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8-K - 8-K - NII HOLDINGS INC | w77596e8vk.htm |
EX-23.1 - EXHIBIT 23.1 - NII HOLDINGS INC | w77596exv23w1.htm |
Exhibit 99.1
NII HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
The Financial Statements and Financial Statement Schedule set forth below have not been
revised to reflect events or developments subsequent to February 25, 2010, which was the date we
filed our Annual Report on Form 10-K for the year ended December 31, 2009, and do not modify or
update the disclosures in this Annual Report on Form 10-K that may have been affected by subsequent
events. The only change to the Financial Statements and Financial Statement Schedule from the
information provided in our Annual Report on Form 10-K for the year ended December 31, 2009 is the
addition of Note 14.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
CONSOLIDATED FINANCIAL STATEMENTS |
Consolidated Balance Sheets As of December 31, 2009 and 2008 |
Consolidated Statements of Operations For the Years Ended December 31, 2009, 2008 and 2007 |
Consolidated Statements of Changes in Stockholders Equity For the Years Ended December 31, 2009, 2008 and 2007 |
Consolidated Statements of Cash Flows For the Years Ended December 31, 2009, 2008 and 2007 |
Notes to Consolidated Financial Statements |
FINANCIAL STATEMENT SCHEDULE |
Schedule II Valuation and Qualifying Accounts |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of NII Holdings, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of operations, of changes in stockholders equity and of cash flows present fairly, in
all material respects, the financial position of NII Holdings, Inc. and its subsidiaries at
December 31, 2009 and 2008, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2009 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion, the accompanying
financial statement schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial statements. Also in our
opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2009, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Companys management is responsible for these financial statements and financial
statement schedule, for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in
Managements Report on Internal Control over Financial Reporting under Item 9A of the Companys
2009 Annual Report on Form 10-K. Our responsibility is to express opinions on these financial
statements, on the financial statement schedule, and on the Companys internal control over
financial reporting based on our integrated audits. We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective internal control over
financial reporting was maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audits
also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 9 to the consolidated financial statements, the Company changed the
manner in which it accounts for uncertain income tax positions in 2007. Additionally, as discussed
in Note 6 to the consolidated financial statements, the Company changed the manner in which it
measures fair value for financial assets and liabilities in 2008. Also, as discussed in Note 5 to
the consolidated financial statements, the Company changed the manner in which it accounts for
convertible debt instruments that may be settled in cash upon conversion (including partial cash
settlement) in 2009.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
McLean, Virginia
February 25, 2010, except with respect to our opinion on the consolidated financial statements
insofar as it relates to the guarantor condensed consolidating financial information discussed in
Note 14, as to which the date is March 8, 2010.
NII HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except par values)
CONSOLIDATED BALANCE SHEETS
(in thousands, except par values)
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
ASSETS |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 2,504,064 | $ | 1,243,251 | ||||
Short-term investments |
116,289 | 82,002 | ||||||
Accounts receivable, less allowance for doubtful accounts of $35,148 and $27,875 |
613,591 | 454,769 | ||||||
Handset and accessory inventory |
188,476 | 139,285 | ||||||
Deferred income taxes, net |
148,498 | 135,265 | ||||||
Prepaid expenses and other |
220,210 | 130,705 | ||||||
Total current assets |
3,791,128 | 2,185,277 | ||||||
Property, plant and equipment, net |
2,502,189 | 1,892,113 | ||||||
Intangible assets, net |
337,233 | 317,878 | ||||||
Deferred income taxes, net |
494,343 | 429,365 | ||||||
Other assets |
429,800 | 265,440 | ||||||
Total assets |
$ | 7,554,693 | $ | 5,090,073 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 186,996 | $ | 136,442 | ||||
Accrued expenses and other |
599,209 | 446,270 | ||||||
Deferred revenues |
136,533 | 116,267 | ||||||
Accrued interest |
42,415 | 13,166 | ||||||
Current portion of long-term debt |
564,544 | 99,054 | ||||||
Total current liabilities |
1,529,697 | 811,199 | ||||||
Long-term debt |
3,016,244 | 2,034,086 | ||||||
Deferred revenues |
22,071 | 29,616 | ||||||
Deferred credits |
93,932 | 144,397 | ||||||
Other long-term liabilities |
145,912 | 158,652 | ||||||
Total liabilities |
4,807,856 | 3,177,950 | ||||||
Commitments and contingencies (Note 7) |
||||||||
Stockholders equity |
||||||||
Undesignated preferred stock, par value $0.001, 10,000 shares authorized
2009 and 2008, no shares issued or outstanding 2009 and 2008 |
| | ||||||
Common stock, par value $0.001, 600,000 shares authorized 2009 and 2008,
166,730 shares issued and outstanding 2009, 165,782 shares issued and
outstanding 2008 |
166 | 166 | ||||||
Paid-in capital |
1,239,541 | 1,158,925 | ||||||
Retained earnings |
1,674,898 | 1,293,407 | ||||||
Accumulated other comprehensive loss |
(167,768 | ) | (540,375 | ) | ||||
Total stockholders equity |
2,746,837 | 1,912,123 | ||||||
Total liabilities and stockholders equity |
$ | 7,554,693 | $ | 5,090,073 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
NII HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Operating revenues |
||||||||||||
Service and other revenues |
$ | 4,153,548 | $ | 4,048,466 | $ | 3,184,696 | ||||||
Digital handset and accessory revenues |
244,051 | 220,914 | 111,599 | |||||||||
4,397,599 | 4,269,380 | 3,296,295 | ||||||||||
Operating expenses |
||||||||||||
Cost of service (exclusive of depreciation and amortization included below) |
1,225,222 | 1,110,927 | 850,934 | |||||||||
Cost of digital handset and accessory sales |
623,733 | 585,391 | 443,760 | |||||||||
Selling, general and administrative |
1,438,463 | 1,400,642 | 1,077,893 | |||||||||
Depreciation |
404,062 | 372,542 | 290,302 | |||||||||
Amortization |
29,242 | 32,578 | 14,727 | |||||||||
3,720,722 | 3,502,080 | 2,677,616 | ||||||||||
Operating income |
676,877 | 767,300 | 618,679 | |||||||||
Other income (expense) |
||||||||||||
Interest expense, net |
(218,844 | ) | (205,516 | ) | (160,642 | ) | ||||||
Interest income |
25,586 | 68,411 | 67,429 | |||||||||
Foreign currency transaction gains (losses), net |
104,866 | (120,572 | ) | 19,008 | ||||||||
Debt conversion expense |
| | (25,753 | ) | ||||||||
Loss on extinguishment of debt |
| | (6,311 | ) | ||||||||
Other expense, net |
(2,308 | ) | (28,806 | ) | (1,914 | ) | ||||||
(90,700 | ) | (286,483 | ) | (108,183 | ) | |||||||
Income before income tax provision |
586,177 | 480,817 | 510,496 | |||||||||
Income tax provision |
(204,686 | ) | (138,862 | ) | (156,748 | ) | ||||||
Net income |
$ | 381,491 | $ | 341,955 | $ | 353,748 | ||||||
Net income, per common share, basic |
$ | 2.30 | $ | 2.05 | $ | 2.12 | ||||||
Net income, per common share, diluted |
$ | 2.27 | $ | 2.02 | $ | 2.02 | ||||||
Weighted average number of common shares outstanding, basic |
166,042 | 166,927 | 166,749 | |||||||||
Weighted average number of common shares outstanding, diluted |
174,014 | 175,290 | 184,256 | |||||||||
The accompanying notes are an integral part of these consolidated financial statements.
NII HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(in thousands)
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(in thousands)
Accumulated Other | ||||||||||||||||||||||||||||
Comprehensive (Loss) | ||||||||||||||||||||||||||||
Income | ||||||||||||||||||||||||||||
Unrealized | ||||||||||||||||||||||||||||
(Loss) Income | ||||||||||||||||||||||||||||
on | ||||||||||||||||||||||||||||
Derivatives | Cumulative | Total | ||||||||||||||||||||||||||
Common Stock | Paid-in | Retained | and | Translation | Stockholders | |||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Investments | Adjustment | Equity | ||||||||||||||||||||||
Balance, January 1, 2007 |
161,814 | $ | 162 | $ | 823,990 | $ | 606,296 | $ | (2,944 | ) | $ | (4,920 | ) | $ | 1,422,584 | |||||||||||||
Cumulative effect of adopting ASC 740-10 |
| | 1,239 | (8,592 | ) | | | (7,353 | ) | |||||||||||||||||||
Net income |
| | | 353,748 | | | 353,748 | |||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||||||
Foreign currency translation
adjustment, net of taxes |
| | | | | 79,553 | 79,553 | |||||||||||||||||||||
Other losses on available-for-sale
securities and derivatives, net of
income taxes |
| | | | 1,043 | | 1,043 | |||||||||||||||||||||
Total comprehensive income |
| | | | | | 434,344 | |||||||||||||||||||||
Purchase of common stock |
(7,402 | ) | (7 | ) | (500,080 | ) | | | | (500,087 | ) | |||||||||||||||||
Share-based payment expense for
equity-based awards |
| | 66,670 | | | | 66,670 | |||||||||||||||||||||
Reversal of deferred tax asset valuation
allowances |
| | 407,041 | | | | 407,041 | |||||||||||||||||||||
Conversion feature, net of income taxes
3.125% convertible notes |
| | 118,874 | | | | 118,874 | |||||||||||||||||||||
Equity issuance costs, net of income
taxes 3.125% convertible notes |
| | (2,268 | ) | | | | (2,268 | ) | |||||||||||||||||||
Conversion of 2.75% convertible notes
and 2.875% convertible notes to common
stock |
11,268 | 11 | 282,186 | | | | 282,197 | |||||||||||||||||||||
Exercise of stock options |
4,230 | 4 | 90,992 | | | | 90,996 | |||||||||||||||||||||
Tax benefits on exercise of stock options |
| | (33 | ) | | | | (33 | ) | |||||||||||||||||||
Tax benefit of prior periods stock
option exercises |
| | 7,794 | | | | 7,794 | |||||||||||||||||||||
Balance, December 31, 2007 |
169,910 | 170 | 1,296,405 | 951,452 | (1,901 | ) | 74,633 | 2,320,759 | ||||||||||||||||||||
Net income |
| | | 341,955 | | | 341,955 | |||||||||||||||||||||
Other comprehensive loss: |
||||||||||||||||||||||||||||
Foreign currency translation
adjustment, net of taxes |
| | | | | (613,649 | ) | (613,649 | ) | |||||||||||||||||||
Other losses on available-for-sale
securities and derivatives, net of
income taxes |
| | | | 542 | | 542 | |||||||||||||||||||||
Total comprehensive loss |
| | | | | | (271,152 | ) | ||||||||||||||||||||
Purchase of common stock |
(5,555 | ) | (5 | ) | (242,665 | ) | | | | (242,670 | ) | |||||||||||||||||
Share-based payment expense for
equity-based awards |
| | 71,414 | | | | 71,414 | |||||||||||||||||||||
Exercise of stock options |
1,427 | 1 | 33,771 | | | | 33,772 | |||||||||||||||||||||
Balance, December 31, 2008 |
165,782 | 166 | 1,158,925 | 1,293,407 | (1,359 | ) | (539,016 | ) | 1,912,123 | |||||||||||||||||||
Net income |
| | | 381,491 | | | 381,491 | |||||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||||||
Foreign currency translation
adjustment, net of taxes |
| | | | | 373,272 | 373,272 | |||||||||||||||||||||
Other losses on available-for-sale
securities and derivatives, net of
income taxes |
| | | | (665 | ) | | (665 | ) | |||||||||||||||||||
Total comprehensive income |
| | | | | | 754,098 | |||||||||||||||||||||
Tax deficiency on current period
exercise of stock options |
| | (5,267 | ) | | | | (5,267 | ) | |||||||||||||||||||
Share-based payment expense for
equity-based awards |
| | 70,213 | | | | 70,213 | |||||||||||||||||||||
Exercise of stock options |
948 | | 15,670 | | | | 15,670 | |||||||||||||||||||||
Balance, December 31, 2009 |
166,730 | $ | 166 | $ | 1,239,541 | $ | 1,674,898 | $ | (2,024 | ) | $ | (165,744 | ) | $ | 2,746,837 | |||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
NII HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net income |
$ | 381,491 | $ | 341,955 | $ | 353,748 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||
Amortization of debt financing costs |
8,480 | 7,846 | 6,044 | |||||||||
Amortization of debt discount |
49,922 | 45,982 | 34,334 | |||||||||
Depreciation and amortization |
433,304 | 405,120 | 305,029 | |||||||||
Provision for losses on accounts receivable |
86,961 | 80,628 | 46,360 | |||||||||
Foreign currency transaction (gains) losses, net |
(104,866 | ) | 120,572 | (19,008 | ) | |||||||
Deferred income tax (benefit) provision |
(24,783 | ) | (76,175 | ) | 38,469 | |||||||
Utilization of deferred credit |
| | (21,087 | ) | ||||||||
Share-based payment expense |
70,716 | 71,279 | 67,010 | |||||||||
Accretion of asset retirement obligations |
8,961 | 7,721 | 5,900 | |||||||||
(Gain) loss on short-term investments |
(2,210 | ) | 14,755 | 3,320 | ||||||||
Loss on extinguishment of debt |
| | 6,311 | |||||||||
Contingency reversals, net of charges |
(7,473 | ) | | (13,141 | ) | |||||||
Other, net |
(4,616 | ) | 1,801 | 2,616 | ||||||||
Change in assets and liabilities: |
||||||||||||
Accounts receivable, gross |
(184,640 | ) | (207,630 | ) | (166,645 | ) | ||||||
Handset and accessory inventory |
(7,284 | ) | (58,623 | ) | (35,766 | ) | ||||||
Prepaid expenses and other |
(53,202 | ) | (44,097 | ) | (33,729 | ) | ||||||
Other long-term assets |
2,054 | (63,365 | ) | (35,514 | ) | |||||||
Accounts payable, accrued expenses and other |
203,208 | 95,145 | 90,992 | |||||||||
Current deferred revenue |
8,558 | 31,067 | 21,526 | |||||||||
Deferred revenue and other long-term liabilities |
174 | 22,442 | 4,580 | |||||||||
Net cash provided by operating activities |
864,755 | 796,423 | 661,349 | |||||||||
Cash flows from investing activities: |
||||||||||||
Capital expenditures |
(649,578 | ) | (806,610 | ) | (624,309 | ) | ||||||
Payments for acquisitions, purchases of licenses and other |
(28,158 | ) | (10,579 | ) | (49,530 | ) | ||||||
Transfers to restricted cash |
(107,070 | ) | (2,335 | ) | (29,062 | ) | ||||||
Purchases of short-term investments |
(964,489 | ) | (672,875 | ) | (269,061 | ) | ||||||
Proceeds from sales of short-term investments |
959,368 | 799,730 | 23,927 | |||||||||
Other |
(6,433 | ) | 2,128 | 2,351 | ||||||||
Net cash used in investing activities |
(796,360 | ) | (690,541 | ) | (945,684 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from issuance of senior notes |
1,249,078 | | | |||||||||
Proceeds from issuance of convertible notes |
| | 1,200,000 | |||||||||
Payments to purchase common stock |
| (242,665 | ) | (500,087 | ) | |||||||
Borrowings under syndicated loan facilities |
| 125,000 | 175,000 | |||||||||
Borrowings under credit paper |
70,078 | | | |||||||||
Repayments under syndicated loan facilities |
(89,673 | ) | (57,744 | ) | (18,309 | ) | ||||||
Proceeds from stock option exercises |
15,671 | 33,772 | 90,996 | |||||||||
Proceeds from towers financing transactions |
| 27,271 | 29,827 | |||||||||
Proceeds from capital lease |
8,779 | | | |||||||||
(Payments of) borrowings under short-term notes payable |
(18,000 | ) | 18,000 | | ||||||||
Payment of debt financing costs |
(5,693 | ) | | (28,617 | ) | |||||||
Repayments under capital leases, tower financing transactions and other |
(14,934 | ) | (9,815 | ) | (5,440 | ) | ||||||
Net cash provided by (used in) financing activities |
1,215,306 | (106,181 | ) | 943,370 | ||||||||
Effect of exchange rate changes on cash and cash equivalents |
(22,888 | ) | (126,615 | ) | 2,539 | |||||||
Net increase (decrease) in cash and cash equivalents |
1,260,813 | (126,914 | ) | 661,574 | ||||||||
Cash and cash equivalents, beginning of year |
1,243,251 | 1,370,165 | 708,591 | |||||||||
Cash and cash equivalents, end of year |
$ | 2,504,064 | $ | 1,243,251 | $ | 1,370,165 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Operations and Significant Accounting Policies
Operations. We provide wireless communication services, primarily targeted at meeting the
needs of customers who use our services in their businesses and individuals that have medium to
high usage patterns, both of whom value our multi-function handsets, including our Nextel Direct
Connect® feature, and our high level of customer service. We provide these services
under the NextelTM brand through operating companies located in selected Latin
American markets, with our principal operations located in major business centers and related
transportation corridors of Mexico, Brazil, Argentina, Peru and Chile. We provide our services in
major urban and suburban centers with high population densities, which we refer to as major
business centers, where we believe there is a concentration of the countrys business users and
economic activity. We believe that vehicle traffic congestion, low wireline service penetration and
the expanded coverage of wireless networks in these major business centers encourage the use of the
mobile wireless communications services that we offer.
The services we offer include:
| mobile telephone service, including advanced calling features such as speakerphone, conference calling, voice-mail, call forwarding and additional line service; |
| Nextel Direct Connect® service, which allows subscribers anywhere on our network to talk to each other instantly, on a push-to-talk basis, for private one-to-one calls or group calls; |
| International Direct Connect® service, together with Sprint Nextel Corporation and TELUS Corporation, which allows subscribers to communicate instantly across national borders with our subscribers in Mexico, Brazil, Argentina, Peru and Chile, with Sprint Nextel subscribers using compatible handsets in the United States and with TELUS subscribers using compatible handsets in Canada; |
| text messaging services, mobile internet services, e-mail services including BlackberryTM services, location-based services, which include the use of global positioning system, or GPS, technologies, digital media services and advanced JavaTM enabled business applications; and |
| international roaming services. |
Use of Estimates. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Due to the inherent uncertainty involved in making estimates,
actual results to be reported in future periods could differ from our estimates.
Principles of Consolidation. The consolidated financial statements include the accounts of
NII Holdings, Inc. and our wholly-owned subsidiaries. Our decision to consolidate an entity is
based on our direct and indirect majority interest in the entity. We eliminate all significant
intercompany transactions, including intercompany profits and losses, in consolidation.
We refer to our subsidiaries by the countries in which they operate, such as Nextel Mexico,
Nextel Brazil, Nextel Argentina, Nextel Peru and Nextel Chile.
Concentrations of Risk. Substantially all of our revenues are generated from our operations
located in Mexico, Brazil, Argentina and Peru. Regulatory entities in each country regulate the
licensing, construction, acquisition, ownership and operation of our digital mobile networks, and
certain other aspects of our business, including some of the rates we charge our customers. Changes
in the current telecommunications statutes or regulations in any of these countries could adversely
affect our business. In addition, as of December 31, 2009 and 2008, approximately $4,765.0 million
and $3,614.4 million, respectively, of our assets were owned by Nextel Mexico and Nextel Brazil.
Political, financial and economic developments in Mexico and Brazil could impact the recoverability
of our assets.
Motorola is currently our sole source for most of the digital network equipment and
substantially all of the handsets used throughout our markets, except for the Blackberry handset,
which is manufactured by Research in Motion, or RIM. If Motorola fails to deliver system
infrastructure equipment and handsets or enhancements to the features and functionality of our
networks and handsets on a timely, cost-effective basis, we may not be able to adequately service
our existing customers or attract new customers. Nextel Communications, a subsidiary of Sprint
Nextel, is the largest customer of Motorola with respect to iDEN technology and, in the past, has
provided significant support with respect to new product development for that technology. Sprint
Nextels plans for the iDEN technology could affect Motorolas ability to provide support for the
development of new iDEN handset models, which could make it more difficult for us to compete
effectively in some of our markets where new handset styles and features are heavily valued by
customers. Lower levels of iDEN equipment purchases by Sprint Nextel could also significantly
increase our costs for equipment and new network features and handset developments and could impact
Motorolas decision to continue to support iDEN technology beyond its current commitments. We
expect to continue to rely principally on Motorola for the manufacture of a substantial portion of
the equipment necessary to construct, enhance and maintain our iDEN-based digital mobile networks
and for the manufacture of iDEN compatible handsets. Accordingly, if Motorola is unable to, or
determines not to, continue supporting or enhancing our iDEN-based infrastructure and handsets, our
business will be materially adversely affected. See Note 7 for more information.
