10-K 1 w84368e10vk.htm NEXTEL COMMUNICATIONS, INC. e10vk
Table of Contents



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-K

     
(Mark One)
þ
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from        to
Commission file number 0-19656

NEXTEL COMMUNICATIONS, INC.

(Exact name of registrant as specified in its charter)
     
Delaware
  36-3939651
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
2001 Edmund Halley Drive, Reston, Virginia
  20191
(Address of principal executive offices)
  (Zip Code)

Registrant’s telephone number, including area code: (703) 433-4000

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: class A common stock, $0.001 par value

      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ     No  o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).  Yes  þ     No  o

      Based on the closing sales price on June 28, 2002, the aggregate market value of the voting and nonvoting common stock held by nonaffiliates of the registrant was about $2,255,317,817.

      On March 14, 2003, the number of shares outstanding of the registrant’s class A common stock, $0.001 par value, and class B nonvoting common stock, $0.001 par value, was 991,486,210 and 35,660,000, respectively.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the Proxy Statement relating to the Annual Meeting of Stockholders scheduled to be held May 29, 2003 are incorporated in Part III, Items 10, 11, 12 and 13.




PART I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
2. Year ended December 31, 2001 vs. year ended December 31, 2000.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters
Item 13. Certain Relationships and Related Transactions
Item 14. Controls and Procedures
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS
Exhibit Index
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES Index to Consolidated Financial Statements and Financial Statement Schedules
INDEPENDENT AUDITORS’ REPORT
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS As of December 31, 2002 and 2001
NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 2002, 2001 and 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT Condensed Balance Sheets As of December 31, 2002 and 2001
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE III —CONSOLIDATED FINANCIAL STATEMENTS OF NII HOLDINGS, INC.
Index to Consolidated Financial Statements and Financial Statement Schedules
NII HOLDINGS, INC. AND SUBSIDIARIES INDEPENDENT AUDITORS’ REPORT
NII HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS As of December 31, 2002 (Successor Company) and December 31, 2001 (Predecessor Company) (in thousands)
NII HOLDINGS, INC. AND SUBSIDIARIES
SUCCESSOR COMPANY CONDENSED CONSOLIDATING BALANCE SHEET As of December 31, 2002 (in thousands)
SUCCESSOR CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS For the Two Months Ended December 31, 2002 (in thousands)
2002/2003 Long-Term Incentive Plan
Employment Agreement
Subsidiaries of Nextel
Consent of Deloitte & Touche LLP
Consent of Deloitte & Touche LLP
Sarbanes-Oxley Act of 2002 Certifications


Table of Contents

TABLE OF CONTENTS

PART I

                 
Item Page


1.
  Business     1  
2.
  Properties     34  
3.
  Legal Proceedings     35  
4.
  Submission of Matters to a Vote of Security Holders     35  
PART II
 
5.
  Market for Registrant’s Common Equity and Related Stockholder Matters     37  
6.
  Selected Financial Data     38  
7.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     41  
7A.
  Quantitative and Qualitative Disclosures about Market Risk     71  
8.
  Financial Statements and Supplementary Data     73  
9.
  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     73  
PART III
 
10.
  Directors and Executive Officers of the Registrant     74  
11.
  Executive Compensation     74  
12.
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters     74  
13.
  Certain Relationships and Related Transactions     74  
14.
  Controls and Procedures     74  
PART IV
15.
  Exhibits, Financial Statement Schedules, and Reports on Form 8-K     75  

See page 35 for “Executive Officers of the Registrant.”


Table of Contents

NEXTEL COMMUNICATIONS, INC.

 
PART I
 

Item 1.     Business

A.     Overview

      We are a leading provider of wireless communications services in the United States. Our service offerings include digital wireless service; Nextel Direct Connect®, our long-range digital walkie-talkie service; and wireless data, including email, text messaging and Nextel Online® services, which provide wireless access to the Internet, an organization’s internal databases and other applications. Our all-digital packet data network is based on Motorola, Inc.’s integrated Digital Enhanced Network, or iDEN®, wireless technology.

      We, together with Nextel Partners, Inc., currently serve 197 of the top 200 U.S. markets where 240 million people live or work. We ended 2002 with about 14,900 employees and 10.6 million handsets in service, and we had $8,721 million in operating revenues for the year.

      We owned about 32% of the common stock of Nextel Partners as of December 31, 2002. Nextel Partners provides digital wireless communications services under the Nextel brand name in mid-sized and tertiary U.S. markets. Nextel Partners has the right to operate in 57 of the top 200 metropolitan statistical areas in the United States ranked by population.

      In addition to our domestic operations, as of December 31, 2002, we owned about 36% of the outstanding common stock of NII Holdings, Inc., formerly known as Nextel International, Inc. NII Holdings provides wireless communications services primarily in selected Latin American markets. On May 24, 2002, NII Holdings filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. On November 12, 2002, NII Holdings emerged from bankruptcy. Before its reorganization, NII Holdings was our substantially wholly owned subsidiary. See “— F. Our Strategic Relationships — 4. NII Holdings.”

      From 1987, when we began operations, through 2001, we were unable to generate sufficient cash flow from operations to fund our business and its expansion. Due to our history of losses and negative cash flow through 2001, we have incurred substantial indebtedness to date to finance our operations. While we had income available to common stockholders of $1,660 million during 2002, there can be no assurance that we will continue to operate profitably, and if we cannot we may not be able to meet our debt service, working capital, capital expenditure or other cash needs. Our accumulated deficit was $7,793 million at December 31, 2002.

      Our principal executive and administrative facility is located at 2001 Edmund Halley Drive, Reston, Virginia 20191, and our telephone number is (703) 433-4000. In addition, we have sales and engineering offices throughout the country.

B.     Business Strategy

      Our business strategy is to provide differentiated products and services in order to acquire and retain the most valuable customers in the wireless telecommunications industry. We also seek to aggressively drive greater operating efficiencies in our business and optimize the performance of our network while minimizing costs.

      1. Provide differentiated products and services. We seek to provide the most advanced suite of differentiated products and services in the wireless industry. Our customers are uniquely equipped with Nextel Direct Connect, so they can instantly make digital two-way calls to one, 10 or even up to 100 other Nextel customers. We are the only national provider of this walkie-talkie service.

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      We are seeking to further differentiate the power of Direct Connect™ in 2003 by implementing nationwide Direct Connect, expected to become available in the third quarter of 2003. At that time, Nextel customers are expected to be able to use the Direct Connect feature to instantly connect with anyone on our national network, regardless of the sender’s or receiver’s location. We further differentiate our suite of services through our nationwide, all-packet data network, which enables our customers to send and receive wireless email and communicate through sophisticated business applications using Nextel wireless phones, in addition to laptop computers and handheld computing devices.

      2. Acquire and retain the most valuable customers in the wireless industry. Our unique and differentiated product base allows us to market our advanced wireless services to small, medium and large businesses, in addition to government agencies, other organizations and high value generating individuals. As compared to other national wireless companies in the U.S., our intense focus on these customer groups has resulted in our gaining what we believe is the most valuable customer base, with the highest customer loyalty rate, the highest monthly average revenue per customer and the highest lifetime revenue per customer.

      3. Aggressively seek greater operating efficiencies. We are always seeking new ways to create operating efficiencies in our business. In 2002, we completed the outsourcing of much of our customer care operations in order to operate more efficiently, while providing more effective customer care. We also outsourced much of the management of our corporate data center, database administration, helpdesk and other technical functions in a further effort to reduce costs. In 2002, we continued to scale our customer convenient distribution channels: web sales, telesales and our Nextel stores. We expect that as we continue to scale these distribution channels in 2003, the cost of acquiring new customers will decrease.

      4. Optimize the performance of our nationwide network at a minimum cost. We have built the largest guaranteed all digital wireless network in the U.S., which has been designed and constructed to support the full complement of our wireless services. In 2002, we implemented enhanced processes and advancements that allow us to more efficiently utilize our network, which allowed us to reduce the number of additional transmitter and receiver sites built as compared to 2001 and accordingly reduce our capital expenditures. In 2003, we will seek to continue to improve and upgrade our network by building additional sites where necessary, and also, more importantly, by implementing advanced technology solutions such as an updated software platform that we believe will allow us to further improve our network capacity and performance while minimizing our costs.

C.     Products and Solutions

      1. Handsets. All of the handsets we sell incorporate iDEN technology and offer our unique 4-in-1 service, including digital wireless service, Nextel Direct Connect walkie-talkie service, wireless Internet access and two-way messaging capabilities. All of our handsets are developed and manufactured by Motorola, other than the Blackberry 6510™ device, which is manufactured by Research in Motion Ltd. In 2002, we introduced over ten different handset models, which range from our most basic model, the i30sx™, designed for entry level communications, to the recently launched Blackberry 6510 device, which offers our customers a single device for all their communications and personal data assistant, or PDA, requirements. Our handsets offer a wide range of features, which may include built-in speakerphone, additional line service, conference calling, an external screen that lets customers view caller ID, voice-activated dialing for hands-free operation, a voice recorder for calls and memos, an advanced phonebook that manages contacts and datebook tools to manage calendars and alert users of business and personal meetings. All of our current handset offerings have subscriber identification module, or SIM, cards. SIM cards carry relevant authentication information and address book information, thereby greatly easing subscribers’ abilities to upgrade their handsets quickly and easily, particularly in conjunction with our on-line web based back-up tools.

      In 2002, we launched several new handsets. In July 2002, we began offering our customers the first mobile phone in the U.S. with a color display and embedded Java™ technology, the Motorola i95cl™. The handset’s large color screen and 8 megabits of memory allow our customers to take advantage of

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robust Java applications including maps, animation, games and graphics. Our customers may also personalize the phone to meet their individual needs by downloading applications from business productivity tools to games, wallpaper and ring tones.

      In October 2002, we began offering the Motorola i88sTM, our first handset supporting location-based services with global positioning satellite, or GPS, technology. This handset is designed to provide technically capable emergency response centers with information that will assist in the location of someone who has called 911 and will support future location-based services for our wireless customers. Equipped with an internal GPS antenna and GPS functionality to provide latitude and longitude information about the handset, the i88s handset also offers our customers Java technology, speakerphone, voice recorder, voice-activated dialing, 250-entry phonebook, date book and VibraCall™ alert.

      We also offer handsets targeted at meeting the needs of particular customer groups. For example, in December 2002 we began offering the Motorola i35s™ and the GPS-enabled Motorola i58sr™. Both handsets were designed with a focus on durability in order to meet the needs of customers in industrial sectors such as construction and public safety. In addition, both models offer non-slip rubber grips and adhere to certain military standards for resistance to dust, shock and vibration, for additional protection in harsh working environments.

      Also in December 2002, in conjunction with Research in Motion, we began offering the Blackberry 6510. This handset offers the combination of a Nextel phone PDA and “always-on” wireless access to business email capability along with Nextel Direct Connect and many of the other features of our traditional handsets. The Blackberry 6510 allows customers to automatically and wirelessly receive and answer email as they would on their computers with a standard typewriter keyboard. In addition, it offers Nextel Online services as well as the Java operating system, which allows customers to develop or use productivity applications for their business.

      Many of our recent handsets include pre-installed Java applications and games, as well as a calculator tool, expense pad and several selectable wallpaper patterns. Customers can also download additional applications and musical ring tones from our website for many of these handsets.

      2. Improved Nextel Direct Connect. Historically our key competitive differentiator has been Nextel Direct Connect, the long-range walkie-talkie service that allows communication at the touch of one button. Direct Connect gives customers the ability to instantly set up a conference on either a private (one-to-one) or group (one-to-many) basis within their local calling area. In 2002, we significantly improved Nextel Direct Connect by beginning the implementation of nationwide Direct Connect, which will allow any two Nextel customers to instantly contact one another from anywhere on the Nextel national network. This service will be the first of its kind to be available on any wireless network. Phase 1 of this innovation, which is currently being deployed, allows Nextel customers traveling to a market outside of their local calling area to continue to use Nextel Direct Connect to contact those who have traveled with them from their home market and also to connect with Nextel customers in the visited market. This allows Nextel customers traveling between any of hundreds of cities within these markets to communicate instantly using Direct Connect with other Nextel customers in that market.

      We expect nationwide Direct Connect to become fully available in the third quarter of 2003. At that time, Nextel customers will be able to use the Direct Connect feature to instantly connect with anyone on our national network, regardless of the sender’s or receiver’s location. We expect nationwide Direct Connect to greatly enhance the instant communication abilities of business users within their organization and with suppliers, vendors and customers, as well as to provide individuals the ability to contact business colleagues, friends and family instantly, from coast-to-coast and to Hawaii.

      3. Wireless business solutions and Nextel Online. In 2002, we announced our wireless business solutions initiative, designed to address the real-time needs of our business customers. Building on our prior experience with providing our customers with data solutions, wireless business solutions are helping companies increase productivity through the delivery of real-time information to mobile decision makers at any location. Accessible via our wireless handsets, as well as handhelds and other devices including laptop

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computers, Nextel wireless data solutions enable quick response among workers in the field and streamline operations through faster exchanges of information by integrating with corporate intranets and back-office systems, such as sales force automation, order entry, inventory tracking and customer relationship management, to support true workforce mobility. We also target wireless business solutions to specific customers based on their industry and individualized business needs. In addition, we offer our customers always-on connectivity to the World Wide Web directly from their handset through Nextel Online. Nextel Online combines the vast resources of the Web with the convenience and immediacy of an Internet-ready handset. We believe wireless business solutions will increase customer retention and generate incremental revenue by providing companies a comprehensive framework for creating end-to-end wireless value.
 
D. Our Network and Technology

      1. Our iDEN network technology. Our handsets and network infrastructure employ the advanced iDEN technology developed and designed by Motorola. iDEN technology is able to employ scattered, non-contiguous spectrum frequencies. Because of their fragmented character, these frequencies previously were only usable for two-way radio calls, such as those used to dispatch taxis and delivery vehicles. We are currently the only national U.S. wireless service provider other than Nextel Partners utilizing iDEN technology, and iDEN handsets are not currently designed to roam onto non-iDEN domestic national wireless networks. While iDEN offers a number of advantages in relation to other technology platforms, unlike other wireless technologies, it is a proprietary technology that relies solely on the efforts of Motorola and any future licensees of this technology for further research and continuing technology and product development and innovation. Motorola is also the sole source supplier of iDEN infrastructure and all of our handsets except the Blackberry 6510. In the event Motorola determined not to continue manufacturing, supporting or enhancing our iDEN based infrastructure and handsets, we may be materially adversely affected. Furthermore, iDEN technology is not as widely adopted and currently has fewer subscribers on a worldwide basis in relation to other wireless technologies.

      The iDEN technology shares many common components with the global system for mobile communications, or GSM, technology that has been established as the digital cellular communications standard in Europe and with a variation of that GSM technology being deployed by certain personal communications services, or PCS, operators in the United States. The design of our network currently is premised on dividing a service area into multiple sites having a typical coverage area of from less than one mile to up to 25 miles in radius, depending on the terrain and the power setting. Each site contains a low-power transmitter/ receiver and control equipment referred to as the base station. The base station in each site is connected by microwave, fiber optic cable or digital telephone line to a computer controlled switching center. The switching center controls the automatic hand-off of cellular calls from site to site as a subscriber travels, coordinates calls to and from a handset and connects wireless calls to the public switched telephone network. Nortel Networks Corporation has supplied most of the mobile telephone switches for our network through Motorola. In the case of Nextel Direct Connect, a piece of equipment called a dispatch application processor provides a fast call setup, identifies the target radio and connects the customers initiating the call to other targeted customers utilizing a highly efficient, packet-based air interface between the base station and the subscriber equipment.

      Currently, there are three principal digital technology formats used by providers of cellular telephone service or PCS in the United States:

  •  time division multiple access, or TDMA, digital transmission technology;
 
  •  code division multiple access, or CDMA, digital transmission technology; and
 
  •  GSM-PCS, a variation of the TDMA-based GSM digital technology format.

      Although TDMA, CDMA and GSM-PCS are digital transmission technologies that share certain basic characteristics and areas of contrast to analog transmission technology, they are not compatible or interchangeable with each other. Although Motorola’s proprietary iDEN technology is based on the

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TDMA technology format, it differs in a number of significant respects from the versions of this technology used by cellular and PCS providers in the United States.

      The iDEN technology significantly increases the capacity of our existing channels and permits us to utilize our current holdings of spectrum more efficiently. This increase in capacity is accomplished in two ways.

  •  First, each channel on our network is capable of carrying up to six voice and/or control paths, by employing six-time slot TDMA digital technology. Alternatively, each channel is capable of carrying up to three voice and/or control paths, by employing three-time slot TDMA digital technology. Each voice transmission is converted into a stream of data bits that are compressed before being transmitted. This compression allows each of these voice or control paths to be transmitted on the same channel without causing interference. Upon receipt of the coded voice data bits, the digital handset decodes the voice signal. Using iDEN technology, our Direct Connect service achieves about six times improvement over analog specialized mobile radio in channel utilization capacity. We also currently achieve about three times improvement over analog specialized mobile radio in channel utilization capacity for channels used for mobile telephone service. See “— 3. Our technology plans.”
 
  •  Second, our network reuses each channel many times throughout the market area in a manner similar to that used in the cellular industry, further improving channel utilization capacity.

      Motorola provides the iDEN infrastructure equipment and substantially all of the handsets throughout our markets under various agreements. These agreements set forth the prices we must pay to purchase and license this equipment as well as a structure to develop new features and make long-term improvements to our network. Motorola is recognized as the overall integrator of our iDEN network elements and has committed to make various components of our network available to us. We and Motorola have also agreed to warranty and maintenance programs and specified indemnity arrangements. We expect to continue to rely principally on Motorola or its licensees for the manufacture of substantially all of our handsets and a substantial portion of the equipment necessary to construct, enhance and maintain our iDEN network for the next several years. If Motorola fails to provide us with equipment and handsets, as well as anticipated handset and infrastructure improvements, our operations will be adversely affected. We are also relying on Motorola to provide us with technology improvements designed to expand our wireless voice capacity and improve our services. These contemplated enhancements include the development of the 6:1 voice coder software upgrade designed to increase voice capacity beginning in 2003, and the expansion of our Direct Connect service to offer our nationwide Direct Connect service.

      In addition to our extensive domestic coverage, our customers are able to travel and still receive the benefits of their Nextel service where we have roaming or interoperability agreements. We have entered into interoperability agreements with NII Holdings’ Latin American affiliates to provide for coordination of customer identification and validation necessary to facilitate roaming between our domestic markets and NII Holdings’ Latin American markets. We also have roaming agreements in effect with TELUS Corporation in Canadian market areas where TELUS offers iDEN-based services. Furthermore, the Motorola i2000plus™ handset we offer is a dual mode handset that operates on both the iDEN technology used by Nextel and the GSM 900 megahertz, or MHz, standard and allows digital roaming on iDEN 800 MHz and GSM 900 MHz networks in over 80 countries. Our iDEN SIM cards can also be placed in standard GSM handsets, such as the Motorola v60™ GSM handset that we offer, to enable international roaming capabilities.

      2. Network enhancement. During 2002, we enhanced our network coverage to our subscribers by adding about 800 transmitter and receiver sites to our network, bringing the total number of sites as of December 31, 2002 to about 16,300. This compares with the 2,800 sites we added to our network in 2001. We reduced the number of additional sites built in 2002 as compared to 2001, and accordingly reduced our necessary capital expenditures, in anticipation of deployment of the 6:1 voice coder (see “— 3. Our technology plans”) and as a result of advanced radio frequency planning and network management tools, inventory management tools and more balanced loading of our network between peak and off-peak hours.

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      Also, to improve the quality and capacity of our network during 2002, we purchased, or agreed to purchase, additional spectrum in the 800 and 900 MHz bands. We now have about 22 MHz of spectrum in the 800 and 900 MHz bands in most of the top 100 U.S. markets and about 4 MHz of spectrum in the 700 MHz band in most major U.S. metropolitan markets. We also increased the number of switches in service on our network to 84 by adding 3 switches during 2002. In 2002, our improved network carried over 73 billion total system minutes of use, up 40% from 2001.

      We anticipate further expanding our network in 2003 to improve our coverage and capacity by adding additional transmitter and receiver sites and through the technological advancements discussed below under “— 3. Our technology plans.” We determine where to build new sites on the basis of the site’s proximity to targeted customers, our ability to acquire and build the site and frequency propagation characteristics. Site procurement efforts include obtaining leases and permits, and in many cases, zoning approvals. Before a new site can be built, we must complete equipment installation, including construction of equipment shelters, towers and power systems, testing and pre-operational systems optimization.

      In an effort to improve our network and expedite network deployment, beginning in 1999 we transferred many of our communications towers and related assets to SpectraSite Holdings, Inc., which we then leased back. SpectraSite also has constructed additional towers to support expansion of our network. In addition, we have signed a master lease agreement for the co-location of sites on Crown Castle International Corporation’s and American Tower Corp.’s domestic communications towers, among others. We also own and operate towers and, in selected sites, seek to co-locate other third parties on those towers.

      3. Our technology plans. We are currently testing a significant technology upgrade to our existing network which will nearly double our capacity for wireless interconnect calls. Motorola has developed new voice coder software, which we refer to as the “6:1 voice coder” since it allows six cellular calls to be conducted concurrently over a single radio channel. Motorola has demonstrated this technology to us, and we currently have this technology in our test laboratory for final evaluation, with an expected roll-out throughout our network beginning in the third quarter of 2003. We expect the improvements to our voice capacity for wireless interconnect calls will be realized once 6:1 capable handsets are available and our customers acquire those handsets. The expected delivery of the 6:1 voice coder has already allowed us to leverage our investment in our existing infrastructure by limiting the number of new sites we must build to meet capacity as we grow our customer base. However, Motorola may not deliver these improvements within our anticipated timeframe, if at all, or they may not provide the advantages that we expect. In that case, we could face additional costs.

      We now have about 22 MHz of spectrum in the 800 and 900 MHz bands in most of the top 100 U.S. markets and about 4 MHz of spectrum in the 700 MHz band in most major U.S. metropolitan markets. We continuously review alternate technologies as they are developed. To date, however, it has not been regarded as necessary to adapt currently available alternative technologies to operate on our present spectrum position. As we have substantially completed the relocation of incumbent operators out of certain portions of our spectrum, we have access to contiguous blocks of spectrum, similar to our cellular and PCS competitors. This availability of a significant block of contiguous spectrum may permit the introduction of a broader range of technology options than is available to us on non-contiguous blocks of spectrum.

      Along with our strong, feature-rich product portfolio based on the Nextel Direct Connect service, we offer what we believe is the most far reaching and robust packet data network of any national wireless operator. It is from this position that we are evaluating potential future technology choices, which include CDMA, evolution data only (EvDO) and orthagonal frequency division multiplexing (OFDM), among others.

      We do not see a need to migrate to a next generation technology at this time for voice capacity given the significant capacity enhancements expected in 2003 for the existing iDEN technology, as discussed above. However, based on our current outlook, we do anticipate an eventual deployment of next generation technology and therefore actively continue to evaluate new technologies. We will only deploy a new technology when it is warranted by expected customer demand, when we have sufficient capital to deploy

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the technology and when the anticipated benefits of services requiring next generation technology outweigh the costs of providing those services. Some of the factors that may influence us to accelerate a deployment of a new technology include:

  •  the possibility that expected capacity upgrades to our network may not be developed and delivered as currently contemplated;
 
  •  a significant increase in customer demand for higher speed data services beyond those available using our existing network; or
 
  •  developments relating to the spectrum realignment now before the Federal Communications Commission, or FCC. See “— 4. Proposed public safety spectrum realignment.”

      Our consideration of alternative technologies would likely be materially affected by our contractual obligations to Motorola. For example, if we were to determine that the iDEN technology we use is no longer suited to our needs, we have agreed to notify Motorola six months prior to any public announcement or formal contract to purchase equipment utilizing alternate technology. If Motorola manufactures, or elects to manufacture, the equipment utilizing the alternate technology that we elect to deploy, we must give Motorola the opportunity to supply 50% of our infrastructure requirements for the alternate technology for three years.

      We have entered into an exclusive development agreement with QUALCOMM, Inc. to develop, subject to certain conditions and limitations, our Nextel Direct Connect service on various CDMA platforms. We may enter into additional development agreements of this nature with other infrastructure or handset vendors. There have been many recent announcements of competitive push-to-talk products by our U.S. national wireless competitors and small start-up companies, some of which have the support of large infrastructure vendors. To date, these announcements largely consist of product demonstrations and laboratory trials.

      4. Proposed public safety spectrum realignment. We currently are authorized to operate on about 26 MHz of spectrum that is licensed to us by the FCC and similar local regulatory bodies (see “— K. Regulation”). While we hold spectrum in each of the 700, 800 and 900 MHz bands, we principally operate on our spectrum located in the 800 MHz band. Our unique iDEN technology allows us to use scattered, non-contiguous channels. Under the licensing scheme developed by the FCC during the 1970s, we occupy spectrum that is intermixed and adjacent to that used by other specialized mobile radio, or SMR, licenses for commercial, business and industrial/land transportation, and public safety users in the 800 MHz band. Different types of SMR licensees successfully coexisted for many years, but changes over the past few years to the network architecture necessary to support high-capacity commercial digital technology have resulted in situations where commercial and non-commercial licensees experience system interference. In particular, high-site analog networks used by public safety entities are experiencing system problems that have been traced to the digital low-site operations of nearby commercial SMR and cellular licensees, even though all licensees are operating within the authorized parameters of their licenses and in compliance with FCC rules.

      Because the public safety interference issue is directly linked to the current 800 MHz spectrum allocations for public safety and commercial users, on November 21, 2001, we filed a proposal with the FCC seeking to resolve the interference problem and enable more efficient use of the spectrum by all parties through the realignment of spectrum allocations and spectrum licenses in the 700, 800 and 900 MHz bands. In March 2002, the FCC issued a Notice of Proposed Rulemaking to consider proposals to solve the public safety interference issue.

      During the course of the FCC’s proceedings, a coalition of private wireless industry associations, public safety associations and we initiated discussions relating to the proposed 700, 800 and 900 MHz spectrum realignment to attempt to present a “Consensus Plan” to the FCC for its consideration. On August 7, 2002, a Consensus Plan was filed by numerous parties that, together with us, represent over 90% of the 800 MHz licensees affected by the proposed realignment. If adopted, the proposal would establish separate channel blocks for low-site cellular and commercial SMR licensees from the channel blocks used

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by high-site public safety and private wireless licensees, so that the realigned licenses, in conjunction with proposed technical requirements, would no longer interfere with each other. Under the proposal, we would maintain our net spectrum allocation, although we would exchange all of our spectrum in the 700 and 900 MHz bands and a running average of 2.5 MHz in the 800 MHz band for 16 MHz of contiguous spectrum in the 800 MHz band and 10 MHz of contiguous spectrum in the 1.9 gigahertz, or GHz, band. On December 24, 2002, the parties filed a supplement to the original Consensus Plan. In the original proposal, assuming the Consensus Plan was adopted, we proposed to contribute up to $500 million over the next several years towards the cost of public safety relocation in accordance with the Consensus Plan. The December 24 submission revises our proposed contribution to up to $850 million over the next several years. Under the revised proposal, up to $700 million would assist public safety users and up to $150 million would assist private wireless licensees in completing relocations under the realignment. The parties to the Consensus Plan reiterated that this funding by us would be provided only if the FCC grants us a replacement 10 MHz nationwide commercial mobile radio services, or CMRS, license at 1910-1915/ 1990-1995 MHz in return for the spectrum that we would relinquish in the 700, 800 and 900 MHz bands. In addition to seeking comment on both the initial and revised Consensus Plan, the FCC also invited the submission of additional proposals that could solve the public safety interference problem.

      We cannot be certain what, if any, long-term solutions to the public safety interference problem will be adopted by the FCC. While we are currently working with the public safety community on a case-by-case basis to solve interference problems as they are reported, absent FCC action we may be unable to solve future problems without reducing the efficiency of our network or restricting service to our customers. In addition, while the public safety community is aware of the potential network problems their personnel may experience, we cannot be certain that we or the wireless industry in general may not be subject to litigation should a situation arise in which damage or harm occurs as a result of commercial interference with a public safety communications network.

 
E. 2002 and Year-to-Date 2003 Developments

      1. Direct Connect upgrade. In January 2003, we began the implementation of nationwide Nextel Direct Connect, which will allow our customers to instantly contact each other using our walkie-talkie feature, nationwide. The first stage of this implementation, which has been substantially completed, allows any Nextel subscribers traveling to a market outside of their local calling area to continue to use Nextel Direct Connect with each other and with other Nextel subscribers in the visited market. We expect nationwide Direct Connect to become available in the third quarter of 2003. See “— C. Products and Solutions — 2. Improved Nextel Direct Connect.”

      2. New distribution channels. In 2002, we opened an additional 210 retail outlets to generate new customers and brand awareness and to serve as additional points of contact for existing and new customers. As of December 31, 2002, we had expanded operations to about 420 retail locations. In 2002, we also expanded the use of our web sales and telesales. Together, these new customer convenient distribution channels accounted for 22% of our new subscribers in 2002. See “— I. Sales and Distribution.”

      3. Customer care. In January 2002, we announced an eight-year customer relationship management agreement with International Business Machines Corporation, or IBM, and Teletech Holdings, Inc., a world leader in customer relationship management solutions, to manage our customer care centers. Under the terms of the agreement, about 4,000 of our employees were transferred to Teletech. This agreement is designed to enhance the customer experience and build ongoing brand loyalty for Nextel as we work with IBM and Teletech to introduce leading edge call center technology and process improvements, including a voice response system designed to address customer requests at a reduced cost to us. See “— G. Customer Care.”

      4. Information technology outsourcing. In January 2002, we announced a five-year information technology outsourcing agreement with Electronic Data Systems Corp., or EDS, under which EDS manages our corporate data center, database administration, helpdesk, desktop services and other technical functions. We and EDS selected Sun Microsystems Inc. as the platform provider of choice for this

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agreement. Under the terms of this outsourcing agreement, about 290 employees were transferred to EDS to work in support of our information technology infrastructure.

      5. Boost Mobile. In the third quarter of 2002, in association with the Australian founders of the Boost™ brand, we launched a lifestyle-based mobile telecommunications test program, providing Boost Mobile™ branded wireless services targeting the California and Nevada youth markets. This test is expected to be completed in the third quarter of 2003, after which Boost Mobile will consider future plans for this program. See “— H. Marketing.”

      6. Director and officer developments. In March 2003, we announced the appointment of Stephanie M. Shern, former vice chair and partner of Ernst & Young, LLP, to serve on our board of directors. In February 2003, Thomas N. Kelly Jr., previously our Executive Vice President and Chief Marketing Officer, was promoted to Executive Vice President and Chief Operating Officer. Mr. Kelly replaces James F. Mooney, who left Nextel effective September 30, 2002. See also “— F. Our Strategic Relationships — 3. Craig O. McCaw.”

      7. Debt repurchase. In 2002, we purchased and retired a total of $1,928 million in aggregate principal amount at maturity of our outstanding senior notes and $1,258 million in aggregate face amount of our outstanding mandatorily redeemable preferred stock in exchange for 172 million shares of class A common stock valued at $1,197 million and $843 million in cash. These repurchases will reduce our future cash needs by eliminating principal and interest payments on the repurchased securities. See note 8 to the consolidated financial statements appearing at the end of this annual report on Form 10-K. We may, from time to time, as we deem appropriate, enter into similar transactions that in the aggregate may be material.

      8. Proposed public safety spectrum realignment. In 2002, we, along with a coalition of private wireless industry associations and public safety associations, proposed a realignment of the 700, 800 and 900 MHz spectrum in which we principally operate, which seeks to resolve interference experienced by public safety communications systems. If the FCC approves this realignment, we would vacate certain portions of our spectrum holdings, exchange certain portions of our spectrum with public safety operators and receive 16 MHz of contiguous spectrum in the 800 MHz band and 10 MHz of contiguous spectrum in the 1.9 GHz band. We also would contribute up to $850 million over the next several years towards the cost of relocation of public safety and private wireless users. We cannot predict the outcome of the proposed realignment plan at this time, and there is no assurance that the FCC will adopt any realignment plan. See “— D. Our Network and Technology — 4. Proposed public safety spectrum realignment.”

      9. NII Holdings. On May 24, 2002, NII Holdings filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. On November 12, 2002, NII Holdings emerged from bankruptcy. Before its reorganization, NII Holdings was our substantially wholly owned subsidiary.

