from 680 average monthly minutes of use per
subscriber for 2003. Our roaming fees paid to Nextel also
increased as our growing subscriber base roamed on Nextels
compatible network.
59
|
|
|
Cost of Equipment Revenues |
Our cost of equipment revenues for the year ended
December 31, 2004 was $152.6 million as compared to
$121.0 million for the same period in 2003, or an increase
of $31.6 million. The increase in costs relates mostly to
recognizing $17.6 million of equipment costs that was
previously deferred in accordance with SAB No. 101 and
$14.0 million due to the increased volume of subscribers.
The table below shows that the gross subsidy (without the
effects of SAB No. 101 and EITF No. 00-21) between
equipment revenues and cost of equipment revenues was a loss of
$74.3 million for 2004, as compared to a loss of
$63.5 million for the same period in 2003.
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended | |
|
|
December 31, | |
|
|
| |
|
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Equipment revenues billed
|
|
$ |
54,216 |
|
|
$ |
51,137 |
|
Cost of equipment revenues billed
|
|
|
(128,551 |
) |
|
|
(114,597 |
) |
|
|
|
|
|
|
|
Total gross subsidy for equipment
|
|
$ |
(74,335 |
) |
|
$ |
(63,460 |
) |
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative Expenses |
For the year ended December 31, 2004, selling, general and
administrative expenses were $492.3 million compared to
$402.3 million for the same period in 2003, representing an
increase of 22%.
Sales and marketing expenses for the year ended
December 31, 2004 were $206.0 million, an increase of
$28.1 million, or 16%, from the same period in 2003 due to
the following:
|
|
|
|
|
$14.5 million increase in advertising and media expenses as
a result of general marketing campaigns along with sponsorship
of NASCAR in conjunction with Nextel; |
|
|
|
$2.1 million increase in facility and lease costs primarily
for the more than 30 new company-owned stores put in operation
during 2004; and |
|
|
|
$11.5 million increase in commissions, commission bonuses
and residuals paid to account representatives and the indirect
sales channel. |
For the year ended December 31, 2004, general and
administrative costs were $286.3 million, an increase of
$61.9 million, or 28%, compared to the same period in 2003
due to the following:
|
|
|
|
|
$10.5 million increase due to hiring additional staff and
operating expenses to support our growing customer base and
related activities in Las Vegas, Nevada and Panama City Beach,
Florida; |
|
|
|
$50.3 million increase in expenses for service and repair,
billing, collection and customer retention expenses including
handset upgrades to support a larger and growing customer base,
offset by a $24.3 million decrease in bad debt due to
improved collection activity; and |
|
|
|
$25.4 million increase in support of our information
systems, facilities and corporate expenses. |
|
|
|
Stock-Based Compensation Expense |
For the years ended December 31, 2004 and 2003, we recorded
non-cash, stock-based compensation expense associated with our
grants of restricted stock and employee stock options of
approximately $0.8 million and $1.1 million,
respectively.
|
|
|
Depreciation and Amortization Expense |
For 2004 our depreciation and amortization expense was
$149.7 million compared to $135.4 million for the same
period in 2003, representing an increase of 11%. The
$14.3 million increase in depreciation
60
expense was due to adding approximately 478 cell sites in 2004.
We also acquired furniture and equipment for our offices and
more than 30 new company-owned stores.
|
|
|
Interest Expense and Interest Income |
Interest expense, net of capitalized interest, declined
$45.8 million, or 30%, from $152.3 million for the
year ended December 31, 2003 to $106.5 million for the
year ended December 31, 2004. This decline was due mostly
to our repurchase for cash of our 14% senior discount notes
due 2009,
121/2% senior
notes due 2009 and 11% senior notes due 2010 during 2003
and 2004. In addition, for our interest rate swap agreements we
recorded a non-cash fair market value gain of approximately
$3.4 million and $4.1 million for 2004 and 2003,
respectively. For 2004, interest income was $2.9 million
compared to $2.8 million for 2003.
|
|
|
Loss on Early Retirement of Debt |
During 2004 we recorded a $55.0 million loss on early
retirement of debt related to our repurchase for cash of the
remaining $1.8 million (principal amount at maturity) of
our 14% senior discount notes due 2009 and
$366.3 million (principal amount at maturity) of our
11% senior notes due 2010. Of the $55.0 million loss,
$45.2 million represents a premium paid to repurchase our
11% senior notes due 2010 for cash and $9.8 million
related to the write-off of the deferred financing costs for the
14% senior discount notes due 2009, the 11% senior
notes due 2010 and the tranche B term loan of the credit
facility that was refinanced on May 19, 2004.
During 2003 we recorded a $95.1 million loss on early
retirement of debt related to our repurchase for cash of
$483.2 million (principal amount at maturity) of our
14% senior discount notes due 2009, $22.6 million
(principal amount at maturity) of our 11% senior notes due
2010, $78.8 million (principal amount at maturity) of our
121/2% senior
notes due 2009, and $38.9 million of our Series B
mandatorily redeemable preferred stock. We also refinanced our
$475.0 million credit facility and exchanged
$8.0 million of our 14% senior discount notes due 2009
for shares of our Class A common stock. Of the
$95.1 million loss, $79.2 million represented a
premium paid to repurchase or exchange the notes and
$15.9 million related to the write-off of the deferred
financing costs for the debt reduction activities.
As a result of adopting SFAS No. 142 Goodwill
and Other Intangible Assets, we recorded a deferred
non-cash income tax provision during 2004 and 2003 of
$8.4 million and $7.8 million, respectively, relating
to our FCC licenses.
|
|
|
Net Income (Loss) Attributable to Common Stockholders |
For 2004, we had a net income attributable to common
stockholders of $53.7 million compared to a net loss
attributable to common stockholders of $211.6 million for
2003, representing a $265.3 million improvement. The
$211.6 million net loss in 2003 included a
$95.1 million loss for early retirement of debt that
pertains to an aggregate of debt reduction and refinancing
transactions totaling $1.1 billion (principal amount at
maturity).
|
|
|
Liquidity and Capital Resources |
As of December 31, 2005, our cash and cash equivalents and
short-term investments balance was approximately
$165.0 million, a decrease of $99.6 million compared
to the balance of $264.6 million as of December 31,
2004. In addition, we had access to an undrawn line of credit of
$100.0 million for a total liquidity position of
$265.0 million as of December 31, 2005. The
$99.6 million decrease in our liquidity position from
December 31, 2004 was, in part, a result of our additional
capital spending and debt repayments offset by positive cash
from operating activities, stock options exercised and proceeds
from sale lease-back transactions.
61
|
|
|
Statement of Cash Flows Discussion |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
?For the Year Ended | |
|
|
|
|
|
|
December 31, | |
|
|
|
|
|
|
| |
|
|
|
|
|
|
2005 | |
|
2004 | |
|
$ Change | |
|
% Change | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Net cash from operating activities
|
|
$ |
379,812 |
|
|
$ |
202,466 |
|
|
$ |
177,346 |
|
|
|
88 |
% |
Net cash from investing activities
|
|
$ |
(132,815 |
) |
|
$ |
(131,620 |
) |
|
$ |
(1,195 |
) |
|
|
(1 |
)% |
Net cash from financing activities
|
|
$ |
(244,078 |
) |
|
$ |
(45,982 |
) |
|
$ |
(198,096 |
) |
|
|
(431 |
)% |
For 2005, we generated $379.8 million in cash from
operating activities, as compared to $202.5 million in cash
for the same period in 2004. The $177.3 million increase in
funds from operating activities was due to the following:
|
|
|
|
|
a $214.1 million increase in income generated from
operating activities, excluding changes in current assets and
liabilities; and |
|
|
|
a $20.0 million increase in accounts payable, accrued
expenses, other current liabilities, other current and long-term
assets and advances to Nextel WIP due to the timing of payments;
offset by |
|
|
|
a $22.8 million increase in our on-hand subscriber
equipment inventory due primarily to adding new phone
models; and |
|
|
|
a $34.0 million increase in our accounts receivable balance
from customers due to 26% growth in number of subscribers in
2005 compared to the same period in 2004. |
Net cash used from investing activities for 2005 was
$132.8 million compared to $131.6 million used for the
same period in 2004. The $1.2 million increase in net cash
used from investing activities was primarily due to:
|
|
|
|
|
a $77.0 million increase in capital expenditures as a
result of adding 546 cell sites in 2005 compared to 478 cell
sites during 2004; offset by |
|
|
|
a $1.5 million net decrease in FCC licenses acquired and
other investing activities; and |
|
|
|
a $339.4 million decrease in purchases of short-term
investments offset by a $265.1 million decrease in cash
proceeds from the sale and maturities of short-term investments
used to fund the increase in capital expenditures and to redeem
the
121/2% senior
discount notes due 2009 and refinance the tranche C term
loan. |
Net cash used from financing activities for 2005 totaled
$244.1 million compared to $46.0 million used in the
same period in 2004. The $198.1 million increase in net
cash from financing activities was due to:
|
|
|
|
|
a $174.6 million decrease in proceeds from refinancing the
credit facility and issuing $25.0 million of
81/8% senior
notes due 2011 in May 2004; and |
|
|
|
a $67.7 million increase in cash used in 2005 for
refinancing the credit facility, repurchase for cash in open
market purchases of our 11% senior notes due 2010, and
redemption of our outstanding
121/2% senior
notes due 2009; offset by |
|
|
|
a $28.6 million increase in proceeds from stock options
exercised and employee purchases of stock; |
|
|
|
a $13.5 million increase in proceeds from sale-leaseback
transactions; and |
|
|
|
a $2.1 million net decrease in debt and equity issuance
costs and other financing activities. |
|
|
|
Capital Needs and Funding Sources |
Our primary liquidity needs arise from the capital requirements
necessary to expand and enhance coverage in our existing markets
that are part of the Nextel Digital Wireless Network. Other
liquidity
62
needs include the future acquisition of additional frequencies,
the installation of new or additional switch equipment, the
introduction of new technology and services, and debt service
requirements related to our long-term debt and capital leases.
Without limiting the foregoing, we expect capital expenditures
to include, among other things, the purchase of switches, base
radios, transmission towers and antennae, radio frequency
engineering, cell site construction, and information technology
software and equipment.
Based on our ten-year operating and capital plan, we believe
that our cash flow from operations, existing cash and cash
equivalents, short-term investments and access to our line of
credit, as necessary, will provide sufficient funds for the
foreseeable future to finance our capital needs and working
capital requirements to build out and maintain our portion of
the Nextel Digital Wireless Network using the current
800 MHz iDEN system as well as provide the necessary funds
to acquire any additional FCC licenses required to operate the
current 800 MHz iDEN system.
To the extent we are not able to generate positive cash from
operating activities, we will be required to use more of our
available liquidity to fund operations or we would require
additional financing. We may be unable to raise additional
capital on acceptable terms, if at all. Furthermore, our ability
to generate positive cash from operating activities is dependent
upon the amount of revenue we receive from customers, operating
expenses required to provide our service, the cost of acquiring
and retaining customers and our ability to continue to grow our
customer base.
Additionally, to the extent we decide to expand our digital
wireless network or deploy next generation technologies, we may
require additional financing to fund these projects. In the
event that additional financing is necessary, such financing may
not be available to us on satisfactory terms, if at all, for a
number of reasons, including, without limitation, restrictions
in our debt instruments on our ability to raise additional
funds, conditions in the economy generally and in the wireless
communications industry specifically, and other factors that may
be beyond our control.
The following table provides details regarding our contractual
obligations subsequent to December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period | |
|
|
| |
Contractual Obligations |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
Thereafter | |
|
Total | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Long-term debt(1)
|
|
$ |
|
|
|
$ |
4,125 |
|
|
$ |
193,810 |
|
|
$ |
5,500 |
|
|
$ |
5,500 |
|
|
$ |
1,004,375 |
|
|
$ |
1,213,310 |
|
Interest on long-term debt(2)
|
|
|
75,630 |
|
|
|
76,038 |
|
|
|
75,694 |
|
|
|
73,031 |
|
|
|
72,676 |
|
|
|
76,563 |
|
|
|
449,632 |
|
Operating leases
|
|
|
103,650 |
|
|
|
89,702 |
|
|
|
78,737 |
|
|
|
67,953 |
|
|
|
38,442 |
|
|
|
53,901 |
|
|
|
432,385 |
|
Capital lease obligations(3)
|
|
|
5,227 |
|
|
|
5,227 |
|
|
|
5,227 |
|
|
|
5,227 |
|
|
|
|
|
|
|
|
|
|
|
20,908 |
|
Purchase obligations(4)
|
|
|
292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$ |
184,799 |
|
|
$ |
175,092 |
|
|
$ |
353,468 |
|
|
$ |
151,711 |
|
|
$ |
116,618 |
|
|
$ |
1,134,839 |
|
|
$ |
2,116,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes $550.0 million of the tranche D term loan
outstanding as of December 31, 2005 and does not reflect
the principal repayment of $50 million we made in March
2006. |
|
(2) |
Includes interest on the remaining $100 million in swaps of
approximately ($832,000) for 2006. These amounts include
estimated payments based on managements expectation as to
future interest rates. |
|
(3) |
Includes interest. |
|
(4) |
Included in the Purchase obligations caption above
are minimum amounts due under our most significant agreements
for telecommunication services required for back-office support.