Financial instruments that potentially subject us to significant amounts of credit risk
consist of cash, cash equivalents, short-term investments and accounts receivable. Our cash and
cash equivalents are deposited with high-quality financial institutions. At times, we maintain cash
balances in excess of Federal Deposit Insurance Corporation (or the foreign country equivalent
institution) limits. Our short-term investments are composed of investments made by Nextel Brazil
in two different investment funds. See Note 6 for further information. Our accounts receivable are
generally unsecured. In some cases, for certain higher risk customers, we require a customer
deposit. We routinely assess the financial strength of our customers and maintain allowances for
anticipated losses, where necessary.
Foreign Currency. In Mexico, Brazil, Argentina and Chile, the functional currency is the
local currency, while in Peru the functional currency is the U.S. dollar since it is the currency
used for substantially all transactions. We translate the results of operations for our non-U.S.
subsidiaries and affiliates from the designated functional currency to the U.S. dollar using
average exchange rates during the relevant period, while we translate assets and liabilities at the
exchange rate in effect at the reporting date. We translate equity balances at historical rates. We
report the resulting gains or losses from translating foreign currency financial statements as
other comprehensive income or loss. We remeasure Nextel Perus financial statements into U.S.
dollars and record remeasurement gains and losses in the statement of operations. For the years
ended December 31, 2009 and 2007, we reported remeasurement gains in our income tax provision of
$5.5 million and $2.2 million, respectively, both of which were related to Nextel Perus deferred
tax assets and liabilities. For the year ended December 31, 2008, we reported remeasurement losses
in our income tax provision of $3.2 million.
In general, monetary assets and liabilities designated in U.S. dollars give rise to foreign
currency realized and unrealized transaction gains and losses, which we record in the consolidated
statement of operations as foreign currency transaction gains, net. We report the effects of
changes in exchange rates associated with certain U.S. dollar-denominated intercompany loans and
advances to our foreign subsidiaries that are of a long-term investment nature as other
comprehensive income or loss in our consolidated financial statements. We have determined that
certain U.S. dollar-denominated intercompany loans and advances to Nextel Brazil and Nextel Chile
and an intercompany payable due to Nextel Mexico are of a long-term investment nature.
Supplemental Cash Flow Information.
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
(in thousands) | ||||||||||||
Capital expenditures |
||||||||||||
Cash paid for capital expenditures, including capitalized interest |
$ | 649,578 | $ | 806,610 | $ | 624,309 | ||||||
Change in capital expenditures accrued and unpaid or financed,
including accreted interest capitalized |
83,579 | 26,299 | 44,029 | |||||||||
$ | 733,157 | $ | 832,909 | $ | 668,338 | |||||||
Interest costs |
||||||||||||
Interest expense, net |
$ | 218,844 | $ | 205,516 | $ | 160,642 | ||||||
Interest capitalized |
12,472 | 10,345 | 7,251 | |||||||||
$ | 231,316 | $ | 215,861 | $ | 167,893 | |||||||
Acquisitions of assets and business combinations |
||||||||||||
Fair value of assets acquired |
$ | 28,158 | $ | 10,579 | $ | 49,530 | ||||||
Less: liabilities assumed and deferred tax liabilities incurred |
| | | |||||||||
Less: cash acquired |
| | | |||||||||
$ | 28,158 | $ | 10,579 | $ | 49,530 | |||||||
Cash paid for interest, net of amounts capitalized |
$ | 105,804 | $ | 118,080 | $ | 92,362 | ||||||
Cash paid for income taxes |
$ | 219,333 | $ | 247,419 | $ | 137,541 | ||||||
For the year ended December 31, 2009, we had $134.2 million in non-cash financing, primarily
related to the short-term financing of imported handsets and infrastructure in both Brazil and
Argentina, the financing of our new corporate aircraft, the financing of a mobile switching office
in Peru and co-location capital lease obligations on our communication towers. For the years ended
December 31, 2008 and 2007, we had $5.8 million and $13.9 million in non-cash financing activities
related to co-location capital lease obligations on our communication towers.
As discussed in Note 5, in the third quarter of 2007, 99.99% of the $300.0 million in
outstanding principal amount of our 2.875% convertible notes was converted into 11,268,103 shares
of our common stock.
Managed Services Agreements. We recently entered into an agreement with Nokia Siemens
Networks to manage our network operations infrastructure and a separate agreement with Hewlett
Packard to manage our information technology infrastructure throughout Latin America. In connection
with these agreements, about 10% of our employees are expected to transition to become employees of
these service providers. As a result, we recorded a pre-tax charge of $26.9 million in the fourth
quarter of 2009 for severance benefits under ASC 712, Compensation Non-Retirement
Post-Employment Benefits, related to the workforce transition. Of the $26.9 million total pre-tax
charge, we recorded $20.7 million in cost of service and $6.2 million in selling, general and
administrative costs. We expect the employee transition to occur, as well as the cash payments for
severance, during the first half of 2010.
Cash and Cash Equivalents. We consider all highly liquid investments with an original
maturity of three months or less at the time of purchase to be cash equivalents. Cash equivalents
primarily consist of money market funds and other similarly structured funds.
Restricted Cash. As of December 31, 2009, we had $144.9 million in restricted cash, $135.2
million of which was included in other assets and was largely comprised of a debt service reserve
account related to our syndicated loan in Brazil and cash collateral supporting the issuance of a
performance bond that was required in connection with our recent spectrum acquisition in Chile. The
remainder of our restricted cash is included in other current assets. As of December 31, 2008, we
did not have a material amount of restricted cash.
Short-Term Investments. Our short-term investments consist of investments made by Nextel
Brazil in two different investment funds. As of December 31, 2008, our short-term investments also
included the current portion of an investment in an enhanced cash fund similar to, but not in the
legal form of, a money market fund that invests primarily in asset backed securities. We classify
investments in debt securities as available-for-sale as of the balance sheet date and report them
at fair value. We record unrealized gains and losses, net of income tax, as other comprehensive
income or loss. During the years ended December 31, 2009, 2008 and 2007, we did not have any
material unrealized gains or losses for available-for-sale securities. We report realized gains or
losses, as determined on a specific identification basis, and other-than-temporary declines in
value, if any, in net other expense in our consolidated statement of operations. We assess declines
in the value of individual investments to determine whether the decline is other-than-temporary and
thus the investment is impaired. We make these assessments by considering available evidence,
including changes in general market conditions, specific industry and individual company data, the
length of time and the extent to which the market value has been less than cost, the financial
condition and near-term prospects of the individual company and our intent and ability to hold the
investment. See Note 6 for additional information.
Handset and Accessory Inventory. We record handsets and accessories at the lower of cost or
market. We determine cost by the weighted average costing method. We expense handset costs at the
time of sale and classify such costs in cost of digital handset and accessory sales. We write down
our inventory to cover losses related to obsolete and slow moving inventory. For the years ended
December 31, 2009, 2008 and 2007, our provision for inventory losses was $0.3 million, $5.2 million
and $1.9 million, respectively.
Property, Plant and Equipment. We record property, plant and equipment, including
improvements that extend useful lives or enhance functionality, at cost, while we charge
maintenance and repairs to operations as incurred. We capitalize internal and external costs
incurred to develop internal-use software, which consist primarily of costs related to
configuration, interfaces, installation and testing. We also capitalize internal and external costs
incurred to develop specified upgrades and enhancements if they result in significant additional
functionalities for our existing software. We expense all costs related to evaluation of software
needs, data conversion, training, maintenance and other post-implementation operating activities.
We calculate depreciation using the straight-line method based on estimated useful lives
ranging from 3 to 20 years for digital mobile network equipment and network software and 3 to 10
years for office equipment, furniture and fixtures, and other, which includes non-network internal
use software. We depreciate our corporate aircraft capital lease using the straight-line method
based on the lease term of 10 years. We include depreciation expense on our corporate aircraft
capital lease and other capital leases in accumulated depreciation. We amortize leasehold
improvements over the shorter of the lease terms or the useful lives of the improvements.
Construction in progress includes internal and external labor, materials, transmission and
related equipment, engineering, site development, interest and other costs relating to the
construction and development of our digital wireless networks. We do not depreciate assets under
construction until they are ready for their intended use. We capitalize interest and other costs,
including labor and software upgrades, which are applicable to the construction of, and significant
improvements that enhance functionality to, our digital mobile network equipment.
We periodically review the depreciation method, useful lives and estimated salvage value of
our property, plant and equipment and revise those estimates if current estimates are significantly
different from previous estimates.
Asset Retirement Obligations. We record an asset retirement obligation and an associated
asset retirement cost when we have a legal obligation in connection with the retirement of tangible
long-lived assets. Our obligations arise from certain of our leases and relate primarily to the
cost of removing our equipment from such leased sites. We report asset retirement obligations and
related asset retirement costs at fair value computed using discounted cash flow techniques. In
addition, we review the adequacy of asset retirement obligations on a regular basis and more often
if changes in events or circumstances warrant it. As of December 31, 2009 and 2008, our asset
retirement obligations were as follows (in thousands):
2009 | 2008 | |||||||
Balance, January 1 |
$ | 49,701 | $ | 41,186 | ||||
New asset retirement obligations |
5,071 | 7,291 | ||||||
Accretion |
8,961 | 7,721 | ||||||
Settlement of asset retirement obligations |
(4 | ) | (1,749 | ) | ||||
Foreign currency translation and other |
(682 | ) | (4,748 | ) | ||||
Balance, December 31 |
$ | 63,047 | $ | 49,701 | ||||
Derivative Financial Instruments. We enter into derivative transactions for hedging or risk
management purposes only. We have not and will not enter into any derivative transactions for
speculative or profit generating purposes. We formally document all relationships between hedging
instruments and hedged items, as well as our risk management objectives for undertaking various
hedge transactions before entering into the transaction.
We record our derivative financial instruments at fair value as either assets or liabilities.
We recognize changes in fair value either in earnings or equity, depending on the nature of the
underlying exposure being hedged and how effective the derivatives are at offsetting price
movements and the underlying exposure. We evaluate the effectiveness of our hedging relationships
both at the hedge inception and on an ongoing basis. Our derivative instruments are designated as
cash-flow hedges and are considered to be highly effective. We record the changes in fair value of
our derivatives financial instruments as other comprehensive income or loss until the underlying
hedged item is recognized in earnings. We recognize in earnings immediately any ineffective portion
of a derivatives change in fair value.
Valuation of Long-Lived Assets. We review for impairment long-lived assets such as property,
plant and equipment and identifiable intangible assets with definite useful lives, which includes
our licenses, whenever events or changes in circumstances indicate that the carrying amount may not
be recoverable. If the total of the expected undiscounted future cash flows of the asset or asset
group is less than the carrying amount of the asset, we recognize a loss, if any, for the
difference between the fair value and carrying value of the asset.
Intangible Assets. Our intangible assets are composed of wireless telecommunications licenses
and a trade name.
We amortize our intangible assets using the straight-line method over the estimated period
benefited. We amortize licenses acquired after our emergence from reorganization over their
estimated useful lives of 10 to 20 years. In the countries in which we operate, licenses are
customarily issued conditionally for specified periods of time ranging from 10 to 40 years,
including renewals. The licenses are generally renewable provided the licensee has complied with
applicable rules and policies. We believe we have complied with these standards in all material
respects. However, the political and regulatory environments in the markets we serve are
continuously changing and, in many cases, the renewal fees could be significant. Therefore, we do
not view the renewal of our licenses to be perfunctory. In addition, the wireless
telecommunications industry is experiencing significant technological change, and the commercial
life of any particular technology is difficult to predict. Most of our licenses give us the right
to use 800 MHz spectrum that is non-contiguous, and the iDEN technology is the only widespread,
commercially available digital technology that operates on non-contiguous spectrum. As a result,
our ability to deploy new technologies on our licensed 800MHz spectrum is limited. In light of the
uncertainty regarding the availability of alternative technologies and regarding the commercial
life of any technology, including the iDEN technology, our ability to use our 800MHz spectrum for
an indefinite period cannot be assured. As a result, we classify our licenses as finite lived
assets.
Revenue Recognition. Operating revenues primarily consist of service revenues and revenues
generated from the sale and rental of digital handsets and accessories. We present our operating
revenues net of value-added taxes, but we include certain revenue-based taxes for which we are the
primary obligor. Service revenues primarily include fixed monthly access charges for digital mobile
telephone service and digital two-way radio and other services, including revenues from calling
party pays programs where applicable and variable charges for airtime and digital two-way radio
usage in excess of plan minutes, long distance charges and international roaming revenues derived
from calls placed by our customers on other carriers networks.
We also have other sources of revenues. Other revenues primarily include amounts generated
from our handset maintenance programs, roaming revenues generated from other companies customers
that roam on our networks and co-location rental revenues from third party tenants that rent space
on our towers.
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred,
the sale price is fixed and determinable and collectibility is reasonably assured. The following
are the policies applicable to our major categories of revenue transactions.
We recognize revenue for access charges and other services charged at fixed amounts ratably
over the service period, net of credits and adjustments for service discounts and value-added
taxes. We recognize excess usage, local, long distance and calling party pays revenue at
contractual rates per minute as minutes are used. We record cash received in excess of revenues
earned as deferred revenues.
We recognize revenue generated from our handset maintenance programs on a monthly basis at
fixed amounts over the service period. We recognize roaming revenues at contractual rates per
minute as minutes are used. We recognize co-location revenues from third party tenants on a monthly
basis based on the terms set by the underlying agreements.
We bill excess usage to our customers in arrears. In order to recognize the revenues
originated from excess usage subsequent to customer invoicing through the end of the reporting
period, we estimate the unbilled portion based on the usage that the handset had during the part of
the month already billed, and we use the actual usage to estimate the unbilled usage for the rest
of the month taking into consideration working days and seasonality. Our estimates are based on our
experience in each market. We periodically evaluate our estimation process by comparing our
estimates to actual excess usage revenue billed the following month. As a result, actual usage
could differ from our estimates.
We recognize revenue from handset and accessory sales when title and risk of loss passes upon
delivery of the handset or accessory to the customer as this is considered to be a separate
earnings process from the sale of wireless services.
We recognized the proceeds received from our spectrum use and build-out agreement with Nextel
Communications as deferred revenues. We amortize this amount into revenue on a straight-line basis
over 15.5 years, which represents the average remaining useful life of our licenses in the Baja
region of Mexico as of the date we began providing service under this agreement.
Handsets Provided Under Leases. Our operating companies periodically provide handsets to our
customers under lease agreements. We evaluate each lease agreement at its inception to determine
whether the agreement represents a capital lease or an operating lease. Under capital lease
agreements, we expense the full cost of the handset at the inception of the lease term and
recognize digital handset sales revenue upon delivery of the handset to the customer and collection
of the up-front rental payment, which corresponds to the inception of the lease term. Under
operating lease agreements, we expense the cost of the handset in excess of the sum of the minimum
contractual revenues associated with the handset lease. We recognize revenue ratably over the lease
term. Revenue generated under the operating lease arrangement relates primarily to the up-front
rental payments required at the inception of lease terms.
Allowance for Doubtful Accounts. We establish an allowance for doubtful accounts receivable
sufficient to cover probable and reasonably estimated losses. Our methodology for determining our
allowance for doubtful accounts receivable requires significant estimates. Since we have over one
million accounts, it is impracticable to review the collectibility of all individual accounts when
we determine the amount of our allowance for doubtful accounts receivable each period. Therefore,
we consider a number of factors in establishing the allowance on a market-by-market basis,
including historical collection experience, current economic trends, estimates of forecasted
write-offs, agings of the accounts receivable portfolio and other factors. While we believe that
the estimates we use are reasonable, actual results could differ from those estimates.
Customer Related Direct Costs. We recognize all costs of handset sales when title and risk of
loss passes upon delivery of the handset to the customer.
Advertising Costs. We expense costs related to advertising and other promotional expenditures
as incurred. Advertising costs totaled $123.4 million, $109.9 million and $88.7 million during the
years ended December 31, 2009, 2008 and 2007, respectively.
Stock-Based Compensation. Effective January 1, 2006, we adopted the Financial Accounting
Standards Boards, or the FASBs, authoritative guidance surrounding share-based payments. In
accordance with this guidance, we used the modified prospective transition method and therefore did
not restate our prior periods results. Share-based payment expense for all share-based payment
awards granted after January 1, 2006 is estimated in accordance with the FASBs authoritative
guidance. We recognize these compensation costs net of actual forfeitures for only those shares
expected to vest on a straight-line basis over the requisite service period of the award. See Note
10 for more information.
Net Income Per Common Share, Basic and Diluted. Basic net income per common share includes no
dilution and is computed by dividing net income by the weighted average number of common shares
outstanding for the period. Diluted net income per common share reflects the potential dilution of
securities that could participate in our earnings.
As presented for the year ended December 31, 2009, our calculation of diluted net income per
share includes common shares resulting from shares issuable upon the potential exercise of stock
options under our stock-based employee compensation plans and our restricted stock, as well as
common shares resulting from the potential conversion of our 2.75% convertible notes. We did not
include the common shares resulting from the potential conversion of our 3.125% convertible notes
in our calculation of diluted net income per common share because their effect would have been
antidilutive to our net income per common share for that period. Further, for the year ended
December 31, 2009, we did not include 10.3 million in antidilutive stock options nor did we include
an immaterial amount of our restricted stock in our calculation of diluted net income per common
share because their effect would also have been antidilutive to our net income per common share for
that period.
As presented for the year ended December 31, 2008, our calculation of diluted net income per
share includes common shares resulting from shares issuable upon the potential exercise of stock
options under our stock-based employee compensation plans and our restricted stock, as well as
common shares resulting from the potential conversion of our 2.75% convertible notes. We did not
include the common shares resulting from the potential conversion of our 3.125% convertible notes
in our calculation of diluted net income per common share because their effect would have been
antidilutive to our net income per common share for that period. Further, for the year ended
December 31, 2008, we did not include 9.1 million in antidilutive stock options nor did we include
an immaterial amount of our restricted stock in our calculation of diluted net income per common
share because their effect would also have been antidilutive to our net income per common share for
that period.
As presented for the year ended December 31, 2007, our calculation of diluted net income per
share includes common shares resulting from shares issuable upon the potential exercise of stock
options under our stock-based employee compensation plans and our restricted stock, as well as
common shares resulting from the potential conversion of our 2.75% convertible notes. Our
calculation of diluted net income per share for the year ended December 31, 2007 also includes
shares that would have been issued had our 2.875% convertible notes been converted at the beginning
of the year instead of on the actual conversion date. We did not include the common shares
resulting from the potential conversion of our 3.125% convertible notes because their effect would
have been antidilutive to our net income per common share for that period. Further, for the year
ended December 31, 2007, we did not include 5.9 million in antidilutive stock options in our
calculation of diluted net income per common share because their effect would also have been
antidilutive to our net income per common share for that period.
The following tables provide a reconciliation of the numerators and denominators used to
calculate basic and diluted net income per common share as disclosed in our consolidated statements
of operations for the years ended December 31, 2009, 2008 and 2007:
Year Ended December 31, 2009 | ||||||||||||
Income | Shares | Per Share | ||||||||||
(Numerator) | (Denominator) | Amount | ||||||||||
(in thousands, except per share data) | ||||||||||||
Basic net income per common share: |
||||||||||||
Net income |
$ | 381,491 | 166,042 | $ | 2.30 | |||||||
Effect of dilutive securities: |
||||||||||||
Stock options |
| 707 | ||||||||||
Restricted stock |
| 277 | ||||||||||
Convertible notes, net of capitalized interest and taxes |
13,076 | 6,988 | ||||||||||
Diluted net income per common share: |
||||||||||||
Net income on which diluted earnings per share is calculated |
$ | 394,567 | 174,014 | $ | 2.27 | |||||||
Year Ended December 31, 2008 | ||||||||||||
Income | Shares | Per Share | ||||||||||
(Numerator) | (Denominator) | Amount | ||||||||||
(in thousands, except per share data) | ||||||||||||
Basic net income per common share: |
||||||||||||
Net income |
$ | 341,955 | 166,927 | $ | 2.05 | |||||||
Effect of dilutive securities: |
||||||||||||
Stock options |
| 1,121 | ||||||||||
Restricted stock |
| 252 | ||||||||||
Convertible notes, net of capitalized interest and taxes |
12,805 | 6,990 | ||||||||||
Diluted net income per common share: |
||||||||||||
Net income on which diluted earnings per share is calculated |
$ | 354,760 | 175,290 | $ | 2.02 | |||||||
Year Ended December 31, 2007 | ||||||||||||
Income | Shares | Per Share | ||||||||||
(Numerator) | (Denominator) | Amount | ||||||||||
(In thousands, except per share data) | ||||||||||||
Basic net income per common share: |
||||||||||||
Net income |
$ | 353,748 | 166,749 | $ | 2.12 | |||||||
Effect of dilutive securities: |
||||||||||||
Stock options |
| 3,633 | ||||||||||
Restricted stock |
| 524 | ||||||||||
Convertible notes, net of capitalized interest and taxes |
18,597 | 13,350 | ||||||||||
Diluted net income per common share: |
||||||||||||
Net income on which diluted earnings per share is calculated |
$ | 372,345 | 184,256 | $ | 2.02 | |||||||
Purchase of Common Stock. In January 2008, our Board of Directors authorized a program to
purchase shares of our common stock for cash. The Board approved the purchase of shares having an
aggregate market value of up to $500.0 million, depending on market conditions and other factors.
