On June 5, 2017, we and ice group entered into an investment agreement to partner in the ownership of Nextel Brazil. On July 20, 2017, ice group completed its initial investment of $50.0 million in Nextel Holdings, which indirectly owns Nextel Brazil, in exchange for 30% ownership in Nextel Holdings. The investment agreement also provided ice group with an option, exercisable on or before November 15, 2017, to invest an additional $150.0 million in Nextel Holdings for an additional 30% ownership. ice group did not exercise its option, and on February 27, 2018, we terminated the investment agreement with ice group, which remains a minority investor in Nextel Brazil.Recommends the compensation structure for the Company’s executive officers.
| | a. | Our interestsProvides recommendations to the Compensation Committee on the level of annual compensation for the Company’s executive officers.
Provides input to the Compensation Committee on the strategy, design and the interestsfunding of our stockholders may not align with the interests of ice group, and actions by ice group could negatively impactincentive compensation plans.
Makes plan design recommendations for broad-based benefit programs in which our performance.executive officers participate. |
ice group currently owns 30% of Nextel Holdings, which indirectly owns Nextel Brazil. Pursuant to our shareholders agreement with ice group, the Board of Managers of Nextel Holdings is comprised of five members, with three members appointed by us and, after regulatory approval and as long as ice group maintains at least a 30% stake in Nextel Holdings, two nominees and one observer from ice group. In addition, the shareholders agreement with ice group provides for certain minority protective rights relating to certain significant actions of Nextel Holdings and Nextel Brazil. Consequently, we and our stockholders have less influence on the management and policies of Nextel Brazil after ice group's initial investment than we previously had. ice group may at any time have economic or business interests or goals which are, or which become, inconsistent with the business interests or goals of us and our stockholders, and could attempt to influence or take actions that are contrary to our requests, policies or objectives. The shareholders agreement remains in effect, and we intend to continue to meet all of our obligations in the shareholders agreement.
Compensation Committee Consultant and Independence.Historically, the Compensation Committee considers the advice of an independent compensation consultant, together with information and analysis from management and its own judgment and experience, when evaluating the Company’s executive compensation program. In addition, our partnership2018, the Compensation Committee utilized the services of Lyons, Benenson & Company Inc. (“Lyons, Benenson”), an independent compensation consultant, in connection with icea review of director compensation. The Compensation Committee did not use an independent compensation consultant, comparative industry data or a peer group carries additional risks, includingin 2018 for executive compensation given the possibility that:determination that no material changes would be made to executive officer compensation for 2018.
we may incur liabilities as a result of an action taken by ice group;Additional Compensation and Compensation Plans
disputes between usBenefits.In the United States, the named executive officers participate in the same benefit plans as the general employee population of the Company. International plans vary, and ice group could arise which could distract managementincremental amounts paid to executives who work outside the United States pursuant to foreign government required programs, including mandatory vacation allowances and retirement benefits, are not taken into consideration in determining base salary and are not used in calculating the annual target bonus amounts or in determining those executives’ target total direct compensation. In general, benefits are designed to provide a safety net of protection against the financial catastrophes that can result from focusing timeillness, disability or death, and effortsto provide a reasonable level of retirement income based on our business, result in an impasseyears of service with the Company. Benefits help keep employees focused on serving the Company and not distracted by matters related to paying for health care, saving for retirement or ultimately in litigation or arbitration or otherwise have a negative influence on our partnership and our ability to successfully operate Nextel Brazil; andsimilar issues.
Retirement, Deferred Compensation and Pension Plans. We are implementing a restructuring of our U.S.-based corporate headquarters to further streamline our expenses by shifting the transfer restrictions, rightscosts and associated responsibilities from our headquarters in Reston, Virginia to Nextel Brazil. In connection with these changes, the Company stopped accepting contributions to its 401(k) plan as of first refusal,December 31, 2017 and “tag along”terminated the 401(k) and “drag along” rights containeddistributed all assets in March 2018. We do not have any pension plans that entitle our agreements with ice group could restrict ournamed executive officers to additional benefits. In addition, we have not adopted a supplemental executive retirement plan or ice group's abilityother “excess plan” that pays benefits to exithighly compensated executives whose salaries exceed the joint venture if desired or discourage a third party transaction that might be in the best interests of stockholders.
Any of the foregoing couldInternal Revenue Service’s maximum allowable salary for qualified plans, and we do not have a material adverse effect on our stock price, business and cash flows, financial condition and results of operations.
any nonqualified deferred compensation plans.
| | b. | ice group's second investment in Nextel Holdings was not completed, which could negatively impact us. |
On July 20, 2017, weIn Brazil, executive officers receive deferred benefits under two programs. The first is a government-sponsored savings program required for all employees called Fundo de Garantia de Tempo de Servico (“FGTS”) pursuant to which Nextel Brazil is required to contribute an amount equal to 8% of an employee’s annual salary, bonus and ice group completed ice group's initial $50.0 million investment in Nextel Holdings. Inseverance, if applicable, into an account for the second stagebenefit of that employee. The funds contributed to FGTS become available to the employee or estate of the transaction, ice group hademployee when an optionemployee is terminated without cause, becomes disabled or dies. The second program is a private savings program for employees that is designed to investcomplement Brazilian social security in which Nextel Brazil matches employee contributions up to 10% of an additional $150.0 million inemployee’s annual salary. The employer contribution vests based on length of service, and a minimum of two years of service is required before vesting begins. Once vested, the funds contributed by Nextel Holdings, which would have increased its ownershipBrazil to 60%. ice group's optionthe private savings plan are available to make this second investment was discretionary, and it chose not to exercise this option prior to its expiration. ice group's decision not to exercise its option may result in various negative consequences, including the potential need to obtain additional funding inemployee or estate of the future. If we are unsuccessful in raising additional capital,employee if and when needed, our results of operations and liquidity, as well as our ability to invest in and grow our business, could be negatively impacted, which could negatively impact future operating results.the employee voluntarily leaves the company, is terminated with or without cause, becomes disabled or dies.
In addition, our business may have been adversely affected by the failure to pursue other beneficial opportunities due to the focus of management on our partnership with ice group. Severance Plans. We have incurred substantial expensestwo severance plans that provide for the payment of severance benefits to our U.S.-based employees, including our U.S.-based executive officers, if their employment is terminated in specified circumstances. One plan provides for the payment of severance benefits if the executive officer’s employment is terminated without cause for certain reasons, and the other plan provides for the payment of severance benefits if, in connection with or following a change of control, the negotiation and completionexecutive officer’s employment is terminated without cause or if the executive officer terminates his or her employment with good reason. The two severance plans are mutually exclusive, meaning that an executive officer may be eligible to receive payments under one or the other of the ice group investment,plans depending on the circumstances surrounding the termination of the executive officer’s employment, but it is not possible for an executive officer to receive payments under both plans. While the Compensation Committee generally does not consider the potential payments to executive officers under our severance plans, including termination and wechange of control arrangements, in performing its annual evaluation of the target total direct compensation that may not realizebe realized by our executive officers, the full expected benefitsCompensation Committee believes that the terms of these arrangements are generally consistent with those offered by similarly situated companies. A description of the terms of our partnershipseverance plans, the specific circumstances that trigger payment of benefits, an estimate of benefits payable upon the occurrence of those triggering events and other information relating to such plans can be found below under the caption “Executive Compensation - Potential Payments Under Severance Plans.”
Executive Compensation Governance Practices
We believe that our compensation programs should ensure that our executives remain accountable for business results and take responsibility for the assets of the business and its employees. Consistent with ice group. In addition, ice groupthese objectives, our Board has a significant influence over Nextel Holdings' operationsincorporated the following governance features into our compensation governance programs.
Compensation Risk Mitigation.The Company’s executive compensation program includes features designed to discourage executives and certain rights pursuantother employees from taking unnecessary risks that could harm the financial health and viability of the Company, including balanced performance measures in the 2018 Bonus Plan. The Compensation Committee believes that the performance criteria used in our 2018 Bonus Plan strike an appropriate balance between preserving liquidity and spending for future growth and profitability and mitigate risk to the shareholders agreement, which could make it more difficultCompany because actions taken to improve our performance with respect to one of the criteria would normally be expected to have a corresponding negative impact on other criteria. For example, if management were to implement promotional programs designed to aggressively pursue another transaction or obtain additional funding. ice group's failuregrowth in revenue, those actions would be expected to completeincrease expenses, resulting in a potential deterioration in operational free cash flow in the second investment may also result in negative reactions fromshort term.
The Compensation Committee reviewed the financial markets or fromrisk profile of our customers, vendorscompensation policies and employees, which couldpractices and determined that our compensation programs are not reasonably likely to have a material adverse effect on our stock price, business and cash flows, financial condition and results of operations.
| | 6. | Our failure to maintain effective internal controls over financial reporting may adversely affect the accuracy and timeliness of our financial reporting. |
As described in “Part II. Item 9A. Controls and Procedures,” included in this annual report on Form 10-K, we disclosed a material weakness in internal control over financial reporting due to a continuing material weakness in our information and communication process and our control environment. During 2017, we did not have a sufficient number of experienced resources at Nextel Brazil, which impacted, among other things, our ability to reach timely conclusions and validate the completeness and accuracy of information used to support various accounting analyses, which resulted in immaterial misstatements, some of which were corrected, and control deficiencies across multiple accounts. Management is committed to dedicating the resources necessary to ensure sustained effective control design and operation is achieved, and will continue to work to ensure we maintain sufficient experienced resources, automate processes, and monitor risks related to new accounting requirements or changes that could place an unmanageable strain on our resources.Company.
Our inability to maintain effective internal control over financial reporting,Trading and Derivatives Policy. The Board has adopted a policy prohibiting our directors, officers and members of their immediate families from entering into any transactions in our securities without first obtaining pre-clearance of the transaction from our general counsel. In addition, we prohibit directors and employees from engaging in any transaction involving our common stock that may be viewed as described above, combined with issuesspeculative, including buying or delays in implementing improvements, could result in a material misstatement toselling puts, calls or options, short sales, hedging transactions or purchases of our financial statements or other disclosures, which could have an adverse effectcommon stock on our business, financial condition or results of operations.margin.
| | 7. | Our business could be negatively impacted by our reliance on indirect distribution channels for a significant portion of our sales. |
Our business depends upon third party distribution channels for securing a portion of the new customers to our services. In some instances, we rely on these third party dealers and retailers to serve as the primary contact between us and the customer and to interact with other third parties on our behalf. As a result, there may be risks associated with the actions taken by our distributors or the operators of our other retail channels, including potential risks associated with the failure of our distributors or other retail channels to follow regulatory requirements. The volume of our new customer additions, our ability to retain customers and our profitability could also be adversely affected if these third party dealers or retailers terminate their relationship with us, if there are adverse changes in our relationships with them, if we alter our compensation arrangements with these dealers or retailers or if the financial condition of these dealers or retailers deteriorates.
| | 8. | If our licenses to provide mobile services are not renewed, or are modified or revoked, our business may be restricted. |
Employment Agreements. Generally, we do not enter into employment contracts with our employees. Our foreign subsidiaries enter into employment contracts with their employees where required or customary based on local law or practice. As is customary for executives in Brazil, Nextel Brazil has entered into an employment agreement with Mr. Rittes in connection with his service as chief executive officer of Nextel Brazil. No Repricing Options. The 2015 Plan approved by our stockholders in connection with the approval of our plan of reorganization prohibits the repricing of stock options governed by the 2015 Plan.
Wireless communications licenses and spectrum allocations are subjectCompensation Recoupment Policy. The Compensation Committee believes that the Company’s compensation programs should provide for the reduction or recovery of certain incentive payments made to ongoing review and,our executives in some cases,the event our financial statements were to modificationbe restated in the future in a manner that would have negatively impacted the size or early termination for failurepayment of the award at the time of payment. Although the Compensation Committee has not adopted a formal policy in addition to comply withremedies available under applicable regulations. If Nextel Brazil failslaw, the Compensation Committee intends to comply with the terms of its licenses and other regulatory requirements, including installation deadlines and minimum loading or service availability requirements, they could be fined or their licenses could be revoked. We believe that Nextel Brazil isadopt a policy to recover payments in compliance with the applicable operational requirements of its licenses in all material respects. Further, compliance with these requirements is a condition for eligibility for license renewal. Most of our wireless communications licenses have fixed termsrules issued by the Securities and Exchange Commission pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act when such rules are not renewed automatically. Because governmental authorities have discretion to grant or renew licenses, our licenses may not be renewed or, if renewed, renewal may not be on acceptable economic terms. In addition, regulations in Brazil permit third parties, including our competitors, to challenge the award and use of our licenses. If our competitors are successful in pursuing claims such as these, or if regulators in Brazil take actions modifying or revoking our licenses in response to these claims, our ability to grow our business and improve our results of operations could be materially adversely affected.
| | 9. | If we are not able to manage changes to our business, our operating results will suffer. |
Our ability to achieve our long-range business goals and to grow profitably is dependent on our ability to manage changes to our business model and cost structure that are necessary to allow us to pursue our plans to expand both our service offerings and our targeted customer segments, including by implementing new and more efficient supporting business systems and processes. Our inability to complete these efforts in a timely fashion, or to manage the related costs, could have an adverse impact on our business.
| | a. | We may be limited in our ability to grow unless we successfully expand network capacity and launch competitive services. |
To continue to successfully retain our existing customers, increase our customer base and grow our business, we must economically:
•expand the capacity and coverage of our network in Brazil;finalized.
secure sufficient transmitter and receiver sites at appropriate locations to meet planned system coverage and capacity targets;
•obtain adequate quantities of base radios and other system infrastructure equipment; and
•obtain an adequate volume and mix of handsets to meet customer demand.
In particular, the deployment and expansion of the coverage and capacity of our WCDMA network and the deployment of LTE technology in Brazil has required us to deploy new transmitter and receiver sites in order to meet the expanded coverage and capacity requirements for those networks resulting from differences in our commercial strategies, differences in the propagation characteristics of the spectrum bands being used to support our network in Brazil and the coverage requirements associated with the spectrum licenses being utilized to support our services. In some areas that we serve, individuals and governments are opposing new tower construction and supporting laws restricting the construction of towers and other transmitter and receiver sites. Compliance with such laws could increase the time and costs associated with our planned network deployments. The effort required to locate and build a significant number of additional transmitter sites to support our services in coming years will be substantial, and our failure to meet this demand could adversely affect our business.
In addition, as we launch a broader array of services on our network in Brazil, we must develop, test and deploy new supporting technologies, software applications and systems intended to enhance our competitiveness both by supporting existing and new services and features, and by reducing the costs associated with providing those services. Successful deployment and implementation of new services and technology depend, in part, on the willingness and ability of third parties to develop new handsets and applications that are attractive to our customers and that are available in a timely manner. We may not be able to successfully expand our new network in Brazil as needed or complete the development and deployment of competitive services. Failure to successfully expand our network coverage and capacity and the services we offer could also be expected to result in subscriber dissatisfaction that could affect our ability to retain subscribers and could have an adverse effect on our results of operations and growth prospects. If this occurs, we may be unable to recover the substantial investment we have made in our new networks and the related costs we have incurred and will continue to incur to offer these new services.
Summary Compensation Table | | | | | | | | | | | | | | Name and Principal
Position | Year | Salary(1)
($) | Bonus(2)
($) |
| Stock
Awards(3)
($) |
| Option
Awards(4)
($) |
| Non-Equity
Incentive Plan
Compensation(5)
($) | All Other
Compensation(6)
($) |
| Total
($) | Roberto Rittes(7) | 2018 | 682,079 | — |
| 850,000 |
| — |
| 1,049,180 | 122,766 |
| 2,704,025 | Chief Executive Officer, Nextel Brazil and Principal Executive Officer | 2017 | 515,200 | — |
| — |
| 210,000 |
| 1,032,652 | 145,408 |
| 1,903,260 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Daniel Freiman | 2018 | 465,750 | 465,750 |
| 465,750 |
| — |
| 465,750 | — |
| 1,863,000 | | Chief Financial Officer | 2017 | 461,813 | 242,513 |
| — |
| — |
| 923,625 | — |
| 1,627,951 | | | 2016 | 450,000 | 3,621 |
| — |
| — |
| 900,000 | 10,600 |
| 1,364,221 | Shana Smith
General Counsel and
Corporate Secretary | 2018 | 465,750 | 465,750 |
| 465,750 |
| — |
| 465,750 | — |
| 1,863,000 | | 2017 | 461,813 | 242,513 |
| — |
| — |
| 923,625 | — |
| 1,627,951 | | 2016 | 450,000 | 3,621 |
| — |
| — |
| 900,000 | 10,600 |
| 1,364,221 |
| | | b.(1) | Failure to successfully implement core information technology and operating systems may adversely affect our business operations. |
Our business strategy envisions growing our business by successfully building and expanding our network in Brazil, expanding our product and service offerings and expanding our target customer base. Even if we do expand our business, if we fail to manage our growth effectively, our financial results could be adversely affected. Separately, growth may place a strain on our management systems and resources. We must continue to refine and expand our business development and sales capabilities; our network operations and information technology infrastructure; and the hardware, software, systems, processes and people to effectively support current and future sales, customer service and information requirements of our business in an efficient and cost-effective manner. In addition, failure to prioritize technology initiatives and effectively allocate resources in order to achieve our strategic goals could result in a failure to realize those goals, including the expected benefits of our growth, and could negatively affect our financial results.
Changes to our networks and business strategies require us to implement new operating and supporting systems to improve our ability to address the needs of our customers, as well as to create additional efficiencies and strengthen our internal controls over financial reporting. We may not be able to successfully implement these new systems in an effective or timely manner or we could fail to complete all necessary data reconciliation or other conversion controls when implementing the new systems. In addition, we may incur significant increases in costs and encounter extensive delays in the implementation and rollout of these new systems. Failure to effectively implement our new operating systems may adversely affect our results of operations, customer perceptions and internal controls over financial reporting.
As our business evolves, we must continue to hire, train, supervise and manage new employees. We cannot assure you that we will be able to allocate our human resources optimally or identify and hire qualified employees or retain valued employees. If we are unable to manage our operations, our results of operations could be adversely affected.
| The amount in this column for Mr. Rittes includes 13 months of base salary, which is typical annual base salary in Brazil, plus salary payments for holidays earned in 2018. | 10.(2) | Any modification or terminationThe amounts in this column for Mr. Freiman and Mrs. Smith for 2018 represent a retention bonus paid in connection with the extension of their separation dates. The amounts in this column for 2017 for Mr. Freiman and Mrs. Smith include a retention bonus of $232,875 paid in connection with the extension of their separation dates. The amounts in this column for 2017 and 2016 for Mr. Freiman and Mrs. Smith include payments made in 2017 and 2016 in connection with the bankruptcy asset sale bonus earned in 2015 in connection with the sale of the Company’s operations in Mexico that is paid in connection with the release of funds escrowed for indemnification and subject to reduction based on amounts paid for indemnification claims. | | (3) | The amounts in this column represent the value of restricted stock unit awards granted to executives in 2018 computed in accordance with stock-based compensation accounting rules (FASB ASC Topic 718), but disregarding estimated forfeitures related to service-based vesting conditions, and based on the closing price of our trademark license with Nextel Communications could increase our costs. |
Nextel Communications, Inc., or Nextel Communications, has licensed to us the right to use “Nextel” and other of its trademarks on a perpetual basis in Latin America. However, Nextel Communications may terminate the license on 60 days’ notice if we commit one of several specified defaults (namely, unauthorized use, failure to maintain agreed quality controls or a change in control of NII Holdings). If there is a change in control of one of our subsidiaries, upon 90 days’ notice, Nextel Communications may terminate the sublicense granted by us to the subsidiary with respect to the licensed marks. The loss of the use of the “Nextel” name and trademark could require us to incur significant costs to establish a new brand, which could have a material adverse effect on our operations.
| common stock on the Nasdaq on the date of grant, May 21, 2018, of $2.19. | 11.(4) | Our reputationNo equity compensation was provided to executive officers in 2017 or 2016 other than a new hire grant of options provided to Mr. Rittes on May 16, 2017. The grant date fair value of Mr. Rittes’ options is computed in accordance with stock-based compensation accounting rules (FASB ASC Topic 718), but disregarding estimated forfeitures related to service-based vesting conditions and business could be negatively impactedbased on the closing price of our common stock on the Nasdaq on the date of grant, May 16, 2017, of $0.5547. | | (5) | The amounts in this column represent the bonus that we paid under the Bonus Plans in effect in 2018, 2017 and 2016. The bonus is determined based on a target bonus amount, which is a predetermined percentage of base salary. For Mr. Rittes the bonus is adjusted based on achievement of performance goals. For Mr. Freiman and Mrs. Smith, the bonus in 2017 and 2016 is adjusted based on achievement of bonus goals. | | (6) | Consists of: (a) amounts contributed by cyber security threatsus under our 401(k) plan for 2016; in 2018 and 2017, the Company did not offer a 401(k) plan, (b) in the case of Mr. Rittes, amounts contributed by Nextel Brazil to FGTS and to a private savings plan and (c) in the case of Mr. Rittes, perquisites and other material disruptionspersonal benefits consisting of our wireless networks.the additional cost paid by Nextel Brazil for medical and insurance benefits for programs different than those offered to the general employee base: |
Our information technology and other systems, including those of our third party service providers, that maintain and transmit our proprietary information and our subscribers’ information, including credit card information, location data, or other personal information may be compromised by a malicious third party penetration of our network security or impacted by advertent or inadvertent actions or inactions by our employees and agents. As a result, our subscribers’ information may be lost, disclosed, accessed, used, corrupted, destroyed, or taken without the subscribers’ consent. Cyber attacks, such as the use of malware, computer viruses, denial of service attacks, or other means for disruption or unauthorized access, have increased in frequency, scope, and potential harm in recent years. We also purchase equipment and software from third parties that could contain software defects, Trojan horses, malware, or other means by which third parties could access our network or the information stored or transmitted on such network or equipment.
While to date we have not been subject to cyber attacks or other cyber incidents that, individually or in the aggregate, have been material to our operations or financial condition, the preventive actions we take to reduce the risk of cyber incidents and protect our information technology and networks may not be sufficient to repel a cyber attack in the future. In addition, the costs of such preventative actions may be significant, which may adversely affect our results of operations. While we maintain information security policies and procedures designed to comply with relevant privacy and security laws and restrictions, any major compromise of our data or network security; failure to prevent or mitigate a loss of our services or network, our proprietary information, or our subscribers’ information; and delays in detecting any such compromise or loss, could disrupt our operations, impact our reputation and subscribers’ willingness to purchase our service, and subject us to significant additional expenses, including lost revenues from business interruption, ransom and litigation, which could be material.
In addition to cyber attacks, major equipment failures and the disruption of our wireless networks as a result of natural disasters, severe weather, terrorist attacks, acts of war, or other breaches of network or information technology security, even for a limited period of time, may result in significant expenses, result in a loss of subscribers or impair our ability to attract new subscribers, which in turn could have a material adverse effect on our business, results of operations and financial condition. In the past, more stringent network performance standards and reporting obligations have been adopted by the government in Brazil in order to ensure quality of service during unforeseen disturbances. We could be required to make significant investments in our existing networks in order to comply with these types of network performance standards. Any of these occurrences could damage our reputation, adversely impact subscriber and investor confidence and could negatively impact our results of operations and financial condition. | | | | | | | | | | | | | | | | Year | | Company
Contributions
to 401(k) Plan
($) | | Company
Contributions
to Government
Plans
($) | | Company
Contributions
to Private
Savings Plan
($) | | Perquisites and
Other Personal
Benefits
($) |
| | Mr. Rittes | | 2018 | | N/A | | 54,566 | | 60,530 | | 7,670 |
| | | | 2017 | | N/A | | 93,727 | | 46,310 | | 5,371 |
| | Mr. Freiman | | 2018 | | N/A | | N/A | | N/A | | — |
| | | | 2017 | | N/A | | N/A | | N/A | | — |
| | | | 2016 | | 10,600 | | N/A | | N/A | | — |
| | Mrs. Smith | | 2018 | | N/A | | N/A | | N/A | | — |
| | | | 2017 | | N/A | | N/A | | N/A | | — |
| | | | 2016 | | 10,600 | | N/A | | N/A | | — |
|
Risks Relating to Our Common Stock
| | | 12.(7) | If our stock price does not remain above $1.00, our common stock could be delisted from The NASDAQ Stock Market, which could haveMr. Rittes’ salary, bonus and benefits, other than his equity grant, were paid in Brazilian Reais. As a material adverse effectresult, the amount of compensation provided to Mr. Rittes as reflected in U.S. dollars in the Salary, Non-Equity Incentive Plan Compensation and All Other Compensation columns varies based on the liquidityapplicable exchange rate of our common stock.the Brazilian Real relative to the U.S. dollar. Mr. Rittes’ compensation as reported in U.S. dollars can vary significantly with no actual change to the compensation paid to Mr. Rittes in Brazilian currency if the exchange rates are volatile. The amounts for Mr. Rittes reflected in the Salary, Non-Equity Incentive Plan Compensation and All Other Compensation columns in the table above are based on the average exchange rate of 3.66 Brazilian Reais to 1.00 U.S. dollar for the year ended December 31, 2018. |
On June 14, 2017, we received a notice (the “Notice”) from The NASDAQ Stock Market LLC (“Nasdaq”) indicating that the bid price of our common stock for the prior 30 consecutive business days had closed below the minimum $1.00 per share required for continued listing on the Nasdaq Global Select Market under Nasdaq Listing Rule 5450(a)(1), and we were provided with a grace period of 180 calendar days, or until December 11, 2017, to regain compliance with the minimum bid price requirement. On December 12, 2017, we received a staff determination letter from Nasdaq indicating that we had failed to regain compliance with the minimum closing bid price requirement, that we were not eligible for a second 180-day grace period and that we would be delisted from the Nasdaq Global Select Market. We requested a hearing before a Nasdaq listing qualifications panel, which automatically stayed the delisting of our common stock pending the issuance of a determination by the panel. At our hearing in February 2018, we were granted an extension through June 11, 2018 to regain compliance with the minimum bid share price necessary for continued listing on the Nasdaq Global Select Market, which requires us to maintain a closing bid price of at least $1.00 for a minimum of ten consecutive business days. During the extension, our common stock will continue to trade on the Nasdaq Global Select Market. On March 8, 2018, the closing bid price of our common stock was above $1.00 for the tenth consecutive business day, and we are now in compliance with all Nasdaq Listing Rules. If we are unable to continue to maintain a closing bid price of at least $1.00, there is a risk that our common stock could be delisted from Nasdaq, and thereafter trading in our common stock, if any, may be conducted through the over-the-counter or other markets. As a consequence of such delisting, an investor could find it more difficult to dispose of, or to obtain quotations as to the price of, our common stock. Delisting of our common stock could also result in lower prices per share of our common stock than would otherwise prevail.
| | 13. | There may be circumstances in which the interests of our significant stockholders could be in conflict with the interests of other stockholders. |
As of February 28, 2018, funds associated with 683 Capital Management, Joseph D. Samberg, Exile Capital Management and Capital World Investors owned approximately 13.5%, 12.2%, 9.9% and 9.5%, respectively, of our outstanding common stock. Capital World Investors also has certain additional rights under our registration rights agreement dated June 26, 2015. Circumstances may arise in which these stockholders may have an interest in pursuing or preventing acquisitions, divestitures or other transactions, including the issuance of additional shares or debt, that, in their judgment, could enhance their investment in us or another company in which they invest. Such transactions might adversely affect us or other holders of our common stock. In addition, our significant concentration of share ownership may adversely affect the trading price of our common shares because investors may perceive disadvantages in owning shares in companies with significant stockholders.
| | 14. | The price of our common stock may be volatile. |
The price of our common stock may fluctuate due to a variety of factors, including:
concentration of our business operations in Brazil;
low trading volumes for our common stock and the inability to sustain an active trading marketing for our common stock;
actual or anticipated fluctuations in our quarterly and annual results and those of other public companies in our industry;
industry cycles and trends;
mergers and strategic alliances in the telecommunications industry;
changes in government regulation;Grants of Plan-Based Awards
potential or actual military conflicts or actsThe table below summarizes the cash incentive bonus payments under our 2018 Bonus Plan and grants of terrorism;restricted stock units made to named executive officers in 2018. Our 2018 Bonus Plan does not provide for payouts in fiscal years after 2018. We historically have not issued any performance-based equity incentive awards.
| | | | | | | | | | | | | | | Estimated Future Payouts Under
Non-Equity Incentive Plan Awards(1) | All Other
Stock
Awards:
Number
of Shares
of Stock
or Units
(#) | All Other
Option
Awards:
Number of
Securities
Underlying
Options
(#) | Exercise or
Base Price
of Option
Awards
($/sh) | Grant
Date Fair
Value of
Stock and
Option
Awards
($)(3) | | Name | | Grant Date | Threshold
($)(2) | Target
($) | Maximum
($) | Roberto Rittes(4) | Annual Bonus | N/A | 0 | 1,049,180 | 1,049,180 | N/A | N/A | N/A | N/A | | | Restricted Stock Units | 5/21/2018 | N/A | N/A | N/A | 388,128 | N/A | N/A | 850,000 | | Daniel Freiman | Annual Bonus | N/A | N/A | 465,750 | 931,500 | N/A | N/A | N/A | N/A | | | Restricted Stock Units | 5/21/2018 | N/A | N/A | N/A | 212,671 | N/A | N/A | 465,750 | | Shana Smith | Annual Bonus | N/A | N/A | 465,750 | 931,500 | N/A | N/A | N/A | N/A | | | Restricted Stock Units | 5/21/2018 | N/A | N/A | N/A | 212,671 | N/A | N/A | 465,750 |
the failure of securities analysts to publish research about us, or shortfalls in our operating results from levels forecast by securities analysts;
future sales of our common stock by our stockholders, including in particular, those stockholders whose shares were included in our Registration Statement on Form S-3;
announcements concerning us or our competitors; and
the general state of the securities market.
As a result of these factors, investors in our common stock may not be able to resell their stock at or above the price they paid or at all. These broad market and industry factors may materially reduce the market price of our common stock, regardless of our operating performance.
| | | 15.(1) | Certain provisionsThe amounts reflect the potential range of payouts pursuant to the 2018 Bonus Plan. The actual amounts of the payment made to Mr. Rittes is subject to Company-based performance targets, and for Mr. Freiman and Mrs. Smith payout under the retention-based 2018 Bonus Plan for U.S.-based employees was set at two times target with 50% paid in cash and 50% paid through an award of restricted stock units made on May 21, 2018. The actual amounts of the cash payments made under this plan to the named executive officers are reflected in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table. | | (2) | The 2018 Bonus Plan for U.S.-based employees is a retention bonus plan, and there are no threshold performance levels under the Company’s 2018 Bonus Plan for U.S.-based employees. | | (3) | The amounts in this column reflect the grant date fair value of the restricted stock unit awards on the date of grant computed in accordance with stock-based compensation accounting rules (FASB ASC Topic 718), but disregarding estimated forfeitures related to service-based vesting conditions. We value restricted stock unit awards on the date of grant based on the number of units subject to the grant multiplied by the closing price of our certificatecommon stock on the date of incorporation and our bylaws may make it difficult for stockholders to change the composition of our Board and may discourage, delay or prevent a merger or acquisition that some stockholders may consider beneficial. |
Certain provisions of our Amended and Restated Certificate of Incorporation (the “Charter”) and our Fifth Amended and Restated Bylaws (the “Bylaws”) may have the effect of delaying or preventing changes in control if our Board determines that such changes in control are not in the best interests of the Company and our stockholders. The provisions in our Charter and Bylaws include, among other things, those that:
authorize our Board to issue preferred stock and to determine the price and other terms, including preferences and voting rights, of those shares without stockholder approval;
establish advance notice procedures for nominating directors or presenting matters at stockholder meetings; and
limit the persons who may call special meetings of stockholders.
While these provisions have the effect of encouraging persons seeking to acquire control of our Company to negotiate with our Board, they could enable the Board to hinder or frustrate a transaction that some, or a majority, of the stockholders may believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors. These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our Board, which is responsible for appointing the members of our management.
| grant. | Item 1B.(4) | Unresolved Staff CommentsMr. Rittes’ annual bonus is paid in Brazilian Reais. As a result, the amount of compensation provided to Mr. Rittes as reflected in U.S. dollars in the Estimated Future Payouts Under Non-Equity Incentive Plan Awards column varies based on the applicable exchange rate of the Brazilian Real relative to the U.S. dollar. The amounts for Mr. Rittes reflected in the Estimated Future Payouts Under Non-Equity Incentive Plan Awards in the table above are based on the average exchange rate of 3.66 Brazilian Reais to 1.00 U.S. dollar for the year ended December 31, 2018. |
None.
Our principal executive and administrative offices are located in Reston, Virginia, where we rent temporary office space on a month-to-month basis. In addition, Nextel Brazil leases office space in São Paulo and Rio de Janeiro. Nextel Brazil also leases transmitter and receiver sites under various individual site leases. As of December 31, 2017, Nextel Brazil had 6,871 constructed sites at leased and owned locations, including those constructed for its networks. In addition, Nextel Brazil also had 1,970 radio access network, or RAN, sharing sites, 153 global system for mobile, or GSM, sites and 511 indoor sites as of December 31, 2017.
Outstanding Equity Awards at Fiscal Year-End 2018 Table
| | | | | | | | | | | | | | | | | | | | | | | | Option Awards | | Stock Awards | | Name | Grant Date | | Number of
Securities
Underlying
Unexercised
Options
Exercisable
(#) |
| | Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(#) |
| | Option
Exercise Price
($) |
| | Option
Expiration
Date |
| | Number
of Shares
or Units of
Stock That
Have Not
Vested
(#) |
| | Market Value
of Shares or
Units of Stock
That Have Not
Vested(1)
($) |
| | Roberto Rittes | 5/21/2018 | | — |
| | — |
| | — |
| | — |
| | 258,752(2) |
| | 1,141,096 |
| | 5/16/2017 | | 333,334(3) |
| | 666,666(3) |
| | 0.5547 |
| | 5/16/2027 |
| | — |
| | — |
| | Daniel Freiman | 5/21/2018 | | —(4) |
| | —(4) |
| | — |
| | — |
| | 106,335(5) |
| | 468,937 |
| | Shana Smith | 5/21/2018 | | —(4) |
| | —(4) |
| | — |
| | — |
| | 106,335(5) |
| | 468,937 |
|
| | | Item 3.(1) | Legal ProceedingsThe market value of the restricted stock units is based on the $4.41 closing price of a share of our common stock as reported on the Nasdaq on December 31, 2018. | | (2) | Restricted stock unit award vests 33-1/3% on each of May 21, 2018, May 16, 2019 and May 16, 2020. | | (3) | Stock option award vests 33-1/3% on each of May 16, 2018, May 16, 2019 and May 16, 2020. | | (4) | In 2017, Mr. Freiman and Mrs. Smith returned to the Company all outstanding options previously granted to them, which had an exercise price of $20.68, for no compensation in order to replenish the Company’s equity compensation share pool. | | (5) | Restricted stock unit award made in lieu of cash in connection with 2018 Bonus Plan vests 50% on each of August 15, 2018 and March 15, 2020. |
We are subject to other claims and legal actions that may arise in the ordinary course of business. We do not believe that any of these pending claims or legal actions will have a material effect on our business, financial condition, results of operations or cash flows. See Note 9 to our consolidated financial statements at the end of this annual report on Form 10-K for more information.
Option Exercises and Stock Vested
In the table below, we list information on the vesting of restricted stock and restricted stock units during the year ended December 31, 2018. None of our executive officers exercised any options in 2018. | | | | | | Stock Awards | | Name | Number of Shares
Acquired on Vesting
(#) | | Value Realized on
Vesting(1)
($) | | Roberto Rittes | 129,376 | | 283,333(2) | | Daniel Freiman | 116,008 | | 614,446(3) | | Shana Smith | 116,008 | | 614,446(3) |
| | | Item 4.(1) | Mine Safety DisclosuresThe value realized on vesting is calculated as the number of shares vested multiplied by the closing price of the shares on the date of vesting, unless vesting occurs on a Saturday or Sunday, in which case the shares vested are multiplied by the closing price on the Friday preceding the vesting date. | | (2) | Value of the vesting of 129,376 restricted stock units that were settled in shares of common stock on May 21, 2018. | | (3) | Value of the vesting of 9,672 shares of restricted stock on June 26, 2018 and 106,336 restricted stock units that were settled in shares of common stock on August 15, 2018. |
Not applicable.Pension Benefits and Nonqualified Deferred Compensation
The Company does not offer pension benefits or a nonqualified deferred compensation plan.