Amounts actually paid under some of these agreements may be
higher due to variable components of these agreements. In
addition to the amounts reflected in the table, we expect to pay
significant amounts to Motorola for infrastructure, handsets and
related services in future years. Potential amounts payable to
Motorola are not shown above due to the uncertainty surrounding
the timing and extent of these payments. See notes to the
consolidated financial statements appearing elsewhere in this
Annual Report on
Form 10-K for
amounts paid to Motorola for the years ended December 31,
2005 and 2004. |
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To date, third-party financing activities and cash flow from
operations have provided all of our funding. Listed below are
the sources of funding, including our refinancing activities:
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proceeds from cash equity contributions and commitments of
$202.8 million in January and September of 1999; |
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the offering of 14% senior discount notes due 2009 for
initial proceeds of $406.4 million in January 1999, less
$167.7 million (principal amount at maturity) for the
partial redemption of these notes in April 2000,
$86.1 million (principal amount at maturity) repurchased
for cash in May and June 2003, $375.8 million (principal
amount at maturity) as of June 30, 2003 repurchased
pursuant to a tender offer commenced in June 2003,
$16.5 million (principal amount at maturity) and
$4.8 million (principal amount at maturity) repurchased for
cash in July 2003 and December 2003, respectively, and
$1.8 million (principal amount at maturity) redeemed in
March 2004; |
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term loans incurred in the aggregate principal amount of
$375.0 million in January and September 1999 and January
2002, which we refinanced in May 2004 and increased to
$700.0 million and reduced to $550.0 million in May
2005; |
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the contribution by Nextel WIP of FCC licenses valued at
$178.3 million, in exchange for Class B common stock
and Series B preferred stock in January and September 1999
and September 2000, less redemption of all the Series B
preferred stock for $38.9 million in November 2003; |
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the contribution by Motorola of a $22.0 million credit to
use against our purchases of Motorola-manufactured
infrastructure equipment in exchange for Class A common
stock, all of which had been used by December 31, 1999; |
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net proceeds from the sale of Class A common stock in our
initial public offering of $510.8 million in February 2000; |
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the offering of 11% senior notes due 2010 for
$200.0 million in March 2000 and an additional
$200.0 million in 11% senior notes due 2010 in July
2000, less $22.6 million (principal amount at maturity)
repurchased for cash in August 2003, $10.5 million
(principal amount at maturity) repurchased for cash in March
2004, $355.8 million (principal amount at maturity)
repurchased for cash through a tender offer that expired in May
2004 and $1.2 million (principal amount at maturity)
repurchased for cash in April 2005; |
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the offering of
121/2% senior
discount notes due 2009 for $210.4 million in December
2001, less $11.1 million (principal amount at maturity)
repurchased for cash in August 2003, redemption of
$67.7 million (principal amount at maturity) in December
2003 and redemption of $146.2 million (principal amount at
maturity) in November 2005; |
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net proceeds totaling $28.0 million from the sale of
switches in Kentucky and Florida in July and October 2002; |
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cancellation of existing indebtedness in November and December
2002 and January and February 2003 in the aggregate amount of
$45.0 million (principal amount at maturity) in exchange
for the issuance of shares of our Class A common stock; |
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the offering of
11/2% convertible
senior notes due 2008 for $150.0 million in May 2003 and an
additional $25.0 million in June 2003 pursuant to the
exercise of an over-allotment option held by the initial
purchasers of the notes, less $88.3 million conversions
during 2005; |
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the offering of
81/8% senior
notes due 2011 for $450.0 million in June 2003 and an
additional $25.0 million in May 2004 for proceeds of
$24.6 million; |
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the offering of
11/2% convertible
senior notes due 2008 for $125.0 million in August 2003,
less $23.4 million conversions during 2005; and |
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net proceeds of $104.5 million from our sale of
Class A common stock in November 2003. |
Our funding sources from debt are described below in more detail:
On May 23, 2005, OPCO refinanced its existing
$700.0 million tranche C term loan with a new
$550.0 million tranche D term loan. JPMorgan
Chase & Co. acted as sole bookrunner and arranger on
the transaction. The new credit facility includes a
$550.0 million tranche D term loan, a
$100.0 million revolving credit facility and an option to
request an additional $200.0 million of incremental term
loans. Such incremental term loans shall not exceed
$200.0 million or have a final maturity date earlier than
the maturity date for the tranche D term loan. The
tranche D term loan matures on May 31, 2012. The
revolving credit facility will terminate on the last business
day falling on or nearest to November 30, 2009. The
incremental term loans, if any, shall mature on the date
specified on the date the respective loan is made, provided that
such maturity date shall not be earlier than the maturity date
for the tranche D term loan. As of December 31, 2005,
$550.0 million of the tranche D term loan was
outstanding and no amounts were outstanding under either the
$100.0 million revolving credit facility or the incremental
term loans. The borrowings under the new term loan were used
along with company funds to repay OPCOs existing
tranche C term loan.
The tranche D term loan bears interest, at our option, at
the administrative agents alternate base rate or
reserve-adjusted LIBOR plus, in each case, applicable margins.
The initial applicable margin for the tranche D term loan
is 1.50% over LIBOR and 0.50% over the base rate. For the
revolving credit facility, the initial applicable margin is
3.00% over LIBOR and 2.00% over the base rate and thereafter
will be determined on the basis of the ratio of total debt to
annualized EBITDA and will range between 1.50% and 3.00% over
LIBOR and between 0.50% and 2.00% over the base rate. As of
December 31, 2005, the interest rate on the tranche D
term loan was 5.91%.
Borrowings under the term loans are secured by, among other
things, a first priority pledge of all assets of OPCO and all
assets of the subsidiaries of OPCO and a pledge of their
respective capital stock. The credit facility contains financial
and other covenants customary for the wireless industry,
including limitations on our ability to pay dividends and incur
additional debt or create liens on assets. The credit facility
also contains covenants requiring that we maintain certain
defined financial ratios. The credit facility does not restrict
the sale of our outstanding shares of Class A common stock
to Nextel WIP, as approved by our Class A common
stockholders on October 24, 2005 following the merger of
Nextel with Sprint. In addition, we are not required to obtain
the consent of the lenders under our credit facility prior to
completing the sale of our outstanding shares of Class A
common stock to Nextel WIP.
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14% Senior Discount Notes Due 2009 |
Our 14% senior discount notes due 2009 were issued in
January 1999. The notes were issued at a discount to their
aggregate principal amount at maturity and generated aggregate
gross proceeds to us of approximately $406.4 million. In
July 1999 we exchanged these notes for registered notes having
the same financial terms and covenants as the notes issued in
January 1999. Cash interest began accruing on the notes on
February 1, 2004. On April 18, 2000, we redeemed 35%
of the accreted value of these outstanding notes for
approximately $191.2 million with proceeds from our initial
public offering. The redemption payment of $191.2 million
included $167.7 million of these outstanding notes
(principal amount at maturity) plus a 14% premium of
approximately $23.5 million. In November and December 2002
we exchanged approximately $27.0 million (principal amount
at maturity) of the notes for shares of our Class A common
stock and again in January and February 2003 exchanged an
additional $8.0 million (principal amount at maturity) of
the notes for shares of our Class A common stock. From
May 13, 2003 through June 4, 2003, we repurchased for
cash approximately $86.1 million (principal amount at
maturity) of the notes outstanding for $87.9 million. On
June 11, 2003 we commenced a tender offer that expired
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July 11, 2003 to repurchase all of the remaining notes
outstanding, which through June 30, 2003 we purchased
approximately $375.8 million (principal amount at maturity)
of the 14% senior discount notes due 2009 for
$398.1 million. From July 1, 2003 through
July 11, 2003, we repurchased for cash an additional
$16.5 million (principal amount at maturity) of the
14% senior discount notes due 2009 for $17.5 million.
On December 1, 2003 we repurchased for cash approximately
$4.8 million (principal amount at maturity) of the notes
outstanding for $5.1 million. During March 2004, we
redeemed the remaining $1.8 million (principal amount at
maturity) of our outstanding 14% senior discount notes due
2009 for a total redemption price of approximately
$1.9 million.
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11% Senior Notes Due 2010 |
On March 10, 2000, we issued $200.0 million of
11% senior notes due 2010, and on July 27, 2000, we
issued an additional $200.0 million of 11% senior
notes due 2010, each in a private placement. We subsequently
exchanged all of the March 2000 and July 2000 notes for
registered notes having the same financial terms and covenants
as the privately placed notes. Interest accrues for these notes
at the rate of 11% per annum, payable semi-annually in cash
in arrears on March 15 and September 15 of each year, which
commenced on September 15, 2000. In November 2002 we
exchanged $10.0 million (principal amount at maturity) of
the notes for shares of our Class A common stock. During
August 2003 and March 2004, we repurchased for cash
$22.6 million and $10.5 million (principal amounts at
maturity), respectively, of our 11% senior notes due 2010
in open-market purchases for $25.0 million and
$11.8 million, respectively, including accrued interest. On
April 28, 2004, we commenced a tender offer and consent
solicitation relating to all of our outstanding 11% senior
notes due 2010. In connection with the tender offer, which
expired on May 25, 2004, we purchased approximately
$355.8 million (principal amount at maturity) of the
11% senior notes due 2010 for approximately
$406.6 million including accrued interest. During April
2005, we redeemed the remaining $1.2 million (principal
amount at maturity) of our outstanding 11% senior notes due
2010.
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121/2% Senior
Discount Notes Due 2009 |
On December 4, 2001 we issued in a private placement
$225.0 million of
121/2% senior
discount notes due 2009. These notes were issued at a discount
to their aggregate principal amount at maturity and generated
aggregate gross proceeds to us of approximately
$210.4 million. We subsequently exchanged all of these
121/2% senior
discount notes due 2009 for registered notes having the same
financial terms and covenants as the privately placed notes.
Interest accrues for these notes at the rate of
121/2% per
annum, payable semi-annually in cash in arrears on May 15 and
November 15 of each year, which commenced on May 15, 2002.
During August 2003, we repurchased for cash $11.1 million
(principal amount at maturity) of our
121/2% senior
discount notes due 2009 in open-market purchases. On
December 31, 2003 we completed the redemption of
$67.7 million (principal amount at maturity) of the notes
outstanding with net proceeds from our public offering in
November 2003. On November 15, 2005 we redeemed the
remaining $146.2 million (principal amount at maturity) of
our
121/2% senior
discount notes for a total redemption price of
$164.5 million.
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81/8% Senior
Notes Due 2011 |
On June 23, 2003, we issued $450.0 million of
81/8% senior
notes due 2011 in a private placement. We subsequently exchanged
all of the
81/8% senior
notes due 2011 for registered notes having the same financial
terms and covenants as the privately placed notes. Interest
accrues for these notes at the rate of
81/8% per
annum, payable semi-annually in cash in arrears on January 1 and
July 1 of each year, which commenced on January 1,
2004. The proceeds from this offering were used primarily to
fund the purchase of the 14% senior discount notes due 2009
in our June 2003 tender offer.
On May 19, 2004, we issued an additional $25.0 million
of
81/8% senior
notes due 2011 under a separate indenture in a private placement
for proceeds of $24.6 million. We subsequently exchanged
all of these
81/8% senior
notes for registered notes having the same financial terms and
covenants as the privately placed notes. Interest accrues for
these notes at the rate of
81/8% per
annum, payable semi-annually in cash
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in arrears on January 1 and July 1 of each year, which
commenced on July 1, 2004. The proceeds were used to fund a
portion of the purchase of the 11% senior notes due 2010 in
our tender offer. Our obligations under the indentures governing
our
81/8% senior
notes shall continue following the closing of the put
transaction with Sprint Nextel.
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11/2% Convertible
Senior Notes Due 2008 |
On May 13, 2003, we closed a private placement of
$150.0 million of
11/2% convertible
senior notes due 2008. On June 11, 2003, we closed a
private placement of an additional $25.0 million of these
notes pursuant to the exercise of an over-allotment option held
by the initial purchasers of these notes, increasing the total
proceeds to $175.0 million. At the option of the holders or
upon change of control, the notes are convertible into shares of
our Class A common stock at an initial conversion rate of
131.9087 shares per $1,000 principal amount of notes, which
represents a conversion price of $7.58 per share, subject
to adjustment. Interest accrues for these notes at the rate of
11/2% per
annum, payable semi-annually in cash in arrears on May 15 and
November 15 of each year, which commenced on November 15,
2003. We subsequently filed a registration statement with the
SEC to register the resale of the
11/2% convertible
senior notes due 2008 and the shares of our Class A common
stock into which the
11/2% convertible
senior notes due 2008 are convertible. As of December 31,
2005, $88.3 million of these
11/2% convertible
senior notes due 2008 had been converted into
11,642,918 shares of our Class A common stock.
On August 6, 2003, we closed a private placement of
$125.0 million of
11/2% convertible
senior notes due 2008. At the option of the holders or upon
change of control, the notes are convertible into shares of our
Class A common stock at an initial conversion rate of
78.3085 shares per $1,000 principal amount of notes, which
represents a conversion price of $12.77 per share, subject
to adjustment. Interest accrues for these notes at the rate of
11/2% per
annum, payable semi-annually in cash in arrears on May 15 and
November 15 of each year, which commenced on November 15,
2003. We subsequently filed a registration statement with the
SEC to register the resale of the
11/2% convertible
senior notes due 2008 and the shares of our Class A common
stock into which the
11/2% convertible
senior notes due 2008 are convertible. As of December 31,
2005, $23.4 million of these
11/2% convertible
senior notes due 2008 had been converted into
1,834,357 shares of our Class A common stock.
Pursuant to the put right set forth in our charter, Sprint
Nextel has an obligation to purchase all of our outstanding
shares of Class A common stock, which will constitute a
fundamental change under the indentures governing
our outstanding
11/2% convertible
senior notes due 2008. As a result, each holder of our
outstanding
11/2% convertible
senior notes due 2008 will have the right, at each such
holders option, to require us to redeem all of such
holders notes subsequent to the closing of the put
transaction at a redemption price equal to 100% of the principal
amount thereof, together with accrued interest to, but
excluding, the redemption date.
As discussed in more detail in Item 1A, Risk
Factors, if we fail to satisfy the financial covenants and
other requirements contained in our credit facility and the
indentures governing our outstanding notes, our debts could
become immediately payable at a time when we are unable to pay
them, which could adversely affect our liquidity and financial
condition.
In the future, we may opportunistically repurchase additional
outstanding notes if the financial terms are sufficiently
attractive.