During the year ended December 31, 2008, we purchased a total of 5,555,033 shares of our common
stock for $242.7 million. During the year ended December 31, 2007, we purchased a total of
7,401,543 shares of our common stock for approximately $500.1 million under our first program to
purchase shares of our common stock for cash, which was approved by our Board of Directors in May
2007. We did not purchase any shares of our common stock during the year ended December 31, 2009.
We treat purchases of our common stock under this program as effective retirements of the purchased
shares and therefore reduce our reported shares issued and outstanding by the number of shares
purchased. In addition, we record the excess of the purchase price over the par value of the common
stock as a reduction to paid-in capital.
Income Taxes. We account for income taxes using the asset and liability method, under which
we recognize deferred income taxes for the tax consequences attributable to differences between the
financial statement carrying amounts and the tax bases of existing assets and liabilities, as well
as for tax loss carryforwards and tax credit carryforwards. We measure deferred tax assets and
liabilities using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recoverable or settled. We recognize the effect on
deferred taxes of a change in tax rates in income in the period that includes the enactment date.
We provide a valuation allowance against deferred tax assets if, based upon the weight of available
evidence, we do not believe it is more-likely-than-not that some or all of the deferred tax
assets will be realized. We report remeasurement gains and losses related to deferred tax assets
and liabilities in our income tax provision.
Historically, a substantial portion of our deferred tax asset valuation allowance related to
deferred tax assets that, if realized, would not result in a benefit to our income tax provision.
In accordance with the FASBs authoritative guidance on financial reporting by entities in
reorganization under the bankruptcy code, we recognize decreases in the valuation allowance
existing at the reorganization date first as a reduction in the carrying value of intangible assets
existing at the reorganization date of October 31, 2002 and then as an increase to paid-in capital.
As of December 31, 2004, we reduced to zero the carrying value of our intangible assets existing at
the reorganization date. In accordance with the FASBs updated authoritative guidance on business
combinations, effective beginning in 2009, we will record the future decreases, if any, of the
valuation allowance existing on the reorganization date as a reduction to income tax expense. We
will also record decreases, if any, of the post-reorganization valuation allowance as a reduction
to our income tax expense. Using a with-and-without method, in accordance with the FASBs updated
authoritative guidance on share-based payments, we recognize decreases in the valuation allowance
attributable to the excess tax benefits resulting from the exercise of employee stock options as an
increase to paid-in capital. In each market and in the U.S., we recognize decreases in the
valuation allowance first as a decrease in the remaining valuation allowance that existed as of the
reorganization date, then as a decrease in any post-reorganization valuation allowance, and finally
as a decrease of the valuation allowance associated with stock option deductions.
We assess the realizability of our deferred tax assets at each reporting period. Our
assessments generally consider several factors, including the reversal of existing deferred tax
temporary differences, projected future taxable income, tax planning strategies and historical and
future book income adjusted for permanent book-to-tax differences.
During 2009, we maintained our prior year position regarding the repatriation of foreign
earnings back to the U.S. As of December 31, 2008, we included a $55.1 million provision in
deferred tax liability for U.S. federal, state and foreign taxes with respect to future remittances
of certain undistributed earnings (other than income that has been previously taxed in the U.S.
under the subpart F rules) of certain of our foreign subsidiaries. This deferred tax liability
decreased by $35.7 million to $19.4 million as of December 31, 2009 due to a $38.3 million tax
effect on the distribution received from our Mexico and Argentine subsidiaries and a $2.6 million
increase due to the strengthening in the Mexican exchange rate against the U.S. dollar. Except for
the earnings associated with this $19.4 million provision, we currently have no intention to remit
any additional undistributed earnings of our foreign subsidiaries, other than income that has been
previously taxed in the U.S. under the subpart F rules. Should additional amounts of our foreign
subsidiaries undistributed earnings be remitted to the U.S. as dividends, we may be subject to
additional U.S. income taxes (net of allowable foreign tax credits) and foreign withholding taxes.
It is not practicable to estimate the amount of any additional taxes which may be payable on the
remaining undistributed earnings.
Reclassifications. We have reclassified some prior period amounts in our consolidated
financial statements to conform to our current year presentation. Specifically, for the year ended
December 31, 2007, we corrected the classification of $28.7 million from cost of service to cost of
digital handset and accessory sales related to costs incurred in connection with replacement
handsets sold to existing customers. This revision did not have a material impact on previously
reported balances. We did not reclassify any prior period amounts in our consolidated financial
statements during the year ended December 31, 2008.
New Accounting Pronouncements. In June 2009, the FASB updated its authoritative guidance on
the consolidation of variable interest entities, or VIEs, to require an ongoing qualitative
assessment to determine the primary beneficiary of the variable interest arrangement. This guidance
also amends the circumstances that would require a reassessment of whether an entity in which we
had a variable interest qualifies as a VIE and would be subject to the consolidation guidance in
this standard. The updated authoritative guidance will be effective for fiscal years beginning
after November 15, 2009. We are currently evaluating the potential impact, if any, that the
adoption of this guidance will have on our consolidated financial statements.
In October 2009, the FASB updated its authoritative guidance for accounting for multiple
deliverable revenue arrangements. The new guidance revises the criteria used to determine the
separate units of accounting in a multiple deliverable arrangement and requires that total
consideration received under the arrangement be allocated over the separate units of accounting
based on their relative selling prices. This guidance also clarifies the methodology used in
determining our best estimate of the selling price used in this allocation. The applicable revenue
recognition criteria will be considered separately for the separate units of accounting. The
updated authoritative guidance will be effective and shall be applied prospectively to revenue
arrangements entered into or materially modified in fiscal years beginning after June 15, 2010.
Early adoption is permitted but must be applied on a retroactive basis. We are currently evaluating
the potential impact, if any, that the adoption of this guidance will have on our consolidated
financial statements.
In August 2009, the FASB issued new authoritative guidance on the measurement and disclosure
of the fair value of liabilities and clarifies the valuation methodologies that may be used when a
quoted market price in an active market for an identical liability is not available. This guidance
will be effective in the first reporting period beginning after August 26, 2009. The adoption of
this guidance did not have a material impact on our consolidated financial statements.
In January 2010, the FASB updated its authoritative guidance on accounting for distributions
to shareholders with components of stock and cash. The amendments clarify that the stock portion of
a distribution to shareholders that allows them to elect to receive cash or stock with a potential
limitation on the total amount of cash that all shareholders can elect to receive in the aggregate
is considered a share issuance that is reflected in earnings per share prospectively and is not a
stock dividend. This updated authoritative guidance was effective for the year ended December 31,
2009. The implementation of this updated guidance did not have an impact to our consolidated
financial statements since we were already accounting for distributions in this manner.
In January 2010, the FASB amended its authoritative guidance on fair value measurements and
disclosures. This update added new requirements for disclosures about transfers into and out of
Levels 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating
to Level 3 measurements. It also clarified existing fair value disclosures about the level of
disaggregation and about inputs and valuation techniques used to measure fair value. This updated
guidance is effective for annual and interim reporting periods beginning after December 15, 2009,
except for the requirement to provide the Level 3 activity between purchases, sales, issuances and
settlements on a gross basis. That requirement is effective for fiscal years beginning after
December 15, 2010 and for interim periods within those fiscal years. We do not expect the adoption
of this new guidance to have a material impact on our consolidated financial statements.
2. Property, Plant and Equipment
The components of our property, plant and equipment are as follows:
December 31, | ||||||||
2009 | 2008 | |||||||
(in thousands) | ||||||||
Land |
$ | 7,365 | $ | 6,600 | ||||
Leasehold improvements |
122,364 | 84,663 | ||||||
Digital mobile network equipment and network software |
3,144,673 | 2,216,212 | ||||||
Office equipment, furniture and fixtures and other |
487,051 | 329,352 | ||||||
Corporate aircraft capital lease |
42,747 | 31,450 | ||||||
Less: Accumulated depreciation and amortization |
(1,451,219 | ) | (928,368 | ) | ||||
2,352,981 | 1,739,909 | |||||||
Construction in progress |
149,208 | 152,204 | ||||||
$ | 2,502,189 | $ | 1,892,113 | |||||
3. Intangible Assets
Our intangible assets consist of our licenses, customer base and trade name, all of which have
finite useful lives, as follows:
December 31, 2009 | December 31, 2008 | |||||||||||||||||||||||
Gross Carrying | Accumulated | Net Carrying | Gross Carrying | Accumulated | Net Carrying | |||||||||||||||||||
Value | Amortization | Value | Value | Amortization | Value | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Amortizable intangible assets: |
||||||||||||||||||||||||
Licenses |
$ | 426,888 | $ | (89,655 | ) | $ | 337,233 | $ | 373,315 | $ | (55,437 | ) | $ | 317,878 | ||||||||||
Trade name and other |
1,640 | (1,640 | ) | | 1,412 | (1,412 | ) | | ||||||||||||||||
Total intangible assets |
$ | 428,528 | $ | (91,295 | ) | $ | 337,233 | $ | 374,727 | $ | (56,849 | ) | $ | 317,878 | ||||||||||
The gross carrying value of our licenses as of December 31, 2009 primarily represent the
licenses we acquired in connection with our purchase of Cosmofrecuencias in Mexico during 2006.
Based solely on the carrying amount of amortizable intangible assets existing as of December
31, 2009 and current exchange rates, we estimate amortization expense for each of the next five
years ending December 31 to be as follows (in thousands):
Estimated | ||||
Amortization | ||||
Years | Expense | |||
2010 |
$ | 30,269 | ||
2011 |
30,878 | |||
2012 |
30,878 | |||
2013 |
30,878 | |||
2014 |
30,690 |
Actual amortization expense to be reported in future periods could differ from these estimates
as a result of additional acquisitions of intangibles, as well as changes in exchange rates and
other relevant factors. During the years ended December 31, 2009 and 2008, we did not acquire,
dispose of or write down any goodwill or intangible assets with indefinite useful lives.
4. Balance Sheet Details
Accrued Expenses and Other.
The components are as follows:
December 31, | December 31, | |||||||
2009 | 2008 | |||||||
(in thousands) | ||||||||
Non-income based taxes |
$ | 133,298 | $ | 52,918 | ||||
Payroll related items and commissions |
114,517 | 70,493 | ||||||
Network system and information technology |
77,281 | 60,333 | ||||||
Capital expenditures |
70,357 | 68,481 | ||||||
Other |
203,756 | 194,045 | ||||||
$ | 599,209 | $ | 446,270 | |||||
5. Debt
December 31, | ||||||||
2009 | 2008 | |||||||
(in thousands) | ||||||||
10.0% senior notes due 2016, net |
$ | 781,261 | $ | | ||||
8.875% senior notes due 2019, net |
495,946 | | ||||||
3.125% convertible notes due 2012 |
1,097,628 | 1,059,997 | ||||||
2.75% convertible notes due 2025 |
342,412 | 330,850 | ||||||
Brazil syndicated loan facility |
259,481 | 300,000 | ||||||
Mexico syndicated loan facility |
156,600 | 205,863 | ||||||
Tower financing obligations |
174,497 | 157,262 | ||||||
Capital lease obligations |
110,063 | 72,449 | ||||||
Other Brazil financings |
151,053 | | ||||||
Other |
11,847 | 6,719 | ||||||
Total debt |
3,580,788 | 2,133,140 | ||||||
Less: current portion |
(564,544 | ) | (99,054 | ) | ||||
$ | 3,016,244 | $ | 2,034,086 | |||||
High Yield Notes.
10.0% Senior Notes due 2016. In August 2009, we issued senior notes with $800.0 million
aggregate principal amount due at maturity for total cash proceeds of $762.5 million, after
deducting original issue discount and commissions. We also incurred $0.9 million in offering
expenses related to the issuance of the notes, which we will amortize into interest expense over
the term of the notes. The notes are senior unsecured obligations of NII Capital Corp., a domestic
subsidiary that we wholly own, and are guaranteed by us and by certain of our other domestic
wholly-owned subsidiaries. These guarantees are full and unconditional, as well as joint and
several. Subject to certain exceptions, the notes are equal in right of payment with any future
unsecured, unsubordinated indebtedness of NII Capital Corp. and of the guarantors of the notes,
including, but not limited to, with respect to NII Holdings guarantee, NII Holdings 3.125%
convertible notes and NII Holdings 2.75% convertible notes. The notes will also be senior to any
of NII Capital Corp.s future subordinated indebtedness. In addition, the notes are effectively
subordinated to all NII Capital Corp.s existing and future secured indebtedness, as well as to all
existing and future indebtedness of our subsidiaries that are not guarantors of the notes,
including the foreign subsidiaries that operate in each of our markets. The notes bear interest at
a rate of 10% per year, which is payable semi-annually in arrears on February 15 and August 15,
beginning on February 15, 2010. The notes will mature on August 15, 2016 when the entire principal
amount of $800.0 million will be due.
The notes are not entitled to any mandatory redemption or sinking fund. Prior to August 15,
2013, NII Capital Corp. may redeem the notes, in whole or in part, at a redemption price equal to
100% of the principal amount thereof plus a make-whole premium and accrued and unpaid interest.
At any time on or after August 15, 2013 and prior to maturity, the notes will be redeemable, in
whole or in part, at the redemption prices presented below (expressed as percentages of principal
amount), plus accrued and unpaid interest to the redemption date if redeemed during the 12-month
period beginning on August 15 of the applicable year:
Redemption | ||||
Year | Price | |||
2013 |
105.00 | % | ||
2014 |
102.50 | % | ||
2015 and thereafter |
100.00 | % |
Prior to August 15, 2012, up to 35% of the aggregate principal amount of the notes may be
redeemed with the net cash proceeds from specified equity offerings at a redemption price of 110%
of their principal amount, plus accrued and unpaid interest. Such redemption may only be made if,
after the redemption, at least 65% of the aggregate principal amount of the notes issued remains
outstanding.
Upon the occurrence of specified events involving a change of control, holders of the notes
may require us to purchase their notes at a purchase price equal to 101% of the principal amount of
the notes, plus accrued and unpaid interest.
The indenture governing the notes, among other things, limits our ability and the ability of
some of our subsidiaries to:
| incur additional indebtedness and issue preferred stock; | ||
| create liens or other encumbrances; | ||
| place limitations on distributions from some of our subsidiaries; | ||
| pay dividends, acquire shares of our capital stock or make investments; | ||
| prepay subordinated indebtedness or make other restricted payments; | ||
| issue or sell capital stock of some of our subsidiaries; | ||
| issue guarantees; | ||
| sell or exchange assets; | ||
| enter into transactions with affiliates; and | ||
| merge or consolidate with another entity. |
These covenants are subject to a number of qualifications and exceptions.
8.875% Senior Notes due 2019. In December 2009, we issued senior notes with $500.0 million
aggregate principal amount due at maturity for total cash proceeds of about $486.6 million, after
deducting original issue discount and commissions. We also incurred $0.5 million in offering
expenses related to the issuance of the notes, which we will amortize into interest expense over
the term of the notes. The notes are senior unsecured obligations of NII Capital Corp., a domestic
subsidiary that we wholly own, and are guaranteed by us and by certain of our other domestic
wholly-owned subsidiaries. These guarantees are full and unconditional, as well as joint and
several. Subject to certain exceptions, the notes are equal in right of payment with any future
unsecured, unsubordinated indebtedness of NII Capital Corp. and of the guarantors of the notes,
including, but not limited to, with respect to NII Holdings guarantee, NII Capital Corp.s
10.0% senior notes, NII Holdings 3.125% convertible notes and NII Holdings 2.75% convertible
notes. The notes will also be senior to any of NII Capital Corp.s future subordinated
indebtedness. In addition, the notes are effectively subordinated to all NII Capital Corp.s
existing and future secured indebtedness, as well as to all existing and future indebtedness of our
subsidiaries that are not guarantors of the notes, including the foreign subsidiaries that operate
in each of our markets. The notes bear interest at a rate of 8.875% per year, which is payable
semi-annually in arrears on June 15 and December 15, beginning on June 15, 2010. The notes will
mature on December 15, 2019 when the entire principal amount of $500.0 million will be due.
The notes are not entitled to any mandatory redemption or sinking fund. Prior to December 15,
2014, NII Capital Corp. may redeem the notes, in whole or in part, at a redemption price equal to
100% of the principal amount thereof plus a make-whole premium and accrued and unpaid interest.
At any time on or after December 15, 2014 and prior to maturity, the notes will be redeemable, in
whole or in part, at the redemption prices presented below (expressed as percentages of principal
amount), plus accrued and unpaid interest to the redemption date if redeemed during the 12-month
period beginning on December 15 of the applicable year:
Redemption | ||||
Year | Price | |||
2014 |
104.438 | % | ||
2015 |
102.958 | % | ||
2016 |
101.479 | % | ||
2017 and thereafter |
100.000 | % |
Prior to December 15, 2012, up to 35% of the aggregate principal amount of the notes may be
redeemed with the net cash proceeds from specified equity offerings at a redemption price of
108.875% of their principal amount, plus accrued and unpaid interest. Such redemption may only be
made if, after the redemption, at least 65% of the aggregate principal amount of the notes issued
remains outstanding. The remainder of the terms under our 8.875% senior notes are identical to the
terms contained in our 10.0% senior notes described above.
Convertible Notes.
3.125% Convertible Notes. In May 2007, we privately placed $1.0 billion aggregate principal
amount of 3.125% convertible notes due 2012, which we refer to as the 3.125% notes. In addition, we
granted the initial purchaser an option to purchase up to an additional $200.0 million principal
amount of 3.125% notes, which the initial purchaser exercised in full. As a result, we issued a
total of $1.2 billion principal amount of the 3.125% notes for which we received total gross
proceeds of $1.2 billion. We also incurred direct issuance costs of $22.8 million, which we
recorded as a deferred financing cost that we will amortize into interest expense over the term of
the 3.125% notes. Our 3.125% notes are senior unsecured obligations and rank equal in right of
payment with all of our other existing and future senior unsecured debt. Historically, some of our
long-term debt has been secured and may be secured in the future.
The 3.125% notes bear interest at a rate of 3.125% per annum on the principal amount of the
notes, payable semi-annually in arrears in cash on June 15 and December 15 of each year, beginning
December 15, 2007, and will mature on June 15, 2012, when the entire principal balance of
$1,200.0 million will be due. In addition, and subject to specified exceptions, the noteholders
have the right to require us to repurchase the notes at a repurchase price equal to 100% of their
principal amount, plus any accrued and unpaid interest (including additional amounts, if any) up
to, but excluding, the repurchase date upon the occurrence of a fundamental change.
The 3.125% notes are convertible into shares of our common stock at a conversion rate of
8.4517 shares per $1,000 principal amount of notes, or 10,142,040 aggregate common shares,
representing a conversion price of $118.32 per share. The 3.125% notes are convertible, subject to
adjustment, prior to the close of business on the final maturity date under any of the following
circumstances:
| during any fiscal quarter commencing after September 30, 2007, if the closing sale price of our common stock exceeds 120% of the conversion price of $118.32 for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter; | ||
| prior to May 15, 2012, during the five business day period after any five consecutive trading day period in which the trading price per note for each day of such period was less than 98% of the product of the closing sale price of our common stock and the number of shares issuable upon conversion of $1,000 principal amount of notes, or 10,142,040 aggregate common shares; | ||
| at any time on or after May 15, 2012; or | ||
| upon the occurrence of specified corporate events. |
For the fiscal quarter ended December 31, 2009, the closing sale price of our common stock did
not exceed 120% of the conversion price of $118.32 per share for at least 20 trading days in the 30
consecutive trading days ending on December 31, 2009. As a result, the conversion contingency was
not met as of December 31, 2009. We have the option to satisfy the conversion of the 3.125% notes
in shares of our common stock, in cash or a combination of both.