PART IIPotential Payments Under Severance Plans
We have arrangements with each of our U.S.-based named executive officers under our Change of Control Severance Plan that provide for payments and benefits if an executive officer’s employment is terminated in connection with the occurrence of certain events involving a change in control. In addition, we have an obligation to make payments and provide certain benefits to our U.S.-based named executive officers under our Severance Plan and the 2015 Plan and the Release Agreements between the Company and Mr. Freiman and Mrs. Smith resulting from termination of employment upon the occurrence of certain events. The following is a summary of the payments that we or our successor may make under each of these arrangements. | | Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
| | 1. | Market for Common Stock |
Payments upon Termination of Employment.Our common stock trades onU.S.-based named executive officers are covered by our Change of Control Severance Plan and our Severance Plan. The Change of Control Severance Plan provides for the Nasdaq Global Select Marketpayment of certain benefits if, in connection with a change of control, an executive officer’s employment is terminated by the Company without cause or by the executive officer for good reason. No benefits are required to be paid unless the executive officer’s employment is terminated. The U.S.-based named executive officers are also entitled to severance benefits if their employment is terminated by the Company in specified circumstances under the trading symbol “NIHD.” Severance Plan. Although the benefits under the Severance Plan apply without regard to whether any change of control has occurred or is pending, the Change of Control Severance Plan provides that employees entitled to receive amounts paid under the Change of Control Severance Plan will not be entitled to cash severance under any other severance plan, including the Severance Plan. Mr. Freiman and Mrs. Smith have additional severance benefits pursuant to the Release Agreements that provide for the payment of one additional year of base salary in addition to the benefits provided by our Severance Plan.
Mr. Rittes is an employee of Nextel Brazil and is not eligible to receive benefits under the Change of Control Severance Plan or the Severance Plan. Mr. Rittes’ termination benefits are as set forth in his employment agreement and as required by Brazilian law. Pursuant to his employment agreement, Mr. Rittes will receive a payment equal to one year of base salary if he is terminated without cause until the legally mandated severance under Brazilian law is greater than this amount, in which case, he will receive the legally mandated severance.
The named executive officers have also received awards of stock options and restricted stock under the 2015 Plan, which contains provisions that may accelerate the vesting of awards made to a named executive officer if we terminate the executive officer’s employment with us, or if the executive officer terminates his or her employment with us for good reason, in connection with a change of control.
Except as noted below, we otherwise have not entered into any employment agreements or other arrangements that provide for benefits in connection with a termination of employment of our named executive officers.
Potential Payments Upon Termination of Employment
Payments Upon Termination of Employment.The following table sets forth onshows the estimated amount of the payments to be made to each of the named executive officers employed with the Company at December 31, 2018 upon termination of their employment in connection with a per share basischange of control under the reported high and low sales prices for our common stock, as reported onChange of Control Severance Plan, their involuntary termination under the market atSeverance Plan or upon their termination in connection with their death, disability or retirement. For purposes of calculating the time,value of the benefits for the quarters indicated. | | | | | | | Price Range of Common Stock | | | High | | Low | | 2016 | | | | | First Quarter | $5.72 | | $3.01 | | Second Quarter | 5.65 | | 2.64 | | Third Quarter | 3.63 | | 2.05 | | Fourth Quarter | 3.33 | | 1.70 | | 2017 | | | | | First Quarter | $3.45 | | $1.05 | | Second Quarter | 1.30 | | 0.36 | | Third Quarter | 0.80 | | 0.40 | | Fourth Quarter | 0.55 | | 0.22 |
| | 2. | Number of Stockholders of Record |
As of March 7, 2018, there were approximately 51 holders of record of our common stock, includingnamed executive officers employed by the Depository Trust Corporation, which acts as a clearinghouse for multiple brokerage and custodial accounts.
We have not paid any dividends on our common stock and do not plan to pay dividends on our common stock for the foreseeable future. We anticipate that for the foreseeable future any cash flow generated from our operations will be used to invest in our business and operations and to make contractual payments under our financing facilities in accordance with our business plan.
| | 4. | Issuer Purchases of Equity Securities |
(b) The following table presents information related to repurchases of our common stock during the three months endedCompany at December 31, 2017:
| | | | | | | | | | | | | | | | | Period | | Total Number of Shares Purchased | | Average Price Per Share | | Total Number of Shares Purchased as Part of Program | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program | | October 1, 2017 - October 31, 2017 | | 78 |
| (1) | $ | 0.43 |
| | 78 |
| | | | November 1, 2017 - November 30, 2017 | | 35 |
| (1) | 0.36 |
| | 35 |
| | | | December 1, 2017 - December 31, 2017 | | — |
| (1) | — |
| | — |
| | | | Total | | 113 |
| (1) | 0.41 |
| | 113 |
| | $ | — |
|
(1) Pursuant2018, we have assumed that the triggering event for payment occurred under each of the arrangements as of December 31, 2018. The footnotes to a general authorization, which was not publicly announced, whereby we are authorizedthe table contain an explanation of the assumptions made by us to repurchase shares of our common stock to satisfy employee withholding tax obligations related to stock-based compensation.calculate the payments, and the discussion that follows the table provides additional details on these arrangements.
Performance Graph
The following graph presents the cumulative total stockholder return on our common stock as listed on the Nasdaq Global Select Market from July 6, 2015 through December 31, 2017. This graph also compares our common stock to the cumulative total stockholder return on the Nasdaq 100 Index, the common stockPotential Payment Upon Termination of Oi S.A. and Telefônica Brasil S.A. The graph assumes an initial investment of $100 in our common stock as of July 6, 2015 and in each of the comparative indices or peer issuers, and that all dividends were reinvested.
 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Index | 7/6/2015 | | 9/30/2015 | | 12/31/2015 | | 3/31/2016 | | 6/30/2016 | | 9/30/2016 | | 12/31/2016 | | NII Holdings | $ | 100.00 |
| | $ | 38.57 |
| | $ | 29.92 |
| | $ | 32.76 |
| | $ | 18.84 |
| | $ | 19.73 |
| | $ | 12.74 |
| | Nasdaq 100 | $ | 100.00 |
| | $ | 94.73 |
| | $ | 104.42 |
| | $ | 102.25 |
| | $ | 100.44 |
| | $ | 111.63 |
| | $ | 110.28 |
| | Oi S.A. | $ | 100.00 |
| | $ | 42.39 |
| | $ | 28.80 |
| | $ | 18.64 |
| | $ | 23.72 |
| | $ | 51.17 |
| | $ | 39.81 |
| | Telefônica Brasil S.A. | $ | 100.00 |
| | $ | 65.39 |
| | $ | 65.22 |
| | $ | 90.33 |
| | $ | 99.32 |
| | $ | 106.84 |
| | $ | 96.03 |
|
| | | | | | | | | | | | | | | Termination Event(1) | | Base
Salary(2)
($) |
| | Bonus(3)
($) |
| | Other
Payments(4)
($) |
| | Equity
Awards(5)
($) | | Total(6)
($) | | Change of Control Severance Plan - Termination by Executive for Good Reason or by the Company Without Cause | | | | | | | | | | | Roberto Rittes(7) | | N/A |
| | 1,049,180 |
| | 726,142 |
| | 3,711,293 | | 5,486,615 | | Daniel Freiman | | 698,625 |
| | 1,397,250 |
| | 53,406 |
| | 468,937 | | 2,618,218 | | Shana Smith | | 698,625 |
| | 1,397,250 |
| | 53,406 |
| | 468,937 | | 2,618,218 | | Severance Plan - Involuntary Termination | | | | | | | | | | | Roberto Rittes(7) | | N/A |
| | 1,049,180 |
| | 726,142 |
| | 2,312,823 | | 4,088,145 | | Daniel Freiman | | 465,750 |
| | 465,750 |
| | 465,750 |
| | 287,788 | | 1,685,038 | | Shana Smith | | 465,750 |
| | 467,750 |
| | 465,750 |
| | 287,788 | | 1,685,038 | | Death, Disability or Retirement | | | | | | | | | | | | Roberto Rittes | | — |
| | — |
| | — |
| | 3,711,293 | | 3,711,293 | | Daniel Freiman | | — |
| | — |
| | — |
| | 468,937 | | 468,937 | | Shana Smith | | — |
| | — |
| | — |
| | 468,937 | | 468,937 |
| | | | | | | | | | | | | | | | | | Index | 3/31/2017 | | 6/30/2017 | | 9/30/2017 | | 12/31/2017 | | NII Holdings | $ | 7.70 |
| | $ | 4.74 |
| | $ | 2.73 |
| | $ | 2.49 |
| | Nasdaq 100 | $ | 124.56 |
| | $ | 129.80 |
| | $ | 137.35 |
| | $ | 146.92 |
| | Oi S.A. | $ | 71.35 |
| | $ | 59.62 |
| | $ | 65.17 |
| | $ | 60.50 |
| | Telefônica Brasil S.A. | $ | 111.43 |
| | $ | 104.93 |
| | $ | 121.73 |
| | $ | 114.98 |
|
| | | | (1) | The Change of Control Severance Plan and Severance Plan provide benefits for employees of NII Holdings. No payments are required to be made to any named executive officer under the Change of Control Severance Plan or the Severance Plan if the executive is terminated for cause or if the executive voluntarily terminates his or her employment (other than for good reason in connection with a change of control under the Change of Control Severance Plan). Change of Control Severance Plan — Termination by Executive for Good Reason or by the Company Without Cause describes the benefits payable to our U.S.-based named executive officers if the named executive officer voluntarily terminates his or her employment for good reason in connection with a change of control or if the named executive officer’s employment is terminated without cause by us or the surviving entity in connection with a change of control as described below in “Change of Control Severance Plan.” The Change of Control Severance Plan provides that employees entitled to receive payments under the Change of Control Severance Plan will not also be entitled to severance under the Severance Plan. Severance Plan — Involuntary Termination describes the benefits payable to a U.S.-based named executive officer if the named executive officer’s employment is terminated by us without cause other than in connection with a change of control under the circumstances described below under “Severance Plan.” As an employee of Nextel Brazil, Mr. Rites is not eligible to receive benefits under the Change of Control Severance Plan or the Severance Plan. Termination benefits for Mr. Rittes are as set forth in his employment agreement and as required by Brazilian law. Equity awards have been granted to the named executive officers pursuant to our 2015 Plan, and this table includes the equity-related impact of an involuntary termination as set forth in the 2015 Plan and grant agreements that apply to equity grants held by all named executive officers.
| | (2) | Amounts included in this column reflect the portion of the severance payment attributable to base salary. Amounts attributable to the target bonus are included in the Bonus column (see note 3 below). The severance payment under the Change of Control Severance Plan for U.S.-based named executive officers is 200% of the executive’s annual base salary on the day immediately preceding the change of control. For Mr. Freiman and Mrs. Smith, the amount of base salary paid in connection with a change of control transaction has been reduced by $232,875, which was previously provided to these executives as a retention bonus in August 2017. As set forth in the retention bonus award letter and the Release Agreements, should Mr. Freiman or Mrs. Smith become eligible for benefits under the Change of Control Severance Plan to be paid on or before June 30, 2020, the retention bonus will be deemed an advance of the amount due to these executives and will reduce the benefits due under the Change of Control Severance Plan. Subsequent to December 31, 2018, the Release Agreements with Mr. Freiman and Mrs. Smith were amended as discussed in "– Retention and Severance Agreements with Mr. Freiman and Mrs. Smith" below. | | The severance payment under the Severance Plan for the U.S.-based named executive officers is 100% of the named executive officer’s annual base salary at the time of termination. Mr. Freiman and Mrs. Smith have entered into Release Agreements with the Company that provide for an additional 12 months of annualized base salary at the time of termination without cause in a situation not involving payment under the Change of Control Severance Plan.
| | (3) | Amounts included in this column reflect the portion of the severance payment attributable to the target bonus. The portion of the severance payment attributable to base salary is included in the Base Salary column (see note 2 above). Under the Change of Control Severance Plan, upon termination, each U.S.-based executive is entitled to receive as part of the severance payment 200% of the executive’s annual target bonus on the day immediately preceding the change of control, as well as an amount equal to the earned portion of the bonus payment for the period ending on the termination event. |
| | Item 6. | Selected Financial Data |
On September 15, 2014, we and eight of our U.S. and Luxembourg-domiciled subsidiaries, including NII Capital Corp. and Nextel International Telecom, or NIIT, filed voluntary petitions seeking relief under Chapter 11 of Title 11 of the United States Bankruptcy Code, which we refer to as Chapter 11, in the United States Bankruptcy Court for the Southern District of New York, which we refer to as the Bankruptcy Court. In addition, subsequent to September 15, 2014, five additional subsidiaries of NII Holdings, Inc. filed voluntary petitions seeking relief under Chapter 11 in the Bankruptcy Court. We refer to the companies that filed voluntary petitions seeking relief under Chapter 11 collectively as the Debtors. Nextel Brazil and our previous other operating subsidiaries in Latin America were not Debtors in these Chapter 11 cases.
On June 19, 2015, the Bankruptcy Court entered an order approving and confirming the First Amended Joint Plan of Reorganization Proposed by the Plan Debtors and the Official Committee of Unsecured Creditors, dated April 20, 2015. We refer to this plan, as amended, as the Plan of Reorganization. On June 26, 2015, the conditions of the Bankruptcy Court's order and the Plan of Reorganization were satisfied, the Plan of Reorganization became effective, and we and the other Debtors emerged from the Chapter 11 proceedings. We refer to June 26, 2015 as the Emergence Date.
In connection with our emergence from Chapter 11, we were required to apply the provisions of fresh start accounting to our financial statements. Because our results of operations during the period from June 26, 2015 to June 30, 2015 were not material, we applied fresh start accounting to our consolidated financial statements as of the close of business on June 30, 2015. As a result of the application of fresh start accounting and other events related to our reorganization under Chapter 11, the Successor Company's financial results are prepared under a new basis of accounting and are not directly comparable to the Predecessor Company's financial results.
The tables below set forth selected consolidated financial data for the periods or as of the dates indicated and should be read in conjunction with the consolidated financial statements and notes thereto in Item 8 of this report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this report. The selected consolidated financial data presented below includes the results of Nextel Brazil and our corporate headquarters. In connection with the sale of Nextel Argentina, Nextel Mexico, Nextel Chile and Nextel Peru, we have included the results of these former operating companies for all periods presented as discontinued operations in the tables below. For more information regarding material uncertainties in our business, see Note 1 and Note 9 to our consolidated financial statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Successor Company | | | Predecessor Company | | | Year Ended December 31, | | Year Ended December 31, | | Six Months Ended December 31, | | | Six Months Ended June 30, | | Year Ended December 31, | | | 2017 | | 2016 | | 2015 | | | 2015 | | 2014 | | 2013 | | | | | (in thousands, except per share data) | | Consolidated Statement of Operations Data: | | | | | | | | |
| | |
| | |
| | Operating revenues | $ | 869,767 |
| | $ | 985,046 |
| | $ | 529,434 |
| | | $ | 683,711 |
| | $ | 1,848,954 |
| | $ | 2,203,040 |
| | Impairment, restructuring and other charges | $ | 179,727 |
| | $ | 1,384,811 |
| | $ | 32,308 |
| | | $ | 36,792 |
| | $ | 105,664 |
| | $ | 121,578 |
| | Foreign currency transaction (losses) gains, net | $ | (1,271 | ) | | $ | 76,615 |
| | $ | (99,737 | ) | | | $ | (63,948 | ) | | $ | (51,149 | ) | | $ | (92,456 | ) | | Net (loss) income from continuing operations | $ | (351,666 | ) | | $ | (1,533,879 | ) | | $ | (292,491 | ) | | | $ | 1,519,401 |
| | $ | (1,224,671 | ) | | $ | (1,200,425 | ) | | Net (loss) income from continuing operations per common share, basic | $ | (3.51 | ) | | $ | (15.32 | ) | | $ | (2.93 | ) | | | $ | 8.73 |
| | $ | (7.11 | ) | | $ | (6.98 | ) | | Net (loss) income from continuing operations per common share, diluted | $ | (3.51 | ) | | $ | (15.32 | ) | | $ | (2.93 | ) | | | $ | 8.71 |
| | $ | (7.11 | ) | | $ | (6.98 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | Successor Company | | | Predecessor Company | | | December 31, | | | December 31, | | | 2017 | | 2016 | | 2015 | | | 2014 | | 2013 | | | | | (in thousands) | | Consolidated Balance Sheet Data: | | | | | |
| | | |
| | |
| | Total assets | $ | 1,105,098 |
| | $ | 1,418,509 |
| | $ | 2,729,908 |
| | | $ | 5,374,034 |
| | $ | 8,679,954 |
| | Long-term debt, including current portion | $ | 655,707 |
| | $ | 756,316 |
| | $ | 665,067 |
| | | $ | 925,271 |
| | $ | 5,298,412 |
| | Liabilities subject to compromise | $ | — |
| | $ | — |
| | $ | — |
| | | $ | 4,593,493 |
| | $ | — |
|
| | | | The Severance Plan provides for the payment of an amount equal to a prorated portion of the actual bonus payment earned for the period ending on the termination event for each U.S.-based named executive officer, payable when bonuses are paid to all other eligible employees. In addition, the 2018 Bonus Plan, which applies to the short-term incentive bonus provided to each named executive officer, provides for a potential prorated portion of the actual bonus payment earned for the period ending on the severance date in connection with a termination without cause, paid at the Company’s discretion. | | (4) | Other Payments for the U.S.-based named executive officers with respect to the Change of Control Severance Plan include 18 months of COBRA health insurance and six months of outplacement counseling assistance; an estimate has been included for these expenses. The U.S.-based executive officers are also eligible for reimbursement of legal, accounting and other fees incurred by the executive in a good faith effort to obtain the benefits provided for under the Change of Control Severance Plan; no amounts have been included in the Other Payments column for these potential payments.
Mr. Rittes is an employee of Nextel Brazil and is not eligible to receive benefits under the Change of Control Severance Plan or the Severance Plan. For Mr. Rittes, Other Payments listed under the Change of Control Severance Plan and Severance Plan represent a severance payment equal to one-year of base salary due to Mr. Rittes under his employment agreement in connection with a termination without cause by Nextel Brazil until legal severance in Brazil exceeds such amount, at which time, Mr. Rittes would receive legal severance. In addition, under Brazilian law, employees terminated without cause are entitled to a 40% increase in FGTS funds, and Other Payments for Mr. Rittes include $70,404 in FGTS relating to a termination without cause. The U.S. dollar amount included above is based on the average exchange rate of 3.66 Brazilian Reais to 1.00 U.S. dollar for the year ended December 31, 2018.
For Mr. Freiman and Mrs. Smith, Other Payments under Severance Plan – Involuntary Termination include an additional 12 months of annualized base salary at the time of termination, as provided for in the Release Agreements. | | (5) | Amounts included in the Equity Awards column reflect the value of unvested restricted stock units calculated using the closing price of our common stock on December 31, 2018 of $4.41 multiplied by the shares whose vesting or payment are prorated or accelerated upon the triggering event. For options, the value is the amount determined using the closing price of our common stock on December 31, 2018 minus the option exercise price multiplied by the shares of common stock that would be purchased through the exercise of the options.
In a change of control situation, we have assumed that the surviving entity has elected not to assume, replace or convert any of the awards made under the 2015 Plan. As described in more detail below, the 2015 Plan provides for the vesting of all unvested options and restricted stock in specific circumstances following a change of control of the Company. The 2015 Plan and the grant agreements made under that plan provide for a pro rata vesting of outstanding awards if an employee is terminated without cause based on the number of days served. The 2015 Plan and the grant agreements made under that plan also provide that outstanding and unvested options and restricted stock will vest upon an employee’s death, disability, and if the employee retires at or after age 65 or at an earlier age with the consent of the Compensation Committee, with vested options remaining exercisable for a period of one year after the date the employee ceases to be an employee of the Company or its subsidiary. The 2015 Plan and the grant agreements also provide for continued exercisability of vested options for a period of 90 days from the employee’s date of termination in all other situations. | | (6) | In addition to the amounts specified in this column, upon termination in each of the circumstances noted, the executive officer is entitled to receive base salary and cash or non-cash benefits earned prior to the date of the named executive officer’s termination, including payments with respect to accrued and unused vacation time and any reimbursements for the reasonable and necessary business expenses incurred by the named executive officer prior to termination. | | (7) | Mr. Rittes is an employee of Nextel Brazil and is not eligible for benefits under the Change of Control Severance Plan or the Severance Plan. Mr. Rittes’ termination benefits are as set forth in his employment agreement and as required by Brazilian law. Under Brazilian law, Mr. Rittes may be eligible for additional benefits than those indicated based on the specific circumstances of his termination. Under his employment agreement, Mr. Rittes is entitled to receive 2,400,000 Brazilian Reais, which represents 13 monthly salaries, in connection with a termination without cause. Under the 2018 Bonus Plan, Mr. Rittes is eligible to receive a prorated portion of the bonus payment earned for the period ending on his severance date in connection with a termination without cause. Mr. Rittes’ restricted stock unit awards and option awards were made pursuant to our 2015 Plan, and the terms of our 2015 Plan and the grant agreements made under that plan apply to his equity grants. The U.S. dollar amount included above is based on the average exchange rate of 3.66 Brazilian Reais to 1.00 U.S. dollar for the year ended December 31, 2018. |
Impairment, RestructuringChange of Control Severance Plan. The Change of Control Severance Plan provides that each U.S.-based named executive officer will receive a payment if a change of control, as defined below, occurs and Other Charges. During 2017, we reviewed our Nextel Brazil segmentsuch U.S.-based named executive officer either is terminated without cause or resigns for potential impairmentgood reason. Each U.S.-based named executive officer will be entitled to receive 200% of his or her annual base salary and determined thattarget bonus at the carrying valuedate of this segment was not fully recoverable. Ashis or her termination upon such an event as provided in the Change of Control Severance Plan. Each named executive officer will be entitled to receive his or her payment under the Change of Control Severance Plan in a result, we recorded non-cash asset impairment chargeslump sum within thirty days following termination of $57.9 millionemployment.
We or the surviving entity will also pay the full premium cost of continued health care coverage for each named executive officer under the federal COBRA law in such a termination. We will make the COBRA payments up to reduce the carrying valueslesser of Nextel Brazil's long-lived assets18 months or the time at which the named executive officer is reemployed and eligible to their respective fair values. receive group health coverage benefits under another employer-provided plan.
In addition, in 2017, Nextel Brazil recognized $70.5 millionthe event that a named executive officer incurs any legal, accounting or other fees and expenses in restructuring costs primarily relateda good faith effort to future lease costsobtain benefits under the Change of Control Severance Plan, we or the surviving entity will reimburse the named executive officer for certain transmitter and receiver sites in low-usage areas and $34.2 million in restructuring costs related to a change insuch reasonable expenses. In the scopeevent that any payment made under the Change of its radio access network, or RAN, sharing implementation. During 2016, we reviewed our Nextel Brazil segment for potential impairment and determined that the carrying value of our Nextel Brazil segment was not fully recoverable. As a result, we recorded a non-cash asset impairment charge of $1.34 billion to reduce the carrying values of Nextel Brazil's long-lived assets to their respective fair values. During the six months ended December 31, 2015 and the six months ended June 30, 2015, we recognized $32.3 million and $36.8 million, respectively, in impairment, restructuring and other charges primarily relatedControl Severance Plan is subject to the shutdown or abandonmentexcise tax imposed by Section 4999 of certain transmitter and receiver sites in Brazil, retail store closures relatedthe Internal Revenue Code, the named executive officer’s payments will be reduced to the realignmentmaximum amount that does not trigger the excise tax unless the named executive officer would be better off (on an after-tax basis) receiving all payments and paying all excise and income taxes.
A change of distribution channels and restructuring charges incurred in connection withcontrol will be deemed to occur under the realignmentChange of our organization and staffing structure. During 2014, we recognized $105.7 million in impairment, restructuring and other charges primarily relatedControl Severance Plan when:
| | | | ● | we are merged, consolidated or reorganized into or with another company, or we sell or otherwise transfer all or substantially all of our assets to another company, and, as a result of either transaction, less than a majority of the combined voting power of the then outstanding securities of the resulting company immediately after the transaction is held by the holders of our voting securities immediately prior to the transaction; | | ● | the directors on our Board as of the effective date of the Change of Control Severance Plan or directors elected subsequent to that date and whose nomination or election was approved by a vote of at least two-thirds of the directors on the Board as of the effective date of the Change of Control Severance Plan cease to be a majority of our board; | | ● | our stockholders approve our complete liquidation or dissolution; | | ● | an individual, entity or group acquires beneficial ownership of 50% or more of our then outstanding shares or 50% of our then outstanding voting power to vote in an election of our directors, excluding any acquisition directly from us; or | | ● | our Board approves a resolution stating that a change of control has occurred. |
A named executive officer will receive compensation under the discontinuationChange of certain projects related to the next generation of our push-to-talk services, restructuring charges incurred in connection with the realignment of our organization and staffing structure, and other asset impairment charges related to store closures and the shutdown or abandonment of transmitter and receiver sites in Brazil. During 2013, we recognized $121.6 million in impairment, restructuring and other charges primarily related to the discontinuation of our use of software relating to customer relationship management, the restructuring of certain outsourcing agreements to manage our network infrastructure and restructuring charges incurred in connection with staff reductions and the realignment of our organization.Control Severance Plan if: Foreign Currency Transaction (Losses) Gains, Net. Consolidated foreign currency transaction gains during the year ended December 31, 2016 were primarily due to the appreciation in the value of the Brazilian real relative to the U.S. dollar during 2016 on Nextel Brazil's U.S. dollar-denominated net liabilities. Consolidated foreign currency transaction losses for each of the remaining periods presented primarily relate to the impact of the depreciation in the value of the Brazilian real relative to the U.S. dollar on Nextel Brazil's assets and liabilities. See “Critical Accounting Policies and Estimates — Foreign Currency.” for more information.
Net (Loss) Income From Continuing Operations. For the years ended December 31, 2017 and 2016, net loss from continuing operations included the $57.9 million and the $1.34 billion non-cash asset impairment charges, respectively, to reduce the carrying values of Nextel Brazil's long-lived assets to their respective fair values discussed above. For the six months ended June 30, 2015, net income from continuing operations included $1,956.9 million in reorganization items, which represented a $1,775.8 million gain we recognized in connection with the settlement of our liabilities subject to compromise upon our emergence from Chapter 11 and a $261.8 million gain we recognized as a result of the implementation of fresh start accounting, partially offset by professional fees and other costs incurred in connection with our Chapter 11 filing. | | | | ● | the named executive officer is terminated without cause, as defined in the Change of Control Severance Plan, within 12 months from a change of control or prior to the change of control if the named executive officer reasonably demonstrates that the termination was at the request of a third party attempting to effect a change of control or otherwise in connection with a change of control; or | | ● | the named executive officer voluntarily terminates his or her employment for good reason during the 12 months following a change of control, defined as when, after the change of control: |
| | Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
INDEX TO MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
| | | | there was a material and Cautionary Statements | adverse change in or reduction of the named executive officer’s duties, responsibilities and authority that the named executive officer held preceding the change of control; | | ● | the named executive officer’s principal work location was moved to a location more than 40 miles away from his or her prior work location; | | ● | the named executive officer was required to travel on business to a substantially greater extent than prior to the change of control, which results in a material adverse change in his or her employment conditions; | | ● | the named executive officer’s salary, bonus or bonus potential were materially reduced or any other significant adverse financial consequences occurred; | | ● | the benefits provided to the named executive officer were materially reduced in the aggregate; or | | ● | we or any successor fail to assume or comply with any material provisions of the Change of Control Severance Plan. |
Severance Plan. The Severance Plan provides payments to our U.S.-based named executive officers in the event of an involuntary termination of employment, which includes termination due to job elimination, work force reductions, lack of work, a determination by us that the executive officer’s contributions no longer meet the needs of the business and any other reason determined by us. Under the Severance Plan, each of the U.S.-based named executive officers will be entitled to a payment equal to 12 months of his or her annualized base salary, not including any bonus, incentive payments or commission payments. Each eligible named executive officer will also receive a pro rata payment of his or her bonus based on the portion of the year that the named executive officer was employed by us. We will pay the bonus to the named executive officer at the same achievement level as other employees subject to the same bonus targets and when we pay bonuses to employees at the same position level following the bonus period.
We expect to make a lump sum payment of the amount due under the Severance Plan, although we reserve the right to make the payments periodically for a period not to exceed 24 months. In order to receive payments under the Severance Plan, each named executive officer must return all of our property and execute a release agreement:
| | | | ● | acknowledging that the payments to be received represent the full amount that the named executive officer is entitled to under the Severance Plan; | | ● | releasing any claims that the named executive officer has or may have against us; and | | ● | 40in our discretion, agreeing not to compete with us for a certain period. | | | | | | | | | | | | |
The release agreement will also require the named executive officer to comply with specified confidentiality, non-disparagement and non-solicitation obligations. Our obligation to make or continue severance payments to the executive officer will cease if the executive officer does not comply with those obligations.
2015 Incentive Compensation Plan. The 2015 Plan currently covers the grant of certain incentives and awards, including stock options, restricted stock, restricted stock units and cash-based incentives, to our employees, including the named executive officers. Under the 2015 Plan, if a change of control occurs and the incentives and awards granted under the 2015 Plan are not assumed by the surviving entity, or the employee is terminated within a certain period following a change of control, each outstanding award is treated as explained below. A change of control under the 2015 Plan is defined the same as in the Change of Control Severance Plan and the same events that trigger payments to the named executive officer under the Change of Control Severance Plan trigger payments under the 2015 Plan.
Forward-Looking and Cautionary Statements | | | | ● | Options. If the surviving entity assumes, replaces or converts the options and the named executive officer is terminated within 12 months under circumstances that would trigger payment, the options will become fully exercisable, vested or earned. If the options are not assumed, replaced or converted, each option shall be fully exercisable upon a change of control. | | ● | Restricted Stock and Restricted Stock Units. If the surviving entity assumes, replaces or converts the stock award and the named executive officer is terminated within 12 months under circumstances that would trigger payment, the stock awards shall be vested. If the restricted stock and restricted stock unit awards are not assumed, replaced or converted, the restricted stock or restricted stock units shall be vested upon a change of control. | | ● | Cash-Based Incentives. If the surviving entity assumes, replaces or converts cash-based incentives and the named executive officer is terminated within 12 months under circumstances that would trigger payment, each outstanding cash-based incentive award shall be deemed earned pro-rata based on the fraction of the performance period that has elapsed from the beginning of the performance period until termination. If the cash-based incentives are not assumed, replaced or converted, the cash-based incentives shall be deemed earned upon a change of control. |
This annual report on Form 10-K may contain “forward-looking statements” withinThe 2015 Plan provides that the meaning of Section 27ACompensation Committee, as administrator of the Securities Act of 1933 and Section 21E ofplan, shall determine what amounts will be payable to the Securities Exchange Act of 1934, as amended. Statements regarding expectations, including forecasts regarding operating results, performance assumptions and estimatesnamed executive officer upon termination, death, disability or retirement in the agreement under which awards are made under the 2015 Plan. The award agreements relating to capital requirements, as well as other statements that are not historical facts, are forward-looking statements. These forward-looking statements are generally identifiedthe 2015 emergence long-term equity grants provide for full vesting of any outstanding restricted stock and option awards covered by such words or phrases as “we expect,” “we believe,” “would be,” “will allow,” “expects to,” “will continue,” “is anticipated,” “estimate,” “project” or similar expressions. These forward-looking statements involve risk and uncertainty, and a variety of facts could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in these forward-looking statements. We do not have a policy of updating or revising forward-looking statements except as otherwise required by law.
While we provide forward-looking statements to assist in the understanding of our anticipated future financial performance, we caution readers not to place undue reliance on any forward-looking statements, which speak only as of the date that we make them. Forward-looking statements are based on current expectations and assumptions that are subject to significant risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Except as otherwise required by law, we undertake no obligation to publicly release any updates to forward-looking statements to reflect events after the date of this annual report on Form 10-K, including unforeseen events.
Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on our operations and results of our business include, but are not limited to:
our ability to attract and retain customers;
our ability to satisfy the requirements of our debt obligations;
our ability to access sufficient debt or equity capital to meet any future operating and financial needs;
our ability to meet established operating goals and generate cash flow;
the availability of other funding sources, including the proceeds from the sale of Nextel Mexico held in escrow;
risks associated with our partnership with ice group;
general economic conditions in Brazil and in the market segments that we are targeting for our services;
the political and social conditions in Brazil, including political instability, which may affect Brazil's economy and the regulatory environment there;
the impact of foreign currency exchange rate volatility in the local currency in Brazil when compared to the U.S. dollar and the impact of related currency depreciation in Brazil;
our having reasonable access to and the successful performance of the technology being deployed in our service areas, and improvements thereon, including technology deployedagreement in connection with digital two-way mobile dataa named executive officer’s death, disability or internet connectivity servicesretirement at or after age 65. In addition, the agreements provide for vesting of a prorated portion of the restricted stock and option awards based on time served if the named executive officer is terminated without cause.
Employment and Retention Agreements with Mr. Rittes. In accordance with his employment agreement with Nextel Brazil, Mr. Rittes will receive a payment equal to one year of base salary if he is terminated without cause until the legally mandated severance under Brazilian law is greater than this amount, in Brazil;which case, he will receive the legally mandated severance. In connection with the Transaction and to ensure a smooth change of control, Nextel Brazil has entered into a retention agreement with Mr. Rittes providing for a retention bonus equal to 12 months of base salary to be paid 50% on the three-month anniversary of the closing of the Transaction and 50% on the six-month anniversary of the closing of the Transaction, in each case subject to Mr. Rittes’ continued employment through the applicable payment date. If the Transaction does not close, no retention payment will be made, and if Mr. Rittes is terminated without cause after the transaction closes, any unpaid retention bonus will be paid in connection with his departure.
Retention and Severance Agreements with Mr. Freiman and Mrs. Smith. As previously disclosed by the availabilityCompany, in 2015 the Board approved an organizational restructuring of adequate quantitiesthe Company to further streamline expenses by shifting the costs and associated responsibilities from the Company’s headquarters in Reston, Virginia to Nextel Brazil. In connection with this restructuring, the Board approved the Release Agreement for certain executive officers of system infrastructurethe Company, which, as amended, provides for a severance payment of two times base salary and subscriber equipment and components at reasonable pricing to meet our service deployment and marketing plans and customer demand; risks relatedpro-rated bonus. The Release Agreements were provided to the operationofficers on November 13, 2015 and expansionhave been amended from time-to-time to reflect changes in the timeline of our networkthe restructuring.
In connection with the Company’s announcement of the Transaction, the Compensation Committee of the Board determined on March 28, 2019 that it would be in Brazil, including the potential needbest interest of the Company to retain Mr. Freiman and Mrs. Smith beyond April 1, 2019 and agreed to amend the Release Agreements with Mr. Freiman and Mrs. Smith in exchange for additional fundingeach officer’s agreement to support enhanced coverageextend their employment. Under the amended arrangements, Mr. Freiman and capacity,Mrs. Smith will receive the 2019 Retention Payments, subject to their continued employment through the applicable payment dates. The severance payment received by Mr. Freiman and Mrs. Smith if they are terminated in connection with a Change of Control of the Company, as defined in the Change of Control Severance Plan, on or before June 30, 2020 will be reduced by the 2017 Retention Payment and the risk2019 Retention Payments. If termination in connection with a Change of Control of the Company occurs after June 30, 2020, Mr. Freiman and Mrs. Smith will be eligible for the full benefits set forth in the Change of Control Severance Plan. In addition, the defined Severance Period of 12 months under the Change of Control Severance Plan will be removed should the Transaction close. Finally, should Mr. Freiman and Mrs. Smith be terminated in a situation that wedoes not trigger payment under the Change of Control Severance Plan, they will not attract enough subscribers to supportremain eligible for the related costs of deploying or operating the network; our ability to successfully scale our billing, collection, customer care and similar back-office operations to keep pace with customer growth as necessary, increased system usage rates and growth or to successfully deploy new systems that support those functions;
future legislation or regulatory actions relating to our services, other wireless communications services or telecommunications generally and the costs and/or potential customer impacts of compliance with regulatory mandates;
the ability to achieve and maintain market penetration and average subscriber revenue levels sufficient to provide financial viability to our business;
the quality and price of similar or comparable wireless communications services offered orRegular Severance to be offered by our competitors, including providers of cellular services and personal communications services;paid when termination without cause occurs.
market acceptance of our new service offerings;
Director Compensation Fees Payable to Non-Employee Directors. Each of our abilitynon-employee directors other than Mr. Shindler receives an annual retainer for serving on the Board. In addition, our non-employee directors other than Mr. Shindler receive additional fees for their service on committees. Our director compensation for 2018 consisted of the following components:
| | | | | | Board: | | | Annual Retainer | $ | 70,000 |
| | Annual Non-Executive Chair | $ | 45,000 |
| | | | | Committees: | | | Committee Chairs | $ | 5,000 |
| | Audit Committee | $ | 25,000 |
| | Compensation Committee | $ | 20,000 |
| | Corporate Governance and Nominating Committee | $ | 15,000 |
|
We pay all retainers in arrears in quarterly installments. We also reimburse directors for travel expenses incurred in connection with attending Board, committee and stockholder meetings and for other related expenses. We do not provide any additional compensation to successfully windemployees who serve as a director or a committee member during periods in which they are also employees.