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Off-Balance Sheet Arrangements |
The SEC requires registrants to disclose off-balance sheet
arrangements. As defined by the SEC, an
off-balance sheet
arrangement includes any contractual obligation, agreement or
transaction arrangement involving an unconsolidated entity under
which a company 1) has made guarantees, 2) has a
retained or a contingent interest in transferred assets,
3) has an obligation under derivative instruments
classified as equity, or 4) has any obligation arising out
of a material variable interest in an unconsolidated entity that
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provides financing, liquidity, market risk or credit risk
support to the company, or that engages in leasing, hedging or
research and development services with the company.
We have examined our contractual obligation structures that may
potentially be impacted by this disclosure requirement and have
concluded that no arrangements of the types described above
exist with respect to our company.
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Critical Accounting Policies |
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires 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
included elsewhere in this Annual Report on
Form 10-K. The SEC
has defined a companys most critical accounting policies
as the ones that are most important to the portrayal of the
companys financial condition and results of operations,
and which require the 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 key
accounting policies, which involve the use of estimates,
judgments and assumptions. For additional information see the
notes to the consolidated financial statements included
elsewhere in this Annual Report on
Form 10-K.
Although we believe that our estimates and assumptions are
reasonable, they are based upon information presently available.
Actual results may differ significantly from these estimates
under different assumptions or conditions.
We recognize service revenues for access charges and other
services charged at fixed amounts ratably over the service
period, net of credits and adjustments for service discounts.
These discounts typically relate to promotional service
campaigns in which customers will receive a monthly discount on
their service plan for a limited period depending on the
features of the rate plan. Additionally, for situations where
customers may have a billing dispute, coverage dispute or
service issue, we may grant a one-time credit or adjustment to
the customers bill. We recognize excess usage and long
distance revenue at contractual rates per minute as minutes are
used. To account for the service revenues, including adjustments
and discounts, that are unbilled at month-end, we make an
estimate of unbilled service revenues from the end of the billed
service period to the end of the month. This estimate, which is
subjective, is based on a number of factors, including: the
increase in net subscribers, number of business days from the
billed service period to the end of the month and the average
revenue per subscriber, after taking partial billing periods
into consideration. This estimate is accrued monthly and
reversed the following month when the actual service period is
billed again. The actual service revenues could be greater or
lower than the amounts estimated due to rate plans in effect and
the minutes of use differing from the factors used for the
estimate. Historically, our differences between the estimated
and actual service revenues have not been material.
Equipment revenues include the sale of handset and accessory
equipment. We recognize revenues for handset and accessory
equipment when title passes to the customer, which is upon
shipping the item to the customer.
In November 2002, the EITF issued a final consensus on Issue
No. 00-21,
Accounting for Revenue Arrangements with Multiple
Deliverables. Issue No. 00-21 provides guidance on how
and when to recognize revenues on arrangements requiring
delivery of more than one product or service. We adopted EITF
Issue No. 00-21 on July 1, 2003 and elected to apply
the provisions prospectively to our existing customer
arrangements, as described below.
Prior to the adoption of EITF
No. 00-21, we
followed the guidance of SAB No. 101, Revenue
Recognition in Financial Statements, and accounted for
the sale of our handset equipment and the subsequent service to
the customer as a single unit of accounting as our wireless
service is essential to the
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functionality of our handsets. Accordingly, we recognized
revenues from the handset equipment sales and an equal amount of
the cost of handset equipment revenues over the expected
customer relationship period when title to the handset passed to
the customer. Under EITF Issue
No. 00-21, we are
no longer required to consider whether a customer is able to
realize utility from the handset in the absence of the
undelivered service. Given that we meet the criteria stipulated
in EITF Issue
No. 00-21, we
account for the sale of a handset as a unit of accounting
separate from the subsequent service to the customer.
Accordingly, we recognize revenues from handset equipment sales
and the related cost of handset equipment revenues when title to
the handset equipment passes to the customer for all
arrangements entered into beginning in the third quarter of
2003. This resulted in the classification of amounts received
for the sale of the handset equipment, including any activation
fees charged to the customer, as equipment revenues at the time
of the sale. For arrangements entered into prior to July 1,
2003, we continue to amortize the revenues and costs previously
deferred as was required by SAB No. 101. In December
2003, the SEC staff issued SAB No. 104,
Revenue Recognition in Financial Statements
which updated SAB No. 101 to reflect the impact of the
issuance of EITF
No. 00-21.
Accounts receivable are recorded at the invoiced amount and
include late payment fee charges for unpaid balances. The
allowance for doubtful accounts is our best estimate of the
amount of probable credit losses that will occur in our existing
accounts receivable balance. We review our allowance for
doubtful accounts monthly. We determine the allowance based on
the age of the balances and our experience of collecting on
certain account types such as corporate, small business,
government, consumer or education, and also, in some cases, the
credit classification of the customer. Account balances are
charged off against the allowance after all means of collection
have been exhausted internally and the potential for recovery is
considered remote or delegated to a third-party collection
agency.
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Subscriber Equipment Inventory |
Subscriber equipment is valued at the lower of cost or market.
Cost for the equipment is determined by the weighted average
method. Equipment costs in excess of the revenue generated from
equipment sales, or equipment subsidies, are expensed at the
point of sale. We do not recognize the expected equipment
subsidy prior to the point of sale due to the fact that we
expect to recover the equipment subsidy through service revenues
and the marketing decision to sell the equipment at less than
cost is confirmed at the point of sale.
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Capitalization and Depreciation of Fixed Assets |
Our business is inherently capital intensive due to the build
out and continual expansion of our digital network. Thus, we
record our system (digital network) and non-system fixed assets,
including improvements that extend useful lives, at cost, while
maintenance and repairs are charged to operations as incurred.
Depreciation and amortization are computed using the
straight-line method with estimated useful lives of up to
31 years for cell site shelters, three to ten years for
digital mobile network equipment, and three to seven years for
furniture and fixtures. Leasehold improvements are amortized
over the shorter of the respective lease term or the useful
lives of the improvements. As we continue to track the
utilization of our system and non-system fixed assets, we may
find that the actual economic lives may be different than our
estimated useful lives, thus resulting in different carrying
values of our fixed assets or property, plant and equipment.
This could also result in a change of our depreciation expense
in future periods. To date, we have not changed the estimated
useful lives that we employ, but we will continue to conduct
periodic evaluations to confirm that they are appropriate,
taking into consideration such factors as changes in our
technology and the industry.
Construction in progress includes costs of labor (internal and
external), materials, transmission and related equipment,
engineering, site design, interest and other costs relating to
the construction and development of our digital mobile network.
Assets under construction are not depreciated until placed into
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service. In capitalizing costs related to the construction of
our digital network, we include costs that are required to
activate the network.
We lease various cell sites, equipment and office and retail
facilities under operating leases. Leases for cell sites are
typically five years with renewal options. The leases normally
provide for the payment of minimum annual rentals and certain
leases include provisions for renewal options of up to five
years. Certain costs related to our cell sites are depreciated
over a ten-year period on a straight-line basis, which
represents the lesser of the lease term or economic life of the
asset. We calculate straight-line rent expense over the initial
lease term and renewals that are reasonably assured. Office
facilities and equipment are leased under agreements with terms
ranging from one month to twenty years. Leasehold improvements
are amortized over the shorter of the respective lives of the
leases or the useful lives of the improvements.
SFAS No. 142, Goodwill and Other Intangible
Assets, requires the use of a non-amortization
approach to account for purchased goodwill and certain
intangibles. Under a non-amortization approach, goodwill and
certain intangibles are not amortized into results of
operations, but instead are reviewed at least annually for
impairment, and written down as a charge to results of
operations only in the periods in which the recorded value of
goodwill and certain intangibles exceeds fair value.
During the third quarter of 2005, we acquired intangible assets
related to an immaterial asset acquisition that are subject to
straight-line amortization over a
24-month term. In
addition, we recorded goodwill for which we will perform an
annual asset impairment analysis.
FCC operating licenses are recorded at historical cost. Our FCC
licenses and the requirements to maintain the licenses are
similar to other licenses granted by the FCC, including PCS and
cellular licenses, in that they are subject to renewal after the
initial 10-year term.
Historically, the renewal process associated with these FCC
licenses has been perfunctory. The accounting for these licenses
has historically not been constrained by the renewal and
operational requirements.
We have determined that FCC licenses have indefinite lives;
therefore, as of January 1, 2002, we no longer amortize the
cost of these licenses. We performed an annual asset impairment
analysis on our FCC licenses in accordance with
SFAS No. 142 and to date we have determined there has
been no impairment related to our FCC licenses as the fair
values of the licenses are greater than their carrying values.
For our impairment analysis, we used the aggregate of all our
FCC licenses, which constitutes the footprint of our portion of
the Nextel Digital Wireless Network, as the unit of accounting
for our FCC licenses based on the guidance in Emerging Issues
Task Force (EITF) Issue No. 02-7, Unit
of Accounting for Testing Impairment of Indefinite-Lived
Intangible Assets to estimate the fair value of our
licenses using a discounted cash flow model. The estimates that
we use in the cash flow model were based on our long-range cash
flow projections, discounted at our corporate weighted average
cost of capital. The use of different estimates or assumptions
within our discounted cash flow model when determining the fair
value of our FCC licenses may result in different values for our
FCC licenses and any related impairment charge.
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Impairment of Long-Lived Assets |
Our long-lived assets consist principally of property, plant and
equipment. It is our policy to assess impairment of long-lived
assets pursuant to SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets.
This includes determining if certain triggering events have
occurred, including significant decreases in the market value of
specified assets, significant changes in the manner in which an
asset is used, significant changes in the legal climate or
business climate that could affect the value of an asset, or
current period or continuing operating or cash flow losses or
projections that demonstrate continuing losses associated with
certain assets used for the purpose of producing revenue that
might be an indicator of impairment. When we perform the
SFAS No. 144 impairment tests, we identify the
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appropriate asset group to be our network system, which includes
the grouping of all of our assets required to operate our
portion of the Nextel Digital Wireless Network and provide
service to our customers. We based this conclusion of asset
grouping on the revenue dependency, operating interdependency
and shared costs to operate our network. Thus far, none of the
above triggering events has resulted in any material impairment
charges.
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Income Taxes Valuation Allowance |
We maintain a valuation allowance that includes reserves against
certain of our deferred tax asset amounts in instances where we
determine that it is more likely than not that a tax benefit
will not be realized. Our valuation allowance has historically
included reserves primarily for the tax benefit of net operating
loss carryforwards. Prior to September 30, 2005, we had
recorded a full reserve against the tax benefits relating to our
net operating loss carryfowards because, at that time, we did
not have a sufficient history of taxable income to conclude that
it was more likely than not that we would be able to realize the
tax benefits of the net operating loss carryforwards.
Accordingly, we recorded in our consolidated statement of
operations only a small provision for income taxes, as our net
operating loss carryfowards resulting from losses generated in
prior years offset virtually all of the taxes that we would have
otherwise incurred.
Based on our cumulative operating results through
September 30, 2005 and an assessment of our expected future
operations, we concluded as of September 30, 2005 that it
was more likely than not that we would be able to realize
certain tax benefits of our net operating loss carryforwards.
Therefore, we decreased a significant portion of the valuation
allowance attributable to our net operating loss carryforwards
as a credit to tax expense in the third quarter of 2005.
Significant changes in our assessment of the future realization
of our deferred tax assets would require us to reconsider the
need for a valuation allowance associated with the deferred tax
assets in amounts that could be material. The valuation
allowance balance as of December 31, 2005 of approximately
$10.5 million is comprised primarily of the tax effect of
state net operating losses incurred in prior years for which an
allowance is still required.
|
|
|
Asset Retirement Obligations |
During 2003, we adopted SFAS No. 143,
Accounting for Asset Retirement Obligations,
which addresses financial accounting and reporting for
obligations associated with the reporting of obligations
associated with the retirement of tangible long-lived assets and
associated asset retirement obligations (ARO). Under
the scope of this pronouncement, we have ARO associated with our
removal of equipment from the cell sites and towers that we
lease from third parties.
In December 2002, the FASB issued SFAS No. 148,
Accounting for Stock Based Compensation
Transition and Disclosure. This statement amends
SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. We continue
to apply the intrinsic value method for stock-based compensation
to employees prescribed by Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock
Issued to Employees. We have provided the disclosures
required by SFAS No. 148.
|
|
|
Interest Rate Risk Management |
See Item 7A. Quantitative and Qualitative Disclosures
about Market Risk below for a full description on our
interest rate risk management policy.
71
|
|
|
Recently Issued Accounting Pronouncements |
See Note 1 Operations and Significant
Accounting Policies in the notes to consolidated financial
statements included elsewhere in this Annual Report on
Form 10-K for a
full description of recently issued accounting pronouncements.
|
|
|
Related Party Transactions |
See Item 13, Certain Relationships and Related
Transactions for a full description of our related party
transactions.
|
|
Item 7A. |
Quantitative and Qualitative Disclosures about Market
Risk |
We are subject to market risks arising from changes in interest
rates. Our primary interest rate risk results from changes in
LIBOR or the prime rate, which are used to determine the
interest rate applicable to the term loan of OPCO under our
credit facility. Our potential loss over one year that would
result from a hypothetical, instantaneous and unfavorable change
of 100 basis points in the interest rate of all our
variable rate obligations would be approximately
$4.0 million.
As of December 31, 2005, we had
81/8% senior
notes due 2011 and
11/2% convertible
senior notes due 2008 outstanding. While fluctuations in
interest rates may affect the fair value of these notes, causing
the notes to trade above or below par, interest expense will not
be affected due to the fixed interest rate of these notes.
We use derivative financial instruments consisting of interest
rate swap and interest rate protection agreements in the
management of our interest rate exposures. We will not use
financial instruments for trading or other speculative purposes,
nor will we be a party to any leveraged derivative instrument.
The use of derivative financial instruments is monitored through
regular communication with senior management. We will be exposed
to credit loss in the event of nonperformance by the counter
parties. This credit risk is minimized by dealing with a group
of major financial institutions with whom we have other
financial relationships. We do not anticipate nonperformance by
these counter parties.