The conversion feature related to the trading price per note meets the criteria of an embedded
derivative in accordance with the FASBs authoritative guidance for derivatives. As a result, we
are required to separate the value of the conversion feature from the notes and record a liability
on our consolidated balance sheet. As of December 31, 2009, the conversion feature had a nominal
value, and therefore it did not have a material impact on our financial position or results of
operations. We will continue to evaluate the materiality of the value of this conversion feature on
a quarterly basis and record the resulting adjustment, if any, in our consolidated balance sheet
and statement of operations.
The conversion rate of the 3.125% notes is subject to adjustment if any of the following
events occur:
| we issue common stock as a dividend or distribution on our common stock; | ||
| we issue to all holders of common stock certain rights or warrants to purchase our common stock; | ||
| we subdivide or combine our common stock; | ||
| we distribute to all holders of our common stock shares of our capital stock, evidences of indebtedness or assets, including cash or securities but excluding the rights, warrants, dividends or distributions specified above; | ||
| we or one of our subsidiaries makes a payment in respect of a tender offer or exchange offer for our common stock to the extent that the cash and value of any other consideration included in the payment per share of common stock exceeds the current market price per share of common stock on the trading day next succeeding the last date on which tenders or exchanges may be made pursuant to this tender or exchange offer; or | ||
| someone other than us or one of our subsidiaries makes a payment in respect of a tender offer or exchange offer in which, as of the closing date of the offer, our board of directors is not recommending the rejection of the offer, subject to certain conditions. |
Neither we, nor any of our subsidiaries, are subject to any financial covenants under our
3.125% notes. In addition, the indenture governing our 3.125% notes does not restrict us or any of
our subsidiaries from paying dividends, incurring debt, or issuing or repurchasing our securities.
As presented for the years ended December 31, 2009, 2008 and 2007, our calculation of diluted
net income per share does not include the common shares resulting from the potential conversion of
our 3.125% convertible notes since their effect would have been antidilutive to our net income per
share for those periods.
2.75% Convertible Notes. In the third quarter of 2005, we privately placed $350.0 million
aggregate principal amount of 2.75% convertible notes due 2025, which we refer to as our
2.75% notes. We also incurred direct issuance costs of $9.0 million, which we recorded as deferred
financing costs on our consolidated balance sheet and are amortizing over five years. Our
2.75% notes are senior unsecured obligations and rank equal in right of payment with all of our
other existing and future senior unsecured debt. Historically, some of our long-term debt has been
secured and may be secured in the future. In addition, since we conduct all of our operations
through our subsidiaries, our 2.75% notes effectively rank junior in right of payment to all
liabilities of our subsidiaries. The 2.75% notes bear interest at a rate of 2.75% per year on the
principal amount of the notes, payable semi-annually in arrears in cash on February 15 and August
15 of each year, and will mature on August 15, 2025, when the entire principal balance of
$350.0 million will be due. The 2.75% notes were publicly registered, effective February 10, 2006.
The noteholders have the right to require us to repurchase the 2.75% notes on August 15 of
2010, 2012, 2015 and 2020 at a repurchase price equal to 100% of their principal amount, plus any
accrued and unpaid interest up to, but excluding, the repurchase date. In addition, if a
fundamental change or termination of trading, as defined, occurs prior to maturity, the noteholders
have a right to require us to repurchase all or part of the notes at a repurchase price equal to
100% of the principal amount, plus accrued and unpaid interest.
The 2.75% notes are convertible, at the option of the holder, into shares of our common stock
at an adjusted conversion rate of 19.967 shares per $1,000 principal amount of notes, or 6,988,370
aggregate common shares, representing a conversion price of about $50.08 per share. The 2.75% notes
are convertible, subject to adjustment, prior to the close of business on the final maturity date
under any of the following circumstances:
| during any fiscal quarter commencing after September 30, 2005 if the closing sale price of our common stock exceeds 120% of the conversion price of $50.08 for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter; | ||
| prior to July 15, 2010, during the five business day period after any five consecutive trading day period in which the trading price per note for each day of such period was less than 98% of the product of the closing sale price of our common stock and the number of shares issuable upon conversion of $1,000 principal amount of notes, or 6,988,370 aggregate common shares; |
| at any time on or after July 15, 2010; or | ||
| upon the occurrence of specified corporate events, including a fundamental change, as defined in the 2.75% note agreement, the issuance of certain rights or warrants or the distribution of certain assets or debt securities. |
For the fiscal quarter ended December 31, 2009, the closing sale price of our common stock did
not exceed 120% of the conversion price of $50.08 per share for at least 20 trading days in the 30
consecutive trading days ending on December 31, 2009. As a result, the conversion contingency was
not met as of December 31, 2009.
The conversion feature related to the trading price per note meets the criteria of an embedded
derivative in accordance with the FASBs authoritative guidance for derivatives. As a result, we
are required to separate the value of the conversion feature from the notes and record a liability
on our consolidated balance sheet. As of December 31, 2009 and 2008, the conversion feature had a
nominal value, and therefore it did not have a material impact on our financial position or results
of operations. We will continue to evaluate the materiality of the value of this conversion feature
on a quarterly basis and record the resulting adjustment, if any, in our consolidated balance sheet
and statement of operations.
Prior to August 20, 2010, the notes will not be redeemable. On or after August 20, 2010, we
may redeem for cash some or all of the notes, at any time and from time to time, upon at least
30 days notice for a price equal to 100% of the principal amount of the notes to be redeemed, plus
any accrued and unpaid interest up to but excluding the redemption date. The remainder of the terms
under our 2.75% convertible notes are identical to the terms contained in our 3.125% convertible
notes described above.
As presented for the years ended December 31, 2009, 2008 and 2007, our calculation of diluted
net income per share includes the common shares resulting from the potential conversion of our
2.75% convertible notes.
2.875% Convertible Notes. As of December 31, 2006, we had outstanding $300.0 million
aggregate principal amount of 2.875% convertible notes due 2034, which we refer to as our
2.875% notes. The 2.875% notes bore interest at a rate of 2.875% per year on the principal amount
of the notes and were scheduled to mature on February 1, 2034.
In July 2007, we accepted the tender of 99.99% of the $300.0 million in outstanding principal
amount of our 2.875% convertible notes under a tender offer that expired on July 23, 2007. In
connection with this tender offer, we issued 11,268,103 shares of our common stock and paid to the
holders of the tendered notes an aggregate cash premium of $25.5 million, $0.3 million in direct
external costs and accrued and unpaid interest of $4.2 million. We recorded the $25.5 million cash
premium and the $0.3 million in direct external costs as debt conversion expense in our
consolidated statement of operations. We also recognized a $6.3 million loss on extinguishment of
our 2.875% convertible notes, including the write-off of $3.4 million of deferred financing costs
related to the notes that were tendered.
As presented for the year ended December 31, 2007, our calculation of diluted net income per
share includes shares that would have been issued had our 2.875% convertible notes been converted
at the beginning of the year instead of on the actual conversion date.
Adoption of Authoritative Guidance on Convertible Debt Instruments. As a result of adopting
the FASBs authoritative guidance on convertible debt instruments, we are required to separately
account for the debt and equity components of our 3.125% convertible notes and our 2.75%
convertible notes in a manner that reflects our nonconvertible debt (unsecured debt) borrowing
rate. The debt and equity components recognized for our 3.125% convertible notes and our 2.75%
convertible notes were as follows (in thousands):
December 31, 2009 | December 31, 2008 | |||||||||||||||
3.125% Notes | 2.75% Notes | 3.125% Notes | 2.75% Notes | |||||||||||||
due 2012 | due 2025 | due 2012 | due 2025 | |||||||||||||
Principal amount of convertible notes |
$ | 1,200,000 | $ | 349,996 | $ | 1,200,000 | $ | 349,996 | ||||||||
Unamortized discount on convertible notes |
102,372 | 7,584 | 140,003 | 19,146 | ||||||||||||
Net carrying amount of convertible notes |
1,097,628 | 342,412 | 1,059,997 | 330,850 | ||||||||||||
Carrying amount of equity component |
194,557 | 53,253 | 194,557 | 53,253 |
As of December 31, 2009, the unamortized discount on our 3.125% convertible notes and our
2.75% convertible notes had remaining recognition periods of about 29 months and 8 months,
respectively.
The amount of interest expense recognized on our 3.125% convertible notes and our 2.75%
convertible notes and effective interest rates for the years ended December 31, 2009 and 2008 were
as follows (dollars in thousands):
Year Ended December 31, | ||||||||||||||||||||||||||||
2009 | 2008 | 2007 | ||||||||||||||||||||||||||
3.125% Notes | 2.75% Notes | 3.125% Notes | 2.75% Notes | 3.125% Notes | 2.75% Notes | 2.875% Notes | ||||||||||||||||||||||
due 2012 | due 2025 | due 2012 | due 2025 | due 2012 | due 2025 | due 2034 | ||||||||||||||||||||||
Contractual coupon interest |
$ | 37,500 | $ | 9,625 | $ | 37,500 | $ | 9,625 | $ | 21,875 | $ | 9,625 | $ | 5,031 | ||||||||||||||
Amortization of discount on
convertible notes |
37,631 | 11,561 | 35,120 | 10,862 | 19,433 | 10,204 | 4,697 | |||||||||||||||||||||
Interest expense, net |
$ | 75,131 | $ | 21,186 | $ | 72,620 | $ | 20,487 | $ | 41,308 | $ | 19,829 | $ | 9,728 | ||||||||||||||
Effective interest rate on
convertible notes |
7.15 | % | 6.45 | % | 7.15 | % | 6.45 | % | 7.15 | % | 6.45 | % | 6.44 | % | ||||||||||||||
Brazil Syndicated Loan Facility. In September 2007, Nextel Brazil entered into a
$300.0 million syndicated loan facility. Of the total amount of the facility, $45.0 million is
denominated in U.S. dollars with a floating interest rate based on LIBOR plus a specified margin
ranging from 2.00% to 2.50% (Tranche A 2.25% and 3.43% as of December 31, 2009 and 2008,
respectively). The remaining $255.0 million is denominated in U.S. dollars with a floating interest
rate based on LIBOR plus a specified margin ranging from 1.75% to 2.25% (Tranche B 2.00% and
3.18% as of December 31, 2009 and 2008, respectively). Tranche A matures on September 14, 2014, and
Tranche B matures on September 14, 2012. Nextel Brazils obligations under the syndicated loan
facility agreement are guaranteed by all of its material operating subsidiaries and are secured by
a pledge of the outstanding equity interests in Nextel Brazil and those subsidiaries. In addition,
Nextel Brazil is subject to various legal and financial covenants under the syndicated loan
facility that, among other things, require Nextel Brazil to maintain certain financial ratios and
may limit the amount of funds that could be repatriated in certain periods. Nextel Brazil has
utilized borrowings under this syndicated loan facility for capital expenditures, general corporate
purposes and the repayment of specified short-term intercompany debt. In connection with this
agreement, Nextel Brazil deferred $5.0 million of financing costs, which Nextel Brazil is
amortizing as additional interest expense over the term of the syndicated loan.
During the fourth quarter of 2007, Nextel Brazil borrowed $26.2 million in term loans under
Tranche A and $148.8 million in term loans under Tranche B of this syndicated loan facility. During
the first quarter of 2008, Nextel Brazil borrowed the remaining $18.8 million in term loans under
Tranche A and $106.2 million in term loans under Tranche B of this syndicated loan facility.
Mexico Syndicated Loan Facility. In October 2004, we closed on a $250.0 million, five year
syndicated loan facility in Mexico. Of the total amount of the facility, $129.0 million was
denominated in U.S. dollars with a floating interest rate based on LIBOR, $31.0 million was
denominated in Mexican pesos with a floating interest rate based on the Mexican reference interest
rate TIIE, and $90.0 million was denominated in Mexican pesos, at an interest rate fixed at the
time of funding. In May 2005, we borrowed the entire $250.0 million available under this facility.
As part of this agreement, Nextel Mexico is subject to various legal and financial covenants that,
among other things, require Nextel Mexico to maintain certain financial ratios and may limit the
amount of funds that could be repatriated in certain periods. In July 2005, Nextel Mexico entered
into an interest rate swap agreement to hedge the $31.4 million portion of the syndicated loan
facility. This interest rate swap fixed the amount of interest expense associated with this portion
of the syndicated loan facility commencing on August 31, 2005 and continuing over the life of the
facility based on a fixed rate of about 11.95% per year.
In June 2006, Nextel Mexico entered into an agreement to refinance its syndicated loan. The
loan principal was increased from the original $250.0 million to $296.6 million after the
refinancing. Under the agreement, the loan was refinanced using the same variable (i.e. LIBOR and
TIIE) and fixed rates as the original agreement but with lower spreads for each tranche. In October
2009, Nextel Mexico paid the remaining principal amounts under both Tranche B and Tranche C of its
syndicated loan. The remaining $156.6 million is denominated in U.S. dollars with a floating
interest rate based on LIBOR (Tranche A 1.56% and 2.44% as of December 31, 2009 and 2008,
respectively). Under the original agreement, principal for Tranche A was also due on the same dates
as the principal under Tranches B and C. However, after the refinancing, principal for Tranche A is
now due in a lump sum of $156.6 million in June 2011.
Tower Financing Obligations. During the year ended December 31, 2008, Nextel Mexico sold 181
communications towers for total proceeds of $23.1 million, and Nextel Brazil sold 54 communications
towers for total proceeds of $5.6 million. Nextel Mexico and Nextel Brazil did not sell any
communications towers during the year ended December 31, 2009.
We account for these tower sales as financing arrangements. As a result, we did not recognize
any gains from the sales, and we maintain the tower assets on our consolidated balance sheet and
continue to depreciate them. We recognize the proceeds received as financing obligations that will
be repaid through monthly payments. To the extent that American Tower leases space on these
communication towers to third party companies, our base rent and ground rent related to the towers
leased are reduced. We recognize ground rent payments as operating expenses in cost of service and
tower base rent payments as interest expense and a reduction in the financing obligation using the
effective interest method. In addition, we recognize co-location rent payments made by the third
party lessees to American Tower as other operating revenues because we are maintaining the tower
assets on our consolidated balance sheet. Both the proceeds received and rent payments due are
denominated in Mexican pesos for the Mexican transactions and in Brazilian reais for the Brazilian
transactions. Rent payments are subject to local inflation adjustments. During the years ended
December 31, 2009, 2008 and 2007, we recognized $68.4 million, 48.7 million and $29.8 million,
respectively, in other operating revenues related to these co-location lease arrangements, a
significant portion of which we recognized as interest expense. Following the sale of these towers,
we no longer have any further contractual obligation or right to transfer towers to American Tower
Corporation.
On March 22, 2005, we amended the sale-leaseback agreement with respect to the construction
and/or the acquisition by American Tower of any new towers to be constructed or purchased by our
Mexican and our Brazilian operating companies. The most significant of these amendments provides
for the elimination of existing minimum purchase and construction commitments, the establishment of
new purchase commitments for the following four years, subject to certain co-location conditions,
the extension for an additional four years, subject to certain conditions and limitations, of the
right of American Tower to market for co-location existing and new towers and the reduction of the
monthly rent payments, as well as the purchase price, of any existing towers not previously
purchased or identified for purchase and of any new sites built.
Capital Lease Obligations.
Corporate Aircraft Lease. In November 2005, we entered into an agreement to lease a new
corporate aircraft beginning in 2009 for ten years. We refer to this aircraft lease as the 2005
aircraft lease. We determined that in accordance with the authoritative guidance for lessee
involvement in asset construction, we were the owner of this new corporate aircraft during its
construction because we had substantially all of the construction period risks. As a result, we
recorded an asset for construction-in-progress and a corresponding long-term liability for the new
aircraft as construction occurs, which was $37.3 million as of December 31, 2008. In December 2009,
upon taking delivery of the aircraft and commencement of the lease term, we began accounting for
the 2005 aircraft lease as a capital lease. As a result, we recorded a capital lease liability and
a corresponding capital lease asset of $42.7 million in December 2009.
Other Capital Lease Obligations. Under the master lease agreement with American Tower, in
certain circumstances, Nextel Mexico and Nextel Brazil are permitted to co-locate communications
equipment on sites owned by American Tower. Nextel Mexico and Nextel Brazil account for the
majority of these co-location agreements as capital leases.
Other Brazil Financings.
Brazil Import Financing. In March 2009, Nextel Brazil began financing certain handset and
infrastructure equipment purchased mainly from Motorola and Research in Motion, or RIM, that is
imported into Brazil through agreements with several Brazilian banks. Each tranche of these
financings matures within a six to twelve-month period.
Brazil Credit Paper. In May 2009, Nextel Brazil entered into a $25.6 million working capital
loan with a Brazilian bank. Interest is payable quarterly for the first twelve months beginning in
August 2009 and monthly for the remaining six months, and the principal matures beginning in June
2010 through November 2010 with the principal amount payable in six equal consecutive monthly
payments. In July 2009, Nextel Brazil entered into a second $16.9 million working capital loan with
the same Brazilian bank. Interest on the second loan is payable quarterly for the first six months
beginning in October 2009 and monthly for the remaining nine months, and the principal matures
beginning in February 2010 through October 2010 with the principal amount payable in nine equal
consecutive monthly payments. In December 2009, Nextel Brazil entered into a third $28.7 million
working capital loan with a separate Brazilian bank. Interest on the third loan is payable monthly
for the first twelve months beginning in January 2010. The principal matures beginning in January
2011 through December 2012 and is payable in 24 equal consecutive monthly payments.
For the year ended December 31, 2009, our short-term financings had a weighted average
interest rate of 8.06%.
Debt Maturities. For the years subsequent to December 31, 2009, scheduled annual maturities
of all long-term debt outstanding as of December 31, 2009 are as follows (in thousands):
Principal | ||||
Year | Repayments | |||
2010 |
$ | 572,130 | ||
2011 |
268,453 | |||
2012 |
1,314,333 | |||
2013 |
30,204 | |||
2014 |
32,370 | |||
Thereafter |
1,496,055 | |||
Total |
$ | 3,713,545 | ||
In accordance with the terms of our 2.75% convertible notes, if the notes are not converted,
the noteholders have the right to require us to repurchase the notes in August 2010 at a repurchase
price equal to 100% of their principal amount plus accrued and unpaid interest. Based on current
market conditions, as well as the effective conversion price and trading prices of our 2.75%
convertible notes, we believe that the noteholders will require us to repurchase our 2.75% notes.
As a result, the $350.0 million repayment of the principal balance of our 2.75% convertible notes
due 2025 is included in the 2010 debt maturity payments in the table above.
6. Fair Value Measurements
The FASBs authoritative guidance on fair value measurements defines fair value as an exit
price, representing the amount that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants. As such, fair value is a
market-based measurement that is determined based on assumptions that market participants would use
in pricing an asset or liability. Valuation techniques discussed under the FASBs authoritative
guidance for fair value measurements include the market approach (comparable market prices), the
income approach (present value of future income or cash flow based on current market expectations)
and the cost approach (cost to replace the service capacity of an asset or replacement cost). As a
basis for considering these assumptions, the guidance utilizes a three-tier fair value hierarchy,
which prioritizes the inputs to the valuation techniques used to measure fair value. The following
is a brief description of the three levels in the fair value hierarchy:
Level 1: Observable inputs such as quoted prices (unadjusted) in active markets for identical
assets or liabilities.
Level 2: Inputs other than quoted prices in active markets that are observable for the asset
or liability, either directly or indirectly.
Level 3: Unobservable inputs that reflect the reporting entitys own assumptions.
To the extent that the valuation is based on models or inputs that are less observable or
unobservable in the market, the determination of fair value requires more judgment. Accordingly,
the degree of judgment exercised in determining fair value is greatest for instruments categorized
in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels
of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value
hierarchy within which the fair value measurement falls is determined based on the lowest level
input that is significant to the fair value measurement in its entirety.