      As a result of the bankruptcy reorganization, all previously outstanding equity interests in NII Holdings were cancelled. In addition, NII Holdings extinguished $2,331 million in senior redeemable notes and other unsecured, non-trade claims that existed prior to its bankruptcy filing and in exchange issued shares of new common stock valued at $2.50 per share. This included the $857 million aggregate principal amount of notes of NII Holdings that we purchased in August 2001. The reorganization of NII Holdings also included a new infusion of capital into NII Holdings of $190 million, $140 million of which was provided by existing creditors in exchange for about $181 million in aggregate principal amount at maturity of a new series of 13% senior secured notes of NII Holdings and shares of NII Holdings’ class A common stock. We contributed about $51 million in cash of this $140 million and received in exchange about $66 million in aggregate principal amount at maturity of these new notes and 5.7 million shares of NII Holdings’ new class A common stock. As a result of the bankruptcy, we also received 1.4 million shares of NII Holdings’ new class A common stock, valued at $4 million, in settlement of the old NII Holdings senior notes held by us and other claims. We also provided $50 million of additional funding to NII Holdings in exchange for a U.S.-Mexico cross border spectrum sharing arrangement, $25 million of which remains in escrow pending the completion of NII Holdings’ obligations under this arrangement.

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      As a result of NII Holdings’ bankruptcy filing in May 2002, we began accounting for our investment in NII Holdings, effective May 2002, using the equity method. In accordance with the equity method, we did not recognize equity in losses of NII Holdings after May 2002 as we had already recognized $1,408 million of losses in excess of our investment in NII Holdings through that date. We have classified the 2002 net operating results of NII Holdings through May 2002 as equity in losses of unconsolidated affiliates, as permitted under the accounting rules governing a mid-year change from consolidating a subsidiary to accounting for the investment using the equity method. However, the presentation of NII Holdings in the financial statements as a consolidated subsidiary in 2001 and prior periods has not changed from the prior presentation.

      In November 2002, upon NII Holdings’ emergence from bankruptcy, we recognized a non-cash pre-tax gain on deconsolidation of NII Holdings in the amount of $1,218 million consisting primarily of the reversal of equity losses we had recorded in excess of our investment in NII Holdings. At the same time, we began accounting for our new ownership interest in NII Holdings using the equity method and resumed recording our proportionate share of NII Holdings’ results of operations. As of December 31, 2002, we owned about 36% of the outstanding common stock of NII Holdings. See “— F. Our Strategic Relationships — 4. NII Holdings.”

      10. Acquisitions. In early 2002, we purchased 800 and 900 MHz SMR licenses and related assets from Chadmoore Wireless Group, Inc. for an aggregate cash purchase price of $136 million. On January 15, 2003, we consummated the acquisition of all of the stock of NeoWorld Communications, Inc., which owned and operated 900 MHz SMR systems. We paid the balance of the purchase price of $201 million in cash on January 15, 2003. This amount is in addition to previous payments of $79 million through December 31, 2002.

      11. SpectraSite. During 2002, we recognized a $37 million other-than-temporary reduction in the fair value of our investment in SpectraSite. In December 2002, we sold all of our equity investment in SpectraSite for a de minimus amount. The sale of our equity investment in SpectraSite ended our continuing involvement in SpectraSite for substantially all of our tower leases. Accordingly, for accounting purposes, we recorded a deferred gain on the sale of these towers to SpectraSite and will account for their leasebacks as operating leases. We also reduced our finance obligation by $655 million. See notes 5 and 7 to the consolidated financial statements appearing at the end of this annual report on Form 10-K.

      12. GSA contract. In December 2002, we announced the signing of a contract award with the U.S. General Services Administration, or GSA, which will enable us to provide our services to all federal agencies, as well as state and local agencies with federal funding, and will offer unique interoperability advantages for emergency preparedness and response. The contract has a term of two years with three one-year option periods. The estimated value of the contract is up to $200 million per year. We were awarded our initial GSA contract in March 1999.

F.     Our Strategic Relationships

      1. Motorola. As of March 14, 2003, Motorola was the beneficial owner of about 8% of our class A common stock, assuming the conversion of the outstanding shares of our class B nonvoting common stock, all of which are owned by Motorola. We have a number of important strategic and commercial relationships with Motorola. Motorola is the sole provider of the iDEN infrastructure equipment and all of the handsets used throughout our network except the Blackberry 6510. As discussed above, we also work closely with Motorola to improve existing products and develop new technologies and enhancements to existing technologies for use in our network. We also rely on Motorola for network maintenance and enhancement. See “— D. Our Network and Technology.”

      In July 1995, we acquired all of Motorola’s 800 MHz SMR licenses in the continental United States in exchange for 83.3 million shares of our class A common stock and 35.7 million shares of our nonvoting class B common stock. As of March 14, 2003, Motorola owned 47.5 million shares of our class A common stock and 35.7 million shares of our nonvoting class B common stock. As a result of the agreement relating to that acquisition, Motorola has the right to nominate two persons for election as members of our

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board of directors. Motorola has exercised this right only with respect to one director, Keith J. Bane. In addition, Motorola has granted Digital Radio, an affiliate of Craig O. McCaw, who is a member of our board of directors, a right of first offer or a right of first refusal to purchase shares of common stock that are owned by Motorola, although that right has been waived with respect to some of these shares.

      2. Nextel Partners. Digital wireless communications services are provided under the Nextel brand name in mid-sized and tertiary U.S. markets by Nextel Partners. Nextel Partners has the right to operate in 57 of the top 200 metropolitan statistical areas in the United States ranked by population. In January 1999, one of our subsidiaries entered into agreements with Nextel Partners and other parties, including Motorola and Eagle River Investments, L.L.C., an affiliate of Mr. McCaw, relating to the capitalization, governance, financing and operation of Nextel Partners. Our subsidiary owned about 32% of Nextel Partners’ common stock as of December 31, 2002.

      We entered into this relationship principally to accelerate the build-out of our network outside the largest metropolitan market areas that are the main focus of our network coverage. As an inducement to obtain Nextel Partners’ commitment to undertake and complete the anticipated network expansion, we agreed that we would not offer wireless communications services under the Nextel brand name, iDEN services on 800 MHz frequencies, or wireless communications services that allow interconnect with landline telecommunications in Nextel Partners’ territory. We also have roaming agreements with Nextel Partners covering all of the U.S. market areas in which Nextel Partners currently provides, or will in the future provide, iDEN-based services.

      In addition, the certificate of incorporation of Nextel Partners establishes circumstances in which we will have the right or obligation to purchase the outstanding shares of class A common stock of Nextel Partners at specified prices. We may pay the consideration of any such purchase in cash, shares of our class A common stock, or a combination of both.

      Subject to various limitations and conditions, including possible deferrals by Nextel Partners, we will have the right to purchase the outstanding shares of Nextel Partners’ class A common stock on January 29, 2008.

      Subject to various limitations and conditions, we may be required to purchase the outstanding shares of Nextel Partners’ class A common stock:

  •  if (i) we elect to cease using iDEN technology on a nationwide basis; (ii) such change means that Nextel Partners cannot offer nationwide roaming comparable to that available to its subscribers before our change; and (iii) we elect not to pay for the equipment necessary to permit Nextel Partners to make a technology change;
 
  •  if we elect to terminate the relationship with Nextel Partners because of its breach of the operating agreements;
 
  •  if we experience a change of control;
 
  •  if we breach the operating agreements; or
 
  •  if Nextel Partners fails to implement changes required by us to match changes we have made in our business, operations or systems.

      If we purchase the outstanding shares of Nextel Partners’ class A common stock:

  •  As a result of the termination of our operating agreements with Nextel Partners as a result of our breach, the purchase price could involve a premium based on a pricing formula.
 
  •  As a result of the termination of our operating agreements as a result of breach by Nextel Partners, the purchase price could involve a discount based on a pricing formula.
 
  •  As a result of the election of a majority of the non-Nextel stockholders to require us to purchase, after Nextel Partners’ failure to implement changes in business, operations or systems required by us, the purchase price will be an amount equal to the higher of the fair market value as determined by the appraisal process and a 20% rate of return on each tranche of invested capital in Nextel Partners, whether contributed in cash or in kind, from the date of its contribution through the purchase date, which value will be divided over all of Nextel Partners’ capital stock.
 
  •  For any other reason, the purchase price will be the fair market value of the class A common stock. Under the certificate of incorporation of Nextel Partners, fair market value is defined as the price

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  that a buyer would be willing to pay for all of Nextel Partners’ outstanding capital stock, excluding the series B preferred stock owned by us, in an arm’s-length transaction and includes a control premium, as determined by an appraisal process.

      We may not transfer our interest in Nextel Partners to a third party before January 29, 2011, and Nextel Partners’ class A common stockholders have the right, and in specified instances the obligation, to participate in any sale of our interest.

      In connection with a series of transactions in 1999, we sold assets and transferred specified FCC licenses to Nextel Partners. In exchange, at the dates of transfer, Nextel Partners issued to us equity having a total agreed value of $140 million and paid us $142 million in cash related to the assets sold and the reimbursement of costs and net operating expenses.

      As a result of Nextel Partners’ initial public offering in February 2000, our total ownership interest was diluted. Our investment in certain Nextel Partners preferred stock converted into voting class B common stock. Our subsidiary continues to hold nonvoting preferred stock that is subject to mandatory cash redemption by February 2010. At December 31, 2002 and 2001, our investment in Nextel Partners, which includes equity in Nextel Partners’ losses, was $52 million and $127 million.

      Timothy M. Donahue, a member of our board of directors and our President and Chief Executive Officer, is a director of Nextel Partners.

      3. Craig O. McCaw. As of March 14, 2003, Mr. McCaw, a member of our board, and his affiliates beneficially owned about 5% of our class A common stock, assuming the exercise of all options held by controlled affiliates of Mr. McCaw. In 1995, Mr. McCaw acquired significant equity interests in Nextel (including an investment in our class A convertible redeemable preferred stock and class B convertible preferred stock), and we agreed to certain arrangements related to our corporate governance. In connection with these equity investments, we reached an agreement with Mr. McCaw and Digital Radio, L.L.C., an affiliate of Mr. McCaw, on a number of matters relating to the ownership, acquisition and disposition of our securities, including without limitation the granting of registration and anti-dilutive rights to Digital Radio and specified affiliates, as well as limitations on investments by Digital Radio and its affiliates in excess of about 45% of our voting securities.

      Pursuant to the original securities purchase agreement, as amended, our certificate of incorporation and our by-laws, we, Digital Radio and Mr. McCaw established certain arrangements relating to our corporate governance associated with those investments, including, without limitation, matters relating to Digital Radio’s right to elect a minimum of three representatives to our board of directors, or that greater number of directors representing not less than 25% of all of the members of the board of directors. Mr. McCaw, Dennis M. Weibling and J. Timothy Bryan were originally appointed as directors pursuant to these rights. We also agreed to create a five-member operations committee of the board of directors, which was responsible for formulating key aspects of our business strategy and operations, and Digital Radio was entitled to have a majority of the members of this committee selected from among its representatives on the board of directors.

      The operations committee had the authority to formulate key aspects of our business strategy, including certain decisions relating to our technology; acquisitions; certain budgets and marketing, strategic and financing plans; nomination and oversight of some of our executive officers; and endorsement of nominees to our board of directors and its committees. If a majority of the members of our board of directors who were independent of Mr. McCaw had voted to override actions taken, or proposed to be taken, by the operations committee, there would have been no consequences to us. If our board of directors had acted to revoke or terminate the operations committee, a $25 million liquidated damages payment would have been due to Digital Radio, except in specified circumstances.

      Under these agreements, in the event Digital Radio, Mr. McCaw and his controlled affiliates were to cease to own at least 5% of the voting power of our equity securities (assuming conversion of the class A preferred stock it held), the shares of class A preferred stock would automatically convert into shares of class A common stock. Further, Mr. McCaw and Digital Radio agreed that, subject to limited exceptions,

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including existing securities holdings and relationships, until one year after the termination of the operations committee, none of Mr. McCaw, Digital Radio or their controlled affiliates would participate in other two-way terrestrial-based mobile wireless communications systems in any part of North America or South America, unless those opportunities first had been presented to and waived or rejected by us in accordance with the provisions of the securities purchase agreement.

      Concurrently with the execution of the securities purchase agreement with Digital Radio and Mr. McCaw, we entered into a management support agreement with Eagle River, Inc., a controlled affiliate of Digital Radio, pursuant to which Eagle River would provide management and consulting services to us, our board of directors and the operations committee of our board from time to time as requested. In consideration of the services to be provided to us under the management support agreement, we agreed to pay Eagle River up to $200,000 per year and entered into an incentive option agreement granting to Eagle River the option to purchase an aggregate of 2.0 million shares of our class A common stock at an exercise price of $6.13 per share. This option expires in April 2005 and is presently exercisable in full.

      In March 2003, we, Digital Radio and Mr. McCaw entered into an agreement revising these arrangements as Mr. McCaw was soon to no longer own at least 5% of the voting power of our outstanding equity securities. As a result, Digital Radio no longer has the right to appoint board members as discussed above, nor does it have rights to appoint board members to serve on committees of our board. In addition, the operations committee was terminated. Furthermore, all of the shares of the class A preferred stock and class B preferred stock held by Digital Radio converted into shares of our class A common stock. In addition, the management support agreement was terminated. Until February 13, 2004, Mr. McCaw, Digital Radio and their controlled affiliates have agreed not to participate in other two-way terrestrial-based mobile wireless communications systems in North America and South America without first presenting us the opportunity and a 30-day right to elect to participate in any such opportunity. In addition, Mr. McCaw and Mr. Weibling have consented to remain members of our board, subject to stockholder ratification.

      4. NII Holdings. On November 12, 2002, NII Holdings, our former subsidiary, reorganized under Chapter 11 of the U.S. Bankruptcy Code. NII Holdings provides wireless communications services primarily in selected Latin American markets.

      On December 31, 2001, NII Holdings’ Argentine operating company failed to make principal payments on its $108 million Argentine credit facilities, and on February 1, 2002, NII Holdings failed to make a $41 million interest payment on its $650 million aggregate principal amount 12.75% senior notes, resulting in defaults under this facility and these notes, as well as under its $382 million of vendor financing facilities with Motorola Credit Corporation due to cross-default provisions. NII Holdings decided not to make these payments as part of the cash preservation process undertaken to restructure its debts and implement a revised business plan.

      In May 2002, NII Holdings reached an agreement in principle with its main creditors to restructure its outstanding debt. In connection with this agreement, on May 24, 2002, NII Holdings filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. While NII Holdings, Inc., the U.S. parent company, operated as a debtor-in-possession under the Bankruptcy Code, its non-U.S. subsidiaries continued providing continuous wireless communication services in the ordinary course of business. On October 28, 2002, the Bankruptcy Court confirmed NII Holdings’ plan of reorganization, and on November 12, 2002, NII Holdings emerged from bankruptcy. Before its reorganization, NII Holdings was our substantially wholly owned subsidiary.

      As a result of the bankruptcy reorganization, all previously outstanding equity interests in NII Holdings were cancelled. In addition, NII Holdings extinguished $2,331 million in senior redeemable notes and other unsecured, non-trade claims that existed prior to its bankruptcy filing and in exchange issued shares of new common stock valued at $2.50 per share. This included the $857 million aggregate principal amount of notes of NII Holdings that we purchased in August 2001. NII Holdings reinstated in full its

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$325 million of outstanding equipment financing owed to Motorola Credit, subject to deferrals of principal amortization and some structural modifications. NII Holdings also repaid the outstanding principal balance, together with accrued interest, due under its $57 million incremental financing facility owed to Motorola Credit using restricted cash held in escrow, which amount will be available for borrowing under some circumstances. The Argentine credit facility was retired in exchange for a $5 million payment and the issuance of 400,000 shares of NII Holdings’ new class A common stock.

      The reorganization of NII Holdings also included a new infusion of capital into NII Holdings of $190 million, $140 million of which was provided by existing creditors in exchange for about $181 million in aggregate principal amount at maturity of a new series of 13% senior secured notes of NII Holdings and shares of NII Holdings’ new class A common stock. We contributed about $51 million in cash of this $140 million and received in exchange about $66 million in aggregate principal amount at maturity of these new notes and 5.7 million shares of NII Holdings’ new class A common stock. We allocated the $51 million investment between the debt and equity instruments based upon their relative fair values. This resulted in a carrying value of $37 million for the debt and a carrying value of $14 million for the 5.7 million shares of NII Holdings’ new class A common stock. As a result of the bankruptcy, we also received 1.4 million shares of NII Holdings’ new class A common stock, valued at $4 million, in settlement of the old NII Holdings senior notes held by us and other claims. We also provided $50 million of additional funding to NII Holdings in exchange for a U.S.-Mexico cross border spectrum sharing arrangement, $25 million of which remains in escrow pending the completion of NII Holdings’ obligations under this arrangement.

      As a result of NII Holdings’ bankruptcy filing in May 2002, we began accounting for our investment in NII Holdings, effective May 2002, using the equity method. In accordance with the equity method, we did not recognize equity in losses of NII Holdings after May 2002 as we had already recognized $1,408 million of losses in excess of our investment in NII Holdings through that date. We have classified the 2002 net operating results of NII Holdings through May 2002 as equity in losses of unconsolidated affiliates, as permitted under the accounting rules governing a mid-year change from consolidating a subsidiary to accounting for the investment using the equity method. However, the presentation of NII Holdings in the financial statements as a consolidated subsidiary in 2001 and prior periods has not changed from the prior presentation.

      In November 2002, upon NII Holdings’ emergence from bankruptcy, we recognized a non-cash pre-tax gain on deconsolidation of NII Holdings in the amount of $1,218 million consisting primarily of the reversal of equity losses we had recorded in excess of our investment in NII Holdings, partially offset by charges recorded when we consolidated NII Holdings, including, among other items, $185 million of cumulative foreign currency translation losses. At the same time, we began accounting for our new ownership interest in NII Holdings using the equity method and resumed recording our proportionate share of NII Holdings’ results of operations. As of December 31, 2002, we owned about 36% of the outstanding common stock of NII Holdings.

      Upon NII Holdings’ emergence from bankruptcy, we entered into a revised overhead services agreement with NII Holdings under which we provide certain administrative, engineering and technical, information technology and marketing services for agreed fees. We also have roaming agreements between one of our wholly owned subsidiaries and wholly owned subsidiaries of NII Holdings.

      Mr. Donahue is a director of NII Holdings.

G.     Customer Care

      We made significant improvements to our customer care function in 2002. We recently completed the implementation of our new billing and customer management system called “Ensemble.” The Ensemble system is a world class activation, billing, and customer management system designed to provide increased reliability and functionality for our customer care representatives, system scalability to allow services to be provided to an estimated 25 million subscribers, one common database and integration of all platform

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software modules included in the system. Through the Ensemble system, we expect to better interact with our customers while reducing our costs.

      In January 2002, we announced an eight-year customer relationship management agreement with IBM and Teletech to manage our customer care centers. See “— E. 2002 and Year-to-Date 2003 Developments — 3. Customer care.” Transferring the day-to-day operations of the call centers has afforded us the ability to significantly refine our business processes and procedures, resulting in a higher customer satisfaction rating and an improved first call resolution rate, while minimizing costs. We believe these improvements in systems, organizational alignment, process, and cost structure have positioned us to continue to make customer care a competitive advantage in 2003.

H.     Marketing

      Our marketing strategy focuses principally on targeting high value customers that we believe will be likely to perceive and appreciate the potential for our wireless services. We believe that our ability to deliver a full line of integrated mobile communications services, including our innovative Nextel Direct Connect feature, using a single multi-function handset on our own network, significantly differentiates us from other providers of wireless communications services.

      Our marketing program and related advertising campaigns currently are designed to increase brand awareness and in particular to expand the use of our newer, customer convenient distribution channels: web sales, telesales and our Nextel stores. We are currently focusing on heightening brand awareness of our differentiated Direct Connect feature in anticipation of its nationwide rollout. Our marketing and advertising is also designed to stimulate additional demand for our services by stressing their versatility, value, simplicity and quality, and we consistently stress the benefits of our unique Nextel Direct Connect service. For example, we are building our brand image through affiliations with most major sports leagues.

      We offer pricing options that we believe differentiate our services from those of many of our competitors. Our pricing packages offer our customers simplicity and predictability in their wireless telecommunications billing by combining Nextel Direct Connect service minutes with a mix of cellular and long-distance minutes. Furthermore, no roaming charges are assessed for mobile telephone services provided to our customers traveling anywhere on our network or the compatible network of Nextel Partners in the United States. We also offer special pricing plans that allow some customers to aggregate the total number of account minutes for all their handsets and reallocate the aggregate minutes among those handsets.

I.     Sales and Distribution

      We use a variety of channels as part of our strategy to increase our customer base. We employ direct sales representatives who market our service directly to potential and existing customers. The focus of our direct sales force is primarily on mid-to-large businesses and government agencies that value our industry expertise and extensive product portfolio.

      We also utilize indirect sales, which mainly consist of local and national non-affiliated dealers. These indirect dealers represent our largest channel of distribution. Dealers are independent contractors that solicit customers for our service and are generally paid through commissions and residuals. Dealers participate with us in all the markets we serve including corporate, government, general business and individual sales.

      In 2002, we continued to expand distribution through customer convenient channels, including web sales, telesales and sales through Nextel stores. These channels generally allow us to acquire customers at a lower cost than our traditional direct and indirect sales. In 2002, we opened about 210 retail locations and had about 420 retail locations as of December 31, 2002. These Nextel stores generate new customers and brand awareness as well as serve as additional points of contact for existing and new customers.

      In 2002, we expanded the number of new subscribers garnered through our web sales and telesales. Customers’ willingness to buy through these customer convenient channels has driven significant growth

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for us. On the web, customers are able to compare our various rate plans and access the full suite of our products and services, including handsets, accessories, and special promotions. Our website allows customers to make account inquiries and encourages handset and accessory sales directly over the Internet. We also provide our customers with a toll-free number (1-800-NEXTEL9) to purchase our products and services. As we increase brand awareness through our expanded marketing efforts, we believe our Nextel stores, web sales and telesales will be increasingly useful distribution channels for all of our services.

J.     Competition

      Since the introduction of mobile communications technology, growth in the industry has been rapid, with more than 135 million wireless handsets now in service in the U.S., providing analog cellular, digital cellular, enhanced SMR and PCS, as reported by the Cellular Telecommunications and Internet Association, or CTIA.

      We compete principally with five other national providers of mobile wireless voice communications: AT&T Wireless, Cingular Wireless, Sprint PCS, Verizon Wireless and Deutsche Telecom/T-Mobile. We also compete with regional providers of mobile wireless voice communications, such as Southern LINC. Additional licensees may enter our markets by operating systems utilizing frequencies obtained in FCC auction proceedings. Some of the competitors listed above have financial resources, subscriber bases, coverage areas and/or name recognition greater than we do. In addition, several of these competitors have more extensive channels of distribution than ours, a more expansive spectrum position than ours, or are able to acquire customers at a lower cost. Additionally, we expect our current and future competitors will continue to upgrade their systems to provide digital wireless communications services competitive with those available on our network.

      We believe we compete based on our differentiated service offerings and products, including Nextel Direct Connect. Several of our competitors have announced the intention to introduce products that compete with Nextel Direct Connect. While no competing product has been introduced yet, our competitors have introduced pricing plans that offer features such as unlimited mobile-to-mobile calling, reduced rates for calls placed between pre-arranged groups of callers or shared minutes between groups of callers. In the event potential customers regard those services as equivalent to Nextel Direct Connect or our competitors are able to provide dispatch service comparable to ours, our competitive advantage could be impaired. Additionally, the wireless industry competes based on price. Over the past several years, as the intensity of competition among wireless communications providers has increased, we and our competitors have decreased prices or increased service and product offerings, resulting in declining average monthly revenue per subscriber which may continue. Competition in pricing and service and product offerings may also adversely impact customer retention.

      Consolidation has and may continue to create additional large, well-capitalized competitors with substantial financial, technical, marketing and other resources. Some of our competitors are also creating joint ventures that will fund and construct a shared infrastructure that both carriers will use to provide advanced services. By using joint ventures, these competitors may lower their cost of providing advanced services to their customers. In addition, we expect that in the future, providers of wireless communications services may compete more directly with providers of traditional landline telephone services and, potentially, energy companies, utility companies and cable operators that expand their services to offer communications services. We also expect our network business to face competition from other technologies and services developed and introduced in the future, including potentially those using unlicensed spectrum.

K.     Regulation

      We are an SMR operator regulated by the FCC. The FCC regulates the licensing, construction, operation and acquisition of all other wireless telecommunications systems in the United States, including cellular and PCS operators. SMR regulations have undergone significant changes during the last decade, and we now are generally subject to the same FCC rules and regulations as cellular and PCS operators, known collectively with SMR operators as CMRS providers.

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      Within the limitations of available spectrum and technology, SMR operators are authorized by the FCC to provide mobile communications services, including mobile telephone, two-way radio dispatch (referred to as walkie-talkie), paging and mobile data and Internet services. We use iDEN technology developed by Motorola to deliver these services. Unlike some other digital transmission technologies, iDEN can be deployed on non-contiguous frequency holdings. This benefits us because many of our 800 MHz channel holdings are composed of non-contiguous blocks of spectrum. While iDEN offers a number of advantages in relation to other technology platforms, unlike other wireless technologies, it is a proprietary technology that relies solely on the efforts of Motorola and any future users of this technology for further research and continuing technology and product development and innovation.

      In addition to being subject to FCC regulation, we are subject to certain state requirements. While the Communications Act of 1996 preempts state and local regulation of the entry of, or the rates charged by, any CMRS provider, it permits states to regulate the “other terms and conditions” of CMRS. The FCC has not clearly defined what is meant by the “other terms and conditions” of CMRS, but has upheld the legality of states assessing universal service payment requirements on CMRS carriers. The FCC also has held that most private lawsuits based on state law claims concerning how wireless rates are promoted or disclosed are not preempted by the Communications Act.

      State and local governments are permitted to manage public rights of way and can require fair and reasonable compensation from telecommunications providers so long as the compensation required is publicly disclosed by the government. The siting of cell sites and base stations also remains subject to state and local jurisdiction. States also may impose competitively neutral requirements that, among other things, are necessary for universal service or to defray the costs of state Enhanced 911, or E911, services programs, to protect the public safety and welfare, and to safeguard the rights of customers.

      1. Licensing. We currently hold about 26 MHz of spectrum in the 700, 800 and 900 MHz bands in our geographic markets, though we primarily operate in 800 MHz spectrum to provide service to our customers. The FCC regulates the licensing, construction, operation, acquisition and sale of our CMRS business and spectrum holdings pursuant to the Communications Act, as amended from time to time, and the FCC’s associated rules, regulations and policies. FCC requirements impose operating and other restrictions on our business that increase our costs. The FCC does not currently regulate CMRS rates, and states are legally preempted from regulating CMRS rates and entry. The Communications Act and FCC rules require the FCC’s prior approval of the assignment or transfer of control of an FCC license. Non-controlling interests in an entity that holds an FCC license generally may be bought or sold without FCC approval. Approval from the Federal Trade Commission and the Department of Justice, as well as state or local regulatory authorities, may be required if we sell or acquire spectrum interests.

      We hold several kinds of licenses to deploy 800 MHz SMR channels in digital mode. We hold thousands of these licenses, which together allow us to provide coverage across the continental United States. Our 700, 800 and 900 MHz licenses are subject to requirements that we meet population coverage benchmarks tied to the initial license grant dates. For most of our licenses, within three years of the license grant date, we must provide coverage to one third of the population in the licensed area, and within five years of the grant date, we must cover two thirds of the population in the licensed area or make a showing of “substantial service.” Our 700 MHz licenses have no specific build-out requirements, but we must show substantial service by the license expiration date. To date, we have met all of the construction milestones applicable to our licenses except in the case of licenses that are not material to our business.

      Our 800 and 900 MHz licenses have a 10-year term and our 700 MHz licenses have a 15-year term, at the end of which each must be renewed. The FCC allows “renewal expectancies,” which are presumptions that the licenses will be renewed to any 700, 800 or 900 MHz licensee that has provided substantial service during its past license term and has substantially complied with applicable FCC rules and policies and the Communications Act.

      On November 21, 2001, we filed a proposal with the FCC that would result in a more efficient use of spectrum through the realignment of spectrum licenses and spectrum allocations in the 700, 800 and 900 MHz bands. In March 2002, the FCC issued a Notice of Proposed Rulemaking to consider proposals

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to solve the public safety interference issue. During the course of the FCC’s proceedings, a coalition of private wireless industry associations, public safety associations and we initiated discussions relating to the proposed 700, 800 and 900 MHz spectrum realignment to attempt to present a “Consensus Plan” to the FCC for its consideration. On August 7, 2002, a Consensus Plan was filed by numerous parties that, together with us, represent over 90% of the 800 MHz licensees affected by the proposed realignment. Under the Consensus Plan, we would exchange certain portions of our spectrum in the 800 MHz band to relocate public safety operators to the lower portion of the 800 MHz band, as well as relinquish all spectrum in the 700 and 900 MHz bands in exchange for contiguous blocks of spectrum in the 800 MHz and 1.9 GHz bands. On December 24, 2002, we, together with the coalition of private wireless industry associations and public safety associations, filed an update to the Consensus Plan which, among other things, modified the amount up to which we would be willing to contribute over the next several years primarily towards the cost of public safety relocation, assuming the FCC approves the Consensus Plan as submitted. See “— D. Our Network and Technology — 4. Proposed public safety spectrum realignment.”

      In some cases we use common carrier point-to-point microwave facilities to connect the transmitter, receiver and signaling equipment for cell sites, and to link them to the main switching office. The FCC licenses these facilities separately and they are subject to regulation as to technical parameters and service.

      Our business is subject to certain Federal Aviation Administration regulations governing the location, lighting, and construction of transmitter towers and antennas and may be subject to regulation under federal environmental laws and the FCC’s environmental regulations. State or local zoning and land use regulations also apply to our activities.

      2. New spectrum opportunities, spectrum auctions, and third generation wireless services. In February 2001, the FCC concluded its auction of 6 MHz of spectrum in the 700 MHz band, also referred to as the “guard band.” In two 700 MHz guard band auctions, we paid about $350 million for 40 licenses. Each license is for 4 MHz of spectrum. These FCC licenses are issued for a period of 15 years and are subject to unique operational requirements, including eligibility and use restrictions, as well as interference protection requirements that generally will preclude their use for CMRS. Additionally, there are FCC restrictions on the amount of spectrum in this band that we can use. As part of the 800 MHz spectrum realignment proposal discussed above, Nextel, as one of a coalition of parties, has proposed to contribute its 700 MHz spectrum to the FCC for reallocation for public safety use, and we would receive replacement spectrum. Thus, the long-term use of our 700 MHz spectrum is dependent upon the outcome of the 800 MHz realignment proceeding. In the event we retain the licenses, we plan to meet all requirements necessary to secure the retention and renewal of these FCC licenses. Under the FCC’s rules, guard band licensees are required to file an annual report describing the use of their licensed spectrum. On October 1, 2002, we made our first required report to the FCC, and on February 27, 2003, we filed our subsequent annual report.

      Other spectrum located in the 700 MHz spectrum band, which can be used for a broad variety of commercial applications, was scheduled for auction by the FCC beginning June 19, 2002. Pursuant to congressional legislation, on July 26, 2002, the FCC postponed the auction for spectrum in the upper 700 MHz band. No date has been set for the upper 700 MHz auction. On June 26, 2002, the FCC also postponed the auction for spectrum in the lower portion of the 700 MHz band until August 27, 2002. That auction ended on September 18, 2002 without our participation. On December 2, 2002, the FCC announced the reauction of over two hundred licenses still available in the lower 700 MHz band. That auction is scheduled to commence on May 28, 2003 and will include the licenses that remained unsold in previous lower 700 MHz band auction. Currently, incumbent television licensees are operating on both blocks of this 700 MHz band spectrum. Under current FCC rules, these licensees are not required to relinquish these channels until 2006 at the earliest, limiting the usefulness of this spectrum for other purposes, including CMRS service, until that time or later.

      In January 2001, the FCC completed an auction of additional spectrum that can be used for providing CMRS. The FCC auctioned certain reclaimed PCS licenses, including those initially awarded to NextWave Communications, Inc. and some of its affiliates which were cancelled by the FCC after

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NextWave failed to make timely payments of its government installment loans as required by the terms of the licenses awarded. We participated, but did not obtain any licenses, in that auction. In June 2001, the United States Court of Appeals for the District of Columbia Circuit found that the FCC had improperly cancelled the NextWave licenses. On January 27, 2003, the Supreme Court ruled that the FCC had acted beyond its regulatory authority when it cancelled NextWave’s licenses. The court, in an 8 to 1 vote, affirmed the lower court’s ruling and rejected arguments that the FCC had a legitimate regulatory interest in taking licenses from a company that is reorganizing its finances in bankruptcy. NextWave now has the option of completing the buildout of its network or selling the licenses to other companies. The FCC recently confirmed that NextWave will have an extended period of time to complete its initial build-out.

      In November 2002, the FCC allocated 90 MHz of spectrum in the 1710-1755 MHz and 2110-2155 MHz bands that can be used for “third generation”, or 3G, wireless services. On November 22, 2002, the FCC also released a Notice of Proposed Rulemaking seeking comment on the service and technical rules for 3G services in the 1710-1755 MHz and 2110-2155 MHz bands. Comments and reply comments have been filed, and the proceeding remains pending.