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by
SFAS No. 138, establish accounting and reporting
standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be
recorded on the balance sheet as either an asset or liability
measured at fair value. These statements require that changes in
the derivatives fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. If
hedge accounting criteria are met, the changes in a
derivatives fair value (for a cash flow hedge) are
deferred in stockholders equity as a component of other
comprehensive income. These deferred gains and losses are
recognized as income in the period in which hedged cash flows
occur. The ineffective portions of hedge returns are recognized
as earnings.
|
|
|
Non-Cash Flow Hedging Instruments |
In April 1999 and 2000, we entered into interest rate swap
agreements for $60 million and $50 million,
respectively, to partially hedge interest rate exposure with
respect to our term B and C loans. In April 2004 and 2005, the
$60 million and $50 million, respectively, interest
rate swap agreements expired in accordance with their original
terms and paid approximately $639,000 and $520,000,
respectively, for the final settlement. We did not record any
realized gain or loss with this expiration since this swap did
not qualify for cash flow hedge accounting and we recognized
changes in its fair value up to the termination date as part of
our interest expense.
For the years ended December 31, 2005 and 2004, we recorded
non-cash, non-operating gains of approximately $1.1 million
and $3.4 million, respectively, related to the change in
market value of the interest rate swap agreements in interest
expense.
72
|
|
|
Cash Flow Hedging Instruments |
In September 2004 we entered into a series of interest rate swap
agreements for $150 million, which had the effect of
converting certain of our variable interest rate loan
obligations to fixed interest rates. The commencement date for
the swap transactions was December 1, 2004 and the
expiration date is August 31, 2006. In December 2004 we
entered into similar agreements to hedge an additional
$50 million commencing March 1, 2005 and expiring
August 31, 2006. The term C loan obligation was replaced
with the refinancing of our credit facility in May 2005;
however, we maintained the existing swap agreements.
These interest rate swap agreements qualify for cash flow
accounting under SFAS 133. Both at inception and on an
ongoing basis we must perform an effectiveness test using the
change in variable cash flows method. In accordance with
SFAS 133, the fair value of the swap agreements at
December 31, 2005 was included in other current assets on
the balance sheet. The change in fair value was recorded in
accumulated other comprehensive income on the balance sheet
since the instruments were determined to be perfectly effective
at December 31, 2005. There were no amounts reclassified
into current earnings due to ineffectiveness during 2005 or 2004.
In January 2006, we cancelled $100 million of these
interest rate swap agreements, which will be accounted for in
the first quarter of 2006.
A summary of our long-term debt obligations, including scheduled
principal repayments and weighted average interest rates, as of
December 31, 2005 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
Thereafter | |
|
Total | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Long-term debt obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate debt
|
|
$ |
|
|
|
$ |
|
|
|
$ |
188,310 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
475,000 |
|
|
$ |
663,310 |
|
|
$ |
1,050,064 |
|
|
|
Average interest rate
|
|
|
6.2 |
% |
|
|
6.2 |
% |
|
|
6.4 |
% |
|
|
8.1 |
% |
|
|
8.1 |
% |
|
|
8.1 |
% |
|
|
7.0 |
% |
|
|
|
|
|
Variable-rate debt(1)
|
|
$ |
|
|
|
$ |
4,125 |
|
|
$ |
5,500 |
|
|
$ |
5,500 |
|
|
$ |
5,500 |
|
|
$ |
529,375 |
|
|
$ |
550,000 |
|
|
$ |
550,000 |
|
|
|
Average interest rate (LIBOR + 1.5%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
As of December 31, 2005, variable-rate debt consisted of
our bank credit facility. The bank credit facility includes a
$550.0 million tranche D term loan, a
$100.0 million revolving credit facility and an option to
request an additional $200.0 million of incremental term
loans and does not reflect the principal repayment of
$50 million we made in March 2006. The tranche D term
loan bears interest, at our option, at the administrative
agents alternate base rate or reserve-adjusted LIBOR plus,
in each case, applicable margin. The initial applicable margin
for the tranche D term loan is 1.50% over LIBOR and 0.50%
over the base rate. For the revolving credit facility, the
initial applicable margin is 3.00% over LIBOR and 2.00% over the
base rate and thereafter will be determined on the basis of the
ratio of total debt to annualized EBITDA and will range between
1.50% and 3.00% over LIBOR and between 0.50% and 2.00% over the
base rate. As of December 31, 2005, the average interest
rate on the tranche D term loan was 5.91%. |
Aggregate notional amounts associated with interest rate swaps
in place as of December 31, 2005 were as follows (listed by
maturity date):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value | |
|
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
2010 | |
|
Thereafter | |
|
Total | |
|
Asset | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Interest rate swaps:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional amount(1)
|
|
$ |
200,000 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
200,000 |
|
|
$ |
1,671 |
|
Weighted-average fixed rate payable(2)
|
|
|
3.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fixed rate receivable(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Includes notional amounts of $200.0 million that will
expire in August 2006. In January 2006, we cancelled
$100 million of the interest rate swap agreements. |
73
|
|
(2) |
Represents the weighted-average fixed rate based on the contract
notional amount as a percentage of total notional amounts in a
given year. |
|
(3) |
The initial applicable margin for the tranche D term loan
is 1.50% over LIBOR and 0.50% over the base rate. For the
revolving credit facility, the applicable margin is 3.00% over
LIBOR and 2.00% over the base rate and thereafter will be
determined on the basis of the ratio of total debt to annualized
EBITDA and will range between 1.50% and 3.00% over LIBOR and
between 0.50% and 2.00% over the base rate. As of
December 31, 2005, the interest rate on the tranche D
term loan was 5.91%. |
74
|
|
Item 8. |
Financial Statements and Supplementary Data |
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
|
|
|
|
|
|
|
Page | |
|
|
| |
|
|
|
76 |
|
|
|
|
77 |
|
|
|
|
78 |
|
|
|
|
79 |
|
|
|
|
80 |
|
|
|
|
111 |
|
|
|
|
112 |
|
75
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(Dollars in thousands, | |
|
|
except per share amounts) | |
ASSETS |
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
150,403 |
|
|
$ |
147,484 |
|
|
Short-term investments
|
|
|
14,624 |
|
|
|
117,095 |
|
|
Accounts and notes receivable, net of allowance $27,267 and
$15,874, respectively
|
|
|
265,720 |
|
|
|
190,954 |
|
|
Subscriber equipment inventory
|
|
|
98,003 |
|
|
|
49,595 |
|
|
Deferred current income taxes
|
|
|
78,027 |
|
|
|
|
|
|
Prepaid expenses
|
|
|
18,560 |
|
|
|
21,175 |
|
|
Other current assets
|
|
|
19,529 |
|
|
|
10,213 |
|
|
|
|
|
|
|
|
Total current assets
|
|
|
644,866 |
|
|
|
536,516 |
|
|
|
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT, at cost
|
|
|
1,744,633 |
|
|
|
1,546,685 |
|
|
Less accumulated depreciation and amortization
|
|
|
(665,583 |
) |
|
|
(503,967 |
) |
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
1,079,050 |
|
|
|
1,042,718 |
|
|
|
|
|
|
|
|
OTHER NON-CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
FCC licenses, net of accumulated amortization of $8,744
|
|
|
376,254 |
|
|
|
375,470 |
|
|
Deferred non-current income taxes
|
|
|
181,252 |
|
|
|
|
|
|
Debt issuance costs and other, net of accumulated amortization
of $7,575 and $6,456, respectively
|
|
|
10,909 |
|
|
|
20,995 |
|
|
Goodwill
|
|
|
1,514 |
|
|
|
|
|
|
Other intangible assets, net of accumulated amortization of $22
and $0, respectively
|
|
|
83 |
|
|
|
|
|
|
|
|
|
|
|
|
Total non-current assets
|
|
|
570,012 |
|
|
|
396,465 |
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$ |
2,293,928 |
|
|
$ |
1,975,699 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
84,024 |
|
|
$ |
82,833 |
|
|
Accrued expenses and other current liabilities
|
|
|
117,446 |
|
|
|
115,447 |
|
|
Due to Nextel WIP
|
|
|
6,962 |
|
|
|
7,379 |
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
208,432 |
|
|
|
205,659 |
|
|
|
|
|
|
|
|
LONG-TERM OBLIGATIONS:
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
1,226,608 |
|
|
|
1,632,518 |
|
|
Deferred income taxes
|
|
|
|
|
|
|
53,964 |
|
|
Other long-term liabilities
|
|
|
39,691 |
|
|
|
32,243 |
|
|
|
|
|
|
|
|
Total long-term obligations
|
|
|
1,266,299 |
|
|
|
1,718,725 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
1,474,731 |
|
|
|
1,924,384 |
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (See Note 8)
|
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY:
|
|
|
|
|
|
|
|
|
|
Preferred stock, no par value, 100,000,000 shares
authorized, no shares issued and outstanding
|
|
|
|
|
|
|
|
|
|
Series B Preferred stock, par value $.001 per share,
13,110,000 shares authorized, no shares outstanding
|
|
|
|
|
|
|
|
|
|
Common stock, Class A, par value $.001 per share,
500,000,000 shares authorized, 200,072,729 and
181,557,105 shares, respectively, issued and outstanding,
and paid-in capital
|
|
|
1,190,586 |
|
|
|
1,029,193 |
|
|
Common stock, Class B, par value $.001 per share
convertible, 600,000,000 shares authorized,
84,632,604 shares, issued and outstanding, and paid-in
capital
|
|
|
172,697 |
|
|
|
172,697 |
|
|
Accumulated deficit
|
|
|
(545,454 |
) |
|
|
(1,150,806 |
) |
|
Deferred compensation
|
|
|
(64 |
) |
|
|
(440 |
) |
|
Accumulated other comprehensive income
|
|
|
1,432 |
|
|
|
671 |
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
819,197 |
|
|
|
51,315 |
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
|
|
$ |
2,293,928 |
|
|
$ |
1,975,699 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
76
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Dollars in thousands, except per share amounts) | |
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenues (earned from Nextel WIP $211,628, $158,710 and
$115,894, respectively)
|
|
$ |
1,695,017 |
|
|
$ |
1,291,352 |
|
|
$ |
964,386 |
|
|
Equipment revenues
|
|
|
106,634 |
|
|
|
85,784 |
|
|
|
60,826 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,801,651 |
|
|
|
1,377,136 |
|
|
|
1,025,212 |
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service revenues (excludes depreciation of $137,488,
$121,644 and $109,572, respectively) (incurred from Nextel WIP
$139,928, $117,491 and $96,612; American Tower $11,784, $10,866
and $10,381 and Sprint Nextel $1,452, $0, $0, respectively)
|
|
|
432,248 |
|
|
|
361,059 |
|
|
|
322,475 |
|
|
Cost of equipment revenues
|
|
|
178,261 |
|
|
|
152,557 |
|
|
|
121,036 |
|
|
Selling, general and administrative (incurred from Nextel WIP
$40,672, $22,140 and $13,292 and Sprint Nextel $327, $0, $0,
respectively)
|
|
|
615,944 |
|
|
|
492,335 |
|
|
|
402,300 |
|
|
Stock based compensation (primarily selling, general and
administrative related)
|
|
|
639 |
|
|
|
755 |
|
|
|
1,092 |
|
|
Depreciation and amortization
|
|
|
170,133 |
|
|
|
149,708 |
|
|
|
135,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
1,397,225 |
|
|
|
1,156,414 |
|
|
|
982,320 |
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
|
404,426 |
|
|
|
220,722 |
|
|
|
42,892 |
|
|
Interest expense, net of capitalized interest
|
|
|
(94,901 |
) |
|
|
(106,500 |
) |
|
|
(152,294 |
) |
|
Interest income
|
|
|
7,759 |
|
|
|
2,891 |
|
|
|
2,811 |
|
|
Loss on early retirement of debt
|
|
|
(17,707 |
) |
|
|
(54,971 |
) |
|
|
(95,093 |
) |
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAX PROVISION
|
|
|
299,577 |
|
|
|
62,142 |
|
|
|
(201,684 |
) |
|
Income tax (provision) benefit
|
|
|
305,775 |
|
|
|
(8,396 |
) |
|
|
(7,811 |
) |
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
|
605,352 |
|
|
|
53,746 |
|
|
|
(209,495 |
) |
|
Mandatorily redeemable preferred stock dividends
|
|
|
|
|
|
|
|
|
|
|
(2,141 |
) |
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS
|
|
$ |
605,352 |
|
|
$ |
53,746 |
|
|
$ |
(211,636 |
) |
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) PER SHARE ATTRIBUTABLE TO COMMON
STOCKHOLDERS, BASIC AND DILUTED:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
2.24 |
|
|
$ |
0.20 |
|
|
$ |
(0.84 |
) |
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$ |
1.96 |
|
|
$ |
0.19 |
|
|
$ |
(0.84 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
270,462,109 |
|
|
|
263,670,839 |
|
|
|
252,439,876 |
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
309,439,683 |
|
|
|
304,985,247 |
|
|
|
252,439,876 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
77
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders
Equity and Comprehensive Income
For the Years Ended December 31, 2003, 2004 and 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class B Common | |
|
|
|
|
|
|
|
|
|
|
Class A Common Stock | |
|
Stock and Paid-In | |
|
|
|
|
|
Accumulated | |
|
|
|
|
and Paid-In Capital | |
|
Capital | |
|
|
|
|
|
Other | |
|
|
|
|
| |
|
| |
|
Accumulated | |
|
Deferred | |
|
Comprehensive | |
|
|
|
|
Shares | |
|
Amount | |
|
Shares | |
|
Amount | |
|
Deficit | |
|
Compensation | |
|
Income | |
|
Totals | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
BALANCE
|
|
|
170,797,589 |
|
|
$ |
897,756 |
|
|
|
79,056,228 |
|
|
$ |
163,312 |
|
|
$ |
(992,916 |
) |
|
$ |
(1,245 |
) |
|
$ |
|
|
|
$ |
66,907 |
|
|
Series B redeemable preferred stock dividend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,141 |
) |
|
|
|
|
|
|
|
|
|
|
(2,141 |
) |
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(209,495 |
) |
|
|
|
|
|
|
|
|
|
|
(209,495 |
) |
|
Issuance of stock options and restricted stock
|
|
|
50,000 |
|
|
|
1,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,188 |
) |
|
|
|
|
|
|
500 |
|
|
Conversion of long-term debt to common stock, net
|
|
|
1,076,000 |
|
|
|
6,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,896 |
|
|
Vesting of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,092 |
|
|