For assets and liabilities measured at fair value on a non-recurring basis, fair value is
determined by using various valuation approaches. The same hierarchy as described above, which
maximizes the use of observable inputs and minimizes the use of unobservable inputs, by generally
requiring that the observable inputs be used when available, is used in measuring fair value for
these items. Fair value may be derived using pricing models. Pricing models take into account the
contract terms (including maturity) as well as multiple inputs, including, where applicable,
interest rate yield curves, credit curves, correlation, credit worthiness of the counterparty,
option volatility and currency rates. In accordance with the FASBs authoritative guidance for fair
value measurements, the impact of our own credit spreads is also considered when measuring the fair
value of liabilities. Where appropriate, valuation adjustments are made to account for various
factors such as credit quality and model uncertainty. These adjustments are subject to judgment,
are applied on a consistent basis and are based upon observable inputs where available. We
generally subject all valuations and models to a review process initially and on a periodic basis
thereafter. As fair value is a market-based measure considered from the perspective of a market
participant rather than an entity-specific measure, even when market assumptions are not readily
available, our own assumptions are set to reflect those that we believe market participants would
use when pricing the asset or liability at the measurement date.
Considerable judgment is required in interpreting market data to develop the estimates of fair
value. Accordingly, the estimates presented below are not necessarily indicative of the amounts
that we could realize in a current market exchange. The use of different market assumptions and
valuation techniques may have a material effect on the estimated fair value amounts. The following
is a description of the major categories of assets and liabilities measured at fair value on a
recurring basis and the valuation techniques applied to them.
Available-for-Sale Securities.
Nextel Brazil Investments. Available-for-sale securities include $116.3 million in short-term
investments made by Nextel Brazil in two investment funds. These funds invest primarily in
Brazilian government bonds, long-term, low-risk bank certificates of deposit and Brazilian
corporate debentures. We account for these securities at fair value in accordance with the FASBs
authoritative guidance surrounding the accounting for investments in debt and equity securities.
The fair value of the securities is based on the net asset value of the funds. In our judgment,
these securities trade with sufficient daily observable market activity to support a Level 1
classification within the fair value hierarchy.
Enhanced Cash Fund. In May 2007, we invested in an enhanced cash fund similar to, but not in
the legal form of, a money market fund that invested primarily in asset-backed securities.
Initially, we classified our investment as a cash equivalent because it was highly liquid at that
time. In December 2007, the fund manager ceased all purchases and sales of interests in the fund
and began an orderly liquidation of the portfolios assets due to issues that arose in the
U.S. credit markets. We concluded that because the fair value per unit of the fund was determined,
published and the basis for current transactions, the fair value of our investment in the fund was
readily determinable and as a result, we classified this investment as available-for-sale. In
addition, we have the right at our option to receive an in-kind distribution of the underlying
assets in the fund that we can sell or hold to maturity. As a result, as of December 31, 2007, we
classified our investment in the fund of $241.8 million as a current asset. Through the third
quarter of 2008, the underlying assets in the fund traded with sufficient daily observable market
activity to support a Level 2 classification within the fair value hierarchy.
Due to the changing market conditions in the fourth quarter of 2008, the net asset value per
unit as determined by the fund manager had declined from $1.000 per unit at inception to $0.827 per
unit as of December 31, 2008. We determined that this loss in value was other-than-temporary. As a
result, during the year ended December 31, 2008, we recognized a pre-tax loss of $14.8 million
related to the loss in value of the fund, which we recorded as a component of net other expense in
our consolidated statement of operations. We also received $173.9 million in distributions from the
fund during the year ended December 31, 2008. Also, as a result of the decline in the overall
market conditions of the credit market and the reduced liquidity in the observable market for
asset-backed securities, we reclassified the enhanced cash fund from Level 2 to Level 3 because
certain significant inputs for the fair value measurement became unobservable.
The fund was liquidated during December 2009. For the year ended December 31, 2009, we
received $55.3 million in total distributions and realized a pre-tax gain during 2009 of
$2.1 million, which we recorded as a component of net other expense in our consolidated statement
of operations.
The following tables set forth the classification within the fair value hierarchy of our
financial instruments measured at fair value on a recurring basis in the accompanying consolidated
balance sheets as of December 31, 2009 and 2008 (in thousands):
Fair Value Measurements as of | ||||||||||||||||
December 31, 2009 | Fair Value as of | |||||||||||||||
Using the Fair Value Hierarchy | December 31, | |||||||||||||||
Financial Instruments | Level 1 | Level 2 | Level 3 | 2009 | ||||||||||||
Short-term investments: |
||||||||||||||||
Available-for-sale securities Nextel Brazil investments |
$ | 116,289 | $ | | $ | | $ | 116,289 | ||||||||
Available-for-sale securities Enhanced cash fund |
| | | | ||||||||||||
$ | 116,289 | $ | | $ | | $ | 116,289 | |||||||||
Fair Value Measurements as of | ||||||||||||||||
December 31, 2008 | Fair Value as of | |||||||||||||||
Using the Fair Value Hierarchy | December 31, | |||||||||||||||
Financial Instruments | Level 1 | Level 2 | Level 3 | 2008 | ||||||||||||
Short-term investment: |
||||||||||||||||
Available-for-sale securities Nextel Brazil investments |
$ | 48,859 | $ | | $ | | $ | 48,859 | ||||||||
Available-for-sale securities Enhanced cash fund |
| | 33,144 | 33,144 | ||||||||||||
48,859 | | 33,144 | 82,003 | |||||||||||||
Long-term investment: |
||||||||||||||||
Available-for-sale securities Enhanced cash fund |
| | 20,016 | 20,016 | ||||||||||||
$ | 48,859 | $ | | $ | 53,160 | $ | 102,019 | |||||||||
The following tables present additional information about Level 3 assets measured at fair
value on a recurring basis:
Year Ended | ||||
December 31, | ||||
2009 | ||||
Beginning balance |
$ | 53,160 | ||
Principal distributions |
(55,302 | ) | ||
Realized gains |
2,142 | |||
Ending balance |
$ | | ||
Year Ended | ||||
December 31, | ||||
2008 | ||||
Beginning balance |
$ | | ||
Transfer to Level 3 classification October 1, 2008 |
86,242 | |||
Principal distributions |
(22,695 | ) | ||
Realized losses |
(10,387 | ) | ||
Ending balance |
$ | 53,160 | ||
Other Financial Instruments.
We estimate the fair value of our financial instruments other than our available-for-sale
securities, including cash and cash equivalents, accounts receivable, accounts payable, derivative
instruments and debt. The carrying values of cash and cash equivalents, accounts receivable and
accounts payable approximate their fair values due to the short-term nature of these instruments.
The fair values of our derivative instruments are immaterial. The carrying amounts and estimated
fair values of our debt instruments at December 31, 2009 and 2008 are as follows:
December 31, | ||||||||||||||||
2009 | 2008 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Amount | Fair Value | Amount | Fair Value | |||||||||||||
(in thousands) | ||||||||||||||||
Long-term debt: |
||||||||||||||||
Senior notes |
$ | 1,277,207 | $ | 1,312,165 | $ | | $ | | ||||||||
Convertible notes |
1,440,040 | 1,447,655 | 1,390,847 | 1,036,526 | ||||||||||||
Syndicated loan facilities |
416,081 | 403,079 | 505,863 | 456,848 | ||||||||||||
Brazil credit paper |
74,661 | 76,322 | | | ||||||||||||
$ | 3,207,989 | $ | 3,239,221 | $ | 1,896,710 | $ | 1,493,374 | |||||||||
Senior Notes and Convertible Notes. We estimated the fair values of our senior notes and our
convertible notes using quoted market prices in a broker dealer market, which may be adjusted for
certain factors such as historical trading levels and market data for our notes, credit default
spreads, stock volatility assumptions with respect to our senior notes and our convertible notes
and other corroborating market or internally generated data. Because our fair value measurement
includes market data, corroborating market data and some internally generated information, we
consider this Level 2 in the fair value hierarchy.
Syndicated Loan Facilities. We estimated the fair values of our syndicated loan facilities
using primarily Level 3 inputs such as U.S. Treasury yield curves, prices of comparable bonds,
LIBOR and zero-coupon yield curves, treasury bond rates and credit spreads on comparable publicly
traded bonds.
Brazil Credit Paper. The Brazilian credit paper represents working capital loans from
Brazilian banks. We borrowed $25.6 million in May 2009, $16.9 million in June 2009 and an
additional $28.7 million in December 2009 under these agreements. We estimated the fair value of
the loans by discounting the expected cash flows utilizing primarily Level 3 inputs such as a
forward zero-coupon curve of the U.S. Treasury bonds and an appropriate credit spread based on
comparable publicly traded bonds.
7. Commitments and Contingencies
Capital and Operating Lease Commitments.
We have co-location capital lease obligations on some of our communication towers in Mexico
and Brazil. The remaining terms of these lease agreements range from one to fifteen years. In
addition, we have a capital lease obligation on our existing corporate aircraft. The remaining term
of this lease agreement is ten years. See Note 5 for further information regarding these
agreements.
We lease various cell sites, office facilities and other assets under operating leases. Some
of these leases provide for annual increases in our rent payments based on changes in locally-based
consumer price indices. The remaining terms of our cell site leases range from one to fifteen years
and are generally renewable, at our option, for additional terms. The remaining terms of our office
leases range from less than one to ten years. During the years ended December 31, 2009, 2008 and
2007, total rent expense under operating leases was $183.3 million, $177.2 million and $133.1
million, respectively.
For years subsequent to December 31, 2009, future minimum payments for all capital and
operating lease obligations that have initial noncancelable lease terms exceeding one year, net of
rental income, are as follows (in thousands):
Capital | Operating | |||||||||||
Leases | Leases | Total | ||||||||||
2010 |
$ | 76,810 | $ | 155,190 | $ | 232,000 | ||||||
2011 |
76,619 | 125,764 | 202,383 | |||||||||
2012 |
76,387 | 106,532 | 182,919 | |||||||||
2013 |
76,103 | 95,463 | 171,566 | |||||||||
2014 |
75,755 | 85,602 | 161,357 | |||||||||
Thereafter |
365,905 | 256,921 | 622,826 | |||||||||
Total minimum lease payments |
747,579 | 825,472 | 1,573,051 | |||||||||
Less: imputed interest |
(463,019 | ) | | (463,019 | ) | |||||||
Total |
$ | 284,560 | $ | 825,472 | $ | 1,110,032 | ||||||
Motorola Commitments.
We are a party to agreements with Motorola, Inc. under which Motorola provides us with
infrastructure equipment and services, including installation, implementation and training. We and
Motorola have also agreed to warranty and maintenance programs and specified indemnity
arrangements. We have also agreed to provide Motorola with notice of our determination that
Motorolas technology is no longer suited to our needs at least six months before publicly
announcing or entering into a contract to purchase equipment utilizing an alternate technology. In
addition, if Motorola manufactures, or elects to manufacture, the equipment utilizing the alternate
technology that we elect to deploy, we must give Motorola the opportunity to supply 50% of our
infrastructure requirements for the equipment utilizing the alternate technology for three years.
In September 2006, we entered into agreements to extend our relationship with Motorola for the
supply of iDEN handsets and iDEN network infrastructure through December 31, 2011. Under these
agreements, Motorola agreed to maintain an adequate supply of the iDEN handsets and equipment used
in our business for the term of the agreement and to continue to invest in the development of new
iDEN devices and infrastructure features. In addition, we agreed to annually escalating handset
volume purchase commitments and certain pricing parameters for handsets and infrastructure linked
to the volume of our purchases. If we do not meet the specified handset volume commitments, we
would be required to pay an additional amount based on any shortfall of actual purchased handsets
compared to the related annual volume commitment.
Brazilian Contingencies.
Nextel Brazil has received various assessment notices from state and federal Brazilian
authorities asserting deficiencies in payments related primarily to value-added taxes, excise taxes
on imported equipment and other non-income based taxes. Nextel Brazil has filed various
administrative and legal petitions disputing these assessments. In some cases, Nextel Brazil has
received favorable decisions, which are currently being appealed by the respective governmental
authority. In other cases, Nextel Brazils petitions have been
denied, and Nextel Brazil is currently appealing those decisions. Nextel Brazil is also
disputing various other claims. Nextel Brazil did not reverse any material accrued liabilities
related to contingencies during 2009.
As of December 31, 2009 and 2008, Nextel Brazil had accrued liabilities of $13.9 million and
$18.3 million, respectively, related to contingencies, all of which were classified in accrued
contingencies reported as a component of other long-term liabilities. Nextel Brazil did not have
any unasserted claims as of December 31, 2009. Of the total accrued liabilities as of December 31,
2008, Nextel Brazil had $9.2 million in unasserted claims. We currently estimate the range of
reasonably possible losses related to matters for which Nextel Brazil has not accrued liabilities,
as they are not deemed probable, to be between $121.8 million and $125.8 million as of December 31,
2009. We are continuing to evaluate the likelihood of probable and reasonably possible losses, if
any, related to all known contingencies. As a result, future increases or decreases to our accrued
liabilities may be necessary and will be recorded in the period when such amounts are determined to
be probable and reasonably estimable.
Argentine Contingencies.
As of December 31, 2009 and 2008, Nextel Argentina had accrued liabilities of $28.2 million
and $35.0 million, respectively, related primarily to local turnover taxes, universal service tax
and local government claims, all of which were classified in accrued contingencies and accrued
non-income taxes reported as components of accrued expenses and other.
Legal Proceedings.
We are subject to claims and legal actions that may arise in the ordinary course of business.
We do not believe that any of these pending claims or legal actions will have a material effect on
our business, financial condition, results of operations or cash flows.
Income Taxes.
We are subject to income taxes in both the United States and the non-U.S. jurisdictions in
which we operate. Certain of our entities are under examination by the relevant taxing authorities
for various tax years. We regularly assess the potential outcome of current and future examinations
in each of the taxing jurisdictions when determining the adequacy of the provision for income
taxes. We have only recorded financial statement benefits for tax positions which we believe
reflect the more-likely-than-not criteria incorporated in the FASBs authoritative guidance on
accounting for uncertainty in income taxes, and we have established income tax reserves in
accordance with this authoritative guidance where necessary. Once a financial statement benefit for
a tax position is recorded or a tax reserve is established, we adjust it only when there is more
information available or when an event occurs necessitating a change. While we believe that the
amount of the recorded financial statement benefits and tax reserves reflect the
more-likely-than-not criteria, it is possible that the ultimate outcome of current or future
examinations may result in a reduction to the tax benefits previously recorded on the financial
statements or may exceed the current income tax reserves in amounts that could be material.
8. Capital Stock
We currently have 600,000,000 shares of authorized common stock, par value $0.001 per share,
and 10,000,000 shares of authorized undesignated preferred stock, par value $0.001 per share.
As described in Note 5, we issued 11,268,103 shares of our common stock in connection with the
conversion of our 2.875% convertible notes in July 2007. In addition, as described in Note 1,
during the years ended December 31, 2008 and 2007, we repurchased a total of 5,555,033 shares and
7,401,543 shares of our common stock, respectively.
During the years ended December 31, 2009, 2008 and 2007, we issued common shares of stock in
connection with the exercise of stock options by employees.
As of December 31, 2009 and 2008, there were 166,730,066 shares and 165,782,002 shares of our
common stock outstanding, respectively.
Common Stock. Holders of our common stock are entitled to one vote per share on all matters
submitted for action by the stockholders and share equally, share for share, if dividends are
declared on the common stock. If our Company is partially or completely liquidated, dissolved or
wound up, whether voluntarily or involuntarily, the holders of the common stock are entitled to
share ratably in the net assets remaining after payment of all liquidation preferences, if any,
applicable to any outstanding preferred stock. There are no redemption or sinking fund provisions
applicable to the common stock.
Undesignated Preferred Stock. Our board of directors has the authority to issue undesignated
preferred stock of one or more series and in connection with the creation of such series, to fix by
resolution the designation, voting powers, preferences and relative, participating, optional and
other special rights of such series, and the qualifications, limitations and restrictions thereof.
As of December 31, 2009, we had not issued any shares of undesignated preferred stock.
Common Stock Reserved for Issuance. As of December 31, 2009 and 2008, under our employee
stock option plan, we had reserved for future issuance 12,517,735 shares and 17,610,279 shares of
our common stock, respectively.
9. Income Taxes
The components of the income tax provision from continuing operations are as follows (in
thousands):
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Current: |
||||||||||||
Federal |
$ | (2,973 | ) | $ | | $ | 2,954 | |||||
State, net of Federal tax benefit |
(480 | ) | | | ||||||||
Foreign |
(226,016 | ) | (215,037 | ) | (121,143 | ) | ||||||
Total current income tax provision |
(229,469 | ) | (215,037 | ) | (118,189 | ) | ||||||
Deferred: |
||||||||||||
Federal |
45,303 | 30,547 | (42,463 | ) | ||||||||
State, net of Federal tax benefit |
5,011 | 3,404 | (4,731 | ) | ||||||||
Foreign |
(25,531 | ) | 42,224 | 8,635 | ||||||||
Total deferred income tax provision |
24,783 | 76,175 | (38,559 | ) | ||||||||
Total income tax provision |
$ | (204,686 | ) | $ | (138,862 | ) | $ | (156,748 | ) | |||
A reconciliation of the U.S. statutory Federal income tax rate to our effective tax rate as a
percentage of income before taxes is as follows:
Year Ended | ||||||||||||
December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Statutory Federal tax rate |
35 | % | 35 | % | 35 | % | ||||||
State taxes, net of Federal tax benefit |
(1 | ) | (1 | ) | (1 | ) | ||||||
Effect of foreign operations |
(4 | ) | (6 | ) | (6 | ) | ||||||
Nondeductible stock option expense |
1 | | 2 | |||||||||
Change in deferred tax asset valuation allowance |
3 | 5 | (9 | ) | ||||||||
Intercompany transactions |
(1 | ) | 3 | 2 | ||||||||
Withholding tax and tax on subpart F income |
3 | 2 | 2 | |||||||||
Tax deductible dividends |
(2 | ) | | (2 | ) | |||||||
U.S. tax on unremitted foreign earnings |
| | 14 | |||||||||
Inflation adjustments |
(2 | ) | (7 | ) | (4 | ) | ||||||
Amortization of acquired tax benefits (deferred credit) |
| | (4 | ) | ||||||||
Income tax credits |
| (2 | ) | | ||||||||
Other nondeductible expenses |
1 | 1 | 1 | |||||||||
Other |
2 | (1 | ) | 1 | ||||||||
Income tax provision |
35 | % | 29 | % | 31 | % | ||||||
Significant components of our deferred tax assets and liabilities consist of the following:
December 31, | ||||||||
2009 | 2008 | |||||||
(in thousands) | ||||||||
Deferred tax assets: |
||||||||
Net operating losses and capital loss carryforwards |
$ | 250,961 | $ | 210,332 | ||||
Allowance for doubtful accounts |
27,635 | 18,339 | ||||||
Accrued expenses |
100,686 | 79,255 | ||||||
Accrual for contingent liabilities |
6,298 | 6,230 | ||||||
Intangible assets |
3,377 | 5,182 |
December 31, | ||||||||
2009 | 2008 | |||||||
(in thousands) | ||||||||
Property, plant and equipment |
266,480 | 170,486 | ||||||
Capital lease obligations |
37,939 | 62,108 | ||||||
Deferred revenue |
45,207 | 40,715 | ||||||
Stock option expense |
51,297 | 41,079 | ||||||
Other |
40,827 | 55,457 | ||||||
830,707 | 689,183 | |||||||
Valuation allowance |
(75,584 | ) | (48,456 | ) | ||||
Total deferred tax asset |
755,123 | 640,727 | ||||||
Deferred tax liabilities: |
||||||||
Intangible assets |
70,151 | 71,555 | ||||||
Unremitted foreign earnings |
19,352 | 55,093 | ||||||
Deferred revenue |
21,565 | 24,132 | ||||||
Property, plant and equipment |
17,560 | 2,418 | ||||||
Debt discount |
42,773 | 61,909 | ||||||
Other |
37,634 | 12,202 | ||||||
Total deferred tax liability |
209,035 | 227,309 | ||||||
Net deferred tax asset |
$ | 546,088 | $ | 413,418 | ||||
We have not recorded a deferred tax liability on Nextel Brazils unrealized foreign currency
gain on the intercompany loan from NII Holdings, Inc. as it is our intention to not subject that
unrealized gain to Brazilian tax. If this gain is subject to tax, it could result in an additional
income tax liability. As of December 31, 2009 and 2008, the cumulative amount of additional tax
liability would have been approximately $123.1 million and $49.3 million, respectively.