      In January 2002, the FCC released a Report and Order reallocating 27 MHz of spectrum that was previously reserved primarily for federal government uses to a variety of non-federal government uses, including private and commercial fixed and mobile operations. These reallocations could provide opportunities for advanced wireless services. In February 2002, the FCC released a Notice of Proposed Rulemaking proposing a flexible licensing, technical and operating framework, as well as competitive bidding and interference standards for the 27 MHz of reallocated spectrum. Generally, the bands identified are encumbered by existing governmental or commercial users, and there are substantial unresolved transitional issues related to the relocation of these incumbents. One nationwide 5 MHz license in the 1670-1675 MHz band will be auctioned on April 30, 2003. This license was originally scheduled for auction on October 30, 2002. We cannot predict when or whether the FCC will conduct any of the other spectrum auctions or if it will release additional spectrum that might be useful to us or the wireless industry in the future.

      On August 9, 2001, the FCC adopted a Notice of Proposed Rulemaking seeking comment on proposals by New ICO Global Communications (Holdings) Ltd., a controlled affiliate of Mr. McCaw, and Motient Services, Inc. to allow mobile satellite service providers to supplement service to their customers through the incorporation of a wireless ancillary terrestrial component into their mobile satellite networks. On January 30, 2003, the FCC adopted an order that permits mobile satellite services providers to integrate ancillary terrestrial components into their mobile satellite networks, subject to FCC authorization. To do so, providers will be required to show compliance with certain FCC mandated conditions. On that same date, the FCC reallocated spectrum that can be used to provide a variety of new wireless services, including 3G service. In particular, the FCC reallocated 30 MHz of spectrum from the 2 GHz mobile satellite service, including the 1990-2000 MHz band, to fixed and mobile services. A rulemaking proceeding has been initiated to identify how that reallocated spectrum can be used and how it will be reallocated. Comments are due on April 14, 2003, and reply comments are due April 28, 2003.

      3. Spectrum caps and secondary spectrum markets. Prior to January 1, 2003, the FCC’s spectrum aggregation limitations prohibited any entity from holding attributable interests in licenses for more than 55 MHz of applicable spectrum, although no more than 10 MHz of SMR spectrum in the 800 and 900 MHz SMR service bands and no 700 MHz licenses were counted toward the spectrum cap. In November 2001, the FCC eliminated the spectrum cap effective January 1, 2003. Although it eliminated the spectrum cap, the FCC will continue to evaluate, on a case-by-case basis, spectrum aggregation caused by CMRS carriers’ mergers and acquisitions to determine whether a particular transaction will result in too much concentration in the affected wireless markets. It is widely believed that elimination of the spectrum cap may facilitate consolidation in the commercial wireless industry; however, it is not known what procedures the FCC will use to evaluate commercial wireless transactions or how such procedures will affect the speed of the FCC’s application process.

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      In November 2000, the FCC adopted a policy statement and Notice of Proposed Rulemaking suggesting ways to promote the development of secondary markets in radio spectrum. The FCC tentatively concluded that spectrum licensees should be permitted to enter into leasing agreements with third parties to encourage greater use of underutilized spectrum. If the FCC adopts liberal spectrum leasing rules, we may have increased access to spectrum from parties who are willing to lease, but not sell, their spectrum. That proceeding remains pending.

      In June 2002, the FCC established a Spectrum Policy Task Force to assist in identifying and evaluating changes in spectrum policy to increase spectrum efficiency and assist with technical and public safety spectrum issues. After receiving industry comment on existing spectrum policies and recommendations for possible improvements, the Task Force released a report setting forth a comprehensive review of current spectrum policy and stating a range of recommendations for further review or implementation. In November 2002, the FCC released a public notice seeking comment on the report and, in particular, issues relating to setting concrete standards for harmful interference, the use of unlicensed spectrum technologies, the legalization of spectrum swaps and spectrum trading. That proceeding remains pending.

      In December 2002, the FCC initiated two inquiries also addressing wireless spectrum issues: the first requests comment on the feasibility of making additional spectrum available for unlicensed devices; and the second requests comment on the provision of spectrum-based services in rural areas. Comments on the rural services notice of inquiry were filed in February 2003, and comments on the unlicensed services inquiry are due in April 2003. All of these spectrum initiatives ultimately could have an effect on the way we do business, and the spectrum that is available to us and our competitors. It is not known at this point what spectrum initiatives the FCC will adopt, if any, in response to the Task Force report or whether it will facilitate secondary markets for spectrum trading or leasing.

      4. 911 services. Pursuant to a 1996 FCC order, CMRS providers, including us, are required to provide E911 services to their customers. Phase I E911, which we began deploying in 1998, requires wireless carriers to transmit (a) the 911 caller’s telephone number and (b) the location of the transmitter and receiver site from which the call is being made to the designated public safety answering point, or PSAP, which is the 911 dispatch center. Phase II E911 requires the transmission of more accurate location information to the PSAP. Pursuant to an October 2001 order, we launched Phase II service on October 1, 2002 by beginning the sale and activation of handsets equipped with assisted GPS, or A-GPS, technology.

      In addition to selling A-GPS handsets, Phase II E911 requires that we coordinate to deploy the infrastructure, facilities and interconnectivity necessary to enable the transmission of latitude and longitude information from the A-GPS handset to a PSAP. Successful transmission of this location information to a PSAP requires substantial cooperation with the local exchange carrier and the PSAP, as well as third party database providers, all of which must have the necessary infrastructure and compatible software in place to connect with our network. As of March 1, 2003, we have deployed Phase II in 28 areas in various parts of the country encompassing more than 100 PSAPs.

      Because our Phase II E911 services can only be accessed with an A-GPS handset, the FCC also required that a certain percentage of our new handset activations be A-GPS pursuant to interim benchmarks between January 1, 2003 and December 31, 2005, when we are required to have 95% of our total customer base using A-GPS-capable handsets. Depending on our rate of customer churn, customers’ decisions to upgrade their handsets, the percentage of new customers added to our network who purchase A-GPS handsets and overall wireless marketplace conditions, achieving these benchmarks could impose material costs on us over time. In 2002, we began charging a fee to recover some of the costs that we are currently incurring associated with Phase II E911. We cannot predict with certainty at this time the effect of this E911 mandate on our operations.

      Motorola is our sole supplier for all of our handsets except the Blackberry 6510 and we are dependent on Motorola to provide the handset-based location technology solution. Nonetheless, the FCC appears to have held us responsible for meeting the Phase II deadlines, even in the event Motorola is unable to produce the necessary handsets and infrastructure on a timely basis. As a result, we have sought

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reconsideration of that portion of the FCC’s decision. That petition is still pending. Additionally, we recently filed comments in a new FCC proceeding on E911, asserting that manufacturers should be equally bound by the FCC’s E911 rules and requirements.

      5. Numbering. The FCC and state communications commissions have been increasingly aggressive in their efforts to conserve the telephone numbers that carriers assign to their customers. These efforts may disproportionately affect wireless service providers by imposing additional costs. Like other telecommunications carriers, we must have access to telephone numbers for new customers. The FCC’s number conservation rules, while intended to make numbers available, could harm us and other telecommunications carriers, either individually or in the aggregate, by causing increased costs and regulatory expense.

      In order to promote the efficient allocation and use of telephone numbers by all telecommunications carriers, the FCC has adopted new number conservation requirements including number “pooling” whereby carriers are assigned phone numbers in blocks of 1,000 rather than 10,000. We have completed all network and infrastructure upgrades in compliance with the FCC’s pooling mandate. Additionally, the FCC requires carriers to meet an increasingly higher number usage threshold before they can obtain additional telephone numbers. The CTIA filed a petition requesting the FCC to forbear from further increases in the utilization threshold. The FCC sought comment on the CTIA petition, and that proceeding remains pending.

      The FCC also has shown a willingness to delegate to the states a larger role in number conservation. Certain states have sought additional numbering authority, outside the number conservation authority originally granted by the FCC. In particular, the California Public Utilities Commission has filed two petitions with the FCC that, if granted, would affect our ability to access telephone numbering resources and assign telephone numbers to our customers, and would require us to replace the phone numbers of many of our customers in California. We filed comments opposing both petitions.

      Wireless providers also are subject to a requirement that they implement telephone number portability, which enables customers to keep their telephone numbers when they change carriers within established geographic markets. Number portability already is available to most wireline customers, and the FCC originally set a deadline of November 24, 2002, for wireless providers to implement number portability for their customers in certain markets. On July 26, 2002, the FCC delayed the implementation of wireless number portability for one year until November 24, 2003. Number portability requires significant upgrades to our network and infrastructure. In addition, number portability may encourage wireless customers to change carriers, which could increase churn, thus further increasing costs for all wireless carriers. In 2002, we began charging a fee to recover some of the costs that we are incurring associated with telephone number portability. The CTIA and Verizon Wireless have appealed the FCC’s November 24, 2003 deadline to the Circuit Court of Appeals for the District of Columbia Circuit and have sought review of the FCC’s standard applied in setting the November 24, 2003 date. On January 23, 2003, the CTIA also filed a petition with the FCC requesting that wireline carriers be required to allow their customers to retain their numbers when switching to a wireless carrier. Resolving this petition could delay the November 24, 2003 number portability deadline. We filed comments in support of the CTIA petition, and that proceeding remains pending.

      6. Motor vehicle restrictions. A number of states and localities are considering banning or restricting the use of wireless phones while driving a motor vehicle. In 2001, New York enacted a statewide ban on driving while holding a wireless phone, and similar legislation is pending in other states. A handful of localities also have enacted ordinances banning or restricting the use of handheld wireless phones by drivers. Should this become a nationwide initiative, all wireless carriers could experience a decline in the number of minutes of use by subscribers. On the federal level, a bill has been introduced in Congress (the Mobile Telephone Driving Safety Act of 2003) that, if passed, would prohibit wireless users from using a handheld mobile telephone while driving. Specifically, the bill would withhold a portion of federal funds appropriated for the states from any state that does not enact legislation that prohibits an individual from using a handheld mobile telephone while operating a motor vehicle, except in the case of an emergency or other exceptional circumstance.

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      7. Health concerns. FCC rules limit the permissible human exposure to radio frequency radiation from wireless transmission equipment. On December 11, 2001, the FCC’s Office of Engineering and Technology dismissed a Petition for Inquiry filed by a non-profit public interest organization, to initiate a proceeding to revise the FCC’s radio frequency guidelines. On January 10, 2002, the organization petitioned the FCC to overturn this decision and open an inquiry. The matter remains pending at the FCC.

      Studies have been undertaken to determine whether certain radio frequency emissions from wireless handsets may be linked to various health problems, including cancer, and whether wireless handsets may also interfere with various electronic medical devices, including hearing aids and pacemakers. Concerns over radio frequency emissions may have the effect of discouraging the use of wireless handsets, which would decrease demand for our services. Various studies have found no evidence that cell phones cause cancer, although one of the reports indicated that further study might be appropriate as to one rare form of cancer. A recent study in Italy, however, has affirmatively linked mobile-phone radiation to cancer growth and the National Cancer Institute has cautioned that the studies have limitations, given the relatively short amount of time cellular phones have been widely available. Additional studies of radio frequency emissions are ongoing, and the ultimate findings of these studies will not be known until they are completed and made public. Class-action lawsuits are also pending against several wireless carriers and manufacturers to force wireless carriers to supply hands-free devices with phones and to compensate customers who have purchased radiation-reducing devices. See “Item 3. Legal Proceedings.”

      8. Electronic surveillance. In 1994, Congress enacted the Communications Assistance for Law Enforcement Act, or CALEA. CALEA requires telecommunications carriers, including us, to upgrade their networks to provide certain wiretap capabilities to law enforcement agencies. The FCC has granted several industry-wide extensions of the CALEA deadline. We have signed two cooperative agreements with the Federal Bureau of Investigation, or FBI, to bring our interconnect and dispatch networks into compliance with CALEA. The agreements essentially confirm the validity of our CALEA software solutions, arrange for the deployment of the solutions in our networks, and provide for some cost recovery associated with their deployment. We have already installed and deployed the required core CALEA capabilities in our interconnect and digital dispatch networks and have therefore brought our interconnect and digital dispatch networks into full compliance with CALEA.

      On September 28, 2001 the FCC issued a public notice governing the CALEA compliance deadlines for the additional CALEA requirements applicable to carriers such as us that operate packet mode communications networks. Pursuant to the public notice, we filed to extend the packet mode compliance deadline to November 19, 2003, and the extension was automatically granted pending FBI approval of the installation and deployment schedule. We are now working with our primary equipment vendor, Motorola, to design and implement a compliant packet mode solution. It is likely that we will request another extension of the packet mode deadline beyond November 19, 2003, which also would be automatically granted pending approval by the FBI of the installation and deployment schedule. The extension may be necessary because of the current uncertainties in the technical requirements. Cost recovery for developing, installing and deploying this solution will depend to a large extent on the FBI’s interpretation of CALEA.

      9. Truth in Billing and consumer protection. The FCC’s Truth in Billing rules generally require CMRS licensees such as us to provide full and fair disclosure of all charges on their wireless bills, display a toll-free phone number to call for billing questions, and identify any third-party service providers whose charges appear on the bill.

      Over twenty states have commenced inquiries to examine the billing and advertising practices of certain nationwide wireless carriers. On October 29, 2001, North Carolina served us with a letter of inquiry requesting certain documents related to our billing and advertising practices in that state. We fully complied with the informational request and the inquiry remains pending. In December 2002, the Missouri Attorney General filed a lawsuit against us, asserting that our imposition of the $1.55 federal programs cost recovery fee on our customers is misleading and deceptive. The lawsuit is pending. Another wireless provider, Sprint PCS, is the subject of a similar pending Missouri Attorney General lawsuit. Recently, the

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Arizona Corporation Commission adopted final rules regulating certain operational and customer-service aspects of our business. Asserting that the Arizona Corporation Commission has no jurisdiction to apply these rules to wireless service, the industry, including us, has sought rehearing at the Arizona Corporation Commission and filed an appeal in court if the rehearing request is rejected. The rules, however, must be “certified” by the Arizona Attorney General before they are effective.

      On June 6, 2002, the California Public Utilities Commission proposed extensive consumer protection and privacy regulations for all telecommunications carriers. If adopted, the rules will significantly alter our business practices in California with respect to nearly every aspect of the carrier-customer relationship, including solicitations, marketing, activations, billing and customer care, and will, according to a recent study, impose approximately $900 million in costs on the wireless industry in California, including the cost of lost jobs. Efforts to amend these proposed rules remain ongoing. It is uncertain when or if the final rules will be adopted.

      In February 2003, United States Senator Schumer announced his intentions to introduce federal legislation that calls for a wireless subscriber “bill of rights.” The legislation would mandate wireless number portability by the November 24, 2003 deadline, would authorize the FCC to monitor cell phone service quality, and would require wireless providers, like us, to prominently indicate all costs and terms of service on all subscriber contracts. If passed, the legislation could significantly increase our costs of doing business.

      10. Miscellaneous federal regulations. Each of the following existing and potential regulatory obligations could increase the costs of our, and our competitors’, operations.

      Certain interstate incumbent local exchange carriers, or ILECs, in rural areas have started to impose on wireless carriers, including us, charges to terminate traffic that we send to them by filing state tariffs. These new rural ILEC tariffs feature high termination rates that are not based on the rural ILECs’ cost of terminating the traffic we send. The rural ILECs justify termination tariffs as a legitimate means of recovering their costs for transport and termination of wireless traffic. On September 6, 2002, we, along with other wireless carriers, filed a petition with the FCC to have these tariffs declared unlawful. This proceeding remains pending.

      Under the FCC’s rules, wireless providers are potentially eligible to receive universal service subsidies; however, they are also required to contribute to both federal and state universal service funds. The rules adopted by the FCC in its universal service orders require telecommunications carriers generally (subject to limited exemptions) to fund existing universal service programs for high cost carriers and low income customers and to fund new universal service programs to support services to schools, libraries and rural health care providers. In 2002, the FCC initiated two universal service proceedings relevant to all telecommunications providers, including us: one concerns what services universal service funds can be used to support, and the other addresses how universal service mandatory contributions from customers are assessed and recovered by carriers. Regardless of our ability to receive universal service funding for the supported services we provide, we are required to fund these federal programs based on our interstate end-user telecommunications revenue and also are required to contribute to some state universal service programs.

      On December 13, 2002, the FCC released an order and Second Further Notice of Proposed Rulemaking in the mandatory contribution proceeding. The order also included a restriction on the amount that carriers can include on a customer’s bill to recover their costs of contributing to the universal service fund. On January 29, 2003, we filed a petition for reconsideration of, among other things, the new restrictions on our ability to recover our costs for contributing to universal service. The Second Further Notice of Proposed Rulemaking could substantially alter the manner by which the FCC calculates carrier contributions to the federal fund. If adopted, the proposal could increase our mandatory contribution to the federal universal service fund, as well as those of other wireless carriers.

      Section 255 of the Communications Act requires telecommunications carriers such as us, and manufacturers of telecommunications equipment such as Motorola, to make their products and services

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accessible to and usable by persons with disabilities to the extent these measures are readily achievable. Pursuant to this mandate, we and Motorola are continuing to develop and market a variety of products and services to facilitate access to our wireless network by persons with disabilities. If the FCC requires the wireless industry to improve accessibility on a unilateral basis by redesigning digital phones, Motorola has advised us that the requirements may not be technologically feasible and that any related technical changes to the iDEN handset could add significantly to its cost of production.

      In addition, a Notice of Proposed Rulemaking currently is pending at the FCC to consider whether mobile phones should be hearing aid compatible. The FCC solicited comments on what technical standards should be adopted if the FCC decides that mobile phones must be hearing aid compatible. We are unable at this point to predict the outcome of this proceeding.

      The FCC also is considering the imposition of an automatic roaming obligation on all CMRS providers. On January 5, 2001, comments were filed with the FCC on this issue, the majority of which opposed a mandatory automatic roaming obligation. We oppose any new roaming regulation, although the second largest iDEN provider in the U.S., Southern LINC, supports a mandate that would apply only to iDEN providers. We filed reply comments on February 5, 2001 opposing the adoption of such a narrow roaming regulation. The proceeding remains pending.

      The issue of wireless subscriber privacy, particularly relating to location tracking, has been implicated in some of the FCC’s wireless proceedings, including those relating to its E911 and CALEA mandates. The FCC has adopted rules limiting the use of customer proprietary network information by telecommunications carriers, including us, in marketing a broad range of telecommunications and other services to their customers and the customers of affiliated companies.

      On July 25, 2002, the FCC clarified its privacy rules governing carriers’ use, disclosure and safeguarding of customer proprietary network information, or CPNI. Most significantly, the FCC prohibited carriers from disclosing CPNI to unrelated third parties or carrier affiliates that do not provide communications-related services, unless they first obtain their customers’ express consent. Moreover the FCC enumerated safeguards that carriers must implement to protect against the unauthorized use and disclosure of CPNI. The FCC did not adopt specific privacy rules for location-based information. Specifically, in a separate order released on July 24, 2002, the FCC declined to commence a rulemaking procedure to adopt rules to implement the wireless location information privacy amendments to Section 222 of the Communications Act of 1934, as amended. The CTIA had requested that the FCC adopt “safe harbor” rules for location privacy. The FCC, however, concluded that the statute was sufficiently plain that a customer must give express consent before the carrier can use or disclose customer location information obtained in connection with a customer’s use of wireless services, except in specified emergencies or if mandated by the court.

      The FCC has issued a Notice of Proposed Rulemaking regarding telemarketing practices. As part of its examination of the Telephone Consumer Protection Act, the FCC is seeking comment on the extent to which telemarketing to wireless consumers exists today and asks whether consumers receive solicitations on their wireless phones, and, if so, the nature and frequency of such solicitations. The FCC will reexamine the scope of implied consumer consent to telemarketing solicitation, which could affect some of our marketing practices. There is no indication on how the FCC will decide this proceeding, and whether more restrictive or additional telephone sales obligations will be imposed. Comments were filed on December 9, 2002, and reply comments were filed January 31, 2003.

      The FCC has determined that the interstate, interexchange offerings (commonly referred to as long-distance) of wireless carriers are subject to the interstate, interexchange rate averaging and integration provisions of the Communications Act. Rate averaging and integration requires carriers to average interstate long-distance CMRS rates between high cost and urban areas, and to offer comparable rates to all customers, including those living in Alaska, Hawaii, Puerto Rico, and the U.S. Virgin Islands. The U.S. Court of Appeals for the District of Columbia Circuit, however, rejected the FCC’s application of these requirements to wireless carriers, remanding the issue to the FCC to consider further whether wireless carriers should be required to average and integrate their long-distance rates across all

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U.S. territories. This proceeding remains pending, but the FCC has stated that the rate averaging and integration rules will not be applied to wireless carriers during the pendency of the proceeding.

L.     Employees

      As of February 28, 2003, we had about 15,200 employees. None of our employees are covered by a collective bargaining agreement, and we believe that our relationship with our employees is good.

M.     Risk Factors

 
     1.  We have a history of net losses and negative cash flow and may not be able to generate sufficient net income.

      From 1987, when we began operations, through 2001, we were unable to generate sufficient cash flow from operations to fund our business and its expansion. We may not be able to generate sufficient cash flow to meet our debt service, working capital, capital expenditure or other cash needs. We may be unable to continue to generate sufficient cash flows from our internal business operations to support our growth and continued operations. While we had income available to common stockholders of $1,660 million during 2002, our accumulated deficit was $7,793 million at December 31, 2002.

 
     2.  We have substantial indebtedness and if we cannot obtain additional funds if needed, we may not be able to implement our long-term business plan.

      Our long-term cash needs may be much greater than our cash on hand and availability under our existing financing agreements. As of December 31, 2002, we had about $13,565 million of outstanding indebtedness, including $7,761 million of senior notes and $4,500 million of indebtedness under our bank credit facility, as well as $272 million of capital lease and finance obligations and $1,015 million in mandatorily redeemable preferred stock obligations. The level of our outstanding indebtedness greatly exceeds our cash on hand and our annual cash flows from operating activities. At December 31, 2002, we had $2,686 million of cash, cash equivalents and short-term investments on hand. We had $2,523 million of cash provided by operating activities during 2002. Our principal repayment obligations on our outstanding indebtedness under our senior notes, credit facility and capital lease and finance obligations and our redemption obligations under our mandatorily redeemable preferred stock as of December 31, 2002 total $251 million for 2003, $383 million for 2004, $494 million for 2005, $523 million for 2006, $2,609 million for 2007 and $9,427 million after 2007.

      If we are unable to raise any necessary additional financing, we may not be able to:

  •  expand and enhance our network, including implementation of any enhanced iDEN services to expand wireless voice capacity or enhanced data services or any deployment of “third generation,” or 3G, or other “next generation” mobile wireless services;
 
  •  maintain our anticipated levels of growth;
 
  •  meet our debt service requirements; or
 
  •  pursue strategic acquisitions or other opportunities to increase our spectrum holdings, including those that may be necessary to support or provide next generation mobile wireless services.

Our failure to timely achieve any one of these goals could result in the delay or abandonment of some or all of our development, expansion and acquisition plans and expenditures, which could have an adverse effect on us.

      Our bank credit facility as in effect on December 31, 2002 provided for total secured financing capacity of up to about $5.9 billion, which availability declines over time, provided we satisfy financial and other conditions. As of December 31, 2002, we had borrowed $4.5 billion of this secured financing. The continued availability of funds under our term loans and our ability to access the remaining availability under our revolving loan commitment is limited by various financial covenants and ratios, including the

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ratio of our total debt to operating cash flow, as defined under the bank credit facility. Our ability to access the remaining availability is also subject to the satisfaction of covenants under indentures relating to our public notes and other conditions. Our access to additional funds also may be limited by:

  •  the terms of our existing financing agreements, including restrictive covenants;
 
  •  existing debt service requirements;
 
  •  market conditions affecting the telecommunications industry in general;
 
  •  the terms of options and other convertible securities issued to others that may make equity financings more difficult;
 
  •  the potential commercial opportunities and risks associated with implementation of our business plan;
 
  •  the market’s perception of our performance and assets; and
 
  •  the actual amount of cash we need to pursue our business strategy.

 
     3.  We have significant intangible assets, which may not be adequate to satisfy our obligations in the event of a liquidation.

      If we default on debt or if we were liquidated, the value of our assets may not be sufficient to satisfy our obligations. We have a significant amount of intangible assets, such as licenses granted by the Federal Communications Commission. The value of these licenses will depend significantly upon the success of our business and the growth of the specialized mobile radio and wireless communications industries in general. We had a net tangible book value deficit of $3,944 million as of December 31, 2002.

 
     4.  Our existing financing agreements contain covenants and financial tests that limit how we conduct business.

      As a result of restrictions contained in our financing agreements, we may be unable to raise additional financing, compete effectively, particularly in respect of next generation technologies, or take advantage of new business opportunities. This may affect our ability to generate revenues and profits. Among other matters, we are restricted in our ability to:

  •  incur or guarantee additional indebtedness, including additional borrowings under existing financing arrangements;
 
  •  pay dividends and make other distributions;
 
  •  pre-pay any subordinated indebtedness;
 
  •  make investments and other restricted payments; and
 
  •  sell assets.

      Under our bank credit facility, we also are required to maintain specified financial ratios and satisfy financial tests. Our inability to meet these ratios and other tests could result in a default under our bank credit facility, which could have a material adverse effect on us as we could then be required to repay all amounts then outstanding, unless we were able to negotiate an amendment or waiver. Although in the first quarter of 2001 we were able to amend the covenants under our bank credit facility to avert a likely covenant violation, there is no assurance that we would be able to do so in the future. Borrowings under the bank credit facility are secured by liens on assets of substantially all of our subsidiaries.

 
     5.  We may not be able to obtain additional or contiguous spectrum, which may adversely affect our ability to implement our long-term business plan.

      We may seek to acquire additional or contiguous spectrum through negotiated purchases, in government-sponsored auctions of spectrum or otherwise. We cannot be sure in which auctions we may

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participate or whether we will be a successful bidder. Contiguous spectrum may be necessary in implementing 3G or other next generation technologies that may allow us to provide additional products or services to our customers or provide other benefits. Further, to the extent we cannot obtain contiguous spectrum, we may not be able to implement future technologies at a lower cost. We may not be able to accomplish any spectrum acquisition or the necessary additional capital for that spectrum may not be available to us. If sufficient additional capital is not available, to the extent we are able to complete any spectrum acquisition, the amount of funding available to us for our existing business would be reduced. Even if we are able to acquire spectrum, we still may require additional capital to finance the pursuit of any new business opportunities associated with our acquisitions of additional spectrum, including those necessary to support or provide next generation wireless services. This additional capital may not be available.
 
     6.  If we are not able to compete effectively in the highly competitive wireless communications industry, our future growth and operating results will suffer.

      There are currently six national wireless communications services providers, including us. Our ability to compete effectively with these providers and other prospective wireless communications service providers depends on the factors below, among others.

 
          a.  If our wireless communications technology does not perform in a manner that meets customer expectations, we will be unable to attract and retain customers.

      Customer acceptance of the services we offer is and will continue to be affected by technology-based differences and by the operational performance and reliability of our network. We may have difficulty attracting and retaining customers if we are unable to resolve quality issues related to our network as they arise or if those issues:

  •  limit our ability to expand our network coverage or capacity as currently planned; or
 
  •  were to place us at a competitive disadvantage to other wireless service providers in our markets.

 
          b.  We may be limited in our ability to grow unless we expand system capacity and improve the efficiency of our business systems and processes.

      Our subscriber base continues to grow rapidly. Our operating performance and ability to retain these new customers may be adversely affected unless we are able to timely and efficiently meet the demands for our services and address increased demands on our customer service, billing and other back-office functions. To successfully increase our number of subscribers, we must:

  •  expand the capacity of our network;
 
  •  potentially obtain additional spectrum in some or all of our markets;
 
  •  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 and related accessories to meet subscriber demand.

      Additionally, customer reliance on our customer care functions will increase as we add customers through channels not involving direct face-to-face contact with a sales representative, such as web sales or telesales. We recently outsourced many aspects of our customer care function and cannot be sure that this outsourcing will not heighten these risks.

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          c.  Some of our competitors are financially stronger than we are, which may limit our ability to compete based on price.

      Because of their resources and, in some cases, ownership by larger companies, some of our competitors may be able to offer services to customers at prices that are below the prices that we can offer for comparable services. If we cannot compete effectively based on the price of our service offerings, our revenues and growth may be adversely affected.

 
          d.  We may face continuing pressure to reduce prices, which could adversely affect operating results.

      Over the past several years, as the intensity of competition among wireless communications providers has increased, we and our competitors have decreased prices or increased service and product offerings, resulting in declining average monthly revenue per subscriber which may continue. Competition in pricing and service and product offerings may also adversely impact customer retention. To the extent we continue to offer more competitive pricing packages, our average monthly revenue per subscriber may continue to decrease, which would adversely affect our results of operations. If this trend continues, it may be increasingly difficult for us to remain competitive. We may encounter further market pressures to:

  •  continue to migrate existing customers to lower priced service offering packages;
 
  •  restructure our service offering packages to offer more value;
 
  •  reduce our service offering prices; or
 
  •  respond to particular short-term, market specific situations, such as special introductory pricing or particular new product or service offerings, in a particular market.

 
          e.  Our digital handsets are more expensive than those of some competitors, which may affect our growth and profitability.

      With the exception of the Blackberry 6510, which is available only from Research in Motion, we currently market multi-function digital handsets only available from one supplier. The higher cost of these handsets, as compared to analog handsets and digital handsets that do not incorporate a similar multi-function capability and are available from multiple suppliers, may make it more difficult or less profitable for us to attract customers. In addition, the higher cost of our handsets requires us to absorb part of the cost of offering handsets to new and existing customers. These increased costs and handset subsidy expenses may reduce our growth and profitability.

 
          f.  If we do not keep pace with rapid technological changes, we may not be able to attract and retain customers.

      Our network uses scattered, non-contiguous spectrum frequencies. Because of their fragmented character, these frequencies traditionally were only usable for two-way radio calls, such as those used to dispatch taxis and delivery vehicles. We became able to use these frequencies to provide a wireless telephone service competitive with cellular carriers only when Motorola developed its proprietary iDEN technology. We are currently the only national U.S. wireless service provider utilizing iDEN technology, and iDEN handsets are not currently designed to roam onto other domestic wireless networks. The wireless telecommunications industry is experiencing significant technological change, including the deployment of unlicensed spectrum devices. Future technological advancements may enable other wireless technologies to equal or exceed our current levels of service and render iDEN technology obsolete. If we are unable to meet future advances in competing technologies on a timely basis, or at an acceptable cost, we may not be able to compete effectively and could lose customers to our competitors. In addition, competition among the differing wireless communications technologies could:

  •  further segment the user markets, which could reduce the demand for, and competitiveness of, our technology; and

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  •  reduce the resources devoted by third party suppliers, including Motorola, which supplies all of our current iDEN technology, to developing or improving the technology for our systems.

 
          g.  Our coverage is not as extensive as that of other wireless service providers, which may limit our ability to attract and retain customers.

      Our network does not provide the extensive roaming coverage that is available through some of our competitors. The coverage areas of these other providers include areas where our network, or that of our affiliate Nextel Partners, has not been built or will not be built. In addition, some of our competitors provide their customers with handsets with both digital and analog capability, which expands their coverage, while we have only digital capability. We may not, either alone or together with Nextel Partners, be able to achieve comparable system coverage with some of our competitors. If a sufficient number of customers or potential customers are not willing to accept system coverage limitations as a trade-off for our multi-function wireless communications package, our operating results will be adversely affected.

 
          h.  If our wireless data and Internet services do not perform satisfactorily, our operations and growth could be adversely affected.

      We offer our subscribers access to wireless data and Internet services, marketed under the brand name Nextel Online. Unless these services perform satisfactorily, are utilized by a sufficient number of our subscribers and produce sufficient levels of customer satisfaction, our future results may be adversely affected. Because we have less spectrum than some of our competitors, and because we have elected to defer the deployment of any next generation technology, any wireless data and Internet services that we offer could be significantly limited compared to those services offered by other wireless communications providers.

      Our wireless data and Internet capabilities may not allow us to perform fulfillment and other customer support services more economically or to realize a source of future incremental revenue. Further, our wireless data and Internet capabilities may not counter the effect of increasing competition in our markets and the related pricing pressure on basic wireless voice services or incrementally differentiate us from our competitors. We also may not successfully realize our goals if:

  •  we or third party developers fail to develop new applications for our customers;
 
  •  we are unable to offer these new services profitably;
 
  •  these new service offerings adversely affect the performance or reliability of our network; or
 
  •  we otherwise do not achieve a satisfactory level of customer acceptance and utilization of these services.