On August 1, 2017, Mr. Shindler voluntarily stepped down our legacy iDEN networkas Chief Executive Officer of the Company. During his tenure as Chief Executive Officer and member of the Board, Mr. Shindler did not receive any additional compensation for his service as a director. Mr. Shindler continues to serve as a member of the Board and serves as the direct line of reporting for the executive team on behalf of the Board. Mr. Shindler receives $200,000 per year paid bi-weekly and health benefits in Brazilconnection with this role. In addition, a grant of restricted stock previously provided to Mr. Shindler on June 26, 2015 and migrate our iDEN subscriber basethat vested 33 1/3% on each of June 26, 2016, June 26, 2017 and June 26, 2018 remained in place and continued to our WCDMA network;vest after Mr. Shindler stepped down from his position. Under Mr. Shindler’s Separation and Release Agreement, as amended, Mr. Shindler has a change of control benefit of $2,576,784, representing 200% of his annual target bonus as of August 1, 2017 and 18 months of COBRA benefits, should the Company enter into a transaction agreement for a transaction meeting the definition of change of control as defined in the Company’s Change of Control Severance Plan on or before July 31, 2019, payable within twenty business days of the closing of such transaction. equipment failure, natural disasters, terrorist acts or other breaches
2018 Director Equity Incentives. In August 2018, directors received grants of network or information technology security;restricted stock units pursuant to the 2015 Plan that are scheduled to vest in three equal annual installments beginning on August 17, 2019. In connection with these awards, the Compensation Committee of the Board engaged Lyons, Benenson as its independent compensation consultant, to assist it in evaluating its director compensation program and other risks to select an appropriate peer group of comparable companies for purposes of setting director compensation. Based on the analysis of the peer group’s director compensation levels, the Company’s director compensation levels had been below the peer group since the Company emerged from bankruptcy in 2015, primarily because the Compensation Committee had not made equity grants to directors in 2016 and uncertainties described2017 in Part I, Item 1A. “Risk Factors,” in this annual report on Form 10-Korder to preserve the limited number of shares available under the 2015 Plan. In addition, the Compensation Committee and Lyons, Benenson considered the Company’s business and strategy, the evolution and growth of the Company since emergence from time to time, in our other reports filedbankruptcy, the amount and type of work required of directors since emergence from bankruptcy, the Company’s unique situation and level of risk associated with the SEC.
Introduction
The following is aCompany’s foreign operations and strategic process, and recent requests by stockholders seeking better alignment of interests between stockholders and directors. In consideration of these and other factors and after consultation and discussion with Lyons, Benenson, the Compensation Committee determined that total director compensation should be above the peer group and analysis of:
our consolidated financial condition as of December 31, 2017 and 2016 and our consolidated results of operations for the years ended December 31, 2017 and 2016, for the six-month periods ended December 31, 2015 and June 30, 2015 and for the combined twelve-month period ended December 31, 2015; and
significant factors which we believe could affect our prospective financial condition and results of operations.
Historical results may not indicate future performance. See “Item 1A. — Risk Factors” for risks and uncertainties that may impact our future performance.
We referawarded 236,996 restricted stock units to our majority-owned Brazilian operating company, Nextel Telecomunicações Ltda., as Nextel Brazil.
Nextel Brazil Business Overview. We provide wireless communication services under the NextelTM brand in Brazil with our principal operations located in major urban and suburban centers with high population densities and related transportation corridors of that country where there is a concentration of Brazil’s population and economic activity, including primarily Rio de Janeiro and São Paulo. Nextel Brazil operates a wideband code division multiple access, or WCDMA, network, which has been upgraded to offer long-term evolution, or LTE, services in certain areas. Nextel Brazil's network enables us to offer a wide range of products and services supported by that technology. We are also a party to a roaming agreement that allows us to offer our subscribers nationwide voice and data services outside of our network's footprint. Our target market is individual consumers who use our services to meet both professional and personal needs. Our target subscribers generally exhibit above average usage, revenue and loyalty characteristics. We believe our target market is attracted to the services and pricing plans we offer, as well as the quality of and data speeds provided by our network.
The services we currently offer include:
mobile telephone voice and wireless data services;
international voice and data roaming services;
application-based radio connection; and
value-added services, including sports, music and entertainment streaming capabilities; online education; and access to national and international WiFi hotspot networks.
In September 2017, Nextel Brazil decided to wind down its iDEN operations with a target to cease all iDEN services in mid-2018. As a result, Nextel Brazil has provided noticeeach of the eventual shutdowndirectors other than Mr. Shindler, and 33,699 restricted stock units to its remaining iDEN subscribersMr. Shindler, due to Mr. Shindler’s director compensation package and is currently workingMr. Shindler’s Separation and Release Agreement and the potential change of control payment available under that agreement. Although awarded in 2018, these grants were intended to actively migrate the remainder of its legacy iDEN subscriber base to its WCDMA network by proactively promoting attractive service offerings. As of December 31, 2017, 11% of our subscribers were on Nextel Brazil's iDEN network.cover equity awards for 2018, 2019 and 2020.
The majority of our subscribers purchase services from us by acquiring the SIM cards from us separately, and using the SIM cards in handsets that they acquire from other sources. As of December 31, 2017, Nextel Brazil had about 3.246 million total subscriber units in commercial service, which we estimate to be about 4.2% of total postpaid mobile handsets and other devices in commercial service in Brazil. We refer to these subscriber units in commercial service collectively as our subscriber base.
Our goal is to grow our subscriber base and revenues by providing differentiated wireless communications services that are valued by our existing and potential subscribers. We are also striving to manage our capital and operating expenditures in the near term and improve our profitability and cash flow over the long term. Our strategy for achieving these goals is based on several core principles, including:
offering a unique and superior customer-centric experience, including a reliable and high quality wireless network and rate plan flexibility;
continuingAt vesting, restricted stock units may be settled in cash or in shares of common stock at the election of the Compensation Committee of the Board.
Director Compensation Table
In the table and discussion below, we summarize the compensation paid to implement cost reduction strategiesour non-employee directors.
Director Compensation for Fiscal Year 2018 | | | | | | | | | Name | | Fees Earned or
Paid in Cash
($) | | Stock
Awards(1)
($) | | Total
($) | | Kevin Beebe | | 140,000 | | 1,293,998 | | 1,433,998 | | James Continenza | | 110,000 | | 1,293,998 | | 1,403,998 | | Howard Hoffmann | | 115,000 | | 1,293,998 | | 1,408,998 | | Ricardo Knoepfelmacher | | 70,000 | | 1,293,998 | | 1,363,998 | | Christopher Rogers | | 110,000 | | 1,293,998 | | 1,403,998 | | Robert Schriesheim | | 115,000 | | 1,293,998 | | 1,408,998 | Steven Shindler(2) | | 221,159 | | 183,997 | | 405,156 |
(1) The amounts in this column reflect the grant date fair value of restricted stock unit awards computed in accordance with stock-based compensation accounting rules (FASB ASC Topic 718). On August 17, 2018, we provided each director other than Mr. Shindler with a grant of 236,996 shares of restricted stock units that vest 33-1/3% on each of August 17, 2019, August 17, 2020 and redesigning our network architecture in orderAugust 17, 2021. The grant date fair value was $5.46 per share. The dollar value of the restricted stock units subject to lower cash costs per user, outweigh scale disadvantages, create an agile organization and improve overall profitability; focusing on higher value customer segments that generate higher ARPU and lower subscriber turnover; and
buildingthose grants, based on the strength$1.88 closing price of a share of our common stock as reported on the Nasdaq on April 1, 2019, was $445,552. Mr. Shindler received a grant of 33,699 shares of restricted stock units. At vesting, restricted stock units may be settled in cash or in shares of common stock at the election of the unique positioningCompensation Committee of the Nextel brand.Board.
| | | (2) | Fees Earned or Paid in Cash include $21,159 of the Company's portion of health benefits. |
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee is a current or former officer of us or any of our subsidiaries. In addition, there are no compensation committee interlocks with other entities with respect to any such member.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Securities Ownership of Directors and Management
In addition,the table and the related footnotes below, we list the amount and percentage of shares of our common stock that are deemed under the rules of the SEC to be beneficially owned on April 15, 2019 by:
•each person who served as one of our directors as of that date; •each of the named executive officers; and •all directors and executive officers as a resultgroup.
| | | | | | | | | | | | | Shares Covered By | | Name of Beneficial Owner | | Shares
Owned and Vested Options(1) | | Options to Vest(2) | | Restricted Stock Units to Vest(3) | | Percent of
Class(4) | | Kevin Beebe | | 11,607 | | | | | | * | | Howard Hoffmann | | 11,607 | | | | | | * | | James Continenza | | 11,607 | | | | | | * | | Ricardo Knoepfelmacher | | 11,607 | | | | | | * | | Christopher Rogers | | 11,607 | | | | | | * | | Robert Schriesheim | | 11,607 | | | | | | * | | Steven Shindler | | 88,309 | | | | | | * | | Roberto Rittes | | 462,710 | | 333,333 | | 129,376 | | * | | Daniel Freiman | | 155,211 | | | | | | * | | Shana Smith | | 153,934 | | | | | | * | | All directors and executive officers as a group (10 persons) | | 929,806 | | 333,333 | | 129,376 | | * |
| | | * | Indicates ownership of less than 1% |
(1) Includes common stock currently owned and exercisable options. (2) Indicates shares that may be acquired upon the exercise of pressurestock options exercisable on or within 60 days of April 15, 2019. (3) Indicates restricted stock units that will vest and may be settled in shares of the Company’s common stock or cash equal to the fair market value thereof on or within 60 days of April 15, 2019. (4) Based on the total number of shares reflected in columns one through three and 101,580,702 shares of our capital resources, overcommon stock issued and outstanding on April 15, 2019.
Principal Stockholders
The table below lists each person or group, as that term is used in Section 13(d)(3) of the last several years, we have implemented changesExchange Act, known by us to be the beneficial owner of more than 5% of our outstanding common stock as of April 15, 2019.
| | | | | | | | Name and Address of Beneficial Owner | Amount and Nature of
Beneficial Ownership | | Percent
of Class(1) | | Principal Stockholders | | | | | 683 Capital Management, LLC(2)
3 Columbus Circle, Suite 2205
New York, NY 10019 | 13,163,432 | | 13.0 | % | Joseph D. Samberg(3)
1091 Boston Post Road
Rye, NY 10580 | 12,362,133 | | 12.2 | % | BlackRock, Inc.(4)
55 East 52nd Street
New York, NY 10055 | 6,412,748 | | 6.3 | % | New Generation Advisors, LLC(5)
13 Elm Street, Suite 2
Manchester, MA 01944 | 6,009,190 | | 5.9 | % | | (1) | Based on 101,580,702 shares of common stock issued and outstanding on April 15, 2019. | | (2) | According to a Schedule 13G/A filed with the SEC on February 14, 2019, 683 Capital Management, LLC, 683 Capital Partners, LP and Ari Zweiman have shared voting and shared dispositive power with respect to 13,163,432 shares of our common stock. |
| | | | | | | | (3) | According to a Schedule 13G/A filed with the SEC on December 4, 2018, Joseph D. Samberg has sole voting and sole dispositive power with respect to 12,362,133 shares of our common stock, of which 10,096,986 shares are owned by The Joseph D. Samberg Revocable Trust, for which Mr. Samberg serves as trustee, and 2,265,147 shares are directly held by an entity controlled by Mr. Samberg. | | (4) | According to a Schedule 13G filed with the SEC on February 8, 2019, BlackRock, Inc. has sole voting power with respect to 6,213,115 shares of our common stock and sole dispositive power with respect to 6,412,748 shares of our common stock. | | (5) | According to a Schedule 13G/A filed with the SEC on February 14, 2019, New Generation Advisors, LLC, George Putnam III, Michael S. Weiner, Darren Beals and F. Baily Dent have shared voting and shared dispositive power with respect to 6,009,190 shares of our common stock. Michael S. Weiner has sole voting power with respect to 14,900 additional shares of our common stock. |
Equity Compensation Plans
The following table sets forth information as of December 31, 2018, with respect to compensation plans under which shares of our common stock are authorized for issuance.
| | | | | | | Number of Securities to Be Issued upon Exercise of Outstanding Options, Warrants and Rights | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights(1) | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (2) | | Equity Compensation Plans Approved by Shareholders: | | | | | 2015 Incentive Compensation Plan | 5,027,060 | $2.69 | 3,554,910(3) | | Total | 5,027,060 | $2.69 | 3,554,910 |
| | | (1) | Restricted stock units issued under the 2015 Incentive Compensation Plan are not included in the calculation of weighted average exercise price. |
| | | (2) | Amounts exclude any securities to be issued upon exercise of outstanding options, warrants and rights, and shares subject to an outstanding but unvested restricted stock or restricted stock unit award. |
| | | (3) | The 2015 Plan permits the grant of one or more of the following awards: options, restricted stock, restricted stock units and cash-based incentives. The number of shares authorized to be issued under the 2015 Plan will be reduced by one share of common stock for each share of common stock issued pursuant to a stock option and by one and one-half shares of common stock for each share of common stock issued pursuant to all other equity-based awards. As of December 31, 2018, common stock reserved for future issuance does not include 2,054,427 restricted stock units that were issued in 2018 that may be settled in cash or shares of common stock at vesting, and if settled in shares of common stock, would reduce the shares available for grant under our 2015 Plan by 3,081,641 shares. |
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Director Independence
In accordance with our Corporate Governance Guidelines, a majority of our Board must be independent as defined by the Nasdaq listing rules and the Exchange Act. On March 11, 2019, the Board determined that the following five of its seven current members (71%) are independent: Kevin Beebe (Chair), James Continenza, Howard Hoffmann, Christopher Rogers and Robert Schriesheim. In making that determination, the Board considered Mr. Shindler’s former employment as chief executive officer of the Company and the relationship between Mr. Knoepfelmacher and RK Partners described below in “Certain Relationships and Related Transactions.” The Audit, Compensation, and Corporate Governance and Nominating Committees are comprised entirely of independent directors. The positions of principal executive officer and Chair of the Board are not held by the same individual. Kevin Beebe serves as Chair of the Board and Roberto Rittes is the principal executive officer of the Company.
Certain Relationships and Related Transactions
As stated in our Corporate Governance Guidelines and the charter of the Audit Committee, the Audit Committee is responsible for reviewing and approving or ratifying transactions involving the Company and related persons (such as the Company’s officers, directors, family members of the officers and directors, and other related parties) in accordance with the requirements of Nasdaq. In determining whether to approve or ratify a related party transaction, the Audit Committee evaluates whether the transaction is in the best interests of the Company taking into consideration all relevant factors, including, as applicable, the Company’s business rationale for entering into the transaction and the fairness of the transaction to better align our organizationthe Company. The Audit Committee generally seeks to consider and costsapprove these transactions in advance where practicable but may also ratify them after the transactions are entered into, particularly in instances where the transactions are entered into in the ordinary course of business or if the transaction is on terms that are consistent with oura policy previously approved by the Audit Committee or the Board. In instances where the transaction is subject to renewal or if the Company has the right to terminate the relationship, the Audit Committee expects to periodically monitor the transaction to ensure that there are no changed circumstances that would render it advisable for the Company to amend or terminate the transaction.
The Audit Committee has reviewed and approved an agreement dated October 27, 2016 between the Company’s subsidiary, Nextel Telecomunicações Ltda (“Nextel Brazil”) and RK Partners, a financial and operational restructuring advisory firm for which Ricardo Knoepfelmacher, a director of the Company, serves as the Managing Partner, for advice relating to the restructuring of the Company’s outstanding debt. The agreement, as amended, provides for fixed monthly payments of R$330,000, or $103,474 based on the average exchange rate of 3.1892 Brazilian Reais to 1.00 U.S. dollar for the year ended December 31, 2017 (the “Average Exchange Rate”) and financial results. These changes have included reduced spendinga success fee of R$12,000,000, or $3,762,699 based on subscriber growth, reductionsthe Average Exchange Rate, less 50% of the monthly payments made through March 2017 and 100% of the monthly payments made starting in capital expenditures, significant reductionsApril 2017. For services provided in our headquarters staff through2017, Nextel Brazil paid RK Partners fixed monthly payments totaling R$3,914,122, or $1,227,305 based on the reorganization of certain roles and responsibilities between our Brazil and corporate teams, and headcount reductions in Brazil, all of which were designed to reduce costs while maintaining the support necessary to meet our subscribers' needs. Additionally, during 2017, we reached agreement with our bank lenders to obtain amortization and covenant relief. EffectiveAverage Exchange Rate, including taxes. The project was successfully completed in January 2018 we entered intowith amendments to Nextel Brazil's equipment financing facility and its bank loans with Brazilian lenders, which aligned the material financing terms in all three facilities. Among other changes, these amendments provide forBrazil’s credit facilities that included the deferral of substantially all principal payments for the first 48 months from the date of effectiveness, an extension of the loan maturity dates to 98 months from the date of effectiveness and a holiday for certain financial covenant compliance including the net debt financial covenant, until June 30, 2020. See Note 7In connection with the effectiveness of the amendments, RK Partners was paid a success fee in January 2018 of R$9,354,741, or $2,933,256 based on the Average Exchange Rate. Due to ourNextel Brazil’s agreement with RK Partners, the Board has determined that Mr. Knoepfelmacher does not meet the independence standards of the Nasdaq listing rules and the Exchange Act.
Item 14. Principal Accountant Fees and Services
Fees Paid to Independent Registered Public Accounting Firm
KPMG LLP has audited the Company’s consolidated financial statements for more information on these financing arrangements. In 2018, we expect that projected lower customer turnover will allow us to grow our WCDMA subscriber base to generate higher revenues in the future. We will also continue to focus on opportunities to reduce operating expenses through operational improvements and cost reductions to preserve our liquidity. See “C. Liquidity and Capital Resources” and “D. Future Capital Needs and Resources” for more information.
Partnership Agreement. On June 5, 2017, we and ice group, an international telecommunications company operating primarily in Norway under the “ice.net” brand, along with certain affiliates of ours and ice group, entered into an investment agreement to partner in the ownership of Nextel Brazil. On July 20, 2017, ice group completed its initial investment of $50.0 million in Nextel Holdings S.à r.l., or Nextel Holdings, a newly formed subsidiary of NII that indirectly owns Nextel Brazil, in exchange for 30% ownership in Nextel Holdings. In connection with the initial investment, ice group received 50.0 million shares of cumulative preferred voting stock in Nextel Holdings, and we received 116.6 million shares of common stock in this entity. The investment agreement also provided ice group with an option, exercisable on or before November 15, 2017, to invest an additional $150.0 million in Nextel Holdings for an additional 30% ownership. ice group did not exercise its option, and on February 27, 2018, we terminated the investment agreement. Since we continue to have a controlling interest in Nextel Brazil, we have consolidated this entity and its subsidiaries.
Prior to the closing of the initial investment by ice group, we contributed $116.6 million in cash to Nextel Holdings. In connection with and subsequent to the closing of the initial investment, we contributed an additional $56.8 million to Nextel Holdings, representing all of our freely distributable cash outside of Nextel Brazil, including proceeds released from escrowed funds from the sale of Nextel Mexico received to date, less $50.0 million we retained for our expenses outside of the partnership.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires us to make estimates and judgments that affect the amounts reported in those financial statements and accompanying notes. We consider the accounting policies and estimates addressed below to be the most important to our financial position and results of operations, either because of the significance of the financial statement item or because they require the exercise of significant judgment and/or use of significant estimates. Although we believe that the estimates we use are reasonable, due to the inherent uncertainty involved in making those estimates, actual results reported in future periods could differ from those estimates.
Revenue Recognition. While our current revenue recognition policy does not require the exercise of significant judgment or the use of significant estimates, we believe that our policy is significant as revenue is a key component of our results of operations.
Operating revenues primarily consist of wireless service revenues and revenues generated from the sale of handsets and accessories. We present our operating revenues net of value-added taxes, but we include certain revenue-based taxes that are our primary obligation.
Service revenues primarily consist of fixed monthly access charges. Other components of service revenue include revenues from calling party pays programs, variable charges for usage in excess of plan limits, long-distance charges and international roaming revenues derived from calls placed by our subscribers on other carriers’ networks. We recognize service revenue as service is provided, net of credits and adjustments for service discounts. We recognize excess usage, local, long distance and calling party pays revenue at contractual rates per minute as minutes are used. We record cash received in excess of revenues earned as deferred revenues. We recognize handset revenue when title and risk of loss passes to the customer.
Other revenues primarily include amounts generated from our handset maintenance programs, roaming revenues generated from other companies’ subscribers that roam on our networks and rental revenues from third party tenants that rent space on our transmitter and receiver sites. 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 revenues from third party tenants on a monthly basis based on the terms set by the underlying agreements.
Allowance for Doubtful Accounts. We establish an allowance for doubtful accounts receivable sufficient to cover probable and reasonably estimable losses. We estimate this allowance based on historical experience, aging of accounts receivable and collections trends. Actual write-offs in the future could be impacted by general economic and business conditions, as well as fluctuations in subscriber deactivations, that are difficult to predict and therefore may differ from our estimates. A 10% increase in our consolidated allowance for doubtful accounts as of December 31, 2017 would have resulted in $4.2 million of additional bad debt expense for the yearfiscal years ended December 31, 2017.
Depreciation of Property, Plant2018 and Equipment. We record our network assets and other improvements that extendDecember 31, 2017. The following table sets forth the useful lives of the underlying assets at cost and depreciate those assets over their estimated useful lives with the exception of property, plant and equipment owned as of the date of our implementation of fresh start accounting. As a result of the application of fresh start accounting in connection with our emergence from Chapter 11 and the non-cash asset impairment charges we recorded in 2016 and 2017, we adjusted all existing property, plant and equipment to its estimated fair value and revised the associated depreciable lives. We calculate depreciation using the straight-line method based on estimated useful lives ranging from 3 to 30 years for network equipment, communication towers and network software and 3 to 10 years for software, office equipment, furniture and fixtures, and other, which includes non-network internal use software. We amortize leasehold improvements over the shorter of the lease termsfees accrued or the useful lives of the improvements. Our networks are highly complex and, due to constant innovation and enhancements, certain components of those networks may lose their utility sooner than expected. We periodically reassess the economic life of these components and make adjustments to their useful lives after considering historical experience and capacity requirements, consulting with the vendor and assessing new product and market demands and other factors. When our assessment indicates that the economic life of a network component is shorter than originally anticipated, we depreciate its remaining book value over its revised useful life. Further, the deployment of any new technologies could adversely affect the estimated remaining useful lives of our network assets, which could significantly impact future results of operations.
Amortization of Intangible Assets. Our intangible assets primarily consist of our telecommunications licenses and our customer relationships. We calculate amortization on our licenses using the straight-line method based on estimated useful lives of 26 to 30 years. We calculate amortization on our customer relationships using the straight-line method based on an estimated useful life of 4 years. While the terms of our licenses, including renewals, range from 10 to 40 years, the political and regulatory environment in Brazil is continuously changing and, as a result, the cost of renewing our licenses beyond that range could be significant. In addition, the wireless telecommunications industry is experiencing significant technological change, and the commercial life of any particular technology is difficult to predict. In light of these uncertainties, we classify our licenses as definite lived intangible assets. Many of our licenses are subject to renewal after the initial term, provided that we have complied with applicable rules and policies in each of our markets. We intend to comply, and believe we have complied, with these rules and policies in all material respects as they relate to licenses that are material to our business. However, because governmental authorities have discretion aspaid to the renewal of licenses, our licenses may not be renewed or we may be required to pay significant renewal fees, either of which could have a significant impact on the estimated useful lives of our licenses, which could significantly impact future results of operations. As a result of the implementation of fresh startCompany’s independent registered public accounting we revised the remaining estimated useful lives of our licenses to include renewal periods in cases where it is probable that a renewal will occur.
Valuation of Long-Lived Assets. We review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the total of the expected undiscounted future cash flows is less than the carrying value of our assets, we recognize a loss for the difference between the estimated fair value and the carrying value of the assets.
In 2017, we reviewed our Nextel Brazil segment for potential impairment and determined that the carrying value of this segment was not fully recoverable. As a result, in 2017, we recorded non-cash asset impairment charges of $57.9 million to reduce the carrying values of Nextel Brazil's long-lived assets to their respective fair values. We allocated these impairment charges on a pro rata basis between property, plant and equipment and spectrum licenses.
During 2016, we reviewed our Nextel Brazil segment for potential impairment and determined that the carrying value of our Nextel Brazil segment was not fully recoverable. As a result, in 2016, we recorded a non-cash asset impairment charge of $1.34 billion to reduce the carrying values of Nextel Brazil's long-lived assets to their respective fair values.
Foreign Currency. We translate Nextel Brazil's results of operations from the Brazilian real to the U.S. dollar using average exchange rates for the relevant period. We translate assets and liabilities using the exchange rate in effect at the relevant reporting date. We report the resulting gains or losses from translating foreign currency financial statements as other comprehensive income or loss. Because we translate Nextel Brazil's operations using average exchange rates, its operating trends may be impacted by the translation.
We report the effect of changes in exchange rates on U.S. dollar-denominated assets and liabilities held by Nextel Brazil as foreign currency transaction gains or losses. We report the effect of changes in exchange rates on intercompany transactions of a long-term investment nature as part of the cumulative foreign currency translation adjustment in our consolidated financial statements. The intercompany transactions that, in our view, are of a long-term investment nature include certain intercompany loans and advances from our U.S. and Luxembourg subsidiaries to Nextel Brazil. In contrast, we report the effect of exchange rates on U.S. dollar-denominated intercompany loans and advances to our foreign subsidiaries that are due, or for which repayment is anticipated in the foreseeable future, as foreign currency transaction gains or losses in our consolidated statements of comprehensive loss. As a result, our determination of whether intercompany loans and advances are of a long-term investment nature can have a significant impact on how we report foreign currency transaction gains and losses in our consolidated financial statements.
Loss Contingencies. We account for and disclose loss contingencies such as pending litigation and actual or possible claims and assessments in accordance with the Financial Accounting Standards Board’s, or the FASB's, authoritative guidance on accounting for contingencies. We accrue for loss contingencies if it is probable that a loss will occur and if the loss can be reasonably estimated. We disclose, but do not accrue for, material loss contingencies if it is reasonably possible that a loss will occur or if the loss cannot be reasonably estimated. We do not accrue for or disclose loss contingencies if there is only a remote possibility that the loss will occur. The FASB’s authoritative guidance requires us to make judgments regarding future events, including an assessment relating to the likelihood that a loss may occur and an estimate of the amount of such loss. In assessing loss contingencies, we often seek the assistance of our legal counsel and in some instances, of third party legal counsel. As a result of the significant judgment required in assessing and estimating loss contingencies, actual losses realized in future periods could differ significantly from our estimates. We currently estimate the reasonably possible losses related to matters for which we have not accrued liabilities, as they are not deemed probable, to be approximately $760.0 million as of December 31, 2017.
Income Taxes. We account for income taxes using the asset and liability method, under which we recognize deferred income taxes for 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.
The realization of deferred tax assets is dependent on the generation of future taxable income sufficient to realize our tax loss carryforwards and other tax deductions. During 2016, we recorded full valuation allowances on the deferred tax assets of Nextel Brazil, our U.S. parent company and subsidiaries and our foreign holding companies due to substantial negative evidence, including the recent history of cumulative losses and the projected losses for 2017 and subsequent years. As a result, the valuation allowance on our deferred tax assets increased by $1.7 billion during 2016. As of December 31, 2017, we continued to maintain full valuation allowances on each of these deferred tax assets. We do not anticipate that we will recognize significant tax benefits with respect to our deferred tax assets.
We are subject to income taxes in both the U.S. 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 that we believe reflect the “more-likely-than-not” criteria of the FASB’s authoritative guidance on accounting for uncertainty in income taxes, and we have established income tax reserves in accordance with this 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 our consolidated financial statements or may exceed the current income tax reserves in amounts that could be material.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act, or the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code. In connection with this legislation, we have recorded our U.S. deferred tax asset and corresponding valuation allowance as of December 31, 2017 at the 21% tax rate with no impact to our income tax expense. In addition, we have determined that no tax liability needs to be recorded for the one-time transition tax as our international subsidiaries have negative cumulative foreign earnings. We are electing to treat the tax on global intangible low-taxed income as an expense in the period in which we become liable for this tax and are not currently recording a deferred tax liability for this item. In accordance with Staff Accounting Bulletin, or SAB No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act,” our measurement period remains open with respect to the above items in order to allow us to evaluate all possible impacts of evolving guidance to be issued by the Internal Revenue Service and the FASB.
In accordance with accounting principles generally accepted in the U.S., we translated the results of operations of our Brazilian operating segment using the average exchange ratesfirm for the years ended December 31, 20172018 and 2016 and for the combined twelve-month period ended December 31, 2015. The following table presents the average exchange rates we used to translate Nextel Brazil's results of operations, as well as changes from the average exchange rates utilized in prior periods.2017.
| | | | | | | | | | | | | | | | | | | | | | | | | Successor Company | | | Predecessor Company | | Combined | | | | | | | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Six Months Ended December 31, 2015 | | | Six Months Ended June 30, 2015 | | Year Ended December 31, 2015 | | 2016 to 2017 Percent Change | | 2015 to 2016 Percent Change | | Brazilian real | 3.19 |
| | 3.49 |
| | 3.70 |
| | | 2.97 |
| | 3.33 |
| | 8.6 | % | | (4.8 | )% |
The following table presents the currency exchange rates in effect at the end of each of the quarters in 2017 and 2016, as well as at the end of 2015. If the value of the exchange rate of the Brazilian real depreciates relative to the U.S. dollar, our future operating results and the values of our assets held in local currencies will be adversely affected. | | | | | | | | | | | | | 2018 |
| | 2017 |
| Audit Fees(1) | |
| $5,349,180 |
| |
| $6,600,725 |
| Audit-Related Fees(2) | |
| $175,000 |
| |
| $30,000 |
| | TOTAL | |
| $5,524,180 |
| |
| $6,630,725 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Successor Company | | | 2017 | | 2016 | | 2015 | | | December | | September | | June | | March | | December | | September | | June | | March | | December | | Brazilian real | 3.31 |
| | 3.17 |
| | 3.31 |
| | 3.13 |
| | 3.26 |
| | 3.25 |
| | 3.21 |
| | 3.56 |
| | 3.90 |
|
The percentage amounts presented in the “Actual Change from Previous Year” and the “Constant Currency Change from Previous Year” columns in the tables below reflect the positive (better, or B,) or negative (worse, or W,) growth rates for each of the line items. In addition, to provide transparency into Nextel Brazil's results of operations, we present the year-over-year percentage change in each of the line items presented on a consolidated basis and for Nextel Brazil on a constant currency basis in the “Constant Currency Change from Previous Year” columns in the tables below. The comparison of results for these line items on a constant currency basis shows the impact of changes in foreign currency exchange rates (i) by adjusting the relevant measures for the year ended December 31, 2016 to amounts that would have resulted if the average foreign currency exchange rates for the year ended December 31, 2016 were the same as the average foreign currency exchange rates that were in effect for the year ended December 31, 2017; and (ii) by comparing the constant currency financial measures for the year ended December 31, 2016 to the actual financial measures for the year ended December 31, 2017. This constant currency comparison applies consistent exchange rates to the operating revenues earned in foreign currencies and to the other components of segment earnings for the year ended December 31, 2016. The constant currency information reflected in the tables below is not a measurement under accounting principles generally accepted in the U.S. and should be considered in addition to, but not as a substitute for, the information contained in our results of operations. | | | | (1) | Audit fees consist of those fees rendered for the audit of our annual consolidated financial statements, audit of the effectiveness of internal controls over financial reporting, review of financial statements included in our quarterly reports and for services normally provided in connection with statutory and regulatory filings. | | (2) | Audit-related fees consist of those fees for assurance and related services that are reasonably related to the review of our financial statements. |
| | 1. | Year Ended December 31, 2017 vs. Year Ended December 31, 2016 |
| | | | | | | | | | | | | | | | | | | | | Successor Company | | Actual Change from Previous Year | | Constant Currency Change from Previous Year | | | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Dollars | | B(W) Change | | B(W) Change | | | (dollars in thousands) | | | | Brazil segment (losses) earnings | $ | (31,071 | ) | | $ | 67,186 |
| | $ | (98,257 | ) | | (146 | )% | | (142 | )% | | Corporate segment losses and eliminations | (24,174 | ) | | (36,821 | ) | | 12,647 |
| | 34 | % | | 34 | % | | Consolidated segment (losses) earnings | (55,245 | ) | | 30,365 |
| | (85,610 | ) | | (282 | )% | | (251 | )% | | Impairment, restructuring and other charges | (179,727 | ) | | (1,384,811 | ) | | 1,205,084 |
| | 87 | % | | 88 | % | | Depreciation and amortization | (37,187 | ) | | (172,383 | ) | | 135,196 |
| | 78 | % | | 80 | % | | Operating loss | (272,159 | ) | | (1,526,829 | ) | | 1,254,670 |
| | 82 | % | | 84 | % | | Interest expense, net | (118,605 | ) | | (113,732 | ) | | (4,873 | ) | | (4 | )% | | 9 | % | | Interest income | 41,507 |
| | 37,689 |
| | 3,818 |
| | 10 | % | | 1 | % | | Foreign currency transaction (losses) gains, net | (1,271 | ) | | 76,615 |
| | (77,886 | ) | | (102 | )% | | (102 | )% | | Other expense, net | (7,930 | ) | | (9,711 | ) | | 1,781 |
| | 18 | % | | 25 | % | | Loss from continuing operations before reorganization items and income tax benefit | (358,458 | ) | | (1,535,968 | ) | | 1,177,510 |
| | 77 | % | | 79 | % | | Reorganization items | 445 |
| | (803 | ) | | 1,248 |
| | 155 | % | | 155 | % | | Income tax benefit | 6,347 |
| | 2,892 |
| | 3,455 |
| | 119 | % | | 119 | % | | Net loss from continuing operations | (351,666 | ) | | (1,533,879 | ) | | 1,182,213 |
| | 77 | % | | 79 | % | | Income (loss) from discontinued operations, net of income taxes | 1,005 |
| | (19,994 | ) | | 20,999 |
| | 105 | % | | 105 | % | | Net loss | (350,661 | ) | | (1,553,873 | ) | | 1,203,212 |
| | 77 | % | | 79 | % | | Net loss attributable to noncontrolling interest | (49,647 | ) | | — |
| | (49,647 | ) | | NM |
| | NM |
| | Net loss attributable to NII Holdings | $ | (301,014 | ) |
| $ | (1,553,873 | ) | | $ | 1,252,859 |
| | 81 | % | | 82 | % |
NM-Not Meaningful
We define segment (losses) earnings as operating loss before depreciation, amortization and impairment, restructuring and other charges. We recognized consolidated segment losses of $55.2 million in 2017 compared to consolidated segment earnings of $30.4 million in 2016. Our consolidated results include the results of operations of our Brazil segment and our corporate operations in the sections that follow.
| | 1. | Impairment, restructuring and other charges |
Consolidated impairment, restructuring and other charges recognized in 2017 included the following:
$70.5 million in restructuring charges, most of which related to future lease costs for certain transmitter and receiver sites that are no longer required in Nextel Brazil's business;
a $57.9 million non-cash asset impairment charge to reduce the carrying values of Nextel Brazil's long-lived assets to their respective fair values;
$34.2 million in restructuring charges related to a change in the scope of Nextel Brazil's radio access network, or RAN, sharing implementation;
$9.3 million in other non-cash asset impairment charges primarily related to the abandonment of certain transmitter and receiver sites that were no longer required in Nextel Brazil's business; and
$6.5 million in severance and other related costs resulting from the separation of certain executive level employees in Brazil.
In 2016, we determined that the carrying value of our Nextel Brazil segment was not fully recoverable. As a result of this determination, we recorded a $1.34 billion non-cash asset impairment charge to reduce the carrying values of Nextel Brazil's long-lived assets to their respective fair values, as well as to impair our trademark intangible asset and other property, plant and equipment at the corporate level. Consolidated impairment, restructuring and other charges recognized in 2016 also included the following:
$21.4 million in restructuring charges related to the early termination of leases for approximately 600 transmitter and receiver sites in connection with the RAN sharing agreement Nextel Brazil entered into with Telefonica Brazil, S.A., or Telefonica, in May 2016;
$11.0 million in non-cash asset impairment charges primarily related to the abandonment of transmitter and receiver sites in Brazil;
$10.8 million in restructuring charges primarily related to future lease costs for certain transmitter and receiver sites that are no longer required in Nextel Brazil's business and office closures; and
$3.2 million in severance and other related costs at the corporate level as a result of the separation of employees in an effort to further streamline our organizational structure and reduce general and administrative expenses.