During 2009, we maintained our prior year position regarding the repatriation of foreign
earnings back to the U.S. As of December 31, 2008, we included a $55.1 million provision in
deferred tax liability for U.S. federal, state and foreign taxes with respect to future remittances
of certain undistributed earnings (other than income that has been previously taxed in the U.S.
under the subpart F rules) of certain of our foreign subsidiaries. This deferred tax liability
decreased by $35.7 million to $19.4 million as of December 31, 2009 due to a $38.3 million tax
effect on a distribution received from our Mexico and Argentine subsidiaries and $2.6 million
increase due to the strengthening in the Mexican exchange rate against the U.S. dollar. Except for
the earnings associated with this $19.4 million provision, we currently have no intention to remit
any additional undistributed earnings of our foreign subsidiaries, other than income that has been
previously taxed in the U.S. under the subpart F rules. Should additional amounts of our foreign
subsidiaries undistributed earnings be remitted to the U.S. as dividends, we may be subject to
additional U.S. income taxes (net of allowable foreign tax credits) and foreign withholding taxes.
It is not practicable to estimate the amount of any additional taxes which may be payable on the
remaining undistributed earnings.
As of December 31, 2009, we had approximately $252.7 million of net operating loss
carryforwards for U.S. Federal and state income tax purposes, $18.2 million of which expires in
various amounts beginning in 2010 through 2019, and $234.5 million expires in various amounts from
2020 through 2028. The timing and manner in which we will utilize the net operating loss
carryforwards in any year, or in total, may be limited in the future under the provisions of
Internal Revenue Code Section 382 regarding changes in our ownership.
As of December 31, 2009, we had approximately $15.9 million of capital loss carryforwards for
U.S. Federal income tax purposes, which expires in various amounts from 2012 through 2014. We will
only be able to utilize these capital losses to the extent we generate U.S. capital gains. As we do
not believe we meet the more-likely-than-not criteria regarding the utilization of these capital
losses prior to their expiration, we have established a full valuation allowance against these
capital losses.
As of December 31, 2009, we had approximately $5.7 million of net operating loss carryforwards
in our Mexican subsidiary. These carryforwards expire in various amounts and at various periods
from 2010 to 2019. Nextel Chile had approximately $88.7 million of net operating loss carryforwards
that can be carried forward indefinitely. In addition, our Brazilian subsidiaries had approximately
$666.5 million of net operating loss carryforwards that can also be carried forward indefinitely,
but the amount that we can utilize annually is limited to 30% of Brazilian taxable income before
the net operating loss deduction. Our foreign subsidiaries ability to utilize the foreign tax net
operating losses in any single year ultimately depends upon their ability to generate sufficient
taxable income.
We excluded $187.7 million of U.S. net operating loss carryforwards from the calculation of
the deferred tax asset above because it represents excess stock option deductions that did not
reduce taxes payable in the U.S. The tax effect of these unrealized excess stock option deductions,
if realized in the future, will result in an increase to paid-in capital. We recognize the benefits
of net operating loss
carryforwards in the following order: (1) net operating losses from items other than excess
stock option deductions; (2) net operating losses from excess stock option deductions accounted for
under FASBs updated authoritative guidance on share-based payments; and (3) from excess stock
option deductions accounted for under FASBs updated authoritative guidance on share-based
payments. We use a with-and-without method to determine the tax benefit realized from excess
stock option deductions under FASBs updated authoritative guidance on share-based payments. We
calculated our adoption date pool of excess tax benefits previously included in paid-in capital
under the standard method outlined in FASBs updated authoritative guidance on share-based
payments.
During 2009, the deferred tax asset valuation allowance increased by $27.1 million, due to the
impact of foreign currency translation adjustments in Brazil, an increase in the net operating loss
carryforward in Chile, for which it is more likely than not that the benefits will not be realized
in the near term, and an increase in items not currently deductible for U.S. tax purposes.
During 2007, the deferred tax asset valuation allowance decreased by $383.1 million primarily
due to the $377.8 million release (net of foreign currency translation adjustments) of the
valuation allowance previously recorded with respect to the deferred tax assets of one of our
Brazilian entities, Nextel Telecomunicacoes Ltda. (Brazil Ltda.). In evaluating the need for a
valuation allowance for Brazil Ltda., we considered the following positive evidence: (1) for the
cumulative three-year period 2005 through 2007, Brazil Ltda. generated positive pre-tax income in
accordance with U.S. GAAP, (2) Brazil Ltda. is expected to continue to generate positive pre-tax
income in accordance with U.S. GAAP for the foreseeable future, and (3) Brazilian net operating
losses can be carried forward indefinitely and utilized in future years without expiration. Based
on this evidence, we concluded in the fourth quarter of 2007 that it was more-likely-than-not the
deferred tax assets of Brazil Ltda. would be fully utilized, and we released the associated
valuation allowance. The financial statement treatment of this valuation allowance release
(excluding the effect of the foreign currency translation adjustments) is shown in the table below.
Our deferred tax asset valuation allowances generally consist of three components. We record
decreases in these valuation allowances as coming first from valuation allowances existing as of
the reorganization date, second from valuation allowances created subsequent to the reorganization
from items other than excess stock option deductions, and third from post-reorganization excess
stock option deductions accounted for under FASBs authoritative guidance on share-based payments.
Historically, in accordance with the FASBs authoritative guidance on financial reporting by
entities in reorganization under the bankruptcy code, we have recognized decreases in the deferred
tax asset valuation allowance that existed at the reorganization date first as a reduction in the
carrying value of our intangible assets existing at the reorganization date until fully exhausted,
and then as an increase to paid-in capital. As of December 31, 2004, we reduced to zero the
carrying value of our intangible assets existing at the reorganization date. In accordance with the
FASBs updated authoritative guidance on business combinations, effective beginning in 2009, we
will record the future decreases, if any, of the valuation allowance existing on the reorganization
date as a reduction to income tax expense. The table below reflects the impact on our stockholders
equity and income tax provision of the deferred tax asset valuation allowance decreases that we
recorded during 2007 in accordance with the FASBs authoritative guidance on financial reporting by
entities in reorganization under the bankruptcy code. There were no changes to our deferred tax
asset valuation allowance during 2008 and 2009 in accordance with the FASBs authoritative guidance
on financial reporting by entities in reorganization under the bankruptcy code.
Year Ended | ||||
December 31, | ||||
2007 | ||||
Increase to stockholders equity |
$ | 407,224 | ||
Reduction to income tax provision |
48,724 | |||
Total |
$ | 455,948 | ||
As of December 31, 2009, Nextel Brazil, Nextel Chile and Nextel Mexico have $21.3 million,
$14.7 million and $1.6 million of deferred tax asset valuation allowances, respectively. In
addition, our U.S. operations have $38.0 million of a deferred tax asset valuation allowance as of
December 31, 2009. Of the total $75.6 million consolidated deferred tax asset valuation allowance
as of December 31, 2009, $17.1 million of Nextel Brazils valuation allowance existed as of our
emergence from Chapter 11 reorganization and therefore, any future decreases in this amount will be
recorded in accordance with the FASBs updated authoritative guidance on financial reporting by
entities in reorganization under the bankruptcy code as a reduction to income tax expense.
Realization of any additional deferred tax assets in any of our markets depends on future
profitability in these markets. Our ability to generate the expected amounts of taxable income from
future operations is dependent upon general economic conditions, technology trends, political
uncertainties, competitive pressures and other factors beyond managements control. If our
operations demonstrate profitability, we may reverse additional deferred tax asset valuation
allowances by jurisdiction in the future. We will continue to evaluate the deferred tax asset
valuation allowance balances in all of our foreign and U.S. companies throughout 2010 to determine
the appropriate level of valuation allowance.
We are subject to income taxes in both the United States and the non-U.S. jurisdictions in
which we operate. Certain of our entities are under examination by the relevant taxing authorities
for various tax years. The earliest years that remain subject to examination by jurisdiction are:
Chile 1993; U.S. 1995; Mexico 2003; Argentina 2002; Peru and Brazil 2005. We
regularly assess the potential outcome of current and future examinations in each of the taxing
jurisdictions when determining the adequacy of the provision for income taxes.
The following table shows a reconciliation of our unrecognized tax benefits according to the
FASBs authoritative guidance on accounting for uncertainty in income taxes, as of December 31,
2009, 2008 and 2007 (in thousands):
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Unrecognized tax benefits at January 1 |
$ | 85,886 | $ | 67,955 | $ | 55,965 | ||||||
Additions for current year tax positions |
12,018 | 27,436 | 14,408 | |||||||||
Additions for prior year tax positions |
| 555 | | |||||||||
Lapse of statute of limitations |
(583 | ) | (490 | ) | (3,058 | ) | ||||||
Settlements with taxing authorities |
| (124 | ) | (152 | ) | |||||||
Foreign currency translation adjustment |
2,274 | (9,446 | ) | 792 | ||||||||
Unrecognized tax benefits at December 31 |
$ | 99,595 | $ | 85,886 | $ | 67,955 | ||||||
The unrecognized tax benefits as of December 31, 2009, 2008 and 2007 included $75.7 million,
$63.2 million and $49.2 million, respectively, of tax benefits that could potentially reduce our
future effective tax rate, if recognized. It also includes $1.0 million of unrecognized tax
benefits related to non-U.S. tax credits inappropriately offset against income tax liabilities,
which are reasonably possible will be recognized within the next twelve months following December
31, 2009, as a result of the expiring statute of limitations.
We record interest and penalties associated with uncertain tax positions as a component of our
income tax provision. During the years ended December 31, 2009, 2008 and 2007, we recognized
approximately $0.3 million, $1.6 million and $0.9 million, respectively, of interest and penalties
in our current income tax provision and statement of financial position and a benefit of $1.9
million and $3.0 million of interest and penalties of the unrecognized tax benefits for which the
statute of limitations expired in 2009 and 2008, respectively. We had accrued approximately $0.5
million, $2.0 million and $3.8 million for the payment of interest and penalties as of December 31,
2009, 2008 and 2007, respectively. We classify our uncertain tax positions as non-current income
tax liabilities.
During 2004, Nextel Mexico amended its Mexican Federal income tax returns in order to reverse
a benefit previously claimed for a disputed provision of the Federal income tax law covering
deductions and gains from the sale of property. We filed the amended returns in order to avoid
potential penalties and we also filed administrative petitions seeking clarification of our right
to the tax benefits claimed on the original income tax returns. The tax authorities constructively
denied our administrative petitions in January 2005 and in May 2005 we filed an annulment suit
challenging the constructive denial. Resolution of the annulment suit is pending. Based on an
opinion by our independent legal counsel in Mexico, we believe it is probable that we will recover
this amount. Our consolidated balance sheets as of December 31, 2009 and 2008 include $13.3 million
and $12.8 million, respectively, in income taxes receivable, which are included as components of
other non-current assets. The $0.5 million increase from December 31, 2008 to December 31, 2009 was
due to the change in the exchange rate between the Mexican peso and the U.S. dollar. The income tax
benefit for this item was related to our income tax provision for the years ended December 31,
2005, 2004 and 2003.
On December 7, 2009, the Mexican government enacted amendments to the Mexican income tax law
that became effective January 1, 2010. The amendments established a transitory increase to the
income tax rate, from 28%, in force for 2007 to 2009, to 30% for 2010 to 2012, 29% for 2013 and 28%
for 2014 and subsequent years.
Income from continuing operations before income taxes consisted of the following (in
thousands):
Year Ended December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
U.S. |
$ | (188,735 | ) | $ | (217,301 | ) | $ | (154,308 | ) | |||
Non-U.S. |
774,912 | 698,118 | 664,804 | |||||||||
Total |
$ | 586,177 | $ | 480,817 | $ | 510,496 | ||||||
10. Employee Stock and Benefit Plans
As of December 31, 2009, we had the following share-based compensation plans:
Under our Revised Third Amended Joint Plan of Reorganization, on November 12, 2002, we adopted
the 2002 Management Incentive Plan for the benefit of our employees and directors. Although there
are 27,958 stock options outstanding under the 2002 Management Incentive Plan as of December 31,
2009, no additional awards will be granted under the Plan. We adopted the 2004 Incentive
Compensation Plan in April 2004. The 2004 Incentive Compensation Plan provides us the opportunity
to compensate selected employees with stock options, stock appreciation rights (SARs), stock
awards, performance share awards, incentive awards and/or stock units. Through December 31, 2009,
we have not granted any SARs, performance share awards, incentive awards or stock units. The 2004
Incentive Compensation Plan provides equity and equity-related incentives to directors, officers or
key employees of and consultants to our company up to a maximum of 39,600,000 shares of common
stock, subject to adjustments. A stock option entitles the optionee to purchase shares of common
stock from us at the specified exercise price. Stock awards consist of awards of common stock,
subject to certain restrictions specified in the 2004 Incentive Compensation Plan. All grants or
awards made under the 2004 Incentive Compensation Plan are governed by written agreements between
us and the participants and have a maximum contractual term of ten years. We issue new shares when
both stock options and stock awards are exercised.
Historically, our Board of Directors has granted stock options and stock awards to employees
on an annual basis near the end of April. On April 22, 2009, our Board of Directors granted
5,153,946 stock options and 449,724 restricted stock awards to certain of our employees and
directors in connection with this annual stock option grant. Stock options are also granted to
certain new employees on the later of their date of hire or the date that the grant is approved. In
addition, our chief executive officer may grant, under authority delegated to him by the
Compensation Committee of our Board of Directors, a limited number of stock options (not to exceed
10,000 shares in any single grant and 100,000 shares in the aggregate) to employees who are not
executive officers.
We adopted the FASBs updated authoritative guidance for stock-based compensation effective
January 1, 2006. We used the modified prospective transition method to adopt this guidance and
therefore did not restate our prior periods results. Under this transition method, share-based
payment expense for the years ended December 31, 2009, 2008 and 2007 includes compensation expense
for all share-based payment awards granted prior to, but not fully vested as of, January 1, 2006
based on the grant date fair value estimated in accordance with the provisions of the FASBs
initial authoritative guidance for stock-based compensation. Share-based payment expense for all
share-based payment awards granted after January 1, 2006 is based on the grant date fair value
estimated in accordance with the provisions of the FASBs updated authoritative guidance on
stock-based compensation. We recognize these compensation costs net of a forfeiture rate for only
those shares expected to vest on a straight-line basis over the requisite service period of the
award. Our stock options generally vest twenty-five percent per year over a four-year period except
for stock options granted in 2009, which vest thirty-three percent per year over a three-year
period. Our restricted shares generally vest in full on the third and/or fourth anniversaries of
the grant except for restricted shares granted in 2009, which vest thirty-three percent per year
over a three-year period. We used actual forfeitures to calculate our compensation expense for the
years ended December 31, 2009, 2008 and 2007.
For the years ended December 31, 2009, 2008 and 2007, we recognized $62.9 million, $64.7
million and $55.2 million, respectively, in share-based payment expense related to stock options.
For the years ended December 31, 2009, 2008 and 2007, we recognized $7.8 million, $6.6 million and
$11.8 million, respectively, in share-based payment expense related to restricted stock. Amounts
recognized in the income statement for tax benefits related to share-based payment arrangements in
2009, 2008 and 2007 were not material. We include substantially all share-based payment expense,
including restricted stock expense, as a component of selling, general and administrative expenses.
We classify tax benefits resulting from tax deductions in excess of the compensation cost
recognized for share-based awards as financing cash flows. As of December 31, 2009, there was
approximately $98.5 million in unrecognized compensation cost related to non-vested employee stock
option awards. We expect this cost to be recognized over a weighted average period of 1.5 years.
Cash received from exercise under all share-based payment arrangements, net of shares surrendered
for employee tax obligations, was $15.7 million for 2009, $33.8 million for 2008 and $91.0 million
for 2007. We did not realize any tax benefits from exercise of the share-based payment arrangements
in 2009, 2008 or 2007.
Stock Option Awards
The following table summarizes stock option activity under all plans:
Weighted Average | ||||||||||||||||
Number of | Exercise Price | Weighted Average | Aggregate Intrinsic | |||||||||||||
Options | per Option | Remaining Life | Value | |||||||||||||
Outstanding, December 31, 2008 |
12,064,657 | 49.75 | ||||||||||||||
Granted |
5,217,946 | 14.44 | ||||||||||||||
Exercised |
(624,064 | ) | 24.62 | |||||||||||||
Forfeited |
(767,738 | ) | 46.98 | |||||||||||||
Outstanding, December 31, 2009 |
15,890,801 | 39.28 | 7.70 years | $ | 118,791,132 | |||||||||||
Exercisable, December 31, 2009 |
6,208,105 | 47.99 | 6.36 years | $ | 21,993,474 | |||||||||||
Total intrinsic value of options exercised for the years ended December 31, 2009, 2008 and
2007 was $4.7 million, $35.7 million and $174.6 million, respectively. The total fair value of
options vested was $69.9 million, $73.4 million and $42.4 million for the years ended December 31,
2009, 2008 and 2007, respectively. Generally, our stock options are non-transferable, except by
will or laws of descent or distribution, and the actual value of the stock options that a recipient
may realize, if any, will depend on the excess of the market price on the date of exercise over the
exercise price.
The weighted average fair value of the stock option awards on their grant dates using the
Black-Scholes-Merton option-pricing model was $7.55 for each option granted for the year ended
December 31, 2009, $18.78 for each option granted for the year ended December 31, 2008 and $29.43
for each option granted for the year ended December 31, 2007 based on the following assumptions:
2009 | 2008 | 2007 | ||||||||||
Risk free interest rate |
1.50% - 2.51 | % | 1.52% - 3.56 | % | 3.84% - 5.04 | % | ||||||
Expected stock price volatility |
47.4% - 62.6 | % | 47.4% - 51.5 | % | 36.9% - 38.5 | % | ||||||
Expected term in years |
4.52 - 4.69 | 4.52 - 4.60 | 4.52 - 4.75 | |||||||||
Expected dividend yield |
0.00 | % | 0.00 | % | 0.00 | % |
The expected term of stock option awards granted represents the period that we expect our
stock option awards will be outstanding and was determined based on (1) historical data on employee
exercise and post-vesting employment termination behavior, (2) the contractual terms of the stock
option awards, (3) vesting schedules and (4) expectations of future employee behavior. The
risk-free interest rate for periods consistent with the contractual life of the stock option award
is based on the yield curve of U.S. Treasury strip securities in effect at the time of the grant.
Expected volatility for options granted after April 1, 2006 takes into consideration historical
volatility and the implied volatility from traded options on our stock consistent with the guidance
in SAB No. 107, Share-Based Payment.
The Black-Scholes-Merton option-pricing model was developed for use in estimating the fair
value of traded options that have no vesting restrictions and are fully transferable. In addition,
option-pricing models such as the Black-Scholes-Merton model require the input of highly subjective
assumptions, including the expected stock price volatility. The assumptions listed above represent
our best estimates, but these estimates involve inherent uncertainties and the application of
management judgment. Consequently, there is a risk that our estimates of the fair values of our
stock option awards on the grant dates may bear little resemblance to the actual values realized
upon the exercise, expiration, early termination or forfeiture of those stock option awards in the
future. Certain stock option awards may expire worthless or otherwise result in zero intrinsic
value as compared to the fair values originally estimated on the grant date and reported in our
financial statements. Alternatively, value may be realized from stock option awards that are
significantly in excess of the fair values originally estimated on the grant date and reported in
our financial statements. Additionally, application of alternative assumptions could produce
significantly different estimates of the fair value of stock option awards and consequently, the
related amounts recognized in the consolidated statements of operations. Currently, there is no
market-based mechanism or other practical application to verify the reliability and accuracy of the
estimates from option-pricing valuation models, such as Black-Scholes-Merton, nor is there a means
to compare and adjust the estimates to actual values. Although the fair value of stock option
awards is determined in accordance with the FASBs updated authoritative guidance for stock-based
compensation, using the Black-Scholes-Merton option-pricing model, the fair value may not be
indicative of the fair value observed in a willing buyer/willing seller market transaction. Because
stock options have characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the fair value estimate,
we believe that the existing models do not necessarily provide a reliable single measure of the
fair value of the stock options.