|
|
|
|
|
1,092 |
|
|
Stock options exercised
|
|
|
921,192 |
|
|
|
3,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,512 |
|
|
Stock issued for employee stock purchase plan
|
|
|
341,653 |
|
|
|
1,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,799 |
|
|
Class A common stock issued, net of equity issuance costs
|
|
|
10,000,000 |
|
|
|
103,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2003
|
|
|
183,186,434 |
|
|
$ |
1,015,376 |
|
|
|
79,056,228 |
|
|
$ |
163,312 |
|
|
$ |
(1,204,552 |
) |
|
$ |
(1,341 |
) |
|
$ |
|
|
|
$ |
(27,205 |
) |
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,746 |
|
|
|
|
|
|
|
|
|
|
|
53,746 |
|
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on cash flow hedge, net of tax of $0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
671 |
|
|
|
671 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures of deferred compensation
|
|
|
|
|
|
|
(265 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
265 |
|
|
|
|
|
|
|
|
|
|
Class A common stock acquired by Nextel WIP
|
|
|
(5,576,376 |
) |
|
|
(9,385 |
) |
|
|
5,576,376 |
|
|
|
9,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
755 |
|
|
|
|
|
|
|
755 |
|
|
Modification of stock options
|
|
|
|
|
|
|
119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(119 |
) |
|
|
|
|
|
|
|
|
|
Stock options exercised
|
|
|
3,743,441 |
|
|
|
20,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,816 |
|
|
Stock issued for employee stock purchase plan
|
|
|
203,606 |
|
|
|
2,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
181,557,105 |
|
|
$ |
1,029,193 |
|
|
|
84,632,604 |
|
|
$ |
172,697 |
|
|
$ |
(1,150,806 |
) |
|
$ |
(440 |
) |
|
$ |
671 |
|
|
$ |
51,315 |
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
605,352 |
|
|
|
|
|
|
|
|
|
|
|
605,352 |
|
|
|
Other comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on investments, net of tax of $21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33 |
|
|
|
33 |
|
|
|
|
Unrealized gain on cash flow hedge, net of tax of $888
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
728 |
|
|
|
728 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
606,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
588 |
|
|
|
|
|
|
|
588 |
|
|
Restricted stock grant
|
|
|
10,000 |
|
|
|
212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(212 |
) |
|
|
|
|
|
|
|
|
|
Conversion of long-term debt to common stock, net
|
|
|
13,477,275 |
|
|
|
109,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109,582 |
|
|
Stock options exercised
|
|
|
4,887,668 |
|
|
|
48,869 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48,869 |
|
|
Stock issued for employee stock purchase plan
|
|
|
140,681 |
|
|
|
2,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,730 |
|
BALANCE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
200,072,729 |
|
|
$ |
1,190,586 |
|
|
|
84,632,604 |
|
|
$ |
172,697 |
|
|
$ |
(545,454 |
) |
|
$ |
(64 |
) |
|
$ |
1,432 |
|
|
$ |
819,197 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
78
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
605,352 |
|
|
$ |
53,746 |
|
|
$ |
(209,495 |
) |
|
Adjustments to reconcile net income (loss) to net cash from
operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax provision (benefit)
|
|
|
(314,177 |
) |
|
|
8,396 |
|
|
|
7,811 |
|
|
Depreciation and amortization
|
|
|
170,133 |
|
|
|
149,708 |
|
|
|
135,417 |
|
|
Amortization of debt issuance costs
|
|
|
3,347 |
|
|
|
3,888 |
|
|
|
5,173 |
|
|
Interest accretion for senior discount notes
|
|
|
|
|
|
|
20 |
|
|
|
28,975 |
|
|
Bond discount amortization
|
|
|
990 |
|
|
|
980 |
|
|
|
1,252 |
|
|
Loss on early retirement of debt
|
|
|
17,707 |
|
|
|
54,971 |
|
|
|
95,093 |
|
|
Fair value adjustments of derivative instruments and investments
|
|
|
(2,263 |
) |
|
|
(4,018 |
) |
|
|
(4,100 |
) |
|
Stock based compensation
|
|
|
639 |
|
|
|
755 |
|
|
|
1,092 |
|
|
Other, net
|
|
|
1,178 |
|
|
|
279 |
|
|
|
3,416 |
|
|
Changes in current assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts and notes receivable, net
|
|
|
(74,766 |
) |
|
|
(40,735 |
) |
|
|
(19,760 |
) |
|
|
Subscriber equipment inventory
|
|
|
(48,394 |
) |
|
|
(25,588 |
) |
|
|
(7,594 |
) |
|
|
Other current and long-term assets
|
|
|
(2,475 |
) |
|
|
(12,482 |
) |
|
|
(3,894 |
) |
|
|
Accounts payable, accrued expenses and other current liabilities
|
|
|
23,122 |
|
|
|
14,954 |
|
|
|
52,853 |
|
|
|
Operating advances due to (from) Nextel WIP
|
|
|
(581 |
) |
|
|
(2,408 |
) |
|
|
915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
|
|
379,812 |
|
|
|
202,466 |
|
|
|
87,154 |
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(233,853 |
) |
|
|
(156,843 |
) |
|
|
(179,794 |
) |
|
FCC licenses
|
|
|
(669 |
) |
|
|
(3,873 |
) |
|
|
(16,026 |
) |
|
Proceeds from maturities of short-term investments
|
|
|
139,703 |
|
|
|
107,985 |
|
|
|
58,253 |
|
|
Proceeds from sales of short-term investments
|
|
|
19,660 |
|
|
|
316,499 |
|
|
|
1,205,104 |
|
|
Purchases of short-term investments
|
|
|
(55,994 |
) |
|
|
(395,388 |
) |
|
|
(1,282,041 |
) |
|
Other
|
|
|
(1,662 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from investing activities
|
|
|
(132,815 |
) |
|
|
(131,620 |
) |
|
|
(214,504 |
) |
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from borrowings
|
|
|
550,000 |
|
|
|
724,565 |
|
|
|
1,125,000 |
|
|
Stock options exercised
|
|
|
48,869 |
|
|
|
20,453 |
|
|
|
3,512 |
|
|
Proceeds from stock issued for employee stock purchase plan
|
|
|
2,730 |
|
|
|
2,532 |
|
|
|
1,799 |
|
|
Proceeds from sale lease-back transactions
|
|
|
15,439 |
|
|
|
1,939 |
|
|
|
6,860 |
|
|
Debt repayments
|
|
|
(856,612 |
) |
|
|
(788,909 |
) |
|
|
(1,034,930 |
) |
|
Capital lease payments
|
|
|
(3,499 |
) |
|
|
(3,209 |
) |
|
|
(2,617 |
) |
|
Class A common stock issued
|
|
|
|
|
|
|
|
|
|
|
104,500 |
|
|
Debt and equity issuance costs
|
|
|
(1,005 |
) |
|
|
(3,353 |
) |
|
|
(21,676 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from financing activities
|
|
|
(244,078 |
) |
|
|
(45,982 |
) |
|
|
182,448 |
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
2,919 |
|
|
|
24,864 |
|
|
|
55,098 |
|
CASH AND CASH EQUIVALENTS, beginning of year
|
|
|
147,484 |
|
|
|
122,620 |
|
|
|
67,522 |
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, end of year
|
|
$ |
150,403 |
|
|
$ |
147,484 |
|
|
$ |
122,620 |
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$ |
4,615 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized interest on accretion of senior discount notes
|
|
$ |
|
|
|
$ |
|
|
|
$ |
379 |
|
|
|
|
|
|
|
|
|
|
|
|
Accretion of mandatorily redeemable preferred stock dividends
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,141 |
|
|
|
|
|
|
|
|
|
|
|
|
Retirement of long-term debt with common stock
|
|
$ |
111,690 |
|
|
$ |
|
|
|
$ |
6,973 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest, net of capitalized amount
|
|
$ |
95,167 |
|
|
$ |
114,815 |
|
|
$ |
103,485 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
79
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
for the Years Ended December 31, 2005, 2004 and 2003
|
|
1. |
OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES |
Nextel Partners provides a wide array of digital wireless
communications services throughout the United States, primarily
to business users, utilizing frequencies licensed by the Federal
Communications Commission (FCC). Our operations are
primarily conducted by Nextel Partners Operating Corp.
(OPCO), a wholly owned subsidiary. Substantially all
of our assets, liabilities, operating income (losses) and cash
flows are within OPCO and our other wholly owned subsidiaries.
Our digital network (Nextel Digital Wireless
Network) has been developed with advanced mobile
communication systems employing digital technology developed by
Motorola, Inc. (Motorola) (such technology is
referred to as the integrated Digital Enhanced
Network or iDEN) with a multi-site
configuration permitting frequency reuse. Our principal business
objective is to offer high-capacity, high-quality, advanced
communication services in our territories throughout the United
States targeted towards mid-sized and rural markets. Various
operating agreements entered into by our subsidiaries and Nextel
WIP Corp. (Nextel WIP), an indirect wholly owned
subsidiary of Sprint Nextel Corporation (Sprint
Nextel) following the merger of Nextel Communications,
Inc. (Nextel) and Sprint Corporation
(Sprint) on August 12, 2005, govern the support
services to be provided to us by Nextel WIP (see Note 11).
The merger constituted a Nextel sale pursuant to our charter. On
October 24, 2005 our Class A common stockholders
voted to exercise the put right, as defined in our charter, to
require Nextel WIP to purchase all our outstanding shares of
Class A common stock. On December 20, 2005, we
announced, along with Sprint Nextel, that the put price at which
Nextel WIP will purchase our outstanding Class A common
stock was determined to be $28.50 per share. The
transaction is subject to the customary regulatory approvals,
including review by the FCC and review under the
Hart-Scott-Rodino Act, and is expected to be completed by the
end of the second quarter of 2006. On February 6, 2006, the
Federal Trade Commission and the Department of Justice provided
early termination of the waiting period under the
Hart-Scott-Rodino Act for Sprint Nextel to purchase our
outstanding Class A common stock. These financial
statements relate only to Nextel Partners, Inc. and its
subsidiaries prior to the consummation of the transaction.
We believe that the geographic and industry diversity of our
customer base minimizes the risk of incurring material losses
due to concentration of credit risk.
We are a party to certain equipment purchase agreements with
Motorola. For the foreseeable future we expect that we will need
to rely on Motorola for the manufacture of a substantial portion
of the infrastructure equipment necessary to construct and make
operational our portion of the Nextel Digital Wireless Network
as well as for the provision of digital mobile telephone
handsets and accessories.
As discussed in Note 11, we rely on Nextel WIP for the
provision of certain services. For the foreseeable future, we
intend to continue to rely on Nextel WIP for the provision of
these services, as we will not have the infrastructure to
support those services. We may begin to build the infrastructure
needed to support some or all of these services to the extent
that Nextel WIP will no longer provide them to us as a result of
the merger between Sprint and Nextel. To the extent that Nextel
WIPs failure or refusal to provide us with these services
is a violation of our joint venture or other agreements with
Nextel WIP, we will pursue appropriate legal and equitable
remedies available to us.
80
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
If Sprint Nextel encounters financial or operating difficulties
relating to its portion of the Nextel Digital Wireless Network,
or experiences a significant decline in customer acceptance of
its services and products, or refuses to provide us with these
services in violation of our agreements, and we are unable to
replace these services timely, our business may be adversely
affected, including the quality of our services, the ability of
our customers to roam within the entire network and our ability
to attract and retain customers.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could
differ materially from those estimates.
|
|
|
Principles of Consolidation |
The consolidated financial statements include our accounts and
those of our wholly owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in
consolidation.
|
|
|
Net Income (Loss) per Share Attributable to Common
Stockholders, Basic and Diluted |
In accordance with SFAS No. 128, Computation
of Earnings Per Share, basic earnings per share is
computed by dividing income (loss) attributable to common
stockholders by the weighted average number of shares of common
stock outstanding during the period. Diluted earnings per share
adjust basic earnings per common share for the effects of
potentially dilutive common shares. Potentially dilutive common
shares primarily include the dilutive effects of shares issuable
under our stock option plan and outstanding unvested restricted
stock using the treasury stock method and the dilutive effects
of shares issuable upon the conversion of our convertible senior
notes using the if-converted method.
81
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
The following schedule is our net income (loss) per share
attributable to common stockholders calculation for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except share and per share | |
|
|
amounts) | |
Income (loss) attributable to common stockholders (numerator for
basic)
|
|
$ |
605,352 |
|
|
$ |
53,746 |
|
|
$ |
(211,636 |
) |
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible Senior Notes
|
|
|
2,494 |
|
|
|
4,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Income (loss) attributable to common stockholders
(numerator for diluted)
|
|
$ |
607,846 |
|
|
$ |
58,246 |
|
|
$ |
(211,636 |
) |
|
|
|
|
|
|
|
|
|
|
Gross weighted average common shares outstanding
|
|
|
270,535,369 |
|
|
|
263,807,868 |
|
|
|
252,609,931 |
|
|
Less: Weighted average shares subject to repurchase
|
|
|
(73,260 |
) |
|
|
(137,029 |
) |
|
|
(170,055 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
basic (denominator for basic)
|
|
|
270,462,109 |
|
|
|
263,670,839 |
|
|
|
252,439,876 |
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
7,387,544 |
|
|
|
8,338,967 |
|
|
|
|
|
|
Convertible Senior Notes
|
|
|
31,527,391 |
|
|
|
32,872,584 |
|
|
|
|
|
|
Restricted stock (unvested)
|
|
|
62,639 |
|
|
|
102,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
diluted (denominator for diluted)
|
|
|
309,439,683 |
|
|
|
304,985,247 |
|
|
|
252,439,876 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to common stockholders,
basic
|
|
$ |
2.24 |
|
|
$ |
0.20 |
|
|
$ |
(0.84 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share attributable to common stockholders,
diluted
|
|
$ |
1.96 |
|
|
$ |
0.19 |
|
|
$ |
(0.84 |
) |
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, 2005 and 2004,
approximately 11,500 and 2.8 million options, respectively,
were excluded from the calculation of diluted earnings per
common share as their exercise prices exceeded the average
market price of our class A common stock.