The restructuring charges related to future lease costs and Nextel Brazil's RAN sharing agreement discussed above had no impact on our current cash balances and are not expected to impact our projected future cash flows.
| | 2. | Depreciation and amortization |
The $135.2 million, or 78%, decrease in consolidated depreciation and amortization on a reported basis, and 80% decrease on a constant currency basis, in 2017 compared to 2016 resulted primarily from the $1.34 billion non-cash asset impairment charge we recognized in 2016.
Consolidated net interest expense increased $4.9 million, or 4%, on a reported basis in 2017 compared to 2016 as a result of the impact of the appreciation in the Brazilian real on our reported results. Consolidated net interest expense decreased 9% on a constant currency basis over the same period primarily due to principal payments under Nextel Brazil's equipment financing facility and bank loans, partially offset by interest incurred under Nextel Brazil's spectrum financing arrangement.
| | 4. | Foreign currency transaction (losses) gains, net |
Consolidated foreign currency transaction gains of $76.6 million in 2016 were primarily due to the appreciation in the value of the Brazilian real relative to the U.S. dollar during the year ended December 31, 2016 on Nextel Brazil's U.S. dollar-denominated net liabilities.
| | | | | | | | | | | | | | | | | | | | | | | | | | | Successor Company | | Actual Change from Previous Year | | Constant Currency Change from Previous Year | | | Year Ended December 31, 2017 | | % of
Nextel Brazil’s Operating Revenues | | Year Ended December 31, 2016 | | % of
Nextel Brazil’s Operating Revenues | | Dollars | | B(W) Change | | B(W) Change | | | (dollars in thousands) | | | | Service and other revenues | $ | 847,773 |
| | 97 | % | | $ | 963,041 |
| | 98 | % | | $ | (115,268 | ) | | (12 | )% | | (20 | )% | | | | | | | | | | | | | | | | | Handset and accessory revenues | 21,888 |
| | 3 | % | | 21,837 |
| | 2 | % | | 51 |
| | — |
| | (8 | )% | | Cost of handsets and accessories | (40,207 | ) | | (5 | )% | | (29,273 | ) | | (3 | )% | | (10,934 | ) | | (37 | )% | | (26 | )% | | Handset and accessory net subsidy | (18,319 | ) | | (2 | )% | | (7,436 | ) | | (1 | )% | | (10,883 | ) | | (146 | )% | | (125 | )% | | Cost of service (exclusive of depreciation and amortization) | (374,637 | ) | | (43 | )% | | (364,648 | ) | | (37 | )% | | (9,989 | ) | | (3 | )% | | 6 | % | | Selling and marketing expenses | (108,490 | ) | | (13 | )% | | (116,538 | ) | | (12 | )% | | 8,048 |
| | 7 | % | | 15 | % | | General and administrative expenses | (377,398 | ) | | (43 | )% | | (407,233 | ) | | (41 | )% | | 29,835 |
| | 7 | % | | 15 | % | | Segment (losses) earnings | $ | (31,071 | ) | | (4 | )% | | $ | 67,186 |
| | 7 | % | | $ | (98,257 | ) | | (146 | )% | | (142 | )% |
The average value of the Brazilian real appreciated relative to the U.S. dollar during 2017 by 9% compared to the average value that prevailed during 2016. As a result, the components of Nextel Brazil's results of operations for 2017, after translation into U.S. dollars, reflect higher revenues and expenses in U.S. dollars than would have occurred if the Brazilian real had not appreciated relative to the U.S. dollar. To the extent the value of the Brazilian real depreciates relative to the U.S. dollar, Nextel Brazil's future reported results of operations will be adversely affected.
We use the term “subscriber unit,” which we also refer to as a subscriber, to represent an active SIM card, which is the level at which we track subscribers. The table below provides an overview of Nextel Brazil's subscriber units in commercial service on both its iDEN and WCDMA networks, as well as Nextel Brazil's subscriber turnover rates for each of the quarters in 2016 and 2017. We calculate subscriber turnover by dividing subscriber deactivations for the period by the average number of subscriber units during that period.
| | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended | | | March 31, 2016 | | June 30, 2016 | | September 30, 2016 | | December 31, 2016 | | March 31, 2017 | | June 30, 2017 | | September 30, 2017 | | December 31, 2017 | | | (subscribers in thousands) | | iDEN subscriber units | 1,552.0 |
| | 1,315.1 |
| | 1,127.8 |
| | 962.1 |
| | 822.7 |
| | 686.3 |
| | 563.3 |
| | 449.7 |
| | WCDMA subscriber units | 2,744.7 |
| | 2,708.7 |
| | 2,717.1 |
| | 2,746.3 |
| | 2,815.2 |
| | 2,874.6 |
| | 2,864.8 |
| | 2,845.8 |
| | Total subscriber units in commercial service — beginning of period | 4,296.7 |
| | 4,023.8 |
| | 3,844.9 |
| | 3,708.4 |
| | 3,637.9 |
| | 3,560.9 |
| | 3,428.1 |
| | 3,295.5 |
| | | | | | | | | | | | | | | | | | | iDEN net subscriber losses | (195.2 | ) | | (149.7 | ) | | (130.8 | ) | | (110.1 | ) | | (115.4 | ) | | (103.5 | ) | | (100.3 | ) | | (76.6 | ) | | WCDMA net subscriber (losses) additions | (77.7 | ) | | (29.2 | ) | | (5.7 | ) | | 39.6 |
| | 38.4 |
| | (29.3 | ) | | (32.3 | ) | | 26.8 |
| | Total net subscriber losses | (272.9 | ) | | (178.9 | ) | | (136.5 | ) | | (70.5 | ) | | (77.0 | ) | | (132.8 | ) | | (132.6 | ) | | (49.8 | ) | | | | | | | | | | | | | | | | | | | Migrations from iDEN to WCDMA | 41.7 |
| | 37.6 |
| | 34.9 |
| | 29.3 |
| | 21.0 |
| | 19.5 |
| | 13.3 |
| | 23.5 |
| | | | | | | | | | | | | | | | | | | iDEN subscriber units | 1,315.1 |
| | 1,127.8 |
| | 962.1 |
| | 822.7 |
| | 686.3 |
| | 563.3 |
| | 449.7 |
| | 349.6 |
| | WCDMA subscriber units | 2,708.7 |
| | 2,717.1 |
| | 2,746.3 |
| | 2,815.2 |
| | 2,874.6 |
| | 2,864.8 |
| | 2,845.8 |
| | 2,896.1 |
| | Total subscriber units in commercial service — end of period | 4,023.8 |
| | 3,844.9 |
| | 3,708.4 |
| | 3,637.9 |
| | 3,560.9 |
| | 3,428.1 |
| | 3,295.5 |
| | 3,245.7 |
| | | | | | | | | | | | | | | | | | | Total subscriber turnover | 4.34 | % | | 3.99 | % | | 3.99 | % | | 3.65 | % | | 3.71 | % | | 3.95 | % | | 4.47 | % | | 3.83 | % | | iDEN subscriber turnover | 4.80 | % | | 4.46 | % | | 4.65 | % | | 4.71 | % | | 5.52 | % | | 5.88 | % | | 6.89 | % | | 6.36 | % | | WCDMA subscriber turnover | 4.10 | % | | 3.78 | % | | 3.73 | % | | 3.31 | % | | 3.23 | % | | 3.53 | % | | 4.04 | % | | 3.47 | % |
Nextel Brazil's WCDMA subscriber turnover steadily decreased throughout 2016 as a result of various actions Nextel Brazil implemented in an effort to retain existing subscribers. These actions included the implementation of new simplified rate plans, the issuance of loyalty discounts and customer care credits, more customer self-care offerings, better delivery of service and other actions to improve our customers' overall experience. During the second and third quarters of 2017, Nextel Brazil's WCDMA subscriber turnover increased as a result of the introduction of unlimited voice offerings by competitors and the tightening of certain credit and collections policies during the first three quarters of 2017. In addition, the increase in Nextel Brazil's WCDMA subscriber turnover in the third quarter of 2017 was partially caused by a significant number of customer contract expirations. In August 2017, Nextel Brazil began offering unlimited voice rate plans in response to the increasingly competitive environment. As a result of its efforts to migrate existing customers to these types of unlimited rate plans, as well as other targeted efforts to promote customer loyalty, Nextel Brazil's WCDMA subscriber turnover declined in the fourth quarter of 2017. We expect that Nextel Brazil's WCDMA subscriber turnover levels will be lower in the first half of 2018 than in the fourth quarter of 2017.
The following table represents Nextel Brazil's average monthly revenue per subscriber, or ARPU, for subscribers on both its iDEN and WCDMA networks for each of the quarters in 2016 and 2017, as well as for the years ended December 31, 2016 and 2017, in both U.S. dollars (US$) and in Brazilian reais (BRL). We calculate service ARPU by dividing service revenues per period by the weighted average number of subscriber units in commercial service during that period.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended | | Year Ended | | Three Months Ended | | Year Ended | | | March 31, 2016 | | June 30, 2016 | | September 30, 2016 | | December 31, 2016 | | December 31, 2016 | | March 31, 2017 | | June 30, 2017 | | September 30, 2017 | | December 31, 2017 | | December 31, 2017 | | Total service ARPU (US$) | 16 |
| | 19 |
| | 21 |
| | 20 |
| | 19 |
| | 21 |
| | 19 |
| | 19 |
| | 18 |
| | 19 |
| | WCDMA service ARPU (US$) | 16 |
| | 20 |
| | 21 |
| | 21 |
| | 20 |
| | 22 |
| | 20 |
| | 19 |
| | 18 |
| | 20 |
| | iDEN service ARPU (US$) | 15 |
| | 16 |
| | 19 |
| | 18 |
| | 16 |
| | 17 |
| | 15 |
| | 15 |
| | 14 |
| | 16 |
| | | | | | | | | | | | | | | | | | | | | | | Total service ARPU (BRL) | 62 |
| | 66 |
| | 67 |
| | 67 |
| | 65 |
| | 65 |
| | 62 |
| | 59 |
| | 57 |
| | 61 |
| | WCDMA service ARPU (BRL) | 64 |
| | 70 |
| | 69 |
| | 69 |
| | 68 |
| | 68 |
| | 65 |
| | 61 |
| | 58 |
| | 63 |
| | iDEN service ARPU (BRL) | 57 |
| | 56 |
| | 60 |
| | 59 |
| | 58 |
| | 54 |
| | 49 |
| | 47 |
| | 47 |
| | 50 |
|
During the first half of 2017, Nextel Brazil's WCDMA service ARPU in Brazilian reais decreased compared to recent prior quarters as the result of a higher volume of discounts to retain existing customers and slightly lower loading ARPU in an effort to attract new customers. Nextel Brazil's WCDMA service ARPU in Brazilian reais continued to decrease in the second half of 2017 due primarily to price deterioration in the overall wireless market and new types of unlimited rate plans that were introduced in response to the competitive environment. These types of plans remove many of the usage-based fees that Nextel Brazil charged in previous quarters, which resulted in less revenue per customer. Nextel Brazil is taking actions in an effort to stabilize WCDMA service ARPU in 2018.
Nextel Brazil's iDEN network does not support data services that are competitive with the higher speed data services offered by its competitors or that are available on its WCDMA network. As a result, Nextel Brazil has had to offer iDEN service plans with lower ARPU levels to retain subscribers on its iDEN network and offer incentives to transition those subscribers to services on its WCDMA network. Nextel Brazil has experienced net subscriber losses and overall declines in its iDEN service ARPU. In response to continued subscriber losses on its iDEN network, in September 2017, Nextel Brazil decided to wind down its iDEN operations with a target to cease all iDEN services in mid-2018. As a result, Nextel Brazil has provided notice of the eventual shutdown to its remaining iDEN subscribers and is actively working to migrate the remainder of its legacy iDEN subscriber base to its WCDMA network by proactively promoting attractive service offerings. As a result of this decision, we expect a significant decrease in iDEN-based operating revenue from 2017 to 2018, which will have a negative impact on operating income in 2018.
Results Overview.
Recently, Brazil has experienced one of the worst economic recessions in its history, characterized by years of negative real wage growth, a net loss of jobs, higher unemployment and lower consumer confidence. These economic conditions and trends resulted in a decline in the amount of consumer disposable income that is available to purchase telecommunications services and negatively impacted Nextel Brazil's results of operations for the past two years. Although by the end of 2017, Brazil's economy was beginning to recover, the growth is slow with gradual improvements.
Nextel Brazil's segment earnings decreased $98.3 million, or 146%, on a reported basis, and 142% on a constant currency basis, in 2017 compared to 2016 primarily as a result of a decline in operating revenues, partially offset by lower operating expenses as follows:
| | 1. | Service and other revenues |
Service and other revenues decreased $115.3 million, or 12%, on a reported basis, and 20% on a constant currency basis, in 2017 compared to 2016 as a result of the decline in Nextel Brazil's iDEN subscriber base, as well as the decrease in service ARPU discussed above.
Nextel Brazil's WCDMA subscriber base grew from 2.815 million subscribers as of the end of 2016 to 2.896 million subscribers as of the end of 2017. Despite the overall growth in its WCDMA subscriber base, Nextel Brazil's WCDMA-based service and other revenues decreased 6% on a constant currency basis from 2016 to 2017 due to a decrease in local currency WCDMA service ARPU.
Nextel Brazil's iDEN-based service and other revenues decreased $132.2 million, or 47%, from 2016 to 2017, or 52% on a constant currency basis, as a result of a 58% decrease in Nextel Brazil's iDEN subscriber base from 823 thousand subscribers as of the end of 2016 to 350 thousand subscribers as of the end of 2017 and the decline in local currency iDEN service ARPU.
| | 2. | Handset and accessory net subsidy |
Nextel Brazil recognized $18.3 million in handset and accessory net subsidy in 2017 compared to $7.4 million in 2016. In 2017 and 2016, approximately 90% of our WCDMA gross subscriber additions utilized existing handsets rather than purchasing a new handset from Nextel Brazil, resulting in relatively low levels of handset and accessory net subsidy.
Cost of service increased $10.0 million, or 3%, on a reported basis in 2017 compared to 2016. On a constant currency basis, Nextel Brazil's cost of service decreased 6% over the same period mainly due to lower transmitter and receiver site rent and maintenance costs, a reduction in the volume of calls on Nextel Brazil's iDEN network and lower mobile termination rates, partially offset by expenses related to Nextel Brazil's RAN sharing agreement. Nextel Brazil will continue to incur rent expenses related to iDEN transmitter and receiver sites subsequent to their shutdown until these leases end.
| | 4. | Selling and marketing expenses |
Selling and marketing expenses decreased $8.0 million, or 7%, on a reported basis, and 15% on a constant currency basis, in 2017 compared to 2016 as a result of a change in the mix between direct and indirect commissions to less costly channels, as well as lower advertising expenses due to fewer television marketing campaigns.
| | 5. | General and administrative expenses |
General and administrative expenses decreased $29.8 million, or 7%, on a reported basis, and 15% on a constant currency basis, in 2017 compared to 2016 primarily resulting from a decrease in certain consulting costs.
| | | | | | | | | | | | | | | | | | Successor Company | | Actual Change from Previous Year | | | Year Ended December 31, 2017 | | Year Ended December 31, 2016 | | Dollars | | B(W) Change | | | (dollars in thousands)
| | Service and other revenues | $ | 106 |
| | $ | 168 |
| | $ | (62 | ) | | (37 | )% | | Selling, general and administrative expenses | (24,280 | ) | | (36,989 | ) | | 12,709 |
| | 34 | % | | Segment losses | $ | (24,174 | ) | | $ | (36,821 | ) | | $ | 12,647 |
| | 34 | % |
Segment losses decreased $12.6 million, or 34%, in 2017 compared to 2016 primarily due to reductions in payroll costs resulting from fewer general and administrative personnel following reductions in force and lower information technology costs resulting from the reorganization of certain roles and responsibilities between our Brazil and corporate teams. General and administrative expenses for 2017 included approximately $2.1 million of transaction costs related to our partnership agreement with ice group.
| | 2. | Year Ended December 31, 2016 vs. Combined Period Ended December 31, 2015 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Successor Company | | | Predecessor Company | | Combined | | Actual Change from Previous Year | | Constant Currency Change from Previous Year | | | Year Ended December 31, 2016 | | Six Months Ended December 31, 2015 | | | Six Months Ended June 30, 2015 | | Year Ended December 31, 2015 | | Dollars | | B(W) Change | | B(W) Change | | | (dollars in thousands) | | | | Brazil segment earnings (losses) | $ | 67,186 |
| | $ | (15,925 | ) | | | $ | (75,234 | ) | | $ | (91,159 | ) | | $ | 158,345 |
| | 174 | % | | 177 | % | | Corporate segment losses and eliminations | (36,821 | ) | | (26,100 | ) | | | (37,982 | ) | | (64,082 | ) | | 27,261 |
| | 43 | % | | 43 | % | | Consolidated segment earnings (losses) | 30,365 |
| | (42,025 | ) | | | (113,216 | ) | | (155,241 | ) | | 185,606 |
| | 120 | % | | 120 | % | | Impairment, restructuring and other charges | (1,384,811 | ) | | (32,308 | ) | | | (36,792 | ) | | (69,100 | ) | | (1,315,711 | ) | | NM |
| | NM |
| | Depreciation and amortization | (172,383 | ) | | (85,364 | ) | | | (153,878 | ) | | (239,242 | ) | | 66,859 |
| | 28 | % | | 25 | % | | Operating loss | (1,526,829 | ) | | (159,697 | ) | | | (303,886 | ) | | (463,583 | ) | | (1,063,246 | ) | | (229 | )% | | (242 | )% | | Interest expense, net | (113,732 | ) | | (55,563 | ) | | | (82,820 | ) | | (138,383 | ) | | 24,651 |
| | 18 | % | | 13 | % | | Interest income | 37,689 |
| | 17,200 |
| | | 15,327 |
| | 32,527 |
| | 5,162 |
| | 16 | % | | 21 | % | | Foreign currency transaction gains (losses), net | 76,615 |
| | (99,737 | ) | | | (63,948 | ) | | (163,685 | ) | | 240,300 |
| | 147 | % | | 149 | % | | Other expense, net | (9,711 | ) | | (1,176 | ) | | | (137 | ) | | (1,313 | ) | | (8,398 | ) | | NM |
| | NM |
| | Loss from continuing operations before reorganization items and income tax benefit (provision) | (1,535,968 | ) | | (298,973 | ) | | | (435,464 | ) | | (734,437 | ) | | (801,531 | ) | | (109 | )% | | (118 | )% | | Reorganization items | (803 | ) | | 1,467 |
| | | 1,956,874 |
| | 1,958,341 |
| | (1,959,144 | ) | | (100 | )% | | (100 | )% | | Income tax benefit (provision) | 2,892 |
| | 5,015 |
| | | (2,009 | ) | | 3,006 |
| | (114 | ) | | (4 | )% | | 6 | % | | Net (loss) income from continuing operations | (1,533,879 | ) | | (292,491 | ) | | | 1,519,401 |
| | 1,226,910 |
| | (2,760,789 | ) | | (225 | )% | | (222 | )% | | Income (loss) from discontinued operations, net of income taxes | (19,994 | ) | | 11,608 |
| | | 221,114 |
| | 232,722 |
| | (252,716 | ) | | (109 | )% | | (109 | )% | | Net (loss) income | $ | (1,553,873 | ) | | $ | (280,883 | ) | | | $ | 1,740,515 |
| | $ | 1,459,632 |
| | $ | (3,013,505 | ) | | (206 | )% | | (204 | )% |
NM-Not Meaningful
For purposes of comparison to the year ended December 31, 2016, we combined the results of operations for the six months ended December 31, 2015 with the results of operations for the six months ended June 30, 2015. However, as a result of the application of fresh start accounting and other events related to our reorganization under Chapter 11, the Successor Company's financial results for the six months ended December 31, 2015 are prepared under a new basis of accounting and are not directly comparable to the Predecessor Company's financial results for the six months ended June 30, 2015. For the same reasons, our results of operations for the combined twelve-month period ended December 31, 2015 are not fully comparable to our results of operations for the year ended December 31, 2016.
We define segment earnings (losses) as operating loss before depreciation, amortization and impairment, restructuring and other charges. We recognized consolidated segment earnings of $30.4 million in 2016 compared to consolidated segment losses of $155.2 million in the combined period ended December 31, 2015. Our consolidated results include the results of operations of our Brazil segment and our corporate operations in the sections that follow.
| | 1. | Impairment, restructuring and other charges |
In 2016, we determined that the carrying value of our Nextel Brazil segment was not fully recoverable. As a result of this determination, we recorded a $1.34 billion non-cash asset impairment charge to reduce the carrying values of Nextel Brazil's long-lived assets to their respective fair values, as well as to impair our trademark intangible asset and other property, plant and equipment at the corporate level. Consolidated impairment, restructuring and other charges recognized in 2016 also included the following:
$21.4 million in restructuring charges related to the early termination of leases for approximately 600 transmitter and receiver sites in connection with the RAN sharing agreement Nextel Brazil entered into with Telefonica Brazil, S.A., or Telefonica, in May 2016;
$11.0 million in non-cash asset impairment charges primarily related to the abandonment of transmitter and receiver sites in Brazil;
$10.8 million in restructuring charges primarily related to future lease costs for certain transmitter and receiver sites that are no longer required in Nextel Brazil's business and office closures; and
$3.2 million in severance and other related costs at the corporate level as a result of the separation of employees in an effort to further streamline our organizational structure and reduce general and administrative expenses.
Consolidated impairment, restructuring and other charges recognized for the combined period ended December 31, 2015 primarily related to the following:
$43.7 million in non-cash asset impairment charges, the majority of which related to the shutdown or abandonment of transmitter and receiver sites and the discontinuation of certain information technology projects in Brazil;
$14.4 million in severance and other related costs incurred in Brazil and at the corporate level resulting from the separation of employees in an effort to streamline our organizational structure and reduce general and administrative expenses; and
$8.4 million in restructuring charges in Brazil related to future lease costs for certain transmitter and receiver sites that are no longer necessary in our business plan.
The restructuring charges related to future lease costs and Nextel Brazil's RAN sharing agreement discussed above had no impact on our cash balances.
| | 2. | Depreciation and amortization |
The $66.9 million, or 28%, decrease in consolidated depreciation and amortization on a reported basis, and the 25% decrease on a constant currency basis, for 2016 compared to the combined period ended December 31, 2015 was principally the result of a decrease in the value of Nextel Brazil's property, plant and equipment in connection with the implementation of fresh start accounting in 2015 and the $1.34 billion non-cash asset impairment charge we recognized in 2016.
Consolidated net interest expense decreased $24.7 million, or 18%, on a reported basis, and 13% on a constant currency basis, for 2016 compared to combined period ended December 31, 2015 primarily as a result of principal payments related to Nextel Brazil's equipment financing facility and bank loans, and the revaluation of some of our capital leases in connection with the implementation of fresh start accounting.
| | 4. | Foreign currency transaction gains (losses), net |
Consolidated foreign currency transaction gains of $76.6 million during the year ended December 31, 2016 were primarily due to the appreciation in the value of the Brazilian real relative to the U.S. dollar during 2016 on Nextel Brazil's U.S. dollar-denominated net liabilities.
Consolidated foreign currency transaction losses of $163.7 million during the combined period ended December 31, 2015 were largely the result of the impact of the depreciation in the value of the Brazilian real relative to the U.S. dollar during the combined period ended December 31, 2015 on Nextel Brazil's U.S. dollar-denominated net liabilities.
Reorganization items of $1,958.3 million in 2015 were primarily related to the $1,775.8 million gain we recognized in connection with the settlement of our liabilities subject to compromise upon our emergence from Chapter 11 and a $261.8 million gain as a result of the implementation of fresh start accounting, partially offset by professional fees and other costs incurred in connection with our Chapter 11 filing.
b. Nextel Brazil
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Successor Company | | | Predecessor Company | | Combined | | Actual Change from Previous Year | | Constant Currency Change from Previous Year | | | Year Ended December 31, 2016 | | % of
Nextel Brazil’s Operating Revenues | | Six Months Ended December 31, 2015 | | |
Six Months Ended June 30, 2015 | | Year Ended December 31, 2015 | | % of
Nextel Brazil’s Operating Revenues | | Dollars | | B(W) Change | | B(W) Change | | | (dollars in thousands) | | | | Service and other revenues | $ | 963,041 |
| | 98 | % | | $ | 501,028 |
| | | $ | 643,804 |
| | $ | 1,144,832 |
| | 94 | % | | $ | (181,791 | ) | | (16 | )% | | (12 | )% | | | | | | | | | | | | | | | | | | | | | | Handset and accessory revenues | 21,837 |
| | 2 | % | | 28,304 |
| | | 39,807 |
| | 68,111 |
| | 6 | % | | (46,274 | ) | | (68 | )% | | (66 | )% | | Cost of handsets and accessories | (29,273 | ) | | (3 | )% | | (46,904 | ) | | | (121,143 | ) | | (168,047 | ) | | (14 | )% | | 138,774 |
| | 83 | % | | 82 | % | | Handset and accessory net subsidy | (7,436 | ) | | (1 | )% | | (18,600 | ) | | | (81,336 | ) | | (99,936 | ) | | (8 | )% | | 92,500 |
| | 93 | % | | 92 | % | | Cost of service (exclusive of depreciation and amortization) | (364,648 | ) | | (37 | )% | | (212,866 | ) | | | (256,153 | ) | | (469,019 | ) | | (39 | )% | | 104,371 |
| | 22 | % | | 19 | % | | Selling and marketing expenses | (116,538 | ) | | (12 | )% | | (71,557 | ) | | | (105,357 | ) | | (176,914 | ) | | (15 | )% | | 60,376 |
| | 34 | % | | 31 | % | | General and administrative expenses | (407,233 | ) | | (41 | )% | | (213,930 | ) | | | (276,192 | ) | | (490,122 | ) | | (40 | )% | | 82,889 |
| | 17 | % | | 13 | % | | Segment earnings (losses) | $ | 67,186 |
| | 7 | % | | $ | (15,925 | ) | | | $ | (75,234 | ) | | $ | (91,159 | ) | | (8 | )% | | $ | 158,345 |
| | 174 | % | | 177 | % |
The average value of the Brazilian real depreciated relative to the U.S. dollar during the year ended December 31, 2016 by 5% compared to the average value that prevailed during the year ended December 31, 2015. As a result, the components of Nextel Brazil's results of operations for 2016, after translation into U.S. dollars, reflect lower revenues and expenses in U.S. dollars than would have occurred if the Brazilian real had not depreciated relative to the U.S. dollar. If the value of the Brazilian real depreciates relative to the U.S. dollar, Nextel Brazil's future reported results of operations will be adversely affected.
Despite decreases in local currency operating revenues, Nextel Brazil recognized segment earnings of $67.2 million, and a segment earnings margin of 7%, during 2016 as a result of the execution of initiatives to reduce operating expenses included in our business plan. Nextel Brazil recognized segment earnings of $67.2 million during 2016 compared to segment losses of $91.2 million during the combined period ended December 31, 2015 as a result of the following:
| | 1. | Service and other revenues |
The $181.8 million, or 16%, decrease in service and other revenues on a reported basis in 2016 compared to the combined period ended December 31, 2015 is primarily the result of the decline in Nextel Brazil's subscriber base and the impact of weaker foreign currency exchange rates on our reported results. On a constant currency basis, Nextel Brazil's service and other revenues decreased 12% in 2016 compared to the combined period ended December 31, 2015.
Nextel Brazil's WCDMA subscriber base grew slightly from 2.7 million subscribers as of the end of 2015 to 2.8 million subscribers as of the end of 2016. Nextel Brazil has continued to strategically facilitate the migration of iDEN subscribers to its WCDMA network, which resulted in 144 thousand migrations during 2016. As a result of the increase in its WCDMA service ARPU and the overall growth in its WCDMA subscriber base, Nextel Brazil's WCDMA-based service and other revenues increased $91.8 million, or 15%, from the combined period ended December 31, 2015 to 2016, or 21% on a constant currency basis. This increase was offset by a $273.6 million, or 50%, decrease in Nextel Brazil's iDEN-based service and other revenues from the combined period ended December 31, 2015 to 2016, or 47% on a constant currency basis, driven by a decrease in Nextel Brazil's iDEN subscriber base from 1.6 million subscribers as of the end of 2015 to 0.8 million subscribers as of the end of 2016.
| | 2. | Handset and accessory net subsidy |
The $92.5 million, or 93%, decrease in handset and accessory net subsidy on a reported basis from the combined period ended December 31, 2015 to 2016 is largely related to an increased emphasis on new service plans under which services are provided to new subscribers using their existing handsets, as well as lower subsidies per handset. As a result of the new service plans, during 2016, 89% of Nextel Brazil's new WCDMA subscribers represented subscribers who utilized their existing handsets rather than purchasing one from Nextel Brazil compared to 70% during 2015. The decrease in handset and accessory net subsidy from the combined period ended December 31, 2015 to 2016 was also impacted by a $25.3 million charge that Nextel Brazil recognized in the second quarter of 2015 related to certain tax credits generated as a result of handset purchases that we estimated were not probable of being recovered. During 2016, we recovered $20.8 million of these credits. On a constant currency basis, Nextel Brazil's handset and accessory net subsidy decreased 92% in 2016 compared to the combined period ended December 31, 2015.
The $104.4 million, or 22%, decrease in cost of service on a reported basis from the combined period ended December 31, 2015 to 2016 is primarily the result of a $57.2 million, or 34%, decrease in interconnect costs related to the reduced volume of calls on Nextel Brazil's iDEN network and lower mobile termination rates, and a $41.2 million, or 15%, decrease in site and switch costs over the same period. The decrease in cost of service was also partially the result of the reversal of $8.1 million in certain non-income based tax-related contingent liabilities in the second quarter of 2016 based on a change in estimate. On a constant currency basis, Nextel Brazil's cost of service decreased 19% from the combined period ended December 31, 2015 to 2016.
| | 4. | Selling and marketing expenses |
The $60.4 million, or 34%, decrease in selling and marketing expenses on a reported basis during 2016 compared to the combined period ended December 31, 2015 is primarily due to a reduction in sales and marketing personnel, lower advertising and media expenses resulting from cost reductions and retail store closures, and lower commissions due to a decrease in gross subscriber additions. Most of these cost reductions were the result of our efforts to align our costs with our business plan. On a constant currency basis, Nextel Brazil's selling and marketing expenses decreased 31% during 2016 compared to the combined period ended December 31, 2015.
| | 5. | General and administrative expenses |
The $82.9 million, or 17%, decrease in general and administrative expenses on a reported basis during 2016 compared to the combined period ended December 31, 2015 is primarily the result of lower customer care expenses related to a decrease in the number of calls Nextel Brazil has received in its call centers, a reduction in payroll costs resulting from fewer general and administrative personnel following reductions in force and a decrease in bad debt expense primarily resulting from higher levels in 2015 caused by deteriorating macroeconomic conditions in Brazil. These decreases were partially offset by increases in certain consulting expenses. On a constant currency basis, Nextel Brazil's general and administrative expenses decreased 13% during 2016 compared to the combined period ended December 31, 2015.
| | | | | | | | | | | | | | | | | | | | | | | | | | | Successor Company | | | Predecessor Company | | Combined | | Actual Change from Previous Year | | | Year Ended December 31, 2016 | | Six Months Ended December 31, 2015 | | |
Six Months Ended June 30, 2015 | | Year Ended December 31, 2015 | | Dollars | | B(W) Change | | | (dollars in thousands) | | Service and other revenues | $ | 168 |
| | $ | 116 |
| | | $ | 168 |
| | $ | 284 |
| | $ | (116 | ) | | (41 | )% | | Selling, general and administrative expenses | (36,989 | ) | | (26,216 | ) | | | (39,071 | ) | | (65,287 | ) | | 28,298 |
| | 43 | % | | Segment losses | $ | (36,821 | ) | | $ | (26,100 | ) | | | $ | (38,903 | ) | | $ | (65,003 | ) | | $ | 28,182 |
| | 43 | % |
Segment losses decreased $28.2 million, or 43%, in 2016 compared to the combined period ended December 31, 2015 primarily due to a reduction in payroll costs resulting from fewer general and administrative personnel following reductions in force, lower consulting expenses and lower information technology costs.
| | C. | Liquidity and Capital Resources |
We define working capital as total current assets less total current liabilities. As of December 31, 2017, we had working capital of $216.5 million compared to a working capital deficit of $119.7 million as of December 31, 2016. The change from a working capital deficit to working capital is the result of the classification of the majority of Nextel Brazil's equipment financing facility and bank loans as long-term debt as of December 31, 2017 compared to the entirety of these balances being classified as current portion of long-term debt as of December 31, 2016. As of December 31, 2017, our working capital included $193.9 million in cash and cash equivalents, of which $5.9 million was held by Nextel Brazil in Brazilian reais, and $16.7 million in short-term investments, all of which was held in Brazilian reais. In addition, as of December 31, 2017, we had $50.3 million of cash collateral securing certain performance bonds relating to our obligations to deploy spectrum in Brazil, all of which we recorded as a component of prepaid expenses and other in our consolidated balance sheet. In January 2018, we recovered substantially all of the cash securing these performance bonds. As of December 31, 2017, we also had $110.0 million in cash held in escrow in connection with the sale of Nextel Mexico, which we classified as a component of prepaid expenses and other in our consolidated balance sheet. We recently reached an agreement with the Mexican tax authorities related to the audits of Nextel Mexico's income tax returns for the years 2010 and 2011. Specifically, we agreed to incremental tax liabilities of $36.9 million to settle all open issues related to these tax years. We expect to utilize existing tax credits to settle these liabilities, although it is possible that we may need to settle a portion of these liabilities using cash that is currently held in escrow. We expect to receive a release of some of the $72.4 million in previously escrowed funds related to the 2010 and 2011 income tax audits in the next few months.
A substantial portion of our U.S. dollar-denominated cash, cash equivalents and short-term investments is held in bank deposits, and our cash, cash equivalents and short-term investments held in Brazilian reais are typically maintained in a combination of money market funds, highly liquid overnight securities and fixed income investments. The values of our cash, cash equivalents and short-term investments that are held in Brazilian reais will fluctuate in U.S. dollars based on changes in the exchange rate of the Brazilian real relative to the U.S. dollar.
Cash Flows
| | | | | | | | | | | | | | | | | | | | | | | | Successor Company | | | Predecessor Company | | | Year Ended December 31, | | Year Ended December 31, | | Six Months Ended December 31, | | | Six Months Ended June 30, | | Combined Year Ended December 31, | | | 2017 | | 2016 | | 2015 | | | 2015 | | 2015 | | | | | | | | | | | | | | Cash and cash equivalents, beginning of period | $ | 257,380 |
| | $ | 342,184 |
| | $ | 423,135 |
| | | $ | 334,194 |
| | $ | 334,194 |
| | Net cash used in operating activities | (87,138 | ) | | (45,205 | ) | | (78,485 | ) | | | (254,757 | ) | | (333,242 | ) | | Net cash provided by (used in) investing activities | 71,795 |
| | 54,450 |
| | (976 | ) | | | 1,027,821 |
| | 1,026,845 |
| | Net cash used in financing activities | (48,690 | ) | | (93,004 | ) | | (25,068 | ) | | | (778,231 | ) | | (803,299 | ) | | Effect of exchange rate changes on cash and cash equivalents | 541 |
| | (1,045 | ) | | 916 |
| | | (9,152 | ) | | (8,236 | ) | | Change in cash and cash equivalents related to discontinued operations | — |
| | — |
| | 22,662 |
| | | 103,260 |
| | 125,922 |
| | Cash and cash equivalents, end of period | $ | 193,888 |
| | $ | 257,380 |
| | $ | 342,184 |
| | | $ | 423,135 |
| | $ | 342,184 |
|
The following is a discussion of the primary sources and uses of cash in our operating, investing and financing activities.
We used $87.1 million of cash in our operating activities during 2017 primarily to fund operating losses and interest expense. We used $45.2 million of cash in our operating activities during 2016, which represents a $288.0 million improvement from the combined year ended December 31, 2015, largely caused by lower operating losses resulting from cost reduction efforts and the sale of our operations in Mexico, partially offset by a $76.9 million upfront payment related to Nextel Brazil's roaming and RAN sharing agreements with Telefonica. We used $78.5 million and $254.8 million of cash in our operating activities during the six months ended December 31, 2015 and June 30, 2015, respectively, primarily to fund operating losses and interest expense. We used $176.3 million less cash during the six months ended December 31, 2015 compared to the six months ended June 30, 2015 primarily as a result of lower operating losses in Brazil and cash conservation efforts both in Brazil and at the corporate level.
Our investing activities provided us with $71.8 million of cash during 2017 primarily due to $53.5 million in cash released from escrow, $33.5 million of net cash returned to us from the release of performance bonds and $59.4 million in net proceeds received from maturities of our short-term investments in Brazil, partially offset by $66.5 million in cash capital expenditures.