Restricted Stock Awards
Following is a summary of the status of our non-vested restricted stock awards:
Weighted | ||||||||
Average Grant | ||||||||
Number of | Date Fair Value | |||||||
Shares | Per Share | |||||||
Non-vested restricted stock awards as of December 31, 2008 |
579,000 | 56.29 | ||||||
Granted |
449,724 | 14.33 | ||||||
Vested |
(324,000 | ) | 61.25 | |||||
Forfeited |
(21,500 | ) | 30.53 | |||||
Non-vested restricted stock awards as of December 31, 2009 |
683,224 | 27.59 | ||||||
If a participant terminates employment prior to the vesting dates, the unvested shares will be
forfeited and available for reissuance under the terms of the 2004 Incentive Compensation Plan. The
fair value of our restricted stock awards is determined based on the quoted price of our common
stock at the grant date. As of December 31, 2009, there was approximately $7.6 million in
unrecognized compensation cost related to non-vested restricted stock awards. We expect this cost
to be recognized over a weighted average period of 1.5 years. The total fair value of restricted
stock units vested was $6.0 million during 2009, $0 during 2008 and $67.4 million during 2007. The
weighted average grant date fair value of restricted stock units granted during 2009 was $14.33 per
unit compared to $44.17 per unit for 2008 and $74.02 per unit for 2007.
11. Segment Information
We have determined that our reportable segments are those that are based on our method of
internal reporting, which disaggregates our business by geographical location. Our reportable
segments are: (1) Mexico, (2) Brazil, (3) Argentina and (4) Peru. The operations of all other
businesses that fall below the segment reporting thresholds are included in the Corporate and
other segment below. This segment includes our Chilean operating companies and our corporate
operations in the U.S. We evaluate performance of these segments and provide resources to them
based on operating income before depreciation, amortization and impairment, restructuring and other
charges, which we refer to as segment earnings. Because we do not view share-based compensation as
an important element of operational performance, we recognize share-based payment expense at the
corporate level and exclude it when evaluating the business performance of our other segments. For
several years, we have charged a management fee to Nextel Mexico for services rendered by corporate
management. In the fourth quarter of 2009, we began charging management fees to our other segments,
retroactive to January 1, 2009.
Corporate | Intercompany | |||||||||||||||||||||||||||
Mexico | Brazil | Argentina | Peru | and other | Eliminations | Consolidated | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Year Ended December 31, 2009 |
||||||||||||||||||||||||||||
Service and other revenues |
$ | 1,785,230 | $ | 1,631,156 | $ | 482,985 | $ | 241,282 | $ | 13,988 | $ | (1,093 | ) | $ | 4,153,548 | |||||||||||||
Digital handset and accessory
revenues |
76,634 | 103,481 | 36,735 | 27,103 | 98 | | 244,051 | |||||||||||||||||||||
Operating revenues |
$ | 1,861,864 | $ | 1,734,637 | $ | 519,720 | $ | 268,385 | $ | 14,086 | $ | (1,093 | ) | $ | 4,397,599 | |||||||||||||
Segment earnings (losses) |
$ | 653,110 | $ | 495,325 | $ | 148,803 | $ | 14,605 | $ | (201,662 | ) | $ | | $ | 1,110,181 | |||||||||||||
Management fee |
(48,742 | ) | (20,026 | ) | (12,310 | ) | (21,385 | ) | 102,463 | | | |||||||||||||||||
Depreciation and amortization |
(168,663 | ) | (180,844 | ) | (38,482 | ) | (32,117 | ) | (13,198 | ) | | (433,304 | ) | |||||||||||||||
Operating income (loss) |
435,705 | 294,455 | 98,011 | (38,897 | ) | (112,397 | ) | | 676,877 | |||||||||||||||||||
Interest expense, net |
(44,411 | ) | (51,741 | ) | 4,773 | (3,022 | ) | (139,715 | ) | 15,272 | (218,844 | ) | ||||||||||||||||
Interest income |
17,225 | 6,304 | 688 | 245 | 16,333 | (15,209 | ) | 25,586 | ||||||||||||||||||||
Foreign currency transaction
(losses) gains, net |
(21,889 | ) | 119,060 | 5,467 | (221 | ) | 2,449 | | 104,866 | |||||||||||||||||||
Other (expense) income, net |
(1,406 | ) | (861 | ) | 3,748 | | 2,141 | (5,930 | ) | (2,308 | ) | |||||||||||||||||
Income (loss) before income tax
(provision) benefit |
385,224 | 367,217 | 112,687 | (41,895 | ) | (231,189 | ) | (5,867 | ) | 586,177 | ||||||||||||||||||
Income tax (provision) benefit |
(96,916 | ) | (109,330 | ) | (40,382 | ) | 9,838 | 32,104 | | (204,686 | ) | |||||||||||||||||
Net income (loss) |
$ | 288,308 | $ | 257,887 | $ | 72,305 | $ | (32,057 | ) | $ | (199,085 | ) | $ | (5,867 | ) | $ | 381,491 | |||||||||||
Capital expenditures |
$ | 104,418 | $ | 407,449 | $ | 38,626 | $ | 148,463 | $ | 34,201 | $ | | $ | 733,157 | ||||||||||||||
Year Ended December 31, 2008 |
||||||||||||||||||||||||||||
Service and other revenues |
$ | 2,047,113 | $ | 1,262,838 | $ | 508,227 | $ | 222,819 | $ | 8,704 | $ | (1,235 | ) | $ | 4,048,466 |
Corporate | Intercompany | |||||||||||||||||||||||||||
Mexico | Brazil | Argentina | Peru | and other | Eliminations | Consolidated | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Digital handset and accessory
revenues |
86,128 | 68,081 | 46,097 | 20,571 | 37 | | 220,914 | |||||||||||||||||||||
Operating revenues |
$ | 2,133,241 | $ | 1,330,919 | $ | 554,324 | $ | 243,390 | $ | 8,741 | $ | (1,235 | ) | $ | 4,269,380 | |||||||||||||
Segment earnings (losses) |
$ | 764,344 | $ | 369,969 | $ | 170,855 | $ | 42,557 | $ | (175,305 | ) | $ | | $ | 1,172,420 | |||||||||||||
Management fee |
(32,187 | ) | | | | 31,836 | 351 | | ||||||||||||||||||||
Depreciation and amortization |
(191,396 | ) | (141,005 | ) | (38,801 | ) | (21,737 | ) | (12,061 | ) | (120 | ) | (405,120 | ) | ||||||||||||||
Operating income (loss) |
540,761 | 228,964 | 132,054 | 20,820 | (155,530 | ) | 231 | 767,300 | ||||||||||||||||||||
Interest expense, net |
(60,086 | ) | (53,146 | ) | (3,223 | ) | (292 | ) | (96,071 | ) | 7,302 | (205,516 | ) | |||||||||||||||
Interest income |
46,221 | 6,141 | 2,425 | 875 | 20,051 | (7,302 | ) | 68,411 | ||||||||||||||||||||
Foreign currency transaction
(losses) gains, net |
(44,811 | ) | (80,211 | ) | 6,558 | (67 | ) | (1,690 | ) | (351 | ) | (120,572 | ) | |||||||||||||||
Other (expense) income, net |
(311 | ) | (12,633 | ) | 45 | | (15,907 | ) | | (28,806 | ) | |||||||||||||||||
Income (loss) before income tax
(provision) benefit |
481,774 | 89,115 | 137,859 | 21,336 | (249,147 | ) | (120 | ) | 480,817 | |||||||||||||||||||
Income tax (provision) benefit |
(100,577 | ) | (22,920 | ) | (49,176 | ) | (9,042 | ) | 42,853 | | (138,862 | ) | ||||||||||||||||
Net income (loss) |
$ | 381,197 | $ | 66,195 | $ | 88,683 | $ | 12,294 | $ | (206,294 | ) | $ | (120 | ) | $ | 341,955 | ||||||||||||
Capital expenditures |
$ | 218,623 | $ | 414,466 | $ | 84,631 | $ | 64,342 | $ | 50,847 | $ | | $ | 832,909 | ||||||||||||||
Year Ended December 31, 2007 |
||||||||||||||||||||||||||||
Service and other revenues |
$ | 1,762,596 | $ | 833,241 | $ | 408,142 | $ | 178,058 | $ | 3,828 | $ | (1,169 | ) | $ | 3,184,696 | |||||||||||||
Digital handset and accessory
revenues |
30,103 | 34,723 | 33,951 | 12,800 | 22 | | 111,599 | |||||||||||||||||||||
Operating revenues |
$ | 1,792,699 | $ | 867,964 | $ | 442,093 | $ | 190,858 | $ | 3,850 | $ | (1,169 | ) | $ | 3,296,295 | |||||||||||||
Segment earnings (losses) |
$ | 675,845 | $ | 217,785 | $ | 138,354 | $ | 35,769 | $ | (144,045 | ) | $ | | $ | 923,708 | |||||||||||||
Management fee |
(34,376 | ) | | | | 34,376 | | | ||||||||||||||||||||
Depreciation and amortization |
(151,597 | ) | (96,435 | ) | (30,436 | ) | (19,946 | ) | (7,008 | ) | 393 | (305,029 | ) | |||||||||||||||
Operating income (loss) |
489,872 | 121,350 | 107,918 | 15,823 | (116,677 | ) | 393 | 618,679 | ||||||||||||||||||||
Interest expense, net |
(60,527 | ) | (33,943 | ) | (2,466 | ) | (120 | ) | (73,782 | ) | 10,196 | (160,642 | ) | |||||||||||||||
Interest income |
29,605 | 744 | 5,370 | 750 | 41,156 | (10,196 | ) | 67,429 | ||||||||||||||||||||
Foreign currency transaction
gains, net |
2,559 | 14,595 | 1,244 | 507 | 103 | | 19,008 | |||||||||||||||||||||
Debt conversion expense |
| | | | (25,753 | ) | | (25,753 | ) | |||||||||||||||||||
Loss on extinguishment of debt |
| | | | (6,311 | ) | | (6,311 | ) | |||||||||||||||||||
Other income (expense), net |
2,103 | (127 | ) | 1,594 | 2 | (5,486 | ) | | (1,914 | ) | ||||||||||||||||||
Income (loss) before income tax
(provision) benefit |
463,612 | 102,619 | 113,660 | 16,962 | (186,750 | ) | 393 | 510,496 | ||||||||||||||||||||
Income tax (provision) benefit |
(101,567 | ) | 36,613 | (39,819 | ) | (3,023 | ) | (48,952 | ) | | (156,748 | ) | ||||||||||||||||
Net income (loss) |
$ | 362,045 | $ | 139,232 | $ | 73,841 | $ | 13,939 | $ | (235,702 | ) | $ | 393 | $ | 353,748 | |||||||||||||
Capital expenditures |
$ | 255,245 | $ | 256,744 | $ | 67,966 | $ | 43,961 | $ | 44,422 | $ | | $ | 668,338 | ||||||||||||||
December 31, 2009 |
||||||||||||||||||||||||||||
Property, plant and equipment,
net |
$ | 670,926 | $ | 1,248,803 | $ | 193,339 | $ | 268,524 | $ | 120,884 | $ | (287 | ) | $ | 2,502,189 | |||||||||||||
Identifiable assets |
$ | 2,234,120 | $ | 2,530,896 | $ | 399,579 | $ | 445,828 | $ | 1,944,557 | $ | (287 | ) | $ | 7,554,693 | |||||||||||||
December 31, 2008 |
||||||||||||||||||||||||||||
Property, plant and equipment,
net |
$ | 687,839 | $ | 725,892 | $ | 212,908 | $ | 151,034 | $ | 114,727 | $ | (287 | ) | $ | 1,892,113 | |||||||||||||
Identifiable assets |
$ | 2,122,133 | $ | 1,492,260 | $ | 450,781 | $ | 291,397 | $ | 733,789 | $ | (287 | ) | $ | 5,090,073 | |||||||||||||
December 31, 2007 |
||||||||||||||||||||||||||||
Property, plant and equipment,
net |
$ | 803,517 | $ | 674,230 | $ | 185,703 | $ | 108,201 | $ | 84,972 | $ | (166 | ) | $ | 1,856,457 | |||||||||||||
Identifiable assets |
$ | 2,297,669 | $ | 1,540,731 | $ | 445,304 | $ | 231,487 | $ | 921,180 | $ | (166 | ) | $ | 5,436,205 | |||||||||||||
12. Quarterly Financial Data (Unaudited)
First | Second | Third | Fourth | |||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
2009 |
||||||||||||||||
Operating revenues |
$ | 961,314 | $ | 1,058,865 | $ | 1,142,458 | $ | 1,234,962 | ||||||||
Operating income |
152,244 | 163,114 | 186,297 | 175,222 | ||||||||||||
Net income |
70,638 | 134,290 | 116,982 | 59,581 | ||||||||||||
Net income, per common share, basic |
$ | 0.43 | $ | 0.81 | $ | 0.70 | $ | 0.36 | ||||||||
Net income, per common share, diluted |
$ | 0.43 | $ | 0.79 | $ | 0.69 | $ | 0.35 | ||||||||
First | Second | Third | Fourth | |||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||
2008 |
||||||||||||||||
Operating revenues |
$ | 993,217 | $ | 1,103,954 | $ | 1,182,725 | $ | 989,484 | ||||||||
Operating income |
191,665 | 199,570 | 218,837 | 157,228 | ||||||||||||
Net income |
107,064 | 148,546 | 84,430 | 1,915 | ||||||||||||
Net income, per common share, basic |
$ | 0.63 | $ | 0.89 | $ | 0.51 | $ | 0.01 | ||||||||
Net income, per common share, diluted |
$ | 0.62 | $ | 0.86 | $ | 0.50 | $ | 0.01 | ||||||||
The sum of the per share amounts do not equal the annual amounts due to changes in the number
of weighted average number of common shares outstanding during the year.
13. Subsequent Event
Televisa Agreement. On February 15, 2010, NII Holdings, Grupo Televisa, S.A.B., a Mexican
corporation, or Televisa, and our wholly-owned subsidiaries, Nextel Mexico and Nextel International
(Uruguay), LLC, a Delaware limited liability company, entered into an investment and securities
subscription agreement pursuant to which Televisa will acquire a 30% equity interest in Nextel
Mexico for an aggregate purchase price of $1.44 billion. Pursuant to this investment agreement, the
parties agreed to form a consortium to participate together in an auction of licenses authorizing
the use of certain frequency bands for wireless communication services in Mexico expected to be
conducted during the first half of 2010. Completion of the transactions contemplated by this
agreement, including the acquisition by Televisa of the equity interest, is conditioned upon, among
other things, the consortiums success in acquiring spectrum in the auction. We are currently
evaluating the effect that completion of the transactions contemplated by this agreement will have
on our consolidated financial statements.
14. Condensed Consolidating Financial Statements
As discussed in Note 5, we issued senior notes in 2009 totaling $1.3 billion in
aggregate principal amount comprised of our 10.0% senior notes due 2016 and our 8.875% senior notes
due 2019 (collectively, the notes). The notes are senior unsecured obligations of NII Capital
Corp., a domestic subsidiary that we wholly own, and are guaranteed by us and by certain of our
other domestic 100% owned subsidiaries. These guarantees are full and unconditional, as well as
joint and several. The notes are not guaranteed by any of our foreign
wholly-owned subsidiaries.
In connection with the issuance of the notes and the guarantees thereof, we are required to
provide certain condensed consolidating financial information. Included in the tables below are
condensed consolidating balance sheets as of December 31, 2009 and 2008, and condensed
consolidating statements of operations and cash flows for the years ended December 31, 2009, 2008
and 2007, of: (a) the parent company, NII Holdings, Inc.; (b) the subsidiary issuer, NII Capital
Corp.; (c) the guarantor subsidiaries on a combined basis; (d) the non-guarantor subsidiaries on a
combined basis; (e) consolidating adjustments; and (f) NII Holdings, Inc. and subsidiaries on a
consolidated basis.