For the year ended December 31, 2003, approximately
32.9 million shares issuable upon the assumed conversion of
our
11/2% senior
convertible notes, 170,000 shares of restricted stock and
approximately 18.2 million options were excluded from the
calculation of common equivalent shares, as their effects were
antidilutive.
|
|
|
Cash and Cash Equivalents |
Cash equivalents include time deposits and highly liquid
investments with remaining maturities of three months or less at
the time of purchase.
Marketable debt and equity securities with original purchase
maturities greater than three months are classified as
short-term investments. We classify our investment securities as
available-for-sale because the securities are not intended to be
held-to-maturity and
are not held principally for the purpose of selling them in the
near term. Available-for-sale securities are recorded at fair
value. Unrealized holding gains and losses on available-for-sale
securities are included in other comprehensive income.
82
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
The fair value of our investment securities by type at
December 31, 2005 and 2004 were as follows:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
U.S. government agency securities
|
|
$ |
5,069 |
|
|
$ |
87,241 |
|
Commercial paper
|
|
|
4,557 |
|
|
|
9,213 |
|
Corporate notes and bonds
|
|
|
4,365 |
|
|
|
|
|
Other
|
|
|
633 |
|
|
|
|
|
Other asset backed securities
|
|
|
|
|
|
|
15,939 |
|
U.S. Treasury securities
|
|
|
|
|
|
|
3,001 |
|
Auction rate securities
|
|
|
|
|
|
|
1,701 |
|
|
|
|
|
|
|
|
Total short-term investments
|
|
$ |
14,624 |
|
|
$ |
117,095 |
|
|
|
|
|
|
|
|
These investments are subject to price volatility associated
with any interest-bearing instrument. Net realized
gains/(losses) during the years ended December 31, 2005,
2004 and 2003 were approximately $(98,000), $68,000 and
$258,000, respectively, and were included in interest income.
Net unrealized holding gains for the year ended
December 31, 2005 were approximately $33,000, net of tax,
and were included in other comprehensive income. There were no
amounts reclassified into current earnings during 2005. For the
years ended December 31, 2004 and 2003, unrealized holding
gains/(losses) were approximately $(137,000) and $149,000,
respectively, and were included in interest income because such
securities were designated as trading securities.
The contractual maturities for the agency securities were an
average of approximately 12 months as of December 31,
2005 and 10 months as of December 31, 2004. The
contractual maturities for corporate notes and bonds were an
average of seven months as of December 31, 2005. The
contractual maturities for the U.S. Treasuries were an
average of approximately 13 months as of December 31,
2004. As of December 31, 2005 and 2004, the commercial
paper contractual maturities were an average of approximately
four months.
Accounts receivable are recorded at the invoiced amount and
include late payment fee charges for unpaid balances. The
allowance for doubtful accounts is our best estimate of the
amount of probable credit losses that will occur in our existing
accounts receivable balance. We review our allowance for
doubtful accounts monthly. We determine the allowance based on
the age of the balances and our experience of collecting on
certain account types such as corporate, small business,
government, consumer or education, and also, in some cases, the
credit classification of the customer. Account balances are
charged off against the allowance after all means of collection
have been exhausted internally and the potential for recovery is
considered remote or delegated to a third-party collection
agency.
|
|
|
Subscriber Equipment Inventory |
Subscriber equipment is valued at the lower of cost or market.
Cost for the equipment is determined by the weighted average
method. Equipment costs in excess of the revenue generated from
equipment sales, or equipment subsidies, are expensed at the
point of sale. We do not recognize the expected equipment
subsidy prior to the point of sale due to the fact that we
expect to recover the equipment subsidy through service revenues
and the marketing decision to sell the equipment at less than
cost is confirmed at the point of sale.
83
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
|
|
|
Property, Plant and Equipment |
Property, plant and equipment, including the assets under
capital lease and improvements that extend useful lives, are
recorded at cost, while maintenance and repairs are charged to
operations as incurred. Depreciation and amortization, including
the assets under capital lease, are computed using the
straight-line method based on estimated useful lives of up to
thirty-one years for cell site shelters, three to ten years for
equipment and three to seven years for furniture and fixtures.
Leasehold improvements are amortized over the shorter of the
respective lease term or the useful lives of the improvements.
We follow the Accounting Standards Executive Committee Statement
of Position (SOP) 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal
Use. This SOP requires the capitalization of certain
costs incurred in developing or obtaining software for internal
use. The majority of our software costs are amortized over three
years, with the exception of the costs pertaining to our billing
system, which is amortized over the term of the license. As of
December 31, 2005 and 2004, we had a net book value of
$19.7 million and $22.7 million, respectively, of
capitalized software costs. During the years ended
December 31, 2005, 2004 and 2003, we recorded
$8.5 million, $7.7 million and $7.1 million,
respectively, in amortization expense for capitalized software.
Construction in progress includes labor, materials, transmission
and related equipment, engineering, site design, interest and
other costs relating to the construction and development of our
digital mobile network. Assets under construction are not
depreciated until placed into service.
Our long-lived assets consist principally of property, plant and
equipment. It is our policy to assess impairment of long-lived
assets pursuant with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets.
This includes determining if certain triggering events have
occurred, including significant decreases in the market value of
certain assets, significant changes in the manner in which an
asset is used, significant changes in the legal climate or
business climate that could affect the value of an asset, or
current period or continuing operating or cash flow losses or
projections that demonstrate continuing losses associated with
certain assets used for the purpose of producing revenue that
might be an indicator of impairment. When we perform the
SFAS No. 144 impairment tests, we identify the
appropriate asset group to be our network system, which includes
the grouping of all our assets required to operate our portion
of the Nextel Digital Wireless Network and provide service to
our customers. We base this conclusion of asset grouping on the
revenue dependency, operating interdependency and shared costs
to operate our network. Thus far, none of the above triggering
events has resulted in any material impairment charges.
|
|
|
Sale-Leaseback Transactions |
We periodically enter into transactions whereby we transfer
specified switching equipment and telecommunication towers and
related assets to third parties, and subsequently lease all or a
portion of these assets from these parties. During 2005, 2004
and 2003 we received cash proceeds of approximately
$15.4 million, $1.9 million and $6.9 million,
respectively, for assets sold to third parties. Gains on
sale-leaseback transactions are deferred and recognized over the
lease term. Losses are recognized immediately into current
earnings.
Our wireless communications systems and FCC licenses represent
qualifying assets pursuant to SFAS No. 34,
Capitalization of Interest Cost. For the
years ended December 31, 2005, 2004 and 2003, we
capitalized interest of approximately $1.6 million,
$1.2 million and $1.7 million, respectively.
84
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
We lease various cell sites, equipment and office and retail
facilities under operating leases. Leases for cell sites are
typically five years with renewal options. The leases normally
provide for the payment of minimum annual rentals and certain
leases include provisions for renewal options of up to five
years. Certain costs related to our cell sites are depreciated
over a ten-year period on a straight-line basis, which
represents the lesser of the lease term or economic life of the
asset. We calculate straight-line rent expense over the initial
lease term and renewals that are reasonably assured. Office and
retail facilities and equipment are leased under agreements with
terms ranging from one month to twenty years. Leasehold
improvements are amortized over the shorter of the respective
lease term or the useful lives of the improvements.
SFAS No. 142, Goodwill and Other Intangible
Assets, requires the use of a non-amortization
approach to account for purchased goodwill and certain
intangibles. Under a non-amortization approach, goodwill and
certain intangibles are not amortized into results of
operations, but instead are reviewed at least annually for
impairment, and written down as a charge to results of
operations only in the periods in which the recorded value of
goodwill and certain intangibles exceeds fair value.
FCC operating licenses are recorded at historical cost. Our FCC
licenses and the requirements to maintain the licenses are
similar to other licenses granted by the FCC, including personal
communications services (PCS) and cellular licenses,
in that they are subject to renewal after the initial
10-year term.
Historically, the renewal process associated with these FCC
licenses has been perfunctory. The accounting for these licenses
has historically not been constrained by the renewal and
operational requirements.
We have determined that FCC licenses have indefinite lives;
therefore, as of January 1, 2002, we no longer amortize the
cost of these licenses. We performed an annual asset impairment
analysis on our FCC licenses and to date we have determined
there has been no impairment related to our FCC licenses. For
our impairment analysis, we used the aggregate of all our FCC
licenses, which constitutes the footprint of our portion of the
Nextel Digital Wireless Network, as the unit of accounting for
our FCC licenses based on the guidance in Emerging Issues Task
Force (EITF) Issue No. 02-7, Unit of
Accounting for Testing Impairment of Indefinite-Lived Intangible
Assets.
During the third quarter of 2005, we acquired $105,000 of
intangible assets related to an immaterial asset acquisition
that are subject to straight-line amortization over a
24-month term. In
addition, we recorded $1.5 million in goodwill for which we
will perform an annual asset impairment analysis.
For the year ended December 31, 2005, we recorded
amortization expense of approximately $22,000. We estimate
amortization expense for fiscal years ending December 31,
2006 and 2007 to be approximately $52,000 and $31,000,
respectively.
|
|
|
|
|
|
|
|
|
|
|
As of | |
|
|
| |
|
|
December 31, | |
|
December 31, | |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Other intangible assets subject to amortization
|
|
$ |
105 |
|
|
$ |
|
|
Less accumulated amortization
|
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets subject to amortization
|
|
$ |
83 |
|
|
$ |
|
|
|
|
|
|
|
|
|
85
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
|
|
|
Interest Rate Risk Management |
We use derivative financial instruments consisting of interest
rate swap and interest rate protection agreements in the
management of our interest rate exposures. We will not use
financial instruments for trading or other speculative purposes,
nor will we be a party to any leveraged derivative instrument.
The use of derivative financial instruments is monitored through
regular communication with senior management. We will be exposed
to credit loss in the event of nonperformance by the counter
parties. This credit risk is minimized by dealing with a group
of major financial institutions with whom we have other
financial relationships. We do not anticipate nonperformance by
these counter parties. We are also subject to market risk should
interest rates change.
SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, as amended by
SFAS No. 138, establishes accounting and reporting
standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be
recorded on the balance sheet as either an asset or liability
measured at fair value. These statements require that changes in
the derivatives fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. If
hedge accounting criteria are met, the changes in a
derivatives fair value (for a cash flow hedge) are
deferred in stockholders equity as a component of other
comprehensive income. These deferred gains and losses are
recognized as income in the period in which hedged cash flows
occur. The ineffective portions of hedge returns are recognized
as earnings.
|
|
|
Non-Cash Flow Hedging Instruments |
In April 1999 and 2000, we entered into interest rate swap
agreements for $60 million and $50 million,
respectively, to partially hedge interest rate exposure with
respect to our term B and C loans. In April 2004 and 2005, the
$60 million and $50 million, respectively, interest
rate swap agreements expired in accordance with its original
terms and paid approximately $639,000 and $520,000,
respectively, for the final settlement. We did not record any
realized gain or loss with this expiration since this swap did
not qualify for cash flow hedge accounting and we recognized
changes in its fair value up to the termination date as part of
our interest expense.
For the years ended December 31, 2005, 2004 and 2003, we
recorded non-cash, non-operating gains of $1.1 million,
$3.4 million and $4.1 million, respectively, related
to the change in market value of the interest rate swap
agreements in interest expense.
|
|
|
Cash Flow Hedging Instruments |
In September 2004 we entered into a series of interest rate swap
agreements for $150 million, which has the effect of
converting certain of our variable interest rate loan
obligations to fixed interest rates. The commencement date for
the swap transactions was December 1, 2004 and the
expiration date is August 31, 2006. In December 2004 we
entered into similar agreements to hedge an additional
$50 million commencing March 1, 2005 and expiring
August 31, 2006. The term C loan obligation was replaced
with the refinancing of our credit facility in May 2005;
however, we maintained the existing swap agreements.
These interest rate swap agreements qualify for cash flow
accounting under SFAS 133. Both at inception and on an
ongoing basis we must perform an effectiveness test using the
change in variable cash flows method. In accordance with
SFAS 133, the fair value of the swap agreements at
December 31, 2005 was included in other current assets on
the balance sheet. The change in fair value was recorded in
accumulated other comprehensive income on the balance sheet
since the instruments were determined to be perfectly effective
at December 31, 2005. There were no amounts reclassified
into current earnings due to ineffectiveness during 2005 or 2004.
86
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
In January 2006 we cancelled $100 million of these interest
rate swap agreements, which will be accounted for in the first
quarter of 2006.
See Note 6, Fair Value of Financial Instruments.
Service revenues primarily include fixed monthly access charges
for the digital cellular voice service, Nextel Direct Connect,
and other wireless services and variable charges for airtime
usage in excess of plan minutes. We recognize revenue for access
charges and other services charged at fixed amounts plus excess
airtime usage ratably over the service period, net of customer
discounts and adjustments, over the period earned.
For regulatory fees billed to customers such as the Universal
Service Fund (USF) we net those billings against
payments to the USF. Total billings to customers during the
years ended December 31, 2005, 2004 and 2003 were
$21.3 million, $13.4 million and $6.7 million,
respectively.