      Any resulting customer dissatisfaction, or failure to realize cost reductions or incremental revenue, could have an adverse effect on our results of operations, growth prospects and perceived value.

 
          i.  Costs and other aspects of a future deployment of advanced digital technology could adversely affect our operations and growth.

      Based on our current outlook, we anticipate eventually deploying advanced digital technology that will allow high capacity wireless voice and higher speed data transmission, and potentially other advanced digital services. The technology that we would deploy to provide these types of broadband wireless services is sometimes referred to as next generation. Significant capital requirements would be involved in implementing any next generation technologies. However, we may not have sufficient capital to deploy this technology. There also can be no guarantee that this technology will provide the advantages that we expect. The actual amount of the funds required to finance and implement this technology could significantly exceed management’s estimate. Further, any future implementation could require additional unforeseen capital expenditures in the event of unforeseen delays, cost overruns, unanticipated expenses, regulatory changes, engineering design changes, network or systems compatibility, equipment unavailability

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and technological or other complications such as our inability to successfully coordinate this change with our customer care, billing, order fulfillment and other back-office operations. Finally, as there are several types of next generation technologies that may not be fully compatible with each other or with other currently deployed digital technologies, if the type of technology that we choose to deploy does not gain widespread acceptance or perform as expected, our business may be adversely affected. In addition to the costs associated with a change in technology, we could also incur specified obligations with respect to Nextel Partners if we elect to deploy new technologies (see “— F. Our Strategic Relationships — 2. Nextel Partners”).
 
          j.  If competitors provide comparable two-way walkie-talkie services, we could lose a competitive advantage.

      We differentiate ourselves by providing two-way walkie-talkie services, marketed as Nextel Direct Connect. These services are currently not available through traditional cellular or personal communication services providers, although there have been many recent announcements of competitive push-to-talk products by our U.S. national wireless competitors and small start-up companies, some of whom have the support of large infrastructure vendors. If either personal communication services or cellular operators provide a comparable two-way walkie-talkie service in the future, our competitive advantage could be impaired. Further, some of our competitors have attempted to compete with our Nextel Direct Connect service by offering unlimited mobile-to-mobile calling plan features and reduced rate calling plan features for designated small groups. If these offerings are perceived as viable substitutes for our Direct Connect service, our business may be adversely affected.

 
          k.  If our roaming partners experience financial or operational difficulties, our customers’ ability to roam onto their networks may be impaired, which could adversely affect our ability to attract and retain customers who roam on those networks.

      Nextel Partners operates a network compatible with ours in numerous mid-sized and tertiary markets. NII Holdings also provides services to our customers through roaming agreements and a cross border spectrum sharing arrangement. If Nextel Partners or NII Holdings experiences financial or operational difficulties, the ability of our customers to roam on their networks may be impaired. In that event, our ability to attract and retain customers who want to access subscribers on Nextel Partners’ portion of the network or NII Holdings’ network may be adversely affected. In addition, in the event of termination of the cross border spectrum sharing arrangement, we may incur additional costs to replace the anticipated benefits from that arrangement.

 
     7.  Government regulations determine how we operate, which could increase our costs and limit our growth and strategy plans.

      The Federal Communications Commission regulates the licensing, operation, acquisition and sale of our business. Future changes in regulation or legislation and Congress’ and the Federal Communications Commission’s continued allocation of additional spectrum for commercial mobile radio services, which include specialized mobile radio, cellular and personal communication services, could impose significant additional costs on us either in the form of direct out of pocket costs or additional compliance obligations. For example, compliance with regulations requiring us to provide public safety organizations with caller location information will materially increase our cost of doing business to the extent that we are unable to recover some or all of these costs from our customers. Further, if we fail to comply with applicable regulations, we may be subject to sanctions, which may have a material adverse effect on our business. For example, while the Communications Act of 1996 requires that we make products and services accessible to persons with disabilities, Motorola has advised us that these requirements may not be technologically feasible. These regulations also can have the effect of introducing additional competitive entrants to the already crowded wireless communications marketplace.

      It is possible that we may face additional regulatory prohibitions or limitations on our services. For example, the California Public Utilities Commission has proposed extensive consumer protection and

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privacy regulations for all telecommunications carriers. If adopted, the rules will significantly alter our business practices in California with respect to nearly every aspect of the carrier-customer relationship, including solicitations, marketing, activations, billing and customer care. If these regulations are adopted in California as currently proposed, they would impose significant additional costs on us as well as other wireless carriers. If any new regulations prohibit us from providing planned services, it could be more difficult for us to compete. Finally, we cannot be certain that we or the wireless industry in general may not be subject to litigation should a situation arise in which damage or harm occurs as a result of interference between a commercial licensee like us and a public safety licensee, such as a 911 emergency operator.

      Further, some state and local jurisdictions have adopted legislation that could affect our costs and operations in those areas. For example, some jurisdictions such as the State of New York have laws restricting or prohibiting the use of portable communications devices while driving motor vehicles, and federal legislation has been proposed that would affect funding available to states that do not adopt similar legislation. If similar laws are enacted in other jurisdictions, we may experience reduced subscriber usage and demand for our services, which could have a material adverse effect on our results of operations.

 
     8.  We are susceptible to influence by Motorola, whose interests may conflict with ours.

      Motorola holds a significant block of our outstanding stock and has the ability to exert significant influence over our affairs, as long as it retains specified ownership levels. Motorola and its affiliates engage in wireless communications businesses, and may in the future engage in additional businesses, which compete with some or all of the services we offer. Motorola’s right to nominate two people for election to our board of directors could give them additional leverage if any conflict of interest were to arise.

     9. If Motorola fails to provide us with equipment and handsets, as well as anticipated handset and infrastructure improvements, our operations will be adversely affected.

      Motorola is currently our sole source for most of the network equipment and all of the handsets we use except the Blackberry 6510. If Motorola fails to deliver system infrastructure and handsets or enhancements on a timely, cost-effective basis, we may not be able to adequately service our existing subscribers or add new subscribers. Furthermore, in the event Motorola determined not to continue manufacturing, supporting or enhancing our iDEN based infrastructure and handsets, we may be materially adversely affected. We expect to continue to rely principally on Motorola or its licensees for the manufacture of a substantial portion of the equipment necessary to construct, enhance and maintain our iDEN network and handset equipment for the next several years.

      We are also relying on Motorola to provide us with technology improvements designed to expand our wireless voice capacity and improve our services. These contemplated enhancements include the development of the 6:1 voice coder software upgrade designed to increase voice capacity and deliver packet data service at higher speeds beginning in 2003, and the expansion of our Direct Connect service to offer our nationwide Direct Connect service. We believe these improvements may be necessary to maintain the competitiveness of our digital network. Any failure of Motorola to deliver these expected improvements would impose significant additional costs on us. However, Motorola may not deliver these improvements within our anticipated timeframe, if at all, or they may not provide the advantages that we expect. We are also relying on Motorola to provide the handset-based location technology solution necessary for us to comply with the Federal Communications Commission’s Enhanced 911 requirements. We are responsible for timely meeting these requirements, whether or not Motorola is able to produce the necessary handsets and infrastructure.

 
     10.  Agreements with Motorola reduce our operational flexibility and may adversely affect our growth or operating results.

      We have entered into agreements with Motorola that reduce our operational flexibility by limiting our ability to use other technologies that would displace our existing iDEN network. These agreements may

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delay or prevent us from employing new or different technologies that perform better or are available at a lower cost because of the additional economic costs and other impediments to change arising under the Motorola agreements. For example, our equipment purchase agreement with Motorola requires us to provide Motorola with notice of our determination that Motorola’s technology is no longer suited to our needs at least six months before publicly announcing or entering into a contract to purchase equipment utilizing an alternate technology. In addition, if Motorola manufactures, or elects to manufacture, the equipment utilizing the alternate technology that we elect to deploy, we must give Motorola the opportunity to supply 50% of our infrastructure requirements for the alternate technology for three years. This may limit our ability to negotiate with an alternate equipment supplier.
 
     11.  Concerns about health risks associated with wireless equipment may reduce the demand for our services.

      Portable communications devices have been alleged to pose health risks, including cancer, due to radio frequency emissions from these devices. Purported class actions and other lawsuits have been filed against numerous wireless carriers, including us, seeking not only damages but also remedies that could increase our cost of doing business. While the current lawsuits against us have been dismissed by the federal court, the time for appeal has not yet run, and we cannot be sure additional lawsuits will not be filed. We cannot be sure that our business and financial condition will not be adversely affected by litigation of this nature or public perception about health risks. The actual or perceived risk of mobile communications devices could adversely affect us through a reduction in subscribers, reduced network usage per subscriber or reduced financing available to the mobile communications industry. Further research and studies are ongoing, and we cannot be sure that these studies will not demonstrate a link between radio frequency emissions and health concerns.

 
     12.  Our investments in other companies may affect our growth and operating results because we are not in sole control of the enterprise.

      We have entered into arrangements regarding our ownership interests in Nextel Partners and have entered into certain agreements regarding our investment in NII Holdings. We may enter into similar arrangements in the future. These arrangements are subject to uncertainties, including risks that:

  •  we do not have the ability to control the enterprises;
 
  •  the other participants at any time may have economic, business or legal interests or goals that are inconsistent with our goals or those of the enterprise;
 
  •  a participant may be unable to meet its economic or other obligations to the enterprise, and we may be required to fulfill some or all of those obligations or restrict the business of the affected enterprise; and
 
  •  in the case of Nextel Partners, we also may be or become obligated to acquire all or a portion of the ownership interest of some or all of the other participants in the enterprise.

 
     13.  Our issuance of additional shares of common stock and general conditions in the wireless communications industry may affect the price of our common stock.

      We currently have arrangements in various forms, including options and convertible securities, under which we will issue a substantial number of new shares of our class A common stock. At December 31, 2002, we had commitments to issue 22.2 million shares upon conversion of class A convertible preferred stock (all of which was converted in March 2003), 35.7 million shares upon conversion of class B nonvoting common stock, 50.7 million shares upon conversion of convertible senior notes and zero coupon convertible preferred stock and 92.4 million shares upon exercise of options or in connection with other awards under our incentive equity plan. All of these in the aggregate represent 201 million shares, or 17% of our class A common stock outstanding on December 31, 2002 assuming these shares issuable had been outstanding on that date. In addition, we may elect in some circumstances to issue equity to satisfy

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obligations otherwise payable in cash or to make acquisitions, and we have and may continue to issue common stock to purchase some of our outstanding securities. An increase in the number of shares of our common stock that are or will become available for sale in the public market may adversely affect the market price of our common stock and, as a result, could impair our ability to raise additional capital through the sale of our common stock or convertible securities and adversely affect our stock price. Some of the shares subject to issuance are or may be registered with the Securities and Exchange Commission and thus are or may become freely tradable, without regard to the volume limitations of Rule 144 under the Securities Act of 1933.
 
     14.  Our forward-looking statements are subject to a variety of factors that could cause actual results to differ materially from current beliefs.

      “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995: A number of the statements made in this annual report on Form 10-K are not historical or current facts, but deal with potential future circumstances and developments. They can be identified by the use of forward-looking words such as “believes,” “expects,” “plans,” “may,” “will,” “would,” “could,” “should” or “anticipates” or other comparable words, or by discussions of strategy that may involve risks and uncertainties. We caution you that these forward-looking statements are only predictions, which are subject to risks and uncertainties including technological uncertainty, financial variations, changes in the regulatory environment, industry growth and trend predictions. The operation and results of our wireless communications business may be subject to the effect of other risks and uncertainties in addition to those outlined in the above “Risk Factors” section and elsewhere in this document including, but not limited to:

  •  general economic conditions in the geographic areas and occupational market segments that we are targeting for our digital mobile network service;
 
  •  the availability of adequate quantities of system infrastructure and handset equipment and components to meet service deployment and marketing plans and customer demand;
 
  •  the availability and cost of acquiring additional spectrum;
 
  •  the timely development and availability of new handsets with expanded applications and features;
 
  •  the success of efforts to improve, and satisfactorily address any issues relating to, our digital mobile network performance;
 
  •  the successful implementation and performance of the technology being deployed or to be deployed in our various market areas, including the expected 6:1 voice coder software upgrade being developed by Motorola and technologies to be implemented in connection with our contemplated launch of our nationwide Direct Connect service;
 
  •  market acceptance of our new line of Java embedded handsets and service offerings, including our Nextel Online services;
 
  •  the timely delivery and successful implementation of new technologies deployed in connection with any future enhanced iDEN or next generation or other advanced services we may offer;
 
  •  the ability to achieve market penetration and average subscriber revenue levels sufficient to provide financial viability to our digital mobile network business;
 
  •  the impact on our cost structure or service levels of the general downturn in the telecommunications sector, including the adverse effect of any bankruptcy of any of our tower providers or telecommunications suppliers;
 
  •  our ability to successfully scale, in some circumstances in conjunction with third parties under our outsourcing arrangements, our billing, collection, customer care and similar back-office operations to keep pace with customer growth, increased system usage rates and growth in levels of accounts receivables being generated by our customers;

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  •  access to sufficient debt or equity capital to meet operating and financing needs;
 
  •  the quality and price of similar or comparable wireless communications services offered or to be offered by our competitors, including providers of cellular and personal communication services;
 
  •  future legislation or regulatory actions relating to specialized mobile radio services, other wireless communications services or telecommunications generally; and
 
  •  the costs of compliance with regulatory mandates, particularly the requirement to deploy location-based 911 capabilities.

N. Available Information

      We make available free of charge on or through our Internet website at www.nextel.com our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such materials with, or furnish them to, the Securities and Exchange Commission.

Item 2.     Properties

      We currently lease our principal executive and administrative offices, which are located at 2001 and 2003 Edmund Halley Drive, in Reston, Virginia. This facility is about 330,000 square feet, and the lease has an initial term expiring July 10, 2009, with four five-year renewal options. A summary of our major leased facilities as of December 31, 2002 is as follows:

                 
Location Square feet Year of Expiration



Reston, Virginia
    330,000       2009  
Denver, Colorado
    114,000       2004  
Englewood, Colorado
    140,000       2008  
Hampton Roads, Virginia
    157,000       2009 and 2010  
Herndon, Virginia
    132,000       2013  
McLean, Virginia
    129,000       2006  
Irvine, California
    119,000       2005  
Rutherford, New Jersey
    116,000       2008  
Temple, Texas
    109,000       2016  
Farmington Hills, Michigan
    108,000       2008  
Norcross, Georgia
    105,000       2005  

      None of the expiration dates for these leases disclosed above include the extensions related to the exercise of renewal options. Under our customer relationship management agreement with IBM and Teletech, we have transitioned some of our customer care operations to different locations and have vacated, and expect to vacate or sublease, some of the facilities mentioned above. We also lease smaller office facilities for sales, maintenance and administrative operations in our markets. We have about 300 of these leases in effect at December 31, 2002, generally with terms ranging from 1 to 15 years, not including extensions related to the exercise of renewal options.

      As of December 31, 2002, we also leased facilities for about 55 mobile switching offices. These leases all have at least ten-year initial terms, typically with renewal options, and range between 15,000 and 45,000 square feet. In 2002, we initiated operations in about 210 retail locations and had in place about 420 outlets at December 31, 2002. These kiosks and small store locations typically have leases of less than five years and range from between 150 and 1,700 square feet.

      We lease transmitter and receiver sites for the transmission of our radio service under various individual site leases as well as master site lease agreements. The terms of these leases generally range from month-to-month to 20 years. As of December 31, 2002, we had about 16,300 constructed sites at leased locations in the United States for our network. We also own properties and a limited number of transmission towers where management considers it advisable.

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Item 3.     Legal Proceedings

      In April 2001, a purported class action lawsuit was filed in the Circuit Court in Baltimore, Maryland by the Law Offices of Peter Angelos, and subsequently in other state courts in Pennsylvania, New York and Georgia by Mr. Angelos and other firms, alleging that wireless telephones pose a health risk to users of those telephones and that the defendants failed to disclose these risks. We, along with numerous other companies, were named as defendants in these cases. The cases were ultimately transferred to federal court in Baltimore, Maryland. On March 5, 2003, the court granted the defendants’ motions to dismiss.

      See “— Item 1. Business — F. Our Strategic Relationships — 4. NII Holdings” for a discussion of NII Holdings’ voluntary reorganization under Chapter 11 of the U.S. Bankruptcy Code.

      We are subject to other claims and legal actions that arise in the ordinary course of business. We do not believe that any of these other pending claims or legal actions will have a material effect on our business or results of operation.

Item 4.     Submission of Matters to a Vote of Security Holders

      No matters were submitted to a vote of our security holders during the fourth quarter of 2002.

Executive Officers of the Registrant

      The following people are serving as our executive officers as of March 27, 2003. These executive officers were elected to serve until their successors have been elected. There is no family relationship between any of our executive officers or between any of these officers and any of our directors.

      Timothy M. Donahue. Mr. Donahue is 54 years old and has served as our Chief Executive Officer since July 1999. Mr. Donahue also has served as President since joining us in February 1996 and also served as Chief Operating Officer from February 1996 until July 1999. Mr. Donahue has served as one of our directors since June 1996. From 1986 to January 1996, Mr. Donahue held various senior management positions with AT&T Wireless Services, Inc., including Regional President for the Northeast. Mr. Donahue serves as a director of NII Holdings, Nextel Partners and Eastman Kodak Company.

      Paul N. Saleh. Mr. Saleh is 46 years old and has served as Executive Vice President and Chief Financial Officer since September 2001. From June 1999 to August 2001, Mr. Saleh served as Senior Vice President and Chief Financial Officer of Disney International, a subsidiary of The Walt Disney Company. From April 1997 to June 1999, Mr. Saleh served as Senior Vice President and Treasurer of The Walt Disney Company. Prior to joining The Walt Disney Company, Mr. Saleh worked for twelve years with Honeywell Inc., where he was most recently Vice President and Treasurer.

      Morgan E. O’Brien. Mr. O’Brien is 58 years old and has served as Vice Chairman of our board of directors since March 1996. Mr. O’Brien also has been one of our directors since co-founding Nextel in 1987. From 1987 to March 1996, Mr. O’Brien served as Chairman of our board of directors and from 1987 to October 1994, Mr. O’Brien also served as our General Counsel.

      Thomas N. Kelly, Jr. Mr. Kelly is 55 years old, joined us in April 1996 and has served as Executive Vice President and Chief Operating Officer since February 2003. From 1996 to February 2003, Mr. Kelly served as our Executive Vice President and Chief Marketing Officer. Between 1993 and 1996, Mr. Kelly was Regional Vice President of Marketing for AT&T Wireless. Prior to joining AT&T Wireless, Mr. Kelly worked for twelve years with the marketing consulting firm of Howard Bedford Nolan, where he was most recently an Executive Vice President.

      Barry J. West. Mr. West is 57 years old, joined us in March 1996 and serves as Executive Vice President and Chief Technology Officer. Previously, Mr. West served in various senior positions with British Telecom plc for more than five years, most recently as Director of Value-Added Services and Corporate Marketing at Cellnet, a cellular communications subsidiary of British Telecom.

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      Leonard J. Kennedy. Mr. Kennedy is 51 years old and since January 2001 has served as Senior Vice President and General Counsel. From 1995 until January 2001, Mr. Kennedy was a member of the law firm Dow, Lohnes & Albertson, specializing in telecommunications law and regulatory policy.

      William G. Arendt. Mr. Arendt is 45 years old and has served as our Vice President and Controller since joining us in May 1997. From June 1996 until joining us, Mr. Arendt was Vice President and Controller for Pocket Communications, Inc., a PCS company. From September 1992 until June 1996, he was Controller for American Mobile Satellite Corporation. Previously, Mr. Arendt worked for thirteen years at Ernst & Young LLP.

      Richard S. Lindahl. Mr. Lindahl is 39 years old and has served as our Vice President and Treasurer since May 2002. From August 1997 to May 2002, Mr. Lindahl served us in various capacities, including Assistant Treasurer and Director, Financial Planning & Analysis. Prior to joining us in August 1997, Mr. Lindahl held the position of Vice President, Financial Planning with Pocket Communications.

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PART II

Item 5.     Market for Registrant’s Common Equity and Related Stockholder Matters

A.     Market for Common Stock

      Our class A common stock is traded on the Nasdaq National Market under the trading symbol “NXTL.” The following table lists, on a per share basis, the high and low sale prices for the common stock as reported by the Nasdaq National Market for the periods indicated:

                                 
Quarterly Common Stock Price Ranges
Year Ended December 31,

2002 2001


Quarter Ended High Low High Low





March 31
  $ 12.08     $ 3.35     $ 38.63     $ 11.75  
June 30
    6.75       2.50       20.35       11.19  
September 30
    8.69       2.57       18.40       7.85  
December 31
    14.67       6.85       12.31       6.87  

B.     Number of Stockholders of Record

      As of March 14, 2003, there were about 3,900 holders of record of our class A common stock. We have the authority to issue shares of nonvoting common stock, which are convertible on a share-for-share basis into shares of class A common stock. As of March 14, 2003, there was a single stockholder of record holding all of the 35,660,000 outstanding shares of nonvoting common stock.

C.     Dividends

      We have not paid any dividends on our common stock and do not plan to pay dividends on our common stock for the foreseeable future. The indentures governing our public notes and our bank credit agreement and other financing documents prohibit us from paying dividends, except in compliance with specified financial covenants, and limit our ability to dividend cash from the subsidiaries that operate our network to Nextel Communications. While these restrictions are in place, any profits generated by these subsidiaries may not be available to us for payment of dividends.

      We anticipate that for the foreseeable future any cash flow generated from our operations will be used to develop and expand our business and operations and fund other financing initiatives. Any future determination as to the payment of dividends on our common stock will be at the discretion of our board of directors and will depend upon our operating results, financial condition and capital requirements, contractual restrictions, general business conditions and other factors that our board of directors deems relevant. There can be no assurance that we will pay dividends on our common stock at any time in the future.

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D. Securities Authorized for Issuance under Equity Compensation Plans

Equity Compensation Plan Information

                         
Number of securities
remaining available for
Number of securities to be future issuance under
issued upon exercise of Weighted-average exercise equity compensation plans
outstanding options, price of outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column (a))
Plan Category (a) (b) (c)




Equity compensation plans approved by security holders
    90,376,546     $ 21.01       50,851,962  
Equity compensation plans not approved by security holders
    2,458 (1)     8.98       N/A  
     
             
 
Total
    90,379,004               50,851,962  
     
             
 


(1)  These shares are issuable under an equity compensation plan assumed in connection with our acquisition of Dial Page, Inc. in 1996.

E.     Recent Sales of Unregistered Securities

      During the year ended December 31, 2002, we issued 172 million shares of our class A common stock to existing security holders in connection with the exchange of securities discussed in note 8 to the consolidated financial statements appearing at the end of this annual report on Form 10-K. These shares were issued pursuant to the exemption from registration requirements of the Securities Act of 1933 provided by Section 3(a)(9).

Item 6.     Selected Financial Data

      The table below sets forth selected consolidated financial data for the periods or dates indicated and should be read in conjunction with the consolidated financial statements, related notes and other financial information appearing at the end of this annual report on Form 10-K.

      The information presented below that is derived from our consolidated financial statements includes the consolidated results of NII Holdings through December 31, 2001. On May 24, 2002, NII Holdings filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. On November 12, 2002, NII Holdings emerged from bankruptcy. Before its reorganization, NII Holdings was our substantially wholly owned subsidiary.

      As a result of NII Holdings’ bankruptcy filing in May 2002, we began accounting for our investment in NII Holdings, effective May 2002, using the equity method. In accordance with the equity method, we did not recognize equity in losses of NII Holdings after May 2002 as we had already recognized $1,408 million of losses in excess of our investment in NII Holdings through that date. We have classified the 2002 net operating results of NII Holdings through May 2002 in the amount of $226 million as equity in losses of unconsolidated affiliates, as permitted under the accounting rules governing a mid-year change from consolidating a subsidiary to accounting for the investment using the equity method. However, the presentation of NII Holdings in the financial statements as a consolidated subsidiary in 2001 and prior periods has not changed from the prior presentation. The following table provides the operating revenues and net loss of NII Holdings included in our consolidated results for 2001 and prior periods, excluding the impact of intercompany eliminations:

                                 
2001 2000 1999 1998




(in millions)
Operating revenues
  $ 680     $ 330     $ 124     $ 68  
Net loss
    2,497       417       520       237  

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      In November 2002, upon NII Holdings’ emergence from bankruptcy, we recognized a non-cash pre-tax gain on deconsolidation of NII Holdings in the amount of $1,218 million. At the same time, we began accounting for our new ownership interest in NII Holdings using the equity method and resumed recording our proportionate share of NII Holdings’ results of operations. As of December 31, 2002, we owned about 36% of the outstanding common stock of NII Holdings. Additional information regarding NII Holdings’ restructuring can be found in notes 1, 3, 5, 7 and 8 to the consolidated financial statements appearing at the end of this annual report on Form 10-K.

      Operating revenues and cost of revenues. Effective January 1, 2000, we adopted the Securities and Exchange Commission’s Staff Accounting Bulletin, or SAB, No. 101, “Revenue Recognition in Financial Statements.” Based upon this guidance, we changed our handset and activation revenue and cost recognition policies. Upon adoption of SAB No. 101, we began recognizing handset sales and activation fees as operating revenues on a straight-line basis over the estimated customer relationship period of 3.5 years for domestic sales and periods of up to 4 years for international sales. We recognize the costs of handset sales and activation over the same periods in amounts equivalent to the revenues recognized from handset sales and activation fees. The direct and incremental handset costs in excess of the revenues generated from handset sales are expensed at the time of sale and the activation costs in excess of the revenues generated from activation fees are expensed as incurred as these amounts exceed our minimum contractual revenues. Prior to the adoption of SAB No. 101, we recognized revenues from handset sales and the related costs when title to the handset passed to the customer, and we recognized activation fees upon completion of the activation service and the related activation costs as incurred.

      We have accounted for the adoption of SAB No. 101 as a change in accounting principle and therefore have not restated the financial statements of years prior to 2000. Additional information regarding this accounting change can be found in note 1 to the consolidated financial statements appearing at the end of this annual report on Form 10-K.

      Restructuring and impairment charges. The restructuring and impairment charge in 2001 is primarily attributable to NII Holdings and consists of non-cash pre-tax impairment charges and pre-tax restructuring and other charges of about $1,747 million. Additional information regarding this restructuring charge can be found in note 3 to the consolidated financial statements appearing at the end of this annual report on Form 10-K.

      Depreciation and amortization. Effective January 1, 2002, we adopted Statement of Financial Accounting Standards, or SFAS, No. 142, “Goodwill and Other Intangible Assets.” Under SFAS No. 142 we are no longer required to amortize goodwill and intangible assets with indefinite useful lives, but we are required to test these assets for impairment at least annually. We will continue to amortize intangible assets that have finite lives over their useful lives. Upon adoption of SFAS No. 142, we ceased amortizing FCC license costs, as we believe that our portfolio of FCC licenses represents an intangible asset with an indefinite useful life. Additional information regarding the adoption of SFAS No. 142 as well as a pro forma presentation of our financial results reflecting the adoption of SFAS No. 142 as if it had occurred on January 1, 2000 can be found in note 1 to the consolidated financial statements appearing at the end of this annual report on Form 10-K.

      Gain on deconsolidation of NII Holdings. In November 2002, upon NII Holdings’ emergence from bankruptcy, we recognized a non-cash pre-tax gain on deconsolidation of NII Holdings in the amount of $1,218 million consisting primarily of the reversal of equity losses we had recorded in excess of our investment in NII Holdings, partially offset by charges recorded when we consolidated NII Holdings, including, among other items, $185 million of cumulative foreign currency translation losses.

      Other income (expense), net. As more fully discussed in note 5 to the consolidated financial statements appearing at the end of this annual report on Form 10-K, other income (expense), net in 2000 includes a $275 million gain realized when NII Holdings exchanged its stock in Clearnet Communications, Inc. for stock in TELUS as a result of the acquisition of Clearnet by TELUS. Other income (expense), net in 2001 includes a $188 million other-than-temporary reduction in the fair value of NII Holdings’ investment in TELUS.

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      Income tax provision. As a result of our adoption of SFAS No. 142, in the first quarter of 2002, we incurred a one-time cumulative non-cash charge to the income tax provision of $335 million to increase the valuation allowance related to our net operating losses. This cumulative charge was required since we have significant deferred tax liabilities related to our FCC licenses that have a significantly lower tax basis than book basis. Additional information regarding the adoption of SFAS No. 142 can be found in note 1 to the consolidated financial statements appearing at the end of this annual report on Form 10-K.

      Domestic long-term debt and mandatorily redeemable preferred stock. In 2002, we purchased and retired a total of $1,928 million in aggregate principal amount at maturity of our outstanding senior notes with a net book value of $1,911 million and $1,258 million in aggregate face amount of our outstanding mandatorily redeemable preferred stock with a net book value of $1,272 million in exchange for 172 million shares of class A common stock valued at $1,197 million and $843 million in cash. Additional information regarding the purchase and retirement of our long-term debt and mandatorily redeemable preferred stock can be found in note 8 to the consolidated financial statements appearing at the end of this annual report on Form 10-K.

      Effective April 1, 2002, we adopted SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” The adoption of SFAS No. 145 required us to classify gains and losses from extinguishments of debt as other income (expense) rather than as extraordinary items in all periods presented.

      Finance obligation. In December 2002, we sold all of our equity investment in SpectraSite for a de minimus amount. The sale of our equity investment in SpectraSite ended our continuing involvement in SpectraSite for substantially all of our tower leases. Accordingly, we recognized a deferred gain on the sale of these towers to SpectraSite and will account for their leasebacks as operating leases. We reduced our finance obligation by $655 million. Additional information regarding SpectraSite can be found in notes 5 and 7 to the consolidated financial statements appearing at the end of this annual report on Form 10-K.

                                           
Year Ended December 31,

2002 2001 2000 1999 1998





(in millions, except per share amounts)
STATEMENT OF OPERATIONS DATA
                                       
Operating revenues
  $ 8,721     $ 7,689     $ 5,714     $ 3,786     $ 2,295  
Cost of revenues (exclusive of depreciation included below)
    2,516       2,869       2,172       1,579       1,218  
Selling, general and administrative
    3,039       3,020       2,278       1,672       1,297  
Restructuring and impairment charges
    35       1,769                    
Depreciation and amortization
    1,595       1,746       1,265       1,004       832  
     
     
     
     
     
 
Operating income (loss)
    1,536       (1,715 )     (1 )     (469 )     (1,052 )
Interest expense, net
    (990 )     (1,196 )     (849 )     (782 )     (622 )
Gain (loss) on retirement of debt, net of debt conversion costs
    354       469       (127 )     (68 )     (133 )
Gain on deconsolidation of NII Holdings
    1,218                          
Equity in losses of unconsolidated affiliates
    (302 )     (95 )     (152 )     (73 )     (12 )
Other (expense) income, net
    (39 )     (223 )     281       26       (25 )
Income tax (provision) benefit
    (391 )     135       33       28       192  
     
     
     
     
     
 
Net income (loss)
    1,386       (2,625 )     (815 )     (1,338 )     (1,652 )
Gain on retirement of mandatorily redeemable preferred stock
    485                          
Mandatorily redeemable preferred stock dividends and accretion
    (211 )     (233 )     (209 )     (192 )     (149 )
     
     
     
     
     
 
Income (loss) available to common stockholders
  $ 1,660     $ (2,858 )   $ (1,024 )   $ (1,530 )   $ (1,801 )
     
     
     
     
     
 
Earnings (loss) per common share
                                       
 
Basic
  $ 1.88     $ (3.67 )   $ (1.35 )   $ (2.39 )   $ (3.23 )
     
     
     
     
     
 
 
Diluted
  $ 1.78     $ (3.67 )   $ (1.35 )   $ (2.39 )   $ (3.23 )
     
     
     
     
     
 
Weighted average number of common shares outstanding
                                       
 
Basic
    884       778       756       639       557  
     
     
     
     
     
 
 
Diluted
    966       778       756       639       557  
     
     
     
     
     
 

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December 31,

2002 2001 2000 1999 1998





(in millions)
BALANCE SHEET DATA
                                       
Cash, cash equivalents and short-term investments, including restricted portion
  $ 2,686     $ 3,801     $ 4,674     $ 5,808     $ 321  
Property, plant and equipment, net
    8,918       9,274       8,791       6,152       4,915  
Intangible assets, net
    6,607       5,778       5,671       4,551       4,937  
Total assets
    21,484       22,064       22,686       18,410       11,573  
Domestic long-term debt, capital lease and finance obligations, including current portion
    12,550       14,865       12,212       9,954       6,462  
Debt of NII Holdings, nonrecourse to and not held by parent
          1,865       2,519       1,549       1,257  
Mandatorily redeemable preferred stock
    1,015       2,114       1,881       1,770       1,578  
Stockholders’ equity (deficit)
    2,846       (582 )     2,028       2,574       230  
 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

A.     Overview

      The following is a discussion and analysis of our consolidated financial condition and results of operations for each of the three years in the period ended December 31, 2002 and significant factors that could affect our prospective financial condition and results of operations. Historical results may not indicate future performance. See Part I, “Item 1. Business — M. Risk Factors — 14. Our forward-looking statements are subject to a variety of factors that could cause actual results to differ materially from current beliefs.”