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2009
(in thousands)
As of December 31, 2009
(in thousands)
NII Capital | ||||||||||||||||||||||||
NII Holdings, | Corp. | Guarantor | Non-Guarantor | Intercompany | ||||||||||||||||||||
Inc. (Parent) | (Issuer) (1) | Subsidiaries (2) | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
ASSETS |
||||||||||||||||||||||||
Current assets |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 1,702,190 | $ | 28 | $ | | $ | 801,846 | $ | | $ | 2,504,064 | ||||||||||||
Short-term investments |
| | | 116,289 | | 116,289 | ||||||||||||||||||
Accounts receivable, net |
| | | 613,666 | (75 | ) | 613,591 | |||||||||||||||||
Handset and accessory inventory, net |
| | | 188,476 | | 188,476 | ||||||||||||||||||
Deferred income taxes, net |
(837 | ) | | 1,977 | 147,358 | | 148,498 | |||||||||||||||||
Prepaid expenses and other |
725 | 15 | 4,812 | 214,692 | (34 | ) | 220,210 | |||||||||||||||||
Total current assets |
1,702,078 | 43 | 6,789 | 2,082,327 | (109 | ) | 3,791,128 | |||||||||||||||||
Property, plant and equipment, net |
| | 57,051 | 2,445,425 | (287 | ) | 2,502,189 | |||||||||||||||||
Investments in and advances to
affiliates |
1,686,513 | 2,195,901 | 540,748 | 12,668,947 | (17,092,109 | ) | | |||||||||||||||||
Intangible assets, net |
| | | 343,065 | (5,832 | ) | 337,233 | |||||||||||||||||
Deferred income taxes, net |
| | | 494,343 | | 494,343 | ||||||||||||||||||
Other assets |
2,237,959 | 940,834 | 698,307 | 903,467 | (4,350,767 | ) | 429,800 | |||||||||||||||||
$ | 5,626,550 | $ | 3,136,778 | $ | 1,302,895 | $ | 18,937,574 | $ | (21,449,104 | ) | $ | 7,554,693 | ||||||||||||
LIABILITIES AND
STOCKHOLDERS EQUITY |
||||||||||||||||||||||||
Current liabilities |
||||||||||||||||||||||||
Accounts payable |
$ | | $ | | $ | 997 | $ | 185,999 | $ | | $ | 186,996 | ||||||||||||
Accrued expenses and other |
1,388,189 | 35,578 | 1,547,458 | 1,251,947 | (3,623,963 | ) | 599,209 | |||||||||||||||||
Deferred revenues |
| | | 136,533 | | 136,533 | ||||||||||||||||||
Accrued interest |
5,693 | 31,405 | | 5,317 | | 42,415 | ||||||||||||||||||
Current portion of long-term debt |
342,412 | | 1,684 | 220,448 | | 564,544 | ||||||||||||||||||
Total current liabilities |
1,736,294 | 66,983 | 1,550,139 | 1,800,244 | (3,623,963 | ) | 1,529,697 | |||||||||||||||||
Long-term debt |
1,097,647 | 1,277,206 | 41,063 | 600,328 | | 3,016,244 | ||||||||||||||||||
Deferred revenues |
| | | 22,071 | | 22,071 | ||||||||||||||||||
Deferred credits |
33,900 | 18,667 | (31,161 | ) | 72,526 | | 93,932 | |||||||||||||||||
Other long-term liabilities |
11,872 | | 8,871 | 853,398 | (728,229 | ) | 145,912 | |||||||||||||||||
Total liabilities |
2,879,713 | 1,362,856 | 1,568,912 | 3,348,567 | (4,352,192 | ) | 4,807,856 | |||||||||||||||||
Total stockholders equity |
2,746,837 | 1,773,922 | (266,017 | ) | 15,589,007 | (17,096,912 | ) | 2,746,837 | ||||||||||||||||
$ | 5,626,550 | $ | 3,136,778 | $ | 1,302,895 | $ | 18,937,574 | $ | (21,449,104 | ) | $ | 7,554,693 | ||||||||||||
(1) | NII Capital Corp. is the issuer of our 10.0% senior notes due 2016 and our 8.875% senior notes due 2019. See Note 5. | |
(2) | Represents our subsidiaries that have provided guarantees of the obligations of NII Capital Corp. under our 10.0% senior notes due 2016 and our 8.875% notes due 2019. See Note 5. |
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 31, 2008
(in thousands)
As of December 31, 2008
(in thousands)
NII | ||||||||||||||||||||||||
Holdings, | NII Capital | |||||||||||||||||||||||
Inc. | Corp. | Guarantor | Non-Guarantor | Intercompany | ||||||||||||||||||||
(Parent) | (Issuer) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
ASSETS |
||||||||||||||||||||||||
Current assets |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 490,795 | $ | | $ | | $ | 752,456 | $ | | $ | 1,243,251 | ||||||||||||
Short-term investments |
33,144 | | | 48,858 | 82,002 | |||||||||||||||||||
Accounts receivable, net |
| | | 454,769 | | 454,769 | ||||||||||||||||||
Handset and accessory inventory, net |
| | | 139,285 | | 139,285 | ||||||||||||||||||
Deferred income taxes, net |
2,471 | | 3,695 | 129,099 | | 135,265 | ||||||||||||||||||
Prepaid expenses and other |
1,289 | | 5,821 | 123,595 | | 130,705 | ||||||||||||||||||
Total current assets |
527,699 | | 9,516 | 1,648,062 | | 2,185,277 | ||||||||||||||||||
Property, plant and equipment, net |
| | 81,200 | 1,811,200 | (287 | ) | 1,892,113 | |||||||||||||||||
Investments in and advances to affiliates |
1,915,245 | 1,291,790 | | 1,320,299 | (4,527,334 | ) | | |||||||||||||||||
Intangible assets, net |
| | | 317,878 | | 317,878 | ||||||||||||||||||
Deferred tax assets |
| | | 429,365 | | 429,365 | ||||||||||||||||||
Other assets |
1,367,664 | | 606,721 | 966,652 | (2,675,597 | ) | 265,440 | |||||||||||||||||
$ | 3,810,608 | $ | 1,291,790 | $ | 697,437 | $ | 6,493,456 | $ | (7,203,218 | ) | $ | 5,090,073 | ||||||||||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||||||||||||||||||
Current liabilities |
||||||||||||||||||||||||
Accounts payable |
$ | | $ | | $ | 65 | $ | 136,377 | $ | | $ | 136,442 | ||||||||||||
Accrued expenses and other |
440,711 | 16,583 | 1,100,381 | 963,937 | (2,075,342 | ) | 446,270 | |||||||||||||||||
Deferred revenues |
| | | 116,267 | | 116,267 | ||||||||||||||||||
Accrued interest |
5,693 | | | 7,473 | | 13,166 | ||||||||||||||||||
Current portion of long-term debt |
| | 1,806 | 97,248 | | 99,054 | ||||||||||||||||||
Total current liabilities |
446,404 | 16,583 | 1,102,252 | 1,321,302 | (2,075,342 | ) | 811,199 | |||||||||||||||||
Long-term debt |
1,390,865 | | 23,453 | 619,768 | | 2,034,086 | ||||||||||||||||||
Deferred revenues |
| | | 29,616 | | 29,616 | ||||||||||||||||||
Deferred credits |
50,257 | 48,219 | (27,328 | ) | 73,249 | | 144,397 | |||||||||||||||||
Other long-term liabilities |
10,959 | | 44,704 | 704,595 | (601,606 | ) | 158,652 | |||||||||||||||||
Total liabilities |
1,898,485 | 64,802 | 1,143,081 | 2,748,530 | (2,676,948 | ) | 3,177,950 | |||||||||||||||||
Total stockholders equity |
1,912,123 | 1,226,988 | (445,644 | ) | 3,744,926 | (4,526,270 | ) | 1,912,123 | ||||||||||||||||
$ | 3,810,608 | $ | 1,291,790 | $ | 697,437 | $ | 6,493,456 | $ | (7,203,218 | ) | $ | 5,090,073 | ||||||||||||
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 2009
(in thousands)
For the Year Ended December 31, 2009
(in thousands)
NII Capital | ||||||||||||||||||||||||
NII Holdings, | Corp. | Guarantor | Non-Guarantor | Intercompany | ||||||||||||||||||||
Inc. (Parent) | (Issuer) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Operating revenues |
$ | | $ | | $ | | $ | 4,398,692 | $ | (1,093 | ) | $ | 4,397,599 | |||||||||||
Operating expenses |
||||||||||||||||||||||||
Cost of revenues (exclusive of
depreciation and amortization
included below) |
| | 175 | 1,849,873 | (1,093 | ) | 1,848,955 | |||||||||||||||||
Selling, general and administrative |
| 4 | 149,734 | 1,288,725 | | 1,438,463 | ||||||||||||||||||
Management fee |
(29,335 | ) | | (81,997 | ) | 111,332 | | | ||||||||||||||||
Depreciation and amortization |
| | 6,636 | 426,668 | | 433,304 | ||||||||||||||||||
(29,335 | ) | 4 | 74,548 | 3,676,598 | (1,093 | ) | 3,720,722 | |||||||||||||||||
Operating income (loss) |
29,335 | (4 | ) | (74,548 | ) | 722,094 | | 676,877 | ||||||||||||||||
Other income (expense) |
||||||||||||||||||||||||
Interest expense, net |
(95,723 | ) | (32,903 | ) | (691 | ) | (121,018 | ) | 31,491 | (218,844 | ) | |||||||||||||
Interest income |
3,884 | | 8,367 | 44,763 | (31,428 | ) | 25,586 | |||||||||||||||||
Foreign currency transaction gains
(losses), net |
3,064 | | (1 | ) | 101,803 | | 104,866 | |||||||||||||||||
Equity in income (loss) of affiliates |
401,770 | 272,843 | (47,425 | ) | 166,479 | (793,667 | ) | | ||||||||||||||||
Other income (expense), net |
2,142 | | (4,063 | ) | 5,542 | (5,929 | ) | (2,308 | ) | |||||||||||||||
315,137 | 239,940 | (43,813 | ) | 197,569 | (799,533 | ) | (90,700 | ) | ||||||||||||||||
Income (loss) before income tax
benefit (provision) |
344,472 | 239,936 | (118,361 | ) | 919,663 | (799,533 | ) | 586,177 | ||||||||||||||||
Income tax benefit (provision) |
37,019 | 8,157 | (12,450 | ) | (237,412 | ) | | (204,686 | ) | |||||||||||||||
Net income (loss) |
$ | 381,491 | $ | 248,093 | $ | (130,811 | ) | $ | 682,251 | $ | (799,533 | ) | $ | 381,491 | ||||||||||
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 2008
(in thousands)
For the Year Ended December 31, 2008
(in thousands)
NII Capital | ||||||||||||||||||||||||
NII Holdings, | Corp. | Guarantor | Non-Guarantor | Intercompany | ||||||||||||||||||||
Inc. (Parent) | (Issuer) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Operating revenues |
$ | | $ | | $ | | $ | 4,270,615 | $ | (1,235 | ) | $ | 4,269,380 | |||||||||||
Operating expenses |
||||||||||||||||||||||||
Cost of revenues (exclusive of depreciation and
amortization included below) |
| | | 1,697,553 | (1,235 | ) | 1,696,318 | |||||||||||||||||
Selling, general and administrative |
| | 130,678 | 1,269,964 | | 1,400,642 | ||||||||||||||||||
Management fee |
| | (83,794 | ) | 84,145 | (351 | ) | | ||||||||||||||||
Depreciation and amortization |
| | 6,892 | 398,108 | 120 | 405,120 | ||||||||||||||||||
| | 53,776 | 3,449,770 | (1,466 | ) | 3,502,080 | ||||||||||||||||||
Operating (loss) income |
| | (53,776 | ) | 820,845 | 231 | 767,300 | |||||||||||||||||
Other income (expense) |
||||||||||||||||||||||||
Interest expense, net |
(95,085 | ) | | (988 | ) | (133,971 | ) | 24,528 | (205,516 | ) | ||||||||||||||
Interest income |
19,949 | | 52 | 72,938 | (24,528 | ) | 68,411 | |||||||||||||||||
Foreign currency transaction losses, net |
(1,455 | ) | | | (118,765 | ) | (352 | ) | (120,572 | ) | ||||||||||||||
Equity in income of affiliates |
404,433 | 374,299 | | 107,128 | (885,860 | ) | | |||||||||||||||||
Other (expense) income, net |
(14,776 | ) | | 401 | (14,431 | ) | | (28,806 | ) | |||||||||||||||
313,066 | 374,299 | (535 | ) | (87,101 | ) | (886,212 | ) | (286,483 | ) | |||||||||||||||
Income (loss) before income tax benefit (provision) |
313,066 | 374,299 | (54,311 | ) | 733,744 | (885,981 | ) | 480,817 | ||||||||||||||||
Income tax benefit (provision) |
28,889 | 585 | 9,642 | (177,978 | ) | | (138,862 | ) | ||||||||||||||||
Net income (loss) |
$ | 341,955 | $ | 374,884 | $ | (44,669 | ) | $ | 555,766 | $ | (885,981 | ) | $ | 341,955 | ||||||||||
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
For the Year Ended December 31, 2007
(in thousands)
For the Year Ended December 31, 2007
(in thousands)
NII Capital | ||||||||||||||||||||||||
NII Holdings, | Corp. | Guarantor | Non-Guarantor | Intercompany | ||||||||||||||||||||
Inc. (Parent) | (Issuer) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Operating revenues |
$ | | $ | | $ | | $ | 3,297,464 | $ | (1,169 | ) | $ | 3,296,295 | |||||||||||
Operating expenses |
||||||||||||||||||||||||
Cost of revenues (exclusive of depreciation and
amortization included below) |
| | | 1,295,863 | (1,169 | ) | 1,294,694 | |||||||||||||||||
Selling, general and administrative |
| | 110,282 | 967,611 | | 1,077,893 | ||||||||||||||||||
Management fee |
(34,376 | ) | | (51,122 | ) | 85,498 | | | ||||||||||||||||
Depreciation and amortization |
| | 5,239 | 300,183 | (393 | ) | 305,029 | |||||||||||||||||
(34,376 | ) | | 64,399 | 2,649,155 | (1,562 | ) | 2,677,616 | |||||||||||||||||
Operating income (loss) |
34,376 | | (64,399 | ) | 648,309 | 393 | 618,679 | |||||||||||||||||
Other income (expense) |
||||||||||||||||||||||||
Interest expense, net |
(72,856 | ) | | (925 | ) | (122,599 | ) | 35,738 | (160,642 | ) | ||||||||||||||
Interest income |
40,842 | | 89 | 62,236 | (35,738 | ) | 67,429 | |||||||||||||||||
Foreign currency transaction gains, net |
| | | 19,008 | | 19,008 | ||||||||||||||||||
Debt conversion expense |
(25,753 | ) | | | | | (25,753 | ) | ||||||||||||||||
(Loss) gain on extinguishment of debt |
(7,642 | ) | | | 1,331 | | (6,311 | ) | ||||||||||||||||
Equity in income of affiliates |
360,663 | 351,586 | | 167,986 | (880,235 | ) | | |||||||||||||||||
Other (expense) income, net |
(3,341 | ) | | 406 | 1,021 | | (1,914 | ) | ||||||||||||||||
291,913 | 351,586 | (430 | ) | 128,983 | (880,235 | ) | (108,183 | ) | ||||||||||||||||
Income (loss) before income tax benefit (provision) |
326,289 | 351,586 | (64,829 | ) | 777,292 | (879,842 | ) | 510,496 | ||||||||||||||||
Income tax benefit (provision) |
27,459 | (71,246 | ) | 1,891 | (114,852 | ) | | (156,748 | ) | |||||||||||||||
Net income (loss) |
$ | 353,748 | $ | 280,340 | $ | (62,938 | ) | $ | 662,440 | $ | (879,842 | ) | $ | 353,748 | ||||||||||
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2009
(in thousands)
For the Year Ended December 31, 2009
(in thousands)
NII Holdings, | NII Capital Corp. |
Guarantor | Non-Guarantor | Intercompany | ||||||||||||||||||||
Inc. (Parent) | (Issuer) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||||||
Net income
(loss) |
$ | 381,491 | $ | 248,093 | $ | (130,811 | ) | $ | 682,251 | $ | (799,533 | ) | $ | 381,491 | ||||||||||
Adjustments to reconcile net income (loss) to net cash from operating activities |
(282,016 | ) | (247,064 | ) | 130,811 | 232,637 | 648,896 | 483,264 | ||||||||||||||||
Net cash from operating
activities |
99,475 | 1,029 | | 914,888 | (150,637 | ) | 864,755 | |||||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||||||
Capital expenditures |
(2,393 | ) | | | (647,185 | ) | | (649,578 | ) | |||||||||||||||
Purchases of short-term investments |
| | | (964,489 | ) | | (964,489 | ) | ||||||||||||||||
Proceeds from sales of short-term
investments |
55,369 | | | 903,999 | | 959,368 | ||||||||||||||||||
Transfers to restricted cash |
508 | | | (107,578 | ) | | (107,070 | ) | ||||||||||||||||
Intercompany borrowings |
(157,058 | ) | (1,248,966 | ) | | | 1,406,024 | | ||||||||||||||||
Other |
(47,716 | ) | | | (29,116 | ) | 42,241 | (34,591 | ) | |||||||||||||||
Net cash used in investing
activities |
(151,290 | ) | (1,248,966 | ) | | (844,369 | ) | 1,448,265 | (796,360 | ) | ||||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||||||
Proceeds from issuance of senior notes |
| 1,249,078 | | | | 1,249,078 | ||||||||||||||||||
Intercompany
investments |
1,248,966 | | | | (1,248,966 | ) | | |||||||||||||||||
Repayments under syndicated loan
facilities |
| | | (89,673 | ) | | (89,673 | ) | ||||||||||||||||
Intercompany dividends |
| | | (150,637 | ) | 150,637 | | |||||||||||||||||
Intercompany investments |
| | | 157,058 | (157,058 | ) | | |||||||||||||||||
Other |
14,244 | (1,113 | ) | | 85,011 | (42,241 | ) | 55,901 | ||||||||||||||||
Net cash flows from financing
activities |
1,263,210 | 1,247,965 | | 1,759 | (1,297,628 | ) | 1,215,306 | |||||||||||||||||
Effect of exchange rate changes on cash
and cash equivalents |
| | | (22,888 | ) | | (22,888 | ) | ||||||||||||||||
Net increase in cash and cash equivalents |
1,211,395 | 28 | | 49,390 | | 1,260,813 | ||||||||||||||||||
Cash and cash equivalents,
beginning of year |
490,795 | | | 752,456 | | 1,243,251 | ||||||||||||||||||
Cash and cash equivalents, end of year |
$ | 1,702,190 | $ | 28 | $ | | $ | 801,846 | $ | | $ | 2,504,064 | ||||||||||||
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2008
(in thousands)
For the Year Ended December 31, 2008
(in thousands)
NII Holdings, | NII Capital Corp. |
Guarantor | Non-Guarantor | Intercompany | ||||||||||||||||||||
Inc. (Parent) | (Issuer) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Cash flows from operating activities: |
||||||||||||||||||||||||
Net income (loss) |
$ | 341,955 | $ | 374,884 | $ | (44,669 | ) | $ | 555,766 | $ | (885,981 | ) | $ | 341,955 | ||||||||||
Adjustments to reconcile net income (loss) to net cash from (used in) operating activities |
(295,224 | ) | (374,884 | ) | 44,610 | 220,499 | 859,467 | 454,468 | ||||||||||||||||
Net cash from (used in) operating
activities |
46,731 | | (59 | ) | 776,265 | (26,514 | ) | 796,423 | ||||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||||||
Capital expenditures |
(9,480 | ) | | | (797,130 | ) | | (806,610 | ) | |||||||||||||||
Purchases of short-term investments |
| | | (672,875 | ) | | (672,875 | ) | ||||||||||||||||
Proceeds from sales of short-term
investments |
173,899 | | | 625,831 | | 799,730 | ||||||||||||||||||
Other |
(98,642 | ) | | | (10,775 | ) | 98,631 | (10,786 | ) | |||||||||||||||
Net cash from (used in) investing
activities |
65,777 | | | (854,949 | ) | 98,631 | (690,541 | ) | ||||||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||||||
Borrowings under syndicated loan
facilities |
| | | 125,000 | | 125,000 | ||||||||||||||||||
Payments to purchase common stock |
(242,665 | ) | | | | | (242,665 | ) | ||||||||||||||||
Other |
32,108 | | | 51,493 | (72,117 | ) | 11,484 | |||||||||||||||||
Net cash
flows (used in) from financing
activities |
(210,557 | ) | | | 176,493 | (72,117 | ) | (106,181 | ) | |||||||||||||||
Effect of exchange rate changes on cash
and cash equivalents |
| | | (126,615 | ) | | (126,615 | ) | ||||||||||||||||
Net decrease in cash and cash equivalents |
(98,049 | ) | | (59 | ) | (28,806 | ) | | (126,914 | ) | ||||||||||||||
Cash and cash equivalents,
beginning of year |
588,844 | | 59 | 781,262 | | 1,370,165 | ||||||||||||||||||
Cash and cash equivalents, end of year |
$ | 490,795 | $ | | $ | | $ | 752,456 | $ | | $ | 1,243,251 | ||||||||||||
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the Year Ended December 31, 2007
(in thousands)
For the Year Ended December 31, 2007
(in thousands)
NII Holdings, | NII Capital Corp. |
Guarantor | Non-Guarantor | Intercompany | ||||||||||||||||||||
Inc. (Parent) | (Issuer) | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Cash
flows from operating activities: |
||||||||||||||||||||||||
Net
income (loss) |
$ | 353,748 | $ | 280,340 | $ | (62,938 | ) | $ | 662,440 | $ | (879,842 | ) | $ | 353,748 | ||||||||||
Adjustments
to reconcile net income (loss) to net cash (used in) from operating
activities |
(353,916 | ) | (280,340 | ) | 62,950 | 59,065 | 819,842 | 307,601 | ||||||||||||||||
Net cash (used in) from operating
activities |
(168 | ) | | 12 | 721,505 | (60,000 | ) | 661,349 | ||||||||||||||||
Cash flows from investing activities: |
||||||||||||||||||||||||
Capital expenditures |
(7,534 | ) | | | (616,775 | ) | | (624,309 | ) | |||||||||||||||
Purchases of short-term investments |
(269,061 | ) | | | | | (269,061 | ) | ||||||||||||||||
Other |
(34,054 | ) | | | (71,485 | ) | 53,225 | (52,314 | ) | |||||||||||||||
Net cash used in investing activities |
(310,649 | ) | | | (688,260 | ) | 53,225 | (945,684 | ) | |||||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||||||
Proceeds from issuance of convertible
notes |
1,200,000 | | | | | 1,200,000 | ||||||||||||||||||
Proceeds from stock option exercises |
90,996 | | | | | 90,996 | ||||||||||||||||||
Borrowings under syndicated loan
facilities |
| | | 175,000 | | 175,000 | ||||||||||||||||||
Payments to purchase common stock |
(500,087 | ) | | | | | (500,087 | ) | ||||||||||||||||
Other |
(24,834 | ) | | | (4,480 | ) | 6,775 | (22,539 | ) | |||||||||||||||
Net cash from financing activities |
766,075 | | | 170,520 | 6,775 | 943,370 | ||||||||||||||||||
Effect of exchange rate changes on
cash and cash equivalents |
| | | 2,539 | | 2,539 | ||||||||||||||||||
Net increase
in cash and cash equivalents |
455,258 | | 12 | 206,304 | | 661,574 | ||||||||||||||||||
Cash and cash equivalents,
beginning of year |
133,586 | | 47 | 574,958 | | 708,591 | ||||||||||||||||||
Cash and cash equivalents, end of year |
$ | 588,844 | $ | | $ | 59 | $ | 781,262 | $ | | $ | 1,370,165 | ||||||||||||
NII HOLDINGS, INC. AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at | Charged to | Deductions | Balance at | |||||||||||||
Beginning of | Costs and | and Other | End of | |||||||||||||
Period | Expenses | Adjustments(1) | Period | |||||||||||||
Year Ended December 31, 2009 |
||||||||||||||||
Allowance for doubtful accounts |
$ | 27,875 | $ | 86,960 | $ | (79,687 | ) | $ | 35,148 | |||||||
Valuation allowance for deferred tax assets |
$ | 48,456 | $ | 27,146 | $ | (22 | ) | $ | 75,580 | |||||||
Year Ended December 31, 2008 |
||||||||||||||||
Allowance for doubtful accounts |
$ | 20,204 | $ | 80,628 | $ | (72,957 | ) | $ | 27,875 | |||||||
Valuation allowance for deferred tax assets |
$ | 32,509 | $ | 25,036 | $ | (9,089 | ) | $ | 48,456 | |||||||
Year Ended December 31, 2007 |
||||||||||||||||
Allowance for doubtful accounts |
$ | 15,928 | $ | 46,360 | $ | (42,084 | ) | $ | 20,204 | |||||||
Valuation allowance for deferred tax assets |
$ | 415,637 | $ | 8,712 | $ | (391,840 | ) | $ | 32,509 | |||||||
(1) | Includes the impact of foreign currency translation adjustments. |