Under EITF Issue
No. 00-21
Accounting for Revenue Arrangements with Multiple
Deliverables, we are no longer required to consider
whether a customer is able to realize utility from the handset
in the absence of the undelivered service. Given that we meet
the criteria stipulated in EITF Issue No. 00-21, we account
for the sale of a handset as a unit of accounting separate from
the subsequent service to the customer. Accordingly, we
recognize revenue from handset equipment sales and the related
cost of handset equipment revenues when title to the handset
equipment passes to the customer for all arrangements entered
into beginning in the third quarter of 2003. This has resulted
in the classification of amounts received for the sale of the
handset equipment, including any activation fees charged to the
customer, as equipment revenues at the time of the sale. In
December 2003, the SEC staff issued SAB No. 104,
Revenue Recognition in Financial Statements,
which updated SAB No. 101 to reflect the impact of the
issuance of EITF
No. 00-21.
For arrangements entered into prior to July 1, 2003, we
continue to amortize the revenues and costs previously deferred
as was required by SAB No. 101. For the years ended
December 31, 2005, 2004 and 2003, we recognized
$13.5 million, $24.0 million and $29.7 million,
respectively, of activation fees and handset equipment revenues
and equipment costs that had been previously deferred. The table
below shows the recognition of service revenues, equipment
revenues and cost of equipment revenues (handset costs) on a pro
forma basis adjusted to exclude the impact of
SAB No. 101 and as if EITF
No. 00-21 had been
historically recorded for all customer arrangements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amount) | |
Service revenues
|
|
$ |
1,692,981 |
|
|
$ |
1,287,604 |
|
|
$ |
963,380 |
|
|
|
|
|
|
|
|
|
|
|
Equipment revenues
|
|
$ |
95,207 |
|
|
$ |
65,526 |
|
|
$ |
55,393 |
|
|
|
|
|
|
|
|
|
|
|
Cost of equipment revenues
|
|
$ |
164,798 |
|
|
$ |
128,551 |
|
|
$ |
114,597 |
|
|
|
|
|
|
|
|
|
|
|
Income (Loss) attributable to common stockholders
|
|
$ |
605,352 |
|
|
$ |
53,746 |
|
|
$ |
(211,636 |
) |
|
|
|
|
|
|
|
|
|
|
Income (Loss) per share attributable to common stockholders,
basic
|
|
$ |
2.24 |
|
|
$ |
0.20 |
|
|
$ |
(0.84 |
) |
|
|
|
|
|
|
|
|
|
|
Income (Loss) per share attributable to common stockholders,
diluted
|
|
$ |
1.96 |
|
|
$ |
0.19 |
|
|
$ |
(0.84 |
) |
|
|
|
|
|
|
|
|
|
|
87
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
Costs related to advertising and other promotional expenditures
are expensed as incurred. Advertising costs totaled
approximately $75.2 million, $57.0 million and
$39.1 million for the years ended December 31, 2005,
2004 and 2003, respectively. In addition, as of
December 31, 2005 and 2004, prepaid expenses included
$1.7 million and $1.0 million, respectively, of
prepaid advertising costs.
In relation to the issuance of long-term debt discussed in
Note 5, we incurred a cumulative total of
$24.8 million, $43.2 million and $61.8 million in
deferred financing costs as of December 31, 2005, 2004 and
2003, respectively. These debt issuance costs are being
amortized over the terms of the underlying obligation. For the
years ended December 31, 2005, 2004 and 2003,
$3.3 million, $3.9 million and $5.2 million of
debt issuance costs, respectively, were amortized and included
in interest expense.
For the year ended December 31, 2005, we wrote off
$4.6 million in net deferred financing costs related to our
repurchase for cash of our remaining 11% senior notes and
121/2% senior
notes, the conversion of
11/2% convertible
notes and the repayment by us on our borrowings under our
tranche C term loan. The amount related to the conversion
of our
11/2% convertible
notes is recorded in equity.
For the year ended December 31, 2004, we wrote off
$9.8 million in net deferred financing costs related to our
repurchase for cash of our remaining 14% senior discount
notes and 11% senior notes and the repayment by us of our
borrowings under our tranche B term loan.
In December 2002, the FASB issued SFAS No. 148,
Accounting for Stock Based Compensation
Transition and Disclosure. This statement amends
SFAS No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method
of accounting for stock-based employee compensation. We continue
to apply the intrinsic value method for stock-based compensation
to employees prescribed by Accounting Principles Board Opinion
(APB) No. 25, Accounting for Stock
Issued to Employees. We have provided the disclosures
required by SFAS No. 148.
88
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
As required by SFAS No. 148, had compensation cost
been determined based upon the fair value of the awards granted
in 2005, 2004 and 2003 our net income (loss) and basic and
diluted income (loss) per share would have changed to the pro
forma amounts indicated below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
|
|
(In thousands, except per share amounts) | |
Net income (loss), as reported
|
|
$ |
605,352 |
|
|
$ |
53,746 |
|
|
$ |
(211,636 |
) |
Add: stock-based employee compensation expense included in
reported net income (loss), net of tax of $248, $0 and $0,
respectively
|
|
|
391 |
|
|
|
755 |
|
|
|
1,092 |
|
Deduct: total stock-based employee compensation expense
determined under fair-value-based method for all awards, net of
tax of $14,167, $0 and $0, respectively
|
|
|
(22,337 |
) |
|
|
(24,523 |
) |
|
|
(25,248 |
) |
Add: prior periods tax effects
|
|
|
16,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As adjusted, net income (loss)
|
|
$ |
599,878 |
|
|
$ |
29,978 |
|
|
$ |
(235,792 |
) |
|
|
|
|
|
|
|
|
|
|
Basic income (loss) per share attributable to common
stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
2.24 |
|
|
$ |
0.20 |
|
|
$ |
(0.84 |
) |
|
|
|
|
|
|
|
|
|
|
As adjusted
|
|
$ |
2.22 |
|
|
$ |
0.11 |
|
|
$ |
(0.93 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted income (loss) per share attributable to common
stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
$ |
1.96 |
|
|
$ |
0.19 |
|
|
$ |
(0.84 |
) |
|
|
|
|
|
|
|
|
|
|
As adjusted
|
|
$ |
1.96 |
|
|
$ |
0.11 |
|
|
$ |
(0.93 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average fair value per share of options granted
|
|
$ |
7.64 |
|
|
$ |
8.37 |
|
|
$ |
4.84 |
|
|
|
|
|
|
|
|
|
|
|
The fair value of each option grant and employee stock purchase
is estimated on the date of grant using the Black-Scholes
option-pricing model as prescribed by SFAS No. 148
using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 | |
|
2004 | |
|
2003 | |
|
|
| |
|
| |
|
| |
Expected stock price volatility
|
|
|
30% - 43% |
|
|
|
50% - 70% |
|
|
|
74% - 85% |
|
Risk-free interest rate
|
|
|
3.7% - 4.3% |
|
|
|
3.1% - 3.4% |
|
|
|
3.6% - 3.8% |
|
Expected life in years option grants
|
|
|
4 years |
|
|
|
4-5 years |
|
|
|
6 years |
|
Expected life in years employee
|
|
|
|
|
|
|
|
|
|
|
|
|
stock purchase plan
|
|
|
.25 years |
|
|
|
.25 years |
|
|
|
.25 years |
|
Expected dividend yield
|
|
|
0.00% |
|
|
|
0.00% |
|
|
|
0.00% |
|
The Black-Scholes option-pricing model requires the input of
subjective assumptions and does not necessarily provide a
reliable measure of fair value.
The fair value of each restricted stock grant is based on the
market value on the date of the grant.
89
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
We recognize deferred tax assets and liabilities based on
differences between the financial reporting and tax bases of
assets and liabilities, applying enacted statutory rates in
effect for the year in which the differences are expected to
reverse. Pursuant to the provisions of SFAS No. 109,
Accounting For Income Taxes, we provide
valuation allowances for deferred tax assets for which we do not
consider realization of such assets to be more likely than not.
See Note 7, Income Taxes.
SFAS No. 131 requires companies to disclose certain
information about operating segments. Based on the criteria
within SFAS No. 131, we have determined that we have
one reportable segment: wireless services.
Certain amounts in prior years financial statements have
been reclassified to conform to the current year presentation.
|
|
|
Asset Retirement Obligations |
During 2003, we adopted SFAS No. 143,
Accounting for Asset Retirement Obligations,
which addresses financial accounting and reporting for
obligations associated with the reporting of obligations
associated with the retirement of tangible long-lived assets and
associated asset retirement obligations (ARO). Under
the scope of this pronouncement, we have ARO associated with our
removal of equipment from the cell sites and towers that we
lease from third parties. The ARO liability was approximately
$177,000 and $184,000 as of December 31, 2005 and 2004,
respectively.
|
|
|
Recently Issued Accounting Pronouncements |
In November 2004, the FASB issued SFAS No. 151,
Inventory Costs, which clarifies the
accounting for abnormal amounts of idle facility expense,
freight, handling costs and wasted material (spoilage).
SFAS No. 151 amends ARB No. 43, Chapter 4,
Inventory Pricing. We adopted
SFAS No. 151 effective July 1, 2005 without any
impact to our financial statements.
In December 2004, the FASB issued SFAS No. 123R
(revised 2004), Share Based Payment, which
focuses primarily on accounting for transactions in which an
entity obtains employee services in share-based payment
transactions. SFAS No. 123R replaces
SFAS No. 123 Accounting for Stock-Based
Compensation, which superceded APB No. 25,
Accounting for Stock Issued to Employees. We
will continue to apply the intrinsic value method for
stock-based compensation to employees prescribed by APB
No. 25 and provide the disclosures as required by
SFAS No. 148, Accounting for Stock Based
Compensation-Transition and Disclosure, until
SFAS No. 123R becomes effective (for full fiscal years
ending after June 15, 2005, which is January 1, 2006
for us). Upon implementation of SFAS No. 123R, we will
recognize in the income statement the grant-date fair value of
stock options and other equity-based compensation issued to
employees. We expect our stock-based compensation expense to
increase by approximately $20.1 million and will not
recognize a deferred compensation component in equity upon
adoption of SFAS No. 123R. In March 2005, the SEC
issued SAB No. 107, Share Based
Payment, and throughout 2005 the FASB issued FASB
Staff Positions FAS 123(R)-1, FAS 123(R)-2 and
FAS 123(R)-3 which provided additional guidance for
adoption of SFAS No. 123R and are also effective for
us January 1, 2006.
In December 2004, the FASB issued SFAS No. 153,
Exchange of Nonmonetary Assets, which
requires nonmonetary exchanges to be accounted for at fair
value. SFAS No. 153 amends APB No. 29,
90
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
Accounting for Nonmonetary Transactions,
which was issued in May 1973. We adopted
SFAS No. 153 effective July 1, 2005 without any
impact to our financial statements.
In March 2005, the FASB issued FASB Interpretation No. 47,
Accounting for Conditional Asset Retirement
Obligations (FIN 47), which clarifies
that an entity is required to recognize a liability for the fair
value of a conditional asset retirement obligation when incurred
if the liabilitys fair value can be reasonably estimated.
We believe there will be no material impact on our financial
statements upon adoption of FIN 47, which becomes effective
for fiscal years ending after December 15, 2005.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections,
which changes the requirements for the accounting for and
reporting of a change in accounting principle. SFAS No. 154
replaces APB No. 20, Accounting Changes,
and SFAS No. 3, Reporting Accounting
Changes in Interim Financial Statements. We will adopt
this standard for accounting changes and corrections of errors
made after December 15, 2005.
In June 2005, the EITF reached final consensus on
issue 05-6,
Determining the Amortization Period for Leasehold
Improvements, related to the amortization period for
subsequently acquired leasehold improvements. We adopted
EITF 05-6
effective July 1, 2005 without any impact to our financial
statements.
In October 2005, the FASB issued FASB Staff Position
FAS 13-1,
Accounting for Rental Costs Incurred during a
Construction Period, which will eliminate
capitalization of rent after January 1, 2006. We believe
there will be no material impact to our financial statements
upon adoption.
In November 2005, the FASB issued FASB Staff Positions
FAS 115-1 and FAS 124-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments, which amends
EITF 03-1 and
addresses the determination as to when a investment is
considered impaired, whether that impairment is other than
temporary, and the measurement of an impairment loss. We believe
there will be no material impact to our financial statements
upon adoption on January 1, 2006.
In 2002, we entered into an agreement with a third party for a
sale-leaseback of certain switch equipment. The closing of this
transaction resulted in proceeds to us of approximately
$28 million. The gain was initially deferred on this
transaction and is being amortized over the lease term. Our
lease for the equipment qualifies as a capital lease. The
following was recorded as equipment in property and equipment
(see Note 3 below) under capital lease:
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Equipment
|
|
$ |
27,453 |
|
|
$ |
27,453 |
|
Accumulated amortization
|
|
|
(12,748 |
) |
|
|
(8,866 |
) |
|
|
|
|
|
|
|
Net equipment
|
|
$ |
14,705 |
|
|
$ |
18,587 |
|
|
|
|
|
|
|
|
See also Note 5, Non-Current Portion of Long-Term Debt.