      We are a leading provider of wireless communications services in the United States. Our service offerings include digital wireless service; Nextel Direct Connect, our long-range digital walkie-talkie service; and wireless data, including email, text messaging and Nextel Online services, which provide wireless access to the Internet, an organization’s internal databases and other applications. Our all-digital packet data network is based on Motorola’s iDEN wireless technology.

      We, together with Nextel Partners, currently serve 197 of the top 200 U.S. markets where 240 million people live or work. We ended 2002 with about 14,900 employees and 10.6 million handsets in service, and we had $8,721 million in operating revenues for the year.

      We owned about 32% of the common stock of Nextel Partners as of December 31, 2002. Nextel Partners provides digital wireless communications services under the Nextel brand name in mid-sized and tertiary U.S. markets. Nextel Partners has the right to operate in 57 of the top 200 metropolitan statistical areas in the United States ranked by population.

      In addition to our domestic operations, as of December 31, 2002, we owned about 36% of the outstanding common stock of NII Holdings, formerly known as Nextel International. NII Holdings provides wireless communications services primarily in selected Latin American markets. On May 24, 2002, NII Holdings filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. On November 12, 2002, NII Holdings emerged from bankruptcy. Before its reorganization, NII Holdings was our substantially wholly owned subsidiary.

      As a result of the bankruptcy reorganization, all previously outstanding equity interests in NII Holdings were cancelled. In addition, NII Holdings extinguished $2,331 million in senior redeemable notes and other unsecured, non-trade claims that existed prior to its bankruptcy filing and in exchange issued shares of new common stock valued at $2.50 per share.

      As a result of NII Holdings’ bankruptcy filing in May 2002, we began accounting for our investment in NII Holdings, effective May 2002, using the equity method. In accordance with the equity method, we did not recognize equity in losses of NII Holdings after May 2002 as we had already recognized $1,408 million of losses in excess of our investment in NII Holdings through that date. We have classified the 2002 net operating results of NII Holdings through May 2002 as equity in losses of unconsolidated affiliates, as permitted under the accounting rules governing a mid-year change from consolidating a

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subsidiary to accounting for the investment using the equity method. However, the presentation of NII Holdings in the financial statements as a consolidated subsidiary in 2001 and prior periods has not changed from the prior presentation.

      In November 2002, upon NII Holdings’ emergence from bankruptcy, we recognized a non-cash pre-tax gain on deconsolidation of NII Holdings in the amount of $1,218 million consisting primarily of the reversal of equity losses we had recorded in excess of our investment in NII Holdings. At the same time, we began accounting for our new ownership interest in NII Holdings using the equity method and resumed recording our proportionate share of NII Holdings’ results of operations.

      Additional information regarding NII Holdings’ restructuring can be found in notes 1, 3, 5, 7 and 8 to the consolidated financial statements appearing at the end of this annual report on Form 10-K.

 
      Critical Accounting Policies and Estimates.

      We consider the following accounting policies and estimates 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. While we believe that the estimates we use are reasonable, actual results could differ from those estimates.

      Revenue recognition. Operating revenues primarily consist of wireless service revenues and revenues generated from handset and accessory sales. Service revenues primarily include fixed monthly access charges for mobile telephone, Nextel Direct Connect and other wireless services, variable charges for airtime and Nextel Direct Connect usage in excess of plan minutes, long-distance charges derived from calls placed by our customers and activation fees.

      We recognize revenue for access charges and other services charged at fixed amounts ratably over the service period, net of credits and adjustments for service discounts, billing disputes and fraud or unauthorized usage. We recognize excess usage and long distance revenue at contractual rates per minute as minutes are used. As a result of the cutoff times of our multiple billing cycles each month, we are required to estimate the amount of subscriber revenues earned but not billed from the end of each billing cycle to the end of each reporting period. These estimates are based primarily on rate plans in effect and historical minutes of use.

      We recognize revenue from handset sales on a straight-line basis over the expected customer relationship period of 3.5 years for domestic sales and periods of up to four years for international sales, when title to the handset passes to the customer. Our wireless service is essential to the functionality of our handsets due to the fact that the handsets can, with very limited exceptions, only be used on our network. Accordingly, this multiple element arrangement is not accounted for separately. This estimate results in our amortizing an equal amount of revenue and expense over the expected customer relationship period and accordingly does not impact operating income or net income.

      Allowance for doubtful accounts. We establish an allowance for doubtful accounts receivable sufficient to cover probable and reasonably estimated losses. Since we have well over one million accounts, it is impracticable to review the collectibility of all individual accounts when we determine the amount of our allowance for doubtful accounts receivable each period. Therefore, we consider a number of factors in establishing the allowance, including historical collection experience, current economic trends, estimates of forecasted write-offs, agings of the accounts receivable portfolio and other factors. When collection efforts on individual accounts have been exhausted, the account is written off by reducing the allowance for doubtful accounts. Our allowance for doubtful accounts was $127 million as of December 31, 2002.

      Valuation and recoverability of long-lived assets. Long-lived assets such as property, plant and equipment represented about $8,918 million of our $21,484 million in total assets as of December 31, 2002. Our nationwide network is highly complex and, due to constant innovation and enhancements, some network assets may lose their utility faster than anticipated. We periodically reassess the economic lives of these components and make adjustments to their expected lives after considering historical experience and capacity requirements, consulting with the vendor and assessing new product and market demands and

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other factors. When these factors indicate network assets may not be useful for as long as anticipated, we depreciate the remaining book values over the remaining useful lives. We currently calculate depreciation using the straight-line method based on estimated useful lives of up to 31 years for buildings, 3 to 20 years for network equipment and network software and 3 to 12 years for non-network internal use software, office equipment and other assets.

      We review our 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 amount of the asset, a loss, if any, is recognized for the difference between the fair value and carrying value of the asset. Impairment analyses are based on our current business and technology strategy, our views of growth rates for our business, anticipated future economic and regulatory conditions and expected technological availability.

      Valuation and recoverability of intangible assets. Intangible assets with indefinite useful lives represented about $6,496 million of our $21,484 million in total assets as of December 31, 2002. Intangible assets with indefinite useful lives consist of our FCC licenses and goodwill. In 2002, we ceased amortizing these assets, and we performed initial and annual impairment tests of FCC licenses and goodwill as of January 1, 2002 and October 1, 2002, respectively. We concluded that there was no impairment as the fair values of these intangible assets were greater than their carrying values. Using a residual value approach, we measured the fair value of our 800 MHz and 900 MHz licenses by deducting the fair values of our domestic net assets, other than these FCC licenses, from our domestic reporting unit’s fair value, which was determined using a discounted cash flow analysis. The analysis was based on our long-term cash flow projections, discounted at our corporate weighted average cost of capital.

      We have invested about $350 million in other FCC licenses that are currently not used in our network. We have pledged to exchange these licenses along with other licenses in a proposal filed with the FCC. If we do not exchange these licenses in the future, we have an alternative business plan for use of these licenses. If the alternative business plan is not realized, some or the entire recorded asset could become impaired.

      Recoverability of capitalized software to be sold, leased, or otherwise marketed. As of December 31, 2002, we had capitalized about $53 million in costs for software that will be sold, leased, or otherwise marketed. We begin amortizing costs when the software is ready for its intended use. Our current plans indicate that we will recover the value of the assets; however, to the extent there are changes in economic conditions, technology or the regulatory environment, or our strategic partners associated with the development and marketing of the software elect not to participate to the extent we expect, our plans could change and some of these assets could become impaired.

      Net operating loss valuation allowance. We have provided a full reserve against our net operating loss carryforwards as of December 31, 2002. This reserve is established due to the fact that we do not have a sufficient history of taxable income at this time to conclude that it is more likely than not that the net operating loss will be realized. To the extent that we have taxable income in future periods, we would expect to realize the benefits of at least some of the net operating loss carryforwards.

B.     Results of Operations

      Operating revenues primarily consist of wireless service revenues and revenues generated from handset and accessory sales. Service revenues primarily include fixed monthly access charges for mobile telephone, Nextel Direct Connect and other wireless services, variable charges for airtime and Nextel Direct Connect usage in excess of plan minutes, long-distance charges derived from calls placed by our customers and activation fees. We recognize revenue for access charges and other services charged at fixed amounts ratably over the service period, net of credits and adjustments for service discounts, billing disputes and fraud or unauthorized usage. We recognize excess usage and long distance revenue at contractual rates per minute as minutes are used. We recognize revenue from activation fees on a straight line basis over the expected customer relationship period of 3.5 years, starting when wireless service is activated.

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      We recognize revenue from accessory sales when title passes upon delivery of the accessory to the customer. We recognize revenue from handset sales on a straight-line basis over the expected customer relationship period of 3.5 years for domestic sales and periods of up to four years for international sales, when title to the handset passes to the customer. Therefore, handset revenues in the current period largely reflect the recognition of handset sales that occurred and were deferred in prior periods. Our wireless service is essential to the functionality of our handsets due to the fact that the handsets can, with very limited exceptions, only be used on our network. Therefore, in accordance with SAB No. 101, “Revenue Recognition in Financial Statements,” we do not account for our multiple element arrangement separately.

      Cost of providing wireless service consists primarily of costs to operate and maintain our network, costs of interconnection with local exchange carrier facilities and costs of activation. Costs to operate and maintain our network primarily include direct switch and transmitter and receiver site costs, such as rent, utilities, property taxes and maintenance for the network switches and sites, payroll and facilities costs associated with our network engineering employees and frequency leasing costs. Interconnection costs have fixed and variable components. The fixed component of interconnection costs consists of monthly flat-rate fees for facilities leased from local exchange carriers and fluctuates in relation to the number of transmitter and receiver sites and switches in service and the related equipment installed at each site. The variable component of interconnection costs, which fluctuates in relation to the level and duration of wireless calls, generally consists of per-minute use fees charged by wireline and wireless providers for wireless calls terminating on their networks. We recognize the cost of activation over the expected customer relationship period of 3.5 years in amounts equivalent to revenues recognized from activation fees.

      Cost of handset and accessory revenues consists primarily of the cost of the handsets and accessories sold, order fulfillment related expenses and write-downs of handset and related accessory inventory for shrinkage. We recognize the costs of handset revenue over the expected customer relationship period of 3.5 years for domestic costs and periods of up to four years for international costs in amounts equivalent to revenues recognized from handset sales. Handset costs in excess of the revenues generated from handset sales, or subsidies, are expensed at the time of sale.

      Selling and marketing costs primarily consist of customer acquisition costs, including residual payments to our dealers, commissions earned by our indirect dealers, distributors and our direct sales force for new handset activations, payroll and facilities costs associated with our direct sales force and marketing employees, advertising and media program costs and telemarketing.

      General and administrative costs primarily consist of fees paid to outsource billing, customer care and information technology operations, bad debt expense and back office support activities including customer retention, collections, information technology, legal, finance, human resources, strategic planning and technology and product development, along with the related payroll and facilities costs.

 
      Selected Domestic Financial and Operating Data.
                         
For the Years Ended
December 31,

2002 2001 2000



Average monthly revenue per handset in service(1)
  $ 70     $ 71     $ 74  
Handsets in service, end of period (in thousands)(2)(3)
    10,612       8,667       6,678  
Net handset additions (in thousands)(2)
    1,956       1,988       2,163  
Transmitter and receiver sites in service, end of period
    16,300       15,500       12,700  
Net transmitter and receiver sites placed in service
    800       2,800       3,900  
Switches in service, end of period
    84       81       75  
System minutes of use (in billions)
    73.5       52.5       31.9  
Average monthly billable minutes of use per handset
    630       565       470  


(1)  Average monthly revenue per handset/unit in service, or ARPU, is an industry term that measures service revenues per month from our customers divided by the weighted average number of handsets in commercial service during that month, excluding the impact of test markets such as the Boost

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Mobile program. ARPU is not a measurement under accounting principles generally accepted in the United States and may not be similar to ARPU measures of other companies. We believe that ARPU provides useful information concerning the appeal of our rate plans and service offerings and our performance in attracting and retaining high value customers. Effective January 1, 2003, the ARPU metric will also include amounts earned under various service and repair programs and cancellation fees.
 
(2)  Amount excludes the impact of test markets such as the Boost Mobile program.
 
(3)  In the fourth quarter of 2002, we completed the analysis of our subscriber records after the conversion of our billing system, and we identified non-revenue generating units that were incorrectly introduced into the subscriber base prior to 2002. Therefore, in 2002, we reduced our subscriber base by about 10,500 subscribers, including about 7,000 as of the beginning of the fourth quarter of 2002.

      An additional measurement we use to manage our business is the rate of customer churn. The customer churn rate is an indicator of customer retention and represents the monthly percentage of the customer base that disconnects from service. Churn consists of both involuntary churn and voluntary churn. Involuntary churn occurs when we have taken action to disconnect the handset from service, usually due to lack of payment. Voluntary churn occurs when a customer elects to disconnect service. Customer churn is calculated by dividing the number of handsets disconnected from commercial service during the period by the average number of handsets in commercial service during the period. A low churn rate is important because customer acquisition costs are generally higher than customer retention costs.

      Our average monthly customer churn rate during 2002 was about 2.1% as compared to about 2.3% during 2001. We attribute the improvement in customer churn to customer retention initiatives that we began implementing in the first quarter of 2001 and have continued into 2003. These initiatives include customer focused programs such as strategic care provided to customers with certain calling attributes and efforts to migrate customers to more optimal service pricing plans. Also, we believe that our customer churn reflects our focus on acquiring high quality subscribers, including add-on subscribers from existing customer accounts, and the attractiveness of our differentiated products and services.

      If general economic conditions worsen, if competitive conditions in the wireless telecommunications industry intensify or if our new handset or service offerings are not well received, we may see declines in demand for our product and service offerings, which may adversely affect our results of operations. See Part I, “Item 1. Business — M. Risk Factors — 14. Our forward-looking statements are subject to a variety of factors that could cause actual results to differ materially from current beliefs.”

 
      1. Year ended December 31, 2002 vs. year ended December 31, 2001.

      As described in note 1 to our consolidated financial statements appearing at the end of this annual report on Form 10-K, our consolidated results for 2001 include the results of operations of NII Holdings. As further described in note 1, we no longer consolidate NII Holdings, and its 2002 results of operations are accounted for using the equity method.

 
      Service Revenues and Cost of Service.
 
Consolidated service revenues and cost of service.

      Consolidated service revenues increased from $7,221 million for the year ended December 31, 2001 to $8,186 million for 2002. The $965 million increase in service revenues reflects a $1,611 million increase attributable to our domestic operations as discussed below, as well as the impact of the deconsolidation of our international operations in 2002, which contributed $646 million to service revenues in our consolidated results in 2001.

      Consolidated cost of service decreased from $1,499 million for the year ended December 31, 2001 to $1,469 million for 2002. The $30 million decrease in cost of service reflects a $145 million increase attributable to our domestic operations as discussed below, as well as the impact of the deconsolidation of our international operations in 2002, which contributed $175 million to cost of service in our consolidated

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results in 2001. The following section provides a more detailed analysis of our domestic service revenues and cost of service.
 
           Domestic service revenues and cost of service.
                                                   
% of % of Change from
Year Ended Domestic Year Ended Domestic Previous Year
December 31, Operating December 31, Operating
2002 Revenues 2001 Revenues Dollars Percent






(dollars in millions)
Service revenues
  $ 8,186       94 %   $ 6,575       94 %   $ 1,611       25 %
Cost of service
    1,469       17 %     1,324       19 %     145       11 %
     
             
             
         
 
Service gross margin
  $ 6,717             $ 5,251             $ 1,466       28 %
     
             
             
         
 
Service gross margin percentage
    82 %             80 %                        
     
             
                         

      Domestic service revenues. Service revenues increased 25% from the year ended December 31, 2001 to the year ended December 31, 2002. Our service revenues are impacted by both the number of handsets in service (volume) and average monthly revenue per handset in service (rate).

      From a volume perspective, our service revenues increased principally as a result of a 22% increase in handsets in service. The growth in the number of handsets in service from December 31, 2001 to December 31, 2002 is the result of a number of factors, principally:

  •  our differentiated products and services, including enhanced Nextel Direct Connect and Nextel Online;
 
  •  increased brand name recognition through increased advertising and marketing campaigns;
 
  •  the introduction of more competitive service pricing plans targeted at meeting more of our customers’ needs, including a variety of fixed-rate plans offering bundled monthly minutes and other integrated services and features;
 
  •  selected handset pricing promotions and improved handset choices; and
 
  •  increased sales force and marketing staff, including staff associated with our Nextel stores, and selling efforts targeted at specific vertical markets.

      From a rate perspective, ARPU decreased from about $71 for the year ended December 31, 2001 to about $70 for the year ended December 31, 2002. We attribute the slight decrease in ARPU to:

  •  the introduction of more competitive pricing plans in 2002, which provide more minutes of use with a lower monthly access charge to the customer; and
 
  •  increases in credits and adjustments for service discounts or billing disputes as a result of issues experienced by customers during the billing system conversion or changes in billing practices as discussed below; partially offset by
 
  •  the following revenue enhancement initiatives during 2002:

  •  in the first quarter of 2002, we began charging many of our customers a fee to recover a portion of the costs associated with government mandated telecommunications services such as E911 and number portability; and
 
  •  in the second quarter of 2002, for many of our customer accounts, we implemented the industry-wide practice of full minute rounding, raised the excess usage rate for some customer accounts and decreased the off-peak hours, which are generally billed at lower rates than peak hours.

      We expect ARPU to drop to the high $60 range in 2003 as competition increases.

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      Domestic cost of service. Cost of service increased 11% from the year ended December 31, 2001 to the year ended December 31, 2002, primarily as a result of increased handsets in service and the resulting increased minutes of use. Specifically, we experienced:

  •  a 12% increase in costs incurred in the operation and maintenance of our network and fixed interconnection costs; and
 
  •  a 4% increase in variable interconnection fees.

      The costs related to the operation and maintenance of our network and fixed interconnection fees increased 12% primarily due to:

  •  a 5% increase in the number of transmitter and receiver sites and a 4% increase in switches placed in service and additional network capacity added to existing sites from December 31, 2001 to December 31, 2002; and
 
  •  increases in frequency leasing costs and roaming fees paid to Nextel Partners as our growing subscriber base roamed onto Nextel Partners’ compatible network.

      Variable interconnection fees increased 4% while total system minutes of use increased 40% from the year ended December 31, 2001 to the year ended December 31, 2002, principally due to a 22% increase in the number of handsets in service as well as a 12% increase in the average monthly billable minutes of use per handset over the same period. Our lower variable interconnection cost per minute of use was affected by favorable settlements of rate disputes with our service providers, rate savings achieved through new agreements with long distance providers signed in mid-2001 as well as efforts implemented during the second quarter of 2002 to move long distance traffic to lower cost carriers.

      We expect the aggregate amount of cost of service to increase as customer usage of our network increases and as we add more sites, switches and capacity to meet our customers’ needs. However, we expect the cost per minute to decline as compared to 2002 due to improvements in network operating efficiencies. Additionally, annual rent expense will benefit through 2007 from the amortization of the deferred gain that we recorded in connection with the lease transaction with SpectraSite. Further, payments previously classified as a reduction to the financing obligation will now be recorded as operating lease payments. Additional information regarding the SpectraSite lease transactions can be found in notes 5 and 7 to the consolidated financial statements appearing at the end of this annual report on Form 10-K. See also “— D. Liquidity and Capital Resources” and “— E. Future Capital Needs and Resources — Capital Needs — Capital Expenditures.”

      Domestic service gross margin. Service gross margin as a percentage of service revenues increased from 80% for the year ended December 31, 2001 to 82% for the year ended December 31, 2002. While the service gross margin has increased in the aggregate, our service gross margin as a percentage of service revenues generally remained flat prior to 2002. During 2002, service gross margin as a percentage of service revenues improved primarily due to a combination of increasing subscriber growth and achievement of economies of scale and network operating efficiencies.

 
      Handset and Accessory Revenues and Cost of Handset and Accessory Revenues.
 
           Consolidated handset and accessory revenues and cost of handset and accessory revenues.

      Consolidated handset and accessory revenues increased from $468 million for the year ended December 31, 2001 to $535 million for 2002. The $67 million increase in handset and accessory revenues reflects a $96 million increase attributable to our domestic operations as discussed below, as well as the impact of the deconsolidation of our international operations in 2002, which contributed $29 million to handset and accessory revenues in our consolidated results in 2001.

      Consolidated cost of handset and accessory revenues decreased from $1,370 million for the year ended December 31, 2001 to $1,047 million for 2002. The $323 million decrease in cost of handset and accessory revenues reflects a $167 million decrease attributable to our domestic operations as discussed below, as

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well as the impact of the deconsolidation of our international operations in 2002, which contributed $156 million to cost of handset and accessory revenues in our consolidated results in 2001. The following section provides a more detailed analysis of our domestic handset and accessory revenues and cost of handset and accessory revenues.
 
           Domestic handset and accessory revenues and cost of handset and accessory revenues.

      During the year ended December 31, 2002, we recorded $535 million of handset and accessory revenues, an increase of $96 million from the year ended December 31, 2001. During the year ended December 31, 2002, we recorded $1,047 million of cost of handset and accessory revenues, a decrease of $167 million from December 31, 2001. These results are summarized in the table below.

                                                   
% of % of Change from
Year Ended Domestic Year Ended Domestic Previous Year
December 31, Operating December 31, Operating
2002 Revenues 2001 Revenues Dollars Percent






(dollars in millions)
Current period handset and accessory sales
  $ 892       10 %   $ 484       7 %   $ 408       84 %
Net effect of SAB No. 101 handset deferrals
    (357 )     (4 )%     (45 )     (1 )%     (312 )     NM  
     
     
     
     
     
         
 
Handset and accessory revenues
    535       6 %     439       6 %     96       22 %
     
     
     
     
     
         
Current period cost of handset and accessory sales
    1,404       16 %     1,259       18 %     145       12 %
Net effect of SAB No. 101 handset deferrals
    (357 )     (4 )%     (45 )     (1 )%     (312 )     NM  
     
     
     
     
     
         
 
Cost of handset and accessory revenues
    1,047       12 %     1,214       17 %     (167 )     (14 )%
     
     
     
     
     
         
Handset and accessory gross subsidy
  $ (512 )           $ (775 )           $ 263       34 %
     
             
             
         


NM — Not Meaningful

     Domestic handset and accessory revenues. Reported handset and accessory revenues are influenced by the number of handsets sold, the sales prices of the handsets sold and the effect of SAB No. 101, which requires that handset revenue generated from sales to customers be spread over the estimated life of the customer relationship period rather than recording all handset revenue at the time of sale. The effect of SAB No. 101 in the table above is the net effect of current period sales being deferred to future periods, offset by the benefit of handset sales deferred in previous periods that are now being recognized as revenue.

                           
Year Ended
December 31,

Change from
SAB No. 101 Effect 2002 2001 Previous Year




(in millions)
Handset sales deferred
  $ (715 )   $ (391 )   $ (324 )
Previously deferred handset sales recognized
    358       346       12  
     
     
     
 
 
Net effect of SAB No. 101 handset deferrals
  $ (357 )   $ (45 )   $ (312 )
     
     
     
 

      Current period handset and accessory sales increased $408 million, or 84%, for the year ended December 31, 2002 compared to 2001. This increase reflects an increase in the number of handsets sold of about 18% and an overall increase in the sales prices of the handsets. This increase in handset and accessory sales was partially offset by the increase in the SAB No. 101 net deferrals of $312 million. The increase in the SAB No. 101 net deferrals reflects increasing revenues from handset sales in 2002 primarily due to increased handset prices.

      Domestic cost of handset and accessory revenues. Reported cost of handset and accessory revenues are influenced by the number of handsets sold, the cost of the handsets sold and the effect of SAB

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No. 101. With respect to the cost of handset and accessory revenues, the SAB No. 101 effect is recorded in amounts equivalent to handset revenues deferred and recognized.
                           
Year Ended
December 31,

Change from
SAB No. 101 Effect 2002 2001 Previous Year




(in millions)
Cost of handset sales deferred
  $ (715 )   $ (391 )   $ (324 )
Previously deferred cost of handset sales recognized
    358       346       12  
     
     
     
 
 
Net effect of SAB No. 101 handset deferrals
  $ (357 )   $ (45 )   $ (312 )
     
     
     
 

      Current period cost of handset and accessory sales increased $145 million, or 12%, for the year ended December 31, 2002 compared to 2001. This increase reflects an increase in the number of handsets sold of about 18% partially offset by a slight reduction in the average cost we pay for handsets. This increase in the cost of handset and accessory sales was more than offset by the increase in the SAB No. 101 net deferrals of $312 million.

      Domestic handset and accessory gross subsidy. We generally sell handsets at prices below our cost in response to competition, to attract new customers and as retention inducements for existing customers. While we expect to continue the industry practice of selling handsets at prices below cost, we experienced improvements in our handset and accessory gross subsidy during 2002. Handset and accessory gross subsidy decreased 34% from the year ended December 31, 2001 to the year ended December 31, 2002 even though we experienced about an 18% increase in the number of handsets sold. We attribute the improvement in handset and accessory gross subsidy to:

  •  increased sales of our feature rich, higher priced and lower subsidy handsets, including the effect of increased handset prices charged to some of our indirect dealers beginning in the second quarter of 2002 in return for higher commissions to be paid to the dealers upon activation of handsets for new subscribers; and
 
  •  a decline in the average cost that we pay for our portfolio of handsets.

See “— Domestic selling and marketing” for a more detailed description of the change in the commission plan.

 
      Selling, General and Administrative Expenses.
 
           Consolidated selling, general and administrative expenses.

      Consolidated selling, general and administrative expenses increased from $3,020 million for the year ended December 31, 2001 to $3,039 million for 2002. The $19 million increase in selling, general and administrative expenses reflects a $464 million increase attributable to our domestic operations as discussed below, as well as the impact of the deconsolidation of our international operations in 2002, which contributed $445 million to selling, general and administrative expenses in our consolidated results in 2001. The following section provides a more detailed analysis of our domestic selling, general and administrative expenses.

 
           Domestic selling, general and administrative expenses.
                                                   
% of % of Change from
Year Ended Domestic Year Ended Domestic Previous Year
December 31, Operating December 31, Operating
2002 Revenues 2001 Revenues Dollars Percent






(dollars in millions)
Selling and marketing
  $ 1,543       18 %   $ 1,252       18 %   $ 291       23 %
General and administrative
    1,496       17 %     1,323       19 %     173       13 %
     
     
     
     
     
         
 
Selling, general and administrative
  $ 3,039       35 %   $ 2,575       37 %   $ 464       18 %
     
     
     
     
     
         

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      Domestic selling and marketing. The increase in domestic selling and marketing expenses from the year ended December 31, 2001 to the year ended December 31, 2002 reflects:

  •  a $165 million, or 32%, increase in commissions and residuals earned by indirect dealers and distributors;
 
  •  a $49 million, or 13%, increase in direct sales and marketing payroll and related expenses;
 
  •  a $42 million, or 15%, increase in advertising expenses; and
 
  •  a $35 million, or 37%, increase in other general selling and marketing expenses.

      Indirect dealers and distributors earn commissions for activation of handsets for new subscribers. In addition, we pay some indirect dealers and distributors residuals to encourage ongoing customer support and to promote handset sales to high value customers who are more likely to generate higher monthly service revenues and less likely to deactivate service. The increase in dealer commissions is primarily attributable to higher commissions earned by dealers on activations of higher priced handsets beginning in the second quarter of 2002. As of December 31, 2002, these higher commissions paid to dealers have substantially offset the impact of the revenues from the higher priced handsets. The remaining increase is primarily related to increasing dealer residuals along with increasing dealer commissions designed to motivate the activation of new handsets and sales of data applications.

      The increase in sales and marketing payroll and related expenses is primarily associated with additional employees hired for our Nextel stores. During 2002, we opened an additional 210 Nextel stores and had about 420 retail locations as of December 31, 2002.

      Advertising expenses have increased due to our marketing campaigns, including sports-related sponsorships and television commercials directed at increasing brand awareness, as well as promoting our differentiated services, including Nextel Direct Connect and Nextel Online. In addition, advertising expenses in 2002 include costs related to the launch of the Boost Mobile program.

      Other general selling and marketing expenses increased primarily due to additional facilities costs related to opening new Nextel stores.

      Domestic general and administrative. The increase in general and administrative expenses from the year ended December 31, 2001 to the year ended December 31, 2002, reflects:

  •  a $97 million, or 19%, increase in expenses related to billing, collection, customer retention and customer care activities;
 
  •  a $5 million, or 2%, increase in bad debt expense; and
 
  •  a $71 million, or 15%, increase in personnel, facilities and general corporate expenses.

      Billing, collection, customer retention and customer care related costs increased due to the costs to support a larger customer base, including increased postage costs, as well as costs associated with the implementation of our new billing and customer care system in 2002. However, these costs are increasing at a slower rate than our customer growth rate in part due to cost savings we are realizing as a result of outsourcing many aspects of our customer care function.

      Although bad debt expense increased $5 million from the year ended December 31, 2001 to the year ended December 31, 2002, it decreased as a percentage of domestic operating revenues from 4.7% in 2001 to 3.8% in 2002. The decrease in bad debt expense as a percentage of operating revenues reflects the results of several initiatives we put in place, including strengthening our credit policies and procedures specifically in the area of compliance with our deposit policy, an increase in our collections staff, limits on the account sizes for designated high risk accounts, the suspension of accounts earlier than in the past and the implementation of new credit and collections software tools which enable us to better screen and monitor the credit quality and delinquency levels of our customers.

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      Personnel, facilities and general corporate expenses increased primarily as a result of increases in headcount, professional fees and other expenses relating to our public safety and technology and product development initiatives, and employee compensation costs.

      We expect the aggregate amount of domestic selling, general and administrative expenses to continue to increase in the future as a result of a number of factors, including but not limited to:

  •  increased marketing and advertising in connection with advertising campaigns designed to increase brand awareness in our markets;
 
  •  increased costs associated with expanding our retail operations by opening additional Nextel stores; and
 
  •  increased costs to support a growing customer base, including costs associated with billing, collection, customer retention and customer care activities and bad debt; partially offset by
 
  •  savings expected from our outsourcing arrangements, our billing and customer care system and obtaining an increasing percentage of sales from our customer convenient channels.

      We expect our information and technology outsourcing arrangement will result in about $140 million of reduced costs over a five-year period relative to our previous run-rate, primarily in the form of lower capital spending. We also expect our customer care outsourcing arrangement will result in more than $1,000 million of reduced costs over an eight-year period relative to our run-rate in 2001. Our actual experience through December 31, 2002 indicates that we are beginning to realize these cost savings. While we believe our aggregate customer care related costs will continue to increase due to our anticipated subscriber growth, we believe these increases will be less than we would have experienced without the outsourcing arrangement.

     Depreciation and Amortization.

            Consolidated depreciation and amortization.

      Consolidated depreciation increased from $1,508 million for the year ended December 31, 2001 to $1,541 million for 2002. The $33 million increase in depreciation reflects a $204 million increase attributable to our domestic operations as discussed below, as well as the impact of the deconsolidation of our international operations in 2002, which contributed $171 million to depreciation in our consolidated results in 2001.

      Consolidated amortization decreased from $238 million for the year ended December 31, 2001 to $54 million for 2002. The $184 million decrease in amortization reflects a $121 million decrease attributable to our domestic operations as discussed below, as well as the impact of the deconsolidation of our international operations in 2002, which contributed $63 million to amortization in our consolidated results in 2001. The following section provides a more detailed analysis of our domestic depreciation and amortization expense.

          Domestic depreciation and amortization.

                                                   
% of % of Change from
Year Ended Domestic Year Ended Domestic Previous Year
December 31, Operating December 31, Operating
2002 Revenues 2001 Revenues Dollars Percent






(dollars in millions)
Depreciation
  $ 1,541       17 %   $ 1,337       19 %   $ 204       15 %
Amortization
    54       1 %     175       2 %     (121 )     (69 )%
     
     
     
     
     
         
 
Depreciation and amortization
  $ 1,595       18 %   $ 1,512       21 %   $ 83       5 %
     
     
     
     
     
         

      The $204 million increase in depreciation expense from the year ended December 31, 2001 to the year ended December 31, 2002 was primarily the result of a 5% increase in transmitter and receiver sites in service and a 4% increase in switches in service, as well as costs to modify existing switches and

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transmitter and receiver sites in existing markets primarily to enhance the capacity of our network. Additionally, depreciation increased as a result of our shortening the useful lives of some of our network assets in the fourth quarter of 2001 in response to technology upgrades. We periodically review the useful lives of our fixed assets as circumstances warrant, and it is possible that depreciation expense may increase in future periods. Depreciation expense recorded in a period can be impacted by several factors, including the effect of fully depreciated assets, the timing between when capital assets are purchased and when they are deployed into service which is when depreciation commences, company-wide decisions surrounding levels of capital spending and the level of spending on non-network assets which generally have much shorter depreciable lives as compared to network assets.