Our investing activities provided us with $54.5 million of cash during 2016, primarily due to $81.1 million of net cash returned to us from the release of performance bonds and $27.4 million in net proceeds from maturities of our short-term investments in Brazil and at the corporate level, partially offset by $61.3 million in cash capital expenditures and $13.2 million we paid for judicial deposits.
We used $1.0 million of cash in our investing activities during the six months ended December 31, 2015, primarily due to $76.6 million in cash capital expenditures and $50.5 million in deposits to secure certain performance bonds relating to our obligations to deploy spectrum in Brazil, offset by net cash proceeds of $153.8 million that we received in connection with the sale of Nextel Argentina (excluding $18.1 million of U.S. treasury notes received as part of the proceeds). Our investing activities provided us with $1,027.8 million in cash during the six months ended June 30, 2015, primarily due to the sale of Nextel Mexico for which we received net proceeds of $1.448 billion, including $187.5 million in cash deposited in escrow. The net proceeds from the sale of Nextel Mexico were partially offset by $88.5 million in cash capital expenditures and $20.0 million in deposits to secure certain performance bonds relating to our obligations to deploy spectrum in Brazil.
We used $48.7 million of cash in our financing activities during 2017 primarily due to $48.9 million in semi-annual principal payments under Nextel Brazil's equipment financing facility and $36.5 million in principal payments under Nextel Brazil's bank loans, partially offset by $50.0 million in cash we received in connection with our partnership agreement with ice group.
We used $93.0 million of cash in our financing activities during 2016, primarily due to $48.4 million in semi-annual principal payments under Nextel Brazil's equipment financing facility and $42.5 million in principal payments under Nextel Brazil's bank loans.
We used $25.1 million of cash in our financing activities during the six months ended December 31, 2015, largely due to a principal repayment under Nextel Brazil's equipment financing facility. We used $778.2 million of cash in our financing activities during the six months ended June 30, 2015, largely due to $745.2 million of cash distributions paid in settlement of certain claims in connection with our emergence from Chapter 11.
| | D. | Future Capital Needs and Resources |
Capital Resources. Our ongoing capital resources depend on a variety of factors, including our existing cash, cash equivalents and investment balances, cash flows generated by our operating activities, cash that we recover from the amounts held in escrow to secure our indemnification obligations in connection with the sale of Nextel Mexico, external financial sources, other financing arrangements and the availability of cash proceeds from the sale of assets.
Our ability to generate sufficient net cash from our operating activities in the future is dependent upon, among other things:
the amount of revenue we are able to generate and collect from our subscribers, including our ability to increase the size of our subscriber base;
the amount of operating expenses required to provide our services;
the cost of acquiring and retaining subscribers, including the subsidies we incur to provide handsets to both our new and existing subscribers; and
changes in foreign currency exchange rates.
Due to the impact of our recent and projected results of operations and other factors, we expect our access to the capital markets in the near term may be limited. See “— Future Outlook.”for more information.
Capital Needs and Contractual Obligations. We currently anticipate that our future capital needs will principally consist of funds required for:
operating expenses and capital expenditures relating to our existing network and the continued deployment of LTE in São Paulo;
payments in connection with previous spectrum purchases and ongoing spectrum license fees;
debt service requirements;
obligations relating to our tower financing arrangements and capital lease obligations;
cash taxes; and
other general corporate expenditures.
The following table sets forth the amounts and timing of contractual payments for our most significant contractual obligations determined as of December 31, 2017. The information included in the table below reflects future unconditional payments and is based upon, among other things, the current terms of the relevant agreements and certain assumptions, such as future interest rates. Most of the amounts included in the table below will be settled in Brazilian reais. Future events could cause actual payments to differ significantly from these amounts. See “Forward-Looking and Cautionary Statements.”
| | | | | | | | | | | | | | | | | | | | | | | Payments due by Period | | | Less than | | | | | | More than | | | | Contractual Obligations | 1 Year | | 1-3 Years | | 3-5 Years | | 5 Years | | Total | | | (in thousands) | | Capital leases and tower financing obligations (1) | $ | 48,354 |
| | $ | 85,916 |
| | $ | 84,314 |
| | $ | 621,495 |
| | $ | 840,079 |
| | Operating leases (2) | 127,430 |
| | 213,871 |
| | 168,047 |
| | 151,364 |
| | 660,712 |
| | Equipment financing (3) | 14,421 |
| | 23,767 |
| | 79,059 |
| | 195,953 |
| | 313,200 |
| | Bank loans (4) | 18,684 |
| | 37,045 |
| | 82,180 |
| | 171,917 |
| | 309,826 |
| | Spectrum financing (5) | — |
| | 63,239 |
| | 74,263 |
| | 85,288 |
| | 222,790 |
| | Purchase obligations (6) | 57,081 |
| | 54,224 |
| | 20,335 |
| | — |
| | 131,640 |
| | Other long-term obligations (7) | 1,682 |
| | 395 |
| | 1,490 |
| | 105,270 |
| | 108,837 |
| | Total contractual commitments | $ | 267,652 |
| | $ | 478,457 |
| | $ | 509,688 |
| | $ | 1,331,287 |
| | $ | 2,587,084 |
|
| | (1) | These amounts represent principal and interest payments due under our co-location agreements, our tower financing arrangements and our sale of towers in Brazil in 2013, which are guaranteed by NIIT. |
| | (2) | These amounts principally include future lease costs related to our transmitter and receiver sites and switches, as well as our office facilities. |
| | (3) | These amounts represent principal and interest payments associated with a U.S. dollar-denominated loan agreement with the China Development Bank in Brazil to finance infrastructure equipment, which is guaranteed by Nextel Holdings. |
| | (4) | These amounts represent principal and interest payments associated with Nextel Brazil's bank loans. |
| | (5) | These amounts represent principal and interest payments in connection with the amount Nextel Brazil borrowed to acquire 30MHz of spectrum in the 1.8 GHz band in July 2016. |
| | (6) | These amounts include maximum contractual purchase obligations under various agreements with our vendors, including the roaming and RAN sharing agreements that Nextel Brazil entered into with Telefonica in May 2016. See Note 9 to our consolidated financial statements for more information regarding these agreements. |
| | (7) | These amounts include our current estimates of asset retirement obligations based on our expectations as to future retirement costs, inflation rates and timing of retirements, as well as amounts related to our uncertain income tax positions. |
Capital Expenditures. Our capital expenditures, including capitalized interest, were $51.1 million and $51.3 million for the years ended December 31, 2017 and 2016, $72.6 million for the six months ended December 31, 2015 and $69.2 million for the six months ended June 30, 2015. We expect to continue our efforts to conserve our cash resources while simultaneously meeting the capacity needs of our network.
Our capital spending and related expenses are expected to be driven by several factors, including:
the amount we spend to enhance our WCDMA network in Brazil and deploy LTE;
the extent to which we expand the coverage of our network in new or existing market areas;
the number of additional transmitter and receiver sites we build in order to increase system capacity, maintain system quality and meet our regulatory requirements, as well as the costs associated with the installation of network infrastructure and switching equipment; and
the costs we incur in connection with non-network related information technology projects.
Our future capital expenditures may also be affected by future technology improvements, technology choices and our available capital.
Future Outlook. As of December 31, 2017, our consolidated sources of funding included $210.6 million in cash and short-term investments, $110.0 million in cash held in escrow to secure our indemnification obligations in connection with the sale of Nextel Mexico, and $50.3 million in cash pledged as collateral to secure certain performance bonds relating to our obligations to deploy our WCDMA spectrum in Brazil. In January 2018, we recovered substantially all of the cash securing these performance bonds. In addition, we recently reached an agreement with the Mexican tax authorities related to the audits of Nextel Mexico's income tax returns for the years 2010 and 2011. We expect to receive a release of some of the $72.4 million in previously escrowed funds related to the 2010 and 2011 income tax audits in the next few months. Based on the recent challenging competitive environment in Brazil that we anticipate will continue, as well as the loss of revenues associated with the shutdown of our iDEN business, we expect that our cash flow from operations will be negative for 2018. We expect our capital expenditures for 2018 to be similar to the levels experienced in 2017.
In October 2017, Nextel Brazil entered into an amended and restated equipment financing facility and sixth amendments to its bank loans with Brazilian lenders. In January 2018, we received the final approval from the China Export and Credit Insurance Corporation, or Sinosure, for the amended and restated equipment financing facility, at which point all of these amendments became effective. As a result of the amendments, the material financing terms in all three facilities were aligned. Among other changes, these amendments provide for the deferral of substantially all principal payments for the first 48 months from the date of effectiveness, an extension of the loan maturity dates to 98 months from the date of effectiveness, and a holiday for certain financial covenant compliance, including the net debt financial covenant, until June 30, 2020. In connection with these amendments, Nextel Brazil granted additional security interests to each of its lenders in the form of preferential rights to amounts held in certain of Nextel Brazil's bank accounts and pledged incremental equipment and property to these lenders. In addition, Nextel Brazil will be subject to monthly minimum cash and minimum receivable requirements. Nextel Holdings and certain of its subsidiaries have agreed to make equity contributions to Nextel Brazil over the next 48 months.
As a result of these amendments, our liquidity forecast has substantially improved, and based on our business plan, we believe our current sources of funding described above will provide us with sufficient liquidity to fund our business through 2019. Our business plan is based on a number of assumptions, including lower subscriber turnover and a decrease in certain costs compared to 2017. In addition, it assumes that we will recover substantially all of the amount held in escrow. If our actual results of operations differ from our business plan and/or the ultimate amount recovered from our cash held in escrow does not meet our current forecasted amount or is delayed for a significant amount of time, our business could be negatively impacted, and we would need to obtain additional funding and/or significantly reduce our capital and operational spending to further preserve our liquidity.
In making the assessment of our funding needs and the adequacy of our current sources of funding, we have considered:
cash and cash equivalents on hand and short-term investments available to fund our operations;
restricted cash currently held in escrow to secure our indemnification obligations in connection with the sale of Nextel Mexico;
expected cash flows from our operations in Brazil;
the timing of spectrum payments, including ongoing fees for spectrum use;
our anticipated level of capital expenditures;
our scheduled debt service obligations;
our other contractual obligations; and
cash income and other taxes.
In addition to the factors described above, the anticipated cash needs of our business, as well as the conclusions presented herein regarding our liquidity needs, could change significantly:
based on the continued development of our business plans and strategy;
if currency values in Brazil depreciate or appreciate relative to the U.S. dollar in a manner that is more significant than we currently expect and assume as part of our plans;
if economic conditions in Brazil do not improve or worsen;
if competitive practices in the mobile wireless telecommunications industry in Brazil change materially from those currently prevailing or from those now anticipated; or
if other presently unexpected circumstances arise that have a material effect on the cash flow or profitability of our business, such as contingencies.
| | E. | Effect of Inflation and Foreign Currency Exchange |
Our net assets are subject to foreign currency exchange risks since they are primarily maintained in Brazilian reais. Additionally, some of Nextel Brazil's debt is denominated entirely in U.S. dollars, which exposes us to foreign currency exchange risks. We conduct business solely in Brazil where the rate of inflation has historically been significantly higher than that of the U.S. We seek to protect our earnings from inflation and possible currency depreciation by periodically adjusting the local currency prices charged by Nextel Brazil for sales of handsets and services to its subscribers. We routinely monitor our foreign currency exposure and the cost effectiveness of hedging instruments.
Inflation is not currently a material factor affecting our business, although rates of inflation in Brazil have been historically volatile. General operating expenses such as salaries, employee benefits and lease costs are, however, subject to normal inflationary pressures. From time to time, we may experience price changes in connection with the purchase of system infrastructure equipment and handsets, but we do not currently believe that any of these price changes will be material to our business.
| | F. | Effect of New Accounting Standards |
In May 2014, the FASB issued Accounting Standards Codification, or ASU, No. 2014-09, “Revenue from Contracts with Customers,” or ASC 606, which provides us with a single revenue recognition model for recognizing revenue from contracts with customers and significantly expands the disclosure requirements for revenue arrangements. We implemented ASC 606 on January 1, 2018, using the modified retrospective method for all contracts open at that date. Prior periods will not be retroactively adjusted. In utilizing the modified retrospective method, we are recognizing the cumulative effect of applying the standard at the date of initial application, and we will disclose the results under both the new and old standards for the first year after adoption, beginning in the first quarter of 2018.
During the first quarter of 2018, we will record a cumulative adjustment to accumulated deficit that is primarily composed of the following:
a net contract asset related to the portion of our revenues associated with service plans that are sold concurrently with a subsidized handset; and
an asset related to costs incurred to acquire a contract, which primarily relates to the deferral of commission expenses.
The future impact of ASC 606 on our revenues primarily relates to contracts with customers where the customer also purchases a subsidized handset from us, which comprises approximately 10% of our new subscribers. A portion of our revenues will be reallocated from service and other revenues to handset and accessory revenues, and these revenues will be recognized at an earlier point in time compared to our current accounting under the existing authoritative guidance. The earlier revenue recognition results in the creation of a contract asset for revenues recognized prior to contractual billing. Given current business trends, we do not expect a material change in total operating revenues.
The timing of expense recognition related to certain of our contract acquisition costs, primarily sales commissions, will be impacted as these expenses will be capitalized and amortized under the new standard rather than being expensed as incurred under existing authoritative guidance. We expensed approximately $36.6 million of contract acquisition costs during the year ended December 31, 2017.
While we have reached conclusions on the key accounting assessments related to adopting this standard, we are continuing to finalize our assessment of the resulting quantitative impacts. Based on currently available information, we estimate that our opening accumulated deficit balance on January 1, 2018 will decrease by between $20.0 million and $30.0 million, primarily related to the deferral of previously expensed contract acquisition costs. We do not expect to recognize a material net contract asset.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which replaces existing leasing rules with a comprehensive lease measurement and recognition standard and expanded disclosure requirements. ASU No. 2016-02 will require lessees to recognize most leases on their balance sheet as liabilities, with corresponding “right-of-use” assets, and is effective for interim and annual reporting periods beginning after December 15, 2018, subject to early adoption. The new standard allows us to make an accounting policy election not to recognize lease assets and liabilities on the balance sheet for leases with a term of 12 months or less. The accounting applied by a lessor is largely unchanged from previous guidance. In transition, lessees and lessors have the option to recognize and measure leases either at the beginning of the earliest period presented or at the beginning of the period of adoption using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that we may elect to apply. We expect that we will record a material amount of lease liabilities as a result of implementing this standard. We are currently evaluating the adoption methods, as well as the additional effects ASU No. 2016-02 will have on our consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which provides guidance regarding cash flow statement classification and presentation of changes in restricted cash. We implemented this new standard on January 1, 2018. The amendments in this ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Entities will also be required to reconcile this total to amounts on the consolidated balance sheet and disclose the nature of the restrictions. We expect that the adoption of this ASU will reclassify changes in restricted cash and other deposits from cash provided by (used in) investing activities to a component of the reconciliation of the beginning of period to end of period change in cash and cash equivalents for all periods presented.
| | Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Our revenues are primarily denominated in Brazilian reais, while a portion of our operations are financed in U.S. dollars. As a result, fluctuations in the Brazilian real relative to the U.S. dollar expose us to foreign currency exchange risks. These risks include the impact of translating our local currency reported earnings into U.S. dollars when the U.S. dollar strengthens against the Brazilian real.
We occasionally enter into derivative transactions for hedging or risk management purposes. We have not and will not enter into any derivative transactions for speculative or profit generating purposes. In the past, Nextel Brazil has entered into hedge agreements to manage foreign currency risk on certain forecasted transactions. The fair values of these instruments were not material.
Interest rate changes expose our fixed rate long-term borrowings to changes in fair value and expose our variable rate long-term borrowings to changes in future cash flows. As of December 31, 2017, approximately 34% of our consolidated principal amount of debt was fixed rate debt, and the remaining 66% of our total consolidated debt was variable rate debt.
The table below presents projected principal amounts, related interest rates by year of maturity and aggregate amounts as of December 31, 2017 for both our fixed and variable rate debt obligations, all of which have been determined at their fair values. See Note 3 to our consolidated financial statements for more information. The changes in the fair values of our debt obligations compared to their fair values as of December 31, 2016 reflect changes in applicable market conditions and changes in other company-specific conditions during 2017. In addition, the interest rates presented below reflect the impact of the implementation of fresh start accounting on our capital lease obligations. All of the information in the table is presented in U.S. dollar equivalents, which is our reporting currency. The actual cash flows associated with our debt obligations are denominated in U.S. dollars (US$) and Brazilian reais (BRL).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Successor Company | | | Year of Maturity | | 2017 | | 2016 | | | 1 Year | | 2 Years | | 3 Years | | 4 Years | | 5 Years | | Thereafter | | Total | | Fair Value | | Total | | Fair Value | | | (dollars in thousands) | | Fixed Rate (BRL) | $ | 4,478 |
| | $ | 24,510 |
| | $ | 25,622 |
| | $ | 25,589 |
| | $ | 24,900 |
| | $ | 122,924 |
| | $ | 228,023 |
| | $ | 218,449 |
| | $ | 222,789 |
| | $ | 214,164 |
| | Average Interest Rate | 99.1 | % | | 22.7 | % | | 25.0 | % | | 24.8 | % | | 22.9 | % | | 49.8 | % | | 39.3 | % | | | | 42.1 | % | | | | Variable Rate (US$) | $ | 1,200 |
| | $ | 1,200 |
| | $ | 1,200 |
| | $ | 1,200 |
| | $ | 57,558 |
| | $ | 182,267 |
| | $ | 244,625 |
| | $ | 237,958 |
| | $ | 293,550 |
| | $ | 280,893 |
| | Average Interest Rate | 3.7 | % | | 3.7 | % | | 3.7 | % | | 3.7 | % | | 3.7 | % | | 3.7 | % | | 3.7 | % | | | | 3.5 | % | | | | Variable Rate (BRL) | $ | 977 |
| | $ | 977 |
| | $ | 977 |
| | $ | 977 |
| | $ | 46,853 |
| | $ | 148,370 |
| | $ | 199,131 |
| | $ | 144,301 |
| | $ | 237,235 |
| | $ | 221,075 |
| | Average Interest Rate | 8.8 | % | | 8.8 | % | | 8.8 | % | | 8.8 | % | | 9.6 | % | | 9.6 | % | | 9.6 | % | | | | 19.1 | % | | |
| | Item 8. | Financial Statements and Supplementary Data |
We have listed the consolidated financial statements required under this Item in Part IV, Item 15(a)(1) of this annual report on Form 10-K. We have also listed the financial statement schedules required under Regulation S-X in Part IV, Item 15(a)(2) of this annual report on Form 10-K. The financial statements and schedules appear following the signature page of this annual report on Form 10-K.
| | Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
Not applicable.
| | Item 9A. | Controls and Procedures |
Evaluation of Disclosure ControlsAudit Committee Pre-Approval Policies and Procedures
We maintain disclosure controls and proceduresIt is the policy of the Audit Committee that are designed to ensureour independent registered public accounting firm may provide only those services that information requiredhave been pre-approved by the Audit Committee. Unless a type of service to be disclosedprovided by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission, or the SEC, and that such information is accumulated and communicated to the Company's management, including our principal executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
As of December 31, 2017, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was carried out under the supervision and with the participation of our management teams in the United States and Brazil, including our principal executive officer and chief financial officer. Based on such evaluation, our principal executive officer and chief financial officer concluded that the design and operation of our disclosure controls and procedures were not effective due to a material weakness in the Company's internal control over financial reporting, as described below. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, that creates a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
We performed procedures to mitigate the impact of these deficiencies on our consolidated financial statements, including reviews and validations performed by staff at our headquarters office who were not part of the financial close process in Brazil. Based on these procedures, management believes that the consolidated financial statements included in this report have been prepared in accordance with U.S. generally accepted accounting principles, and present fairly, in all material respects, the financial position, results of operations and cash flows of the Company, as of and for the periods presented.
Changes in Internal Control over Financial Reporting
Over the course of 2017, we took a number of actions that improved Nextel Brazil’s control environment and information and communication processes.
In April 2017 and September 2017, respectively, Nextel Brazil hired a new chief executive officer and a new chief financial officer, both of whom have enhanced the monitoring of compliance with internal control objectives by formalizing internal control accountability measures across the organization in Brazil. As a result of these and other actions demonstrating an increased commitment to establishing an appropriate tone at the top in Nextel Brazil, we believe this previously disclosed control deficiency underlying the control environment component of our material weakness has been remediated.
To address the previously disclosed deficiencies in our information and communication process, we performed risk assessments and detailed walkthroughs of the processes related to leases, accrued liabilities and operating expenses. We identified the key information required for these processes and designed and implemented controls over such information. The controls we implemented over accrued liabilities and operating expenses operated effectively over a sufficient period of time to allow us to conclude we have remediated this component of the material weakness. However, the controls we implemented over information related to leases did not operate consistently, and we have concluded that further improvements will be required to consider these controls effective.
As a result of these and other actions, we observed meaningful decreases in both the number of new deficiencies identified throughout the year and the number of unremediated deficiencies at December 31, 2017. In addition, we have implemented and will continue to implement controls related to our adoption of ASU No. 2014-09, “Revenue from Contracts with Customers,” which is effective as of January 1, 2018. These improvements, some of which were implemented in the fourth quarter, as well as the items discussed below, have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Securities Exchange Act of 1934, as amended). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.
In order to evaluate the effectiveness of internal control over financial reporting, management conducted an assessment using the criteria established in Internal Control - Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded the Company's internal control over financial reporting was not effective as of December 31, 2017 due to a continuing material weakness in our information and communication process and our control environment. Because our overall control environment lacks automation, we depend on a large number of personnel to validate the completeness and accuracy of information used to support accounting analyses, to revise control activities to be responsive to changes in our business and to manage the financial statement close process. During 2017, we did not have a sufficient number of experienced resources at Nextel Brazil, which impacted, among other things, our ability to reach timely conclusions and validate the completeness and accuracy of information used to support various accounting analyses, which resulted in immaterial misstatements, some of which were corrected, and control deficiencies across multiple accounts. These matters create a reasonable possibility that a material misstatement to our consolidated financial statements will not be prevented or detected on a timely basis.
KPMG LLP, an independent registered public accounting firm has expressed an adverse reportreceived general pre-approval, it requires specific pre-approval by the Audit Committee or, in specified circumstances, the Audit Committee chair pursuant to authority delegated by the Audit Committee. The term of any general pre-approval is eighteen months from the date of pre-approval, unless the Audit Committee or a related engagement letter specifically provides for a different period. The Audit Committee will annually review and pre-approve the services that may be provided by the independent registered public accounting firm without obtaining specific pre-approval. The Audit Committee has delegated its pre-approval authority to Robert Schriesheim, the chair of the Audit Committee.
Requests or applications to provide services that require specific approval by the Audit Committee must be submitted to the Audit Committee by both the independent registered public accounting firm and our controller, and must include a joint statement as to whether, in their view, the request or application is consistent with the SEC’s rules on auditor independence. For the operating effectiveness of our internal control over financial reporting as ofyears ended December 31, 2017. KPMG LLP’s report appears on Page F-3 of this annual report on Form 10-K.
Plan for Remediation of Nextel Brazil's Material Weakness
Management is committed to dedicating2018 and 2017, all services provided by our independent registered public accounting firm were pre-approved in accordance with the resources necessary to ensure sustained effective control design and operation is achieved, and will continue to work to ensure we maintain sufficient experienced resources, automate processes such as lease accounting, and monitor risks related to new accounting requirements or changes that could place an unmanageable strain on our resources.
| | Item 9B. | Other Information |
None.Audit Committee policy described above.
PART III
| | Item 10. | Directors, Executive Officers of the Registrant and Corporate Governance |
The information required by this item will be provided by being incorporated herein by reference to the Company’s definitive proxy statement for the 2018 Annual Meeting of Stockholders, which we expect will be held on May 3, 2018.
| | Item 11. | Executive Compensation |
The information required by this item will be provided by being incorporated herein by reference to the Company’s definitive proxy statement for the 2018 Annual Meeting of Stockholders.
| | Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this item will be provided by being incorporated herein by reference to the Company’s definitive proxy statement for the 2018 Annual Meeting of Stockholders.
| | Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by this item will be provided by being incorporated herein by reference to the Company’s definitive proxy statement for the 2018 Annual Meeting of Stockholders.
| | Item 14. | Principal Accountant Fees and Services |
The information required by this item will be provided by being incorporated herein by reference to the Company’s definitive proxy statement for the 2018 Annual Meeting of Stockholders.
PART IV
| | Item 15. | Exhibits, Financial Statement Schedules. |
Item 15. Exhibits, Financial Statement Schedules
(a)(1) Financial Statements. Consolidated financial statements and reports of independent registered public accounting firms filed as part of this report are listed below:(3) Exhibits:
| | | | | | | | | | | | | Exhibit Number | | Exhibit Description | | Form | | Exhibit | | Incorporated by
Reference Filing Date | | Filed Herewith | | 2.1 | | | | 8-K | | 2.1 | | 06/22/15 | | | | 3.1 | | | | S-8 | | 3.1 | | 06/26/15 | | | | 3.2 | | | | S-8 | | 3.2 | | 06/26/15 | | | | 4.2 | | | | 8-K | | 4.1 | | 08/14/18 | | | | 4.3 | | | | 8-K | | 4.2 | | 08/14/18 | | | | 10.1 | | | | 10-Q | | 10.1 | | 11/08/11 | | | | 10.2 | | | | 10-K | | 10.2 | | 03/03/16 | | | | 10.3 | | Purchase and Sale Agreement, dated as of January 26, 2015, between New Cingular Wireless Services, Inc., NIHD Telecom Holdings, B.V., NIU Holdings LLC, Comunicaciones de Mexico S.A. de C.V., Nextel International (Uruguay) LLC, NII International Telecom S.C.A., NII International Holdings S.à r.l., NII Global Holdings, Inc., NII Capital Corp. and NII Holdings. | | 8-K | | 10.1 | | 01/26/15 | | | | 10.4 | | | | 8-K | | 10.1 | | 11/01/17 | | | | 10.5 | | | | 8-K | | 10.2 | | 11/01/17 | | | | 10.6 | | | | 8-K | | 10.4 | | 11/01/17 | | | | 10.7 (+) | | | | 8-K | | 10.1 | | 02/01/19 | | | | 10.8 | | | | 8-K | | 10.8 | | 11/01/17 | | | | 10.9 | | | | 8-K | | 10.6 | | 11/01/17 | | |
| | | | | | | | | | | | | 10.10 | | | | 8-K | | 10.1 | | 06/06/17 | | | | 10.11 | | | | 8-K | | 10.2 | | 06/06/17 | | | | 10.12 | | | | 10-K | | 10.16 | | 02/28/13 | | | | 10.13(+) | | | | 8-K | | 10.2 | | 12/22/15 | | | | 10.14(+) | | | | S-8 | | 4.1 | | 06/26/15 | | | | 10.15(+) | | | | 8-K | | 10.3 | | 06/30/15 | | | | 10.16(+) | | | | 8-K | | 10.4 | | 06/30/15 | | | | 10.17(+) | | | | 10-K | | 10.32 | | 03/03/16 | | | | 10.18(+) | | | | 10-K | | 10.18 | | 03/15/18 | | | | 10.19(+) | | | | 8-K | | 10.1 | | 05/02/13 | | | | 10.20(+) | | | | 8-K | | 10.1 | | 07/27/17 | | | | 10.21(+) | | | | 8-K | | 10.2 | | 07/27/17 | | | | 10.22(+) | | | | 10-K | | 10.22 | | 03/15/18 | | | | 10.23(+) | | | | 8-K | | 10.3 | | 07/27/17 | | | | 10.24(+) | | | | 8-K | | 10.4 | | 07/27/17 | | | | 10.25(+) | | | | 8-K | | 10.1 | | 08/01/18 | | | | 10.26(+) | | | | 10-Q | | 10.1 | | 08/07/18 | | | | 10.27(+) | | | | 10-Q | | 10.2 | | 08/07/18 | | | | 10.28(+) | | | | 10-Q | | 10.3 | | 08/07/18 | | | | 10.29 | | | | 8-K | | 10.1 | | 03/18/19 | | | | 10.30 | | | | 8-K | | 10.2 | | 03/18/19 | | | | 21.1 | | | | 10-K | | 21.1 | | 03/18/19 | | | | 23.1 | | | | 10-K | | 23.1 | | 03/18/19 | | | | 31.1 | | | | | | | | | | * | | 31.2 | | | | | | | | | | * | | 32.1 | | | | 10-K | | 32.1 | | 03/18/19 | | | | 32.2 | | | | 10-K | | 32.2 | | 03/18/19 | | |
| | | | | | | | | | | | | 101 | | The following materials from the NII Holdings Annual Report on Form 10-K for the year ended December 31, 2018 formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Comprehensive Loss, (iii) Consolidated Statements of Changes in Stockholders’ Equity (Deficit), (iv) Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements. | | 10-K | | 101 | | 03/18/19 | | |
| | (2) | Financial Statement Schedules. The following financial statement schedules are filed as part of this report. Schedules other than the schedules listed below are omitted because they are either not required or not applicable. |
| | | | | | | | | | | | | Exhibit Number | | Exhibit Description | | Form | | Exhibit | | Incorporated by
Reference Filing Date | | Filed Herewith | | 2.1 | | | | 8-K | | 2.1 | | 06/22/15 | | | | 3.1 | | | | S-8 | | 3.1 | | 06/26/15 | | | | 3.2 | | | | S-8 | | 3.2 | | 06/26/15 | | | | 4.1 | | | | 8-K | | 10.1 | | 06/30/15 | | | | 10.1 | | | | 10-Q | | 10.1 | | 11/08/11 | | | | 10.2 | | | | 10-K | | 10.2 | | 03/03/16 | | | | 10.3 | | Purchase and Sale Agreement, dated as of January 26, 2015, between New Cingular Wireless Services, Inc., NIHD Telecom Holdings, B.V., NIU Holdings LLC, Comunicaciones de Mexico S.A. de C.V., Nextel International (Uruguay) LLC, NII International Telecom S.C.A., NII International Holdings S.à r.l., NII Global Holdings, Inc., NII Capital Corp. and NII Holdings. | | 8-K | | 10.1 | | 01/26/15 | | | | 10.4 | | | | 8-K | | 10.1 | | 11/01/17 | | | | 10.5 | | | | 8-K | | 10.2 | | 11/01/17 | | | | 10.6 | | | | 8-K | | 10.4 | | 11/01/17 | | | | 10.7 | | | | 10-K | | 10.16 | | 03/03/16 | | | | 10.8 | | | | 8-K | | 10.8 | | 11/01/17 | | | | 10.9 | | | | 8-K | | 10.6 | | 11/01/17 | | | | 10.10 | | | | 8-K | | 10.1 | | 06/06/17 | | | | 10.11 | | | | 8-K | | 10.2 | | 06/06/17 | | | | 10.12 | | | | 10-K | | 10.16 | | 02/28/13 | | | | 10.13(+) | | | | 8-K | | 10.2 | | 12/22/15 | | | | 10.14(+) | | | | S-8 | | 4.1 | | 06/26/15 | | | | 10.15(+) | | | | 8-K | | 10.3 | | 06/30/15 | | | | 10.16(+) | | | | 8-K | | 10.4 | | 06/30/15 | | | | 10.17(+) | | | | 10-K | | 10.32 | | 03/03/16 | | |
| | | | | | | | | | | | | 10.18(+) | | | | | | | | | | * | | 10.19(+) | | | | 8-K | | 10.1 | | 05/02/13 | | | | 10.20(+) | | | | 8-K | | 10.1 | | 07/27/17 | | | | 10.21(+) | | | | 8-K | | 10.2 | | 07/27/17 | | | | 10.22(+) | | | | | | | | | | * | | 10.23(+) | | | | 8-K | | 10.3 | | 07/27/17 | | | | 10.24(+) | | | | 8-K | | 10.4 | | 07/27/17 | | | | 10.25(+) | | | | 10-K | | 10.37 | | 03/03/16 | | | | 10.26(+) | | | | 8-K | | 10.1 | | 05/24/17 | | | | 21.1 | | | | | | | | | | * | | 23.1 | | | | | | | | | | * | | 31.1 | | | | | | | | | | * | | 31.2 | | | | | | | | | | * | | 32.1 | | | | | | | | | | * | | 32.2 | | | | | | | | | | * | | 99.1 | | | | 8-K | | 99.1 | | 06/07/17 | | | | 99.2 | | | | 8-K | | 99.2 | | 06/07/17 | | | | 101 | | The following materials from the NII Holdings, Inc. Annual Report on Form 10-K for the year ended December 31, 2017 formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Comprehensive (Loss) Income, (iii) Consolidated Statements of Changes in Stockholders’ (Deficit) Equity, (iv) Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements. | | | | | | | | * |
| | | + | Indicates Management Compensatory Plan, Contract or Arrangement. |
| | Item 16. | Form 10-K Summary. |
None.37
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NII HOLDINGS, INC. | | | | | | By: | /s/ TIMOTHY M. MULIERI | | | | Timothy M. Mulieri Vice President, Corporate Controller (on behalf of the registrant and as Principal Accounting Officer) |
March 15, 2018April 30, 2019
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 15, 2018.April 30, 2019.
| | | | Signature
Signature | | Title | | | | | | | | | /s/ ROBERTO RITTES | | Chief Executive Officer, Nextel Brazil (Principal Executive Officer) | | Roberto Rittes | | | | | | | | /s/ DANIEL E. FREIMAN | | Chief Financial Officer (Principal Financial Officer) | | Daniel E. Freiman | | | | | | | | /s/ KEVIN L. BEEBE | | Chairman of the Board of Directors | | Kevin L. Beebe | | | | | | | | /s/ JAMES V. CONTINENZA | | Director | | James V. Continenza | | | | | | | | /s/ HOWARD S. HOFFMANN | | Director | | Howard S. Hoffmann | | | | | | | | /s/ RICARDO KNOEPFELMACHER | | Director | | Ricardo Knoepfelmacher | | | | | | | | /s/ CHRISTOPHER T. ROGERS | | Director | | Christopher T. Rogers | | | | | | | | /s/ ROBERT A. SCHRIESHEIM | | Director | | Robert A. Schriesheim | | | | | | | | /s/ STEVEN M. SHINDLER | | Director | | Steven M. Shindler | | |
NII HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
| | | | | | | CONSOLIDATED FINANCIAL STATEMENTS | | | | | | | | | | | | FINANCIAL STATEMENT SCHEDULES | | | | | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
NII Holdings, Inc.:
Opinion on the ConsolidatedFinancial Statements
We have audited the accompanying consolidated balance sheets of NII Holdings, Inc. and subsidiaries (the Company) as of December 31, 2017 and 2016 (Successor), the related consolidated statements of comprehensive (loss) income, changes in stockholders’ (deficit) equity, and cash flows for the years ended December 31, 2017 and 2016 (Successor), for the six-month periods ended December 31, 2015 (Successor) and June 30, 2015 (Predecessor), and the related notes and financial statement schedules listed in the accompanying index (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016 (Successor), and the results of its operations and its cash flows for the years ended December 31, 2017 and 2016, and for the six-month periods ended December 31, 2015 (Successor) and June 30, 2015 (Predecessor), in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 15, 2018 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.
Fresh-Start Reporting
As discussed in Note 3 to the consolidated financial statements, on June 26, 2015, the Company satisfied the conditions to emerge from Chapter 11 bankruptcy proceedings. Accordingly, the accompanying consolidated financial statements as of and for the years ended December 31, 2017 and 2016 (Successor) and for the six-month period ended December 31, 2015 (Successor) have been prepared in accordance with Accounting Standards Codification Topic 852, Reorganizations. The Company applied fresh-start reporting as of June 30, 2015 and recognized net assets at fair value, resulting in a lack of comparability with the consolidated financial statements of the Predecessor.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company's auditor since 2014.