91
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
|
|
3. |
PROPERTY AND EQUIPMENT |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Equipment
|
|
$ |
1,546,814 |
|
|
$ |
1,363,923 |
|
Furniture, fixtures and software
|
|
|
145,492 |
|
|
|
125,299 |
|
Building and improvements
|
|
|
14,872 |
|
|
|
9,870 |
|
Less accumulated depreciation and amortization
|
|
|
(665,583 |
) |
|
|
(503,967 |
) |
|
|
|
|
|
|
|
Subtotal
|
|
|
1,041,595 |
|
|
|
995,125 |
|
Construction in progress
|
|
|
37,455 |
|
|
|
47,593 |
|
|
|
|
|
|
|
|
Total property and equipment
|
|
$ |
1,079,050 |
|
|
$ |
1,042,718 |
|
|
|
|
|
|
|
|
For the years ended December 31, 2005, 2004 and 2003, we
recorded depreciation and amortization expense of
$170.1 million, $149.7 million and
$135.4 million, respectively, including $3.9 million,
$3.9 million and $3.9 million, respectively, for
assets under capital lease.
|
|
4. |
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Accrued payroll and related
|
|
$ |
35,019 |
|
|
$ |
37,303 |
|
Customer deposits
|
|
|
26,470 |
|
|
|
14,160 |
|
Accrued interest
|
|
|
22,564 |
|
|
|
26,051 |
|
Other accrued expenses
|
|
|
18,897 |
|
|
|
10,663 |
|
Accrued network and interconnect
|
|
|
6,184 |
|
|
|
3,125 |
|
Current portion of capital leases
|
|
|
3,817 |
|
|
|
3,500 |
|
Accrued advertising
|
|
|
3,504 |
|
|
|
3,184 |
|
Inventory in transit
|
|
|
991 |
|
|
|
17,461 |
|
|
|
|
|
|
|
|
Total accrued expenses and other current liabilities
|
|
$ |
117,446 |
|
|
$ |
115,447 |
|
|
|
|
|
|
|
|
92
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
|
|
5. |
NON-CURRENT PORTION OF LONG-TERM DEBT |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
(In thousands) | |
Bank Credit Facility tranche C and D term
loans, interest, at our option, calculated on Administrative
Agents alternate base rate or reserve adjusted LIBOR
|
|
$ |
550,000 |
|
|
$ |
700,000 |
|
81/8% Senior
Notes due 2011, net of $0.4 million discount, interest
payable semi-annually in cash and in arrears
|
|
|
474,643 |
|
|
|
474,593 |
|
11/2% Convertible
Senior Notes due 2008, interest payable semi-annually in cash
and in arrears
|
|
|
188,310 |
|
|
|
300,000 |
|
121/2% Senior
Discount Notes due 2009, net discount of $7.0 million
|
|
|
|
|
|
|
139,296 |
|
11% Senior Notes due 2010, interest payable semi-annually
in cash and in arrears
|
|
|
|
|
|
|
1,157 |
|
Capital leases
|
|
|
13,655 |
|
|
|
17,472 |
|
|
|
|
|
|
|
|
Total non-current portion of long-term debt
|
|
$ |
1,226,608 |
|
|
$ |
1,632,518 |
|
|
|
|
|
|
|
|
On May 23, 2005, OPCO refinanced its existing
$700.0 million tranche C term loan with a new
$550.0 million tranche D term loan. JPMorgan
Chase & Co. acted as sole bookrunner and arranger on
the transaction. The new credit facility includes a
$550.0 million tranche D term loan, a
$100.0 million revolving credit facility and an option to
request an additional $200.0 million of incremental term
loans. Such incremental term loans shall not exceed
$200.0 million or have a final maturity date earlier than
the maturity date for the tranche D term loan. The
tranche D term loan matures on May 31, 2012. The
revolving credit facility will terminate on the last business
day falling on or nearest to November 30, 2009. The
incremental term loans, if any, shall mature on the date
specified on the date the respective loan is made, provided that
such maturity date shall not be earlier than the maturity date
for the tranche D term loan. As of December 31, 2005,
$550.0 million of the tranche D term loan was
outstanding and no amounts were outstanding under either the
$100.0 million revolving credit facility or the incremental
term loans. The borrowings under the new term loan were used
along with company funds to repay OPCOs existing
tranche C term loan.
The tranche D term loan bears interest, at our option, at
the administrative agents alternate base rate or
reserve-adjusted LIBOR plus, in each case, applicable margins.
The initial applicable margin for the tranche D term loan
is 1.50% over LIBOR and 0.50% over the base rate. For the
revolving credit facility, the initial applicable margin is
3.00% over LIBOR and 2.00% over the base rate and thereafter
will be determined on the basis of the ratio of total debt to
annualized EBITDA and will range between 1.50% and 3.00% over
LIBOR and between 0.50% and 2.00% over the base rate. As of
December 31, 2005, the interest rate on the tranche D
term loan was 5.91%.
Borrowings under the term loans are secured by, among other
things, a first priority pledge of all assets of OPCO and all
assets of the subsidiaries of OPCO and a pledge of their
respective capital stock. The credit facility contains financial
and other covenants customary for the wireless industry,
including limitations on our ability to pay dividends and incur
additional debt or create liens on assets. The credit facility
also contains covenants requiring that we maintain certain
defined financial ratios. The credit facility does not restrict
the sale of our outstanding shares of Class A common stock
to Nextel WIP, as approved by our Class A common
stockholders on October 24, 2005 following the merger of
Nextel with
93
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
Sprint. In addition, we are not required to obtain the consent
of the lenders under our credit facility prior to completing the
sale of our outstanding shares of Class A common stock to
Nextel WIP.
|
|
|
81/8% Senior
Notes Due 2011 |
On June 23, 2003, we issued $450.0 million of
81/8% senior
notes due 2011 in a private placement. We subsequently exchanged
all of the
81/8% senior
notes due 2011 for registered notes having the same financial
terms and covenants as the privately placed notes. Interest
accrues for these notes at the rate of
81/8% per
annum, payable semi-annually in cash in arrears on January 1 and
July 1 of each year, which commenced on January 1,
2004.
On May 19, 2004, we issued an additional $25 million
of
81/8% senior
notes due 2011 under a separate indenture in a private placement
for proceeds of $24.6 million. We subsequently exchanged
all of the
81/8% senior
notes due 2011 for registered notes having the same financial
terms and covenants as the privately placed notes. Interest
accrues for these notes at the rate of
81/8% per
annum, payable semi-annually in cash in arrears on January 1 and
July 1 of each year, which commenced on July 1, 2004.
The
81/8% senior
notes due 2011 represent our senior unsecured obligations and
rank equally in right of payment to our entire existing and
future senior unsecured indebtedness and senior in right of
payment to all of our existing and future subordinated
indebtedness. The
81/8% senior
notes due 2011 are effectively subordinated to (i) all of
our secured obligations, including borrowings under the bank
credit facility, to the extent of assets securing such
obligations and (ii) all indebtedness including borrowings
under the bank credit facility and trade payables, of OPCO. Our
obligations under the indentures governing our
81/8% senior
notes shall continue following the closing of the put
transaction with Sprint Nextel.
|
|
|
11/2% Convertible
Senior Notes Due 2008 |
In May and June 2003, we issued an aggregate principal amount of
$175.0 million of
11/2% convertible
senior notes due 2008 in private placements. At the option of
the holders or upon change of control, these
11/2% convertible
senior notes due 2008 are convertible into shares of our
Class A common stock at an initial conversion rate of
131.9087 shares per $1,000 principal amount of notes, which
represents a conversion price of $7.58 per share, subject
to adjustment. Interest accrues for these notes at the rate of
11/2% per
annum, payable semi-annually in cash in arrears on May 15 and
November 15 of each year, which commenced on November 15,
2003. We subsequently filed a registration statement with the
SEC to register the resale of the
11/2% convertible
senior notes due 2008 and the shares of our Class A common
stock into which the
11/2% convertible
senior notes due 2008 are convertible. As of December 31,
2005, $88.3 million of these
11/2% convertible
senior notes due 2008 had been converted into
11,642,918 shares of our Class A common stock.
In addition, in August 2003 we closed a private placement of
$125.0 million of
11/2% convertible
senior notes due 2008. At the option of the holders or upon
change of control, these
11/2% convertible
senior notes due 2008 are convertible into shares of our
Class A common stock at an initial conversion rate of
78.3085 shares per $1,000 principal amount of notes, which
represents a conversion price of $12.77 per share, subject
to adjustment. Interest accrues for these notes at the rate of
11/2% per
annum, payable semi-annually in cash in arrears on May 15 and
November 15 of each year, which commenced on November 15,
2003. We subsequently filed a registration statement with the
SEC to register the resale of the
11/2% convertible
senior notes due 2008 and the shares of our Class A common
stock into which the
11/2% convertible
senior notes due 2008 are convertible. As of December 31,
2005, $23.4 million of these
11/2% convertible
senior notes due 2008 had been converted into
1,834,357 shares of our Class A common stock.
94
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
The
11/2% convertible
senior notes due 2008 represent our senior unsecured
obligations, and rank equally in right of payment to our entire
existing and future senior unsecured indebtedness and senior in
right of payment to all of our existing and future subordinated
indebtedness. The
11/2% convertible
senior notes due 2008 are effectively subordinated to
(i) all of our secured obligations, including borrowings
under the bank credit facility, to the extent of assets securing
such obligations and (ii) all indebtedness, including
borrowings under the bank credit facility and trade payables, of
OPCO.
Pursuant to the put right set forth in our charter, Sprint
Nextel has an obligation to purchase all of our outstanding
shares of Class A common stock, which will constitute a
fundamental change under the indentures governing
our outstanding
11/2% convertible
senior notes due 2008. As a result, each holder of our
outstanding
11/2% convertible
senior notes due 2008 will have the right, at each such
holders option, to require us to redeem all of such
holders notes subsequent to the closing of the put
transaction at a redemption price equal to 100% of the principal
amount thereof, together with accrued interest to, but
excluding, the redemption date.
|
|
|
121/2% Senior
Discount Notes Due 2009 |
On December 4, 2001, we issued in a private placement
$225.0 million of
121/2% senior
discount notes due 2009. These notes were issued at a discount
to their aggregate principal amount at maturity and generated
aggregate gross proceeds to us of approximately
$210.4 million. We subsequently exchanged all of these
121/2% senior
discount notes due 2009 for registered notes having the same
financial terms as the privately placed notes. Interest accrues
for these notes at the rate of
121/2% per
annum, payable semi-annually in cash in arrears on May 15 and
November 15, which commenced on May 15, 2002. During
August 2003, we repurchased for cash $11.1 million
(principal amount at maturity) of our
121/2% senior
discount notes due 2009 in open-market purchases. On
December 31, 2003 we completed the redemption of
$67.7 million (principal amount at maturity) of the notes
outstanding with net proceeds from our public offering in
November 2003.
On November 15, 2005 we completed redemption of the
outstanding
121/2% senior
discount notes due 2009, representing approximately
$146.2 million aggregate principal amount at maturity, for
a total redemption price of approximately $164.5 million,
including interest and premium. We used available cash to fund
the redemption. Upon completion of the redemption, the notes
were paid in full.
|
|
|
11% Senior Notes Due 2010 |
On March 28, 2005 we sent notice of redemption on our
outstanding 11% senior notes due 2010, representing
approximately $1.2 million aggregate principal amount at
maturity. We used available cash to fund the redemption, which
was consummated on April 29, 2005. Upon completion of the
redemption, the notes were paid in full.
95
NEXTEL PARTNERS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Continued)
|
|
|
Future Maturities of Long-Term Debt and Capital
Leases |
Scheduled annual maturities of long-term debt outstanding under
existing long-term debt agreements and the future minimum lease
payments under the capital leases together with the present
value of the net minimum lease payments as of December 31,
2005 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Maturities | |
|
|
| |
|
|
Long-Term Debt | |
|
Capital Leases | |
|
Total | |
|
|
| |
|
| |
|
| |
|
|
|
|
(In thousands) | |
|
|
2006
|
|
$ |
|
|
|
$ |
5,227 |
|
|
$ |
5,227 |
|
2007
|
|
|
4,125 |
|
|
|
5,227 |
|
|
|
9,352 |
|
2008
|
|
|
193,810 |
|
|
|
5,227 |
|
|
|
199,037 |
|
2009
|
|
|
5,500 |
|
|
|
5,227 |
|
|
|
10,727 |
|
2010
|
|
|
5,500 |
|
|
|
|
|
|
|
5,500 |
|
Thereafter
|
|
|
1,004,375 |
|
|
|
|
|
|
|
1,004,375 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,213,310 |
|
|
|
20,908 |
|
|
|
1,234,218 |
|
Less unamortized discount and interest(1)
|
|
|
(357 |
) |
|
|
(3,436 |
) |
|
|
(3,793 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,212,953 |
|
|
|
17,472 |
|
|
|
1,230,425 |
|
Current portion of capital lease obligation
|
|
|
|
|
|
|
(3,817 |
) |
|
|
(3,817 |
) |
|
|
|
|
|
|
|
|
|
|
Long-term debt and capital lease obligations
|
|
$ |
1,212,953 |
|
|
$ |
13,655 |
|
|
$ |
1,226,608 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
Interest calculated for the capital leases is based on the
implicit rate in the lease agreement. |
|
|
6. |
FAIR VALUE OF FINANCIAL INSTRUMENTS |
Fair value estimates, assumptions and methods used to estimate
the fair value of our financial instruments are made in
accordance with the requirements of SFAS No. 107,
Disclosures about Fair Value of Financial
Instruments. We used quoted market prices to derive
our estimates for the 11% senior notes due 2010, the
121/2% senior
notes due 2009, the
11/2% convertible
senior notes due 2008 and the
81/8% senior
notes due 2011. For the tranche C and D term loans we
estimated the fair value to be the same as the carrying amount
due to the variable rate nature of the loan facilities. The
carrying amount and fair value for the interest rate swap
agreements covering our outstanding credit facilities are the
same since we record the fair value on the balance sheet each
month and are derived from valuation statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, | |
|
|
| |
|
|
2005 | |
|
2004 | |
|
|
| |
|
| |
|
|
Carrying | |
|
Estimated | |
|
Carrying | |
|
Estimated | |
|
|
Amount | |
|
Fair Value | |
|
Amount | |
|
Fair Value | |
|
|
| |
|
| |
|
| |
|
| |
|
|
|
|
(In millions) | |
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11% senior notes due 2010
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
1.2 |
|
|
$ |
1.2 |
|
121/2% senior
notes due 2009
|
|
|
N/A |
|
|
|
N/A |
|
|
$ |
139.3 |
|
|
$ |
158.1 |
|
11/2% convertible
senior notes due 2008
|
|
$ |
188.3 |
|
|
$ |
541.8 |
|
|
$ |
300.0 |
|
|
$ |
656.9 |
|
81/8% senior
notes due 2011
|
|
$ |
474.6 |
|
|
$ |
508.3 |
|
|
$ |
474.6 |
|
|
|