      The $121 million decrease in amortization expense from the year ended December 31, 2001 to the year ended December 31, 2002 is primarily attributable to the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets,” which required us to cease amortizing goodwill and FCC licenses effective January 1, 2002.

 
      Consolidated Restructuring and Impairment Charges, Interest and Other.
                                 
Change from
Year Ended December 31, Previous Year


2002 2001 Dollars Percent




(dollars in millions)
Restructuring and impairment charges
  $ (35 )   $ (1,769 )   $ 1,734       98 %
Interest expense
    (1,048 )     (1,403 )     355       25 %
Interest income
    58       207       (149 )     (72 )%
Gain on retirement of debt, net of debt conversion costs
    354       469       (115 )     (25 )%
Gain on deconsolidation of NII Holdings
    1,218             1,218       NM  
Equity in losses of unconsolidated affiliates
    (302 )     (95 )     (207 )     NM  
Foreign currency transaction losses, net
          (70 )     70        
Realized gain on investment
          47       (47 )     NM  
Reduction in fair value of investment, net
    (37 )     (188 )     151       80 %
Other, net
    (2 )     (12 )     10       83 %
Income tax (provision) benefit
    (391 )     135       (526 )     NM  
Income (loss) available to common stockholders
    1,660       (2,858 )     4,518       158 %


NM — Not Meaningful

     In January 2002, we announced a five-year information technology outsourcing agreement with EDS, under which EDS manages our corporate data center, database administration, helpdesk, desktop services and other technical functions. Additionally, in January 2002, we announced an eight-year customer relationship management agreement with IBM and TeleTech to manage our customer care centers. In connection with these outsourcing agreements, we recorded a $35 million domestic restructuring charge in the first quarter of 2002, which primarily represents the future lease payments related to facilities we planned to vacate net of estimated sublease income.

      In view of the capital constrained environment and NII Holdings’ lack of funding sources, during the fourth quarter of 2001, NII Holdings undertook an extensive review of its business plan and determined to pursue a less aggressive growth strategy that targeted conservation of cash resources by slowing enhancement and expansion of its networks and reducing subscriber growth and operating expenses. In connection with the implementation of this plan and the decision to discontinue funding to its Philippine operating company, NII Holdings recorded non-cash pre-tax asset impairment charges and pre-tax restructuring and other charges of about $1,747 million in 2001. In May 2001, we recorded a $22 million restructuring charge to reduce domestic payroll and other operating costs by implementing a 5% workforce reduction and streamlining our operations. For more detailed information, see note 3 to the consolidated financial statements appearing at the end of this annual report on Form 10-K.

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      Consolidated interest expense decreased from $1,403 million for the year ended December 31, 2001 to $1,048 million for 2002. The $355 million decrease in interest expense reflects a $91 million decrease attributable to our domestic operations as discussed below, as well as the impact of the deconsolidation of our international operations in 2002, which contributed $300 million to interest expense in our consolidated results in 2001, offset by a $36 million elimination included in our consolidated results in 2001. The $91 million decrease in domestic interest expense from the year ended December 31, 2001 to the year ended December 31, 2002 primarily relates to:

  •  a $140 million decrease due primarily to a reduction in the weighted average interest rates related to our bank credit facility from 6.9% during the year ended December 31, 2001 to 4.7% during the year ended December 31, 2002; partially offset by
 
  •  a $36 million decrease in capitalized interest due to a decrease in our capital expenditures as well as the reduction in our average interest rates;
 
  •  a $10 million increase due to the changes in fair values of our interest rate swaps; and
 
  •  a $3 million increase primarily related to the retirement of our senior notes, as discussed below.

      Interest expense related to our senior notes increased from the year ended December 31, 2001 to the year ended December 31, 2002 primarily due to the issuance of our 9.5% senior notes in February 2001 and our 6% convertible senior notes in May 2001, partially offset by the retirement of $1,928 million in aggregate principal amount of our senior notes during 2002. As of December 31, 2001, we had outstanding domestic long-term debt of $13,864 million. Due principally to repurchases of these securities, as of December 31, 2002, we had outstanding domestic long-term debt of $12,278 million.

      Consolidated interest income decreased from $207 million for the year ended December 31, 2001 to $58 million for 2002. The $149 million decrease in interest income reflects a $172 million decrease attributable to our domestic operations as discussed below, as well as the impact of the deconsolidation of our international operations in 2002, which contributed $13 million to interest income in our consolidated results in 2001, offset by a $36 million elimination included in our consolidated results in 2001. The $172 million decrease in interest income from the year ended December 31, 2001 to the year ended December 31, 2002 is primarily due to a general decrease in interest rates as well as lower average cash and short-term investments balances in 2002.

      The gain on retirement of debt, net of debt conversion costs in 2002 relates to the purchase and retirement of some of our senior notes during 2002. The gain on retirement of debt during 2001 relates to Nextel Communications’ purchase of some of NII Holdings’ senior notes in August 2001.

      In November 2002, upon NII Holdings’ emergence from bankruptcy, we recognized a non-cash pre-tax gain on deconsolidation of NII Holdings in the amount of $1,218 million consisting primarily of the reversal of equity losses we had recorded in excess of our investment in NII Holdings, partially offset by charges recorded when we consolidated NII Holdings, including, among other items, $185 million of cumulative foreign currency translation losses.

      The $302 million equity in losses of unconsolidated affiliates for the year ended December 31, 2002 include:

  •  a $226 million loss representing our share of NII Holdings’ pre-emergence results through May 2002;
 
  •  a $16 million gain representing our share of NII Holdings’ post-emergence results from November to December 2002; and
 
  •  a $92 million loss representing our share of Nextel Partners’ 2002 results.

      The $95 million equity in losses of unconsolidated affiliates for the year ended December 31, 2001 is primarily due to our losses attributable to our equity method investment in Nextel Partners.

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      The foreign currency transaction loss in 2001 is attributable to the inclusion of our international operations in our consolidated results in 2001.

      The realized gain on investment in 2001 primarily consists of a $42 million gain related to the sale of NII Holdings’ investment in TELUS.

      During 2002, we recognized a $37 million reduction in the fair value of our investment in SpectraSite, as we determined the decline in fair value of this investment to be other-than-temporary. During 2001, NII Holdings recognized a $188 million reduction in fair value of its investment in TELUS, as NII Holdings determined the decline in fair value of this investment to be other-than-temporary.

      The increase in the income tax provision in 2002 is primarily attributable to the adoption of SFAS No. 142, “Goodwill and Other Intangible Assets,” as a result of which we incurred non-cash charges of $386 million to the income tax provision. For more detailed information, see notes 1 and 10 to our consolidated financial statements appearing at the end of this annual report on Form 10-K. We have provided a full reserve against our net operating loss carryforwards as of December 31, 2002. This reserve is established due to the fact that we do not have a sufficient history of taxable income at this time to conclude that it is more likely than not that the net operating loss will be realized. To the extent that we have taxable income in future periods, we will realize the benefits of at least some of the net operating loss carryforwards.

 
     2.  Year ended December 31, 2001 vs. year ended December 31, 2000.
 
      Service Revenues and Cost of Service.
 
           Consolidated service revenues and cost of service.

      Consolidated service revenues increased from $5,297 million for the year ended December 31, 2000 to $7,221 million for 2001. The $1,924 million increase in service revenues reflects a $1,586 million increase attributable to our domestic operations as discussed below and a $342 million increase attributable to our international operations, offset by a $4 million increase in intercompany eliminations.

      Consolidated cost of service increased from $1,071 million for the year ended December 31, 2000 to $1,499 million for 2001. The $428 million increase in cost of service reflects a $333 million increase attributable to our domestic operations as discussed below and a $99 million increase attributable to our international operations, offset by a $4 million increase in intercompany eliminations.

 
           Domestic service revenues and cost of service.
                                                   
% of % of Changes from
Year Ended Domestic Year Ended Domestic Previous Year
December 31, Operating December 31, Operating
2001 Revenues 2000 Revenues Dollars Percent






(dollars in millions)
Service revenues
  $ 6,575       94 %   $ 4,989       93 %   $ 1,586       32 %
Cost of service
    1,324       19 %     991       18 %     333       34 %
     
             
             
         
 
Service gross margin
  $ 5,251             $ 3,998             $ 1,253       31 %
     
             
             
         
 
Service gross margin percentage
    80 %             80 %                        
     
             
                         

      Domestic service revenues. Service revenues increased 32% from the year ended December 31, 2000 to the year ended December 31, 2001. Our service revenues are impacted by both the number of handsets in service (volume) and average monthly revenue per handset in service (rate).

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      From a volume perspective, our service revenues increased principally as a result of a 30% increase in handsets in service. The growth in the number of handsets in service from December 31, 2000 to December 31, 2001 is the result of a number of factors, principally:

  •  the introduction of more competitive service pricing plans targeted at meeting more of our customers’ needs, including a variety of fixed-rate plans offering bundled monthly minutes and other integrated services and features;
 
  •  our differentiated products and services, including Nextel Direct Connect and Nextel Online;
 
  •  increased brand name recognition through increased advertising and marketing campaigns;
 
  •  aggressive handset pricing promotions and increased handset choices;
 
  •  increased sales force and marketing staff and selling efforts targeted at specific vertical markets; and
 
  •  improved quality of service.

      From a rate perspective, ARPU decreased from about $74 for the year ended December 31, 2000 to about $71 for the year ended December 31, 2001. We attribute the decrease in ARPU to the introduction of more competitive pricing plans providing more minutes of use at a lower price to the subscriber. These plans typically included a fixed amount of interconnect minutes combined with an unlimited or fixed amount of Nextel Direct Connect service, unlimited Nextel Online services, free incoming calls or free long distance service, all for a stated package price.

      Domestic cost of service. Cost of service increased 34% from the year ended December 31, 2000 to the year ended December 31, 2001, primarily as a result of a 68% increase in costs incurred related to variable interconnect fees on higher minutes of use and a 31% increase in costs incurred related to direct switch and transmitter and receiver site costs including rent, utility and fixed interconnection costs. Total system minutes of use grew 65% from the year ended December 31, 2000 to the year ended December 31, 2001 principally due to the larger number of handsets in service as well as a 20% increase in average monthly minutes of use per subscriber in 2001 compared to 2000. The direct switch and transmitter and receiver site costs increased primarily due to a 22% increase in transmitter and receiver sites and related equipment and an 8% increase in the number of switches we placed in service from December 31, 2000 to December 31, 2001.

      Domestic service gross margin. Service gross margin as a percentage of service revenues remained flat at 80% for each of the years ended December 31, 2000 and December 31, 2001.

 
           International service revenues and cost of service.
                                                   
% of % of Changes from
Year Ended International Year Ended International Previous Year
December 31, Operating December 31, Operating
2001 Revenues 2000 Revenues Dollars Percent






(dollars in millions)
Service revenues
  $ 651       96 %   $ 309       94 %   $ 342       111 %
Cost of service
    180       26 %     81       25 %     99       122 %
     
             
             
         
 
Service gross margin
  $ 471             $ 228             $ 243       107 %
     
             
             
         
 
Service gross margin percentage
    72 %             74 %                        
     
             
                         

      International service gross margin. International service gross margin increased 107% from the year ended December 31, 2000 to the year ended December 31, 2001. While the international service gross margin has increased in the aggregate, the international service gross margin as a percentage of international service revenues has decreased due to the introduction of competitive pricing plans, an increase in costs related to variable interconnect fees on significantly increased minutes of use and an increase in site ground lease and utility expenses incurred due to a 52% increase in the number of

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international transmitter and receiver sites placed in service by NII Holdings from December 31, 2000 to December 31, 2001.
 
      Handset and Accessory Revenues and Cost of Handset and Accessory Revenues.
 
           Consolidated handset and accessory revenues and cost of handset and accessory revenues.

      Consolidated handset and accessory revenues increased from $417 million for the year ended December 31, 2000 to $468 million in 2001. The $51 million increase in handset and accessory revenues reflects a $43 million increase attributable to our domestic operations as discussed below, and an $8 million increase attributable to our international operations.

      Consolidated cost of handset and accessory revenues increased from $1,101 million for the year ended December 31, 2000 to $1,370 million in 2001. The $269 million increase in cost of handset and accessory revenues reflects a $214 million increase attributable to our domestic operations as discussed below and a $55 million increase attributable to our international operations. The following section provides a more detailed analysis of our domestic handset and accessory revenues and cost of handset and accessory revenues.

 
           Domestic handset and accessory revenues and cost of handset and accessory revenues.

      During the year ended December 31, 2001, we recorded $439 million of handset and accessory revenues, an increase of $43 million over 2000. During the year ended December 31, 2001, we recorded $1,214 million of cost of handset and accessory revenues, an increase of $214 million over 2000. These results are summarized in the table below.

                                                   
% of % of Change from
Year Ended Domestic Year Ended Domestic Previous Year
December 31, Operating December 31, Operating
2001 Revenues 2000 Revenues Dollars Percent






(dollars in millions)
Current period handset and accessory sales
  $ 484       7  %   $ 424       8  %   $ 60       14  %
Net effect of SAB No. 101 handset deferrals
    (45 )     (1 )%     (28 )     (1 )%     (17 )     (61 )%
     
     
     
     
     
         
 
Handset and accessory revenues
    439       6  %     396       7  %     43       11  %
     
     
     
     
     
         
Current period cost of handset and accessory sales
    1,259       18  %     1,028       19  %     231       22  %
Net effect of SAB No. 101 handset deferrals
    (45 )     (1 )%     (28 )     (1 )%     (17 )     (61 )%
     
     
     
     
     
         
 
Cost of handset and accessory revenues
    1,214       17  %     1,000       18  %     214       21  %
     
     
     
     
     
         
 
Handset and accessory gross subsidy
  $ (775 )           $ (604 )           $ (171 )     (28 )%
     
             
             
         

NM — Not Meaningful

     Domestic handset and accessory revenues. Reported handset and accessory revenues are influenced by the number of handsets sold, the sales prices of the handsets sold and the effect of SAB No. 101, which requires that handset revenue generated from sales to customers be spread over the estimated life of the customer relationship period rather than recording all handset revenue at the time of sale. The effect of SAB No. 101 in the table above was the net effect of current period sales being deferred to future

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periods, offset by the benefit of handset sales deferred in previous periods that were being recognized as revenue.
                           
Year Ended
December 31,

Change from
SAB No. 101 Effect 2001 2000 Previous Year




(in millions)
Handset sales deferred
  $ (391 )   $ (322 )   $ (69 )
Previously deferred handset sales recognized
    346       294       52  
     
     
     
 
 
Net effect of SAB No. 101 handset deferrals
  $ (45 )   $ (28 )   $ (17 )
     
     
     
 

      Current period handset and accessory sales increased $60 million for the year ended December 31, 2001 compared to 2000. This increase reflected an increase in the number of handsets sold to new and existing customers, including sales of new feature rich and higher priced handsets primarily in the second half of 2001. Due to the competitive environment, this increase was partially offset by continued reliance on various customer inducements, including reductions in the sales prices of handset models and volume-based handset promotions. This increase in handset and accessory sales was partially offset by the increase in the SAB No. 101 net deferrals of $17 million. The increase in the SAB No. 101 net deferrals reflected increasing revenues from handset sales in 2001 primarily due to increased handset prices.

      Domestic cost of handset and accessory revenues. Reported cost of handset and accessory revenues are influenced by the number of handsets sold, the cost of the handsets sold and the effect of SAB No. 101. With respect to the cost of handset and accessory revenues, the SAB No. 101 effect is recorded in amounts equivalent to handset revenues deferred and recognized.

                           
Year Ended
December 31,

Change from
SAB No. 101 Effect 2001 2000 Previous Year




(in millions)
Cost of handset sales deferred
  $ (391 )   $ (322 )   $ (69 )
Previously deferred cost of handset sales recognized
    346       294       52  
     
     
     
 
 
Net effect of SAB No. 101 handset deferrals
  $ (45 )   $ (28 )   $ (17 )
     
     
     
 

      Current period cost of handset and accessory sales increased $231 million for the year ended December 31, 2001 compared to 2000. This increase reflected an increase in the number of handsets sold, and to a lesser extent, the increase in the percentage of higher cost handsets sold, partially offset by the increase in the SAB No. 101 net deferrals of $17 million.

      Domestic handset and accessory gross subsidy. We generally sell handsets at prices below our cost in response to competition, to attract new customers and as retention inducements for existing customers. Handset and accessory gross subsidy increased 28% from the year ended December 31, 2000 to 2001 due to the increased number of handsets sold and to the higher costs of our handsets.

 
           International handset and accessory revenues and cost of handset and accessory revenues.
                                                   
% of % of Changes from
Year Ended International Year Ended International Previous Year
December 31, Operating December 31, Operating
2001 Revenues 2000 Revenues Dollars Percent






(dollars in millions)
Handset and accessory revenues
  $ 29       4 %   $ 21       6 %   $ 8       38 %
Cost of handset and accessory revenues
    156       23 %     101       31 %     55       54 %
     
             
             
         
 
Handset and accessory gross subsidy
  $ (127 )           $ (80 )           $ (47 )     (59 )%
     
             
             
         

      International handset and accessory gross subsidy. International handset and accessory gross subsidy increased 59% from the year ended December 31, 2000 to the year ended December 31, 2001 primarily

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due to the increase in handsets sold primarily in Mexico and Brazil, partially offset by a decrease in the average cost NII Holdings paid for the handsets sold.

     Selling, General and Administrative Expenses.

 
           Consolidated selling, general and administrative expenses.

      Consolidated selling, general and administrative expenses increased from $2,278 million for the year ended December 31, 2000 to $3,020 million for 2001. The $742 million increase in selling, general and administrative expenses reflects a $576 million increase attributable to our domestic operations as discussed below, a $163 million increase attributable to our international operations and a $3 million increase in intercompany eliminations. The following section provides a more detailed analysis of our domestic selling, general and administrative expenses.

 
           Domestic selling, general and administrative expenses.
                                                   
% of % of Change from
Year Ended Domestic Year Ended Domestic Previous Year
December 31, Operating December 31, Operating
2001 Revenues 2000 Revenues Dollars Percent






(dollars in millions)
Selling and marketing
  $ 1,252       18 %   $ 1,002       19 %   $ 250       25 %
General and administrative
    1,323       19 %     997       18 %     326       33 %
     
     
     
     
     
         
 
Selling, general and administrative
  $ 2,575       37 %   $ 1,999       37 %   $ 576       29 %
     
     
     
     
     
         

      Domestic selling and marketing. The increase in domestic selling and marketing expenses from the year ended December 31, 2000 to the year ended December 31, 2001 primarily reflects increased costs incurred in connection with growing our customer base, including:

  •  a $90 million, or 49%, increase in advertising expenses due to aggressive marketing campaigns, including sports-related sponsorships and television commercials directed at increasing brand awareness, as well as promoting our differentiated services, including the enhancements being made to Nextel Direct Connect and Nextel Online;
 
  •  a $74 million, or 17%, increase in commissions and residuals earned by indirect dealers and distributors as a result of increased handset sales through these channels;
 
  •  a $62 million, or 20%, increase in sales and marketing payroll and related expenses, including costs associated with our Nextel stores acquired and opened in 2001 and increased commissions attributable to increased volume through our direct distribution channels; and
 
  •  a $24 million increase in other general marketing expenses, including $10 million in facilities costs related to our Nextel stores acquired and opened in 2001.

      Domestic general and administrative. Domestic general and administrative expenses increased from the year ended December 31, 2000 to the year ended December 31, 2001 primarily as a result of activities to support a larger customer base, specifically:

  •  a $166 million, or 102%, increase in bad debt expense, which has increased as a percentage of domestic operating revenues primarily due to the impact of a slowing economy and aggressive promotions in late 2000 and early 2001 to less creditworthy customers;
 
  •  a $145 million, or 39%, increase in expenses related to billing, collection, customer retention and customer care activities, including the costs associated with our fifth customer care center which commenced operations in January 2001 and our sixth customer care center which commenced operations in July 2001, as well as costs associated with the implementation of our billing and customer care system, which was put into production in 2002; and
 
  •  a $15 million increase in personnel, facilities and general corporate expenses.

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           International selling, general and administrative expenses.
                                                   
% of % of Change from
Year Ended International Year Ended International Previous Year
December 31, Operating December 31, Operating
2001 Revenues 2000 Revenues Dollars Percent






(dollars in millions)
Selling and marketing
  $ 210       31 %   $ 143       43 %   $ 67       47 %
General and administrative
    234       34 %     138       42 %     96       70 %
     
     
     
     
     
         
 
Selling, general and administrative
  $ 444       65 %   $ 281       85 %   $ 163       58 %
     
     
     
     
     
         

      International selling, general and administrative expenses. The $67 million increase in international selling and marketing expenses from the year ended December 31, 2000 to the year ended December 31, 2001 is primarily attributable to increased commissions from higher levels of handset sales in Mexico and increased advertising in Mexico. The $96 million increase in international general and administrative expenses from the year ended December 31, 2000 to the year ended December 31, 2001 is primarily due to an increase in billing and customer care, information technology, facilities and other general corporate expenses to support a growing customer base. Additionally, international bad debt expense increased $25 million, or 156%, from the year ended December 31, 2000 to the year ended December 31, 2001, largely in Brazil and Mexico.

 
      Depreciation and Amortization.
 
           Consolidated depreciation and amortization.

      Consolidated depreciation increased from $1,063 million for the year ended December 31, 2000 to $1,508 million for 2001. The $445 million increase in depreciation reflects a $392 million increase attributable to our domestic operations as discussed below, and a $53 million increase attributable to our international operations.

      Consolidated amortization increased from $202 million for the year ended December 31, 2000 to $238 million for 2001. The $36 million increase in amortization reflects a $16 million increase attributable to our domestic operations as discussed below, and a $20 million increase attributable to our international operations. The following section provides a more detailed analysis of our domestic depreciation and amortization expense.

 
           Domestic depreciation and amortization.
                                                   
% of % of Change from
Year Ended Domestic Year Ended Domestic Previous Year
December 31, Operating December 31, Operating
2001 Revenues 2000 Revenues Dollars Percent






(dollars in millions)
Depreciation
  $ 1,337       19 %   $ 945       18 %   $ 392       41 %
Amortization
    175       2 %     159       3 %     16       10 %
     
     
     
     
     
         
 
Depreciation and amortization
  $ 1,512       21 %   $ 1,104       21 %   $ 408       37 %
     
     
     
     
     
         

      Depreciation increased from the year ended December 31, 2000 to the year ended December 31, 2001 primarily as a result of placing into service, as well as modifying, additional switches and transmitter and receiver sites in existing domestic markets primarily to enhance the coverage and capacity of our network. During the fourth quarter of 2001, we shortened the useful lives of some assets located in the information technology data center and the customer care locations as a result of our customer care and information technology outsourcing arrangements. We also changed the lives of some network assets. We recorded an additional $21 million, or $0.03 per share, in depreciation expense for the fourth quarter of 2001 as a result of these changes in estimates.

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      The increase in amortization during 2001 is primarily attributable to domestic licenses acquired in auctions in late 2000 as well as acquisitions occurring in 2001.

 
           International depreciation and amortization.
                                                   
% of % of Change from
Year Ended International Year Ended International Previous Year
December 31, Operating December 31, Operating
2001 Revenues 2000 Revenues Dollars Percent






(dollars in millions)
Depreciation
  $ 171       25 %   $ 118       36 %   $ 53       45 %
Amortization
    63       9 %     43       13 %     20       47 %
     
     
     
     
     
         
 
Depreciation and amortization
  $ 234       34 %   $ 161       49 %   $ 73       45 %
     
     
     
     
     
         

      International depreciation increased from the year ended December 31, 2000 to the year ended December 31, 2001 primarily as a result of placing into service, as well as modifying, additional switches and transmitter and receiver sites in international markets primarily to enhance the coverage and capacity NII Holdings’ networks.

      The increase in international amortization in 2001 is primarily attributable to international acquisition activities completed during the second half of 2000.

 
           Consolidated Restructuring and Impairment Charges, Interest and Other.
                                 
Year Ended Change from
December 31, Previous Year


2001 2000 Dollars Percent




(dollars in millions)
Restructuring and impairment charges
  $ (1,769 )   $     $ (1,769 )      
Interest expense
    (1,403 )     (1,245 )     (158 )     (13 )%
Interest income
    207       396       (189 )     (48 )%
Gain (loss) on retirement of debt, net of debt conversion costs
    469       (127 )     596       NM  
Equity in losses of unconsolidated affiliates
    (95 )     (152 )     57       38 %
Foreign currency transaction losses, net
    (70 )     (25 )     (45 )     (180 )%
Realized gain on investment, net
    47       275       (228 )     (83 )%
Reduction in fair value of investment
    (188 )           (188 )      
Other, net
    (12 )     31       (43 )     NM  
Income tax benefit
    135       33       102       NM  
Loss attributable to common stockholders
    (2,858 )     (1,024 )     (1,834 )     (179 )%


NM — Not Meaningful

     In May 2001, we announced a domestic restructuring to reduce payroll and other operating costs by implementing a 5% workforce reduction and streamlining our operations. The workforce reduction, completed during the second quarter, affected about 800 employees across the entire domestic organization. As a result of the restructuring, we recorded a $22 million charge in the second quarter of 2001 consisting of $15 million related to severance and fringe benefits and $7 million related to the write-off of information technology development projects that we abandoned as a result of the reduced headcount.

      During the third quarter of 2001, following NII Holdings’ review of the economic conditions, operating performance and other relevant factors in the Philippines, NII Holdings decided to discontinue funding to its Philippine operating company. In view of the capital constrained environment and NII Holdings’ lack of funding sources, during the fourth quarter of 2001, NII Holdings undertook an extensive review of its business plan and determined to pursue a less aggressive growth strategy that targeted conservation of cash resources by slowing enhancement and expansion of its networks and reducing subscriber growth and operating expenses. In connection with the implementation of this plan and the

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decision to discontinue funding to its Philippine operating company, NII Holdings recorded non-cash pre-tax asset impairment charges and pre-tax restructuring and other charges of about $1,747 million in 2001, consisting of write-offs of property, plant and equipment of $1,089 million, licenses of $476 million, goodwill of $144 million, intangible and other assets of $32 million and restructuring charges of $6 million. For more detailed information, see note 3 to the consolidated financial statements appearing at the end of this annual report on Form 10-K.

      The increase in interest expense from the year ended December 31, 2000 to the year ended December 31, 2001 resulted primarily from the issuance of our senior notes in January 2001 and our convertible notes in May 2001 and NII Holdings’ issuance of its senior notes in August 2000, as well as a higher average level of outstanding borrowings under our credit facilities, offset by a reduction in the weighted average interest rate for our domestic bank credit facility.

      The decrease in interest income from the year ended December 31, 2000 to the year ended December 31, 2001 is primarily due to a decrease in interest rates during 2001 as well as a lower average cash balance in 2001.

      The gain on retirement of debt in 2001 relates to our purchase of some of NII Holdings’ senior notes during the third quarter of 2001. While these notes were held by Nextel Communications and remained outstanding obligations of NII Holdings, a gain was recognized in our consolidated financial statements in accordance with generally accepted accounting principles. The loss on retirement of debt, net of debt conversion costs in 2000 relates to the early retirement of some of our senior notes during the first quarter of 2000.

      The decrease in equity in losses of unconsolidated affiliates from the year ended December 31, 2000 to the year ended December 31, 2001 is due to $3 million of decreased losses attributable to our equity method investment in Nextel Partners. The remaining decrease is attributable to NII Holdings’ Philippine affiliate, which we began consolidating in the third quarter of 2000, and to NII Holdings’ Japanese investment, which was written off in the fourth quarter of 2000.

      The foreign currency transaction loss in 2001 is due primarily to the weakening of the Brazilian real relative to the U.S. dollar as a result of the economic environment in both Brazil and Argentina. During the third quarter of 2001, NII Holdings recorded a translation adjustment of $11 million as part of the cumulative translation adjustment related to intercompany loans between a subsidiary of NII Holdings and its Brazilian operating company as a result of NII Holdings’ determination that these intercompany loans were of a long-term investment nature. Prior to August 2001, the effect of exchange rate changes on these intercompany loans was reported as foreign currency transaction losses in our consolidated statements of operations. The foreign currency transaction loss in 2000 is primarily attributable to the weakening of the Brazilian real and Philippine peso relative to the U.S. dollar in the fourth quarter of 2000.

      The realized gain on investment in 2000 resulted from the exchange of NII Holdings’ stock in Clearnet for stock in TELUS as a result of the acquisition of Clearnet by TELUS in October 2000. On September 30, 2001, NII Holdings recognized a $188 million reduction in fair value of its investment in TELUS, as NII Holdings determined the decline in fair value of this investment to be other-than-temporary. The realized gain on investment in 2001 primarily consists of a $42 million gain related to the sale of NII Holdings’ investment in TELUS in the fourth quarter.

      The increase in the income tax benefit from the year ended December 31, 2000 to December 31, 2001 is primarily attributable to the write-off of deferred tax liabilities related to NII Holdings’ asset impairment charges in 2001.

C.     Related Party Transactions

      Motorola. We have had and expect to continue to have significant transactions with Motorola. As of March 14, 2003, Motorola was the beneficial owner of about 8% of our class A common stock, assuming the conversion of shares of our class B nonvoting common stock, all of which is owned by Motorola. We have a number of important strategic and commercial relationships with Motorola. Motorola is the sole

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provider of the iDEN infrastructure equipment and all the handsets except the Blackberry 6510 used throughout our markets. We paid Motorola about $2,314 million during 2002 for these goods and services and net payables to Motorola were $225 million at December 31, 2002. We also work closely with Motorola to improve existing products and develop new technologies for use in our network such as Nationwide Direct Connect. We rely on Motorola for network maintenance and enhancements. See Part I, “Item 1. Business — D. Our Network and Technology” and “— F. Our Strategic Relationships — 1. Motorola.”

      Nextel Partners. In 1999, we entered into agreements with Nextel Partners, and other parties, including Motorola and Eagle River Investments, relating to the capitalization, governance, financing and operation of Nextel Partners. Nextel Partners operates a network utilizing the iDEN technology used in our network under the Nextel brand name. The certificate of incorporation of Nextel Partners establishes circumstances in which we will have the right or obligation to purchase the outstanding shares of class A common stock of Nextel Partners at specified prices. Subject to certain limitations, we will have the right to purchase the outstanding shares of Nextel Partners’ class A common stock on January 29, 2008. We owned about 32% of the common stock of Nextel Partners as of December 31, 2002.

      Under a roaming agreement between one of our wholly owned subsidiaries and a wholly owned subsidiary of Nextel Partners, we were charged $40 million during 2002 for our customers roaming on Nextel Partners’ network, net of roaming revenues earned. One of our wholly owned subsidiaries provides specified telecommunications switching services to Nextel Partners under a switch sharing agreement. For these services, we earned $52 million in 2002, which we recorded as a reduction to cost of service. We charged Nextel Partners $6 million in 2002 for administrative services provided under a transition services agreement. We recorded these amounts as a reduction to selling, general and administrative expenses. We had a net receivable due from Nextel Partners of $16 million as of December 31, 2002.

      Mr. Donahue is a director of Nextel Partners. See Part I, “Item 1. Business — F. Our Strategic Relationships — 2. Nextel Partners.”

      NII Holdings. On November 12, 2002, NII Holdings reorganized under Chapter 11 of the U.S. Bankruptcy Code. NII Holdings provides wireless communications services primarily in selected Latin American markets.

      On December 31, 2001, NII Holdings’ Argentine operating company failed to make principal payments on its $108 million Argentine credit facilities, and on February 1, 2002, NII Holdings failed to make a $41 million interest payment on its $650 million aggregate principal amount 12.75% senior notes, resulting in defaults under these facilities, as well as under its $382 million of vendor financing facilities with Motorola Credit Corporation due to cross-default provisions. NII Holdings decided not to make these payments as part of the cash preservation process undertaken to restructure its debts and implement a revised business plan.

      In May 2002, NII Holdings reached an agreement in principle with its main creditors to restructure its outstanding debt. In connection with this agreement, on May 24, 2002, NII Holdings filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. While NII Holdings, Inc., the U.S. parent company, operated as a debtor-in-possession under the Bankruptcy Code, its non-U.S. subsidiaries continued providing continuous wireless communication services in the ordinary course of business. On October 28, 2002, the Bankruptcy Court confirmed NII Holdings’ plan of reorganization and on November 12, 2002, NII Holdings emerged from bankruptcy. Before its reorganization, NII Holdings was our substantially wholly owned subsidiary.