McLean, Virginia
March 15, 2018
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors
NII Holdings, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited NII Holdings, Inc. and subsidiaries’(the Company) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the material weakness, described below, on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2017 and 2016 (Successor), the related consolidated statements of comprehensive (loss) income, changes in stockholders’ (deficit) equity, and cash flows for the years ended December 31, 2017 and 2016 (Successor), for the six-month periods ended December 31, 2015 (Successor) and June 30, 2015 (Predecessor), and the related notes and financial statement schedules listed in the accompanying index (collectively, the consolidated financial statements), and our report dated March 15, 2018 expressed an unqualified opinion on those consolidated financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness related to an insufficient number of experienced resources at Nextel Brazil, which impacted, among other things, the Company's ability to reach timely conclusions and validate the completeness and accuracy of information used to support accounting analyses across multiple accounts was identified and included in management’s assessment. The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2017 consolidated financial statements, and this report does not affect our report on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. 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 audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s 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 company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s 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/ KPMG LLP
McLean, Virginia
March 15, 2018
NII HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except par values)
| | | | | | | | | | | Successor Company | | | December 31,
2017 | | December 31,
2016 | | ASSETS | | Current assets | |
| | |
| | Cash and cash equivalents | $ | 193,888 |
| | $ | 257,380 |
| | Short-term investments | 16,711 |
| | 73,859 |
| | Accounts receivable, net of allowance for doubtful accounts of $42,011 and $54,221 | 106,715 |
| | 153,806 |
| | Handset and accessory inventory | 3,163 |
| | 8,295 |
| | Prepaid expenses and other | 254,461 |
| | 280,145 |
| | Total current assets | 574,938 |
| | 773,485 |
| | Property, plant and equipment, net | 117,262 |
| | 129,475 |
| | Intangible assets, net | 194,694 |
| | 243,681 |
| | Other assets | 218,204 |
| | 271,868 |
| | Total assets | $ | 1,105,098 |
| | $ | 1,418,509 |
| | LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | | Current liabilities | |
| | |
| | Accounts payable | $ | 42,284 |
| | $ | 69,186 |
| | Accrued expenses and other | 300,815 |
| | 271,899 |
| | Deferred revenues | 7,314 |
| | 11,614 |
| | Current portion of long-term debt | 7,990 |
| | 540,474 |
| | Total current liabilities | 358,403 |
| | 893,173 |
| | Long-term debt | 647,717 |
| | 215,842 |
| | Other long-term liabilities | 220,925 |
| | 143,472 |
| | Total liabilities | 1,227,045 |
| | 1,252,487 |
| | Commitments and contingencies (Note 9) |
|
| |
|
| | Stockholders’ (deficit) equity | |
| | |
| | Undesignated preferred stock, par value $0.001, 10,000 shares authorized, no shares issued or outstanding | — |
| | — |
| | Common stock, par value $0.001, 140,000 shares authorized, 100,384 shares issued and outstanding — 2017, 100,258 shares issued and outstanding — 2016 | 100 |
| | 100 |
| | Paid-in capital | 2,139,299 |
| | 2,076,612 |
| | Accumulated deficit | (2,135,770 | ) | | (1,834,756 | ) | | Accumulated other comprehensive loss | (46,903 | ) | | (75,934 | ) | | Total NII Holdings stockholders’ (deficit) equity | (43,274 | ) | | 166,022 |
| | Noncontrolling interest | (78,673 | ) | | — |
| | Total (deficit) equity | (121,947 | ) | | 166,022 |
| | Total liabilities and stockholders’ (deficit) equity | $ | 1,105,098 |
| | $ | 1,418,509 |
|
The accompanying notes are an integral part of these consolidated financial statements.
NII HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (in thousands, except per share amounts) | | | | | | | | | | | | | | | | | | | | Successor Company | | | Predecessor Company | | | Year Ended December 31, | | Six Months Ended December 31, | | | Six Months Ended June 30, | | | 2017 | | 2016 | | 2015 | | | 2015 | | Operating revenues | | | |
| | | | | |
| | Service and other revenues | $ | 847,879 |
| | $ | 963,209 |
| | $ | 501,130 |
| | | $ | 643,904 |
| | Handset and accessory revenues | 21,888 |
| | 21,837 |
| | 28,304 |
| | | 39,807 |
| | | 869,767 |
| | 985,046 |
| | 529,434 |
| | | 683,711 |
| | Operating expenses | | | |
| | |
| | | |
| Cost of service (exclusive of depreciation and amortization included below) | 374,637 |
| | 364,648 |
| | 212,852 |
| | | 256,085 |
| | Cost of handsets and accessories | 40,207 |
| | 29,273 |
| | 46,904 |
| | | 121,143 |
| | Selling, general and administrative | 510,168 |
| | 560,760 |
| | 311,703 |
| | | 419,699 |
| | Impairment, restructuring and other charges | 179,727 |
| | 1,384,811 |
| | 32,308 |
| | | 36,792 |
| | Depreciation | 22,192 |
| | 135,429 |
| | 64,108 |
| | | 126,789 |
| | Amortization | 14,995 |
| | 36,954 |
| | 21,256 |
| | | 27,089 |
| | | 1,141,926 |
| | 2,511,875 |
| | 689,131 |
| | | 987,597 |
| | Operating loss | (272,159 | ) | | (1,526,829 | ) | | (159,697 | ) | | | (303,886 | ) | | Other (expense) income | | | |
| | |
| | | |
| | Interest expense, net | (118,605 | ) | | (113,732 | ) | | (55,563 | ) | | | (82,820 | ) | | Interest income | 41,507 |
| | 37,689 |
| | 17,200 |
| | | 15,327 |
| | Foreign currency transaction (losses) gains, net | (1,271 | ) | | 76,615 |
| | (99,737 | ) | | | (63,948 | ) | | Other expense, net | (7,930 | ) | | (9,711 | ) | | (1,176 | ) | | | (137 | ) | | | (86,299 | ) | | (9,139 | ) | | (139,276 | ) | | | (131,578 | ) | | Loss from continuing operations before reorganization items and income tax benefit (provision) | (358,458 | ) | | (1,535,968 | ) | | (298,973 | ) | | | (435,464 | ) | | Reorganization items (Note 3) | 445 |
| | (803 | ) | | 1,467 |
| | | 1,956,874 |
| | Income tax benefit (provision) (Note 11) | 6,347 |
| | 2,892 |
| | 5,015 |
| | | (2,009 | ) | | Net (loss) income from continuing operations | (351,666 | ) | | (1,533,879 | ) | | (292,491 | ) | | | 1,519,401 |
| Income (loss) from discontinued operations, net of income taxes (Note 6) | 1,005 |
| | (19,994 | ) | | 11,608 |
| | | 221,114 |
| | Net (loss) income | (350,661 | ) | | (1,553,873 | ) | | (280,883 | ) | | | 1,740,515 |
| | Net loss attributable to noncontrolling interest | (49,647 | ) | | — |
| | — |
| | | — |
| | Net (loss) income attributable to NII Holdings | $ | (301,014 | ) | | $ | (1,553,873 | ) | | $ | (280,883 | ) | |
| $ | 1,740,515 |
| | | | | | | | | | | | Net (loss) income from continuing operations per common share, basic | $ | (3.51 | ) | | $ | (15.32 | ) | | $ | (2.93 | ) | | | $ | 8.73 |
| | Net income (loss) from discontinued operations per common share, basic | 0.01 |
| | (0.20 | ) | | 0.12 |
| | | 1.27 |
| | Net (loss) income attributable to NII Holdings per common share, basic | $ | (3.50 | ) | | $ | (15.52 | ) | | $ | (2.81 | ) | | | $ | 10.00 |
| Net (loss) income from continuing operations per common share, diluted | $ | (3.51 | ) | | $ | (15.32 | ) | | $ | (2.93 | ) | | | $ | 8.71 |
| | Net income (loss) from discontinued operations per common share, diluted | 0.01 |
| | (0.20 | ) | | 0.12 |
| | | 1.27 |
| | Net (loss) income attributable to NII Holdings per common share, diluted | $ | (3.50 | ) | | $ | (15.52 | ) | | $ | (2.81 | ) | | | $ | 9.98 |
| | | | | | | | | | | | Weighted average number of common shares outstanding, basic | 100,332 |
| | 100,098 |
| | 100,000 |
| | | 172,363 |
| | Weighted average number of common shares outstanding, diluted | 100,332 |
| | 100,098 |
| | 100,000 |
| | | 172,691 |
| | | | | | | | | | | | Comprehensive (loss) income, net of income taxes | | | | | | | | | | Foreign currency translation adjustment | $ | 7,696 |
| | $ | 169,785 |
| | $ | (248,781 | ) | | | $ | (205,899 | ) | | Reclassification adjustment for sale of Nextel Argentina, Nextel Mexico and Nextel Chile (Note 6) | — |
| | — |
| | (1,672 | ) | | | 421,953 |
| | Other | — |
| | — |
| | 4,734 |
| | | 2,956 |
| | Other comprehensive income (loss) | 7,696 |
| | 169,785 |
| | (245,719 | ) | | | 219,010 |
| | Net (loss) income attributable to NII Holdings | (301,014 | ) | | (1,553,873 | ) | | (280,883 | ) | | | 1,740,515 |
| | Total comprehensive (loss) income attributable to NII Holdings | $ | (293,318 | ) | | $ | (1,384,088 | ) | | $ | (526,602 | ) | | | $ | 1,959,525 |
|
The accompanying notes are an integral part of these consolidated financial statements.
NII HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ (DEFICIT) EQUITY (in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Common Stock | | Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Stockholders’ (Deficit) Equity | | Noncontrolling Interest | | Total (Deficit) Equity | | | Shares | | Amount | | | | | | | Balance, January 1, 2015 — Predecessor Company | 172,363 |
| | $ | 172 |
| | $ | 1,517,081 |
| | $ | (2,150,664 | ) | | $ | (1,331,353 | ) | | $ | (1,964,764 | ) | | $ | — |
| | $ | (1,964,764 | ) | | Net income | — |
| | — |
| | — |
| | 1,740,515 |
| | — |
| | 1,740,515 |
| | — |
| | 1,740,515 |
| | Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 219,010 |
| | 219,010 |
| | — |
| | 219,010 |
| | Share-based compensation activity | — |
| | — |
| | 5,239 |
| | — |
| | — |
| | 5,239 |
| | — |
| | 5,239 |
| Balance, June 30, 2015 — Predecessor Company | 172,363 |
| | 172 |
| | 1,522,320 |
| | (410,149 | ) | | (1,112,343 | ) | | — |
| | — |
| | — |
| | Elimination of Predecessor Company's equity | (172,363 | ) | | (172 | ) | | (1,522,320 | ) | | 410,149 |
| | 1,112,343 |
| | — |
| | — |
| | — |
| | Issuance of Successor Company's common stock | 100,000 |
| | 100 |
| | 2,067,565 |
| | — |
| | — |
| | 2,067,665 |
| | — |
| | 2,067,665 |
| Balance, July 1, 2015 — Successor Company | 100,000 |
| | 100 |
| | 2,067,565 |
| | — |
| | — |
| | 2,067,665 |
| | — |
| | 2,067,665 |
| | Net loss | — |
| | — |
| | — |
| | (280,883 | ) | | — |
| | (280,883 | ) | | — |
| | (280,883 | ) | | Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (245,719 | ) | | (245,719 | ) | | — |
| | (245,719 | ) | | Share-based compensation activity | 1 |
| | — |
| | 2,932 |
| | — |
| | — |
| | 2,932 |
| | — |
| | 2,932 |
| Balance, December 31, 2015 — Successor Company | 100,001 |
| | 100 |
| | 2,070,497 |
| | (280,883 | ) | | (245,719 | ) | | 1,543,995 |
| | — |
| | 1,543,995 |
| | Net loss | — |
| | — |
| | — |
| | (1,553,873 | ) | | — |
| | (1,553,873 | ) | | — |
| | (1,553,873 | ) | | Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 169,785 |
| | 169,785 |
| | — |
| | 169,785 |
| | Share-based compensation activity | 257 |
| | — |
| | 6,115 |
| | — |
| | — |
| | 6,115 |
| | — |
| | 6,115 |
| Balance, December 31, 2016 — Successor Company | 100,258 |
| | 100 |
| | 2,076,612 |
| | (1,834,756 | ) | | (75,934 | ) | | 166,022 |
| | — |
| | 166,022 |
| | Net loss | — |
| | — |
| | — |
| | (301,014 | ) | | — |
| | (301,014 | ) | | (49,647 | ) | | (350,661 | ) | | Other comprehensive income | — |
| | — |
| | — |
| | — |
| | 7,696 |
| | 7,696 |
| | 1,604 |
| | 9,300 |
| | Share-based compensation activity | 126 |
| | — |
| | 4,797 |
| | — |
| | — |
| | 4,797 |
| | 170 |
| | 4,967 |
| | Sale of noncontrolling interest | — |
| | — |
| | 57,890 |
| | — |
| | 21,335 |
| | 79,225 |
| | (30,800 | ) | | 48,425 |
| Balance, December 31, 2017 — Successor Company | 100,384 |
| | $ | 100 |
| | $ | 2,139,299 |
| | $ | (2,135,770 | ) | | $ | (46,903 | ) | | $ | (43,274 | ) | | $ | (78,673 | ) | | $ | (121,947 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
NII HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) | | | | | | | | | | | | | | | | | | | | Successor Company | | | Predecessor Company | | | Year Ended December 31, | | Year Ended December 31, | | Six Months Ended December 31, | | | Six Months Ended June 30, | | | 2017 | | 2016 | | 2015 | | | 2015 | | Cash flows from operating activities: | | | |
| | | | | |
| | Net (loss) income | $ | (350,661 | ) | | $ | (1,553,873 | ) | | $ | (280,883 | ) | | | $ | 1,740,515 |
| | Adjustments to reconcile net (loss) income to net cash used in operating activities: | | | | | | | | |
| | (Income) loss from discontinued operations | (1,005 | ) | | 19,994 |
| | (11,608 | ) | | | (221,114 | ) | | Amortization of debt (premiums) discounts and financing costs | (3,297 | ) | | (4,570 | ) | | 181 |
| | | 18,753 |
| | Depreciation and amortization | 37,187 |
| | 172,383 |
| | 85,364 |
| | | 153,878 |
| | Provision for losses on accounts receivable | 76,518 |
| | 77,883 |
| | 32,279 |
| | | 65,396 |
| | Provision for inventory obsolescence | 1,033 |
| | 1,731 |
| | 2,156 |
| | | — |
| | Foreign currency transaction losses (gains), net | 1,271 |
| | (76,615 | ) | | 99,737 |
| | | 63,948 |
| | Impairment charges, restructuring charges and losses on disposal of fixed assets | 68,529 |
| | 1,352,667 |
| | 13,354 |
| | | 31,471 |
| | Deferred income tax (benefit) provision | (568 | ) | | (3,183 | ) | | (2,513 | ) | | | 905 |
| | Share-based compensation expense | 4,967 |
| | 6,076 |
| | 2,923 |
| | | 5,239 |
| | Reorganization items in connection with emergence from Chapter 11 | — |
| | — |
| | — |
| | | (1,775,787 | ) | | Fresh start adjustments, net | — |
| | — |
| | — |
| | | (248,709 | ) | | Other, net | 2,636 |
| | 1,898 |
| | (3,829 | ) | | | (11,083 | ) | | Changes in assets and liabilities: | | | | | | | | |
| | Accounts receivable | (30,534 | ) | | (58,951 | ) | | (38,756 | ) | | | (35,013 | ) | | Prepaid value-added taxes | 13,879 |
| | 15,894 |
| | 9,311 |
| | | 50,564 |
| | Handset and accessory inventory | 4,139 |
| | 17,273 |
| | 13,940 |
| | | 7,513 |
| | Prepaid expenses and other | (13,358 | ) | | 8,903 |
| | (21,027 | ) | | | (26,688 | ) | | Other long-term assets | (5,341 | ) | | (41,447 | ) | | 20,981 |
| | | 47,253 |
| | Accrued value-added taxes | 19,211 |
| | (7,565 | ) | | (285 | ) | | | (7,941 | ) | | Other long-term liabilities | 88,460 |
| | 41,851 |
| | 23,876 |
| | | (32,819 | ) | | Accounts payable, accrued expenses and other | (204 | ) | | (15,554 | ) | | (46,674 | ) | | | 18,565 |
| | Total operating cash used in continuing operations | (87,138 | ) | | (45,205 | ) | | (101,473 | ) | | | (155,154 | ) | | Total operating cash provided by (used in) discontinued operations | — |
| | — |
| | 22,988 |
| | | (99,603 | ) | | Net cash used in operating activities | (87,138 | ) | | (45,205 | ) | | (78,485 | ) | | | (254,757 | ) | | Cash flows from investing activities: | | | | | | | | |
| | Capital expenditures | (66,536 | ) | | (61,291 | ) | | (76,630 | ) | | | (88,485 | ) | | Purchases of investments | (629,364 | ) | | (1,075,119 | ) | | (558,883 | ) | | | (757,714 | ) | | Proceeds from sales of investments | 688,714 |
| | 1,102,492 |
| | 575,838 |
| | | 756,546 |
| | Purchase of licenses | (2,289 | ) | | (16,936 | ) | | (4,018 | ) | | | (5,391 | ) | | Change in restricted cash and other deposits | 27,516 |
| | 67,894 |
| | (51,235 | ) | | | (57,074 | ) | | Other, net | 275 |
| | (2,243 | ) | | 4,697 |
| | | 3,501 |
| | Total investing cash provided by (used in) continuing operations | 18,316 |
| | 14,797 |
| | (110,231 | ) | | | (148,617 | ) | | Total investing cash provided by discontinued operations | 53,479 |
| | 39,653 |
| | 109,255 |
| | | 1,176,438 |
| | Net cash provided by (used in) investing activities | 71,795 |
| | 54,450 |
| | (976 | ) | | | 1,027,821 |
| | Cash flows from financing activities: | | | | | | | | |
| | Proceeds from partnership agreement | 50,000 |
| | — |
| | — |
| | | — |
| | Repayments under equipment financing facility and bank loans | (85,949 | ) | | (90,843 | ) | | (24,452 | ) | | | (124 | ) | | Repayments under capital leases and other | (9,522 | ) | | (2,161 | ) | | (616 | ) | | | (1,884 | ) | | Claims paid to senior noteholders | — |
| | — |
| | — |
| | | (745,221 | ) | | Net proceeds from debtor-in-possession loan | — |
| | — |
| | — |
| | | 340,375 |
| | Repayment of debtor-in-possession loan | — |
| | — |
| | — |
| | | (340,375 | ) | | Other, net | (3,219 | ) | | — |
| | — |
| | | (4,291 | ) | | Total financing cash used in continuing operations | (48,690 | ) | | (93,004 | ) | | (25,068 | ) | | | (751,520 | ) | | Total financing cash used in discontinued operations | — |
| | — |
| | — |
| | | (26,711 | ) | | Net cash used in financing activities | (48,690 | ) | | (93,004 | ) | | (25,068 | ) | | | (778,231 | ) | | Effect of exchange rate changes on cash and cash equivalents | 541 |
| | (1,045 | ) | | 916 |
| | | (9,152 | ) | | Change in cash and cash equivalents related to discontinued operations | — |
| | — |
| | 22,662 |
| | | 103,260 |
| | Net (decrease) increase in cash and cash equivalents | (63,492 | ) | | (84,804 | ) | | (80,951 | ) | | | 88,941 |
| | Cash and cash equivalents, beginning of period | 257,380 |
| | 342,184 |
| | 423,135 |
| | | 334,194 |
| | Cash and cash equivalents, end of period | $ | 193,888 |
| | $ | 257,380 |
| | $ | 342,184 |
| | | $ | 423,135 |
|
The accompanying notes are an integral part of these consolidated financial statements.
NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Operations
Overview. Unless the context requires otherwise, “NII Holdings, Inc.,” “NII Holdings,” “we,” “our,” “us” and “the Company” refer to the combined businesses of NII Holdings, Inc. and its consolidated subsidiaries. We refer to our majority-owned Brazilian operating company, Nextel Telecomunicações Ltda., as Nextel Brazil. Our consolidated results from continuing operations in this annual report on Form 10-K include the results of operations of Nextel Brazil and our corporate headquarters.
We provide wireless communication services under the NextelTM brand in Brazil with our principal operations located in major urban and suburban centers with high population densities and related transportation corridors of that country where there is a concentration of Brazil’s population and economic activity, including primarily Rio de Janeiro and São Paulo. Nextel Brazil operates a wideband code division multiple access, or WCDMA, network, which has been upgraded to offer long-term evolution, or LTE, services in certain areas. Nextel Brazil's network enables us to offer a wide range of products and services supported by that technology. We are also a party to a roaming agreement that allows us to offer our subscribers nationwide voice and data services outside of our network's footprint. Our target market is individual consumers who use our services to meet both professional and personal needs. Our target subscribers generally exhibit above average usage, revenue and loyalty characteristics. We believe our target market is attracted to the services and pricing plans we offer, as well as the quality of and data speeds provided by our network.
The services we currently offer include:
mobile telephone voice and wireless data services;
international voice and data roaming services;
application-based radio connection; and
value-added services, including sports, music and entertainment streaming capabilities; online education; and access to national and international WiFi hotspot networks.
In September 2017, Nextel Brazil decided to wind down its integrated digital enhanced network, or iDEN, operations with a target to cease all iDEN services in mid-2018. As a result, Nextel Brazil has provided notice of the eventual shutdown to its remaining iDEN subscribers and is currently working to actively migrate the remainder of its legacy iDEN subscriber base to its WCDMA network by proactively promoting attractive service offerings. As of December 31, 2017, 11% of our subscribers were on Nextel Brazil's iDEN network.
As of December 31, 2017, Nextel Brazil had about 3.246 million total subscriber units in commercial service.
Removal of Going Concern. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
Prior to the fourth quarter of 2017, and as previously disclosed, there was substantial doubt about whether our results of operations would provide us with sufficient liquidity to settle our obligations as they became due, principally the amounts due under Nextel Brazil's equipment financing facility and its bank loans.
Effective in January 2018, Nextel Brazil entered into an amended and restated equipment financing facility and sixth amendments to its bank loans with Brazilian lenders. Among other changes, these amendments provide for the deferral of substantially all principal payments for the first 48 months from the date of effectiveness, an extension of the loan maturity dates to 98 months from the date of effectiveness, and a holiday for certain financial covenant compliance, including the net debt financial covenant, until June 30, 2020.
As of December 31, 2017, our consolidated sources of funding included $210.6 million in cash and short-term investments, $110.0 million in cash held in escrow to secure our indemnification obligations in connection with the sale of Nextel Mexico, and $50.3 million in cash pledged as collateral to secure certain performance bonds relating to our obligations to deploy our WCDMA spectrum in Brazil. In January 2018, we recovered substantially all of the cash securing these performance bonds.
As a result of these amendments, our liquidity forecast has substantially improved, and based on our business plan, we believe our current sources of funding described above will provide us with sufficient liquidity to fund our business through 2019. As a result, we believe that there is no longer substantial doubt surrounding our ability to continue as a going concern.
NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our business plan is based on a number of assumptions, including lower subscriber turnover and a decrease in certain costs compared to 2017. In addition, it assumes that we will recover substantially all of the amount held in escrow. If our actual results of operations differ from our business plan and/or the ultimate amount recovered from our cash held in escrow does not meet our current forecasted amount or is delayed for a significant amount of time, our business could be negatively impacted, and we would need to obtain additional funding and/or significantly reduce our planned capital and operational spending to further preserve our liquidity.
Partnership Agreement. On June 5, 2017, we and AINMT Holdings AB, or ice group, an international telecommunications company operating primarily in Norway under the “ice.net” brand, along with certain affiliates of ours and ice group, entered into an investment agreement to partner in the ownership of Nextel Brazil. On July 20, 2017, ice group completed its initial investment of $50.0 million in Nextel Holdings S. à r.l., or Nextel Holdings, a newly formed subsidiary of NII that indirectly owns Nextel Brazil, in exchange for 30% ownership in Nextel Holdings. In connection with the initial investment, ice group received 50.0 million shares of cumulative preferred voting stock in Nextel Holdings, and we received 116.6 million shares of common stock in this entity. The investment agreement also provided ice group with an option, exercisable on or before November 15, 2017, to invest an additional $150.0 million in Nextel Holdings for an additional 30% ownership. ice group did not exercise its option, and on February 27, 2018, we terminated the investment agreement. Since we continue to have a controlling interest in Nextel Brazil, we have consolidated this entity and its subsidiaries.
Prior to the closing of the initial investment by ice group, we contributed $116.6 million in cash to Nextel Holdings. In connection with and subsequent to the closing of the initial investment, we contributed an additional $56.8 million to Nextel Holdings, representing all of our freely distributable cash outside of Nextel Brazil, including proceeds released from escrowed funds from the sale of Nextel Mexico received to date, less $50.0 million we retained for our expenses outside of the partnership.
2. Summary of Significant Accounting Policies
Reorganization Accounting. In accordance with the requirements of reorganization accounting, NII Holdings adopted the provisions of fresh start accounting as of June 30, 2015 and became a new entity for financial reporting purposes. References to the “Successor Company” relate to NII Holdings on or subsequent to June 30, 2015. References to the “Predecessor Company” relate to NII Holdings prior to June 30, 2015. See Note 3 for more information regarding the implementation of fresh start accounting.
Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States, or the U.S., 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 and our subsidiaries. Our decision to consolidate an entity is based on our control of the entity through direct and indirect majority interest in the entity. We eliminate all intercompany transactions, including intercompany profits and losses, in consolidation.
Concentrations of Risk. Substantially all of our revenues are generated from our operations located in Brazil. Regulatory entities in Brazil regulate the licensing, construction, acquisition, ownership and operation of our networks, and certain other aspects of our business, including some of the rates we charge our subscribers. Changes in the current telecommunications statutes or regulations in Brazil could adversely affect our business. In addition, as of December 31, 2017, 87% of our total assets were owned by Nextel Brazil. Political, financial and economic developments in Brazil could impact the recoverability of our assets.
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 certain investments made by Nextel Brazil. See Note 8 for further information. Our accounts receivable are generally unsecured. We routinely assess the credit worthiness of our subscribers and maintain allowances for probable losses, where necessary.
Foreign Currency. We translate Nextel Brazil's results of operations from Brazilian reais to U.S. dollars 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.
NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In general, monetary assets and liabilities held by Nextel Brazil that are denominated in U.S. dollars give rise to realized and unrealized foreign currency transaction gains and losses, which we record in our consolidated statement of comprehensive (loss) income as foreign currency transaction gains or losses. 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 are of a long-term investment nature.
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, except for certain certificates of deposit in Brazil that are redeemable on demand. We classify these certificates of deposit as short-term investments. Cash equivalents primarily consist of money market funds and other similarly structured funds.
Short-Term Investments. 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. 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 comprehensive (loss) income. See Note 8 for additional information.
Handset and Accessory Inventory. We record handsets and accessories at the lower of cost or their net realizable value. 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 handsets and accessories. Inventory cost includes amounts associated with non-income based taxes.
We analyze the net realizable value of handset and accessory inventory on a periodic basis. This analysis includes an assessment of the obsolescence of individual devices, our sales forecasts and other factors. For the year ended December 31, 2017 and 2016, we recorded losses related to inventory obsolescence of $1.0 million and $1.7 million, respectively. In addition, for the six months ended December 31, 2015, we recorded losses related to inventory obsolescence of $2.2 million. We did not record any losses related to inventory obsolescence during the six months ended June 30, 2015.
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 expense 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 30 years for network equipment, communication towers and network software and 3 to 10 years for software, office equipment, furniture and fixtures, and other, which includes non-network internal use software. We include depreciation expense on our 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 wireless network. 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 network equipment.
As of June 30, 2015, in connection with the implementation of fresh start accounting, we adjusted our property, plant and equipment to its estimated fair value and revised the depreciable lives. We will continue to 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, or ARO, and an associated asset retirement cost, or ARC, when we have a legal obligation in connection with the retirement of tangible long-lived assets. Our obligations arise from certain of our leases and relate primarily to the cost of removing our communication towers and network equipment from leased sites. We recognize an ARO, and the associated ARC, in the period in which it is incurred at fair value computed using discounted cash flow techniques. The liability is then accreted over time until the obligation is settled and the ARC is depreciated over the useful life of the related assets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We make adjustments for changes to either the timing or amount of the estimated future settlement obligation in the period incurred. We recognize increases in the present value of the AROs as an additional liability and add this amount to the carrying amount of the associated ARC. We record decreases as a reduction in both the recorded liability and the carrying amount of the associated ARC.
As of December 31, 2017 and 2016, our asset retirement obligations were included as a component of other long-term liabilities in our consolidated balance sheet and are as follows (in thousands):
| | | | | | | Balance, January 1, 2016 — Successor Company | | $ | 19,642 |
| | New asset retirement obligations | | 198 |
| | Change in assumptions | | (1,619 | ) | | Accretion | | 2,552 |
| | Settlement of asset retirement obligations | | (441 | ) | | Foreign currency translation and other | | 7,274 |
| | Balance, December 31, 2016 — Successor Company | | 27,606 |
| | New asset retirement obligations | | 486 |
| | Change in assumptions | | (9,181 | ) | | Accretion | | 1,677 |
| | Settlement of asset retirement obligations | | (9,375 | ) | | Foreign currency translation and other | | 112 |
| | Balance, December 31, 2017 — Successor Company | | $ | 11,325 |
|
Derivative Financial Instruments. We occasionally enter into derivative transactions for hedging or risk management purposes. We record all derivative instruments as either assets or liabilities on our consolidated balance sheet at their fair value. We have not and will not enter into any derivative transactions for speculative or profit generating purposes. See Note 8 for additional information.
Valuation of Long-Lived Assets. We review long-lived assets such as property, plant and equipment and identifiable intangible assets with definite useful lives, which include our telecommunications licenses, for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the total of the expected undiscounted future cash flows 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 consist of our telecommunications licenses and our customer relationships. We calculate amortization on our licenses using the straight-line method based on an estimated useful life of 26 to 30 years. We calculate amortization on our customer relationships using the straight-line method based on an estimated useful life of 4 years.
In Brazil, licenses are customarily issued conditionally for specified periods of time ranging from 10 to 40 years, including renewals. In addition, the wireless telecommunications industry is experiencing significant technological change, and the commercial life of any particular technology is difficult to predict. In light of these uncertainties, we classify our licenses as definite lived intangible assets. In connection with the implementation of fresh start accounting, we revised the remaining estimated useful lives of our licenses to include renewal periods in cases where it is probable that a renewal will occur.
Revenue Recognition. Operating revenues primarily consist of wireless service revenues and revenues generated from the sale of handsets and accessories. We present our operating revenues net of value-added taxes, but we include certain revenue-based taxes that are our primary obligation.
Service revenues primarily consist of fixed monthly access charges. Other components of service revenue include revenues from calling party pays programs, where applicable, variable charges for usage in excess of plan limits, long-distance charges, international roaming revenues derived from calls placed by our subscribers on other carriers’ networks and revenues generated from broadband data services we provide on our WCDMA network, net of credits and adjustments for service discounts. We recognize excess usage, local, long distance and calling party pays revenue at contractual rates per minute as minutes are used. We record cash received in excess of revenues earned as deferred revenues. We recognize service revenue as service is provided. We recognize handset revenue when title and risk of loss passes to the customer.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other revenues primarily include amounts generated from our handset maintenance programs, roaming revenues generated from other companies’ subscribers that roam on our networks and co-location rental revenues from third party tenants that rent space on our towers. 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 expect our revenue recognition policies to change in the first quarter of 2018 in connection with the implementation of Accounting Standards Update, or ASU, No. 2014-09, “Revenue from Contracts with Customers,” or ASC 606.
Revenue-Based Taxes. We record revenue-based taxes and other excise taxes on a gross basis as a component of both service and other revenues and selling, general and administrative expenses in our consolidated financial statements. For the years ended December 31, 2017 and 2016, we recognized $28.2 million and $46.9 million in revenue-based taxes and other excise taxes, respectively. For the six months ended December 31, 2015 and the six months ended June 30, 2015, we recognized $30.9 million and $39.0 million in revenue-based taxes and other excise taxes, respectively.
Accounts Receivable. Accounts receivable represents amounts due from subscribers, net of an allowance for doubtful accounts, and includes amounts that have been billed to customers and amounts that have not yet been billed.
Allowance for Doubtful Accounts. We establish an allowance for doubtful accounts receivable sufficient to cover probable and reasonably estimated losses. We estimate this allowance based on historical experience, aging of accounts receivable and recent collections trends. While we believe that the estimates we use are reasonable, actual results could differ from those estimates.
Advertising Costs. We expense costs related to advertising and other promotional expenditures as incurred. Advertising costs totaled $26.9 million and $30.9 million for the years ended December 31, 2017 and 2016, respectively. We recognized $21.6 million in advertising costs during the six months ended December 31, 2015 and $28.7 million during the six months ended June 30, 2015, respectively.
Share-Based Compensation. We measure and recognize compensation expense for all share-based compensation awards based on estimated fair values. We account for share-based awards exchanged for employee services in accordance with the authoritative guidance for stock compensation. Under that guidance, share-based compensation expense is measured at the grant date, based on the estimated fair value of the award when settled in shares, and is recognized over the employee's requisite service period. Compensation expense is amortized on a straight-line basis over the requisite service period for the entire award, which is generally the vesting period of the award. See Note 12 for more information.
Net (Loss) Income Per Common Share, Basic and Diluted. Basic net (loss) income per common share is computed by dividing adjusted net (loss) income attributable to common shares by the weighted average number of common shares outstanding for the period. Diluted net (loss) income per common share reflects the potential dilution of securities that could participate in our earnings, but not securities that are antidilutive, including stock options with an exercise price greater than the average market price of our common stock.
Our unvested restricted stock awards, or RSAs, contain non-forfeitable rights to dividends, whether paid or unpaid. As a result, our RSAs are considered participating securities because their holders have the right to participate in earnings with common stockholders. We use the two-class method to allocate net income between common shares and other participating securities.
ice group's investment in Nextel Holdings was made in the form of cumulative preferred shares. Under the terms of this agreement, liquidation proceeds or distributions of Nextel Brazil's future earnings will be allocated first to ice group until its cumulative dividends and original investment have been recouped. Earnings will then be allocated to us to the extent of our investment and pro rata thereafter. ice group is entitled to receive a 2% annual dividend on its cumulative preferred voting stock in Nextel Holdings. ice group's preferred shares are considered participating securities. As presented for the year ended December 31, 2017, our calculation of basic net loss from continuing operations per common share includes $49.6 million in net loss attributable to noncontrolling interest and $0.5 million related to undeclared dividends on ice group's preferred stock.
As presented for the year ended December 31, 2017, we did not include 3.4 million stock options and 0.3 million in restricted common shares in our calculation of diluted net loss from continuing operations per common share because their effect would have been antidilutive. In addition, as presented for the year ended December 31, 2016, we did not include 3.5 million stock options and 0.8 million in restricted common shares in our calculation of diluted net loss from continuing operations per common share because their effect would have been antidilutive. As presented for the six months ended December 31, 2015 and the six months ended June 30, 2015, we did not include 2.2 million and 4.8 million stock options, respectively, in our calculation of diluted net (loss) income from continuing operations per common share because their effect would have been antidilutive. In addition, for the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
six months ended December 31, 2015, we did not include an immaterial amount of restricted common shares in our calculation of diluted net (loss) income from continuing operations per common share because their effect would have been antidilutive.
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 recognize a valuation allowance on deferred tax assets unless it is determined that it is “more-likely-than-not” that the asset will be realized.
New Accounting Pronouncements. In May 2014, the Financial Accounting Standards Board, or the FASB, issued Accounting Standards Codification, or ASC, No. 2014-09, “Revenue from Contracts with Customers,” or ASC 606, which provides us with a single revenue recognition model for recognizing revenue from contracts with customers and significantly expands the disclosure requirements for revenue arrangements. We implemented ASC 606 on January 1, 2018, using the modified retrospective method for all contracts open at that date. Prior periods will not be retroactively adjusted. In utilizing the modified retrospective method, we are recognizing the cumulative effect of applying the standard at the date of initial application, and we will disclose the results under both the new and old standards for the first year after adoption, beginning in the first quarter of 2018.
During the first quarter of 2018, we will record a cumulative adjustment to accumulated deficit that is primarily composed of the following:
a net contract asset related to the portion of our revenues associated with service plans that are sold concurrently with a subsidized handset; and
an asset related to costs incurred to acquire a contract, which primarily relates to the deferral of commission expenses.
The future impact of ASC 606 on our revenues primarily relates to contracts with customers where the customer also purchases a subsidized handset from us, which comprises approximately 10% of our new subscribers. A portion of our revenues will be reallocated from service and other revenues to handset and accessory revenues, and these revenues will be recognized at an earlier point in time compared to our current accounting under the existing authoritative guidance. The earlier revenue recognition results in the creation of a contract asset for revenues recognized prior to contractual billing. Given current business trends, we do not expect a material change in total operating revenues.
The timing of expense recognition related to certain of our contract acquisition costs, primarily sales commissions, will be impacted as these expenses will be capitalized and amortized under the new standard rather than being expensed as incurred under existing authoritative guidance. We expensed approximately $36.6 million of contract acquisition costs during the year ended December 31, 2017.