      As a result of the bankruptcy reorganization, all previously outstanding equity interests in NII Holdings were cancelled. In addition, NII Holdings extinguished $2,331 million in senior redeemable notes and other unsecured, non-trade claims that existed prior to its bankruptcy filing and in exchange issued shares of new common stock valued at $2.50 per share. This included the $857 million aggregate principal amount of notes of NII Holdings that we purchased in August 2001. NII Holdings reinstated in full its

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$325 million of outstanding equipment financing owed to Motorola Credit, subject to deferrals of principal amortization and some structural modifications. NII Holdings also repaid the outstanding principal balance, together with accrued interest, due under its $57 million incremental financing facility owed to Motorola Credit using restricted cash held in escrow, which amount will be available for borrowing under some circumstances. The Argentine credit facility was retired in exchange for a $5 million payment and the issuance of 400,000 shares of NII Holdings’ new class A common stock.

      The reorganization of NII Holdings included a new infusion of capital into NII Holdings of $190 million, $140 million of which was provided by existing creditors in exchange for about $181 million in aggregate principal amount at maturity of a new series of 13% senior secured notes of NII Holdings and shares of NII Holdings’ class A common stock. We contributed about $51 million in cash of this $140 million and received in exchange about $66 million in aggregate principal amount at maturity of these new notes and 5.7 million shares of NII Holdings’ new class A common stock. We allocated the $51 million investment between the debt and equity instruments based upon their relative fair values. This resulted in a carrying value of $37 million for the debt and a carrying value of $14 million for the 5.7 million shares of NII Holdings’ new class A common stock. Our allocation was performed in the same manner as and is consistent with NII Holdings’ allocation. As a result of the bankruptcy, we also received 1.4 million shares of NII Holdings’ new class A common stock, valued at $4 million, in settlement of the old NII Holdings senior notes held by us and other claims. We also provided $50 million of additional funding to NII Holdings in exchange for a U.S.-Mexico cross border spectrum sharing arrangement, $25 million of which remains in escrow pending the completion of NII Holdings’ obligations under this arrangement.

      As a result of NII Holdings’ bankruptcy filing in May 2002, we began accounting for our investment in NII Holdings, effective May 2002, using the equity method. In accordance with the equity method, we did not recognize equity in losses of NII Holdings after May 2002 as we had already recognized $1,408 million of losses in excess of our investment in NII Holdings through that date. We have classified the 2002 net operating results of NII Holdings through May 2002 as equity in losses of unconsolidated affiliates as permitted under the accounting rules governing a mid-year change from consolidating a subsidiary to accounting for the investment using the equity method. However, the presentation of NII Holdings in the financial statements as a consolidated subsidiary in 2001 and prior periods has not changed from the prior presentation.

      In November 2002, upon NII Holdings’ emergence from bankruptcy, we recognized a non-cash pre-tax gain on deconsolidation of NII Holdings in the amount of $1,218 million consisting primarily of the reversal of equity losses we had recorded in excess of our investment in NII Holdings, partially offset by charges recorded when we consolidated NII Holdings, including, among other items, $185 million of cumulative foreign currency translation losses. At the same time, we began accounting for our new ownership interest in NII Holdings using the equity method and resumed recording our proportionate share of NII Holdings’ results of operations. As of December 31, 2002, we owned about 36% of the outstanding common stock of NII Holdings.

      Upon NII Holdings’ emergence from bankruptcy, we entered into a revised overhead services agreement with NII Holdings under which we provide certain administrative, engineering and technical information technology and marketing services for agreed upon service fees. During 2002, we charged NII Holdings $2 million for services provided under both the original and revised overhead services agreement. We recorded these amounts as a reduction to selling, general and administrative expenses. Under roaming agreements between one of our wholly owned subsidiaries and wholly owned subsidiaries of NII Holdings, we were charged $7 million during 2002 for our subscribers roaming on NII Holdings’ networks, net of roaming revenues earned of $1 million for NII Holdings’ subscribers roaming on our network. We recorded the roaming revenues we earned from NII Holdings as service revenues and we recorded the roaming expenses we were charged as cost of service. We have a net receivable due from NII Holdings of $1 million as of December 31, 2002.

      Mr. Donahue is a director of NII Holdings.

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      XO Communications. During 2002, two members of our board of directors served on the board of directors of XO Communications, Inc. Additionally, Mr. McCaw held rights to shares representing a majority of the voting interest of XO Communications. As a result of XO Communications’ reorganization under Chapter 11 of the U.S. Bankruptcy Code, Mr. McCaw no longer holds these voting interests. We are a party to a multi-year agreement with XO Communications under which it provides us with telecommunications services. We paid $70 million to XO Communications during 2002 for telecommunications services.

D.     Liquidity and Capital Resources

      As of December 31, 2002, we had total liquidity of $4.1 billion available to fund our operations including $2.7 billion of cash, cash equivalents and short-term investments and about $1.4 billion available under the revolving loan commitment of our bank credit facility. Until the fourth quarter of 2002, total cash used in investing activities, primarily for capital expenditures and spectrum acquisitions associated with developing, enhancing and operating our network has more than offset our cash flows provided by operating activities. For the year ended December 31, 2002, total cash provided by operating activities exceeded cash flows used in investing activities by $287 million as compared to a deficit of $2,383 million for the same period in 2001. We have historically used external sources of funds, primarily from debt incurrences and equity issuances, to fund capital expenditures, acquisitions and other nonoperating needs.

 
      Cash Flows.
                                 
Year Ended Change from
December 31, Previous Year


2002 2001 Dollars Percent




(dollars in millions)
Cash provided by operating activities
  $ 2,523     $ 1,129     $ 1,394       123  %
Cash used in investing activities
    (2,236 )     (3,512 )     1,276       36  %
Cash (used in) provided by financing activities
    (922 )     2,256       (3,178 )     (141 )%

      Net cash provided by operating activities for the year ended December 31, 2002 improved by $1,394 million over the same period in 2001 primarily reflecting the improved performance of our domestic operations from our achievement of certain economies of scale and from the growth in our domestic customer base.

      Net cash used in investing activities for the year ended December 31, 2002 decreased by $1,276 million over the same period in 2001 due to:

  •  a $1,555 million decrease in cash paid for capital expenditures; and
 
  •  a $585 million decrease in cash paid for purchases of licenses, acquisitions, investments and other; offset by
 
  •  a $474 million decrease in net cash proceeds from maturities and sales of short-term investments;
 
  •  a $250 million decrease in cash and cash equivalents as a result of the deconsolidation of NII Holdings; and
 
  •  a $140 million decrease in proceeds from sales of investments.

      Capital expenditures to fund the continued enhancement of our network to provide greater capacity continued to represent the largest use of our funds for investing activities. Cash payments for capital expenditures include payments made during the period for capital expenditures that were accrued at the beginning of the period and included in capital expenditures during the prior year. Cash payments for capital expenditures totaled $1,863 million for the year ended December 31, 2002 and $3,418 million (including $645 million of international capital expenditures) for the year ended December 31, 2001. Domestic capital expenditures decreased primarily due to a 71% decrease in the number of transmitter and

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receiver sites placed into service during the year ended December 31, 2002 as compared the same period in 2001. We attribute this decrease primarily to several factors, including:

  •  implementation of enhanced processes and tools that allow us to more efficiently deploy and utilize network assets;
 
  •  improved spectrum position which allows us to add more capacity to existing transmitter and receiver sites rather than building additional sites;
 
  •  technological advances in network equipment which provide us with more capacity at a lower cost; and
 
  •  a reduced network build as a result of anticipated technological enhancements; see “— E. Future Capital Needs and Resources — Capital Needs — Capital expenditures.”

      We made cash payments during the year ended December 31, 2002 totaling $543 million for licenses, acquisitions, investments and other, including $111 million related to the acquisition of 800 MHz and 900 MHz licenses from Chadmoore, $51 million for our investment in NII Holdings’ new class A common stock and new senior notes issued in its reorganization, $50 million for our U.S.-Mexico cross border spectrum sharing agreement with NII Holdings and $40 million in cash payments toward our purchase of NeoWorld.

      Net cash used in financing activities during the year ended December 31, 2002 consisted primarily of $843 million paid for the purchase of our outstanding debt securities and mandatorily redeemable preferred stock and $147 million for repayments under capital lease and finance obligations and long-term credit facilities. As to the purchase of our outstanding debt securities and mandatorily redeemable preferred stock, we may, from time to time, as we deem appropriate, enter into similar transactions that in the aggregate may be material. Net cash provided by financing activities during the year ended December 31, 2001 consisted primarily of $2,250 million in gross proceeds from the private placements of our 9.5% senior serial redeemable notes due 2011 and our 6% convertible senior notes due 2011.

E.     Future Capital Needs and Resources

       Capital Resources.

      As of December 31, 2002, our capital resources included:

  •  $2.7 billion of cash, cash equivalents and short-term investments; and
 
  •  about $1.4 billion of the revolving loan commitment under our credit facility, as discussed below.

Therefore, our resulting total amount of liquidity to fund our operations was about $4.1 billion as of December 31, 2002.

      Our ongoing capital needs depend on a variety of factors, including the extent to which we are able to fund the cash needs of our business from earnings. Until recently, we have been unable to fund our capital expenditures, spectrum acquisition costs and business acquisitions with the cash generated by our operating activities. Therefore, we have met the cash needs of our business principally by raising capital from issuances of debt and equity securities. To the extent we can generate sufficient cash flow from our operating activities, we will be able to use less of our available liquidity and will have less, if any, need to raise capital from the capital markets. To the extent we generate less cash flow from our operating activities, we will be required to use more of our available liquidity to fund operations or raise additional capital from the capital markets. We may be unable to raise additional capital on acceptable terms, if at all. Our ability to generate earnings is dependent upon, among other things:

  •  the amount of revenue we are able to generate from our customers;
 
  •  the amount of operating expenses required to provide our services;

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  •  the cost of acquiring and retaining customers, including the subsidies we incur to provide handsets to both our new and existing customers; and
 
  •  our ability to continue to grow our customer base.

      As of December 31, 2002, our credit facility provided for total secured financing capacity of up to $5.9 billion, subject to the satisfaction or waiver of applicable borrowing conditions. As of December 31, 2002, this facility consisted of a $1.4 billion revolving loan commitment and $4.5 billion in term loans. All of the term loans have already been fully accessed. Principal repayment began on the term loans in the amount of $47 million in the fourth quarter of 2002, and the several tranches that make up the term loans mature over a period from December 31, 2007 to March 31, 2009. On December 31, 2002, the amount of the revolving loan commitment available to us was reduced by $38 million and will continue to be reduced by $38 million every quarter through March 31, 2004. Starting April 1, 2004, the reductions become more significant until 2007 when no amounts will be available under the credit facility.

      The credit facility requires compliance with financial ratio tests, including total indebtedness to operating cash flow, secured indebtedness to operating cash flow, operating cash flow to interest expense and operating cash flow to specified charges, each as defined under the credit facility, as amended. Some of these ratios become more stringent in 2003, at which time they become fixed. As of December 31, 2002, we were in compliance with all financial ratio tests under our credit facility, and we expect to remain in full compliance with these ratio tests when they become more stringent in 2003. Borrowings under the credit facility are secured by liens on assets of substantially all of our subsidiaries. The maturity dates of the loans may accelerate if we do not comply with the financial ratio tests, which could have a material adverse effect on our financial condition.

      In addition, the loans under the credit facility can accelerate if the aggregate amount of our public notes that mature within the succeeding six months of any date before June 30, 2009, or if the aggregate amount of our redeemable stock that is mandatorily redeemable within the succeeding six months of any date before June 30, 2009, exceed amounts specified in our credit facility. However, no such acceleration is permitted if the long-term rating for our public notes is at least BBB- by Standard & Poor’s Ratings Services or Baa3 by Moody’s Investors Service, Inc. There is no provision under any of our indebtedness that requires repayment in the event of a downgrade by any ratings service.

      Our ability to access additional amounts under the credit facility may be restricted by provisions included in some of our public notes and mandatorily redeemable preferred stock that limit the incurrence of additional indebtedness in certain circumstances. The availability of borrowings under this facility also is subject to the satisfaction or waiver of specified borrowing conditions. As of December 31, 2002, we were able to access substantially all of the remaining $1.4 billion available under the bank credit facility.

      The credit facility also contains covenants which limit our ability and the ability of some of our subsidiaries to incur additional indebtedness; create liens; pay dividends or make distributions in respect of our or their capital stock or make specified other restricted payments; consolidate, merge or sell all or substantially all of our or their assets; guarantee obligations of other entities; enter into hedging agreements; enter into transactions with affiliates or related persons or engage in any business other than the telecommunications business. Finally, except for distributions for specified limited purposes, these covenants limit the distribution of substantially all of our subsidiaries’ net assets.

 
      Capital Needs.

      We currently anticipate that our future capital needs will principally consist of funds required for:

  •  capital expenditures to expand and enhance our network, as discussed immediately below under “— Capital expenditures;”
 
  •  operating expenses relating to our network;
 
  •  future investments, including potential spectrum purchases and investments in new business opportunities;

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  •  potential substantial payments in connection with the Consensus Plan relating to the proposed public safety spectrum realignment (see Part I, “Item 1. Business — D. Our Network and Technology — 4. Proposed public safety spectrum realignment”);
 
  •  debt service requirements related to our long-term debt, capital lease and financing obligations and mandatorily redeemable preferred stock;
 
  •  potential material increases in the cost of compliance with regulatory mandates (see Part I, “Item 1. Business — K. Regulation”); and
 
  •  other general corporate expenditures.

      Capital expenditures. Our capital expenditures in 2002 were $1,904 million, including capitalized interest. In the future, we expect our capital spending to be driven by several factors including:

  •  the construction of additional transmitter and receiver sites to increase system capacity and maintain system quality and the installation of related switching equipment in existing market coverage areas;
 
  •  the enhancement of our network coverage;
 
  •  the enhancements to our existing iDEN technology to increase voice capacity and to offer nationwide Direct Connect in 2003; and
 
  •  any potential future enhancement of our network through the deployment of next generation technologies.

      Our future capital expenditures are significantly affected by future technology improvements and technology choices. In 2003, we expect to commence implementation of a significant technology upgrade to our iDEN network, the 6:1 voice coder software upgrade. We expect that this software upgrade will nearly double our voice capacity for wireless interconnect calls and leverage our investment in our existing infrastructure. See Part I, “Item 1. Business — M. Risk Factors — 14. Our forward-looking statements are subject to a variety of factors that could cause actual results to differ materially from current beliefs.” Technological developments like this would allow us to significantly reduce the amount of capital expenditures we would need to make for our current network in future years. However, any anticipated reductions in capital expenditures could be more than offset to the extent we incur additional capital expenditures to deploy new technologies. We will only deploy a new technology when deployment is warranted by expected customer demand, when we have sufficient capital available and when the anticipated benefits of services requiring the next generation technology outweigh the costs of providing those services.

      Future domestic contractual obligations. The following table sets forth our best estimates as to the amounts and timing of contractual payments for our most significant domestic contractual obligations as of December 31, 2002. The information in the table reflects future unconditional payments and is based upon, among other things, the terms of the relevant agreements, appropriate classification of items under generally accepted accounting principles currently in effect and certain assumptions, such as future interest rates. Future events, including additional purchases of our securities and refinancing of those securities, could cause actual payments to differ significantly from these amounts. See Part I, “Item 1. Business — M. Risk Factors — 14. Our forward-looking statements are subject to a variety of factors that could cause

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actual results to differ materially from current beliefs.” Except as required by applicable law, we disclaim any obligation to modify or update the information contained in the table.
                                                         
Future Domestic 2008 and
Contractual Obligations Total 2003 2004 2005 2006 2007 Thereafter








(in millions)
Public senior notes
  $ 11,556     $ 627     $ 695     $ 695     $ 695     $ 2,822     $ 6,022  
Credit facility(1)
    5,905       400       541       686       715       681       2,882  
Capital lease and finance obligations
    336       75       75       74       64       48        
Preferred stock cash payments
    1,837       100       112       112       112       112       1,289  
Operating leases(2)
    1,602       450       397       295       183       101       176  
Other
    1,990       567       379       296       232       172       344  
     
     
     
     
     
     
     
 
Total
  $ 23,226     $ 2,219     $ 2,199     $ 2,158     $ 2,001     $ 3,936     $ 10,713  
     
     
     
     
     
     
     
 


(1)  These amounts include principal amortization and estimated interest payments based on management’s expectation as to future interest rates, assume the current payment schedule and exclude any additional drawdown under the revolving loan commitment.
 
(2)  These amounts principally include future lease costs relating to transmitter and receiver sites and switches and office facilities.

      The above table excludes amounts that may be paid or will be paid in connection with interest rate swap agreements that do not have mandatory cash settlement provisions prior to maturity and spectrum acquisitions. We have committed, subject to certain conditions which may not be met, to pay up to $369 million for domestic spectrum acquisitions (including $201 million paid for NeoWorld Communications in January 2003) and leasing agreements entered into and outstanding as of December 31, 2002. Included in the “Other” caption are minimum amounts due under our most significant service contracts. 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 items such as hours contracted, subscribers, interest rates and other factors. In addition, we are 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 products. Because it is not possible to predict the timing or amounts that may be due under these conditional arrangements, no amounts have been included in the table above. Significant amounts expected to be paid to Motorola for infrastructure, handsets and related services are not shown above due to the uncertainty surrounding the timing and extent of these payments and because minimum contractual amounts under our agreements with Motorola are not significant. See note 15 of the consolidated financial statements appearing at the end of this annual report on Form 10-K for amounts paid to Motorola in 2002. The amounts in the table do not contemplate any future refinancing of indebtedness, although management’s current expectation is to refinance a significant portion of this indebtedness.

      In addition, the table above excludes amounts that we may be required to or elect to pay with respect to Nextel Partners. In 1999, we entered into agreements with Nextel Partners, and other parties, including Motorola and Eagle River Investments, relating to the capitalization, governance, financing and operation of Nextel Partners. Nextel Partners is constructing and operating a network utilizing the iDEN technology used in our network. In addition, the certificate of incorporation of Nextel Partners establishes circumstances in which we will have the right or obligation to purchase the outstanding shares of class A common stock of Nextel Partners at specified prices. We may pay the consideration for such a purchase in cash, shares of our stock, or a combination of both. Subject to certain limitations and conditions, including possible deferrals by Nextel Partners, we will have the right to purchase the outstanding shares of Nextel Partners’ class A common stock on January 29, 2008.

      Subject to various limitations and conditions, we may be required to purchase the outstanding shares of Nextel Partners’ class A common stock:

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  •  if (i) we elect to cease using iDEN technology on a nationwide basis; (ii) such change means that Nextel Partners cannot offer nationwide roaming comparable to that available to its subscribers before our change; and (iii) we elect not to pay for the equipment necessary to permit Nextel Partners to make a technology change;
 
  •  if we elect to terminate the relationship with Nextel Partners because of its breach of the operating agreements;
 
  •  if we experience a change of control; or
 
  •  if we breach the operating agreements.

In addition, if we require a change by Nextel Partners to match changes we have made in our business, operations or systems, in certain circumstances we have the right to purchase, and Nextel Partners’ stockholders have the right to require us to purchase, the outstanding class A common stock. Except in the case of Nextel Partners’ breach, the consideration we would be required to pay could also involve a premium based on various pricing formulas or appraisal processes. We may not transfer our interest in Nextel Partners to a third party before January 29, 2011, and Nextel Partners’ class A common stockholders have the right, and in specified instances the obligation, to participate in any sale of our interest.

      Future outlook. We expect to fund our capital requirements for at least the next 12 months by using existing cash balances, cash generated from operations, and if management deems appropriate, the revolving loan commitment under our credit facility. See Part I, “Item 1. Business — M. Risk Factors — 14. Our forward-looking statements are subject to a variety of factors that could cause actual results to differ materially from current beliefs.”

      In making this assessment, we have considered:

  •  cash, cash equivalents and short-term investments on hand and available as of December 31, 2002 of $2.7 billion;
 
  •  the availability of incremental funding under our revolving loan commitment under our credit facility, which currently totals about $1.4 billion;
 
  •  the anticipated level of capital expenditures, including an expected significant positive impact associated with the 6:1 voice coder software upgrade which Motorola is developing for our expected deployment in 2003; and
 
  •  our scheduled debt service requirements.

      If our business plans change, including as a result of changes in technology, or if economic conditions in any of our markets generally or competitive practices in the mobile wireless telecommunications industry change materially from those currently prevailing or from those now anticipated, or if other presently unexpected circumstances arise that have a material effect on the cash flow or profitability of our mobile wireless business, the anticipated cash needs of our business could change significantly.

      Our above conclusion that we will be able to fund our capital requirements for at least the next 12 months by using existing cash balances and cash generated from operations does not take into account:

  •  the impact of our participation in any future auctions for the purchase of spectrum licenses;
 
  •  any significant acquisition transactions or the pursuit of any significant new business opportunities other than those currently being pursued by us;
 
  •  deployment of next generation technologies;
 
  •  potential material additional purchases of our outstanding debt securities and mandatorily redeemable preferred stock for cash;
 
  •  potential material increases in the cost of compliance with regulatory mandates; and

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  •  potential material changes to our business plan that could result from the proposed public safety spectrum realignment, if effected.

Any of these events or circumstances could involve significant additional funding needs in excess of the identified currently available sources, and could require us to raise additional capital to meet those needs. However, our ability to raise additional capital, if necessary, is subject to a variety of additional factors that we cannot presently predict with certainty, including:

  •  the commercial success of our operations;
 
  •  the volatility and demand of the capital markets; and
 
  •  the market prices of our securities.

      We have had and may in the future have discussions with third parties regarding potential sources of new capital to satisfy actual or anticipated financing needs. At present, other than the existing arrangements that have been consummated or are described in this report, we have no legally binding commitments or understandings with any third parties to obtain any material amount of additional capital. The entirety of the above discussion also is subject to the risks and other cautionary and qualifying factors set forth under “— Forward Looking Statements.”

F.     Effect of Inflation

      Inflation is not a material factor affecting our domestic business. 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.

G.     Effect of New Accounting Standards

      In November 2002, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” The Interpretation addresses disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. The Interpretation also clarifies requirements related to the recognition of liability by a guarantor at the inception of a guarantee for the fair value of the obligations the guarantor has undertaken in issuing that guarantee. The initial recognition and measurement provisions of the Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for guarantees existing as of December 31, 2002. See notes 6 and 11 to the consolidated financial statements appearing at the end of this annual report on Form 10-K.

      In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.” The Interpretation clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The Interpretation applies immediately to variable interest entities created after January 31, 2003, or in which we obtain an interest after that date. The Interpretation is effective July 1, 2003 to variable interest entities in which we hold a variable interest acquired before February 1, 2003. We are currently assessing the impact of adopting this Interpretation; however, we do not believe that it will have a material impact on our financial position or results of operations.

      In November 2002, the Emerging Issues Task Force, or EITF, issued a final consensus on EITF Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” EITF Issue No. 00-21 provides guidance on when and how an arrangement involving multiple deliverables should be divided into separate units of accounting. EITF Issue No. 00-21 is effective prospectively for arrangements

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entered into in fiscal periods beginning after June 15, 2003, and we may elect to apply the provisions of EITF Issue No. 00-21 to existing arrangements and record the impact as a cumulative effect of a change in accounting principle in the statement of operations. We are currently assessing the impact of adopting EITF Issue No. 00-21. Under the provisions of SAB No. 101, we account for the sale of our handsets and the subsequent service to the customer as a single unit of accounting due to the fact that our wireless service is essential to the functionality of handsets. Accordingly, we recognize revenue from handset sales and an equal amount of cost of handset revenues over the expected customer relationship period, when title to the handset passes to the customer. Under EITF Issue No. 00-21, we no longer need to consider whether a customer is able to realize utility from the handset in the absence of the undelivered service. If we conclude that EITF Issue No. 00-21 requires us to account for the sale of our handsets as a unit of accounting separate from the subsequent service to the customer, we would recognize revenue from handset sales and the related cost of handset revenues when title to the handset passes to the customer. Accordingly, handset revenues and cost of handset revenues would be increased by equal amounts for sales of handsets beginning in the third quarter of 2003. If we applied EITF Issue No. 00-21 to existing arrangements, we would also reduce our total assets and liabilities by an equal amount, representing the revenues and costs deferred under SAB No. 101. There would be no impact on our cash flow, operating income or net income if we divide our arrangement into separate units of accounting under EITF Issue No. 00-21.

Forward-Looking Statements

      “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995. A number of statements made in the foregoing “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are not historical or current facts, but deal with potential future circumstances and developments. They can be identified by the use of forward-looking words such as “believes,” “expects,” “plans,” “may,” “will,” “would,” “could,” “should” or “anticipates” or other comparable words, or by discussions of strategy that may involve risks and uncertainties. We caution you that these forward-looking statements are only predictions, which are subject to risks and uncertainties including technological uncertainty, financial variations, changes in the regulatory environment, industry growth and trend predictions. The operation and results of our wireless communications business may be subject to the effect of other risks and uncertainties in addition to the relevant qualifying factors identified in the foregoing “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and those outlined under Part I, “Item 1. Business — M. Risk Factors.”

 
Item 7A. Quantitative and Qualitative Disclosures about Market Risk

      We primarily use senior notes, bank and vendor credit facilities and mandatorily redeemable preferred stock to finance our obligations. We are exposed to market risk from changes in interest rates and equity prices. Our primary interest rate risk results from changes in the U.S. London Interbank Offered Rate, or LIBOR, U.S. prime and Eurodollar rates, which are used to determine the interest rates applicable to our borrowings. 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. We use derivative instruments primarily consisting of interest rate swap agreements to manage this interest rate exposure by achieving a desired proportion of fixed rate versus variable rate borrowings. All of our derivative transactions are entered into for non-trading purposes.

      As of December 31, 2002, we held $840 million of short-term investments consisting of debt securities in the form of commercial paper and corporate bonds. As the weighted average maturity from the date of purchase was less than five months, these short-term investments do not expose us to a significant amount of interest rate risk.

      As of December 31, 2002, the fair value of our investment in NII Holdings’ 13% senior secured notes, which was determined based on quoted market prices of the notes, totaled $49 million. This investment is reported at its fair value in our financial statements.

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      The table below summarizes our remaining market risks as of December 31, 2002 in U.S. dollars. Since our financial instruments expose us to interest rate risks, these instruments are presented within each market risk category. The table presents principal cash flows and related interest rates by year of maturity for our senior notes, bank and vendor credit facilities, capital lease and finance obligations and mandatorily redeemable preferred stock in effect at December 31, 2002. In the case of the mandatorily redeemable preferred stock and senior notes, the table excludes the potential exercise of the relevant redemption or conversion features. This table also assumes that we will refinance our indebtedness to levels necessary to avoid an earlier repayment obligation with respect to our domestic bank credit agreement. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — E. Future Capital Needs and Resources.” For interest rate swap agreements, the table presents notional amounts and the related interest rates by year of maturity. Fair values included in this section have been determined based on:

  •  quoted market prices for senior notes and mandatorily redeemable preferred stock;
 
  •  estimates from bankers for our domestic bank credit facility;
 
  •  present value of future cash flows for capital lease and finance obligations using a discount rate available for similar obligations; and
 
  •  estimates from bankers to settle interest rate swap agreements.

      Notes 7, 8, 9 and 12 to the consolidated financial statements appearing at the end of this annual report on Form 10-K contain descriptions and significant changes in outstanding amounts of our senior

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notes, bank and vendor credit facilities, capital lease and finance obligations, interest rate swap agreements and mandatorily redeemable preferred stock and should be read together with the following table.
                                                                                 
Year of Maturity 2002 2001



Fair Fair
2003 2004 2005 2006 2007 Thereafter Total Value Total Value










(dollars in millions)
I. Interest Rate Sensitivity
                                                                               
Mandatorily Redeemable Preferred Stock, Long-term Debt and Capital Lease and Finance Obligations
                                                                               
Fixed Rate
  $ 52     $ 56     $ 61     $ 57     $ 2,173     $ 6,771     $ 9,170     $ 8,140     $ 14,617     $ 8,978  
Average Interest Rate
    10 %     10 %     10 %     10 %     9 %     9 %     9 %             10 %        
Variable Rate
  $ 199     $ 327     $ 433     $ 466     $ 436     $ 2,656     $ 4,517     $ 4,085     $ 5,009     $ 4,426  
Average Interest Rate
    3 %     3 %     3 %     3 %     3 %     5 %     4 %             5 %        
Interest Rate Swaps
                                                                               
Variable to Fixed(1)
  $     $     $     $ 570     $     $     $ 570     $ (112 )   $ 570     $ (83 )
Average Pay Rate
                      8 %                 8 %             8 %        
Average Receive Rate
                      2 %                 2 %             3 %        
Variable to Variable
  $ 400     $     $     $     $     $     $ 400     $ (3 )   $ 400     $ (13 )
Average Pay Rate
    5 %                                   5 %             5 %        
Average Receive Rate
    1 %                                   1 %             2 %        
Fixed to Variable
  $     $     $     $     $     $ 500     $ 500     $ 74     $ 500     $ 26  
Average Pay Rate
                                  5 %     5 %             5 %        
Average Receive Rate
                                  10 %     10 %             10 %        
II. Foreign Currency Exchange Rate Sensitivity
                                                                               
Long-Term Debt
                                                                               
Fixed Rate
  $     $     $     $     $     $     $     $     $ 1,475     $ 52  
Average Interest Rate
                                                      13 %        
Variable Rate
  $     $     $     $     $     $     $     $     $ 490     $ 490  
Average Interest Rate
                                                      7 %        


(1)  This interest rate swap requires a cash settlement in October 2003.

Item 8.     Financial Statements and Supplementary Data

      Our consolidated financial statements are filed under this item, beginning on page F-1 of this annual report on Form 10-K. The financial statement schedules required under Regulation S-X are filed pursuant to Item 15 of this annual report on Form 10-K.

Item 9.     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

      None.

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PART III

 
Item 10. Directors and Executive Officers of the Registrant

      Information regarding our directors is incorporated by reference to the information set forth under the caption “Election of Directors” in our proxy statement relating to our 2003 annual meeting of stockholders, which will be filed with the Securities and Exchange Commission. Information regarding our executive officers is incorporated by reference to Part I of this report under the caption “Executive Officers of the Registrant.” Information regarding compliance with Section 16(a) of the Securities and Exchange Act of 1934 by our directors, executive officers and holders of ten percent of a registered class of our equity securities is incorporated by reference to the information set forth under the caption “Other Information — Section 16(a) Beneficial Ownership Reporting Compliance” in our proxy statement relating to our 2003 annual meeting of stockholders.

 
Item 11. Executive Compensation

      Information regarding compensation of executive officers and directors is incorporated by reference to the information set forth under the captions “Election of Directors — Board Committees — Compensation — Compensation Committee Interlocks and Insider Participation” and “— Director Compensation,” and “Executive Compensation” in our proxy statement relating to our 2003 annual meeting of stockholders, which will be filed with the Securities and Exchange Commission.

 
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters

      Information required by this item is incorporated by reference to Part II, “Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters — D. Securities Authorized for Issuance Under Equity Compensation Plans” of this report and the information set forth under the caption “Securities Ownership” in our proxy statement relating to our 2003 annual meeting of stockholders, which will be filed with the Securities and Exchange Commission.

 
Item 13. Certain Relationships and Related Transactions

      Information required by this item is incorporated by reference to the information set forth under the caption “Certain Relationships and Related Transactions” in our proxy statement relating to our 2003 annual meeting of stockholders, which will be filed with the Securities and Exchange Commission.

 
Item 14. Controls and Procedures

      We maintain a set of disclosure controls and procedures that are designed to ensure that information relating to Nextel (including our consolidated subsidiaries) required to be disclosed in our periodic filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported in a timely manner under the Securities Exchange Act. Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to our most recent evaluation.

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PART IV

Item 15.     Exhibits, Financial Statement Schedules, and Reports on Form 8-K

  (a)  (1)  The following financial statements are included in this annual report on Form 10-K:

         
Page

Independent Auditors’ Report
    F-2  
Consolidated Balance Sheets as of December 31, 2002 and 2001
    F-3  
Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000
    F-4  
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the Years Ended December 31, 2002, 2001 and 2000
    F-5  
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000
    F-6  
Notes to Consolidated Financial Statements
    F-7  

     (2)  The following financial statement schedules are included in this annual report on Form 10-K.

         
 
Schedule I — Condensed Financial Information of Registrant
    F-49  
Schedule II — Valuation and Qualifying Accounts
    F-53  
Schedule III — Consolidated Financial Statements of NII Holdings, Inc.
    F-54  

     (3) List of Exhibits: The exhibits filed as part of this report are listed in the Exhibit Index, beginning on page 79.

      (b) Reports on Form 8-K:

     (1)  Current Report on Form 8-K dated and filed with the Commission on October 8, 2002, reporting under Item 5 specified third quarter operating information.
 