While we have reached conclusions on the key accounting assessments related to adopting this standard, we are continuing to finalize our assessment of the resulting quantitative impacts. Based on currently available information, we estimate that our opening accumulated deficit balance on January 1, 2018 will decrease by between $20.0 million and $30.0 million, primarily related to the deferral of previously expensed contract acquisition costs. We do not expect to recognize a material net contract asset.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which replaces existing leasing rules with a comprehensive lease measurement and recognition standard and expanded disclosure requirements. ASU No. 2016-02 will require lessees to recognize most leases on their balance sheet as liabilities, with corresponding “right-of-use” assets, and is effective for interim and annual reporting periods beginning after December 15, 2018, subject to early adoption. The new standard allows us to make an accounting policy election not to recognize lease assets and liabilities on the balance sheet for leases with a term of 12 months or less. The accounting applied by a lessor is largely unchanged from previous guidance. In transition, lessees and lessors have the option to recognize and measure leases either at the beginning of the earliest period presented or at the beginning of the period of adoption using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that we may elect to apply. We expect that we will record a material amount of lease liabilities as a result of implementing this standard. We are currently evaluating the adoption methods, as well as the additional effects ASU No. 2016-02 will have on our consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash,” which provides guidance regarding cash flow statement classification and presentation of changes in restricted cash. We implemented this new standard on January 1, 2018. The amendments in this ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Entities will also be required to reconcile this total to amounts on the consolidated balance sheet and disclose the nature of the restrictions. We expect that the adoption of this ASU will reclassify changes in restricted cash and other deposits from cash provided by (used in) investing activities to a component of the reconciliation of the beginning of period to end of period change in cash and cash equivalents for all periods presented.
3. Emergence from Chapter 11 Proceedings and Fresh Start Accounting
On September 15, 2014, we and eight of our U.S. and Luxembourg-domiciled subsidiaries, including NII Capital Corp. and NII International Telecom, S.C.A., or NIIT, filed voluntary petitions seeking relief under Chapter 11 of Title 11 of the United States Bankruptcy Code, which we refer to as Chapter 11, in the United States Bankruptcy Court for the Southern District of New York, which we refer to as the Bankruptcy Court. In addition, subsequent to September 15, 2014, five additional subsidiaries of NII Holdings, Inc. filed voluntary petitions seeking relief under Chapter 11 in the Bankruptcy Court. We refer to the companies that filed voluntary petitions seeking relief under Chapter 11 collectively as the Debtors. Nextel Brazil and our previous other operating subsidiaries in Latin America were not Debtors in these Chapter 11 cases.
On June 19, 2015, the Bankruptcy Court entered an order approving and confirming the First Amended Joint Plan of Reorganization Proposed by the Plan Debtors and the Official Committee of Unsecured Creditors, dated April 20, 2015. We refer to this plan, as amended, as the Plan of Reorganization. On June 26, 2015, the conditions of the Bankruptcy Court's order and the Plan of Reorganization were satisfied, the Plan of Reorganization became effective, and we and the other Debtors emerged from the Chapter 11 proceedings. We refer to June 26, 2015 as the Emergence Date.
The significant transactions that occurred on the Emergence Date in connection with the effectiveness of our Plan of Reorganization included the following:
NII Holdings canceled all shares of its common stock, preferred stock and other equity interests that existed prior to June 26, 2015;
NII Holdings amended and restated its Bylaws and filed an Amended and Restated Certificate of Incorporation authorizing the Company to issue up to 140,000,000 shares of common stock, par value $0.001 per share, and up to 10,000,000 shares of undesignated preferred stock, par value $0.001 per share;
NII Holdings issued 99,999,992 shares of new common stock, with a per share value of $20.68, and distributed cash of $776.3 million to the holders of claims and service providers in comprehensive settlement of numerous integrated claims and disputes approved by the Bankruptcy Court in connection with the confirmation of the Plan of Reorganization;
In accordance with the Plan of Reorganization, all of the obligations of the Debtors with respect to the following indebtedness were canceled:
$700.0 million aggregate principal amount of 7.875% senior notes due 2019 issued by NIIT pursuant to an indenture, dated as of May 23, 2013, among NIIT (as issuer), the Company (as guarantor), and Wilmington Trust National Association (as trustee) and all amendments, supplements or modifications thereto and extensions thereof;
$900.0 million aggregate principal amount of 11.375% senior notes due 2019 issued by NIIT pursuant to an indenture, dated as of February 19, 2013, among NIIT (as issuer), the Company (as guarantor), and Wilmington Trust National Association (as trustee) and all amendments, supplements or modifications thereto and extensions thereof;
$1.45 billion aggregate principal amount of 7.625% senior notes due 2021 issued by NII Capital Corp. pursuant to an indenture, dated as of March 29, 2011, among NII Capital Corp. (as issuer), each of the guarantors party thereto and Wilmington Savings Fund Society, FSB (as successor trustee) and all amendments, supplements or modifications thereto and extensions thereof;
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$500.0 million aggregate principal amount of 8.875% senior notes due 2019 issued by NII Capital Corp. pursuant to an indenture, dated as of December 15, 2009, among NII Capital Corp. (as issuer), each of the guarantors party thereto and U.S. Bank National Association (as successor trustee) and all amendments, supplements or modifications thereto and extensions thereof; and
$800.0 million aggregate principal amount of 10.0% senior notes due 2016 issued by NII Capital Corp. pursuant to an indenture, dated as of August 18, 2009, among NII Capital Corp. (as issuer), each of the guarantors party thereto and Wilmington Savings Fund Society, FSB (as successor trustee) and all amendments, supplements or modifications thereto and extensions thereof.
Pursuant to our Plan of Reorganization, we entered into a registration rights agreement to provide registration rights to parties that, together with their affiliates, received upon emergence 10% or more of the issued and outstanding common stock of NII Holdings in connection with the Plan of Reorganization. In satisfaction of this registration rights agreement, on July 14, 2015, we filed a Registration Statement on Form S-1 under the Securities Act of 1933 to register our common stock that may be offered for sale from time to time by certain selling stockholders. On July 21, 2015, this Form S-1 was declared effective. We are not selling any common stock under the related prospectus and will not receive any proceeds from the sale of common stock by the selling stockholders.
In connection with our emergence from Chapter 11, we were required to apply the provisions of fresh start accounting to our financial statements because: (i) the holders of existing voting shares of NII Holdings prior to its emergence from the Chapter 11 proceedings received less than 50% of the voting shares of NII Holdings outstanding following its emergence from the Chapter 11 proceedings; and (ii) the reorganization value of our assets immediately prior to confirmation of the Plan of Reorganization was less than the post-petition liabilities and allowed claims. Because our results of operations during the period from June 26, 2015 to June 30, 2015 were not material, we applied fresh start accounting to our consolidated financial statements as of the close of business on June 30, 2015. Under the principles of fresh start accounting, a new reporting entity is considered to be created, and as a result, we allocated the reorganization value of NII Holdings as of June 30, 2015 to our individual assets based on their estimated fair values at the date we applied fresh start accounting.
Reorganization Items.
The components of our reorganization items were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | Successor Company | | | Predecessor Company | | | Year Ended | | Six Months Ended | | | Six Months Ended | | | December 31, 2017 | | December 31, 2016 | | December 31, 2015 | | | June 30, 2015 | | Gain on settlement of liabilities subject to compromise | $ | — |
| | $ | — |
| | $ | — |
| | | $ | 1,775,787 |
| | Net gain on fresh start fair value adjustments | — |
| | — |
| | — |
| | | 261,772 |
| | Reorganization-related professional fees and other costs | 445 |
| | (803 | ) | | 1,467 |
| | | (80,685 | ) | | Total reorganization items | $ | 445 |
| | $ | (803 | ) | | $ | 1,467 |
| | | $ | 1,956,874 |
|
NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Impairment, Restructuring and Other Charges
Long-Lived Asset Impairments.
During 2016, we reviewed our Nextel Brazil segment for potential impairment and compared the carrying value of Nextel Brazil's long-lived assets to our estimate of undiscounted future cash flows. Our estimate of undiscounted future cash flows was probability-weighted and took into consideration our ability to obtain capital necessary to fund our business plan. In addition, we assumed that the proceeds from any potential sale of Nextel Brazil would be significantly less than its carrying value. Based on our estimates, we determined that the carrying value of our Nextel Brazil segment was not fully recoverable. As a result, we recorded a non-cash asset impairment charge of $1.34 billion to reduce the carrying values of Nextel Brazil's long-lived assets to their respective fair values. We estimated the fair value of our Nextel Brazil segment using a market approach based on our market capitalization and combined it with the fair value of our outstanding debt obligations to determine the impairment charge. See Note 8 for more information on our estimate of the fair value of our debt obligations. We allocated the non-cash asset impairment charge first to reduce the $36.8 million carrying value of our trademark intangible asset to zero, and the remainder between property, plant and equipment and spectrum licenses on a pro rata basis.
During the first quarter of 2017, we reviewed our Nextel Brazil segment for potential impairment and determined that, as a result of the continued decline in share price, the carrying value of this segment was not fully recoverable. As a result, we recorded non-cash asset impairment charges of $57.9 million in 2017 to reduce the carrying values of Nextel Brazil's long-lived assets to their respective fair values. We estimated the fair value of our Nextel Brazil segment using the same approach applied in 2016 and allocated these impairment charges on a pro rata basis between property, plant and equipment and spectrum licenses.
During the fourth quarter of 2017, we reviewed our Nextel Brazil segment for potential impairment and determined that its carrying value was recoverable as of December 31, 2017.
Other Asset Impairments.
During 2017 and 2016, Nextel Brazil recognized $9.3 million and $11.0 million in non-cash asset impairment charges, respectively, primarily related to the abandonment of certain transmitter and receiver sites that are no longer required in its business.
During the six months ended December 31, 2015 and the six months ended June 30, 2015, we recognized $12.6 million and $31.1 million in non-cash asset impairment charges, the majority of which related to the shutdown or abandonment of transmitter and receiver sites that are no longer required in Nextel Brazil's business, retail store closures related to the realignment of distribution channels in Brazil and the discontinuation of certain information technology projects in Brazil and at the corporate level.
Restructuring Charges.
In 2017, as a result of a change in the scope of Nextel Brazil's radio access network, or RAN, sharing implementation, Nextel Brazil determined that RAN sharing would no longer be utilized for approximately 800 transmitter and receiver sites. As a result, Nextel Brazil recognized $34.2 million in restructuring costs, of which $17.5 million relates to the present value of future payments to which Nextel Brazil was committed and the remainder relates to the impairment of certain prepayments and other deferred costs attributable to these transmitter and receiver sites.
In 2017, Nextel Brazil recognized $70.5 million in restructuring costs, the majority of which related to future lease costs for approximately 1,200 transmitter and receiver sites in low-usage areas in connection with Nextel Brazil's RAN sharing agreement. In addition, Nextel Brazil recognized $6.5 million in severance and other related costs in 2017 related to the separation of approximately 200 employees, which included executive level employees.
In an effort to further reduce costs, in the first quarter of 2018, Nextel Brazil entered into arrangements with certain of its tower lessors for the exchange of unused transmitter and receiver sites for other sites needed in its wireless network. As of December 31, 2017, Nextel Brazil had $27.6 million in accrued restructuring charges related to transmitter and receiver sites that could be exchanged, a portion of which may be reversed in the future.
In 2016, Nextel Brazil recognized $21.4 million in restructuring costs related to the early termination of leases for approximately 600 transmitter and receiver sites in connection with Nextel Brazil's RAN sharing agreement.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2016, we recognized $3.2 million in severance and other related costs at the corporate level. In addition, during 2016, Nextel Brazil recognized $10.8 million in restructuring charges primarily related to future lease costs for certain transmitter and receiver sites that are no longer required in its business and certain office closures.
During the six months ended December 31, 2015, Nextel Brazil recognized $8.4 million in restructuring charges related to future lease costs for certain transmitter and receiver sites that are no longer necessary in our business plan. In addition, during the six months ended December 31, 2015, we recognized $9.9 million in severance and other related costs in Brazil and at the corporate level as a result of the separation of employees. These actions included the termination of:
approximately 45 employees at the corporate level, all of whom were notified in the fourth quarter of 2015 of their severance date; and
approximately 700 employees in Brazil, all of whom were severed in the second half of 2015.
We also recognized $5.4 million in severance and other related costs at the corporate level during the six months ended June 30, 2015 related to the separation of approximately 30 employees.
Total impairment, restructuring and other charges were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | Successor Company | | | Predecessor Company | | | Year Ended December 31, | | Six Months Ended December 31, | | | Six Months Ended June 30, | | | 2017 | | 2016 | | 2015 | | | 2015 | | Brazil | $ | 178,467 |
| | $ | 1,340,610 |
| | $ | 23,968 |
| | | $ | 28,072 |
| | Corporate | 1,260 |
| | 44,201 |
| | 8,340 |
| | | 8,720 |
| | Total impairment, restructuring and other charges | $ | 179,727 |
| | $ | 1,384,811 |
| | $ | 32,308 |
| | | $ | 36,792 |
|
In addition, as of December 31, 2017, the total of our accrued restructuring charges was as follows (in thousands):
| | | | | | Balance, January 1, 2017 — Successor Company | $ | 24,103 |
| | Restructuring charges | 95,363 |
| | Cash payments and other | (6,315 | ) | | Foreign currency translation adjustment | (3,380 | ) | Balance, December 31, 2017 — Successor Company | $ | 109,771 |
|
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Supplemental Financial Statement Information
Prepaid Expenses and Other.
The components of our prepaid expenses and other are as follows:
| | | | | | | | | | | Successor Company | | | December 31, | | | 2017 | | 2016 | | | (in thousands) | | Cash in escrow | $ | 110,024 |
| | $ | 163,435 |
| | Cash collateral related to performance bonds | 50,340 |
| | 30,928 |
| | Brazil judicial deposits | 43,648 |
| | — |
| | Value-added taxes | 27,635 |
| | 29,829 |
| | Prepayment for roaming and RAN sharing agreements | 4,586 |
| | 27,731 |
| | Other prepaid assets | 14,231 |
| | 23,020 |
| | Other current assets | 3,997 |
| | 5,202 |
| | | $ | 254,461 |
| | $ | 280,145 |
|
Property, Plant and Equipment, Net.
The components of our property, plant and equipment, net are as follows:
| | | | | | | | | | | Successor Company | | | December 31, | | | 2017 | | 2016 | | | (in thousands) | | Land | $ | 489 |
| | $ | 675 |
| | Building and leasehold improvements | 935 |
| | 1,489 |
| | Network equipment, communication towers and network software | 82,493 |
| | 95,298 |
| | Software, office equipment, furniture and fixtures and other | 22,498 |
| | 10,952 |
| | Less: Accumulated depreciation and amortization | (11,461 | ) | | — |
| | | 94,954 |
| | 108,414 |
| | Construction in progress | 22,308 |
| | 21,061 |
| | | $ | 117,262 |
| | $ | 129,475 |
|
See Note 4 for information regarding the impairment of property, plant and equipment.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible Assets, Net.
Our intangible assets, net include the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Successor Company | | | | | December 31, 2017 | | December 31, 2016 | | | Average Useful Life (Years) | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | Gross Carrying Value | | Accumulated Amortization | | Net Carrying Value | | | | | (in thousands) | | Amortizable intangible assets: | | | | | | | | | |
| | |
| | |
| | Licenses | 26 | | $ | 189,920 |
| | $ | (5,426 | ) | | $ | 184,494 |
| | $ | 226,426 |
| | $ | — |
| | $ | 226,426 |
| | Customer relationships | 4 | | 15,300 |
| | (5,100 | ) | | 10,200 |
| | 17,255 |
| | — |
| | 17,255 |
| | | | | $ | 205,220 |
| | $ | (10,526 | ) | | $ | 194,694 |
| | $ | 243,681 |
| | $ | — |
| | $ | 243,681 |
|
See Note 4 for information regarding the impairment of intangible assets. In addition, the weighted average useful lives of the intangible assets we acquired during the year ended December 31, 2016 was 30 years.
Based on the carrying amount of our intangible assets as of December 31, 2017 and current exchange rates, we estimate amortization expense for each of the next five years to be as follows (in thousands):
| | | | | | Years | Estimated Amortization Expense | | 2018 | $ | 14,464 |
| | 2019 | 11,064 |
| | 2020 | 7,664 |
| | 2021 | 7,664 |
| | 2022 | 7,664 |
|
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 foreign currency exchange rates and other relevant factors.
Other Assets.
The components of our other long-term assets are as follows:
| | | | | | | | | | | Successor Company | | | December 31, | | | 2017 | | 2016 | | | (in thousands) | | Brazil judicial deposits | $ | 110,758 |
| | $ | 85,123 |
| | Prepayment for roaming and RAN sharing agreements | 23,747 |
| | 37,433 |
| | Cash collateral related to performance bonds | — |
| | 56,523 |
| | Other | 83,699 |
| | 92,789 |
| | | $ | 218,204 |
| | $ | 271,868 |
|
NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accrued Expenses and Other.
The components of our accrued expenses and other are as follows:
| | | | | | | | | | | Successor Company | | | December 31, | | | 2017 | | 2016 | | | (in thousands) | | Contingencies | $ | 78,006 |
| | $ | 56,171 |
| | Network system and information technology | 48,702 |
| | 50,286 |
| | Payroll related items and commissions | 32,613 |
| | 45,187 |
| | Non-income based taxes | 30,044 |
| | 28,158 |
| | Capital expenditures | 10,198 |
| | 17,514 |
| | Other | 101,252 |
| | 74,583 |
| | | $ | 300,815 |
| | $ | 271,899 |
|
Other Long-Term Liabilities.
The components of our other long-term liabilities are as follows:
| | | | | | | | | | | Successor Company | | | December 31, | | | 2017 | | 2016 | | | (in thousands) | | Accrued lease termination and other restructuring charges | $ | 92,463 |
| | $ | 31,365 |
| | Non-current withholding taxes | 67,356 |
| | 55,078 |
| | Other | 61,106 |
| | 57,029 |
| | | $ | 220,925 |
| | $ | 143,472 |
|
Accumulated Other Comprehensive Loss. As of December 31, 2017 and 2016, the tax impact on our accumulated other comprehensive loss was not material. In addition, as of December 31, 2017 and 2016, all of our accumulated other comprehensive loss represented cumulative foreign currency translation adjustment.
NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental Cash Flow Information.
| | | | | | | | | | | | | | | | | | | | Successor Company | | | Predecessor Company | | | Year Ended December 31, | | Year Ended December 31, | | Six Months Ended December 31, | | | Six Months Ended June 30, | | | 2017 | | 2016 | | 2015 | | | 2015 | | | (in thousands) | | Capital expenditures | | | | | |
| | | |
| | Cash paid for capital expenditures, including capitalized interest | $ | 66,536 |
| | $ | 61,291 |
| | $ | 76,630 |
| | | $ | 88,485 |
| | Change in capital expenditures accrued and unpaid or financed, including accreted interest capitalized | (15,433 | ) | | (9,984 | ) | | (4,018 | ) | | | (19,282 | ) | | | $ | 51,103 |
| | $ | 51,307 |
| | $ | 72,612 |
| | | $ | 69,203 |
| | Interest costs | | | |
| | |
| | | |
| | Interest expense, net | $ | 118,605 |
| | $ | 113,732 |
| | $ | 55,563 |
| | | $ | 82,820 |
| | Interest capitalized | 1,669 |
| | 283 |
| | 2,142 |
| | | 2,556 |
| | | $ | 120,274 |
| | $ | 114,015 |
| | $ | 57,705 |
| | | $ | 85,376 |
| | | | | |
| | |
| | | |
| | Cash paid for interest, net of amounts capitalized | $ | 91,297 |
| | $ | 105,636 |
| | $ | 59,914 |
| | | $ | 65,598 |
|
In connection with the completion of the sale of Nextel Argentina to Grupo Clarin in January 2016, the promissory note that was initially issued in connection with this transaction was canceled. See Note 6 for more information. In addition, as of December 31, 2016, we recorded $125.7 million as a component of long-term debt on our consolidated balance sheet in connection with the signing of the license agreement related to our acquisition of 30MHz of spectrum in the 1.8 GHz band in July 2016. Other than these two transactions, we did not have any significant non-cash investing or financing activities during the years ended December 31, 2017 and 2016.
For the six months ended December 31, 2015, we had $25.0 million in non-cash investing activities, representing U.S. treasury notes that we received and cash placed in escrow to secure our indemnification obligations in connection with the sale of Nextel Argentina. For the six months ended June 30, 2015, we had the following non-cash investing and financing activities:
$2,067.7 million in Successor Company common stock that we issued in partial satisfaction of certain claims that were settled in connection with our emergence from Chapter 11 (see Note 3 for more information); and
$187.5 million in restricted cash that we received, which represents cash placed in escrow to secure our indemnification obligations in connection with the sale of Nextel Mexico.
6. Discontinued Operations
Sale of Nextel Argentina. On September 11, 2015, NII Mercosur Telecom, S.L.U. and NII Mercosur Moviles, S.L.U., both of which were indirect subsidiaries of NII Holdings, entered into a binding agreement with Grupo Clarin relating to the sale of all of the outstanding equity interests of Nextel Communications Argentina, S.R.L., or Nextel Argentina. This agreement provided for aggregate cash consideration of $178.0 million, of which $159.0 million was paid at signing in connection with the transfer of a 49% equity interest in Nextel Argentina and the grant of a call option that allowed Grupo Clarin or any of its affiliates to acquire the remaining 51% equity interest in Nextel Argentina upon receipt of required approvals from the regulatory authorities in Argentina. We received the remaining cash consideration in October 2015, including $6.0 million deposited in escrow to satisfy potential indemnification claims. On January 27, 2016, the agreement was amended to permit Grupo Clarin or any of its affiliates to exercise the right to acquire the remaining 51% equity interest prior to receiving regulatory approval, and Grupo Clarin and its affiliates immediately acquired the remaining 51% of Nextel Argentina for no additional proceeds. In the second half of 2016, $5.4 million in escrow was released to us, and we entered into a mutual release agreement with Grupo Clarin for all current and future claims. As a result, we have no further obligations in connection with this transaction.
NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sale of Nextel Mexico. On April 30, 2015, we, together with our wholly-owned subsidiary NIU Holdings LLC, completed the sale of our Mexican operations to New Cingular Wireless, an indirect subsidiary of AT&T. The transaction was structured as a sale of all of the outstanding stock of the parent company of Comunicaciones Nextel de Mexico, S.A. de C.V., or Nextel Mexico, for a purchase price of $1.875 billion, including $187.5 million deposited in escrow to satisfy potential indemnification claims. The net proceeds from this sale were $1.448 billion after deducting Nextel Mexico's outstanding indebtedness and applying other specified purchase price adjustments. In 2016, we paid $4.0 million, plus interest, out of escrow to settle an indemnification claim. As of December 31, 2017, $73.5 million of the cash held in escrow has been released to us and $110.0 million remains deposited in escrow related to certain potential tax indemnity claims made by New Cingular Wireless. While we are required to continue to indemnify New Cingular Wireless for any valid claims that arise in the future, New Cingular Wireless is not permitted to make any additional claims against the escrow account other than for claims relating to the 2012 tax year totaling not more than $3.8 million.
The potential tax indemnity claims submitted by New Cingular Wireless purport to relate to various ongoing tax audits by the Mexican tax authorities for the years 2010 through 2014. Of the total potential tax claims, $12.2 million relates to actual assessments that Nextel Mexico has received. The remaining amounts relate to unassessed matters. New Cingular Wireless' claims include $35.5 million related to the audit of Nextel Mexico’s income tax return for 2010 and $36.9 million related to the audit of Nextel Mexico's income tax return for 2011. The remaining $37.6 million of potential tax claims relates primarily to non-income tax-based audits for the years 2011 through 2014.
We recently reached an agreement with the Mexican tax authorities related to the audits of Nextel Mexico's income tax returns for the years 2010 and 2011. Specifically, we agreed to incremental tax liabilities of $36.9 million to settle all open issues related to these tax years. We expect to utilize existing tax credits to settle these liabilities, although it is possible that we may need to settle a portion of these liabilities using cash that is currently held in escrow. We expect to receive a release of some of the $72.4 million in previously escrowed funds related to the 2010 and 2011 income tax audits in the next few months. As of December 31, 2017, we had accrued $1.5 million related to the 2011 income tax audit. We are continuing to work with the Mexican tax authorities to settle the open non-income tax-based audits and accelerate the release of the remaining escrow.
There can be no assurance as to the outcome of the foregoing remaining tax audits or indemnity claims.
Sale of Nextel Peru. In August 2013, our wholly-owned subsidiaries NII Mercosur Telecom, S.L. and NII Mercosur Moviles, S.L., completed the sale of all of the outstanding equity interests of our wholly-owned subsidiary, Nextel del Peru, S.A., or Nextel Peru, to Empresa Nacional de Telecomunicaciones S.A. and one of its subsidiaries, Entel Inversiones, S.A., which we refer to collectively as Entel. In connection with this sale, $50.0 million was placed in escrow. Through December 31, 2015, we paid $15.6 million in response to certain claims. In December 2016, we paid $17.3 million out of the escrow account to settle all outstanding claims with Entel, and the remaining $17.1 million in escrow was released to us. As a result, Entel released us from all current and future indemnification obligations, and we have no further obligations in connection with this transaction.
In connection with the sale of Nextel Argentina, Nextel Mexico and Nextel Peru, we have reported the results of these operating companies as discontinued operations in this annual report on Form 10-K. Accordingly, we reclassified the results of operations for these former operating companies as discontinued operations for all periods presented. Unless otherwise noted, amounts included in these notes to our consolidated financial statements exclude amounts attributable to discontinued operations. The major components of income (loss) from discontinued operations related to Nextel Argentina, Nextel Mexico and Nextel Peru were as follows (in thousands):
NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | Successor Company | | | Predecessor Company | | | Year Ended December 31, | | Year Ended December 31, | | Six Months Ended December 31, | | | Six Months Ended June 30, | | | 2017 | | 2016 | | 2015 | | | 2015 | | Operating revenues | $ | — |
| | $ | — |
| | $ | 75,450 |
| | | $ | 599,038 |
| | Operating expenses | — |
| | — |
| | (60,863 | ) | | | (675,245 | ) | | Other income (expense), net | — |
| | — |
| | 1,159 |
| | | (49,974 | ) | | Income (loss) before income tax provision | — |
| | — |
| | 15,746 |
| | | (126,181 | ) | | Income tax provision | — |
| | — |
| | (4,770 | ) | | | (8,065 | ) | | | — |
| | — |
| | 10,976 |
| | | (134,246 | ) | | Income (loss) on disposal of Nextel Argentina, Nextel Mexico and Nextel Peru | 1,005 |
| | (19,994 | ) | | 632 |
| | | 355,360 |
| | Income (loss) from discontinued operations, net of income taxes | $ | 1,005 |
| | $ | (19,994 | ) | | $ | 11,608 |
| | | $ | 221,114 |
|
7. Debt
The components of our debt are as follows:
| | | | | | | | | | | Successor Company | | | December 31, | | | 2017 | | 2016 | | | (in thousands) | | Brazil equipment financing | $ | 242,883 |
| | $ | 291,597 |
| | Brazil bank loans | 200,567 |
| | 242,076 |
| | Brazil spectrum financing | 122,044 |
| | 125,684 |
| | Brazil capital lease and tower financing obligations | 90,213 |
| | 96,722 |
| | Other | — |
| | 237 |
| | Total debt | 655,707 |
| | 756,316 |
| | Less: current portion | (7,990 | ) | | (540,474 | ) | | | $ | 647,717 |
| | $ | 215,842 |
|
Amendments to Equipment Financing Facility and Bank Loans. In October 2017, Nextel Brazil entered into an amended and restated equipment financing facility and sixth amendments to its bank loans with Brazilian lenders. In January 2018, we received final approval for the amended and restated equipment financing facility, at which point all of these amendments became effective. We accounted for these amendments as a non-substantial modification of debt and capitalized $6.1 million in expenses related to creditors that will be amortized over the new term of the loans. As a result of the amendments, the material financing terms in all three facilities were aligned. Among other changes, these amendments provide for the deferral of substantially all principal payments for the first 48 months from the date of effectiveness, an extension of the loan maturity dates to 98 months from the date of effectiveness, and a holiday for certain financial covenant compliance, including the net debt financial covenant, until June 30, 2020. In connection with these amendments, Nextel Brazil granted additional security interests to each of its lenders in the form of preferential rights to amounts held in certain of Nextel Brazil's bank accounts and pledged incremental equipment and property to these lenders. In addition, Nextel Brazil will be subject to monthly minimum cash and minimum receivable requirements. Nextel Holdings and certain of its subsidiaries have agreed to make equity contributions to Nextel Brazil over the next 48 months.
NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Brazil Equipment Financing Facility. In April 2012, Nextel Brazil entered into a U.S. dollar-denominated loan agreement with the China Development Bank, under which Nextel Brazil was able to borrow up to $500.0 million to finance infrastructure equipment and certain other costs related to the deployment of its WCDMA network. A portion of this financing has a floating interest rate based on LIBOR plus 2.90% (an all-in interest rate of 4.46% and 4.22% as of December 31, 2017 and 2016, respectively), and the remainder has a floating interest rate based on LIBOR plus 1.80% (an all-in interest rate of 3.36% and 3.12% as of December 31, 2017 and 2016, respectively). This financing is guaranteed by Nextel Holdings. In addition, the terms of this financing limit Nextel Brazil's ability to pay dividends and other upstream payments. Loans under this agreement have a 48-month grace period from January 2018 for material repayments, a 50-month material repayment term that begins in January 2022 and a final maturity of February 2026. Assets purchased using the amounts borrowed under Nextel Brazil's equipment financing facility are pledged as collateral. A portion of Nextel Brazil's accounts receivable is also pledged as collateral under its equipment financing facility. As of December 31, 2017, we had $244.6 million in principal amount outstanding under Nextel Brazil's equipment financing facility. Nextel Brazil does not have the ability to borrow additional amounts under this facility.
Brazil Bank Loans. In December 2011, Nextel Brazil borrowed the equivalent of $341.2 million from a Brazilian bank. Because this loan is denominated in Brazilian reais, the payments for principal and interest will fluctuate in U.S. dollars based on changes in the exchange rate of the Brazilian real relative to the U.S. dollar. In October 2012, Nextel Brazil entered into an additional Brazilian real-denominated bank loan agreement, under which Nextel Brazil borrowed the equivalent of approximately $196.9 million. Prior to the effectiveness of the sixth amendments to these bank loans discussed above, both of these loan agreements had floating interest rates equal to 139.54% of the local Brazilian borrowing rate (an all-in interest rate of 9.63% and 19.05% as of December 31, 2017 and 2016, respectively). As a result of the effectiveness of the loan amendments, both of the loan agreements have floating interest rates equal to 127.00% of the local Brazilian borrowing rate for 48 months from January 2018. After this period elapses, the interest rates will return to 139.54% of the local Brazilian borrowing rate for the remainder of the loan period. Loans under these agreements have a 48-month grace period from January 2018 for material repayments, a 50-month material repayment term that begins in January 2022 and a final maturity of January 2026. A portion of Nextel Brazil's accounts receivable is pledged as collateral under these bank loans. As of December 31, 2017, we had $199.1 million in principal amount outstanding under Nextel Brazil's bank loans.
Brazil Spectrum Financing. In December 2015, Nextel Brazil participated in a spectrum auction and was the successful bidder for 30 MHz of spectrum in the 1.8 GHz band for 455 million Brazilian reais, or approximately $116.7 million based on foreign currency exchange rates at the time. The spectrum license has an initial term of 15 years with an optional 15-year renewal period. In July 2016, Nextel Brazil paid 45.5 million Brazilian reais, or approximately $14.0 million based on foreign currency exchange rates in effect at the time, in connection with the signing of this license agreement. The remaining 409.5 million Brazilian reais, or approximately $122.2 million based on foreign currency exchange rates at the time, plus accrued interest of 1% per month and annual inflationary adjustments, is due in six annual installments, beginning in July 2019. Nextel Brazil elected to accept the government-provided spectrum financing for the remaining amount due under this spectrum financing.
Capital Leases and Tower Financing Obligations.
Site-Related Capital Lease Obligations. We have entered into various agreements under which we are entitled to lease space on towers or other structures owned by third parties and to install our transmitter and receiver equipment in that space.
Tower Financing Obligations. From 2002 to 2008, we sold and subsequently leased back space on certain transmitter and receiver sites in Brazil. Due to our continuing involvement with these properties, we account for these transactions as financing arrangements. As a result, we did not recognize any gains from the sales of these towers under these arrangements, and we maintain the tower assets on our consolidated balance sheets. In addition, we recognized the proceeds received as financing obligations. 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 the owner of the site as other operating revenues because of our continuing involvement with the tower assets. During the years ended December 31, 2017 and 2016, we recognized $8.1 million and $7.7 million, respectively, in other operating revenues related to these co-location lease arrangements. During the six months ended December 31, 2015 and the six months ended June 30, 2015, we recognized $3.6 million and $7.8 million in other operating revenues, respectively, related to these arrangements.
NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debt Maturities.
For the years subsequent to December 31, 2017, scheduled annual maturities of all debt outstanding are as follows (in thousands):
| | | | | | Year | Principal Repayments | | 2018 | $ | 6,655 |
| | 2019 | 26,687 |
| | 2020 | 27,799 |
| | 2021 | 27,766 |
| | 2022 | 129,311 |
| | Thereafter | 453,561 |
| | Total | $ | 671,779 |
|
8. Fair Value Measurements
Available-for-Sale Securities.
As of December 31, 2017 and 2016, available-for-sale securities held by Nextel Brazil included $16.7 million and $73.8 million, respectively, in investment funds. These funds invest primarily in Brazilian government bonds, long-term bank certificates of deposit and Brazilian corporate debentures. During the years ended December 31, 2017 and 2016, the six months ended December 31, 2015 and the six months ended June 30, 2015, we did not have any material unrealized gains or losses associated with these investments.
We account for our available-for-sale securities at fair value. The fair value of our Brazilian certificates of deposit is based on their current redemption amount, and we classify these certificates of deposit within Level 2 of the fair value hierarchy. The fair value of Nextel Brazil's investment funds is measured based on the funds' net asset value as a practical expedient, which is excluded from the fair value hierarchy.
Debt Instruments.
The carrying amounts and estimated fair values of our debt instruments are as follows:
| | | | | | | | | | | | | | | | | | | Successor Company | | | December 31, | | | 2017 | | 2016 | | | Carrying Amount | | Estimated Fair Value | | Carrying Amount | | Estimated Fair Value | | | (in thousands) | | Brazil equipment financing | $ | 242,883 |
| | $ | 237,958 |
| | $ | 291,597 |
| | $ | 280,893 |
| | Bank loans and other | 200,567 |
| | 144,312 |
| | 242,313 |
| | 221,458 |
| | Brazil spectrum financing | 122,044 |
| | 128,225 |
| | 125,684 |
| | 117,059 |
| | | $ | 565,494 |
| | $ | 510,495 |
| | $ | 659,594 |
| | $ | 619,410 |
|
We estimated the fair value of the Brazil bank loans, as well as the fair value of our equipment financing facility in Brazil, utilizing inputs such as U.S. Treasury security yield curves, prices of comparable bonds, LIBOR, U.S. Treasury bond rates and credit spreads on comparable publicly traded bonds. We consider Nextel Brazil's equipment financing facility, bank loans and other and its spectrum financing to be Level 3 in the fair value hierarchy.
NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivative Instruments.
We occasionally enter into derivative transactions for risk management purposes. We have not and will not enter into any derivative transactions for speculative or profit generating purposes. Nextel Brazil did not have any derivative instruments as of December 31, 2017. As of December 31, 2016, Nextel Brazil had an immaterial amount of derivative instruments that we classified as short-term investments in our consolidated balance sheets. We consider this measurement to be Level 3 in the fair value hierarchy. Nextel Brazil entered into foreign currency option agreements to manage the foreign currency exposures associated with the forecasted purchase of handsets and other U.S. dollar-denominated payments. We do not apply hedge accounting to these derivative instruments. As a result, we have included all changes in the fair value of these instruments as a component of other expense, net in our consolidated statement of comprehensive (loss) income. For the year ended December 31, 2016, Nextel Brazil recognized $3.3 million in net realized losses, resulting from the changes in estimated fair value of these derivative instruments. Unrealized losses recognized during 2016 were not material. For the six months ended December 31, 2015 and June 30, 2015, Nextel Brazil recognized $5.2 million and $6.3 million in net realized gains, respectively, resulting from the changes in the estimated fair value of these derivative instruments. In addition, for the six months ended December 31, 2015 and June 30, 2015, Nextel Brazil recorded an immaterial amount of unrealized losses resulting from the changes in the estimated fair value of these derivative instruments.
Other Financial Instruments.
The carrying values of cash and cash equivalents, accounts receivable and accounts payable contained in our consolidated balance sheets approximate their fair values due to the short-term nature of these instruments.
9. Commitments and Contingencies
Capital and Operating Lease Commitments.
We have co-location capital lease obligations on some of our transmitter and receiver sites in Brazil. See Note 7 for further information regarding these agreements.