     (2)  Current Report on Form 8-K dated and filed with the Commission on October 24, 2002, reporting under Item 5 financial results and other data for the third quarter of 2002.
 
     (3)  Current Report on Form 8-K dated and filed with the Commission December 17, 2002 reporting under Items 5 and 9 specified network plans.
 
     (4)  Current Report on Form 8-K dated and filed with the Commission on December 24, 2002, reporting under Item 5 the announcement of a filing with the Federal Communications Commission regarding the proposed public safety spectrum realignment.

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SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

  NEXTEL COMMUNICATIONS, INC.

  By:  /s/ PAUL N. SALEH
 

March 27, 2003
  Paul N. Saleh
  Executive Vice President and Chief Financial
  Officer

     Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated below.

             
Signature Title Date



/s/ WILLIAM E. CONWAY, JR.

William E. Conway, Jr.
 
Chairman of the Board of Directors
  March 27, 2003
/s/ TIMOTHY M. DONAHUE

Timothy M. Donahue
 
President, Chief Executive Officer and Director
  March 27, 2003
/s/ PAUL N. SALEH

Paul N. Saleh
 
Executive Vice President and Chief Financial Officer (principal financial officer)
  March 27, 2003
/s/ WILLIAM G. ARENDT

William G. Arendt
 
Vice President and Controller (principal accounting officer)
  March 27, 2003
/s/ MORGAN E. O’BRIEN

Morgan E. O’Brien
 
Vice Chairman of the Board
  March 27, 2003
/s/ J. TIMOTHY BRYAN

J. Timothy Bryan
 
Director
  March 27, 2003
/s/ KEITH J. BANE

Keith J. Bane
 
Director
  March 27, 2003
/s/ CRAIG O. MCCAW

Craig O. McCaw
 
Director
  March 27, 2003
/s/ V. JANET HILL

V. Janet Hill
 
Director
  March 27, 2003
/s/ DENNIS M. WEIBLING

Dennis M. Weibling
 
Director
  March 27, 2003
/s/ FRANK M. DRENDEL

Frank M. Drendel
 
Director
  March 27, 2003
/s/ WILLIAM E. KENNARD

William E. Kennard
 
Director
  March 27, 2003
/s/ STEPHANIE M. SHERN

Stephanie M. Shern
 
Director
  March 27, 2003

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CERTIFICATIONS

I, Timothy M. Donahue, President & Chief Executive Officer of Nextel Communications, Inc., certify that:

        1. I have reviewed this annual report on Form 10-K of Nextel Communications, Inc.;
 
        2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
 
        3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
 
        4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

        a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
 
        b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
 
        c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

        5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

        a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
        b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

        6. The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

  /s/ TIMOTHY M. DONAHUE
 
  Timothy M. Donahue
  President & Chief Executive Officer

Date: March 27, 2003

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I, Paul N. Saleh, Executive Vice President & Chief Financial Officer of Nextel Communications, Inc., certify that:

        1. I have reviewed this annual report on Form 10-K of Nextel Communications, Inc.;
 
        2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
 
        3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
 
        4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

        a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
 
        b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
 
        c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

        5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

        a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
        b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

        6. The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

  /s/ PAUL N. SALEH
 
  Paul N. Saleh
  Executive Vice President & Chief Financial Officer

Date: March 27, 2003

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Exhibit Index

All documents referenced below were filed pursuant to the Securities Exchange Act of 1934 by Nextel Communications, Inc., file no. 0-19656, unless otherwise indicated.

         
Exhibit
Number

  3.1.1     Restated Certificate of Incorporation of Nextel (filed June 1, 2000 as Exhibit 3.1 to Nextel’s post-effective amendment no. 2 to registration statement no. 33-1290 on Form S-4 and incorporated herein by reference).
  3.1.2     Certificate of Designation of the Powers, Preferences and Relative, Participating, Optional and Other Special Rights of 13% Series D Exchangeable Preferred Stock and Qualifications, Limitations and Restrictions Thereof (filed July 22, 1997 as Exhibit 4.1 to Nextel’s current report on Form 8-K dated July 21, 1997 and incorporated herein by reference).
  3.1.3     Certificate of Designation of the Powers, Preferences and Relative, Participating, Optional and Other Special Rights of 11.125% Series E Exchangeable Preferred Stock and Qualifications, Limitations and Restrictions Thereof (filed February 12, 1998 as Exhibit 4.1 to Nextel’s current report on Form 8-K and incorporated herein by reference).
  3.1.4     Certificate of Designation of the Powers, Preferences and Relative, Participating, Optional and Other Special Rights of Zero Coupon Convertible Preferred Stock due 2013 and Qualifications, Limitations and Restrictions Thereof (filed February 10, 1999 as Exhibit 4.16 to Nextel’s registration statement on Form S-4 and incorporated herein by reference).
  3.2     Amended and Restated By-Laws of Nextel (filed July 31, 1995 as Exhibit 4.2 to Nextel’s post-effective amendment no. 1 on Form S-8 to registration statement no. 33-91716 on Form S-4 and incorporated herein by reference).
  4.1     Indenture dated September 17, 1997 between Nextel and Harris Trust and Savings Bank, as Trustee, relating to Nextel’s 10.65% Senior Redeemable Discount Notes due 2007 (filed September 22, 1997 as Exhibit 4.1 to Nextel’s current report on Form 8-K and incorporated herein by reference).
  4.2     Indenture dated October 22, 1997 between Nextel and Harris Trust and Savings Bank, as Trustee, relating to Nextel’s 9.75% Senior Serial Redeemable Discount Notes due 2007 (filed October 23, 1997 as Exhibit 4.1 to Nextel’s current report on Form 8-K and incorporated herein by reference).
  4.3     Indenture dated February 11, 1998 between Nextel and Harris Trust and Savings Bank, as Trustee, relating to Nextel’s 9.95% Senior Serial Redeemable Discount Notes due 2008 (filed February 12, 1998 as Exhibit 4.2 to Nextel’s current report on Form 8-K and incorporated herein by reference).
  4.4     Indenture dated November 4, 1998 between Nextel and Harris Trust and Savings Bank, as Trustee, relating to Nextel’s 12.0% Senior Serial Redeemable Notes due 2008 (filed February 10, 1999 as Exhibit 4.13.1 to Nextel’s registration statement on Form S-4 and incorporated herein by reference).
  4.5     Indenture dated June 16, 1999 between Nextel and Harris Trust and Savings Bank, as Trustee, relating to Nextel’s 4.75% Convertible Senior Redeemable Notes due 2007 (filed June 23, 1999 as Exhibit 4.1 to Nextel’s current report on Form 8-K and incorporated herein by reference).
  4.6     Indenture dated November 12, 1999 between Nextel and Harris Trust and Savings Bank, as Trustee, relating to Nextel’s 9.375% Senior Serial Redeemable Notes due 2009 (filed November 15, 1999 as Exhibit 4.1 to Nextel’s quarterly report on Form 10-Q for the quarter ended September 30, 1999 (the “1999 Third Quarter 10-Q”) and incorporated herein by reference).

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Exhibit
Number

  4.7     Indenture dated January 26, 2000 between Nextel and Harris Trust and Savings Bank, as Trustee, relating to Nextel’s 5.25% Convertible Senior Redeemable Notes due 2010 (filed January 26, 2000 as Exhibit 4.1 to Nextel’s current report on Form 8-K and incorporated herein by reference).
  4.8     Indenture dated January 26, 2001, between Nextel and BNY Midwest Trust Company, as Trustee, relating to Nextel’s 9.5% Senior Serial Redeemable Notes due 2011 (filed January 29, 2001 as Exhibit 4.1 to Nextel’s current report on Form 8-K and incorporated herein by reference).
  4.9     Indenture dated May 29, 2001, between Nextel and BNY Midwest Trust Company, as Trustee, relating to Nextel’s 6.0% Convertible Senior Redeemable Notes due 2011 (filed May 29, 2001 as Exhibit 4.1 to Nextel’s current report on Form 8-K and incorporated herein by reference).
  4.9.1     Amended and Restated Credit Agreement dated November 9, 1999 among Nextel, Nextel Finance Company, the other Restricted Companies party thereto, the Lenders Party thereto, Toronto Dominion (Texas) Inc., as Administrative Agent, and The Chase Manhattan Bank as Collateral Agent (filed November 15, 1999 as Exhibit 4.3 to the 1999 Third Quarter 10-Q and incorporated herein by reference).
  4.9.2     Tranche D Term Loan Agreement dated March 15, 2000 among Nextel, Nextel Finance Company, the other Restricted Companies party thereto, the Lenders Party thereto, Toronto Dominion (Texas), as Administrative Agent, and The Chase Manhattan Bank as Collateral Agent (filed March 15, 2000 as Exhibit 4.1 to Nextel’s current report on Form 8-K and incorporated herein by reference).
  4.9.3     Amendment no. 1 dated April 26, 2000 to the Amended and Restated Credit Agreement dated November 9, 1999 among Nextel, Nextel Finance Company, the Other Restricted Companies party thereto, the Lenders party thereto, Toronto Dominion (Texas), as Administrative Agent, and The Chase Manhattan Bank, as Collateral Agent (filed May 5, 2000 as Exhibit 4.1 to Nextel’s current report on Form 8-K and incorporated herein by reference).
  4.9.4     Amendment no. 2 dated March 29, 2001 to the Amended and Restated Credit Agreement dated November 9, 1999, as amended, among Nextel, Nextel Finance Company, the Other Restricted Companies party thereto, the Lenders party thereto, Toronto Dominion (Texas), as Administrative Agent, and The Chase Manhattan Bank, as Collateral Agent. (filed April 2, 2001 as Exhibit 4.13.4 to Nextel’s annual report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference).
  10.1.1*     Letter Agreement between Motorola, Inc. and Nextel dated November 4, 1991 (filed November 15, 1991 as Exhibit 10.47 to the registration statement no. 33-43415 on Form S-1 (the “1991 S-1 Registration Statement”) and incorporated herein by reference).
  10.1.2*     1991 Enhanced Specialized Mobile Radio System Purchase Agreement between Motorola and Nextel dated November 4, 1991(filed November 15, 1991 as Exhibit 10.48 to the 1991 S-1 Registration Statement and incorporated herein by reference).
  10.1.3*     Amendment dated August 4, 1994 to the Enhanced Specialized Mobile Radio System Equipment Purchase Agreement between Nextel and Motorola dated November 1, 1991, as amended, and to the Letter Agreement between Nextel and Motorola dated November 4, 1991, as amended (collectively the “Equipment Purchase Agreements”) (filed April 28, 1995 as Exhibit 10.02 to registration statement no. 33-91716 on Form S-4 of ESMR, Inc. (the “ESMR Form S-4 Registration Statement”) and incorporated herein by reference).

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Exhibit
Number

  10.1.4*     Second Amendment to Equipment Purchase Agreements dated April 4, 1995 (filed April 28, 1995 as Exhibit 10.03 to the ESMR Form S-4 Registration Statement and incorporated herein by reference).
  10.1.5*     Amendment 004 to the Enhanced Specialized Mobile Radio System Purchase Agreement dated April 28, 1996 between Nextel and Motorola (filed July 5, 1996 as Exhibit 99.1 to Nextel’s current report on Form 8-K and incorporated herein by reference).
  10.1.6*     Nextel/ Motorola Agreement dated March 27, 1997 (filed May 15, 1997 as Exhibit 10.1 to Nextel’s quarterly report on Form 10-Q for the quarter ended March 31, 1997 and incorporated by reference herein).
  10.1.7*     iDEN Infrastructure [*] Supply Agreement between Motorola and Nextel dated April 13, 1999 (filed August 16, 1999 as Exhibit 10.2 to Nextel’s quarterly report on Form 10-Q for the quarter ended June 30, 1999 and incorporated herein by reference).
  10.1.8*     Amendment dated December 29, 1999 to the iDEN Subscriber Supply Agreement dated November 4, 1991 between Nextel and Motorola (filed March 30, 2000 as Exhibit 10.2.7 to Nextel’s annual report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference).
  10.1.9*     Amendment 001 dated December 29, 1999 to the iDEN Infrastructure [*] Supply Agreement dated April 13, 1999 between Nextel and Motorola (filed March 30, 2000 as Exhibit 10.2.8 to Nextel’s annual report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference).
  10.1.10*     Amendment 002 dated December 30, 1999 to the iDEN Infrastructure [*] Supply Agreement dated April 13, 1999 between Nextel and Motorola (filed March 30, 2000 as Exhibit 10.2.9 to Nextel’s annual report on Form 10-K for the year ended December 31, 1999 and incorporated herein by reference).
  10.1.11*     Amendment dated December 28, 2000 to iDEN Subscriber Supply Agreement dated November 4, 1991 between Nextel and Motorola (filed April 2, 2001 as Exhibit 10.1.11 to Nextel’s annual report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference).
  10.1.12*     Amendment 003 dated March 29, 2001 to iDEN Subscriber Supply Agreement dated November 4, 1991 between Nextel and Motorola (filed May 15, 2001 as Exhibit 10.1 to Nextel’s quarterly report on Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by reference).
  10.1.13*     Amendment dated December 28, 2000 to iDEN Infrastructure [*] Supply Agreement dated April 13, 1999, as amended, between Nextel and Motorola (filed April 2, 2001 as Exhibit 10.1.12 to Nextel’s annual report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference).
  10.1.14*     Amendment 003 dated November 13, 2001 Availability/ Outage Goals for 2001 to iDEN Infrastructure [*] Supply Agreement dated April 13, 1999, as amended, between Nextel and Motorola (filed March 29, 2002 as Exhibit 10.1.14 to Nextel’s annual report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference).
  10.1.16*     Amendment 004 dated March 15, 2002 to iDEN Subscriber Supply Agreement dated November 4, 1991 between Nextel and Motorola (filed May 15, 2002 as Exhibit 10.1 to the quarterly report on Form 10-Q for the quarter ended March 31, 2002 (the “First Quarter 2002 10-Q”) and incorporated herein by reference).
  10.1.17*     Amendment 004 dated March 22, 2002 to Availability/ Outage Goals for 2002 to iDEN Infrastructure [*] Supply Agreement dated April 13, 1999, as amended, between Nextel and Motorola (filed May 15, 2002 as Exhibit 10.2 to the First Quarter 2002 10-Q and incorporated herein by reference).

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Exhibit
Number

  10.2     Agreement and Plan of Contribution and Merger dated August 4, 1994, as amended, among Nextel, Motorola, ESMR, Inc., ESMR Sub, Inc. and others (filed April 28, 1995 as Exhibit 2.01 to the ESMR Form S-4 Registration Statement and incorporated herein by reference).
  10.3     Registration Rights Agreement dated July 28, 1995 between Nextel and Motorola (filed November 14, 1995 as Exhibit 10.8 to Nextel’s quarterly report on Form 10-Q for the quarter ended September 30, 1995 and incorporated herein by reference).
  10.4.1     Securities Purchase Agreement between Nextel, Digital Radio, L.L.C. and Craig O. McCaw, dated April 4, 1995 (filed April 11, 1995 as Exhibit 2.1 to Nextel’s current report on Form 8-K dated April 10, 1995 and incorporated herein by reference).
  10.4.2     Management Support Agreement dated April 4, 1995 between Nextel and Eagle River, Inc. (filed on April 11, 1995 as Exhibit 99.2 to Nextel’s current report on Form 8-K dated April 10, 1995 and incorporated herein by reference).
  10.4.3     Form of Registration Rights Agreement dated July 28, 1995 between Nextel and Digital Radio (filed March 31, 1997 as Exhibit 10.38 to Nextel’s annual report on Form 10-K for the year ended December 31, 1996 (the “1996 Form 10-K”) and incorporated herein by reference).
  10.4.4     First Amendment to the Registration Rights Amendment (dated July 28, 1995) among Nextel, Digital Radio and Option Acquisition, L.L.C., dated June 18, 1997 (filed July 9, 1997 as Exhibit 10.7 to Nextel’s current report on Form 8-K and incorporated herein by reference).
  10.4.5     Option Exercise and Lending Commitment Agreement between Nextel and Digital Radio dated June 16, 1997 (filed July 9, 1997 as Exhibit 10.1 to Nextel’s current report on Form 8-K and incorporated herein by reference).
  10.4.6     Incentive Option Agreement between Nextel and Eagle River dated April 4, 1995 (filed April 11, 1995 as Exhibit 99.3 to Nextel’s current report on Form 8-K dated April 10, 1995 and incorporated herein by reference).
  10.5.1     Option Purchase Agreement among Nextel, Unrestricted Subsidiary Funding Company and Option Acquisition dated June 16, 1997 (filed July 9, 1997 as Exhibit 10.3 to Nextel’s current report on Form 8-K and incorporated herein by reference).
  10.5.2     Registration Rights Agreement between Nextel and Option Acquisition dated June 18, 1997 (filed July 9, 1997 as Exhibit 10.6 to Nextel’s current report on Form 8-K and incorporated herein by reference).
  10.6     Agreement dated March 5, 2003 between Nextel, Digital Radio, L.L.C. and Craig O. McCaw (filed March 6, 2003 as Exhibit 10.1 to Nextel’s current report on Form 8-K and incorporated herein by reference).
  10.7**     Form of Indemnification Agreement and exhibits thereto between Nextel and each of its directors (filed June 24, 1992 as Exhibit 10.56 to Nextel’s annual report on Form 10-K for the year ended March 31, 1992 and incorporated herein by reference).
  10.8     Amendment dated August 9, 2001 to the Securities Purchase Agreement dated April 4, 1995 between Nextel, Digital Radio, L.L.C. and Craig O. McCaw (filed August 10, 2001 as Exhibit 10.1 to Nextel’s quarterly report on Form 10-Q for the quarter ended June 30, 2001 and incorporated herein by reference).
  10.9**     Nextel Amended and Restated Incentive Equity Plan (filed April 2, 2001 as Exhibit 10.8 to Nextel’s annual report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference).

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Exhibit
Number

  10.10**     Nextel Severance Benefits Plan (filed March 29, 2002 as Exhibit 10.9 to Nextel’s annual report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference).
  10.11**     Nextel Associate Stock Purchase Plan (filed June 21, 1996 as Exhibit 4.3 to Nextel’s registration statement no. 333-06523 on Form S-8 and incorporated herein by reference).
  10.12**     Nextel Cash Compensation Deferral Plan (filed December 17, 1997 as Exhibit 4.1 to Nextel’s registration statement No. 333-42537 on Form S-8 and incorporated herein by reference).
  10.13**     Nextel Change of Control Retention Bonus and Severance Pay Plan dated July 14, 1999 (filed April 2, 2001 as Exhibit 10.12 to Nextel’s annual report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference).
  10.14.1* *   Employment Agreement dated February 1, 1996 between Tim Donahue and Nextel (filed March 31, 1997 as Exhibit 10.36 to the 1996 Form 10-K and incorporated herein by reference).
  10.14.2* *   Addendum to Employment Agreement between Tim Donahue and Nextel dated March 24, 1997 (filed March 31, 1997 as Exhibit 10.37 to the 1996 Form 10-K and incorporated herein by reference).
  10.15**     Employment Agreement between Paul N. Saleh and Nextel dated August 3, 2001 (filed March 29, 2002 as Exhibit 10.14 to Nextel’s annual report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference).
  10.16.1     Joint Venture Agreement among Nextel Partners, Inc., Nextel Partners Operating Corp. and Nextel WIP Corp. dated January 29, 1999 (filed February 24, 1999 as Exhibit 10.1 to Nextel’s current report on Form 8-K and incorporated herein by reference).
  10.16.2     Amended and Restated Shareholders’ Agreement among Nextel Partners and the shareholders named therein dated February 18, 2000 (the “Nextel Partners Shareholder Agreement”)(filed by Nextel Partners February 22, 2000 as Exhibit 10.2 to amendment no. 2 to the registration statement no. 333-95473 on Form S-1 and incorporated herein by reference).
  10.16.3     Amendment no. 1 dated February 22, 2000 to the Nextel Partners Shareholders Agreement (filed by Nextel Partners on October 23, 2000 as Exhibit 10.2 to the registration statement no. 333-48470 on Form S-4 and incorporated herein by reference).
  10.16.4     Amendment no. 2 dated March 20, 2001 to the Nextel Partners Shareholders Agreement (filed by Nextel Partners on May 11, 2001 as Exhibit 10.2(b) to Nextel Partners’ current report on Form 8-K and incorporated herein by reference).
  10.16.5     Amendment no. 3 dated April 18, 2001 to the Nextel Partners Shareholders Agreement (filed by Nextel Partners on May 11, 2001 as Exhibit 10.2(c) to Nextel Partners’ current report on Form 8-K and incorporated herein by reference).
  10.16.6     Amendment no. 4 dated July 25, 2001 to the Nextel Partners Shareholders Agreement (filed by Nextel Partners on November 13, 2001 as Exhibit 10.2(d) to Nextel Partners’ current report on Form 8-K and incorporated herein by reference).
  10.16.7     Agreement Specifying Obligations of, and Limiting Liability and Recourse to, Nextel dated January 29, 1999 (filed February 24, 1999 as Exhibit 10.3 to Nextel’s current report on Form 8-K and incorporated herein by reference).

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Exhibit
Number

  10.17     Master Site Lease Agreement among Nextel of New York, Inc. Nextel Communications of the Mid-Atlantic, Inc., Nextel South Corp., Nextel of Texas, Inc. Nextel West Corp., and Nextel of California, Inc. and Tower Asset Sub Inc. and the Landlord Parties as defined therein (filed April 29, 1999 as Exhibit 10.33 to SpectraSite Holdings, Inc.’s registration statement no. 333-67043 on Form S-4 (the “SpectraSite Holdings S-4 Registration Statement”) and incorporated herein by reference).
  10.18     Master Site Commitment Agreement among Nextel, Nextel of New York, Nextel Communications of the Mid-Atlantic, Nextel South Corp., Nextel of Texas, Nextel West Corp., Nextel of California, Tower Parent Corp., SpectraSite Holdings and Tower Asset Sub (filed April 29, 1999 as Exhibit 10.34 to the SpectraSite Holdings S-4 Registration Statement and incorporated herein by reference).
  10.19**     Nextel Communications, Inc. 2002/2003 Long-Term Incentive Plan.
  10.20**     First Amendment, dated September 19, 2002, to Nextel’s Change of Control Retention Bonus and Severance Pay Plan (filed November 14, 2002 as Exhibit 10.1 to Nextel’s quarterly report on Form 10-Q for the quarter ended September 30, 2002 (the “Third Quarter 2002 10-Q”) and incorporated herein by reference).
  10.21**     Separation and Non-Competition Agreement, dated September 19, 2002, between Nextel and James F. Mooney (filed November 14, 2002 as Exhibit 10.2 to the Third Quarter 2002 10-Q and incorporated herein by reference).
  10.22**     Release Agreement, dated October 1, 2002, between Nextel and James F. Mooney (filed November 14, 2002 as Exhibit 10.3 to the Third Quarter 2002 10-Q and incorporated herein by reference).
  10.23**     Loan Agreement, dated April 27, 2001, between Unrestricted Subsidiary Funding Company and James F. Mooney (filed October 11, 2002 as Exhibit 99.1 to Nextel’s registration statement on Form S-3 (file no. 333-98261) and incorporated herein by reference).
  10.24**     Employment Agreement, dated as of January 1, 2001, between Leonard J. Kennedy and Nextel.
  21     Subsidiaries of Nextel.
  23.1     Consent of Deloitte & Touche LLP with respect to Nextel.
  23.2     Consent of Deloitte & Touche LLP with respect to NII Holdings, Inc.
  99.1     Memorandum Opinion and Order of the FCC dated February 13, 1991 (filed December 5, 1992 as Exhibit 28.1 to the S-1 Registration Statement and incorporated herein by reference).
  99.2     Sarbanes-Oxley Act of 2002 Certifications.


*   Portions of this exhibit have been omitted and filed separately with the Commission pursuant to a request for confidential treatment.
 
**  Management contract or compensatory plan or arrangement

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NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES

Index to Consolidated Financial Statements and

Financial Statement Schedules
           
Page

INDEPENDENT AUDITORS’ REPORT
    F-2  
CONSOLIDATED FINANCIAL STATEMENTS
       
 
Consolidated Balance Sheets as of December 31, 2002 and 2001
    F-3  
 
Consolidated Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000
    F-4  
 
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the Years Ended December 31, 2002, 2001 and 2000
    F-5  
 
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000
    F-6  
 
Notes to Consolidated Financial Statements
    F-7  
FINANCIAL STATEMENT SCHEDULES
       
 
Schedule I — Condensed Financial Information of Registrant
    F-49  
 
Schedule II — Valuation and Qualifying Accounts
    F-53  
 
Schedule III — Consolidated Financial Statements of NII Holdings, Inc. 
    F-54  

F-1


Table of Contents

INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Stockholders of Nextel Communications, Inc.

Reston, Virginia

      We have audited the accompanying consolidated balance sheets of Nextel Communications, Inc. and subsidiaries (the “Company”) as of December 31, 2002 and 2001, and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included financial statement schedules I and II listed in the Index at Item 15(a)(2). These consolidated financial statements and financial statement schedules I and II are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and the financial statement schedules I and II based on our audits.

      We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

      In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Nextel Communications, Inc. and subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.

      As discussed in note 1 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and other Intangible Assets,” in 2002. As discussed in notes 1 and 9 to the consolidated financial statements, in 2001, the Company changed its method of accounting for derivative instruments to conform to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” and recorded a cumulative effect of a change in accounting principle in 2001. As discussed in note 1 to the consolidated financial statements, the Company adopted the provisions of Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements,” in 2000.

/s/ DELOITTE & TOUCHE LLP

McLean, Virginia

February 20, 2003, March 5, 2003 as to notes 11, 13 and 15

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Table of Contents

NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES

 
CONSOLIDATED BALANCE SHEETS
As of December 31, 2002 and 2001
(in millions)
                     
2002 2001


ASSETS
Current assets
               
 
Cash and cash equivalents, of which $0 and $250 is restricted
  $ 1,846     $ 2,481  
 
Restricted cash of NII Holdings held in escrow
          84  
 
Short-term investments
    840       1,236  
 
Accounts and notes receivable, net
    1,077       1,111  
 
Due from related parties
    33       18  
 
Handset and accessory inventory
    245       260  
 
Prepaid expenses and other current assets
    609       533  
     
     
 
   
Total current assets
    4,650       5,723  
Investments
    145       188  
Property, plant and equipment, net
    8,918       9,274  
Intangible assets, net
    6,607       5,778  
Other assets
    1,164       1,101  
     
     
 
    $ 21,484     $ 22,064  
     
     
 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities
               
 
Accounts payable
  $ 515     $ 756  
 
Accrued expenses and other
    1,749       1,470  
 
Due to related parties
    241       341  
 
Current portion of long-term debt, capital lease and finance obligations
    251       145  
 
Debt of NII Holdings, nonrecourse to and not held by parent (notes 7 and 8)
          1,865  
     
     
 
   
Total current liabilities
    2,756       4,577  
Long-term debt
    12,079       13,815  
Capital lease and finance obligations
    220       905  
Deferred income taxes
    1,619       669  
Deferred revenues and other
    949       566  
     
     
 
   
Total liabilities
    17,623       20,532  
     
     
 
Commitments and contingencies (notes 7, 11 and 15)
               
Mandatorily redeemable preferred stock (note 12)
    1,015       2,114  
Stockholders’ equity (deficit)
               
 
Convertible preferred stock, 4 and 8 shares issued and outstanding
    136       283  
 
Common stock, class A, 968 and 763 shares issued and outstanding
    1       1  
 
Common stock, class B, nonvoting convertible, 36 shares issued and outstanding
           
 
Paid-in capital
    10,530       8,581  
 
Accumulated deficit
    (7,793 )     (9,179 )
 
Deferred compensation, net
    (7 )     (17 )
 
Accumulated other comprehensive loss
    (21 )     (251 )
     
     
 
   
Total stockholders’ equity (deficit)
    2,846       (582 )
     
     
 
    $ 21,484     $ 22,064  
     
     
 

The accompanying notes are an integral part of these consolidated financial statements.

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Table of Contents

NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES

 
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2002, 2001 and 2000
(in millions, except per share amounts)
                           
2002 2001 2000



Operating revenues
                       
 
Service revenues
  $ 8,186     $ 7,221     $ 5,297  
 
Handset and accessory revenues
    535       468       417  
     
     
     
 
      8,721       7,689       5,714  
     
     
     
 
Operating expenses
                       
 
Cost of service (exclusive of depreciation included below)
    1,469       1,499       1,071  
 
Cost of handset and accessory revenues
    1,047       1,370       1,101  
 
Selling, general and administrative
    3,039       3,020       2,278  
 
Restructuring and impairment charges (note 3)
    35       1,769        
 
Depreciation
    1,541       1,508       1,063  
 
Amortization
    54       238       202  
     
     
     
 
Operating income (loss)
    1,536       (1,715 )     (1 )
     
     
     
 
Other income (expense)
                       
 
Interest expense
    (1,048 )     (1,403 )     (1,245 )
 
Interest income
    58       207       396  
 
Gain (loss) on retirement of debt, net of debt conversion costs of $160, $0 and $23
    354       469       (127 )
 
Gain on deconsolidation of NII Holdings (note 1)
    1,218              
 
Equity in losses of unconsolidated affiliates
    (302 )     (95 )     (152 )
 
Foreign currency transaction losses, net
          (70 )     (25 )
 
Realized gain on investments, net
          47       275  
 
Reduction in fair value of investments, net
    (37 )     (188 )      
 
Other, net
    (2 )     (12 )     31  
     
     
     
 
      241       (1,045 )     (847 )
     
     
     
 
Income (loss) before income tax (provision) benefit
    1,777       (2,760 )     (848 )
Income tax (provision) benefit
    (391 )     135       33  
     
     
     
 
Net income (loss)
    1,386       (2,625 )     (815 )
 
Gain on retirement of mandatorily redeemable preferred stock
    485              
 
Mandatorily redeemable preferred stock dividends and accretion
    (211 )     (233 )     (209 )
     
     
     
 
Income (loss) available to common stockholders
  $ 1,660     $ (2,858 )   $ (1,024 )
     
     
     
 
Earnings (loss) per common share
                       
 
Basic
  $ 1.88     $ (3.67 )   $ (1.35 )
     
     
     
 
 
Diluted
  $ 1.78     $ (3.67 )   $ (1.35 )
     
     
     
 
Weighted average number of common shares outstanding
                       
 
Basic
    884       778       756  
     
     
     
 
 
Diluted
    966       778       756  
     
     
     
 

The accompanying notes are an integral part of these consolidated financial statements.

F-4


Table of Contents

NEXTEL COMMUNICATIONS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

For the Years Ended December 31, 2002, 2001 and 2000
(in millions)
                                                                                                 
Convertible Class A Class B
Preferred Stock Common Stock Common Stock Treasury Stock



Paid-in Accumulated
Deferred
Shares Amount Shares Amount Shares Amount Capital Deficit Shares Amount Compensation











Balance, December 31, 1999
    8     $ 291       702     $ 1       36     $     $ 8,046     $ (5,739 )         $ (6 )   $ (23 )
 
Net loss
                                                            (815 )                        
   
Other comprehensive loss, net of income tax:
                                                                                       
     
Foreign currency translation adjustment
                                                                                       
     
Net unrealized gains on available- for-sale securities:
                                                                                       
       
Unrealized holding gains arising during the period
                                                                                       
       
Reclassification adjustment for gain included in net loss
                                                                                       
 
Total comprehensive loss
                                                                                       
 
Common stock issued under equity plans
                    7                             89                     4          
 
Conversion of debt securities and preferred stock into common stock
          (8 )     18                             344                                  
 
Gain on issuance of equity by affiliate, net of income tax
                                                    87                                  
 
Deferred compensation
                                                    13                               (5 )
 
Dividends and accretion on mandatorily redeemable preferred stock
                                                  (209 )                                
     
     
     
     
     
     
     
     
     
     
     
 
Balance, December 31, 2000
    8       283       727       1       36             8,370       (6,554 )           (2 )     (28 )
 
Net loss
                                                            (2,625 )                        
   
Other comprehensive loss, net of income tax:
                                                                                       
     
Foreign currency translation adjustment
                                                                                       
     
Net unrealized gains on available- for-sale securities:
                                                                                       
       
Unrealized holding losses arising during the period
                                                                                       
       
Reclassification adjustment for losses included in net loss
                                                                                       
     
Cash flow hedge:
                                                                                       
       
Cumulative effect of accounting change
                                                                                       
       
Reclassification of transition adjustment included in net loss
                                                                                       
       
Unrealized loss on cash flow hedge
                                                                                       
 
Total comprehensive loss
                                                                                       
 
Common stock issued under equity plans
                    14                             142                     2          
 
Exchange of debt securities for common stock
                    22                             292                                  
 
Deferred compensation and other
                                                    10