We lease various cell sites, office facilities and other assets under operating leases. Some of these leases provide for annual increases in our rent payments based on changes in locally-based consumer price indices. The remaining terms of our cell site leases range from less than one to fifteen years and are generally renewable for additional terms. The remaining terms of our office leases range from less than one to ten years. We have not included reasonably assured renewal periods in our calculation of future minimum payments for operating lease obligations shown in the table below. For the year ended December 31, 2017, total rent expense under operating leases was $178.5 million, of which approximately $63.2 million related to rent payments for certain transmitter and receiver sites that Nextel Brazil is not fully utilizing. For the year ended December 31, 2016, total rent expense under operating leases was $164.6 million. In addition, during the six months ended December 31, 2015 and the six months ended June 30, 2015, total rent expense under operating leases was $76.4 million and $93.4 million, respectively.
For years subsequent to December 31, 2017, future minimum payments for all capital and operating lease obligations that have initial or remaining noncancelable lease terms exceeding one year, net of rental income, are as follows (in thousands):
| | | | | | | | | | | | | | | Capital Leases | | Operating Leases | | Total | | 2018 | $ | 48,354 |
| | $ | 127,430 |
| | $ | 175,784 |
| | 2019 | 43,026 |
| | 112,280 |
| | 155,306 |
| | 2020 | 42,890 |
| | 101,591 |
| | 144,481 |
| | 2021 | 43,016 |
| | 90,622 |
| | 133,638 |
| | 2022 | 41,298 |
| | 77,425 |
| | 118,723 |
| | Thereafter | 621,495 |
| | 151,364 |
| | 772,859 |
| | Total minimum lease payments | 840,079 |
| | 660,712 |
| | 1,500,791 |
| | Less: imputed interest | (749,866 | ) | | — |
| | (749,866 | ) | | Total | $ | 90,213 |
| | $ | 660,712 |
| | $ | 750,925 |
|
NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Brazil RAN Sharing Commitment.
In May 2016, Nextel Brazil entered into an amendment to a nationwide roaming voice and data services agreement with Telefonica Brazil, S.A., or Telefonica, to reduce the usage rates for roaming traffic. Concurrently, Nextel Brazil entered into a 10-year RAN sharing agreement with Telefonica, under which Telefonica will permit Nextel Brazil to use some of its tower and equipment infrastructure to transmit telecommunications signals on Nextel Brazil's spectrum. Nextel Brazil expects to use this agreement to fulfill the regulatory coverage obligations under its spectrum licenses rather than utilizing its own network. These agreements require Nextel Brazil to meet certain minimum annual commitments over a five-year period totaling 800 million Brazilian reais, or approximately $246.2 million based on foreign currency exchange rates at the time, which replaced the remaining commitments under the original roaming agreement. Nextel Brazil was required to prepay 250 million Brazilian reais, or approximately $76.9 million based on foreign currency exchange rates at the time, shortly after the agreements became effective with receipt of regulatory approvals, which occurred in August 2016.
We are allocating the aggregate 800 million Brazilian reais in minimum payments on a relative fair value basis to the services being received. We are recognizing approximately 318 million Brazilian reais on a ratable basis over a period of five years for the amended roaming agreement, which began in August 2016, and approximately 482 million Brazilian reais over a period of approximately seven years for the RAN sharing agreement, which began in October 2016. In 2017, Nextel Brazil recorded approximately 116 million Brazilian reais, or approximately $36.9 million based on foreign currency exchange rates at the time, of the total 482 million Brazilian reais related to the RAN sharing agreement as a component of restructuring costs as a result of a change in the scope of this arrangement.
Equipment, Handsets and Other Commitments.
We are a party to purchase agreements with various suppliers, under which we have committed to purchase equipment, network services and handsets that will be used or sold in the ordinary course of business. As of December 31, 2017, we are committed to purchase $131.6 million in total under these arrangements, which includes amounts related to the RAN sharing agreement discussed above, $57.1 million of which we are committed to pay in 2018, $54.2 million of which we are committed to pay in 2019 and 2020 combined and $20.3 million of which we are committed to pay in 2021 and 2022 combined. These amounts do not represent our entire anticipated purchases in the future, but represent only those items that are the subject of contractual obligations. Our commitments are generally determined based on noncancelable quantities or termination amounts. We also purchase products and services as needed with no firm commitment. Amounts actually paid under some of these agreements will likely be higher due to variable components of these agreements. The more significant variable components that determine the ultimate obligation owed include such items as hours contracted, subscribers and other factors. In addition, we are a party to various arrangements that are conditional in nature and obligate us to make payments only upon the occurrence of certain events, such as the delivery of functioning software or a product.
Contingencies.
Nextel Brazil has received various assessment notices from municipal, state and federal Brazilian authorities asserting deficiencies in payments related primarily to value-added taxes 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 Brazil's petitions have been denied, and Nextel Brazil is currently appealing those decisions. As of December 31, 2017 and 2016, Nextel Brazil also had contingencies related to certain consumer, contract and labor-related matters, some of which are secured by judicial guarantees. Nextel Brazil may in the future be subject to litigation involving tax and other matters requiring judicial deposits of cash that will not be released until the pending matter is resolved.
As of December 31, 2017 and 2016, Nextel Brazil had accrued liabilities of $81.2 million and $76.8 million, respectively, related to contingencies, of which $7.4 million and $1.4 million related to unasserted claims, respectively. We currently estimate the reasonably possible losses related to matters for which Nextel Brazil has not accrued liabilities, as they are not deemed probable, to be approximately $760.0 million as of December 31, 2017. We continue 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.
NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
10. Capital Stock
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, 2017, we had not issued any shares of undesignated preferred stock.
Common Stock Reserved for Issuance. In connection with our emergence from Chapter 11, our Board of Directors adopted an incentive compensation plan, which contemplates grants of up to 5,263,158 shares of our common stock to directors and employees of the reorganized company, including potential grants of restricted stock, restricted stock units and options to purchase shares of our common stock. Under the 2015 Incentive Compensation Plan, we had 1,183,767 shares of our common stock reserved for future issuance as of December 31, 2017.
11. Income Taxes
The components of (loss) income from continuing operations before income taxes and the related income tax benefit (provision) are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | Successor Company | | | Predecessor Company | | | Year Ended December 31, | | Year Ended December 31, | | Six Months Ended December 31, | | | Six Months Ended June 30, | | | 2017 | | 2016 | | 2015 | | | 2015 | | U.S. | $ | (41,143 | ) | | $ | (53,843 | ) | | $ | (1,820 | ) | | | $ | 1,745,628 |
| | Non-U.S. | (316,870 | ) | | (1,482,928 | ) | | (295,686 | ) | | | (224,218 | ) | | Total | $ | (358,013 | ) | | $ | (1,536,771 | ) | | $ | (297,506 | ) | | | $ | 1,521,410 |
|
NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | Successor Company | | | Predecessor Company | | | Year Ended December 31, | | Year Ended December 31, | | Six Months Ended December 31, | | | Six Months Ended June 30, | | | 2017 | | 2016 | | 2015 | | | 2015 | | Current: | | | | | |
| | | |
| | Federal | $ | — |
| | $ | — |
| | $ | — |
| | | $ | — |
| | Foreign | 5,779 |
| | (291 | ) | | 2,502 |
| | | (1,104 | ) | | Total current income tax benefit (provision) | 5,779 |
| | (291 | ) | | 2,502 |
| | | (1,104 | ) | | Deferred: | | | | | |
| | | |
| | Federal | — |
| | 2,864 |
| | (403 | ) | | | (814 | ) | | State, net of Federal tax benefit (provision) | — |
| | 319 |
| | (45 | ) | | | (91 | ) | | Foreign | 568 |
| | — |
| | 2,961 |
| | | — |
| | Total deferred income tax benefit (provision) | 568 |
| | 3,183 |
| | 2,513 |
| | | (905 | ) | | Total income tax benefit (provision) | $ | 6,347 |
| | $ | 2,892 |
| | $ | 5,015 |
| | | $ | (2,009 | ) |
A reconciliation of the U.S. statutory Federal income tax rate to our effective tax rate as a percentage of (loss) income from continuing operations before income tax benefit (provision) is as follows:
| | | | | | | | | | | | Successor Company | | | Predecessor Company | | | Year Ended December 31, | | Year Ended December 31, | | Six Months Ended December 31, | | | Six Months Ended June 30, | | | 2017 | | 2016 | | 2015 | | | 2015 | | Statutory Federal tax rate | 35% | | 35% | | 35% | | | 35% | | Reorganization items | — | | — | | — | | | (46) | | Effect of foreign operations | — | | (2) | | (12) | | | — | | Effect of statutory Federal tax rate change on deferred tax asset | (37) | | — | | — | | | — | | Change in deferred tax asset valuation allowance | 16 | | (32) | | (20) | | | 9 | | Effect of permanent differences | (12) | | — | | — | | | — | | Other, net | — | | (1) | | (1) | | | 2 | | Effective tax rate | 2% | | — | | 2% | | | — |
NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The components of our deferred tax assets and liabilities consist of the following:
| | | | | | | | | | | Successor Company | | | December 31, | | | 2017 | | 2016 | | | (in thousands) | | Deferred tax assets: | |
| | |
| | Net operating losses and capital loss carryforwards | $ | 6,509,165 |
| | $ | 6,363,915 |
| | Allowance for doubtful accounts | 20,122 |
| | 17,867 |
| | Accrued expenses | 53,867 |
| | 54,263 |
| | Accrual for contingent liabilities | 27,016 |
| | 24,669 |
| | Intangible assets | 121,122 |
| | 130,983 |
| | Property, plant and equipment | 143,701 |
| | 253,882 |
| | Leasing related activity | 27,519 |
| | 25,822 |
| | Equity compensation | 1,151 |
| | 1,182 |
| | Long term debt | 55,146 |
| | 53,159 |
| | Inventory reserve | 717 |
| | 1,729 |
| | Other | 1,004 |
| | 17,573 |
| | | 6,960,530 |
| | 6,945,044 |
| | Valuation allowance | (6,957,569 | ) | | (6,945,044 | ) | | Total deferred tax asset | 2,961 |
| | — |
| | Deferred tax liabilities: | | | | | Other | 2,432 |
| | — |
| | Total deferred tax liability | 2,432 |
| | — |
| | Net deferred tax asset | $ | 529 |
| | $ | — |
|
As of December 31, 2017, we had $1.4 billion of net operating loss carryforwards for U.S. Federal and state income tax purposes, which expire in various amounts beginning in 2027 through 2037. Due to our emergence from bankruptcy on June 26, 2015, the timing and manner in which we will utilize the net operating loss carryforwards in any year will be limited relating to changes in our ownership. The annual limitation is $40.2 million, and some of our net operating loss carryforwards will expire before use in the future due to this limitation. As a result of this limitation, our net operating loss carryforwards for U.S. Federal and state income tax purposes are $898.9 million.
As of December 31, 2017, our Brazilian subsidiaries had $2.1 billion of net operating loss carryforwards that can 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.
As of December 31, 2017, our holding companies in Luxembourg each had net operating losses ranging from $1.1 billion to $8.7 billion that can be carried forward indefinitely. An immaterial amount of losses generated in 2017 can be carried forward 17 years. Our holding companies in Spain had $964.2 million of net operating loss carryforwards that can be carried forward 18 years. Given the nature of activities that are considered taxable in these jurisdictions and the activities engaged in by the holding companies, these net operating loss carryforwards will never be utilized by our holding companies.
NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The deferred tax asset valuation allowances that our subsidiaries and holding companies had as of December 31, 2017 and 2016 are as follows:
| | | | | | | | | | | Successor Company | | | 2017 | | 2016 | | | (in millions) | | Brazil | $ | 1,162.5 |
| | $ | 1,089.9 |
| | U.S. | 240.4 |
| | 367.2 |
| | Luxembourg | 5,313.7 |
| | 5,275.9 |
| | Spain | 241.0 |
| | 212.0 |
| | Total | $ | 6,957.6 |
| | $ | 6,945.0 |
|
The realization of deferred tax assets is dependent on the generation of future taxable income sufficient to realize our tax loss carryforwards and other tax deductions. Valuation allowances are required to be recognized on deferred tax assets unless it is determined that it is “more-likely-than-not” that the asset will be realized. As of December 31, 2017, we continued to record full valuation allowances on the deferred tax assets of our foreign operating companies, our U.S. parent company and subsidiaries and our foreign holding companies due to substantial negative evidence, including the recent history of cumulative losses and the projected losses for 2018 and subsequent years.
We are subject to income taxes in both the U.S. and the non-U.S. jurisdictions in which we operate and to potential examination by the relevant tax authorities. The earliest years that remain subject to examination by jurisdiction are: U.S. - 2007; Brazil - 2012, and Luxembourg, Netherlands and Spain - 2009. We regularly assess the potential outcome of future examinations in each of the taxing jurisdictions when determining the adequacy of our 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 FASB’s authoritative guidance on accounting for uncertainty in income taxes, and we have established income tax accruals in accordance with this authoritative guidance where necessary. Once a financial statement benefit for a tax position is recorded or a tax accrual 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 amounts of the recorded financial statement benefits and tax accruals 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.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act, or the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code, including, but not limited to: (1) reducing the U.S. Federal corporate tax rate from 35 percent to 21 percent; (2) requiring companies to pay a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries; and (3) requiring a current inclusion in U.S. Federal taxable income of certain earnings of controlled foreign corporations, known as global intangible low-taxed income.
We have prepared an analysis of the effect of the Tax Act on our U.S. income taxes and have formed the following conclusions:
In response to the reduction in the U.S. Federal tax rate to 21%, which was effective January 1, 2018, we have recorded our deferred tax asset and corresponding valuation allowance as of December 31, 2017 at the 21% tax rate with no impact to our income tax expense;
We have determined that no tax liability needs to be recorded for the one-time transition tax as our international subsidiaries have negative cumulative foreign earnings; and
We are electing to treat the tax on global intangible low-taxed income as an expense in the period in which we become liable for this tax and are not currently recording a deferred tax liability for this item.
In accordance with Staff Accounting Bulletin, or SAB No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act,” our measurement period remains open with respect to the above items in order to allow us to evaluate all possible impacts of evolving guidance to be issued by the Internal Revenue Service and the FASB.
NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Employee Stock and Benefit Plans
In connection with our emergence from Chapter 11, NII Holdings canceled all shares of its common stock, preferred stock and other equity interests that existed prior to June 26, 2015. Our Board of Directors subsequently adopted an incentive compensation plan, which we refer to as the 2015 Incentive Compensation Plan. The 2015 Incentive Compensation Plan provides us with the ability to award stock options, restricted stock, restricted stock units, and cash-based incentives to our employees, directors and officers. The 2015 Incentive Compensation Plan contemplates grants of up to 5,263,158 shares of our common stock to directors and employees of the reorganized company, including potential grants of restricted stock, restricted stock units and options to purchase shares of our common stock. All grants or awards made under the 2015 Incentive Compensation Plan are governed by written agreements between us and the participants and have a maximum term of ten years.
On the date of our emergence from Chapter 11, we made grants of 564,311 shares of restricted stock, 41,721 restricted stock units and 1,580,208 options to purchase shares of common stock. Subsequent to this date, we made grants of an additional 468,069 shares of restricted stock and 5,071,457 options to purchase shares of common stock. Stock options, restricted stock awards and restricted stock units are also granted to certain new employees on the later of the date of hire or the date that the grant is approved.
Stock Option Awards
For the years ended December 31, 2017 and 2016, the six months ended December 31, 2015 and the six months ended June 30, 2015, we recognized $2.6 million, $2.8 million, $1.0 million and $1.5 million, respectively, in share-based compensation expense related to stock options. The amounts recognized in our consolidated statements of comprehensive (loss) income for tax benefits related to share-based payment arrangements in 2017, 2016 and both periods in 2015 were not material. We include substantially all share-based compensation expense as a component of selling, general and administrative expenses. As of December 31, 2017, there was $1.1 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 1.50 years. The amount of cash paid for exercises under all share-based payment arrangements was immaterial for 2017, 2016 and both periods in 2015.
As a result of the Company's emergence from Chapter 11 proceedings, all prior stock option awards granted under the 2012 Incentive Compensation Plan were canceled. Our stock options generally vest thirty-three percent per year over a three-year period. The following table summarizes stock option activity under the 2015 Incentive Compensation Plan:
| | | | | | | | | | | | | | | Number of Options | | Weighted Average Exercise Price per Option | | Weighted Average Remaining Life | | Aggregate Intrinsic Value | | Outstanding, December 31, 2016 | 3,276,105 |
| | $ | 10.14 |
| | | | | | Granted | 2,250,000 |
| | $ | 0.58 |
| | | | | | Exercised | — |
| | — |
| | | | | | Forfeited | (2,168,407 | ) | | $ | 11.02 |
| | | | | | Outstanding, December 31, 2017 | 3,357,698 |
| | $ | 3.16 |
| | 8.83 | | — |
| | Exercisable, December 31, 2017 | 660,677 |
| | $ | 9.02 |
| | 7.48 | | — |
|
There were no options exercised during the year ended December 31, 2017. As of December 31, 2017, our vested stock options had an intrinsic value of zero. 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. If a participant's employment is terminated without cause prior to the date options are available to be exercised, the participant will receive stock options on a pro-rata basis based on the fraction of the performance period that has elapsed from the beginning of the performance period until the participant's termination. If the participant does not exercise the pro-rata shares within 90 days of the employee's termination, the options are considered forfeited and are available for reissuance under the terms of the 2015 Incentive Compensation Plan.
NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The weighted average fair value of the stock option awards on their grant dates using the Black-Scholes-Merton option-pricing model were $0.22 and $1.48 for each option granted during the years ended December 31, 2017 and 2016 and $2.98 for the period from June 26, 2015 to December 31, 2015, based on the following assumptions:
| | | | | | | | | Successor Company | | | Year Ended | | Period from June 26, 2015 | | | December 31, 2017 | | December 31, 2016 | | to December 31, 2015 | | Risk free interest rate | 1.53% | | 1.53% - 1.90% | | 1.71% - 2.05% | | Expected stock price volatility | 40.87% | | 40.71% - 40.87% | | 31.73% - 41.92% | | Expected term in years | 5.16 | | 5.16 | | 5.16 - 6.00 | | Expected dividend yield | — | | — | | — |
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 a Monte Carlo model of stock prices and option disposition intensity. The intensity is based on models of stock price path, time dependent suboptimal voluntary exercise and post-vest termination. The risk free interest rate for the grant date of options granted is consistent with the zero-coupon U.S. Treasury rate curve. Expected volatility takes into consideration a blended historical and implied volatility of comparable companies' option contracts.
Restricted Stock and Restricted Stock Unit Awards
For the years ended December 31, 2017 and 2016, the six months ended December 31, 2015 and the six months ended June 30, 2015, we recognized $2.0 million, $3.4 million, $1.9 million and $2.3 million, respectively, in share-based compensation expense related to restricted stock and restricted stock units. The amounts recognized in our consolidated statements of comprehensive (loss) income for tax benefits related to share-based payment arrangements for the years ended December 31, 2017 and 2016, the six months ended December 31, 2015 and the six months ended June 30, 2015 were not material. We include substantially all share-based compensation expense as a component of selling, general and administrative expenses.
As a result of the Company's emergence from Chapter 11 proceedings, all prior restricted stock awards and restricted stock units granted under the 2012 Incentive Compensation Plan were canceled. As of December 31, 2017, restricted stock represented both non-vested restricted stock awards and restricted stock units. Our restricted stock awards generally vest thirty-three percent per year over a three-year period. The following table summarizes restricted stock activity under the 2015 Incentive Compensation Plan, for the year ended December 31, 2017:
| | | | | | | | Number of Shares | | Weighted Average Grant Date Fair Value Per Share | | Restricted stock awards as of December 31, 2016 | 522,442 |
| | $10.65 | | Granted | — |
| | — | | Vested | (185,387 | ) | | $12.06 | | Forfeited | (239,705 | ) | | $7.38 | | Restricted stock awards as of December 31, 2017 | 97,350 |
| | $15.99 |
If a participant's employment is terminated without cause prior to the vesting dates, the participant will receive restricted stock on a pro-rata basis based on the fraction of the performance period that has elapsed from the beginning of the performance period until the participant's termination. Any unvested shares are forfeited and available for reissuance under the terms of the 2015 Incentive Compensation Plan. The fair value of our restricted stock is determined based on the quoted price of our common stock at the grant date. As of December 31, 2017, there was $0.8 million in unrecognized compensation cost related to restricted stock. We expect this cost to be recognized over a weighted average period of 0.48 years. For the year ended December 31, 2017, the value of our vested restricted stock awards was immaterial.
NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Segment Information
We have determined our reportable segment based on our method of internal reporting, which disaggregates our business by geographic location. We evaluate performance and provide resources to it based on operating income before depreciation, amortization and impairment, restructuring and other charges, which we refer to as segment earnings. Nextel Brazil is our only reportable segment.
NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | Brazil | | Corporate and Eliminations | | Consolidated | | | (in thousands) | | Year Ended December 31, 2017 - Successor Company | | | | | | | Operating revenues | $ | 869,661 |
| | $ | 106 |
| | $ | 869,767 |
| | Segment losses | $ | (31,071 | ) | | $ | (24,174 | ) | | $ | (55,245 | ) | | Less: | | | | | |
| | Impairment, restructuring and other charges | | | | | (179,727 | ) | | Depreciation and amortization | | | | | (37,187 | ) | | Foreign currency transaction losses, net | | | | | (1,271 | ) | | Interest expense and other, net | | | | | (85,028 | ) | | Loss from continuing operations before reorganization items and income tax provision | | | | | $ | (358,458 | ) | | Capital expenditures | $ | 51,103 |
| | $ | — |
| | $ | 51,103 |
| | Year Ended December 31, 2016 - Successor Company | | | | | | | Operating revenues | $ | 984,878 |
| | $ | 168 |
| | $ | 985,046 |
| | Segment earnings (losses) | $ | 67,186 |
| | $ | (36,821 | ) | | $ | 30,365 |
| | Less: | | | | | |
| | Impairment, restructuring and other charges | | | | | (1,384,811 | ) | | Depreciation and amortization | | | | | (172,383 | ) | | Foreign currency transaction gains, net | | | | | 76,615 |
| | Interest expense and other, net | | | | | (85,754 | ) | | Loss from continuing operations before reorganization items and income tax provision | | | | | $ | (1,535,968 | ) | | Capital expenditures | $ | 51,307 |
| | $ | — |
| | $ | 51,307 |
| | Six Months Ended December 31, 2015 - Successor Company | |
| | |
| | |
| | Operating revenues | $ | 529,332 |
| | $ | 102 |
| | $ | 529,434 |
| | Segment losses | $ | (15,925 | ) | | $ | (26,100 | ) | | $ | (42,025 | ) | | Less: | | | | | |
| | Impairment, restructuring and other charges | | | | | (32,308 | ) | | Depreciation and amortization | | | | | (85,364 | ) | | Foreign currency transaction losses, net | | | | | (99,737 | ) | | Interest expense and other, net | | | | | (39,539 | ) | | Loss from continuing operations before reorganization items and income tax provision | | | | | $ | (298,973 | ) | | Capital expenditures | $ | 72,112 |
| | $ | 500 |
| | $ | 72,612 |
| | Six Months Ended June 30, 2015 - Predecessor Company | |
| | |
| | |
| | Operating revenues | $ | 683,611 |
| | $ | 100 |
| | $ | 683,711 |
| | Segment losses | $ | (75,234 | ) | | $ | (37,982 | ) | | $ | (113,216 | ) | | Less: | | | | | |
| | Impairment, restructuring and other charges | | | | | (36,792 | ) | | Depreciation and amortization | | | | | (153,878 | ) | | Foreign currency transaction losses, net | | | | | (63,948 | ) | | Interest expense and other, net | | | | | (67,630 | ) | | Loss from continuing operations before reorganization items and income tax provision | | | | | $ | (435,464 | ) | | Capital expenditures | $ | 68,385 |
| | $ | 818 |
| | $ | 69,203 |
| | December 31, 2017 - Successor Company | | | | | |
| | Identifiable assets | $ | 957,495 |
| | $ | 147,603 |
| | $ | 1,105,098 |
| | December 31, 2016 - Successor Company | | | | | |
| | Identifiable assets | $ | 1,000,098 |
| | $ | 418,411 |
| | $ | 1,418,509 |
|
NII HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Quarterly Financial Data (Unaudited)
| | | | | | | | | | | | | | | | | | | Successor Company | | | First | | Second | | Third | | Fourth | | | (in thousands, except per share amounts) | | 2017 | |
| | |
| | |
| | |
| | Operating revenues | $ | 250,955 |
| | $ | 225,134 |
| | $ | 204,808 |
| | $ | 188,870 |
| | Operating loss | (79,849 | ) | | (68,931 | ) | | (83,372 | ) | | (40,007 | ) | | Net loss from continuing operations | (92,675 | ) | | (87,467 | ) | | (94,428 | ) | | (77,096 | ) | | Net (loss) income from discontinued operations | (38 | ) | | 2,697 |
| | (92 | ) | | (1,562 | ) | | Net loss from continuing operations, per common share, basic | $ | (0.92 | ) | | $ | (0.87 | ) | | $ | (0.94 | ) | | $ | (0.77 | ) | | Net income (loss) from discontinued operations, per common share, basic | $ | — |
| | $ | 0.02 |
| | $ | — |
| | $ | (0.02 | ) | | Net loss from continuing operations, per common share, diluted | $ | (0.92 | ) | | $ | (0.87 | ) | | $ | (0.94 | ) | | $ | (0.77 | ) | | Net income (loss) from discontinued operations, per common share, diluted | $ | — |
| | $ | 0.02 |
| | $ | — |
| | $ | (0.02 | ) |
| | | | | | | | | | | | | | | | | | | Successor Company | | | First | | Second | | Third | | Fourth | | | (in thousands, except per share amounts) | | 2016 | |
| | |
| | |
| | |
| | Operating revenues | $ | 226,557 |
| | $ | 249,213 |
| | $ | 260,836 |
| | $ | 248,440 |
| | Operating loss | (54,064 | ) | | (28,751 | ) | | (1,386,696 | ) | | (57,318 | ) | | Net loss from continuing operations | (32,807 | ) | | (4,796 | ) | | (1,411,554 | ) | | (84,722 | ) | | Net loss from discontinued operations | (3,781 | ) | | (5,075 | ) | | (7,389 | ) | | (3,749 | ) | | Net loss from continuing operations, per common share, basic | $ | (0.33 | ) | | $ | (0.05 | ) | | $ | (14.10 | ) | | $ | (0.84 | ) | | Net loss from discontinued operations, per common share, basic | $ | (0.04 | ) | | $ | (0.05 | ) | | $ | (0.07 | ) | | $ | (0.04 | ) | | Net loss from continuing operations, per common share, diluted | $ | (0.33 | ) | | $ | (0.05 | ) | | $ | (14.10 | ) | | $ | (0.84 | ) | | Net loss from discontinued operations, per common share, diluted | $ | (0.04 | ) | | $ | (0.05 | ) | | $ | (0.07 | ) | | $ | (0.04 | ) |
During 2016, we recorded a non-cash asset impairment charge of $1.34 billion to reduce the carrying values of Nextel Brazil's long-lived assets to their respective fair values. See Note 4 for more information on these impairment charges.
The sum of the per share amounts do not equal the annual amounts due to changes in the number of weighted average common shares outstanding during the year.
NII HOLDINGS, INC. AND SUBSIDIARIES
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
NII HOLDINGS, INC. CONDENSED BALANCE SHEETS (PARENT COMPANY ONLY) (in thousands)
| | | | | | | | | | | Successor Company | | | December 31,
2017 | | December 31,
2016 | | ASSETS | | Current assets | | | | | Cash and cash equivalents | $ | 28,167 |
| | $ | 54,101 |
| | Short-term intercompany receivables | — |
| | 1,242 |
| | Prepaid expenses and other | 104 |
| | — |
| | Total current assets | 28,271 |
| | 55,343 |
| | Long-term intercompany receivables | 15 |
| | 3,146 |
| | Other assets | 2 |
| | 112,503 |
| | Total assets | $ | 28,288 |
| | $ | 170,992 |
| | LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY | | | | | | | Current liabilities | | | | | Short-term intercompany payables | $ | 1,439 |
| | $ | 4,570 |
| | Total current liabilities | 1,439 |
| | 4,570 |
| | Other long-term liabilities | 148,796 |
| | 400 |
| | Total liabilities | 150,235 |
| | 4,970 |
| | Total (deficit) equity | (121,947 | ) | | 166,022 |
| | Total liabilities and stockholders’ (deficit) equity | $ | 28,288 |
| | $ | 170,992 |
|
NII HOLDINGS, INC. AND SUBSIDIARIES
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
NII HOLDINGS, INC. CONDENSED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (PARENT COMPANY ONLY) (in thousands)
| | | | | | | | | | | | | | | | | | | | Successor Company | | | Predecessor Company | | | Year Ended December 31, | | Year Ended December 31, | | Six Months Ended December 31, | | | Six Months Ended June 30, | | | 2017 | | 2016 | | 2015 | | | 2015 | | Operating revenues | $ | — |
| | $ | — |
| | $ | — |
| | | $ | — |
| | Operating expenses | | | | | | | | | | Selling, general and administrative | — |
| | — |
| | — |
| | | 429 |
| | Impairment, restructuring and other charges | — |
| | 36,839 |
| | — |
| | | — |
| | Depreciation and amortization | — |
| | 1,116 |
| | 744 |
| | | — |
| | | — |
| | 37,955 |
| | 744 |
| | | 429 |
| | Operating loss | — |
| | (37,955 | ) | | (744 | ) | | | (429 | ) | | Other (expense) income | | | |
| | |
| | | |
| | Interest expense, net | — |
| | — |
| | — |
| | | (119 | ) | | Intercompany interest expense | — |
| | (117,078 | ) | | (118,365 | ) | | | (159,117 | ) | | Interest income | — |
| | — |
| | — |
| | | 37 |
| | Intercompany interest income | 231 |
| | 197 |
| | 97 |
| | | 125 |
| | Equity in (loss) income of affiliates | (300,107 | ) | | (1,401,998 | ) | | (167,324 | ) | | | 1,793,151 |
| | Other (expense) income, net | (1,138 | ) | | (206 | ) | | (3 | ) | | | 995 |
| | | (301,014 | ) | | (1,519,085 | ) | | (285,595 | ) | | | 1,635,072 |
| (Loss) income before reorganization items and income tax benefit | (301,014 | ) | | (1,557,040 | ) | | (286,339 | ) | | | 1,634,643 |
| | Reorganization items | — |
| | — |
| | (373 | ) | | | 68,355 |
| | Income tax benefit (provision) | — |
| | 3,183 |
| | (448 | ) | | | (1,002 | ) | | Net (loss) income from continuing operations | (301,014 | ) | | (1,553,857 | ) | | (287,160 | ) | | | 1,701,996 |
| | (Loss) income from discontinued operations, net of income taxes | — |
| | (16 | ) | | 6,277 |
| | | 38,519 |
| | Net (loss) income | $ | (301,014 | ) | | $ | (1,553,873 | ) | | $ | (280,883 | ) | | | $ | 1,740,515 |
| | | | |
|
| | | | | | Comprehensive (loss) income, net of income taxes | | |
|
| |
|
| | |
|
| | Foreign currency translation adjustment | $ | 7,696 |
| | $ | 169,785 |
| | $ | (248,781 | ) | | | $ | (205,899 | ) | | Reclassification adjustment for sale of Nextel Argentina, Nextel Mexico and Nextel Peru | — |
| | — |
| | (1,672 | ) | | | 421,953 |
| | Other | — |
| | — |
| | 4,734 |
| | | 2,956 |
| | Other comprehensive income (loss) | 7,696 |
| | 169,785 |
| | (245,719 | ) | | | 219,010 |
| | Net (loss) income | (301,014 | ) | | (1,553,873 | ) | | (280,883 | ) | | | 1,740,515 |
| | Total comprehensive (loss) income | $ | (293,318 | ) | | $ | (1,384,088 | ) | | $ | (526,602 | ) | | | $ | 1,959,525 |
| | | | |
|
| | | | | |
NII HOLDINGS, INC. AND SUBSIDIARIES
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
NII HOLDINGS, INC. CONDENSED STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY) (in thousands)
| | | | | | | | | | | | | | | | | | | | Successor Company | | | Predecessor Company | | | Year Ended December 31, | | Year Ended December 31, | | Six Months Ended December 31, | | | Six Months Ended June 30, | | | 2017 | | 2016 | | 2015 | | | 2015 | | Cash flows from operating activities: | | | | | |
| | | | | Net (loss) income | $ | (301,014 | ) | | $ | (1,553,873 | ) | | $ | (280,883 | ) | | | $ | 1,740,515 |
| | Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities | 284,932 |
| | 1,554,075 |
| | 280,910 |
| | | (1,735,521 | ) | | Net cash (used in) provided by operating activities | (16,082 | ) | | 202 |
| | 27 |
| | | 4,994 |
| | Cash flows from investing activities: | | | | | | | | |
| | Investments in subsidiaries | (10,043 | ) | | (36,356 | ) | | (29,690 | ) | | | (61,405 | ) | | Return of investments in subsidiaries | 162 |
| | 34,260 |
| | 35,315 |
| | | 23 |
| | Other, net | — |
| | (16 | ) | | — |
| | | — |
| | Net cash (used in) provided by investing activities | (9,881 | ) | | (2,112 | ) | | 5,625 |
| | | (61,382 | ) | | Cash flows from financing activities: | | | | | | | | |
| | Other, net | 29 |
| | — |
| | — |
| | | — |
| | Net cash provided by financing activities | 29 |
| | — |
| | — |
| | | — |
| | Net (decrease) increase in cash and cash equivalents | (25,934 | ) | | (1,910 | ) | | 5,652 |
| | | (56,388 | ) | | Cash and cash equivalents, beginning of period | 54,101 |
| | 56,011 |
| | 50,359 |
| | | 106,747 |
| | Cash and cash equivalents, end of period | $ | 28,167 |
| | $ | 54,101 |
| | $ | 56,011 |
| | | $ | 50,359 |
|
NII HOLDINGS, INC. AND SUBSIDIARIES
SCHEDULE I — CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
1. Basis of Presentation
NII Holdings, Inc., or NII Holdings, our parent company, is a holding company that conducts substantially all of its business operations through Nextel Brazil. See Note 1 to our consolidated financial statements for more information. As specified in Nextel Brazil's local financing agreements, there are restrictions on the parent company's ability to obtain funds from certain of its subsidiaries through dividends, loans or advances. These condensed financial statements have been presented on a “parent company only” basis. In accordance with this parent company only presentation, we have presented our parent company's investments in consolidated subsidiaries under the equity method. These condensed parent company only financial statements should be read in conjunction with our consolidated financial statements included elsewhere herein.
2. Dividends From Subsidiaries
For the year ended December 31, 2016, NII Holdings' consolidated subsidiaries declared and paid $33.9 million in cash dividends to the parent company. NII Holdings' consolidated subsidiaries did not declare any dividends to the parent company during the year ended December 31, 2017, the six months ended December 31, 2015 or the six months ended June 30, 2015.
NII HOLDINGS, INC. AND SUBSIDIARIES
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
| | | | | | | | | | | | | | | | | | | Balance at Beginning of Period | | Charged to Costs and Expenses | | Deductions and Other Adjustments (1) | | Balance at End of Period | | Year Ended December 31, 2017 — Successor Company | | | | | | | | | Allowance for doubtful accounts | $ | 54,221 |
| | $ | 76,518 |
| | $ | (88,728 | ) | | $ | 42,011 |
| | Valuation allowance for deferred tax assets | $ | 6,945,044 |
| | $ | 28,637 |
| | $ | (16,112 | ) | | $ | 6,957,569 |
| Year Ended December 31, 2016 — Successor Company | | | | | | | | | Allowance for doubtful accounts | $ | 39,033 |
| | $ | 77,883 |
| | $ | (62,695 | ) | | $ | 54,221 |
| | Valuation allowance for deferred tax assets | $ | 5,290,813 |
| | $ | 1,555,006 |
| | $ | 99,225 |
| | $ | 6,945,044 |
| Six Months Ended December 31, 2015 — Successor Company | |
| | |
| | |
| | |
| | Allowance for doubtful accounts | $ | — |
| | $ | 32,279 |
| | $ | 6,754 |
| (2) | $ | 39,033 |
| | Valuation allowance for deferred tax assets | $ | 4,388,792 |
| | $ | 1,010,438 |
| | $ | (108,417 | ) | | $ | 5,290,813 |
| Six Months Ended June 30, 2015 — Predecessor Company | |
| | |
| | |
| | |
| | Allowance for doubtful accounts | $ | 30,749 |
| | $ | 65,396 |
| | $ | (96,145 | ) | (3) | $ | — |
| | Valuation allowance for deferred tax assets | $ | 4,447,133 |
| | $ | 22,828 |
| | $ | (81,169 | ) | | $ | 4,388,792 |
|
| | (1) | Includes the impact of foreign currency translation adjustments. |
| | (2) | Includes the impact of cash collections subsequent to the implementation of fresh start accounting. |
| | (3) | Includes the impact of a $50.6 million reduction to allowance for doubtful accounts resulting from the application of fresh start accounting. |
|